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A	4	2,020	2020-11-23 16:30:00	Operator: Good afternoon, and welcome to the Agilent Technologies Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. And now, I'd like to introduce you to the host for today's conference, Ankur Dhingra, Vice President of Investor Relations. Sir, please go ahead. Ankur Dhingra: Thank you, and welcome everyone to Agilent's fourth quarter and full-year conference call for fiscal year 2020. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Bob's comments will be: Jacob Thaysen, President of Agilent's Life Sciences & Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of Agilent CrossLab Group. This presentation is being webcast live. The news release, Investor presentation, and information to supplement today's discussion along with the recording of this webcast are made available on our Web site at investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our Web site. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year, and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency, and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of October 31, 2020. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties, and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. Also, as announced, we will hold our virtual investor day in a few weeks, on December 9. The event with include presentations from our CEO, CFO, and the three group Presidents, followed by a Q&A. We look forward to having you join us on December 9. And now, I would like to turn the call over to Mike. Mike McMullen: Thanks, Ankur, and thanks to everyone for joining us on our call today. Today, I want to get straight to our quarterly results, because they tell a very compelling story. The Agilent team delivered a very strong close to 2020. We posted revenues of $1.48 billion during the quarter. Revenues are up 8% on a reported basis, and up 6% core. Operating margins are a healthy 24.9%. EPS of $0.98 is up 10% year-over-year. These numbers tell the story of a strong resilient company that's built for continued growth. Our better than expected results are due to the strength of our core business, along with signs of recovery in our end markets. Geographically, China continues to lead the way with double-digit growth. From an end-market view, both our pharmaceutical and food businesses grew double-digits. In addition, our chemical and energy business grew after two quarters of declines, exceeding our expectations. We also saw a rebound in U.S. sales during the quarter. Overall, COVID-19 tailwinds contributed just over two points of core growth. Achieving these results in the face of a global pandemic is a tribute to our team and the company we've built over the last five years. I couldn't be more pleased with the way the Agilent team has performed over the last quarter and throughout 2020. We have again proven our ability to work together and step up to meet any challenge that comes our way. During the quarter, all three of our business groups grew high single-digits on a reported basis. Our Life Sciences and Applied Markets Group generated $671 million in revenue, up 8% on a reported basis, and up 4% core. LSAG growth is broad-based. The cell analysis and mass spec businesses both grew at double-digit rates. In terms of end markets, chemical and energy returned to growth, food grew double-digits, and pharma high single-digits. LSAG remains extremely well-positioned and is outperforming the market. The Agilent CrossLab Group came in with revenues at $518 million. This is up a reported 9% and up 7% core. ACG's growth is also broad-based across end markets and geographies. Our focus on on-demand service is paying off as activities in our customer's labs continues to increase. The ACG team continues to build on it's already deep connections with our customers, helping them operate through the pandemic, and continue to drive improved efficiencies in lab operations. In the Diagnostics and Genomics Group, revenues were $294 million, up 9% reported, and up 7% core. Growth was broad-based, with NASD oligo manufacturing revenues up roughly 40%. The Genomics and pathology businesses continue to improve during the quarter. I'm also very proud of our NASD team for successfully ramping production at our new Frederick site this year. We have built a very strong position in this attractive market, with excellent long-term prospects for high growth. Let's now shift gears and look at our full-year fiscal 2020 results. Despite the disruption, uncertainty, and economic turmoil dealing with a global pandemic, the Agilent team delivered solid results. We generated $5.34 billion in revenue, up 3% on a reported basis, and up nearly 1% core. To put this in perspective, it's helpful to recall the progression of our growth. In Q1, we delivered 2% core growth, as you saw the first impact of COVID-19 in our business in China. Both Q2 and Q3 declined low single-digits as the pandemic spread across the globe and governments instituted broad shutdowns. With 6% core growth, 8% reported in Q4, we're seeing business and economies start to recover. As a result, we are clearly exiting 2020 with solid momentum. Our recurring types of businesses, represented by ACG and DGG prove resilient, growing low to mid single-digits for the year. In a very tough CapEx market, our LSAG instrument business declined only 2% for the year, and returned to growth in the final quarter. China led the way for our recovery with accelerating growth as the year progressed. In our end markets, pharma remained the most resilient, and food markets recovered most quickly. Full-year earnings per share grew 5% during fiscal 2020, to $3.28. The full-year operating margin of 23.5% is up 20 basis points over fiscal 2019. As we head into 2021 we do so with tremendous advantage. Our diverse industry-leading product portfolio has never been stronger. Our building and buying growth strategy, with the focus of high growth markets continues to deliver. Our ability to respond quickly to rapidly changing conditions is also serving us well. The way our sales and service teams have been able to quickly pivot to meet customer requirements during the pandemic has been nothing short of remarkable. You know, last year this time, I used this call to remind you of the Agilent shareholder value creation model. Our approach is focused on delivering above market growth, while expanding operating margin, along with a balanced deployment of capital. We prioritized the plan of our capital both internally and externally on additional growth. A few proof points on our growth-oriented capital deployment strategy. A year ago, we spoke about recently closing the BioTek acquisition and the promise of growth that BioTek represented. Today, BioTek is no longer a promise, but a driver of growth. In total, the cell analysis business generated more than $300 million in revenue for us during the year, with double-digit growth in Q4, and continued strong growth prospects. Similar to last year, I was talking about ramping up our new Frederick site facility, a $185 million capital investment. In addition to successfully ramping Frederick as we planned, we did so with an expanding book of business. We also recently announced additional $150 million investment to add future manufacturing capacity. We are aggressively adding capacity to capture future growth opportunities in this high-growth market. Even in the face of a pandemic, we stayed true to our build and buy strategy. We have clearly seen the advantages of our approach. I'm confident our strategy will continue to produce strong results for us. The strength of our team and resilience of our business model has served us well, and as you can see from the numbers, our growth strategy is producing outstanding results for our customers, employees, and shareholders. While uncertainty remains as we being fiscal 2021, we're operating from a position of strength. Because of this, we're cautiously optimistic about the future. We have built and will sustain our track record of delivering results, and working as a one Agilent team on behalf of our customers and shareholders. As I noted earlier, I couldn't be more pleased with the results the Agilent team delivered in the fourth quarter and throughout the year. Thank you for being on the call today, and I look forward to your questions. I will now hand the call off to Bob. Bob, you're up. Bob McMahon: Thanks, Mike, and good afternoon, everyone. In my remarks today, I'll provide some additional revenue detail, and take you through the fourth quarter income statement, and some other key financial metrics. I'll then finish up with our outlook for 2021, and the first quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. We are very pleased with our fourth quarter results as we saw strong growth exceeding our expectations, especially considering the ongoing challenges associated with COVID-19. For the quarter, revenue was $1.48 billion, reflecting core revenue growth of 5.6%. Reported growth was stronger, at 8.5%, currency contributed 1.7%, while M&A added 1.2 points of growth. From an end market perspective, pharma, our largest market, showed strength across all regions, and delivered 12% growth in the quarter. Both small and large molecule businesses grew, with large molecule posting strong double-digit growth. We continue to invest and build capabilities in faster growth biopharma markets, and offer leading solutions across both small and large molecule applications. The food market also experienced double-digit growth during the quarter, positing a 16% increase in revenue. While our growth in food business was broad-based, China led the way. And as Mike noted earlier, our chemical and energy market exceeded our expectations growing 3% after two quarters of double-digit declines. Well, one quarter does not a trend make, we are certainly pleased with this result, and the growth came primarily from the chemical and materials segment. Diagnostics and clinical revenue grew 1% during Q4 led by recovery in the U.S. and Europe. We continue to see recovery in non-COVID '19 testing as expected, although the levels that are still slightly below pre-COVID levels. Academia and government was flat to last year, continuing the steady improvement in this market, and revenue in the environmental and forensics market declined mid single-digits against a strong comparison to last year. On a geographic basis, all regions returned to growth. China continues to lead our results with broad based growth across most end markets. For the quarter, China finished with 13% growth, and ended the full-year up 7% just a great result from our team in China. The Americas delivered a strong performance during the quarter, growing 5% with results driven by large pharma food and chemical and energy, and in Europe, we grew 2% as we saw lab activity improved sequentially benefiting from our on-demand service business in ACG, as well as from a rebound in pathology and genomics as elective procedures and screening started to resume. However, while improving CapEx demand still lags are servicing consumables business. Now turning to the rest of the P&L, fourth quarter gross margin was 55%. This was down 150 basis points year-over-year, primarily by a shift in revenue mix and an unfavorable impact of FX on margin. In terms of operating margin, our fourth quarter margin was 24.9%. This is down 20 basis points from Q4 of last year. As we made some incremental growth focused investments in marketing and R&D, which we expect to benefit us in the coming year. The quarter also capped off with full-year operating margin of 23.5%, an increase of 20 basis points over fiscal 2019. Now wrapping up the income statement, our non-GAAP EPS for the quarter came in at $0.98, up 10% versus last year. Our full-year earnings per share of $3.28 increased 5%. In addition, our operating cash flow continues to be strong. In Q4, we had operating cash flow of $377 million, but more than $60 million over last year, and in Q4, we continued our balanced capital approach to repurchasing $2.48 million shares for $250 million. For the year, we repurchased just over 5.2 million shares for $469 million, and ended the fiscal year in a strong financial position with $1.4 billion in cash and just under $2.4 billion in debt; all-in-all, a very good end to the year. Now let's move on to our outlook for the 2021 fiscal year. We and our customers have been dealing with COVID-19 for nearly a full-year and are seeing our end markets recover. Visibility into the business cadence is improving, and as a result, we're initiating guidance for 2021. There is still a greater than usual level of uncertainty in the marketplace across most regions and so while we're providing guidance, we're doing so with a wider range than we have provided historically. It is with this perspective that we're taking a positive, but prudent view of Q1 in the coming year. For the full-year, we're expecting revenue to range between $5.6 billion and $5.7 billion, representing reported growth of 5% to 7% in core growth of 4% to 6%. This range takes into account the steady macro environment we're seeing. It does not contemplate any business disruptions caused by extended shutdowns like we saw in the first half of this year. In addition, we're expecting all three of our businesses to grow led by DGG. We expect DDG to grow high single-digits with the continued contribution of NASD ramp and the recovery in cancer diagnostics. We believe ACG will return to its historical high single-digit growth, while LSAG is expected to grow low to mid single-digits. We expect operating margin expansion of 50 to 70 basis points for the year, as we absorbed the build-out costs of the second line and our Frederick Colorado NASD site, and then helping you build out your models, we're planning for a tax rate of 14.75%, which is based on current tax policies, and 309 million of fully diluted shares outstanding, and this includes only anti-dilutive share buybacks. All this translates to a fiscal year 2021 non-GAAP earnings per share expected to be between $3.57, and $3.67 per share, resulting in double-digit growth at the midpoint. Finally, we expect operating cash flow of approximately $1 billion to $1.05 billion and an increase in capital expenditures to $200 million, driven by our NASD expansion. We have also announced raising our dividend by 8%, continuing an important streak of dividend increases, providing another source of value to our shareholders. Now, let's finish with our first quarter guidance, but before we get into the specifics, some additional context. Many places around the world are currently seeing renewed spikes in COVID-19 that could cause some additional economic uncertainty, and while we're extremely pleased with the momentum we have built during Q4, we are taking a prudent approach to our outlook for Q1 because of the current situation with the pandemic. For Q1, we're expecting revenue to range from $1.42 billion to $1.43 billion, representing recorded growth of 4.5% to 5.5%, and core growth of 3.5% to 4.5% and first quarter 2021 non-GAAP earnings are expected to be in the range of $0.85 to $0.88 per share. Before opening the call for questions, I want to conclude by echoing Mike's comments about the amazing work the Agilent team performed during fiscal 2020. To be where we are now, after knowing where we stood in March, is truly remarkable. Add to this the strong momentum we saw in Q4, I truly believe we are well-positioned to accelerate our growth in fiscal 2021. With that, Ankur, back to you for Q&A. Ankur Dhingra: Thanks, Bob. David, let's provide the instructions for Q&A. Operator: Certainly. [Operator Instructions] Your first question comes from the line of Vijay Kumar with Evercore ISI. Your line is open. Vijay Kumar: Hey, guys, congrats on the good prints here, and a couple of questions for me. Mike McMullen: Hey, Vijay. Vijay Kumar: Mike, maybe first on the guidance part here, I guess with a Q1 guidance of 4.5% to 5.5% core, does it have -- does it assume any core tailwinds because, I guess you look at Q4, I mean 6% core, any reason why the core should slow down sequentially? Mike McMullen: Yes, let me start with, Bob. So again, thanks for the earlier comments, Vijay. So how to characterize our Q1 guide is positive, but we're using a very prudent approach, and that we got a lot of confidence in that in terms of we're reinstating the guidance, and we had very good momentum in Q4, and we looked at the backlog, we feel very confident about reinstating guidance, but the virus is still out there, and we still think there's still a higher level of uncertainty that calls for a prudent approach, so hence the positive but prudent approach. If it turns out better we'd be -- we'd love to be in a position of being able to raise our outlook for the year, but we thought for the first guide for the year, including Q1, and we should take a positive and prudent approach, this is recognizing that the virus is still out there. Bob, I don't know if you'd like to add anything to that. Bob McMahon: Yes, Vijay, I think a couple of things, you know, the thing that I would say is we didn't end the year with emptying the tank out, and feel really good about that, but that being said, we do have some business that is somewhat susceptible to some of these areas, and so we probably have greater visibility or variability in some of our diagnostics businesses. So, as Mike said, we're taking kind of prudent approach there, and the other area is we want to see more than just one quarter in the chemical and energy business. I think that's one of the areas where I think -- we think we're biased to the upside and the way we're kind of thinking about the business, but it's certainly with a recovery. We do expect some COVID tailwinds, to your point. It's probably on the order of roughly about one-and-a-half to two points, kind of consistent with what we've seen in the last -- the last several quarters. So that's kind of how we're thinking about it. Vijay Kumar: That's helpful, Bob; and Mike, one bigger picture question for you. I think you mentioned NASD was up 40% in the quarter. Did that business accelerate NASD, and I'm curious, the longer-term opportunity here when you think about it, how -- can this end up being a $500 million product for Agilent as you look at four or five years out? I'm curious to know your thoughts, and Bob, I think you mentioned the 50 to 70 basis points of margin expansion inclusive of investments in Frederick facility. What do you think the impact was of those investments on the margins, or I guess what I'm asking is what should margin expansion have been without those investments? Thank you. Mike McMullen: Hey, Bob -- thanks for the questions, Vijay. How about I take the first part, and then you can take the second part. So that's not out of the realm of reason, your first question in terms of the longer-term potential total revenue for Agilent. We kind of put a teaser out there earlier about our December analyst and investor day, so we'll talk a bit more about NASD when we meet, but as you know, we are really pleased with -- and we've talked about in the past in terms of getting to that exit rate of over $200 million business, and while our capacity in terms of the physical capacity is built, we're now just finishing up the first year of operations, so we're -- just like we did with our Boulder site continue to find ways to drive more productivity and efficiency out of that asset, and we just announced another expansion of another production line within that existing facility. So I hope what you're hearing is a very bullish tone, both in terms of the market growth but also our ability to get our -- more of our unfair share, if you will, to the capital share in a growing market. Bob McMahon: Yes, Vijay, this is Bob. Just to build on that, what Mike talked about, the beauty of that business is it continues to accelerate throughout the year, and that 40% -- that roughly 40% in Q4 was the highest it was all year, and that team has done just a fantastic job of scaling that business, and we're not done, and as Mike said, we're making incremental investments in building out that capacity, which we'll continue to make throughout the course of next year. That is probably about a 20 basis point headwind next year and in the operating margin just rough numbers there, Vijay, but extremely pleased with the work that that team has been able to do, and continuing to drive that growth, and so we feel very good about that business. Vijay Kumar: Thank you, guys. Mike McMullen: You're welcome. Operator: Your next question comes from the line of Puneet Souda with SVB Leerink. Your line is open. Puneet Souda: Yes, hi, Bob and Mike. Thanks for taking the question. So, Bob, actually on one of the question on guidance, and this is probably a favorite topic for you, the Chinese Lunar New Year. Mike McMullen: Oh yes. That's the New Year again, isn't it? Puneet Souda: That time of the year. So, this time, obviously, you are seeing how the troops are acting on the ground, how things are there, and I would suspect it would be a lesser impact this year, lesser travel, but correct me if I'm wrong on that, and then in light of that, I mean the guidance again appears conservative. Is there anything that we ought to keep in mind for a market that is growing double-digit for you already, and is a sizable portion of your revenue? So just walk us through how are you thinking about the Lunar New Year impact here. Bob McMahon: Yes, that's a great question, Puneet, and as you accurately state, our expectation is the impact is going to be much less this year than it was last year for all the things that you just talked about, less travel, timing of when it is, and so forth, relative to Q1, and what we're seeing is actually very strong continued recovery and performance in our China business, and I would say that there's -- Q1 is no different, and so, the story there certainly remains in tact, and I would expect it to be very strong performance in Q1. I think what we're trying to do is there's nothing in particular, but I think we're just probably taking a little more prudent approach in Europe, and as we're seeing some of the shutdowns, particularly in some of these areas. And I think as we look at where are the things that could potentially be upsides or downsides, I think that continued recovery in chemical and energy across the business, also continued performance in Americas. We're expecting kind of an average budget flush, so to speak. That's another question that's probably -- if people are thinking about by -- for the end of the year and both of those things could be better than expected. Mike McMullen: Yes, Bob, I could just jump into that, just amplify the point, Puneet, that Bob made. We're very, very happy with our China business, and we exited the year with momentum, and that's carrying forward into 2021. We're positioning ourselves with a wait-and-see moment on C&E, and that could be a source of upside for the year, and like I said earlier, we're fully prepared to reflect that in a revised outlook, and I would just use the word, maybe, prudent as a way to describe as the adjective Bob and I have been using to describe our guide. Puneet Souda: Okay, that's -- no, that's very helpful, thanks, and if I could get a sense on the -- in the cell analysis business, that business continues to be really strong for you, BioTek, [indiscernible] horse, other products in that product line, just wanted to get a sense of what are some of the key drivers there, is it largely the cell and gene therapy, the cellular product and drug product market, or is there something in the academic end that is driving that growth or specifically in China? Would appreciate and helping frame what's exactly happening there, and the opportunity there longer-term. Mike McMullen: Yes, Puneet, thanks for the question, and as I mentioned in my call script, we're really pleased with how we've been able to integrate the BioTek team, make them part of the Agilent family, and then how that collective has lead to having us have a very healthy cell analysis, just north of $300 million, growing nicely for us, and I know that Jacob would love to be able to have an opportunity to talk a little bit more about the cell analysis, back to Jacob, your thoughts on the specific questions that Puneet put forward? Jacob Thaysen: First of all, let me just echo that I think it's very impressive what Agilent has been doing here the past year, and the growth actually stems from many multiple dimensions here. First of all, we have seen, so first of all, with the testing that a lot of our BioTek portfolio has been using for that for the ELISA testing, and -- but we also see, generally speaking, imaging being very relevant in the academic markets, but also in the biopharma markets, and the [CS] [ph] portfolio with the flow of tachometry is also seeing quite a lot of interest. So it's really broad across both academic and biopharma and COVID-related that we see interest. Lifestyle analysis was where we felt a few years ago that this was an area that would continue to see in our growth. Particularly that point about immune-oncology, we're pleased that has moved into a broader understanding on the immune system, right now on COVID, but generally speaking I think would be a focus for many years to come. So very pleased, and we continue to expect good growth in that business. Mike McMullen: Yes, and hey, Puneet, just one thing because you mentioned China, and we see really China as a huge opportunity for us going forward. The real growth has been primarily in the U.S. and Europe. I mean it's growing in China as well, but it's off a very small base. So when we think about the opportunities going forward, leveraging the large infrastructure that Agilent has is really a big opportunity for us for many, many years to come in the cell analysis space. Puneet Souda: Great. Okay, thank you. Operator: The next question comes from the line of Tycho Peterson with J.P. Morgan. Your line is open. Tycho Peterson: Hey, good afternoon. Mike, I wondering if you could talk a little more on the biopharma strength, 12% on a 7% comp is obviously phenomenal. I know you had 2% from NASD, and you just talked about cell analysis, but can you maybe just talk more broadly on the strength in biopharma. Was any of this a catch-up from slower setting in the first-half of the year? And how do you think about the sustainability of demand. I know you mentioned you're thinking about an average budget flush, but can you just talk to the broader strength in biopharma? Mike McMullen: Yes, sure, happy to do so, Tycho, and without giving away too many of the tidbits that I want to talk about more -- in more depth in a few weeks. There was no catch-up here. This is part of this continued strength in the biopharma area. It's an area of focus, and we'll go into some more detail with you in a few weeks, but it's an area of focus in terms of increased investments relative to our biopharma tools, but the instrumentation along with chemistry platform, a real workflow focus there across the whole value chain, but we're getting growth, as you mentioned earlier, NASD, but that's -- the story is much bigger, and bigger, and that's to be honest with you. And then, obviously, we're picking up some growth here in the cell analysis. So I think it's really a multifaceted strategy that really driving this growth. We think it's sustainable. We think a double-digit outlook on the biopharma portion of Agilent's business is quite reasonable. We're really excited, and it's an investment priority for us. Bob McMahon: Yes, and Tycho, maybe if I can add to Mike's point, in terms of -- because it's not only the platforms in the portfolio that we have on the instrument basis, which we've been making some heavy investments in, but it's also been the informatics and the software piece, which is has allowed us to be able to kind of plug in to the labs, the analytical labs, and then you bring in the ACG services portfolio that helped them manage the labs, and particularly with everything that's going on right now, the last thing they want is their scientists to be managing the instrumentation. They want them to be doing the science, and so, we think we've got a very compelling software and tools offering, and I think it's showing up in the marketplace across multiple technology platforms really. Tycho Peterson: Great, and then Mike, you used the phrase, wait and see mode for C&E a couple minutes ago, and it's good to see that back to growth, can you maybe just talk on some of the data points you're watching in your customer base and how you're thinking about the recovery curve there? Mike McMullen: Yes, thanks Tycho. So, my comments come back from my first year as a CEO when I tried to call the trend of the C&E business, and eventually it turned out I think it was all by several quarters. So I learned my lesson, so to speak. So as Bob mentioned, one quarter trend does not make but we're very encouraged by that, because it's the first time we've seen some growth after those two double-digit declines earlier this year. And we look at a couple of things, Tycho one is the PMIs and the positive moves in the PMIs are indicative of improved end market strength, particularly in C&E, we also look at what we estimate to be the age of the installed base, because a lot of aged equipment out there, and that's been probably at very high levels, and then we look at the deal flow. So, kind of all those factors, the macro outlook from PMIs what we know to be the current environment for customers in terms of the age of their installed base, and then also overseen in our funnels, and you know, Agilent has a real strength in this market. So I think we will benefit from returned to growth, again we're not ready yet to put it into numbers for Q1 in the full-year, but we're hopeful that that trend will continue. There're some indications that it could, but let's give it another quarter or so. Tycho Peterson: Okay, and then lastly before I hop off, one quick one on China, one of your coolest companies, Mettler, talked about pent-up demand kind of suggested that what they saw may not be sustainable. Have you seen anything in your order book that would suggest what you're seeing in China? Mike McMullen: Yes, no, Tycho really appreciate you asking that question because not at all, I mean, this has been a continuing steady flow of business. We think the end markets are really strong here. We see a lot of strength in China Government funding to make sure they stimulate the economy, and then we talked earlier about just overall their investments in improving the quality of life, you noticed the strong growth in the food market, continued strength in pharma. So no, we've seen this. Now, I think we really look closely at the pacing and it's all nothing unusual. Bob McMahon: Yes, Tycho, I think we've been extraordinarily pleased with the way our China businesses performed throughout the course of this year, and when you think about kind of our cadence through Q1, Q2, Q3, and Q4, we've seen accelerated growth. So we saw our lowest growth in the first quarter where we saw the impact of COVID-19, but then what we've seen is improvements as opposed to this real huge increase, and then kind of a drop-off. So, we're not expecting any drop-off, and we haven't seen that in our order book or any of the conversations that we've had with our customers that there was sort of a material catch-up. Tycho Peterson: Okay, thank you. Mike McMullen: You're quite welcome, Tycho. Operator: Your next question comes from the line of Brandon Couillard with Jefferies. Your line is open. Brandon Couillard: Hi, thanks. Good afternoon; Mike, a couple of questions on LSAG. Mike McMullen: Sure. Brandon Couillard: I'm curious, if you could speak to the order book in the fourth quarter, and to the extent that you may have built some backlog there, and curious to speak to perhaps the margin compression in the fourth quarter, but that was mostly mix or is today's dynamics there? Mike McMullen: Happy to see you, Brandon. So, one of the reasons why we were able to reinstate guidance this year was what we saw in the LSAG order book, and as you know, we stopped a few years ago talking about specifics around orders, but I think in today's call, it's really prudent for us to give you a sense of why Bob and I have this confidence around the outlook. So we didn't guessed as we ran across the finish line for 2020, order book was strong in LSAG and as continued into the fairly few weeks of this year. So again, all the other caveats aside being prudent and recognition of the virus, we feel pretty good about our ability to reinstate guideline because as we mentioned earlier reinstate guidance as mentioned earlier, LSAG was one where we hit the most early on the year, and I think we're feeling pretty good about that. And Bob, as I recall, most of the gross margin is really just a mix of the various instrument platforms. Bob McMahon: Yes, that's right. I mean, I think Brandon, to read what Mike is saying, I mean we feel very good, orders exceeded revenue and exceeded our expectations, and so, it was a bit of a mix shift that is impacting that, but we would expect that to kind of normalize out throughout the course of next year, and so, we feel very good about kind of where that business is going into 2021. Mike McMullen: Yes, Brandon, just one additional thought here which is, we've seen a real change in the price environment. So, that's why we can say pretty common that has happened to be the mix product this quarter. Brandon Couillard: Super, and one more for Bob, you mentioned currency with the drag to margins in the fourth quarter, could you quantify that, the magnitude of the operating line, and then what you penciled in for impact of FX to operating margins in '21? Bob McMahon: Yes, it was roughly about 40-ish, 45-ish on the COGS line, and some of that was offset through the bottom line, and for next year less impactful, much less impactful than that, probably less than about 10 points, 10 basis points. Brandon Couillard: Super, thanks. Mike McMullen: You're welcome. Operator: Your next question comes from the line of Dan Leonard with Wells Fargo. Your line is open. Dan Leonard: Thank you. So, to start off, on the guidance, a question for probably you Bob, you've touched on this in pieces, but can you give us at a high level what your key assumptions are, by region and by end-markets? Bob McMahon: Yes, so by at the highest level, we're expecting steady improvement throughout the course of the year from the standpoint of the economic perspective, if I think about it from a geography first, China's going to lead the way with high single-digit growth continuing the momentum that we've seen, we ended this year FY '20 about 7%, and we're expecting that or better into next year, and then what you would see as a recovery in the Americas getting back to kind of mid to high single-digits, and then followed by Europe, which would be kind of the low to mid single-digits. So that's kind of on an end market perspective, how we would think about it, it's predicated on that continued recovery, and that we would as I mentioned before, not have any extended periods of shutdown that would disrupt business. I think the good thing is what we're seeing not only ourselves, but our customers are being able to operate in a different environment than they had the first time these were shut down. So we're not expecting any material impact there, and from an end-market perspective, the strength is really going to be the continued strength that we've seen in the last several years really driven behind our pharma business, which is probably high single-digits with biopharma as one of the earlier questions came out, probably growing double-digits going forward. And then food, we'll probably expect maybe a little tempering, where it'd be great to have 16% every quarter, but we're not ready to put that into our plan, but I would expect continued recovery there probably in the mid-single-digits and also recovery in our diagnostics and clinical business, particularly in that same kind of mid-single-digits, and probably ramping throughout the course of the year, probably more muted on the academia, and government probably flattish to low, and as we talked about before chemical and energy flattish, but that's really one where we're hoping that we're biased, and there's more upside than downside here, but certainly given the momentum, but one quarter is too early to put a forecast on there, and so, we're assuming roughly flat and then probably recovery in the environmental and forensics market low-single-digits. Dan Leonard: Okay, thanks for that overview, and that's my follow-up, you touched on there being a wider range of outcomes in '21 and typical and mentioned at the bottom end doesn't capture any threats around reestablishment of lockdowns or whatnot. Do you feel the high-end of guidance really captures all the benefits from easy comparisons, any potential upside there might be or how would you frame, what you're capturing in the high-end there? Bob McMahon: Yes, I'd say it's continued momentum, but I think that there's probably more upsides and downsides in the way that we're trying to capture that certainly exiting at a 6% growth rate, there are we're probably the biggest areas are around chemical and energy and the pace of recovery in academia and government, and if those continue, I would say - let me put it this way, if chemical and energy continued at 3% and growing, we'll be that number. Dan Leonard: Yes, absolutely. Thank you. Mike McMullen: Thanks, Dan. Operator: Your next question comes from the line of Douglas Schenkel with Cowen. Your line is open. Douglas Schenkel: Hi, good afternoon guys. Mike McMullen: Good evening, Doug. Douglas Schenkel: Maybe I have a few cleanup guidance questions, but before I get to that one, I just wanted to talk about your performance specific to your mass spec product line. You talked about another quarter of double-digit growth. I'm just wondering if you'd be willing to unpack that a bit more and just talk about what's driving this, and specifically is China and more specifically China food, a major driver, I guess I'm just trying to get at which segments of the portfolio or specific end markets or geographies that really stand out within a pretty robust and impressive growth rate there? Mike McMullen: Hi, Doug really appreciate the opportunity to have Jacob comment more deeply on that, but as you know, I highlighted that in my script, we were able to call out that double-digit growth. We're extremely proud of that. And Jacob, I think you've got some additional insights that you could share with Doug. Jacob Thaysen: Yes, that's a great question, and I'm certainly proud of what the team has been doing over the past years, because this is not only a quarterly effect here, but we have done a quiet and overhaul of our master portfolio, particularly the LC/MS portfolio over the last few years, both on the high-end triple quad, but also the single quad, and [indiscernible] the team applications, and this is really what the customer is looking for right now. So, you can really see that the investments we have done really resonates with our customer base, and right now, I would say in most geographies and in most end markets, but if you look into it's biopharma and China is definitely a big part of this story, but -- and the other element into it is that we pivoted very quickly to remote customer engagement during this beginning of this year, and when the customer has to shut down the laboratories, we were there for them. We did support them when the tough times, and you can see that pay dividends today that they also continue with the partnership with accidents. So, I actually believe that we are in a quite good momentum here with the mass aide business. Douglas Schenkel: Yes, all right. Douglas Schenkel: Yes, that sure does. Thank you for that, and then maybe just a few guidance questions, yes, so this'll be kind of a speed round in a way, because you have got some questions about these already, but on China, did you expect double-digit growth in fiscal '21? On gross margin, you talked about some of the headwinds you saw in Q4 becoming less pronounced moving forward. So, do you expect gross margin overall to get back up to the 56 plus level? And then on COVID-19, I think you talked about just over two points of COVID tailwinds in the quarter. I'm just wondering if looking forward either fiscal Q1 or for the full-year, if you could see a scenario where this would accelerate over time if serology volumes began to inflect in a positive way and same thing on the antibody business, could those in combination drive more of a tailwind moving forward, so China gross margin and COVID-19? Bob McMahon: Yes, so China, high single-digits, maybe low double-digits based on the range that we gave you in terms of COVID what I would say is, we are expecting less incremental the growth, but certainly the things that you talked about are baked into our guidance. So more serology our antigen based testing or even vaccine driven volume is not fully baked into the numbers that we are -- it's just too early to tell, but those are certainly be things that are potential upsides, and then the last one, I know which was your second question around gross margin, I would expect it to stabilize and not see this the same level of decline. Now, what I would say is you will have some mix shifts, right, because our ACG business, which is lower gross margin than the instrument business, but much higher operating margin helps us with that. So, you do see a dampening effect on the gross margin side, but you will more than make up for it on the operating margin side. Douglas Schenkel: Okay, Bob. Sorry. Bob McMahon: Doug specific to COVID-19 we'll hit a little bit more of that when we have our Analyst Day, but we are planning to launch in early 2021 our serology test, and there are some things that we're working on that aren't baked into the guide. We'll see how that they play out. Douglas Schenkel: Okay, that's great. Thank you guys for all the time and happy Thanksgiving everybody. Bob McMahon: Same to you. Douglas Schenkel: Thank you. Operator: Your next question comes from the line of Derik de Bruin with Bank of America. Your line is open. Derik de Bruin: Hi, good afternoon. Mike McMullen: Hi, Derik. Bob McMahon: Hi, Derik. Derik de Bruin: Hi, so I'm going to do this similar to Doug. I've got a couple of focus questions. I got one guidance cleanup. So I guess specifically, Bob, you mentioned some software pushes in business between the pharma business. Can you be a little bit more specific on that? I mean, is OpenLab taking share against Empower, you winning have be replaced Empower and some of the accounts there, I'm just sort of curious on what the dynamics are in the CDS market? Mike McMullen: Yes. What I would say Doug, excuse me, Derik, is that we feel very good about our competitive positioning with OpenLab and the rest of our products. Derik de Bruin: Okay. Now I'll live with that I guess. Yes, and by the way, I'm better looking than Doug. On the Core Genomics business, I mean, we don't really have talk about that. I mean, you talk about the NASD and some other things here, but what is going on in your Core Genomics business, you've got SureSelect, I mean, you've had some pressures and some of that end market there. What is that underlying business growing? Bob McMahon: Yes, actually a great question because we didn't highlight that, but actually when you look at sequential performance, that was one of the things that was very, very positive in the DDG business. It recovered very nicely into Q4, and maybe I'll let Sam talk about some of the details there. Sam Raha: Yes, sure. Thanks, Bob. As you said, as we went into the heavy part of the pandemic, if you will, late Q2, Q3, some of the Genomics business also serves clinical diagnostic customers be it for SureSelect being the backbone and some of the leading cancer diagnostic and US-based tests as well as other inherited diseases. So we definitely saw the effect of that, but coming into Q4, we've seen a steady stream of increase there, and we've also seen a positive effect in parts of our portfolio that are related to qPCR be it instruments, be it our consumables that are used and also we have the leading Genomics QC portfolio as you're probably aware of, and we see a number of those products, including our fragment analyzer being used increasingly for picking up conventional or sorry, would the pickup of conventional clinical testing, but also being used for example for some siRNA vaccines that are in development. So, all-in-all, the trend is looking encouraging for our Core Genomics business. Derik de Bruin: Great, and then just one housekeeping question. For '21, the other income expense line, how should we think about that for '21? Bob do you want to handle that or you want to take that? Bob McMahon: Yes, that'd be slightly better than where it is this year. Derik de Bruin: Thank you. Operator: Your next question comes from the line of Jack Meehan with Nephron Research. Your line is open. Mike McMullen: Hello, Jack. Jack Meehan: Thanks. Hi, good afternoon. Let me go back to biopharm, Mike, I was curious if you're seeing any change in terms of customer spending patterns at all, because of COVID-19, there is just been such a focus on bioprocessing, the support vaccines and therapeutics. What's that doing in small molecule if you can call out any trends? Mike McMullen: Jack, great question. So, to our delight, it really hasn't seen them cause any kind of material shift. I mean, we're seeing -- in fact, I think Bob in his script, where we saw strength across small molecule and bio -- large molecule. Now the small molecule is not growing as fast as large molecules, it was growing, and… Bob McMahon: Yes, Jack to give you some numbers, I mean for Q4 small molecule grew high single-digits, and for the year it grew low single-digits. So despite all the hoopla, small molecule is not dead. Jack Meehan: Yes. Great, and maybe just to build on that, so the high teens ACG growth in China, could you just parse out for us? How did food do versus how did maybe generics do in terms of some of that consolidation there? Mike McMullen: Bob, as I recall, and I'd like Padraig on this, I think it was broad-based across all end-markets. Everything was in that double-digit range, and Padraig anything you could add to that? Padraig McDonnell: No, I think you said it well, Mike, I think across both sides of the business, both the chemistries serves as very strong demand in all markets, and we see certainly a strong demand for our installation familiarization and startup services. So I'm really strong across the board in China. Jack Meehan: Great, thank you, guys. Operator: Your next question comes from the line of Patrick Donnelly with Citi. Your line is open. Patrick Donnelly: Hey guys, thanks for taking the questions. Let me follow-up on the -- Mike McMullen: Hi, Patrick. Patrick Donnelly: Hey, Mike, just on the chemical and energy side, it certainly sounds like that's the biggest area of upside, maybe the biggest variable for next year. Sounds like chemicals and material things are improving, can you just give a bit more detail around the customer tone there, and then is energy the bigger variable for '21 maybe just talk through kind of the scenario analysis as you guys think about it certainly seems like there's upside, but maybe just kind of what parts of the business you feel like are the biggest variable there? Mike McMullen: Yes, I think that sort of all the kind of this always helpful reminder, but in a kind of our mix, so it's 70:30, 70:30 in chemicals and materials, and 30% energy. Actually the upside on the chemical and material, energy lags, and we aren't really seeing a lot of indications of why that would, that would pick up, but you have to remember some of the chemical companies are actually providing products and such into end markets that support COVID-19. They're feeling, what drives this marketplace? Yes, we talked about PMIs, but really all the PMIs are really related to the view of global growth, and I think that customer base is feeling more confident about where the economy is going and things this shut really slowed down earlier this year just for a must kind of purchases, but I think it's a prove view of the overall economic outlook for the chemical and materials side plus the fact that they have some kind of COVID-19 tailwind to help out. I wouldn't say that's the entire story is just the element of it. I think the biggest part here is just the fact that there's much more common in the customer base about the growth environment from an economic standpoint, Bob anything you would add to that? Bob McMahon: Thank you, Mike. I don't. Patrick Donnelly: Okay, yes, that's very helpful, and then maybe just on a capital deployment side. You guys always take the balanced approach, and I'm sure we'll hear more about it in a couple of weeks, but how are things trending in the pipeline on the M&A side, your cash flow has actually been pretty strong? How active should we expect you guys to be on that front? Any changes and thoughts around the size of deals you want to pursue, and any metrics you can throw out there would be helpful? Thanks. Mike McMullen: No, no we continue to be very interested in deploying capital for growth standpoint along all the dimensions we talked about earlier. We said that the BioTek size deal, which we were really quite happy with that, that was largest deal we've done to-date. That doesn't mean that would be the largest deal we would do. We've always said, I think it was not magnitudes of delta, and although we didn't closed any deals this year, I think that really was somewhat tied into some of the COVID-19 challenges of doing due diligence and working with potential targets, but we still see this as a key part of our, what we call, our build and buy growth strategy, and think that M&A can be a nice attitude to our core growth businesses. So you guessed right, so we'll talk more about it in a few weeks. We still have aspirations in the space, but really sticking to the model, the framework that we've been using before, which is M&A in markets at a higher growth investor company that aligns strategically with us where they can benefit by our scale and are accretive to the P&L. Bob McMahon: Yes, I would say Patrick, just to build on what Mike was saying. I mean, we feel very good about the acquisitions that we made, the last two which was BioTek and ACEA were probably the fastest growing parts of our business, if you take out NASD, and so, I think it validates the space that we're looking at, and we don't see a reason to need to change our M&A framework. Patrick Donnelly: Okay, thanks guys. Operator: Your final question comes from the line of Steve Beuchaw with Wolfe Research. Your line is open. Steve Beuchaw: Hi, thanks for sneaking me in here. I'll just ask one maybe I guess it's a two-parter; one part for Mike, one part for Bob, and… Mike McMullen: Okay, I'll be giving easy one. Steve Beuchaw: I think you're going to like it. I think you are going to like it. Mike McMullen: Okay. Steve Beuchaw: Mike, so last call, you raised this concept, you called it a flight to quality, and you talked about how the team with the execution has been able to drive share gains, I wonder if you could talk about whether you think that as the pandemic subsided in some ways and labs are opening up again, if you think that dynamic has become any more or less acute, and if you think it's sticky, I'm going to go ahead and ask the second part of my -- I guess I'll call it COVID discovery question for Bob; Bob, like a lot of CFOs, you've had a chance to see how much you can save within operating expenses, as we're all working remotely and being more digital. Have you thought about putting any numbers around how much of the savings that you've discovered here could end up being permanent? Thanks a bunch, everybody. Mike McMullen: Yes, thanks, Steve. So, in regards to the first one, we probably talked about the flight to quality when money is tight, but we also think tied it to stability, and how we protected our overall field team and our ability to support our customers during the pandemic. So, I think those two things are going to carry us forward. So we think that the stickiness will remain there, and I don't think that the quality will fall out of fashion, and I think as you continue to grow your position in the installed base, it just gives you an upper hand in terms of next buy when they get around to making the next capital purchasing decision. Bob McMahon: Yes, I would agree with that, Mike, and I think that, you know, I think two things; one is, we were there when the customers needed us the most, and our team particularly in the field, helping support critical operations and so forth, and that flight to quality on the instrumentation side only pays dividends going forward. So, I think there is no -- there will be no follow-up there, I truly believe that. On the cost side, we're still working through some of those things, a big thing, probably the biggest variable here, and it's got a couple of different tentacles to it would be around travel, and I think we had talked about before at one point in time we're spending roughly $10 million a month in travel, and that that is down, I would say substantially, and our goal is that will be back to $10 million a month, and so, that doesn't say that we're going to necessarily drop it all to the bottom line, but reinvest in some areas that will drive growth going forward, but certainly those, and then there will be more efficient ways of doing things like marketing outreach to our customers, and even operating, one of the things is we still operated and launched new products, despite not having been in the labs for the most part for nine months out of the year, and so, our teams are finding innovative ways to continue to actually move things around without having to spend incremental dollars, so more to come on that. Mike McMullen: We think [some things] [ph] are going to stick. Particularly, as it relates to your digital engagement with customers, because there's a huge element of being responsive, and we think that digital cable is a big part of that story, and yes, it has been accelerated by COVID, but we don't think there's any going back either. Steve Beuchaw: Got it. Thank you for all the color, guys. Mike McMullen: You're quite welcome. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.	[ { "speaker": "Operator", "text": "Good afternoon, and welcome to the Agilent Technologies Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. And now, I'd like to introduce you to the host for today's conference, Ankur Dhingra, Vice President of Investor Relations. Sir, please go ahead." }, { "speaker": "Ankur Dhingra", "text": "Thank you, and welcome everyone to Agilent's fourth quarter and full-year conference call for fiscal year 2020. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Bob's comments will be: Jacob Thaysen, President of Agilent's Life Sciences & Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of Agilent CrossLab Group. This presentation is being webcast live. The news release, Investor presentation, and information to supplement today's discussion along with the recording of this webcast are made available on our Web site at investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our Web site. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year, and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency, and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of October 31, 2020. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties, and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. Also, as announced, we will hold our virtual investor day in a few weeks, on December 9. The event with include presentations from our CEO, CFO, and the three group Presidents, followed by a Q&A. We look forward to having you join us on December 9. And now, I would like to turn the call over to Mike." }, { "speaker": "Mike McMullen", "text": "Thanks, Ankur, and thanks to everyone for joining us on our call today. Today, I want to get straight to our quarterly results, because they tell a very compelling story. The Agilent team delivered a very strong close to 2020. We posted revenues of $1.48 billion during the quarter. Revenues are up 8% on a reported basis, and up 6% core. Operating margins are a healthy 24.9%. EPS of $0.98 is up 10% year-over-year. These numbers tell the story of a strong resilient company that's built for continued growth. Our better than expected results are due to the strength of our core business, along with signs of recovery in our end markets. Geographically, China continues to lead the way with double-digit growth. From an end-market view, both our pharmaceutical and food businesses grew double-digits. In addition, our chemical and energy business grew after two quarters of declines, exceeding our expectations. We also saw a rebound in U.S. sales during the quarter. Overall, COVID-19 tailwinds contributed just over two points of core growth. Achieving these results in the face of a global pandemic is a tribute to our team and the company we've built over the last five years. I couldn't be more pleased with the way the Agilent team has performed over the last quarter and throughout 2020. We have again proven our ability to work together and step up to meet any challenge that comes our way. During the quarter, all three of our business groups grew high single-digits on a reported basis. Our Life Sciences and Applied Markets Group generated $671 million in revenue, up 8% on a reported basis, and up 4% core. LSAG growth is broad-based. The cell analysis and mass spec businesses both grew at double-digit rates. In terms of end markets, chemical and energy returned to growth, food grew double-digits, and pharma high single-digits. LSAG remains extremely well-positioned and is outperforming the market. The Agilent CrossLab Group came in with revenues at $518 million. This is up a reported 9% and up 7% core. ACG's growth is also broad-based across end markets and geographies. Our focus on on-demand service is paying off as activities in our customer's labs continues to increase. The ACG team continues to build on it's already deep connections with our customers, helping them operate through the pandemic, and continue to drive improved efficiencies in lab operations. In the Diagnostics and Genomics Group, revenues were $294 million, up 9% reported, and up 7% core. Growth was broad-based, with NASD oligo manufacturing revenues up roughly 40%. The Genomics and pathology businesses continue to improve during the quarter. I'm also very proud of our NASD team for successfully ramping production at our new Frederick site this year. We have built a very strong position in this attractive market, with excellent long-term prospects for high growth. Let's now shift gears and look at our full-year fiscal 2020 results. Despite the disruption, uncertainty, and economic turmoil dealing with a global pandemic, the Agilent team delivered solid results. We generated $5.34 billion in revenue, up 3% on a reported basis, and up nearly 1% core. To put this in perspective, it's helpful to recall the progression of our growth. In Q1, we delivered 2% core growth, as you saw the first impact of COVID-19 in our business in China. Both Q2 and Q3 declined low single-digits as the pandemic spread across the globe and governments instituted broad shutdowns. With 6% core growth, 8% reported in Q4, we're seeing business and economies start to recover. As a result, we are clearly exiting 2020 with solid momentum. Our recurring types of businesses, represented by ACG and DGG prove resilient, growing low to mid single-digits for the year. In a very tough CapEx market, our LSAG instrument business declined only 2% for the year, and returned to growth in the final quarter. China led the way for our recovery with accelerating growth as the year progressed. In our end markets, pharma remained the most resilient, and food markets recovered most quickly. Full-year earnings per share grew 5% during fiscal 2020, to $3.28. The full-year operating margin of 23.5% is up 20 basis points over fiscal 2019. As we head into 2021 we do so with tremendous advantage. Our diverse industry-leading product portfolio has never been stronger. Our building and buying growth strategy, with the focus of high growth markets continues to deliver. Our ability to respond quickly to rapidly changing conditions is also serving us well. The way our sales and service teams have been able to quickly pivot to meet customer requirements during the pandemic has been nothing short of remarkable. You know, last year this time, I used this call to remind you of the Agilent shareholder value creation model. Our approach is focused on delivering above market growth, while expanding operating margin, along with a balanced deployment of capital. We prioritized the plan of our capital both internally and externally on additional growth. A few proof points on our growth-oriented capital deployment strategy. A year ago, we spoke about recently closing the BioTek acquisition and the promise of growth that BioTek represented. Today, BioTek is no longer a promise, but a driver of growth. In total, the cell analysis business generated more than $300 million in revenue for us during the year, with double-digit growth in Q4, and continued strong growth prospects. Similar to last year, I was talking about ramping up our new Frederick site facility, a $185 million capital investment. In addition to successfully ramping Frederick as we planned, we did so with an expanding book of business. We also recently announced additional $150 million investment to add future manufacturing capacity. We are aggressively adding capacity to capture future growth opportunities in this high-growth market. Even in the face of a pandemic, we stayed true to our build and buy strategy. We have clearly seen the advantages of our approach. I'm confident our strategy will continue to produce strong results for us. The strength of our team and resilience of our business model has served us well, and as you can see from the numbers, our growth strategy is producing outstanding results for our customers, employees, and shareholders. While uncertainty remains as we being fiscal 2021, we're operating from a position of strength. Because of this, we're cautiously optimistic about the future. We have built and will sustain our track record of delivering results, and working as a one Agilent team on behalf of our customers and shareholders. As I noted earlier, I couldn't be more pleased with the results the Agilent team delivered in the fourth quarter and throughout the year. Thank you for being on the call today, and I look forward to your questions. I will now hand the call off to Bob. Bob, you're up." }, { "speaker": "Bob McMahon", "text": "Thanks, Mike, and good afternoon, everyone. In my remarks today, I'll provide some additional revenue detail, and take you through the fourth quarter income statement, and some other key financial metrics. I'll then finish up with our outlook for 2021, and the first quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. We are very pleased with our fourth quarter results as we saw strong growth exceeding our expectations, especially considering the ongoing challenges associated with COVID-19. For the quarter, revenue was $1.48 billion, reflecting core revenue growth of 5.6%. Reported growth was stronger, at 8.5%, currency contributed 1.7%, while M&A added 1.2 points of growth. From an end market perspective, pharma, our largest market, showed strength across all regions, and delivered 12% growth in the quarter. Both small and large molecule businesses grew, with large molecule posting strong double-digit growth. We continue to invest and build capabilities in faster growth biopharma markets, and offer leading solutions across both small and large molecule applications. The food market also experienced double-digit growth during the quarter, positing a 16% increase in revenue. While our growth in food business was broad-based, China led the way. And as Mike noted earlier, our chemical and energy market exceeded our expectations growing 3% after two quarters of double-digit declines. Well, one quarter does not a trend make, we are certainly pleased with this result, and the growth came primarily from the chemical and materials segment. Diagnostics and clinical revenue grew 1% during Q4 led by recovery in the U.S. and Europe. We continue to see recovery in non-COVID '19 testing as expected, although the levels that are still slightly below pre-COVID levels. Academia and government was flat to last year, continuing the steady improvement in this market, and revenue in the environmental and forensics market declined mid single-digits against a strong comparison to last year. On a geographic basis, all regions returned to growth. China continues to lead our results with broad based growth across most end markets. For the quarter, China finished with 13% growth, and ended the full-year up 7% just a great result from our team in China. The Americas delivered a strong performance during the quarter, growing 5% with results driven by large pharma food and chemical and energy, and in Europe, we grew 2% as we saw lab activity improved sequentially benefiting from our on-demand service business in ACG, as well as from a rebound in pathology and genomics as elective procedures and screening started to resume. However, while improving CapEx demand still lags are servicing consumables business. Now turning to the rest of the P&L, fourth quarter gross margin was 55%. This was down 150 basis points year-over-year, primarily by a shift in revenue mix and an unfavorable impact of FX on margin. In terms of operating margin, our fourth quarter margin was 24.9%. This is down 20 basis points from Q4 of last year. As we made some incremental growth focused investments in marketing and R&D, which we expect to benefit us in the coming year. The quarter also capped off with full-year operating margin of 23.5%, an increase of 20 basis points over fiscal 2019. Now wrapping up the income statement, our non-GAAP EPS for the quarter came in at $0.98, up 10% versus last year. Our full-year earnings per share of $3.28 increased 5%. In addition, our operating cash flow continues to be strong. In Q4, we had operating cash flow of $377 million, but more than $60 million over last year, and in Q4, we continued our balanced capital approach to repurchasing $2.48 million shares for $250 million. For the year, we repurchased just over 5.2 million shares for $469 million, and ended the fiscal year in a strong financial position with $1.4 billion in cash and just under $2.4 billion in debt; all-in-all, a very good end to the year. Now let's move on to our outlook for the 2021 fiscal year. We and our customers have been dealing with COVID-19 for nearly a full-year and are seeing our end markets recover. Visibility into the business cadence is improving, and as a result, we're initiating guidance for 2021. There is still a greater than usual level of uncertainty in the marketplace across most regions and so while we're providing guidance, we're doing so with a wider range than we have provided historically. It is with this perspective that we're taking a positive, but prudent view of Q1 in the coming year. For the full-year, we're expecting revenue to range between $5.6 billion and $5.7 billion, representing reported growth of 5% to 7% in core growth of 4% to 6%. This range takes into account the steady macro environment we're seeing. It does not contemplate any business disruptions caused by extended shutdowns like we saw in the first half of this year. In addition, we're expecting all three of our businesses to grow led by DGG. We expect DDG to grow high single-digits with the continued contribution of NASD ramp and the recovery in cancer diagnostics. We believe ACG will return to its historical high single-digit growth, while LSAG is expected to grow low to mid single-digits. We expect operating margin expansion of 50 to 70 basis points for the year, as we absorbed the build-out costs of the second line and our Frederick Colorado NASD site, and then helping you build out your models, we're planning for a tax rate of 14.75%, which is based on current tax policies, and 309 million of fully diluted shares outstanding, and this includes only anti-dilutive share buybacks. All this translates to a fiscal year 2021 non-GAAP earnings per share expected to be between $3.57, and $3.67 per share, resulting in double-digit growth at the midpoint. Finally, we expect operating cash flow of approximately $1 billion to $1.05 billion and an increase in capital expenditures to $200 million, driven by our NASD expansion. We have also announced raising our dividend by 8%, continuing an important streak of dividend increases, providing another source of value to our shareholders. Now, let's finish with our first quarter guidance, but before we get into the specifics, some additional context. Many places around the world are currently seeing renewed spikes in COVID-19 that could cause some additional economic uncertainty, and while we're extremely pleased with the momentum we have built during Q4, we are taking a prudent approach to our outlook for Q1 because of the current situation with the pandemic. For Q1, we're expecting revenue to range from $1.42 billion to $1.43 billion, representing recorded growth of 4.5% to 5.5%, and core growth of 3.5% to 4.5% and first quarter 2021 non-GAAP earnings are expected to be in the range of $0.85 to $0.88 per share. Before opening the call for questions, I want to conclude by echoing Mike's comments about the amazing work the Agilent team performed during fiscal 2020. To be where we are now, after knowing where we stood in March, is truly remarkable. Add to this the strong momentum we saw in Q4, I truly believe we are well-positioned to accelerate our growth in fiscal 2021. With that, Ankur, back to you for Q&A." }, { "speaker": "Ankur Dhingra", "text": "Thanks, Bob. David, let's provide the instructions for Q&A." }, { "speaker": "Operator", "text": "Certainly. [Operator Instructions] Your first question comes from the line of Vijay Kumar with Evercore ISI. Your line is open." }, { "speaker": "Vijay Kumar", "text": "Hey, guys, congrats on the good prints here, and a couple of questions for me." }, { "speaker": "Mike McMullen", "text": "Hey, Vijay." }, { "speaker": "Vijay Kumar", "text": "Mike, maybe first on the guidance part here, I guess with a Q1 guidance of 4.5% to 5.5% core, does it have -- does it assume any core tailwinds because, I guess you look at Q4, I mean 6% core, any reason why the core should slow down sequentially?" }, { "speaker": "Mike McMullen", "text": "Yes, let me start with, Bob. So again, thanks for the earlier comments, Vijay. So how to characterize our Q1 guide is positive, but we're using a very prudent approach, and that we got a lot of confidence in that in terms of we're reinstating the guidance, and we had very good momentum in Q4, and we looked at the backlog, we feel very confident about reinstating guidance, but the virus is still out there, and we still think there's still a higher level of uncertainty that calls for a prudent approach, so hence the positive but prudent approach. If it turns out better we'd be -- we'd love to be in a position of being able to raise our outlook for the year, but we thought for the first guide for the year, including Q1, and we should take a positive and prudent approach, this is recognizing that the virus is still out there. Bob, I don't know if you'd like to add anything to that." }, { "speaker": "Bob McMahon", "text": "Yes, Vijay, I think a couple of things, you know, the thing that I would say is we didn't end the year with emptying the tank out, and feel really good about that, but that being said, we do have some business that is somewhat susceptible to some of these areas, and so we probably have greater visibility or variability in some of our diagnostics businesses. So, as Mike said, we're taking kind of prudent approach there, and the other area is we want to see more than just one quarter in the chemical and energy business. I think that's one of the areas where I think -- we think we're biased to the upside and the way we're kind of thinking about the business, but it's certainly with a recovery. We do expect some COVID tailwinds, to your point. It's probably on the order of roughly about one-and-a-half to two points, kind of consistent with what we've seen in the last -- the last several quarters. So that's kind of how we're thinking about it." }, { "speaker": "Vijay Kumar", "text": "That's helpful, Bob; and Mike, one bigger picture question for you. I think you mentioned NASD was up 40% in the quarter. Did that business accelerate NASD, and I'm curious, the longer-term opportunity here when you think about it, how -- can this end up being a $500 million product for Agilent as you look at four or five years out? I'm curious to know your thoughts, and Bob, I think you mentioned the 50 to 70 basis points of margin expansion inclusive of investments in Frederick facility. What do you think the impact was of those investments on the margins, or I guess what I'm asking is what should margin expansion have been without those investments? Thank you." }, { "speaker": "Mike McMullen", "text": "Hey, Bob -- thanks for the questions, Vijay. How about I take the first part, and then you can take the second part. So that's not out of the realm of reason, your first question in terms of the longer-term potential total revenue for Agilent. We kind of put a teaser out there earlier about our December analyst and investor day, so we'll talk a bit more about NASD when we meet, but as you know, we are really pleased with -- and we've talked about in the past in terms of getting to that exit rate of over $200 million business, and while our capacity in terms of the physical capacity is built, we're now just finishing up the first year of operations, so we're -- just like we did with our Boulder site continue to find ways to drive more productivity and efficiency out of that asset, and we just announced another expansion of another production line within that existing facility. So I hope what you're hearing is a very bullish tone, both in terms of the market growth but also our ability to get our -- more of our unfair share, if you will, to the capital share in a growing market." }, { "speaker": "Bob McMahon", "text": "Yes, Vijay, this is Bob. Just to build on that, what Mike talked about, the beauty of that business is it continues to accelerate throughout the year, and that 40% -- that roughly 40% in Q4 was the highest it was all year, and that team has done just a fantastic job of scaling that business, and we're not done, and as Mike said, we're making incremental investments in building out that capacity, which we'll continue to make throughout the course of next year. That is probably about a 20 basis point headwind next year and in the operating margin just rough numbers there, Vijay, but extremely pleased with the work that that team has been able to do, and continuing to drive that growth, and so we feel very good about that business." }, { "speaker": "Vijay Kumar", "text": "Thank you, guys." }, { "speaker": "Mike McMullen", "text": "You're welcome." }, { "speaker": "Operator", "text": "Your next question comes from the line of Puneet Souda with SVB Leerink. Your line is open." }, { "speaker": "Puneet Souda", "text": "Yes, hi, Bob and Mike. Thanks for taking the question. So, Bob, actually on one of the question on guidance, and this is probably a favorite topic for you, the Chinese Lunar New Year." }, { "speaker": "Mike McMullen", "text": "Oh yes. That's the New Year again, isn't it?" }, { "speaker": "Puneet Souda", "text": "That time of the year. So, this time, obviously, you are seeing how the troops are acting on the ground, how things are there, and I would suspect it would be a lesser impact this year, lesser travel, but correct me if I'm wrong on that, and then in light of that, I mean the guidance again appears conservative. Is there anything that we ought to keep in mind for a market that is growing double-digit for you already, and is a sizable portion of your revenue? So just walk us through how are you thinking about the Lunar New Year impact here." }, { "speaker": "Bob McMahon", "text": "Yes, that's a great question, Puneet, and as you accurately state, our expectation is the impact is going to be much less this year than it was last year for all the things that you just talked about, less travel, timing of when it is, and so forth, relative to Q1, and what we're seeing is actually very strong continued recovery and performance in our China business, and I would say that there's -- Q1 is no different, and so, the story there certainly remains in tact, and I would expect it to be very strong performance in Q1. I think what we're trying to do is there's nothing in particular, but I think we're just probably taking a little more prudent approach in Europe, and as we're seeing some of the shutdowns, particularly in some of these areas. And I think as we look at where are the things that could potentially be upsides or downsides, I think that continued recovery in chemical and energy across the business, also continued performance in Americas. We're expecting kind of an average budget flush, so to speak. That's another question that's probably -- if people are thinking about by -- for the end of the year and both of those things could be better than expected." }, { "speaker": "Mike McMullen", "text": "Yes, Bob, I could just jump into that, just amplify the point, Puneet, that Bob made. We're very, very happy with our China business, and we exited the year with momentum, and that's carrying forward into 2021. We're positioning ourselves with a wait-and-see moment on C&E, and that could be a source of upside for the year, and like I said earlier, we're fully prepared to reflect that in a revised outlook, and I would just use the word, maybe, prudent as a way to describe as the adjective Bob and I have been using to describe our guide." }, { "speaker": "Puneet Souda", "text": "Okay, that's -- no, that's very helpful, thanks, and if I could get a sense on the -- in the cell analysis business, that business continues to be really strong for you, BioTek, [indiscernible] horse, other products in that product line, just wanted to get a sense of what are some of the key drivers there, is it largely the cell and gene therapy, the cellular product and drug product market, or is there something in the academic end that is driving that growth or specifically in China? Would appreciate and helping frame what's exactly happening there, and the opportunity there longer-term." }, { "speaker": "Mike McMullen", "text": "Yes, Puneet, thanks for the question, and as I mentioned in my call script, we're really pleased with how we've been able to integrate the BioTek team, make them part of the Agilent family, and then how that collective has lead to having us have a very healthy cell analysis, just north of $300 million, growing nicely for us, and I know that Jacob would love to be able to have an opportunity to talk a little bit more about the cell analysis, back to Jacob, your thoughts on the specific questions that Puneet put forward?" }, { "speaker": "Jacob Thaysen", "text": "First of all, let me just echo that I think it's very impressive what Agilent has been doing here the past year, and the growth actually stems from many multiple dimensions here. First of all, we have seen, so first of all, with the testing that a lot of our BioTek portfolio has been using for that for the ELISA testing, and -- but we also see, generally speaking, imaging being very relevant in the academic markets, but also in the biopharma markets, and the [CS] [ph] portfolio with the flow of tachometry is also seeing quite a lot of interest. So it's really broad across both academic and biopharma and COVID-related that we see interest. Lifestyle analysis was where we felt a few years ago that this was an area that would continue to see in our growth. Particularly that point about immune-oncology, we're pleased that has moved into a broader understanding on the immune system, right now on COVID, but generally speaking I think would be a focus for many years to come. So very pleased, and we continue to expect good growth in that business." }, { "speaker": "Mike McMullen", "text": "Yes, and hey, Puneet, just one thing because you mentioned China, and we see really China as a huge opportunity for us going forward. The real growth has been primarily in the U.S. and Europe. I mean it's growing in China as well, but it's off a very small base. So when we think about the opportunities going forward, leveraging the large infrastructure that Agilent has is really a big opportunity for us for many, many years to come in the cell analysis space." }, { "speaker": "Puneet Souda", "text": "Great. Okay, thank you." }, { "speaker": "Operator", "text": "The next question comes from the line of Tycho Peterson with J.P. Morgan. Your line is open." }, { "speaker": "Tycho Peterson", "text": "Hey, good afternoon. Mike, I wondering if you could talk a little more on the biopharma strength, 12% on a 7% comp is obviously phenomenal. I know you had 2% from NASD, and you just talked about cell analysis, but can you maybe just talk more broadly on the strength in biopharma. Was any of this a catch-up from slower setting in the first-half of the year? And how do you think about the sustainability of demand. I know you mentioned you're thinking about an average budget flush, but can you just talk to the broader strength in biopharma?" }, { "speaker": "Mike McMullen", "text": "Yes, sure, happy to do so, Tycho, and without giving away too many of the tidbits that I want to talk about more -- in more depth in a few weeks. There was no catch-up here. This is part of this continued strength in the biopharma area. It's an area of focus, and we'll go into some more detail with you in a few weeks, but it's an area of focus in terms of increased investments relative to our biopharma tools, but the instrumentation along with chemistry platform, a real workflow focus there across the whole value chain, but we're getting growth, as you mentioned earlier, NASD, but that's -- the story is much bigger, and bigger, and that's to be honest with you. And then, obviously, we're picking up some growth here in the cell analysis. So I think it's really a multifaceted strategy that really driving this growth. We think it's sustainable. We think a double-digit outlook on the biopharma portion of Agilent's business is quite reasonable. We're really excited, and it's an investment priority for us." }, { "speaker": "Bob McMahon", "text": "Yes, and Tycho, maybe if I can add to Mike's point, in terms of -- because it's not only the platforms in the portfolio that we have on the instrument basis, which we've been making some heavy investments in, but it's also been the informatics and the software piece, which is has allowed us to be able to kind of plug in to the labs, the analytical labs, and then you bring in the ACG services portfolio that helped them manage the labs, and particularly with everything that's going on right now, the last thing they want is their scientists to be managing the instrumentation. They want them to be doing the science, and so, we think we've got a very compelling software and tools offering, and I think it's showing up in the marketplace across multiple technology platforms really." }, { "speaker": "Tycho Peterson", "text": "Great, and then Mike, you used the phrase, wait and see mode for C&E a couple minutes ago, and it's good to see that back to growth, can you maybe just talk on some of the data points you're watching in your customer base and how you're thinking about the recovery curve there?" }, { "speaker": "Mike McMullen", "text": "Yes, thanks Tycho. So, my comments come back from my first year as a CEO when I tried to call the trend of the C&E business, and eventually it turned out I think it was all by several quarters. So I learned my lesson, so to speak. So as Bob mentioned, one quarter trend does not make but we're very encouraged by that, because it's the first time we've seen some growth after those two double-digit declines earlier this year. And we look at a couple of things, Tycho one is the PMIs and the positive moves in the PMIs are indicative of improved end market strength, particularly in C&E, we also look at what we estimate to be the age of the installed base, because a lot of aged equipment out there, and that's been probably at very high levels, and then we look at the deal flow. So, kind of all those factors, the macro outlook from PMIs what we know to be the current environment for customers in terms of the age of their installed base, and then also overseen in our funnels, and you know, Agilent has a real strength in this market. So I think we will benefit from returned to growth, again we're not ready yet to put it into numbers for Q1 in the full-year, but we're hopeful that that trend will continue. There're some indications that it could, but let's give it another quarter or so." }, { "speaker": "Tycho Peterson", "text": "Okay, and then lastly before I hop off, one quick one on China, one of your coolest companies, Mettler, talked about pent-up demand kind of suggested that what they saw may not be sustainable. Have you seen anything in your order book that would suggest what you're seeing in China?" }, { "speaker": "Mike McMullen", "text": "Yes, no, Tycho really appreciate you asking that question because not at all, I mean, this has been a continuing steady flow of business. We think the end markets are really strong here. We see a lot of strength in China Government funding to make sure they stimulate the economy, and then we talked earlier about just overall their investments in improving the quality of life, you noticed the strong growth in the food market, continued strength in pharma. So no, we've seen this. Now, I think we really look closely at the pacing and it's all nothing unusual." }, { "speaker": "Bob McMahon", "text": "Yes, Tycho, I think we've been extraordinarily pleased with the way our China businesses performed throughout the course of this year, and when you think about kind of our cadence through Q1, Q2, Q3, and Q4, we've seen accelerated growth. So we saw our lowest growth in the first quarter where we saw the impact of COVID-19, but then what we've seen is improvements as opposed to this real huge increase, and then kind of a drop-off. So, we're not expecting any drop-off, and we haven't seen that in our order book or any of the conversations that we've had with our customers that there was sort of a material catch-up." }, { "speaker": "Tycho Peterson", "text": "Okay, thank you." }, { "speaker": "Mike McMullen", "text": "You're quite welcome, Tycho." }, { "speaker": "Operator", "text": "Your next question comes from the line of Brandon Couillard with Jefferies. Your line is open." }, { "speaker": "Brandon Couillard", "text": "Hi, thanks. Good afternoon; Mike, a couple of questions on LSAG." }, { "speaker": "Mike McMullen", "text": "Sure." }, { "speaker": "Brandon Couillard", "text": "I'm curious, if you could speak to the order book in the fourth quarter, and to the extent that you may have built some backlog there, and curious to speak to perhaps the margin compression in the fourth quarter, but that was mostly mix or is today's dynamics there?" }, { "speaker": "Mike McMullen", "text": "Happy to see you, Brandon. So, one of the reasons why we were able to reinstate guidance this year was what we saw in the LSAG order book, and as you know, we stopped a few years ago talking about specifics around orders, but I think in today's call, it's really prudent for us to give you a sense of why Bob and I have this confidence around the outlook. So we didn't guessed as we ran across the finish line for 2020, order book was strong in LSAG and as continued into the fairly few weeks of this year. So again, all the other caveats aside being prudent and recognition of the virus, we feel pretty good about our ability to reinstate guideline because as we mentioned earlier reinstate guidance as mentioned earlier, LSAG was one where we hit the most early on the year, and I think we're feeling pretty good about that. And Bob, as I recall, most of the gross margin is really just a mix of the various instrument platforms." }, { "speaker": "Bob McMahon", "text": "Yes, that's right. I mean, I think Brandon, to read what Mike is saying, I mean we feel very good, orders exceeded revenue and exceeded our expectations, and so, it was a bit of a mix shift that is impacting that, but we would expect that to kind of normalize out throughout the course of next year, and so, we feel very good about kind of where that business is going into 2021." }, { "speaker": "Mike McMullen", "text": "Yes, Brandon, just one additional thought here which is, we've seen a real change in the price environment. So, that's why we can say pretty common that has happened to be the mix product this quarter." }, { "speaker": "Brandon Couillard", "text": "Super, and one more for Bob, you mentioned currency with the drag to margins in the fourth quarter, could you quantify that, the magnitude of the operating line, and then what you penciled in for impact of FX to operating margins in '21?" }, { "speaker": "Bob McMahon", "text": "Yes, it was roughly about 40-ish, 45-ish on the COGS line, and some of that was offset through the bottom line, and for next year less impactful, much less impactful than that, probably less than about 10 points, 10 basis points." }, { "speaker": "Brandon Couillard", "text": "Super, thanks." }, { "speaker": "Mike McMullen", "text": "You're welcome." }, { "speaker": "Operator", "text": "Your next question comes from the line of Dan Leonard with Wells Fargo. Your line is open." }, { "speaker": "Dan Leonard", "text": "Thank you. So, to start off, on the guidance, a question for probably you Bob, you've touched on this in pieces, but can you give us at a high level what your key assumptions are, by region and by end-markets?" }, { "speaker": "Bob McMahon", "text": "Yes, so by at the highest level, we're expecting steady improvement throughout the course of the year from the standpoint of the economic perspective, if I think about it from a geography first, China's going to lead the way with high single-digit growth continuing the momentum that we've seen, we ended this year FY '20 about 7%, and we're expecting that or better into next year, and then what you would see as a recovery in the Americas getting back to kind of mid to high single-digits, and then followed by Europe, which would be kind of the low to mid single-digits. So that's kind of on an end market perspective, how we would think about it, it's predicated on that continued recovery, and that we would as I mentioned before, not have any extended periods of shutdown that would disrupt business. I think the good thing is what we're seeing not only ourselves, but our customers are being able to operate in a different environment than they had the first time these were shut down. So we're not expecting any material impact there, and from an end-market perspective, the strength is really going to be the continued strength that we've seen in the last several years really driven behind our pharma business, which is probably high single-digits with biopharma as one of the earlier questions came out, probably growing double-digits going forward. And then food, we'll probably expect maybe a little tempering, where it'd be great to have 16% every quarter, but we're not ready to put that into our plan, but I would expect continued recovery there probably in the mid-single-digits and also recovery in our diagnostics and clinical business, particularly in that same kind of mid-single-digits, and probably ramping throughout the course of the year, probably more muted on the academia, and government probably flattish to low, and as we talked about before chemical and energy flattish, but that's really one where we're hoping that we're biased, and there's more upside than downside here, but certainly given the momentum, but one quarter is too early to put a forecast on there, and so, we're assuming roughly flat and then probably recovery in the environmental and forensics market low-single-digits." }, { "speaker": "Dan Leonard", "text": "Okay, thanks for that overview, and that's my follow-up, you touched on there being a wider range of outcomes in '21 and typical and mentioned at the bottom end doesn't capture any threats around reestablishment of lockdowns or whatnot. Do you feel the high-end of guidance really captures all the benefits from easy comparisons, any potential upside there might be or how would you frame, what you're capturing in the high-end there?" }, { "speaker": "Bob McMahon", "text": "Yes, I'd say it's continued momentum, but I think that there's probably more upsides and downsides in the way that we're trying to capture that certainly exiting at a 6% growth rate, there are we're probably the biggest areas are around chemical and energy and the pace of recovery in academia and government, and if those continue, I would say - let me put it this way, if chemical and energy continued at 3% and growing, we'll be that number." }, { "speaker": "Dan Leonard", "text": "Yes, absolutely. Thank you." }, { "speaker": "Mike McMullen", "text": "Thanks, Dan." }, { "speaker": "Operator", "text": "Your next question comes from the line of Douglas Schenkel with Cowen. Your line is open." }, { "speaker": "Douglas Schenkel", "text": "Hi, good afternoon guys." }, { "speaker": "Mike McMullen", "text": "Good evening, Doug." }, { "speaker": "Douglas Schenkel", "text": "Maybe I have a few cleanup guidance questions, but before I get to that one, I just wanted to talk about your performance specific to your mass spec product line. You talked about another quarter of double-digit growth. I'm just wondering if you'd be willing to unpack that a bit more and just talk about what's driving this, and specifically is China and more specifically China food, a major driver, I guess I'm just trying to get at which segments of the portfolio or specific end markets or geographies that really stand out within a pretty robust and impressive growth rate there?" }, { "speaker": "Mike McMullen", "text": "Hi, Doug really appreciate the opportunity to have Jacob comment more deeply on that, but as you know, I highlighted that in my script, we were able to call out that double-digit growth. We're extremely proud of that. And Jacob, I think you've got some additional insights that you could share with Doug." }, { "speaker": "Jacob Thaysen", "text": "Yes, that's a great question, and I'm certainly proud of what the team has been doing over the past years, because this is not only a quarterly effect here, but we have done a quiet and overhaul of our master portfolio, particularly the LC/MS portfolio over the last few years, both on the high-end triple quad, but also the single quad, and [indiscernible] the team applications, and this is really what the customer is looking for right now. So, you can really see that the investments we have done really resonates with our customer base, and right now, I would say in most geographies and in most end markets, but if you look into it's biopharma and China is definitely a big part of this story, but -- and the other element into it is that we pivoted very quickly to remote customer engagement during this beginning of this year, and when the customer has to shut down the laboratories, we were there for them. We did support them when the tough times, and you can see that pay dividends today that they also continue with the partnership with accidents. So, I actually believe that we are in a quite good momentum here with the mass aide business." }, { "speaker": "Douglas Schenkel", "text": "Yes, all right." }, { "speaker": "Douglas Schenkel", "text": "Yes, that sure does. Thank you for that, and then maybe just a few guidance questions, yes, so this'll be kind of a speed round in a way, because you have got some questions about these already, but on China, did you expect double-digit growth in fiscal '21? On gross margin, you talked about some of the headwinds you saw in Q4 becoming less pronounced moving forward. So, do you expect gross margin overall to get back up to the 56 plus level? And then on COVID-19, I think you talked about just over two points of COVID tailwinds in the quarter. I'm just wondering if looking forward either fiscal Q1 or for the full-year, if you could see a scenario where this would accelerate over time if serology volumes began to inflect in a positive way and same thing on the antibody business, could those in combination drive more of a tailwind moving forward, so China gross margin and COVID-19?" }, { "speaker": "Bob McMahon", "text": "Yes, so China, high single-digits, maybe low double-digits based on the range that we gave you in terms of COVID what I would say is, we are expecting less incremental the growth, but certainly the things that you talked about are baked into our guidance. So more serology our antigen based testing or even vaccine driven volume is not fully baked into the numbers that we are -- it's just too early to tell, but those are certainly be things that are potential upsides, and then the last one, I know which was your second question around gross margin, I would expect it to stabilize and not see this the same level of decline. Now, what I would say is you will have some mix shifts, right, because our ACG business, which is lower gross margin than the instrument business, but much higher operating margin helps us with that. So, you do see a dampening effect on the gross margin side, but you will more than make up for it on the operating margin side." }, { "speaker": "Douglas Schenkel", "text": "Okay, Bob. Sorry." }, { "speaker": "Bob McMahon", "text": "Doug specific to COVID-19 we'll hit a little bit more of that when we have our Analyst Day, but we are planning to launch in early 2021 our serology test, and there are some things that we're working on that aren't baked into the guide. We'll see how that they play out." }, { "speaker": "Douglas Schenkel", "text": "Okay, that's great. Thank you guys for all the time and happy Thanksgiving everybody." }, { "speaker": "Bob McMahon", "text": "Same to you." }, { "speaker": "Douglas Schenkel", "text": "Thank you." }, { "speaker": "Operator", "text": "Your next question comes from the line of Derik de Bruin with Bank of America. Your line is open." }, { "speaker": "Derik de Bruin", "text": "Hi, good afternoon." }, { "speaker": "Mike McMullen", "text": "Hi, Derik." }, { "speaker": "Bob McMahon", "text": "Hi, Derik." }, { "speaker": "Derik de Bruin", "text": "Hi, so I'm going to do this similar to Doug. I've got a couple of focus questions. I got one guidance cleanup. So I guess specifically, Bob, you mentioned some software pushes in business between the pharma business. Can you be a little bit more specific on that? I mean, is OpenLab taking share against Empower, you winning have be replaced Empower and some of the accounts there, I'm just sort of curious on what the dynamics are in the CDS market?" }, { "speaker": "Mike McMullen", "text": "Yes. What I would say Doug, excuse me, Derik, is that we feel very good about our competitive positioning with OpenLab and the rest of our products." }, { "speaker": "Derik de Bruin", "text": "Okay. Now I'll live with that I guess. Yes, and by the way, I'm better looking than Doug. On the Core Genomics business, I mean, we don't really have talk about that. I mean, you talk about the NASD and some other things here, but what is going on in your Core Genomics business, you've got SureSelect, I mean, you've had some pressures and some of that end market there. What is that underlying business growing?" }, { "speaker": "Bob McMahon", "text": "Yes, actually a great question because we didn't highlight that, but actually when you look at sequential performance, that was one of the things that was very, very positive in the DDG business. It recovered very nicely into Q4, and maybe I'll let Sam talk about some of the details there." }, { "speaker": "Sam Raha", "text": "Yes, sure. Thanks, Bob. As you said, as we went into the heavy part of the pandemic, if you will, late Q2, Q3, some of the Genomics business also serves clinical diagnostic customers be it for SureSelect being the backbone and some of the leading cancer diagnostic and US-based tests as well as other inherited diseases. So we definitely saw the effect of that, but coming into Q4, we've seen a steady stream of increase there, and we've also seen a positive effect in parts of our portfolio that are related to qPCR be it instruments, be it our consumables that are used and also we have the leading Genomics QC portfolio as you're probably aware of, and we see a number of those products, including our fragment analyzer being used increasingly for picking up conventional or sorry, would the pickup of conventional clinical testing, but also being used for example for some siRNA vaccines that are in development. So, all-in-all, the trend is looking encouraging for our Core Genomics business." }, { "speaker": "Derik de Bruin", "text": "Great, and then just one housekeeping question. For '21, the other income expense line, how should we think about that for '21? Bob do you want to handle that or you want to take that?" }, { "speaker": "Bob McMahon", "text": "Yes, that'd be slightly better than where it is this year." }, { "speaker": "Derik de Bruin", "text": "Thank you." }, { "speaker": "Operator", "text": "Your next question comes from the line of Jack Meehan with Nephron Research. Your line is open." }, { "speaker": "Mike McMullen", "text": "Hello, Jack." }, { "speaker": "Jack Meehan", "text": "Thanks. Hi, good afternoon. Let me go back to biopharm, Mike, I was curious if you're seeing any change in terms of customer spending patterns at all, because of COVID-19, there is just been such a focus on bioprocessing, the support vaccines and therapeutics. What's that doing in small molecule if you can call out any trends?" }, { "speaker": "Mike McMullen", "text": "Jack, great question. So, to our delight, it really hasn't seen them cause any kind of material shift. I mean, we're seeing -- in fact, I think Bob in his script, where we saw strength across small molecule and bio -- large molecule. Now the small molecule is not growing as fast as large molecules, it was growing, and…" }, { "speaker": "Bob McMahon", "text": "Yes, Jack to give you some numbers, I mean for Q4 small molecule grew high single-digits, and for the year it grew low single-digits. So despite all the hoopla, small molecule is not dead." }, { "speaker": "Jack Meehan", "text": "Yes. Great, and maybe just to build on that, so the high teens ACG growth in China, could you just parse out for us? How did food do versus how did maybe generics do in terms of some of that consolidation there?" }, { "speaker": "Mike McMullen", "text": "Bob, as I recall, and I'd like Padraig on this, I think it was broad-based across all end-markets. Everything was in that double-digit range, and Padraig anything you could add to that?" }, { "speaker": "Padraig McDonnell", "text": "No, I think you said it well, Mike, I think across both sides of the business, both the chemistries serves as very strong demand in all markets, and we see certainly a strong demand for our installation familiarization and startup services. So I'm really strong across the board in China." }, { "speaker": "Jack Meehan", "text": "Great, thank you, guys." }, { "speaker": "Operator", "text": "Your next question comes from the line of Patrick Donnelly with Citi. Your line is open." }, { "speaker": "Patrick Donnelly", "text": "Hey guys, thanks for taking the questions. Let me follow-up on the --" }, { "speaker": "Mike McMullen", "text": "Hi, Patrick." }, { "speaker": "Patrick Donnelly", "text": "Hey, Mike, just on the chemical and energy side, it certainly sounds like that's the biggest area of upside, maybe the biggest variable for next year. Sounds like chemicals and material things are improving, can you just give a bit more detail around the customer tone there, and then is energy the bigger variable for '21 maybe just talk through kind of the scenario analysis as you guys think about it certainly seems like there's upside, but maybe just kind of what parts of the business you feel like are the biggest variable there?" }, { "speaker": "Mike McMullen", "text": "Yes, I think that sort of all the kind of this always helpful reminder, but in a kind of our mix, so it's 70:30, 70:30 in chemicals and materials, and 30% energy. Actually the upside on the chemical and material, energy lags, and we aren't really seeing a lot of indications of why that would, that would pick up, but you have to remember some of the chemical companies are actually providing products and such into end markets that support COVID-19. They're feeling, what drives this marketplace? Yes, we talked about PMIs, but really all the PMIs are really related to the view of global growth, and I think that customer base is feeling more confident about where the economy is going and things this shut really slowed down earlier this year just for a must kind of purchases, but I think it's a prove view of the overall economic outlook for the chemical and materials side plus the fact that they have some kind of COVID-19 tailwind to help out. I wouldn't say that's the entire story is just the element of it. I think the biggest part here is just the fact that there's much more common in the customer base about the growth environment from an economic standpoint, Bob anything you would add to that?" }, { "speaker": "Bob McMahon", "text": "Thank you, Mike. I don't." }, { "speaker": "Patrick Donnelly", "text": "Okay, yes, that's very helpful, and then maybe just on a capital deployment side. You guys always take the balanced approach, and I'm sure we'll hear more about it in a couple of weeks, but how are things trending in the pipeline on the M&A side, your cash flow has actually been pretty strong? How active should we expect you guys to be on that front? Any changes and thoughts around the size of deals you want to pursue, and any metrics you can throw out there would be helpful? Thanks." }, { "speaker": "Mike McMullen", "text": "No, no we continue to be very interested in deploying capital for growth standpoint along all the dimensions we talked about earlier. We said that the BioTek size deal, which we were really quite happy with that, that was largest deal we've done to-date. That doesn't mean that would be the largest deal we would do. We've always said, I think it was not magnitudes of delta, and although we didn't closed any deals this year, I think that really was somewhat tied into some of the COVID-19 challenges of doing due diligence and working with potential targets, but we still see this as a key part of our, what we call, our build and buy growth strategy, and think that M&A can be a nice attitude to our core growth businesses. So you guessed right, so we'll talk more about it in a few weeks. We still have aspirations in the space, but really sticking to the model, the framework that we've been using before, which is M&A in markets at a higher growth investor company that aligns strategically with us where they can benefit by our scale and are accretive to the P&L." }, { "speaker": "Bob McMahon", "text": "Yes, I would say Patrick, just to build on what Mike was saying. I mean, we feel very good about the acquisitions that we made, the last two which was BioTek and ACEA were probably the fastest growing parts of our business, if you take out NASD, and so, I think it validates the space that we're looking at, and we don't see a reason to need to change our M&A framework." }, { "speaker": "Patrick Donnelly", "text": "Okay, thanks guys." }, { "speaker": "Operator", "text": "Your final question comes from the line of Steve Beuchaw with Wolfe Research. Your line is open." }, { "speaker": "Steve Beuchaw", "text": "Hi, thanks for sneaking me in here. I'll just ask one maybe I guess it's a two-parter; one part for Mike, one part for Bob, and…" }, { "speaker": "Mike McMullen", "text": "Okay, I'll be giving easy one." }, { "speaker": "Steve Beuchaw", "text": "I think you're going to like it. I think you are going to like it." }, { "speaker": "Mike McMullen", "text": "Okay." }, { "speaker": "Steve Beuchaw", "text": "Mike, so last call, you raised this concept, you called it a flight to quality, and you talked about how the team with the execution has been able to drive share gains, I wonder if you could talk about whether you think that as the pandemic subsided in some ways and labs are opening up again, if you think that dynamic has become any more or less acute, and if you think it's sticky, I'm going to go ahead and ask the second part of my -- I guess I'll call it COVID discovery question for Bob; Bob, like a lot of CFOs, you've had a chance to see how much you can save within operating expenses, as we're all working remotely and being more digital. Have you thought about putting any numbers around how much of the savings that you've discovered here could end up being permanent? Thanks a bunch, everybody." }, { "speaker": "Mike McMullen", "text": "Yes, thanks, Steve. So, in regards to the first one, we probably talked about the flight to quality when money is tight, but we also think tied it to stability, and how we protected our overall field team and our ability to support our customers during the pandemic. So, I think those two things are going to carry us forward. So we think that the stickiness will remain there, and I don't think that the quality will fall out of fashion, and I think as you continue to grow your position in the installed base, it just gives you an upper hand in terms of next buy when they get around to making the next capital purchasing decision." }, { "speaker": "Bob McMahon", "text": "Yes, I would agree with that, Mike, and I think that, you know, I think two things; one is, we were there when the customers needed us the most, and our team particularly in the field, helping support critical operations and so forth, and that flight to quality on the instrumentation side only pays dividends going forward. So, I think there is no -- there will be no follow-up there, I truly believe that. On the cost side, we're still working through some of those things, a big thing, probably the biggest variable here, and it's got a couple of different tentacles to it would be around travel, and I think we had talked about before at one point in time we're spending roughly $10 million a month in travel, and that that is down, I would say substantially, and our goal is that will be back to $10 million a month, and so, that doesn't say that we're going to necessarily drop it all to the bottom line, but reinvest in some areas that will drive growth going forward, but certainly those, and then there will be more efficient ways of doing things like marketing outreach to our customers, and even operating, one of the things is we still operated and launched new products, despite not having been in the labs for the most part for nine months out of the year, and so, our teams are finding innovative ways to continue to actually move things around without having to spend incremental dollars, so more to come on that." }, { "speaker": "Mike McMullen", "text": "We think [some things] [ph] are going to stick. Particularly, as it relates to your digital engagement with customers, because there's a huge element of being responsive, and we think that digital cable is a big part of that story, and yes, it has been accelerated by COVID, but we don't think there's any going back either." }, { "speaker": "Steve Beuchaw", "text": "Got it. Thank you for all the color, guys." }, { "speaker": "Mike McMullen", "text": "You're quite welcome." }, { "speaker": "Operator", "text": "Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect." } ]	Agilent Technologies, Inc.	154,924
A	3	2,020	2020-08-18 16:30:00	Operator: Good afternoon, and welcome to the Agilent Technologies Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. And now, I'd like to introduce you to the host for today's conference, Ankur Dhingra, Vice President of Investor Relations. Sir, please go ahead. Ankur Dhingra: Thank you, Robert, and welcome, everyone, to Agilent's conference call for the third quarter of fiscal year 2020. I hope that all of you and your families are safe and healthy. On the webcast today are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining for the Q&A after Bob's comments will be Jacob Thaysen, President of Agilent's Life Sciences & Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of Agilent CrossLab Group. You can find the press release, investor presentation and information to supplement today's discussion on our website at investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year, and revenue growth will be referred to on a core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. We will also make forward-looking statements about the financial performance of the Company. These statements are subject to risks and uncertainties and are only valid as of today. The Company assumes no obligation to update them. Please look at the Company's recent SEC filings for a more complete picture of our risks and other factors. And now, I would like to turn the call over to Mike. Mike McMullen: Thanks, Ankur, and thanks, everyone, for joining us on our call today. The Agilent team delivered excellent results in the third quarter in the midst of a historic global pandemic. Against this backdrop, Agilent's performance once again highlights the strength and resiliency of our team and our business. Agilent's Q3 revenues are $1.26 billion. Our revenues are down just 1% on a reported basis, despite COVID-19 headwinds in what we expect to be the year's most challenging quarter. On a core basis, revenues are down 3%. These results demonstrate the strong resilience we have built into our business over the past several years. EPS is $0.78 per share. This is a 3% year-over-year increase. Operating margin grew 90 basis points over last year to 23.7%. Our Q3 results are further evidence of the success of our profitable build-and-by growth strategy. We continue to build a more resilient growth oriented business. Last quarter, I talked to you about the four key priorities we're focused on during the COVID-19 pandemic: Protecting our people; being open for business for our customers; taking decisive action to deliver our P&L and balance sheet; and unwavering commitment to growth. Staying focused on these priorities has helped us navigate through the COVID-19 effects on our team, customers and business. Our customers continue to respond very favorably to our team's engagement and enhanced digital capabilities. In fact, Q3 customer satisfaction rankings are at all-time highs. In all regions, we're seeing improvement in lab access for our customers and increase non-COVID-19 testing volumes. There are, however, regional and end-market differences in the pacing of improvement. Labs access improved through the quarter, although still not at pre-COVID-19 levels. Globally, lab access remains limited in academia, non-COVID-19 research and testing labs. We're also seeing continued limited access at some private sector research labs in Europe and United States. Similarly, non-COVID-19 diagnostic testing volumes improved throughout the quarter, but remained down from prior levels. Hospital access in Europe and the U.S. is improving, although disrupted at times by virus flare up. While there are indications of improvement in economic growth at varying degrees across the globe, caution remains at customer capital expenditure decisions. Consistent with our thinking coming into the quarter, the pace of recovery varied by region. As expected, China led the way for us and exceeded our expectations with revenues up 11%. China's growth in the quarter is broad-based across all end market and for all business groups. While improving the rate of recovery in Europe, and the Americas lags China, given the timing when these reasons first felt the brunt of the pandemic, European revenues are down 5%. Americas market conditions trailed both China and Europe with revenues declining 10%. However, as we exited the quarter, we are seeing signs of improvement in service activity, consumables and diagnostic testing volumes. On a total Company basis, we exited July with modest growth across all major markets. Now, let's talk about our performance by business groups. Our Life Sciences and Applied Markets Group grew 2% on a reported basis and declined 4%. Our team is focused and determined to gain market share despite a constrained capital environment. The strength of our portfolio coupled with an energized and stable sales team is paying dividends. I'm also very proud of contributions are selling our cell analysis technologies are making in COVID-19 virus research. Our M&A strategy is working and making a difference in the pandemic fight. Our CrossLab Group revenues grew 1%. Increase in customer activity led to increased sales of consumables and an uptake of on-demand services. The CrossLab team continues to win large, multiyear contracts for enterprise laboratory management that will benefit us moving forward. We will continue to increase our competitiveness in this space. Our Diagnostics and Genomics Group revenues declined 8%. While our overall pathology and genomics businesses are down for the quarter, we did see gradual improvement in diagnostic testing volumes and non-COVID-19 lab openings. Partially offsetting this, our nucleic acid solution business delivered another strong quarter, growing almost 25%. We are very excited about the future of our NASD business. As we announced earlier today, we plan to more than double oligo manufacturing capacity and our new Frederick, Colorado site. This expansion helps us meet significantly increasing customer demand. We are growing double-digit and expect to continue this rate of growth in the coming years. We continue to advance in our portfolio across all our businesses. Highlights during the quarter included LSAG launching two new LC/MS products in Agilent 6470B Triple Quad and the Agilent RapidFire 400 systems. Both products are in high throughput labs, driving productivity and superior resolution. We launched our CrossLab Asset Monitoring service, which is a new subscription service using instrument sensor technologies to provide data driven usage insights. This helps drive improved customer economics and lab productivity. While early, we are seeing strong interest from customers in this service. During the quarter, our PD-L1 assay was approved by the FDA for expanded use of non-small cell lung cancer, helping guide physicians in selecting treatments using specific immunotherapies. Our team is very proud of the role their company is playing in the global COVID-19 play. We are supporting COVID-19 research, testing and therapeutic of vaccine development. Our efforts in the global fight against the virus delivered 2 percentage points of reported growth. We are accelerating efforts to make a difference in the battle against COVID-19 and have mobilized across Agilent team to maximize customer support. Let me close with few comments on our outlook in the coming quarter. While there's still significant uncertainty regarding the continued pace of recovery, we expect the July trend of gradual improvement in our business to continue into Q4. By region, China will continue to be a positive story for us and lead return to growth. Europe is starting to trend upward. The Americas are also expected to improve but at lower rate than China and Europe. Globally, improved lab access, increasing non-COVID-19 testing and a slowly recovering global economy are all positive signs. I remain absolutely convinced Agilent will emerge from this pandemic with a stronger position in the marketplace. Our continued focus action on four priorities, protect the team; support our customers; preserve our P&L and balance sheet; and our unwavering investment in growth are delivering. Entering Q4, we are operating from a position of strength and with momentum. Yes, this pandemic remains unpredictable. However, I am cautiously optimistic about our continued gradual recovery and return to growth. Before I hand the call over to Bob, I'd like to pause and share my hope that you and your loved ones are staying safe and healthy. Thanks for being on the call. I look forward to taking your question after Bob's remarks. And now, Bob, over to you. Bob McMahon: Thank you, Mike, and good afternoon, everyone. Today, I'll provide some additional detail on revenue, walk through the third quarter income statement and some other key financial metrics. And then, I'll finish up with a framework for thinking about Q4. As with last quarter, there are still too many unknowns. So, we're not going to provide formal forward-looking guidance today. However, we will provide a framework for how we see things potentially playing out in Q4. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike mentioned, our revenue for the quarter was $1.26 billion, down 1% on a reported basis. On a core basis, revenue declined 3.1% in the quarter, currency negatively affected revenue by 1.3 percentage points, while acquisitions added 3.4 percentage points to growth. As Mike talked about the regional performance, I'll speak to the end-market performance. In terms of our end markets, pharma grew 2% in Q3 against a very strong comparison of 13% from last year. Both, small and large molecule applications grew and biopharma improved throughout the quarter as drug development labs increased production and access. We experienced softness in diagnostics and clinical, as anticipated. Revenues declined 10%, primarily due to conditions in the U.S., driven by COVID-19-related disruptions to patient visits and diagnostic lab opportunities. Encouragingly, we did see an improvement in routine testing throughout the quarter, especially in China and Europe, while the U.S. lagged. Chemical and energy was down 10%, consistent with our thinking. Revenues were generally flat sequentially with conditions largely similar to what we saw in Q2. As we've talked about previously, we expect this segment to ramp more slowly than others. The food segment was a bright spot, up 8%. We're seeing ongoing signals that the market in China has stabilized with the transition of more testing by commercial labs. The food market was just one of several bright spots that contributed to double-digit growth in China, including growth in the low-teens for our pharma business. Our environmental and forensics business declined mid-single-digits against the double-digit compare and the academic and government segments declined mid-single-digits, while improving on a sequential basis in Q3. Strength in cell analysis and liquid handling for viral research partially offset the widespread impact of the ongoing academic lab closes. Now, let's turn to the rest of the P&L. I'm extremely proud of how the Agilent team has responded to the challenging environment. During the quarter, we continued our focus on managing expenses, while ensuring we continue to invest in our key growth opportunities. These expense management actions we initiated last quarter were on full display in Q3. In addition, our customer engagement model using digital tools continued to gain traction, while also delivering savings in SG&A. As a result, operating margins of 23.7% improved 90 basis points over last year on declining revenues. Gross margin at 55.1% was down 130 basis points versus the prior year, largely due to mix, and higher logistics costs. However, strong cost management and operating expenses more than offset the decline in gross margin. This combination of factors resulted in non-GAAP EPS for the quarter coming in at $0.78 per share, up nearly 3% from the number we posted a year ago. From a balance sheet perspective, we generated $290 million in operating cash flow during the quarter, which is $48 million improvement over last year. In terms of capital spending, we spent $25 million, lower than last year and in line with our revised look in Q2. We ended the quarter in a strong position with $2.3 billion in available liquidity, including $1.36 billion in cash. Also during the quarter, we took advantage of low interest rates and refinanced $0.5 billion in short-term debt with a 10-year bond and a 2.1% coupon, the lowest coupon in our portfolio. As you know, we paused share buybacks in Q2, pending improvement in business conditions. In Q3, our visibility into business trends and cash flow improved, and we resumed anti-dilutive share repurchases late in the quarter. In the quarter, in total, we repurchase 360,000 shares for $33 million. Going forward, we intend to resume our normal pattern of regular anti-dilutive repurchases, along with additional opportunistic buying. Our overall capital deployment approach remains balanced with the primary focus on growth M&A opportunities, while also returning the cash to shareholders via dividends and buybacks. As we look to Q4, business and trends have gradually improved, but significant uncertainty remains around the evolution of this pandemic. However, let me provide a framework for how we see a range of possible revenue growth scenarios in the coming quarter. We generally expected trajectory of gradual improvement in business results to continue across all regions. Areas where we see a broader range of scenarios include research spending, both in academia and other markets, non-COVID diagnostic testing, especially in the U.S., and the general CapEx environment. The combination of these factors could result in scenarios where our revenue performance could range from a 4% decline to 1% core growth. Also, as a reminder, the BioTek acquisition closed midway through Q4 of last year. So, the M&A impact in Q4 will be smaller than in previous quarters, roughly 1 point growth and currency is forecasted to be positive in the quarter. The low end of this range envisions COVID-19 flare-ups occurring in the fall in various geographies, limiting and in some cases, reversing the recovery gains we've seen in a period of time. In this scenario, one might expect to see slower or stalled improvements in research, academia and other markets as continued tight cash management leading to lower CapEx spending in the U.S. and Europe. We hope this bottom end of the range is overly conservative, but we wanted to let you know, we have plans in place in case this happens. The higher end of the range assumes continued recovery by region, building on what we have seen in July, with the biggest impact coming from the U.S. This would include a continual increase in elective medical procedures such as cancer screenings, as well as continued lab openings. This view would also include continued China momentum, along with the continued improvement in Europe and other areas in the Americas. Again, this is not guidance, but should provide a sense for some of the variables we see for Q4. Overall, I feel we are very well positioned to deal with this challenging environment, accelerate market share gains and come out even stronger as the global economy continues its path to recovery. With that, I'll turn over things to Ankur to direct the Q&A. Ankur? Ankur Dhingra: Thanks, Bob. Robert, if you can provide the instructions for the Q&A, please? Operator: Certainly. [Operator Instructions] Your first question comes from the line of Doug Schenkel with Cowen. Your line is open. Doug Schenkel: Hey. Good afternoon, guys. Mike McMullen: Hey, Doug. How are you doing? Doug Schenkel: I’m doing well. Nice work in a tough environment. Can we maybe just start with a clean-up question right off the bat which is just about the prepared remarks. I don't think you quantified COVID-19 tailwinds in the quarter. Again, I may have missed that. But, it just would be helpful to get that so we could try to normalize there? Mike McMullen: Yes. Sure, Doug. I touched on it briefly in my comments. So, there's two points of reported growth in Q3. Doug Schenkel: Okay. That’s great. And then, on China, just a couple, I'm just curious if you would share the exit rate. And as we look ahead, I know you're not guiding, I'm just wondering if you think based on what you're seeing, if you think that double-digit growth can be sustained, from here, at least a term. And then, specific on food, it’s great to see it return to solid quarter first time [Technical Difficulty] seeing some stabilization last quarter. Can the high-single-digit growth rate you saw this quarter be sustained moving forward, given favorable multiyear comparisons? Thank you. Mike McMullen: Hey Doug. Thanks for those questions. So, just to make sure it came through the audience. The question was about our view on the growth rate of China for the rest of the year as well as can that high-single-digit growth rate in food be sustained. We think the answer is yes on both. We're really pleased with our performance in China. It was broad based. I tried to really accentuate that in my comments. We saw basically double-digit growth across all end markets in China. And we think that a double-digit growth rate is within the realm of possibility for Q4 in China. And I have to say, Doug, it's wonderful we talking about China food from a different vector. We've been talking about it probably last 18, 24 months of one that will return to growth. We saw some early indications in Q2, we saw strong Q3, and we think that are all numbers probably sustainable for the rest of this year. Want to say something, Bob? Bob McMahon: Yes. I would just say, Doug, to add, I mean, one of the things that was very positive about China was it was pretty consistent across the quarter, and in fact exited slightly higher than that overall 11%, but we saw solid growth all three months. Operator: Your next question comes from the line of Vijay Kumar with Evercore ISI. Your line is open. Vijay Kumar: Mike or Bob, just maybe on the guidance here. If I step back, the third quarter guidance, down mid-single to down mid-teens, this down low-single was up, came well above expectations I would say, perhaps not surprising than peers, but nonetheless solid execution. Maybe Q4, down 4 to plus 1 implies declines. What’s the cause of declines, just given in light of performance? Is that that the minus 4 at the low end, is that assuming that Life Sciences [Technical Difficulty]? Bob McMahon: Yes. Vijay, this is Bob. I'll take that. And as I mentioned in the prepared remarks, we hope that that is overly conservative. What that would imply is actually a retrenchment -- and in COVID-19 flare-ups here in the U.S. as we go back -- as we move into the fall, and you start seeing some elements of shutdown. So, we certainly would hope that we would do better than that. But, we wanted to provide, hey, that's within the realm of kind of how we're thinking about our spending and so forth. Our July results -- or our exit rate of the quarter was much higher than that. And so, we're aiming to do better. But there's still uncertainty in the world with the pandemic, people going back to school and so forth, so. Mike McMullen: And Bob, I think it’s probably fair to say, the wildcard is United States, right? Bob McMahon: Yes, absolutely. Mike McMullen: And we were encouraged by the movement in PMIs. You probably noticed that. But, let's see how that translates into business in the coming quarter. And again, we have to keep in mind ourselves, as pleased as we are with the result we just delivered, there's still a lot of uncertainty out there because the virus is unpredictable at times. Bob McMahon: Yes. That's right, Mike. I mean, if you looked at each one of the major markets, each one of the major markets got better in Q3 versus Q2 with the exception of the U.S., which we expected given kind of the state of affairs with the pandemic. Vijay Kumar: That helpful perspective. So, the minus 4 implies that things get worse. Was July flattish or positive? And I'm curious Mike that you mentioned NASD doubling up a while ago. I know, if you turn back the page, we were doubling capacity. So, is this now versus six months of a quadrupling capacity versus where we were last year? Is that the right way to think about the revenues going from 100, 200 to perhaps, is that the math here? Bob McMahon: No, it's slightly different math. I think, we've been consistent with our view of needing to double our capacity. What we ended up doing is actually triggering the decision to initiate expansion earlier than we thought, just given the robust nature of the end market. And as well as we have worked our way to be able to -- in the same space, we challenged ourselves to find ways to drive as much revenue in the same physical space. So, we are investing a little bit more capital than we initially thought. But, we're also building something slightly different than our first train, which is going to give us actually more volume than our current train A. So, it's a really -- we thought it was really positive signal. And that’s why sent out the press release this morning, because we're super excited about our prospects here. Mike McMullen: Yes. And Vijay, let me kind of frame into kind of the numbers. What we were talking about is the Frederick site has the potential of roughly $100 million worth of revenue. And we added capacity that more than doubles that $100 million to give you a frame of the numbers. So, it's not 100, 200, 400, it's 100, 200 and more than 300 to kind of give you a sense. And in terms of July, we actually came in with growth across all three groups in exiting in July. Operator: Your next question comes from the line of Tycho Peterson with JP Morgan. Your line is open. Tycho Peterson: I’ll start with the COVID commentary. I guess, if I go back to last quarter, there was some talk about launching the serology test. You guys obviously have an installed base of real-time PCR instruments. We've got the questions that why you haven’t launched a PCR test. So, can you just talk a little bit about, how you think about those tailwinds going forward and how you think about your capabilities on diagnostics side? Mike McMullen: Yes. Tycho, I'll make some initial comments and then the group presidents are kind of quiet today. So, I’ll pull Sam in here as well, to provide his perspective. But, we think that there's still tailwinds in front of us and now two points of growth, and we think we can sustain that at a minimum. That's why I tried to put fairly bullish comments about our stepped up efforts across the Company. Some of these things are going to take a little bit longer. We think there's still room for our own test of quality tests with some different features. But, I think maybe a few comments there, Sam, from your perspective? Sam Raha: Yes. Sure, Mike. Hi, Tycho. As you -- I think you’d have seen a good pickup in terms of our qPCR instruments, which are our Aria systems, as well as our bioreagents related to qPCR both reverse transcriptase master mixes. On the antibody side, we’ve definitely also seen an increase in IgA, IgG and those antibodies. In terms of our own tests, we are very actively exploring the possibilities of developing those. So, more to share in due course. Mike McMullen: And Tycho, I guess, what I’d just close off here is a broad-based nature of our portfolio is allowing us to play in multiple aspects of this COVID-19. Some of these things may take a little bit longer to actually turn into revenue, right? So, if you're working with, say, a pharma partner or something in the therapeutic area, it may take a while for that to come to market. So, we think these tailwinds are here to stay for some time. And we're stepping up our efforts here because it plays right into the broad nature of our portfolio. Tycho Peterson: I guess, that's a good segue on the NASD expansion. Could you maybe draw to what degree that's tied to the COVID vaccine, and any updates from your add-on capabilities on APIs for mRNA or siRNA vaccines? Mike McMullen: Do you want to take that one, Sam? Sam Raha: Yes, sure. No problem. Tycho, I'd start by reiterating a little bit of what Mike and Bob were talking about. It's interesting that it was just last June that we did a ribbon cutting and starting of the new Frederick, Colorado facility. And quite frankly, we've seen demand that exceeded our expectations, just 12 months ago. So, building really -- sorry, the new manufacturing line that we're building, you can consider it, as we call it, training on steroids as our general. But, it is very-differentiated, both in throughput and the molecules it can do, which is a segue to your -- a little bit of your question that we're able to do multiple iterations or types of siRNA or RNA. We're also actively looking at other different versions of molecules that are oligo based. Though I can't reveal the details, we have had a lot of interest related to COVID-19, all of those used for either COVID-19-related therapeutics or even for vaccines. So, I can say that we have started to work on some of those programs now. Bob McMahon: Yes. And maybe Sam to add. That being said, the capacity expansion isn't tied to COVID-19. We have plenty of demand outside of COVID-19 therapeutics and vaccines. And so, this is a broad-based capacity expansion. Tycho Peterson: And then, just last one, I know we don't have official guidance, but there's a framework for the quarter -- for the fourth quarter. As we think about C&E and then also pharma biotech, should we expect any kind of material change in either of those end markets for the coming quarter? I know, you talked about restoring activities for C&E. I wasn't sure if that was maybe a positive improvement in trajectory there? Bob McMahon: Yes. Probably -- C&E is probably the one that's -- I would expect it to be pretty stable and that down 10ish percent -- 8% to 10% in that range. We do expect pharma to continue to improve. So that 2% certainly even in the low scenario would stay there and then on the high scenario would accelerate, which is consistent with the trends we've seen throughout the quarter of Q3. Mike McMullen: And Tycho, the supply chain consideration and discussions still happen and it gets added a level of stability, albeit down to this -- into the space. And, again, as you look ahead for the future, this is an area where eventually it'll come back, and again, too early to call. But, I'd say we're pretty confident about the improvement rate in pharma. Bob McMahon: Yes. The way to think about those reshoring is those are opportunities and discussions that could happen through the order book, and then will happen actually in '21 and beyond in terms of investments are being made. So, that's more future looking. Operator: Your next question comes from the line of Puneet Souda with Leerink. Your line is open. Puneet Souda: So, first question is just on NASD, [ph] it’s obviously strong in the quarter, but that would imply Dako and clinical business, obviously you pointed that out, it was down in the quarter. But that's a significant decline. Maybe just could you parse that out for us? What is -- it's the COVID impact, for sure, but is there anything beyond that in terms of the way market is fundamentally potentially shifting here to NGS maybe? And if you could just maybe elaborate a little bit of that, clarify? Thanks. Mike McMullen: Yes. Happy to do so. So, it's all market, it’s all access to labs and patients going for the diagnostic test. So, it's real all market. I think, we're seeing different pace of pacing throughout the quarter. All of our geographies in the diagnostic testing front ended up with positive growth in July, but it was down sharply in May and June, particularly in the U.S. And keep in mind also, we -- part of our business in our genomics front is so select into NGS-based diagnostic labs and for genetic disorders, for example, those tests aren't getting done either. So, it's really all market. Bob McMahon: Yes. I was going to say, Puneet, actually if you bifurcate those two and look at our performance, actually, pathology performed better than NGS testing volumes, given what Mike was just talking about, as well as some of the academic institutions. Mike McMullen: That's good point, Bob. Thanks. Puneet Souda: Yes. Thanks for that. And if you could, I know you quantified it last quarter, Bravo contribution. I was wondering if you can provide that for Bravo Magnis liquid handling system, sort of how much of that contribution happened in the quarter? Mike McMullen: Yes. That's part of the story for our COVID-19 tailwinds. And I think probably the biggest contribution this quarter actually came from BioTek, Bob, if I remember correctly? Bob McMahon: Yes. Between BioTek and Bravo. Mike McMullen: Bravo. So, it's kind of like, now we like a one-two punch kind of going there on the core instrumentation. I’d also remind you, with the Bravo platform comes an ongoing revenue stream associated with the tips that go with those liquid handlers. Puneet Souda: Okay. And last one on just ACG. I mean, could you just elaborate on -- in these times, you mentioned, there are some larger contracts -- service contracts and likes that you’re getting into. Sort of what are those sort of COVID-driven, what's behind those and maybe if you can elaborate on geography there? Mike McMullen: Yes. Puneet, happy to have Padraig jumping on here and provide his perspective on that. So, Padraig, in the call script I talk a bit about the large enterprise deals you guys won. So, why don’t you talk about that a little more detail? Padraig McDonnell: Yes. So, thanks, Mike. We launched our CrossLab Asset Monitoring service, which has seen a big uptick. And what we're seeing from customers is a large demand for sourcing from one vendor. And because of our capabilities in terms of the asset monitoring capability, relocation services and our core delivery services, which are extremely in strong demand. We're seeing a big uptick from large customers, and we expect that to continue as we go through the quarter, next quarter. Mike McMullen: Yes. And I was going to say that I think the geography Puneet is largely in the U.S., but there are some global opportunities as well. It’s really non-COVID-19 related. I mean, this is part of the core growth strategy for Padraig’s business to continue to expand our market share on the Enterprise Services front. And we're really delighted that we made some big pharma deals. Operator: Your next question comes from the line of Derik de Bruin with Bank of America. Your line is open. Derik de Bruin: So, a couple of questions. Very impressive margin expansion in the third quarter. How should we think about the operating margin into Q4? And then, I guess, how much of these costs are permanent removals versus what has to come back in '21? Bob McMahon: Let me take that, Derik. It's great question and we certainly are very pleased with how the team has responded, as I mentioned before. As we talked about, a large amount of the cost, we have not done things like furloughs. We stabilized the team. We have not reduced base pay and things like that. So, these are discretionary expenses that a lot of them we think had the opportunity to stay away, be travel and things like that, which our digital tools have enabled us to really continue to support our customers. And so, there aren't any kind of one time things that happened in the quarter. In terms of going forward to Q4, we are looking at probably less of a margin -- incremental margin improvement because we are looking for ways to continue to invest to drive growth as the economy recovers. We also have some startup costs in the NASD new facility as well. So, it's probably less than what we've had historically had, which is call it 30% to 40% incremental. But it's really to drive growth. Mike McMullen: Hey Bob, if I could maybe add a comment on your -- on the first remark. So, this is really, Derik, all about a new way of working in Agilent. So, I'm preparing for a manager's call later this week. And what we're talking to our team about is more digital, less travel. And we're really going to make sure that when we get on the other side of COVID-19 pandemic that we don't revert to our old ways of traveling. And we know from our customer satisfaction scores, they love the responses we have now with our digital platforms. Derik de Bruin: And two questions on LASG (sic) [LSAG]. I guess, the first question is, if you look at your numbers in China versus some of your major peers in that area, I mean, you really outshone in China. Can you just talk about just share dynamics there that are going on? I mean, as I said, there was a pretty stark comparison between you and your main LC competitor there. And I guess, also along those lines, can you talk about potentially any sign of a budget -- any sign of a budget flush into sort of thinking about 4Q trends? What are you hearing in terms of people with budgets? And are they going to be allowed to roll things over and to -- or are they going to have to use it or lose it? Just some dynamics in terms of growth on the fourth quarter and just sort of to your general thoughts on what customer spending habits are? Mike McMullen: I'm going to have Jacob handle the first question. And Jacob, you can pass it back to Bob and I for the second question. And I know Jacob would be just delighted to talk about the share dynamics in China, which we think are very positive for Agilent? Jacob Thaysen: Yes. Thanks for that. And the number speaks for itself. It's clear that both in China but I think actually globally that we right now will be taking care. And this doesn’t come like coincidence. We have been executing our strategy to make a deal over the past year. And the customers are really buying into our value proposition. We are playing a game where we are leveraging our whole portfolio, not going after one product line versus each other and the customer really likes that we’re outcome based. So that's what is happening right now. And we see here in the crisis that not only are they excited about the investments we have done over the past year, but also, as Mike talked about, in the digital world, into the work world, we have been very optimistic and super responsive they have taken off the digital, we take challenge variable very, very good and the customers responded very, very positive to it. They know that when they work with Agilent that we are there for them in this crisis. Mike McMullen: And then, on the other question, Derek, what we're hearing from our customers, particularly in the public sector and we’re seeing it in our order book, and while I'll offer my perspective here, and feel free to build on my comments here. But, there's a real sense of making sure they commit to the budgets. So, we're seeing it both in our order book as well as order activity, where there is a lot of uncertainty what's going to happen post elections as we go into 2021. So, they want to commit those funds. And it's actually quite amazing the amount of deal activity that's going to occur without visiting a customer face to face. So Bob, I don’t know what you're hearing from field… Bob McMahon: The only thing I would add is just reiterate what Jacob was saying, because it's not just China. I think, when you look at our LSAG portfolio, I think what people don't fully appreciate is, is how we've actually changed the portfolio to technology platforms, they're probably the best -- in the best shape they have been in probably five years in terms of new products and so forth. And I think you're seeing that across the globe. And when we think about where we ended up in Q3, LSAG was certainly the standout relative to where we thought they were going to be. In a capital constrained environment only down 4% on a core basically speaks to our responsiveness to customers. Operator: Your next question comes from the line of Brandon Couillard with Jefferies. Please go ahead. Brandon Couillard: Bob, on the gross margin line, you mentioned higher logistics cost in the third quarter. Is that a new trend? And then, could you help us just think through some of the puts and takes, whether it's logistics costs or mix and how those puts and takes might evolve in the fourth quarter? Bob McMahon: Yes. Sure. We’re hoping that's not a trend that's going to be around for a while, but it certainly was exacerbated in the Q3. That being said, I would say three quarters of that was probably mix, when you look at the various businesses across each one of the groups. But, where we saw logistics, challenges are, it's lower capacity and freight and air capacity. But we would expect that -- and we actually saw that through the quarter to kind of relax. And I think as you’re starting to see more intercontinental travel, both from a passenger standpoint as well as freight standpoint we would expect that to kind of relax over time. Brandon Couillard: Okay. And then, Bob or Mike, you're not quite giving formal forward-looking guidance yet, but you do feel comfortable enough to restart the buyback program. Just what are your latest thoughts just around comfort as far as capital deployment goes and maybe your appetite for M&A right now and what the funnel might look like there? Mike McMullen: Yes. Sure, Brandon. And I'll start off here, and Bob, feel free to jump in. But, we felt quite comfortable resuming our share repurchase program on the non-dilutive perspective, and we'll be looking at opportunistic as well. And cash flow remains strong. We felt for some time that the third quarter of this year would be the toughest quarter for us for the year. We’re through that now. And the third quarter actually was significantly better than we had thought. And we saw positive growth across all the businesses in July. So, we think, okay, barring some kind of major flare-up, we should be able to continue to see this gradual improvement of growth in the fourth quarter, sort of our message. So, we have the comp. We also narrowed the framework that we provided, it’s more narrower than it was in Q3. But again, I think we need to keep in mind ourselves that we still -- there's still a lot of uncertainty associated with the pandemic. I think, our capital deployment approach remains unchanged, which is, we certainly wanted a balanced approach to capital deployment across dividends, cash, share repos and with the prioritization of investment in business, we just made a significant commitment in capital with our new NASD expansion. And we're still on the hunt for deals that make sense for Agilent. So, our approach to capital deployment really fundamentally remains unchanged. We paused a bit in the second quarter just because -- on the share repo because of the -- in the early part of the third quarter, given what was going on in the environment outside of Agilent. So, we feel pretty good about where we are right now and have a reasonable level of confidence, and there is decent level of stability about the business. Operator: Your next question comes from the line of Dan Leonard with Wells Fargo. Your line is open. Dan Leonard: So, maybe just to circle back… Mike McMullen: Hey Dan. Dan Leonard: Hi Mike. So, maybe this is a question for Bob, talking again about the Q4 framework. So, if your business grew in July and the world improves month to month through October, what does that imply then the high end should be above that 1% organic growth number? Bob McMahon: It could be. I'll just leave it at that. There's still a lot of uncertainty and so forth. But certainly, we wouldn't complain if it was better than that. Dan Leonard: Okay. And then, my follow-up, whoever wants to take it, on the NASD business. Can you elaborate on, what's the lead time for that announced expansion? Is it something that would take a year or multiple years to put in the new line, or is it a quicker turn? And can you comment on your willingness to commit capital inorganically in that business in addition to your organic commitments? Bob McMahon: I'll take the first one just real quick. And then, Mike, if you want to add something on the second one. We announced that we would make that $150 million investment and we would expect it to go live towards the end of 2022. So, it's taking a little longer than just a regular train. Sam mentioned train A on steroids. So, it's bigger, and probably take a little more capital. And obviously with COVID-19 there's some activity there in terms of little long lead time. But, we feel like we have the capacity to be able to manage us through that time, and then that will come online at the end of 2020. Mike McMullen: Yes. I think, it’s perhaps end of '22. And don’t specifically talk about specific targets or areas of focus, certainly, but it's not out of the realm of reason that I would say, why wouldn’t we want to further expand this business inorganically as well? So, that's not out of the realm. I'm not singling anything near-term happening. But we think we're operating from a position of strength here in this business. We had a first -- get our new factory up and running and build for that. So, we now think we have a, if you will, a beachhead to build from both, organically and inorganically. Operator: Your next question comes from the line of Catherine Schulte with Baird. Your line is open. Catherine Schulte: I guess, first, despite the relatively good LSAG results in the quarter, it sounds like the outlook on the capital equipment side is still a bit uncertain. Can you just talk to how the services and consumable side of the business trended in July, and what your expectations are for instrumentation trends in the coming quarters? Bob McMahon: Yes. I think -- Catherine, this is Bob, all three of our businesses actually performed better in July than they did in May and June, which was very positive. The ACG business actually led the charge in terms of that, as you would expect, given the resumption of activities. There's some catch up there, in terms of -- we saw that kind of phenomenon actually in China, in April. But ultimately ACG was there. I think, LSAG capital is going to continue to be constrained. But I think what we've seen in our business is we've talked about this in the past kind of this flight to quality. And with our instrumentation and the reputation that we have, I think in a capital constrained environment, those dollars are precious. And we think our positioning is very good vis-à-vis the market. Mike McMullen: Yes. I tried to hit that in my remarks, which as I really say, hey listen, we know we're picking up share in a tight market. And I think you saw that on C&E, right, which is if a C&E capital purchase is going down, it's coming Agilent’s way. And that's why -- and the market is still cautious, but you see PMI starting to creep up a bit, so. Bob McMahon: Yes, Catherine, just one last thing, to give you maybe a little more color. If we look across the groups, we would expect LSAG to still be negative in Q4. I mean, it's probably going to lag, given the [Multiple Speakers] big fourth quarter last year as well. Catherine Schulte: And then, Mike, you mentioned seeing growth in all regions for the non-COVID diagnostics business exiting the quarter. Can you just give us a sense of where those activity levels are in the U.S. versus China and where they bottomed out across the different regions? Mike McMullen: Sure. So, I think, I’d say China is in lead position in terms of if you -- almost full recovery. Europe is second and the U.S. is trailing. So for the first -- throughout the quarter, if I look at Sam's business in the U.S., for example, the first two months were negative of diagnostic testing values in pathology. But we saw actually improvement to growth in July. So, I think that's sort of the pattern of how the pandemic has flowed around the world. China is back. Europe's on its way. And I'd say, U.S. is still in the early stages of recovery. Bob McMahon: Yes. And I would say, in the U.S. it’s probably -- and keep me honest, Sam it’s -- we're probably still at about 80% pre-COVID levels from a diagnostics perspective, but improving where it was. It was below that at the beginning of the quarter, so. Does that sound, Sam? Sam Raha: It does. Operator: Your next question comes from the line of Steve Willoughby with Cleveland Research. Your line is open. Steve Willoughby: Just one question for you. A lot of my other questions have already been answered. 90 days ago, you made a brief comment about potential onshoring back in the U.S. Just was wondering if there's any update on that at all? Mike McMullen: Thanks, Steve. Happy to comment on that. I think, that's still going to happen. And these things take time. But, there's active discussion. And, by the way, I wouldn't say it's just confined I the United States. I mean, many geographies are now looking at the security of their supply chain, both in the pharma side as well as in the chemical marketplace where they're providing precursors into the APIs for the pharma chains. So, there's nothing significant to announce relative to the impact on business, but there does seem to be an overall trend in this regard. And I can say also from an Agilent perspective, we're working hard to make sure that our supply chain is secure as well. So, I think that the COVID-19 pandemic is a real wake up call to really some vulnerabilities in some aspects of supply chain. So, we're kind of working both sides of it, which are to ensure our own ability to deliver product under multiple scenarios, as well as we do see some market trends underway. Bob, I know you take a look at this pretty… Bob McMahon: Yes. Just to build on that, we talked a little bit about earlier in the call. We would expect that to see some of that opportunity show in our order book. And that's probably more a ‘21 timeframe for revenue. I wouldn't expect any of that to happen in Q4, just given the kind of timing. But you're seeing it in multiple end markets in multiple regions. We think this is a trend that will continue. Operator: Your next question comes from the line of Dan Brennan with UBS. Your line is open. Dan Brennan: Maybe first question just on chemical and energy, obviously, you've already highlighted a few comments throughout the call. But just wondering if you can kind of walk through a little more color separate trends within that segment by customer in chemical and if it's worth seeing if there's going to be divergence here between chemical and A&P and R&M? And then secondarily, maybe just remind us of how much of that business is tied towards like QA/QC versus R&D and kind of what are we looking for to determine whether or not this down 10% begins to improve more reliably, or if it's going to save the slow steady progress that you believe? Mike McMullen: Hey, Bob, why don't I make some initial comments, and then we can check our notes to see if I missed anything. But, I think unlike the last quarter, the mix here -- and I think both the chemical and the energy later side had about the same dynamics where both were down about the same, primarily on the instrument side. And on one hand, the chemical side of the business was really benefiting -- continues benefit from the low oil prices. But, some of their end markets are weak, whether be automotive or some of the other markets that they service are weak. Some of them are getting a little bit of help on COVID-19 related products. But overall, I'd say both, the chemical side, as well as the energy side of that are down about the same, but stable. And I have to say that Bob and I had talked to at some length about this in our last call. And our prediction at the time was we thought we were going to be in a stable situation relative to this. That wasn’t going to get any worse. That was sort of the question we were getting last call. So, I think we're really pleased to see that that came through this quarter. And we expect that eventually this thing will start to move back to grow. I think it's probably a 70-30 mix, where most of it’s in QA/QC. And that's why these facilities are running, albeit maybe not at full volume. So, QA/QC equipment will be needed as well as consumer services that go with it. So, they can only hold off the depots on that side for so long. There is an element of research. But I think in the chemical and energy space, the biggest driver for that is the QA/QC side of the business. Bob McMahon: Yes. And the only thing I’d add, Dan is we would expect this, as you said, kind of steady slow progress going forward. Dan Brennan: Okay. And then, maybe one different follow-up, I know -- a couple of questions on China. But maybe could you just go a little bit more into detail on what you saw in food and generics? Obviously COVID is impacting the globe and the recovery. But, you've got some pretty unique issues with food and generics that are maybe a little different. So, dependent upon the improvement or lack thereof, that could drive notable changes in China. So, what did you see there? And what's the outlook as we look forward to those segments? Bob McMahon: Yes. I was going to say, Dan, one of the things we were incredibly proud of in China was all three of the business groups grew and all of our end markets grew, really led by food, which was up over 20%. It's been a while since we've been able to say that. And so, we think that -- we talked about kind of the moves away from the government labs or the central labs into the commercial labs, and we think that that's stabilized, and team has really been able to garner share, or our view of capacity in that space. And then, in pharma, it continues to perform very well. Actually, pharma was up roughly 10% in China, and that's a combination of both, large and small molecule. And I think that our thesis around that continues to play out, which is that the winners of the 4 plus 7 or the tendering process are -- customers that where we are over indexed, and we continue to see that positive momentum, we actually saw acceleration from Q2 to Q3 in both, food and pharma, and the rest of the businesses were positive as well. So, I think, it’s broad-based. Operator: Your next question comes from the line of Patrick Donnelly with Citigroup. Your line is open. Patrick Donnelly: Mike, maybe just one for you on -- I know, there’s been a few questions in July obviously. But with all the businesses returning to growth, I guess, is it safe to assume you guys didn't see too much of a pullback around the second wave here in the U.S., even the first few weeks of August? It sounds like you're a little more cautious on Americas versus other geographies. But, just wondering, any surprises on an end market basis in the U.S., as you went through July and even early August, given the reoccurrence of virus? Mike McMullen: No, I'll jump in on this. But from our perspective, I don't know real surprises. Maybe we're -- like all of us are watching what was happening with the pandemic as it worked its way across throughout the U.S. and we saw the case numbers go up and lab access was down really sharply April, May, June and we started seeing some recovery. So, I think no real surprises versus what we thought. Bob McMahon: Yes. I would agree. I mean, Patrick, this is Bob. The Americas, as Mike said earlier, is in fact the biggest variable because it's further along in its recovery than both Europe and China. And I think, the thing that we're watching is those COVID flare-ups and the potential impact on elective procedures, which would impact our diagnostics business. That's probably got the biggest variability going into Q4 relative to LSAG and ACG. But, to Mike's point, we did not see any significant change with these flare-ups in August -- or excuse me in July and early August. Patrick Donnelly: And then, bunch of that good commentary on the chemical and energy and industrial side. Just want to and just clarify, I mean it certainly seems like the industrial sentiment feels like it might have bottomed. It seems like your tone is little bit better from three months ago. Even though, again, chemical and energy is probably going to be down similar this quarter and again next quarter. But, I guess what you're hearing from customers there on spend plans? Again, it sounds like you're a little more optimistic and talking a little more bullishly about '21. So, I'm just wondering, I guess, as we enter into the end of this fiscal year into '21, are you seeing things improve a little bit? Obviously, you’ll come up against very easy comps, but it does seem like the tone is a little more positive. So, are you hearing from customers, things that are trending a little bit better into '21? Mike McMullen: Yes. I think that's a fair assessment of what I was trying to communicate today. First of all, the fact that we do think it's bottomed. And that was our thesis when things started going directly down and the pandemic hit. So, we do see that. Again, I don't want to get too far out and describe some big dramatic increase in growth in this space. But, customers are working on the plans. Chevron actually is making some big investments in Iraq. So capital -- these are ongoing concerns, and they can hold back their capital for a while, but they're going to want to maintain their operations at the highest capabilities. So, we're hopeful that the budget environment will be a little bit different in '21. I think once we get a little bit more clarity, once our customers feeling more clarity in their view where the economy's gone, then they can make their decisions with a lot more confidence. So, the PMIs are good view of how some of them may be changing. So, again, don't over interpret this for fourth quarter, but it does point to '21 being perhaps a better environment. Operator: And your last question comes from the line of Jack Meehan with Nephron Research. Your line is open. Jack Meehan: So, I wanted to go back to the NASD business and just get a little bit more color. Are you working on any of the mRNA-based COVID-19 vaccine? I guess, curious because the trials are going so quickly. I was curious to get your take if one [indiscernible] and into commercial within the next six months, how would you manage the business to deliver on the capacity that customer might need for that? Mike McMullen: Hey, Sam, I’m going to pass that to you. Sam Raha: Yes. no problem, Mike. So, I can't comment specifically on the molecule or the molecule of the projects that we're doing related to COVID-19. But, two things I will point out. As Bob indicated earlier, this is business separate for or different than the business we're already doing or it's not taking the place of business, if you will. And we believe, we have the capacity and that's -- if the demand is there related to certain things playing out related to COVID-19 and the molecule that we happen to be working on, we believe we will be in a position to be able to supply that material as the volume required. Jack Meehan: And then, one more follow-up on LSAG. I'm just curious, as you're looking at the research labs around the globe, kind of in this conversation around deferral versus cancellation, what are customers telling you? Is it still mostly deferrals versus cancellations? And on the deferral side, when do you expect these, how far out is it getting pushed something that you think it hits before the end of the year or probably more likely in calendar '21? Mike McMullen: Hey Jack. Happy to answer this question. This is something we've been monitoring pretty closely, deferrals versus cancellations. And we've really been pleased, our cancellations are actually lower than last year. And our thesis is they’re being pushed and actually funds will be deployed this calendar year. Bob McMahon: Yes. That's what we actually -- we saw that -- Jack, some of that actually happened in Q3. And as people are going back into the labs physically there, then they can install the instrumentation. But to Mike's point, we've seen no cancellation or lower cancellations than what we would have last year. There's always some level of it. I would say that we've been extraordinarily pleased. And I would expect it to happen this calendar year. Operator: This concludes the allotted time for our question-and-answer session. I'd now like to turn the call back over to Ankur for any closing remarks. Ankur Dhingra: Yes. So, that concludes the call for today. Thanks, everyone for joining us. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.	[ { "speaker": "Operator", "text": "Good afternoon, and welcome to the Agilent Technologies Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. And now, I'd like to introduce you to the host for today's conference, Ankur Dhingra, Vice President of Investor Relations. Sir, please go ahead." }, { "speaker": "Ankur Dhingra", "text": "Thank you, Robert, and welcome, everyone, to Agilent's conference call for the third quarter of fiscal year 2020. I hope that all of you and your families are safe and healthy. On the webcast today are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining for the Q&A after Bob's comments will be Jacob Thaysen, President of Agilent's Life Sciences & Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of Agilent CrossLab Group. You can find the press release, investor presentation and information to supplement today's discussion on our website at investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year, and revenue growth will be referred to on a core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. We will also make forward-looking statements about the financial performance of the Company. These statements are subject to risks and uncertainties and are only valid as of today. The Company assumes no obligation to update them. Please look at the Company's recent SEC filings for a more complete picture of our risks and other factors. And now, I would like to turn the call over to Mike." }, { "speaker": "Mike McMullen", "text": "Thanks, Ankur, and thanks, everyone, for joining us on our call today. The Agilent team delivered excellent results in the third quarter in the midst of a historic global pandemic. Against this backdrop, Agilent's performance once again highlights the strength and resiliency of our team and our business. Agilent's Q3 revenues are $1.26 billion. Our revenues are down just 1% on a reported basis, despite COVID-19 headwinds in what we expect to be the year's most challenging quarter. On a core basis, revenues are down 3%. These results demonstrate the strong resilience we have built into our business over the past several years. EPS is $0.78 per share. This is a 3% year-over-year increase. Operating margin grew 90 basis points over last year to 23.7%. Our Q3 results are further evidence of the success of our profitable build-and-by growth strategy. We continue to build a more resilient growth oriented business. Last quarter, I talked to you about the four key priorities we're focused on during the COVID-19 pandemic: Protecting our people; being open for business for our customers; taking decisive action to deliver our P&L and balance sheet; and unwavering commitment to growth. Staying focused on these priorities has helped us navigate through the COVID-19 effects on our team, customers and business. Our customers continue to respond very favorably to our team's engagement and enhanced digital capabilities. In fact, Q3 customer satisfaction rankings are at all-time highs. In all regions, we're seeing improvement in lab access for our customers and increase non-COVID-19 testing volumes. There are, however, regional and end-market differences in the pacing of improvement. Labs access improved through the quarter, although still not at pre-COVID-19 levels. Globally, lab access remains limited in academia, non-COVID-19 research and testing labs. We're also seeing continued limited access at some private sector research labs in Europe and United States. Similarly, non-COVID-19 diagnostic testing volumes improved throughout the quarter, but remained down from prior levels. Hospital access in Europe and the U.S. is improving, although disrupted at times by virus flare up. While there are indications of improvement in economic growth at varying degrees across the globe, caution remains at customer capital expenditure decisions. Consistent with our thinking coming into the quarter, the pace of recovery varied by region. As expected, China led the way for us and exceeded our expectations with revenues up 11%. China's growth in the quarter is broad-based across all end market and for all business groups. While improving the rate of recovery in Europe, and the Americas lags China, given the timing when these reasons first felt the brunt of the pandemic, European revenues are down 5%. Americas market conditions trailed both China and Europe with revenues declining 10%. However, as we exited the quarter, we are seeing signs of improvement in service activity, consumables and diagnostic testing volumes. On a total Company basis, we exited July with modest growth across all major markets. Now, let's talk about our performance by business groups. Our Life Sciences and Applied Markets Group grew 2% on a reported basis and declined 4%. Our team is focused and determined to gain market share despite a constrained capital environment. The strength of our portfolio coupled with an energized and stable sales team is paying dividends. I'm also very proud of contributions are selling our cell analysis technologies are making in COVID-19 virus research. Our M&A strategy is working and making a difference in the pandemic fight. Our CrossLab Group revenues grew 1%. Increase in customer activity led to increased sales of consumables and an uptake of on-demand services. The CrossLab team continues to win large, multiyear contracts for enterprise laboratory management that will benefit us moving forward. We will continue to increase our competitiveness in this space. Our Diagnostics and Genomics Group revenues declined 8%. While our overall pathology and genomics businesses are down for the quarter, we did see gradual improvement in diagnostic testing volumes and non-COVID-19 lab openings. Partially offsetting this, our nucleic acid solution business delivered another strong quarter, growing almost 25%. We are very excited about the future of our NASD business. As we announced earlier today, we plan to more than double oligo manufacturing capacity and our new Frederick, Colorado site. This expansion helps us meet significantly increasing customer demand. We are growing double-digit and expect to continue this rate of growth in the coming years. We continue to advance in our portfolio across all our businesses. Highlights during the quarter included LSAG launching two new LC/MS products in Agilent 6470B Triple Quad and the Agilent RapidFire 400 systems. Both products are in high throughput labs, driving productivity and superior resolution. We launched our CrossLab Asset Monitoring service, which is a new subscription service using instrument sensor technologies to provide data driven usage insights. This helps drive improved customer economics and lab productivity. While early, we are seeing strong interest from customers in this service. During the quarter, our PD-L1 assay was approved by the FDA for expanded use of non-small cell lung cancer, helping guide physicians in selecting treatments using specific immunotherapies. Our team is very proud of the role their company is playing in the global COVID-19 play. We are supporting COVID-19 research, testing and therapeutic of vaccine development. Our efforts in the global fight against the virus delivered 2 percentage points of reported growth. We are accelerating efforts to make a difference in the battle against COVID-19 and have mobilized across Agilent team to maximize customer support. Let me close with few comments on our outlook in the coming quarter. While there's still significant uncertainty regarding the continued pace of recovery, we expect the July trend of gradual improvement in our business to continue into Q4. By region, China will continue to be a positive story for us and lead return to growth. Europe is starting to trend upward. The Americas are also expected to improve but at lower rate than China and Europe. Globally, improved lab access, increasing non-COVID-19 testing and a slowly recovering global economy are all positive signs. I remain absolutely convinced Agilent will emerge from this pandemic with a stronger position in the marketplace. Our continued focus action on four priorities, protect the team; support our customers; preserve our P&L and balance sheet; and our unwavering investment in growth are delivering. Entering Q4, we are operating from a position of strength and with momentum. Yes, this pandemic remains unpredictable. However, I am cautiously optimistic about our continued gradual recovery and return to growth. Before I hand the call over to Bob, I'd like to pause and share my hope that you and your loved ones are staying safe and healthy. Thanks for being on the call. I look forward to taking your question after Bob's remarks. And now, Bob, over to you." }, { "speaker": "Bob McMahon", "text": "Thank you, Mike, and good afternoon, everyone. Today, I'll provide some additional detail on revenue, walk through the third quarter income statement and some other key financial metrics. And then, I'll finish up with a framework for thinking about Q4. As with last quarter, there are still too many unknowns. So, we're not going to provide formal forward-looking guidance today. However, we will provide a framework for how we see things potentially playing out in Q4. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike mentioned, our revenue for the quarter was $1.26 billion, down 1% on a reported basis. On a core basis, revenue declined 3.1% in the quarter, currency negatively affected revenue by 1.3 percentage points, while acquisitions added 3.4 percentage points to growth. As Mike talked about the regional performance, I'll speak to the end-market performance. In terms of our end markets, pharma grew 2% in Q3 against a very strong comparison of 13% from last year. Both, small and large molecule applications grew and biopharma improved throughout the quarter as drug development labs increased production and access. We experienced softness in diagnostics and clinical, as anticipated. Revenues declined 10%, primarily due to conditions in the U.S., driven by COVID-19-related disruptions to patient visits and diagnostic lab opportunities. Encouragingly, we did see an improvement in routine testing throughout the quarter, especially in China and Europe, while the U.S. lagged. Chemical and energy was down 10%, consistent with our thinking. Revenues were generally flat sequentially with conditions largely similar to what we saw in Q2. As we've talked about previously, we expect this segment to ramp more slowly than others. The food segment was a bright spot, up 8%. We're seeing ongoing signals that the market in China has stabilized with the transition of more testing by commercial labs. The food market was just one of several bright spots that contributed to double-digit growth in China, including growth in the low-teens for our pharma business. Our environmental and forensics business declined mid-single-digits against the double-digit compare and the academic and government segments declined mid-single-digits, while improving on a sequential basis in Q3. Strength in cell analysis and liquid handling for viral research partially offset the widespread impact of the ongoing academic lab closes. Now, let's turn to the rest of the P&L. I'm extremely proud of how the Agilent team has responded to the challenging environment. During the quarter, we continued our focus on managing expenses, while ensuring we continue to invest in our key growth opportunities. These expense management actions we initiated last quarter were on full display in Q3. In addition, our customer engagement model using digital tools continued to gain traction, while also delivering savings in SG&A. As a result, operating margins of 23.7% improved 90 basis points over last year on declining revenues. Gross margin at 55.1% was down 130 basis points versus the prior year, largely due to mix, and higher logistics costs. However, strong cost management and operating expenses more than offset the decline in gross margin. This combination of factors resulted in non-GAAP EPS for the quarter coming in at $0.78 per share, up nearly 3% from the number we posted a year ago. From a balance sheet perspective, we generated $290 million in operating cash flow during the quarter, which is $48 million improvement over last year. In terms of capital spending, we spent $25 million, lower than last year and in line with our revised look in Q2. We ended the quarter in a strong position with $2.3 billion in available liquidity, including $1.36 billion in cash. Also during the quarter, we took advantage of low interest rates and refinanced $0.5 billion in short-term debt with a 10-year bond and a 2.1% coupon, the lowest coupon in our portfolio. As you know, we paused share buybacks in Q2, pending improvement in business conditions. In Q3, our visibility into business trends and cash flow improved, and we resumed anti-dilutive share repurchases late in the quarter. In the quarter, in total, we repurchase 360,000 shares for $33 million. Going forward, we intend to resume our normal pattern of regular anti-dilutive repurchases, along with additional opportunistic buying. Our overall capital deployment approach remains balanced with the primary focus on growth M&A opportunities, while also returning the cash to shareholders via dividends and buybacks. As we look to Q4, business and trends have gradually improved, but significant uncertainty remains around the evolution of this pandemic. However, let me provide a framework for how we see a range of possible revenue growth scenarios in the coming quarter. We generally expected trajectory of gradual improvement in business results to continue across all regions. Areas where we see a broader range of scenarios include research spending, both in academia and other markets, non-COVID diagnostic testing, especially in the U.S., and the general CapEx environment. The combination of these factors could result in scenarios where our revenue performance could range from a 4% decline to 1% core growth. Also, as a reminder, the BioTek acquisition closed midway through Q4 of last year. So, the M&A impact in Q4 will be smaller than in previous quarters, roughly 1 point growth and currency is forecasted to be positive in the quarter. The low end of this range envisions COVID-19 flare-ups occurring in the fall in various geographies, limiting and in some cases, reversing the recovery gains we've seen in a period of time. In this scenario, one might expect to see slower or stalled improvements in research, academia and other markets as continued tight cash management leading to lower CapEx spending in the U.S. and Europe. We hope this bottom end of the range is overly conservative, but we wanted to let you know, we have plans in place in case this happens. The higher end of the range assumes continued recovery by region, building on what we have seen in July, with the biggest impact coming from the U.S. This would include a continual increase in elective medical procedures such as cancer screenings, as well as continued lab openings. This view would also include continued China momentum, along with the continued improvement in Europe and other areas in the Americas. Again, this is not guidance, but should provide a sense for some of the variables we see for Q4. Overall, I feel we are very well positioned to deal with this challenging environment, accelerate market share gains and come out even stronger as the global economy continues its path to recovery. With that, I'll turn over things to Ankur to direct the Q&A. Ankur?" }, { "speaker": "Ankur Dhingra", "text": "Thanks, Bob. Robert, if you can provide the instructions for the Q&A, please?" }, { "speaker": "Operator", "text": "Certainly. [Operator Instructions] Your first question comes from the line of Doug Schenkel with Cowen. Your line is open." }, { "speaker": "Doug Schenkel", "text": "Hey. Good afternoon, guys." }, { "speaker": "Mike McMullen", "text": "Hey, Doug. How are you doing?" }, { "speaker": "Doug Schenkel", "text": "I’m doing well. Nice work in a tough environment. Can we maybe just start with a clean-up question right off the bat which is just about the prepared remarks. I don't think you quantified COVID-19 tailwinds in the quarter. Again, I may have missed that. But, it just would be helpful to get that so we could try to normalize there?" }, { "speaker": "Mike McMullen", "text": "Yes. Sure, Doug. I touched on it briefly in my comments. So, there's two points of reported growth in Q3." }, { "speaker": "Doug Schenkel", "text": "Okay. That’s great. And then, on China, just a couple, I'm just curious if you would share the exit rate. And as we look ahead, I know you're not guiding, I'm just wondering if you think based on what you're seeing, if you think that double-digit growth can be sustained, from here, at least a term. And then, specific on food, it’s great to see it return to solid quarter first time [Technical Difficulty] seeing some stabilization last quarter. Can the high-single-digit growth rate you saw this quarter be sustained moving forward, given favorable multiyear comparisons? Thank you." }, { "speaker": "Mike McMullen", "text": "Hey Doug. Thanks for those questions. So, just to make sure it came through the audience. The question was about our view on the growth rate of China for the rest of the year as well as can that high-single-digit growth rate in food be sustained. We think the answer is yes on both. We're really pleased with our performance in China. It was broad based. I tried to really accentuate that in my comments. We saw basically double-digit growth across all end markets in China. And we think that a double-digit growth rate is within the realm of possibility for Q4 in China. And I have to say, Doug, it's wonderful we talking about China food from a different vector. We've been talking about it probably last 18, 24 months of one that will return to growth. We saw some early indications in Q2, we saw strong Q3, and we think that are all numbers probably sustainable for the rest of this year. Want to say something, Bob?" }, { "speaker": "Bob McMahon", "text": "Yes. I would just say, Doug, to add, I mean, one of the things that was very positive about China was it was pretty consistent across the quarter, and in fact exited slightly higher than that overall 11%, but we saw solid growth all three months." }, { "speaker": "Operator", "text": "Your next question comes from the line of Vijay Kumar with Evercore ISI. Your line is open." }, { "speaker": "Vijay Kumar", "text": "Mike or Bob, just maybe on the guidance here. If I step back, the third quarter guidance, down mid-single to down mid-teens, this down low-single was up, came well above expectations I would say, perhaps not surprising than peers, but nonetheless solid execution. Maybe Q4, down 4 to plus 1 implies declines. What’s the cause of declines, just given in light of performance? Is that that the minus 4 at the low end, is that assuming that Life Sciences [Technical Difficulty]?" }, { "speaker": "Bob McMahon", "text": "Yes. Vijay, this is Bob. I'll take that. And as I mentioned in the prepared remarks, we hope that that is overly conservative. What that would imply is actually a retrenchment -- and in COVID-19 flare-ups here in the U.S. as we go back -- as we move into the fall, and you start seeing some elements of shutdown. So, we certainly would hope that we would do better than that. But, we wanted to provide, hey, that's within the realm of kind of how we're thinking about our spending and so forth. Our July results -- or our exit rate of the quarter was much higher than that. And so, we're aiming to do better. But there's still uncertainty in the world with the pandemic, people going back to school and so forth, so." }, { "speaker": "Mike McMullen", "text": "And Bob, I think it’s probably fair to say, the wildcard is United States, right?" }, { "speaker": "Bob McMahon", "text": "Yes, absolutely." }, { "speaker": "Mike McMullen", "text": "And we were encouraged by the movement in PMIs. You probably noticed that. But, let's see how that translates into business in the coming quarter. And again, we have to keep in mind ourselves, as pleased as we are with the result we just delivered, there's still a lot of uncertainty out there because the virus is unpredictable at times." }, { "speaker": "Bob McMahon", "text": "Yes. That's right, Mike. I mean, if you looked at each one of the major markets, each one of the major markets got better in Q3 versus Q2 with the exception of the U.S., which we expected given kind of the state of affairs with the pandemic." }, { "speaker": "Vijay Kumar", "text": "That helpful perspective. So, the minus 4 implies that things get worse. Was July flattish or positive? And I'm curious Mike that you mentioned NASD doubling up a while ago. I know, if you turn back the page, we were doubling capacity. So, is this now versus six months of a quadrupling capacity versus where we were last year? Is that the right way to think about the revenues going from 100, 200 to perhaps, is that the math here?" }, { "speaker": "Bob McMahon", "text": "No, it's slightly different math. I think, we've been consistent with our view of needing to double our capacity. What we ended up doing is actually triggering the decision to initiate expansion earlier than we thought, just given the robust nature of the end market. And as well as we have worked our way to be able to -- in the same space, we challenged ourselves to find ways to drive as much revenue in the same physical space. So, we are investing a little bit more capital than we initially thought. But, we're also building something slightly different than our first train, which is going to give us actually more volume than our current train A. So, it's a really -- we thought it was really positive signal. And that’s why sent out the press release this morning, because we're super excited about our prospects here." }, { "speaker": "Mike McMullen", "text": "Yes. And Vijay, let me kind of frame into kind of the numbers. What we were talking about is the Frederick site has the potential of roughly $100 million worth of revenue. And we added capacity that more than doubles that $100 million to give you a frame of the numbers. So, it's not 100, 200, 400, it's 100, 200 and more than 300 to kind of give you a sense. And in terms of July, we actually came in with growth across all three groups in exiting in July." }, { "speaker": "Operator", "text": "Your next question comes from the line of Tycho Peterson with JP Morgan. Your line is open." }, { "speaker": "Tycho Peterson", "text": "I’ll start with the COVID commentary. I guess, if I go back to last quarter, there was some talk about launching the serology test. You guys obviously have an installed base of real-time PCR instruments. We've got the questions that why you haven’t launched a PCR test. So, can you just talk a little bit about, how you think about those tailwinds going forward and how you think about your capabilities on diagnostics side?" }, { "speaker": "Mike McMullen", "text": "Yes. Tycho, I'll make some initial comments and then the group presidents are kind of quiet today. So, I’ll pull Sam in here as well, to provide his perspective. But, we think that there's still tailwinds in front of us and now two points of growth, and we think we can sustain that at a minimum. That's why I tried to put fairly bullish comments about our stepped up efforts across the Company. Some of these things are going to take a little bit longer. We think there's still room for our own test of quality tests with some different features. But, I think maybe a few comments there, Sam, from your perspective?" }, { "speaker": "Sam Raha", "text": "Yes. Sure, Mike. Hi, Tycho. As you -- I think you’d have seen a good pickup in terms of our qPCR instruments, which are our Aria systems, as well as our bioreagents related to qPCR both reverse transcriptase master mixes. On the antibody side, we’ve definitely also seen an increase in IgA, IgG and those antibodies. In terms of our own tests, we are very actively exploring the possibilities of developing those. So, more to share in due course." }, { "speaker": "Mike McMullen", "text": "And Tycho, I guess, what I’d just close off here is a broad-based nature of our portfolio is allowing us to play in multiple aspects of this COVID-19. Some of these things may take a little bit longer to actually turn into revenue, right? So, if you're working with, say, a pharma partner or something in the therapeutic area, it may take a while for that to come to market. So, we think these tailwinds are here to stay for some time. And we're stepping up our efforts here because it plays right into the broad nature of our portfolio." }, { "speaker": "Tycho Peterson", "text": "I guess, that's a good segue on the NASD expansion. Could you maybe draw to what degree that's tied to the COVID vaccine, and any updates from your add-on capabilities on APIs for mRNA or siRNA vaccines?" }, { "speaker": "Mike McMullen", "text": "Do you want to take that one, Sam?" }, { "speaker": "Sam Raha", "text": "Yes, sure. No problem. Tycho, I'd start by reiterating a little bit of what Mike and Bob were talking about. It's interesting that it was just last June that we did a ribbon cutting and starting of the new Frederick, Colorado facility. And quite frankly, we've seen demand that exceeded our expectations, just 12 months ago. So, building really -- sorry, the new manufacturing line that we're building, you can consider it, as we call it, training on steroids as our general. But, it is very-differentiated, both in throughput and the molecules it can do, which is a segue to your -- a little bit of your question that we're able to do multiple iterations or types of siRNA or RNA. We're also actively looking at other different versions of molecules that are oligo based. Though I can't reveal the details, we have had a lot of interest related to COVID-19, all of those used for either COVID-19-related therapeutics or even for vaccines. So, I can say that we have started to work on some of those programs now." }, { "speaker": "Bob McMahon", "text": "Yes. And maybe Sam to add. That being said, the capacity expansion isn't tied to COVID-19. We have plenty of demand outside of COVID-19 therapeutics and vaccines. And so, this is a broad-based capacity expansion." }, { "speaker": "Tycho Peterson", "text": "And then, just last one, I know we don't have official guidance, but there's a framework for the quarter -- for the fourth quarter. As we think about C&E and then also pharma biotech, should we expect any kind of material change in either of those end markets for the coming quarter? I know, you talked about restoring activities for C&E. I wasn't sure if that was maybe a positive improvement in trajectory there?" }, { "speaker": "Bob McMahon", "text": "Yes. Probably -- C&E is probably the one that's -- I would expect it to be pretty stable and that down 10ish percent -- 8% to 10% in that range. We do expect pharma to continue to improve. So that 2% certainly even in the low scenario would stay there and then on the high scenario would accelerate, which is consistent with the trends we've seen throughout the quarter of Q3." }, { "speaker": "Mike McMullen", "text": "And Tycho, the supply chain consideration and discussions still happen and it gets added a level of stability, albeit down to this -- into the space. And, again, as you look ahead for the future, this is an area where eventually it'll come back, and again, too early to call. But, I'd say we're pretty confident about the improvement rate in pharma." }, { "speaker": "Bob McMahon", "text": "Yes. The way to think about those reshoring is those are opportunities and discussions that could happen through the order book, and then will happen actually in '21 and beyond in terms of investments are being made. So, that's more future looking." }, { "speaker": "Operator", "text": "Your next question comes from the line of Puneet Souda with Leerink. Your line is open." }, { "speaker": "Puneet Souda", "text": "So, first question is just on NASD, [ph] it’s obviously strong in the quarter, but that would imply Dako and clinical business, obviously you pointed that out, it was down in the quarter. But that's a significant decline. Maybe just could you parse that out for us? What is -- it's the COVID impact, for sure, but is there anything beyond that in terms of the way market is fundamentally potentially shifting here to NGS maybe? And if you could just maybe elaborate a little bit of that, clarify? Thanks." }, { "speaker": "Mike McMullen", "text": "Yes. Happy to do so. So, it's all market, it’s all access to labs and patients going for the diagnostic test. So, it's real all market. I think, we're seeing different pace of pacing throughout the quarter. All of our geographies in the diagnostic testing front ended up with positive growth in July, but it was down sharply in May and June, particularly in the U.S. And keep in mind also, we -- part of our business in our genomics front is so select into NGS-based diagnostic labs and for genetic disorders, for example, those tests aren't getting done either. So, it's really all market." }, { "speaker": "Bob McMahon", "text": "Yes. I was going to say, Puneet, actually if you bifurcate those two and look at our performance, actually, pathology performed better than NGS testing volumes, given what Mike was just talking about, as well as some of the academic institutions." }, { "speaker": "Mike McMullen", "text": "That's good point, Bob. Thanks." }, { "speaker": "Puneet Souda", "text": "Yes. Thanks for that. And if you could, I know you quantified it last quarter, Bravo contribution. I was wondering if you can provide that for Bravo Magnis liquid handling system, sort of how much of that contribution happened in the quarter?" }, { "speaker": "Mike McMullen", "text": "Yes. That's part of the story for our COVID-19 tailwinds. And I think probably the biggest contribution this quarter actually came from BioTek, Bob, if I remember correctly?" }, { "speaker": "Bob McMahon", "text": "Yes. Between BioTek and Bravo." }, { "speaker": "Mike McMullen", "text": "Bravo. So, it's kind of like, now we like a one-two punch kind of going there on the core instrumentation. I’d also remind you, with the Bravo platform comes an ongoing revenue stream associated with the tips that go with those liquid handlers." }, { "speaker": "Puneet Souda", "text": "Okay. And last one on just ACG. I mean, could you just elaborate on -- in these times, you mentioned, there are some larger contracts -- service contracts and likes that you’re getting into. Sort of what are those sort of COVID-driven, what's behind those and maybe if you can elaborate on geography there?" }, { "speaker": "Mike McMullen", "text": "Yes. Puneet, happy to have Padraig jumping on here and provide his perspective on that. So, Padraig, in the call script I talk a bit about the large enterprise deals you guys won. So, why don’t you talk about that a little more detail?" }, { "speaker": "Padraig McDonnell", "text": "Yes. So, thanks, Mike. We launched our CrossLab Asset Monitoring service, which has seen a big uptick. And what we're seeing from customers is a large demand for sourcing from one vendor. And because of our capabilities in terms of the asset monitoring capability, relocation services and our core delivery services, which are extremely in strong demand. We're seeing a big uptick from large customers, and we expect that to continue as we go through the quarter, next quarter." }, { "speaker": "Mike McMullen", "text": "Yes. And I was going to say that I think the geography Puneet is largely in the U.S., but there are some global opportunities as well. It’s really non-COVID-19 related. I mean, this is part of the core growth strategy for Padraig’s business to continue to expand our market share on the Enterprise Services front. And we're really delighted that we made some big pharma deals." }, { "speaker": "Operator", "text": "Your next question comes from the line of Derik de Bruin with Bank of America. Your line is open." }, { "speaker": "Derik de Bruin", "text": "So, a couple of questions. Very impressive margin expansion in the third quarter. How should we think about the operating margin into Q4? And then, I guess, how much of these costs are permanent removals versus what has to come back in '21?" }, { "speaker": "Bob McMahon", "text": "Let me take that, Derik. It's great question and we certainly are very pleased with how the team has responded, as I mentioned before. As we talked about, a large amount of the cost, we have not done things like furloughs. We stabilized the team. We have not reduced base pay and things like that. So, these are discretionary expenses that a lot of them we think had the opportunity to stay away, be travel and things like that, which our digital tools have enabled us to really continue to support our customers. And so, there aren't any kind of one time things that happened in the quarter. In terms of going forward to Q4, we are looking at probably less of a margin -- incremental margin improvement because we are looking for ways to continue to invest to drive growth as the economy recovers. We also have some startup costs in the NASD new facility as well. So, it's probably less than what we've had historically had, which is call it 30% to 40% incremental. But it's really to drive growth." }, { "speaker": "Mike McMullen", "text": "Hey Bob, if I could maybe add a comment on your -- on the first remark. So, this is really, Derik, all about a new way of working in Agilent. So, I'm preparing for a manager's call later this week. And what we're talking to our team about is more digital, less travel. And we're really going to make sure that when we get on the other side of COVID-19 pandemic that we don't revert to our old ways of traveling. And we know from our customer satisfaction scores, they love the responses we have now with our digital platforms." }, { "speaker": "Derik de Bruin", "text": "And two questions on LASG (sic) [LSAG]. I guess, the first question is, if you look at your numbers in China versus some of your major peers in that area, I mean, you really outshone in China. Can you just talk about just share dynamics there that are going on? I mean, as I said, there was a pretty stark comparison between you and your main LC competitor there. And I guess, also along those lines, can you talk about potentially any sign of a budget -- any sign of a budget flush into sort of thinking about 4Q trends? What are you hearing in terms of people with budgets? And are they going to be allowed to roll things over and to -- or are they going to have to use it or lose it? Just some dynamics in terms of growth on the fourth quarter and just sort of to your general thoughts on what customer spending habits are?" }, { "speaker": "Mike McMullen", "text": "I'm going to have Jacob handle the first question. And Jacob, you can pass it back to Bob and I for the second question. And I know Jacob would be just delighted to talk about the share dynamics in China, which we think are very positive for Agilent?" }, { "speaker": "Jacob Thaysen", "text": "Yes. Thanks for that. And the number speaks for itself. It's clear that both in China but I think actually globally that we right now will be taking care. And this doesn’t come like coincidence. We have been executing our strategy to make a deal over the past year. And the customers are really buying into our value proposition. We are playing a game where we are leveraging our whole portfolio, not going after one product line versus each other and the customer really likes that we’re outcome based. So that's what is happening right now. And we see here in the crisis that not only are they excited about the investments we have done over the past year, but also, as Mike talked about, in the digital world, into the work world, we have been very optimistic and super responsive they have taken off the digital, we take challenge variable very, very good and the customers responded very, very positive to it. They know that when they work with Agilent that we are there for them in this crisis." }, { "speaker": "Mike McMullen", "text": "And then, on the other question, Derek, what we're hearing from our customers, particularly in the public sector and we’re seeing it in our order book, and while I'll offer my perspective here, and feel free to build on my comments here. But, there's a real sense of making sure they commit to the budgets. So, we're seeing it both in our order book as well as order activity, where there is a lot of uncertainty what's going to happen post elections as we go into 2021. So, they want to commit those funds. And it's actually quite amazing the amount of deal activity that's going to occur without visiting a customer face to face. So Bob, I don’t know what you're hearing from field…" }, { "speaker": "Bob McMahon", "text": "The only thing I would add is just reiterate what Jacob was saying, because it's not just China. I think, when you look at our LSAG portfolio, I think what people don't fully appreciate is, is how we've actually changed the portfolio to technology platforms, they're probably the best -- in the best shape they have been in probably five years in terms of new products and so forth. And I think you're seeing that across the globe. And when we think about where we ended up in Q3, LSAG was certainly the standout relative to where we thought they were going to be. In a capital constrained environment only down 4% on a core basically speaks to our responsiveness to customers." }, { "speaker": "Operator", "text": "Your next question comes from the line of Brandon Couillard with Jefferies. Please go ahead." }, { "speaker": "Brandon Couillard", "text": "Bob, on the gross margin line, you mentioned higher logistics cost in the third quarter. Is that a new trend? And then, could you help us just think through some of the puts and takes, whether it's logistics costs or mix and how those puts and takes might evolve in the fourth quarter?" }, { "speaker": "Bob McMahon", "text": "Yes. Sure. We’re hoping that's not a trend that's going to be around for a while, but it certainly was exacerbated in the Q3. That being said, I would say three quarters of that was probably mix, when you look at the various businesses across each one of the groups. But, where we saw logistics, challenges are, it's lower capacity and freight and air capacity. But we would expect that -- and we actually saw that through the quarter to kind of relax. And I think as you’re starting to see more intercontinental travel, both from a passenger standpoint as well as freight standpoint we would expect that to kind of relax over time." }, { "speaker": "Brandon Couillard", "text": "Okay. And then, Bob or Mike, you're not quite giving formal forward-looking guidance yet, but you do feel comfortable enough to restart the buyback program. Just what are your latest thoughts just around comfort as far as capital deployment goes and maybe your appetite for M&A right now and what the funnel might look like there?" }, { "speaker": "Mike McMullen", "text": "Yes. Sure, Brandon. And I'll start off here, and Bob, feel free to jump in. But, we felt quite comfortable resuming our share repurchase program on the non-dilutive perspective, and we'll be looking at opportunistic as well. And cash flow remains strong. We felt for some time that the third quarter of this year would be the toughest quarter for us for the year. We’re through that now. And the third quarter actually was significantly better than we had thought. And we saw positive growth across all the businesses in July. So, we think, okay, barring some kind of major flare-up, we should be able to continue to see this gradual improvement of growth in the fourth quarter, sort of our message. So, we have the comp. We also narrowed the framework that we provided, it’s more narrower than it was in Q3. But again, I think we need to keep in mind ourselves that we still -- there's still a lot of uncertainty associated with the pandemic. I think, our capital deployment approach remains unchanged, which is, we certainly wanted a balanced approach to capital deployment across dividends, cash, share repos and with the prioritization of investment in business, we just made a significant commitment in capital with our new NASD expansion. And we're still on the hunt for deals that make sense for Agilent. So, our approach to capital deployment really fundamentally remains unchanged. We paused a bit in the second quarter just because -- on the share repo because of the -- in the early part of the third quarter, given what was going on in the environment outside of Agilent. So, we feel pretty good about where we are right now and have a reasonable level of confidence, and there is decent level of stability about the business." }, { "speaker": "Operator", "text": "Your next question comes from the line of Dan Leonard with Wells Fargo. Your line is open." }, { "speaker": "Dan Leonard", "text": "So, maybe just to circle back…" }, { "speaker": "Mike McMullen", "text": "Hey Dan." }, { "speaker": "Dan Leonard", "text": "Hi Mike. So, maybe this is a question for Bob, talking again about the Q4 framework. So, if your business grew in July and the world improves month to month through October, what does that imply then the high end should be above that 1% organic growth number?" }, { "speaker": "Bob McMahon", "text": "It could be. I'll just leave it at that. There's still a lot of uncertainty and so forth. But certainly, we wouldn't complain if it was better than that." }, { "speaker": "Dan Leonard", "text": "Okay. And then, my follow-up, whoever wants to take it, on the NASD business. Can you elaborate on, what's the lead time for that announced expansion? Is it something that would take a year or multiple years to put in the new line, or is it a quicker turn? And can you comment on your willingness to commit capital inorganically in that business in addition to your organic commitments?" }, { "speaker": "Bob McMahon", "text": "I'll take the first one just real quick. And then, Mike, if you want to add something on the second one. We announced that we would make that $150 million investment and we would expect it to go live towards the end of 2022. So, it's taking a little longer than just a regular train. Sam mentioned train A on steroids. So, it's bigger, and probably take a little more capital. And obviously with COVID-19 there's some activity there in terms of little long lead time. But, we feel like we have the capacity to be able to manage us through that time, and then that will come online at the end of 2020." }, { "speaker": "Mike McMullen", "text": "Yes. I think, it’s perhaps end of '22. And don’t specifically talk about specific targets or areas of focus, certainly, but it's not out of the realm of reason that I would say, why wouldn’t we want to further expand this business inorganically as well? So, that's not out of the realm. I'm not singling anything near-term happening. But we think we're operating from a position of strength here in this business. We had a first -- get our new factory up and running and build for that. So, we now think we have a, if you will, a beachhead to build from both, organically and inorganically." }, { "speaker": "Operator", "text": "Your next question comes from the line of Catherine Schulte with Baird. Your line is open." }, { "speaker": "Catherine Schulte", "text": "I guess, first, despite the relatively good LSAG results in the quarter, it sounds like the outlook on the capital equipment side is still a bit uncertain. Can you just talk to how the services and consumable side of the business trended in July, and what your expectations are for instrumentation trends in the coming quarters?" }, { "speaker": "Bob McMahon", "text": "Yes. I think -- Catherine, this is Bob, all three of our businesses actually performed better in July than they did in May and June, which was very positive. The ACG business actually led the charge in terms of that, as you would expect, given the resumption of activities. There's some catch up there, in terms of -- we saw that kind of phenomenon actually in China, in April. But ultimately ACG was there. I think, LSAG capital is going to continue to be constrained. But I think what we've seen in our business is we've talked about this in the past kind of this flight to quality. And with our instrumentation and the reputation that we have, I think in a capital constrained environment, those dollars are precious. And we think our positioning is very good vis-à-vis the market." }, { "speaker": "Mike McMullen", "text": "Yes. I tried to hit that in my remarks, which as I really say, hey listen, we know we're picking up share in a tight market. And I think you saw that on C&E, right, which is if a C&E capital purchase is going down, it's coming Agilent’s way. And that's why -- and the market is still cautious, but you see PMI starting to creep up a bit, so." }, { "speaker": "Bob McMahon", "text": "Yes, Catherine, just one last thing, to give you maybe a little more color. If we look across the groups, we would expect LSAG to still be negative in Q4. I mean, it's probably going to lag, given the [Multiple Speakers] big fourth quarter last year as well." }, { "speaker": "Catherine Schulte", "text": "And then, Mike, you mentioned seeing growth in all regions for the non-COVID diagnostics business exiting the quarter. Can you just give us a sense of where those activity levels are in the U.S. versus China and where they bottomed out across the different regions?" }, { "speaker": "Mike McMullen", "text": "Sure. So, I think, I’d say China is in lead position in terms of if you -- almost full recovery. Europe is second and the U.S. is trailing. So for the first -- throughout the quarter, if I look at Sam's business in the U.S., for example, the first two months were negative of diagnostic testing values in pathology. But we saw actually improvement to growth in July. So, I think that's sort of the pattern of how the pandemic has flowed around the world. China is back. Europe's on its way. And I'd say, U.S. is still in the early stages of recovery." }, { "speaker": "Bob McMahon", "text": "Yes. And I would say, in the U.S. it’s probably -- and keep me honest, Sam it’s -- we're probably still at about 80% pre-COVID levels from a diagnostics perspective, but improving where it was. It was below that at the beginning of the quarter, so. Does that sound, Sam?" }, { "speaker": "Sam Raha", "text": "It does." }, { "speaker": "Operator", "text": "Your next question comes from the line of Steve Willoughby with Cleveland Research. Your line is open." }, { "speaker": "Steve Willoughby", "text": "Just one question for you. A lot of my other questions have already been answered. 90 days ago, you made a brief comment about potential onshoring back in the U.S. Just was wondering if there's any update on that at all?" }, { "speaker": "Mike McMullen", "text": "Thanks, Steve. Happy to comment on that. I think, that's still going to happen. And these things take time. But, there's active discussion. And, by the way, I wouldn't say it's just confined I the United States. I mean, many geographies are now looking at the security of their supply chain, both in the pharma side as well as in the chemical marketplace where they're providing precursors into the APIs for the pharma chains. So, there's nothing significant to announce relative to the impact on business, but there does seem to be an overall trend in this regard. And I can say also from an Agilent perspective, we're working hard to make sure that our supply chain is secure as well. So, I think that the COVID-19 pandemic is a real wake up call to really some vulnerabilities in some aspects of supply chain. So, we're kind of working both sides of it, which are to ensure our own ability to deliver product under multiple scenarios, as well as we do see some market trends underway. Bob, I know you take a look at this pretty…" }, { "speaker": "Bob McMahon", "text": "Yes. Just to build on that, we talked a little bit about earlier in the call. We would expect that to see some of that opportunity show in our order book. And that's probably more a ‘21 timeframe for revenue. I wouldn't expect any of that to happen in Q4, just given the kind of timing. But you're seeing it in multiple end markets in multiple regions. We think this is a trend that will continue." }, { "speaker": "Operator", "text": "Your next question comes from the line of Dan Brennan with UBS. Your line is open." }, { "speaker": "Dan Brennan", "text": "Maybe first question just on chemical and energy, obviously, you've already highlighted a few comments throughout the call. But just wondering if you can kind of walk through a little more color separate trends within that segment by customer in chemical and if it's worth seeing if there's going to be divergence here between chemical and A&P and R&M? And then secondarily, maybe just remind us of how much of that business is tied towards like QA/QC versus R&D and kind of what are we looking for to determine whether or not this down 10% begins to improve more reliably, or if it's going to save the slow steady progress that you believe?" }, { "speaker": "Mike McMullen", "text": "Hey, Bob, why don't I make some initial comments, and then we can check our notes to see if I missed anything. But, I think unlike the last quarter, the mix here -- and I think both the chemical and the energy later side had about the same dynamics where both were down about the same, primarily on the instrument side. And on one hand, the chemical side of the business was really benefiting -- continues benefit from the low oil prices. But, some of their end markets are weak, whether be automotive or some of the other markets that they service are weak. Some of them are getting a little bit of help on COVID-19 related products. But overall, I'd say both, the chemical side, as well as the energy side of that are down about the same, but stable. And I have to say that Bob and I had talked to at some length about this in our last call. And our prediction at the time was we thought we were going to be in a stable situation relative to this. That wasn’t going to get any worse. That was sort of the question we were getting last call. So, I think we're really pleased to see that that came through this quarter. And we expect that eventually this thing will start to move back to grow. I think it's probably a 70-30 mix, where most of it’s in QA/QC. And that's why these facilities are running, albeit maybe not at full volume. So, QA/QC equipment will be needed as well as consumer services that go with it. So, they can only hold off the depots on that side for so long. There is an element of research. But I think in the chemical and energy space, the biggest driver for that is the QA/QC side of the business." }, { "speaker": "Bob McMahon", "text": "Yes. And the only thing I’d add, Dan is we would expect this, as you said, kind of steady slow progress going forward." }, { "speaker": "Dan Brennan", "text": "Okay. And then, maybe one different follow-up, I know -- a couple of questions on China. But maybe could you just go a little bit more into detail on what you saw in food and generics? Obviously COVID is impacting the globe and the recovery. But, you've got some pretty unique issues with food and generics that are maybe a little different. So, dependent upon the improvement or lack thereof, that could drive notable changes in China. So, what did you see there? And what's the outlook as we look forward to those segments?" }, { "speaker": "Bob McMahon", "text": "Yes. I was going to say, Dan, one of the things we were incredibly proud of in China was all three of the business groups grew and all of our end markets grew, really led by food, which was up over 20%. It's been a while since we've been able to say that. And so, we think that -- we talked about kind of the moves away from the government labs or the central labs into the commercial labs, and we think that that's stabilized, and team has really been able to garner share, or our view of capacity in that space. And then, in pharma, it continues to perform very well. Actually, pharma was up roughly 10% in China, and that's a combination of both, large and small molecule. And I think that our thesis around that continues to play out, which is that the winners of the 4 plus 7 or the tendering process are -- customers that where we are over indexed, and we continue to see that positive momentum, we actually saw acceleration from Q2 to Q3 in both, food and pharma, and the rest of the businesses were positive as well. So, I think, it’s broad-based." }, { "speaker": "Operator", "text": "Your next question comes from the line of Patrick Donnelly with Citigroup. Your line is open." }, { "speaker": "Patrick Donnelly", "text": "Mike, maybe just one for you on -- I know, there’s been a few questions in July obviously. But with all the businesses returning to growth, I guess, is it safe to assume you guys didn't see too much of a pullback around the second wave here in the U.S., even the first few weeks of August? It sounds like you're a little more cautious on Americas versus other geographies. But, just wondering, any surprises on an end market basis in the U.S., as you went through July and even early August, given the reoccurrence of virus?" }, { "speaker": "Mike McMullen", "text": "No, I'll jump in on this. But from our perspective, I don't know real surprises. Maybe we're -- like all of us are watching what was happening with the pandemic as it worked its way across throughout the U.S. and we saw the case numbers go up and lab access was down really sharply April, May, June and we started seeing some recovery. So, I think no real surprises versus what we thought." }, { "speaker": "Bob McMahon", "text": "Yes. I would agree. I mean, Patrick, this is Bob. The Americas, as Mike said earlier, is in fact the biggest variable because it's further along in its recovery than both Europe and China. And I think, the thing that we're watching is those COVID flare-ups and the potential impact on elective procedures, which would impact our diagnostics business. That's probably got the biggest variability going into Q4 relative to LSAG and ACG. But, to Mike's point, we did not see any significant change with these flare-ups in August -- or excuse me in July and early August." }, { "speaker": "Patrick Donnelly", "text": "And then, bunch of that good commentary on the chemical and energy and industrial side. Just want to and just clarify, I mean it certainly seems like the industrial sentiment feels like it might have bottomed. It seems like your tone is little bit better from three months ago. Even though, again, chemical and energy is probably going to be down similar this quarter and again next quarter. But, I guess what you're hearing from customers there on spend plans? Again, it sounds like you're a little more optimistic and talking a little more bullishly about '21. So, I'm just wondering, I guess, as we enter into the end of this fiscal year into '21, are you seeing things improve a little bit? Obviously, you’ll come up against very easy comps, but it does seem like the tone is a little more positive. So, are you hearing from customers, things that are trending a little bit better into '21?" }, { "speaker": "Mike McMullen", "text": "Yes. I think that's a fair assessment of what I was trying to communicate today. First of all, the fact that we do think it's bottomed. And that was our thesis when things started going directly down and the pandemic hit. So, we do see that. Again, I don't want to get too far out and describe some big dramatic increase in growth in this space. But, customers are working on the plans. Chevron actually is making some big investments in Iraq. So capital -- these are ongoing concerns, and they can hold back their capital for a while, but they're going to want to maintain their operations at the highest capabilities. So, we're hopeful that the budget environment will be a little bit different in '21. I think once we get a little bit more clarity, once our customers feeling more clarity in their view where the economy's gone, then they can make their decisions with a lot more confidence. So, the PMIs are good view of how some of them may be changing. So, again, don't over interpret this for fourth quarter, but it does point to '21 being perhaps a better environment." }, { "speaker": "Operator", "text": "And your last question comes from the line of Jack Meehan with Nephron Research. Your line is open." }, { "speaker": "Jack Meehan", "text": "So, I wanted to go back to the NASD business and just get a little bit more color. Are you working on any of the mRNA-based COVID-19 vaccine? I guess, curious because the trials are going so quickly. I was curious to get your take if one [indiscernible] and into commercial within the next six months, how would you manage the business to deliver on the capacity that customer might need for that?" }, { "speaker": "Mike McMullen", "text": "Hey, Sam, I’m going to pass that to you." }, { "speaker": "Sam Raha", "text": "Yes. no problem, Mike. So, I can't comment specifically on the molecule or the molecule of the projects that we're doing related to COVID-19. But, two things I will point out. As Bob indicated earlier, this is business separate for or different than the business we're already doing or it's not taking the place of business, if you will. And we believe, we have the capacity and that's -- if the demand is there related to certain things playing out related to COVID-19 and the molecule that we happen to be working on, we believe we will be in a position to be able to supply that material as the volume required." }, { "speaker": "Jack Meehan", "text": "And then, one more follow-up on LSAG. I'm just curious, as you're looking at the research labs around the globe, kind of in this conversation around deferral versus cancellation, what are customers telling you? Is it still mostly deferrals versus cancellations? And on the deferral side, when do you expect these, how far out is it getting pushed something that you think it hits before the end of the year or probably more likely in calendar '21?" }, { "speaker": "Mike McMullen", "text": "Hey Jack. Happy to answer this question. This is something we've been monitoring pretty closely, deferrals versus cancellations. And we've really been pleased, our cancellations are actually lower than last year. And our thesis is they’re being pushed and actually funds will be deployed this calendar year." }, { "speaker": "Bob McMahon", "text": "Yes. That's what we actually -- we saw that -- Jack, some of that actually happened in Q3. And as people are going back into the labs physically there, then they can install the instrumentation. But to Mike's point, we've seen no cancellation or lower cancellations than what we would have last year. There's always some level of it. I would say that we've been extraordinarily pleased. And I would expect it to happen this calendar year." }, { "speaker": "Operator", "text": "This concludes the allotted time for our question-and-answer session. I'd now like to turn the call back over to Ankur for any closing remarks." }, { "speaker": "Ankur Dhingra", "text": "Yes. So, that concludes the call for today. Thanks, everyone for joining us." }, { "speaker": "Operator", "text": "Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect." } ]	Agilent Technologies, Inc.	154,924
A	2	2,020	2020-05-21 16:30:00	Operator: Good afternoon, and welcome to the Agilent Technologies Second Quarter Earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. And now I'd like to introduce you to the host for today's conference, Ankur Dhingra, Vice President of Investor Relations. Sir, please go ahead. Ankur Dhingra: Thank you, Jody, and welcome, everyone, to Agilent’s conference call for the second quarter of fiscal year 2020. I hope that all of you and your families are safe and healthy. On the webcast today are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining for the Q&A after prepared remarks will be Jacob Thaysen, President of Agilent's Life Sciences & Applied Markets Group; and Sam Raha, President of Agilent's Diagnostics and Genomics Group; along with Padraig McDonnell, President of Agilent CrossLab Group. You can find the press release, investor presentation and information to supplement today's discussion on our website at investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year, and revenue growth will be referred to on a core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now I would like to turn the call over to Mike. Mike McMullen: Thanks, Ankur, and thanks, everyone, for joining our call today. I want to add my best wishes as well and hope that you and your families are safe and healthy. I'm pleased to have Padraig McDonnell, our President of the Agilent CrossLab Group, joining us for the first time today. As I mentioned last quarter, Mark Doak has retired from the company and Padraig is now leading the ACG. I know you’ll enjoy getting to know Padraig better in his new role. I'm glad he could be here with us on the call. Last quarter, Agilent was among the first to discuss the business impacts of COVID-19. Since then, much has changed as COVID-19 is now a global pandemic. The world is a very different place than it was back in February. But what hasn't changed is the attitude and execution of the Agilent team and our unwavering focus in four key areas. Let me first talk about how we are protecting our people. Our top priority is ensuring the health and safety of the Agilent team. Early on, we entered the global work-from-home policy and severely restricted travel. We implemented new work practices and safety protocols for our manufacturing teams and service engineers visiting customer laboratories. The team is really stepping up. True to the Agilent mission, our response to COVID-19 is driven by our commitment to our people and our customers. It should be no surprise then that our second area of focus is unwavering commitment to our customers. We are and have been open for business. From the early stage of the pandemic, we took decisive action to secure our global business operations. We are using innovative and more efficient ways to support our customers, from leveraging our digital capabilities, promote technical assistance to urgently delivering Bravo liquid handler systems for their COVID-19 test or providing live online guidance to keep labs functioning. We're doubling down on our efforts to support our customers. This is especially true as their needs change and evolve. Our third focus area is taking quick and decisive action to preserve a strong P&L and balance sheet. When we experienced significant disruption to business activity in late March, we made change in our supply chain, logistics and business operations. This ensured [indiscernible] order intake and our ability to deliver products and services to our customers. We also didn't shy away from taking swift action to reduce expenses. We quickly put in place a cost management program while reprioritize and sustained our growth investments. As we continue to sharpen our plans, we will not put our future growth opportunities at risk. Bob will share more details, but the top priority is monitoring our liquidity and cash flow. We have taken actions to ensure a strong balance sheet and financial flexibility. The positive impact of our approach shows in our Q2 results. In the midst of the spread of the global pandemic, the Agilent team delivered Q2 revenues of $1.24 billion. This is flat on a reported basis and down a little less than 2% on a core basis. Our Q2 operating margin of 22.4% are up 50 basis points. We posted earnings per share of $0.71 during the quarter, flat versus our results a year ago. Before covering additional Q2 detail, a few comments on our fourth key area of focus, our continued prioritization on growth. Our building and buying growth strategy remains firmly in place while we are taking decisive action on our cost structure to respond to the COVID-19 impact. We are continuing to prioritize investments in fast-growing markets such as biopharma that deliver incremental growth and help us create a more resilient business. When we all come out of this on the other side, Agilent will be poised for growth. Our Q2 pharma growth is being driven by the strength of our biopharma business. This is a direct result of our building and buying strategy in action. Our approach to investing for growth continue to serve us well and will be a major factor and help us emerge in the current environment stronger than ever. An example of our approach to continually assessing our growth investments is the decision we made regarding our cancer diagnostics strategy and the Lasergen sequencer development program. Given change in the marketplace, we believe we can now capture future growth in the NGS diagnostics space without the need our own sequencer platform. As a result, we made a decision to shutter our sequencer development program. We are redirecting our investments with the valuable intellectual property we’ve created into areas of higher interest. Despite this program change, we remain optimistic about continued growth in NGS cancer diagnostics. Let’s now take a closer look at the quarter as well as the future outlook in today’s COVID-19 world. Last quarter, our attention and revised outlook was focused on our China team, customers and business, as COVID-19 spread to other parts of the world in the second quarter, the situation changed. During February and March, our overall business was up about 1%, however, in late March, we faced significant disruption in business activity as Europe and the Americas restricted access to facilities. Our China business is recovering better than forecasted. We posted 4% core growth in China with increasing strength throughout the quarter. In fact, in April, China posted strong growth, while all other geographies experienced declines. We expect that China growth recovery to continue throughout the year as lab operations and investments continue to resume. The near-term outlook in Europe and the U.S., however, remains challenging, particularly for new equipment parts across most end markets and non-COVID-19 diagnostic testing. Some quick highlights across our businesses, both DGG and ACG delivered core growth. DGG’s 5% growth is driven by NASD, up 35% as the ramp of that business continues as planned. ACG was up 1%. Our LSAG business declined 7% as customers curtailed equipment purchases, although we did have pockets of growth in biopharma, cell analysis and COVID-19 testing and research. From an end market perspective, pharma grew 5% in the quarter, followed by 4% growth in diagnostics and clinical. The food market continues its recovery with a modest 1% growth driven by China. Our environmental and forensics business is down 1% for the quarter. In Q2, academia and chemical and energy are the end markets that are most impacted, down 16% and 10%, respectively. We expect continued pressure in these markets throughout the rest of the year, although we are seeing some pockets of growth in chemical production regionally as some customers shift supply chains. Looking forward, we expect Q3 to be the most challenging quarter of the year, with gradual improvement during the course of the quarter and continuing into Q4. As a key player in the life science industry, Agilent also has an important role to play in the fight against COVID-19. Before closing, I’d like to share a few thoughts on our COVID-19 offerings. While the COVID-19 virus is negatively affecting our overall growth at this time, Agilent is supporting several aspects of COVID-19 research and testing, along with therapeutic and vaccine development. In Q2, this resulted in a one-point tailwind of growth, primarily in providing instrumentation. There is potential that this will become a more meaningful tailwind in future quarters. To address this, we have mobilized across Agilent team to maximize support to customers around the globe fighting the virus. These offerings range from instrumentation, such as automation, PCR and marketplace testing to consumables and components necessary for testing as well as lab support to these customers. As we enter Q3, I want you to know that the global Agilent team is energized and remains focused on supporting our customers and driving growth. We have taken swift and decisive actions to ensure a continued strong P&L and balance sheet. We remain a diversified, resilient company with a bias for speed, execution and growth. Thank you for being on the call. I will have a few closing comments after Bob speaks, and then we look forward to taking your questions. And now, Bob, you’re up. Bob McMahon: Thank you, Mike, and good afternoon, everyone. Before I begin, I want to repeat what Mike and Ankur said and hoping that you are doing well and staying safe. Looking forward, I, for one, am confident we will get through this and look forward to the day when we can follow up these calls with face-to-face meetings again. In my remarks today, I’ll provide some additional detail on revenue, walk through the second quarter income statement and some other key financial metrics, and then finish up with a framework for thinking about Q3. Given the current volatility and uncertainty that exists, we’re not going to be providing specific forward-looking guidance today. That said, in the spirit of trying to be helpful and transparent, we will provide a glimpse into the evolution of our business during the second quarter and our thought process and how things may play out in the coming quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. Reported revenue for the quarter was $1.24 billion, which was flat versus last year on a reported basis. Currency negatively impacted revenue by 1.6 percentage points and acquisitions added 3.3 percentage points to growth. On a core basis, revenue declined 1.7% in the quarter. The pacing of revenue during the quarter varies significantly by region driven by where each region was in the cycle of precautionary measures, being taken to slow their spread of the virus. As we previously disclosed, we saw overall business activity slow in late March, driven by the U.S. and Europe. The stay-at-home measures in those regions reduce lab operations and limited lab access and our ability to install equipment. This lower level of business activity carry through the month of April resulting in double digit declines for the month in those regions. On the other hand, and as we had anticipated business activity picked up throughout the quarter in China, as restrictions were slowly lifted. We saw strong growth in China in April, partially due to catch up from lower business volumes in February and March. Overall, China grew 4% for the quarter, exceeding our initial expectations at the start of Q2. In total for Q2, quarter-to-date results through March were up 1%, while April was down roughly 6.5%, resulting in the 1.7% core decline. Before getting into some additional group details, it’s also important to note while we have seen some order push outs, we have not seen increased order cancellations. While there are always some level of cancellations in both March and April cancellations were actually lower than the previous year. Our resilient business model was extremely important to us as we navigated the effects of a challenging environment. As Mike mentioned, DGG and ACG both grew on a core basis, while LSAG instrument business declined. LSAG declined 7% core in the quarter, but did see some bright spots with growth in large molecule pharma, cell analysis and COVID-19 testing and research. In addition as Mike mentioned, we had modest growth in the food market. For LSAG the impact of COVID-19 related closures was most pronounced in the Academia and government and chemical and energy markets. ACG grew 1% with China growing in the high single digits. Our ACG results were negatively affected by delays and installations and lab closures in Europe and the Americas during the quarter. And I’m pleased to say that our DDG business delivered 5% growth during Q2, and it was on track for double digit growth prior to the slowdown in U.S. and Europe. We saw sequential growth in genomics, boosted by products used to develop testing capabilities and for vaccine research into COVID-19. And as Mike mentioned, our NASD ramp remains on track and delivered excellent growth this quarter as well. The pathology business grew in all regions except for the U.S. where the affects of delayed and non-COVID-19 related medical procedures was more pronounced in April. On a geographic basis, all regions ranged from flat to down 4% for the quarter with Europe down 4%, Americas down 1% and Asia Pacific flat. And within Asia, as we mentioned, China grew 4%. Now let’s turn to the rest of the P&L. As the expanded impact of the pandemic became apparent, we moved quickly and decisively to adjust our cost trucker through targeted discretionary spending program reductions. We continue to invest in our key growth opportunities and important capabilities, such as digital. For example, we leverage digital and virtual reality investments for our field service engineers to continue to support our customers where we did not have physical lab access. While we took actions across the P&L, we focus most of our effort on SG&A. R&D investments as a percentage of revenue were largely unchanged from the prior year. As a result operating margins of 22.4% improved 50 basis points over last year on flat revenue. Gross margin at 55.4% was down 60 basis points versus the prior year, mostly due to volume and the revenue mix shifting more towards services. In addition, we saw higher logistics costs as moving goods internationally became more expensive. This combination of factors resulted in non-GAAP EPS for the quarter coming in at $0.71 per share flat with the number we posted a year ago. Now in terms of the balance sheet, we were in the market early in the quarter, repurchasing 1.66 million shares for $126 million. In late March, however, we suspended all our share repurchases to maximize our liquidity and financial position. While not in our current plans for Q3, we continue to monitor and evaluate when repurchases will resume. We generated $313 in operating cash flow during the quarter, which is a $61 million improvement over last year, despite building some raw material inventory to assure supply. Additionally, we've taken steps to reduce our capital spending by roughly one-third for the rest of the year. In addition, we ended the quarter in a strong position with $2.1 billion in available liquidity, including $1.3 billion in cash and roughly $800 million available under our revolving credit facility. Our net leverage ratio as defined by net debt to EBITDA was 0.9 times. Given our cash flows and our strong financial position, there is no change to our dividend. As you may recall, we withdrew our 2020 guidance in mid-April due to the uncertainty surrounding the duration and severity of the global COVID-19 pandemic and the impact on the global economic environment. While various countries have started working towards reopening, the pace and effect of global reopening efforts is still unknown. So we won't be providing guidance for Q3 or the full year. However, we did want to provide a framework and a range of possibilities for how our business could unfold in the coming quarter. When we look at Q3, we expect May to be very similar and the business activity is very similar to April and the business activity we've seen in the first few weeks of the month confirmed that. We anticipate that China will remain ahead of the curve in terms of economic recovery, relative to the rest of the world. We expect pharma and our services, particularly contracted services, which make up the majority of our service revenue to remain resilient. And we will be following the consumables business very closely to monitor early signs of recovery and demand patterns. A combination of these factors could result in our revenues being down between 5% and 15% on a core basis. At the lower end of the decline, we assume activity in June and July will continue to improve, with the COVID-19 offerings Mike mentioned having a more significant impact than the 1$ contribution in Q2. On the higher end of the decline, we’re building in the assumption that there would be no significant improvement throughout the course of the quarter in the U.S., and Europe, that non-COVID-19 testing would not recover, and China would plateau. While this is a wide range, there is still significant uncertainty in the pace of recovery as the U.S., and Europe are currently lifting restrictions. We hope that the 15% decline proves very conservative but wanted to provide you with some of the assumptions we are using to manage going forward. In Q3, we expect a two-point headwind due to exchange rates, and M&A should be a three-point tailwind. Again, this is not formal guidance, but should give you a sense for some of the variables we are looking at within the business and believe this is the best way to view the third quarter given the uncertainties that exist. As Mike said, we also believe that fiscal year as the world works through reopening the economy. Overall, I feel we are very well positioned to deal with this challenging environment, accelerate market share gains and come out even stronger as the global economy recovers. Before I turn the call back over to Mike, I want to conclude by saying Agilent’s performance for the first two quarters truly shows the resiliency of our company. I also want to thank the Agilent team for remaining focused on supporting our customers during this time. And, I’d be remiss without a shout out to the finance team for being able to close the books in such a professional manner with everyone working from home. We’ve taken the actions that will serve us incredibly well through the rest of 2020 and into the future. And with that, I believe Mike would like to share some final thoughts before we move on to the Q&A. Mike? Mike McMullen: Yes, thanks, Bob. Before we take your questions, I want to close by saying that I couldn’t be more proud of our Agilent team. The idea that difficult situations provide the opportunity for organizations and individuals to step up and exhibit strength, leadership and resiliency has never been more true at Agilent. The Agilent team has been tested during this crisis like no other time and they have not shied away from it. Instead, we have answered the call with world class execution, an even stronger focus on customer service and an inspired creativity that is second to none. I am absolutely convinced we will emerge from this pandemic as an even stronger force in the marketplace. And, with that, I will turn things over to Ankur so we can take your questions. Thank you. Ankur Dhingra: Thank you. Jody, if you can open the line for Q&A, please. Operator: [Operator Instructions] And our first question comes from the line of Tycho Peterson of JPMorgan. Please go ahead. Your line is open. Tycho Peterson: Thanks. I'm going to start by asking about the guide. You said China is plateauing. So what I guess sequentially is getting worse here since you captured April in the prior quarter. Why should things be deteriorating for the upcoming quarter? And then, on the COVID tailwinds did the 35% growth you called out in NASD, does that capture anything around COVID manufacturing? Or can you maybe just touch on what drove the strength there too? Mike McMullen: Do you want to take that one? Bob McMahon: Yes. Thank you, Tycho. And this is Bob, I'll take the question. I'll actually take the second question first around NASD. The NASD growth is on the ramp that we had talked about previously. It actually had nothing to do with COVID-19 testing or research. It's mostly the activities that have continued in our pipeline of products and clinical testing that has happened. And we're very pleased with the progress there. So that has nothing to do with the COVID-19 testing. On the first question that you had, again, this isn't guidance it's kind of a range of scenarios that we're planning. And we hope that the bottom end of that or the minus 15% would be very conservative. If you look at, we are expecting May to be very similar to April, which would hopefully be the bottom and then improvement in June and July. And but if there are relapses, if China does relapse, or there is a slowdown in that growth that would be the bottom end of the range. So it's a wider range than we would normally have. But there's obviously very much a lot of uncertainty around the forecast. Tycho Peterson: And on the uncertainty, chemical and energy, you mentioned customer shifting supply chains. Can you maybe just talk about how much of the sequential step down here at C&E and given the volatility in oil purchase, how much of a factor that is? Mike McMullen: Sure. Yes, Bob, I'll take that one. So I think for C&E for Q3, basically, we assume than it kind of looks like Q2 and with the potential that the investments that we're starting to see inclinations of a regional approach to this pandemic is really cause many parts of world to rethink their supply chain. So we're seeing early indications of moving of on shoring ensuring certain types of critical chemical components in certain geographies. So that could represent some upside I think. But basically, we're assuming kind of current situation continues into Q3. Bob McMahon: Yes, Tyco, if you look – if we took our chemical and energy end market and looked at the first two months versus April, they were roughly the same. So we said it was down 10% in the quarter. It didn't have a material change in April. One of the businesses that did was academia and government. So academia and government with the lab closures and so forth was worse in April than it was in other markets. But chemical and energy was pretty steady throughout the quarter now albeit down. Tycho Peterson: Okay. And then one clarification point… Mike McMullen: Okay. Sorry, I was going to add to that. I think when we talk about chemical and energy, it's important to keep in mind that about 70% of that segment is actually chemicals, including material testing. Tycho Peterson: And then just one clarification before I hop off on Lasergen, again, it sounds like, this is a full write down, is that correct? You're kind of abandoning your project. That seems a little bit different than what you talked about back at our conference in January. So can you clarify, what changed there? Mike McMullen: Yes. Well, actually you reference your conference a lot changed after the conference where we saw a number of new announcements indicating there were some changes in terms of how certain competitors in the space were thinking about access to the platform. So that caused us to rethink our current investments and we had an opportunity to really move our program forward without needing to invest directly in a sequencer platform of our own. And Bob, I'll let you comment on the financial side of that. Bob McMahon: Yes. It is a full shut down and we will have a write-off in Q2. Tycho Peterson: Thank you. Operator: And our next question comes from the line of Steve Beuchaw of Wolfe Research. Please go ahead. Your line is open. Steve Beuchaw: Thanks for your time here. I wanted to ask, first of all, on the strategic activity in this space. One thing that we've seen across tools and devices is this upwelling of interest in capital raise in part with a view that there is an opportunity for accelerated capital deployment, given potential for opportunity here. You guys have a uniquely strong balance sheet comparatively, certainly plenty of liquidity. I wonder if you could speak to how you think about capital deployment and the intensity of capital deployment in the next year. And then I have two follow-ups. Thanks. Mike McMullen: Yes. I think from an Agilent perspective, our overall thesis of building and buying still stays intact where we'd like to deploy capital in M&A, that makes sense for the company. And we've talked about our criteria around end markets that we know, where companies that we've acquired and have higher levels of growth in the overall company average accretive. So that formula remains relatively unchanged. But we have noticed as some of these moves as well. So I think that speaks to a continued robust interest in the M&A pipeline across the industry. I'd also tell you the valuations haven't moved much. So this is not a buyer's market and you can buy things on the cheap, so you really have to be think through what you're looking at and does it make sense for the company? Anything else you'd add to that, Bob? Steve, do you have a follow-up or… Steve Beuchaw: Yes. Sorry. I thought Bob might chime in there. But I have two follow-ups. One is, I wonder if you could speak to activity on a month-to-month basis and the extent to which you think there might've been any sort of April snapback. You commented on it specifically in China, but any snapback activity in other parts of the world and the extent to which people might be trying to ramp quickly and how that might reflect, not just in China, but on – growth as a trend line prospectively for non-China regions. And then one just quick one, I am curious how you guys are thinking about planning for growth in CrossLab given that CrossLab historically been a very strong grower and some component of the CrossLab growth story has been penetration into new categories, is that penetration story still active in the current environment. Thanks so much. Bob McMahon: Yes. I'll take the first question in terms of the pacing, Steve and you're right. What we have seen is that the pacing by region really follows kind of how the pandemic spread and then how the countries are coming back. And so what we saw was a more pronounced, obviously in China that has – I wouldn't call it a snapback, but it's a recovery. And we're actually seeing the same thing in Europe, where Europe, we felt more of the pain, and that it's actually coming back faster. And then the U.S., and now we're starting to see some of the U.S., it’s still very early days in the U.S., but you are seeing kind of that – that kind of wave of recovery happening throughout the course of each one of the regions. And I'll turn it over to Padraig to give a chance to talk about the CrossLab’s business, but we remain incredibly bullish about that business. And I think even more so now, given some of the proof points that we have in terms of being able to support our customers, both directly and through our digital means. Padraig? Padraig McDonnell: Yes. Thanks, Bob. And I think yes, very, very strong demand. We're seeing, for example, in our service business, a lot of strong tracks which really help our customers be productive and help with startup services and actually achieve a critical component in the services. On the consumable side, we certainly saw a strong demand in China, a big snapback up on in terms of a demand for our products that are really supporting workflows. And we see this continue especially around a lot of the digital capabilities that we've developed and our way of interacting with customers. The last thing, I would mention is that also our productivity story in CrossLab about our lab enterprise business is doing extremely well. And also we really shows that the customer need for productivity in these times on beyond going forward is going to be very strong. Bob McMahon: And Steve, let me add just one other thing. In the case, obviously ACG grew 1%, it would have been stronger – several points stronger. We did have some deferrals because we couldn't install the equipment and we recognize a portion of the price for the service, the training and installation and so forth. And so that is revenue that is on the balance sheet today and it will come back to us in the course of Q3 and Q4. Steve Beuchaw: Okay. In Q2, this particular quarter was not a good indicator. Much appreciate it. Thank you very much. Operator: Our next question comes from the line of Patrick Donnelly of Citi. Please go ahead. Your line is open. Patrick Donnelly: Great. Thanks guys. Mike, maybe one for you on the C&E segment, certainly encouraging to hear there was no real deterioration in April. Can you just talk through the exposure there? Obviously, E&P pretty correlated to oil prices. Maybe on the refining side, how has that reacting to the oil decline? I know typically low oil could actually be a positive if it's over supply. It feels like at least part of what's going on now is low demand, but maybe just talk through what you're seeing there and the expectations going forward. Mike McMullen: Yes. That’s a great question. And what we also try to think through, what’s really behind the lower oil price. And I think this time, you’ve got two things going on, right, which was oversupply and then really driven by, obviously, the COVID-19 and the slower growth in the economy and demand for those services. But I’m really glad to get a chance to comment on the mix of our business because that segment is pretty subdued right now. But over the years, we’ve continued to have more and more of our business move into the chemical side of that. So roughly about 70% of our business in C&E is in the chemical side and really saw much different dynamics in April, actually, almost all through all Q2, where the energy segment was pretty subdued where limited investment there, mainly business was carried forward through our ACG business, but really not a lot of demand on instruments, different kind of scenario on the chemical side. Patrick Donnelly: Okay. And then maybe on the other side of COVID, obviously, academic labs closing during this understandable that they should snapback quickly. I guess, how do you feel about the C&E segment? Does it feel different where, again, labs reopening, demand comes back quickly, do you think this will linger because of the oil prices? What’s your outlook, maybe again? Not asking for guidance by any means, but over the next 6 months to 12 months, does this have the potential to linger versus some of the other ones that should snapback? Mike McMullen: In my prepared remarks, we basically said we expect this segment to be subdued for the foreseeable future. So it’s really just tied to events that I’m just not smart enough to figure out myself, which is when does global growth start to get solidified and when does it start to turn. I think what we wanted to point out, there actually are some little glimmers of positive aspects of C&E business, particularly the COVID-19 has exposed the fragility of the world’s supply chain. And we’re seeing many customers and many governments, they want certain critical components made in their country and made in their region. So we are seeing indications across multiple industries of onshoring initiatives actually starting, which would speak to some longer-term growth prospects in this space. But don’t get too excited. This – I would just say, let’s assume that it’s going to stay subdued for a while as we’re thinking about it right now. Hence, the reason why we went through the guidance in Q2, because some of these are just too difficult to predict the timing of transition. Bob McMahon: Yes. And I would say, Patrick, just on that, obviously, the more subdued piece is the instrumentation… Mike McMullen: Yes, yes, yes, absolutely. Bob McMahon: And we will see the snapback or the improvement first in the ACG business. Mike McMullen: Absolutely. Patrick Donnelly: That’s really helpful. And then a very quick cleanup on NASD, following up Tycho’s question there. Do you guys have capacity to increase the address demand from COVID? Or are you already kind of maxed out in terms of the build out and just as you build out capacity, it’s kind of addressing? Mike McMullen: We are not capacity constrained. And now, we continue to build out the new facility in Frederick as well as optimizing our Boulder facility. And while I can’t share specific names, I can tell you that there are programs underway that aren’t in the revenue yet right now that are related to COVID-19 work. Patrick Donnelly: Great. Thanks a lot, Mike. Mike McMullen: You are quite welcome. Operator: Our next question comes from the line of Derik de Bruin of Bank of America. Please go ahead. Your line is open. Mike McMullen: Hey, Derik. Derik de Bruin: Hello, good afternoon. Hi. Couple of questions, just a couple of cleanups. The NASD base now in 2Q, what’s that – where are we in terms of revenues? That was up 35%. I’m just curious on the base. Mike McMullen: Yes. It’s tracking well to the number that we talked about at the – or what people have estimated, ramping up to $150 million kind of run rate. It’s tracking well to that. Derik de Bruin: Great. And what are you going to do with the – are you reinvesting the Lasergen money into the business? Or is that going to drop through? Are you going to – and can you remind us on what you were spending on that I think it was around $50-ish million. Mike McMullen: Yes. No, it was about $30 million a year. That was what was kind of forecasted this year. We’ve spent basically half of that. So the second half of the year, that’ll be a combination of reinvesting where appropriate and also managing the dynamic situation that we’re in, in terms of COVID-19. Hey, Bob, I think we had the full cost of the program in our Q2 results, in our next quarter results. Bob McMahon: That’s correct. Mike McMullen: And there’s some real talent in that team, and there’s some really great intellectual property that we think we can really deploy in other programs. So we’re looking to go forward that combo approach, as Bob mentioned. Derik de Bruin: So you mentioned that you’re seeing some of your chemical customers think about their supply chains and move around. What about the pharmaceutical customers? I mean, obviously, there’s a push looking about bringing API manufacturing back, and you’re a big player there. And this also sort of dovetails with another question on geopolitical tensions. And are you worried about the longer-term impacts of what’s happening now between the U.S. and China in terms of your China business? Bob McMahon: Yes. I’ll – hey Derik, this is Bob. Yes. I’ll take the first one, and I’ll leave the second one to Mike. I think on the pharmaceutical one, we’re actually watching that very closely. It’s different than the chemical side because I think the chemical side will probably move a little faster than this. Obviously, there’s regulations, but you are seeing discussions about that even as recently as earlier this week about the U.S. providing a contract here in the U.S. for some APIs and so forth. So we actually think – we’re watching that closely, and we think that, that could be an opportunity for us as those new labs or capacity come out, because our offering here is, I think, second to none, and so more to come there. It’s probably not as fast-moving, but we certainly is on our radar screen. Mike McMullen: And without waiting in too deeply on the political dimension of things today, what I can tell you is we’re actively scenario planning. We – under potential scenarios around changes in trade policies and supply chain. So we don’t want to be caught in the reactive mode that we were when tariffs were first announced a few years ago. So our teams are really working through a number of different strategies right now. Derik de Bruin: And if I can squeeze one more in. Mike McMullen: Sure, sure. Derik de Bruin: While Agilent doesn’t do – you don’t supply testing products for COVID-19. I mean, obviously, how are you thinking about testing and deploying testing for your employees? And I’m sort of curious about, are your customers demanding that you get tested or people come in? Because there’s some very large numbers being thrown around in terms of the size of the testing market. And so I’m just curious in terms of what you’re thinking. Mike McMullen: Yes, a couple of things right now. So first of all, although we don’t provide kits directly ourselves, we provide a lot of the components and ingredients, antibodies and other enzymes, that go into testing kits. So we’ve – I’ve personally involved in a number of calls where customers and governments are looking for us to assure to supply to them. So I think we’ve got a good feel for the demand that we’re seeing out there. Relative to our own employees, right now, we’re not requiring employees to be tested for – return in the office. Just a reminder, about 85% of the employees now are, for Agilent, are working from home, and we’re going to be very, very careful on phasing in the return to office. So we’re thinking this through. Once more routine testing does become available, that’s probably something we would look at pretty closely. But we’re in no hurry right now because our teams are working from home right now. Relative – it’s funny. We keep asking that question of our – particularly our service teams, and that has not come up yet. So we’re continuing to monitor. But right now, we’re not seeing requests from our customers to have any type of testing done prior to our employees coming onto the site. Clearly, we have to follow that our safety protocols, and we offered our team with the right PPE and the right training. But on the testing side, we’ve not yet seen that. Derik de Bruin: Thank you very much. Operator: Our next question comes from the line of Dan Leonard of Wells Fargo. Please go ahead. Your line is open. Dan Leonard: Thank you. So hate to overanalyze one month, but I want to circle back to the month of April. So 6.5% down is not so bad for all of the news we’ve seen. Can you – you mentioned strength in China. Can you quantify China? I mean I was doing some back of the envelope, but it looks like it might have been greater than 20% growth in April in China. Is that in the right ballpark? Bob McMahon: Yes. You’re in the ballpark. Mike McMullen: You’re pretty at good math, Dan. Dan Leonard: Okay. And then maybe separately follow-up. Mike, it does seem like you don’t trust the trend in China. And how much of that is just uncertainty around the virus trajectory versus the maybe geopolitical or any other things? Mike McMullen: Dan, thanks for the follow-up question. I do trust the trend in China. So I hope that didn’t come through that way in my remarks. So actually… Dan Leonard: Okay. There’s the plateau earlier. I wasn’t sure. Mike McMullen: No, no. That was sort of the worst-case scenario that Bob was trying to put together this framework, said, well, we could be wrong. And if it’s wrong, we – this is what the implications would be. We don’t think we’re wrong. But if in case we were wrong, this is – you see that far end of the framework that Bob described. But in fact, Q2 China growth was better than we had expected, and we believe it’s going to continue to return to higher levels of growth throughout the quarter. And I hope a few of you noticed that the China food also grew in Q2. Dan Leonard: Great. Thank you for that clarification. Mike McMullen: Absolutely. Operator: Our next question comes from the line of Doug Schenkel of Cowen. Please go ahead, your line is open. Doug Schenkel: Hey, good afternoon, guys. Mike McMullen: Hey, Doug. How are you doing? Doug Schenkel: I’m doing well, thank you. So maybe a quick follow-up to Dan’s question, cutting it in a different way. Bob, you said May is going to be similar to April, but you acknowledged, again, in answering the last question that China continues to get better. Logically, I think that means something or somewhere still must be getting worse coming out of April into May. Maybe I’m just being a bit too forensic with how you position this. But I’m just wondering, are there areas where you saw and continue to see continued deterioration as we sit here in mid to late May? Bob McMahon: Yes, we haven’t seen any continue – again, these are one point out of the month, right, but – or one point out of a year. But May is trending the way April trended in total. And so we’re not seeing anything that is dramatically off pace. Mike McMullen: And I think Bob, it’s – maybe this is worth mentioning that we don’t go in a lot of details on the order front, our order forecast have been tracking well for both April and through this point in time through May. So, yes. Doug Schenkel: That’s great. Helpful color. Regarding ACG trends, specifically on the consumable side, what did you see in April and then what was that trend into May. Consumable use picking up would be a really great sign that more people are getting into labs, and as you noted, a good leading indicator for future demands. So I’m just wondering, recognizing it’s an unusual time, if you’d be willing to go to that level just because it’s important for you in the group. And if so, if you’d say anything about specific end markets and geographies? Bob McMahon: Yes. I would say, generally speaking, our consumables business has started to pick up. And I’ll just leave it at that. Doug Schenkel: And it’s tied directly to the opening a facility. Mike McMullen: You can draw a parallel, where things are opening up. You see the consumables recovering. It’s recovering much faster than the instrumentation. And that’s really – that’s why we keep using word uncertainty, because we can’t project exactly how certain facilities will open up. But we know when they opened up in China, we’ve gotten the business. We know as they’ve been opening up in Europe, we’re getting the business. And then when they’ve slowly been opened up in the U.S. but getting the business, with the exception being universities, which aren’t opening up right now, unless you’re doing COVID-19 research. Bob McMahon: Correct. Doug Schenkel: Okay. Super, helpful. Last one, cell analysis. Can you talk a bit more about trends in this business in the quarter? You had a good quarter. The business grew year-over-year. I think on the surface, that’s a bit surprising just because of the heavy mix of heavy, the exposure to academic research. How are you able to pull that off? Mike McMullen: Yes, Doug. Thanks for the observations there, because there is a big footprint of the business in academia, but the overall business did grow. And I think I’d like to give the opportunity to Jacob to crow a little about what’s going on there. Jacob Thaysen: Yes, absolutely. Thank you very much. And it is actually a good story. I mean, as you say, Doug, it is a tale of two cities that clearly academia and government has been challenged during this period of time. While our exposure in biopharma has really picked up here. And furthermore, we have also seen quite some interest for the BioTek ELISA and [indiscernible] in for the theology testing. So with that, that’s actually quite good demand. We also see a flow, will have a tremendous growth. We see a lot of the flow instruments being used in the research sector right now to better understand the cytokine that is happening in – relates to the COVID-19. So overall, both the biopharma space is seeing strong demand. We’ve seen demand into the diagnostic testing on the COVID-19. And then obviously, academia and government overall is challenging, but we do see pocket of interest still there. So overall, great performance. Mike McMullen: Thanks, Jacob. Doug Schenkel: Okay, great. Thanks, again. Mike McMullen: Thanks. Operator: And our next question comes from the line of Puneet Souda of SVB Leerink. Please go ahead, your line is open. Puneet Souda: Yes, thanks. Hi, Mike. First one on NASD. Mike McMullen: Hi, Puneet. How are you doing. Puneet Souda: Great, great. Thanks, Mike. So the first one on NASD. Great to see the growth there, but just wondering, was there any element of stocking from the biopharma or biotech customers there just given heading into COVID? Mike McMullen: Sam, I think the answer is no, but I’m going to – you haven’t had a chance to talk today. So why don’t you confirm or deny this room or around. Sam Raha: Yes, yes. Thank you. No, the answer is no, Mike. And Puneet, that business, it’s a long lead business where we both contract with customers usually several months, sometimes quarters out the work because there’s a lot of a proprietary work that has to be done in conjunction with them, scheduling all the pre-validation work. So no, there was no stocking work. We’ve got things scheduled out for months ahead already. So, no stocking effect. Bob McMahon: Hey, Puneet, this is Bob. Just to add on to what Sam said, because there’s been a lot of news about clinical trials being put on hold and so forth. We haven’t seen any of that in our demand for NASD. Puneet Souda: Okay. That’s great to hear. So Sam, if I could and Mike, you as well, if I could ask on cancer diagnostics, obviously a high growth area and expansion into liquid biopsies and other significant market opportunities there. Now with the decision on Lasergen, how are you thinking about the long-term focus for your genomics portfolio and overall market position longer term? Mike McMullen: Yes, I’ll make some initial comments, and I’ll invite Sam to join in here as well. So I guess, first of all, important just to remind the audience we actually do have a cancer diagnosis business with day from an NGS perspective. So we provide a lot of components and sample prep and other instrumentation into these workflows today. We’re overall very – we continue to be very, very bullish about the cancer diagnostics market for NGS-based – cancer-based diagnostics. And we think there’s a path forward for incremental growth on top of what we’re doing that doesn’t require a – or having our own sequencer, because of some change in the external marketplace. And Sam, maybe you have some building comments on that. Sam Raha: Yes, yes. Absolutely, Mike. As you said, we are – we remain the leading provider for library preparation, particularly target enrichment kits that are used as part of NGS-based cancer diagnostics. We have some of the leading workflow elements as it relates to NGS-quality control and so forth. And also our combination of our access to clinical diagnostic labs through our pathology franchise, our CDX business where we work with pharma partners to develop companion diagnostics from – we believe, together with what we have in genomics, it still gives us a unique capability set, which we are looking to deploy that capability set by bringing that together and there’s partnering opportunities. So Puneet, we haven’t really changed our thesis. And as Mike said earlier, we just don’t believe we need to directly develop the sequencer ourselves. But our commitment to genomics, including arrays, including NGS continues, and we feel good about it. Puneet Souda: Okay. That’s very helpful. And if I could squeeze last one then on the Bravo Liquid Handling robots that you have obviously are being used widely among the COVID testing community as well and genomics community. So trying to see if that was a meaningful number of this quarter. And is that something you expect to continue? And if you can – if there’s something you can quantify for along those lines. And I wasn’t sure, this is in Sam’s bucket or it’s actually in the LSAG bucket. Bob McMahon: Yes. Hey, Puneet. This is Bob. I’ll tell you it’s in the LSAG bucket. And that was the majority of the instrument of the COVID-19 testing that Mike talked about one-point tailwind in Q2 and growing. So… Mike McMullen: So that demand has not peaked, and it comes not only with instrumentation, but an ongoing supply of consumables associated with an instrumentation. Puneet Souda: Okay. That’s great. All right, thank you. Operator: And our next question comes from the line of Vijay Kumar of Evercore ISI. Please go ahead. Your line is open. Vijay Kumar: Thanks guys for squeezing me in here. Mike McMullen: Sure, Vijay. No problem. Vijay Kumar: Mike, so I think I just want to make sure I heard this correctly. You guys say April was down 7%, because I’m trying to figure it out, If May is in line with April 6.5%. So if May is, I guess, in line with April or even I guess, if the next – forward two months are in line with April. Like how do we get to minus 15%? Maybe just help us understand the range? Bob McMahon: It wouldn’t – Vijay, you wouldn’t, that would be kind of the – towards the lower end, right? So what we’re saying is, if things kind of backtracked, we didn’t get any better in the U.S. and Europe and we didn’t really have – there was a sort of a backtrack in China. So again, we’re saying we don’t expect that. We hope that that’s very conservative. But things are just now opening up in U.S. and Europe. But if you do the math that you’re saying, you don’t get there, you get a lot better. You get towards the minus 5%. Vijay Kumar: Understood. That’s helpful, Bob. And then I guess, on that China topic, I know in the past you guys have or I guess, some of your peers have spoken about the stimulus – China stimulus. Any details around or thoughts around a potential for stimulus? And perhaps how that could benefit you guys? Bob McMahon: Yes. We haven’t heard any specifics on that. So that clearly would be a boost to our view of market demand the latter part of this year, but that’s not at all in our calculus right now when we talk about a recovering China marketplace for us. Vijay Kumar: Perfect. Thanks guys. Operator: And our next question comes from the line of Brandon Couillard of Jefferies. Please go ahead. Your line is open. Brandon Couillard: Thanks. Mike, I was hoping you could just touch on the small molecule pharma trends in the quarter and around capital equipments. Any disruption in places like India or other geographies? Mike McMullen: No, significant disruption, but it’s relatively flattish I think for the quarter, that’s about 70% of our pharma business, about 30% it was growing quite strongly in biopharma, small molecule is relatively flattish on the instrumentation side. Bob McMahon: Yes. We – our business in India is fairly small today. Brandon Couillard: Okay. Then just one follow-up for you, Bob, just around the P&L. Can you sort of speak to the cost structure breakdown through fixed and variable? And maybe how we should think about OpEx trends into the third quarter? Bob McMahon: Yes. I would say, I mean, we’ve been – we were very pleased with our ability to kind of manage the kind of the cost structure here. If you looked at it kind of on a sequential basis, there was about a $35 million kind of reduction, about a third of that quite honestly was travel related. As we put the brakes on and I would expect that to be probably even more significant in Q3. Obviously variable and then discretionary spend and then we do have some element of our variable comps that reduces with performance. But what I would say is, Q3 is going to be more challenging because we are protecting those growth investments. But we are very pleased with our ability to kind of manage our costs. Mike McMullen: Yes, Bob I could just jump in there. I mean, the fact that we were able to increase margins in the quarter in the midst of a pandemic, we’re really quite pleased with that. And we didn’t take shortcuts here. So we – there was no COVID-19 layoffs within Agilent. And we’ve got a team that is not worried about their future employment. They are all worried about winning the marketplace and taking care of our customers. Brandon Couillard: Okay. Thank you. Mike McMullen: Thanks. Operator: And our next question comes from the line of Dan Brennan of UBS. Please go ahead. Your line is open. Dan Brennan: Great. Thanks for taking the question guys. Mike McMullen: Sure, Dan. Dan Brennan: I was hoping maybe to – hey, Mike, maybe to go back to China for a moment. Mike McMullen: Sure. Dan Brennan: Can you break it down a little bit more, kind of what you’re seeing in China? I know you kind of highlighted in the deck that food grew and I think you’ve given some other tidbits. But maybe just give us a little flavor for your segments in China and then specifically if you could also just address maybe an update on food and generics, which had been two big drags for you guys. Bob McMahon: Yes, I’ll take it Dan. What I would say is, in the quarter we were very pleased with the performance. All three business groups grew with DGG, albeit, the smallest one growing the fastest followed by ACG and LSAG was up a modest percentage, which is a great testament to the team there. Across the groups all, but I think Academia and government grew to varying levels. And food as we talked about was up in China and it helped drive the global food being up. So again, very good recovery there. And we’ve been very pleased with our performance in China. Dan Brennan: And we throw, Bob, and thank you for that. The generic issue obviously maybe gets a little lost right now during COVID and did major… Bob McMahon: Yes. From a generic perspective, pharma was up it’s really driven by the biopharma business. But our small molecule was not significantly impacted. As Mike said, our small molecule business was roughly flat globally and it was not that far off in China as well. Again, we’ve got the view that now COVID-19 kind of throws some variables in here, but we’ve continued to have the view that this ultimately is a good thing long-term for the industry and ultimately for us because we continue to see the customers who win are disproportionally our customers. And nothing really changed in Q2 from that standpoint. Dan Brennan: Got it. Jacob Thaysen: Well, I can add to that. The conservation just continued with the generics, but according to our expectations. Dan Brennan: Yes. Got it. And I know there was already a question I think – thanks, Jacob. And then I know plenty to ask the question on the diagnostics business, but if you think about DGG ex-NASD business, obviously that business should be a lot less sensitive towards discretionary visits given the nature of what you’re selling there. But can you just give us a little flavor for what you are seeing since there is such a focus on the ability for hospitals to open back up and patient visits? So what do we track there? Mike McMullen: Yes. I think actually, hospital access for – and patients willingness to go to the hospital, medical care outside of COVID-19 has put a damper on the U.S. business in pathology. So that’s one of the areas of “uncertainty” we’re looking at is when will those – when will patients start to return to hospital to get those procedures done. We saw that resume, I believe Bob in Europe. But we’ve not yet seen it in the pathology U.S. business and that puts somewhat of a – that’s put a drag on our Q2 results. We were quite pleased to post a 5% core growth in that business, despite this drag in the U.S., which we think eventually is going to come back. But again, this is when. Bob McMahon: Yes. And Dan, that’s one of the variables that we were taking to account with the framework that we were talking about. If in fact, the large labs continue to focus on COVID-19 testing or there’s not any resumption of non-COVID-19 medical procedures, then that will impact our pathology business because right now, biopsies aren’t being done. Cancer screening is being deferred. And then if you have cancer, then you go for a biopsy and so forth. We’re hoping that that will resume throughout the course of this quarter. But it’s still very early days. Ultimately we see that as bad for the healthcare of the world, quite honestly. And so we hope not just as manufacturers, but as brothers and sisters and mothers and fathers that happens. But that’s one of the things that is still in front of us. Dan Brennan: Terrific. Thank you, guys. Bob McMahon: Welcome. Operator: Thank you. And that’s all the time that we have for questions. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect.	[ { "speaker": "Operator", "text": "Good afternoon, and welcome to the Agilent Technologies Second Quarter Earnings Conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. And now I'd like to introduce you to the host for today's conference, Ankur Dhingra, Vice President of Investor Relations. Sir, please go ahead." }, { "speaker": "Ankur Dhingra", "text": "Thank you, Jody, and welcome, everyone, to Agilent’s conference call for the second quarter of fiscal year 2020. I hope that all of you and your families are safe and healthy. On the webcast today are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining for the Q&A after prepared remarks will be Jacob Thaysen, President of Agilent's Life Sciences & Applied Markets Group; and Sam Raha, President of Agilent's Diagnostics and Genomics Group; along with Padraig McDonnell, President of Agilent CrossLab Group. You can find the press release, investor presentation and information to supplement today's discussion on our website at investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year, and revenue growth will be referred to on a core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now I would like to turn the call over to Mike." }, { "speaker": "Mike McMullen", "text": "Thanks, Ankur, and thanks, everyone, for joining our call today. I want to add my best wishes as well and hope that you and your families are safe and healthy. I'm pleased to have Padraig McDonnell, our President of the Agilent CrossLab Group, joining us for the first time today. As I mentioned last quarter, Mark Doak has retired from the company and Padraig is now leading the ACG. I know you’ll enjoy getting to know Padraig better in his new role. I'm glad he could be here with us on the call. Last quarter, Agilent was among the first to discuss the business impacts of COVID-19. Since then, much has changed as COVID-19 is now a global pandemic. The world is a very different place than it was back in February. But what hasn't changed is the attitude and execution of the Agilent team and our unwavering focus in four key areas. Let me first talk about how we are protecting our people. Our top priority is ensuring the health and safety of the Agilent team. Early on, we entered the global work-from-home policy and severely restricted travel. We implemented new work practices and safety protocols for our manufacturing teams and service engineers visiting customer laboratories. The team is really stepping up. True to the Agilent mission, our response to COVID-19 is driven by our commitment to our people and our customers. It should be no surprise then that our second area of focus is unwavering commitment to our customers. We are and have been open for business. From the early stage of the pandemic, we took decisive action to secure our global business operations. We are using innovative and more efficient ways to support our customers, from leveraging our digital capabilities, promote technical assistance to urgently delivering Bravo liquid handler systems for their COVID-19 test or providing live online guidance to keep labs functioning. We're doubling down on our efforts to support our customers. This is especially true as their needs change and evolve. Our third focus area is taking quick and decisive action to preserve a strong P&L and balance sheet. When we experienced significant disruption to business activity in late March, we made change in our supply chain, logistics and business operations. This ensured [indiscernible] order intake and our ability to deliver products and services to our customers. We also didn't shy away from taking swift action to reduce expenses. We quickly put in place a cost management program while reprioritize and sustained our growth investments. As we continue to sharpen our plans, we will not put our future growth opportunities at risk. Bob will share more details, but the top priority is monitoring our liquidity and cash flow. We have taken actions to ensure a strong balance sheet and financial flexibility. The positive impact of our approach shows in our Q2 results. In the midst of the spread of the global pandemic, the Agilent team delivered Q2 revenues of $1.24 billion. This is flat on a reported basis and down a little less than 2% on a core basis. Our Q2 operating margin of 22.4% are up 50 basis points. We posted earnings per share of $0.71 during the quarter, flat versus our results a year ago. Before covering additional Q2 detail, a few comments on our fourth key area of focus, our continued prioritization on growth. Our building and buying growth strategy remains firmly in place while we are taking decisive action on our cost structure to respond to the COVID-19 impact. We are continuing to prioritize investments in fast-growing markets such as biopharma that deliver incremental growth and help us create a more resilient business. When we all come out of this on the other side, Agilent will be poised for growth. Our Q2 pharma growth is being driven by the strength of our biopharma business. This is a direct result of our building and buying strategy in action. Our approach to investing for growth continue to serve us well and will be a major factor and help us emerge in the current environment stronger than ever. An example of our approach to continually assessing our growth investments is the decision we made regarding our cancer diagnostics strategy and the Lasergen sequencer development program. Given change in the marketplace, we believe we can now capture future growth in the NGS diagnostics space without the need our own sequencer platform. As a result, we made a decision to shutter our sequencer development program. We are redirecting our investments with the valuable intellectual property we’ve created into areas of higher interest. Despite this program change, we remain optimistic about continued growth in NGS cancer diagnostics. Let’s now take a closer look at the quarter as well as the future outlook in today’s COVID-19 world. Last quarter, our attention and revised outlook was focused on our China team, customers and business, as COVID-19 spread to other parts of the world in the second quarter, the situation changed. During February and March, our overall business was up about 1%, however, in late March, we faced significant disruption in business activity as Europe and the Americas restricted access to facilities. Our China business is recovering better than forecasted. We posted 4% core growth in China with increasing strength throughout the quarter. In fact, in April, China posted strong growth, while all other geographies experienced declines. We expect that China growth recovery to continue throughout the year as lab operations and investments continue to resume. The near-term outlook in Europe and the U.S., however, remains challenging, particularly for new equipment parts across most end markets and non-COVID-19 diagnostic testing. Some quick highlights across our businesses, both DGG and ACG delivered core growth. DGG’s 5% growth is driven by NASD, up 35% as the ramp of that business continues as planned. ACG was up 1%. Our LSAG business declined 7% as customers curtailed equipment purchases, although we did have pockets of growth in biopharma, cell analysis and COVID-19 testing and research. From an end market perspective, pharma grew 5% in the quarter, followed by 4% growth in diagnostics and clinical. The food market continues its recovery with a modest 1% growth driven by China. Our environmental and forensics business is down 1% for the quarter. In Q2, academia and chemical and energy are the end markets that are most impacted, down 16% and 10%, respectively. We expect continued pressure in these markets throughout the rest of the year, although we are seeing some pockets of growth in chemical production regionally as some customers shift supply chains. Looking forward, we expect Q3 to be the most challenging quarter of the year, with gradual improvement during the course of the quarter and continuing into Q4. As a key player in the life science industry, Agilent also has an important role to play in the fight against COVID-19. Before closing, I’d like to share a few thoughts on our COVID-19 offerings. While the COVID-19 virus is negatively affecting our overall growth at this time, Agilent is supporting several aspects of COVID-19 research and testing, along with therapeutic and vaccine development. In Q2, this resulted in a one-point tailwind of growth, primarily in providing instrumentation. There is potential that this will become a more meaningful tailwind in future quarters. To address this, we have mobilized across Agilent team to maximize support to customers around the globe fighting the virus. These offerings range from instrumentation, such as automation, PCR and marketplace testing to consumables and components necessary for testing as well as lab support to these customers. As we enter Q3, I want you to know that the global Agilent team is energized and remains focused on supporting our customers and driving growth. We have taken swift and decisive actions to ensure a continued strong P&L and balance sheet. We remain a diversified, resilient company with a bias for speed, execution and growth. Thank you for being on the call. I will have a few closing comments after Bob speaks, and then we look forward to taking your questions. And now, Bob, you’re up." }, { "speaker": "Bob McMahon", "text": "Thank you, Mike, and good afternoon, everyone. Before I begin, I want to repeat what Mike and Ankur said and hoping that you are doing well and staying safe. Looking forward, I, for one, am confident we will get through this and look forward to the day when we can follow up these calls with face-to-face meetings again. In my remarks today, I’ll provide some additional detail on revenue, walk through the second quarter income statement and some other key financial metrics, and then finish up with a framework for thinking about Q3. Given the current volatility and uncertainty that exists, we’re not going to be providing specific forward-looking guidance today. That said, in the spirit of trying to be helpful and transparent, we will provide a glimpse into the evolution of our business during the second quarter and our thought process and how things may play out in the coming quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. Reported revenue for the quarter was $1.24 billion, which was flat versus last year on a reported basis. Currency negatively impacted revenue by 1.6 percentage points and acquisitions added 3.3 percentage points to growth. On a core basis, revenue declined 1.7% in the quarter. The pacing of revenue during the quarter varies significantly by region driven by where each region was in the cycle of precautionary measures, being taken to slow their spread of the virus. As we previously disclosed, we saw overall business activity slow in late March, driven by the U.S. and Europe. The stay-at-home measures in those regions reduce lab operations and limited lab access and our ability to install equipment. This lower level of business activity carry through the month of April resulting in double digit declines for the month in those regions. On the other hand, and as we had anticipated business activity picked up throughout the quarter in China, as restrictions were slowly lifted. We saw strong growth in China in April, partially due to catch up from lower business volumes in February and March. Overall, China grew 4% for the quarter, exceeding our initial expectations at the start of Q2. In total for Q2, quarter-to-date results through March were up 1%, while April was down roughly 6.5%, resulting in the 1.7% core decline. Before getting into some additional group details, it’s also important to note while we have seen some order push outs, we have not seen increased order cancellations. While there are always some level of cancellations in both March and April cancellations were actually lower than the previous year. Our resilient business model was extremely important to us as we navigated the effects of a challenging environment. As Mike mentioned, DGG and ACG both grew on a core basis, while LSAG instrument business declined. LSAG declined 7% core in the quarter, but did see some bright spots with growth in large molecule pharma, cell analysis and COVID-19 testing and research. In addition as Mike mentioned, we had modest growth in the food market. For LSAG the impact of COVID-19 related closures was most pronounced in the Academia and government and chemical and energy markets. ACG grew 1% with China growing in the high single digits. Our ACG results were negatively affected by delays and installations and lab closures in Europe and the Americas during the quarter. And I’m pleased to say that our DDG business delivered 5% growth during Q2, and it was on track for double digit growth prior to the slowdown in U.S. and Europe. We saw sequential growth in genomics, boosted by products used to develop testing capabilities and for vaccine research into COVID-19. And as Mike mentioned, our NASD ramp remains on track and delivered excellent growth this quarter as well. The pathology business grew in all regions except for the U.S. where the affects of delayed and non-COVID-19 related medical procedures was more pronounced in April. On a geographic basis, all regions ranged from flat to down 4% for the quarter with Europe down 4%, Americas down 1% and Asia Pacific flat. And within Asia, as we mentioned, China grew 4%. Now let’s turn to the rest of the P&L. As the expanded impact of the pandemic became apparent, we moved quickly and decisively to adjust our cost trucker through targeted discretionary spending program reductions. We continue to invest in our key growth opportunities and important capabilities, such as digital. For example, we leverage digital and virtual reality investments for our field service engineers to continue to support our customers where we did not have physical lab access. While we took actions across the P&L, we focus most of our effort on SG&A. R&D investments as a percentage of revenue were largely unchanged from the prior year. As a result operating margins of 22.4% improved 50 basis points over last year on flat revenue. Gross margin at 55.4% was down 60 basis points versus the prior year, mostly due to volume and the revenue mix shifting more towards services. In addition, we saw higher logistics costs as moving goods internationally became more expensive. This combination of factors resulted in non-GAAP EPS for the quarter coming in at $0.71 per share flat with the number we posted a year ago. Now in terms of the balance sheet, we were in the market early in the quarter, repurchasing 1.66 million shares for $126 million. In late March, however, we suspended all our share repurchases to maximize our liquidity and financial position. While not in our current plans for Q3, we continue to monitor and evaluate when repurchases will resume. We generated $313 in operating cash flow during the quarter, which is a $61 million improvement over last year, despite building some raw material inventory to assure supply. Additionally, we've taken steps to reduce our capital spending by roughly one-third for the rest of the year. In addition, we ended the quarter in a strong position with $2.1 billion in available liquidity, including $1.3 billion in cash and roughly $800 million available under our revolving credit facility. Our net leverage ratio as defined by net debt to EBITDA was 0.9 times. Given our cash flows and our strong financial position, there is no change to our dividend. As you may recall, we withdrew our 2020 guidance in mid-April due to the uncertainty surrounding the duration and severity of the global COVID-19 pandemic and the impact on the global economic environment. While various countries have started working towards reopening, the pace and effect of global reopening efforts is still unknown. So we won't be providing guidance for Q3 or the full year. However, we did want to provide a framework and a range of possibilities for how our business could unfold in the coming quarter. When we look at Q3, we expect May to be very similar and the business activity is very similar to April and the business activity we've seen in the first few weeks of the month confirmed that. We anticipate that China will remain ahead of the curve in terms of economic recovery, relative to the rest of the world. We expect pharma and our services, particularly contracted services, which make up the majority of our service revenue to remain resilient. And we will be following the consumables business very closely to monitor early signs of recovery and demand patterns. A combination of these factors could result in our revenues being down between 5% and 15% on a core basis. At the lower end of the decline, we assume activity in June and July will continue to improve, with the COVID-19 offerings Mike mentioned having a more significant impact than the 1$ contribution in Q2. On the higher end of the decline, we’re building in the assumption that there would be no significant improvement throughout the course of the quarter in the U.S., and Europe, that non-COVID-19 testing would not recover, and China would plateau. While this is a wide range, there is still significant uncertainty in the pace of recovery as the U.S., and Europe are currently lifting restrictions. We hope that the 15% decline proves very conservative but wanted to provide you with some of the assumptions we are using to manage going forward. In Q3, we expect a two-point headwind due to exchange rates, and M&A should be a three-point tailwind. Again, this is not formal guidance, but should give you a sense for some of the variables we are looking at within the business and believe this is the best way to view the third quarter given the uncertainties that exist. As Mike said, we also believe that fiscal year as the world works through reopening the economy. Overall, I feel we are very well positioned to deal with this challenging environment, accelerate market share gains and come out even stronger as the global economy recovers. Before I turn the call back over to Mike, I want to conclude by saying Agilent’s performance for the first two quarters truly shows the resiliency of our company. I also want to thank the Agilent team for remaining focused on supporting our customers during this time. And, I’d be remiss without a shout out to the finance team for being able to close the books in such a professional manner with everyone working from home. We’ve taken the actions that will serve us incredibly well through the rest of 2020 and into the future. And with that, I believe Mike would like to share some final thoughts before we move on to the Q&A. Mike?" }, { "speaker": "Mike McMullen", "text": "Yes, thanks, Bob. Before we take your questions, I want to close by saying that I couldn’t be more proud of our Agilent team. The idea that difficult situations provide the opportunity for organizations and individuals to step up and exhibit strength, leadership and resiliency has never been more true at Agilent. The Agilent team has been tested during this crisis like no other time and they have not shied away from it. Instead, we have answered the call with world class execution, an even stronger focus on customer service and an inspired creativity that is second to none. I am absolutely convinced we will emerge from this pandemic as an even stronger force in the marketplace. And, with that, I will turn things over to Ankur so we can take your questions. Thank you." }, { "speaker": "Ankur Dhingra", "text": "Thank you. Jody, if you can open the line for Q&A, please." }, { "speaker": "Operator", "text": "[Operator Instructions] And our first question comes from the line of Tycho Peterson of JPMorgan. Please go ahead. Your line is open." }, { "speaker": "Tycho Peterson", "text": "Thanks. I'm going to start by asking about the guide. You said China is plateauing. So what I guess sequentially is getting worse here since you captured April in the prior quarter. Why should things be deteriorating for the upcoming quarter? And then, on the COVID tailwinds did the 35% growth you called out in NASD, does that capture anything around COVID manufacturing? Or can you maybe just touch on what drove the strength there too?" }, { "speaker": "Mike McMullen", "text": "Do you want to take that one?" }, { "speaker": "Bob McMahon", "text": "Yes. Thank you, Tycho. And this is Bob, I'll take the question. I'll actually take the second question first around NASD. The NASD growth is on the ramp that we had talked about previously. It actually had nothing to do with COVID-19 testing or research. It's mostly the activities that have continued in our pipeline of products and clinical testing that has happened. And we're very pleased with the progress there. So that has nothing to do with the COVID-19 testing. On the first question that you had, again, this isn't guidance it's kind of a range of scenarios that we're planning. And we hope that the bottom end of that or the minus 15% would be very conservative. If you look at, we are expecting May to be very similar to April, which would hopefully be the bottom and then improvement in June and July. And but if there are relapses, if China does relapse, or there is a slowdown in that growth that would be the bottom end of the range. So it's a wider range than we would normally have. But there's obviously very much a lot of uncertainty around the forecast." }, { "speaker": "Tycho Peterson", "text": "And on the uncertainty, chemical and energy, you mentioned customer shifting supply chains. Can you maybe just talk about how much of the sequential step down here at C&E and given the volatility in oil purchase, how much of a factor that is?" }, { "speaker": "Mike McMullen", "text": "Sure. Yes, Bob, I'll take that one. So I think for C&E for Q3, basically, we assume than it kind of looks like Q2 and with the potential that the investments that we're starting to see inclinations of a regional approach to this pandemic is really cause many parts of world to rethink their supply chain. So we're seeing early indications of moving of on shoring ensuring certain types of critical chemical components in certain geographies. So that could represent some upside I think. But basically, we're assuming kind of current situation continues into Q3." }, { "speaker": "Bob McMahon", "text": "Yes, Tyco, if you look – if we took our chemical and energy end market and looked at the first two months versus April, they were roughly the same. So we said it was down 10% in the quarter. It didn't have a material change in April. One of the businesses that did was academia and government. So academia and government with the lab closures and so forth was worse in April than it was in other markets. But chemical and energy was pretty steady throughout the quarter now albeit down." }, { "speaker": "Tycho Peterson", "text": "Okay. And then one clarification point…" }, { "speaker": "Mike McMullen", "text": "Okay. Sorry, I was going to add to that. I think when we talk about chemical and energy, it's important to keep in mind that about 70% of that segment is actually chemicals, including material testing." }, { "speaker": "Tycho Peterson", "text": "And then just one clarification before I hop off on Lasergen, again, it sounds like, this is a full write down, is that correct? You're kind of abandoning your project. That seems a little bit different than what you talked about back at our conference in January. So can you clarify, what changed there?" }, { "speaker": "Mike McMullen", "text": "Yes. Well, actually you reference your conference a lot changed after the conference where we saw a number of new announcements indicating there were some changes in terms of how certain competitors in the space were thinking about access to the platform. So that caused us to rethink our current investments and we had an opportunity to really move our program forward without needing to invest directly in a sequencer platform of our own. And Bob, I'll let you comment on the financial side of that." }, { "speaker": "Bob McMahon", "text": "Yes. It is a full shut down and we will have a write-off in Q2." }, { "speaker": "Tycho Peterson", "text": "Thank you." }, { "speaker": "Operator", "text": "And our next question comes from the line of Steve Beuchaw of Wolfe Research. Please go ahead. Your line is open." }, { "speaker": "Steve Beuchaw", "text": "Thanks for your time here. I wanted to ask, first of all, on the strategic activity in this space. One thing that we've seen across tools and devices is this upwelling of interest in capital raise in part with a view that there is an opportunity for accelerated capital deployment, given potential for opportunity here. You guys have a uniquely strong balance sheet comparatively, certainly plenty of liquidity. I wonder if you could speak to how you think about capital deployment and the intensity of capital deployment in the next year. And then I have two follow-ups. Thanks." }, { "speaker": "Mike McMullen", "text": "Yes. I think from an Agilent perspective, our overall thesis of building and buying still stays intact where we'd like to deploy capital in M&A, that makes sense for the company. And we've talked about our criteria around end markets that we know, where companies that we've acquired and have higher levels of growth in the overall company average accretive. So that formula remains relatively unchanged. But we have noticed as some of these moves as well. So I think that speaks to a continued robust interest in the M&A pipeline across the industry. I'd also tell you the valuations haven't moved much. So this is not a buyer's market and you can buy things on the cheap, so you really have to be think through what you're looking at and does it make sense for the company? Anything else you'd add to that, Bob? Steve, do you have a follow-up or…" }, { "speaker": "Steve Beuchaw", "text": "Yes. Sorry. I thought Bob might chime in there. But I have two follow-ups. One is, I wonder if you could speak to activity on a month-to-month basis and the extent to which you think there might've been any sort of April snapback. You commented on it specifically in China, but any snapback activity in other parts of the world and the extent to which people might be trying to ramp quickly and how that might reflect, not just in China, but on – growth as a trend line prospectively for non-China regions. And then one just quick one, I am curious how you guys are thinking about planning for growth in CrossLab given that CrossLab historically been a very strong grower and some component of the CrossLab growth story has been penetration into new categories, is that penetration story still active in the current environment. Thanks so much." }, { "speaker": "Bob McMahon", "text": "Yes. I'll take the first question in terms of the pacing, Steve and you're right. What we have seen is that the pacing by region really follows kind of how the pandemic spread and then how the countries are coming back. And so what we saw was a more pronounced, obviously in China that has – I wouldn't call it a snapback, but it's a recovery. And we're actually seeing the same thing in Europe, where Europe, we felt more of the pain, and that it's actually coming back faster. And then the U.S., and now we're starting to see some of the U.S., it’s still very early days in the U.S., but you are seeing kind of that – that kind of wave of recovery happening throughout the course of each one of the regions. And I'll turn it over to Padraig to give a chance to talk about the CrossLab’s business, but we remain incredibly bullish about that business. And I think even more so now, given some of the proof points that we have in terms of being able to support our customers, both directly and through our digital means. Padraig?" }, { "speaker": "Padraig McDonnell", "text": "Yes. Thanks, Bob. And I think yes, very, very strong demand. We're seeing, for example, in our service business, a lot of strong tracks which really help our customers be productive and help with startup services and actually achieve a critical component in the services. On the consumable side, we certainly saw a strong demand in China, a big snapback up on in terms of a demand for our products that are really supporting workflows. And we see this continue especially around a lot of the digital capabilities that we've developed and our way of interacting with customers. The last thing, I would mention is that also our productivity story in CrossLab about our lab enterprise business is doing extremely well. And also we really shows that the customer need for productivity in these times on beyond going forward is going to be very strong." }, { "speaker": "Bob McMahon", "text": "And Steve, let me add just one other thing. In the case, obviously ACG grew 1%, it would have been stronger – several points stronger. We did have some deferrals because we couldn't install the equipment and we recognize a portion of the price for the service, the training and installation and so forth. And so that is revenue that is on the balance sheet today and it will come back to us in the course of Q3 and Q4." }, { "speaker": "Steve Beuchaw", "text": "Okay. In Q2, this particular quarter was not a good indicator. Much appreciate it. Thank you very much." }, { "speaker": "Operator", "text": "Our next question comes from the line of Patrick Donnelly of Citi. Please go ahead. Your line is open." }, { "speaker": "Patrick Donnelly", "text": "Great. Thanks guys. Mike, maybe one for you on the C&E segment, certainly encouraging to hear there was no real deterioration in April. Can you just talk through the exposure there? Obviously, E&P pretty correlated to oil prices. Maybe on the refining side, how has that reacting to the oil decline? I know typically low oil could actually be a positive if it's over supply. It feels like at least part of what's going on now is low demand, but maybe just talk through what you're seeing there and the expectations going forward." }, { "speaker": "Mike McMullen", "text": "Yes. That’s a great question. And what we also try to think through, what’s really behind the lower oil price. And I think this time, you’ve got two things going on, right, which was oversupply and then really driven by, obviously, the COVID-19 and the slower growth in the economy and demand for those services. But I’m really glad to get a chance to comment on the mix of our business because that segment is pretty subdued right now. But over the years, we’ve continued to have more and more of our business move into the chemical side of that. So roughly about 70% of our business in C&E is in the chemical side and really saw much different dynamics in April, actually, almost all through all Q2, where the energy segment was pretty subdued where limited investment there, mainly business was carried forward through our ACG business, but really not a lot of demand on instruments, different kind of scenario on the chemical side." }, { "speaker": "Patrick Donnelly", "text": "Okay. And then maybe on the other side of COVID, obviously, academic labs closing during this understandable that they should snapback quickly. I guess, how do you feel about the C&E segment? Does it feel different where, again, labs reopening, demand comes back quickly, do you think this will linger because of the oil prices? What’s your outlook, maybe again? Not asking for guidance by any means, but over the next 6 months to 12 months, does this have the potential to linger versus some of the other ones that should snapback?" }, { "speaker": "Mike McMullen", "text": "In my prepared remarks, we basically said we expect this segment to be subdued for the foreseeable future. So it’s really just tied to events that I’m just not smart enough to figure out myself, which is when does global growth start to get solidified and when does it start to turn. I think what we wanted to point out, there actually are some little glimmers of positive aspects of C&E business, particularly the COVID-19 has exposed the fragility of the world’s supply chain. And we’re seeing many customers and many governments, they want certain critical components made in their country and made in their region. So we are seeing indications across multiple industries of onshoring initiatives actually starting, which would speak to some longer-term growth prospects in this space. But don’t get too excited. This – I would just say, let’s assume that it’s going to stay subdued for a while as we’re thinking about it right now. Hence, the reason why we went through the guidance in Q2, because some of these are just too difficult to predict the timing of transition." }, { "speaker": "Bob McMahon", "text": "Yes. And I would say, Patrick, just on that, obviously, the more subdued piece is the instrumentation…" }, { "speaker": "Mike McMullen", "text": "Yes, yes, yes, absolutely." }, { "speaker": "Bob McMahon", "text": "And we will see the snapback or the improvement first in the ACG business." }, { "speaker": "Mike McMullen", "text": "Absolutely." }, { "speaker": "Patrick Donnelly", "text": "That’s really helpful. And then a very quick cleanup on NASD, following up Tycho’s question there. Do you guys have capacity to increase the address demand from COVID? Or are you already kind of maxed out in terms of the build out and just as you build out capacity, it’s kind of addressing?" }, { "speaker": "Mike McMullen", "text": "We are not capacity constrained. And now, we continue to build out the new facility in Frederick as well as optimizing our Boulder facility. And while I can’t share specific names, I can tell you that there are programs underway that aren’t in the revenue yet right now that are related to COVID-19 work." }, { "speaker": "Patrick Donnelly", "text": "Great. Thanks a lot, Mike." }, { "speaker": "Mike McMullen", "text": "You are quite welcome." }, { "speaker": "Operator", "text": "Our next question comes from the line of Derik de Bruin of Bank of America. Please go ahead. Your line is open." }, { "speaker": "Mike McMullen", "text": "Hey, Derik." }, { "speaker": "Derik de Bruin", "text": "Hello, good afternoon. Hi. Couple of questions, just a couple of cleanups. The NASD base now in 2Q, what’s that – where are we in terms of revenues? That was up 35%. I’m just curious on the base." }, { "speaker": "Mike McMullen", "text": "Yes. It’s tracking well to the number that we talked about at the – or what people have estimated, ramping up to $150 million kind of run rate. It’s tracking well to that." }, { "speaker": "Derik de Bruin", "text": "Great. And what are you going to do with the – are you reinvesting the Lasergen money into the business? Or is that going to drop through? Are you going to – and can you remind us on what you were spending on that I think it was around $50-ish million." }, { "speaker": "Mike McMullen", "text": "Yes. No, it was about $30 million a year. That was what was kind of forecasted this year. We’ve spent basically half of that. So the second half of the year, that’ll be a combination of reinvesting where appropriate and also managing the dynamic situation that we’re in, in terms of COVID-19. Hey, Bob, I think we had the full cost of the program in our Q2 results, in our next quarter results." }, { "speaker": "Bob McMahon", "text": "That’s correct." }, { "speaker": "Mike McMullen", "text": "And there’s some real talent in that team, and there’s some really great intellectual property that we think we can really deploy in other programs. So we’re looking to go forward that combo approach, as Bob mentioned." }, { "speaker": "Derik de Bruin", "text": "So you mentioned that you’re seeing some of your chemical customers think about their supply chains and move around. What about the pharmaceutical customers? I mean, obviously, there’s a push looking about bringing API manufacturing back, and you’re a big player there. And this also sort of dovetails with another question on geopolitical tensions. And are you worried about the longer-term impacts of what’s happening now between the U.S. and China in terms of your China business?" }, { "speaker": "Bob McMahon", "text": "Yes. I’ll – hey Derik, this is Bob. Yes. I’ll take the first one, and I’ll leave the second one to Mike. I think on the pharmaceutical one, we’re actually watching that very closely. It’s different than the chemical side because I think the chemical side will probably move a little faster than this. Obviously, there’s regulations, but you are seeing discussions about that even as recently as earlier this week about the U.S. providing a contract here in the U.S. for some APIs and so forth. So we actually think – we’re watching that closely, and we think that, that could be an opportunity for us as those new labs or capacity come out, because our offering here is, I think, second to none, and so more to come there. It’s probably not as fast-moving, but we certainly is on our radar screen." }, { "speaker": "Mike McMullen", "text": "And without waiting in too deeply on the political dimension of things today, what I can tell you is we’re actively scenario planning. We – under potential scenarios around changes in trade policies and supply chain. So we don’t want to be caught in the reactive mode that we were when tariffs were first announced a few years ago. So our teams are really working through a number of different strategies right now." }, { "speaker": "Derik de Bruin", "text": "And if I can squeeze one more in." }, { "speaker": "Mike McMullen", "text": "Sure, sure." }, { "speaker": "Derik de Bruin", "text": "While Agilent doesn’t do – you don’t supply testing products for COVID-19. I mean, obviously, how are you thinking about testing and deploying testing for your employees? And I’m sort of curious about, are your customers demanding that you get tested or people come in? Because there’s some very large numbers being thrown around in terms of the size of the testing market. And so I’m just curious in terms of what you’re thinking." }, { "speaker": "Mike McMullen", "text": "Yes, a couple of things right now. So first of all, although we don’t provide kits directly ourselves, we provide a lot of the components and ingredients, antibodies and other enzymes, that go into testing kits. So we’ve – I’ve personally involved in a number of calls where customers and governments are looking for us to assure to supply to them. So I think we’ve got a good feel for the demand that we’re seeing out there. Relative to our own employees, right now, we’re not requiring employees to be tested for – return in the office. Just a reminder, about 85% of the employees now are, for Agilent, are working from home, and we’re going to be very, very careful on phasing in the return to office. So we’re thinking this through. Once more routine testing does become available, that’s probably something we would look at pretty closely. But we’re in no hurry right now because our teams are working from home right now. Relative – it’s funny. We keep asking that question of our – particularly our service teams, and that has not come up yet. So we’re continuing to monitor. But right now, we’re not seeing requests from our customers to have any type of testing done prior to our employees coming onto the site. Clearly, we have to follow that our safety protocols, and we offered our team with the right PPE and the right training. But on the testing side, we’ve not yet seen that." }, { "speaker": "Derik de Bruin", "text": "Thank you very much." }, { "speaker": "Operator", "text": "Our next question comes from the line of Dan Leonard of Wells Fargo. Please go ahead. Your line is open." }, { "speaker": "Dan Leonard", "text": "Thank you. So hate to overanalyze one month, but I want to circle back to the month of April. So 6.5% down is not so bad for all of the news we’ve seen. Can you – you mentioned strength in China. Can you quantify China? I mean I was doing some back of the envelope, but it looks like it might have been greater than 20% growth in April in China. Is that in the right ballpark?" }, { "speaker": "Bob McMahon", "text": "Yes. You’re in the ballpark." }, { "speaker": "Mike McMullen", "text": "You’re pretty at good math, Dan." }, { "speaker": "Dan Leonard", "text": "Okay. And then maybe separately follow-up. Mike, it does seem like you don’t trust the trend in China. And how much of that is just uncertainty around the virus trajectory versus the maybe geopolitical or any other things?" }, { "speaker": "Mike McMullen", "text": "Dan, thanks for the follow-up question. I do trust the trend in China. So I hope that didn’t come through that way in my remarks. So actually…" }, { "speaker": "Dan Leonard", "text": "Okay. There’s the plateau earlier. I wasn’t sure." }, { "speaker": "Mike McMullen", "text": "No, no. That was sort of the worst-case scenario that Bob was trying to put together this framework, said, well, we could be wrong. And if it’s wrong, we – this is what the implications would be. We don’t think we’re wrong. But if in case we were wrong, this is – you see that far end of the framework that Bob described. But in fact, Q2 China growth was better than we had expected, and we believe it’s going to continue to return to higher levels of growth throughout the quarter. And I hope a few of you noticed that the China food also grew in Q2." }, { "speaker": "Dan Leonard", "text": "Great. Thank you for that clarification." }, { "speaker": "Mike McMullen", "text": "Absolutely." }, { "speaker": "Operator", "text": "Our next question comes from the line of Doug Schenkel of Cowen. Please go ahead, your line is open." }, { "speaker": "Doug Schenkel", "text": "Hey, good afternoon, guys." }, { "speaker": "Mike McMullen", "text": "Hey, Doug. How are you doing?" }, { "speaker": "Doug Schenkel", "text": "I’m doing well, thank you. So maybe a quick follow-up to Dan’s question, cutting it in a different way. Bob, you said May is going to be similar to April, but you acknowledged, again, in answering the last question that China continues to get better. Logically, I think that means something or somewhere still must be getting worse coming out of April into May. Maybe I’m just being a bit too forensic with how you position this. But I’m just wondering, are there areas where you saw and continue to see continued deterioration as we sit here in mid to late May?" }, { "speaker": "Bob McMahon", "text": "Yes, we haven’t seen any continue – again, these are one point out of the month, right, but – or one point out of a year. But May is trending the way April trended in total. And so we’re not seeing anything that is dramatically off pace." }, { "speaker": "Mike McMullen", "text": "And I think Bob, it’s – maybe this is worth mentioning that we don’t go in a lot of details on the order front, our order forecast have been tracking well for both April and through this point in time through May. So, yes." }, { "speaker": "Doug Schenkel", "text": "That’s great. Helpful color. Regarding ACG trends, specifically on the consumable side, what did you see in April and then what was that trend into May. Consumable use picking up would be a really great sign that more people are getting into labs, and as you noted, a good leading indicator for future demands. So I’m just wondering, recognizing it’s an unusual time, if you’d be willing to go to that level just because it’s important for you in the group. And if so, if you’d say anything about specific end markets and geographies?" }, { "speaker": "Bob McMahon", "text": "Yes. I would say, generally speaking, our consumables business has started to pick up. And I’ll just leave it at that." }, { "speaker": "Doug Schenkel", "text": "And it’s tied directly to the opening a facility." }, { "speaker": "Mike McMullen", "text": "You can draw a parallel, where things are opening up. You see the consumables recovering. It’s recovering much faster than the instrumentation. And that’s really – that’s why we keep using word uncertainty, because we can’t project exactly how certain facilities will open up. But we know when they opened up in China, we’ve gotten the business. We know as they’ve been opening up in Europe, we’re getting the business. And then when they’ve slowly been opened up in the U.S. but getting the business, with the exception being universities, which aren’t opening up right now, unless you’re doing COVID-19 research." }, { "speaker": "Bob McMahon", "text": "Correct." }, { "speaker": "Doug Schenkel", "text": "Okay. Super, helpful. Last one, cell analysis. Can you talk a bit more about trends in this business in the quarter? You had a good quarter. The business grew year-over-year. I think on the surface, that’s a bit surprising just because of the heavy mix of heavy, the exposure to academic research. How are you able to pull that off?" }, { "speaker": "Mike McMullen", "text": "Yes, Doug. Thanks for the observations there, because there is a big footprint of the business in academia, but the overall business did grow. And I think I’d like to give the opportunity to Jacob to crow a little about what’s going on there." }, { "speaker": "Jacob Thaysen", "text": "Yes, absolutely. Thank you very much. And it is actually a good story. I mean, as you say, Doug, it is a tale of two cities that clearly academia and government has been challenged during this period of time. While our exposure in biopharma has really picked up here. And furthermore, we have also seen quite some interest for the BioTek ELISA and [indiscernible] in for the theology testing. So with that, that’s actually quite good demand. We also see a flow, will have a tremendous growth. We see a lot of the flow instruments being used in the research sector right now to better understand the cytokine that is happening in – relates to the COVID-19. So overall, both the biopharma space is seeing strong demand. We’ve seen demand into the diagnostic testing on the COVID-19. And then obviously, academia and government overall is challenging, but we do see pocket of interest still there. So overall, great performance." }, { "speaker": "Mike McMullen", "text": "Thanks, Jacob." }, { "speaker": "Doug Schenkel", "text": "Okay, great. Thanks, again." }, { "speaker": "Mike McMullen", "text": "Thanks." }, { "speaker": "Operator", "text": "And our next question comes from the line of Puneet Souda of SVB Leerink. Please go ahead, your line is open." }, { "speaker": "Puneet Souda", "text": "Yes, thanks. Hi, Mike. First one on NASD." }, { "speaker": "Mike McMullen", "text": "Hi, Puneet. How are you doing." }, { "speaker": "Puneet Souda", "text": "Great, great. Thanks, Mike. So the first one on NASD. Great to see the growth there, but just wondering, was there any element of stocking from the biopharma or biotech customers there just given heading into COVID?" }, { "speaker": "Mike McMullen", "text": "Sam, I think the answer is no, but I’m going to – you haven’t had a chance to talk today. So why don’t you confirm or deny this room or around." }, { "speaker": "Sam Raha", "text": "Yes, yes. Thank you. No, the answer is no, Mike. And Puneet, that business, it’s a long lead business where we both contract with customers usually several months, sometimes quarters out the work because there’s a lot of a proprietary work that has to be done in conjunction with them, scheduling all the pre-validation work. So no, there was no stocking work. We’ve got things scheduled out for months ahead already. So, no stocking effect." }, { "speaker": "Bob McMahon", "text": "Hey, Puneet, this is Bob. Just to add on to what Sam said, because there’s been a lot of news about clinical trials being put on hold and so forth. We haven’t seen any of that in our demand for NASD." }, { "speaker": "Puneet Souda", "text": "Okay. That’s great to hear. So Sam, if I could and Mike, you as well, if I could ask on cancer diagnostics, obviously a high growth area and expansion into liquid biopsies and other significant market opportunities there. Now with the decision on Lasergen, how are you thinking about the long-term focus for your genomics portfolio and overall market position longer term?" }, { "speaker": "Mike McMullen", "text": "Yes, I’ll make some initial comments, and I’ll invite Sam to join in here as well. So I guess, first of all, important just to remind the audience we actually do have a cancer diagnosis business with day from an NGS perspective. So we provide a lot of components and sample prep and other instrumentation into these workflows today. We’re overall very – we continue to be very, very bullish about the cancer diagnostics market for NGS-based – cancer-based diagnostics. And we think there’s a path forward for incremental growth on top of what we’re doing that doesn’t require a – or having our own sequencer, because of some change in the external marketplace. And Sam, maybe you have some building comments on that." }, { "speaker": "Sam Raha", "text": "Yes, yes. Absolutely, Mike. As you said, we are – we remain the leading provider for library preparation, particularly target enrichment kits that are used as part of NGS-based cancer diagnostics. We have some of the leading workflow elements as it relates to NGS-quality control and so forth. And also our combination of our access to clinical diagnostic labs through our pathology franchise, our CDX business where we work with pharma partners to develop companion diagnostics from – we believe, together with what we have in genomics, it still gives us a unique capability set, which we are looking to deploy that capability set by bringing that together and there’s partnering opportunities. So Puneet, we haven’t really changed our thesis. And as Mike said earlier, we just don’t believe we need to directly develop the sequencer ourselves. But our commitment to genomics, including arrays, including NGS continues, and we feel good about it." }, { "speaker": "Puneet Souda", "text": "Okay. That’s very helpful. And if I could squeeze last one then on the Bravo Liquid Handling robots that you have obviously are being used widely among the COVID testing community as well and genomics community. So trying to see if that was a meaningful number of this quarter. And is that something you expect to continue? And if you can – if there’s something you can quantify for along those lines. And I wasn’t sure, this is in Sam’s bucket or it’s actually in the LSAG bucket." }, { "speaker": "Bob McMahon", "text": "Yes. Hey, Puneet. This is Bob. I’ll tell you it’s in the LSAG bucket. And that was the majority of the instrument of the COVID-19 testing that Mike talked about one-point tailwind in Q2 and growing. So…" }, { "speaker": "Mike McMullen", "text": "So that demand has not peaked, and it comes not only with instrumentation, but an ongoing supply of consumables associated with an instrumentation." }, { "speaker": "Puneet Souda", "text": "Okay. That’s great. All right, thank you." }, { "speaker": "Operator", "text": "And our next question comes from the line of Vijay Kumar of Evercore ISI. Please go ahead. Your line is open." }, { "speaker": "Vijay Kumar", "text": "Thanks guys for squeezing me in here." }, { "speaker": "Mike McMullen", "text": "Sure, Vijay. No problem." }, { "speaker": "Vijay Kumar", "text": "Mike, so I think I just want to make sure I heard this correctly. You guys say April was down 7%, because I’m trying to figure it out, If May is in line with April 6.5%. So if May is, I guess, in line with April or even I guess, if the next – forward two months are in line with April. Like how do we get to minus 15%? Maybe just help us understand the range?" }, { "speaker": "Bob McMahon", "text": "It wouldn’t – Vijay, you wouldn’t, that would be kind of the – towards the lower end, right? So what we’re saying is, if things kind of backtracked, we didn’t get any better in the U.S. and Europe and we didn’t really have – there was a sort of a backtrack in China. So again, we’re saying we don’t expect that. We hope that that’s very conservative. But things are just now opening up in U.S. and Europe. But if you do the math that you’re saying, you don’t get there, you get a lot better. You get towards the minus 5%." }, { "speaker": "Vijay Kumar", "text": "Understood. That’s helpful, Bob. And then I guess, on that China topic, I know in the past you guys have or I guess, some of your peers have spoken about the stimulus – China stimulus. Any details around or thoughts around a potential for stimulus? And perhaps how that could benefit you guys?" }, { "speaker": "Bob McMahon", "text": "Yes. We haven’t heard any specifics on that. So that clearly would be a boost to our view of market demand the latter part of this year, but that’s not at all in our calculus right now when we talk about a recovering China marketplace for us." }, { "speaker": "Vijay Kumar", "text": "Perfect. Thanks guys." }, { "speaker": "Operator", "text": "And our next question comes from the line of Brandon Couillard of Jefferies. Please go ahead. Your line is open." }, { "speaker": "Brandon Couillard", "text": "Thanks. Mike, I was hoping you could just touch on the small molecule pharma trends in the quarter and around capital equipments. Any disruption in places like India or other geographies?" }, { "speaker": "Mike McMullen", "text": "No, significant disruption, but it’s relatively flattish I think for the quarter, that’s about 70% of our pharma business, about 30% it was growing quite strongly in biopharma, small molecule is relatively flattish on the instrumentation side." }, { "speaker": "Bob McMahon", "text": "Yes. We – our business in India is fairly small today." }, { "speaker": "Brandon Couillard", "text": "Okay. Then just one follow-up for you, Bob, just around the P&L. Can you sort of speak to the cost structure breakdown through fixed and variable? And maybe how we should think about OpEx trends into the third quarter?" }, { "speaker": "Bob McMahon", "text": "Yes. I would say, I mean, we’ve been – we were very pleased with our ability to kind of manage the kind of the cost structure here. If you looked at it kind of on a sequential basis, there was about a $35 million kind of reduction, about a third of that quite honestly was travel related. As we put the brakes on and I would expect that to be probably even more significant in Q3. Obviously variable and then discretionary spend and then we do have some element of our variable comps that reduces with performance. But what I would say is, Q3 is going to be more challenging because we are protecting those growth investments. But we are very pleased with our ability to kind of manage our costs." }, { "speaker": "Mike McMullen", "text": "Yes, Bob I could just jump in there. I mean, the fact that we were able to increase margins in the quarter in the midst of a pandemic, we’re really quite pleased with that. And we didn’t take shortcuts here. So we – there was no COVID-19 layoffs within Agilent. And we’ve got a team that is not worried about their future employment. They are all worried about winning the marketplace and taking care of our customers." }, { "speaker": "Brandon Couillard", "text": "Okay. Thank you." }, { "speaker": "Mike McMullen", "text": "Thanks." }, { "speaker": "Operator", "text": "And our next question comes from the line of Dan Brennan of UBS. Please go ahead. Your line is open." }, { "speaker": "Dan Brennan", "text": "Great. Thanks for taking the question guys." }, { "speaker": "Mike McMullen", "text": "Sure, Dan." }, { "speaker": "Dan Brennan", "text": "I was hoping maybe to – hey, Mike, maybe to go back to China for a moment." }, { "speaker": "Mike McMullen", "text": "Sure." }, { "speaker": "Dan Brennan", "text": "Can you break it down a little bit more, kind of what you’re seeing in China? I know you kind of highlighted in the deck that food grew and I think you’ve given some other tidbits. But maybe just give us a little flavor for your segments in China and then specifically if you could also just address maybe an update on food and generics, which had been two big drags for you guys." }, { "speaker": "Bob McMahon", "text": "Yes, I’ll take it Dan. What I would say is, in the quarter we were very pleased with the performance. All three business groups grew with DGG, albeit, the smallest one growing the fastest followed by ACG and LSAG was up a modest percentage, which is a great testament to the team there. Across the groups all, but I think Academia and government grew to varying levels. And food as we talked about was up in China and it helped drive the global food being up. So again, very good recovery there. And we’ve been very pleased with our performance in China." }, { "speaker": "Dan Brennan", "text": "And we throw, Bob, and thank you for that. The generic issue obviously maybe gets a little lost right now during COVID and did major…" }, { "speaker": "Bob McMahon", "text": "Yes. From a generic perspective, pharma was up it’s really driven by the biopharma business. But our small molecule was not significantly impacted. As Mike said, our small molecule business was roughly flat globally and it was not that far off in China as well. Again, we’ve got the view that now COVID-19 kind of throws some variables in here, but we’ve continued to have the view that this ultimately is a good thing long-term for the industry and ultimately for us because we continue to see the customers who win are disproportionally our customers. And nothing really changed in Q2 from that standpoint." }, { "speaker": "Dan Brennan", "text": "Got it." }, { "speaker": "Jacob Thaysen", "text": "Well, I can add to that. The conservation just continued with the generics, but according to our expectations." }, { "speaker": "Dan Brennan", "text": "Yes. Got it. And I know there was already a question I think – thanks, Jacob. And then I know plenty to ask the question on the diagnostics business, but if you think about DGG ex-NASD business, obviously that business should be a lot less sensitive towards discretionary visits given the nature of what you’re selling there. But can you just give us a little flavor for what you are seeing since there is such a focus on the ability for hospitals to open back up and patient visits? So what do we track there?" }, { "speaker": "Mike McMullen", "text": "Yes. I think actually, hospital access for – and patients willingness to go to the hospital, medical care outside of COVID-19 has put a damper on the U.S. business in pathology. So that’s one of the areas of “uncertainty” we’re looking at is when will those – when will patients start to return to hospital to get those procedures done. We saw that resume, I believe Bob in Europe. But we’ve not yet seen it in the pathology U.S. business and that puts somewhat of a – that’s put a drag on our Q2 results. We were quite pleased to post a 5% core growth in that business, despite this drag in the U.S., which we think eventually is going to come back. But again, this is when." }, { "speaker": "Bob McMahon", "text": "Yes. And Dan, that’s one of the variables that we were taking to account with the framework that we were talking about. If in fact, the large labs continue to focus on COVID-19 testing or there’s not any resumption of non-COVID-19 medical procedures, then that will impact our pathology business because right now, biopsies aren’t being done. Cancer screening is being deferred. And then if you have cancer, then you go for a biopsy and so forth. We’re hoping that that will resume throughout the course of this quarter. But it’s still very early days. Ultimately we see that as bad for the healthcare of the world, quite honestly. And so we hope not just as manufacturers, but as brothers and sisters and mothers and fathers that happens. But that’s one of the things that is still in front of us." }, { "speaker": "Dan Brennan", "text": "Terrific. Thank you, guys." }, { "speaker": "Bob McMahon", "text": "Welcome." }, { "speaker": "Operator", "text": "Thank you. And that’s all the time that we have for questions. Ladies and gentlemen, this concludes today’s conference call. Thank you for participating. You may now disconnect." } ]	Agilent Technologies, Inc.	154,924
A	1	2,020	2020-02-18 16:30:00	Operator: Good afternoon and welcome to the Agilent Technologies first quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. And now, I would like to introduce you to the host for today's conference, Ankur Dhingra, Vice President of Investor Relations. Sir, please go ahead. Thanks. Ankur Dhingra: Thank you Julianne. Welcome everyone to Agilent's conference call for the first quarter of fiscal year 2020. With me are Mike McMullen, Agilent's President and CEO and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Bob's comments will be Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group and Sam Raha, President of Agilent's Diagnostics and Genomics Group. Due to certain personal engagements, Mark Doak, President of the Agilent's CrossLab Group, is unavailable to join us today. You can find the press release, investor presentation and information to supplement today's discussion on our website at investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year. Revenue growth will be referred to on either reported or core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of January 31. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now, I would like to turn the call over to Mike. Mike McMullen: Thanks Ankur and thanks everyone, for joining us on our call today. I would like to start today's call with a reminder that Mark Doak, ACG Group President, will be retiring on May 1. While Mark and his wife are currently enjoying a long planned location and is not able join us today, I would be remiss in not taking the opportunity to recognize the outstanding accomplishments Mark has made in his stellar 38-year. His track record of results speak for itself. Thank you, Mark. We have a very strong bench at Agilent and have already named Mark's successor, Padraig McDonnell. Padraig knows the business well. He has been on Mark's staff for several years and is currently running out chemistries and supplies division. Padraig and Mark are already working on transition activities as Padraig prepares to take the helm of the ACG business at the start of fiscal Q3. Our congratulations to both Mark and Padraig. And now on to the quarterly results. The Agilent team delivered a strong start to 2020. Q1 revenues are above our expectations as business grew in all regions and markets. Total revenues of $1.36 billion are up 5.7% year-over-year on a reported basis and 2.4% on a core basis. We continue to translate our topline growth into strong bottomline earnings. Our EPS of $0.81 is up 7% and is at the high-end of our guidance. Before going into business units and market details of our quarterly results, I want to speak about two specific areas that highlight how our building and buying strategy of investing in fast-growing markets continues to deliver growth and help us create a more resilient business. First, I want to talk about our most recent acquisition, BioTek. This was the first quarter with the BioTek team onboard and the business is off to a very strong start with revenue growth above our expectations. We continue to be very enthusiastic about the cell analysis space and BioTek continues the strong momentum that originally got us interested in bring them into Agilent. The BioTek leadership team was just in Santa Clara for a few days of planned meetings and they are very energized and excited about the future possibilities to make it a great business even stronger as part of the Agilent. Second, the resiliency of our business model is on full display this quarter as Agilent delivered strong growth and earnings in the face of a negative Q1 impact from the Coronavirus outbreak in China. As this has dominated headlines, let me add a few additional comments regarding the Coronavirus and its impact on Agilent. Most importantly, our thoughts go out to all those affected by the Coronavirus. On the Agilent front, our team fortunately has not had any direct health impact and many returned to work last week. We are remotely supporting our customers as a number of them gradually resume operations. We have also restarted our in-country production activities and they are shipping products to customers within China and internationally, albeit at a reduced rate. On the business side, given that our first quarter ended January 31, we are seeing business impact across both fiscal quarters, Q1 and Q2. In Q1, our revenues are running ahead of expectations right up to Lunar New Year Holiday. However, the extensive Lunar New Year Holiday affects our customers' ability to transact and accept shipments during the last days of the quarter. This reduced our reported revenue by approximately $10 million in total for the quarter, primarily in our LSAG instrument business. We have since recognized the bulk of this revenue now in Q2. Looking ahead, we are projecting that Coronavirus will continue to impact our China business throughout Q2. Bob will share additional details, but we are anticipating delays in new equipment purchases and a slower uptake of consumables and services. The slower uptake is due to reduced number of selling days resulting from the extension of Lunar New Year, along with customer and logistics operations that are ramping, but not yet fully operational. It's important to note, while we are forecasting the impact to our Q2 business, our full year outlook for total Agilent revenues and EPS remains unchanged. Our business outside of China remains on a solid footing and we believe a large portion of our China business that is currently being impacted by the Coronavirus is not lost but rather is delayed. As you know, the Coronavirus outbreak is unfortunately impacting the health and safety of tens of thousands of people. I am very proud of how the Agilent team has responded to do our part to help. Our Agilent China team is now actually supporting those customers during crucial research into the virus. We have donated instruments and supplies to four clinical and research institutions based in China to support these research and drug development efforts. We continue to closely monitor events in China and are prepared to act quickly to help wherever possible. Now on to additional details of our quarterly results. Agilent's growth is broad-based as our business grew across all regions and end markets. Regional performance was led by the Americas posting 5% core growth with America coming in with low single digit results and Asia holding steady. Despite the timing of the Lunar New Year and the Coronavirus impact late in the quarter, our China business grew low single digits. While all end markets grew, our results were led by strong growth in the biopharma and environmental forensics markets. Now taking a closer look at how the individual business units performed. LSAG revenues grew 5% on a reported basis driven my strong performance in our biopharma and cell analysis business. On a core basis, LSAG's revenues were down 2% against a tough compare and inclusive of the unexpected Q1 impact from the Coronavirus. With the exception of China, all regions and end markets performed in line with expectations. The ACG business continues to deliver strong results, posting 7% core growth even with reduced selling days in China. This growth was broad-based across all major market segments and regions. These results continue to demonstrate the strength of our ACG CrossLab strategy and how we are leading the transformation of the analytical lab. DGG has also posted 7% growth in the quarter against a difficult 12% growth compare. We have experienced a continuation of positive trends winning share on our core pathology business and seeing strength our NGS QA/QC franchise. We continue to be pleased with the revenue ramp at our new oligo manufacturing facility in Frederick, Colorado. In addition to driving strong finance results, I want to highlight some other notable events that took place during the quarter. We continue to bring different and new product to the market, meaning strong customer and external recognition. We just introduced the Agilent SureSelect XT HS2 DNA kit. This, along with our recently launched automated sample prep platform, Magnis, further strengthens our leadership position in the NGS sample prep market. In addition, two industry publication honored the Agilent InfinityLab LC/MSD iQ system with 2019 innovation awards. The award-winning mass spectrometer introduced last June incorporates intelligent design and innovations such as embedded sensors that monitor instrument health. And finally, earlier this month, Barron's name Agilent number one in the list of the 2019 Most Sustainable Companies in America. We are very proud of this recognition. Sustainability is a critical topic that is gaining increased interest from customers, employees and investors. More importantly, we believe focusing on sustainability is simply the right thing to do. Before I pass the call on to Bob, I would like to close with a reminder of Agilent's resilience and our shareholder value creation model, delivering above market growth, expanding operating margins and a balanced deployment of capital. We are able to thrive by focusing on platforms with multiple large end markets and long term growth opportunities. We are also driving growth in the aftermarket, increasing our focus on faster growing end markets, streamlining our infrastructure and operations and investing in the future of Agilent, both organically and inorganically. We do all this while maintaining acute focus on delivering EPS growth with superior quality of earnings and driving shareholder value creation. Despite the temporary business uncertainty created by the Coronavirus in China, I remain confident about the longer term growth prospects of the China market, our China growth strategy and most importantly our team. I am very proud and confident in the strength and resiliency of our China team and their ability to overcome any near term challenges that come our way. When I look at our global team in our business, our growth prospects and team have never been stronger. We are laser focused on driving revenue and earnings growth. I am pleased to tell you that all these facts allow us to maintain our growth and earnings outlook for the year. Thank you for being on the call and I look forward to answering your questions. I will now hand off the call to Bob. Bob? Bob McMahon: Thank you Mike and good afternoon everyone. In my remarks today, I will provide some additional detail on revenue, walk through the first quarter income statement and some other key financial metrics and then finish up with our updated guidance for Q2 and the full year. Unless otherwise noted, my remarks will focus on non-GAAP results. Our first quarter results were very good as we had strong execution across all regions and markets. Revenue for the quarter was $1.36 billion with reported revenue growth of 5.7%. Currency negatively impacted revenue by 0.4 percentage points and acquisitions added 3.7 percentage points to growth. Our core growth was 2.4% in the quarter. As Mike indicated, our performance was impacted by the extension of the Lunar New Year Holiday due to the Coronavirus. This reduced the number of shipping days in China and we estimate it shifted $10 million in revenue out of Q1. If not for the reduced shipping days in Q1, our performance would have been stronger with the shift affecting our core revenue growth by roughly 70 basis points. In terms of end markets, we saw growth across all of our six end market segments. Pharma, environmental and forensics and diagnostics and clinical led the way for us in the first quarter. During the quarter, pharma grew 3%, double digit growth in DGG and high single digit growth in ACG, offset a mid single digit decline for LSAG. Within pharma, our biopharma or large molecule segment grew high single digits. And on a geographic basis, our pharma business experienced high single-digit growth in the Americas and mid single digit growth in Europe. This was partially offset by mid single digit decline in China, largely associated with the timing of the Lunar New Year and to a lesser extent the execution of the 4+7 program. The 4+7 program is playing out as we expected with the third round completed in January and multiple winners per drug. We continue to believe that this is a long-term positive for the industry as drug quality improves and access to healthcare increases. Our environmental and forensics business grew 4% against a very tough compare last year of 10%. During the quarter, we saw balanced growth between instruments and aftermarket sales. And diagnostics and clinical revenue grew 3% against a strong 11% compare last year. Mid single digit growth in DGG, driven by continued share gains in our pathology business, were partially offset by declines in LSAG and ACG with both only having small businesses in this segment. Chemical and energy revenue grew 2%. Services and consumables grew mid single digits offset by flat instrument sales. Academia and government grew 1% with services and consumables growing mid single digits, partially offset by flat instrument sales. Mid single digit growth in the Americas was partially offset by flat to low single digit declines in the other regions. And finally, food returned a modest growth, up 1%. Low teens growth in services and consumables was partially offset by declines in instrumentation. While one quarter does not make a trend, we are pleased with the continual progress in this market. On a geographic basis, we saw growth in all regions, led by Americas growing mid single digits. Europe grew 2%, in line with our expectations. And as Mike mentioned, our business in China was running ahead of expectations through the first two months of fiscal 2020. As mentioned earlier, despite the shift of the $10 million, China still grew 1%. If not for the extension of the Lunar New Year, our core growth in China would have been solidly mid single digits. Now let's turn to the rest of the P&L. Gross margin was 55.7%, down 120 basis points versus the prior year. This is a result of the planned startup costs for our new NASD facility as well as product mix and some negative pricing effects on our instrumentation business. We offset 90 basis points as we leveraged our cost basis in operating expenses. And as a result, our operating margin was 22.9%, down slightly from 23.1% in the first quarter of last year. Adjusting for the $10 million Coronavirus impact on revenue, operating margins would have increased versus the prior year and so we feel good about our continued opportunity to expand operating margins. We were also able to lower our tax rate slightly to 15.5% and expect that rate to continue for the rest of the year. This resulted a non-GAAP EPS for the quarter coming in at $0.81, at the top end of our guidance and representing 7% growth. Before turning to second quarter guidance, I want to touch on a few other financial metrics. Our operating cash flow was an outflow of $59 million, in line with expectations as we incurred the one-time tax outflow of $226 million related to the transfer of intangibles as noted last quarter. We also paid out $56 million in dividends and purchased 726,000 shares for $60 million. We ended the quarter in a net debt position and a net leverage ratio of 0.9 times. Now let's turn to our non-GAAP financial guidance for Q2. We are anticipating revenues in the range of $1.28 billion to $1.32 billion in the second quarter. This range is larger than we have traditionally provided as we have been tempted to estimate an impact of the Coronavirus on our business in the second quarter. As this is a fluid situation, we thought it would be helpful to detail all our assumptions, particularly as we have seen impact across both Q1 and Q2. Our guidance contemplates a $25 million to $50 million impact in our first half of our fiscal year, which translates to roughly to a 1.5 to three week impact on China revenues. Of this, we saw $10 million in Q1 and we are estimating a net $15 million to $40 million incremental impact in Q2. The Q2 revenue range of $1.28 billion to $1.32 billion translates into reported growth of 3.4% to 6.6% with core growth of 1% to 4%. Currency is expected to have a negative 1.1% impact while M&A is expected to contribute 3.5% to 3.7% in the quarter. We are estimating the Coronavirus to negatively impact our Q2 core growth by one to three points. Our revenue outlook translates Q2 earnings in the range of $0.72 to $0.76 per share, 1.4% to 7% growth versus last year. Importantly, as Mike mentioned, we believe the majority of this business is not lost, rather delayed as customers and the government ramp and recover. In addition, our business outside of China remains strong. As such, we expect a larger second half of the year and are not changing our full year guidance for revenue or EPS. So before starting up the call for questions, I want to conclude by saying we have a very solid start to the year that shows the strength and breadth of our portfolio. It is that portfolio, coupled with the strength of the Agilent team that, despite the uncertainty caused by the Coronavirus, we are maintaining our full year outlook. With that, Ankur, back to you for the Q&A. Ankur Dhingra: Thanks Bob. For Q&A, I would like to request to limit to one question and maybe one quick follow-up. Julianne, if you can please provide instructions for Q&A. Operator: [Operator Instructions]. Your first question comes from Tycho Peterson from JPMorgan. Your line is open. Tycho Peterson: Hi. Thanks. I appreciate you guys quantifying the corona impact. I guess, a couple of things. I mean you have previously talked about mid single digit China expectations for the full year. So should we assume that's still the case, just more back-end loaded? And then, Mike, as we think about collateral damage within China, how should we think about the C&E market, just given that the broader economic activity in China is slowing? So should we think about some impact on C&E as well? Mike McMullen: Sure, Tycho. I think I will handle both questions. And Bob, correct me if I go off script here. But I think we still think that the mid single digit number is doable for the year in China. What we are seeing already on ground from our team, I was just on the phone today with our team in China, we are still able to transact and orders are actually coming in as forecast. I think that we think a lot of the procurement is going to occur a little bit later in the year. We think a lot of it's recoverable with the exception of probably some aspects of our service business where customers really are looking for service people to arrive on the sites. I think we feel pretty good about how we are thinking about China throughout the rest of the year, albeit it being a very fluid situation. And you know, we really haven't seen any kind of transitory or connected impact on C&E. In fact, C&E actually did better than we were thinking in the first quarter. It's too early to call it a trend but some of the PMIs are actually inching up which would maybe give an indication of perhaps a better outlook and some initial noise in some of our major accounts about thinking on procurement. But we still remain cautious in terms of the outlook for C&E but I am f encouraged by the Q1 results. And again, we are not really seeing significant movements around in that area on a global basis. And we think back to the first comment on China, we weren't expecting a lot in C&E this year in China anyway. So I think we are in pretty solid shape relative to the outlook there as well. Tycho Peterson: And then a follow-up on biopharma. You grew 3% on a 10% comp. Last quarter, it was 7% on a 14% comp. So you know, was that a pull forward last quarter? And if so, can you maybe just talk to that dynamic? Mike McMullen: You know, I think the big story there is China, right. Bob McMahon: Yes. That's exactly right, Mike. There's two elements there. One is the shifting of the Lunar New Year from Q2 into Q1 as well as the extension of the Lunar New Year Holiday. So those are the two primary pieces. Mike McMullen: Yes. And then within the pharma numbers, Tycho, the biopharma segment really was strong for us again this quarter as well. And then we think as the 4+7 initiative rolls out in the latter part of this year, then we will see the growth in the small molecule side of that space. And then, we have really strong growth in NASD and the ACG business is strong in pharma. So we are feeling pretty good about pharma. Tycho Peterson: Okay. Thank you. Mike McMullen: Thank you Tycho. Operator: Your next question comes from Doug Schenkel from Cowen. Your line is open. Mike McMullen: Hi Doug. Ryan Blicker: Hi. This is Ryan, on for Doug. Thanks for taking my question. Mike McMullen: How are you, Ryan? Ryan Blicker: Maybe just to round out the China dynamic quickly, can you provide some more color on your supply chain exposure? Within China, it sounds like the operating environment is improving. But how should we think about your direct and indirect supply chain exposure? And do you see any risk to your ability to fulfill demand within and outside of China over the course of this year? Mike McMullen: Yes. Sure, Ryan. Thanks for that question. So as I touched briefly on my call script, we actually have resumed production and are in a really solid position now to not only ship the product to our customers in China, but also products that are manufactured in China to have them exported into the global market environment. And as we have a very diversified global footprint in terms of supply chain and manufacturing capabilities, we think the near term, we are in pretty solid shape relative to ability to meet our commitments from a he shipment perspective. And then you also may recall that starting with the initiation of the U.S. based tariffs, we actually had initiated a movement of a lot of our supply chain out of China. So it actually has mitigated our risk here as well. Bob McMahon: Yes. Ryan, this is Bob. Just to follow-up, we have twice weekly calls with our team in China, inclusive of logistics as well as our supply chain. And obviously, it's quite dynamic but as it currently stands today, we feel like we have the ability to be able to procure not only raw materials but also produce the finished goods and ship not only within China but also get product into China and vice versa. Ryan Blicker: Great. And then maybe just following up with a brief two-parter. Number one, on the food market. It sounds like things were improving a bit prior to this Coronavirus dynamic. Can you talk a little bit more about what you are seeing in the market and if you think that the China portion of that market specifically could be poised to return to growth as we get past this Coronavirus dynamic? And then specifically for gross margin, can you talk about what the timing headwind was for the quarter versus the other dynamics that you called out? Thank you. Mike McMullen: You want to take this, Bob. Bob McMahon: Yes. So on food, as I mentioned, we certainly are pleased with the progress we have had several quarters of kind of very predictable performance there. And actually Q1, despite the Coronavirus, it probably had more impact on the pharma side then in food. It grew 1% on a global basis. It was down slightly in China, but certainly not to the level that it had been in the past. So we feel good about that. It's probably too early to call that it's going to return to growth. Long term, we do believe it will return to growth, but not ready to call that in this fiscal year. In terms of the timing of the Coronavirus, that $10 million, that was quite a large incremental because we had all the costs. So that was probably a higher than normal kind of incremental drop to the bottomline. And that was probably a little over $0.01 of impact on the full quarter. Ryan Blicker: Very helpful. Thank you. Operator: Your next question comes from Jack Meehan from Barclays. Your line is open. Jack Meehan: Hi. Good afternoon. Mike McMullen: Good afternoon Jack. Jack Meehan: Hi. I was hoping could you give us an update on the NASD rollout at the new site and how much that contributed to the quarter in both DGG and the pharma end market? Mike McMullen: So as I imagine, you maybe getting a little tired of hearing this from Bob and myself. I am going to pull Sam into this conversation. But as we highlighted in the call script, the NASD business continues to ramp as we would expect. We are really pleased with the progress and how we are starting to fill out that factory. Still not yet at full capacity, operating at full capacity yet but it was a contributor to our growth in the first quarter, no doubt. And Sam, anything else you would like to add there? Sam Raha: No. Mike, you hit the nail the head. The business is performing as we have expected. We continue to see interest in all the customers, the pharma customers that we have given tours to. We are doing work now there for a number of customers. Not to be boring, nothing new to report. It is progressing as per plan. Mike McMullen: So all good news right now. Bob McMahon: Yes. I would just add, Jack. You know, as we have talked about, this will ramp up and be a more material impact in the second half of the year. It's progressing as we expected it. It had a slight impact to the DGG and a slight impact to the overall Agilent organic core growth and we are very pleased with the progress. Mike McMullen: Yes. And Bob, I think I will just make this one more point too, while we look at the second half outlook for the business, it's not all about China recovery. The other elements of the business, including NASD, which we know we are going to have a strong second half. Bob McMahon: That's right. Jack Meehan: Great. One follow-up on DGG. You know, the core growth of 7%, not to nitpick it too much but was there any thing that was a little softer in the quarter in that segment, just knowing some of the other growth drivers relative to how the segment was growing last year? Mike McMullen: I think it was really -- this is Mike, Jack and Sam feel free to jump in on this. We had 12% growth last year, so tough compares. We had solid growth across all elements of that business. And outside of again may be a China impact for an element of the business, things are firing on all cylinders also across the businesses is how I recall. Sam Raha: Yes. That's right, Mike. We continue to have good growth, you know, with market, above market with our overall NGS portfolio. So we feel good about that. And the low double digits, our pathology business, as you heard on Mike's opening comments and Bob's as well, we believe we will continue to gain share there growing in the mid single digits. And you just heard about NASD. So you look at the major parts of DGG, we had I think a really well-balanced good quarter. Mike McMullen: It mainly is a comparison story. Jack Meehan: Great. Thank you guys. Mike McMullen: No problem. Operator: Your next question comes from Dan Leonard from Wells Fargo. Your line is open. Dan Leonard: Hi. Thank you. So just a couple of things to circle back to. One, what decelerated in the Americas in the quarter? Your growth rate in that region had been trending higher than 5% for quite some time. Bob McMahon: Yes. Hi. Dan. Welcome back and appreciate the question. It was really a combination of a very tough compare. I would say probably the area that was a little softer was the instrumentation business. They had the most difficult compare in the first quarter and we would expect that to improve in Q2 through Q4 as we get to easier compares. Mike McMullen: Yes. I know, Jacob you were looking into this. Jacob Thaysen: Yes. And I think the continued depressed PMI certainly impacts C&E business, chemical and energy business. So we continue to see that in U.S. being performing at least flat and we would like to see improvement. But I think it's going to still take some time for that to happen. Mike McMullen: And I would add that you know, it ended where we expected it to be. Jacob Thaysen: Yes, sure. Dan Leonard: And then a related question. Bob you mentioned when discussing the gross margin dynamics that there were some negative pricing effects on the instrument business. Can you elaborate on that? Are you pulling maybe the pricing lever to drive more demand in the instrument business after four quarters in a row of very soft demanded at LSAG? Mike McMullen: Hi Dan, I just can't help but to jump in on this one. And I think that question should be posed to our competitors because we saw particularly as we finished the calendar year, we saw some very aggressive pricing by some of our competitors, particularly in the liquid chromatography and mass spectrometry platforms. And I don't know if you are adding to that, Jacob. Jacob Thaysen: No. I think it's fair to say that we continue to be premium priced but there is certainly some competition in the market space right now. And yes, so there is a price pressure. Mike McMullen: But we don't play the price game here. I mean that's not how we want to win. Dan Leonard: Okay. I appreciate the color. Thank you. Operator: Your next question comes from Patrick Donnelly from Citi. Your line is open. Jesse Klink: Hi. Thanks. This is Jesse, on for Patrick. First, I just wanted to touch on the China impact. I mean you guys have laid out a 1% impact to core growth from that. I just wanted to understand how that compares to your expectations of Coronavirus made at a lower than anticipated? Mike McMullen: Yes. Maybe just to be crystal clear here. We saw roughly a 70 basis point impact in Q1. We had product that was getting ready. It was staged and getting ready to ship. Bob McMahon: In-country. Mike McMullen: And on the last couple of days of January and with the extension of the formal holiday, there was no one there to pick that up. So we know that was clearly an impact in Q1. In terms of Q2, what we are expecting between the first half of our year, it's roughly 1.5 to three week impact as we are ramping up. And most of that's happening in Q2. We are expecting in Q2 that the Coronavirus has roughly a one to three point impact to our growth in Q2, roughly $15 million to $40 million. In the first half, it's $25 million to $50 million. And we will expect to get that back in the second half of our fiscal year. Jesse Klink: Okay. That's helpful. And then just maybe one on the BioTek acquisition. Just wondering how that business performed relative to expectations and just kind of how the customer reception has been so far as you have broadened the portfolio offering there? Mike McMullen: Yes. Jesse, happy to hit that right up. And relative to expectations, it's ahead of our expectations. It really has been just a tremendous addition to the company. And we are talking about this the other day inside the company. Typically, when you put together a deal scenario, it's often out of the gate, you don't see a team beating the revenue numbers all the time. And that is actually what we saw in the case of BioTek in the first full quarter as part of Agilent. And Jacob, I know you have been talking to customers and how are they thinking about BioTek being part of Agilent? Jacob Thaysen: Yes. Again, I just want to underscore once again that we have been very pleased with the performance of BioTek while it's been here in Agilent. But not only BioTek, the whole cell analysis business is doing very well and are we posting double digit growth for the whole business. So we are very pleased with that and we actually believe it is going to continue for quite a long time. We see cell analysis is going to be a key driver for understanding the immune system and immune oncology. And with now the Seahorse, ACEA and BioTek and Luxcel combined, we have a very unique value proposition. And that that is really what excites us and what also is very exciting for customs is that when we combine those technologies, these techniques together, we can create more insight for the researchers and the biopharma customers that nobody else in the industry can do. So this is very exciting and we are just getting started. Operator: Your next question comes from Puneet Souda from SVB Leerink. Your line is open. Puneet Souda: Yes. Hi. Thanks Mike. So first question on Europe. You pointed 2% growth there. I was hoping to get a view from you on outlook and what you are baking in the guidance here? Thanks. Mike McMullen: Thanks. Bob, why don't I just talk about our performance and you can maybe comment on the outlook. So it came in right as expected. And I think you know that Europe is in a difficult economic environment and we think our team is really doing well there relative to what's going on in the market environment. So we were actually quite pleased with how Q1 came out for us in Europe. And Bob in terms of the outlook? Bob McMahon: Yes. So Puneet, good afternoon. As Mike said, we were pleased with the outlook of being 2% and that's kind of what we are forecasting in Q2 and the rest of the year. And so certainly the is doing a really great job of being able to deliver in a tough environment. But it kind of hit where we expected and that's kind of what we are expecting for the rest of the year as well. Puneet Souda: Okay. That's very helpful. So if I could touch back on China. Mike McMullen: Sure. Puneet Souda: I know it's been covered quite a bit. But I would really appreciate your thought there, given one of the strongest legacy positions in that country for Agilent. As the recovery happens here, are there certain segments which you think where you will see more acceleration, more faster recovery, certain product lines or certain segments where you would see a recovery faster versus others? And then I was sort of also surprised with growth you are seeing in ACG. CrossLab continues to deliver. I was trying to understand what sort of exposure you had there in China? And given the travel restrictions and everything, are you still able to ship products and service instruments seeing the growth in CrossLab here? Or how much was the impact in CrossLab, if you could quantify? Thank you. Bob McMahon: Puneet, let me take, there is a lot into that question. So let me try to hit them. In terms of recovery, we would expect that obviously, the instrumentation portion would recover and within that probably pharma first. And so we would expect that to be prioritized over some of the other markets. In terms of ACG, we continue to be pleased by the broad-based strength there. Actually even in China, despite kind of the reduced selling days, it grew 11%. We do expect probably a slower ramp up there, less on the consumable side as the factories are getting back to production, but more on the services side, as you can imagine having our folks getting into labs right now is fairly difficult and there is a portion of that would be on demand for servicing equipment. And so we would see that probably ramp up a little slower in Q2 but then ramp back up to normal, latter half of Q2 and into Q3 and Q4. At least, that's our current assumption. As Mike mentioned, we have been in close contact with our teams in China and have been watching the order flow. And the order flow to-date is, across both ACG and LSAG as well as our DGG business which is a smaller piece, tracking to our expectations. Puneet Souda: Okay. And any sense in terms of the exposure that you have in China and could that mix change in the next quarter or so? Mike McMullen: No. I don't anticipate a major shift. We have largely got a instrument heavy business in China relative to the rest of the business anyway. But our opportunity really lies in the consumables and service over time. So I don't see a dramatic change in Q2 or in the back half of the year. Bob McMahon: Yes. Puneet Souda: Great. Thank you. Mike McMullen: Very welcome, Puneet. Operator: Your next question comes from Dan Arias from Stifel. Your line is open. Dan Arias: Good afternoon guys. Thanks. Mike McMullen: Hi Dan. Dan Arias: Mike, just back to Tycho's biopharma question. Hi Mike. Next quarter, I think the comp goes way down to low singles for that customer segment. So where are you feeling like biopharma growth heads in 2Q as we just think about the momentum in the favorable comparison, but also China? Can that be more mid singles when we net out the moving parts there? Mike McMullen: Hi Dan. I think that's a reasonable expectation. So when I was asked earlier about the pharma, we remain confident about our ability to grow in pharma. You know, part of it's going to be the pickup and continued growth that we are going to have in our NASD business. We also know that we are getting to some of the easier compares relative to the LSAG instrument business, because as you may all recall that's in the Q2 is when we starting seeing the slowdown as China went through this whole looking at their procurement practices around the generics. So we think there is a lot of good reason to be positive about the ability to have a higher growth rate in the outer quarters than we did in Q1 in our pharma business. Bob McMahon: Yes. And we are expecting a faster growth in Q2. Mike McMullen: Yes. Dan Arias: Okay. And then maybe one again for you, Mike or maybe even Sam. It feels like 1Q is always a good time to ask this question, just given that most are heading down to AGBT. Any update you can give us on Lasergen product development? How much of a focus is that at this point? And then maybe what are you looking at in terms of the change in total investment there if we compare 2020 to 2019? Mike McMullen: So I think, Sam, you are getting our bags packed, maybe at least now your team is getting their bags packed to head to that. You are staying home. That's right. Okay. Maybe just a few comments on this. Sam Raha: Yes. Overall, thanks for the question, Dan, if you would have heard my comments already from JPMorgan, we are making progress on a number of fronts related to the development work we are doing on the Lasergen sequencer, particularly as it comes to the technical specs on our read length, on our quality and so forth. So we are continuing to make that progress. When you think about AGBT, of course, it's not just about sequencers, it's about the overall NGS workflow, it's about really looking at beyond NGS, the overall genomics. So we are excited about Magnis, which we introduced not too long ago. We are seeing, sorry to remind you, Magnis is this really walkaway automation for taking DNA libraries or actually putting DNA in and being able to come back and just load that directly onto your NGS sequencer. We have seen some really good interest in that in Europe, in America and in China. So we are going to continue sharing the message there and sharing some data from a number of customers. We also, as you would have heard us talk about, we have launched a new SureSelect XT HS2 DNA reagent kit which allows us to look at even lower starting amounts, down to 10 nanograms of DNA for FFPE which is very important for cancer. It also allows on Illumina sequencers. It's very important to be able to use molecular barcodes. We have that going on as well. And then we have a number of partnerships that we are working on with a number of customers and collaborators. So stay tuned. I think it's going to be an exciting AGBT. Bob McMahon: Yes. And Dan, the other part of your question was -- Mike McMullen: Investment outlook. Bob McMahon: Yes. So just quickly, our spending forecast in 2020 is the same as 2019. So we are not expecting any ramp up. Dan Arias: Okay. I appreciate it. Thank you. Operator: Your next question comes from Derek de Bruin from Bank of America. Your line is open. Derek de Bruin: Hi. Good morning or good afternoon. I have got a number of questions. Mike McMullen: Sure. Derek de Bruin: First one is, I guess just on the gross margin outlook for 2020. Can you sort of walk it through the next couple of quarters in terms of how that looks? Bob McMahon: Yes. We talked about at the beginning of the year, our guide was contemplating roughly a flattish gross margin across the company and that hasn't changed. So we have always said that the first half of the year, with Q1 being the hardest of comparison because of the startup costs in NASD and you can see that kind of in our numbers. We also were affected a little less, as we mentioned before, in LSAG. We would expect that to recover as we get through the course of the year. So at a high level, Derek, I would expect our gross margins still to be within that range, roughly flat year-over-year. And where we are getting our operating leverage is really in the OpEx expense line. Mike McMullen: And Bob, I think we are also looking to see maybe more favorable mix in our instrument business as we move forward. And I made some comments about the pricing pressure that we saw more of a calendar year end kind of phenomenon with pricing more stabilizing as we started the 2020. Bob McMahon: Yes. Derek de Bruin: Well, great. That segues into my next question on instruments. And so I think you had said last quarter, you were expecting may be flattish instruments for the full year. Is that still sort of your expectation? And that leads into, any idea of sort of what pent-up demand could be? I mean do you sense from customers, particularly in C&E, if there's people waiting on the sidelines to buy when the budget gets better? I am just trying to get a sense of what the instrument dynamic looks like. Bob McMahon: Yes. Hi Derek. This Bob. I think the short answer on your first question is, yes. We are still in that range of roughly flat. Actually if you looked at Q1, we were down 2% core, but if you adjust it for the Coronavirus, it would been down about 1% on the most difficult comp that we had. To your point around C&E, there have been chutes of life and some of our customers looking at things. Now what I would say is the Coronavirus kind of froze some of that into question. But I would say, that's still intact right now. I don't know. Jacob, if you have anything? Jacob Thaysen: No. Overall, I do think that there is some pushed out pent-up demand here. And eventually, there will be a tech refresh. And we have invested over the past period quite a lot into our instrument portfolio and really refreshed across the whole portfolio. So when that pent-up demand is coming forward, we are ready. But we just can't call it right now exactly when that's going to happen. Mike McMullen: Yes. Jacob, I will just add one thing. Early on in my tenure, we had a similar kind of slowdown in the C&E. The difference here is that, at that time, a lot of our platforms were rather aged. This time, we have a completely refreshed platform. So it also is a great productivity message there to customers. And our lab managers also have the ability to go to their management and say, listen, there is something new out there. I am not buying this, I am replacing like-for-like. Derek de Bruin: Great. And then just one, maybe I missed something, but you did 3.7% contribution from M&A in the first quarter, 3.5% to 3.7% in the second quarter and then the guide for the full year is 2.85 to 2.9%. Is it something else in the first half besides BioTek? And if not, why are you expecting a step down? Bob McMahon: So you have get very good math and we are not expecting a step down. The only thing that's in the numbers and that could be an area of potential opportunity. Derek de Bruin: Great. Thank you. Operator: Your next question comes from Brandon Couillard from Jefferies. Your line is open. Mike McMullen: Hi Brandon. Brandon Couillard: Mike, just on a separate topic. Mike McMullen: Sure. Brandon Couillard: Can you sort of speak to the Twist settlement last week? Why only $25 million? And should we expect any legal savings from having that case out of the way now to reinvest those dollars? Mike McMullen: Yes. So first of all, just a few comments on the settlement. So we are very pleased with the agreement that was reached with Twist. As you know, we think it's in the best interest of our shareholders to rigorously protect our IP. And not only in addition to receiving a payment from Twist, they also had to procure a license from us for certain aspects of our oligo synthesis technology. And we are really a company that's committed to doing innovation in the right way. So we are really pleased with how the settlement goes. And Bob relative to the treatment of the legal expenses and outlook for the rest of the year? I think we have that in pro forma, right? Bob McMahon: Yes. We will pro forma that. Mike McMullen: Yes. So you will see both the settlement come in, Brandon, as well as the costs associated with that, I guess, in our Q2 results. Bob McMahon: That's right. Brandon Couillard: Thanks. And maybe one more higher-level question for you, Mike. Mike McMullen: Sure. Brandon Couillard: I mean you mentioned sustainability, that recognition. Clearly, that's becoming a much bigger focus I think for the investment community. Can you just help us contextualize that focus may help contribute to your growth or cash flow or differentiate you in terms of the customer base? Mike McMullen: Yes. It's a great question. So as I mentioned in my call script, we have been doing these things because we thought it was the right thing to do and now people are really paying attention to it. So I think it helps on multiple aspects of the business. So first of all, relative to our new products which have a very favorable environmental impact, there is real compelling reason for customers because a lot of our most important customers have their own sustainability initiatives and they are very interested. I have several European customers I am visiting next month and they want to hear about our sustainability plans. So when you talk to them about how we are reducing the footprint, the electrical consumption, that some of our products don't even use gases and that we have eliminated the use of gases and gas chromatography in the case the NPIs and we are reducing the size of the packaging. And by the way, that also comes with the benefit to Agilent's P&L. So it really helps in terms of our customer relationships and our ability to drive sales into those accounts. And also it is really quite helpful for recruiting of new employees into the company. New employees when they are looking at potentially joining the company really want to know what Agilent stands for when we talk to them about our culture and what we do as a company in the local community, what we do for the environment, our views on diversity and inclusion. I think it really is a powerful message to attract new employees to Agilent, but also for those who are part of the Agilent team to really be proud of the company they work for and be energized about where the company is going forward. I think we have talked before, I am a big fan of sports and if you build a great team, you get great things happen in the marketplace or on the field. And I think that really is really one of the major benefits you get here which is what it does for your team. So it really is a multitude of impact for the customers, I mean for the company and something we really believe in. Brandon Couillard: Okay. Thank you. Operator: Your next question comes from Vijay Kumar from Evercore ISI. Your line is open. Vijay Kumar: Hi guys. Thanks for squeezing me in. Mike McMullen: Hi Vijay. Vijay Kumar: One, maybe on China, Mike. We have heard some chatter of possibly the government initiating some sort of stimulus here to kick-start the economy. If that were to be the case, where would that impact fall? Is that in C&E and food? Is that where we would see your China numbers coming up? Mike McMullen: Well, I have to say I have heard some rumblings of stimulus, but I haven't seen anything around the specifics of what a stimulus would be. I don't know Bob or whether you have anything to add. Bob McMahon: No. I think you are getting -- Mike McMullen: That's a likely area. Bob McMahon: Yes. Exactly, I think that's a likely area. That and pharma. Mike McMullen: And also, I would also expect environmental as well. So that would be my guess, because these are major quality of life initiatives that the Chinese government has been behind. So my guess is that's where they would put the stimulus. But again, we don't have any specifics. That would just be pure speculation on my part at this point in time. Vijay Kumar: Understood. And Bob, a quick one on the EPS guidance here. I see that the tax rate ticked down sequentially on the guidance front. Did anything change on the margins at all because it looks like the revenue range remains unchanged? So I am wondering if this is below the line or margins some sort of impact here? Bob McMahon: Yes. Nothing material, Vijay. Vijay Kumar: All right. Thanks guys. Mike McMullen: You are welcome. Operator: Your next question comes from Steve Beuchaw from Wolfe Research. Your line is open. Steve Beuchaw: Hi and thanks for the time everybody. Mike McMullen: Sure, Steve. Steve Beuchaw: I guess first I wanted to start with Bob with just a question about one of the underpinnings of the outlook for the year that hasn't been touched on so much just yet and it's NASD, maybe a two-parter on NASD. One is, do you think we feel good about getting to a few dozen millions of dollars of contribution from NASD? And then can you give us any perspective and I guess maybe this is a Sam question, as to how much of the capacity on the new facility in Fredrick is now contracted? And then I have one for Mike. Bob McMahon: Sure. Yes. Let me make sure I answer your question correctly. What I would say is, Q1 came in slightly better than what we expected on the ramp. So we feel very good about that trajectory. Obviously, you know the second half of the year is going to be significantly greater than the first half of the year as we ramp up that business. And I would say that the order book, we feel very good about. Sam Raha: Yes. And maybe Steve, to build on what Bob said. We have said that there is a ramp rate that we have been planning all along. That's what we are seeing. So as you really get into Q4, we will be much more in the run rate, if you will, of what to expect going into financial year 2021 in terms of the Frederick site in particular. So it's ramping as planned. It is being utilized. We were happy to produce good product and good revenue from that in this quarter again after starting last quarter. And further to what Bob said, a lot of these programs and projects are long lead, both working with our customers to really lay the groundwork and do the work. So though I can't tell you exactly what percentage, I do feel good about the percentage of programs and projects that we are already lining up going into next year. Mike McMullen: And Steve, if I could just amplify one of the points that Sam made. It was absolutely crucial that those first batches we produce for customers met their expectations. And as you know, we are very cautious in terms of how we started positioning the ramp here because we just had to get it right and we have gotten it right for those first few customers. I think that really positions us well when we look at the outlook for the rest of the year. Steve Beuchaw: Okay. That makes a ton of sense. Thank you for all the color there. And then Mike, I wonder if we could just do the zoom-out thing, if you will, where we think about the full year. I mean there are so many moving parts, right. And the Coronavirus certainly makes it more complicated. But if I rewind to 90 days ago or so, there was a perspective, not necessarily from Agilent, but certainly in investor conversations that the outlook for fiscal 2020 was really conservative or significantly conservative. And I think we have, of course, heard from you guys over the years, outlook that started at one point and you pretty consistently do better than the outlook. I wonder if you could just give us your perspective on the outlook and guidance philosophy now that you know 90 days more than you did at the time you gave the outlook at the beginning of the year, to what extent is this middle of the fairway, to what extent is this conservative? And as you talk to your customers and you think about the outlook, I mean, how are you feeling and how has that evolved, just again really zooming out? Thanks so much. Mike McMullen: Yes. Steve, so I am in the conference room zooming out right now and great question. And I think that that's how we thought about the full year guide, which I will leave it to you to prescribe the first adjective. I mean there were proper adjectives, but we started this year with a guide that we thought was relatively the floor of what we could do and talked about areas of potential upside for the business. And we were actually tracking well in the first quarter where it would have been a beat, both on the revenue and EPS side of the quarter, albeit the impact of the much talked about today the impact of the Coronavirus. So that's why we felt pretty confident about our ability to say, listen, there are still a lot of puts and takes relative to China in the near term, but there are other aspects of the business are doing extremely well outside of China, whether it be NASD or ACG business. The compares and the strength of our LASG instrument portfolio, that's gone on NGS. So we have a lot and then back to cell analysis. So we have a lot of confidence and whether we call it a middle of fairway right now, but we feel pretty good about -- Bob McMahon: Yes. I would say, Steve, one thing. Obviously 90 days ago, we didn't have the epidemic that we are seeing right now which is unprecedented. And so what we are trying to do is we are seeing, hey, in the first half of the year, we are expecting a $25 million to $50 million impact that we are going to make up in the second half of the year. Now the question is, how fast. And we hope for everyone's sake that that will ramp up fast and we will get this behind us. But that's certainly puts a lot more variability in our forecast. We feel good about where our forecast is. But we certainly didn't anticipate that at the beginning of the year. Steve Beuchaw: Okay. I really appreciate the color there. Thanks for bearing with me. I appreciate it. Mike McMullen: Sure, Steve. Great question. Operator: Your next question comes from Bill Quirk from Piper Sandler. Your line is open. Bill Quirk: Great. Thanks. Good afternoon everybody. Mike McMullen: Good afternoon Bill. Bob McMahon: Hi Bill. Bill Quirk: So I guess Bob or Mike, just update on M&A. You had mentioned on the last call that you would be considering looking at larger deals in and around $1 billion. Just curious what the update is? Mike McMullen: Yes. I think the statement I made in last quarterly call remains which is, we think that deploying our capital towards growth and earnings drivers on the M&A front makes a lot of sense for our shareholders in deals that makes sense for us, in markets that we know where we can really leverage the scale of the company. And we did our largest deal, BioTek, the past quarter. And as you heard earlier, that's off to a really good start. I think we often get the question, well, how large you are willing to go? And the way, Bob and I have described it is, listen, we could go maybe multiples of that. But we are looking to stay in our lane here and not do anything that's magnitude larger than a BioTek. So I am not saying that BioTek is the max level. But probably multiples of that as opposed to something that's of a magnitude size. Bob McMahon: Yes. And Bill, as you can appreciate, timing there is always very difficult to understand and we are going to remain disciplined. And if there isn't anything out there that would meet our financial criteria, we are not going to do it. We don't need to do M&A to make our model work. But certainly, you see in the first quarter the benefit that we have seen with BioTek and really building scale in cell analysis, which we think has a long term growth opportunity for us, not only in LSAG but across the business. Bill Quirk: Understood. And then just secondly, I guess kind of a bigger picture question about the pacing of CrossLab. Over the course of the year, we are going to be heading into slightly more difficult comps for the next couple of quarters? Bob McMahon: Yes. The beauty of ACG has been it's predictability across the business and we are not expecting any dramatic change in the back half of the year with the possible exception of slightly an elevated ramp in China. But that business that Mark and team have built has been just phenomenal in terms of providing stable high growth and profitable growth over the course of the last several years. And I think that that, quite honestly, is a great legacy to what Mark has been able to accomplish. And not only that, it really speaks to what our customers are looking for in terms of productivity in the labs and so forth. So we would expect that to continue to kind of chug along as we have talked about in the past. Bill Quirk: Got it. Thank you very much. Mike McMullen: You are welcome. Ankur Dhingra: All right. Thanks everyone. With that, we would like to wrap up the call for today. Have a great rest of your day. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.	[ { "speaker": "Operator", "text": "Good afternoon and welcome to the Agilent Technologies first quarter 2020 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. Thank you. And now, I would like to introduce you to the host for today's conference, Ankur Dhingra, Vice President of Investor Relations. Sir, please go ahead. Thanks." }, { "speaker": "Ankur Dhingra", "text": "Thank you Julianne. Welcome everyone to Agilent's conference call for the first quarter of fiscal year 2020. With me are Mike McMullen, Agilent's President and CEO and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Bob's comments will be Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group and Sam Raha, President of Agilent's Diagnostics and Genomics Group. Due to certain personal engagements, Mark Doak, President of the Agilent's CrossLab Group, is unavailable to join us today. You can find the press release, investor presentation and information to supplement today's discussion on our website at investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year. Revenue growth will be referred to on either reported or core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of January 31. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now, I would like to turn the call over to Mike." }, { "speaker": "Mike McMullen", "text": "Thanks Ankur and thanks everyone, for joining us on our call today. I would like to start today's call with a reminder that Mark Doak, ACG Group President, will be retiring on May 1. While Mark and his wife are currently enjoying a long planned location and is not able join us today, I would be remiss in not taking the opportunity to recognize the outstanding accomplishments Mark has made in his stellar 38-year. His track record of results speak for itself. Thank you, Mark. We have a very strong bench at Agilent and have already named Mark's successor, Padraig McDonnell. Padraig knows the business well. He has been on Mark's staff for several years and is currently running out chemistries and supplies division. Padraig and Mark are already working on transition activities as Padraig prepares to take the helm of the ACG business at the start of fiscal Q3. Our congratulations to both Mark and Padraig. And now on to the quarterly results. The Agilent team delivered a strong start to 2020. Q1 revenues are above our expectations as business grew in all regions and markets. Total revenues of $1.36 billion are up 5.7% year-over-year on a reported basis and 2.4% on a core basis. We continue to translate our topline growth into strong bottomline earnings. Our EPS of $0.81 is up 7% and is at the high-end of our guidance. Before going into business units and market details of our quarterly results, I want to speak about two specific areas that highlight how our building and buying strategy of investing in fast-growing markets continues to deliver growth and help us create a more resilient business. First, I want to talk about our most recent acquisition, BioTek. This was the first quarter with the BioTek team onboard and the business is off to a very strong start with revenue growth above our expectations. We continue to be very enthusiastic about the cell analysis space and BioTek continues the strong momentum that originally got us interested in bring them into Agilent. The BioTek leadership team was just in Santa Clara for a few days of planned meetings and they are very energized and excited about the future possibilities to make it a great business even stronger as part of the Agilent. Second, the resiliency of our business model is on full display this quarter as Agilent delivered strong growth and earnings in the face of a negative Q1 impact from the Coronavirus outbreak in China. As this has dominated headlines, let me add a few additional comments regarding the Coronavirus and its impact on Agilent. Most importantly, our thoughts go out to all those affected by the Coronavirus. On the Agilent front, our team fortunately has not had any direct health impact and many returned to work last week. We are remotely supporting our customers as a number of them gradually resume operations. We have also restarted our in-country production activities and they are shipping products to customers within China and internationally, albeit at a reduced rate. On the business side, given that our first quarter ended January 31, we are seeing business impact across both fiscal quarters, Q1 and Q2. In Q1, our revenues are running ahead of expectations right up to Lunar New Year Holiday. However, the extensive Lunar New Year Holiday affects our customers' ability to transact and accept shipments during the last days of the quarter. This reduced our reported revenue by approximately $10 million in total for the quarter, primarily in our LSAG instrument business. We have since recognized the bulk of this revenue now in Q2. Looking ahead, we are projecting that Coronavirus will continue to impact our China business throughout Q2. Bob will share additional details, but we are anticipating delays in new equipment purchases and a slower uptake of consumables and services. The slower uptake is due to reduced number of selling days resulting from the extension of Lunar New Year, along with customer and logistics operations that are ramping, but not yet fully operational. It's important to note, while we are forecasting the impact to our Q2 business, our full year outlook for total Agilent revenues and EPS remains unchanged. Our business outside of China remains on a solid footing and we believe a large portion of our China business that is currently being impacted by the Coronavirus is not lost but rather is delayed. As you know, the Coronavirus outbreak is unfortunately impacting the health and safety of tens of thousands of people. I am very proud of how the Agilent team has responded to do our part to help. Our Agilent China team is now actually supporting those customers during crucial research into the virus. We have donated instruments and supplies to four clinical and research institutions based in China to support these research and drug development efforts. We continue to closely monitor events in China and are prepared to act quickly to help wherever possible. Now on to additional details of our quarterly results. Agilent's growth is broad-based as our business grew across all regions and end markets. Regional performance was led by the Americas posting 5% core growth with America coming in with low single digit results and Asia holding steady. Despite the timing of the Lunar New Year and the Coronavirus impact late in the quarter, our China business grew low single digits. While all end markets grew, our results were led by strong growth in the biopharma and environmental forensics markets. Now taking a closer look at how the individual business units performed. LSAG revenues grew 5% on a reported basis driven my strong performance in our biopharma and cell analysis business. On a core basis, LSAG's revenues were down 2% against a tough compare and inclusive of the unexpected Q1 impact from the Coronavirus. With the exception of China, all regions and end markets performed in line with expectations. The ACG business continues to deliver strong results, posting 7% core growth even with reduced selling days in China. This growth was broad-based across all major market segments and regions. These results continue to demonstrate the strength of our ACG CrossLab strategy and how we are leading the transformation of the analytical lab. DGG has also posted 7% growth in the quarter against a difficult 12% growth compare. We have experienced a continuation of positive trends winning share on our core pathology business and seeing strength our NGS QA/QC franchise. We continue to be pleased with the revenue ramp at our new oligo manufacturing facility in Frederick, Colorado. In addition to driving strong finance results, I want to highlight some other notable events that took place during the quarter. We continue to bring different and new product to the market, meaning strong customer and external recognition. We just introduced the Agilent SureSelect XT HS2 DNA kit. This, along with our recently launched automated sample prep platform, Magnis, further strengthens our leadership position in the NGS sample prep market. In addition, two industry publication honored the Agilent InfinityLab LC/MSD iQ system with 2019 innovation awards. The award-winning mass spectrometer introduced last June incorporates intelligent design and innovations such as embedded sensors that monitor instrument health. And finally, earlier this month, Barron's name Agilent number one in the list of the 2019 Most Sustainable Companies in America. We are very proud of this recognition. Sustainability is a critical topic that is gaining increased interest from customers, employees and investors. More importantly, we believe focusing on sustainability is simply the right thing to do. Before I pass the call on to Bob, I would like to close with a reminder of Agilent's resilience and our shareholder value creation model, delivering above market growth, expanding operating margins and a balanced deployment of capital. We are able to thrive by focusing on platforms with multiple large end markets and long term growth opportunities. We are also driving growth in the aftermarket, increasing our focus on faster growing end markets, streamlining our infrastructure and operations and investing in the future of Agilent, both organically and inorganically. We do all this while maintaining acute focus on delivering EPS growth with superior quality of earnings and driving shareholder value creation. Despite the temporary business uncertainty created by the Coronavirus in China, I remain confident about the longer term growth prospects of the China market, our China growth strategy and most importantly our team. I am very proud and confident in the strength and resiliency of our China team and their ability to overcome any near term challenges that come our way. When I look at our global team in our business, our growth prospects and team have never been stronger. We are laser focused on driving revenue and earnings growth. I am pleased to tell you that all these facts allow us to maintain our growth and earnings outlook for the year. Thank you for being on the call and I look forward to answering your questions. I will now hand off the call to Bob. Bob?" }, { "speaker": "Bob McMahon", "text": "Thank you Mike and good afternoon everyone. In my remarks today, I will provide some additional detail on revenue, walk through the first quarter income statement and some other key financial metrics and then finish up with our updated guidance for Q2 and the full year. Unless otherwise noted, my remarks will focus on non-GAAP results. Our first quarter results were very good as we had strong execution across all regions and markets. Revenue for the quarter was $1.36 billion with reported revenue growth of 5.7%. Currency negatively impacted revenue by 0.4 percentage points and acquisitions added 3.7 percentage points to growth. Our core growth was 2.4% in the quarter. As Mike indicated, our performance was impacted by the extension of the Lunar New Year Holiday due to the Coronavirus. This reduced the number of shipping days in China and we estimate it shifted $10 million in revenue out of Q1. If not for the reduced shipping days in Q1, our performance would have been stronger with the shift affecting our core revenue growth by roughly 70 basis points. In terms of end markets, we saw growth across all of our six end market segments. Pharma, environmental and forensics and diagnostics and clinical led the way for us in the first quarter. During the quarter, pharma grew 3%, double digit growth in DGG and high single digit growth in ACG, offset a mid single digit decline for LSAG. Within pharma, our biopharma or large molecule segment grew high single digits. And on a geographic basis, our pharma business experienced high single-digit growth in the Americas and mid single digit growth in Europe. This was partially offset by mid single digit decline in China, largely associated with the timing of the Lunar New Year and to a lesser extent the execution of the 4+7 program. The 4+7 program is playing out as we expected with the third round completed in January and multiple winners per drug. We continue to believe that this is a long-term positive for the industry as drug quality improves and access to healthcare increases. Our environmental and forensics business grew 4% against a very tough compare last year of 10%. During the quarter, we saw balanced growth between instruments and aftermarket sales. And diagnostics and clinical revenue grew 3% against a strong 11% compare last year. Mid single digit growth in DGG, driven by continued share gains in our pathology business, were partially offset by declines in LSAG and ACG with both only having small businesses in this segment. Chemical and energy revenue grew 2%. Services and consumables grew mid single digits offset by flat instrument sales. Academia and government grew 1% with services and consumables growing mid single digits, partially offset by flat instrument sales. Mid single digit growth in the Americas was partially offset by flat to low single digit declines in the other regions. And finally, food returned a modest growth, up 1%. Low teens growth in services and consumables was partially offset by declines in instrumentation. While one quarter does not make a trend, we are pleased with the continual progress in this market. On a geographic basis, we saw growth in all regions, led by Americas growing mid single digits. Europe grew 2%, in line with our expectations. And as Mike mentioned, our business in China was running ahead of expectations through the first two months of fiscal 2020. As mentioned earlier, despite the shift of the $10 million, China still grew 1%. If not for the extension of the Lunar New Year, our core growth in China would have been solidly mid single digits. Now let's turn to the rest of the P&L. Gross margin was 55.7%, down 120 basis points versus the prior year. This is a result of the planned startup costs for our new NASD facility as well as product mix and some negative pricing effects on our instrumentation business. We offset 90 basis points as we leveraged our cost basis in operating expenses. And as a result, our operating margin was 22.9%, down slightly from 23.1% in the first quarter of last year. Adjusting for the $10 million Coronavirus impact on revenue, operating margins would have increased versus the prior year and so we feel good about our continued opportunity to expand operating margins. We were also able to lower our tax rate slightly to 15.5% and expect that rate to continue for the rest of the year. This resulted a non-GAAP EPS for the quarter coming in at $0.81, at the top end of our guidance and representing 7% growth. Before turning to second quarter guidance, I want to touch on a few other financial metrics. Our operating cash flow was an outflow of $59 million, in line with expectations as we incurred the one-time tax outflow of $226 million related to the transfer of intangibles as noted last quarter. We also paid out $56 million in dividends and purchased 726,000 shares for $60 million. We ended the quarter in a net debt position and a net leverage ratio of 0.9 times. Now let's turn to our non-GAAP financial guidance for Q2. We are anticipating revenues in the range of $1.28 billion to $1.32 billion in the second quarter. This range is larger than we have traditionally provided as we have been tempted to estimate an impact of the Coronavirus on our business in the second quarter. As this is a fluid situation, we thought it would be helpful to detail all our assumptions, particularly as we have seen impact across both Q1 and Q2. Our guidance contemplates a $25 million to $50 million impact in our first half of our fiscal year, which translates to roughly to a 1.5 to three week impact on China revenues. Of this, we saw $10 million in Q1 and we are estimating a net $15 million to $40 million incremental impact in Q2. The Q2 revenue range of $1.28 billion to $1.32 billion translates into reported growth of 3.4% to 6.6% with core growth of 1% to 4%. Currency is expected to have a negative 1.1% impact while M&A is expected to contribute 3.5% to 3.7% in the quarter. We are estimating the Coronavirus to negatively impact our Q2 core growth by one to three points. Our revenue outlook translates Q2 earnings in the range of $0.72 to $0.76 per share, 1.4% to 7% growth versus last year. Importantly, as Mike mentioned, we believe the majority of this business is not lost, rather delayed as customers and the government ramp and recover. In addition, our business outside of China remains strong. As such, we expect a larger second half of the year and are not changing our full year guidance for revenue or EPS. So before starting up the call for questions, I want to conclude by saying we have a very solid start to the year that shows the strength and breadth of our portfolio. It is that portfolio, coupled with the strength of the Agilent team that, despite the uncertainty caused by the Coronavirus, we are maintaining our full year outlook. With that, Ankur, back to you for the Q&A." }, { "speaker": "Ankur Dhingra", "text": "Thanks Bob. For Q&A, I would like to request to limit to one question and maybe one quick follow-up. Julianne, if you can please provide instructions for Q&A." }, { "speaker": "Operator", "text": "[Operator Instructions]. Your first question comes from Tycho Peterson from JPMorgan. Your line is open." }, { "speaker": "Tycho Peterson", "text": "Hi. Thanks. I appreciate you guys quantifying the corona impact. I guess, a couple of things. I mean you have previously talked about mid single digit China expectations for the full year. So should we assume that's still the case, just more back-end loaded? And then, Mike, as we think about collateral damage within China, how should we think about the C&E market, just given that the broader economic activity in China is slowing? So should we think about some impact on C&E as well?" }, { "speaker": "Mike McMullen", "text": "Sure, Tycho. I think I will handle both questions. And Bob, correct me if I go off script here. But I think we still think that the mid single digit number is doable for the year in China. What we are seeing already on ground from our team, I was just on the phone today with our team in China, we are still able to transact and orders are actually coming in as forecast. I think that we think a lot of the procurement is going to occur a little bit later in the year. We think a lot of it's recoverable with the exception of probably some aspects of our service business where customers really are looking for service people to arrive on the sites. I think we feel pretty good about how we are thinking about China throughout the rest of the year, albeit it being a very fluid situation. And you know, we really haven't seen any kind of transitory or connected impact on C&E. In fact, C&E actually did better than we were thinking in the first quarter. It's too early to call it a trend but some of the PMIs are actually inching up which would maybe give an indication of perhaps a better outlook and some initial noise in some of our major accounts about thinking on procurement. But we still remain cautious in terms of the outlook for C&E but I am f encouraged by the Q1 results. And again, we are not really seeing significant movements around in that area on a global basis. And we think back to the first comment on China, we weren't expecting a lot in C&E this year in China anyway. So I think we are in pretty solid shape relative to the outlook there as well." }, { "speaker": "Tycho Peterson", "text": "And then a follow-up on biopharma. You grew 3% on a 10% comp. Last quarter, it was 7% on a 14% comp. So you know, was that a pull forward last quarter? And if so, can you maybe just talk to that dynamic?" }, { "speaker": "Mike McMullen", "text": "You know, I think the big story there is China, right." }, { "speaker": "Bob McMahon", "text": "Yes. That's exactly right, Mike. There's two elements there. One is the shifting of the Lunar New Year from Q2 into Q1 as well as the extension of the Lunar New Year Holiday. So those are the two primary pieces." }, { "speaker": "Mike McMullen", "text": "Yes. And then within the pharma numbers, Tycho, the biopharma segment really was strong for us again this quarter as well. And then we think as the 4+7 initiative rolls out in the latter part of this year, then we will see the growth in the small molecule side of that space. And then, we have really strong growth in NASD and the ACG business is strong in pharma. So we are feeling pretty good about pharma." }, { "speaker": "Tycho Peterson", "text": "Okay. Thank you." }, { "speaker": "Mike McMullen", "text": "Thank you Tycho." }, { "speaker": "Operator", "text": "Your next question comes from Doug Schenkel from Cowen. Your line is open." }, { "speaker": "Mike McMullen", "text": "Hi Doug." }, { "speaker": "Ryan Blicker", "text": "Hi. This is Ryan, on for Doug. Thanks for taking my question." }, { "speaker": "Mike McMullen", "text": "How are you, Ryan?" }, { "speaker": "Ryan Blicker", "text": "Maybe just to round out the China dynamic quickly, can you provide some more color on your supply chain exposure? Within China, it sounds like the operating environment is improving. But how should we think about your direct and indirect supply chain exposure? And do you see any risk to your ability to fulfill demand within and outside of China over the course of this year?" }, { "speaker": "Mike McMullen", "text": "Yes. Sure, Ryan. Thanks for that question. So as I touched briefly on my call script, we actually have resumed production and are in a really solid position now to not only ship the product to our customers in China, but also products that are manufactured in China to have them exported into the global market environment. And as we have a very diversified global footprint in terms of supply chain and manufacturing capabilities, we think the near term, we are in pretty solid shape relative to ability to meet our commitments from a he shipment perspective. And then you also may recall that starting with the initiation of the U.S. based tariffs, we actually had initiated a movement of a lot of our supply chain out of China. So it actually has mitigated our risk here as well." }, { "speaker": "Bob McMahon", "text": "Yes. Ryan, this is Bob. Just to follow-up, we have twice weekly calls with our team in China, inclusive of logistics as well as our supply chain. And obviously, it's quite dynamic but as it currently stands today, we feel like we have the ability to be able to procure not only raw materials but also produce the finished goods and ship not only within China but also get product into China and vice versa." }, { "speaker": "Ryan Blicker", "text": "Great. And then maybe just following up with a brief two-parter. Number one, on the food market. It sounds like things were improving a bit prior to this Coronavirus dynamic. Can you talk a little bit more about what you are seeing in the market and if you think that the China portion of that market specifically could be poised to return to growth as we get past this Coronavirus dynamic? And then specifically for gross margin, can you talk about what the timing headwind was for the quarter versus the other dynamics that you called out? Thank you." }, { "speaker": "Mike McMullen", "text": "You want to take this, Bob." }, { "speaker": "Bob McMahon", "text": "Yes. So on food, as I mentioned, we certainly are pleased with the progress we have had several quarters of kind of very predictable performance there. And actually Q1, despite the Coronavirus, it probably had more impact on the pharma side then in food. It grew 1% on a global basis. It was down slightly in China, but certainly not to the level that it had been in the past. So we feel good about that. It's probably too early to call that it's going to return to growth. Long term, we do believe it will return to growth, but not ready to call that in this fiscal year. In terms of the timing of the Coronavirus, that $10 million, that was quite a large incremental because we had all the costs. So that was probably a higher than normal kind of incremental drop to the bottomline. And that was probably a little over $0.01 of impact on the full quarter." }, { "speaker": "Ryan Blicker", "text": "Very helpful. Thank you." }, { "speaker": "Operator", "text": "Your next question comes from Jack Meehan from Barclays. Your line is open." }, { "speaker": "Jack Meehan", "text": "Hi. Good afternoon." }, { "speaker": "Mike McMullen", "text": "Good afternoon Jack." }, { "speaker": "Jack Meehan", "text": "Hi. I was hoping could you give us an update on the NASD rollout at the new site and how much that contributed to the quarter in both DGG and the pharma end market?" }, { "speaker": "Mike McMullen", "text": "So as I imagine, you maybe getting a little tired of hearing this from Bob and myself. I am going to pull Sam into this conversation. But as we highlighted in the call script, the NASD business continues to ramp as we would expect. We are really pleased with the progress and how we are starting to fill out that factory. Still not yet at full capacity, operating at full capacity yet but it was a contributor to our growth in the first quarter, no doubt. And Sam, anything else you would like to add there?" }, { "speaker": "Sam Raha", "text": "No. Mike, you hit the nail the head. The business is performing as we have expected. We continue to see interest in all the customers, the pharma customers that we have given tours to. We are doing work now there for a number of customers. Not to be boring, nothing new to report. It is progressing as per plan." }, { "speaker": "Mike McMullen", "text": "So all good news right now." }, { "speaker": "Bob McMahon", "text": "Yes. I would just add, Jack. You know, as we have talked about, this will ramp up and be a more material impact in the second half of the year. It's progressing as we expected it. It had a slight impact to the DGG and a slight impact to the overall Agilent organic core growth and we are very pleased with the progress." }, { "speaker": "Mike McMullen", "text": "Yes. And Bob, I think I will just make this one more point too, while we look at the second half outlook for the business, it's not all about China recovery. The other elements of the business, including NASD, which we know we are going to have a strong second half." }, { "speaker": "Bob McMahon", "text": "That's right." }, { "speaker": "Jack Meehan", "text": "Great. One follow-up on DGG. You know, the core growth of 7%, not to nitpick it too much but was there any thing that was a little softer in the quarter in that segment, just knowing some of the other growth drivers relative to how the segment was growing last year?" }, { "speaker": "Mike McMullen", "text": "I think it was really -- this is Mike, Jack and Sam feel free to jump in on this. We had 12% growth last year, so tough compares. We had solid growth across all elements of that business. And outside of again may be a China impact for an element of the business, things are firing on all cylinders also across the businesses is how I recall." }, { "speaker": "Sam Raha", "text": "Yes. That's right, Mike. We continue to have good growth, you know, with market, above market with our overall NGS portfolio. So we feel good about that. And the low double digits, our pathology business, as you heard on Mike's opening comments and Bob's as well, we believe we will continue to gain share there growing in the mid single digits. And you just heard about NASD. So you look at the major parts of DGG, we had I think a really well-balanced good quarter." }, { "speaker": "Mike McMullen", "text": "It mainly is a comparison story." }, { "speaker": "Jack Meehan", "text": "Great. Thank you guys." }, { "speaker": "Mike McMullen", "text": "No problem." }, { "speaker": "Operator", "text": "Your next question comes from Dan Leonard from Wells Fargo. Your line is open." }, { "speaker": "Dan Leonard", "text": "Hi. Thank you. So just a couple of things to circle back to. One, what decelerated in the Americas in the quarter? Your growth rate in that region had been trending higher than 5% for quite some time." }, { "speaker": "Bob McMahon", "text": "Yes. Hi. Dan. Welcome back and appreciate the question. It was really a combination of a very tough compare. I would say probably the area that was a little softer was the instrumentation business. They had the most difficult compare in the first quarter and we would expect that to improve in Q2 through Q4 as we get to easier compares." }, { "speaker": "Mike McMullen", "text": "Yes. I know, Jacob you were looking into this." }, { "speaker": "Jacob Thaysen", "text": "Yes. And I think the continued depressed PMI certainly impacts C&E business, chemical and energy business. So we continue to see that in U.S. being performing at least flat and we would like to see improvement. But I think it's going to still take some time for that to happen." }, { "speaker": "Mike McMullen", "text": "And I would add that you know, it ended where we expected it to be." }, { "speaker": "Jacob Thaysen", "text": "Yes, sure." }, { "speaker": "Dan Leonard", "text": "And then a related question. Bob you mentioned when discussing the gross margin dynamics that there were some negative pricing effects on the instrument business. Can you elaborate on that? Are you pulling maybe the pricing lever to drive more demand in the instrument business after four quarters in a row of very soft demanded at LSAG?" }, { "speaker": "Mike McMullen", "text": "Hi Dan, I just can't help but to jump in on this one. And I think that question should be posed to our competitors because we saw particularly as we finished the calendar year, we saw some very aggressive pricing by some of our competitors, particularly in the liquid chromatography and mass spectrometry platforms. And I don't know if you are adding to that, Jacob." }, { "speaker": "Jacob Thaysen", "text": "No. I think it's fair to say that we continue to be premium priced but there is certainly some competition in the market space right now. And yes, so there is a price pressure." }, { "speaker": "Mike McMullen", "text": "But we don't play the price game here. I mean that's not how we want to win." }, { "speaker": "Dan Leonard", "text": "Okay. I appreciate the color. Thank you." }, { "speaker": "Operator", "text": "Your next question comes from Patrick Donnelly from Citi. Your line is open." }, { "speaker": "Jesse Klink", "text": "Hi. Thanks. This is Jesse, on for Patrick. First, I just wanted to touch on the China impact. I mean you guys have laid out a 1% impact to core growth from that. I just wanted to understand how that compares to your expectations of Coronavirus made at a lower than anticipated?" }, { "speaker": "Mike McMullen", "text": "Yes. Maybe just to be crystal clear here. We saw roughly a 70 basis point impact in Q1. We had product that was getting ready. It was staged and getting ready to ship." }, { "speaker": "Bob McMahon", "text": "In-country." }, { "speaker": "Mike McMullen", "text": "And on the last couple of days of January and with the extension of the formal holiday, there was no one there to pick that up. So we know that was clearly an impact in Q1. In terms of Q2, what we are expecting between the first half of our year, it's roughly 1.5 to three week impact as we are ramping up. And most of that's happening in Q2. We are expecting in Q2 that the Coronavirus has roughly a one to three point impact to our growth in Q2, roughly $15 million to $40 million. In the first half, it's $25 million to $50 million. And we will expect to get that back in the second half of our fiscal year." }, { "speaker": "Jesse Klink", "text": "Okay. That's helpful. And then just maybe one on the BioTek acquisition. Just wondering how that business performed relative to expectations and just kind of how the customer reception has been so far as you have broadened the portfolio offering there?" }, { "speaker": "Mike McMullen", "text": "Yes. Jesse, happy to hit that right up. And relative to expectations, it's ahead of our expectations. It really has been just a tremendous addition to the company. And we are talking about this the other day inside the company. Typically, when you put together a deal scenario, it's often out of the gate, you don't see a team beating the revenue numbers all the time. And that is actually what we saw in the case of BioTek in the first full quarter as part of Agilent. And Jacob, I know you have been talking to customers and how are they thinking about BioTek being part of Agilent?" }, { "speaker": "Jacob Thaysen", "text": "Yes. Again, I just want to underscore once again that we have been very pleased with the performance of BioTek while it's been here in Agilent. But not only BioTek, the whole cell analysis business is doing very well and are we posting double digit growth for the whole business. So we are very pleased with that and we actually believe it is going to continue for quite a long time. We see cell analysis is going to be a key driver for understanding the immune system and immune oncology. And with now the Seahorse, ACEA and BioTek and Luxcel combined, we have a very unique value proposition. And that that is really what excites us and what also is very exciting for customs is that when we combine those technologies, these techniques together, we can create more insight for the researchers and the biopharma customers that nobody else in the industry can do. So this is very exciting and we are just getting started." }, { "speaker": "Operator", "text": "Your next question comes from Puneet Souda from SVB Leerink. Your line is open." }, { "speaker": "Puneet Souda", "text": "Yes. Hi. Thanks Mike. So first question on Europe. You pointed 2% growth there. I was hoping to get a view from you on outlook and what you are baking in the guidance here? Thanks." }, { "speaker": "Mike McMullen", "text": "Thanks. Bob, why don't I just talk about our performance and you can maybe comment on the outlook. So it came in right as expected. And I think you know that Europe is in a difficult economic environment and we think our team is really doing well there relative to what's going on in the market environment. So we were actually quite pleased with how Q1 came out for us in Europe. And Bob in terms of the outlook?" }, { "speaker": "Bob McMahon", "text": "Yes. So Puneet, good afternoon. As Mike said, we were pleased with the outlook of being 2% and that's kind of what we are forecasting in Q2 and the rest of the year. And so certainly the is doing a really great job of being able to deliver in a tough environment. But it kind of hit where we expected and that's kind of what we are expecting for the rest of the year as well." }, { "speaker": "Puneet Souda", "text": "Okay. That's very helpful. So if I could touch back on China." }, { "speaker": "Mike McMullen", "text": "Sure." }, { "speaker": "Puneet Souda", "text": "I know it's been covered quite a bit. But I would really appreciate your thought there, given one of the strongest legacy positions in that country for Agilent. As the recovery happens here, are there certain segments which you think where you will see more acceleration, more faster recovery, certain product lines or certain segments where you would see a recovery faster versus others? And then I was sort of also surprised with growth you are seeing in ACG. CrossLab continues to deliver. I was trying to understand what sort of exposure you had there in China? And given the travel restrictions and everything, are you still able to ship products and service instruments seeing the growth in CrossLab here? Or how much was the impact in CrossLab, if you could quantify? Thank you." }, { "speaker": "Bob McMahon", "text": "Puneet, let me take, there is a lot into that question. So let me try to hit them. In terms of recovery, we would expect that obviously, the instrumentation portion would recover and within that probably pharma first. And so we would expect that to be prioritized over some of the other markets. In terms of ACG, we continue to be pleased by the broad-based strength there. Actually even in China, despite kind of the reduced selling days, it grew 11%. We do expect probably a slower ramp up there, less on the consumable side as the factories are getting back to production, but more on the services side, as you can imagine having our folks getting into labs right now is fairly difficult and there is a portion of that would be on demand for servicing equipment. And so we would see that probably ramp up a little slower in Q2 but then ramp back up to normal, latter half of Q2 and into Q3 and Q4. At least, that's our current assumption. As Mike mentioned, we have been in close contact with our teams in China and have been watching the order flow. And the order flow to-date is, across both ACG and LSAG as well as our DGG business which is a smaller piece, tracking to our expectations." }, { "speaker": "Puneet Souda", "text": "Okay. And any sense in terms of the exposure that you have in China and could that mix change in the next quarter or so?" }, { "speaker": "Mike McMullen", "text": "No. I don't anticipate a major shift. We have largely got a instrument heavy business in China relative to the rest of the business anyway. But our opportunity really lies in the consumables and service over time. So I don't see a dramatic change in Q2 or in the back half of the year." }, { "speaker": "Bob McMahon", "text": "Yes." }, { "speaker": "Puneet Souda", "text": "Great. Thank you." }, { "speaker": "Mike McMullen", "text": "Very welcome, Puneet." }, { "speaker": "Operator", "text": "Your next question comes from Dan Arias from Stifel. Your line is open." }, { "speaker": "Dan Arias", "text": "Good afternoon guys. Thanks." }, { "speaker": "Mike McMullen", "text": "Hi Dan." }, { "speaker": "Dan Arias", "text": "Mike, just back to Tycho's biopharma question. Hi Mike. Next quarter, I think the comp goes way down to low singles for that customer segment. So where are you feeling like biopharma growth heads in 2Q as we just think about the momentum in the favorable comparison, but also China? Can that be more mid singles when we net out the moving parts there?" }, { "speaker": "Mike McMullen", "text": "Hi Dan. I think that's a reasonable expectation. So when I was asked earlier about the pharma, we remain confident about our ability to grow in pharma. You know, part of it's going to be the pickup and continued growth that we are going to have in our NASD business. We also know that we are getting to some of the easier compares relative to the LSAG instrument business, because as you may all recall that's in the Q2 is when we starting seeing the slowdown as China went through this whole looking at their procurement practices around the generics. So we think there is a lot of good reason to be positive about the ability to have a higher growth rate in the outer quarters than we did in Q1 in our pharma business." }, { "speaker": "Bob McMahon", "text": "Yes. And we are expecting a faster growth in Q2." }, { "speaker": "Mike McMullen", "text": "Yes." }, { "speaker": "Dan Arias", "text": "Okay. And then maybe one again for you, Mike or maybe even Sam. It feels like 1Q is always a good time to ask this question, just given that most are heading down to AGBT. Any update you can give us on Lasergen product development? How much of a focus is that at this point? And then maybe what are you looking at in terms of the change in total investment there if we compare 2020 to 2019?" }, { "speaker": "Mike McMullen", "text": "So I think, Sam, you are getting our bags packed, maybe at least now your team is getting their bags packed to head to that. You are staying home. That's right. Okay. Maybe just a few comments on this." }, { "speaker": "Sam Raha", "text": "Yes. Overall, thanks for the question, Dan, if you would have heard my comments already from JPMorgan, we are making progress on a number of fronts related to the development work we are doing on the Lasergen sequencer, particularly as it comes to the technical specs on our read length, on our quality and so forth. So we are continuing to make that progress. When you think about AGBT, of course, it's not just about sequencers, it's about the overall NGS workflow, it's about really looking at beyond NGS, the overall genomics. So we are excited about Magnis, which we introduced not too long ago. We are seeing, sorry to remind you, Magnis is this really walkaway automation for taking DNA libraries or actually putting DNA in and being able to come back and just load that directly onto your NGS sequencer. We have seen some really good interest in that in Europe, in America and in China. So we are going to continue sharing the message there and sharing some data from a number of customers. We also, as you would have heard us talk about, we have launched a new SureSelect XT HS2 DNA reagent kit which allows us to look at even lower starting amounts, down to 10 nanograms of DNA for FFPE which is very important for cancer. It also allows on Illumina sequencers. It's very important to be able to use molecular barcodes. We have that going on as well. And then we have a number of partnerships that we are working on with a number of customers and collaborators. So stay tuned. I think it's going to be an exciting AGBT." }, { "speaker": "Bob McMahon", "text": "Yes. And Dan, the other part of your question was --" }, { "speaker": "Mike McMullen", "text": "Investment outlook." }, { "speaker": "Bob McMahon", "text": "Yes. So just quickly, our spending forecast in 2020 is the same as 2019. So we are not expecting any ramp up." }, { "speaker": "Dan Arias", "text": "Okay. I appreciate it. Thank you." }, { "speaker": "Operator", "text": "Your next question comes from Derek de Bruin from Bank of America. Your line is open." }, { "speaker": "Derek de Bruin", "text": "Hi. Good morning or good afternoon. I have got a number of questions." }, { "speaker": "Mike McMullen", "text": "Sure." }, { "speaker": "Derek de Bruin", "text": "First one is, I guess just on the gross margin outlook for 2020. Can you sort of walk it through the next couple of quarters in terms of how that looks?" }, { "speaker": "Bob McMahon", "text": "Yes. We talked about at the beginning of the year, our guide was contemplating roughly a flattish gross margin across the company and that hasn't changed. So we have always said that the first half of the year, with Q1 being the hardest of comparison because of the startup costs in NASD and you can see that kind of in our numbers. We also were affected a little less, as we mentioned before, in LSAG. We would expect that to recover as we get through the course of the year. So at a high level, Derek, I would expect our gross margins still to be within that range, roughly flat year-over-year. And where we are getting our operating leverage is really in the OpEx expense line." }, { "speaker": "Mike McMullen", "text": "And Bob, I think we are also looking to see maybe more favorable mix in our instrument business as we move forward. And I made some comments about the pricing pressure that we saw more of a calendar year end kind of phenomenon with pricing more stabilizing as we started the 2020." }, { "speaker": "Bob McMahon", "text": "Yes." }, { "speaker": "Derek de Bruin", "text": "Well, great. That segues into my next question on instruments. And so I think you had said last quarter, you were expecting may be flattish instruments for the full year. Is that still sort of your expectation? And that leads into, any idea of sort of what pent-up demand could be? I mean do you sense from customers, particularly in C&E, if there's people waiting on the sidelines to buy when the budget gets better? I am just trying to get a sense of what the instrument dynamic looks like." }, { "speaker": "Bob McMahon", "text": "Yes. Hi Derek. This Bob. I think the short answer on your first question is, yes. We are still in that range of roughly flat. Actually if you looked at Q1, we were down 2% core, but if you adjust it for the Coronavirus, it would been down about 1% on the most difficult comp that we had. To your point around C&E, there have been chutes of life and some of our customers looking at things. Now what I would say is the Coronavirus kind of froze some of that into question. But I would say, that's still intact right now. I don't know. Jacob, if you have anything?" }, { "speaker": "Jacob Thaysen", "text": "No. Overall, I do think that there is some pushed out pent-up demand here. And eventually, there will be a tech refresh. And we have invested over the past period quite a lot into our instrument portfolio and really refreshed across the whole portfolio. So when that pent-up demand is coming forward, we are ready. But we just can't call it right now exactly when that's going to happen." }, { "speaker": "Mike McMullen", "text": "Yes. Jacob, I will just add one thing. Early on in my tenure, we had a similar kind of slowdown in the C&E. The difference here is that, at that time, a lot of our platforms were rather aged. This time, we have a completely refreshed platform. So it also is a great productivity message there to customers. And our lab managers also have the ability to go to their management and say, listen, there is something new out there. I am not buying this, I am replacing like-for-like." }, { "speaker": "Derek de Bruin", "text": "Great. And then just one, maybe I missed something, but you did 3.7% contribution from M&A in the first quarter, 3.5% to 3.7% in the second quarter and then the guide for the full year is 2.85 to 2.9%. Is it something else in the first half besides BioTek? And if not, why are you expecting a step down?" }, { "speaker": "Bob McMahon", "text": "So you have get very good math and we are not expecting a step down. The only thing that's in the numbers and that could be an area of potential opportunity." }, { "speaker": "Derek de Bruin", "text": "Great. Thank you." }, { "speaker": "Operator", "text": "Your next question comes from Brandon Couillard from Jefferies. Your line is open." }, { "speaker": "Mike McMullen", "text": "Hi Brandon." }, { "speaker": "Brandon Couillard", "text": "Mike, just on a separate topic." }, { "speaker": "Mike McMullen", "text": "Sure." }, { "speaker": "Brandon Couillard", "text": "Can you sort of speak to the Twist settlement last week? Why only $25 million? And should we expect any legal savings from having that case out of the way now to reinvest those dollars?" }, { "speaker": "Mike McMullen", "text": "Yes. So first of all, just a few comments on the settlement. So we are very pleased with the agreement that was reached with Twist. As you know, we think it's in the best interest of our shareholders to rigorously protect our IP. And not only in addition to receiving a payment from Twist, they also had to procure a license from us for certain aspects of our oligo synthesis technology. And we are really a company that's committed to doing innovation in the right way. So we are really pleased with how the settlement goes. And Bob relative to the treatment of the legal expenses and outlook for the rest of the year? I think we have that in pro forma, right?" }, { "speaker": "Bob McMahon", "text": "Yes. We will pro forma that." }, { "speaker": "Mike McMullen", "text": "Yes. So you will see both the settlement come in, Brandon, as well as the costs associated with that, I guess, in our Q2 results." }, { "speaker": "Bob McMahon", "text": "That's right." }, { "speaker": "Brandon Couillard", "text": "Thanks. And maybe one more higher-level question for you, Mike." }, { "speaker": "Mike McMullen", "text": "Sure." }, { "speaker": "Brandon Couillard", "text": "I mean you mentioned sustainability, that recognition. Clearly, that's becoming a much bigger focus I think for the investment community. Can you just help us contextualize that focus may help contribute to your growth or cash flow or differentiate you in terms of the customer base?" }, { "speaker": "Mike McMullen", "text": "Yes. It's a great question. So as I mentioned in my call script, we have been doing these things because we thought it was the right thing to do and now people are really paying attention to it. So I think it helps on multiple aspects of the business. So first of all, relative to our new products which have a very favorable environmental impact, there is real compelling reason for customers because a lot of our most important customers have their own sustainability initiatives and they are very interested. I have several European customers I am visiting next month and they want to hear about our sustainability plans. So when you talk to them about how we are reducing the footprint, the electrical consumption, that some of our products don't even use gases and that we have eliminated the use of gases and gas chromatography in the case the NPIs and we are reducing the size of the packaging. And by the way, that also comes with the benefit to Agilent's P&L. So it really helps in terms of our customer relationships and our ability to drive sales into those accounts. And also it is really quite helpful for recruiting of new employees into the company. New employees when they are looking at potentially joining the company really want to know what Agilent stands for when we talk to them about our culture and what we do as a company in the local community, what we do for the environment, our views on diversity and inclusion. I think it really is a powerful message to attract new employees to Agilent, but also for those who are part of the Agilent team to really be proud of the company they work for and be energized about where the company is going forward. I think we have talked before, I am a big fan of sports and if you build a great team, you get great things happen in the marketplace or on the field. And I think that really is really one of the major benefits you get here which is what it does for your team. So it really is a multitude of impact for the customers, I mean for the company and something we really believe in." }, { "speaker": "Brandon Couillard", "text": "Okay. Thank you." }, { "speaker": "Operator", "text": "Your next question comes from Vijay Kumar from Evercore ISI. Your line is open." }, { "speaker": "Vijay Kumar", "text": "Hi guys. Thanks for squeezing me in." }, { "speaker": "Mike McMullen", "text": "Hi Vijay." }, { "speaker": "Vijay Kumar", "text": "One, maybe on China, Mike. We have heard some chatter of possibly the government initiating some sort of stimulus here to kick-start the economy. If that were to be the case, where would that impact fall? Is that in C&E and food? Is that where we would see your China numbers coming up?" }, { "speaker": "Mike McMullen", "text": "Well, I have to say I have heard some rumblings of stimulus, but I haven't seen anything around the specifics of what a stimulus would be. I don't know Bob or whether you have anything to add." }, { "speaker": "Bob McMahon", "text": "No. I think you are getting --" }, { "speaker": "Mike McMullen", "text": "That's a likely area." }, { "speaker": "Bob McMahon", "text": "Yes. Exactly, I think that's a likely area. That and pharma." }, { "speaker": "Mike McMullen", "text": "And also, I would also expect environmental as well. So that would be my guess, because these are major quality of life initiatives that the Chinese government has been behind. So my guess is that's where they would put the stimulus. But again, we don't have any specifics. That would just be pure speculation on my part at this point in time." }, { "speaker": "Vijay Kumar", "text": "Understood. And Bob, a quick one on the EPS guidance here. I see that the tax rate ticked down sequentially on the guidance front. Did anything change on the margins at all because it looks like the revenue range remains unchanged? So I am wondering if this is below the line or margins some sort of impact here?" }, { "speaker": "Bob McMahon", "text": "Yes. Nothing material, Vijay." }, { "speaker": "Vijay Kumar", "text": "All right. Thanks guys." }, { "speaker": "Mike McMullen", "text": "You are welcome." }, { "speaker": "Operator", "text": "Your next question comes from Steve Beuchaw from Wolfe Research. Your line is open." }, { "speaker": "Steve Beuchaw", "text": "Hi and thanks for the time everybody." }, { "speaker": "Mike McMullen", "text": "Sure, Steve." }, { "speaker": "Steve Beuchaw", "text": "I guess first I wanted to start with Bob with just a question about one of the underpinnings of the outlook for the year that hasn't been touched on so much just yet and it's NASD, maybe a two-parter on NASD. One is, do you think we feel good about getting to a few dozen millions of dollars of contribution from NASD? And then can you give us any perspective and I guess maybe this is a Sam question, as to how much of the capacity on the new facility in Fredrick is now contracted? And then I have one for Mike." }, { "speaker": "Bob McMahon", "text": "Sure. Yes. Let me make sure I answer your question correctly. What I would say is, Q1 came in slightly better than what we expected on the ramp. So we feel very good about that trajectory. Obviously, you know the second half of the year is going to be significantly greater than the first half of the year as we ramp up that business. And I would say that the order book, we feel very good about." }, { "speaker": "Sam Raha", "text": "Yes. And maybe Steve, to build on what Bob said. We have said that there is a ramp rate that we have been planning all along. That's what we are seeing. So as you really get into Q4, we will be much more in the run rate, if you will, of what to expect going into financial year 2021 in terms of the Frederick site in particular. So it's ramping as planned. It is being utilized. We were happy to produce good product and good revenue from that in this quarter again after starting last quarter. And further to what Bob said, a lot of these programs and projects are long lead, both working with our customers to really lay the groundwork and do the work. So though I can't tell you exactly what percentage, I do feel good about the percentage of programs and projects that we are already lining up going into next year." }, { "speaker": "Mike McMullen", "text": "And Steve, if I could just amplify one of the points that Sam made. It was absolutely crucial that those first batches we produce for customers met their expectations. And as you know, we are very cautious in terms of how we started positioning the ramp here because we just had to get it right and we have gotten it right for those first few customers. I think that really positions us well when we look at the outlook for the rest of the year." }, { "speaker": "Steve Beuchaw", "text": "Okay. That makes a ton of sense. Thank you for all the color there. And then Mike, I wonder if we could just do the zoom-out thing, if you will, where we think about the full year. I mean there are so many moving parts, right. And the Coronavirus certainly makes it more complicated. But if I rewind to 90 days ago or so, there was a perspective, not necessarily from Agilent, but certainly in investor conversations that the outlook for fiscal 2020 was really conservative or significantly conservative. And I think we have, of course, heard from you guys over the years, outlook that started at one point and you pretty consistently do better than the outlook. I wonder if you could just give us your perspective on the outlook and guidance philosophy now that you know 90 days more than you did at the time you gave the outlook at the beginning of the year, to what extent is this middle of the fairway, to what extent is this conservative? And as you talk to your customers and you think about the outlook, I mean, how are you feeling and how has that evolved, just again really zooming out? Thanks so much." }, { "speaker": "Mike McMullen", "text": "Yes. Steve, so I am in the conference room zooming out right now and great question. And I think that that's how we thought about the full year guide, which I will leave it to you to prescribe the first adjective. I mean there were proper adjectives, but we started this year with a guide that we thought was relatively the floor of what we could do and talked about areas of potential upside for the business. And we were actually tracking well in the first quarter where it would have been a beat, both on the revenue and EPS side of the quarter, albeit the impact of the much talked about today the impact of the Coronavirus. So that's why we felt pretty confident about our ability to say, listen, there are still a lot of puts and takes relative to China in the near term, but there are other aspects of the business are doing extremely well outside of China, whether it be NASD or ACG business. The compares and the strength of our LASG instrument portfolio, that's gone on NGS. So we have a lot and then back to cell analysis. So we have a lot of confidence and whether we call it a middle of fairway right now, but we feel pretty good about --" }, { "speaker": "Bob McMahon", "text": "Yes. I would say, Steve, one thing. Obviously 90 days ago, we didn't have the epidemic that we are seeing right now which is unprecedented. And so what we are trying to do is we are seeing, hey, in the first half of the year, we are expecting a $25 million to $50 million impact that we are going to make up in the second half of the year. Now the question is, how fast. And we hope for everyone's sake that that will ramp up fast and we will get this behind us. But that's certainly puts a lot more variability in our forecast. We feel good about where our forecast is. But we certainly didn't anticipate that at the beginning of the year." }, { "speaker": "Steve Beuchaw", "text": "Okay. I really appreciate the color there. Thanks for bearing with me. I appreciate it." }, { "speaker": "Mike McMullen", "text": "Sure, Steve. Great question." }, { "speaker": "Operator", "text": "Your next question comes from Bill Quirk from Piper Sandler. Your line is open." }, { "speaker": "Bill Quirk", "text": "Great. Thanks. Good afternoon everybody." }, { "speaker": "Mike McMullen", "text": "Good afternoon Bill." }, { "speaker": "Bob McMahon", "text": "Hi Bill." }, { "speaker": "Bill Quirk", "text": "So I guess Bob or Mike, just update on M&A. You had mentioned on the last call that you would be considering looking at larger deals in and around $1 billion. Just curious what the update is?" }, { "speaker": "Mike McMullen", "text": "Yes. I think the statement I made in last quarterly call remains which is, we think that deploying our capital towards growth and earnings drivers on the M&A front makes a lot of sense for our shareholders in deals that makes sense for us, in markets that we know where we can really leverage the scale of the company. And we did our largest deal, BioTek, the past quarter. And as you heard earlier, that's off to a really good start. I think we often get the question, well, how large you are willing to go? And the way, Bob and I have described it is, listen, we could go maybe multiples of that. But we are looking to stay in our lane here and not do anything that's magnitude larger than a BioTek. So I am not saying that BioTek is the max level. But probably multiples of that as opposed to something that's of a magnitude size." }, { "speaker": "Bob McMahon", "text": "Yes. And Bill, as you can appreciate, timing there is always very difficult to understand and we are going to remain disciplined. And if there isn't anything out there that would meet our financial criteria, we are not going to do it. We don't need to do M&A to make our model work. But certainly, you see in the first quarter the benefit that we have seen with BioTek and really building scale in cell analysis, which we think has a long term growth opportunity for us, not only in LSAG but across the business." }, { "speaker": "Bill Quirk", "text": "Understood. And then just secondly, I guess kind of a bigger picture question about the pacing of CrossLab. Over the course of the year, we are going to be heading into slightly more difficult comps for the next couple of quarters?" }, { "speaker": "Bob McMahon", "text": "Yes. The beauty of ACG has been it's predictability across the business and we are not expecting any dramatic change in the back half of the year with the possible exception of slightly an elevated ramp in China. But that business that Mark and team have built has been just phenomenal in terms of providing stable high growth and profitable growth over the course of the last several years. And I think that that, quite honestly, is a great legacy to what Mark has been able to accomplish. And not only that, it really speaks to what our customers are looking for in terms of productivity in the labs and so forth. So we would expect that to continue to kind of chug along as we have talked about in the past." }, { "speaker": "Bill Quirk", "text": "Got it. Thank you very much." }, { "speaker": "Mike McMullen", "text": "You are welcome." }, { "speaker": "Ankur Dhingra", "text": "All right. Thanks everyone. With that, we would like to wrap up the call for today. Have a great rest of your day." }, { "speaker": "Operator", "text": "Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect." } ]	Agilent Technologies, Inc.	154,924
A	4	2,021	2021-11-22 16:30:00	Operator: Good afternoon and welcome to the Agilent Technologies Fourth Quarter Earnings Conference Call. My name is Bethany, and I will be the operator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] And now I'd like to introduce you to the host for today's call, Parmeet Ahuja, Vice President of Investor Relations. Sir, please go ahead. Parmeet Ahuja : Thank you, Bethany, and welcome everyone to Agilent's Fourth Quarter Conference Call for Fiscal Year 2021. With me are Mike McMullen, Agilent's president and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob’s comments will be Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release, investor presentation, and information to supplement today's discussion, along with the recording of this webcast are made available on our website at www.investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth, excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of October 31. We will also make forward-looking statements about the financial performance of the Company. These statements are subject to risks and uncertainties and are only valid as of today. The Company assumes no obligation to update them. Please look at the Company's recent SEC filings for a more complete picture of our risks and other factors. And now, I'd like to turn the call over to Mike. Mike McMullen: Thanks, Parmeet, and thanks everyone for joining our call today. The Agilent team delivered another excellent quarter to close out an outstanding, record-setting 2021. At $6.32 billion for fiscal 2021, revenues are almost $1 billion higher than last year. Full year, core growth is up 15% on top of growing 1% last year. The strength is broad-based with our three business units all growing more than 10% core for the year. Our full year operating margins are up 200 basis points. Earnings per share of $4.34 are up 32%. Let’s now take a closer look at our strong finish to 2021 and review Q4 results. Our momentum continues as orders increased faster than revenue in Q4 and at the same time, we delivered our fourth straight quarter of double-digit revenue growth. At $1.66 billion, revenues are up 12% on a reported basis. Our core revenues grew 11%, exceeding our expectations. This is on top of 6% core growth last year. Our Q4 operating margin is 26.5%. This is up 160 basis points from last year. EPS is $1.21, up 23% year-over-year. Our earnings growth also exceeded our expectations. We continue to perform extremely well in pharma, our largest market growing 21%, driven by our biopharma business. Total pharma now represents 36% of our overall revenue. This compares to 31% of our revenues just two years ago. The strong growth in our chemical and energy business continues, as we delivered 11% growth in the quarter. This is on top of growing 3% in Q4 of last year. PMI numbers are positive and we expect that chemical and energy will continue its strong growth trajectory into fiscal 2022. In diagnostics and clinical, revenues grew 11% on top of growing 1% last year, as testing volumes started to recover. On a geographic basis, our results were led by a strong performance in the Americas and China. Our business in the Americas grew 15% on top of 5% last year. China grew 8% core on top of strong 13% growth in Q4 of last year. China order growth outpaced revenue growth for the third quarter in a row. Now, looking at our performance by business unit, the Life Sciences and Applied Markets Group generated revenue of $747 million. LSAG is up 11% on both a reported and a core basis. LSAG’s growth was broad-based and led by strength in liquid chromatography and cell analysis. The pharma and chemical and energy markets were particularly strong for new instrument purchases. Our cell analysis business crossed the $100 million revenue mark in the quarter for the first time. During the quarter, the LSAG team announced a new Ion Mobility LC/Q-TOF and enhancements to our VWorks automation software suite. These new, well-received offerings are used to improve the analysis of proteins and peptides to speed development of new protein-based therapeutics. The Agilent CrossLab Group posted revenue of $572 million. This is up a reported 10% and 9% core. Growth is broad-based driven by strength in service contracts and on-demand services, as well as for chemistries and supplies. Our focus on increasing connect rates continues to pay off for us. The strong expansion of our installed base in 2021 and increasing connect rates bodes well for continued strength in our ACG business moving forward. Our ability to drive growth and leverage our scale produced operating margins of roughly 30%, up more than 200 basis points from the prior year. The Diagnostics and Genomics Group delivered revenue of $341 million, up 16% reported and up 13% core. Our NASD oligo business led the way with robust double-digit growth in the quarter and achieved full-year revenues exceeding $225 million. We expect another year of strong double-digit growth as the team continues to do a great job of increasing throughput with the existing capacity. The additional expansion of our “Train B” oligo manufacturing facility in Frederick, Colorado is proceeding as planned. We expect this additional capacity to come online by the end of calendar year2022. Moving on from our other business group updates, there were several other significant developments for Agilent this quarter. We announced our commitment to achieving net zero greenhouse gas emissions by 2050. We believe our approach delivers the same rigor to sustainability that we apply to everything else we do. We also believe these actions are not only the right thing to do, but fundamental to achieving long-term success. Our sustainability leadership continues to be prominently recognized, as well. You may have seen that Investors’ Business Daily recently named Agilent to its Top 100 ESG Companies list. We are also a company where diversity and inclusion represent a company priority and is a core element of our culture. During the quarter, we achieved recognition by Forbes as one of the World’s Best Employers, and as a Best Workplace for Women. While the Agilent team has a strong track record of delivering above market growth and leading customer satisfaction, we are always looking to do more. To further accelerate growth and strengthen our focus on customers, we are implementing a new One Agilent Commercial organization, combining, for the first-time, all customer-facing activities under one leader. The new organization brings together and strengthens our sales, marketing, digital channel, and services team. The new enterprise-level commercial organization is led by Padraig McDonnell. Padraig will continue to lead the Agilent CrossLab Group as Business Group President, as well as serve as Agilent’s first-ever Chief Commercial Officer. The way I like to characterize this move is to say we are “doubling-down” on the success we’ve achieved with ACG applying a holistic, customer-focused approach to all aspects of our business. We are also moving the Chemistries and Supplies Division to LSAG. This closer organizational alignment between instrument and chemistries development will further accelerate our progress on instrument connect rates for chemistries and consumables. We believe that “structure follows strategy” and that this new organizational structure will further enhance our customer focus and the execution of our growth strategies. Looking ahead to the coming year, we are in a strong position to continue to deliver on our “build and buy” growth strategy. Agilent’s business remains strong. We enter the New Year with a robust backlog and have multiple growth drivers, coupled with the proven execution excellence of the Agilent team. A year ago, during our Agilent Investor Day, we raised our long-term annual growth outlook to the 5% to 7% range, while reaffirming our commitment to annual operating margin improvement and double-digit EPS growth. We are now one year in and well on our way to achieving these long-term goals. Bob will provide more details, but for fiscal 2022 our initial full-year guide calls for core growth in a range of 5.5% to 7%. We expect to continue our top-line growth as we launch market-leading products and services, invest in fast-growing businesses, and deliver outstanding customer service. My confidence in the unstoppable One Agilent team and our ability to execute and deliver remains firmly intact. This is our formula for delivering solid financial results, outstanding shareholder returns and continued strong growth. We are very pleased with our performance in 2021, but not satisfied. As I tell the Agilent team: The best is yet to come, for our customers, our team, and our shareholders. Thank you for being on the call today and I look forward to your questions. I will now hand the call off to Bob. Bob? Bob McMahon: Thanks Mike, and good afternoon everyone. In my remarks today, I will provide some additional details on revenue and take you through the income statement and some other key financial metrics. I’ll then finish up with our initial outlook for the upcoming year and for the first quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike mentioned, we had very strong results in the fourth quarter. Revenue was $1.66 billion, reflecting reported growth of 12%. Before I get into the details, I want to acknowledge our supply chain team, which has been doing a great job managing in a very challenging global environment. Core revenue growth at 11% was a point above our top end guidance range. Currency accounted for 0.8% of growth, while M&A contributed 0.5% of growth during Q4. And as expected, COVID-19 related revenues were roughly flat sequentially and resulted in just over a point headwind to the quarterly core growth. Late in the quarter, we did see transit times that were in certain cases greater than anticipated resulting in some revenues being deferred into Q1. Our results were driven by a continuation of outstanding momentum in pharma, and in biopharma in particular, while chemical and energy and diagnostics and clinical also delivered strong results for us. Our largest market, pharma grew 21% during the quarter against a tough compare of 12% last year. The small molecule segment delivered mid-teens growth, while large molecule grew 31%. Pharma was a standout all year, growing 24% for the full year after growing 6% in 2020. And in FY22, we expect our pharma business to grow in the high-single digits. Chemical and energy continued to show strength, growing 11% with instrument growth in the mid-teens during the quarter. This impressive performance was against a 3% increase last year. The C&E business grew 12% for the year, after declining 3% in 2020. Growth was driven by continued momentum in chemicals and engineered materials and we expect our C&E business to continue to grow solidly next year in the high-single-digits. Diagnostics and clinical grew 11% with all three groups growing nicely during the quarter. While the largest dollar contributor to this market is DGG driven by our pathology-related businesses, the LSAG business continues to penetrate the clinical market and drive growth with strong performances by cell analysis and mass spec. We saw mid-teens growth in the Americas and strong growth in China, albeit off a small base. For the year, the diagnostics and clinical business grew 15% for the year after declining slightly by 1% in 2020. And we expect to continue to grow in the mid- to high-single-digits in 2022. Academia and government, which can be lumpy and represents less than 10% of our business was up 1% in Q4 versus a flat growth last year. Most research labs continue to remain open globally and increase capacity to pre-pandemic levels. China came in at low-single-digits, while the Americas and Europe were roughly flat. For the year, we grew 7% after declining 4% last year. We expect this market will continue to improve slightly in fiscal year 2022 and expect growth of low to mid-single-digits. Food was flat during the quarter against a very tough 16% compare. Europe and the Americas grew while China declined. For the year, food grew 13% after growing 7% in 2020. Looking forward, we expect food to return to historical growth rates in the low-single-digits. And rounding out the markets, environmental and forensics declined 2% in the fourth quarter, off a 5% decline last year, as growth in environmental was overshadowed by a decline in forensics. For the year, we grew 5% off a 2% decline in 2020. And looking forward, like food, we expect environmental and forensics to grow in the low-single-digits in the coming year. For Agilent overall, on a geographic basis, all regions again grew in Q4 led by the Americas at 15%. China grew 8%, and Europe grew 4%. And for the year, Americas led the way with 21% growth, followed by China at 13% and Europe at 12%. Now let’s turn to the rest of the P&L, fourth quarter gross margin was 55.9%, up 90 basis points from a year ago. Gross margin performance, along with continued operating expense leverage, resulted in an operating margin for the fourth quarter of 26.5%, improving 160 basis points over last year. Putting it all together, we delivered EPS of $1.21, up 23% versus last year. And during the quarter, we benefitted from some additional tax savings resulting in a quarterly tax rate of 13% and our full-year tax rate was 14.25%. Our share count was 305 million shares, as expected. And for the year, EPS came in at $4.34, an increase of 32% from 2020. We continued our strong cash flow generation, resulting in $441 million for the quarter, an increase of 17% versus last year. For all of 2021, we generated almost $1.5 billion in operating cash and invested $188 million in capital expenditures. During the quarter, we returned $195 million to our shareholders paying out $59 million in dividends and repurchasing roughly 830,000 shares for $136 million. And for the year, we returned over a $1 billion to shareholders in the forms of dividends and share repurchases. And we ended the year with $1.5 billion in cash and $2.7 billion in outstanding debt and a net leverage ratio of 0.7. All in all, a great end to an outstanding year. Now let’s move on to our outlook for the fiscal 2022. While we are still dealing with the pandemic and we have the additional challenges around logistics and inflationary pressures, we enter the year with strong backlog and momentum. For the full year, we are expecting revenue to range between $6.65 billion and $6.73 billion, representing reported growth of 5% to 6.5% and core growth of 5.5% to 7% consistent with our long range goals. And this incorporates absorbing roughly a half a point headwind associated with COVID-related revenues, with the majority of that impact coming in Q1. We are expecting all three of our businesses to grow, led by DGG. We expect DGG to grow high-single-digits with the continued contribution of NASD and cancer diagnostics. We expect ACG to grow at high-single-digits with both services and our chemistries and supplies businesses growing comparably, while LSAG is expected to grow in mid-single-digits. We expect operating margin expansion of 60 to 80 basis points for the year as we absorb the build out costs of Train B at our Frederick, Colorado NASD site. And in helping you build out your models, we are planning for a tax rate of 14.25%, consistent with current tax policies, and 305 million fully diluted shares outstanding. All this translates to a fiscal 2022 non-GAAP EPS expected to be between $4.76 to $4.86 per share resulting in double-digit growth. And finally, we expect operating cash flow of approximately $1.4 billion to $1.5 billion and capital expenditures of $300 million. This capital investment represents an increase over 2021 as we continue our focus on growth, bringing our NASD Train B expansion online and expanding consumables manufacturing capacity for our cell analysis and genomics businesses. We have also announced raising our dividend by 8% continuing an important streak of dividend increases and providing another source of value to our shareholders. Now, let’s move on to our first quarter guidance, but before I get into the specifics, some additional context. Lunar New Year is February 1st this year, a shift from last year when it was in mid-February. As a result, we expect some Q1 revenue to shift to the second quarter this year as customers shut down ahead of the holiday. In addition, as I mentioned, we do expect to see the largest impact of COVID-related revenue headwinds in the first quarter. We estimate these two factors will impact our base business growth by 2 to 3 points and are roughly equal in impact. For Q1, we are expecting revenue to range from $1.64 billion to $1.66 billion, representing reported and core growth of 5.9% to 7.2%. Adjusting for the timing of Lunar New Year and COVID-related headwinds, core growth would be roughly 8% to 10% in the quarter. First quarter 2022 non-GAAP earnings are expected to be in the range of $1.16 to $1.18. And a couple additional points before opening the call for questions. In conjunction with new One Agilent Commercial organization Mike talked about, we will be reporting under the new structure starting in Q1. In addition, we will be providing a recast of certain LSAG and ACG historical financials to account for the segment changes after the filing of our Annual Report on Form 10-K in December. I am extremely proud of what the Agilent team achieved in 2021 and look forward to another strong performance in 2022. With that, Parmeet, back to you for Q&A. Parmeet Ahuja: Thanks, Bob. Bethany, if you could please provide instructions for the Q&A now? Operator: [Operator Instructions] The first question comes from the line of Vijay Kumar with Evercore. You may proceed. Vijay Kumar: Hey guys. Congrats on a nice print here and thanks for taking my question. Maybe as to my first one on… Mike McMullen: Thanks, Vijay. Vijay Kumar: Mike, maybe my first one on the guidance here. A lot of questions around supply chain inflationary environment. The guide of 5.5% to 7% core growth for fiscal 2022, what is that assuming for pricing versus volume? And does it assume any contribution from interest run? Bob McMahon: Hey, Vijay, this is Bob. I did get the last part of your question, maybe. Yes, so, on the price, we do have built in roughly a point of price into our plan which is slightly higher than what we had this year, Vijay. And in terms of inclusion, we won’t get into individual customer products, but what I would say is NASD is expecting another year of very strong growth. Vijay Kumar: And just on that last point, Bob, and maybe, Mike for you, Mike McMullen: Sure. Vijay Kumar: I think the Analyst Day outlook had NASD ramping up quite meaningfully. Has anything changed on NASD it did capacity ramp up by timing change at all and I am curious on just around on anything changed – your response letter to no orders? Mike McMullen: Not at all. What I would say, the one big change is the business is doing even better than we had communicated at December of last year. So really appreciate the question. As you know, in my – we’ve been talking about the new capacity coming online and that’s still gone right per schedule, in fact, we distributed earlier last week and that’s still to come on online by the end of calendar 2022. But I think the team has just done a fabulous job, which is we are going to be able to grow double-digit in 2022 even without the new capacity, because they are able to continue to drive process improvements of broader book of business and larger batches. So the business is really on fire. I mean we are very, very happy with it. Bob McMahon: Yes. Vijay, if we looked at our order backlog, we are taking orders for 2023 already. Mike McMullen: Yes. I have met Bob the other day, Vijay that a year ago we are talking about could we fill out the factory? Could it ramp and we’ve blown right through that. Vijay Kumar: Yes. That’s fantastic, Mike. And just sorry to clarify post the complete response letter to Nord, there is no change in interest around assumptions for you guys, correct? Mike McMullen: No. No. Vijay Kumar: Fantastic. Thank you, guys. Mike McMullen: You are welcome. Appreciate the feedback. Operator: Thank you, Mr. Kumar. The next question comes from the line of Tycho Peterson with JPMorgan. You may proceed. Mike McMullen: Tycho? Tycho, I think you are on. Operator: Your line is now open. Mike McMullen: Moving to the next in the queue. Operator: Okay. The next question comes from the line – excuse me, of Brandon Couillard with Jefferies. You may proceed. Brandon Couillard : Hi. Thanks. Good afternoon. Mike McMullen: Hey, Brandon. Brandon Couillard : Mike, maybe just – Mike, maybe just starting with the guide for next year. You just kind of talked through some of the variable upside, downside that you considered when building the outlook. I’d be curious what you’ve embedded for China specifically, as well? Mike McMullen: Yes, when I talk about the – what we see is the potential upside in the guide and Bob, maybe you can talk about the – our China assumptions. And by the way, we are – hope we came through, so we are very happy with the momentum we have in China. I think the upside fits with our two largest end-markets, pharma and chemical energy. And as Bob indicated in his script, we are assuming high-singles, I believe, Bob, for the pharma market really coming off just toward growth here in 2021. That high-level growth continues, that would represent upside in our biggest market. And we’ve got a lot of early positive things happened in the pharma side of things. Pharma, let’s say, C&E as well, right, Bob. So we’ve always – I think this is the most bullish language that I’ve had in a call for sometime about the C&E. So you can imagine there has been even some caution about not over plan or too much. But I’d say the two – our two largest end-markets represent the highest – where we think we may have some upside relative to our initial first guide for the year. Bob, can you remind what we had assumed for China? Bob McMahon: Yes, Brandon, it’s a good question on China and we continue to be very positive on China. If we look at our backlog, our order growth rate has increased higher than our revenue for the last three quarters. We exited 2021 with a record backlog going into 2022 for China. And our guidance comprehends high-single-digit growth in China. So, both being led by – from a geographic basis, growth will be led by Americas and China going forward. Brandon Couillard : Okay. And then, Mike, in terms of the new organization structure, why need the COO role now? And then, correct me if I am wrong, are you planning to collapse ACG into the LSAG segment entirely? Mike McMullen: Yes, no, thanks for that clarifying question. So, let me handle the second part of your question first, which is the ACG group will be 100% services in 2022 and then we are moving over the CSD, the chemistry and supplies portion of that business over to Jacob, for two reasons. One is, just the breadth of responsibility that product would have as we had made that change. But we think that’s going to be a driver of growth and I ask Jacob to make a comment on that here in a second, because I think they have these teams even closer together. We are going to be able to even further accelerate our connect rates on instruments for our chemistry products. Why the change? Hey, it’s best to make, when things are going really well, it’s really time to put down the hammer and really go as hard as you can and that’s what we are doing here. So, as you may know, when I first came in as CEO, I had five sales forces. I collapsed those into two. This is next evolution of that overall transformation of the company with this One Agilent culture behind it. The real belief is that the segmentation of our markets really calls for a much more of a customer orientation as opposed to product-centric view of how we want to sell and reach our customers. And you think about the scale as you get with the digital platforms, digital infrastructure, our services organization, this makes sense to do this volume on top of your game. So, all things are going well, we thought it was really time to pit the seller down even further. And Jacob, you wouldn’t mind just to comment to what you are thinking about your new responsibilities? Jacob Thaysen: Yes. Thanks for that, Mike and I am sure that things got with now that you see the consumables product where it is, so we can truly build out end-to-end solutions that will really drive customer expectations and I think Padraig and the team have over the past few years in fact shown that the design end consumables can really drive a tremendous connect rates. So I think that already shown the path forward and now all being completely into LSAG, we can really accelerate that. Brandon Couillard : And, hey, thanks for that Jacob. And then, maybe just to close off this line of response, any thoughts about your additional new responsibilities? Padraig McDonnell: Yes. Thanks, Mike. First of all, really excited about the new role and I think the unified commercial strategy and organization will really continue to strengthen Agilent’s customer focus and help us to align capabilities for the future where we are going to kind of maximize the connect rate and customer lifetime value. And also, I think accelerate execution of our digital ambitions for both delivering near-term growth and strategically invest for the future. So, very excited and already building on what is a great capability in the company. Brandon Couillard : Okay. That’s helpful. Thank you. Mike McMullen: Thanks, Brandon, appreciate the questions. Operator: Thank you, Mr. Couillard. The next question comes from the line of Derik de Bruin with Bank of America. You may proceed. Derik de Bruin : Hi. Good afternoon. Mike McMullen: Hey, Derik. Derik de Bruin : Hey. Just maybe – so, a couple of questions. I guess, can you talk a little bit about the market expansion 68 at this point is and just repeat that out. You got some inflationary pressures. You got some FX. You’ve got some COVID headwinds coming off. Can you just provide what’s the underlying market expansion is just sort of normalizes, you have obviously the capacity coming on car rails. Just how should we think about the margins and just the different pieces? Mike McMullen: Bob, do you want to take that? Bob McMahon: Yes. Yes. Thanks, Derik. It’s a great question. And what we’ve been able to do even in this last quarter in the phase of inflationary pressures is be able to drive pretty significant margin expansion across our businesses. And so, as we think about the 60 to 80 basis points to put kind of as perspective, we are anticipating roughly 15 basis point headwind associated with that train B build up and that’s hiring the people and getting the product coming online and so forth. And so, if we think about that, that’s closer to 75 to close to that 100 basis points. A lot of that’s going to come through SG&A operating leverage and the activities associated with just not growing our business expenses as fast as the top-line. And we are going to be looking to cover some of the inflationary pressures on the top-line with that price that I talked about before which we didn’t really have any significant price in 2021. We have started to see that. We took quick action earlier this year to reflect that and so a combination of it. Most if it being in OpEx leverage, but there will be some small operating leverage at the top-line as well, if you take out the – excuse me, at the gross margin, if you take out the NASD expenses as a result of covering our cost through pricing increases. Derik de Bruin : Thanks. And then just a couple of quick follow-ups. Any evidence of stocking transportation supply chains degree on the consumable side and just an update on ResBio, that looks like it so lagging its largest rotations? Thank you. Mike McMullen: Hey, Derik, a follow-up on those two questions and so, and I have Sam coming on the second question. So, we’ve not seen any real evidence of stocking on the consumables. So, I think that’s pretty interesting, right, Bob? Bob McMahon: That’s great. Mike McMullen: Yes. Yes. And then, what you are going to hear from Sam in a minute he will provide a little bit of color, we remain very, very bullish about the long-term prospects with ResBio and a lot of the work has been done to develop new opportunities with our pharma partners. But we are already on the short-term as well. Sam? Sam Raha: Yes. Hey. Thanks, Mike. In terms of Q4, whereas the revenue came in a little bit below expectations and that’s driven in part by COVID-19 related delays in clinical trial enrollment. Overall, the interest that we are seeing both from our existing customers on the pharma side that we’ve been doing I see work with, as well as new customers that’s very, very real. In fact, we’ve now signed an agreement which is our first with a large existing customer giving evidence to the interest that’s there in terms of the work that we are doing on the PMAs. These are approvals related to existing agreements with our Resolution Bioscience business. We are making good progress on that. And so, lot of the momentum in a number of areas. So, very pleased to have them as part of our business to really bring together the strategy we’ve had which is to be the companion diagnostic development and commercialization partner leveraging multiple modalities including immunohistochemistry and next-generation sequencing. Derik de Bruin : Thanks, Sam. Operator: Thank you, Mr. de Bruin. The next question comes from the line of Tycho Peterson. I do apologize. The next question comes from the line of Dan Leonard with Wells Fargo. You may proceed. Dan Leonard: Hi, good afternoon. Mike McMullen: Good afternoon, Dan. Bob McMahon: Hey, Dan. Dan Leonard: So my first question relates to the 2022 guide. What are some of the factors that might pull performance back down to the mid-single digit range, specifically, something that would start with the five handle? Mike McMullen: Yes. I think, what I would say is, first of all, I think our guidance is prudent given the beginning of the year. If we saw continued, greater than expected disruptions in the supply chain that may impact demand, particularly in some of the applied markets that could do it. Although we haven’t seen that, to be very clear, Dan. We feel very good about where we are given our forecast and backlog. So we are – I would say are, we have bias towards the upside in our forecast as opposed to bias towards the downside. Dan Leonard: Appreciate that. And then, a follow-up on the shift in chemicals and supplies from ACG to LSAG. Is the logic behind the move is to increase the connect rate? Can you remind me where is the connect rate today and where you want it to be over some period of time? Mike McMullen: Yes. It’s a great question and the team continues to do a great job under Padraig’s leadership here to do that both at the purchase and then on the ongoing aftermarket. What I would say is, right now, if you look at the overall attach rate, it’s probably in the mid-20s right now. And if you look at the attach rates year-on-year, we saw very nice growth on the new placements. So, all the new instruments that Jacob and team have been able to sell, that’s why we feel very good about the ACG business going forward. So, we still have a long way to go there in terms of opportunity across both the services as well as the consumables. Some of our competitors are higher than that and so we’ve got aspirations that are well above that mid 20s. And Dan, I just like to make sure this clear, we are not making this change because we were dissatisfied with the improvements in that connect rates. This is icing on top of the cake before that accelerated as we look to balance span of control and business responsibilities with the real driver was the one commercial – creation of the one commercial organization. And I think this is a nice secondary benefit that we are actually going to get, we think even more focus and header alignment between our product development groups on the CSD side and instrument side. Dan Leonard: Helpful clarification, Mike. Thank you. Mike McMullen: You are welcome. Operator: Thank you, Mr. Leonard. The next question comes from the line of Puneet Souda with SVB Leerink. You may proceed. Puneet Souda: Yes. Hi, Mike. Thanks for taking the question. Mike McMullen: Sure, Puneet. Puneet Souda: Bob, thanks. So, first one is on environmental. I mean, you have a leading position there with a number of products across the LSAG product line. Maybe just could you elaborate a bit more for us what’s going on there? Specifically, related to China, the timing in China, is that just Lunar New Year? Is there something more that we need to consider? Mike McMullen: Yes. I think this is – let me start, Bob, you can jump in on this. So, I think when we talk about environmental and forensics, I think it’s a tale of two cities. So, buried in that number is a decline in forensics and I think that’s probably really tied to governments prioritizing other investments in this COVID-19 world. The demand is not there. I think relative to China, it’s been more about priorities. Right now, they are shifting some of their priorities towards the pharma and other COVID-19 related type investments. So, I think that’s probably, I mean… Bob McMahon: Yes, the only thing I would add on that Mike is, there is some shift, but it’s also timing. Mike McMullen: Yes. Yes. Bob McMahon: There are some… Mike McMullen: Something… Bob McMahon: Yes, yes, there is some budget that we’ve seen that has shifted into our fiscal first quarter and into FY 2022 in particular in China. I think long-term, we still see the importance of the environmental testing in China and around the world remains to be seen or is still intact, Puneet. And it’s more a function of timing than anything. Mike McMullen: And thanks for jumping in on that, Bob, because we still are very, very confident about our ability to grow environment builds in China I think it’s well known the government’s real emphasis on continuing to make improvements in the quality of life of citizens. Puneet Souda: Got it. And then, just on the liquid chromatography, just staying on that point, I’d really appreciate your comments on the chemistry columns and consumables now being part of LSAG, but when we look at the business overall today, you obviously have a strong 1200 series offering. We are also seeing pickup from another competitor in the market space that had lost some share over the last few years and there seems like they are gaining some back. But just wondering what you are seeing in the field and in terms of further competition in this side of the market, we’ll appreciate any thoughts. Thank you. Mike McMullen: Yes, hey Jacob. I lead off on here and I mean, I first want to say is the key competitors in the LC market remain unchanged. Nobody new in the market and what I can tell you is that, we are very, very happy with where we are in liquid chromatography. So we are not playing any kind of catch-up game at all here. We delivered high-teens growth in the quarter and exited the year with record backlog and our growth rate in orders were significantly higher than our revenue growth rate. And I think, Jacob, it’s fair to say that the strength is both on the large and small molecule size with the real standout of China geographically. And I think you exited the year, but we see as record backlog. So we are really bullish on our LC business and maybe you want to have some additional comments? Jacob Thaysen : Yes. Thanks, Mike. It’s something to be proud of and I am – I feel really good where we are right now. As you said, we are growing very strongly. As I can see, when I look into the market, we are in a very strong position versus our competition also. And just a reminder, we - a few quarters ago, we did announced that we have expanded our Bio LC portfolio substantially. So we really have the full range of Bio LCs out there. But we also have 2D-LCs and also online LCs to really drive growth in that area. So a Bio LC really came timely with all the investment that goes into large molecules right now. So I truly believe we have momentum and we’ll continue with that over the next period of time. Puneet Souda : Great. Thanks, guys. Mike McMullen : Thanks, Jacob. Operator: Thank you, Mr. Souda. The next question comes from the line of Patrick Donnelly with Citi. You may proceed. Patrick Donnelly : Hey, guys. Thanks for taking the questions. Mike McMullen : Hello, Patrick. Patrick Donnelly : Bob, maybe one for you to start, just on the margin side. I know you talked about 60 to 80 BPS of expansion. It sounds like the NASD facility might be a little bit of a headwind. Can you just talk through the moving pieces there? I know you called out price a little bit, as well. Can you just talk about the levers and how much of an offset the facility is, as we can kind of think about the underlying number as well? Bob McMahon : Yes. So, I would say, maybe on NASD, if I look at it and I break it into two components. If I look at it with the existing capacity, that team not only has driven top-line growth, but if we looked at the margin, it actually is accretive to the overall Agilent margin. So that team has done a fabulous job ramping up. Mike McMullen : It’s accretive, right? Bob McMahon : Accretive, yes, very nicely. And so, we are making the investment on Train B. It’s roughly 15 basis points. That’s inclusive of that 60 to 80. So it’s a roughly $10 million to $15 million of incremental cost associated with the training and investments as the lines come on board. And so, we are seeing that and take that to a side because those are kind of discrete. And if I look at the business, what we are seeing is the faster growing areas. We actually are seeing a benefit of mix. And so, we talked a little bit about cell analysis but also cell analysis in LSAG has been very accretive both on the gross margin, as well as the operating profit side. And so, we’ve got these faster growing businesses that are helping with mix and then we are adding on the incremental price to cover the inflationary pressures that we are seeing and so forth. But we’ve also got productivity measures in place and this is where I think the One Agilent approach to our systems and our infrastructure really pays dividends, because we are able to leverage those costs across a larger base and because a lot of that is internal, we don’t have that same level of pressure on cost as we are seeing in some other areas. And so, it’s a combination of product mix, that price. I talked about 1% price and then leverage in the operating expense side. Patrick Donnelly : That’s helpful. Thanks, Bob. And then, Mike maybe one for you on C&E. I know, in the script, you kind of called out maybe having the most positive tone you’ve had in a little while here on that segment. Obviously the end-market health seems pretty high from the customers. And can you just talk about, I guess, the conversations you’re having there, visibility, again, guiding to high single for next year off a pretty strong 2021 is encouraging. So maybe just your confidence and then again, it sounds like maybe there’s even some upside to that number? Mike McMullen : Yes. Sure, Patrick. So, yes, so we are seeing really good end market demand for and I think Bob highlighted a lot of those like the advanced materials or chemicals. It really speaks to the overall recovery economically on a global basis and the fact that this in particular, this customer base had deferred a lot of investments for some period of time. So, they are in a reinvestment mode and we have pretty good visibility to the funnel. So, I think we probably got at least a six month lead view on what’s coming down on instrument purchases. So, we are feeling really good about the C&E business as well as there is the ACG story here as well of where we are continuing to increase services in this segment, which has historically been more of a self-maintainer kind of market, as well as the chemistries and consumables side. So, I think we’ve got pretty good visibility, given our confidence and be able to put this kind of number out there in a full year guide at this point in time. Bob, anything else you’d add to that? I know we spend a lot of time talking about this. Bob McMahon : No, I think you got it. You said it well. Patrick Donnelly : Great. Thanks, Mike. Bob McMahon : You are quite welcome. Operator: Thank you, Mr. Donnelly. The next question comes from the line of Josh Waldman with Cleveland Research. You may proceed. Josh Waldman : Hi. Thanks for taking my questions. Wanted to start with a quick follow-up on supply chain. Bob McMahon : Sure, sure. Josh Waldman : Yes. Hey, Bob. Wanted to start with a quick follow-up on supply chain. I wondered if you could give us the magnitude of the push-outs you referenced and is this all LSAG? Mike McMullen : Well, I am going to pass it to Bob here in a second, but let me really clear in terms of our language. When I use supply chain, that means material constraints and then we have logistics. I think, of the issues that Bob, the transit times was really logistics issue. In terms of our ability to get product to customers and get the raw materials, we feel pretty good about what’s been going on there so. Bob McMahon : Yes, exactly. So it was more just longer delivery times and Josh, it was in the LSAG business, as you would expect. It was roughly a point in the quarter. Josh Waldman : Okay. And given the transient nature, it sounds like you are assuming this all hits in the first quarter. Is that kind of what’s embedded in your guide? Bob McMahon : We are assuming that it will get better over the course of the first half of next year or first half of the fiscal year. So not all of it will come back in Q1. Josh Waldman : Got it, okay. And then, I wanted to follow-up on your comments within the LC/MS franchise. I believe, in your prepared remarks, you highlighted stronger install rates in this franchise in the fourth quarter. Just wondered if you could provide any additional color on that, maybe what’s driving it? Is it higher or faster kind of accelerated refresh levels at legacy accounts? Or maybe you’re seeing kind of increased win rates at new accounts? Mike McMullen : I am going to – great question. I am going to pass that to our expert on this topic. Jacob, maybe you want to talk about what’s going on in the LC/MS front. Jacob Thaysen: Yes. Certainly, Mike and as you mentioned, we had great success with our new Ion Mobility, 6560C that we launched here at ASMS and we had a fantastic worker and user meeting also that was rally all subscribed. But as you also speak to, we had tremendous traction on our triple core and single cord businesses. And particularly in the biopharma space, we see a lot of smaller accounts also coming live, small mid-sized accounts that are starting to build up their capabilities within the analytical instruments business. So we see a lot of tremendous momentum there. But obviously, also the big accounts that is more in the refresh mode. Mike McMullen : Yes. So, I think part of the story, Josh, is new customers, right, particularly on the biopharma side and also doing very well on the refresh side with existing customers. Josh Waldman : Got it. Yes. Really appreciate it guys. Mike McMullen : You are quite welcome. Operator: Thank you, Mr. Waldman. [Operator Instructions] Our next question comes from the line of Michael Gokay with KeyBanc Capital Markets. Paul Knight : Hey, Mike. It’s Paul Knight. Thanks for the time. Mike McMullen : Hey, Paul. How are you doing? Paul Knight : Good, good. On the Avantor agreement, is there any way you can talk about - does that give you another 5% of addressable market? What are your thoughts around that deal? Mike McMullen : Yes. Hey, thanks for noticing that we had worked with Michael’s team and have a real agreement we are really excited about. And I’m actually going to pass it over to Agilent’s new Commercial Officer to his view on that question. Go ahead, Padraig. Padraig McDonnell : Yes. I think, yes, thanks, Mike. I think we see that it’s a really mutual beneficial arrangement that we are going to see not only different customers, but at different spaces within customers and it also helps with overall the addressable market and coverage. So, the Agilent team and the Avantor team will be able to share leads and so on so we’ll be able to cover the market better. We’ll also be able to use our digital capabilities to be able to find new customers and also increase the wallet share and customer side. So all around, a very positive development. Mike McMullen : And Paul, it’s hard to put an exact percentage on the question. But we wouldn’t be doing it if it was on the margin. Bob McMahon : Yeah. And I was going to say, Paul, this is Bob. Just to add, I mean, we didn’t really see any revenue. That’s all future opportunity for us. And I think one of the areas that Avantor is strong is in the research area, Academia and Government, and this will help us even cover that market even broader than we do today. Mike McMullen : Yes. Absolutely. Paul Knight : Thank you. Operator: Thank you. The next question comes from the line of Dan Brennan with Cowen. You may proceed. Dan Brennan : Hey, Mike. Hey, Bob. How are you guys doing? Mike McMullen : All right, Dan. How about yourself? Dan Brennan : Thank you. Thank you. Doing well, doing well. Maybe first question on NASD, maybe I missed it. Did you guys give a number for 2022, what’s implied? Bob McMahon : We did not, but what we did say is, we would expect strong double-digit growth. I’ll leave it at that. Yes, what I can tell you is we exited at a run rate that was higher than the - if you took our $225 million that we talked about and divided by four, our runrate was higher than that. Mike McMullen : Right. Bob McMahon : So we continue to ramp. Mike McMullen : Yes, thanks for that question. It was hard to explain it in the call narrative. But as Bob mentioned, our Q4 exit rate is higher than the full year number. Dan Brennan : And maybe could you give a little color there. I think, Bob, you mentioned in the prepared remarks or in Q&A that you’re taking in orders to 2023. Could you just give us a sense like what the utilization is today of your capacity that’s available and any color about demand trends book of business things of that nature? Bob McMahon : Yes. In short, we are running 24/7 at both our Frederick facility, as well as our Boulder facility, which was a legacy facility. And we are – I feel very good about our ability to continue to expand capacity. What Brian and team have been able to do is increase both throughput, as well as yield. And so, that’s really helped us drive additional capacity with the existing footprint or the existing manufacturing facility. And the Train B, as we talked about has the opportunity to add more than $100 million of incremental volume coming online starting at the end of this - our fiscal - our calendar 2022. Dan Brennan : Got it. And then, maybe on the One Agilent, Mike, could you just give us, I know, Mike, when you got there, you made some changes to the sales force that have made under your predecessor, now you are going further. So how should we see this manifest from the outside over the next, I don’t know, one to two years? Does this – could this lead to stronger growth? Is it going to lead to more better margins, more durable growth? Just obviously the customers are going to see something, but how will that manifest in reported results, do you think? Mike McMullen : I think it’s a check for each one of the things you listed there. But the number one reason why we are doing is to drive more growth. And it’s just a natural evolution of the transformation in the sales force. I started a number of years ago. And it really points to the fact that we have this broad-based portfolio that’s selling into the same customer base. And why have two separate sales forces and have to go do the coordination between across sales forces, and then the big push that we made over the last several years in terms of digital, this allow us, I believe, to even go faster on realizing our digital ambitions. And then you’ve got the voice of the customer will be right in the CEO’s staff and on Padraig’s table, the Head of the service delivery organization. So, everything relative to the customer facing that we do in this company will be under one leader. We just think it’s going to find ways to accelerate our growth, increase our customer satisfaction, and I think as we push more and more of our business because customers want to buy that way through digital, it will have a natural knock-on effect of efficiency gains in the P&L. Dan Brennan : Great. And then, maybe one more, obviously, balance sheet is in great shape. So, the proverbial question about M&A, just wondering what does the funnel look like? Any update on the strategy? I know you’ve been pretty cognizant of not wanting to go too big here and kind of not disrupt what you built there. But just give us a sense of what the needs are today? And what is the outlook for M&A in 2022? Bob McMahon : Yes. Sure, Dan. So I’ve used - been using this order the last several years of the build and buy growth strategy. So, we are still very interested on the buy element of fueling future growth and for example, in this past year, we did the Res Bio acquisition really got us into liquid biopsy and really allows us to play to our strengths that we already have from our CDx and IHC business. So, we are going to look for continued opportunities such as those where you are in higher growth markets than the total company average, where they can really benefit by being part of Agilent and where they have differentiated technology and differentiated teams. We will stay in our lane, so to speak, on valuations. Let’s - I’d say, the - you know that’s better than I do, perhaps, Dan. The market is still very robust. We are very active. And we just want to make sure that the deal works for our shareholders. But deploying capital for M&A is part of our story going forward and it’s all upgrade. Dan Brennan : Thanks, guys. Excellent. Great. Thank you. Operator: Thank you, Mr. Brennan. The next question comes from the line of Jack Meehan with Nephron Research. You may proceed. Jack Meehan : Thanks. Good afternoon. Hey. I want to dig in a little bit more on Cell Analysis. So, heard cleared $100 million in the quarter. What was the 2021 contribution? And similar to the line of questioning on ASP, what’s the target there for 2022 growth? Bob McMahon : Yes. So, I’ll start with the cell analysis business and I’ll bring in Jacob here, because it has just done a fantastic job and it’s really continued the momentum that we saw at the beginning - throughout 2020. So, it ended just short of $400 million for the full year and it grew in the mid-20s. And I would expect us to looking forward if we think about where the market is headed and the fundamental demand there, that will be growing double-digits for sure going forward. And as I mentioned before, the beauty of that business is, it’s right ingrained with where the research and technologies are going and where a lot of money is being put in. But it’s also an extremely well run and profitable business for us. Mike McMullen : And Jacob, maybe you can give some insights in terms of where are the end-markets you think that are driving - been driving the growth and where we think it’s going to come from in the future? Jacob Thaysen: Yes, thanks for that. It’s a really good question. Obviously it’s something I’d really like talk about. The cell analysis business has been super successful in the past years and our focus on the immuno-oncology space has really paid off. We continue to see opportunities there and we continue to see that our portfolio of being able to measure live cells is required to really drive the research forward. So where we really see the opportunities is, is in the - between biopharma and also the academic markets there, that’s where we see the biggest and the biggest momentum going forward. While we have seen here in the past period of time also that the diagnostic business, particularly with our flow cytometry is picking up good speed, but, I would say, the main opportunity sits in the biopharma space. Mike McMullen : And did you ask a question about NASD? Jack Meehan : No. Mike McMullen : Okay. Jack Meehan : Can you down that line just from the comparison? Mike McMullen : Okay. All right. You are right, Bob. Jack Meehan : My follow-up was going to be, a lot of discussion obviously around driving growth. I was hoping to just get your philosophy on CapEx. So, I think the guidance implies about 4.5% of sales for 2022. That’d be higher than you’ve done in the last few years. Do you expect this is going to remain elevated more kind of in the medium-term? Or is this just kind of some of the near-term opportunities coming through? Bob McMahon : Yes. Jack, that’s a great question and what I would say is, if we look at where our there is different kinds of CapEx, and it’s not all created equal. But the reason that it’s being increased is really to fund that growth and capacity expansion, whether that be Train B and NASD or the capacity expansions in places like genomics and cell analysis and I would say, given our growth trajectory in those areas, I would expect us to continue at probably an elevated level to incorporate that growth. As Mike said, we’ve got this buy and build strategy and that’s part of the build strategy and it has paid off in spades with NASD. And what I would say is, we are not – there is more letters in the alphabet than B. It doesn’t end at B. But what I would say is, there is - we are going to be prudent about it, but also be aggressive about going forward. Jack Meehan : Thank you. Operator: Thank you, Mr. Meehan. The last question is from the line of Catherine Schulte with Baird. You may proceed. Catherine Schulte : Hey, guys. Thanks for the questions. Mike McMullen : Hey, Catherine. Catherine Schulte : First - first on the LSAG guide for mid-single-digits. I think on the last call, you talked about the GC replacement cycle coming back on, maybe being in the midst of an LC replacement cycle on small molecule. And you’ll now have chemistries in there as well. So, should we think about this as being more towards upper-end of that mid-single-digit range for 2022 or was there some sort of catch-up spend in 2021 that maybe is a headwind as we get into 2022? Bob McMahon : Yes. I think you’re spot on, Catherine. It’s the former, not the latter. Think about it as a higher end and that’s where, I would say, if we think about where our opportunities for upside are, are in the instrumentation business and continuing the strong momentum that we’ve seen. Now we are also going up against, I think, a 15% core growth rate year-on-year. But we feel very good about the momentum in that business, particularly in the areas that you just talked about in Chemical and Energy and in Pharma. We continue to believe that the pharma business coming out of COVID is structurally a higher growth market and as we continue to place our focus on the biopharma or the large molecule, if you look at that throughout 2021, that was a much - growing much faster than the overall pharma business. And so, we would expect that - we feel very good about that business going forward. Catherine Schulte : Okay. And then, maybe one more, you had a lot of success on NASD. Do you have any interest in entering other areas as manufacturing components for biopharma, whether it’s GMP reagents or DNA plasmas or other areas? And is that’s something that you might get into in 2022? Mike McMullen : Well, Catherine, we are always looking for new drivers of growth that would make sense for Agilent to be directly involved in. So, nothing to report for 2022. We’ve got a handful of adding different additional letters, if you will to the all that we serve in NASD. But never say never to the thesis of your question. Catherine Schulte : Okay. Great. Thank you. Mike McMullen : Quite welcome. Operator: Thank you, Ms. Schulte. And the last question is from the line of Noah Baron with JPMorgan. You may proceed. Tycho Peterson : Can you guys hear me? Mike McMullen : Yes. Bob McMahon : Hey, Tycho. Tycho Peterson : It’s Tycho. Sorry about the phone issues. Mike McMullen : No problem. No problem at all. Sure. Tycho Peterson : So, Dako, I appreciate the China color. Obviously people are focused on China tenders at the moment. It doesn’t sound like you’re flagging any issues there, specifically for Dako, but can you talk about what you’re kind of seeing on the ground there for China? And then, how big is the CDx business? You mentioned that earlier, Mike, and you obviously had a bunch of press releases during the quarter about new approvals for CDx? Mike McMullen : Yes. So, Sam, I know this is something you’ve been talking to your team about relative specifically about what maybe happened in the China diagnostics market and what’s going on there. So, we think we’ve got a pretty good protective position. But why don’t you elaborate a bit more? Sam Raha : Yes, happy to, Mike. Tycho, thanks for the question. We’ve had another, just overall for our pathology business, the former Dako business, if you will, a really good quarter, including in China. And you may be referring, Tycho, to the buy China requirements that we are all aware of that are happening specifically to our former Dako business, if you will. The relative unique position, particularly with PD-L1 and having a minimal number of local competitors really differentiates us. So, we haven’t felt really pressure from the buy China impacting our business. But we have continued to see really good interest not only in PD-L1 companion diagnostics that brought more broadly speaking in China for our diagnostic products. Mike McMullen : And Sam, if I recall, you’ve got your PD-L1 registered in China, right? Sam Raha : Yes, we do. I mean, we registered that almost exactly two years ago, becoming the first-ever companion diagnostic in China. And it’s doing well for us there in China. We’ve actually now trained over 400 different pathologists throughout China to utilize our companion diagnostics. Mike McMullen : Yes. Hey, and Tycho, maybe just a follow-up, if I looked at our business in China for DGG for the year, it grew in the 30s, and it was actually in excess of that for Q4. So, it had very positive momentum and CDx is roughly $100 million, ex the Res Bio acquisition. Tycho Peterson : Great. And then, on Cell Analysis, Mike, I know one of the priorities you’ve talked about is moving that portfolio downstream. Can you talk about those efforts how actively you’re looking at kind of pushing that into QA/QC and further downstream? Mike McMullen : Yes. So, Jacob, why don’t you follow-up with some thoughts here? Jacob Thaysen: So, Tycho, when you said downstream, can you tell a little more? Tycho Peterson : More in the bioproduction versus R&D, yes. Jacob Thaysen: On the bioprocessing, yes, we see a big opportunity in the bioprocessing space, both for our Cell Analysis business, but also for our Analytical Instrument business. So, I think that’s something we will continue to invest in going forward. Bob McMahon : Yes. I think what we are seeing right now, Tycho, is moving from truly research into the development area. And then, that will then lead into the QA/QC. So, I think you see a multi-step process here and so, as Jacob said, it’s just early days here from that standpoint. And - but making great progress across all three of those kind of sub-businesses and have high hopes for that to continue. Mike McMullen : A similar flow that we’ve seen in pharma for years, right, which is starting in our R&D then works its way into QA/QC. Bob McMahon : Yes. Mike McMullen : And, Tycho, I think we’ve built this great business through a series of acquisitions and the way we integrate into it making one business. And this would be an area of obviously future focus for us on the M&A front, as well. Tycho Peterson : Great. And just one last one on the new Agilent and I know you’ve got a number of questions on the rollouts there. Mike McMullen : Sure. Tycho Peterson : Are there new services you’re introducing in conjunction with that? Are you broadening the service portfolio? Mike McMullen : Not yet, but stay tuned. It’s only just a few weeks old. Tycho Peterson : Fair enough. Alright. Thanks. Mike McMullen : Okay. Thanks a lot, Tycho. Glad you get on the call. Operator: Thank you, Mr. Peterson. There are no additional questions waiting at this time. I would like to pass the conference back to Parmeet Ahuja for any closing remarks. Parmeet Ahuja : Thanks, Bethany, and thanks, everyone. With that, we would like to wrap up the call for today. Have a great rest of your day. Operator: That concludes the Agilent Technologies fourth quarter earnings conference call. I hope you all enjoy the rest of your day. You may now disconnect your lines.	[ { "speaker": "Operator", "text": "Good afternoon and welcome to the Agilent Technologies Fourth Quarter Earnings Conference Call. My name is Bethany, and I will be the operator for today’s call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] And now I'd like to introduce you to the host for today's call, Parmeet Ahuja, Vice President of Investor Relations. Sir, please go ahead." }, { "speaker": "Parmeet Ahuja", "text": "Thank you, Bethany, and welcome everyone to Agilent's Fourth Quarter Conference Call for Fiscal Year 2021. With me are Mike McMullen, Agilent's president and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob’s comments will be Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release, investor presentation, and information to supplement today's discussion, along with the recording of this webcast are made available on our website at www.investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth, excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of October 31. We will also make forward-looking statements about the financial performance of the Company. These statements are subject to risks and uncertainties and are only valid as of today. The Company assumes no obligation to update them. Please look at the Company's recent SEC filings for a more complete picture of our risks and other factors. And now, I'd like to turn the call over to Mike." }, { "speaker": "Mike McMullen", "text": "Thanks, Parmeet, and thanks everyone for joining our call today. The Agilent team delivered another excellent quarter to close out an outstanding, record-setting 2021. At $6.32 billion for fiscal 2021, revenues are almost $1 billion higher than last year. Full year, core growth is up 15% on top of growing 1% last year. The strength is broad-based with our three business units all growing more than 10% core for the year. Our full year operating margins are up 200 basis points. Earnings per share of $4.34 are up 32%. Let’s now take a closer look at our strong finish to 2021 and review Q4 results. Our momentum continues as orders increased faster than revenue in Q4 and at the same time, we delivered our fourth straight quarter of double-digit revenue growth. At $1.66 billion, revenues are up 12% on a reported basis. Our core revenues grew 11%, exceeding our expectations. This is on top of 6% core growth last year. Our Q4 operating margin is 26.5%. This is up 160 basis points from last year. EPS is $1.21, up 23% year-over-year. Our earnings growth also exceeded our expectations. We continue to perform extremely well in pharma, our largest market growing 21%, driven by our biopharma business. Total pharma now represents 36% of our overall revenue. This compares to 31% of our revenues just two years ago. The strong growth in our chemical and energy business continues, as we delivered 11% growth in the quarter. This is on top of growing 3% in Q4 of last year. PMI numbers are positive and we expect that chemical and energy will continue its strong growth trajectory into fiscal 2022. In diagnostics and clinical, revenues grew 11% on top of growing 1% last year, as testing volumes started to recover. On a geographic basis, our results were led by a strong performance in the Americas and China. Our business in the Americas grew 15% on top of 5% last year. China grew 8% core on top of strong 13% growth in Q4 of last year. China order growth outpaced revenue growth for the third quarter in a row. Now, looking at our performance by business unit, the Life Sciences and Applied Markets Group generated revenue of $747 million. LSAG is up 11% on both a reported and a core basis. LSAG’s growth was broad-based and led by strength in liquid chromatography and cell analysis. The pharma and chemical and energy markets were particularly strong for new instrument purchases. Our cell analysis business crossed the $100 million revenue mark in the quarter for the first time. During the quarter, the LSAG team announced a new Ion Mobility LC/Q-TOF and enhancements to our VWorks automation software suite. These new, well-received offerings are used to improve the analysis of proteins and peptides to speed development of new protein-based therapeutics. The Agilent CrossLab Group posted revenue of $572 million. This is up a reported 10% and 9% core. Growth is broad-based driven by strength in service contracts and on-demand services, as well as for chemistries and supplies. Our focus on increasing connect rates continues to pay off for us. The strong expansion of our installed base in 2021 and increasing connect rates bodes well for continued strength in our ACG business moving forward. Our ability to drive growth and leverage our scale produced operating margins of roughly 30%, up more than 200 basis points from the prior year. The Diagnostics and Genomics Group delivered revenue of $341 million, up 16% reported and up 13% core. Our NASD oligo business led the way with robust double-digit growth in the quarter and achieved full-year revenues exceeding $225 million. We expect another year of strong double-digit growth as the team continues to do a great job of increasing throughput with the existing capacity. The additional expansion of our “Train B” oligo manufacturing facility in Frederick, Colorado is proceeding as planned. We expect this additional capacity to come online by the end of calendar year2022. Moving on from our other business group updates, there were several other significant developments for Agilent this quarter. We announced our commitment to achieving net zero greenhouse gas emissions by 2050. We believe our approach delivers the same rigor to sustainability that we apply to everything else we do. We also believe these actions are not only the right thing to do, but fundamental to achieving long-term success. Our sustainability leadership continues to be prominently recognized, as well. You may have seen that Investors’ Business Daily recently named Agilent to its Top 100 ESG Companies list. We are also a company where diversity and inclusion represent a company priority and is a core element of our culture. During the quarter, we achieved recognition by Forbes as one of the World’s Best Employers, and as a Best Workplace for Women. While the Agilent team has a strong track record of delivering above market growth and leading customer satisfaction, we are always looking to do more. To further accelerate growth and strengthen our focus on customers, we are implementing a new One Agilent Commercial organization, combining, for the first-time, all customer-facing activities under one leader. The new organization brings together and strengthens our sales, marketing, digital channel, and services team. The new enterprise-level commercial organization is led by Padraig McDonnell. Padraig will continue to lead the Agilent CrossLab Group as Business Group President, as well as serve as Agilent’s first-ever Chief Commercial Officer. The way I like to characterize this move is to say we are “doubling-down” on the success we’ve achieved with ACG applying a holistic, customer-focused approach to all aspects of our business. We are also moving the Chemistries and Supplies Division to LSAG. This closer organizational alignment between instrument and chemistries development will further accelerate our progress on instrument connect rates for chemistries and consumables. We believe that “structure follows strategy” and that this new organizational structure will further enhance our customer focus and the execution of our growth strategies. Looking ahead to the coming year, we are in a strong position to continue to deliver on our “build and buy” growth strategy. Agilent’s business remains strong. We enter the New Year with a robust backlog and have multiple growth drivers, coupled with the proven execution excellence of the Agilent team. A year ago, during our Agilent Investor Day, we raised our long-term annual growth outlook to the 5% to 7% range, while reaffirming our commitment to annual operating margin improvement and double-digit EPS growth. We are now one year in and well on our way to achieving these long-term goals. Bob will provide more details, but for fiscal 2022 our initial full-year guide calls for core growth in a range of 5.5% to 7%. We expect to continue our top-line growth as we launch market-leading products and services, invest in fast-growing businesses, and deliver outstanding customer service. My confidence in the unstoppable One Agilent team and our ability to execute and deliver remains firmly intact. This is our formula for delivering solid financial results, outstanding shareholder returns and continued strong growth. We are very pleased with our performance in 2021, but not satisfied. As I tell the Agilent team: The best is yet to come, for our customers, our team, and our shareholders. Thank you for being on the call today and I look forward to your questions. I will now hand the call off to Bob. Bob?" }, { "speaker": "Bob McMahon", "text": "Thanks Mike, and good afternoon everyone. In my remarks today, I will provide some additional details on revenue and take you through the income statement and some other key financial metrics. I’ll then finish up with our initial outlook for the upcoming year and for the first quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike mentioned, we had very strong results in the fourth quarter. Revenue was $1.66 billion, reflecting reported growth of 12%. Before I get into the details, I want to acknowledge our supply chain team, which has been doing a great job managing in a very challenging global environment. Core revenue growth at 11% was a point above our top end guidance range. Currency accounted for 0.8% of growth, while M&A contributed 0.5% of growth during Q4. And as expected, COVID-19 related revenues were roughly flat sequentially and resulted in just over a point headwind to the quarterly core growth. Late in the quarter, we did see transit times that were in certain cases greater than anticipated resulting in some revenues being deferred into Q1. Our results were driven by a continuation of outstanding momentum in pharma, and in biopharma in particular, while chemical and energy and diagnostics and clinical also delivered strong results for us. Our largest market, pharma grew 21% during the quarter against a tough compare of 12% last year. The small molecule segment delivered mid-teens growth, while large molecule grew 31%. Pharma was a standout all year, growing 24% for the full year after growing 6% in 2020. And in FY22, we expect our pharma business to grow in the high-single digits. Chemical and energy continued to show strength, growing 11% with instrument growth in the mid-teens during the quarter. This impressive performance was against a 3% increase last year. The C&E business grew 12% for the year, after declining 3% in 2020. Growth was driven by continued momentum in chemicals and engineered materials and we expect our C&E business to continue to grow solidly next year in the high-single-digits. Diagnostics and clinical grew 11% with all three groups growing nicely during the quarter. While the largest dollar contributor to this market is DGG driven by our pathology-related businesses, the LSAG business continues to penetrate the clinical market and drive growth with strong performances by cell analysis and mass spec. We saw mid-teens growth in the Americas and strong growth in China, albeit off a small base. For the year, the diagnostics and clinical business grew 15% for the year after declining slightly by 1% in 2020. And we expect to continue to grow in the mid- to high-single-digits in 2022. Academia and government, which can be lumpy and represents less than 10% of our business was up 1% in Q4 versus a flat growth last year. Most research labs continue to remain open globally and increase capacity to pre-pandemic levels. China came in at low-single-digits, while the Americas and Europe were roughly flat. For the year, we grew 7% after declining 4% last year. We expect this market will continue to improve slightly in fiscal year 2022 and expect growth of low to mid-single-digits. Food was flat during the quarter against a very tough 16% compare. Europe and the Americas grew while China declined. For the year, food grew 13% after growing 7% in 2020. Looking forward, we expect food to return to historical growth rates in the low-single-digits. And rounding out the markets, environmental and forensics declined 2% in the fourth quarter, off a 5% decline last year, as growth in environmental was overshadowed by a decline in forensics. For the year, we grew 5% off a 2% decline in 2020. And looking forward, like food, we expect environmental and forensics to grow in the low-single-digits in the coming year. For Agilent overall, on a geographic basis, all regions again grew in Q4 led by the Americas at 15%. China grew 8%, and Europe grew 4%. And for the year, Americas led the way with 21% growth, followed by China at 13% and Europe at 12%. Now let’s turn to the rest of the P&L, fourth quarter gross margin was 55.9%, up 90 basis points from a year ago. Gross margin performance, along with continued operating expense leverage, resulted in an operating margin for the fourth quarter of 26.5%, improving 160 basis points over last year. Putting it all together, we delivered EPS of $1.21, up 23% versus last year. And during the quarter, we benefitted from some additional tax savings resulting in a quarterly tax rate of 13% and our full-year tax rate was 14.25%. Our share count was 305 million shares, as expected. And for the year, EPS came in at $4.34, an increase of 32% from 2020. We continued our strong cash flow generation, resulting in $441 million for the quarter, an increase of 17% versus last year. For all of 2021, we generated almost $1.5 billion in operating cash and invested $188 million in capital expenditures. During the quarter, we returned $195 million to our shareholders paying out $59 million in dividends and repurchasing roughly 830,000 shares for $136 million. And for the year, we returned over a $1 billion to shareholders in the forms of dividends and share repurchases. And we ended the year with $1.5 billion in cash and $2.7 billion in outstanding debt and a net leverage ratio of 0.7. All in all, a great end to an outstanding year. Now let’s move on to our outlook for the fiscal 2022. While we are still dealing with the pandemic and we have the additional challenges around logistics and inflationary pressures, we enter the year with strong backlog and momentum. For the full year, we are expecting revenue to range between $6.65 billion and $6.73 billion, representing reported growth of 5% to 6.5% and core growth of 5.5% to 7% consistent with our long range goals. And this incorporates absorbing roughly a half a point headwind associated with COVID-related revenues, with the majority of that impact coming in Q1. We are expecting all three of our businesses to grow, led by DGG. We expect DGG to grow high-single-digits with the continued contribution of NASD and cancer diagnostics. We expect ACG to grow at high-single-digits with both services and our chemistries and supplies businesses growing comparably, while LSAG is expected to grow in mid-single-digits. We expect operating margin expansion of 60 to 80 basis points for the year as we absorb the build out costs of Train B at our Frederick, Colorado NASD site. And in helping you build out your models, we are planning for a tax rate of 14.25%, consistent with current tax policies, and 305 million fully diluted shares outstanding. All this translates to a fiscal 2022 non-GAAP EPS expected to be between $4.76 to $4.86 per share resulting in double-digit growth. And finally, we expect operating cash flow of approximately $1.4 billion to $1.5 billion and capital expenditures of $300 million. This capital investment represents an increase over 2021 as we continue our focus on growth, bringing our NASD Train B expansion online and expanding consumables manufacturing capacity for our cell analysis and genomics businesses. We have also announced raising our dividend by 8% continuing an important streak of dividend increases and providing another source of value to our shareholders. Now, let’s move on to our first quarter guidance, but before I get into the specifics, some additional context. Lunar New Year is February 1st this year, a shift from last year when it was in mid-February. As a result, we expect some Q1 revenue to shift to the second quarter this year as customers shut down ahead of the holiday. In addition, as I mentioned, we do expect to see the largest impact of COVID-related revenue headwinds in the first quarter. We estimate these two factors will impact our base business growth by 2 to 3 points and are roughly equal in impact. For Q1, we are expecting revenue to range from $1.64 billion to $1.66 billion, representing reported and core growth of 5.9% to 7.2%. Adjusting for the timing of Lunar New Year and COVID-related headwinds, core growth would be roughly 8% to 10% in the quarter. First quarter 2022 non-GAAP earnings are expected to be in the range of $1.16 to $1.18. And a couple additional points before opening the call for questions. In conjunction with new One Agilent Commercial organization Mike talked about, we will be reporting under the new structure starting in Q1. In addition, we will be providing a recast of certain LSAG and ACG historical financials to account for the segment changes after the filing of our Annual Report on Form 10-K in December. I am extremely proud of what the Agilent team achieved in 2021 and look forward to another strong performance in 2022. With that, Parmeet, back to you for Q&A." }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Bob. Bethany, if you could please provide instructions for the Q&A now?" }, { "speaker": "Operator", "text": "[Operator Instructions] The first question comes from the line of Vijay Kumar with Evercore. You may proceed." }, { "speaker": "Vijay Kumar", "text": "Hey guys. Congrats on a nice print here and thanks for taking my question. Maybe as to my first one on…" }, { "speaker": "Mike McMullen", "text": "Thanks, Vijay." }, { "speaker": "Vijay Kumar", "text": "Mike, maybe my first one on the guidance here. A lot of questions around supply chain inflationary environment. The guide of 5.5% to 7% core growth for fiscal 2022, what is that assuming for pricing versus volume? And does it assume any contribution from interest run?" }, { "speaker": "Bob McMahon", "text": "Hey, Vijay, this is Bob. I did get the last part of your question, maybe. Yes, so, on the price, we do have built in roughly a point of price into our plan which is slightly higher than what we had this year, Vijay. And in terms of inclusion, we won’t get into individual customer products, but what I would say is NASD is expecting another year of very strong growth." }, { "speaker": "Vijay Kumar", "text": "And just on that last point, Bob, and maybe, Mike for you," }, { "speaker": "Mike McMullen", "text": "Sure." }, { "speaker": "Vijay Kumar", "text": "I think the Analyst Day outlook had NASD ramping up quite meaningfully. Has anything changed on NASD it did capacity ramp up by timing change at all and I am curious on just around on anything changed – your response letter to no orders?" }, { "speaker": "Mike McMullen", "text": "Not at all. What I would say, the one big change is the business is doing even better than we had communicated at December of last year. So really appreciate the question. As you know, in my – we’ve been talking about the new capacity coming online and that’s still gone right per schedule, in fact, we distributed earlier last week and that’s still to come on online by the end of calendar 2022. But I think the team has just done a fabulous job, which is we are going to be able to grow double-digit in 2022 even without the new capacity, because they are able to continue to drive process improvements of broader book of business and larger batches. So the business is really on fire. I mean we are very, very happy with it." }, { "speaker": "Bob McMahon", "text": "Yes. Vijay, if we looked at our order backlog, we are taking orders for 2023 already." }, { "speaker": "Mike McMullen", "text": "Yes. I have met Bob the other day, Vijay that a year ago we are talking about could we fill out the factory? Could it ramp and we’ve blown right through that." }, { "speaker": "Vijay Kumar", "text": "Yes. That’s fantastic, Mike. And just sorry to clarify post the complete response letter to Nord, there is no change in interest around assumptions for you guys, correct?" }, { "speaker": "Mike McMullen", "text": "No. No." }, { "speaker": "Vijay Kumar", "text": "Fantastic. Thank you, guys." }, { "speaker": "Mike McMullen", "text": "You are welcome. Appreciate the feedback." }, { "speaker": "Operator", "text": "Thank you, Mr. Kumar. The next question comes from the line of Tycho Peterson with JPMorgan. You may proceed." }, { "speaker": "Mike McMullen", "text": "Tycho? Tycho, I think you are on." }, { "speaker": "Operator", "text": "Your line is now open." }, { "speaker": "Mike McMullen", "text": "Moving to the next in the queue." }, { "speaker": "Operator", "text": "Okay. The next question comes from the line – excuse me, of Brandon Couillard with Jefferies. You may proceed." }, { "speaker": "Brandon Couillard", "text": "Hi. Thanks. Good afternoon." }, { "speaker": "Mike McMullen", "text": "Hey, Brandon." }, { "speaker": "Brandon Couillard", "text": "Mike, maybe just – Mike, maybe just starting with the guide for next year. You just kind of talked through some of the variable upside, downside that you considered when building the outlook. I’d be curious what you’ve embedded for China specifically, as well?" }, { "speaker": "Mike McMullen", "text": "Yes, when I talk about the – what we see is the potential upside in the guide and Bob, maybe you can talk about the – our China assumptions. And by the way, we are – hope we came through, so we are very happy with the momentum we have in China. I think the upside fits with our two largest end-markets, pharma and chemical energy. And as Bob indicated in his script, we are assuming high-singles, I believe, Bob, for the pharma market really coming off just toward growth here in 2021. That high-level growth continues, that would represent upside in our biggest market. And we’ve got a lot of early positive things happened in the pharma side of things. Pharma, let’s say, C&E as well, right, Bob. So we’ve always – I think this is the most bullish language that I’ve had in a call for sometime about the C&E. So you can imagine there has been even some caution about not over plan or too much. But I’d say the two – our two largest end-markets represent the highest – where we think we may have some upside relative to our initial first guide for the year. Bob, can you remind what we had assumed for China?" }, { "speaker": "Bob McMahon", "text": "Yes, Brandon, it’s a good question on China and we continue to be very positive on China. If we look at our backlog, our order growth rate has increased higher than our revenue for the last three quarters. We exited 2021 with a record backlog going into 2022 for China. And our guidance comprehends high-single-digit growth in China. So, both being led by – from a geographic basis, growth will be led by Americas and China going forward." }, { "speaker": "Brandon Couillard", "text": "Okay. And then, Mike, in terms of the new organization structure, why need the COO role now? And then, correct me if I am wrong, are you planning to collapse ACG into the LSAG segment entirely?" }, { "speaker": "Mike McMullen", "text": "Yes, no, thanks for that clarifying question. So, let me handle the second part of your question first, which is the ACG group will be 100% services in 2022 and then we are moving over the CSD, the chemistry and supplies portion of that business over to Jacob, for two reasons. One is, just the breadth of responsibility that product would have as we had made that change. But we think that’s going to be a driver of growth and I ask Jacob to make a comment on that here in a second, because I think they have these teams even closer together. We are going to be able to even further accelerate our connect rates on instruments for our chemistry products. Why the change? Hey, it’s best to make, when things are going really well, it’s really time to put down the hammer and really go as hard as you can and that’s what we are doing here. So, as you may know, when I first came in as CEO, I had five sales forces. I collapsed those into two. This is next evolution of that overall transformation of the company with this One Agilent culture behind it. The real belief is that the segmentation of our markets really calls for a much more of a customer orientation as opposed to product-centric view of how we want to sell and reach our customers. And you think about the scale as you get with the digital platforms, digital infrastructure, our services organization, this makes sense to do this volume on top of your game. So, all things are going well, we thought it was really time to pit the seller down even further. And Jacob, you wouldn’t mind just to comment to what you are thinking about your new responsibilities?" }, { "speaker": "Jacob Thaysen", "text": "Yes. Thanks for that, Mike and I am sure that things got with now that you see the consumables product where it is, so we can truly build out end-to-end solutions that will really drive customer expectations and I think Padraig and the team have over the past few years in fact shown that the design end consumables can really drive a tremendous connect rates. So I think that already shown the path forward and now all being completely into LSAG, we can really accelerate that." }, { "speaker": "Brandon Couillard", "text": "And, hey, thanks for that Jacob. And then, maybe just to close off this line of response, any thoughts about your additional new responsibilities?" }, { "speaker": "Padraig McDonnell", "text": "Yes. Thanks, Mike. First of all, really excited about the new role and I think the unified commercial strategy and organization will really continue to strengthen Agilent’s customer focus and help us to align capabilities for the future where we are going to kind of maximize the connect rate and customer lifetime value. And also, I think accelerate execution of our digital ambitions for both delivering near-term growth and strategically invest for the future. So, very excited and already building on what is a great capability in the company." }, { "speaker": "Brandon Couillard", "text": "Okay. That’s helpful. Thank you." }, { "speaker": "Mike McMullen", "text": "Thanks, Brandon, appreciate the questions." }, { "speaker": "Operator", "text": "Thank you, Mr. Couillard. The next question comes from the line of Derik de Bruin with Bank of America. You may proceed." }, { "speaker": "Derik de Bruin", "text": "Hi. Good afternoon." }, { "speaker": "Mike McMullen", "text": "Hey, Derik." }, { "speaker": "Derik de Bruin", "text": "Hey. Just maybe – so, a couple of questions. I guess, can you talk a little bit about the market expansion 68 at this point is and just repeat that out. You got some inflationary pressures. You got some FX. You’ve got some COVID headwinds coming off. Can you just provide what’s the underlying market expansion is just sort of normalizes, you have obviously the capacity coming on car rails. Just how should we think about the margins and just the different pieces?" }, { "speaker": "Mike McMullen", "text": "Bob, do you want to take that?" }, { "speaker": "Bob McMahon", "text": "Yes. Yes. Thanks, Derik. It’s a great question. And what we’ve been able to do even in this last quarter in the phase of inflationary pressures is be able to drive pretty significant margin expansion across our businesses. And so, as we think about the 60 to 80 basis points to put kind of as perspective, we are anticipating roughly 15 basis point headwind associated with that train B build up and that’s hiring the people and getting the product coming online and so forth. And so, if we think about that, that’s closer to 75 to close to that 100 basis points. A lot of that’s going to come through SG&A operating leverage and the activities associated with just not growing our business expenses as fast as the top-line. And we are going to be looking to cover some of the inflationary pressures on the top-line with that price that I talked about before which we didn’t really have any significant price in 2021. We have started to see that. We took quick action earlier this year to reflect that and so a combination of it. Most if it being in OpEx leverage, but there will be some small operating leverage at the top-line as well, if you take out the – excuse me, at the gross margin, if you take out the NASD expenses as a result of covering our cost through pricing increases." }, { "speaker": "Derik de Bruin", "text": "Thanks. And then just a couple of quick follow-ups. Any evidence of stocking transportation supply chains degree on the consumable side and just an update on ResBio, that looks like it so lagging its largest rotations? Thank you." }, { "speaker": "Mike McMullen", "text": "Hey, Derik, a follow-up on those two questions and so, and I have Sam coming on the second question. So, we’ve not seen any real evidence of stocking on the consumables. So, I think that’s pretty interesting, right, Bob?" }, { "speaker": "Bob McMahon", "text": "That’s great." }, { "speaker": "Mike McMullen", "text": "Yes. Yes. And then, what you are going to hear from Sam in a minute he will provide a little bit of color, we remain very, very bullish about the long-term prospects with ResBio and a lot of the work has been done to develop new opportunities with our pharma partners. But we are already on the short-term as well. Sam?" }, { "speaker": "Sam Raha", "text": "Yes. Hey. Thanks, Mike. In terms of Q4, whereas the revenue came in a little bit below expectations and that’s driven in part by COVID-19 related delays in clinical trial enrollment. Overall, the interest that we are seeing both from our existing customers on the pharma side that we’ve been doing I see work with, as well as new customers that’s very, very real. In fact, we’ve now signed an agreement which is our first with a large existing customer giving evidence to the interest that’s there in terms of the work that we are doing on the PMAs. These are approvals related to existing agreements with our Resolution Bioscience business. We are making good progress on that. And so, lot of the momentum in a number of areas. So, very pleased to have them as part of our business to really bring together the strategy we’ve had which is to be the companion diagnostic development and commercialization partner leveraging multiple modalities including immunohistochemistry and next-generation sequencing." }, { "speaker": "Derik de Bruin", "text": "Thanks, Sam." }, { "speaker": "Operator", "text": "Thank you, Mr. de Bruin. The next question comes from the line of Tycho Peterson. I do apologize. The next question comes from the line of Dan Leonard with Wells Fargo. You may proceed." }, { "speaker": "Dan Leonard", "text": "Hi, good afternoon." }, { "speaker": "Mike McMullen", "text": "Good afternoon, Dan." }, { "speaker": "Bob McMahon", "text": "Hey, Dan." }, { "speaker": "Dan Leonard", "text": "So my first question relates to the 2022 guide. What are some of the factors that might pull performance back down to the mid-single digit range, specifically, something that would start with the five handle?" }, { "speaker": "Mike McMullen", "text": "Yes. I think, what I would say is, first of all, I think our guidance is prudent given the beginning of the year. If we saw continued, greater than expected disruptions in the supply chain that may impact demand, particularly in some of the applied markets that could do it. Although we haven’t seen that, to be very clear, Dan. We feel very good about where we are given our forecast and backlog. So we are – I would say are, we have bias towards the upside in our forecast as opposed to bias towards the downside." }, { "speaker": "Dan Leonard", "text": "Appreciate that. And then, a follow-up on the shift in chemicals and supplies from ACG to LSAG. Is the logic behind the move is to increase the connect rate? Can you remind me where is the connect rate today and where you want it to be over some period of time?" }, { "speaker": "Mike McMullen", "text": "Yes. It’s a great question and the team continues to do a great job under Padraig’s leadership here to do that both at the purchase and then on the ongoing aftermarket. What I would say is, right now, if you look at the overall attach rate, it’s probably in the mid-20s right now. And if you look at the attach rates year-on-year, we saw very nice growth on the new placements. So, all the new instruments that Jacob and team have been able to sell, that’s why we feel very good about the ACG business going forward. So, we still have a long way to go there in terms of opportunity across both the services as well as the consumables. Some of our competitors are higher than that and so we’ve got aspirations that are well above that mid 20s. And Dan, I just like to make sure this clear, we are not making this change because we were dissatisfied with the improvements in that connect rates. This is icing on top of the cake before that accelerated as we look to balance span of control and business responsibilities with the real driver was the one commercial – creation of the one commercial organization. And I think this is a nice secondary benefit that we are actually going to get, we think even more focus and header alignment between our product development groups on the CSD side and instrument side." }, { "speaker": "Dan Leonard", "text": "Helpful clarification, Mike. Thank you." }, { "speaker": "Mike McMullen", "text": "You are welcome." }, { "speaker": "Operator", "text": "Thank you, Mr. Leonard. The next question comes from the line of Puneet Souda with SVB Leerink. You may proceed." }, { "speaker": "Puneet Souda", "text": "Yes. Hi, Mike. Thanks for taking the question." }, { "speaker": "Mike McMullen", "text": "Sure, Puneet." }, { "speaker": "Puneet Souda", "text": "Bob, thanks. So, first one is on environmental. I mean, you have a leading position there with a number of products across the LSAG product line. Maybe just could you elaborate a bit more for us what’s going on there? Specifically, related to China, the timing in China, is that just Lunar New Year? Is there something more that we need to consider?" }, { "speaker": "Mike McMullen", "text": "Yes. I think this is – let me start, Bob, you can jump in on this. So, I think when we talk about environmental and forensics, I think it’s a tale of two cities. So, buried in that number is a decline in forensics and I think that’s probably really tied to governments prioritizing other investments in this COVID-19 world. The demand is not there. I think relative to China, it’s been more about priorities. Right now, they are shifting some of their priorities towards the pharma and other COVID-19 related type investments. So, I think that’s probably, I mean…" }, { "speaker": "Bob McMahon", "text": "Yes, the only thing I would add on that Mike is, there is some shift, but it’s also timing." }, { "speaker": "Mike McMullen", "text": "Yes. Yes." }, { "speaker": "Bob McMahon", "text": "There are some…" }, { "speaker": "Mike McMullen", "text": "Something…" }, { "speaker": "Bob McMahon", "text": "Yes, yes, there is some budget that we’ve seen that has shifted into our fiscal first quarter and into FY 2022 in particular in China. I think long-term, we still see the importance of the environmental testing in China and around the world remains to be seen or is still intact, Puneet. And it’s more a function of timing than anything." }, { "speaker": "Mike McMullen", "text": "And thanks for jumping in on that, Bob, because we still are very, very confident about our ability to grow environment builds in China I think it’s well known the government’s real emphasis on continuing to make improvements in the quality of life of citizens." }, { "speaker": "Puneet Souda", "text": "Got it. And then, just on the liquid chromatography, just staying on that point, I’d really appreciate your comments on the chemistry columns and consumables now being part of LSAG, but when we look at the business overall today, you obviously have a strong 1200 series offering. We are also seeing pickup from another competitor in the market space that had lost some share over the last few years and there seems like they are gaining some back. But just wondering what you are seeing in the field and in terms of further competition in this side of the market, we’ll appreciate any thoughts. Thank you." }, { "speaker": "Mike McMullen", "text": "Yes, hey Jacob. I lead off on here and I mean, I first want to say is the key competitors in the LC market remain unchanged. Nobody new in the market and what I can tell you is that, we are very, very happy with where we are in liquid chromatography. So we are not playing any kind of catch-up game at all here. We delivered high-teens growth in the quarter and exited the year with record backlog and our growth rate in orders were significantly higher than our revenue growth rate. And I think, Jacob, it’s fair to say that the strength is both on the large and small molecule size with the real standout of China geographically. And I think you exited the year, but we see as record backlog. So we are really bullish on our LC business and maybe you want to have some additional comments?" }, { "speaker": "Jacob Thaysen", "text": "Yes. Thanks, Mike. It’s something to be proud of and I am – I feel really good where we are right now. As you said, we are growing very strongly. As I can see, when I look into the market, we are in a very strong position versus our competition also. And just a reminder, we - a few quarters ago, we did announced that we have expanded our Bio LC portfolio substantially. So we really have the full range of Bio LCs out there. But we also have 2D-LCs and also online LCs to really drive growth in that area. So a Bio LC really came timely with all the investment that goes into large molecules right now. So I truly believe we have momentum and we’ll continue with that over the next period of time." }, { "speaker": "Puneet Souda", "text": "Great. Thanks, guys." }, { "speaker": "Mike McMullen", "text": "Thanks, Jacob." }, { "speaker": "Operator", "text": "Thank you, Mr. Souda. The next question comes from the line of Patrick Donnelly with Citi. You may proceed." }, { "speaker": "Patrick Donnelly", "text": "Hey, guys. Thanks for taking the questions." }, { "speaker": "Mike McMullen", "text": "Hello, Patrick." }, { "speaker": "Patrick Donnelly", "text": "Bob, maybe one for you to start, just on the margin side. I know you talked about 60 to 80 BPS of expansion. It sounds like the NASD facility might be a little bit of a headwind. Can you just talk through the moving pieces there? I know you called out price a little bit, as well. Can you just talk about the levers and how much of an offset the facility is, as we can kind of think about the underlying number as well?" }, { "speaker": "Bob McMahon", "text": "Yes. So, I would say, maybe on NASD, if I look at it and I break it into two components. If I look at it with the existing capacity, that team not only has driven top-line growth, but if we looked at the margin, it actually is accretive to the overall Agilent margin. So that team has done a fabulous job ramping up." }, { "speaker": "Mike McMullen", "text": "It’s accretive, right?" }, { "speaker": "Bob McMahon", "text": "Accretive, yes, very nicely. And so, we are making the investment on Train B. It’s roughly 15 basis points. That’s inclusive of that 60 to 80. So it’s a roughly $10 million to $15 million of incremental cost associated with the training and investments as the lines come on board. And so, we are seeing that and take that to a side because those are kind of discrete. And if I look at the business, what we are seeing is the faster growing areas. We actually are seeing a benefit of mix. And so, we talked a little bit about cell analysis but also cell analysis in LSAG has been very accretive both on the gross margin, as well as the operating profit side. And so, we’ve got these faster growing businesses that are helping with mix and then we are adding on the incremental price to cover the inflationary pressures that we are seeing and so forth. But we’ve also got productivity measures in place and this is where I think the One Agilent approach to our systems and our infrastructure really pays dividends, because we are able to leverage those costs across a larger base and because a lot of that is internal, we don’t have that same level of pressure on cost as we are seeing in some other areas. And so, it’s a combination of product mix, that price. I talked about 1% price and then leverage in the operating expense side." }, { "speaker": "Patrick Donnelly", "text": "That’s helpful. Thanks, Bob. And then, Mike maybe one for you on C&E. I know, in the script, you kind of called out maybe having the most positive tone you’ve had in a little while here on that segment. Obviously the end-market health seems pretty high from the customers. And can you just talk about, I guess, the conversations you’re having there, visibility, again, guiding to high single for next year off a pretty strong 2021 is encouraging. So maybe just your confidence and then again, it sounds like maybe there’s even some upside to that number?" }, { "speaker": "Mike McMullen", "text": "Yes. Sure, Patrick. So, yes, so we are seeing really good end market demand for and I think Bob highlighted a lot of those like the advanced materials or chemicals. It really speaks to the overall recovery economically on a global basis and the fact that this in particular, this customer base had deferred a lot of investments for some period of time. So, they are in a reinvestment mode and we have pretty good visibility to the funnel. So, I think we probably got at least a six month lead view on what’s coming down on instrument purchases. So, we are feeling really good about the C&E business as well as there is the ACG story here as well of where we are continuing to increase services in this segment, which has historically been more of a self-maintainer kind of market, as well as the chemistries and consumables side. So, I think we’ve got pretty good visibility, given our confidence and be able to put this kind of number out there in a full year guide at this point in time. Bob, anything else you’d add to that? I know we spend a lot of time talking about this." }, { "speaker": "Bob McMahon", "text": "No, I think you got it. You said it well." }, { "speaker": "Patrick Donnelly", "text": "Great. Thanks, Mike." }, { "speaker": "Bob McMahon", "text": "You are quite welcome." }, { "speaker": "Operator", "text": "Thank you, Mr. Donnelly. The next question comes from the line of Josh Waldman with Cleveland Research. You may proceed." }, { "speaker": "Josh Waldman", "text": "Hi. Thanks for taking my questions. Wanted to start with a quick follow-up on supply chain." }, { "speaker": "Bob McMahon", "text": "Sure, sure." }, { "speaker": "Josh Waldman", "text": "Yes. Hey, Bob. Wanted to start with a quick follow-up on supply chain. I wondered if you could give us the magnitude of the push-outs you referenced and is this all LSAG?" }, { "speaker": "Mike McMullen", "text": "Well, I am going to pass it to Bob here in a second, but let me really clear in terms of our language. When I use supply chain, that means material constraints and then we have logistics. I think, of the issues that Bob, the transit times was really logistics issue. In terms of our ability to get product to customers and get the raw materials, we feel pretty good about what’s been going on there so." }, { "speaker": "Bob McMahon", "text": "Yes, exactly. So it was more just longer delivery times and Josh, it was in the LSAG business, as you would expect. It was roughly a point in the quarter." }, { "speaker": "Josh Waldman", "text": "Okay. And given the transient nature, it sounds like you are assuming this all hits in the first quarter. Is that kind of what’s embedded in your guide?" }, { "speaker": "Bob McMahon", "text": "We are assuming that it will get better over the course of the first half of next year or first half of the fiscal year. So not all of it will come back in Q1." }, { "speaker": "Josh Waldman", "text": "Got it, okay. And then, I wanted to follow-up on your comments within the LC/MS franchise. I believe, in your prepared remarks, you highlighted stronger install rates in this franchise in the fourth quarter. Just wondered if you could provide any additional color on that, maybe what’s driving it? Is it higher or faster kind of accelerated refresh levels at legacy accounts? Or maybe you’re seeing kind of increased win rates at new accounts?" }, { "speaker": "Mike McMullen", "text": "I am going to – great question. I am going to pass that to our expert on this topic. Jacob, maybe you want to talk about what’s going on in the LC/MS front." }, { "speaker": "Jacob Thaysen", "text": "Yes. Certainly, Mike and as you mentioned, we had great success with our new Ion Mobility, 6560C that we launched here at ASMS and we had a fantastic worker and user meeting also that was rally all subscribed. But as you also speak to, we had tremendous traction on our triple core and single cord businesses. And particularly in the biopharma space, we see a lot of smaller accounts also coming live, small mid-sized accounts that are starting to build up their capabilities within the analytical instruments business. So we see a lot of tremendous momentum there. But obviously, also the big accounts that is more in the refresh mode." }, { "speaker": "Mike McMullen", "text": "Yes. So, I think part of the story, Josh, is new customers, right, particularly on the biopharma side and also doing very well on the refresh side with existing customers." }, { "speaker": "Josh Waldman", "text": "Got it. Yes. Really appreciate it guys." }, { "speaker": "Mike McMullen", "text": "You are quite welcome." }, { "speaker": "Operator", "text": "Thank you, Mr. Waldman. [Operator Instructions] Our next question comes from the line of Michael Gokay with KeyBanc Capital Markets." }, { "speaker": "Paul Knight", "text": "Hey, Mike. It’s Paul Knight. Thanks for the time." }, { "speaker": "Mike McMullen", "text": "Hey, Paul. How are you doing?" }, { "speaker": "Paul Knight", "text": "Good, good. On the Avantor agreement, is there any way you can talk about - does that give you another 5% of addressable market? What are your thoughts around that deal?" }, { "speaker": "Mike McMullen", "text": "Yes. Hey, thanks for noticing that we had worked with Michael’s team and have a real agreement we are really excited about. And I’m actually going to pass it over to Agilent’s new Commercial Officer to his view on that question. Go ahead, Padraig." }, { "speaker": "Padraig McDonnell", "text": "Yes. I think, yes, thanks, Mike. I think we see that it’s a really mutual beneficial arrangement that we are going to see not only different customers, but at different spaces within customers and it also helps with overall the addressable market and coverage. So, the Agilent team and the Avantor team will be able to share leads and so on so we’ll be able to cover the market better. We’ll also be able to use our digital capabilities to be able to find new customers and also increase the wallet share and customer side. So all around, a very positive development." }, { "speaker": "Mike McMullen", "text": "And Paul, it’s hard to put an exact percentage on the question. But we wouldn’t be doing it if it was on the margin." }, { "speaker": "Bob McMahon", "text": "Yeah. And I was going to say, Paul, this is Bob. Just to add, I mean, we didn’t really see any revenue. That’s all future opportunity for us. And I think one of the areas that Avantor is strong is in the research area, Academia and Government, and this will help us even cover that market even broader than we do today." }, { "speaker": "Mike McMullen", "text": "Yes. Absolutely." }, { "speaker": "Paul Knight", "text": "Thank you." }, { "speaker": "Operator", "text": "Thank you. The next question comes from the line of Dan Brennan with Cowen. You may proceed." }, { "speaker": "Dan Brennan", "text": "Hey, Mike. Hey, Bob. How are you guys doing?" }, { "speaker": "Mike McMullen", "text": "All right, Dan. How about yourself?" }, { "speaker": "Dan Brennan", "text": "Thank you. Thank you. Doing well, doing well. Maybe first question on NASD, maybe I missed it. Did you guys give a number for 2022, what’s implied?" }, { "speaker": "Bob McMahon", "text": "We did not, but what we did say is, we would expect strong double-digit growth. I’ll leave it at that. Yes, what I can tell you is we exited at a run rate that was higher than the - if you took our $225 million that we talked about and divided by four, our runrate was higher than that." }, { "speaker": "Mike McMullen", "text": "Right." }, { "speaker": "Bob McMahon", "text": "So we continue to ramp." }, { "speaker": "Mike McMullen", "text": "Yes, thanks for that question. It was hard to explain it in the call narrative. But as Bob mentioned, our Q4 exit rate is higher than the full year number." }, { "speaker": "Dan Brennan", "text": "And maybe could you give a little color there. I think, Bob, you mentioned in the prepared remarks or in Q&A that you’re taking in orders to 2023. Could you just give us a sense like what the utilization is today of your capacity that’s available and any color about demand trends book of business things of that nature?" }, { "speaker": "Bob McMahon", "text": "Yes. In short, we are running 24/7 at both our Frederick facility, as well as our Boulder facility, which was a legacy facility. And we are – I feel very good about our ability to continue to expand capacity. What Brian and team have been able to do is increase both throughput, as well as yield. And so, that’s really helped us drive additional capacity with the existing footprint or the existing manufacturing facility. And the Train B, as we talked about has the opportunity to add more than $100 million of incremental volume coming online starting at the end of this - our fiscal - our calendar 2022." }, { "speaker": "Dan Brennan", "text": "Got it. And then, maybe on the One Agilent, Mike, could you just give us, I know, Mike, when you got there, you made some changes to the sales force that have made under your predecessor, now you are going further. So how should we see this manifest from the outside over the next, I don’t know, one to two years? Does this – could this lead to stronger growth? Is it going to lead to more better margins, more durable growth? Just obviously the customers are going to see something, but how will that manifest in reported results, do you think?" }, { "speaker": "Mike McMullen", "text": "I think it’s a check for each one of the things you listed there. But the number one reason why we are doing is to drive more growth. And it’s just a natural evolution of the transformation in the sales force. I started a number of years ago. And it really points to the fact that we have this broad-based portfolio that’s selling into the same customer base. And why have two separate sales forces and have to go do the coordination between across sales forces, and then the big push that we made over the last several years in terms of digital, this allow us, I believe, to even go faster on realizing our digital ambitions. And then you’ve got the voice of the customer will be right in the CEO’s staff and on Padraig’s table, the Head of the service delivery organization. So, everything relative to the customer facing that we do in this company will be under one leader. We just think it’s going to find ways to accelerate our growth, increase our customer satisfaction, and I think as we push more and more of our business because customers want to buy that way through digital, it will have a natural knock-on effect of efficiency gains in the P&L." }, { "speaker": "Dan Brennan", "text": "Great. And then, maybe one more, obviously, balance sheet is in great shape. So, the proverbial question about M&A, just wondering what does the funnel look like? Any update on the strategy? I know you’ve been pretty cognizant of not wanting to go too big here and kind of not disrupt what you built there. But just give us a sense of what the needs are today? And what is the outlook for M&A in 2022?" }, { "speaker": "Bob McMahon", "text": "Yes. Sure, Dan. So I’ve used - been using this order the last several years of the build and buy growth strategy. So, we are still very interested on the buy element of fueling future growth and for example, in this past year, we did the Res Bio acquisition really got us into liquid biopsy and really allows us to play to our strengths that we already have from our CDx and IHC business. So, we are going to look for continued opportunities such as those where you are in higher growth markets than the total company average, where they can really benefit by being part of Agilent and where they have differentiated technology and differentiated teams. We will stay in our lane, so to speak, on valuations. Let’s - I’d say, the - you know that’s better than I do, perhaps, Dan. The market is still very robust. We are very active. And we just want to make sure that the deal works for our shareholders. But deploying capital for M&A is part of our story going forward and it’s all upgrade." }, { "speaker": "Dan Brennan", "text": "Thanks, guys. Excellent. Great. Thank you." }, { "speaker": "Operator", "text": "Thank you, Mr. Brennan. The next question comes from the line of Jack Meehan with Nephron Research. You may proceed." }, { "speaker": "Jack Meehan", "text": "Thanks. Good afternoon. Hey. I want to dig in a little bit more on Cell Analysis. So, heard cleared $100 million in the quarter. What was the 2021 contribution? And similar to the line of questioning on ASP, what’s the target there for 2022 growth?" }, { "speaker": "Bob McMahon", "text": "Yes. So, I’ll start with the cell analysis business and I’ll bring in Jacob here, because it has just done a fantastic job and it’s really continued the momentum that we saw at the beginning - throughout 2020. So, it ended just short of $400 million for the full year and it grew in the mid-20s. And I would expect us to looking forward if we think about where the market is headed and the fundamental demand there, that will be growing double-digits for sure going forward. And as I mentioned before, the beauty of that business is, it’s right ingrained with where the research and technologies are going and where a lot of money is being put in. But it’s also an extremely well run and profitable business for us." }, { "speaker": "Mike McMullen", "text": "And Jacob, maybe you can give some insights in terms of where are the end-markets you think that are driving - been driving the growth and where we think it’s going to come from in the future?" }, { "speaker": "Jacob Thaysen", "text": "Yes, thanks for that. It’s a really good question. Obviously it’s something I’d really like talk about. The cell analysis business has been super successful in the past years and our focus on the immuno-oncology space has really paid off. We continue to see opportunities there and we continue to see that our portfolio of being able to measure live cells is required to really drive the research forward. So where we really see the opportunities is, is in the - between biopharma and also the academic markets there, that’s where we see the biggest and the biggest momentum going forward. While we have seen here in the past period of time also that the diagnostic business, particularly with our flow cytometry is picking up good speed, but, I would say, the main opportunity sits in the biopharma space." }, { "speaker": "Mike McMullen", "text": "And did you ask a question about NASD?" }, { "speaker": "Jack Meehan", "text": "No." }, { "speaker": "Mike McMullen", "text": "Okay." }, { "speaker": "Jack Meehan", "text": "Can you down that line just from the comparison?" }, { "speaker": "Mike McMullen", "text": "Okay. All right. You are right, Bob." }, { "speaker": "Jack Meehan", "text": "My follow-up was going to be, a lot of discussion obviously around driving growth. I was hoping to just get your philosophy on CapEx. So, I think the guidance implies about 4.5% of sales for 2022. That’d be higher than you’ve done in the last few years. Do you expect this is going to remain elevated more kind of in the medium-term? Or is this just kind of some of the near-term opportunities coming through?" }, { "speaker": "Bob McMahon", "text": "Yes. Jack, that’s a great question and what I would say is, if we look at where our there is different kinds of CapEx, and it’s not all created equal. But the reason that it’s being increased is really to fund that growth and capacity expansion, whether that be Train B and NASD or the capacity expansions in places like genomics and cell analysis and I would say, given our growth trajectory in those areas, I would expect us to continue at probably an elevated level to incorporate that growth. As Mike said, we’ve got this buy and build strategy and that’s part of the build strategy and it has paid off in spades with NASD. And what I would say is, we are not – there is more letters in the alphabet than B. It doesn’t end at B. But what I would say is, there is - we are going to be prudent about it, but also be aggressive about going forward." }, { "speaker": "Jack Meehan", "text": "Thank you." }, { "speaker": "Operator", "text": "Thank you, Mr. Meehan. The last question is from the line of Catherine Schulte with Baird. You may proceed." }, { "speaker": "Catherine Schulte", "text": "Hey, guys. Thanks for the questions." }, { "speaker": "Mike McMullen", "text": "Hey, Catherine." }, { "speaker": "Catherine Schulte", "text": "First - first on the LSAG guide for mid-single-digits. I think on the last call, you talked about the GC replacement cycle coming back on, maybe being in the midst of an LC replacement cycle on small molecule. And you’ll now have chemistries in there as well. So, should we think about this as being more towards upper-end of that mid-single-digit range for 2022 or was there some sort of catch-up spend in 2021 that maybe is a headwind as we get into 2022?" }, { "speaker": "Bob McMahon", "text": "Yes. I think you’re spot on, Catherine. It’s the former, not the latter. Think about it as a higher end and that’s where, I would say, if we think about where our opportunities for upside are, are in the instrumentation business and continuing the strong momentum that we’ve seen. Now we are also going up against, I think, a 15% core growth rate year-on-year. But we feel very good about the momentum in that business, particularly in the areas that you just talked about in Chemical and Energy and in Pharma. We continue to believe that the pharma business coming out of COVID is structurally a higher growth market and as we continue to place our focus on the biopharma or the large molecule, if you look at that throughout 2021, that was a much - growing much faster than the overall pharma business. And so, we would expect that - we feel very good about that business going forward." }, { "speaker": "Catherine Schulte", "text": "Okay. And then, maybe one more, you had a lot of success on NASD. Do you have any interest in entering other areas as manufacturing components for biopharma, whether it’s GMP reagents or DNA plasmas or other areas? And is that’s something that you might get into in 2022?" }, { "speaker": "Mike McMullen", "text": "Well, Catherine, we are always looking for new drivers of growth that would make sense for Agilent to be directly involved in. So, nothing to report for 2022. We’ve got a handful of adding different additional letters, if you will to the all that we serve in NASD. But never say never to the thesis of your question." }, { "speaker": "Catherine Schulte", "text": "Okay. Great. Thank you." }, { "speaker": "Mike McMullen", "text": "Quite welcome." }, { "speaker": "Operator", "text": "Thank you, Ms. Schulte. And the last question is from the line of Noah Baron with JPMorgan. You may proceed." }, { "speaker": "Tycho Peterson", "text": "Can you guys hear me?" }, { "speaker": "Mike McMullen", "text": "Yes." }, { "speaker": "Bob McMahon", "text": "Hey, Tycho." }, { "speaker": "Tycho Peterson", "text": "It’s Tycho. Sorry about the phone issues." }, { "speaker": "Mike McMullen", "text": "No problem. No problem at all. Sure." }, { "speaker": "Tycho Peterson", "text": "So, Dako, I appreciate the China color. Obviously people are focused on China tenders at the moment. It doesn’t sound like you’re flagging any issues there, specifically for Dako, but can you talk about what you’re kind of seeing on the ground there for China? And then, how big is the CDx business? You mentioned that earlier, Mike, and you obviously had a bunch of press releases during the quarter about new approvals for CDx?" }, { "speaker": "Mike McMullen", "text": "Yes. So, Sam, I know this is something you’ve been talking to your team about relative specifically about what maybe happened in the China diagnostics market and what’s going on there. So, we think we’ve got a pretty good protective position. But why don’t you elaborate a bit more?" }, { "speaker": "Sam Raha", "text": "Yes, happy to, Mike. Tycho, thanks for the question. We’ve had another, just overall for our pathology business, the former Dako business, if you will, a really good quarter, including in China. And you may be referring, Tycho, to the buy China requirements that we are all aware of that are happening specifically to our former Dako business, if you will. The relative unique position, particularly with PD-L1 and having a minimal number of local competitors really differentiates us. So, we haven’t felt really pressure from the buy China impacting our business. But we have continued to see really good interest not only in PD-L1 companion diagnostics that brought more broadly speaking in China for our diagnostic products." }, { "speaker": "Mike McMullen", "text": "And Sam, if I recall, you’ve got your PD-L1 registered in China, right?" }, { "speaker": "Sam Raha", "text": "Yes, we do. I mean, we registered that almost exactly two years ago, becoming the first-ever companion diagnostic in China. And it’s doing well for us there in China. We’ve actually now trained over 400 different pathologists throughout China to utilize our companion diagnostics." }, { "speaker": "Mike McMullen", "text": "Yes. Hey, and Tycho, maybe just a follow-up, if I looked at our business in China for DGG for the year, it grew in the 30s, and it was actually in excess of that for Q4. So, it had very positive momentum and CDx is roughly $100 million, ex the Res Bio acquisition." }, { "speaker": "Tycho Peterson", "text": "Great. And then, on Cell Analysis, Mike, I know one of the priorities you’ve talked about is moving that portfolio downstream. Can you talk about those efforts how actively you’re looking at kind of pushing that into QA/QC and further downstream?" }, { "speaker": "Mike McMullen", "text": "Yes. So, Jacob, why don’t you follow-up with some thoughts here?" }, { "speaker": "Jacob Thaysen", "text": "So, Tycho, when you said downstream, can you tell a little more?" }, { "speaker": "Tycho Peterson", "text": "More in the bioproduction versus R&D, yes." }, { "speaker": "Jacob Thaysen", "text": "On the bioprocessing, yes, we see a big opportunity in the bioprocessing space, both for our Cell Analysis business, but also for our Analytical Instrument business. So, I think that’s something we will continue to invest in going forward." }, { "speaker": "Bob McMahon", "text": "Yes. I think what we are seeing right now, Tycho, is moving from truly research into the development area. And then, that will then lead into the QA/QC. So, I think you see a multi-step process here and so, as Jacob said, it’s just early days here from that standpoint. And - but making great progress across all three of those kind of sub-businesses and have high hopes for that to continue." }, { "speaker": "Mike McMullen", "text": "A similar flow that we’ve seen in pharma for years, right, which is starting in our R&D then works its way into QA/QC." }, { "speaker": "Bob McMahon", "text": "Yes." }, { "speaker": "Mike McMullen", "text": "And, Tycho, I think we’ve built this great business through a series of acquisitions and the way we integrate into it making one business. And this would be an area of obviously future focus for us on the M&A front, as well." }, { "speaker": "Tycho Peterson", "text": "Great. And just one last one on the new Agilent and I know you’ve got a number of questions on the rollouts there." }, { "speaker": "Mike McMullen", "text": "Sure." }, { "speaker": "Tycho Peterson", "text": "Are there new services you’re introducing in conjunction with that? Are you broadening the service portfolio?" }, { "speaker": "Mike McMullen", "text": "Not yet, but stay tuned. It’s only just a few weeks old." }, { "speaker": "Tycho Peterson", "text": "Fair enough. Alright. Thanks." }, { "speaker": "Mike McMullen", "text": "Okay. Thanks a lot, Tycho. Glad you get on the call." }, { "speaker": "Operator", "text": "Thank you, Mr. Peterson. There are no additional questions waiting at this time. I would like to pass the conference back to Parmeet Ahuja for any closing remarks." }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Bethany, and thanks, everyone. With that, we would like to wrap up the call for today. Have a great rest of your day." }, { "speaker": "Operator", "text": "That concludes the Agilent Technologies fourth quarter earnings conference call. I hope you all enjoy the rest of your day. You may now disconnect your lines." } ]	Agilent Technologies, Inc.	154,924
A	3	2,021	2021-08-17 16:30:00	Operator: Good afternoon and welcome to the Agilent Technologies Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] And now I'd like to introduce you to the host for today's conference. [Indiscernible], Vice President of Investor Relations. Sir, please go ahead. Ruben DiRador: Thank you, Paul. And welcome everyone to Agilent's Third Quarter Conference Call for the Fiscal Year 2021. With me are Mike McMullen, Agilent's president and CEO, and Bob McMahon, Agilent's Senior Vice President and CFO. Joining the Q&A after Bob and Mike's comments will be Jacob Thaysen. President of Agilent's Life Science and Applied Markets Group; Sam Raha, president of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release, investor presentation, and information to supplement today's discussion, along with the recording of this webcast is made available on our website at www.investor.agilent.com. Today's comments by Mike and Bob were [Indiscernible] from non-GAAP financial measures. We will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth, excluding the impact of currency and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of July 31. We will also make forward-looking statements about the financial performance of the Company. These statements are subject to risks and uncertainties and are only valid as of today. The Company assumes no obligation to update them. Please look at the Company's recent SEC filings for a more complete picture of our risks and other factors. And now, I'd like to turn the call over to Mike. Mike McMullen: Thanks, Barney, and welcome to your first Agilent's earnings call as our new Vice President of Investor Relations. And thanks to everyone for joining our call today. Before covering our Third Quarter financial results, I want to acknowledge the recent passing of Dr. Tachi Yamada, a giant in our industry, and a former Agilent board member. Tachi was much more than a knowledgeable, deeply involved Agilent board member for nine years. As many of you on the call already know, Tachi lived a very full life as a doctor, a scientist, as a humanitarian who was driven to help others. I know that the Agilent team is not alone in recognizing that Tachi Yamada will be greatly missed. And we extend our deepest sympathies to Tachi's family. Now, on the Third Quarter Review and our updated outlook for the year. In Q3, the very strong, broad-based momentum in our business continues. The Agilent team delivered another outstanding quarter, exceeding our expectations. Q3 revenue of 1.59 billion is up a reported 26% and is up 21% core. This is against a modest decline of 3% in Q3 of last year. So, we are well above the Fiscal Year 2019 pre-pandemic levels. In addition, like other positive signs of continued momentum, orders outpaced revenue during the quarter. Our growth is broad-based across all business groups, markets, and geographies. The combination of strong top-line performance and execution translated to excellent growth and profitability and earnings per share. Our Q3 operating margin is 26%. This is up 230 basis points from last year. EPS is $1.10, up 41% year-over-year. Agilent success continues to be driven by our build and buy growth strategy and execution prowess. We're developing market-leading products and services, investing in fast-growing businesses, while delivering outstanding customer service, and continue to drive profitability. Since the onset of the pandemic, we have taken actions to ensure Agilent emerges even stronger as a Company. While we have yet to leave COVID -19 in the rearview mirror, our Q3 results are another indicator our actions are delivering the intended results. Bob will provide more details on end markets and geographies, But I want to briefly highlight our performance in our two largest end markets, Pharma and Chemical & Energy. We continue to perform extremely well in Pharma, our largest market, growing 27% with strength in both small and large molecule segments. Our large molecule business grew roughly 52% in the quarter and now represents 36% of our overall Pharma revenue, up from the mid-20s, just a few years ago. In chemical energy, our business is recovering faster than expected, expanding 23% in the quarter. This is an acceleration of the momentum we achieved in the first half, and our order funnel continues to strengthen. Looking at our performance by business unit, the Life Science Applied Markets Group generated revenue of 680 million. LSAG is up 22% on a reported basis, this is up 18% core of just a 4% decline last year. LSAG 's growth is broad-based across all end markets. Our performance was led by strength in Pharma, which is up 22%, and chemical energy up 31%. All businesses delivered strong growth led by cell analysis at 38% growth, and our LC and LCMS businesses, which grew 22%. We continue to strengthen our position in the fast-growing Large Molecule market segment. During the quarter, the LSAG team launched 3 InfinityLab Bio - LC Systems at the well-attended InfinityLab LC Virtual Conference in June. These new products further extend our LC leadership position. In addition, building on our already strong Pharma offerings, we launched new compliance-ready LC/Q - TOF and LC - TOF solutions to our portfolio in the quarter. The Agilent CrossLab Group posted a revenue of 560 million. This is up a reported 21% and up 15% on a core basis. These results are on top of 1% growth last year. The business is benefiting from increased activity in [Indiscernible] labs and instrument connect rates. This led to more contractive services, on-demand services, and consumables consumption across all end markets. All end markets grew mid-teens or higher, with exception of environmental [Indiscernible] which still grew 9%, The pandemic has shown ACG to be our most durable business with ACG growing each quarter since COVID-19 first emerged. Our customer-focused approach and digital investments continue to pay dividends. Looking forward, instrument placements and demand as well, [Indiscernible] strong performance by ACG, as we drive attractive rates and increased costs for lifetime value. The diagnostic genomics group produced revenue of 346 million up 44% reported, and up 37% poor, compared to an 8% decline last year. The growth was broad-based across product lines and regions and was led by our NASD GMP Alago business. The ramp of our facility in Frederick, Colorado continues to go very well. The quarterly results exceeded our expectations, easily, surpassing the $50 million revenue milestone. While one quarter does not make a trend, our team has done a tremendous job increasing output in a high-quality manner. This gives us increased confidence in our ability to exceed the $200 million annual run rate in revenue with existing capacity. In addition, the trained manufacturing line expense is well underway and on schedule. Our Genomics Instrumentation and Consumables businesses rebounded strongly in the quarter, as did our pathology-related businesses. For the first time in several quarters, we saw diagnostic testing above pre-pandemic levels. While we are watching the Delta variant very closely, to date, we have not seen a meaningful negative impact in testing volumes. I also want to highlight our performance in China. While still less than 10% of DGG revenue, our China business grew 50% in the quarter. We continue to see tangible progress in building a stronger China market position. In Q3, we signed our first ever companion diagnostic development services agreement with a China-based BioPharma Company. Earlier this month, we also announced the initiation of in-country manufacturing for our SureSelect product line. We are very bullish about long-term growth prospects in China for our DGG Product and Services offerings. In addition, the integration of the Resolution Bioscience team is going well. And we are very pleased to enter and expand our participation in the fast-growing NGS-based cancer diagnostic market. It was a busy quarter at Agilent, so I have a few other achievements I'd like to share with you. Last month we published Agilent's 21st Annual Corporate Social Responsibility report. At a time when some are just starting to look at issues like sustainability and societal impact, this has always been a key part of who we are as a Company. We've been addressing these issues since our founding more than 2 decades ago. I would encourage you to review our report on the Agilent website. We're also very pleased to receive recognition as a great place to work in the U.S. by the Great Place to Work Institute. This resulted from just one more example of us when having a highly engaged and energized team. And as you know, teams with high engagement win in the market. Looking ahead, building on another excellent quarter and the momentum we're seeing, we expect the business to continue to perform well as we close out what we believe will be the outstanding fiscal year 2021. As a result, we are once again raising our full-year revenue and earnings guidance. Bob (ph) will share more details, but we're expecting a continuation of our excellent top-line growth and earnings generation. While the world has yet to fully emerge from a global pandemic, Agilent is well-positioned to deliver excellent results again in the fourth quarter. I remain very proud of the Agilent team's ability to consistently deliver for our customers and shareholders. Thank you for being on the call today, and I look forward to your questions. I will now hand the call off to Bob. Bob? Bob McMahon: Thanks, Mike. And good afternoon, everyone. In my remarks today, I will provide some additional details on Q3 revenue, and take you through the income statement and some other key financial metrics. I'll then finish up with our updated outlook for the fourth quarter and the full year. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike mentioned, we had an excellent result in the Third Quarter. Revenue was 1.59 billion, reflecting reported growth of 26%. Core revenue growth was 21%. Currency added, 4.5% for the quarter, and M&A added 0.5. In addition, COVID-related revenues were in line with the prior year. All end markets performed well with Pharma and Chemical & Energy as standouts versus [Indiscernible] expectations. Our largest market Pharma, grew 27% during the quarter, after growing 2% last year. The performance was led by the continued strength in our large molecule business, growing 52%, while our Small Molecule business grew mid-teens. And all regions in the pharma market grew double-digits. Our Large Molecule business was driven by our NASD division and demand for LC and Mass Spec instrumentation and solutions. While our Small Molecule business was primarily driven by QA/QC refresh. Chemical & Energy also performed well this quarter, with 23% growth. Even after accounting for the comparison against the 10% decline last year, this was clearly our best quarter since the onset of the pandemic. This result was driven by increasing momentum and demand for advanced materials and the general global economic growth. Our view is that the Chemical and Energy market still has additional room to grow moving forward. The diagnostics and clinical, we're very encouraged with the continued recovery in the market as our genomics and pathology businesses saw very good growth. On a regional basis, all regions grew with China up 41% and America is delivering 38% growth. In academia, in the government market, we delivered 12% growth as most research labs continue to open globally and expand capacity. On a regional basis, Europe led the way. The Food market continued its double-digit performance, growing 12% on top of growing 1% last year. Food manufacturers continue to invest in increased testing to ensure quality and authenticity. A developing cannabis testing market, primarily in the U.S. also contributed to the growth in this market. And regionally, the food market was led by the Americas and Europe. Rounding out our key markets, environmental and forensics came in with 5% growth. On a geographic basis, all regions demonstrated solid growth led by the Americas at 32% and Europe at 23%, both exceeding our expectations. The performance was broad-based across all markets. And as expected, China was up 8% on top of 11% growth last year. All 3 business groups grew in China during the quarter. Pharma, Chemical & Energy, and Diagnostics were the key drivers. Now, turning to the rest of the P&L. Third Quarter gross margin was 55.9% up 80 basis points from a year ago, despite roughly 40 basis points of headwind from currency. Our strong top-line, some positive product mix, coupled with the strong execution from our operations team, drove the year-over-year improvement. And our supply chain team is doing a tremendous job getting our products to customers despite the increase in demand. Gross margin improvement in performance, along with continued operating expense leverage, resulted in operating margin for the third quarter of 26%, improving 230 basis points over last year. Putting it all together, we delivered EPS of $1.10 up 41% versus last year. Our tax rate was 14.75% and the share count was 306 million shares as expected. We delivered $334 million in operating cash flow during the quarter, showing a strong conversion from net income and up more than 15% from last year. During the quarter, we returned $172 million to our shareholders, paying out $59 million in dividends, and repurchasing roughly 800,000 shares for $113 million. Year-to-date, we've returned $829 million to shareholders in the forms of dividends and share repurchases, a leverage ratio of 0.8. Accounting for our Q3 performance and improved outlook in the fourth quarter, we are again raising our full-year projections for both revenue and earnings per share. We are increasing our full-year revenue projection to a range of 6.29 to 6.32 billion, up to $125 million at the midpoint from previous guidance. and representing reported growth of 17.8% to 18.4%. in core growth of 14.5% to 15%. Included is roughly three points of impact from currency and a small amount from M&A. In addition, we're on track to deliver, roughly $100 million in COVID-related revenue in fiscal 2021, in line with our expectations from the beginning of the year and flat to last year. We expect to continue our strong operating leverage, and so we are increasing our fiscal 2021 non-GAAP EPS to a range of $4.28 to $4.31 per share, up 30% to 31% for the year. This translates to fourth-quarter revenue ranging from 1.63 billion to 1.66 billion. This represents reported growth of 10% to 12%, and core growth of 8.5% to 10%, on top of the 6% growth in Q4 of last year, when we started to see early signs of recovery from the strict lockdowns. In addition, while COVID revenue was roughly flat year-on-year for the full year, last year's fiscal fourth quarter represented the high-water mark in our COVID-related revenue. And as a result, we expect to see roughly a 1-point headwind due to COVID revenue in the quarter. So, our core growth, excluding COVID, would be comparable to 9.5% to 11%. We are forecasting higher expenses in the fourth quarter as we invest to maintain our strong momentum, but expect continued operating leverage in excess of 100 basis points. non-GAAP EPS is expected to be between 1.15 and 1.18 with a growth of 17% to 20%. Now before opening the call for questions, I want to reiterate that we continue to see good demand in our end markets, have solid momentum in all our businesses, and expect to close the year extremely well. We believe our strategies are the right ones for Agilent, but we couldn't achieve these results, we [Indiscernible] without the excellent execution by the team. With that Barney (ph) back to you for Q&A. Barney: Thanks, Bob (ph). Paul (ph), if you could please provide instructions for the Q&A now. Operator: Definitely, sir. We will now begin the question-and-answer session. [Operator Instructions]. However, if your question has been answered and you wish to remove yourself from the queue [Operator Instructions]. Please stand by while we compile the Q&A roster. Your first question is from Tycho Peterson with JPMorgan. Tycho Peterson: Hey, good afternoon. Congrats on the quarter. Mike, I want to start with the -- Mike McMullen: Thanks, Tycho. Tycho Peterson: -- China outlook. I know in China, there's been a fair amount of noise about companies being able to do products in-country -- [Indiscernible] shutdown -- internal shutdown. So, can you maybe just talk to some of the near-term dynamics in China? And it sounds like trade tension's also getting worse with the buy China policy. How do you think about that over the next couple of quarters? Mike McMullen: Sure. Thanks for the congratulatory comments, Tycho, and we really, actually, continue to feel quite good about our performance in China, as Bob and I mentioned in the call script, I think 8% up on 11% last year, and I think our stack growth is around 19% Q2. It's actually up over our stack growth of 17 Q2. We're seeing this good, strong, Pharma and C&E demand in China. Now, the funnels really remain quite robust. And I think, now getting to your specific question, we're not seeing any significant changes in terms of ability to get the product in. I mean, there's been a lot of noise for years, I have to say, between the U.S and China, yet the business seems to somehow get transacted. So, Bob, I think we're not really overly concerned about those dynamics. We did have somewhat of a little bit of shipment interruption as some of our Academia government customers were – had [Indiscernible] our VAP tax exemption change. But I think that was a relatively minor impact on the P&L. But clearly, we're monitoring those developments and you have to continue to work to make sure you've got the logistics of flowing through the country, but we've always been able to find a way and are not overly concerned about it at this point. Bob McMahon: Yes. I would say, Tycho. We continue to invest in China as we mentioned in the call. And there are always bumps here and there, but long-term we feel very good about the business in China. Mike McMullen: Yes, that's having one other thought here, Tycho (ph.), is relative logistics. We have divested into a number of forward-looking stocking locations over the last few years, not really has paid us dividend, because we are less dependent on stuff coming directly into the port because we have a lot of in-country inventory. Tycho Peterson: Okay. That's helpful. And then it sounds like you've got a lot of underlying momentum. I know you don't like to talk about the order book, but any preliminary comments you can make on '22 at this point, you know, Street has you are up about 6.5%, curious if you think that's a reasonable bar and any comments on where you think margins may go next year? Mike McMullen: Yes. Thanks. Those specifics, but what I can tell you is that we feel really good about the momentum of the business, the order book is continuing to be strong and that's as of today, where we got the latest view of the early orders through August, so all the momentum remains there. As I mentioned on our prior earnings call, we feel a really good ability to meet and exceed those long-term growth goals we put out, and the margin goals. I think that's where we stand right now, is we'll get to that in November, but we're feeling good about the trajectory of the business momentum we built here. Tycho Peterson: Okay. Thanks a lot [Indiscernible] Operator: Your next question is from Brandon Couillard with Jefferies. Brandon Couillard: Many thanks. Good afternoon. Mike McMullen: Good afternoon, Brandon. Brandon Couillard: Maybe to start with the Biopharma business. I mean, 50% growth in Large Molecules is pretty impressive. Used to elaborate, given the sources of growth there, and what that would look like if you back out the NASD contribution. Mike McMullen: Yes. Sure. And then I'm actually going to invite Bob and I will also want to have Jacob make a few comments on some of those new introductions here. I think I used the word broad-based, at least 5 or 6 times, maybe 10 times in my prepared remarks and we're seeing that in the biopharma. So, we've got across the board, double-digit growth happening here. Cell Analysis LC, LCMS, other platforms that go into Biopharma, along with our consumables and services. And then to your point, really outstanding growth in NASD. But while NASD was a big contributor, it was an Agilent-wide life story. And Bob, maybe you can just answer the specifics on the numbers? Bob McMahon: Yeah. And Brandon, to your point, the total in Large Molecules was 52% as I mentioned before. But even if you back out the NASD businesses still grew in excess of 40%. So very strong business on NASD, but it shows that the rest of the business, both instrumentations, as well as the consumables pieces and the other elements on the Pharma associated revenue in Diagnostics and Genomics also, very strong business in it. Mike McMullen: And Brandon (ph.), I just wanted to maybe have Jacob (ph.) jump in very quickly because we have a continued drumbeat of new introductions into this space as well, which has been the focus and prioritization of our R&D pipeline. Jacob (ph.), I know we had 2 big introductions in Q3 as well. Jacob Thaysen: Yeah, thanks for that, Mike (ph.). And that's -- you know, at the analyst said, I think we've talked about in [Indiscernible] that about 70% of our portfolio above that was really focused on Biopharma a so I'm really happy to see that momentum we have right now. And as you also mentioned in the prepared remarks, you know, I'm very pleased with the bio-LC portfolio. In fact, we had and -- and, one of the [Indiscernible] of our momentum is that with that Bio-LC that we introduced here a few months ago. And we had a virtual conference with more than 1,000 customers participating, and we had more than 25 external scientific speakers, which I would actually say I know it's the best in history by far. So that introduction is actually creating quite a lot of momentum and it allows us to play for all the [Indiscernible] biocompatible space to the 2D-LC, but clearly, also into the Mass Spec, with the Mass Spec at the end of it. And we also mentioned compliance. The FDA [Indiscernible] informatics compliances and all that very important part that most of the Biopharma see as the requirement to do business with them. And we have invested in this for quite a while, so we ensure that data integrity, audit readiness, and storage of data is the level of security. And right now, we have the offering both supporting our LC, but also all our major marketable Mass Spec instruments. And also, in spectroscopy, with the recent announcement here off the top in the Q2 informatics solutions. So right now, we are -- we have a very strong portfolio and that truly drives our growth. Well, I can continue talking about the cell analysis, but I will -- Mike McMullen: I'm going to bounce it back to Brandon. Hey Brandon, thanks for allowing us to do an advertisement on the Agilent portfolio strength. But, back do you. Do you have any additional questions? Brandon Couillard: Yeah, I think just touched on maybe if we could just elaborate on the Small Molecule market. You mentioned QA/QC refresh, curious [Indiscernible] we might be in there and what you think the market is kind of growing for Small Molecule relative to your big team. Mike McMullen: It's our view that there is always a replacement market going on in the Small Molecule space, and sometimes, it picks up a bit more. But then -- and I think we're in that phase right now. I wouldn't say it's a huge acceleration, it's just the solid and probably high changes. Jacob Thaysen: Yeah, I was going to say, Brandon as we think about this prior to the pandemic, we were probably slower growth than normal were some of the QA, QC refresh was probably elongated. And now we're starting to see that pick back up, and that typically is an 18 to 24 months kind of cycle. And I would say we're still at the beginning of that. And so, feel good about the continued performance of the refresh cycle going forward. Brandon Couillard: Great. Thank you. Operator: Your next question is from Vijay Kumar with Evercore ISI. Vijay Kumar: Hey guys, congrats on the strong print this afternoon. Mike McMullen: Thanks, Vijay. Vijay Kumar: Mike, maybe on my first question here, Resolution Bio, that deal that you guys did, did that come in line with expectations? I'm just curious. The 50-basis points contribution seems a little light. Is there some ramp-up phase here that's in log and not? Maybe just talk about what the deal does to you and how it adds to the corporate growth rates here. Mike McMullen: So, you do some very good math. So, it's about half-a-point of reported growth rate, Bob. And I'd say relative to Q3, probably a little bit behind the revenue as we learn more about this business or some elements of this global lumpiness, so we're feeling pretty good about how our business will finish, but we're expecting a lot in the Fourth Quarter. I think this is a story of continued acceleration of growth in '22 and beyond and we're just super delighted by the early days of how the teams feel about being part of Agilent. And then we're really building scale around this business. So, I think it's still a relatively small part of the overall revenue picture today for Agilent, and we knew that going in, I think is roughly [Indiscernible] million, but we would expect really strong growth rates in the coming years and again, we really feel like we're off to a great start with this team. Just interacting with Mark Li, who is the founder -- co-founder of Resolution Bio. He is really happy about the capabilities that we're bringing to his business to further scale it. So early days, but feeling good -- pretty good about things and [Indiscernible] I don't know if you're saying [Indiscernible] Bob McMahon: Yeah, I was just going to say the other thing is, obviously, we're just now having more and more conversations with our existing CDx customers and the power of being able to have our established CDx business on the [Indiscernible] side coupled with NGS-based technology, I think is going to be a real significant competitive advantage for us going forward. So very excited about this business going forward. Vijay Kumar: That's helpful, Mike. And Bob, one for you on expenses. In the year-to-date operating expense as a percentage of revenues, you guys [Indiscernible] a low 30s sub 31%, that's well below your historical level. I guess my question is, is this all just associated with the volume leverage rate given the strong organic performance year-to-date, or are there some timing elements on expenses, that [Indiscernible], and how should we -- if there are how should we think about those factors coming back in '22? Bob McMahon: Yeah, Vijay, it's a great question. And I think if you remember, maybe a year ago we talked about some of these expenses that were going down, and our goal was not to have them come back to the same levels that they had. And these would be in areas around travel, but also leveraging our digital capabilities, and what we've been able to do is be very successful. Certainly, volume is our friend. And the leverage that we've been able to drive across all three of our business groups has really helped. But if you look at our year-over-year elements around travel and costs associated with marketing programs and digital investments. Our digitals investments have gone up, but the actual return on those investments has actually gone up. And in fact, Jacob just highlighted one of the programs that we had. And so those are -- our goals are for those to continue -- they will continue to ramp next year to come back, but not near the level that they had come prior to the pandemic. So, we do think that there's a fundamental margin improvement associated with these expenses. And that's why Mike talked about our long-term margin expansion story is intact. It's not going to be 200+ basis points like it were this last quarter, but certainly feel good about our continued ability to drive margin expansion. Mike McMullen: And Vijay (ph.), this is Mike, if I can just add one additional comment too, and I hopefully came out in my prepared remarks, but we're not holding back on investing for growth. So, we're quite pleased with the margin performance, but it didn't come at the expense of our ability to grow down the road. Vijay Kumar: That's extremely helpful, Mike (ph.). Congrats again. Thank you. Mike McMullen: Thank you. Operator: Your next question is from Doug Schenkel with Cowen. Your line is open. Doug Schenkel: Hey, guys. Good afternoon. Could I -- actually could I just build off of that last question with a quick follow-up. Again, acknowledging and recognizing you're not going to guide on 2022 today. I'm just wondering though at high levels, should we assume that incremental margin is going to be a little bit lower than normal next year? If we're assuming a normalization of activity in the post-pandemic world? I heard what you said about areas where you're not going to need to invest as much, but at the same time, you are investing in growth. Just mathematically, does the incremental need to be a little bit lower than normal next year? Mike McMullen: Yes. We're still building our plan. But our intent is to still be able to drive that margin expansion. I will say that we are having our new Train B in NASD come online, which will add a little pressure to it. But, I think, we've been very good about being able to do 30% to 40% incremental and sometimes even higher than that when the margin comes in. And I don't see any reason why we shouldn't be able to continue to do that, Doug. Doug Schenkel: Okay, super helpful. Bob McMahon: Maybe what's -- yes, maybe what's underlying your question is inflationary pressures and activities around that I would say that we didn't see any material impact. Obviously, there is some but we're planning to manage that going forward. Doug Schenkel: Yeah, that's in audits. It's supply constraints, it's inflation or refreshers. It's the hope that we're traveling a little bit more and there are real conferences and real site visits, things like that. So that's the spirit of the question. Just making sure that the capture of those dynamics, we don't have to think about something other than that 30 to 40 traditional [Indiscernible] range. So that's helpful, Bob (ph.). Mike McMullen: I would just add. [Indiscernible] we're under 22 now. Sorry to interrupt there, but I'd just say that some of our programs, and -- and such are really geared towards making sure we can manage our way through this in '22, so we're on this already. Doug Schenkel: Got it. Okay. In terms of full-year guidance, as it's been noted a few times, you increased the outlook by more than the magnitude of the Q3 B. I guess I'm just wondering what gives you confidence in this change. Is it backlog data? Is it pacing across the quarter? Is it activity through the first month of the quarter? Maybe it's all the above and maybe more importantly -- Mike McMullen: [Indiscernible] Doug Schenkel: You just checked everyone? Okay. Perfect. Mike McMullen: I know. Bob and I are smiling in the room here, and, I think, we can probably put a checkmark on all -- first of those 3 things you mentioned. Doug Schenkel: Okay. And then throughout the year, you've consistently beaten your own targets pretty maturely, and it definitely makes sense to skew the error bars a bit more conservatively when you set your targets, given the state of the world. That said, given how well you performed relative to those targets, and recognizing we're not out of the pandemic, but we've got a little more experience with it at this point. Is it fair to say that you're at the point where you could adjust the philosophy a little bit and maybe change the positioning of those error bars as you set guidance moving ahead? Mike McMullen: Yeah, I think that that's fair. I think -- what we've tried to do is set prudent guidance as we've talked about in the past. But certainly, as we've and our customers, more importantly, the market is getting used to dealing in a COVID world, there are fewer variables to be able to understand. And I would look at just what we did in Q2 to Q3, we dramatically increased our Q3 guidance and then did the same thing here for Q4. So, I think our visibility is improving. You should take that away for all the things so you rattled off. Certainly, Bob McMahon: the momentum that we're seeing, the general economic improvements, and so forth. But as you mentioned, there's still a Delta variant out there, and so well, as Mike mentioned, we haven't seen any impact of that yet. We also recognize that that could change during the course of the quarter. So, we're trying to take all those factors into account, but also try to provide some realistic guidance going forward. Doug Schenkel: Okay. Thanks again, guys. Bob McMahon: You're welcome, Doug. Operator: Your next question is from Derik de Bruin with Bank of America. Derik de Bruin: Hello, and good afternoon. Mike McMullen: Hey, Derik. Derik de Bruin: Hey. Can we talk a little about environmental and [Indiscernible] and I wanted Doug to tell that question too? I know it's probably a little bit early, but any signs of how we should think about the GC portfolio picking up, or you just replaced -- is it just sort of like catch-up spending right now in the industrial or any initial indications that the replacement cycle that you were going -- you were in the midst of prior to the pandemic is likely to restart. Mike McMullen: Hey, Derik. Hey, how do I take the first one in Bob -- I mean, Bob and Jacob, you may want to add additional comments here. But let me talk about the question around gas chromatography. We are seeing that. And that's really behind a lot of the fairly bullish comments, if you will, around C&E space. So, we're seeing it in our GC revenue, and we're also seeing it in our GC order book. And I've been very reluctant to call that hey, we think this business is now in a situation of returning to growth. That reluctance has now passed. I think we're now into what looks to be the start of some really good potential business on our GC side, as that replacement cycle turns back on. And Jacob, I know you're a lot closer to the detail’s alignments, anything else you could add to that? Jacob Thaysen: Yeah, Mike (ph.). You're absolutely right. I think first of all of them -- I think Bob (ph.) mentioned that also the chemicals and engineered materials market certainly on fire right now, [Indiscernible] in Semicon and in the mining industry, including lease term for batteries. But we also see the traditional Petrochem markets really start to see some momentum now. And there's a lot of talk about the future of Petrochem but this market is going to pay for quite along. And I think that all the analysis shows that there'll be [Indiscernible], so we see investments coming into this market right now. And the new market that's also coming along is Renewable Energy, which will also use many of our technologies. And we see a great opportunity there also in the future. They're still in a development phase, but as you know, there's a lot of investments going in here, so we are participating in that also. So, we see a lot of opportunities in GC and the GC is actually seeing momentum both first in the chemical markets, but now into the energy markets. Derik de Bruin: Okay, so following up on that. So, you're feeling good about your more industrial [Indiscernible] experiments, even with some of the choppiness in the Chinese market, the data there. So, are you seeing -- is it the U.S. and Europe [Indiscernible] anymore or is it just that you're seeing turn on that one? And then where were we -- what remind me in annoying baseball analogies where we were in [Indiscernible] on the GC replacement cycle? Bob McMahon: Yes. So, Bob, I think it's fair to say that there really is no difference across the regions. I mean, China actually was the area of strength for us in C&E, and I think we're seeing good -- good strength globally, which I think points to the importance of global economic outlook for this segment. And I'd say we're probably earlier middle innings on the -- paused there for a while because we got rate run going with the new portfolio, but a pause. I'd say we're early innings, middle innings. Mike McMullen: Yeah. I would say too, Derik, just to give you a frame, China was more than twice the -- China C&E market was in line with the overall C&E growth rate that we saw. Derik de Bruin: Thanks for answering the question. Operator: Your next question is from Dan Leonard with Wells Fargo. Your line is open. Dan Leonard: Thank you. And good afternoon. Mike McMullen: Good afternoon. Dan Leonard: I was hoping you could -- Mike (ph.), I was hoping you could address the 5% to 7% core revenue growth model that you've introduced in December. Is that still relevant? Do you think something has fundamentally changed in the markets from that time period? Mike McMullen: I'd say it's relevant till we change it. So, I'm not ready to, on the fly here, revise our long-term growth. But as you may recall, in our December outlook, we said, think about us being more of the high range in that area. And I think [Indiscernible] a little tougher so I put a 7 out there in any type of long-term growth guidance. I think what's changing is the nature of our portfolio, which is we continue to build very quickly, much bigger positions in faster-growing segments. And I think it's probably fair to say that the Pharma market, in particular, the Biopharma market is -- remains very robust, but again, we're sticking with those long-term growth goals at this point in time. Bob McMahon: I would say, Dan, to build on what Mike is saying, particularly the pharma market. We do feel that that market, and in fact, Mike talked about it in his prepared remarks that we're emerging as a stronger Company. We do think that the Pharma market, really driven by that Large Molecule area, is a faster-growing market coming out of the pandemic than going into it. And I think if we look at where our investments are and the performance that we've had in particularly the Large Molecule. Now again, Small Molecule has been doing very well. That, in and of itself, would elevate that overall long-term growth rate to be faster than what we saw going in, which certainly helps us, given that is -- that's our largest market. So, I'll leave it at that. Dan Leonard: Okay. That's a helpful clarification. And just a follow-up on China, could you elaborate further on the drivers of that 50% growth rate you called out for DGG in China? Mike McMullen: Yes, I'm going to invite Sam on this call. He hasn't had a chance to work today in this call. So, Sam, your thoughts of what's been going on in China, I was doing a little bragging on your growth rate there. Sam Raha: Yeah. Mike, happy to give more perspective on China. We actually had a good quarter across the board for all of our business groups within DGG. Specifically, we continue to see real momentum in clinical diagnostic testing, led in pathology. We've seen really good pick up of our PD - L1, and our diagnostic -- or companion diagnostic there, as we've continued to train more pathologists there in the use and so forth. Genomics also had a really, really, good quarter, both on the consumable side. And we've also just recently announced within the quarter, the launch of our new V8 Xome, which is being well received in China and globally. And I will tell you one of our absolute strengths in China as it is elsewhere, remain our core NGS and Genomics QC portfolio. So, all of those elements, along with Mike, as you mentioned now, the signing of our first companion diagnostic development agreement with the Biopharma there, I think foretell a continued story of strength in China for DGG. Mike McMullen: And just to build on Sam's comments, I mean, we've been working really hard the last several years putting in the right foundational capabilities, building the right commercial channel, the right ability to handle diagnostics products ourselves, and it's really great to actually see those investment starting to pay off in year term growth. Dan Leonard: Appreciate all that color. Thanks, everyone. Operator: Your next question is from Patrick Donnelly with Citi. Your line is open. Patrick Donnelly: Hey, thanks for taking the question, guys. Mike McMullen: Sure. Patrick Donnelly: Mike, maybe one on the Chemical & Energy side to follow up on some of the earlier questions. I know that's one where you pretty closely keep an eye on the order book and your confidence goes with that. Are you getting more visibility as the order book builds there? I'm just trying to compare it to pre-pandemic mid-pandemic, I know you guys had a pretty short leash on in terms of how you would guide for that segment, how comfortable you would allow yourselves to get. Just wondering how the order book is looking there relative to some of the past quarters and how you're feeling about that segment. Certainly, seems like the tone is pretty positive here. Mike McMullen: Yes. Now I'm glad you picked up on that. We really want that to come through in the call. And I think the confidence is coming from not only the revenues that we've reported, but as Bob (ph.) mentioned in general, and I think it also holds for C&E, we just have much better visibility into our funnel. And you may have recalled I was talking a lot of -- in prior calls, I talk a lot about a conversation we're having with customers and we knew there was activity. But now that conversation is turning into orders. So, we're feeling much better about the trajectory of the C&E space. Historically I've been very cautious to give any real kind of positive trends in this area. But I think we've seen enough over the last few quarters and what we're seeing with our customers and the order book is really the basis for this confidence. And again, it's tied to not only the pent-up demand they've had in terms of even replacing aged equipment in their laboratories, but they are also -- what we hear from our customers, there are much more confident about where the global economy is going. So, they're willing to make investments. A couple of positives here and there and there will be some ups and downs because of outbreaks here and there of COVID, but in general, the [Indiscernible] remains very positive, I think as Bob mentioned earlier, our customers have learned to deal with this. So, Bob, I know this is -- we've talked a lot about this, anything I missed there? Bob McMahon: No. Mike McMullen: Okay. Patrick Donnelly: That's helpful. I appreciate it, Mike. And then on the diagnostic side and just given commentary that you guys are above pre-pandemic levels, can you just talk about the pace of the recovery in the quarter and then expectations for the further ramp from here. And I just want to clarify and make sure you haven't seen any impact in Delta up until I guess this week. I just want to make sure I have that clear. Thank you. Bob McMahon: Yeah. I mean, we saw continued recovery. I think we mentioned at the beginning -- at the end of Q2 that we were at pre-pandemic. We exited there. The average was still below. And that steady improvement across our business, across really across all of the regions continued into Q3. And by the end of Q3, we were above. And Patrick, to your specific question about Delta, we have not seen any impact to date associated with that. Patrick Donnelly: Great. Thanks, Bob. Bob McMahon: Yeah. Operator: Your next question is from Matt Sykes with Goldman Sachs. Your line is open. Matt Sykes: Hello. Hey guys, thanks for taking my questions, congrats on the quarter. Bob McMahon: Sure. Mike McMullen: Thank you. Matt Sykes: Just on ACG, you guys had a pretty impressive operating margin, over 29% for the quarter. I'm just wondering what you feel about the sustainability of those margins and then any progress that you've made on attachment rates in that business? I know you mentioned a little bit in your prepared remarks, but any additional color on that would be helpful. Mike McMullen: I think I'll pass it on to Borick (ph.), who can provide some additional color to the ACG and answer your questions. Go ahead, Borick. Padraig McDonnell: Yeah. Great. Thanks -- thanks, Mike. And we're getting back to more normalized service support with our customers, which is more cost associated, of course, with travel, but we're starting to see an accretive margin in Q3 and we're seeing that come through to improve in Q4. So very, very strong in that. In terms of touch rate, we're seeing increased touch on our services and consumables and of course, with the larger install base, this bodes really well for the future, as more attach rates for services and consumers will be available to a very strong outlook. Mike McMullen: Yes, hey, and Matt, maybe just to build on what Borick(ph.) is saying in terms of sustainability, we feel very good about the ability to continue to sustain those levels of margin. It gets back to the work that our service engineers do in servicing our customers. It's mission-critical for our customers, keeping those labs and those instruments up. And our ability to continue to invest in digital, as well as, be there on-site on the labs or with the labs is really important. A one piece that I would add is we continue to invest in that digital as I mentioned before, and our online orders actually grew faster -- our revenue grew faster than the overall ACG business, which actually speaks to our continued relevance in that space. And obviously, that's good for our customers in terms of either doing business with Agilent, but it also helps from that margin perspective as well. Matt Sykes: Great. Thanks for that color, it's very helpful. And then just one more on C&E. I know you've answered a lot of questions already, but I'm just wondering how the competitive landscape might have changed. Obviously, it had a challenging time during COVID. It took a while for it to recover, and now, it's certainly in recovery mode. I'm just wondering, as you look out of the competitive landscape, have you seen some competitor's slow investment; and therefore, there are some share gain opportunities in that growth that you're seeing? Mike McMullen: I don't know where they slowed. I'm not sure they're investing for that segment. So, and we're not seeing much happen on the competitive side. We're by far this is -- we're the clear leader in this space, we've continued to invest in our core portfolio pre and throughout the pandemic. So, as you can tell, I'm pretty bullish about our ability to outgrow the competition in this space. Bob McMahon: Yeah, let me add. It seems like a long time ago, but we launched 2 new GCs back in 2019, both at the high end and a mid-range GC. And we talked about one of the reasons that we did that is we've got a leadership position in the GC market. But when you look at it, we're over-index to the high-end, and so the ability for us to be able to have this mid -- mid-range, I think was really critical, and we're starting to see that benefit. And maybe Jacob wants to jump in that conversation. Yeah. Jacob Thaysen: Yes. Exactly. You're actually right on the GT and our strength in our GT, but I think we should also mention our spectroscopy business and the ITPMS, where we have done a lot of work also ITP, OES, and MS, where you're doing a lot of work that is -- that has a very strong market share for the material science. And we continue to take market share in that space also. So, I think you'll see us being very strong here. And we have also a site that we will continue to invest in this market going forward. So that's [Indiscernible] therefore the costumers going forward. Matt Sykes: Thanks very much. Operator: Your next question is from Joshua Waldman with Cleveland Research, your line is open. Joshua Waldman: Hi, thanks for taking my questions, just two for you. Mike, you mentioned overall orders outpaced sales in the quarter, and it sounds like book-to-bill in the LSAG business was slightly positive. Just wondered if you could provide us with your assumptions for core growth in the LSAG business in the fourth quarter. And then as we look beyond FY21, given the broad-based strength you've spoken about on the call today, I guess, is it fair to assume that as we look to FY '22, this business should likely grow something above a low to mid-single-digit longer-term average? Mike McMullen: Yeah. Let me talk about the fourth quarter and I'm not sure we're going to answer the last one just yet as we're going through our plan, but --. Joshua Waldman: I had to try. Mike McMullen: Yes, yes, that was a good try. But I would say for Q4, you're accurate in the belief that our book-to-bill was positive for the quarter, and if you think about Q4, our guidance comprehends high single-digit, low double-digit growth for the LSAG business core growth. And so, I'll leave it at that. Joshua Waldman: Got it. And then it seems like here today, Pharma has outperformed what you expected coming into the year. I just wondered if you could comment on any current thoughts you have around the potential magnitude of any year-end budget flush, I guess, given -- it seems like investments from these customers have -- have been fairly consistent -- consistent, and strong throughout the year. Does that deflate any year-end spending? Mike McMullen: Yeah. We'll address that in the Q1 call. But to your point, we've been pleasantly surprised, and it has continued to be stronger than what we've anticipated throughout the first 3 quarters, and what I would say is we don't expect that to slow down any in Q4 either. Joshua Waldman: Got it. Thank you. Operator: And your last question is from Jack Meehan with Nephron Research. Your line is open. Jack Meehan: Thanks. Good afternoon. You talked about the job that your team is doing, managing the supply chain. Was wondering if you can elaborate on a hotspot you're seeing in terms of inputs, shipping, or labor. And when you look at the fourth-quarter guidance, is that -- are you taking any more prudent or conservative type approach based on what's going on in the supply chains? Mike McMullen: Yes, I mean, this has been a lot of discussion on that. I think everybody is talking about the supply chain constraints on a global basis. It's been a challenge for us, but as Bob noted in this call script, our team has just done a tremendous job getting the Agilent products to our customers. And we're really good at this about managing situations. So, we will work on a number of commodity areas for some time. And we also have done things as identifying a changing alternatives source, supply. So, we've been able to do that. We've had a last-minute changes notification from logistics suppliers that they won't pick up our boxes, and so we switched to another supplier. So, we've been able to manage our way through that. And it was conspicuous, it was absent in our cost script a lot of details because while we continue to monitor it, we don't believe that's a material risk to the Company at this time, and we still likely -- we factored all that into our guide for the fourth quarter. And Bob (ph.), I know that you've done a close study of this as well, anything else you'd add to that? Bob McMahon: Yeah. The only thing I would say is it's the usual suspects that other folks have called out, things like [Indiscernible] and our team has done, to date, an outstanding job of being able to continue to satisfy demand here. And our expectation is that that's going to continue to happen into Q4. And we've got a continuous improvement program that continues to drive productivity and efficiency gains. And we're expecting that, and to combat some of these inflationary pressures as well as continuing to deliver to our customers. And we will continue to do that into '22 as well. Jack Meehan: Great. And then one other follow-up is on COVID. Mike McMullen: Sure. Jack Meehan: So, the fourth-quarter guidance assumes it's a 1-point headwind, though we're obviously in the middle of another Delta wave here. So, I was curious what you're seeing on the ground or whether your products are just starting to wane in general and any preliminary thoughts around how, you have 100 million this year, just how you're going to guide as you go into 2022 related to that? Bob McMahon: What I would say, Jack, it's a good question, and our products aren't directly tied to the testing. We didn't see the dramatic increase but also didn't see the dramatic decline with the testing there. Ours is more around expanding capacity both in testing and over the course of this last year. We've actually seen it migrate to more therapeutic capacity or excuse me, vaccine capacity in demand there. And so, we don't see it spiking up or not building that into Q4. I think it's a little too early to tell for -- for FY22. It's been -- it's been reasonably steady the last couple of quarters. And we do expect contribution in '22 and we'll provide more color as we get through our planning process, but we don't see it dramatically dropping off. Jack Meehan: Sounds good. Thanks, Bob (ph.). Operator: I do apologize but we do have an additional question. The last question is from Dan Arias with Stifel. Your line is open. Dan Arias: Yeah. Hi, guys. Thanks for getting me in here at the end. Hi, Mike? Mike McMullen: Sure. No problems. Dan Arias: Just one for me. Just Bob, maybe a high-level question. Just to the idea of getting to a post-COVID world, whenever that might be. I'm wondering which of the 3 segments you think might stand the best chance of maybe rebasing at a higher level of the up-margin line, just by virtue of some of the success that you're having, and then to your point, some of the fundamental changes that might come to the expense structure. Is that something you think is possible? And if so, would you be willing to help us with which one is looking most promising there? Mike McMullen: I do think it's possible. I'm not going to call out because I'm not going to let -- if I call out one, I'm not going to let the other two Division Presidents off the hook. They must have paid you. I think we could continue to do it across the board. Certainly, we are making investments across all three of the businesses to continue to grow. But we certainly feel like we have opportunities to continue to drive margin enhancement across all 3 of our business groups. Sorry guys. Dan Arias: Okay. Thanks so much. Mike McMullen: Thanks, Dan. Operator: And that concludes the question-and-answer session for this conference call. I will now turn the conference back to Puneet Souda for closing remarks. Puneet Souda: Thanks, Paul. And thanks, everyone. With that, we would like to wrap up the call for today. Have a great rest of your day. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect. Stay safe and well.	[ { "speaker": "Operator", "text": "Good afternoon and welcome to the Agilent Technologies Third Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. [Operator Instructions] And now I'd like to introduce you to the host for today's conference. [Indiscernible], Vice President of Investor Relations. Sir, please go ahead." }, { "speaker": "Ruben DiRador", "text": "Thank you, Paul. And welcome everyone to Agilent's Third Quarter Conference Call for the Fiscal Year 2021. With me are Mike McMullen, Agilent's president and CEO, and Bob McMahon, Agilent's Senior Vice President and CFO. Joining the Q&A after Bob and Mike's comments will be Jacob Thaysen. President of Agilent's Life Science and Applied Markets Group; Sam Raha, president of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release, investor presentation, and information to supplement today's discussion, along with the recording of this webcast is made available on our website at www.investor.agilent.com. Today's comments by Mike and Bob were [Indiscernible] from non-GAAP financial measures. We will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth, excluding the impact of currency and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of July 31. We will also make forward-looking statements about the financial performance of the Company. These statements are subject to risks and uncertainties and are only valid as of today. The Company assumes no obligation to update them. Please look at the Company's recent SEC filings for a more complete picture of our risks and other factors. And now, I'd like to turn the call over to Mike." }, { "speaker": "Mike McMullen", "text": "Thanks, Barney, and welcome to your first Agilent's earnings call as our new Vice President of Investor Relations. And thanks to everyone for joining our call today. Before covering our Third Quarter financial results, I want to acknowledge the recent passing of Dr. Tachi Yamada, a giant in our industry, and a former Agilent board member. Tachi was much more than a knowledgeable, deeply involved Agilent board member for nine years. As many of you on the call already know, Tachi lived a very full life as a doctor, a scientist, as a humanitarian who was driven to help others. I know that the Agilent team is not alone in recognizing that Tachi Yamada will be greatly missed. And we extend our deepest sympathies to Tachi's family. Now, on the Third Quarter Review and our updated outlook for the year. In Q3, the very strong, broad-based momentum in our business continues. The Agilent team delivered another outstanding quarter, exceeding our expectations. Q3 revenue of 1.59 billion is up a reported 26% and is up 21% core. This is against a modest decline of 3% in Q3 of last year. So, we are well above the Fiscal Year 2019 pre-pandemic levels. In addition, like other positive signs of continued momentum, orders outpaced revenue during the quarter. Our growth is broad-based across all business groups, markets, and geographies. The combination of strong top-line performance and execution translated to excellent growth and profitability and earnings per share. Our Q3 operating margin is 26%. This is up 230 basis points from last year. EPS is $1.10, up 41% year-over-year. Agilent success continues to be driven by our build and buy growth strategy and execution prowess. We're developing market-leading products and services, investing in fast-growing businesses, while delivering outstanding customer service, and continue to drive profitability. Since the onset of the pandemic, we have taken actions to ensure Agilent emerges even stronger as a Company. While we have yet to leave COVID -19 in the rearview mirror, our Q3 results are another indicator our actions are delivering the intended results. Bob will provide more details on end markets and geographies, But I want to briefly highlight our performance in our two largest end markets, Pharma and Chemical & Energy. We continue to perform extremely well in Pharma, our largest market, growing 27% with strength in both small and large molecule segments. Our large molecule business grew roughly 52% in the quarter and now represents 36% of our overall Pharma revenue, up from the mid-20s, just a few years ago. In chemical energy, our business is recovering faster than expected, expanding 23% in the quarter. This is an acceleration of the momentum we achieved in the first half, and our order funnel continues to strengthen. Looking at our performance by business unit, the Life Science Applied Markets Group generated revenue of 680 million. LSAG is up 22% on a reported basis, this is up 18% core of just a 4% decline last year. LSAG 's growth is broad-based across all end markets. Our performance was led by strength in Pharma, which is up 22%, and chemical energy up 31%. All businesses delivered strong growth led by cell analysis at 38% growth, and our LC and LCMS businesses, which grew 22%. We continue to strengthen our position in the fast-growing Large Molecule market segment. During the quarter, the LSAG team launched 3 InfinityLab Bio - LC Systems at the well-attended InfinityLab LC Virtual Conference in June. These new products further extend our LC leadership position. In addition, building on our already strong Pharma offerings, we launched new compliance-ready LC/Q - TOF and LC - TOF solutions to our portfolio in the quarter. The Agilent CrossLab Group posted a revenue of 560 million. This is up a reported 21% and up 15% on a core basis. These results are on top of 1% growth last year. The business is benefiting from increased activity in [Indiscernible] labs and instrument connect rates. This led to more contractive services, on-demand services, and consumables consumption across all end markets. All end markets grew mid-teens or higher, with exception of environmental [Indiscernible] which still grew 9%, The pandemic has shown ACG to be our most durable business with ACG growing each quarter since COVID-19 first emerged. Our customer-focused approach and digital investments continue to pay dividends. Looking forward, instrument placements and demand as well, [Indiscernible] strong performance by ACG, as we drive attractive rates and increased costs for lifetime value. The diagnostic genomics group produced revenue of 346 million up 44% reported, and up 37% poor, compared to an 8% decline last year. The growth was broad-based across product lines and regions and was led by our NASD GMP Alago business. The ramp of our facility in Frederick, Colorado continues to go very well. The quarterly results exceeded our expectations, easily, surpassing the $50 million revenue milestone. While one quarter does not make a trend, our team has done a tremendous job increasing output in a high-quality manner. This gives us increased confidence in our ability to exceed the $200 million annual run rate in revenue with existing capacity. In addition, the trained manufacturing line expense is well underway and on schedule. Our Genomics Instrumentation and Consumables businesses rebounded strongly in the quarter, as did our pathology-related businesses. For the first time in several quarters, we saw diagnostic testing above pre-pandemic levels. While we are watching the Delta variant very closely, to date, we have not seen a meaningful negative impact in testing volumes. I also want to highlight our performance in China. While still less than 10% of DGG revenue, our China business grew 50% in the quarter. We continue to see tangible progress in building a stronger China market position. In Q3, we signed our first ever companion diagnostic development services agreement with a China-based BioPharma Company. Earlier this month, we also announced the initiation of in-country manufacturing for our SureSelect product line. We are very bullish about long-term growth prospects in China for our DGG Product and Services offerings. In addition, the integration of the Resolution Bioscience team is going well. And we are very pleased to enter and expand our participation in the fast-growing NGS-based cancer diagnostic market. It was a busy quarter at Agilent, so I have a few other achievements I'd like to share with you. Last month we published Agilent's 21st Annual Corporate Social Responsibility report. At a time when some are just starting to look at issues like sustainability and societal impact, this has always been a key part of who we are as a Company. We've been addressing these issues since our founding more than 2 decades ago. I would encourage you to review our report on the Agilent website. We're also very pleased to receive recognition as a great place to work in the U.S. by the Great Place to Work Institute. This resulted from just one more example of us when having a highly engaged and energized team. And as you know, teams with high engagement win in the market. Looking ahead, building on another excellent quarter and the momentum we're seeing, we expect the business to continue to perform well as we close out what we believe will be the outstanding fiscal year 2021. As a result, we are once again raising our full-year revenue and earnings guidance. Bob (ph) will share more details, but we're expecting a continuation of our excellent top-line growth and earnings generation. While the world has yet to fully emerge from a global pandemic, Agilent is well-positioned to deliver excellent results again in the fourth quarter. I remain very proud of the Agilent team's ability to consistently deliver for our customers and shareholders. Thank you for being on the call today, and I look forward to your questions. I will now hand the call off to Bob. Bob?" }, { "speaker": "Bob McMahon", "text": "Thanks, Mike. And good afternoon, everyone. In my remarks today, I will provide some additional details on Q3 revenue, and take you through the income statement and some other key financial metrics. I'll then finish up with our updated outlook for the fourth quarter and the full year. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike mentioned, we had an excellent result in the Third Quarter. Revenue was 1.59 billion, reflecting reported growth of 26%. Core revenue growth was 21%. Currency added, 4.5% for the quarter, and M&A added 0.5. In addition, COVID-related revenues were in line with the prior year. All end markets performed well with Pharma and Chemical & Energy as standouts versus [Indiscernible] expectations. Our largest market Pharma, grew 27% during the quarter, after growing 2% last year. The performance was led by the continued strength in our large molecule business, growing 52%, while our Small Molecule business grew mid-teens. And all regions in the pharma market grew double-digits. Our Large Molecule business was driven by our NASD division and demand for LC and Mass Spec instrumentation and solutions. While our Small Molecule business was primarily driven by QA/QC refresh. Chemical & Energy also performed well this quarter, with 23% growth. Even after accounting for the comparison against the 10% decline last year, this was clearly our best quarter since the onset of the pandemic. This result was driven by increasing momentum and demand for advanced materials and the general global economic growth. Our view is that the Chemical and Energy market still has additional room to grow moving forward. The diagnostics and clinical, we're very encouraged with the continued recovery in the market as our genomics and pathology businesses saw very good growth. On a regional basis, all regions grew with China up 41% and America is delivering 38% growth. In academia, in the government market, we delivered 12% growth as most research labs continue to open globally and expand capacity. On a regional basis, Europe led the way. The Food market continued its double-digit performance, growing 12% on top of growing 1% last year. Food manufacturers continue to invest in increased testing to ensure quality and authenticity. A developing cannabis testing market, primarily in the U.S. also contributed to the growth in this market. And regionally, the food market was led by the Americas and Europe. Rounding out our key markets, environmental and forensics came in with 5% growth. On a geographic basis, all regions demonstrated solid growth led by the Americas at 32% and Europe at 23%, both exceeding our expectations. The performance was broad-based across all markets. And as expected, China was up 8% on top of 11% growth last year. All 3 business groups grew in China during the quarter. Pharma, Chemical & Energy, and Diagnostics were the key drivers. Now, turning to the rest of the P&L. Third Quarter gross margin was 55.9% up 80 basis points from a year ago, despite roughly 40 basis points of headwind from currency. Our strong top-line, some positive product mix, coupled with the strong execution from our operations team, drove the year-over-year improvement. And our supply chain team is doing a tremendous job getting our products to customers despite the increase in demand. Gross margin improvement in performance, along with continued operating expense leverage, resulted in operating margin for the third quarter of 26%, improving 230 basis points over last year. Putting it all together, we delivered EPS of $1.10 up 41% versus last year. Our tax rate was 14.75% and the share count was 306 million shares as expected. We delivered $334 million in operating cash flow during the quarter, showing a strong conversion from net income and up more than 15% from last year. During the quarter, we returned $172 million to our shareholders, paying out $59 million in dividends, and repurchasing roughly 800,000 shares for $113 million. Year-to-date, we've returned $829 million to shareholders in the forms of dividends and share repurchases, a leverage ratio of 0.8. Accounting for our Q3 performance and improved outlook in the fourth quarter, we are again raising our full-year projections for both revenue and earnings per share. We are increasing our full-year revenue projection to a range of 6.29 to 6.32 billion, up to $125 million at the midpoint from previous guidance. and representing reported growth of 17.8% to 18.4%. in core growth of 14.5% to 15%. Included is roughly three points of impact from currency and a small amount from M&A. In addition, we're on track to deliver, roughly $100 million in COVID-related revenue in fiscal 2021, in line with our expectations from the beginning of the year and flat to last year. We expect to continue our strong operating leverage, and so we are increasing our fiscal 2021 non-GAAP EPS to a range of $4.28 to $4.31 per share, up 30% to 31% for the year. This translates to fourth-quarter revenue ranging from 1.63 billion to 1.66 billion. This represents reported growth of 10% to 12%, and core growth of 8.5% to 10%, on top of the 6% growth in Q4 of last year, when we started to see early signs of recovery from the strict lockdowns. In addition, while COVID revenue was roughly flat year-on-year for the full year, last year's fiscal fourth quarter represented the high-water mark in our COVID-related revenue. And as a result, we expect to see roughly a 1-point headwind due to COVID revenue in the quarter. So, our core growth, excluding COVID, would be comparable to 9.5% to 11%. We are forecasting higher expenses in the fourth quarter as we invest to maintain our strong momentum, but expect continued operating leverage in excess of 100 basis points. non-GAAP EPS is expected to be between 1.15 and 1.18 with a growth of 17% to 20%. Now before opening the call for questions, I want to reiterate that we continue to see good demand in our end markets, have solid momentum in all our businesses, and expect to close the year extremely well. We believe our strategies are the right ones for Agilent, but we couldn't achieve these results, we [Indiscernible] without the excellent execution by the team. With that Barney (ph) back to you for Q&A." }, { "speaker": "Barney", "text": "Thanks, Bob (ph). Paul (ph), if you could please provide instructions for the Q&A now." }, { "speaker": "Operator", "text": "Definitely, sir. We will now begin the question-and-answer session. [Operator Instructions]. However, if your question has been answered and you wish to remove yourself from the queue [Operator Instructions]. Please stand by while we compile the Q&A roster. Your first question is from Tycho Peterson with JPMorgan." }, { "speaker": "Tycho Peterson", "text": "Hey, good afternoon. Congrats on the quarter. Mike, I want to start with the --" }, { "speaker": "Mike McMullen", "text": "Thanks, Tycho." }, { "speaker": "Tycho Peterson", "text": "-- China outlook. I know in China, there's been a fair amount of noise about companies being able to do products in-country -- [Indiscernible] shutdown -- internal shutdown. So, can you maybe just talk to some of the near-term dynamics in China? And it sounds like trade tension's also getting worse with the buy China policy. How do you think about that over the next couple of quarters?" }, { "speaker": "Mike McMullen", "text": "Sure. Thanks for the congratulatory comments, Tycho, and we really, actually, continue to feel quite good about our performance in China, as Bob and I mentioned in the call script, I think 8% up on 11% last year, and I think our stack growth is around 19% Q2. It's actually up over our stack growth of 17 Q2. We're seeing this good, strong, Pharma and C&E demand in China. Now, the funnels really remain quite robust. And I think, now getting to your specific question, we're not seeing any significant changes in terms of ability to get the product in. I mean, there's been a lot of noise for years, I have to say, between the U.S and China, yet the business seems to somehow get transacted. So, Bob, I think we're not really overly concerned about those dynamics. We did have somewhat of a little bit of shipment interruption as some of our Academia government customers were – had [Indiscernible] our VAP tax exemption change. But I think that was a relatively minor impact on the P&L. But clearly, we're monitoring those developments and you have to continue to work to make sure you've got the logistics of flowing through the country, but we've always been able to find a way and are not overly concerned about it at this point." }, { "speaker": "Bob McMahon", "text": "Yes. I would say, Tycho. We continue to invest in China as we mentioned in the call. And there are always bumps here and there, but long-term we feel very good about the business in China." }, { "speaker": "Mike McMullen", "text": "Yes, that's having one other thought here, Tycho (ph.), is relative logistics. We have divested into a number of forward-looking stocking locations over the last few years, not really has paid us dividend, because we are less dependent on stuff coming directly into the port because we have a lot of in-country inventory." }, { "speaker": "Tycho Peterson", "text": "Okay. That's helpful. And then it sounds like you've got a lot of underlying momentum. I know you don't like to talk about the order book, but any preliminary comments you can make on '22 at this point, you know, Street has you are up about 6.5%, curious if you think that's a reasonable bar and any comments on where you think margins may go next year?" }, { "speaker": "Mike McMullen", "text": "Yes. Thanks. Those specifics, but what I can tell you is that we feel really good about the momentum of the business, the order book is continuing to be strong and that's as of today, where we got the latest view of the early orders through August, so all the momentum remains there. As I mentioned on our prior earnings call, we feel a really good ability to meet and exceed those long-term growth goals we put out, and the margin goals. I think that's where we stand right now, is we'll get to that in November, but we're feeling good about the trajectory of the business momentum we built here." }, { "speaker": "Tycho Peterson", "text": "Okay. Thanks a lot [Indiscernible]" }, { "speaker": "Operator", "text": "Your next question is from Brandon Couillard with Jefferies." }, { "speaker": "Brandon Couillard", "text": "Many thanks. Good afternoon." }, { "speaker": "Mike McMullen", "text": "Good afternoon, Brandon." }, { "speaker": "Brandon Couillard", "text": "Maybe to start with the Biopharma business. I mean, 50% growth in Large Molecules is pretty impressive. Used to elaborate, given the sources of growth there, and what that would look like if you back out the NASD contribution." }, { "speaker": "Mike McMullen", "text": "Yes. Sure. And then I'm actually going to invite Bob and I will also want to have Jacob make a few comments on some of those new introductions here. I think I used the word broad-based, at least 5 or 6 times, maybe 10 times in my prepared remarks and we're seeing that in the biopharma. So, we've got across the board, double-digit growth happening here. Cell Analysis LC, LCMS, other platforms that go into Biopharma, along with our consumables and services. And then to your point, really outstanding growth in NASD. But while NASD was a big contributor, it was an Agilent-wide life story. And Bob, maybe you can just answer the specifics on the numbers?" }, { "speaker": "Bob McMahon", "text": "Yeah. And Brandon, to your point, the total in Large Molecules was 52% as I mentioned before. But even if you back out the NASD businesses still grew in excess of 40%. So very strong business on NASD, but it shows that the rest of the business, both instrumentations, as well as the consumables pieces and the other elements on the Pharma associated revenue in Diagnostics and Genomics also, very strong business in it." }, { "speaker": "Mike McMullen", "text": "And Brandon (ph.), I just wanted to maybe have Jacob (ph.) jump in very quickly because we have a continued drumbeat of new introductions into this space as well, which has been the focus and prioritization of our R&D pipeline. Jacob (ph.), I know we had 2 big introductions in Q3 as well." }, { "speaker": "Jacob Thaysen", "text": "Yeah, thanks for that, Mike (ph.). And that's -- you know, at the analyst said, I think we've talked about in [Indiscernible] that about 70% of our portfolio above that was really focused on Biopharma a so I'm really happy to see that momentum we have right now. And as you also mentioned in the prepared remarks, you know, I'm very pleased with the bio-LC portfolio. In fact, we had and -- and, one of the [Indiscernible] of our momentum is that with that Bio-LC that we introduced here a few months ago. And we had a virtual conference with more than 1,000 customers participating, and we had more than 25 external scientific speakers, which I would actually say I know it's the best in history by far. So that introduction is actually creating quite a lot of momentum and it allows us to play for all the [Indiscernible] biocompatible space to the 2D-LC, but clearly, also into the Mass Spec, with the Mass Spec at the end of it. And we also mentioned compliance. The FDA [Indiscernible] informatics compliances and all that very important part that most of the Biopharma see as the requirement to do business with them. And we have invested in this for quite a while, so we ensure that data integrity, audit readiness, and storage of data is the level of security. And right now, we have the offering both supporting our LC, but also all our major marketable Mass Spec instruments. And also, in spectroscopy, with the recent announcement here off the top in the Q2 informatics solutions. So right now, we are -- we have a very strong portfolio and that truly drives our growth. Well, I can continue talking about the cell analysis, but I will --" }, { "speaker": "Mike McMullen", "text": "I'm going to bounce it back to Brandon. Hey Brandon, thanks for allowing us to do an advertisement on the Agilent portfolio strength. But, back do you. Do you have any additional questions?" }, { "speaker": "Brandon Couillard", "text": "Yeah, I think just touched on maybe if we could just elaborate on the Small Molecule market. You mentioned QA/QC refresh, curious [Indiscernible] we might be in there and what you think the market is kind of growing for Small Molecule relative to your big team." }, { "speaker": "Mike McMullen", "text": "It's our view that there is always a replacement market going on in the Small Molecule space, and sometimes, it picks up a bit more. But then -- and I think we're in that phase right now. I wouldn't say it's a huge acceleration, it's just the solid and probably high changes." }, { "speaker": "Jacob Thaysen", "text": "Yeah, I was going to say, Brandon as we think about this prior to the pandemic, we were probably slower growth than normal were some of the QA, QC refresh was probably elongated. And now we're starting to see that pick back up, and that typically is an 18 to 24 months kind of cycle. And I would say we're still at the beginning of that. And so, feel good about the continued performance of the refresh cycle going forward." }, { "speaker": "Brandon Couillard", "text": "Great. Thank you." }, { "speaker": "Operator", "text": "Your next question is from Vijay Kumar with Evercore ISI." }, { "speaker": "Vijay Kumar", "text": "Hey guys, congrats on the strong print this afternoon." }, { "speaker": "Mike McMullen", "text": "Thanks, Vijay." }, { "speaker": "Vijay Kumar", "text": "Mike, maybe on my first question here, Resolution Bio, that deal that you guys did, did that come in line with expectations? I'm just curious. The 50-basis points contribution seems a little light. Is there some ramp-up phase here that's in log and not? Maybe just talk about what the deal does to you and how it adds to the corporate growth rates here." }, { "speaker": "Mike McMullen", "text": "So, you do some very good math. So, it's about half-a-point of reported growth rate, Bob. And I'd say relative to Q3, probably a little bit behind the revenue as we learn more about this business or some elements of this global lumpiness, so we're feeling pretty good about how our business will finish, but we're expecting a lot in the Fourth Quarter. I think this is a story of continued acceleration of growth in '22 and beyond and we're just super delighted by the early days of how the teams feel about being part of Agilent. And then we're really building scale around this business. So, I think it's still a relatively small part of the overall revenue picture today for Agilent, and we knew that going in, I think is roughly [Indiscernible] million, but we would expect really strong growth rates in the coming years and again, we really feel like we're off to a great start with this team. Just interacting with Mark Li, who is the founder -- co-founder of Resolution Bio. He is really happy about the capabilities that we're bringing to his business to further scale it. So early days, but feeling good -- pretty good about things and [Indiscernible] I don't know if you're saying [Indiscernible]" }, { "speaker": "Bob McMahon", "text": "Yeah, I was just going to say the other thing is, obviously, we're just now having more and more conversations with our existing CDx customers and the power of being able to have our established CDx business on the [Indiscernible] side coupled with NGS-based technology, I think is going to be a real significant competitive advantage for us going forward. So very excited about this business going forward." }, { "speaker": "Vijay Kumar", "text": "That's helpful, Mike. And Bob, one for you on expenses. In the year-to-date operating expense as a percentage of revenues, you guys [Indiscernible] a low 30s sub 31%, that's well below your historical level. I guess my question is, is this all just associated with the volume leverage rate given the strong organic performance year-to-date, or are there some timing elements on expenses, that [Indiscernible], and how should we -- if there are how should we think about those factors coming back in '22?" }, { "speaker": "Bob McMahon", "text": "Yeah, Vijay, it's a great question. And I think if you remember, maybe a year ago we talked about some of these expenses that were going down, and our goal was not to have them come back to the same levels that they had. And these would be in areas around travel, but also leveraging our digital capabilities, and what we've been able to do is be very successful. Certainly, volume is our friend. And the leverage that we've been able to drive across all three of our business groups has really helped. But if you look at our year-over-year elements around travel and costs associated with marketing programs and digital investments. Our digitals investments have gone up, but the actual return on those investments has actually gone up. And in fact, Jacob just highlighted one of the programs that we had. And so those are -- our goals are for those to continue -- they will continue to ramp next year to come back, but not near the level that they had come prior to the pandemic. So, we do think that there's a fundamental margin improvement associated with these expenses. And that's why Mike talked about our long-term margin expansion story is intact. It's not going to be 200+ basis points like it were this last quarter, but certainly feel good about our continued ability to drive margin expansion." }, { "speaker": "Mike McMullen", "text": "And Vijay (ph.), this is Mike, if I can just add one additional comment too, and I hopefully came out in my prepared remarks, but we're not holding back on investing for growth. So, we're quite pleased with the margin performance, but it didn't come at the expense of our ability to grow down the road." }, { "speaker": "Vijay Kumar", "text": "That's extremely helpful, Mike (ph.). Congrats again. Thank you." }, { "speaker": "Mike McMullen", "text": "Thank you." }, { "speaker": "Operator", "text": "Your next question is from Doug Schenkel with Cowen. Your line is open." }, { "speaker": "Doug Schenkel", "text": "Hey, guys. Good afternoon. Could I -- actually could I just build off of that last question with a quick follow-up. Again, acknowledging and recognizing you're not going to guide on 2022 today. I'm just wondering though at high levels, should we assume that incremental margin is going to be a little bit lower than normal next year? If we're assuming a normalization of activity in the post-pandemic world? I heard what you said about areas where you're not going to need to invest as much, but at the same time, you are investing in growth. Just mathematically, does the incremental need to be a little bit lower than normal next year?" }, { "speaker": "Mike McMullen", "text": "Yes. We're still building our plan. But our intent is to still be able to drive that margin expansion. I will say that we are having our new Train B in NASD come online, which will add a little pressure to it. But, I think, we've been very good about being able to do 30% to 40% incremental and sometimes even higher than that when the margin comes in. And I don't see any reason why we shouldn't be able to continue to do that, Doug." }, { "speaker": "Doug Schenkel", "text": "Okay, super helpful." }, { "speaker": "Bob McMahon", "text": "Maybe what's -- yes, maybe what's underlying your question is inflationary pressures and activities around that I would say that we didn't see any material impact. Obviously, there is some but we're planning to manage that going forward." }, { "speaker": "Doug Schenkel", "text": "Yeah, that's in audits. It's supply constraints, it's inflation or refreshers. It's the hope that we're traveling a little bit more and there are real conferences and real site visits, things like that. So that's the spirit of the question. Just making sure that the capture of those dynamics, we don't have to think about something other than that 30 to 40 traditional [Indiscernible] range. So that's helpful, Bob (ph.)." }, { "speaker": "Mike McMullen", "text": "I would just add. [Indiscernible] we're under 22 now. Sorry to interrupt there, but I'd just say that some of our programs, and -- and such are really geared towards making sure we can manage our way through this in '22, so we're on this already." }, { "speaker": "Doug Schenkel", "text": "Got it. Okay. In terms of full-year guidance, as it's been noted a few times, you increased the outlook by more than the magnitude of the Q3 B. I guess I'm just wondering what gives you confidence in this change. Is it backlog data? Is it pacing across the quarter? Is it activity through the first month of the quarter? Maybe it's all the above and maybe more importantly --" }, { "speaker": "Mike McMullen", "text": "[Indiscernible]" }, { "speaker": "Doug Schenkel", "text": "You just checked everyone? Okay. Perfect." }, { "speaker": "Mike McMullen", "text": "I know. Bob and I are smiling in the room here, and, I think, we can probably put a checkmark on all -- first of those 3 things you mentioned." }, { "speaker": "Doug Schenkel", "text": "Okay. And then throughout the year, you've consistently beaten your own targets pretty maturely, and it definitely makes sense to skew the error bars a bit more conservatively when you set your targets, given the state of the world. That said, given how well you performed relative to those targets, and recognizing we're not out of the pandemic, but we've got a little more experience with it at this point. Is it fair to say that you're at the point where you could adjust the philosophy a little bit and maybe change the positioning of those error bars as you set guidance moving ahead?" }, { "speaker": "Mike McMullen", "text": "Yeah, I think that that's fair. I think -- what we've tried to do is set prudent guidance as we've talked about in the past. But certainly, as we've and our customers, more importantly, the market is getting used to dealing in a COVID world, there are fewer variables to be able to understand. And I would look at just what we did in Q2 to Q3, we dramatically increased our Q3 guidance and then did the same thing here for Q4. So, I think our visibility is improving. You should take that away for all the things so you rattled off. Certainly," }, { "speaker": "Bob McMahon", "text": "the momentum that we're seeing, the general economic improvements, and so forth. But as you mentioned, there's still a Delta variant out there, and so well, as Mike mentioned, we haven't seen any impact of that yet. We also recognize that that could change during the course of the quarter. So, we're trying to take all those factors into account, but also try to provide some realistic guidance going forward." }, { "speaker": "Doug Schenkel", "text": "Okay. Thanks again, guys." }, { "speaker": "Bob McMahon", "text": "You're welcome, Doug." }, { "speaker": "Operator", "text": "Your next question is from Derik de Bruin with Bank of America." }, { "speaker": "Derik de Bruin", "text": "Hello, and good afternoon." }, { "speaker": "Mike McMullen", "text": "Hey, Derik." }, { "speaker": "Derik de Bruin", "text": "Hey. Can we talk a little about environmental and [Indiscernible] and I wanted Doug to tell that question too? I know it's probably a little bit early, but any signs of how we should think about the GC portfolio picking up, or you just replaced -- is it just sort of like catch-up spending right now in the industrial or any initial indications that the replacement cycle that you were going -- you were in the midst of prior to the pandemic is likely to restart." }, { "speaker": "Mike McMullen", "text": "Hey, Derik. Hey, how do I take the first one in Bob -- I mean, Bob and Jacob, you may want to add additional comments here. But let me talk about the question around gas chromatography. We are seeing that. And that's really behind a lot of the fairly bullish comments, if you will, around C&E space. So, we're seeing it in our GC revenue, and we're also seeing it in our GC order book. And I've been very reluctant to call that hey, we think this business is now in a situation of returning to growth. That reluctance has now passed. I think we're now into what looks to be the start of some really good potential business on our GC side, as that replacement cycle turns back on. And Jacob, I know you're a lot closer to the detail’s alignments, anything else you could add to that?" }, { "speaker": "Jacob Thaysen", "text": "Yeah, Mike (ph.). You're absolutely right. I think first of all of them -- I think Bob (ph.) mentioned that also the chemicals and engineered materials market certainly on fire right now, [Indiscernible] in Semicon and in the mining industry, including lease term for batteries. But we also see the traditional Petrochem markets really start to see some momentum now. And there's a lot of talk about the future of Petrochem but this market is going to pay for quite along. And I think that all the analysis shows that there'll be [Indiscernible], so we see investments coming into this market right now. And the new market that's also coming along is Renewable Energy, which will also use many of our technologies. And we see a great opportunity there also in the future. They're still in a development phase, but as you know, there's a lot of investments going in here, so we are participating in that also. So, we see a lot of opportunities in GC and the GC is actually seeing momentum both first in the chemical markets, but now into the energy markets." }, { "speaker": "Derik de Bruin", "text": "Okay, so following up on that. So, you're feeling good about your more industrial [Indiscernible] experiments, even with some of the choppiness in the Chinese market, the data there. So, are you seeing -- is it the U.S. and Europe [Indiscernible] anymore or is it just that you're seeing turn on that one? And then where were we -- what remind me in annoying baseball analogies where we were in [Indiscernible] on the GC replacement cycle?" }, { "speaker": "Bob McMahon", "text": "Yes. So, Bob, I think it's fair to say that there really is no difference across the regions. I mean, China actually was the area of strength for us in C&E, and I think we're seeing good -- good strength globally, which I think points to the importance of global economic outlook for this segment. And I'd say we're probably earlier middle innings on the -- paused there for a while because we got rate run going with the new portfolio, but a pause. I'd say we're early innings, middle innings." }, { "speaker": "Mike McMullen", "text": "Yeah. I would say too, Derik, just to give you a frame, China was more than twice the -- China C&E market was in line with the overall C&E growth rate that we saw." }, { "speaker": "Derik de Bruin", "text": "Thanks for answering the question." }, { "speaker": "Operator", "text": "Your next question is from Dan Leonard with Wells Fargo. Your line is open." }, { "speaker": "Dan Leonard", "text": "Thank you. And good afternoon." }, { "speaker": "Mike McMullen", "text": "Good afternoon." }, { "speaker": "Dan Leonard", "text": "I was hoping you could -- Mike (ph.), I was hoping you could address the 5% to 7% core revenue growth model that you've introduced in December. Is that still relevant? Do you think something has fundamentally changed in the markets from that time period?" }, { "speaker": "Mike McMullen", "text": "I'd say it's relevant till we change it. So, I'm not ready to, on the fly here, revise our long-term growth. But as you may recall, in our December outlook, we said, think about us being more of the high range in that area. And I think [Indiscernible] a little tougher so I put a 7 out there in any type of long-term growth guidance. I think what's changing is the nature of our portfolio, which is we continue to build very quickly, much bigger positions in faster-growing segments. And I think it's probably fair to say that the Pharma market, in particular, the Biopharma market is -- remains very robust, but again, we're sticking with those long-term growth goals at this point in time." }, { "speaker": "Bob McMahon", "text": "I would say, Dan, to build on what Mike is saying, particularly the pharma market. We do feel that that market, and in fact, Mike talked about it in his prepared remarks that we're emerging as a stronger Company. We do think that the Pharma market, really driven by that Large Molecule area, is a faster-growing market coming out of the pandemic than going into it. And I think if we look at where our investments are and the performance that we've had in particularly the Large Molecule. Now again, Small Molecule has been doing very well. That, in and of itself, would elevate that overall long-term growth rate to be faster than what we saw going in, which certainly helps us, given that is -- that's our largest market. So, I'll leave it at that." }, { "speaker": "Dan Leonard", "text": "Okay. That's a helpful clarification. And just a follow-up on China, could you elaborate further on the drivers of that 50% growth rate you called out for DGG in China?" }, { "speaker": "Mike McMullen", "text": "Yes, I'm going to invite Sam on this call. He hasn't had a chance to work today in this call. So, Sam, your thoughts of what's been going on in China, I was doing a little bragging on your growth rate there." }, { "speaker": "Sam Raha", "text": "Yeah. Mike, happy to give more perspective on China. We actually had a good quarter across the board for all of our business groups within DGG. Specifically, we continue to see real momentum in clinical diagnostic testing, led in pathology. We've seen really good pick up of our PD - L1, and our diagnostic -- or companion diagnostic there, as we've continued to train more pathologists there in the use and so forth. Genomics also had a really, really, good quarter, both on the consumable side. And we've also just recently announced within the quarter, the launch of our new V8 Xome, which is being well received in China and globally. And I will tell you one of our absolute strengths in China as it is elsewhere, remain our core NGS and Genomics QC portfolio. So, all of those elements, along with Mike, as you mentioned now, the signing of our first companion diagnostic development agreement with the Biopharma there, I think foretell a continued story of strength in China for DGG." }, { "speaker": "Mike McMullen", "text": "And just to build on Sam's comments, I mean, we've been working really hard the last several years putting in the right foundational capabilities, building the right commercial channel, the right ability to handle diagnostics products ourselves, and it's really great to actually see those investment starting to pay off in year term growth." }, { "speaker": "Dan Leonard", "text": "Appreciate all that color. Thanks, everyone." }, { "speaker": "Operator", "text": "Your next question is from Patrick Donnelly with Citi. Your line is open." }, { "speaker": "Patrick Donnelly", "text": "Hey, thanks for taking the question, guys." }, { "speaker": "Mike McMullen", "text": "Sure." }, { "speaker": "Patrick Donnelly", "text": "Mike, maybe one on the Chemical & Energy side to follow up on some of the earlier questions. I know that's one where you pretty closely keep an eye on the order book and your confidence goes with that. Are you getting more visibility as the order book builds there? I'm just trying to compare it to pre-pandemic mid-pandemic, I know you guys had a pretty short leash on in terms of how you would guide for that segment, how comfortable you would allow yourselves to get. Just wondering how the order book is looking there relative to some of the past quarters and how you're feeling about that segment. Certainly, seems like the tone is pretty positive here." }, { "speaker": "Mike McMullen", "text": "Yes. Now I'm glad you picked up on that. We really want that to come through in the call. And I think the confidence is coming from not only the revenues that we've reported, but as Bob (ph.) mentioned in general, and I think it also holds for C&E, we just have much better visibility into our funnel. And you may have recalled I was talking a lot of -- in prior calls, I talk a lot about a conversation we're having with customers and we knew there was activity. But now that conversation is turning into orders. So, we're feeling much better about the trajectory of the C&E space. Historically I've been very cautious to give any real kind of positive trends in this area. But I think we've seen enough over the last few quarters and what we're seeing with our customers and the order book is really the basis for this confidence. And again, it's tied to not only the pent-up demand they've had in terms of even replacing aged equipment in their laboratories, but they are also -- what we hear from our customers, there are much more confident about where the global economy is going. So, they're willing to make investments. A couple of positives here and there and there will be some ups and downs because of outbreaks here and there of COVID, but in general, the [Indiscernible] remains very positive, I think as Bob mentioned earlier, our customers have learned to deal with this. So, Bob, I know this is -- we've talked a lot about this, anything I missed there?" }, { "speaker": "Bob McMahon", "text": "No." }, { "speaker": "Mike McMullen", "text": "Okay." }, { "speaker": "Patrick Donnelly", "text": "That's helpful. I appreciate it, Mike. And then on the diagnostic side and just given commentary that you guys are above pre-pandemic levels, can you just talk about the pace of the recovery in the quarter and then expectations for the further ramp from here. And I just want to clarify and make sure you haven't seen any impact in Delta up until I guess this week. I just want to make sure I have that clear. Thank you." }, { "speaker": "Bob McMahon", "text": "Yeah. I mean, we saw continued recovery. I think we mentioned at the beginning -- at the end of Q2 that we were at pre-pandemic. We exited there. The average was still below. And that steady improvement across our business, across really across all of the regions continued into Q3. And by the end of Q3, we were above. And Patrick, to your specific question about Delta, we have not seen any impact to date associated with that." }, { "speaker": "Patrick Donnelly", "text": "Great. Thanks, Bob." }, { "speaker": "Bob McMahon", "text": "Yeah." }, { "speaker": "Operator", "text": "Your next question is from Matt Sykes with Goldman Sachs. Your line is open." }, { "speaker": "Matt Sykes", "text": "Hello. Hey guys, thanks for taking my questions, congrats on the quarter." }, { "speaker": "Bob McMahon", "text": "Sure." }, { "speaker": "Mike McMullen", "text": "Thank you." }, { "speaker": "Matt Sykes", "text": "Just on ACG, you guys had a pretty impressive operating margin, over 29% for the quarter. I'm just wondering what you feel about the sustainability of those margins and then any progress that you've made on attachment rates in that business? I know you mentioned a little bit in your prepared remarks, but any additional color on that would be helpful." }, { "speaker": "Mike McMullen", "text": "I think I'll pass it on to Borick (ph.), who can provide some additional color to the ACG and answer your questions. Go ahead, Borick." }, { "speaker": "Padraig McDonnell", "text": "Yeah. Great. Thanks -- thanks, Mike. And we're getting back to more normalized service support with our customers, which is more cost associated, of course, with travel, but we're starting to see an accretive margin in Q3 and we're seeing that come through to improve in Q4. So very, very strong in that. In terms of touch rate, we're seeing increased touch on our services and consumables and of course, with the larger install base, this bodes really well for the future, as more attach rates for services and consumers will be available to a very strong outlook." }, { "speaker": "Mike McMullen", "text": "Yes, hey, and Matt, maybe just to build on what Borick(ph.) is saying in terms of sustainability, we feel very good about the ability to continue to sustain those levels of margin. It gets back to the work that our service engineers do in servicing our customers. It's mission-critical for our customers, keeping those labs and those instruments up. And our ability to continue to invest in digital, as well as, be there on-site on the labs or with the labs is really important. A one piece that I would add is we continue to invest in that digital as I mentioned before, and our online orders actually grew faster -- our revenue grew faster than the overall ACG business, which actually speaks to our continued relevance in that space. And obviously, that's good for our customers in terms of either doing business with Agilent, but it also helps from that margin perspective as well." }, { "speaker": "Matt Sykes", "text": "Great. Thanks for that color, it's very helpful. And then just one more on C&E. I know you've answered a lot of questions already, but I'm just wondering how the competitive landscape might have changed. Obviously, it had a challenging time during COVID. It took a while for it to recover, and now, it's certainly in recovery mode. I'm just wondering, as you look out of the competitive landscape, have you seen some competitor's slow investment; and therefore, there are some share gain opportunities in that growth that you're seeing?" }, { "speaker": "Mike McMullen", "text": "I don't know where they slowed. I'm not sure they're investing for that segment. So, and we're not seeing much happen on the competitive side. We're by far this is -- we're the clear leader in this space, we've continued to invest in our core portfolio pre and throughout the pandemic. So, as you can tell, I'm pretty bullish about our ability to outgrow the competition in this space." }, { "speaker": "Bob McMahon", "text": "Yeah, let me add. It seems like a long time ago, but we launched 2 new GCs back in 2019, both at the high end and a mid-range GC. And we talked about one of the reasons that we did that is we've got a leadership position in the GC market. But when you look at it, we're over-index to the high-end, and so the ability for us to be able to have this mid -- mid-range, I think was really critical, and we're starting to see that benefit. And maybe Jacob wants to jump in that conversation. Yeah." }, { "speaker": "Jacob Thaysen", "text": "Yes. Exactly. You're actually right on the GT and our strength in our GT, but I think we should also mention our spectroscopy business and the ITPMS, where we have done a lot of work also ITP, OES, and MS, where you're doing a lot of work that is -- that has a very strong market share for the material science. And we continue to take market share in that space also. So, I think you'll see us being very strong here. And we have also a site that we will continue to invest in this market going forward. So that's [Indiscernible] therefore the costumers going forward." }, { "speaker": "Matt Sykes", "text": "Thanks very much." }, { "speaker": "Operator", "text": "Your next question is from Joshua Waldman with Cleveland Research, your line is open." }, { "speaker": "Joshua Waldman", "text": "Hi, thanks for taking my questions, just two for you. Mike, you mentioned overall orders outpaced sales in the quarter, and it sounds like book-to-bill in the LSAG business was slightly positive. Just wondered if you could provide us with your assumptions for core growth in the LSAG business in the fourth quarter. And then as we look beyond FY21, given the broad-based strength you've spoken about on the call today, I guess, is it fair to assume that as we look to FY '22, this business should likely grow something above a low to mid-single-digit longer-term average?" }, { "speaker": "Mike McMullen", "text": "Yeah. Let me talk about the fourth quarter and I'm not sure we're going to answer the last one just yet as we're going through our plan, but --." }, { "speaker": "Joshua Waldman", "text": "I had to try." }, { "speaker": "Mike McMullen", "text": "Yes, yes, that was a good try. But I would say for Q4, you're accurate in the belief that our book-to-bill was positive for the quarter, and if you think about Q4, our guidance comprehends high single-digit, low double-digit growth for the LSAG business core growth. And so, I'll leave it at that." }, { "speaker": "Joshua Waldman", "text": "Got it. And then it seems like here today, Pharma has outperformed what you expected coming into the year. I just wondered if you could comment on any current thoughts you have around the potential magnitude of any year-end budget flush, I guess, given -- it seems like investments from these customers have -- have been fairly consistent -- consistent, and strong throughout the year. Does that deflate any year-end spending?" }, { "speaker": "Mike McMullen", "text": "Yeah. We'll address that in the Q1 call. But to your point, we've been pleasantly surprised, and it has continued to be stronger than what we've anticipated throughout the first 3 quarters, and what I would say is we don't expect that to slow down any in Q4 either." }, { "speaker": "Joshua Waldman", "text": "Got it. Thank you." }, { "speaker": "Operator", "text": "And your last question is from Jack Meehan with Nephron Research. Your line is open." }, { "speaker": "Jack Meehan", "text": "Thanks. Good afternoon. You talked about the job that your team is doing, managing the supply chain. Was wondering if you can elaborate on a hotspot you're seeing in terms of inputs, shipping, or labor. And when you look at the fourth-quarter guidance, is that -- are you taking any more prudent or conservative type approach based on what's going on in the supply chains?" }, { "speaker": "Mike McMullen", "text": "Yes, I mean, this has been a lot of discussion on that. I think everybody is talking about the supply chain constraints on a global basis. It's been a challenge for us, but as Bob noted in this call script, our team has just done a tremendous job getting the Agilent products to our customers. And we're really good at this about managing situations. So, we will work on a number of commodity areas for some time. And we also have done things as identifying a changing alternatives source, supply. So, we've been able to do that. We've had a last-minute changes notification from logistics suppliers that they won't pick up our boxes, and so we switched to another supplier. So, we've been able to manage our way through that. And it was conspicuous, it was absent in our cost script a lot of details because while we continue to monitor it, we don't believe that's a material risk to the Company at this time, and we still likely -- we factored all that into our guide for the fourth quarter. And Bob (ph.), I know that you've done a close study of this as well, anything else you'd add to that?" }, { "speaker": "Bob McMahon", "text": "Yeah. The only thing I would say is it's the usual suspects that other folks have called out, things like [Indiscernible] and our team has done, to date, an outstanding job of being able to continue to satisfy demand here. And our expectation is that that's going to continue to happen into Q4. And we've got a continuous improvement program that continues to drive productivity and efficiency gains. And we're expecting that, and to combat some of these inflationary pressures as well as continuing to deliver to our customers. And we will continue to do that into '22 as well." }, { "speaker": "Jack Meehan", "text": "Great. And then one other follow-up is on COVID." }, { "speaker": "Mike McMullen", "text": "Sure." }, { "speaker": "Jack Meehan", "text": "So, the fourth-quarter guidance assumes it's a 1-point headwind, though we're obviously in the middle of another Delta wave here. So, I was curious what you're seeing on the ground or whether your products are just starting to wane in general and any preliminary thoughts around how, you have 100 million this year, just how you're going to guide as you go into 2022 related to that?" }, { "speaker": "Bob McMahon", "text": "What I would say, Jack, it's a good question, and our products aren't directly tied to the testing. We didn't see the dramatic increase but also didn't see the dramatic decline with the testing there. Ours is more around expanding capacity both in testing and over the course of this last year. We've actually seen it migrate to more therapeutic capacity or excuse me, vaccine capacity in demand there. And so, we don't see it spiking up or not building that into Q4. I think it's a little too early to tell for -- for FY22. It's been -- it's been reasonably steady the last couple of quarters. And we do expect contribution in '22 and we'll provide more color as we get through our planning process, but we don't see it dramatically dropping off." }, { "speaker": "Jack Meehan", "text": "Sounds good. Thanks, Bob (ph.)." }, { "speaker": "Operator", "text": "I do apologize but we do have an additional question. The last question is from Dan Arias with Stifel. Your line is open." }, { "speaker": "Dan Arias", "text": "Yeah. Hi, guys. Thanks for getting me in here at the end. Hi, Mike?" }, { "speaker": "Mike McMullen", "text": "Sure. No problems." }, { "speaker": "Dan Arias", "text": "Just one for me. Just Bob, maybe a high-level question. Just to the idea of getting to a post-COVID world, whenever that might be. I'm wondering which of the 3 segments you think might stand the best chance of maybe rebasing at a higher level of the up-margin line, just by virtue of some of the success that you're having, and then to your point, some of the fundamental changes that might come to the expense structure. Is that something you think is possible? And if so, would you be willing to help us with which one is looking most promising there?" }, { "speaker": "Mike McMullen", "text": "I do think it's possible. I'm not going to call out because I'm not going to let -- if I call out one, I'm not going to let the other two Division Presidents off the hook. They must have paid you. I think we could continue to do it across the board. Certainly, we are making investments across all three of the businesses to continue to grow. But we certainly feel like we have opportunities to continue to drive margin enhancement across all 3 of our business groups. Sorry guys." }, { "speaker": "Dan Arias", "text": "Okay. Thanks so much." }, { "speaker": "Mike McMullen", "text": "Thanks, Dan." }, { "speaker": "Operator", "text": "And that concludes the question-and-answer session for this conference call. I will now turn the conference back to Puneet Souda for closing remarks." }, { "speaker": "Puneet Souda", "text": "Thanks, Paul. And thanks, everyone. With that, we would like to wrap up the call for today. Have a great rest of your day." }, { "speaker": "Operator", "text": "Ladies and gentlemen, this concludes today's conference call. Thank you for joining. You may now disconnect. Stay safe and well." } ]	Agilent Technologies, Inc.	154,924
A	2	2,021	2021-05-25 16:30:00	Operator: Good afternoon, and welcome to the Agilent Technologies Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] And now I'd like to introduce you to the host for today's conference, Ruben DiRado, Director of Investor Relations. Please go ahead, sir. Ruben DiRado: Thank you, [Gabriel], and welcome, everyone, to Agilent's second quarter conference call for fiscal year 2021. With me are Mike McMullen, Agilent’s President and CEO; and Bob McMahon, Agilent’s Senior Vice President and CFO. Joining in the Q&A after Bob and Mike’s comments will be Jacob Thaysen, President of Agilent’s Life Science and Applied Markets Group; Sam Raha, President of Agilent’s Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release, investor presentation, and information to supplement today’s discussion, along with a recording of this webcast, are made available on our website at www.investor.agilent.com. Today’s comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency, and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of April 30. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now, I’d like to turn the call over to Mike. Mike? Mike McMullen: Thanks, Ruben, and thanks to everyone for joining our call today. Before I get into the quarterly details, I want to start by recognizing our Agilent India team. Despite the challenging COVID-19 situation, our India team is working closely with our customers to do what we can to help in this time of extreme need. In addition, our Agilent India customer support, finance, and IT teams have worked tirelessly to help us close out the second quarter and keep us moving forward. I could not be more proud of how the team has worked together in true ‘One Agilent’ fashion. Our thoughts go out to the entire Agilent India team and their families during this difficult time. In Q2, the strong momentum in our business continues against the backdrop of a recovering market. The Agilent team delivered another outstanding quarter exceeding our expectations. Both revenue and earnings are up sharply versus a solid Q2 last year, when revenues and earnings per share were relatively flat. Our growth is broad-based across all business groups, markets, and geographies. We also expanded margins, driving faster earnings per share growth. Revenues for the quarter are $1.525 billion. This is up 23% on a reported basis and up 19% core. COVID-19 related revenues account for roughly 2% of overall revenues as expected and contributed about a point to our overall growth. Our revenue growth is not a one quarter or easy compare story, but one of sustained above market growth. For example, our Q2 revenues are up more than 17% core from two years ago. Q2 operating margins are 23.9%. This is up 150 basis points. EPS of $0.97 is up 37% year-over-year. Late in the quarter, we also welcomed the Resolution Bioscience team to Agilent, continuing our investments in high-growth markets and bringing outstanding talent into Agilent. Like our recent acquisitions in cell analysis, Resolution Bioscience is an example of our build and buy growth strategy in action. The Agilent story remains the same. It is a story of one team outpacing the market to deliver strong, broad based growth in an environment of a continuing market recovery. Moving on to our end-market highlights, we grew strongly in all markets. Our growth is led by 29% growth in pharma and 22% in food. We are seeing improving growth in the chemical and energy market with 14% growth. We also posted low teens growth in diagnostics and over 20% growth in academia and government. Lastly, environmental and forensics grew 8%. Bob will provide more end-market detail later in his comments. Geographically, the Americas led the way with 27% growth. Strength in China, Europe and the rest of Asia continues with all growing in the mid-teens. The 13% growth in China is on top of 4% growth last year when the business started to recover from the pandemic. As we look at our performance by business group, the Life Sciences and Applied Markets Group generated revenue of $674 million during the quarter. LSAG is up 28% on a reported basis and up 25% core, off a 7% decline last year. LSAG’s growth is broad-based, across all end-markets and geographies. Our focus and investments in fast growing end markets continues to pay off. The LSAG pharma business is very strong, growing 41% with strength in both biopharma and small molecule. From a product perspective, we saw strength in liquid chromatography and LCMS along with continued growth in cell analysis. During the quarter, cell analysis grew 34%, with our BioTek business growing close to 40%. During the quarter, the LSAG team also contributed to our long-term company-wide focus on sustainability in advancing important ESG initiatives. LSAG announced several new products that have earned the highly respected Accountability, Consistency, and Transparency, ACT Label from My Green Lab. My Green Lab is a non-profit organization dedicated to improving the sustainability of scientific research. LSAG products also received two Scientists' Choice Awards announced at the SelectScience Virtual Analytical Summit. In our cell analysis business during the quarter, we launched our Cytation 10 Confocal Imaging Reader, a multi-functional automated system focused on research labs and core facilities looking for increased productivity. This product builds on the BioTek cell imaging leadership with the Cytation multi-mode reader and expands our reach in this strategic business. While still early, customer feedback has been extremely positive. We are also very pleased with the progress and trajectory of our cell analysis business overall and see a very positive future for this space. The Agilent CrossLab Group posted revenues of $536 million. This is up a reported 19% and up 15% on a core basis versus a 1% increase last year. ACG’s growth is driven by demand for consumables and services across the portfolio as lab activity continues to increase for our customers. This is leading to more on-demand services and parts consumption. Revenues from our contract business continue to drive strong growth due to the high level of contract renewals seen in the previous quarter. Our strong instrument placements and the increasing installed base will benefit the ACG business going forward. At the same time, our digital investments continue to pay off with continued strong customer uptake in consumables and our digitally enabled service offerings. Our LSAG and ACG business has come together in the analytical lab. This is where we believe we are well-positioned to continue driving above market growth as we build on our market leading portfolio, strong service organization, and outstanding customer service. For the Diagnostics and Genomics Group, revenues were $315 million, up 20% reported and up 16% core versus a 5% increase last year. Growth is broad-based, led by our NASD oligo and genomics businesses. Demand for our NASD offerings remains strong and our capacity expansion plans for our high-growth NASD business remain on-track. We’re very pleased with our acquisition of Resolution Bioscience during the quarter. With their liquid biopsy technology, Resolution Bioscience is a key player in a very exciting area of cancer diagnostics. We are very glad to have them on the Agilent team. I’m confident that as time goes on, you will be hearing more and more from us on this business and its contributions. I would now like to recap the second quarter and take a look forward. The strong momentum in our business continues. This is being driven by our relentless customer focus, the strength of our portfolio and the execution capability of the One Agilent team. Our build and buy growth strategy is delivering, as intended, with above-market growth. Over the last year, I have often said that Agilent is focused on coming out of the pandemic even stronger as a company. I believe you’re seeing the impact of this approach in our current results. As we look ahead, we do so with a sense of both optimism and confidence. We are optimistic because of the continued market recovery and the strength of our portfolio. We are confident because we have the right team, customer focused, operationally excellent and driven to win. As a result, we are once again raising our full-year revenue and earnings guidance. Bob will share more details, but we are expecting a continuation of our excellent top line growth. We also expect to convert this strong top line into excellent earnings growth and cash generation. During our investor event in December, we discussed our shareholder value creation model and our goals for increasing long-term growth and expanding margins. Six months into fiscal 2021, we are well on our way to achieving those objectives. Our build and buy growth strategy is delivering. The One Agilent team continues to demonstrate its execution prowess and strong drive to win. We’ve raised the bar on customer service and continue to exceed customer expectations in providing industry-leading products and services. While we have yet to fully emerge from the global pandemic, we are looking forward to the future with both optimism and confidence. Thank you for being on the call today and I look forward to your questions. I will now hand the call off to Bob. Bob? Bob McMahon: Thanks Mike and good afternoon everyone. In my remarks today, I’ll provide some additional details on Q2 revenue and take you through the income statement and some other key financial metrics. I’ll then finish up with our updated outlook for 2021 and the third quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. Revenue for the second quarter was $1.525 billion, reflecting reported growth of 23%. Core revenue growth was 19%, while currency contributed just under 4 points of growth. We are very pleased with our second quarter results as we saw strong, broad based growth with all three business groups posting mid-teens growth or higher, and all end markets growing strongly. From an end-market perspective, our focus on fast growing markets is paying off. Pharma, our largest market, again led the way, delivering 29% growth. This is on top of growing 5% last year. Growth was led by cell analysis, LC, and Mass Spec. These tools are delivering critical capabilities to our Bio-Pharma customers as they continue to make investments to develop new therapies and vaccines. Our biopharma business grew roughly 40% and represented over 35% of our pharma business in the quarter. Our small molecule segment also has momentum, growing in the mid-20s in the quarter. Overall, we are well-positioned within pharma and expect the pharma market to continue being the strongest end-market as we enter the second half of the year. The food market continued its strong performance, growing 22%. We experienced strong growth across all regions and segments as we continue to see global investments across the entire food supply-chain. We were very pleased to see the non-COVID diagnostics businesses continue to improve throughout the quarter growing 13% as routine doctor visits returned closer to pre-pandemic levels. We posted a very strong month in the diagnostics and clinical market as we came to anniversary the weak April we experienced in our large markets at the onset of the pandemic last year. And we exited the quarter with testing volumes at a run rate slightly higher than pre-pandemic levels. The chemical and energy end-market continues to recover as we grew 14% off a decline of 10% last year. Our results were primarily driven by continued strength in the chemicals and materials markets. And in a positive sign, our order growth rates were ahead of revenues and finished the quarter strong, leading us to believe this trend will continue. We also saw a nice recovery in the academia and government market as non-COVID-related labs resume operations in a strong funding environment. With the increase in activity, our business grew 21% against the weakest comparison of the year. We would expect the academia and government market to continue to recover throughout the rest of the year. Lastly, the environmental and forensics market saw high single-digit growth driven by the Americas, services and consumables, and atomic spectroscopy. On a geographic basis, all regions grew, led by the Americas at 27%. The pharma and academia and government markets in Americas grew in the low 30% range and all markets grew at least 20%. Europe experienced 16% growth led by food, academia, and government, and C&E. Those three markets all grew more than 20%. And as Mike noted, China grew 13% after growing 4% last year. This was driven by pharma growth in the high 30s. Our growth in orders outpaced revenue growth by mid-single digits during the quarter. Now turning to the rest of the P&L, second quarter gross margin was 55.4%, flat year-on-year despite a headwind of more than 30 basis points from currency. Our operating margin for the second quarter came in at 23.9%. Driven by volume, this is up a solid 150 basis points from last year even as we saw increased spending as activity ramped and we invest in the future. Strong top line growth coupled with our operating leverage helped deliver EPS of $0.97, up 37% versus last year. Our tax rate was 14.75% and share count was 307 million shares. Now, on to cash flow and the balance sheet. Our performance translated into very strong cash flows. We delivered $472 million in operating cash flow during the quarter, up more than 50% from last year. This strong cash flow has continued to help drive our balanced capital deployment strategy. During the quarter, we retuned $254 million to our shareholders, paying out $59 million in dividends, and repurchasing 1.55 million shares for $195 million. And as Mike mentioned, we also continue to strategically invest in the business. We spent a net of $547 million to purchase Resolution Bioscience and invested $31 million in capital expenditures. Year to-date, we’ve returned $657 million to shareholders in the form of dividends and share repurchases, while re-investing in the business by spending $619 million on M&A and capital expenditures. We ended the quarter with a strong balance sheet, which enables us to enjoy financial flexibility going forward. During the quarter, we raised $850 million in long term debt at very favorable terms, redeemed $300 million that was maturing next year and reduced our ongoing interest expense. We ended the quarter with $1.4 billion in cash, $2.9 billion in outstanding debt and a net leverage ratio of 1X. Now, turning to the outlook for the full-year and the third quarter, we see great opportunity to build on our strong first half results. Looking forward, while the pandemic is still with us, we continue to see recovery in our end-markets and have solid momentum in all our businesses. As a result, we’re again increasing our full-year projections for both revenue and earnings per share. This reflects our strong Q2 results and increasing expectations for the second half of the year. We are also incorporating the Resolution Bioscience into our new guidance. For revenue, we are increasing our full-year to a range of $6.15 billion to $6.21 billion, up nearly $320 million at the midpoint and representing reported growth of 15% to 16% and core growth of 12% to 13%. Included is roughly 3 points of currency and about a half-point attributable to M&A. This increased outlook also reflects continued growth in our end-markets. We see sustained momentum in the second half of the year in the pharma, food, and environmental and forensic markets. End markets that we expect will continue to recover in the second half include diagnostics and clinical, academic and government, and C&E. As Mike mentioned during our investor event in December, we provided a long-range plan of annual margin expansion in the range of 50 basis points to 100 basis points. Our updated guidance for the year exceeds the top end of that range. In addition, we are increasing our fiscal 2021 non-GAAP EPS to a range of $4.09 to $4.14 per share. This is growth of 25% to 26% for the year. Now for the third fiscal quarter, we are expecting revenue to range from $1.51 million to $1.54 billion, representing reported growth of 20% to 22% and core growth of 15% to 17.5%. And we expect third quarter non-GAAP EPS to be in the range of $0.97 to $0.99 per share with growth of 24% to 27%. Now, before opening the call for questions, I want to say, we’re extremely pleased with how we’ve started the first half of the year. We believe our strategies and our execution are driving the strong results we’ve achieved and put us in a great position to continue to drive strong results for the remainder of the year. With that, Ruben back to you for Q&A. Ruben DiRado: Thanks Bob. Gabriel, if you could please provide instruction for the Q&A. Operator: Absolutely. [Operator Instructions] Our first question will come from Vijay Kumar of Evercore ISI. Please go ahead. Vijay Kumar: Hey guys, thanks for taking my question and congrats on a pretty impressive [half year]. I did want to start on pharma BioTek. It accelerated sequentially the number, it's really impressive, 35 on large molecule plus 28 in small molecule, so maybe talk about what is driving this maybe at a high level, if you can talk about what is your end-market growing? Is this a market acceleration? Are you guys gaining share and how much of this is incremental contribution for NASD? I think the prior assumption was $200 million in the fiscal coming in about? Mike McMullen: Yes, there was a lot to unpack there Vijay. I'll take the congratulations Vijay and I'll pass the [indiscernible] to Bob. No. Yes, we're extremely pleased with the results that we've seen in the pharma business really across all three of our end business groups. I think it shows the investments in the great execution by the team that has been paying off over the last several years and I think what you're seeing is not only a market recovery for sure, but I think the relevance of our portfolio across all three of our business groups in that business, and certainly we are benefiting from the investments to expand capacity and new therapeutics across various end markets. But I also think the number of new products that we have launched in this space are really seeing a nice uptake. And on NASD to your point, I mean, we saw nice growth in NASD was in the high 30s and we are still on track for that $200 million that you talked about. And feel very good about that business going forward. Bob McMahon: And my perspective, I think we're capturing share in a faster growing market. So, I think there is a combination of both above expectations on market growth, but we're also getting more than our fair share of that market. Vijay Kumar: That's helpful comments there Mike. One question on perhaps a more medium-term question and I'm not asking for guidance, but I think the question on the Group has been, the comps are going to be pretty hard for some of these companies. Certainly COVID diagnostics has been [Technical Difficulty] I think you guys are one of the cleanest stories here in the group. But again, if I'm looking at this guide of high teens, perhaps talk about maybe broad strokes what is sustainable, it looks like some of these trends, Biopharma share gains etcetera should be sustainable? Maybe some product line on that, how to think about the plus and the minuses? Mike McMullen: Hey Bob, maybe if I can start with some comments? So, I think if there has been a positive on COVID, I think it's actually stimulating to some increased levels of investments in some of these end markets. So, we think that that some of these growth rates we've seen from the markets perspective are sustainable for a while. And we mentioned earlier, our story is a core business story. We've been very pleased that our team has been able to participate and have a role here to play in the fight against COVID-19, but our story really is all about what we're doing in terms of driving the core business. Vijay Kumar: Understood. Thanks guys. Operator: Your next question will come from Tycho Peterson of JPMorgan. Please go ahead. Tycho Peterson: Hey, good afternoon. I wanted to actually start with the M&A question just on resolution. Their obviously a CLIA lab, but have a distributed model as well. Can you just talk about those two businesses? I know the overall revenue contribution this year is like $50 million, $55 million, but how do you think about leveraging both the CLIA lab and the distributed model across your portfolio going forward? Mike McMullen: Yes. Tycho thanks for the question and good afternoon. I'll make a few comments here and I'll pass it over to Sam. So, my comments are going to be, we're very excited about having Resolution Bioscience team as part of Agilent. And Sam, I think we were even becoming even more excited now that we've had even a deeper look about what's been going on with the company and I think you've just come back from a visit from with the team. So you've had a chance of our – because maybe perhaps your first face to face business trip in well over a year, but with that lead in, why don't I pass over to you and answer Tycho's question. Sam Raha: Yes. Thanks Mike. Thanks for the question, Tycho. Yes, it was very exciting to finally get out and see real human beings again and very exciting to see the enthusiasm of the team there. And first-hand what is now part of our company. And Tycho the specific answer is, both parts are important. The primary business today that we have in Resolution Bio is related to pharma services, very much akin to what we do in our traditional CDx business here at Agilent, it's working with pharma to better understand biomarkers and then to develop companion diagnostics, which will [ultimately block] the market. There is some testing that's done in the CLIA lab as you mentioned, there is a relationship with LabCorp, and that is something that we expect over time to ramp, both because of the testing for LabCorp and also testing that will result from actual companion diagnostics that are approved as part of the former work that we're doing, but both are important, but the substantial part of our revenue today in this year, and even in the coming 18 months, 24 months will continue to be some pharma services revenue. Mike McMullen: Yeah. That's the focus. Tycho Peterson: Okay. And then on the quarter – two quick follow-ups, Mike, food up 22%. I know you talked about all regions and segments strong and sustained momentum. But we don't think about that market being 20% plus growth sustainably. So, can you just talk about whether there is stockpiling? How much of this is China coming out of the overhaul there? And then totally unrelated question on ACG operating margins, they were down about 90 bps. I'm just curious is that reinvestment there? Mike McMullen: Yes, sure. You're close study on the numbers, I can see it Tycho, so thanks for two good questions. So, while we're super pleased with the overall growth rate of food, it's been a story here for a number of quarters. We don't expect it to be a 20% growth rate in 2022 and years beyond, but we are expecting continued strength throughout this year, probably not at that same level. And Bob, I think it's really a – clinically China is part of that story, but in fact, when we look across the globe, it's been a – we also saw strength in other geographies as well. And I don't have exact... Bob McMahon: Yes, that's right. Mike McMullen: Geographic split, but it was a broad-based kind of story, with China leading the way, being the key part but not the only part of the story. Bob McMahon: Yes, absolutely, Tycho to Mike's point I think we see this kind of reverting back over time, but certainly what we're seeing is increased investment and increased testing here really around the globe. And China was actually slightly lower than the overall core business, you saw a strong recovery both in Americas and Europe and the Rest of Asia. And I think we're seeing some halo effect of COVID testing kind of a surveillance testing in various aspects of China or of food testing. And so, I think we feel very good about the business there. And then I think on your question... Mike McMullen: Bob I just want to add one thing. Additional thought in the Americas, historically that's been a lower growth rate for us in food. But with the inclusion of the cannabis testing market we're getting a bit of a bump there as well. Bob McMahon: Yes, thanks. Thanks Mike. And I think what you're seeing in the ACG business Tycho, is a combination of two things. One is some reinvestment, we continue to double down in areas like the digital investments to continue to increase our capabilities there and then you did see some increased activity, and so as we actually see this is a good thing. Our sales and field service engineers are traveling to more customers. And so, we're seeing some increases there associated with just increased activity, which we saw on the on-demand side, but it also comes with some incremental cost. But long-term, we feel very good about our ACG business and continued ability to scale that business going forward. Mike McMullen: Absolutely. Tycho Peterson: Okay, thank you. Mike McMullen: You're welcome. Operator: And your next question will come from Doug Schenkel with Cowen. Please go ahead. Doug Schenkel: Good afternoon, guys. Thanks for taking my questions. I'm just doing some math here, and Bob I'm trying to make us a little more sense of your guidance. On one hand, you guided fiscal Q3 revenue expectations well above consensus. On the other hand your guidance assumes essentially that revenue is going to move sideways, maybe even move I think down sequentially in a quarter, which I think is normally a little bit better relative to fiscal Q2, if for no other reason than in China, one of your bigger markets, you don't have a Lunar New Year in that period. And then we're kind of back into the Q4 implied number, you know there is I think something like 4% sequential growth and a pretty big implied moderation in year-over-year growth in the fourth quarter relative to the rest of the year even accounting for comps. So, there’s all that, you've got more M&A in there. And then, I listened to what you're seeing in your prepared remarks, and look at the numbers and it sure seems like you're crushing it with no slowdown. So, am I missing anything here? Bob McMahon: No, I think you are reading the numbers very well, Doug. And what I would say is, certainly, we feel very good about Q3 and that's where we have most of our visibility. We still are in a pandemic, but we feel good about the recovery and our – I think still a little prudent in terms of our forecast going forward. We want to see how the continued rollout of the vaccines are around the world and I think there isn't anything that in the near term that we see is going to stop us from our momentum. Doug Schenkel: Okay, all right, that's helpful. And then again doing math on the fly, so hopefully, I'm not messing up anything. Bob McMahon: But your math on the fly is pretty good Doug. Doug Schenkel: I am doing okay so far. Thank you. So, it seems like you're assuming operating investment growth 15% year-over-year in the second half or something like that, just backing into that from the top and bottom line. And that seems to be a couple of points higher than the revenue growth rate you're guiding to for the second half. So, assuming I'm still doing this right, could you just talk about what some of the key areas of investment focus are? It seems like you're planning on maybe opportunistically pulling forward some investment even separate from the M&A? And then building off of that, if you are in a position to drive revenue upside relative to guidance, do you think it's possible we could see flow through to the operating line and the bottom line along the lines of what we saw in the second – in the first half of the year? Bob McMahon: Yes, the short answer on that, let me take the question around investment. The biggest investment that we have going forward is really the addition of the Resolution Bioscience business and continuing to invest behind the capabilities there both from an R&D and development perspective, as well as the channel. And so that that does have an outsized investment relative to the second half versus the first half where we didn't really have that in here, but we are continuing to invest in demand driving activities. Some of those things like we just talked about an ACG around the digital aspects, but also building capabilities to continue the momentum going forward, whether it'd be marketing programs and other activities within our R&D pipeline. And I think the last question that you had is, if we do have upside, will it drive the same kind of level of incrementals? And I would say the answer is yes. Doug Schenkel: Okay, super helpful. Thanks guys. Bob McMahon: Yes, thanks Doug. Appreciate the comments. Operator: Your next question will come from Dan Leonard of Wells Fargo. Please go ahead. Dan Leonard: Thank you. So first off, on the core analytical business, do you think you've seen any benefits from on-shoring through the order book or the revenue line as of yet? Mike McMullen: Dan. Hey, thanks for the question. Not yet. We've talked about it with you in prior quarters and we still think it's a area of interest of our customers in terms of future investment, but nothing material yet. This is the core kind of reinvestment happening in the chemical and materials side of C&E and as you heard in our prepared remarks, the order book actually was stronger than the revenue book. So, pointing to a recovery of this segment which, you know in passive and fairly cautious about in terms of calling it, but the trends are positive now. Dan Leonard: Okay. And Mike, I want to ask a follow-up on Resolution Bio, you kind of assume this a build the future positive updates to come there. Can you talk about your [indiscernible] to invest in that business? And the reason I ask is, it does seem like a driver of success in that space is a willingness to absorb losses for long periods of time. So, can you talk about how you plan to invest in the business and how that fits your overall operating model? Thank you. Mike McMullen: Yeah, I'm not sure I accept the premise that do you need to have huge operating losses to have the business depend on the type of play you're trying to make here. And Bob and Sam you guys, keep me honest here as well, but pharma services business model we have where we can leverage a lot of investments that we've already made around our IHC base CDx business, we're not in the same position increment there perhaps maybe start up some of it brand new entering the space. So, we have something to build from. So, I think our expense structure may look perhaps look different than others in this space. We do plan to invest aggressively on the R&D side as well, building out additional commercial relationships. But we think our plan has been to absorb within the overall operating model. So, there wasn't any asterisk when we put our long-term goals out and said well without Res Bio, so I think we believe that we can manage within our overall operating model and I think given where we're starting from, which is we're not starting from zero in this business. We have something to build from our acquisition, a number of years ago from Darko. I think that puts us in a different perhaps a different place. Anything else add to that... Dan Leonard: I appreciate the color. Okay, thank you. Mike McMullen: You're welcome. Operator: Next question comes from Derik de Bruin of Bank of America. Please go ahead. Derik de Bruin: Hi, sorry, had the mute on, sorry about that. So, can you talk a little bit more about the LCMS growth and the service going on there. And a couple of questions on that one. First of all, I've asked this question about are you seeing an accelerated replacement cycle in that market or any of your markets. Basically, are people feeling good about budgets. You're spending a little bit more than they had so that general question. And I guess one of your competitors has been talking about new LC platforms, particularly targeting the biologics area. I'm just sort of wondering what your sort of competitive response and product offerings are that will going against that? And then I've got one follow-up. Mike McMullen: It's maybe there are competitive response. But I'm going to pass over to Jacob, because we're in the conference room here and I'm looking at him on the screen and he is finally loved to be able to answer your question. Derik. So, I'm going to pass it over to you, Jacob. Jacob Thaysen: Yes. Thanks Mike. And, Derik this is great question. So thanks for that. First of all the – what the growth you're seeing both in our LC and LC/MS space is certainly not a coincidence, it is something we have invested in for quite some years. If you really think about our mass spec portfolio, we have really invested and innovated around the lines of robust reliable on the team and we really see our customers especially on our single and triple quads have really taken off here in the last period of time. I think even before in the food space, where we see a lot of upgrades into triple quads, but clearly in the pharma and biopharma space, we have doubled and tripled down on that, really, we can see that there's great opportunities there. So, when you move from small molecule things, the last molecule, we are also seeing that the customer base is changing and the customers or the users of the mass spec is changing and hence, they are looking for a different experience and we have invested quite a lot into our software platforms. First of all, to live up to the expectation from a regulatory perspective, but also from a usability. So that's a big part of our success in what we see and I truly believe there is a lot more to come in that area. If you look at the LC, investing into bio is a part of the game. We have had out at bio LC high end high LC for quite a while now and it is doing very well. We can compete about against everyone in this space and you will see us come out – continuously come out with new products in that space. So, we feel very good where we are, and we'll continue to invest to continue to keep tech market standards very important market for us. Mike McMullen: And Derik, if I could just add on to that, I think it's fair to say Jacob, we're seeing both market expansion but also some acceleration of replacement market as well, particularly in pharma molecule. Jacob Thaysen: Absolutely. Derik de Bruin: Great, thanks. And then I'm going to ask you an unfair question, but what the hell. And part of it goes like it is – this is like all the tools companies that put up really strong results, they're coming off of easier comps and that's great. But I think that everyone sort of focuses on the next fiscal year and the ability to grow earnings. I just sort of thought, can you sort of generally share any thoughts on sort of earnings growth next year and will it be in the double-digit range? Just your general thoughts right now as people are going to start worrying about the tough comps. Not the COVID tough comps and then other core tough comps. Mike McMullen: So Bob and I haven't actually compared notes on this. I'll start with a few comments. And then I think we'll probably end been in the line. That said, potential U.S. tax reformer side, our model has been to be able to deliver double-digit EPS growth and I'm not seeing a need to deviate from that in 2022. Bob McMahon: Agreed. Derik de Bruin: Okay. I appreciate it. Have a great day. Operator: Your next question will come from Matt Sykes of Goldman Sachs. Please go ahead. Matt Sykes: Hey, thanks for taking my questions. Just maybe in the category of too early, but just look at the growth rate that you guys have been showing in cell analysis. I'm just wondering if you can kind of give us an idea of contribution from that, just given – it's been integrated and growing at a pretty good clip. And then also, just sort of what you're seeing in terms of customer is largely new customers deepening relationships with existing customers. Just put more color on cell analysis? Thanks. Mike McMullen: Sure, Matt, I think Bob kind of give a view on the overall size of the business and maybe pass it to you Jacob for some more insight on the customer side. Bob McMahon: Yeah, I was going to say, Matt, we're extremely pleased with the performance really across all three of the major business groups within cell analysis really driving strong growth. And we are well on our way to continue to drive accelerated growth in those areas. And I would say the margin profile of that business is above the Agilent average. And so, I'll let Jacob actually talk about some of the areas where we continue to invest in new products such as the Cytation C10, but also some of the areas around customer acquisition and what we're doing in the marketplace. Jacob Thaysen: Yes, thanks. It's another great question. And as you can hear we are super excited about the cell analysis business, particularly I'll focus on live cell analysis by immuno-oncology and immunology as a whole. And as Bob has also mentioned, we have made some quite some good investments into that space, particularly in also the imaging space where we have recently come out with the Cytation C10. I think Bob also talked about that, which is a new confocal microscope and what it really does is that it allows we have build it and build it out this way that you can get a relatively good entry level microscope that will compete based on the market and then you can upgrade it and use all the other automation platform and configurations that we already have established in BioTek. So, it is a really mixed unmatched stat that our customers are really delighted about. And our customer base, of course, we enjoy a very strong installed base from the BioTek acquisition, which we are now leveraging also for [our Seahorse]. But we also see a much stronger push into the biopharma space where some of our businesses have been very exposed to the academia government and we had a very clear focus areas to move in that, and that works very well. So, we are very excited where we are but I would say that the main growth comes from the biopharma space, but clearly now with the academia government coming back that of course also across the growth. Bob McMahon: Yes, Matt, just one other thing to add to what Jacob is saying. I mean this is an area that if you look at over the last several years, we continue to invest both organically and inorganically. And I would say, given our success in the strength in that marketplace and the strength of our portfolio, those are areas where we continue to look to invest further. Matt Sykes: Great. Thanks for that. That's very helpful. And then just on Diagnostics. Your comment that you exit the quarter is stronger run rate. I'm sure some of that sort of catch-up demand from the COVID period, but just can you talk about the sustainability and your views on diagnostics throughout the rest of the year? Sam Raha: Yes, that's one where we are – if we think about the opportunities, we're very, very pleased with kind of the progression of that business recovery throughout the course of the year. If you recall last year, we actually grew in that business and then saw a strong fall off when the pandemic really hit and we're expecting accelerated growth in Q3, but this is an area where we're watching to say, is there going to be sustained – how fast is that sustained recovery going. But all signs right now are very positive from the standpoint of the recovery, not only in our business, but if you look at just the overall testing environment continues to be very positive on non-COVID testing. So, I think people are getting back into the doctors' for wellness tests, certainly diagnostic tests like cancer diagnostics and so forth, and I think we're seeing the benefit of that going forward. And then couple that with the addition of the Res Bio business and I think we've got a very compelling portfolio of opportunities to provide to our customers going forward. Matt Sykes: Great, thank you very much. Operator: [Operator Instructions] Your next question comes from Puneet Souda of SVBL. Please go ahead. Puneet Souda: Yes, hi. Thanks, Mike and Bob. Bob question for you first. What are you baking in for pricing expectations for the year? And I think the bigger question here is, your ability to take pricing in the market in case there is a rise in raw material prices and in-line with the expectations? And then I have a follow-up for Jacob and Sam. Bob McMahon: That's a great question, Puneet, and what I would say is, first of all, just a shout out to our OFS team, our supply chain organization, who've just done a fantastic job of being able to manage the increased demands on a increasingly fragile supply chain or logistics, I would say. And so they've just done a fantastic job of supporting our customers. And as you say, we are starting to see inflationary pressures in these areas, but I would say, you know our contracts are more long-term in nature and the teams have been able to drive with the volume, as well as continued discussions, good cost controls there at least in the near term. And on pricing, our pricing hasn't changed. We felt that we had modest price built into our plan. That's what we've seen through this first half of the year and that's what we're assuming in the second half of the year. It depends on what group, but overall, we hadn't built any expectation of significant price increase or decreases into our business. Puneet Souda: Okay, that's helpful. And then a quick one for Sam first and then other one for Jacob. Sam, if you could characterize what are your expectations with the pipeline in terms of MRD, beyond therapy management for Resolution Biosciences, and if you could also talk a little bit about the regulatory framework? In past you followed PDL1 pharmDx assays into FDA approvals. How should we think about the new product launches? Are they going to follow a similar path? And then for Jacob briefly, could you update us briefly on the Open Lab efforts and your position in pharma there, obviously with your competitor now being focused again on the – very much on the core LC position. I'm wondering if you're seeing any changes in the market and I totally appreciate your 1,100 and 1,200 LCs has done well, but I just want to get a sense of Open Lab. Thank you very much and congrats again on the quarter. Bob McMahon: Yeah, thank you for the question on the Resolution Bio, I think … Mike McMullen: How many questions in there. Sam Raha: Quick response for you. Our primary focus remains therapy selection and that's where the programs that we have contracted and the continued significant interest we're seeing both from our existing pharma partners on the Agilent side, as well as the Resolution clientele that are coming into our pipeline as well. Now the fundamental technology is, we do believe the minimal to more applications including minimum residual disease and monitoring, but once again our primary focus remains therapy selection. Now, in terms of the model, I think you asked about that. It is what we can do before, which is we believe as Agilent, we've got a capability set, which we've used for PDL1 where we work, specifically with pharma partners to work on companion diagnostics meaning to develop register and then commercialize those companion diagnostics as they come to market and are approved, tied to a specific indication specific drugs. So that is our model and ultimately our vision is to have IVD kitted NGS solutions that are near to patients that are distributable, but of course as you heard even earlier we've got a CLIA lab and there's diagnostic testing that will happen along the way, and that's a little bit different than the PDL1 model that we have today, because that's the nature of NGS based diagnostic testing, but our interest and long-term focus remains an IVD kitted diagnostic test. Jacob, over to you. Jacob Thaysen: Yeah. Thank you and let me just start by saying that Informatics and Open Lab is key to our strategy. So, though we like to talk about our instrument, it's always connected – most of the time connected within a very strong position in Informatics, and we continue to invest in Open Lab, in fact, we believe that is the lab, where we connect all our instruments into an ecosystem in a cloud setup where you can also track your samples and in the end also connect into an e-commerce set up is going to be the future, and with Agilent's broad portfolio we can very quickly, we can very well do this. So, I'm very excited about that and we continue to invest, in fact we have over the last few months decided to further invest into these areas to further accelerate our presence here. Puneet Souda: That's great. I appreciate you guys taking that extra questions. Thanks guys. Mike McMullen: Sure not a problem. Operator: Your next question will come from Brandon Couillard of Jefferies. Please go ahead. Brandon Couillard: Thanks, good afternoon. Bob or Mike in terms of the chemical energy business, could you break out instruments versus aftermarket in the quarter? I suspect it's probably the first quarter in a while that you've seen solid instrument growth. Just wanted to confirm that's the case. And then what's embedded in terms of the updated full-year guide for that end markets specifically? Mike McMullen: Bob, I know that the instrument business was strong for us in C&E. I can't remember the actual relative ratios of [indiscernible]. We're looking though our notes here right now to answer your question. And going into the Q3 is probably our easiest compare in C&E. We're still looking for that stack growth to kind of move up bit on us, but Bob? Bob McMahon: Yes, I was going to say, Brandon to your point of that [14%] LSAG or the instrument business is slightly higher than that and LSAG was slightly lower than that, but both double-digit growth. And as we think about where we are going forward in terms of the guide for the third quarter and it kind of going forward, our assumption for Q3 is somewhat similar to Q2 in terms of continued recovery of a weak base. It was down 10% again last Q3 and then we started seeing recovery. And so I think about it – we're thinking about it in roughly the same kind of terms in Q3 that we saw in Q2. Mike McMullen: I think right now we're taking it quarter-by-quarter, Bob. But I think overall we see this trending being more upside than downside. Bob McMahon: That's right. Brandon Couillard: Got you. And then just one more, it doesn't sound like, based on your prepared remarks today, but to what extent if at all are you seeing any supply constraints, printed circuit boards or other marked materials? Mike McMullen: Brandon, I just would echo what Bob mentioned earlier, our office team that is on a spectacular job, so in our remarks you heard we talked about some strong orders, order growth higher in China and C&E, but that was not at all tied to any supply chain constraints. So, we've been able to get product. We've been able to ship product and listen, it's not easy, but the teams find a way to make it happen. So, I think Bob is relatively material at all to the quarter and we think it's manageable moving forward as well. Bob McMahon: That's right. Brandon Couillard: Great, thanks. Operator: And your next question will come from Patrick Donnelly of Citi. Please go ahead. Patrick Donnelly: Great, thanks for taking the questions guys. Maybe following-up on Brandon's question on C&E there, can you just talk through what you're seeing in there a bit more? Obviously, the order book growth is encouraging coming in higher than revenue. You know, was that enough to give you confidence that this won't kind of turn quickly on you? I know you've noted historically it's been a bit hesitant to bake in too much growth there. I mean this is among the most positive [indiscernible] I’ve heard from you guys over the past couple of years. So, can you just talk through that and then I guess was that segment the biggest piece [recovering the back half] guidance raise doing a bit more comfortable about the sustainability there? Mike McMullen: Yes. Thanks, Patrick. And I'm glad you remember my earlier comments, because I always said once the orders here in my book I'll start to talk a little bit differently about it and that's why you're getting more positive tone. I would say that we're still in the early phases of the transition. We feel really good about where things are on the chemical materials side of C&E. I would say we're starting to see quoting and some initial order activity on the refining side still relatively light compared to the Materials and Chemicals segments. As you know, the larger part of that business for us, but yes we are – I am much more positive. I think it's probably the first time in a long time that we've had this kind of view on the trends we're seeing in the C&E space. And yes, we had in prior quarters seamless PMIs, but I wanted to see in the order book and I started to see it this quarter. Bob McMahon: And I would say, Patrick to build on what Mike is saying, we still have – we're taking it as he said, kind of, one quarter at a time. We've built in some of that into Q3 and I would still say there is a bias to the upside in Q4. Patrick Donnelly: Okay, that's helpful. And then just maybe on the M&A landscape. Bob, you mentioned the balance sheet helped, obviously we saw the Resolution deal you guys touched on that a few times. Should we expect more deals of that nature? Are you still on the hunt for something a bit larger? Mike, maybe if you could talk a little bit about the pipeline activity and the segments you're focused on and then Bob, if you want to talk about where the leverage could go, that will certainly be appreciated. Mike McMullen: Yes. So I think our view on M&A remains the same. We see that as a key part of our – we've been terming our build and buy growth strategy. We've signaled that we would be willing to do deals in the multiples of BioTek, which to date is our largest deal. And that's still an area of interest for us. We like to, kind of a growth accretive deals that you're seeing. We're bringing in great new teams like Res Bio team, like the BioTek, ACEA, so we are maintaining our focus on higher growth segments. We like the areas we're going, we've been gone after. We like cell analysis, we like the genomics look at biopsy space, I think Informatics others. We have a number of areas that we were continuing to look for growth opportunities. Again, we don't have to do deals to make our model work. But if we can find great new teams and great businesses to bring into the company we're quite willing to do that. You just have to remain disciplined in terms of valuation expectations. There's a lot of frothiness in certain segments of the market, but we're going to stay where we've been successful in the private space, where company founders often looked at and say listen, this will be a great home for my company my team. We like how you guys run your company, we like your culture, we like to just for in terms of growing the business for the long-term. So, we're going to stick to our model. It’s been working for us Bob and I think we can adjust the question... Bob McMahon: Just quickly, we're not going to give a specific target around that other than to say that our intent is to maintain an investment grade and we ended the quarter at, kind of 1 times net leverage and that gives us plenty of flexibility to continue to invest in deals growth accretive deals as Mike just talked about. Patrick Donnelly: Okay. Thanks, Mike and Bob, really appreciate it. Mike McMullen: You're very welcome. Operator: And your last question today will come from Dan Brennan of UBS. Please go ahead. Unidentified Analyst: Hi this is [Nathan] on for Dan. Just a quick question. To what extent has your upgrade cycle been impacted by the pandemic, and now that we're kind of coming out of the pandemic, are you seeing any traction, any acceleration in the upgrade cycle in any of your instruments or end market? Mike McMullen: Yes, I think to answer your question, I think when the pandemic hit, it really slowed down any kind of replacement cycle. Particularly I would say in the C&E side of our business. And as we just commented, we're seeing positive indications that that actually is now turning to different direction. So, I'd say it's been even in the C&E space that are tied to chromatography spectroscopy platforms. Bob McMahon: I would say, Nathan as Mike said, still early days, but all the trends are looking positive. Unidentified Analyst: Great. And just, if I can switch [pharma], you did mention that you're seeing share gains on top end market grow. Can you just elaborate what is driving share gains for you? Mike McMullen: If you think about our – the combination of our LSAG and ACG businesses where we come in the analytical lab, as Jacob mentioned earlier and I haven't had a chance to have [indiscernible] jump into the call yet, but you know they’ve been working very well together for multiple years. And you're seeing it by bringing innovative solutions to the market that have a differentiated value proposition from the competition. A superior service experience and I think it's – we continue to build out our commercial reach as well. So, I think it's been the combination of portfolio and the workflow focus within that portfolio, building the service capability and then building out further commercial reach. I think it's been a combination of all those factors helping us to do really well in our LSAG and ACG groups, and then obviously we talked earlier about the play in cell analysis, which is a new addition to the company in biopharma, and then our NASD play in Sam's business. I think it's been a combination of all those factors. So, that's why we keep using the word broad-based growth because you see it in all parts of the businesses. So, we feel really good about the results from the size we were working on for a while. Unidentified Analyst: Great, thanks. Operator: And this concludes today’s conference call. Thank you everyone for joining us. You may now disconnect.	[ { "speaker": "Operator", "text": "Good afternoon, and welcome to the Agilent Technologies Second Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] And now I'd like to introduce you to the host for today's conference, Ruben DiRado, Director of Investor Relations. Please go ahead, sir." }, { "speaker": "Ruben DiRado", "text": "Thank you, [Gabriel], and welcome, everyone, to Agilent's second quarter conference call for fiscal year 2021. With me are Mike McMullen, Agilent’s President and CEO; and Bob McMahon, Agilent’s Senior Vice President and CFO. Joining in the Q&A after Bob and Mike’s comments will be Jacob Thaysen, President of Agilent’s Life Science and Applied Markets Group; Sam Raha, President of Agilent’s Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release, investor presentation, and information to supplement today’s discussion, along with a recording of this webcast, are made available on our website at www.investor.agilent.com. Today’s comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency, and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of April 30. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now, I’d like to turn the call over to Mike. Mike?" }, { "speaker": "Mike McMullen", "text": "Thanks, Ruben, and thanks to everyone for joining our call today. Before I get into the quarterly details, I want to start by recognizing our Agilent India team. Despite the challenging COVID-19 situation, our India team is working closely with our customers to do what we can to help in this time of extreme need. In addition, our Agilent India customer support, finance, and IT teams have worked tirelessly to help us close out the second quarter and keep us moving forward. I could not be more proud of how the team has worked together in true ‘One Agilent’ fashion. Our thoughts go out to the entire Agilent India team and their families during this difficult time. In Q2, the strong momentum in our business continues against the backdrop of a recovering market. The Agilent team delivered another outstanding quarter exceeding our expectations. Both revenue and earnings are up sharply versus a solid Q2 last year, when revenues and earnings per share were relatively flat. Our growth is broad-based across all business groups, markets, and geographies. We also expanded margins, driving faster earnings per share growth. Revenues for the quarter are $1.525 billion. This is up 23% on a reported basis and up 19% core. COVID-19 related revenues account for roughly 2% of overall revenues as expected and contributed about a point to our overall growth. Our revenue growth is not a one quarter or easy compare story, but one of sustained above market growth. For example, our Q2 revenues are up more than 17% core from two years ago. Q2 operating margins are 23.9%. This is up 150 basis points. EPS of $0.97 is up 37% year-over-year. Late in the quarter, we also welcomed the Resolution Bioscience team to Agilent, continuing our investments in high-growth markets and bringing outstanding talent into Agilent. Like our recent acquisitions in cell analysis, Resolution Bioscience is an example of our build and buy growth strategy in action. The Agilent story remains the same. It is a story of one team outpacing the market to deliver strong, broad based growth in an environment of a continuing market recovery. Moving on to our end-market highlights, we grew strongly in all markets. Our growth is led by 29% growth in pharma and 22% in food. We are seeing improving growth in the chemical and energy market with 14% growth. We also posted low teens growth in diagnostics and over 20% growth in academia and government. Lastly, environmental and forensics grew 8%. Bob will provide more end-market detail later in his comments. Geographically, the Americas led the way with 27% growth. Strength in China, Europe and the rest of Asia continues with all growing in the mid-teens. The 13% growth in China is on top of 4% growth last year when the business started to recover from the pandemic. As we look at our performance by business group, the Life Sciences and Applied Markets Group generated revenue of $674 million during the quarter. LSAG is up 28% on a reported basis and up 25% core, off a 7% decline last year. LSAG’s growth is broad-based, across all end-markets and geographies. Our focus and investments in fast growing end markets continues to pay off. The LSAG pharma business is very strong, growing 41% with strength in both biopharma and small molecule. From a product perspective, we saw strength in liquid chromatography and LCMS along with continued growth in cell analysis. During the quarter, cell analysis grew 34%, with our BioTek business growing close to 40%. During the quarter, the LSAG team also contributed to our long-term company-wide focus on sustainability in advancing important ESG initiatives. LSAG announced several new products that have earned the highly respected Accountability, Consistency, and Transparency, ACT Label from My Green Lab. My Green Lab is a non-profit organization dedicated to improving the sustainability of scientific research. LSAG products also received two Scientists' Choice Awards announced at the SelectScience Virtual Analytical Summit. In our cell analysis business during the quarter, we launched our Cytation 10 Confocal Imaging Reader, a multi-functional automated system focused on research labs and core facilities looking for increased productivity. This product builds on the BioTek cell imaging leadership with the Cytation multi-mode reader and expands our reach in this strategic business. While still early, customer feedback has been extremely positive. We are also very pleased with the progress and trajectory of our cell analysis business overall and see a very positive future for this space. The Agilent CrossLab Group posted revenues of $536 million. This is up a reported 19% and up 15% on a core basis versus a 1% increase last year. ACG’s growth is driven by demand for consumables and services across the portfolio as lab activity continues to increase for our customers. This is leading to more on-demand services and parts consumption. Revenues from our contract business continue to drive strong growth due to the high level of contract renewals seen in the previous quarter. Our strong instrument placements and the increasing installed base will benefit the ACG business going forward. At the same time, our digital investments continue to pay off with continued strong customer uptake in consumables and our digitally enabled service offerings. Our LSAG and ACG business has come together in the analytical lab. This is where we believe we are well-positioned to continue driving above market growth as we build on our market leading portfolio, strong service organization, and outstanding customer service. For the Diagnostics and Genomics Group, revenues were $315 million, up 20% reported and up 16% core versus a 5% increase last year. Growth is broad-based, led by our NASD oligo and genomics businesses. Demand for our NASD offerings remains strong and our capacity expansion plans for our high-growth NASD business remain on-track. We’re very pleased with our acquisition of Resolution Bioscience during the quarter. With their liquid biopsy technology, Resolution Bioscience is a key player in a very exciting area of cancer diagnostics. We are very glad to have them on the Agilent team. I’m confident that as time goes on, you will be hearing more and more from us on this business and its contributions. I would now like to recap the second quarter and take a look forward. The strong momentum in our business continues. This is being driven by our relentless customer focus, the strength of our portfolio and the execution capability of the One Agilent team. Our build and buy growth strategy is delivering, as intended, with above-market growth. Over the last year, I have often said that Agilent is focused on coming out of the pandemic even stronger as a company. I believe you’re seeing the impact of this approach in our current results. As we look ahead, we do so with a sense of both optimism and confidence. We are optimistic because of the continued market recovery and the strength of our portfolio. We are confident because we have the right team, customer focused, operationally excellent and driven to win. As a result, we are once again raising our full-year revenue and earnings guidance. Bob will share more details, but we are expecting a continuation of our excellent top line growth. We also expect to convert this strong top line into excellent earnings growth and cash generation. During our investor event in December, we discussed our shareholder value creation model and our goals for increasing long-term growth and expanding margins. Six months into fiscal 2021, we are well on our way to achieving those objectives. Our build and buy growth strategy is delivering. The One Agilent team continues to demonstrate its execution prowess and strong drive to win. We’ve raised the bar on customer service and continue to exceed customer expectations in providing industry-leading products and services. While we have yet to fully emerge from the global pandemic, we are looking forward to the future with both optimism and confidence. Thank you for being on the call today and I look forward to your questions. I will now hand the call off to Bob. Bob?" }, { "speaker": "Bob McMahon", "text": "Thanks Mike and good afternoon everyone. In my remarks today, I’ll provide some additional details on Q2 revenue and take you through the income statement and some other key financial metrics. I’ll then finish up with our updated outlook for 2021 and the third quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. Revenue for the second quarter was $1.525 billion, reflecting reported growth of 23%. Core revenue growth was 19%, while currency contributed just under 4 points of growth. We are very pleased with our second quarter results as we saw strong, broad based growth with all three business groups posting mid-teens growth or higher, and all end markets growing strongly. From an end-market perspective, our focus on fast growing markets is paying off. Pharma, our largest market, again led the way, delivering 29% growth. This is on top of growing 5% last year. Growth was led by cell analysis, LC, and Mass Spec. These tools are delivering critical capabilities to our Bio-Pharma customers as they continue to make investments to develop new therapies and vaccines. Our biopharma business grew roughly 40% and represented over 35% of our pharma business in the quarter. Our small molecule segment also has momentum, growing in the mid-20s in the quarter. Overall, we are well-positioned within pharma and expect the pharma market to continue being the strongest end-market as we enter the second half of the year. The food market continued its strong performance, growing 22%. We experienced strong growth across all regions and segments as we continue to see global investments across the entire food supply-chain. We were very pleased to see the non-COVID diagnostics businesses continue to improve throughout the quarter growing 13% as routine doctor visits returned closer to pre-pandemic levels. We posted a very strong month in the diagnostics and clinical market as we came to anniversary the weak April we experienced in our large markets at the onset of the pandemic last year. And we exited the quarter with testing volumes at a run rate slightly higher than pre-pandemic levels. The chemical and energy end-market continues to recover as we grew 14% off a decline of 10% last year. Our results were primarily driven by continued strength in the chemicals and materials markets. And in a positive sign, our order growth rates were ahead of revenues and finished the quarter strong, leading us to believe this trend will continue. We also saw a nice recovery in the academia and government market as non-COVID-related labs resume operations in a strong funding environment. With the increase in activity, our business grew 21% against the weakest comparison of the year. We would expect the academia and government market to continue to recover throughout the rest of the year. Lastly, the environmental and forensics market saw high single-digit growth driven by the Americas, services and consumables, and atomic spectroscopy. On a geographic basis, all regions grew, led by the Americas at 27%. The pharma and academia and government markets in Americas grew in the low 30% range and all markets grew at least 20%. Europe experienced 16% growth led by food, academia, and government, and C&E. Those three markets all grew more than 20%. And as Mike noted, China grew 13% after growing 4% last year. This was driven by pharma growth in the high 30s. Our growth in orders outpaced revenue growth by mid-single digits during the quarter. Now turning to the rest of the P&L, second quarter gross margin was 55.4%, flat year-on-year despite a headwind of more than 30 basis points from currency. Our operating margin for the second quarter came in at 23.9%. Driven by volume, this is up a solid 150 basis points from last year even as we saw increased spending as activity ramped and we invest in the future. Strong top line growth coupled with our operating leverage helped deliver EPS of $0.97, up 37% versus last year. Our tax rate was 14.75% and share count was 307 million shares. Now, on to cash flow and the balance sheet. Our performance translated into very strong cash flows. We delivered $472 million in operating cash flow during the quarter, up more than 50% from last year. This strong cash flow has continued to help drive our balanced capital deployment strategy. During the quarter, we retuned $254 million to our shareholders, paying out $59 million in dividends, and repurchasing 1.55 million shares for $195 million. And as Mike mentioned, we also continue to strategically invest in the business. We spent a net of $547 million to purchase Resolution Bioscience and invested $31 million in capital expenditures. Year to-date, we’ve returned $657 million to shareholders in the form of dividends and share repurchases, while re-investing in the business by spending $619 million on M&A and capital expenditures. We ended the quarter with a strong balance sheet, which enables us to enjoy financial flexibility going forward. During the quarter, we raised $850 million in long term debt at very favorable terms, redeemed $300 million that was maturing next year and reduced our ongoing interest expense. We ended the quarter with $1.4 billion in cash, $2.9 billion in outstanding debt and a net leverage ratio of 1X. Now, turning to the outlook for the full-year and the third quarter, we see great opportunity to build on our strong first half results. Looking forward, while the pandemic is still with us, we continue to see recovery in our end-markets and have solid momentum in all our businesses. As a result, we’re again increasing our full-year projections for both revenue and earnings per share. This reflects our strong Q2 results and increasing expectations for the second half of the year. We are also incorporating the Resolution Bioscience into our new guidance. For revenue, we are increasing our full-year to a range of $6.15 billion to $6.21 billion, up nearly $320 million at the midpoint and representing reported growth of 15% to 16% and core growth of 12% to 13%. Included is roughly 3 points of currency and about a half-point attributable to M&A. This increased outlook also reflects continued growth in our end-markets. We see sustained momentum in the second half of the year in the pharma, food, and environmental and forensic markets. End markets that we expect will continue to recover in the second half include diagnostics and clinical, academic and government, and C&E. As Mike mentioned during our investor event in December, we provided a long-range plan of annual margin expansion in the range of 50 basis points to 100 basis points. Our updated guidance for the year exceeds the top end of that range. In addition, we are increasing our fiscal 2021 non-GAAP EPS to a range of $4.09 to $4.14 per share. This is growth of 25% to 26% for the year. Now for the third fiscal quarter, we are expecting revenue to range from $1.51 million to $1.54 billion, representing reported growth of 20% to 22% and core growth of 15% to 17.5%. And we expect third quarter non-GAAP EPS to be in the range of $0.97 to $0.99 per share with growth of 24% to 27%. Now, before opening the call for questions, I want to say, we’re extremely pleased with how we’ve started the first half of the year. We believe our strategies and our execution are driving the strong results we’ve achieved and put us in a great position to continue to drive strong results for the remainder of the year. With that, Ruben back to you for Q&A." }, { "speaker": "Ruben DiRado", "text": "Thanks Bob. Gabriel, if you could please provide instruction for the Q&A." }, { "speaker": "Operator", "text": "Absolutely. [Operator Instructions] Our first question will come from Vijay Kumar of Evercore ISI. Please go ahead." }, { "speaker": "Vijay Kumar", "text": "Hey guys, thanks for taking my question and congrats on a pretty impressive [half year]. I did want to start on pharma BioTek. It accelerated sequentially the number, it's really impressive, 35 on large molecule plus 28 in small molecule, so maybe talk about what is driving this maybe at a high level, if you can talk about what is your end-market growing? Is this a market acceleration? Are you guys gaining share and how much of this is incremental contribution for NASD? I think the prior assumption was $200 million in the fiscal coming in about?" }, { "speaker": "Mike McMullen", "text": "Yes, there was a lot to unpack there Vijay. I'll take the congratulations Vijay and I'll pass the [indiscernible] to Bob. No. Yes, we're extremely pleased with the results that we've seen in the pharma business really across all three of our end business groups. I think it shows the investments in the great execution by the team that has been paying off over the last several years and I think what you're seeing is not only a market recovery for sure, but I think the relevance of our portfolio across all three of our business groups in that business, and certainly we are benefiting from the investments to expand capacity and new therapeutics across various end markets. But I also think the number of new products that we have launched in this space are really seeing a nice uptake. And on NASD to your point, I mean, we saw nice growth in NASD was in the high 30s and we are still on track for that $200 million that you talked about. And feel very good about that business going forward." }, { "speaker": "Bob McMahon", "text": "And my perspective, I think we're capturing share in a faster growing market. So, I think there is a combination of both above expectations on market growth, but we're also getting more than our fair share of that market." }, { "speaker": "Vijay Kumar", "text": "That's helpful comments there Mike. One question on perhaps a more medium-term question and I'm not asking for guidance, but I think the question on the Group has been, the comps are going to be pretty hard for some of these companies. Certainly COVID diagnostics has been [Technical Difficulty] I think you guys are one of the cleanest stories here in the group. But again, if I'm looking at this guide of high teens, perhaps talk about maybe broad strokes what is sustainable, it looks like some of these trends, Biopharma share gains etcetera should be sustainable? Maybe some product line on that, how to think about the plus and the minuses?" }, { "speaker": "Mike McMullen", "text": "Hey Bob, maybe if I can start with some comments? So, I think if there has been a positive on COVID, I think it's actually stimulating to some increased levels of investments in some of these end markets. So, we think that that some of these growth rates we've seen from the markets perspective are sustainable for a while. And we mentioned earlier, our story is a core business story. We've been very pleased that our team has been able to participate and have a role here to play in the fight against COVID-19, but our story really is all about what we're doing in terms of driving the core business." }, { "speaker": "Vijay Kumar", "text": "Understood. Thanks guys." }, { "speaker": "Operator", "text": "Your next question will come from Tycho Peterson of JPMorgan. Please go ahead." }, { "speaker": "Tycho Peterson", "text": "Hey, good afternoon. I wanted to actually start with the M&A question just on resolution. Their obviously a CLIA lab, but have a distributed model as well. Can you just talk about those two businesses? I know the overall revenue contribution this year is like $50 million, $55 million, but how do you think about leveraging both the CLIA lab and the distributed model across your portfolio going forward?" }, { "speaker": "Mike McMullen", "text": "Yes. Tycho thanks for the question and good afternoon. I'll make a few comments here and I'll pass it over to Sam. So, my comments are going to be, we're very excited about having Resolution Bioscience team as part of Agilent. And Sam, I think we were even becoming even more excited now that we've had even a deeper look about what's been going on with the company and I think you've just come back from a visit from with the team. So you've had a chance of our – because maybe perhaps your first face to face business trip in well over a year, but with that lead in, why don't I pass over to you and answer Tycho's question." }, { "speaker": "Sam Raha", "text": "Yes. Thanks Mike. Thanks for the question, Tycho. Yes, it was very exciting to finally get out and see real human beings again and very exciting to see the enthusiasm of the team there. And first-hand what is now part of our company. And Tycho the specific answer is, both parts are important. The primary business today that we have in Resolution Bio is related to pharma services, very much akin to what we do in our traditional CDx business here at Agilent, it's working with pharma to better understand biomarkers and then to develop companion diagnostics, which will [ultimately block] the market. There is some testing that's done in the CLIA lab as you mentioned, there is a relationship with LabCorp, and that is something that we expect over time to ramp, both because of the testing for LabCorp and also testing that will result from actual companion diagnostics that are approved as part of the former work that we're doing, but both are important, but the substantial part of our revenue today in this year, and even in the coming 18 months, 24 months will continue to be some pharma services revenue." }, { "speaker": "Mike McMullen", "text": "Yeah. That's the focus." }, { "speaker": "Tycho Peterson", "text": "Okay. And then on the quarter – two quick follow-ups, Mike, food up 22%. I know you talked about all regions and segments strong and sustained momentum. But we don't think about that market being 20% plus growth sustainably. So, can you just talk about whether there is stockpiling? How much of this is China coming out of the overhaul there? And then totally unrelated question on ACG operating margins, they were down about 90 bps. I'm just curious is that reinvestment there?" }, { "speaker": "Mike McMullen", "text": "Yes, sure. You're close study on the numbers, I can see it Tycho, so thanks for two good questions. So, while we're super pleased with the overall growth rate of food, it's been a story here for a number of quarters. We don't expect it to be a 20% growth rate in 2022 and years beyond, but we are expecting continued strength throughout this year, probably not at that same level. And Bob, I think it's really a – clinically China is part of that story, but in fact, when we look across the globe, it's been a – we also saw strength in other geographies as well. And I don't have exact..." }, { "speaker": "Bob McMahon", "text": "Yes, that's right." }, { "speaker": "Mike McMullen", "text": "Geographic split, but it was a broad-based kind of story, with China leading the way, being the key part but not the only part of the story." }, { "speaker": "Bob McMahon", "text": "Yes, absolutely, Tycho to Mike's point I think we see this kind of reverting back over time, but certainly what we're seeing is increased investment and increased testing here really around the globe. And China was actually slightly lower than the overall core business, you saw a strong recovery both in Americas and Europe and the Rest of Asia. And I think we're seeing some halo effect of COVID testing kind of a surveillance testing in various aspects of China or of food testing. And so, I think we feel very good about the business there. And then I think on your question..." }, { "speaker": "Mike McMullen", "text": "Bob I just want to add one thing. Additional thought in the Americas, historically that's been a lower growth rate for us in food. But with the inclusion of the cannabis testing market we're getting a bit of a bump there as well." }, { "speaker": "Bob McMahon", "text": "Yes, thanks. Thanks Mike. And I think what you're seeing in the ACG business Tycho, is a combination of two things. One is some reinvestment, we continue to double down in areas like the digital investments to continue to increase our capabilities there and then you did see some increased activity, and so as we actually see this is a good thing. Our sales and field service engineers are traveling to more customers. And so, we're seeing some increases there associated with just increased activity, which we saw on the on-demand side, but it also comes with some incremental cost. But long-term, we feel very good about our ACG business and continued ability to scale that business going forward." }, { "speaker": "Mike McMullen", "text": "Absolutely." }, { "speaker": "Tycho Peterson", "text": "Okay, thank you." }, { "speaker": "Mike McMullen", "text": "You're welcome." }, { "speaker": "Operator", "text": "And your next question will come from Doug Schenkel with Cowen. Please go ahead." }, { "speaker": "Doug Schenkel", "text": "Good afternoon, guys. Thanks for taking my questions. I'm just doing some math here, and Bob I'm trying to make us a little more sense of your guidance. On one hand, you guided fiscal Q3 revenue expectations well above consensus. On the other hand your guidance assumes essentially that revenue is going to move sideways, maybe even move I think down sequentially in a quarter, which I think is normally a little bit better relative to fiscal Q2, if for no other reason than in China, one of your bigger markets, you don't have a Lunar New Year in that period. And then we're kind of back into the Q4 implied number, you know there is I think something like 4% sequential growth and a pretty big implied moderation in year-over-year growth in the fourth quarter relative to the rest of the year even accounting for comps. So, there’s all that, you've got more M&A in there. And then, I listened to what you're seeing in your prepared remarks, and look at the numbers and it sure seems like you're crushing it with no slowdown. So, am I missing anything here?" }, { "speaker": "Bob McMahon", "text": "No, I think you are reading the numbers very well, Doug. And what I would say is, certainly, we feel very good about Q3 and that's where we have most of our visibility. We still are in a pandemic, but we feel good about the recovery and our – I think still a little prudent in terms of our forecast going forward. We want to see how the continued rollout of the vaccines are around the world and I think there isn't anything that in the near term that we see is going to stop us from our momentum." }, { "speaker": "Doug Schenkel", "text": "Okay, all right, that's helpful. And then again doing math on the fly, so hopefully, I'm not messing up anything." }, { "speaker": "Bob McMahon", "text": "But your math on the fly is pretty good Doug." }, { "speaker": "Doug Schenkel", "text": "I am doing okay so far. Thank you. So, it seems like you're assuming operating investment growth 15% year-over-year in the second half or something like that, just backing into that from the top and bottom line. And that seems to be a couple of points higher than the revenue growth rate you're guiding to for the second half. So, assuming I'm still doing this right, could you just talk about what some of the key areas of investment focus are? It seems like you're planning on maybe opportunistically pulling forward some investment even separate from the M&A? And then building off of that, if you are in a position to drive revenue upside relative to guidance, do you think it's possible we could see flow through to the operating line and the bottom line along the lines of what we saw in the second – in the first half of the year?" }, { "speaker": "Bob McMahon", "text": "Yes, the short answer on that, let me take the question around investment. The biggest investment that we have going forward is really the addition of the Resolution Bioscience business and continuing to invest behind the capabilities there both from an R&D and development perspective, as well as the channel. And so that that does have an outsized investment relative to the second half versus the first half where we didn't really have that in here, but we are continuing to invest in demand driving activities. Some of those things like we just talked about an ACG around the digital aspects, but also building capabilities to continue the momentum going forward, whether it'd be marketing programs and other activities within our R&D pipeline. And I think the last question that you had is, if we do have upside, will it drive the same kind of level of incrementals? And I would say the answer is yes." }, { "speaker": "Doug Schenkel", "text": "Okay, super helpful. Thanks guys." }, { "speaker": "Bob McMahon", "text": "Yes, thanks Doug. Appreciate the comments." }, { "speaker": "Operator", "text": "Your next question will come from Dan Leonard of Wells Fargo. Please go ahead." }, { "speaker": "Dan Leonard", "text": "Thank you. So first off, on the core analytical business, do you think you've seen any benefits from on-shoring through the order book or the revenue line as of yet?" }, { "speaker": "Mike McMullen", "text": "Dan. Hey, thanks for the question. Not yet. We've talked about it with you in prior quarters and we still think it's a area of interest of our customers in terms of future investment, but nothing material yet. This is the core kind of reinvestment happening in the chemical and materials side of C&E and as you heard in our prepared remarks, the order book actually was stronger than the revenue book. So, pointing to a recovery of this segment which, you know in passive and fairly cautious about in terms of calling it, but the trends are positive now." }, { "speaker": "Dan Leonard", "text": "Okay. And Mike, I want to ask a follow-up on Resolution Bio, you kind of assume this a build the future positive updates to come there. Can you talk about your [indiscernible] to invest in that business? And the reason I ask is, it does seem like a driver of success in that space is a willingness to absorb losses for long periods of time. So, can you talk about how you plan to invest in the business and how that fits your overall operating model? Thank you." }, { "speaker": "Mike McMullen", "text": "Yeah, I'm not sure I accept the premise that do you need to have huge operating losses to have the business depend on the type of play you're trying to make here. And Bob and Sam you guys, keep me honest here as well, but pharma services business model we have where we can leverage a lot of investments that we've already made around our IHC base CDx business, we're not in the same position increment there perhaps maybe start up some of it brand new entering the space. So, we have something to build from. So, I think our expense structure may look perhaps look different than others in this space. We do plan to invest aggressively on the R&D side as well, building out additional commercial relationships. But we think our plan has been to absorb within the overall operating model. So, there wasn't any asterisk when we put our long-term goals out and said well without Res Bio, so I think we believe that we can manage within our overall operating model and I think given where we're starting from, which is we're not starting from zero in this business. We have something to build from our acquisition, a number of years ago from Darko. I think that puts us in a different perhaps a different place. Anything else add to that..." }, { "speaker": "Dan Leonard", "text": "I appreciate the color. Okay, thank you." }, { "speaker": "Mike McMullen", "text": "You're welcome." }, { "speaker": "Operator", "text": "Next question comes from Derik de Bruin of Bank of America. Please go ahead." }, { "speaker": "Derik de Bruin", "text": "Hi, sorry, had the mute on, sorry about that. So, can you talk a little bit more about the LCMS growth and the service going on there. And a couple of questions on that one. First of all, I've asked this question about are you seeing an accelerated replacement cycle in that market or any of your markets. Basically, are people feeling good about budgets. You're spending a little bit more than they had so that general question. And I guess one of your competitors has been talking about new LC platforms, particularly targeting the biologics area. I'm just sort of wondering what your sort of competitive response and product offerings are that will going against that? And then I've got one follow-up." }, { "speaker": "Mike McMullen", "text": "It's maybe there are competitive response. But I'm going to pass over to Jacob, because we're in the conference room here and I'm looking at him on the screen and he is finally loved to be able to answer your question. Derik. So, I'm going to pass it over to you, Jacob." }, { "speaker": "Jacob Thaysen", "text": "Yes. Thanks Mike. And, Derik this is great question. So thanks for that. First of all the – what the growth you're seeing both in our LC and LC/MS space is certainly not a coincidence, it is something we have invested in for quite some years. If you really think about our mass spec portfolio, we have really invested and innovated around the lines of robust reliable on the team and we really see our customers especially on our single and triple quads have really taken off here in the last period of time. I think even before in the food space, where we see a lot of upgrades into triple quads, but clearly in the pharma and biopharma space, we have doubled and tripled down on that, really, we can see that there's great opportunities there. So, when you move from small molecule things, the last molecule, we are also seeing that the customer base is changing and the customers or the users of the mass spec is changing and hence, they are looking for a different experience and we have invested quite a lot into our software platforms. First of all, to live up to the expectation from a regulatory perspective, but also from a usability. So that's a big part of our success in what we see and I truly believe there is a lot more to come in that area. If you look at the LC, investing into bio is a part of the game. We have had out at bio LC high end high LC for quite a while now and it is doing very well. We can compete about against everyone in this space and you will see us come out – continuously come out with new products in that space. So, we feel very good where we are, and we'll continue to invest to continue to keep tech market standards very important market for us." }, { "speaker": "Mike McMullen", "text": "And Derik, if I could just add on to that, I think it's fair to say Jacob, we're seeing both market expansion but also some acceleration of replacement market as well, particularly in pharma molecule." }, { "speaker": "Jacob Thaysen", "text": "Absolutely." }, { "speaker": "Derik de Bruin", "text": "Great, thanks. And then I'm going to ask you an unfair question, but what the hell. And part of it goes like it is – this is like all the tools companies that put up really strong results, they're coming off of easier comps and that's great. But I think that everyone sort of focuses on the next fiscal year and the ability to grow earnings. I just sort of thought, can you sort of generally share any thoughts on sort of earnings growth next year and will it be in the double-digit range? Just your general thoughts right now as people are going to start worrying about the tough comps. Not the COVID tough comps and then other core tough comps." }, { "speaker": "Mike McMullen", "text": "So Bob and I haven't actually compared notes on this. I'll start with a few comments. And then I think we'll probably end been in the line. That said, potential U.S. tax reformer side, our model has been to be able to deliver double-digit EPS growth and I'm not seeing a need to deviate from that in 2022." }, { "speaker": "Bob McMahon", "text": "Agreed." }, { "speaker": "Derik de Bruin", "text": "Okay. I appreciate it. Have a great day." }, { "speaker": "Operator", "text": "Your next question will come from Matt Sykes of Goldman Sachs. Please go ahead." }, { "speaker": "Matt Sykes", "text": "Hey, thanks for taking my questions. Just maybe in the category of too early, but just look at the growth rate that you guys have been showing in cell analysis. I'm just wondering if you can kind of give us an idea of contribution from that, just given – it's been integrated and growing at a pretty good clip. And then also, just sort of what you're seeing in terms of customer is largely new customers deepening relationships with existing customers. Just put more color on cell analysis? Thanks." }, { "speaker": "Mike McMullen", "text": "Sure, Matt, I think Bob kind of give a view on the overall size of the business and maybe pass it to you Jacob for some more insight on the customer side." }, { "speaker": "Bob McMahon", "text": "Yeah, I was going to say, Matt, we're extremely pleased with the performance really across all three of the major business groups within cell analysis really driving strong growth. And we are well on our way to continue to drive accelerated growth in those areas. And I would say the margin profile of that business is above the Agilent average. And so, I'll let Jacob actually talk about some of the areas where we continue to invest in new products such as the Cytation C10, but also some of the areas around customer acquisition and what we're doing in the marketplace." }, { "speaker": "Jacob Thaysen", "text": "Yes, thanks. It's another great question. And as you can hear we are super excited about the cell analysis business, particularly I'll focus on live cell analysis by immuno-oncology and immunology as a whole. And as Bob has also mentioned, we have made some quite some good investments into that space, particularly in also the imaging space where we have recently come out with the Cytation C10. I think Bob also talked about that, which is a new confocal microscope and what it really does is that it allows we have build it and build it out this way that you can get a relatively good entry level microscope that will compete based on the market and then you can upgrade it and use all the other automation platform and configurations that we already have established in BioTek. So, it is a really mixed unmatched stat that our customers are really delighted about. And our customer base, of course, we enjoy a very strong installed base from the BioTek acquisition, which we are now leveraging also for [our Seahorse]. But we also see a much stronger push into the biopharma space where some of our businesses have been very exposed to the academia government and we had a very clear focus areas to move in that, and that works very well. So, we are very excited where we are but I would say that the main growth comes from the biopharma space, but clearly now with the academia government coming back that of course also across the growth." }, { "speaker": "Bob McMahon", "text": "Yes, Matt, just one other thing to add to what Jacob is saying. I mean this is an area that if you look at over the last several years, we continue to invest both organically and inorganically. And I would say, given our success in the strength in that marketplace and the strength of our portfolio, those are areas where we continue to look to invest further." }, { "speaker": "Matt Sykes", "text": "Great. Thanks for that. That's very helpful. And then just on Diagnostics. Your comment that you exit the quarter is stronger run rate. I'm sure some of that sort of catch-up demand from the COVID period, but just can you talk about the sustainability and your views on diagnostics throughout the rest of the year?" }, { "speaker": "Sam Raha", "text": "Yes, that's one where we are – if we think about the opportunities, we're very, very pleased with kind of the progression of that business recovery throughout the course of the year. If you recall last year, we actually grew in that business and then saw a strong fall off when the pandemic really hit and we're expecting accelerated growth in Q3, but this is an area where we're watching to say, is there going to be sustained – how fast is that sustained recovery going. But all signs right now are very positive from the standpoint of the recovery, not only in our business, but if you look at just the overall testing environment continues to be very positive on non-COVID testing. So, I think people are getting back into the doctors' for wellness tests, certainly diagnostic tests like cancer diagnostics and so forth, and I think we're seeing the benefit of that going forward. And then couple that with the addition of the Res Bio business and I think we've got a very compelling portfolio of opportunities to provide to our customers going forward." }, { "speaker": "Matt Sykes", "text": "Great, thank you very much." }, { "speaker": "Operator", "text": "[Operator Instructions] Your next question comes from Puneet Souda of SVBL. Please go ahead." }, { "speaker": "Puneet Souda", "text": "Yes, hi. Thanks, Mike and Bob. Bob question for you first. What are you baking in for pricing expectations for the year? And I think the bigger question here is, your ability to take pricing in the market in case there is a rise in raw material prices and in-line with the expectations? And then I have a follow-up for Jacob and Sam." }, { "speaker": "Bob McMahon", "text": "That's a great question, Puneet, and what I would say is, first of all, just a shout out to our OFS team, our supply chain organization, who've just done a fantastic job of being able to manage the increased demands on a increasingly fragile supply chain or logistics, I would say. And so they've just done a fantastic job of supporting our customers. And as you say, we are starting to see inflationary pressures in these areas, but I would say, you know our contracts are more long-term in nature and the teams have been able to drive with the volume, as well as continued discussions, good cost controls there at least in the near term. And on pricing, our pricing hasn't changed. We felt that we had modest price built into our plan. That's what we've seen through this first half of the year and that's what we're assuming in the second half of the year. It depends on what group, but overall, we hadn't built any expectation of significant price increase or decreases into our business." }, { "speaker": "Puneet Souda", "text": "Okay, that's helpful. And then a quick one for Sam first and then other one for Jacob. Sam, if you could characterize what are your expectations with the pipeline in terms of MRD, beyond therapy management for Resolution Biosciences, and if you could also talk a little bit about the regulatory framework? In past you followed PDL1 pharmDx assays into FDA approvals. How should we think about the new product launches? Are they going to follow a similar path? And then for Jacob briefly, could you update us briefly on the Open Lab efforts and your position in pharma there, obviously with your competitor now being focused again on the – very much on the core LC position. I'm wondering if you're seeing any changes in the market and I totally appreciate your 1,100 and 1,200 LCs has done well, but I just want to get a sense of Open Lab. Thank you very much and congrats again on the quarter." }, { "speaker": "Bob McMahon", "text": "Yeah, thank you for the question on the Resolution Bio, I think …" }, { "speaker": "Mike McMullen", "text": "How many questions in there." }, { "speaker": "Sam Raha", "text": "Quick response for you. Our primary focus remains therapy selection and that's where the programs that we have contracted and the continued significant interest we're seeing both from our existing pharma partners on the Agilent side, as well as the Resolution clientele that are coming into our pipeline as well. Now the fundamental technology is, we do believe the minimal to more applications including minimum residual disease and monitoring, but once again our primary focus remains therapy selection. Now, in terms of the model, I think you asked about that. It is what we can do before, which is we believe as Agilent, we've got a capability set, which we've used for PDL1 where we work, specifically with pharma partners to work on companion diagnostics meaning to develop register and then commercialize those companion diagnostics as they come to market and are approved, tied to a specific indication specific drugs. So that is our model and ultimately our vision is to have IVD kitted NGS solutions that are near to patients that are distributable, but of course as you heard even earlier we've got a CLIA lab and there's diagnostic testing that will happen along the way, and that's a little bit different than the PDL1 model that we have today, because that's the nature of NGS based diagnostic testing, but our interest and long-term focus remains an IVD kitted diagnostic test. Jacob, over to you." }, { "speaker": "Jacob Thaysen", "text": "Yeah. Thank you and let me just start by saying that Informatics and Open Lab is key to our strategy. So, though we like to talk about our instrument, it's always connected – most of the time connected within a very strong position in Informatics, and we continue to invest in Open Lab, in fact, we believe that is the lab, where we connect all our instruments into an ecosystem in a cloud setup where you can also track your samples and in the end also connect into an e-commerce set up is going to be the future, and with Agilent's broad portfolio we can very quickly, we can very well do this. So, I'm very excited about that and we continue to invest, in fact we have over the last few months decided to further invest into these areas to further accelerate our presence here." }, { "speaker": "Puneet Souda", "text": "That's great. I appreciate you guys taking that extra questions. Thanks guys." }, { "speaker": "Mike McMullen", "text": "Sure not a problem." }, { "speaker": "Operator", "text": "Your next question will come from Brandon Couillard of Jefferies. Please go ahead." }, { "speaker": "Brandon Couillard", "text": "Thanks, good afternoon. Bob or Mike in terms of the chemical energy business, could you break out instruments versus aftermarket in the quarter? I suspect it's probably the first quarter in a while that you've seen solid instrument growth. Just wanted to confirm that's the case. And then what's embedded in terms of the updated full-year guide for that end markets specifically?" }, { "speaker": "Mike McMullen", "text": "Bob, I know that the instrument business was strong for us in C&E. I can't remember the actual relative ratios of [indiscernible]. We're looking though our notes here right now to answer your question. And going into the Q3 is probably our easiest compare in C&E. We're still looking for that stack growth to kind of move up bit on us, but Bob?" }, { "speaker": "Bob McMahon", "text": "Yes, I was going to say, Brandon to your point of that [14%] LSAG or the instrument business is slightly higher than that and LSAG was slightly lower than that, but both double-digit growth. And as we think about where we are going forward in terms of the guide for the third quarter and it kind of going forward, our assumption for Q3 is somewhat similar to Q2 in terms of continued recovery of a weak base. It was down 10% again last Q3 and then we started seeing recovery. And so I think about it – we're thinking about it in roughly the same kind of terms in Q3 that we saw in Q2." }, { "speaker": "Mike McMullen", "text": "I think right now we're taking it quarter-by-quarter, Bob. But I think overall we see this trending being more upside than downside." }, { "speaker": "Bob McMahon", "text": "That's right." }, { "speaker": "Brandon Couillard", "text": "Got you. And then just one more, it doesn't sound like, based on your prepared remarks today, but to what extent if at all are you seeing any supply constraints, printed circuit boards or other marked materials?" }, { "speaker": "Mike McMullen", "text": "Brandon, I just would echo what Bob mentioned earlier, our office team that is on a spectacular job, so in our remarks you heard we talked about some strong orders, order growth higher in China and C&E, but that was not at all tied to any supply chain constraints. So, we've been able to get product. We've been able to ship product and listen, it's not easy, but the teams find a way to make it happen. So, I think Bob is relatively material at all to the quarter and we think it's manageable moving forward as well." }, { "speaker": "Bob McMahon", "text": "That's right." }, { "speaker": "Brandon Couillard", "text": "Great, thanks." }, { "speaker": "Operator", "text": "And your next question will come from Patrick Donnelly of Citi. Please go ahead." }, { "speaker": "Patrick Donnelly", "text": "Great, thanks for taking the questions guys. Maybe following-up on Brandon's question on C&E there, can you just talk through what you're seeing in there a bit more? Obviously, the order book growth is encouraging coming in higher than revenue. You know, was that enough to give you confidence that this won't kind of turn quickly on you? I know you've noted historically it's been a bit hesitant to bake in too much growth there. I mean this is among the most positive [indiscernible] I’ve heard from you guys over the past couple of years. So, can you just talk through that and then I guess was that segment the biggest piece [recovering the back half] guidance raise doing a bit more comfortable about the sustainability there?" }, { "speaker": "Mike McMullen", "text": "Yes. Thanks, Patrick. And I'm glad you remember my earlier comments, because I always said once the orders here in my book I'll start to talk a little bit differently about it and that's why you're getting more positive tone. I would say that we're still in the early phases of the transition. We feel really good about where things are on the chemical materials side of C&E. I would say we're starting to see quoting and some initial order activity on the refining side still relatively light compared to the Materials and Chemicals segments. As you know, the larger part of that business for us, but yes we are – I am much more positive. I think it's probably the first time in a long time that we've had this kind of view on the trends we're seeing in the C&E space. And yes, we had in prior quarters seamless PMIs, but I wanted to see in the order book and I started to see it this quarter." }, { "speaker": "Bob McMahon", "text": "And I would say, Patrick to build on what Mike is saying, we still have – we're taking it as he said, kind of, one quarter at a time. We've built in some of that into Q3 and I would still say there is a bias to the upside in Q4." }, { "speaker": "Patrick Donnelly", "text": "Okay, that's helpful. And then just maybe on the M&A landscape. Bob, you mentioned the balance sheet helped, obviously we saw the Resolution deal you guys touched on that a few times. Should we expect more deals of that nature? Are you still on the hunt for something a bit larger? Mike, maybe if you could talk a little bit about the pipeline activity and the segments you're focused on and then Bob, if you want to talk about where the leverage could go, that will certainly be appreciated." }, { "speaker": "Mike McMullen", "text": "Yes. So I think our view on M&A remains the same. We see that as a key part of our – we've been terming our build and buy growth strategy. We've signaled that we would be willing to do deals in the multiples of BioTek, which to date is our largest deal. And that's still an area of interest for us. We like to, kind of a growth accretive deals that you're seeing. We're bringing in great new teams like Res Bio team, like the BioTek, ACEA, so we are maintaining our focus on higher growth segments. We like the areas we're going, we've been gone after. We like cell analysis, we like the genomics look at biopsy space, I think Informatics others. We have a number of areas that we were continuing to look for growth opportunities. Again, we don't have to do deals to make our model work. But if we can find great new teams and great businesses to bring into the company we're quite willing to do that. You just have to remain disciplined in terms of valuation expectations. There's a lot of frothiness in certain segments of the market, but we're going to stay where we've been successful in the private space, where company founders often looked at and say listen, this will be a great home for my company my team. We like how you guys run your company, we like your culture, we like to just for in terms of growing the business for the long-term. So, we're going to stick to our model. It’s been working for us Bob and I think we can adjust the question..." }, { "speaker": "Bob McMahon", "text": "Just quickly, we're not going to give a specific target around that other than to say that our intent is to maintain an investment grade and we ended the quarter at, kind of 1 times net leverage and that gives us plenty of flexibility to continue to invest in deals growth accretive deals as Mike just talked about." }, { "speaker": "Patrick Donnelly", "text": "Okay. Thanks, Mike and Bob, really appreciate it." }, { "speaker": "Mike McMullen", "text": "You're very welcome." }, { "speaker": "Operator", "text": "And your last question today will come from Dan Brennan of UBS. Please go ahead." }, { "speaker": "Unidentified Analyst", "text": "Hi this is [Nathan] on for Dan. Just a quick question. To what extent has your upgrade cycle been impacted by the pandemic, and now that we're kind of coming out of the pandemic, are you seeing any traction, any acceleration in the upgrade cycle in any of your instruments or end market?" }, { "speaker": "Mike McMullen", "text": "Yes, I think to answer your question, I think when the pandemic hit, it really slowed down any kind of replacement cycle. Particularly I would say in the C&E side of our business. And as we just commented, we're seeing positive indications that that actually is now turning to different direction. So, I'd say it's been even in the C&E space that are tied to chromatography spectroscopy platforms." }, { "speaker": "Bob McMahon", "text": "I would say, Nathan as Mike said, still early days, but all the trends are looking positive." }, { "speaker": "Unidentified Analyst", "text": "Great. And just, if I can switch [pharma], you did mention that you're seeing share gains on top end market grow. Can you just elaborate what is driving share gains for you?" }, { "speaker": "Mike McMullen", "text": "If you think about our – the combination of our LSAG and ACG businesses where we come in the analytical lab, as Jacob mentioned earlier and I haven't had a chance to have [indiscernible] jump into the call yet, but you know they’ve been working very well together for multiple years. And you're seeing it by bringing innovative solutions to the market that have a differentiated value proposition from the competition. A superior service experience and I think it's – we continue to build out our commercial reach as well. So, I think it's been the combination of portfolio and the workflow focus within that portfolio, building the service capability and then building out further commercial reach. I think it's been a combination of all those factors helping us to do really well in our LSAG and ACG groups, and then obviously we talked earlier about the play in cell analysis, which is a new addition to the company in biopharma, and then our NASD play in Sam's business. I think it's been a combination of all those factors. So, that's why we keep using the word broad-based growth because you see it in all parts of the businesses. So, we feel really good about the results from the size we were working on for a while." }, { "speaker": "Unidentified Analyst", "text": "Great, thanks." }, { "speaker": "Operator", "text": "And this concludes today’s conference call. Thank you everyone for joining us. You may now disconnect." } ]	Agilent Technologies, Inc.	154,924
A	1	2,021	2021-02-16 16:30:00	Operator: Good afternoon, and welcome to the Agilent Technologies First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. And now I'd like to introduce you to the host for today's conference, Ankur Dhingra, Vice President of Investor Relations. Sir, please go ahead. Ankur Dhingra : Thank you, Jason, and welcome, everyone, to Agilent's first quarter conference call for fiscal year 2021. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Bob's comments will be Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of Agilent CrossLab Group. This presentation is being webcast live. The news release, investor presentation and information to supplement today's discussion, along with the recording of this webcast, are made available on our website at investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year, and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of January 31. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now, I would like to turn the call over to Mike. Mike? Mike McMullen : Thanks, Ankur, and thank you to everyone for joining us today on our call. I'm very pleased to be on the call with you today. We are off to an excellent start to our fiscal year. The Agilent team delivered outstanding results in the first quarter. The momentum in our business continues. Revenues for the quarter are $1.55 billion. This is up 14% on a reported basis and 11% core, exceeding our mid-January revised expectations. Also, as expected, COVID-19 tailwinds added roughly 2.5 points to our overall growth. Operating margins are healthy, 25.5%. EPS of $1.06 is up 31% year-over-year. Overall, a very impressive start to 2021. Our growth is broad-based. All 3 of our business groups delivered double-digit growth. All regions grew, with the 2 largest leading the way. China grew 25%, and the Americas posted 13% growth. We continue to see strength in most of our end markets, led by pharma growing 20%. These results are a testament to our build and buy growth strategy and the Agilent team's relentless customer focus. Demand remains strong for the full breadth of our offerings. We have been gaining market share in key areas. We are clearly keeping our foot on the gas. Now, let's take a look at our performance by business group. The Life Sciences and Applied Markets Group generated $722 million in revenue, up 13% on a reported basis and up 11% core. LSAG's growth is broad-based across end markets and geographies. We are particularly pleased with our cell analysis business. Cell analysis grew in the high teens, led by BioTek, which grew 26%. Growth is also strong at liquid chromatography and mass spec product lines, with both growing in the teens. Overall, our LSAG business saw very strong demand as many customers utilized their end-of-year CapEx budgets and our market share gains continued. From an end market perspective, food and pharma led the way for LSAG. Continuing our biopharma investment focus, we introduced new updates to our MassHunter LC/MS software. This new software enables data integrity consisting important regulatory requirements for our biopharma customers. As we continue to build our digital lab, we introduced the Agilent 7850 ICP-MS System, which provides new smart digital tools to improve workflows. LSAG's broad and continually strengthening portfolio is well positioned and continues to outperform the industry. The Agilent CrossLab Group posted revenues of $532 million. This is up a reported 13% and up 10% core. ACG's growth is also broad-based across end markets and geographies. Growth is strong in both services and consumables. Our digital investments and scale are adding significant value. We continue to drive improved attach rates to Agilent's large installed base of instruments. Annual service contract renewal rates and growth were strong in the quarter as we continue to build a more resilient and higher growth business. The Diagnostic and Genomics Group, revenues are $294 million, up 18% reported and up 15% core. Growth is broad-based, led by our NASD oligo business. Our genomics product portfolio grew double-digit, aided by COVID-19-related qPCR demand. We also achieved strong growth in our core NGS sample prep business. As mentioned earlier, overall company growth is broad-based across most of our end markets. The pharmaceutical food businesses led the way, both growing strong double-digits. We also posted 10% growth in the environmental and forensics market. Chemical and energy grew 2%, and we've seen increased business activity in the C&E space. The academia end market is down 1%, with many university labs still operating in a constrained environment. We are also continuing our efforts in the battle against COVID-19. We have completed our development and clinical validation for a serology assay to detect COVID-19 antibodies. We plan to submit to the U.S. FDA for Emergency Use Authorization within the next month. In addition, we're making progress on our qPCR-based test for COVID-19 detection and plan to launch in Europe in the next couple of months and submit for Emergency Use Authorization in the U.S. within the same time frame. I'm also pleased to share that Barron's again recently named Agilent One of America's Most Sustainable Companies. This marks the third year in a row we have been included among the top 3 companies in this ranking. We've also been a leader in our industry all 4 years that Barron's list has been published. We're very proud of this honor. Sustainability is a key priority for our company. When I look back on the uncertainty we faced this time last year, I'm so proud of what the Agilent team accomplished, all-time high customer satisfaction ratings, building momentum in all our businesses and delivering excellent results. Our first quarter results are another compelling proof point that we’re building an even stronger company and market position during the pandemic. As we discussed at our December investor event, our diverse industry-leading product portfolio has never been stronger. Our building and buying growth strategy with a focus on high-growth markets continues to deliver. Our M&A funnel is robust and remains focused on growth-accretive M&A opportunities. We are targeting companies in markets where we see potential for significant long-term growth, and Agilent is in a strong position to win. As we look ahead, we have a sense of realistic optimism. We have solid momentum. We're winning in the market, and we have the right team to continue to succeed. As a result, we are raising our core growth guidance range to 6.5% to 8% for the year. As you may recall, we recently guided to a long-term core growth rate of between 5% and 7%, so we are certainly off to a good start in 2021, and we have no intention of slowing down. We have also raised our earnings guidance for the year. In December, I shared Agilent's long-range plan of margin expansion at 50 basis points to 100 basis points a year. We are now guiding towards the top end of that range for 2021. Bob will share more details on this in his remarks. I couldn't be more pleased with how we have started the year. We have momentum. Our team is strong and energized. We are gaining market share in key areas, and we have an even more promising outlook for the full year. Thanks for being on the call today, and I look forward to your questions. I will now hand the call off to Bob. Bob? Bob McMahon : Thanks, Mike, and good afternoon, everyone. In my remarks today, I'll provide some additional details on Q1 revenue and take you through the first quarter income statement and some other key financial metrics. I'll then finish up with our outlook for 2021 and the second quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. We are very pleased with our first quarter results as we saw strong broad-based growth exceeding our revised expectations. Revenue for the first quarter was $1.55 billion, reflecting reported growth of 14.1%. Core revenue growth was 11.3%, while currency contributed 2.8 points of growth. Now before I get into the end markets, Mike's earlier comments bear repeating. All 3 business groups delivered double-digit growth -- core growth in the quarter. Our superior value proposition continues to resonate with our customers and our team executed well, capitalizing on recovering demand in our end markets. Pharma, our largest market, was strong across all regions, delivering 20% growth. Growth was led by NASD, which experienced significant growth in the quarter, albeit against the easiest comp of the year. NASD contributed 4 points to the overall pharma growth rate. We continue to be very pleased about the ramp of the Frederick oligo facility, and the recently announced capacity expansion in Frederick is on track. Small molecule grew mid-teens, while biopharma, excluding NASD, delivered 20% growth driven in part by strong demand for LC and mass spec instrumentation. We saw strong year-end demand from pharma customers. We're also seeing increased business related to the characterization of oligo-based therapies and vaccines. The food market also experienced strong double-digit growth during the quarter, posting a 22% increase in revenue. Our business grew in all geographies driven by increased demand for food safety and quality testing. China is leading the way, driven by investments in both commercial and government entities. Environmental and forensics grew double-digits, coming in at 10% core growth. Broad regional growth reflected strong tech refresh or replacement demand from contract labs. Our diagnostics and clinical revenue grew 9% during the quarter and has benefited from growth in COVID-related applications, primarily in the Americas and Europe. Our pathology business grew slightly as non-COVID testing continues to improve but has not yet recovered to pre-pandemic levels globally. While our diagnostics and clinical end market in China is still small, it experienced strong growth due to improvements in non-COVID testing and the uptake of our clinical LC/MS. The chemical and energy end market continued the recovery we saw last quarter and grew 2% in Q1. We continue to see signs of increased business activity, particularly in specialty chemicals and engineered materials along with encouraging improvements in the macro environment. And while we are optimistic, we are not yet reflecting a change in our forecast for the rest of the year. And as expected, the academia and government market recovery has lagged the other end markets, down 1% year-on-year as research labs are still not operating at full capacity. We continue to expect a slow but steady recovery throughout 2021. On a geographic basis, all regions grew. China grew 25%, leading all geographies, led by the food and pharma markets. The Americas delivered a strong double-digit performance during the quarter with 13% growth, while Europe was up 6%, both also led by pharma and food. Now turning to the rest of the P&L. The first quarter gross margin was 55.8%, up 10 basis points year-on-year. Adjusting for the exchange rates, gross margins improved 50 basis points. Our operating margin for the first quarter came in at 25.5%. This is up an impressive 260 basis points from last year, driven by volume and spending discipline. And this result includes the impact of increased strategic investments we started last quarter. Our top-line growth, coupled with our operating leverage, helped deliver EPS of $1.06 per share, up 31% versus last year. Our tax rate was 14.75%, and our share count was [309 million] shares, as expected. Now onto the cash flow and the balance sheet. Our operating cash flow continues to be very strong. In Q1, we had operating cash flow of $238 million, a 43% increase over last year after adjusting for last year's 1 year -- one-time tax payment. This performance shows the strength of our business model and provides financial flexibility going forward. We continued the balanced capital deployment strategy we highlighted at our Annual Investor Event in December. In the quarter, we invested $41 million in capital expenditures, paid out $59 million in dividends and repurchased 2.9 million shares for $344 million. And as we announced earlier today, our Board of Directors authorized a new $2 billion share repurchase program replacing the current program. We ended the quarter in a strong financial position with $1.3 billion in cash and $2.5 billion in debt. Now moving on to the outlook. We have had a strong start to the year. And while there are still uncertainties in front of us and the business environment remains fluid, we have solid momentum, and we see continued recovery in our end markets, albeit at different rates. And as a result, we're increasing our full year projections for both revenue and earnings per share. For revenue, we are increasing our full year to a range of $5.825 billion to $5.9 billion, up over $200 million at the midpoint and representing reported growth of 9% to 11% and core growth of 6.5% to 8%. This increase reflects strong Q1 results and some improvement in our outlook for the remainder of the year. The increased guide assumes stronger performance in most of our end markets. The academia market continues to track as expected in our initial plans. And while business activity in the chemical and energy has picked up, we have not yet included any improvement in that market in this updated outlook. In addition, we have not included any revenue associated with either the serology or qPCR COVID assay in the outlook. As Mike mentioned, we also feel very good about expanding our margins. During the Investor Event in December, we provided long-range plan of annual margin expansion in the range of 50 basis points to 100 basis points. Given the volatility in results during 2020, our margin expansion profile will vary each quarter. However, we feel confident about our full year margin expansion being towards the top end of that range while also investing for future growth. The higher sales and margin expansion coupled with maintaining our tax rate at 14.75% and a lower share count of roughly 307 million shares, increases our fiscal 2021 non-GAAP EPS to a range of $3.80 to $3.90 per share. This is growth of 16% to 19% for the year. Now for the second fiscal quarter, we're expecting revenue to range from $1.37 billion to $1.39 billion, representing reported growth of 11% to 12% and core growth of 7% to 9%. We expect second quarter 2021 non-GAAP earnings to be in the range of $0.78 to $0.80 per share, with growth of 10% to 13% as we approach the 1-year anniversary of the significant reduction in expenses in Q2 of last year. Now before opening the call for questions, I want to say I couldn't be more proud of the Agilent team in driving such strong performance. We have gotten off to a great start this year, and I'm personally very excited to know what this company is capable of moving forward. We have very strong momentum, the right approach that leads me believe that we're on a very solid path for Q2 and the rest of 2021. With that, Ankur, back to you for the Q&A. Ankur Dhingra : Thanks, Bob. Jason, if you can provide the instructions for Q&A, please. Operator: [Operator Instructions]. Your first question comes from the line of Tycho Peterson from JPMorgan. Tycho Peterson : Congratulation here on the preannouncement. On that note, Mike, actually, I'm wondering if you could talk a little bit about what drove the delta to the preannouncement. And then importantly, on sustainability, it sounds like you're not really calling out any kind of pull forward here. Curious as we think about it, and particularly that biopharma strength and the mid-teens growth you’ve had in LC/MS, how are you thinking about the sustainability there? Mike McMullen : Well, first of all, Tycho, thanks for the recognition. Really proud of the performance to even top our earlier revised expectations for the quarter. And I'd say that as we got into January, business in January was stronger than we had anticipated. And I think it was -- from a geographic perspective, we saw the strength in China. Obviously, that was higher than we had. We're thinking as long as very -- really good strength in the Americas, led by pharma and the food market. I'm sure we'll dial in today on the call about the food market, which is both growth in China as well as in Americas. And then no pull forwards. So it was a clean quarter with January being stronger than we had anticipated, when we already had announced an increase in our revenue outlook for the quarter. Bob, I don't know if I missed anything on the... Bob McMahon : No. You got it. Tycho Peterson : And on the LC/MS strength, up mid-teens, certainly better numbers than we're seeing from a lot of your peers. Can you just talk to that? Mike McMullen : Yes, I think that it's a continuation of story that's been underway for several quarters. We've continued to innovate and provide value to the customers really see in our offerings, coupled with our approach to our field engagement and really maintaining our field force when our customer needs us most. We're getting the business. And it's very clear that not only is it a -- was there -- we saw, particularly in some of the pharma and non-COVID areas where they were basically making sure that they spent the capital had allocated for 2020, we got all that business, but it's more than that. It was a market share gain story as well for us. So I think it was a combination of a backtrack of investment by the pharma world but also our ability to gain share. And Bob, I know you've taken a close look at this and... Bob McMahon : Yes, I think, Tycho, to Mike's point, I think one of the things we feel really good about is just our portfolio and our offerings to our customers. I think one things that we've seen is our responsiveness continues to improve, and that's been evidenced by the increased customer satisfaction that we've seen. And as Mike said, as the year-end CapEx spending happened, we were there, and I think we took more than our fair share. And we do think that this is an area that we continue to invest behind. Mike talked about the investment in the MassHunter software, which I think is going to really help continue this momentum that we have going forward from a compliance standpoint, and it's an area of focus, and we're very excited about the biopharma business going forward. Mike McMullen : Yes. And there's a real holistic story here as well. You know the story already Tycho with our ACG business complementing, on the services and consumables complementing what we can do on leading innovative instrument solutions. Tycho Peterson: And before I hop off, just one on ACG, you grew mid-20s in China off a low-teens comp. So it's not like the bar was low. Are you doing anything there structurally to kind of drive that acceleration? Mike McMullen : What -- I'm going to let Padraig talk a little bit about that. Padraig, why don't you share your thoughts on that? Padraig McDonnell : Yes. Thanks, Mike. I think it's a combination of our scale on our service business in China and our connection with customers. And also, we've been investing in a number of years in our digital capabilities in China, which is really seeing a lot of pull-through from the customers and all markets are really driving the business forward, and we see it sustaining over the next period. Bob McMahon : Yes, Tycho, just to build on what Padraig is saying, I mean, this is an area where we've also increased our investments in people on the street. And as we think about, Mike mentioned this in his script, actually our focus on actually turning ongoing revenue into service contracts, this is an area where we've had a specific focus in China there, and it's really helped us. And so we're -- that productivity aspect continues to play out in China. Operator: Your next question comes from the line of Brandon Couillard from Jefferies. Brandon Couillard : Maybe, Mike, could you elaborate on your comment as far as beginning to see some improved activity in the C&E market? And maybe, Bob, could you give us some color on instruments versus aftermarket growth in the first quarter? Mike McMullen : Yes, we're really talking about order activity, right? So we're seeing a lot of discussion with our field teams, particularly in the area what I would call high-value chemicals, specialty chemicals. So there's a lot more discussion going on with our field teams right now. And I think our customers are feeling more confident about the economic outlook and the end market demand that they can anticipate in the coming quarters. And as you know, this is against a backdrop of a lot of pent-up demand where investments have been deferred. And we're seeing -- continue to see strong PMIs. But as you heard me share the story forward, Brandon, I'm always reluctant to call a turn until we actually see a couple of quarters. So while we're optimistic about what we're seeing so far, we're not ready to yet to put it into the formal guide for the year. Bob McMahon : Yes. And just on the second part of your question, Brandon, our instrumentation was roughly flat, and ACG was up mid-single-digits. Brandon Couillard : Then one follow-up for you, Bob. Gross margins in the first quarter were better. Do we expect that -- are you still thinking that the full year is still relatively flat to down? And any chance you could quantify the impact of the NASD capacity built on gross margin in the first quarter? Bob McMahon : Yes. It was a little lower than what -- we would expect that to be higher in the back half of the year as we continue to ramp up. So it didn't really have a material impact on the first quarter. If you recall, we talked about that being roughly about 20 basis points for the full year, and that really didn't have an impact in the first quarter. And in terms of the overall year, I would say we're slightly more optimistic, kind of given where, certainly, the first quarter came in. And that's part of the increasing our top end, I would say, the margin expansion. It's a combination of a little more in gross margin, but most of it actually will be in the operating expenses. Operator: Your next question comes from the line of Vijay Kumar from Evercore ISI. Vijay Kumar : I guess for my first one, Mike, the guidance here, I guess Q2, your comps are pretty easy. You just did 11 in Q1. Could you perhaps comment on the Q2 and why that should step down? And when you look at the annual from an end market perspective, if C&E didn't change, I guess, is this biopharma that's changing for the annual outlook? Bob McMahon : Yes, let me take a shot at it, and then I'll turn it over to Mike, Vijay. Thanks for the acknowledgment. Yes, I'll take the second question first and then go back to the first -- second quarter. If we think about where the full year is, it's mainly in that pharma and food markets across all of the regions that we see the uptake. And we are optimistic about chemical and energy, but we're not yet putting it into the forecast. It's still at the end of the quarter. As Mike said, we're seeing a lot of business activity. We're seeing the order funnel build and so forth, but we want to actually see those translate into orders and then ultimately into revenue. So everything there is moving in the right direction, and we would expect that to continue to play out throughout the course of the year. If I look at Q2, we did have a higher-than-expected budget -- year-end budget dynamic that helped, obviously, the 11%. That doesn't repeat itself in Q2. And -- but if you looked at -- we feel very confident about the continued momentum of the business going forward. Mike McMullen : And that was probably a couple of points of growth maybe. Bob McMahon : Yes. It's hard to estimate, but that's the best guess that we have, yes. Vijay Kumar : Understood. And then I guess, just for my follow-up. Is the guide assuming, this COVID tailwinds that you mentioned 200 basis points in Q1, is that going to sustain? And I'm curious, what is driving the margin strength here, I guess, relative to your prior guide? Mike McMullen : Yes. So I'll take the first one. Yes. So we're still in that 2 percentage kind of revenue range for COVID. So that's a good number to lock into. Bob McMahon : Yes. And I think the growth on the margin expansion has been just really the strength in our volume. And I think that, that -- when we have that strong growth, you actually see it going to the bottom-line. When you look at last year, our spending profile changed pretty dramatically quarter-on-quarter as we were reflecting the pandemic and so forth. If we think about Q1 to Q2 this year, our spending, think about it as roughly flat sequentially. Mike McMullen : Yes. And Vijay, I'm sure you had a chance to look at Jacob's margins for the first quarter, but LSAG had very strong margins. And that's -- when you have double-digit growth in LC, the strength in the cell analysis business, we had indicated when we acquired BioTek that we are buying not only high growth but also a high-margin company, I think you're seeing it in the numbers. Operator: Your next question comes from the line of Puneet Souda from SVBL. Puneet Souda : So my first question is on China, which you alluded to a little bit before. Obviously, a strong quarter, but just walk us through where do we stand today in China food and where the products are resonating? What's your outlook here? Obviously, this has been a market that has been improving for you after some disruptions a while ago. And just want to get a sense of where it stands and how should we think about it going forward? Mike McMullen : Yes, Puneet, thanks for your kind comments. And I'll make some initial introduction comments here about China food, and I'll invite Jacob into this conversation as his solutions are a big part of the story here. So this is a quick remind to the audience. You may recall that we saw a slowdown for the better part of over 2 years in the China food market as a result of the reorganization of the China food ministries, and we always have been pointing to the fact that there had been really deferred investment at the national level. And now that situation has completely changed, which are -- there's reinvestment going into new technologies at the national level. In addition too, the testing volumes continue to grow for the contract testing lab side, picking up that volume. And Jacob, I think we've got a pretty good position here in the marketplace with our mass spec portfolio. Jacob Thaysen : Yes, certainly, Mike. So you're right that we are seeing a broad-based interest from our portfolio. But particularly, what stands out is our triple quad, both the LC/MS and the GC/MS, which is sought after, especially for pesticide testing where both technologies are used. And what we have developed here is one workflow, one sample press that can be used for both technologies. So that is very much better performance versus many others where you have to have 2 different kinds of setups. So we see a lot of interest in that. And so the triple quad is really paving the way right now. Mike McMullen : And Jacob invested in a China solution center as well. So we actually, again, based on these leading technology platforms, are able to tailor our solutions for that China food market. So we're really excited about the change in the business volume there, as you can imagine. Puneet Souda : That's great. And if I could also ask in terms of pharma in China, could you maybe just elaborate your positioning there? You had really strong growth here in terms of both small molecules and biomolecules as well. Maybe just if you could characterize that, is that biomarker growth largely coming from NASD? Is that what's driving that part of the component? And the small molecules, you had really strong growth, too, so maybe if you could parse that out. Mike McMullen : Yes. Specific to China, there's no NASD volume at all. It's zero in China. So that's purely on the -- on what we call the LSS side, which is ACG and LSAG business. Bob McMahon : Yes. And I was going to say, Puneet, as we said in the call, our -- if you stripped out NASD, biopharma in total, so this would be our ACG and LSAG businesses together along with some contribution at DGG, grew 20%. And that was really broad-based across all regions. Actually, it was faster than that in China. But if you look across, they were all kind of neck and neck in terms of the performance across the regions. Mike McMullen : Hey, Bob, I'd just add one thing. Although we don't have direct NASD business in China, as Bob highlighted in his script, we're seeing a lot of demand for LC/MS-based solution for oligo-based R&D research. And the fact that we're in this business ourselves with our own API business and that we have a state-of-the-art facility in our Frederick, Colorado site really helps us be able to sell solutions to our customers doing research in this area as well. So I do think there's a linkage of the oligo business into China, albeit on what we're seen on the research side. Bob McMahon : Yes. And that small molecule in China was very strong. Mike McMullen : Oh, yes, sorry about that. I missed that one. Yes. How can I miss that one? Operator: Your next question comes from the line of Dan Leonard from Wells Fargo. Dan Leonard : So first question, still trying to think of how to interpret your chemical and energy comments. The comps get pretty easy for that end market. And it doesn't sound like the 2% you reported in the quarter reflects what you're currently seeing on the order side. Are you still expecting kind of flattish chemical and energy performance through the balance of the year? Or could you help me with that? Mike McMullen : I think the headline here is potential upside to our guide. And then, Bob, maybe you can answer the... Bob McMahon : Yes. Mike mentioned the headline quite well. As we think about the chemical and energy, we've built in some slight improvement in Q1 and Q2, but have not made any changes to the back half. Mike McMullen : And by the way, Dan, I'm not trying to be coy here or cute. We've just seen this market can easily can turn on the dime. And I've had experience where I've called it too soon. So once we feel confident about the book of business we have inside Agilent, we will be sure to give you an updated view of the outlook for the year. Padraig McDonnell : Mike, I think it's worth mentioning again that our competitive positioning is very strong here. And as you know, we have invested very heavily into our portfolio, both from an instrumentation, but also from an informatics point of view. So when the market comes back, we will certainly see a lion's share of that. Mike McMullen : Yes. It should have been part 2 of my headline. When the business is there, we're going to get it. Dan Leonard : Okay. And I appreciate that. And Mike, you've seen a lot of budget cycles. Could you maybe -- what we just saw in the quarter in context, you had a strong quarter, and I know share gain is part of that. All your peers had a really strong quarter. Are we going to look back at this period a couple of years from flush, particularly in pharma? Was this 1 for the history books? Or was this just a good flush? Like how would you characterize that? Mike McMullen : I sure hope that's for the history books because it had a backdrop of a pandemic, and what we saw was some deferred capital investment that had been -- normally would have maybe been invested in the -- our Q2, Q3 because of COVID-19 concerns. And just the fact that customers weren't working, deferred the capital. But again, I would have to say there's more to the story in our Q1 than just that budget flush. So -- and -- but... Bob McMahon : Yes, I was going to say, I would say it certainly was bigger than the last several years. I don't know -- and -- but I think as we think about the momentum that we've seen, when you look at where we were in Q4 as well, we started seeing the turnaround. And we saw it continue through Q1, and we're expecting that to continue into the rest of this year as well. So it's not just a one-quarter phenomenon. Certainly, it was stronger than we anticipated. But we have higher expectations going forward for growth in pharma. Operator: Our next question comes from the line of Doug Schenkel from Cowen. Doug Schenkel : So my first question is on share gains. In your prepared remarks, and actually, I think in -- even in the press release, you highlighted market share several times in the context of the strong revenue growth you delivered in the fiscal first quarter. I'm curious if you could opine on where you think you're taking the most share and how sustainable this is? So that's the first topic. The second is on M&A. And the balance sheet is clean. You're re-upping on the share buybacks. I'm just wondering how you're thinking about M&A, and more specifically, the parameters that you are using to evaluate potential acquisitions moving forward? Mike McMullen : Yes, Doug, thanks a lot for that. Happy to opine both questions. So yes, we really wanted to make sure the story came through that we had this a great start to 2021, and it wasn't just about a year-end budget flush. There's some really good things that have been going in for several quarters, and this continued in the first quarter. And we very specifically chose the language in key areas. So we're gaining share in some of our biggest product line areas. I would point to liquid chromatography. I’d point to mass spectrometry, both gas phase, liquid phase and the inorganic side. I'd point to our services business. And -- what else might you add to that? I mean, I think it's pretty much broad-based. Bob McMahon : Yes, and in our oligos business. Mike McMullen : Yes, oligos because it always comes in 3, the oligos, I mean we had outstanding growth in Q1. So we're getting market share gains in the product lines where they really are collectively needle movers for the entire company. And then relative to the M&A, yes, we were in the market repurchasing shares this quarter, this past quarter, I should say, being anti-dilutive. But our priority remains, as we communicated, our December Investor and Analyst Day, which is we want to invest in the business, not only in terms of capital expansion building down NASD, for example, but also growth accretive M&A. And that remains our priority. You may have picked up in my comments, prepared comments that the discussions with potential targets, the deal activity is picking up. And I think -- and we've seen a number of other deals announced in our space. But I'd say the volume of discussion has much increased over the last quarter or 2. So nothing to announce, but that remains our area of focus for utilization of our strong balance sheet. And Bob, anything else you want to add? Bob McMahon : Yes, the only thing I would say is, Doug, as we think about the markets that we compete in, our framework really hasn't changed. We're looking at markets that are faster-growing than the markets that we are in or sub-segments of those markets. We think the last couple of acquisitions have really borne that out with ACEA as well as BioTek in the cell analysis space, and it's really helped continue that shift to higher-growth markets, and that's the area that I would think -- and there's really opportunities across all of our -- both in instrumentation as well as in kind of consumables area or that recurring revenue stream as well. So that's the way I would think about it. Mike McMullen : Yes. And Doug, we continue to look for companies also not only to meet that criteria, but also we think there are strong cultural fit that really would be part -- could really be a key part of the overall Agilent family, so to speak, and also a business where we think we can make that business even better. Operator: Your next question comes from the line of Matt Sykes from Goldman Sachs. Matt Sykes : Nice solid quarter, guys. I just wanted to focus on, if you -- when you look at the DGG operating margin in the fourth quarter, it was obviously very strong. Just in terms of sustainability for that, what was driving that? And what should we expect as we go forward in '21? Mike McMullen : Hey, Bob, do you and Sam want to tag team on this? Bob McMahon : Yes, I'll start and then turn it over to Sam. I mean you see the strength really was volume-driven here -- and when we look at it. And as we ramp up that NASD facility, that's generated a very nice incremental growth on the bottom-line. As we mentioned in an earlier call, we haven't had the start-up costs really start showing up yet there. But I think that -- and then some of the qPCR activities and related have really helped drive this. Sam? Sam Raha : Yes, Bob, great lead-in. I'll just add as you said, NASD, that business, we are in a place where we are getting -- using more and more our capacity. And that's a good thing as it relates to margin. On the genomics and pathology side as well, we have high-value products, such as our SureSelect NGS target enrichment platform, which had a good quarter, and we anticipate that continuing to grow. That's high margin. We have leadership in NGS quality control. And it's not just instruments there, there's ongoing consumables that go along with standards. So we expect our leadership position for that to grow. And we haven't talked about in a little while. But this past quarter, we also announced our seventh indication for PD-L1 to go along with KEYTRUDA for triple-negative breast cancer, and that's another place where we have leadership and drives good margin for us. Matt Sykes : Great. And just one quick follow-up. Just more of a high level. As you continue to grow your ACG franchise, could you just talk about how that impacts some of the divisions? And as you expand your reach, does that really help drive the LSG division and other types of segments that you have, just given that it just continues your reach within the market and deeper customer penetration? Mike McMullen : Yes, Matt, you're on the right theme here. So in fact, when I talked about this most recently inside Agilent, I talked about this is where our LSAG and ACG businesses come together. And there really is a very symbiotic relationship here, which is both businesses help one another, right? So I pointed earlier to some of the strength we saw in the pharmaceutical industry in LC, LC/MS in Q1, but also was tied to the enterprise services story we've been talking about for a number of years. And when you start to get yourself into a different relationship with customers, they truly see you as that valued partner. And for example, when they've had several years of an enterprise service arrangement with you, and you show them collectively -- or I should say, actually, objectively, what's been going on the lab with various different vendors in terms of equipment, it will point to, for our case, a decision to let's move more of our business to Agilent instrument side. Also, I think as Bob mentioned, we were there on a responsiveness standpoint. On our services, digital capabilities, we were able to respond to customers even in the midst of the pandemic, and they remember that, that we were there for them. And that translates into instrument business when they're doing their next round of capital purchase. So I think there really is a very close symbiotic relationship. And although we run them as we show the outside world, 2 separate business group results, they work very, very closely together, not only inside the company, but most importantly, with customers. Operator: Your next question comes from the line of Mike Ryskin from Bank of America. Mike Ryskin : This is Mike on for Derik. I want to follow-up on one thing you touched on it earlier. I mean, we've already hit on LC and just broader pharma markets a little bit. You had a comment of higher growth and pharma expected going forward. I just wanted to go a little deeper and try to get a sense for what are the key drivers here because there's so many moving pieces. You've got the end of your flush and maybe some catch-up in COVID early in the year. NASD obviously doing very well. Selling out is becoming a bigger part of the picture. You've got the share gains. So I'm just wondering, as you strip some of those out, are we seeing broader, higher levels of spend in pharma? Are we at to start of another LC replacement cycle? If you pay off some of those individual drivers, are we just seeing a better environment in pharma going forward for the next couple of years that would give you confidence that that's a little more sustainable? I got a follow-up to that. Mike McMullen : Yes. So maybe just kind of parse out a couple of thoughts here, and then Bob we welcome your commentary here as well. So some of the things that you mentioned are clearly areas of higher growth today and expected to be higher growth for years to come. And that was part of our story back at the December Analyst Day, where we talked about, hey, we think RNA-based therapeutics are an area of very, very strong growth for years to come. And that's why you're seeing this growth in NASD happening right now as well as our continued investments to capture more of that future growth. Immuno-oncology is an area of major investment right now, and that's why we went after the cell analysis business several years ago. So we expect those segments of the market to be really strong double-digit growers for many years to come. So I think that's part of the story there, which is to really have focused our investments and our portfolio towards those segments of the marketplace, which we expect to have even higher growth in the overall pharma market space. I think in general, we expect the biopharma R&D investments to continue the move to large molecule. When I get the question around LC replacements, the replacement cycle is always going on. And -- but what I do think is going to happen is, it's going to be stable, strong funding environment for pharma. So we're very optimistic about the long-term outlook for pharma. And I think it's a market I know we're betting on right now at Agilent. Mike Ryskin : And then my follow-up on that is, by our math, if you take the magnitude of the 1Q beat and then also the stronger FX tailwind for the rest of the year, that accounts for roughly $175 million of the raised fiscal year guide. And maybe you have these other items coming in. You mentioned the COVID test. You've got the -- all your comments on the strength in the current market. So where exactly is the downside risk? I mean, especially given the comps over the next couple of quarters, what are the areas we should be keeping an eye on that would keep you from doing something closer to 10%-plus quarterly? Bob McMahon : Yes, it's a great question. And I think one of the things, we still are in the midst of the pandemic, right? There's still the variance out there. We haven't seen any impact of that to date, but those are some things that we're watching. And we haven't built any of the COVID testing that you just talked about into the numbers. So that would definitely be something that when we get those approved, that would be upside to this. And that's not all within our control. The development and those timings are within our control. But ultimately, that's a bet that both on the serology side as well as the qPCR side that we feel confident about, and that would be on top of these. And then as we talked about before, the variability potentially in the C&E market is more biased towards the upside as we think about the forecast going forward. And so we feel good about where we are. We're early in the year and... Mike McMullen : We’re just one quarter in. Bob McMahon : But we don't expect the momentum to abate. Operator: Your next question comes from the line of Daniel Brennan from UBS. Daniel Brennan : I guess first question is maybe on China first, just I don't know if I missed it. Did you give what number or what growth rate you're assuming for the full year? And then within that, could you just discuss a bit more detail on the components of that, in particular, food, obviously, very strong this quarter. But how much more catch up potential is there in food, given how weak that business is then? Bob McMahon : Yes. Let me take -- I'll take the first one, and then we can jump on and we can tag team, Mike, on the second one. Mike McMullen : Yes, absolutely. Bob McMahon : In China, we had forecasted roughly high single-digits at the beginning of the year. It certainly started much stronger than that. So we're expecting it be double-digits for the full year, really driven by both pharma and food. Those would be the two -- the upside drivers to our initial guide. And then I think on food, we've seen -- we saw stabilization really in the first half of 2020, saw an improvement in Q4. And that improvement continued here into Q1. And we would expect that to continue, given kind of the overall environment and sensitivity around food testing and so forth. But we're not quantifying how long or how much is left to catch up, so to speak. Mike McMullen : Yes. I think also with food, I'm not sure I would really would use catch up describe this because, clearly, where you had some of the pharma companies just weren't having the research in and didn't work, had deferred investment, I think this has been part of the coming together of the new 5-year plan for China, and that's what's really driving this. So we would expect to see sustained investments, albeit not at this double-digit level. I think it's hard to know, Dan -- we've always felt this thing was not a market that was shrinking, wouldn't shrink long-term, which it had been for a few years, but it's more like a high single-digit longer term. And I think that's probably where we'd land, on your question, although I think we'll do double-digit for sure this year in '21. Bob McMahon : Yes. We -- Mike, to your point, in our initial guide, we assume kind of a mid-single-digit as the recovery, and it's probably high single-digit to double-digit for the range for the full year. Daniel Brennan : Great. And then maybe just one follow-up on the NASD? What was the dollar contribution this quarter? What's kind of assumed in the full year? I don't know if you've changed that at all. And I know you've touched upon this, but in terms of other modalities besides interference, I guess, is that still -- it sounds like it's something that could possibly come, but we're still going to wait to hear from you guys on that. Bob McMahon : Yes. What I would say, Dan, is we're at our full run rate capacity, which is, as we've talked in the past, $200 million a year. We hit that kind of where we expected to in Q1. Mike McMullen : We're really happy with how that business is ramping. Bob McMahon : And we're not done yet. Jacob Thaysen : Hey, Bob, I would just add to that, that as I mentioned before, RNAi interference is our primary focus, but we are doing programs on Guide RNA for CRISPR, and we are at full tilt with that. But we are always looking to be in tune with new modalities. And if they're relevant, if they're sufficiently meaningful, we're definitely apprised of that as well. Operator: Your next question comes from the line of Patrick Donnelly from Citi. Patrick Donnelly : Mike, maybe one for you. Just on the chemical and energy side, certainly appreciate the conservatism baked in here. Can you just talk a little bit -- I know in the past, you've talked about kind of the shift from insourcing to outsourcing from customers and how that should play nicely into your strengths. Can you just talk about, I guess, where we are in that process and how big of an opportunity that is for you guys? . Mike McMullen : Yes, I think we're still early days on that. I think it's -- that's part of the discussion. I think the investments that are going to happen this year, if they drop, are going to be more tied to deferred tech refresh. But I think it's probably more of a 2023 kind of -- excuse me, '22 event from the onshore and insourcing that we've been talking about. And I think this probably points to us being able to be able to sustain a mid-single-digit kind of end market. So it's -- I mean, it points to the fact that chemical and energy with these kind of longer-term outlooks coming from our customers will not be a drag on the overall growth rate, any material extended off. So I think it's an adder to the thesis that there is growth in the C&E market as well, albeit it can be a little bit -- it can move a little bit, depending on what's happening in the overall economy. Patrick Donnelly : Okay. Now it's going to be the year of durability at least. And then maybe just one... Mike McMullen : I like what you said, I should have used durability. How was the short to answer your question. Patrick Donnelly : All good. I appreciate that. And then maybe just one on the academic side. Obviously, that's been lingering a little bit on the soft side, not only for you guys, but for much of the industry. I guess, where do you think we are there in terms of whatever metrics you guys look at, whether it's customers in the labs or whatever it may be? Maybe just kind of dive in that a little bit. Mike McMullen : Yes. Great question. So when we’re talking to our team and our customers, here's our view of it right now. We think about -- if you think about 30% of the research labs are fully operational now, we think about 60% are working at reduced capacity. We think about 10% are closed. And we really think it's going to be -- all this is really tied to ability to get the infection rates down, to get the vaccinations out. I think until that changes significantly, we're expecting kind of more of the same, I'd say, Bob, for the -- until we actually see a change in the overall… Bob McMahon : Yes, I think the real catalyst for us, Patrick, to Mike's point, is what's going to happen in the fall semester for classes? Mike McMullen : Yes. Bob McMahon : Are people -- are students going to be back full? Or is it still going to be at kind of reduced rates and so forth. Mike McMullen : Yes. Bob McMahon : So we're expecting continued recovery, albeit slow, really, and that's what we're looking at in addition to some of the kind of the macro levels. Mike McMullen : I would say, though, that the conversation with customers is very robust right now. So it's just a matter of things opening up. Operator: Your next question comes from the line of Steve Willoughby from Cleveland Research. Steve Willoughby : I had a follow-up question to Mike Ryskin's question as it relates to guidance, Bob. Maybe trying to ask it a different way. Have you really changed your organic or core growth assumptions over the remainder of the year? Because even in the first quarter here, you back out a couple of hundred basis points from sort of end-of-year budget spending. The first quarter still did basically twice what you were initially expecting for growth in the first quarter. And just looking to your guidance and doing some math, it looks like you really haven't made too much of a change for the organic growth over the remainder of the year. Is that fair to assume? Bob McMahon : Yes. I would say we took Q1. We also upgraded Q2 and made some modest changes to the back half of the year, but most of that would be in the areas -- once we get further into the year, that would be an opportunity to revisit the forecast going forward. So I think bottom-line, you're in the ballpark. Steve Willoughby : Okay. And then just a follow-up question on diagnostics. So I guess 2 things to it. One, do you think we return to 2019 or normal levels in your non-COVID Diagnostics business this year? And then also, could you just provide a reminder on where you see your PCR test potentially fitting once it does come to market? Mike McMullen : You want to take the first one and Sam the second one? Bob McMahon : Yes. The short answer is yes, we expect it to get back, but again, latter half of this year. We're starting to see improvement. If you look at it by region, China is back. Certain pockets in Europe are back and certain places in the U.S. are back as well. But I think overall, it's probably going to be a few more months at least before it gets back to pre-COVID levels. Sam Raha : Yes. With regards to your second question on qPCR, for COVID-19, our master mixes, our instruments are already being leveraged as part of other testing systems by customers around the world. When our own test comes to market, we see the opportunity. There's still a dearth of robust testing solutions that are available. So we'll have the right performance going after the right fragments or looking at the right elements of COVID-19. And it's really about our broad ability to distribute, make it available and also something that could be automatable on multiple platforms. So we think we'll have a play. Operator: Our final question today comes from the line of Paul Knight from KeyBanc. Paul Knight : So obviously, you've got a full array of products in the analytical instrument marketplace. And it goes back to, I think, Doug's question in terms of M&A, an opportunity. Where do you think you are in the full solution in cell analysis? Is there a lot to build? Is there a lot to buy in that particular market? Mike McMullen : We think so. In fact, thanks for the question, Paul. You may recall -- and Jacob, feel free to jump in on this question as well. We teed up a fairly large -- although we're fully really proud of the business we've built so far, we think we have scale at a $300 million-plus business. We're playing in a much larger SAM. And we think there's both opportunities to further build out but also buy here as well. Jacob, your thoughts there? Jacob Thaysen : Yes, certainly. We've been very intentional about how we build out our portfolio. Firstly, it’s with instrument platforms that we ensure we can get some footprint and a scale in the market. And the next thing that would be the -- logic next step is to look at content, how do we actually get content on our instrument portfolio. So that's clearly an area we're looking into. But I actually think with the footprint, there's also opportunity to add other technique modalities into that. So we are -- we have open eyes. We follow what we call the tale of strains -- strain for all. And -- but -- and we wait to put another firm on that strain. And so we are -- keep our eyes open and then see what happens. Paul Knight : And then the last question would be you had mentioned your cost-cutting program that had started in the second quarter of last year, where you are -- where are you in that process? And what happens to cost-cutting when travel and entertainment might come back kind of post-COVID? Bob McMahon : Yes. We're seeing some of that. And some of that is lapping this quarter because we saw a significant drop, and so you're not seeing the year-over-year changes. We're not seeing it go back. And our goal is to not have it go back. So we think we're at a new watermark here in terms of spending, particularly in travel and some of these other areas. Now we are increasing investments in places like digital and some of these other places that are driving demand as well as some of the capacity that we talked about before. But certainly, in those types of things, travel and so forth, we're not looking for that to go back. It will go back some, but certainly not back to the way we have been doing business before. Customers don't want it, and we are not going to let it happen. Mike McMullen : Absolutely. To Bob's point, as I spoke the other day to our global field team, and we were talking about embracing our new ways of working. And of course, a lot of people drove and love to be back on the road. But not everybody feels that way. And the customers certainly don't feel that way because we're much more responsive and attentive to their needs by using digital platforms, there is a place for face-to-face, but it has to be based on the customer need, not because we want to be in the road to be out there doing things in a very traditional way. So we're keenly aware of the question you posed, Paul, really challenged ourselves to make sure that we really continue forward with these new ways of working. And this allows us to put money into areas that really do matter to customers. So I'd rather invest there rather than travel and entertainment. Operator: That concludes Q&A, and it also concludes today's Agilent Technologies First Quarter 2021 Earnings Conference Call. Thank you, everybody, for joining. You may now disconnect.	[ { "speaker": "Operator", "text": "Good afternoon, and welcome to the Agilent Technologies First Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions]. And now I'd like to introduce you to the host for today's conference, Ankur Dhingra, Vice President of Investor Relations. Sir, please go ahead." }, { "speaker": "Ankur Dhingra", "text": "Thank you, Jason, and welcome, everyone, to Agilent's first quarter conference call for fiscal year 2021. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Bob's comments will be Jacob Thaysen, President of Agilent's Life Science and Applied Markets Group; Sam Raha, President of Agilent's Diagnostics and Genomics Group; and Padraig McDonnell, President of Agilent CrossLab Group. This presentation is being webcast live. The news release, investor presentation and information to supplement today's discussion, along with the recording of this webcast, are made available on our website at investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year, and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and the acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of January 31. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now, I would like to turn the call over to Mike. Mike?" }, { "speaker": "Mike McMullen", "text": "Thanks, Ankur, and thank you to everyone for joining us today on our call. I'm very pleased to be on the call with you today. We are off to an excellent start to our fiscal year. The Agilent team delivered outstanding results in the first quarter. The momentum in our business continues. Revenues for the quarter are $1.55 billion. This is up 14% on a reported basis and 11% core, exceeding our mid-January revised expectations. Also, as expected, COVID-19 tailwinds added roughly 2.5 points to our overall growth. Operating margins are healthy, 25.5%. EPS of $1.06 is up 31% year-over-year. Overall, a very impressive start to 2021. Our growth is broad-based. All 3 of our business groups delivered double-digit growth. All regions grew, with the 2 largest leading the way. China grew 25%, and the Americas posted 13% growth. We continue to see strength in most of our end markets, led by pharma growing 20%. These results are a testament to our build and buy growth strategy and the Agilent team's relentless customer focus. Demand remains strong for the full breadth of our offerings. We have been gaining market share in key areas. We are clearly keeping our foot on the gas. Now, let's take a look at our performance by business group. The Life Sciences and Applied Markets Group generated $722 million in revenue, up 13% on a reported basis and up 11% core. LSAG's growth is broad-based across end markets and geographies. We are particularly pleased with our cell analysis business. Cell analysis grew in the high teens, led by BioTek, which grew 26%. Growth is also strong at liquid chromatography and mass spec product lines, with both growing in the teens. Overall, our LSAG business saw very strong demand as many customers utilized their end-of-year CapEx budgets and our market share gains continued. From an end market perspective, food and pharma led the way for LSAG. Continuing our biopharma investment focus, we introduced new updates to our MassHunter LC/MS software. This new software enables data integrity consisting important regulatory requirements for our biopharma customers. As we continue to build our digital lab, we introduced the Agilent 7850 ICP-MS System, which provides new smart digital tools to improve workflows. LSAG's broad and continually strengthening portfolio is well positioned and continues to outperform the industry. The Agilent CrossLab Group posted revenues of $532 million. This is up a reported 13% and up 10% core. ACG's growth is also broad-based across end markets and geographies. Growth is strong in both services and consumables. Our digital investments and scale are adding significant value. We continue to drive improved attach rates to Agilent's large installed base of instruments. Annual service contract renewal rates and growth were strong in the quarter as we continue to build a more resilient and higher growth business. The Diagnostic and Genomics Group, revenues are $294 million, up 18% reported and up 15% core. Growth is broad-based, led by our NASD oligo business. Our genomics product portfolio grew double-digit, aided by COVID-19-related qPCR demand. We also achieved strong growth in our core NGS sample prep business. As mentioned earlier, overall company growth is broad-based across most of our end markets. The pharmaceutical food businesses led the way, both growing strong double-digits. We also posted 10% growth in the environmental and forensics market. Chemical and energy grew 2%, and we've seen increased business activity in the C&E space. The academia end market is down 1%, with many university labs still operating in a constrained environment. We are also continuing our efforts in the battle against COVID-19. We have completed our development and clinical validation for a serology assay to detect COVID-19 antibodies. We plan to submit to the U.S. FDA for Emergency Use Authorization within the next month. In addition, we're making progress on our qPCR-based test for COVID-19 detection and plan to launch in Europe in the next couple of months and submit for Emergency Use Authorization in the U.S. within the same time frame. I'm also pleased to share that Barron's again recently named Agilent One of America's Most Sustainable Companies. This marks the third year in a row we have been included among the top 3 companies in this ranking. We've also been a leader in our industry all 4 years that Barron's list has been published. We're very proud of this honor. Sustainability is a key priority for our company. When I look back on the uncertainty we faced this time last year, I'm so proud of what the Agilent team accomplished, all-time high customer satisfaction ratings, building momentum in all our businesses and delivering excellent results. Our first quarter results are another compelling proof point that we’re building an even stronger company and market position during the pandemic. As we discussed at our December investor event, our diverse industry-leading product portfolio has never been stronger. Our building and buying growth strategy with a focus on high-growth markets continues to deliver. Our M&A funnel is robust and remains focused on growth-accretive M&A opportunities. We are targeting companies in markets where we see potential for significant long-term growth, and Agilent is in a strong position to win. As we look ahead, we have a sense of realistic optimism. We have solid momentum. We're winning in the market, and we have the right team to continue to succeed. As a result, we are raising our core growth guidance range to 6.5% to 8% for the year. As you may recall, we recently guided to a long-term core growth rate of between 5% and 7%, so we are certainly off to a good start in 2021, and we have no intention of slowing down. We have also raised our earnings guidance for the year. In December, I shared Agilent's long-range plan of margin expansion at 50 basis points to 100 basis points a year. We are now guiding towards the top end of that range for 2021. Bob will share more details on this in his remarks. I couldn't be more pleased with how we have started the year. We have momentum. Our team is strong and energized. We are gaining market share in key areas, and we have an even more promising outlook for the full year. Thanks for being on the call today, and I look forward to your questions. I will now hand the call off to Bob. Bob?" }, { "speaker": "Bob McMahon", "text": "Thanks, Mike, and good afternoon, everyone. In my remarks today, I'll provide some additional details on Q1 revenue and take you through the first quarter income statement and some other key financial metrics. I'll then finish up with our outlook for 2021 and the second quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. We are very pleased with our first quarter results as we saw strong broad-based growth exceeding our revised expectations. Revenue for the first quarter was $1.55 billion, reflecting reported growth of 14.1%. Core revenue growth was 11.3%, while currency contributed 2.8 points of growth. Now before I get into the end markets, Mike's earlier comments bear repeating. All 3 business groups delivered double-digit growth -- core growth in the quarter. Our superior value proposition continues to resonate with our customers and our team executed well, capitalizing on recovering demand in our end markets. Pharma, our largest market, was strong across all regions, delivering 20% growth. Growth was led by NASD, which experienced significant growth in the quarter, albeit against the easiest comp of the year. NASD contributed 4 points to the overall pharma growth rate. We continue to be very pleased about the ramp of the Frederick oligo facility, and the recently announced capacity expansion in Frederick is on track. Small molecule grew mid-teens, while biopharma, excluding NASD, delivered 20% growth driven in part by strong demand for LC and mass spec instrumentation. We saw strong year-end demand from pharma customers. We're also seeing increased business related to the characterization of oligo-based therapies and vaccines. The food market also experienced strong double-digit growth during the quarter, posting a 22% increase in revenue. Our business grew in all geographies driven by increased demand for food safety and quality testing. China is leading the way, driven by investments in both commercial and government entities. Environmental and forensics grew double-digits, coming in at 10% core growth. Broad regional growth reflected strong tech refresh or replacement demand from contract labs. Our diagnostics and clinical revenue grew 9% during the quarter and has benefited from growth in COVID-related applications, primarily in the Americas and Europe. Our pathology business grew slightly as non-COVID testing continues to improve but has not yet recovered to pre-pandemic levels globally. While our diagnostics and clinical end market in China is still small, it experienced strong growth due to improvements in non-COVID testing and the uptake of our clinical LC/MS. The chemical and energy end market continued the recovery we saw last quarter and grew 2% in Q1. We continue to see signs of increased business activity, particularly in specialty chemicals and engineered materials along with encouraging improvements in the macro environment. And while we are optimistic, we are not yet reflecting a change in our forecast for the rest of the year. And as expected, the academia and government market recovery has lagged the other end markets, down 1% year-on-year as research labs are still not operating at full capacity. We continue to expect a slow but steady recovery throughout 2021. On a geographic basis, all regions grew. China grew 25%, leading all geographies, led by the food and pharma markets. The Americas delivered a strong double-digit performance during the quarter with 13% growth, while Europe was up 6%, both also led by pharma and food. Now turning to the rest of the P&L. The first quarter gross margin was 55.8%, up 10 basis points year-on-year. Adjusting for the exchange rates, gross margins improved 50 basis points. Our operating margin for the first quarter came in at 25.5%. This is up an impressive 260 basis points from last year, driven by volume and spending discipline. And this result includes the impact of increased strategic investments we started last quarter. Our top-line growth, coupled with our operating leverage, helped deliver EPS of $1.06 per share, up 31% versus last year. Our tax rate was 14.75%, and our share count was [309 million] shares, as expected. Now onto the cash flow and the balance sheet. Our operating cash flow continues to be very strong. In Q1, we had operating cash flow of $238 million, a 43% increase over last year after adjusting for last year's 1 year -- one-time tax payment. This performance shows the strength of our business model and provides financial flexibility going forward. We continued the balanced capital deployment strategy we highlighted at our Annual Investor Event in December. In the quarter, we invested $41 million in capital expenditures, paid out $59 million in dividends and repurchased 2.9 million shares for $344 million. And as we announced earlier today, our Board of Directors authorized a new $2 billion share repurchase program replacing the current program. We ended the quarter in a strong financial position with $1.3 billion in cash and $2.5 billion in debt. Now moving on to the outlook. We have had a strong start to the year. And while there are still uncertainties in front of us and the business environment remains fluid, we have solid momentum, and we see continued recovery in our end markets, albeit at different rates. And as a result, we're increasing our full year projections for both revenue and earnings per share. For revenue, we are increasing our full year to a range of $5.825 billion to $5.9 billion, up over $200 million at the midpoint and representing reported growth of 9% to 11% and core growth of 6.5% to 8%. This increase reflects strong Q1 results and some improvement in our outlook for the remainder of the year. The increased guide assumes stronger performance in most of our end markets. The academia market continues to track as expected in our initial plans. And while business activity in the chemical and energy has picked up, we have not yet included any improvement in that market in this updated outlook. In addition, we have not included any revenue associated with either the serology or qPCR COVID assay in the outlook. As Mike mentioned, we also feel very good about expanding our margins. During the Investor Event in December, we provided long-range plan of annual margin expansion in the range of 50 basis points to 100 basis points. Given the volatility in results during 2020, our margin expansion profile will vary each quarter. However, we feel confident about our full year margin expansion being towards the top end of that range while also investing for future growth. The higher sales and margin expansion coupled with maintaining our tax rate at 14.75% and a lower share count of roughly 307 million shares, increases our fiscal 2021 non-GAAP EPS to a range of $3.80 to $3.90 per share. This is growth of 16% to 19% for the year. Now for the second fiscal quarter, we're expecting revenue to range from $1.37 billion to $1.39 billion, representing reported growth of 11% to 12% and core growth of 7% to 9%. We expect second quarter 2021 non-GAAP earnings to be in the range of $0.78 to $0.80 per share, with growth of 10% to 13% as we approach the 1-year anniversary of the significant reduction in expenses in Q2 of last year. Now before opening the call for questions, I want to say I couldn't be more proud of the Agilent team in driving such strong performance. We have gotten off to a great start this year, and I'm personally very excited to know what this company is capable of moving forward. We have very strong momentum, the right approach that leads me believe that we're on a very solid path for Q2 and the rest of 2021. With that, Ankur, back to you for the Q&A." }, { "speaker": "Ankur Dhingra", "text": "Thanks, Bob. Jason, if you can provide the instructions for Q&A, please." }, { "speaker": "Operator", "text": "[Operator Instructions]. Your first question comes from the line of Tycho Peterson from JPMorgan." }, { "speaker": "Tycho Peterson", "text": "Congratulation here on the preannouncement. On that note, Mike, actually, I'm wondering if you could talk a little bit about what drove the delta to the preannouncement. And then importantly, on sustainability, it sounds like you're not really calling out any kind of pull forward here. Curious as we think about it, and particularly that biopharma strength and the mid-teens growth you’ve had in LC/MS, how are you thinking about the sustainability there?" }, { "speaker": "Mike McMullen", "text": "Well, first of all, Tycho, thanks for the recognition. Really proud of the performance to even top our earlier revised expectations for the quarter. And I'd say that as we got into January, business in January was stronger than we had anticipated. And I think it was -- from a geographic perspective, we saw the strength in China. Obviously, that was higher than we had. We're thinking as long as very -- really good strength in the Americas, led by pharma and the food market. I'm sure we'll dial in today on the call about the food market, which is both growth in China as well as in Americas. And then no pull forwards. So it was a clean quarter with January being stronger than we had anticipated, when we already had announced an increase in our revenue outlook for the quarter. Bob, I don't know if I missed anything on the..." }, { "speaker": "Bob McMahon", "text": "No. You got it." }, { "speaker": "Tycho Peterson", "text": "And on the LC/MS strength, up mid-teens, certainly better numbers than we're seeing from a lot of your peers. Can you just talk to that?" }, { "speaker": "Mike McMullen", "text": "Yes, I think that it's a continuation of story that's been underway for several quarters. We've continued to innovate and provide value to the customers really see in our offerings, coupled with our approach to our field engagement and really maintaining our field force when our customer needs us most. We're getting the business. And it's very clear that not only is it a -- was there -- we saw, particularly in some of the pharma and non-COVID areas where they were basically making sure that they spent the capital had allocated for 2020, we got all that business, but it's more than that. It was a market share gain story as well for us. So I think it was a combination of a backtrack of investment by the pharma world but also our ability to gain share. And Bob, I know you've taken a close look at this and..." }, { "speaker": "Bob McMahon", "text": "Yes, I think, Tycho, to Mike's point, I think one of the things we feel really good about is just our portfolio and our offerings to our customers. I think one things that we've seen is our responsiveness continues to improve, and that's been evidenced by the increased customer satisfaction that we've seen. And as Mike said, as the year-end CapEx spending happened, we were there, and I think we took more than our fair share. And we do think that this is an area that we continue to invest behind. Mike talked about the investment in the MassHunter software, which I think is going to really help continue this momentum that we have going forward from a compliance standpoint, and it's an area of focus, and we're very excited about the biopharma business going forward." }, { "speaker": "Mike McMullen", "text": "Yes. And there's a real holistic story here as well. You know the story already Tycho with our ACG business complementing, on the services and consumables complementing what we can do on leading innovative instrument solutions." }, { "speaker": "Tycho Peterson", "text": "And before I hop off, just one on ACG, you grew mid-20s in China off a low-teens comp. So it's not like the bar was low. Are you doing anything there structurally to kind of drive that acceleration?" }, { "speaker": "Mike McMullen", "text": "What -- I'm going to let Padraig talk a little bit about that. Padraig, why don't you share your thoughts on that?" }, { "speaker": "Padraig McDonnell", "text": "Yes. Thanks, Mike. I think it's a combination of our scale on our service business in China and our connection with customers. And also, we've been investing in a number of years in our digital capabilities in China, which is really seeing a lot of pull-through from the customers and all markets are really driving the business forward, and we see it sustaining over the next period." }, { "speaker": "Bob McMahon", "text": "Yes, Tycho, just to build on what Padraig is saying, I mean, this is an area where we've also increased our investments in people on the street. And as we think about, Mike mentioned this in his script, actually our focus on actually turning ongoing revenue into service contracts, this is an area where we've had a specific focus in China there, and it's really helped us. And so we're -- that productivity aspect continues to play out in China." }, { "speaker": "Operator", "text": "Your next question comes from the line of Brandon Couillard from Jefferies." }, { "speaker": "Brandon Couillard", "text": "Maybe, Mike, could you elaborate on your comment as far as beginning to see some improved activity in the C&E market? And maybe, Bob, could you give us some color on instruments versus aftermarket growth in the first quarter?" }, { "speaker": "Mike McMullen", "text": "Yes, we're really talking about order activity, right? So we're seeing a lot of discussion with our field teams, particularly in the area what I would call high-value chemicals, specialty chemicals. So there's a lot more discussion going on with our field teams right now. And I think our customers are feeling more confident about the economic outlook and the end market demand that they can anticipate in the coming quarters. And as you know, this is against a backdrop of a lot of pent-up demand where investments have been deferred. And we're seeing -- continue to see strong PMIs. But as you heard me share the story forward, Brandon, I'm always reluctant to call a turn until we actually see a couple of quarters. So while we're optimistic about what we're seeing so far, we're not ready to yet to put it into the formal guide for the year." }, { "speaker": "Bob McMahon", "text": "Yes. And just on the second part of your question, Brandon, our instrumentation was roughly flat, and ACG was up mid-single-digits." }, { "speaker": "Brandon Couillard", "text": "Then one follow-up for you, Bob. Gross margins in the first quarter were better. Do we expect that -- are you still thinking that the full year is still relatively flat to down? And any chance you could quantify the impact of the NASD capacity built on gross margin in the first quarter?" }, { "speaker": "Bob McMahon", "text": "Yes. It was a little lower than what -- we would expect that to be higher in the back half of the year as we continue to ramp up. So it didn't really have a material impact on the first quarter. If you recall, we talked about that being roughly about 20 basis points for the full year, and that really didn't have an impact in the first quarter. And in terms of the overall year, I would say we're slightly more optimistic, kind of given where, certainly, the first quarter came in. And that's part of the increasing our top end, I would say, the margin expansion. It's a combination of a little more in gross margin, but most of it actually will be in the operating expenses." }, { "speaker": "Operator", "text": "Your next question comes from the line of Vijay Kumar from Evercore ISI." }, { "speaker": "Vijay Kumar", "text": "I guess for my first one, Mike, the guidance here, I guess Q2, your comps are pretty easy. You just did 11 in Q1. Could you perhaps comment on the Q2 and why that should step down? And when you look at the annual from an end market perspective, if C&E didn't change, I guess, is this biopharma that's changing for the annual outlook?" }, { "speaker": "Bob McMahon", "text": "Yes, let me take a shot at it, and then I'll turn it over to Mike, Vijay. Thanks for the acknowledgment. Yes, I'll take the second question first and then go back to the first -- second quarter. If we think about where the full year is, it's mainly in that pharma and food markets across all of the regions that we see the uptake. And we are optimistic about chemical and energy, but we're not yet putting it into the forecast. It's still at the end of the quarter. As Mike said, we're seeing a lot of business activity. We're seeing the order funnel build and so forth, but we want to actually see those translate into orders and then ultimately into revenue. So everything there is moving in the right direction, and we would expect that to continue to play out throughout the course of the year. If I look at Q2, we did have a higher-than-expected budget -- year-end budget dynamic that helped, obviously, the 11%. That doesn't repeat itself in Q2. And -- but if you looked at -- we feel very confident about the continued momentum of the business going forward." }, { "speaker": "Mike McMullen", "text": "And that was probably a couple of points of growth maybe." }, { "speaker": "Bob McMahon", "text": "Yes. It's hard to estimate, but that's the best guess that we have, yes." }, { "speaker": "Vijay Kumar", "text": "Understood. And then I guess, just for my follow-up. Is the guide assuming, this COVID tailwinds that you mentioned 200 basis points in Q1, is that going to sustain? And I'm curious, what is driving the margin strength here, I guess, relative to your prior guide?" }, { "speaker": "Mike McMullen", "text": "Yes. So I'll take the first one. Yes. So we're still in that 2 percentage kind of revenue range for COVID. So that's a good number to lock into." }, { "speaker": "Bob McMahon", "text": "Yes. And I think the growth on the margin expansion has been just really the strength in our volume. And I think that, that -- when we have that strong growth, you actually see it going to the bottom-line. When you look at last year, our spending profile changed pretty dramatically quarter-on-quarter as we were reflecting the pandemic and so forth. If we think about Q1 to Q2 this year, our spending, think about it as roughly flat sequentially." }, { "speaker": "Mike McMullen", "text": "Yes. And Vijay, I'm sure you had a chance to look at Jacob's margins for the first quarter, but LSAG had very strong margins. And that's -- when you have double-digit growth in LC, the strength in the cell analysis business, we had indicated when we acquired BioTek that we are buying not only high growth but also a high-margin company, I think you're seeing it in the numbers." }, { "speaker": "Operator", "text": "Your next question comes from the line of Puneet Souda from SVBL." }, { "speaker": "Puneet Souda", "text": "So my first question is on China, which you alluded to a little bit before. Obviously, a strong quarter, but just walk us through where do we stand today in China food and where the products are resonating? What's your outlook here? Obviously, this has been a market that has been improving for you after some disruptions a while ago. And just want to get a sense of where it stands and how should we think about it going forward?" }, { "speaker": "Mike McMullen", "text": "Yes, Puneet, thanks for your kind comments. And I'll make some initial introduction comments here about China food, and I'll invite Jacob into this conversation as his solutions are a big part of the story here. So this is a quick remind to the audience. You may recall that we saw a slowdown for the better part of over 2 years in the China food market as a result of the reorganization of the China food ministries, and we always have been pointing to the fact that there had been really deferred investment at the national level. And now that situation has completely changed, which are -- there's reinvestment going into new technologies at the national level. In addition too, the testing volumes continue to grow for the contract testing lab side, picking up that volume. And Jacob, I think we've got a pretty good position here in the marketplace with our mass spec portfolio." }, { "speaker": "Jacob Thaysen", "text": "Yes, certainly, Mike. So you're right that we are seeing a broad-based interest from our portfolio. But particularly, what stands out is our triple quad, both the LC/MS and the GC/MS, which is sought after, especially for pesticide testing where both technologies are used. And what we have developed here is one workflow, one sample press that can be used for both technologies. So that is very much better performance versus many others where you have to have 2 different kinds of setups. So we see a lot of interest in that. And so the triple quad is really paving the way right now." }, { "speaker": "Mike McMullen", "text": "And Jacob invested in a China solution center as well. So we actually, again, based on these leading technology platforms, are able to tailor our solutions for that China food market. So we're really excited about the change in the business volume there, as you can imagine." }, { "speaker": "Puneet Souda", "text": "That's great. And if I could also ask in terms of pharma in China, could you maybe just elaborate your positioning there? You had really strong growth here in terms of both small molecules and biomolecules as well. Maybe just if you could characterize that, is that biomarker growth largely coming from NASD? Is that what's driving that part of the component? And the small molecules, you had really strong growth, too, so maybe if you could parse that out." }, { "speaker": "Mike McMullen", "text": "Yes. Specific to China, there's no NASD volume at all. It's zero in China. So that's purely on the -- on what we call the LSS side, which is ACG and LSAG business." }, { "speaker": "Bob McMahon", "text": "Yes. And I was going to say, Puneet, as we said in the call, our -- if you stripped out NASD, biopharma in total, so this would be our ACG and LSAG businesses together along with some contribution at DGG, grew 20%. And that was really broad-based across all regions. Actually, it was faster than that in China. But if you look across, they were all kind of neck and neck in terms of the performance across the regions." }, { "speaker": "Mike McMullen", "text": "Hey, Bob, I'd just add one thing. Although we don't have direct NASD business in China, as Bob highlighted in his script, we're seeing a lot of demand for LC/MS-based solution for oligo-based R&D research. And the fact that we're in this business ourselves with our own API business and that we have a state-of-the-art facility in our Frederick, Colorado site really helps us be able to sell solutions to our customers doing research in this area as well. So I do think there's a linkage of the oligo business into China, albeit on what we're seen on the research side." }, { "speaker": "Bob McMahon", "text": "Yes. And that small molecule in China was very strong." }, { "speaker": "Mike McMullen", "text": "Oh, yes, sorry about that. I missed that one. Yes. How can I miss that one?" }, { "speaker": "Operator", "text": "Your next question comes from the line of Dan Leonard from Wells Fargo." }, { "speaker": "Dan Leonard", "text": "So first question, still trying to think of how to interpret your chemical and energy comments. The comps get pretty easy for that end market. And it doesn't sound like the 2% you reported in the quarter reflects what you're currently seeing on the order side. Are you still expecting kind of flattish chemical and energy performance through the balance of the year? Or could you help me with that?" }, { "speaker": "Mike McMullen", "text": "I think the headline here is potential upside to our guide. And then, Bob, maybe you can answer the..." }, { "speaker": "Bob McMahon", "text": "Yes. Mike mentioned the headline quite well. As we think about the chemical and energy, we've built in some slight improvement in Q1 and Q2, but have not made any changes to the back half." }, { "speaker": "Mike McMullen", "text": "And by the way, Dan, I'm not trying to be coy here or cute. We've just seen this market can easily can turn on the dime. And I've had experience where I've called it too soon. So once we feel confident about the book of business we have inside Agilent, we will be sure to give you an updated view of the outlook for the year." }, { "speaker": "Padraig McDonnell", "text": "Mike, I think it's worth mentioning again that our competitive positioning is very strong here. And as you know, we have invested very heavily into our portfolio, both from an instrumentation, but also from an informatics point of view. So when the market comes back, we will certainly see a lion's share of that." }, { "speaker": "Mike McMullen", "text": "Yes. It should have been part 2 of my headline. When the business is there, we're going to get it." }, { "speaker": "Dan Leonard", "text": "Okay. And I appreciate that. And Mike, you've seen a lot of budget cycles. Could you maybe -- what we just saw in the quarter in context, you had a strong quarter, and I know share gain is part of that. All your peers had a really strong quarter. Are we going to look back at this period a couple of years from flush, particularly in pharma? Was this 1 for the history books? Or was this just a good flush? Like how would you characterize that?" }, { "speaker": "Mike McMullen", "text": "I sure hope that's for the history books because it had a backdrop of a pandemic, and what we saw was some deferred capital investment that had been -- normally would have maybe been invested in the -- our Q2, Q3 because of COVID-19 concerns. And just the fact that customers weren't working, deferred the capital. But again, I would have to say there's more to the story in our Q1 than just that budget flush. So -- and -- but..." }, { "speaker": "Bob McMahon", "text": "Yes, I was going to say, I would say it certainly was bigger than the last several years. I don't know -- and -- but I think as we think about the momentum that we've seen, when you look at where we were in Q4 as well, we started seeing the turnaround. And we saw it continue through Q1, and we're expecting that to continue into the rest of this year as well. So it's not just a one-quarter phenomenon. Certainly, it was stronger than we anticipated. But we have higher expectations going forward for growth in pharma." }, { "speaker": "Operator", "text": "Our next question comes from the line of Doug Schenkel from Cowen." }, { "speaker": "Doug Schenkel", "text": "So my first question is on share gains. In your prepared remarks, and actually, I think in -- even in the press release, you highlighted market share several times in the context of the strong revenue growth you delivered in the fiscal first quarter. I'm curious if you could opine on where you think you're taking the most share and how sustainable this is? So that's the first topic. The second is on M&A. And the balance sheet is clean. You're re-upping on the share buybacks. I'm just wondering how you're thinking about M&A, and more specifically, the parameters that you are using to evaluate potential acquisitions moving forward?" }, { "speaker": "Mike McMullen", "text": "Yes, Doug, thanks a lot for that. Happy to opine both questions. So yes, we really wanted to make sure the story came through that we had this a great start to 2021, and it wasn't just about a year-end budget flush. There's some really good things that have been going in for several quarters, and this continued in the first quarter. And we very specifically chose the language in key areas. So we're gaining share in some of our biggest product line areas. I would point to liquid chromatography. I’d point to mass spectrometry, both gas phase, liquid phase and the inorganic side. I'd point to our services business. And -- what else might you add to that? I mean, I think it's pretty much broad-based." }, { "speaker": "Bob McMahon", "text": "Yes, and in our oligos business." }, { "speaker": "Mike McMullen", "text": "Yes, oligos because it always comes in 3, the oligos, I mean we had outstanding growth in Q1. So we're getting market share gains in the product lines where they really are collectively needle movers for the entire company. And then relative to the M&A, yes, we were in the market repurchasing shares this quarter, this past quarter, I should say, being anti-dilutive. But our priority remains, as we communicated, our December Investor and Analyst Day, which is we want to invest in the business, not only in terms of capital expansion building down NASD, for example, but also growth accretive M&A. And that remains our priority. You may have picked up in my comments, prepared comments that the discussions with potential targets, the deal activity is picking up. And I think -- and we've seen a number of other deals announced in our space. But I'd say the volume of discussion has much increased over the last quarter or 2. So nothing to announce, but that remains our area of focus for utilization of our strong balance sheet. And Bob, anything else you want to add?" }, { "speaker": "Bob McMahon", "text": "Yes, the only thing I would say is, Doug, as we think about the markets that we compete in, our framework really hasn't changed. We're looking at markets that are faster-growing than the markets that we are in or sub-segments of those markets. We think the last couple of acquisitions have really borne that out with ACEA as well as BioTek in the cell analysis space, and it's really helped continue that shift to higher-growth markets, and that's the area that I would think -- and there's really opportunities across all of our -- both in instrumentation as well as in kind of consumables area or that recurring revenue stream as well. So that's the way I would think about it." }, { "speaker": "Mike McMullen", "text": "Yes. And Doug, we continue to look for companies also not only to meet that criteria, but also we think there are strong cultural fit that really would be part -- could really be a key part of the overall Agilent family, so to speak, and also a business where we think we can make that business even better." }, { "speaker": "Operator", "text": "Your next question comes from the line of Matt Sykes from Goldman Sachs." }, { "speaker": "Matt Sykes", "text": "Nice solid quarter, guys. I just wanted to focus on, if you -- when you look at the DGG operating margin in the fourth quarter, it was obviously very strong. Just in terms of sustainability for that, what was driving that? And what should we expect as we go forward in '21?" }, { "speaker": "Mike McMullen", "text": "Hey, Bob, do you and Sam want to tag team on this?" }, { "speaker": "Bob McMahon", "text": "Yes, I'll start and then turn it over to Sam. I mean you see the strength really was volume-driven here -- and when we look at it. And as we ramp up that NASD facility, that's generated a very nice incremental growth on the bottom-line. As we mentioned in an earlier call, we haven't had the start-up costs really start showing up yet there. But I think that -- and then some of the qPCR activities and related have really helped drive this. Sam?" }, { "speaker": "Sam Raha", "text": "Yes, Bob, great lead-in. I'll just add as you said, NASD, that business, we are in a place where we are getting -- using more and more our capacity. And that's a good thing as it relates to margin. On the genomics and pathology side as well, we have high-value products, such as our SureSelect NGS target enrichment platform, which had a good quarter, and we anticipate that continuing to grow. That's high margin. We have leadership in NGS quality control. And it's not just instruments there, there's ongoing consumables that go along with standards. So we expect our leadership position for that to grow. And we haven't talked about in a little while. But this past quarter, we also announced our seventh indication for PD-L1 to go along with KEYTRUDA for triple-negative breast cancer, and that's another place where we have leadership and drives good margin for us." }, { "speaker": "Matt Sykes", "text": "Great. And just one quick follow-up. Just more of a high level. As you continue to grow your ACG franchise, could you just talk about how that impacts some of the divisions? And as you expand your reach, does that really help drive the LSG division and other types of segments that you have, just given that it just continues your reach within the market and deeper customer penetration?" }, { "speaker": "Mike McMullen", "text": "Yes, Matt, you're on the right theme here. So in fact, when I talked about this most recently inside Agilent, I talked about this is where our LSAG and ACG businesses come together. And there really is a very symbiotic relationship here, which is both businesses help one another, right? So I pointed earlier to some of the strength we saw in the pharmaceutical industry in LC, LC/MS in Q1, but also was tied to the enterprise services story we've been talking about for a number of years. And when you start to get yourself into a different relationship with customers, they truly see you as that valued partner. And for example, when they've had several years of an enterprise service arrangement with you, and you show them collectively -- or I should say, actually, objectively, what's been going on the lab with various different vendors in terms of equipment, it will point to, for our case, a decision to let's move more of our business to Agilent instrument side. Also, I think as Bob mentioned, we were there on a responsiveness standpoint. On our services, digital capabilities, we were able to respond to customers even in the midst of the pandemic, and they remember that, that we were there for them. And that translates into instrument business when they're doing their next round of capital purchase. So I think there really is a very close symbiotic relationship. And although we run them as we show the outside world, 2 separate business group results, they work very, very closely together, not only inside the company, but most importantly, with customers." }, { "speaker": "Operator", "text": "Your next question comes from the line of Mike Ryskin from Bank of America." }, { "speaker": "Mike Ryskin", "text": "This is Mike on for Derik. I want to follow-up on one thing you touched on it earlier. I mean, we've already hit on LC and just broader pharma markets a little bit. You had a comment of higher growth and pharma expected going forward. I just wanted to go a little deeper and try to get a sense for what are the key drivers here because there's so many moving pieces. You've got the end of your flush and maybe some catch-up in COVID early in the year. NASD obviously doing very well. Selling out is becoming a bigger part of the picture. You've got the share gains. So I'm just wondering, as you strip some of those out, are we seeing broader, higher levels of spend in pharma? Are we at to start of another LC replacement cycle? If you pay off some of those individual drivers, are we just seeing a better environment in pharma going forward for the next couple of years that would give you confidence that that's a little more sustainable? I got a follow-up to that." }, { "speaker": "Mike McMullen", "text": "Yes. So maybe just kind of parse out a couple of thoughts here, and then Bob we welcome your commentary here as well. So some of the things that you mentioned are clearly areas of higher growth today and expected to be higher growth for years to come. And that was part of our story back at the December Analyst Day, where we talked about, hey, we think RNA-based therapeutics are an area of very, very strong growth for years to come. And that's why you're seeing this growth in NASD happening right now as well as our continued investments to capture more of that future growth. Immuno-oncology is an area of major investment right now, and that's why we went after the cell analysis business several years ago. So we expect those segments of the market to be really strong double-digit growers for many years to come. So I think that's part of the story there, which is to really have focused our investments and our portfolio towards those segments of the marketplace, which we expect to have even higher growth in the overall pharma market space. I think in general, we expect the biopharma R&D investments to continue the move to large molecule. When I get the question around LC replacements, the replacement cycle is always going on. And -- but what I do think is going to happen is, it's going to be stable, strong funding environment for pharma. So we're very optimistic about the long-term outlook for pharma. And I think it's a market I know we're betting on right now at Agilent." }, { "speaker": "Mike Ryskin", "text": "And then my follow-up on that is, by our math, if you take the magnitude of the 1Q beat and then also the stronger FX tailwind for the rest of the year, that accounts for roughly $175 million of the raised fiscal year guide. And maybe you have these other items coming in. You mentioned the COVID test. You've got the -- all your comments on the strength in the current market. So where exactly is the downside risk? I mean, especially given the comps over the next couple of quarters, what are the areas we should be keeping an eye on that would keep you from doing something closer to 10%-plus quarterly?" }, { "speaker": "Bob McMahon", "text": "Yes, it's a great question. And I think one of the things, we still are in the midst of the pandemic, right? There's still the variance out there. We haven't seen any impact of that to date, but those are some things that we're watching. And we haven't built any of the COVID testing that you just talked about into the numbers. So that would definitely be something that when we get those approved, that would be upside to this. And that's not all within our control. The development and those timings are within our control. But ultimately, that's a bet that both on the serology side as well as the qPCR side that we feel confident about, and that would be on top of these. And then as we talked about before, the variability potentially in the C&E market is more biased towards the upside as we think about the forecast going forward. And so we feel good about where we are. We're early in the year and..." }, { "speaker": "Mike McMullen", "text": "We’re just one quarter in." }, { "speaker": "Bob McMahon", "text": "But we don't expect the momentum to abate." }, { "speaker": "Operator", "text": "Your next question comes from the line of Daniel Brennan from UBS." }, { "speaker": "Daniel Brennan", "text": "I guess first question is maybe on China first, just I don't know if I missed it. Did you give what number or what growth rate you're assuming for the full year? And then within that, could you just discuss a bit more detail on the components of that, in particular, food, obviously, very strong this quarter. But how much more catch up potential is there in food, given how weak that business is then?" }, { "speaker": "Bob McMahon", "text": "Yes. Let me take -- I'll take the first one, and then we can jump on and we can tag team, Mike, on the second one." }, { "speaker": "Mike McMullen", "text": "Yes, absolutely." }, { "speaker": "Bob McMahon", "text": "In China, we had forecasted roughly high single-digits at the beginning of the year. It certainly started much stronger than that. So we're expecting it be double-digits for the full year, really driven by both pharma and food. Those would be the two -- the upside drivers to our initial guide. And then I think on food, we've seen -- we saw stabilization really in the first half of 2020, saw an improvement in Q4. And that improvement continued here into Q1. And we would expect that to continue, given kind of the overall environment and sensitivity around food testing and so forth. But we're not quantifying how long or how much is left to catch up, so to speak." }, { "speaker": "Mike McMullen", "text": "Yes. I think also with food, I'm not sure I would really would use catch up describe this because, clearly, where you had some of the pharma companies just weren't having the research in and didn't work, had deferred investment, I think this has been part of the coming together of the new 5-year plan for China, and that's what's really driving this. So we would expect to see sustained investments, albeit not at this double-digit level. I think it's hard to know, Dan -- we've always felt this thing was not a market that was shrinking, wouldn't shrink long-term, which it had been for a few years, but it's more like a high single-digit longer term. And I think that's probably where we'd land, on your question, although I think we'll do double-digit for sure this year in '21." }, { "speaker": "Bob McMahon", "text": "Yes. We -- Mike, to your point, in our initial guide, we assume kind of a mid-single-digit as the recovery, and it's probably high single-digit to double-digit for the range for the full year." }, { "speaker": "Daniel Brennan", "text": "Great. And then maybe just one follow-up on the NASD? What was the dollar contribution this quarter? What's kind of assumed in the full year? I don't know if you've changed that at all. And I know you've touched upon this, but in terms of other modalities besides interference, I guess, is that still -- it sounds like it's something that could possibly come, but we're still going to wait to hear from you guys on that." }, { "speaker": "Bob McMahon", "text": "Yes. What I would say, Dan, is we're at our full run rate capacity, which is, as we've talked in the past, $200 million a year. We hit that kind of where we expected to in Q1." }, { "speaker": "Mike McMullen", "text": "We're really happy with how that business is ramping." }, { "speaker": "Bob McMahon", "text": "And we're not done yet." }, { "speaker": "Jacob Thaysen", "text": "Hey, Bob, I would just add to that, that as I mentioned before, RNAi interference is our primary focus, but we are doing programs on Guide RNA for CRISPR, and we are at full tilt with that. But we are always looking to be in tune with new modalities. And if they're relevant, if they're sufficiently meaningful, we're definitely apprised of that as well." }, { "speaker": "Operator", "text": "Your next question comes from the line of Patrick Donnelly from Citi." }, { "speaker": "Patrick Donnelly", "text": "Mike, maybe one for you. Just on the chemical and energy side, certainly appreciate the conservatism baked in here. Can you just talk a little bit -- I know in the past, you've talked about kind of the shift from insourcing to outsourcing from customers and how that should play nicely into your strengths. Can you just talk about, I guess, where we are in that process and how big of an opportunity that is for you guys? ." }, { "speaker": "Mike McMullen", "text": "Yes, I think we're still early days on that. I think it's -- that's part of the discussion. I think the investments that are going to happen this year, if they drop, are going to be more tied to deferred tech refresh. But I think it's probably more of a 2023 kind of -- excuse me, '22 event from the onshore and insourcing that we've been talking about. And I think this probably points to us being able to be able to sustain a mid-single-digit kind of end market. So it's -- I mean, it points to the fact that chemical and energy with these kind of longer-term outlooks coming from our customers will not be a drag on the overall growth rate, any material extended off. So I think it's an adder to the thesis that there is growth in the C&E market as well, albeit it can be a little bit -- it can move a little bit, depending on what's happening in the overall economy." }, { "speaker": "Patrick Donnelly", "text": "Okay. Now it's going to be the year of durability at least. And then maybe just one..." }, { "speaker": "Mike McMullen", "text": "I like what you said, I should have used durability. How was the short to answer your question." }, { "speaker": "Patrick Donnelly", "text": "All good. I appreciate that. And then maybe just one on the academic side. Obviously, that's been lingering a little bit on the soft side, not only for you guys, but for much of the industry. I guess, where do you think we are there in terms of whatever metrics you guys look at, whether it's customers in the labs or whatever it may be? Maybe just kind of dive in that a little bit." }, { "speaker": "Mike McMullen", "text": "Yes. Great question. So when we’re talking to our team and our customers, here's our view of it right now. We think about -- if you think about 30% of the research labs are fully operational now, we think about 60% are working at reduced capacity. We think about 10% are closed. And we really think it's going to be -- all this is really tied to ability to get the infection rates down, to get the vaccinations out. I think until that changes significantly, we're expecting kind of more of the same, I'd say, Bob, for the -- until we actually see a change in the overall…" }, { "speaker": "Bob McMahon", "text": "Yes, I think the real catalyst for us, Patrick, to Mike's point, is what's going to happen in the fall semester for classes?" }, { "speaker": "Mike McMullen", "text": "Yes." }, { "speaker": "Bob McMahon", "text": "Are people -- are students going to be back full? Or is it still going to be at kind of reduced rates and so forth." }, { "speaker": "Mike McMullen", "text": "Yes." }, { "speaker": "Bob McMahon", "text": "So we're expecting continued recovery, albeit slow, really, and that's what we're looking at in addition to some of the kind of the macro levels." }, { "speaker": "Mike McMullen", "text": "I would say, though, that the conversation with customers is very robust right now. So it's just a matter of things opening up." }, { "speaker": "Operator", "text": "Your next question comes from the line of Steve Willoughby from Cleveland Research." }, { "speaker": "Steve Willoughby", "text": "I had a follow-up question to Mike Ryskin's question as it relates to guidance, Bob. Maybe trying to ask it a different way. Have you really changed your organic or core growth assumptions over the remainder of the year? Because even in the first quarter here, you back out a couple of hundred basis points from sort of end-of-year budget spending. The first quarter still did basically twice what you were initially expecting for growth in the first quarter. And just looking to your guidance and doing some math, it looks like you really haven't made too much of a change for the organic growth over the remainder of the year. Is that fair to assume?" }, { "speaker": "Bob McMahon", "text": "Yes. I would say we took Q1. We also upgraded Q2 and made some modest changes to the back half of the year, but most of that would be in the areas -- once we get further into the year, that would be an opportunity to revisit the forecast going forward. So I think bottom-line, you're in the ballpark." }, { "speaker": "Steve Willoughby", "text": "Okay. And then just a follow-up question on diagnostics. So I guess 2 things to it. One, do you think we return to 2019 or normal levels in your non-COVID Diagnostics business this year? And then also, could you just provide a reminder on where you see your PCR test potentially fitting once it does come to market?" }, { "speaker": "Mike McMullen", "text": "You want to take the first one and Sam the second one?" }, { "speaker": "Bob McMahon", "text": "Yes. The short answer is yes, we expect it to get back, but again, latter half of this year. We're starting to see improvement. If you look at it by region, China is back. Certain pockets in Europe are back and certain places in the U.S. are back as well. But I think overall, it's probably going to be a few more months at least before it gets back to pre-COVID levels." }, { "speaker": "Sam Raha", "text": "Yes. With regards to your second question on qPCR, for COVID-19, our master mixes, our instruments are already being leveraged as part of other testing systems by customers around the world. When our own test comes to market, we see the opportunity. There's still a dearth of robust testing solutions that are available. So we'll have the right performance going after the right fragments or looking at the right elements of COVID-19. And it's really about our broad ability to distribute, make it available and also something that could be automatable on multiple platforms. So we think we'll have a play." }, { "speaker": "Operator", "text": "Our final question today comes from the line of Paul Knight from KeyBanc." }, { "speaker": "Paul Knight", "text": "So obviously, you've got a full array of products in the analytical instrument marketplace. And it goes back to, I think, Doug's question in terms of M&A, an opportunity. Where do you think you are in the full solution in cell analysis? Is there a lot to build? Is there a lot to buy in that particular market?" }, { "speaker": "Mike McMullen", "text": "We think so. In fact, thanks for the question, Paul. You may recall -- and Jacob, feel free to jump in on this question as well. We teed up a fairly large -- although we're fully really proud of the business we've built so far, we think we have scale at a $300 million-plus business. We're playing in a much larger SAM. And we think there's both opportunities to further build out but also buy here as well. Jacob, your thoughts there?" }, { "speaker": "Jacob Thaysen", "text": "Yes, certainly. We've been very intentional about how we build out our portfolio. Firstly, it’s with instrument platforms that we ensure we can get some footprint and a scale in the market. And the next thing that would be the -- logic next step is to look at content, how do we actually get content on our instrument portfolio. So that's clearly an area we're looking into. But I actually think with the footprint, there's also opportunity to add other technique modalities into that. So we are -- we have open eyes. We follow what we call the tale of strains -- strain for all. And -- but -- and we wait to put another firm on that strain. And so we are -- keep our eyes open and then see what happens." }, { "speaker": "Paul Knight", "text": "And then the last question would be you had mentioned your cost-cutting program that had started in the second quarter of last year, where you are -- where are you in that process? And what happens to cost-cutting when travel and entertainment might come back kind of post-COVID?" }, { "speaker": "Bob McMahon", "text": "Yes. We're seeing some of that. And some of that is lapping this quarter because we saw a significant drop, and so you're not seeing the year-over-year changes. We're not seeing it go back. And our goal is to not have it go back. So we think we're at a new watermark here in terms of spending, particularly in travel and some of these other areas. Now we are increasing investments in places like digital and some of these other places that are driving demand as well as some of the capacity that we talked about before. But certainly, in those types of things, travel and so forth, we're not looking for that to go back. It will go back some, but certainly not back to the way we have been doing business before. Customers don't want it, and we are not going to let it happen." }, { "speaker": "Mike McMullen", "text": "Absolutely. To Bob's point, as I spoke the other day to our global field team, and we were talking about embracing our new ways of working. And of course, a lot of people drove and love to be back on the road. But not everybody feels that way. And the customers certainly don't feel that way because we're much more responsive and attentive to their needs by using digital platforms, there is a place for face-to-face, but it has to be based on the customer need, not because we want to be in the road to be out there doing things in a very traditional way. So we're keenly aware of the question you posed, Paul, really challenged ourselves to make sure that we really continue forward with these new ways of working. And this allows us to put money into areas that really do matter to customers. So I'd rather invest there rather than travel and entertainment." }, { "speaker": "Operator", "text": "That concludes Q&A, and it also concludes today's Agilent Technologies First Quarter 2021 Earnings Conference Call. Thank you, everybody, for joining. You may now disconnect." } ]	Agilent Technologies, Inc.	154,924
A	4	2,022	2022-11-21 16:30:00	Operator: Ladies and gentlemen, welcome to the Agilent Technologies Q4 2022 Earnings Conference Call. My name is Bo and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja, Vice President of Investor Relations. Mr. Ahuja, please go ahead. Parmeet Ahuja: Thank you, Bo, and welcome, everyone, to Agilent's conference call for the fourth quarter of fiscal year 2022. With me are Mike McMullen, Agilent President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group, and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our fourth quarter financial results, investor presentation and information to supplement today's discussion along with the recording of this webcast are available on our website at www.investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of October 31. As previously announced, beginning in the first quarter of fiscal 2022, we implemented certain changes to our segment reporting structure. We have recast our historical segment information to reflect these changes. These changes have no impact on our company's consolidated financial statements. Please note that we have changed the name of the Chemical & Energy end market to the Chemicals & Advanced Materials end market. This change better reflects the mix of business in this market. It does not affect financial reporting in this quarter or prior quarters. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now I'd like to turn the call over to Mike. Mike McMullen: Thanks, Parmeet. And thanks, everyone, for joining our call today. In the fourth quarter, the Agilent team continued its strong performance. We delivered an excellent quarter, significantly exceeding our revenue and earnings expectations. Revenue of $1.85 billion is up more than 17% core. Our strong top line performance helped deliver fourth quarter operating margins of 29.1%. The operating margins continue to expand despite the inflationary environment and the strengthening dollar and are up 260 basis points from last year. Earnings per share of $1.53 were up 26%. These Q4 results mark an outstanding finish to another strong year for Agilent’s fiscal 2022. The full year revenue of $6.85 billion, we delivered core revenue growth of 12%. This is on top of core revenue growth of 15% in 2021. Our operating margin continued to increase and a 27.1% for the year, up 160 basis points. Earnings per share of $5.22 per share, up 20% for the year. Rx result this year highlight the ongoing strength of our diversified business and shine a light on the multiple growth drivers we put in place over the years. They also continue to demonstrate the outstanding execution capabilities of the Agilent team. Throughout the year, we navigated market uncertainties, inflation, COVID-related shutdowns and supply chain and logistics constraints. Our strength is broad-based with all three business groups growing double digits for the year. All major geographies and regions grew double digits in FY '22 after adjusting from our exit from Russia. This was highlighted by China leading the way, growing 18%. From an end market perspective, all markets expanded led by excellent growth in our two largest markets, Pharma and Chemical & Advanced Materials. All in all, it was an extremely good year for Agilent. Let's now take a closer look at our fourth quarter performance, starting with end market highlights. During Q4, our performance led by 20%-plus growth in three of our six end markets. Pharma, our largest market, posted 20% growth on top of 21% in Q4 last year. The Chemicals & Advanced Materials business grew 27%. We saw robust demand in chemicals, along with secular growth in semiconductors, batteries and other advanced materials. The food market also grew 20% on a strong end-of-year demand in China that have been previously delayed by COVID-related shutdowns. On a regional basis, China led the way for us with stellar 44% growth as demand remains strong. Business activity continued to recover and the Agilent team worked quickly and effectively to start working down the backlog including delivering remaining shipments deferred due to the Shanghai COVID related shutdown in Q2. Europe also exceeded expectations by delivering double-digit growth in the quarter, coming in 14% higher than a year ago, with broad strength across our markets, highlighted by low 20s growth in pharma. Looking at our performance by business unit, the Life Science and Applied Markets Group continued its outstanding performance and posted revenue of $1.12 billion. This represents growth of 22% with the instrument business growing 24% and our Consumers and Applied business growing 15%. We also saw excellent low 30s growth in our LC/MS instruments business as our solutions continue to resonate with customers. LSAG was able to build our leadership implied markets with spectroscopy growing in the low 20s and the GC and GC/MS business growing in the low 30s. In addition, Agilent is doing its part to help customers monitor and manage microplastic in the environment as we released the latest version of the 8700 LDIR chemical imaging system. This unique system has been optimized specifically for the analysis of microplastics in environmental samples. The ads on Agilent CrossLab Group posted revenue of $381 million in Q4. This is up 14% core with broad-based strength across our entire portfolio of offerings. Pharma and Chemicals & Advanced Materials both grew mid-teens for ACG. On a regional basis, China led the way with high 20s growth as business continued to recover. ACG also delivered double-digit growth in the Americas. ACG has delivered double-digit growth for us every quarter this year, and our engagement large enterprise customers continues to accelerate. Through its deep understanding and insights into lab operations, the ACG team continues to build strategic partnerships and long-term relationships that maximize customer value and provide ongoing demand for services and support. The Diagnostics and Genomics Group delivered revenue of $352 million, up 8% core. DGG's results were led by strong growth in the low 20s for NASD. As expected, our NASD business delivered high quarterly revenue on a sequential basis given the plant shutdown last quarter. Our genomics portfolio also posted solid results, growing low teens and pathology grew mid-single digits. On a regional basis, DGG also delivered mid-20s growth in China. In addition to these business group highlights, during Q4, Agilent was recognized by the World Economic Forum Global Lighthouse Network as a world leader in advanced manufacturing. Agilent's manufacturing facility in Singapore received this recognition for deploying innovative technologies at scale in the manufacture of scientific instruments, driving productivity, while advancing sustainability. Also, we are extremely pleased to announce a new multimillion-dollar partnership with Delaware State University, a leading historically black university. The work we will do together with DSU is geared towards increasing the number of underrepresented students entering stem fields. In addition, Agilent is certified as a great place to work by the Great Place to Work Institute in more than 20 countries and regions around the world during the quarter. This recognition distinguishes Agilent as a top employer based on an independent survey of its global workforce. Recap in 2022, we had another very successful year, not only on delivering excellent financial results, but building for the future. We continue to drive innovation focused on supporting our customers and executing our Build and Buy strategy to outgrow the market. The Agilent team continues to deliver. We have built a resilient company with multiple drivers for growth and target investments focused on high-growth areas. We have an unstoppable One Agilent team that can take on any challenge and execute at an extremely high level. As we look ahead to 2023, we believe these qualities are a winning formula for continuing to deliver in an increasingly uncertain economic environment. Bob will now share more detail on the quarter and the year along with our initial view on expectations for fiscal year 2023. After his remarks, I will rejoin to add some final comments and perspective. Thank you for joining us today. And now, Bob, over to you. Robert McMahon: Thanks, Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter and the year as well as take you through the income statement and other key financial metrics. I'll then finish up with our guidance for fiscal year 2023 and the first quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. We are extremely pleased with our Q4 performance and finished the year on a very strong note, exceeding our expectations on both revenue and earnings per share. Q4 revenue was $1.85 billion, up 17.5% core and 11.4% on a reported basis. During the quarter, we saw the dollar continue to strengthen. Currency exchange rates were a 6.2 point headwind to growth or $103 million. The contribution from M&A was as expected, adding 0.1 point to reported growth. Our performance was again broad-based as all end markets and regions grew during the quarter. Orders also grew again during the quarter, while outstanding execution from our order fulfillment and supply chain teams enabled us to start working down our record backlog. As we enter FY '23, our backlog is still elevated and helps provide good visibility and confidence in our outlook going forward. Now I'd like to share additional details on our end markets. Results in our largest market pharma were very strong. This market represents 37% of Agilent's revenue and grew 20% in the quarter. Biopharma grew 18% and small molecule was up 21%. Looking forward, we expect the pharma end market to grow high single digits in FY '23. Chemicals and Advanced Materials led growth for us during the quarter at 27%. This compares with 11% growth in Q4 of last year. All three submarkets, Chemicals, Advanced Materials and Energy had strong growth in the quarter. All regions grew as well, led by China. Demand continues to be driven by investments in advanced materials, driving secular growth opportunities in batteries, alternative energy and semiconductors. While not immune to macro uncertainties, we believe these secular drivers in Advanced Materials will continue, helping to drive mid-single-digit growth for this market next year. We delivered growth of 20% in the food market led by China as our results continue to benefit from the recovery of revenue delays due to COVID-related shutdowns in Q2. During FY '23, we expect the food market to normalize and grow in the low single digits after two years of very strong growth. The Environmental & Forensics market posted 18% growth with particular strength in the Americas. This result was driven by increased governmental spending helping to drive technology refresh for newer applications like PFAS testing. Europe and China also posted impressive double-digit growth in the quarter. We see PFAS-related funding and demand continuing to be a driver for this end market and expect mid-single-digit growth next year. Our business in the diagnostics and clinical market grew 6% against an 11% compare last year. Growth was led by Europe and China, while Americas grew low single digits. We also expect to see mid-single-digit growth in this market in FY '23. The Academia & Government market grew 3%, led by continued strength in our service business. This market grew 3% overall for the year as well; and looking forward, we expect similar growth in 2023. On a geographic basis, China led the way with phenomenal 44% growth in Q4, driven by underlying demand across multiple end markets and our continued ability to quickly recover deferred revenue from Q2. As we have discussed the last two quarters, the COVID-related lockdowns in China earlier this year deferred an estimated $50 million to $55 million in revenue from Q2 into future quarters. This recovery started last quarter, and our team in China continued their outstanding work to ramp production and shipments quickly in Q4. We've now fully worked through this deferred revenue a full quarter earlier than originally anticipated back in Q2, a true testament to the entire team. We estimate this recovery had a mid-single-digit positive impact to China's Q4 growth. So even excluding this, our business performance in Q4 was very strong. Now looking ahead to next year, we expect China will continue to be a key growth driver for us. And as Mike mentioned, Europe grew a very solid 14%, which exceeded our expectations. We also posted 8% growth in the Americas, driven by Pharma, Chemicals & Advanced Materials and strong growth in the Environmental & Forensics market, partially offset by Academia & Government. And lastly, the rest of Asia grew 12%. Now turning to the rest of the P&L. Our team continues to execute at a very high level. Fourth quarter gross margin was 56.3%, up 40 basis points from a year ago. Volume leverage, along with pricing, helped overcome continued inflationary pressures and higher logistics costs. Our operating margin was 29.1% in Q4, up 260 basis points from last year. Below the line, our tax rate was 14% for the quarter as expected, and we had 298 million diluted shares outstanding. Putting it all together, earnings per share were $1.53 for the quarter, up 26% from a year ago, as Mike mentioned. So in summary, Q4 ended with 17% core top line growth and 26% EPS growth, a very strong finish to the year, where we had revenue growth of 12% and EPS growth of 20%. Now some metrics on our cash flow and balance sheet. In Q4, we generated operating cash flow of $448 million, while investing $70 million in capital expenditures. The CapEx spending is driven by our continued scale-up of Train B for our NASD expansion. And in the quarter, we also paid out $62 million in dividends and repurchased shares valued at $135 million. For the year, we returned almost $1.4 billion to shareholders through $250 million in dividends and a bit more than $1.1 billion in share repurchases. And as we've indicated before, given the ongoing strength of the business, we believe these share repurchases represent a very good long-term investment. Our balance sheet continues to remain healthy as we end the fiscal year with a net leverage ratio of 0.8. Now let's move to our outlook for the upcoming fiscal year and first quarter. Now looking forward to 2023, we entered the year with business momentum and a very healthy backlog. We also acknowledge the increasingly uncertain macro environment, rising interest rates and currency headwinds and have reflected that in our thinking based on what we know today. For fiscal year 2023, we expect revenue in the range of $6.9 billion to $7 billion as we have significantly greater currency headwinds since the last we spoke. Core growth is expected to be in the range of 5% to 6.5%, in line with our long-range goals. Currency will negatively affect reported growth by 430 basis points or roughly $295 million during the year based on fiscal year-end rates. And to help with your modeling at a business group level, this revenue guidance assumes mid-single-digit core growth for LSAG, mid- to high single-digit growth for DGG and high single-digit growth for ACG. And despite the ongoing currency headwinds and a continued inflationary environment, we are expecting operating margin expansion for FY '23. Now below the line, we expect $40 million to $50 million of net expense, a tax rate of 13.75%, which is slightly below this year and 297 million shares outstanding. Fiscal 2023 non-GAAP EPS is expected to be in the range of $5.61 to $5.69. This range represents a growth rate of 7.5% to 9% versus the prior year and incorporates an estimated 4 percentage point headwind due to currency net of our hedging activities. We are also expecting $1.4 billion to $1.5 billion in operating cash next year and CapEx of roughly $300 million based on currently approved expansion projects, primarily Train B for NASD. We have also announced raising our dividend 7%, providing our shareholders with another source of value. And finally, for Q1 2023, we expect revenue in the range of $1.68 billion to $1.70 billion. Core growth is expected to be in the range of 6.8% to 8%, while currency will be a 6.6 point headwind to reported growth. This outlook for the quarter incorporates the impact of the timing of Lunar New Year this year. First quarter 2023 non-GAAP earnings per share expected to be between $1.29 and $1.31. Mike will speak to this further in just a minute, but our diversified business model and the strength of our team are key assets for Agilent. These two elements produced an outstanding Q4 and a full year 2022 and they have put us in an excellent position to again deliver strong results in the coming year. And now I will turn the floor back over to Mike for some closing comments. Mike? Mike McMullen: Thanks, Bob. Today's results are a strong indication that Agilent has the right growth strategies, the right team and right culture to continue delivering strong results. Our customers know we are reliable, resilient and extremely quick in reacting to meet their needs. The Agilent team continues to work hard to earn their trust. Looking ahead, we are all seeing increasing economic uncertainty. However, this company and team have built to successfully navigate any economic challenges we may encounter. Throughout the pandemic, we have stated that Agilent will emerge as a stronger company. Today's results are yet another proof point that we are well on our way in this journey, and we're not done yet. We continue to prioritize investments in growth. We are a resilient company with multiple growth drivers and unmatched execution capabilities. I'm quite confident we will continue to react quickly to changing conditions and deliver at a high level. Thanks for being on the call. And now I will turn things back over to Parmeet as we take your questions. Parmeet? Parmeet Ahuja: Thanks, Mike. Bo, if you could please provide instructions for the Q&A now? Operator: [Operator Instructions] And we'll take our first question this afternoon from Vijay Kumar of Evercore ISI. Vijay Kumar : Congratulations on a really impressive finish to the year here. Mike or Bob, maybe if I could start with the high-level fiscal '23 guidance question. 5% to 6.5% organic for the year, that's coming off of some tough comps. Maybe just talk about your assumptions for end markets which you're expecting for forma chemicals and advanced materials, et cetera. Just given your commentary on orders and backlog, it looks like the start 5% to 6.5%, it seems reasonably conservative. Mike McMullen: Why don't you take that? Robert McMahon : Yes, Vijay, yes, I appreciate the comments on the end of the year. And as we mentioned, we're moving into FY '23 with momentum. And really, what we've seen across our business in FY '22, we are expecting to continue into FY '23. Broad-based business results really led by our two largest markets, Pharma and Chemicals & Advanced Materials. And when we think about those, those are both in the mid- to high single-digit growth range and with growth in the other areas as well. We're expecting all of our markets to grow and really given some of the secular drivers that we've seen this year and continued strength in the pharma business. Mike McMullen: Hey, Bob, I would just add, too. This is our initial guide for the year. We're at the top end of our long growth model in terms of the long-term growth aspirations we laid out at our last [AID] coming off two straight years of double-digit growth. And its initial guide of the year, Vijay. And you probably hear a few times they were being prudent given the increasing economic uncertainty out there. But I would point out that if you look at the core growth rate assumptions, the Q1 '22 guide is actually higher than the full year number. Vijay Kumar : Mike, I appreciate the prudent comment. And if I could just have one follow-up on. On margins, that EPS guide came in about Street models despite FX headwinds, it looks like coming in about Street models. What are you assuming for pricing inflation? And what's implied from margin expansion in the guide? Mike McMullen: You want to take that, Bob? Robert McMahon : Yes. Yes. So we ended Q4 in a very good position here with a little over 4% and that has ramped throughout the year, and we're forecasting roughly about a little over 3% in price next year across our book of business. And we are assuming margin expansion, Vijay, next year. And when we look at that 7.5% to 9%, what we are seeing is kind of unprecedented strength in currency. And we do hedge, but our hedges become less effective over time. And we're -- that's absorbing a 4-point headwind. So if you added that back in, it would be closer to 11.5% to 13% EPS growth. Operator: We'll go next now to Matt Life with Goldman Sachs. Matt Sykes: Appreciate it. Maybe I just want to dig a little bit more into the margins. You guys mentioned operating margin expansion expectations for next year. But maybe talk a little bit about where you see those drivers coming from, maybe on a segment basis or an end market basis? Where do you feel there's more upside to expand those margins at the group level and where the impact will be felt? Robert McMahon : Yes, I think what you would see is a continuation of what we've been able to do this year. And what we've been able to do is cover the increase in costs associated with the inflation through the pricing activities, but then really leveraging our operating expenses. And you saw that in full display here in where we did have operating -- gross margin expansion, but you also saw a majority of the margin expansion in the operating expense. And I think that that's 1 of the benefits that we have through the investments that we've been making in digital over time, as Mike mentioned, as well as the continued effort around the One Agilent focus. So I would expect us to continue to see that I do think that the scale that we have across our businesses will continue to provide benefits next year, certainly, as we drive more business into our service organization. I do think that we will continue to be able to leverage that footprint. And then if you look at the higher growth areas that we've been investing in, in the instrumentation side of the business, those are our more profitable businesses. And we are also looking to continue to attach -- increase our attach rates both on the services but then also consumables, which are 1 of our highest profit. And I would say in Diagnostics, the DGG business, we are facing kind of some of the start-up costs with our Train B next year. But if you peel the onion, I would say, fundamentally, our business is performing very well there as well in '23. And I would expect margin improvement outside of kind of some onetime start-up costs that we would have in bringing that train up and running in the second half of the year. Matt Sykes : Got it. Then maybe a question on the Chemicals & Advanced Materials. You guys made a comment in the slide deck about increased demand in the energy business during Q4. Could you talk about the drivers behind that? And what your expectations are, specifically for the energy market as we move through '23? Mike McMullen: Yes. So we really wanted to make sure that it was clear that across all three segments of the CAM segment, we saw growth. And what you're seeing going on here is a lot of investments in the HPI industry given the strength of their businesses. So -- and I'll have Jacob jump on this as well, I think their businesses with the ability to invest and they have a lot of deferred investments over the years, but also a lot of new money going into renewable and green energy initiatives as well. Jacob Thaysen: Yes, I think you're right, Mike. I think we're seeing, as you mentioned, there has been some pause in the capital equipment investment over the years, and we're definitely seeing that coming back. So -- and both in the HPI, but also in the renewable energy, we continue to see a lot of strength, and we believe that will continue forward. Mike McMullen: Yes, we're expecting that trend to continue into '23. Operator: Ladies and gentlemen, we'll go next now to Puneet Souda of SVB Securities. Puneet Souda : Mike, Bob, thanks for taking the question. I mean to say this is impressive as a quarter is an understatement in the sort of uncertain times. So first of all, congrats on the quarter. Mike, so on China, impressive results there. Can you just parse that out a bit? I know you talked about gas chromatography delays were there, and those are -- it looks like they're fully booked in this quarter and the revenues booked or food is also impressive. Could you maybe talk about the order book visibility you have in China and your growth expectations there going forward despite the Lunar Year? And also, what is the longer-term expectation for overall growth in China, just given the multiple end markets that are working so well for you in the quarter? Mike McMullen: Yes, sure, Puneet. Happy to respond and Bob and I probably can have tag team on this. But again, thanks for your earlier comments, brought a lot of smiles in the room here. Yes, we were quite pleased with the results for China, not only in the quarter but for the year. And I think it's important to know the 44% print we had in Q4 wasn't just about catch-up from deferred revenue due to the COVID; and again, shutdowns. And again, it points to the fact that when you do see those types of things happen, eventually, the business does materialize. We didn't lose any business. I think the strength of the business continues to be there across multiple end markets, really been led by pharma, chemical. And then we think that the food market will probably normalize to kind of the traditional growth rates in China. But expecting pharma and the CAM marketplace to be strong, in particular, a lot of -- we expect a lot of business on the renewable energy and HPI side in China as well. So that Advanced Materials segment, we've been talking a lot about, we think is going to sustain the growth in China in '23. But I think we're kind of looking at maybe high singles for China for next year. Is our initial thinking? Robert McMahon : Yes, that's right. And Puneet, I would say the strength that we saw in Q4 in China was really across the board across all the major technology platforms within the instrument business. The consumables business was incredibly strong as well. And then the services business, if you recall back in Q3, we said that activity hadn't fully come back, was fully back in Q4. And so we saw very strong there. And not to forget, DGG. We had double-digit growth in our Diagnostics and Genomics business as well. So it was really broad-based. And you talked about visibility, orders continue to grow in China. And we have very good visibility in -- certainly into the first half of this year. And as we think about the secular growth drivers, those are still in place. If you think about the investments that are made in technologies around the biotechnology areas, but increasingly actually in advanced materials and some of the secular drivers around batteries and lithium-ion production and so forth. And we would expect that to continue into next year for sure. Mike McMullen: Bob, I just have to think to your comment about the DGG business. Just a reminder, Puneet as we came into this year, we created a unique structure as part of our one commercialization to have all of our China businesses we put into one single leader. Really, the idea was to add scale to the parts of our business, which we felt underrepresented, and you saw the payoff already starting to happen with the growth rate in DGG, for example. Puneet Souda : That's great. Just quick one on pharma. I mean this was the first quarter in a long time when I saw small molecules growing faster than biomolecules. Can you elaborate a bit what's behind that dynamic? Mike McMullen: I thought it was really good newsprint because we've been talking lately about that while we still continue to believe that biopharma large molecules will have the inherently higher growth rate, we've also been pointing the fact that the small molecule will continue to have growth. And I think it speaks to some of the strength of particularly our LC and LC/MS business in small molecule. And Jacob, I'll have you add a few comments here in a second. I wouldn't overread too much in that particular quarter. It's just one quarter. I think we would expect to continue to see over time a differentiation in the growth rates between biopharma and small molecule, but small molecule by no means is dead and it's an opportunity for growth. And I think we've got a great portfolio there, Jacob. Jacob Thaysen : Yes. Right, Mike. Oh, sorry, I was on mute here. So sorry, this was Jacob coming with some comments. But you're absolutely right, Mike. We continue to see the small molecule being -- while it's still the largest part of our business, of course, we see biopharma as a great opportunity, but we take the small molecule business very seriously and continue to build full workflow solutions for that, particularly for the LC and LC/MS space, and that's where the growth is coming from. Mike McMullen: Thanks, Jacobs. Operator: We go next to now to Brandon Couillard from Jefferies. Brandon Couillard : Mike or Bob, I can't remember. You mentioned the PFAS market several times in the prepared remarks. Can you just give us a ballpark size of how big that market is right now, maybe relative growth rates and whether it's primarily a U.S.-centric market or if it's developing in other parts of the world as well? Mike McMullen: So Jacob, how if you and I tag team on this? We're viewing this, I think, about a $200 million market, growing double digit. We think while there's -- a lot of the growth is centered in the U.S., there's also going to be very strong growth in the U.S. and perhaps some in China. So we actually see this as a sort of a global story with initial big legs in U.S. and Europe and the growing interest in China. But let me see if I got that right, Jacob? Jacob Thaysen : Yes, you're absolutely right, Mike. It's a huge market. And in fact, there was more than 4 billion put aside in the infrastructure build for PFAS testing, not only for analytical instrument, obviously, but overall for PFAS testing. So this is a great opportunity. And it's particularly a great opportunity for us as this requires -- it's very high-sensitivity instruments you need and you have run very easily into issues in your sample, perhaps you don't take that very seriously. So really building out the flow solutions and have something that works every time. We spend a lot of energy on that. And in fact, we have a solution now that lives up to all the EPA regulations and our customers just love it because it's just plug and play, and it works very well for them for very sophisticated ways of doing business here. And on top of that, while most of the opportunity sits in the LC/MS space. We're also starting to see the GC/MS as an opportunity to look at testing of PFAS molecules in the year and all the volatile, so which speaks extremely well to our opportunity. Mike McMullen: Yes. Thanks, Jacob, for those build. And this is the first time in my tenure where that we've seen this kind of money coming in, in the U.S. marketplace with the government support. So it's a very encouraging trend, and we think that trend is going to be with us into '23. Brandon Couillard : That's great. Then a couple for Bob. Just number one, can you just quantify the Lunar New Year impact in the first quarter on a year-over-year basis. And then with supply chain loosening, which it sounds like they are, what are the implications for that in terms of working capital as you move through the balance of the year? Robert McMahon : Yes. Brandon, thanks for the questions. Yes, the Lunar New Year is roughly a little over 0.5 point impact year-on-year for headwind had in our first quarter. It starts in mid-January this year versus the first of February last year. And so -- and for those that will come back to us in the second quarter. And then I think in terms of supply chain, -- it is -- we think it is improving, but it's not back to kind of pre-COVID levels, both on the standpoint of being able to get products to customers, but also procuring raw materials and the costs associated with that. We do think that that's going to improve over time. I would say I wouldn't expect any changes -- any material changes certainly in the first half of the year and then maybe some slight changes as we get into the back half of the year. But -- we do think it is improving, but we've increased our stocks of critical supplies. And I don't think it will go back to pre-COVID levels in terms of how we're running that just to ensure that we have the ability to flex when we need to if there were challenges around logistics across the world. Operator: We'll go next now to Daniel Brennan of Cowen. Daniel Brennan : Congrats on the quarter. Maybe just the first one, just on LSAG. Another really impressive quarter with 24% growth on the instruments. So the mid-single-digit guide, obviously, you're up against tough comps, but it does reflect the notable slowdown from what you guys have been doing. And maybe just walk through a little bit of what kind of drove the strength this quarter kind of end market versus Agilent specific? And then is there just a healthy degree of conservatism baked in for the guide? Or is it really just tough comps? Robert McMahon : Yes. I would say at the beginning, Dan, we're at the beginning of the year, there are uncertainties out there, as I'd repeat what Mike said, it's beginning of the year and that's a prudent guide. I would say that there's an element of tough comps, particularly in the second half of the year as we have been building -- taking down the backlog certainly in China, which was China just a deferral from Q2 into the second half of the year. But I would say, fundamentally, the demand is still strong. And I think across the end markets, our expectation is that the Pharma and Chemical & Advanced Materials markets will continue to lead the way for us with faster-than-expected growth, I think, in Environmental & Forensics for that PFAS testing. Mike McMullen: Maybe just a couple of additional comments here, Bob, maybe Jacob, you have thoughts as well. But we continue to see improving market share. So the latest industry stats from -- showed us all green across all platforms. So that should bring to -- and any kind of debate on whether or not we're picking up share. But I also think it's kind of also recognize we've been in kind of an unprecedented environment here for a number of quarters in a row where we've seen instrument growth rates in 20s plus, 30 plus. A lot of it -- and we've been very transparent about this in all our calls that an element of that it's tied to an accelerated replacement cycle in some end markets, in some technologies. So we're thinking though, as we set up the guide for '23, we should assume some return to more normalized replacement rates in certain end markets but there's going to be growth there, but perhaps not at the same rate we've seen. And I don't know if you have any additional thoughts there, Jacob. Jacob Thaysen : No, I think we’re good, Mike. Mike McMullen: Okay. Cool. I got it right. I'm 2 for 2 today. Daniel Brennan : And then maybe just a follow-up. I know you've already discussed in the Chemical & Advanced Materials, a really strong quarter. And then on the outlook. I'm just wondering for the mid-single-digit guide obviously, the Advanced Material portion is like 1/3 of that business. It sounds like that's expected to grow really strong. Maybe just give us a flavor for how you're thinking about the three subcomponents in the '23. And like is there anything baked in on the chemical side of the energy side that would reflect some kind of impact from a selling economy? Or just kind of how should we think about that mid-single digit. Mike McMullen: I'm going to invite Padraig on this too because he's working with his team very closely on this. But we're taking a cautious outlook as it relates to the chemical industry in Europe, particularly -- and I want to separate that from what maybe happened relative to the HPI and renewable energies. But in the base chemical business, our large customers are having to work through higher input costs to their production. So we're assuming a cautious outlook from that particular segment in Europe. And Padraig I know you are from that part of the world, and I know that you've been talking to our team about this as well. Anything you'd add? Padraig McDonnell : Yes. No, I think it's cautious, Mike. And I think what we're seeing is that there's additional scrutiny being played on converting quotes to orders that we're seeing across, particularly in Europe. And of course, there's quite a lot of macroeconomic pressures there as well. So I think you're spot-on on that one. Robert McMahon : The only thing I would say, Dan, this is Bob, to add is this is an area -- sometimes people ask us, this would be an area of potential upside? If things continue the way that they are, there would be an opportunity for upside in this end market, given the strength that we're seeing. Mike McMullen: Absolutely, Bob. Operator: And we'll go next now to Rachel Vatnsdal at JPMorgan. Rachel Vatnsdal : So first up on Train B. Last quarter, you guys said that there were some supply chain delays as you guys were building up that manufacturing line. So can you just give us the latest on timing if you're still on track for that to come online mid fiscal year.? And then thinking about beyond Train B, you guys have hinted at potential capacity expansions beyond this. So can you give us the latest on your thinking on those capacity expansions and when we could hear an update there? Mike McMullen: Yes. So Sam, why don't you take the first part, and I'll close with the second part? Sam Raha : Yes. It sounds good. Rachel, thank you for the question, and happy to report there haven't been any changes since we last spoke about Train B and timing. We're on track to go live in the middle of the calendar year coming up in 2023. Mike McMullen: And at the risk of being repetitive, Rachel, we're on record saying that there's more letters than the alphabets in A&B. So we're focused on getting Train B up and running and have it generating revenue in '23. But at the same time, we continue to explore possible expansion plans, and nothing yet to announce yet, but stay tuned. Rachel Vatnsdal : Great. And then just one more follow-up on food. So food grew 20% this quarter. It sounds like some of that was from that China recovery and pull forward there. But all in, you're guiding to low single digits next year off of that two year stacked tough comps. So can you just walk us through how should we be thinking about the food market going forward? Do you think in 2024, it's going to normalize more at a low single digit? Or is this market really accelerated and the guide this year is just more on that typical comp. Robert McMahon : Yes, it's a good question. And this is Bob. And I would say it wasn't pull forward, it was catch up in terms of the growth rate here because it was -- as you know, Rachel, China has got a bigger proportion of the food market. And I would say it is a function of having two years of very strong performance there and so difficult comps. And I do think it is trending up with some of the investments that are being made there. But this still is a low to mid-single-digit grower. Mike McMullen: I think just to kind of reinforce our ability to hit that mid-single or low to mid-single-digit growth rates, we also see continued strength in the U.S., for example, where our cannabis testing business is part of what we reported, so, right Jacob? Jacob Thaysen : Yes, correct. And the cannabis business continues to do very well, and we see a lot of lab owners that is looking for us to come in and help them to equip the full laboratories. So that's a big opportunity for us. But also the alternative protein space is really picking up, both here in U.S., but particularly also in in Asia. So I do believe that is going to continue to be a secular growth driver for us in food. Mike McMullen: Right. And I really wanted to make sure that we highlight those new secular growth drivers because a lot of growth historically has come from China. We're seeing actually a much more diversified mix of business as we move forward. Operator: We go next now to Derik De Bruin of Bank of America. Derik De Bruin: So Mike, you said it’s an unprecedented environment for instrument demand and such. We've been covering these markets a long time, you and I and looking at these, and these are just numbers, which are really just amazing instrumentation numbers. So what's embedded for instrument growth in your 2023 guide? And how much of this is already covered by your backlog versus what's going to be new or have to get in through the year? Mike McMullen: Yes. So yes, thanks, Derik. And you and I have been in this business for a while and eye-popping growth rates, that's why we love -- we've really been joining these growth rates. I do think there's elements in the market that actually have increased the long-term growth rates relative what we've seen in the past. But I think it's also fair to assume that some of these accelerated replacement cycle seen will start to moderate over time. That being said, Bob, I think we're looking at LSAG, what, in the mid-singles? Robert McMahon : Mid-single. That's correct. Mike McMullen: And I'll let you pick the second part of the question there. Robert McMahon : Yes, yes. So it is mid-single digits. What I would say, Derik, is we're not going to disclose the amount of contribution for our backlog in there. But you can imagine that, that healthy backlog that we just talked about is primarily on the instrument side. It's just the way that we book business. And we have pretty good visibility into the first half of the year just given the way our order trends happened. Derik De Bruin : Got it. Can we talk a little bit about the academic market and what you're seeing there? Low single digits there in the quarter, low single-digit demand. How is that sort of like tracking relative to your expectations? I mean, I know you don't have a huge academic footprint, but I know your genomics business was actually doing -- they actually did -- was actually quite strong in the quarter. So I'm just wondering if you could sort of talk through what's going on in that market and sort of are you seeing any pressures there? Mike McMullen: Yes. So Bob, maybe we can tag team on this, and I'll start. So first of all, this is the one market that we always coming out of COVID said will be the slowest to recover, and that's still proven to be the case. We saw really, really good demand in China in Academia & Government and also good demand for certain aspects of our portfolio. But at the same point in time, a level of caution is around CapEx. NIH funding is not as robust as people had hoped. So we've tempered our outlook for '23 as kind of just a continuation of more and more of the same. Robert McMahon : Yes. And I would say, Derik, the growth that we had met our expectations right down the line; and as Mike said, stronger in places like China, and less so in the U.S. but it met our overall expectations. And that's kind of how we're expecting it in FY '23 as well. Derik De Bruin : And I have to ask the obligatory M&A question. Your share is obviously a good choice right now, but anything peaking your interest, valuation starting to come in on some of the stragglers in the market? Mike McMullen: Yes. So thanks for that, Derik. And as you know, we've got this Build and Buy growth strategy and one aspect of it is to look for opportunities for us to add great new businesses and team to Agilent through the use of our balance sheet. And as you may recall, some of our calls in the early part of '22, wow, these -- and finished out when these valuations were really out of site. And we saw that both in the public, but also in the private space. And things are starting to actually moderate down. So nothing at all to announce, but I'd say that the activities are -- we are very active here, and we're getting to places where you can see deals happening that would work for shareholders. Operator: We'll go next now to Jack Meehan of Nephron. Jack Meehan : I wanted to keep going on the instrument side. I was wondering if you could comment on cancellation trends. So just in context of the broader macro uncertainty, is that showing up anywhere in your instrument backlog? Mike McMullen: Yes, Jack, thanks for that question because one of the reasons why we have the confidence we have with the outlook we've guided to -- and when Bob talks about elevated backlogs, it's a healthy backlog. In that we have no significant change. There's no significant order cancellations, remain very low. So the orders we have in backlog will ship and we feel really good about the -- if you will, the quality of our backlog. Robert McMahon : Yes, Jack, just to build on that, the other piece -- the first piece of that would be our orders being pushed out, and we're not even seeing that either. So we're not seeing any push out of orders as well as any cancellations. Jack Meehan : Awesome. Okay. And then kind of the other pressure area we've been monitoring is more in the bioprocessing side, just stocking trends at customers. I know you compete sort of adjacent to some of these markets on large molecule. Are you seeing any destocking activity in any of the markets that you serve? Mike McMullen: No, no. Thanks for that question, Jack, because we've been reading some of the print as well, and we're saying, well, that's really not what we all were seeing with our business. So you saw -- and Jacob, we posted what double-digit 15% growth in CSD. We saw low teens growth in the genomics area, which would be the area you might see those things. And so it's not a concern for our ongoing business. Operator: We'll go next now to Patrick Donnelly of Citi. Patrick Donnelly : Maybe following up another one on the instrument side. I know you aren't going to give a hard number on the backlog. You did mention it was still elevated, Mike, and obviously gives us some good visibility into next year. I mean, any way you can frame kind of what it looks like today going into kind of a year compared to historicals? And then just on the order growth, what did that look like in the quarter? Obviously, the past few quarters, you called out outgrew revenue nicely. I'm just trying to get a feel for that, maybe if you have it on a geographic basis as well, that would be helpful? Mike McMullen: Yes, sure. So I think backlog remains up over historic exit levels. And that's why we very carefully chose the word elevated in our text to make sure that that you know there's more gas to left in the tank. While we won't give you a specific growth rate, I will tell you that we again grew our orders in Q4 off a prior year double-digit compare. I do think it's also worth pointing out, though, we did see a different trend within the quarter. So -- and I think this speaks to our confidence around the year-end revenues because customers were ordering earlier in the quarter in like August and through September, really to make sure they got product by the fiscal year. So that was probably the only thing that we saw a little bit different than historical patterns, if I remember correctly, Bob? And then I think the story was pretty much across the board geographically. Robert McMahon : Yes. Correct. Correct. Mike McMullen: Yes. Same story. Patrick Donnelly : That's helpful. And then maybe sticking on the geographic point. Can you just talk about Europe, what you're seeing there? I mean, there's been concerns about tightening capital spend just given the geopolitical environment, the energy side. Maybe what you're seeing there? And then maybe a second one on the order side. Just the budget flush, you guys tend to have a decent look at it at this point. I know it's still a little bit away, but any early indications there would be helpful? Mike McMullen: Yes. So relative to Europe, I think I'd just remind you, we had a 14% print in the quarter. So we really feel good about our performance relative to the competition in that part of the world. But this area is a watch out for us. The -- a lot of the economic -- future economic concerns are really sending around what may happen to the European economy, particularly with the energy prices that they're having to deal with and what does it mean for demand and the ability for our customers to have the profitable revenue streams they want for their business. So that's an area that we're watching, and that's why we've taken this prudent guide in for example, assuming what will happen on the chemical side of Europe. Robert McMahon : Yes, I was going to say there's really nothing -- it's an area -- as Mike, you said, it's an area that we're watching. We haven't seen any material change in the way things are operating there. Just to add on that 14% was against a year ago that we did have revenue in Russia. And so that 14% was even higher than that if you looked at it on a pro forma basis. So… Derik De Bruin : Great. And any quick thoughts on the budget flush would be helpful. I appreciate. Robert McMahon: Yes, stay tuned. What I would say is, I mean, we have -- as Mike said, I think we did see some of that in our order book in Q4 given some of the extended delivery times that are still out there between us and the rest of the market. But we're not assuming any greater than kind of normal budget flush for the end of the year. Robert McMahon: Correct. Operator: We will go next to Josh Waldman at Cleveland Research. Joshua Waldman : A couple for you. First, Mike, a lot of questions on instrumentation, so I'll ask on CrossLab. A nice quarter here. I wondered if you could talk through the drivers to the acceleration? Anything beyond just the comps? I mean are you guys seeing signs of higher adoption of contracted service, share benefit. Is this a category where maybe price is just now starting to come into the mix? Mike McMullen: Yes, absolutely. So I'm going to tag team with Padraig on this one, but I think all those factors are hitting, and we're going to talk about services, but I think it's important to know that between services and consumables, we actually crossed over the 30% connect rate for the first time in the fourth quarter. So we've been talking about the importance of connect rates going forward. And on the services side, which is where your question is centered is, we've seen an acceleration of growth. We hinted at some of the places we're doing really well at the big enterprise level. But Padraig, why don't you add some your thoughts on here? Because this is your business and a lot of good things happening here. Padraig McDonnell : Yes. I think, Mike, as you said, touch rates continue to be very strong, and it's much more than a break/fix business and we see our contract rates actually growing at double digits, which is incredibly sticky with customers. And all key offering categories right from enterprise down to some of the preventive maintenance services we do are all very, very strong. We also see that, of course, we have a large installed base and being able to provide different solutions and services for that have been really great. I will close by saying that we had some very big wins in the enterprise service business, and that's where we really look about productivity of labs and how we help customers with their outcomes, and we're seeing that increase as we go through the quarter and through the year. Joshua Waldman : Then Bob or Mike, curious to get your updated thoughts on supply chain and what you're seeing from a component availability and cost perspective entering '23? And I guess, whether or not your guide assumes improvements in either of these or maybe if supply chain improvement could represent upside to the guide? Robert McMahon : Yes. I would say we have seen in the second half of this year, incremental improvements as we went through Q3 and Q4 that helped us allow us to increase our revenue here in Q4. I would expect that incremental improvement to continue into next year. But it's by no means back to kind of normal I think if it happens to improve, I do think that, that would be a good thing for us. And -- but we're not -- we're assuming kind of the same level of improvement that we've seen in the back half of this year moving into FY '23. I do think that some of the costs have come down but there we're still having to purchase things in the aftermarket to be able to ensure supply and deliver to customers. Mike McMullen: Yes, to Josh's question, if we get to a point where we don't have to go into that aspect of the market, that would be upside for us. Robert McMahon : That's right. Operator: We'll go next now to Dan Leonard of Credit Suisse. Dan Leonard : Mike, I have a follow-up on Europe. So when you're framing the possibilities for 2023, I hear you on the conservatism for the chemical industry. But what about other end markets? Does the macro uncertainty in Europe bleed into pharma or aca, gov or anywhere else? Mike McMullen: We think there's an element that will also be in pharma as well. So you're right. I was focusing specifically on the Chemical segment of Europe, but that's also part of the storyboard as well. You can manage large pharma accounts who are dealing with increased costs, trying to figure out what they want to do in 2023. So that's a watch area for us as well. But I will say, some of the other secular drivers that we talked about earlier, such as investments in renewable energy, there's a big push to make hydrogen more of a source of energy. So this plays right in the sweet spot of Agilent. So -- but we are cautious about the large accounts in Europe and what they may do in '23 in those two end markets. Dan Leonard : And then I have an unrelated follow-up. On the NASD business, can you be specific about what is your outlook for that business in 2023? And what might be your opportunity to expand the service offerings in that business beyond your traditional product offering? Mike McMullen: Yes. Sam you know might obviously take a lead on that just to kind of -- and then have Bob jump in here as well. I mean we're assuming that our new capacity for Train B comes online, mid-year calendar year, it starts and will reach I believe full capacity by the end of the year. And we do think there's further expansion opportunities both in terms of what we do already, but broadening the portfolio. But Bob, maybe you want to walk through some of the thoughts on the financial expectations. Robert McMahon : Yes. I mean we ended this year touching on roughly $300 million for that business, and we've talked about this Train B being $150 million plus of capacity when Mike says we're going to be at capacity at that run rate by the end of the fiscal year. And you could imagine that probably less than half of that is a ramp-up, but we would expect a strong growth here. And I would say Train B is primarily siRNA, although we do have early -- some growing business in CRISPR Therapeutics out of our existing facilities, and we expect that to continue to grow as well. Operator: We go next now to Dan Arias of Stifel. Daniel Arias : Hey, Mike, just a question on GC/MS. 30% growth for the quarter is pretty robust. For '23, would you expect a little bit of a decoupling from LC/MS there just given that it feels like there's more -- a little bit more cyclicality on the GC side, maybe a little bit more pharma on the LC side? Or do you think those portfolios track similarly again? Mike McMullen: I think we've always felt -- and Jacob, feel free to jump in this. We've always felt that long term, we expected LC/MS to have higher growth rates than GC/MS. And I think we'd expect that to play out in the long run. I'm not sure about '23 because GC/MS plays really well in the advanced materials space. We've been talking about some of the secular drivers there. But also, as Jacob mentioned, PFAS is an area, too. So I don't know if we're going to see that much divergence in '23, but it's a great question. I haven't thought about it. Jacob Thaysen : Yes. Thanks, Mike. And we came out with some very nice innovations here at the ASMS on the GC/MS side, including the way that you can use hydrogen to measure or to as your carrier gas and set up the helium, which has been really nice pickup in the GC/MS space. And as Mike also alluded to, I think we are seeing a lot of opportunity in the Advanced Materials side, particularly in the lithium battery side, where we both see our spectroscopy portfolio combined with the GC, GC/MS is completely or really addressing some of the challenges there. And actually on top of that, you have LC that is a part of that equation as you also want to look at electrolytes in batteries. So I think we continue to see a lot of opportunities in Advanced Materials, but particularly for the GC, GC/MS side. Daniel Arias : Yes. Okay. Interesting. And then, Bob, maybe just thinking about investments next year in the context of the growth that you're seeing this year, are there areas where you might add resources beyond what might just be expected given the uncertainty that's floating around? Seems like there's an opportunity to sort of improve your positioning at a time of strength, not sure if you're seeing it that way, though. Robert McMahon : Yes. No, we agree. And I would say it's -- we've been doing that over the course of this last year. And I would say one of the areas, obviously, we're building out the capacity in NASD that we've talked about extensively. But we're also significantly investing in places like digital and software. And we think that that's an area of increasing strength for us and would look to continue to invest incrementally there as we go into FY '23. Operator: Ladies and gentlemen, we have no further questions this afternoon. Mr. Ahuja, I'll turn things back to you for closing comments. Parmeet Ahuja : Thanks, Bo, and thanks, everyone, for joining. With that, we would like to wrap up the call for today. Have a great rest of the day. Operator: Thank you. Ladies and gentlemen, that concludes today's call. Thank you for joining. You may now disconnect.	[ { "speaker": "Operator", "text": "Ladies and gentlemen, welcome to the Agilent Technologies Q4 2022 Earnings Conference Call. My name is Bo and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja, Vice President of Investor Relations. Mr. Ahuja, please go ahead." }, { "speaker": "Parmeet Ahuja", "text": "Thank you, Bo, and welcome, everyone, to Agilent's conference call for the fourth quarter of fiscal year 2022. With me are Mike McMullen, Agilent President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group, and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our fourth quarter financial results, investor presentation and information to supplement today's discussion along with the recording of this webcast are available on our website at www.investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of October 31. As previously announced, beginning in the first quarter of fiscal 2022, we implemented certain changes to our segment reporting structure. We have recast our historical segment information to reflect these changes. These changes have no impact on our company's consolidated financial statements. Please note that we have changed the name of the Chemical & Energy end market to the Chemicals & Advanced Materials end market. This change better reflects the mix of business in this market. It does not affect financial reporting in this quarter or prior quarters. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now I'd like to turn the call over to Mike." }, { "speaker": "Mike McMullen", "text": "Thanks, Parmeet. And thanks, everyone, for joining our call today. In the fourth quarter, the Agilent team continued its strong performance. We delivered an excellent quarter, significantly exceeding our revenue and earnings expectations. Revenue of $1.85 billion is up more than 17% core. Our strong top line performance helped deliver fourth quarter operating margins of 29.1%. The operating margins continue to expand despite the inflationary environment and the strengthening dollar and are up 260 basis points from last year. Earnings per share of $1.53 were up 26%. These Q4 results mark an outstanding finish to another strong year for Agilent’s fiscal 2022. The full year revenue of $6.85 billion, we delivered core revenue growth of 12%. This is on top of core revenue growth of 15% in 2021. Our operating margin continued to increase and a 27.1% for the year, up 160 basis points. Earnings per share of $5.22 per share, up 20% for the year. Rx result this year highlight the ongoing strength of our diversified business and shine a light on the multiple growth drivers we put in place over the years. They also continue to demonstrate the outstanding execution capabilities of the Agilent team. Throughout the year, we navigated market uncertainties, inflation, COVID-related shutdowns and supply chain and logistics constraints. Our strength is broad-based with all three business groups growing double digits for the year. All major geographies and regions grew double digits in FY '22 after adjusting from our exit from Russia. This was highlighted by China leading the way, growing 18%. From an end market perspective, all markets expanded led by excellent growth in our two largest markets, Pharma and Chemical & Advanced Materials. All in all, it was an extremely good year for Agilent. Let's now take a closer look at our fourth quarter performance, starting with end market highlights. During Q4, our performance led by 20%-plus growth in three of our six end markets. Pharma, our largest market, posted 20% growth on top of 21% in Q4 last year. The Chemicals & Advanced Materials business grew 27%. We saw robust demand in chemicals, along with secular growth in semiconductors, batteries and other advanced materials. The food market also grew 20% on a strong end-of-year demand in China that have been previously delayed by COVID-related shutdowns. On a regional basis, China led the way for us with stellar 44% growth as demand remains strong. Business activity continued to recover and the Agilent team worked quickly and effectively to start working down the backlog including delivering remaining shipments deferred due to the Shanghai COVID related shutdown in Q2. Europe also exceeded expectations by delivering double-digit growth in the quarter, coming in 14% higher than a year ago, with broad strength across our markets, highlighted by low 20s growth in pharma. Looking at our performance by business unit, the Life Science and Applied Markets Group continued its outstanding performance and posted revenue of $1.12 billion. This represents growth of 22% with the instrument business growing 24% and our Consumers and Applied business growing 15%. We also saw excellent low 30s growth in our LC/MS instruments business as our solutions continue to resonate with customers. LSAG was able to build our leadership implied markets with spectroscopy growing in the low 20s and the GC and GC/MS business growing in the low 30s. In addition, Agilent is doing its part to help customers monitor and manage microplastic in the environment as we released the latest version of the 8700 LDIR chemical imaging system. This unique system has been optimized specifically for the analysis of microplastics in environmental samples. The ads on Agilent CrossLab Group posted revenue of $381 million in Q4. This is up 14% core with broad-based strength across our entire portfolio of offerings. Pharma and Chemicals & Advanced Materials both grew mid-teens for ACG. On a regional basis, China led the way with high 20s growth as business continued to recover. ACG also delivered double-digit growth in the Americas. ACG has delivered double-digit growth for us every quarter this year, and our engagement large enterprise customers continues to accelerate. Through its deep understanding and insights into lab operations, the ACG team continues to build strategic partnerships and long-term relationships that maximize customer value and provide ongoing demand for services and support. The Diagnostics and Genomics Group delivered revenue of $352 million, up 8% core. DGG's results were led by strong growth in the low 20s for NASD. As expected, our NASD business delivered high quarterly revenue on a sequential basis given the plant shutdown last quarter. Our genomics portfolio also posted solid results, growing low teens and pathology grew mid-single digits. On a regional basis, DGG also delivered mid-20s growth in China. In addition to these business group highlights, during Q4, Agilent was recognized by the World Economic Forum Global Lighthouse Network as a world leader in advanced manufacturing. Agilent's manufacturing facility in Singapore received this recognition for deploying innovative technologies at scale in the manufacture of scientific instruments, driving productivity, while advancing sustainability. Also, we are extremely pleased to announce a new multimillion-dollar partnership with Delaware State University, a leading historically black university. The work we will do together with DSU is geared towards increasing the number of underrepresented students entering stem fields. In addition, Agilent is certified as a great place to work by the Great Place to Work Institute in more than 20 countries and regions around the world during the quarter. This recognition distinguishes Agilent as a top employer based on an independent survey of its global workforce. Recap in 2022, we had another very successful year, not only on delivering excellent financial results, but building for the future. We continue to drive innovation focused on supporting our customers and executing our Build and Buy strategy to outgrow the market. The Agilent team continues to deliver. We have built a resilient company with multiple drivers for growth and target investments focused on high-growth areas. We have an unstoppable One Agilent team that can take on any challenge and execute at an extremely high level. As we look ahead to 2023, we believe these qualities are a winning formula for continuing to deliver in an increasingly uncertain economic environment. Bob will now share more detail on the quarter and the year along with our initial view on expectations for fiscal year 2023. After his remarks, I will rejoin to add some final comments and perspective. Thank you for joining us today. And now, Bob, over to you." }, { "speaker": "Robert McMahon", "text": "Thanks, Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter and the year as well as take you through the income statement and other key financial metrics. I'll then finish up with our guidance for fiscal year 2023 and the first quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. We are extremely pleased with our Q4 performance and finished the year on a very strong note, exceeding our expectations on both revenue and earnings per share. Q4 revenue was $1.85 billion, up 17.5% core and 11.4% on a reported basis. During the quarter, we saw the dollar continue to strengthen. Currency exchange rates were a 6.2 point headwind to growth or $103 million. The contribution from M&A was as expected, adding 0.1 point to reported growth. Our performance was again broad-based as all end markets and regions grew during the quarter. Orders also grew again during the quarter, while outstanding execution from our order fulfillment and supply chain teams enabled us to start working down our record backlog. As we enter FY '23, our backlog is still elevated and helps provide good visibility and confidence in our outlook going forward. Now I'd like to share additional details on our end markets. Results in our largest market pharma were very strong. This market represents 37% of Agilent's revenue and grew 20% in the quarter. Biopharma grew 18% and small molecule was up 21%. Looking forward, we expect the pharma end market to grow high single digits in FY '23. Chemicals and Advanced Materials led growth for us during the quarter at 27%. This compares with 11% growth in Q4 of last year. All three submarkets, Chemicals, Advanced Materials and Energy had strong growth in the quarter. All regions grew as well, led by China. Demand continues to be driven by investments in advanced materials, driving secular growth opportunities in batteries, alternative energy and semiconductors. While not immune to macro uncertainties, we believe these secular drivers in Advanced Materials will continue, helping to drive mid-single-digit growth for this market next year. We delivered growth of 20% in the food market led by China as our results continue to benefit from the recovery of revenue delays due to COVID-related shutdowns in Q2. During FY '23, we expect the food market to normalize and grow in the low single digits after two years of very strong growth. The Environmental & Forensics market posted 18% growth with particular strength in the Americas. This result was driven by increased governmental spending helping to drive technology refresh for newer applications like PFAS testing. Europe and China also posted impressive double-digit growth in the quarter. We see PFAS-related funding and demand continuing to be a driver for this end market and expect mid-single-digit growth next year. Our business in the diagnostics and clinical market grew 6% against an 11% compare last year. Growth was led by Europe and China, while Americas grew low single digits. We also expect to see mid-single-digit growth in this market in FY '23. The Academia & Government market grew 3%, led by continued strength in our service business. This market grew 3% overall for the year as well; and looking forward, we expect similar growth in 2023. On a geographic basis, China led the way with phenomenal 44% growth in Q4, driven by underlying demand across multiple end markets and our continued ability to quickly recover deferred revenue from Q2. As we have discussed the last two quarters, the COVID-related lockdowns in China earlier this year deferred an estimated $50 million to $55 million in revenue from Q2 into future quarters. This recovery started last quarter, and our team in China continued their outstanding work to ramp production and shipments quickly in Q4. We've now fully worked through this deferred revenue a full quarter earlier than originally anticipated back in Q2, a true testament to the entire team. We estimate this recovery had a mid-single-digit positive impact to China's Q4 growth. So even excluding this, our business performance in Q4 was very strong. Now looking ahead to next year, we expect China will continue to be a key growth driver for us. And as Mike mentioned, Europe grew a very solid 14%, which exceeded our expectations. We also posted 8% growth in the Americas, driven by Pharma, Chemicals & Advanced Materials and strong growth in the Environmental & Forensics market, partially offset by Academia & Government. And lastly, the rest of Asia grew 12%. Now turning to the rest of the P&L. Our team continues to execute at a very high level. Fourth quarter gross margin was 56.3%, up 40 basis points from a year ago. Volume leverage, along with pricing, helped overcome continued inflationary pressures and higher logistics costs. Our operating margin was 29.1% in Q4, up 260 basis points from last year. Below the line, our tax rate was 14% for the quarter as expected, and we had 298 million diluted shares outstanding. Putting it all together, earnings per share were $1.53 for the quarter, up 26% from a year ago, as Mike mentioned. So in summary, Q4 ended with 17% core top line growth and 26% EPS growth, a very strong finish to the year, where we had revenue growth of 12% and EPS growth of 20%. Now some metrics on our cash flow and balance sheet. In Q4, we generated operating cash flow of $448 million, while investing $70 million in capital expenditures. The CapEx spending is driven by our continued scale-up of Train B for our NASD expansion. And in the quarter, we also paid out $62 million in dividends and repurchased shares valued at $135 million. For the year, we returned almost $1.4 billion to shareholders through $250 million in dividends and a bit more than $1.1 billion in share repurchases. And as we've indicated before, given the ongoing strength of the business, we believe these share repurchases represent a very good long-term investment. Our balance sheet continues to remain healthy as we end the fiscal year with a net leverage ratio of 0.8. Now let's move to our outlook for the upcoming fiscal year and first quarter. Now looking forward to 2023, we entered the year with business momentum and a very healthy backlog. We also acknowledge the increasingly uncertain macro environment, rising interest rates and currency headwinds and have reflected that in our thinking based on what we know today. For fiscal year 2023, we expect revenue in the range of $6.9 billion to $7 billion as we have significantly greater currency headwinds since the last we spoke. Core growth is expected to be in the range of 5% to 6.5%, in line with our long-range goals. Currency will negatively affect reported growth by 430 basis points or roughly $295 million during the year based on fiscal year-end rates. And to help with your modeling at a business group level, this revenue guidance assumes mid-single-digit core growth for LSAG, mid- to high single-digit growth for DGG and high single-digit growth for ACG. And despite the ongoing currency headwinds and a continued inflationary environment, we are expecting operating margin expansion for FY '23. Now below the line, we expect $40 million to $50 million of net expense, a tax rate of 13.75%, which is slightly below this year and 297 million shares outstanding. Fiscal 2023 non-GAAP EPS is expected to be in the range of $5.61 to $5.69. This range represents a growth rate of 7.5% to 9% versus the prior year and incorporates an estimated 4 percentage point headwind due to currency net of our hedging activities. We are also expecting $1.4 billion to $1.5 billion in operating cash next year and CapEx of roughly $300 million based on currently approved expansion projects, primarily Train B for NASD. We have also announced raising our dividend 7%, providing our shareholders with another source of value. And finally, for Q1 2023, we expect revenue in the range of $1.68 billion to $1.70 billion. Core growth is expected to be in the range of 6.8% to 8%, while currency will be a 6.6 point headwind to reported growth. This outlook for the quarter incorporates the impact of the timing of Lunar New Year this year. First quarter 2023 non-GAAP earnings per share expected to be between $1.29 and $1.31. Mike will speak to this further in just a minute, but our diversified business model and the strength of our team are key assets for Agilent. These two elements produced an outstanding Q4 and a full year 2022 and they have put us in an excellent position to again deliver strong results in the coming year. And now I will turn the floor back over to Mike for some closing comments. Mike?" }, { "speaker": "Mike McMullen", "text": "Thanks, Bob. Today's results are a strong indication that Agilent has the right growth strategies, the right team and right culture to continue delivering strong results. Our customers know we are reliable, resilient and extremely quick in reacting to meet their needs. The Agilent team continues to work hard to earn their trust. Looking ahead, we are all seeing increasing economic uncertainty. However, this company and team have built to successfully navigate any economic challenges we may encounter. Throughout the pandemic, we have stated that Agilent will emerge as a stronger company. Today's results are yet another proof point that we are well on our way in this journey, and we're not done yet. We continue to prioritize investments in growth. We are a resilient company with multiple growth drivers and unmatched execution capabilities. I'm quite confident we will continue to react quickly to changing conditions and deliver at a high level. Thanks for being on the call. And now I will turn things back over to Parmeet as we take your questions. Parmeet?" }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Mike. Bo, if you could please provide instructions for the Q&A now?" }, { "speaker": "Operator", "text": "[Operator Instructions] And we'll take our first question this afternoon from Vijay Kumar of Evercore ISI." }, { "speaker": "Vijay Kumar", "text": "Congratulations on a really impressive finish to the year here. Mike or Bob, maybe if I could start with the high-level fiscal '23 guidance question. 5% to 6.5% organic for the year, that's coming off of some tough comps. Maybe just talk about your assumptions for end markets which you're expecting for forma chemicals and advanced materials, et cetera. Just given your commentary on orders and backlog, it looks like the start 5% to 6.5%, it seems reasonably conservative." }, { "speaker": "Mike McMullen", "text": "Why don't you take that?" }, { "speaker": "Robert McMahon", "text": "Yes, Vijay, yes, I appreciate the comments on the end of the year. And as we mentioned, we're moving into FY '23 with momentum. And really, what we've seen across our business in FY '22, we are expecting to continue into FY '23. Broad-based business results really led by our two largest markets, Pharma and Chemicals & Advanced Materials. And when we think about those, those are both in the mid- to high single-digit growth range and with growth in the other areas as well. We're expecting all of our markets to grow and really given some of the secular drivers that we've seen this year and continued strength in the pharma business." }, { "speaker": "Mike McMullen", "text": "Hey, Bob, I would just add, too. This is our initial guide for the year. We're at the top end of our long growth model in terms of the long-term growth aspirations we laid out at our last [AID] coming off two straight years of double-digit growth. And its initial guide of the year, Vijay. And you probably hear a few times they were being prudent given the increasing economic uncertainty out there. But I would point out that if you look at the core growth rate assumptions, the Q1 '22 guide is actually higher than the full year number." }, { "speaker": "Vijay Kumar", "text": "Mike, I appreciate the prudent comment. And if I could just have one follow-up on. On margins, that EPS guide came in about Street models despite FX headwinds, it looks like coming in about Street models. What are you assuming for pricing inflation? And what's implied from margin expansion in the guide?" }, { "speaker": "Mike McMullen", "text": "You want to take that, Bob?" }, { "speaker": "Robert McMahon", "text": "Yes. Yes. So we ended Q4 in a very good position here with a little over 4% and that has ramped throughout the year, and we're forecasting roughly about a little over 3% in price next year across our book of business. And we are assuming margin expansion, Vijay, next year. And when we look at that 7.5% to 9%, what we are seeing is kind of unprecedented strength in currency. And we do hedge, but our hedges become less effective over time. And we're -- that's absorbing a 4-point headwind. So if you added that back in, it would be closer to 11.5% to 13% EPS growth." }, { "speaker": "Operator", "text": "We'll go next now to Matt Life with Goldman Sachs." }, { "speaker": "Matt Sykes", "text": "Appreciate it. Maybe I just want to dig a little bit more into the margins. You guys mentioned operating margin expansion expectations for next year. But maybe talk a little bit about where you see those drivers coming from, maybe on a segment basis or an end market basis? Where do you feel there's more upside to expand those margins at the group level and where the impact will be felt?" }, { "speaker": "Robert McMahon", "text": "Yes, I think what you would see is a continuation of what we've been able to do this year. And what we've been able to do is cover the increase in costs associated with the inflation through the pricing activities, but then really leveraging our operating expenses. And you saw that in full display here in where we did have operating -- gross margin expansion, but you also saw a majority of the margin expansion in the operating expense. And I think that that's 1 of the benefits that we have through the investments that we've been making in digital over time, as Mike mentioned, as well as the continued effort around the One Agilent focus. So I would expect us to continue to see that I do think that the scale that we have across our businesses will continue to provide benefits next year, certainly, as we drive more business into our service organization. I do think that we will continue to be able to leverage that footprint. And then if you look at the higher growth areas that we've been investing in, in the instrumentation side of the business, those are our more profitable businesses. And we are also looking to continue to attach -- increase our attach rates both on the services but then also consumables, which are 1 of our highest profit. And I would say in Diagnostics, the DGG business, we are facing kind of some of the start-up costs with our Train B next year. But if you peel the onion, I would say, fundamentally, our business is performing very well there as well in '23. And I would expect margin improvement outside of kind of some onetime start-up costs that we would have in bringing that train up and running in the second half of the year." }, { "speaker": "Matt Sykes", "text": "Got it. Then maybe a question on the Chemicals & Advanced Materials. You guys made a comment in the slide deck about increased demand in the energy business during Q4. Could you talk about the drivers behind that? And what your expectations are, specifically for the energy market as we move through '23?" }, { "speaker": "Mike McMullen", "text": "Yes. So we really wanted to make sure that it was clear that across all three segments of the CAM segment, we saw growth. And what you're seeing going on here is a lot of investments in the HPI industry given the strength of their businesses. So -- and I'll have Jacob jump on this as well, I think their businesses with the ability to invest and they have a lot of deferred investments over the years, but also a lot of new money going into renewable and green energy initiatives as well." }, { "speaker": "Jacob Thaysen", "text": "Yes, I think you're right, Mike. I think we're seeing, as you mentioned, there has been some pause in the capital equipment investment over the years, and we're definitely seeing that coming back. So -- and both in the HPI, but also in the renewable energy, we continue to see a lot of strength, and we believe that will continue forward." }, { "speaker": "Mike McMullen", "text": "Yes, we're expecting that trend to continue into '23." }, { "speaker": "Operator", "text": "Ladies and gentlemen, we'll go next now to Puneet Souda of SVB Securities." }, { "speaker": "Puneet Souda", "text": "Mike, Bob, thanks for taking the question. I mean to say this is impressive as a quarter is an understatement in the sort of uncertain times. So first of all, congrats on the quarter. Mike, so on China, impressive results there. Can you just parse that out a bit? I know you talked about gas chromatography delays were there, and those are -- it looks like they're fully booked in this quarter and the revenues booked or food is also impressive. Could you maybe talk about the order book visibility you have in China and your growth expectations there going forward despite the Lunar Year? And also, what is the longer-term expectation for overall growth in China, just given the multiple end markets that are working so well for you in the quarter?" }, { "speaker": "Mike McMullen", "text": "Yes, sure, Puneet. Happy to respond and Bob and I probably can have tag team on this. But again, thanks for your earlier comments, brought a lot of smiles in the room here. Yes, we were quite pleased with the results for China, not only in the quarter but for the year. And I think it's important to know the 44% print we had in Q4 wasn't just about catch-up from deferred revenue due to the COVID; and again, shutdowns. And again, it points to the fact that when you do see those types of things happen, eventually, the business does materialize. We didn't lose any business. I think the strength of the business continues to be there across multiple end markets, really been led by pharma, chemical. And then we think that the food market will probably normalize to kind of the traditional growth rates in China. But expecting pharma and the CAM marketplace to be strong, in particular, a lot of -- we expect a lot of business on the renewable energy and HPI side in China as well. So that Advanced Materials segment, we've been talking a lot about, we think is going to sustain the growth in China in '23. But I think we're kind of looking at maybe high singles for China for next year. Is our initial thinking?" }, { "speaker": "Robert McMahon", "text": "Yes, that's right. And Puneet, I would say the strength that we saw in Q4 in China was really across the board across all the major technology platforms within the instrument business. The consumables business was incredibly strong as well. And then the services business, if you recall back in Q3, we said that activity hadn't fully come back, was fully back in Q4. And so we saw very strong there. And not to forget, DGG. We had double-digit growth in our Diagnostics and Genomics business as well. So it was really broad-based. And you talked about visibility, orders continue to grow in China. And we have very good visibility in -- certainly into the first half of this year. And as we think about the secular growth drivers, those are still in place. If you think about the investments that are made in technologies around the biotechnology areas, but increasingly actually in advanced materials and some of the secular drivers around batteries and lithium-ion production and so forth. And we would expect that to continue into next year for sure." }, { "speaker": "Mike McMullen", "text": "Bob, I just have to think to your comment about the DGG business. Just a reminder, Puneet as we came into this year, we created a unique structure as part of our one commercialization to have all of our China businesses we put into one single leader. Really, the idea was to add scale to the parts of our business, which we felt underrepresented, and you saw the payoff already starting to happen with the growth rate in DGG, for example." }, { "speaker": "Puneet Souda", "text": "That's great. Just quick one on pharma. I mean this was the first quarter in a long time when I saw small molecules growing faster than biomolecules. Can you elaborate a bit what's behind that dynamic?" }, { "speaker": "Mike McMullen", "text": "I thought it was really good newsprint because we've been talking lately about that while we still continue to believe that biopharma large molecules will have the inherently higher growth rate, we've also been pointing the fact that the small molecule will continue to have growth. And I think it speaks to some of the strength of particularly our LC and LC/MS business in small molecule. And Jacob, I'll have you add a few comments here in a second. I wouldn't overread too much in that particular quarter. It's just one quarter. I think we would expect to continue to see over time a differentiation in the growth rates between biopharma and small molecule, but small molecule by no means is dead and it's an opportunity for growth. And I think we've got a great portfolio there, Jacob." }, { "speaker": "Jacob Thaysen", "text": "Yes. Right, Mike. Oh, sorry, I was on mute here. So sorry, this was Jacob coming with some comments. But you're absolutely right, Mike. We continue to see the small molecule being -- while it's still the largest part of our business, of course, we see biopharma as a great opportunity, but we take the small molecule business very seriously and continue to build full workflow solutions for that, particularly for the LC and LC/MS space, and that's where the growth is coming from." }, { "speaker": "Mike McMullen", "text": "Thanks, Jacobs." }, { "speaker": "Operator", "text": "We go next to now to Brandon Couillard from Jefferies." }, { "speaker": "Brandon Couillard", "text": "Mike or Bob, I can't remember. You mentioned the PFAS market several times in the prepared remarks. Can you just give us a ballpark size of how big that market is right now, maybe relative growth rates and whether it's primarily a U.S.-centric market or if it's developing in other parts of the world as well?" }, { "speaker": "Mike McMullen", "text": "So Jacob, how if you and I tag team on this? We're viewing this, I think, about a $200 million market, growing double digit. We think while there's -- a lot of the growth is centered in the U.S., there's also going to be very strong growth in the U.S. and perhaps some in China. So we actually see this as a sort of a global story with initial big legs in U.S. and Europe and the growing interest in China. But let me see if I got that right, Jacob?" }, { "speaker": "Jacob Thaysen", "text": "Yes, you're absolutely right, Mike. It's a huge market. And in fact, there was more than 4 billion put aside in the infrastructure build for PFAS testing, not only for analytical instrument, obviously, but overall for PFAS testing. So this is a great opportunity. And it's particularly a great opportunity for us as this requires -- it's very high-sensitivity instruments you need and you have run very easily into issues in your sample, perhaps you don't take that very seriously. So really building out the flow solutions and have something that works every time. We spend a lot of energy on that. And in fact, we have a solution now that lives up to all the EPA regulations and our customers just love it because it's just plug and play, and it works very well for them for very sophisticated ways of doing business here. And on top of that, while most of the opportunity sits in the LC/MS space. We're also starting to see the GC/MS as an opportunity to look at testing of PFAS molecules in the year and all the volatile, so which speaks extremely well to our opportunity." }, { "speaker": "Mike McMullen", "text": "Yes. Thanks, Jacob, for those build. And this is the first time in my tenure where that we've seen this kind of money coming in, in the U.S. marketplace with the government support. So it's a very encouraging trend, and we think that trend is going to be with us into '23." }, { "speaker": "Brandon Couillard", "text": "That's great. Then a couple for Bob. Just number one, can you just quantify the Lunar New Year impact in the first quarter on a year-over-year basis. And then with supply chain loosening, which it sounds like they are, what are the implications for that in terms of working capital as you move through the balance of the year?" }, { "speaker": "Robert McMahon", "text": "Yes. Brandon, thanks for the questions. Yes, the Lunar New Year is roughly a little over 0.5 point impact year-on-year for headwind had in our first quarter. It starts in mid-January this year versus the first of February last year. And so -- and for those that will come back to us in the second quarter. And then I think in terms of supply chain, -- it is -- we think it is improving, but it's not back to kind of pre-COVID levels, both on the standpoint of being able to get products to customers, but also procuring raw materials and the costs associated with that. We do think that that's going to improve over time. I would say I wouldn't expect any changes -- any material changes certainly in the first half of the year and then maybe some slight changes as we get into the back half of the year. But -- we do think it is improving, but we've increased our stocks of critical supplies. And I don't think it will go back to pre-COVID levels in terms of how we're running that just to ensure that we have the ability to flex when we need to if there were challenges around logistics across the world." }, { "speaker": "Operator", "text": "We'll go next now to Daniel Brennan of Cowen." }, { "speaker": "Daniel Brennan", "text": "Congrats on the quarter. Maybe just the first one, just on LSAG. Another really impressive quarter with 24% growth on the instruments. So the mid-single-digit guide, obviously, you're up against tough comps, but it does reflect the notable slowdown from what you guys have been doing. And maybe just walk through a little bit of what kind of drove the strength this quarter kind of end market versus Agilent specific? And then is there just a healthy degree of conservatism baked in for the guide? Or is it really just tough comps?" }, { "speaker": "Robert McMahon", "text": "Yes. I would say at the beginning, Dan, we're at the beginning of the year, there are uncertainties out there, as I'd repeat what Mike said, it's beginning of the year and that's a prudent guide. I would say that there's an element of tough comps, particularly in the second half of the year as we have been building -- taking down the backlog certainly in China, which was China just a deferral from Q2 into the second half of the year. But I would say, fundamentally, the demand is still strong. And I think across the end markets, our expectation is that the Pharma and Chemical & Advanced Materials markets will continue to lead the way for us with faster-than-expected growth, I think, in Environmental & Forensics for that PFAS testing." }, { "speaker": "Mike McMullen", "text": "Maybe just a couple of additional comments here, Bob, maybe Jacob, you have thoughts as well. But we continue to see improving market share. So the latest industry stats from -- showed us all green across all platforms. So that should bring to -- and any kind of debate on whether or not we're picking up share. But I also think it's kind of also recognize we've been in kind of an unprecedented environment here for a number of quarters in a row where we've seen instrument growth rates in 20s plus, 30 plus. A lot of it -- and we've been very transparent about this in all our calls that an element of that it's tied to an accelerated replacement cycle in some end markets, in some technologies. So we're thinking though, as we set up the guide for '23, we should assume some return to more normalized replacement rates in certain end markets but there's going to be growth there, but perhaps not at the same rate we've seen. And I don't know if you have any additional thoughts there, Jacob." }, { "speaker": "Jacob Thaysen", "text": "No, I think we’re good, Mike." }, { "speaker": "Mike McMullen", "text": "Okay. Cool. I got it right. I'm 2 for 2 today." }, { "speaker": "Daniel Brennan", "text": "And then maybe just a follow-up. I know you've already discussed in the Chemical & Advanced Materials, a really strong quarter. And then on the outlook. I'm just wondering for the mid-single-digit guide obviously, the Advanced Material portion is like 1/3 of that business. It sounds like that's expected to grow really strong. Maybe just give us a flavor for how you're thinking about the three subcomponents in the '23. And like is there anything baked in on the chemical side of the energy side that would reflect some kind of impact from a selling economy? Or just kind of how should we think about that mid-single digit." }, { "speaker": "Mike McMullen", "text": "I'm going to invite Padraig on this too because he's working with his team very closely on this. But we're taking a cautious outlook as it relates to the chemical industry in Europe, particularly -- and I want to separate that from what maybe happened relative to the HPI and renewable energies. But in the base chemical business, our large customers are having to work through higher input costs to their production. So we're assuming a cautious outlook from that particular segment in Europe. And Padraig I know you are from that part of the world, and I know that you've been talking to our team about this as well. Anything you'd add?" }, { "speaker": "Padraig McDonnell", "text": "Yes. No, I think it's cautious, Mike. And I think what we're seeing is that there's additional scrutiny being played on converting quotes to orders that we're seeing across, particularly in Europe. And of course, there's quite a lot of macroeconomic pressures there as well. So I think you're spot-on on that one." }, { "speaker": "Robert McMahon", "text": "The only thing I would say, Dan, this is Bob, to add is this is an area -- sometimes people ask us, this would be an area of potential upside? If things continue the way that they are, there would be an opportunity for upside in this end market, given the strength that we're seeing." }, { "speaker": "Mike McMullen", "text": "Absolutely, Bob." }, { "speaker": "Operator", "text": "And we'll go next now to Rachel Vatnsdal at JPMorgan." }, { "speaker": "Rachel Vatnsdal", "text": "So first up on Train B. Last quarter, you guys said that there were some supply chain delays as you guys were building up that manufacturing line. So can you just give us the latest on timing if you're still on track for that to come online mid fiscal year.? And then thinking about beyond Train B, you guys have hinted at potential capacity expansions beyond this. So can you give us the latest on your thinking on those capacity expansions and when we could hear an update there?" }, { "speaker": "Mike McMullen", "text": "Yes. So Sam, why don't you take the first part, and I'll close with the second part?" }, { "speaker": "Sam Raha", "text": "Yes. It sounds good. Rachel, thank you for the question, and happy to report there haven't been any changes since we last spoke about Train B and timing. We're on track to go live in the middle of the calendar year coming up in 2023." }, { "speaker": "Mike McMullen", "text": "And at the risk of being repetitive, Rachel, we're on record saying that there's more letters than the alphabets in A&B. So we're focused on getting Train B up and running and have it generating revenue in '23. But at the same time, we continue to explore possible expansion plans, and nothing yet to announce yet, but stay tuned." }, { "speaker": "Rachel Vatnsdal", "text": "Great. And then just one more follow-up on food. So food grew 20% this quarter. It sounds like some of that was from that China recovery and pull forward there. But all in, you're guiding to low single digits next year off of that two year stacked tough comps. So can you just walk us through how should we be thinking about the food market going forward? Do you think in 2024, it's going to normalize more at a low single digit? Or is this market really accelerated and the guide this year is just more on that typical comp." }, { "speaker": "Robert McMahon", "text": "Yes, it's a good question. And this is Bob. And I would say it wasn't pull forward, it was catch up in terms of the growth rate here because it was -- as you know, Rachel, China has got a bigger proportion of the food market. And I would say it is a function of having two years of very strong performance there and so difficult comps. And I do think it is trending up with some of the investments that are being made there. But this still is a low to mid-single-digit grower." }, { "speaker": "Mike McMullen", "text": "I think just to kind of reinforce our ability to hit that mid-single or low to mid-single-digit growth rates, we also see continued strength in the U.S., for example, where our cannabis testing business is part of what we reported, so, right Jacob?" }, { "speaker": "Jacob Thaysen", "text": "Yes, correct. And the cannabis business continues to do very well, and we see a lot of lab owners that is looking for us to come in and help them to equip the full laboratories. So that's a big opportunity for us. But also the alternative protein space is really picking up, both here in U.S., but particularly also in in Asia. So I do believe that is going to continue to be a secular growth driver for us in food." }, { "speaker": "Mike McMullen", "text": "Right. And I really wanted to make sure that we highlight those new secular growth drivers because a lot of growth historically has come from China. We're seeing actually a much more diversified mix of business as we move forward." }, { "speaker": "Operator", "text": "We go next now to Derik De Bruin of Bank of America." }, { "speaker": "Derik De Bruin", "text": "So Mike, you said it’s an unprecedented environment for instrument demand and such. We've been covering these markets a long time, you and I and looking at these, and these are just numbers, which are really just amazing instrumentation numbers. So what's embedded for instrument growth in your 2023 guide? And how much of this is already covered by your backlog versus what's going to be new or have to get in through the year?" }, { "speaker": "Mike McMullen", "text": "Yes. So yes, thanks, Derik. And you and I have been in this business for a while and eye-popping growth rates, that's why we love -- we've really been joining these growth rates. I do think there's elements in the market that actually have increased the long-term growth rates relative what we've seen in the past. But I think it's also fair to assume that some of these accelerated replacement cycle seen will start to moderate over time. That being said, Bob, I think we're looking at LSAG, what, in the mid-singles?" }, { "speaker": "Robert McMahon", "text": "Mid-single. That's correct." }, { "speaker": "Mike McMullen", "text": "And I'll let you pick the second part of the question there." }, { "speaker": "Robert McMahon", "text": "Yes, yes. So it is mid-single digits. What I would say, Derik, is we're not going to disclose the amount of contribution for our backlog in there. But you can imagine that, that healthy backlog that we just talked about is primarily on the instrument side. It's just the way that we book business. And we have pretty good visibility into the first half of the year just given the way our order trends happened." }, { "speaker": "Derik De Bruin", "text": "Got it. Can we talk a little bit about the academic market and what you're seeing there? Low single digits there in the quarter, low single-digit demand. How is that sort of like tracking relative to your expectations? I mean, I know you don't have a huge academic footprint, but I know your genomics business was actually doing -- they actually did -- was actually quite strong in the quarter. So I'm just wondering if you could sort of talk through what's going on in that market and sort of are you seeing any pressures there?" }, { "speaker": "Mike McMullen", "text": "Yes. So Bob, maybe we can tag team on this, and I'll start. So first of all, this is the one market that we always coming out of COVID said will be the slowest to recover, and that's still proven to be the case. We saw really, really good demand in China in Academia & Government and also good demand for certain aspects of our portfolio. But at the same point in time, a level of caution is around CapEx. NIH funding is not as robust as people had hoped. So we've tempered our outlook for '23 as kind of just a continuation of more and more of the same." }, { "speaker": "Robert McMahon", "text": "Yes. And I would say, Derik, the growth that we had met our expectations right down the line; and as Mike said, stronger in places like China, and less so in the U.S. but it met our overall expectations. And that's kind of how we're expecting it in FY '23 as well." }, { "speaker": "Derik De Bruin", "text": "And I have to ask the obligatory M&A question. Your share is obviously a good choice right now, but anything peaking your interest, valuation starting to come in on some of the stragglers in the market?" }, { "speaker": "Mike McMullen", "text": "Yes. So thanks for that, Derik. And as you know, we've got this Build and Buy growth strategy and one aspect of it is to look for opportunities for us to add great new businesses and team to Agilent through the use of our balance sheet. And as you may recall, some of our calls in the early part of '22, wow, these -- and finished out when these valuations were really out of site. And we saw that both in the public, but also in the private space. And things are starting to actually moderate down. So nothing at all to announce, but I'd say that the activities are -- we are very active here, and we're getting to places where you can see deals happening that would work for shareholders." }, { "speaker": "Operator", "text": "We'll go next now to Jack Meehan of Nephron." }, { "speaker": "Jack Meehan", "text": "I wanted to keep going on the instrument side. I was wondering if you could comment on cancellation trends. So just in context of the broader macro uncertainty, is that showing up anywhere in your instrument backlog?" }, { "speaker": "Mike McMullen", "text": "Yes, Jack, thanks for that question because one of the reasons why we have the confidence we have with the outlook we've guided to -- and when Bob talks about elevated backlogs, it's a healthy backlog. In that we have no significant change. There's no significant order cancellations, remain very low. So the orders we have in backlog will ship and we feel really good about the -- if you will, the quality of our backlog." }, { "speaker": "Robert McMahon", "text": "Yes, Jack, just to build on that, the other piece -- the first piece of that would be our orders being pushed out, and we're not even seeing that either. So we're not seeing any push out of orders as well as any cancellations." }, { "speaker": "Jack Meehan", "text": "Awesome. Okay. And then kind of the other pressure area we've been monitoring is more in the bioprocessing side, just stocking trends at customers. I know you compete sort of adjacent to some of these markets on large molecule. Are you seeing any destocking activity in any of the markets that you serve?" }, { "speaker": "Mike McMullen", "text": "No, no. Thanks for that question, Jack, because we've been reading some of the print as well, and we're saying, well, that's really not what we all were seeing with our business. So you saw -- and Jacob, we posted what double-digit 15% growth in CSD. We saw low teens growth in the genomics area, which would be the area you might see those things. And so it's not a concern for our ongoing business." }, { "speaker": "Operator", "text": "We'll go next now to Patrick Donnelly of Citi." }, { "speaker": "Patrick Donnelly", "text": "Maybe following up another one on the instrument side. I know you aren't going to give a hard number on the backlog. You did mention it was still elevated, Mike, and obviously gives us some good visibility into next year. I mean, any way you can frame kind of what it looks like today going into kind of a year compared to historicals? And then just on the order growth, what did that look like in the quarter? Obviously, the past few quarters, you called out outgrew revenue nicely. I'm just trying to get a feel for that, maybe if you have it on a geographic basis as well, that would be helpful?" }, { "speaker": "Mike McMullen", "text": "Yes, sure. So I think backlog remains up over historic exit levels. And that's why we very carefully chose the word elevated in our text to make sure that that you know there's more gas to left in the tank. While we won't give you a specific growth rate, I will tell you that we again grew our orders in Q4 off a prior year double-digit compare. I do think it's also worth pointing out, though, we did see a different trend within the quarter. So -- and I think this speaks to our confidence around the year-end revenues because customers were ordering earlier in the quarter in like August and through September, really to make sure they got product by the fiscal year. So that was probably the only thing that we saw a little bit different than historical patterns, if I remember correctly, Bob? And then I think the story was pretty much across the board geographically." }, { "speaker": "Robert McMahon", "text": "Yes. Correct. Correct." }, { "speaker": "Mike McMullen", "text": "Yes. Same story." }, { "speaker": "Patrick Donnelly", "text": "That's helpful. And then maybe sticking on the geographic point. Can you just talk about Europe, what you're seeing there? I mean, there's been concerns about tightening capital spend just given the geopolitical environment, the energy side. Maybe what you're seeing there? And then maybe a second one on the order side. Just the budget flush, you guys tend to have a decent look at it at this point. I know it's still a little bit away, but any early indications there would be helpful?" }, { "speaker": "Mike McMullen", "text": "Yes. So relative to Europe, I think I'd just remind you, we had a 14% print in the quarter. So we really feel good about our performance relative to the competition in that part of the world. But this area is a watch out for us. The -- a lot of the economic -- future economic concerns are really sending around what may happen to the European economy, particularly with the energy prices that they're having to deal with and what does it mean for demand and the ability for our customers to have the profitable revenue streams they want for their business. So that's an area that we're watching, and that's why we've taken this prudent guide in for example, assuming what will happen on the chemical side of Europe." }, { "speaker": "Robert McMahon", "text": "Yes, I was going to say there's really nothing -- it's an area -- as Mike, you said, it's an area that we're watching. We haven't seen any material change in the way things are operating there. Just to add on that 14% was against a year ago that we did have revenue in Russia. And so that 14% was even higher than that if you looked at it on a pro forma basis. So…" }, { "speaker": "Derik De Bruin", "text": "Great. And any quick thoughts on the budget flush would be helpful. I appreciate." }, { "speaker": "Robert McMahon", "text": "Yes, stay tuned. What I would say is, I mean, we have -- as Mike said, I think we did see some of that in our order book in Q4 given some of the extended delivery times that are still out there between us and the rest of the market. But we're not assuming any greater than kind of normal budget flush for the end of the year." }, { "speaker": "Robert McMahon", "text": "Correct." }, { "speaker": "Operator", "text": "We will go next to Josh Waldman at Cleveland Research." }, { "speaker": "Joshua Waldman", "text": "A couple for you. First, Mike, a lot of questions on instrumentation, so I'll ask on CrossLab. A nice quarter here. I wondered if you could talk through the drivers to the acceleration? Anything beyond just the comps? I mean are you guys seeing signs of higher adoption of contracted service, share benefit. Is this a category where maybe price is just now starting to come into the mix?" }, { "speaker": "Mike McMullen", "text": "Yes, absolutely. So I'm going to tag team with Padraig on this one, but I think all those factors are hitting, and we're going to talk about services, but I think it's important to know that between services and consumables, we actually crossed over the 30% connect rate for the first time in the fourth quarter. So we've been talking about the importance of connect rates going forward. And on the services side, which is where your question is centered is, we've seen an acceleration of growth. We hinted at some of the places we're doing really well at the big enterprise level. But Padraig, why don't you add some your thoughts on here? Because this is your business and a lot of good things happening here." }, { "speaker": "Padraig McDonnell", "text": "Yes. I think, Mike, as you said, touch rates continue to be very strong, and it's much more than a break/fix business and we see our contract rates actually growing at double digits, which is incredibly sticky with customers. And all key offering categories right from enterprise down to some of the preventive maintenance services we do are all very, very strong. We also see that, of course, we have a large installed base and being able to provide different solutions and services for that have been really great. I will close by saying that we had some very big wins in the enterprise service business, and that's where we really look about productivity of labs and how we help customers with their outcomes, and we're seeing that increase as we go through the quarter and through the year." }, { "speaker": "Joshua Waldman", "text": "Then Bob or Mike, curious to get your updated thoughts on supply chain and what you're seeing from a component availability and cost perspective entering '23? And I guess, whether or not your guide assumes improvements in either of these or maybe if supply chain improvement could represent upside to the guide?" }, { "speaker": "Robert McMahon", "text": "Yes. I would say we have seen in the second half of this year, incremental improvements as we went through Q3 and Q4 that helped us allow us to increase our revenue here in Q4. I would expect that incremental improvement to continue into next year. But it's by no means back to kind of normal I think if it happens to improve, I do think that, that would be a good thing for us. And -- but we're not -- we're assuming kind of the same level of improvement that we've seen in the back half of this year moving into FY '23. I do think that some of the costs have come down but there we're still having to purchase things in the aftermarket to be able to ensure supply and deliver to customers." }, { "speaker": "Mike McMullen", "text": "Yes, to Josh's question, if we get to a point where we don't have to go into that aspect of the market, that would be upside for us." }, { "speaker": "Robert McMahon", "text": "That's right." }, { "speaker": "Operator", "text": "We'll go next now to Dan Leonard of Credit Suisse." }, { "speaker": "Dan Leonard", "text": "Mike, I have a follow-up on Europe. So when you're framing the possibilities for 2023, I hear you on the conservatism for the chemical industry. But what about other end markets? Does the macro uncertainty in Europe bleed into pharma or aca, gov or anywhere else?" }, { "speaker": "Mike McMullen", "text": "We think there's an element that will also be in pharma as well. So you're right. I was focusing specifically on the Chemical segment of Europe, but that's also part of the storyboard as well. You can manage large pharma accounts who are dealing with increased costs, trying to figure out what they want to do in 2023. So that's a watch area for us as well. But I will say, some of the other secular drivers that we talked about earlier, such as investments in renewable energy, there's a big push to make hydrogen more of a source of energy. So this plays right in the sweet spot of Agilent. So -- but we are cautious about the large accounts in Europe and what they may do in '23 in those two end markets." }, { "speaker": "Dan Leonard", "text": "And then I have an unrelated follow-up. On the NASD business, can you be specific about what is your outlook for that business in 2023? And what might be your opportunity to expand the service offerings in that business beyond your traditional product offering?" }, { "speaker": "Mike McMullen", "text": "Yes. Sam you know might obviously take a lead on that just to kind of -- and then have Bob jump in here as well. I mean we're assuming that our new capacity for Train B comes online, mid-year calendar year, it starts and will reach I believe full capacity by the end of the year. And we do think there's further expansion opportunities both in terms of what we do already, but broadening the portfolio. But Bob, maybe you want to walk through some of the thoughts on the financial expectations." }, { "speaker": "Robert McMahon", "text": "Yes. I mean we ended this year touching on roughly $300 million for that business, and we've talked about this Train B being $150 million plus of capacity when Mike says we're going to be at capacity at that run rate by the end of the fiscal year. And you could imagine that probably less than half of that is a ramp-up, but we would expect a strong growth here. And I would say Train B is primarily siRNA, although we do have early -- some growing business in CRISPR Therapeutics out of our existing facilities, and we expect that to continue to grow as well." }, { "speaker": "Operator", "text": "We go next now to Dan Arias of Stifel." }, { "speaker": "Daniel Arias", "text": "Hey, Mike, just a question on GC/MS. 30% growth for the quarter is pretty robust. For '23, would you expect a little bit of a decoupling from LC/MS there just given that it feels like there's more -- a little bit more cyclicality on the GC side, maybe a little bit more pharma on the LC side? Or do you think those portfolios track similarly again?" }, { "speaker": "Mike McMullen", "text": "I think we've always felt -- and Jacob, feel free to jump in this. We've always felt that long term, we expected LC/MS to have higher growth rates than GC/MS. And I think we'd expect that to play out in the long run. I'm not sure about '23 because GC/MS plays really well in the advanced materials space. We've been talking about some of the secular drivers there. But also, as Jacob mentioned, PFAS is an area, too. So I don't know if we're going to see that much divergence in '23, but it's a great question. I haven't thought about it." }, { "speaker": "Jacob Thaysen", "text": "Yes. Thanks, Mike. And we came out with some very nice innovations here at the ASMS on the GC/MS side, including the way that you can use hydrogen to measure or to as your carrier gas and set up the helium, which has been really nice pickup in the GC/MS space. And as Mike also alluded to, I think we are seeing a lot of opportunity in the Advanced Materials side, particularly in the lithium battery side, where we both see our spectroscopy portfolio combined with the GC, GC/MS is completely or really addressing some of the challenges there. And actually on top of that, you have LC that is a part of that equation as you also want to look at electrolytes in batteries. So I think we continue to see a lot of opportunities in Advanced Materials, but particularly for the GC, GC/MS side." }, { "speaker": "Daniel Arias", "text": "Yes. Okay. Interesting. And then, Bob, maybe just thinking about investments next year in the context of the growth that you're seeing this year, are there areas where you might add resources beyond what might just be expected given the uncertainty that's floating around? Seems like there's an opportunity to sort of improve your positioning at a time of strength, not sure if you're seeing it that way, though." }, { "speaker": "Robert McMahon", "text": "Yes. No, we agree. And I would say it's -- we've been doing that over the course of this last year. And I would say one of the areas, obviously, we're building out the capacity in NASD that we've talked about extensively. But we're also significantly investing in places like digital and software. And we think that that's an area of increasing strength for us and would look to continue to invest incrementally there as we go into FY '23." }, { "speaker": "Operator", "text": "Ladies and gentlemen, we have no further questions this afternoon. Mr. Ahuja, I'll turn things back to you for closing comments." }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Bo, and thanks, everyone, for joining. With that, we would like to wrap up the call for today. Have a great rest of the day." }, { "speaker": "Operator", "text": "Thank you. Ladies and gentlemen, that concludes today's call. Thank you for joining. You may now disconnect." } ]	Agilent Technologies, Inc.	154,924
A	3	2,022	2022-08-16 16:30:00	Operator: Good afternoon. Thank you for attending today’s Agilent Technologies Q3 ‘22 Earnings Call. My name is Tina, and I will be your moderator for today’s call. [Operator Instructions] I would now like to pass the conference over to our host, Parmeet Ahuja with Agilent. Please go ahead. Parmeet Ahuja: Thank you, Hannah and welcome everyone to Agilent’s conference call for the third quarter of fiscal year 2022. With me are Mike McMullen, Agilent President and CEO; and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A after Mike and Bob’s comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our third quarter financial results, investor presentation and information to supplement today’s discussion along with a recording of this webcast are available on our website at www.investor.agilent.com. Today’s comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year, and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of July 31. As previously announced, beginning in the first quarter of fiscal 2022, we implemented certain changes to our segment reporting structure. We have recast our historical segment information to reflect these changes. These changes have no impact on our company’s consolidated financial statements. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company’s recent SEC filings for a more complete picture of our risks and other factors. And now, I’d like to turn the call over to Mike. Mike McMullen: Thanks, Parmeet and thanks everyone for joining our call today. In the third quarter, we once again demonstrated the strength of our diversified business and the unstoppable One Agilent team. We delivered an excellent quarter, significantly exceeding our revenue and earnings expectations. Revenues of $1.72 billion are up 13% core. This is on top of 21% core growth in Q3 of 2021. Third quarter operating margin of 27.5%. Operating margins continue to expand and are up 150 basis points from last year. Earnings per share of $1.34, up 22%. Our strong results in Q3, coupled with orders continuing to outpace revenues, highlight the ongoing strength of our diversified business. The momentum in our business continues, and we once again raised our outlook for the year. Let’s take a closer look at our Q3 results. From an end-market perspective, our results were once again led by strength in our two largest markets, pharma and chemical energy. Our largest market, pharma, grew 16% versus 27% a year ago. Within pharma, both the biopharma and small molecule segments grew double-digits. The momentum in our C&E market segment continues with Q3 growth of 22%. This is on top of 23% growth a year ago. The C&E market is being fueled by demand in chemicals, along with strong secular demand and ongoing investment within the advanced materials space. We are also very pleased to achieve double-digit growth in the food and environmental and forensic markets with both markets growing 11%. In our last call, I shared our belief that the business impact of the Shanghai COVID-19 lockdown would be transitory. I also expressed that we remain confident about the ongoing strength of our business in China. In Q3, the China delivered 29% growth. These stellar results were driven by continued strong end-market demand, coupled with the faster-than-expected recovery of production and shipment activity following the end of the Shanghai area lockdown. We are also very pleased with its results, which highlights the customer focus, drive and outstanding execution of the Agilent China team. Strength in Americas continued as we posted another quarter of double-digit growth on top of 32% growth last year. Our European business grew 6% against 23% last year despite a 2 point headwind for the curtailment of our operations in Russia. In terms of business unit performance, the Life Science and Applied [Technical Difficulty] revenues of $1.02 billion, up 18% on a core basis. Growth was broad-based but continued strong demand for our LC and LC/MS offerings, where we posted high 20s growth. Our spectroscopy business grew low 30s driven by strength in the advanced materials market. Chemistries and consumables, cell analysis and our GC business each delivered double-digit growth in the quarter. LSAG’s end-market growth is broad-based with particular strength in the pharma and chemical and energy markets. Our pharma results were driven by strength in the biopharma segment, which grew more than 20%. We had an excellent showing at the recent ASMS conference, introducing several important LC/MS and GC/MS instruments and biopharma workflow solutions. These innovative and intelligent LC/MS and GC/MS systems have been designed to make the lives of our customers easier. To build an instrument intelligence and a higher level instrument diagnostics helped maximize system uptime and improve lab productivity by allowing operators to focus on their analysis rather than their instruments. In addition, we introduced an industry-first hydro in net source for GC single-quad and GC Triple-Quad instruments, enabling customers to seamlessly migrate from helium as a supplier gas to lower-cost hydrogen. And rounding out the list of new products announced at ASMS, we introduced the mass Hunter BioConfirm 12.0 software, an integrated compliant workflow, targeted at the fast growing oligo-based therapy development market. These new products have already been well received by customers and represent the latest addition to Agilent history of leadership in mass spectrometry. Our LSAG business also won some important awards during the quarter, including the 6560c i-Mobility LCT system, winning the Scientist Choice Award for Best New Spectroscopy product. Earlier this month, we also strengthened and broadened our advanced materials and biopharma portfolio with the acquisition of PSS, Polymer Standard Service, a leader in polymer characterization. We are extremely pleased to welcome the PSS team and their technology to the Agilent family. The Agilent CrossLab Group posted services revenue of $359 million. This is up 10% core. We grew 10% core even as lab activity continues to ramp in China. Growth in services was again broad-based across services contracts, preventive maintenance, compliance, education and informatic enterprise services. Strong instrument placements and increased connect rates continue to be a driver for our service business as customers continue to see value in our ACG offerings. Another critical important factor on our results is the scale and execution capability of Agilent’s world-class global service delivery organization in service of customers to meet their needs. Agilent was seen as the trusted company to work with among our global customers. The Diagnostic and Genomics Group delivered revenue of $340 million, up 3% core. This is diverse compare a 37% growth last year. The solid results in our clinical cancer testing and NGS businesses were partially offset by COVID testing headwinds in a Q PCR portfolio. In addition, the DGG business in China continues to ramp from the COVID-related shutdowns there. NASD revenues were up modestly in line with expectations. As we noted last quarter, Q3 included the impact of a planned shutdown, our oligo manufacturing line in Frederick, Colorado. The shutdown of Frederick was for both routine maintenance and development of key elements of our Train B. Our new manufacturing line have increased our capacity $150 million plus when fully ramped. While we continue to make good progress in the construction of Train B, we have seen some supply chain-related delays and are now targeted a midyear 2023 go-live, a slight delay. We see continued strong demand for oligo-based therapies as the number of approved drugs continues to increase and the pipeline of drugs in development are targeting disease states with larger patient populations. We are more confident than ever in the long-term trajectory of the market and our business. In addition to these highlights, I’d like to also point the recent release of Agilent’s 2021 ESG report. While we’ve always published our progress in sustainability and addressing societal needs, this year, we’ve taken our approach to the next level. We address these issues a new format that for the first time that looks specifically at our progress in the areas of environmental, social and governance issues. We hope you have a chance to review our progress in ESG by checking out the report on the Agilent website, learning more about how we’re executing our mission to advance the quality of life. Agilent’s Q3 results again point to the strength of our diversified business and the outstanding execution ability of the Agilent team. We continue to bring innovative, differentiated new offerings in the marketplace. Acceleration in digital orders growth continues as well as new customer acquisition. In addition, as we started 2022, we undertook a bold move to create One Agilent commercial organization to further drive customer focus and growth. The strength in our portfolio and the continued strong execution by our One Agilent commercial organization make a powerful combination, and you see it in the results we’re delivering. Customer satisfaction hit another all-time high this quarter. We continue to outgrow the market. As a result of our strong Q3 performance and continued momentum, we’re once again raising our full year revenue and EPS guidance. Bob will share more of the specifics. It’s an exciting time at Agilent with the best yet to come. Thank you for being on the call today. And now I will hand the call off to Bob. Bob? Bob McMahon: Thanks Mike and good afternoon everyone. In my remarks today, I will provide some additional details on revenue in the quarter and take you through the income statement and other key financial metrics. I will then finish up with our guidance for the fourth quarter and fiscal year. Unless otherwise noted, my remarks will focus on non-GAAP results. We are extremely pleased with our Q3 performance. Results were above expectations, and we expect that strength to continue in the fourth quarter. Q3 revenues were $1.72 billion, up 8.4% on a reported basis and up 13.2% core. FX was a 4 point headwind to growth or $76 million. Pricing for the quarter contributed over 3 points of growth year-on-year and improved sequentially. The performance was broad-based as all end markets and regions grew during the quarter. As we mentioned last quarter, the COVID-related lockdowns in China deferred an estimated $50 million to $55 million in revenue from Q2, and we forecasted that revenue would be recovered during the rest of the calendar year. Our team in China did a fantastic job ramping production and shipments faster than expected following the shutdowns. We estimate over half of that deferred total was delivered in Q3, exceeding our expectations. Given the strong performance, we now expect the remainder will be delivered in Q4, which is an acceleration from our thinking from last quarter. The acceleration of the COVID-related shutdown recovery in China contributed to an already strong Q3 for the company. For perspective, we estimate the total business grew double digits, excluding the accelerated recovery. As Mike mentioned, earnings per share of $1.34 were up 22% from a year ago, representing strong incremental flow-through of the better-than-expected revenue growth. This performance is against our most difficult comparison of the year as EPS grew 41% in Q3 of last year. Now let me dive a little deeper into the end markets. Our largest market, pharma, was up 16%, exceeding our expectations. Biopharma grew 18% and small molecule was up 14%. Biopharma is a focus area for us and now represents 38% of our overall pharma business. We expect that ratio to continue to climb over time. In addition, all 3 business groups grew double digits in the pharma segment. And our LC portfolio continues to perform very well, growing 25% in this important market for us. Chemical and energy continued to show strength, growing 22% during the quarter, driven by the chemicals and advanced materials segment of this market. We saw strength in plastics and packaging for chemicals and ongoing demand in advanced materials coming from the markets for semiconductors and batteries. In the food segment, we achieved growth of 11% on top of 12% growth a year ago. Strength in the food market was led by the Americas and China. Our environmental and forensics market also grew 11% during the quarter, driven by the Americas and China. In the Americas, we saw increased funding to support PFAS testing, while China experienced faster-than-expected recovery post the Shanghai shutdowns for GC and GC/MS. The academia and government market grew 5% on top of a 12% comparison last year, in line with expectations. And rounding out the review of our end markets, our business in the diagnostics and clinical market grew 2% against a very strong 28% compare versus last year. While not material at the Agilent level, this market did experience some headwinds associated with COVID-related revenues being lower than last year. Excluding this, the growth would have been mid-single digits in this quarter. On a geographic basis, China led the way with 29% growth driven by underlying demand and a faster-than-expected recovery following the COVID-related lockdowns. And looking forward, demand in China continues to be very strong. The Americas grew 11%, another strong showing, and Europe grew 6%, which exceeded expectations. Now turning to the rest of the P&L. Our team continues to execute at a very high level. Third quarter gross margin was 56.4%, up 50 basis points from a year ago as pricing actions, volume and productivity helped to offset inflationary pressures tied to ongoing supply chain challenges and higher logistics costs. Operating expense leverage, driven by the strong top line and continued attention to cost management, helped to deliver very healthy margin improvements. Our operating margin was 27.5%, up 150 basis points from last year. Below the line, our tax rate was 14% for the quarter as expected, and we had 299 million diluted shares outstanding. Looking at cash flow and our balance sheet. We generated operating cash flow of $326 million in the quarter while investing $82 million in capital expenditures during Q3, driven by our NASD expansion. During the quarter, we also repurchased $323 million worth of shares. We paid out $62 million in dividends in Q3, returning a combined total of $385 million to shareholders in the quarter. Year-to-date, we have purchased over $1 billion of shares. Given the ongoing strength of the business, we believe this is a very good investment. Our balance sheet continues to remain healthy with a net leverage ratio of 1. Now let’s move to our outlook for the full year and the fourth quarter. We now expect revenues for the full year to be in the range of $6.75 billion to $6.775 billion. This takes into account our Q3 results and an improved outlook in Q4, partially offset by an additional $40 million headwind associated with the strengthening of the dollar. This represents core revenue growth of between 9.9% and 10.3%. We are also raising our EPS guidance for the year to a range of $5.06 to $5.08, representing 17% growth year-on-year. This translates to Q4 revenue in the range of $1.75 billion to $1.775 billion. Core growth is expected to be in the range of 10.3% to 11.8%, while exchange rates will be a 5-point headwind, and M&A will contribute 0.1 points. In closing out our Q4 guidance, non-GAAP EPS is expected to be in the range of $1.38 to $1.40, up 14% to 16% versus the prior year. This is based on a 14% tax rate and 299 million diluted shares outstanding. The Agilent team once again performed extremely well in Q3, delivering strong results, driving excellent execution and building a strong foundation for the future. Our diversified business and most importantly, our team have put us in an excellent position to again deliver strong results in Q4. And now back to Parmeet, as we take your questions. Parmeet? Parmeet Ahuja: Thanks Bob. Hannah, if you could please provide instructions for the Q&A now? Operator: [Operator Instructions] The first question is from the line of Matt Sykes with Goldman Sachs. Please proceed. Matt Sykes: Hey, good afternoon, Mike and Bob. Congrats on the quarter. Thanks for taking the questions. Mike McMullen: Good afternoon, Matt. Matt Sykes: Maybe just starting on LSAG, where you had a really good quarter, just interested to know, one, what drove the operating margin expansion in the quarter relative to your expectations last year? And then specifically, I know it was broad-based strength across instrument categories, but was there one or two areas that really surprised you to the upside where you feel is either underappreciated or could see continued momentum in the back half of the calendar year? Mike McMullen: Yes. So I will take the first part of that and we will jump in and have Bob and Jacob add their thoughts here as well. So, I think relative to the strength and why the operating margin was so high is one is, I think we have been – we rightly benefited from the leverage impact of having those higher-than-expected revenues. But more importantly, we have been working on the pricing side and really ensuring that we are receiving the value for our offerings. And Bob, I think we are well over 3 points of price appreciation overall for the portfolio in LSAG, I believe. Bob McMahon: That’s correct. That’s correct. Mike McMullen: And we are – as you may have picked up in my script, it was across the board a great quarter for LSAG and across all product categories. But Jacob, I think a couple really stood out for you, didn’t they? Jacob Thaysen: Yes. I think, as we know, we continue to do really well in the LC/MS space, but this quarter is really a spectroscopy that was standing out. We have – especially in our atomic spectroscopy field we have really seen a lot of momentum based, of course, on the dynamics in the markets, but also the innovation that has been created over the past years. And I think we really see the impact of that these days. Mike McMullen: Yes. I think it was a real race to see who had the highest growth, right, spectroscopy or LC/MS. They both did extremely well. Matt Sykes: Great. And then maybe just as a follow-up, I know Europe – yes, I just say for a follow-up. Can you hear me? Mike McMullen: Yes, yes, yes. Matt Sykes: Yes, sorry. Just for a follow-up on Europe, 6% growth. I think getting a lot of questions on just the spend environment in that region. What are you seeing there? And are there any kind of concerns you might have in terms of demand either from the currency fluctuations or just overall demand in certain end-markets within Europe? Mike McMullen: Yes. Sure, Matt. So we posted a 6% growth rate – core growth in the third quarter, albeit there was actually 2 points of headwind for the containment of our Russian operations. So really it was high single-digit, 8%, on a restated basis. And Europe clearly is a watch area for us, but we haven’t seen any significant signals of movement to the downside. Bob McMahon: Yes. I think, Matt, to build on what Mike is saying, I think in particular we continue to see very strong growth in our pharma business and that really is a global phenomenon. And – but we also saw very nice growth in our chemical and energy businesses as well. And so as Mike mentioned, it is a watch area, but the demand – from what we are seeing in the health of the order funnel continues to be there. Matt Sykes: Great. Thanks very much. Operator: Thank you. The next question is from the line of Brandon Couillard with Jefferies. Please proceed. Brandon Couillard: Hey, thanks. Good afternoon. Mike, could you elaborate just on the core order growth that you saw in the third quarter? And given the strength of order momentum over the last several periods, how does that inform kind of your initial thoughts on ‘23? I mean, should we still think about 5% to 7% still being relevant? And then Bob, should we expect normal 30% to 40% incrementals next year, any headwinds to consider, maybe the new ASP line? Mike McMullen: Brandon, we are probably not ready to talk about ‘23, but what I’ll leave you with is a couple of thoughts here, which is very clearly the business has momentum and/or even though we had the highest revenue quarter ever for Agilent in this recent third quarter, we still build backlog both globally and also in China. So, our orders that exceeded our revenues in those. So, it sets us up nicely, I think for ‘23, but we’ll get to ‘23 guide when we get there. Bob McMahon: Yes. And I think, Brandon, on your core incrementals, I mean, I think that if you look at historically, that’s where we have been. Obviously, we do have some startup costs in ‘23 for NASD and we will spell those out when we get to the numbers. But I don’t think that there is going to be anything fundamentally different on an incremental basis going forward. Brandon Couillard: Okay. That’s helpful. And then on the NASD Train B line, Mike, you said it was pushed out a little bit in terms of the launch timeline. Is that like 1 or 2 months? I thought the plan was already mid next year. And could you elaborate a little more specifically on kind of where the supply chain issues exactly what those are that are kind of pushing the delay? Mike McMullen: I think you got the right timeframe in there, which is a month or two. It’s really been sort of specialized steel that’s required. So, I actually had a chance to see it myself, where you go into a room or you are – the steel pipe fitters are working and they are getting the area ready. They can’t close things off, because they are missing one valve or something. So we have had bits and pieces that have been missing that actually caused us certain delays. I mean, the team has been all over. I think the global supply chains are pretty well publicized, but we thought it was – we thought we should in the spirit of transparency let you know we are still on track for revenue coming out of the facility in ‘23, but maybe a month or two later than you thought initially. Bob McMahon: Yes. And I think, Brandon, there is one more important piece. I think based on what we know today, we still expect to be at capacity at the exit of FY ‘23 as well in terms of the ramp up. Brandon Couillard: Great. Thank you. Operator: The next question is from the line of Vijay Kumar with Evercore ISI. Please proceed. Vijay Kumar: Hey, guys. Congrats on a really strong quarter here. Hi, Mike. Thank you. Congrats on the print. And one maybe on the guidance here, Q4 at the midpoint is 11% organic. You guys just said 15%. The comps will get easier for Q4. I am curious sequentially, when you think about it, is the change just because of the cadence of how the China deferred revenues were recognized more in 3Q versus Q4? Can you just talk about the sequential assumptions here for the 4Q guidance? Mike McMullen: Sure, Vijay. And again, we are very, very pleased with the print. So thanks for the feedback. And Bob, we didn’t use it in our script, but I think the word prudent may apply to our Q4 guide as well. Bob McMahon: That’s right. Yes. I think, Vijay, if you think about kind of the moving pieces within China, what we did was we pulled forward some of the revenue that was deferred into Q3, but we also pulled Q1 revenue into Q4. So, Q4, I would say we didn’t have a material change one way or another. We actually feel very good that we are going to realize that full $50 million to $55 million here in the fiscal year versus having it bleed a little into Q1. And as Mike said, I mean we are not out of the woods, certainly in supply chain challenges and COVID situations. And so we thought at this point in time, a double-digit core growth is very good but also prudent, as Mike said. Vijay Kumar: I love that word prudent. Maybe one on some of the moving parts for ‘23, Mike and I am not asking for a guidance, but if I look at pricing contribution, I think we started the year at 100 basis points. We are running at 300 basis points. I think that pricing should continue until it annualizes until mid of next year. You did mention orders coming in about revenues. What is the backlog conversion? Is that a 3-month or a 6-month or a 12-month visibility that you have from backlog, any impact from NASD? And sorry, on C&E very strong, but obviously, with the macro, should we perhaps be prudent for ‘23? Mike McMullen: Yes. So, great question, Vijay. So I think I’d like to – the headline here was as way Bob closed off his prepared remarks, we are building a strong foundation for the future. So, we have got – we had record revenues in Q3 yet we still build backlog. And some of that backlog obviously will carry into ‘23. And we – it’s probably a 3 to 6-month visibility for sure on the revenue coming from the backlog. And Bob, I don’t see that. And we agree with your thesis around pricing and the impact it will have on our ‘23 business as well. And Bob, maybe you want to add to... Bob McMahon: Yes. The only thing – I think you are spot on, Vijay. I would say there is not a material change right now in terms of how we are thinking about NASD. And if I think about the various pieces there, they certainly set us up for a good momentum going into FY ‘23. Now there is still some unknowns in terms of kind of the macro environment, but we are expecting to have a stronger than normal backlog. We certainly have that right now and are expecting to continue that into ‘23. And then obviously, pricing is continuing to anniversary and I would expect it to be a higher contributor to growth next year, all things being equal. Vijay Kumar: Understood. Thank you, guys. Mike McMullen: Thanks, Vijay. Operator: Thank you. The next question is from the line of Puneet Souda with SVB. Please proceed. Puneet Souda: Hi, Mike and Bob. Thanks for taking the questions. So, first one just LSAG, obviously, a very strong quarter and I mean, obviously, congrats on the quarter here. When you look at the 25% growth that you are seeing in LC overall, the order book being strong, can you maybe just characterize sort of from an end-market perspective, it seems like biopharma continues to do well. But geographically, can you just characterize – is this contribution from biopharma China in the quarter and how should we think about the sort of order book? Can you maybe characterize the order book more geographically? And do you expect this – again in line with sort of some of the other questions as sort of how should we think about this order book flow through – flowing through into 2023? Bob McMahon: Puneet, you packed in a lot in that one question. But we’ll try to address it. Sorry, Mike. Mike McMullen: I was just saying, maybe you want to take that, Bob. But I think the answer was really across the board. I mean both – I mean clearly, biopharma and pharma, our portfolio is doing really, really well there. And as I mentioned to the team the other day, we just got the most recent auto report, which shows market share movements. And as my Danish colleagues like to say, it was green as a Danish forest. Did I get that right, Jacob? So... Jacob Thaysen: That’s right. That’s right, Mike. Mike McMullen: It was across the board, but I think it’s the same story holds geographically well. So it really is a nice global story. But I think it’s more than just pharma. I know you’re getting some good C&E growth, right, for – in the advanced materials, LC/MS. We posted some really good numbers in food and the environmental market, which also are big users of LC and LC/MS. So I think it was really a broad-based story there, if I remember correctly, Jacob. Jacob Thaysen: Yes. Correct, Mike. I think we’ve really seen good performance across the board, as you’re saying, Mike. And we are also seeing that the customers are really interested in our full solutions. I think PFAS is a good example of where we see a lot of interest right now both right now, but also where we see some of the big builds that is coming through in U.S. where PFAS have a prominent exposure. So we expect to continue to see momentum in that space. Bob McMahon: I think, Puneet, just to build on what Mike and Jacob were saying, I think one of the things you’re really seeing come out in Q3 is just the strength and breadth of our portfolio. And why we haven’t talked about spectroscopy a lot in the past, it continues to be a very important part of our portfolio and solution set. And I think it fits nicely across multiple end markets. And the LC and LC/MS get a lot of headlines, but we’re more than just an LC and LC/MS business. Puneet Souda: Got it. Thanks for that. And then just – I’ll keep it simple for my follow-up. Polymer Standards acquisition, can you characterize sort of what’s the contribution this year? And how does that enhance your offering for columns and sort of biomolecules? And should – how should we think about that overall – acquisition overall fitting into the LSAG group? Mike McMullen: You want to take the first piece of that? Bob McMahon: Yes. Yes, I’ll – it’s not a material business. We estimate that’s less than $10 million annualized today. That’s the 0.1% that we built into our guide for Q4. But more importantly, I think strategically, I’ll let Jacob talk about the merits of the portfolio and how we think it’s going to continue to drive growth for us. Jacob Thaysen: Yes. Thanks for that. And we have a long-standing relationship with PFS, so we knew exactly their strength. And we’ve been very impressed with what they have done in the polymer business for the – for a long period of time. And particularly, our interest was intrigued when we also see polymer science going from advanced material into biopharma, where we see a lot of opportunities. And PFS have done a wonderful job using our instrumentation together with their columns and also an informatics pack they have built to really go after a segment of the market and also the expertise in the field. They have more than 500 application nodes within this field. So we can really leverage that with the strong presence we have across the globe to really accelerate that business opportunity that has been up over the past decades, really. Puneet Souda: Got it. Okay, great. Thanks, guys. Congrats again. Mike McMullen: Thank you. Appreciate it. Operator: Thank you. The next question is from the line of Rachel Vatnsdal with JPMorgan. Please proceed. Rachel Vatnsdal: Hi, thanks for taking the questions and congrats on the nice quarter. Mike McMullen: Hi, Rachel. Thank you. Rachel Vatnsdal: The first up on China – thank you, Mike. Yes. Great to hear that some of that catch-up in China was pulled forward there. And then you also pointed to double-digit growth in the region for that ex acceleration recovery. So first off, can you just walk us through specifically what drove that pull-forward on the catch-up from lockdown? And are you seeing an acceleration of demand catch up in China? And then second, how are you thinking about that longer-term growth within China because that we source of upside for the year? Mike McMullen: Great. So I’ll start, Bob, here. So I’d have to say it was an extraordinary effort of our team in China. I mean people sacrificed and worked tremendously hard. We had people coming into our factories and living at the factories. They slept and worked at the factories for the entire period of when before you couldn’t really get out beyond – back to your local community. So they did that for several weeks both in our logistics operations as well as our factories. And that allowed us to get our global GC production going as well as the import/export of our products as well. So I have to say it really was extraordinary effort of the team that made that happen. And we’re very optimistic about our ability to continue to grow well in China. In Q2, I think we talked about a greater than 20% order rate. We posted a number of 29% growth in Q3. Yes, we still built backlog in the third quarter in China. So I think we’re well positioned for the fourth quarter. And Bob, I said that probably does represent a level of upside potentially with things continuing to develop as we hope. The wildcards from my perspective are how much money could come into the segment from government stimulus. I know they’re talking about some of the things we haven’t seen any specifics. So that would be something that would be there on a positive. But again, our demand really is coming from the core private sector, commercial sector around pharma and C&E. We think those things are sustainable. Bob McMahon: Yes. Exactly, Mike. I think you mentioned Q2 kind of order growth rate, and Q3 was in that same range. And so we’re seeing very strong demand and been able to do a fantastic job of ramping up that capacity, and we expect that to continue into Q4. Rachel Vatnsdal: Great to hear. And then last one for me, just on the C&E segment. So 22% growth is quite impressive, and that growth has really continued to accelerate in recent quarters in that end market. So how should we be thinking about that longer-term outlook for C&E, especially given some of the macro dependence on that portfolio? Mike McMullen: Well, we think that the structure of this marketplace has changed over the last few years. And yes, that’s still a segment that’s tied directly to what happens to the global GDP situation. But we had – it in my comments, there’s secular demand happening here, particularly in advanced materials when there’s investments being made in battery technology, more sustainable materials, semiconductors, onshoring of production. So we think those trends are here for a number of years. I think our view is the sector has probably got a higher growth rate than we viewed it having a couple of years ago because of the secular aspect of growth in C&E. And Bob, what else might you add there? Bob McMahon: I think – as you said, I think one of the things that I think is really important, don’t take ‘22 and take – build it into your model because we don’t think that, that growth rate is going to continue. We certainly are pleased with it. But I think the other more important piece is we have a very strong right to win in the C&E business. We’re a leader in this space and feel good about our portfolio. And as Mike said, this is an area that we are seeing kind of a renewed sense in some of these areas that we do think that has many years to come in terms of investment. Mike McMullen: I’m going to use an undisputed leader in the space. Bob McMahon: I won’t disagree. Mike McMullen: Thanks for the question, Rachel. Rachel Vatnsdal: Great, thank you. Operator: Thank you. The next question is from the line of Derik De Bruin with Bank of America. Please proceed. Mike Ryskin: Great. Thanks for taking the question. This is Mike Ryskin on for Derik. I want to follow-up on your comments on price. Mike McMullen: Hi, Mike. Mike Ryskin: Hi, guys. You sort of indicated that price continues to sort of grow as you go through the year. Is that a factor of the timing of when orders are converted to revenues and when you’re recognizing those revenues? So it’s just more of a dynamic of that? Or is this an incremental price increase that you’re building in as you go through the year? And just alongside that, any comments you could take in terms of reception to price? Any pushback or any particular areas where are you able to take more versus last? Just sort of give us an update on the pricing dynamic as you go through the year. Bob McMahon: Yes. Hi, Mike, this is Bob. I’ll take that ear. It’s the former. And so when we take price, it takes some time to get through the backlog. And so we’re seeing the price realization from the orders that – the price increase that we took back in the beginning of the calendar year. And really, what we’re trying to do is cover our costs. And we’re seeing increased logistics costs and increased material costs. And so we’ve taken it across the board, but also recognizing where the costs are higher, we’ve taken those prices up higher. We haven’t really heard any pushback, I think, as evidenced by our strong order growth. And then also we look very closely at cancellations or – within our order book, and that continues to be very low. And so I think our customers understand why we’re having to raise prices because of the inflationary environment. And I think to date, we’ve been able to actually generate more price than I think we anticipated at the beginning of the year. Mike Ryskin: Okay. Great. And then a follow-up. You’ve commented on the balance sheet that you’re getting the leverage lower and lower. I’ve done a couple of deals here and there in the past couple of years with the defended to be on the much smaller side. So could you talk about your willingness to lever up a little bit to put a little bit more of that capital to work? And if so, what are the types of assets you’re looking for? Sort of are sellers willing to engage in this market? Or is the – how are things proceeding on that front – on the BD front? Thanks. Bob McMahon: Yes. I think we’ve been public about being willing to take on bigger deals than what we have had historically. I think we’re still – we have the benefit of having a very strong balance sheet. We’re going to first invest in our business. We think that that’s the greatest opportunity, but we’re always out on the lookout for M&A. And as you said – I would say the pipeline continues to be healthy. The dynamic has certainly changed in the last 9 months, particularly on the public market side, and I think there’s some good assets out there. It’s probably taken a little longer on the private market side, which is where we tend to focus our efforts. But I can tell you that we have – the beauty of our model is that we have organic growth first and M&A as kind of an adder on top of that. And so it is something that we’re continuing to look at and would be not uncomfortable levering up a little higher than where we are today for the right deal and if the economics work. Mike McMullen: Absolutely, Bob. Mike Ryskin: Is that 3x to 4x lever or... Bob McMahon: I’m not – that’s pretty rich. But I think it all depends on what the right asset and what it looks like. Mike Ryskin: Got it. Thanks. Operator: Thank you. Next question is from the line of Josh Waldman with Cleveland Research. Please proceed. Josh Waldman: Thanks for taking my questions. Just two for you guys. First, Mike, wondered if you could provide more context on the supply chain situation, how supply and cost to track versus your expectations over the last 90 days. Have you seen any relief on supply? And then it sounds like you built backlog in Q3. Curious whether your fourth quarter guide assumes any work-down in the backlog given recent order rates? Mike McMullen: Yes. So I’ll let Bob handle the second question, and I’ll start with the first one. So supply chain challenges are still out there, but our team continues to do an excellent job navigating them, getting the material that we need for our customers. We continue to have very, very low order cancellation rates is something we watch like a hawk. And I think we’re managing the price changes. So I think in the early days of things, we were kind of surprised at what things would cost on the market for chips and others, but I think we’ve now found ways to work that and then offset that with some of the pricing actions that we mentioned earlier. So I think if anything, it’s probably trending in a more positive direction, albeit is still challenging out there. Bob McMahon: Yes. And I would say – on the second question, Josh, I would say, first and foremost, demand continues to be very strong in our marketplace. And so we’re expecting order growth to continue in our fourth quarter. As you know, that typically is one of the larger quarters that we have for our sales organization and certainly for our customers as well. That being said, I would expect maybe some slight degradation in backlog just given, again, the deferral that we’re talking about within China. But don’t interpret that as us seeing anything slowing in the marketplace. Josh Waldman: Got it. And then kind of along those lines, wondered if the group has any initial thoughts on pharma budget flushing this year given the strength in orders from these accounts. Curious at this point if you’re getting any indication that maybe the strength in the order book is reflecting pull-forward or just not seeing that yet? Mike McMullen: Yes. Josh, I’m going to pass this call over to Padraig. He’s the closest to what’s going on. As you know, he heads up our one commercialization addition to running our ACG services business. So Padraig what’s your thoughts on that? Padraig McDonnell: Yes. No, I think it’s pretty steady, Mike. We’re not seeing any pull-forward at this point. And of course, the team are very focused on key end-market workflows where we have the best chance to meet the customer needs. So we’re seeing a very steady-state order rate with not much pull-forward. Josh Waldman: Got it. Appreciate it. Mike McMullen: Welcome. Operator: Thank you. Next question is from the line of Jack Meehan with Nephron Research. Please proceed. Jack Meehan: Thank you. Good afternoon. Mike McMullen: Good afternoon. Jack Meehan: I wanted to ask about the chemical and energy – good afternoon. So the chemical and energy acceleration, my first question is on the chemicals customers. So your commentary sounds pretty bullish. There has certainly been some headlines from some of the big European chemical players that have been a little bit more mixed though. So it would just be great to get your perspective on how you feel about the durability of that customer class and kind of squaring your view versus what we might be hearing from others in the market? Mike McMullen: Yes. That maybe more regionally specific to Europe, where we did see a level of growth a little bit slower than we’ve seen in the Americas and China. So I’d say that’s probably more regionally specific. And as we mentioned earlier on the call, Europe remains sort of a watch area for us because of, obviously, obvious challenges in that region right now. But I think we think it’s pretty durable right now. I mean, I think – remember, the chemical piece is going into some of these supply chains as fabs go up and other things. So it’s fueling some of the efforts in the advanced materials area. Bob, I know that you and Jacob looked at this a little more closely. I don’t know if there’s anything else you’d add to that? Bob McMahon: No. I think you’re spot on, Mike. I mean if we looked across the – all regions grew in C&E as, Mike, you were saying, but Europe was below the average. And so – but I think over time, that investment in some of these areas, we think, is ongoing demand. Jack Meehan: Great. And then it was only a week ago, the CHIPS and Science Act got signed into law. I’m not sure if you have any early perspectives as to what this might mean for Agilent. If you could call out kind of the businesses that you think could benefit from some of the funding that’s going in? And can you just maybe call out what did the advanced materials business grow this quarter? Thanks. Mike McMullen: Yes. So I’m going to – I’ll let Bob handle the second question. He’s got more numbers on the pages than I do in front of him. But relative to the recent enactment by Congress, we see some real upside for us. And we actually were just talking about that before this call. I think the big debate is when is it actually going to release. But Jacob mentioned earlier PFAS. There’s – what we can see there’s some funding in there for PFAS, which will help our LC/MS and GC/MS business and then tied to the chips, both the upstream and downstream side, the semiconductor fabs that play right into spectroscopy strength that that we mentioned as well. And Jacob, perhaps you want to add a few other things. Jacob Thaysen: Yes. I think, I mean, actually, even though spectroscopy and GC are the big winners in the – related to the CHIPS Act, we actually see across the board. It’s both the mass spec business, also the LC/MS that Mike was mentioning and then, of course, a lot of our consumables also. And so we see a lot of opportunities here. I think both the CHIP Act, but also the other bill, the – what’s it called, the... Mike McMullen: Inflation. Jacob Thaysen: And the Inflation Bill here, all of them are driving some of our technologies. So we see a lot of opportunities in that. Now it all comes down to timing here. Mike McMullen: Yes. Bob McMahon: And the answer to your last question, it was above 30%. Jack Meehan: Thanks. Super. Thank you, guys. Operator: Thank you. The next question is from the line of Elizabeth Garcia with UBS. Please proceed. Elizabeth Garcia: Hey, guys. Thanks so much for taking the question. Congrats. Mike McMullen: Sure, Elizabeth. No problem. Thank you very much. Elizabeth Garcia: Yes. Great. So maybe I just didn’t catch it, but I know there was the planned shutdown this quarter for NASD. But just thinking about kind of how we should think about kind of close this quarter and then maybe sequentially as we head into the next quarter, in 4Q? Mike McMullen: Bob, you and Sam want to tag team on this one? Bob McMahon: Yes. So we had a planned shutdown this quarter, expect return to strong growth in Q4 for NASD. Mike McMullen: And Sam, I don’t know if you want to add some comments about what you’re seeing on the market as well? Sam Raha: Yes. Yes. Thanks, Mike, and thanks for the question. I mean, listen, it was a good quarter. We had the planned shutdown you already heard about. But I want to note that we are very pleased with the trend that we’re seeing that increasingly these very therapeutic oligos that we’re working on that the treatment modalities beyond the more rare indications are expanding into diseases for larger populations. For example, you might have seen just the recent news from Alnylam that reported favorable results on their Phase 3 study for patisiran. And this is for patients with ATTR for cardiomyopathy. And as Alnylam’s supplier for the API and patisiran, we’re of course, excited. We also think this is indicative of just generally the trend that we’re starting to see in the promise of therapeutic oligos. And our book of business remains strong as we go into the quarter and as we will go into next year. Mike McMullen: Thanks, Sam. I probably should elaborate a little more, Elizabeth, on the routine. I think it’s also important understand why we were shutting down, right? It’s both for routine maintenance but also a critical milestone in the construction of Train B. So we tied the infrastructure together. So that’s why we’re speaking with confidence about our ability to get revenue in ‘23. Elizabeth Garcia: Great. Great news. And I guess just one more for me thing on the theme of kind of biopharma. So you kind of – you’ve announced the collaboration with APC for real-time process monitoring. We also had announcement Merck around downstream PAT. It would be great to kind of get your thoughts around the space and kind of the work you’re doing here. Mike McMullen: Yes. Yes. I’ll make some high-level comments, and then maybe, Jacob, you want to provide some specific as well. So we love this space. And we’ve been putting a lot of our investments over the last several years targeted at the biopharma space. And you see it reflected now in the growth rates and actually how we’re shifting the mix of our pharma business both in the lab but also plays outside the lab. And Jacob, I know you’ve got a lot of interesting things happening there. Jacob Thaysen: Yes. Thanks for that, Mike. And we are very interesting in the bioprocessing space, especially from the unlatent perspective, where we truly believe that the – that instruments will start to move into the manufacturing. Historically, we have had in the small molecule space, the QA/QC sitting in a different lab. And now we see the opportunity to bring adline online LC and LC/MS technologies into the bioprocessing space itself or manufacturing space itself. And hence, we have decided and we have made collaborations with leaders in that space, Merck being one of them, where we’re developing, of course, based on our individual strength new solutions to address that. But we’re looking at the multiple partnerships in this space here, and we’re really bullish around that. Elizabeth Garcia: Thanks so much. Mike McMullen: Welcome. Operator: Thank you. The next question is from the line of Patrick Donnelly with Citi. Please proceed. Patrick Donnelly: Hey, guys. Thanks for taking the question. Mike McMullen: Hi, Patrick. Sure. Patrick Donnelly: Mike, maybe one for you – hey, how are you? Maybe one for you just on China specifically in terms of the linearity of the quarter. Can you just talk about – I mean it sounds like things clearly picked up as we went, obviously, on the supply side and you guys kind of got back online. Can you talk about the demand environment as well? Obviously, you guys are the only ones who have kind of a full July in the quarter. So just curious what kind of ramp you saw throughout the quarter. And then again, as we work our way through August here, I mean, it certainly seems like the order growth has been encouraging. But maybe just talk about how things trended there throughout the quarter kind of going into this quarter. Mike McMullen: Great question. Yes, sure. Happy to do so. I think it’s a great question. And I’ll pass my response into two areas: orders and revenue. So I think I would say the order intake throughout the quarter was there. It was linear, smooth, no, no big lumpiness and the fact that what we saw in the second quarter as well. So now as you know, the revenue side has been a different story because the ability to get product in and out of China as well as produced in China was affected by the COVID-19 shutdowns. And that’s where we saw maybe a slower start first few weeks of Q3, but then the team’s efforts really started paying off when we were able to get back into our facilities. So I think the ramp rate of revenue had looked at a little different profile throughout the quarter. And Bob, I don’t know if you’d add anything? Bob McMahon: Yes. No, that’s exactly right. I mean if you think about the months in our quarters, May was very light. As we talked about, we were ramping up, and I think we exited May at like 25% capacity. And then the teams really started kicking in in gear as the COVID restrictions started to ease. And July was very strong as they not only got the production up to full capacity, but then were able to not only satisfy existing demand, but also some of that deferral bring it in. Mike McMullen: And they were really focused on meeting the expectations of our customers who wanted the product. And as I mentioned earlier in my earlier comments, we had teams working a lot of overtime, working in the factories over the weekend. So really some heroics that got us back on track. Patrick Donnelly: Yes. It’s encouraging to hear. And then, Bob, maybe one for you just on the margin side. You talked about pricing a few times on the call. Can you just talk about, I guess, the flow-through to the margin side? You basically said it’s offsetting some of the increase in costs. Maybe just talk about the give and take on that front in terms of pricing increases, the cost increases and how we should think about kind of that algorithm going forward on the margin piece. Bob McMahon: Yes. I think if you looked at our 150 basis points year-on-year, it was roughly 50 basis points in gross margin and then 100 basis points of leverage on the SG&A OpEx side. And I think if you looked at that, there was some productivity. As I mentioned, price probably would have kept things flat. And then the other 50 basis points were a benefit of some productivity that the OFS team did and then the volume. That’s the thing that really – I think really helped drive a benefit in gross margin is just the amount of product that was able to be produced through the factories. And so that I think – think about pricing as covering our costs. And then if those incrementals around better-than-expected revenues drove the margin improvement on the gross margin side. What I would say is we continue to leverage the OpEx side to drive our productivity as a company overall. Patrick Donnelly: Helpful. Thank you, guys. Mike McMullen: Welcome. Operator: Thank you. The last question is from the line of Tim Daley with Wells Fargo. Please proceed. Tim Daley: Hi, everyone. Thanks for the time. Mike McMullen: Sure, Tim. Tim Daley: Quickly, wanted to touch back on NASD here. So if we’re just thinking about when we’re past the Train B build-out, things have kind of normalized a bit, you’re starting to leverage those investments and upfront costs here, what’s the clean run rate margin profile to think about in that business, I guess, initially when we get past that capacity build-out here? Mike McMullen: And Tim, that question brought a smile to Bob’s face. I’ll let him answer that. Bob McMahon: I would say very good. I’ll leave it at that. Mike McMullen: The company average, right? Bob McMahon: Yes. Yes. Tim Daley: Alright. I can work with that. And then a quick one here on capital allocation. So another strong quarter of buybacks. Just thinking about the go-forward outlook, how should we be sizing this in our heads? The $1 billion, you’ve already hit in ‘22 with a quarter left to go. Is that a good base for the out-years? Just kind of – just general thoughts on the capital allocation hierarchy as some assets are probably getting a bit cheaper and more attractive here. Bob McMahon: Yes. I mean, I think our methodology really hasn’t changed. I think what we do is invest for growth first internally, and then we look for value-accreting M&A. But if there isn’t anything imminent, we’re also not going to keep cash on the books. And if I looked at historically, we’ve generated roughly 2% of earnings per share growth kind of below the line through share repurchase. And I think that that’s probably a fair way to look at it going forward. But in terms of – to be very clear, our priorities are investing for growth internally and then M&A before we would do share repurchases. And we’re also committed to continuing to grow our dividend as well. Tim Daley: Alright. Great. That’s it from my end. Thank you. Bob McMahon: You quite welcome. Operator: There are no additional questions waiting at this time, so I will turn the call back over to Parmeet for closing remarks. Parmeet Ahuja: Thanks, Hannah, and thanks, everyone, for joining. With that, we would like to wrap up the call for today. Have a great rest of the day. Operator: That concludes today’s call. Thank you for your participation. You may now disconnect your lines.	[ { "speaker": "Operator", "text": "Good afternoon. Thank you for attending today’s Agilent Technologies Q3 ‘22 Earnings Call. My name is Tina, and I will be your moderator for today’s call. [Operator Instructions] I would now like to pass the conference over to our host, Parmeet Ahuja with Agilent. Please go ahead." }, { "speaker": "Parmeet Ahuja", "text": "Thank you, Hannah and welcome everyone to Agilent’s conference call for the third quarter of fiscal year 2022. With me are Mike McMullen, Agilent President and CEO; and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A after Mike and Bob’s comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our third quarter financial results, investor presentation and information to supplement today’s discussion along with a recording of this webcast are available on our website at www.investor.agilent.com. Today’s comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year, and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of July 31. As previously announced, beginning in the first quarter of fiscal 2022, we implemented certain changes to our segment reporting structure. We have recast our historical segment information to reflect these changes. These changes have no impact on our company’s consolidated financial statements. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company’s recent SEC filings for a more complete picture of our risks and other factors. And now, I’d like to turn the call over to Mike." }, { "speaker": "Mike McMullen", "text": "Thanks, Parmeet and thanks everyone for joining our call today. In the third quarter, we once again demonstrated the strength of our diversified business and the unstoppable One Agilent team. We delivered an excellent quarter, significantly exceeding our revenue and earnings expectations. Revenues of $1.72 billion are up 13% core. This is on top of 21% core growth in Q3 of 2021. Third quarter operating margin of 27.5%. Operating margins continue to expand and are up 150 basis points from last year. Earnings per share of $1.34, up 22%. Our strong results in Q3, coupled with orders continuing to outpace revenues, highlight the ongoing strength of our diversified business. The momentum in our business continues, and we once again raised our outlook for the year. Let’s take a closer look at our Q3 results. From an end-market perspective, our results were once again led by strength in our two largest markets, pharma and chemical energy. Our largest market, pharma, grew 16% versus 27% a year ago. Within pharma, both the biopharma and small molecule segments grew double-digits. The momentum in our C&E market segment continues with Q3 growth of 22%. This is on top of 23% growth a year ago. The C&E market is being fueled by demand in chemicals, along with strong secular demand and ongoing investment within the advanced materials space. We are also very pleased to achieve double-digit growth in the food and environmental and forensic markets with both markets growing 11%. In our last call, I shared our belief that the business impact of the Shanghai COVID-19 lockdown would be transitory. I also expressed that we remain confident about the ongoing strength of our business in China. In Q3, the China delivered 29% growth. These stellar results were driven by continued strong end-market demand, coupled with the faster-than-expected recovery of production and shipment activity following the end of the Shanghai area lockdown. We are also very pleased with its results, which highlights the customer focus, drive and outstanding execution of the Agilent China team. Strength in Americas continued as we posted another quarter of double-digit growth on top of 32% growth last year. Our European business grew 6% against 23% last year despite a 2 point headwind for the curtailment of our operations in Russia. In terms of business unit performance, the Life Science and Applied [Technical Difficulty] revenues of $1.02 billion, up 18% on a core basis. Growth was broad-based but continued strong demand for our LC and LC/MS offerings, where we posted high 20s growth. Our spectroscopy business grew low 30s driven by strength in the advanced materials market. Chemistries and consumables, cell analysis and our GC business each delivered double-digit growth in the quarter. LSAG’s end-market growth is broad-based with particular strength in the pharma and chemical and energy markets. Our pharma results were driven by strength in the biopharma segment, which grew more than 20%. We had an excellent showing at the recent ASMS conference, introducing several important LC/MS and GC/MS instruments and biopharma workflow solutions. These innovative and intelligent LC/MS and GC/MS systems have been designed to make the lives of our customers easier. To build an instrument intelligence and a higher level instrument diagnostics helped maximize system uptime and improve lab productivity by allowing operators to focus on their analysis rather than their instruments. In addition, we introduced an industry-first hydro in net source for GC single-quad and GC Triple-Quad instruments, enabling customers to seamlessly migrate from helium as a supplier gas to lower-cost hydrogen. And rounding out the list of new products announced at ASMS, we introduced the mass Hunter BioConfirm 12.0 software, an integrated compliant workflow, targeted at the fast growing oligo-based therapy development market. These new products have already been well received by customers and represent the latest addition to Agilent history of leadership in mass spectrometry. Our LSAG business also won some important awards during the quarter, including the 6560c i-Mobility LCT system, winning the Scientist Choice Award for Best New Spectroscopy product. Earlier this month, we also strengthened and broadened our advanced materials and biopharma portfolio with the acquisition of PSS, Polymer Standard Service, a leader in polymer characterization. We are extremely pleased to welcome the PSS team and their technology to the Agilent family. The Agilent CrossLab Group posted services revenue of $359 million. This is up 10% core. We grew 10% core even as lab activity continues to ramp in China. Growth in services was again broad-based across services contracts, preventive maintenance, compliance, education and informatic enterprise services. Strong instrument placements and increased connect rates continue to be a driver for our service business as customers continue to see value in our ACG offerings. Another critical important factor on our results is the scale and execution capability of Agilent’s world-class global service delivery organization in service of customers to meet their needs. Agilent was seen as the trusted company to work with among our global customers. The Diagnostic and Genomics Group delivered revenue of $340 million, up 3% core. This is diverse compare a 37% growth last year. The solid results in our clinical cancer testing and NGS businesses were partially offset by COVID testing headwinds in a Q PCR portfolio. In addition, the DGG business in China continues to ramp from the COVID-related shutdowns there. NASD revenues were up modestly in line with expectations. As we noted last quarter, Q3 included the impact of a planned shutdown, our oligo manufacturing line in Frederick, Colorado. The shutdown of Frederick was for both routine maintenance and development of key elements of our Train B. Our new manufacturing line have increased our capacity $150 million plus when fully ramped. While we continue to make good progress in the construction of Train B, we have seen some supply chain-related delays and are now targeted a midyear 2023 go-live, a slight delay. We see continued strong demand for oligo-based therapies as the number of approved drugs continues to increase and the pipeline of drugs in development are targeting disease states with larger patient populations. We are more confident than ever in the long-term trajectory of the market and our business. In addition to these highlights, I’d like to also point the recent release of Agilent’s 2021 ESG report. While we’ve always published our progress in sustainability and addressing societal needs, this year, we’ve taken our approach to the next level. We address these issues a new format that for the first time that looks specifically at our progress in the areas of environmental, social and governance issues. We hope you have a chance to review our progress in ESG by checking out the report on the Agilent website, learning more about how we’re executing our mission to advance the quality of life. Agilent’s Q3 results again point to the strength of our diversified business and the outstanding execution ability of the Agilent team. We continue to bring innovative, differentiated new offerings in the marketplace. Acceleration in digital orders growth continues as well as new customer acquisition. In addition, as we started 2022, we undertook a bold move to create One Agilent commercial organization to further drive customer focus and growth. The strength in our portfolio and the continued strong execution by our One Agilent commercial organization make a powerful combination, and you see it in the results we’re delivering. Customer satisfaction hit another all-time high this quarter. We continue to outgrow the market. As a result of our strong Q3 performance and continued momentum, we’re once again raising our full year revenue and EPS guidance. Bob will share more of the specifics. It’s an exciting time at Agilent with the best yet to come. Thank you for being on the call today. And now I will hand the call off to Bob. Bob?" }, { "speaker": "Bob McMahon", "text": "Thanks Mike and good afternoon everyone. In my remarks today, I will provide some additional details on revenue in the quarter and take you through the income statement and other key financial metrics. I will then finish up with our guidance for the fourth quarter and fiscal year. Unless otherwise noted, my remarks will focus on non-GAAP results. We are extremely pleased with our Q3 performance. Results were above expectations, and we expect that strength to continue in the fourth quarter. Q3 revenues were $1.72 billion, up 8.4% on a reported basis and up 13.2% core. FX was a 4 point headwind to growth or $76 million. Pricing for the quarter contributed over 3 points of growth year-on-year and improved sequentially. The performance was broad-based as all end markets and regions grew during the quarter. As we mentioned last quarter, the COVID-related lockdowns in China deferred an estimated $50 million to $55 million in revenue from Q2, and we forecasted that revenue would be recovered during the rest of the calendar year. Our team in China did a fantastic job ramping production and shipments faster than expected following the shutdowns. We estimate over half of that deferred total was delivered in Q3, exceeding our expectations. Given the strong performance, we now expect the remainder will be delivered in Q4, which is an acceleration from our thinking from last quarter. The acceleration of the COVID-related shutdown recovery in China contributed to an already strong Q3 for the company. For perspective, we estimate the total business grew double digits, excluding the accelerated recovery. As Mike mentioned, earnings per share of $1.34 were up 22% from a year ago, representing strong incremental flow-through of the better-than-expected revenue growth. This performance is against our most difficult comparison of the year as EPS grew 41% in Q3 of last year. Now let me dive a little deeper into the end markets. Our largest market, pharma, was up 16%, exceeding our expectations. Biopharma grew 18% and small molecule was up 14%. Biopharma is a focus area for us and now represents 38% of our overall pharma business. We expect that ratio to continue to climb over time. In addition, all 3 business groups grew double digits in the pharma segment. And our LC portfolio continues to perform very well, growing 25% in this important market for us. Chemical and energy continued to show strength, growing 22% during the quarter, driven by the chemicals and advanced materials segment of this market. We saw strength in plastics and packaging for chemicals and ongoing demand in advanced materials coming from the markets for semiconductors and batteries. In the food segment, we achieved growth of 11% on top of 12% growth a year ago. Strength in the food market was led by the Americas and China. Our environmental and forensics market also grew 11% during the quarter, driven by the Americas and China. In the Americas, we saw increased funding to support PFAS testing, while China experienced faster-than-expected recovery post the Shanghai shutdowns for GC and GC/MS. The academia and government market grew 5% on top of a 12% comparison last year, in line with expectations. And rounding out the review of our end markets, our business in the diagnostics and clinical market grew 2% against a very strong 28% compare versus last year. While not material at the Agilent level, this market did experience some headwinds associated with COVID-related revenues being lower than last year. Excluding this, the growth would have been mid-single digits in this quarter. On a geographic basis, China led the way with 29% growth driven by underlying demand and a faster-than-expected recovery following the COVID-related lockdowns. And looking forward, demand in China continues to be very strong. The Americas grew 11%, another strong showing, and Europe grew 6%, which exceeded expectations. Now turning to the rest of the P&L. Our team continues to execute at a very high level. Third quarter gross margin was 56.4%, up 50 basis points from a year ago as pricing actions, volume and productivity helped to offset inflationary pressures tied to ongoing supply chain challenges and higher logistics costs. Operating expense leverage, driven by the strong top line and continued attention to cost management, helped to deliver very healthy margin improvements. Our operating margin was 27.5%, up 150 basis points from last year. Below the line, our tax rate was 14% for the quarter as expected, and we had 299 million diluted shares outstanding. Looking at cash flow and our balance sheet. We generated operating cash flow of $326 million in the quarter while investing $82 million in capital expenditures during Q3, driven by our NASD expansion. During the quarter, we also repurchased $323 million worth of shares. We paid out $62 million in dividends in Q3, returning a combined total of $385 million to shareholders in the quarter. Year-to-date, we have purchased over $1 billion of shares. Given the ongoing strength of the business, we believe this is a very good investment. Our balance sheet continues to remain healthy with a net leverage ratio of 1. Now let’s move to our outlook for the full year and the fourth quarter. We now expect revenues for the full year to be in the range of $6.75 billion to $6.775 billion. This takes into account our Q3 results and an improved outlook in Q4, partially offset by an additional $40 million headwind associated with the strengthening of the dollar. This represents core revenue growth of between 9.9% and 10.3%. We are also raising our EPS guidance for the year to a range of $5.06 to $5.08, representing 17% growth year-on-year. This translates to Q4 revenue in the range of $1.75 billion to $1.775 billion. Core growth is expected to be in the range of 10.3% to 11.8%, while exchange rates will be a 5-point headwind, and M&A will contribute 0.1 points. In closing out our Q4 guidance, non-GAAP EPS is expected to be in the range of $1.38 to $1.40, up 14% to 16% versus the prior year. This is based on a 14% tax rate and 299 million diluted shares outstanding. The Agilent team once again performed extremely well in Q3, delivering strong results, driving excellent execution and building a strong foundation for the future. Our diversified business and most importantly, our team have put us in an excellent position to again deliver strong results in Q4. And now back to Parmeet, as we take your questions. Parmeet?" }, { "speaker": "Parmeet Ahuja", "text": "Thanks Bob. Hannah, if you could please provide instructions for the Q&A now?" }, { "speaker": "Operator", "text": "[Operator Instructions] The first question is from the line of Matt Sykes with Goldman Sachs. Please proceed." }, { "speaker": "Matt Sykes", "text": "Hey, good afternoon, Mike and Bob. Congrats on the quarter. Thanks for taking the questions." }, { "speaker": "Mike McMullen", "text": "Good afternoon, Matt." }, { "speaker": "Matt Sykes", "text": "Maybe just starting on LSAG, where you had a really good quarter, just interested to know, one, what drove the operating margin expansion in the quarter relative to your expectations last year? And then specifically, I know it was broad-based strength across instrument categories, but was there one or two areas that really surprised you to the upside where you feel is either underappreciated or could see continued momentum in the back half of the calendar year?" }, { "speaker": "Mike McMullen", "text": "Yes. So I will take the first part of that and we will jump in and have Bob and Jacob add their thoughts here as well. So, I think relative to the strength and why the operating margin was so high is one is, I think we have been – we rightly benefited from the leverage impact of having those higher-than-expected revenues. But more importantly, we have been working on the pricing side and really ensuring that we are receiving the value for our offerings. And Bob, I think we are well over 3 points of price appreciation overall for the portfolio in LSAG, I believe." }, { "speaker": "Bob McMahon", "text": "That’s correct. That’s correct." }, { "speaker": "Mike McMullen", "text": "And we are – as you may have picked up in my script, it was across the board a great quarter for LSAG and across all product categories. But Jacob, I think a couple really stood out for you, didn’t they?" }, { "speaker": "Jacob Thaysen", "text": "Yes. I think, as we know, we continue to do really well in the LC/MS space, but this quarter is really a spectroscopy that was standing out. We have – especially in our atomic spectroscopy field we have really seen a lot of momentum based, of course, on the dynamics in the markets, but also the innovation that has been created over the past years. And I think we really see the impact of that these days." }, { "speaker": "Mike McMullen", "text": "Yes. I think it was a real race to see who had the highest growth, right, spectroscopy or LC/MS. They both did extremely well." }, { "speaker": "Matt Sykes", "text": "Great. And then maybe just as a follow-up, I know Europe – yes, I just say for a follow-up. Can you hear me?" }, { "speaker": "Mike McMullen", "text": "Yes, yes, yes." }, { "speaker": "Matt Sykes", "text": "Yes, sorry. Just for a follow-up on Europe, 6% growth. I think getting a lot of questions on just the spend environment in that region. What are you seeing there? And are there any kind of concerns you might have in terms of demand either from the currency fluctuations or just overall demand in certain end-markets within Europe?" }, { "speaker": "Mike McMullen", "text": "Yes. Sure, Matt. So we posted a 6% growth rate – core growth in the third quarter, albeit there was actually 2 points of headwind for the containment of our Russian operations. So really it was high single-digit, 8%, on a restated basis. And Europe clearly is a watch area for us, but we haven’t seen any significant signals of movement to the downside." }, { "speaker": "Bob McMahon", "text": "Yes. I think, Matt, to build on what Mike is saying, I think in particular we continue to see very strong growth in our pharma business and that really is a global phenomenon. And – but we also saw very nice growth in our chemical and energy businesses as well. And so as Mike mentioned, it is a watch area, but the demand – from what we are seeing in the health of the order funnel continues to be there." }, { "speaker": "Matt Sykes", "text": "Great. Thanks very much." }, { "speaker": "Operator", "text": "Thank you. The next question is from the line of Brandon Couillard with Jefferies. Please proceed." }, { "speaker": "Brandon Couillard", "text": "Hey, thanks. Good afternoon. Mike, could you elaborate just on the core order growth that you saw in the third quarter? And given the strength of order momentum over the last several periods, how does that inform kind of your initial thoughts on ‘23? I mean, should we still think about 5% to 7% still being relevant? And then Bob, should we expect normal 30% to 40% incrementals next year, any headwinds to consider, maybe the new ASP line?" }, { "speaker": "Mike McMullen", "text": "Brandon, we are probably not ready to talk about ‘23, but what I’ll leave you with is a couple of thoughts here, which is very clearly the business has momentum and/or even though we had the highest revenue quarter ever for Agilent in this recent third quarter, we still build backlog both globally and also in China. So, our orders that exceeded our revenues in those. So, it sets us up nicely, I think for ‘23, but we’ll get to ‘23 guide when we get there." }, { "speaker": "Bob McMahon", "text": "Yes. And I think, Brandon, on your core incrementals, I mean, I think that if you look at historically, that’s where we have been. Obviously, we do have some startup costs in ‘23 for NASD and we will spell those out when we get to the numbers. But I don’t think that there is going to be anything fundamentally different on an incremental basis going forward." }, { "speaker": "Brandon Couillard", "text": "Okay. That’s helpful. And then on the NASD Train B line, Mike, you said it was pushed out a little bit in terms of the launch timeline. Is that like 1 or 2 months? I thought the plan was already mid next year. And could you elaborate a little more specifically on kind of where the supply chain issues exactly what those are that are kind of pushing the delay?" }, { "speaker": "Mike McMullen", "text": "I think you got the right timeframe in there, which is a month or two. It’s really been sort of specialized steel that’s required. So, I actually had a chance to see it myself, where you go into a room or you are – the steel pipe fitters are working and they are getting the area ready. They can’t close things off, because they are missing one valve or something. So we have had bits and pieces that have been missing that actually caused us certain delays. I mean, the team has been all over. I think the global supply chains are pretty well publicized, but we thought it was – we thought we should in the spirit of transparency let you know we are still on track for revenue coming out of the facility in ‘23, but maybe a month or two later than you thought initially." }, { "speaker": "Bob McMahon", "text": "Yes. And I think, Brandon, there is one more important piece. I think based on what we know today, we still expect to be at capacity at the exit of FY ‘23 as well in terms of the ramp up." }, { "speaker": "Brandon Couillard", "text": "Great. Thank you." }, { "speaker": "Operator", "text": "The next question is from the line of Vijay Kumar with Evercore ISI. Please proceed." }, { "speaker": "Vijay Kumar", "text": "Hey, guys. Congrats on a really strong quarter here. Hi, Mike. Thank you. Congrats on the print. And one maybe on the guidance here, Q4 at the midpoint is 11% organic. You guys just said 15%. The comps will get easier for Q4. I am curious sequentially, when you think about it, is the change just because of the cadence of how the China deferred revenues were recognized more in 3Q versus Q4? Can you just talk about the sequential assumptions here for the 4Q guidance?" }, { "speaker": "Mike McMullen", "text": "Sure, Vijay. And again, we are very, very pleased with the print. So thanks for the feedback. And Bob, we didn’t use it in our script, but I think the word prudent may apply to our Q4 guide as well." }, { "speaker": "Bob McMahon", "text": "That’s right. Yes. I think, Vijay, if you think about kind of the moving pieces within China, what we did was we pulled forward some of the revenue that was deferred into Q3, but we also pulled Q1 revenue into Q4. So, Q4, I would say we didn’t have a material change one way or another. We actually feel very good that we are going to realize that full $50 million to $55 million here in the fiscal year versus having it bleed a little into Q1. And as Mike said, I mean we are not out of the woods, certainly in supply chain challenges and COVID situations. And so we thought at this point in time, a double-digit core growth is very good but also prudent, as Mike said." }, { "speaker": "Vijay Kumar", "text": "I love that word prudent. Maybe one on some of the moving parts for ‘23, Mike and I am not asking for a guidance, but if I look at pricing contribution, I think we started the year at 100 basis points. We are running at 300 basis points. I think that pricing should continue until it annualizes until mid of next year. You did mention orders coming in about revenues. What is the backlog conversion? Is that a 3-month or a 6-month or a 12-month visibility that you have from backlog, any impact from NASD? And sorry, on C&E very strong, but obviously, with the macro, should we perhaps be prudent for ‘23?" }, { "speaker": "Mike McMullen", "text": "Yes. So, great question, Vijay. So I think I’d like to – the headline here was as way Bob closed off his prepared remarks, we are building a strong foundation for the future. So, we have got – we had record revenues in Q3 yet we still build backlog. And some of that backlog obviously will carry into ‘23. And we – it’s probably a 3 to 6-month visibility for sure on the revenue coming from the backlog. And Bob, I don’t see that. And we agree with your thesis around pricing and the impact it will have on our ‘23 business as well. And Bob, maybe you want to add to..." }, { "speaker": "Bob McMahon", "text": "Yes. The only thing – I think you are spot on, Vijay. I would say there is not a material change right now in terms of how we are thinking about NASD. And if I think about the various pieces there, they certainly set us up for a good momentum going into FY ‘23. Now there is still some unknowns in terms of kind of the macro environment, but we are expecting to have a stronger than normal backlog. We certainly have that right now and are expecting to continue that into ‘23. And then obviously, pricing is continuing to anniversary and I would expect it to be a higher contributor to growth next year, all things being equal." }, { "speaker": "Vijay Kumar", "text": "Understood. Thank you, guys." }, { "speaker": "Mike McMullen", "text": "Thanks, Vijay." }, { "speaker": "Operator", "text": "Thank you. The next question is from the line of Puneet Souda with SVB. Please proceed." }, { "speaker": "Puneet Souda", "text": "Hi, Mike and Bob. Thanks for taking the questions. So, first one just LSAG, obviously, a very strong quarter and I mean, obviously, congrats on the quarter here. When you look at the 25% growth that you are seeing in LC overall, the order book being strong, can you maybe just characterize sort of from an end-market perspective, it seems like biopharma continues to do well. But geographically, can you just characterize – is this contribution from biopharma China in the quarter and how should we think about the sort of order book? Can you maybe characterize the order book more geographically? And do you expect this – again in line with sort of some of the other questions as sort of how should we think about this order book flow through – flowing through into 2023?" }, { "speaker": "Bob McMahon", "text": "Puneet, you packed in a lot in that one question. But we’ll try to address it. Sorry, Mike." }, { "speaker": "Mike McMullen", "text": "I was just saying, maybe you want to take that, Bob. But I think the answer was really across the board. I mean both – I mean clearly, biopharma and pharma, our portfolio is doing really, really well there. And as I mentioned to the team the other day, we just got the most recent auto report, which shows market share movements. And as my Danish colleagues like to say, it was green as a Danish forest. Did I get that right, Jacob? So..." }, { "speaker": "Jacob Thaysen", "text": "That’s right. That’s right, Mike." }, { "speaker": "Mike McMullen", "text": "It was across the board, but I think it’s the same story holds geographically well. So it really is a nice global story. But I think it’s more than just pharma. I know you’re getting some good C&E growth, right, for – in the advanced materials, LC/MS. We posted some really good numbers in food and the environmental market, which also are big users of LC and LC/MS. So I think it was really a broad-based story there, if I remember correctly, Jacob." }, { "speaker": "Jacob Thaysen", "text": "Yes. Correct, Mike. I think we’ve really seen good performance across the board, as you’re saying, Mike. And we are also seeing that the customers are really interested in our full solutions. I think PFAS is a good example of where we see a lot of interest right now both right now, but also where we see some of the big builds that is coming through in U.S. where PFAS have a prominent exposure. So we expect to continue to see momentum in that space." }, { "speaker": "Bob McMahon", "text": "I think, Puneet, just to build on what Mike and Jacob were saying, I think one of the things you’re really seeing come out in Q3 is just the strength and breadth of our portfolio. And why we haven’t talked about spectroscopy a lot in the past, it continues to be a very important part of our portfolio and solution set. And I think it fits nicely across multiple end markets. And the LC and LC/MS get a lot of headlines, but we’re more than just an LC and LC/MS business." }, { "speaker": "Puneet Souda", "text": "Got it. Thanks for that. And then just – I’ll keep it simple for my follow-up. Polymer Standards acquisition, can you characterize sort of what’s the contribution this year? And how does that enhance your offering for columns and sort of biomolecules? And should – how should we think about that overall – acquisition overall fitting into the LSAG group?" }, { "speaker": "Mike McMullen", "text": "You want to take the first piece of that?" }, { "speaker": "Bob McMahon", "text": "Yes. Yes, I’ll – it’s not a material business. We estimate that’s less than $10 million annualized today. That’s the 0.1% that we built into our guide for Q4. But more importantly, I think strategically, I’ll let Jacob talk about the merits of the portfolio and how we think it’s going to continue to drive growth for us." }, { "speaker": "Jacob Thaysen", "text": "Yes. Thanks for that. And we have a long-standing relationship with PFS, so we knew exactly their strength. And we’ve been very impressed with what they have done in the polymer business for the – for a long period of time. And particularly, our interest was intrigued when we also see polymer science going from advanced material into biopharma, where we see a lot of opportunities. And PFS have done a wonderful job using our instrumentation together with their columns and also an informatics pack they have built to really go after a segment of the market and also the expertise in the field. They have more than 500 application nodes within this field. So we can really leverage that with the strong presence we have across the globe to really accelerate that business opportunity that has been up over the past decades, really." }, { "speaker": "Puneet Souda", "text": "Got it. Okay, great. Thanks, guys. Congrats again." }, { "speaker": "Mike McMullen", "text": "Thank you. Appreciate it." }, { "speaker": "Operator", "text": "Thank you. The next question is from the line of Rachel Vatnsdal with JPMorgan. Please proceed." }, { "speaker": "Rachel Vatnsdal", "text": "Hi, thanks for taking the questions and congrats on the nice quarter." }, { "speaker": "Mike McMullen", "text": "Hi, Rachel. Thank you." }, { "speaker": "Rachel Vatnsdal", "text": "The first up on China – thank you, Mike. Yes. Great to hear that some of that catch-up in China was pulled forward there. And then you also pointed to double-digit growth in the region for that ex acceleration recovery. So first off, can you just walk us through specifically what drove that pull-forward on the catch-up from lockdown? And are you seeing an acceleration of demand catch up in China? And then second, how are you thinking about that longer-term growth within China because that we source of upside for the year?" }, { "speaker": "Mike McMullen", "text": "Great. So I’ll start, Bob, here. So I’d have to say it was an extraordinary effort of our team in China. I mean people sacrificed and worked tremendously hard. We had people coming into our factories and living at the factories. They slept and worked at the factories for the entire period of when before you couldn’t really get out beyond – back to your local community. So they did that for several weeks both in our logistics operations as well as our factories. And that allowed us to get our global GC production going as well as the import/export of our products as well. So I have to say it really was extraordinary effort of the team that made that happen. And we’re very optimistic about our ability to continue to grow well in China. In Q2, I think we talked about a greater than 20% order rate. We posted a number of 29% growth in Q3. Yes, we still built backlog in the third quarter in China. So I think we’re well positioned for the fourth quarter. And Bob, I said that probably does represent a level of upside potentially with things continuing to develop as we hope. The wildcards from my perspective are how much money could come into the segment from government stimulus. I know they’re talking about some of the things we haven’t seen any specifics. So that would be something that would be there on a positive. But again, our demand really is coming from the core private sector, commercial sector around pharma and C&E. We think those things are sustainable." }, { "speaker": "Bob McMahon", "text": "Yes. Exactly, Mike. I think you mentioned Q2 kind of order growth rate, and Q3 was in that same range. And so we’re seeing very strong demand and been able to do a fantastic job of ramping up that capacity, and we expect that to continue into Q4." }, { "speaker": "Rachel Vatnsdal", "text": "Great to hear. And then last one for me, just on the C&E segment. So 22% growth is quite impressive, and that growth has really continued to accelerate in recent quarters in that end market. So how should we be thinking about that longer-term outlook for C&E, especially given some of the macro dependence on that portfolio?" }, { "speaker": "Mike McMullen", "text": "Well, we think that the structure of this marketplace has changed over the last few years. And yes, that’s still a segment that’s tied directly to what happens to the global GDP situation. But we had – it in my comments, there’s secular demand happening here, particularly in advanced materials when there’s investments being made in battery technology, more sustainable materials, semiconductors, onshoring of production. So we think those trends are here for a number of years. I think our view is the sector has probably got a higher growth rate than we viewed it having a couple of years ago because of the secular aspect of growth in C&E. And Bob, what else might you add there?" }, { "speaker": "Bob McMahon", "text": "I think – as you said, I think one of the things that I think is really important, don’t take ‘22 and take – build it into your model because we don’t think that, that growth rate is going to continue. We certainly are pleased with it. But I think the other more important piece is we have a very strong right to win in the C&E business. We’re a leader in this space and feel good about our portfolio. And as Mike said, this is an area that we are seeing kind of a renewed sense in some of these areas that we do think that has many years to come in terms of investment." }, { "speaker": "Mike McMullen", "text": "I’m going to use an undisputed leader in the space." }, { "speaker": "Bob McMahon", "text": "I won’t disagree." }, { "speaker": "Mike McMullen", "text": "Thanks for the question, Rachel." }, { "speaker": "Rachel Vatnsdal", "text": "Great, thank you." }, { "speaker": "Operator", "text": "Thank you. The next question is from the line of Derik De Bruin with Bank of America. Please proceed." }, { "speaker": "Mike Ryskin", "text": "Great. Thanks for taking the question. This is Mike Ryskin on for Derik. I want to follow-up on your comments on price." }, { "speaker": "Mike McMullen", "text": "Hi, Mike." }, { "speaker": "Mike Ryskin", "text": "Hi, guys. You sort of indicated that price continues to sort of grow as you go through the year. Is that a factor of the timing of when orders are converted to revenues and when you’re recognizing those revenues? So it’s just more of a dynamic of that? Or is this an incremental price increase that you’re building in as you go through the year? And just alongside that, any comments you could take in terms of reception to price? Any pushback or any particular areas where are you able to take more versus last? Just sort of give us an update on the pricing dynamic as you go through the year." }, { "speaker": "Bob McMahon", "text": "Yes. Hi, Mike, this is Bob. I’ll take that ear. It’s the former. And so when we take price, it takes some time to get through the backlog. And so we’re seeing the price realization from the orders that – the price increase that we took back in the beginning of the calendar year. And really, what we’re trying to do is cover our costs. And we’re seeing increased logistics costs and increased material costs. And so we’ve taken it across the board, but also recognizing where the costs are higher, we’ve taken those prices up higher. We haven’t really heard any pushback, I think, as evidenced by our strong order growth. And then also we look very closely at cancellations or – within our order book, and that continues to be very low. And so I think our customers understand why we’re having to raise prices because of the inflationary environment. And I think to date, we’ve been able to actually generate more price than I think we anticipated at the beginning of the year." }, { "speaker": "Mike Ryskin", "text": "Okay. Great. And then a follow-up. You’ve commented on the balance sheet that you’re getting the leverage lower and lower. I’ve done a couple of deals here and there in the past couple of years with the defended to be on the much smaller side. So could you talk about your willingness to lever up a little bit to put a little bit more of that capital to work? And if so, what are the types of assets you’re looking for? Sort of are sellers willing to engage in this market? Or is the – how are things proceeding on that front – on the BD front? Thanks." }, { "speaker": "Bob McMahon", "text": "Yes. I think we’ve been public about being willing to take on bigger deals than what we have had historically. I think we’re still – we have the benefit of having a very strong balance sheet. We’re going to first invest in our business. We think that that’s the greatest opportunity, but we’re always out on the lookout for M&A. And as you said – I would say the pipeline continues to be healthy. The dynamic has certainly changed in the last 9 months, particularly on the public market side, and I think there’s some good assets out there. It’s probably taken a little longer on the private market side, which is where we tend to focus our efforts. But I can tell you that we have – the beauty of our model is that we have organic growth first and M&A as kind of an adder on top of that. And so it is something that we’re continuing to look at and would be not uncomfortable levering up a little higher than where we are today for the right deal and if the economics work." }, { "speaker": "Mike McMullen", "text": "Absolutely, Bob." }, { "speaker": "Mike Ryskin", "text": "Is that 3x to 4x lever or..." }, { "speaker": "Bob McMahon", "text": "I’m not – that’s pretty rich. But I think it all depends on what the right asset and what it looks like." }, { "speaker": "Mike Ryskin", "text": "Got it. Thanks." }, { "speaker": "Operator", "text": "Thank you. Next question is from the line of Josh Waldman with Cleveland Research. Please proceed." }, { "speaker": "Josh Waldman", "text": "Thanks for taking my questions. Just two for you guys. First, Mike, wondered if you could provide more context on the supply chain situation, how supply and cost to track versus your expectations over the last 90 days. Have you seen any relief on supply? And then it sounds like you built backlog in Q3. Curious whether your fourth quarter guide assumes any work-down in the backlog given recent order rates?" }, { "speaker": "Mike McMullen", "text": "Yes. So I’ll let Bob handle the second question, and I’ll start with the first one. So supply chain challenges are still out there, but our team continues to do an excellent job navigating them, getting the material that we need for our customers. We continue to have very, very low order cancellation rates is something we watch like a hawk. And I think we’re managing the price changes. So I think in the early days of things, we were kind of surprised at what things would cost on the market for chips and others, but I think we’ve now found ways to work that and then offset that with some of the pricing actions that we mentioned earlier. So I think if anything, it’s probably trending in a more positive direction, albeit is still challenging out there." }, { "speaker": "Bob McMahon", "text": "Yes. And I would say – on the second question, Josh, I would say, first and foremost, demand continues to be very strong in our marketplace. And so we’re expecting order growth to continue in our fourth quarter. As you know, that typically is one of the larger quarters that we have for our sales organization and certainly for our customers as well. That being said, I would expect maybe some slight degradation in backlog just given, again, the deferral that we’re talking about within China. But don’t interpret that as us seeing anything slowing in the marketplace." }, { "speaker": "Josh Waldman", "text": "Got it. And then kind of along those lines, wondered if the group has any initial thoughts on pharma budget flushing this year given the strength in orders from these accounts. Curious at this point if you’re getting any indication that maybe the strength in the order book is reflecting pull-forward or just not seeing that yet?" }, { "speaker": "Mike McMullen", "text": "Yes. Josh, I’m going to pass this call over to Padraig. He’s the closest to what’s going on. As you know, he heads up our one commercialization addition to running our ACG services business. So Padraig what’s your thoughts on that?" }, { "speaker": "Padraig McDonnell", "text": "Yes. No, I think it’s pretty steady, Mike. We’re not seeing any pull-forward at this point. And of course, the team are very focused on key end-market workflows where we have the best chance to meet the customer needs. So we’re seeing a very steady-state order rate with not much pull-forward." }, { "speaker": "Josh Waldman", "text": "Got it. Appreciate it." }, { "speaker": "Mike McMullen", "text": "Welcome." }, { "speaker": "Operator", "text": "Thank you. Next question is from the line of Jack Meehan with Nephron Research. Please proceed." }, { "speaker": "Jack Meehan", "text": "Thank you. Good afternoon." }, { "speaker": "Mike McMullen", "text": "Good afternoon." }, { "speaker": "Jack Meehan", "text": "I wanted to ask about the chemical and energy – good afternoon. So the chemical and energy acceleration, my first question is on the chemicals customers. So your commentary sounds pretty bullish. There has certainly been some headlines from some of the big European chemical players that have been a little bit more mixed though. So it would just be great to get your perspective on how you feel about the durability of that customer class and kind of squaring your view versus what we might be hearing from others in the market?" }, { "speaker": "Mike McMullen", "text": "Yes. That maybe more regionally specific to Europe, where we did see a level of growth a little bit slower than we’ve seen in the Americas and China. So I’d say that’s probably more regionally specific. And as we mentioned earlier on the call, Europe remains sort of a watch area for us because of, obviously, obvious challenges in that region right now. But I think we think it’s pretty durable right now. I mean, I think – remember, the chemical piece is going into some of these supply chains as fabs go up and other things. So it’s fueling some of the efforts in the advanced materials area. Bob, I know that you and Jacob looked at this a little more closely. I don’t know if there’s anything else you’d add to that?" }, { "speaker": "Bob McMahon", "text": "No. I think you’re spot on, Mike. I mean if we looked across the – all regions grew in C&E as, Mike, you were saying, but Europe was below the average. And so – but I think over time, that investment in some of these areas, we think, is ongoing demand." }, { "speaker": "Jack Meehan", "text": "Great. And then it was only a week ago, the CHIPS and Science Act got signed into law. I’m not sure if you have any early perspectives as to what this might mean for Agilent. If you could call out kind of the businesses that you think could benefit from some of the funding that’s going in? And can you just maybe call out what did the advanced materials business grow this quarter? Thanks." }, { "speaker": "Mike McMullen", "text": "Yes. So I’m going to – I’ll let Bob handle the second question. He’s got more numbers on the pages than I do in front of him. But relative to the recent enactment by Congress, we see some real upside for us. And we actually were just talking about that before this call. I think the big debate is when is it actually going to release. But Jacob mentioned earlier PFAS. There’s – what we can see there’s some funding in there for PFAS, which will help our LC/MS and GC/MS business and then tied to the chips, both the upstream and downstream side, the semiconductor fabs that play right into spectroscopy strength that that we mentioned as well. And Jacob, perhaps you want to add a few other things." }, { "speaker": "Jacob Thaysen", "text": "Yes. I think, I mean, actually, even though spectroscopy and GC are the big winners in the – related to the CHIPS Act, we actually see across the board. It’s both the mass spec business, also the LC/MS that Mike was mentioning and then, of course, a lot of our consumables also. And so we see a lot of opportunities here. I think both the CHIP Act, but also the other bill, the – what’s it called, the..." }, { "speaker": "Mike McMullen", "text": "Inflation." }, { "speaker": "Jacob Thaysen", "text": "And the Inflation Bill here, all of them are driving some of our technologies. So we see a lot of opportunities in that. Now it all comes down to timing here." }, { "speaker": "Mike McMullen", "text": "Yes." }, { "speaker": "Bob McMahon", "text": "And the answer to your last question, it was above 30%." }, { "speaker": "Jack Meehan", "text": "Thanks. Super. Thank you, guys." }, { "speaker": "Operator", "text": "Thank you. The next question is from the line of Elizabeth Garcia with UBS. Please proceed." }, { "speaker": "Elizabeth Garcia", "text": "Hey, guys. Thanks so much for taking the question. Congrats." }, { "speaker": "Mike McMullen", "text": "Sure, Elizabeth. No problem. Thank you very much." }, { "speaker": "Elizabeth Garcia", "text": "Yes. Great. So maybe I just didn’t catch it, but I know there was the planned shutdown this quarter for NASD. But just thinking about kind of how we should think about kind of close this quarter and then maybe sequentially as we head into the next quarter, in 4Q?" }, { "speaker": "Mike McMullen", "text": "Bob, you and Sam want to tag team on this one?" }, { "speaker": "Bob McMahon", "text": "Yes. So we had a planned shutdown this quarter, expect return to strong growth in Q4 for NASD." }, { "speaker": "Mike McMullen", "text": "And Sam, I don’t know if you want to add some comments about what you’re seeing on the market as well?" }, { "speaker": "Sam Raha", "text": "Yes. Yes. Thanks, Mike, and thanks for the question. I mean, listen, it was a good quarter. We had the planned shutdown you already heard about. But I want to note that we are very pleased with the trend that we’re seeing that increasingly these very therapeutic oligos that we’re working on that the treatment modalities beyond the more rare indications are expanding into diseases for larger populations. For example, you might have seen just the recent news from Alnylam that reported favorable results on their Phase 3 study for patisiran. And this is for patients with ATTR for cardiomyopathy. And as Alnylam’s supplier for the API and patisiran, we’re of course, excited. We also think this is indicative of just generally the trend that we’re starting to see in the promise of therapeutic oligos. And our book of business remains strong as we go into the quarter and as we will go into next year." }, { "speaker": "Mike McMullen", "text": "Thanks, Sam. I probably should elaborate a little more, Elizabeth, on the routine. I think it’s also important understand why we were shutting down, right? It’s both for routine maintenance but also a critical milestone in the construction of Train B. So we tied the infrastructure together. So that’s why we’re speaking with confidence about our ability to get revenue in ‘23." }, { "speaker": "Elizabeth Garcia", "text": "Great. Great news. And I guess just one more for me thing on the theme of kind of biopharma. So you kind of – you’ve announced the collaboration with APC for real-time process monitoring. We also had announcement Merck around downstream PAT. It would be great to kind of get your thoughts around the space and kind of the work you’re doing here." }, { "speaker": "Mike McMullen", "text": "Yes. Yes. I’ll make some high-level comments, and then maybe, Jacob, you want to provide some specific as well. So we love this space. And we’ve been putting a lot of our investments over the last several years targeted at the biopharma space. And you see it reflected now in the growth rates and actually how we’re shifting the mix of our pharma business both in the lab but also plays outside the lab. And Jacob, I know you’ve got a lot of interesting things happening there." }, { "speaker": "Jacob Thaysen", "text": "Yes. Thanks for that, Mike. And we are very interesting in the bioprocessing space, especially from the unlatent perspective, where we truly believe that the – that instruments will start to move into the manufacturing. Historically, we have had in the small molecule space, the QA/QC sitting in a different lab. And now we see the opportunity to bring adline online LC and LC/MS technologies into the bioprocessing space itself or manufacturing space itself. And hence, we have decided and we have made collaborations with leaders in that space, Merck being one of them, where we’re developing, of course, based on our individual strength new solutions to address that. But we’re looking at the multiple partnerships in this space here, and we’re really bullish around that." }, { "speaker": "Elizabeth Garcia", "text": "Thanks so much." }, { "speaker": "Mike McMullen", "text": "Welcome." }, { "speaker": "Operator", "text": "Thank you. The next question is from the line of Patrick Donnelly with Citi. Please proceed." }, { "speaker": "Patrick Donnelly", "text": "Hey, guys. Thanks for taking the question." }, { "speaker": "Mike McMullen", "text": "Hi, Patrick. Sure." }, { "speaker": "Patrick Donnelly", "text": "Mike, maybe one for you – hey, how are you? Maybe one for you just on China specifically in terms of the linearity of the quarter. Can you just talk about – I mean it sounds like things clearly picked up as we went, obviously, on the supply side and you guys kind of got back online. Can you talk about the demand environment as well? Obviously, you guys are the only ones who have kind of a full July in the quarter. So just curious what kind of ramp you saw throughout the quarter. And then again, as we work our way through August here, I mean, it certainly seems like the order growth has been encouraging. But maybe just talk about how things trended there throughout the quarter kind of going into this quarter." }, { "speaker": "Mike McMullen", "text": "Great question. Yes, sure. Happy to do so. I think it’s a great question. And I’ll pass my response into two areas: orders and revenue. So I think I would say the order intake throughout the quarter was there. It was linear, smooth, no, no big lumpiness and the fact that what we saw in the second quarter as well. So now as you know, the revenue side has been a different story because the ability to get product in and out of China as well as produced in China was affected by the COVID-19 shutdowns. And that’s where we saw maybe a slower start first few weeks of Q3, but then the team’s efforts really started paying off when we were able to get back into our facilities. So I think the ramp rate of revenue had looked at a little different profile throughout the quarter. And Bob, I don’t know if you’d add anything?" }, { "speaker": "Bob McMahon", "text": "Yes. No, that’s exactly right. I mean if you think about the months in our quarters, May was very light. As we talked about, we were ramping up, and I think we exited May at like 25% capacity. And then the teams really started kicking in in gear as the COVID restrictions started to ease. And July was very strong as they not only got the production up to full capacity, but then were able to not only satisfy existing demand, but also some of that deferral bring it in." }, { "speaker": "Mike McMullen", "text": "And they were really focused on meeting the expectations of our customers who wanted the product. And as I mentioned earlier in my earlier comments, we had teams working a lot of overtime, working in the factories over the weekend. So really some heroics that got us back on track." }, { "speaker": "Patrick Donnelly", "text": "Yes. It’s encouraging to hear. And then, Bob, maybe one for you just on the margin side. You talked about pricing a few times on the call. Can you just talk about, I guess, the flow-through to the margin side? You basically said it’s offsetting some of the increase in costs. Maybe just talk about the give and take on that front in terms of pricing increases, the cost increases and how we should think about kind of that algorithm going forward on the margin piece." }, { "speaker": "Bob McMahon", "text": "Yes. I think if you looked at our 150 basis points year-on-year, it was roughly 50 basis points in gross margin and then 100 basis points of leverage on the SG&A OpEx side. And I think if you looked at that, there was some productivity. As I mentioned, price probably would have kept things flat. And then the other 50 basis points were a benefit of some productivity that the OFS team did and then the volume. That’s the thing that really – I think really helped drive a benefit in gross margin is just the amount of product that was able to be produced through the factories. And so that I think – think about pricing as covering our costs. And then if those incrementals around better-than-expected revenues drove the margin improvement on the gross margin side. What I would say is we continue to leverage the OpEx side to drive our productivity as a company overall." }, { "speaker": "Patrick Donnelly", "text": "Helpful. Thank you, guys." }, { "speaker": "Mike McMullen", "text": "Welcome." }, { "speaker": "Operator", "text": "Thank you. The last question is from the line of Tim Daley with Wells Fargo. Please proceed." }, { "speaker": "Tim Daley", "text": "Hi, everyone. Thanks for the time." }, { "speaker": "Mike McMullen", "text": "Sure, Tim." }, { "speaker": "Tim Daley", "text": "Quickly, wanted to touch back on NASD here. So if we’re just thinking about when we’re past the Train B build-out, things have kind of normalized a bit, you’re starting to leverage those investments and upfront costs here, what’s the clean run rate margin profile to think about in that business, I guess, initially when we get past that capacity build-out here?" }, { "speaker": "Mike McMullen", "text": "And Tim, that question brought a smile to Bob’s face. I’ll let him answer that." }, { "speaker": "Bob McMahon", "text": "I would say very good. I’ll leave it at that." }, { "speaker": "Mike McMullen", "text": "The company average, right?" }, { "speaker": "Bob McMahon", "text": "Yes. Yes." }, { "speaker": "Tim Daley", "text": "Alright. I can work with that. And then a quick one here on capital allocation. So another strong quarter of buybacks. Just thinking about the go-forward outlook, how should we be sizing this in our heads? The $1 billion, you’ve already hit in ‘22 with a quarter left to go. Is that a good base for the out-years? Just kind of – just general thoughts on the capital allocation hierarchy as some assets are probably getting a bit cheaper and more attractive here." }, { "speaker": "Bob McMahon", "text": "Yes. I mean, I think our methodology really hasn’t changed. I think what we do is invest for growth first internally, and then we look for value-accreting M&A. But if there isn’t anything imminent, we’re also not going to keep cash on the books. And if I looked at historically, we’ve generated roughly 2% of earnings per share growth kind of below the line through share repurchase. And I think that that’s probably a fair way to look at it going forward. But in terms of – to be very clear, our priorities are investing for growth internally and then M&A before we would do share repurchases. And we’re also committed to continuing to grow our dividend as well." }, { "speaker": "Tim Daley", "text": "Alright. Great. That’s it from my end. Thank you." }, { "speaker": "Bob McMahon", "text": "You quite welcome." }, { "speaker": "Operator", "text": "There are no additional questions waiting at this time, so I will turn the call back over to Parmeet for closing remarks." }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Hannah, and thanks, everyone, for joining. With that, we would like to wrap up the call for today. Have a great rest of the day." }, { "speaker": "Operator", "text": "That concludes today’s call. Thank you for your participation. You may now disconnect your lines." } ]	Agilent Technologies, Inc.	154,924
A	2	2,022	2022-05-24 16:30:00	Operator: Good afternoon and thank you for attending today's Agilent Technologies Inc. Q2 2022 Earnings Conference Call. My name is Selena, and I will be your moderator. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to our host, Parmeet Ahuja, Vice President of Investor Relations. Please go ahead. Parmeet Ahuja: Thank you, Selena, and welcome, everyone, to Agilent's conference call for the second quarter of fiscal year 2022. With me are Mike McMullen, Agilent President and CEO; and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Sciences and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our second quarter financial results, investor presentation and information to supplement today's discussion along with a recording of this webcast are available on our website at www.investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of April 30th. As previously announced, beginning in the first quarter of fiscal 2022, we implemented certain changes to our segment reporting structure. We have recast our historical segment information to reflect these changes. These changes have no impact on our Company's consolidated financial statements. We will also make forward-looking statements about the financial performance of the Company. These statements are subject to risks and uncertainties and are only valid as of today. The Company assumes no obligation to update them. Please look at the Company's recent SEC filings for a more complete picture of our risks and other factors. And now, I'd like to turn the call over to Mike. Mike McMullen: Thanks Parmeet, and thanks to everyone for joining our call today. In Q2, the Agilent team again demonstrated the resilience and strength of our business model. We delivered core revenue growth in line with our forecast, expanded operating margins, and exceeded our EPS expectations. We did this while navigating a dynamic macro environment, including the conflict in Ukraine and COVID-related lockdowns in China. Our Q2 revenues are $1.61 billion. This is up 7% core and is on top of growing 19% in Q2 a year ago. Order performance was even stronger growing double digits on a core basis. Second quarter operating margins at 25.3% continued to expand, up 140 basis points from last year. Earnings per share of $1.13 are up 16%. We achieved these results despite the COVID-related lockdowns that closed our operations in Shanghai, starting in late March and continuing through the entire month of April. We estimate that this is roughly a 350-basis point headwind to our core revenue growth for the quarter. As Bob will indicate when he takes you through the details, this business is not lost and is expected to be recovered through the rest of the calendar year. Most importantly, our team in China is safe, and we restarted limited operations in May at our GC factory and logistics center in Shanghai. From an end-market perspective, the pharma and chemical and energy markets again led the way for us. Our pharma business, Agilent’s largest market, grew 13%, led by biopharma growing high 20s. This represents our seventh consecutive quarter of double-digit growth in the pharma market. It also builds on top of a stellar 29% growth rate last year. The momentum in our chemical and energy business also continued this quarter, delivering 9% growth in line with expectations and overcoming the shutdown of our primary GC production facility in Shanghai and the conflict in Ukraine. Growth was driven by advanced materials and chemicals. On a geographic basis, the Americas again led the way with 13% growth built on top of 27% growth a year ago. Europe also performed well with growth coming in at 7% following 16% growth last year. China revenues were on track with our expectations through March, but we exited the quarter down 3% given the COVID-related lockdowns. While revenues were affected by the temporary shutdowns in the quarter, overall demand in China remains very robust. In fact, China was the fastest growing region in Q2 from an order perspective, up about 20%. We remain very confident about the ongoing strength of our business in China. Looking at performance by business unit, the Life Sciences and Applied Markets Group generated revenue of $896 million, an increase of 4% on a core basis. Given our manufacturing footprint and relative strength in China, LSAG was disproportionately impacted by the COVID-related shutdowns there. To provide some additional perspective, all major product lines, excluding GC related products, grew solidly in the quarter, led by strong performance in our cell analysis business growing in the mid-teens. Orders for LC and LC/MS continued to be strong. Orders grew mid-20’s globally with particularly high adoption of our two new Bio-LC products. On the LC/MS front, we look forward to announcing several exciting new offerings at the upcoming ASMS conference that will expand our portfolio. Our value proposition continues to resonate with our customers and LSAG exited the quarter with record backlog. The Agilent CrossLab Group posted services revenues of $353 million. This is up 10% core. Growth in services was again broad-based across services contracts, preventive maintenance, compliance, education, and informatic enterprise services. The scale of our ACG business and breadth of portfolio continued to drive growth and margin expansion even in the face of inflationary pressures. Q2 marked the sixth straight quarter we’ve delivered growth across all markets and regions. The Diagnostics and Genomics Group delivered revenue of $358 million, up 15% core versus 16% last year. Our excellent growth was led by NASD and genomics. The NASD team delivered yet another strong quarter, generating record revenue and profitability. During the quarter, I had a chance to visit our team in Colorado and see first-hand the excellent progress that’s being made meeting current customer needs and also the work underway in continuing to build for future growth with our Train B expansion. We remain extremely bullish about NASD’s future and with Train B coming online in 2023, we’re adding yet another $150 million plus in capacity. Looking across the company, our One Agilent approach and focus on our customers has never been stronger. During the quarter, we were ranked number one in our industry and number two overall in customer satisfaction in The Management 250 ranking, developed by the Drucker Institute. In addition, the new Agilent Commercial organization is already resonating well and delivering successfully for our customers. Agilent’s Q2 results are yet another proof point for how we build a resilient company that can quickly adjust to a changing environment and still post strong results. Given our results to date, along with our backlog and continued order strength, we are again raising our full year core revenue growth and EPS guidance. For the year, we are now expecting 8% to 9% core revenue growth and EPS of $4.86 to $4.93. Bob will provide more detail on our Q3 outlook along with more information on what we expect for the rest of the year. After Bob’s comments and before we take your questions, I will be rejoining the call for some concluding remarks. Thank you for being on the call today, and now I will hand the call off to Bob. Bob? Bob McMahon: Thanks Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue and take you through the income statement and some other key financial metrics. I’ll then finish up with our guidance for the third quarter and the fiscal year. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike described, we posted solid topline results in Q2 while overcoming some difficult macro challenges in the business environment. Revenue was $1.61 billion, up a reported 5.4%. In the current quarter, currency was a headwind of 2.1 points while M&A added 20 basis points of growth. Core growth was up 7.3%, in line with expectations despite the COVID-related lockdowns in China, which primarily affected us in April. We estimate the lockdowns deferred $50 million to $55 million of revenue into future quarters, impacting growth in Q2 by roughly 350 basis points. In addition, COVID testing-related revenues were roughly a one-point headwind in the quarter. Our largest market, pharma, grew 13% during the quarter, on top of 29% growth last year. Biopharma continued to be the main driver of results, growing 27% year-on-year, led by NASD. Investments in R&D programs and demand for instrumentation, consumables and critical components remained strong. Pharma represented 37% of our overall revenues this quarter. To put that in perspective, in Q2 2019, effectively one year before the pandemic started, pharma represented just 30% of our business. This not only highlights the strength and resilience of this market, but it also demonstrates how our innovation and investments in higher growth markets continues to pay off. Chemical and energy continued its strong trend of positive results, growing 9% during the quarter despite the impact of the COVID-related lockdowns in China and the conflict in Ukraine. Results were led by strong double-digit growth in advanced materials and specialty chemicals. We expect strong demand to continue in these areas, particularly in semiconductors and battery and clean energy technologies as industry-wide capacity expands. Diagnostics and clinical grew 5% on top of 13% growth last year as year-on-year declines in COVID-related revenues and the temporary shutdowns in China muted our results. The academia and government market was a nice surprise for us, growing 5% in Q2 on top of 21% growth last year. We saw an increase in spending in this market as more university labs opened up and students returned to on-campus learning. In addition, sales activity and the funding environment continues to be healthy. In the food segment, we saw growth across all regions except for China due to the shutdowns. The higher concentration of food business in China drove the food segment to decline low single digits against a very strong comparison of 22% growth last year. And rounding out our end-markets, environmental and forensics grew 1% versus an 8% growth last year. On a geographic basis, the Americas grew 13%, Europe grew 7%, Asia, excluding China grew 8%, while China declined 3% in the quarter as the lockdowns affected our manufacturing and logistics operations for over a month. Regarding China, I’d like to provide some additional detail on how the quarter evolved and how we expect to see the recovery progress. First, as Mike said, demand remains strong with the order growth of about 20%, despite the temporary COVID lockdowns. Second, our business in China was tracking very well with our expectations through late March when production and our main logistics hub in Shanghai were shut down and remained closed throughout April. We were able to partially reduce the impact of the lockdown by shifting production to other factories where possible and adjusting the shipping routes into and out of China. We expect the $50 million to $55 million in revenue to be recovered throughout the rest of the calendar year, so it is deferred, not lost. In terms of phasing, we expect to continue to ramp our operations and anticipate modest recovery of the Q2 impact in Q3. We expect the majority of the recovery to occur in fiscal Q4 with some spillover into November and December, which is our first fiscal quarter of 2023. This phasing is baked into our updated guidance. Now turning to the P&L. The team continues to execute at a very high level. Second quarter gross margin was 55.7%, up 30 basis points from a year ago as pricing actions and productivity helped offset inflationary pressures tied to ongoing supply chain constraints and higher logistics costs. Operating expense leverage and strong cost management helped drive very healthy incremental improvements as we delivered an operating margin of 25.3%, up 140 basis points from last year. Our tax rate for the quarter was 50 basis points better than forecast, helping us deliver earnings per share of $1.13, up 16% versus last year, and exceeding our expectations. Looking at cash flow and our balance sheet, we generated operating cash flow of $283 million in the quarter while investing in $64 million in capital expenditures during Q2, with the year-on-year increase primarily related to the NASD expansion. Cash flow in the quarter was impacted by the transitory impact of COVID-related lockdowns in China as well as increased inventory to fulfill strong demand in a challenging supply chain and logistics environment, as expected. We are still on track to deliver our cash flow forecast for the year. During the quarter, we again took advantage of market volatility to repurchase $234 million worth of shares. We also paid out $63 million in dividends, returning a combined total of $297 million to shareholders. Our balance sheet continues to be healthy with a net leverage ratio of 0.9 times. And earlier this month, we refinanced $600 million in senior notes opportunistically, and now have no long-term debt maturing until 2025. As we stated last quarter, our approach given current market conditions is to continue to be aggressive in deploying our capital. Given our strong balance sheet and confidence in the future, we intend to deploy another $250 million in opportunistic share repurchases in Q3 while continuing to actively look at M&A opportunities. Now, let’s move to our improved full year guidance and our outlook for the third quarter. Given the strong business performance in the first half of the year and order backlog, we are raising our full year core revenue growth to an expected range of 8% to 9%, up a full point from our previous guide. This core revenue takes into account the recovery phasing in China, as well as a $35 million, or 55 basis-point headwind due to the conflict in Ukraine. While we’ve increased our core growth expectations, the dollar has again strengthened considerably since our last guide, resulting in estimated currency headwinds of $170 million for the year, up $60 million since our last guide. And the impact of M&A remains unchanged. This results in us maintaining our full year reported revenue guidance range of $6.67 billion to $6.73 billion for the full year. We have also increased our EPS guidance for the full year to $4.86 to $4.93 per share. This is up from the previous range of $4.80 to $4.90 per share, and now represents 12% to 14% growth versus fiscal year 2021. For Q3, we’re expecting revenue to range from $1.625 billion to $1.650 billion. This represents core growth between 7% and 9%. We expect operations in China to ramp and be fully operational before the end of the quarter and continue to accelerate into Q4. Given the strengthening of the dollar, exchange rates are expected to have a negative impact of about 4.7 points on the reported growth in the quarter. Closing out our guidance, in Q3 non-GAAP EPS is expected to be in the range of $1.20 to $1.22, up 9% to 11% versus the prior year. This is based on a 14% tax rate and 300 million diluted shares outstanding. The Agilent team once again performed extremely well in Q2 under some very challenging circumstances. At the same time, our business remains strong, and I’m confident we will continue to deliver strong results in Q3 and through the rest of the year. With that, Mike, I will turn it over to you for some concluding comments. Mike McMullen: Thanks Bob. Before we take your questions, I would like to share some thoughts with you on the current environment. As you know, we’re living in very dynamic times. However, our end markets remain strong. Our build and buy growth strategy is working. What is also very clear is the ability of the Agilent team to continue to deliver in a challenging external environment. We have built a resourceful, quick moving team and a resilient business model that has shown again-and-again, time-after-time, that we can successfully address any challenges or obstacles that come our way. We delivered inline growth, increased margins by 140 basis points and exceeded our EPS expectations during a time of rapidly growing inflation, continued supply chain challenges and the effects of a COVID-related lockdown in a key market. In times like this, our customers want to work with people and companies they can rely on. This works to our advantage, and I remain confident in our growth strategy continuing to deliver, and in the power of the unstoppable One Agilent team. Our growth drivers remain intact, and our business prospects remain strong now, and into the future. Thank you. And now, back to Parmeet as we take your questions. Parmeet? Parmeet Ahuja: Thanks, Mike. Selena, please provide instructions for Q&A now. Operator: [Operator Instructions] The first question comes from Vijay Kumar with Evercore ISI. Vijay Kumar: Hey, guys. Thanks for taking my question. Mike, certainly, you did mention this is an impressive performance given the relative fears on the Street on impact from China lockdowns. So, I guess, one, when you look at your peers, very strong instrument growth across LC and mass spec. Maybe could you talk about how did Agilent's portfolio within that instruments segment perform? What were the trends within the Q? Were there any lockdown impact for instruments and maybe order trends specific to instruments, please? Mike McMullen: Yes. Vijay, thanks for the comments. We're really pleased with the performance given all the teams we're dealing with in the external environment. So, we're going to tag team the response here with myself and Jacob. So, the story is the -- our instrument business is doing very well. And in the call, we highlighted a few areas where we received an outstanding order growth. We talked about the cell analysis business, LC and LC/MS, particularly on the bio side, and I'll have Jacob add some specifics. And absolutely, as I tried to pull out in remarks, I think Jacob's business was disproportionately impacted by the shutdowns that we experienced of a COVID nature in China. So, we're very bullish about the strength of our LSAG business, exiting the quarter with record, record backlog. And Jacob, why don't you talk about what's been going on and why you're excited about the future? Jacob Thaysen: Yes. Absolutely. Of course, the quarter was challenging with the Shanghai lockdown. But overall, we continue to see very strong growth in orders coming in, particularly in our LC, LC/MS business, which I think Mike alluded to also some of the NPIs we came out with approximately a year ago in the LC business. And with that connected with our very strong positioning in the mass spec, we continue to see very strong growth in that aspect. Clearly, with GC and GC/MS was challenged in China this year -- or this quarter due to the situation. But overall, the orders continue to be very strong. So, I'm not concerned about that. And besides that, I think we have seen also for the spectroscopy business that the material science is really a strength for us right now. So overall, very strong performance across the portfolio. Bob McMahon: Yes. And hey, Vijay, this is Bob. Just to kind of dimensionalize that impact when we talk about disproportionate, roughly 80 to 85% of the impact due to the COVID lockdowns was instrument -- LSAG-related. Vijay Kumar: That's helpful, Bob. And maybe one on the top -- lockdown impact in China. The guidance is assuming that $50 million to $75 million comes back in the second half. What gives you the confidence that this is coming back in second half? And where are we in China? Have the markets reopened? Like is your production facility up and running? Because I know you have a GC manufacturing facility, and there have been some questions on perhaps there could be an impact in GC shipments out of China. Mike McMullen: Vijay, how would I lead off the response here? So -- and this ties into why we have confidence about the outlook. So, we are back up and running in Shanghai, albeit on limited capacity. Both our logistics and production facilities are now up to 25% operating capacity. And we've actually started some limited international and in-country shipments. So product is starting to move. And we expect to have -- our view is that the lockdown controls will start to ease over the coming weeks and that we'll be fully operational by the end of the quarter, but we don't want to get too far ahead of ourselves here, and that's why I think Bob will describe a fairly modest recovery assumption in Q2. I'd also like to take this opportunity to call just to do a shout out to our team in Shanghai, who are actually camped out, living at the factory and not being asked and volunteering to do that. So, I've also got confidence in the outlook because I know what this team can do. Bob McMahon: Yes. And to build on that point, Vijay, a couple of thoughts. I mean, we've watched the order backlog very closely. We haven't seen any cancellations associated with this. And as we're ramping up the factory in Shanghai, we also have dual manufacturing capabilities, and we continue to ramp up the factory here in the United States to be able to also provide GC and GC/MS. So, we are expecting, as Mike said, a very modest recovery of that $50 million to $55 million in Q3, the majority of it being in Q4 and then spilling over a little into November and December, but given the backlog and the fact that we haven't seen any of those orders cancelled, we feel like we definitely will get the product back. And if we go back to what happened in the initial phases of COVID, China dropped down pretty substantially and then came back fairly quickly, so. Operator: The next question comes from Matt Sykes with Goldman Sachs. Matt Sykes: Congrats on a quarter in a tough environment. Maybe kind of following up on the instrument question, just dig a little bit more into C&E. Another good quarter there. And a couple of things you called out in terms of advanced materials, battery, semis. I mean, I think traditionally this has been looked at as sort of a highly cyclical sector, but when you're seeing sort of the secular growth drivers within those subsegments, it just seems less cyclical. Could you maybe kind of help us size that sort of cyclicality versus non-cyclicality within C&E? And what could be actually far more durable from an instrument growth standpoint in that segment over the course of this year and into next year? Mike McMullen: So, I'm going to lead off with this and then tag team again with Jacob and Bob. But we completely agree with the premise of your question. In fact, you may recall some of our earlier presentations where we talked about there's elements of the C&E segment that aren't fully appreciated. They're being driven by capacity expansion for supply chain concerns, move to new materials, investments in semiconductor batteries. All you have to do is see what's happening in the whole automobile industry. We're a part of that. And I think it's important to just remind the audience here of the three segments that we have. And advanced materials grew, I think, mid-20s for us. The chemical side grew high teens. We were down in the energy segment. And I think that's been historically the more cyclical element of the business. But I think you need to keep in mind that that's less than 3% -- and energy side, less than 3% of Agilent's total revenues. And perhaps I'll pass it over to you, Bob and Jacob, to -- some commentary on the relative size of those buckets, if you will. Jacob Thaysen: Yes. I can also mention that Agilent has actually historically been very strong in material science. So, we have a very strong market presence both in the semicon industry, especially with our IC-PMS portfolio, but also with the GC, and generally speaking, in materials, in batteries and other renewable energy with our GC business. So I think we see a great potential in that. Bob? Bob McMahon: Yes. Just one other thing. I think on the -- just a couple of things. Energy was down. That is one area that was disproportionately impacted in China as well. So, we also had that impact. So, it wasn't -- it was a temporary phenomenon there. And then you can speak to -- it was -- China was also impacting the chemicals and advanced materials, and they still grew. So, that kind of speaks to the strength of those markets. And these are areas -- I mean it's our second-largest market. We have a leadership presence in these areas. And I would say it's just starting. When you think about the amount of capacity that's needed just for lithium-ion batteries as an example, we're only at a fraction of the capacity that needs to be there. So, these are probably $100 million-plus markets today that are having a long runway, if you just look at the cars and the opportunities here to continue to develop those. And that's just on the battery side. If you look at that, this is a very significant opportunity for us going forward, and we are definitely the leader. Matt Sykes: Great. Thanks very much. I appreciate the color. And then just secondly, on the pricing side. Bob, you mentioned that some of the offsets on the gross margin pressure coming from pricing. Can you just kind of remind us of what your expectations are for pricing this year? And then, in terms of some of the actions you did last year, how quickly are you realizing some of those higher prices that you put in place? Bob McMahon: Yes. It's a really good question. And we continue to be pleased by the ability for our value proposition to be recognized in the marketplace and actually having higher price than what we had initially had at the beginning of the year. If you recall, we had talked about roughly a 1-point year-on-year price realization. Q1, we were ahead of that. In Q2, we actually accelerated beyond that. And I would say most of the pricing that we're realizing today were for actions that we took most in the fall of last year and just starting to see some of the actions that we took in January of this year just given the strength of our backlog. So, it was above that. I would say in our new guide that we actually feel more optimistic about being able to be higher than that 1%. It was higher than that, certainly in Q2, which we needed because we -- our costs have been higher as well in terms of being able to have higher logistics costs given the price of oil and the cost of shipping. But we feel very good about our ability to continue to manage that across our entire portfolio. Mike McMullen: Bob, I think it's also very well. We feel really pleased about the net price realization that's occurred. We also continue to drive productivity as well. So, it's a combination of pricing and productivity improvements we're having across the Company. Bob McMahon: That's right. That's right, Mike. Operator: The next question comes from Brandon Couillard with Jefferies. Brandon Couillard: Mike, biotech end market, very strong again in the second quarter. Just talk about sustainability of trends there and perhaps the impact of NASD specifically on the biotech segment growth. Mike McMullen: Yes. So, I'll have you call that out, Bob. I know that's in our notes. And I think what you'll hear from Bob is it's a broad-based biopharma story with really strong growth in both sides of the market, the analytical lab and NASD. We remain quite bullish on the outlook in biopharma. In fact, we continue to actually gain new business. And actually, I'll have Padraig talk about in a second. We've actually expanded the number of accounts we're serving in the biopharma space. So we're feeling really good about the long-term growth aspects of biopharma as well as the impact it's having on the business right now. You heard me crone about a few of our growth numbers in the prepared remarks. And Bob, before I pass it over to Padraig for some comments, can you remind me what it was? Bob McMahon: Yes. Our biopharma continues to -- first of all, Brandon, continues to be a greater proportion of the overall pharma market. So we're not only disproportionately growing in pharma, but the fastest-growing market continues to be bigger and bigger. It grew 27%. If you took out NASD, that number was still 19%. So, it still says that we have very strong growth there, and we grew backlog. And so, I feel very good about our offerings across both the instrumentation but then also across the entire portfolio of products and solutions that we have. Mike McMullen: Yes. Thanks, Bob. And I thought given the start of this fiscal year of our one commercial organization, maybe Padraig, you think some comments of how us helping to gain further penetration in the biopharma space. Padraig McDonnell: Yes. Mike, we're absolutely seeing that we have a bigger focus on the longer tail of accounts or smaller biopharma accounts as well as the large players. And of course, our strong focus in biopharma was with application support and so on, really helps us with attach rate in that business. And it really helps the instrument trend with that attach rate. So overall, I think we see both services and consumer has been a very strong play and very strong enabler within -- in the biopharma accounts, which we're, of course, getting a lot more access to. Brandon Couillard: Got you. That's helpful. And then, the DGG gross margin at 56% are quite strong. Is that a mix dynamic or pricing? And should we think about mid-50s as sustainable for this business going forward now? Mike McMullen: I'll let you and Sam hash that one out, Bob. Go ahead. Bob McMahon: Yes. I think we certainly benefited from an extremely strong performance there. And Sam and team have continued to drive productivity in the business there. We did benefit from mix, but it -- I wouldn't necessarily put that number in for Q3 and Q4 because if you recall, one of the things that we are starting to do in the second half of the year is ramp up the start-up costs for Train B in our NASD facility and so forth. So -- and that hits our gross margin. But obviously, that has a great payoff in '23 with that $150 million-plus capacity. So, I would say the team had a benefit of mix. They're working on that productivity and activities. But I would say in the second half of the year, we probably will see some pressure because of some of that start-up costs. Sam Raha: Bob, it's -- completely agree with everything you said. So, it is mix, it is volume. By the way, just also affirm we benefited from price. We have some leadership positions in the market, which we are absolutely able to go after. And continued good performance expected, though. As you said, the expectation is going to be a little tougher with NASD Train B coming on board. Operator: The next question comes from Puneet Souda with SVB Securities. Puneet Souda: So, first one, strong pharma, obviously. But just focusing on North America and pharma. Any reason why you shouldn't continue to see that in the second half, too? I mean, the question is more around instrumentation, and it's really around -- we're seeing your peers deliver very strong growth rate in U.S. pharma. So, wondering if there is any element of pull-forward you're seeing here. And should we see a sustained sort of growth rate when we think about North America and U.S. pharma? Mike McMullen: Puneet, happy to answer that question. We're seeing the same phenomena. Pharma remains very, very strong in the U.S., and our outlook remains very bullish for the remainder of this year. Bob McMahon: Yes. To give you perspective, I mean, our Americas business in pharma grew twice as fast as the overall pharma business. And we do -- we will have some comps in NASD that we won't be continuing to post a great -- the strong performance there -- as strong a performance, I should say, because we're ramping up against the capacity, which is what Train B is going to help us provide. But we're still seeing that very strong performance, particularly in the instrumentation that you were just asking about. That has been a standout. Puneet Souda: Okay, great. And then just briefly on another smaller segment, academic and government for you, that was strong in the quarter. Maybe could you just elaborate a little bit there what's driving that? And what sort of -- what are some of the elements of growth that we should continue to expect through the year? Thank you. Mike McMullen: Yes. And as Bob mentioned -- this is Mike. That was a nice surprise for us. I think we came off a 21% compare and still grew 5%. So, we're seeing some positive developments. The funding environment seems to be quite healthy. And even though we had some COVID-related headwinds in the academia segment in China, even that area was strong. So, we think it's continuing to be a healthy funding environment. I think perhaps some of the COVID challenges we had as the society over the last several years has reinforced the importance of funding in those areas. As well, we're seeing return to labs or access for students and others in the lab activity as well. So, I think it's that combination of a healthy funding environment as well as lab access. Bob McMahon: Yes. I think, Puneet, just to build on what Mike was talking about, if you go back to our first quarter results, we had January in our first quarter, and that was just coming off of Omicron -- the wave of Omicron. And we were talking about seeing increased activity starting in February as -- late in January, early February as kids were going back to school. We saw that continue throughout the course of our second quarter and really across the board. So, I think, it's pretty broad-based, particularly in our cell analysis business was one of the -- probably the strongest in that area and saw a really nice recovery after that first wave of Omicron there. And I think it continues to speak to kind of the value proposition that we have in cell analysis. Operator: The next question comes from Derik De Bruin with Bank of America. Derik De Bruin: Hey. It's Derik. Thanks for taking the questions. Just sort of follow-up on some things Puneet asked. So, we've been getting a lot of questions from investors basically asking if what the instrumentation sector is seeing is sort of like a pull-forward of the budget flush earlier in the year because customers are worried about delays in products, supply chains or anything like this. I mean, are you seeing any sort of like unusual order patterns? Or anything that's still suggesting it could be still catch-up orders from 2022 that didn't get -- sorry, for 2021 that didn't get shipped this year? Just like to because the instrumentation numbers have been just so strong across the group. Mike McMullen: No. We haven't seen any indication of that. And I think the supply chain challenges, if you will, are no better, no worse. So, there's nothing that would be -- from a supply chain standpoint that would be encouraging customers. I got to get my order book now or I won't get a product. So we're not seeing that. We do think that some of the markets have seen an increase in their overall inherent long-term growth rate, particularly pharma, biopharma. We actually think some of the COVID challenges we had that I mentioned earlier have actually led to a more positive funding environment in some aspects of our marketplace. And Bob, I don't know if you have thoughts on this as well or... Bob McMahon: Yes. I think from the standpoint of order growth, from a budget perspective, it only counts if they actually get the product, right? And so, if you look at -- the order growth continues to grow faster than revenue, which says, hey, from our standpoint, there's not necessarily pull-forward and it's just robust demand. Derik De Bruin: Got it. So, no sign of over-ordering, for example, that you can see? Okay. And I guess another question... Bob McMahon: Derik, just one other thing, I think, just real quick on that. Yes, because we continue to look at -- we talked about it relative to China, but we look at it on a on a regional and global basis. And again, the order cancellations are at -- year-on-year, they're lower than they were last year. And last year, they were lower than the prior year. So, they continue to be at a very de minimis amount. It's something that we haven't seen more -- somebody is placing orders with multiple vendors and whoever can deliver gets the product first. I think it is consistent across the industry where we just are seeing very strong demand. Derik De Bruin: Got it. Thanks. That's really helpful. And just in terms of some of the competitive dynamics, I mean, it -- some of the other companies in the space have been talking about share shifts and changes going on in the markets and customers going on. I mean, it sounds like your order book is still -- I mean, did I hear you correctly you said mid-20s order growth in China? It doesn't sound like there's any sort of like change in the competitive dynamics going on in that region? Mike McMullen: At least not with us. Bob McMahon: Yes. I was going to say for some of our core technologies, it's mid-20s globally. Mike McMullen: Yes. And we have included analytics on this, Derik, with win-loss ratio. So, we know what's going on with the business, and we can kind of parse through the rhetoric. Operator: The next question comes from Patrick Donnelly with Citi. Patrick Donnelly: Bob, maybe following up on that. Just looking at the guidance -- in terms of the guidance, obviously, you guys are typically pretty conservative. So, it's encouraging to see that 100 bp bump for the year. Can you just talk about, I guess, what gave you the confidence? It obviously implies a decent 4Q ramp. Is that just coming from exactly what you talked about there, the order growth, obviously, China coming back, visibility into that? Maybe just talk to the confidence level. Again, historically pretty conservative. So, that 100-bp bump off an in line quarter, maybe just talk through that a little bit. Thank you. Bob McMahon: Yes. No, you're spot on, Patrick. You hit on the two key points. One is the continued strength in our order book globally, where our orders continue to outpace our revenue. And then you build on that fact we have a strong conviction that the revenue deferred from China we will recover. And so, you see that in both, Q3 and really Q4. You see that step-up because of the strength. I would say our visibility remains high, particularly in the instrument side of the business with record backlogs across all of our technology stacks. Patrick Donnelly: Okay, great. And then, Mike, maybe following up on one of the earlier questions on cyclicality. Mike McMullen: Sure. Patrick Donnelly: We get a lot of questions about recession sensitivity and thoughts about if there is a recession where the companies look like. You guys have obviously transformed the portfolio quite a bit since the last time we saw a real pullback. Can you just talk about the resiliency of the portfolio broadly, how you would think about, what this would look like into a recession? And then again, maybe just expand a little bit on what's cyclical, what's not across the entire portfolio there. And then similarly, Bob, just the levers on the cost side, if things were to slow. Mike McMullen: So I'm going to make a few opening comments here. Then Bob has been doing a nice little set of model here. He has a few slides to reference, so he can give an even more precise answer. But I must use the word resiliency or resilient in my script comments at least 5 or 10 times because -- really to drive the point home that the Agilent business model, business portfolio, is significantly different than the last time that we've seen some type of recessionary pressure on the business. And at this point, for example, to a service business that just posted another 10% core revenue growth where I've got over 10% of my total company revenues under a service contract, whole consumables business, our NASD business, what we've been doing to really change the nature of our business and also deeper penetration in markets such as pharma, biopharma, which tend not to be as affected by a recessionary pressure if that was to occur. And Bob, I know this is something you're a keen student of, and I think we'd be happy to share some more insights here. Bob McMahon: Yes. Thanks, Mike, and you're telling all my secrets with my secret pages here. But I think, Patrick, to your point, this is something -- as Mike was talking about, the portfolio really has dramatically changed. So, if you went back to probably '08, '09, the great financial crisis, our business was much more capital-intense, much more instrument-oriented than it is today. It was probably in the mid-30s in terms of services and consumables. And today, it's closer to 60%. And then, if you also look at it, the pharma and clinical businesses, which are probably more recession-resistant, they're now 50% -- greater than 50% of the entire company. And so, back then, we were pretty close to GDP. And if you just look at what happened in COVID 2020, one of the greatest shocks we had, actually, we still grew 1%. And so, you can see that we've got a much more resilient business model because of the higher concentration, not only in faster and more resilient markets like diagnostics and the pharma business. But then when you look at the types of products that we have, the greater element of services, a lot of them on contract, as Mike just talked about, but then the consumables piece and then the consumables and services a greater proportion of the business than we had before. And then, even in some of those areas that we talked about, the more -- we're traditionally viewed as cyclical, there's some longer-term growth drivers. I think that people are going to still transition from gas-powered cars to electrical cars. There's still going to be a regionalization of investments and capacity around semiconductors and so forth to bring them closer to the markets, whether that be here in the U.S., Europe and other places to diversify that supply chain. Those are things that weren't there in 2020 -- or in 2008-2009. So I think we've got some tailwinds from a market perspective, and the business composition looks very different. Operator: The next question comes from Rachel Vatnsdal with JP Morgan. Rachel Vatnsdal: So, another question around biopharma. Biotech funding slowdowns have obviously been an area of concern. So, could you just talk about if you've seen any slowdown from customers related to funding concerns at all? And then, have you had any concern amongst challenging therapy customers? Or is that business really operating as expected as well? Mike McMullen: Yes. So, let me leave with some thoughts on the biopharma, and maybe you want to jump in on the cell and gene therapy, Jacob. But no, we haven't seen it. We've seen some of the publicized concerns, but it's not showing up in our discussions with customers or in our order book or order funnel. In fact, that's why I pulled Padraig into the conversation earlier because we're actually expanding our penetration in there. So, the funding environment still remains strong for the products and services looking from Agilent. And then, I know that you've got something going on with Lonza right now already on the cell... Jacob Thaysen: Yes. Actually, the -- overall the cell analysis business is doing really well, and we are -- we have a high penetration into biopharma. Actually, one of the areas we didn't have that high was in the Seahorse, where we were very balanced towards academia. And here over the last a period of time, we have launched a new product which is really penetrating into biopharma, really doubled our penetration into the biopharma for the -- especially for the gene and cell therapy area. Also the same for the our LC/MS business where we have a strong presence in the oligo, and we will further improve that over the next period of time here. So, we actually see a lot of strength still in that area. And as Mike mentioned, we also are committed to partnerships. Lonza, where they have built a new platform that can be a bioreactor that can actually -- that could be used out in the in the hospital settings. And we are working with them to improve that to put QC methodologies in there based on our cell analysis technology. So we are -- continue to be very bullish in this space. Bob McMahon: Yes. Hey Rachel, one other thing, it's a question that's come up a number of times. So, we've done a fair amount of analysis. And as Mike and Jacob talked about, we haven't really -- we haven't seen any slowdown in the order book or any -- even in the elongation, any material elongation, in kind of the order conversion cycle, so to speak, in terms of getting from proposal to order. The other piece that I think is probably underappreciated is the penetration that we have actually into this market from a services and consumables base. And so, we have probably some of the highest attach rates in our biopharma businesses just because of the types of instruments that they buy and the amount of service uptime that they require. And as long as those customers don't go bankrupt, we'll still have that. And we haven't seen any material write-offs in any of those things. So, I think people think about it and go right to instrument, but there's a big component of services and consumables there, too, that will continue to be kind of the gift that keeps on giving. Rachel Vatnsdal: Great. Thanks. That's really helpful. And then two more questions from me on C&E. So, last quarter, you listed the C&E guide for the year at high single digits to low double-digit growth. So, can you give us an update on if that outlook has changed at all given the 9% growth this quarter? And then, kind of diving deeper into C&E. So, you and your peers have touched on battery testing being an opportunity in that segment, and it's really starting to get some increasing traction. So can you walk us through that market opportunity and how meaningful that could be over time? Bob McMahon: Yes. So,, our guidance for C&E hasn't changed. We were in line with the expectations for Q3 despite kind of the pushout of some of the China-related business. If you can -- GC and GC/MS have probably a higher concentration into the chemical and energy business. And actually, we still grew 9%. So, we're expecting to see a nice rebound into Q3 and Q4, primarily Q4 as that business comes back, and they're still on track to that double digit. Mike McMullen: And Bob, I think it's fair to say it wasn't just C&E in China. It also was C&E globally where our product is provided by China for those customers. Bob McMahon: And I think in terms of the areas around battery and technology and clean energy technology, and I would throw in kind of semiconductor in that and some of the capacity expansion. So on the battery technology, those are emerging areas that we've talked about for the last several quarters here. It's still an emerging technology. There's only a handful of battery manufacturers right now, but they are significantly increasing capacity around the world. And so, it's a several hundred million dollar kind of market opportunity today and growing quite substantially. Operator: The next question comes from Josh Waldman with Cleveland Research. Josh Waldman: I think one for you, Mike, and then one for Bob. Mike, just want to expand on the instrument backlog questions. I mean, curious if you could provide a bit more context on the backlog strength. Just trying to get a sense on how much of this is a reflection of stronger orders versus potentially a function of tighter supply, maybe even the China GC facility shutdown in fact. You talked on biopharma strength. Are you seeing order -- instrument orders from more cyclical accounts like applied and industrial also run ahead of expectations? Mike McMullen: Yes. I think the story -- the headline story here is transitory impact on backlog build for an element of a COVID-19 lockdowns in China. But the big story -- the big macro story is orders continue to outpace revenue, so strong instrument demand across our two largest markets. And I can recall some of the questions we got earlier this year about, hey, what's the upside in your plan. We said, we think it sits in our two largest markets, pharma and C&E. And that's actually what's happening. So -- and I think we've probably got a little bit larger backlog build right now in C&E just because of the need to be able to deliver GCs from our Shanghai factory, albeit we were able to shift some of our production to our site in the U.S., and that's continuing to ramp. But again, I think the macro story here is really strong overall market environment for orders. And we're feeling really good about our ability to meet our customers' expectations on deliveries. We see customers continue to be satisfied with their relationship with Agilent. I think you saw me try to hit that in my closing comments. And then as Bob mentioned, we monitor very closely the level of order cancellations and continue to be delighted with where that stands. Bob McMahon: Yes. Hey Josh, this is Bob to kind of build on that. If we kind of peeled the onion back and looked at the backlog for LSAG, it's significantly above where it was last year. It's hard to peel out. There have been some longer delivery times because of logistics, but I would say the majority of it is demand-driven. It is not because it's longer delivery times. I mean, even if you took the $50 million to $55 million out -- yes. Even if you took the $50 million to $55 million out, it's still significantly higher than what it would be historically. It's a record backlog even if you take the kind of the onetime $50 million to $55 million China deferral out. Josh Waldman: Okay. And then, Bob, can you bridge us to the new EPS outlook? I mean you beat Q2 guide by $0.01 at the high-end raise, the full year by $0.03. Just curious how strong organic growth and other variables like share repo, FX and margin are being accounted for in the new guide. Bob McMahon: Yes. It's a good question. So, it's $0.01 for Q2 beat and basically $0.01 for Q3 and Q4 with the share repurchase helping us by a couple of points, offset by FX. I would say, it's a prudent guide. Josh Waldman: Oh, prudent guide. Okay. Mike McMullen: We had to get that prudent in today. Didn't we, Bob? Operator: The next question comes from Jack Meehan with Nephron Research. Jack Meehan: I just wanted to keep going on chemical and energy. Just first, how much of the manufacturing headwind was in this end market, maybe versus food or environmental or elsewhere? I'm just guessing the underlying was a lot stronger than the 9% headline for the end market. Bob McMahon: Yes. Your intuition, Jack, is spot on. We didn't -- for purposes of looking at this, we looked at it more on a technology stand rather than kind of end market. But if you look at most of it actually being in China, that's where most of the impact was. And that is a market that's over-indexed to food, chemical and energy and pharma. Those were the 3 biggest markets. Environmental and forensics does have an impact there as well, but it's probably less so than the other three that I just talked about. Mike McMullen: I do recall we had some larger European orders in C&E that will be filled later because we couldn't get GCs to them this quarter -- this past quarter. Jack Meehan: Got it. That's helpful. And then, just following up on NASD. Just the expectations in the back half of the year. You guys are the masters of eking out additional capacity and what you have today with Train A and the Frederick site. But is the expectation kind of revenue is more flattish from here for the remainder of the year? And then, just a quick clarification for Train B, talked about 2023. I think previously, you said end of this year, just don't know if there's any -- I'm reading too much into that, but just any comment on the time line would be great. Mike McMullen: Bob, do you want to take the first one? Bob McMahon: I'll take the first one, yes. So I think if we look at what we have been able to do in Q2, it was very strong growth. it is slightly better than flattish as we've kind of tapped out -- as we're maxed out right now in capacity. But as you point out, the team continues to do a fantastic job to bring out new capacity. I will say that we do have a shutdown -- a planned shutdown in Q3 as we're doing some of the installation of Train B, which will temporarily depress the revenue there. That's built into the guide. And so, there may be a slight sequential downturn, but that's all part of the overall plan. Mike McMullen: And Jack, as I mentioned in my prepared remarks, we had a chance -- actually, Bob and I and Sam had a chance to actually go down and spend time with the team to see firsthand does a great job there to thank them for their work. And they've really done a great job both winning new business as we looked into '23 but also meeting -- also supporting a major expansion of our production, which we've been referring to as Train B. And to answer your question, I would say is, first of all, there's no changes to our outlook in terms of 2023 revenue. We do think it's not likely that we'll start production this calendar year. So, it's most likely early calendar 2023. We've had some great support from the construction teams are supporting our effort here, but also have experienced some COVID-related to supply chain issues. But as you can imagine, Jack, we also were prudent in our initial outlook for 2023. So, don't read into that anything beyond the fact that it may take us a little bit longer to get the plant up and running, the new capacity up and running, but our revenue outlook for 2023 remains unchanged. Jack Meehan: Super. And Mike, you said prudent now a couple of times but was just wondering, could you confirm, is the best still yet to come? Mike McMullen: Absolutely. Thank you, Jack. The best is yet to come. We’re Agilent. Right after this call, I'll be doing an earnings call video for the Agilent team and that might close. So -- and thank you very much for that, Jack. Operator: The next question comes from Daniel Arias with Stifel. Daniel Arias: Bob, I just wanted to maybe follow up on that pricing question and ask if there are areas in the portfolio where the backlog or the lead times are long enough to where you sort of need to go back and requote pricing for the current environment. Or is that not something that you really have in play? And if it is, how successful might you be in doing that? Bob McMahon: Yes. I'll look to my colleague and Jacob, but we don't requote when we price. So we commit to the pricing at the time that the quote was valid or the order. And so, what we're seeing here is, if we take pricing in January, we just started seeing some of that flow through in the late second quarter just given the backlog. So, if we take pricing now, it's really in terms of anticipating you'll expect to see it sometime in late Q4, really into 2023. Mike McMullen: You can write, Jacob? Daniel Arias: And then, maybe just on NAS -- oh, sorry, Jacob. Yes. Mike McMullen: No, no, I was -- just sorry about that. Daniel Arias: I was just going to ask one about NASD and just sort of the way that the order book is building out for 2023. Is that more a reflection of where backlog is for NASD or just the acceptance time lines that you have customers talking about at this point? Mike McMullen: Sam, why don't you speak to that? I know you spent time with Brian on the exact question. Sam Raha: Yes. Happy to. Well, listen, I mean, the backdrop of the market continues to be a strong demand. And we're seeing that both, from existing clients that we have for materials we're making for them right now but as well as new programs. And we are seeing a lot of interest from new pharma clients as well. So, when you look at 2023, it's very healthy demand. In fact, we've already sold a very significant part of our capacity for 2023 and already working on opportunities for 2024 and beyond. And that's just the cycle and the maturity and I think the positive outlook for this segment and our leadership in it. Bob McMahon: I was going to say, hey, Dan, just to build on what Sam is saying, I mean, this is really a class effect. I mean when we think about kind of the therapeutic areas and the proof of now several new products that are on the market, this is really -- you're seeing multiple big pharma and mid-cap pharma looking at therapeutic areas with this technology. And so it is really something that we're a leader in. We're building capacity aggressively. And it is really more a function of the market demand as opposed to anything from our standpoint of capacity. If we add more capacity, we'd have more revenue. Daniel Arias: So, just to maybe put a bow on that, incremental orders that are coming in now, is it possible for those to be delivered in 2022? Or are those 2023 deliveries just by virtue of what you're saying on capacity? Bob McMahon: Yes. We're pretty much capped on 2022. We have all the business we're able to process this year. So it's really about 2023 and beyond at this point. Operator: The next question comes from Catherine Schulte with Baird. Catherine Schulte: I guess, first one on NASD, and then I have a follow-up on M&A. But with NASD, clearly, a lot of interest there, a lot of demand from customers. I think one of your main customers has a PDUFA date coming up in July. How do you think about evaluating capacity expansions even beyond Train B? And what should we be expecting to hear from you guys on that front? Mike McMullen: Yes. We're actively working on the answer to that question right now. So nothing yet to share, but I can assure you there'll be more -- there's more letters in the alphabet than A and B. So you can expect us to continue to invest and expand this business. Catherine Schulte: All right. Perfect. And then, you mentioned in your comments -- yes. You mentioned your comments continuing to actively look at M&A opportunities. Can you just give us your latest thoughts there in terms of appetite and of size and substantial hurdles that you would be applying? Mike McMullen: Yes. I think our appetite remains the same in terms of as part of our Build and Buy growth strategy. We've indicated previously that we have an appetite to do a larger M&A that we done historically. We've talked about it being multiples of the BioTek acquisition. It's really just a matter of making sure we find the targets that make the most sense for us strategically, and of course, making sure they create value for our shareholders. And we have remained disciplined through all the hype of the -- of what we experienced last year with the SPACs and IPOs coming out, et cetera. I think the market is still -- is now becoming a little more rational in terms of -- and I say a little bit more rational in terms of price expectations, albeit not everybody has forgotten what they thought they once were or were 6 or 7 months ago, Bob. So we remain very active nothing to announce, but this remains a priority for the Company. But we're not going to do deals just to do deals. We have to do deals that makes sense for our shareholders. Operator: There are no further questions registered at this time. And that concludes the Q&A session. I'll pass the conference back to Parmeet to conclude the call. Parmeet Ahuja: Thanks, Selena. And thanks, everyone, for joining. With that, we would like to wrap up the call for today. Have a great rest of the day. Operator: That concludes the Agilent Technologies Inc. Q2 2022 earnings conference call. Thank you for your participation. You may now disconnect your line.	[ { "speaker": "Operator", "text": "Good afternoon and thank you for attending today's Agilent Technologies Inc. Q2 2022 Earnings Conference Call. My name is Selena, and I will be your moderator. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to our host, Parmeet Ahuja, Vice President of Investor Relations. Please go ahead." }, { "speaker": "Parmeet Ahuja", "text": "Thank you, Selena, and welcome, everyone, to Agilent's conference call for the second quarter of fiscal year 2022. With me are Mike McMullen, Agilent President and CEO; and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Sciences and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our second quarter financial results, investor presentation and information to supplement today's discussion along with a recording of this webcast are available on our website at www.investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of April 30th. As previously announced, beginning in the first quarter of fiscal 2022, we implemented certain changes to our segment reporting structure. We have recast our historical segment information to reflect these changes. These changes have no impact on our Company's consolidated financial statements. We will also make forward-looking statements about the financial performance of the Company. These statements are subject to risks and uncertainties and are only valid as of today. The Company assumes no obligation to update them. Please look at the Company's recent SEC filings for a more complete picture of our risks and other factors. And now, I'd like to turn the call over to Mike." }, { "speaker": "Mike McMullen", "text": "Thanks Parmeet, and thanks to everyone for joining our call today. In Q2, the Agilent team again demonstrated the resilience and strength of our business model. We delivered core revenue growth in line with our forecast, expanded operating margins, and exceeded our EPS expectations. We did this while navigating a dynamic macro environment, including the conflict in Ukraine and COVID-related lockdowns in China. Our Q2 revenues are $1.61 billion. This is up 7% core and is on top of growing 19% in Q2 a year ago. Order performance was even stronger growing double digits on a core basis. Second quarter operating margins at 25.3% continued to expand, up 140 basis points from last year. Earnings per share of $1.13 are up 16%. We achieved these results despite the COVID-related lockdowns that closed our operations in Shanghai, starting in late March and continuing through the entire month of April. We estimate that this is roughly a 350-basis point headwind to our core revenue growth for the quarter. As Bob will indicate when he takes you through the details, this business is not lost and is expected to be recovered through the rest of the calendar year. Most importantly, our team in China is safe, and we restarted limited operations in May at our GC factory and logistics center in Shanghai. From an end-market perspective, the pharma and chemical and energy markets again led the way for us. Our pharma business, Agilent’s largest market, grew 13%, led by biopharma growing high 20s. This represents our seventh consecutive quarter of double-digit growth in the pharma market. It also builds on top of a stellar 29% growth rate last year. The momentum in our chemical and energy business also continued this quarter, delivering 9% growth in line with expectations and overcoming the shutdown of our primary GC production facility in Shanghai and the conflict in Ukraine. Growth was driven by advanced materials and chemicals. On a geographic basis, the Americas again led the way with 13% growth built on top of 27% growth a year ago. Europe also performed well with growth coming in at 7% following 16% growth last year. China revenues were on track with our expectations through March, but we exited the quarter down 3% given the COVID-related lockdowns. While revenues were affected by the temporary shutdowns in the quarter, overall demand in China remains very robust. In fact, China was the fastest growing region in Q2 from an order perspective, up about 20%. We remain very confident about the ongoing strength of our business in China. Looking at performance by business unit, the Life Sciences and Applied Markets Group generated revenue of $896 million, an increase of 4% on a core basis. Given our manufacturing footprint and relative strength in China, LSAG was disproportionately impacted by the COVID-related shutdowns there. To provide some additional perspective, all major product lines, excluding GC related products, grew solidly in the quarter, led by strong performance in our cell analysis business growing in the mid-teens. Orders for LC and LC/MS continued to be strong. Orders grew mid-20’s globally with particularly high adoption of our two new Bio-LC products. On the LC/MS front, we look forward to announcing several exciting new offerings at the upcoming ASMS conference that will expand our portfolio. Our value proposition continues to resonate with our customers and LSAG exited the quarter with record backlog. The Agilent CrossLab Group posted services revenues of $353 million. This is up 10% core. Growth in services was again broad-based across services contracts, preventive maintenance, compliance, education, and informatic enterprise services. The scale of our ACG business and breadth of portfolio continued to drive growth and margin expansion even in the face of inflationary pressures. Q2 marked the sixth straight quarter we’ve delivered growth across all markets and regions. The Diagnostics and Genomics Group delivered revenue of $358 million, up 15% core versus 16% last year. Our excellent growth was led by NASD and genomics. The NASD team delivered yet another strong quarter, generating record revenue and profitability. During the quarter, I had a chance to visit our team in Colorado and see first-hand the excellent progress that’s being made meeting current customer needs and also the work underway in continuing to build for future growth with our Train B expansion. We remain extremely bullish about NASD’s future and with Train B coming online in 2023, we’re adding yet another $150 million plus in capacity. Looking across the company, our One Agilent approach and focus on our customers has never been stronger. During the quarter, we were ranked number one in our industry and number two overall in customer satisfaction in The Management 250 ranking, developed by the Drucker Institute. In addition, the new Agilent Commercial organization is already resonating well and delivering successfully for our customers. Agilent’s Q2 results are yet another proof point for how we build a resilient company that can quickly adjust to a changing environment and still post strong results. Given our results to date, along with our backlog and continued order strength, we are again raising our full year core revenue growth and EPS guidance. For the year, we are now expecting 8% to 9% core revenue growth and EPS of $4.86 to $4.93. Bob will provide more detail on our Q3 outlook along with more information on what we expect for the rest of the year. After Bob’s comments and before we take your questions, I will be rejoining the call for some concluding remarks. Thank you for being on the call today, and now I will hand the call off to Bob. Bob?" }, { "speaker": "Bob McMahon", "text": "Thanks Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue and take you through the income statement and some other key financial metrics. I’ll then finish up with our guidance for the third quarter and the fiscal year. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike described, we posted solid topline results in Q2 while overcoming some difficult macro challenges in the business environment. Revenue was $1.61 billion, up a reported 5.4%. In the current quarter, currency was a headwind of 2.1 points while M&A added 20 basis points of growth. Core growth was up 7.3%, in line with expectations despite the COVID-related lockdowns in China, which primarily affected us in April. We estimate the lockdowns deferred $50 million to $55 million of revenue into future quarters, impacting growth in Q2 by roughly 350 basis points. In addition, COVID testing-related revenues were roughly a one-point headwind in the quarter. Our largest market, pharma, grew 13% during the quarter, on top of 29% growth last year. Biopharma continued to be the main driver of results, growing 27% year-on-year, led by NASD. Investments in R&D programs and demand for instrumentation, consumables and critical components remained strong. Pharma represented 37% of our overall revenues this quarter. To put that in perspective, in Q2 2019, effectively one year before the pandemic started, pharma represented just 30% of our business. This not only highlights the strength and resilience of this market, but it also demonstrates how our innovation and investments in higher growth markets continues to pay off. Chemical and energy continued its strong trend of positive results, growing 9% during the quarter despite the impact of the COVID-related lockdowns in China and the conflict in Ukraine. Results were led by strong double-digit growth in advanced materials and specialty chemicals. We expect strong demand to continue in these areas, particularly in semiconductors and battery and clean energy technologies as industry-wide capacity expands. Diagnostics and clinical grew 5% on top of 13% growth last year as year-on-year declines in COVID-related revenues and the temporary shutdowns in China muted our results. The academia and government market was a nice surprise for us, growing 5% in Q2 on top of 21% growth last year. We saw an increase in spending in this market as more university labs opened up and students returned to on-campus learning. In addition, sales activity and the funding environment continues to be healthy. In the food segment, we saw growth across all regions except for China due to the shutdowns. The higher concentration of food business in China drove the food segment to decline low single digits against a very strong comparison of 22% growth last year. And rounding out our end-markets, environmental and forensics grew 1% versus an 8% growth last year. On a geographic basis, the Americas grew 13%, Europe grew 7%, Asia, excluding China grew 8%, while China declined 3% in the quarter as the lockdowns affected our manufacturing and logistics operations for over a month. Regarding China, I’d like to provide some additional detail on how the quarter evolved and how we expect to see the recovery progress. First, as Mike said, demand remains strong with the order growth of about 20%, despite the temporary COVID lockdowns. Second, our business in China was tracking very well with our expectations through late March when production and our main logistics hub in Shanghai were shut down and remained closed throughout April. We were able to partially reduce the impact of the lockdown by shifting production to other factories where possible and adjusting the shipping routes into and out of China. We expect the $50 million to $55 million in revenue to be recovered throughout the rest of the calendar year, so it is deferred, not lost. In terms of phasing, we expect to continue to ramp our operations and anticipate modest recovery of the Q2 impact in Q3. We expect the majority of the recovery to occur in fiscal Q4 with some spillover into November and December, which is our first fiscal quarter of 2023. This phasing is baked into our updated guidance. Now turning to the P&L. The team continues to execute at a very high level. Second quarter gross margin was 55.7%, up 30 basis points from a year ago as pricing actions and productivity helped offset inflationary pressures tied to ongoing supply chain constraints and higher logistics costs. Operating expense leverage and strong cost management helped drive very healthy incremental improvements as we delivered an operating margin of 25.3%, up 140 basis points from last year. Our tax rate for the quarter was 50 basis points better than forecast, helping us deliver earnings per share of $1.13, up 16% versus last year, and exceeding our expectations. Looking at cash flow and our balance sheet, we generated operating cash flow of $283 million in the quarter while investing in $64 million in capital expenditures during Q2, with the year-on-year increase primarily related to the NASD expansion. Cash flow in the quarter was impacted by the transitory impact of COVID-related lockdowns in China as well as increased inventory to fulfill strong demand in a challenging supply chain and logistics environment, as expected. We are still on track to deliver our cash flow forecast for the year. During the quarter, we again took advantage of market volatility to repurchase $234 million worth of shares. We also paid out $63 million in dividends, returning a combined total of $297 million to shareholders. Our balance sheet continues to be healthy with a net leverage ratio of 0.9 times. And earlier this month, we refinanced $600 million in senior notes opportunistically, and now have no long-term debt maturing until 2025. As we stated last quarter, our approach given current market conditions is to continue to be aggressive in deploying our capital. Given our strong balance sheet and confidence in the future, we intend to deploy another $250 million in opportunistic share repurchases in Q3 while continuing to actively look at M&A opportunities. Now, let’s move to our improved full year guidance and our outlook for the third quarter. Given the strong business performance in the first half of the year and order backlog, we are raising our full year core revenue growth to an expected range of 8% to 9%, up a full point from our previous guide. This core revenue takes into account the recovery phasing in China, as well as a $35 million, or 55 basis-point headwind due to the conflict in Ukraine. While we’ve increased our core growth expectations, the dollar has again strengthened considerably since our last guide, resulting in estimated currency headwinds of $170 million for the year, up $60 million since our last guide. And the impact of M&A remains unchanged. This results in us maintaining our full year reported revenue guidance range of $6.67 billion to $6.73 billion for the full year. We have also increased our EPS guidance for the full year to $4.86 to $4.93 per share. This is up from the previous range of $4.80 to $4.90 per share, and now represents 12% to 14% growth versus fiscal year 2021. For Q3, we’re expecting revenue to range from $1.625 billion to $1.650 billion. This represents core growth between 7% and 9%. We expect operations in China to ramp and be fully operational before the end of the quarter and continue to accelerate into Q4. Given the strengthening of the dollar, exchange rates are expected to have a negative impact of about 4.7 points on the reported growth in the quarter. Closing out our guidance, in Q3 non-GAAP EPS is expected to be in the range of $1.20 to $1.22, up 9% to 11% versus the prior year. This is based on a 14% tax rate and 300 million diluted shares outstanding. The Agilent team once again performed extremely well in Q2 under some very challenging circumstances. At the same time, our business remains strong, and I’m confident we will continue to deliver strong results in Q3 and through the rest of the year. With that, Mike, I will turn it over to you for some concluding comments." }, { "speaker": "Mike McMullen", "text": "Thanks Bob. Before we take your questions, I would like to share some thoughts with you on the current environment. As you know, we’re living in very dynamic times. However, our end markets remain strong. Our build and buy growth strategy is working. What is also very clear is the ability of the Agilent team to continue to deliver in a challenging external environment. We have built a resourceful, quick moving team and a resilient business model that has shown again-and-again, time-after-time, that we can successfully address any challenges or obstacles that come our way. We delivered inline growth, increased margins by 140 basis points and exceeded our EPS expectations during a time of rapidly growing inflation, continued supply chain challenges and the effects of a COVID-related lockdown in a key market. In times like this, our customers want to work with people and companies they can rely on. This works to our advantage, and I remain confident in our growth strategy continuing to deliver, and in the power of the unstoppable One Agilent team. Our growth drivers remain intact, and our business prospects remain strong now, and into the future. Thank you. And now, back to Parmeet as we take your questions. Parmeet?" }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Mike. Selena, please provide instructions for Q&A now." }, { "speaker": "Operator", "text": "[Operator Instructions] The first question comes from Vijay Kumar with Evercore ISI." }, { "speaker": "Vijay Kumar", "text": "Hey, guys. Thanks for taking my question. Mike, certainly, you did mention this is an impressive performance given the relative fears on the Street on impact from China lockdowns. So, I guess, one, when you look at your peers, very strong instrument growth across LC and mass spec. Maybe could you talk about how did Agilent's portfolio within that instruments segment perform? What were the trends within the Q? Were there any lockdown impact for instruments and maybe order trends specific to instruments, please?" }, { "speaker": "Mike McMullen", "text": "Yes. Vijay, thanks for the comments. We're really pleased with the performance given all the teams we're dealing with in the external environment. So, we're going to tag team the response here with myself and Jacob. So, the story is the -- our instrument business is doing very well. And in the call, we highlighted a few areas where we received an outstanding order growth. We talked about the cell analysis business, LC and LC/MS, particularly on the bio side, and I'll have Jacob add some specifics. And absolutely, as I tried to pull out in remarks, I think Jacob's business was disproportionately impacted by the shutdowns that we experienced of a COVID nature in China. So, we're very bullish about the strength of our LSAG business, exiting the quarter with record, record backlog. And Jacob, why don't you talk about what's been going on and why you're excited about the future?" }, { "speaker": "Jacob Thaysen", "text": "Yes. Absolutely. Of course, the quarter was challenging with the Shanghai lockdown. But overall, we continue to see very strong growth in orders coming in, particularly in our LC, LC/MS business, which I think Mike alluded to also some of the NPIs we came out with approximately a year ago in the LC business. And with that connected with our very strong positioning in the mass spec, we continue to see very strong growth in that aspect. Clearly, with GC and GC/MS was challenged in China this year -- or this quarter due to the situation. But overall, the orders continue to be very strong. So, I'm not concerned about that. And besides that, I think we have seen also for the spectroscopy business that the material science is really a strength for us right now. So overall, very strong performance across the portfolio." }, { "speaker": "Bob McMahon", "text": "Yes. And hey, Vijay, this is Bob. Just to kind of dimensionalize that impact when we talk about disproportionate, roughly 80 to 85% of the impact due to the COVID lockdowns was instrument -- LSAG-related." }, { "speaker": "Vijay Kumar", "text": "That's helpful, Bob. And maybe one on the top -- lockdown impact in China. The guidance is assuming that $50 million to $75 million comes back in the second half. What gives you the confidence that this is coming back in second half? And where are we in China? Have the markets reopened? Like is your production facility up and running? Because I know you have a GC manufacturing facility, and there have been some questions on perhaps there could be an impact in GC shipments out of China." }, { "speaker": "Mike McMullen", "text": "Vijay, how would I lead off the response here? So -- and this ties into why we have confidence about the outlook. So, we are back up and running in Shanghai, albeit on limited capacity. Both our logistics and production facilities are now up to 25% operating capacity. And we've actually started some limited international and in-country shipments. So product is starting to move. And we expect to have -- our view is that the lockdown controls will start to ease over the coming weeks and that we'll be fully operational by the end of the quarter, but we don't want to get too far ahead of ourselves here, and that's why I think Bob will describe a fairly modest recovery assumption in Q2. I'd also like to take this opportunity to call just to do a shout out to our team in Shanghai, who are actually camped out, living at the factory and not being asked and volunteering to do that. So, I've also got confidence in the outlook because I know what this team can do." }, { "speaker": "Bob McMahon", "text": "Yes. And to build on that point, Vijay, a couple of thoughts. I mean, we've watched the order backlog very closely. We haven't seen any cancellations associated with this. And as we're ramping up the factory in Shanghai, we also have dual manufacturing capabilities, and we continue to ramp up the factory here in the United States to be able to also provide GC and GC/MS. So, we are expecting, as Mike said, a very modest recovery of that $50 million to $55 million in Q3, the majority of it being in Q4 and then spilling over a little into November and December, but given the backlog and the fact that we haven't seen any of those orders cancelled, we feel like we definitely will get the product back. And if we go back to what happened in the initial phases of COVID, China dropped down pretty substantially and then came back fairly quickly, so." }, { "speaker": "Operator", "text": "The next question comes from Matt Sykes with Goldman Sachs." }, { "speaker": "Matt Sykes", "text": "Congrats on a quarter in a tough environment. Maybe kind of following up on the instrument question, just dig a little bit more into C&E. Another good quarter there. And a couple of things you called out in terms of advanced materials, battery, semis. I mean, I think traditionally this has been looked at as sort of a highly cyclical sector, but when you're seeing sort of the secular growth drivers within those subsegments, it just seems less cyclical. Could you maybe kind of help us size that sort of cyclicality versus non-cyclicality within C&E? And what could be actually far more durable from an instrument growth standpoint in that segment over the course of this year and into next year?" }, { "speaker": "Mike McMullen", "text": "So, I'm going to lead off with this and then tag team again with Jacob and Bob. But we completely agree with the premise of your question. In fact, you may recall some of our earlier presentations where we talked about there's elements of the C&E segment that aren't fully appreciated. They're being driven by capacity expansion for supply chain concerns, move to new materials, investments in semiconductor batteries. All you have to do is see what's happening in the whole automobile industry. We're a part of that. And I think it's important to just remind the audience here of the three segments that we have. And advanced materials grew, I think, mid-20s for us. The chemical side grew high teens. We were down in the energy segment. And I think that's been historically the more cyclical element of the business. But I think you need to keep in mind that that's less than 3% -- and energy side, less than 3% of Agilent's total revenues. And perhaps I'll pass it over to you, Bob and Jacob, to -- some commentary on the relative size of those buckets, if you will." }, { "speaker": "Jacob Thaysen", "text": "Yes. I can also mention that Agilent has actually historically been very strong in material science. So, we have a very strong market presence both in the semicon industry, especially with our IC-PMS portfolio, but also with the GC, and generally speaking, in materials, in batteries and other renewable energy with our GC business. So I think we see a great potential in that. Bob?" }, { "speaker": "Bob McMahon", "text": "Yes. Just one other thing. I think on the -- just a couple of things. Energy was down. That is one area that was disproportionately impacted in China as well. So, we also had that impact. So, it wasn't -- it was a temporary phenomenon there. And then you can speak to -- it was -- China was also impacting the chemicals and advanced materials, and they still grew. So, that kind of speaks to the strength of those markets. And these are areas -- I mean it's our second-largest market. We have a leadership presence in these areas. And I would say it's just starting. When you think about the amount of capacity that's needed just for lithium-ion batteries as an example, we're only at a fraction of the capacity that needs to be there. So, these are probably $100 million-plus markets today that are having a long runway, if you just look at the cars and the opportunities here to continue to develop those. And that's just on the battery side. If you look at that, this is a very significant opportunity for us going forward, and we are definitely the leader." }, { "speaker": "Matt Sykes", "text": "Great. Thanks very much. I appreciate the color. And then just secondly, on the pricing side. Bob, you mentioned that some of the offsets on the gross margin pressure coming from pricing. Can you just kind of remind us of what your expectations are for pricing this year? And then, in terms of some of the actions you did last year, how quickly are you realizing some of those higher prices that you put in place?" }, { "speaker": "Bob McMahon", "text": "Yes. It's a really good question. And we continue to be pleased by the ability for our value proposition to be recognized in the marketplace and actually having higher price than what we had initially had at the beginning of the year. If you recall, we had talked about roughly a 1-point year-on-year price realization. Q1, we were ahead of that. In Q2, we actually accelerated beyond that. And I would say most of the pricing that we're realizing today were for actions that we took most in the fall of last year and just starting to see some of the actions that we took in January of this year just given the strength of our backlog. So, it was above that. I would say in our new guide that we actually feel more optimistic about being able to be higher than that 1%. It was higher than that, certainly in Q2, which we needed because we -- our costs have been higher as well in terms of being able to have higher logistics costs given the price of oil and the cost of shipping. But we feel very good about our ability to continue to manage that across our entire portfolio." }, { "speaker": "Mike McMullen", "text": "Bob, I think it's also very well. We feel really pleased about the net price realization that's occurred. We also continue to drive productivity as well. So, it's a combination of pricing and productivity improvements we're having across the Company." }, { "speaker": "Bob McMahon", "text": "That's right. That's right, Mike." }, { "speaker": "Operator", "text": "The next question comes from Brandon Couillard with Jefferies." }, { "speaker": "Brandon Couillard", "text": "Mike, biotech end market, very strong again in the second quarter. Just talk about sustainability of trends there and perhaps the impact of NASD specifically on the biotech segment growth." }, { "speaker": "Mike McMullen", "text": "Yes. So, I'll have you call that out, Bob. I know that's in our notes. And I think what you'll hear from Bob is it's a broad-based biopharma story with really strong growth in both sides of the market, the analytical lab and NASD. We remain quite bullish on the outlook in biopharma. In fact, we continue to actually gain new business. And actually, I'll have Padraig talk about in a second. We've actually expanded the number of accounts we're serving in the biopharma space. So we're feeling really good about the long-term growth aspects of biopharma as well as the impact it's having on the business right now. You heard me crone about a few of our growth numbers in the prepared remarks. And Bob, before I pass it over to Padraig for some comments, can you remind me what it was?" }, { "speaker": "Bob McMahon", "text": "Yes. Our biopharma continues to -- first of all, Brandon, continues to be a greater proportion of the overall pharma market. So we're not only disproportionately growing in pharma, but the fastest-growing market continues to be bigger and bigger. It grew 27%. If you took out NASD, that number was still 19%. So, it still says that we have very strong growth there, and we grew backlog. And so, I feel very good about our offerings across both the instrumentation but then also across the entire portfolio of products and solutions that we have." }, { "speaker": "Mike McMullen", "text": "Yes. Thanks, Bob. And I thought given the start of this fiscal year of our one commercial organization, maybe Padraig, you think some comments of how us helping to gain further penetration in the biopharma space." }, { "speaker": "Padraig McDonnell", "text": "Yes. Mike, we're absolutely seeing that we have a bigger focus on the longer tail of accounts or smaller biopharma accounts as well as the large players. And of course, our strong focus in biopharma was with application support and so on, really helps us with attach rate in that business. And it really helps the instrument trend with that attach rate. So overall, I think we see both services and consumer has been a very strong play and very strong enabler within -- in the biopharma accounts, which we're, of course, getting a lot more access to." }, { "speaker": "Brandon Couillard", "text": "Got you. That's helpful. And then, the DGG gross margin at 56% are quite strong. Is that a mix dynamic or pricing? And should we think about mid-50s as sustainable for this business going forward now?" }, { "speaker": "Mike McMullen", "text": "I'll let you and Sam hash that one out, Bob. Go ahead." }, { "speaker": "Bob McMahon", "text": "Yes. I think we certainly benefited from an extremely strong performance there. And Sam and team have continued to drive productivity in the business there. We did benefit from mix, but it -- I wouldn't necessarily put that number in for Q3 and Q4 because if you recall, one of the things that we are starting to do in the second half of the year is ramp up the start-up costs for Train B in our NASD facility and so forth. So -- and that hits our gross margin. But obviously, that has a great payoff in '23 with that $150 million-plus capacity. So, I would say the team had a benefit of mix. They're working on that productivity and activities. But I would say in the second half of the year, we probably will see some pressure because of some of that start-up costs." }, { "speaker": "Sam Raha", "text": "Bob, it's -- completely agree with everything you said. So, it is mix, it is volume. By the way, just also affirm we benefited from price. We have some leadership positions in the market, which we are absolutely able to go after. And continued good performance expected, though. As you said, the expectation is going to be a little tougher with NASD Train B coming on board." }, { "speaker": "Operator", "text": "The next question comes from Puneet Souda with SVB Securities." }, { "speaker": "Puneet Souda", "text": "So, first one, strong pharma, obviously. But just focusing on North America and pharma. Any reason why you shouldn't continue to see that in the second half, too? I mean, the question is more around instrumentation, and it's really around -- we're seeing your peers deliver very strong growth rate in U.S. pharma. So, wondering if there is any element of pull-forward you're seeing here. And should we see a sustained sort of growth rate when we think about North America and U.S. pharma?" }, { "speaker": "Mike McMullen", "text": "Puneet, happy to answer that question. We're seeing the same phenomena. Pharma remains very, very strong in the U.S., and our outlook remains very bullish for the remainder of this year." }, { "speaker": "Bob McMahon", "text": "Yes. To give you perspective, I mean, our Americas business in pharma grew twice as fast as the overall pharma business. And we do -- we will have some comps in NASD that we won't be continuing to post a great -- the strong performance there -- as strong a performance, I should say, because we're ramping up against the capacity, which is what Train B is going to help us provide. But we're still seeing that very strong performance, particularly in the instrumentation that you were just asking about. That has been a standout." }, { "speaker": "Puneet Souda", "text": "Okay, great. And then just briefly on another smaller segment, academic and government for you, that was strong in the quarter. Maybe could you just elaborate a little bit there what's driving that? And what sort of -- what are some of the elements of growth that we should continue to expect through the year? Thank you." }, { "speaker": "Mike McMullen", "text": "Yes. And as Bob mentioned -- this is Mike. That was a nice surprise for us. I think we came off a 21% compare and still grew 5%. So, we're seeing some positive developments. The funding environment seems to be quite healthy. And even though we had some COVID-related headwinds in the academia segment in China, even that area was strong. So, we think it's continuing to be a healthy funding environment. I think perhaps some of the COVID challenges we had as the society over the last several years has reinforced the importance of funding in those areas. As well, we're seeing return to labs or access for students and others in the lab activity as well. So, I think it's that combination of a healthy funding environment as well as lab access." }, { "speaker": "Bob McMahon", "text": "Yes. I think, Puneet, just to build on what Mike was talking about, if you go back to our first quarter results, we had January in our first quarter, and that was just coming off of Omicron -- the wave of Omicron. And we were talking about seeing increased activity starting in February as -- late in January, early February as kids were going back to school. We saw that continue throughout the course of our second quarter and really across the board. So, I think, it's pretty broad-based, particularly in our cell analysis business was one of the -- probably the strongest in that area and saw a really nice recovery after that first wave of Omicron there. And I think it continues to speak to kind of the value proposition that we have in cell analysis." }, { "speaker": "Operator", "text": "The next question comes from Derik De Bruin with Bank of America." }, { "speaker": "Derik De Bruin", "text": "Hey. It's Derik. Thanks for taking the questions. Just sort of follow-up on some things Puneet asked. So, we've been getting a lot of questions from investors basically asking if what the instrumentation sector is seeing is sort of like a pull-forward of the budget flush earlier in the year because customers are worried about delays in products, supply chains or anything like this. I mean, are you seeing any sort of like unusual order patterns? Or anything that's still suggesting it could be still catch-up orders from 2022 that didn't get -- sorry, for 2021 that didn't get shipped this year? Just like to because the instrumentation numbers have been just so strong across the group." }, { "speaker": "Mike McMullen", "text": "No. We haven't seen any indication of that. And I think the supply chain challenges, if you will, are no better, no worse. So, there's nothing that would be -- from a supply chain standpoint that would be encouraging customers. I got to get my order book now or I won't get a product. So we're not seeing that. We do think that some of the markets have seen an increase in their overall inherent long-term growth rate, particularly pharma, biopharma. We actually think some of the COVID challenges we had that I mentioned earlier have actually led to a more positive funding environment in some aspects of our marketplace. And Bob, I don't know if you have thoughts on this as well or..." }, { "speaker": "Bob McMahon", "text": "Yes. I think from the standpoint of order growth, from a budget perspective, it only counts if they actually get the product, right? And so, if you look at -- the order growth continues to grow faster than revenue, which says, hey, from our standpoint, there's not necessarily pull-forward and it's just robust demand." }, { "speaker": "Derik De Bruin", "text": "Got it. So, no sign of over-ordering, for example, that you can see? Okay. And I guess another question..." }, { "speaker": "Bob McMahon", "text": "Derik, just one other thing, I think, just real quick on that. Yes, because we continue to look at -- we talked about it relative to China, but we look at it on a on a regional and global basis. And again, the order cancellations are at -- year-on-year, they're lower than they were last year. And last year, they were lower than the prior year. So, they continue to be at a very de minimis amount. It's something that we haven't seen more -- somebody is placing orders with multiple vendors and whoever can deliver gets the product first. I think it is consistent across the industry where we just are seeing very strong demand." }, { "speaker": "Derik De Bruin", "text": "Got it. Thanks. That's really helpful. And just in terms of some of the competitive dynamics, I mean, it -- some of the other companies in the space have been talking about share shifts and changes going on in the markets and customers going on. I mean, it sounds like your order book is still -- I mean, did I hear you correctly you said mid-20s order growth in China? It doesn't sound like there's any sort of like change in the competitive dynamics going on in that region?" }, { "speaker": "Mike McMullen", "text": "At least not with us." }, { "speaker": "Bob McMahon", "text": "Yes. I was going to say for some of our core technologies, it's mid-20s globally." }, { "speaker": "Mike McMullen", "text": "Yes. And we have included analytics on this, Derik, with win-loss ratio. So, we know what's going on with the business, and we can kind of parse through the rhetoric." }, { "speaker": "Operator", "text": "The next question comes from Patrick Donnelly with Citi." }, { "speaker": "Patrick Donnelly", "text": "Bob, maybe following up on that. Just looking at the guidance -- in terms of the guidance, obviously, you guys are typically pretty conservative. So, it's encouraging to see that 100 bp bump for the year. Can you just talk about, I guess, what gave you the confidence? It obviously implies a decent 4Q ramp. Is that just coming from exactly what you talked about there, the order growth, obviously, China coming back, visibility into that? Maybe just talk to the confidence level. Again, historically pretty conservative. So, that 100-bp bump off an in line quarter, maybe just talk through that a little bit. Thank you." }, { "speaker": "Bob McMahon", "text": "Yes. No, you're spot on, Patrick. You hit on the two key points. One is the continued strength in our order book globally, where our orders continue to outpace our revenue. And then you build on that fact we have a strong conviction that the revenue deferred from China we will recover. And so, you see that in both, Q3 and really Q4. You see that step-up because of the strength. I would say our visibility remains high, particularly in the instrument side of the business with record backlogs across all of our technology stacks." }, { "speaker": "Patrick Donnelly", "text": "Okay, great. And then, Mike, maybe following up on one of the earlier questions on cyclicality." }, { "speaker": "Mike McMullen", "text": "Sure." }, { "speaker": "Patrick Donnelly", "text": "We get a lot of questions about recession sensitivity and thoughts about if there is a recession where the companies look like. You guys have obviously transformed the portfolio quite a bit since the last time we saw a real pullback. Can you just talk about the resiliency of the portfolio broadly, how you would think about, what this would look like into a recession? And then again, maybe just expand a little bit on what's cyclical, what's not across the entire portfolio there. And then similarly, Bob, just the levers on the cost side, if things were to slow." }, { "speaker": "Mike McMullen", "text": "So I'm going to make a few opening comments here. Then Bob has been doing a nice little set of model here. He has a few slides to reference, so he can give an even more precise answer. But I must use the word resiliency or resilient in my script comments at least 5 or 10 times because -- really to drive the point home that the Agilent business model, business portfolio, is significantly different than the last time that we've seen some type of recessionary pressure on the business. And at this point, for example, to a service business that just posted another 10% core revenue growth where I've got over 10% of my total company revenues under a service contract, whole consumables business, our NASD business, what we've been doing to really change the nature of our business and also deeper penetration in markets such as pharma, biopharma, which tend not to be as affected by a recessionary pressure if that was to occur. And Bob, I know this is something you're a keen student of, and I think we'd be happy to share some more insights here." }, { "speaker": "Bob McMahon", "text": "Yes. Thanks, Mike, and you're telling all my secrets with my secret pages here. But I think, Patrick, to your point, this is something -- as Mike was talking about, the portfolio really has dramatically changed. So, if you went back to probably '08, '09, the great financial crisis, our business was much more capital-intense, much more instrument-oriented than it is today. It was probably in the mid-30s in terms of services and consumables. And today, it's closer to 60%. And then, if you also look at it, the pharma and clinical businesses, which are probably more recession-resistant, they're now 50% -- greater than 50% of the entire company. And so, back then, we were pretty close to GDP. And if you just look at what happened in COVID 2020, one of the greatest shocks we had, actually, we still grew 1%. And so, you can see that we've got a much more resilient business model because of the higher concentration, not only in faster and more resilient markets like diagnostics and the pharma business. But then when you look at the types of products that we have, the greater element of services, a lot of them on contract, as Mike just talked about, but then the consumables piece and then the consumables and services a greater proportion of the business than we had before. And then, even in some of those areas that we talked about, the more -- we're traditionally viewed as cyclical, there's some longer-term growth drivers. I think that people are going to still transition from gas-powered cars to electrical cars. There's still going to be a regionalization of investments and capacity around semiconductors and so forth to bring them closer to the markets, whether that be here in the U.S., Europe and other places to diversify that supply chain. Those are things that weren't there in 2020 -- or in 2008-2009. So I think we've got some tailwinds from a market perspective, and the business composition looks very different." }, { "speaker": "Operator", "text": "The next question comes from Rachel Vatnsdal with JP Morgan." }, { "speaker": "Rachel Vatnsdal", "text": "So, another question around biopharma. Biotech funding slowdowns have obviously been an area of concern. So, could you just talk about if you've seen any slowdown from customers related to funding concerns at all? And then, have you had any concern amongst challenging therapy customers? Or is that business really operating as expected as well?" }, { "speaker": "Mike McMullen", "text": "Yes. So, let me leave with some thoughts on the biopharma, and maybe you want to jump in on the cell and gene therapy, Jacob. But no, we haven't seen it. We've seen some of the publicized concerns, but it's not showing up in our discussions with customers or in our order book or order funnel. In fact, that's why I pulled Padraig into the conversation earlier because we're actually expanding our penetration in there. So, the funding environment still remains strong for the products and services looking from Agilent. And then, I know that you've got something going on with Lonza right now already on the cell..." }, { "speaker": "Jacob Thaysen", "text": "Yes. Actually, the -- overall the cell analysis business is doing really well, and we are -- we have a high penetration into biopharma. Actually, one of the areas we didn't have that high was in the Seahorse, where we were very balanced towards academia. And here over the last a period of time, we have launched a new product which is really penetrating into biopharma, really doubled our penetration into the biopharma for the -- especially for the gene and cell therapy area. Also the same for the our LC/MS business where we have a strong presence in the oligo, and we will further improve that over the next period of time here. So, we actually see a lot of strength still in that area. And as Mike mentioned, we also are committed to partnerships. Lonza, where they have built a new platform that can be a bioreactor that can actually -- that could be used out in the in the hospital settings. And we are working with them to improve that to put QC methodologies in there based on our cell analysis technology. So we are -- continue to be very bullish in this space." }, { "speaker": "Bob McMahon", "text": "Yes. Hey Rachel, one other thing, it's a question that's come up a number of times. So, we've done a fair amount of analysis. And as Mike and Jacob talked about, we haven't really -- we haven't seen any slowdown in the order book or any -- even in the elongation, any material elongation, in kind of the order conversion cycle, so to speak, in terms of getting from proposal to order. The other piece that I think is probably underappreciated is the penetration that we have actually into this market from a services and consumables base. And so, we have probably some of the highest attach rates in our biopharma businesses just because of the types of instruments that they buy and the amount of service uptime that they require. And as long as those customers don't go bankrupt, we'll still have that. And we haven't seen any material write-offs in any of those things. So, I think people think about it and go right to instrument, but there's a big component of services and consumables there, too, that will continue to be kind of the gift that keeps on giving." }, { "speaker": "Rachel Vatnsdal", "text": "Great. Thanks. That's really helpful. And then two more questions from me on C&E. So, last quarter, you listed the C&E guide for the year at high single digits to low double-digit growth. So, can you give us an update on if that outlook has changed at all given the 9% growth this quarter? And then, kind of diving deeper into C&E. So, you and your peers have touched on battery testing being an opportunity in that segment, and it's really starting to get some increasing traction. So can you walk us through that market opportunity and how meaningful that could be over time?" }, { "speaker": "Bob McMahon", "text": "Yes. So,, our guidance for C&E hasn't changed. We were in line with the expectations for Q3 despite kind of the pushout of some of the China-related business. If you can -- GC and GC/MS have probably a higher concentration into the chemical and energy business. And actually, we still grew 9%. So, we're expecting to see a nice rebound into Q3 and Q4, primarily Q4 as that business comes back, and they're still on track to that double digit." }, { "speaker": "Mike McMullen", "text": "And Bob, I think it's fair to say it wasn't just C&E in China. It also was C&E globally where our product is provided by China for those customers." }, { "speaker": "Bob McMahon", "text": "And I think in terms of the areas around battery and technology and clean energy technology, and I would throw in kind of semiconductor in that and some of the capacity expansion. So on the battery technology, those are emerging areas that we've talked about for the last several quarters here. It's still an emerging technology. There's only a handful of battery manufacturers right now, but they are significantly increasing capacity around the world. And so, it's a several hundred million dollar kind of market opportunity today and growing quite substantially." }, { "speaker": "Operator", "text": "The next question comes from Josh Waldman with Cleveland Research." }, { "speaker": "Josh Waldman", "text": "I think one for you, Mike, and then one for Bob. Mike, just want to expand on the instrument backlog questions. I mean, curious if you could provide a bit more context on the backlog strength. Just trying to get a sense on how much of this is a reflection of stronger orders versus potentially a function of tighter supply, maybe even the China GC facility shutdown in fact. You talked on biopharma strength. Are you seeing order -- instrument orders from more cyclical accounts like applied and industrial also run ahead of expectations?" }, { "speaker": "Mike McMullen", "text": "Yes. I think the story -- the headline story here is transitory impact on backlog build for an element of a COVID-19 lockdowns in China. But the big story -- the big macro story is orders continue to outpace revenue, so strong instrument demand across our two largest markets. And I can recall some of the questions we got earlier this year about, hey, what's the upside in your plan. We said, we think it sits in our two largest markets, pharma and C&E. And that's actually what's happening. So -- and I think we've probably got a little bit larger backlog build right now in C&E just because of the need to be able to deliver GCs from our Shanghai factory, albeit we were able to shift some of our production to our site in the U.S., and that's continuing to ramp. But again, I think the macro story here is really strong overall market environment for orders. And we're feeling really good about our ability to meet our customers' expectations on deliveries. We see customers continue to be satisfied with their relationship with Agilent. I think you saw me try to hit that in my closing comments. And then as Bob mentioned, we monitor very closely the level of order cancellations and continue to be delighted with where that stands." }, { "speaker": "Bob McMahon", "text": "Yes. Hey Josh, this is Bob to kind of build on that. If we kind of peeled the onion back and looked at the backlog for LSAG, it's significantly above where it was last year. It's hard to peel out. There have been some longer delivery times because of logistics, but I would say the majority of it is demand-driven. It is not because it's longer delivery times. I mean, even if you took the $50 million to $55 million out -- yes. Even if you took the $50 million to $55 million out, it's still significantly higher than what it would be historically. It's a record backlog even if you take the kind of the onetime $50 million to $55 million China deferral out." }, { "speaker": "Josh Waldman", "text": "Okay. And then, Bob, can you bridge us to the new EPS outlook? I mean you beat Q2 guide by $0.01 at the high-end raise, the full year by $0.03. Just curious how strong organic growth and other variables like share repo, FX and margin are being accounted for in the new guide." }, { "speaker": "Bob McMahon", "text": "Yes. It's a good question. So, it's $0.01 for Q2 beat and basically $0.01 for Q3 and Q4 with the share repurchase helping us by a couple of points, offset by FX. I would say, it's a prudent guide." }, { "speaker": "Josh Waldman", "text": "Oh, prudent guide. Okay." }, { "speaker": "Mike McMullen", "text": "We had to get that prudent in today. Didn't we, Bob?" }, { "speaker": "Operator", "text": "The next question comes from Jack Meehan with Nephron Research." }, { "speaker": "Jack Meehan", "text": "I just wanted to keep going on chemical and energy. Just first, how much of the manufacturing headwind was in this end market, maybe versus food or environmental or elsewhere? I'm just guessing the underlying was a lot stronger than the 9% headline for the end market." }, { "speaker": "Bob McMahon", "text": "Yes. Your intuition, Jack, is spot on. We didn't -- for purposes of looking at this, we looked at it more on a technology stand rather than kind of end market. But if you look at most of it actually being in China, that's where most of the impact was. And that is a market that's over-indexed to food, chemical and energy and pharma. Those were the 3 biggest markets. Environmental and forensics does have an impact there as well, but it's probably less so than the other three that I just talked about." }, { "speaker": "Mike McMullen", "text": "I do recall we had some larger European orders in C&E that will be filled later because we couldn't get GCs to them this quarter -- this past quarter." }, { "speaker": "Jack Meehan", "text": "Got it. That's helpful. And then, just following up on NASD. Just the expectations in the back half of the year. You guys are the masters of eking out additional capacity and what you have today with Train A and the Frederick site. But is the expectation kind of revenue is more flattish from here for the remainder of the year? And then, just a quick clarification for Train B, talked about 2023. I think previously, you said end of this year, just don't know if there's any -- I'm reading too much into that, but just any comment on the time line would be great." }, { "speaker": "Mike McMullen", "text": "Bob, do you want to take the first one?" }, { "speaker": "Bob McMahon", "text": "I'll take the first one, yes. So I think if we look at what we have been able to do in Q2, it was very strong growth. it is slightly better than flattish as we've kind of tapped out -- as we're maxed out right now in capacity. But as you point out, the team continues to do a fantastic job to bring out new capacity. I will say that we do have a shutdown -- a planned shutdown in Q3 as we're doing some of the installation of Train B, which will temporarily depress the revenue there. That's built into the guide. And so, there may be a slight sequential downturn, but that's all part of the overall plan." }, { "speaker": "Mike McMullen", "text": "And Jack, as I mentioned in my prepared remarks, we had a chance -- actually, Bob and I and Sam had a chance to actually go down and spend time with the team to see firsthand does a great job there to thank them for their work. And they've really done a great job both winning new business as we looked into '23 but also meeting -- also supporting a major expansion of our production, which we've been referring to as Train B. And to answer your question, I would say is, first of all, there's no changes to our outlook in terms of 2023 revenue. We do think it's not likely that we'll start production this calendar year. So, it's most likely early calendar 2023. We've had some great support from the construction teams are supporting our effort here, but also have experienced some COVID-related to supply chain issues. But as you can imagine, Jack, we also were prudent in our initial outlook for 2023. So, don't read into that anything beyond the fact that it may take us a little bit longer to get the plant up and running, the new capacity up and running, but our revenue outlook for 2023 remains unchanged." }, { "speaker": "Jack Meehan", "text": "Super. And Mike, you said prudent now a couple of times but was just wondering, could you confirm, is the best still yet to come?" }, { "speaker": "Mike McMullen", "text": "Absolutely. Thank you, Jack. The best is yet to come. We’re Agilent. Right after this call, I'll be doing an earnings call video for the Agilent team and that might close. So -- and thank you very much for that, Jack." }, { "speaker": "Operator", "text": "The next question comes from Daniel Arias with Stifel." }, { "speaker": "Daniel Arias", "text": "Bob, I just wanted to maybe follow up on that pricing question and ask if there are areas in the portfolio where the backlog or the lead times are long enough to where you sort of need to go back and requote pricing for the current environment. Or is that not something that you really have in play? And if it is, how successful might you be in doing that?" }, { "speaker": "Bob McMahon", "text": "Yes. I'll look to my colleague and Jacob, but we don't requote when we price. So we commit to the pricing at the time that the quote was valid or the order. And so, what we're seeing here is, if we take pricing in January, we just started seeing some of that flow through in the late second quarter just given the backlog. So, if we take pricing now, it's really in terms of anticipating you'll expect to see it sometime in late Q4, really into 2023." }, { "speaker": "Mike McMullen", "text": "You can write, Jacob?" }, { "speaker": "Daniel Arias", "text": "And then, maybe just on NAS -- oh, sorry, Jacob. Yes." }, { "speaker": "Mike McMullen", "text": "No, no, I was -- just sorry about that." }, { "speaker": "Daniel Arias", "text": "I was just going to ask one about NASD and just sort of the way that the order book is building out for 2023. Is that more a reflection of where backlog is for NASD or just the acceptance time lines that you have customers talking about at this point?" }, { "speaker": "Mike McMullen", "text": "Sam, why don't you speak to that? I know you spent time with Brian on the exact question." }, { "speaker": "Sam Raha", "text": "Yes. Happy to. Well, listen, I mean, the backdrop of the market continues to be a strong demand. And we're seeing that both, from existing clients that we have for materials we're making for them right now but as well as new programs. And we are seeing a lot of interest from new pharma clients as well. So, when you look at 2023, it's very healthy demand. In fact, we've already sold a very significant part of our capacity for 2023 and already working on opportunities for 2024 and beyond. And that's just the cycle and the maturity and I think the positive outlook for this segment and our leadership in it." }, { "speaker": "Bob McMahon", "text": "I was going to say, hey, Dan, just to build on what Sam is saying, I mean, this is really a class effect. I mean when we think about kind of the therapeutic areas and the proof of now several new products that are on the market, this is really -- you're seeing multiple big pharma and mid-cap pharma looking at therapeutic areas with this technology. And so it is really something that we're a leader in. We're building capacity aggressively. And it is really more a function of the market demand as opposed to anything from our standpoint of capacity. If we add more capacity, we'd have more revenue." }, { "speaker": "Daniel Arias", "text": "So, just to maybe put a bow on that, incremental orders that are coming in now, is it possible for those to be delivered in 2022? Or are those 2023 deliveries just by virtue of what you're saying on capacity?" }, { "speaker": "Bob McMahon", "text": "Yes. We're pretty much capped on 2022. We have all the business we're able to process this year. So it's really about 2023 and beyond at this point." }, { "speaker": "Operator", "text": "The next question comes from Catherine Schulte with Baird." }, { "speaker": "Catherine Schulte", "text": "I guess, first one on NASD, and then I have a follow-up on M&A. But with NASD, clearly, a lot of interest there, a lot of demand from customers. I think one of your main customers has a PDUFA date coming up in July. How do you think about evaluating capacity expansions even beyond Train B? And what should we be expecting to hear from you guys on that front?" }, { "speaker": "Mike McMullen", "text": "Yes. We're actively working on the answer to that question right now. So nothing yet to share, but I can assure you there'll be more -- there's more letters in the alphabet than A and B. So you can expect us to continue to invest and expand this business." }, { "speaker": "Catherine Schulte", "text": "All right. Perfect. And then, you mentioned in your comments -- yes. You mentioned your comments continuing to actively look at M&A opportunities. Can you just give us your latest thoughts there in terms of appetite and of size and substantial hurdles that you would be applying?" }, { "speaker": "Mike McMullen", "text": "Yes. I think our appetite remains the same in terms of as part of our Build and Buy growth strategy. We've indicated previously that we have an appetite to do a larger M&A that we done historically. We've talked about it being multiples of the BioTek acquisition. It's really just a matter of making sure we find the targets that make the most sense for us strategically, and of course, making sure they create value for our shareholders. And we have remained disciplined through all the hype of the -- of what we experienced last year with the SPACs and IPOs coming out, et cetera. I think the market is still -- is now becoming a little more rational in terms of -- and I say a little bit more rational in terms of price expectations, albeit not everybody has forgotten what they thought they once were or were 6 or 7 months ago, Bob. So we remain very active nothing to announce, but this remains a priority for the Company. But we're not going to do deals just to do deals. We have to do deals that makes sense for our shareholders." }, { "speaker": "Operator", "text": "There are no further questions registered at this time. And that concludes the Q&A session. I'll pass the conference back to Parmeet to conclude the call." }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Selena. And thanks, everyone, for joining. With that, we would like to wrap up the call for today. Have a great rest of the day." }, { "speaker": "Operator", "text": "That concludes the Agilent Technologies Inc. Q2 2022 earnings conference call. Thank you for your participation. You may now disconnect your line." } ]	Agilent Technologies, Inc.	154,924
A	1	2,022	2022-02-22 16:30:00	Operator: Hello. And welcome to the Q1 2022 Agilent Technologies Earnings Conference Call. My name is Emily, and I will be coordinating the call today. During the presentation you will have the opportunity to ask a question [Audio Gap] [Operator Instructions] I now have the pleasure [Technical Difficulty] Parmeet Ahuja: [Technical Difficulty] Agilent President and CEO; and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A after Mike and Bob’s comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our Q1 financial results, investor presentation and information to supplement today’s discussion, along with a recording of this webcast are available on our website at www.investor.agilent.com. Today’s comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of January 31. As previously announced, beginning in the first quarter of fiscal 2022, we implemented certain changes to our segment reporting structure. We have recast our historical segment information to reflect these changes. These changes have no impact on our company’s consolidated financial statements. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties, and are only valid as of today. The company assumes no obligation to update them. Please look at the company’s recent SEC filings for a more complete picture of our risks and other factors. And now, I’d like to turn the call over to Mike. Mike McMullen: Thanks, Parmeet, and thanks everyone for joining our call today. Our momentum continues. The Agilent team delivered a strong start to 2022 in Q1, exceeding the expectation of both the top and bottomline. Our Q1 revenues are $1.67 billion. This is up 9% core and up 8% reported. This is on top of growing 11% core in Q1 a year ago. Excluding COVID-19-related revenues, our core growth is even better at 10% this quarter. We continue to see strength in our order book with robust order intake throughout the quarter. In fact, Q1 orders grew roughly twice as fast as revenues. Q1 operating margins are a healthy 26.3%, up 80 basis points from last year. Earnings per share of $1.21 are up 14%. The EPS increases versus a tough comparison of 31% growth in the first quarter of 2021. These strong results have been achieved in a very dynamic environment. I could not be more proud of the Agilent team’s ability to execute and deliver. Let’s take a closer look at some of what’s driving our strong results. Bob will go into more details later in the call, but our two largest markets continued strong double-digit growth. Our Pharma business, Agilent’s largest market, continues to lead the way for us, growing 17%. Global end market demand for our products and services remains very strong. Biopharma grew 32% while small molecule growth came in about at a robust 9%. The momentum in our Chemical and Energy business also continues, delivering 15% growth in the quarter. This was driven by mid-teens revenue increases in Chemicals and Advanced Materials. PMIs remain positive, along with our overall outlook in the Chemicals, Energy and Advanced Materials markets. On a geographic basis, our results led by 13% growth in the Americas. This is on top of 13% growth in Q1 a year ago. China grew 3% on top of 25% growth in Q1 of last year and was impacted by the timing of Lunar New Year, as noted in our November call. Demand in China remained strong as orders grew high-teens in the first quarter. We continue to invest in China for China to further strengthen our ability to serve our customers. We recently announced a $20 million expansion of our Shanghai manufacturing center to meet growing demand for our locally made liquor chromatography, spectroscopy and mass spec systems. Looking at our performance by business unit, the Life Science and Applied Markets Group generated revenue of $976 million, an increase of 7% on a core basis. This is versus a 10% core growth in Q1 of 2021. LSAG’s growth was led by strength in the Pharma and Chemical and Energy markets. From a platform perspective, customer interest and purchases of our chromatography systems and mass spec offerings are very robust. Our chemistries and supplies business, which moved over from ACG this year, continue to do very well, delivering double-digit growth. We also continue to invest and strategically partner for future growth. Late last week, we announced the acquisition of very exciting artificial intelligence technology that will be integrated into our industry-leading chromatography businesses. This technology has the potential to significantly improve lab growth productivity and accuracy by automating manual interpretational chromatography data. We believe that this capability will be very well received by the high throughput labs Agilent serves around the world. This acquisition is an example of our build and buy growth strategy, as a complement to work, our internal R&D teams are going to develop these types of capabilities for other Agilent platforms. During the quarter, we also announced a partnership with Lonza to integrate Agilent’s analytics technologies and techniques into Lonza’s Cocoon Platform cell therapy manufacturing workflow. The collaboration has the potential to transform the way personalized cell therapies are manufactured. In addition, to ensure we can meet the strong and growing demand for our cell analysis offerings, we also recently announced plans to invest more than $30 million for the construction of a new manufacturing site in Chicopee, Massachusetts. The Agilent CrossLab Group posted services revenue of $359 million. This is up 10% core against a 11% Q1 2021 core growth compare. This growth is broad-based with strength in service contracts, preventive maintenance, compliance, education and informatic enterprise services. Our focus on providing a differentiated customer experience that leverages our large-scale and talented customer support team continues to pay off. Our connect rates continue to improve and our installed base continues to expand, both boding well for continued strength in our services business. The Diagnostics and Genomics Group delivered revenue of $339 million, up 14% core versus Q1 2021 core growth of 15%. Our excellent growth is broad-based across pathology, genomics and NASD. Our Pathology business grew roughly 10% with strength across all regions. Our core genomics business grew low-teens, with strength in target enrichment and our genomics quality control product lines. The NASD team continues to deliver, driving 45% plus growth in the quarter. Meanwhile, the additional capacity expansion at our Frederick GMP oligo manufacturing facility continues to proceed as planned. We continue to expect this capacity to come on line by the end of calendar year 2022. Our Resolution Bioscience team achieved a major milestone in the first quarter by completing the pre-market approval submission for the Resolution ctDx FIRST liquid biopsy assay as a companion diagnostic. This was done in conjunction with Mirati Therapeutics for non-small cell lung cancer and is currently under review by the FDA. It is the first of what we hope will be several indications for liquid biopsy assays. I am pleased with how we have started the year. Building on our Q1 results, continued order strength and execution prowess, we are increasing our full year financial guidance. We are raising our core growth guidance to a range of 7% to 8%, up 125 basis points at the mid-point from our prior guidance. Fiscal year 2022 non-GAAP EPS guidance is increased to a range of $4.80 per share to 4.90 per share, growing 11% to 13% over last year. Bob will be providing the Q2 outlook along with more detail on our improved full year guidance. We are very pleased with our Q1 results and looking forward to another strong quarter and year ahead. I am also very confident in our team and our ability to execute and deliver for our customers and shareholders, no matter what the challenge. Thank you for being on the call today and I look forward to taking your questions later. However, for right now, I will now hand the call off to Bob. Bob? Bob McMahon: Thanks, Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue, take you through the income statement and some other key financial metrics. I will then finish up with our improved outlook for the full year and our guidance for the second quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike described, we posted very strong results in Q1 and exceeded expectations. Revenue was $1.6 billion -- $1.67 billion, up a reported 8.1%. Core growth was even better at 8.9% as we overcame a greater than expected negative exchange rate impact of 1.3 points, while M&A added 0.5 point to growth. Q1 core growth was 170 basis points higher than the top end of our guidance. In addition, after adjusting for the 1-point headwind due to COVID-19 revenues, our core growth outside of COVID was roughly 10%, and as Mike said, order growth was even better. Again, a very strong start to the year. Now moving to our end-market performance, our results were driven by a continuation of strong growth in Pharma, led by Biopharma, while momentum in Chemical and Energy and strong results in Diagnostics and Clinical also led the way for us in Q1. Our largest market, Pharma grew 17% during the quarter, on top of 20% growth last year. The small molecule subsegment delivered high single-digit growth, while large molecule continued its strong performance growing 32%. We are seeing our ongoing investments in biopharma paying off as demand was strong throughout the quarter. We continue to believe in the long-term growth potential of the Pharma market and that our business will drive above market growth. Chemical and Energy continued to show strength, growing 15% during the quarter. Growth in Chemicals and Advanced Materials led the way, and we expect continued growth in this business. Diagnostics and Clinical grew 11% on top of 9% growth last year, with all three business groups again expanding revenues nicely during the quarter. Our expansion of LC/MS equipment into the clinical space continues to do well. And our growth in China was particularly strong, increasing more than 30% as we continue to penetrate this market. The academia and government market was flat in Q1. The business remained resilient despite omicron impacts in the U.S. as some universities delayed in-person learning in the period following the holiday break in December and reduced lab activity in January. We have seen lab activity improve into February and believe the funding environment remains positive. The Food segment declined low-single digits against a very strong 22% growth comparison from last year. The Americas were a bright spot for us, growing in the mid-teens, while Europe was flat and China down due to difficult comparisons and Lunar New Year timing. Closing out on the performance of the markets, environmental and forensics, our smallest market was down 11%. For Agilent overall on a geographic basis, all regions again grew in Q1, led by the Americas at 13% and Europe at 6%. China grew 3% on top of 25% in Q1 last year, in addition to the effect of Lunar New Year timing, which should benefit us in Q2. Now turning to the rest of the P&L, first quarter gross margin was 56.1%, up 30 basis points from a year ago. Our team has done a good job increasing productivity and pricing has helped offset higher input and logistics costs. Operating margins of 26.3% increased 80 basis points even as we have increased our R&D investments. Our investments in digital technology for our internal operations also continue to pay off as we leverage our infrastructure across the company using our One Agilent approach. Our tax rate of 14.25% came in as expected and we had 303 million diluted shares outstanding, slightly lower than projected. Putting it all together, we delivered EPS of $1.21, up 14% versus last year after growing 31% in Q1 of fiscal 2021. We continued to produce strong operating cash flow, generating $255 million in the quarter, beating our forecast, while we also invested $75 million in capital expenditures during Q1. And during the quarter, we took advantage of market volatility to repurchase $447 million worth of shares. We also paid out $63 million in dividends, returning a combined total of $510 million to shareholders. Our balance sheet remains very healthy with a net leverage ratio of 0.9 times and given current market conditions, we expect to continue to be aggressive in deploying capital. Now, let’s move on to our improved full year guidance and our outlook for the second quarter. As Mike indicated, we are raising our full year core revenue growth to an expected range of 7% to 8%, up from our initial guide in November of 5.5% to 7%. Excluding the COVID related 0.5-point headwind this year, this results in core growth of 7.5% to 8.5%. The new guidance takes into account our strong Q1 results and an improved outlook for the rest of the year on a core basis. While we have increased our core growth expectations, the dollar has strengthened considerably, doubling the estimated exchange rate headwinds from our initial guide to $110 million for the year, while the M&A impact remains relatively unchanged. Putting it all together, we are expecting full year revenues to be between $6.67 billion and $6.73 billion. In addition, we have increased our EPS guidance for the full year to $4.80 per share to $4.90 per share, up from the previous range of $4.76 per share to $4.86 per share and representing 11% to 13% growth versus fiscal year 2021. For Q2, we are expecting revenue to range from $1.595 billion to $1.625 billion. This represents core growth between 7% and 9% after adjusting for an expected 0.5-point impact related to COVID year-on-year and we expect reported growth in the range of 4.6% to 6.6%. Exchange rates are expected to have a negative impact of about 2.3% in the quarter while M&A is expected to contribute 0.3 points to growth. And closing out our Q2 guidance, non-GAAP EPS is expected to be in the range of $1.10 to $1.12, up 13% to 15% versus the prior year. This is based on a 14.25% tax rate and 303 million diluted shares outstanding. Again, the Agilent team performed extremely well in Q1 and with the solid growth we are seeing in orders and the team’s willingness and ability to take on every challenge that comes their way, I am confident that Q2 and our full year results will also be strong. With that, Parmeet, back to you for Q&A. Parmeet Ahuja: Thanks, Bob. Emily, if you could please provide instructions for the Q&A now. Operator: Of course. [Operator Instructions] Our first question for the call today comes from Tycho Peterson from JPMorgan. Tycho, your line is open. Rachel Vatnsdal: Great. Hi. This is Rachel on for Tycho. Thanks for taking the question. So, first off, great to hear the… Mike McMullen: Hi, Rachel. Rachel Vatnsdal: … about companion diagnostic package for FDA review. So can you just give us the expected time line for when you think you will get that back and if anything is expected in contribution for this guide for 2022? Mike McMullen: Rachel, thanks for that question. I am going to pass it over to Sam. Sam Raha: Yeah. Rachel, thank you very much for the question. We are very excited about having completed all the modules and made the submission for the companion diagnostic related to Mirati’s adagrasib. As you know now, we have done what we need to and we will engage with the FDA as they come back with questions. We can’t -- we don’t exactly are able to control the time line, and as you likely know, the actual approval would be very much tied to the approval of the drug itself, which of course, we have no control over either. But we are very excited about the progress. Bob McMahon: Yeah. I would say, Rachel… Rachel Vatnsdal: Okay. And then… Bob McMahon: …to the following question. Mike McMullen: Rachel, I think, Bob had to build on that. Bob McMahon: Yeah. Just to build on that as… Rachel Vatnsdal: Yeah. Bob McMahon: As was recently disclosed, the PDUFA date is scheduled for the end of this fiscal -- calendar year. So there’s not any material revenue associated with this built into our fiscal year guide, but we are very excited about the opportunity in 2023 and beyond. Rachel Vatnsdal: Noted. And then, for the updated guide, can you just give us a rundown on the updated outlook by end market for what’s assumed in the new guide? Mike McMullen: For the full year or second quarter, Rachel? Rachel Vatnsdal: Both would actually be great. Mike McMullen: Yeah. I am going to let the witness, Bob. Bob McMahon: Yeah. So, I think very similar to what we had talked about at the very beginning of the year. The two strongest markets will continue to be our Pharma and Chemical and Energy market. I think, as we look at those, certainly, both of them performed better than we expected in Q1 and our expectation is that, those will continue to be the driver of growth for the full year, with Pharma probably at a roughly double-digit growth and Chemical and Energy about that high single-digit, double-digit growth as well, and then, followed very closely by Diagnostics in -- at high single-digits. And then food, environmental and academia and government are probably in the low-to-mid single digits, which is pretty consistent with our expectations at the beginning of the year. And it’s slightly different, but same directional for Q2 with Pharma probably being a little stronger. Rachel Vatnsdal: Got it. And then, for Chemical and Energy, can you just talk about if you see any risk coming from Russia and Ukraine, and then also, if you could just touch on that decline 11% this quarter in environmental. How much of a headwind with COVID for that segment or is there anything else underlying in that market that’s really changed relative to your prior expectation? Mike McMullen: Yeah. I would say, for Chemical and Energy, as you know, I mean, our business is really globally based. And so as of right now, we don’t see any material impact to the Chemical and Energy market or our forecast going forward. Obviously, we are watching that closely. And then, I think for environmental and forensics, it’s our smallest market and can be lumpy. There was some impact associated with Chinese Lunar or Lunar New Year in China. But we haven’t seen any impact there. What I would say is we are starting to see some of the disbursements more in our order funnel than in revenue associated with the Infrastructure Initial Bill here in the United States. So I wouldn’t read anything into it in terms of changing in fundamental demand. Rachel Vatnsdal: Great. Thanks for taking my questions. Mike McMullen: You are very welcome. Operator: Our next question today comes from Matthew Sykes from Goldman Sachs. Matthew, your line is open. Unidentified Analyst: Hey guys. This is Dave on for Matt. It was great to see the strength in biopharma end market. It’s impressive given the challenging funding market for these biotech firms. Any additional color you can give on what you are seeing in the biotech end market and productivity there? Mike McMullen: Yeah. Dave, first of all, thanks for the recognition. We are really pleased with that 32% growth print and we see the underlying demand remaining strong. And Bob, I think, it’s fair to say, we haven’t release any impact at all from … Bob McMahon: No. Mike McMullen: …what maybe happened in the biotech funding arena. Bob McMahon: Yeah. We are very excited about our portfolio and how it plays into that space and are believing that that strong growth will continue going forward. Unidentified Analyst: Fantastic. And any additional color on the drivers of the strong margin expansion in LSAG and how sustainable is this margin expansion over the rest of the year? Bob McMahon: Yeah. I will jump in there. it -- yeah, the team has done a fantastic job really driving margin and if we look at it, it’s a combination of being able to cover our costs from the standpoint of the increased logistics and material costs, as well as very strong management discipline in the operating expenses. So it’s a combination of being successful in our price, which we had talked about before and covering those costs, as well as being able to leverage kind of our infrastructure across all three of the groups. Mike McMullen: And Bob, I think, you also called out the digital investments we are making. So that’s in particular showing up through the SG&A line as we leverage digital investments. Unidentified Analyst: Fantastic. Congrats on the quarter, guys. Mike McMullen: Thanks, Dave. Most appreciated. Operator: Our next question comes from Vijay Kumar from Evercore ISI. Vijay, please go ahead. Vijay Kumar: Hey, guys. Congrats on a nice quarter here. Mike McMullen: Hey, Vijay. Vijay Kumar: And thanks for taking my question. Mike McMullen: Thank you. Vijay Kumar: Bob, maybe one near-term question here on the second quarter guide. The 200 basis points range, that’s wider than your normal -- typical range, your annual guidance range is 100 basis points, any reason for a wider branch and it comes to it really hard in 2Q. So I am curious, what’s giving you the confidence to get to that upper end of 8.5%, which would imply sequentially flattish with 1Q trends? Bob McMahon: Yeah. So let me take the second part first. As Mike mentioned in the call, our demand continues to be very strong and we actually had order growth that exceeded revenue growth almost 2x and that gives us confidence around the order book going into Q2 really across multiple end markets. And so that gives us the ability to deliver the -- or expected to deliver the high growth in Q2. In regards to the range, there are still uncertainties out there, as Omicron continues to impact, mainly Asia right now and then some other uncertainties. So I think that’s just taking a little wider lens, but we still feel good about the business for the full year. Mike McMullen: Yeah. I appreciate the recognition, I think, Bob, what we posted 19% core last year. Bob McMahon: Yeah. Mike McMullen: So I appreciate that recognition, Vijay. And as Bob mentioned, the book of business is really quite strong, plus also our services business is really strong Diagnostics. So the recurring revenue side of the house is quite strong. Vijay Kumar: That’s helpful, Mike. And maybe on the comment on the acquisition contribution here in the second quarter, it seems to be sequentially down. Is there any seasonality to that business and what is the guide assuming for -- you didn’t note the strong order book for 2Q? Is the guide assuming perhaps the order book momentum tapers down in the back half? Bob McMahon: Yeah. No. It doesn’t. There is an element of getting tougher comps, but the momentum continues. I would say for Q2, it’s more timing than anything else relative to the M&A. It is down slightly sequentially, but I would say, in the overall scheme of things, not material. Vijay Kumar: Got it. Thanks, guys. Mike McMullen: You are very welcome. Operator: Up next we have a question from Brandon Couillard from Jefferies. Brandon, your line is open. Brandon Couillard: Hey. Good afternoon. Mike, on the… Mike McMullen: Hi, Brandon. Brandon Couillard: …AI acquisition, it sounds interesting. It’s definitely a buzzword. Would you expect to be making incremental investments with this deal and could you just comment on how and why the AI tools are kind of used in the instrumentation today and when you sort of expect this to be, I guess, more of a reality of feature? Mike McMullen: Yeah. Brandon, happy to do so. I am going to actually invite Jacob on the response here, because, yeah, we hear a lot about the buzzwords and when the team first came to be and started talking about this opportunity, we said, well, in actuality, there’s a lot more than buzzwords here. We actually have some lighthouse customers using this capability already. And as you hear from Jacob, it really drives productivity for those high volume labs. So we think for certain segments market, this is actually going to be a reality. And Jacob, why don’t you, why don’t you build on my comments there, if you don’t mind? Jacob Thaysen: Yeah. Sure. Thanks for the question, Brandon. I am very excited about this also on bringing the best control team here into Agilent. It might be a buzzword, but we have really seen that it really makes a difference. And first of all, it fits very well into an informatic strategy, where we are all about digitalizing the lab and create that deal inside both scientifically and productivity wise for our customers. Here, the first product realization, which has already been prototype, we are aiming to what a part of the -- that is very prone for AI right now and that is really the manual interpretation of commercial graft, as Mike also mentioned. Usually, labs are spending a highly trained chemist to go out and do manual peak integration, which is tedious process. And you can imagine if you have a high volume lab, there’s a lot of investment going into this area. And active virtual control here have already proven with the customers that they can take a substantial part of that work and actually automate that. So we are very glad about that. We are going after the PCMs business first. We have a substantial installed base and we actually believe that we can implement this here in the second part of fiscal 2022. Now long-term, we do believe there’s a great opportunity to provide those algorithms also across our analytical platforms and also for other applications like QC release and predictive maintenance and all things. So even though it’s the buzzword, there is a lot of real products behind this and I am very excited about it. Mike? Mike McMullen: Thanks, Jacob. Brandon Couillard: Thanks. Just one follow-up for Bob. Just if you could just elaborate a little bit more about the book-to-bill in the first quarter and then a couple just housekeeping, was the Lunar New Year impact kind of in line with the plan, and I think, last quarter you talked about… Bob McMahon: Yes. Brandon Couillard: … $15 million of kind of delayed orders, were all those recouped in the first quarter, just kind of an update on that? Bob McMahon: Brandon, as usual, your notes are quite accurate and so let me address a couple of those things. So the Lunar New Year impact came in kind of as we anticipated, which should come back into Q2. That transit time or that $15 million that came in, but we haven’t seen really the improvement. So that’s still opportunities in the second half of this year. Our end of the quarter coincided with the large snowstorm in the U.S., but the shipments were out and we still were able to deliver. In terms of the first question was about Lunar. Mike McMullen: I think on both. Bob McMahon: Yeah. Okay. I think on both. Brandon, we missed something? Brandon Couillard: No. Just if you quantify the book-to-bill, if you are really? Bob McMahon: Oh! Yeah. Yeah. Quantify the book-to-bill. Yeah. Mike McMullen: You are right. Bob McMahon: I knew that there was something else. I was trying to avoid that one on purpose, because we are not going to provide that. But what I can tell you is that, the growth rate of our orders was twice as much as the revenue growth, and I would say, our backlog is the highest it’s ever been. Mike McMullen: And Brandon, this is Mike. I would just add one comment. There is one word in my script. I really want to make sure that I emphasize here throughout the quarter. So this wasn’t just a calendar December year end kind of story. We saw this order strength throughout the entirety of our fiscal Q1. Brandon Couillard: Got it. Thank you. Operator: Our next question comes from Puneet Souda from SVB Leerink. Puneet, your line is open. Puneet Souda: Yes. Hi, Mike and Bob. Thanks for taking the question. So, the first one is just a follow-up on the order book. I am wondering if you can quantify that, obviously, that’s been growing strongly. And maybe just help us understand, once said, you have the strong order book, you have confidence in the rest of, I mean, the guide throughout the year based on what you are providing. But maybe just talk to us about the sort of the cadence wise in terms of supply chains. Obviously, we are hearing -- we have a number of questions that we get on supply chains frequently. So just wondering what’s your level of confidence on the supply chain and turning those order books into orders? Mike McMullen: Yeah. So, first of all, I’d say, that the supply chain environment continues to be quite challenging. On the other hand, I remain quite confident, because our team has found ways to continue to navigate through those and meeting the expectations of customers terms to delivery times. In fact, if I recall correctly, our order cancellation was actually lower this year than prior year. So while I don’t want to imply that it’s all sunny out there in terms of the supply chain, we have been working on this thing for a while. I mean many quarters ago, we were working on this quarter and the second half of this year. So while the environment remains challenged externally, I remain confident in our ability to actually get product to customers when they need it. Bob McMahon: Yeah. Puneet to your first question on the quantification, we are not going to provide that other than what I had answered… Mike McMullen: Yeah. That one, Bob. But we did find the 2x order growth rate versus revenue. Puneet Souda: Got it. Fair. And in terms of cell analysis, Mike, I mean, that franchise has been growing. You highlighted Lonza, the Cocoon platform, a couple of other capabilities. Maybe can you -- I know at one point, you had sort of quantified that business. I am wondering if you can do that again and what sort of growth rates you are seeing there and what’s the expectation this year given the acceleration you are seeing in overall in biomolecules? Thank you. Mike McMullen: Yeah. Thanks for that question. We love to talk about the cell analysis. It’s been a really great addition to the company over the years and we continue to grow and expand that. So, first of all, I’d say, that business remains to be very healthy. We are seeing really good strong end market demand. And Bob I think for the year, we are expecting the double-digit growth out of the cell analysis business. And really excited and the fact that, in addition to the manufacturing expansion we had in Chicopee, that kind of gives you an indication of our confidence in future growth. And I believe we are close to, Bob and Jacob, close a north of $400 million for this business? Bob McMahon: This year. Mike McMullen: This year. Yeah. Bob McMahon: Forecast for this year. Mike McMullen: Yeah. Bob McMahon: Yeah. Puneet Souda: Got it. Super helpful guys. All right. Thank you. Mike McMullen: You are very welcome. Operator: Our next question comes from Patrick Donnelly from Citi. Patrick, your line is open. Patrick Donnelly: Hey. Thanks for the questions guys. Mike McMullen: Hey, Patrick. Patrick Donnelly: Mike, maybe one on China, between the tough comp… Mike McMullen: Sure. Patrick Donnelly: … Lunar New Year, obviously, a few layers there. Can you just talk about, I guess, the core performance is going to stripping that out a little bit, what you are seeing there, what you saw through… Mike McMullen: Got it. Patrick Donnelly: … to your point there throughout the quarter, I guess, the cadence and then the expectations going forward there as well, just between the different markets there. Just curious what’s going on? Mike McMullen: Yeah. It’s interesting. Sometimes you can get kind of diverted on the headlines out of China, because our business remains quite strong and we are seeing good strength in pharma has really been a key driver for us, which Bob highlighted in the script. But also our Diagnostics business, DDG grew, I think, over 40% in the first quarter, services growth in the mid-teens. So other things that I have talked to you about, which is, in addition to continuing to grow and strengthen our instrumentation portfolio market share in China. We have also been talking about our ability to grow our ACG business in China with that large installed base and the fact that we have historically viewed ourselves of being underpenetrated in Diagnostic and Genomics, and we are really starting to see traction on both of those growth factors. So, again, we feel really confident about the state of the China business, because we don’t have the order book we have, but also these other areas of recurring revenue are really growing, growing well for us and we continue to invest for our customers in China, as I mentioned in my call script. So I think there’s a lot to like about the opportunities in our business in China. Bob McMahon: Yeah. Patrick, just one other thing, we -- while we grew 3% as we mentioned, if we add back in kind of the Lunar New Year estimate, it was high-single digits, which was in our -- in line with what we had expected and our expectation is that, that’s going to be for the full year as well. Now Q2 will be stronger than that, obviously, as it comes back and we also saw mid-teen -- mid-to-high-teens growth in orders in Q1. Patrick Donnelly: Okay. That’s helpful. And then maybe just on the academic government market. You are not alone, obviously, calling that out as being a little sluggish to come back. Maybe just what you saw there in January, Mike, I know you called out the remote learning maybe caused a little more of a pause even as we go into 2022? And then just expectations there going forward, you expect the market to kind of normalize a little bit and what are you hearing from customers on that front? Mike McMullen: Yeah. Thanks for that, Patrick. We saw -- we see the Omicron impact is transitory. We saw that in the U.S., for example, and we would expect to, I think, Bob, you called out in the script back to normal kind of levels in February. So we actually expect the environment to improve over the year. I think we are flattish for Q1. But, Bob, I think, we are calling for mid-singles or so growth for the full year. So that would imply a pickup in growth in this segment later on this year. Bob McMahon: Yeah. I mean, for everything that we see, Patrick, funding levels continue in activity within our order book continues to be strong. So it not as strong obviously as the Pharma and C&E areas, which are leading the growth in the Diagnostics, but we are not seeing any fundamentally different performance in that market going forward. Patrick Donnelly: That’s helpful. Thank you, guys. Mike McMullen: You are very welcome. Operator: Up next we have a question from Jack Meehan from Nephron Research. Jack, your line is open. Jack Meehan: Thank you. Good afternoon, guys. Mike McMullen: Good afternoon, Jack. Jack Meehan: I was hoping you could elaborate on the pricing actions you are taking in the market? How do they compare to kind of normal periods and what areas of the portfolio have you had success when it comes to pricing? Bob McMahon: Yeah. I will take that, Jack. And I think we mentioned at the beginning of the year that we were estimating roughly a point of growth associated with that was about half of what we had seen normally to cover the increased costs, and what I would say is, through Q1 we are ahead of schedule, which is good. Jack Meehan: Okay. And then, the other area I was hoping you had an update on is NASD, so over 45% growth in the quarter. Maybe just any update to what your guidance is for the full year? It seems like you are tracking ahead of schedule here and just when the new line opens up, just what sort of pace you expect to be able to take advantage of that capacity? Bob McMahon: Yeah. I was going to say, we -- the team continues to do a fantastic job and continues to drive even more revenue and product out of the existing capacity and it was a great first quarter and slightly ahead of our expectations. We had expected double-digit growth and that continues to be our expectation before the new train, Train B comes online at the end of this calendar year. And the order book continues to be strong. That team continues to actually build the order book for 2023 and building that demand for that train. So we are extremely excited about that business and are looking forward to not only bringing that up, but also looking for other ways to expand our capacity. Mike McMullen: Absolutely. Jack Meehan: Thank you, Bob. Bob McMahon: Thank you. Operator: Our next question comes from Derik de Bruin from Bank of America. Derik, please go ahead. Mike Ryskin: Hi. Thanks for taking the questions. This is Mike on for Derik. Mike McMullen: Hi, Mike. Mike Ryskin: I want to ask a little bit on the -- hey -- I want to ask a little bit on the Diagnostics and the Clinical end markets. In particular, you called out sort of the expansion of our CNS [ph] into some of the applications here and you are seeing a new vector of clinical growth here. I was wondering if you could elaborate on that. Just sort of what are the specific drivers you are seeing there and where some of that uptick happening. Mike McMullen: Yeah. I am going to pass it over to Jacob for some more details here. But also I would also just remind, we also had a very good print on the pathology side of our Diagnostics business. But I think you will hear from, Jacob, LC/MS is an indication of some future traction, we are already getting some good growth. So, Jacob, your thoughts there? Jacob Thaysen: Yeah. Absolutely. We have closed the year have a good LC/MS Clinical business in U.S. But over the past year, we have also expanded ourselves into China, really good tractions. We both have our own product line there, our direct sales, but we also have an OEM partner. So in that sense we are both addressing the customers that we know, but also a lot of customers that we want to get access to. And that’s been quite successful and hence we are right now looking to expand the portfolio even further. We have the Ultivo, of course, with our LC connected and we are looking to other parts of our portfolio, both within LC/MS, but also beyond LC/MS here over the next period of time. But we do see China as a great opportunity, but here over the next over time, we will also enter into other areas like Europe and other places. Mike McMullen: And Jacob, on the Ultivo, what I think the customers love the combination of performance and the size of the footprint really fits nicely into the diagnostic lab. Jacob Thaysen: Yeah. Exactly. We spent a lot of energy of both making it a size that fits very well into the LC stack. But more than that we also made it more easy to work with. So it’s actually an ease-of-use solution. So we are very excited about that and even better the customers are also super excited about that. I do want to mention also that we also have a strong Clinical business within the flow cytometry. With the Ultivo business that continues to drive growth and particularly China, where we see a lot of demand there also. As you might recall, the flow cytometry from the LC business is really focused on decentralized lab also again with ease-of-use and we see a lot of interest in that. And I do expect also that U.S. will be a future market for us here. Mike Ryskin: Great. I appreciate that. Any color you can give us just real quick on sort of how meaningful LC/MS is within that 15% of your exposure? Is it just to give us a sense of the scale of that relative to genomics and cancer diagnostics and pathology things like that? Mike McMullen: Bob, do you want to take it or do you want me to? Bob McMahon: Yeah. Yeah. I will take it. It is still relatively small but growing very fast, which the market itself is quite large and so the opportunity here is really in front of us going forward. Mike Ryskin: Great. And if I could ask a quick follow-up on -- just on the capital deployment side… Mike McMullen: Sure. Mike Ryskin: … and on M&A. Obviously, you have done some smaller deals in the last couple of years and you continue to invest in new technologies and you have got some, you have had M&A deployed into sort of Life Science Solutions and cell analysis. You have had things in liquid biopsy and now artificial intelligence. So it’s kind of showcase that you can deploy capital in a variety of different markets. But just looking at where the balance sheet is now, any thought on larger acquisitions and sort of scaling up to do a bigger deal? And what excites you, what markets would you be looking to? What’s -- so how would you go about starting to deploy that capital? Mike McMullen: Yeah. Sure. Happy to address that, Mike. So I appreciate, by the way, the recognition of the variety of where we deploy capital. But there’s a consistent theme across where we deploy capital, which is high growth end markets, which will drive increase to the overall core growth of the company in places where we can leverage the scale and the capabilities we have in the company to really make those businesses even more successful. So I think there’s a timing kind of an underlying theme behind all those acquisitions. So that would continue to be our thesis and our approach, as well as staying focused in the private sector, which we think there’s -- really fits well the Agilent model and often the potential acquired companies and leadership teams really find the Agilent culture, a good place to be and they also see how well we have done with previous acquisitions. So we have got a track record as well that they can point to. And I am on record saying that, we wanted to deploy our balance sheet as part of our overall growth story. It’s part of what we have been calling our build and buy growth strategy. And as you may know, the largest deal that we have done to date has been -- was the acquisition of BioTek, but we believe we can do multiples of that deal and be willing to deploy capital if the right opportunity comes along for us. Mike Ryskin: Okay. Thanks. Operator: Our next question comes from Thomas Peterson from Baird. Thomas, your line is open. Thomas Peterson: Hi, guys. Thanks for taking my questions. Mike McMullen: Sure. Thomas Peterson: Just wanted to circle back on Pharma and just wanted to know if you had seen any benefit within Pharma from both onshoring activities and manufacturing redundancies and kind of, if so, where has this tailwind been and what are your expectations for any potential durability here? Mike McMullen: Great question. So I think this is actually a story both for the Pharma, as well as elements of our Chemical and Energy business. And I’d say right now, not yet material in terms of order book or revenue, but we believe it’s coming. There’s a lot of discussions with customers that are building new capacity. I would say it’s probably more of a 2023 kind of event. But I think it speaks to the durability of growth that we think we have in Agilent’s two largest end markets. So we are hearing lots of discussions about dual sources of critical components, onshoring of previously offshore critical supply chain elements. So I think the continued supply chain challenges that the world is seeing is only putting more emphasis on that direction. So I’d say right now, it’s in the longer term planning phase. As you know, the analytical laboratory instrumentation is often the last thing that’s added when they bring on new capacity, but we believe it’s coming, but it’s not been material yet to the company’s performance. Thomas Peterson: Great. That’s super helpful. And maybe just to finish for me, just any updated thoughts on the One Agilent commercial organization transition? Anything that surprised you relative to expectations, sort of how is that incorporation gone internally? Mike McMullen: Yeah. So I am going to have Padraig jump in here with some additional specifics. As you know, I have asked Padraig to take on this role in addition to his leading the overall Agilent Services business. But we are just delighted with the start of this new structure and I think I always say the proofs in the results and we are off to a good start with the fact that we had such a strong Q1 order book throughout the quarter. And Padraig, I know it’s been just a few months where you have been pulling your team together and but I think you are already starting to work with customers differently and maybe you could share some of your thoughts here. Padraig McDonnell: Yeah. Thanks, Mike. I think we are starting to see the benefit of an enterprise approach to both sales and service, and the associated functions, and of course, selling the complete Agilent solution to customers, which includes instruments, services and consumers with aligned sales approach is really giving us a lot of scale with customers. We are also seeing a doubling down on our investment in our digital interaction with customers and we continue to see strong momentum with accelerating digital growth of about 25%. So great start, Mike, and more to come. Thomas Peterson: Okay. Operator: Our next question comes from Dan Brennan from Cowen. Dan, your line is open. Dan Brennan: Hey, Mike and Bob, thanks for taking the questions. Congrats. Mike McMullen: Sure, Dan. Dan Brennan: I was hoping to go back to C&E, Mike, could you or Bob... Mike McMullen: Sure. Dan Brennan: …unpack -- kind of unpack the customers there, Chemical R&M, can you just kind of give us a flavor for what you are seeing? I know the question was asked earlier about the impact of what’s going on. But just wondering, as oil price spikes in the past, kind of what kind of impact have you seen if the oil price spike is sustained? Mike McMullen: Yeah. I’d say if you look at the three sub-segments of the C&E marketplace, we often talk about the Chemicals, Energy and Advanced Materials market. I think it’s the Chemicals and Advanced Materials market segments that are driving the growth here. Now theoretically, when -- although, be it now much -- it’s a very small part of the total number these days, higher oil prices would tend to lead to more investment in that Energy segment portion of the whole market segment. But I can’t remember the exact percentage. I know it’s evolved a bit over time. But I think what’s most interest to us is how does the world view global growth were PMI. So, yes, I think, the highest correlation of growth in this segment relate to PMI and the global growth outlook. But we would -- there could be some more money to invest in exploration, perhaps, if oil prices stay high, but it’s really also really driven by the PMI view. That’s why they still remain positive and that’s why we are optimistic about our ability to grow this overall market throughout the rest of this year. Bob McMahon: Yeah. Dan, to build on what Mike was saying, if we looked at those three big areas, over 90% or roughly 90% of our C&E business is actually Chemicals and Advanced Materials. And so the Energy piece is an important component, but that demand around new types of Chemicals, Advanced Materials and so forth is really what’s driving it… Mike McMullen: Yeah. Bob McMahon: And so whether it be batteries and other areas around these is the growth driver today. Dan Brennan: Got it. Thanks guys. And then, just related to the Oligo business the MAC business, just can you remind us, at least from the perspective of like basin within your high single-digit growth for Pharma, kind of how many points of growth should we be thinking that business is contributing? Bob McMahon: From Pharma, it grew -- it was roughly 2 points to 3 points of growth for pharma in Q1. Dan Brennan: And then, for the year, sorry? Yeah. Yeah. Sorry about that, I misspoke. So for the year, I think you are talking low double now for Pharma. So what’s assumed from the Oligo business… Bob McMahon: Yeah. Dan Brennan: …within that [inaudible] demo? Bob McMahon: A point or two. Mike McMullen: Yeah. I think the… Dan Brennan: Very clear. Mike McMullen: … message here is the, yeah, the Pharma growth was strong for the biopharma, NASD, but also across the rest of the company’s portfolio as well. Dan Brennan: Yeah. Mike McMullen: So it’s an Agilent wide story. Dan Brennan: Yeah. Great. And then maybe just one final one to sneak in just the LC market, Mike, it’s always entering here, what’s going on… Mike McMullen: Yeah. Dan Brennan: … and that’s a big part of your business, what the competitive trends there like in LC? Mike McMullen: All I can tell you about is what’s going on in my business, which is its doing very well. So we have got -- we had -- we continue to see very strong business momentum. The market demand is very robust. You may have recall in my script, I tried to call out demand in our chromatography systems remains very robust. We saw double-digit growth again in Q2 -- Q1 2022 off double-digit or the prior year, backlog strong, orders growing faster than revenue. So there’s a lot to like about what’s going on with the LC business. Dan Brennan: Great. Thank you guys. Mike McMullen: You are very welcome. Operator: Our next question comes from Paul Knight from KeyBanc. Paul, please go ahead. Paul Knight: It’s always tough to ask a good question late in the day, Mike. Mike McMullen: Come on, Paul. I know you are up to it. I know you are up to it. Paul Knight: As I look at the 32% biotechnology growth, which seems extraordinarily good, would you attribute this to the cell and gene therapy market, and what specifically biotech instruments? What’s behind that really high growth rate? Mike McMullen: Bob, why don’t we tag team on this, but I’d say, it’s really being driven by not only the NASD business we talked about earlier, but our core LC/MS business. I mean there is some contribution from cell and gene therapy, but it really is coming from the LC/MS business along with really strong growth of services and consumables as well. So, I’d say, it’s really a broad-based story, but really around our core instrumentation platforms along with services and consumables. Bob McMahon: Yeah. Spot on. Mike McMullen: I mean, goes for that. Paul Knight: Okay. Sorry, Bob. Bob McMahon: Go ahead, Paul. Sorry. Paul Knight: You have mentioned LC/MS more than, I think, is typical. Is this a result of -- are you seeing a result of benefit yet from the Avantor JV. And in addition, I know CrossLab, you mentioned higher connectivity. I think you are implying you continue to gain some share there, if you can talk to those two topics? Mike McMullen: Yeah. Sure. Happy to do. ACG has been what we are doing has been near and dear to our overall growth strategy for a number of years and we are very excited about the new relationship we have with Avantor. I’d say it’s still very early days, so not yet a material contributor to the topline revenue and that really was all according -- so it’s proceeding according to plan. So I’d say there’s more to come in that regard. And then on the connect rate, yeah, in fact, we called that out on purpose to say, we continue to see higher connect rates with our consumables and services business, and we think that bodes well for future growth. And Padraig, maybe you want to just comment a bit on what you are seeing on the services side and the connect rate. Padraig McDonnell: Yeah. Well, overall, the attach rate for both service and consumables in the high 20s, but we believe and we have significant headroom for growth going forward as we target into higher technology spaces. And on the services side, in particular, we have a strong demand for contracts and that’s driving a lot of connect rate with new instruments as well, Mike. Mike McMullen: Yeah. I think we had double-digit contract growth and probably more than 10% of Agilent’s revenues now in -- under service contracts. Paul Knight: Okay. Thank you. Operator: Those are all the questions we have time for today. So I will now hand back to Parmeet to conclude today’s call. Parmeet Ahuja: Thanks, Emily, and thanks everyone for joining. With that, we would like to wrap up the call for today. Have a great rest of the day everyone. Operator: Thank you everyone for joining our call today. This now concludes our call. Please disconnect your lines.	[ { "speaker": "Operator", "text": "Hello. And welcome to the Q1 2022 Agilent Technologies Earnings Conference Call. My name is Emily, and I will be coordinating the call today. During the presentation you will have the opportunity to ask a question [Audio Gap] [Operator Instructions] I now have the pleasure [Technical Difficulty]" }, { "speaker": "Parmeet Ahuja", "text": "[Technical Difficulty] Agilent President and CEO; and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A after Mike and Bob’s comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our Q1 financial results, investor presentation and information to supplement today’s discussion, along with a recording of this webcast are available on our website at www.investor.agilent.com. Today’s comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on exchange rates as of January 31. As previously announced, beginning in the first quarter of fiscal 2022, we implemented certain changes to our segment reporting structure. We have recast our historical segment information to reflect these changes. These changes have no impact on our company’s consolidated financial statements. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties, and are only valid as of today. The company assumes no obligation to update them. Please look at the company’s recent SEC filings for a more complete picture of our risks and other factors. And now, I’d like to turn the call over to Mike." }, { "speaker": "Mike McMullen", "text": "Thanks, Parmeet, and thanks everyone for joining our call today. Our momentum continues. The Agilent team delivered a strong start to 2022 in Q1, exceeding the expectation of both the top and bottomline. Our Q1 revenues are $1.67 billion. This is up 9% core and up 8% reported. This is on top of growing 11% core in Q1 a year ago. Excluding COVID-19-related revenues, our core growth is even better at 10% this quarter. We continue to see strength in our order book with robust order intake throughout the quarter. In fact, Q1 orders grew roughly twice as fast as revenues. Q1 operating margins are a healthy 26.3%, up 80 basis points from last year. Earnings per share of $1.21 are up 14%. The EPS increases versus a tough comparison of 31% growth in the first quarter of 2021. These strong results have been achieved in a very dynamic environment. I could not be more proud of the Agilent team’s ability to execute and deliver. Let’s take a closer look at some of what’s driving our strong results. Bob will go into more details later in the call, but our two largest markets continued strong double-digit growth. Our Pharma business, Agilent’s largest market, continues to lead the way for us, growing 17%. Global end market demand for our products and services remains very strong. Biopharma grew 32% while small molecule growth came in about at a robust 9%. The momentum in our Chemical and Energy business also continues, delivering 15% growth in the quarter. This was driven by mid-teens revenue increases in Chemicals and Advanced Materials. PMIs remain positive, along with our overall outlook in the Chemicals, Energy and Advanced Materials markets. On a geographic basis, our results led by 13% growth in the Americas. This is on top of 13% growth in Q1 a year ago. China grew 3% on top of 25% growth in Q1 of last year and was impacted by the timing of Lunar New Year, as noted in our November call. Demand in China remained strong as orders grew high-teens in the first quarter. We continue to invest in China for China to further strengthen our ability to serve our customers. We recently announced a $20 million expansion of our Shanghai manufacturing center to meet growing demand for our locally made liquor chromatography, spectroscopy and mass spec systems. Looking at our performance by business unit, the Life Science and Applied Markets Group generated revenue of $976 million, an increase of 7% on a core basis. This is versus a 10% core growth in Q1 of 2021. LSAG’s growth was led by strength in the Pharma and Chemical and Energy markets. From a platform perspective, customer interest and purchases of our chromatography systems and mass spec offerings are very robust. Our chemistries and supplies business, which moved over from ACG this year, continue to do very well, delivering double-digit growth. We also continue to invest and strategically partner for future growth. Late last week, we announced the acquisition of very exciting artificial intelligence technology that will be integrated into our industry-leading chromatography businesses. This technology has the potential to significantly improve lab growth productivity and accuracy by automating manual interpretational chromatography data. We believe that this capability will be very well received by the high throughput labs Agilent serves around the world. This acquisition is an example of our build and buy growth strategy, as a complement to work, our internal R&D teams are going to develop these types of capabilities for other Agilent platforms. During the quarter, we also announced a partnership with Lonza to integrate Agilent’s analytics technologies and techniques into Lonza’s Cocoon Platform cell therapy manufacturing workflow. The collaboration has the potential to transform the way personalized cell therapies are manufactured. In addition, to ensure we can meet the strong and growing demand for our cell analysis offerings, we also recently announced plans to invest more than $30 million for the construction of a new manufacturing site in Chicopee, Massachusetts. The Agilent CrossLab Group posted services revenue of $359 million. This is up 10% core against a 11% Q1 2021 core growth compare. This growth is broad-based with strength in service contracts, preventive maintenance, compliance, education and informatic enterprise services. Our focus on providing a differentiated customer experience that leverages our large-scale and talented customer support team continues to pay off. Our connect rates continue to improve and our installed base continues to expand, both boding well for continued strength in our services business. The Diagnostics and Genomics Group delivered revenue of $339 million, up 14% core versus Q1 2021 core growth of 15%. Our excellent growth is broad-based across pathology, genomics and NASD. Our Pathology business grew roughly 10% with strength across all regions. Our core genomics business grew low-teens, with strength in target enrichment and our genomics quality control product lines. The NASD team continues to deliver, driving 45% plus growth in the quarter. Meanwhile, the additional capacity expansion at our Frederick GMP oligo manufacturing facility continues to proceed as planned. We continue to expect this capacity to come on line by the end of calendar year 2022. Our Resolution Bioscience team achieved a major milestone in the first quarter by completing the pre-market approval submission for the Resolution ctDx FIRST liquid biopsy assay as a companion diagnostic. This was done in conjunction with Mirati Therapeutics for non-small cell lung cancer and is currently under review by the FDA. It is the first of what we hope will be several indications for liquid biopsy assays. I am pleased with how we have started the year. Building on our Q1 results, continued order strength and execution prowess, we are increasing our full year financial guidance. We are raising our core growth guidance to a range of 7% to 8%, up 125 basis points at the mid-point from our prior guidance. Fiscal year 2022 non-GAAP EPS guidance is increased to a range of $4.80 per share to 4.90 per share, growing 11% to 13% over last year. Bob will be providing the Q2 outlook along with more detail on our improved full year guidance. We are very pleased with our Q1 results and looking forward to another strong quarter and year ahead. I am also very confident in our team and our ability to execute and deliver for our customers and shareholders, no matter what the challenge. Thank you for being on the call today and I look forward to taking your questions later. However, for right now, I will now hand the call off to Bob. Bob?" }, { "speaker": "Bob McMahon", "text": "Thanks, Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue, take you through the income statement and some other key financial metrics. I will then finish up with our improved outlook for the full year and our guidance for the second quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. As Mike described, we posted very strong results in Q1 and exceeded expectations. Revenue was $1.6 billion -- $1.67 billion, up a reported 8.1%. Core growth was even better at 8.9% as we overcame a greater than expected negative exchange rate impact of 1.3 points, while M&A added 0.5 point to growth. Q1 core growth was 170 basis points higher than the top end of our guidance. In addition, after adjusting for the 1-point headwind due to COVID-19 revenues, our core growth outside of COVID was roughly 10%, and as Mike said, order growth was even better. Again, a very strong start to the year. Now moving to our end-market performance, our results were driven by a continuation of strong growth in Pharma, led by Biopharma, while momentum in Chemical and Energy and strong results in Diagnostics and Clinical also led the way for us in Q1. Our largest market, Pharma grew 17% during the quarter, on top of 20% growth last year. The small molecule subsegment delivered high single-digit growth, while large molecule continued its strong performance growing 32%. We are seeing our ongoing investments in biopharma paying off as demand was strong throughout the quarter. We continue to believe in the long-term growth potential of the Pharma market and that our business will drive above market growth. Chemical and Energy continued to show strength, growing 15% during the quarter. Growth in Chemicals and Advanced Materials led the way, and we expect continued growth in this business. Diagnostics and Clinical grew 11% on top of 9% growth last year, with all three business groups again expanding revenues nicely during the quarter. Our expansion of LC/MS equipment into the clinical space continues to do well. And our growth in China was particularly strong, increasing more than 30% as we continue to penetrate this market. The academia and government market was flat in Q1. The business remained resilient despite omicron impacts in the U.S. as some universities delayed in-person learning in the period following the holiday break in December and reduced lab activity in January. We have seen lab activity improve into February and believe the funding environment remains positive. The Food segment declined low-single digits against a very strong 22% growth comparison from last year. The Americas were a bright spot for us, growing in the mid-teens, while Europe was flat and China down due to difficult comparisons and Lunar New Year timing. Closing out on the performance of the markets, environmental and forensics, our smallest market was down 11%. For Agilent overall on a geographic basis, all regions again grew in Q1, led by the Americas at 13% and Europe at 6%. China grew 3% on top of 25% in Q1 last year, in addition to the effect of Lunar New Year timing, which should benefit us in Q2. Now turning to the rest of the P&L, first quarter gross margin was 56.1%, up 30 basis points from a year ago. Our team has done a good job increasing productivity and pricing has helped offset higher input and logistics costs. Operating margins of 26.3% increased 80 basis points even as we have increased our R&D investments. Our investments in digital technology for our internal operations also continue to pay off as we leverage our infrastructure across the company using our One Agilent approach. Our tax rate of 14.25% came in as expected and we had 303 million diluted shares outstanding, slightly lower than projected. Putting it all together, we delivered EPS of $1.21, up 14% versus last year after growing 31% in Q1 of fiscal 2021. We continued to produce strong operating cash flow, generating $255 million in the quarter, beating our forecast, while we also invested $75 million in capital expenditures during Q1. And during the quarter, we took advantage of market volatility to repurchase $447 million worth of shares. We also paid out $63 million in dividends, returning a combined total of $510 million to shareholders. Our balance sheet remains very healthy with a net leverage ratio of 0.9 times and given current market conditions, we expect to continue to be aggressive in deploying capital. Now, let’s move on to our improved full year guidance and our outlook for the second quarter. As Mike indicated, we are raising our full year core revenue growth to an expected range of 7% to 8%, up from our initial guide in November of 5.5% to 7%. Excluding the COVID related 0.5-point headwind this year, this results in core growth of 7.5% to 8.5%. The new guidance takes into account our strong Q1 results and an improved outlook for the rest of the year on a core basis. While we have increased our core growth expectations, the dollar has strengthened considerably, doubling the estimated exchange rate headwinds from our initial guide to $110 million for the year, while the M&A impact remains relatively unchanged. Putting it all together, we are expecting full year revenues to be between $6.67 billion and $6.73 billion. In addition, we have increased our EPS guidance for the full year to $4.80 per share to $4.90 per share, up from the previous range of $4.76 per share to $4.86 per share and representing 11% to 13% growth versus fiscal year 2021. For Q2, we are expecting revenue to range from $1.595 billion to $1.625 billion. This represents core growth between 7% and 9% after adjusting for an expected 0.5-point impact related to COVID year-on-year and we expect reported growth in the range of 4.6% to 6.6%. Exchange rates are expected to have a negative impact of about 2.3% in the quarter while M&A is expected to contribute 0.3 points to growth. And closing out our Q2 guidance, non-GAAP EPS is expected to be in the range of $1.10 to $1.12, up 13% to 15% versus the prior year. This is based on a 14.25% tax rate and 303 million diluted shares outstanding. Again, the Agilent team performed extremely well in Q1 and with the solid growth we are seeing in orders and the team’s willingness and ability to take on every challenge that comes their way, I am confident that Q2 and our full year results will also be strong. With that, Parmeet, back to you for Q&A." }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Bob. Emily, if you could please provide instructions for the Q&A now." }, { "speaker": "Operator", "text": "Of course. [Operator Instructions] Our first question for the call today comes from Tycho Peterson from JPMorgan. Tycho, your line is open." }, { "speaker": "Rachel Vatnsdal", "text": "Great. Hi. This is Rachel on for Tycho. Thanks for taking the question. So, first off, great to hear the…" }, { "speaker": "Mike McMullen", "text": "Hi, Rachel." }, { "speaker": "Rachel Vatnsdal", "text": "… about companion diagnostic package for FDA review. So can you just give us the expected time line for when you think you will get that back and if anything is expected in contribution for this guide for 2022?" }, { "speaker": "Mike McMullen", "text": "Rachel, thanks for that question. I am going to pass it over to Sam." }, { "speaker": "Sam Raha", "text": "Yeah. Rachel, thank you very much for the question. We are very excited about having completed all the modules and made the submission for the companion diagnostic related to Mirati’s adagrasib. As you know now, we have done what we need to and we will engage with the FDA as they come back with questions. We can’t -- we don’t exactly are able to control the time line, and as you likely know, the actual approval would be very much tied to the approval of the drug itself, which of course, we have no control over either. But we are very excited about the progress." }, { "speaker": "Bob McMahon", "text": "Yeah. I would say, Rachel…" }, { "speaker": "Rachel Vatnsdal", "text": "Okay. And then…" }, { "speaker": "Bob McMahon", "text": "…to the following question." }, { "speaker": "Mike McMullen", "text": "Rachel, I think, Bob had to build on that." }, { "speaker": "Bob McMahon", "text": "Yeah. Just to build on that as…" }, { "speaker": "Rachel Vatnsdal", "text": "Yeah." }, { "speaker": "Bob McMahon", "text": "As was recently disclosed, the PDUFA date is scheduled for the end of this fiscal -- calendar year. So there’s not any material revenue associated with this built into our fiscal year guide, but we are very excited about the opportunity in 2023 and beyond." }, { "speaker": "Rachel Vatnsdal", "text": "Noted. And then, for the updated guide, can you just give us a rundown on the updated outlook by end market for what’s assumed in the new guide?" }, { "speaker": "Mike McMullen", "text": "For the full year or second quarter, Rachel?" }, { "speaker": "Rachel Vatnsdal", "text": "Both would actually be great." }, { "speaker": "Mike McMullen", "text": "Yeah. I am going to let the witness, Bob." }, { "speaker": "Bob McMahon", "text": "Yeah. So, I think very similar to what we had talked about at the very beginning of the year. The two strongest markets will continue to be our Pharma and Chemical and Energy market. I think, as we look at those, certainly, both of them performed better than we expected in Q1 and our expectation is that, those will continue to be the driver of growth for the full year, with Pharma probably at a roughly double-digit growth and Chemical and Energy about that high single-digit, double-digit growth as well, and then, followed very closely by Diagnostics in -- at high single-digits. And then food, environmental and academia and government are probably in the low-to-mid single digits, which is pretty consistent with our expectations at the beginning of the year. And it’s slightly different, but same directional for Q2 with Pharma probably being a little stronger." }, { "speaker": "Rachel Vatnsdal", "text": "Got it. And then, for Chemical and Energy, can you just talk about if you see any risk coming from Russia and Ukraine, and then also, if you could just touch on that decline 11% this quarter in environmental. How much of a headwind with COVID for that segment or is there anything else underlying in that market that’s really changed relative to your prior expectation?" }, { "speaker": "Mike McMullen", "text": "Yeah. I would say, for Chemical and Energy, as you know, I mean, our business is really globally based. And so as of right now, we don’t see any material impact to the Chemical and Energy market or our forecast going forward. Obviously, we are watching that closely. And then, I think for environmental and forensics, it’s our smallest market and can be lumpy. There was some impact associated with Chinese Lunar or Lunar New Year in China. But we haven’t seen any impact there. What I would say is we are starting to see some of the disbursements more in our order funnel than in revenue associated with the Infrastructure Initial Bill here in the United States. So I wouldn’t read anything into it in terms of changing in fundamental demand." }, { "speaker": "Rachel Vatnsdal", "text": "Great. Thanks for taking my questions." }, { "speaker": "Mike McMullen", "text": "You are very welcome." }, { "speaker": "Operator", "text": "Our next question today comes from Matthew Sykes from Goldman Sachs. Matthew, your line is open." }, { "speaker": "Unidentified Analyst", "text": "Hey guys. This is Dave on for Matt. It was great to see the strength in biopharma end market. It’s impressive given the challenging funding market for these biotech firms. Any additional color you can give on what you are seeing in the biotech end market and productivity there?" }, { "speaker": "Mike McMullen", "text": "Yeah. Dave, first of all, thanks for the recognition. We are really pleased with that 32% growth print and we see the underlying demand remaining strong. And Bob, I think, it’s fair to say, we haven’t release any impact at all from …" }, { "speaker": "Bob McMahon", "text": "No." }, { "speaker": "Mike McMullen", "text": "…what maybe happened in the biotech funding arena." }, { "speaker": "Bob McMahon", "text": "Yeah. We are very excited about our portfolio and how it plays into that space and are believing that that strong growth will continue going forward." }, { "speaker": "Unidentified Analyst", "text": "Fantastic. And any additional color on the drivers of the strong margin expansion in LSAG and how sustainable is this margin expansion over the rest of the year?" }, { "speaker": "Bob McMahon", "text": "Yeah. I will jump in there. it -- yeah, the team has done a fantastic job really driving margin and if we look at it, it’s a combination of being able to cover our costs from the standpoint of the increased logistics and material costs, as well as very strong management discipline in the operating expenses. So it’s a combination of being successful in our price, which we had talked about before and covering those costs, as well as being able to leverage kind of our infrastructure across all three of the groups." }, { "speaker": "Mike McMullen", "text": "And Bob, I think, you also called out the digital investments we are making. So that’s in particular showing up through the SG&A line as we leverage digital investments." }, { "speaker": "Unidentified Analyst", "text": "Fantastic. Congrats on the quarter, guys." }, { "speaker": "Mike McMullen", "text": "Thanks, Dave. Most appreciated." }, { "speaker": "Operator", "text": "Our next question comes from Vijay Kumar from Evercore ISI. Vijay, please go ahead." }, { "speaker": "Vijay Kumar", "text": "Hey, guys. Congrats on a nice quarter here." }, { "speaker": "Mike McMullen", "text": "Hey, Vijay." }, { "speaker": "Vijay Kumar", "text": "And thanks for taking my question." }, { "speaker": "Mike McMullen", "text": "Thank you." }, { "speaker": "Vijay Kumar", "text": "Bob, maybe one near-term question here on the second quarter guide. The 200 basis points range, that’s wider than your normal -- typical range, your annual guidance range is 100 basis points, any reason for a wider branch and it comes to it really hard in 2Q. So I am curious, what’s giving you the confidence to get to that upper end of 8.5%, which would imply sequentially flattish with 1Q trends?" }, { "speaker": "Bob McMahon", "text": "Yeah. So let me take the second part first. As Mike mentioned in the call, our demand continues to be very strong and we actually had order growth that exceeded revenue growth almost 2x and that gives us confidence around the order book going into Q2 really across multiple end markets. And so that gives us the ability to deliver the -- or expected to deliver the high growth in Q2. In regards to the range, there are still uncertainties out there, as Omicron continues to impact, mainly Asia right now and then some other uncertainties. So I think that’s just taking a little wider lens, but we still feel good about the business for the full year." }, { "speaker": "Mike McMullen", "text": "Yeah. I appreciate the recognition, I think, Bob, what we posted 19% core last year." }, { "speaker": "Bob McMahon", "text": "Yeah." }, { "speaker": "Mike McMullen", "text": "So I appreciate that recognition, Vijay. And as Bob mentioned, the book of business is really quite strong, plus also our services business is really strong Diagnostics. So the recurring revenue side of the house is quite strong." }, { "speaker": "Vijay Kumar", "text": "That’s helpful, Mike. And maybe on the comment on the acquisition contribution here in the second quarter, it seems to be sequentially down. Is there any seasonality to that business and what is the guide assuming for -- you didn’t note the strong order book for 2Q? Is the guide assuming perhaps the order book momentum tapers down in the back half?" }, { "speaker": "Bob McMahon", "text": "Yeah. No. It doesn’t. There is an element of getting tougher comps, but the momentum continues. I would say for Q2, it’s more timing than anything else relative to the M&A. It is down slightly sequentially, but I would say, in the overall scheme of things, not material." }, { "speaker": "Vijay Kumar", "text": "Got it. Thanks, guys." }, { "speaker": "Mike McMullen", "text": "You are very welcome." }, { "speaker": "Operator", "text": "Up next we have a question from Brandon Couillard from Jefferies. Brandon, your line is open." }, { "speaker": "Brandon Couillard", "text": "Hey. Good afternoon. Mike, on the…" }, { "speaker": "Mike McMullen", "text": "Hi, Brandon." }, { "speaker": "Brandon Couillard", "text": "…AI acquisition, it sounds interesting. It’s definitely a buzzword. Would you expect to be making incremental investments with this deal and could you just comment on how and why the AI tools are kind of used in the instrumentation today and when you sort of expect this to be, I guess, more of a reality of feature?" }, { "speaker": "Mike McMullen", "text": "Yeah. Brandon, happy to do so. I am going to actually invite Jacob on the response here, because, yeah, we hear a lot about the buzzwords and when the team first came to be and started talking about this opportunity, we said, well, in actuality, there’s a lot more than buzzwords here. We actually have some lighthouse customers using this capability already. And as you hear from Jacob, it really drives productivity for those high volume labs. So we think for certain segments market, this is actually going to be a reality. And Jacob, why don’t you, why don’t you build on my comments there, if you don’t mind?" }, { "speaker": "Jacob Thaysen", "text": "Yeah. Sure. Thanks for the question, Brandon. I am very excited about this also on bringing the best control team here into Agilent. It might be a buzzword, but we have really seen that it really makes a difference. And first of all, it fits very well into an informatic strategy, where we are all about digitalizing the lab and create that deal inside both scientifically and productivity wise for our customers. Here, the first product realization, which has already been prototype, we are aiming to what a part of the -- that is very prone for AI right now and that is really the manual interpretation of commercial graft, as Mike also mentioned. Usually, labs are spending a highly trained chemist to go out and do manual peak integration, which is tedious process. And you can imagine if you have a high volume lab, there’s a lot of investment going into this area. And active virtual control here have already proven with the customers that they can take a substantial part of that work and actually automate that. So we are very glad about that. We are going after the PCMs business first. We have a substantial installed base and we actually believe that we can implement this here in the second part of fiscal 2022. Now long-term, we do believe there’s a great opportunity to provide those algorithms also across our analytical platforms and also for other applications like QC release and predictive maintenance and all things. So even though it’s the buzzword, there is a lot of real products behind this and I am very excited about it. Mike?" }, { "speaker": "Mike McMullen", "text": "Thanks, Jacob." }, { "speaker": "Brandon Couillard", "text": "Thanks. Just one follow-up for Bob. Just if you could just elaborate a little bit more about the book-to-bill in the first quarter and then a couple just housekeeping, was the Lunar New Year impact kind of in line with the plan, and I think, last quarter you talked about…" }, { "speaker": "Bob McMahon", "text": "Yes." }, { "speaker": "Brandon Couillard", "text": "… $15 million of kind of delayed orders, were all those recouped in the first quarter, just kind of an update on that?" }, { "speaker": "Bob McMahon", "text": "Brandon, as usual, your notes are quite accurate and so let me address a couple of those things. So the Lunar New Year impact came in kind of as we anticipated, which should come back into Q2. That transit time or that $15 million that came in, but we haven’t seen really the improvement. So that’s still opportunities in the second half of this year. Our end of the quarter coincided with the large snowstorm in the U.S., but the shipments were out and we still were able to deliver. In terms of the first question was about Lunar." }, { "speaker": "Mike McMullen", "text": "I think on both." }, { "speaker": "Bob McMahon", "text": "Yeah. Okay. I think on both. Brandon, we missed something?" }, { "speaker": "Brandon Couillard", "text": "No. Just if you quantify the book-to-bill, if you are really?" }, { "speaker": "Bob McMahon", "text": "Oh! Yeah. Yeah. Quantify the book-to-bill. Yeah." }, { "speaker": "Mike McMullen", "text": "You are right." }, { "speaker": "Bob McMahon", "text": "I knew that there was something else. I was trying to avoid that one on purpose, because we are not going to provide that. But what I can tell you is that, the growth rate of our orders was twice as much as the revenue growth, and I would say, our backlog is the highest it’s ever been." }, { "speaker": "Mike McMullen", "text": "And Brandon, this is Mike. I would just add one comment. There is one word in my script. I really want to make sure that I emphasize here throughout the quarter. So this wasn’t just a calendar December year end kind of story. We saw this order strength throughout the entirety of our fiscal Q1." }, { "speaker": "Brandon Couillard", "text": "Got it. Thank you." }, { "speaker": "Operator", "text": "Our next question comes from Puneet Souda from SVB Leerink. Puneet, your line is open." }, { "speaker": "Puneet Souda", "text": "Yes. Hi, Mike and Bob. Thanks for taking the question. So, the first one is just a follow-up on the order book. I am wondering if you can quantify that, obviously, that’s been growing strongly. And maybe just help us understand, once said, you have the strong order book, you have confidence in the rest of, I mean, the guide throughout the year based on what you are providing. But maybe just talk to us about the sort of the cadence wise in terms of supply chains. Obviously, we are hearing -- we have a number of questions that we get on supply chains frequently. So just wondering what’s your level of confidence on the supply chain and turning those order books into orders?" }, { "speaker": "Mike McMullen", "text": "Yeah. So, first of all, I’d say, that the supply chain environment continues to be quite challenging. On the other hand, I remain quite confident, because our team has found ways to continue to navigate through those and meeting the expectations of customers terms to delivery times. In fact, if I recall correctly, our order cancellation was actually lower this year than prior year. So while I don’t want to imply that it’s all sunny out there in terms of the supply chain, we have been working on this thing for a while. I mean many quarters ago, we were working on this quarter and the second half of this year. So while the environment remains challenged externally, I remain confident in our ability to actually get product to customers when they need it." }, { "speaker": "Bob McMahon", "text": "Yeah. Puneet to your first question on the quantification, we are not going to provide that other than what I had answered…" }, { "speaker": "Mike McMullen", "text": "Yeah. That one, Bob. But we did find the 2x order growth rate versus revenue." }, { "speaker": "Puneet Souda", "text": "Got it. Fair. And in terms of cell analysis, Mike, I mean, that franchise has been growing. You highlighted Lonza, the Cocoon platform, a couple of other capabilities. Maybe can you -- I know at one point, you had sort of quantified that business. I am wondering if you can do that again and what sort of growth rates you are seeing there and what’s the expectation this year given the acceleration you are seeing in overall in biomolecules? Thank you." }, { "speaker": "Mike McMullen", "text": "Yeah. Thanks for that question. We love to talk about the cell analysis. It’s been a really great addition to the company over the years and we continue to grow and expand that. So, first of all, I’d say, that business remains to be very healthy. We are seeing really good strong end market demand. And Bob I think for the year, we are expecting the double-digit growth out of the cell analysis business. And really excited and the fact that, in addition to the manufacturing expansion we had in Chicopee, that kind of gives you an indication of our confidence in future growth. And I believe we are close to, Bob and Jacob, close a north of $400 million for this business?" }, { "speaker": "Bob McMahon", "text": "This year." }, { "speaker": "Mike McMullen", "text": "This year. Yeah." }, { "speaker": "Bob McMahon", "text": "Forecast for this year." }, { "speaker": "Mike McMullen", "text": "Yeah." }, { "speaker": "Bob McMahon", "text": "Yeah." }, { "speaker": "Puneet Souda", "text": "Got it. Super helpful guys. All right. Thank you." }, { "speaker": "Mike McMullen", "text": "You are very welcome." }, { "speaker": "Operator", "text": "Our next question comes from Patrick Donnelly from Citi. Patrick, your line is open." }, { "speaker": "Patrick Donnelly", "text": "Hey. Thanks for the questions guys." }, { "speaker": "Mike McMullen", "text": "Hey, Patrick." }, { "speaker": "Patrick Donnelly", "text": "Mike, maybe one on China, between the tough comp…" }, { "speaker": "Mike McMullen", "text": "Sure." }, { "speaker": "Patrick Donnelly", "text": "… Lunar New Year, obviously, a few layers there. Can you just talk about, I guess, the core performance is going to stripping that out a little bit, what you are seeing there, what you saw through…" }, { "speaker": "Mike McMullen", "text": "Got it." }, { "speaker": "Patrick Donnelly", "text": "… to your point there throughout the quarter, I guess, the cadence and then the expectations going forward there as well, just between the different markets there. Just curious what’s going on?" }, { "speaker": "Mike McMullen", "text": "Yeah. It’s interesting. Sometimes you can get kind of diverted on the headlines out of China, because our business remains quite strong and we are seeing good strength in pharma has really been a key driver for us, which Bob highlighted in the script. But also our Diagnostics business, DDG grew, I think, over 40% in the first quarter, services growth in the mid-teens. So other things that I have talked to you about, which is, in addition to continuing to grow and strengthen our instrumentation portfolio market share in China. We have also been talking about our ability to grow our ACG business in China with that large installed base and the fact that we have historically viewed ourselves of being underpenetrated in Diagnostic and Genomics, and we are really starting to see traction on both of those growth factors. So, again, we feel really confident about the state of the China business, because we don’t have the order book we have, but also these other areas of recurring revenue are really growing, growing well for us and we continue to invest for our customers in China, as I mentioned in my call script. So I think there’s a lot to like about the opportunities in our business in China." }, { "speaker": "Bob McMahon", "text": "Yeah. Patrick, just one other thing, we -- while we grew 3% as we mentioned, if we add back in kind of the Lunar New Year estimate, it was high-single digits, which was in our -- in line with what we had expected and our expectation is that, that’s going to be for the full year as well. Now Q2 will be stronger than that, obviously, as it comes back and we also saw mid-teen -- mid-to-high-teens growth in orders in Q1." }, { "speaker": "Patrick Donnelly", "text": "Okay. That’s helpful. And then maybe just on the academic government market. You are not alone, obviously, calling that out as being a little sluggish to come back. Maybe just what you saw there in January, Mike, I know you called out the remote learning maybe caused a little more of a pause even as we go into 2022? And then just expectations there going forward, you expect the market to kind of normalize a little bit and what are you hearing from customers on that front?" }, { "speaker": "Mike McMullen", "text": "Yeah. Thanks for that, Patrick. We saw -- we see the Omicron impact is transitory. We saw that in the U.S., for example, and we would expect to, I think, Bob, you called out in the script back to normal kind of levels in February. So we actually expect the environment to improve over the year. I think we are flattish for Q1. But, Bob, I think, we are calling for mid-singles or so growth for the full year. So that would imply a pickup in growth in this segment later on this year." }, { "speaker": "Bob McMahon", "text": "Yeah. I mean, for everything that we see, Patrick, funding levels continue in activity within our order book continues to be strong. So it not as strong obviously as the Pharma and C&E areas, which are leading the growth in the Diagnostics, but we are not seeing any fundamentally different performance in that market going forward." }, { "speaker": "Patrick Donnelly", "text": "That’s helpful. Thank you, guys." }, { "speaker": "Mike McMullen", "text": "You are very welcome." }, { "speaker": "Operator", "text": "Up next we have a question from Jack Meehan from Nephron Research. Jack, your line is open." }, { "speaker": "Jack Meehan", "text": "Thank you. Good afternoon, guys." }, { "speaker": "Mike McMullen", "text": "Good afternoon, Jack." }, { "speaker": "Jack Meehan", "text": "I was hoping you could elaborate on the pricing actions you are taking in the market? How do they compare to kind of normal periods and what areas of the portfolio have you had success when it comes to pricing?" }, { "speaker": "Bob McMahon", "text": "Yeah. I will take that, Jack. And I think we mentioned at the beginning of the year that we were estimating roughly a point of growth associated with that was about half of what we had seen normally to cover the increased costs, and what I would say is, through Q1 we are ahead of schedule, which is good." }, { "speaker": "Jack Meehan", "text": "Okay. And then, the other area I was hoping you had an update on is NASD, so over 45% growth in the quarter. Maybe just any update to what your guidance is for the full year? It seems like you are tracking ahead of schedule here and just when the new line opens up, just what sort of pace you expect to be able to take advantage of that capacity?" }, { "speaker": "Bob McMahon", "text": "Yeah. I was going to say, we -- the team continues to do a fantastic job and continues to drive even more revenue and product out of the existing capacity and it was a great first quarter and slightly ahead of our expectations. We had expected double-digit growth and that continues to be our expectation before the new train, Train B comes online at the end of this calendar year. And the order book continues to be strong. That team continues to actually build the order book for 2023 and building that demand for that train. So we are extremely excited about that business and are looking forward to not only bringing that up, but also looking for other ways to expand our capacity." }, { "speaker": "Mike McMullen", "text": "Absolutely." }, { "speaker": "Jack Meehan", "text": "Thank you, Bob." }, { "speaker": "Bob McMahon", "text": "Thank you." }, { "speaker": "Operator", "text": "Our next question comes from Derik de Bruin from Bank of America. Derik, please go ahead." }, { "speaker": "Mike Ryskin", "text": "Hi. Thanks for taking the questions. This is Mike on for Derik." }, { "speaker": "Mike McMullen", "text": "Hi, Mike." }, { "speaker": "Mike Ryskin", "text": "I want to ask a little bit on the -- hey -- I want to ask a little bit on the Diagnostics and the Clinical end markets. In particular, you called out sort of the expansion of our CNS [ph] into some of the applications here and you are seeing a new vector of clinical growth here. I was wondering if you could elaborate on that. Just sort of what are the specific drivers you are seeing there and where some of that uptick happening." }, { "speaker": "Mike McMullen", "text": "Yeah. I am going to pass it over to Jacob for some more details here. But also I would also just remind, we also had a very good print on the pathology side of our Diagnostics business. But I think you will hear from, Jacob, LC/MS is an indication of some future traction, we are already getting some good growth. So, Jacob, your thoughts there?" }, { "speaker": "Jacob Thaysen", "text": "Yeah. Absolutely. We have closed the year have a good LC/MS Clinical business in U.S. But over the past year, we have also expanded ourselves into China, really good tractions. We both have our own product line there, our direct sales, but we also have an OEM partner. So in that sense we are both addressing the customers that we know, but also a lot of customers that we want to get access to. And that’s been quite successful and hence we are right now looking to expand the portfolio even further. We have the Ultivo, of course, with our LC connected and we are looking to other parts of our portfolio, both within LC/MS, but also beyond LC/MS here over the next period of time. But we do see China as a great opportunity, but here over the next over time, we will also enter into other areas like Europe and other places." }, { "speaker": "Mike McMullen", "text": "And Jacob, on the Ultivo, what I think the customers love the combination of performance and the size of the footprint really fits nicely into the diagnostic lab." }, { "speaker": "Jacob Thaysen", "text": "Yeah. Exactly. We spent a lot of energy of both making it a size that fits very well into the LC stack. But more than that we also made it more easy to work with. So it’s actually an ease-of-use solution. So we are very excited about that and even better the customers are also super excited about that. I do want to mention also that we also have a strong Clinical business within the flow cytometry. With the Ultivo business that continues to drive growth and particularly China, where we see a lot of demand there also. As you might recall, the flow cytometry from the LC business is really focused on decentralized lab also again with ease-of-use and we see a lot of interest in that. And I do expect also that U.S. will be a future market for us here." }, { "speaker": "Mike Ryskin", "text": "Great. I appreciate that. Any color you can give us just real quick on sort of how meaningful LC/MS is within that 15% of your exposure? Is it just to give us a sense of the scale of that relative to genomics and cancer diagnostics and pathology things like that?" }, { "speaker": "Mike McMullen", "text": "Bob, do you want to take it or do you want me to?" }, { "speaker": "Bob McMahon", "text": "Yeah. Yeah. I will take it. It is still relatively small but growing very fast, which the market itself is quite large and so the opportunity here is really in front of us going forward." }, { "speaker": "Mike Ryskin", "text": "Great. And if I could ask a quick follow-up on -- just on the capital deployment side…" }, { "speaker": "Mike McMullen", "text": "Sure." }, { "speaker": "Mike Ryskin", "text": "… and on M&A. Obviously, you have done some smaller deals in the last couple of years and you continue to invest in new technologies and you have got some, you have had M&A deployed into sort of Life Science Solutions and cell analysis. You have had things in liquid biopsy and now artificial intelligence. So it’s kind of showcase that you can deploy capital in a variety of different markets. But just looking at where the balance sheet is now, any thought on larger acquisitions and sort of scaling up to do a bigger deal? And what excites you, what markets would you be looking to? What’s -- so how would you go about starting to deploy that capital?" }, { "speaker": "Mike McMullen", "text": "Yeah. Sure. Happy to address that, Mike. So I appreciate, by the way, the recognition of the variety of where we deploy capital. But there’s a consistent theme across where we deploy capital, which is high growth end markets, which will drive increase to the overall core growth of the company in places where we can leverage the scale and the capabilities we have in the company to really make those businesses even more successful. So I think there’s a timing kind of an underlying theme behind all those acquisitions. So that would continue to be our thesis and our approach, as well as staying focused in the private sector, which we think there’s -- really fits well the Agilent model and often the potential acquired companies and leadership teams really find the Agilent culture, a good place to be and they also see how well we have done with previous acquisitions. So we have got a track record as well that they can point to. And I am on record saying that, we wanted to deploy our balance sheet as part of our overall growth story. It’s part of what we have been calling our build and buy growth strategy. And as you may know, the largest deal that we have done to date has been -- was the acquisition of BioTek, but we believe we can do multiples of that deal and be willing to deploy capital if the right opportunity comes along for us." }, { "speaker": "Mike Ryskin", "text": "Okay. Thanks." }, { "speaker": "Operator", "text": "Our next question comes from Thomas Peterson from Baird. Thomas, your line is open." }, { "speaker": "Thomas Peterson", "text": "Hi, guys. Thanks for taking my questions." }, { "speaker": "Mike McMullen", "text": "Sure." }, { "speaker": "Thomas Peterson", "text": "Just wanted to circle back on Pharma and just wanted to know if you had seen any benefit within Pharma from both onshoring activities and manufacturing redundancies and kind of, if so, where has this tailwind been and what are your expectations for any potential durability here?" }, { "speaker": "Mike McMullen", "text": "Great question. So I think this is actually a story both for the Pharma, as well as elements of our Chemical and Energy business. And I’d say right now, not yet material in terms of order book or revenue, but we believe it’s coming. There’s a lot of discussions with customers that are building new capacity. I would say it’s probably more of a 2023 kind of event. But I think it speaks to the durability of growth that we think we have in Agilent’s two largest end markets. So we are hearing lots of discussions about dual sources of critical components, onshoring of previously offshore critical supply chain elements. So I think the continued supply chain challenges that the world is seeing is only putting more emphasis on that direction. So I’d say right now, it’s in the longer term planning phase. As you know, the analytical laboratory instrumentation is often the last thing that’s added when they bring on new capacity, but we believe it’s coming, but it’s not been material yet to the company’s performance." }, { "speaker": "Thomas Peterson", "text": "Great. That’s super helpful. And maybe just to finish for me, just any updated thoughts on the One Agilent commercial organization transition? Anything that surprised you relative to expectations, sort of how is that incorporation gone internally?" }, { "speaker": "Mike McMullen", "text": "Yeah. So I am going to have Padraig jump in here with some additional specifics. As you know, I have asked Padraig to take on this role in addition to his leading the overall Agilent Services business. But we are just delighted with the start of this new structure and I think I always say the proofs in the results and we are off to a good start with the fact that we had such a strong Q1 order book throughout the quarter. And Padraig, I know it’s been just a few months where you have been pulling your team together and but I think you are already starting to work with customers differently and maybe you could share some of your thoughts here." }, { "speaker": "Padraig McDonnell", "text": "Yeah. Thanks, Mike. I think we are starting to see the benefit of an enterprise approach to both sales and service, and the associated functions, and of course, selling the complete Agilent solution to customers, which includes instruments, services and consumers with aligned sales approach is really giving us a lot of scale with customers. We are also seeing a doubling down on our investment in our digital interaction with customers and we continue to see strong momentum with accelerating digital growth of about 25%. So great start, Mike, and more to come." }, { "speaker": "Thomas Peterson", "text": "Okay." }, { "speaker": "Operator", "text": "Our next question comes from Dan Brennan from Cowen. Dan, your line is open." }, { "speaker": "Dan Brennan", "text": "Hey, Mike and Bob, thanks for taking the questions. Congrats." }, { "speaker": "Mike McMullen", "text": "Sure, Dan." }, { "speaker": "Dan Brennan", "text": "I was hoping to go back to C&E, Mike, could you or Bob..." }, { "speaker": "Mike McMullen", "text": "Sure." }, { "speaker": "Dan Brennan", "text": "…unpack -- kind of unpack the customers there, Chemical R&M, can you just kind of give us a flavor for what you are seeing? I know the question was asked earlier about the impact of what’s going on. But just wondering, as oil price spikes in the past, kind of what kind of impact have you seen if the oil price spike is sustained?" }, { "speaker": "Mike McMullen", "text": "Yeah. I’d say if you look at the three sub-segments of the C&E marketplace, we often talk about the Chemicals, Energy and Advanced Materials market. I think it’s the Chemicals and Advanced Materials market segments that are driving the growth here. Now theoretically, when -- although, be it now much -- it’s a very small part of the total number these days, higher oil prices would tend to lead to more investment in that Energy segment portion of the whole market segment. But I can’t remember the exact percentage. I know it’s evolved a bit over time. But I think what’s most interest to us is how does the world view global growth were PMI. So, yes, I think, the highest correlation of growth in this segment relate to PMI and the global growth outlook. But we would -- there could be some more money to invest in exploration, perhaps, if oil prices stay high, but it’s really also really driven by the PMI view. That’s why they still remain positive and that’s why we are optimistic about our ability to grow this overall market throughout the rest of this year." }, { "speaker": "Bob McMahon", "text": "Yeah. Dan, to build on what Mike was saying, if we looked at those three big areas, over 90% or roughly 90% of our C&E business is actually Chemicals and Advanced Materials. And so the Energy piece is an important component, but that demand around new types of Chemicals, Advanced Materials and so forth is really what’s driving it…" }, { "speaker": "Mike McMullen", "text": "Yeah." }, { "speaker": "Bob McMahon", "text": "And so whether it be batteries and other areas around these is the growth driver today." }, { "speaker": "Dan Brennan", "text": "Got it. Thanks guys. And then, just related to the Oligo business the MAC business, just can you remind us, at least from the perspective of like basin within your high single-digit growth for Pharma, kind of how many points of growth should we be thinking that business is contributing?" }, { "speaker": "Bob McMahon", "text": "From Pharma, it grew -- it was roughly 2 points to 3 points of growth for pharma in Q1." }, { "speaker": "Dan Brennan", "text": "And then, for the year, sorry? Yeah. Yeah. Sorry about that, I misspoke. So for the year, I think you are talking low double now for Pharma. So what’s assumed from the Oligo business…" }, { "speaker": "Bob McMahon", "text": "Yeah." }, { "speaker": "Dan Brennan", "text": "…within that [inaudible] demo?" }, { "speaker": "Bob McMahon", "text": "A point or two." }, { "speaker": "Mike McMullen", "text": "Yeah. I think the…" }, { "speaker": "Dan Brennan", "text": "Very clear." }, { "speaker": "Mike McMullen", "text": "… message here is the, yeah, the Pharma growth was strong for the biopharma, NASD, but also across the rest of the company’s portfolio as well." }, { "speaker": "Dan Brennan", "text": "Yeah." }, { "speaker": "Mike McMullen", "text": "So it’s an Agilent wide story." }, { "speaker": "Dan Brennan", "text": "Yeah. Great. And then maybe just one final one to sneak in just the LC market, Mike, it’s always entering here, what’s going on…" }, { "speaker": "Mike McMullen", "text": "Yeah." }, { "speaker": "Dan Brennan", "text": "… and that’s a big part of your business, what the competitive trends there like in LC?" }, { "speaker": "Mike McMullen", "text": "All I can tell you about is what’s going on in my business, which is its doing very well. So we have got -- we had -- we continue to see very strong business momentum. The market demand is very robust. You may have recall in my script, I tried to call out demand in our chromatography systems remains very robust. We saw double-digit growth again in Q2 -- Q1 2022 off double-digit or the prior year, backlog strong, orders growing faster than revenue. So there’s a lot to like about what’s going on with the LC business." }, { "speaker": "Dan Brennan", "text": "Great. Thank you guys." }, { "speaker": "Mike McMullen", "text": "You are very welcome." }, { "speaker": "Operator", "text": "Our next question comes from Paul Knight from KeyBanc. Paul, please go ahead." }, { "speaker": "Paul Knight", "text": "It’s always tough to ask a good question late in the day, Mike." }, { "speaker": "Mike McMullen", "text": "Come on, Paul. I know you are up to it. I know you are up to it." }, { "speaker": "Paul Knight", "text": "As I look at the 32% biotechnology growth, which seems extraordinarily good, would you attribute this to the cell and gene therapy market, and what specifically biotech instruments? What’s behind that really high growth rate?" }, { "speaker": "Mike McMullen", "text": "Bob, why don’t we tag team on this, but I’d say, it’s really being driven by not only the NASD business we talked about earlier, but our core LC/MS business. I mean there is some contribution from cell and gene therapy, but it really is coming from the LC/MS business along with really strong growth of services and consumables as well. So, I’d say, it’s really a broad-based story, but really around our core instrumentation platforms along with services and consumables." }, { "speaker": "Bob McMahon", "text": "Yeah. Spot on." }, { "speaker": "Mike McMullen", "text": "I mean, goes for that." }, { "speaker": "Paul Knight", "text": "Okay. Sorry, Bob." }, { "speaker": "Bob McMahon", "text": "Go ahead, Paul. Sorry." }, { "speaker": "Paul Knight", "text": "You have mentioned LC/MS more than, I think, is typical. Is this a result of -- are you seeing a result of benefit yet from the Avantor JV. And in addition, I know CrossLab, you mentioned higher connectivity. I think you are implying you continue to gain some share there, if you can talk to those two topics?" }, { "speaker": "Mike McMullen", "text": "Yeah. Sure. Happy to do. ACG has been what we are doing has been near and dear to our overall growth strategy for a number of years and we are very excited about the new relationship we have with Avantor. I’d say it’s still very early days, so not yet a material contributor to the topline revenue and that really was all according -- so it’s proceeding according to plan. So I’d say there’s more to come in that regard. And then on the connect rate, yeah, in fact, we called that out on purpose to say, we continue to see higher connect rates with our consumables and services business, and we think that bodes well for future growth. And Padraig, maybe you want to just comment a bit on what you are seeing on the services side and the connect rate." }, { "speaker": "Padraig McDonnell", "text": "Yeah. Well, overall, the attach rate for both service and consumables in the high 20s, but we believe and we have significant headroom for growth going forward as we target into higher technology spaces. And on the services side, in particular, we have a strong demand for contracts and that’s driving a lot of connect rate with new instruments as well, Mike." }, { "speaker": "Mike McMullen", "text": "Yeah. I think we had double-digit contract growth and probably more than 10% of Agilent’s revenues now in -- under service contracts." }, { "speaker": "Paul Knight", "text": "Okay. Thank you." }, { "speaker": "Operator", "text": "Those are all the questions we have time for today. So I will now hand back to Parmeet to conclude today’s call." }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Emily, and thanks everyone for joining. With that, we would like to wrap up the call for today. Have a great rest of the day everyone." }, { "speaker": "Operator", "text": "Thank you everyone for joining our call today. This now concludes our call. Please disconnect your lines." } ]	Agilent Technologies, Inc.	154,924
A	4	2,023	2023-11-20 16:30:00	Operator: Ladies and gentlemen, welcome to the Agilent Technologies Q4 2023 Earnings Conference Call. My name is Bo and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja, Vice President, Investor Relations. Please go ahead, sir. Parmeet Ahuja: Thank you, Bo, and welcome, everyone, to Agilent's conference call for the fourth quarter of fiscal year 2023. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. This presentation is being webcast live. The news release for our fourth quarter financial results investor presentation and information to supplement today's discussion along with a recording of this webcast are available on our website at www.investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics year-over-year, and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted exchange rates. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now I'd like to turn the call over to Mike. Mike McMullen: Thanks, Parmeet, and thanks, everyone, for joining our call today. Before we get into discussing our results and outlook, I want to mention that we're joined today by Padraig McDonnell, President of the Agilent CrossLab Group; and Sam Raha, President of the Agilent Diagnostics and Genomics Group. We're also joined on this call for the first time by Phil Binns, President of the Agilent Life Sciences and Applied Markets Group. Phil’s name may be new to some of you, but he's well-known at Agilent and in the industry. Phil has been with us for more than 13 years, coming over with the Varian acquisition and overseeing our market leading spectroscopy business. We’re extremely pleased to have someone with Phil’s knowledge, experience and proven leadership strength heading up our LSAG business. In his short time in the role, we’ve already seen Phil add tremendous value as a member of our senior leadership team. Welcome, Phil. Now onto our fourth quarter results. The Agilent team once again continued to perform well under challenging market conditions. Revenue of $1.69 billion declined 9.7% core after increasing 17.5% last year. This is at the high end of our guidance. Our proactive approach to managing our cost structure in this market environment helped us deliver healthy fourth quarter operating margins of 27.8%. Q4 earnings per share of $1.38 exceeded our guidance. While this was a decline of 10%, it comes against a tough compare last year when EPS grew 26%. While the market continues to be challenging, we believe we are starting to see signs of stabilization. As an encouraging data point, for the quarter our book-to-bill ratio was 1 for the company and greater than 1 for our LSAG instruments. Let’s take a closer look at our Q4 performance, starting with our regional results. During the quarter, while down year-on-year, we delivered sequential growth except for China, as expected. In China, our business declined 31% year-on-year after growing 44% in Q4 last year. While China was down sequentially, these results were very much in line with our expectations. And the year-on-year monthly performance improved slightly as the quarter progressed. In addition, orders were slightly higher than revenue for the quarter. While it is too early to call these two data points a trend, we see this as an encouraging sign of potential stabilization. In late September, I traveled to China for the first time since the COVID outbreak to meet with the Agilent team, key customers, and government officials. I was reminded of both the sheer size of the Chinese economy and our market there. I saw first-hand the work being done to bolster economic activity in the near-term and create an environment that will support continued growth into the future. I remain convinced China will continue to play an important role in life sciences and I’m confident that the China market will return to growth. In looking at our largest end market, pharma declined 14% driven by continued caution among customers on capital expenditures for new instruments. Within pharma, biopharma performed better than small molecule. Geographically, our biopharma business outside of China grew high-single digits. Looking at our performance by business unit, the Life Sciences and Applied Markets Group delivered revenue of $928 million, down 18% core versus a tough compare last year of up 22%. Customers continue to hold off on capital expenditures, particularly in the pharma segment of LSAG’s business, which declined in the high 20% range. This is against growth in the low 20s last year. On the other hand, we continue to see strong customer demand and growth in our PFAS solutions, as well as continued strength in the advanced materials segment. These are two secular trends we’ve highlighted before and we remain optimistic about future growth in these market segments. While the market environment remains challenged, we continue to innovate and provide unique solutions for our customers. The new products we launched in June at ASMS, in particular the 6595 LC triple quad, which is focused on key applications like PFAS, continue to generate positive customer interest and new orders. We’re also bringing innovative new solutions for customers across the biopharma value chain. We have installed a number of our online UHPLC systems with large biopharma companies. The systems are easy-to-use, reliable, and deliver significant value by providing fully automated analysis of critical quality attributes and allowing real time decision making outside the lab. The Agilent CrossLab Group posted revenue of $404 million, up 4% core and 6% on a reported basis. ACG delivered growth across all end-markets, and in all regions except China. The contract services business was up double-digits, offset by the services associated with new instrument placements. Our strategy of increasing the connect rate continues to pay off. In the quarter, the contract services business represented 65% of ACG revenue, a number that has grown nicely over the years. The Diagnostics and Genomics Group delivered revenue of $356 million, flat on a core basis and up 1% reported. DGG’s results were led by the pathology and NASD businesses, which both delivered low double-digit growth. These strong results were offset by the continued market challenges in genomics in both consumables and instruments. Our NASD portfolio and capacity expansion are continuing as planned. We’re confident in the long-term growth prospects for the markets we serve. Before I finish covering DGG, I want to thank Sam Raha for his contributions over the years and for helping us build a strong foundation for the DGG business. I wish Sam well. In addition to these business group highlights, during the quarter we were recognized for our commitment to sustainability. Agilent’s near and long-term targets for reaching net-zero greenhouse gas emissions have been approved by the highly regarded Science Based Targets initiative. A year ago, we entered 2023 sharing a view of economic and industry uncertainty, as we guided for moderating growth in the second half of 2023. We had not anticipated, however, the significance of the market headwinds the industry eventually faced, particularly in the pharma market and China. Despite the challenging market conditions, we delivered full year revenue of $6.83 billion, growing 1.5% core. While our full-year growth was lower than initially expected, we met or exceeded every quarterly guidance range we provided, a solid testament to the team’s execution ability. Including FY23 results, our 4-year compound annual growth rate is 7%. This is at the high end of our long-term growth guidance. In FY23, we delivered operating margins of 27.4%. This is up 30 basis points this year and up more than 400 basis points in the last four years. Earnings per share of $5.44 are up 4%, delivering leveraged earnings growth for the year. Our 4-year compound annual growth rate for EPS is 15%. Looking back, 2023 was a challenging year. What I’m particularly proud of is the Agilent team’s ability to quickly pivot and take action to address these challenges while staying relentlessly focused on our customers. While we’ve worked to significantly reduce expenses, Agilent’s customer satisfaction ratings remain at all-time highs. At the same time, our employee engagement continues to be excellent as we achieved a number of best employer awards over the last year. All of this helped us deliver another year of leveraged earnings in an extremely difficult market environment. Before turning it over to Bob for more details, I want to provide some high-level perspective on FY24 and beyond. For 2024, we anticipate a slow, but steady recovery, throughout the year. In our initial outlook, at the high end of our guidance we expect revenues to return to growth. At the same time, our range for EPS in the year ahead has us again delivering leveraged EPS growth. As we look ahead, we remain convinced the market challenges being faced by the industry today are transient. Our end markets are powered by investments in improving the human condition. The pace of science, innovation and discovery continues to increase, which will fuel further growth. We remain focused on winning in the marketplace. Our differentiated products, services and most importantly our One Agilent team, are all essential to the success of our customers. We are well-positioned for long-term growth. Bob will now share more detail on the quarter and the year, along with more specifics on our initial view for fiscal 2024 and Q1. Thank you for joining us today. And now, Bob, over to you. Robert McMahon: Thanks Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter and the year, as well as take you through the income statement and other key financial metrics. I’ll then finish up with our guidance for fiscal year 2024 and the first quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. Agilent finished the fourth quarter with core growth at the top end of guidance and EPS exceeding our expectations as we executed well against challenging macroeconomic conditions. Q4 revenue was $1.69 billion, down 9.7% core and 8.7% on a reported basis. This is after growing 17.5% in Q4 last year, when we benefitted from the recovery from the Shanghai shutdown in Q2 of last year. This created an estimated 1 point of headwind in the year-on-year results this quarter. As expected, we saw weakness in capital purchases in LSAG with the biggest impact in our China business. Now, I’d like to share additional detail on our end markets for the quarter. Revenue in our largest market pharma, declined 14%, versus 20% growth in Q4 last year. BioPharma declined 2% while small molecule was down 23%. However, biopharma ex-China was up 7% in the quarter and grew solidly for the year. And while small molecule was down, the decline was most pronounced in China. And outside China, small molecule was up sequentially in the quarter. Chemicals and advanced materials declined 11% versus growth of 27% last year, while flat sequentially. Our chemicals and energy subsegments were down 15% while advanced materials were down roughly 2% globally and up 4% in the Americas and Europe combined. The food market was down low double digits against a tough 20% growth comparison last year. High single digit growth in the Americas was offset by declines in all other regions. In the Americas, PFAS testing is emerging as an important growth area in food testing, helping drive the high single digit growth. We expect testing for PFAS chemicals will continue to be a growth driver across multiple end markets over time. The environmental and forensics market declined 3% versus 18% growth last year. Similar to the food market, the Americas region continues to experience strong growth, up double digits driven by PFAS. This strong performance was primarily offset by softness in China, which was down year-on-year, but up slightly on a sequential basis. Our business in the diagnostics and clinical market declined 4%. While we delivered low double-digit growth in our pathology-related businesses, it was more than offset by continued weakness in genomics. The academia and government market was down low single digits with strength in the Americas driven by government funding offset by weakness in China and Europe. Results were pressured across all geographies in the quarter. As Mike mentioned, China was down 31% year-on-year after growing 44% in Q4 of last year, in line with our expectations coming into the quarter. The rest of Asia was down mid-single digits and both the Americas and Europe declined low single digits in the quarter. Before turning to the rest of the P&L, I’d like to quickly summarize some full year highlights by end market and geography. From an end market perspective, all markets grew low to mid-single digits for the year except for pharma, which was down 2% globally. In addition, all geographies grew, except China which was down 5%. Back to the P&L for the quarter. Despite the revenue declines, our team continues to execute at a very high level. Fourth quarter gross margin was 55.8%, and our operating margin was a healthy 27.8% in Q4, which was slightly better than our internal expectations. Below the line, we benefitted from stronger than expected cash flow generating incremental interest income in the quarter. Our tax rate was 13.75% and we had 293 million diluted shares outstanding, both as expected. Putting it all together, earnings per share were $1.38 for the quarter, exceeding our expectations, albeit down 10% from a year ago when EPS grew 26%. As Mike mentioned, our Q4 results capped a year where we grew 1.5% core on the topline, increased operating margins by 30 basis points and grew EPS by 4%, while overcoming a couple of points of currency headwinds. This is a real statement on the team’s ability to quickly adapt to market changes while still delivering leveraged earnings growth. Turning to cash flow and the balance sheet, I’m incredibly proud of the Agilent team as Q4 continued a string of very strong quarterly cash flow results. In Q4, we generated operating cash flow of $516 million, well over 100% of adjusted net income, and invested $84 million in capital expenditures. CapEx spending is driven by our ongoing NASD capacity expansion, which remains on track. For the year, we delivered $1.5 billion in free cash flow, an increase of 44% over last year. Our balance sheet continues to remain healthy as we end the fiscal year with a net leverage ratio of 0.6 times. With the current challenges in the market, it is great to be a company with a fortress balance sheet and strong cash flow. In the quarter, we paid out $66 million in dividends and spent $80 million to repurchase shares. And for the year, we returned $840 million to shareholders through $265 million in dividends and $575 million in share repurchases. Looking forward, you may have also seen that we recently announced a 5% increase in our quarterly dividend providing another source of value to our shareholders. It’s worth noting that we have increased our dividend every year since we first began issuing them in 2012. Now, let’s move on to our outlook for the upcoming fiscal year and first quarter. As Mike stated, we expect to see a slow but steady recovery throughout fiscal 2024. However, we also acknowledge the continued market uncertainty, high interest rates, volatile exchange rates and depressed capital spending. Like several of our peers, we expect the markets to be down slightly for the year, while we expect to perform better. Given the expected slower market conditions, we have taken additional steps to adjust our cost structure. Incorporated into our guidance is roughly $175 million of cost savings. Given the significance, I want to provide a little more detail on these actions. Roughly 30% of the savings are related to portfolio optimization decisions we have taken in DGG, the largest of which was the exit of the Resolution Biosciences business. Another 25% is related to materials and logistics cost savings as well as optimizing our real estate footprint, with the remaining savings tied to continued reductions in discretionary spend and optimizing our workforce. Along with these actions, we have taken a $46 million charge for restructuring and other related costs in our Q4 GAAP results. These reductions, while difficult, are necessary to ensure we continue to fund our most critical investments as well as fund the variable compensation resets from this year. These actions help ensure the company delivers leveraged earnings growth in FY24 and will enable us to emerge even stronger when our markets inevitably return to their long-term growth rates. As Mike noted earlier, we exited Q4 with some potential signs of stabilization with a book to bill ratio of 1 for the company and greater than 1 for LSAG instruments. While this is positive, we are going to be prudent in our initial guidance. For the full year guide, we expect revenue in the range of $6.71 billion to $6.81 billion. This represents a core growth range from a slight decline of 0.5% at the low end to 1 point of growth at the high end. Currency is a headwind of 1.2 points while M&A is also a slight headwind of 10 basis points related to Resolution Bioscience. On a reported basis, we are expecting a decline in the range of 1.8% to 0.3% year-on-year. From a geographic perspective, we expect modest growth in the Americas and Europe. While we expect to see recovery during the year in China, our initial view is it will still decline for the full year. From a business group perspective, we expect growth in both DGG and ACG, while LSAG instruments will still be pressured. In terms of phasing, we expect the first half of FY24 to look similar to the second half of FY23, with growth in the second half of next year. We are projecting modest operating margin expansion for the year. Below the line, we expect interest income and expense to offset each other, a tax rate of 13.5%, and 293 million shares outstanding. Fiscal 2024 non-GAAP EPS is expected to be in the range of $5.44 to $5.55. This range represents flat to 2% growth versus FY23. From a cash flow perspective, we expect another robust year. We are expecting roughly $1.6 billion in operating cash flow and $400 million in CapEx as spending increases on NASD’s Train C and D expansions. Looking to Q1 2024, we expect revenue in the range of $1.555 billion to $1.605 billion. This represents a core decline of 11.3% to 8.5% with currency and M&A having a minimal impact. At the midpoint, we are expecting growth that resembles what we just delivered in Q4 and assumes no significant budget flush during the end of this calendar year. This is against another difficult comp of 10% growth in Q1 of last year. First quarter 2024 non-GAAP earnings per share are expected to be between $1.20 and $1.23 as the cost savings fully ramp through the quarter. As Mike indicated, while we are expecting low growth in 2024, we remain optimistic about the future of our markets and our long-term prospects. Our business remains very profitable and healthy, and I know we will come out stronger as a company when market growth returns. And now I will turn the floor back over to Parmeet for your questions. Parmeet? Parmeet Ahuja: Thanks, Bob. Bo, if you could please provide instructions for the Q&A now? Operator: [Operator Instructions] We'll go first this afternoon to Vijay Kumar at Evercore ISI. Vijay Kumar : And some helpful comments here. Mike, maybe starting with those book-to-bill comments here. Overall company 1 turn LSAG instrumentation looks like it's turned. Curious what those book-to-bill numbers for ex-China? And if instrumentation has turned, that Q1 guidance, comps get easier. Why is Q1 assuming no benefit from this turn in instrumentation? Robert McMahon : Yes, Vijay. Let me take that. I think if you look at the book-to-bill ratio, it's -- for LSAG instruments, it's actually very similar to both including China and excluding China. China was actually slightly positive as well. So that's a good sign. And as we mentioned in the prepared remarks, we're taking a prudent approach to our first quarter. And certainly, we see this as a positive. We did have some -- we typically do have seasonality from our Q4 to Q1, but we're taking it kind of one quarter at a time. Mike McMullen: Yes, I think part of the big story, too, Vijay, is the 10% comp from last year as well. But as we said it in the call, we were -- it was encouraging to see some initial signs of stabilization with that kind of book-to-bill on the instrument side. Vijay Kumar : Understood. I'm glad to hear prudency and right off the bat here. Mike McMullen: We got that into the script, Vijay. Vijay Kumar : On -- just one more related on guidance here. What are you assuming for NASD in China for fiscal '24? Robert McMahon: Yes. So for China, we are thinking mid-single-digit decline for the full year. So very similar to this year. And then for NASD, right now, we're expecting low single-digit -- mid-single-digit growth. Mike McMullen: Mid-singles. Yes. Operator: We go next now to Patrick Donnelly at Citi. Patrick Donnelly: Maybe kind of a follow-up on the 1Q guide. It seems like, again, the order's encouraging. Maybe a little bit prudent on the guide, as you said, I guess when you think about just the implication for the ramp 2Q to 4Q, is it optimism in the market based on some of those order trends is that obviously the comps get easier in the second half as you work through it. And can you just talk about the visibility into the recovery and kind of what gives you the confidence in the ramp as the year progresses here? Mike McMullen: Yes, sure, Patrick. I want in lead off, Bob, and then you can add any additional comments you'd like to make here. But when we think about these comps around what we described as a gradual recovery and grow. I think is, first of all, important to remind the audience that we do expect the first half of the year to be very much like what we saw in the second half of '23. But looking forward, why do we think that things are going to be different in the second half which is though it's initial and still early, there are some early signs of potential stabilization that you see in our order book. The fact that book-to-bill for the company was above 1, the fact that we had the same result in our instrument business, which has been the most pressured part of the company. And listen, while it's too early for customers to be confirming their 2024 budgets with us, let's go back to the sales phone, which is a predictor of potential growth, right? So our sales funnels continue to show a lot of interest from customers. And we know that at some point in time of things will start to release. The funnels remain healthy. And listen, an environment like this, we've seen these things before, which was healthy capital spending has been constrained. So some release can be expected. And we hear -- I don't want to get too down my skies on this, but we hear customers talk about some new focused investments. And I think we're not calling for a big broad-based market recovery, but certain segments of the market are going to be better. We're talking about some investments in R&D tools, what's going to PFAS testing capacity expansion plan we're hearing from our customers, Advanced Materials. And then as you mentioned earlier, Patrick, there's an easier compare in second half '24 as well. So we do expect this return to growth. And I think as -- it's not simply a hope. We've got some information to be kind of back up our thinking there. Again, we'll know a lot better about how things look when we get to the budgeting phase of our customers in early 2024. Again, right now, the markets for capital -- instrument still remain quite challenged. And as I mentioned, we are seeing encouraging signs of potential stabilization, but it's going to be a journey for our return into growth. And I think our guide reflects that. And again, I think we're -- we've got a high degree of confidence this is what the back half of the year will look like. Robert McMahon: Yes. And Patrick, you asked about Q1, as I mentioned in the prepared remarks, I think we're taking a prudent approach here. but we're also going up against last year where we did have a budget flush and happened earlier in the year but for delivery in November and December, and we're assuming that we're not seeing that or building that into our into our estimates. So that happens, then it would be -- that would be a nice thing for all of us. Mike McMullen: Yes, absolutely, Bob. Patrick Donnelly : That's helpful. Bob. And maybe, Bob, just on the margin side, helpful to hear you talk through a few of the different moving pieces. It sounds like some cost savings in DGG, among others. I guess can you just give a bit more color on kind of the moving pieces, where you're pulling levers, the ability to take out some additional costs to hit these margin numbers. Obviously, you talked about margins being up a bit. I think there are some headwinds like incentive comp, things like that. So maybe just talk about the gives and takes there and confidence in terms of some of the cost outs. Robert McMahon: Yes, that's a great insight there, Patrick. Yes, because we do have some add backs, I would say that -- so don't take that $175 million and drop it to the bottom line because we have some resets, I would say roughly half of that is kind of a reset between our sales comp and variable pay. If we think about it is really across the P&L, the biggest piece actually is in DGG with the exit of the Res Bio business, but we've also taken some tough decisions in other product lines to streamline the portfolio there. And I would say roughly a little over 30% of that is associated with that. The other 25% is really within our COGS. Our OFS team has done a phenomenal job of really kind of leaning into reducing our costs around logistics and material costs. And then I talked about the site consolidation as well, which will show up and down the P&L. So we've taken a look at our real estate footprint and have actually closed several smaller sites between -- around the world really. And then the final piece is really kind of infrastructure optimization, which would be discretionary spend but then also headcount reductions that would be focused on areas where we've rightsized it to the demand. Mike McMullen: And Patrick, this is Mike, I stated about the confidence about the growth recovery. I think when it comes to hitting the $175 million, high degree of confidence, we control this 100%, and we'll deliver on this. Operator: We'll go next now to Matt Sykes at Goldman Sachs. Matt Sykes: Maybe just on NASD, I noticed just over the past, call it 1.5 years, we've kind of gone from high double digits, low double digits next year, mid-single digits, which it's probably just some level of normalization as you ramp capacity. But just given the step up in CapEx you're guiding to next year, is there some wiggle room in terms of how you guys lay that capacity out? Or is the confidence in that market growth enough to keep investing in that area next year? Mike McMullen: I'll jump right into that one. So I tried to make that come out in the script. But our plans to continue to invest for the future long-term growth this business remains high. We're going full steam ahead on the capital expansion and they're tracking according to plan. In fact, I think we'll probably do a little bit better on the cost side when all said and done relative to the CapEx that's involved. And Bob, maybe you can talk a little bit about some of the things we're seeing relative -- I think we commented on this before, but what have we seen in the marketplace relative to 2024 relative to NASD. Robert McMahon: Yes. I think, Matt, it's a great question. And so if we look at the details of kind of the mix, actually, I would say we have the most healthy mix of portfolio in NASD and '24 than we've had. So a significant increase in the number of programs that we are going to have been going through. Now it's a bigger component of clinical volume versus commercial volume, which I actually think bodes very well for the future going forward. We have seen some, I would say, some pausing of certain customers as associated with IRA but we think that, that's transitory. So as Mike said, we're not at all concerned about the long-term growth prospects of this market. And in fact, many of the programs that we're seeing come into our portfolio are actually as what we had talked about in previous calls, much larger targeted patient populations, which really speaks well to the volume. And then as Mike mentioned, we're actually expanding our portfolio, our technologies. And so it's not just siRNA, but we're having the ability to continue to grow our CRISPR -- GMP grade CRISPR business as well as antisense. So we're continuing to do that as well. Mike McMullen: Sam, I know this will be your last call, would have thought it might be interesting for you to jump in here for a second. As part of your transition, you've been talking to a lot of our key customers. And I think we're hearing the same story from them about long-term growth continued investment here. Sam Raha : Yes. Absolutely, Mike. I'll just add a couple of things to your and Bob's comments. One, we are now on contract with more major pharma than we ever have been. And it's very promising. If you look at publicly the percentage of their overall R&D budgets that they're now spending on therapeutic oligos, and we are in the driver's seat to win those opportunities. And just in the last couple of weeks alone, I've spoken with a number of our lead pharma partners, and they've reaffirmed. So there is a slight navigation through the IRA, as Bob mentioned, the conviction on their end of the market potential remains unchanged and in the leadership position to pursue that. Matt Sykes : Got it. That's a great amount of detail. Maybe just, Bob, for you, just on pricing. Kind of what's embedded for next year as you think about pricing? And how has pricing kind of trended over the course of this year? Are we back to sort of normalized levels of pricing that you guys have historically achieved? Or is there still some pricing gains to see sort of as we move into next year in certain areas of your business? Robert McMahon: Yes. Matt, that's a great question. And we ended the Q4 at just a little under 3% and actually for the full year was greater than that. So it actually continues to be hold up very well. What we're building into our plan for next year is roughly 2 percentage points of price, which, as you know, is greater than our historical kind of pre-COVID levels. And so what we've been able to do, I think, is -- really speaks to the value proposition that we have as well as the emerging mix of our businesses as well. Operator: We go next now to Rachel Vatnsdal at JPMorgan. Rachel Vatnsdal: So first off, I just want to ask on China. You mentioned that the region is down 30% this quarter. That was in line with your expectations. You're expecting it to decline mid-singles again next year. So I guess, just how much of a function is that really due to some of the comps and starting to lap the easier comp late into next year versus is there anything structurally wrong with that market? And how do you expect China to continue to grow on that medium to long term? Mike McMullen: Do you want to take the first part, Bob, I think it's... Robert McMahon: Yes, yes. So well, I think from the standpoint of the comps, what we would see is, obviously, if you looked at what we did in the first half of this year, we had very strong growth, and then we're going up against, extremely difficult comparisons this year. I mean, as I mentioned, we were down -- up 44% in Q4 of last year, so down 31% this year, we're still up over the 2 years. And as we think about this similar to the rest of the kind of the guide, we're expecting kind of declines in the mid-20s in Q1 and getting better from there. And some of that, it will be an easier comp. And I'm sure Mike will talk a little bit more about this, but we don't see anything structurally changing in the Chinese marketplace for life science tools. Mike McMullen: Absolutely, Bob. Why don't pick up from there. So I made a few comments about this in the prepared remarks, but I may first trip to China since October 2019 when we're there for the [BCIA] show. And what did I see, first of all, I'll just remind how quickly things can happen in China. Electric vehicles everywhere, a lot more green, digital adoption was just amazing. I don't think anybody uses cash there anymore. And then you also remind as you travel around the country, just how big a country is, how big the economy is and how big the markets are for Life Sciences. But to your specific question, here's what I was hearing from customers and my team when I have seen as well, which was why do we think this market eventually will return to growth, all the things that have been driving this market over the years, which is primarily the Chinese government's 14th 5-year plan. They're still on it. They're pointing to long-term growth, improving the quality of life in China. We're hearing stories of new environmental regs coming from PFAS. The anticorruption impacts that we've seen in the health and the pharma space look to may have peaked, with a lot of the actions occurring, which could ultimately long term, lead to more R&D investments because there'll be less money being spent in the SG&A area. But I don't want to be too short-term optimistic about this expansion of growth because the business is bouncing along at a certain level. And that's why we call it stabilization in our prepared remarks. So what we're seeing, what we're forecasting, what we're hearing is from our teams and our customers don't expect any significant near-term improvements but don't expect any significant near-term deterioration either. And I think that's why when you look at the year-to-year numbers in terms of growth rate, Bob, was probably a comp -- payer issue. But we've had a couple of months now just run at a certain level, and that gives us the sense that what -- I think we used were potential signs of stabilization. So I hope that helps. Rachel Vatnsdal: Yes. No, that's helpful color. And then I just want to dig a little bit more on your comments around next year. So you mentioned that you expect the first half to be similar to what you're seeing in the back half of this year. So I guess, can you just walk us through in a little bit more detail what exactly you mean by that? Should we be expecting similarities from an organic growth perspective? Or are you really talking about more from a revenue dollar standpoint. And then same type of question on the trajectory of the rebound on margins and EPS next year. Should we expect kind of that similar ramp given the cost dynamic as well? Robert McMahon: Yes. I think if -- I'll try to answer all that in short order, Rachel. As we think about the first half of the year, yes, we think that we -- as we look at our business and look at that kind of book-to-bill, we've kind of troughed in Q2. Q3, I think we mentioned actually was a little better. It was less than -- still less than 1 and then Q4 continue to improve. And our expectation is that, that kind of performance will continue. Now we're going up against difficult comps when we were actually bleeding down our inventory. And that particularly happened in Q1 and Q2 of last year as we were talking about it. And so I would expect us to have the trough of '24 be in Q1, Q2 being a little better and then growing out of that as we benefit from the easier compares. And I would expect our P&L and the EPS to look very similar to that. Q1, we are -- we've taken most of the actions they will have all been taken in the first quarter, but they won't have a full quarter. And so we'll have full quarters of the cost savings in Q2 through Q4. And so as that business kind of improves as the business improves, we'll get more and more leverage on the bottom line. Operator: Moving on now to Derik De Bruin at Bank of America. Derik De Bruin: So can we talk a little bit about pharma? That market was up and down all year, not a lot of visibility. Are you seeing some of the orders that were sort of stuck in the funnel starting to come loose, right? I mean, how are you sort of looking at the pharma market going forward? Mike McMullen: Yes, I think the answer is the deal funnel still remain elongated. So… Padraig McDonnell: So yes, I think what we see from our funnels is that they're growing, but the velocity in closing deals from the point of funnel to order is still static on that side -- elongated. Robert McMahon: Yes. And Derik, I think if we think about the pharma end market, we're assuming very low single-digit growth for next year. And some of that is actually getting past the tougher comps in China. If we looked at actually our pharma business ex China, we grew in FY23. And actually, our biopharma business grew in total. And we think about small molecule was the area that was dragging the pharma business down as you know very well, that typically has a replacement cycle. We are well into that replacement cycle. We were up very high. We kept calling it. And we've seen that be very depressed, and our expectation is that will start coming back in earnest in '24, but probably in the back half of '24. Derik De Bruin: So this goes -- sorry to beat this up, but your China got going down. Pharma, you just basically said you've got -- not -- you don't have a ton of visibility, hope things have come back. I'm just not -- I'm curious why you can put a little bit more cushion in the guide, like that. It just seems like -- it still feels like it's a little bit -- it still feels like it's a little back end. Well, it's not a little a lot back-end heavy, given where we are soaring in the cycle? Mike McMullen: Yes. I think as we said earlier, Derik, there's reason to believe that you have the comps working in our favor for the second half, there’s real. And we know that customers want there's interest in the products. And I think they've got a step -- and by the way, we're not calling for this miracle snapback in 2024. But we're also saying that small markets continue to decline 20%, 30% on the numbers we're seeing this year, particularly, that's where the pressure has been. But we know that biopharma, they need some tools for R&D. We know that those replacement cycles only last -- can only be held up for so long. So there's confidence relative to what we see in the funnel. Deals aren't coming out of the funnel. And then although we are focusing here on pharma right now in his commentary, there's a lot of other strength in some of the other secular markets and applied markets, in particular, which is a nice diversification we have on the instrument side as well. And Bob, I don't know if there's any additional thoughts on the pharma story. Robert McMahon: No. Derik De Bruin: And just one final one. Just what were bookings. I mean, I know you said the book-to-bill was greater than 1, but I'm just curious in terms of bookings. And do you often see a spike in bookings in Q4 Basically, I'm just trying to get the sense of like what you saw as a head fake or you've got -- where you think you've got real demand here? Robert McMahon: Yes. So we don't give the absolute dollars rather than to say it was greater than 1. It was -- roughly 1 for the total company and then instruments were higher. Typically, we do see a where it is higher. So this kind of goes back to kind of our historical performance where orders are a little higher, particularly because we have October in our results. And so last year was actually an aberration, so to speak, as we're working down the backlog and this kind of gets back to our normal process. Mike McMullen: Yes. And through the quarter, Derik, we saw a normal seasonality. So there wasn't anything unusual about the order pattern to kind of say, is this a head fake or not. So I think that also is one of the reasons why we say, okay, early signs of some stabilization here. Again, not huge growth. We're seeing stabilization. Operator: We'll go next now to Jack Meehan at Nephron Research. Jack Meehan: So I wanted to dig a little bit more into LSAG in the quarter. Can you break down the growth between instruments and consumables and just any commentary across product lines. Robert McMahon: Everything I would say for the quarter was pressured, although consumables performed better than the instrumentation. Our consumables business was down kind of low single digits and against a very tough comp of almost 9%, 10%. And if you looked at it ex-China, that was largely influenced by China, we grew low single digits in consumables. Jack Meehan: Okay. And so does that imply instruments may be down over 20% in the quarter? Robert McMahon: They were down, yes. Jack Meehan: Okay. Yes. And I guess maybe just a follow up on Derik's question. I think everybody is trying to think about the right way to interpret this book-to-bill commentary, but just is there any additional color you can share on the magnitude were orders down in the quarter? Or I guess, just trying to understand because there was an easy or a difficult comp on revenue like are orders kind of more -- don't have a similar level of volatility. It should have mathematically been over 1, right? Robert McMahon: Yes. So the orders were down year-on-year, but obviously down not as much as revenue down year-on-year. And so when we look at it, I think that kind of shows though, the stabilization because we had some pretty significant revenue last year because of the recovery in the first thing Shanghai shutdown. So I don't think that, that -- we actually think that this is the best way to kind of look at it on a go-forward basis because we don't have the play of the backlog happening much anymore. And so actually, as we look at it on a quarterly basis, we've seen a nice, steady progression up back to historical numbers. Mike McMullen: And Jack, I think it's fair to say, Bob, that one of the things we were conscious was a lot of commentary about how significantly things we're getting in terms of being worse. And as you know, we've been out for some time, calling for no year-end budget flush, constrained capital environment. We came into the year actually guiding for a slower growth in the second half. So what we're trying to intimate in the call today is what we've been saying for the last several quarters is exactly what we're seeing right now. And I thought -- we thought a proof point was the book-to-bill -- listen, it's not great out there in terms of robust growth, but the sky is also not falling either. Operator: The next now to Puneet Souda at Leerink Partners. Puneet Souda: First one on CrossLab. Bob, with 65% of your business being a service contracts, could you elaborate on what sort of growth contribution we should expect here for full year? And also, I don't know if you provided the LSAG expectation contribution for 2024 as well? Robert McMahon: Yes. For ACG, we're expecting kind of mid-single-digit growth as we are -- with the contracted services piece being double digit, but then being pressured by the instrumentation. So that will be moderated. And for the LSAG business, right now, we're looking at kind of low single-digit decline. Again, with a greater decline in the first half of the year and the return to better performance in the second half of the year. Puneet Souda: Got it. Okay. And then on -- if I could ask a little bit on am I onshoring that's point that you're pointing -- that's not something we are focused on in prior calls. And I hear you that you're growing on the PFAS side, but just wondered -- could you elaborate a little bit on both some onshoring as well as the environmental gains that you're having? And why shouldn't that contribute more to your instrumentation growth in 2024. Robert McMahon: Yes. It has the potential to do that. And as we talked about it, we're at the beginning of the year, and so we want to be prudent there. But there's nothing out there that doesn't say that, that should continue given the macro economic environment and the incentives that governments are providing to continue to invest. And actually, what we're seeing is nice business in Southeast Asia as well as India. And I would expect that to continue. That's where we're placing incremental investments to continue to drive and capture that demand. I would expect the same thing in the environmental area as well. But we're not going to build all of that in right now at the beginning of the year. Mike McMullen: But I think we saw some trends too that we're starting to see, PFAS is also now driving some testing in the food marketplace as well as every country that we talk to is in the process of further enhancing their own reg. So we wanted to have some other areas of potential growth for the company beyond the story around pharma. Operator: We'll go next now to Josh Waldman at Cleveland Research. Josh Waldman: Maybe one for Bob and then one for Mike. Bob, maybe circling back on Derik's question, I wondered if you could provide more context on the forecasting process this round or the puts and takes that went into the organic guide. Could you take a step back, were there segments in the business that were like decelerating or slowing as you went into the guide or maybe areas where you're still trying to find bottom? And if so, how did you expect that in the guide? Robert McMahon: Yes. Obviously, this year has been one for the ages in terms of being able to try to manage the forecasting. And so we've taken a number of different angles at it to look at it. So not only growth rates, which I think is the focus here, but also actually if you looked at it on a sequential basis and look at the actual dollars, I think that that's probably more instructive, particularly as we were looking at the bleeding of the inventory. I would say what we've seen over the last couple of quarters is that signs of stabilization. There are always puts and takes across the various businesses. And we think that we've tried to do that. We've built in feedback based on the field's projections, the funnel that Mike and Padraig talked about and then an assumption around the conversion of those funnels. And we haven't seen the funnels slow down. There's still modest growth, and we're starting to see the slowing of the elongation. I'm not saying that it's stopped or accelerated in terms of the purchase but we are starting to see that slowing and you're actually seeing that in that book to bill. And when we look at the orders on a sequential basis, we're starting to see that kind of stabilization as well. And so that's kind of how we're looking at continuing to go forward. if you kind of just built that going into next year, you would start seeing a challenging first half and then better performance in the second half. Hopefully, that gives you some flavor. Josh Waldman: Yes, that's helpful. And that was actually going to be my follow-up. And maybe I don't know, Bob or Mike, if you want to take it. I was curious if you could maybe quantify where the funnel stands entering '24 versus maybe where it typically is entering the year? And just how correlative or how much do you think it is a predictor of near-term demand? I mean is that -- is better funnel conversion at all kind of part of what drives the improvement as you progress through the year? Mike McMullen: I think pursuant to Padraig and Bob, kind of the same rates, right, no significant improvement. Robert McMahon: Correct. We're going up against -- the first half of this year, actually, what you saw was the elongation of those cycle times. And so what we're seeing right now is kind of -- like I said, it's not necessarily fully stable, but it's not decline -- or increasing at the rate that we saw in the first and second quarters of last year. And so you're starting to see that. And so all things being equal, that conversion is actually improving slightly versus a year ago. It's still not back to historical numbers. And that's what we're trying to handicap here as we look at our forecast going forward. Operator: We'll go next now to Daniel Brennan at Cowen. Daniel Brennan: Great. Maybe just on China. I know you mentioned, I think, in the prepared remarks like month-to-month pacing had improved in the quarter. Just any more color or anything on exit rates in China. And if you could, I'd be entered to get like some more color on the end market trends in China. I know you gave some color on biopharma, but could you discuss pharma overall and any other interesting color from an end market basis? Mike McMullen: Sure. Bob, maybe we'll tag team on this, which was -- I think the -- relative to the order book, I think we were slightly above revenue for the quarter. No really unusual pacing through the quarter from China. We've been calling -- I know a lot of our conversation today has been about pharma, but we've been saying for some quarters overall for China, it's been a broad-based slowdown. And that's what the business has been, and that's how we ended the year in terms of the end market performance. I will say that we were pleased that we were in line with our expectations for the business. So again, we described earlier that the business was moving along at a certain overall level. I think we do have a view of China that we will still be down in terms of the revenue for the year. But reflective of where we are, where we're seeing the business right now. So… Robert McMahon: Dan, and to build on Mike's point, just a couple of other additional data points. we were down pretty significantly in all end markets in Q4, as you would expect because we were up 44% in Q4 of '22. And so that's probably not as relevant because we were catching up relative to some of the catch-up of the Shanghai shutdown. Another data point, though, is if we looked at kind of year-on-year growth actually, we exited October, the year-on-year performance. It was still a decline, but it was much better than what we saw at the beginning of the quarter. And so we actually saw a sequential improvement. I think Mike mentioned that in his prepared remarks. And then if we looked at kind of absolute dollars, they've been pretty steady month-on-month. Daniel Brennan: Got it. And then Chemical and Advanced Material was like a tale of 2 cities. It looks like C&E was down 15% in the quarter, you said and you talked a lot about PFAS. And so is there any more color like what you're seeing on kind of both sides of coin there? What's kind of baked in on the core chemical and energy side for the year and just anything on trends there? And then obviously, it sounds like you guys still remain really constructive on the Applied Materials side or Advanced Material side. Mike McMullen: So how about Bob lead here a few comments. And then I've been dying to pull Phil in on here as well. And maybe talk about some of the things he's seen on the Advanced Materials side, which is a real area of expertise for him, so. But I think your word of tail of 2 cities is really quite appropriate, both in terms of breakout by segment, also by geography. I think we posted 70% growth, if I remember correctly, in China last year. So I mean that's a tough comp. I don't care who you are. But we're seeing continued slowness on the C&E side. Our major customers here are really conservative in terms of their deployment of capital. Many of our largest customers are on cost control. So that's been -- that's what you're seeing reflected in the numbers, and that's why we expect a constrained outlook on that side of the business for a while. The different story on the Advanced Materials, and I think Bob, you pointed to good growth geographically globally outside of China. And then Phil, I know you and the team got a whole bunch of initiatives around the applied markets, particularly not only PFAS but Advanced Materials. And I thought a good opportunity for me to introduce you to the audience and have you share your perspective on what we're doing on the applied on the Advanced Materials side. Phil Binns: Yes. Thanks, Mike. Yes, certainly, we've mentioned you've talked around the activity within labs being ex-China, at least being reasonably robust. But on the applied market side and certainly around Advanced Materials. We're certainly relatively strong in those markets, and we're seeing good really good generation around the batteries market. And of course, we've spoken about the onshoring process around there in the Advanced Materials area. So globally, that obviously comes into the onshoring. And globally, we're in strong positions in those markets and have been historically and continue to innovate strongly around those markets and stay close to those customers. Operator: We go next now to Dan Leonard at UBS. Dan Leonard: I wanted to circle back for a moment on the Q1 guide. You spoke about a challenging year-on-year comp a couple of times. But as you're thinking about the Q4 to Q1 sequential ramp in dollars, how much of that decline forecasted is what you chalk up to seasonality versus prudent if you could give us a flavor. Mike McMullen: Great question, Bob. Robert McMahon: Yes, Dan, that's a great question. If you look at last year and our revenue went down roughly $90 million; $90 million, $95 million from an extremely strong Q4 to also a very strong -- if you look at the midpoint of the guide, it's a little over $105 million, $110 million. So there is an element of looking at what we did last year, again, not assuming a strong budget. I don't want to kind of parse it out to give you a percent, but that kind of at least gives you kind of how we were thinking about the Q1 guide relative to what we saw in Q1 of last year. Dan Leonard: Appreciate that. And then as a follow-up, can you remind me in 2024, when do we lap the headwinds on the genomics side? And what is your appetite continued investment in genomics as part of the DGG portfolio. Robert McMahon: Yes, I would expect us to -- we will have a difficult Q1 and then starting to get better from Q2 and beyond, not dissimilar from the rest of some of the businesses. And then I'll let Mike talk about the kind of the investment. Mike McMullen: Yes, I think first of all, just to remind the audience, when we talk about the genomics mix business, what are we talking about? We got a $500 million business, probably 50% of it is in QA/QC instrumentation, where we are the undisputed leader here, a lot of appetite to invest here. Our TapeStation product, particularly the consumables business is on fire right now. Capital side is constrained as we've seen across the marketplace. And then I think we all believe in the view that NGS will continue to be a growth market for us. And for the industry, I think that people are dying on back their expectations about how robust it is for a period of time. And I think we're seeing that in our business. So why do we make some of the structure changes we made in the portfolio because we want to ensure that we've got the ability to have a healthy P&L while at the same point in time invest in growth. So there's a reallocation of R&D dollars happening as a result of some of the changes we made that we talked about over the call. So answer the story is we have a lot of appetite for focused investments in areas where we think we can win in genomics. Operator: And ladies and gentlemen, that is all the time we have for questions this afternoon. I'd like to turn things back to you Mr. Ahuja for any closing comments. Parmeet Ahuja : Thanks, Bob, and thanks, everyone, for joining the call today. With that, we would like to end the call. Have a good day, everyone. Operator: Thank you. Again, ladies and gentlemen, that will conclude the Agilent Technologies Q4 2023 Earnings Call. Again, thanks for joining us, and we wish you all a great evening. Goodbye.	[ { "speaker": "Operator", "text": "Ladies and gentlemen, welcome to the Agilent Technologies Q4 2023 Earnings Conference Call. My name is Bo and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja, Vice President, Investor Relations. Please go ahead, sir." }, { "speaker": "Parmeet Ahuja", "text": "Thank you, Bo, and welcome, everyone, to Agilent's conference call for the fourth quarter of fiscal year 2023. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. This presentation is being webcast live. The news release for our fourth quarter financial results investor presentation and information to supplement today's discussion along with a recording of this webcast are available on our website at www.investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics year-over-year, and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted exchange rates. We will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now I'd like to turn the call over to Mike." }, { "speaker": "Mike McMullen", "text": "Thanks, Parmeet, and thanks, everyone, for joining our call today. Before we get into discussing our results and outlook, I want to mention that we're joined today by Padraig McDonnell, President of the Agilent CrossLab Group; and Sam Raha, President of the Agilent Diagnostics and Genomics Group. We're also joined on this call for the first time by Phil Binns, President of the Agilent Life Sciences and Applied Markets Group. Phil’s name may be new to some of you, but he's well-known at Agilent and in the industry. Phil has been with us for more than 13 years, coming over with the Varian acquisition and overseeing our market leading spectroscopy business. We’re extremely pleased to have someone with Phil’s knowledge, experience and proven leadership strength heading up our LSAG business. In his short time in the role, we’ve already seen Phil add tremendous value as a member of our senior leadership team. Welcome, Phil. Now onto our fourth quarter results. The Agilent team once again continued to perform well under challenging market conditions. Revenue of $1.69 billion declined 9.7% core after increasing 17.5% last year. This is at the high end of our guidance. Our proactive approach to managing our cost structure in this market environment helped us deliver healthy fourth quarter operating margins of 27.8%. Q4 earnings per share of $1.38 exceeded our guidance. While this was a decline of 10%, it comes against a tough compare last year when EPS grew 26%. While the market continues to be challenging, we believe we are starting to see signs of stabilization. As an encouraging data point, for the quarter our book-to-bill ratio was 1 for the company and greater than 1 for our LSAG instruments. Let’s take a closer look at our Q4 performance, starting with our regional results. During the quarter, while down year-on-year, we delivered sequential growth except for China, as expected. In China, our business declined 31% year-on-year after growing 44% in Q4 last year. While China was down sequentially, these results were very much in line with our expectations. And the year-on-year monthly performance improved slightly as the quarter progressed. In addition, orders were slightly higher than revenue for the quarter. While it is too early to call these two data points a trend, we see this as an encouraging sign of potential stabilization. In late September, I traveled to China for the first time since the COVID outbreak to meet with the Agilent team, key customers, and government officials. I was reminded of both the sheer size of the Chinese economy and our market there. I saw first-hand the work being done to bolster economic activity in the near-term and create an environment that will support continued growth into the future. I remain convinced China will continue to play an important role in life sciences and I’m confident that the China market will return to growth. In looking at our largest end market, pharma declined 14% driven by continued caution among customers on capital expenditures for new instruments. Within pharma, biopharma performed better than small molecule. Geographically, our biopharma business outside of China grew high-single digits. Looking at our performance by business unit, the Life Sciences and Applied Markets Group delivered revenue of $928 million, down 18% core versus a tough compare last year of up 22%. Customers continue to hold off on capital expenditures, particularly in the pharma segment of LSAG’s business, which declined in the high 20% range. This is against growth in the low 20s last year. On the other hand, we continue to see strong customer demand and growth in our PFAS solutions, as well as continued strength in the advanced materials segment. These are two secular trends we’ve highlighted before and we remain optimistic about future growth in these market segments. While the market environment remains challenged, we continue to innovate and provide unique solutions for our customers. The new products we launched in June at ASMS, in particular the 6595 LC triple quad, which is focused on key applications like PFAS, continue to generate positive customer interest and new orders. We’re also bringing innovative new solutions for customers across the biopharma value chain. We have installed a number of our online UHPLC systems with large biopharma companies. The systems are easy-to-use, reliable, and deliver significant value by providing fully automated analysis of critical quality attributes and allowing real time decision making outside the lab. The Agilent CrossLab Group posted revenue of $404 million, up 4% core and 6% on a reported basis. ACG delivered growth across all end-markets, and in all regions except China. The contract services business was up double-digits, offset by the services associated with new instrument placements. Our strategy of increasing the connect rate continues to pay off. In the quarter, the contract services business represented 65% of ACG revenue, a number that has grown nicely over the years. The Diagnostics and Genomics Group delivered revenue of $356 million, flat on a core basis and up 1% reported. DGG’s results were led by the pathology and NASD businesses, which both delivered low double-digit growth. These strong results were offset by the continued market challenges in genomics in both consumables and instruments. Our NASD portfolio and capacity expansion are continuing as planned. We’re confident in the long-term growth prospects for the markets we serve. Before I finish covering DGG, I want to thank Sam Raha for his contributions over the years and for helping us build a strong foundation for the DGG business. I wish Sam well. In addition to these business group highlights, during the quarter we were recognized for our commitment to sustainability. Agilent’s near and long-term targets for reaching net-zero greenhouse gas emissions have been approved by the highly regarded Science Based Targets initiative. A year ago, we entered 2023 sharing a view of economic and industry uncertainty, as we guided for moderating growth in the second half of 2023. We had not anticipated, however, the significance of the market headwinds the industry eventually faced, particularly in the pharma market and China. Despite the challenging market conditions, we delivered full year revenue of $6.83 billion, growing 1.5% core. While our full-year growth was lower than initially expected, we met or exceeded every quarterly guidance range we provided, a solid testament to the team’s execution ability. Including FY23 results, our 4-year compound annual growth rate is 7%. This is at the high end of our long-term growth guidance. In FY23, we delivered operating margins of 27.4%. This is up 30 basis points this year and up more than 400 basis points in the last four years. Earnings per share of $5.44 are up 4%, delivering leveraged earnings growth for the year. Our 4-year compound annual growth rate for EPS is 15%. Looking back, 2023 was a challenging year. What I’m particularly proud of is the Agilent team’s ability to quickly pivot and take action to address these challenges while staying relentlessly focused on our customers. While we’ve worked to significantly reduce expenses, Agilent’s customer satisfaction ratings remain at all-time highs. At the same time, our employee engagement continues to be excellent as we achieved a number of best employer awards over the last year. All of this helped us deliver another year of leveraged earnings in an extremely difficult market environment. Before turning it over to Bob for more details, I want to provide some high-level perspective on FY24 and beyond. For 2024, we anticipate a slow, but steady recovery, throughout the year. In our initial outlook, at the high end of our guidance we expect revenues to return to growth. At the same time, our range for EPS in the year ahead has us again delivering leveraged EPS growth. As we look ahead, we remain convinced the market challenges being faced by the industry today are transient. Our end markets are powered by investments in improving the human condition. The pace of science, innovation and discovery continues to increase, which will fuel further growth. We remain focused on winning in the marketplace. Our differentiated products, services and most importantly our One Agilent team, are all essential to the success of our customers. We are well-positioned for long-term growth. Bob will now share more detail on the quarter and the year, along with more specifics on our initial view for fiscal 2024 and Q1. Thank you for joining us today. And now, Bob, over to you." }, { "speaker": "Robert McMahon", "text": "Thanks Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter and the year, as well as take you through the income statement and other key financial metrics. I’ll then finish up with our guidance for fiscal year 2024 and the first quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. Agilent finished the fourth quarter with core growth at the top end of guidance and EPS exceeding our expectations as we executed well against challenging macroeconomic conditions. Q4 revenue was $1.69 billion, down 9.7% core and 8.7% on a reported basis. This is after growing 17.5% in Q4 last year, when we benefitted from the recovery from the Shanghai shutdown in Q2 of last year. This created an estimated 1 point of headwind in the year-on-year results this quarter. As expected, we saw weakness in capital purchases in LSAG with the biggest impact in our China business. Now, I’d like to share additional detail on our end markets for the quarter. Revenue in our largest market pharma, declined 14%, versus 20% growth in Q4 last year. BioPharma declined 2% while small molecule was down 23%. However, biopharma ex-China was up 7% in the quarter and grew solidly for the year. And while small molecule was down, the decline was most pronounced in China. And outside China, small molecule was up sequentially in the quarter. Chemicals and advanced materials declined 11% versus growth of 27% last year, while flat sequentially. Our chemicals and energy subsegments were down 15% while advanced materials were down roughly 2% globally and up 4% in the Americas and Europe combined. The food market was down low double digits against a tough 20% growth comparison last year. High single digit growth in the Americas was offset by declines in all other regions. In the Americas, PFAS testing is emerging as an important growth area in food testing, helping drive the high single digit growth. We expect testing for PFAS chemicals will continue to be a growth driver across multiple end markets over time. The environmental and forensics market declined 3% versus 18% growth last year. Similar to the food market, the Americas region continues to experience strong growth, up double digits driven by PFAS. This strong performance was primarily offset by softness in China, which was down year-on-year, but up slightly on a sequential basis. Our business in the diagnostics and clinical market declined 4%. While we delivered low double-digit growth in our pathology-related businesses, it was more than offset by continued weakness in genomics. The academia and government market was down low single digits with strength in the Americas driven by government funding offset by weakness in China and Europe. Results were pressured across all geographies in the quarter. As Mike mentioned, China was down 31% year-on-year after growing 44% in Q4 of last year, in line with our expectations coming into the quarter. The rest of Asia was down mid-single digits and both the Americas and Europe declined low single digits in the quarter. Before turning to the rest of the P&L, I’d like to quickly summarize some full year highlights by end market and geography. From an end market perspective, all markets grew low to mid-single digits for the year except for pharma, which was down 2% globally. In addition, all geographies grew, except China which was down 5%. Back to the P&L for the quarter. Despite the revenue declines, our team continues to execute at a very high level. Fourth quarter gross margin was 55.8%, and our operating margin was a healthy 27.8% in Q4, which was slightly better than our internal expectations. Below the line, we benefitted from stronger than expected cash flow generating incremental interest income in the quarter. Our tax rate was 13.75% and we had 293 million diluted shares outstanding, both as expected. Putting it all together, earnings per share were $1.38 for the quarter, exceeding our expectations, albeit down 10% from a year ago when EPS grew 26%. As Mike mentioned, our Q4 results capped a year where we grew 1.5% core on the topline, increased operating margins by 30 basis points and grew EPS by 4%, while overcoming a couple of points of currency headwinds. This is a real statement on the team’s ability to quickly adapt to market changes while still delivering leveraged earnings growth. Turning to cash flow and the balance sheet, I’m incredibly proud of the Agilent team as Q4 continued a string of very strong quarterly cash flow results. In Q4, we generated operating cash flow of $516 million, well over 100% of adjusted net income, and invested $84 million in capital expenditures. CapEx spending is driven by our ongoing NASD capacity expansion, which remains on track. For the year, we delivered $1.5 billion in free cash flow, an increase of 44% over last year. Our balance sheet continues to remain healthy as we end the fiscal year with a net leverage ratio of 0.6 times. With the current challenges in the market, it is great to be a company with a fortress balance sheet and strong cash flow. In the quarter, we paid out $66 million in dividends and spent $80 million to repurchase shares. And for the year, we returned $840 million to shareholders through $265 million in dividends and $575 million in share repurchases. Looking forward, you may have also seen that we recently announced a 5% increase in our quarterly dividend providing another source of value to our shareholders. It’s worth noting that we have increased our dividend every year since we first began issuing them in 2012. Now, let’s move on to our outlook for the upcoming fiscal year and first quarter. As Mike stated, we expect to see a slow but steady recovery throughout fiscal 2024. However, we also acknowledge the continued market uncertainty, high interest rates, volatile exchange rates and depressed capital spending. Like several of our peers, we expect the markets to be down slightly for the year, while we expect to perform better. Given the expected slower market conditions, we have taken additional steps to adjust our cost structure. Incorporated into our guidance is roughly $175 million of cost savings. Given the significance, I want to provide a little more detail on these actions. Roughly 30% of the savings are related to portfolio optimization decisions we have taken in DGG, the largest of which was the exit of the Resolution Biosciences business. Another 25% is related to materials and logistics cost savings as well as optimizing our real estate footprint, with the remaining savings tied to continued reductions in discretionary spend and optimizing our workforce. Along with these actions, we have taken a $46 million charge for restructuring and other related costs in our Q4 GAAP results. These reductions, while difficult, are necessary to ensure we continue to fund our most critical investments as well as fund the variable compensation resets from this year. These actions help ensure the company delivers leveraged earnings growth in FY24 and will enable us to emerge even stronger when our markets inevitably return to their long-term growth rates. As Mike noted earlier, we exited Q4 with some potential signs of stabilization with a book to bill ratio of 1 for the company and greater than 1 for LSAG instruments. While this is positive, we are going to be prudent in our initial guidance. For the full year guide, we expect revenue in the range of $6.71 billion to $6.81 billion. This represents a core growth range from a slight decline of 0.5% at the low end to 1 point of growth at the high end. Currency is a headwind of 1.2 points while M&A is also a slight headwind of 10 basis points related to Resolution Bioscience. On a reported basis, we are expecting a decline in the range of 1.8% to 0.3% year-on-year. From a geographic perspective, we expect modest growth in the Americas and Europe. While we expect to see recovery during the year in China, our initial view is it will still decline for the full year. From a business group perspective, we expect growth in both DGG and ACG, while LSAG instruments will still be pressured. In terms of phasing, we expect the first half of FY24 to look similar to the second half of FY23, with growth in the second half of next year. We are projecting modest operating margin expansion for the year. Below the line, we expect interest income and expense to offset each other, a tax rate of 13.5%, and 293 million shares outstanding. Fiscal 2024 non-GAAP EPS is expected to be in the range of $5.44 to $5.55. This range represents flat to 2% growth versus FY23. From a cash flow perspective, we expect another robust year. We are expecting roughly $1.6 billion in operating cash flow and $400 million in CapEx as spending increases on NASD’s Train C and D expansions. Looking to Q1 2024, we expect revenue in the range of $1.555 billion to $1.605 billion. This represents a core decline of 11.3% to 8.5% with currency and M&A having a minimal impact. At the midpoint, we are expecting growth that resembles what we just delivered in Q4 and assumes no significant budget flush during the end of this calendar year. This is against another difficult comp of 10% growth in Q1 of last year. First quarter 2024 non-GAAP earnings per share are expected to be between $1.20 and $1.23 as the cost savings fully ramp through the quarter. As Mike indicated, while we are expecting low growth in 2024, we remain optimistic about the future of our markets and our long-term prospects. Our business remains very profitable and healthy, and I know we will come out stronger as a company when market growth returns. And now I will turn the floor back over to Parmeet for your questions. Parmeet?" }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Bob. Bo, if you could please provide instructions for the Q&A now?" }, { "speaker": "Operator", "text": "[Operator Instructions] We'll go first this afternoon to Vijay Kumar at Evercore ISI." }, { "speaker": "Vijay Kumar", "text": "And some helpful comments here. Mike, maybe starting with those book-to-bill comments here. Overall company 1 turn LSAG instrumentation looks like it's turned. Curious what those book-to-bill numbers for ex-China? And if instrumentation has turned, that Q1 guidance, comps get easier. Why is Q1 assuming no benefit from this turn in instrumentation?" }, { "speaker": "Robert McMahon", "text": "Yes, Vijay. Let me take that. I think if you look at the book-to-bill ratio, it's -- for LSAG instruments, it's actually very similar to both including China and excluding China. China was actually slightly positive as well. So that's a good sign. And as we mentioned in the prepared remarks, we're taking a prudent approach to our first quarter. And certainly, we see this as a positive. We did have some -- we typically do have seasonality from our Q4 to Q1, but we're taking it kind of one quarter at a time." }, { "speaker": "Mike McMullen", "text": "Yes, I think part of the big story, too, Vijay, is the 10% comp from last year as well. But as we said it in the call, we were -- it was encouraging to see some initial signs of stabilization with that kind of book-to-bill on the instrument side." }, { "speaker": "Vijay Kumar", "text": "Understood. I'm glad to hear prudency and right off the bat here." }, { "speaker": "Mike McMullen", "text": "We got that into the script, Vijay." }, { "speaker": "Vijay Kumar", "text": "On -- just one more related on guidance here. What are you assuming for NASD in China for fiscal '24?" }, { "speaker": "Robert McMahon", "text": "Yes. So for China, we are thinking mid-single-digit decline for the full year. So very similar to this year. And then for NASD, right now, we're expecting low single-digit -- mid-single-digit growth." }, { "speaker": "Mike McMullen", "text": "Mid-singles. Yes." }, { "speaker": "Operator", "text": "We go next now to Patrick Donnelly at Citi." }, { "speaker": "Patrick Donnelly", "text": "Maybe kind of a follow-up on the 1Q guide. It seems like, again, the order's encouraging. Maybe a little bit prudent on the guide, as you said, I guess when you think about just the implication for the ramp 2Q to 4Q, is it optimism in the market based on some of those order trends is that obviously the comps get easier in the second half as you work through it. And can you just talk about the visibility into the recovery and kind of what gives you the confidence in the ramp as the year progresses here?" }, { "speaker": "Mike McMullen", "text": "Yes, sure, Patrick. I want in lead off, Bob, and then you can add any additional comments you'd like to make here. But when we think about these comps around what we described as a gradual recovery and grow. I think is, first of all, important to remind the audience that we do expect the first half of the year to be very much like what we saw in the second half of '23. But looking forward, why do we think that things are going to be different in the second half which is though it's initial and still early, there are some early signs of potential stabilization that you see in our order book. The fact that book-to-bill for the company was above 1, the fact that we had the same result in our instrument business, which has been the most pressured part of the company. And listen, while it's too early for customers to be confirming their 2024 budgets with us, let's go back to the sales phone, which is a predictor of potential growth, right? So our sales funnels continue to show a lot of interest from customers. And we know that at some point in time of things will start to release. The funnels remain healthy. And listen, an environment like this, we've seen these things before, which was healthy capital spending has been constrained. So some release can be expected. And we hear -- I don't want to get too down my skies on this, but we hear customers talk about some new focused investments. And I think we're not calling for a big broad-based market recovery, but certain segments of the market are going to be better. We're talking about some investments in R&D tools, what's going to PFAS testing capacity expansion plan we're hearing from our customers, Advanced Materials. And then as you mentioned earlier, Patrick, there's an easier compare in second half '24 as well. So we do expect this return to growth. And I think as -- it's not simply a hope. We've got some information to be kind of back up our thinking there. Again, we'll know a lot better about how things look when we get to the budgeting phase of our customers in early 2024. Again, right now, the markets for capital -- instrument still remain quite challenged. And as I mentioned, we are seeing encouraging signs of potential stabilization, but it's going to be a journey for our return into growth. And I think our guide reflects that. And again, I think we're -- we've got a high degree of confidence this is what the back half of the year will look like." }, { "speaker": "Robert McMahon", "text": "Yes. And Patrick, you asked about Q1, as I mentioned in the prepared remarks, I think we're taking a prudent approach here. but we're also going up against last year where we did have a budget flush and happened earlier in the year but for delivery in November and December, and we're assuming that we're not seeing that or building that into our into our estimates. So that happens, then it would be -- that would be a nice thing for all of us." }, { "speaker": "Mike McMullen", "text": "Yes, absolutely, Bob." }, { "speaker": "Patrick Donnelly", "text": "That's helpful. Bob. And maybe, Bob, just on the margin side, helpful to hear you talk through a few of the different moving pieces. It sounds like some cost savings in DGG, among others. I guess can you just give a bit more color on kind of the moving pieces, where you're pulling levers, the ability to take out some additional costs to hit these margin numbers. Obviously, you talked about margins being up a bit. I think there are some headwinds like incentive comp, things like that. So maybe just talk about the gives and takes there and confidence in terms of some of the cost outs." }, { "speaker": "Robert McMahon", "text": "Yes, that's a great insight there, Patrick. Yes, because we do have some add backs, I would say that -- so don't take that $175 million and drop it to the bottom line because we have some resets, I would say roughly half of that is kind of a reset between our sales comp and variable pay. If we think about it is really across the P&L, the biggest piece actually is in DGG with the exit of the Res Bio business, but we've also taken some tough decisions in other product lines to streamline the portfolio there. And I would say roughly a little over 30% of that is associated with that. The other 25% is really within our COGS. Our OFS team has done a phenomenal job of really kind of leaning into reducing our costs around logistics and material costs. And then I talked about the site consolidation as well, which will show up and down the P&L. So we've taken a look at our real estate footprint and have actually closed several smaller sites between -- around the world really. And then the final piece is really kind of infrastructure optimization, which would be discretionary spend but then also headcount reductions that would be focused on areas where we've rightsized it to the demand." }, { "speaker": "Mike McMullen", "text": "And Patrick, this is Mike, I stated about the confidence about the growth recovery. I think when it comes to hitting the $175 million, high degree of confidence, we control this 100%, and we'll deliver on this." }, { "speaker": "Operator", "text": "We'll go next now to Matt Sykes at Goldman Sachs." }, { "speaker": "Matt Sykes", "text": "Maybe just on NASD, I noticed just over the past, call it 1.5 years, we've kind of gone from high double digits, low double digits next year, mid-single digits, which it's probably just some level of normalization as you ramp capacity. But just given the step up in CapEx you're guiding to next year, is there some wiggle room in terms of how you guys lay that capacity out? Or is the confidence in that market growth enough to keep investing in that area next year?" }, { "speaker": "Mike McMullen", "text": "I'll jump right into that one. So I tried to make that come out in the script. But our plans to continue to invest for the future long-term growth this business remains high. We're going full steam ahead on the capital expansion and they're tracking according to plan. In fact, I think we'll probably do a little bit better on the cost side when all said and done relative to the CapEx that's involved. And Bob, maybe you can talk a little bit about some of the things we're seeing relative -- I think we commented on this before, but what have we seen in the marketplace relative to 2024 relative to NASD." }, { "speaker": "Robert McMahon", "text": "Yes. I think, Matt, it's a great question. And so if we look at the details of kind of the mix, actually, I would say we have the most healthy mix of portfolio in NASD and '24 than we've had. So a significant increase in the number of programs that we are going to have been going through. Now it's a bigger component of clinical volume versus commercial volume, which I actually think bodes very well for the future going forward. We have seen some, I would say, some pausing of certain customers as associated with IRA but we think that, that's transitory. So as Mike said, we're not at all concerned about the long-term growth prospects of this market. And in fact, many of the programs that we're seeing come into our portfolio are actually as what we had talked about in previous calls, much larger targeted patient populations, which really speaks well to the volume. And then as Mike mentioned, we're actually expanding our portfolio, our technologies. And so it's not just siRNA, but we're having the ability to continue to grow our CRISPR -- GMP grade CRISPR business as well as antisense. So we're continuing to do that as well." }, { "speaker": "Mike McMullen", "text": "Sam, I know this will be your last call, would have thought it might be interesting for you to jump in here for a second. As part of your transition, you've been talking to a lot of our key customers. And I think we're hearing the same story from them about long-term growth continued investment here." }, { "speaker": "Sam Raha", "text": "Yes. Absolutely, Mike. I'll just add a couple of things to your and Bob's comments. One, we are now on contract with more major pharma than we ever have been. And it's very promising. If you look at publicly the percentage of their overall R&D budgets that they're now spending on therapeutic oligos, and we are in the driver's seat to win those opportunities. And just in the last couple of weeks alone, I've spoken with a number of our lead pharma partners, and they've reaffirmed. So there is a slight navigation through the IRA, as Bob mentioned, the conviction on their end of the market potential remains unchanged and in the leadership position to pursue that." }, { "speaker": "Matt Sykes", "text": "Got it. That's a great amount of detail. Maybe just, Bob, for you, just on pricing. Kind of what's embedded for next year as you think about pricing? And how has pricing kind of trended over the course of this year? Are we back to sort of normalized levels of pricing that you guys have historically achieved? Or is there still some pricing gains to see sort of as we move into next year in certain areas of your business?" }, { "speaker": "Robert McMahon", "text": "Yes. Matt, that's a great question. And we ended the Q4 at just a little under 3% and actually for the full year was greater than that. So it actually continues to be hold up very well. What we're building into our plan for next year is roughly 2 percentage points of price, which, as you know, is greater than our historical kind of pre-COVID levels. And so what we've been able to do, I think, is -- really speaks to the value proposition that we have as well as the emerging mix of our businesses as well." }, { "speaker": "Operator", "text": "We go next now to Rachel Vatnsdal at JPMorgan." }, { "speaker": "Rachel Vatnsdal", "text": "So first off, I just want to ask on China. You mentioned that the region is down 30% this quarter. That was in line with your expectations. You're expecting it to decline mid-singles again next year. So I guess, just how much of a function is that really due to some of the comps and starting to lap the easier comp late into next year versus is there anything structurally wrong with that market? And how do you expect China to continue to grow on that medium to long term?" }, { "speaker": "Mike McMullen", "text": "Do you want to take the first part, Bob, I think it's..." }, { "speaker": "Robert McMahon", "text": "Yes, yes. So well, I think from the standpoint of the comps, what we would see is, obviously, if you looked at what we did in the first half of this year, we had very strong growth, and then we're going up against, extremely difficult comparisons this year. I mean, as I mentioned, we were down -- up 44% in Q4 of last year, so down 31% this year, we're still up over the 2 years. And as we think about this similar to the rest of the kind of the guide, we're expecting kind of declines in the mid-20s in Q1 and getting better from there. And some of that, it will be an easier comp. And I'm sure Mike will talk a little bit more about this, but we don't see anything structurally changing in the Chinese marketplace for life science tools." }, { "speaker": "Mike McMullen", "text": "Absolutely, Bob. Why don't pick up from there. So I made a few comments about this in the prepared remarks, but I may first trip to China since October 2019 when we're there for the [BCIA] show. And what did I see, first of all, I'll just remind how quickly things can happen in China. Electric vehicles everywhere, a lot more green, digital adoption was just amazing. I don't think anybody uses cash there anymore. And then you also remind as you travel around the country, just how big a country is, how big the economy is and how big the markets are for Life Sciences. But to your specific question, here's what I was hearing from customers and my team when I have seen as well, which was why do we think this market eventually will return to growth, all the things that have been driving this market over the years, which is primarily the Chinese government's 14th 5-year plan. They're still on it. They're pointing to long-term growth, improving the quality of life in China. We're hearing stories of new environmental regs coming from PFAS. The anticorruption impacts that we've seen in the health and the pharma space look to may have peaked, with a lot of the actions occurring, which could ultimately long term, lead to more R&D investments because there'll be less money being spent in the SG&A area. But I don't want to be too short-term optimistic about this expansion of growth because the business is bouncing along at a certain level. And that's why we call it stabilization in our prepared remarks. So what we're seeing, what we're forecasting, what we're hearing is from our teams and our customers don't expect any significant near-term improvements but don't expect any significant near-term deterioration either. And I think that's why when you look at the year-to-year numbers in terms of growth rate, Bob, was probably a comp -- payer issue. But we've had a couple of months now just run at a certain level, and that gives us the sense that what -- I think we used were potential signs of stabilization. So I hope that helps." }, { "speaker": "Rachel Vatnsdal", "text": "Yes. No, that's helpful color. And then I just want to dig a little bit more on your comments around next year. So you mentioned that you expect the first half to be similar to what you're seeing in the back half of this year. So I guess, can you just walk us through in a little bit more detail what exactly you mean by that? Should we be expecting similarities from an organic growth perspective? Or are you really talking about more from a revenue dollar standpoint. And then same type of question on the trajectory of the rebound on margins and EPS next year. Should we expect kind of that similar ramp given the cost dynamic as well?" }, { "speaker": "Robert McMahon", "text": "Yes. I think if -- I'll try to answer all that in short order, Rachel. As we think about the first half of the year, yes, we think that we -- as we look at our business and look at that kind of book-to-bill, we've kind of troughed in Q2. Q3, I think we mentioned actually was a little better. It was less than -- still less than 1 and then Q4 continue to improve. And our expectation is that, that kind of performance will continue. Now we're going up against difficult comps when we were actually bleeding down our inventory. And that particularly happened in Q1 and Q2 of last year as we were talking about it. And so I would expect us to have the trough of '24 be in Q1, Q2 being a little better and then growing out of that as we benefit from the easier compares. And I would expect our P&L and the EPS to look very similar to that. Q1, we are -- we've taken most of the actions they will have all been taken in the first quarter, but they won't have a full quarter. And so we'll have full quarters of the cost savings in Q2 through Q4. And so as that business kind of improves as the business improves, we'll get more and more leverage on the bottom line." }, { "speaker": "Operator", "text": "Moving on now to Derik De Bruin at Bank of America." }, { "speaker": "Derik De Bruin", "text": "So can we talk a little bit about pharma? That market was up and down all year, not a lot of visibility. Are you seeing some of the orders that were sort of stuck in the funnel starting to come loose, right? I mean, how are you sort of looking at the pharma market going forward?" }, { "speaker": "Mike McMullen", "text": "Yes, I think the answer is the deal funnel still remain elongated. So…" }, { "speaker": "Padraig McDonnell", "text": "So yes, I think what we see from our funnels is that they're growing, but the velocity in closing deals from the point of funnel to order is still static on that side -- elongated." }, { "speaker": "Robert McMahon", "text": "Yes. And Derik, I think if we think about the pharma end market, we're assuming very low single-digit growth for next year. And some of that is actually getting past the tougher comps in China. If we looked at actually our pharma business ex China, we grew in FY23. And actually, our biopharma business grew in total. And we think about small molecule was the area that was dragging the pharma business down as you know very well, that typically has a replacement cycle. We are well into that replacement cycle. We were up very high. We kept calling it. And we've seen that be very depressed, and our expectation is that will start coming back in earnest in '24, but probably in the back half of '24." }, { "speaker": "Derik De Bruin", "text": "So this goes -- sorry to beat this up, but your China got going down. Pharma, you just basically said you've got -- not -- you don't have a ton of visibility, hope things have come back. I'm just not -- I'm curious why you can put a little bit more cushion in the guide, like that. It just seems like -- it still feels like it's a little bit -- it still feels like it's a little back end. Well, it's not a little a lot back-end heavy, given where we are soaring in the cycle?" }, { "speaker": "Mike McMullen", "text": "Yes. I think as we said earlier, Derik, there's reason to believe that you have the comps working in our favor for the second half, there’s real. And we know that customers want there's interest in the products. And I think they've got a step -- and by the way, we're not calling for this miracle snapback in 2024. But we're also saying that small markets continue to decline 20%, 30% on the numbers we're seeing this year, particularly, that's where the pressure has been. But we know that biopharma, they need some tools for R&D. We know that those replacement cycles only last -- can only be held up for so long. So there's confidence relative to what we see in the funnel. Deals aren't coming out of the funnel. And then although we are focusing here on pharma right now in his commentary, there's a lot of other strength in some of the other secular markets and applied markets, in particular, which is a nice diversification we have on the instrument side as well. And Bob, I don't know if there's any additional thoughts on the pharma story." }, { "speaker": "Robert McMahon", "text": "No." }, { "speaker": "Derik De Bruin", "text": "And just one final one. Just what were bookings. I mean, I know you said the book-to-bill was greater than 1, but I'm just curious in terms of bookings. And do you often see a spike in bookings in Q4 Basically, I'm just trying to get the sense of like what you saw as a head fake or you've got -- where you think you've got real demand here?" }, { "speaker": "Robert McMahon", "text": "Yes. So we don't give the absolute dollars rather than to say it was greater than 1. It was -- roughly 1 for the total company and then instruments were higher. Typically, we do see a where it is higher. So this kind of goes back to kind of our historical performance where orders are a little higher, particularly because we have October in our results. And so last year was actually an aberration, so to speak, as we're working down the backlog and this kind of gets back to our normal process." }, { "speaker": "Mike McMullen", "text": "Yes. And through the quarter, Derik, we saw a normal seasonality. So there wasn't anything unusual about the order pattern to kind of say, is this a head fake or not. So I think that also is one of the reasons why we say, okay, early signs of some stabilization here. Again, not huge growth. We're seeing stabilization." }, { "speaker": "Operator", "text": "We'll go next now to Jack Meehan at Nephron Research." }, { "speaker": "Jack Meehan", "text": "So I wanted to dig a little bit more into LSAG in the quarter. Can you break down the growth between instruments and consumables and just any commentary across product lines." }, { "speaker": "Robert McMahon", "text": "Everything I would say for the quarter was pressured, although consumables performed better than the instrumentation. Our consumables business was down kind of low single digits and against a very tough comp of almost 9%, 10%. And if you looked at it ex-China, that was largely influenced by China, we grew low single digits in consumables." }, { "speaker": "Jack Meehan", "text": "Okay. And so does that imply instruments may be down over 20% in the quarter?" }, { "speaker": "Robert McMahon", "text": "They were down, yes." }, { "speaker": "Jack Meehan", "text": "Okay. Yes. And I guess maybe just a follow up on Derik's question. I think everybody is trying to think about the right way to interpret this book-to-bill commentary, but just is there any additional color you can share on the magnitude were orders down in the quarter? Or I guess, just trying to understand because there was an easy or a difficult comp on revenue like are orders kind of more -- don't have a similar level of volatility. It should have mathematically been over 1, right?" }, { "speaker": "Robert McMahon", "text": "Yes. So the orders were down year-on-year, but obviously down not as much as revenue down year-on-year. And so when we look at it, I think that kind of shows though, the stabilization because we had some pretty significant revenue last year because of the recovery in the first thing Shanghai shutdown. So I don't think that, that -- we actually think that this is the best way to kind of look at it on a go-forward basis because we don't have the play of the backlog happening much anymore. And so actually, as we look at it on a quarterly basis, we've seen a nice, steady progression up back to historical numbers." }, { "speaker": "Mike McMullen", "text": "And Jack, I think it's fair to say, Bob, that one of the things we were conscious was a lot of commentary about how significantly things we're getting in terms of being worse. And as you know, we've been out for some time, calling for no year-end budget flush, constrained capital environment. We came into the year actually guiding for a slower growth in the second half. So what we're trying to intimate in the call today is what we've been saying for the last several quarters is exactly what we're seeing right now. And I thought -- we thought a proof point was the book-to-bill -- listen, it's not great out there in terms of robust growth, but the sky is also not falling either." }, { "speaker": "Operator", "text": "The next now to Puneet Souda at Leerink Partners." }, { "speaker": "Puneet Souda", "text": "First one on CrossLab. Bob, with 65% of your business being a service contracts, could you elaborate on what sort of growth contribution we should expect here for full year? And also, I don't know if you provided the LSAG expectation contribution for 2024 as well?" }, { "speaker": "Robert McMahon", "text": "Yes. For ACG, we're expecting kind of mid-single-digit growth as we are -- with the contracted services piece being double digit, but then being pressured by the instrumentation. So that will be moderated. And for the LSAG business, right now, we're looking at kind of low single-digit decline. Again, with a greater decline in the first half of the year and the return to better performance in the second half of the year." }, { "speaker": "Puneet Souda", "text": "Got it. Okay. And then on -- if I could ask a little bit on am I onshoring that's point that you're pointing -- that's not something we are focused on in prior calls. And I hear you that you're growing on the PFAS side, but just wondered -- could you elaborate a little bit on both some onshoring as well as the environmental gains that you're having? And why shouldn't that contribute more to your instrumentation growth in 2024." }, { "speaker": "Robert McMahon", "text": "Yes. It has the potential to do that. And as we talked about it, we're at the beginning of the year, and so we want to be prudent there. But there's nothing out there that doesn't say that, that should continue given the macro economic environment and the incentives that governments are providing to continue to invest. And actually, what we're seeing is nice business in Southeast Asia as well as India. And I would expect that to continue. That's where we're placing incremental investments to continue to drive and capture that demand. I would expect the same thing in the environmental area as well. But we're not going to build all of that in right now at the beginning of the year." }, { "speaker": "Mike McMullen", "text": "But I think we saw some trends too that we're starting to see, PFAS is also now driving some testing in the food marketplace as well as every country that we talk to is in the process of further enhancing their own reg. So we wanted to have some other areas of potential growth for the company beyond the story around pharma." }, { "speaker": "Operator", "text": "We'll go next now to Josh Waldman at Cleveland Research." }, { "speaker": "Josh Waldman", "text": "Maybe one for Bob and then one for Mike. Bob, maybe circling back on Derik's question, I wondered if you could provide more context on the forecasting process this round or the puts and takes that went into the organic guide. Could you take a step back, were there segments in the business that were like decelerating or slowing as you went into the guide or maybe areas where you're still trying to find bottom? And if so, how did you expect that in the guide?" }, { "speaker": "Robert McMahon", "text": "Yes. Obviously, this year has been one for the ages in terms of being able to try to manage the forecasting. And so we've taken a number of different angles at it to look at it. So not only growth rates, which I think is the focus here, but also actually if you looked at it on a sequential basis and look at the actual dollars, I think that that's probably more instructive, particularly as we were looking at the bleeding of the inventory. I would say what we've seen over the last couple of quarters is that signs of stabilization. There are always puts and takes across the various businesses. And we think that we've tried to do that. We've built in feedback based on the field's projections, the funnel that Mike and Padraig talked about and then an assumption around the conversion of those funnels. And we haven't seen the funnels slow down. There's still modest growth, and we're starting to see the slowing of the elongation. I'm not saying that it's stopped or accelerated in terms of the purchase but we are starting to see that slowing and you're actually seeing that in that book to bill. And when we look at the orders on a sequential basis, we're starting to see that kind of stabilization as well. And so that's kind of how we're looking at continuing to go forward. if you kind of just built that going into next year, you would start seeing a challenging first half and then better performance in the second half. Hopefully, that gives you some flavor." }, { "speaker": "Josh Waldman", "text": "Yes, that's helpful. And that was actually going to be my follow-up. And maybe I don't know, Bob or Mike, if you want to take it. I was curious if you could maybe quantify where the funnel stands entering '24 versus maybe where it typically is entering the year? And just how correlative or how much do you think it is a predictor of near-term demand? I mean is that -- is better funnel conversion at all kind of part of what drives the improvement as you progress through the year?" }, { "speaker": "Mike McMullen", "text": "I think pursuant to Padraig and Bob, kind of the same rates, right, no significant improvement." }, { "speaker": "Robert McMahon", "text": "Correct. We're going up against -- the first half of this year, actually, what you saw was the elongation of those cycle times. And so what we're seeing right now is kind of -- like I said, it's not necessarily fully stable, but it's not decline -- or increasing at the rate that we saw in the first and second quarters of last year. And so you're starting to see that. And so all things being equal, that conversion is actually improving slightly versus a year ago. It's still not back to historical numbers. And that's what we're trying to handicap here as we look at our forecast going forward." }, { "speaker": "Operator", "text": "We'll go next now to Daniel Brennan at Cowen." }, { "speaker": "Daniel Brennan", "text": "Great. Maybe just on China. I know you mentioned, I think, in the prepared remarks like month-to-month pacing had improved in the quarter. Just any more color or anything on exit rates in China. And if you could, I'd be entered to get like some more color on the end market trends in China. I know you gave some color on biopharma, but could you discuss pharma overall and any other interesting color from an end market basis?" }, { "speaker": "Mike McMullen", "text": "Sure. Bob, maybe we'll tag team on this, which was -- I think the -- relative to the order book, I think we were slightly above revenue for the quarter. No really unusual pacing through the quarter from China. We've been calling -- I know a lot of our conversation today has been about pharma, but we've been saying for some quarters overall for China, it's been a broad-based slowdown. And that's what the business has been, and that's how we ended the year in terms of the end market performance. I will say that we were pleased that we were in line with our expectations for the business. So again, we described earlier that the business was moving along at a certain overall level. I think we do have a view of China that we will still be down in terms of the revenue for the year. But reflective of where we are, where we're seeing the business right now. So…" }, { "speaker": "Robert McMahon", "text": "Dan, and to build on Mike's point, just a couple of other additional data points. we were down pretty significantly in all end markets in Q4, as you would expect because we were up 44% in Q4 of '22. And so that's probably not as relevant because we were catching up relative to some of the catch-up of the Shanghai shutdown. Another data point, though, is if we looked at kind of year-on-year growth actually, we exited October, the year-on-year performance. It was still a decline, but it was much better than what we saw at the beginning of the quarter. And so we actually saw a sequential improvement. I think Mike mentioned that in his prepared remarks. And then if we looked at kind of absolute dollars, they've been pretty steady month-on-month." }, { "speaker": "Daniel Brennan", "text": "Got it. And then Chemical and Advanced Material was like a tale of 2 cities. It looks like C&E was down 15% in the quarter, you said and you talked a lot about PFAS. And so is there any more color like what you're seeing on kind of both sides of coin there? What's kind of baked in on the core chemical and energy side for the year and just anything on trends there? And then obviously, it sounds like you guys still remain really constructive on the Applied Materials side or Advanced Material side." }, { "speaker": "Mike McMullen", "text": "So how about Bob lead here a few comments. And then I've been dying to pull Phil in on here as well. And maybe talk about some of the things he's seen on the Advanced Materials side, which is a real area of expertise for him, so. But I think your word of tail of 2 cities is really quite appropriate, both in terms of breakout by segment, also by geography. I think we posted 70% growth, if I remember correctly, in China last year. So I mean that's a tough comp. I don't care who you are. But we're seeing continued slowness on the C&E side. Our major customers here are really conservative in terms of their deployment of capital. Many of our largest customers are on cost control. So that's been -- that's what you're seeing reflected in the numbers, and that's why we expect a constrained outlook on that side of the business for a while. The different story on the Advanced Materials, and I think Bob, you pointed to good growth geographically globally outside of China. And then Phil, I know you and the team got a whole bunch of initiatives around the applied markets, particularly not only PFAS but Advanced Materials. And I thought a good opportunity for me to introduce you to the audience and have you share your perspective on what we're doing on the applied on the Advanced Materials side." }, { "speaker": "Phil Binns", "text": "Yes. Thanks, Mike. Yes, certainly, we've mentioned you've talked around the activity within labs being ex-China, at least being reasonably robust. But on the applied market side and certainly around Advanced Materials. We're certainly relatively strong in those markets, and we're seeing good really good generation around the batteries market. And of course, we've spoken about the onshoring process around there in the Advanced Materials area. So globally, that obviously comes into the onshoring. And globally, we're in strong positions in those markets and have been historically and continue to innovate strongly around those markets and stay close to those customers." }, { "speaker": "Operator", "text": "We go next now to Dan Leonard at UBS." }, { "speaker": "Dan Leonard", "text": "I wanted to circle back for a moment on the Q1 guide. You spoke about a challenging year-on-year comp a couple of times. But as you're thinking about the Q4 to Q1 sequential ramp in dollars, how much of that decline forecasted is what you chalk up to seasonality versus prudent if you could give us a flavor." }, { "speaker": "Mike McMullen", "text": "Great question, Bob." }, { "speaker": "Robert McMahon", "text": "Yes, Dan, that's a great question. If you look at last year and our revenue went down roughly $90 million; $90 million, $95 million from an extremely strong Q4 to also a very strong -- if you look at the midpoint of the guide, it's a little over $105 million, $110 million. So there is an element of looking at what we did last year, again, not assuming a strong budget. I don't want to kind of parse it out to give you a percent, but that kind of at least gives you kind of how we were thinking about the Q1 guide relative to what we saw in Q1 of last year." }, { "speaker": "Dan Leonard", "text": "Appreciate that. And then as a follow-up, can you remind me in 2024, when do we lap the headwinds on the genomics side? And what is your appetite continued investment in genomics as part of the DGG portfolio." }, { "speaker": "Robert McMahon", "text": "Yes, I would expect us to -- we will have a difficult Q1 and then starting to get better from Q2 and beyond, not dissimilar from the rest of some of the businesses. And then I'll let Mike talk about the kind of the investment." }, { "speaker": "Mike McMullen", "text": "Yes, I think first of all, just to remind the audience, when we talk about the genomics mix business, what are we talking about? We got a $500 million business, probably 50% of it is in QA/QC instrumentation, where we are the undisputed leader here, a lot of appetite to invest here. Our TapeStation product, particularly the consumables business is on fire right now. Capital side is constrained as we've seen across the marketplace. And then I think we all believe in the view that NGS will continue to be a growth market for us. And for the industry, I think that people are dying on back their expectations about how robust it is for a period of time. And I think we're seeing that in our business. So why do we make some of the structure changes we made in the portfolio because we want to ensure that we've got the ability to have a healthy P&L while at the same point in time invest in growth. So there's a reallocation of R&D dollars happening as a result of some of the changes we made that we talked about over the call. So answer the story is we have a lot of appetite for focused investments in areas where we think we can win in genomics." }, { "speaker": "Operator", "text": "And ladies and gentlemen, that is all the time we have for questions this afternoon. I'd like to turn things back to you Mr. Ahuja for any closing comments." }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Bob, and thanks, everyone, for joining the call today. With that, we would like to end the call. Have a good day, everyone." }, { "speaker": "Operator", "text": "Thank you. Again, ladies and gentlemen, that will conclude the Agilent Technologies Q4 2023 Earnings Call. Again, thanks for joining us, and we wish you all a great evening. Goodbye." } ]	Agilent Technologies, Inc.	154,924
A	3	2,023	2023-08-15 16:30:00	Operator: Ladies and gentlemen, welcome to the Agilent Technologies Q3 2023 Earnings Conference Call. My name is Bo and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja. Parmeet, please go ahead. Parmeet Ahuja: Thank you, Bo, and welcome, everyone, to Agilent's conference call for the third quarter of fiscal year 2023. With me are Mike McMullen, Agilent President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our third quarter financial results, investor presentation and information to supplement today's discussion along with a recording of this webcast are available on our website at www.investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted currency exchange rates. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now I'd like to turn the call over to Mike. Mike McMullen: Thanks, Parmeet, and thanks, everyone, for joining our call. In today's call, I'll walk you through our Q3 results, share what we're now seeing in the market and provide context for our revised full year outlook. I'll then turn things over to Bob for more detail on the quarter and outlook before returning for some brief closing comments. The Agilent team continues to execute well as we navigate our way through ongoing challenges of the current market environment. Our Q3 revenue was $1.67 billion at the top end of our expectations. This is a decline of 2% on a core basis against a tough compare of 13% in Q3 of last year. We continue to be proactive and are taking steps to help us deliver on our leveraged earnings model. Operating margins are 29.3%, up 180 basis points. Quarterly earnings per share of $1.43 are up 7% and above our expectations. The major drive behind our Q3 year-on-year decline in revenue is our China business. Excluding China, the rest of Agilent grew 2%, which was better than expected. We knew we're up against a difficult compare in China and had previously guided for lower China revenues in Q3. However, the economy in China continued to weaken during the quarter, translated into a more challenging market environment than we had anticipated. With the softer market conditions in China and continued global macroeconomic challenges, we have lower growth expectations for the remainder of the fiscal year. We now expect core growth for the full year to be around 1%, down from our previous guide. Based on what we're seeing at this time, we're not assuming any improvement in the China market for the remainder of the year. We, however, view the near-term challenges we're experiencing as transitory and remain confident about the long-term growth prospects of our end markets. Before turning now to our third quarter results, I'd like to touch on our two largest end markets. Our total pharma business is down 8%, driven by the pharma market in China being down 30%. Within pharma, our biopharma business grew 5%, while small molecule was down 16%. The Chemical Advanced Materials market declined 3% versus a 22% increase last year. While we did see the chemical energy space being weighed down by macro concerns, slowing growth in Advanced Materials was more a function of a difficult compare as the volumes have remained steady and robust. Looking at our performance by business unit. The Life Science and Applied Markets have delivered revenues of $927 million. This was a decline of 9% of a very tough compare of 18% growth. Last year's growth was helped by the benefit of recovery from the Q2 2022 Shanghai shutdown. LSAG's performance continues to be affected by the market environment in China across all end markets and pharma globally. Our sales funnel remains healthy and are up year-on-year, but deal velocity continues to slow as customers remain cautious in making capital purchases. We expect this market environment for new instrument purchases to continue for the rest of the year. At this time, we are not assuming any benefit from a year-end budget flush or incremental stimulus in China. As we said before, we are continuing to prioritize invest in innovation. As an example, in June, Agilent's investment innovation were on full display at the Annual ASMS Conference. The LSAG team introduced new products and comprehensive workflows to enhance data quality and productivity for our customers. These include two new LC/MS systems, a new PFAS workflow solution and an AI software for data analysis, among others. The Agilent CrossLab Group posted revenues of $396 million. This is up an impressive 11% core with growth in all regions and end markets, as customers continue to embrace our value proposition. We continue to see strong demand for our services as we help customers drive productivity in the lab. The Diagnostics and Genomics Group delivered revenues of $349 million, up 3% core. Pathology grew high single digits as demand for our diagnostic test continues to grow. Our NASD business grew high teens. This growth was partially offset as we are continuing to see market weakness for our Genomics and Resolution Bioscience businesses. Regarding resolution Bioscience, the market for kidded NGS-based companion diagnostics has not developed as we expected. Furthermore, we don't see a realistic path to profitability. As a result, we've made a difficult decision to shut down the business. However, our investments in future growth continue. For example, we achieved an important milestone during the quarter when our NASD business generated the first revenues from our Train B investment in Frederick, Colorado. Now looking forward for the company, as we navigate this challenging macroeconomic environment, we remain confident in the Agilent team and our ability to continue driving leverage earnings growth, use our agile Agilent framework. We faced challenges before, and we're taking actions now that will make us stronger and position us well for the future. As we stated last quarter, we are doubling down on delivering cost efficiencies and increasing productivity. The goal is to generate additional cost savings so we can continue to invest in innovative new solutions and support for our customers as we enable future profitable growth. We are on track to achieve the cost savings we've targeted for the second half of this year. We are in attractive markets that will produce long-term growth. Our innovation engine remains strong and the battle test at One Agilent team is driving outstanding execution. Bob and I will provide the details on our results as well as our outlook for the remainder of the year. After Bob delivers his comments, I will be back to provide some closing remarks. And now, Bob, over to you. Robert McMahon: Thanks, Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter as well as take you through the income statement and other key financial metrics. I'll then finish up with our updated guidance for the full year and our fourth quarter outlook. Unless otherwise noted, my remarks will focus on non-GAAP results. Q3 revenue was $1.67 billion, a decline of 2.3% core and down 2.7% on a reported basis. This compares with 13.2% core growth last year. Currency was a 0.5 point headwind while M&A contribution was minimal. As you may recall, Q3 of last year benefited from roughly $35 million in revenue deferred from the second quarter as we ramp back up from the Shanghai shutdown in China. Accounting for this, our Q3 core growth would be roughly flat versus a year ago. As Mike mentioned, Pharma, our largest end market, declined 8%. This is in line with our reduced expectations coming out of Q2 with underperformance in China, offset by better performance in the rest of the world. The Chemicals and Advanced Materials market was down 3% off a very tough 22% compare, but dollar-wise was flat sequentially. The academia and government market was up 5% and with all regions showing growth except the Americas, which was flat. Our business in the diagnostics and clinical market grew 3%, driven by high single-digit growth in pathology, partially offset by genomics weakness. The environmental and forensics business grew 2%, driven by double-digit growth in the Americas and Europe. The growth was generated by the build-out of water infrastructure projects and an expansion of funding for PFAS-related activities. The food market grew 1% based on strength in Asia outside of China and mid-single-digit growth in Europe, driven by new food testing regulations. On a geographic basis, while China underperformed, the Americas and the rest of Asia were better than expected, while Europe was in line with our expectations. Moving down the P&L. Third quarter gross margin was 56.3%, down 10 basis points from a year ago. Like last quarter, this was largely due to the product and services mix, and pricing was slightly better than our expectations. Below gross margin, the expense reduction actions we initiated in the second quarter helped strengthen operating margins. We also benefited from a reduction in variable pay expenses. As Mike mentioned, margins were 29.3%, up 180 basis points from last year. Below the line, our interest income was higher than planned, while our tax rate was 13.75% and we had 295 million diluted shares outstanding. Putting it all together, Q3 earnings per share were $1.43, up 7% from a year ago, a very good result given declining revenue. Now let me turn to cash flow and the balance sheet. I continue to be pleased with our cash flow generation this year. Cash flow from operations was $562 million in the quarter, and is $1.3 billion year-to-date. In Q3, we invested $81 million in capital expenditures, totaling $214 million year-to-date, effectively flat year-on-year as we continue to optimize our CapEx spending. Given the strong year-to-date results, we are increasing our free cash flow forecast for the year to $1.2 billion, comprised of operating cash flow of $1.5 billion and CapEx of $300 million. This is an increase of $250 million from the midpoint of our previous guidance. Despite the challenging macroeconomic conditions, our balanced capital allocation strategy is intact. During the quarter, we returned $401 million to shareholders. $66 million through dividends and repurchase shares worth $335 million. This ongoing balanced approach to capital deployment is another example of the confidence we have in our team and our belief in the long-term strength of our markets. Before getting into the revised full year outlook, I want to mention we have taken a $291 million pretax charge in Q3 associated with the decision to shut down the Resolution Bioscience business. This charge, which is excluded from non-GAAP results, includes an impairment write-down along with charges associated with the wind-down and exit of the business. We expect the wind down to continue through Q4 and into early FY '24. Now to the revised outlook for the year in Q4. Given the more challenging macroeconomic environment we are seeing, particularly in China, we now expect full year revenue to be in the range of $6.80 billion to $6.85 billion. This represents a decline of 0.7% to flat on a reported basis and core growth of 0.8% to 1.5%. This is a core growth reduction of 260 basis points from the midpoint of our last guide. Roughly 85% of the change is related to reduced expectations in China while the remainder is due to some incremental cautiousness from our customers on CapEx spend as well as softness in genomics and the shutdown of Resolution Bioscience. As Mike said earlier, we are not assuming any incremental stimulus in China or any material year-end budget flush in these revised projections. Given the large change in China, I wanted to provide some additional perspective on how we are forecasting the rest of the year, recognizing that the market continues to be very dynamic. To provide some context, in Q3 through June, our business in China was tracking to a mid-single-digit decline in revenue, which was in line with our expectations. However, in July, we saw a further deterioration in China, resulting in the 17% decline for the quarter. And while the Q3 decline in China was centered in pharma, which was down 30%, we did see weakness in the other end markets as well. We expect the conditions we've seen in July to persist in China for Q4. In addition, we are facing our most difficult quarterly compare in China, where we grew 44% in Q4 of last year. We are now expecting Q4 to decline in the mid-30s year-on-year. For the full year, we are expecting China to decline mid-single digits versus growing mid-single digits. With the change in revenue, we now expect full year fiscal 2023 non-GAAP earnings per share to be between $5.40 and $5.43, representing leveraged earnings growth of 3% to 4% and roughly 6% to 7% growth net of currency. The change in full year guide results in Q4 revenue being in the range of $1.655 billion to $1.705 billion. This represents a decline of 8% to 10.5% on a reported basis and a decline of 9.5% to 12% on a core basis. The recovery last year in Q4 of the remaining revenue deferred from the Shanghai Q2 shutdown negatively impacts the year-on-year results by roughly 1 point. In fourth quarter, non-GAAP earnings per share are expected to be between $1.33 and $1.36. Thanks for being on the call. And now I will turn things back over to Mike for some closing comments before taking your questions. Mike? Mike McMullen: Thanks, Bob. While today's macroenvironment is challenged for new instrument purchases, we remain confident in the long-term growth prospects of our end markets, the diversification of our business and in our proven ability to grow faster than the market. I'd like to share a few examples why my confidence remains intact despite near-term challenges. In Pharma, our largest end market, innovation and advance of medicines continue with new therapeutics flowing into the market. The demographic drivers of this market are on our side, a growing global population that expects access to health care and extending life expectancy to be key priorities from their governments. Our market-leading solutions are critical to innovation behind new therapeutics and ensuring the safety and quality of on-market drugs. In the applied markets, growing PFAS testing and the electrical vehicle transition are here to stay, action in new opportunities for growth. Everyone wants to have a safer water to drink, food to eat and air to breathe and the search for and production of more sustainable materials and energy sources remains a global priority. Agilent is a diversified leader in a unique position to help our customers drive their solutions. We remain a trusted partner, our customers though they can rely on in both good and challenging times. Our combination of leading instrumentation and world-class customer support is a long-term competitive advantage. At the heart of this long-term competitive advantage is the Agilent team and the One Agilent culture. You see this reflected in a recent recognition on Glassdoor and in being named A Great Place to Work in all 27 countries and territories around the world where we qualify for certification. We have a company mission focused on advancing the quality of life. To learn more about this, I would encourage you to review the latest addition of the ESG report that we issued last month. We have proactively managed the company through the short term, always with an eye towards our customers and in the long term. We have been proactive in managing our business to drive leveraged earnings but not at the expense of customer satisfaction and future growth. Yes, these are challenging times, but we have the team, the strategy and the right culture that would deliver long-term success. Thank you for joining us today. And now over to you, Parmeet, to lead the question-and-answer session. Parmeet? Parmeet Ahuja: Thanks, Mike. Bo, if you could please provide instructions for the Q&A now. Operator: Thank you, Parmeet. [Operator Instructions] We'll go first this afternoon to Matt Sykes at Goldman Sachs. Matt Sykes: Hi. Good afternoon. Thanks for taking my questions. I thought maybe I'd start just with China, sort of a high-level question. You guys talked about sort of the transitory impact of the current environment. You mentioned pharma. Could you kind of extend those comments to China? Do you think it's more cyclical versus structural? Are there competitive issues that you're facing or just your outlook on that region? Thanks. Mike McMullen: Yes, Matt, thanks for the question. So let me start with the last part of your question. This is a macro story, not a competitive story. So market shares continue to be very, very strong. I know there's a lot of discussion about increased local competition, but we've moved pretty aggressively on our made in China strategy. So we don't see that all as a competitive issue. Transitory, the comment there is really about the fact that the China market is not going away. It's going to be a big market for years to come. It clearly is challenged right now. And we're not -- we're taking a sort of one quarter at a time, actually month by month. And as Bob mentioned in his comments, I think July, we actually saw the weakest performance within the quarter, and we're still seeing weakness in the pharmaceutical industry, for example, the level of manufacturing declined pretty specifically in the month of July. So we think the market is going to be there, but it's going to take a while for it to get back to growth. And I guess probably the other thing to point here is - and again, I'm talking specifically around the instrument side of the China market. As you know, we have a very large, in fact, the largest installed base of instrumentation in the marketplace. So very positive on the ability to grow the aftermarket in our diagnostics business. Probably anything you add to that? Okay. Matt Sykes: Maybe just for my follow-up, just on ACG. So a good quarter in that business. And I know you guys talked about a year or two ago about sort of a goal of 30% plus margins obviously achieved this quarter. Can you maybe talk about sort of where you see the durability of that growth is sort of high single, low double, 30%-plus margins, how we should be thinking about the business? Or were there some one-offs in the quarter that you'd want to call out to kind of measure expectations there? Mike McMullen: Yes. We've consistently communicated that we think this is a high single digit, low double-digit kind of growth business for us. It's been that way since pretty much most of my tenure as CEO, and we don't see that changing as we go forward. Of course, there'll be puts and takes by quarter. But we're continuing to see good growth in our connect rates, which we've talked a lot about. And we're also doing very well on winning the enterprise business as well to complement the other aspects of our portfolio offerings. I would say that the profitability was probably a little bit higher in Q3 than - but we do think that the high double-digit number you quote about is pretty manageable for that business, but not at the level we saw in Q3, right, Bob? Robert McMahon: Yes. Matt, this is Bob. And just maybe to further what Mike is saying, when we think about the components of that business, the fastest-growing component is actually the contracted business, which is that connect rate. And it was in the mid-teens this last quarter and continues to be faster growing than the overall business. And as long as we continue to be able to drive that increased attach rate, we feel very good about that. And that comes with - with that growth comes scale and being able to leverage our team with the work that the digital initiatives that we've had as well. And so as Mike said, don't book, I think it was 32% going forward because there were some variable pay true-ups. But certainly, what you've seen quarter in, quarter out is a nice, steady cadence of margin improvement there. Matt Sykes: Got it. Thanks guys. Operator: Thank you. We'll go next now to Jack Meehan at Nephron Research. Jack Meehan: Thank you. Good afternoon. Mike McMullen: Good afternoon, Jack. Jack Meehan: Mike, I was hoping you could talk a little bit more about some of the more cyclical areas of the business in the CAM segment. Just what are you seeing from some of your chemicals customers. You've heard some conversation of budget cuts there. Are you starting to see that? Just how is your visibility into some of these cyclical areas? Mike McMullen: Yes. So as we've talked earlier - thanks for the question and Jack and comments and then have Jacob jump in on this one as well. But we look across the CAM, I'd say the Advanced Materials segment of that market, which we've communicated is more driven by secular trends and cyclical trends continues to hold up quite well. And by the way, also, I just want to point out we had a really tough compare, I think we grew 22% last year in Q3 in CAM. If we look at the chemicals and energy side of it, the energy side actually popped up a bit, particularly driven by the U.S. where we are seeing some weakness is in the chemical side where customers are looking at the macroeconomic environment and are slowing their capital investment there. So I'd say that kind of puts and takes. But I think in terms of the quarter, Bob, I think we came in right about where we thought we'd be in CAM and I'd say it's a mixed story in terms of different segments growing at different rates. Robert McMahon: Yes. Before Jacob, maybe you can jump in. I think the one thing that I think is important is you really have story in China, which is its own and then the rest of the business. And so if you think about where Americas and Europe is, it's performed extremely well. And if you actually look - we mentioned this in the call, sequentially, the dollars actually were very stable. And so we are expecting a challenging Q4, mainly because we grew 70% in China. Mike McMullen: 43% in Q3. Robert McMahon: Yes. So it's a compare situation. But this business continues to be very strong. Mike McMullen: Do you want to make the comments on the Advanced Materials side of the house there, Jacob? Jacob Thaysen: Yes, I can say that. And Mike, I think you also started with that saying that we continue to see a lot of activities in that space, especially in the battery space, where, of course, there are also compares we are against, but there's still a lot of interest in that space, and we are doing very, very well. Semicon is also cycling down right now, but we are - we continue to see business in that space, but not as strong as we did last year. Jack Meehan: Thanks Jacob. And my follow-up, I wanted to ask about margins. Just how you're thinking about some of the puts and takes for 2024. I think some of the cost savings you've talked about should extend to next year, should get some leverage out of NASD. But at the same time, some of the performance comp comes back and would think some of these top line pressures extend as well. I don't know, can you just talk about maybe relative to the LRP, how you're thinking about margins for next year? Mike McMullen: Bob, do you want to lead that one? Yes. By the way, one thing I'd add to that before Bob's, the specifics, Jack, is our decision on the Resolution Bioscience business so as part of the story for us next year in terms of margin expansion. So Bob? Robert McMahon: Yes. I would say that our view of leveraged earnings growth continues into '24. And so while we do have some things coming back to us, some of the actions that we've taken will continue to move into a full year for 2024. And quite honestly, that's kind of what we expect our job to be is to be able to drive that leveraged earnings growth. Jack Meehan: Thank you, guys. Mike McMullen: Welcome. Operator: Thank you. We go next now to Vijay Kumar at Evercore ISI. Vijay Kumar: Hi, guys. Thanks for taking my question. Good job on the margin execution here, Mike. Mike, maybe I missed some of the comments here. Can you talk about the phasing in the quarter here in China? I think I heard when you start off down mid-singles and was July off like minus 25%, minus 30%, is that the exit rate? Mike McMullen: Yes. We take a change within the quarter. Robert McMahon: Yes, Vijay, this is Bob. Your math is in the ballpark. Yes. So we were down mid-single digits through June. So May and June kind of tracking as we expected, and then we saw incremental weakness in July, and we ended up for the full quarter down 17%. And what we're assuming going into Q4 is that, that performance will continue into Q4. And given the tough comp that we have because I think we grew 44% in Q4 of last year, we're estimating roughly a 35-ish percent drop in Q4 in China. Vijay Kumar: Sorry. That's helpful, Bob. And just -- sorry, where I was going with that question was, can you talk about capital versus recurring? And I think when I look at your Americas in Europe, America is just flattish. Do you see a similar sort of phasing in ex-China, maybe talk about exit rates in July? Robert McMahon: So actually, if you think about the ACG business, actually ACG grew in all regions and all end markets, inclusive of China. So there wasn't a change there. And I would say both in the Americas and Europe, we didn't see that same effect. Mike McMullen: Yes. And overall, outside of China, the geographic performance was better than expected. Robert McMahon: Correct. Mike McMullen: We saw no trends like the China trend in our other geographies. Vijay Kumar: That's helpful, Mike. And Mike, maybe one that you mentioned a couple of times on transitory. I think that's a new firm that you're using -- what have you heard - Mike McMullen: I think I move away from prudent to transitory. Vijay Kumar: Yes. What have you guys heard on the ground on China stimulus, maybe some positive commentary, but nothing is concrete and why use the word transitory is the implication here fiscal '24 should be a more normalized year when we look at the comps? Robert McMahon: Yes. So, a couple of thoughts here, I think relative to the China business, we're hearing similar things, but nothing really significant and there's not enough to go onto assume we have kind of material impact on our outlook for the rest of the year. When we talk about transitory, we talked about the fact that these markets are driven by investments to improve the human condition as I mentioned. They're not going to go away. And neither while we're not going to get into the specifics of an actual number, we actually see a path to growth next year for full year for Agilent. And of course, we have the tough compare the first half of next year, we did coming off a double-digit print for first half this year, but as we looked at our business keep in mind, we're - what's behind my thought process here which is - we're instrument company, yes, we have big instrument business around 60%, we have a 40% of those in recurring revenue business. I don't know if you caught it in Mike call script, but our sales funnel for instruments are actually growing. So that would say that at some point in time those budgets are going to be released and the orders will close, when I've seen deals come out of - the funnel. We're not seeing order cancellations, we're not seeing changes to our one loss ratio. And we're encouraged by the growth we're seeing in biopharma. On the small molecule side, we know that different rates of replacements during the cycles, but we think this will follow historical cycle. I think the real wildcard for us, we look forward into '24, is really what do we assume around the China market. We're not assuming any kind of major further degradation, but at the same point in time, it's the path to return to kind of historic growth rates. That's the open question right now. Vijay Kumar: Understood. Thanks, guys. Operator: We'll go next now to Dan Leonard at Credit Suisse. Mike McMullen: Hi, Dan. Dan Leonard: Thank you. Hi, Mike. I wanted to follow-up on that last part. You've seen a lot of cycles in China over 30 plus years. What would you compare this to and how do we get out of it? Mike McMullen: I am as old as the dirt and have been working in this marketplace since the mid-90s. I haven't seen a cycle like this before. And we've not seen a situation where the - there's really seem to be a lack of confidence right now in the macro economy. Now, look I'm not sharing - anything that the audience here doesn't fully understand already. So, the way we get out of this, I think is China led by the government. We'll get back to focusing on its long-term goals of making China an innovation driven economy, which will require continued investments in R&D. It's going to also get back to focusing on improving the health of - the population, addressing some of environment issue, so we think it's getting back to fundamentals. Yes, we think that eventually will occur, but there's a lot of issues that we may be work through within the China right now. But - it's a very large market, the market is not going to disappear. And I think there'll be investments. I think there's also needs to be a level of confidence in the private sector in China, that it's a good time to reinvest and maybe I shouldn't wait on the sidelines hope for its stimulus, but get back to work and get my business going. So there's a lot of dynamics. I really have to say though, I don't know if I have a comparable situation that we've been through for this long. I think Bob and I were talking earlier today. The change in the food ministry, a number of years ago is - was the biggest thing we've seen or 24 plus seven some of the biggest things we've seen a change, but this is much more of a macro economic issue in China, which is different than what we've seen before. Obviously, we have an impact on life sciences tool, but it's a much bigger macro story is really driving the softness right now in our markets. Robert McMahon: Yes. The only thing I would say, Dan to build on what Mike was saying is, as he mentioned, the demographics are with us when you think about the aging population, the need to actually access healthcare more important therapeutics, and the importance of ensuring the water and food supply. They are the world's leaders today in electric and clean energy. It's hard to believe when everyone thinks about that. But they are the leader, and they have more electric cars than any other region. And so, I think that investment is going to be key as Mike talking about from the government, but unless they changed their strategic priorities, I think that's the benefit for life sciences in general. Dan Leonard: I appreciate all that perspective. And just a follow-up. I was hoping you could elaborate on your decision to shut down Res Bio. I was surprised by that, given that you acquired the company only a couple of years ago? Mike McMullen: Yes, sure Dan. Happy to do so. So obviously, a very difficult decision, then I'll have Sam jump in on this conversation, but our fundamental belief was that our differentiation will be all around what we called the kitted strategy to have a distributed on market companion diagnostics for our pharma partners, and that market really hasn't developed as we had anticipated. Sam? Sam Raha: Yes, Mike. Building on what you said, while NGS and cancer diagnostics is here and we serve that market in a number of ways, right, for just to be clear, too. We absolutely continue to serve cancer research translational research and diagnostic, test developer customers. But our core to our thesis, our differentiation is really the ability to develop and distribute these kitted tests in the market, the pharma market and the testing market just as evolve that way. And we also looked at our recent analysis and concluded that even with more additional investment, this is going to be a business that's going to be undergoing significant losses for some foreseeable future, so. It was a difficult, as Mike said, that the right decision to make this move now. But again to be clear, we continue to serve cancer research and diagnostics in a number of ways. Mike McMullen: Yes. I think - Sam, when we've talked about this in the past. So, we think we're still going be able to participate in what we believe the strong growth of liquid biopsy market. But to really providing a lot of the - if you will, ingredients for the test developers for themselves. Sam Raha: Here and Mike. I'm going to take this opportunity to also just to say beyond our core SureSelect Target Enrichment portfolio which is used broadly for liquid biopsy testing today. Early next year, we'll be launching solutions from Avida BioMed, an acquisition that we announced earlier this year, which we think is really going to be a differentiated way to look at methylation, as well as classic mutation analysis. Robert McMahon: Yes. Maybe just one add, Dan, is obviously a difficult decision for us, but I also think it also looks - it shows the discipline that we have in terms of our portfolio rationalization, and we felt we had better returns in other places to invest in so. Dan Leonard: Understood. Thanks for the time. Mike McMullen: You're welcome. Operator: We'll go next now to Brandon Couillard at Jefferies. Brandon Couillard: Hi, guys. Good afternoon. Mike McMullen: Good afternoon, Brandon. Brandon Couillard: Mike would you just find packing mass spec versus LC trends in the quarter? And then based on your revised guide, what is the four-year CAGR from 2019 for LSAG instruments exiting the year? How does that compare to historical average over the cycle? Mike McMullen: Hi Brandon, I'm going to start with the response to your question. I'll let Bob dig through his notes to find the actual number. But first of all, I just started to say, is that we believe what we're dealing with here in our core instrument portfolio, inclusive of LC and LCMS continues to be a macro market story. Our market shares are holding up really well. We're seeing in our one loss data. We're seeing it in the external reports from order. And I think when we look at our performance in those core platforms versus our peers, we're reporting some numbers and kind of adjust for the timing of when we report. I think we're putting up similar kind of numbers. And Jacob, I know you looked at this thing pretty closely and I'm trying to buy some time for Bob to check down the... Jacob Thaysen: We're trying to find the CAGR the last three years, which I don't have in front of me here, but you're right Mike, we follow this very accurately. And we're doing - we continue to do very well in this marketplace. We continue to innovate into it. And we have seen - actually, we have taken share over the last period of time. And if you actually compare our calendar two versus competition, would actually see that we are approximately flat in the LC, LCMS space. And I think that stacks up very well versus competition. Robert McMahon: Yes, hi Brandon, we can get that to you afterwards. Brandon Couillard: Okay. Robert McMahon: I can tell you though, if you looked at the LSAG business over the last three years, it's been averaging 5% CAGR, despite being forecasted to be down this year. And obviously, those are two large businesses. Brandon Couillard: Okay. And then I guess, two housekeeping questions for you, Bob. You talked about NASD growth in the third quarter? I imagine it might have been up sequentially with Train B coming online and on the CapEx line. You pushed out $200 million you spend in that. Just roll into '24? There are some projects maybe you decided to defer from the time being - the environment? Robert McMahon: Yes, it's a great question. So NASD, we continue to be very pleased with that. We had our first revenue in Q3 from Train B, the first of many more revenues to come from that standpoint, and expect it to continue, and we're still on track for the numbers that we've been talking about through 50-plus for the full year. And in terms of the CapEx, some of that will roll forward, but it's not - we're not going to spend that $200 million in '24 as well. This would be - we have deferred projects being very rational, really focused on revenue-generating programs. And so, I do expect some of that will flow into '24, but I don't expect '24 to have an incremental $200 million show up in the forecast. Brandon Couillard: Got it. Thank you. Operator: We'll go next now to Puneet Souda at Leerink Partners. Puneet Souda: Hi Mike, Bob. Thanks for taking the questions. Mike McMullen: Sure. Puneet Souda: The first one, thanks. So maybe, Bob, could you elaborate a bit on pricing here? I know pricing was a meaningful contributor initially this year. We're seeing China, obviously, you talked quite a bit about it, and we're seeing the headline for China deflation. So wondering if you are expecting pricing to maintain there, or do you expect pricing pressure in China continuing? And also, we're seeing some of the peer sort of bioprocessing companies talking about local competition rising on the less high tech product. And so wondering if you're seeing that on any of - sort of your product lines as well? Robert McMahon: Yes. Let me take the second question first. We can compete against the Chinese local competitors each and every day. And nothing has changed from that standpoint. We continue to feel very good about our portfolio, and continue to drive that growth. In regards to pricing across the board, we were slightly better than what we had expected. It was roughly over - a little over 4% for the quarter. And that was driven across all three of the groups. So we continue to drive - positive price across not only our DGG and ACG business, but also our instrumentation and that's globally. And we expect to be able to continue to demonstrate the value of our instrumentation across the globe. Obviously, in a deflationary environment, that will put a little more pressure on the instrumentation business, particularly in China but we've incorporated that into, our forecast and are still on track for positive price contributions, for the full year in excess of 3%. Mike McMullen: Hi Bob, maybe Bob or Padraig and also going to maybe comment on some discounting trends he may have been seeing? Padraig McDonnell: Yes. No, I think - no, I think it's the pricing holds discounts has really held stable as well. We haven't seen any - increase in that rate of it, and we continue to monitor that, but it's been very stable, Mike. Puneet Souda: Got it. Thanks for that. And then if I could ask an academic and government here, smaller segment for you, but it did solid in the quarter. Maybe could you talk a little bit about what you're seeing across the globe in different geographies for academic and government and your expectations here going forward? Thank you. Mike McMullen: Yes, Bob, I think this is an end market that is holding up reasonably well. I mean we're seeing that on a global basis, in most cases, with the exception being China, where the funding is there, the funding is stable. And it's been a positive surprise for us so far through this year. And I don't... Robert McMahon: No, it's really across many of our instrument platforms as well as the service business. And from what we're seeing, Puneet, is funding continue to be available, and it's flowing from governments. I think they're seeing the strategic nature of many of the investments that they're making. And our expectation is that, that funding will continue. Puneet Souda: Got it. Super. Thank you. Mike McMullen: You're welcome. Operator: We'll go next now to Rachel Vatnsdal at JPMorgan. Rachel Vatnsdal: Good afternoon. And thank you for taking the question. So first off, one of your peers have flagged that they were actually seeing some early signs of pharma spending recovery I appreciate that most of the incremental this quarter, is really related to the China weakness. So maybe ex-China, can you walk us through if you're seeing any signs of recovery of spending with biopharma customers. And then you've previously flagged for us that historically, when pharma spending slows down, like we're seeing today that it can take 12 to 24 months to recover. So how are you thinking about the timing, and recovery given the incremental weakness this quarter? Mike McMullen: Sure, Rachel. So while we saw signs of stabilization in our European and U.S. business stabilization relative to expectations. We're not hearing anything along those lines yet in terms of recovery or desire to increase spending, the fact we're hearing the exact opposite right now from our large major pharma companies. So, I hope that commentary from others in this space is correct. And there's going to be a big recovery here from year-end, but we're not seeing any kind of indications of that. If it does happen, great. It would be upside relative to our current outlook, and we know we do well in these markets. But Padraig, I don't think we're seeing and hearing anything like along those lines. Padraig McDonnell: No, I think it's spot on, Mike. Robert McMahon: The only thing I would say, Rachel, is if we look at our funnels, they continue to be growing. So it's a question of when, not if, and particularly in pharma. And as Mike and Padraig just mentioned, we're not assuming a budget flush into our Q4. And if it happens, that would likely happen in our Q1 in any event, from a revenue perspective. But what we see at least from our funnels, is they continue to be helping. And let me just answer Brandon's question from a couple of times ago. If I look at LC and LCMS on a three-year CAGR, they're between 7% and 9%, so higher than the overall LSAG average. Mike McMullen: Right. Thanks for that and Bob. And Rachel, I think the second question relative to - I think you're referring to the small molecule replacement cycle. And as you know, coming probably at least for the last 12 to 18 months, we had been indicating that we were expecting to see a slowdown in the rate of replacement. And in fact, we've seen that occur this year. Actually, given the weakness in China even beyond our expectations with a minus 16% number overall in the quarter. That being said, we do stay with our view that these tend to be 18 to 24 months, 12 to 18-month cycles, and we'd expect that they'll start to see movement back towards a higher growth rate. And that's one of the reasons as we look into '24, we're saying some of these markets will start to turn as - the base cycle gets back to more of a growth phase in that cycle. And as we've mentioned earlier, we see that particularly in liquid chromatography is probably about a five percentage kind of growth market long-term. Rachel Vatnsdal: Great. Thank you for all that color. Maybe just following up on your small molecule comments there. So small molecule declined 16% this quarter. So can you talk to us about how much of your China exposure is really tied to those small molecule workflows? And then what else is really driving incremental weakness on the small molecule side? We've heard of IRA pressuring some pharma decisions and potentially leading to them reprioritizing the pipeline. So is there any risk that you won't see a recovery? Or could the growth rate for small molecule really be reset in? What are your conversations with customers on that trend? Thank you. Mike McMullen: Okay. So you got it. So relative to China, I would say it's probably the same ratio as the global business, right? That's probably what 60%, 65%? Robert McMahon: Yes. Mike McMullen: Is probably related to a small molecule. And relative to what's happened in large pharma, what we're seeing is in medium-sized pharma is, again, a continuation of this cautious about deferring capital. I'm sure they're thinking through implications of iRNA also other expenses are running hotter in their P&Ls where they need to make some offsets with capital purchases. That being said, if you believe, and I know pharma believes the importance of having safe on-market drugs. You have to have the instrumentation QA/QC environment to support that. That requires you to have modern liquid chromatography fleets. So, I don't think it's a question that they can - that this market is going to go away and won't be an area that the pharma will need to invest in. You can defer for a period of time, but then only last for so long. Operator: Thank you. We'll go next now to Patrick Donnelly at Citi. Patrick Donnelly: Hi guys. Thanks for taking the questions. Mike, maybe just given that commentary around the instrument cycle, you're not really seeing much improvement yet. Obviously, the China piece transitory, but certainly seems like it's going to linger. You only a couple of months in '24 for you guys here. How do you think about some of these impacts lingering in? I think you said there's still plans for growth next year, but it certainly sounds like some of the headwinds at least will linger into the first half, given some of those costs. I just wanted to talk through that top line setup given some of these headwinds lingering into next year? Mike McMullen: Yes. We still have a few more months so we finish off the fiscal year, and we'll give you our guide in November. And I think we'll know a lot more by then. But I do think we know that we'll be able to grow this company in '24. That said, I was very careful in my comments to make sure that there's a full year growth rate. We do expect the first half of the year to be a challenging year just from a comp standpoint to begin with, but also some of the things that we've been talking about today in the call, we don't expect a quick snapback to be occurring in the next quarter or 2. Patrick Donnelly: Okay. That's helpful. And then I know you mentioned budget flush is still a little bit away from that at the calendar year event for pharma and other areas. Do you have any view at this point? It sounds like you guys are expecting to be a more subdued budget flush, but whatever you're hearing from customers would be helpful just to pull back a little bit more on that. Mike McMullen: Yes, sure, Patrick, happy to do so, and then I'll invite Padraig to this conversation. I know he's been talking a lot to his team about this. But as I mentioned earlier, we're not really seeing any kind of indication of customers saying, hey, listen, I'm going to have money. I'm planning to spend it this way. In fact, we've seen the opposite where sometimes orders that we thought were closed to actually keep deferring and require more purchases. In fact, I think one story we heard was we probably 3x. Fondo CFO, approved it on the third go-around and the CEO overruled it. So we know eventually going to get that business. But this is kind of dynamics ever seen. So we're not seeing a lot of indications of a strong year-end budget flush. Again, we'd love to see the opposite happen, but we're not going to indication of that. And I don't if you have something to add there. Padraig McDonnell: What we're hearing from the customers is that we're not planning on a budget flow through the end of the year, but we're - we will take the upside of corsa.com. I think I think one thing is really clear that the funnels are very strong, and it's there, but we're not seeing them to be released through a big push at the end of the year. Mike McMullen: I think this comment, Patrick, on the funnel being strong and these funnels are actually growing is really important because this is one of the reasons why we think about full year outlook in '24. We know the business is there. It's just a question of when it's going to get - Padraig McDonnell: Yes. We watch very closely our win loss rates. And we haven't - we've seen them very, very stable -- we had a strong funnel, which is very positive over time. Patrick Donnelly: Understood. Thank you, guys. Operator: We'll go next now to Derik De Bruin at Bank of America. Derik De Bruin: Hi. Good afternoon. Mike McMullen: Good afternoon, Derik. Derik De Bruin: A lot of what I wanted to ask has been asked, so I've got some cleanups here. Just did you give a specific instrument core growth number in consumables growth or number for 3Q and then sort of your all-in number for this year, what you're expecting? Robert McMahon: Yes. We didn't. LSAG for Q3 was down roughly 9% core. Consumables was up slightly. Derik De Bruin: Got it. Thank you. So what's the revenue contribution for Res Bio in 4Q? And what do we need to pull out for 2024? Robert McMahon: Yes. So we've got a minimal number in Q4 as we wind down the business. And I would say it was roughly 1 point to a little over 1 point to the headwind to DGG going forward in FY '24. Derik De Bruin: Got it. Okay. And so staying on the topic of M&A. I mean, you've done a couple of genomics deals, which haven't gone your way. And I'm just sort of wondering what's your thinking about deployment going forward? I mean valuations have obviously come in, industry is consolidating, you would say, but we have -- it's been relatively quiet across the space for the last 18 months. And so like how are you sort of thinking about capital deployment? And at what point do you decide you maybe want to buy -- start maybe doing even with the share prices, maybe doing some share buybacks. You sort of talk about your general capital deployment strategy at this moment? Mike McMullen: Yes. I think Bob alluded to it a bit in his prepared remarks, but we still are staying with our balanced capital allocation strategy, and you saw us in the market opportunistically on share repurchases given where we saw the share price setting that. In terms of our - an appetite for M&A, it remains unchanged given - despite the Resolution Bioscience decision. We knew that was a higher risk acquisition for us, early-stage company in hot area based on a really differentiating strategy that didn't want this to play out. But we've had some success in other aspects of our genomics acquisitions, including the AAT acquisition on the instrumentation side. So we're still out there looking. But as Bob mentioned, we take a disciplined approach to not only to how we view our internal choices and our internal business performance in terms of what's in the portfolio, but we'll also take that same lens, if you will, on how we look at M&A. So really, nothing has changed beyond the fact that this is more of a buyer's market. And companies with a strong balance sheet like Agilent, I think they're in a good favorable position to work on opportunities, but we're going to stay disciplined and not get caught up in what once was a value of a company, either in the private or public space. Derik De Bruin: Just one more follow-up, if I may. What are your orders in liquid chromatography? How is your order book? Are you seeing orders increasing? Robert McMahon: Our order book was down, largely a function of China, but they were down year-on-year. Derik De Bruin: Thanks. Operator: Thank you. We'll go next now to Josh Waldman at Cleveland Research. Josh Waldman: Hi. Thanks for taking my questions. A couple for you. First, Bob, can you provide more context on the puts and takes within the fourth quarter core organic growth guide? I guess maybe the assumptions by business unit. And then curious what areas or in markets outside of China seem to be like slowing real time that you're trying to reflect in the guide versus areas that maybe have stabilized or improving over the last few days. Robert McMahon: Yes. So Josh, just real quick. When we think about kind of the Q4 implied guide, the big driver is China. As I mentioned, down roughly mid-30s and that really impacts a number of markets you can imagine, both AR and chemical and energy, which are - or chemical and advanced materials, which are the two largest markets in China. I would also say that the diagnostics and clinical is also down. We've seen that softness in genomics. And then obviously, the shutdown of Res Bio also impacts that business, and that's primarily a U.S. phenomenon. So we did see an impact in U.S. on that side. And then there's some puts and takes in other places, but those are the two big pieces for Q4. Mike McMullen: But as I recall, I think 85% of the change was really China driven and bleeds over into pharma in CAM. Josh Waldman: Got it. Okay. Then Mike, I guess, staying on China and a follow-up there. Can you unpack a bit more of what you're seeing by end market? I mean, like where demand is holding in versus like areas that you've seen come in lighter as the quarter progressed again. I guess, outside of China - sorry, outside of pharma. And then I guess, a follow-up on Dan's question. I believe it was earlier. What are the variables within China, Mike that you're trying to account for as you forecast the medium term? I mean, maybe beyond just the next couple of months. And I guess any risk that we need to kind of rethink, the underlying growth rate in the industry if China remains light here in the medium term? Mike McMullen: Yes. So let me start with the view by end market. I think the academia and government market was - grew for us in the third quarter. But everything else was pretty much down. The big change really were in the pharma space. And as Bob commented earlier about how we exited the quarter, the July performance. Some weakness in chemicals, but I'd say the down there was really just a byproduct of - we're going off of 43% compared last year. And we're looking at a 70% growth compare in the fourth quarter. But I'd say the concerns or the cost of this in the China marketplace is really across the board. And with varying degrees, but I think it's really most reflected in the pharma outlook. I think that's a $64,000 question. I think there's a case to be made that this market will get back to its longer-term growth rates, but it will take a period of years to get there. It's not going to be a snapback in 12 months. But again, that's work to be done. The factors that we're looking at, I think are the same factors that everybody else is staring at, which is what's going to happen to the macro in China. Storyboard here is a macro story and is bleeding over into life science tools, but we need to see the China economy get moving again. We need to see consumer confidence coming back. We need to see investment commerce is coming back in China. I think those things will take some time. But I do think there are priorities of the government, and they'll find a way to make that happen. But we're not calling for a quick snapback here either. Josh Waldman: Got it. Appreciate guys. Operator: Thank you. We'll go next now to Dan Brennan at TD Cowen. Dan Brennan: Great guys. Thanks for taking the questions. Maybe just one on instruments, Bob, I think you talked earlier, I think to Derik's question maybe you gave the L segment, but I know there's consumables within that. Could you just break out what the instrument number is? I know we've got on the Q. Just wondering how instrument did and as we look ahead, I think given your instrument exposure, it's always a key question, I know there's been various times asked throughout, but just how would we think about kind of the outlook for instrument, whether it be fourth quarter, if you want to point to go out a little further? Robert McMahon: Yes. So to maybe add a little more flavor and clarity to my answer previously, LSAG was down 9% core. It was down 9% in instruments as well. So the consumables business was up basically a point. Dan Brennan: And as we look out there, I'm just wondering. I guess it's really depends upon that - the type of product, which you guys already discussed, it sounds like you're optimistic on LSAG given the funnel is going to get back towards that excuse me LCMS is going to get back to that 5% growth. I guess, would you assume instruments as a starting point growth in fiscal '24 for what you see today? Mike McMullen: Based on what we see today, yes. Dan Brennan: Got it. I mean one more, quick one just on - yes… Robert McMahon: There's no reason to believe when we think about kind of the level of investment over-time. And the importance of our instruments in the Discovery of new therapeutic areas or food testing, we think about as Mike was talking about these new areas around Applied Markets, there's no reason to think that there is something fundamentally has changed, that they don't need instrumentation. And so, I think we feel very good about our market-share and our good about our market-share, and our competitiveness and do expect our LSAG business to be a growth driver for us going forward. Yes, no completely. No, is this more just on the comp basis, after making… Dan Brennan: That sounds great. Bob and just one quick one, just on - the applied versus the chemical, you mentioned some chemical weakening just that were concerned during the quarter, but the applied obviously powering through. Can you just maybe unpack a little bit more how you're thinking about like how we exit the year across your different buckets within the chemical and applied segment? Robert McMahon: Yes. I mean, I think if you look at Q4, it will be really an impact of China. So we're actually looking at chemical and advanced materials declining in Q4, because of that 70% increase that Mike mentioned in Q4 of last year. That was across-the-board. I would say the advanced materials will be much stronger than that down high or down double-digits. And the chemical side, probably we will have a bigger impact. If you recall, the Shanghai shutdown impact was centered in the chemical and advanced materials market, because that's where our GC manufacturing was and that's a Workhorse for some of those products. So, we do see it down in Q4, but up for the full-year. I think that's a really important to make sure that people understand. Dan Brennan: Great, thank you. Operator: Thank you. And we have time for one more question this afternoon, we'll take that now from Luke Sergott at Barclays. Luke Sergott: Great. Thanks for squeezing me in. Mike McMullen: Hi Luke. Luke Sergott: Just real quick on the - thanks. So real quick on NASD. But are you guys seeing any pressure from the market, seeing any in-sourcing from the market? I know Novartis has talked about doing some of this as well. And then lastly additionally, with that with the CapEx guide down. Are you guys still investing in additional lines there for the year? Or is that really on pause is that have anything to do with that kind of CapEx stepped down? Mike McMullen: Let me leave it there. And then have Bob jump-in and Sam as well, but from in-sourcing standpoint. No, we're not seeing any material moves in this direction. And in fact as we head into '24, we continue to broaden our book of business and we're going to have more customers overhead in terms of breadth of customers as we go into '24. And yes, it's called Project Endeavor. So Train B we went live, which we had a different code-named. And that's live, but we continue to move forward with our expansion plans on the other front, siRNA front, along with what we like to do on the CRISPR side as well And antisense. So, we're going to broaden that. So our stated investment plans remain unchanged. Robert McMahon: Yes, to be very clear, Luke, to add what Mike said, we are not slowing that down at all. That investment is one of the highest priorities, we've trimmed back spending in another less more infrastructure kind of oriented projects as opposed to kind of revenue-generating. I think what you're seeing actually is it's actually coming in better-than-expected, because the pricing is better-than-expected and you probably have seen that in other places. And so, the availability of parts and the key materials is better than what we had initially planned as well. Sam Raha: Yes, I only add to what you guys said that Mike along with having more customers and actually more diversified set of customers, we're going to be we're contracted to do more programs next year than in the history of NASD. So it's a yes, all full-speed ahead. Luke Sergott: Got you. Got you. And then I didn't - hear anybody asked about the ACG margin, maybe they did I missed it, but you guys had a material step-up there, can you talk about really what went on there, is that - is there any benefit that you saw from Mike lack of incentive comp just kind of break-out, where the drivers there and really how we should think about that in Q4, and as a jump-off point? Mike McMullen: Yes, we did mention that there was a benefit, Luke, of the variable pay comp, obviously, that's got a big component of people in it, but it's also a reflection of the scale and - continued growth of that business. We didn't say take that 32% I believe it was in Q3 and kind of book that as the new starting point. Because it had outsized growth. But we continue to be pleased and expect continued margin expansion for ACG going-forward. Luke Sergott: All right, great. Thank you. Operator: Thank you. Ladies and gentlemen, at this time I would like to turn things back to Parmeet Ahuja for any closing comments. Parmeet Ahuja: Thanks Bo, and thanks everyone for joining the call today. With that, we'd like to end the call. Have a good day everyone. Operator: Thank you, Parmeet. Ladies and gentlemen, this does conclude today's call. Thank you for joining. We wish you all a great day. Goodbye.	[ { "speaker": "Operator", "text": "Ladies and gentlemen, welcome to the Agilent Technologies Q3 2023 Earnings Conference Call. My name is Bo and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja. Parmeet, please go ahead." }, { "speaker": "Parmeet Ahuja", "text": "Thank you, Bo, and welcome, everyone, to Agilent's conference call for the third quarter of fiscal year 2023. With me are Mike McMullen, Agilent President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our third quarter financial results, investor presentation and information to supplement today's discussion along with a recording of this webcast are available on our website at www.investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted currency exchange rates. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now I'd like to turn the call over to Mike." }, { "speaker": "Mike McMullen", "text": "Thanks, Parmeet, and thanks, everyone, for joining our call. In today's call, I'll walk you through our Q3 results, share what we're now seeing in the market and provide context for our revised full year outlook. I'll then turn things over to Bob for more detail on the quarter and outlook before returning for some brief closing comments. The Agilent team continues to execute well as we navigate our way through ongoing challenges of the current market environment. Our Q3 revenue was $1.67 billion at the top end of our expectations. This is a decline of 2% on a core basis against a tough compare of 13% in Q3 of last year. We continue to be proactive and are taking steps to help us deliver on our leveraged earnings model. Operating margins are 29.3%, up 180 basis points. Quarterly earnings per share of $1.43 are up 7% and above our expectations. The major drive behind our Q3 year-on-year decline in revenue is our China business. Excluding China, the rest of Agilent grew 2%, which was better than expected. We knew we're up against a difficult compare in China and had previously guided for lower China revenues in Q3. However, the economy in China continued to weaken during the quarter, translated into a more challenging market environment than we had anticipated. With the softer market conditions in China and continued global macroeconomic challenges, we have lower growth expectations for the remainder of the fiscal year. We now expect core growth for the full year to be around 1%, down from our previous guide. Based on what we're seeing at this time, we're not assuming any improvement in the China market for the remainder of the year. We, however, view the near-term challenges we're experiencing as transitory and remain confident about the long-term growth prospects of our end markets. Before turning now to our third quarter results, I'd like to touch on our two largest end markets. Our total pharma business is down 8%, driven by the pharma market in China being down 30%. Within pharma, our biopharma business grew 5%, while small molecule was down 16%. The Chemical Advanced Materials market declined 3% versus a 22% increase last year. While we did see the chemical energy space being weighed down by macro concerns, slowing growth in Advanced Materials was more a function of a difficult compare as the volumes have remained steady and robust. Looking at our performance by business unit. The Life Science and Applied Markets have delivered revenues of $927 million. This was a decline of 9% of a very tough compare of 18% growth. Last year's growth was helped by the benefit of recovery from the Q2 2022 Shanghai shutdown. LSAG's performance continues to be affected by the market environment in China across all end markets and pharma globally. Our sales funnel remains healthy and are up year-on-year, but deal velocity continues to slow as customers remain cautious in making capital purchases. We expect this market environment for new instrument purchases to continue for the rest of the year. At this time, we are not assuming any benefit from a year-end budget flush or incremental stimulus in China. As we said before, we are continuing to prioritize invest in innovation. As an example, in June, Agilent's investment innovation were on full display at the Annual ASMS Conference. The LSAG team introduced new products and comprehensive workflows to enhance data quality and productivity for our customers. These include two new LC/MS systems, a new PFAS workflow solution and an AI software for data analysis, among others. The Agilent CrossLab Group posted revenues of $396 million. This is up an impressive 11% core with growth in all regions and end markets, as customers continue to embrace our value proposition. We continue to see strong demand for our services as we help customers drive productivity in the lab. The Diagnostics and Genomics Group delivered revenues of $349 million, up 3% core. Pathology grew high single digits as demand for our diagnostic test continues to grow. Our NASD business grew high teens. This growth was partially offset as we are continuing to see market weakness for our Genomics and Resolution Bioscience businesses. Regarding resolution Bioscience, the market for kidded NGS-based companion diagnostics has not developed as we expected. Furthermore, we don't see a realistic path to profitability. As a result, we've made a difficult decision to shut down the business. However, our investments in future growth continue. For example, we achieved an important milestone during the quarter when our NASD business generated the first revenues from our Train B investment in Frederick, Colorado. Now looking forward for the company, as we navigate this challenging macroeconomic environment, we remain confident in the Agilent team and our ability to continue driving leverage earnings growth, use our agile Agilent framework. We faced challenges before, and we're taking actions now that will make us stronger and position us well for the future. As we stated last quarter, we are doubling down on delivering cost efficiencies and increasing productivity. The goal is to generate additional cost savings so we can continue to invest in innovative new solutions and support for our customers as we enable future profitable growth. We are on track to achieve the cost savings we've targeted for the second half of this year. We are in attractive markets that will produce long-term growth. Our innovation engine remains strong and the battle test at One Agilent team is driving outstanding execution. Bob and I will provide the details on our results as well as our outlook for the remainder of the year. After Bob delivers his comments, I will be back to provide some closing remarks. And now, Bob, over to you." }, { "speaker": "Robert McMahon", "text": "Thanks, Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter as well as take you through the income statement and other key financial metrics. I'll then finish up with our updated guidance for the full year and our fourth quarter outlook. Unless otherwise noted, my remarks will focus on non-GAAP results. Q3 revenue was $1.67 billion, a decline of 2.3% core and down 2.7% on a reported basis. This compares with 13.2% core growth last year. Currency was a 0.5 point headwind while M&A contribution was minimal. As you may recall, Q3 of last year benefited from roughly $35 million in revenue deferred from the second quarter as we ramp back up from the Shanghai shutdown in China. Accounting for this, our Q3 core growth would be roughly flat versus a year ago. As Mike mentioned, Pharma, our largest end market, declined 8%. This is in line with our reduced expectations coming out of Q2 with underperformance in China, offset by better performance in the rest of the world. The Chemicals and Advanced Materials market was down 3% off a very tough 22% compare, but dollar-wise was flat sequentially. The academia and government market was up 5% and with all regions showing growth except the Americas, which was flat. Our business in the diagnostics and clinical market grew 3%, driven by high single-digit growth in pathology, partially offset by genomics weakness. The environmental and forensics business grew 2%, driven by double-digit growth in the Americas and Europe. The growth was generated by the build-out of water infrastructure projects and an expansion of funding for PFAS-related activities. The food market grew 1% based on strength in Asia outside of China and mid-single-digit growth in Europe, driven by new food testing regulations. On a geographic basis, while China underperformed, the Americas and the rest of Asia were better than expected, while Europe was in line with our expectations. Moving down the P&L. Third quarter gross margin was 56.3%, down 10 basis points from a year ago. Like last quarter, this was largely due to the product and services mix, and pricing was slightly better than our expectations. Below gross margin, the expense reduction actions we initiated in the second quarter helped strengthen operating margins. We also benefited from a reduction in variable pay expenses. As Mike mentioned, margins were 29.3%, up 180 basis points from last year. Below the line, our interest income was higher than planned, while our tax rate was 13.75% and we had 295 million diluted shares outstanding. Putting it all together, Q3 earnings per share were $1.43, up 7% from a year ago, a very good result given declining revenue. Now let me turn to cash flow and the balance sheet. I continue to be pleased with our cash flow generation this year. Cash flow from operations was $562 million in the quarter, and is $1.3 billion year-to-date. In Q3, we invested $81 million in capital expenditures, totaling $214 million year-to-date, effectively flat year-on-year as we continue to optimize our CapEx spending. Given the strong year-to-date results, we are increasing our free cash flow forecast for the year to $1.2 billion, comprised of operating cash flow of $1.5 billion and CapEx of $300 million. This is an increase of $250 million from the midpoint of our previous guidance. Despite the challenging macroeconomic conditions, our balanced capital allocation strategy is intact. During the quarter, we returned $401 million to shareholders. $66 million through dividends and repurchase shares worth $335 million. This ongoing balanced approach to capital deployment is another example of the confidence we have in our team and our belief in the long-term strength of our markets. Before getting into the revised full year outlook, I want to mention we have taken a $291 million pretax charge in Q3 associated with the decision to shut down the Resolution Bioscience business. This charge, which is excluded from non-GAAP results, includes an impairment write-down along with charges associated with the wind-down and exit of the business. We expect the wind down to continue through Q4 and into early FY '24. Now to the revised outlook for the year in Q4. Given the more challenging macroeconomic environment we are seeing, particularly in China, we now expect full year revenue to be in the range of $6.80 billion to $6.85 billion. This represents a decline of 0.7% to flat on a reported basis and core growth of 0.8% to 1.5%. This is a core growth reduction of 260 basis points from the midpoint of our last guide. Roughly 85% of the change is related to reduced expectations in China while the remainder is due to some incremental cautiousness from our customers on CapEx spend as well as softness in genomics and the shutdown of Resolution Bioscience. As Mike said earlier, we are not assuming any incremental stimulus in China or any material year-end budget flush in these revised projections. Given the large change in China, I wanted to provide some additional perspective on how we are forecasting the rest of the year, recognizing that the market continues to be very dynamic. To provide some context, in Q3 through June, our business in China was tracking to a mid-single-digit decline in revenue, which was in line with our expectations. However, in July, we saw a further deterioration in China, resulting in the 17% decline for the quarter. And while the Q3 decline in China was centered in pharma, which was down 30%, we did see weakness in the other end markets as well. We expect the conditions we've seen in July to persist in China for Q4. In addition, we are facing our most difficult quarterly compare in China, where we grew 44% in Q4 of last year. We are now expecting Q4 to decline in the mid-30s year-on-year. For the full year, we are expecting China to decline mid-single digits versus growing mid-single digits. With the change in revenue, we now expect full year fiscal 2023 non-GAAP earnings per share to be between $5.40 and $5.43, representing leveraged earnings growth of 3% to 4% and roughly 6% to 7% growth net of currency. The change in full year guide results in Q4 revenue being in the range of $1.655 billion to $1.705 billion. This represents a decline of 8% to 10.5% on a reported basis and a decline of 9.5% to 12% on a core basis. The recovery last year in Q4 of the remaining revenue deferred from the Shanghai Q2 shutdown negatively impacts the year-on-year results by roughly 1 point. In fourth quarter, non-GAAP earnings per share are expected to be between $1.33 and $1.36. Thanks for being on the call. And now I will turn things back over to Mike for some closing comments before taking your questions. Mike?" }, { "speaker": "Mike McMullen", "text": "Thanks, Bob. While today's macroenvironment is challenged for new instrument purchases, we remain confident in the long-term growth prospects of our end markets, the diversification of our business and in our proven ability to grow faster than the market. I'd like to share a few examples why my confidence remains intact despite near-term challenges. In Pharma, our largest end market, innovation and advance of medicines continue with new therapeutics flowing into the market. The demographic drivers of this market are on our side, a growing global population that expects access to health care and extending life expectancy to be key priorities from their governments. Our market-leading solutions are critical to innovation behind new therapeutics and ensuring the safety and quality of on-market drugs. In the applied markets, growing PFAS testing and the electrical vehicle transition are here to stay, action in new opportunities for growth. Everyone wants to have a safer water to drink, food to eat and air to breathe and the search for and production of more sustainable materials and energy sources remains a global priority. Agilent is a diversified leader in a unique position to help our customers drive their solutions. We remain a trusted partner, our customers though they can rely on in both good and challenging times. Our combination of leading instrumentation and world-class customer support is a long-term competitive advantage. At the heart of this long-term competitive advantage is the Agilent team and the One Agilent culture. You see this reflected in a recent recognition on Glassdoor and in being named A Great Place to Work in all 27 countries and territories around the world where we qualify for certification. We have a company mission focused on advancing the quality of life. To learn more about this, I would encourage you to review the latest addition of the ESG report that we issued last month. We have proactively managed the company through the short term, always with an eye towards our customers and in the long term. We have been proactive in managing our business to drive leveraged earnings but not at the expense of customer satisfaction and future growth. Yes, these are challenging times, but we have the team, the strategy and the right culture that would deliver long-term success. Thank you for joining us today. And now over to you, Parmeet, to lead the question-and-answer session. Parmeet?" }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Mike. Bo, if you could please provide instructions for the Q&A now." }, { "speaker": "Operator", "text": "Thank you, Parmeet. [Operator Instructions] We'll go first this afternoon to Matt Sykes at Goldman Sachs." }, { "speaker": "Matt Sykes", "text": "Hi. Good afternoon. Thanks for taking my questions. I thought maybe I'd start just with China, sort of a high-level question. You guys talked about sort of the transitory impact of the current environment. You mentioned pharma. Could you kind of extend those comments to China? Do you think it's more cyclical versus structural? Are there competitive issues that you're facing or just your outlook on that region? Thanks." }, { "speaker": "Mike McMullen", "text": "Yes, Matt, thanks for the question. So let me start with the last part of your question. This is a macro story, not a competitive story. So market shares continue to be very, very strong. I know there's a lot of discussion about increased local competition, but we've moved pretty aggressively on our made in China strategy. So we don't see that all as a competitive issue. Transitory, the comment there is really about the fact that the China market is not going away. It's going to be a big market for years to come. It clearly is challenged right now. And we're not -- we're taking a sort of one quarter at a time, actually month by month. And as Bob mentioned in his comments, I think July, we actually saw the weakest performance within the quarter, and we're still seeing weakness in the pharmaceutical industry, for example, the level of manufacturing declined pretty specifically in the month of July. So we think the market is going to be there, but it's going to take a while for it to get back to growth. And I guess probably the other thing to point here is - and again, I'm talking specifically around the instrument side of the China market. As you know, we have a very large, in fact, the largest installed base of instrumentation in the marketplace. So very positive on the ability to grow the aftermarket in our diagnostics business. Probably anything you add to that? Okay." }, { "speaker": "Matt Sykes", "text": "Maybe just for my follow-up, just on ACG. So a good quarter in that business. And I know you guys talked about a year or two ago about sort of a goal of 30% plus margins obviously achieved this quarter. Can you maybe talk about sort of where you see the durability of that growth is sort of high single, low double, 30%-plus margins, how we should be thinking about the business? Or were there some one-offs in the quarter that you'd want to call out to kind of measure expectations there?" }, { "speaker": "Mike McMullen", "text": "Yes. We've consistently communicated that we think this is a high single digit, low double-digit kind of growth business for us. It's been that way since pretty much most of my tenure as CEO, and we don't see that changing as we go forward. Of course, there'll be puts and takes by quarter. But we're continuing to see good growth in our connect rates, which we've talked a lot about. And we're also doing very well on winning the enterprise business as well to complement the other aspects of our portfolio offerings. I would say that the profitability was probably a little bit higher in Q3 than - but we do think that the high double-digit number you quote about is pretty manageable for that business, but not at the level we saw in Q3, right, Bob?" }, { "speaker": "Robert McMahon", "text": "Yes. Matt, this is Bob. And just maybe to further what Mike is saying, when we think about the components of that business, the fastest-growing component is actually the contracted business, which is that connect rate. And it was in the mid-teens this last quarter and continues to be faster growing than the overall business. And as long as we continue to be able to drive that increased attach rate, we feel very good about that. And that comes with - with that growth comes scale and being able to leverage our team with the work that the digital initiatives that we've had as well. And so as Mike said, don't book, I think it was 32% going forward because there were some variable pay true-ups. But certainly, what you've seen quarter in, quarter out is a nice, steady cadence of margin improvement there." }, { "speaker": "Matt Sykes", "text": "Got it. Thanks guys." }, { "speaker": "Operator", "text": "Thank you. We'll go next now to Jack Meehan at Nephron Research." }, { "speaker": "Jack Meehan", "text": "Thank you. Good afternoon." }, { "speaker": "Mike McMullen", "text": "Good afternoon, Jack." }, { "speaker": "Jack Meehan", "text": "Mike, I was hoping you could talk a little bit more about some of the more cyclical areas of the business in the CAM segment. Just what are you seeing from some of your chemicals customers. You've heard some conversation of budget cuts there. Are you starting to see that? Just how is your visibility into some of these cyclical areas?" }, { "speaker": "Mike McMullen", "text": "Yes. So as we've talked earlier - thanks for the question and Jack and comments and then have Jacob jump in on this one as well. But we look across the CAM, I'd say the Advanced Materials segment of that market, which we've communicated is more driven by secular trends and cyclical trends continues to hold up quite well. And by the way, also, I just want to point out we had a really tough compare, I think we grew 22% last year in Q3 in CAM. If we look at the chemicals and energy side of it, the energy side actually popped up a bit, particularly driven by the U.S. where we are seeing some weakness is in the chemical side where customers are looking at the macroeconomic environment and are slowing their capital investment there. So I'd say that kind of puts and takes. But I think in terms of the quarter, Bob, I think we came in right about where we thought we'd be in CAM and I'd say it's a mixed story in terms of different segments growing at different rates." }, { "speaker": "Robert McMahon", "text": "Yes. Before Jacob, maybe you can jump in. I think the one thing that I think is important is you really have story in China, which is its own and then the rest of the business. And so if you think about where Americas and Europe is, it's performed extremely well. And if you actually look - we mentioned this in the call, sequentially, the dollars actually were very stable. And so we are expecting a challenging Q4, mainly because we grew 70% in China." }, { "speaker": "Mike McMullen", "text": "43% in Q3." }, { "speaker": "Robert McMahon", "text": "Yes. So it's a compare situation. But this business continues to be very strong." }, { "speaker": "Mike McMullen", "text": "Do you want to make the comments on the Advanced Materials side of the house there, Jacob?" }, { "speaker": "Jacob Thaysen", "text": "Yes, I can say that. And Mike, I think you also started with that saying that we continue to see a lot of activities in that space, especially in the battery space, where, of course, there are also compares we are against, but there's still a lot of interest in that space, and we are doing very, very well. Semicon is also cycling down right now, but we are - we continue to see business in that space, but not as strong as we did last year." }, { "speaker": "Jack Meehan", "text": "Thanks Jacob. And my follow-up, I wanted to ask about margins. Just how you're thinking about some of the puts and takes for 2024. I think some of the cost savings you've talked about should extend to next year, should get some leverage out of NASD. But at the same time, some of the performance comp comes back and would think some of these top line pressures extend as well. I don't know, can you just talk about maybe relative to the LRP, how you're thinking about margins for next year?" }, { "speaker": "Mike McMullen", "text": "Bob, do you want to lead that one? Yes. By the way, one thing I'd add to that before Bob's, the specifics, Jack, is our decision on the Resolution Bioscience business so as part of the story for us next year in terms of margin expansion. So Bob?" }, { "speaker": "Robert McMahon", "text": "Yes. I would say that our view of leveraged earnings growth continues into '24. And so while we do have some things coming back to us, some of the actions that we've taken will continue to move into a full year for 2024. And quite honestly, that's kind of what we expect our job to be is to be able to drive that leveraged earnings growth." }, { "speaker": "Jack Meehan", "text": "Thank you, guys." }, { "speaker": "Mike McMullen", "text": "Welcome." }, { "speaker": "Operator", "text": "Thank you. We go next now to Vijay Kumar at Evercore ISI." }, { "speaker": "Vijay Kumar", "text": "Hi, guys. Thanks for taking my question. Good job on the margin execution here, Mike. Mike, maybe I missed some of the comments here. Can you talk about the phasing in the quarter here in China? I think I heard when you start off down mid-singles and was July off like minus 25%, minus 30%, is that the exit rate?" }, { "speaker": "Mike McMullen", "text": "Yes. We take a change within the quarter." }, { "speaker": "Robert McMahon", "text": "Yes, Vijay, this is Bob. Your math is in the ballpark. Yes. So we were down mid-single digits through June. So May and June kind of tracking as we expected, and then we saw incremental weakness in July, and we ended up for the full quarter down 17%. And what we're assuming going into Q4 is that, that performance will continue into Q4. And given the tough comp that we have because I think we grew 44% in Q4 of last year, we're estimating roughly a 35-ish percent drop in Q4 in China." }, { "speaker": "Vijay Kumar", "text": "Sorry. That's helpful, Bob. And just -- sorry, where I was going with that question was, can you talk about capital versus recurring? And I think when I look at your Americas in Europe, America is just flattish. Do you see a similar sort of phasing in ex-China, maybe talk about exit rates in July?" }, { "speaker": "Robert McMahon", "text": "So actually, if you think about the ACG business, actually ACG grew in all regions and all end markets, inclusive of China. So there wasn't a change there. And I would say both in the Americas and Europe, we didn't see that same effect." }, { "speaker": "Mike McMullen", "text": "Yes. And overall, outside of China, the geographic performance was better than expected." }, { "speaker": "Robert McMahon", "text": "Correct." }, { "speaker": "Mike McMullen", "text": "We saw no trends like the China trend in our other geographies." }, { "speaker": "Vijay Kumar", "text": "That's helpful, Mike. And Mike, maybe one that you mentioned a couple of times on transitory. I think that's a new firm that you're using -- what have you heard -" }, { "speaker": "Mike McMullen", "text": "I think I move away from prudent to transitory." }, { "speaker": "Vijay Kumar", "text": "Yes. What have you guys heard on the ground on China stimulus, maybe some positive commentary, but nothing is concrete and why use the word transitory is the implication here fiscal '24 should be a more normalized year when we look at the comps?" }, { "speaker": "Robert McMahon", "text": "Yes. So, a couple of thoughts here, I think relative to the China business, we're hearing similar things, but nothing really significant and there's not enough to go onto assume we have kind of material impact on our outlook for the rest of the year. When we talk about transitory, we talked about the fact that these markets are driven by investments to improve the human condition as I mentioned. They're not going to go away. And neither while we're not going to get into the specifics of an actual number, we actually see a path to growth next year for full year for Agilent. And of course, we have the tough compare the first half of next year, we did coming off a double-digit print for first half this year, but as we looked at our business keep in mind, we're - what's behind my thought process here which is - we're instrument company, yes, we have big instrument business around 60%, we have a 40% of those in recurring revenue business. I don't know if you caught it in Mike call script, but our sales funnel for instruments are actually growing. So that would say that at some point in time those budgets are going to be released and the orders will close, when I've seen deals come out of - the funnel. We're not seeing order cancellations, we're not seeing changes to our one loss ratio. And we're encouraged by the growth we're seeing in biopharma. On the small molecule side, we know that different rates of replacements during the cycles, but we think this will follow historical cycle. I think the real wildcard for us, we look forward into '24, is really what do we assume around the China market. We're not assuming any kind of major further degradation, but at the same point in time, it's the path to return to kind of historic growth rates. That's the open question right now." }, { "speaker": "Vijay Kumar", "text": "Understood. Thanks, guys." }, { "speaker": "Operator", "text": "We'll go next now to Dan Leonard at Credit Suisse." }, { "speaker": "Mike McMullen", "text": "Hi, Dan." }, { "speaker": "Dan Leonard", "text": "Thank you. Hi, Mike. I wanted to follow-up on that last part. You've seen a lot of cycles in China over 30 plus years. What would you compare this to and how do we get out of it?" }, { "speaker": "Mike McMullen", "text": "I am as old as the dirt and have been working in this marketplace since the mid-90s. I haven't seen a cycle like this before. And we've not seen a situation where the - there's really seem to be a lack of confidence right now in the macro economy. Now, look I'm not sharing - anything that the audience here doesn't fully understand already. So, the way we get out of this, I think is China led by the government. We'll get back to focusing on its long-term goals of making China an innovation driven economy, which will require continued investments in R&D. It's going to also get back to focusing on improving the health of - the population, addressing some of environment issue, so we think it's getting back to fundamentals. Yes, we think that eventually will occur, but there's a lot of issues that we may be work through within the China right now. But - it's a very large market, the market is not going to disappear. And I think there'll be investments. I think there's also needs to be a level of confidence in the private sector in China, that it's a good time to reinvest and maybe I shouldn't wait on the sidelines hope for its stimulus, but get back to work and get my business going. So there's a lot of dynamics. I really have to say though, I don't know if I have a comparable situation that we've been through for this long. I think Bob and I were talking earlier today. The change in the food ministry, a number of years ago is - was the biggest thing we've seen or 24 plus seven some of the biggest things we've seen a change, but this is much more of a macro economic issue in China, which is different than what we've seen before. Obviously, we have an impact on life sciences tool, but it's a much bigger macro story is really driving the softness right now in our markets." }, { "speaker": "Robert McMahon", "text": "Yes. The only thing I would say, Dan to build on what Mike was saying is, as he mentioned, the demographics are with us when you think about the aging population, the need to actually access healthcare more important therapeutics, and the importance of ensuring the water and food supply. They are the world's leaders today in electric and clean energy. It's hard to believe when everyone thinks about that. But they are the leader, and they have more electric cars than any other region. And so, I think that investment is going to be key as Mike talking about from the government, but unless they changed their strategic priorities, I think that's the benefit for life sciences in general." }, { "speaker": "Dan Leonard", "text": "I appreciate all that perspective. And just a follow-up. I was hoping you could elaborate on your decision to shut down Res Bio. I was surprised by that, given that you acquired the company only a couple of years ago?" }, { "speaker": "Mike McMullen", "text": "Yes, sure Dan. Happy to do so. So obviously, a very difficult decision, then I'll have Sam jump in on this conversation, but our fundamental belief was that our differentiation will be all around what we called the kitted strategy to have a distributed on market companion diagnostics for our pharma partners, and that market really hasn't developed as we had anticipated. Sam?" }, { "speaker": "Sam Raha", "text": "Yes, Mike. Building on what you said, while NGS and cancer diagnostics is here and we serve that market in a number of ways, right, for just to be clear, too. We absolutely continue to serve cancer research translational research and diagnostic, test developer customers. But our core to our thesis, our differentiation is really the ability to develop and distribute these kitted tests in the market, the pharma market and the testing market just as evolve that way. And we also looked at our recent analysis and concluded that even with more additional investment, this is going to be a business that's going to be undergoing significant losses for some foreseeable future, so. It was a difficult, as Mike said, that the right decision to make this move now. But again to be clear, we continue to serve cancer research and diagnostics in a number of ways." }, { "speaker": "Mike McMullen", "text": "Yes. I think - Sam, when we've talked about this in the past. So, we think we're still going be able to participate in what we believe the strong growth of liquid biopsy market. But to really providing a lot of the - if you will, ingredients for the test developers for themselves." }, { "speaker": "Sam Raha", "text": "Here and Mike. I'm going to take this opportunity to also just to say beyond our core SureSelect Target Enrichment portfolio which is used broadly for liquid biopsy testing today. Early next year, we'll be launching solutions from Avida BioMed, an acquisition that we announced earlier this year, which we think is really going to be a differentiated way to look at methylation, as well as classic mutation analysis." }, { "speaker": "Robert McMahon", "text": "Yes. Maybe just one add, Dan, is obviously a difficult decision for us, but I also think it also looks - it shows the discipline that we have in terms of our portfolio rationalization, and we felt we had better returns in other places to invest in so." }, { "speaker": "Dan Leonard", "text": "Understood. Thanks for the time." }, { "speaker": "Mike McMullen", "text": "You're welcome." }, { "speaker": "Operator", "text": "We'll go next now to Brandon Couillard at Jefferies." }, { "speaker": "Brandon Couillard", "text": "Hi, guys. Good afternoon." }, { "speaker": "Mike McMullen", "text": "Good afternoon, Brandon." }, { "speaker": "Brandon Couillard", "text": "Mike would you just find packing mass spec versus LC trends in the quarter? And then based on your revised guide, what is the four-year CAGR from 2019 for LSAG instruments exiting the year? How does that compare to historical average over the cycle?" }, { "speaker": "Mike McMullen", "text": "Hi Brandon, I'm going to start with the response to your question. I'll let Bob dig through his notes to find the actual number. But first of all, I just started to say, is that we believe what we're dealing with here in our core instrument portfolio, inclusive of LC and LCMS continues to be a macro market story. Our market shares are holding up really well. We're seeing in our one loss data. We're seeing it in the external reports from order. And I think when we look at our performance in those core platforms versus our peers, we're reporting some numbers and kind of adjust for the timing of when we report. I think we're putting up similar kind of numbers. And Jacob, I know you looked at this thing pretty closely and I'm trying to buy some time for Bob to check down the..." }, { "speaker": "Jacob Thaysen", "text": "We're trying to find the CAGR the last three years, which I don't have in front of me here, but you're right Mike, we follow this very accurately. And we're doing - we continue to do very well in this marketplace. We continue to innovate into it. And we have seen - actually, we have taken share over the last period of time. And if you actually compare our calendar two versus competition, would actually see that we are approximately flat in the LC, LCMS space. And I think that stacks up very well versus competition." }, { "speaker": "Robert McMahon", "text": "Yes, hi Brandon, we can get that to you afterwards." }, { "speaker": "Brandon Couillard", "text": "Okay." }, { "speaker": "Robert McMahon", "text": "I can tell you though, if you looked at the LSAG business over the last three years, it's been averaging 5% CAGR, despite being forecasted to be down this year. And obviously, those are two large businesses." }, { "speaker": "Brandon Couillard", "text": "Okay. And then I guess, two housekeeping questions for you, Bob. You talked about NASD growth in the third quarter? I imagine it might have been up sequentially with Train B coming online and on the CapEx line. You pushed out $200 million you spend in that. Just roll into '24? There are some projects maybe you decided to defer from the time being - the environment?" }, { "speaker": "Robert McMahon", "text": "Yes, it's a great question. So NASD, we continue to be very pleased with that. We had our first revenue in Q3 from Train B, the first of many more revenues to come from that standpoint, and expect it to continue, and we're still on track for the numbers that we've been talking about through 50-plus for the full year. And in terms of the CapEx, some of that will roll forward, but it's not - we're not going to spend that $200 million in '24 as well. This would be - we have deferred projects being very rational, really focused on revenue-generating programs. And so, I do expect some of that will flow into '24, but I don't expect '24 to have an incremental $200 million show up in the forecast." }, { "speaker": "Brandon Couillard", "text": "Got it. Thank you." }, { "speaker": "Operator", "text": "We'll go next now to Puneet Souda at Leerink Partners." }, { "speaker": "Puneet Souda", "text": "Hi Mike, Bob. Thanks for taking the questions." }, { "speaker": "Mike McMullen", "text": "Sure." }, { "speaker": "Puneet Souda", "text": "The first one, thanks. So maybe, Bob, could you elaborate a bit on pricing here? I know pricing was a meaningful contributor initially this year. We're seeing China, obviously, you talked quite a bit about it, and we're seeing the headline for China deflation. So wondering if you are expecting pricing to maintain there, or do you expect pricing pressure in China continuing? And also, we're seeing some of the peer sort of bioprocessing companies talking about local competition rising on the less high tech product. And so wondering if you're seeing that on any of - sort of your product lines as well?" }, { "speaker": "Robert McMahon", "text": "Yes. Let me take the second question first. We can compete against the Chinese local competitors each and every day. And nothing has changed from that standpoint. We continue to feel very good about our portfolio, and continue to drive that growth. In regards to pricing across the board, we were slightly better than what we had expected. It was roughly over - a little over 4% for the quarter. And that was driven across all three of the groups. So we continue to drive - positive price across not only our DGG and ACG business, but also our instrumentation and that's globally. And we expect to be able to continue to demonstrate the value of our instrumentation across the globe. Obviously, in a deflationary environment, that will put a little more pressure on the instrumentation business, particularly in China but we've incorporated that into, our forecast and are still on track for positive price contributions, for the full year in excess of 3%." }, { "speaker": "Mike McMullen", "text": "Hi Bob, maybe Bob or Padraig and also going to maybe comment on some discounting trends he may have been seeing?" }, { "speaker": "Padraig McDonnell", "text": "Yes. No, I think - no, I think it's the pricing holds discounts has really held stable as well. We haven't seen any - increase in that rate of it, and we continue to monitor that, but it's been very stable, Mike." }, { "speaker": "Puneet Souda", "text": "Got it. Thanks for that. And then if I could ask an academic and government here, smaller segment for you, but it did solid in the quarter. Maybe could you talk a little bit about what you're seeing across the globe in different geographies for academic and government and your expectations here going forward? Thank you." }, { "speaker": "Mike McMullen", "text": "Yes, Bob, I think this is an end market that is holding up reasonably well. I mean we're seeing that on a global basis, in most cases, with the exception being China, where the funding is there, the funding is stable. And it's been a positive surprise for us so far through this year. And I don't..." }, { "speaker": "Robert McMahon", "text": "No, it's really across many of our instrument platforms as well as the service business. And from what we're seeing, Puneet, is funding continue to be available, and it's flowing from governments. I think they're seeing the strategic nature of many of the investments that they're making. And our expectation is that, that funding will continue." }, { "speaker": "Puneet Souda", "text": "Got it. Super. Thank you." }, { "speaker": "Mike McMullen", "text": "You're welcome." }, { "speaker": "Operator", "text": "We'll go next now to Rachel Vatnsdal at JPMorgan." }, { "speaker": "Rachel Vatnsdal", "text": "Good afternoon. And thank you for taking the question. So first off, one of your peers have flagged that they were actually seeing some early signs of pharma spending recovery I appreciate that most of the incremental this quarter, is really related to the China weakness. So maybe ex-China, can you walk us through if you're seeing any signs of recovery of spending with biopharma customers. And then you've previously flagged for us that historically, when pharma spending slows down, like we're seeing today that it can take 12 to 24 months to recover. So how are you thinking about the timing, and recovery given the incremental weakness this quarter?" }, { "speaker": "Mike McMullen", "text": "Sure, Rachel. So while we saw signs of stabilization in our European and U.S. business stabilization relative to expectations. We're not hearing anything along those lines yet in terms of recovery or desire to increase spending, the fact we're hearing the exact opposite right now from our large major pharma companies. So, I hope that commentary from others in this space is correct. And there's going to be a big recovery here from year-end, but we're not seeing any kind of indications of that. If it does happen, great. It would be upside relative to our current outlook, and we know we do well in these markets. But Padraig, I don't think we're seeing and hearing anything like along those lines." }, { "speaker": "Padraig McDonnell", "text": "No, I think it's spot on, Mike." }, { "speaker": "Robert McMahon", "text": "The only thing I would say, Rachel, is if we look at our funnels, they continue to be growing. So it's a question of when, not if, and particularly in pharma. And as Mike and Padraig just mentioned, we're not assuming a budget flush into our Q4. And if it happens, that would likely happen in our Q1 in any event, from a revenue perspective. But what we see at least from our funnels, is they continue to be helping. And let me just answer Brandon's question from a couple of times ago. If I look at LC and LCMS on a three-year CAGR, they're between 7% and 9%, so higher than the overall LSAG average." }, { "speaker": "Mike McMullen", "text": "Right. Thanks for that and Bob. And Rachel, I think the second question relative to - I think you're referring to the small molecule replacement cycle. And as you know, coming probably at least for the last 12 to 18 months, we had been indicating that we were expecting to see a slowdown in the rate of replacement. And in fact, we've seen that occur this year. Actually, given the weakness in China even beyond our expectations with a minus 16% number overall in the quarter. That being said, we do stay with our view that these tend to be 18 to 24 months, 12 to 18-month cycles, and we'd expect that they'll start to see movement back towards a higher growth rate. And that's one of the reasons as we look into '24, we're saying some of these markets will start to turn as - the base cycle gets back to more of a growth phase in that cycle. And as we've mentioned earlier, we see that particularly in liquid chromatography is probably about a five percentage kind of growth market long-term." }, { "speaker": "Rachel Vatnsdal", "text": "Great. Thank you for all that color. Maybe just following up on your small molecule comments there. So small molecule declined 16% this quarter. So can you talk to us about how much of your China exposure is really tied to those small molecule workflows? And then what else is really driving incremental weakness on the small molecule side? We've heard of IRA pressuring some pharma decisions and potentially leading to them reprioritizing the pipeline. So is there any risk that you won't see a recovery? Or could the growth rate for small molecule really be reset in? What are your conversations with customers on that trend? Thank you." }, { "speaker": "Mike McMullen", "text": "Okay. So you got it. So relative to China, I would say it's probably the same ratio as the global business, right? That's probably what 60%, 65%?" }, { "speaker": "Robert McMahon", "text": "Yes." }, { "speaker": "Mike McMullen", "text": "Is probably related to a small molecule. And relative to what's happened in large pharma, what we're seeing is in medium-sized pharma is, again, a continuation of this cautious about deferring capital. I'm sure they're thinking through implications of iRNA also other expenses are running hotter in their P&Ls where they need to make some offsets with capital purchases. That being said, if you believe, and I know pharma believes the importance of having safe on-market drugs. You have to have the instrumentation QA/QC environment to support that. That requires you to have modern liquid chromatography fleets. So, I don't think it's a question that they can - that this market is going to go away and won't be an area that the pharma will need to invest in. You can defer for a period of time, but then only last for so long." }, { "speaker": "Operator", "text": "Thank you. We'll go next now to Patrick Donnelly at Citi." }, { "speaker": "Patrick Donnelly", "text": "Hi guys. Thanks for taking the questions. Mike, maybe just given that commentary around the instrument cycle, you're not really seeing much improvement yet. Obviously, the China piece transitory, but certainly seems like it's going to linger. You only a couple of months in '24 for you guys here. How do you think about some of these impacts lingering in? I think you said there's still plans for growth next year, but it certainly sounds like some of the headwinds at least will linger into the first half, given some of those costs. I just wanted to talk through that top line setup given some of these headwinds lingering into next year?" }, { "speaker": "Mike McMullen", "text": "Yes. We still have a few more months so we finish off the fiscal year, and we'll give you our guide in November. And I think we'll know a lot more by then. But I do think we know that we'll be able to grow this company in '24. That said, I was very careful in my comments to make sure that there's a full year growth rate. We do expect the first half of the year to be a challenging year just from a comp standpoint to begin with, but also some of the things that we've been talking about today in the call, we don't expect a quick snapback to be occurring in the next quarter or 2." }, { "speaker": "Patrick Donnelly", "text": "Okay. That's helpful. And then I know you mentioned budget flush is still a little bit away from that at the calendar year event for pharma and other areas. Do you have any view at this point? It sounds like you guys are expecting to be a more subdued budget flush, but whatever you're hearing from customers would be helpful just to pull back a little bit more on that." }, { "speaker": "Mike McMullen", "text": "Yes, sure, Patrick, happy to do so, and then I'll invite Padraig to this conversation. I know he's been talking a lot to his team about this. But as I mentioned earlier, we're not really seeing any kind of indication of customers saying, hey, listen, I'm going to have money. I'm planning to spend it this way. In fact, we've seen the opposite where sometimes orders that we thought were closed to actually keep deferring and require more purchases. In fact, I think one story we heard was we probably 3x. Fondo CFO, approved it on the third go-around and the CEO overruled it. So we know eventually going to get that business. But this is kind of dynamics ever seen. So we're not seeing a lot of indications of a strong year-end budget flush. Again, we'd love to see the opposite happen, but we're not going to indication of that. And I don't if you have something to add there." }, { "speaker": "Padraig McDonnell", "text": "What we're hearing from the customers is that we're not planning on a budget flow through the end of the year, but we're - we will take the upside of corsa.com. I think I think one thing is really clear that the funnels are very strong, and it's there, but we're not seeing them to be released through a big push at the end of the year." }, { "speaker": "Mike McMullen", "text": "I think this comment, Patrick, on the funnel being strong and these funnels are actually growing is really important because this is one of the reasons why we think about full year outlook in '24. We know the business is there. It's just a question of when it's going to get -" }, { "speaker": "Padraig McDonnell", "text": "Yes. We watch very closely our win loss rates. And we haven't - we've seen them very, very stable -- we had a strong funnel, which is very positive over time." }, { "speaker": "Patrick Donnelly", "text": "Understood. Thank you, guys." }, { "speaker": "Operator", "text": "We'll go next now to Derik De Bruin at Bank of America." }, { "speaker": "Derik De Bruin", "text": "Hi. Good afternoon." }, { "speaker": "Mike McMullen", "text": "Good afternoon, Derik." }, { "speaker": "Derik De Bruin", "text": "A lot of what I wanted to ask has been asked, so I've got some cleanups here. Just did you give a specific instrument core growth number in consumables growth or number for 3Q and then sort of your all-in number for this year, what you're expecting?" }, { "speaker": "Robert McMahon", "text": "Yes. We didn't. LSAG for Q3 was down roughly 9% core. Consumables was up slightly." }, { "speaker": "Derik De Bruin", "text": "Got it. Thank you. So what's the revenue contribution for Res Bio in 4Q? And what do we need to pull out for 2024?" }, { "speaker": "Robert McMahon", "text": "Yes. So we've got a minimal number in Q4 as we wind down the business. And I would say it was roughly 1 point to a little over 1 point to the headwind to DGG going forward in FY '24." }, { "speaker": "Derik De Bruin", "text": "Got it. Okay. And so staying on the topic of M&A. I mean, you've done a couple of genomics deals, which haven't gone your way. And I'm just sort of wondering what's your thinking about deployment going forward? I mean valuations have obviously come in, industry is consolidating, you would say, but we have -- it's been relatively quiet across the space for the last 18 months. And so like how are you sort of thinking about capital deployment? And at what point do you decide you maybe want to buy -- start maybe doing even with the share prices, maybe doing some share buybacks. You sort of talk about your general capital deployment strategy at this moment?" }, { "speaker": "Mike McMullen", "text": "Yes. I think Bob alluded to it a bit in his prepared remarks, but we still are staying with our balanced capital allocation strategy, and you saw us in the market opportunistically on share repurchases given where we saw the share price setting that. In terms of our - an appetite for M&A, it remains unchanged given - despite the Resolution Bioscience decision. We knew that was a higher risk acquisition for us, early-stage company in hot area based on a really differentiating strategy that didn't want this to play out. But we've had some success in other aspects of our genomics acquisitions, including the AAT acquisition on the instrumentation side. So we're still out there looking. But as Bob mentioned, we take a disciplined approach to not only to how we view our internal choices and our internal business performance in terms of what's in the portfolio, but we'll also take that same lens, if you will, on how we look at M&A. So really, nothing has changed beyond the fact that this is more of a buyer's market. And companies with a strong balance sheet like Agilent, I think they're in a good favorable position to work on opportunities, but we're going to stay disciplined and not get caught up in what once was a value of a company, either in the private or public space." }, { "speaker": "Derik De Bruin", "text": "Just one more follow-up, if I may. What are your orders in liquid chromatography? How is your order book? Are you seeing orders increasing?" }, { "speaker": "Robert McMahon", "text": "Our order book was down, largely a function of China, but they were down year-on-year." }, { "speaker": "Derik De Bruin", "text": "Thanks." }, { "speaker": "Operator", "text": "Thank you. We'll go next now to Josh Waldman at Cleveland Research." }, { "speaker": "Josh Waldman", "text": "Hi. Thanks for taking my questions. A couple for you. First, Bob, can you provide more context on the puts and takes within the fourth quarter core organic growth guide? I guess maybe the assumptions by business unit. And then curious what areas or in markets outside of China seem to be like slowing real time that you're trying to reflect in the guide versus areas that maybe have stabilized or improving over the last few days." }, { "speaker": "Robert McMahon", "text": "Yes. So Josh, just real quick. When we think about kind of the Q4 implied guide, the big driver is China. As I mentioned, down roughly mid-30s and that really impacts a number of markets you can imagine, both AR and chemical and energy, which are - or chemical and advanced materials, which are the two largest markets in China. I would also say that the diagnostics and clinical is also down. We've seen that softness in genomics. And then obviously, the shutdown of Res Bio also impacts that business, and that's primarily a U.S. phenomenon. So we did see an impact in U.S. on that side. And then there's some puts and takes in other places, but those are the two big pieces for Q4." }, { "speaker": "Mike McMullen", "text": "But as I recall, I think 85% of the change was really China driven and bleeds over into pharma in CAM." }, { "speaker": "Josh Waldman", "text": "Got it. Okay. Then Mike, I guess, staying on China and a follow-up there. Can you unpack a bit more of what you're seeing by end market? I mean, like where demand is holding in versus like areas that you've seen come in lighter as the quarter progressed again. I guess, outside of China - sorry, outside of pharma. And then I guess, a follow-up on Dan's question. I believe it was earlier. What are the variables within China, Mike that you're trying to account for as you forecast the medium term? I mean, maybe beyond just the next couple of months. And I guess any risk that we need to kind of rethink, the underlying growth rate in the industry if China remains light here in the medium term?" }, { "speaker": "Mike McMullen", "text": "Yes. So let me start with the view by end market. I think the academia and government market was - grew for us in the third quarter. But everything else was pretty much down. The big change really were in the pharma space. And as Bob commented earlier about how we exited the quarter, the July performance. Some weakness in chemicals, but I'd say the down there was really just a byproduct of - we're going off of 43% compared last year. And we're looking at a 70% growth compare in the fourth quarter. But I'd say the concerns or the cost of this in the China marketplace is really across the board. And with varying degrees, but I think it's really most reflected in the pharma outlook. I think that's a $64,000 question. I think there's a case to be made that this market will get back to its longer-term growth rates, but it will take a period of years to get there. It's not going to be a snapback in 12 months. But again, that's work to be done. The factors that we're looking at, I think are the same factors that everybody else is staring at, which is what's going to happen to the macro in China. Storyboard here is a macro story and is bleeding over into life science tools, but we need to see the China economy get moving again. We need to see consumer confidence coming back. We need to see investment commerce is coming back in China. I think those things will take some time. But I do think there are priorities of the government, and they'll find a way to make that happen. But we're not calling for a quick snapback here either." }, { "speaker": "Josh Waldman", "text": "Got it. Appreciate guys." }, { "speaker": "Operator", "text": "Thank you. We'll go next now to Dan Brennan at TD Cowen." }, { "speaker": "Dan Brennan", "text": "Great guys. Thanks for taking the questions. Maybe just one on instruments, Bob, I think you talked earlier, I think to Derik's question maybe you gave the L segment, but I know there's consumables within that. Could you just break out what the instrument number is? I know we've got on the Q. Just wondering how instrument did and as we look ahead, I think given your instrument exposure, it's always a key question, I know there's been various times asked throughout, but just how would we think about kind of the outlook for instrument, whether it be fourth quarter, if you want to point to go out a little further?" }, { "speaker": "Robert McMahon", "text": "Yes. So to maybe add a little more flavor and clarity to my answer previously, LSAG was down 9% core. It was down 9% in instruments as well. So the consumables business was up basically a point." }, { "speaker": "Dan Brennan", "text": "And as we look out there, I'm just wondering. I guess it's really depends upon that - the type of product, which you guys already discussed, it sounds like you're optimistic on LSAG given the funnel is going to get back towards that excuse me LCMS is going to get back to that 5% growth. I guess, would you assume instruments as a starting point growth in fiscal '24 for what you see today?" }, { "speaker": "Mike McMullen", "text": "Based on what we see today, yes." }, { "speaker": "Dan Brennan", "text": "Got it. I mean one more, quick one just on - yes…" }, { "speaker": "Robert McMahon", "text": "There's no reason to believe when we think about kind of the level of investment over-time. And the importance of our instruments in the Discovery of new therapeutic areas or food testing, we think about as Mike was talking about these new areas around Applied Markets, there's no reason to think that there is something fundamentally has changed, that they don't need instrumentation. And so, I think we feel very good about our market-share and our good about our market-share, and our competitiveness and do expect our LSAG business to be a growth driver for us going forward. Yes, no completely. No, is this more just on the comp basis, after making…" }, { "speaker": "Dan Brennan", "text": "That sounds great. Bob and just one quick one, just on - the applied versus the chemical, you mentioned some chemical weakening just that were concerned during the quarter, but the applied obviously powering through. Can you just maybe unpack a little bit more how you're thinking about like how we exit the year across your different buckets within the chemical and applied segment?" }, { "speaker": "Robert McMahon", "text": "Yes. I mean, I think if you look at Q4, it will be really an impact of China. So we're actually looking at chemical and advanced materials declining in Q4, because of that 70% increase that Mike mentioned in Q4 of last year. That was across-the-board. I would say the advanced materials will be much stronger than that down high or down double-digits. And the chemical side, probably we will have a bigger impact. If you recall, the Shanghai shutdown impact was centered in the chemical and advanced materials market, because that's where our GC manufacturing was and that's a Workhorse for some of those products. So, we do see it down in Q4, but up for the full-year. I think that's a really important to make sure that people understand." }, { "speaker": "Dan Brennan", "text": "Great, thank you." }, { "speaker": "Operator", "text": "Thank you. And we have time for one more question this afternoon, we'll take that now from Luke Sergott at Barclays." }, { "speaker": "Luke Sergott", "text": "Great. Thanks for squeezing me in." }, { "speaker": "Mike McMullen", "text": "Hi Luke." }, { "speaker": "Luke Sergott", "text": "Just real quick on the - thanks. So real quick on NASD. But are you guys seeing any pressure from the market, seeing any in-sourcing from the market? I know Novartis has talked about doing some of this as well. And then lastly additionally, with that with the CapEx guide down. Are you guys still investing in additional lines there for the year? Or is that really on pause is that have anything to do with that kind of CapEx stepped down?" }, { "speaker": "Mike McMullen", "text": "Let me leave it there. And then have Bob jump-in and Sam as well, but from in-sourcing standpoint. No, we're not seeing any material moves in this direction. And in fact as we head into '24, we continue to broaden our book of business and we're going to have more customers overhead in terms of breadth of customers as we go into '24. And yes, it's called Project Endeavor. So Train B we went live, which we had a different code-named. And that's live, but we continue to move forward with our expansion plans on the other front, siRNA front, along with what we like to do on the CRISPR side as well And antisense. So, we're going to broaden that. So our stated investment plans remain unchanged." }, { "speaker": "Robert McMahon", "text": "Yes, to be very clear, Luke, to add what Mike said, we are not slowing that down at all. That investment is one of the highest priorities, we've trimmed back spending in another less more infrastructure kind of oriented projects as opposed to kind of revenue-generating. I think what you're seeing actually is it's actually coming in better-than-expected, because the pricing is better-than-expected and you probably have seen that in other places. And so, the availability of parts and the key materials is better than what we had initially planned as well." }, { "speaker": "Sam Raha", "text": "Yes, I only add to what you guys said that Mike along with having more customers and actually more diversified set of customers, we're going to be we're contracted to do more programs next year than in the history of NASD. So it's a yes, all full-speed ahead." }, { "speaker": "Luke Sergott", "text": "Got you. Got you. And then I didn't - hear anybody asked about the ACG margin, maybe they did I missed it, but you guys had a material step-up there, can you talk about really what went on there, is that - is there any benefit that you saw from Mike lack of incentive comp just kind of break-out, where the drivers there and really how we should think about that in Q4, and as a jump-off point?" }, { "speaker": "Mike McMullen", "text": "Yes, we did mention that there was a benefit, Luke, of the variable pay comp, obviously, that's got a big component of people in it, but it's also a reflection of the scale and - continued growth of that business. We didn't say take that 32% I believe it was in Q3 and kind of book that as the new starting point. Because it had outsized growth. But we continue to be pleased and expect continued margin expansion for ACG going-forward." }, { "speaker": "Luke Sergott", "text": "All right, great. Thank you." }, { "speaker": "Operator", "text": "Thank you. Ladies and gentlemen, at this time I would like to turn things back to Parmeet Ahuja for any closing comments." }, { "speaker": "Parmeet Ahuja", "text": "Thanks Bo, and thanks everyone for joining the call today. With that, we'd like to end the call. Have a good day everyone." }, { "speaker": "Operator", "text": "Thank you, Parmeet. Ladies and gentlemen, this does conclude today's call. Thank you for joining. We wish you all a great day. Goodbye." } ]	Agilent Technologies, Inc.	154,924
A	2	2,023	2023-05-23 16:30:00	Operator: Ladies and gentlemen, welcome to the Agilent Technologies' Q2 2023 Earnings Call. My name is Sarah, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja, to begin. Please go ahead. Parmeet Ahuja: Thank you, Sarah, and welcome, everyone, to Agilent's conference call for the second quarter of fiscal year 2023. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our second quarter financial results, investor presentation and information to supplement today's discussion along with the recording of this webcast are available on our website at www.investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Our guidance is based on forecasted currency exchange rates. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now I'd like to turn the call over to Mike. Mike McMullen: Thanks, Parmeet, and thanks, everyone, for joining our call. In our call today, I'd like to first cover our second quarter results. I'll then provide some insight into the recent market dynamics that we are seeing and how this has translated into lower expectations for the second half of this year. I'll then turn things over to Bob for more detail on the quarter and outlook before returning for some brief closing comments. In an increasingly challenging market environment, the Agilent team delivered very solid results in the second quarter. Revenues of $1.72 billion are up 9.5% core above our expectations with growth across all end markets and regions. Our results are driven by an innovative and broad portfolio, a differentiated customer experience and outstanding execution by the Agilent team. Operating margin for the quarter 25.6%, up 30 basis points. Earnings per share of $1.27 are up 12%. Highlights from an end market perspective include our two largest markets, pharma and chemicals and advanced materials performing very well in the quarter. Our pharma business grew 6% on top of 13% growth last year. Pharma was led by biopharma, which grew 16% driven by lab services, consumables and our NASD business, while small molecule declined 1%. In previous calls, we talked about the small molecule replacement cycle and that the exceptional double-digit growth rates we've seen in the past two years would eventually moderate, which is what we started to see this quarter. Our chemicals and advanced materials business delivered strong results once again growing 16%. The advanced materials segment grew more than 20% and the chemical and energy segment grew double digits. On a geographic basis, 32% growth in China exceeded our high expectations. While the compare was an easier one, even adjusting for the COVID lockdowns in Shanghai a year ago, we still achieved double-digit growth in China. In addition, Europe delivered 5% core growth, while Americas grew 3%, albeit against a tough compare of 13% a year ago. Looking at our performance by business unit. The Life Sciences and Applied Markets group delivered revenues of $968 million, up 10% core. Our strong results were aided by backlog conversion across our instrument platforms. Our LC and LCMS products continued to lead the way with 16% growth in the quarter with strength across all end markets. Continued demand for lab consumables led to 13% growth in that business as well. During the quarter, we added additional strength to our LCMS product line by acquiring e-MSion and their innovative electron capture technology. e-MSion technology allows researchers to develop biotherapeutic products more quickly for treating disease. Agilent's LSAG team continued to bring several innovative new products to market, including enhancements to our Bravo NGS automation, Cary UV-Vis and the cell analysis NovoCyte systems. Many of these enhancements are specifically focused on serving our customers in the biopharma market. The Agilent CrossLab Group posted revenues of $387 million. This is up 13% core driven by strong revenues from service contracts. ACG's growth was broad-based, representing ongoing resilient demand for our services. We continue to see many opportunities for future growth given our services portfolio. In particular, the benefits of our service offerings as they help customers drive productivity in lab are even more relevant in today's challenging environment. Our strong and trusted customer support is also helping us to drive share gains and acquire new enterprise customers. The Diagnostics and Genomics Group delivered revenues of $362 million, up 3% core. Strength in our pathology and NASD businesses drove growth, partially offset by general industry-wide weakness in genomics. NASD posted another strong quarter growing in the high 20s. Our Train B manufacturing expansion remains on track to come online later this quarter, while construction has already started on the next phase of expansion. Overall, we wrapped up Agilent's first half of fiscal 2023 with double-digit core growth in both revenue and earnings per share. However, continued macroeconomic uncertainty, coupled with stresses in the banking system have accelerated a more conservative approach from our customers across the globe. This has primarily affected CapEx-related instrument spending across most end markets but are centered mainly in the pharma markets in the U.S. and China. Early stage biotech customers, while a small part of our revenues, dramatically scaled back purchases as funding and liquidity challenges drove cash conservation. Outside of these early-stage biotechs, the order funnel continues to be healthy, but it has taken a longer time for order to be approved, slowing deal velocity and generation of new orders. We expect this constrained capital environment to remain in place throughout the course of our fiscal year. Because of these factors, we are taking a more cautious approach to the second half and have revised our forecast downward. As a result, we now expect core revenue growth to be in the range of 3% to 4.5%, with EPS growing faster than revenue at 7% to 8%. Our operating margin increased in the first half of the year and we're doubling down on delivering cost efficiencies and increasing productivity to drive more leveraged earnings growth in the second half. As we've done in the past, we will generate additional cost savings so we can continue to invest in innovative new solutions and support for our customers as we enable future profitable growth. We have an unstoppable One Agilent team that is battle-tested. They consistently execute at extremely high level and are well prepared to deal with any challenges they may face. Bob will provide the details on our outlook for Q3 and the full year, but overall, we remain convinced our strategic focus, customer service and unmatched execution of the Agilent team remain the keys to our continued success. After Bob delivers his comments, I'll be back to provide some closing remarks. And now, Bob, over to you. Robert McMahon: Thanks, Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter as well as take you through the income statement and other key financial metrics. I'll then finish up with our updated guidance for the year and our third quarter outlook. Unless otherwise noted, my remarks will focus on non-GAAP results. Q2 revenue was $1.72 billion, exceeding our expectations. Revenues were up 9.5% core and up 6.8% on a reported basis. Currency was a 2.8 point headwind, while the M&A contribution was minor as expected. In Q2, we continued to leverage our backlog and exited the quarter with our backlog at a normalized level. As Mike mentioned, our two largest end markets performed well in the quarter. Pharma, our largest end market, posted 6% growth led by biopharma, while small molecule declined slightly. Chemicals and advanced materials continued to drive strong secular growth of 16% during the quarter on top of 9% growth last year. The chemical and energy subsegments of the market are doing well, with the advanced materials market continuing to lead the way. As in past quarters, semiconductors and batteries are driving demand in this space. And looking at the rest of the end markets, the food market grew an impressive 21% during the quarter driven by very strong growth in China. We also saw strong results in the Americas and in Europe. The academia and government market was up 11%, led by China and Europe as the funding environment continues to be constructive. Our business in the diagnostics and clinical market grew 6% on top of 5% growth last year. Pathology again led the way for us here, partially offset by genomics. And the environmental and forensics business grew 2%, led by China and the Americas, while Europe declined. The Americas slowed after a very strong Q1, but still delivered mid-single-digit growth. On a geographic basis, the China team exceeded our expectations, delivering 32% growth following last year's COVID lockdowns in Shanghai. As we mentioned last year, the COVID-related lockdowns deferred roughly $55 million in Q2 from last year into third and fourth quarters. So while Q2 is an easier compare, we will have much tougher compares in China going forward. Taking out the effects of the lockdown this quarter, we estimate China still grew double digits, so very solid results by our China team. And the rest of Asia grew high single digits, better than expected. The Americas grew 3% with growth across all end markets. From a group perspective, both ACG and DGG grew, while LSAG unexpectedly declined low single digits as we started to see the accelerated effects of the slowing CapEx environment. Europe grew 5%, in line with expectations led by pharma and CAM. Now moving down the P&L. Second quarter gross margin was 55.3%, down 40 basis points from a year ago, largely due to an unfavorable product mix. The benefit of pricing was as expected. Below gross margin, we had good cost discipline in SG&A, which drove our operating margin to 25.6%, up 30 basis points from last year. Below the line, we benefited from higher-than-planned interest income due to higher interest rates and strong cash flow. Our tax rate was 13.75% for the quarter and we had 297 million diluted shares outstanding, both as expected. Now putting it all together, Q2 earnings per share were $1.27, up 12% from a year ago, a very good result, combined with our 9.5% core topline growth. During the quarter, operating cash flow was very strong, generating $398 million. This result was helped in part by deferring estimated U.S. tax payments of roughly $60 million to our fiscal fourth quarter. This is due to the payment deferral relief made available by the IRS to taxpayers in designated counties affected by the winter storms in California. We returned $151 million to shareholders, $66 million through dividends and repurchased shares worth $85 million, while also investing $57 million in CapEx, continuing our successful balanced approach to capital deployment. Our strong balance sheet is even more of an asset in this market environment and remains very healthy as we ended the quarter with a net leverage ratio of 0.7x. And earlier this month, Moody's upgraded Agilent's investment-grade rating on our corporate long-term debt to Baa1. This action is an important recognition of Agilent's financial strength. Now on to the revised outlook for the year and guidance for Q3. For the year, we now expect revenue to be in the range of $6.93 billion to $7.03 billion. This represents reported growth of 1.2% to 2.7% and core growth of 3% to 4.5%. Currency is expected to be a headwind of 1.9 points while M&A will contribute 0.1 points of growth. In addition to revising our guidance, we've increased the guidance range for the second half of the year to reflect a wider range of possible outcomes. For modeling purposes, I would encourage you to use the midpoint of our guide. Our updated guidance reflects a more constrained capital market, primarily impacting our instrument business. The outlook for our recurring revenue businesses remains largely unchanged. From an end market perspective, the market most impacted is pharma where we are now expecting full year growth of low single digits, down from high single digits. And from a geographic perspective, we see impacts focused in the U.S. and China. With the change in revenue, we now expect full year fiscal 2023 non-GAAP earnings per share to be between $5.60 and $5.65, representing growth of 7% to 8%. As with revenue, I encourage you to model at the midpoint of our guidance. Now turning to Q3. We expect revenue in the range of $1.64 billion to $1.675 billion. This represents a decline of 4.5% to a decline of 2.5% for both reported and core revenue. This is on top of a tough compare of 13% growth last year. Adjusting for the China deferral in Q3 of last year would add roughly 200 basis points to both reported and core growth in the quarter. Currency and M&A impact in Q3 are minimal, and are expected to offset each other. Third quarter non-GAAP earnings per share are expected to be between $1.36 and $1.38, representing growth of 1.5% to 3% versus the prior year. We are pleased with the first half performance, and while we are facing a more difficult market environment than we were estimating a quarter ago, I am confident that our team will continue to deliver for our customers. Thanks for being on the call. And now I'll turn over things back to Mike for some closing comments before we take your questions. Mike? Mike McMullen: Thanks, Bob. During Q4 '22 call in November, I shared with you that I believe Agilent has the right growth strategies, the right team and right culture to continue delivering strong above-market results. My belief remains unchanged. Our customers know we are reliable, resilient and extremely quick in reacting to meet their needs. The Agilent team continues to work hard to earn their trust. While the near-term outlook points to continuing challenges in the market, we remain confident in the long-term growth prospects in our end markets and our ability to continue to grow faster than the market. As a trusted partner that our customers know they can rely on, despite the current market environment, I remain confident in our ability to deliver on our shareholder value creation model. Our core values and approach haven't changed. Our focus on investing for growth, providing the industry's best customer support, our innovation prowess and being a great place for our team to work with a differentiated company culture are here to stay. They remain Agilent's formula for long-term success. Thank you. And now to you, Parmeet, to lead the question-and-answer session. Parmeet? Parmeet Ahuja: Thanks, Mike. Sarah, if you could please provide instructions for the Q&A now. Operator: [Operator Instructions] Your first question comes from the line of Brandon Couillard with Jefferies. Please go ahead. Brandon Couillard: Hi, thanks. Good afternoon. Mike McMullen: Good afternoon, Brandon. Brandon Couillard: Mike, it would be helpful if you kind of unpack what you're seeing in terms of instrument demand between, let's say, mid to large pharma relative to smaller biotech. Some of your peers have talked about maybe that large pharma budget just being delayed coming back later in the year. Curious what you're embedding in kind of your outlook and how you're bringing those two customer bases? Mike McMullen: Sure. Happy to do so, Brandon. So I think there are differences between the two sectors. The small biotech is pretty much shut down. We've seen real efforts on cash conservation as they've been dealing with the financing challenges of less venture capital money out there, banking crises and limited access to the IPO market. But on the medium-sized and large pharma companies, we still see a very -- actually, an increasing level of conservatism coming from new capital investments, particularly as it relates to our business in instruments. You can make a case that perhaps, there'll be a year-end budget flush, if customers go to try to spend their year-end money that they're not spending now. We're not assuming that because all we can really comment on right now is what we're seeing today. We're not giving any indications that that situation will change. And I think what remains to be seen is, I think it's going to be a CEO/CFO decision at our larger pharma companies about how they'll handle their full year budgets. And again, that relates primarily to the instrument side of our business. As we commented in our prepared remarks, consumables and services continued -- demand continued quite strong in these marketplaces. Anything else to add to that? Robert McMahon: Brandon, this is Bob. Just to kind of frame in, if we think about these businesses, this emerging biotech, which is the one that has really changed during the course of Q2. That represents roughly about 10% of our pharma business, and we were projecting that at roughly low double digits. And now we're expecting that to decline. And as Mike was saying, the rest of the business was high single digits, and now we're assuming kind of low double digits, given this more conservative capital. I would also say the funnels are healthy from the standpoint of working with them. It's just taking longer for them to translate that deal velocity into orders. Mike McMullen: Bob, one thing I forgot to mention as well is we aren't hearing the budgets are being cut. But the timeline, as Bob mentioned, are extended, and we're often here -- often at higher levels of approval as well within our customer base. Brandon Couillard: That's helpful. Lastly, if you could unpack kind of what you're seeing in Europe. Overnight, we got pretty weak manufacturing PMIs. I was just curious if you see any slowdown in terms of the more cyclical, let's say, industrial odds in the geography. Mike McMullen: Yes. Sure, Brandon. No, you may recall earlier this year, we really were pointing to Europe as a watch area, particularly Western Europe. I have to say, we continue to point to it as a watch area, but we've been pleased with the results to date. We are seeing signs of increased cautiousness on the chemical side of our customer base in Europe, but advanced materials continues to be -- demand there. And we're pleased with how the business is holding up right now. Brandon Couillard: Thanks. Operator: Your next question comes from the line of Vijay Kumar with Evercore ISI. Please go ahead. Vijay Kumar: Hi guys, thanks for taking my question. Mike McMullen: Sure. Vijay Kumar: Mike, can you just frame sort of what April trends were? How it may progress because I'm just trying to make sense of the guidance. You guys did double digits in the first half. And we went from double digits to low single-digit declines. Just frame us this pace of slowdown. Is there any historical analogies when you see these kinds of slowdowns? Do these things last like a couple of quarters or is this like four quarters? And I'm assuming this guide change so far, it's only pharma, correct? Like we're not reflecting any other end market changes? Mike McMullen: So there's a lot to unpack there. Bob, so you and I maybe can tag team on this. But let's first of all talk about the pace of business. So as you're right, Vijay, it really is a tale of two cities. I mean, look at how we performed for the first half, double-digit core growth, double-digit EPS growth, continued margin expansion. But we saw -- and we have been signaling a level of cautiousness in our customer base, and we talked about the uncertainty that was assumed in our second half guide. We've been talking about that for a few quarters. But what I would tell you is that we actually started and it's really a late quarter phenomena. We started to see a little bit maybe the last week or so of March, really centered in April, where the level of caution from our customers increased. Deal cycles were continuing to get further pushed out, deals weren't closing. And that really was the reason for the push in terms of downward guide for the second half. What I can tell you, what we're seeing so far through May, I think that was also one of your questions, is mid-May today orders, if you will, are tracking towards our revised order expectation. We haven't -- we've been through these cycles before in terms of downturns. These are always hard to predict because it's always hard to know exactly when the cycle started. But our experience is at least 12-month kind of cycles, 12 to 18 months. So -- and I think that's really the question that we need to work through here in the next few quarters. And again, as Bob and I have said in the past, we take one quarter at a time. And what we're trying to do here is comment to you today is what we're seeing today in the marketplace, and it's a level of increased cautiousness on capital deployment. Robert McMahon: Vijay, maybe just to add a couple of other comments to what Mike was saying. In the second quarter, we talked about revenue exceeding our orders, and that was really at the -- towards the back end. And we came into Q2, we'd say, still greater than normal backlog. And so we were able to -- our OFS team was able to actually drive down our backlog and leverage that. And if you took the backlog impact out of our numbers, we would have been at mid-single digits for transparency in Q2. And we had built some of that into our forecast. We just didn't refill the funnel as much as we thought we were going to coming into Q2, which means resulted in a lower expectation for the second half of the year. Vijay Kumar: That's extremely helpful, Bob and Mike. Sorry, go ahead, Mike. Mike McMullen: I was just going to say too, Bob, I think it's fair to say relative to our guide assumptions, we're mainly looking at the pharma market. Although this level of cautiousness -- the increased level of cautiousness we're seeing is really across all end market segments, but really centered in pharma. Robert McMahon: Yes. Vijay Kumar: That's helpful, Mike. And just one quick one. This back half EPS and margins up, I think 2Q operating margins missed and just rough math here suggests back half operating margins need to be up 300 basis points from 2Q levels. With revenues coming down, can you just walk us through what gets us to that? What drives that margin expansion? Robert McMahon: Yes, you're right. In Q2, we did -- we had higher revenues than expected. And we did have some negative mix effect that resulted in a lower-than-expected margin. Now we did expand. We just didn't expand as much as we had anticipated. And as a result of the lower guidance, as Mike talked about doubling down on cost efficiencies, so we've taken a number of actions to streamline our spending profile in the second half of the year in order to drive greater margin expansion in the second half to drive the EPS. Mike McMullen: And Vijay, I'd also point out there is a level of variability in our pay plans tied directly to adjust for the company's performance that are assumed in our guide for second half. Vijay Kumar: Thanks guys. Robert McMahon: All right. Operator: Your next question comes from the line of Puneet Souda with SVB Securities. Please go ahead. Puneet Souda: Yes, hi Mike, Bob, thanks for taking the question. Thanks Mike. So first one is really on, obviously, China, very strong in the quarter. Can you elaborate a bit on sort of the stimulus contribution that happened this quarter? And what are you -- obviously, you're expecting moderation in the second half. Also, if you could talk about if you're seeing anything relevant to the new COVID wave that's emerging there. Is that something baked into your guide and overall just expectations for China for the full year? Mike McMullen: Yes. Why don't I start out with answering the last question first, and then I'll probably mention to you, Bob, to our guide assumptions. But in terms of -- I think you mentioned the new COVID wave, we've not considered that into our second half guide, and I don't believe we would because we have experienced pretty significant COVID waves throughout the years. And as we've shown each quarter, we can very easily -- not easily, but we can navigate through that. In fact, that was a storyboard that you may recall from Q1 of this year. Relative to stimulus, we've been on record and the story remains the same as we've seen no material impact from China stimulus, which, in fact, we understand was closed off at the end of -- in February. And that initial stimulus program from our understanding was really focused on more on the high-end research space, things such as NMRs and SEMs, products where we don't have an offering or compete. So we're not seeing much happening at all on our front relative to stimulus. Now there is some discussion in the marketplace that maybe there's another one coming. If that would occur, that would be upside to our forecast for the year as we're assuming really no change in the current environment and no stimulus is assumed in our second half guide. And Bob, I know we've made some adjustments to the outlook for China for the year? Robert McMahon: Yes. Puneet, if we look at Q2, we always assumed that Q2 was going to be a very strong, given what we were facing on an easier comp, and we talked about that in our prepared remarks, where Shanghai was shut down for roughly six weeks. That deferred roughly $50 million to $55 million of revenue that's now showing up in Q3 and Q4 of last year, which will make it much tougher comps. And to give you a perspective, last year, we went minus 3% in Q2, 29% growth and then 44% growth. So we're always expecting moderated growth expectations in the back half of the year just given that tough comp. Now what we've seen is not a pickup in the performance in the marketplace, particularly in pharma, which we were expecting coming out of kind of the first quarter after the elimination of the zero COVID. And we're assuming that this current performance will maintain through the second half of the year. We're not going to see a recovery. Puneet Souda: Got it. That's super helpful. And then if I could touch on the early-stage biotech customers. Can you just remind us for the overall company, I know you provided pharma. But for the overall company, what's the mix there? And then also, is there any impact that you saw -- expect there in the NASD business or your cell therapy offerings as a result of that? And just given the number of questions we're getting here, just at a high level, Mike, instrumentation, very strong over the last two years, one of the remarkable cycle of instrumentation placements that we have seen over the last few decades. When do you think we get back to sort of a normalized order pattern for instrumentation? Mike McMullen: So maybe we start with the biotech and NASD business questions first. So no impact at all in our NASD business. I think, Sam, we can say that pretty equivocally, right? Robert McMahon: And to give you a perspective, emerging biotech, Puneet, is roughly -- it's less than 5% of the total company. It's roughly closer to 3% for the full company in terms of revenue. Mike McMullen: And your last question is the toughest question, which is, sort of, if you will, your crystal ball question. We've typically seen 12- to 18-month kind of cycles historically. And as Jacob and I and Bob have talked in the past, we've always felt that this is more of a mid-single-digit kind of growth market with -- for instruments, which is still very healthy end market growth rate and particularly when you build around at the service and consumables piece. We're not calling for that yet to occur for this year. So I think the only other thing I would say is for a large majority of our instrument business it is a replacement cycle. We've talked about that time and time again. And so these products are in the installed base. They will have to be replaced. The question is when. And again, interest and demand remains high. I mean, our backlog is strong. As we mentioned in prior calls, and I just -- we emphasized that again today. Quality backlog remains high, no significant order cancellations and as Padraig likes to say, we're adding fresh funnel to the backlog. So it points to future demand, but we're just not seeing indications of when their buying behaviors are going to change. Puneet Souda: All right, thanks. Thanks guys. I appreciate it. Operator: Your next question comes from the line of Matt Sykes with Goldman Sachs. Please go ahead. Matt Sykes: Hi. Good afternoon, Mike and Bob. Thanks for taking my questions. My first question is just clearly the -- it seems to be the delta in the changing full year guide is largely concentrated in pharma, both large and small. But given the sort of resilience you've seen in the strength in the chemical and advanced materials space with that 16% growth, what is your kind of outlook on that end market? I mean should we expect a level of durability of demand certainly relative to what you're seeing in pharma over the course of this year, which could help offset some of the growth impact you're seeing in outside? Mike McMullen: It's a great question. And Bob, I think that's actually what we've assumed in our full year guide. So maybe you want to share some of the specifics? Robert McMahon: Yes, Matt. What we've built into the -- if you looked at where we were at the beginning of the year, the largest changes in pharma, where we were at high single digits, and as I mentioned, going to low single digits. Our chemical and advanced materials, we're still assuming a mid- to high single-digit growth for the full year. Certainly front-end loaded given kind of the challenges that we see in terms of the comps with China. But we are seeing -- we are expecting that to be more resilient given some of the fundamental secular drivers of semicon and batteries. So it continues to be strong and are expected to stay strong in the second half of the year as well. Matt Sykes: Got it. It's really helpful. And then just a second question for you guys, maybe Padraig. Just on ACG, just given if we do have this sort of 12- to 18-month cycle, you've talked in the past about the ability for ACG on the services side, whether it's extended warranties or others in terms of kind of helping to offset some of the weakness you might see in sort of capital equipment purchases by extending those services or increasing the services revenues. I realize it's a smaller portion of revenue relative to LSAG. But I'm just wondering if this is sort of a 12- to 18-month cycle, could you see some level of acceleration or at least durable sort of low double, high single-digit growth in ACG over the course of that time period? Padraig McDonnell: Yes. Look, I think the breadth of product offerings across many of the hardware platforms enables us to add all types of customer -- all types of customer operations. And what we're seeing is extremely strong demand for our services as utilization of the installed base happens. And in particular, we're seeing lab-wide enterprise service offerings, a big demand for that where we're helping customers with their efficiency, their asset management and so on. So I think it's a very durable business, and I think it's going to continue to be durable over that time frame. Mike McMullen: Yes. I think durability is the right word to use here, Padraig and Matt. And this is a resilient part of our company's portfolio. We've talked about these recurring revenue businesses. And I think the story here is even bigger, Padraig, than extension of instrument life as people are deferring replacement purchases. We also believe we've been picking up share and particularly been doing really nicely job on the enterprise level. Padraig McDonnell: I would also say, Mike, we still have a big opportunity to attach our service contracts onto the business. And of course, as we go through this cycle, we continue to accelerate that. Matt Sykes: Great. Thanks very much. Operator: Your next question comes from the line of Rachel Vatnsdal with JPMorgan. Please go ahead. Rachel Vatnsdal: Okay, thank you for taking the questions. So first, just maybe some questions on backlog. You noted that you worked on your backlog this quarter. So could you just tell us how many months of backlog do you have on that instrument portfolio today? And then last quarter, you noted that you'd worked on the backlog on the instrument portfolio, but for the total business, orders can grew faster than revenues. So can you kind of give us some of that context as well in terms of order book and backlog trends between instruments versus the rest of the business as well? Mike McMullen: Rachel, thanks for the question. As you know, we don't report on book-to-bill, but what we can use is how to qualitatively describe the backlog and I think we used the word normalized backlog from the elevated levels we have seen in the quarter. So we're at a normal level of backlog in terms of month supply. So -- and we've been talking about this movement towards normalization in terms of the backlog, and we're there now. Yes. Robert McMahon: And Rachel, you're right. Our orders grew greater than revenue in Q1. And as I mentioned earlier in the call, Q2, it reversed where revenue was greater than orders. And we did eat into backlog both in Q1 and Q2 in the instrument side and supply. As to the delivery times declined, we thought that that was a healthy thing. And we're back at normalized delivery times as well as a normalized backlog. Mike McMullen: Bob, I think we did have some pretty tough compares in terms of our prior year order growth. But -- and I think ACG and DGG continued to grow in the quarter. Robert McMahon: That's right. Yes. Rachel Vatnsdal: Great. And then a question on the LC market here. You guys grew 16% in the quarter. So we've heard some varying comments on this market. So can you just walk us through what are you exactly seeing? And what do you expect for the full year for LC growth? And then finally, you've said some comments today about share gains. You talked about that in some recent weeks as well or recent months as well. So can you just talk to us about share gains and kind of what parts of the market, whether that's geographic basis or customer segment wise, that you're doing in LC? Mike McMullen: Yes, I'm going to pull Jacob into this call, but he has had an opportunity to join in the conversation. But I think the storyboard here for LC is very consistent with the overall macro environment we described, which is an increasingly cautious set of decisions being made by customers relative to new instrument purchases. And as you know, we've been talking for some quarters about the moderation we were expecting to see in small molecule LC placements, that the 20-plus growth rates that the industry have been seeing for a number of quarters, would actually see a level of moderation start to occur. And that's what we saw in this recent quarter, and we would expect to see that continue throughout this year. And perhaps, you want to add some of your thoughts here as well, Jacob, and then take on the question about market share as well. Jacob Thaysen: Yes, absolutely, and thanks for the question. I mean, first of all, we continue to see good market share gain in the LC business. And we see that, as Mike was mentioning also, over the last year, we have really seen a high growth in the LC business over many of our end markets. Obviously, being fueled significantly in the pharma, both small and large molecules. And as both Mike and Bob was talking about, these markets are changing right now. So while we will see a change in the market dynamics and thereby also some of the growth rates, the strategy have been in place from LCMS and pretty much the whole portfolio has been to build these workflows that is based on robust reliable instruments and really solution-oriented. And we expect and we see that this is what our customers are looking for. And hence, I'm expecting that while the markets are down, we will continue to see market share gain in this business and also in the LCMS business. Operator: Your next question comes from the line of Dan Leonard with Credit Suisse. Please go ahead. Dan Leonard: Hi, thank you. Going back to the, Mike, so your comment on large pharma, mid and large pharma, the 90% of the business is not the emerging biotech within your reported pharma segment. Do you have any sense or any theory from your field team on why that customer base has gotten more cautious and why deal cycles have lengthened? I wouldn't think it would be very GDP, PMI-tethered and I wouldn't think that Silicon Valley Bank or what have you would be that material for that customer set. Mike McMullen: Yes. I don't think you can point to Silicon Valley, but you can point to the pressure that the pharma companies run relative to their P&Ls, and they're cautious. They're really cautious about deploying new capital. And it's... Padraig McDonnell: Yes. And I would add, Mike, the approval levels that we're seeing are going up and up and at the highest levels within pharma accounts are making decisions on capital purchase. So a lot of caution is around that. Mike McMullen: Yes. And Dan, I have to say in all transparency, it's a little bit hard to figure out, right, because we had a similar thesis, which was the markets would be more resilient. Although we expect with some level of pressure as we assumed in our second half guide, a little more resilient in the face of slowing GDP. But things have -- obviously, things have moved more quickly than we had anticipated. And this level of increased costs was something we've seen in the last probably four to six weeks. And it's difficult to figure out from the standpoint is there's no obvious external catalyst. We just know we're seeing it across a broad section of our customer base. Dan Leonard: Appreciate that. And a separate question. Can you comment a bit more on what's going on in the genomics market within your DGG business? Do you think there's any share shift happen? Is it all the pressure is market related? And when would you expect that that could improve? Mike McMullen: Yes. So I'm going to invite Sam on to this, but I think what you'll hear from him is he'll talk to you about it's a U.S.-centric phenomenon, not a market share issue. And there is that level of CapEx there that's on the instrument side that we're feeling a bit as well. Sam Raha: Yes. Absolutely, Mike. And thank you for the question. What we found is that when you think about translational research, we've already talked about pharma here also as it's used in genomics and diagnostic testing too. There's just become a slowness in decision making, not only in instruments, but even in the usage of consumables particularly on the instruments. I will tell you that even within the quarter, our NGS QC backlog for consumables related to NGS QC, that's actually grown and our orders have grown. So we're doing well there. But there has been a slowness that we're seeing that's broad-based. And to answer your question about share, we don't believe that we're losing share. Similar to what you've heard about the instrument, it's not that we're losing orders at the time in which the orders are being placed. It is just being lengthened. And in U.S. in particular, a little bit in China is where we're seeing the impact. Mike McMullen: We are assuming a level of improvement in our genomics business in the second half in our guidance I'll recall, Bob, and not full recovery, but improvement. Robert McMahon: Yes. I would say, Dan, some of our end customers have had a really challenging time and shut down sites, and that has affected our volumes. We saw that in Q1, and it continued into Q2. As Mike, you're saying, we start anniversary-ing some of those in the back half of the year and expect it to perform better. But some of those are customer-specific. Dan Leonard: Thank you for all the color. Operator: Your next question comes from the line of Derik De Bruin with Bank of America. Please go ahead. Mike Ryskin: Hi, thanks for taking the question. This is Mike Ryskin on for Derik. Just following up on the previous point on pharma -- big pharma slowing down. You used a lot of comments in a slower deal velocity taking longer to close the deals, et cetera. But as you just said, you're not seeing an obvious catalyst. Is there any risk you're going to see slower deal velocity elsewhere as you go through the year? I mean, academic and government, applied materials, these are sectors that also had, I would say, above trend growth in recent years and in the fiscal first half. So -- but you're not building in any conservatism in those areas for the rest of the year. So how would you characterize the risk there just given how quickly pharma turned? Mike McMullen: Sure. Bob and I think we've got a realistic forecast here. And that's why we're asking to think about guidance in the midpoint. We had already assumed some level of slower capital investment in those end markets in our previous guide. So there really is no change to that. We think that outside of maybe the chemical side of CAM, those other end markets will hold up relative to our guide expectations. And listen, we've had experience in these cycles before. And Mike, one of the things I wanted to mention earlier to a previous caller's question was, we know when the market is low. This is actually when the Agilent team even shines further. We always gain market share in down markets. So I'm absolutely convinced you heard in my prepared remarks that we're going to come out of this thing stronger. I think the only debate is how long the cycle is going to be. Mike Ryskin: Right, right. Yes. And then kind of to that point, for the fiscal second half, I mean, you're pointing to a 3.5% decline core growth, core sales growth in 3Q, but then it implies roughly flat in 4Q. You touched a little bit on comps at China moving around and things like that. But still sequentially, that's a pretty big reacceleration in the fourth quarter regardless of how you look at it even in absolute dollar terms. So are you assuming any reaccel in the 4Q? Are you -- any indication of that happening in terms of orders? I guess, just why is it really fiscal 3Q that's being hammered here? Robert McMahon: Yes. I mean, we typically do have some seasonality built into our results. If you not just looked at last year, but historically, our Q4 does have a typical ramp-up from Q3. And we're looking at it. If you look historically kind of how we're looking at the seasonality, that's kind of how we built it in. We are expecting stronger both revenue and order performance, Q4 relative to Q3, based on what we know today. Mike Ryskin: Okay, all right, thanks. Operator: Your next question comes from the line of Dan Brennan with TD Cowen. Please go ahead. Dan Brennan: Great, thanks. Thanks guys for the questions. Mike and Bob, maybe just a question just kind of clarifying some of the numbers here on emerging biopharma. What did that business do in the quarter itself? I don't think I caught that. I know, Bob, you said it's going to decline as part of your guidance. So if you just flush out like what you're assuming for the rest of the year for emerging biopharma and then kind of what does that imply for the commercial biopharma? And I didn't hear any as well for LSAG. Like did you guys talk about what you're expecting LSAG to do in the back half of the year? Robert McMahon: Yes, I would say -- let me take the last one first. Our LSAG business, where we were assuming for the full year kind of mid-single-digit growth with it front-end loaded, we're now expecting low single digits, just above 0. So we're actually expecting a decline in both the second -- third quarter and fourth quarter for LSAG driven in part by the emerging biotech and the small molecule. In terms of the biopharma, biopharma actually in total grew 16% in the Q2 results, and that was benefited obviously from NASD. If you took NASD out, it was 11%. So what we saw was this change in the quarter, and we're assuming that change will stay pretty consistent in the back half of the year. Dan Brennan: Got it. Okay. And then -- and maybe just one on NASD since you brought it up. Another terrific quarter. Can you just unpack a little bit on kind of what the funnel looks like there? Is the same level of growth kind of persist in the second half? And now that you're bringing on -- kind of working on the new Train, kind of what's the durability of that growth as you look out beyond year-end? Mike McMullen: Of course, you will take that one. Robert McMahon: Yes, super pleased with the performance of NASD. And as we look out to the second half of the year, we feel good about the performance and are excited about Train B coming online. And we're having conversations with customers as we look to fill that Train up. And what I would say is kind of stay tuned from that standpoint. But what I would say long term, we're extremely excited about this. That's why we're investing another $700 million in adding Train C and D as well. So we think that we're in the early stage of therapeutic discovery here in terms of RNA, siRNA-based therapies and there will just be more larger indications as those move through the clinic. Mike McMullen: Absolutely. Dan Brennan: Great, thanks guys. Mike McMullen: You're welcome. Operator: Your next question comes from the line of Jack Meehan with Nephron. Please go ahead. Jack Meehan: Thank you. Good afternoon. So I have one more question on China. Obviously, great quarter even if you exclude the comps. But you're talking about some incremental caution here. Can you talk about like what customers in the China region you're seeing. Some of this incremental caution, is CDMOs one of those? Just any color on specific customers in the region would be great. Mike McMullen: Yes, sure. Maybe I'll tag team with you, Padraig, on this one. So as Bob mentioned, even adjusting for the Shanghai shutdown last year, we did 10% core in China in Q2. We are bumping up some pretty hefty comparisons, 29% and 44%, if I remember the numbers correctly, for Q3 and Q4. But I would say that the China market is really reflective of what we're seeing in the United States as well. So it's our pharma customers in China. It's our chemical customers in China, albeit the advanced materials piece of the China market continues to hold up quite nicely. And Padraig, I know you've been in conversations with our China sales leader. What are you hearing from them? Padraig McDonnell: Yes. No, I think you said it well, Mike. It's a very similar dynamics in China from what we're seeing in the rest of the world, which is quite simply customers have become more conservative CapEx budgets and spending decisions, albeit on the EV markets and so on, that's a particular strength that we're going to continue to see. But I think that's what we're seeing. Yes. Jack Meehan: Great. And then one market you didn't call out in CAM was the PFAS testing. I was wondering if you could give us an update on that and just how you're -- if there's been a change in terms of the market dynamics there? Mike McMullen: I think we remain very positive on that, Jacob, right? Jacob Thaysen: Yes, absolutely. I think that we are still in the -- to use the baseball term, the early innings. Mike McMullen: Yes, American baseball terms. Jacob Thaysen: I think I am, but we certainly are early innings here. We have been -- we've seen a lot of growth last year, and we continue to see it. Obviously, right now, since there's also a lot of funding through the government, it's a little bit lumpy. But if you look at for the long horizon, this is a huge opportunity for us, and we have a very strong position with our LCMS business here. And we're also seeing it expanding into new areas with the DCMS business. So I'm still very bullish on that, and we continue to see a lot of business here. Mike McMullen: And Jack, I think it's also fair to say it's primarily a U.S. and a little bit European phenomena. We've got to see really new ranks being deployed and implemented in China and Japan, which down the road could be a source of continued growth on a global basis. Jacob Thaysen: Yes, you're absolutely right, Mike. I mean there's a lot of things going on here in U.S., and there's been regulation in certain states right now, but it's driven by regulation. So when regulations go onboard and online in different countries, you see a step-up in that. So there's definitely more to come here. Jack Meehan: Got it. Thank you, guys. Operator: Your next question comes from the line of Patrick Donnelly with Citi. Please go ahead. Patrick Donnelly: Hi guys, thanks for taking the question. Mike, just a quick one. Just following up on the LSAG piece. Getting a good amount of inbounds on that. I know you don't want to talk about the book-to-bill, Mike, but just given the level of focus and the visibility here, I know you mentioned the backlog, back down to normal. It seemed like that was adding to it a little bit this quarter. Can you give us a sense on the orders? I mean, were they down double digits? And Bob, maybe just the magnitude of what that decline could look like in 3Q in terms of LSAG revs would be helpful. Mike McMullen: Yes, sure. We want to give you some additional insights, Bob, so I think you've got some? Robert McMahon: Yes. So if you looked at our overall orders, they were down low single digits. As Mike mentioned, ACG and DDG grew and LSAG was down mid- to high single digits in the quarter. And as I mentioned before, our guide contemplates a decline for LSAG in both Q3 and Q4. Patrick Donnelly: Okay. Got it. And then maybe just a margin piece. I know you talked a little bit about the second half. And Mike, I think you flagged maybe some additional cost savings in the second half. Can you just talk about, I guess, where you guys are pulling some costs from? How nimble you can be, and how aggressive you want to be as well. Mike, you obviously sound good on the long term. You're kind of dealing with this pullback here. Looks like it's transitory. So how do you think about just the expense management in the near term and that second half margin ramp? Mike McMullen: Yes. Thanks for the question. I'm really glad to address this head on. So because you hit one of the key messages, we still are very positive on the long-term growth opportunities in these markets we serve. We think we're in a pause in certain segments of our market, but we remain very bullish on the long-term end markets. And the trick here is to make sure you're doing the right thing to manage the business in the short run in terms of being able to deliver leveraged earnings growth for our shareholders, and that's why I talked about the confidence we have in our shareholder value creation model. But at the same point in time, make sure that we don't cut off things that are going to get in the way of our long-term growth. And we know how to do this. We've done this before. We've got some variable pay programs. We have things we look at relative to travel and other things that are associated with expense, things that aren't necessarily immediately near-term revenue generating. And then what we'll do is we'll prioritize. We'll make sure that we're focusing on the sustaining our ability to realize the growth opportunities in a lot of these businesses, which are growing right now. One thing that came out today is it's a story of the multiple growth drivers across Agilent. Clearly, we're having some near-term challenges right now in analytical instrumentation business, yet pathology is growing well. NSE is growing well, services, consumables. So we've got a pretty rigorous program. And what I can assure you is that we will make the reductions in areas that we don't think will get in the way of our ability to continue to sustain what we believe to be out market growth. And Bob, I know you put a lot of thought and time on this, but we've already been activating a lot of the software already. So we didn't wait to the earnings call to get started on this, but I know that we think there's a path forward here for us. Robert McMahon: Yes. Just to build on what Mike is saying. Obviously, we've got -- we've been looking at discretionary spend, things like travel but also demand related. If there's not demand, we're not going to spend the same level of marketing funds as an example. And we continue to really drive productivity. We talked about that at the very beginning of the year around productivity in our workforce, and we'll continue to do that, making sure that we don't get ahead of ourselves in terms of adding more people relative to the business. Patrick Donnelly: Understood. Thank you, guys. Robert McMahon: Sure. Operator: Your next question comes from the line of Josh Waldman with Cleveland Research. Please go ahead. Josh Waldman: Mike, curious what year-over-year orders were in LC and mass spec? Were orders there down kind of in the mid-teens range? And then within large pharma, I think you mentioned the funnel remains healthy, but it's just taking longer to close deals. I guess based on conversations with key accounts recently, anything you can point to that gives you confidence that the slower orders here are more reflecting delays in the purchasing process as opposed to just tighter budgets and maybe lapse reprioritize the capital to other instrument categories, maybe outside of LCMS? Mike McMullen: Yes, I want to tag team with Padraig on this, and then I'll go back to the order question to Bob. But yes, I mean, what we're hearing or I heard directly is customers aren't cutting their budgets. And I happened to be in Europe last month at our demo facility in Vauban, Germany. It's fully booked for the next three months. I mean -- so there's a lot of interest, a lot of interest in Agilent solutions. We just can't get the PEOs through their approval process inside their companies. And that's why we think it's transitory, although we have to acknowledge what we're seeing today, and that's reflective of the revised guide for the second half. Padraig McDonnell: Yes. No. Look, I think you're right, Mike. I think the customer activity remains high. I think one thing that we've really seen is no uptick in cancellations whatsoever. Funnels remain intact. And actually, we're adding fresh funnel in certain cases. So I think it's really a case of slower deal velocity. Robert McMahon: And on orders, Josh, we won't disclose individual product lines. But as I mentioned, the order growth for LSAG was down mid to high, and they were higher than that. The decline was greater than the average. Josh Waldman: Okay. And then just a follow-up, I think, on Jack's question. Can you provide more context on what within pharma in China has been softer than expected? Any examples of customers -- any examples that customers have provided on why they're pulling back? And then curious if the softness has been pocketed within a few large accounts there or if it's been fairly systemic? Mike McMullen: I think there's no real significant difference between some segments of the overall pharma market. And I think the -- and Padraig, correct me if I'm wrong, I think the overall sentiment is economic uncertainty and just being cautious. It's a -- it's like I said earlier, it's a hard one to initially figure out because there's no obvious external catalysts because we deal with this. But -- this is what we're seeing, and we just thought it was important to share that directly on the call today. Robert McMahon: Yes. I think, Josh, the one thing that we did see, and we talked about this at the beginning of the year because there was a lot of talk about the stimulus. That stimulus was targeted at higher-end applications and instrumentation that we don't necessarily have the product portfolio or compete in. And so I don't think that has moved budgets, but it created a stimulus for potentially areas that we're not as exposed to as maybe some other players in the marketplace. Josh Waldman: Okay. I appreciate all the detail. Mike McMullen: You're quite welcome. Operator: Your final question comes from the line of Liza Garcia with UBS. Please go ahead. Liza Garcia: Thanks for squeezing me in. Really appreciate it. I guess coming back to the margin progression in the guidance and just kind of -- I appreciate all the clarity on kind of the cost potential. But also with the second train line kind of ramping and thinking about NAV, I know that you've talked about how those should be accretive -- train line should be accretive to the overall margins. But just as we think about it ramping, can you just give us some context to how to think about that train line coming on and its impact in the back half? Mike McMullen: Bob, do you want to take that? . Robert McMahon: Yes, sure. So Liza, if you looked at that in isolation, actually, there is margin compression, given the Train B startup. But we've taken that into account. We had that in our initial guide, and that's money. That's good money to spend because we've got a lot of opportunity there. And so the cost savings that we've been talking about is really not in that area. It's in the other parts of the business. Liza Garcia: Great. And I just don't think I caught this, but I'm assuming pricing is still tracking to -- is 300 bps still kind of what we should be thinking about in the guidance? Robert McMahon: That's correct. That's correct. It was actually a little over 4% for Q2. Liza Garcia: Great. Thank you so much guys. Robert McMahon: You're quite welcome. Parmeet Ahuja: Thanks, Sarah, and thanks, everyone, for joining. With that, we would like to end the call for today. Have a great rest of the day, everyone. Operator: Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.	[ { "speaker": "Operator", "text": "Ladies and gentlemen, welcome to the Agilent Technologies' Q2 2023 Earnings Call. My name is Sarah, and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja, to begin. Please go ahead." }, { "speaker": "Parmeet Ahuja", "text": "Thank you, Sarah, and welcome, everyone, to Agilent's conference call for the second quarter of fiscal year 2023. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our second quarter financial results, investor presentation and information to supplement today's discussion along with the recording of this webcast are available on our website at www.investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Our guidance is based on forecasted currency exchange rates. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now I'd like to turn the call over to Mike." }, { "speaker": "Mike McMullen", "text": "Thanks, Parmeet, and thanks, everyone, for joining our call. In our call today, I'd like to first cover our second quarter results. I'll then provide some insight into the recent market dynamics that we are seeing and how this has translated into lower expectations for the second half of this year. I'll then turn things over to Bob for more detail on the quarter and outlook before returning for some brief closing comments. In an increasingly challenging market environment, the Agilent team delivered very solid results in the second quarter. Revenues of $1.72 billion are up 9.5% core above our expectations with growth across all end markets and regions. Our results are driven by an innovative and broad portfolio, a differentiated customer experience and outstanding execution by the Agilent team. Operating margin for the quarter 25.6%, up 30 basis points. Earnings per share of $1.27 are up 12%. Highlights from an end market perspective include our two largest markets, pharma and chemicals and advanced materials performing very well in the quarter. Our pharma business grew 6% on top of 13% growth last year. Pharma was led by biopharma, which grew 16% driven by lab services, consumables and our NASD business, while small molecule declined 1%. In previous calls, we talked about the small molecule replacement cycle and that the exceptional double-digit growth rates we've seen in the past two years would eventually moderate, which is what we started to see this quarter. Our chemicals and advanced materials business delivered strong results once again growing 16%. The advanced materials segment grew more than 20% and the chemical and energy segment grew double digits. On a geographic basis, 32% growth in China exceeded our high expectations. While the compare was an easier one, even adjusting for the COVID lockdowns in Shanghai a year ago, we still achieved double-digit growth in China. In addition, Europe delivered 5% core growth, while Americas grew 3%, albeit against a tough compare of 13% a year ago. Looking at our performance by business unit. The Life Sciences and Applied Markets group delivered revenues of $968 million, up 10% core. Our strong results were aided by backlog conversion across our instrument platforms. Our LC and LCMS products continued to lead the way with 16% growth in the quarter with strength across all end markets. Continued demand for lab consumables led to 13% growth in that business as well. During the quarter, we added additional strength to our LCMS product line by acquiring e-MSion and their innovative electron capture technology. e-MSion technology allows researchers to develop biotherapeutic products more quickly for treating disease. Agilent's LSAG team continued to bring several innovative new products to market, including enhancements to our Bravo NGS automation, Cary UV-Vis and the cell analysis NovoCyte systems. Many of these enhancements are specifically focused on serving our customers in the biopharma market. The Agilent CrossLab Group posted revenues of $387 million. This is up 13% core driven by strong revenues from service contracts. ACG's growth was broad-based, representing ongoing resilient demand for our services. We continue to see many opportunities for future growth given our services portfolio. In particular, the benefits of our service offerings as they help customers drive productivity in lab are even more relevant in today's challenging environment. Our strong and trusted customer support is also helping us to drive share gains and acquire new enterprise customers. The Diagnostics and Genomics Group delivered revenues of $362 million, up 3% core. Strength in our pathology and NASD businesses drove growth, partially offset by general industry-wide weakness in genomics. NASD posted another strong quarter growing in the high 20s. Our Train B manufacturing expansion remains on track to come online later this quarter, while construction has already started on the next phase of expansion. Overall, we wrapped up Agilent's first half of fiscal 2023 with double-digit core growth in both revenue and earnings per share. However, continued macroeconomic uncertainty, coupled with stresses in the banking system have accelerated a more conservative approach from our customers across the globe. This has primarily affected CapEx-related instrument spending across most end markets but are centered mainly in the pharma markets in the U.S. and China. Early stage biotech customers, while a small part of our revenues, dramatically scaled back purchases as funding and liquidity challenges drove cash conservation. Outside of these early-stage biotechs, the order funnel continues to be healthy, but it has taken a longer time for order to be approved, slowing deal velocity and generation of new orders. We expect this constrained capital environment to remain in place throughout the course of our fiscal year. Because of these factors, we are taking a more cautious approach to the second half and have revised our forecast downward. As a result, we now expect core revenue growth to be in the range of 3% to 4.5%, with EPS growing faster than revenue at 7% to 8%. Our operating margin increased in the first half of the year and we're doubling down on delivering cost efficiencies and increasing productivity to drive more leveraged earnings growth in the second half. As we've done in the past, we will generate additional cost savings so we can continue to invest in innovative new solutions and support for our customers as we enable future profitable growth. We have an unstoppable One Agilent team that is battle-tested. They consistently execute at extremely high level and are well prepared to deal with any challenges they may face. Bob will provide the details on our outlook for Q3 and the full year, but overall, we remain convinced our strategic focus, customer service and unmatched execution of the Agilent team remain the keys to our continued success. After Bob delivers his comments, I'll be back to provide some closing remarks. And now, Bob, over to you." }, { "speaker": "Robert McMahon", "text": "Thanks, Mike, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter as well as take you through the income statement and other key financial metrics. I'll then finish up with our updated guidance for the year and our third quarter outlook. Unless otherwise noted, my remarks will focus on non-GAAP results. Q2 revenue was $1.72 billion, exceeding our expectations. Revenues were up 9.5% core and up 6.8% on a reported basis. Currency was a 2.8 point headwind, while the M&A contribution was minor as expected. In Q2, we continued to leverage our backlog and exited the quarter with our backlog at a normalized level. As Mike mentioned, our two largest end markets performed well in the quarter. Pharma, our largest end market, posted 6% growth led by biopharma, while small molecule declined slightly. Chemicals and advanced materials continued to drive strong secular growth of 16% during the quarter on top of 9% growth last year. The chemical and energy subsegments of the market are doing well, with the advanced materials market continuing to lead the way. As in past quarters, semiconductors and batteries are driving demand in this space. And looking at the rest of the end markets, the food market grew an impressive 21% during the quarter driven by very strong growth in China. We also saw strong results in the Americas and in Europe. The academia and government market was up 11%, led by China and Europe as the funding environment continues to be constructive. Our business in the diagnostics and clinical market grew 6% on top of 5% growth last year. Pathology again led the way for us here, partially offset by genomics. And the environmental and forensics business grew 2%, led by China and the Americas, while Europe declined. The Americas slowed after a very strong Q1, but still delivered mid-single-digit growth. On a geographic basis, the China team exceeded our expectations, delivering 32% growth following last year's COVID lockdowns in Shanghai. As we mentioned last year, the COVID-related lockdowns deferred roughly $55 million in Q2 from last year into third and fourth quarters. So while Q2 is an easier compare, we will have much tougher compares in China going forward. Taking out the effects of the lockdown this quarter, we estimate China still grew double digits, so very solid results by our China team. And the rest of Asia grew high single digits, better than expected. The Americas grew 3% with growth across all end markets. From a group perspective, both ACG and DGG grew, while LSAG unexpectedly declined low single digits as we started to see the accelerated effects of the slowing CapEx environment. Europe grew 5%, in line with expectations led by pharma and CAM. Now moving down the P&L. Second quarter gross margin was 55.3%, down 40 basis points from a year ago, largely due to an unfavorable product mix. The benefit of pricing was as expected. Below gross margin, we had good cost discipline in SG&A, which drove our operating margin to 25.6%, up 30 basis points from last year. Below the line, we benefited from higher-than-planned interest income due to higher interest rates and strong cash flow. Our tax rate was 13.75% for the quarter and we had 297 million diluted shares outstanding, both as expected. Now putting it all together, Q2 earnings per share were $1.27, up 12% from a year ago, a very good result, combined with our 9.5% core topline growth. During the quarter, operating cash flow was very strong, generating $398 million. This result was helped in part by deferring estimated U.S. tax payments of roughly $60 million to our fiscal fourth quarter. This is due to the payment deferral relief made available by the IRS to taxpayers in designated counties affected by the winter storms in California. We returned $151 million to shareholders, $66 million through dividends and repurchased shares worth $85 million, while also investing $57 million in CapEx, continuing our successful balanced approach to capital deployment. Our strong balance sheet is even more of an asset in this market environment and remains very healthy as we ended the quarter with a net leverage ratio of 0.7x. And earlier this month, Moody's upgraded Agilent's investment-grade rating on our corporate long-term debt to Baa1. This action is an important recognition of Agilent's financial strength. Now on to the revised outlook for the year and guidance for Q3. For the year, we now expect revenue to be in the range of $6.93 billion to $7.03 billion. This represents reported growth of 1.2% to 2.7% and core growth of 3% to 4.5%. Currency is expected to be a headwind of 1.9 points while M&A will contribute 0.1 points of growth. In addition to revising our guidance, we've increased the guidance range for the second half of the year to reflect a wider range of possible outcomes. For modeling purposes, I would encourage you to use the midpoint of our guide. Our updated guidance reflects a more constrained capital market, primarily impacting our instrument business. The outlook for our recurring revenue businesses remains largely unchanged. From an end market perspective, the market most impacted is pharma where we are now expecting full year growth of low single digits, down from high single digits. And from a geographic perspective, we see impacts focused in the U.S. and China. With the change in revenue, we now expect full year fiscal 2023 non-GAAP earnings per share to be between $5.60 and $5.65, representing growth of 7% to 8%. As with revenue, I encourage you to model at the midpoint of our guidance. Now turning to Q3. We expect revenue in the range of $1.64 billion to $1.675 billion. This represents a decline of 4.5% to a decline of 2.5% for both reported and core revenue. This is on top of a tough compare of 13% growth last year. Adjusting for the China deferral in Q3 of last year would add roughly 200 basis points to both reported and core growth in the quarter. Currency and M&A impact in Q3 are minimal, and are expected to offset each other. Third quarter non-GAAP earnings per share are expected to be between $1.36 and $1.38, representing growth of 1.5% to 3% versus the prior year. We are pleased with the first half performance, and while we are facing a more difficult market environment than we were estimating a quarter ago, I am confident that our team will continue to deliver for our customers. Thanks for being on the call. And now I'll turn over things back to Mike for some closing comments before we take your questions. Mike?" }, { "speaker": "Mike McMullen", "text": "Thanks, Bob. During Q4 '22 call in November, I shared with you that I believe Agilent has the right growth strategies, the right team and right culture to continue delivering strong above-market results. My belief remains unchanged. Our customers know we are reliable, resilient and extremely quick in reacting to meet their needs. The Agilent team continues to work hard to earn their trust. While the near-term outlook points to continuing challenges in the market, we remain confident in the long-term growth prospects in our end markets and our ability to continue to grow faster than the market. As a trusted partner that our customers know they can rely on, despite the current market environment, I remain confident in our ability to deliver on our shareholder value creation model. Our core values and approach haven't changed. Our focus on investing for growth, providing the industry's best customer support, our innovation prowess and being a great place for our team to work with a differentiated company culture are here to stay. They remain Agilent's formula for long-term success. Thank you. And now to you, Parmeet, to lead the question-and-answer session. Parmeet?" }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Mike. Sarah, if you could please provide instructions for the Q&A now." }, { "speaker": "Operator", "text": "[Operator Instructions] Your first question comes from the line of Brandon Couillard with Jefferies. Please go ahead." }, { "speaker": "Brandon Couillard", "text": "Hi, thanks. Good afternoon." }, { "speaker": "Mike McMullen", "text": "Good afternoon, Brandon." }, { "speaker": "Brandon Couillard", "text": "Mike, it would be helpful if you kind of unpack what you're seeing in terms of instrument demand between, let's say, mid to large pharma relative to smaller biotech. Some of your peers have talked about maybe that large pharma budget just being delayed coming back later in the year. Curious what you're embedding in kind of your outlook and how you're bringing those two customer bases?" }, { "speaker": "Mike McMullen", "text": "Sure. Happy to do so, Brandon. So I think there are differences between the two sectors. The small biotech is pretty much shut down. We've seen real efforts on cash conservation as they've been dealing with the financing challenges of less venture capital money out there, banking crises and limited access to the IPO market. But on the medium-sized and large pharma companies, we still see a very -- actually, an increasing level of conservatism coming from new capital investments, particularly as it relates to our business in instruments. You can make a case that perhaps, there'll be a year-end budget flush, if customers go to try to spend their year-end money that they're not spending now. We're not assuming that because all we can really comment on right now is what we're seeing today. We're not giving any indications that that situation will change. And I think what remains to be seen is, I think it's going to be a CEO/CFO decision at our larger pharma companies about how they'll handle their full year budgets. And again, that relates primarily to the instrument side of our business. As we commented in our prepared remarks, consumables and services continued -- demand continued quite strong in these marketplaces. Anything else to add to that?" }, { "speaker": "Robert McMahon", "text": "Brandon, this is Bob. Just to kind of frame in, if we think about these businesses, this emerging biotech, which is the one that has really changed during the course of Q2. That represents roughly about 10% of our pharma business, and we were projecting that at roughly low double digits. And now we're expecting that to decline. And as Mike was saying, the rest of the business was high single digits, and now we're assuming kind of low double digits, given this more conservative capital. I would also say the funnels are healthy from the standpoint of working with them. It's just taking longer for them to translate that deal velocity into orders." }, { "speaker": "Mike McMullen", "text": "Bob, one thing I forgot to mention as well is we aren't hearing the budgets are being cut. But the timeline, as Bob mentioned, are extended, and we're often here -- often at higher levels of approval as well within our customer base." }, { "speaker": "Brandon Couillard", "text": "That's helpful. Lastly, if you could unpack kind of what you're seeing in Europe. Overnight, we got pretty weak manufacturing PMIs. I was just curious if you see any slowdown in terms of the more cyclical, let's say, industrial odds in the geography." }, { "speaker": "Mike McMullen", "text": "Yes. Sure, Brandon. No, you may recall earlier this year, we really were pointing to Europe as a watch area, particularly Western Europe. I have to say, we continue to point to it as a watch area, but we've been pleased with the results to date. We are seeing signs of increased cautiousness on the chemical side of our customer base in Europe, but advanced materials continues to be -- demand there. And we're pleased with how the business is holding up right now." }, { "speaker": "Brandon Couillard", "text": "Thanks." }, { "speaker": "Operator", "text": "Your next question comes from the line of Vijay Kumar with Evercore ISI. Please go ahead." }, { "speaker": "Vijay Kumar", "text": "Hi guys, thanks for taking my question." }, { "speaker": "Mike McMullen", "text": "Sure." }, { "speaker": "Vijay Kumar", "text": "Mike, can you just frame sort of what April trends were? How it may progress because I'm just trying to make sense of the guidance. You guys did double digits in the first half. And we went from double digits to low single-digit declines. Just frame us this pace of slowdown. Is there any historical analogies when you see these kinds of slowdowns? Do these things last like a couple of quarters or is this like four quarters? And I'm assuming this guide change so far, it's only pharma, correct? Like we're not reflecting any other end market changes?" }, { "speaker": "Mike McMullen", "text": "So there's a lot to unpack there. Bob, so you and I maybe can tag team on this. But let's first of all talk about the pace of business. So as you're right, Vijay, it really is a tale of two cities. I mean, look at how we performed for the first half, double-digit core growth, double-digit EPS growth, continued margin expansion. But we saw -- and we have been signaling a level of cautiousness in our customer base, and we talked about the uncertainty that was assumed in our second half guide. We've been talking about that for a few quarters. But what I would tell you is that we actually started and it's really a late quarter phenomena. We started to see a little bit maybe the last week or so of March, really centered in April, where the level of caution from our customers increased. Deal cycles were continuing to get further pushed out, deals weren't closing. And that really was the reason for the push in terms of downward guide for the second half. What I can tell you, what we're seeing so far through May, I think that was also one of your questions, is mid-May today orders, if you will, are tracking towards our revised order expectation. We haven't -- we've been through these cycles before in terms of downturns. These are always hard to predict because it's always hard to know exactly when the cycle started. But our experience is at least 12-month kind of cycles, 12 to 18 months. So -- and I think that's really the question that we need to work through here in the next few quarters. And again, as Bob and I have said in the past, we take one quarter at a time. And what we're trying to do here is comment to you today is what we're seeing today in the marketplace, and it's a level of increased cautiousness on capital deployment." }, { "speaker": "Robert McMahon", "text": "Vijay, maybe just to add a couple of other comments to what Mike was saying. In the second quarter, we talked about revenue exceeding our orders, and that was really at the -- towards the back end. And we came into Q2, we'd say, still greater than normal backlog. And so we were able to -- our OFS team was able to actually drive down our backlog and leverage that. And if you took the backlog impact out of our numbers, we would have been at mid-single digits for transparency in Q2. And we had built some of that into our forecast. We just didn't refill the funnel as much as we thought we were going to coming into Q2, which means resulted in a lower expectation for the second half of the year." }, { "speaker": "Vijay Kumar", "text": "That's extremely helpful, Bob and Mike. Sorry, go ahead, Mike." }, { "speaker": "Mike McMullen", "text": "I was just going to say too, Bob, I think it's fair to say relative to our guide assumptions, we're mainly looking at the pharma market. Although this level of cautiousness -- the increased level of cautiousness we're seeing is really across all end market segments, but really centered in pharma." }, { "speaker": "Robert McMahon", "text": "Yes." }, { "speaker": "Vijay Kumar", "text": "That's helpful, Mike. And just one quick one. This back half EPS and margins up, I think 2Q operating margins missed and just rough math here suggests back half operating margins need to be up 300 basis points from 2Q levels. With revenues coming down, can you just walk us through what gets us to that? What drives that margin expansion?" }, { "speaker": "Robert McMahon", "text": "Yes, you're right. In Q2, we did -- we had higher revenues than expected. And we did have some negative mix effect that resulted in a lower-than-expected margin. Now we did expand. We just didn't expand as much as we had anticipated. And as a result of the lower guidance, as Mike talked about doubling down on cost efficiencies, so we've taken a number of actions to streamline our spending profile in the second half of the year in order to drive greater margin expansion in the second half to drive the EPS." }, { "speaker": "Mike McMullen", "text": "And Vijay, I'd also point out there is a level of variability in our pay plans tied directly to adjust for the company's performance that are assumed in our guide for second half." }, { "speaker": "Vijay Kumar", "text": "Thanks guys." }, { "speaker": "Robert McMahon", "text": "All right." }, { "speaker": "Operator", "text": "Your next question comes from the line of Puneet Souda with SVB Securities. Please go ahead." }, { "speaker": "Puneet Souda", "text": "Yes, hi Mike, Bob, thanks for taking the question. Thanks Mike. So first one is really on, obviously, China, very strong in the quarter. Can you elaborate a bit on sort of the stimulus contribution that happened this quarter? And what are you -- obviously, you're expecting moderation in the second half. Also, if you could talk about if you're seeing anything relevant to the new COVID wave that's emerging there. Is that something baked into your guide and overall just expectations for China for the full year?" }, { "speaker": "Mike McMullen", "text": "Yes. Why don't I start out with answering the last question first, and then I'll probably mention to you, Bob, to our guide assumptions. But in terms of -- I think you mentioned the new COVID wave, we've not considered that into our second half guide, and I don't believe we would because we have experienced pretty significant COVID waves throughout the years. And as we've shown each quarter, we can very easily -- not easily, but we can navigate through that. In fact, that was a storyboard that you may recall from Q1 of this year. Relative to stimulus, we've been on record and the story remains the same as we've seen no material impact from China stimulus, which, in fact, we understand was closed off at the end of -- in February. And that initial stimulus program from our understanding was really focused on more on the high-end research space, things such as NMRs and SEMs, products where we don't have an offering or compete. So we're not seeing much happening at all on our front relative to stimulus. Now there is some discussion in the marketplace that maybe there's another one coming. If that would occur, that would be upside to our forecast for the year as we're assuming really no change in the current environment and no stimulus is assumed in our second half guide. And Bob, I know we've made some adjustments to the outlook for China for the year?" }, { "speaker": "Robert McMahon", "text": "Yes. Puneet, if we look at Q2, we always assumed that Q2 was going to be a very strong, given what we were facing on an easier comp, and we talked about that in our prepared remarks, where Shanghai was shut down for roughly six weeks. That deferred roughly $50 million to $55 million of revenue that's now showing up in Q3 and Q4 of last year, which will make it much tougher comps. And to give you a perspective, last year, we went minus 3% in Q2, 29% growth and then 44% growth. So we're always expecting moderated growth expectations in the back half of the year just given that tough comp. Now what we've seen is not a pickup in the performance in the marketplace, particularly in pharma, which we were expecting coming out of kind of the first quarter after the elimination of the zero COVID. And we're assuming that this current performance will maintain through the second half of the year. We're not going to see a recovery." }, { "speaker": "Puneet Souda", "text": "Got it. That's super helpful. And then if I could touch on the early-stage biotech customers. Can you just remind us for the overall company, I know you provided pharma. But for the overall company, what's the mix there? And then also, is there any impact that you saw -- expect there in the NASD business or your cell therapy offerings as a result of that? And just given the number of questions we're getting here, just at a high level, Mike, instrumentation, very strong over the last two years, one of the remarkable cycle of instrumentation placements that we have seen over the last few decades. When do you think we get back to sort of a normalized order pattern for instrumentation?" }, { "speaker": "Mike McMullen", "text": "So maybe we start with the biotech and NASD business questions first. So no impact at all in our NASD business. I think, Sam, we can say that pretty equivocally, right?" }, { "speaker": "Robert McMahon", "text": "And to give you a perspective, emerging biotech, Puneet, is roughly -- it's less than 5% of the total company. It's roughly closer to 3% for the full company in terms of revenue." }, { "speaker": "Mike McMullen", "text": "And your last question is the toughest question, which is, sort of, if you will, your crystal ball question. We've typically seen 12- to 18-month kind of cycles historically. And as Jacob and I and Bob have talked in the past, we've always felt that this is more of a mid-single-digit kind of growth market with -- for instruments, which is still very healthy end market growth rate and particularly when you build around at the service and consumables piece. We're not calling for that yet to occur for this year. So I think the only other thing I would say is for a large majority of our instrument business it is a replacement cycle. We've talked about that time and time again. And so these products are in the installed base. They will have to be replaced. The question is when. And again, interest and demand remains high. I mean, our backlog is strong. As we mentioned in prior calls, and I just -- we emphasized that again today. Quality backlog remains high, no significant order cancellations and as Padraig likes to say, we're adding fresh funnel to the backlog. So it points to future demand, but we're just not seeing indications of when their buying behaviors are going to change." }, { "speaker": "Puneet Souda", "text": "All right, thanks. Thanks guys. I appreciate it." }, { "speaker": "Operator", "text": "Your next question comes from the line of Matt Sykes with Goldman Sachs. Please go ahead." }, { "speaker": "Matt Sykes", "text": "Hi. Good afternoon, Mike and Bob. Thanks for taking my questions. My first question is just clearly the -- it seems to be the delta in the changing full year guide is largely concentrated in pharma, both large and small. But given the sort of resilience you've seen in the strength in the chemical and advanced materials space with that 16% growth, what is your kind of outlook on that end market? I mean should we expect a level of durability of demand certainly relative to what you're seeing in pharma over the course of this year, which could help offset some of the growth impact you're seeing in outside?" }, { "speaker": "Mike McMullen", "text": "It's a great question. And Bob, I think that's actually what we've assumed in our full year guide. So maybe you want to share some of the specifics?" }, { "speaker": "Robert McMahon", "text": "Yes, Matt. What we've built into the -- if you looked at where we were at the beginning of the year, the largest changes in pharma, where we were at high single digits, and as I mentioned, going to low single digits. Our chemical and advanced materials, we're still assuming a mid- to high single-digit growth for the full year. Certainly front-end loaded given kind of the challenges that we see in terms of the comps with China. But we are seeing -- we are expecting that to be more resilient given some of the fundamental secular drivers of semicon and batteries. So it continues to be strong and are expected to stay strong in the second half of the year as well." }, { "speaker": "Matt Sykes", "text": "Got it. It's really helpful. And then just a second question for you guys, maybe Padraig. Just on ACG, just given if we do have this sort of 12- to 18-month cycle, you've talked in the past about the ability for ACG on the services side, whether it's extended warranties or others in terms of kind of helping to offset some of the weakness you might see in sort of capital equipment purchases by extending those services or increasing the services revenues. I realize it's a smaller portion of revenue relative to LSAG. But I'm just wondering if this is sort of a 12- to 18-month cycle, could you see some level of acceleration or at least durable sort of low double, high single-digit growth in ACG over the course of that time period?" }, { "speaker": "Padraig McDonnell", "text": "Yes. Look, I think the breadth of product offerings across many of the hardware platforms enables us to add all types of customer -- all types of customer operations. And what we're seeing is extremely strong demand for our services as utilization of the installed base happens. And in particular, we're seeing lab-wide enterprise service offerings, a big demand for that where we're helping customers with their efficiency, their asset management and so on. So I think it's a very durable business, and I think it's going to continue to be durable over that time frame." }, { "speaker": "Mike McMullen", "text": "Yes. I think durability is the right word to use here, Padraig and Matt. And this is a resilient part of our company's portfolio. We've talked about these recurring revenue businesses. And I think the story here is even bigger, Padraig, than extension of instrument life as people are deferring replacement purchases. We also believe we've been picking up share and particularly been doing really nicely job on the enterprise level." }, { "speaker": "Padraig McDonnell", "text": "I would also say, Mike, we still have a big opportunity to attach our service contracts onto the business. And of course, as we go through this cycle, we continue to accelerate that." }, { "speaker": "Matt Sykes", "text": "Great. Thanks very much." }, { "speaker": "Operator", "text": "Your next question comes from the line of Rachel Vatnsdal with JPMorgan. Please go ahead." }, { "speaker": "Rachel Vatnsdal", "text": "Okay, thank you for taking the questions. So first, just maybe some questions on backlog. You noted that you worked on your backlog this quarter. So could you just tell us how many months of backlog do you have on that instrument portfolio today? And then last quarter, you noted that you'd worked on the backlog on the instrument portfolio, but for the total business, orders can grew faster than revenues. So can you kind of give us some of that context as well in terms of order book and backlog trends between instruments versus the rest of the business as well?" }, { "speaker": "Mike McMullen", "text": "Rachel, thanks for the question. As you know, we don't report on book-to-bill, but what we can use is how to qualitatively describe the backlog and I think we used the word normalized backlog from the elevated levels we have seen in the quarter. So we're at a normal level of backlog in terms of month supply. So -- and we've been talking about this movement towards normalization in terms of the backlog, and we're there now. Yes." }, { "speaker": "Robert McMahon", "text": "And Rachel, you're right. Our orders grew greater than revenue in Q1. And as I mentioned earlier in the call, Q2, it reversed where revenue was greater than orders. And we did eat into backlog both in Q1 and Q2 in the instrument side and supply. As to the delivery times declined, we thought that that was a healthy thing. And we're back at normalized delivery times as well as a normalized backlog." }, { "speaker": "Mike McMullen", "text": "Bob, I think we did have some pretty tough compares in terms of our prior year order growth. But -- and I think ACG and DGG continued to grow in the quarter." }, { "speaker": "Robert McMahon", "text": "That's right. Yes." }, { "speaker": "Rachel Vatnsdal", "text": "Great. And then a question on the LC market here. You guys grew 16% in the quarter. So we've heard some varying comments on this market. So can you just walk us through what are you exactly seeing? And what do you expect for the full year for LC growth? And then finally, you've said some comments today about share gains. You talked about that in some recent weeks as well or recent months as well. So can you just talk to us about share gains and kind of what parts of the market, whether that's geographic basis or customer segment wise, that you're doing in LC?" }, { "speaker": "Mike McMullen", "text": "Yes, I'm going to pull Jacob into this call, but he has had an opportunity to join in the conversation. But I think the storyboard here for LC is very consistent with the overall macro environment we described, which is an increasingly cautious set of decisions being made by customers relative to new instrument purchases. And as you know, we've been talking for some quarters about the moderation we were expecting to see in small molecule LC placements, that the 20-plus growth rates that the industry have been seeing for a number of quarters, would actually see a level of moderation start to occur. And that's what we saw in this recent quarter, and we would expect to see that continue throughout this year. And perhaps, you want to add some of your thoughts here as well, Jacob, and then take on the question about market share as well." }, { "speaker": "Jacob Thaysen", "text": "Yes, absolutely, and thanks for the question. I mean, first of all, we continue to see good market share gain in the LC business. And we see that, as Mike was mentioning also, over the last year, we have really seen a high growth in the LC business over many of our end markets. Obviously, being fueled significantly in the pharma, both small and large molecules. And as both Mike and Bob was talking about, these markets are changing right now. So while we will see a change in the market dynamics and thereby also some of the growth rates, the strategy have been in place from LCMS and pretty much the whole portfolio has been to build these workflows that is based on robust reliable instruments and really solution-oriented. And we expect and we see that this is what our customers are looking for. And hence, I'm expecting that while the markets are down, we will continue to see market share gain in this business and also in the LCMS business." }, { "speaker": "Operator", "text": "Your next question comes from the line of Dan Leonard with Credit Suisse. Please go ahead." }, { "speaker": "Dan Leonard", "text": "Hi, thank you. Going back to the, Mike, so your comment on large pharma, mid and large pharma, the 90% of the business is not the emerging biotech within your reported pharma segment. Do you have any sense or any theory from your field team on why that customer base has gotten more cautious and why deal cycles have lengthened? I wouldn't think it would be very GDP, PMI-tethered and I wouldn't think that Silicon Valley Bank or what have you would be that material for that customer set." }, { "speaker": "Mike McMullen", "text": "Yes. I don't think you can point to Silicon Valley, but you can point to the pressure that the pharma companies run relative to their P&Ls, and they're cautious. They're really cautious about deploying new capital. And it's..." }, { "speaker": "Padraig McDonnell", "text": "Yes. And I would add, Mike, the approval levels that we're seeing are going up and up and at the highest levels within pharma accounts are making decisions on capital purchase. So a lot of caution is around that." }, { "speaker": "Mike McMullen", "text": "Yes. And Dan, I have to say in all transparency, it's a little bit hard to figure out, right, because we had a similar thesis, which was the markets would be more resilient. Although we expect with some level of pressure as we assumed in our second half guide, a little more resilient in the face of slowing GDP. But things have -- obviously, things have moved more quickly than we had anticipated. And this level of increased costs was something we've seen in the last probably four to six weeks. And it's difficult to figure out from the standpoint is there's no obvious external catalyst. We just know we're seeing it across a broad section of our customer base." }, { "speaker": "Dan Leonard", "text": "Appreciate that. And a separate question. Can you comment a bit more on what's going on in the genomics market within your DGG business? Do you think there's any share shift happen? Is it all the pressure is market related? And when would you expect that that could improve?" }, { "speaker": "Mike McMullen", "text": "Yes. So I'm going to invite Sam on to this, but I think what you'll hear from him is he'll talk to you about it's a U.S.-centric phenomenon, not a market share issue. And there is that level of CapEx there that's on the instrument side that we're feeling a bit as well." }, { "speaker": "Sam Raha", "text": "Yes. Absolutely, Mike. And thank you for the question. What we found is that when you think about translational research, we've already talked about pharma here also as it's used in genomics and diagnostic testing too. There's just become a slowness in decision making, not only in instruments, but even in the usage of consumables particularly on the instruments. I will tell you that even within the quarter, our NGS QC backlog for consumables related to NGS QC, that's actually grown and our orders have grown. So we're doing well there. But there has been a slowness that we're seeing that's broad-based. And to answer your question about share, we don't believe that we're losing share. Similar to what you've heard about the instrument, it's not that we're losing orders at the time in which the orders are being placed. It is just being lengthened. And in U.S. in particular, a little bit in China is where we're seeing the impact." }, { "speaker": "Mike McMullen", "text": "We are assuming a level of improvement in our genomics business in the second half in our guidance I'll recall, Bob, and not full recovery, but improvement." }, { "speaker": "Robert McMahon", "text": "Yes. I would say, Dan, some of our end customers have had a really challenging time and shut down sites, and that has affected our volumes. We saw that in Q1, and it continued into Q2. As Mike, you're saying, we start anniversary-ing some of those in the back half of the year and expect it to perform better. But some of those are customer-specific." }, { "speaker": "Dan Leonard", "text": "Thank you for all the color." }, { "speaker": "Operator", "text": "Your next question comes from the line of Derik De Bruin with Bank of America. Please go ahead." }, { "speaker": "Mike Ryskin", "text": "Hi, thanks for taking the question. This is Mike Ryskin on for Derik. Just following up on the previous point on pharma -- big pharma slowing down. You used a lot of comments in a slower deal velocity taking longer to close the deals, et cetera. But as you just said, you're not seeing an obvious catalyst. Is there any risk you're going to see slower deal velocity elsewhere as you go through the year? I mean, academic and government, applied materials, these are sectors that also had, I would say, above trend growth in recent years and in the fiscal first half. So -- but you're not building in any conservatism in those areas for the rest of the year. So how would you characterize the risk there just given how quickly pharma turned?" }, { "speaker": "Mike McMullen", "text": "Sure. Bob and I think we've got a realistic forecast here. And that's why we're asking to think about guidance in the midpoint. We had already assumed some level of slower capital investment in those end markets in our previous guide. So there really is no change to that. We think that outside of maybe the chemical side of CAM, those other end markets will hold up relative to our guide expectations. And listen, we've had experience in these cycles before. And Mike, one of the things I wanted to mention earlier to a previous caller's question was, we know when the market is low. This is actually when the Agilent team even shines further. We always gain market share in down markets. So I'm absolutely convinced you heard in my prepared remarks that we're going to come out of this thing stronger. I think the only debate is how long the cycle is going to be." }, { "speaker": "Mike Ryskin", "text": "Right, right. Yes. And then kind of to that point, for the fiscal second half, I mean, you're pointing to a 3.5% decline core growth, core sales growth in 3Q, but then it implies roughly flat in 4Q. You touched a little bit on comps at China moving around and things like that. But still sequentially, that's a pretty big reacceleration in the fourth quarter regardless of how you look at it even in absolute dollar terms. So are you assuming any reaccel in the 4Q? Are you -- any indication of that happening in terms of orders? I guess, just why is it really fiscal 3Q that's being hammered here?" }, { "speaker": "Robert McMahon", "text": "Yes. I mean, we typically do have some seasonality built into our results. If you not just looked at last year, but historically, our Q4 does have a typical ramp-up from Q3. And we're looking at it. If you look historically kind of how we're looking at the seasonality, that's kind of how we built it in. We are expecting stronger both revenue and order performance, Q4 relative to Q3, based on what we know today." }, { "speaker": "Mike Ryskin", "text": "Okay, all right, thanks." }, { "speaker": "Operator", "text": "Your next question comes from the line of Dan Brennan with TD Cowen. Please go ahead." }, { "speaker": "Dan Brennan", "text": "Great, thanks. Thanks guys for the questions. Mike and Bob, maybe just a question just kind of clarifying some of the numbers here on emerging biopharma. What did that business do in the quarter itself? I don't think I caught that. I know, Bob, you said it's going to decline as part of your guidance. So if you just flush out like what you're assuming for the rest of the year for emerging biopharma and then kind of what does that imply for the commercial biopharma? And I didn't hear any as well for LSAG. Like did you guys talk about what you're expecting LSAG to do in the back half of the year?" }, { "speaker": "Robert McMahon", "text": "Yes, I would say -- let me take the last one first. Our LSAG business, where we were assuming for the full year kind of mid-single-digit growth with it front-end loaded, we're now expecting low single digits, just above 0. So we're actually expecting a decline in both the second -- third quarter and fourth quarter for LSAG driven in part by the emerging biotech and the small molecule. In terms of the biopharma, biopharma actually in total grew 16% in the Q2 results, and that was benefited obviously from NASD. If you took NASD out, it was 11%. So what we saw was this change in the quarter, and we're assuming that change will stay pretty consistent in the back half of the year." }, { "speaker": "Dan Brennan", "text": "Got it. Okay. And then -- and maybe just one on NASD since you brought it up. Another terrific quarter. Can you just unpack a little bit on kind of what the funnel looks like there? Is the same level of growth kind of persist in the second half? And now that you're bringing on -- kind of working on the new Train, kind of what's the durability of that growth as you look out beyond year-end?" }, { "speaker": "Mike McMullen", "text": "Of course, you will take that one." }, { "speaker": "Robert McMahon", "text": "Yes, super pleased with the performance of NASD. And as we look out to the second half of the year, we feel good about the performance and are excited about Train B coming online. And we're having conversations with customers as we look to fill that Train up. And what I would say is kind of stay tuned from that standpoint. But what I would say long term, we're extremely excited about this. That's why we're investing another $700 million in adding Train C and D as well. So we think that we're in the early stage of therapeutic discovery here in terms of RNA, siRNA-based therapies and there will just be more larger indications as those move through the clinic." }, { "speaker": "Mike McMullen", "text": "Absolutely." }, { "speaker": "Dan Brennan", "text": "Great, thanks guys." }, { "speaker": "Mike McMullen", "text": "You're welcome." }, { "speaker": "Operator", "text": "Your next question comes from the line of Jack Meehan with Nephron. Please go ahead." }, { "speaker": "Jack Meehan", "text": "Thank you. Good afternoon. So I have one more question on China. Obviously, great quarter even if you exclude the comps. But you're talking about some incremental caution here. Can you talk about like what customers in the China region you're seeing. Some of this incremental caution, is CDMOs one of those? Just any color on specific customers in the region would be great." }, { "speaker": "Mike McMullen", "text": "Yes, sure. Maybe I'll tag team with you, Padraig, on this one. So as Bob mentioned, even adjusting for the Shanghai shutdown last year, we did 10% core in China in Q2. We are bumping up some pretty hefty comparisons, 29% and 44%, if I remember the numbers correctly, for Q3 and Q4. But I would say that the China market is really reflective of what we're seeing in the United States as well. So it's our pharma customers in China. It's our chemical customers in China, albeit the advanced materials piece of the China market continues to hold up quite nicely. And Padraig, I know you've been in conversations with our China sales leader. What are you hearing from them?" }, { "speaker": "Padraig McDonnell", "text": "Yes. No, I think you said it well, Mike. It's a very similar dynamics in China from what we're seeing in the rest of the world, which is quite simply customers have become more conservative CapEx budgets and spending decisions, albeit on the EV markets and so on, that's a particular strength that we're going to continue to see. But I think that's what we're seeing. Yes." }, { "speaker": "Jack Meehan", "text": "Great. And then one market you didn't call out in CAM was the PFAS testing. I was wondering if you could give us an update on that and just how you're -- if there's been a change in terms of the market dynamics there?" }, { "speaker": "Mike McMullen", "text": "I think we remain very positive on that, Jacob, right?" }, { "speaker": "Jacob Thaysen", "text": "Yes, absolutely. I think that we are still in the -- to use the baseball term, the early innings." }, { "speaker": "Mike McMullen", "text": "Yes, American baseball terms." }, { "speaker": "Jacob Thaysen", "text": "I think I am, but we certainly are early innings here. We have been -- we've seen a lot of growth last year, and we continue to see it. Obviously, right now, since there's also a lot of funding through the government, it's a little bit lumpy. But if you look at for the long horizon, this is a huge opportunity for us, and we have a very strong position with our LCMS business here. And we're also seeing it expanding into new areas with the DCMS business. So I'm still very bullish on that, and we continue to see a lot of business here." }, { "speaker": "Mike McMullen", "text": "And Jack, I think it's also fair to say it's primarily a U.S. and a little bit European phenomena. We've got to see really new ranks being deployed and implemented in China and Japan, which down the road could be a source of continued growth on a global basis." }, { "speaker": "Jacob Thaysen", "text": "Yes, you're absolutely right, Mike. I mean there's a lot of things going on here in U.S., and there's been regulation in certain states right now, but it's driven by regulation. So when regulations go onboard and online in different countries, you see a step-up in that. So there's definitely more to come here." }, { "speaker": "Jack Meehan", "text": "Got it. Thank you, guys." }, { "speaker": "Operator", "text": "Your next question comes from the line of Patrick Donnelly with Citi. Please go ahead." }, { "speaker": "Patrick Donnelly", "text": "Hi guys, thanks for taking the question. Mike, just a quick one. Just following up on the LSAG piece. Getting a good amount of inbounds on that. I know you don't want to talk about the book-to-bill, Mike, but just given the level of focus and the visibility here, I know you mentioned the backlog, back down to normal. It seemed like that was adding to it a little bit this quarter. Can you give us a sense on the orders? I mean, were they down double digits? And Bob, maybe just the magnitude of what that decline could look like in 3Q in terms of LSAG revs would be helpful." }, { "speaker": "Mike McMullen", "text": "Yes, sure. We want to give you some additional insights, Bob, so I think you've got some?" }, { "speaker": "Robert McMahon", "text": "Yes. So if you looked at our overall orders, they were down low single digits. As Mike mentioned, ACG and DDG grew and LSAG was down mid- to high single digits in the quarter. And as I mentioned before, our guide contemplates a decline for LSAG in both Q3 and Q4." }, { "speaker": "Patrick Donnelly", "text": "Okay. Got it. And then maybe just a margin piece. I know you talked a little bit about the second half. And Mike, I think you flagged maybe some additional cost savings in the second half. Can you just talk about, I guess, where you guys are pulling some costs from? How nimble you can be, and how aggressive you want to be as well. Mike, you obviously sound good on the long term. You're kind of dealing with this pullback here. Looks like it's transitory. So how do you think about just the expense management in the near term and that second half margin ramp?" }, { "speaker": "Mike McMullen", "text": "Yes. Thanks for the question. I'm really glad to address this head on. So because you hit one of the key messages, we still are very positive on the long-term growth opportunities in these markets we serve. We think we're in a pause in certain segments of our market, but we remain very bullish on the long-term end markets. And the trick here is to make sure you're doing the right thing to manage the business in the short run in terms of being able to deliver leveraged earnings growth for our shareholders, and that's why I talked about the confidence we have in our shareholder value creation model. But at the same point in time, make sure that we don't cut off things that are going to get in the way of our long-term growth. And we know how to do this. We've done this before. We've got some variable pay programs. We have things we look at relative to travel and other things that are associated with expense, things that aren't necessarily immediately near-term revenue generating. And then what we'll do is we'll prioritize. We'll make sure that we're focusing on the sustaining our ability to realize the growth opportunities in a lot of these businesses, which are growing right now. One thing that came out today is it's a story of the multiple growth drivers across Agilent. Clearly, we're having some near-term challenges right now in analytical instrumentation business, yet pathology is growing well. NSE is growing well, services, consumables. So we've got a pretty rigorous program. And what I can assure you is that we will make the reductions in areas that we don't think will get in the way of our ability to continue to sustain what we believe to be out market growth. And Bob, I know you put a lot of thought and time on this, but we've already been activating a lot of the software already. So we didn't wait to the earnings call to get started on this, but I know that we think there's a path forward here for us." }, { "speaker": "Robert McMahon", "text": "Yes. Just to build on what Mike is saying. Obviously, we've got -- we've been looking at discretionary spend, things like travel but also demand related. If there's not demand, we're not going to spend the same level of marketing funds as an example. And we continue to really drive productivity. We talked about that at the very beginning of the year around productivity in our workforce, and we'll continue to do that, making sure that we don't get ahead of ourselves in terms of adding more people relative to the business." }, { "speaker": "Patrick Donnelly", "text": "Understood. Thank you, guys." }, { "speaker": "Robert McMahon", "text": "Sure." }, { "speaker": "Operator", "text": "Your next question comes from the line of Josh Waldman with Cleveland Research. Please go ahead." }, { "speaker": "Josh Waldman", "text": "Mike, curious what year-over-year orders were in LC and mass spec? Were orders there down kind of in the mid-teens range? And then within large pharma, I think you mentioned the funnel remains healthy, but it's just taking longer to close deals. I guess based on conversations with key accounts recently, anything you can point to that gives you confidence that the slower orders here are more reflecting delays in the purchasing process as opposed to just tighter budgets and maybe lapse reprioritize the capital to other instrument categories, maybe outside of LCMS?" }, { "speaker": "Mike McMullen", "text": "Yes, I want to tag team with Padraig on this, and then I'll go back to the order question to Bob. But yes, I mean, what we're hearing or I heard directly is customers aren't cutting their budgets. And I happened to be in Europe last month at our demo facility in Vauban, Germany. It's fully booked for the next three months. I mean -- so there's a lot of interest, a lot of interest in Agilent solutions. We just can't get the PEOs through their approval process inside their companies. And that's why we think it's transitory, although we have to acknowledge what we're seeing today, and that's reflective of the revised guide for the second half." }, { "speaker": "Padraig McDonnell", "text": "Yes. No. Look, I think you're right, Mike. I think the customer activity remains high. I think one thing that we've really seen is no uptick in cancellations whatsoever. Funnels remain intact. And actually, we're adding fresh funnel in certain cases. So I think it's really a case of slower deal velocity." }, { "speaker": "Robert McMahon", "text": "And on orders, Josh, we won't disclose individual product lines. But as I mentioned, the order growth for LSAG was down mid to high, and they were higher than that. The decline was greater than the average." }, { "speaker": "Josh Waldman", "text": "Okay. And then just a follow-up, I think, on Jack's question. Can you provide more context on what within pharma in China has been softer than expected? Any examples of customers -- any examples that customers have provided on why they're pulling back? And then curious if the softness has been pocketed within a few large accounts there or if it's been fairly systemic?" }, { "speaker": "Mike McMullen", "text": "I think there's no real significant difference between some segments of the overall pharma market. And I think the -- and Padraig, correct me if I'm wrong, I think the overall sentiment is economic uncertainty and just being cautious. It's a -- it's like I said earlier, it's a hard one to initially figure out because there's no obvious external catalysts because we deal with this. But -- this is what we're seeing, and we just thought it was important to share that directly on the call today." }, { "speaker": "Robert McMahon", "text": "Yes. I think, Josh, the one thing that we did see, and we talked about this at the beginning of the year because there was a lot of talk about the stimulus. That stimulus was targeted at higher-end applications and instrumentation that we don't necessarily have the product portfolio or compete in. And so I don't think that has moved budgets, but it created a stimulus for potentially areas that we're not as exposed to as maybe some other players in the marketplace." }, { "speaker": "Josh Waldman", "text": "Okay. I appreciate all the detail." }, { "speaker": "Mike McMullen", "text": "You're quite welcome." }, { "speaker": "Operator", "text": "Your final question comes from the line of Liza Garcia with UBS. Please go ahead." }, { "speaker": "Liza Garcia", "text": "Thanks for squeezing me in. Really appreciate it. I guess coming back to the margin progression in the guidance and just kind of -- I appreciate all the clarity on kind of the cost potential. But also with the second train line kind of ramping and thinking about NAV, I know that you've talked about how those should be accretive -- train line should be accretive to the overall margins. But just as we think about it ramping, can you just give us some context to how to think about that train line coming on and its impact in the back half?" }, { "speaker": "Mike McMullen", "text": "Bob, do you want to take that? ." }, { "speaker": "Robert McMahon", "text": "Yes, sure. So Liza, if you looked at that in isolation, actually, there is margin compression, given the Train B startup. But we've taken that into account. We had that in our initial guide, and that's money. That's good money to spend because we've got a lot of opportunity there. And so the cost savings that we've been talking about is really not in that area. It's in the other parts of the business." }, { "speaker": "Liza Garcia", "text": "Great. And I just don't think I caught this, but I'm assuming pricing is still tracking to -- is 300 bps still kind of what we should be thinking about in the guidance?" }, { "speaker": "Robert McMahon", "text": "That's correct. That's correct. It was actually a little over 4% for Q2." }, { "speaker": "Liza Garcia", "text": "Great. Thank you so much guys." }, { "speaker": "Robert McMahon", "text": "You're quite welcome." }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Sarah, and thanks, everyone, for joining. With that, we would like to end the call for today. Have a great rest of the day, everyone." }, { "speaker": "Operator", "text": "Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines." } ]	Agilent Technologies, Inc.	154,924
A	1	2,023	2023-02-28 08:30:00	Operator: Ladies and gentlemen, welcome to the Agilent Technologies Q1 2023 Earnings Call. My name is Bill and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja, to begin the conference. Parmeet, please go ahead. Parmeet Ahuja: Thank you, Bill and welcome, everyone, to Agilent's conference call for the first quarter of fiscal year 2023. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our first quarter financial results, investor presentation and information to supplement today's discussion along with the recording of this webcast are available on our website at www.investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Our guidance is based on forecasted currency exchange rates. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now, I'd like to turn the call over to Mike. Mike McMullen: Thanks, Parmeet. And thanks, everyone, for joining our call today. The Agent team delivered an excellent start to 2023, exceeding both top and bottom line expectations. Q1 revenues of $1.76 billion or up 10% core. Agilent's broad-based portfolio and resilient growth model are on a full display during the quarter with growth across all end markets and geographic regions. Operating margin in the quarter are 27.1%, up 80 basis points. Earnings per share of $1.37 were up 13%. Let's now take a closer look at our first quarter performance, starting with end market highlights. Chemicals and Advanced materials led the way for us with another outstanding quarter, delivering 14% core growth with strength across all geographies. The strength in our pharma business continues and is up 11%, with both large and small molecule growing nicely. This is on top of 17% growth last year. Our environmental friend business grew 12%, while the academia government and the food markets both grew 8%. On a geographic basis, China once again led the way. Our China team continued their record of strong execution overcoming any disruption associated with COVID and delivered 13% growth during the quarter, exceeding our expectations. In Europe, we also delivered stronger-than-expected results, growing 10%. The Americas shows a solid results with 8% growth. Looking at our performance by business unit. The Life Sciences and Applied Markets Group delivered revenues of $1.03 billion, up 11% core. LSAG delivered growth across all end markets and regions. Our LC and LC/MS platforms continued their strong performance during the quarter, growing faster than the market at 16%. Demand in the chemicals and advanced materials end market continues to be strong. particularly for materials used in manufacturing semiconductors and batteries. Our Spectra business grew more than 20% in the quarter and we continue to strengthen our base in spectroscopy across multiple end markets. In Q1, we announced an appointment at the Insight200M. This system is used at checkpoints throughout the London Heathrow Airport to officially provide enhanced security and ensure passenger safety. The Asian Crosse group posted revenue of $381 million in Q1. This is up 13% core as the team continues to take advantage of record instrument placements over the past 2 years along with continued growth and attach rates. Across our team's deep knowledge of customer lab operations continues to drive consistently high levels of customer satisfaction. The breadth and diversity of our product offerings is driving record renewals for support contracts. At the same time, our Enterprise Services business continued its strong momentum, driving growth and converting competitive accounts. The Diagnostics and Genomics Group delivered revenues of $342 million, up 5% core. Our pathology-related business performed well with double-digit growth led by the Americas and Europe. NASD posted another strong quarter, growing 22%. Our Train B manufacturing expansion remains on track to come online mid-calendar year. In January, we announced an additional $725 million expansion of our NASD facility that will double our oligo manufacturing capacity. And 2 weeks ago, we are pleased to have the Governor of Colorado join us in our groundbreaking ceremony at the Frederick site. In addition to organic investments, we continue to invest externally in new technologies and partnerships. In the quarter, we welcomed the Avida Biomed team into Agilent, further enhancing our genomics capabilities. Avida is early-stage life sciences company designed to assist clinical researchers using NGS approach in the study of cancer. We also continue to partner with new technology platform companies to drive our solutions in the marketplace. This quarter, we announced a partnership with the Akoya Biosciences to combine our companion diagnostic and IHC workload expertise with their solution to drive multiplex tissue assay development for biopharma. In addition to these business group highlights, Agilent was again recognized among the top 100 most just companies in the U.S. by Just Capital and CNBC. As part of this announcement, we are very proud to be the leader in the medical equipment and services industry for our treatment of employees and focus on customer relations. The Agilent team navigated challenging market uncertainties in Q1 and yet once again produced excellent results. It was a great start to the year. Q1 was another outstanding example of the work we've done to build a resilient company with multiple growth drivers. Those growth drivers create through targeted investments that aim to expand and enhance our business in high-growth areas are the heart of our Build and Buy growth strategy. As we look ahead to Q2, we remain confident in the strength and resilience of our business. We have an unstoppable One Agilent team that continues to execute at an extremely high level and is well prepared to deal with any challenges they face. Given the strong start to the year, we are raising our full year core revenue and EPS guidance while also keeping a close eye on macroeconomic conditions. I will provide the detail on our overall outlook but overall, we remain convinced our strategic focus and unmatched execution capabilities will continue to drive strong results. Thank you for joining us today. And now, Bob, over to you. Robert McMahon: Thanks, Mike and good afternoon, everyone. In my remarks today, I'll provide some additional details on revenue in the quarter as well as take you through the income statement and other key financial metrics. I'll then finish up with our updated full year guidance and initial guidance for the second quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. We are extremely pleased with our Q1 performance. It was a very solid start to the year. Q1 revenue was $1.76 billion, exceeding our expectations. Revenues were up 10% core and 5% on a reported basis. Currency was a 5-point headwind which was an improvement from the beginning of the quarter, while the M&A contribution was as we expected. Pricing for the quarter was higher than the full year forecast also as we expected. Now I'd like to share some additional detail on our end markets. Results in our largest market, pharma were again very strong. Pharma grew 11% following 17% growth of last year. Performance was solid across both small and large molecules. Small molecule grew 12%, while large molecule grew 9%. And as Mike mentioned, Chemicals and Advanced Materials also continued to be very strong, growing 14% during the quarter on top of 15% growth last year. The chemical and energy subsegments of the market are doing well while the advanced materials market continues to deliver outsized growth. Semiconductors and batteries are driving demand, helped by government investment in this area. The food market grew 8% during the quarter, driven by double-digit growth in China. The environmental and forensics business grew 12%, led by the Americas as increased testing for PFAS chemicals drives customer investment in this area and recently approved U.S. legislation leads to broad spending in the environmental market. Our business in the diagnostics and clinical market grew 4% versus 11% growth last year. Pathology led the way for us here, partially offset by industry-wide challenges in the genomics market. And the academia and government market was up 8%, led by LCs and services. Regionally, Europe and Asia showed strong results. On a geographic basis, the China team delivered 13% growth and Europe grew 10%, both exceeding expectations. The Americas had another solid quarter coming in at 8%, in line with our expectations. Now let's turn to the rest of the P&L. First quarter gross margin was 56.5%, up 40 basis points from a year ago. The gross margin performance, coupled with good cost discipline and SG&A helped drive our operating margin to 27.1%, up 80 basis points from last year. Below the line, our tax rate was 13.75% for the quarter and we had 297 million diluted shares outstanding, both as expected. And putting it all together, earnings per share were $1.37, up 13% from a year ago. In summary, Q1 ended with 10% core top line growth and 13% earnings per share growth, a very good start to the year. Now some metrics on cash flow and our balance sheet. In Q1, we generated $296 million in operating cash flow, up 16% versus last year, while investing $76 million in CapEx. CapEx spending continues to be driven by our scale-up of our Train B manufacturing line and other capacity expansion projects. In the quarter, we returned $142 million to shareholders through $67 million in dividends and by repurchasing shares worth $75 million. We also announced we're increasing our dividend by 7%, along with a new $2 billion share repurchase authorization continuing our successful balanced approach to capital deployment. Our balance sheet continues to remain healthy as we ended the quarter with a net leverage ratio of 0.8. Now let's move to our revised outlook for the year and the upcoming quarter. The macroeconomic environment remains dynamic and interest rates and currencies continue to be volatile. However, given the good start to the year, we are increasing our full year revenue to a range of $7.03 billion to $7.10 billion. This increase updates our full year core revenue guidance to a range of 5.5% to 6.5%, increasing the midpoint of our guidance to 6%. We've also seen the dollar weaken against major currencies in the first quarter although it has rebounded somewhat in February. And as a result, the full year guide reflects $100 million of favorable currency movements since our initial guide in November. And for the full year, we still expect currency to be an almost 300 basis point headwind to reported growth. In addition, we're also raising our full year EPS guidance to a new range of $5.65 to $5.70 per share. And lastly, given the recently announced NASD expansion to double our oligo manufacturing capacity -- we are updating our forecasted capital spending for the year to $500 million, up $200 million from our guidance at the beginning of the year. Now turning to Q2, we expect revenue in the range of $1.655 billion to $1.680 billion. This represents core growth of 6% to 7.5% and reported growth of 3% to 4.5%. Currency is expected to be a headwind of 3.1 points, while M&A will contribute 0.1 points of growth in Q2 which is consistent with Q1. Second quarter non-GAAP earnings per share are expected to be between $1.24 and $1.27, representing growth of 10% to 12% versus the prior year. I'm pleased with how the team has delivered in the first quarter. We are focused on the things we can control. Our team is driving strong execution in the marketplace and coupled with our broad portfolio of products and services, we expect to continue to grow faster than the market as we go through the year. Thanks for being on the call. And now I'll turn over things back to Parmeet as we take your questions. Parmeet? Parmeet Ahuja: Thanks, Bob. Bill, if you could please provide instructions for the Q&A now. Operator: [Operator Instructions] We take our first question this afternoon from Matt Sykes of Goldman Sachs. Matt Sykes: Mike and Bob, maybe we'll start on ACG, just given the quarter that it had and the comp it was facing last year, you've talked in the past about areas of underpenetration. I think China was a region you called out. Could you just maybe kind of give us a mark-to-market on where you feel from sort of an end market and regional standpoint, there's still a lot of room for that growth in ACG if we see it continue throughout this year and into next? Mike McMullen: Yes. Thanks, Matt. First of all, I appreciate the recognition of the numbers we posted and we think there's still a lot more opportunity in front of us. And I want to actually have provide a little bit more color on where those opportunities may lie. Padraig McDonnell: Yes. So look, I think the broad product offering across the hardware platforms where we've had a value to -- where we add a lot of value to customer operations has been broad-based. We certainly see a lot of our offerings, particularly around asset utilization and so on, being able to be used outside pharma in different industries and we see that as an opportunity to grow. I think also given our big installed base and our ability to attach in different markets and sectors is going to continue as we go through the year. Mike McMullen: Yes, I think we see a lot of opportunity, obviously, in China. That's when we flagged in the past. The other one that we're pointing to is a lot of the growth has historically been centered in the pharma space. We're seeing growing interest in the CAM space as well. So I think from an end market perspective, that's an area we would expect to see some more growth. And geographically, the China story still hasn't fully played out yet. And then again, I would just remind you, Matt, some of the points we made in the call, record renewals for support contracts and also clearly taking share on the enterprise level. Those attach rates we keep talking about are going up as well. So a lot to like here. Matt Sykes: Great. And then maybe just kind of refresh us on your outlook for instruments. I mean you've kind of guided to a mid-single-digit growth for the full year. Given that we're a little ways into this year, you probably have a little more visibility on that backlog. How are you thinking about sort of the back half for instruments overall? Mike McMullen: Yes. So first of all, let me -- I'm taking a bit on this with Bob but let's -- I'll talk about the backlog, first of all, I think it's very important to just to remind the audience that the quality of our backlog remains extremely high. So -- and you can see the great work of our team at to work down the backlog but we're not seeing any cancellations or anything pulling out of backlog. So that gives us level of confidence around the revenues we can forecast. I think there really isn't anything new to talk about today relative to new news relative to the second half, we still remain -- we still want to acknowledge the uncertainty about the back half of the year. So really no new news here. It's very consistent to what we talked about in November. I think you're going to hear a lot of us talking about normalization of growth rates -- normalization of deal cycle times. So the funnels remain healthy. The deal cycle times are I think we've already more towards historical levels. And Bob, I don't know if you'd add anything to that? Robert McMahon: No, I think you're right. I mean, I think, obviously, we had a very strong start to the year with double-digit growth from LSAG we will go up against very tough comps in the back half of the year with the recovery of the business. But as Mike said, pleased with the very good start but not anything material change. Operator: The next to Brandon Couillard of Jefferies. Brandon Couillard: Mike, I think you said China was up 13% in the quarter. That's a lot better than we've heard from some of the other counterparts. Could you unpack that a little bit for us? Could it perhaps have been due to the fact that you're 1 month later maybe talk about linearity in China through the quarter and if your outlook for the full year. So I think it was high single digits has changed at all. Mike McMullen: Well, I'm glad you noticed, Brandon and if you were in the conference room here, you see there's a lot of smiling in the room here because really proud of what the team has done here. So I don't think it's all a timing issue. It's about execution and its ability of this team to execute because our teams were hit with waves of COVID during the quarter. But we know how to execute. We've also enabled the -- our ability to interact with customers digitally. So while people maybe couldn't go to the office or couldn't go to customer sites, they were able to support the customers. So we were just -- we were just delighted with the performance out of China in Q3. And Bob, I think it was a broad-based story. We had growth and double-digit growth in pharma, chem, food. So it was really pleased with the results. I know our narrative is different than others are saying but I also think my team in China capability is also different. Brandon Couillard: Got it. And then on the NASD Train C, I guess, expansion. Can you just talk about time line for that build-out. And as I remember back to Train B, I think a good amount of that was already kind of earmarked for customer demand. In the same case this time around with the current expansion. Mike McMullen: Yes. I want to tag team a bit with this with Sam and myself and Bob. So we evenly refer to Train B. That's the latest expansion that's coming online this year. In fact, we had a chance to see that firsthand when we went to the groundbreaking ceremony for what we call Project endeavor or as you're referring to [indiscernible]; it looks really good. We're on track for that mid-calendar year go live and we have a full book of business for that just a matter of ramp. And again, project up. And then I'm going to pass it over to Sam and maybe you want to remind, Brandon, what our plans are with the new expansion, when we expect to see some of that first revenue coming into Agilent. Sam Raha: Yes. Yes, happy to do so. And as you mentioned, Mike, first of all, we're tracking right on plan for Train B, right, midpoint -- midyear coming on. And it was great to see first-hand, Bob joined me really the progress that we're making, the facility is looking really, really nice. A lot of validation work happening miles and miles of stainless steel piping and other infrastructure that's been put in place. As you also noted, we did at the end of February, the middle of February, pardon me, the groundbreaking for trains, C and D. And these projects will take some time but we've started the process and the first revenue from that would be coming online in 2025. And remember, there's 2 trains, Train C and Train D, both dedicated to siRNA, antisense capabilities as well as expanding our ability to serve customers with single guide RNA or CRISPR. So excited about the progress in the NASD team under Brian Crude's leadership is firing in all cylinders. Mike McMullen: Sam, unless you're going to commit to me for earlier to go live. I think you meant to say '26, right? Sam Raha: Did I say '25? Thank you, Mike, for catching. Usually, you're the one that accelerates me instead of the other way. Indeed, it's '26. Thanks for catching that. Robert McMahon: Yes. And Brandon, to your point around the question of purchase orders and so forth. We have good visibility into the pipeline in the funnel but we haven't started taking orders given the time frame there. So we have high confidence that we wouldn't be putting in $725 million into the expansion. Operator: We're going next now to Vijay Kumar of Evercore ISI. Vijay Kumar: Congrats on a good print here, Mike. My first question here on the second quarter guidance, 6% to 7.5% organic. That's a sequential step down of 250 basis points at the high end. I guess the comps get easier. Is there anything in the second quarter? Was there any timing of revenues that got to fall to Q1? Or any China impact, anything that can explain here at the sequential guide for 2Q? Mike McMullen: Yes. I'll pass this over to Bob for additional detail but I think the answer is no, not the unusual about movements between the quarters. And Bob, I think what we're going to do is we want to set up another guide in Q2 that was above our full year guide. So that was the process there. Robert McMahon: That's exactly right. I mean, I think as we look at this, we just came off a 10%, still 6% to 7.5% is still significantly above where we're forecasting the full year and I think we feel good and I think it's consistent with how we have guided in the past. Mike McMullen: I have missed we're very prudent yet today, Bob? Vijay Kumar: I was waiting for that, Mike. So have to say the second quarter is a prudent guide. Is that a fair comment? Mike McMullen: That is correct. Vijay Kumar: Fantastic. And then I did have one on this NASD, Mike -- at Novartis. I think they're pulling their API manufacturing in-house. And I know you're starting to train to see maybe provide some context and how big is Novartis as a customer? What's the pipeline looking in ASD and uses at risk? Mike McMullen: Yes. I'll tag team on this. I'll lead and Sam, if you want to add some additional color. But first of all, the announcement from Novartis is no new news. We -- that has always been part of the plan and we actually have contractual agreements relative to how much of the on market demand we get. So that's all well known. But relative to the Novartis is one of the many customers we have in this business and we really have worked hard to build a diversified book of business. And we talk a lot about Novartis great customer. I talk a lot about Anylam because we're allowed to talk about those programs but we have a much broader base book of business. And I think that gives us a lot of confidence as we move forward because we have a number of programs that we're supporting. We know not everyone is going to hit but we know that there's going to be a lot of success rates there as well. And Bob? Robert McMahon: Yes, let me just add something. I mean I would say this means nothing to our expansion. I mean or I want to be very clear about that. I mean I think we feel very good about -- we've continued to be capacity constrained. We've had more orders than we can satisfy. And I think that continues to be the case and we feel extremely good about the overall technology and our position in the marketplace. Mike McMullen: Thanks, Bob. I appreciate that build. Sam Raha: Mike, if I can just add just a couple of quick things, right? We've stated this before. We think the therapeutic oligo market for the suppliers that we are $1 billion today, growing to $2.4 billion by 2027. And what's really encouraging about the market is the number of molecules that are advancing, right? Just to give you a little bit more color, we're doing work with over 30 pharma partners today and on dozens of programs at various stages. So the pipeline of programs are working on, some of which have the potential of being molecules also broad populations is absolutely there and something that we're excited about. Operator: We go next now to Puneet Souda of SVB. Puneet Souda: So first one, Bob, I don't know if I heard it on the call, contribution sort of from pricing in the quarter and for the full year. If I'm correct, you are still expecting 3% pricing contribution this year and that would imply a 3% volume contribution which it appears below historical levels for what Agilent has grown. So just maybe just -- we're trying to understand, given the tailwinds you're seeing in China, NASD and the other areas and obviously, congrats on the strong growth in the quarter. So is there anything you're seeing beyond sort of tougher compares that are emerging in the sort of the second half? Robert McMahon: No, it's a great question. So I did make a quick reference in the prepared remarks. Actually, Q1 was higher than the overall 3% as expected. We are still planning and forecasting that 3% price contribution for the full year of FY '23. And you're right, that would speak to roughly a 3-point volume. What I would say is we're taking it 1 quarter at a time. As we've said, we're dealing with -- looking forward, there's still some uncertainties around macro. And that's where I think our forecast and our guidance is prudent to use that word again. But I wouldn't say anything has materially changed since the beginning of the year from that standpoint. And I've been very pleased with our ability to continue to maintain that pricing throughout the course of the last several quarters and I would expect that to continue going forward. Puneet Souda: Okay. That's helpful. And then on the Lunar New Year, is that part of -- is that baked into the guide as well? And I just wanted to clarify on China. I mean obviously, you have heard about the stimulus, your -- actually Agilent is listed -- one of the companies listed within the document that was put out for the loan stimulus for China. This is sizable. How are you thinking about it? You obviously have the longest and one of the most legacy positions in China. So just trying to understand what does that mean for China growth in 2023 and '24. Mike McMullen: You want to take the first part of the question. Robert McMahon: Sure. Yes. But the impact of Lunar New Year was not only in Q1 but it's also been reflected in our Q2. It was roughly 0.5 point headwind in Q1 and that's come back to us in Q2. So it was kind of as planned. And in regards to the stimulus, the way we're looking at this is Sims got kicked off in the calendar Q4. There is a section in there that's focused on equipment for universities and hospitals. But from our perspective, it's still early. So we're kind of waiting right now to see how it plays out. And but I think at this point, we really haven't put anything assumed in our guide or China growth relative to the stimulus. So if it does get deployed and comes to our way, then that will be an upside to our current forecast. Mike McMullen: And I think Puneet, you said it well. I mean, our business in China continues to be very, very strong and I couldn't be prouder of the team, how they delivered in Q1 and that's continuing strong momentum throughout the second half of last year and we would expect that to continue here in Q2 as well. Operator: We go next now to Rachel Vatnsdal at JPM. Rachel Vatnsdal: Congrats on the quarter. So first up on semiconductors, one of your peers have flagged that they were expecting the semiconductor market to be soft throughout 2023, just as semiconductors or semi customers were facing a reset just given a macro environment. So you mentioned strength in semi-dry prepared. So can you just walk us through, first off which part of the market do you guys really play in, in semis? And then are you seeing any of the softness that one of your peers have flagged? Mike McMullen: Yes, I'll start and then we'll turn it over to Jacob to give some additional color about where we play and so forth. But I would say the short answer is no. I mean, our spectroscopy business grew over 20% in the quarter and we're still seeing strong demand. And Jacob, you want to provide a little more color? Jacob Thaysen: Yes, absolutely. We have -- I would say we have the strongest portfolio in atomic recopy for this market in semi but generally speaking, in material science. And we continue to see demand from the semicon industry, both in the fabs but also in the upstream for all the fine chemicals that goes into the fabs, they require the same level of QC testing like they do in the labs and hence, they are using the same instruments. So we see a lot of benefits. Those were the new fabs built but also for the continuous operation in the labs. So we expect this to continue for a while. We, of course, see a lot of news around investments into this in other parts of the world, also particularly in the U.S. Obviously, that will take some time before it comes into play. But we are -- we expect the whole semicon market to continue to be an upside for us. But as I mentioned also, we also see a lot of interest in the rest of the materials market, particularly in lithium batteries, where we see a lot of demand, not only for our spectroscopy business but really across our broad portfolio where lithium battery needs both the LCs, the GC, the spectroscopies and the CMS. So we are very excited about that space and see a lot of continued growth there. Mike McMullen: And Jack, I think the point you made earlier, too, about some of the funding environment, we're seeing some government funding coming in from different parts of the world as part of the semiconductor industry which has benefited us. Rachel Vatnsdal: Great. And then maybe just shifting over more towards pharma biotech. The small molecule grew faster than large molecule this quarter. You've talked in the past about some of that outpaced strength in small molecule being driven from spending related to instrument purchases that were delayed back in 2018, 2019 time frame. Can you walk us through really what inning are we in, in terms of that catch-up spend? And how long can you sustain an outpaced growth in small molecule before it kind of resets back to that normalized level? And then just update on large molecule as well. Mike McMullen: Sure, Rachel, do I dare pass this question to the Danish member of the staff over that baseball analogy but I think, Jacob, got a great print on LC and LC/MS 17% growth, clearly outpacing the market. And I think we saw some really good strength in small molecule in particular this quarter. Jacob Thaysen: Yes, absolutely. I will start by saying, I don't think this is a baseball game. I think there is a continuous opportunity on indicate space. So -- and we see both opportunities and we continue to believe that there is a big market in small molecules. And I think the current performance is a reflection of the investments we have done into -- we made into our portfolio over the past years both for the LC and the CMS. So it's really, really focused very much on where we have gone strategically on a lot of investment into making robust reliable and routine instruments and instrument solutions. We continue to spend significant time to truly understand our customers' pain point that is not only about the overall performance but also about how you can ease of use, a lot of smarts we put into the instruments and of course, also continues on focus on uptime of instruments. And our commercial organization is brilliantly going out and connect both our consumables and also the service contracts to it. So this just continues to be a great business for Agilent. Robert McMahon: Yes, Rachel, maybe -- this is Bob, maybe I can add a few points because we talked at the beginning of the year, about this strong performance kind of normalizing this year. We also said if it continues, we're going to take it. And I think what you're seeing is some of that as well. But we still do think that this will normalize over time. And the portfolio that Jacob and team have I think speaks very well to us growing faster than the market. And I think you talked about the biopharma, the beauty of our business is we've got that nice diversification across both small -- and small and large molecule and certainly starting up the year very nicely. Operator: We'll go next now to Derik DeBruin [ph] of Bank of America. Unidentified Analyst: This is Peter [ph] on for Derik. Could you just dive a bit more into the latest on what you're seeing in Europe? You've expressed in bending some caution, particularly in Chem on the last call. So if you can touch on that as well, that would be great. Mike McMullen: Yes. So I hope it came through in the call remarks and I'll make a few comments here, then invite organ here as well but we were delighted with the print in Europe in the first quarter exceeded our expectations. Actually, the strength across the marketplace was pretty good. I think 5 of our 6 end markets were growing high single digits or better. I think the standouts for us were actually the chem markets along with diagnostics. But I have to say we continue to watch closely the investment plans particularly for our large accounts in the chemical space as well as pharma space. But we're off to a really good start but that's -- that remains a watch area for us. But again, we're delighted with the broad-based growth we had. And I don't know if you... Padraig McDonnell: I think you said it all, Mike, I think it's broad-based in 5 out of 6 markets, growing high single digits. And I think what the team has been able to do has been able to really work together to take share in a lot of areas on all the markets and our focus, of course, on attach rates in both services and consumables has really benefited as well. Mike McMullen: I think we don't talk about weather but I think the more favorable weather environment in Europe actually has put less pressure on customers relative to energy cost and energy demand. So that's been net positive but we're still keeping an eye on things. Unidentified Analyst: Okay. And then could you just discuss your margin outlook and then pacing across '23? What's kind of -- and then further ahead, kind of what's the level of expansion potential going forward? How much gas is left in the tank there, looking out in the out years? Mike McMullen: You want to take that, Bob? Robert McMahon: Yes. I still have gas in the tank, yes. I mean I think, obviously, despite the inflationary environment that we're in, we're still able to manage growing our margins. You saw both a nice balance here this quarter with about half of it coming through gross margin as well as half of it coming through OpEx. I think as we think about it going forward, I think that 50 to 100 basis points over the course of the next several years is still a reasonable way to think about it. That's how we're thinking about the rest of this year as well. Operator: And we'll go next now to Dan Brennan of Cowen. Dan Brennan: On the quarter -- maybe just the first maybe the first one, another a few questions asked on the Chemical and Advanced Materials segment. But obviously, great growth in the quarter. Just wondering, with your new higher guide for the year, are you assuming something above the mid-single-digit outlook that you previously guided to for the year? And would love if you can give us any color on kind of how the growth broke out this quarter between advanced material and then chemical and energy. Robert McMahon: Yes. That's -- it's a great question, Dan. I'll take that. And so with our revised guide, we have ticked it up a bit, given the strong performance that we had in Q1. And we continue to be surprised to the upside. When we talked about it at the beginning of the year, what was a source of upside. This would have been one of the markets that we would have talked about. And what we're seeing is actually good growth across all of the submarkets in our chem market. If I think about the chemical and energy markets, those were up high single digits and the growth was really outsized in that advanced materials that we've been talking about. So that semiconductor in batteries area grew in excess in the high 20s. And so this is a continued strength really given not only the investment there but really the power and strength of our portfolio to be able to supply critical tools and instrumentation into markets that are really continuing to expand. So we're expecting that don't book high single digits and the high 20s for the rest of the quarter, so we'll take it. But we're expecting a slight uptick there, given the strong performance that we had in Q1. Dan Brennan: Great. And maybe just one on the balance sheet. Obviously, the -- it's in great shape, leverage is very low. Just wondering what you're seeing from the M&A environment. Obviously, Waters had a deal in the quarter. I'm wondering what you're seeing in terms of -- have you identified any interesting opportunities like what's the appetite like for sellers to kind of move forward? Just wondering what we could expect for management while it's always hard at time. I'm just kind of wondering about your appetite potential to do something bigger since you guys have been looking for the right fit. Mike McMullen: Yes. No, I think you're closing -- happy to comment on the day your closing comments exactly where our head is at which is the right fit. So we think the environment is much more favorable than it was a year ago. We think it's now much more of a buyer's market, so to speak. Most people are willing to come off at a view of last round. There's still some dialogue around there. So we're -- we have obviously nothing to announce but we remain very interested in looking for opportunities that can augment our core organic business and this is at the heart of our build and buy growth strategy. As I've said a number of times, the buy side is all optionality for us. We'll do just fine with all the bets we have right now. But if we see the right thing, we will move on it. And we just have also just wanted to make sure we stuck with our framework and we don't ever want to have buyers remorse. So we've been very happy with all the deals we've done to date and we'll continue to use that framework moving forward. I think that fit piece that you described is really a key criteria for us. Operator: Our next question comes from Patrick Donnelly of Citi. Patrick Donnelly: Maybe one on just the order side. I know you guys talked a little bit about the backlog remaining pretty healthy. Can you just give a little bit of color in terms of what the order growth looked like in the quarter? I know last quarter, you guys started eating into the backlog a little bit which is natural, just given the supply chain is normalizing a little bit. Can you just talk about, I guess, order growth versus revenue growth, what you saw in the quarter? And any color there would be helpful. Mike McMullen: Yes. Let me make some summary comments and then Bob, feel free to jump in here. But as you mentioned, we don't specifically provide book-to-bill ratios. But what I can tell you is that orders for the quarter were greater than revenue. So -- and so we continue to grow orders with particular strength in our ASD and the services business. On the instrument side, we continue to bring down this record backlog we had as we really are focused on meeting those customer shipment requirements and really thanks to the great work of the order fulfillment team, we've really been able to get back to a normal flow of shipment times and delivery commitments. Again, I would just say that the funnels remain healthy, the backlog is still a very high quality. I think we have pretty much next to no cancellations. So the quality is good. It gives Bob and I that level of predictability around revenue from that backlog. Robert McMahon: Yes. I would say, as Mike said, I mean, the backlog continues to be healthy and we haven't seen anyone back out of any cancellations or anything like that, that would be beyond kind of the normal activity. Mike McMullen: But I would emphasize one point I made earlier, the deal cycles are reverting towards the historic norms in this space. Again, this whole construct that we see of a normalization of particularly the analytical instrumentation marketplace evolving. Patrick Donnelly: Yes, that's helpful. I appreciate that. And maybe just on kind of the environmental spend, PFAS testing. You've called out the last couple of quarters, Mike, I know you're excited to see some actual infrastructure dollars coming through in the U.S. here. Can you just talk about what you're seeing there, kind of where we are? I mean, it seems really early but just your perspective on kind of how that's tracking, what impact you guys are seeing from that and obviously, the durability as well. Mike McMullen: Sure. Happy to talk about that. And I actually happen to have Jacob talk about it because I think you've just spent some time in front of the Board recently and talking about the PFAS opportunity. I don't want to educate the Board on what it's all about but the durability of growth we're seeing, we see here. Jacob Thaysen: Yes, absolutely. And we continue to see a lot of opportunities in the PFAS where at the beginning was really all about looking for PFAS in the water supply and now it's moving into food and other types of areas. So I think you are right, we are still in the early phases of the growth opportunity. As you know, the U.S. infrastructure build, there was a $4 billion set aside to PFAS testing. And so we have one of the leading solutions here. I mean PFAS is very difficult to measure. So you need high-end instrumentation but also very specified sample prep and consumables to really make sure that you don't contaminate why you measure. So we have spent a lot of energy of putting a high-quality solutions out there and we continue to see a lot of opportunities and we will continue to invest in this space beyond PFAS. I think environmental is really a place that there will be a lot of investment going in over the next decade. So really excited about that area also besides the Advanced Materials. Operator: And we'll go next now to Jack Meehan at Nephron Research. Jack Meehan: Wanted to spend a little time on DGG. Maybe start with the pathology business. So double-digit growth was stronger than, I guess, what we've seen in the last few quarters. Was there anything you noticed in terms of the uptick in the quarter? Mike McMullen: Yes. Jack, I'm going to actually pass that over to Sam because Sam actually is calling in from Denmark. He's actually with the pathology team right now. So you can get it latest and greatest on the ground from Glostrup. Go ahead, Sam. Sam Raha: Yes. Thanks, Mike. Jack, thanks for the question. I'd offer you a couple of things that we've observed in the quarter and I think are also promising going forward. First of all, we continue to see the trend of hospitals and health care systems being able to work through COVID and start to reprioritize cancer diagnostics. So overall, I think that's been something that's positive. We've continued to see strength in our IHC solutions, be it our companion diagnostic solutions that are in the market. But more broadly speaking, including for the antibodies that we have, that we sell as ready-to-use reagents. We're also continuing to see good traction for our advanced staining system, the Dakotas. So all of that, you look at that geographically, we've had some good success, particularly in Europe but the Americas as well. Jack Meehan: Great. And then sticking with DGG, either for you, Sam, or for Mike. Just on the genomics side, I was backing into sort of like a high-teens decline in the quarter, if that sounds right. I'm just curious, different companies have called out different issues in this end market. If you could talk about just maybe what exactly you're seeing, that would be great. Mike McMullen: Bob, I don't remember the exact number but it was down but not to that extent. Robert McMahon: Yes, it was down close to double digits but not high teens. Mike McMullen: Okay. And I'm going to have Sam talk about this but we're seeing some what we think is a transitory disruption in the diagnostics side of genomics that there's a lot going on with a lot of the diagnostic firms where we provide our solutions into their assays. So Sam, your perspective on the think would be really good. Sam Raha: Yes, happy to provide that. And building on what you said, Mike, right, there's a lot of public information now that I'm sure, Jack, that you're aware of, it restructuring or other sort of operational challenges at a number of customers from research into technology-driven genomics companies and diagnostic testing companies are going through. Based on that, we've definitely seen conservatism from customers that they've pulled back on purchasing levels. They're working down excess safety stock that they perhaps have built up. And we've just seen a little bit of hesitation in purchase patterns. Now that being said, just recently, earlier in February, I had the chance to attend AGBT which is one of the most important technology and science conferences. And there, we definitely saw good interest for our early access that we've been doing for our SureSelect cancer CGP which is a comprehensive cancer panel 679 genes. We continue to see really good interest in our Magnus automation system which is the walk away for our SureSelect platform and our broad-based market leadership and genomics and NGS QC remains intact. So I think this is some market headwinds that we're seeing but it's just, I think, a transitory thing, as Mike mentioned. Operator: We take our next question now from Josh Waldman of Cleveland Research. Josh Waldman: For you -- two for you, if I may. First, on the core growth guide, I wondered if you could provide a bit more color on the considerations that went into reiterating the top end of the core growth outlook for the year. I guess, maybe a bit surprised, we didn't see more of the Q1 upside flow through to the full year. I'm wondering if maybe this is backlog work down benefit here in the quarter that starts to abate as we get into the second half for some, I guess, something else? Mike McMullen: Yes. Bob, I'll let -- I think the headline is more just the recognition of the continued uncertainty about the back half but... Robert McMahon: Yes, I think the way to think about that, Josh, is we raised the midpoint of the guidance delivered 10% in Q1. We're saying that Q2 is going to be higher than the full year. And we're going to take this 1 quarter at a time, given some of the uncertainty that we're seeing. Obviously, we did talk about having great visibility into Q1 with some of the backlog activities and so forth. But I wouldn't say it was just that. I mean, I think what I would characterize it as a prudent guide given kind of what we're seeing and taking it 1 quarter at a time. Josh Waldman: Got it. Okay. And then, Mike, following up on pharma, I think these accounts typically start to get better clarity on their full year budgets this time of year. Wondered if you could update us on what you're hearing from key pharma accounts with respect to instrument budgets and purchasing plans here in '23? Mike McMullen: Yes. Sure, Josh. In fact, Padraig, I think you've just done recently around with some of the large pharma accounts and... Padraig McDonnell: Yes. So I think what we're seeing is our funnels are very, very stable on it. And of course, you're correct, the pharma budgets are set around this time of the year. And I think we're watching closely on how that moves to the second half but for now, no change. Mike McMullen: So I think we probably haven't seen any surprises on those like themselves but they're not aggressively releasing yet either. I think that's -- that's why I made a few times on this call comments around normalization of deal cycle times. Operator: And we'll take our next question now from Lisa Garcia of UBS. Lisa Garcia: Congrats on the quarter. I wanted to talk about sell analysis if we could. Obviously, it's like a $400 million business over for you at this point. I'd love to hear about performance. And then I think in a recent presentation, kind of indicated that it's pharma that's like maybe the largest customer set followed by research. So it would be great to get a sense of kind of the different customer groups and what you're seeing there? Mike McMullen: It's hard to get all the good news in but I think we had a good start to the year at cell analysis, Jacob, as I recall? Jacob Thaysen: Yes. We had another good quarter in sale analysis. Actually, we're really proud of what we build up of the business over the past years here in cell analysis in the M&A and the acquisitions we have done. And you're absolutely right that the main opportunities are within the biopharma academia and we've actually done a really good job in diversifying where we had some of the business we acquired was very exposed to academia and we've been able to really penetrate into the biopharma over the past years. So we continue to see opportunities and especially actually in the high end of the business that there's still a lot of opportunities in the biopharma space and especially in understanding the immune system, immuno-oncology, CAR-T and others is areas that we have put a lot of investments into and we see that pays off. So I believe there is still a lot of opportunities in front of us here. There is a strong correlation there in the biopharma academia space. There's a lot of collaborations where especially if you look into the CAR-T where you see a lot of the big university hospitals that is investing into this. So it's kind of a crossover between the academia and biopharma right now. So we see opportunities in both those areas right now. Lisa Garcia: Awesome. And then I guess... Robert McMahon: Just one other comment. Just you had asked about kind of growth rates. What I would say is it grew faster than the overall company faster than LSAG. Lisa Garcia: Awesome. Super helpful. I guess if I could just squeeze in one last one on the attachment rate. You're just crossed over the 30% line. I think I'm more thinking about kind of -- how do we think about kind of the incremental, particularly I'm thinking about services, ACG did pretty well this quarter. The revenue progression as we're looking at a larger installed base that's been put out over the past couple of years? Mike McMullen: Yes. And I'll have you make some cost or part. But I think we're expecting the continued step-up in that attach rate. Padraig McDonnell: Yes. I think there's significant opportunity to drive growth for our business and it's about at 1 point of attach rate is about $30 million annually. And we know our customers have adopted workflow solutions that a tight integration on the instruments. And that allows us, of course, with the 1 commercial organization to demonstrate the value and of course, attach more services and consumables. I will say if you think about what Jacob said about PFAS and biopharma, our focus on solution selling has really paid off. That's really driven attach rates. And I think our overall attach rate in both services and consumers are now in the low 30s and that represents a 2% increase and we expect that to grow as we move forward. Mike McMullen: And as your question focused on the attach rate on services. But I'd be remiss not to have Jacob talked about what's going on in attach rate to consumers that ties in this workflow solutions because we did make some changes organizationally but the ACG strategy of driving connect rates and services and consumables remains intact. Jacob Thaysen: Yes, exactly. And I think along what Padraig mentioned is that there's been a lot of investment from both the businesses and in commercial about driving connect rate also with consumables. And it's more about selling the full solution and hence, going out not only present an instrument but percent, the instrument is the consumables, informatics to go after as Padraig was mentioning, PFAS, other workflows in the biopharmas and really addressing -- we're starting to addressing the high-end parts of the market. And we've seen a significant uptake in our attach rates in our consumables and -- and I would say we are -- we will continue to see growth. We still have a long -- a lot of opportunities but I've been really impressed with the team to take it from the 20s up way beyond the 30s now. Operator: We'll go next now to Paul Knight of KeyBanc. Paul Knight: On the RNA or the oligo production business, it looks like we've had, I guess, 4 or 5 here in the last 4 years or so dominated by Alnylam and Novartis. I'm assuming that this customer count you talk to and project count is expanding well beyond that group of that customer. So my question really is what's your position in the market? Do you think you're the dominant vendor? And two, does this number of partners suggest you're going way beyond Novartis and Alnylam? Mike McMullen: Paul, I'm really glad you hung on and got your question because very enthusiastic to answer that question. We have a much broader base of business beyond 2 very good customers but the programs go much, much, much broader than that. Robert McMahon: And we are the market leader. Mike McMullen: Yes. We crossed over on the siRNA piece. We are clearly the market leader. We are going to be going after more aggressively the CRISPR space where we can't yet claim leadership. But overall, we've really -- with the capacity expansion, the continued great work of our team. We continue to gain market share. And from the math we're doing, we've now crossed over in the leader in the space. Paul Knight: So in fact, what you're really building out is the kind of market or the technological I guess, threshold we've now achieved. Is that fair to say? Mike McMullen: I'm not sure I understand completely the question. But I think what we're doing is, I think I got it which is we're actually expanding our portfolio which is we're the leader in siRNA. We've got a broad base of business broad-based set of number of pharma customers. Over time, you hear more about those when their therapeutics come to market. but also we're expanding into the CRISPR area. We've got a small business there right now. We do really well. We just don't have all the capacity we need and that's part of the storyboard what we're doing, what we call Project Endeavor. Robert McMahon: Yes. And Paul, to build on what Mike was saying is not only are we expanding but I think just as importantly, the market is expanding. And so the Alnylams of the world were the pioneers of this technology or one of the pioneers. But if you look at the number of products that are in the clinic or compounds that are in the clinic, it goes well beyond the 2 customers that you just talked about. Sam Raha: Rob, maybe just to add just a twitch color to that. The actual number of programs that are in various stages has literally doubled over the last 4 years. And then in terms of pharma partners, we're not in a position today to share anything publicly. But I already said we're working with more than 30 pharma partners. And I think what's encouraging for us is even within pharma, the caliber of the companies that have now entered and advancing molecules at various stages. So this is a market that is maturing the number of FDA approvals that have happened, European approvals that have happened. So there's momentum in the market. And we are -- we've worked hard to be the leaders in siRNA but there's momentum that's there for us to ride as well. Operator: Thank you. And gentlemen, it appears we have no further questions today. Parmeet, I'll hand things back to you for any closing comments. Parmeet Ahuja: Thanks, Bill and thanks, everyone, for joining. With that, we would like to end the call for today. Have a great rest of the day, everyone. Operator: Thank you, Parmeet. And ladies and gentlemen, this concludes today's call. Thank you again for joining and you may now disconnect your lines.	[ { "speaker": "Operator", "text": "Ladies and gentlemen, welcome to the Agilent Technologies Q1 2023 Earnings Call. My name is Bill and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja, to begin the conference. Parmeet, please go ahead." }, { "speaker": "Parmeet Ahuja", "text": "Thank you, Bill and welcome, everyone, to Agilent's conference call for the first quarter of fiscal year 2023. With me are Mike McMullen, Agilent's President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A after Mike and Bob's comments will be Jacob Thaysen, President of the Agilent Life Science and Applied Markets Group; Sam Raha, President of the Agilent Diagnostics and Genomics Group; and Padraig McDonnell, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our first quarter financial results, investor presentation and information to supplement today's discussion along with the recording of this webcast are available on our website at www.investor.agilent.com. Today's comments by Mike and Bob will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Our guidance is based on forecasted currency exchange rates. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now, I'd like to turn the call over to Mike." }, { "speaker": "Mike McMullen", "text": "Thanks, Parmeet. And thanks, everyone, for joining our call today. The Agent team delivered an excellent start to 2023, exceeding both top and bottom line expectations. Q1 revenues of $1.76 billion or up 10% core. Agilent's broad-based portfolio and resilient growth model are on a full display during the quarter with growth across all end markets and geographic regions. Operating margin in the quarter are 27.1%, up 80 basis points. Earnings per share of $1.37 were up 13%. Let's now take a closer look at our first quarter performance, starting with end market highlights. Chemicals and Advanced materials led the way for us with another outstanding quarter, delivering 14% core growth with strength across all geographies. The strength in our pharma business continues and is up 11%, with both large and small molecule growing nicely. This is on top of 17% growth last year. Our environmental friend business grew 12%, while the academia government and the food markets both grew 8%. On a geographic basis, China once again led the way. Our China team continued their record of strong execution overcoming any disruption associated with COVID and delivered 13% growth during the quarter, exceeding our expectations. In Europe, we also delivered stronger-than-expected results, growing 10%. The Americas shows a solid results with 8% growth. Looking at our performance by business unit. The Life Sciences and Applied Markets Group delivered revenues of $1.03 billion, up 11% core. LSAG delivered growth across all end markets and regions. Our LC and LC/MS platforms continued their strong performance during the quarter, growing faster than the market at 16%. Demand in the chemicals and advanced materials end market continues to be strong. particularly for materials used in manufacturing semiconductors and batteries. Our Spectra business grew more than 20% in the quarter and we continue to strengthen our base in spectroscopy across multiple end markets. In Q1, we announced an appointment at the Insight200M. This system is used at checkpoints throughout the London Heathrow Airport to officially provide enhanced security and ensure passenger safety. The Asian Crosse group posted revenue of $381 million in Q1. This is up 13% core as the team continues to take advantage of record instrument placements over the past 2 years along with continued growth and attach rates. Across our team's deep knowledge of customer lab operations continues to drive consistently high levels of customer satisfaction. The breadth and diversity of our product offerings is driving record renewals for support contracts. At the same time, our Enterprise Services business continued its strong momentum, driving growth and converting competitive accounts. The Diagnostics and Genomics Group delivered revenues of $342 million, up 5% core. Our pathology-related business performed well with double-digit growth led by the Americas and Europe. NASD posted another strong quarter, growing 22%. Our Train B manufacturing expansion remains on track to come online mid-calendar year. In January, we announced an additional $725 million expansion of our NASD facility that will double our oligo manufacturing capacity. And 2 weeks ago, we are pleased to have the Governor of Colorado join us in our groundbreaking ceremony at the Frederick site. In addition to organic investments, we continue to invest externally in new technologies and partnerships. In the quarter, we welcomed the Avida Biomed team into Agilent, further enhancing our genomics capabilities. Avida is early-stage life sciences company designed to assist clinical researchers using NGS approach in the study of cancer. We also continue to partner with new technology platform companies to drive our solutions in the marketplace. This quarter, we announced a partnership with the Akoya Biosciences to combine our companion diagnostic and IHC workload expertise with their solution to drive multiplex tissue assay development for biopharma. In addition to these business group highlights, Agilent was again recognized among the top 100 most just companies in the U.S. by Just Capital and CNBC. As part of this announcement, we are very proud to be the leader in the medical equipment and services industry for our treatment of employees and focus on customer relations. The Agilent team navigated challenging market uncertainties in Q1 and yet once again produced excellent results. It was a great start to the year. Q1 was another outstanding example of the work we've done to build a resilient company with multiple growth drivers. Those growth drivers create through targeted investments that aim to expand and enhance our business in high-growth areas are the heart of our Build and Buy growth strategy. As we look ahead to Q2, we remain confident in the strength and resilience of our business. We have an unstoppable One Agilent team that continues to execute at an extremely high level and is well prepared to deal with any challenges they face. Given the strong start to the year, we are raising our full year core revenue and EPS guidance while also keeping a close eye on macroeconomic conditions. I will provide the detail on our overall outlook but overall, we remain convinced our strategic focus and unmatched execution capabilities will continue to drive strong results. Thank you for joining us today. And now, Bob, over to you." }, { "speaker": "Robert McMahon", "text": "Thanks, Mike and good afternoon, everyone. In my remarks today, I'll provide some additional details on revenue in the quarter as well as take you through the income statement and other key financial metrics. I'll then finish up with our updated full year guidance and initial guidance for the second quarter. Unless otherwise noted, my remarks will focus on non-GAAP results. We are extremely pleased with our Q1 performance. It was a very solid start to the year. Q1 revenue was $1.76 billion, exceeding our expectations. Revenues were up 10% core and 5% on a reported basis. Currency was a 5-point headwind which was an improvement from the beginning of the quarter, while the M&A contribution was as we expected. Pricing for the quarter was higher than the full year forecast also as we expected. Now I'd like to share some additional detail on our end markets. Results in our largest market, pharma were again very strong. Pharma grew 11% following 17% growth of last year. Performance was solid across both small and large molecules. Small molecule grew 12%, while large molecule grew 9%. And as Mike mentioned, Chemicals and Advanced Materials also continued to be very strong, growing 14% during the quarter on top of 15% growth last year. The chemical and energy subsegments of the market are doing well while the advanced materials market continues to deliver outsized growth. Semiconductors and batteries are driving demand, helped by government investment in this area. The food market grew 8% during the quarter, driven by double-digit growth in China. The environmental and forensics business grew 12%, led by the Americas as increased testing for PFAS chemicals drives customer investment in this area and recently approved U.S. legislation leads to broad spending in the environmental market. Our business in the diagnostics and clinical market grew 4% versus 11% growth last year. Pathology led the way for us here, partially offset by industry-wide challenges in the genomics market. And the academia and government market was up 8%, led by LCs and services. Regionally, Europe and Asia showed strong results. On a geographic basis, the China team delivered 13% growth and Europe grew 10%, both exceeding expectations. The Americas had another solid quarter coming in at 8%, in line with our expectations. Now let's turn to the rest of the P&L. First quarter gross margin was 56.5%, up 40 basis points from a year ago. The gross margin performance, coupled with good cost discipline and SG&A helped drive our operating margin to 27.1%, up 80 basis points from last year. Below the line, our tax rate was 13.75% for the quarter and we had 297 million diluted shares outstanding, both as expected. And putting it all together, earnings per share were $1.37, up 13% from a year ago. In summary, Q1 ended with 10% core top line growth and 13% earnings per share growth, a very good start to the year. Now some metrics on cash flow and our balance sheet. In Q1, we generated $296 million in operating cash flow, up 16% versus last year, while investing $76 million in CapEx. CapEx spending continues to be driven by our scale-up of our Train B manufacturing line and other capacity expansion projects. In the quarter, we returned $142 million to shareholders through $67 million in dividends and by repurchasing shares worth $75 million. We also announced we're increasing our dividend by 7%, along with a new $2 billion share repurchase authorization continuing our successful balanced approach to capital deployment. Our balance sheet continues to remain healthy as we ended the quarter with a net leverage ratio of 0.8. Now let's move to our revised outlook for the year and the upcoming quarter. The macroeconomic environment remains dynamic and interest rates and currencies continue to be volatile. However, given the good start to the year, we are increasing our full year revenue to a range of $7.03 billion to $7.10 billion. This increase updates our full year core revenue guidance to a range of 5.5% to 6.5%, increasing the midpoint of our guidance to 6%. We've also seen the dollar weaken against major currencies in the first quarter although it has rebounded somewhat in February. And as a result, the full year guide reflects $100 million of favorable currency movements since our initial guide in November. And for the full year, we still expect currency to be an almost 300 basis point headwind to reported growth. In addition, we're also raising our full year EPS guidance to a new range of $5.65 to $5.70 per share. And lastly, given the recently announced NASD expansion to double our oligo manufacturing capacity -- we are updating our forecasted capital spending for the year to $500 million, up $200 million from our guidance at the beginning of the year. Now turning to Q2, we expect revenue in the range of $1.655 billion to $1.680 billion. This represents core growth of 6% to 7.5% and reported growth of 3% to 4.5%. Currency is expected to be a headwind of 3.1 points, while M&A will contribute 0.1 points of growth in Q2 which is consistent with Q1. Second quarter non-GAAP earnings per share are expected to be between $1.24 and $1.27, representing growth of 10% to 12% versus the prior year. I'm pleased with how the team has delivered in the first quarter. We are focused on the things we can control. Our team is driving strong execution in the marketplace and coupled with our broad portfolio of products and services, we expect to continue to grow faster than the market as we go through the year. Thanks for being on the call. And now I'll turn over things back to Parmeet as we take your questions. Parmeet?" }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Bob. Bill, if you could please provide instructions for the Q&A now." }, { "speaker": "Operator", "text": "[Operator Instructions] We take our first question this afternoon from Matt Sykes of Goldman Sachs." }, { "speaker": "Matt Sykes", "text": "Mike and Bob, maybe we'll start on ACG, just given the quarter that it had and the comp it was facing last year, you've talked in the past about areas of underpenetration. I think China was a region you called out. Could you just maybe kind of give us a mark-to-market on where you feel from sort of an end market and regional standpoint, there's still a lot of room for that growth in ACG if we see it continue throughout this year and into next?" }, { "speaker": "Mike McMullen", "text": "Yes. Thanks, Matt. First of all, I appreciate the recognition of the numbers we posted and we think there's still a lot more opportunity in front of us. And I want to actually have provide a little bit more color on where those opportunities may lie." }, { "speaker": "Padraig McDonnell", "text": "Yes. So look, I think the broad product offering across the hardware platforms where we've had a value to -- where we add a lot of value to customer operations has been broad-based. We certainly see a lot of our offerings, particularly around asset utilization and so on, being able to be used outside pharma in different industries and we see that as an opportunity to grow. I think also given our big installed base and our ability to attach in different markets and sectors is going to continue as we go through the year." }, { "speaker": "Mike McMullen", "text": "Yes, I think we see a lot of opportunity, obviously, in China. That's when we flagged in the past. The other one that we're pointing to is a lot of the growth has historically been centered in the pharma space. We're seeing growing interest in the CAM space as well. So I think from an end market perspective, that's an area we would expect to see some more growth. And geographically, the China story still hasn't fully played out yet. And then again, I would just remind you, Matt, some of the points we made in the call, record renewals for support contracts and also clearly taking share on the enterprise level. Those attach rates we keep talking about are going up as well. So a lot to like here." }, { "speaker": "Matt Sykes", "text": "Great. And then maybe just kind of refresh us on your outlook for instruments. I mean you've kind of guided to a mid-single-digit growth for the full year. Given that we're a little ways into this year, you probably have a little more visibility on that backlog. How are you thinking about sort of the back half for instruments overall?" }, { "speaker": "Mike McMullen", "text": "Yes. So first of all, let me -- I'm taking a bit on this with Bob but let's -- I'll talk about the backlog, first of all, I think it's very important to just to remind the audience that the quality of our backlog remains extremely high. So -- and you can see the great work of our team at to work down the backlog but we're not seeing any cancellations or anything pulling out of backlog. So that gives us level of confidence around the revenues we can forecast. I think there really isn't anything new to talk about today relative to new news relative to the second half, we still remain -- we still want to acknowledge the uncertainty about the back half of the year. So really no new news here. It's very consistent to what we talked about in November. I think you're going to hear a lot of us talking about normalization of growth rates -- normalization of deal cycle times. So the funnels remain healthy. The deal cycle times are I think we've already more towards historical levels. And Bob, I don't know if you'd add anything to that?" }, { "speaker": "Robert McMahon", "text": "No, I think you're right. I mean, I think, obviously, we had a very strong start to the year with double-digit growth from LSAG we will go up against very tough comps in the back half of the year with the recovery of the business. But as Mike said, pleased with the very good start but not anything material change." }, { "speaker": "Operator", "text": "The next to Brandon Couillard of Jefferies." }, { "speaker": "Brandon Couillard", "text": "Mike, I think you said China was up 13% in the quarter. That's a lot better than we've heard from some of the other counterparts. Could you unpack that a little bit for us? Could it perhaps have been due to the fact that you're 1 month later maybe talk about linearity in China through the quarter and if your outlook for the full year. So I think it was high single digits has changed at all." }, { "speaker": "Mike McMullen", "text": "Well, I'm glad you noticed, Brandon and if you were in the conference room here, you see there's a lot of smiling in the room here because really proud of what the team has done here. So I don't think it's all a timing issue. It's about execution and its ability of this team to execute because our teams were hit with waves of COVID during the quarter. But we know how to execute. We've also enabled the -- our ability to interact with customers digitally. So while people maybe couldn't go to the office or couldn't go to customer sites, they were able to support the customers. So we were just -- we were just delighted with the performance out of China in Q3. And Bob, I think it was a broad-based story. We had growth and double-digit growth in pharma, chem, food. So it was really pleased with the results. I know our narrative is different than others are saying but I also think my team in China capability is also different." }, { "speaker": "Brandon Couillard", "text": "Got it. And then on the NASD Train C, I guess, expansion. Can you just talk about time line for that build-out. And as I remember back to Train B, I think a good amount of that was already kind of earmarked for customer demand. In the same case this time around with the current expansion." }, { "speaker": "Mike McMullen", "text": "Yes. I want to tag team a bit with this with Sam and myself and Bob. So we evenly refer to Train B. That's the latest expansion that's coming online this year. In fact, we had a chance to see that firsthand when we went to the groundbreaking ceremony for what we call Project endeavor or as you're referring to [indiscernible]; it looks really good. We're on track for that mid-calendar year go live and we have a full book of business for that just a matter of ramp. And again, project up. And then I'm going to pass it over to Sam and maybe you want to remind, Brandon, what our plans are with the new expansion, when we expect to see some of that first revenue coming into Agilent." }, { "speaker": "Sam Raha", "text": "Yes. Yes, happy to do so. And as you mentioned, Mike, first of all, we're tracking right on plan for Train B, right, midpoint -- midyear coming on. And it was great to see first-hand, Bob joined me really the progress that we're making, the facility is looking really, really nice. A lot of validation work happening miles and miles of stainless steel piping and other infrastructure that's been put in place. As you also noted, we did at the end of February, the middle of February, pardon me, the groundbreaking for trains, C and D. And these projects will take some time but we've started the process and the first revenue from that would be coming online in 2025. And remember, there's 2 trains, Train C and Train D, both dedicated to siRNA, antisense capabilities as well as expanding our ability to serve customers with single guide RNA or CRISPR. So excited about the progress in the NASD team under Brian Crude's leadership is firing in all cylinders." }, { "speaker": "Mike McMullen", "text": "Sam, unless you're going to commit to me for earlier to go live. I think you meant to say '26, right?" }, { "speaker": "Sam Raha", "text": "Did I say '25? Thank you, Mike, for catching. Usually, you're the one that accelerates me instead of the other way. Indeed, it's '26. Thanks for catching that." }, { "speaker": "Robert McMahon", "text": "Yes. And Brandon, to your point around the question of purchase orders and so forth. We have good visibility into the pipeline in the funnel but we haven't started taking orders given the time frame there. So we have high confidence that we wouldn't be putting in $725 million into the expansion." }, { "speaker": "Operator", "text": "We're going next now to Vijay Kumar of Evercore ISI." }, { "speaker": "Vijay Kumar", "text": "Congrats on a good print here, Mike. My first question here on the second quarter guidance, 6% to 7.5% organic. That's a sequential step down of 250 basis points at the high end. I guess the comps get easier. Is there anything in the second quarter? Was there any timing of revenues that got to fall to Q1? Or any China impact, anything that can explain here at the sequential guide for 2Q?" }, { "speaker": "Mike McMullen", "text": "Yes. I'll pass this over to Bob for additional detail but I think the answer is no, not the unusual about movements between the quarters. And Bob, I think what we're going to do is we want to set up another guide in Q2 that was above our full year guide. So that was the process there." }, { "speaker": "Robert McMahon", "text": "That's exactly right. I mean, I think as we look at this, we just came off a 10%, still 6% to 7.5% is still significantly above where we're forecasting the full year and I think we feel good and I think it's consistent with how we have guided in the past." }, { "speaker": "Mike McMullen", "text": "I have missed we're very prudent yet today, Bob?" }, { "speaker": "Vijay Kumar", "text": "I was waiting for that, Mike. So have to say the second quarter is a prudent guide. Is that a fair comment?" }, { "speaker": "Mike McMullen", "text": "That is correct." }, { "speaker": "Vijay Kumar", "text": "Fantastic. And then I did have one on this NASD, Mike -- at Novartis. I think they're pulling their API manufacturing in-house. And I know you're starting to train to see maybe provide some context and how big is Novartis as a customer? What's the pipeline looking in ASD and uses at risk?" }, { "speaker": "Mike McMullen", "text": "Yes. I'll tag team on this. I'll lead and Sam, if you want to add some additional color. But first of all, the announcement from Novartis is no new news. We -- that has always been part of the plan and we actually have contractual agreements relative to how much of the on market demand we get. So that's all well known. But relative to the Novartis is one of the many customers we have in this business and we really have worked hard to build a diversified book of business. And we talk a lot about Novartis great customer. I talk a lot about Anylam because we're allowed to talk about those programs but we have a much broader base book of business. And I think that gives us a lot of confidence as we move forward because we have a number of programs that we're supporting. We know not everyone is going to hit but we know that there's going to be a lot of success rates there as well. And Bob?" }, { "speaker": "Robert McMahon", "text": "Yes, let me just add something. I mean I would say this means nothing to our expansion. I mean or I want to be very clear about that. I mean I think we feel very good about -- we've continued to be capacity constrained. We've had more orders than we can satisfy. And I think that continues to be the case and we feel extremely good about the overall technology and our position in the marketplace." }, { "speaker": "Mike McMullen", "text": "Thanks, Bob. I appreciate that build." }, { "speaker": "Sam Raha", "text": "Mike, if I can just add just a couple of quick things, right? We've stated this before. We think the therapeutic oligo market for the suppliers that we are $1 billion today, growing to $2.4 billion by 2027. And what's really encouraging about the market is the number of molecules that are advancing, right? Just to give you a little bit more color, we're doing work with over 30 pharma partners today and on dozens of programs at various stages. So the pipeline of programs are working on, some of which have the potential of being molecules also broad populations is absolutely there and something that we're excited about." }, { "speaker": "Operator", "text": "We go next now to Puneet Souda of SVB." }, { "speaker": "Puneet Souda", "text": "So first one, Bob, I don't know if I heard it on the call, contribution sort of from pricing in the quarter and for the full year. If I'm correct, you are still expecting 3% pricing contribution this year and that would imply a 3% volume contribution which it appears below historical levels for what Agilent has grown. So just maybe just -- we're trying to understand, given the tailwinds you're seeing in China, NASD and the other areas and obviously, congrats on the strong growth in the quarter. So is there anything you're seeing beyond sort of tougher compares that are emerging in the sort of the second half?" }, { "speaker": "Robert McMahon", "text": "No, it's a great question. So I did make a quick reference in the prepared remarks. Actually, Q1 was higher than the overall 3% as expected. We are still planning and forecasting that 3% price contribution for the full year of FY '23. And you're right, that would speak to roughly a 3-point volume. What I would say is we're taking it 1 quarter at a time. As we've said, we're dealing with -- looking forward, there's still some uncertainties around macro. And that's where I think our forecast and our guidance is prudent to use that word again. But I wouldn't say anything has materially changed since the beginning of the year from that standpoint. And I've been very pleased with our ability to continue to maintain that pricing throughout the course of the last several quarters and I would expect that to continue going forward." }, { "speaker": "Puneet Souda", "text": "Okay. That's helpful. And then on the Lunar New Year, is that part of -- is that baked into the guide as well? And I just wanted to clarify on China. I mean obviously, you have heard about the stimulus, your -- actually Agilent is listed -- one of the companies listed within the document that was put out for the loan stimulus for China. This is sizable. How are you thinking about it? You obviously have the longest and one of the most legacy positions in China. So just trying to understand what does that mean for China growth in 2023 and '24." }, { "speaker": "Mike McMullen", "text": "You want to take the first part of the question." }, { "speaker": "Robert McMahon", "text": "Sure. Yes. But the impact of Lunar New Year was not only in Q1 but it's also been reflected in our Q2. It was roughly 0.5 point headwind in Q1 and that's come back to us in Q2. So it was kind of as planned. And in regards to the stimulus, the way we're looking at this is Sims got kicked off in the calendar Q4. There is a section in there that's focused on equipment for universities and hospitals. But from our perspective, it's still early. So we're kind of waiting right now to see how it plays out. And but I think at this point, we really haven't put anything assumed in our guide or China growth relative to the stimulus. So if it does get deployed and comes to our way, then that will be an upside to our current forecast." }, { "speaker": "Mike McMullen", "text": "And I think Puneet, you said it well. I mean, our business in China continues to be very, very strong and I couldn't be prouder of the team, how they delivered in Q1 and that's continuing strong momentum throughout the second half of last year and we would expect that to continue here in Q2 as well." }, { "speaker": "Operator", "text": "We go next now to Rachel Vatnsdal at JPM." }, { "speaker": "Rachel Vatnsdal", "text": "Congrats on the quarter. So first up on semiconductors, one of your peers have flagged that they were expecting the semiconductor market to be soft throughout 2023, just as semiconductors or semi customers were facing a reset just given a macro environment. So you mentioned strength in semi-dry prepared. So can you just walk us through, first off which part of the market do you guys really play in, in semis? And then are you seeing any of the softness that one of your peers have flagged?" }, { "speaker": "Mike McMullen", "text": "Yes, I'll start and then we'll turn it over to Jacob to give some additional color about where we play and so forth. But I would say the short answer is no. I mean, our spectroscopy business grew over 20% in the quarter and we're still seeing strong demand. And Jacob, you want to provide a little more color?" }, { "speaker": "Jacob Thaysen", "text": "Yes, absolutely. We have -- I would say we have the strongest portfolio in atomic recopy for this market in semi but generally speaking, in material science. And we continue to see demand from the semicon industry, both in the fabs but also in the upstream for all the fine chemicals that goes into the fabs, they require the same level of QC testing like they do in the labs and hence, they are using the same instruments. So we see a lot of benefits. Those were the new fabs built but also for the continuous operation in the labs. So we expect this to continue for a while. We, of course, see a lot of news around investments into this in other parts of the world, also particularly in the U.S. Obviously, that will take some time before it comes into play. But we are -- we expect the whole semicon market to continue to be an upside for us. But as I mentioned also, we also see a lot of interest in the rest of the materials market, particularly in lithium batteries, where we see a lot of demand, not only for our spectroscopy business but really across our broad portfolio where lithium battery needs both the LCs, the GC, the spectroscopies and the CMS. So we are very excited about that space and see a lot of continued growth there." }, { "speaker": "Mike McMullen", "text": "And Jack, I think the point you made earlier, too, about some of the funding environment, we're seeing some government funding coming in from different parts of the world as part of the semiconductor industry which has benefited us." }, { "speaker": "Rachel Vatnsdal", "text": "Great. And then maybe just shifting over more towards pharma biotech. The small molecule grew faster than large molecule this quarter. You've talked in the past about some of that outpaced strength in small molecule being driven from spending related to instrument purchases that were delayed back in 2018, 2019 time frame. Can you walk us through really what inning are we in, in terms of that catch-up spend? And how long can you sustain an outpaced growth in small molecule before it kind of resets back to that normalized level? And then just update on large molecule as well." }, { "speaker": "Mike McMullen", "text": "Sure, Rachel, do I dare pass this question to the Danish member of the staff over that baseball analogy but I think, Jacob, got a great print on LC and LC/MS 17% growth, clearly outpacing the market. And I think we saw some really good strength in small molecule in particular this quarter." }, { "speaker": "Jacob Thaysen", "text": "Yes, absolutely. I will start by saying, I don't think this is a baseball game. I think there is a continuous opportunity on indicate space. So -- and we see both opportunities and we continue to believe that there is a big market in small molecules. And I think the current performance is a reflection of the investments we have done into -- we made into our portfolio over the past years both for the LC and the CMS. So it's really, really focused very much on where we have gone strategically on a lot of investment into making robust reliable and routine instruments and instrument solutions. We continue to spend significant time to truly understand our customers' pain point that is not only about the overall performance but also about how you can ease of use, a lot of smarts we put into the instruments and of course, also continues on focus on uptime of instruments. And our commercial organization is brilliantly going out and connect both our consumables and also the service contracts to it. So this just continues to be a great business for Agilent." }, { "speaker": "Robert McMahon", "text": "Yes, Rachel, maybe -- this is Bob, maybe I can add a few points because we talked at the beginning of the year, about this strong performance kind of normalizing this year. We also said if it continues, we're going to take it. And I think what you're seeing is some of that as well. But we still do think that this will normalize over time. And the portfolio that Jacob and team have I think speaks very well to us growing faster than the market. And I think you talked about the biopharma, the beauty of our business is we've got that nice diversification across both small -- and small and large molecule and certainly starting up the year very nicely." }, { "speaker": "Operator", "text": "We'll go next now to Derik DeBruin [ph] of Bank of America." }, { "speaker": "Unidentified Analyst", "text": "This is Peter [ph] on for Derik. Could you just dive a bit more into the latest on what you're seeing in Europe? You've expressed in bending some caution, particularly in Chem on the last call. So if you can touch on that as well, that would be great." }, { "speaker": "Mike McMullen", "text": "Yes. So I hope it came through in the call remarks and I'll make a few comments here, then invite organ here as well but we were delighted with the print in Europe in the first quarter exceeded our expectations. Actually, the strength across the marketplace was pretty good. I think 5 of our 6 end markets were growing high single digits or better. I think the standouts for us were actually the chem markets along with diagnostics. But I have to say we continue to watch closely the investment plans particularly for our large accounts in the chemical space as well as pharma space. But we're off to a really good start but that's -- that remains a watch area for us. But again, we're delighted with the broad-based growth we had. And I don't know if you..." }, { "speaker": "Padraig McDonnell", "text": "I think you said it all, Mike, I think it's broad-based in 5 out of 6 markets, growing high single digits. And I think what the team has been able to do has been able to really work together to take share in a lot of areas on all the markets and our focus, of course, on attach rates in both services and consumables has really benefited as well." }, { "speaker": "Mike McMullen", "text": "I think we don't talk about weather but I think the more favorable weather environment in Europe actually has put less pressure on customers relative to energy cost and energy demand. So that's been net positive but we're still keeping an eye on things." }, { "speaker": "Unidentified Analyst", "text": "Okay. And then could you just discuss your margin outlook and then pacing across '23? What's kind of -- and then further ahead, kind of what's the level of expansion potential going forward? How much gas is left in the tank there, looking out in the out years?" }, { "speaker": "Mike McMullen", "text": "You want to take that, Bob?" }, { "speaker": "Robert McMahon", "text": "Yes. I still have gas in the tank, yes. I mean I think, obviously, despite the inflationary environment that we're in, we're still able to manage growing our margins. You saw both a nice balance here this quarter with about half of it coming through gross margin as well as half of it coming through OpEx. I think as we think about it going forward, I think that 50 to 100 basis points over the course of the next several years is still a reasonable way to think about it. That's how we're thinking about the rest of this year as well." }, { "speaker": "Operator", "text": "And we'll go next now to Dan Brennan of Cowen." }, { "speaker": "Dan Brennan", "text": "On the quarter -- maybe just the first maybe the first one, another a few questions asked on the Chemical and Advanced Materials segment. But obviously, great growth in the quarter. Just wondering, with your new higher guide for the year, are you assuming something above the mid-single-digit outlook that you previously guided to for the year? And would love if you can give us any color on kind of how the growth broke out this quarter between advanced material and then chemical and energy." }, { "speaker": "Robert McMahon", "text": "Yes. That's -- it's a great question, Dan. I'll take that. And so with our revised guide, we have ticked it up a bit, given the strong performance that we had in Q1. And we continue to be surprised to the upside. When we talked about it at the beginning of the year, what was a source of upside. This would have been one of the markets that we would have talked about. And what we're seeing is actually good growth across all of the submarkets in our chem market. If I think about the chemical and energy markets, those were up high single digits and the growth was really outsized in that advanced materials that we've been talking about. So that semiconductor in batteries area grew in excess in the high 20s. And so this is a continued strength really given not only the investment there but really the power and strength of our portfolio to be able to supply critical tools and instrumentation into markets that are really continuing to expand. So we're expecting that don't book high single digits and the high 20s for the rest of the quarter, so we'll take it. But we're expecting a slight uptick there, given the strong performance that we had in Q1." }, { "speaker": "Dan Brennan", "text": "Great. And maybe just one on the balance sheet. Obviously, the -- it's in great shape, leverage is very low. Just wondering what you're seeing from the M&A environment. Obviously, Waters had a deal in the quarter. I'm wondering what you're seeing in terms of -- have you identified any interesting opportunities like what's the appetite like for sellers to kind of move forward? Just wondering what we could expect for management while it's always hard at time. I'm just kind of wondering about your appetite potential to do something bigger since you guys have been looking for the right fit." }, { "speaker": "Mike McMullen", "text": "Yes. No, I think you're closing -- happy to comment on the day your closing comments exactly where our head is at which is the right fit. So we think the environment is much more favorable than it was a year ago. We think it's now much more of a buyer's market, so to speak. Most people are willing to come off at a view of last round. There's still some dialogue around there. So we're -- we have obviously nothing to announce but we remain very interested in looking for opportunities that can augment our core organic business and this is at the heart of our build and buy growth strategy. As I've said a number of times, the buy side is all optionality for us. We'll do just fine with all the bets we have right now. But if we see the right thing, we will move on it. And we just have also just wanted to make sure we stuck with our framework and we don't ever want to have buyers remorse. So we've been very happy with all the deals we've done to date and we'll continue to use that framework moving forward. I think that fit piece that you described is really a key criteria for us." }, { "speaker": "Operator", "text": "Our next question comes from Patrick Donnelly of Citi." }, { "speaker": "Patrick Donnelly", "text": "Maybe one on just the order side. I know you guys talked a little bit about the backlog remaining pretty healthy. Can you just give a little bit of color in terms of what the order growth looked like in the quarter? I know last quarter, you guys started eating into the backlog a little bit which is natural, just given the supply chain is normalizing a little bit. Can you just talk about, I guess, order growth versus revenue growth, what you saw in the quarter? And any color there would be helpful." }, { "speaker": "Mike McMullen", "text": "Yes. Let me make some summary comments and then Bob, feel free to jump in here. But as you mentioned, we don't specifically provide book-to-bill ratios. But what I can tell you is that orders for the quarter were greater than revenue. So -- and so we continue to grow orders with particular strength in our ASD and the services business. On the instrument side, we continue to bring down this record backlog we had as we really are focused on meeting those customer shipment requirements and really thanks to the great work of the order fulfillment team, we've really been able to get back to a normal flow of shipment times and delivery commitments. Again, I would just say that the funnels remain healthy, the backlog is still a very high quality. I think we have pretty much next to no cancellations. So the quality is good. It gives Bob and I that level of predictability around revenue from that backlog." }, { "speaker": "Robert McMahon", "text": "Yes. I would say, as Mike said, I mean, the backlog continues to be healthy and we haven't seen anyone back out of any cancellations or anything like that, that would be beyond kind of the normal activity." }, { "speaker": "Mike McMullen", "text": "But I would emphasize one point I made earlier, the deal cycles are reverting towards the historic norms in this space. Again, this whole construct that we see of a normalization of particularly the analytical instrumentation marketplace evolving." }, { "speaker": "Patrick Donnelly", "text": "Yes, that's helpful. I appreciate that. And maybe just on kind of the environmental spend, PFAS testing. You've called out the last couple of quarters, Mike, I know you're excited to see some actual infrastructure dollars coming through in the U.S. here. Can you just talk about what you're seeing there, kind of where we are? I mean, it seems really early but just your perspective on kind of how that's tracking, what impact you guys are seeing from that and obviously, the durability as well." }, { "speaker": "Mike McMullen", "text": "Sure. Happy to talk about that. And I actually happen to have Jacob talk about it because I think you've just spent some time in front of the Board recently and talking about the PFAS opportunity. I don't want to educate the Board on what it's all about but the durability of growth we're seeing, we see here." }, { "speaker": "Jacob Thaysen", "text": "Yes, absolutely. And we continue to see a lot of opportunities in the PFAS where at the beginning was really all about looking for PFAS in the water supply and now it's moving into food and other types of areas. So I think you are right, we are still in the early phases of the growth opportunity. As you know, the U.S. infrastructure build, there was a $4 billion set aside to PFAS testing. And so we have one of the leading solutions here. I mean PFAS is very difficult to measure. So you need high-end instrumentation but also very specified sample prep and consumables to really make sure that you don't contaminate why you measure. So we have spent a lot of energy of putting a high-quality solutions out there and we continue to see a lot of opportunities and we will continue to invest in this space beyond PFAS. I think environmental is really a place that there will be a lot of investment going in over the next decade. So really excited about that area also besides the Advanced Materials." }, { "speaker": "Operator", "text": "And we'll go next now to Jack Meehan at Nephron Research." }, { "speaker": "Jack Meehan", "text": "Wanted to spend a little time on DGG. Maybe start with the pathology business. So double-digit growth was stronger than, I guess, what we've seen in the last few quarters. Was there anything you noticed in terms of the uptick in the quarter?" }, { "speaker": "Mike McMullen", "text": "Yes. Jack, I'm going to actually pass that over to Sam because Sam actually is calling in from Denmark. He's actually with the pathology team right now. So you can get it latest and greatest on the ground from Glostrup. Go ahead, Sam." }, { "speaker": "Sam Raha", "text": "Yes. Thanks, Mike. Jack, thanks for the question. I'd offer you a couple of things that we've observed in the quarter and I think are also promising going forward. First of all, we continue to see the trend of hospitals and health care systems being able to work through COVID and start to reprioritize cancer diagnostics. So overall, I think that's been something that's positive. We've continued to see strength in our IHC solutions, be it our companion diagnostic solutions that are in the market. But more broadly speaking, including for the antibodies that we have, that we sell as ready-to-use reagents. We're also continuing to see good traction for our advanced staining system, the Dakotas. So all of that, you look at that geographically, we've had some good success, particularly in Europe but the Americas as well." }, { "speaker": "Jack Meehan", "text": "Great. And then sticking with DGG, either for you, Sam, or for Mike. Just on the genomics side, I was backing into sort of like a high-teens decline in the quarter, if that sounds right. I'm just curious, different companies have called out different issues in this end market. If you could talk about just maybe what exactly you're seeing, that would be great." }, { "speaker": "Mike McMullen", "text": "Bob, I don't remember the exact number but it was down but not to that extent." }, { "speaker": "Robert McMahon", "text": "Yes, it was down close to double digits but not high teens." }, { "speaker": "Mike McMullen", "text": "Okay. And I'm going to have Sam talk about this but we're seeing some what we think is a transitory disruption in the diagnostics side of genomics that there's a lot going on with a lot of the diagnostic firms where we provide our solutions into their assays. So Sam, your perspective on the think would be really good." }, { "speaker": "Sam Raha", "text": "Yes, happy to provide that. And building on what you said, Mike, right, there's a lot of public information now that I'm sure, Jack, that you're aware of, it restructuring or other sort of operational challenges at a number of customers from research into technology-driven genomics companies and diagnostic testing companies are going through. Based on that, we've definitely seen conservatism from customers that they've pulled back on purchasing levels. They're working down excess safety stock that they perhaps have built up. And we've just seen a little bit of hesitation in purchase patterns. Now that being said, just recently, earlier in February, I had the chance to attend AGBT which is one of the most important technology and science conferences. And there, we definitely saw good interest for our early access that we've been doing for our SureSelect cancer CGP which is a comprehensive cancer panel 679 genes. We continue to see really good interest in our Magnus automation system which is the walk away for our SureSelect platform and our broad-based market leadership and genomics and NGS QC remains intact. So I think this is some market headwinds that we're seeing but it's just, I think, a transitory thing, as Mike mentioned." }, { "speaker": "Operator", "text": "We take our next question now from Josh Waldman of Cleveland Research." }, { "speaker": "Josh Waldman", "text": "For you -- two for you, if I may. First, on the core growth guide, I wondered if you could provide a bit more color on the considerations that went into reiterating the top end of the core growth outlook for the year. I guess, maybe a bit surprised, we didn't see more of the Q1 upside flow through to the full year. I'm wondering if maybe this is backlog work down benefit here in the quarter that starts to abate as we get into the second half for some, I guess, something else?" }, { "speaker": "Mike McMullen", "text": "Yes. Bob, I'll let -- I think the headline is more just the recognition of the continued uncertainty about the back half but..." }, { "speaker": "Robert McMahon", "text": "Yes, I think the way to think about that, Josh, is we raised the midpoint of the guidance delivered 10% in Q1. We're saying that Q2 is going to be higher than the full year. And we're going to take this 1 quarter at a time, given some of the uncertainty that we're seeing. Obviously, we did talk about having great visibility into Q1 with some of the backlog activities and so forth. But I wouldn't say it was just that. I mean, I think what I would characterize it as a prudent guide given kind of what we're seeing and taking it 1 quarter at a time." }, { "speaker": "Josh Waldman", "text": "Got it. Okay. And then, Mike, following up on pharma, I think these accounts typically start to get better clarity on their full year budgets this time of year. Wondered if you could update us on what you're hearing from key pharma accounts with respect to instrument budgets and purchasing plans here in '23?" }, { "speaker": "Mike McMullen", "text": "Yes. Sure, Josh. In fact, Padraig, I think you've just done recently around with some of the large pharma accounts and..." }, { "speaker": "Padraig McDonnell", "text": "Yes. So I think what we're seeing is our funnels are very, very stable on it. And of course, you're correct, the pharma budgets are set around this time of the year. And I think we're watching closely on how that moves to the second half but for now, no change." }, { "speaker": "Mike McMullen", "text": "So I think we probably haven't seen any surprises on those like themselves but they're not aggressively releasing yet either. I think that's -- that's why I made a few times on this call comments around normalization of deal cycle times." }, { "speaker": "Operator", "text": "And we'll take our next question now from Lisa Garcia of UBS." }, { "speaker": "Lisa Garcia", "text": "Congrats on the quarter. I wanted to talk about sell analysis if we could. Obviously, it's like a $400 million business over for you at this point. I'd love to hear about performance. And then I think in a recent presentation, kind of indicated that it's pharma that's like maybe the largest customer set followed by research. So it would be great to get a sense of kind of the different customer groups and what you're seeing there?" }, { "speaker": "Mike McMullen", "text": "It's hard to get all the good news in but I think we had a good start to the year at cell analysis, Jacob, as I recall?" }, { "speaker": "Jacob Thaysen", "text": "Yes. We had another good quarter in sale analysis. Actually, we're really proud of what we build up of the business over the past years here in cell analysis in the M&A and the acquisitions we have done. And you're absolutely right that the main opportunities are within the biopharma academia and we've actually done a really good job in diversifying where we had some of the business we acquired was very exposed to academia and we've been able to really penetrate into the biopharma over the past years. So we continue to see opportunities and especially actually in the high end of the business that there's still a lot of opportunities in the biopharma space and especially in understanding the immune system, immuno-oncology, CAR-T and others is areas that we have put a lot of investments into and we see that pays off. So I believe there is still a lot of opportunities in front of us here. There is a strong correlation there in the biopharma academia space. There's a lot of collaborations where especially if you look into the CAR-T where you see a lot of the big university hospitals that is investing into this. So it's kind of a crossover between the academia and biopharma right now. So we see opportunities in both those areas right now." }, { "speaker": "Lisa Garcia", "text": "Awesome. And then I guess..." }, { "speaker": "Robert McMahon", "text": "Just one other comment. Just you had asked about kind of growth rates. What I would say is it grew faster than the overall company faster than LSAG." }, { "speaker": "Lisa Garcia", "text": "Awesome. Super helpful. I guess if I could just squeeze in one last one on the attachment rate. You're just crossed over the 30% line. I think I'm more thinking about kind of -- how do we think about kind of the incremental, particularly I'm thinking about services, ACG did pretty well this quarter. The revenue progression as we're looking at a larger installed base that's been put out over the past couple of years?" }, { "speaker": "Mike McMullen", "text": "Yes. And I'll have you make some cost or part. But I think we're expecting the continued step-up in that attach rate." }, { "speaker": "Padraig McDonnell", "text": "Yes. I think there's significant opportunity to drive growth for our business and it's about at 1 point of attach rate is about $30 million annually. And we know our customers have adopted workflow solutions that a tight integration on the instruments. And that allows us, of course, with the 1 commercial organization to demonstrate the value and of course, attach more services and consumables. I will say if you think about what Jacob said about PFAS and biopharma, our focus on solution selling has really paid off. That's really driven attach rates. And I think our overall attach rate in both services and consumers are now in the low 30s and that represents a 2% increase and we expect that to grow as we move forward." }, { "speaker": "Mike McMullen", "text": "And as your question focused on the attach rate on services. But I'd be remiss not to have Jacob talked about what's going on in attach rate to consumers that ties in this workflow solutions because we did make some changes organizationally but the ACG strategy of driving connect rates and services and consumables remains intact." }, { "speaker": "Jacob Thaysen", "text": "Yes, exactly. And I think along what Padraig mentioned is that there's been a lot of investment from both the businesses and in commercial about driving connect rate also with consumables. And it's more about selling the full solution and hence, going out not only present an instrument but percent, the instrument is the consumables, informatics to go after as Padraig was mentioning, PFAS, other workflows in the biopharmas and really addressing -- we're starting to addressing the high-end parts of the market. And we've seen a significant uptake in our attach rates in our consumables and -- and I would say we are -- we will continue to see growth. We still have a long -- a lot of opportunities but I've been really impressed with the team to take it from the 20s up way beyond the 30s now." }, { "speaker": "Operator", "text": "We'll go next now to Paul Knight of KeyBanc." }, { "speaker": "Paul Knight", "text": "On the RNA or the oligo production business, it looks like we've had, I guess, 4 or 5 here in the last 4 years or so dominated by Alnylam and Novartis. I'm assuming that this customer count you talk to and project count is expanding well beyond that group of that customer. So my question really is what's your position in the market? Do you think you're the dominant vendor? And two, does this number of partners suggest you're going way beyond Novartis and Alnylam?" }, { "speaker": "Mike McMullen", "text": "Paul, I'm really glad you hung on and got your question because very enthusiastic to answer that question. We have a much broader base of business beyond 2 very good customers but the programs go much, much, much broader than that." }, { "speaker": "Robert McMahon", "text": "And we are the market leader." }, { "speaker": "Mike McMullen", "text": "Yes. We crossed over on the siRNA piece. We are clearly the market leader. We are going to be going after more aggressively the CRISPR space where we can't yet claim leadership. But overall, we've really -- with the capacity expansion, the continued great work of our team. We continue to gain market share. And from the math we're doing, we've now crossed over in the leader in the space." }, { "speaker": "Paul Knight", "text": "So in fact, what you're really building out is the kind of market or the technological I guess, threshold we've now achieved. Is that fair to say?" }, { "speaker": "Mike McMullen", "text": "I'm not sure I understand completely the question. But I think what we're doing is, I think I got it which is we're actually expanding our portfolio which is we're the leader in siRNA. We've got a broad base of business broad-based set of number of pharma customers. Over time, you hear more about those when their therapeutics come to market. but also we're expanding into the CRISPR area. We've got a small business there right now. We do really well. We just don't have all the capacity we need and that's part of the storyboard what we're doing, what we call Project Endeavor." }, { "speaker": "Robert McMahon", "text": "Yes. And Paul, to build on what Mike was saying is not only are we expanding but I think just as importantly, the market is expanding. And so the Alnylams of the world were the pioneers of this technology or one of the pioneers. But if you look at the number of products that are in the clinic or compounds that are in the clinic, it goes well beyond the 2 customers that you just talked about." }, { "speaker": "Sam Raha", "text": "Rob, maybe just to add just a twitch color to that. The actual number of programs that are in various stages has literally doubled over the last 4 years. And then in terms of pharma partners, we're not in a position today to share anything publicly. But I already said we're working with more than 30 pharma partners. And I think what's encouraging for us is even within pharma, the caliber of the companies that have now entered and advancing molecules at various stages. So this is a market that is maturing the number of FDA approvals that have happened, European approvals that have happened. So there's momentum in the market. And we are -- we've worked hard to be the leaders in siRNA but there's momentum that's there for us to ride as well." }, { "speaker": "Operator", "text": "Thank you. And gentlemen, it appears we have no further questions today. Parmeet, I'll hand things back to you for any closing comments." }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Bill and thanks, everyone, for joining. With that, we would like to end the call for today. Have a great rest of the day, everyone." }, { "speaker": "Operator", "text": "Thank you, Parmeet. And ladies and gentlemen, this concludes today's call. Thank you again for joining and you may now disconnect your lines." } ]	Agilent Technologies, Inc.	154,924
A	4	2,024	2024-11-25 16:30:00	Operator: Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Agilent Technologies Inc. Fourth Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to withdraw your question, again, press star one. Thank you. Parmeet Ahuja, you may begin your conference. Parmeet Ahuja: Thank you, and welcome everyone to Agilent's conference call for the fourth quarter of fiscal year 2024. I am sure you have seen our press release earlier today regarding our new market-focused organizational structure, which we will talk about in more detail. These changes have no impact on our company's consolidated financial statements. All financial metrics and guidance during this call will be shared under our historical structure. We will provide recast historical segment information to reflect these changes ahead of our upcoming investor day. Now onto our quarterly results. With me are Padraig McDonnell, Agilent President and CEO, and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A will be Phil Binns, President of the former Life Sciences and Applied Markets Group, Simon May, President of the newly formed Life Sciences and Diagnostic Markets Group, and Angelica Riemann, President of the expanded Agilent CrossLab Group. Also joining the call is Mike Zhang, President of the newly formed Applied Markets Group. This presentation is being webcast live. The news release for our fourth quarter financial results, investor presentation, and information to supplement today's discussion, along with the recording of this webcast, are available on our website at investors.agilent.com. Today's comments will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year, and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past twelve months. Guidance is based on forecasted exchange rates. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risk and other factors. And now I would like to turn the call over to Padraig. Padraig McDonnell: Great. Thank you, Parmeet. Hello, everyone, and thank you for joining today's call. Before I begin, I would like to welcome new AMG President, Mike Zhang. While Mike is new to this role, he is not new to Agilent. Mike joined Agilent more than twenty years ago as a manufacturing engineer in China and most recently was Vice President and General Manager of the GC and GCMS business. Within our former Life Sciences and Applied Markets Group, with his broad experience in both manufacturing and into the business, Mike will be an incredible asset in this role. Very much looking forward to him moving AMG and Agilent forward. I also want to take a moment to wish Phil Binns a wonderful retirement in advance of him leaving Agilent. Phil joined Agilent with the Varian acquisition in 2010. All told, Phil is celebrating just over forty years of service with Agilent and Varian. Although Phil is retiring from the business president role, he has graciously agreed to serve as a special adviser through April 2025. All of us at Agilent wish Phil the very best and look forward to working with him during the last five months at Agilent. Now onto our high-level Q4 results. I am happy to share not only our solid fourth quarter results that point to continued steady market recovery, but also our outlook and drivers for the 2025 fiscal year. I am especially excited to talk about Agilent's customer-first strategy evolution and our aggressive transformation ambition that led to the news you read ahead of the call. The new market-focused organizational structure to become a nimbler, even more customer-centric company to accelerate our performance. In the fourth quarter, the Agilent team delivered revenue of $1.701 billion, roughly one percent reported growth with a flat core growth. This represents a sequential improvement of over four hundred basis points from Q3. In addition, our total company book-to-bill was greater than one. This points to a steady market improvement we are seeing and we expect it to continue in 2025. We also gained share in all our geographies. Evidence that even in challenging CapEx environment, customers trust Agilent. As we evolve, we are confident this will only accelerate. Bob will provide deeper details on our Q4 results and our outlook for Q1 and FY 2025. Now I would like to spend some time talking about our new organization structure we announced earlier today. Our new market-focused organization structure is a result of our customer-centric market force strategy and an important step in our organizational transformation work, which we have named Ignite. This is a product of our enterprise focus strategy that drives our evolution to become a nimbler, even more customer-centric company to accelerate our performance. The new market-focused organization structure is one of the most significant changes Agilent has seen in a decade and continues the work we did creating our commercial organization three years ago. The commercial organization doubled down on our customer-first approach in the field and it's a critical competitive advantage in supporting our customers. At that time, we started by creating a singular commercial leadership structure. We then created a foundational infrastructure and intensified our focus on digital capabilities, accelerated and end-to-end customer experience, and ensured sales channels were customer and market-centric. So changes you see today are part of the successful journey we started three years ago. With the new structure, we are aligning business units to our markets facilitating close collaboration among the businesses like never before and enabling better execution and cross-division customer-first priorities. We are combining the strength of our three businesses as well as our portfolios so that we can offer end-to-end solutions and workflows revolve around our customers and markets. The Life Sciences and Diagnostics Markets Group's or LDG represents $2.5 billion in annual revenue and is primarily focused on our pharma, biopharma, and clinical diagnostic end markets. LDG provides a comprehensive portfolio of leading technology platforms and solutions to serve Agilent's customers' value chain, including research and discovery, development and scale-up, production of therapeutics, and development of critical cancer diagnostics. LDG includes LC and LCMS, cell analysis as well as CDMO capabilities which include NESD and BioVectra. The business also includes pathology, companion diagnostics, and genomics. Simon May will serve as president of LDG prior to joining Agilent earlier this year at Bio-Rad Laboratories. Simon was Executive Vice President and President of Life Science Group. The Applied Markets Group or AMG represents $1.3 billion in annual revenue and is focused on food, environmental, forensics, chemicals, and advanced materials markets. AMG includes GC and GCMS spectroscopy, vacuum technology platforms, and certified pre-owned business. AMG will focus on growing its agile and strong leadership in these markets and accelerating growth in new areas of the market. Mike Zhang, a twenty-two-year veteran of Agilent, has been promoted to president of AMG. Most recently, Mike was Vice President and General Manager of our GC and GCMS product lines. The Agilent CrossLab Group or ACG represents $2.7 billion in annual revenue and is focused on supporting our customers in all our end markets. The group is uniquely positioned to leverage its comprehensive portfolio and capabilities to further enhance the installed base of instruments with targeted workflows and applications that drive critical outcomes and productivity in labs. ACG includes services, software and informatics, automation, and consumables. This business will accelerate and strengthen customer relationships across all end markets. Angelica Riemann, a twenty-five-year veteran of Agilent, will continue to serve as president of ACG. Prior to her current role, she served as Vice President and General Manager of the ACG services business. This change is one of the many that demonstrate how we are becoming nimbler and accelerating the pace of innovation. And you can see that with the Q4 launch of the exciting Agilent Infinity 3 LC series that harnesses our fifty years of LC expertise and leadership. The Infinity 3 series has advanced automation that simplifies our customers' daily routines and is compatible with previous generation, which allows for seamless upgrades and technology refreshes. And Agilent Infinity Lab LC solutions are certified by MyGreenLab. These instruments optimize lab space, and they reduce water, solvent, and energy consumption while also minimizing waste. While just launched in October, early traction from customers has been very positive. Also in Q4, we closed our acquisition of BioVectra, demonstrating our commitment to providing customers the most advanced capabilities to accelerate our therapeutic programs. With BioVectra now being part of Agilent, we expand our portfolio of CDMO services beyond our market-leading oligonucleotide production at NASD. Adding more rapidly growing therapeutic modalities like peptide synthesis, a market expected to continue to expand rapidly over the coming years. And bringing world-class capability to support gene editing therapies. Just last month, my leadership team and I visited BioVectra to welcome our new team members to Agilent, and we became even more accelerated by the capabilities we would be able to harness. Plus both Agilent and BioVectra's focus on putting customer first and accelerating the pace of innovation so we can add to and capitalize on opportunities was abundantly clear as I spoke to dozens of BioVectra employees. Separately, during the quarter, we hit another important milestone. For the full year, we passed the $1 billion mark in digital orders, for the first time across the company. This is a result of our investment in our digital ecosystem to ensure our customers can do business with us in ways that meet their needs. To reinforce what I have stated in previous calls, we are sharply focused on key growth factors such as BioPharma, PFAS, and advanced materials. And the Agilent team has mobilized to accelerate value creation through our Ignite transformation program. The objective of Ignite is to drive revenue growth and margin expansion by increasing our execution capabilities. Operator: The world is moving faster than ever, Padraig McDonnell: and so are we. That is exactly why we introduced our new market-focused organization structure. We are laser-focused on winning in the marketplace and adding value to our customers and shareholders. We will dive more deeply into these details including our evolved strategy and the Ignite transformation, that will help us execute on that strategy. At our investor day on December seventeenth in New York. Bob McMahon: We Padraig McDonnell: Bob would now provide the details of the results as well as our outlook for the fiscal year of 2025 and the first quarter. After Bob delivers his comments, I will be back for some closing remarks. Over to you, Bob. Bob McMahon: Thank you, Padraig, and good afternoon, everyone. In my remarks today, I will provide some additional details on fourth quarter revenue and take you through the income statement and other key financial metrics. I will then cover our guidance for fiscal year 2025 and the first quarter of 2025. Unless otherwise noted, my remarks will focus on non-GAAP results. As Padraig said, we are pleased with our Q4 results. Agilent finished the fourth quarter, with core growth in line with our expectations while EPS exceeded our expectations as we executed well against a challenging albeit improving market. Q4 revenue was $1.701 billion, a decline of 0.3% core but a sequential improvement of over four hundred basis points. On a reported basis, our revenues were up 0.8% as we benefited from fifty basis points of currency and BioVectra contributed sixty basis points. Looking at our Q4 performance by business unit, the Life Sciences and Applied Markets Group reported $833 million in revenue. That represents a 1% decline as instrument volumes continue to be constrained, by conservative customer CapEx spending while consumables grew mid-single digits. Having said that, for our instruments business, our orders grew year on year and for the third consecutive quarter, our book-to-bill was once again greater than one. We see this as positive evidence of an ongoing steady instrument recovery. Moving on to Agilent CrossLab Group, the business delivered revenue of $426 million for the quarter, 5%. ACG grew in every market and in every region except China, where it was flat year over year but up sequentially. The contracts business including our fast-growing enterprise services business, double digits again in Q4 as it has every quarter this year. Our largest customers continue to maximize utilization of their assets, right-size their operations, and leverage OpEx budgets to deliver on their productivity goals and outcomes. We recently received a top supplier award from one of our largest strategic customers in the applied markets as a recognition of our long-standing and beneficial partnership throughout the years. The Diagnostics and Genomics Group posted $442 million in revenue, representing a 3% decline that was slightly above expectations. Pathology saw solid growth globally, and was offset by expected softness in NESD and cell analysis instruments. Now looking at our end markets and geographies, our largest end market, pharma, declined 1%, slightly better than what we expected. Within pharma, biopharma declined mid-single digits while small molecule grew low single digits. Encouragingly, all regions except for the Americas, grew in the quarter. The Americas region was pressured by the expected decline of NASD. We expect both the Americas region and NASD to return to growth in fiscal year 2025. In chemicals and advanced materials, revenue grew 1% with our advanced materials submarket growing mid-single digits driven by our business in the semiconductor market. Our business in the diagnostics and clinical end market performed strongly growing 7% driven by pathology, and improved performance in genomics. Operator: In environmental and forensics, Bob McMahon: we declined 6% although dollars were roughly flat sequentially. All regions grew except for the US, related to timing of orders. That being said, we continue to see very strong growth in PFAS solutions. With our business growing more than 40% in Q4 across multiple end markets. Now wrapping up our end markets, food was down 3% versus last year. While our academia and government market was down 1%. Geographically, Asia ex-China high single digits and Europe grew low single digits in the quarter while the Americas and China declined as expected. China was down only 3% and exceeded our expectations. We also booked our first China stimulus orders in October and anticipate much more in fiscal year 2025. Now let's move to the rest of the P&L. Gross margin was 55.1% in the quarter, down seventy basis points versus last year driven by lower volume and mix. Our operating margin was 27.4% as our productivity initiatives and the cost actions we took earlier in the year were fully recognized this quarter. The annualization of these savings coupled with the market recovery and the initial returns from the Ignite transformation, give us confidence in driving EPS growth in fiscal year 2025. In addition, we continue to look for ways to drive EPS growth below the line. Our net interest income was in line while we benefited from a lower tax rate in the quarter and our share count was 287 million diluted shares outstanding. Now putting it all together, Q4 earnings per share was $1.46, that was ahead of our expectations and up 6% from a year ago. Now let me turn to cash flow and the balance sheet. We continue to enjoy a very strong balance sheet and healthy cash flows. Operating cash flow was $481 million in the quarter, and we invested $93 million in capital expenditures. For the year, we well exceeded our operating cash flow expectations. With operating cash flow of $1.75 billion during the quarter, we returned over $400 million to shareholders, consisting of $335 million in share repurchases, and $68 million in dividends. For the year, we returned over $1.4 billion to shareholders, through repurchasing shares and dividends. Looking forward, you may have also seen recently we announced a 5% increase in our quarterly dividend. Marking another year of increases advancing our industry-leading dividend. We ended the quarter with a net leverage ratio of 1.1, a very strong number even as we acquired BioVectra in the quarter. Our strong cash flow and healthy balance sheet provide us with plenty of opportunity to invest in the business going forward. In summary, we performed well and saw steady market improvement in the quarter. We are executing well, staying disciplined, and investing in high-growth opportunities. Now let's move on to our outlook for the upcoming fiscal year and first quarter. We expect the recovery that we have seen the past few quarters to continue throughout fiscal 2025. While we expect the market to grow slower than historical rates for the full year, we expect improvement throughout the year with the second half of the year returning to more traditional levels of growth. We expect our results to mirror that cadence of improvement on a core basis. As Padraig noted earlier, we exited Q4 with a book-to-bill ratio over one for the company, and greater than one for instruments. In addition, Q4 was the first quarter in 2024 that instrument orders grew year on year. While one quarter does not a trend make, it is certainly encouraging. For the full year guide, we expect revenue in the range of $6.79 to $6.87 billion. This represents a reported growth range of 4.3% to 5.5%. Currency is a slight headwind of 0.2 points while M&A related to BioVectra contributes 2% at the low end and 2.2% at the high end. This translates to a core growth of 2.5% to 3.5%. To start the year, we think this is a prudent way to plan given the near-term dynamics in the US. From a geographic perspective, we expect modest growth in the Americas and Europe. While we see funnel activity increasing in China, we are taking a conservative approach on the timing of revenue associated with the stimulus. We expect to see recovery over the course of the year in China, resulting in slightly positive growth for the full year. From a business group perspective, we expect to return to growth in all three groups led by ACG. As a note, this statement is true under the new structure as well. As Parmeet mentioned earlier, we will provide recast historical segment information to reflect these changes ahead of our upcoming investor day. In terms of phasing, we expect improvement throughout the year with more normalized growth expected in the second half of the year. We are projecting roughly fifty to seventy basis points of operating margin expansion for the year. Below the line, we expect net interest expense of $25 million due to the financing of BioVectra versus the net interest income this year. In addition, we expect a tax rate of 13% and 286 million shares outstanding. Fiscal 2025 non-GAAP EPS is expected to be in the range of $5.54 to $5.61 and incorporates the planned five cents year one dilution from BioVectra. This range represents a 5% to 6% growth rate if excluding the BioVectra dilution, a growth rate of 6% to 7% year on year. We expect cash flow to remain strong in fiscal year 2025. We are expecting roughly $1.65 billion in operating cash flow and $450 million in CapEx as 2025 is the peak spending year for the NASD expansion. Looking to Q1, we expect revenue in the range of $1.65 billion to $1.68 billion. Our forecast assumes no significant budget flush during the end of this calendar year. This represents a reported decline of 0.5% to growth of 1.3%. Currency is a thirty basis point headwind while M&A is expected to contribute 1.8 points of growth. We are expecting core growth between a decline of 2% to flat at the upper end. It's important to note that we estimate our projected Q1 year-over-year results will be negatively impacted this year by roughly two percentage points due to timing of the Lunar New Year which occurs in late January, versus February of last year. This includes the additional $15 million in revenue pull forward we communicated in Q1 of last year. Adjusting for the Lunar New Year impact, we are expecting continued sequential growth improvement. First quarter 2025 non-GAAP earnings per share are expected to be between $1.25 and $1.28. Lower than the full year growth rate due to the Lunar New Year timing. Looking into 2025 and beyond, we remain incredibly optimistic about the future of our markets and our long-term prospects. We are confident in our new market-focused approach and the Ignite transformation will propel us to accelerated growth and we will become a stronger company. With that, I'll turn it back over to Padraig for some closing comments. Padraig McDonnell: I've said it before and I want to say it again. These are exciting times at Agilent. Over the last several months, we've been focused on evolving our strategy, transforming our processes, and empowering our people while continuing to win in the marketplace. Already we've made bold moves that have created momentum. We've developed our future strategy, we've kicked off our Ignite transformation to help execute on that strategy. And along the way, we've made moves to create new growth vectors. We are making acquisitions that will contribute to our growth and we are strengthening our capability to efficiently and effectively integrate those acquisitions that will lay the foundation for future M&A. These initial actions position us well for the journey ahead. Bob McMahon: They ensure we are building the capability Padraig McDonnell: strength, and speed to reinvigorate our culture and enable us to thrive while delivering outstanding results for our customers and for our shareholders. And amid all this change, Fortune magazine this month named Agilent number eleven among the world's best workplaces 2024, a list that only includes twenty-five companies. This is yet another recognition of what we already know internally. The Agilent team is the best in the industry. This is not only a recognition of our outstanding company culture, of the talented professionals we have. Bob McMahon: Ones who are ambitious, Padraig McDonnell: resilient, and high performing. This is exactly the team we need to evolve Agilent. To build an enduring company that sets the standard for excellence with our customers, and creates value for our shareholders. Thank you again for joining today's call. I couldn't be more energized by the momentum we have, the opportunities we will seize, and the history we will make. Now I look forward to answering your questions. Parmeet? Parmeet Ahuja: Thanks, Padraig. Operator, if you could please provide instructions for Q&A now. Operator: And your first question today comes from the line of Patrick Donnelly from Citi. Your line is open. Patrick Donnelly: Hey, guys. Thanks so much for taking the questions. Padraig, maybe one for you. Just on the instrument side, and I know you guys touched on the book-to-bill over one for three quarters now, a little bit of improved growth on the order side year over year. Can you talk about where we are in the cycle, what your expectations are? As you guys know, there's a debate in the market about what the cycle looks like. Does it overcorrect to the upside as we work our way through the next year or so? Are you guys framing that up? What's the right way to think about this replacement cycle, where we are, and the size of it as we go forward here? Padraig McDonnell: Yeah. Thanks, Patrick. Great question. So, you know, clearly, we're seeing a steady recovery in instruments and, you know, our book-to-bill was greater than one, which is really great to see. In terms of replacement cycle, what you would see across the industry is that it's not uniform. It's across different vendors at different speeds and, of course, at different times. But what we do see is that we have we're probably midway through the expected timing on where we expect that replacement cycle to be. We see competitors are probably benefiting from refresh of their own install base with some new systems. But what you would see from our side is our Infinity 3 that we announced last month. We expect to start seeing an increased demand for our solutions, and we're seeing a lot of excitement with our customer base. And we've already seen tens of millions of dollars in orders there. So what we expect in that replacement cycle is to be slow and steady, but really kicking off in Q1. Patrick Donnelly: Okay. And that's helpful. And then maybe on China, you know, always a focus with you guys. It sounds like slight growth for 2025 is the right way to think about it. Can you just talk about what you guys are seeing there and hearing there? You know, Bob, helpful to hear that you guys got your first orders there in October. What's the expectation as we move forward here? It sounds like a steady recovery. Are you still seeing I know you guys were kinda hovering around that $300 million revenue a quarter stability. It sounds like continued and maybe a little bit of improvements as we work our way through the year. Are there different segments that are maybe picking up a little bit? Would be helpful to talk through. Thank you, guys. Padraig McDonnell: Yeah. Thanks, Patrick. So performance was a bit better than expected, and it was also really encouraging to see lab activity to continue to improve across our services and consumables. So we actually have seen quite dramatic share gains within China, which is also a really good point. So what I would say is it's steadily improving. You know, talking to the teams. And I would say on the stimulus side, you know, we talked in the call about we've already have some stimulus orders in. We expect much more in Q1. That will, of course, translate to revenue. And this is a really, really good sign as we see momentum both from the direct input of more confidence in the market and, of course, getting the dollars in. So steadily improving, and we expect that through the year, Patrick. We expect as we go through the stimulus orders and we go forward, expect that to improve. One area that was really standout for us was PFAS in China. It was the fastest-growing business for us across the globe or region across the globe, and that just goes to show the durable nature of some of these growth factors that are happening where you have the emergent pollutants act moving. And what we've seen in China is that our great technical expertise coupled with our great solutions are already there to pick up the business. So that was one real clear standout. Bob McMahon: Yeah. Hey, Patrick. Just want to add on to what Padraig is saying. Yeah. You're absolutely right. We ended the quarter with roughly $310 million, $312 to be precise, in China. Which was a nice sequential increase from Q3 and, you know, it was down 3% as I mentioned. In addition to the PFAS, both chemical and advanced materials actually grew in the quarter. We're, you know, we have a leadership position and pharma was flat, which was actually a very nice thing. And we're taking a kind of a conservative approach, as I mentioned, in terms of the stimulus orders, but we've seen quite active funnel from the standpoint of bidding activity here in the first half of this quarter as well as and expect that to continue throughout the course of 2025. Patrick Donnelly: Okay. That's helpful. Thanks, Bob and Padraig. I appreciate it. Padraig McDonnell: Thanks, Patrick. Operator: Next question comes from the line of Matt Sykes from Goldman Sachs. Your line is open. Matt Sykes: Hi, good afternoon. Thanks for taking my questions. Maybe the first one just on DGG, which has been sort of weighing on growth over the course of the year, but noticeably strong quarter. You had called out CancerDx as well as genomics. Could you just provide a little bit more color on what's driving that growth? And how sustainable do you think that growth is, particularly in genomics as we move through 2025? Padraig McDonnell: Yeah. I just said start off, and I'll kick it over to Simon. You know, as we really are seeing nice growth in our pathology business, which grew high single digits in Q4 and is slightly ahead of expectations. A highly durable business in any markets. What we're seeing in genomics, while it's a still challenging market, we posted low single-digit growth, which was also ahead of expectations. But, Simon, I don't know if you want to add some color. Simon May: Yeah. Just a quick couple of quick points to add. As Padraig mentioned, we were pretty pleased with the high single-digit growth that we saw in pathology in the quarter. And in particular, the blend and the mix between instruments and consumables there, we continue to be really healthy. With our instrument placements, and we think that sees us quite nicely going into 2025. On the genomic side, it was really notable because it's the first time that we've seen growth in genomics for quite a while now. I'd say we've had a bit of a pivot in our strategy there to really double down on the growth drivers that we see in genomics, where we've got clearly differentiated value propositions and in particular, our Magnus automated NGS library prep continues to see fantastic traction. We're also very encouraged by the pipeline that we're seeing for our Aveda NGS chemistry. And, again, this gives us a lot of hope going into FY 2025. And as I think about pathology and genomics and these growth factors that we see here, we do believe that they're durable given the macro conditions and the competitive position that we enjoy. Matt Sykes: Great. Thanks. And maybe just for my follow-up, a high-level question for you, Padraig. On the resegmentation, it makes sense from a go-to-market strategy for some of these segments to put them together. I'm wondering from an R&D development and new product innovation, how this might help. I mean, you referenced the LC replacement cycle accelerating faster for competitors as they refresh their installed base. Should we start to see a faster cycle of new product introductions due to the resegmentation, or is it gonna be similar to the pace that we've seen in the past and resegmentation really doesn't necessarily inform R&D direction? Padraig McDonnell: Yeah. Well, look, I think we're refocusing the groups really for a few reasons. We want to be closer to customers, but also understanding where do we want to make our biggest investment or most asymmetric that are going to accelerate innovation in key areas. And when I talk about focus, it's really three things. You know, it's the energy to time, but also the capital allocation. And what you will see from this refocusing of our segments, we're gonna be able to do that. You're gonna see programs accelerate. But also, we don't want to be two inches deep across the company. We want to be focused on our key growth factors and making sure we accelerate. We have a huge amount of product lines and, of course, we can have incremental additions to product lines across the board. But from this new structure, you're gonna see an acceleration of R&D. No doubt about it. Matt Sykes: Thank you. Operator: Your next question comes from the line of Rachael Raycroft with Your line is open. Rachael Raycroft: Perfect. Thank you for taking the questions, you guys, and good afternoon. So I wanted to follow-up on Patrick's question on China. Appreciate that it's early days, but how are you guys thinking about the risk of potential tariffs on Agilent's business at this point in China and in the rest of the world? Is there anything embedded in guidance currently from a tariff standpoint? And then can you remind us what was the tariff impact on Agilent in the first Trump administration? Bob McMahon: Yeah. Hey, Rachael. This is Bob. I'll take that question. As you can imagine, there's been a fair amount of work that we've been doing on this exact question. What I would take it if I took it into two chunks, actually, we've been working on diversifying our supply chain particularly within China, you know, China, back in eighteen, nineteen when the first tariffs came and then, obviously, double down on that resiliency with COVID. And so it is ten to fifteen million dollars existing today. And we think that the future potential magnitude of this is certainly manageable with us with additional mitigation activities. Obviously, with something that would be more broad-based than that, it would be more material. But to just give you a frame of reference, roughly two-thirds of our business in the US comes from product that's sourced in the US. Rachael Raycroft: Great. That's helpful. And then just for my follow-up, you mentioned that chemical and advanced materials grew 1% this quarter. Was wondering, could you just break down some of the trends that you saw within? You mentioned that semiconductors drove some of the performance that you saw on the advanced materials side. We actually had one of your peers call out some weakness in semi this quarter. So just talk to us about what you're seeing from an underlying perspective on that side. And then again, just tell me business as well. Thanks. Padraig McDonnell: Yeah. So in the chemical advance materials, we grew 1% and we sold 4% of materials, and that's driven, you know, a lot by our battery business that we have and, of course, semiconductor. We saw a slight decline in chemical and energy. But overall, we're very happy with the growth that we've seen in Asia ex-China, by the way, was driven and also low single digits in China. So the one thing that I would note about this industry is that we've got the broadest platform and solutions around it. And it's the CAM is returning to positive year on year growth for the first time since Q2 in 2023, so that really bodes well for the future. Bob McMahon: Yeah. Hey, Rachael. And maybe just for the benefit of you and the rest of the folks on the call, I talked about guidance. If you look at it by end market, just to kinda give everyone a frame, you know, for the full year FY 2025, we're expecting pharma to return to growth. So low to mid-single-digit growth there. Academia government roughly flat. Actually, expect the diagnosis and clinical that Simon just talked about to continue and be the highest growth end market, at least to start off the year here in FY 2025 at mid-single digits. CAM also low to mid, given the work and the discussion that Padraig just gave. And then food and environmental, both low single digits with pockets of very strong growth. And really, you know, food, there was a potential where the actually could accelerate throughout the course of the year given some of the potential changes in the administration coming up. Operator: Your next question comes from the line of Vijay Kumar from Evercore ISI. Your line is open. Vijay Kumar: Hey, guys. Thanks for taking my question. Maybe building off of the last question here on the drivers of fiscal 2025. When you look at the first half versus second half, it does assume a back half step up. We're just curious. Is that being driven by end markets normalizing? Maybe if you could just walk us through from first half versus back half dynamics in fiscal 2025? Bob McMahon: Yeah, Vijay. That's exactly right. So, you know, obviously, our first quarter is what I would call artificially depressed just because of the way of the nature of our timing of our fiscal year relative to Lunar New Year. But if you looked at first half versus second half, we're expecting this continued recovery throughout the course of the year. And with a more normalized growth in the back half of the year. And so where does that show up? It shows up in a couple of areas. Obviously, with the potential for China getting better throughout the course of the year. As Padraig mentioned, certainly, stimulus can help that. We've taken a conservative approach on that and not fully baked in with all the activity that we talked about. We'll see how that plays out, but certainly early days are very positive from that standpoint. And then also from a pharma perspective, we're also expecting to see that recovery particularly on the back of Infinity 3 as Padraig just mentioned, and that replacement cycle accelerating. So you're actually seeing those that would be the two biggest and then, you know, continued biotech recovery on the small biotech side as well throughout the course of next year. Vijay Kumar: Understood. And then one on that maybe margins, we cash. Pretty impressive free cash execution in fiscal 2024. Just wanna make sure I have the numbers right. Is the guide assuming free cash flow down above it, there's a timing element and on the margin sort of similar cadence question, what is Q1 assuming and what drives the back half step up in margins? Thank you. Bob McMahon: Yeah. So Q1, so let me answer your question around free cash flow. Yeah. We are expecting a slight slip down really a result of a step up in CapEx spending this year versus last year. As we, you know, finished the heavy levels of spending for the NASD expansion for Trane CND. I don't expect that to continue into 2026 and 2027, so you would see that then step back down. So that free cash flow is really a timing issue. In terms of Q1, profitability with the lower revenue, we typically have higher expenses in Q1 as some of the merit resets. We've got our sales meetings and kickoffs meetings there, and then you've got, you know, some January typically is a very light month, but we have a full amount of expenses in there. And then you then also look at the Ignite transformation that Padraig talked about, many of those activities that we've been kicking off will come into play in the second half of the year, which will generate incremental savings both on the top line and the bottom line. And what you'll hear more about that, some of those details at the Investor Day in mid-December. Vijay Kumar: And so thank you. Operator: Next question comes from the line of Jack Meehan from Nephron Research. Your line is open. Jack Meehan: Thank you. Good afternoon. I was wondering if you could just walk us through for the 2025 guide what this assumes for each of the segments. Not sure if you can provide it under the old method or just the new method, but any color would be great. Bob McMahon: Yeah. I could do that. So if you think about this at, I'll call it legacy number. So LSAG kinda low single digits with the consumables business being kind of mid-single-digit and slower on the instrument throughout the course of the year. That's probably our area where we've taken a prudent approach as we go through the course of the year. It could be more than that, depending on the uptake of the replacement cycle INFINITY 3, but low single digits there. ACG continued to be very strong with mid to high single digits as the instrumentation recovery and then continued double-digit on the services business. Just continues to be a real stalwart of growth, and we still have a lot of opportunity there around rate. And then for DGG, kind of low to mid-single-digit growth. Going forward, which is a recovery, you know, the continued performance of pathology in the genomics businesses, as Simon mentioned, and then a return to growth really for NESD. Jack Meehan: Right. Okay. And then wondering if you could just talk a little bit more just what your expectations are for LC, LCMS. I think everybody's trying to benchmark expectations for next year and one of your peers sounds a little bit more bullish as it pertains to the cycle. So I don't know if you have any thoughts as we try and compare and contrast some of these results. Any color would be great. And maybe just off of that, any comments you can share around GLP one contribution I think that might be a factor, but any color would be great. Thank you. Padraig McDonnell: Yeah. So, you know, there's a lot of dynamism in terms of replacement cycle. You know, it doesn't happen at any time, as I said before, any one time, but it's across the board in different industries and different times. From our perspective, you know, our LC and LCMS orders are improving. There's no doubt about that. And we have a huge amount of excitement around our Infinity 3. We have a lot of focus programs with our customers around that. So what you will see next year is I think it's a steady increase in cadence of that replacement cycle. You know, it's a little bit too early to call. Will that be gradual over a number of quarters or a bolus in one quarter or maybe then a slowdown and again on the next quarter? But we're really watching that as we go forward. I think we're being very conservative around what we're seeing on that because of a lot of turbulences everybody has seen in the last few years in the market. But I would say customer sentiment is steadily improving. And on the GLP One side, you know, we had a really fantastic year. We grew 30% in GLP one this year. We're involved in a lot of new site build-outs in QAQC departments and actual getting closer to production as well with systems. So a very, very strong year. And actually one thing that's really interesting is through the acquisition of BioVectra, we, of course, have a healthy pipeline of GLP-one and synthetic peptides within their CDMO capability. We're seeing a lot of requests from both sides of the business about how we can help customers both on the analytical side and on the CDMO side. So we're seeing a huge amount of synergies there. So this is a market that's going to continue very strongly and we're going to be really there to take the business. Bob McMahon: Hey, Jack. Just to build on what Padraig is saying on the LC replacement cycle, I think one of the things is, you know, we're taking a more conservative approach as Padraig mentioned. And I think if that happens, we will get that business rest assured. I would also say, if we look at the age of our installed base, it is continuing to get old. It is well beyond the median now. And throughout the course of next year. So we would expect that to continue to be able to be replaced. Because when we look at the instrumentation through our consumables business and our services business, the activity continues to be high. So these instruments are being used, and so it's only a matter of time to be able to do that replacement. Jack Meehan: Awesome. Thank you, guys. Operator: Your next question comes from the line of Dan Leonard from UBS. Hi. Thank you. Just to clarify on instruments one last time, is your expectation that instrument growth is flat in 2025? Bob McMahon: In aggregate across all platforms, our expectation is that it will grow. Low single digits. Dan Leonard: Okay. And then my follow-up. You mentioned, I think, something about the administration and changes in your food forecast. Are there any other areas where you think the change in US administration could impact your business? Any other areas that you were sensitive to putting together your forecast for 2025? Padraig McDonnell: Yeah. Look, there's a lot of changes that can happen at this time. You know, there's a lot of people expecting a lot of change. We have yet to see what those changes will be. Of course, you can see maybe some changes in the NIH funding, which is very low for us as a percentage of the business. We actually expect the PFAS spending will actually increase as it goes forward on it. The area to watch, I would say, is, of course, tariffs, which Bob talked about. We're ready for that. Ready for any scenario on that side. But also on biopharma, I think, is the IRA is also continues to move forward, the International Pricing Index seeing what happens on biopharma is gonna be really important. So that's why we're taking a kind of conservative and prudent approach. So lots going on. But what I would say is from the strategy work, I would imagine, we're ready for all outcomes. Dan Leonard: Okay. Thank you. Operator: Your next question comes from the line of Puneet Souda from Leerink Partners. Your line is open. Puneet Souda: Yeah. Hi, Padraig, Bob, thanks for taking my questions. First one, just wanted to clarify on the tariff side. I mean, if there were any retaliatory tariffs could you elaborate on your manufacturing and final assembly positions just globally so we can understand sort of how much of the product is sort of China for China, made in China versus made in other Asian countries and not coming from the US. Padraig McDonnell: Yeah. Maybe I can start off by talking about our, you know, our US supply chain in there. About 60%, as Bob said, is produced in the United States. About 35% is the rest of the world. So it's actually a small percentage that's produced in China. But, of course, we have mitigations and steps there. We have many supply chain areas across the globe that we can move around, and we've done that before since 2018. We expect the impact probably in the quarter of $4 million to $5 million we can probably mitigate that within a few months. So I would say we're waiting to see how that all plays out. But we're already taking steps across potential tariffs. The big question for everybody is that will it be on will it be beyond China? I think everybody's waiting to see what that is, but even in that case, we're ready with mitigations. Bob McMahon: Yeah. Hey, Puneet. To build on what Padraig is saying, particularly for retaliatory tariffs in China, very little of our revenue now is produced in the US that goes into China. We spent a lot of time and effort building in China for China, and we have a full portfolio of capabilities there. Which is actually really important for us to be able to take full advantage of the stimulus products today. So, and, you know, I think that number will be relatively small. From the standpoint of retaliatory impact from China exports from the US. Puneet Souda: That's helpful. Thanks. And then, I have a question on Infinity 3 series. Just wondering, given the launch timing, was there any pause that you saw in on the instrumentation? And what is the order book telling you? Do you think this is what's driving, you know, is it a major driver of instrumentation orders in the quarter being positive as you pointed out? Padraig McDonnell: Yeah. You know, we had a minimal effect to be honest. We really planned around that and of course, we are very careful with our customers to make sure we bring them through the cycle of replacement. So minimal impact. You know, we're very extremely excited about it. You know, it's a system that not only will be best in class in terms of performance, but also in terms of productivity. And that's what we're hearing loud and clear from our customers. It's about productivity and how it lends their labs to be more productive going forward. We're extremely pleased with the order book that we've seen so far. And we expect that that will continue to ramp and, you know, customers are really voting with their orders on that. So we're excited about that ramp for next year. Puneet Souda: Okay. Thank you. Look forward to the investor day. Operator: Your next question comes from the line of Tycho Peterson from Jefferies. Your line is open. Tycho Peterson: Hey, thanks. Wanted to probe in a little bit. Are you able to delineate what LC did and what mass spec did in the quarter? And then just thinking a little bit about the new administration, I know you're not guiding for any budget flush here, but is there any risk of kind of pause in spending given all the moving pieces around pharma? What are you hearing from customers at this point? Padraig McDonnell: Yeah. Maybe I can start with the second part, Tycho. We're not seeing a pause from pharma validating. We're actually seeing a little bit more activity. So we're not seeing that across the board, and that's about the US and globally. And, of course, that's something we really want to watch with the new administration coming in. And what transpires over the next few weeks. But in terms of the LC and LCMS, Bob, I don't know if you got any color on those. Bob McMahon: Yeah. Hey, Tycho. Just to give you a couple of different pieces of data. If I look at our pharma business overall, it was down low single digits. Pharma, small molecule was actually up 3% overall with biotech or biopharma being down. If we look at specifically LC, LCMS, within pharma, it was up low single digits. Tycho Peterson: Okay. That's helpful. And then the follow-up on NASD, I know I think you're talking back to growth in 2025. Can you maybe just talk a little bit about your ability to cross-sell with BioVectra and then how are you thinking about clinical versus commercial customers? Padraig McDonnell: Yeah. I'll start off, Tycho, and I'll hand it over to Simon. You know, first of all, we are extremely pleased on the cross-selling ability between the two businesses. It was one of the key sources of value about why we did the BioVectra acquisition that customers were asking us for this capability, a broader range of capability, and we've seen that actually accelerate from both sides. Simon, I don't know if you want to add more color on NESD. Simon May: Yeah. Just to build on what Padraig said with BioVectra and the NASD cross-pollination, there's been really strong engagement between the teams. In fact, they spent several days together in our Boulder facility last week, and I'd say they came away really energized that the portfolio complementarity fit between businesses is exactly as we expected. In fact, maybe a little bit more so. Then as we think about NASD going into FY 2025, I think as Bob mentioned earlier, we're projecting high single-digit growth for the business. The order book looks really strong in NASD, but it's important to understand the nuances of the mix in that order book. We've got a number of commercialization qualifications going on right now. So in terms of FY 2025 revenue, there's a lot of energy going into that with relatively limited revenue upside, and a lot of that's gonna actually hit towards FY 2026. But, again, the order book overall is very healthy. And as we think about twelve, eighteen, twenty-four months view, we're really bullish about what we're seeing. But once again, high single-digit growth, maybe we'll nudge double-digit in NASD in FY 2025? Tycho Peterson: Thank you. Operator: Your next question comes from the line of Brandon Couillard from Wells Fargo. Your line is open. Brandon Couillard: Hey, thanks. Good afternoon. Just on the Infinity 3 launch, can you remind us, you know, when the Infinity 2 I think it's the 1290 system rolled out. And what's the is there an ASP premium? Is there an ASP kicker to this replacement cycle this time as well to the three versus the legacy two system. Thanks. Padraig McDonnell: Yeah. We don't talk about a difference in pricing on it, you know, but I think we've had a number of years, of course, very, very successful years with the Infinity 2 and this builds on success. I will say that the installed base for Agilent is way broader than the Infinity 2. You know, we have 1100s that are very, very prominent out there. We have a lot of labs with 1100s and those are the labs for us, I think, that are gonna be talking about replacement. But we also have seen significant interest from Infinity 2 customers because the CDXTR productivity capability is really going to help them in the lab. So I would say it's not just, you know, one series to the next. It's a broad install base replenishment we're gonna see. Bob McMahon: Yeah. All I would say is pricing has held up very nicely. Early days. Brandon Couillard: Okay. And then Bob, how much of the CapEx is in Nexter is tied to the train B and build out for NASD, we expect those to come online, and what does maintenance CapEx look like? In fiscal 2026? Thanks. Bob McMahon: Yeah. That's a great question. So roughly half is NASD between the continued build-out and the validation activities of that $450 million. If I look at, kinda maintenance CapEx, think about it in, you know, kinda two and a half to three times sales. Range on a go-forward basis. Brandon Couillard: That's total cover. Thank you. Operator: Your next question comes from the line of Doug Schenkel from Wolfe Research. Your line is open. Doug Schenkel: Good afternoon, guys. Thanks for taking my questions. Just want to start first with a question on guidance philosophy. Just to be clear, it sounds like you're trying to factor in a degree of conservatism on China stimulus, the impact of uncertainty as it relates to the new administration, and conservatism on a potential LC replacement cycle. Hopefully, I'm not missing anything there. But is it fair to say that the error bar around your assumptions are wider than normal heading into a new fiscal year and your intent across the board was to make assumptions that were consistently on the lower end of those error bars? Padraig McDonnell: I think you said it well. You know, we were very conservative in that because of those reasons, you know, what is the expected LC replacement cycle recovery? Is it faster? Is it, you know, is it a little bit less than that? The China stimulus, you know, which is very early days, you know, I think we want to make sure that we continue to monitor that. And, of course, whether we see improved conditions or not in terms of sentiment in the US. So all of these things are factoring into this. So it is conservative in what we're guiding, but also I'd say here, the bars are wider than normal. Doug Schenkel: Okay. Thank you for that. And just as always, correct me if I'm wrong, but I believe in your prepared remarks, you indicated that small molecule was up low single digits while biopharma was down mid-singles. If I have that right, is that comp effect, or are you seeing more of a recovery in demand amongst, you know, small versus large molecule applications, and I guess, finally, if so, why? That seems to be a little contradicting just curious if you could give us a little more there. Bob McMahon: Yeah, Doug. You know, you heard it right. Our small molecule business was up low single digits across both instruments. You know, it was the combination of instruments and services. And our biotech, our large molecule was down mid-singles. Now if you took out NASD, which shows up in the large molecule, it was down low single digits. So better recovery than the mid-single digits. And it actually speaks to, I think, that continuation of volume in small molecule. You know, if you look at pill count, it continues to go up. And these are, you know, well-capitalized companies. They have probably the older fleet you just think about kind of the replacement versus kind of the biotechs of the world, and so we're expecting that to continue and, it was the first to kind of go down. And so we're, you know, in the cycle, and I think we're expecting it to be the first, you know, moving positive. Now we think there's more upside in biotech than there is in small molecule, but it certainly is a nice leading indicator around the idea around this replacement cycle. Doug Schenkel: Okay. Thanks very much. Operator: Your next question comes from the line of Michael Ryskin from Bank of America. Line is open. Michael Ryskin: Great. Thanks for taking the question, guys. First, I want to ask a quick follow-up on China stimulus. I know you kinda touched on them in a couple of different questions. But early in the prepared remarks, you did make some comments of, you know, seeing some initial China stimulus orders come in. I think China in the quarter exceeded your expectations. I know there's not a lot embedded directly into the guide. But could you just walk us through sort of, like, how China's stimulus could play out next year? And I'm asking this from a perspective of, you know, gradual ramp as you go through the year. Is it gonna be a trickle? Is it could it be very back-end loaded? It's just trying to think through the various scenarios and what you're looking for there. Once the initial order is clear. Padraig McDonnell: Yeah. Look. I think what we've seen is that it's much broader. The stimulus in terms of range. We spoke about that before. We see it, you know, both on commercial and government accounts. Our first orders have actually come in from government accounts. We've been highly successful in those overall tenders, and we're in the low millions range, low single-digit millions range of orders to bring. We're expecting to close much more this quarter. And one thing that's really playing into our favor is our broad platform capabilities. Including the technical capabilities of our teams up and running. And you couple that with our Made in China initiatives that we really invested over the last year, it puts us in a very, very strong position to capitalize, but it'll be interesting to see how that's launched. Past the first quarter, we don't have great visibility yet, but, of course, a lot of deal activity. But the first quarter is looking very strong in terms of orders. Bob McMahon: Yeah. Hey, Mike. And just to kind of frame it, kind of how we're thinking about China to your point. If we took Q4 and just divide it by or multiply it by four, that would get you to that low single-digit growth. Now we're expecting a recovery throughout the course of the year, but that kind of gives you a sense for what we put in the initial guide and we'll know a lot more about those timing of the stimulus revenues going forward. You know, once we actually get those awarded and then the delivery dates and so forth. But we do think that that'll occur throughout the course of the year. Michael Ryskin: Okay. That's helpful. And then, Bob, maybe for you, just on the margin guide for next year, fifty to seventy bps. So really impressive starting point honestly better than I think a lot expected. Especially given, you know, still a little bit of a subdued top-line environment. How much of that can you attribute to Ignite and sort of, you know, maybe some of the transformation or one-time cost savings, how much is just the underlying strength of the business, maybe beside the price or some mix shift next year? Just a little bit of what's going into that margin expansion for next year? Bob McMahon: Yeah. What I would say, Mike, is it's a little of all those things. So maybe stay tuned, and we'll give you a little more meat on the bones here come mid-December. But we certainly have some incremental opportunities both in price and, you know, cost efficiencies associated with the Ignite transformation. And those things will start to feather into the second half of this year, as I mentioned before. If you recall, the first half of this year also has the annualization of the savings of the actions that we had to take in the June, July time frame as well. So we're benefiting and then you also have the merit increases and so forth that gets reset. And so you'll actually see this throughout the course of the year through a series of initiatives that have already been kicked off. Padraig McDonnell: And I would say just following up on that, Bob, we're very excited to meet everybody in December in New York to talk about it. It's an extremely well-thought-out program. It's across the board. It's ultimately gonna help us to invest for growth in key areas as well as margin expansion. Michael Ryskin: Okay. Thanks a lot, guys. Operator: And your final question comes from the line of Dan Brennan from TD Cowen. Your line is open. Dan Brennan: Great. Thanks for taking the questions here. Maybe the first one just on pharma. In the Americas. I think you called that in the prepared remarks Americas Pharma XMASD was kind of maybe a weaker spot. You just unpack a little bit what's happening in, you know, US versus, say, Europe, rest of the world and kind of, you know, what's kind of assumed from what happened in 4Q in 2025? Padraig McDonnell: Yeah. I mean, look, we saw a lot of strength in Europe in terms of pharma. I wouldn't read too much into the American numbers. You know, I think there is, of course, companies wondering about their CapEx budgets and that comes at different phases. But we expect, we expect Pharma to continue. Dan Brennan: Okay. That's helpful. And then maybe just one on if I can just go into the broader market. I know you talked about the period in Mark's, Bob, and a few times it came up like you're expecting a below-trend market. At least it sounds like for the first half of the year, can you just remind us in terms of your kind of growth algorithm maybe, like, what would what is your assumptions based upon for a market growth typically? Kinda what are you assuming? And kind of specifically, is it just pharma that's weaker? Or are there other spots that you're pointing to that are below trend? And, you know, any color on that would be helpful. Thank you. Bob McMahon: Yeah, Dan, if we looked at the long-term growth rates of our markets, we believe those are mid-single digits, you know, four to when you look at the aggregate across. We're obviously not expecting that for the full year here. We are expecting that we're doing better than the market. If you look at kinda how we exited here roughly flat on a core basis, you know, if you adjust for the timing of Lunar New Year, you know, you had the midpoint one percent, you know, and expect that kind of performance to continue that cadence. And so you would have the second half of the year a more normalized kind of growth rates. And so it's really across the board. We're seeing, you know, some of the industrial or applied markets things like CAM being a little ahead of the curve and certainly our diagnostics and clinical business continues to be strong. It has been throughout the course of this year. Exiting at a very healthy rate, and I would expect that to continue. The big ones are pharma coming in and then, you know, some of the other applied markets as well. Operator: And this concludes the question and answer session. Mr. Ahuja, I turn the call back over to you. Parmeet Ahuja: Thanks, Rob, and thanks everyone for joining the call today. Before we sign off, I'd like to wish everyone a happy Thanksgiving. Have a good rest of the day and week everyone. Operator: This concludes today's conference call. You may now disconnect.	[ { "speaker": "Operator", "text": "Good afternoon. My name is Rob, and I will be your conference operator today. At this time, I would like to welcome everyone to the Agilent Technologies Inc. Fourth Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to withdraw your question, again, press star one. Thank you. Parmeet Ahuja, you may begin your conference." }, { "speaker": "Parmeet Ahuja", "text": "Thank you, and welcome everyone to Agilent's conference call for the fourth quarter of fiscal year 2024. I am sure you have seen our press release earlier today regarding our new market-focused organizational structure, which we will talk about in more detail. These changes have no impact on our company's consolidated financial statements. All financial metrics and guidance during this call will be shared under our historical structure. We will provide recast historical segment information to reflect these changes ahead of our upcoming investor day. Now onto our quarterly results. With me are Padraig McDonnell, Agilent President and CEO, and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A will be Phil Binns, President of the former Life Sciences and Applied Markets Group, Simon May, President of the newly formed Life Sciences and Diagnostic Markets Group, and Angelica Riemann, President of the expanded Agilent CrossLab Group. Also joining the call is Mike Zhang, President of the newly formed Applied Markets Group. This presentation is being webcast live. The news release for our fourth quarter financial results, investor presentation, and information to supplement today's discussion, along with the recording of this webcast, are available on our website at investors.agilent.com. Today's comments will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year, and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past twelve months. Guidance is based on forecasted exchange rates. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risk and other factors. And now I would like to turn the call over to Padraig." }, { "speaker": "Padraig McDonnell", "text": "Great. Thank you, Parmeet. Hello, everyone, and thank you for joining today's call. Before I begin, I would like to welcome new AMG President, Mike Zhang. While Mike is new to this role, he is not new to Agilent. Mike joined Agilent more than twenty years ago as a manufacturing engineer in China and most recently was Vice President and General Manager of the GC and GCMS business. Within our former Life Sciences and Applied Markets Group, with his broad experience in both manufacturing and into the business, Mike will be an incredible asset in this role. Very much looking forward to him moving AMG and Agilent forward. I also want to take a moment to wish Phil Binns a wonderful retirement in advance of him leaving Agilent. Phil joined Agilent with the Varian acquisition in 2010. All told, Phil is celebrating just over forty years of service with Agilent and Varian. Although Phil is retiring from the business president role, he has graciously agreed to serve as a special adviser through April 2025. All of us at Agilent wish Phil the very best and look forward to working with him during the last five months at Agilent. Now onto our high-level Q4 results. I am happy to share not only our solid fourth quarter results that point to continued steady market recovery, but also our outlook and drivers for the 2025 fiscal year. I am especially excited to talk about Agilent's customer-first strategy evolution and our aggressive transformation ambition that led to the news you read ahead of the call. The new market-focused organizational structure to become a nimbler, even more customer-centric company to accelerate our performance. In the fourth quarter, the Agilent team delivered revenue of $1.701 billion, roughly one percent reported growth with a flat core growth. This represents a sequential improvement of over four hundred basis points from Q3. In addition, our total company book-to-bill was greater than one. This points to a steady market improvement we are seeing and we expect it to continue in 2025. We also gained share in all our geographies. Evidence that even in challenging CapEx environment, customers trust Agilent. As we evolve, we are confident this will only accelerate. Bob will provide deeper details on our Q4 results and our outlook for Q1 and FY 2025. Now I would like to spend some time talking about our new organization structure we announced earlier today. Our new market-focused organization structure is a result of our customer-centric market force strategy and an important step in our organizational transformation work, which we have named Ignite. This is a product of our enterprise focus strategy that drives our evolution to become a nimbler, even more customer-centric company to accelerate our performance. The new market-focused organization structure is one of the most significant changes Agilent has seen in a decade and continues the work we did creating our commercial organization three years ago. The commercial organization doubled down on our customer-first approach in the field and it's a critical competitive advantage in supporting our customers. At that time, we started by creating a singular commercial leadership structure. We then created a foundational infrastructure and intensified our focus on digital capabilities, accelerated and end-to-end customer experience, and ensured sales channels were customer and market-centric. So changes you see today are part of the successful journey we started three years ago. With the new structure, we are aligning business units to our markets facilitating close collaboration among the businesses like never before and enabling better execution and cross-division customer-first priorities. We are combining the strength of our three businesses as well as our portfolios so that we can offer end-to-end solutions and workflows revolve around our customers and markets. The Life Sciences and Diagnostics Markets Group's or LDG represents $2.5 billion in annual revenue and is primarily focused on our pharma, biopharma, and clinical diagnostic end markets. LDG provides a comprehensive portfolio of leading technology platforms and solutions to serve Agilent's customers' value chain, including research and discovery, development and scale-up, production of therapeutics, and development of critical cancer diagnostics. LDG includes LC and LCMS, cell analysis as well as CDMO capabilities which include NESD and BioVectra. The business also includes pathology, companion diagnostics, and genomics. Simon May will serve as president of LDG prior to joining Agilent earlier this year at Bio-Rad Laboratories. Simon was Executive Vice President and President of Life Science Group. The Applied Markets Group or AMG represents $1.3 billion in annual revenue and is focused on food, environmental, forensics, chemicals, and advanced materials markets. AMG includes GC and GCMS spectroscopy, vacuum technology platforms, and certified pre-owned business. AMG will focus on growing its agile and strong leadership in these markets and accelerating growth in new areas of the market. Mike Zhang, a twenty-two-year veteran of Agilent, has been promoted to president of AMG. Most recently, Mike was Vice President and General Manager of our GC and GCMS product lines. The Agilent CrossLab Group or ACG represents $2.7 billion in annual revenue and is focused on supporting our customers in all our end markets. The group is uniquely positioned to leverage its comprehensive portfolio and capabilities to further enhance the installed base of instruments with targeted workflows and applications that drive critical outcomes and productivity in labs. ACG includes services, software and informatics, automation, and consumables. This business will accelerate and strengthen customer relationships across all end markets. Angelica Riemann, a twenty-five-year veteran of Agilent, will continue to serve as president of ACG. Prior to her current role, she served as Vice President and General Manager of the ACG services business. This change is one of the many that demonstrate how we are becoming nimbler and accelerating the pace of innovation. And you can see that with the Q4 launch of the exciting Agilent Infinity 3 LC series that harnesses our fifty years of LC expertise and leadership. The Infinity 3 series has advanced automation that simplifies our customers' daily routines and is compatible with previous generation, which allows for seamless upgrades and technology refreshes. And Agilent Infinity Lab LC solutions are certified by MyGreenLab. These instruments optimize lab space, and they reduce water, solvent, and energy consumption while also minimizing waste. While just launched in October, early traction from customers has been very positive. Also in Q4, we closed our acquisition of BioVectra, demonstrating our commitment to providing customers the most advanced capabilities to accelerate our therapeutic programs. With BioVectra now being part of Agilent, we expand our portfolio of CDMO services beyond our market-leading oligonucleotide production at NASD. Adding more rapidly growing therapeutic modalities like peptide synthesis, a market expected to continue to expand rapidly over the coming years. And bringing world-class capability to support gene editing therapies. Just last month, my leadership team and I visited BioVectra to welcome our new team members to Agilent, and we became even more accelerated by the capabilities we would be able to harness. Plus both Agilent and BioVectra's focus on putting customer first and accelerating the pace of innovation so we can add to and capitalize on opportunities was abundantly clear as I spoke to dozens of BioVectra employees. Separately, during the quarter, we hit another important milestone. For the full year, we passed the $1 billion mark in digital orders, for the first time across the company. This is a result of our investment in our digital ecosystem to ensure our customers can do business with us in ways that meet their needs. To reinforce what I have stated in previous calls, we are sharply focused on key growth factors such as BioPharma, PFAS, and advanced materials. And the Agilent team has mobilized to accelerate value creation through our Ignite transformation program. The objective of Ignite is to drive revenue growth and margin expansion by increasing our execution capabilities." }, { "speaker": "Operator", "text": "The world is moving faster than ever," }, { "speaker": "Padraig McDonnell", "text": "and so are we. That is exactly why we introduced our new market-focused organization structure. We are laser-focused on winning in the marketplace and adding value to our customers and shareholders. We will dive more deeply into these details including our evolved strategy and the Ignite transformation, that will help us execute on that strategy. At our investor day on December seventeenth in New York." }, { "speaker": "Bob McMahon", "text": "We" }, { "speaker": "Padraig McDonnell", "text": "Bob would now provide the details of the results as well as our outlook for the fiscal year of 2025 and the first quarter. After Bob delivers his comments, I will be back for some closing remarks. Over to you, Bob." }, { "speaker": "Bob McMahon", "text": "Thank you, Padraig, and good afternoon, everyone. In my remarks today, I will provide some additional details on fourth quarter revenue and take you through the income statement and other key financial metrics. I will then cover our guidance for fiscal year 2025 and the first quarter of 2025. Unless otherwise noted, my remarks will focus on non-GAAP results. As Padraig said, we are pleased with our Q4 results. Agilent finished the fourth quarter, with core growth in line with our expectations while EPS exceeded our expectations as we executed well against a challenging albeit improving market. Q4 revenue was $1.701 billion, a decline of 0.3% core but a sequential improvement of over four hundred basis points. On a reported basis, our revenues were up 0.8% as we benefited from fifty basis points of currency and BioVectra contributed sixty basis points. Looking at our Q4 performance by business unit, the Life Sciences and Applied Markets Group reported $833 million in revenue. That represents a 1% decline as instrument volumes continue to be constrained, by conservative customer CapEx spending while consumables grew mid-single digits. Having said that, for our instruments business, our orders grew year on year and for the third consecutive quarter, our book-to-bill was once again greater than one. We see this as positive evidence of an ongoing steady instrument recovery. Moving on to Agilent CrossLab Group, the business delivered revenue of $426 million for the quarter, 5%. ACG grew in every market and in every region except China, where it was flat year over year but up sequentially. The contracts business including our fast-growing enterprise services business, double digits again in Q4 as it has every quarter this year. Our largest customers continue to maximize utilization of their assets, right-size their operations, and leverage OpEx budgets to deliver on their productivity goals and outcomes. We recently received a top supplier award from one of our largest strategic customers in the applied markets as a recognition of our long-standing and beneficial partnership throughout the years. The Diagnostics and Genomics Group posted $442 million in revenue, representing a 3% decline that was slightly above expectations. Pathology saw solid growth globally, and was offset by expected softness in NESD and cell analysis instruments. Now looking at our end markets and geographies, our largest end market, pharma, declined 1%, slightly better than what we expected. Within pharma, biopharma declined mid-single digits while small molecule grew low single digits. Encouragingly, all regions except for the Americas, grew in the quarter. The Americas region was pressured by the expected decline of NASD. We expect both the Americas region and NASD to return to growth in fiscal year 2025. In chemicals and advanced materials, revenue grew 1% with our advanced materials submarket growing mid-single digits driven by our business in the semiconductor market. Our business in the diagnostics and clinical end market performed strongly growing 7% driven by pathology, and improved performance in genomics." }, { "speaker": "Operator", "text": "In environmental and forensics," }, { "speaker": "Bob McMahon", "text": "we declined 6% although dollars were roughly flat sequentially. All regions grew except for the US, related to timing of orders. That being said, we continue to see very strong growth in PFAS solutions. With our business growing more than 40% in Q4 across multiple end markets. Now wrapping up our end markets, food was down 3% versus last year. While our academia and government market was down 1%. Geographically, Asia ex-China high single digits and Europe grew low single digits in the quarter while the Americas and China declined as expected. China was down only 3% and exceeded our expectations. We also booked our first China stimulus orders in October and anticipate much more in fiscal year 2025. Now let's move to the rest of the P&L. Gross margin was 55.1% in the quarter, down seventy basis points versus last year driven by lower volume and mix. Our operating margin was 27.4% as our productivity initiatives and the cost actions we took earlier in the year were fully recognized this quarter. The annualization of these savings coupled with the market recovery and the initial returns from the Ignite transformation, give us confidence in driving EPS growth in fiscal year 2025. In addition, we continue to look for ways to drive EPS growth below the line. Our net interest income was in line while we benefited from a lower tax rate in the quarter and our share count was 287 million diluted shares outstanding. Now putting it all together, Q4 earnings per share was $1.46, that was ahead of our expectations and up 6% from a year ago. Now let me turn to cash flow and the balance sheet. We continue to enjoy a very strong balance sheet and healthy cash flows. Operating cash flow was $481 million in the quarter, and we invested $93 million in capital expenditures. For the year, we well exceeded our operating cash flow expectations. With operating cash flow of $1.75 billion during the quarter, we returned over $400 million to shareholders, consisting of $335 million in share repurchases, and $68 million in dividends. For the year, we returned over $1.4 billion to shareholders, through repurchasing shares and dividends. Looking forward, you may have also seen recently we announced a 5% increase in our quarterly dividend. Marking another year of increases advancing our industry-leading dividend. We ended the quarter with a net leverage ratio of 1.1, a very strong number even as we acquired BioVectra in the quarter. Our strong cash flow and healthy balance sheet provide us with plenty of opportunity to invest in the business going forward. In summary, we performed well and saw steady market improvement in the quarter. We are executing well, staying disciplined, and investing in high-growth opportunities. Now let's move on to our outlook for the upcoming fiscal year and first quarter. We expect the recovery that we have seen the past few quarters to continue throughout fiscal 2025. While we expect the market to grow slower than historical rates for the full year, we expect improvement throughout the year with the second half of the year returning to more traditional levels of growth. We expect our results to mirror that cadence of improvement on a core basis. As Padraig noted earlier, we exited Q4 with a book-to-bill ratio over one for the company, and greater than one for instruments. In addition, Q4 was the first quarter in 2024 that instrument orders grew year on year. While one quarter does not a trend make, it is certainly encouraging. For the full year guide, we expect revenue in the range of $6.79 to $6.87 billion. This represents a reported growth range of 4.3% to 5.5%. Currency is a slight headwind of 0.2 points while M&A related to BioVectra contributes 2% at the low end and 2.2% at the high end. This translates to a core growth of 2.5% to 3.5%. To start the year, we think this is a prudent way to plan given the near-term dynamics in the US. From a geographic perspective, we expect modest growth in the Americas and Europe. While we see funnel activity increasing in China, we are taking a conservative approach on the timing of revenue associated with the stimulus. We expect to see recovery over the course of the year in China, resulting in slightly positive growth for the full year. From a business group perspective, we expect to return to growth in all three groups led by ACG. As a note, this statement is true under the new structure as well. As Parmeet mentioned earlier, we will provide recast historical segment information to reflect these changes ahead of our upcoming investor day. In terms of phasing, we expect improvement throughout the year with more normalized growth expected in the second half of the year. We are projecting roughly fifty to seventy basis points of operating margin expansion for the year. Below the line, we expect net interest expense of $25 million due to the financing of BioVectra versus the net interest income this year. In addition, we expect a tax rate of 13% and 286 million shares outstanding. Fiscal 2025 non-GAAP EPS is expected to be in the range of $5.54 to $5.61 and incorporates the planned five cents year one dilution from BioVectra. This range represents a 5% to 6% growth rate if excluding the BioVectra dilution, a growth rate of 6% to 7% year on year. We expect cash flow to remain strong in fiscal year 2025. We are expecting roughly $1.65 billion in operating cash flow and $450 million in CapEx as 2025 is the peak spending year for the NASD expansion. Looking to Q1, we expect revenue in the range of $1.65 billion to $1.68 billion. Our forecast assumes no significant budget flush during the end of this calendar year. This represents a reported decline of 0.5% to growth of 1.3%. Currency is a thirty basis point headwind while M&A is expected to contribute 1.8 points of growth. We are expecting core growth between a decline of 2% to flat at the upper end. It's important to note that we estimate our projected Q1 year-over-year results will be negatively impacted this year by roughly two percentage points due to timing of the Lunar New Year which occurs in late January, versus February of last year. This includes the additional $15 million in revenue pull forward we communicated in Q1 of last year. Adjusting for the Lunar New Year impact, we are expecting continued sequential growth improvement. First quarter 2025 non-GAAP earnings per share are expected to be between $1.25 and $1.28. Lower than the full year growth rate due to the Lunar New Year timing. Looking into 2025 and beyond, we remain incredibly optimistic about the future of our markets and our long-term prospects. We are confident in our new market-focused approach and the Ignite transformation will propel us to accelerated growth and we will become a stronger company. With that, I'll turn it back over to Padraig for some closing comments." }, { "speaker": "Padraig McDonnell", "text": "I've said it before and I want to say it again. These are exciting times at Agilent. Over the last several months, we've been focused on evolving our strategy, transforming our processes, and empowering our people while continuing to win in the marketplace. Already we've made bold moves that have created momentum. We've developed our future strategy, we've kicked off our Ignite transformation to help execute on that strategy. And along the way, we've made moves to create new growth vectors. We are making acquisitions that will contribute to our growth and we are strengthening our capability to efficiently and effectively integrate those acquisitions that will lay the foundation for future M&A. These initial actions position us well for the journey ahead." }, { "speaker": "Bob McMahon", "text": "They ensure we are building the capability" }, { "speaker": "Padraig McDonnell", "text": "strength, and speed to reinvigorate our culture and enable us to thrive while delivering outstanding results for our customers and for our shareholders. And amid all this change, Fortune magazine this month named Agilent number eleven among the world's best workplaces 2024, a list that only includes twenty-five companies. This is yet another recognition of what we already know internally. The Agilent team is the best in the industry. This is not only a recognition of our outstanding company culture, of the talented professionals we have." }, { "speaker": "Bob McMahon", "text": "Ones who are ambitious," }, { "speaker": "Padraig McDonnell", "text": "resilient, and high performing. This is exactly the team we need to evolve Agilent. To build an enduring company that sets the standard for excellence with our customers, and creates value for our shareholders. Thank you again for joining today's call. I couldn't be more energized by the momentum we have, the opportunities we will seize, and the history we will make. Now I look forward to answering your questions. Parmeet?" }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Padraig. Operator, if you could please provide instructions for Q&A now." }, { "speaker": "Operator", "text": "And your first question today comes from the line of Patrick Donnelly from Citi. Your line is open." }, { "speaker": "Patrick Donnelly", "text": "Hey, guys. Thanks so much for taking the questions. Padraig, maybe one for you. Just on the instrument side, and I know you guys touched on the book-to-bill over one for three quarters now, a little bit of improved growth on the order side year over year. Can you talk about where we are in the cycle, what your expectations are? As you guys know, there's a debate in the market about what the cycle looks like. Does it overcorrect to the upside as we work our way through the next year or so? Are you guys framing that up? What's the right way to think about this replacement cycle, where we are, and the size of it as we go forward here?" }, { "speaker": "Padraig McDonnell", "text": "Yeah. Thanks, Patrick. Great question. So, you know, clearly, we're seeing a steady recovery in instruments and, you know, our book-to-bill was greater than one, which is really great to see. In terms of replacement cycle, what you would see across the industry is that it's not uniform. It's across different vendors at different speeds and, of course, at different times. But what we do see is that we have we're probably midway through the expected timing on where we expect that replacement cycle to be. We see competitors are probably benefiting from refresh of their own install base with some new systems. But what you would see from our side is our Infinity 3 that we announced last month. We expect to start seeing an increased demand for our solutions, and we're seeing a lot of excitement with our customer base. And we've already seen tens of millions of dollars in orders there. So what we expect in that replacement cycle is to be slow and steady, but really kicking off in Q1." }, { "speaker": "Patrick Donnelly", "text": "Okay. And that's helpful. And then maybe on China, you know, always a focus with you guys. It sounds like slight growth for 2025 is the right way to think about it. Can you just talk about what you guys are seeing there and hearing there? You know, Bob, helpful to hear that you guys got your first orders there in October. What's the expectation as we move forward here? It sounds like a steady recovery. Are you still seeing I know you guys were kinda hovering around that $300 million revenue a quarter stability. It sounds like continued and maybe a little bit of improvements as we work our way through the year. Are there different segments that are maybe picking up a little bit? Would be helpful to talk through. Thank you, guys." }, { "speaker": "Padraig McDonnell", "text": "Yeah. Thanks, Patrick. So performance was a bit better than expected, and it was also really encouraging to see lab activity to continue to improve across our services and consumables. So we actually have seen quite dramatic share gains within China, which is also a really good point. So what I would say is it's steadily improving. You know, talking to the teams. And I would say on the stimulus side, you know, we talked in the call about we've already have some stimulus orders in. We expect much more in Q1. That will, of course, translate to revenue. And this is a really, really good sign as we see momentum both from the direct input of more confidence in the market and, of course, getting the dollars in. So steadily improving, and we expect that through the year, Patrick. We expect as we go through the stimulus orders and we go forward, expect that to improve. One area that was really standout for us was PFAS in China. It was the fastest-growing business for us across the globe or region across the globe, and that just goes to show the durable nature of some of these growth factors that are happening where you have the emergent pollutants act moving. And what we've seen in China is that our great technical expertise coupled with our great solutions are already there to pick up the business. So that was one real clear standout." }, { "speaker": "Bob McMahon", "text": "Yeah. Hey, Patrick. Just want to add on to what Padraig is saying. Yeah. You're absolutely right. We ended the quarter with roughly $310 million, $312 to be precise, in China. Which was a nice sequential increase from Q3 and, you know, it was down 3% as I mentioned. In addition to the PFAS, both chemical and advanced materials actually grew in the quarter. We're, you know, we have a leadership position and pharma was flat, which was actually a very nice thing. And we're taking a kind of a conservative approach, as I mentioned, in terms of the stimulus orders, but we've seen quite active funnel from the standpoint of bidding activity here in the first half of this quarter as well as and expect that to continue throughout the course of 2025." }, { "speaker": "Patrick Donnelly", "text": "Okay. That's helpful. Thanks, Bob and Padraig. I appreciate it." }, { "speaker": "Padraig McDonnell", "text": "Thanks, Patrick." }, { "speaker": "Operator", "text": "Next question comes from the line of Matt Sykes from Goldman Sachs. Your line is open." }, { "speaker": "Matt Sykes", "text": "Hi, good afternoon. Thanks for taking my questions. Maybe the first one just on DGG, which has been sort of weighing on growth over the course of the year, but noticeably strong quarter. You had called out CancerDx as well as genomics. Could you just provide a little bit more color on what's driving that growth? And how sustainable do you think that growth is, particularly in genomics as we move through 2025?" }, { "speaker": "Padraig McDonnell", "text": "Yeah. I just said start off, and I'll kick it over to Simon. You know, as we really are seeing nice growth in our pathology business, which grew high single digits in Q4 and is slightly ahead of expectations. A highly durable business in any markets. What we're seeing in genomics, while it's a still challenging market, we posted low single-digit growth, which was also ahead of expectations. But, Simon, I don't know if you want to add some color." }, { "speaker": "Simon May", "text": "Yeah. Just a quick couple of quick points to add. As Padraig mentioned, we were pretty pleased with the high single-digit growth that we saw in pathology in the quarter. And in particular, the blend and the mix between instruments and consumables there, we continue to be really healthy. With our instrument placements, and we think that sees us quite nicely going into 2025. On the genomic side, it was really notable because it's the first time that we've seen growth in genomics for quite a while now. I'd say we've had a bit of a pivot in our strategy there to really double down on the growth drivers that we see in genomics, where we've got clearly differentiated value propositions and in particular, our Magnus automated NGS library prep continues to see fantastic traction. We're also very encouraged by the pipeline that we're seeing for our Aveda NGS chemistry. And, again, this gives us a lot of hope going into FY 2025. And as I think about pathology and genomics and these growth factors that we see here, we do believe that they're durable given the macro conditions and the competitive position that we enjoy." }, { "speaker": "Matt Sykes", "text": "Great. Thanks. And maybe just for my follow-up, a high-level question for you, Padraig. On the resegmentation, it makes sense from a go-to-market strategy for some of these segments to put them together. I'm wondering from an R&D development and new product innovation, how this might help. I mean, you referenced the LC replacement cycle accelerating faster for competitors as they refresh their installed base. Should we start to see a faster cycle of new product introductions due to the resegmentation, or is it gonna be similar to the pace that we've seen in the past and resegmentation really doesn't necessarily inform R&D direction?" }, { "speaker": "Padraig McDonnell", "text": "Yeah. Well, look, I think we're refocusing the groups really for a few reasons. We want to be closer to customers, but also understanding where do we want to make our biggest investment or most asymmetric that are going to accelerate innovation in key areas. And when I talk about focus, it's really three things. You know, it's the energy to time, but also the capital allocation. And what you will see from this refocusing of our segments, we're gonna be able to do that. You're gonna see programs accelerate. But also, we don't want to be two inches deep across the company. We want to be focused on our key growth factors and making sure we accelerate. We have a huge amount of product lines and, of course, we can have incremental additions to product lines across the board. But from this new structure, you're gonna see an acceleration of R&D. No doubt about it." }, { "speaker": "Matt Sykes", "text": "Thank you." }, { "speaker": "Operator", "text": "Your next question comes from the line of Rachael Raycroft with Your line is open." }, { "speaker": "Rachael Raycroft", "text": "Perfect. Thank you for taking the questions, you guys, and good afternoon. So I wanted to follow-up on Patrick's question on China. Appreciate that it's early days, but how are you guys thinking about the risk of potential tariffs on Agilent's business at this point in China and in the rest of the world? Is there anything embedded in guidance currently from a tariff standpoint? And then can you remind us what was the tariff impact on Agilent in the first Trump administration?" }, { "speaker": "Bob McMahon", "text": "Yeah. Hey, Rachael. This is Bob. I'll take that question. As you can imagine, there's been a fair amount of work that we've been doing on this exact question. What I would take it if I took it into two chunks, actually, we've been working on diversifying our supply chain particularly within China, you know, China, back in eighteen, nineteen when the first tariffs came and then, obviously, double down on that resiliency with COVID. And so it is ten to fifteen million dollars existing today. And we think that the future potential magnitude of this is certainly manageable with us with additional mitigation activities. Obviously, with something that would be more broad-based than that, it would be more material. But to just give you a frame of reference, roughly two-thirds of our business in the US comes from product that's sourced in the US." }, { "speaker": "Rachael Raycroft", "text": "Great. That's helpful. And then just for my follow-up, you mentioned that chemical and advanced materials grew 1% this quarter. Was wondering, could you just break down some of the trends that you saw within? You mentioned that semiconductors drove some of the performance that you saw on the advanced materials side. We actually had one of your peers call out some weakness in semi this quarter. So just talk to us about what you're seeing from an underlying perspective on that side. And then again, just tell me business as well. Thanks." }, { "speaker": "Padraig McDonnell", "text": "Yeah. So in the chemical advance materials, we grew 1% and we sold 4% of materials, and that's driven, you know, a lot by our battery business that we have and, of course, semiconductor. We saw a slight decline in chemical and energy. But overall, we're very happy with the growth that we've seen in Asia ex-China, by the way, was driven and also low single digits in China. So the one thing that I would note about this industry is that we've got the broadest platform and solutions around it. And it's the CAM is returning to positive year on year growth for the first time since Q2 in 2023, so that really bodes well for the future." }, { "speaker": "Bob McMahon", "text": "Yeah. Hey, Rachael. And maybe just for the benefit of you and the rest of the folks on the call, I talked about guidance. If you look at it by end market, just to kinda give everyone a frame, you know, for the full year FY 2025, we're expecting pharma to return to growth. So low to mid-single-digit growth there. Academia government roughly flat. Actually, expect the diagnosis and clinical that Simon just talked about to continue and be the highest growth end market, at least to start off the year here in FY 2025 at mid-single digits. CAM also low to mid, given the work and the discussion that Padraig just gave. And then food and environmental, both low single digits with pockets of very strong growth. And really, you know, food, there was a potential where the actually could accelerate throughout the course of the year given some of the potential changes in the administration coming up." }, { "speaker": "Operator", "text": "Your next question comes from the line of Vijay Kumar from Evercore ISI. Your line is open." }, { "speaker": "Vijay Kumar", "text": "Hey, guys. Thanks for taking my question. Maybe building off of the last question here on the drivers of fiscal 2025. When you look at the first half versus second half, it does assume a back half step up. We're just curious. Is that being driven by end markets normalizing? Maybe if you could just walk us through from first half versus back half dynamics in fiscal 2025?" }, { "speaker": "Bob McMahon", "text": "Yeah, Vijay. That's exactly right. So, you know, obviously, our first quarter is what I would call artificially depressed just because of the way of the nature of our timing of our fiscal year relative to Lunar New Year. But if you looked at first half versus second half, we're expecting this continued recovery throughout the course of the year. And with a more normalized growth in the back half of the year. And so where does that show up? It shows up in a couple of areas. Obviously, with the potential for China getting better throughout the course of the year. As Padraig mentioned, certainly, stimulus can help that. We've taken a conservative approach on that and not fully baked in with all the activity that we talked about. We'll see how that plays out, but certainly early days are very positive from that standpoint. And then also from a pharma perspective, we're also expecting to see that recovery particularly on the back of Infinity 3 as Padraig just mentioned, and that replacement cycle accelerating. So you're actually seeing those that would be the two biggest and then, you know, continued biotech recovery on the small biotech side as well throughout the course of next year." }, { "speaker": "Vijay Kumar", "text": "Understood. And then one on that maybe margins, we cash. Pretty impressive free cash execution in fiscal 2024. Just wanna make sure I have the numbers right. Is the guide assuming free cash flow down above it, there's a timing element and on the margin sort of similar cadence question, what is Q1 assuming and what drives the back half step up in margins? Thank you." }, { "speaker": "Bob McMahon", "text": "Yeah. So Q1, so let me answer your question around free cash flow. Yeah. We are expecting a slight slip down really a result of a step up in CapEx spending this year versus last year. As we, you know, finished the heavy levels of spending for the NASD expansion for Trane CND. I don't expect that to continue into 2026 and 2027, so you would see that then step back down. So that free cash flow is really a timing issue. In terms of Q1, profitability with the lower revenue, we typically have higher expenses in Q1 as some of the merit resets. We've got our sales meetings and kickoffs meetings there, and then you've got, you know, some January typically is a very light month, but we have a full amount of expenses in there. And then you then also look at the Ignite transformation that Padraig talked about, many of those activities that we've been kicking off will come into play in the second half of the year, which will generate incremental savings both on the top line and the bottom line. And what you'll hear more about that, some of those details at the Investor Day in mid-December." }, { "speaker": "Vijay Kumar", "text": "And so thank you." }, { "speaker": "Operator", "text": "Next question comes from the line of Jack Meehan from Nephron Research. Your line is open." }, { "speaker": "Jack Meehan", "text": "Thank you. Good afternoon. I was wondering if you could just walk us through for the 2025 guide what this assumes for each of the segments. Not sure if you can provide it under the old method or just the new method, but any color would be great." }, { "speaker": "Bob McMahon", "text": "Yeah. I could do that. So if you think about this at, I'll call it legacy number. So LSAG kinda low single digits with the consumables business being kind of mid-single-digit and slower on the instrument throughout the course of the year. That's probably our area where we've taken a prudent approach as we go through the course of the year. It could be more than that, depending on the uptake of the replacement cycle INFINITY 3, but low single digits there. ACG continued to be very strong with mid to high single digits as the instrumentation recovery and then continued double-digit on the services business. Just continues to be a real stalwart of growth, and we still have a lot of opportunity there around rate. And then for DGG, kind of low to mid-single-digit growth. Going forward, which is a recovery, you know, the continued performance of pathology in the genomics businesses, as Simon mentioned, and then a return to growth really for NESD." }, { "speaker": "Jack Meehan", "text": "Right. Okay. And then wondering if you could just talk a little bit more just what your expectations are for LC, LCMS. I think everybody's trying to benchmark expectations for next year and one of your peers sounds a little bit more bullish as it pertains to the cycle. So I don't know if you have any thoughts as we try and compare and contrast some of these results. Any color would be great. And maybe just off of that, any comments you can share around GLP one contribution I think that might be a factor, but any color would be great. Thank you." }, { "speaker": "Padraig McDonnell", "text": "Yeah. So, you know, there's a lot of dynamism in terms of replacement cycle. You know, it doesn't happen at any time, as I said before, any one time, but it's across the board in different industries and different times. From our perspective, you know, our LC and LCMS orders are improving. There's no doubt about that. And we have a huge amount of excitement around our Infinity 3. We have a lot of focus programs with our customers around that. So what you will see next year is I think it's a steady increase in cadence of that replacement cycle. You know, it's a little bit too early to call. Will that be gradual over a number of quarters or a bolus in one quarter or maybe then a slowdown and again on the next quarter? But we're really watching that as we go forward. I think we're being very conservative around what we're seeing on that because of a lot of turbulences everybody has seen in the last few years in the market. But I would say customer sentiment is steadily improving. And on the GLP One side, you know, we had a really fantastic year. We grew 30% in GLP one this year. We're involved in a lot of new site build-outs in QAQC departments and actual getting closer to production as well with systems. So a very, very strong year. And actually one thing that's really interesting is through the acquisition of BioVectra, we, of course, have a healthy pipeline of GLP-one and synthetic peptides within their CDMO capability. We're seeing a lot of requests from both sides of the business about how we can help customers both on the analytical side and on the CDMO side. So we're seeing a huge amount of synergies there. So this is a market that's going to continue very strongly and we're going to be really there to take the business." }, { "speaker": "Bob McMahon", "text": "Hey, Jack. Just to build on what Padraig is saying on the LC replacement cycle, I think one of the things is, you know, we're taking a more conservative approach as Padraig mentioned. And I think if that happens, we will get that business rest assured. I would also say, if we look at the age of our installed base, it is continuing to get old. It is well beyond the median now. And throughout the course of next year. So we would expect that to continue to be able to be replaced. Because when we look at the instrumentation through our consumables business and our services business, the activity continues to be high. So these instruments are being used, and so it's only a matter of time to be able to do that replacement." }, { "speaker": "Jack Meehan", "text": "Awesome. Thank you, guys." }, { "speaker": "Operator", "text": "Your next question comes from the line of Dan Leonard from UBS. Hi. Thank you. Just to clarify on instruments one last time, is your expectation that instrument growth is flat in 2025?" }, { "speaker": "Bob McMahon", "text": "In aggregate across all platforms, our expectation is that it will grow. Low single digits." }, { "speaker": "Dan Leonard", "text": "Okay. And then my follow-up. You mentioned, I think, something about the administration and changes in your food forecast. Are there any other areas where you think the change in US administration could impact your business? Any other areas that you were sensitive to putting together your forecast for 2025?" }, { "speaker": "Padraig McDonnell", "text": "Yeah. Look, there's a lot of changes that can happen at this time. You know, there's a lot of people expecting a lot of change. We have yet to see what those changes will be. Of course, you can see maybe some changes in the NIH funding, which is very low for us as a percentage of the business. We actually expect the PFAS spending will actually increase as it goes forward on it. The area to watch, I would say, is, of course, tariffs, which Bob talked about. We're ready for that. Ready for any scenario on that side. But also on biopharma, I think, is the IRA is also continues to move forward, the International Pricing Index seeing what happens on biopharma is gonna be really important. So that's why we're taking a kind of conservative and prudent approach. So lots going on. But what I would say is from the strategy work, I would imagine, we're ready for all outcomes." }, { "speaker": "Dan Leonard", "text": "Okay. Thank you." }, { "speaker": "Operator", "text": "Your next question comes from the line of Puneet Souda from Leerink Partners. Your line is open." }, { "speaker": "Puneet Souda", "text": "Yeah. Hi, Padraig, Bob, thanks for taking my questions. First one, just wanted to clarify on the tariff side. I mean, if there were any retaliatory tariffs could you elaborate on your manufacturing and final assembly positions just globally so we can understand sort of how much of the product is sort of China for China, made in China versus made in other Asian countries and not coming from the US." }, { "speaker": "Padraig McDonnell", "text": "Yeah. Maybe I can start off by talking about our, you know, our US supply chain in there. About 60%, as Bob said, is produced in the United States. About 35% is the rest of the world. So it's actually a small percentage that's produced in China. But, of course, we have mitigations and steps there. We have many supply chain areas across the globe that we can move around, and we've done that before since 2018. We expect the impact probably in the quarter of $4 million to $5 million we can probably mitigate that within a few months. So I would say we're waiting to see how that all plays out. But we're already taking steps across potential tariffs. The big question for everybody is that will it be on will it be beyond China? I think everybody's waiting to see what that is, but even in that case, we're ready with mitigations." }, { "speaker": "Bob McMahon", "text": "Yeah. Hey, Puneet. To build on what Padraig is saying, particularly for retaliatory tariffs in China, very little of our revenue now is produced in the US that goes into China. We spent a lot of time and effort building in China for China, and we have a full portfolio of capabilities there. Which is actually really important for us to be able to take full advantage of the stimulus products today. So, and, you know, I think that number will be relatively small. From the standpoint of retaliatory impact from China exports from the US." }, { "speaker": "Puneet Souda", "text": "That's helpful. Thanks. And then, I have a question on Infinity 3 series. Just wondering, given the launch timing, was there any pause that you saw in on the instrumentation? And what is the order book telling you? Do you think this is what's driving, you know, is it a major driver of instrumentation orders in the quarter being positive as you pointed out?" }, { "speaker": "Padraig McDonnell", "text": "Yeah. You know, we had a minimal effect to be honest. We really planned around that and of course, we are very careful with our customers to make sure we bring them through the cycle of replacement. So minimal impact. You know, we're very extremely excited about it. You know, it's a system that not only will be best in class in terms of performance, but also in terms of productivity. And that's what we're hearing loud and clear from our customers. It's about productivity and how it lends their labs to be more productive going forward. We're extremely pleased with the order book that we've seen so far. And we expect that that will continue to ramp and, you know, customers are really voting with their orders on that. So we're excited about that ramp for next year." }, { "speaker": "Puneet Souda", "text": "Okay. Thank you. Look forward to the investor day." }, { "speaker": "Operator", "text": "Your next question comes from the line of Tycho Peterson from Jefferies. Your line is open." }, { "speaker": "Tycho Peterson", "text": "Hey, thanks. Wanted to probe in a little bit. Are you able to delineate what LC did and what mass spec did in the quarter? And then just thinking a little bit about the new administration, I know you're not guiding for any budget flush here, but is there any risk of kind of pause in spending given all the moving pieces around pharma? What are you hearing from customers at this point?" }, { "speaker": "Padraig McDonnell", "text": "Yeah. Maybe I can start with the second part, Tycho. We're not seeing a pause from pharma validating. We're actually seeing a little bit more activity. So we're not seeing that across the board, and that's about the US and globally. And, of course, that's something we really want to watch with the new administration coming in. And what transpires over the next few weeks. But in terms of the LC and LCMS, Bob, I don't know if you got any color on those." }, { "speaker": "Bob McMahon", "text": "Yeah. Hey, Tycho. Just to give you a couple of different pieces of data. If I look at our pharma business overall, it was down low single digits. Pharma, small molecule was actually up 3% overall with biotech or biopharma being down. If we look at specifically LC, LCMS, within pharma, it was up low single digits." }, { "speaker": "Tycho Peterson", "text": "Okay. That's helpful. And then the follow-up on NASD, I know I think you're talking back to growth in 2025. Can you maybe just talk a little bit about your ability to cross-sell with BioVectra and then how are you thinking about clinical versus commercial customers?" }, { "speaker": "Padraig McDonnell", "text": "Yeah. I'll start off, Tycho, and I'll hand it over to Simon. You know, first of all, we are extremely pleased on the cross-selling ability between the two businesses. It was one of the key sources of value about why we did the BioVectra acquisition that customers were asking us for this capability, a broader range of capability, and we've seen that actually accelerate from both sides. Simon, I don't know if you want to add more color on NESD." }, { "speaker": "Simon May", "text": "Yeah. Just to build on what Padraig said with BioVectra and the NASD cross-pollination, there's been really strong engagement between the teams. In fact, they spent several days together in our Boulder facility last week, and I'd say they came away really energized that the portfolio complementarity fit between businesses is exactly as we expected. In fact, maybe a little bit more so. Then as we think about NASD going into FY 2025, I think as Bob mentioned earlier, we're projecting high single-digit growth for the business. The order book looks really strong in NASD, but it's important to understand the nuances of the mix in that order book. We've got a number of commercialization qualifications going on right now. So in terms of FY 2025 revenue, there's a lot of energy going into that with relatively limited revenue upside, and a lot of that's gonna actually hit towards FY 2026. But, again, the order book overall is very healthy. And as we think about twelve, eighteen, twenty-four months view, we're really bullish about what we're seeing. But once again, high single-digit growth, maybe we'll nudge double-digit in NASD in FY 2025?" }, { "speaker": "Tycho Peterson", "text": "Thank you." }, { "speaker": "Operator", "text": "Your next question comes from the line of Brandon Couillard from Wells Fargo. Your line is open." }, { "speaker": "Brandon Couillard", "text": "Hey, thanks. Good afternoon. Just on the Infinity 3 launch, can you remind us, you know, when the Infinity 2 I think it's the 1290 system rolled out. And what's the is there an ASP premium? Is there an ASP kicker to this replacement cycle this time as well to the three versus the legacy two system. Thanks." }, { "speaker": "Padraig McDonnell", "text": "Yeah. We don't talk about a difference in pricing on it, you know, but I think we've had a number of years, of course, very, very successful years with the Infinity 2 and this builds on success. I will say that the installed base for Agilent is way broader than the Infinity 2. You know, we have 1100s that are very, very prominent out there. We have a lot of labs with 1100s and those are the labs for us, I think, that are gonna be talking about replacement. But we also have seen significant interest from Infinity 2 customers because the CDXTR productivity capability is really going to help them in the lab. So I would say it's not just, you know, one series to the next. It's a broad install base replenishment we're gonna see." }, { "speaker": "Bob McMahon", "text": "Yeah. All I would say is pricing has held up very nicely. Early days." }, { "speaker": "Brandon Couillard", "text": "Okay. And then Bob, how much of the CapEx is in Nexter is tied to the train B and build out for NASD, we expect those to come online, and what does maintenance CapEx look like? In fiscal 2026? Thanks." }, { "speaker": "Bob McMahon", "text": "Yeah. That's a great question. So roughly half is NASD between the continued build-out and the validation activities of that $450 million. If I look at, kinda maintenance CapEx, think about it in, you know, kinda two and a half to three times sales. Range on a go-forward basis." }, { "speaker": "Brandon Couillard", "text": "That's total cover. Thank you." }, { "speaker": "Operator", "text": "Your next question comes from the line of Doug Schenkel from Wolfe Research. Your line is open." }, { "speaker": "Doug Schenkel", "text": "Good afternoon, guys. Thanks for taking my questions. Just want to start first with a question on guidance philosophy. Just to be clear, it sounds like you're trying to factor in a degree of conservatism on China stimulus, the impact of uncertainty as it relates to the new administration, and conservatism on a potential LC replacement cycle. Hopefully, I'm not missing anything there. But is it fair to say that the error bar around your assumptions are wider than normal heading into a new fiscal year and your intent across the board was to make assumptions that were consistently on the lower end of those error bars?" }, { "speaker": "Padraig McDonnell", "text": "I think you said it well. You know, we were very conservative in that because of those reasons, you know, what is the expected LC replacement cycle recovery? Is it faster? Is it, you know, is it a little bit less than that? The China stimulus, you know, which is very early days, you know, I think we want to make sure that we continue to monitor that. And, of course, whether we see improved conditions or not in terms of sentiment in the US. So all of these things are factoring into this. So it is conservative in what we're guiding, but also I'd say here, the bars are wider than normal." }, { "speaker": "Doug Schenkel", "text": "Okay. Thank you for that. And just as always, correct me if I'm wrong, but I believe in your prepared remarks, you indicated that small molecule was up low single digits while biopharma was down mid-singles. If I have that right, is that comp effect, or are you seeing more of a recovery in demand amongst, you know, small versus large molecule applications, and I guess, finally, if so, why? That seems to be a little contradicting just curious if you could give us a little more there." }, { "speaker": "Bob McMahon", "text": "Yeah, Doug. You know, you heard it right. Our small molecule business was up low single digits across both instruments. You know, it was the combination of instruments and services. And our biotech, our large molecule was down mid-singles. Now if you took out NASD, which shows up in the large molecule, it was down low single digits. So better recovery than the mid-single digits. And it actually speaks to, I think, that continuation of volume in small molecule. You know, if you look at pill count, it continues to go up. And these are, you know, well-capitalized companies. They have probably the older fleet you just think about kind of the replacement versus kind of the biotechs of the world, and so we're expecting that to continue and, it was the first to kind of go down. And so we're, you know, in the cycle, and I think we're expecting it to be the first, you know, moving positive. Now we think there's more upside in biotech than there is in small molecule, but it certainly is a nice leading indicator around the idea around this replacement cycle." }, { "speaker": "Doug Schenkel", "text": "Okay. Thanks very much." }, { "speaker": "Operator", "text": "Your next question comes from the line of Michael Ryskin from Bank of America. Line is open." }, { "speaker": "Michael Ryskin", "text": "Great. Thanks for taking the question, guys. First, I want to ask a quick follow-up on China stimulus. I know you kinda touched on them in a couple of different questions. But early in the prepared remarks, you did make some comments of, you know, seeing some initial China stimulus orders come in. I think China in the quarter exceeded your expectations. I know there's not a lot embedded directly into the guide. But could you just walk us through sort of, like, how China's stimulus could play out next year? And I'm asking this from a perspective of, you know, gradual ramp as you go through the year. Is it gonna be a trickle? Is it could it be very back-end loaded? It's just trying to think through the various scenarios and what you're looking for there. Once the initial order is clear." }, { "speaker": "Padraig McDonnell", "text": "Yeah. Look. I think what we've seen is that it's much broader. The stimulus in terms of range. We spoke about that before. We see it, you know, both on commercial and government accounts. Our first orders have actually come in from government accounts. We've been highly successful in those overall tenders, and we're in the low millions range, low single-digit millions range of orders to bring. We're expecting to close much more this quarter. And one thing that's really playing into our favor is our broad platform capabilities. Including the technical capabilities of our teams up and running. And you couple that with our Made in China initiatives that we really invested over the last year, it puts us in a very, very strong position to capitalize, but it'll be interesting to see how that's launched. Past the first quarter, we don't have great visibility yet, but, of course, a lot of deal activity. But the first quarter is looking very strong in terms of orders." }, { "speaker": "Bob McMahon", "text": "Yeah. Hey, Mike. And just to kind of frame it, kind of how we're thinking about China to your point. If we took Q4 and just divide it by or multiply it by four, that would get you to that low single-digit growth. Now we're expecting a recovery throughout the course of the year, but that kind of gives you a sense for what we put in the initial guide and we'll know a lot more about those timing of the stimulus revenues going forward. You know, once we actually get those awarded and then the delivery dates and so forth. But we do think that that'll occur throughout the course of the year." }, { "speaker": "Michael Ryskin", "text": "Okay. That's helpful. And then, Bob, maybe for you, just on the margin guide for next year, fifty to seventy bps. So really impressive starting point honestly better than I think a lot expected. Especially given, you know, still a little bit of a subdued top-line environment. How much of that can you attribute to Ignite and sort of, you know, maybe some of the transformation or one-time cost savings, how much is just the underlying strength of the business, maybe beside the price or some mix shift next year? Just a little bit of what's going into that margin expansion for next year?" }, { "speaker": "Bob McMahon", "text": "Yeah. What I would say, Mike, is it's a little of all those things. So maybe stay tuned, and we'll give you a little more meat on the bones here come mid-December. But we certainly have some incremental opportunities both in price and, you know, cost efficiencies associated with the Ignite transformation. And those things will start to feather into the second half of this year, as I mentioned before. If you recall, the first half of this year also has the annualization of the savings of the actions that we had to take in the June, July time frame as well. So we're benefiting and then you also have the merit increases and so forth that gets reset. And so you'll actually see this throughout the course of the year through a series of initiatives that have already been kicked off." }, { "speaker": "Padraig McDonnell", "text": "And I would say just following up on that, Bob, we're very excited to meet everybody in December in New York to talk about it. It's an extremely well-thought-out program. It's across the board. It's ultimately gonna help us to invest for growth in key areas as well as margin expansion." }, { "speaker": "Michael Ryskin", "text": "Okay. Thanks a lot, guys." }, { "speaker": "Operator", "text": "And your final question comes from the line of Dan Brennan from TD Cowen. Your line is open." }, { "speaker": "Dan Brennan", "text": "Great. Thanks for taking the questions here. Maybe the first one just on pharma. In the Americas. I think you called that in the prepared remarks Americas Pharma XMASD was kind of maybe a weaker spot. You just unpack a little bit what's happening in, you know, US versus, say, Europe, rest of the world and kind of, you know, what's kind of assumed from what happened in 4Q in 2025?" }, { "speaker": "Padraig McDonnell", "text": "Yeah. I mean, look, we saw a lot of strength in Europe in terms of pharma. I wouldn't read too much into the American numbers. You know, I think there is, of course, companies wondering about their CapEx budgets and that comes at different phases. But we expect, we expect Pharma to continue." }, { "speaker": "Dan Brennan", "text": "Okay. That's helpful. And then maybe just one on if I can just go into the broader market. I know you talked about the period in Mark's, Bob, and a few times it came up like you're expecting a below-trend market. At least it sounds like for the first half of the year, can you just remind us in terms of your kind of growth algorithm maybe, like, what would what is your assumptions based upon for a market growth typically? Kinda what are you assuming? And kind of specifically, is it just pharma that's weaker? Or are there other spots that you're pointing to that are below trend? And, you know, any color on that would be helpful. Thank you." }, { "speaker": "Bob McMahon", "text": "Yeah, Dan, if we looked at the long-term growth rates of our markets, we believe those are mid-single digits, you know, four to when you look at the aggregate across. We're obviously not expecting that for the full year here. We are expecting that we're doing better than the market. If you look at kinda how we exited here roughly flat on a core basis, you know, if you adjust for the timing of Lunar New Year, you know, you had the midpoint one percent, you know, and expect that kind of performance to continue that cadence. And so you would have the second half of the year a more normalized kind of growth rates. And so it's really across the board. We're seeing, you know, some of the industrial or applied markets things like CAM being a little ahead of the curve and certainly our diagnostics and clinical business continues to be strong. It has been throughout the course of this year. Exiting at a very healthy rate, and I would expect that to continue. The big ones are pharma coming in and then, you know, some of the other applied markets as well." }, { "speaker": "Operator", "text": "And this concludes the question and answer session. Mr. Ahuja, I turn the call back over to you." }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Rob, and thanks everyone for joining the call today. Before we sign off, I'd like to wish everyone a happy Thanksgiving. Have a good rest of the day and week everyone." }, { "speaker": "Operator", "text": "This concludes today's conference call. You may now disconnect." } ]	Agilent Technologies, Inc.	154,924
A	3	2,024	2024-08-21 16:30:00	Operator: Ladies and gentlemen, welcome to the Agilent Technologies Q3 2024 Earnings Call. My name is Regina and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja, to begin. Please go ahead. Parmeet Ahuja: Thank you and welcome, everyone, to Agilent's conference call for the Third Quarter of Fiscal Year 2024. With me are Padraig McDonnell, Agilent President and CEO; and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A will be Phil Binns, President of the Agilent Life Sciences and Applied Markets Group; Simon May, President of the Agilent Diagnostics and Genomics Group; and Angelica Riemann, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our third quarter financial results, investor presentation and information to supplement today's discussion, along with a recording of this webcast are available on our website at www.investor.agilent.com. Today's comments will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted exchange rate. As a reminder, beginning in the first quarter of fiscal 2024, we implemented certain changes to our segment reporting structure related to the move of our Cell Analysis business from LSAG into DGG. We have recast our historical segment information to reflect these changes. These changes have no impact on our company's consolidated financial statements. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risk and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risk and other factors. And now, I'd like to turn the call over to Padraig. Padraig McDonnell: Thanks, Parmeet. Good afternoon, everyone and thank you for joining today's call. The Agilent team executed well in the third quarter and posted solid results, delivering better-than-expected revenue and earnings. Revenue of $1.578 billion, declined 4.4%, an improvement of 300 basis points from Q2, reflecting the steady improvement in the market. Operating margin of 27.4% improved sequentially, as the actions we announced last quarter start to deliver. And we remain on-track to deliver the incremental annualized savings of $100 million by the end of the fiscal year. Earnings per share of $1.32 is $0.04 above the high end of guidance. As a result of our strong Q3 performance, we are raising our guidance at the midpoint for both revenue and EPS and we continue to make investments in our most promising growth opportunities that I referenced in our Q2 call. We are investing in our digital ecosystem to further enhance our differentiated customer experience, plus we are mobilizing the organization to accelerate value creation through strategic transformation initiatives, driving margin expansion and growth and increasing our execution capabilities. Separately in the quarter, we were excited to announce two acquisitions that demonstrate our focus on biopharma and our digital ecosystem, which I'll talk about in a moment. As you know well, the pace of change is faster than ever. Our markets, customers and competitors are not standing still, neither are we. We are accelerating our pace of innovation and execution, so we can add to and capitalize on opportunities in front of us. We are sharply focused on key growth vectors, including biopharma, PFAS and Advanced Materials. I continue to meet and connect with employees, customers and shareholders around the globe to listen to their perspectives on how we should build on our strengths and move Agilent forward. The entire Agilent team is clear on what is vital to the company's future, becoming even more customer focused and even more nimble to continue to win in the marketplace and add value to customers and shareholders. We are evolving our strategy, adapting quickly to market trends and changes, while accelerating our pace of innovation in areas of greatest return for long-term growth. We're excited to announce that you'll hear more about these topics and our transformation at our Investor Day we have planned in New York on December 17th. Now, let's talk further about our Q3 results. All our end markets except academia and government, which is our smallest, ended the quarter better-than-expected. Our largest market pharma declined high-single-digits, slightly better than our expectations and while biopharma continues to be pressured, we are seeing relatively better performance in small molecule. Our leadership in providing workflow solutions for PFAS continued to show strong performance in the environmental markets. Geographically, Europe exceeded expectations led by small-molecule pharma, as well as continued strength in environmental. Our other regions performed roughly in-line with expectations. While capital equipment budgets remain constrained, we continue to see good lab activity in Q3 with services plus consumables growing mid-single digits. When looking at our performance by business unit, the Life Sciences and Applied Markets Group reported $782 million in revenue, down 7%, while the instrument side of the business remains constrained, it was encouraging that our instrument book-to-bill was again greater than one. The group saw a decline across all regions and most end-markets with low single-digit growth in Environmental & Forensics. The Consumables continue to be a bright spot, growing by mid-single digit. The LSAG team also was busy innovating with the introduction of the 8850 GC that helps customers reach their sustainability goals by delivering answers efficiently, while using up to 30% less power than other GC's and has a much smaller footprint. Moving on to the Agilent CrossLab Group, the business delivered revenue of $411 million for the quarter, up mid-single digit. ACG grew in every region except China, where we were down modestly year-on-year, but showed meaningful improvement versus last quarter. Once again, we drove double-digit growth in service contracts, which represented nearly 70% of the total business. And beyond another quarter of solid revenue growth, ACG also delivered a record operating margin of 34%, demonstrating that the resiliency and strength of the recurring revenue business continues despite the constrained capital equipment environment. The continued strength of our business is a testament to our strategy of increasing the connect rates on our instruments and the ongoing value we are providing to our customers in helping them reach their productivity goals. The Diagnostics and Genomics Group posted $385 million in revenue, representing an 8% decline. Pathology grew mid-single digits globally and was offset by declines in Cell Analysis, NASD and genomics. NASD stepped down sequentially in Q3 as expected and we are on track for NASD's revenues to step-up sequentially in Q4. In the face of a constrained CapEx environment, the Agilent team has remained consistent in putting our customers first and fostering deeper relationships with them. We continue to execute well and be disciplined, while investing in high-growth opportunities. As I mentioned earlier, we were thrilled to announce two acquisitions, that speak to our focus on biopharma and increasing recurring revenue, as well as on strengthening the digital ecosystem for Agilent customers. In late July, we signed a definitive agreement to acquire BIOVECTRA, a leading specialized contract development and manufacturing organization. The Canada-based company builds on Agilent's capabilities in oligonucleotides and CRISPR therapeutics by expanding our portfolio of services. BIOVECTRA adds rapidly growing modalities in microbial fermentation, antibody-drug conjugates and high-potency active pharmaceutical ingredients. It also brings world-class capabilities that when combined with NASD enables us to deliver customers a complete gene editing solution. The company delivered more than $110 million in revenue during the calendar year 2023 and expects double-digit revenue growth this year. The BIOVECTRA acquisition remains on-track to be closed by the end of the year and we're looking-forward to welcoming the BIOVECTRA team to Agilent. At the end of the quarter, we also announced the acquisition of California-based Sigsense, a start-up that uses artificial intelligence and power monitoring to help customers optimize their lab operations. Sigsense Technology already is available to our customers through CrossLab Connect, a suite of digital applications that improve lab performance. A hearty welcome to the Sigsense team who already is part of Agilent. During the quarter, we released our annual ESG report, which showcases a large and growing portfolio of products that help our customers reach their sustainability goals. Instruments certified with the My GreenLab ACT label now accounts for 40% of all instrument revenue and we continue to regularly release products like the new 8850 GC with environmental benefits. We are also proud that we have recently ranked in the top 20 of Time Magazine's 500 Most Sustainable companies in the world. Bob will now provide the details on our results, as well as our outlook for the remainder of the year. After Bob delivers his comments, I will be back for some closing remarks. Over to you, Bob. Bob McMahon: Thanks, Padraig and good afternoon, everyone. In my remarks today, I'll provide some additional details on revenue in the quarter, as well as take you through the income statement and other key financial metrics. I'll then cover our updated full-year and fourth quarter guidance. Q3 revenue was $1.578 billion, a decline of 4.4% core, but a 300 basis-point sequential improvement as Padraig noted. Excluding China, revenue declined low-single digits in the quarter. On a reported basis, currency had a negative impact of 1.1 percentage points, while M&A had a negative impact of 10 basis points, resulting in a reported decline of 5.6%. Our largest end market pharma declined 8%. Biopharma was down low double-digits or down mid-single digits, excluding NASD. Small molecule performed better, down mid-single digits and was led by growth in Europe. Services and pharma continues to perform well, growing high single-digit. In Chemical & Advanced Materials, revenue declined 5%, with growth in Americas offset by softness in China. Our Advanced Materials sub-segment performed better, driven by our business in the semiconductor market. Academia and government, our smallest market, can be lumpy from quarter-to-quarter. We saw a decline of 11% as Europe and China both saw double-digit declines, partially offset by better performance in the Americas region. Our business in the diagnostics and clinical end-market grew 2%, including continued mid-single digit growth in pathology, offset by ongoing softness in genomics. In Environmental & Forensics, we grew 4%, another great quarter for our PFAS testing business. We saw robust business in Europe, led by the new EU Water Directive and in China due to the nationwide emerging pollutants program. Now wrapping up our end-markets, food was down 3% versus last year, but grew sequentially and was led by Asia, ex-China. Moving on to our regional performance, Europe was flat overall, beating our expectations, while we declined 6% in the Americas and declined 1% in Asia, ex-China. China revenue declined 11% with quarterly revenue improving sequentially, driven by growth in services and consumables. This speaks to some increase in lab activity, which is encouraging. Now, let's move on to the rest of the P&L. Gross margin was 56.0% in the quarter, down slightly versus a year-ago, but up 40 basis points sequentially. Our operating margin of 27.4% improved sequentially and was better-than-expected. Despite the dampened demand, we continue to make good progress in driving our productivity initiatives and continuing to manage the cost structure very well, while investing for growth. As Padraig mentioned, we are on track to deliver the $100 million in incremental annualized cost-savings by the end of the fiscal year. Below the line, our net interest income was in line as was our tax rate of 13% and we had $291 million diluted shares outstanding in the quarter. Putting it all together, Q3 earnings per share were $1.32. That was ahead of our expectations, but down 7.7% from a year ago as we went up against a difficult compare due to the variable pay reset in Q3 of last year. Now, let me turn to cash flow and the balance sheet. We continue to enjoy a very strong balance sheet and healthy cash flows. Operating cash flow was $452 million in the quarter and we invested $92 million in capital expenditures. As we committed in Q2, we ramped-up our share repurchases starting here in Q3. We purchased $585 million in shares and paid out $68 million through dividends, for a total of $653 million returned to shareholders in the quarter. This includes $500 million of the previously announced $750 million opportunistic share repurchase and we expect to complete the additional $250 million repurchase in Q4. We ended the quarter with a net leverage ratio of $0.6 and even with the upcoming BIOVECTRA acquisition, our balance sheet and leverage ratios will still be in a very strong position. In summary, we performed well and continue to see a steady improvement in the market and expect that to continue into FY 2025. Because of our Q3 results, we are increasing the midpoint of our revenue and earnings per share guidance for the year. We now expect full-year revenue to be in the range of $6.450 billion to $6.500 billion. This represents a decline of 5.6% to 4.9% on a reported basis and a decline of 5.0% to 4.3% on a core basis. Currency and M&A combined are a headwind of 60 basis points. Full-year non-GAAP earnings per share are now expected to be between $5.21 and $5.25, representing a decline of 4.2% to 3.5%. This assumes net interest income of $38 million, a 13% tax rate and $292 million fully diluted shares outstanding. We have not included any impact of the BIOVECTRA acquisition in our updated guidance and $0.06 does not have a material financial impact to the year or Q4. This full-year guidance translates into Q4 revenue in the range of $1.641 billion to $1.691 billion. This represents a decline of 1.9% to 1.1% growth on a core basis and a decline of 2.8% to 0.2% growth on a reported basis. Currency and M&A are a combined headwind of 90 basis-points. Fourth quarter non-GAAP earnings per share are expected to be between $1.38 and $1.42, marking a return to growth at the midpoint. We expect a 13% tax rate, a decrease in net interest income to $5 million due to the lower cash balance and $287 million diluted shares outstanding for the quarter. Now, I'd like to turn the call back to Padraig for some closing comments. Padraig? Padraig McDonnell: These are exciting times at Agilent, with a team that is second to known, we are doubling down on our customer force culture and deepening our relationships to further enhance our market leading customer experience that is already the best in the industry. We are evolving our strategy to aggressively pursue our ambition to grow in markets where we have a right to win through both organic and inorganic growth and we will continue to accelerate value creation through strategic transformation initiatives. We remain a leader across key platforms and we're in great long-term growth markets that are beginning to show evidence of recovery. And best of all, our team is engaged, leading to Newsweek including Agilent on its America's Greatest Workplaces 2024 list. Again, thank you for joining today's call. I'm energized by how we are evolving Agilent. Each data team gains momentum in building an enduring company that sets the standard for excellence with our customers and creates value for our shareholders. We are fueled by the future possibilities and I look forward to continuing to share our progress. Parmeet, over to you for Q&A. Parmeet Ahuja: Thanks, Padraig. Regina, if you could please provide instructions for Q&A now? Operator: [Operator Instructions] Our first question will come from the line of Matt Sykes with Goldman Sachs. Please go ahead. Matt Sykes: Hi, good afternoon. Thanks for taking my questions. Maybe the first one, just digging in a little bit on the LSAG where you had a pretty solid beat. It looks like that was driven primarily by consumables and services. So, I'm curious if you can give any more color on what instruments did? I know you had a book-to-bill above one, but just how does that inform your view as we go into 2025 on the replacement cycle, specifically large biopharma demand and how that might impact your view on when that replacement cycle starts kicking-in? Padraig McDonnell: Yes. Thanks a lot, Matt, maybe I'll kick it off and give it to Bob. I think, first of all, you're correct, we saw very, very promising growth in both Consumables & Services, which shows lab activity is actually improving or is very stable. We're still very challenged on the instrument side, but what we're seeing is, we're seeing a lot of activity around conversations with lab managers. Our funnel is extremely stable. We haven't seen any -- any cancellations. But what I would say is that, deal closure times are still elevated. So we're not at this point seeing any budget towards the end of the year and which of course for us ends at the end of October, but we're watching that closely. I don't know if you want to add anything, Bob? Bob McMahon: Yes. Thanks, Matt, for that question and maybe just to fill in and add some additional commentary to what Padraig was saying. When we looked at the quarter, we were very pleased actually both our Consumables business, as well as our Instrument business performed better-than-expected in the quarter. We were down 7% in total. Our Consumables business was actually up mid-single digits towards the high-end there. And our Instruments business was down low-double-digits, but that was better than what we expected. And as Padraig mentioned, we had a book-to-bill that was greater than one on the instrument side again this quarter, which was very encouraging. Matt Sykes: Got it. Thanks for that. Very helpful. And then just on Academic & Government, I know you've talked about it and you've talked about it for a while, how volatile that can be, but just given sort of the two quarters in a row of sort of negative performance there and you called out Europe and China specifically. Are there any kind of durable trends you're seeing either in funding or in demand that you think might be more persistent in that specific end-market as we go through Q4 and then as we look into 2025? Padraig McDonnell: No, I think, look, we saw a decline of about 11% and that was really against the comparative feature, the stimulus in EMEA and strong results in APAC and China. And so it was a really tough compare. And I think what we're seeing is funding remains stable in most regions and except I would say Europe where we're seeing a reallocation of funding towards defense, but I would say no major changes in that market. Matt Sykes: Got it. Thank you very much. Operator: Our next question will come from the line of Rachel Vatnsdal with JP Morgan. Please go ahead. Rachel Vatnsdal: Perfect. Good afternoon. Thanks for taking the questions you guys. I wanted to dig into NASD a little bit. Obviously, we had some positive announcements intra quarter with the Helios-B readout. You mentioned that NASD stepped down sequentially as expected and then you said you're expecting that to then step up into fiscal 4Q. So could you unpack all that for us a little bit? How should we think about the magnitude of the step-up into 4Q? And then given some of the updated data readouts that we got intra quarter, how does that underpin your assumptions on NASD next year and then also long-term? Padraig McDonnell: Yes. Look, I'll start off and maybe I'll hand it over to Simon, who is on the call here as well. We've seen, with clinical batches, of course, there can be changes with customers progress in those batches. We're not seeing any changes in what we're saying for Q4, so we're fairly certain of Q4 on that. What we're seeing as well is that we've grown our clinical business over 50% this year, which is very promising. The long range view of the market is very strong with the drugs and the modalities that are being used. But I think what you're seeing is a normal kind of up and down between quarters with that business. But I don't know if you want to add any more color, Simon? Simon May: Yes, I'd just echo what Padraig said, I think the Q3 performance that we saw in NASD was largely in line with expectations. And in that business, we always see a natural lag between order booking activity and revenue recognition because of the length of time that these programs take. And towards the end of last year, we were really seeing the effects of the IRA impacts and that's still not completely waned, but what we saw in Q3 was pretty strong bookings activity. So as we look to Q4 and into 2025, I think we're cautiously optimistic about seeing a return to growth there. So I'd really just characterize Q3 as in line with expectations and part and parcel of the lumpiness you see in this business. You also mentioned Helios, I think it's just worth mentioning that we were very happy to see that development, but still very early days in terms of how that's going to ramp up and play out and too soon to say where that's concerned. There's certainly no impact in the remainder of 2024 and unlikely in 2025 as well. Bob McMahon: Yes. Hey, Rachel, this is Bob. Just to add-on a little more to answer your last part of your question in terms of the sequential step-up where we had talked -- as Simon and Padraig had said, we've done a little better actually in Q3 than we expected and we're expecting a roughly $20 million step-up from Q3 to Q4. Those orders are all in-house and we're still on-track for the long -- the full-year estimate for NASD and that's incorporated into our guidance. Rachel Vatnsdal: Great. That's helpful. Then for my follow-up, I just wanted to dig a little bit more into 4Q guidance and what that means in terms of an exit-rate into 2025. So appreciate some of your comments earlier, you highlighted in Matt's question that you're not really assuming a budget flush for your fiscal year end in October. But I guess, how should investors look at this 4Q number on an organic growth basis of that down 2% to up 1% on the range. And how do we look at that translating into 2025? If I look at consensus right now, consensus is just shy of 5% organic on 2025, Street is also nearing that double digit EPS growth. So I appreciate it's still a little bit early for you guys to formally give us 2025 expectation, but what do you think about exit rate and where sell-side numbers are right now? Bob McMahon: Yes, you were reading my mind, Rachel. This is Bob and it is a little too early to talk about FY 2025. But I think what it does show is our expectation of this continued steady improvement. We improved here in Q3, 300 basis-points sequentially. We're expecting another improvement here going into Q4. And I would expect that improvement to continue into FY 2025. So -- and we do expect -- while it's too early to give you a specific number, we do expect to grow next year. These markets will return and we've been below the long-term trend, but there's nothing to suggest that the or the long-term growth rates of these markets, there's nothing to suggest that these markets have changed and so we're optimistic about continued recovery going into FY 2025. Rachel Vatnsdal: Understood. Thanks, guys. Operator: Our next question comes from the line of Patrick Donnelly with Citi. Please go ahead. Patrick Donnelly: Hey, guys. Thank you for taking the questions. Bob, maybe one for me, just on China, how you guys are thinking about the region there? It sounds like it was down 11%, that got a little bit better on the revenue side sequentially. It sounds like again, lab activity maybe look a little bit better. Could you just talk about expectations into year-end? Some of your peers have suggested you could see a bit of a pause on the capital side into calendar year-end as we wait for a little clarity on the stimulus. Just how you guys are thinking about China, again, not only into your fiscal year, but just into the year-end on the calendar side and what's your view in terms of do we see a little bit of an air pocket here until the good news dollars get firmed up? Padraig McDonnell: Yes, Patrick. It's a great question and we had actually seen a little of that in our Q2 of last -- just a quarter ago here really on the bid activity, primarily for instrumentation. We are optimistic about the mid-term here in terms of the stimulus. That's probably more FY 2025 event probably. But what we are seeing is more activity there and I think what's encouraging and maybe I can turn it over to Angelica as well, our services business has seen an increase in a pickup in activity and certainly we saw consumables as well. So it still dampened demand and we did see that impact in Academia & Government, that was the biggest impact in China, but we are seeing some pockets of green shoot in terms of recovery. Angelica Riemann: Yes, Bob, I'll just add. In China, we are encouraged from a services perspective on the nice sequential growth that we saw from Q2 to Q3, which is indicative of continued and somewhat increasing lab activity in China. Patrick Donnelly: Okay. That sounds encouraging. And then maybe another one for you, Bob. Just as we think about the margin construct as we work our way into year end and into 2025, maybe just remind us some of the moving pieces to think about high-level as we look ahead to next year, obviously, the cost out program seems to be progressing well to your point, the margins came in nicely here in 3Q. But yeah, maybe just the moving pieces as we go ahead to next year without talking too much about the top line, obviously, the volume matters there. But just kind of down the P&L, how to think about some of the margin algo for next year would be helpful. Bob McMahon: Yes, I think as we talked about, Patrick, it's a great question and we're committed to continuing to drive efficiencies across all of the P&L line items and I think you've seen that across the actions that we've taken. We're on track to delivering that $100 million of incremental annualized savings by the end of 2024. So there will still be a tailwind, obviously going into 2025 for that benefit. Offsetting that will be some resets of our variable pay and activities like that, but we are committed to covering that. If I think about it at the highest level, what I would expect us to continue to be able to do is drive leveraged earnings next year. And I think you're seeing that the scale benefit that we're seeing in certainly our ACG business here this last quarter, just phenomenal profit contribution and I think with volume coming back into the instrument business as well, that will set us up nicely for next year. So think about a nice incremental tailwind associated with the continued actions or the annualization of that actions that come in FY 2025, partially offset by merit in some of the activities and then we'll have our ongoing productivity measures and some -- we'll actually share some of the more detail around this probably in our Analyst Day in December. So stay-tuned on that as well. Patrick Donnelly: Thanks. Okay. That's great. Thank you, guys. Operator: Our next question comes from the line of Jack Meehan with Nephron Research. Please go ahead. Jack Meehan: Thank you. Good afternoon. I wanted to dig into some of these instrument trends a little bit more. I was wondering, if you could talk about just what you're seeing across some of the big categories like LC, LCMS, GC, spectroscopy, any color on how those performed? Padraig McDonnell: Yes, I mean in general terms, Jack, I think you know the customers are very, very cautious. But what I will say is that lab manager remain very engaged with our sales teams about future projects, that is true. We see a lot of stability in that. So it's still very challenged and I would say that, you know our deal close rate is still elevated, but our funnels are very stable with low cancellations. So I think that goes across most of the markets. And as you see going-forward, you know our results in CST and services growing mid-single digits and bodes very, very well in terms of lab activity increasing. So we're seeing slow, but steady improvement. Bob McMahon: Yes. Hey, Jack, just to follow-on to that. I think one of the things as we mentioned in the call, the book-to-bill being at one for instruments is a positive sign. It was slightly better than what we expected. Overall, LSAG instruments were down low-double-digit. Jack Meehan: Yes. Yeah. Were all the categories kind of right around there? Padraig McDonnell: I would say if you looked at the LC and LCMS business, they were in the mid-teens, our spectroscopy business better than that. Jack Meehan: Okay. And then just as one end-market follow-up, I was curious in CAM in the third quarter, so it was down 5%, it was a little bit below what I was thinking. Is there anything just within the different categories within that end-market that softened a little bit relative to what you were thinking a few months ago? Padraig McDonnell: Yes. So, you're correct, it was declined by 5% and it was really due to the impact of overproduction in China, which negatively impacted market investments globally. But we did see increases in service and consumables, both combined at 7% increase, but there was a decrease of about 14% in instruments and I think CapEx spending remains slightly challenged there. Jack Meehan: Yes. That makes sense. Thank you, guys. Operator: Our next question comes from the line of Vijay Kumar with Evercore ISI. Please go ahead. Vijay Kumar: Hey, guys. Thanks for taking my question. One, I guess, Padraig or Bob, if you look at the guidance change over the last three months, NASD, China, biopharma, those have been the big categories, right? I think the guide assumes NASD doubled -- down double digits in fiscal 2024, China down high singles, double-digits, biopharma down, which of these is expected to get better next year? What is getting better or worse? And is there a first-half versus second-half dynamic that we should be aware of? Padraig McDonnell: Yes, Vijay, thanks for the question. I think in terms of what we expect getting better, we expect all of them to improve next year. We raised the midpoint of guidance, $15 million on revenue and $0.03 in EPS and we see across all those areas, markets improving slowly and that's reflected in the sequential increase that we're guiding in Q4. So while we had a kind of a solid Q3, the end market environment for capital remains constrained and visibility while improving is still difficult. Vijay Kumar: Understood. And maybe on that Q4 commentary for guidance implies I think up 6% or 7%, which seems generally in line with your historical sequential step-up from 3Q. And is the bookings trends that we saw and NASE trends we saw, does it support that historical, I guess, seasonality because I think where the Street is debating upon is that historical seasonality, does it bake in some year-end budget flush or what is baked into that sequential step-up? Padraig McDonnell: Yes. So I think what we're seeing is that it's -- we normally see the step-up, that's what we're expecting this time. We're not including the budget flush in that. If we see a budget flush, it's on top and that will be in our Q1 numbers as we go forward. Bob McMahon: Yes. Hey, Vijay, this is Bob and just to build-on what Padraig is saying, I mean you're absolutely right. When we look at the sequential, it is in-line with our historical in our order book based on what we've seen today. Obviously, we have to book orders in Q4, but our order book trends would support that. Vijay Kumar: Fantastic. Thank you, guys. Operator: Our next question will come from the line of Tycho Peterson with Jefferies. Please go ahead. Tycho Peterson: Hey, guys. Question on BIOVECTRA and maybe just synergies with the rest of the NASD business. How do you think about -- does that change views on capacity? And maybe just talk a little bit about how much of their BIOVECTRA business is clinical versus commercial and any kind of emerging modalities that you're adding here? Padraig McDonnell: Yes. I'll start, Tycho and I'll bring in Simon in a minute. So we are absolutely delighted with BIOVECTRA. We think it's a great asset that enhances our offerings and it really allows us to deepen our relationships with our key pharma customers. And what we're really excited about is that it builds on our capabilities on the current NASD modalities around anti-sense and particularly gene editing with microbial fermentation and ADC capability. And so we're very happy with that. So there's a lot of synergies as we bring that forward. So I'll hand over to Simon to talk maybe about capacity in the main business. Simon May: Yes, I think Padraig hit many of the high notes already in terms of the synergies. We already mentioned the complete solution offering in gene editing, which we see as a really significant competitive advantage going forward. Sterile fill finish is another synergy that we're excited about. We've had a lot of request from our customers over the past few years for that capability. And from the diligence we've done with BIOVECTRA, we think they've got truly world-class capabilities there. And as Padraig also mentioned with microbial fermentation, high potency APIs, there's an existing footprint there in GLP-1 manufacturing. So I think we've got a slightly higher clinical mix in BIOVECTRA than we have in NASD. So I think we're just killing several birds with one stone with this acquisition. From a capacity perspective, I'd say BIOVECTRA has been ahead of the curve with capacity CapEx and we've got some skin to grow into there over the next few years Tycho Peterson: Okay. That's helpful. And then a follow-up on China. You had the pull-forward dynamic in the first quarter, $15 million. If that were back in 2Q, I think you were effectively flat, maybe down a little bit. First, is that the right assumption? What are you actually embedding in 4Q for China in guidance? And then how do you think about the return to growth in 2025? Could you see that in the first half of the year? Padraig McDonnell: Yes. Hey, Tycho, that's -- your recollection is correct. And as we think about implied fourth quarter down mid-single digits in China, we're going up quite honestly against some easier compares in-full disclosure. And we would expect a slight sequential step-up from a revenue perspective as well. And so that reflects this steady improvement. We do expect, again, not a lot of that stimulus to come in our Q4, basically none, but more into Q5, but the bidding activity that we're seeing has ramped-up. And then I think the activity that we're seeing in services and consumables, we're expecting that to continue. It's probably too early to tell next year for China, but I would expect it to continue to improve and not be down the way it is. We're expecting a low double-digit decline this year, we would expect to improve from that and it will probably be improvement throughout the year as opposed to an immediate improvement. Certainly, the stimulus will help us with that. But again, that will be in our first and second quarters most likely, but we're not expecting a huge step-up right there. It will be overtime because this stimulus is over a three-year period. Tycho Peterson: Understood. Thanks. Operator: Our next question comes from the line of Puneet Souda with Leerink Partners. Please go ahead. Puneet Souda: Yes. Hi, guys. Thanks for the questions here. Instrumentation growth, obviously, an important question. You know, last quarter, you lowered expectations meaningfully, but again, book-to-bill was a strong more than one. Again, this quarter it is more than one and I think you said that, that last quarter was the first time you saw growth in the market after seven quarters. So that looks like it's continued again into the quarter. So just maybe help us understand instrument where we sit on instrumentation and what sort of recovery are you seeing here in August and what gives you sort of confidence that the instrumentation should bounce -- continue to bounce back into 2025 as well? Padraig McDonnell: Yes, look at the indications from the team, we have a strategic account team that does a lot of citations with our major accounts. There's -- we're seeing that more positive than negative in terms of customer sentiment, which is a very good sign. We see a lot of activity in our testing labs, as well as focusing on PFAS and so on. So there is drivers within the markets that are positive. But overall, I would say it's slow and steady and we're trading it as that. And the teams have really good visibility. Our commercial teams, which we've transformed in the last few years are really, really close to our customers. We have really good visibility into that. So it's slow, but steady. I don't know if you want to add anything, Bob, to that? Bob McMahon: Yes. No, I think you're spot-on and we're not building any budget flush into our Q4, Puneet. So if that does in fact happen, that would be a benefit to our current estimate. Puneet Souda: Okay. Thanks. And then recent drug pricing negotiation with Medicare on the first drugs are out. Obviously, IRA is having an impact, but over the next three years annually, 15 drugs will be negotiated and that probably leads to another set of impacts. So what are you hearing from your large pharma customers and overall, how are they thinking about the R&D spend and the spend that they're -- that they currently have on Agilent? Padraig McDonnell: Yes. Look, I think in general, they're very cautious, of course, with some of the impacts, the macro impacts that are facing. They're not -- there's a lot of M&A activity going on within pharma, a lot of consolidation, which of course takes time and energy for these companies to focus on. And I think what you're going to see overtime is it probably even out in terms of impact. What isn't going down, by the way, is the number of R&D programs. We see that increasing in a number of key modality areas, particularly around GLP-1, etc. So we need to wait and see, but having said that, people kind of forget in the last few years the enormous amount of spend that has happened and we're seeing that normalize now, of course in the installed-base and coming out of that in 2025. Puneet Souda: Okay, fair. Okay. Thank you. Operator: Our next question comes from the line of Michael Ryskin with Bank of America. Please go ahead. Michael Ryskin: Hey, guys. Thanks for taking the questions. I want to follow-up on maybe this is what Puneet was just getting at, but you called out in your prepared remarks a couple of times that with biopharma, small molecule held up a little bit better or small molecule did a little bit better than large molecule, I assume. Just wondering if you could delve into that a little bit more, was that a particular instrument class or modality that drove that? Was that -- does that have to do with budget cycles, just what you're seeing there and why there's such a difference in molecule type? Bob McMahon: Yes. Hey, Mike, this is Bob. You're right, I mean, our small molecule business was down mid-single digits in the quarter, which was better-than-expected actually. And then in Europe, it grew, which was a very positive sign. And this does speak to -- you can only hold-on to your old instruments for so long before the replacements need to happen. We're not calling replacement cycle inflection just yet, but every quarter these instruments get older. And one of the things that I think is important here is, pill counts and volumes continue to grow. And back to the question around the IRA and the pricing, I think it was generally, you know, not the worst case scenario, maybe a little better than people expected. And where our strength is, is in the development moving into production and that continues to be long-term positive trend. So that would be our core LC franchise and then the biopharma, some of that was impacted by our NASD business, which was kind of the air pocket. Actually, if you take our biopharma business, which was down double digits and you take NASD out, we are at mid-single digits as well. Not as -- it was down a little more than small molecule, but generally still in that same range. So both of them are actually when you take out the kind of the one-time unique aspect of NASD performing better quarter-on-quarter, which is a positive sign. Padraig McDonnell: So I would say, just adding to that, Bob, we saw services growing double-digits in biopharma and mid-single digits in small molecules. So that's a big component of what we see in those different modalities. Michael Ryskin: Okay. Both of those answers really helpful. And then for my follow-up, I want to lean in a little bit more on BIOVECTRA. I mean, everything you kind of laid out there for the rationale and the financials of the deal certainly makes sense. But I'm just curious, you know, you've had a presence in some CDMO type capabilities in the past. Just wondering how hard are you going to lean into this? And what I'm alluding to is obviously, one of your large traditional tools vendors has a CDMO business has been in that business for a number of years now and there's a lot of talk of the benefits of having both the instrument, the consumables and the services business on the tail-end. Is this something you're going to continue to grow overtime? Is it BIOVECTRA like a beachhead acquisition? I mean we should expect more investment down the road? Padraig McDonnell: Yes, I'll start and then maybe hand it over to Simon. When we look at our M&A ambition, first of all, we're -- it's going to be -- it's going to be really centered around where our strategy is, what's the strategic fit in faster-growing markets and of course, value creation. BIOVECTRA takes all of those boxes and it's an area of where we're building out more capabilities for customers. So we see that continuing. And so we're really excited about it, but we do see that this business has a lot of runway. It's a business that's growing well, very well-run, of course and has had a lot of capital investment over a number of years. And I think this is only the start of our ambition in continuing to grow BIOVECTRA and NASD. But Simon? Simon May: Not much to add really, only beyond that, we've got a very strong existing position in the RNA modality. I'd say up until this point, it's been a relatively narrow capability position and BIOVECTRA builds on that quite nicely as we look at future optionality around complementary capabilities and modalities, we think it's a rich space and that's probably all we can say at this point. Michael Ryskin: Great. Thank you. Operator: Our next question comes from the line of Dan Brennan with TD Cowen. Please go ahead. Dan Brennan: Great. Thanks. Thanks for taking the questions. Maybe just back to China, the down 11% was a bit better than we were looking for. Can you just unpack what specifically got better in the quarter given the guidance cut that you made last quarter, maybe either by customer type or by product type? And then just to clear up, like so your guidance for China, I know it was down double digit. Has that changed at all? Have you improved that? So that's my first question. Bob McMahon: Yes. Hey, Dan. Thanks for the question. China is still in line with our full-year end guidance down low-double-digits. If I look at where we actually performed slightly better than what we anticipated, it was actually in pharma and it gets back to what we were talking about before, the activity both on the services side performing sequentially better, as well as our consumables business actually growing. And so we were down you know close to 30% in Q2 of last year, we were down low double-digits in pharma year-on-year. And so that was the big sequential improvement in Q3 and I would expect that to continue into Q4. Dan Brennan: Okay. Thanks, Bob. And then sorry to go back to NASD, but there's just been a lot of questions from investors after the turn of events year-to-date in terms of that business really slowing a lot. Can you -- did you say what it did actually in the quarter? I didn't hear the number kind of year-over-year, what did NSD do in the quarter and then kind of if we take your guidance full-year, I know you said step-up, could you just give us some clarity on the quarter? And then any additional color on clinical versus commercial? It sounds like your bookings are improving, so that portends well for the outlook, but just trying to unpack like what's going on right now in the quarter? Thank you. Bob McMahon: Yes. Hey, Dan. What I would say is, we typically don't give a specific number for NASD, but it actually performed in line or slightly better than what we expected. So we had been signaling a step down in Q3 and we actually did better than what we were expecting there. The full-year is still in line with where we were, which is roughly a $300 million business. As Simon was saying, the bookings continue to be positive in terms of activity and we're starting to see some of our customers, the readouts of some of the activities, which is more a harbinger of long-term opportunity versus short-term. But you know, if anything, it was a little better than we expected. So I don't want anyone to takeaway that it wasn't -- even though it was down in the quarter, we expected that and communicated that as part of our guidance and we're still on-track for the full-year estimate that we had coming into the quarter. Dan Brennan: Got it. Thank you. Operator: Our next question will come from the line of Catherine Schulte with Baird. Please go ahead. Catherine Schulte: Hey, guys, thanks for the questions. Maybe first, just could you talk about growth rates by segment for the fiscal fourth quarter and maybe your assumptions for instrumentation versus consumables and services in the fourth quarter? Padraig McDonnell: Bob? Bob McMahon: Yes, I'll -- hey, Catherine, it's Bob. What I would say is, if I look at our Q4, all groups, we would expect to do better and if I went by group, LSAG would be -- we're expecting kind of low single digits off of a down 7% this year. Consumables being better than that overall and with the instrument side, still probably down slightly or would be down slightly. DGD down mid-single digits and ACG up mid-single digits towards the high-end. That's what we've embedded in our guidance. So all three of those actually performing better than where we were in Q3. Catherine Schulte: Yes, perfect. And then maybe going back to Small Molecule, nice to see the improvement there. I think what was just Small Molecule performance excluding China? I know you said Europe grew, but just curious to get more color on what you're seeing elsewhere? Padraig McDonnell: Yes, I think what we're seeing is Europe was a standout in Small Molecule, a lot of activity there, but probably stable across the different markets on us. And what we did see from the Small Molecule side, we did see pretty good growth in services that as well as has had that number, but I think overall Europe ahead, but everywhere else stable. Bob McMahon: Yes. What -- and so we were down mid-single digits and as Padraig said, if you took China out, we were down low-single digits everywhere else. Operator: Our next question will come from the line of Josh Waldman with Cleveland Research. Please go ahead. Josh Waldman: Hey, good afternoon. Thanks for taking my questions. A couple for you. Padraig or Bob, maybe first a follow-up. On your assumption for no budget flushing impact on pharma instrumentation, is that just a function of the timing of your quarter relative to calendar year-end buying from these customers? Or are there other things you're seeing that are leaving you on the sidelines as it relates to end of your pharma spending? And then a related question was, curious any high-level thoughts you had on 2025 based on planning conversations you're having with pharma accounts, are you thinking next year should be a return to normal growth type year in pharma instrument budget as budgets are reset or is it more of a gradual recovery or return to normal over a couple of year period. Any feedback you're getting from accounts on that? Padraig McDonnell: Yes, I'll take the first one and maybe hand-off to Bob for the second one. I think it's a year ago and we were -- people were talking about budget flushes. We didn't expect it and we didn't see it. We saw a little bit, but not much. We're expecting the same this time, of course, our year-end at the end of October. So if we do see any activity will be in Q1 2025. Why do we see this is because we're very close to our customers. We know exactly when, where the funnel is, where the deals are and where installed base, we have a lot of installed base information. So we're not expecting it anything substantial at the end-of-the year. But what we are seeing is a lot more conversations about next year, slow, steady recovery and we're hearing that across the board. I don't know if you want to take the second question, Bob? Bob McMahon: Yes. Josh, on 2025 as we were saying, it's probably too early to say. But what I -- our current indication is that it's not going to snap back November 1st to be back to normal. I do think that you'll continue to see a recovery throughout FY 2025 and get back to that long-term growth rate sometime in 2025, that's the way we kind of think about it. But I don't think it's another two to three year estimate either or based on our conversations with our customers right now. So it's probably in between. Josh Waldman: Got it. Okay. And then just had a follow-up on ACG. I was curious if you could provide a bit more context on the dynamics you're seeing there, especially interested in what you're seeing from an RFP and win rate dynamic in the contracted business? And then you mentioned, I think in the slide decks, benefiting from mix. I was wondering if you could flush that out a bit? Padraig McDonnell: Yes, I'll take the first part of that question and hand it over to Angelica. Extremely pleased with ACG's performance and that's years of investment in a broad product offerings in key markets, that are really being received by customers in this environment where they want to get more productivity out of their systems, they want to use their assets in different ways. And we've seen the flow through to our results in spite of the CapEx challenges all year. So the business performs extremely well and the margins are extremely good. So I'll ask Angelica to provide more color on the contract business. But I think what's really interesting is our enterprise service business as well. Angelica? Angelica Riemann: Yes, so to really dive in on the contracts, right? It's nearly 70% of our business in Q3 and it's continuing to grow double-digit. As we continue to see that strong demand in our enterprise service offerings, which are in the high -- the mid-teens, it's really about being there to help customers optimize their lab operations, improve their productivity and our offers really facilitate our customers improving the lab operations, the efficiencies and the waste reduction. So we're continuing to see some very strong and sticky behavior within our contracts franchise. Bob McMahon: Yes. And Josh, just on the comment on mix is, when we have business on-contract, that generally is good for us and good for our customers as well. Josh Waldman: Got it. Okay. Appreciate all the detail. Operator: Our final question will come from the line of Doug Schenkel with Wolfe Research. Please go ahead. Doug Schenkel: Hey, guys. Thanks for fitting me in. I know it's late in the call, that being said, I got three lightning round questions, which I'm going to rattle through and then listen to the answers. The first is on math. If recurring revenue growth was up mid-single digits in the quarter, it seems like instruments has to be down around 20%, maybe more based on the numbers you reported in the 10-Q in Q3 of last year. Bob, I think you said in response to Matt Sykes' question, it was down low-double digits. What are we missing? Just not trying to be too picky here, but it just seems important in the context of assessing trends and what way to put on your book-to-bill commentary. So that's the first question. The second is on China stimulus. Any change in dynamics regarding stalling either in terms of conversions or even cancellations? There's some skeletal that that there's been some recent changes as the shape of stimulus becomes a bit more clear? And then the third question is on 2025. If you exit 2024 with flattish core growth in Q4, that would obviously be a positive trend relative to what we've seen over the last few quarters. That said, it would seem like if you draw a straight line that you'd be on track to exit 2025 at around, call it 5%, maybe 6% growth rather than growing mid-single digits for the year. So I think you need a fundamental improvement in overall market conditions and/or a real impact from China stimulus to get to mid-singles for the year. I just want to see if any of my logic is flawed there? Thank you and have a good night. Padraig McDonnell: That's certainly a lightning round, Doug, but we'll try and we'll answer it. I think, Bob, you can take the first and the last one, I'll take China. Bob McMahon: Yes. The comment that I had on Instruments was specifically related to LSAG instruments and they were down low double-digit. Consumables was up mid-single digits for the total being down minus 7%. So that is. We do have some instrumentation in DGG as well that was down roughly the same as where LSAG was. So down 20% is way too negative. I'll turn it over to Padraig for the second one and then I can jump back into last one. Padraig McDonnell: Yes. Look, I think, we're very close to our China team and the local team has seen an increased activity. We're seeing that improve from last quarter and for clarity, of course, we're not building any benefit from the stimulus into our Q4 guide. But what we're seeing is, we're seeing in early days, what we're hearing that the stimulus is broader in terms of its reach over a three-year period. Having said that, we are hearing that the first tranche will likely be focused on Academic & Government accounts. But again, it's early days, as it trickles down through provinces, as the mechanism of the funding goes, we'll be sure to update as we know that. Bob McMahon: Yes. And I think just the last one real quick. It's too early. We're not going to get into what we're looking at for FY 2025 other than to say that we expect improvement throughout the year. Operator: And I'll now turn the call back over to Parmeet Ahuja for any closing remarks. Parmeet Ahuja: Thanks, Regina and thanks everyone for joining the call today. With that, we'd like to end the call. Have a good rest of the day, everyone. Operator: Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect.	[ { "speaker": "Operator", "text": "Ladies and gentlemen, welcome to the Agilent Technologies Q3 2024 Earnings Call. My name is Regina and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja, to begin. Please go ahead." }, { "speaker": "Parmeet Ahuja", "text": "Thank you and welcome, everyone, to Agilent's conference call for the Third Quarter of Fiscal Year 2024. With me are Padraig McDonnell, Agilent President and CEO; and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A will be Phil Binns, President of the Agilent Life Sciences and Applied Markets Group; Simon May, President of the Agilent Diagnostics and Genomics Group; and Angelica Riemann, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our third quarter financial results, investor presentation and information to supplement today's discussion, along with a recording of this webcast are available on our website at www.investor.agilent.com. Today's comments will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted exchange rate. As a reminder, beginning in the first quarter of fiscal 2024, we implemented certain changes to our segment reporting structure related to the move of our Cell Analysis business from LSAG into DGG. We have recast our historical segment information to reflect these changes. These changes have no impact on our company's consolidated financial statements. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risk and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risk and other factors. And now, I'd like to turn the call over to Padraig." }, { "speaker": "Padraig McDonnell", "text": "Thanks, Parmeet. Good afternoon, everyone and thank you for joining today's call. The Agilent team executed well in the third quarter and posted solid results, delivering better-than-expected revenue and earnings. Revenue of $1.578 billion, declined 4.4%, an improvement of 300 basis points from Q2, reflecting the steady improvement in the market. Operating margin of 27.4% improved sequentially, as the actions we announced last quarter start to deliver. And we remain on-track to deliver the incremental annualized savings of $100 million by the end of the fiscal year. Earnings per share of $1.32 is $0.04 above the high end of guidance. As a result of our strong Q3 performance, we are raising our guidance at the midpoint for both revenue and EPS and we continue to make investments in our most promising growth opportunities that I referenced in our Q2 call. We are investing in our digital ecosystem to further enhance our differentiated customer experience, plus we are mobilizing the organization to accelerate value creation through strategic transformation initiatives, driving margin expansion and growth and increasing our execution capabilities. Separately in the quarter, we were excited to announce two acquisitions that demonstrate our focus on biopharma and our digital ecosystem, which I'll talk about in a moment. As you know well, the pace of change is faster than ever. Our markets, customers and competitors are not standing still, neither are we. We are accelerating our pace of innovation and execution, so we can add to and capitalize on opportunities in front of us. We are sharply focused on key growth vectors, including biopharma, PFAS and Advanced Materials. I continue to meet and connect with employees, customers and shareholders around the globe to listen to their perspectives on how we should build on our strengths and move Agilent forward. The entire Agilent team is clear on what is vital to the company's future, becoming even more customer focused and even more nimble to continue to win in the marketplace and add value to customers and shareholders. We are evolving our strategy, adapting quickly to market trends and changes, while accelerating our pace of innovation in areas of greatest return for long-term growth. We're excited to announce that you'll hear more about these topics and our transformation at our Investor Day we have planned in New York on December 17th. Now, let's talk further about our Q3 results. All our end markets except academia and government, which is our smallest, ended the quarter better-than-expected. Our largest market pharma declined high-single-digits, slightly better than our expectations and while biopharma continues to be pressured, we are seeing relatively better performance in small molecule. Our leadership in providing workflow solutions for PFAS continued to show strong performance in the environmental markets. Geographically, Europe exceeded expectations led by small-molecule pharma, as well as continued strength in environmental. Our other regions performed roughly in-line with expectations. While capital equipment budgets remain constrained, we continue to see good lab activity in Q3 with services plus consumables growing mid-single digits. When looking at our performance by business unit, the Life Sciences and Applied Markets Group reported $782 million in revenue, down 7%, while the instrument side of the business remains constrained, it was encouraging that our instrument book-to-bill was again greater than one. The group saw a decline across all regions and most end-markets with low single-digit growth in Environmental & Forensics. The Consumables continue to be a bright spot, growing by mid-single digit. The LSAG team also was busy innovating with the introduction of the 8850 GC that helps customers reach their sustainability goals by delivering answers efficiently, while using up to 30% less power than other GC's and has a much smaller footprint. Moving on to the Agilent CrossLab Group, the business delivered revenue of $411 million for the quarter, up mid-single digit. ACG grew in every region except China, where we were down modestly year-on-year, but showed meaningful improvement versus last quarter. Once again, we drove double-digit growth in service contracts, which represented nearly 70% of the total business. And beyond another quarter of solid revenue growth, ACG also delivered a record operating margin of 34%, demonstrating that the resiliency and strength of the recurring revenue business continues despite the constrained capital equipment environment. The continued strength of our business is a testament to our strategy of increasing the connect rates on our instruments and the ongoing value we are providing to our customers in helping them reach their productivity goals. The Diagnostics and Genomics Group posted $385 million in revenue, representing an 8% decline. Pathology grew mid-single digits globally and was offset by declines in Cell Analysis, NASD and genomics. NASD stepped down sequentially in Q3 as expected and we are on track for NASD's revenues to step-up sequentially in Q4. In the face of a constrained CapEx environment, the Agilent team has remained consistent in putting our customers first and fostering deeper relationships with them. We continue to execute well and be disciplined, while investing in high-growth opportunities. As I mentioned earlier, we were thrilled to announce two acquisitions, that speak to our focus on biopharma and increasing recurring revenue, as well as on strengthening the digital ecosystem for Agilent customers. In late July, we signed a definitive agreement to acquire BIOVECTRA, a leading specialized contract development and manufacturing organization. The Canada-based company builds on Agilent's capabilities in oligonucleotides and CRISPR therapeutics by expanding our portfolio of services. BIOVECTRA adds rapidly growing modalities in microbial fermentation, antibody-drug conjugates and high-potency active pharmaceutical ingredients. It also brings world-class capabilities that when combined with NASD enables us to deliver customers a complete gene editing solution. The company delivered more than $110 million in revenue during the calendar year 2023 and expects double-digit revenue growth this year. The BIOVECTRA acquisition remains on-track to be closed by the end of the year and we're looking-forward to welcoming the BIOVECTRA team to Agilent. At the end of the quarter, we also announced the acquisition of California-based Sigsense, a start-up that uses artificial intelligence and power monitoring to help customers optimize their lab operations. Sigsense Technology already is available to our customers through CrossLab Connect, a suite of digital applications that improve lab performance. A hearty welcome to the Sigsense team who already is part of Agilent. During the quarter, we released our annual ESG report, which showcases a large and growing portfolio of products that help our customers reach their sustainability goals. Instruments certified with the My GreenLab ACT label now accounts for 40% of all instrument revenue and we continue to regularly release products like the new 8850 GC with environmental benefits. We are also proud that we have recently ranked in the top 20 of Time Magazine's 500 Most Sustainable companies in the world. Bob will now provide the details on our results, as well as our outlook for the remainder of the year. After Bob delivers his comments, I will be back for some closing remarks. Over to you, Bob." }, { "speaker": "Bob McMahon", "text": "Thanks, Padraig and good afternoon, everyone. In my remarks today, I'll provide some additional details on revenue in the quarter, as well as take you through the income statement and other key financial metrics. I'll then cover our updated full-year and fourth quarter guidance. Q3 revenue was $1.578 billion, a decline of 4.4% core, but a 300 basis-point sequential improvement as Padraig noted. Excluding China, revenue declined low-single digits in the quarter. On a reported basis, currency had a negative impact of 1.1 percentage points, while M&A had a negative impact of 10 basis points, resulting in a reported decline of 5.6%. Our largest end market pharma declined 8%. Biopharma was down low double-digits or down mid-single digits, excluding NASD. Small molecule performed better, down mid-single digits and was led by growth in Europe. Services and pharma continues to perform well, growing high single-digit. In Chemical & Advanced Materials, revenue declined 5%, with growth in Americas offset by softness in China. Our Advanced Materials sub-segment performed better, driven by our business in the semiconductor market. Academia and government, our smallest market, can be lumpy from quarter-to-quarter. We saw a decline of 11% as Europe and China both saw double-digit declines, partially offset by better performance in the Americas region. Our business in the diagnostics and clinical end-market grew 2%, including continued mid-single digit growth in pathology, offset by ongoing softness in genomics. In Environmental & Forensics, we grew 4%, another great quarter for our PFAS testing business. We saw robust business in Europe, led by the new EU Water Directive and in China due to the nationwide emerging pollutants program. Now wrapping up our end-markets, food was down 3% versus last year, but grew sequentially and was led by Asia, ex-China. Moving on to our regional performance, Europe was flat overall, beating our expectations, while we declined 6% in the Americas and declined 1% in Asia, ex-China. China revenue declined 11% with quarterly revenue improving sequentially, driven by growth in services and consumables. This speaks to some increase in lab activity, which is encouraging. Now, let's move on to the rest of the P&L. Gross margin was 56.0% in the quarter, down slightly versus a year-ago, but up 40 basis points sequentially. Our operating margin of 27.4% improved sequentially and was better-than-expected. Despite the dampened demand, we continue to make good progress in driving our productivity initiatives and continuing to manage the cost structure very well, while investing for growth. As Padraig mentioned, we are on track to deliver the $100 million in incremental annualized cost-savings by the end of the fiscal year. Below the line, our net interest income was in line as was our tax rate of 13% and we had $291 million diluted shares outstanding in the quarter. Putting it all together, Q3 earnings per share were $1.32. That was ahead of our expectations, but down 7.7% from a year ago as we went up against a difficult compare due to the variable pay reset in Q3 of last year. Now, let me turn to cash flow and the balance sheet. We continue to enjoy a very strong balance sheet and healthy cash flows. Operating cash flow was $452 million in the quarter and we invested $92 million in capital expenditures. As we committed in Q2, we ramped-up our share repurchases starting here in Q3. We purchased $585 million in shares and paid out $68 million through dividends, for a total of $653 million returned to shareholders in the quarter. This includes $500 million of the previously announced $750 million opportunistic share repurchase and we expect to complete the additional $250 million repurchase in Q4. We ended the quarter with a net leverage ratio of $0.6 and even with the upcoming BIOVECTRA acquisition, our balance sheet and leverage ratios will still be in a very strong position. In summary, we performed well and continue to see a steady improvement in the market and expect that to continue into FY 2025. Because of our Q3 results, we are increasing the midpoint of our revenue and earnings per share guidance for the year. We now expect full-year revenue to be in the range of $6.450 billion to $6.500 billion. This represents a decline of 5.6% to 4.9% on a reported basis and a decline of 5.0% to 4.3% on a core basis. Currency and M&A combined are a headwind of 60 basis points. Full-year non-GAAP earnings per share are now expected to be between $5.21 and $5.25, representing a decline of 4.2% to 3.5%. This assumes net interest income of $38 million, a 13% tax rate and $292 million fully diluted shares outstanding. We have not included any impact of the BIOVECTRA acquisition in our updated guidance and $0.06 does not have a material financial impact to the year or Q4. This full-year guidance translates into Q4 revenue in the range of $1.641 billion to $1.691 billion. This represents a decline of 1.9% to 1.1% growth on a core basis and a decline of 2.8% to 0.2% growth on a reported basis. Currency and M&A are a combined headwind of 90 basis-points. Fourth quarter non-GAAP earnings per share are expected to be between $1.38 and $1.42, marking a return to growth at the midpoint. We expect a 13% tax rate, a decrease in net interest income to $5 million due to the lower cash balance and $287 million diluted shares outstanding for the quarter. Now, I'd like to turn the call back to Padraig for some closing comments. Padraig?" }, { "speaker": "Padraig McDonnell", "text": "These are exciting times at Agilent, with a team that is second to known, we are doubling down on our customer force culture and deepening our relationships to further enhance our market leading customer experience that is already the best in the industry. We are evolving our strategy to aggressively pursue our ambition to grow in markets where we have a right to win through both organic and inorganic growth and we will continue to accelerate value creation through strategic transformation initiatives. We remain a leader across key platforms and we're in great long-term growth markets that are beginning to show evidence of recovery. And best of all, our team is engaged, leading to Newsweek including Agilent on its America's Greatest Workplaces 2024 list. Again, thank you for joining today's call. I'm energized by how we are evolving Agilent. Each data team gains momentum in building an enduring company that sets the standard for excellence with our customers and creates value for our shareholders. We are fueled by the future possibilities and I look forward to continuing to share our progress. Parmeet, over to you for Q&A." }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Padraig. Regina, if you could please provide instructions for Q&A now?" }, { "speaker": "Operator", "text": "[Operator Instructions] Our first question will come from the line of Matt Sykes with Goldman Sachs. Please go ahead." }, { "speaker": "Matt Sykes", "text": "Hi, good afternoon. Thanks for taking my questions. Maybe the first one, just digging in a little bit on the LSAG where you had a pretty solid beat. It looks like that was driven primarily by consumables and services. So, I'm curious if you can give any more color on what instruments did? I know you had a book-to-bill above one, but just how does that inform your view as we go into 2025 on the replacement cycle, specifically large biopharma demand and how that might impact your view on when that replacement cycle starts kicking-in?" }, { "speaker": "Padraig McDonnell", "text": "Yes. Thanks a lot, Matt, maybe I'll kick it off and give it to Bob. I think, first of all, you're correct, we saw very, very promising growth in both Consumables & Services, which shows lab activity is actually improving or is very stable. We're still very challenged on the instrument side, but what we're seeing is, we're seeing a lot of activity around conversations with lab managers. Our funnel is extremely stable. We haven't seen any -- any cancellations. But what I would say is that, deal closure times are still elevated. So we're not at this point seeing any budget towards the end of the year and which of course for us ends at the end of October, but we're watching that closely. I don't know if you want to add anything, Bob?" }, { "speaker": "Bob McMahon", "text": "Yes. Thanks, Matt, for that question and maybe just to fill in and add some additional commentary to what Padraig was saying. When we looked at the quarter, we were very pleased actually both our Consumables business, as well as our Instrument business performed better-than-expected in the quarter. We were down 7% in total. Our Consumables business was actually up mid-single digits towards the high-end there. And our Instruments business was down low-double-digits, but that was better than what we expected. And as Padraig mentioned, we had a book-to-bill that was greater than one on the instrument side again this quarter, which was very encouraging." }, { "speaker": "Matt Sykes", "text": "Got it. Thanks for that. Very helpful. And then just on Academic & Government, I know you've talked about it and you've talked about it for a while, how volatile that can be, but just given sort of the two quarters in a row of sort of negative performance there and you called out Europe and China specifically. Are there any kind of durable trends you're seeing either in funding or in demand that you think might be more persistent in that specific end-market as we go through Q4 and then as we look into 2025?" }, { "speaker": "Padraig McDonnell", "text": "No, I think, look, we saw a decline of about 11% and that was really against the comparative feature, the stimulus in EMEA and strong results in APAC and China. And so it was a really tough compare. And I think what we're seeing is funding remains stable in most regions and except I would say Europe where we're seeing a reallocation of funding towards defense, but I would say no major changes in that market." }, { "speaker": "Matt Sykes", "text": "Got it. Thank you very much." }, { "speaker": "Operator", "text": "Our next question will come from the line of Rachel Vatnsdal with JP Morgan. Please go ahead." }, { "speaker": "Rachel Vatnsdal", "text": "Perfect. Good afternoon. Thanks for taking the questions you guys. I wanted to dig into NASD a little bit. Obviously, we had some positive announcements intra quarter with the Helios-B readout. You mentioned that NASD stepped down sequentially as expected and then you said you're expecting that to then step up into fiscal 4Q. So could you unpack all that for us a little bit? How should we think about the magnitude of the step-up into 4Q? And then given some of the updated data readouts that we got intra quarter, how does that underpin your assumptions on NASD next year and then also long-term?" }, { "speaker": "Padraig McDonnell", "text": "Yes. Look, I'll start off and maybe I'll hand it over to Simon, who is on the call here as well. We've seen, with clinical batches, of course, there can be changes with customers progress in those batches. We're not seeing any changes in what we're saying for Q4, so we're fairly certain of Q4 on that. What we're seeing as well is that we've grown our clinical business over 50% this year, which is very promising. The long range view of the market is very strong with the drugs and the modalities that are being used. But I think what you're seeing is a normal kind of up and down between quarters with that business. But I don't know if you want to add any more color, Simon?" }, { "speaker": "Simon May", "text": "Yes, I'd just echo what Padraig said, I think the Q3 performance that we saw in NASD was largely in line with expectations. And in that business, we always see a natural lag between order booking activity and revenue recognition because of the length of time that these programs take. And towards the end of last year, we were really seeing the effects of the IRA impacts and that's still not completely waned, but what we saw in Q3 was pretty strong bookings activity. So as we look to Q4 and into 2025, I think we're cautiously optimistic about seeing a return to growth there. So I'd really just characterize Q3 as in line with expectations and part and parcel of the lumpiness you see in this business. You also mentioned Helios, I think it's just worth mentioning that we were very happy to see that development, but still very early days in terms of how that's going to ramp up and play out and too soon to say where that's concerned. There's certainly no impact in the remainder of 2024 and unlikely in 2025 as well." }, { "speaker": "Bob McMahon", "text": "Yes. Hey, Rachel, this is Bob. Just to add-on a little more to answer your last part of your question in terms of the sequential step-up where we had talked -- as Simon and Padraig had said, we've done a little better actually in Q3 than we expected and we're expecting a roughly $20 million step-up from Q3 to Q4. Those orders are all in-house and we're still on-track for the long -- the full-year estimate for NASD and that's incorporated into our guidance." }, { "speaker": "Rachel Vatnsdal", "text": "Great. That's helpful. Then for my follow-up, I just wanted to dig a little bit more into 4Q guidance and what that means in terms of an exit-rate into 2025. So appreciate some of your comments earlier, you highlighted in Matt's question that you're not really assuming a budget flush for your fiscal year end in October. But I guess, how should investors look at this 4Q number on an organic growth basis of that down 2% to up 1% on the range. And how do we look at that translating into 2025? If I look at consensus right now, consensus is just shy of 5% organic on 2025, Street is also nearing that double digit EPS growth. So I appreciate it's still a little bit early for you guys to formally give us 2025 expectation, but what do you think about exit rate and where sell-side numbers are right now?" }, { "speaker": "Bob McMahon", "text": "Yes, you were reading my mind, Rachel. This is Bob and it is a little too early to talk about FY 2025. But I think what it does show is our expectation of this continued steady improvement. We improved here in Q3, 300 basis-points sequentially. We're expecting another improvement here going into Q4. And I would expect that improvement to continue into FY 2025. So -- and we do expect -- while it's too early to give you a specific number, we do expect to grow next year. These markets will return and we've been below the long-term trend, but there's nothing to suggest that the or the long-term growth rates of these markets, there's nothing to suggest that these markets have changed and so we're optimistic about continued recovery going into FY 2025." }, { "speaker": "Rachel Vatnsdal", "text": "Understood. Thanks, guys." }, { "speaker": "Operator", "text": "Our next question comes from the line of Patrick Donnelly with Citi. Please go ahead." }, { "speaker": "Patrick Donnelly", "text": "Hey, guys. Thank you for taking the questions. Bob, maybe one for me, just on China, how you guys are thinking about the region there? It sounds like it was down 11%, that got a little bit better on the revenue side sequentially. It sounds like again, lab activity maybe look a little bit better. Could you just talk about expectations into year-end? Some of your peers have suggested you could see a bit of a pause on the capital side into calendar year-end as we wait for a little clarity on the stimulus. Just how you guys are thinking about China, again, not only into your fiscal year, but just into the year-end on the calendar side and what's your view in terms of do we see a little bit of an air pocket here until the good news dollars get firmed up?" }, { "speaker": "Padraig McDonnell", "text": "Yes, Patrick. It's a great question and we had actually seen a little of that in our Q2 of last -- just a quarter ago here really on the bid activity, primarily for instrumentation. We are optimistic about the mid-term here in terms of the stimulus. That's probably more FY 2025 event probably. But what we are seeing is more activity there and I think what's encouraging and maybe I can turn it over to Angelica as well, our services business has seen an increase in a pickup in activity and certainly we saw consumables as well. So it still dampened demand and we did see that impact in Academia & Government, that was the biggest impact in China, but we are seeing some pockets of green shoot in terms of recovery." }, { "speaker": "Angelica Riemann", "text": "Yes, Bob, I'll just add. In China, we are encouraged from a services perspective on the nice sequential growth that we saw from Q2 to Q3, which is indicative of continued and somewhat increasing lab activity in China." }, { "speaker": "Patrick Donnelly", "text": "Okay. That sounds encouraging. And then maybe another one for you, Bob. Just as we think about the margin construct as we work our way into year end and into 2025, maybe just remind us some of the moving pieces to think about high-level as we look ahead to next year, obviously, the cost out program seems to be progressing well to your point, the margins came in nicely here in 3Q. But yeah, maybe just the moving pieces as we go ahead to next year without talking too much about the top line, obviously, the volume matters there. But just kind of down the P&L, how to think about some of the margin algo for next year would be helpful." }, { "speaker": "Bob McMahon", "text": "Yes, I think as we talked about, Patrick, it's a great question and we're committed to continuing to drive efficiencies across all of the P&L line items and I think you've seen that across the actions that we've taken. We're on track to delivering that $100 million of incremental annualized savings by the end of 2024. So there will still be a tailwind, obviously going into 2025 for that benefit. Offsetting that will be some resets of our variable pay and activities like that, but we are committed to covering that. If I think about it at the highest level, what I would expect us to continue to be able to do is drive leveraged earnings next year. And I think you're seeing that the scale benefit that we're seeing in certainly our ACG business here this last quarter, just phenomenal profit contribution and I think with volume coming back into the instrument business as well, that will set us up nicely for next year. So think about a nice incremental tailwind associated with the continued actions or the annualization of that actions that come in FY 2025, partially offset by merit in some of the activities and then we'll have our ongoing productivity measures and some -- we'll actually share some of the more detail around this probably in our Analyst Day in December. So stay-tuned on that as well." }, { "speaker": "Patrick Donnelly", "text": "Thanks. Okay. That's great. Thank you, guys." }, { "speaker": "Operator", "text": "Our next question comes from the line of Jack Meehan with Nephron Research. Please go ahead." }, { "speaker": "Jack Meehan", "text": "Thank you. Good afternoon. I wanted to dig into some of these instrument trends a little bit more. I was wondering, if you could talk about just what you're seeing across some of the big categories like LC, LCMS, GC, spectroscopy, any color on how those performed?" }, { "speaker": "Padraig McDonnell", "text": "Yes, I mean in general terms, Jack, I think you know the customers are very, very cautious. But what I will say is that lab manager remain very engaged with our sales teams about future projects, that is true. We see a lot of stability in that. So it's still very challenged and I would say that, you know our deal close rate is still elevated, but our funnels are very stable with low cancellations. So I think that goes across most of the markets. And as you see going-forward, you know our results in CST and services growing mid-single digits and bodes very, very well in terms of lab activity increasing. So we're seeing slow, but steady improvement." }, { "speaker": "Bob McMahon", "text": "Yes. Hey, Jack, just to follow-on to that. I think one of the things as we mentioned in the call, the book-to-bill being at one for instruments is a positive sign. It was slightly better than what we expected. Overall, LSAG instruments were down low-double-digit." }, { "speaker": "Jack Meehan", "text": "Yes. Yeah. Were all the categories kind of right around there?" }, { "speaker": "Padraig McDonnell", "text": "I would say if you looked at the LC and LCMS business, they were in the mid-teens, our spectroscopy business better than that." }, { "speaker": "Jack Meehan", "text": "Okay. And then just as one end-market follow-up, I was curious in CAM in the third quarter, so it was down 5%, it was a little bit below what I was thinking. Is there anything just within the different categories within that end-market that softened a little bit relative to what you were thinking a few months ago?" }, { "speaker": "Padraig McDonnell", "text": "Yes. So, you're correct, it was declined by 5% and it was really due to the impact of overproduction in China, which negatively impacted market investments globally. But we did see increases in service and consumables, both combined at 7% increase, but there was a decrease of about 14% in instruments and I think CapEx spending remains slightly challenged there." }, { "speaker": "Jack Meehan", "text": "Yes. That makes sense. Thank you, guys." }, { "speaker": "Operator", "text": "Our next question comes from the line of Vijay Kumar with Evercore ISI. Please go ahead." }, { "speaker": "Vijay Kumar", "text": "Hey, guys. Thanks for taking my question. One, I guess, Padraig or Bob, if you look at the guidance change over the last three months, NASD, China, biopharma, those have been the big categories, right? I think the guide assumes NASD doubled -- down double digits in fiscal 2024, China down high singles, double-digits, biopharma down, which of these is expected to get better next year? What is getting better or worse? And is there a first-half versus second-half dynamic that we should be aware of?" }, { "speaker": "Padraig McDonnell", "text": "Yes, Vijay, thanks for the question. I think in terms of what we expect getting better, we expect all of them to improve next year. We raised the midpoint of guidance, $15 million on revenue and $0.03 in EPS and we see across all those areas, markets improving slowly and that's reflected in the sequential increase that we're guiding in Q4. So while we had a kind of a solid Q3, the end market environment for capital remains constrained and visibility while improving is still difficult." }, { "speaker": "Vijay Kumar", "text": "Understood. And maybe on that Q4 commentary for guidance implies I think up 6% or 7%, which seems generally in line with your historical sequential step-up from 3Q. And is the bookings trends that we saw and NASE trends we saw, does it support that historical, I guess, seasonality because I think where the Street is debating upon is that historical seasonality, does it bake in some year-end budget flush or what is baked into that sequential step-up?" }, { "speaker": "Padraig McDonnell", "text": "Yes. So I think what we're seeing is that it's -- we normally see the step-up, that's what we're expecting this time. We're not including the budget flush in that. If we see a budget flush, it's on top and that will be in our Q1 numbers as we go forward." }, { "speaker": "Bob McMahon", "text": "Yes. Hey, Vijay, this is Bob and just to build-on what Padraig is saying, I mean you're absolutely right. When we look at the sequential, it is in-line with our historical in our order book based on what we've seen today. Obviously, we have to book orders in Q4, but our order book trends would support that." }, { "speaker": "Vijay Kumar", "text": "Fantastic. Thank you, guys." }, { "speaker": "Operator", "text": "Our next question will come from the line of Tycho Peterson with Jefferies. Please go ahead." }, { "speaker": "Tycho Peterson", "text": "Hey, guys. Question on BIOVECTRA and maybe just synergies with the rest of the NASD business. How do you think about -- does that change views on capacity? And maybe just talk a little bit about how much of their BIOVECTRA business is clinical versus commercial and any kind of emerging modalities that you're adding here?" }, { "speaker": "Padraig McDonnell", "text": "Yes. I'll start, Tycho and I'll bring in Simon in a minute. So we are absolutely delighted with BIOVECTRA. We think it's a great asset that enhances our offerings and it really allows us to deepen our relationships with our key pharma customers. And what we're really excited about is that it builds on our capabilities on the current NASD modalities around anti-sense and particularly gene editing with microbial fermentation and ADC capability. And so we're very happy with that. So there's a lot of synergies as we bring that forward. So I'll hand over to Simon to talk maybe about capacity in the main business." }, { "speaker": "Simon May", "text": "Yes, I think Padraig hit many of the high notes already in terms of the synergies. We already mentioned the complete solution offering in gene editing, which we see as a really significant competitive advantage going forward. Sterile fill finish is another synergy that we're excited about. We've had a lot of request from our customers over the past few years for that capability. And from the diligence we've done with BIOVECTRA, we think they've got truly world-class capabilities there. And as Padraig also mentioned with microbial fermentation, high potency APIs, there's an existing footprint there in GLP-1 manufacturing. So I think we've got a slightly higher clinical mix in BIOVECTRA than we have in NASD. So I think we're just killing several birds with one stone with this acquisition. From a capacity perspective, I'd say BIOVECTRA has been ahead of the curve with capacity CapEx and we've got some skin to grow into there over the next few years" }, { "speaker": "Tycho Peterson", "text": "Okay. That's helpful. And then a follow-up on China. You had the pull-forward dynamic in the first quarter, $15 million. If that were back in 2Q, I think you were effectively flat, maybe down a little bit. First, is that the right assumption? What are you actually embedding in 4Q for China in guidance? And then how do you think about the return to growth in 2025? Could you see that in the first half of the year?" }, { "speaker": "Padraig McDonnell", "text": "Yes. Hey, Tycho, that's -- your recollection is correct. And as we think about implied fourth quarter down mid-single digits in China, we're going up quite honestly against some easier compares in-full disclosure. And we would expect a slight sequential step-up from a revenue perspective as well. And so that reflects this steady improvement. We do expect, again, not a lot of that stimulus to come in our Q4, basically none, but more into Q5, but the bidding activity that we're seeing has ramped-up. And then I think the activity that we're seeing in services and consumables, we're expecting that to continue. It's probably too early to tell next year for China, but I would expect it to continue to improve and not be down the way it is. We're expecting a low double-digit decline this year, we would expect to improve from that and it will probably be improvement throughout the year as opposed to an immediate improvement. Certainly, the stimulus will help us with that. But again, that will be in our first and second quarters most likely, but we're not expecting a huge step-up right there. It will be overtime because this stimulus is over a three-year period." }, { "speaker": "Tycho Peterson", "text": "Understood. Thanks." }, { "speaker": "Operator", "text": "Our next question comes from the line of Puneet Souda with Leerink Partners. Please go ahead." }, { "speaker": "Puneet Souda", "text": "Yes. Hi, guys. Thanks for the questions here. Instrumentation growth, obviously, an important question. You know, last quarter, you lowered expectations meaningfully, but again, book-to-bill was a strong more than one. Again, this quarter it is more than one and I think you said that, that last quarter was the first time you saw growth in the market after seven quarters. So that looks like it's continued again into the quarter. So just maybe help us understand instrument where we sit on instrumentation and what sort of recovery are you seeing here in August and what gives you sort of confidence that the instrumentation should bounce -- continue to bounce back into 2025 as well?" }, { "speaker": "Padraig McDonnell", "text": "Yes, look at the indications from the team, we have a strategic account team that does a lot of citations with our major accounts. There's -- we're seeing that more positive than negative in terms of customer sentiment, which is a very good sign. We see a lot of activity in our testing labs, as well as focusing on PFAS and so on. So there is drivers within the markets that are positive. But overall, I would say it's slow and steady and we're trading it as that. And the teams have really good visibility. Our commercial teams, which we've transformed in the last few years are really, really close to our customers. We have really good visibility into that. So it's slow, but steady. I don't know if you want to add anything, Bob, to that?" }, { "speaker": "Bob McMahon", "text": "Yes. No, I think you're spot-on and we're not building any budget flush into our Q4, Puneet. So if that does in fact happen, that would be a benefit to our current estimate." }, { "speaker": "Puneet Souda", "text": "Okay. Thanks. And then recent drug pricing negotiation with Medicare on the first drugs are out. Obviously, IRA is having an impact, but over the next three years annually, 15 drugs will be negotiated and that probably leads to another set of impacts. So what are you hearing from your large pharma customers and overall, how are they thinking about the R&D spend and the spend that they're -- that they currently have on Agilent?" }, { "speaker": "Padraig McDonnell", "text": "Yes. Look, I think in general, they're very cautious, of course, with some of the impacts, the macro impacts that are facing. They're not -- there's a lot of M&A activity going on within pharma, a lot of consolidation, which of course takes time and energy for these companies to focus on. And I think what you're going to see overtime is it probably even out in terms of impact. What isn't going down, by the way, is the number of R&D programs. We see that increasing in a number of key modality areas, particularly around GLP-1, etc. So we need to wait and see, but having said that, people kind of forget in the last few years the enormous amount of spend that has happened and we're seeing that normalize now, of course in the installed-base and coming out of that in 2025." }, { "speaker": "Puneet Souda", "text": "Okay, fair. Okay. Thank you." }, { "speaker": "Operator", "text": "Our next question comes from the line of Michael Ryskin with Bank of America. Please go ahead." }, { "speaker": "Michael Ryskin", "text": "Hey, guys. Thanks for taking the questions. I want to follow-up on maybe this is what Puneet was just getting at, but you called out in your prepared remarks a couple of times that with biopharma, small molecule held up a little bit better or small molecule did a little bit better than large molecule, I assume. Just wondering if you could delve into that a little bit more, was that a particular instrument class or modality that drove that? Was that -- does that have to do with budget cycles, just what you're seeing there and why there's such a difference in molecule type?" }, { "speaker": "Bob McMahon", "text": "Yes. Hey, Mike, this is Bob. You're right, I mean, our small molecule business was down mid-single digits in the quarter, which was better-than-expected actually. And then in Europe, it grew, which was a very positive sign. And this does speak to -- you can only hold-on to your old instruments for so long before the replacements need to happen. We're not calling replacement cycle inflection just yet, but every quarter these instruments get older. And one of the things that I think is important here is, pill counts and volumes continue to grow. And back to the question around the IRA and the pricing, I think it was generally, you know, not the worst case scenario, maybe a little better than people expected. And where our strength is, is in the development moving into production and that continues to be long-term positive trend. So that would be our core LC franchise and then the biopharma, some of that was impacted by our NASD business, which was kind of the air pocket. Actually, if you take our biopharma business, which was down double digits and you take NASD out, we are at mid-single digits as well. Not as -- it was down a little more than small molecule, but generally still in that same range. So both of them are actually when you take out the kind of the one-time unique aspect of NASD performing better quarter-on-quarter, which is a positive sign." }, { "speaker": "Padraig McDonnell", "text": "So I would say, just adding to that, Bob, we saw services growing double-digits in biopharma and mid-single digits in small molecules. So that's a big component of what we see in those different modalities." }, { "speaker": "Michael Ryskin", "text": "Okay. Both of those answers really helpful. And then for my follow-up, I want to lean in a little bit more on BIOVECTRA. I mean, everything you kind of laid out there for the rationale and the financials of the deal certainly makes sense. But I'm just curious, you know, you've had a presence in some CDMO type capabilities in the past. Just wondering how hard are you going to lean into this? And what I'm alluding to is obviously, one of your large traditional tools vendors has a CDMO business has been in that business for a number of years now and there's a lot of talk of the benefits of having both the instrument, the consumables and the services business on the tail-end. Is this something you're going to continue to grow overtime? Is it BIOVECTRA like a beachhead acquisition? I mean we should expect more investment down the road?" }, { "speaker": "Padraig McDonnell", "text": "Yes, I'll start and then maybe hand it over to Simon. When we look at our M&A ambition, first of all, we're -- it's going to be -- it's going to be really centered around where our strategy is, what's the strategic fit in faster-growing markets and of course, value creation. BIOVECTRA takes all of those boxes and it's an area of where we're building out more capabilities for customers. So we see that continuing. And so we're really excited about it, but we do see that this business has a lot of runway. It's a business that's growing well, very well-run, of course and has had a lot of capital investment over a number of years. And I think this is only the start of our ambition in continuing to grow BIOVECTRA and NASD. But Simon?" }, { "speaker": "Simon May", "text": "Not much to add really, only beyond that, we've got a very strong existing position in the RNA modality. I'd say up until this point, it's been a relatively narrow capability position and BIOVECTRA builds on that quite nicely as we look at future optionality around complementary capabilities and modalities, we think it's a rich space and that's probably all we can say at this point." }, { "speaker": "Michael Ryskin", "text": "Great. Thank you." }, { "speaker": "Operator", "text": "Our next question comes from the line of Dan Brennan with TD Cowen. Please go ahead." }, { "speaker": "Dan Brennan", "text": "Great. Thanks. Thanks for taking the questions. Maybe just back to China, the down 11% was a bit better than we were looking for. Can you just unpack what specifically got better in the quarter given the guidance cut that you made last quarter, maybe either by customer type or by product type? And then just to clear up, like so your guidance for China, I know it was down double digit. Has that changed at all? Have you improved that? So that's my first question." }, { "speaker": "Bob McMahon", "text": "Yes. Hey, Dan. Thanks for the question. China is still in line with our full-year end guidance down low-double-digits. If I look at where we actually performed slightly better than what we anticipated, it was actually in pharma and it gets back to what we were talking about before, the activity both on the services side performing sequentially better, as well as our consumables business actually growing. And so we were down you know close to 30% in Q2 of last year, we were down low double-digits in pharma year-on-year. And so that was the big sequential improvement in Q3 and I would expect that to continue into Q4." }, { "speaker": "Dan Brennan", "text": "Okay. Thanks, Bob. And then sorry to go back to NASD, but there's just been a lot of questions from investors after the turn of events year-to-date in terms of that business really slowing a lot. Can you -- did you say what it did actually in the quarter? I didn't hear the number kind of year-over-year, what did NSD do in the quarter and then kind of if we take your guidance full-year, I know you said step-up, could you just give us some clarity on the quarter? And then any additional color on clinical versus commercial? It sounds like your bookings are improving, so that portends well for the outlook, but just trying to unpack like what's going on right now in the quarter? Thank you." }, { "speaker": "Bob McMahon", "text": "Yes. Hey, Dan. What I would say is, we typically don't give a specific number for NASD, but it actually performed in line or slightly better than what we expected. So we had been signaling a step down in Q3 and we actually did better than what we were expecting there. The full-year is still in line with where we were, which is roughly a $300 million business. As Simon was saying, the bookings continue to be positive in terms of activity and we're starting to see some of our customers, the readouts of some of the activities, which is more a harbinger of long-term opportunity versus short-term. But you know, if anything, it was a little better than we expected. So I don't want anyone to takeaway that it wasn't -- even though it was down in the quarter, we expected that and communicated that as part of our guidance and we're still on-track for the full-year estimate that we had coming into the quarter." }, { "speaker": "Dan Brennan", "text": "Got it. Thank you." }, { "speaker": "Operator", "text": "Our next question will come from the line of Catherine Schulte with Baird. Please go ahead." }, { "speaker": "Catherine Schulte", "text": "Hey, guys, thanks for the questions. Maybe first, just could you talk about growth rates by segment for the fiscal fourth quarter and maybe your assumptions for instrumentation versus consumables and services in the fourth quarter?" }, { "speaker": "Padraig McDonnell", "text": "Bob?" }, { "speaker": "Bob McMahon", "text": "Yes, I'll -- hey, Catherine, it's Bob. What I would say is, if I look at our Q4, all groups, we would expect to do better and if I went by group, LSAG would be -- we're expecting kind of low single digits off of a down 7% this year. Consumables being better than that overall and with the instrument side, still probably down slightly or would be down slightly. DGD down mid-single digits and ACG up mid-single digits towards the high-end. That's what we've embedded in our guidance. So all three of those actually performing better than where we were in Q3." }, { "speaker": "Catherine Schulte", "text": "Yes, perfect. And then maybe going back to Small Molecule, nice to see the improvement there. I think what was just Small Molecule performance excluding China? I know you said Europe grew, but just curious to get more color on what you're seeing elsewhere?" }, { "speaker": "Padraig McDonnell", "text": "Yes, I think what we're seeing is Europe was a standout in Small Molecule, a lot of activity there, but probably stable across the different markets on us. And what we did see from the Small Molecule side, we did see pretty good growth in services that as well as has had that number, but I think overall Europe ahead, but everywhere else stable." }, { "speaker": "Bob McMahon", "text": "Yes. What -- and so we were down mid-single digits and as Padraig said, if you took China out, we were down low-single digits everywhere else." }, { "speaker": "Operator", "text": "Our next question will come from the line of Josh Waldman with Cleveland Research. Please go ahead." }, { "speaker": "Josh Waldman", "text": "Hey, good afternoon. Thanks for taking my questions. A couple for you. Padraig or Bob, maybe first a follow-up. On your assumption for no budget flushing impact on pharma instrumentation, is that just a function of the timing of your quarter relative to calendar year-end buying from these customers? Or are there other things you're seeing that are leaving you on the sidelines as it relates to end of your pharma spending? And then a related question was, curious any high-level thoughts you had on 2025 based on planning conversations you're having with pharma accounts, are you thinking next year should be a return to normal growth type year in pharma instrument budget as budgets are reset or is it more of a gradual recovery or return to normal over a couple of year period. Any feedback you're getting from accounts on that?" }, { "speaker": "Padraig McDonnell", "text": "Yes, I'll take the first one and maybe hand-off to Bob for the second one. I think it's a year ago and we were -- people were talking about budget flushes. We didn't expect it and we didn't see it. We saw a little bit, but not much. We're expecting the same this time, of course, our year-end at the end of October. So if we do see any activity will be in Q1 2025. Why do we see this is because we're very close to our customers. We know exactly when, where the funnel is, where the deals are and where installed base, we have a lot of installed base information. So we're not expecting it anything substantial at the end-of-the year. But what we are seeing is a lot more conversations about next year, slow, steady recovery and we're hearing that across the board. I don't know if you want to take the second question, Bob?" }, { "speaker": "Bob McMahon", "text": "Yes. Josh, on 2025 as we were saying, it's probably too early to say. But what I -- our current indication is that it's not going to snap back November 1st to be back to normal. I do think that you'll continue to see a recovery throughout FY 2025 and get back to that long-term growth rate sometime in 2025, that's the way we kind of think about it. But I don't think it's another two to three year estimate either or based on our conversations with our customers right now. So it's probably in between." }, { "speaker": "Josh Waldman", "text": "Got it. Okay. And then just had a follow-up on ACG. I was curious if you could provide a bit more context on the dynamics you're seeing there, especially interested in what you're seeing from an RFP and win rate dynamic in the contracted business? And then you mentioned, I think in the slide decks, benefiting from mix. I was wondering if you could flush that out a bit?" }, { "speaker": "Padraig McDonnell", "text": "Yes, I'll take the first part of that question and hand it over to Angelica. Extremely pleased with ACG's performance and that's years of investment in a broad product offerings in key markets, that are really being received by customers in this environment where they want to get more productivity out of their systems, they want to use their assets in different ways. And we've seen the flow through to our results in spite of the CapEx challenges all year. So the business performs extremely well and the margins are extremely good. So I'll ask Angelica to provide more color on the contract business. But I think what's really interesting is our enterprise service business as well. Angelica?" }, { "speaker": "Angelica Riemann", "text": "Yes, so to really dive in on the contracts, right? It's nearly 70% of our business in Q3 and it's continuing to grow double-digit. As we continue to see that strong demand in our enterprise service offerings, which are in the high -- the mid-teens, it's really about being there to help customers optimize their lab operations, improve their productivity and our offers really facilitate our customers improving the lab operations, the efficiencies and the waste reduction. So we're continuing to see some very strong and sticky behavior within our contracts franchise." }, { "speaker": "Bob McMahon", "text": "Yes. And Josh, just on the comment on mix is, when we have business on-contract, that generally is good for us and good for our customers as well." }, { "speaker": "Josh Waldman", "text": "Got it. Okay. Appreciate all the detail." }, { "speaker": "Operator", "text": "Our final question will come from the line of Doug Schenkel with Wolfe Research. Please go ahead." }, { "speaker": "Doug Schenkel", "text": "Hey, guys. Thanks for fitting me in. I know it's late in the call, that being said, I got three lightning round questions, which I'm going to rattle through and then listen to the answers. The first is on math. If recurring revenue growth was up mid-single digits in the quarter, it seems like instruments has to be down around 20%, maybe more based on the numbers you reported in the 10-Q in Q3 of last year. Bob, I think you said in response to Matt Sykes' question, it was down low-double digits. What are we missing? Just not trying to be too picky here, but it just seems important in the context of assessing trends and what way to put on your book-to-bill commentary. So that's the first question. The second is on China stimulus. Any change in dynamics regarding stalling either in terms of conversions or even cancellations? There's some skeletal that that there's been some recent changes as the shape of stimulus becomes a bit more clear? And then the third question is on 2025. If you exit 2024 with flattish core growth in Q4, that would obviously be a positive trend relative to what we've seen over the last few quarters. That said, it would seem like if you draw a straight line that you'd be on track to exit 2025 at around, call it 5%, maybe 6% growth rather than growing mid-single digits for the year. So I think you need a fundamental improvement in overall market conditions and/or a real impact from China stimulus to get to mid-singles for the year. I just want to see if any of my logic is flawed there? Thank you and have a good night." }, { "speaker": "Padraig McDonnell", "text": "That's certainly a lightning round, Doug, but we'll try and we'll answer it. I think, Bob, you can take the first and the last one, I'll take China." }, { "speaker": "Bob McMahon", "text": "Yes. The comment that I had on Instruments was specifically related to LSAG instruments and they were down low double-digit. Consumables was up mid-single digits for the total being down minus 7%. So that is. We do have some instrumentation in DGG as well that was down roughly the same as where LSAG was. So down 20% is way too negative. I'll turn it over to Padraig for the second one and then I can jump back into last one." }, { "speaker": "Padraig McDonnell", "text": "Yes. Look, I think, we're very close to our China team and the local team has seen an increased activity. We're seeing that improve from last quarter and for clarity, of course, we're not building any benefit from the stimulus into our Q4 guide. But what we're seeing is, we're seeing in early days, what we're hearing that the stimulus is broader in terms of its reach over a three-year period. Having said that, we are hearing that the first tranche will likely be focused on Academic & Government accounts. But again, it's early days, as it trickles down through provinces, as the mechanism of the funding goes, we'll be sure to update as we know that." }, { "speaker": "Bob McMahon", "text": "Yes. And I think just the last one real quick. It's too early. We're not going to get into what we're looking at for FY 2025 other than to say that we expect improvement throughout the year." }, { "speaker": "Operator", "text": "And I'll now turn the call back over to Parmeet Ahuja for any closing remarks." }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Regina and thanks everyone for joining the call today. With that, we'd like to end the call. Have a good rest of the day, everyone." }, { "speaker": "Operator", "text": "Ladies and gentlemen, this concludes today’s call. Thank you for joining. You may now disconnect." } ]	Agilent Technologies, Inc.	154,924
A	2	2,024	2024-05-29 16:30:00	Operator: Ladies and gentlemen, welcome to the Agilent Technologies Q2 2024 Earnings Call. My name is Regina, and I will be coordinating your call today. [Operator Instructions]. I will now hand you over to your host, Parmeet Ahuja, to begin. Please go ahead. Parmeet Ahuja: Thank you, and welcome, everyone, to Agilent's conference call for the second quarter of fiscal year 2024. With me are Padraig McDonnell, Agilent President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A will be Phil Binns, President of the Agilent Life Sciences and Applied Markets Group; Simon May, our newly named President of the Agilent Diagnostics and Genomics Group; and Angelica Riemann, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our second quarter financial results, investor presentation and information to supplement today's discussion along with the recording of this webcast are available on our website at www.investor.agilent.com. Today's comments will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted exchange rates. As previously announced, beginning in the first quarter of fiscal 2024, we implemented certain changes to our segment reporting structure related to the move of our cell analysis business from LSAG into DGG. We have recast our historical segment information to reflect these changes. These changes have no impact on our company's consolidated financial statements. During this call, we will also make forward-looking statements about the financial performance of the Company. These statements are subject to risks and uncertainties and are only valid as of today. The Company assumes no obligation to update them. Please look at the Company's recent SEC filings for a more complete picture of our risks and other factors. And now, I'd like to turn the call over to Padraig. Padraig McDonnell: Thanks, Parmeet. Good afternoon, everyone, and thank you for joining today's call. I want to begin by saying I'm incredibly honored to serve as CEO of this great company, and I'm thankful for the opportunity to lead such a talented team. I truly believe the Agilent team is second to none, and I'm energized about the future possibilities that lie ahead of us. I also want to take this time to welcome our new DGG President, Simon May to the Agilent team. Simon's diversified experience, strong technical skills and growth mindset will be a key asset in this role. Since starting earlier this month, Simon has hit the ground running, and I am really looking forward to him helping move DGG and Agilent forward. Before I talk about the quarterly results, I'd like to tell you how I spent my time since the announcement in February that I will become Agilent's CEO. I've been meeting and connecting with employees, customers and shareholders around the world to listen to their perspectives and how we should build on our strengths and evolve Agilent. What they have told me is clear, Agilent must become even more customer focused and even more nimble to continue to win in the marketplace and add value to customers and shareholders. This has really resonated with our employees and customers. As an energized Agilent team, we will evolve our strategy, adapting quickly to market trends and changes while accelerating our pace of innovation in areas of greatest return for long-term growth. We will double down on our customer first culture, deepening our relationship to further enhance our market-leading customer experience that is already the best in the industry. Now let's talk about the Q2 results and outlook moving forward. In a challenging market environment, the Agilent team delivered on expectations. In the second quarter, we reported revenue of $1.573 billion, a 7.4% decline. This was against a tough compare of 9.5% growth in Q2 of last year. While revenues declined in the quarter, our book-to-bill was greater than one, and orders grew year-over-year for the first time in seven quarters. Earnings per share of $1.22 beat our expectations and represented a 4% decline from the second quarter of 2023. Now looking forward, the market environment continues to be challenging, but we are seeing early signs of recovery. However, as we announced in our press release, this market recovery is not at the pace we anticipated when we provided guidance earlier in the year. As a result, we are reducing our market growth expectations and revising our full year core revenue to be in the range of $6.42 billion to $6.5 billion and growth to decline between 4.3% and 5.4%. We now expect earnings per share to be between $5.15 and $5.25 for the year. We have responded quickly to the lower market growth expectations and are taking difficult, but necessary actions to streamline our cost structure. These actions will allow us to invest in our most promising growth opportunities while also delivering incremental annualized savings of $100 million by the end of the fiscal year. We are sharpening our focus on key growth vectors such as Biopharma, PFAS and Advanced Materials, while also investing in our digital ecosystem, and accelerating our innovation to drive even faster execution. And we are leveraging our strong balance sheet and plan to repurchase $750 million of our common stock across the third and four quarters, over and above our normal anti-dilutive repurchases. Bob will provide more details on our results and latest outlook in his remarks. Getting back to Q2 results. As expected, all end markets saw a declining revenue in Q2. Geographically, the Americas and Europe came in slightly ahead of expectations, while China lagged. Despite the challenging market conditions, our Agilent team stay close to our customers and continue to leverage our strong relationships with them to execute remarkably well while maintaining strong cost discipline. When we look at our performance by business unit, the Life Sciences and Applied Markets Group reported $754 million in revenue, down 13%. The group saw a decline across all end markets and regions, with consumables being a bright spot. Consumables grew in the low single digits, driven by Chemical and Advanced Materials, Food, and Environmental and Forensics. Also, while relatively small, we continue to see strong growth in our pre-owned instrument business. The LSAG team continues to innovate, introducing two new instruments this quarter that extend our applied markets leadership. First, our 7010D GC/Triple Quad instrument delivers exceptional sensitivity for customers in the environmental PFAS and Advanced Materials markets. Designed for analysis that demand the lowest limit of detection. And second is our 8850 GC, a distinguished new member of our market-leading GC portfolio. The 8850 is ultrafast in separation and colon speeds with design innovations that enable customers to run tests up to twice as fast as regular benchtop GC. And it's the smallest high-performance benchtop GC on the market. Plus, it's sustainable, using up to 30% less electricity power compared with a traditional benchtop GC. Now moving on to the Agilent CrossLab Group, which delivered revenue of $402 million for the quarter, up 5%. ACG grew across all end markets in every region except China. The business delivered double-digit growth in services contracts which now represent almost 70% of the total business, offset by declines in new instrument installation revenues. The ongoing strength in our contracted business speaks to our strategy of increasing the connect rates on our instruments and the ongoing value we are providing to our customers. The Diagnostics and Genomics Group posted $417 million in revenue, representing an 8% decline. Pathology was up mid-single digits globally and was more than offset by declines in the mid-20s in cell analysis due to the constrained capital environment for instrumentation. NASD declined low teens as expected, driven by more clinical products being produced this year versus Q2 of last year. Europe was a bright spot for DGG, growing low single digits in the quarter, while Americas and China declined. Despite the subdued market environment, we continue to innovate in our cell analysis business. We recently introduced the Agilent Spectrum Flow Cytometer, which allows our customers to perform sophisticated experiments that expand the range of the research on the same easy-to-use NovoCyte platform. Bob will now provide details on our results as well as our outlook for the remainder of the year. After Bob delivers his comments, I will be back for some closing remarks. Over to you, Bob. Bob McMahon: Thanks, Padraig, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter as well as take you through the income statement and other key financial metrics. I'll then cover our updated full year and third quarter guidance. Q2 revenue was $1.573 billion. a decline of 7.4% core. On a reported basis, currency had a negative impact of 0.8 percentage points, while M&A had a negative impact of 0.2%, resulting in a reported decline of 8.4%. As Padraig mentioned, Pharma, our largest end market, declined 11%, with both Biopharma and Small Molecule declining roughly the same percentage. Instrument demand continues to be constrained, while services delivered mid-single-digit growth. Looking forward, while we have seen sentiment improve, instrument purchases are still constrained and we are expecting that to continue for the rest of the year. In addition, we have reduced our expectations for NASD as several clinical programs have pushed out into next year and some commercial products have not ramped at the pace as expected. As a result, we have reduced our full year growth outlook for the Pharma end market from roughly flat to down low double digits, similar to our Q2 performance. Our revised expectation for the Pharma end market is the largest change in our outlook. The Chemical and Advanced Materials market was better than expected, declining 3% after coming off a very tough comparison of 16% growth last year. The academia and government market declined 12% against a tough compare of 11% growth last year. While soft globally, the decline was driven by China, which was down mid-30s. Our business in the Diagnostics and Clinical market declined 2%. Our pathology business continues to show resilience in this market, growing mid-single digits, while our NGS QC instrumentation business also grew slightly. These were offset by softness in our NGS chemistries business. The Environmental and Forensics market declined 2%. The business grew mid-single digits ex China, highlighted by continued strength in serving the rapidly expanding PFAS opportunity. The Food market declined 13% on a very tough compare of 21% growth last year, heavily impacted by the low 30s decline in China. On a geographic basis, all regions declined. The Americas region was down 5%. Europe was down 3%, while Asia Pacific ex China was down slightly. China was down 21%, missing our expectations of a mid-teens decline. We saw demand weakness expand beyond Pharma. As a result, we have revised our full year expectations for China for a mid-single-digit decline to a double-digit decline. We have seen funnel activity increase because of the recently announced stimulus program, but we are not assuming any revenue impact in our fiscal year. Moving down to P&L. Our second quarter gross margin was 55.6%, up 30 basis points from a year ago as productivity and cost savings were offset by lower demand and mix. Our operating margin of 25.1% was down year-over-year as expected. Below the line, we benefited from greater-than-expected interest income and a lower tax rate. Our tax rate was 12.5%, and we had 293 million diluted shares outstanding. Putting it all together, Q2 earnings per share were $1.22, down 4% from a year ago, less than the decline in revenue and ahead of our expectations. Now let me turn to cash flow and the balance sheet. Operating cash flow was $333 million in the quarter and we invested $103 million in capital expenditures as we continue our planned NASD expansion. We returned $299 million to shareholders in the quarter, $69 million through dividends and $230 million through repurchase shares, catching up on our anti-dilutive buying year-to-date. In summary, we met our expectations for the quarter our markets are recovering but at a slower pace than we anticipated. We are directing our energy towards high-growth opportunities and are committed to delivering value to our customers and our shareholders. Now on to our revised outlook for the year and our third quarter guidance. We now expect full year revenue to be in the range of $6.42 billion to $6.50 billion. This represents a decline of 6.0% to 4.9% on a reported basis and a decline of 5.4% to 4.3% on a core basis. Currency and M&A combined are a headwind of 60 basis points. This is a $300 million reduction at the midpoint and is primarily related to changes in two areas: China overall in the Pharma end market outside of China. For China, we have reduced our expectations to a double-digit decline from mid-single digits with all end markets being reduced. This represents roughly $70 million of the guidance reduction. The remainder of the change in the Pharma end market globally outside of China is due to two factors. The first and largest factor is continued caution in budget releases and extended approval times for instrumentation purchases in both Small and Large Molecules. This is roughly $175 million of the change. The second factor is related to NASD due to the reasons I mentioned earlier, and represents the remaining $55 million reduction. While down from our previous guidance, we are expecting growth in the second half of the year to be roughly 400 basis points better than the first half of the year and plan to exit the year roughly flat year-on-year at the midpoint of the new guidance. Full year non-GAAP earnings per share are now expected to be between $5.15 and $5.25, representing a decline of 5.3% to 3.5%. This incorporates a roughly $35 million expense reduction due to the actions Padraig mentioned. The majority hit in Q4 in order to help mitigate the bottom-line impact of the change to our revenue guidance. It also assumes a 13% tax rate and 292 million fully diluted shares outstanding. We will leverage our strong balance sheet and plan to repurchase $750 million of our shares in the second half of the year in addition to our anti-dilutive repurchases. We expect these repurchases to be weighted towards Q3. All told, we expect to return roughly $1.4 billion to shareholders this year between dividends and share repurchases. In addition, the Board authorized a new $2 billion share repurchase program that will go into effect August 1 and replace the existing authorization. Now for our Q3 guidance, we expect revenue will be in the range of $1.535 billion to $1.575 billion. This represents a decline of 8.2% to 5.8% on a reported basis and a decline of 6.9% to 4.5% on a core basis. Currency and M&A combined were a headwind of 130 basis points. Third quarter non-GAAP earnings per share are expected to be between $1.25 and $1.28, representing a decline of 12.6% to 10.5%. Looking forward, we remain disciplined. We're focusing on what we can control and driving strong execution in a challenging market, and we are optimistic about the long-term future. Now back to Padraig. Padraig McDonnell: When I joined you last quarter as CEO-elect, I said Agilent has a compelling story to tell, and I was excited by the possibilities that lie before us as we help our customers bring great science to life. That excitement has only grown. I spent 26 years at Agilent, first starting as a field employee before moving to sales and then leading some of our businesses. I know Agilent's strengths and its opportunities very well. We are in great long-term growth markets. And while the markets are recovering slower than anticipated, they are recovering. This company is a leader across key platforms, making us uniquely qualified to support our customers and their missions to solve some of the world's most important problems. And our customers value their relationships with us because we offer them an unparalleled experience. And as I said earlier, that is a competitive differentiator in the market. The actions we are now taking, while difficult, will enable us to quickly capitalize on growth opportunities as the markets fully recover. I know the future is bright, and we will forge an enduring company that sets the standard for excellence with our customers and create value for our shareholders. Thank you again for joining today's call. I look forward to continued dialogue with all of you. Parmeet, over to you for Q&A. Parmeet Ahuja: Thanks, Padraig. Regina, if you could please provide instructions for the Q&A now. Operator: [Operator Instructions] Our first question will come from the line of Matt Sykes with Goldman Sachs. Please go ahead. Matt Sykes: Maybe just the first one is more of a timing question on China. I mean we've been through a lot of quarterly results this season and the stabilization theme in China has been pretty consistent and you guys have talked about sequential stabilization over the last number of quarters. So, was this really an April impact that you saw in China? And if so, what was sort of the deceleration that you saw there? And what were some of the causes of it? Padraig McDonnell: Yes. Thanks, Matt. I think while Q2 was relatively soft to guidance, we adjusted the H2 outlook, what we're seeing in China is we saw a -- stability over a number of quarters. What we really believe is that this is not a material deterioration from that. But what we've seen is that we've seen the stimulus have some effect and the stimulus has been much larger than previous stimulus. It's over multi-years. And of course, customers are looking about what are the components of that and they're looking at some of the areas and where it's going to help them. So that has had a material effect. We don't see the stimulus having an impact in H2, but we do think it's going to have an impact in '25. I think there's kind of a direct and indirect side of the stimulus. I think on the direct side, you see this delay, which is normal, but you see also the indirect side where, the government is investing in technology and sciences going forward, which creates a lot of, I would say, future momentum. Matt Sykes: Got it. And then just for my follow-up, you guys have often talked about sort of 18- to 24-month down cycle in the LC replacement cycle. And I'm just wondering just given some of the comments you made around Biopharma, given that's an important customer segment for that, have you kind of changed those views in terms of what the LC replacement cycle will look like and what the potential recovery in the replacement cycle will look like? I think some were thinking sort of towards the end of this year, but is this more now into 2025, is that replacement cycle been extended in terms of recovery? Padraig McDonnell: Yes, we don't see any material change. But Bob, I don't know if you want to add some color on that. Bob McMahon: Yes. I think, Matt, as you said, we're still expecting improvement in the back half of this year, just not at the pace that we had expected. And so, we're not seeing any material extension of kind of the use case for LC or an LC/MS in the marketplace and are still expecting recovery in '25. Operator: Our next question will from the line of Jack Meehan with Nephron Research. Please go ahead. Jack Meehan: I was wondering if you could share what's the new sales outlook for an ASP this year? And can you talk about like bridging from kind of the second half to some of the longer-term targets you've had previously. Like what are you assuming in terms of kind of progression after this year? Padraig McDonnell: Yes. I mean the NASD business, we talked before about the business being about 50% commercial and 50% clinical that's changed a bit to be more like 75% clinical and 25% commercial. We've seen the IRA inflation Reduction Act having an impact on the price provisioning. So, what you see with Pharma partners, they are looking for larger indications instead of smaller indications. So, what we've seen is, I would call it, an air pocket in Q3. And our clinical business is actually growing. Orders are growing about 50%. So, we're -- we have a good order book on that side. So, it's a readjustment and we see that readjustment go through H2 and beyond. I don't know if you want to add anything to that, Bob. Bob McMahon: Yes, I think Jack to add some numbers to what Padraig was saying here. Originally, we were expecting it to be roughly flat, which would have said roughly a $350 million business. We're now seeing roughly $300 million this year. As Padraig is mentioning, we're expecting to build back from there as these clinical programs move through the clinical pathway and are expecting to have more volume in '25. And I would say our long-term perspective on NASD remains unchanged. We're still very excited about that opportunity and are still building out the capacity in our Colorado site. Padraig McDonnell: Second question, I think the second part of the question was about '25. We'll grow next year. And as you can see in our guidance that we really are anticipating improving conditions across the second half, but it's too early to talk about specific ranges for next year. We want to wait to see how pacing an improvement plans out in the second half. Jack Meehan: And then on the cost savings program, I think I heard talk about $100 million. I just wanted to clarify, is that incremental to the $175 million you previously talked about? And where are those -- any color on where the savings is coming from? Bob McMahon: Yes, it is incremental to the savings that we've already built into the plan, and we're expecting to get that annualized savings by the end of the year. It's primarily headcount-related, Jack. Operator: Our next question comes from the line of Patrick Donnelly with Citi. Please go ahead. Patrick Donnelly: Maybe one on the instrument side, I guess it will be China and then just broadly, I know a few quarters ago, you guys felt like orders were picking up, the funnel looked okay, but it was really that I think, Bob, you said it was the velocity of conversion of those orders in that funnel to revenue. Is that what you're seeing is just that continues to stretch out the visibility into that normalizing. It's just proving to be a little trickier. I just want to talk through, I guess, that instrument piece because again, you sound okay on the orders in the funnel and the conversation, but that converting over rim, I guess that I just want to talk through again, the conversion piece and the velocity of the conversion. Padraig McDonnell: Yes. Yes. No, I think at an at level, as we talked about, our book-to-bill was greater than one, which is a positive sign and where orders grew year-over-year. On the instrument side, the orders grew low single digits, excluding China, but declined low single digits overall. So, what we're really seeing is that our funnel is really stable, but we're seeing those extended purchasing decisions being continuing to extend out through the second half. Bob McMahon: Yes. I think, Patrick, to build on what Padraig is saying at the beginning of the year, we were expecting when we were talking primarily to our Pharma customers, budgets weren't being materially cut outside of a specific number of well-publicized customers. And we were expecting to see by our second quarter, some of these budgets being released. And what we're seeing now is still a very cautious environment. And so, the funnel is still there. We are seeing our book-to-bill as Padraig mentioned, to be greater than one. We just haven't seen that inflection, which we would have expected to see at least in our order book. One of the things that we do see and it primarily happened late in the quarter is our teams are paid on first half versus second half quota. And so, our April numbers are usually quite large, which prepares us for the -- for Q3 and we just didn't see that inflection in late April, which we normally would see. Patrick Donnelly: Okay. That's helpful color. And then maybe to follow up on Jack's question on NASD there. You understand the revenue change. How are you guys thinking about the capital investment on that front? Obviously, it's been sizable in the past years, you've often talked about the continued expansion of the trains. How do you think about the CapEx devoted to this over the next few years? Has there been any change in terms of push out of that capital? Or how you're thinking about the potential investment and the expansion on this front just given the shift in revenue here. Padraig McDonnell: Yes. No, absolutely not. I think despite some near-term headwinds that we have, the medium, long-term story for NSAD is really holds firm. And as I said before, we're seeing our clinical business grow more than 50% this year, and we really remain excited about the expansion of customers. And getting back to the therapeutic class that we're involved in with siRNAs drugs, we're seeing those approvals for drugs increase substantially in 2023. And being an integral part of the manufacturers of several of these on market therapeutics, the future is extremely bright in this area. So, no change in our capital investment. Bob McMahon: Yes. Patrick, just one other thing to add on to that as I'm sure you're aware, as part of that expansion, not only are we expanding capacity, we're also expanding our therapeutic options. So, not only siRNA but also anti-sense and also CRISPR opportunity. So, it also provides us with more capabilities to support our existing and new client base. Operator: Our next question will come from the line of Vijay Kumar with Evercore ISI. Please go ahead. Vijay Kumar: I guess Padraig or Bob, thanks for laying out the changes in the guidance assumptions here, right. I think part of it was China, part of it was NASD. But more than half, I think, it's coming from Pharma cautiousness that's outside of China, ex-NASD, which I think that the market. I thought we were expecting stabilization. Is this a funding environment kind of question or is elections or what changed because second quarter, it feels like revenues were roughly in line -- was it the exit rate? Can you just talk about what the exit rate trends were and what customers are telling you? Padraig McDonnell: Yes. I mean on the Pharma instrumentation side, in terms of guidance, we see an impact of about $175 million and it really simply Pharma's willingness to spend in capital equipment remains challenged over time. And again, customers are focusing on lab efficiency and productivity. But based on what we're hearing from customers, these trends will continue to impact the second half. And that's why we're lowering our expectations around that instrument piece. What I will say that the formulas are holding very strong. The conversations are very robust with customers, so we do expect it to improve going into next year. Bob McMahon: Vijay, to build on what Padraig is saying, the guidance that we're building out right now is based on what we're seeing today. It doesn't assume any meaningful inflection. That certainly -- I'd characterize this as a prudent guide given what we know today. Certainly, we're not assuming any of that inflection. You bring up a number of variables, which are hard to quantify around the upcoming election and so forth. But we don't think it's a funding issue. We do feel like we are seeing biotech funding coming up. Obviously, on the Small Molecule side, those are they're well-capitalized companies. It's just a very -- it's still cautious in terms of them getting through their approval processes. Vijay Kumar: And just maybe related to that Padraig, Bob. I think is this just a few handful of customers or across the Board? Because obviously, the next question is, is this a share loss? Or is this more of -- what gives you the confidence that this is just a pushout and not a share shift on the savings or cost savings, Bob, that 35 is in Q4. So the expectations is the incremental 65 is for fiscal '25. Bob McMahon: Let me answer the last question first. So that is a cumulative number for the second half of the year. We'll see some of that happen here in Q3 and roughly be at that $100 million run rate in Q4. So roughly about a $25 million run rate and then we'll get the full incremental 65, obviously, next year as we go into the business. Do you want to comment? Padraig McDonnell: Yes. Yes, look, when we look across our Pharma customers, we see generally, it's across the board. We do have some customers that are a little bit more positive than negative this year. But overall, I would say it's a market effect. What I would say -- on the other question, this is definitely a macro story, not a market share story. And in fact, when we look at our objective market share data, we're holding or even gaining in some areas. And I will remind you not to comment on our peers in this area, but we have a month ahead in what we're seeing on it, but we're seeing very robust market share numbers coming in. Operator: Our next question comes from the line of Dan Brennan with TD Cowen. Please go ahead. Dan Brennan: Maybe first one, just on China. You talked about in response to an earlier question about the stimulus is delaying demand this year. Could you just speak through that a little bit? Like what's your visibility on that? Any way to get a sense of how much of what you should be seeing in China's customers waiting to see the final details of the stimulus. And I know you also alluded to like this could be a big impact in '25. Can you just speak through that a little bit? Padraig McDonnell: Yes. Look, I think having worked with China for many years. It's a multiyear program as opposed to the last one, which I think was a year program in the shorter term. So, it's very encouraging to see it. We've seen some proposals from customers, but they're still, quite frankly, trying to work out what are the mechanisms for the funding as we go forward. So, we're seeing a lot of activity around that. And I would say in terms of the confidence boost, we do really see that in '25, we're going to get some benefit from this, but really too early to tell on it. So, we're taking down our guidance in the second half primarily related to this. Bob McMahon: Dan, this is Bob. To build on that, I had mentioned in our prepared remarks that bid activity has actually improved. And so, we're seeing a number of proposals working with our customers to actually get a piece of the stimulus. What's not yet clear is the timing of the release of that budget comes from the provincial -- or from the state down to the provincial and then to the local government. And so, we've taken a, what I would say, is a conservative approach to assuming none of that stimulus money will actually -- we'll see any of that in the second half of the year. But it will come, it will come. And so -- if it comes earlier, that would be a benefit to what we're forecasting right now. But we're -- what we did see, particularly in April is a little slowing down of normal bid process waiting to get access to that money. And so, we think that, that's just a transitory change, not a structural change. Dan Brennan: Got it. And then -- and maybe just one more on Pharma, if you don't mind. So, the instrument growth was so powerful for yourselves and some of your peers coming out of COVID. Is there any chance that like the slowdown you're seeing now maybe just some miscalculation, maybe there was such instrument demand and purchase is done in the last couple of years that customers at work just kind of working through that all those purchases versus like an exceptional slowdown right now given the macro? Just maybe speak a little bit to that, if you could about the overhang for maybe the strength in the past couple of years versus what you're seeing real time now? Padraig McDonnell: Yes, no doubt about it. We've -- tremendous growth rates during the post-COVID period. But we don't see anything fundamentally changing with the cycle on instrument replacement cycles. We don't see it's a kind of a rundown of available instruments or anything like that because lab activity is very, very high. We see that across the board. We actually see activity on the sales side, but also on the support side, very, very high. So we think it's primarily actually on the macro situation. Bob McMahon: Yes. And Dan, just to kind of build on what Padraig had said. We looked at ACG and our CSD or our consumables business outside of China, both of those grew mid- to high single digits in the quarter. So, it does speak to lab activity. They're not having instruments just sitting idle. And in ACG, our contracted services business continues to perform extraordinarily well, up double digits. So, the demand is there outside of China right now. Operator: Our next question will come from the line of Rachel Vatnsdal with JPMorgan. Please go ahead. Rachel Vatnsdal: So first up, I just wanted to ask on China. We've seen some of the headlines from BIOSECURE Act. So, I was wondering if you could break down your exposure to large CDMOs in the region? And if that contributed to any of the weakness there just given me some of the commentary from an RFP standpoint? And then just on China stimulus and some of the dynamics there, how should we think about local competition competing for some of these dollars on the stimulus dynamic and you talked about some of these proposals that you're working on. So, can you detail what sectors, what types of customers are you really seeing that proposal work be done right now? Padraig McDonnell: Yes. Look, I think on the BIOSECURE Act, we see normal -- people are looking at their supply chains, and that's positives and negatives around the globe. As you see that one of the areas that we've seen from that is actually we see a benefit on our service business as we relocate laboratories in some cases and get them up and running quickly with our services on that one. So, definitely some exposure to CDMO, but I would say not the overall macro side on it. And then I think the second part, Bob, I don't know if you want to take that one? Bob McMahon: Yes. I would say just a building on that point on our questions around CDMO, most of our business in China is local. So, it's not multinational and so wouldn't necessarily fall under the BIOSECURE Act. There are certain large companies that are on that list that are customers of ours, but that is that business has been pretty muted for a while, and that's not the cause of the incremental weakness here. I would say on the bid activity, it's about -- it's across the board. It's not in one region of the country or one end market or customers and obviously, Chinese local competitors are going to be buying for that business like we are. But I think we've shown time and time again our ability to provide very strong and robust instrumentation, coupled with very good service. And so, I don't think that we're in any disadvantage from a local perspective from that standpoint. Padraig McDonnell: In fact, Bob, I would say our scale and service there really makes it a differentiator where we can scale with customers and get them up and running very, very quickly. We take the competition very seriously. But we've always had competition in China, and we continue to keep a focus on that. Rachel Vatnsdal: Great. And then for my follow-up, just given some of the moving pieces on this fiscal 3Q guide, could you walk us through your expectations by segment for 3Q? Bob McMahon: Sure. I'll take that real quick. By business group, we're expecting LSAG to be down double-digits DGG down mid-single and ACG growing at mid-single digits. If we looked at by end market, Pharma, as I mentioned in the prepared remarks, would be down very similar to Q2, so down low double digits. And with academia and diagnostics markets being roughly flat, Chemical and Advanced Materials being very similar to Q2 results. And then Food being down roughly the same, maybe a little better than where we saw Q2 as well. And then Environmental and Forensics similar performance as Q2. Operator: Our next question will come from the line of Doug Schenkel with Wolfe Research. Please go ahead. Doug Schenkel: I guess, I have too high level, but I think important questions. One is Yes. Simply put, I want to get your thoughts as we sit here today about the Company's long-term growth outlook. And essentially, to what top line growth rate are you managing the business as you think about the next few years? In Pharma and Biotech, you have less exposure as a percentage of sales to some of the higher growth areas of that end market and the outlook for one of your higher growth areas, NASD within Biopharma it's certainly in question amongst investors given how things have been going recently. And while there is hope that China stimulus will help across many end markets, as we kind of think past that, ultimately, many believe the durable growth rate in China where you're overexposed will be materially lower than what we've seen in years past. And then as we think of other discrete differentiating growth drivers for the Company, when we look at CrossLabs and DGG, the growth rates have moderated there in part because of the market, but also in part because you did have above-average concentration with one high-growth diagnostic companies as an example. So, there's a lot of bad guys here right now. Obviously, in the long term, there's a lot of belief in Agilent in how you run the business. But I think there are a lot of questions when you kind of pull all this together about what is the inherent growth rate of this business. Can you share any thoughts on that? Padraig McDonnell: Maybe I'll kick it off a bit at a high level. I think, first of all, we participate in excellent markets with multiple long-term growth drivers. You look at the characterization that's going to be needed in biotherapeutics in time, improving human health. Quality of our Food is really going to be a continued growth driver for the Company. I would say there's a lot of growth factors within the business that in adjacent markets where we continue to invest in those opportunities. You've seen part of Biopharma, PFAS. And I do believe NASD long term is going to continue to grow. In our service business, we expect that to grow high single digits over the long term as we increase our attach rate, which is not a small point because every percentage increase in attach rate is about $30 million incremental on that side. So overall, I think we're in extremely durable long-term markets. On the China story, we're going to see probably getting down to more mature level growth rates in China, but I would remind everybody that there are secular drivers in China that continue to come up and the government continues to invest in science and technology, but also the scale of the country being so large, we benefit tremendously from the aftermarket element consumable and service around that and being able to kind of drive attachment to some of the emerging workflows. So, Bob, I don't know if you have anything to add on that? Bob McMahon: Yes, I would just say, as we think about kind of our long-term algorithm that we've been talking about, that 5% to 7%, we're not ready to walk away from that. I think we still feel good about that. And I think while you talked about some of the bad guys, we still believe in Biopharma and are continuing to invest there. In addition, Padraig mentioned a few things on the applied side where we are the undisputed leader. So, things like PFAS, the electrification, semiconductors, those things weren't there five years ago to the extent that they're going to be there in the next five years. So certainly, the markets are a bit challenging right now, but we are seeing them recover, and we would expect to be able to get back to those rates in the near term. Doug Schenkel: Okay. And Bob, maybe sticking with you. If we go back to the beginning of the year when you set guidance for the fiscal year. Yes, I think it's fair to say there were a number of questions from the investment community about how you were setting guidance for the year. Specifically, there was concern about the plausibility of what you assumed for the second half. In hindsight, obviously, these questions and concern to be well-founded. What went wrong? Does this tell you something about your visibility for the business? If so, is it a transitory issue? And if that's the case, can you help us explain why? And if it's not visibility, what do you need to do in terms of changing your guidance philosophy moving forward? Bob McMahon: Yes. Thanks, Doug. And I think it is visibility. I think if you looked across the last seven years, the two most volatile years have been the last two. And so, I think we were expecting based on the feedback that we got from our customers that they would be releasing budgets much more quickly than what they have or at least what we're seeing and while we did have an expectation that we were going to see an inflection in the back half of this year, when we're talking to our customers, it just hasn't happened. And so, I think the visibility is something that I think will we will get back, particularly as we have more recurring revenue and continue to have the connect rate on to the services business. And we're disappointed as everyone else is, but you can rest assured that we're going to come out of this stronger going forward. Operator: Our next question comes from the line of Dan Leonard with UBS. Please go ahead. Dan, your line might be on mute. Our next question will come from the line of Michael Ryskin with Bank of America. Please go ahead. Michael Ryskin: I want to pick things up exactly where you just ended on the last answer with Doug on visibility. So, I mean you kind of talked about how you had a certain set of expectations going into the year based on conversations with customers that didn't play out. I mean, is that -- is there any reason to think that visibility is better now, I guess, is my question, if we look at the guide change and specifically focusing on Pharma with or without an NASD, if you want to just talk about Pharma, the CapEx of Pharma and NASD, it seems like visibility there is still really, really challenged. So, on the one hand, a lot of your prepared remarks are markets are improving. But on the other hand, you're not expecting in 3Q because you just talked about low double digits. It doesn't seem that you're expecting for the rest of the year. So just exiting the year, entering next year, how do we know we're not going to be having the same conversation again about another push out and then another push out? Just talk about that visibility going forward. Bob McMahon: Yes. I think if we look at just first half, second half and look at where our core guidance is, it's not assuming any inflection in the back half. I mean you could make an argument that typically, we have a higher weighting towards the back half of the year, just part of normal seasonality, and we're not assuming that in our guide. And so, if you look at also Pharma, we're assuming it's down roughly the same as it's been in the first half of the year, but we'll get easier compares. And so, we're not expecting "a big inflection in the back half of the year." I would say also on NASD, which we are assuming a reduction in the second half of the year relative to the first half of the year, we have all those orders in-house. And so, we've got a plan, a production plan and both for Q3 and Q4. And while something could happen, it's not like we're looking for orders to guide us on those. And those are the two big areas that made the biggest change when I think about where we were back in November, giving guidance to where we are today. Michael Ryskin: Okay. And Bob, since you touched on 3Q, 4Q ramp, I'm going to follow up on that as well, actually. I mean, you normally do see some seasonality third quarter, the fourth quarter, depending on the year, depending on the comp, let's call it about $100 million, maybe $100 million plus. You're something that your guide for 3Q and fiscal year implies about $120 million repeat to 4Q for this year. So again, not excessive, but still some step-up and it seems like 2Q and 3Q certainly are below trend. So, is there any risk to that 4Q number? I mean is there anything else we should be thinking about in terms of what makes that achievable besides just comp and seasonality? Bob McMahon: Yes. The biggest change there is our NASD business, which we will see a low water point here in Q3 if we -- what we ended up seeing is some of these clinical programs getting pushed out. They've got pushed out from Q3 into Q4. And so, there's a $30 million incremental step-up from Q3 to Q4. So, if you took that out, we did get back to a more historical kind of level. Operator: Our next question will come from the line of Dan Arias with Stifel. Please go ahead. Dan Arias: Bob or Padraig, on the capital equipment portfolio and the order book and the sales funnel that you have there, maybe just in simplistic terms, how would you describe the average time to deal close that it feels like you're going to be working with in the back half of the year versus what you've seen as a historical average? And embedded in that is just this question on instrument demand that you have a line of sight on via the sales funnel, but that just hasn't been booked yet versus what's not materialized at all yet? And then how the outlook change reflects those two things. Padraig McDonnell: Yes. Look at it, I think it's hard to put a number on the extended deal time. It depends actually on the platform and portfolio. So, there's quite a big difference between, for example, GC and LCMS on that. But what I would say, in general, the deal time is prolonged. The win rates, of course, haven't changed. They're still very, very strong, but that deal time is prolonged. And I think if you look at it in the second half when we're looking at the visibility of what we're seeing in the funnel, the best thing and we're doing is staying close to customers on this one, making sure we're there to help them, of course, with their decisions and help them get up and running when they make the decision to purchase on it. So, we're going to see this continued extended deal time, I think, through the end -- through the second half. Bob McMahon: Yes. Dan, I wish I could say we have all the orders in-house for the second half for instruments. It just doesn't work that way. So, we have much better visibility into Q3, but we will need continued performance in Q3. Now we've had several quarters here of book-to-bills being greater than one in our instrumentation portfolio, which is a positive thing. I would say, hey, we're building some backlog. And as Padraig mentioned earlier in the call, particularly in LSAG. LSAG orders grew ex-China. And that is the first time that's happened in several quarters. So, we are seeing some positives and if you look at the second half of the year, our performance relative to last year should improve just because of the benefit of easier compares. And so -- we're not, again, looking for that huge inflection. And we're not expecting also as Padraig was saying, a constriction, so to speak, or an acceleration of those deal funnels. We're expecting them to stay very similar to the way they are right now. Padraig McDonnell: Yes. I think just to close off, Bob, I think the deal closure time lines remain at an elevated but very stable level. They're not deteriorating further, which I think is a really good sign. And in terms of the funnel is stable, no cancellations within that, which, of course, is very important to see. Dan Arias: Okay. And then maybe on -- as a follow-up on Biopharma. I'm just curious about the extent to which the IRA is part of the conversation there these days. It sounded like last year, the industry kind of contemplated an adjustment as the idea was coming into the picture. So, do you think spending expectations got rightsized for a period of time? Are you finding that that's sort of a continual evolving conversation? Padraig McDonnell: Yes, I would say it's a continuing evolving conversation. Clearly, on the NASD side, we've seen an impact from the IRA something we're watching closely, but I think this will evolve over time. What we're seeing in terms of programs-based around pricing provisions, there definitely has been an impact on that side. Operator: Our next question will come from the line of Josh Waldman with Cleeland Research. Please go ahead. Josh Waldman: A couple for you. Padraig or Bob, I wondered if you could talk a bit more on how instrument orders progressed sequentially. I mean did orders deteriorate over the last 90 days or really just a function of orders not improving as you expected? And then I wondered if you could comment on what you're seeing from new orders, new order perspective across the key product categories within LSAG categories like LC/MS, GC, ICP. I guess is it fair to assume LC/MS is driving the majority of the softness just given the comments on Pharma. Padraig McDonnell: I don't know if you want to take that one, Bob. Bob McMahon: Yes, I'll take it. So, I wouldn't characterize it, Josh, is a deterioration. It actually just wasn't the inflection or the acceleration that we were expecting. We did -- as we were saying here, we did have a positive book-to-bill and ex China orders grew. They just didn't grow to the extent that we expected them to, particularly in April, which we would typically have higher acceleration just kind of given the end of the quarter. In terms of the platform, what you're seeing is the platforms that are more focused on Pharma being the areas that are the weakest. So, LC and LC/MS are weaker than the applied markets. And you can kind of see that in our end markets as well. And so, we were expecting those to kind of perform better this year, and we're just still seeing that, I'd say, lower-than-expected performance from the standpoint of order velocity. Josh Waldman: Got it. Okay. Then a follow-up on China. I wondered if you could comment a bit more on where we’re seeing… Bob McMahon: I would say -- sorry, just one quick -- so one thing I would say, though, is if I looked at the performance, the revenue performance versus the order performance, the order performance was significantly better in Q2 on those two main platforms than the revenue. So again, these are points that says we are getting out of it, maybe not at the pace that we were expecting. So -- and so those are some positive points that would suggest that we're going to continue to -- it's not going to deteriorate coming out in Q2 -- or excuse me, in second half. Sorry. Josh Waldman: Is it -- what were the two platforms? Bob McMahon: LC and LC/MS. So yes. Yes. Josh Waldman: Okay. Okay. Got it. Got it. And then a follow-up on China. I just wondered if you could comment a bit more on where all you're seeing demand coming softer than expected from a new booking’s perspective and then a bit more detail on how you're contemplating the stimulus. I mean, it sounds like you saw improved bidding and funnel activity on the prospects of stimulus, but just wondered if you could provide what's giving you the confidence that, that stimulus related funnel ends up converting to orders and sales at some point in the future? Padraig McDonnell: Yes. Maybe starting on the stimulus. This is an extremely large program, a multiyear program. It's very real. We've seen some of the customers with activity is asking us to bid and some of the things, even though they're not sure exactly yet how the mechanisms would work. So that gives us great confidence for '25 just from that. But I said earlier, also the indirect impact of confidence in science and technology in China. It's a real photo confidence by the government in making sure we -- making sure to get the market going again. So, I think in -- we saw meaningful softness extend to all markets because remember, the stimulus is not only academia and government, it's across all markets. And that has really come at once. And we did see at the end of the quarter, we also started to see customers postpone purchasing decisions have told us, right, sort of said we're going to postpone and they try to gauge if there's any benefit of the stimulus-related funding, and that's normal. I think that's expected. If you didn't see that, then the stimulus would have different questions. And why we believe that a stimulus program will ultimately be long-term positive, we really don't see any benefit in H2, and that's why we're roughly reducing by $70 million. Josh Waldman: Got it. Did you see stimulus-related postponing and Pharma and CDMO as well or more just government accounts? Bob McMahon: Yes, it was both government and non-government accounts across the board. So, I would say it was pretty broad beyond Pharma. Operator: Our next question comes from the line of Catherine Schulte with Baird. Please go ahead. Catherine Schulte: Maybe just sticking on China stimulus to start off. Is there any way to quantify the increase in the funnel activity that you've seen there just as we try to think about potential opportunity in future years? Padraig McDonnell: Yes. What we're seeing is a postponement, and I think it's really too early to tell on the funnel side on -- if the customers are still working out the mechanisms about how it works, we're still waiting to see on the impact on the panel, particularly for '25, it's too early to tell. Catherine Schulte: Okay. And then on LSAG, what was performance in the quarter, excluding China? And then any commentary on the Pharma end market specifically for that business outside of China in the quarter? Padraig McDonnell: Bob, do you want to take this one? Bob McMahon: Yes. So, our LSAG business declined 13% globally, ex-China, it was down 8%. Operator: Our next question will come from the line of Paul Knight with KeyBanc. Please go ahead. Paul Knight: Within the 34% of business that's Pharma, what portion is Biopharma or Large Molecule, Bob? Bob McMahon: It's roughly 45%. Paul Knight: And what's the overall growth rate of that piece, do you think? Bob McMahon: Long term or in the quarter? Paul Knight: In the quarter and long term. Bob McMahon: Yes. So, if we looked at our Biopharma business, it was down roughly 12%, Small Molecule was down roughly 10%. Total Pharma was down 11%. So, it kind of gives you a sense. I think. Padraig McDonnell: Yes, I would say before we get on to the long term, Bob, for Biopharma, really tough compare was mid-teens, plus mid-teens last year on that side. But what we're seeing is the long-term prospect for this market is very strong. Paul Knight: Yes. And then I know that you've got -- you have always been very aggressive and innovative on your M&A for biologics. Are you seeing that market open up on the M&A side of that marketplace? Padraig McDonnell: You mean in the space itself. Paul Knight: Is pricing becoming more realistic as you think about your acquisition strategy? Padraig McDonnell: Yes. Well, I think there's long memories. So, people don't forget the elevated pricing for assets, but we're going to remain very disciplined. It's going to become an increasingly bigger part of the puzzle for us M&A, but we're going to make sure that we do it in a very disciplined way, link to strategy and of course, looking at areas of where we can double down and growth factors. So we're very focused on that going forward. But I would say, while pricing maybe has come down in little areas across the board, people have long memories. Operator: I will now turn the call back over to Parmeet Ahuja for closing remarks. Parmeet Ahuja: Thanks, Regina, and thanks, everyone, for joining the call today. With that, we would like to end the call. Have a good rest of the day, everyone. Operator: Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect.	[ { "speaker": "Operator", "text": "Ladies and gentlemen, welcome to the Agilent Technologies Q2 2024 Earnings Call. My name is Regina, and I will be coordinating your call today. [Operator Instructions]. I will now hand you over to your host, Parmeet Ahuja, to begin. Please go ahead." }, { "speaker": "Parmeet Ahuja", "text": "Thank you, and welcome, everyone, to Agilent's conference call for the second quarter of fiscal year 2024. With me are Padraig McDonnell, Agilent President and CEO; and Bob McMahon, Agilent's Senior Vice President and CFO. Joining in the Q&A will be Phil Binns, President of the Agilent Life Sciences and Applied Markets Group; Simon May, our newly named President of the Agilent Diagnostics and Genomics Group; and Angelica Riemann, President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our second quarter financial results, investor presentation and information to supplement today's discussion along with the recording of this webcast are available on our website at www.investor.agilent.com. Today's comments will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted exchange rates. As previously announced, beginning in the first quarter of fiscal 2024, we implemented certain changes to our segment reporting structure related to the move of our cell analysis business from LSAG into DGG. We have recast our historical segment information to reflect these changes. These changes have no impact on our company's consolidated financial statements. During this call, we will also make forward-looking statements about the financial performance of the Company. These statements are subject to risks and uncertainties and are only valid as of today. The Company assumes no obligation to update them. Please look at the Company's recent SEC filings for a more complete picture of our risks and other factors. And now, I'd like to turn the call over to Padraig." }, { "speaker": "Padraig McDonnell", "text": "Thanks, Parmeet. Good afternoon, everyone, and thank you for joining today's call. I want to begin by saying I'm incredibly honored to serve as CEO of this great company, and I'm thankful for the opportunity to lead such a talented team. I truly believe the Agilent team is second to none, and I'm energized about the future possibilities that lie ahead of us. I also want to take this time to welcome our new DGG President, Simon May to the Agilent team. Simon's diversified experience, strong technical skills and growth mindset will be a key asset in this role. Since starting earlier this month, Simon has hit the ground running, and I am really looking forward to him helping move DGG and Agilent forward. Before I talk about the quarterly results, I'd like to tell you how I spent my time since the announcement in February that I will become Agilent's CEO. I've been meeting and connecting with employees, customers and shareholders around the world to listen to their perspectives and how we should build on our strengths and evolve Agilent. What they have told me is clear, Agilent must become even more customer focused and even more nimble to continue to win in the marketplace and add value to customers and shareholders. This has really resonated with our employees and customers. As an energized Agilent team, we will evolve our strategy, adapting quickly to market trends and changes while accelerating our pace of innovation in areas of greatest return for long-term growth. We will double down on our customer first culture, deepening our relationship to further enhance our market-leading customer experience that is already the best in the industry. Now let's talk about the Q2 results and outlook moving forward. In a challenging market environment, the Agilent team delivered on expectations. In the second quarter, we reported revenue of $1.573 billion, a 7.4% decline. This was against a tough compare of 9.5% growth in Q2 of last year. While revenues declined in the quarter, our book-to-bill was greater than one, and orders grew year-over-year for the first time in seven quarters. Earnings per share of $1.22 beat our expectations and represented a 4% decline from the second quarter of 2023. Now looking forward, the market environment continues to be challenging, but we are seeing early signs of recovery. However, as we announced in our press release, this market recovery is not at the pace we anticipated when we provided guidance earlier in the year. As a result, we are reducing our market growth expectations and revising our full year core revenue to be in the range of $6.42 billion to $6.5 billion and growth to decline between 4.3% and 5.4%. We now expect earnings per share to be between $5.15 and $5.25 for the year. We have responded quickly to the lower market growth expectations and are taking difficult, but necessary actions to streamline our cost structure. These actions will allow us to invest in our most promising growth opportunities while also delivering incremental annualized savings of $100 million by the end of the fiscal year. We are sharpening our focus on key growth vectors such as Biopharma, PFAS and Advanced Materials, while also investing in our digital ecosystem, and accelerating our innovation to drive even faster execution. And we are leveraging our strong balance sheet and plan to repurchase $750 million of our common stock across the third and four quarters, over and above our normal anti-dilutive repurchases. Bob will provide more details on our results and latest outlook in his remarks. Getting back to Q2 results. As expected, all end markets saw a declining revenue in Q2. Geographically, the Americas and Europe came in slightly ahead of expectations, while China lagged. Despite the challenging market conditions, our Agilent team stay close to our customers and continue to leverage our strong relationships with them to execute remarkably well while maintaining strong cost discipline. When we look at our performance by business unit, the Life Sciences and Applied Markets Group reported $754 million in revenue, down 13%. The group saw a decline across all end markets and regions, with consumables being a bright spot. Consumables grew in the low single digits, driven by Chemical and Advanced Materials, Food, and Environmental and Forensics. Also, while relatively small, we continue to see strong growth in our pre-owned instrument business. The LSAG team continues to innovate, introducing two new instruments this quarter that extend our applied markets leadership. First, our 7010D GC/Triple Quad instrument delivers exceptional sensitivity for customers in the environmental PFAS and Advanced Materials markets. Designed for analysis that demand the lowest limit of detection. And second is our 8850 GC, a distinguished new member of our market-leading GC portfolio. The 8850 is ultrafast in separation and colon speeds with design innovations that enable customers to run tests up to twice as fast as regular benchtop GC. And it's the smallest high-performance benchtop GC on the market. Plus, it's sustainable, using up to 30% less electricity power compared with a traditional benchtop GC. Now moving on to the Agilent CrossLab Group, which delivered revenue of $402 million for the quarter, up 5%. ACG grew across all end markets in every region except China. The business delivered double-digit growth in services contracts which now represent almost 70% of the total business, offset by declines in new instrument installation revenues. The ongoing strength in our contracted business speaks to our strategy of increasing the connect rates on our instruments and the ongoing value we are providing to our customers. The Diagnostics and Genomics Group posted $417 million in revenue, representing an 8% decline. Pathology was up mid-single digits globally and was more than offset by declines in the mid-20s in cell analysis due to the constrained capital environment for instrumentation. NASD declined low teens as expected, driven by more clinical products being produced this year versus Q2 of last year. Europe was a bright spot for DGG, growing low single digits in the quarter, while Americas and China declined. Despite the subdued market environment, we continue to innovate in our cell analysis business. We recently introduced the Agilent Spectrum Flow Cytometer, which allows our customers to perform sophisticated experiments that expand the range of the research on the same easy-to-use NovoCyte platform. Bob will now provide details on our results as well as our outlook for the remainder of the year. After Bob delivers his comments, I will be back for some closing remarks. Over to you, Bob." }, { "speaker": "Bob McMahon", "text": "Thanks, Padraig, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter as well as take you through the income statement and other key financial metrics. I'll then cover our updated full year and third quarter guidance. Q2 revenue was $1.573 billion. a decline of 7.4% core. On a reported basis, currency had a negative impact of 0.8 percentage points, while M&A had a negative impact of 0.2%, resulting in a reported decline of 8.4%. As Padraig mentioned, Pharma, our largest end market, declined 11%, with both Biopharma and Small Molecule declining roughly the same percentage. Instrument demand continues to be constrained, while services delivered mid-single-digit growth. Looking forward, while we have seen sentiment improve, instrument purchases are still constrained and we are expecting that to continue for the rest of the year. In addition, we have reduced our expectations for NASD as several clinical programs have pushed out into next year and some commercial products have not ramped at the pace as expected. As a result, we have reduced our full year growth outlook for the Pharma end market from roughly flat to down low double digits, similar to our Q2 performance. Our revised expectation for the Pharma end market is the largest change in our outlook. The Chemical and Advanced Materials market was better than expected, declining 3% after coming off a very tough comparison of 16% growth last year. The academia and government market declined 12% against a tough compare of 11% growth last year. While soft globally, the decline was driven by China, which was down mid-30s. Our business in the Diagnostics and Clinical market declined 2%. Our pathology business continues to show resilience in this market, growing mid-single digits, while our NGS QC instrumentation business also grew slightly. These were offset by softness in our NGS chemistries business. The Environmental and Forensics market declined 2%. The business grew mid-single digits ex China, highlighted by continued strength in serving the rapidly expanding PFAS opportunity. The Food market declined 13% on a very tough compare of 21% growth last year, heavily impacted by the low 30s decline in China. On a geographic basis, all regions declined. The Americas region was down 5%. Europe was down 3%, while Asia Pacific ex China was down slightly. China was down 21%, missing our expectations of a mid-teens decline. We saw demand weakness expand beyond Pharma. As a result, we have revised our full year expectations for China for a mid-single-digit decline to a double-digit decline. We have seen funnel activity increase because of the recently announced stimulus program, but we are not assuming any revenue impact in our fiscal year. Moving down to P&L. Our second quarter gross margin was 55.6%, up 30 basis points from a year ago as productivity and cost savings were offset by lower demand and mix. Our operating margin of 25.1% was down year-over-year as expected. Below the line, we benefited from greater-than-expected interest income and a lower tax rate. Our tax rate was 12.5%, and we had 293 million diluted shares outstanding. Putting it all together, Q2 earnings per share were $1.22, down 4% from a year ago, less than the decline in revenue and ahead of our expectations. Now let me turn to cash flow and the balance sheet. Operating cash flow was $333 million in the quarter and we invested $103 million in capital expenditures as we continue our planned NASD expansion. We returned $299 million to shareholders in the quarter, $69 million through dividends and $230 million through repurchase shares, catching up on our anti-dilutive buying year-to-date. In summary, we met our expectations for the quarter our markets are recovering but at a slower pace than we anticipated. We are directing our energy towards high-growth opportunities and are committed to delivering value to our customers and our shareholders. Now on to our revised outlook for the year and our third quarter guidance. We now expect full year revenue to be in the range of $6.42 billion to $6.50 billion. This represents a decline of 6.0% to 4.9% on a reported basis and a decline of 5.4% to 4.3% on a core basis. Currency and M&A combined are a headwind of 60 basis points. This is a $300 million reduction at the midpoint and is primarily related to changes in two areas: China overall in the Pharma end market outside of China. For China, we have reduced our expectations to a double-digit decline from mid-single digits with all end markets being reduced. This represents roughly $70 million of the guidance reduction. The remainder of the change in the Pharma end market globally outside of China is due to two factors. The first and largest factor is continued caution in budget releases and extended approval times for instrumentation purchases in both Small and Large Molecules. This is roughly $175 million of the change. The second factor is related to NASD due to the reasons I mentioned earlier, and represents the remaining $55 million reduction. While down from our previous guidance, we are expecting growth in the second half of the year to be roughly 400 basis points better than the first half of the year and plan to exit the year roughly flat year-on-year at the midpoint of the new guidance. Full year non-GAAP earnings per share are now expected to be between $5.15 and $5.25, representing a decline of 5.3% to 3.5%. This incorporates a roughly $35 million expense reduction due to the actions Padraig mentioned. The majority hit in Q4 in order to help mitigate the bottom-line impact of the change to our revenue guidance. It also assumes a 13% tax rate and 292 million fully diluted shares outstanding. We will leverage our strong balance sheet and plan to repurchase $750 million of our shares in the second half of the year in addition to our anti-dilutive repurchases. We expect these repurchases to be weighted towards Q3. All told, we expect to return roughly $1.4 billion to shareholders this year between dividends and share repurchases. In addition, the Board authorized a new $2 billion share repurchase program that will go into effect August 1 and replace the existing authorization. Now for our Q3 guidance, we expect revenue will be in the range of $1.535 billion to $1.575 billion. This represents a decline of 8.2% to 5.8% on a reported basis and a decline of 6.9% to 4.5% on a core basis. Currency and M&A combined were a headwind of 130 basis points. Third quarter non-GAAP earnings per share are expected to be between $1.25 and $1.28, representing a decline of 12.6% to 10.5%. Looking forward, we remain disciplined. We're focusing on what we can control and driving strong execution in a challenging market, and we are optimistic about the long-term future. Now back to Padraig." }, { "speaker": "Padraig McDonnell", "text": "When I joined you last quarter as CEO-elect, I said Agilent has a compelling story to tell, and I was excited by the possibilities that lie before us as we help our customers bring great science to life. That excitement has only grown. I spent 26 years at Agilent, first starting as a field employee before moving to sales and then leading some of our businesses. I know Agilent's strengths and its opportunities very well. We are in great long-term growth markets. And while the markets are recovering slower than anticipated, they are recovering. This company is a leader across key platforms, making us uniquely qualified to support our customers and their missions to solve some of the world's most important problems. And our customers value their relationships with us because we offer them an unparalleled experience. And as I said earlier, that is a competitive differentiator in the market. The actions we are now taking, while difficult, will enable us to quickly capitalize on growth opportunities as the markets fully recover. I know the future is bright, and we will forge an enduring company that sets the standard for excellence with our customers and create value for our shareholders. Thank you again for joining today's call. I look forward to continued dialogue with all of you. Parmeet, over to you for Q&A." }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Padraig. Regina, if you could please provide instructions for the Q&A now." }, { "speaker": "Operator", "text": "[Operator Instructions] Our first question will come from the line of Matt Sykes with Goldman Sachs. Please go ahead." }, { "speaker": "Matt Sykes", "text": "Maybe just the first one is more of a timing question on China. I mean we've been through a lot of quarterly results this season and the stabilization theme in China has been pretty consistent and you guys have talked about sequential stabilization over the last number of quarters. So, was this really an April impact that you saw in China? And if so, what was sort of the deceleration that you saw there? And what were some of the causes of it?" }, { "speaker": "Padraig McDonnell", "text": "Yes. Thanks, Matt. I think while Q2 was relatively soft to guidance, we adjusted the H2 outlook, what we're seeing in China is we saw a -- stability over a number of quarters. What we really believe is that this is not a material deterioration from that. But what we've seen is that we've seen the stimulus have some effect and the stimulus has been much larger than previous stimulus. It's over multi-years. And of course, customers are looking about what are the components of that and they're looking at some of the areas and where it's going to help them. So that has had a material effect. We don't see the stimulus having an impact in H2, but we do think it's going to have an impact in '25. I think there's kind of a direct and indirect side of the stimulus. I think on the direct side, you see this delay, which is normal, but you see also the indirect side where, the government is investing in technology and sciences going forward, which creates a lot of, I would say, future momentum." }, { "speaker": "Matt Sykes", "text": "Got it. And then just for my follow-up, you guys have often talked about sort of 18- to 24-month down cycle in the LC replacement cycle. And I'm just wondering just given some of the comments you made around Biopharma, given that's an important customer segment for that, have you kind of changed those views in terms of what the LC replacement cycle will look like and what the potential recovery in the replacement cycle will look like? I think some were thinking sort of towards the end of this year, but is this more now into 2025, is that replacement cycle been extended in terms of recovery?" }, { "speaker": "Padraig McDonnell", "text": "Yes, we don't see any material change. But Bob, I don't know if you want to add some color on that." }, { "speaker": "Bob McMahon", "text": "Yes. I think, Matt, as you said, we're still expecting improvement in the back half of this year, just not at the pace that we had expected. And so, we're not seeing any material extension of kind of the use case for LC or an LC/MS in the marketplace and are still expecting recovery in '25." }, { "speaker": "Operator", "text": "Our next question will from the line of Jack Meehan with Nephron Research. Please go ahead." }, { "speaker": "Jack Meehan", "text": "I was wondering if you could share what's the new sales outlook for an ASP this year? And can you talk about like bridging from kind of the second half to some of the longer-term targets you've had previously. Like what are you assuming in terms of kind of progression after this year?" }, { "speaker": "Padraig McDonnell", "text": "Yes. I mean the NASD business, we talked before about the business being about 50% commercial and 50% clinical that's changed a bit to be more like 75% clinical and 25% commercial. We've seen the IRA inflation Reduction Act having an impact on the price provisioning. So, what you see with Pharma partners, they are looking for larger indications instead of smaller indications. So, what we've seen is, I would call it, an air pocket in Q3. And our clinical business is actually growing. Orders are growing about 50%. So, we're -- we have a good order book on that side. So, it's a readjustment and we see that readjustment go through H2 and beyond. I don't know if you want to add anything to that, Bob." }, { "speaker": "Bob McMahon", "text": "Yes, I think Jack to add some numbers to what Padraig was saying here. Originally, we were expecting it to be roughly flat, which would have said roughly a $350 million business. We're now seeing roughly $300 million this year. As Padraig is mentioning, we're expecting to build back from there as these clinical programs move through the clinical pathway and are expecting to have more volume in '25. And I would say our long-term perspective on NASD remains unchanged. We're still very excited about that opportunity and are still building out the capacity in our Colorado site." }, { "speaker": "Padraig McDonnell", "text": "Second question, I think the second part of the question was about '25. We'll grow next year. And as you can see in our guidance that we really are anticipating improving conditions across the second half, but it's too early to talk about specific ranges for next year. We want to wait to see how pacing an improvement plans out in the second half." }, { "speaker": "Jack Meehan", "text": "And then on the cost savings program, I think I heard talk about $100 million. I just wanted to clarify, is that incremental to the $175 million you previously talked about? And where are those -- any color on where the savings is coming from?" }, { "speaker": "Bob McMahon", "text": "Yes, it is incremental to the savings that we've already built into the plan, and we're expecting to get that annualized savings by the end of the year. It's primarily headcount-related, Jack." }, { "speaker": "Operator", "text": "Our next question comes from the line of Patrick Donnelly with Citi. Please go ahead." }, { "speaker": "Patrick Donnelly", "text": "Maybe one on the instrument side, I guess it will be China and then just broadly, I know a few quarters ago, you guys felt like orders were picking up, the funnel looked okay, but it was really that I think, Bob, you said it was the velocity of conversion of those orders in that funnel to revenue. Is that what you're seeing is just that continues to stretch out the visibility into that normalizing. It's just proving to be a little trickier. I just want to talk through, I guess, that instrument piece because again, you sound okay on the orders in the funnel and the conversation, but that converting over rim, I guess that I just want to talk through again, the conversion piece and the velocity of the conversion." }, { "speaker": "Padraig McDonnell", "text": "Yes. Yes. No, I think at an at level, as we talked about, our book-to-bill was greater than one, which is a positive sign and where orders grew year-over-year. On the instrument side, the orders grew low single digits, excluding China, but declined low single digits overall. So, what we're really seeing is that our funnel is really stable, but we're seeing those extended purchasing decisions being continuing to extend out through the second half." }, { "speaker": "Bob McMahon", "text": "Yes. I think, Patrick, to build on what Padraig is saying at the beginning of the year, we were expecting when we were talking primarily to our Pharma customers, budgets weren't being materially cut outside of a specific number of well-publicized customers. And we were expecting to see by our second quarter, some of these budgets being released. And what we're seeing now is still a very cautious environment. And so, the funnel is still there. We are seeing our book-to-bill as Padraig mentioned, to be greater than one. We just haven't seen that inflection, which we would have expected to see at least in our order book. One of the things that we do see and it primarily happened late in the quarter is our teams are paid on first half versus second half quota. And so, our April numbers are usually quite large, which prepares us for the -- for Q3 and we just didn't see that inflection in late April, which we normally would see." }, { "speaker": "Patrick Donnelly", "text": "Okay. That's helpful color. And then maybe to follow up on Jack's question on NASD there. You understand the revenue change. How are you guys thinking about the capital investment on that front? Obviously, it's been sizable in the past years, you've often talked about the continued expansion of the trains. How do you think about the CapEx devoted to this over the next few years? Has there been any change in terms of push out of that capital? Or how you're thinking about the potential investment and the expansion on this front just given the shift in revenue here." }, { "speaker": "Padraig McDonnell", "text": "Yes. No, absolutely not. I think despite some near-term headwinds that we have, the medium, long-term story for NSAD is really holds firm. And as I said before, we're seeing our clinical business grow more than 50% this year, and we really remain excited about the expansion of customers. And getting back to the therapeutic class that we're involved in with siRNAs drugs, we're seeing those approvals for drugs increase substantially in 2023. And being an integral part of the manufacturers of several of these on market therapeutics, the future is extremely bright in this area. So, no change in our capital investment." }, { "speaker": "Bob McMahon", "text": "Yes. Patrick, just one other thing to add on to that as I'm sure you're aware, as part of that expansion, not only are we expanding capacity, we're also expanding our therapeutic options. So, not only siRNA but also anti-sense and also CRISPR opportunity. So, it also provides us with more capabilities to support our existing and new client base." }, { "speaker": "Operator", "text": "Our next question will come from the line of Vijay Kumar with Evercore ISI. Please go ahead." }, { "speaker": "Vijay Kumar", "text": "I guess Padraig or Bob, thanks for laying out the changes in the guidance assumptions here, right. I think part of it was China, part of it was NASD. But more than half, I think, it's coming from Pharma cautiousness that's outside of China, ex-NASD, which I think that the market. I thought we were expecting stabilization. Is this a funding environment kind of question or is elections or what changed because second quarter, it feels like revenues were roughly in line -- was it the exit rate? Can you just talk about what the exit rate trends were and what customers are telling you?" }, { "speaker": "Padraig McDonnell", "text": "Yes. I mean on the Pharma instrumentation side, in terms of guidance, we see an impact of about $175 million and it really simply Pharma's willingness to spend in capital equipment remains challenged over time. And again, customers are focusing on lab efficiency and productivity. But based on what we're hearing from customers, these trends will continue to impact the second half. And that's why we're lowering our expectations around that instrument piece. What I will say that the formulas are holding very strong. The conversations are very robust with customers, so we do expect it to improve going into next year." }, { "speaker": "Bob McMahon", "text": "Vijay, to build on what Padraig is saying, the guidance that we're building out right now is based on what we're seeing today. It doesn't assume any meaningful inflection. That certainly -- I'd characterize this as a prudent guide given what we know today. Certainly, we're not assuming any of that inflection. You bring up a number of variables, which are hard to quantify around the upcoming election and so forth. But we don't think it's a funding issue. We do feel like we are seeing biotech funding coming up. Obviously, on the Small Molecule side, those are they're well-capitalized companies. It's just a very -- it's still cautious in terms of them getting through their approval processes." }, { "speaker": "Vijay Kumar", "text": "And just maybe related to that Padraig, Bob. I think is this just a few handful of customers or across the Board? Because obviously, the next question is, is this a share loss? Or is this more of -- what gives you the confidence that this is just a pushout and not a share shift on the savings or cost savings, Bob, that 35 is in Q4. So the expectations is the incremental 65 is for fiscal '25." }, { "speaker": "Bob McMahon", "text": "Let me answer the last question first. So that is a cumulative number for the second half of the year. We'll see some of that happen here in Q3 and roughly be at that $100 million run rate in Q4. So roughly about a $25 million run rate and then we'll get the full incremental 65, obviously, next year as we go into the business. Do you want to comment?" }, { "speaker": "Padraig McDonnell", "text": "Yes. Yes, look, when we look across our Pharma customers, we see generally, it's across the board. We do have some customers that are a little bit more positive than negative this year. But overall, I would say it's a market effect. What I would say -- on the other question, this is definitely a macro story, not a market share story. And in fact, when we look at our objective market share data, we're holding or even gaining in some areas. And I will remind you not to comment on our peers in this area, but we have a month ahead in what we're seeing on it, but we're seeing very robust market share numbers coming in." }, { "speaker": "Operator", "text": "Our next question comes from the line of Dan Brennan with TD Cowen. Please go ahead." }, { "speaker": "Dan Brennan", "text": "Maybe first one, just on China. You talked about in response to an earlier question about the stimulus is delaying demand this year. Could you just speak through that a little bit? Like what's your visibility on that? Any way to get a sense of how much of what you should be seeing in China's customers waiting to see the final details of the stimulus. And I know you also alluded to like this could be a big impact in '25. Can you just speak through that a little bit?" }, { "speaker": "Padraig McDonnell", "text": "Yes. Look, I think having worked with China for many years. It's a multiyear program as opposed to the last one, which I think was a year program in the shorter term. So, it's very encouraging to see it. We've seen some proposals from customers, but they're still, quite frankly, trying to work out what are the mechanisms for the funding as we go forward. So, we're seeing a lot of activity around that. And I would say in terms of the confidence boost, we do really see that in '25, we're going to get some benefit from this, but really too early to tell on it. So, we're taking down our guidance in the second half primarily related to this." }, { "speaker": "Bob McMahon", "text": "Dan, this is Bob. To build on that, I had mentioned in our prepared remarks that bid activity has actually improved. And so, we're seeing a number of proposals working with our customers to actually get a piece of the stimulus. What's not yet clear is the timing of the release of that budget comes from the provincial -- or from the state down to the provincial and then to the local government. And so, we've taken a, what I would say, is a conservative approach to assuming none of that stimulus money will actually -- we'll see any of that in the second half of the year. But it will come, it will come. And so -- if it comes earlier, that would be a benefit to what we're forecasting right now. But we're -- what we did see, particularly in April is a little slowing down of normal bid process waiting to get access to that money. And so, we think that, that's just a transitory change, not a structural change." }, { "speaker": "Dan Brennan", "text": "Got it. And then -- and maybe just one more on Pharma, if you don't mind. So, the instrument growth was so powerful for yourselves and some of your peers coming out of COVID. Is there any chance that like the slowdown you're seeing now maybe just some miscalculation, maybe there was such instrument demand and purchase is done in the last couple of years that customers at work just kind of working through that all those purchases versus like an exceptional slowdown right now given the macro? Just maybe speak a little bit to that, if you could about the overhang for maybe the strength in the past couple of years versus what you're seeing real time now?" }, { "speaker": "Padraig McDonnell", "text": "Yes, no doubt about it. We've -- tremendous growth rates during the post-COVID period. But we don't see anything fundamentally changing with the cycle on instrument replacement cycles. We don't see it's a kind of a rundown of available instruments or anything like that because lab activity is very, very high. We see that across the board. We actually see activity on the sales side, but also on the support side, very, very high. So we think it's primarily actually on the macro situation." }, { "speaker": "Bob McMahon", "text": "Yes. And Dan, just to kind of build on what Padraig had said. We looked at ACG and our CSD or our consumables business outside of China, both of those grew mid- to high single digits in the quarter. So, it does speak to lab activity. They're not having instruments just sitting idle. And in ACG, our contracted services business continues to perform extraordinarily well, up double digits. So, the demand is there outside of China right now." }, { "speaker": "Operator", "text": "Our next question will come from the line of Rachel Vatnsdal with JPMorgan. Please go ahead." }, { "speaker": "Rachel Vatnsdal", "text": "So first up, I just wanted to ask on China. We've seen some of the headlines from BIOSECURE Act. So, I was wondering if you could break down your exposure to large CDMOs in the region? And if that contributed to any of the weakness there just given me some of the commentary from an RFP standpoint? And then just on China stimulus and some of the dynamics there, how should we think about local competition competing for some of these dollars on the stimulus dynamic and you talked about some of these proposals that you're working on. So, can you detail what sectors, what types of customers are you really seeing that proposal work be done right now?" }, { "speaker": "Padraig McDonnell", "text": "Yes. Look, I think on the BIOSECURE Act, we see normal -- people are looking at their supply chains, and that's positives and negatives around the globe. As you see that one of the areas that we've seen from that is actually we see a benefit on our service business as we relocate laboratories in some cases and get them up and running quickly with our services on that one. So, definitely some exposure to CDMO, but I would say not the overall macro side on it. And then I think the second part, Bob, I don't know if you want to take that one?" }, { "speaker": "Bob McMahon", "text": "Yes. I would say just a building on that point on our questions around CDMO, most of our business in China is local. So, it's not multinational and so wouldn't necessarily fall under the BIOSECURE Act. There are certain large companies that are on that list that are customers of ours, but that is that business has been pretty muted for a while, and that's not the cause of the incremental weakness here. I would say on the bid activity, it's about -- it's across the board. It's not in one region of the country or one end market or customers and obviously, Chinese local competitors are going to be buying for that business like we are. But I think we've shown time and time again our ability to provide very strong and robust instrumentation, coupled with very good service. And so, I don't think that we're in any disadvantage from a local perspective from that standpoint." }, { "speaker": "Padraig McDonnell", "text": "In fact, Bob, I would say our scale and service there really makes it a differentiator where we can scale with customers and get them up and running very, very quickly. We take the competition very seriously. But we've always had competition in China, and we continue to keep a focus on that." }, { "speaker": "Rachel Vatnsdal", "text": "Great. And then for my follow-up, just given some of the moving pieces on this fiscal 3Q guide, could you walk us through your expectations by segment for 3Q?" }, { "speaker": "Bob McMahon", "text": "Sure. I'll take that real quick. By business group, we're expecting LSAG to be down double-digits DGG down mid-single and ACG growing at mid-single digits. If we looked at by end market, Pharma, as I mentioned in the prepared remarks, would be down very similar to Q2, so down low double digits. And with academia and diagnostics markets being roughly flat, Chemical and Advanced Materials being very similar to Q2 results. And then Food being down roughly the same, maybe a little better than where we saw Q2 as well. And then Environmental and Forensics similar performance as Q2." }, { "speaker": "Operator", "text": "Our next question will come from the line of Doug Schenkel with Wolfe Research. Please go ahead." }, { "speaker": "Doug Schenkel", "text": "I guess, I have too high level, but I think important questions. One is Yes. Simply put, I want to get your thoughts as we sit here today about the Company's long-term growth outlook. And essentially, to what top line growth rate are you managing the business as you think about the next few years? In Pharma and Biotech, you have less exposure as a percentage of sales to some of the higher growth areas of that end market and the outlook for one of your higher growth areas, NASD within Biopharma it's certainly in question amongst investors given how things have been going recently. And while there is hope that China stimulus will help across many end markets, as we kind of think past that, ultimately, many believe the durable growth rate in China where you're overexposed will be materially lower than what we've seen in years past. And then as we think of other discrete differentiating growth drivers for the Company, when we look at CrossLabs and DGG, the growth rates have moderated there in part because of the market, but also in part because you did have above-average concentration with one high-growth diagnostic companies as an example. So, there's a lot of bad guys here right now. Obviously, in the long term, there's a lot of belief in Agilent in how you run the business. But I think there are a lot of questions when you kind of pull all this together about what is the inherent growth rate of this business. Can you share any thoughts on that?" }, { "speaker": "Padraig McDonnell", "text": "Maybe I'll kick it off a bit at a high level. I think, first of all, we participate in excellent markets with multiple long-term growth drivers. You look at the characterization that's going to be needed in biotherapeutics in time, improving human health. Quality of our Food is really going to be a continued growth driver for the Company. I would say there's a lot of growth factors within the business that in adjacent markets where we continue to invest in those opportunities. You've seen part of Biopharma, PFAS. And I do believe NASD long term is going to continue to grow. In our service business, we expect that to grow high single digits over the long term as we increase our attach rate, which is not a small point because every percentage increase in attach rate is about $30 million incremental on that side. So overall, I think we're in extremely durable long-term markets. On the China story, we're going to see probably getting down to more mature level growth rates in China, but I would remind everybody that there are secular drivers in China that continue to come up and the government continues to invest in science and technology, but also the scale of the country being so large, we benefit tremendously from the aftermarket element consumable and service around that and being able to kind of drive attachment to some of the emerging workflows. So, Bob, I don't know if you have anything to add on that?" }, { "speaker": "Bob McMahon", "text": "Yes, I would just say, as we think about kind of our long-term algorithm that we've been talking about, that 5% to 7%, we're not ready to walk away from that. I think we still feel good about that. And I think while you talked about some of the bad guys, we still believe in Biopharma and are continuing to invest there. In addition, Padraig mentioned a few things on the applied side where we are the undisputed leader. So, things like PFAS, the electrification, semiconductors, those things weren't there five years ago to the extent that they're going to be there in the next five years. So certainly, the markets are a bit challenging right now, but we are seeing them recover, and we would expect to be able to get back to those rates in the near term." }, { "speaker": "Doug Schenkel", "text": "Okay. And Bob, maybe sticking with you. If we go back to the beginning of the year when you set guidance for the fiscal year. Yes, I think it's fair to say there were a number of questions from the investment community about how you were setting guidance for the year. Specifically, there was concern about the plausibility of what you assumed for the second half. In hindsight, obviously, these questions and concern to be well-founded. What went wrong? Does this tell you something about your visibility for the business? If so, is it a transitory issue? And if that's the case, can you help us explain why? And if it's not visibility, what do you need to do in terms of changing your guidance philosophy moving forward?" }, { "speaker": "Bob McMahon", "text": "Yes. Thanks, Doug. And I think it is visibility. I think if you looked across the last seven years, the two most volatile years have been the last two. And so, I think we were expecting based on the feedback that we got from our customers that they would be releasing budgets much more quickly than what they have or at least what we're seeing and while we did have an expectation that we were going to see an inflection in the back half of this year, when we're talking to our customers, it just hasn't happened. And so, I think the visibility is something that I think will we will get back, particularly as we have more recurring revenue and continue to have the connect rate on to the services business. And we're disappointed as everyone else is, but you can rest assured that we're going to come out of this stronger going forward." }, { "speaker": "Operator", "text": "Our next question comes from the line of Dan Leonard with UBS. Please go ahead. Dan, your line might be on mute. Our next question will come from the line of Michael Ryskin with Bank of America. Please go ahead." }, { "speaker": "Michael Ryskin", "text": "I want to pick things up exactly where you just ended on the last answer with Doug on visibility. So, I mean you kind of talked about how you had a certain set of expectations going into the year based on conversations with customers that didn't play out. I mean, is that -- is there any reason to think that visibility is better now, I guess, is my question, if we look at the guide change and specifically focusing on Pharma with or without an NASD, if you want to just talk about Pharma, the CapEx of Pharma and NASD, it seems like visibility there is still really, really challenged. So, on the one hand, a lot of your prepared remarks are markets are improving. But on the other hand, you're not expecting in 3Q because you just talked about low double digits. It doesn't seem that you're expecting for the rest of the year. So just exiting the year, entering next year, how do we know we're not going to be having the same conversation again about another push out and then another push out? Just talk about that visibility going forward." }, { "speaker": "Bob McMahon", "text": "Yes. I think if we look at just first half, second half and look at where our core guidance is, it's not assuming any inflection in the back half. I mean you could make an argument that typically, we have a higher weighting towards the back half of the year, just part of normal seasonality, and we're not assuming that in our guide. And so, if you look at also Pharma, we're assuming it's down roughly the same as it's been in the first half of the year, but we'll get easier compares. And so, we're not expecting \"a big inflection in the back half of the year.\" I would say also on NASD, which we are assuming a reduction in the second half of the year relative to the first half of the year, we have all those orders in-house. And so, we've got a plan, a production plan and both for Q3 and Q4. And while something could happen, it's not like we're looking for orders to guide us on those. And those are the two big areas that made the biggest change when I think about where we were back in November, giving guidance to where we are today." }, { "speaker": "Michael Ryskin", "text": "Okay. And Bob, since you touched on 3Q, 4Q ramp, I'm going to follow up on that as well, actually. I mean, you normally do see some seasonality third quarter, the fourth quarter, depending on the year, depending on the comp, let's call it about $100 million, maybe $100 million plus. You're something that your guide for 3Q and fiscal year implies about $120 million repeat to 4Q for this year. So again, not excessive, but still some step-up and it seems like 2Q and 3Q certainly are below trend. So, is there any risk to that 4Q number? I mean is there anything else we should be thinking about in terms of what makes that achievable besides just comp and seasonality?" }, { "speaker": "Bob McMahon", "text": "Yes. The biggest change there is our NASD business, which we will see a low water point here in Q3 if we -- what we ended up seeing is some of these clinical programs getting pushed out. They've got pushed out from Q3 into Q4. And so, there's a $30 million incremental step-up from Q3 to Q4. So, if you took that out, we did get back to a more historical kind of level." }, { "speaker": "Operator", "text": "Our next question will come from the line of Dan Arias with Stifel. Please go ahead." }, { "speaker": "Dan Arias", "text": "Bob or Padraig, on the capital equipment portfolio and the order book and the sales funnel that you have there, maybe just in simplistic terms, how would you describe the average time to deal close that it feels like you're going to be working with in the back half of the year versus what you've seen as a historical average? And embedded in that is just this question on instrument demand that you have a line of sight on via the sales funnel, but that just hasn't been booked yet versus what's not materialized at all yet? And then how the outlook change reflects those two things." }, { "speaker": "Padraig McDonnell", "text": "Yes. Look at it, I think it's hard to put a number on the extended deal time. It depends actually on the platform and portfolio. So, there's quite a big difference between, for example, GC and LCMS on that. But what I would say, in general, the deal time is prolonged. The win rates, of course, haven't changed. They're still very, very strong, but that deal time is prolonged. And I think if you look at it in the second half when we're looking at the visibility of what we're seeing in the funnel, the best thing and we're doing is staying close to customers on this one, making sure we're there to help them, of course, with their decisions and help them get up and running when they make the decision to purchase on it. So, we're going to see this continued extended deal time, I think, through the end -- through the second half." }, { "speaker": "Bob McMahon", "text": "Yes. Dan, I wish I could say we have all the orders in-house for the second half for instruments. It just doesn't work that way. So, we have much better visibility into Q3, but we will need continued performance in Q3. Now we've had several quarters here of book-to-bills being greater than one in our instrumentation portfolio, which is a positive thing. I would say, hey, we're building some backlog. And as Padraig mentioned earlier in the call, particularly in LSAG. LSAG orders grew ex-China. And that is the first time that's happened in several quarters. So, we are seeing some positives and if you look at the second half of the year, our performance relative to last year should improve just because of the benefit of easier compares. And so -- we're not, again, looking for that huge inflection. And we're not expecting also as Padraig was saying, a constriction, so to speak, or an acceleration of those deal funnels. We're expecting them to stay very similar to the way they are right now." }, { "speaker": "Padraig McDonnell", "text": "Yes. I think just to close off, Bob, I think the deal closure time lines remain at an elevated but very stable level. They're not deteriorating further, which I think is a really good sign. And in terms of the funnel is stable, no cancellations within that, which, of course, is very important to see." }, { "speaker": "Dan Arias", "text": "Okay. And then maybe on -- as a follow-up on Biopharma. I'm just curious about the extent to which the IRA is part of the conversation there these days. It sounded like last year, the industry kind of contemplated an adjustment as the idea was coming into the picture. So, do you think spending expectations got rightsized for a period of time? Are you finding that that's sort of a continual evolving conversation?" }, { "speaker": "Padraig McDonnell", "text": "Yes, I would say it's a continuing evolving conversation. Clearly, on the NASD side, we've seen an impact from the IRA something we're watching closely, but I think this will evolve over time. What we're seeing in terms of programs-based around pricing provisions, there definitely has been an impact on that side." }, { "speaker": "Operator", "text": "Our next question will come from the line of Josh Waldman with Cleeland Research. Please go ahead." }, { "speaker": "Josh Waldman", "text": "A couple for you. Padraig or Bob, I wondered if you could talk a bit more on how instrument orders progressed sequentially. I mean did orders deteriorate over the last 90 days or really just a function of orders not improving as you expected? And then I wondered if you could comment on what you're seeing from new orders, new order perspective across the key product categories within LSAG categories like LC/MS, GC, ICP. I guess is it fair to assume LC/MS is driving the majority of the softness just given the comments on Pharma." }, { "speaker": "Padraig McDonnell", "text": "I don't know if you want to take that one, Bob." }, { "speaker": "Bob McMahon", "text": "Yes, I'll take it. So, I wouldn't characterize it, Josh, is a deterioration. It actually just wasn't the inflection or the acceleration that we were expecting. We did -- as we were saying here, we did have a positive book-to-bill and ex China orders grew. They just didn't grow to the extent that we expected them to, particularly in April, which we would typically have higher acceleration just kind of given the end of the quarter. In terms of the platform, what you're seeing is the platforms that are more focused on Pharma being the areas that are the weakest. So, LC and LC/MS are weaker than the applied markets. And you can kind of see that in our end markets as well. And so, we were expecting those to kind of perform better this year, and we're just still seeing that, I'd say, lower-than-expected performance from the standpoint of order velocity." }, { "speaker": "Josh Waldman", "text": "Got it. Okay. Then a follow-up on China. I wondered if you could comment a bit more on where we’re seeing…" }, { "speaker": "Bob McMahon", "text": "I would say -- sorry, just one quick -- so one thing I would say, though, is if I looked at the performance, the revenue performance versus the order performance, the order performance was significantly better in Q2 on those two main platforms than the revenue. So again, these are points that says we are getting out of it, maybe not at the pace that we were expecting. So -- and so those are some positive points that would suggest that we're going to continue to -- it's not going to deteriorate coming out in Q2 -- or excuse me, in second half. Sorry." }, { "speaker": "Josh Waldman", "text": "Is it -- what were the two platforms?" }, { "speaker": "Bob McMahon", "text": "LC and LC/MS. So yes. Yes." }, { "speaker": "Josh Waldman", "text": "Okay. Okay. Got it. Got it. And then a follow-up on China. I just wondered if you could comment a bit more on where all you're seeing demand coming softer than expected from a new booking’s perspective and then a bit more detail on how you're contemplating the stimulus. I mean, it sounds like you saw improved bidding and funnel activity on the prospects of stimulus, but just wondered if you could provide what's giving you the confidence that, that stimulus related funnel ends up converting to orders and sales at some point in the future?" }, { "speaker": "Padraig McDonnell", "text": "Yes. Maybe starting on the stimulus. This is an extremely large program, a multiyear program. It's very real. We've seen some of the customers with activity is asking us to bid and some of the things, even though they're not sure exactly yet how the mechanisms would work. So that gives us great confidence for '25 just from that. But I said earlier, also the indirect impact of confidence in science and technology in China. It's a real photo confidence by the government in making sure we -- making sure to get the market going again. So, I think in -- we saw meaningful softness extend to all markets because remember, the stimulus is not only academia and government, it's across all markets. And that has really come at once. And we did see at the end of the quarter, we also started to see customers postpone purchasing decisions have told us, right, sort of said we're going to postpone and they try to gauge if there's any benefit of the stimulus-related funding, and that's normal. I think that's expected. If you didn't see that, then the stimulus would have different questions. And why we believe that a stimulus program will ultimately be long-term positive, we really don't see any benefit in H2, and that's why we're roughly reducing by $70 million." }, { "speaker": "Josh Waldman", "text": "Got it. Did you see stimulus-related postponing and Pharma and CDMO as well or more just government accounts?" }, { "speaker": "Bob McMahon", "text": "Yes, it was both government and non-government accounts across the board. So, I would say it was pretty broad beyond Pharma." }, { "speaker": "Operator", "text": "Our next question comes from the line of Catherine Schulte with Baird. Please go ahead." }, { "speaker": "Catherine Schulte", "text": "Maybe just sticking on China stimulus to start off. Is there any way to quantify the increase in the funnel activity that you've seen there just as we try to think about potential opportunity in future years?" }, { "speaker": "Padraig McDonnell", "text": "Yes. What we're seeing is a postponement, and I think it's really too early to tell on the funnel side on -- if the customers are still working out the mechanisms about how it works, we're still waiting to see on the impact on the panel, particularly for '25, it's too early to tell." }, { "speaker": "Catherine Schulte", "text": "Okay. And then on LSAG, what was performance in the quarter, excluding China? And then any commentary on the Pharma end market specifically for that business outside of China in the quarter?" }, { "speaker": "Padraig McDonnell", "text": "Bob, do you want to take this one?" }, { "speaker": "Bob McMahon", "text": "Yes. So, our LSAG business declined 13% globally, ex-China, it was down 8%." }, { "speaker": "Operator", "text": "Our next question will come from the line of Paul Knight with KeyBanc. Please go ahead." }, { "speaker": "Paul Knight", "text": "Within the 34% of business that's Pharma, what portion is Biopharma or Large Molecule, Bob?" }, { "speaker": "Bob McMahon", "text": "It's roughly 45%." }, { "speaker": "Paul Knight", "text": "And what's the overall growth rate of that piece, do you think?" }, { "speaker": "Bob McMahon", "text": "Long term or in the quarter?" }, { "speaker": "Paul Knight", "text": "In the quarter and long term." }, { "speaker": "Bob McMahon", "text": "Yes. So, if we looked at our Biopharma business, it was down roughly 12%, Small Molecule was down roughly 10%. Total Pharma was down 11%. So, it kind of gives you a sense. I think." }, { "speaker": "Padraig McDonnell", "text": "Yes, I would say before we get on to the long term, Bob, for Biopharma, really tough compare was mid-teens, plus mid-teens last year on that side. But what we're seeing is the long-term prospect for this market is very strong." }, { "speaker": "Paul Knight", "text": "Yes. And then I know that you've got -- you have always been very aggressive and innovative on your M&A for biologics. Are you seeing that market open up on the M&A side of that marketplace?" }, { "speaker": "Padraig McDonnell", "text": "You mean in the space itself." }, { "speaker": "Paul Knight", "text": "Is pricing becoming more realistic as you think about your acquisition strategy?" }, { "speaker": "Padraig McDonnell", "text": "Yes. Well, I think there's long memories. So, people don't forget the elevated pricing for assets, but we're going to remain very disciplined. It's going to become an increasingly bigger part of the puzzle for us M&A, but we're going to make sure that we do it in a very disciplined way, link to strategy and of course, looking at areas of where we can double down and growth factors. So we're very focused on that going forward. But I would say, while pricing maybe has come down in little areas across the board, people have long memories." }, { "speaker": "Operator", "text": "I will now turn the call back over to Parmeet Ahuja for closing remarks." }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Regina, and thanks, everyone, for joining the call today. With that, we would like to end the call. Have a good rest of the day, everyone." }, { "speaker": "Operator", "text": "Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect." } ]	Agilent Technologies, Inc.	154,924
A	1	2,024	2024-02-27 16:30:00	Operator: Ladies and gentlemen, welcome to the Agilent Technologies Q1 2024 Earnings Call. My name is Regina and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja, to begin. Please go ahead. Parmeet Ahuja: Thank you, Regina and welcome, everyone, to Agilent's conference call for the first quarter of fiscal year 2024. With me are Mike McMullen, Agilent's President and CEO; Padraig McDonnell, Agilent Chief Operating Officer and CEO-elect; and Bob McMahon, Agilent's Senior Vice President and CFO and acting President of the Diagnostics and Genomics Group. Joining in the Q&A will be Phil Binns, President of the Agilent Life Science and Applied Markets Group; and Angelica Riemann, our newly named President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our first quarter financial results, investor presentation and information to supplement today's discussion along with the recording of this webcast are available on our website at www.investor.agilent.com. Today's comments will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted exchange rates. As previously announced, beginning in the first quarter of fiscal 2024, we implemented certain changes to our segment reporting structure related to the move of our cell analysis business from LSAG into DGG. We have recast our historical segment information to reflect these changes. These changes have no impact on our company's consolidated financial statements. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now, I'd like to turn the call over to Mike. Mike McMullen: Thanks, Parmeet and thanks, everyone, for joining our call. Before I review our first quarter results, I want to first acknowledge our news last week that I will be retiring at the end of the fiscal year and that Padraig McDonnell is Agilent's new Chief Operating Officer and will become CEO on May 1. It was a difficult decision to retire after almost 40 great years with this special company and in the role that I love, I will miss working with the One Agilent team. However, I must say it's a great feeling and quite gratifying to be handing over the CEO reins to a tremendously capable successor in Padraig. With Agilent operating from a position of strength and with a very promising long-term outlook. I have known Padraig for more than 20 years. I've worked closely with him during that time. He has always been completely committed to our customers and Agilent's success. He is a product of our culture, knows our company, team and markets and those have developed compelling business strategies, build winning teams and deliver exceptional results. Padraig has a strong track record result at every position he has held during his 26-year career at Agilent. I know he has the knowledge, leadership skills and customer focus that will be key to Agilent's success moving forward. I look forward to all of you seeing first-hand what a capable result driven leader we have in Padraig. Padraig would you like to say a few words? Padraig McDonnell: Thank you, Mike. I'm honored to be able to follow you as Agilent's next CEO and I'm grateful for your support throughout my career and during this transition. You have made a significant impact on Agilent, our customers and our team. I'd also like to welcome Angelica Riemann to this call. After leading our services division for the last 2.5 years, I can tell you she has the experience and the skill set to continue evolving ACG to align with the growing opportunities that the business has demonstrated in supporting the broad installed base and our enterprise customers. Expect to see continued great things ahead from Angelica and ACG. I've had the pleasure of meeting some of you on this call and I look forward to meeting and working with you all in the future. Agilent has a compelling story to tell and I'm excited by the possibilities that lie in front of us as we help our customers bring great signs to life. Mike McMullen: Thanks, Padraig. For today's call, I will take lead, covering the overview of our financial results, while next quarter, Padraig will take on these duties as the new CEO. Now, on to the Q1 results. We are pleased with the start of the year. The Agilent team continues its strong execution in a challenging market environment. The first quarter provided further evidence of our team's capabilities with revenue coming in better than expected at $1.66 billion. This represents a decline of 6.4% against a tough compare of 10% growth in Q1 of last year. The better-than-expected top line results and disciplined cost management drove higher-than-expected earnings per share of $1.29 down 6% from Q1 last year. Given the solid Q1 results and our continued view is slow but steady recovery throughout the year, we are maintaining our full year outlook that we shared with you in November. Key to our Q1 performance was the ongoing sequential stabilization we experienced in China and secular growth drivers in applied markets globally. From an end market perspective, our total pharma business is down 12% which was in line with our expectations. This falls 11% increase in the first quarter last year. While declining overall against a very strong Q1 of last year, our applied end markets were more resilient than expected and show sequential growth from the fourth quarter. In these markets, PFAS Solutions and Advanced Materials, including batteries and semiconductors were high bits for us. Geographically, both China and Europe finished Q1 better than expected, while revenue for the Americas was in line with expectations. Looking at performance by business unit, the Life Sciences and Applied Markets Group delivered revenues of $846 million and down 11%. This is against a difficult compare of 10% growth last year. While still too early to call an overall market recovery, results were better than expected. Our diversified portfolio and broad end market coverage helped drive the performance. We continue to experience a conservative environment for capital spending. But are better than expected, Q1 results were driven by consumables which grew mid-single digits, China and a better-than-expected performance in applied markets. During the quarter, we also completed the expansion of our Shanghai manufacturing facility as we continue to take steps to ensure our long-term leadership in China. We also made our first customer shipments for Agilent's newly released LC/MS offerings. Our latest highest sensitivity triple quad, the 6495D enables expanded and enhanced workflows, including for PFAS. This, in addition to Revident, the first of a new generation of LC/Q-TOF systems that combine a new architecture with enhanced instrument intelligence for maximize operation time and productivity. The Agilent CrossLab Group posted revenue of $405 million. This is up 5% with growth across all regions except China. Our contracts business led the way with double-digit growth overall, led by strength in enterprise service contracts. This performance highlights the continued strength and resiliency of our business. Connect rates for both services and consumables continue to improve. This is a result of our focused strategy to deliver end-to-end customer value while also building a larger recurring revenue business. The Diagnostics and Genomics Group delivered revenue of $407 million, down 6% core. Our pathology-related businesses and our NGS QC portfolio grew mid-single digits which was more than offset by declines in NGS chemistries and NASD. NASD declined low double digits as expected. This is because a very tough compare of 22% growth driven by significant volume last year from a single commercial program. We continue to be encouraged with our long-term prospects due to the increasing number of programs across a range of indications many of them target large patient populations. The DGG team continues to innovate and deliver differentiated solutions for our customers. In the quarter, we induced a new ProteoAnalyzer system. The new platform simplifies and improves the efficiency of analyzing complex protein mixtures. And processes that are central to analytical workflows across the pharma, biotech, food analysis and academia sectors. From an overall Agilent perspective, we recently achieved World Economic Forum recognition for operations of Waldbronn, Germany. This site was named a Global Lighthouse for implementing innovation that boost productivity, output and quality. This marks the second Global Lighthouse award for us after seeing the recognition for our Singapore facility two years ago. Agilent is the only life science tools company to be recognized as a Global Lighthouse. Agilent recently achieved a top 5 ranking in the Barron's list of 100 most sustainable companies. In addition, we are included in the Dow Jones Sustainability Index globally and in North America for the ninth year in a row. Looking ahead, we expect the current market environment to persist through the first half, we expect a slow and steady improvement in the second half of the year. We will continue taking actions that will make us stronger and position us well for the future. We will maintain our approach to prioritize investing for growth with a focus on execution and driving productivity. Our better-than-expected Q1 results and my confidence the Agilent team reinforced our view for the full year. Bob will now provide the details on our results as well as our outlook for Q2. After Bob's comments, I will rejoin for some closing remarks. And now, Bob, over to you. Robert McMahon: Thanks, Mike and good afternoon, everyone. In my remarks today, I'll provide some additional details on revenue in the quarter, as well as take you through the income statement and other key financial metrics. I'll then finish up with our second quarter guidance. Q1 revenue was $1.66 billion, a decline of 6.4% core. On a reported basis, currency added 0.9 percentage points, while M&A had a negative impact of 0.1%, resulting in a reported decline of 5.6%. And overall, orders were greater than revenue in Q1 as expected. As Mike mentioned, pharma, our largest end market declined 12%. Within pharma, biopharma declined low single digits but grew low single digits outside China, bolstered by strength in services and consumables. Small molecule was down high teens in the quarter with softness globally. The chemical and advanced materials market was down 4% off a very tough comparison of 14% growth last year. We saw broad resilience in advanced materials with a low single-digit increase year-on-year as well as growth sequentially. Given the extremely tough compare of high 20s growth last year, these are impressive results. As expected, the chemical side saw a decline. The academia and government market was up 2%. The growth in this market reflects the stability of academic funding and lab activity. Our business in the diagnostics and clinical market declined 5%, mid-single-digit growth in pathology was more than offset by continued headwinds in genomics, cell analysis and LC and LC/MS. The environmental and forensics market declined 1% after growing 12% in Q1 of last year. We continue to see new regulations around the world driving PFAS testing. Europe grew mid-single digits, while China and the Americas were down low single digits. Americas faced a difficult compare of low 30s growth last year. The food market declined 3% but was up low single digits, excluding China. On a geographic basis, as Mike mentioned, both China and Europe exceeded our expectations while the Americas were in line with our expectations. China was down 9% and showed a sequential increase over last quarter which was much better than expectations. China benefited from continued stabilization and a bigger-than-expected Lunar New Year impact as some customers pulled forward incremental demand from Q2. We estimate the pull-forward impact to be roughly $15 million or 5% of China's revenue in the quarter. Even adjusting for this impact, China outperformed. Europe was down 4% year-on-year after growing 10% last year and was up mid-single digits sequentially. This was driven by continued strong demand for our ACG services, offset by muted demand in pharma and expected softness in chemicals. In the Americas, revenue was down 8% due to declines in pharma and the softness in NASD and NGS chemistries. Moving down the P&L. First quarter gross margin was 56.0% down 50 basis points from a year ago as productivity and cost savings were offset by lower demand and mix. Our operating margin of 25.8% was down year-over-year as expected. Our ongoing cost savings initiatives are delivering as planned. Below the line, we benefited from greater-than-expected interest income in the quarter, driven by nice work from our treasury team, coupled with very strong cash flow. Our tax rate was 13.5% and we had 294 million diluted shares outstanding. Putting it all together, Q1 earnings per share were $1.29, down 6% from a year ago and ahead of our expectations. Now, let me turn to cash flow and the balance sheet. I continue to be very pleased with our cash flow generation. Operating cash flow was $485 million in the quarter, significantly above last year. In Q1, we invested $90 million in capital expenditures as we continue our planned NASD expansion. And during the quarter, we returned $69 million to shareholders through dividends. Although no shares were repurchased during the quarter, we expect to catch up on our anti-dilutive share repurchasing for the remainder of the year. In Q2, we expect a minimum of $180 million to be repurchased. All in all, we had a good start to the year. And as Mike mentioned, it reinforces our confidence in the full year guide we provided in November. Now, to our guidance for the second quarter. We expect Q2 revenue will be in the range of $1.56 billion to $1.59 billion. This represents a decline of 9.1% to 7.4% on a reported basis and a decline of 8.4% to 6.7% on a core basis against 9% growth last year. Currency and M&A combined are a headwind of 70 basis points. Our Q2 guidance also reflects the $15 million impact of the Q1 pull forward in China I mentioned earlier. Second quarter non-GAAP earnings per share expected to be between $1.17 and $1.20. Before turning back over to Mike, I just want to express my thanks to Mike and to congratulate Padraig. Mike, it has been a real pleasure to work with you. While there have been many ups and downs in the markets these past few years, one thing I knew I could always count on is your steady leadership and strong partnership. And Padraig, congratulations again. I'm really looking forward to working with you. And now, I'll turn things back over to Mike. Mike? Mike McMullen: Thanks, Bob. Today marks my 37th and final earnings call with all of you. Time does truly fly by. I want to first thank you for your support and engagement over the years. I have to say it has been a tremendous honor serving as Agilent's CEO and represent the achievements of the One Agilent team to all of you and the broader investor community. In 2015, we launched the then new Agilent with a goal to transform Agilent into a leading life science and diagnostics company. We had ambitious goals to drive long-term shareholder value creation with significantly stepped up financial results delivered by an unmatched One Agilent team working together in a truly differentiated and compelling company culture. I couldn't be proud of the Agilent team and what we've accomplished together over the last 9 years. While current market conditions remain challenging, the long-term promise of growth remains with end markets power buying investments to improve the human condition. On the Agilent front, we've never been in a stronger position to continue to capitalize on opportunities to serve our customers within the market and deliver differentiated financial results. It's been a pleasure to work with all of you over the years. I will miss it. While at the same time, I know that you will enjoy working with Padraig in the years ahead. Like me, I know you'll be impressed with Padraig's knowledge of our industry and our business. As I noted earlier, he knows how to develop compelling business strategies, build winning teams and deliver exceptional results. His track record of success during his Agilent leadership journey speaks for itself and have no doubt, it will continue in his new role. While this is my last earnings call with you, I'm certain that the best is yet to come for Agilent. Thank you. And now over to you, Parmeet for the Q&A. Parmeet Ahuja: Thanks, Mike. Regina, if you could please provide instructions for Q&A now. Operator: [Operator Instructions] Our first question comes from the line of Derik De Bruin with Bank of America. Derik De Bruin: Congratulations, Mike. And good luck. So first question, we've been getting a lot of incomings on the NASD business. And just because the growth trajectory is not doing what I think what people had thought it was going to do this year. I assume there's a couple of questions. It's like, look, there's been some pushouts in some clinical readouts from Alnylam with their HELIOS-B trial, there's been some other sort of like developments in the market. I guess the question is like, are you still confident that, that segment can grow this year, NASD can grow this year? And I just -- is there any risk at all that there's like an overcapacity situation because as the market -- is it just taking longer for things to catch up? Just sort of your thoughts on that, please? Mike McMullen: I'll tag team with Bob on this. So as you saw in our prepared remarks, Q1 came in as expected for the NASD business. And we are in a situation where we've had, I think, the broadest number of clinical programs and such. So we're very active. The volume is less commercial this year as we pointed out in the script as well versus clinical. And Bob, I know we've been talking a lot with the team about the outlook for the year, particularly with some of our customers who are resequencing some of the clinical programs into '25. Robert McMahon: Yes. Derik. And as you're talking about, we remain very optimistic about the future of NASD, our forecast for Train C and D remains intact in terms of building out the expansion. I would say that as we're talking about things, you mentioned one of the clinical trials. That's an important element of one of our customers. We are seeing some potential pushouts into FY '25. And as they are looking at revisiting the clinical trial programs and time lines and it's probably closer to flat this year based on that, although we're not giving up hope but that's built into kind of keeping our guide the way it is. But I think if you look at the number of commercial programs -- or excuse me, clinical programs that we have, we're very excited about the future. Mike McMullen: And Bob, I think it's also fair to say that this is not a byproduct of overcapacity in the industry or a significant change in in-sourcing. It's really how some of our customers are reacting to really the IRAC. Robert McMahon: That's right. Derik De Bruin: Well, that takes me -- that's a great segue into my next question which is what's sort of the latest on pharma? It doesn't sound like you're ready to call an inflection point but it does sound like things sounded a little bit better. Can you just sort of give your thoughts on what budget releases are sort of timing around that? Any sort of like notable developments? I mean, when do you -- are you seeing any sort of like signs of life that -- or the signs of budgets could start to be released in the second quarter? Mike McMullen: Yes. Great question, Derik. Obviously, top of mind, within Agilent, as we mentioned, Q1 came in where we thought it would. But what's the outlook? And Padraig, I know you've just spending a lot of time with your team and customers talking about this exact question. Padraig McDonnell: Yes. Thanks, Mike. And I think customers continue to be cautious globally. I think as we're stable -- what we're seeing a stability but no material improvement versus what we saw in the last half of last year. And in terms of the capital budget cycle in '24, this is the time we see it. It's pretty early in that cycle. But we've heard move in both directions, positive and negative but fewer customers expecting negative budgets. So we're watching and seeing how that goes. Mike McMullen: Yes. I think what you shared with me earlier, Padraig, was the tone was more negative at this time last year. It's still not super positive yet and still a lot of caution but we're not seeing anything to cause us to change our outlook for the year. I think Bob -- thank you very much. I think, Bob, you had one. Robert McMahon: Yes, I was just going to say one of the things that we see is very strong performance in our services and our consumables business in the pharma sector which actually speaks to lab activity. And so while we've seen a depressed capital cycle here and we're optimistic about that turning around in the second half of the year. Operator: Our next question will come from the line of Matt Sykes with Goldman Sachs. Matt Sykes: Maybe just to start out, maybe bigger picture in China. It sounded like you made some comments about sequential improvement. It sounds like it's informing some of your confidence for back half. What are the risks that China just simply doesn't get worse and just kind of bounce along the bottom. And what kind of catalysts are you looking for in China for the back half for some level of improvement? I know it's not necessarily baked in your guide but you did make some comments about some sort of nascent optimism there potentially? Mike McMullen: Yes, sure. Thanks for the question, Matt. And as we had a really, I think, a nice print to start off the year. A big part of that was the performance in China. Yes, we had a bit of a pull-in from Q2 from Lunar New Year but the business overall was better than expected. And to answer your question, we now have several quarters real orders, real revenue and the sequential growth, the numbers are real. So we're not seeing anything on the macro world that would also dramatically change what has continued to be a very challenging economic market in China. So what gives us confidence is the fact that we've had a number of quarters now, our predictability in the business. The numbers are coming in slightly better than we had anticipated. But again, I think it's more just the fact that there's ongoing run rate of business that gives us confidence on the outlook. And Bob, I know that you want to jump in on this one Padraig? Padraig McDonnell: Yes. And I think if, Matt, as you just mentioned, we aren't assuming any inflection in our guide. That's been consistent. Actually, Q1 ended up being a little better than we anticipated. We kind of putting that money in the bank, so to speak. And if you look at it, we'll have now quarters of numbers that are relatively stable which is a very positive sign. And I think when we look at our funnel, it's also stable as well as the order funnel -- order forecast is what Mike just talked about as well. Matt Sykes: And then maybe just on ACG which had a good quarter. You talked about the contract revenue and specifically enterprise services. With that growth, maybe could you just help kind of size that contract business within ACG? And then maybe talk about what is driving that growth? And what kind of contribution can that make to the ACG segment over the course of this year? Mike McMullen: Matt, thanks for your support of the ACG business over the years. And I want to use this opportunity to introduce our new ACG Group President. But first, I'd like to maybe have a two-part response probably and Bob, I think it's roughly about 65% just to make sure. So roughly about 65% of our total services business is in the contracts arena. And Angelica, maybe you could share your thoughts on really what's been driving the growth we're seeing in that contract business. Angelica Riemann: Yes. Thanks, Mike. As you mentioned, it's about 65% of the total business. And a part of that demand has really been driven by the lab-wide enterprise services offerings, where we're able to help customers as they're navigating their own economic situation really helping them optimize their entire lab operation. And our portfolio offerings in this stage have allowed us to really facilitate that improvement in lab operations, lab efficiency and that's particularly important to those enterprise customers. Mike McMullen: And in times of tough economic times, the market times, the productivity help and driving productivity in the labs as a well-received offering we have. Robert McMahon: Matt, just one other quick thing on that. One of the great things that Angelica and team have been doing and you heard us talk about this a lot is about the increasing of the attach rate and that continues to grow at roughly 1 point again year-on-year this year. And that kind of locks in that resiliency of that stability in that business. And if you think about a 2/3 of that business growing double digits, it really helped power the business and when we see the inevitable turnaround of the instrument business, that will be a nice tailwind as well. Mike McMullen: So, absolutely, Bob. Operator: Your next question comes from the line of Brandon Couillard with Jefferies. Brandon Couillard: So the chemical and advanced materials business, we actually performed a little better than we were expecting. Obviously, you're still seeing some headwinds in the chemical side. Just give us your state of the union there, what you're seeing from a macro's perspective and kind of outlook for that business moving into the second half look like? Mike McMullen: Yes. So I'll do a tag team on this with Padraig. So as you may recall, we've talked earlier this year about these secular growth drivers in the applied markets. And we saw that pretty much across the globe. And I think what we're seeing again is the investments being made in advanced materials relative to the semiconductor supply chain and also the fab is driving productivity. We're seeing continued investment relative to battery, battery development, QA/QC. And I think we continue to see some real nice growth in the PFAS side of our environmental business. Started in the U.S., I think all those applied market secular drivers that we've been pointing to for, for some time, delivered in Q1. And I think our outlook remains the same that we're expecting there'll be a source of positivity for us in the overall CAM [ph] market space, albeit the chemical market is expected to remain subdued. Padraig McDonnell: Yes. That's right, Mike. I think it's really a tale of two submarkets. We saw broad resilience in the advanced materials with sequential growth. And given the extremely tough compare and high 20s we had last year, it was truly a very impressive result from the teams. The chemical and energy side was -- we saw a decline but on a very tough compare of 10% but we did see a sequential improvement versus Q4 '23. Overall, I think our portfolio is extremely strong in this area. We have ability to cross and upsell across that. And of course, our strong services offerings have that value proposition. Brandon Couillard: And then, Bob, in terms of the guide for the year, I mean, you're sticking with the organic growth range for the year, you beat the first quarter. This China pull forward, then explain all of the upside in the first quarter what the NASD outlook is lower, what other moving parts by end market or geography kind of gets you to the same midpoint? Robert McMahon: Yes. That's a great question, Brandon. And you talked about a couple of them. We feel really good about where we started the year. It's still at the beginning of the year, though, so we're kind of banking some of that. What I would say is if you looked across the moving pieces, with the NASD being slightly lower, that would be offset by a little better results in the LSAG side of the business. And really, that chemical and advanced materials and academia are two areas that are probably slightly better than what we had forecasted. But overall, we're maintaining the guide and as we are looking here felt good about really at the start to the year. Operator: Your next question comes from the line of Puneet Souda with Leerink Partners. Puneet Souda: So my first question is really around maybe, I think Bob, you talked a little bit about the book-to-bill orders growing faster than revenue. But maybe could you elaborate a bit on more on the instrumentation side, what you're seeing and what you're seeing with the respect to book-to-bill in China? And a quick question, a clarifying question on the 2Q guide. It does look a slight step down versus Q1. And I just want to make sure beyond the Lunar New Year? What else are you baking in there? Robert McMahon: Yes. I'll take that. There are a lot of questions in that one question. But so true to form, Puneet and one of the things -- I'll start with the last one. I mean, we typically do have seasonality. There is that $15 million that gets pushed from one quarter to another; that's strictly timing in China because of the Lunar New Year. But Q2 is typically a lower revenue number. So we're building in that normal seasonality. In terms of book-to-bill in China, actually book-to-bill was greater than 1 in China; so continued stabilization. And in terms of book-to-bill for our instruments, it was below 1, are kind of expected. Now some of that was a result of the China pull forward where the orders came in and we were expecting that revenue to be shipped in Q2; so there's some element of timing there. But all in all, a positive start to the year. Mike McMullen: Bob, if I cover headline on that, too, I'd just say that Q2 seasonality is as normal and the Q1 book-to-bill results are as our normal pattern. So again, we've been talking a lot about normalization of business flow. And I think we're seeing it in terms of the seasonal patterns and book-to-revenue situations. Puneet Souda: And then just a high-level question, or a simple question. Could you maybe elaborate a bit on the pharma side, where you're seeing more traction, more growth? Is it the large pharma, small biotechs, CROs, CDMOs. Maybe just talk a little bit about that. Robert McMahon: Yes, I'll take that, Puneet. If we look at across our business, the relative strength was actually in our biopharma. So a large molecule. And our business is skewed to the larger midsize and large cap companies. The standout has been the ACG business and our consumables on that. So it actually speaks to activity in the labs. We are starting to see -- I don't want to call it a trend but certainly a stabilization on the emerging biotech side of it. The instruments were still down but that is where we're starting to see the relative strength in the pharma business. And that speaks to kind of the long-term growth drivers, I think, in that market. And I would expect that to continue throughout the course of the year as our business gets stronger and the markets get stronger. And quite honestly, we have more favorable comps. Mike McMullen: Bob, I think I recall correctly, outside of China, our biopharma business actually grew in the quarter. Robert McMahon: That's right. Operator: Your next question comes from the line of Rachel Vatnsdal with JPMorgan. Rachel Vatnsdal: So first up, I just want to follow up there on a comments around book-to-bill. So you mentioned the book-to-bill for instrumentation was below 1 for the quarter and some of that was really timing related. So I guess, can you just break that down for us a little bit further. What trends are you seeing in liquid chromatography versus mass spectro for example? And then is there any dynamics or trends to call out from geography on the instrumentation business as well? Mike McMullen: I don't think there's any new trends here. I think without going into the details of our product line, the small molecule side has really been in an area where we've talked about the year-on-year challenges there from the LC side. But Phil, I don't know if you want to jump in with any thoughts here but I don't think there's any real outstanding new trends here with perhaps the better-than-expected trends we saw in applied markets, particularly on advanced materials but maybe you have something else you want to add? Phil Binns: Yes, sure, Mike. I think that's pretty much the case similar to Q1 around how the markets are performing. We're seeing some bright spots around some of the secular areas in the applied markets, in the instrumentation which is driving the business forward but just support your comments there. Robert McMahon: Rachel, just one other thing to build on what Mike and Phil were just talking about. When we look at our LSAG business, it was down 11% which was better than what we expected. The piece that's really been driving that down is the pharma market which is what we've been expecting. If we looked at the rest of the markets, they were much better than the down 11% with the exception of the diagnostics and clinical which is a small number. Mike McMullen: Right. And to your question, Rachel, that dynamic in the pharma really speaks to pressure on the LC business. Rachel Vatnsdal: And then I just wanted to ask about monthly trends. Some of your peers have talked about how spending a bit, a little bit slow out of the gate in January and then into early February. So I guess, since you guys have a few more weeks of visibility here. Can you walk us through where you seeing similar trends on just slower spending to start the year? And has any of that started to come back? Any color there as we enter fiscal 2Q would be helpful. Mike McMullen: Well, I've been in this business for a while and it's always slow in January. And that's why we have the seasonality we talked about relative to Q2. So I don't think we're seeing any significantly different trends that we've seen historically. Padraig, I know that you're closer than I am but [indiscernible]. Padraig McDonnell: Yes. No, I think that's right, Mike. I think on the ACG side, we see a number of service -- our service contract business comes in strong under the ACG side but on the capital side, we're not seeing much. Robert McMahon: Yes. And Bill, just a final -- put a finer point on that, January came in as we expected. Operator: Our next question will come from the line of Vijay Kumar with Evercore ISI. Unidentified Analyst: This is Jordan [ph] on for Vijay. Maybe one follow-up on the China side. Have you seen any hints of stimulus to start the year? And if we do see a stimulus, do you have any foresight to what implications that will have on Agilent? Mike McMullen: Both Padraig and I are in the conference and we're shaking our head, no. We've not heard anything about any potential stimulus. And what I can tell you is if it does happen, it's upside to our outlook. Unidentified Analyst: Understood. And then maybe one more for me. Can you talk about how pricing has trended in the quarter? And any updates to your expectations for the remainder of the year? Mike McMullen: Bob, do you want to take that one? Robert McMahon: Yes. We were pleased with the results. It was between 1% and 2%. So but in line with kind of the seasonality and the mix that we saw, we would expect to see in Q1. So right now, it's on track. As we've talked about, our consumables business and ACG business have the greatest price realization followed by generally speaking, actually, we had a very good result in diagnostics and genomics in the quarter. And then we did see some mix but not anything out of the ordinary instrumentation side. So all in, we're on track for what we expected for the full year. Operator: Your next question comes from the line of Patrick Donnelly with Citi. Patrick Donnelly: Bob, maybe one for you first. Just in terms of the EPS guide. It looks like you guys got an additional $20 million on the kind of net interest other income. Can you just kind of flag if that's rolling through, did that core earnings number move a little lower? Is any moving pieces there? And then secondarily, just on the margin piece, you guys have that cost savings plan. Can you just talk about how that paces as the year goes, would be helpful. Robert McMahon: Yes. Thanks, Patrick. Great question. And what I would say is a couple of things. We are on track to have more interest income than what we anticipated at the beginning of the year that $20 million and some of that in the first quarter as well and that's really a result of actually having better-than-expected cash flow in the first quarter and great work by the treasury team. I would say that the savings -- we're on track for the savings targets for the full year. And as I think about the year, it's still very early in the year and this provides us what I would say is more confidence in the guide. Patrick Donnelly: And then, maybe just on kind of the book-to-bill. How are you guys thinking about -- I think last quarter, you said the book-to-bill for the year would be above 1 but you'd have quarters kind of in and out on the instrument side which obviously we're seeing this quarter. How are you thinking about just the order trends and the book-to-bill trends on the instrument side as we work our way through the year given what you're seeing today? Robert McMahon: Yes, no change to what we said back in November. Q1 is a proof point for what we said. Operator: Your next question comes from the line of Dan Brennan with TD Cowen. Daniel Brennan: Maybe just going to beat the dead horse but just for the instruments, did you guys say -- I know in the Q, you usually put out what the instrument number actually was. So what did actually instruments do in the quarter? And then given how much easier comps go as we get through the year? Can you just kind of give us a sense of pacing like what should we expect on Q2 in instruments and then we can kind of have at the back half of the year? Mike McMullen: I know the team did a calculation on that because LSAG was down 11% but that includes our consumables business which was up. Robert McMahon: Yes, I would say we typically don't give all that information but it was down -- we were down 11%. It was down, puts 20%, in the quarter but that was better than expected, offset by 6% growth in our consumables business. If we look at the LSAG thinking for Q2, it's down low teens. So -- and a lot of that has to do with some of the timing associated with that $15 million shift. That's almost all capital equipment from Q1 -- from Q2 back into Q1. So if you look at it, it is in line with where we expect it to be. Mike McMullen: And then, we go into more favorable compares in Q3 and Q4. Robert McMahon: Correct, correct. Daniel Brennan: Got it. Okay. And then I know there's been a handful of questions running on China. But can you just -- would you mind spending a bit more color on kind of what maybe by segment, pharma, applied? Any color you can give us kind of what you're seeing within the different businesses in China? And is down mid-single still the expectation for China for the full year? Or is there a chance you can kind of see some upside for that number. Mike McMullen: I think we've have raised it up a bit. It's still down... Robert McMahon: Yes, yes. I think we're cautiously optimistic there. I'd say it's still within a range that we had before, so I don't want to call an inflection. But if you looked at the markets we were down that 9% was roughly down 20%-ish [ph] in pharma. So that continues to be the area of really around the globe but China is no different. The great thing is many of the other markets performed much better. So even when you think about like academia and government, that grew, so did our chem and advanced material business now grew very low single digits. And then our forensics in environmental was down low single digits. So you're actually starting to see the continued stabilization and then you'll get into very much easier compares in the back half of the year in China because that down 22% was down compared to up 12% last year. We had another strong compare in Q2 and then we actually started seeing the pretty significant declines year-on-year. And so there's reasons to be optimistic about that continued stabilization that Mike talked about but we're not ready yet to call an inflection. But when it happens, we'll take it. Mike McMullen: And Padraig, I know you want to jump in this as well. Padraig McDonnell: Yes. And I think what we see is as also consumables and services continue to outperform expectations in China, so that's kind of we expect that to continue. Mike McMullen: Yes, I think the story is a great. I think the story really was in pharma, Q1, the instrument and the CapEx side of things. But we're pleased with the start there. Operator: Your next question comes from the line of Catherine Schulte with Baird. Catherine Schulte: Maybe first, when pharma was down 12% in the quarter. I think you said biopharma was up 2% ex China. What was small molecule performance ex China. And maybe the outlook for biopharma versus a small molecule for the rest of the year? Robert McMahon: So small molecule on a global basis was down roughly 18%. And it was ex China, it was down 20% and down roughly 14% for China. So pretty consistent across the globe. I would say, in China, the big area in China that has been impacted is on the small molecule side, where we'll start to see better comps going forward after Q2. Catherine Schulte: Okay. And then maybe on consumables, it's great to see a return to growth there this quarter. Can you talk through what you saw outside of China on the consumables side? Robert McMahon: Our consumables business was pretty consistent across the globe in terms of growth. Mike McMullen: So I don't know if you have anything you want to add to that on the -- or we've seen the consumables, I think we're really pleased to see that because it really speaks to the lab activity being robust. So anything else you want to jump in on with? Phil Binns: Yes. Probably just one item there, Mike. I think we are seeing really good traction around our workflow development. So end-to-end solutions which obviously is also drives our services business as well. But around the consumables, the -- in most of our end markets, we've been pretty heavily focused on developing workflows and making our customers' lives easier and more integrated in our labs and that's showing some really good traction and that's reflected in solid connected attach rates in the consumable space. Mike McMullen: Thanks, Phil. I'm really glad you close with the comments about connect rates. We talked about that relative to our services business, we're also seeing a very strong positive trend on consumables as well which bodes well to our future in terms of recurring revenue business growth. Operator: Your next question comes from the line of Jack Meehan with Nephron Research. Jack Meehan: Just had a couple of follow-ups. The first one was, could you just talk about what you're seeing in the genomics business within DGG. I know it's still been a bit of a drag. Just when do you think that's going to start to turn? Mike McMullen: I think I'll invite Bob in on this one but I think it's been sort of a tale of two cities. When we talk about our genomics business, there's really two pieces to it. The half of it's in QA/QC activities for NGS workflows and we're seeing really solid growth in the consumables on that side of things as well as you're starting to see signs of life on the CapEx, not the current because the call churn there yet but that's in a reasonably good shape. I think we've seen really in our U.S.-based genomics business, some really market challenges have been hitting us. And Bob, maybe you can elaborate on that? Robert McMahon: That's right. Thanks, Mike. And as you said, our NGS QC portfolio from an instrument and consumable side actually grew mid-single digits in the quarter which was very nice. The genomics chemistry side that we referenced in the prepared remarks was down. We faced some very difficult comps. We had a couple of companies that reorganized and exited some businesses. They had some lifetime buys at the end of Q1. I would expect that the performance of that to improve starting in the second half of the year. Jack Meehan: Great. And I also wanted to ask about the academic end market. I know that's been very stable for you guys. But just what you're seeing in the U.S. here with the continuing resolution for the NIH, just thoughts on the durability moving forward. Mike McMullen: Yes, Jack, thanks for noticing that. That was a real bright spot for us. We actually grew, I think, 2% in the quarter. And this is -- we've been working on this thing for some time to really build out our portfolio and really change our market position in academia research and I think it's starting to show up in the numbers. I think stabilization really is what we're seeing which is the funding is there. And NIH is a relatively really small part of Agilent's business, so really is immaterial. But we're seeing universities have increasingly been funded through private sector. So the money is there. And even so, we saw money in China as well. So it was really a nice global story for us and we're fairly optimistic that, that kind of stabilization can be there for us for the rest of the year. Operator: Your next question will come from the line of Doug Schenkel with Wolfe Research. Doug Schenkel: I want to ask a question on guidance and then a question on capital deployment. Mike McMullen: Surely, absolutely. Go ahead, Doug. Doug Schenkel: So for the year, on one hand, around 48% of sales is in the first half, at least that's how you've guided, I believe. Yes, that's lower than last year but it's not outside the norm for the last several years. On the other hand, just given some math, your guidance for the first half embeds the assumption that revenue declines around 7% organically and then improves 7% to 9% positive organic in the second half. Can you could do that just as a function of the comps? Or do you actually really need to see improvement in certain geographies or certain end markets or categories? And then again, just a math question. Does guidance assume Q4 revenue kind of exiting around like $1.8 billion? Robert McMahon: Doug, this is Bob. I'll take that last one. We'll tell you when we get to Q4 and what I would say but your math is -- in all seriousness, your math is spot on as usual. I think one of the things that we look at is, we look at it a couple of different ways. I think the way to look at it is that first half, second half kind of looking at seasonality, that's probably more instructive given kind of the changes in the growth rates. And when you look at it, as you noticed -- as you mentioned, it is in line with our historical seasonality. And when you look at the growth rates, you're right, we are expecting growth in the back half of the year. A lot of that is, in fact, the easier the compares. And when we actually look at -- what I would ask you to take a look at also is a 2-year stack basis relative to implied Q1 and first half and second half. And what you would see there is a much more smooth number that we also looked at as well. So as usual, you're spot on there. Mike McMullen: And Bob, I think that's why we really emphasized in the script, the word stabilization because as things, as we have kind of a stabilization, we're going to get a lift in the growth rate just by the comps as they go. Doug Schenkel: Yes, I know there's a lot of focus on how much improvement is necessary to get there. So if a lot of this is stability is just math that I think obviously makes people more comfortable. I know I've taken up a lot of air time already. Real quick. Capital deployment, the cash flow remains robust. The balance sheet is super clean. Can you just talk about your thinking right now on capital deployment and what the environment looks like right now? Mike McMullen: Yes. I think we remain very interested in deploying capital in a balanced way which is inclusive of investing for in the business. And that speaks directly to we are interested in M&A. It's our build and buy growth strategy. I just have to say that the funnel pipeline is more robust than I've seen in a number of years and nothing to obviously announce but we're very much engaged. Operator: Your next question comes from the line of Josh Waldman with Cleveland Research. Josh Waldman: Yes. Just a couple on my end and maybe Bob, starting with you first, a follow-up on the guide. Can you comment a bit more on how Q2 guide moved versus the framework and the initial outlook? I assume core outlook came down a bit but just wanted to confirm the moving pieces there. And then, does the core guide reflect any changes in Q3 or Q4? Or is it really just reflecting an update on H1? Robert McMahon: Yes, that's a good question. It's a little of both, Josh. So Q2 is relatively intact for what we had originally thought with the exception of that small movement of the China business, that's roughly a point of core growth from Q1 and Q2 switching. What I would say is Q1 also had a beat into it and what we're taking is some of that out of the second half of the year. And so the takeaway is Q2 is spot on from where we expected it to be, absent that kind of shifting the timing shift of China and then the Q2 or the rest of Q1 kind of the beat really helps us in the second half of the year. Josh Waldman: And then, Mike, can you talk about how visibility in the business as you've covered the last three months? Has there been any improvement in the ability of the funnel to predict near-term sales or still seeing an elongation of kind of opportunity and quoting, flipping to orders. Curious, total company and then also what you're seeing in pharma specifically. Mike McMullen: Yes. No, I'll have Padraig jump in as well. I think the business remains the same. I don't think it's any better or any worse. And so I think it's the normal kind of cadence of business. And that's why, as Bob just mentioned, when we're talking about the second half, we bank some of the beat to put again the second half because we've yet to see the second half materialize in terms of the order book which is typical at this time of the year. Padraig McDonnell: I think that's right, Mike. And I think as far as the quality of orders remains -- that remain in our backlog, nothing has changed. We've not seen any increase in cancellations and ex China the funnel continues to grow and that's led by the aftermarket business. I will say as a continuing theme, the deal closure times remain at an elevated levels but it's definitely stable and deal win rates have been consistent. Mike McMullen: Yes. I think there's been an important point made here, elevated but we're not seeing the elongation. So they're stable but they're longer than they have been in the past. Operator: Your next question comes from the line of Dan Leonard with UBS. Dan Leonard: My first question, just a bit more on China. Are you expecting sequential growth in Q2 in China similar to Q1? Robert McMahon: No, if you looked at the sequential number, it's going to be roughly the same as what we had in Q1. Dan Leonard: And Mike, congrats on your retirement. I was wondering if you could elaborate on timing. I was surprised, others were surprised. I've gotten the question a number of times and we would just love to hear your thoughts. Mike McMullen: Yes. Thanks for that. So while it's maybe a surprise to many on the call and it was a surprise when I shared the news across the company because the Agilent team just knows how much I love working for this company and work with them. And it really was a hard-wall, really difficult decision for me but not been contemplating this for a while. And I pulled the Board into the discussion sort of communicating with them because we really wanted to make sure that they had enough time to really run a thorough and thoughtful selection process in which they were able to do. And in my mind, they came out with the best possible choice in selecting Padraig. But yes but this is something that I've been contemplating for a while and then try to engage in the Board about my timing and then I really want to make sure they had enough time to really pick the right successor and that's what they did. Dan Leonard: You always seem to be having a lot of fun. So congrats again it's been good. Mike McMullen: Thank you. It's going to be hard to step away. But I have to say, the [indiscernible] family was just too strong. We have a 6-month old -- 18-month old grandson and he will soon have a brother and sister so there's a lot going on, on the family side. And there's only one way I could make more time. So again, it's been a real pleasure to work with all of you on the call. Operator: Your next question comes from the line of Luke Sergott with Barclays. Luke Sergott: I just want to talk about the margins on the quarter and kind of the step down in DGG and LSAG and I assume, obviously, it's probably driven by the volume declines there on the instrument side. But how do you guys view the recovery in the margins between DGG and LSAG throughout the year to hit your guide? Robert McMahon: Luke, this is Bob. Just real quick. You're right. If I look at DGG, it actually was improvement year-over-year but it was down and it was really a result of that margin or the volume. I would say also there was an element of mix in LSAG and I would expect that to continue to improve. The cost actions that we took weren't fully actualized all and as expected in Q1. So we'll have the full impact of those as well in Q2 throughout. So I would expect an improvement over the course of the year as volumes grow up in both LSAG and DGG. Luke Sergott: And then, just a follow-up here from the 2Q guide. Can you just help frame what you guys are embedded there by the different segments? Robert McMahon: Yes, if I look at Q2 guide, we're still expecting, if I looked at the end market pharma down double-digits academia and government down low single digits really as a result of some of that timing shift, diagnostics and clinical down mid-singles and chemical and advanced materials, down high single digits and food about the same. Both of those are, as a result of some of the shift also in the China business from Q2 back into Q1 and then environmental and forensics kind of mid-single-digit decline. Operator: Our final question will come from the line of Paul Knight with KeyBanc. Paul Knight: Mike, really super to see you love doing what you're doing and I knew you, I don't know, 15 years before you became CEO. So I guess, concluding question I would have, at least professionally, would be what do you see in terms of two things. Number one, why do you think the kind of market growth rate is for the markets that Agilent participates in? And then geographically, where do you see the surprise over the next 5 years? Like will Japan reinvigorate its growth? Will Europe see more in-sourcing? I would love to have your perspective on those things. Mike McMullen: Thanks, Paul. Yes, we do go way back to don't we and it's been great to work with you over those years, going way back to the CAG days in my prior role, I think we think this is a 4% to 6% kind of growth market, mid-singles. So we think that the kind of market growth that we're not experienced in the industry right now is the anomalies and this will be back to that 4% to 6% kind of long-term growth rate. Obviously, certain segments within that overall macro number, that big TAM will be growing faster than that and that's always a challenge to make sure that you pick those segments so you can actually beat that number. I think there's going to be some geographic mix. I mean, we've evolved our view of long-term growth into China because we actually expect some of the supply chain moves and other things that have been going on that you'll see a growth, more growth in Europe which has been more of a slower grower for us geographically. But we've been -- continue to be surprised how well we do. Our team does in Europe. I think you're going to expect to see Japan rejuvenate it, particularly, I think you can make the case of the semi industry which is going to return to some strength in Japan. But that's the beauty of this business is just the diversified nature of both the end markets and geographies. So that would be my last -- I guess, my final projection of long-term growth for the market in this role. But thanks, Paul. I appreciate the comments and looking forward to staying in touch. Operator: I will now turn the call back over to Parmeet Ahuja for closing remarks. Parmeet Ahuja: Thank you, Regina and thanks everyone for being on the call today. With that, we'd like to close the call. Have a good day, everyone. Operator: Ladies and gentlemen, this concludes today's call. Thank you all for joining.	[ { "speaker": "Operator", "text": "Ladies and gentlemen, welcome to the Agilent Technologies Q1 2024 Earnings Call. My name is Regina and I will be coordinating your call today. [Operator Instructions] I will now hand you over to your host, Parmeet Ahuja, to begin. Please go ahead." }, { "speaker": "Parmeet Ahuja", "text": "Thank you, Regina and welcome, everyone, to Agilent's conference call for the first quarter of fiscal year 2024. With me are Mike McMullen, Agilent's President and CEO; Padraig McDonnell, Agilent Chief Operating Officer and CEO-elect; and Bob McMahon, Agilent's Senior Vice President and CFO and acting President of the Diagnostics and Genomics Group. Joining in the Q&A will be Phil Binns, President of the Agilent Life Science and Applied Markets Group; and Angelica Riemann, our newly named President of the Agilent CrossLab Group. This presentation is being webcast live. The news release for our first quarter financial results, investor presentation and information to supplement today's discussion along with the recording of this webcast are available on our website at www.investor.agilent.com. Today's comments will refer to non-GAAP financial measures. You will find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted exchange rates. As previously announced, beginning in the first quarter of fiscal 2024, we implemented certain changes to our segment reporting structure related to the move of our cell analysis business from LSAG into DGG. We have recast our historical segment information to reflect these changes. These changes have no impact on our company's consolidated financial statements. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company's recent SEC filings for a more complete picture of our risks and other factors. And now, I'd like to turn the call over to Mike." }, { "speaker": "Mike McMullen", "text": "Thanks, Parmeet and thanks, everyone, for joining our call. Before I review our first quarter results, I want to first acknowledge our news last week that I will be retiring at the end of the fiscal year and that Padraig McDonnell is Agilent's new Chief Operating Officer and will become CEO on May 1. It was a difficult decision to retire after almost 40 great years with this special company and in the role that I love, I will miss working with the One Agilent team. However, I must say it's a great feeling and quite gratifying to be handing over the CEO reins to a tremendously capable successor in Padraig. With Agilent operating from a position of strength and with a very promising long-term outlook. I have known Padraig for more than 20 years. I've worked closely with him during that time. He has always been completely committed to our customers and Agilent's success. He is a product of our culture, knows our company, team and markets and those have developed compelling business strategies, build winning teams and deliver exceptional results. Padraig has a strong track record result at every position he has held during his 26-year career at Agilent. I know he has the knowledge, leadership skills and customer focus that will be key to Agilent's success moving forward. I look forward to all of you seeing first-hand what a capable result driven leader we have in Padraig. Padraig would you like to say a few words?" }, { "speaker": "Padraig McDonnell", "text": "Thank you, Mike. I'm honored to be able to follow you as Agilent's next CEO and I'm grateful for your support throughout my career and during this transition. You have made a significant impact on Agilent, our customers and our team. I'd also like to welcome Angelica Riemann to this call. After leading our services division for the last 2.5 years, I can tell you she has the experience and the skill set to continue evolving ACG to align with the growing opportunities that the business has demonstrated in supporting the broad installed base and our enterprise customers. Expect to see continued great things ahead from Angelica and ACG. I've had the pleasure of meeting some of you on this call and I look forward to meeting and working with you all in the future. Agilent has a compelling story to tell and I'm excited by the possibilities that lie in front of us as we help our customers bring great signs to life." }, { "speaker": "Mike McMullen", "text": "Thanks, Padraig. For today's call, I will take lead, covering the overview of our financial results, while next quarter, Padraig will take on these duties as the new CEO. Now, on to the Q1 results. We are pleased with the start of the year. The Agilent team continues its strong execution in a challenging market environment. The first quarter provided further evidence of our team's capabilities with revenue coming in better than expected at $1.66 billion. This represents a decline of 6.4% against a tough compare of 10% growth in Q1 of last year. The better-than-expected top line results and disciplined cost management drove higher-than-expected earnings per share of $1.29 down 6% from Q1 last year. Given the solid Q1 results and our continued view is slow but steady recovery throughout the year, we are maintaining our full year outlook that we shared with you in November. Key to our Q1 performance was the ongoing sequential stabilization we experienced in China and secular growth drivers in applied markets globally. From an end market perspective, our total pharma business is down 12% which was in line with our expectations. This falls 11% increase in the first quarter last year. While declining overall against a very strong Q1 of last year, our applied end markets were more resilient than expected and show sequential growth from the fourth quarter. In these markets, PFAS Solutions and Advanced Materials, including batteries and semiconductors were high bits for us. Geographically, both China and Europe finished Q1 better than expected, while revenue for the Americas was in line with expectations. Looking at performance by business unit, the Life Sciences and Applied Markets Group delivered revenues of $846 million and down 11%. This is against a difficult compare of 10% growth last year. While still too early to call an overall market recovery, results were better than expected. Our diversified portfolio and broad end market coverage helped drive the performance. We continue to experience a conservative environment for capital spending. But are better than expected, Q1 results were driven by consumables which grew mid-single digits, China and a better-than-expected performance in applied markets. During the quarter, we also completed the expansion of our Shanghai manufacturing facility as we continue to take steps to ensure our long-term leadership in China. We also made our first customer shipments for Agilent's newly released LC/MS offerings. Our latest highest sensitivity triple quad, the 6495D enables expanded and enhanced workflows, including for PFAS. This, in addition to Revident, the first of a new generation of LC/Q-TOF systems that combine a new architecture with enhanced instrument intelligence for maximize operation time and productivity. The Agilent CrossLab Group posted revenue of $405 million. This is up 5% with growth across all regions except China. Our contracts business led the way with double-digit growth overall, led by strength in enterprise service contracts. This performance highlights the continued strength and resiliency of our business. Connect rates for both services and consumables continue to improve. This is a result of our focused strategy to deliver end-to-end customer value while also building a larger recurring revenue business. The Diagnostics and Genomics Group delivered revenue of $407 million, down 6% core. Our pathology-related businesses and our NGS QC portfolio grew mid-single digits which was more than offset by declines in NGS chemistries and NASD. NASD declined low double digits as expected. This is because a very tough compare of 22% growth driven by significant volume last year from a single commercial program. We continue to be encouraged with our long-term prospects due to the increasing number of programs across a range of indications many of them target large patient populations. The DGG team continues to innovate and deliver differentiated solutions for our customers. In the quarter, we induced a new ProteoAnalyzer system. The new platform simplifies and improves the efficiency of analyzing complex protein mixtures. And processes that are central to analytical workflows across the pharma, biotech, food analysis and academia sectors. From an overall Agilent perspective, we recently achieved World Economic Forum recognition for operations of Waldbronn, Germany. This site was named a Global Lighthouse for implementing innovation that boost productivity, output and quality. This marks the second Global Lighthouse award for us after seeing the recognition for our Singapore facility two years ago. Agilent is the only life science tools company to be recognized as a Global Lighthouse. Agilent recently achieved a top 5 ranking in the Barron's list of 100 most sustainable companies. In addition, we are included in the Dow Jones Sustainability Index globally and in North America for the ninth year in a row. Looking ahead, we expect the current market environment to persist through the first half, we expect a slow and steady improvement in the second half of the year. We will continue taking actions that will make us stronger and position us well for the future. We will maintain our approach to prioritize investing for growth with a focus on execution and driving productivity. Our better-than-expected Q1 results and my confidence the Agilent team reinforced our view for the full year. Bob will now provide the details on our results as well as our outlook for Q2. After Bob's comments, I will rejoin for some closing remarks. And now, Bob, over to you." }, { "speaker": "Robert McMahon", "text": "Thanks, Mike and good afternoon, everyone. In my remarks today, I'll provide some additional details on revenue in the quarter, as well as take you through the income statement and other key financial metrics. I'll then finish up with our second quarter guidance. Q1 revenue was $1.66 billion, a decline of 6.4% core. On a reported basis, currency added 0.9 percentage points, while M&A had a negative impact of 0.1%, resulting in a reported decline of 5.6%. And overall, orders were greater than revenue in Q1 as expected. As Mike mentioned, pharma, our largest end market declined 12%. Within pharma, biopharma declined low single digits but grew low single digits outside China, bolstered by strength in services and consumables. Small molecule was down high teens in the quarter with softness globally. The chemical and advanced materials market was down 4% off a very tough comparison of 14% growth last year. We saw broad resilience in advanced materials with a low single-digit increase year-on-year as well as growth sequentially. Given the extremely tough compare of high 20s growth last year, these are impressive results. As expected, the chemical side saw a decline. The academia and government market was up 2%. The growth in this market reflects the stability of academic funding and lab activity. Our business in the diagnostics and clinical market declined 5%, mid-single-digit growth in pathology was more than offset by continued headwinds in genomics, cell analysis and LC and LC/MS. The environmental and forensics market declined 1% after growing 12% in Q1 of last year. We continue to see new regulations around the world driving PFAS testing. Europe grew mid-single digits, while China and the Americas were down low single digits. Americas faced a difficult compare of low 30s growth last year. The food market declined 3% but was up low single digits, excluding China. On a geographic basis, as Mike mentioned, both China and Europe exceeded our expectations while the Americas were in line with our expectations. China was down 9% and showed a sequential increase over last quarter which was much better than expectations. China benefited from continued stabilization and a bigger-than-expected Lunar New Year impact as some customers pulled forward incremental demand from Q2. We estimate the pull-forward impact to be roughly $15 million or 5% of China's revenue in the quarter. Even adjusting for this impact, China outperformed. Europe was down 4% year-on-year after growing 10% last year and was up mid-single digits sequentially. This was driven by continued strong demand for our ACG services, offset by muted demand in pharma and expected softness in chemicals. In the Americas, revenue was down 8% due to declines in pharma and the softness in NASD and NGS chemistries. Moving down the P&L. First quarter gross margin was 56.0% down 50 basis points from a year ago as productivity and cost savings were offset by lower demand and mix. Our operating margin of 25.8% was down year-over-year as expected. Our ongoing cost savings initiatives are delivering as planned. Below the line, we benefited from greater-than-expected interest income in the quarter, driven by nice work from our treasury team, coupled with very strong cash flow. Our tax rate was 13.5% and we had 294 million diluted shares outstanding. Putting it all together, Q1 earnings per share were $1.29, down 6% from a year ago and ahead of our expectations. Now, let me turn to cash flow and the balance sheet. I continue to be very pleased with our cash flow generation. Operating cash flow was $485 million in the quarter, significantly above last year. In Q1, we invested $90 million in capital expenditures as we continue our planned NASD expansion. And during the quarter, we returned $69 million to shareholders through dividends. Although no shares were repurchased during the quarter, we expect to catch up on our anti-dilutive share repurchasing for the remainder of the year. In Q2, we expect a minimum of $180 million to be repurchased. All in all, we had a good start to the year. And as Mike mentioned, it reinforces our confidence in the full year guide we provided in November. Now, to our guidance for the second quarter. We expect Q2 revenue will be in the range of $1.56 billion to $1.59 billion. This represents a decline of 9.1% to 7.4% on a reported basis and a decline of 8.4% to 6.7% on a core basis against 9% growth last year. Currency and M&A combined are a headwind of 70 basis points. Our Q2 guidance also reflects the $15 million impact of the Q1 pull forward in China I mentioned earlier. Second quarter non-GAAP earnings per share expected to be between $1.17 and $1.20. Before turning back over to Mike, I just want to express my thanks to Mike and to congratulate Padraig. Mike, it has been a real pleasure to work with you. While there have been many ups and downs in the markets these past few years, one thing I knew I could always count on is your steady leadership and strong partnership. And Padraig, congratulations again. I'm really looking forward to working with you. And now, I'll turn things back over to Mike. Mike?" }, { "speaker": "Mike McMullen", "text": "Thanks, Bob. Today marks my 37th and final earnings call with all of you. Time does truly fly by. I want to first thank you for your support and engagement over the years. I have to say it has been a tremendous honor serving as Agilent's CEO and represent the achievements of the One Agilent team to all of you and the broader investor community. In 2015, we launched the then new Agilent with a goal to transform Agilent into a leading life science and diagnostics company. We had ambitious goals to drive long-term shareholder value creation with significantly stepped up financial results delivered by an unmatched One Agilent team working together in a truly differentiated and compelling company culture. I couldn't be proud of the Agilent team and what we've accomplished together over the last 9 years. While current market conditions remain challenging, the long-term promise of growth remains with end markets power buying investments to improve the human condition. On the Agilent front, we've never been in a stronger position to continue to capitalize on opportunities to serve our customers within the market and deliver differentiated financial results. It's been a pleasure to work with all of you over the years. I will miss it. While at the same time, I know that you will enjoy working with Padraig in the years ahead. Like me, I know you'll be impressed with Padraig's knowledge of our industry and our business. As I noted earlier, he knows how to develop compelling business strategies, build winning teams and deliver exceptional results. His track record of success during his Agilent leadership journey speaks for itself and have no doubt, it will continue in his new role. While this is my last earnings call with you, I'm certain that the best is yet to come for Agilent. Thank you. And now over to you, Parmeet for the Q&A." }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Mike. Regina, if you could please provide instructions for Q&A now." }, { "speaker": "Operator", "text": "[Operator Instructions] Our first question comes from the line of Derik De Bruin with Bank of America." }, { "speaker": "Derik De Bruin", "text": "Congratulations, Mike. And good luck. So first question, we've been getting a lot of incomings on the NASD business. And just because the growth trajectory is not doing what I think what people had thought it was going to do this year. I assume there's a couple of questions. It's like, look, there's been some pushouts in some clinical readouts from Alnylam with their HELIOS-B trial, there's been some other sort of like developments in the market. I guess the question is like, are you still confident that, that segment can grow this year, NASD can grow this year? And I just -- is there any risk at all that there's like an overcapacity situation because as the market -- is it just taking longer for things to catch up? Just sort of your thoughts on that, please?" }, { "speaker": "Mike McMullen", "text": "I'll tag team with Bob on this. So as you saw in our prepared remarks, Q1 came in as expected for the NASD business. And we are in a situation where we've had, I think, the broadest number of clinical programs and such. So we're very active. The volume is less commercial this year as we pointed out in the script as well versus clinical. And Bob, I know we've been talking a lot with the team about the outlook for the year, particularly with some of our customers who are resequencing some of the clinical programs into '25." }, { "speaker": "Robert McMahon", "text": "Yes. Derik. And as you're talking about, we remain very optimistic about the future of NASD, our forecast for Train C and D remains intact in terms of building out the expansion. I would say that as we're talking about things, you mentioned one of the clinical trials. That's an important element of one of our customers. We are seeing some potential pushouts into FY '25. And as they are looking at revisiting the clinical trial programs and time lines and it's probably closer to flat this year based on that, although we're not giving up hope but that's built into kind of keeping our guide the way it is. But I think if you look at the number of commercial programs -- or excuse me, clinical programs that we have, we're very excited about the future." }, { "speaker": "Mike McMullen", "text": "And Bob, I think it's also fair to say that this is not a byproduct of overcapacity in the industry or a significant change in in-sourcing. It's really how some of our customers are reacting to really the IRAC." }, { "speaker": "Robert McMahon", "text": "That's right." }, { "speaker": "Derik De Bruin", "text": "Well, that takes me -- that's a great segue into my next question which is what's sort of the latest on pharma? It doesn't sound like you're ready to call an inflection point but it does sound like things sounded a little bit better. Can you just sort of give your thoughts on what budget releases are sort of timing around that? Any sort of like notable developments? I mean, when do you -- are you seeing any sort of like signs of life that -- or the signs of budgets could start to be released in the second quarter?" }, { "speaker": "Mike McMullen", "text": "Yes. Great question, Derik. Obviously, top of mind, within Agilent, as we mentioned, Q1 came in where we thought it would. But what's the outlook? And Padraig, I know you've just spending a lot of time with your team and customers talking about this exact question." }, { "speaker": "Padraig McDonnell", "text": "Yes. Thanks, Mike. And I think customers continue to be cautious globally. I think as we're stable -- what we're seeing a stability but no material improvement versus what we saw in the last half of last year. And in terms of the capital budget cycle in '24, this is the time we see it. It's pretty early in that cycle. But we've heard move in both directions, positive and negative but fewer customers expecting negative budgets. So we're watching and seeing how that goes." }, { "speaker": "Mike McMullen", "text": "Yes. I think what you shared with me earlier, Padraig, was the tone was more negative at this time last year. It's still not super positive yet and still a lot of caution but we're not seeing anything to cause us to change our outlook for the year. I think Bob -- thank you very much. I think, Bob, you had one." }, { "speaker": "Robert McMahon", "text": "Yes, I was just going to say one of the things that we see is very strong performance in our services and our consumables business in the pharma sector which actually speaks to lab activity. And so while we've seen a depressed capital cycle here and we're optimistic about that turning around in the second half of the year." }, { "speaker": "Operator", "text": "Our next question will come from the line of Matt Sykes with Goldman Sachs." }, { "speaker": "Matt Sykes", "text": "Maybe just to start out, maybe bigger picture in China. It sounded like you made some comments about sequential improvement. It sounds like it's informing some of your confidence for back half. What are the risks that China just simply doesn't get worse and just kind of bounce along the bottom. And what kind of catalysts are you looking for in China for the back half for some level of improvement? I know it's not necessarily baked in your guide but you did make some comments about some sort of nascent optimism there potentially?" }, { "speaker": "Mike McMullen", "text": "Yes, sure. Thanks for the question, Matt. And as we had a really, I think, a nice print to start off the year. A big part of that was the performance in China. Yes, we had a bit of a pull-in from Q2 from Lunar New Year but the business overall was better than expected. And to answer your question, we now have several quarters real orders, real revenue and the sequential growth, the numbers are real. So we're not seeing anything on the macro world that would also dramatically change what has continued to be a very challenging economic market in China. So what gives us confidence is the fact that we've had a number of quarters now, our predictability in the business. The numbers are coming in slightly better than we had anticipated. But again, I think it's more just the fact that there's ongoing run rate of business that gives us confidence on the outlook. And Bob, I know that you want to jump in on this one Padraig?" }, { "speaker": "Padraig McDonnell", "text": "Yes. And I think if, Matt, as you just mentioned, we aren't assuming any inflection in our guide. That's been consistent. Actually, Q1 ended up being a little better than we anticipated. We kind of putting that money in the bank, so to speak. And if you look at it, we'll have now quarters of numbers that are relatively stable which is a very positive sign. And I think when we look at our funnel, it's also stable as well as the order funnel -- order forecast is what Mike just talked about as well." }, { "speaker": "Matt Sykes", "text": "And then maybe just on ACG which had a good quarter. You talked about the contract revenue and specifically enterprise services. With that growth, maybe could you just help kind of size that contract business within ACG? And then maybe talk about what is driving that growth? And what kind of contribution can that make to the ACG segment over the course of this year?" }, { "speaker": "Mike McMullen", "text": "Matt, thanks for your support of the ACG business over the years. And I want to use this opportunity to introduce our new ACG Group President. But first, I'd like to maybe have a two-part response probably and Bob, I think it's roughly about 65% just to make sure. So roughly about 65% of our total services business is in the contracts arena. And Angelica, maybe you could share your thoughts on really what's been driving the growth we're seeing in that contract business." }, { "speaker": "Angelica Riemann", "text": "Yes. Thanks, Mike. As you mentioned, it's about 65% of the total business. And a part of that demand has really been driven by the lab-wide enterprise services offerings, where we're able to help customers as they're navigating their own economic situation really helping them optimize their entire lab operation. And our portfolio offerings in this stage have allowed us to really facilitate that improvement in lab operations, lab efficiency and that's particularly important to those enterprise customers." }, { "speaker": "Mike McMullen", "text": "And in times of tough economic times, the market times, the productivity help and driving productivity in the labs as a well-received offering we have." }, { "speaker": "Robert McMahon", "text": "Matt, just one other quick thing on that. One of the great things that Angelica and team have been doing and you heard us talk about this a lot is about the increasing of the attach rate and that continues to grow at roughly 1 point again year-on-year this year. And that kind of locks in that resiliency of that stability in that business. And if you think about a 2/3 of that business growing double digits, it really helped power the business and when we see the inevitable turnaround of the instrument business, that will be a nice tailwind as well." }, { "speaker": "Mike McMullen", "text": "So, absolutely, Bob." }, { "speaker": "Operator", "text": "Your next question comes from the line of Brandon Couillard with Jefferies." }, { "speaker": "Brandon Couillard", "text": "So the chemical and advanced materials business, we actually performed a little better than we were expecting. Obviously, you're still seeing some headwinds in the chemical side. Just give us your state of the union there, what you're seeing from a macro's perspective and kind of outlook for that business moving into the second half look like?" }, { "speaker": "Mike McMullen", "text": "Yes. So I'll do a tag team on this with Padraig. So as you may recall, we've talked earlier this year about these secular growth drivers in the applied markets. And we saw that pretty much across the globe. And I think what we're seeing again is the investments being made in advanced materials relative to the semiconductor supply chain and also the fab is driving productivity. We're seeing continued investment relative to battery, battery development, QA/QC. And I think we continue to see some real nice growth in the PFAS side of our environmental business. Started in the U.S., I think all those applied market secular drivers that we've been pointing to for, for some time, delivered in Q1. And I think our outlook remains the same that we're expecting there'll be a source of positivity for us in the overall CAM [ph] market space, albeit the chemical market is expected to remain subdued." }, { "speaker": "Padraig McDonnell", "text": "Yes. That's right, Mike. I think it's really a tale of two submarkets. We saw broad resilience in the advanced materials with sequential growth. And given the extremely tough compare and high 20s we had last year, it was truly a very impressive result from the teams. The chemical and energy side was -- we saw a decline but on a very tough compare of 10% but we did see a sequential improvement versus Q4 '23. Overall, I think our portfolio is extremely strong in this area. We have ability to cross and upsell across that. And of course, our strong services offerings have that value proposition." }, { "speaker": "Brandon Couillard", "text": "And then, Bob, in terms of the guide for the year, I mean, you're sticking with the organic growth range for the year, you beat the first quarter. This China pull forward, then explain all of the upside in the first quarter what the NASD outlook is lower, what other moving parts by end market or geography kind of gets you to the same midpoint?" }, { "speaker": "Robert McMahon", "text": "Yes. That's a great question, Brandon. And you talked about a couple of them. We feel really good about where we started the year. It's still at the beginning of the year, though, so we're kind of banking some of that. What I would say is if you looked across the moving pieces, with the NASD being slightly lower, that would be offset by a little better results in the LSAG side of the business. And really, that chemical and advanced materials and academia are two areas that are probably slightly better than what we had forecasted. But overall, we're maintaining the guide and as we are looking here felt good about really at the start to the year." }, { "speaker": "Operator", "text": "Your next question comes from the line of Puneet Souda with Leerink Partners." }, { "speaker": "Puneet Souda", "text": "So my first question is really around maybe, I think Bob, you talked a little bit about the book-to-bill orders growing faster than revenue. But maybe could you elaborate a bit on more on the instrumentation side, what you're seeing and what you're seeing with the respect to book-to-bill in China? And a quick question, a clarifying question on the 2Q guide. It does look a slight step down versus Q1. And I just want to make sure beyond the Lunar New Year? What else are you baking in there?" }, { "speaker": "Robert McMahon", "text": "Yes. I'll take that. There are a lot of questions in that one question. But so true to form, Puneet and one of the things -- I'll start with the last one. I mean, we typically do have seasonality. There is that $15 million that gets pushed from one quarter to another; that's strictly timing in China because of the Lunar New Year. But Q2 is typically a lower revenue number. So we're building in that normal seasonality. In terms of book-to-bill in China, actually book-to-bill was greater than 1 in China; so continued stabilization. And in terms of book-to-bill for our instruments, it was below 1, are kind of expected. Now some of that was a result of the China pull forward where the orders came in and we were expecting that revenue to be shipped in Q2; so there's some element of timing there. But all in all, a positive start to the year." }, { "speaker": "Mike McMullen", "text": "Bob, if I cover headline on that, too, I'd just say that Q2 seasonality is as normal and the Q1 book-to-bill results are as our normal pattern. So again, we've been talking a lot about normalization of business flow. And I think we're seeing it in terms of the seasonal patterns and book-to-revenue situations." }, { "speaker": "Puneet Souda", "text": "And then just a high-level question, or a simple question. Could you maybe elaborate a bit on the pharma side, where you're seeing more traction, more growth? Is it the large pharma, small biotechs, CROs, CDMOs. Maybe just talk a little bit about that." }, { "speaker": "Robert McMahon", "text": "Yes, I'll take that, Puneet. If we look at across our business, the relative strength was actually in our biopharma. So a large molecule. And our business is skewed to the larger midsize and large cap companies. The standout has been the ACG business and our consumables on that. So it actually speaks to activity in the labs. We are starting to see -- I don't want to call it a trend but certainly a stabilization on the emerging biotech side of it. The instruments were still down but that is where we're starting to see the relative strength in the pharma business. And that speaks to kind of the long-term growth drivers, I think, in that market. And I would expect that to continue throughout the course of the year as our business gets stronger and the markets get stronger. And quite honestly, we have more favorable comps." }, { "speaker": "Mike McMullen", "text": "Bob, I think I recall correctly, outside of China, our biopharma business actually grew in the quarter." }, { "speaker": "Robert McMahon", "text": "That's right." }, { "speaker": "Operator", "text": "Your next question comes from the line of Rachel Vatnsdal with JPMorgan." }, { "speaker": "Rachel Vatnsdal", "text": "So first up, I just want to follow up there on a comments around book-to-bill. So you mentioned the book-to-bill for instrumentation was below 1 for the quarter and some of that was really timing related. So I guess, can you just break that down for us a little bit further. What trends are you seeing in liquid chromatography versus mass spectro for example? And then is there any dynamics or trends to call out from geography on the instrumentation business as well?" }, { "speaker": "Mike McMullen", "text": "I don't think there's any new trends here. I think without going into the details of our product line, the small molecule side has really been in an area where we've talked about the year-on-year challenges there from the LC side. But Phil, I don't know if you want to jump in with any thoughts here but I don't think there's any real outstanding new trends here with perhaps the better-than-expected trends we saw in applied markets, particularly on advanced materials but maybe you have something else you want to add?" }, { "speaker": "Phil Binns", "text": "Yes, sure, Mike. I think that's pretty much the case similar to Q1 around how the markets are performing. We're seeing some bright spots around some of the secular areas in the applied markets, in the instrumentation which is driving the business forward but just support your comments there." }, { "speaker": "Robert McMahon", "text": "Rachel, just one other thing to build on what Mike and Phil were just talking about. When we look at our LSAG business, it was down 11% which was better than what we expected. The piece that's really been driving that down is the pharma market which is what we've been expecting. If we looked at the rest of the markets, they were much better than the down 11% with the exception of the diagnostics and clinical which is a small number." }, { "speaker": "Mike McMullen", "text": "Right. And to your question, Rachel, that dynamic in the pharma really speaks to pressure on the LC business." }, { "speaker": "Rachel Vatnsdal", "text": "And then I just wanted to ask about monthly trends. Some of your peers have talked about how spending a bit, a little bit slow out of the gate in January and then into early February. So I guess, since you guys have a few more weeks of visibility here. Can you walk us through where you seeing similar trends on just slower spending to start the year? And has any of that started to come back? Any color there as we enter fiscal 2Q would be helpful." }, { "speaker": "Mike McMullen", "text": "Well, I've been in this business for a while and it's always slow in January. And that's why we have the seasonality we talked about relative to Q2. So I don't think we're seeing any significantly different trends that we've seen historically. Padraig, I know that you're closer than I am but [indiscernible]." }, { "speaker": "Padraig McDonnell", "text": "Yes. No, I think that's right, Mike. I think on the ACG side, we see a number of service -- our service contract business comes in strong under the ACG side but on the capital side, we're not seeing much." }, { "speaker": "Robert McMahon", "text": "Yes. And Bill, just a final -- put a finer point on that, January came in as we expected." }, { "speaker": "Operator", "text": "Our next question will come from the line of Vijay Kumar with Evercore ISI." }, { "speaker": "Unidentified Analyst", "text": "This is Jordan [ph] on for Vijay. Maybe one follow-up on the China side. Have you seen any hints of stimulus to start the year? And if we do see a stimulus, do you have any foresight to what implications that will have on Agilent?" }, { "speaker": "Mike McMullen", "text": "Both Padraig and I are in the conference and we're shaking our head, no. We've not heard anything about any potential stimulus. And what I can tell you is if it does happen, it's upside to our outlook." }, { "speaker": "Unidentified Analyst", "text": "Understood. And then maybe one more for me. Can you talk about how pricing has trended in the quarter? And any updates to your expectations for the remainder of the year?" }, { "speaker": "Mike McMullen", "text": "Bob, do you want to take that one?" }, { "speaker": "Robert McMahon", "text": "Yes. We were pleased with the results. It was between 1% and 2%. So but in line with kind of the seasonality and the mix that we saw, we would expect to see in Q1. So right now, it's on track. As we've talked about, our consumables business and ACG business have the greatest price realization followed by generally speaking, actually, we had a very good result in diagnostics and genomics in the quarter. And then we did see some mix but not anything out of the ordinary instrumentation side. So all in, we're on track for what we expected for the full year." }, { "speaker": "Operator", "text": "Your next question comes from the line of Patrick Donnelly with Citi." }, { "speaker": "Patrick Donnelly", "text": "Bob, maybe one for you first. Just in terms of the EPS guide. It looks like you guys got an additional $20 million on the kind of net interest other income. Can you just kind of flag if that's rolling through, did that core earnings number move a little lower? Is any moving pieces there? And then secondarily, just on the margin piece, you guys have that cost savings plan. Can you just talk about how that paces as the year goes, would be helpful." }, { "speaker": "Robert McMahon", "text": "Yes. Thanks, Patrick. Great question. And what I would say is a couple of things. We are on track to have more interest income than what we anticipated at the beginning of the year that $20 million and some of that in the first quarter as well and that's really a result of actually having better-than-expected cash flow in the first quarter and great work by the treasury team. I would say that the savings -- we're on track for the savings targets for the full year. And as I think about the year, it's still very early in the year and this provides us what I would say is more confidence in the guide." }, { "speaker": "Patrick Donnelly", "text": "And then, maybe just on kind of the book-to-bill. How are you guys thinking about -- I think last quarter, you said the book-to-bill for the year would be above 1 but you'd have quarters kind of in and out on the instrument side which obviously we're seeing this quarter. How are you thinking about just the order trends and the book-to-bill trends on the instrument side as we work our way through the year given what you're seeing today?" }, { "speaker": "Robert McMahon", "text": "Yes, no change to what we said back in November. Q1 is a proof point for what we said." }, { "speaker": "Operator", "text": "Your next question comes from the line of Dan Brennan with TD Cowen." }, { "speaker": "Daniel Brennan", "text": "Maybe just going to beat the dead horse but just for the instruments, did you guys say -- I know in the Q, you usually put out what the instrument number actually was. So what did actually instruments do in the quarter? And then given how much easier comps go as we get through the year? Can you just kind of give us a sense of pacing like what should we expect on Q2 in instruments and then we can kind of have at the back half of the year?" }, { "speaker": "Mike McMullen", "text": "I know the team did a calculation on that because LSAG was down 11% but that includes our consumables business which was up." }, { "speaker": "Robert McMahon", "text": "Yes, I would say we typically don't give all that information but it was down -- we were down 11%. It was down, puts 20%, in the quarter but that was better than expected, offset by 6% growth in our consumables business. If we look at the LSAG thinking for Q2, it's down low teens. So -- and a lot of that has to do with some of the timing associated with that $15 million shift. That's almost all capital equipment from Q1 -- from Q2 back into Q1. So if you look at it, it is in line with where we expect it to be." }, { "speaker": "Mike McMullen", "text": "And then, we go into more favorable compares in Q3 and Q4." }, { "speaker": "Robert McMahon", "text": "Correct, correct." }, { "speaker": "Daniel Brennan", "text": "Got it. Okay. And then I know there's been a handful of questions running on China. But can you just -- would you mind spending a bit more color on kind of what maybe by segment, pharma, applied? Any color you can give us kind of what you're seeing within the different businesses in China? And is down mid-single still the expectation for China for the full year? Or is there a chance you can kind of see some upside for that number." }, { "speaker": "Mike McMullen", "text": "I think we've have raised it up a bit. It's still down..." }, { "speaker": "Robert McMahon", "text": "Yes, yes. I think we're cautiously optimistic there. I'd say it's still within a range that we had before, so I don't want to call an inflection. But if you looked at the markets we were down that 9% was roughly down 20%-ish [ph] in pharma. So that continues to be the area of really around the globe but China is no different. The great thing is many of the other markets performed much better. So even when you think about like academia and government, that grew, so did our chem and advanced material business now grew very low single digits. And then our forensics in environmental was down low single digits. So you're actually starting to see the continued stabilization and then you'll get into very much easier compares in the back half of the year in China because that down 22% was down compared to up 12% last year. We had another strong compare in Q2 and then we actually started seeing the pretty significant declines year-on-year. And so there's reasons to be optimistic about that continued stabilization that Mike talked about but we're not ready yet to call an inflection. But when it happens, we'll take it." }, { "speaker": "Mike McMullen", "text": "And Padraig, I know you want to jump in this as well." }, { "speaker": "Padraig McDonnell", "text": "Yes. And I think what we see is as also consumables and services continue to outperform expectations in China, so that's kind of we expect that to continue." }, { "speaker": "Mike McMullen", "text": "Yes, I think the story is a great. I think the story really was in pharma, Q1, the instrument and the CapEx side of things. But we're pleased with the start there." }, { "speaker": "Operator", "text": "Your next question comes from the line of Catherine Schulte with Baird." }, { "speaker": "Catherine Schulte", "text": "Maybe first, when pharma was down 12% in the quarter. I think you said biopharma was up 2% ex China. What was small molecule performance ex China. And maybe the outlook for biopharma versus a small molecule for the rest of the year?" }, { "speaker": "Robert McMahon", "text": "So small molecule on a global basis was down roughly 18%. And it was ex China, it was down 20% and down roughly 14% for China. So pretty consistent across the globe. I would say, in China, the big area in China that has been impacted is on the small molecule side, where we'll start to see better comps going forward after Q2." }, { "speaker": "Catherine Schulte", "text": "Okay. And then maybe on consumables, it's great to see a return to growth there this quarter. Can you talk through what you saw outside of China on the consumables side?" }, { "speaker": "Robert McMahon", "text": "Our consumables business was pretty consistent across the globe in terms of growth." }, { "speaker": "Mike McMullen", "text": "So I don't know if you have anything you want to add to that on the -- or we've seen the consumables, I think we're really pleased to see that because it really speaks to the lab activity being robust. So anything else you want to jump in on with?" }, { "speaker": "Phil Binns", "text": "Yes. Probably just one item there, Mike. I think we are seeing really good traction around our workflow development. So end-to-end solutions which obviously is also drives our services business as well. But around the consumables, the -- in most of our end markets, we've been pretty heavily focused on developing workflows and making our customers' lives easier and more integrated in our labs and that's showing some really good traction and that's reflected in solid connected attach rates in the consumable space." }, { "speaker": "Mike McMullen", "text": "Thanks, Phil. I'm really glad you close with the comments about connect rates. We talked about that relative to our services business, we're also seeing a very strong positive trend on consumables as well which bodes well to our future in terms of recurring revenue business growth." }, { "speaker": "Operator", "text": "Your next question comes from the line of Jack Meehan with Nephron Research." }, { "speaker": "Jack Meehan", "text": "Just had a couple of follow-ups. The first one was, could you just talk about what you're seeing in the genomics business within DGG. I know it's still been a bit of a drag. Just when do you think that's going to start to turn?" }, { "speaker": "Mike McMullen", "text": "I think I'll invite Bob in on this one but I think it's been sort of a tale of two cities. When we talk about our genomics business, there's really two pieces to it. The half of it's in QA/QC activities for NGS workflows and we're seeing really solid growth in the consumables on that side of things as well as you're starting to see signs of life on the CapEx, not the current because the call churn there yet but that's in a reasonably good shape. I think we've seen really in our U.S.-based genomics business, some really market challenges have been hitting us. And Bob, maybe you can elaborate on that?" }, { "speaker": "Robert McMahon", "text": "That's right. Thanks, Mike. And as you said, our NGS QC portfolio from an instrument and consumable side actually grew mid-single digits in the quarter which was very nice. The genomics chemistry side that we referenced in the prepared remarks was down. We faced some very difficult comps. We had a couple of companies that reorganized and exited some businesses. They had some lifetime buys at the end of Q1. I would expect that the performance of that to improve starting in the second half of the year." }, { "speaker": "Jack Meehan", "text": "Great. And I also wanted to ask about the academic end market. I know that's been very stable for you guys. But just what you're seeing in the U.S. here with the continuing resolution for the NIH, just thoughts on the durability moving forward." }, { "speaker": "Mike McMullen", "text": "Yes, Jack, thanks for noticing that. That was a real bright spot for us. We actually grew, I think, 2% in the quarter. And this is -- we've been working on this thing for some time to really build out our portfolio and really change our market position in academia research and I think it's starting to show up in the numbers. I think stabilization really is what we're seeing which is the funding is there. And NIH is a relatively really small part of Agilent's business, so really is immaterial. But we're seeing universities have increasingly been funded through private sector. So the money is there. And even so, we saw money in China as well. So it was really a nice global story for us and we're fairly optimistic that, that kind of stabilization can be there for us for the rest of the year." }, { "speaker": "Operator", "text": "Your next question will come from the line of Doug Schenkel with Wolfe Research." }, { "speaker": "Doug Schenkel", "text": "I want to ask a question on guidance and then a question on capital deployment." }, { "speaker": "Mike McMullen", "text": "Surely, absolutely. Go ahead, Doug." }, { "speaker": "Doug Schenkel", "text": "So for the year, on one hand, around 48% of sales is in the first half, at least that's how you've guided, I believe. Yes, that's lower than last year but it's not outside the norm for the last several years. On the other hand, just given some math, your guidance for the first half embeds the assumption that revenue declines around 7% organically and then improves 7% to 9% positive organic in the second half. Can you could do that just as a function of the comps? Or do you actually really need to see improvement in certain geographies or certain end markets or categories? And then again, just a math question. Does guidance assume Q4 revenue kind of exiting around like $1.8 billion?" }, { "speaker": "Robert McMahon", "text": "Doug, this is Bob. I'll take that last one. We'll tell you when we get to Q4 and what I would say but your math is -- in all seriousness, your math is spot on as usual. I think one of the things that we look at is, we look at it a couple of different ways. I think the way to look at it is that first half, second half kind of looking at seasonality, that's probably more instructive given kind of the changes in the growth rates. And when you look at it, as you noticed -- as you mentioned, it is in line with our historical seasonality. And when you look at the growth rates, you're right, we are expecting growth in the back half of the year. A lot of that is, in fact, the easier the compares. And when we actually look at -- what I would ask you to take a look at also is a 2-year stack basis relative to implied Q1 and first half and second half. And what you would see there is a much more smooth number that we also looked at as well. So as usual, you're spot on there." }, { "speaker": "Mike McMullen", "text": "And Bob, I think that's why we really emphasized in the script, the word stabilization because as things, as we have kind of a stabilization, we're going to get a lift in the growth rate just by the comps as they go." }, { "speaker": "Doug Schenkel", "text": "Yes, I know there's a lot of focus on how much improvement is necessary to get there. So if a lot of this is stability is just math that I think obviously makes people more comfortable. I know I've taken up a lot of air time already. Real quick. Capital deployment, the cash flow remains robust. The balance sheet is super clean. Can you just talk about your thinking right now on capital deployment and what the environment looks like right now?" }, { "speaker": "Mike McMullen", "text": "Yes. I think we remain very interested in deploying capital in a balanced way which is inclusive of investing for in the business. And that speaks directly to we are interested in M&A. It's our build and buy growth strategy. I just have to say that the funnel pipeline is more robust than I've seen in a number of years and nothing to obviously announce but we're very much engaged." }, { "speaker": "Operator", "text": "Your next question comes from the line of Josh Waldman with Cleveland Research." }, { "speaker": "Josh Waldman", "text": "Yes. Just a couple on my end and maybe Bob, starting with you first, a follow-up on the guide. Can you comment a bit more on how Q2 guide moved versus the framework and the initial outlook? I assume core outlook came down a bit but just wanted to confirm the moving pieces there. And then, does the core guide reflect any changes in Q3 or Q4? Or is it really just reflecting an update on H1?" }, { "speaker": "Robert McMahon", "text": "Yes, that's a good question. It's a little of both, Josh. So Q2 is relatively intact for what we had originally thought with the exception of that small movement of the China business, that's roughly a point of core growth from Q1 and Q2 switching. What I would say is Q1 also had a beat into it and what we're taking is some of that out of the second half of the year. And so the takeaway is Q2 is spot on from where we expected it to be, absent that kind of shifting the timing shift of China and then the Q2 or the rest of Q1 kind of the beat really helps us in the second half of the year." }, { "speaker": "Josh Waldman", "text": "And then, Mike, can you talk about how visibility in the business as you've covered the last three months? Has there been any improvement in the ability of the funnel to predict near-term sales or still seeing an elongation of kind of opportunity and quoting, flipping to orders. Curious, total company and then also what you're seeing in pharma specifically." }, { "speaker": "Mike McMullen", "text": "Yes. No, I'll have Padraig jump in as well. I think the business remains the same. I don't think it's any better or any worse. And so I think it's the normal kind of cadence of business. And that's why, as Bob just mentioned, when we're talking about the second half, we bank some of the beat to put again the second half because we've yet to see the second half materialize in terms of the order book which is typical at this time of the year." }, { "speaker": "Padraig McDonnell", "text": "I think that's right, Mike. And I think as far as the quality of orders remains -- that remain in our backlog, nothing has changed. We've not seen any increase in cancellations and ex China the funnel continues to grow and that's led by the aftermarket business. I will say as a continuing theme, the deal closure times remain at an elevated levels but it's definitely stable and deal win rates have been consistent." }, { "speaker": "Mike McMullen", "text": "Yes. I think there's been an important point made here, elevated but we're not seeing the elongation. So they're stable but they're longer than they have been in the past." }, { "speaker": "Operator", "text": "Your next question comes from the line of Dan Leonard with UBS." }, { "speaker": "Dan Leonard", "text": "My first question, just a bit more on China. Are you expecting sequential growth in Q2 in China similar to Q1?" }, { "speaker": "Robert McMahon", "text": "No, if you looked at the sequential number, it's going to be roughly the same as what we had in Q1." }, { "speaker": "Dan Leonard", "text": "And Mike, congrats on your retirement. I was wondering if you could elaborate on timing. I was surprised, others were surprised. I've gotten the question a number of times and we would just love to hear your thoughts." }, { "speaker": "Mike McMullen", "text": "Yes. Thanks for that. So while it's maybe a surprise to many on the call and it was a surprise when I shared the news across the company because the Agilent team just knows how much I love working for this company and work with them. And it really was a hard-wall, really difficult decision for me but not been contemplating this for a while. And I pulled the Board into the discussion sort of communicating with them because we really wanted to make sure that they had enough time to really run a thorough and thoughtful selection process in which they were able to do. And in my mind, they came out with the best possible choice in selecting Padraig. But yes but this is something that I've been contemplating for a while and then try to engage in the Board about my timing and then I really want to make sure they had enough time to really pick the right successor and that's what they did." }, { "speaker": "Dan Leonard", "text": "You always seem to be having a lot of fun. So congrats again it's been good." }, { "speaker": "Mike McMullen", "text": "Thank you. It's going to be hard to step away. But I have to say, the [indiscernible] family was just too strong. We have a 6-month old -- 18-month old grandson and he will soon have a brother and sister so there's a lot going on, on the family side. And there's only one way I could make more time. So again, it's been a real pleasure to work with all of you on the call." }, { "speaker": "Operator", "text": "Your next question comes from the line of Luke Sergott with Barclays." }, { "speaker": "Luke Sergott", "text": "I just want to talk about the margins on the quarter and kind of the step down in DGG and LSAG and I assume, obviously, it's probably driven by the volume declines there on the instrument side. But how do you guys view the recovery in the margins between DGG and LSAG throughout the year to hit your guide?" }, { "speaker": "Robert McMahon", "text": "Luke, this is Bob. Just real quick. You're right. If I look at DGG, it actually was improvement year-over-year but it was down and it was really a result of that margin or the volume. I would say also there was an element of mix in LSAG and I would expect that to continue to improve. The cost actions that we took weren't fully actualized all and as expected in Q1. So we'll have the full impact of those as well in Q2 throughout. So I would expect an improvement over the course of the year as volumes grow up in both LSAG and DGG." }, { "speaker": "Luke Sergott", "text": "And then, just a follow-up here from the 2Q guide. Can you just help frame what you guys are embedded there by the different segments?" }, { "speaker": "Robert McMahon", "text": "Yes, if I look at Q2 guide, we're still expecting, if I looked at the end market pharma down double-digits academia and government down low single digits really as a result of some of that timing shift, diagnostics and clinical down mid-singles and chemical and advanced materials, down high single digits and food about the same. Both of those are, as a result of some of the shift also in the China business from Q2 back into Q1 and then environmental and forensics kind of mid-single-digit decline." }, { "speaker": "Operator", "text": "Our final question will come from the line of Paul Knight with KeyBanc." }, { "speaker": "Paul Knight", "text": "Mike, really super to see you love doing what you're doing and I knew you, I don't know, 15 years before you became CEO. So I guess, concluding question I would have, at least professionally, would be what do you see in terms of two things. Number one, why do you think the kind of market growth rate is for the markets that Agilent participates in? And then geographically, where do you see the surprise over the next 5 years? Like will Japan reinvigorate its growth? Will Europe see more in-sourcing? I would love to have your perspective on those things." }, { "speaker": "Mike McMullen", "text": "Thanks, Paul. Yes, we do go way back to don't we and it's been great to work with you over those years, going way back to the CAG days in my prior role, I think we think this is a 4% to 6% kind of growth market, mid-singles. So we think that the kind of market growth that we're not experienced in the industry right now is the anomalies and this will be back to that 4% to 6% kind of long-term growth rate. Obviously, certain segments within that overall macro number, that big TAM will be growing faster than that and that's always a challenge to make sure that you pick those segments so you can actually beat that number. I think there's going to be some geographic mix. I mean, we've evolved our view of long-term growth into China because we actually expect some of the supply chain moves and other things that have been going on that you'll see a growth, more growth in Europe which has been more of a slower grower for us geographically. But we've been -- continue to be surprised how well we do. Our team does in Europe. I think you're going to expect to see Japan rejuvenate it, particularly, I think you can make the case of the semi industry which is going to return to some strength in Japan. But that's the beauty of this business is just the diversified nature of both the end markets and geographies. So that would be my last -- I guess, my final projection of long-term growth for the market in this role. But thanks, Paul. I appreciate the comments and looking forward to staying in touch." }, { "speaker": "Operator", "text": "I will now turn the call back over to Parmeet Ahuja for closing remarks." }, { "speaker": "Parmeet Ahuja", "text": "Thank you, Regina and thanks everyone for being on the call today. With that, we'd like to close the call. Have a good day, everyone." }, { "speaker": "Operator", "text": "Ladies and gentlemen, this concludes today's call. Thank you all for joining." } ]	Agilent Technologies, Inc.	154,924
A	1	2,025	2025-02-26 16:30:00	Operator: Good afternoon. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2025 Agilent Technologies Inc. Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Parmeet Ahuja, you may begin the conference. Parmeet Ahuja: Thank you, Regina, and welcome everyone to Agilent’s conference call for the first quarter of fiscal year 2025. With me are Padraig McDonnell, Agilent President and CEO; and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A will be Simon May, President of the Life Sciences and Diagnostics Markets Group; Angelica Riemann, President of the Agilent CrossLab Group; and Mike Zhang, President of the Applied Markets Group. This presentation is being webcast live. The press release for our first quarter financial results, investor presentation and information to supplement today’s discussion, along with the recording of this webcast, are available on our website at investor.agilent.com. Today’s comments will refer to non-GAAP financial measures. You’ll find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted exchange rates. As a reminder, beginning in the first quarter of fiscal 2025, we implemented certain changes to our reporting structure related to reorganization of our three business segments. We have recast our historical segment information to reflect these changes and have provided the financial details on our website. These changes have no impact on our company’s consolidated financial statements. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company’s recent SEC filings for a more complete picture of our risk and other factors. And now, I’d like to turn the call over to Padraig. Padraig McDonnell: Thank you, Parmeet, and thanks to all of you for joining today’s call. As you saw in our press release, we had a very solid start to the year, exceeding our expectations for core revenue growth and EPS. Before diving into the details, I want to first follow-up on conversations I had with many of you starting at our Analyst and Investor Day in December at the New York Stock Exchange and provide an update on progress of our Ignite Transformation. We’ve stated that Ignite is for our customers, employees, and shareholders. For customers, we want to create a seamless experience across Agilent products, software, and services. For our employees, we want to become nimbler and reduce complexity to enhance our ability to serve our customers. And for shareholders, we want to deliver industry-leading shareholder value through differentiated growth. We have set targets to grow core revenues between 5% and 7% annually, expand our operating margin by 50 to 100 plus basis points per year, and deliver double-digit EPS growth. Right now, I want to share three notable accomplishments from the Ignite Transformation that focus on setting a new pricing mechanisms, elevating our digital ecosystem, and identifying procurement opportunities. First, the creation of an Enterprise strategic-pricing organization that will focus on setting our standard approach for pricing across the entire solution set with the customer and not just at a tactical bottoms-up product level. Second, our digital ecosystem, a critical enabler in our evolved strategy we unveiled at Investor Day continues to be a key area of investment for us. Already, we have made meaningful improvements to our website, upgrading the user experience on our e-commerce platform by making it easier to find and purchase the products our customers need, helping driving topline growth. In Q1, our progress continued with digital orders growing high-single-digits. And third, our procurement teams have challenged our historical approach and are identifying significant cost-savings opportunities in many of Agilent’s functions. Also related to our Ignite Transformation, we’re assessing our organizational health. On my first day as CEO, I promised our employees we would become a nimbler organization to make decisions faster and accelerate innovation in service of our customers. As a result, we are removing some management layers and increasing spans of control. This is a continuation of our new organizational structure we announced in late November. Through that reorganization, we’re seeing our business leaders in lockstep on our strategy and transformation. This alignment enables us to make business decisions faster on priorities and trade-offs. As my leadership team and I look forward, we are focused on growing Agilent. A foundational element of growth is innovation, innovation that our customers want. Every time I visit a customer in any part of the world, they say the same thing; they want to partner with Agilent for better outcomes. That’s what differentiates Agilent, the deep scientific knowledge of our customer-facing team members that our competitors simply can’t duplicate. Customers want everything from the ability to parse massive amounts of data in seconds, to automating more tasks so they can focus on complex scientific challenges. In essence, they want to increase their productivity. That’s why driving lab productivity is among our key priorities. You can see evidence of this in our collaborative agreement with Zurich-based ABB Robotics to produce automated laboratory solutions, ones that will help our customers find new ways of improved workflows and make operations more efficient and flexible. These are customers across multiple markets, including pharma, biotech, energy, and food. Together with ABB, Agilent can transform the customer lab operations by making workflow processes for research, development, and quality control faster and more efficient. The goal is for all instruments, robots, and software to be interoperable, which is crucial to significantly boosting productivity for our customers. Our customers want to buy whole product solutions not just a single instrument. To illustrate that, our Infinity III series that we introduced in October has seen great adoption from all our customers. As a reminder, the Infinity III has an advanced automation that simplifies our customers’ daily routines and is compatible with previous generations, which allows for seamless upgrades and technology refreshes. And that has become a differentiator. Customers are saying that the backward compatibility combined with the modularity of Agilent systems allows them to decide how to upgrade and refresh their instruments. Plus, they’re telling us that they’re choosing Agilent because of our longstanding quality and technology leadership that’s been further enforced with the Infinity III. And the Agilent InfinityLab LC Solutions are certified by My Green Lab. These instruments optimize lab space, and they reduce water, solvent, and energy consumption while also minimizing waste. We continue to see strong momentum and growth in our sales funnel for the Infinity III because of its advanced automation that empowers our customers to be more productive and because of InfinityLab Assist, our automation software that provides on-board intelligence. So, our customers are not simply buying a platform, but a whole product solution. Just as exciting is that the great success of our Infinity III provides Agilent an incredible opportunity for us to upgrade our customers’ instruments. And it’s already happening across our legacy LC platforms, representing an opportunity in the hundreds of millions of dollars over the coming years. Now, I’d like to highlight some key aspects of our Q1 results. As you can see from our press release, we drove topline year-over-year growth while macro market trends, such as CapEx spending, continue to improve. Our revenue of $1.681 billion increased 1% over the same quarter in FY ‘24. This result exceeded our expectations and was led by excellent growth in PFAS and capturing an outsized share of the China stimulus awards. Our instrument book-to-bill was greater than one in Q1, a quarter when it’s typically less than one. This is another sign of market recovery, but more importantly, it’s a testament to our intense customer focus with products such as the highly successful Infinity III and our success driving our market-leading position in China. Additionally, we exceeded expectations in all regions and end markets except for Academia and Government. In our end markets, revenue was led by Food, which grew 9% driven by our success in capturing stimulus orders in China. In China, our accelerating share gains were apparent in recording a win rate of more than 50% on stimulus-related tenders. With our long history in the region elevated by our local manufacturing capabilities, we are well-positioned to expand our market leadership in China. Now, let me talk about our businesses and some growth vectors in each. Our Life Sciences and Diagnostics Markets Group grew 1% in the quarter, reporting $647 million. Performance was driven by a nice result in our LC and LCMS instruments, which grew high-single-digits during the quarter on the heels of our Infinity III launch. Within LDG, we remain focused on the integration of BIOVECTRA and we are delighted by the response we’re hearing from our existing and potential customers who are interested in leveraging BIOVECTRA’s unique capabilities and Agilent’s expertise. It’s clear that BIOVECTRA’s capabilities are in the sweet spot of tremendous markets with a terrific growth potential. The Agilent CrossLab Group grew 3%, reporting $696 million, which was in-line with our expectations, led by services. We are especially excited about the new ACG that now includes services, automation, consumables, and software and informatics. Software and informatics are among our key priorities, and we’ve had an overwhelmingly positive response to both our InfinityLab Assist automation software and our OpenLab CDS. The InfinityLab automation software offers remote notifications, trouble shootings, diagnostics, and maintenance that paves the way for a fully-automated, digital lab. And our OpenLab CDS provides time-saving steps in analysis, interpretation, and reporting workflows while technical controls ensure work quality, effective records management, and enhanced data security. In short, software is an incredible area of opportunity for us that we are poised to capitalize upon. Already, customers are telling us that InfinityLab Assist and OpenLab offer differentiated functionality and solutions in high-throughput environments. Our Applied Markets Group reported $338 million in the quarter, a 2% decline better than expected related to a strong China stimulus orders. We are very pleased with our team’s ability to compete and win these tenders. We continue to invest in the Applied Markets for next-generation technology innovation and, as I said, support our customers with lab productivity. Every customer we meet has expressed a desire to partner with Agilent to make better use of their instrument fleets to integrate with front-end solutions. And, we’re happy to help them find ways to create customized solutions so they can deliver products faster. Before I hand over to Bob, I want to address topics that have been in the news of late. Regarding the recent news around tariffs, we have a diversified supply chain with a manufacturing presence in all major regions of the world. Our teams already are taking action to mitigate the impacts on our business. In terms of potential reductions to NIH funding, as we’ve shared with you before, our exposure to NIH-related programs is limited to around 1% of our revenue. We currently believe the forecasted impact is manageable within our current guidance. Bob, will now delve deeper on our Q1 results, as well as our outlook for Q2. After Bob delivers his comments, I will be back for some closing remarks. Bob? Robert W. McMahon: Thanks Padraig, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter, as well as take you through the income statement and other key financial metrics. I’ll then cover our updated full-year and second quarter guidance. As Padraig mentioned, Q1 revenue was $1.68 billion, just above the top-end of guidance despite the strengthening of the U.S. dollar during the quarter. On a core basis, we posted growth of 1.2%, beating expectations. Adjusting for the timing of Lunar New Year impacts, core growth is estimated to be just over 3%. On a reported basis, growth was 1.4%. Currency had a negative impact of 1.4 percentage points, which was over one percentage point higher than estimated at the start of the quarter. And M&A contributed 1.6%. Padraig already discussed our business group results, so I’ll focus on deeper details about our end markets. We exceeded expectations in all of our end markets except for our smallest one, Academia and Government. Our business in the Food market grew 9%, benefiting from our excellent performance in China’s national stimulus program. In Environmental and Forensics, we grew 6% as we continue to leverage our best-in-class PFAS workflow solutions to grow our market-leading position. We continue to capitalize on the strong demand for PFAS testing that we are seeing globally. Our 6495 triple quad LCMS is the most complete instrument in the PFAS testing market with a specific performance edge in small and fragile molecules where many of the emerging PFAS exist. Along with our new offerings in PFAS-specific consumables and our workflow deployment services, Agilent provides the fastest, highest-quality and most reliable way for customers to add or expand PFAS testing capabilities in their labs. Now looking across all end markets, PFAS grew 70% in the quarter, contributing 75 basis points of growth to the company. Pharma was flat during the quarter, with low-single-digit growth ex-China offset by a high-single-digit decline in China. Globally biopharma and small molecule performed roughly in-line with the overall market. In Chemical and Advanced Materials, revenue declined 2% with growth ex-China offset by a high-teens decline in China, which was mostly impacted by the timing of the Lunar New Year. Our business in the Diagnostics and Clinical end market grew 7%, led by strong results in the Americas and Europe. Academia and Government, our smallest market, saw a decline of 7%, with soft results around the globe. Now moving on to our regional performance, the Americas grew 3%, Europe grew 2%, and Asia ex-China grew 2%, all slightly ahead of expectations. China revenue declined 4%, also better than expectations, on the strength of our stimulus performance. For your models, we estimate that Lunar New Year was a $10 million revenue headwind in the quarter, which we expect to come back in the second quarter. This compares to a $25 million favorable Lunar New Year impact in the first quarter of last year, so combined a 2 percentage point year-on-year impact. Now, let’s move on to the rest of the P&L. Gross margin was 54.7% in the quarter, down versus last year primarily due to mix, currency and the Lunar New Year timing. We drove operating margins of 25.1%, roughly in-line with our expectations, despite currency headwinds. While down versus last year, we expect improvement throughout the year as the results of our Ignite Transformation continue to deliver. And below the line, our net interest expense was better than expected as was our tax rate of 12.5%. And we had $287 million diluted shares outstanding in the quarter. Putting it all together, Q1 earnings per share were $1.31. That was ahead of our expectations and up 2% from a year ago, growing slightly faster than revenue. Now, let me turn to cash flow and the balance sheet. We continue to enjoy a very strong balance sheet and healthy cash flows. Operating cash flow was $431 million in the quarter, and we invested $97 million in capital expenditures. We purchased $90 million in shares and paid out $71 million through dividends during the quarter. And, we ended the quarter with a net leverage ratio of 1.0. In summary, we had a good start to the year, and expect continued steady improvement in the market through the year. Now, let’s move on to our outlook for the fiscal year and the second quarter. While we exceeded core growth expectations for Q1, we are maintaining our core growth guidance of 2.5% to 3.5% for the year. This guidance incorporates an element of prudence reflecting the uncertainty over the U.S. federal funding environment, even though it is a small part of our business. However, we are adjusting our full-year reported revenue to be in the range of $6.68 billion to $6.76 billion to reflect the strengthening of the U.S. dollar. If you recall our initial guidance back in November incorporated only a very modest FX headwind. Since then, the U.S. dollar has appreciated and based on current exchange rates, we are now projecting an incremental $110 million in currency headwinds relative to our prior guidance. Currency is now expected to represent a 1.9% headwind for the year versus a prior 20 basis point headwind. We also have left our M&A guidance unchanged at plus 2.0% to 2.2% revenue impact for the year. Full-year, non-GAAP earnings per share are unchanged at $5.54 to $5.61, representing an increase of 4.7% to 6.0%. Relative to our prior guide, currency net of hedging is an estimated additional $0.09 headwind for the year, which we are covering. This assumes flat other income and expense, a 12.5% tax rate, and $286 million diluted shares outstanding. Now for the second quarter, we are guiding to revenue of $1.61 billion to $1.65 billion. This range is a bit wider than we typically use for the upcoming quarter, reflecting the uncertainty around U.S. Federal Government spending. This range represents an increase of 2.5% to 5% growth on a core basis and an increase of 2.4% to 4.9% growth on a reported basis. Currency is a 2.1% headwind, and M&A impact is expected to be a 2% benefit for the quarter. Second quarter non-GAAP earnings per share are expected to be between $1.25 and $1.28, representing growth of 2.5% to 4.9%. Year-on-year currency net of hedging is expected to be a $0.02 headwind to EPS. Now, I would like to turn the call over back to Padraig for closing comments. Padraig? Padraig McDonnell: Thanks, Bob. Before we end the call, I want to take this opportunity to highlight more of the Agilent team’s tremendous work. This quarter, the World Economic Forum named our factories in Shanghai, China and Penang, Malaysia, as Global Lighthouse Networks. This recognizes Agilent for its breakthroughs in scaling AI, 3D printing, robotics, big-data analytics, and industrial internet of things. I was delighted to be able to accept those awards in person this year at the Forum in Davos, Switzerland. Shanghai and Penang are two of four Agilent manufacturing sites that have earned this prestigious distinction. In 2022, the Forum named our Singapore and Waldbronn, Germany, sites as Lighthouses. Still today, Agilent is the only analytical and clinical laboratory technology company in the world to be recognized by the World Economic Forum. Also during the quarter, Newsweek ranked Agilent No. 10 out of 600 on its 2025 list of America’s Most Responsible Companies up seven places from 2024. This is our sixth consecutive year on the prestigious list and is a recognition of Agilent being a leading sustainable lab partner to our customers. We are proud to be among the U.S. based companies who are making a positive global impact. At Agilent, we’re only at the start of our Ignite Transformation journey and already we’re seeing early benefits like the ones I described at the start of this call. In less than nine months, we’ve made incredible changes that are improving our customers’ productivity in an era when the pace of science is faster than ever. We’re also becoming nimbler for our employees to better serve our customers. The outcome we’re enabling is faster decision making so that we can accelerate innovation and create differentiated growth. And that, in turn, leads to industry-leading shareholder value. What we are doing at Agilent is turning a good company into a great one. We are committed to continuous improvement and adapting to changing market dynamics. Thank you for joining today’s call. Let’s move to Q&A. Parmeet? Parmeet Ahuja: Thanks, Padraig. Regina, if you could please provide instructions for Q&A now. Operator: [Operator Instructions] The first question will come from the line of Rachel Vatnsdal with J.P. Morgan. Please go ahead. Rachel Vatnsdal: Great. Good afternoon, and thanks so much for taking the questions. So first up, I just kind of wanted to dig into some of this prudence that you mentioned in the guide. Obviously, you’re talking up some of the progress that you guys have seen on your orderbook, but you’re also acknowledging some of that headline risk that we’ve seen on the funding side the last month and a half or so. So, could you quantify for us what level of headline risk can be really embedded into not only the fiscal 2Q guide, but the full-year guide at this point? And then have you seen any impact so far from customers and what are you really seeing from your sales teams that are boots on the ground? Padraig McDonnell: Yes. So, thanks for the question, Rachel. You know, our guide is a prudent one as we see a lot of changes happening. I will say from our customer base and particularly in our pharma base, activity has increased. The sentiment is increasing as we talk to our customers. Of course, things are, on the macro side are changing with NIH funding, which were less than 1% and, of course, tariffs, which we can mitigate. So, I would say our guide is as a prudent one, but we’ll be able to monitor that as we go through the next quarters. But Bob, I don’t know if you want to add more detail. Robert W. McMahon: Yes. Hey, Rachel, good afternoon. And to your point, around the prudence, we did raise, increase the range for our second quarter guide to roughly $40 million in between the low and the high. It’s typically anywhere from $25 million to $30 million. As I mentioned in the prepared remarks, our NIH funding is roughly 1% at the maximum. And so, given the strength that we had in the first quarter and the fact that we’re not raising guide, we feel that we’re well compensating any potential downside. And to Padraig’s point, we haven’t seen any of that materially impact our business, and the activity in our customers. Rachel Vatnsdal: Perfect. And then just on my follow-up, I hate to ask specifically on FX, but I think it’s a question that a lot of us have on the line here. Can you just walk us through how much of the EPS number in the fiscal 2Q number especially is impacted by that FX given how much rates have really moved within the quarter? And then same idea just on the margin front, especially around that 2Q and for the full-year at all, what would that look like without these FX impacts? Thanks. Robert W. McMahon: Yes, that’s a great question, Rachel. So, let me give you a little more data. So for the full-year, that incremental $110 million is a $0.09 impact for the full-year, as I mentioned before, and that really is roughly a 50 basis point headwind to the overall company that we’re covering. If I look at it for second quarter, it’s about a $30 million, $32 million headwind in the quarter, roughly 2.1% and it’s $0.02 to $0.03 in the quarter, and roughly the same kind of impact from a profitability standpoint. Operator: Our next question will come from the line of Matthew Sykes with Goldman Sachs. Please go ahead. Unidentified Analyst: Hi, this is Ebie on for Matt. Thanks for taking my questions. So, the first one, can you talk through the opportunities within PFAS given the 70% growth you saw in the quarter? How much of this demand is coming from Europe following the packaging regulation? And then also, what do you think the growth contribution going forward could look like for this market? Padraig McDonnell: Yes. Thanks for the question. So, the demand for PFAS solutions remains extremely strong. During Q1, the solutions growth accounted for 75 basis points at a company level. And while most of the volume came on the environmental side, we’re seeing actually exceptional growth in food and chemical materials as well. And the opportunity in Q1 grew 70%, but also if you look at that compared to Q4 was 50%, it was a big step up in growth rates. And, with the environmental market still accounts for the largest part of the PFAS revenues. We saw increased customer purchasing in the CAM market, with water discharge in some of those areas. And really we see, all regions doing well. We saw a little bit of a pause in China, which had a great sequential quarter of growth in PFAS. But that’s normal as labs tool up on the equipment side. Europe was very strong and we expect that to be very strong. And, this is a market and this is an area where it’s going to continue to morph and grow depending on new regulations and expanding into new modalities. And I will say, at the core of this is our 6595D triple quad, which is the leading sensitivity in the market, which helps with emerging PFAS characterization and of course our ability to offer consumables and workflow deployment services are really important as customers get set up quickly in their labs. Robert W. McMahon: Yes. And Ebie, just to build on what Padraig was saying, we ended last year approaching $100 million in revenue in the first quarter. We’re well over that piece, as you can imagine. So I’d say, I think we’re uniquely positioned given all the things that Padraig just said and it’s becoming even bigger component of our growth story going forward. Unidentified Analyst: Okay, great. Thank you. And then can you talk through how much of the growth in instruments is due to true end market recovery versus replacements being driven by the Infinity III launch? And then any updates on how that launch is impacting your overall win rates? Padraig McDonnell: Yes. I mean, if you look at our core on the LC and LCMS side in pharma, which is we grew high-single-digits globally and ex-China we grew double-digits actually on that. And, what we’re seeing is a continued improvement in pharma’s willingness on CapEx spending, undertaking opportunities in PFAS and GLP-1s as well. Infinity III has gone extremely well for us. We’re seeing significant rise in win rates. We’re seeing of course that the productivity gains that this system gives out is resonating with customers extremely well. And as we look at our, refresh of our installed base, whether it’s 1100s, 1260s or 1290s, there’s a lot of opportunity there. Some of that is actually spurred by end of support on the 1100 side in some areas. So, we’re seeing our tech refresh momentum has really started around the Infinity III. So, really good momentum. Operator: Our next question will come from the line of Patrick Donnelly with Citi. Please go ahead. Patrick Donnelly: Hey, guys. Thanks for taking the questions. Padraig, maybe just on China. I know you talked about seeing an out-sized share from the China stimulus I know when we chatted a month ago, you guys were pretty positive on that piece as well. Felt like you were getting more than your fair share given where those dollars are going. It felt like a little more GCs and industrial. Can you just talk about what you’re seeing there, the traction? It feels like there could be some nice upside there. I know that there’s more tenders coming as well. So it would be helpful to talk through China stimulus and the impact around GCs and the industrial piece. Padraig McDonnell: Yes. No, thanks, Patrick. And we did saw a really nice uplift to our excellent performance and winning outside share of the tenders and the national stimulus program. The total stimulus demand for Q1 was around $35 million and we recognized all of that in the quarter. We won 50% of all stimulus orders. And with this round, our China team is now expecting the next round of stimulus to come later in the year. That’s yet to be quantified. It is going to be broad and I think it’s going to be slightly more fragmented in the type of customers. But the size of that round is really not clear as of yet. So, but I think, at this point, we’re not assuming that all stimulus we booked in Q1 would be fully incremental for the year. I think that’s important to say. We expect that some of that is likely pull-forward and our thinking is about [50%] (ph) of that is pull-forward. And we did not see a meaningful improvement in the underlying business in Q1. What I would say the China market is stable and we’re otherwise maintaining our expectation on the base business, resulting in a modest increase for FY ‘25 expectations. And while we’re increasing our expectations for the year, the total remains within our low-single-digit guide range. Patrick Donnelly: And Bob, are you rolling that second tender into the guide or will that be upside? Robert W. McMahon: Yes, that’s a good question, Patrick. We’re staying consistent with how we did it in the beginning of the year, which is, we have not rolled any incremental into the guide. So, that would be a source of upside, Patrick, once we understand more about what the scope and timing of that will be. We do believe that based on the folks, our team on the ground that it will happen in the second quarter of the second half of this year, whether that shows up in our second or third and fourth quarter, or by the end of the calendar year still be determined. But needless to say, we are very optimistic given our strong performance in this first cycle and the fact that we have a strong ability to produce all of our products in China before China. Patrick Donnelly: Yes. That’s helpful. And then maybe just on the NASD business, can you talk about what you’re seeing there? I know last quarter you talked about high-single-digit growth expectations, maybe some potential for double-digits. So, we’d love to hear the latest thoughts there. Any color commercial versus clinical would obviously be helpful as well. Padraig McDonnell: Yes, I’ll kick it off and I’ll hand it over to Simon. So, very much as expected in Q1, demand continues to be very strong. No change in guidance for the year, which is guiding at high-single-digits and of course nudging to low-double-digit target. But Simon, you want to add more color? Simon May: Yes. I think you said it well Padraig, demand very much in-line with expectations, revenue profile also in-line with the expectation, the full-year outlook remains absolutely intact. I think we still have a dynamic in NASD, which bodes very well for the future where we’ve got a lot of process qualification work for molecules that are headed towards the commercial space. And that coupled with the order intake patterns that we’ve been seeing for quite a while now make us very enthusiastic for the future. So confident about the ‘25 guide and even more confident and enthusiastic about the longer-term. Patrick Donnelly: Great. Thank you, guys. Operator: Our next question comes from the line of Tycho Peterson with Jefferies. Please go ahead. Unidentified Analyst: Yes. Hi, good afternoon. This is Jack on for Tycho. Appreciate you taking our question. I guess just one on the replacement cycle. Appreciate the color on Infinity III and kind of the influence there. I guess any other data points that spike out to help us understand where we sit today, and kind of better understand the shape and pace of the replacement cycle and how it could play out over the next two to three years? Padraig McDonnell: Yes. I mean, LC replacements, it happens at different times within different installed bases and so on. What I will say about, us in terms of Infinity III, it really has kicked off that replacement cycle. And, what we’ve seen is that typically, the replacement cycle is about nine to 12 months. And because of our installed base and a lot of 1100s out there that are some of those are coming to end of support, it really has created momentum around it. So, we expect that to be a steady replacement cycle. We don’t expect the super cycle in any particular quarter, but as we move forward, our installed base will move with it. What I will say as well, we’ve made significant improvements in our lifecycle management process. So how we can look at where the installed base is, how we can inform customers for better productivity and so on. And the good news is Infinity III has all those capabilities. Robert W. McMahon: Yes. Hey, Jack, maybe just to build on what Padraig is saying is, I would say we’re in the still in the early stages of that recovery. We had a very strong performance in Q1 with the uptake of Infinity III. The feedback continues to be very positive. And I would also look at when we look at the average age of our installed base is still older than normal, and so, we’re very excited about this. I would also say that order growth outpaced revenue growth in the quarter. So again, another positive instance. And that’s on top of overcoming Chinese Lunar New Year, that’s across the board. So, certainly, early days very positive for all the things that Padraig was talking about in the call. And I think there’s a long runway here, for us to be able to take advantage of not only our own installed base, but also, competitive installed base as well. Unidentified Analyst: Appreciate it. Thank you. Operator: Our next question comes from the line of Jack Meehan with Nephron Research. Please go ahead. Jack Meehan: Thank you. Good afternoon. Padraig, you mentioned, I think early in the script, some changes in the management layers within Agilent. Is there any additional color you can share on what you’re doing? And then just is there any associated savings, attached to that that you would call out? Thanks. Padraig McDonnell: Yes. Thanks, Jack. So, first of all, we layered we talked about our new organizational structure at the Investor Day at JPMorgan. And one of the key elements of our customer centric strategy we introduced was becoming more nimble. That’s going to speed up decision making and also increase innovation. And these changes are absolutely critical to our strategy and we know they’re going to deliver many benefits to our customers. So, what we’re really doing is we’re looking at layers in the organization where we can flatten a little bit, increase our span of control so we can improve our decision making and also get a better coverage in our management layer. And while I would say the focus of this is truly strategic, it really is leading with our strategy. There will be some cost reductions associated with these changes later in the year. And that’s where you have those baked into our guide. Robert W. McMahon: Yes. Hey, Jack, just if you recall, when we talked about the Ignite savings at the beginning of the year, we talked about some being in the second half, more in the second half. That’s where you’ll see the activities that we’re going through right now. Jack Meehan: Okay. And then, it’d be great to get an update on BIOVECTRA. It looks like that M&A added $26 million of sales in the quarter. Has your target for the year changed at all? I think I heard $145 million in the model. And can you just talk about how things are going there? Thank you. Padraig McDonnell: Yes. I’ll pass this one to Simon to take. Simon May: Yes. Thanks for the question. I’d say overall, as we are going through the integration process with BIOVECTRA, we’re increasingly excited about what we’re seeing there. I think the more we get under the hood, the more the capabilities that we have there are resonating with our internal experts and also with our customers. We think it’s still very early inning and we’re absolutely in the sweet spot there with those capabilities and relative to where the book is going with therapeutic modalities. We were slightly soft on revenue in the first quarter. The focus there is really very heavily on bringing certain aspects of the operation up to the Agilent NASD standards with process and quality, and that’s progressing really well. But then with regard to the full year guide, we’re holding to the previous guidance and so no change there. Jack Meehan: Okay. Thank you, Simon. Operator: Our next question comes from the line of Vijay Kumar with Evercore ISI. Please go ahead. Vijay Kumar: Hi, guys. Good afternoon and thank you for taking my question. I guess, Bob, when we report again on your book-to-bill commentary here being about one versus seasonally being built sub-1x, is that being driven by stimulus or perhaps timing of the Chinese New Year? Maybe talk about the book-to-bill trends and what is that signaling? Robert W. McMahon: Yes. Hey, Vijay, it’s Bob. Yes, actually the Lunar New Year didn’t have a big impact on that. Actually, I would take that as a sign of the continued recovery, particularly in the instrumentation market. We did have an impact or a contribution from the Lunar New Year, but the real big area is both LC and LCMS. So, typically what we see is just because the way our fiscal year is that our first fiscal year because January is the last month of the quarter the instrument book-to-bill is typically lower than one. And so the fact that it’s above one is a very positive sign from our perspective that recovery continues. And as we were saying, it’s really been led by some of the new products in the unique attributes of our, the Infinity III portfolio and has given us or allowed us to have renewed conversations with customers and so forth. Vijay Kumar: Understood. And Padraig, maybe one for you on, I think I heard you mention you’ve identified a few hundred million dollars worth of replacement opportunity. I guess, what is the average age of the fleet? And when you do that math, what is incremental of that few hundred million versus a normal replacement cycle? And when you think about the attach rates on services and chemistry, do you feel like that part of the business is growing mid-to-high singles or where are we on services and consumables? Padraig McDonnell: Yes, I’ll take the first step piece and I’ll hand it over to Angelica to give more color on the services and consumables. But we’re older than the median, I would say, of the age of the installed base. And the installed base is very large, very disparate, a lot of different equipment in it. So, we expect that we’re going to see the pace of that change, continually improve throughout the year. And then there’s a huge opportunity there in terms of opportunity for replacements. And also when that comes, of course, we have attach rate with the new Infinity III both on the services on the consumer side. So, I would say as well, just to mention that we did see an improvement at the end of year orders. If not back to pre-COVID days, but there was a sequential improvement in terms of December orders in terms of budget flush versus the previous year, which again was in large part about install base change. And I would say when I talk to lab managers out there and we talk to, high level procurement people there’s a lot of pent up demand for, instrument changes. Lab managers are really pressing that. And we do see the purse strings loosening a bit within our pharma customers. But Angelica on service and consumables? Angelica Riemann: Yes. Great. Thanks, Padraig. To add to what you’ve already said, it is going to the replacement cycle is going to occur over a period of time, and it’s probably going to be a mix of some incremental, placements of new instruments as well as replacing some of the aging instruments on the lab bench. And what that really allows us to do is continue our focus on increasing our ability to connect services and consumables as those new instruments are being put into service, and we know that, that motion allows for greater and longer customer lifetime value both in how the customer is using that instrument but also in terms of the continued revenue stream that that generates for Agilent. So, there is upside and incremental opportunity, for sure. Understood. Operator: Our next question comes from the line of Brandon Couillard with Wells Fargo. Please go ahead. Brandon Couillard : Hey, thanks. Good afternoon. Bob, can you just help us understand what’s going on with gross margins, down over 130 basis points in the first quarter? Was that in line with your expectations? How much did currency affect that? And what are you expecting kind of the next few quarters? Robert W. McMahon: Yes, Brandon, what I would say is if we looked at the bottom line, operating profit was in line. Gross margin was a little lower just because of some of the mix of products. It wasn’t anything material and I would expect that to improve throughout the course of the year. If you can imagine, with a large stimulus in China that did have some pressure on our margins at the gross margin level, but very profitable at the operating profit margin. And currency did have an impact as well in Q1, and that impact was roughly 20-30 basis points in the quarter for the total company. And I’d expect some of that to continue throughout the course of the year. We do get some benefit because we do hedge, but still the drop through of that is greater on the gross margin. So, the one thing I would say, Brandon, to offset that is we were actually pleased with the pricing. Padraig mentioned about the pricing. It actually was trending a bit higher than what we had expected in Q1 and are expecting that to continue through the course of the year. Brandon Couillard: Okay. That’s helpful. And then, it’d be great if you could get an update just on the pathology and genomics pieces and how those performed in the first quarter. I think genomics is actually up in the fourth quarter. Can you share an update? It would be helpful. Thanks. Padraig McDonnell: Yes. I’m going to pass this one to Simon. Simon May: Yes. I said genomics was puts and takes in the first quarter. We saw some negative impacts from the funding situation in the U.S. with academia and government. And then on the flip side, we continue to see really strong traction with our Magnus automated NGS prep system that’s on a very strong growth trajectory. And the way the chemistry as well still is pretty a pretty small acorn, but the customer adoption there is looking pretty strong. So, as we look to the full year, I still think we see a path to return to growth in genomics. But again, the near-term headwinds, at least with academic and government funding slightly outweighed the positives from Magnus in the first quarter. Robert W. McMahon: And the diagnostics and clinical overall grew 7% and pathology was flat year-over-year, but we see very steady growth rates as we go through the year on that side. Brandon Couillard: Great. Thanks. Operator: Our next question comes from the line of Puneet Souda with Leerink Partners. Please go ahead. Puneet Souda: Yes. Hi, Padraig and team. Thanks for taking my questions. First one, if you could just elaborate a little bit on the China stimulus, we were expecting more orders and maybe more continued orders. And so I’m just trying to understand, so why are you expecting it in the second and the rest of the instrumentations and growth from stimulus potentially in the second half? Maybe can you elaborate, what you saw? What are you hearing from the ground in China? Padraig McDonnell: Yes. So, the stimulus order was within the food area, within the Chinese customs and government departments. And it was very broad based in terms of instruments that actually held most of our platforms in it. We won 50% of that stimulus order, which is around $35 million and was recognized essentially all of that was recognized in the quarter. That’s a very extremely high, win rate. And of course, we think it’s not all of that is incremental. We believe about half of it is kind of run rate pull forward. Half of that is incremental. And, but it shows when these stimulus come in, the Agilent team can really win its oversized share of it. And as I said before, you know, we’re expecting more stimulus, which we haven’t baked into the guide in the second half. But rest assured, when that arises, the Agilent team will be there to help customers. Simon May: Yes. Hey, Puneet, to build on what Padraig is saying, I actually see this as a really positive that we were able to not only get that revenue in, the orders in and actually deliver it, it’s a real testament to the Agilent team. And so it actually gives me increased confidence that when the orders come in, we will get more than our fair share in the second half of the year. So, I think we still feel very optimistic about not just this year, but, you know, if you remember, this is a multi-year kind of stimulus program. And, so, we feel very good about the momentum that we have. I wouldn’t look at it quarter-to-quarter. I look at it year-over-year. Padraig McDonnell: And just maybe adding one point. I mean, what is absolutely crucial for those orders, to come in is having met in China capabilities and having our ability now to make all our platforms within China for China is really a significant advantage for us. Puneet Souda: Got it. Thanks for clarifying that. And then question on the margin side. With Ignite efforts, can you elaborate the margin contribution? You talked about pricing on one end, number of cost efforts and also reducing some of the management changes that you have in place. So just wondering how should we think about the margin contribution? Do you have a target, this year from Ignite? Thank you. Padraig McDonnell: I’ll start it off and I’ll hand it over to Bob. So yes, of course, we have a very well defined program as we go through the year. Actually, Ignite is a three year program. And what we said is over the three years, [72] (ph) basis points plus in terms of margin expansion. And of course, all of this doesn’t happen all at once, right? So we’ve seen early benefits both from the procurement, direct and indirect procurement side and from pricing in terms of what we’re seeing. But of course, we’ll see more in the second half and as we go into next year. But Bob, I don’t know if you want to give more color on that. Robert W. McMahon: Yes. I was going to say, we’re on track with what we had talked about at the beginning of the year Puneet, which was 50 to 70 basis points this year. We’re going to have to work harder for that because of some of the currency. But pricing has held up here in the quarter and we’re on track, as Padraig mentioned for some of the other areas. Puneet Souda: Got it. Helpful. Thank you. Operator: Our next question comes from the line of Doug Schenkel with Wolfe Research. Please go ahead. Doug Schenkel: Good afternoon, guys, and thank you for taking my questions. When we caught up with you guys in January, it sounded like similar to the rest of the peer group, you had a strong December in terms of the instrument budget flush, especially in the pharma end market. And, I guess I’m just wondering if one, I want to confirm that was the case that the end of the fiscal year came together strongly. And if so, it would be interesting to hear if there’s anything, interesting that occurred in terms of a particular rebound in specific instrument categories, specific geographies, specific end markets, and then kind of building off of that. Was January normal? Or did you, you know, kind of go into the second topic I wanted to cover given the change in administration? If December felt a little more normal, did January feel maybe less normal given all the uncertainty in terms of pharma regs, academic funding, food and water testing. Any commentary on all of those things would be really helpful. Padraig McDonnell: Okay. Thanks. So, I’ll start off and I’ll hand over to Bob. So, it was certainly as we talked before December, it did play out as we expect us. We did have that strong momentum. And what was driving that, overall demand, I would say particularly around Infinity III, but also we talked about PFAS testing and including, also what we’re seeing in the GLP-I areas. And January new administration comes in a lot of changes. And of course, we’re mitigating those changes as we go through it. The only area where we’ve seen some softness is really in Academia, with NIH funding where things have really slowed down a bit. But of course, that’s a very small part of our business and it’s not within the guide on us. In pharma, when we talk to our customers, actually there’s a lot of questions, you see a lot of discussions around Aira, etcetera, what changes might happen about international pricing index, etcetera. But I would say that hasn’t impacted on the pharma side. We’re still seeing a steady business coming out of that side, but everybody’s really, really watching that. On the PFAS side, just going back to the pharma side as well, people were talking about FDA, changes within the FDA. I think that hit more of the medical device companies, areas within that expertise, but we haven’t seen anything on us yet. And within PFAS, that business continues to be strong. We still see it in January, there’s been no change in that as it happens. So, it’s an area we’re going to continue to watch very, very closely, hugely dynamic. But I would say January is a steady progression from December. Doug Schenkel: Thank you very much. Operator: Our next question comes from the line of Dan Leonard with UBS. Please go ahead. Dan Leonard: Thank you. You mentioned a couple of times that you saw an improvement in pharma CapEx. And what I’m curious about is how much of that improvement was narrowly relevant to QAQC versus broader and inclusive of R&D functions in pharma and other product categories in your portfolio like cell analysis? Padraig McDonnell: Yes. So, I’ll kick it off and maybe hand it to Simon on this one. So, we’re of course, we have heavy fleets and a lot of capabilities when QAQC and development for QAQC. So we saw that across the board on that side. I would say in R&D you see a lot of shifts in terms of where customers are spending money. So, we did actually see a good continuation of positivity on that side. But in the pharma QAQC and the development areas of labs, we’ve seen continued, I would say, steadiness and incremental strength in it driven around a replacement of fleets and driven by the Infinity III. But Simon, I don’t know if you want to add anything to that. Simon May: Very little to add on. There was a reference in the question to cell analysis tools and there’s a look at that overall. And actually, so on the academic and government side, we’ve had some impact there in cell analysis with our lower end instrumentation where although at company level, the exposure is very minimal within cell analysis, it’s a little higher. But generally speaking, the funnels are robust in biopharma across the entire continuum. We’re seeing really nice adoption of our NovoCyte Opteon platform, the spectral flow cytometer and the citation C10 is also performing really well. So a few puts and takes in cell analysis. Dan Leonard: Okay. That’s really helpful. And then a follow-up question. I think, Padraig, you mentioned in your prepared remarks that you’ve taken specific actions in response to the tariff talk. Can you elaborate on that? Padraig McDonnell: Yes, no problem. So, we have a very diverse manufacturing capability around and if you talk about the three areas for tariffs, we talked about in Mexico, we have no manufacturing. In Canada, we do have manufacturing with BIOVECTRA, but it’s about 30%, I think is, put into the U.S. And of course, in China, we have in China, China on it. So we believe the overall impact is about $5 million and we actually believe that’s very mitigated bodes down to much less than that and we’re working on it. Just to give you a sense of it, we were able to shift our supply chain pretty quickly in areas from, say, China back into the U.S. and, into Singapore as well, which really is very mitigatable. Dan Leonard: Thank you. Operator: Our next question comes from the line of Michael Ryskin with BofA. Please go ahead. Michael Ryskin: Thanks guys. Maybe a little bit of cleanup, but you’ve touched on this a couple of times in terms of the academic government. I just kind of want to make sure I understand the timing of it. If I’m just going to go back to the slide deck, the negative seven in the quarter, you call out softness globally and then anticipated slowdown in government spending, impacts willingness to some customers are staying. So, is this things you started seeing back in November, December? I’m just trying to think of the timing of what was happening in the quarter as it relates to election, inauguration, all of that. Any clarity there would be helpful. Robert W. McMahon: Yes. Hey, Mike, this is Bob. What we saw actually was a pretty consistent performance across all of the regions. So, they were all down. So that’s what we were talking about when we did see globally. We did see maybe a slight more in January incremental softness towards the end as people were trying to figure out the NAH activity. I wouldn’t say that necessarily is super material for us. And as you know, the Academia and government can be kind of lumpy at times. So, the one area that I would say got disproportionate impact actually was China and a lot of that is some of the impact of the timing of the Lunar New Year. And so, I think that they were the most negative for the full Q1. And that we have a slightly larger exposure in Academia and government in China than we do relative to the rest of the world. So, I wouldn’t read too much into it. Hopefully, that kind of clarifies, kind of what we were seeing. Michael Ryskin: Yes. It does. It does. And I think, I mean, just right now in response to, I think Dan’s question, you’re talking about cell analysis specifically. Is that just another area where you have overlap where it’s concentrated in a handful of different parts of the portfolio? I imagine there’s not a lot of GCs going into academic and government labs. Padraig McDonnell: Yes. That’s the true statement. And again in cell analysis the way I’d characterize it is that we began to see hesitancy in Academia and government in the run up to the election last year. People were kind of in wait and see mode to see what happened with the election. Now what we’re starting to see, of course, is that the impacts are real. And just to say, again, in cell analysis, we’ve got proportionally higher exposure there in Academia and government than we do in many, if not all, other parts of our portfolio. So, your statement there about the relative impact is a true one and we don’t see that elsewhere. Michael Ryskin: All right. Thanks. That’s helpful. Operator: Our final question will come from the line of Eve Burstein with Bernstein Research. Please go ahead. Eve Burstein: Thanks a lot for taking the question. This has been asked a couple of ways, but maybe just to follow-up on Mike’s question for academic and government. You said you were starting to see a little bit of softness at the end of January. How is that trending into February? Can you just give us a take now where you stand today? Padraig McDonnell: Yes. What I would say is, that’s why we have a little wider guidance in the Q2 guide between the low and the high. And we have, I wouldn’t say it’s any materially different than what we saw in January from a trends perspective. It hasn’t deteriorated, but we’re just being prudent there from a standpoint of, what potentially would be there. And then, for the full year, we’re not changing our guidance. Eve Burstein: Okay. Fair enough. Thank you. And then we’ve talked quite a bit about the LC replacement cycle. Within GC, is there opportunity for an upcycle here as well? You’ve mentioned several times that in LC different customers, different applications are going to improve at different times. But how do you anticipate GC playing out, through the rest of the year in terms of improvement pace timing? And can you just give a little color there? Padraig McDonnell: Yes. No. That’s a great question. And of course, GC replacement is a different timing than LCs, because of the technology. But I’m going to ask Mike Zhang to give some color here. Mike Zhang: Yes. Thank you, Padraig. Obviously, we have, strong leadership in the GC market and we’re very, very strong install base. And we actually have introduced a new GCMS to the market and we’re seeing very strong response from customers. So, yes, we’re very optimistic about opportunities, but certainly it will be again it’s over time, it’s annual long term opportunity. So, we’re very excited about that. Eve Burstein: Great. Thanks. Operator: And Mr. Ahuja, I turn the call back over to you. Parmeet Ahuja: Thanks, Regina, and thanks, everyone, for joining the call today. With that we would like to end the call. Have a good rest of the day, everyone. Operator: This concludes today’s conference call. You may now disconnect.	[ { "speaker": "Operator", "text": "Good afternoon. My name is Regina, and I will be your conference operator today. At this time, I would like to welcome everyone to the First Quarter 2025 Agilent Technologies Inc. Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Parmeet Ahuja, you may begin the conference." }, { "speaker": "Parmeet Ahuja", "text": "Thank you, Regina, and welcome everyone to Agilent’s conference call for the first quarter of fiscal year 2025. With me are Padraig McDonnell, Agilent President and CEO; and Bob McMahon, Agilent Senior Vice President and CFO. Joining in the Q&A will be Simon May, President of the Life Sciences and Diagnostics Markets Group; Angelica Riemann, President of the Agilent CrossLab Group; and Mike Zhang, President of the Applied Markets Group. This presentation is being webcast live. The press release for our first quarter financial results, investor presentation and information to supplement today’s discussion, along with the recording of this webcast, are available on our website at investor.agilent.com. Today’s comments will refer to non-GAAP financial measures. You’ll find the most directly comparable GAAP financial metrics and reconciliations on our website. Unless otherwise noted, all references to increases or decreases in financial metrics are year-over-year and references to revenue growth are on a core basis. Core revenue growth excludes the impact of currency and any acquisitions and divestitures completed within the past 12 months. Guidance is based on forecasted exchange rates. As a reminder, beginning in the first quarter of fiscal 2025, we implemented certain changes to our reporting structure related to reorganization of our three business segments. We have recast our historical segment information to reflect these changes and have provided the financial details on our website. These changes have no impact on our company’s consolidated financial statements. During this call, we will also make forward-looking statements about the financial performance of the company. These statements are subject to risks and uncertainties and are only valid as of today. The company assumes no obligation to update them. Please look at the company’s recent SEC filings for a more complete picture of our risk and other factors. And now, I’d like to turn the call over to Padraig." }, { "speaker": "Padraig McDonnell", "text": "Thank you, Parmeet, and thanks to all of you for joining today’s call. As you saw in our press release, we had a very solid start to the year, exceeding our expectations for core revenue growth and EPS. Before diving into the details, I want to first follow-up on conversations I had with many of you starting at our Analyst and Investor Day in December at the New York Stock Exchange and provide an update on progress of our Ignite Transformation. We’ve stated that Ignite is for our customers, employees, and shareholders. For customers, we want to create a seamless experience across Agilent products, software, and services. For our employees, we want to become nimbler and reduce complexity to enhance our ability to serve our customers. And for shareholders, we want to deliver industry-leading shareholder value through differentiated growth. We have set targets to grow core revenues between 5% and 7% annually, expand our operating margin by 50 to 100 plus basis points per year, and deliver double-digit EPS growth. Right now, I want to share three notable accomplishments from the Ignite Transformation that focus on setting a new pricing mechanisms, elevating our digital ecosystem, and identifying procurement opportunities. First, the creation of an Enterprise strategic-pricing organization that will focus on setting our standard approach for pricing across the entire solution set with the customer and not just at a tactical bottoms-up product level. Second, our digital ecosystem, a critical enabler in our evolved strategy we unveiled at Investor Day continues to be a key area of investment for us. Already, we have made meaningful improvements to our website, upgrading the user experience on our e-commerce platform by making it easier to find and purchase the products our customers need, helping driving topline growth. In Q1, our progress continued with digital orders growing high-single-digits. And third, our procurement teams have challenged our historical approach and are identifying significant cost-savings opportunities in many of Agilent’s functions. Also related to our Ignite Transformation, we’re assessing our organizational health. On my first day as CEO, I promised our employees we would become a nimbler organization to make decisions faster and accelerate innovation in service of our customers. As a result, we are removing some management layers and increasing spans of control. This is a continuation of our new organizational structure we announced in late November. Through that reorganization, we’re seeing our business leaders in lockstep on our strategy and transformation. This alignment enables us to make business decisions faster on priorities and trade-offs. As my leadership team and I look forward, we are focused on growing Agilent. A foundational element of growth is innovation, innovation that our customers want. Every time I visit a customer in any part of the world, they say the same thing; they want to partner with Agilent for better outcomes. That’s what differentiates Agilent, the deep scientific knowledge of our customer-facing team members that our competitors simply can’t duplicate. Customers want everything from the ability to parse massive amounts of data in seconds, to automating more tasks so they can focus on complex scientific challenges. In essence, they want to increase their productivity. That’s why driving lab productivity is among our key priorities. You can see evidence of this in our collaborative agreement with Zurich-based ABB Robotics to produce automated laboratory solutions, ones that will help our customers find new ways of improved workflows and make operations more efficient and flexible. These are customers across multiple markets, including pharma, biotech, energy, and food. Together with ABB, Agilent can transform the customer lab operations by making workflow processes for research, development, and quality control faster and more efficient. The goal is for all instruments, robots, and software to be interoperable, which is crucial to significantly boosting productivity for our customers. Our customers want to buy whole product solutions not just a single instrument. To illustrate that, our Infinity III series that we introduced in October has seen great adoption from all our customers. As a reminder, the Infinity III has an advanced automation that simplifies our customers’ daily routines and is compatible with previous generations, which allows for seamless upgrades and technology refreshes. And that has become a differentiator. Customers are saying that the backward compatibility combined with the modularity of Agilent systems allows them to decide how to upgrade and refresh their instruments. Plus, they’re telling us that they’re choosing Agilent because of our longstanding quality and technology leadership that’s been further enforced with the Infinity III. And the Agilent InfinityLab LC Solutions are certified by My Green Lab. These instruments optimize lab space, and they reduce water, solvent, and energy consumption while also minimizing waste. We continue to see strong momentum and growth in our sales funnel for the Infinity III because of its advanced automation that empowers our customers to be more productive and because of InfinityLab Assist, our automation software that provides on-board intelligence. So, our customers are not simply buying a platform, but a whole product solution. Just as exciting is that the great success of our Infinity III provides Agilent an incredible opportunity for us to upgrade our customers’ instruments. And it’s already happening across our legacy LC platforms, representing an opportunity in the hundreds of millions of dollars over the coming years. Now, I’d like to highlight some key aspects of our Q1 results. As you can see from our press release, we drove topline year-over-year growth while macro market trends, such as CapEx spending, continue to improve. Our revenue of $1.681 billion increased 1% over the same quarter in FY ‘24. This result exceeded our expectations and was led by excellent growth in PFAS and capturing an outsized share of the China stimulus awards. Our instrument book-to-bill was greater than one in Q1, a quarter when it’s typically less than one. This is another sign of market recovery, but more importantly, it’s a testament to our intense customer focus with products such as the highly successful Infinity III and our success driving our market-leading position in China. Additionally, we exceeded expectations in all regions and end markets except for Academia and Government. In our end markets, revenue was led by Food, which grew 9% driven by our success in capturing stimulus orders in China. In China, our accelerating share gains were apparent in recording a win rate of more than 50% on stimulus-related tenders. With our long history in the region elevated by our local manufacturing capabilities, we are well-positioned to expand our market leadership in China. Now, let me talk about our businesses and some growth vectors in each. Our Life Sciences and Diagnostics Markets Group grew 1% in the quarter, reporting $647 million. Performance was driven by a nice result in our LC and LCMS instruments, which grew high-single-digits during the quarter on the heels of our Infinity III launch. Within LDG, we remain focused on the integration of BIOVECTRA and we are delighted by the response we’re hearing from our existing and potential customers who are interested in leveraging BIOVECTRA’s unique capabilities and Agilent’s expertise. It’s clear that BIOVECTRA’s capabilities are in the sweet spot of tremendous markets with a terrific growth potential. The Agilent CrossLab Group grew 3%, reporting $696 million, which was in-line with our expectations, led by services. We are especially excited about the new ACG that now includes services, automation, consumables, and software and informatics. Software and informatics are among our key priorities, and we’ve had an overwhelmingly positive response to both our InfinityLab Assist automation software and our OpenLab CDS. The InfinityLab automation software offers remote notifications, trouble shootings, diagnostics, and maintenance that paves the way for a fully-automated, digital lab. And our OpenLab CDS provides time-saving steps in analysis, interpretation, and reporting workflows while technical controls ensure work quality, effective records management, and enhanced data security. In short, software is an incredible area of opportunity for us that we are poised to capitalize upon. Already, customers are telling us that InfinityLab Assist and OpenLab offer differentiated functionality and solutions in high-throughput environments. Our Applied Markets Group reported $338 million in the quarter, a 2% decline better than expected related to a strong China stimulus orders. We are very pleased with our team’s ability to compete and win these tenders. We continue to invest in the Applied Markets for next-generation technology innovation and, as I said, support our customers with lab productivity. Every customer we meet has expressed a desire to partner with Agilent to make better use of their instrument fleets to integrate with front-end solutions. And, we’re happy to help them find ways to create customized solutions so they can deliver products faster. Before I hand over to Bob, I want to address topics that have been in the news of late. Regarding the recent news around tariffs, we have a diversified supply chain with a manufacturing presence in all major regions of the world. Our teams already are taking action to mitigate the impacts on our business. In terms of potential reductions to NIH funding, as we’ve shared with you before, our exposure to NIH-related programs is limited to around 1% of our revenue. We currently believe the forecasted impact is manageable within our current guidance. Bob, will now delve deeper on our Q1 results, as well as our outlook for Q2. After Bob delivers his comments, I will be back for some closing remarks. Bob?" }, { "speaker": "Robert W. McMahon", "text": "Thanks Padraig, and good afternoon, everyone. In my remarks today, I will provide some additional details on revenue in the quarter, as well as take you through the income statement and other key financial metrics. I’ll then cover our updated full-year and second quarter guidance. As Padraig mentioned, Q1 revenue was $1.68 billion, just above the top-end of guidance despite the strengthening of the U.S. dollar during the quarter. On a core basis, we posted growth of 1.2%, beating expectations. Adjusting for the timing of Lunar New Year impacts, core growth is estimated to be just over 3%. On a reported basis, growth was 1.4%. Currency had a negative impact of 1.4 percentage points, which was over one percentage point higher than estimated at the start of the quarter. And M&A contributed 1.6%. Padraig already discussed our business group results, so I’ll focus on deeper details about our end markets. We exceeded expectations in all of our end markets except for our smallest one, Academia and Government. Our business in the Food market grew 9%, benefiting from our excellent performance in China’s national stimulus program. In Environmental and Forensics, we grew 6% as we continue to leverage our best-in-class PFAS workflow solutions to grow our market-leading position. We continue to capitalize on the strong demand for PFAS testing that we are seeing globally. Our 6495 triple quad LCMS is the most complete instrument in the PFAS testing market with a specific performance edge in small and fragile molecules where many of the emerging PFAS exist. Along with our new offerings in PFAS-specific consumables and our workflow deployment services, Agilent provides the fastest, highest-quality and most reliable way for customers to add or expand PFAS testing capabilities in their labs. Now looking across all end markets, PFAS grew 70% in the quarter, contributing 75 basis points of growth to the company. Pharma was flat during the quarter, with low-single-digit growth ex-China offset by a high-single-digit decline in China. Globally biopharma and small molecule performed roughly in-line with the overall market. In Chemical and Advanced Materials, revenue declined 2% with growth ex-China offset by a high-teens decline in China, which was mostly impacted by the timing of the Lunar New Year. Our business in the Diagnostics and Clinical end market grew 7%, led by strong results in the Americas and Europe. Academia and Government, our smallest market, saw a decline of 7%, with soft results around the globe. Now moving on to our regional performance, the Americas grew 3%, Europe grew 2%, and Asia ex-China grew 2%, all slightly ahead of expectations. China revenue declined 4%, also better than expectations, on the strength of our stimulus performance. For your models, we estimate that Lunar New Year was a $10 million revenue headwind in the quarter, which we expect to come back in the second quarter. This compares to a $25 million favorable Lunar New Year impact in the first quarter of last year, so combined a 2 percentage point year-on-year impact. Now, let’s move on to the rest of the P&L. Gross margin was 54.7% in the quarter, down versus last year primarily due to mix, currency and the Lunar New Year timing. We drove operating margins of 25.1%, roughly in-line with our expectations, despite currency headwinds. While down versus last year, we expect improvement throughout the year as the results of our Ignite Transformation continue to deliver. And below the line, our net interest expense was better than expected as was our tax rate of 12.5%. And we had $287 million diluted shares outstanding in the quarter. Putting it all together, Q1 earnings per share were $1.31. That was ahead of our expectations and up 2% from a year ago, growing slightly faster than revenue. Now, let me turn to cash flow and the balance sheet. We continue to enjoy a very strong balance sheet and healthy cash flows. Operating cash flow was $431 million in the quarter, and we invested $97 million in capital expenditures. We purchased $90 million in shares and paid out $71 million through dividends during the quarter. And, we ended the quarter with a net leverage ratio of 1.0. In summary, we had a good start to the year, and expect continued steady improvement in the market through the year. Now, let’s move on to our outlook for the fiscal year and the second quarter. While we exceeded core growth expectations for Q1, we are maintaining our core growth guidance of 2.5% to 3.5% for the year. This guidance incorporates an element of prudence reflecting the uncertainty over the U.S. federal funding environment, even though it is a small part of our business. However, we are adjusting our full-year reported revenue to be in the range of $6.68 billion to $6.76 billion to reflect the strengthening of the U.S. dollar. If you recall our initial guidance back in November incorporated only a very modest FX headwind. Since then, the U.S. dollar has appreciated and based on current exchange rates, we are now projecting an incremental $110 million in currency headwinds relative to our prior guidance. Currency is now expected to represent a 1.9% headwind for the year versus a prior 20 basis point headwind. We also have left our M&A guidance unchanged at plus 2.0% to 2.2% revenue impact for the year. Full-year, non-GAAP earnings per share are unchanged at $5.54 to $5.61, representing an increase of 4.7% to 6.0%. Relative to our prior guide, currency net of hedging is an estimated additional $0.09 headwind for the year, which we are covering. This assumes flat other income and expense, a 12.5% tax rate, and $286 million diluted shares outstanding. Now for the second quarter, we are guiding to revenue of $1.61 billion to $1.65 billion. This range is a bit wider than we typically use for the upcoming quarter, reflecting the uncertainty around U.S. Federal Government spending. This range represents an increase of 2.5% to 5% growth on a core basis and an increase of 2.4% to 4.9% growth on a reported basis. Currency is a 2.1% headwind, and M&A impact is expected to be a 2% benefit for the quarter. Second quarter non-GAAP earnings per share are expected to be between $1.25 and $1.28, representing growth of 2.5% to 4.9%. Year-on-year currency net of hedging is expected to be a $0.02 headwind to EPS. Now, I would like to turn the call over back to Padraig for closing comments. Padraig?" }, { "speaker": "Padraig McDonnell", "text": "Thanks, Bob. Before we end the call, I want to take this opportunity to highlight more of the Agilent team’s tremendous work. This quarter, the World Economic Forum named our factories in Shanghai, China and Penang, Malaysia, as Global Lighthouse Networks. This recognizes Agilent for its breakthroughs in scaling AI, 3D printing, robotics, big-data analytics, and industrial internet of things. I was delighted to be able to accept those awards in person this year at the Forum in Davos, Switzerland. Shanghai and Penang are two of four Agilent manufacturing sites that have earned this prestigious distinction. In 2022, the Forum named our Singapore and Waldbronn, Germany, sites as Lighthouses. Still today, Agilent is the only analytical and clinical laboratory technology company in the world to be recognized by the World Economic Forum. Also during the quarter, Newsweek ranked Agilent No. 10 out of 600 on its 2025 list of America’s Most Responsible Companies up seven places from 2024. This is our sixth consecutive year on the prestigious list and is a recognition of Agilent being a leading sustainable lab partner to our customers. We are proud to be among the U.S. based companies who are making a positive global impact. At Agilent, we’re only at the start of our Ignite Transformation journey and already we’re seeing early benefits like the ones I described at the start of this call. In less than nine months, we’ve made incredible changes that are improving our customers’ productivity in an era when the pace of science is faster than ever. We’re also becoming nimbler for our employees to better serve our customers. The outcome we’re enabling is faster decision making so that we can accelerate innovation and create differentiated growth. And that, in turn, leads to industry-leading shareholder value. What we are doing at Agilent is turning a good company into a great one. We are committed to continuous improvement and adapting to changing market dynamics. Thank you for joining today’s call. Let’s move to Q&A. Parmeet?" }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Padraig. Regina, if you could please provide instructions for Q&A now." }, { "speaker": "Operator", "text": "[Operator Instructions] The first question will come from the line of Rachel Vatnsdal with J.P. Morgan. Please go ahead." }, { "speaker": "Rachel Vatnsdal", "text": "Great. Good afternoon, and thanks so much for taking the questions. So first up, I just kind of wanted to dig into some of this prudence that you mentioned in the guide. Obviously, you’re talking up some of the progress that you guys have seen on your orderbook, but you’re also acknowledging some of that headline risk that we’ve seen on the funding side the last month and a half or so. So, could you quantify for us what level of headline risk can be really embedded into not only the fiscal 2Q guide, but the full-year guide at this point? And then have you seen any impact so far from customers and what are you really seeing from your sales teams that are boots on the ground?" }, { "speaker": "Padraig McDonnell", "text": "Yes. So, thanks for the question, Rachel. You know, our guide is a prudent one as we see a lot of changes happening. I will say from our customer base and particularly in our pharma base, activity has increased. The sentiment is increasing as we talk to our customers. Of course, things are, on the macro side are changing with NIH funding, which were less than 1% and, of course, tariffs, which we can mitigate. So, I would say our guide is as a prudent one, but we’ll be able to monitor that as we go through the next quarters. But Bob, I don’t know if you want to add more detail." }, { "speaker": "Robert W. McMahon", "text": "Yes. Hey, Rachel, good afternoon. And to your point, around the prudence, we did raise, increase the range for our second quarter guide to roughly $40 million in between the low and the high. It’s typically anywhere from $25 million to $30 million. As I mentioned in the prepared remarks, our NIH funding is roughly 1% at the maximum. And so, given the strength that we had in the first quarter and the fact that we’re not raising guide, we feel that we’re well compensating any potential downside. And to Padraig’s point, we haven’t seen any of that materially impact our business, and the activity in our customers." }, { "speaker": "Rachel Vatnsdal", "text": "Perfect. And then just on my follow-up, I hate to ask specifically on FX, but I think it’s a question that a lot of us have on the line here. Can you just walk us through how much of the EPS number in the fiscal 2Q number especially is impacted by that FX given how much rates have really moved within the quarter? And then same idea just on the margin front, especially around that 2Q and for the full-year at all, what would that look like without these FX impacts? Thanks." }, { "speaker": "Robert W. McMahon", "text": "Yes, that’s a great question, Rachel. So, let me give you a little more data. So for the full-year, that incremental $110 million is a $0.09 impact for the full-year, as I mentioned before, and that really is roughly a 50 basis point headwind to the overall company that we’re covering. If I look at it for second quarter, it’s about a $30 million, $32 million headwind in the quarter, roughly 2.1% and it’s $0.02 to $0.03 in the quarter, and roughly the same kind of impact from a profitability standpoint." }, { "speaker": "Operator", "text": "Our next question will come from the line of Matthew Sykes with Goldman Sachs. Please go ahead." }, { "speaker": "Unidentified Analyst", "text": "Hi, this is Ebie on for Matt. Thanks for taking my questions. So, the first one, can you talk through the opportunities within PFAS given the 70% growth you saw in the quarter? How much of this demand is coming from Europe following the packaging regulation? And then also, what do you think the growth contribution going forward could look like for this market?" }, { "speaker": "Padraig McDonnell", "text": "Yes. Thanks for the question. So, the demand for PFAS solutions remains extremely strong. During Q1, the solutions growth accounted for 75 basis points at a company level. And while most of the volume came on the environmental side, we’re seeing actually exceptional growth in food and chemical materials as well. And the opportunity in Q1 grew 70%, but also if you look at that compared to Q4 was 50%, it was a big step up in growth rates. And, with the environmental market still accounts for the largest part of the PFAS revenues. We saw increased customer purchasing in the CAM market, with water discharge in some of those areas. And really we see, all regions doing well. We saw a little bit of a pause in China, which had a great sequential quarter of growth in PFAS. But that’s normal as labs tool up on the equipment side. Europe was very strong and we expect that to be very strong. And, this is a market and this is an area where it’s going to continue to morph and grow depending on new regulations and expanding into new modalities. And I will say, at the core of this is our 6595D triple quad, which is the leading sensitivity in the market, which helps with emerging PFAS characterization and of course our ability to offer consumables and workflow deployment services are really important as customers get set up quickly in their labs." }, { "speaker": "Robert W. McMahon", "text": "Yes. And Ebie, just to build on what Padraig was saying, we ended last year approaching $100 million in revenue in the first quarter. We’re well over that piece, as you can imagine. So I’d say, I think we’re uniquely positioned given all the things that Padraig just said and it’s becoming even bigger component of our growth story going forward." }, { "speaker": "Unidentified Analyst", "text": "Okay, great. Thank you. And then can you talk through how much of the growth in instruments is due to true end market recovery versus replacements being driven by the Infinity III launch? And then any updates on how that launch is impacting your overall win rates?" }, { "speaker": "Padraig McDonnell", "text": "Yes. I mean, if you look at our core on the LC and LCMS side in pharma, which is we grew high-single-digits globally and ex-China we grew double-digits actually on that. And, what we’re seeing is a continued improvement in pharma’s willingness on CapEx spending, undertaking opportunities in PFAS and GLP-1s as well. Infinity III has gone extremely well for us. We’re seeing significant rise in win rates. We’re seeing of course that the productivity gains that this system gives out is resonating with customers extremely well. And as we look at our, refresh of our installed base, whether it’s 1100s, 1260s or 1290s, there’s a lot of opportunity there. Some of that is actually spurred by end of support on the 1100 side in some areas. So, we’re seeing our tech refresh momentum has really started around the Infinity III. So, really good momentum." }, { "speaker": "Operator", "text": "Our next question will come from the line of Patrick Donnelly with Citi. Please go ahead." }, { "speaker": "Patrick Donnelly", "text": "Hey, guys. Thanks for taking the questions. Padraig, maybe just on China. I know you talked about seeing an out-sized share from the China stimulus I know when we chatted a month ago, you guys were pretty positive on that piece as well. Felt like you were getting more than your fair share given where those dollars are going. It felt like a little more GCs and industrial. Can you just talk about what you’re seeing there, the traction? It feels like there could be some nice upside there. I know that there’s more tenders coming as well. So it would be helpful to talk through China stimulus and the impact around GCs and the industrial piece." }, { "speaker": "Padraig McDonnell", "text": "Yes. No, thanks, Patrick. And we did saw a really nice uplift to our excellent performance and winning outside share of the tenders and the national stimulus program. The total stimulus demand for Q1 was around $35 million and we recognized all of that in the quarter. We won 50% of all stimulus orders. And with this round, our China team is now expecting the next round of stimulus to come later in the year. That’s yet to be quantified. It is going to be broad and I think it’s going to be slightly more fragmented in the type of customers. But the size of that round is really not clear as of yet. So, but I think, at this point, we’re not assuming that all stimulus we booked in Q1 would be fully incremental for the year. I think that’s important to say. We expect that some of that is likely pull-forward and our thinking is about [50%] (ph) of that is pull-forward. And we did not see a meaningful improvement in the underlying business in Q1. What I would say the China market is stable and we’re otherwise maintaining our expectation on the base business, resulting in a modest increase for FY ‘25 expectations. And while we’re increasing our expectations for the year, the total remains within our low-single-digit guide range." }, { "speaker": "Patrick Donnelly", "text": "And Bob, are you rolling that second tender into the guide or will that be upside?" }, { "speaker": "Robert W. McMahon", "text": "Yes, that’s a good question, Patrick. We’re staying consistent with how we did it in the beginning of the year, which is, we have not rolled any incremental into the guide. So, that would be a source of upside, Patrick, once we understand more about what the scope and timing of that will be. We do believe that based on the folks, our team on the ground that it will happen in the second quarter of the second half of this year, whether that shows up in our second or third and fourth quarter, or by the end of the calendar year still be determined. But needless to say, we are very optimistic given our strong performance in this first cycle and the fact that we have a strong ability to produce all of our products in China before China." }, { "speaker": "Patrick Donnelly", "text": "Yes. That’s helpful. And then maybe just on the NASD business, can you talk about what you’re seeing there? I know last quarter you talked about high-single-digit growth expectations, maybe some potential for double-digits. So, we’d love to hear the latest thoughts there. Any color commercial versus clinical would obviously be helpful as well." }, { "speaker": "Padraig McDonnell", "text": "Yes, I’ll kick it off and I’ll hand it over to Simon. So, very much as expected in Q1, demand continues to be very strong. No change in guidance for the year, which is guiding at high-single-digits and of course nudging to low-double-digit target. But Simon, you want to add more color?" }, { "speaker": "Simon May", "text": "Yes. I think you said it well Padraig, demand very much in-line with expectations, revenue profile also in-line with the expectation, the full-year outlook remains absolutely intact. I think we still have a dynamic in NASD, which bodes very well for the future where we’ve got a lot of process qualification work for molecules that are headed towards the commercial space. And that coupled with the order intake patterns that we’ve been seeing for quite a while now make us very enthusiastic for the future. So confident about the ‘25 guide and even more confident and enthusiastic about the longer-term." }, { "speaker": "Patrick Donnelly", "text": "Great. Thank you, guys." }, { "speaker": "Operator", "text": "Our next question comes from the line of Tycho Peterson with Jefferies. Please go ahead." }, { "speaker": "Unidentified Analyst", "text": "Yes. Hi, good afternoon. This is Jack on for Tycho. Appreciate you taking our question. I guess just one on the replacement cycle. Appreciate the color on Infinity III and kind of the influence there. I guess any other data points that spike out to help us understand where we sit today, and kind of better understand the shape and pace of the replacement cycle and how it could play out over the next two to three years?" }, { "speaker": "Padraig McDonnell", "text": "Yes. I mean, LC replacements, it happens at different times within different installed bases and so on. What I will say about, us in terms of Infinity III, it really has kicked off that replacement cycle. And, what we’ve seen is that typically, the replacement cycle is about nine to 12 months. And because of our installed base and a lot of 1100s out there that are some of those are coming to end of support, it really has created momentum around it. So, we expect that to be a steady replacement cycle. We don’t expect the super cycle in any particular quarter, but as we move forward, our installed base will move with it. What I will say as well, we’ve made significant improvements in our lifecycle management process. So how we can look at where the installed base is, how we can inform customers for better productivity and so on. And the good news is Infinity III has all those capabilities." }, { "speaker": "Robert W. McMahon", "text": "Yes. Hey, Jack, maybe just to build on what Padraig is saying is, I would say we’re in the still in the early stages of that recovery. We had a very strong performance in Q1 with the uptake of Infinity III. The feedback continues to be very positive. And I would also look at when we look at the average age of our installed base is still older than normal, and so, we’re very excited about this. I would also say that order growth outpaced revenue growth in the quarter. So again, another positive instance. And that’s on top of overcoming Chinese Lunar New Year, that’s across the board. So, certainly, early days very positive for all the things that Padraig was talking about in the call. And I think there’s a long runway here, for us to be able to take advantage of not only our own installed base, but also, competitive installed base as well." }, { "speaker": "Unidentified Analyst", "text": "Appreciate it. Thank you." }, { "speaker": "Operator", "text": "Our next question comes from the line of Jack Meehan with Nephron Research. Please go ahead." }, { "speaker": "Jack Meehan", "text": "Thank you. Good afternoon. Padraig, you mentioned, I think early in the script, some changes in the management layers within Agilent. Is there any additional color you can share on what you’re doing? And then just is there any associated savings, attached to that that you would call out? Thanks." }, { "speaker": "Padraig McDonnell", "text": "Yes. Thanks, Jack. So, first of all, we layered we talked about our new organizational structure at the Investor Day at JPMorgan. And one of the key elements of our customer centric strategy we introduced was becoming more nimble. That’s going to speed up decision making and also increase innovation. And these changes are absolutely critical to our strategy and we know they’re going to deliver many benefits to our customers. So, what we’re really doing is we’re looking at layers in the organization where we can flatten a little bit, increase our span of control so we can improve our decision making and also get a better coverage in our management layer. And while I would say the focus of this is truly strategic, it really is leading with our strategy. There will be some cost reductions associated with these changes later in the year. And that’s where you have those baked into our guide." }, { "speaker": "Robert W. McMahon", "text": "Yes. Hey, Jack, just if you recall, when we talked about the Ignite savings at the beginning of the year, we talked about some being in the second half, more in the second half. That’s where you’ll see the activities that we’re going through right now." }, { "speaker": "Jack Meehan", "text": "Okay. And then, it’d be great to get an update on BIOVECTRA. It looks like that M&A added $26 million of sales in the quarter. Has your target for the year changed at all? I think I heard $145 million in the model. And can you just talk about how things are going there? Thank you." }, { "speaker": "Padraig McDonnell", "text": "Yes. I’ll pass this one to Simon to take." }, { "speaker": "Simon May", "text": "Yes. Thanks for the question. I’d say overall, as we are going through the integration process with BIOVECTRA, we’re increasingly excited about what we’re seeing there. I think the more we get under the hood, the more the capabilities that we have there are resonating with our internal experts and also with our customers. We think it’s still very early inning and we’re absolutely in the sweet spot there with those capabilities and relative to where the book is going with therapeutic modalities. We were slightly soft on revenue in the first quarter. The focus there is really very heavily on bringing certain aspects of the operation up to the Agilent NASD standards with process and quality, and that’s progressing really well. But then with regard to the full year guide, we’re holding to the previous guidance and so no change there." }, { "speaker": "Jack Meehan", "text": "Okay. Thank you, Simon." }, { "speaker": "Operator", "text": "Our next question comes from the line of Vijay Kumar with Evercore ISI. Please go ahead." }, { "speaker": "Vijay Kumar", "text": "Hi, guys. Good afternoon and thank you for taking my question. I guess, Bob, when we report again on your book-to-bill commentary here being about one versus seasonally being built sub-1x, is that being driven by stimulus or perhaps timing of the Chinese New Year? Maybe talk about the book-to-bill trends and what is that signaling?" }, { "speaker": "Robert W. McMahon", "text": "Yes. Hey, Vijay, it’s Bob. Yes, actually the Lunar New Year didn’t have a big impact on that. Actually, I would take that as a sign of the continued recovery, particularly in the instrumentation market. We did have an impact or a contribution from the Lunar New Year, but the real big area is both LC and LCMS. So, typically what we see is just because the way our fiscal year is that our first fiscal year because January is the last month of the quarter the instrument book-to-bill is typically lower than one. And so the fact that it’s above one is a very positive sign from our perspective that recovery continues. And as we were saying, it’s really been led by some of the new products in the unique attributes of our, the Infinity III portfolio and has given us or allowed us to have renewed conversations with customers and so forth." }, { "speaker": "Vijay Kumar", "text": "Understood. And Padraig, maybe one for you on, I think I heard you mention you’ve identified a few hundred million dollars worth of replacement opportunity. I guess, what is the average age of the fleet? And when you do that math, what is incremental of that few hundred million versus a normal replacement cycle? And when you think about the attach rates on services and chemistry, do you feel like that part of the business is growing mid-to-high singles or where are we on services and consumables?" }, { "speaker": "Padraig McDonnell", "text": "Yes, I’ll take the first step piece and I’ll hand it over to Angelica to give more color on the services and consumables. But we’re older than the median, I would say, of the age of the installed base. And the installed base is very large, very disparate, a lot of different equipment in it. So, we expect that we’re going to see the pace of that change, continually improve throughout the year. And then there’s a huge opportunity there in terms of opportunity for replacements. And also when that comes, of course, we have attach rate with the new Infinity III both on the services on the consumer side. So, I would say as well, just to mention that we did see an improvement at the end of year orders. If not back to pre-COVID days, but there was a sequential improvement in terms of December orders in terms of budget flush versus the previous year, which again was in large part about install base change. And I would say when I talk to lab managers out there and we talk to, high level procurement people there’s a lot of pent up demand for, instrument changes. Lab managers are really pressing that. And we do see the purse strings loosening a bit within our pharma customers. But Angelica on service and consumables?" }, { "speaker": "Angelica Riemann", "text": "Yes. Great. Thanks, Padraig. To add to what you’ve already said, it is going to the replacement cycle is going to occur over a period of time, and it’s probably going to be a mix of some incremental, placements of new instruments as well as replacing some of the aging instruments on the lab bench. And what that really allows us to do is continue our focus on increasing our ability to connect services and consumables as those new instruments are being put into service, and we know that, that motion allows for greater and longer customer lifetime value both in how the customer is using that instrument but also in terms of the continued revenue stream that that generates for Agilent. So, there is upside and incremental opportunity, for sure. Understood." }, { "speaker": "Operator", "text": "Our next question comes from the line of Brandon Couillard with Wells Fargo. Please go ahead." }, { "speaker": "Brandon Couillard", "text": "Hey, thanks. Good afternoon. Bob, can you just help us understand what’s going on with gross margins, down over 130 basis points in the first quarter? Was that in line with your expectations? How much did currency affect that? And what are you expecting kind of the next few quarters?" }, { "speaker": "Robert W. McMahon", "text": "Yes, Brandon, what I would say is if we looked at the bottom line, operating profit was in line. Gross margin was a little lower just because of some of the mix of products. It wasn’t anything material and I would expect that to improve throughout the course of the year. If you can imagine, with a large stimulus in China that did have some pressure on our margins at the gross margin level, but very profitable at the operating profit margin. And currency did have an impact as well in Q1, and that impact was roughly 20-30 basis points in the quarter for the total company. And I’d expect some of that to continue throughout the course of the year. We do get some benefit because we do hedge, but still the drop through of that is greater on the gross margin. So, the one thing I would say, Brandon, to offset that is we were actually pleased with the pricing. Padraig mentioned about the pricing. It actually was trending a bit higher than what we had expected in Q1 and are expecting that to continue through the course of the year." }, { "speaker": "Brandon Couillard", "text": "Okay. That’s helpful. And then, it’d be great if you could get an update just on the pathology and genomics pieces and how those performed in the first quarter. I think genomics is actually up in the fourth quarter. Can you share an update? It would be helpful. Thanks." }, { "speaker": "Padraig McDonnell", "text": "Yes. I’m going to pass this one to Simon." }, { "speaker": "Simon May", "text": "Yes. I said genomics was puts and takes in the first quarter. We saw some negative impacts from the funding situation in the U.S. with academia and government. And then on the flip side, we continue to see really strong traction with our Magnus automated NGS prep system that’s on a very strong growth trajectory. And the way the chemistry as well still is pretty a pretty small acorn, but the customer adoption there is looking pretty strong. So, as we look to the full year, I still think we see a path to return to growth in genomics. But again, the near-term headwinds, at least with academic and government funding slightly outweighed the positives from Magnus in the first quarter." }, { "speaker": "Robert W. McMahon", "text": "And the diagnostics and clinical overall grew 7% and pathology was flat year-over-year, but we see very steady growth rates as we go through the year on that side." }, { "speaker": "Brandon Couillard", "text": "Great. Thanks." }, { "speaker": "Operator", "text": "Our next question comes from the line of Puneet Souda with Leerink Partners. Please go ahead." }, { "speaker": "Puneet Souda", "text": "Yes. Hi, Padraig and team. Thanks for taking my questions. First one, if you could just elaborate a little bit on the China stimulus, we were expecting more orders and maybe more continued orders. And so I’m just trying to understand, so why are you expecting it in the second and the rest of the instrumentations and growth from stimulus potentially in the second half? Maybe can you elaborate, what you saw? What are you hearing from the ground in China?" }, { "speaker": "Padraig McDonnell", "text": "Yes. So, the stimulus order was within the food area, within the Chinese customs and government departments. And it was very broad based in terms of instruments that actually held most of our platforms in it. We won 50% of that stimulus order, which is around $35 million and was recognized essentially all of that was recognized in the quarter. That’s a very extremely high, win rate. And of course, we think it’s not all of that is incremental. We believe about half of it is kind of run rate pull forward. Half of that is incremental. And, but it shows when these stimulus come in, the Agilent team can really win its oversized share of it. And as I said before, you know, we’re expecting more stimulus, which we haven’t baked into the guide in the second half. But rest assured, when that arises, the Agilent team will be there to help customers." }, { "speaker": "Simon May", "text": "Yes. Hey, Puneet, to build on what Padraig is saying, I actually see this as a really positive that we were able to not only get that revenue in, the orders in and actually deliver it, it’s a real testament to the Agilent team. And so it actually gives me increased confidence that when the orders come in, we will get more than our fair share in the second half of the year. So, I think we still feel very optimistic about not just this year, but, you know, if you remember, this is a multi-year kind of stimulus program. And, so, we feel very good about the momentum that we have. I wouldn’t look at it quarter-to-quarter. I look at it year-over-year." }, { "speaker": "Padraig McDonnell", "text": "And just maybe adding one point. I mean, what is absolutely crucial for those orders, to come in is having met in China capabilities and having our ability now to make all our platforms within China for China is really a significant advantage for us." }, { "speaker": "Puneet Souda", "text": "Got it. Thanks for clarifying that. And then question on the margin side. With Ignite efforts, can you elaborate the margin contribution? You talked about pricing on one end, number of cost efforts and also reducing some of the management changes that you have in place. So just wondering how should we think about the margin contribution? Do you have a target, this year from Ignite? Thank you." }, { "speaker": "Padraig McDonnell", "text": "I’ll start it off and I’ll hand it over to Bob. So yes, of course, we have a very well defined program as we go through the year. Actually, Ignite is a three year program. And what we said is over the three years, [72] (ph) basis points plus in terms of margin expansion. And of course, all of this doesn’t happen all at once, right? So we’ve seen early benefits both from the procurement, direct and indirect procurement side and from pricing in terms of what we’re seeing. But of course, we’ll see more in the second half and as we go into next year. But Bob, I don’t know if you want to give more color on that." }, { "speaker": "Robert W. McMahon", "text": "Yes. I was going to say, we’re on track with what we had talked about at the beginning of the year Puneet, which was 50 to 70 basis points this year. We’re going to have to work harder for that because of some of the currency. But pricing has held up here in the quarter and we’re on track, as Padraig mentioned for some of the other areas." }, { "speaker": "Puneet Souda", "text": "Got it. Helpful. Thank you." }, { "speaker": "Operator", "text": "Our next question comes from the line of Doug Schenkel with Wolfe Research. Please go ahead." }, { "speaker": "Doug Schenkel", "text": "Good afternoon, guys, and thank you for taking my questions. When we caught up with you guys in January, it sounded like similar to the rest of the peer group, you had a strong December in terms of the instrument budget flush, especially in the pharma end market. And, I guess I’m just wondering if one, I want to confirm that was the case that the end of the fiscal year came together strongly. And if so, it would be interesting to hear if there’s anything, interesting that occurred in terms of a particular rebound in specific instrument categories, specific geographies, specific end markets, and then kind of building off of that. Was January normal? Or did you, you know, kind of go into the second topic I wanted to cover given the change in administration? If December felt a little more normal, did January feel maybe less normal given all the uncertainty in terms of pharma regs, academic funding, food and water testing. Any commentary on all of those things would be really helpful." }, { "speaker": "Padraig McDonnell", "text": "Okay. Thanks. So, I’ll start off and I’ll hand over to Bob. So, it was certainly as we talked before December, it did play out as we expect us. We did have that strong momentum. And what was driving that, overall demand, I would say particularly around Infinity III, but also we talked about PFAS testing and including, also what we’re seeing in the GLP-I areas. And January new administration comes in a lot of changes. And of course, we’re mitigating those changes as we go through it. The only area where we’ve seen some softness is really in Academia, with NIH funding where things have really slowed down a bit. But of course, that’s a very small part of our business and it’s not within the guide on us. In pharma, when we talk to our customers, actually there’s a lot of questions, you see a lot of discussions around Aira, etcetera, what changes might happen about international pricing index, etcetera. But I would say that hasn’t impacted on the pharma side. We’re still seeing a steady business coming out of that side, but everybody’s really, really watching that. On the PFAS side, just going back to the pharma side as well, people were talking about FDA, changes within the FDA. I think that hit more of the medical device companies, areas within that expertise, but we haven’t seen anything on us yet. And within PFAS, that business continues to be strong. We still see it in January, there’s been no change in that as it happens. So, it’s an area we’re going to continue to watch very, very closely, hugely dynamic. But I would say January is a steady progression from December." }, { "speaker": "Doug Schenkel", "text": "Thank you very much." }, { "speaker": "Operator", "text": "Our next question comes from the line of Dan Leonard with UBS. Please go ahead." }, { "speaker": "Dan Leonard", "text": "Thank you. You mentioned a couple of times that you saw an improvement in pharma CapEx. And what I’m curious about is how much of that improvement was narrowly relevant to QAQC versus broader and inclusive of R&D functions in pharma and other product categories in your portfolio like cell analysis?" }, { "speaker": "Padraig McDonnell", "text": "Yes. So, I’ll kick it off and maybe hand it to Simon on this one. So, we’re of course, we have heavy fleets and a lot of capabilities when QAQC and development for QAQC. So we saw that across the board on that side. I would say in R&D you see a lot of shifts in terms of where customers are spending money. So, we did actually see a good continuation of positivity on that side. But in the pharma QAQC and the development areas of labs, we’ve seen continued, I would say, steadiness and incremental strength in it driven around a replacement of fleets and driven by the Infinity III. But Simon, I don’t know if you want to add anything to that." }, { "speaker": "Simon May", "text": "Very little to add on. There was a reference in the question to cell analysis tools and there’s a look at that overall. And actually, so on the academic and government side, we’ve had some impact there in cell analysis with our lower end instrumentation where although at company level, the exposure is very minimal within cell analysis, it’s a little higher. But generally speaking, the funnels are robust in biopharma across the entire continuum. We’re seeing really nice adoption of our NovoCyte Opteon platform, the spectral flow cytometer and the citation C10 is also performing really well. So a few puts and takes in cell analysis." }, { "speaker": "Dan Leonard", "text": "Okay. That’s really helpful. And then a follow-up question. I think, Padraig, you mentioned in your prepared remarks that you’ve taken specific actions in response to the tariff talk. Can you elaborate on that?" }, { "speaker": "Padraig McDonnell", "text": "Yes, no problem. So, we have a very diverse manufacturing capability around and if you talk about the three areas for tariffs, we talked about in Mexico, we have no manufacturing. In Canada, we do have manufacturing with BIOVECTRA, but it’s about 30%, I think is, put into the U.S. And of course, in China, we have in China, China on it. So we believe the overall impact is about $5 million and we actually believe that’s very mitigated bodes down to much less than that and we’re working on it. Just to give you a sense of it, we were able to shift our supply chain pretty quickly in areas from, say, China back into the U.S. and, into Singapore as well, which really is very mitigatable." }, { "speaker": "Dan Leonard", "text": "Thank you." }, { "speaker": "Operator", "text": "Our next question comes from the line of Michael Ryskin with BofA. Please go ahead." }, { "speaker": "Michael Ryskin", "text": "Thanks guys. Maybe a little bit of cleanup, but you’ve touched on this a couple of times in terms of the academic government. I just kind of want to make sure I understand the timing of it. If I’m just going to go back to the slide deck, the negative seven in the quarter, you call out softness globally and then anticipated slowdown in government spending, impacts willingness to some customers are staying. So, is this things you started seeing back in November, December? I’m just trying to think of the timing of what was happening in the quarter as it relates to election, inauguration, all of that. Any clarity there would be helpful." }, { "speaker": "Robert W. McMahon", "text": "Yes. Hey, Mike, this is Bob. What we saw actually was a pretty consistent performance across all of the regions. So, they were all down. So that’s what we were talking about when we did see globally. We did see maybe a slight more in January incremental softness towards the end as people were trying to figure out the NAH activity. I wouldn’t say that necessarily is super material for us. And as you know, the Academia and government can be kind of lumpy at times. So, the one area that I would say got disproportionate impact actually was China and a lot of that is some of the impact of the timing of the Lunar New Year. And so, I think that they were the most negative for the full Q1. And that we have a slightly larger exposure in Academia and government in China than we do relative to the rest of the world. So, I wouldn’t read too much into it. Hopefully, that kind of clarifies, kind of what we were seeing." }, { "speaker": "Michael Ryskin", "text": "Yes. It does. It does. And I think, I mean, just right now in response to, I think Dan’s question, you’re talking about cell analysis specifically. Is that just another area where you have overlap where it’s concentrated in a handful of different parts of the portfolio? I imagine there’s not a lot of GCs going into academic and government labs." }, { "speaker": "Padraig McDonnell", "text": "Yes. That’s the true statement. And again in cell analysis the way I’d characterize it is that we began to see hesitancy in Academia and government in the run up to the election last year. People were kind of in wait and see mode to see what happened with the election. Now what we’re starting to see, of course, is that the impacts are real. And just to say, again, in cell analysis, we’ve got proportionally higher exposure there in Academia and government than we do in many, if not all, other parts of our portfolio. So, your statement there about the relative impact is a true one and we don’t see that elsewhere." }, { "speaker": "Michael Ryskin", "text": "All right. Thanks. That’s helpful." }, { "speaker": "Operator", "text": "Our final question will come from the line of Eve Burstein with Bernstein Research. Please go ahead." }, { "speaker": "Eve Burstein", "text": "Thanks a lot for taking the question. This has been asked a couple of ways, but maybe just to follow-up on Mike’s question for academic and government. You said you were starting to see a little bit of softness at the end of January. How is that trending into February? Can you just give us a take now where you stand today?" }, { "speaker": "Padraig McDonnell", "text": "Yes. What I would say is, that’s why we have a little wider guidance in the Q2 guide between the low and the high. And we have, I wouldn’t say it’s any materially different than what we saw in January from a trends perspective. It hasn’t deteriorated, but we’re just being prudent there from a standpoint of, what potentially would be there. And then, for the full year, we’re not changing our guidance." }, { "speaker": "Eve Burstein", "text": "Okay. Fair enough. Thank you. And then we’ve talked quite a bit about the LC replacement cycle. Within GC, is there opportunity for an upcycle here as well? You’ve mentioned several times that in LC different customers, different applications are going to improve at different times. But how do you anticipate GC playing out, through the rest of the year in terms of improvement pace timing? And can you just give a little color there?" }, { "speaker": "Padraig McDonnell", "text": "Yes. No. That’s a great question. And of course, GC replacement is a different timing than LCs, because of the technology. But I’m going to ask Mike Zhang to give some color here." }, { "speaker": "Mike Zhang", "text": "Yes. Thank you, Padraig. Obviously, we have, strong leadership in the GC market and we’re very, very strong install base. And we actually have introduced a new GCMS to the market and we’re seeing very strong response from customers. So, yes, we’re very optimistic about opportunities, but certainly it will be again it’s over time, it’s annual long term opportunity. So, we’re very excited about that." }, { "speaker": "Eve Burstein", "text": "Great. Thanks." }, { "speaker": "Operator", "text": "And Mr. Ahuja, I turn the call back over to you." }, { "speaker": "Parmeet Ahuja", "text": "Thanks, Regina, and thanks, everyone, for joining the call today. With that we would like to end the call. Have a good rest of the day, everyone." }, { "speaker": "Operator", "text": "This concludes today’s conference call. You may now disconnect." } ]	Agilent Technologies, Inc.	154,924
AAPL	4	2,020	2020-10-29 17:00:00	Operator: Good day everyone and welcome to the Apple Inc. Fourth Quarter Fiscal Year 2020 Earnings Conference Call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn things over to Tejas Gala, Senior Analyst, Corporate Finance and Investor Relations. Please go ahead, sir. Tejas Gala: Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple’s CEO, Tim Cook, and he will be followed by CFO, Luca Maestri. After that, we’ll open the call to questions from analysts. Please note that some of the information you’ll hear during the discussion today, will consist of our forward-looking statements including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company’s business, and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple’s most recently filed Annual Report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I’d now like to turn the call over to Tim for introductory remarks. Tim Cook: Thanks Tejas. Good afternoon and thanks for joining the call today. Back in April, I said we were in the most challenging environment in which Apple as a company has ever operated. That atmosphere of uncertainty, of resolve, of making difficult calls with limited information has not only come to define Apple’s year, but each of our lives as individuals across this country, and around the world. It has been a chapter that none of us will forget. In the face of these challenges, Apple stayed relentlessly focused on what we do best, seeing in every obstacle an opportunity to do something new, something creative, something better on behalf of our customers. Today we report a quarter and a fiscal year that reflects that effort. This quarter, Apple achieved revenue of $64.7 billion, a September quarter record, despite the anticipated absence of new iPhone availability during the quarter, and the ongoing impacts of COVID-19, including closures at many of our retail locations. We also set a new all-time record for Mac and Services. Outside of iPhone, each of our product categories saw strong double digit year-over-year growth, despite supply constraints in several product categories. Our results for this quarter were ahead of our expectations, driven by stronger-than-expected iPhone and Services performance. As we anticipated, we launched new iPhone models in October, a few weeks later than last year’s mid-September launch. Up to that mid-September point, customer demand for iPhone was very strong, and grew double-digits. On Services, we saw stronger-than-expected performance across the board. Geographically, we set September quarter records in the Americas, Europe and Rest of Asia Pacific. We also set a September quarter record in India, thanks in part to a very strong reception to this quarter’s launch of our online store in the country. Greater China is the region that was most heavily impacted by the absence of the new iPhones during the September quarter, still we beat our internal expectations in the region, growing non-iPhone revenue strong double digits and iPhone customer demand grew through mid-September. When you pull back the lens to the entire fiscal year, it’s a testament to the team’s work and to the resilience of the business in the era of COVID-19. This year, we set an all-time revenue record of $274.5 billion, growing 6% year-on-year. We grew every quarter, set all-time yearly records in Mac, Wearables Home and Accessories, and Services, and grew by double-digits in every product category outside of iPhone. When we first began to grapple with COVID-19, I said there are worse things for a company whose business is innovation, than having to periodically do just about everything in an entirely new way. This year, we not only launched our most powerful and compelling generation of hardware, software and Services ever, we did it in a way that pushes to reimagine every part of that innovation process, down to how we share these announcements with the world and how we get new products into our customers’ hands. Working from kitchen tables and bedrooms, in distanced office settings and rework labs and manufacturing facilities, the team rebuilt every part of the plane while it was mid-air, and the results speak for themselves. In a year that has been enormously challenging, our retail teams, contact centers, and all those who work with our customers most closely, have gone to creative and dedicated [lengths] [ph] to keep serving our customers. From adapting our stores for contactless pickup to new Apple Express storefronts, to new online customer support options. Amid store closings, reopenings and reimagining, these teams have been an unfailing source of energy, creativity and determination. Innovation isn’t just about what you make; it’s about how you approach problems, and these teams and every team across Apple having not faced a single question this year that they haven’t found an answer to with passion and resolve. Their actions didn’t just meet the moment; they will make us a better company moving forward. The pandemic has hit home for all of us, and at Apple we have seen it as a call to action. We have seen the pain in our communities. Many of us have seen our children work hard to adapt to remote learning, and we all know that the road ahead is uncertain. This quarter and throughout the year, our response to this crisis has been to ask, how can we help? In terms of COVID-19 response, that has meant sourcing and donating millions of face masks, designing and manufacturing millions of face shields, and scaling the production of millions of test kits. But we have tried to live our values more broadly. We’ve pledged $100 million to our new racial equity and justice initiative. We’ve committed to be fully carbon neutral by 2030 across our entire supply chain and device usage, as massive wildfires, hurricanes and floods, bring home the consequences of climate change for all of us. And we’ve deepened our enduring educational partnerships, from coding education beginning in elementary school, to new efforts with dozens of historically black colleges and universities. One of the many areas where COVID-19 continues to have a significant impact is in education. As teachers, students and parents alike work hard to keep education relevant, creative and effective, our products have helped them meet the moment. In a typical year, the back-to-school season is a bustling time for us. This year, that was true in the biggest way ever. We’ve helped school districts around the world meet this moment in an unprecedented way, including starting nine of our 10 largest school district deployments ever, that alone will support over 1 million students and teachers. We have also supported these deployments and educators and learners everywhere with free tools and training, reaching over 150,000 teachers and millions of parents and students around the world. Looking forward, we feel great optimism about the road in front of us. We’re in the midst of our most prolific product introduction period ever. In addition to the announcement of HomePod Mini, which achieves unmatched sound quality and Siri and smart-home capabilities in a small and affordable format, we just marked the beginning of a new era for iPhone, with the arrival of our first 5G enabled devices. The iPhone 12 and 12 Mini boasts powerful breakthroughs like an edge-to-edge Super Retina XDR display, unprecedented durability with a new ceramic shield, developed with our partners at Corning, new MagSafe charging and accessories, the fastest ever A14 Bionic chip, and a new dual camera system, driven by computational photography. The iPhone 12 Pro and 12 Pro Max take all of this to an even higher level, driven by the most powerful photo and video tools ever delivered by a smartphone, including an all new LiDAR scanner and the ability to shoot an Apple ProRAW and full Dolby video. And of course, all of these devices bring the 5G experience users have been waiting for, with lightning fast download and uploads, a new standard in video streaming, more responsive gaming and much more. The early product reviews have been tremendously positive, and our customers have been similarly excited to get their hands on this next era of devices. We’re very optimistic about what the next few weeks will bring. We’re also seeing a very positive response to our September announcement, the all new Apple Watch Series 6, boasts powerful new health and wellness features, including a blood oxygen sensor, a next generation altimeter, and a wide variety of new colors and bands. The potential for Apple Watch’s powerful health and wellness capabilities continues to grow. Just yesterday, the government of Singapore and Apple launched LumiHealth, a first of its kind program designed to encourage healthy activity and behaviors using Apple Watch. Created in collaboration with a team of physicians and public health experts, LumiHealth uses technology and behavioral insights to encourage Singaporeans to keep healthy and complete wellness challenges through their Apple Watch and iPhone. Singapore is a trailblazer here, and we’re proud to be their partner. Our iPad lineup continues to set the pace for the category, including the new iPad Air now shipping with the A14 Bionic, our most powerful chip ever. We announced Apple Fitness Plus, which delivers deep personalization and integration across the fitness tools our users love and depend on. And Apple One, launching tomorrow, is the easiest way for users to enjoy Apple’s services, like Music, TV+, Arcade, iCloud, News+ and Fitness+ on a single plan that is right for them and their family. Looking across services more broadly, we’re really excited about what we see. This was a record quarter for the App Store, AppleCare, Cloud Services, Music and Payment Services. The App Store in particular, continues to play an essential role in helping small businesses, educational institutions and workplaces adapt to COVID-19. Apple TV+ continues to impress, from fan favorites like Ted Lasso, which has won a worldwide audience with its hopeful tone during challenging times, to critical and award praise, including a Primetime Emmy for Billy Crudup in the morning show. Luca will speak in greater detail about our expectations for the December quarter. Without giving away too much, I can tell you that this year has a few more exciting things in store. Before I hand things off, I want to offer one more comment on resilience, because I think if I had to describe our performance this quarter in a single word, it’s resilient. Financial performance aside, I don’t think this year will be a time that any of us look back on with great fondness or nostalgia. Those of us, who wake up every day, hoping for a return to normal, can count ourselves fortunate. Others don’t have that luxury. There is the great pain of a lost loved one, the uncertainty and fear of a lost job, a deep well of concern for people we care about, who we are not able to see. A sense of opportunities missed, of plans delayed, of time lost. Even though we’re apart, it has been obvious this year that around the company, teams and colleagues have been leaning on and counting on each other more than in normal times. I think that instinct, that resilience has been an essential part of how we have navigated this year. Work can’t solve for all the things we’re missing right now, but a shared sense of purpose goes a long way. A belief that we can do more together than we can alone, that people of goodwill, driven by creativity and passion, and that certain itch of a big idea, can still do things that help other people in our own small way to teach, to learn, to create or just to relax at a time like this. Even as the things we make require us to operate at the very cutting edge of technology, in materials, products and ideas that didn’t exist just a few years ago, this year has forced us to face plainly the things that make us human; disease, resilience and hope. You never wished for a year like this one, but I couldn’t be prouder of the team, the work we have done and the small role we have played in helping our communities find hope and resilience in this time. With that, I’ll hand things over to Luca. Luca Maestri: Thank you, Tim. Good afternoon, everyone. We are very pleased to report today a new September quarter revenue record, which caps a remarkable level of performance for our fiscal year 2020, during which we set new all-time records for revenue, earnings per share and free cash flow, in spite of an extremely volatile and challenging macro environment. We could not be more proud of the way our team has innovated and executed, throughout this unprecedented period of uncertainty. We reported total revenue of $64.7 billion for the September quarter, up 1% from a year ago. This is a very impressive level of performance, when we consider that this year; we did not launch and ship any new iPhone models during the quarter. Outside of iPhone, we grew 25% in aggregate, and had strong double-digit year-over-year revenue growth in each of our product categories. We set all-time records for Mac and Services, and a September quarter record for Wearables, Home and Accessories. We also achieved new September quarter records in the vast majority of countries that we track, including among others, The U.S., Canada Brazil, Germany, France, Italy, Spain, Turkey, Russia, India, Korea, Thailand, Malaysia and Vietnam. Products revenue was $50.1 billion with very strong underlying performance across each product category. Our products outside of iPhone grew a combined 30%, despite supply constraints on iPad, Mac and Apple Watch throughout the quarter. For iPhone, through mid-September, customer demand grew double-digits. As a result of this level of sales performance and the unmatched loyalty of our customers, our installed base of active devices reached an all-time high in aggregate, and in each of our major product categories. Our Services set an all-time record of $14.5 billion, growing 16% year-over-year. We established new all-time records in many Services categories and September quarter records in each geographic segment. I’ll cover this in more detail later. Company gross margin was 38.2%. This was up 20 basis points sequentially, due to cost savings and a higher mix of services, partially offset by a different mix of products. Products’ gross margin was 29.8%, growing 10 basis points sequentially, driven by cost savings, partially offset by a different mix. Services gross margin was 66.9% decreasing 30 basis points sequentially, mainly due to a different mix. Let me get into more detail for each of our product categories; iPhone revenue was $26.4 billion, as we did not have availability of new iPhone models during the September quarter this year, which we had mentioned during our call in July. While COVID-19 and social distancing measures impacted store operations in a significant manner, demand for iPhone remained very strong. In fact, through mid-September, customer demand for our current product lineup grew double digits, and was well above our expectations. Our active installed base of iPhones reached a new all-time high, thanks to the exceptional loyalty of our customer base and strength of our ecosystem. In fact, in the U.S., the last survey of consumers from 451 Research indicates iPhone customer satisfaction of 98% for iPhone 11, 11 Pro and 11 Pro Max combined. Turning to Services, as I said, we set an all-time revenue record of $14.5 billion. We grew strong double digits and set all-time records in App Store, Cloud Services, Music, Advertising and Payment Services. We also set an all-time record in Apple Care, as in-store traffic improved and we were able to support more customers. Our new services, Apple TV+, Apple Arcade, Apple News+, and Apple Card, are also contributing to overall services growth, and continue to add users, content and features. The key drivers for our Services growth, all continue to be moving in the right direction. First, our installed base continues to grow and is at an all-time high across each major product category. Second, the number of both transacting and paid accounts on our digital content stores reached a new all-time high during the September quarter, with paid accounts increasing double digits in each of our geographic segments. Third, paid subscriptions grew more than 35 million sequentially, and we now have over 585 million paid subscriptions across the services on our platform, up 135 million from just a year ago. With this momentum, we are very confident to reach and exceed our increased target of 600 million paid subscriptions before the end of calendar 2020. Finally, as Tim mentioned, we continue to improve the breadth and the quality of our current services offerings, and are adding new service offerings that we think our customers will love, like Apple One and Apple Fitness+. Wearables, home and accessories established a new September quarter record, with revenue of $7.9 billion, up 21% year-over-year. We set September quarter records in every geographic segment and for each of the three product categories; Wearables, Home and Accessories. As a result, our wearables business is now the size of a Fortune 130 company. Importantly, Apple Watch continues to extend its reach, with over 75% of the customers purchasing Apple Watch during the quarter, being new to the product. We’re very excited about the future of this category, including the recent launches of our new products; Apple Watch Series 6 NFC, HomePod Mini, and the MagSafe ecosystem of accessories. Next, I’d like to talk about Mac; revenue was by far an all-time record at $9 billion, up 29% over last year and $1.6 billion above our previous record, in spite of supply constraints during the quarter. We grew strong double digits in each geographic segment and set all time revenue records in the Americas, and the rest of Asia Pacific, as well as September quarter records in Europe and Japan. We’ve seen amazing customer response to the new MacBook Air and MacBook Pro and very strong demand during the back to school season. IPad performance was also very impressive, with revenue of $6.8 billion, up 46%, and our highest September quarter revenue in eight years despite supply constraints. Demand exceeded our expectations around the world, as we grew very strong double digits in every geographic segment, including an all-time record in Japan and a September quarter record in the Americas. Both Mac and iPad are incredibly relevant products for our customers in the current working and learning environments, and we are delighted that the most recent surveys of consumers from 451 Research, measure customer satisfaction at 93% for Mac and 95% for iPad. With this level of customer satisfaction and with around half of the customers purchasing Mac and iPad during the quarter being new to that product, it is no surprise that the active installed base for both products reached a new all-time high. In the Enterprise market, our products are helping companies grow their business, while achieving their sustainability goals. One example is Vestas, a leading producer of wind turbines. Vestas is using Apple products and native iOS apps extensively across their operations to deliver renewable energy efficiently to customers worldwide. For instance, they use iPads to help optimize onsite construction operations, cutting crane usage on average by one day per project. Vestas field technicians are using iPhone for work orders, troubleshooting a remote collaboration, saving them 400,000 service hours annually. More recently, they’ve started piloting the augmented reality capability in iPads, to help customers visualize wind turbine installations. We ended the quarter with almost $192 billion in cash plus marketable securities. We issued $5.5 billion of new term debt, and decreased short term borrowing facilities by $6.2 billion during the quarter, leaving us with total debt of $112 billion. As a result, net cash was $79 billion at the end of the quarter, as we continue on our path to reaching a net cash neutral position over time. We returned nearly $22 billion to shareholders during the September quarter, including $3.5 billion in dividends and equivalents, and $18 billion to open market repurchases of 168.7 million Apple shares. We also retired an additional 3.1 million shares, in the final settlement of our 16th ASR. Before looking ahead, I want to provide just a few highlights for the amazing fiscal year we just completed. In fiscal ’20, we grew revenue by 6% to $274.5 billion, a new all-time record. We showed remarkable resilience throughout the year, as we were able to grow both revenue and installed base of active devices in every quarter. During the September quarter, including $3.5 billion in dividends and equivalents and $18 billion through open market repurchases of 168.7 million Apple shares. We also retired an additional 3.1 million shares in the final settlement of our 16th ASR. Before looking ahead, I want to provide just a few highlights for the amazing fiscal year we just completed. In fiscal 20, we grew revenue by 6% to $274.5 billion and new all-time record. We showed remarkable resilience throughout the year as we were able to grow both revenue and installed base of active devices in every quarter. In spite of the most challenging economic environment we can remember, we said new revenue records in the Americas, in Europe and in the rest of Asia Pacific. We grow our business outside of iPhone by 16%. We grew earnings per share 10% to a new all-time record and most importantly, we continue to deliver innovative products and services that our customers love. As we move ahead into the December quarter, I’d like to provide some color on what we are seeing, which includes the types of forward-looking information that Tejas referred to, at the beginning of the call. Given the continued uncertainty around the world in the near term, we will not be issuing revenue guidance for the coming quarter. However, we are providing some insights on our expectations for the December quarter for our product categories. These directional comments, assume that COVID related impacts to our business in November and December are similar to what we’re seeing in October. We just started shipping iPhone 12 and 12 Pro, and we’re off to a great start. We are also excited to start preorders on iPhone 12 Mini and 12 Pro Max next Friday. Given the tremendously positive response, we expect iPhone revenue to grow during the December quarter, despite shipping iPhone 12 and 12 Pro four weeks into the quarter, and iPhone 12 Mini and 12 Pro Max seven weeks into the quarter. We expect all other products in aggregate to grow double digits, and we also expect services to continue to grow double digits. For gross margin, we expect it to be similar to our most recent quarters, despite the costs associated with the launch of several new products. For OpEx, we expect to be between $10.7 billion and $10.8 billion. We expect OI&E to be around $50 million, and the tax rate to be around 16%. Finally today, our Board of Directors has declared a cash dividend of $0.205 per share of common stock, payable November 12, 2020 to shareholders of record as of November 9, 2020. With that, let’s open the call to questions. Tejas Gala: Thank you, Luca. We ask you that you limit yourself to two questions. Operator, may we have the first question please. Operator: Certainly we'll hear first today from Shannon Cross, Cross Research. ShannonCross: Thank you very much. Tim, can you talk a bit more about China? And in terms of linearity, I think Luca, you'd mentioned that services in all regions were up at an all time high. I'm not sure exactly what your comment was. But, maybe give us a little idea of, whether you're seeing any blowback or benefits in the Huawei situation and just dig a bit more into the trends we're seeing in China, and then have a follow up. Thank you. TimCook: Thanks, Shannon. If you look at China, and look at last quarters, I'll talk about both last quarter and this quarter, the last quarter, what we saw was our non iPhone business was up strong double digit for the full quarter. And then if you look at iPhone and you look at it in two parts one, pre mid September, which is pre the point at which the previous year, we would have launched iPhones that period of time which was the bulk of the quarter iPhone was growing from a customer demand point of view. And of course not shipping new iPhones for the last two weeks of September makes that number in the aggregate a negative but the net is the underlying business in China last quarter was very strong and perhaps very different than you might think from just a quick look at the stated number In terms of this quarter, given the explanation for last quarter and the momentum that we've got, and as importantly given the initial data points that we see on iPhone 12 and iPhone 12 Pro, although we don't guide to revenue as Lucas said, I would tell you that we're confident that we will grow this quarter in China. And so we're very bullish on what's going on there. A little more color on last quarter, we had a much more significant inventory draw down on the channel side than other regions. And so that is one reason why the numbers are different than other regions. And additionally, the new products in the year ago quarter were a higher percentage of our iPhone sales than they were in other regions. So hopefully that explains what's going on in China. In terms of the market there, 5G is fairly advanced there. They're forecasting 600,000 base stations by the end of the year. And so we're entering the market at a very good time, and with the reception that we've gotten so far; we're very confident there. ShannonCross: Okay, great. And then can you talk a bit about just overall in the world, the cadence that you see sort of for the 5G adoption launch, what you see will be sort of the key drivers, obviously, there's a fair amount of subsidies going on in the US at this point. Thank you. TimCook: Yes, we're working hard to provide the best experience for iPhone users. To do so we've been collaborating closely with carriers all around the world to ensure iPhone has great throughput and coverage and battery and call quality. We've completed 5G testing so far on over 100 carriers in over 30 regions. And so it's pretty, it's pretty pervasive around the world. But grantedly, it will continue to roll out in more places as carriers continue to expand their coverage. And this will happen every week. And so it's just going to get better. There are obvious places in the world where it's more ahead than others. But we feel like we are entering at a sort of at exactly the right time. Operator: That will be from Jeriel Ong from Deutsche Bank. JerielOng: Yes, thank you so much. I guess I appreciate the guidance for revenue to grow but I guess my question, perhaps, if I could, is relative to seasonality, you guys over the last five years of seasonality is typically above 50% quarter-on-quarter, do you think that you can beat that, even with the later release? And I have a follow up. LucaMaestri: So as I said, Jay, we're not providing a range, for the reasons that I explained during my prepared remarks. So you need to keep in mind a couple of things that are unique about this quarter versus the past. And that I mentioned again, the launch timing of the phones is different from the past. So we are launching the new iPhones, four weeks into the quarter for two models for the 12 and 12 Pro and seven weeks into the quarter for the other two, the iPhone Mini and for 12 Pro Max. So that is something to keep in mind as you think about the growth rates. With regard to all the other product categories, as I said, we are expecting to grow double digits essentially across the board for the rest of our products and for services. And so we are incredibly optimistic about what we've seen so far. Obviously, we started taking pre orders five days ago and it's a bit early for the phone. But we think that there are a lot of tailwinds this year for iPhone for the entire cycle. Some of the comments that Tim has already made, right, we've got the best lineup of iPhones that we've ever had. We got an install base of iPhone that is very large continues to grow. It's an all time high. Obviously, 5G is a once in a decade, opportunity. And as you've seen in some markets, certainly here in the United States, carrier offers are very aggressive. And so that is very good for consumers and ultimately, very good for us. So very, very optimistic, given what we've seen so far. JerielOng: Awesome, thank you so much for that context and given us some of the levers to think about. I'd like to ask a little bit more of a strategic one, a little bit longer term in nature. I think one thing is interesting about the Apple one bundle is the desire two bundles in the first place, I guess. I'm wondering, and some investors have asked me this as well, is that why wouldn't you also take that rationale perhaps in hardware, perhaps maybe AirPods and iPhone or AirPods watch and iPhone? Because if it makes sense to bundle services, would it also make sense to bundle hardware? And if that's not the case, then are there benefits of services, bundling that don't necessarily translate to hardware bundling? Thanks. TimCook: Yes, we don't have anything to announce today at our hardware bundle but backing up a bit. And we do view that people like to pay for their hardware are at least some substantial portion of it monthly. And so that's the reason that we have implemented installments in our stores and online. And that's the reason you see in some of the channels too selling the hardware on a per month kind of basis. If that begins to look like a subscription, perhaps to some buyers because they're used to holding the phone for a fixed period of time and then turning it over and using the residual value of that phone in a way that gives them a de facto kind of subsidy on a new phone. And so there is something today in the market that works somewhat similar. On the services side; we have -- we had customers coming to us and asking for an easier way to buy all of our services. And we wanted to provide that and we're looking forward to tomorrow to getting Apple one out there. Operator: It will come from Katy Huberty with Morgan Stanley. KatyHuberty: Thank you. Good afternoon. New technologies, including the chips that support 5G put upward pressure on cost this year. But you managed to leave ASPS for iPhones relatively unchanged this product cycle. How should we think about the margin profiles of iPhone 12 relative to past iPhone cycles? LucaMaestri: Hi, Katy. Obviously, we don't provide any outlook at the gross margin level for product categories. What I said in my prepared remarks, we expect gross margins in total for the company to be pretty much in line with what we've seen during the last quarter. Because obviously, as you said, it's very good, right, because we are offering the new phones at price points that are essentially unchanged. And we are taking on a lot of new technology into the phones. I would say the commodity environment is good. For the first time in many, many quarters, I don't have to say that foreign exchange is a headwind and getting into the quarter is not going to be a factor during the quarter. As we've made it clear in our comments, we are bullish about our sales performance expectation, so we should be getting some leverage. And so I think that the gross margin dynamics are good and it's very good to see that we're able to offer so much more technology and still able to deliver the level of gross margins that I think investors are expecting. KatyHuberty: Okay and shifting to the services business. This isn't dependent on certainly any one service but licensing and other historically has been a driver of growth. That's where the ad based revenue comes in. When you think about the Google antitrust pressure, what's the risk that you see some shrinkage in your licensing and others segment within services and do you see opportunities for other services to make up for any potential weakness? KatyHuberty: We've got Katy, as you know; we've announced a number of services over the last couple of years. And we are ramping those between Apple TV plus and Apple News plus and Apple Kay, we've got Apple Card. We've got Apple Fitness Plus coming. We've got a number of services that have been launched a bit longer that are doing really well from the app store to iCloud, and So there's a lot of room their input and potential there. I have no idea how the DOJ suit will go, but I think it's a long way from a conclusion on it. Operator: That will come from Evercore's Amit Daryanani. AmitDaryanani: Thanks for taking my question. I guess I have two as well. First off, Tim, on iPhones, you talked about the iPhone install data thing being the highest and largest ever been satisfaction rates, obviously pretty high. And our data would suggest replacement cycles are getting elongated. And if I take all of that together, along with the fact that, if iPhone user like me with embarrassingly high weekly usage rate, does that in aggregate give you better confident, better clarity that we could enter an extensive period of iPhone revenue growth versus what we seen the last couple of years. TimCook: We're very bullish on this cycle, very bullish on it, because as I sort of step back from it and look at what we've now done, we have for the first time ever, we've launched four iPhones. And there is an iPhone for everyone there. It is the strongest lineup we've ever had by far, we have -- we do have a very large, loyal and growing install base. And we're also reaching out to switchers. And so I'm very optimistic there. We've got a once in a decade opportunity with 5G. There's a lot of excitement around 5G. And we've got some aggressive offers in the marketplace. And so when I think about all of those, I'm really and I look at the initial data points that we've got on the iPhone 12 and the 12 Pro, we are off to a great start. AmitDaryanani: Got it. And I guess, Luca had a follow up to you on the services gross margin it just was to kind of continue to move higher rather nicely. Do you think this level at 67% essentially is sustainable? And what do you think are the two or three factors that are enabling these gross margins to remain here as we go forward? LucaMaestri: I mean, obviously, we're very pleased with the level of gross margins in services, as you said; they've been expanding almost 300 basis points on a year-over-year basis. The reason for that is, of course that, we are growing the services revenue, and therefore we're getting leverage on a lot of these services, right. Some of it, as explained in the past, we have a portfolio of services that got different margin profiles. And so sometimes, depending on the mix of products we have, we can see margin expansion through mix, as well. And so, but we're also launching new services that where we need to invest heavily up front. And but we think we've been able to show, for example, this year that we've launched a lot of new services, made all the necessary investments and still being able to expand gross margin. So we feel quite confident about that trajectory that we have, that we have for services and we're very, very happy to see the customer response to really all of them, because as we've mentioned earlier, I mean, we've seen revenue records across essentially every category and in across the entire world, right? We've seen September quarter records in every geography around the world. So of the dynamics, all the levers that we have in the services business are working very well right now. And that translates also into margin, of course. Operator: We'll hear from Samik Chatterjee with JP Morgan. SamikChatterjee: Hi, thanks for taking the question. I just want to start off with the iPhone lineup here, particularly as you mentioned, the carrier subsidies that you see mixed optimistic about iPhone sales. I think just looking at some other factors here. Earlier in the year, you had mentioned that iPhone sales was seeing an uptake with stimulus checks going out to consumers helping in the consumer spending overall here in the US. So as we see some delays here on that front, are you seeing anything change on the consumer spending side as a macro impacting? How you think about iPhone sales, particularly with -- even with the new product lineup? And I have a follow up. Thank you. TimCook: It's prior to mid September, we were seeing double digit growth in customer demand on iPhone. So there's a lot of momentum there. And there is a lot of momentum even much more so now given the launch of the 12 Pro and the iPhone 12. If you're asking whether it could have been even more with a different macro spending environment? I believe the answer to be yes. But you can't run the experiment. And so I don't know for sure. But I suspect that just the COVID in general take something off from a worldwide economic point of view. SamikChatterjee: Perfect. And if can just follow up just following up on that COVID discussion. We are potentially here looking at a second wave, right. And I think all companies are trying to prepare for that which you discussed as well in your prepared remarks. But if you can share any kind of thoughts about how you're preparing in relation to either inventory levels, or sourcing from the supply chain, to prepare for any potential disruption, like we had earlier this year? TimCook: Well, we're doing everything we can do. But we're prioritizing safety first, obviously. And so with our stores as an example, we've come up with a new concept that puts an essentially turns the store into an express storefront. And we've implemented that in a number of places where we believe that helps from the safety of our employee and the safety of the customer's point of view, but still allows for an interaction to take place. And so we've also put a lot more people on the phones because a lot more people are reaching out to us in that way. And of course, the online store has stayed up and running through the whole of this. I think if you take some of those, the channel is doing some similar things and then some different things as well. And so I think everybody to the best of their ability is putting in contingency plans and finding a way to adapt to the environment. But it is difficult to call and there's a level of uncertainty in it, obviously. And that's what Luca was referring to earlier. Operator: That will come from Krish Sankar from Cowen and Company. KrishSankar: Hi, thanks for taking my question. I have two of them, first on palooka. I understand you don't want to give color on gross margin by products or segments. But Luca you mentioned growth margin should be similar in December versus September. And so it should grow double digit, there's a general view that on the iPhone side, the bond cost would be headwind for gross margin, but carrier subsidies would be attainment. So I'm kind of curious, how should we think about the different, like gross margin levels into December quarter? And I have a follow up. LucaMaestri: Yes. And so typically during the December quarter, we have positive factors because we have the typical seasonal leverage, right, sequentially as we go from September to the holiday season. And we also have an improved mix between products, particularly this year, as we've launched the new iPhone, at the same time, we shouldn't forget that we have launched a lot of new products. During the last several weeks, we launched four new models of iPhone; we launch new models of Apple watch new, models of iPads. And so, clearly every time we launch a new product, the cost structure is higher. And so that is going to be the other side of the coin. So but we think that those two things should balance out and again, as I was saying earlier, and we are accomplishing this while delivering a lot of new technologies, a lot of new features to our customers. This time for an exchange is not a factor and that's something that is a bit different from the past. So but that those are the pluses and minuses. KrishSankar: Got it. Definitely helpful, Luca. And then a follow up for Tim. Tim, I kind of surprised you didn't say a lot about the payments ecosystem in this prepared comments kind of curious to find out from your advantage point, how you think of your whole payments ecosystem including Apple Card, Apple Pay, Apple Cash; now you're disaggregating the whole FinTech environment. TimCook: Thanks for the question. There's just a limited number of things I can talk about is kind of a reason I didn't talk about it. We continue to be very enthusiastic about the whole Payment Services area. Apple Card is doing well. And Apple Pay is doing exceptionally well. As you can imagine in this environment, people are less want to hand over a card. So this contactless payment has taken on a different level of adoption in it that I think will never go back. The US has been lagging a bit in contactless payment. And I think that the pandemic may well get put the US on a different trajectory there. And so we are very bullish about this area and view that there are there are more things that Apple can do in this space. And in so it's an area of great interest to us. Operator: That will come from Kyle McNealy with Jefferies. KyleMcNealy: Hi, thanks for the question. I wanted to ask a little bit about the supply chain. Given your latest start from manufacturing to the flagship phone line of this year, do you think that supply will be able to meet demand through the end of the calendar? Are there any component shortages that you're seeing? Or are there any actions that you can take to increase weekly output versus last year? Thanks. TimCook: Yes, Kyle, I don't know what you're talking about iPhone in particular. But if you look at iPhone, we are constrained today. And that's not a surprise where at the front end of the ramp, if you will, and how long we will be supply constrained, it's hard to predict. I mean, we haven't taken orders yet for the iPhone 12 Mini or the Pro Max either. And so those are coming in. So we shall see. But right now we are supply constrained, we are also supply constrained for avoidance of any confusion where supply constrained on Mac, we are supply constrained on iPad. And we're supply constrained on some Apple watches as well. And so we have a fair number of areas right now of focus, and we're working really, really hard to remedy those as quickly as we can. But at this point, I can't estimate when we'll be out of that. KyleMcNealy: Okay, great. Thanks a lot. And then switching to Mac and iPad. How do you think about the durability of the strength you've seen there with Mac and iPad? Is there any potential for stronger than seasonal pullback after the strong back to school season and holiday season? And these supply constraints make it feel like there's a good chance for continuation of the strong demand trends and in flow through of that. What do we think about the seasonality into December and March quarter being more positive in seasonal or less positive in seasonal? Thanks. TimCook: Yes, we placed our thoughts in the color that Luca provided when he said that all products excluding iPhone, all products and services excluding iPhone or all products, rather excluding iPhone would grow in the double digits. And so we continue to be bullish on what Mac and iPad can do. I think the moves that have taken place to remote learning and remote work are not going to go back to normal, normal will become something different. Because I think people are learning that there are aspects of this that work well. And so I don't believe that we're going to go back to where we were. And I think that means that iPads and Macs are even more important in those environments. The growth in both of these last quarter were phenomenal as you can tell from your from datasheet with Mac at 29 and iPad at 46. These are tremendous numbers and as Luca said the September quarter was the all time high for Mac in the history of the company, and by not by little bit by $1.6 billion. And so it was a substantial difference that we did have aggressive promotion for college students that were going back to going back to school. And so that invariably part of it. But I think the other part of it during the remote work thing is not something that's going to snap back to the way it used to be anytime soon. Operator: That will come from Chris Caso with Raymond James. ChrisCaso: Yes, thank you. I guess first question is on iPhone pricing. And there was some changes in the iPhone price back this year, the iPhone, the price point for iPhone 12 moves up a bit, I guess the difference the gap between 12 and 12 Pro is smaller. And I guess that's after you made some adjustments years prior where the price point came down a bit? Can you talk through the thought process behind that and the potential implications for either unit out elasticity or blended ASP as a result of the price changes? TimCook: Well, I the iPhone 12 family start at $699. In many places, because you can get in the deals that people are really paying are very different than that, because a lot of people, particularly in this country, but also in several other countries in the world connect to a carrier plan. And of course, those offers are much more aggressive. And so the price that our customers paying is probably the most important one. The iPhone 12 is at $799. And so I think what you're saying is there's a $200 difference there. But I would guess that people are viewing it more as a $300 difference between the 12 Mini and the 12 Pro. And so we'll see what the mix turns out. Right now we have no data other than 12 and 12. Pro, we like the data on the 12 Mini and the Pro Max, because we're not taking orders yet. But what we try to always do in pricing is give the customer a great value. And I feel like we really did that this year. And that's despite, as was mentioned earlier, all of the extra features that we placed into the phones, including 5G. ChrisCaso: As a follow up you mentioned, some of the carrier incentives we've seen here in the US. And if you could provide some more color about that, about what you're seeing now. And obviously, as we went through, years ago, the incentive from carriers were a lot larger. Is this mark some shift in the approach of carriers as we're moving into 5G? What's the extent of the permanence of some of these incentives? And then, as 5G rolls out around the world and into other geographies, is this something we should expect that as either they try to protect from switchers or kind of promote the 5G networks will see a higher prevalence of incentives and carriers as we go forward? TimCook: I don't want to speak for our carrier partners that would be up to them to talk about their plans. Generally, I think it's to the vast, vast majority of carriers around the world to their interest to move customers to 5G. And I think it's in the customer's interest to move to 5G and obviously, we like that as well. And so I think you have a situation where everyone's whoring in the same direction. And that's a very different kind of situation than normally we would have. And so it is one of the things as I alluded to earlier that makes me very bullish, only one, the other things are very important to the size of the install base, the product lineup, these things are critically important as well. Tejas Gala: Thank you, Chris. A replay of today's call will be available for two weeks on Apple podcasts, as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457- 0820, please enter confirmation code 9501153. These replays will be available by approximately 5 PM Pacific time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414; financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. Operator: And again, that does conclude today's conference. Thank you all for joining us today.	[ { "speaker": "Operator", "text": "Good day everyone and welcome to the Apple Inc. Fourth Quarter Fiscal Year 2020 Earnings Conference Call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn things over to Tejas Gala, Senior Analyst, Corporate Finance and Investor Relations. Please go ahead, sir." }, { "speaker": "Tejas Gala", "text": "Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple’s CEO, Tim Cook, and he will be followed by CFO, Luca Maestri. After that, we’ll open the call to questions from analysts. Please note that some of the information you’ll hear during the discussion today, will consist of our forward-looking statements including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company’s business, and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple’s most recently filed Annual Report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I’d now like to turn the call over to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thanks Tejas. Good afternoon and thanks for joining the call today. Back in April, I said we were in the most challenging environment in which Apple as a company has ever operated. That atmosphere of uncertainty, of resolve, of making difficult calls with limited information has not only come to define Apple’s year, but each of our lives as individuals across this country, and around the world. It has been a chapter that none of us will forget. In the face of these challenges, Apple stayed relentlessly focused on what we do best, seeing in every obstacle an opportunity to do something new, something creative, something better on behalf of our customers. Today we report a quarter and a fiscal year that reflects that effort. This quarter, Apple achieved revenue of $64.7 billion, a September quarter record, despite the anticipated absence of new iPhone availability during the quarter, and the ongoing impacts of COVID-19, including closures at many of our retail locations. We also set a new all-time record for Mac and Services. Outside of iPhone, each of our product categories saw strong double digit year-over-year growth, despite supply constraints in several product categories. Our results for this quarter were ahead of our expectations, driven by stronger-than-expected iPhone and Services performance. As we anticipated, we launched new iPhone models in October, a few weeks later than last year’s mid-September launch. Up to that mid-September point, customer demand for iPhone was very strong, and grew double-digits. On Services, we saw stronger-than-expected performance across the board. Geographically, we set September quarter records in the Americas, Europe and Rest of Asia Pacific. We also set a September quarter record in India, thanks in part to a very strong reception to this quarter’s launch of our online store in the country. Greater China is the region that was most heavily impacted by the absence of the new iPhones during the September quarter, still we beat our internal expectations in the region, growing non-iPhone revenue strong double digits and iPhone customer demand grew through mid-September. When you pull back the lens to the entire fiscal year, it’s a testament to the team’s work and to the resilience of the business in the era of COVID-19. This year, we set an all-time revenue record of $274.5 billion, growing 6% year-on-year. We grew every quarter, set all-time yearly records in Mac, Wearables Home and Accessories, and Services, and grew by double-digits in every product category outside of iPhone. When we first began to grapple with COVID-19, I said there are worse things for a company whose business is innovation, than having to periodically do just about everything in an entirely new way. This year, we not only launched our most powerful and compelling generation of hardware, software and Services ever, we did it in a way that pushes to reimagine every part of that innovation process, down to how we share these announcements with the world and how we get new products into our customers’ hands. Working from kitchen tables and bedrooms, in distanced office settings and rework labs and manufacturing facilities, the team rebuilt every part of the plane while it was mid-air, and the results speak for themselves. In a year that has been enormously challenging, our retail teams, contact centers, and all those who work with our customers most closely, have gone to creative and dedicated [lengths] [ph] to keep serving our customers. From adapting our stores for contactless pickup to new Apple Express storefronts, to new online customer support options. Amid store closings, reopenings and reimagining, these teams have been an unfailing source of energy, creativity and determination. Innovation isn’t just about what you make; it’s about how you approach problems, and these teams and every team across Apple having not faced a single question this year that they haven’t found an answer to with passion and resolve. Their actions didn’t just meet the moment; they will make us a better company moving forward. The pandemic has hit home for all of us, and at Apple we have seen it as a call to action. We have seen the pain in our communities. Many of us have seen our children work hard to adapt to remote learning, and we all know that the road ahead is uncertain. This quarter and throughout the year, our response to this crisis has been to ask, how can we help? In terms of COVID-19 response, that has meant sourcing and donating millions of face masks, designing and manufacturing millions of face shields, and scaling the production of millions of test kits. But we have tried to live our values more broadly. We’ve pledged $100 million to our new racial equity and justice initiative. We’ve committed to be fully carbon neutral by 2030 across our entire supply chain and device usage, as massive wildfires, hurricanes and floods, bring home the consequences of climate change for all of us. And we’ve deepened our enduring educational partnerships, from coding education beginning in elementary school, to new efforts with dozens of historically black colleges and universities. One of the many areas where COVID-19 continues to have a significant impact is in education. As teachers, students and parents alike work hard to keep education relevant, creative and effective, our products have helped them meet the moment. In a typical year, the back-to-school season is a bustling time for us. This year, that was true in the biggest way ever. We’ve helped school districts around the world meet this moment in an unprecedented way, including starting nine of our 10 largest school district deployments ever, that alone will support over 1 million students and teachers. We have also supported these deployments and educators and learners everywhere with free tools and training, reaching over 150,000 teachers and millions of parents and students around the world. Looking forward, we feel great optimism about the road in front of us. We’re in the midst of our most prolific product introduction period ever. In addition to the announcement of HomePod Mini, which achieves unmatched sound quality and Siri and smart-home capabilities in a small and affordable format, we just marked the beginning of a new era for iPhone, with the arrival of our first 5G enabled devices. The iPhone 12 and 12 Mini boasts powerful breakthroughs like an edge-to-edge Super Retina XDR display, unprecedented durability with a new ceramic shield, developed with our partners at Corning, new MagSafe charging and accessories, the fastest ever A14 Bionic chip, and a new dual camera system, driven by computational photography. The iPhone 12 Pro and 12 Pro Max take all of this to an even higher level, driven by the most powerful photo and video tools ever delivered by a smartphone, including an all new LiDAR scanner and the ability to shoot an Apple ProRAW and full Dolby video. And of course, all of these devices bring the 5G experience users have been waiting for, with lightning fast download and uploads, a new standard in video streaming, more responsive gaming and much more. The early product reviews have been tremendously positive, and our customers have been similarly excited to get their hands on this next era of devices. We’re very optimistic about what the next few weeks will bring. We’re also seeing a very positive response to our September announcement, the all new Apple Watch Series 6, boasts powerful new health and wellness features, including a blood oxygen sensor, a next generation altimeter, and a wide variety of new colors and bands. The potential for Apple Watch’s powerful health and wellness capabilities continues to grow. Just yesterday, the government of Singapore and Apple launched LumiHealth, a first of its kind program designed to encourage healthy activity and behaviors using Apple Watch. Created in collaboration with a team of physicians and public health experts, LumiHealth uses technology and behavioral insights to encourage Singaporeans to keep healthy and complete wellness challenges through their Apple Watch and iPhone. Singapore is a trailblazer here, and we’re proud to be their partner. Our iPad lineup continues to set the pace for the category, including the new iPad Air now shipping with the A14 Bionic, our most powerful chip ever. We announced Apple Fitness Plus, which delivers deep personalization and integration across the fitness tools our users love and depend on. And Apple One, launching tomorrow, is the easiest way for users to enjoy Apple’s services, like Music, TV+, Arcade, iCloud, News+ and Fitness+ on a single plan that is right for them and their family. Looking across services more broadly, we’re really excited about what we see. This was a record quarter for the App Store, AppleCare, Cloud Services, Music and Payment Services. The App Store in particular, continues to play an essential role in helping small businesses, educational institutions and workplaces adapt to COVID-19. Apple TV+ continues to impress, from fan favorites like Ted Lasso, which has won a worldwide audience with its hopeful tone during challenging times, to critical and award praise, including a Primetime Emmy for Billy Crudup in the morning show. Luca will speak in greater detail about our expectations for the December quarter. Without giving away too much, I can tell you that this year has a few more exciting things in store. Before I hand things off, I want to offer one more comment on resilience, because I think if I had to describe our performance this quarter in a single word, it’s resilient. Financial performance aside, I don’t think this year will be a time that any of us look back on with great fondness or nostalgia. Those of us, who wake up every day, hoping for a return to normal, can count ourselves fortunate. Others don’t have that luxury. There is the great pain of a lost loved one, the uncertainty and fear of a lost job, a deep well of concern for people we care about, who we are not able to see. A sense of opportunities missed, of plans delayed, of time lost. Even though we’re apart, it has been obvious this year that around the company, teams and colleagues have been leaning on and counting on each other more than in normal times. I think that instinct, that resilience has been an essential part of how we have navigated this year. Work can’t solve for all the things we’re missing right now, but a shared sense of purpose goes a long way. A belief that we can do more together than we can alone, that people of goodwill, driven by creativity and passion, and that certain itch of a big idea, can still do things that help other people in our own small way to teach, to learn, to create or just to relax at a time like this. Even as the things we make require us to operate at the very cutting edge of technology, in materials, products and ideas that didn’t exist just a few years ago, this year has forced us to face plainly the things that make us human; disease, resilience and hope. You never wished for a year like this one, but I couldn’t be prouder of the team, the work we have done and the small role we have played in helping our communities find hope and resilience in this time. With that, I’ll hand things over to Luca." }, { "speaker": "Luca Maestri", "text": "Thank you, Tim. Good afternoon, everyone. We are very pleased to report today a new September quarter revenue record, which caps a remarkable level of performance for our fiscal year 2020, during which we set new all-time records for revenue, earnings per share and free cash flow, in spite of an extremely volatile and challenging macro environment. We could not be more proud of the way our team has innovated and executed, throughout this unprecedented period of uncertainty. We reported total revenue of $64.7 billion for the September quarter, up 1% from a year ago. This is a very impressive level of performance, when we consider that this year; we did not launch and ship any new iPhone models during the quarter. Outside of iPhone, we grew 25% in aggregate, and had strong double-digit year-over-year revenue growth in each of our product categories. We set all-time records for Mac and Services, and a September quarter record for Wearables, Home and Accessories. We also achieved new September quarter records in the vast majority of countries that we track, including among others, The U.S., Canada Brazil, Germany, France, Italy, Spain, Turkey, Russia, India, Korea, Thailand, Malaysia and Vietnam. Products revenue was $50.1 billion with very strong underlying performance across each product category. Our products outside of iPhone grew a combined 30%, despite supply constraints on iPad, Mac and Apple Watch throughout the quarter. For iPhone, through mid-September, customer demand grew double-digits. As a result of this level of sales performance and the unmatched loyalty of our customers, our installed base of active devices reached an all-time high in aggregate, and in each of our major product categories. Our Services set an all-time record of $14.5 billion, growing 16% year-over-year. We established new all-time records in many Services categories and September quarter records in each geographic segment. I’ll cover this in more detail later. Company gross margin was 38.2%. This was up 20 basis points sequentially, due to cost savings and a higher mix of services, partially offset by a different mix of products. Products’ gross margin was 29.8%, growing 10 basis points sequentially, driven by cost savings, partially offset by a different mix. Services gross margin was 66.9% decreasing 30 basis points sequentially, mainly due to a different mix. Let me get into more detail for each of our product categories; iPhone revenue was $26.4 billion, as we did not have availability of new iPhone models during the September quarter this year, which we had mentioned during our call in July. While COVID-19 and social distancing measures impacted store operations in a significant manner, demand for iPhone remained very strong. In fact, through mid-September, customer demand for our current product lineup grew double digits, and was well above our expectations. Our active installed base of iPhones reached a new all-time high, thanks to the exceptional loyalty of our customer base and strength of our ecosystem. In fact, in the U.S., the last survey of consumers from 451 Research indicates iPhone customer satisfaction of 98% for iPhone 11, 11 Pro and 11 Pro Max combined. Turning to Services, as I said, we set an all-time revenue record of $14.5 billion. We grew strong double digits and set all-time records in App Store, Cloud Services, Music, Advertising and Payment Services. We also set an all-time record in Apple Care, as in-store traffic improved and we were able to support more customers. Our new services, Apple TV+, Apple Arcade, Apple News+, and Apple Card, are also contributing to overall services growth, and continue to add users, content and features. The key drivers for our Services growth, all continue to be moving in the right direction. First, our installed base continues to grow and is at an all-time high across each major product category. Second, the number of both transacting and paid accounts on our digital content stores reached a new all-time high during the September quarter, with paid accounts increasing double digits in each of our geographic segments. Third, paid subscriptions grew more than 35 million sequentially, and we now have over 585 million paid subscriptions across the services on our platform, up 135 million from just a year ago. With this momentum, we are very confident to reach and exceed our increased target of 600 million paid subscriptions before the end of calendar 2020. Finally, as Tim mentioned, we continue to improve the breadth and the quality of our current services offerings, and are adding new service offerings that we think our customers will love, like Apple One and Apple Fitness+. Wearables, home and accessories established a new September quarter record, with revenue of $7.9 billion, up 21% year-over-year. We set September quarter records in every geographic segment and for each of the three product categories; Wearables, Home and Accessories. As a result, our wearables business is now the size of a Fortune 130 company. Importantly, Apple Watch continues to extend its reach, with over 75% of the customers purchasing Apple Watch during the quarter, being new to the product. We’re very excited about the future of this category, including the recent launches of our new products; Apple Watch Series 6 NFC, HomePod Mini, and the MagSafe ecosystem of accessories. Next, I’d like to talk about Mac; revenue was by far an all-time record at $9 billion, up 29% over last year and $1.6 billion above our previous record, in spite of supply constraints during the quarter. We grew strong double digits in each geographic segment and set all time revenue records in the Americas, and the rest of Asia Pacific, as well as September quarter records in Europe and Japan. We’ve seen amazing customer response to the new MacBook Air and MacBook Pro and very strong demand during the back to school season. IPad performance was also very impressive, with revenue of $6.8 billion, up 46%, and our highest September quarter revenue in eight years despite supply constraints. Demand exceeded our expectations around the world, as we grew very strong double digits in every geographic segment, including an all-time record in Japan and a September quarter record in the Americas. Both Mac and iPad are incredibly relevant products for our customers in the current working and learning environments, and we are delighted that the most recent surveys of consumers from 451 Research, measure customer satisfaction at 93% for Mac and 95% for iPad. With this level of customer satisfaction and with around half of the customers purchasing Mac and iPad during the quarter being new to that product, it is no surprise that the active installed base for both products reached a new all-time high. In the Enterprise market, our products are helping companies grow their business, while achieving their sustainability goals. One example is Vestas, a leading producer of wind turbines. Vestas is using Apple products and native iOS apps extensively across their operations to deliver renewable energy efficiently to customers worldwide. For instance, they use iPads to help optimize onsite construction operations, cutting crane usage on average by one day per project. Vestas field technicians are using iPhone for work orders, troubleshooting a remote collaboration, saving them 400,000 service hours annually. More recently, they’ve started piloting the augmented reality capability in iPads, to help customers visualize wind turbine installations. We ended the quarter with almost $192 billion in cash plus marketable securities. We issued $5.5 billion of new term debt, and decreased short term borrowing facilities by $6.2 billion during the quarter, leaving us with total debt of $112 billion. As a result, net cash was $79 billion at the end of the quarter, as we continue on our path to reaching a net cash neutral position over time. We returned nearly $22 billion to shareholders during the September quarter, including $3.5 billion in dividends and equivalents, and $18 billion to open market repurchases of 168.7 million Apple shares. We also retired an additional 3.1 million shares, in the final settlement of our 16th ASR. Before looking ahead, I want to provide just a few highlights for the amazing fiscal year we just completed. In fiscal ’20, we grew revenue by 6% to $274.5 billion, a new all-time record. We showed remarkable resilience throughout the year, as we were able to grow both revenue and installed base of active devices in every quarter. During the September quarter, including $3.5 billion in dividends and equivalents and $18 billion through open market repurchases of 168.7 million Apple shares. We also retired an additional 3.1 million shares in the final settlement of our 16th ASR. Before looking ahead, I want to provide just a few highlights for the amazing fiscal year we just completed. In fiscal 20, we grew revenue by 6% to $274.5 billion and new all-time record. We showed remarkable resilience throughout the year as we were able to grow both revenue and installed base of active devices in every quarter. In spite of the most challenging economic environment we can remember, we said new revenue records in the Americas, in Europe and in the rest of Asia Pacific. We grow our business outside of iPhone by 16%. We grew earnings per share 10% to a new all-time record and most importantly, we continue to deliver innovative products and services that our customers love. As we move ahead into the December quarter, I’d like to provide some color on what we are seeing, which includes the types of forward-looking information that Tejas referred to, at the beginning of the call. Given the continued uncertainty around the world in the near term, we will not be issuing revenue guidance for the coming quarter. However, we are providing some insights on our expectations for the December quarter for our product categories. These directional comments, assume that COVID related impacts to our business in November and December are similar to what we’re seeing in October. We just started shipping iPhone 12 and 12 Pro, and we’re off to a great start. We are also excited to start preorders on iPhone 12 Mini and 12 Pro Max next Friday. Given the tremendously positive response, we expect iPhone revenue to grow during the December quarter, despite shipping iPhone 12 and 12 Pro four weeks into the quarter, and iPhone 12 Mini and 12 Pro Max seven weeks into the quarter. We expect all other products in aggregate to grow double digits, and we also expect services to continue to grow double digits. For gross margin, we expect it to be similar to our most recent quarters, despite the costs associated with the launch of several new products. For OpEx, we expect to be between $10.7 billion and $10.8 billion. We expect OI&E to be around $50 million, and the tax rate to be around 16%. Finally today, our Board of Directors has declared a cash dividend of $0.205 per share of common stock, payable November 12, 2020 to shareholders of record as of November 9, 2020. With that, let’s open the call to questions." }, { "speaker": "Tejas Gala", "text": "Thank you, Luca. We ask you that you limit yourself to two questions. Operator, may we have the first question please." }, { "speaker": "Operator", "text": "Certainly we'll hear first today from Shannon Cross, Cross Research." }, { "speaker": "ShannonCross", "text": "Thank you very much. Tim, can you talk a bit more about China? And in terms of linearity, I think Luca, you'd mentioned that services in all regions were up at an all time high. I'm not sure exactly what your comment was. But, maybe give us a little idea of, whether you're seeing any blowback or benefits in the Huawei situation and just dig a bit more into the trends we're seeing in China, and then have a follow up. Thank you." }, { "speaker": "TimCook", "text": "Thanks, Shannon. If you look at China, and look at last quarters, I'll talk about both last quarter and this quarter, the last quarter, what we saw was our non iPhone business was up strong double digit for the full quarter. And then if you look at iPhone and you look at it in two parts one, pre mid September, which is pre the point at which the previous year, we would have launched iPhones that period of time which was the bulk of the quarter iPhone was growing from a customer demand point of view. And of course not shipping new iPhones for the last two weeks of September makes that number in the aggregate a negative but the net is the underlying business in China last quarter was very strong and perhaps very different than you might think from just a quick look at the stated number In terms of this quarter, given the explanation for last quarter and the momentum that we've got, and as importantly given the initial data points that we see on iPhone 12 and iPhone 12 Pro, although we don't guide to revenue as Lucas said, I would tell you that we're confident that we will grow this quarter in China. And so we're very bullish on what's going on there. A little more color on last quarter, we had a much more significant inventory draw down on the channel side than other regions. And so that is one reason why the numbers are different than other regions. And additionally, the new products in the year ago quarter were a higher percentage of our iPhone sales than they were in other regions. So hopefully that explains what's going on in China. In terms of the market there, 5G is fairly advanced there. They're forecasting 600,000 base stations by the end of the year. And so we're entering the market at a very good time, and with the reception that we've gotten so far; we're very confident there." }, { "speaker": "ShannonCross", "text": "Okay, great. And then can you talk a bit about just overall in the world, the cadence that you see sort of for the 5G adoption launch, what you see will be sort of the key drivers, obviously, there's a fair amount of subsidies going on in the US at this point. Thank you." }, { "speaker": "TimCook", "text": "Yes, we're working hard to provide the best experience for iPhone users. To do so we've been collaborating closely with carriers all around the world to ensure iPhone has great throughput and coverage and battery and call quality. We've completed 5G testing so far on over 100 carriers in over 30 regions. And so it's pretty, it's pretty pervasive around the world. But grantedly, it will continue to roll out in more places as carriers continue to expand their coverage. And this will happen every week. And so it's just going to get better. There are obvious places in the world where it's more ahead than others. But we feel like we are entering at a sort of at exactly the right time." }, { "speaker": "Operator", "text": "That will be from Jeriel Ong from Deutsche Bank." }, { "speaker": "JerielOng", "text": "Yes, thank you so much. I guess I appreciate the guidance for revenue to grow but I guess my question, perhaps, if I could, is relative to seasonality, you guys over the last five years of seasonality is typically above 50% quarter-on-quarter, do you think that you can beat that, even with the later release? And I have a follow up." }, { "speaker": "LucaMaestri", "text": "So as I said, Jay, we're not providing a range, for the reasons that I explained during my prepared remarks. So you need to keep in mind a couple of things that are unique about this quarter versus the past. And that I mentioned again, the launch timing of the phones is different from the past. So we are launching the new iPhones, four weeks into the quarter for two models for the 12 and 12 Pro and seven weeks into the quarter for the other two, the iPhone Mini and for 12 Pro Max. So that is something to keep in mind as you think about the growth rates. With regard to all the other product categories, as I said, we are expecting to grow double digits essentially across the board for the rest of our products and for services. And so we are incredibly optimistic about what we've seen so far. Obviously, we started taking pre orders five days ago and it's a bit early for the phone. But we think that there are a lot of tailwinds this year for iPhone for the entire cycle. Some of the comments that Tim has already made, right, we've got the best lineup of iPhones that we've ever had. We got an install base of iPhone that is very large continues to grow. It's an all time high. Obviously, 5G is a once in a decade, opportunity. And as you've seen in some markets, certainly here in the United States, carrier offers are very aggressive. And so that is very good for consumers and ultimately, very good for us. So very, very optimistic, given what we've seen so far." }, { "speaker": "JerielOng", "text": "Awesome, thank you so much for that context and given us some of the levers to think about. I'd like to ask a little bit more of a strategic one, a little bit longer term in nature. I think one thing is interesting about the Apple one bundle is the desire two bundles in the first place, I guess. I'm wondering, and some investors have asked me this as well, is that why wouldn't you also take that rationale perhaps in hardware, perhaps maybe AirPods and iPhone or AirPods watch and iPhone? Because if it makes sense to bundle services, would it also make sense to bundle hardware? And if that's not the case, then are there benefits of services, bundling that don't necessarily translate to hardware bundling? Thanks." }, { "speaker": "TimCook", "text": "Yes, we don't have anything to announce today at our hardware bundle but backing up a bit. And we do view that people like to pay for their hardware are at least some substantial portion of it monthly. And so that's the reason that we have implemented installments in our stores and online. And that's the reason you see in some of the channels too selling the hardware on a per month kind of basis. If that begins to look like a subscription, perhaps to some buyers because they're used to holding the phone for a fixed period of time and then turning it over and using the residual value of that phone in a way that gives them a de facto kind of subsidy on a new phone. And so there is something today in the market that works somewhat similar. On the services side; we have -- we had customers coming to us and asking for an easier way to buy all of our services. And we wanted to provide that and we're looking forward to tomorrow to getting Apple one out there." }, { "speaker": "Operator", "text": "It will come from Katy Huberty with Morgan Stanley." }, { "speaker": "KatyHuberty", "text": "Thank you. Good afternoon. New technologies, including the chips that support 5G put upward pressure on cost this year. But you managed to leave ASPS for iPhones relatively unchanged this product cycle. How should we think about the margin profiles of iPhone 12 relative to past iPhone cycles?" }, { "speaker": "LucaMaestri", "text": "Hi, Katy. Obviously, we don't provide any outlook at the gross margin level for product categories. What I said in my prepared remarks, we expect gross margins in total for the company to be pretty much in line with what we've seen during the last quarter. Because obviously, as you said, it's very good, right, because we are offering the new phones at price points that are essentially unchanged. And we are taking on a lot of new technology into the phones. I would say the commodity environment is good. For the first time in many, many quarters, I don't have to say that foreign exchange is a headwind and getting into the quarter is not going to be a factor during the quarter. As we've made it clear in our comments, we are bullish about our sales performance expectation, so we should be getting some leverage. And so I think that the gross margin dynamics are good and it's very good to see that we're able to offer so much more technology and still able to deliver the level of gross margins that I think investors are expecting." }, { "speaker": "KatyHuberty", "text": "Okay and shifting to the services business. This isn't dependent on certainly any one service but licensing and other historically has been a driver of growth. That's where the ad based revenue comes in. When you think about the Google antitrust pressure, what's the risk that you see some shrinkage in your licensing and others segment within services and do you see opportunities for other services to make up for any potential weakness?" }, { "speaker": "KatyHuberty", "text": "We've got Katy, as you know; we've announced a number of services over the last couple of years. And we are ramping those between Apple TV plus and Apple News plus and Apple Kay, we've got Apple Card. We've got Apple Fitness Plus coming. We've got a number of services that have been launched a bit longer that are doing really well from the app store to iCloud, and So there's a lot of room their input and potential there. I have no idea how the DOJ suit will go, but I think it's a long way from a conclusion on it." }, { "speaker": "Operator", "text": "That will come from Evercore's Amit Daryanani." }, { "speaker": "AmitDaryanani", "text": "Thanks for taking my question. I guess I have two as well. First off, Tim, on iPhones, you talked about the iPhone install data thing being the highest and largest ever been satisfaction rates, obviously pretty high. And our data would suggest replacement cycles are getting elongated. And if I take all of that together, along with the fact that, if iPhone user like me with embarrassingly high weekly usage rate, does that in aggregate give you better confident, better clarity that we could enter an extensive period of iPhone revenue growth versus what we seen the last couple of years." }, { "speaker": "TimCook", "text": "We're very bullish on this cycle, very bullish on it, because as I sort of step back from it and look at what we've now done, we have for the first time ever, we've launched four iPhones. And there is an iPhone for everyone there. It is the strongest lineup we've ever had by far, we have -- we do have a very large, loyal and growing install base. And we're also reaching out to switchers. And so I'm very optimistic there. We've got a once in a decade opportunity with 5G. There's a lot of excitement around 5G. And we've got some aggressive offers in the marketplace. And so when I think about all of those, I'm really and I look at the initial data points that we've got on the iPhone 12 and the 12 Pro, we are off to a great start." }, { "speaker": "AmitDaryanani", "text": "Got it. And I guess, Luca had a follow up to you on the services gross margin it just was to kind of continue to move higher rather nicely. Do you think this level at 67% essentially is sustainable? And what do you think are the two or three factors that are enabling these gross margins to remain here as we go forward?" }, { "speaker": "LucaMaestri", "text": "I mean, obviously, we're very pleased with the level of gross margins in services, as you said; they've been expanding almost 300 basis points on a year-over-year basis. The reason for that is, of course that, we are growing the services revenue, and therefore we're getting leverage on a lot of these services, right. Some of it, as explained in the past, we have a portfolio of services that got different margin profiles. And so sometimes, depending on the mix of products we have, we can see margin expansion through mix, as well. And so, but we're also launching new services that where we need to invest heavily up front. And but we think we've been able to show, for example, this year that we've launched a lot of new services, made all the necessary investments and still being able to expand gross margin. So we feel quite confident about that trajectory that we have, that we have for services and we're very, very happy to see the customer response to really all of them, because as we've mentioned earlier, I mean, we've seen revenue records across essentially every category and in across the entire world, right? We've seen September quarter records in every geography around the world. So of the dynamics, all the levers that we have in the services business are working very well right now. And that translates also into margin, of course." }, { "speaker": "Operator", "text": "We'll hear from Samik Chatterjee with JP Morgan." }, { "speaker": "SamikChatterjee", "text": "Hi, thanks for taking the question. I just want to start off with the iPhone lineup here, particularly as you mentioned, the carrier subsidies that you see mixed optimistic about iPhone sales. I think just looking at some other factors here. Earlier in the year, you had mentioned that iPhone sales was seeing an uptake with stimulus checks going out to consumers helping in the consumer spending overall here in the US. So as we see some delays here on that front, are you seeing anything change on the consumer spending side as a macro impacting? How you think about iPhone sales, particularly with -- even with the new product lineup? And I have a follow up. Thank you." }, { "speaker": "TimCook", "text": "It's prior to mid September, we were seeing double digit growth in customer demand on iPhone. So there's a lot of momentum there. And there is a lot of momentum even much more so now given the launch of the 12 Pro and the iPhone 12. If you're asking whether it could have been even more with a different macro spending environment? I believe the answer to be yes. But you can't run the experiment. And so I don't know for sure. But I suspect that just the COVID in general take something off from a worldwide economic point of view." }, { "speaker": "SamikChatterjee", "text": "Perfect. And if can just follow up just following up on that COVID discussion. We are potentially here looking at a second wave, right. And I think all companies are trying to prepare for that which you discussed as well in your prepared remarks. But if you can share any kind of thoughts about how you're preparing in relation to either inventory levels, or sourcing from the supply chain, to prepare for any potential disruption, like we had earlier this year?" }, { "speaker": "TimCook", "text": "Well, we're doing everything we can do. But we're prioritizing safety first, obviously. And so with our stores as an example, we've come up with a new concept that puts an essentially turns the store into an express storefront. And we've implemented that in a number of places where we believe that helps from the safety of our employee and the safety of the customer's point of view, but still allows for an interaction to take place. And so we've also put a lot more people on the phones because a lot more people are reaching out to us in that way. And of course, the online store has stayed up and running through the whole of this. I think if you take some of those, the channel is doing some similar things and then some different things as well. And so I think everybody to the best of their ability is putting in contingency plans and finding a way to adapt to the environment. But it is difficult to call and there's a level of uncertainty in it, obviously. And that's what Luca was referring to earlier." }, { "speaker": "Operator", "text": "That will come from Krish Sankar from Cowen and Company." }, { "speaker": "KrishSankar", "text": "Hi, thanks for taking my question. I have two of them, first on palooka. I understand you don't want to give color on gross margin by products or segments. But Luca you mentioned growth margin should be similar in December versus September. And so it should grow double digit, there's a general view that on the iPhone side, the bond cost would be headwind for gross margin, but carrier subsidies would be attainment. So I'm kind of curious, how should we think about the different, like gross margin levels into December quarter? And I have a follow up." }, { "speaker": "LucaMaestri", "text": "Yes. And so typically during the December quarter, we have positive factors because we have the typical seasonal leverage, right, sequentially as we go from September to the holiday season. And we also have an improved mix between products, particularly this year, as we've launched the new iPhone, at the same time, we shouldn't forget that we have launched a lot of new products. During the last several weeks, we launched four new models of iPhone; we launch new models of Apple watch new, models of iPads. And so, clearly every time we launch a new product, the cost structure is higher. And so that is going to be the other side of the coin. So but we think that those two things should balance out and again, as I was saying earlier, and we are accomplishing this while delivering a lot of new technologies, a lot of new features to our customers. This time for an exchange is not a factor and that's something that is a bit different from the past. So but that those are the pluses and minuses." }, { "speaker": "KrishSankar", "text": "Got it. Definitely helpful, Luca. And then a follow up for Tim. Tim, I kind of surprised you didn't say a lot about the payments ecosystem in this prepared comments kind of curious to find out from your advantage point, how you think of your whole payments ecosystem including Apple Card, Apple Pay, Apple Cash; now you're disaggregating the whole FinTech environment." }, { "speaker": "TimCook", "text": "Thanks for the question. There's just a limited number of things I can talk about is kind of a reason I didn't talk about it. We continue to be very enthusiastic about the whole Payment Services area. Apple Card is doing well. And Apple Pay is doing exceptionally well. As you can imagine in this environment, people are less want to hand over a card. So this contactless payment has taken on a different level of adoption in it that I think will never go back. The US has been lagging a bit in contactless payment. And I think that the pandemic may well get put the US on a different trajectory there. And so we are very bullish about this area and view that there are there are more things that Apple can do in this space. And in so it's an area of great interest to us." }, { "speaker": "Operator", "text": "That will come from Kyle McNealy with Jefferies." }, { "speaker": "KyleMcNealy", "text": "Hi, thanks for the question. I wanted to ask a little bit about the supply chain. Given your latest start from manufacturing to the flagship phone line of this year, do you think that supply will be able to meet demand through the end of the calendar? Are there any component shortages that you're seeing? Or are there any actions that you can take to increase weekly output versus last year? Thanks." }, { "speaker": "TimCook", "text": "Yes, Kyle, I don't know what you're talking about iPhone in particular. But if you look at iPhone, we are constrained today. And that's not a surprise where at the front end of the ramp, if you will, and how long we will be supply constrained, it's hard to predict. I mean, we haven't taken orders yet for the iPhone 12 Mini or the Pro Max either. And so those are coming in. So we shall see. But right now we are supply constrained, we are also supply constrained for avoidance of any confusion where supply constrained on Mac, we are supply constrained on iPad. And we're supply constrained on some Apple watches as well. And so we have a fair number of areas right now of focus, and we're working really, really hard to remedy those as quickly as we can. But at this point, I can't estimate when we'll be out of that." }, { "speaker": "KyleMcNealy", "text": "Okay, great. Thanks a lot. And then switching to Mac and iPad. How do you think about the durability of the strength you've seen there with Mac and iPad? Is there any potential for stronger than seasonal pullback after the strong back to school season and holiday season? And these supply constraints make it feel like there's a good chance for continuation of the strong demand trends and in flow through of that. What do we think about the seasonality into December and March quarter being more positive in seasonal or less positive in seasonal? Thanks." }, { "speaker": "TimCook", "text": "Yes, we placed our thoughts in the color that Luca provided when he said that all products excluding iPhone, all products and services excluding iPhone or all products, rather excluding iPhone would grow in the double digits. And so we continue to be bullish on what Mac and iPad can do. I think the moves that have taken place to remote learning and remote work are not going to go back to normal, normal will become something different. Because I think people are learning that there are aspects of this that work well. And so I don't believe that we're going to go back to where we were. And I think that means that iPads and Macs are even more important in those environments. The growth in both of these last quarter were phenomenal as you can tell from your from datasheet with Mac at 29 and iPad at 46. These are tremendous numbers and as Luca said the September quarter was the all time high for Mac in the history of the company, and by not by little bit by $1.6 billion. And so it was a substantial difference that we did have aggressive promotion for college students that were going back to going back to school. And so that invariably part of it. But I think the other part of it during the remote work thing is not something that's going to snap back to the way it used to be anytime soon." }, { "speaker": "Operator", "text": "That will come from Chris Caso with Raymond James." }, { "speaker": "ChrisCaso", "text": "Yes, thank you. I guess first question is on iPhone pricing. And there was some changes in the iPhone price back this year, the iPhone, the price point for iPhone 12 moves up a bit, I guess the difference the gap between 12 and 12 Pro is smaller. And I guess that's after you made some adjustments years prior where the price point came down a bit? Can you talk through the thought process behind that and the potential implications for either unit out elasticity or blended ASP as a result of the price changes?" }, { "speaker": "TimCook", "text": "Well, I the iPhone 12 family start at $699. In many places, because you can get in the deals that people are really paying are very different than that, because a lot of people, particularly in this country, but also in several other countries in the world connect to a carrier plan. And of course, those offers are much more aggressive. And so the price that our customers paying is probably the most important one. The iPhone 12 is at $799. And so I think what you're saying is there's a $200 difference there. But I would guess that people are viewing it more as a $300 difference between the 12 Mini and the 12 Pro. And so we'll see what the mix turns out. Right now we have no data other than 12 and 12. Pro, we like the data on the 12 Mini and the Pro Max, because we're not taking orders yet. But what we try to always do in pricing is give the customer a great value. And I feel like we really did that this year. And that's despite, as was mentioned earlier, all of the extra features that we placed into the phones, including 5G." }, { "speaker": "ChrisCaso", "text": "As a follow up you mentioned, some of the carrier incentives we've seen here in the US. And if you could provide some more color about that, about what you're seeing now. And obviously, as we went through, years ago, the incentive from carriers were a lot larger. Is this mark some shift in the approach of carriers as we're moving into 5G? What's the extent of the permanence of some of these incentives? And then, as 5G rolls out around the world and into other geographies, is this something we should expect that as either they try to protect from switchers or kind of promote the 5G networks will see a higher prevalence of incentives and carriers as we go forward?" }, { "speaker": "TimCook", "text": "I don't want to speak for our carrier partners that would be up to them to talk about their plans. Generally, I think it's to the vast, vast majority of carriers around the world to their interest to move customers to 5G. And I think it's in the customer's interest to move to 5G and obviously, we like that as well. And so I think you have a situation where everyone's whoring in the same direction. And that's a very different kind of situation than normally we would have. And so it is one of the things as I alluded to earlier that makes me very bullish, only one, the other things are very important to the size of the install base, the product lineup, these things are critically important as well." }, { "speaker": "Tejas Gala", "text": "Thank you, Chris. A replay of today's call will be available for two weeks on Apple podcasts, as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457- 0820, please enter confirmation code 9501153. These replays will be available by approximately 5 PM Pacific time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414; financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us." }, { "speaker": "Operator", "text": "And again, that does conclude today's conference. Thank you all for joining us today." } ]	Apple Inc.	24,937
AAPL	3	2,020	2020-07-30 17:00:00	Operator: Good day, everyone. Welcome to the Apple Incorporated Third Quarter Fiscal Year 2020 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn things over to Mr. Tejas Gala, Senior Manager, Corporate Finance and Investor Relations. Please go ahead, sir. Tejas Gala: Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, and future business outlook, including the potential impact of COVID-19 on the company's business and results of operations. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed periodic reports Form 10-K and Form 10-Q and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook: Thanks, Tejas. Good afternoon, everyone. Thanks for joining the call today. Before we begin, I joined the many millions across this country in mourning and memorialize Congressman John Lewis, who was laid to rest earlier today. We've lost a hero who walked among us, a leader in the truest sense who urged this country to aim higher and be better until the very end. I was humbled and fortunate to know him and as an Alabama native his example inspires me still. It now falls to every American to be a living memorial to John Lewis and to carry forward the work and the mission that defined his life. Throughout the call I'll speak in greater detail about Apple's support for equity and justice topics of great urgency on a number of fronts, but first I want to pull the lens back to consider the quarter and full. In an uncertain environment Apple saw a quarter of historic results demonstrating the important role our products play in our customers' lives. We set a June quarter record with revenue of $59.7 billion, up 11% from a year ago. Both products and services set June quarter records and grew double-digits and revenue grew in each of our geographic segments, reflecting the broad base of this success. As always and especially in times of real adversity, what makes us proud as a company is not merely what we did, but how we did it. As millions March for justice in big cities and small towns alike, we committed a $100 million to launch Apple's racial equity and justice initiative as well as new and renewed internal efforts to foster diversity and inclusion at all levels of the company. As COVID-19 continues to represent great risks for individuals and great uncertainty for our communities, care and adaptability are defining how we conduct our work wherever we work. In some places that has met responsibly reopening our operations and retail stores with enhanced health and safety precautions. In others, where the virus has reemerge it's meant taking the challenging, but necessary step of re-closing stores. I'll touch on these topics more in a little bit. But first I want to offer some more context on the quarter's results. Due to the uncertain and ongoing impacts of COVID-19, we did not provide our typical guidance when we reported our results last quarter, but we did provide some color on how we expected the June quarter to play out. I'd like to contextualize our results in terms of that color across each of our product categories beginning with iPhone. iPhone revenue grew 2% this quarter. In April, we expected year-over-year performance to worsen, but we saw better-than-expected demand in May and June. We attribute this increase in demand to several interactive causes including a strong iPhone SE launch, continued economic stimulus, and potentially some benefit from shelter in place restrictions lifting around the world. We expected iPad and Mac growth to accelerate and we saw very strong double-digit growth for these devices this quarter. This remarkable performance came in spite of supply constraints on both products. We're working hard to get more iPads and Macs into customers' hands as quickly as possible recognizing how integral they have become to working and learning from home providing entertainment and staying connected with loved ones. Wearables growth decelerated as we expected, but still grew by strong double-digits and set a revenue record for a non-holiday quarter. Building on powerful new features built into watchOS 7 and AirPods Pro announced this quarter, we are very excited about the many opportunities in front of us for this product category. These strong results helped drive our installed base of active devices to new all-time records across each of our product categories. Reflecting the deep integration of hardware, software and services, services generated a June quarter record of $13.2 billion, up 15% year-over-year. As we mentioned during our last call, there were two distinct trends we were seeing and they played out as we thought. First, results for advertising and AppleCare were impacted by the reduced level of economic activity and store closures to a degree that was in line with our expectations. Second, we had strong performance in our digital services with all-time revenue records in the App Store, Apple Music, video and cloud services as well as elevated engagement on iMessage, Siri and FaceTime. Customers are loving new offerings across Apple services like Apple News today, our new daily audio briefing and Greyhound, our new summer blockbuster starring Tom Hanks. In fact, Apple TV+ just hit a history making 95 awards nominations and 25 wins and accolades. Based on these results and our performance over the last four quarters, we are proud to announce that we have achieved our goal of doubling. Our fiscal 2016 services revenue six months ahead of schedule. We're conscious of the fact that these results stand in stark relief during a time of real economic adversity for businesses large and small and certainly for families. We do not have a zero-sum approach to prosperity and especially in times like this, we are focused on growing the pie, making sure our success isn't just our success and that everything we make, build or do is geared towards creating opportunities for others. The App Store is a great example. This quarter, a new study by independent economists at the Analysis Group founded the App Store facilitated more than 0.5 trillion in commerce globally in 2019 alone. Especially in a time of COVID-19, you can measure economic resilience in the ways in which the App Store supports remote ordering for restaurants, digital commerce for small businesses and an enduring entrepreneurial opportunity for creators and visionaries. Keeping learning vibrant and impactful in the time of COVID-19 is a priority everyone shares. Earlier this month, we announced significant enhancements to the development Swift and Everyone Can Code curricula and we launched a new professional learning course available exclusively to educators. In just two weeks ago, our Community Education initiative added 10 more historically black college and university regional coding centers to our roster, bringing the total to 24 locations nationwide, 12 of which are HBCUs and 21 of which serve majority black and brown student populations. In Apple's backyard, we announced that we are allocating $400 million of our multi-year $2.5 billion affordable housing commitment to new housing construction, homebuyer assistance programs and support for those at greatest risk of experiencing homelessness across Silicon Valley. Apple's results this quarter are only possible due to our people and their ongoing ingenuity, flexibility, resilience and determination during these ever-changing times. I want to thank our AppleCare and retail teams who have paired exceptional service during a time of intense demand with great adaptability during a quarter where stores have reopened in some places and reclosed in others. A dedicated team of specialists and experts has shouldered the task of caring for the well-being of our teams and communities store by store, location by location with evidence driven granularity and agility that is unrivaled anywhere. Innovation from adversity certainly define this year's Worldwide Developers Conference as well. This is an event where traditionally Apple's worldwide community of developers gathers together to share, celebrate and do big things together. Though we could not be together in person, Apple set a new standard for what online events can achieve with our celebrated all virtual event. The results here speak for themselves. More than 22 million viewers tuned in across all of Apple streams. For our developers we distributed more than 72 hours of video content. That's three full days of video. The weak saw more than 200 direct video engineering and design sessions and about 4500 person to person appointments with developers across 227 virtual labs. And of course that's even before you get to this year's announcements from iOS 14, which boasts the radical redesign to the home screen, powerful updates to messages, streamlined and effortless app clips and even greater privacy transparency and controls to major updates to Apple Pencil, Siri and calling and iPad OS 14 to much anticipated sleep tracking, new fitness and wellness features and unprecedented customization and watchOS 7 to the new macOS Big Sur boasting the biggest redesign upgrade to macOS since OS X. No less important for Apple's innovation roadmap is our transition to Apple silicon for the Mac. This two-year effort will achieve both unprecedented performance for the Mac and a common architecture across all Apple products. Looking forward, we are profoundly optimistic about Apple's future and we recognize that with this success comes some real responsibility to lead with our values because those values help make that success possible in the first place. We are just as proud of our announcement this month that Apple will be fully carbon-neutral by 2030 across our entire supply chain and including the energy use of every device we make as we are of any hardware innovation because they spring from the same instinct to leave the world better than we found it. We're committed to standing with those marching for the lives and dignity through our new $100 million commitment to Apple's racial equity and justice initiative, and we're deepening our diversity and inclusion efforts internally because our future as a business is inextricably linked with the future of our communities. There are times when things seem to move slowly when needed progress, economic or social themes bogged down when the instinct to turn away from the horizon and hold onto what you've got fields and ex-capable, and then there are times like this when people of goodwill step forward, when progressed on Moore's itself, when the insistence of hope forces something new. This is an immensely challenging moment. COVID-19 is still devastating many places and we have work left to do to care for the health and well-being of the communities in which all of us live and work. But no community of people, whether a company or a country, can afford to miss this call when it comes. At Apple, we never have and we don't intend to start now. With that, I'll hand things off to Luca. Luca Maestri: Thank you, Tim. Good afternoon, everyone. Our June quarter was a testament to Apple's ability to innovate and execute during challenging times. Our results speak to the resilience of our business and the relevance of our products and services in our customers' lives. Total revenue was $59.7 billion, a new June quarter record, up 11% from a year ago, despite a 300 basis point headwind from foreign exchange. Our performance was strong across our entire portfolio as we grew revenue in each of our product categories and set June quarter records for Mac, for Wearables and for services. Similarly, our results were very strong all around the world with growth in all geographic segments and new June quarter records in the Americas, in Europe, in Japan and Rest of Asia-Pacific. Products revenue was $46.5 billion, up 10% and a June quarter record. iPhone returned to growth and we saw very strong double-digit growth from iPad, Mac and Wearables. Lockdowns and point of sale closures were widespread during April and impacted our performance, but we saw demand for all products improve significantly in May and June. As a result of our strong performance and the unmatched loyalty of our customers, our installed base of active devices reached an all-time high in all of our geographic segments and all major product categories. Our services continue to grow strongly up 15% year-over-year and reached a June quarter record of $13.2 billion. We set all-time records in many services categories and June quarter records in each geographic segment. I'll cover this in more detail later. Company gross margin was 38%. This was down 40 basis points sequentially due to unfavorable FX of 90 basis points and a different mix of products partially offset by cost savings and services mix. Products gross margin was 29.7% decreasing 60 basis points sequentially due to FX and a different mix partially offset by cost savings. Services gross margin was 67.2% up 180 basis points sequentially mainly due to mix. Net income was $11.3 billion and earnings per share were $2.58, up 18% and a June quarter record. Operating cash flow was also a June quarter record at $16.3 billion, an improvement of $4.6 billion over a year ago. Let me get into more detail for each of our revenue categories. iPhone revenue grew 2% to $26.4 billion with customer demand improving as the quarter progressed. COVID-19 was most impactful during the first three weeks of April when lockdowns and point of sale closures became more widespread in many countries. We saw marked improvement around the world in May and June, which we attribute to an improved level of customer demand helped by the very successful launch of iPhone SE and economic stimulus packages. Our active installed base of iPhones again reached an all-time high as a result of the loyalty of our customer base and strength of our ecosystem. In fact in the US the latest survey of consumers from 451 Research indicates iPhone customer satisfaction of 98% for iPhone 11, 11 Pro and 11 Pro Max combined. Turning to services, as I said, we set a June quarter record of $13.4 billion of revenue. We had all-time record performance and strong double-digit growth in the App Store, Apple Music, video and cloud services. Our new services Apple TV+, Apple Arcade, Apple News+ and Apple Card are also contributing to overall services growth and continue to add users’ content and features. At the same time customer engagement in our ecosystem continues to grow at a fast pace. The number of both transacting and paid accounts on our digital content stores reached a new all-time high during the June quarter with paid accounts increasing double-digits in each of our geographic segments. In aggregate, paid subscriptions grew more than 35 million sequentially and we now have over 550 million paid subscriptions across the services on our platform, up 130 million from a year ago. With this momentum we remain confident to reach our increased target of 600 million paid subscriptions before the end of calendar 2020. Wearables, Home and Accessories established a new June quarter record with revenue of $6.5 billion, up 17% year-over-year. Our Wearables business is now the size of a Fortune 140 company and we set June quarter records in the majority of markets we track. Importantly Apple Watch continues to extend its reach with over 75% of the customers purchasing Apple Watch during the quarter new to the product. Next, I'd like to talk about the impressive performance of Mac. Revenue was $7.1 billion, up 22% over last year and a June quarter record. We grew double digits in each geographic segment and set all-time revenue records in Japan and rest of Asia-Pacific as well as June quarter records in the Americas and Europe. Customer response to our new MacBook Air and MacBook Pro launches has been extremely strong. iPad performance was equally impressive with revenue of $6.6 billion, up 31% and our highest June quarter revenue in eight years. Demand was strong around the world with double-digit growth in each of our geographic segments, including a June quarter record in Greater China. The launch of our new iPad Pro has been received incredibly well in every region of the world. Both Mac and iPad are extremely relevant products in the new working and learning environments and the most recent surveys of consumers from 451 Research measured customer satisfaction at 96% for Mac and 97% for iPad. Around half of the customers purchasing Mac and iPad during the quarter were new to that product. And as a result, the active installed base for both products reached a new all-time high. Our retail business had record June quarter revenue. Thanks to the performance of our online store which had records in all geographic segments and grew across all major product categories. In June, we launched Apple Card Monthly Installments for more products in our US stores allowing customers to pay for their devices all the time with 0% interest. We're very pleased with the level of customer interest this new offering has generated. In the enterprise market, we continue to see companies leverage Apple products and offerings to successfully navigate their businesses through COVID-19. In healthcare, we are seeing rapid acceleration of telehealth to support a more flexible model of patient care. Many hospitals such as UVA Health, Rush University Medical Center and UC San Diego Health are using apps on iPad and iPhone to have triage, monitor and care for patients who are at home. This helps free up hospital capacity to support patients who need inpatient care while enabling continued care for patients who do not require in-person visits. Since many call center employees are currently working remotely, Apple Business Chat has proven an invaluable tool for staying connected with customers. This quarter HSBC deployed Apple Business Chat in its US and UK contact centers. Apple Business Chat provides a flexible and secured channel for digital banking assistance through a native Apple experience improving the efficiency and experience for both customers and agents. We are seeing similar adoption by hundreds of other organizations. Let me now turn to our cash position. We ended the quarter with almost $194 billion in cash plus marketable securities. We issued $8.5 billion of new term debt, retired $7.4 billion of term debt and increased short-term borrowing facilities by $1.1 billion during the quarter leaving us with total debt of $113 billion. As a result, net cash was $81 billion at the end of the quarter and we continue on our path to reaching a net cash neutral position over time. We returned over $21 billion to shareholders during the June quarter, including $3.7 billion in dividends and equivalents and $10 billion through open market repurchases of 31.3 million Apple shares. We also began a $6 billion accelerated share repurchase program in May resulting in the initial delivery and retirement of 15.2 million shares. And finally, we retired an additional 4.8 million shares in the final settlement of our 15th ASR. As we move ahead into the September quarter, I'd like to provide some color on what we are seeing, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Similar to last quarter, given the uncertainty around the world in the near-term, we will not be issuing revenue and margin guidance for the coming quarter. However, we will provide some additional insight on our expectations for the September quarter for our product categories. On iPhone, we expect to see recent performance continue for our current product lineup, including the strong customer response for iPhone SE. In addition, as you know, last year we started selling new iPhones in late September. This year we project supply to be available a few weeks later. We expect the rest of our product categories to have strong year-over-year performance. For services, we expect the September quarter to have the same trends that we have observed during the June quarter except for AppleCare where during the September quarter a year ago we expanded our distribution significantly. As a consequence, we expect a difficult comp for AppleCare also considering the COVID related point of sale closures this year. For gross margin, keep in mind that we will have a different mix than in prior years as I just explained. For OpEx, we expect to be between $9.8 billion and $9.9 billion. We expect the tax rate to be about 16.5% and OI&E to be $50 million. Also today our Board of Directors has declared a cash dividend of $0.82 per share of common stock payable on August 13, 2020 to shareholders of record as of August 10, 2020. And finally, today we're announcing a four for one split of Apple common stock to make our stock more accessible to a broader base of investors. Each shareholder of record at the close of business on August 24, 2020 will receive three additional shares for every outstanding share held on the record date and trading will begin on a split-adjusted basis on August 31st, 2020. With that let's open the call to questions. Tejas Gala: Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we please have the first question? Operator: Yes, that will be from Katy Huberty with Morgan Stanley. Katy Huberty: Thank you. Good afternoon. Tim in light of the economic adversity that you talked about in the prepared remarks, can you just walk us through how Apple is leveraging finance and trade-in programs to make technology more affordable and accessible during this period, while also addressing the opportunity to recycle and reuse products and maybe also extend that to how these programs might expand over time and then I have a follow-up. Tim Cook: Yes. As Luca mentioned, in June we actually rolled out to the overwhelming balance of our other products the ability to do interest rate, interest free financing in our stores with payments. And that's in addition to trade-in which is becoming a more common trend now which I think is terrific because it is great for the environment and it acts as a subsidy, if you will, against the price of the new phone. And so when you compound these two things with the financing and the trade-in it makes the product super affordable. And we're really happy with what we're seeing in that regard. Katy Huberty: And then, as a follow-up, just specifically to iPhone the category returned to growth. As you pointed out, the installed base is larger today. Our math would suggest that replacement cycles in some cases are elongated. And then you have the affordability element that you just discussed. Does all of that combine to build confidence that we're entering a longer period of iPhone revenue growth after what's been six quarters of decline? Tim Cook: We're very pleased with how we did on iPhone. It was better than we thought largely because as we pointed out in the prepared remarks May and June were much better. If you look at iPhone in totality the things that get me very optimistic is the size of the active installed base. The fact that if you look in the major geographies like the US, we had the top two selling smartphones. In the UK we had three of the top four. In Australia, we had five of the top six. And in Japan we had the top four. Urban China we were, iPhone 11 was the top selling smartphone in the country. And so these are some very different geographies with their very different competitive situations and we're doing fairly well. The iPhone SE, it's also clear that from the early data we're seeing a higher switcher number than we did in the previous year, which we feel very good about. And it also seems to appeal to some people that were holding onto the device a little longer because they wanted a smaller form factor phone. And so the combination of the smaller form factor and an incredibly affordable price made the iPhone SE very popular. iPhone 11 is still the most popular smartphone, but iPhone SE definitely helped our results. And as we -- as Lucas said in his outlook, we do see that continuing into this quarter currently. Tejas Gala: Thank you, Katy. Katy Huberty: Thank you. Congrats on the quarter. Tim Cook: Thank you so much. Tejas Gala: Can we have the next question, please? Operator: Yes, that would be from Krish Sankar with Cowen & Company. Krish Sankar: Hi, thanks for taking my question. I have two of them. First one, Tim, when you look at the services business and in terms of your TV+ content production have the movement restrictions impacted the content production efforts? And along the same path four years ago your premonition on services being a $50 billion business in 2020 came sooner than expected, I don't know if you want to make any such forecast four years out and how you think services revenue is going to be. Then I have a follow-up for Luca. Tim Cook: I'm sorry. I missed that second question because the audio didn't come through. But I think I got the gist of the first. And that is production has been affected for Apple TV+ as I think it has for most people. We are working to get restarted. I don't have a precise date yet when we will get it restarted, but there will be some impact because we shut down in the March time frame and are yet to really restart in a significant way particularly for those that are shut in the LA area given the current status of the virus and those. And I'm sorry I missed your, the second part of your question. Krish Sankar: Yes, Tim, I was trying to see, four years ago you made a great prediction that services is going to be $50 billion by 2020. I wanted to see if you have any update to the prediction four years down the road? Tim Cook: We're not updating today. We feel good. We want to take the moment and feel good about achieving the doubling six months early. And we do have still hanging out there, as you know, the subscription number that we're shooting for later in the year at 600 million. So we do have that objective out there. Krish Sankar: If I could just squeeze in one for Luca. With the strong sales in Mac given the shelter-in-place, do you think the back-to-school season got pulled in by a quarter or do you expect the momentum to still continue? Thank you very much. Luca Maestri: As I said, when I was talking about providing some commentary for the September quarter, we expect all the non-iPhone product categories to have a very strong year-over-year performance. So we definitely, I mean, the back-to-school season is clearly this one and we are very excited not only for the Mac, but also for the iPad. We've got a fantastic lineup of products and we know that these products are incredibly relevant especially given the current circumstances. So we expect the performance that we've seen for Mac in the June quarter to continue. Tejas Gala: Thank you. Can we have the next question, please? Operator: Yes. From Cross Research we'll hear from Shannon Cross. Shannon Cross: Thank you very much. Tim, can you talk a bit about what you're seeing in China? I know the revenue was up 2% and I think Luca talked about record iPad, but just curious as to given their 5G [indiscernible] how you're seeing the market play out? And then I have a follow-up. Thank you. Tim Cook: Shannon, the growth that we -- we did see growth in Greater China for the quarter of 2%, currency affected China, a bit more than in other places, it affected 400 basis points. And so in constant currency, we would have grown at 6%. As I had mentioned before, the iPhone 11 has been our best-selling phone and has been number one in urban China and so we're very, very proud of that. iPad was helped in the June quarter there by the work from home and distance learning as it was in other geographies and the Mac also grew strong double digit during the quarter. And services set a new June quarter record there. We also continue to see extremely high new customer rates on Mac and iPad there, to give you a perspective, about three out of four customers that are buying the Mac are new in China and about two out of three that are buying the iPad are new. And so these are numbers that we're super proud of. Shannon Cross: Great. And then, can you talk a little bit more about the decision to bring Mac Silicon in-house, then the benefits that you expect to see or you've seen from vertical integration of acquisitions like the Intel modem business? Thanks. Tim Cook: Thanks. Yes, I mean, what we will end up -- what we'll end up with is a common architecture across all of our products, which gives us some interesting things that we can do in products that are -- that is sort of unleashes another round of innovation. And so I don't want to say a lot about it, other than we are extremely excited about it, it's something that we've worked on quite a while to get to this point and we're looking forward to shipping the first Mac with Apple Silicon later in the year. Tejas Gala: Thank you, Shannon. Can we have the next question please. Operator: That will come from Amit Daryanani with Evercore. Amit Daryanani: Thanks a lot for taking my question guys. I have one and a follow-up as well. Fortunately, I guess, Tim, if I think about the strength, you're seeing with iPhones right now, do you have a sense in terms of where is this trend coming from? Is it more replacement cycles getting shorter or which is getting new customers into the iOS ecosystem because, clearly these growth rates seem fairly impressive in the context of a pandemic and upcoming refresh cycle that we have? Tim Cook: I think, Amit, it's a combination of a strong launch with iPhone SE and some -- probably some pick up because of the economic stimulus that hit different countries at different points in time. And probably some of the reopening that took place across the quarter, particularly in May and June as Store started to reopen. And so it's a combination of all of those. And as you know, we've been having a strong cycle with the iPhone 11 and the 11 Pro. And so when you combine the -- a strong cycle plus and iPhone SE launch, plus the reopening of the stores, et cetera, I think there were a lot of things that we're going in the right direction there. Amit Daryanani: Perfect, that's helpful. And then I guess, Luca, if I could just follow up with you. I'd love to get your perspective on how do we think about the overall 38% gross margins? What do you think of the levers to improve this as you go forward, not really September quarter, but over the next one to two years? And in that context, do you see a point where the product gross margin starts to stabilize because they have been trending somewhat lower for the last couple of quarters now. Luca Maestri: Yes. Well, let me start with what we've seen during the June quarter. We were at 38%, we were down slightly sequentially but up the same amount on a year-over-year basis. And really the big negative impact that we felt for several quarters now has been the strength of the US dollar, so the foreign exchange impact on a sequential basis was 90 basis points on a year-over-year basis was 130 basis points. So obviously that is something to keep in mind. And then, the other aspect; I think it's always important to keep in mind, Amit, is that we sell many different products. They have different margin profiles. And so sometimes a different mix can have an impact on the aggregate level of products gross margins and we are very pleased to see the performance of Mac, iPad and Wearables but obviously, it's a different mix. Going forward, the variables are always the same, is that the foreign exchange will continue to play an impact, the mix of products there, we're going to be selling, will have an impact as well. The commodities market has been relatively benign and we'll see how that plays out over time. As you know now for several years, we've been managing gross margin, I would say, fairly well in spite of some difficult situations like the one with the strength of the dollar and we plan to continue to make a good trade off decisions between revenue and units and margins. Tejas Gala: Thank you, Amit. Can we have the next question, please? Operator: It will come from Kyle McNealy with Jefferies. Kyle McNealy: Hi, thanks a lot for the question. Our team in Asia recently, we did some survey work on smartphones in China. It showed that there is still a high proportion of the installed bases on 6, 7, 8 devices. I know you talked about the trade-in programs and promotions that you've been doing there. I wonder if you can tell us whether there is anything else that you're doing to get these customers in your latest technology? What made those customers be looking for and how should we think about when an upgrade cycle might come on more strongly there in China? Thanks. Tim Cook: Customers upgraded different at a different pace and I don't have in front of me the exact installed base data from China. But much like in other geographies, the upgrades have extended some, it extended some during the depths if you will of the pandemic in China and the rest of the world, and probably to some degree is happening still at this point. The key things that we can do is keep innovating, deliver product that people can't imagine, going through life about. And obviously keep rolling out these programs that makes the front-end purchase be much less, and this is things like the financing in the trade-in programs that you mentioned. And I do feel like those are going quite good in a number of geographies. Kyle McNealy: Okay, great, thanks. And one more if I may. Congrats again on the strong iPad and Mac results, that's really impressive. I guess the obvious question is, should we ever think about how much of that might be pull-forward and what might be the future upgrades in next few years? Anything else you can share on how you think about growth from here or whether there is a hangover period maybe after the back-to-school season or holiday season. That would be helpful. Thanks. Tim Cook: The installed base is growing and the new customer numbers that Luca went over in the aggregate are still very high in the close to 50% kind of range. And so, that to me, makes the -- bodes well for the future. There is clearly, as we had indicated, there is some amount of work from home and remote learning that do affect the results of Mac and iPad positively. They probably affect wearables and iPhone, the other direction. And -- but on Mac and iPad, these are productivity tools that people are using to stay engaged with their work or stay engaged with their school work. And we believe we're going to have a strong back to school season. Sitting here today, it certainly looks like that. Tejas Gala: Thank you, Kyle. Kyle McNealy: Great. Thanks very much. Tejas Gala: Can we have the next question, please? Operator: That will come from Cleveland Research's Ben Bollin. Ben Bollin: Good evening, everyone. Thanks for taking the question. Tim, I was hoping you could share a little bit about where you think channel inventory is? You talked about the tightness you saw exiting the June quarter for Mac and iPad. Interested, where you think inventory is across major product categories. And then I had a follow-up for Luca. Tim Cook: We usually -- we've gotten away from talking about channel inventories. But to give you a perspective sitting here looking at it, on iPhone the inventory is slightly less than it was a year ago and that's I'm saying that at a quarter end point, so at the end of Q3. And obviously iPad and Mac are constrained and so both of those are less than they were in the year ago quarter. Ben Bollin: Okay. And then, Luca, I'm interested, any color you could share about the impact COVID had on OpEx in the quarter, be it work from home, stipends, travel, other employee support costs. And also how the company is thinking about the longer-term opportunity of employees working remotely maybe more permanently many considerations and how that could influence the future OpEx? Thanks. Luca Maestri: Well, on the OpEx front, there are being obviously certain things that have been affected in terms of cost reductions. Obviously, travel, it is a perfect example. The number of meetings that we have internally, some of those costs have been reduced. We've also invested heavily in initiatives for example, we're really trying to help during a very difficult circumstances. For example, we have had a program for example where we match our employee donations, we made donations directly as a company around the world to many institutions and governments. On a net basis, I would say probably the cost have outweighed the savings both during the March and the June quarter, but we think it's absolutely the right thing to do. From an employee perspective, what we said so far is that here in the United States, in most -- the majority of our population will continue to work from home until the end of the year. And then we'll see, I mean, we've taken an approach that we try to understand how the virus is evolving over time. We've taken a very cautious approach of both with our corporate facilities and with our retail stores. I think what you've seen with retail stores is that we have reopened in number of geographies around the world. We've reopened here in the United States. We've had to re-close some of the stores yet here in the United States, as the number of cases has gone up. And we will continue to track how the virus is doing. And hopefully at some point, we're going to get to a point where there is a vaccine or there is a cure. And so we will make those decisions as we get more information. Tejas Gala: Thank you. Can we have the next question, please? Operator: That will be from Jeriel Ong with Deutsche Bank. Jeriel Ong: Yes, thank you so much. I have two questions as well. I'd like to focus on the gross margin expansion within the services line all-time record for the quarter. I'm just curious whether you think that will sustain, I understand within services is a pretty wide range of gross margins by business, and I'm wondering if that should continue to improve. Tim Cook: Well, as you've seen, obviously, we've had a sequential expansion in gross margin for services. And that was driven primarily by mix as you said, right. We have a very broad portfolio and depending on which one of the services does better than we have an impact on Services gross margins. We like the Services business because it is -- it's a recurring type of revenue and the margins are accretive to company margin. We did over 67% this quarter, but we want to offer very competitive services across the board and the same -- I think I'm going to make the same comments that I made on products. What matters to us is to be successful with everything that we do and provide great products and services to our customers. So the relative success of our products and services in the marketplace will drive to a certain extent with our margins are, that's the margins are a byproduct of our success in the marketplace. Jeriel Ong: Got it, really appreciate that. And I wanted to ask question on the Wearables segment. It seems to me that you're categorizing the Wearables business as maybe being a little bit impact from pandemic similar to the iPhones. And it's the first time that Wearables hasn't materially upsided and at least a while in recent memory. I guess the drivers of the Wearables being Watch and predominantly Watch and AirPods. What are your thoughts going forward on whether there is a little bit of pent-up demand perhaps that might resume ads that will get back to a more normalized environment? Tim Cook: I think on the Watch in particular is like the iPhone more affected by store closures, because people -- some people want to try on the Watch and see what it looks like, look at different band choices and those sorts of things. And so I think as stores closed, it puts more pressure on that. I was -- we did come out sort of the way we told you last quarter, we were going to come out from the color that we gave you. So we knew things would decelerate because of the closures. So we will end up being, we're very pleased with how we did. But the store closures definitely affect the wearables and the iPhone. Tejas Gala: Thank you, Jeriel. Jeriel Ong: Got it. Really appreciate that. Tejas Gala: Yes. Can we have the next question, please? Operator: That will come from Jim Suva with Citigroup. Jim Suva: Thank you very much. And I have two questions. I'll ask them at the same time and it's one for Tim and one for Luca. Tim, the coronavirus, your company has done a fantastic job at overcoming one of the hurdles. So congratulations to you. As you look forward, say to the Christmas holiday shopping season, and given the economic challenges around the world of virus, coronavirus and your product launches and things like that. Can you give me commentary maybe how this Christmas you're looking forward, to say, maybe some past cycles of Christmas? Because it just seems like it's a little bit different, but Apple is really showing a lot more strength coming into this Christmas than may be some of the past years. And then for Luca, I think you made a quick comment, Luca, that you mentioned something about a few weeks later, was Apple like iPhone, iPhone chips or product launches or maybe expand upon that. I know things are more difficult, but I didn't quite keep the commentary, it was in your prepared comments, we'll go about a few weeks late that let's just have a quick little blood. Thank you so much, gentlemen. Tim Cook: Yes, we take it one quarter at a time. And so, we'll give you color on the December quarter and October. Generally speaking, I think we need to see a vaccine or therapeutic or both. And there is some optimism around that and in that particular timeframe. And so, we'll see, I don't have any information that is publicly available there. But I think that would boost consumer confidence quite a bit if it begins to happen and I think that any kind of consumer style company would benefit from that. Luca Maestri: And Jim, on the iPhone, I said in my remarks that we launched a year ago, we launched the new iPhone in late September. So I was referring to the new product. And I said that this year, the supply of the new product will be a few weeks later than that. Jim Suva: Great. Congratulations to you and your entire organization and teams. Thank you so much. Tim Cook: Thanks so much. Tejas Gala: Thank you. Can we have the next question, please? Operator: That will come from Wamsi Mohan with Bank of America. Wamsi Mohan: Hi. Yes, thank you. I was wondering if you can maybe comment on the penetration of Apple Card users in the iOS installed base? And have you seen any change in the buying behavior of Apple Card users in terms of accelerating spend on more Apple products and services? Then I have a follow-on. Tim Cook: We saw changes in consumer spending as the shutdowns occurred and the store closures occurred, we could see that across the Card. It affected the categories that you would guess the most like travel and entertainment et cetera. But overall if you sort of pull the lens out on the Apple Card, we're very happy with the number of people that have Apple Card. We believe based on what we've heard that it's the fastest rollout in the history of credit cards and so we feel very good about that. Wamsi Mohan: Okay. Thanks, Tim. And as a follow-up, now that Apple has Apple Silicon for Macs. Would you ever consider monetizing this as a merchant silicon vendor or is this going to be forever for Apple use? Tim Cook: Well, I don't want to make a forever comment, but there are -- we are a product company and we love making the whole thing. And because if we can -- on the user experience in that way and with the goal of delighting the user. And that's the reason that we're doing the Apple Silicon is because we can envision some products that we can achieve with Apple Silicon that we couldn't achieve otherwise. And so that's how we look at it. Wamsi Mohan: Thanks, Tim. Tejas Gala: Thank you, Wamsi. A replay of today's call will be available for two-week on Apple podcasts as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please enter confirmation code 2630782. These replays will be available by approximately 5:00 PM Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. Operator: And again, that will conclude today's conference.	[ { "speaker": "Operator", "text": "Good day, everyone. Welcome to the Apple Incorporated Third Quarter Fiscal Year 2020 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn things over to Mr. Tejas Gala, Senior Manager, Corporate Finance and Investor Relations. Please go ahead, sir." }, { "speaker": "Tejas Gala", "text": "Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, and future business outlook, including the potential impact of COVID-19 on the company's business and results of operations. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed periodic reports Form 10-K and Form 10-Q and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thanks, Tejas. Good afternoon, everyone. Thanks for joining the call today. Before we begin, I joined the many millions across this country in mourning and memorialize Congressman John Lewis, who was laid to rest earlier today. We've lost a hero who walked among us, a leader in the truest sense who urged this country to aim higher and be better until the very end. I was humbled and fortunate to know him and as an Alabama native his example inspires me still. It now falls to every American to be a living memorial to John Lewis and to carry forward the work and the mission that defined his life. Throughout the call I'll speak in greater detail about Apple's support for equity and justice topics of great urgency on a number of fronts, but first I want to pull the lens back to consider the quarter and full. In an uncertain environment Apple saw a quarter of historic results demonstrating the important role our products play in our customers' lives. We set a June quarter record with revenue of $59.7 billion, up 11% from a year ago. Both products and services set June quarter records and grew double-digits and revenue grew in each of our geographic segments, reflecting the broad base of this success. As always and especially in times of real adversity, what makes us proud as a company is not merely what we did, but how we did it. As millions March for justice in big cities and small towns alike, we committed a $100 million to launch Apple's racial equity and justice initiative as well as new and renewed internal efforts to foster diversity and inclusion at all levels of the company. As COVID-19 continues to represent great risks for individuals and great uncertainty for our communities, care and adaptability are defining how we conduct our work wherever we work. In some places that has met responsibly reopening our operations and retail stores with enhanced health and safety precautions. In others, where the virus has reemerge it's meant taking the challenging, but necessary step of re-closing stores. I'll touch on these topics more in a little bit. But first I want to offer some more context on the quarter's results. Due to the uncertain and ongoing impacts of COVID-19, we did not provide our typical guidance when we reported our results last quarter, but we did provide some color on how we expected the June quarter to play out. I'd like to contextualize our results in terms of that color across each of our product categories beginning with iPhone. iPhone revenue grew 2% this quarter. In April, we expected year-over-year performance to worsen, but we saw better-than-expected demand in May and June. We attribute this increase in demand to several interactive causes including a strong iPhone SE launch, continued economic stimulus, and potentially some benefit from shelter in place restrictions lifting around the world. We expected iPad and Mac growth to accelerate and we saw very strong double-digit growth for these devices this quarter. This remarkable performance came in spite of supply constraints on both products. We're working hard to get more iPads and Macs into customers' hands as quickly as possible recognizing how integral they have become to working and learning from home providing entertainment and staying connected with loved ones. Wearables growth decelerated as we expected, but still grew by strong double-digits and set a revenue record for a non-holiday quarter. Building on powerful new features built into watchOS 7 and AirPods Pro announced this quarter, we are very excited about the many opportunities in front of us for this product category. These strong results helped drive our installed base of active devices to new all-time records across each of our product categories. Reflecting the deep integration of hardware, software and services, services generated a June quarter record of $13.2 billion, up 15% year-over-year. As we mentioned during our last call, there were two distinct trends we were seeing and they played out as we thought. First, results for advertising and AppleCare were impacted by the reduced level of economic activity and store closures to a degree that was in line with our expectations. Second, we had strong performance in our digital services with all-time revenue records in the App Store, Apple Music, video and cloud services as well as elevated engagement on iMessage, Siri and FaceTime. Customers are loving new offerings across Apple services like Apple News today, our new daily audio briefing and Greyhound, our new summer blockbuster starring Tom Hanks. In fact, Apple TV+ just hit a history making 95 awards nominations and 25 wins and accolades. Based on these results and our performance over the last four quarters, we are proud to announce that we have achieved our goal of doubling. Our fiscal 2016 services revenue six months ahead of schedule. We're conscious of the fact that these results stand in stark relief during a time of real economic adversity for businesses large and small and certainly for families. We do not have a zero-sum approach to prosperity and especially in times like this, we are focused on growing the pie, making sure our success isn't just our success and that everything we make, build or do is geared towards creating opportunities for others. The App Store is a great example. This quarter, a new study by independent economists at the Analysis Group founded the App Store facilitated more than 0.5 trillion in commerce globally in 2019 alone. Especially in a time of COVID-19, you can measure economic resilience in the ways in which the App Store supports remote ordering for restaurants, digital commerce for small businesses and an enduring entrepreneurial opportunity for creators and visionaries. Keeping learning vibrant and impactful in the time of COVID-19 is a priority everyone shares. Earlier this month, we announced significant enhancements to the development Swift and Everyone Can Code curricula and we launched a new professional learning course available exclusively to educators. In just two weeks ago, our Community Education initiative added 10 more historically black college and university regional coding centers to our roster, bringing the total to 24 locations nationwide, 12 of which are HBCUs and 21 of which serve majority black and brown student populations. In Apple's backyard, we announced that we are allocating $400 million of our multi-year $2.5 billion affordable housing commitment to new housing construction, homebuyer assistance programs and support for those at greatest risk of experiencing homelessness across Silicon Valley. Apple's results this quarter are only possible due to our people and their ongoing ingenuity, flexibility, resilience and determination during these ever-changing times. I want to thank our AppleCare and retail teams who have paired exceptional service during a time of intense demand with great adaptability during a quarter where stores have reopened in some places and reclosed in others. A dedicated team of specialists and experts has shouldered the task of caring for the well-being of our teams and communities store by store, location by location with evidence driven granularity and agility that is unrivaled anywhere. Innovation from adversity certainly define this year's Worldwide Developers Conference as well. This is an event where traditionally Apple's worldwide community of developers gathers together to share, celebrate and do big things together. Though we could not be together in person, Apple set a new standard for what online events can achieve with our celebrated all virtual event. The results here speak for themselves. More than 22 million viewers tuned in across all of Apple streams. For our developers we distributed more than 72 hours of video content. That's three full days of video. The weak saw more than 200 direct video engineering and design sessions and about 4500 person to person appointments with developers across 227 virtual labs. And of course that's even before you get to this year's announcements from iOS 14, which boasts the radical redesign to the home screen, powerful updates to messages, streamlined and effortless app clips and even greater privacy transparency and controls to major updates to Apple Pencil, Siri and calling and iPad OS 14 to much anticipated sleep tracking, new fitness and wellness features and unprecedented customization and watchOS 7 to the new macOS Big Sur boasting the biggest redesign upgrade to macOS since OS X. No less important for Apple's innovation roadmap is our transition to Apple silicon for the Mac. This two-year effort will achieve both unprecedented performance for the Mac and a common architecture across all Apple products. Looking forward, we are profoundly optimistic about Apple's future and we recognize that with this success comes some real responsibility to lead with our values because those values help make that success possible in the first place. We are just as proud of our announcement this month that Apple will be fully carbon-neutral by 2030 across our entire supply chain and including the energy use of every device we make as we are of any hardware innovation because they spring from the same instinct to leave the world better than we found it. We're committed to standing with those marching for the lives and dignity through our new $100 million commitment to Apple's racial equity and justice initiative, and we're deepening our diversity and inclusion efforts internally because our future as a business is inextricably linked with the future of our communities. There are times when things seem to move slowly when needed progress, economic or social themes bogged down when the instinct to turn away from the horizon and hold onto what you've got fields and ex-capable, and then there are times like this when people of goodwill step forward, when progressed on Moore's itself, when the insistence of hope forces something new. This is an immensely challenging moment. COVID-19 is still devastating many places and we have work left to do to care for the health and well-being of the communities in which all of us live and work. But no community of people, whether a company or a country, can afford to miss this call when it comes. At Apple, we never have and we don't intend to start now. With that, I'll hand things off to Luca." }, { "speaker": "Luca Maestri", "text": "Thank you, Tim. Good afternoon, everyone. Our June quarter was a testament to Apple's ability to innovate and execute during challenging times. Our results speak to the resilience of our business and the relevance of our products and services in our customers' lives. Total revenue was $59.7 billion, a new June quarter record, up 11% from a year ago, despite a 300 basis point headwind from foreign exchange. Our performance was strong across our entire portfolio as we grew revenue in each of our product categories and set June quarter records for Mac, for Wearables and for services. Similarly, our results were very strong all around the world with growth in all geographic segments and new June quarter records in the Americas, in Europe, in Japan and Rest of Asia-Pacific. Products revenue was $46.5 billion, up 10% and a June quarter record. iPhone returned to growth and we saw very strong double-digit growth from iPad, Mac and Wearables. Lockdowns and point of sale closures were widespread during April and impacted our performance, but we saw demand for all products improve significantly in May and June. As a result of our strong performance and the unmatched loyalty of our customers, our installed base of active devices reached an all-time high in all of our geographic segments and all major product categories. Our services continue to grow strongly up 15% year-over-year and reached a June quarter record of $13.2 billion. We set all-time records in many services categories and June quarter records in each geographic segment. I'll cover this in more detail later. Company gross margin was 38%. This was down 40 basis points sequentially due to unfavorable FX of 90 basis points and a different mix of products partially offset by cost savings and services mix. Products gross margin was 29.7% decreasing 60 basis points sequentially due to FX and a different mix partially offset by cost savings. Services gross margin was 67.2% up 180 basis points sequentially mainly due to mix. Net income was $11.3 billion and earnings per share were $2.58, up 18% and a June quarter record. Operating cash flow was also a June quarter record at $16.3 billion, an improvement of $4.6 billion over a year ago. Let me get into more detail for each of our revenue categories. iPhone revenue grew 2% to $26.4 billion with customer demand improving as the quarter progressed. COVID-19 was most impactful during the first three weeks of April when lockdowns and point of sale closures became more widespread in many countries. We saw marked improvement around the world in May and June, which we attribute to an improved level of customer demand helped by the very successful launch of iPhone SE and economic stimulus packages. Our active installed base of iPhones again reached an all-time high as a result of the loyalty of our customer base and strength of our ecosystem. In fact in the US the latest survey of consumers from 451 Research indicates iPhone customer satisfaction of 98% for iPhone 11, 11 Pro and 11 Pro Max combined. Turning to services, as I said, we set a June quarter record of $13.4 billion of revenue. We had all-time record performance and strong double-digit growth in the App Store, Apple Music, video and cloud services. Our new services Apple TV+, Apple Arcade, Apple News+ and Apple Card are also contributing to overall services growth and continue to add users’ content and features. At the same time customer engagement in our ecosystem continues to grow at a fast pace. The number of both transacting and paid accounts on our digital content stores reached a new all-time high during the June quarter with paid accounts increasing double-digits in each of our geographic segments. In aggregate, paid subscriptions grew more than 35 million sequentially and we now have over 550 million paid subscriptions across the services on our platform, up 130 million from a year ago. With this momentum we remain confident to reach our increased target of 600 million paid subscriptions before the end of calendar 2020. Wearables, Home and Accessories established a new June quarter record with revenue of $6.5 billion, up 17% year-over-year. Our Wearables business is now the size of a Fortune 140 company and we set June quarter records in the majority of markets we track. Importantly Apple Watch continues to extend its reach with over 75% of the customers purchasing Apple Watch during the quarter new to the product. Next, I'd like to talk about the impressive performance of Mac. Revenue was $7.1 billion, up 22% over last year and a June quarter record. We grew double digits in each geographic segment and set all-time revenue records in Japan and rest of Asia-Pacific as well as June quarter records in the Americas and Europe. Customer response to our new MacBook Air and MacBook Pro launches has been extremely strong. iPad performance was equally impressive with revenue of $6.6 billion, up 31% and our highest June quarter revenue in eight years. Demand was strong around the world with double-digit growth in each of our geographic segments, including a June quarter record in Greater China. The launch of our new iPad Pro has been received incredibly well in every region of the world. Both Mac and iPad are extremely relevant products in the new working and learning environments and the most recent surveys of consumers from 451 Research measured customer satisfaction at 96% for Mac and 97% for iPad. Around half of the customers purchasing Mac and iPad during the quarter were new to that product. And as a result, the active installed base for both products reached a new all-time high. Our retail business had record June quarter revenue. Thanks to the performance of our online store which had records in all geographic segments and grew across all major product categories. In June, we launched Apple Card Monthly Installments for more products in our US stores allowing customers to pay for their devices all the time with 0% interest. We're very pleased with the level of customer interest this new offering has generated. In the enterprise market, we continue to see companies leverage Apple products and offerings to successfully navigate their businesses through COVID-19. In healthcare, we are seeing rapid acceleration of telehealth to support a more flexible model of patient care. Many hospitals such as UVA Health, Rush University Medical Center and UC San Diego Health are using apps on iPad and iPhone to have triage, monitor and care for patients who are at home. This helps free up hospital capacity to support patients who need inpatient care while enabling continued care for patients who do not require in-person visits. Since many call center employees are currently working remotely, Apple Business Chat has proven an invaluable tool for staying connected with customers. This quarter HSBC deployed Apple Business Chat in its US and UK contact centers. Apple Business Chat provides a flexible and secured channel for digital banking assistance through a native Apple experience improving the efficiency and experience for both customers and agents. We are seeing similar adoption by hundreds of other organizations. Let me now turn to our cash position. We ended the quarter with almost $194 billion in cash plus marketable securities. We issued $8.5 billion of new term debt, retired $7.4 billion of term debt and increased short-term borrowing facilities by $1.1 billion during the quarter leaving us with total debt of $113 billion. As a result, net cash was $81 billion at the end of the quarter and we continue on our path to reaching a net cash neutral position over time. We returned over $21 billion to shareholders during the June quarter, including $3.7 billion in dividends and equivalents and $10 billion through open market repurchases of 31.3 million Apple shares. We also began a $6 billion accelerated share repurchase program in May resulting in the initial delivery and retirement of 15.2 million shares. And finally, we retired an additional 4.8 million shares in the final settlement of our 15th ASR. As we move ahead into the September quarter, I'd like to provide some color on what we are seeing, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Similar to last quarter, given the uncertainty around the world in the near-term, we will not be issuing revenue and margin guidance for the coming quarter. However, we will provide some additional insight on our expectations for the September quarter for our product categories. On iPhone, we expect to see recent performance continue for our current product lineup, including the strong customer response for iPhone SE. In addition, as you know, last year we started selling new iPhones in late September. This year we project supply to be available a few weeks later. We expect the rest of our product categories to have strong year-over-year performance. For services, we expect the September quarter to have the same trends that we have observed during the June quarter except for AppleCare where during the September quarter a year ago we expanded our distribution significantly. As a consequence, we expect a difficult comp for AppleCare also considering the COVID related point of sale closures this year. For gross margin, keep in mind that we will have a different mix than in prior years as I just explained. For OpEx, we expect to be between $9.8 billion and $9.9 billion. We expect the tax rate to be about 16.5% and OI&E to be $50 million. Also today our Board of Directors has declared a cash dividend of $0.82 per share of common stock payable on August 13, 2020 to shareholders of record as of August 10, 2020. And finally, today we're announcing a four for one split of Apple common stock to make our stock more accessible to a broader base of investors. Each shareholder of record at the close of business on August 24, 2020 will receive three additional shares for every outstanding share held on the record date and trading will begin on a split-adjusted basis on August 31st, 2020. With that let's open the call to questions." }, { "speaker": "Tejas Gala", "text": "Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we please have the first question?" }, { "speaker": "Operator", "text": "Yes, that will be from Katy Huberty with Morgan Stanley." }, { "speaker": "Katy Huberty", "text": "Thank you. Good afternoon. Tim in light of the economic adversity that you talked about in the prepared remarks, can you just walk us through how Apple is leveraging finance and trade-in programs to make technology more affordable and accessible during this period, while also addressing the opportunity to recycle and reuse products and maybe also extend that to how these programs might expand over time and then I have a follow-up." }, { "speaker": "Tim Cook", "text": "Yes. As Luca mentioned, in June we actually rolled out to the overwhelming balance of our other products the ability to do interest rate, interest free financing in our stores with payments. And that's in addition to trade-in which is becoming a more common trend now which I think is terrific because it is great for the environment and it acts as a subsidy, if you will, against the price of the new phone. And so when you compound these two things with the financing and the trade-in it makes the product super affordable. And we're really happy with what we're seeing in that regard." }, { "speaker": "Katy Huberty", "text": "And then, as a follow-up, just specifically to iPhone the category returned to growth. As you pointed out, the installed base is larger today. Our math would suggest that replacement cycles in some cases are elongated. And then you have the affordability element that you just discussed. Does all of that combine to build confidence that we're entering a longer period of iPhone revenue growth after what's been six quarters of decline?" }, { "speaker": "Tim Cook", "text": "We're very pleased with how we did on iPhone. It was better than we thought largely because as we pointed out in the prepared remarks May and June were much better. If you look at iPhone in totality the things that get me very optimistic is the size of the active installed base. The fact that if you look in the major geographies like the US, we had the top two selling smartphones. In the UK we had three of the top four. In Australia, we had five of the top six. And in Japan we had the top four. Urban China we were, iPhone 11 was the top selling smartphone in the country. And so these are some very different geographies with their very different competitive situations and we're doing fairly well. The iPhone SE, it's also clear that from the early data we're seeing a higher switcher number than we did in the previous year, which we feel very good about. And it also seems to appeal to some people that were holding onto the device a little longer because they wanted a smaller form factor phone. And so the combination of the smaller form factor and an incredibly affordable price made the iPhone SE very popular. iPhone 11 is still the most popular smartphone, but iPhone SE definitely helped our results. And as we -- as Lucas said in his outlook, we do see that continuing into this quarter currently." }, { "speaker": "Tejas Gala", "text": "Thank you, Katy." }, { "speaker": "Katy Huberty", "text": "Thank you. Congrats on the quarter." }, { "speaker": "Tim Cook", "text": "Thank you so much." }, { "speaker": "Tejas Gala", "text": "Can we have the next question, please?" }, { "speaker": "Operator", "text": "Yes, that would be from Krish Sankar with Cowen & Company." }, { "speaker": "Krish Sankar", "text": "Hi, thanks for taking my question. I have two of them. First one, Tim, when you look at the services business and in terms of your TV+ content production have the movement restrictions impacted the content production efforts? And along the same path four years ago your premonition on services being a $50 billion business in 2020 came sooner than expected, I don't know if you want to make any such forecast four years out and how you think services revenue is going to be. Then I have a follow-up for Luca." }, { "speaker": "Tim Cook", "text": "I'm sorry. I missed that second question because the audio didn't come through. But I think I got the gist of the first. And that is production has been affected for Apple TV+ as I think it has for most people. We are working to get restarted. I don't have a precise date yet when we will get it restarted, but there will be some impact because we shut down in the March time frame and are yet to really restart in a significant way particularly for those that are shut in the LA area given the current status of the virus and those. And I'm sorry I missed your, the second part of your question." }, { "speaker": "Krish Sankar", "text": "Yes, Tim, I was trying to see, four years ago you made a great prediction that services is going to be $50 billion by 2020. I wanted to see if you have any update to the prediction four years down the road?" }, { "speaker": "Tim Cook", "text": "We're not updating today. We feel good. We want to take the moment and feel good about achieving the doubling six months early. And we do have still hanging out there, as you know, the subscription number that we're shooting for later in the year at 600 million. So we do have that objective out there." }, { "speaker": "Krish Sankar", "text": "If I could just squeeze in one for Luca. With the strong sales in Mac given the shelter-in-place, do you think the back-to-school season got pulled in by a quarter or do you expect the momentum to still continue? Thank you very much." }, { "speaker": "Luca Maestri", "text": "As I said, when I was talking about providing some commentary for the September quarter, we expect all the non-iPhone product categories to have a very strong year-over-year performance. So we definitely, I mean, the back-to-school season is clearly this one and we are very excited not only for the Mac, but also for the iPad. We've got a fantastic lineup of products and we know that these products are incredibly relevant especially given the current circumstances. So we expect the performance that we've seen for Mac in the June quarter to continue." }, { "speaker": "Tejas Gala", "text": "Thank you. Can we have the next question, please?" }, { "speaker": "Operator", "text": "Yes. From Cross Research we'll hear from Shannon Cross." }, { "speaker": "Shannon Cross", "text": "Thank you very much. Tim, can you talk a bit about what you're seeing in China? I know the revenue was up 2% and I think Luca talked about record iPad, but just curious as to given their 5G [indiscernible] how you're seeing the market play out? And then I have a follow-up. Thank you." }, { "speaker": "Tim Cook", "text": "Shannon, the growth that we -- we did see growth in Greater China for the quarter of 2%, currency affected China, a bit more than in other places, it affected 400 basis points. And so in constant currency, we would have grown at 6%. As I had mentioned before, the iPhone 11 has been our best-selling phone and has been number one in urban China and so we're very, very proud of that. iPad was helped in the June quarter there by the work from home and distance learning as it was in other geographies and the Mac also grew strong double digit during the quarter. And services set a new June quarter record there. We also continue to see extremely high new customer rates on Mac and iPad there, to give you a perspective, about three out of four customers that are buying the Mac are new in China and about two out of three that are buying the iPad are new. And so these are numbers that we're super proud of." }, { "speaker": "Shannon Cross", "text": "Great. And then, can you talk a little bit more about the decision to bring Mac Silicon in-house, then the benefits that you expect to see or you've seen from vertical integration of acquisitions like the Intel modem business? Thanks." }, { "speaker": "Tim Cook", "text": "Thanks. Yes, I mean, what we will end up -- what we'll end up with is a common architecture across all of our products, which gives us some interesting things that we can do in products that are -- that is sort of unleashes another round of innovation. And so I don't want to say a lot about it, other than we are extremely excited about it, it's something that we've worked on quite a while to get to this point and we're looking forward to shipping the first Mac with Apple Silicon later in the year." }, { "speaker": "Tejas Gala", "text": "Thank you, Shannon. Can we have the next question please." }, { "speaker": "Operator", "text": "That will come from Amit Daryanani with Evercore." }, { "speaker": "Amit Daryanani", "text": "Thanks a lot for taking my question guys. I have one and a follow-up as well. Fortunately, I guess, Tim, if I think about the strength, you're seeing with iPhones right now, do you have a sense in terms of where is this trend coming from? Is it more replacement cycles getting shorter or which is getting new customers into the iOS ecosystem because, clearly these growth rates seem fairly impressive in the context of a pandemic and upcoming refresh cycle that we have?" }, { "speaker": "Tim Cook", "text": "I think, Amit, it's a combination of a strong launch with iPhone SE and some -- probably some pick up because of the economic stimulus that hit different countries at different points in time. And probably some of the reopening that took place across the quarter, particularly in May and June as Store started to reopen. And so it's a combination of all of those. And as you know, we've been having a strong cycle with the iPhone 11 and the 11 Pro. And so when you combine the -- a strong cycle plus and iPhone SE launch, plus the reopening of the stores, et cetera, I think there were a lot of things that we're going in the right direction there." }, { "speaker": "Amit Daryanani", "text": "Perfect, that's helpful. And then I guess, Luca, if I could just follow up with you. I'd love to get your perspective on how do we think about the overall 38% gross margins? What do you think of the levers to improve this as you go forward, not really September quarter, but over the next one to two years? And in that context, do you see a point where the product gross margin starts to stabilize because they have been trending somewhat lower for the last couple of quarters now." }, { "speaker": "Luca Maestri", "text": "Yes. Well, let me start with what we've seen during the June quarter. We were at 38%, we were down slightly sequentially but up the same amount on a year-over-year basis. And really the big negative impact that we felt for several quarters now has been the strength of the US dollar, so the foreign exchange impact on a sequential basis was 90 basis points on a year-over-year basis was 130 basis points. So obviously that is something to keep in mind. And then, the other aspect; I think it's always important to keep in mind, Amit, is that we sell many different products. They have different margin profiles. And so sometimes a different mix can have an impact on the aggregate level of products gross margins and we are very pleased to see the performance of Mac, iPad and Wearables but obviously, it's a different mix. Going forward, the variables are always the same, is that the foreign exchange will continue to play an impact, the mix of products there, we're going to be selling, will have an impact as well. The commodities market has been relatively benign and we'll see how that plays out over time. As you know now for several years, we've been managing gross margin, I would say, fairly well in spite of some difficult situations like the one with the strength of the dollar and we plan to continue to make a good trade off decisions between revenue and units and margins." }, { "speaker": "Tejas Gala", "text": "Thank you, Amit. Can we have the next question, please?" }, { "speaker": "Operator", "text": "It will come from Kyle McNealy with Jefferies." }, { "speaker": "Kyle McNealy", "text": "Hi, thanks a lot for the question. Our team in Asia recently, we did some survey work on smartphones in China. It showed that there is still a high proportion of the installed bases on 6, 7, 8 devices. I know you talked about the trade-in programs and promotions that you've been doing there. I wonder if you can tell us whether there is anything else that you're doing to get these customers in your latest technology? What made those customers be looking for and how should we think about when an upgrade cycle might come on more strongly there in China? Thanks." }, { "speaker": "Tim Cook", "text": "Customers upgraded different at a different pace and I don't have in front of me the exact installed base data from China. But much like in other geographies, the upgrades have extended some, it extended some during the depths if you will of the pandemic in China and the rest of the world, and probably to some degree is happening still at this point. The key things that we can do is keep innovating, deliver product that people can't imagine, going through life about. And obviously keep rolling out these programs that makes the front-end purchase be much less, and this is things like the financing in the trade-in programs that you mentioned. And I do feel like those are going quite good in a number of geographies." }, { "speaker": "Kyle McNealy", "text": "Okay, great, thanks. And one more if I may. Congrats again on the strong iPad and Mac results, that's really impressive. I guess the obvious question is, should we ever think about how much of that might be pull-forward and what might be the future upgrades in next few years? Anything else you can share on how you think about growth from here or whether there is a hangover period maybe after the back-to-school season or holiday season. That would be helpful. Thanks." }, { "speaker": "Tim Cook", "text": "The installed base is growing and the new customer numbers that Luca went over in the aggregate are still very high in the close to 50% kind of range. And so, that to me, makes the -- bodes well for the future. There is clearly, as we had indicated, there is some amount of work from home and remote learning that do affect the results of Mac and iPad positively. They probably affect wearables and iPhone, the other direction. And -- but on Mac and iPad, these are productivity tools that people are using to stay engaged with their work or stay engaged with their school work. And we believe we're going to have a strong back to school season. Sitting here today, it certainly looks like that." }, { "speaker": "Tejas Gala", "text": "Thank you, Kyle." }, { "speaker": "Kyle McNealy", "text": "Great. Thanks very much." }, { "speaker": "Tejas Gala", "text": "Can we have the next question, please?" }, { "speaker": "Operator", "text": "That will come from Cleveland Research's Ben Bollin." }, { "speaker": "Ben Bollin", "text": "Good evening, everyone. Thanks for taking the question. Tim, I was hoping you could share a little bit about where you think channel inventory is? You talked about the tightness you saw exiting the June quarter for Mac and iPad. Interested, where you think inventory is across major product categories. And then I had a follow-up for Luca." }, { "speaker": "Tim Cook", "text": "We usually -- we've gotten away from talking about channel inventories. But to give you a perspective sitting here looking at it, on iPhone the inventory is slightly less than it was a year ago and that's I'm saying that at a quarter end point, so at the end of Q3. And obviously iPad and Mac are constrained and so both of those are less than they were in the year ago quarter." }, { "speaker": "Ben Bollin", "text": "Okay. And then, Luca, I'm interested, any color you could share about the impact COVID had on OpEx in the quarter, be it work from home, stipends, travel, other employee support costs. And also how the company is thinking about the longer-term opportunity of employees working remotely maybe more permanently many considerations and how that could influence the future OpEx? Thanks." }, { "speaker": "Luca Maestri", "text": "Well, on the OpEx front, there are being obviously certain things that have been affected in terms of cost reductions. Obviously, travel, it is a perfect example. The number of meetings that we have internally, some of those costs have been reduced. We've also invested heavily in initiatives for example, we're really trying to help during a very difficult circumstances. For example, we have had a program for example where we match our employee donations, we made donations directly as a company around the world to many institutions and governments. On a net basis, I would say probably the cost have outweighed the savings both during the March and the June quarter, but we think it's absolutely the right thing to do. From an employee perspective, what we said so far is that here in the United States, in most -- the majority of our population will continue to work from home until the end of the year. And then we'll see, I mean, we've taken an approach that we try to understand how the virus is evolving over time. We've taken a very cautious approach of both with our corporate facilities and with our retail stores. I think what you've seen with retail stores is that we have reopened in number of geographies around the world. We've reopened here in the United States. We've had to re-close some of the stores yet here in the United States, as the number of cases has gone up. And we will continue to track how the virus is doing. And hopefully at some point, we're going to get to a point where there is a vaccine or there is a cure. And so we will make those decisions as we get more information." }, { "speaker": "Tejas Gala", "text": "Thank you. Can we have the next question, please?" }, { "speaker": "Operator", "text": "That will be from Jeriel Ong with Deutsche Bank." }, { "speaker": "Jeriel Ong", "text": "Yes, thank you so much. I have two questions as well. I'd like to focus on the gross margin expansion within the services line all-time record for the quarter. I'm just curious whether you think that will sustain, I understand within services is a pretty wide range of gross margins by business, and I'm wondering if that should continue to improve." }, { "speaker": "Tim Cook", "text": "Well, as you've seen, obviously, we've had a sequential expansion in gross margin for services. And that was driven primarily by mix as you said, right. We have a very broad portfolio and depending on which one of the services does better than we have an impact on Services gross margins. We like the Services business because it is -- it's a recurring type of revenue and the margins are accretive to company margin. We did over 67% this quarter, but we want to offer very competitive services across the board and the same -- I think I'm going to make the same comments that I made on products. What matters to us is to be successful with everything that we do and provide great products and services to our customers. So the relative success of our products and services in the marketplace will drive to a certain extent with our margins are, that's the margins are a byproduct of our success in the marketplace." }, { "speaker": "Jeriel Ong", "text": "Got it, really appreciate that. And I wanted to ask question on the Wearables segment. It seems to me that you're categorizing the Wearables business as maybe being a little bit impact from pandemic similar to the iPhones. And it's the first time that Wearables hasn't materially upsided and at least a while in recent memory. I guess the drivers of the Wearables being Watch and predominantly Watch and AirPods. What are your thoughts going forward on whether there is a little bit of pent-up demand perhaps that might resume ads that will get back to a more normalized environment?" }, { "speaker": "Tim Cook", "text": "I think on the Watch in particular is like the iPhone more affected by store closures, because people -- some people want to try on the Watch and see what it looks like, look at different band choices and those sorts of things. And so I think as stores closed, it puts more pressure on that. I was -- we did come out sort of the way we told you last quarter, we were going to come out from the color that we gave you. So we knew things would decelerate because of the closures. So we will end up being, we're very pleased with how we did. But the store closures definitely affect the wearables and the iPhone." }, { "speaker": "Tejas Gala", "text": "Thank you, Jeriel." }, { "speaker": "Jeriel Ong", "text": "Got it. Really appreciate that." }, { "speaker": "Tejas Gala", "text": "Yes. Can we have the next question, please?" }, { "speaker": "Operator", "text": "That will come from Jim Suva with Citigroup." }, { "speaker": "Jim Suva", "text": "Thank you very much. And I have two questions. I'll ask them at the same time and it's one for Tim and one for Luca. Tim, the coronavirus, your company has done a fantastic job at overcoming one of the hurdles. So congratulations to you. As you look forward, say to the Christmas holiday shopping season, and given the economic challenges around the world of virus, coronavirus and your product launches and things like that. Can you give me commentary maybe how this Christmas you're looking forward, to say, maybe some past cycles of Christmas? Because it just seems like it's a little bit different, but Apple is really showing a lot more strength coming into this Christmas than may be some of the past years. And then for Luca, I think you made a quick comment, Luca, that you mentioned something about a few weeks later, was Apple like iPhone, iPhone chips or product launches or maybe expand upon that. I know things are more difficult, but I didn't quite keep the commentary, it was in your prepared comments, we'll go about a few weeks late that let's just have a quick little blood. Thank you so much, gentlemen." }, { "speaker": "Tim Cook", "text": "Yes, we take it one quarter at a time. And so, we'll give you color on the December quarter and October. Generally speaking, I think we need to see a vaccine or therapeutic or both. And there is some optimism around that and in that particular timeframe. And so, we'll see, I don't have any information that is publicly available there. But I think that would boost consumer confidence quite a bit if it begins to happen and I think that any kind of consumer style company would benefit from that." }, { "speaker": "Luca Maestri", "text": "And Jim, on the iPhone, I said in my remarks that we launched a year ago, we launched the new iPhone in late September. So I was referring to the new product. And I said that this year, the supply of the new product will be a few weeks later than that." }, { "speaker": "Jim Suva", "text": "Great. Congratulations to you and your entire organization and teams. Thank you so much." }, { "speaker": "Tim Cook", "text": "Thanks so much." }, { "speaker": "Tejas Gala", "text": "Thank you. Can we have the next question, please?" }, { "speaker": "Operator", "text": "That will come from Wamsi Mohan with Bank of America." }, { "speaker": "Wamsi Mohan", "text": "Hi. Yes, thank you. I was wondering if you can maybe comment on the penetration of Apple Card users in the iOS installed base? And have you seen any change in the buying behavior of Apple Card users in terms of accelerating spend on more Apple products and services? Then I have a follow-on." }, { "speaker": "Tim Cook", "text": "We saw changes in consumer spending as the shutdowns occurred and the store closures occurred, we could see that across the Card. It affected the categories that you would guess the most like travel and entertainment et cetera. But overall if you sort of pull the lens out on the Apple Card, we're very happy with the number of people that have Apple Card. We believe based on what we've heard that it's the fastest rollout in the history of credit cards and so we feel very good about that." }, { "speaker": "Wamsi Mohan", "text": "Okay. Thanks, Tim. And as a follow-up, now that Apple has Apple Silicon for Macs. Would you ever consider monetizing this as a merchant silicon vendor or is this going to be forever for Apple use?" }, { "speaker": "Tim Cook", "text": "Well, I don't want to make a forever comment, but there are -- we are a product company and we love making the whole thing. And because if we can -- on the user experience in that way and with the goal of delighting the user. And that's the reason that we're doing the Apple Silicon is because we can envision some products that we can achieve with Apple Silicon that we couldn't achieve otherwise. And so that's how we look at it." }, { "speaker": "Wamsi Mohan", "text": "Thanks, Tim." }, { "speaker": "Tejas Gala", "text": "Thank you, Wamsi. A replay of today's call will be available for two-week on Apple podcasts as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please enter confirmation code 2630782. These replays will be available by approximately 5:00 PM Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us." }, { "speaker": "Operator", "text": "And again, that will conclude today's conference." } ]	Apple Inc.	24,937
AAPL	2	2,020	2020-04-30 17:00:00	Operator: Good day everyone. Welcome to the Apple Incorporated Second Quarter Fiscal Year 2020 Earnings Conference Call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Tejas Gala, Senior Manager, Corporate Finance and Investor Relations. Please go ahead. Tejas Gala: Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple’s CEO, Tim Cook, and he will be followed by CFO, Luca Maestri. After that, we’ll open the call to questions from analysts. Please note that some of the information you’ll hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook including the potential impact of COVID-19 on the Company’s business and results of operations. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple’s most recently filed periodic reports on Form 10-K and Form 10-Q and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speaks as of their respective dates. I’d now like to turn the call over to Tim for introductory remarks. Tim Cook: Thanks, Tejas. Good afternoon, everyone. Thanks for joining us today. I hope you’re staying safe and well. Today Apple reports $58.3 billion in revenue, an all-time record for Services, and a quarterly record for Wearables, Home and Accessories. It was also a quarterly revenue record for Apple Retail powered by phenomenal growth in our online store. Amid the most challenging global environment in which we’ve ever operated our business, we’re proud to say that Apple grew during the quarter. But before we dive more deeply into the numbers, I want to speak just for a bit on COVID-19. This is something Apple has been contending with since January. And I think that how we have responded, what we have been inspired to do, tells an important story about Apple’s great durability as a business, and the enduring importance of our products in our customers’ lives. It also speaks to Apple’s unmatched capacity to be creative, to think always in terms of the long term and to forge ahead when others may feel an instinct to pull back. Before COVID-19 was on the horizon, we anticipated that Q2 was going to be a prolific and energetic period for Apple. And when the pandemic did strike, our teams not only succeeded in growing the business in introducing powerful new products, and in meeting our customers’ needs, but they also rose to the occasion in terms of meeting our broader obligations to the communities in which we live and work. Let’s look quickly across the business. At the same time that they were leaving no stone unturned to get our latest generation of devices manufactured and into our customers’ hands, our worldwide network of supply chain partners, logistics and operations folks in every part of the Company were also sourcing more than 30 million masks for frontline medical workers, ensuring they’re donated to places of greatest need in every region around the world. While our product teams were preparing to launch a new iPad Pro, Magic Keyboard, MacBook Air and the new iPhone SE, all of which have been very well received by reviewers and consumers alike, they were also working with our suppliers to design, test, manufacture and distribute more than 7.5 million face shields, and we continue to ship more than 1 million of these every week to the doctors, nurses and medical personnel on the frontlines. In a quarter where our Services teams achieved strong growth, which Luca will dig into in a minute, and which speaks to the real durability of our Services strategy, these teams were also putting COVID-19 front and center. As Apple News, reached 125 million monthly active users, we elevated trusted information from reliable sources through a special COVID-19 vertical. We let customers skip payments without incurring interest on Apple Card for March and April in light of financial hardship for many families. We worked with everyone from Oprah to Lady Gaga to inform, entertain and give back through Apple TV and services like FaceTime and Messages set new all-time records for daily volume during this quarter as users relied on their devices to stay connected in a new reality. In software, at the same time that our teams worked with great creativity and excitement as we prepare to deliver our first ever all online Worldwide Developers Conference later this quarter, they also worked with the same creativity and speed to put together our COVID-19 symptom checking website and app in partnership with the CDC. As of today, the app has been installed nearly 2 million times and the web tool has received over 3 million unique visits. And just this month, to accelerate contact tracing, we are launching a joint effort with Google to enable the use of Bluetooth technology to help governments and health agencies reduce the spread of the virus with user privacy and security central to the design. We paired these programmatic efforts with a broader strategy to get back where it’s needed most. We’ve made major corporate donations to response efforts around the world to support global citizens as well as a new fund for Americans experiencing food insecurity as a result of the crisis. When you tally these things up and consider our ongoing 2 to 1 match for employee donations, Apple’s contributions to the global response are significant, diverse, and a great source of pride for the whole chain. We’re also doing what we can to help our employees, their families, and by extension their communities stay safe and well by modifying our operations where appropriate. This extends of course to our retail employees, they are Apple’s face to our customers and an instrumental part of our business and we’re compensating them normally despite store closures. During a quarter where circumstances evolve by the hour, we have been gratified by the resilience and adaptability of our global supply chain. While we felt some temporary supply constraints in February, our operations team, suppliers and manufacturing partners have been safely returning to work and production was back at typical levels toward the end of March. At this time of social distance, of shuttered school and gathering places, of delayed plans and new ways of socializing, we have seen significant evidence that our products have taken a renewed importance for customers. Teachers and students around the world are relying on our technology to teach, learn, and stay connected with each other. We are in the process of deploying major orders of iPads to school systems working to keep learning going strong at a distance, including tens of thousands in Ontario, Canada; Glasgow, Scotland and Puerto Rico, a 100,000 to the city of Los Angeles and 350,000 to New York City, our largest educational iPad deployment ever. Since early March, we’ve seen unprecedented demand for a pro app from students, enthusiasts and creative professionals. These folks are keeping us all entertained and inspired as we stay at home. And to help them do it, we made Final Cut Pro X and Logic Pro X available for free for 90-days for everyone. And the reaction has been overwhelming, driving software downloads and usage to record levels. And doctors and medical professionals are making even greater use of Apple Watch and other health features to communicate with patients and to treat them safely from a distance when necessary. With new FDA guidance on non-invasive remote patient monitoring, for example, the ECG app on Apple Watch is increasingly being used to facilitate remote ECG measurements and recordings for telemedicine usage, reducing patient and healthcare provider contact and exposure. Many hospitals such as Geisinger Health System, NYU Langone Health, and Stanford Health Care are using apps on iPad and iPhone to support communication and video conferences between hospitalized patients and their care teams. This enables the care teams to keep a close watch on patients without entering isolation rooms, which helps to minimize exposure and reduces some of the need for personal protective equipment. Now, when you step back and tally all this up, when you consider all the ways COVID-19 has touched Apple, our customers and the way we work, this may not have been the quarter it could have been absent this pandemic, but I don't think I can recall a quarter where I've been prouder of what we do or how we do it. As I said at the outset, we achieved revenue of $58.3 billion and underneath that was product revenue of $45 billion. The performance of our product business had three very different phases during the March quarter. Based on Apple’s performance during the first five weeks of the quarter, we were confident we were headed toward a record second quarter at the very high end of our expectations. In the next five weeks of the quarter, as COVID-19 started impacting China, iPhone supply was temporarily affected, as well as demand for our products within China. This caused us to withdraw our revenue guidance in February. At that point, demand for our products outside of China was still strong and in line with our expectations. During the last three weeks of the quarter, as the virus spread globally and social distancing measures were put in place worldwide, including the closure of all our retail stores outside of Greater China on March 13th, and many channel partner points of sales around the world, we saw downward pressure on demand, particularly for iPhone and Wearables. Given the lack of visibility and uncertainly in the near term, we will not be issuing guidance for the coming quarter. Over the long term though, we have a high degree of confidence in the enduring strength of our business. Our global supply chain is profoundly durable and resilient. We have shown the consistent ability to meet and manage temporary supply challenges like those caused by COVID-19. We have continued to deliver innovative new products across multiple categories that appeal to a broad cross-section of customers, including the all-new iPhone SE, which achieved unmatched technological capacity at an incredible value. Our teams worldwide have tackled the complexities of this moment with unmatched creativity, good humor and dedication to our customers. For a company whose business is innovation, there are real upsides in periodically having to figure out how to do just about everything in a brand new way. Our long-running investment in our Services strategy is succeeding. This business is growing and is a reflection of our enduring large and growing installed base. We expect to meet our longstanding goal of doubling our fiscal 2016 Services revenue in 2020. We have always run Apple for the long term. We entered this period with unmatched financial strain, a robust cash position and our best product pipeline ever. Major investments, including our five-year commitment to contribute $350 billion to the economy here in the United States are moving forward full speed ahead. It’s in these moments that we set ourselves apart. We’ve always managed through difficult moments by doubling down and investing in the next generation of innovation. And that’s our strategy today. And so, while we can’t say for sure how many chapters are in this book, we can have confidence that the ending will be a good one. Apple will continue to do everything we can do to help the global response and to keep our customers learning, creating, sharing, and connecting so that life can remain as normal as it can during this challenging time. With that, I’ll hand things off to Luca. Luca Maestri: Thank you, Tim. Good afternoon, everyone. It has been a very different quarter than we were expecting when we last talked to you at the end of January. But, we could not be more proud of our Apple teams around the world, our role in supporting local communities and our partners throughout the value chain, and how resilient our business and financial performance has been during these challenging times. So, the revenue for the quarter was $58.3 billion, up 1% from a year ago, despite the extreme circumstances from the impact of COVID-19 and a headwind of a 100 basis points from foreign exchange. Products revenue was $45 billion, down 3%. After a very strong January, our performance was impacted particularly during the last three weeks of the quarter when lockdowns and point-of-sale closures increase due to COVID-19 spreading around the world and affected our product sales. However, on a demand basis, our performance was stronger than our reported results as we reduced iPhone channel inventory more than we did a year ago. Importantly, our installed base of active devices reached an all-time high in all of our geographic segments and all major product categories. Services revenue followed a different trend with very strong year-over-year growth of 17%. We set a new all-time revenue record of $13.3 billion with all-time records in many of our Services categories and in most countries we track. I’ll provide more details on this later. Company gross margin was 38.4%, flat sequentially with cost savings and mix shift towards Services offset by the seasonal loss of leverage. Products gross margin was 30.3%, decreasing 380 basis points sequentially due to loss of leverage and unfavorable mix. This drop was more pronounced than under normal circumstances due to the COVID-19 impact I mentioned earlier. Services gross margin was 65.4%, up 100 basis points sequentially, driven by favorable mix. Our reported tax rate for the quarter was 14.4%. This was lower than our 16.5% guidance due to onetime discreet items. Net income was $11.2 billion and earnings per share with $2.55, up 4%. Operating cash flow was very strong at $13.3 billion, an improvement of $2.2 billion over a year ago. Let me get into more detail for each of our revenue categories. iPhone revenue of $29 billion, declined 7% year-over-year as both iPhone supply and demand were affected by the impact of COVID-19 at some point during the quarter. On the supply side, we suffered from some temporary supply shortages during February, but we’ve been extremely pleased with the resilience and adaptability of our global supply chain, as well as its ability to get people back to work safely when circumstances allow. Our operations team and manufacturing partners put forth an extraordinary effort to restore production quickly, and we exited the quarter in a good supply position for most of our product lines. On the demand side, after very strong first five weeks, we saw the impact of COVID-19 affect demand in China for the next five weeks, and then more broadly around the world for the last three weeks of the quarter, when lockdowns and point-of-sale closures became more widespread in many countries. While we did see a slight elongation in our replacement cycle towards the end of the quarter, which we attribute to the widespread point-of-sale closures, our active installed base of iPhones has reached an all-time high. This speaks to the quality of our products and strength of our ecosystem. In fact, in the U.S., the latest survey of consumers from 451 Research indicates iPhone customer satisfaction of 99% for iPhone 11, 11 Pro and 11 Pro Max combined. Turning to Services. We set an all-time revenue record of $13.3 billion with strong performance across the board with all-time revenue records in the App Store, Apple Music, Video, cloud services, and our App Store search ad business. And we also set a March quarter record for AppleCare. Our new services, Apple TV Plus, Apple Arcade, Apple News Plus and Apple Card continue to add users, content and features while contributing to overall Services growth. As Tim mentioned, we’re well on our way to accomplishing our goal of doubling our fiscal ‘16 Services revenue during 2020. App Store revenue grew by strong double digits, thanks to robust customer demand for both in-app purchases and subscriptions. Our third-party subscription business grew across multiple categories and increased over 30% year-over-year, reaching a new all-time high. Our first party subscription services also continued to perform very well. Apple Music and cloud services, both set all-time revenue record and AppleCare set a March quarter record. Paid subscriptions for all three of these services were up strong double-digits. Customer engagement in our ecosystem continues to grow strongly, and the number of both transacting and paid accounts on our digital content stores reached a new all-time high during the March quarter. In particular, the number of paid accounts increased double digits in all of our geographic segments. We now have over 515 million paid subscriptions across the services on our platform, up 125 million from a year ago. On a sequential basis, paid subscriptions grew by over 35 million. This is the highest sequential growth we have ever experienced. With this momentum, we’re confident we will reach our increased target of 600 million paid subscriptions before the end of calendar 2020. Wearables, Home and Accessories established a new March quarter record with revenue of $6.3 billion, up 23% year-over-year with strong double digit performance across all five geographic segments. Our Wearables business is now the size of a Fortune 140 company, and we’re very excited by the many opportunities in front of us for this product category. For example, Apple Watch continues to expand its reach as over 75% of the customers purchasing Apple Watch around the world during the quarter were new to the product. Next, I’d like to talk about Mac and iPad. Mac revenue was $5.4 billion; iPad revenue was $4.4 billion. Towards the end of the quarter, we launched a brand new iPad Pro that includes a first in class LiDAR scanner with some really exciting augmented reality applications; and MacBook Air with significantly improved performance at a lower price. We’re very pleased with the strong customer interest for both products. Importantly, around half of the customers purchasing Macs and iPads around the world during the quarter were new to that product and the active installed base for both Mac and iPad reached a new all-time high. And the most recent surveys of consumers from 451 Research measured customer satisfaction at 95% for iPad and 96% for Mac. In the enterprise market businesses everywhere have been making the transition to working remotely. We’ve created content to assist our customers in this transition including an on-demand video learning series focused on topics like remote deployments of iPad and Mac and security. We’ve also realigned our own retail business and enterprise teams to provide timely and relevant support to customers as they navigate new work environments. Some of our largest customers offering Mac to employees such as IBM and SAP have been able to pivot quickly to allow employees to easily set up and secure their devices from home, benefiting from Apple Business Manager and zero-touch deployment. And we’ve seen countless examples of new projects of remote deployments implemented in just a few hours. Peloton for instance, worked with our New York teams to deploy an entire fleet of Macs overnight, so their team could work remotely. In essential sectors, such as grocery and financial services, we’ve seen organizations adopt our technology to better serve their customers safely. Leading grocers around the world, like Trader Joe’s, Woolworths, Lawson’s, Sainsbury’s, Lidl, and Carrefour offer Apple Pay so customers can use contactless payments. And as stores shift to become fulfillment centers for online orders, organizations are leveraging apps for remote shoppers and food delivery to reduce foot traffic. In banking, where safety and securities are a top priority, one way to protect company and client information is by providing corporate iOS devices to employees who use mobile phones daily as part of their jobs. As an example, Bank of America is purchasing tens of thousands of additional iOS devices for their workforce. Let me now turn to our cash position. First, I want to note that liquidity has not been an issue for us during these highly unusual financial market conditions. We have an extraordinarily strong balance sheet, very deep access to capital markets, and unmatched free cash flow generation. We ended the quarter with $193 billion in cash plus marketable securities, total debt of $110 billion. And as a result, net cash was $83 billion at the end of the quarter. We returned $22 billion to shareholders during the March quarter, including $18.5 billion through open market repurchases of 64.7 million Apple shares, and $3.4 billion in dividends and equivalents. Finally, as we move ahead into the June quarter, I’d like to provide some color on what we are seeing, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. As Tim mentioned, given the lack of visibility and certainty in the near term, we will not be issuing guidance for the coming quarter. However, based on what we have seen in April, and how we think things might play out, I would like to provide some additional insight on headwinds and tailwinds we’re facing. From a foreign exchange standpoint, the U.S. dollar has appreciated recently against most currencies around the world. And as a result, we expect our revenue to be negatively impacted by more than $1.5 billion on a year-over-year basis. Our global supply chain is back, up and running. We are in a typical supply position, including our usual ramp associated with new products recently launched. These newly launched products, iPad Pro, MacBook Air, and iPhone SE have all received outstanding customer response, even during these extreme circumstances. On iPhone and Wearables, we expect a year-over-year revenue performance to worsen in the June quarter relative to the March quarter; on iPad and Mac, we expect the year-over-year revenue performance to improve in the June quarter. On Services, we are seeing two distinct trends. First, customers are actively engaging with our ecosystem and digital services, and we believe the very strong recent performance in the App Store, Video, Music, and cloud services will continue throughout the June quarter. Second, due to the overall reduced level of economic activity, due to the lockdowns around the world, services like AppleCare and advertising are being impacted. AppleCare is comprised of our product repair business and the warranty agreements with our customers, both of which have been obviously affected by store closures and reduced level of customer traffic. Advertising, which is comprised of third-party agreements, our App Store search ads, and Apple News ads has been impacted by overall economic weakness and uncertainty on when businesses will reopen. For gross margin, sequential headwinds include foreign exchange, the mix within products, and the seasonal loss of leverage on our product business. Foreign exchange will have a 70 basis points impact sequentially and 130 basis points impact year-over-year. Regarding product mix, keep in mind the commentary we provided at the revenue level. Sequential tailwinds include cost savings and the mix shift towards services. With regard to capital allocation, our approach remains unchanged. We continue to invest confidently in our future while also returning value to our shareholders. We are in the midst of developing our most exciting pipeline of products and services ever while contributing over $350 billion to the U.S. economy and expanding our footprint in many cities around the country over a five-year period. We also continue to believe that there is great value in our stock, and we are maintaining our target of reaching a net cash neutral position over time. As a testament to the confidence we have in our business today and into the future, our Board has authorized $50 billion for share repurchases in addition to the over $40 billion authorization remaining under the current share repurchase plan. Our Board has also authorized a 6% increase in our quarterly dividend and today declared a cash dividend of $0.82 per share of common stock, payable on May 14, 2020, to shareholders of record as of May 11, 2020. Finally, and most importantly, we are managing Apple for the long term, as we’ve always done. During uncertain times historically, we have continued to invest in the business and this remains our philosophy. We will continue to stay focused on what we do best, investing in our product and service pipeline, managing the business wisely, and taking care of our teams and believe we will come out from this stronger. With that, let’s open the call to questions. Tejas Gala: Thank you, Luca. We ask that you limit yourself to two questions. Operator, may have the first question, please? Operator: Yes. That will come from Shannon Cross, Cross Research. Shannon Cross: Thank you very much for taking my question, and I hope everyone is well. Tim, you talked about seeing some improvement in the second half of April. So, I was wondering if you could just talk maybe a bit more on the segment, a geographic basis, what you’re seeing and in the various regions that you’re selling in and what you’re hearing from your customers. And then, I have a follow-up. Thank you. Tim Cook: Sure, Shannon. If you look at -- I’ll start with China. If you look at what happened in China, we were having a really good January. The lockdown started there toward the end of January, as you know. February, we saw a steep decline in demand. We closed our stores in February. As the lockdown completed in mid-February, toward the second half of February, we begin to open stores. We opened on a staggered basis that took about 30 days until mid-March. And from a demand point of view, we saw then an improvement in March over February. And if you look at, kind of where we are today, we’ve seen further improvement in April as compared to March. And so, that’s China. If you look at the rest of the world, we were doing great in January, the first five weeks of the quarter. And we do believe that we were headed toward the sort of the top end of our expectations that we had talked to you about on the last call. The next five weeks were spent sort of reacting and getting the supply chain back up in full force and working through the sharp decline in China that I already talked about. The real thing for the rest of the world happened in March when the shelter-in-place orders went in and the work-from-home began. For those two, three weeks period, at the end of the quarter, we saw a sharp decline in demand. If you now step out into April and look at that, early April started like the end of March, but in the second half of April, we’ve seen an uptick across really across the board. It’s not just related to a certain geo or a certain product. We think, by looking at it, a part of it is due to just our new products, a part of it is due to the stimulus programs taking effect in April, and then a part of it is probably the consumer behavior of knowing this is going to go on for a little while longer and getting some devices and so forth lined up to work at home more. In particular for as I think Luca shared, we believe that iPad and Mac are going to improve on a year-over-year basis during this quarter, and that’s customers that are either taking online education or working remotely. So, complex answer to your question, but that’s what we’re seeing. Shannon Cross: Thank you. That was helpful. Luca, unless I missed it, you talked about various puts and takes in the quarter, but didn’t really discuss operating expenses. I know you mentioned some cost savings on the COGS line. I’m curious how you’re thinking about your spending and OpEx, given some of the macro challenges that you may be facing. Thank you. Luca Maestri: Yes. So, Shannon, as we said, we manage the Company for the long term, right? So, we know that the core of the business, the core of the Company is innovation and product and services development. So, we will continue to invest in our pipeline. We’re very excited about what we have in store. And so, we will continue to invest there. Obviously, we are aware of the environment and so, we will manage the SG&A portion of the company tightly. We are making new investments in the new services that we launched recently. As you know, we purchased the baseband activities from Intel. And obviously, we want to develop that technology because we consider it’s a core technology for us. And so, we will try to balance the need to continue to invest during difficult circumstances and the fact that we like to manage the business wisely. Tejas Gala: Thank you, Shannon. Can we have the next question, please? Operator: That will be from Wamsi Mohan from Bank of America. Wamsi Mohan: Yes. Thank you. Tim, I think I speak for everyone on the call that we’re all very appreciative of Apple’s contribution during this pandemic. We all appreciate it. Tim Cook: Thank you very much for that. Wamsi Mohan: Tim, in past downturns, we have not really seen Apple pull back from investing. And you as a company have largely maintained the product introduction cadence. But given these are unprecedented times and there are a lot of challenges associated with product development, during a time when you have a global footprint for such activities and unable to really do a lot of things in person, how should we think about the product development and introduction cadence as we go over the next several quarters? And I have a follow-up. Tim Cook: Well, we’re continuing to operate. And so, as you can tell, along with everything else going on, we were able to launch and ship the iPhone SE, the iPad Pro with the Magic Keyboard, and the MacBook Air. And so, the business continues and the new products are our lifeblood. And so, we’re continuing to work. Everybody’s getting used to the work-at-home. In some areas of the Company, people maybe even more productive, in some other areas they’re not as productive. And so, it’s mixed, depending upon what the roles are. But, as you can tell from what we did this quarter, despite the environment, we have our head down, are working because we know that our customers want the products that we’ve got. They’re even more important in these times. Wamsi Mohan: Thank you, Tim. As a follow-up, I know you’re doing a lot with both the Apple Card and financing plan for iPhones to get your products in the hands of customers. But, I was wondering, would you consider using the strength of your balance sheet maybe a little differently, structure maybe deferred payments or things like that, or do you think that there could be other steps like bundling that you will consider versus what you already currently do? Thank you. Tim Cook: Well, as you know, we launched the payment plan earlier on Apple Card for iPhone. We’re working on doing that for other products as well. And you’ll see something on that shortly. So, we’re very-focused on the affordability point. The trade-in programs also are fairly wide across the board and act as both something great for the environment, also something great from a way to get that entry price down. In terms of deferred payments, nothing to announce today. But, as you know, having access to the card, at least in the United States, gives us more degrees of freedom. And that is not using our balance sheet. But, we play a key role in deciding what kind of programs go with the card. Tejas Gala: Thanks, Wamsi. Can we have the next question, please? Operator: That will come from Morgan Stanley’s Katy Huberty. Katy Huberty: Thank you for the question. I hope the whole team is staying healthy and safe. Tim, I want to start on a longer term question. Where do you see structural changes on the back of this health crisis that might present opportunities for new revenue streams at Apple? And I’m particularly thinking about your past comments on health and augmented reality. But I’m sure there is even more areas of inspiration and creativity coming out of the company. And then, I have a follow-up. Tim Cook: I think, there are things from just a great reminder of how important our products are for remote work. And it’s pretty clear to me that where things will get a lot closer to normal than they are today, obviously. I think many people are finding that they can learn remotely. And so, I suspect that trend will accelerate some. I think that’s probably also true about working remotely in some areas and in some jobs. And so, I think we have significant solutions and products for all of those groups. On the health area, I gave some examples in my opening comments about the ECG being used on the Watch. You can bet that we’re looking at other areas in this. We were already doing that because we viewed that that area was a huge opportunity for the Company and a way for us to help a lot of people. And so, you will see us continue on that. I wouldn’t say that the health door opened wider. I would say, it was already opened fairly wide. Katy Huberty: Okay. And then, as a follow-up, the $50 billion share repurchase authorization is impressive in absolute terms, but it is a bit lower than the last couple of years. So, just any context around the thought process of landing on $50 billion. And then, related to that, you have one of the strongest balance sheets in the world. Does the current environment change your thinking at all around M&A opportunities? Luca Maestri: Let me answer that, Katy. First of all, on the buyback. As I said, in general, our approach to capital allocation has remained the same for the last several years and it’s not changing now. Keep in mind here, we’re talking about just the authorization, right? And when you look at our actual results at the end of every quarter, you see how much we actually do in terms of share repurchases. The $50 billion is in addition to over $40 billion that is still remaining from the past authorization that we’ve received from our Board, right? So it’s the total available or outstanding in terms of authorization is over $90. And as you look at our run rate during the last several years, you know that that is a very adequate amount. And as you know, we will provide an additional update a year from now. So, nothing really has changed there. And nothing has changed on our approach for M&A. We’ve been quite active over the last several years. We purchase companies on a very regular basis. We’re always looking for ways to accelerate our product roadmaps or fill gaps in our portfolio, both on the hardware side, on the software side, on the services side. So, we will continue to do that. And so, also on the M&A front, nothing has changed. Tejas Gala: Thanks, Katy. Can we have the next question, please? Operator: That will come from Amit Daryanani with Evercore. Amit Daryanani: Thanks for taking my question. I have two as well. I guess, first off on the channel inventory. I was hoping if you could talk about how did channel inventory look like in the March quarter, because it sounds like it may be below the historical ranges. And then, the discussion you had for June quarter performance of iPhones, what are you embedding from a channel building back inventory levels in that expectation. Tim Cook: Amit, it’s Tim. If you look at the iPhone channel inventory during Q2, the reduction of it was more than the reduction from the previous year. It’s not unusual that we reduce in Q2. In fact, if you look back, generally speaking, in the first half of the calendar year, we reduce channel inventories; during the second half of the calendar year, we generally raise channel inventories. That’s a seasonal thing. And sitting here today, I believe that will happen this year as well. So, hopefully, that answers your question. And by the way, we ended in a comfortable position. You could conclude from that that we were within a target range. Amit Daryanani: That’s really helpful. Maybe just for follow-up. Tim, I was hoping you could maybe talk a little bit about, how do you think about Apple’s manufacturing strategy and perhaps need for some diversity, especially given everything in the Company and everyone has gone through over the last 12 months, how do you think about that? And do you feel comfortable that the supply chain and the manufacturing base is well situated today to launch the traditional fall products that they used to get from Apple? Tim Cook: As you know, our supply chain is global. And so, our products are truly made everywhere. And I would focus on that versus focus on one element of the manufacturing process, which tends to get more visibility, which is the final assembly. We have some final assembly in the United States; we have final assembly in China as well. I think, you’d have to conclude, or at least I conclude that if you look at the shock to the supply chain that took place this quarter, for it to come back up so quickly really demonstrates that it’s durable and resilient. And so, I feel good about where we are. That said, we’re always looking at tweaks. And it’s just not something we talk about, because if we view it as confidential and competitive information. And so, we will look at the -- as we get out of this totally, we will look to see what we learned and what we should change. Tejas Gala: Thank you, Amit. Can we have the next question, please? Operator: We’ll hear from Jeriel Ong with Deutsche Bank Jeriel Ong: Hi, guys. Thanks for letting me ask a couple of questions. So, I want to focus my question on Services. The segment was solid in the quarter despite overall macro weakness. I can kind of see the logic behind it being strong despite product weakness overall. As you kind of look at the rest of the year, do you think that sustains or at some point does the macro impacts worldwide impact the Services line? Luca Maestri: Jeriel, let me take that one. We typically don’t give a lot of specifics about our categories. But I’ve said, as we look into the June quarter, we see two distinct trends in our services business overall. Our ecosystem is very strong. Our customers are very engaged. We are continuing to grow double digits, the number of transacting accounts and paid accounts. And so, we expect our digital services to continue at the same level of performance that we have seen during the March quarter. And that includes the App Store, of course, our video business, our music business, cloud services. So, we expect all these businesses to continue to grow very strongly. Given the overall economic environment, the level of demand right now, there are two businesses that we believe are going to be impacted during the June quarter. One of them is AppleCare. AppleCare is essentially comprised of our product repair business and the warranty agreements that we signed with our customers when they purchase our devices. Both these businesses have been affected obviously by the store closures. And not only our retail stores, but also our partners points of sale, and obviously, the reduced level of customer traffic because of the social distancing measures. Right? And we do expect AppleCare to be affected during the during the June quarter. The other business, which we think is going to be impacted by the overall economic weakness and the uncertainty on when businesses will reopen is advertising, which is the sum of our advertising business on the App Store, on Apple News, and the third party agreements that we have on the advertising front. So, these are two things that during the June quarter will create a headwind for the Services business. Jeriel Ong: Got it. I appreciate that. My second question is about the overall purchasing decisions the consumers are making. So far, through April, have you seen increased perhaps downtick across your product line? So for example, somebody might have shift maybe toward the lower end of the storage mix of certain products. And do you expect that going forward, as unemployment uptick and macro impacts kind of layer on through the rest of ‘20? Thanks. Tim Cook: I haven’t seen what you’re asking. No. I have seen a strong customer response to iPhone SE, which is our most affordable iPhone. But it appears that those customers are primarily coming from wanting a smaller form factor with the latest technology, or coming over from it from Android. So, those are the two principal kind of segments versus somebody buying down, as you’re talking about it. We’ve also seen -- we launched the iPad Pro in the midst of all of this and the reception there has also been incredibly good. And that’s obviously our top of the line iPad. And so, I’m not seeing what you’re alluding to, at least at this point. Tejas Gala: Thanks, Jeriel. Can we have the next question, please. Operator: That will be from JP Morgan’s Samik Chatterjee. Samik Chatterjee: Hi. Thanks for taking my question. If I can just start with a question on kind of what you’re seeing in China. You mentioned going to the pickup in activity. But, is that driven by more kind of footfall in the stores, or what’ve you seen relative to online activity, and how much of this recovery is being driven online? Any thoughts on that, please? Tim Cook: Yes. What we saw in China for the full quarter -- and I’ll speak about mainland China because I think that’s the source of your question. We saw strong results in iPad and in Wearables, and in Services. And if you look up underneath the full quarter, we saw a strong January, and then a significantly reduced demand in February as the shelter-in-place orders and the lockdowns went into effect in China and the stores closed. And then, in March, as stores reopened, the recovery began. And then, we’ve seen further recovery in April. Where that goes, we will see. But that’s kind of what we’ve seen so far there. To your question about store traffic, store traffic is obviously up from where it was in February, but it is not back to where it was pre the lockdown. There has been, however, more move to online. And as I mentioned earlier in my remarks, it’s pretty phenomenal actually. Retail had a quarterly record for us during the quarter. And that’s despite stores being closed for the three-week period around the world. And ex China -- and then China was closed prior to that three weeks. And that’s partly because the online store had such a phenomenal quarter, and that included in China, but it was also other regions as well. So, there is definitely a move. And whether that’s a permanent shift, I would hesitate to go that far, because I think people like to be out and about. They just know that now is not the time to do that. Samik Chatterjee: If I can just follow up on your previous comment about the strong demand you’re seeing for iPhone SE. Just given the price point, I’m wondering if you are expecting any change in terms of the geographic mix of where the demand comes from relative to typically what do you see for other iPhones from the line up on, just giving the lower price point? Tim Cook: I think, it plays in every geo, but I would expect to see it doing even better in areas where the median incomes are less. And so, we’ll see how that plays out. And I expect some fair number of people switching over to iOS. So, it’s an unbelievable offer. It’s, if you will, the engine of our top phones in a very affordable package. And I think -- and it’s faster than the fastest Android phones. And so, it’s an exceptional value. Tejas Gala: Thank you. Can we have the next question, please? Operator: Certainly. Our last question today will be from Chris Caso with Raymond James. Chris Caso: Yes. Thank you. I wanted to follow up with another question on iPhone SE and the decision to bring it back and where it sits within the total iPhone strategy. And I guess, coupled with the fact that iPhone 11, you made the decision to bring that at a lower price point. What does that tell us with respect to your approach to iPhone pricing and flexibility? Is this helping to add users and kind of bring people into the ecosystem? And if so, what does that imply for gross margins? Tim Cook: Chris, we’ve always been about delivering the best product at a good price. And that fundamental strategy has not changed at all. As you know, we did have an SE for a while. It’s great to bring it back. It was a beloved product. And so, I wouldn’t read anything into that other than we want to give people the best deal that we can while making the best product. Chris Caso: Okay. As a follow-up -- the follow-up question is on commodity pricing. And I think, you had expected to see some commodity price declines through the March quarter. If you could talk about what you expect, as you go through the year, perhaps in this new environment, and again, whether that turns into a challenge or a headwind for gross margins as you go into the second half? Tim Cook: Yes. For March, Chris, we saw NAND pricing increase slightly while DRAM and displays and the other commodities declined. For the June quarter, we would expect NAND and DRAM pricing to remain at this historically low level, while displays and most other commodity prices we expect to decline. Tejas Gala: Thank you, Chris. A replay of today’s call will be available for two weeks on Apple Podcasts as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 8888-203-1112 or 719-457-0820. Please enter a confirmation code 3229513. These replays will be available by approximately 5 pm Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. Operator: And that does conclude today’s conference. Thank you all for joining us today.	[ { "speaker": "Operator", "text": "Good day everyone. Welcome to the Apple Incorporated Second Quarter Fiscal Year 2020 Earnings Conference Call. Today’s call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Tejas Gala, Senior Manager, Corporate Finance and Investor Relations. Please go ahead." }, { "speaker": "Tejas Gala", "text": "Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple’s CEO, Tim Cook, and he will be followed by CFO, Luca Maestri. After that, we’ll open the call to questions from analysts. Please note that some of the information you’ll hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook including the potential impact of COVID-19 on the Company’s business and results of operations. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple’s most recently filed periodic reports on Form 10-K and Form 10-Q and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speaks as of their respective dates. I’d now like to turn the call over to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thanks, Tejas. Good afternoon, everyone. Thanks for joining us today. I hope you’re staying safe and well. Today Apple reports $58.3 billion in revenue, an all-time record for Services, and a quarterly record for Wearables, Home and Accessories. It was also a quarterly revenue record for Apple Retail powered by phenomenal growth in our online store. Amid the most challenging global environment in which we’ve ever operated our business, we’re proud to say that Apple grew during the quarter. But before we dive more deeply into the numbers, I want to speak just for a bit on COVID-19. This is something Apple has been contending with since January. And I think that how we have responded, what we have been inspired to do, tells an important story about Apple’s great durability as a business, and the enduring importance of our products in our customers’ lives. It also speaks to Apple’s unmatched capacity to be creative, to think always in terms of the long term and to forge ahead when others may feel an instinct to pull back. Before COVID-19 was on the horizon, we anticipated that Q2 was going to be a prolific and energetic period for Apple. And when the pandemic did strike, our teams not only succeeded in growing the business in introducing powerful new products, and in meeting our customers’ needs, but they also rose to the occasion in terms of meeting our broader obligations to the communities in which we live and work. Let’s look quickly across the business. At the same time that they were leaving no stone unturned to get our latest generation of devices manufactured and into our customers’ hands, our worldwide network of supply chain partners, logistics and operations folks in every part of the Company were also sourcing more than 30 million masks for frontline medical workers, ensuring they’re donated to places of greatest need in every region around the world. While our product teams were preparing to launch a new iPad Pro, Magic Keyboard, MacBook Air and the new iPhone SE, all of which have been very well received by reviewers and consumers alike, they were also working with our suppliers to design, test, manufacture and distribute more than 7.5 million face shields, and we continue to ship more than 1 million of these every week to the doctors, nurses and medical personnel on the frontlines. In a quarter where our Services teams achieved strong growth, which Luca will dig into in a minute, and which speaks to the real durability of our Services strategy, these teams were also putting COVID-19 front and center. As Apple News, reached 125 million monthly active users, we elevated trusted information from reliable sources through a special COVID-19 vertical. We let customers skip payments without incurring interest on Apple Card for March and April in light of financial hardship for many families. We worked with everyone from Oprah to Lady Gaga to inform, entertain and give back through Apple TV and services like FaceTime and Messages set new all-time records for daily volume during this quarter as users relied on their devices to stay connected in a new reality. In software, at the same time that our teams worked with great creativity and excitement as we prepare to deliver our first ever all online Worldwide Developers Conference later this quarter, they also worked with the same creativity and speed to put together our COVID-19 symptom checking website and app in partnership with the CDC. As of today, the app has been installed nearly 2 million times and the web tool has received over 3 million unique visits. And just this month, to accelerate contact tracing, we are launching a joint effort with Google to enable the use of Bluetooth technology to help governments and health agencies reduce the spread of the virus with user privacy and security central to the design. We paired these programmatic efforts with a broader strategy to get back where it’s needed most. We’ve made major corporate donations to response efforts around the world to support global citizens as well as a new fund for Americans experiencing food insecurity as a result of the crisis. When you tally these things up and consider our ongoing 2 to 1 match for employee donations, Apple’s contributions to the global response are significant, diverse, and a great source of pride for the whole chain. We’re also doing what we can to help our employees, their families, and by extension their communities stay safe and well by modifying our operations where appropriate. This extends of course to our retail employees, they are Apple’s face to our customers and an instrumental part of our business and we’re compensating them normally despite store closures. During a quarter where circumstances evolve by the hour, we have been gratified by the resilience and adaptability of our global supply chain. While we felt some temporary supply constraints in February, our operations team, suppliers and manufacturing partners have been safely returning to work and production was back at typical levels toward the end of March. At this time of social distance, of shuttered school and gathering places, of delayed plans and new ways of socializing, we have seen significant evidence that our products have taken a renewed importance for customers. Teachers and students around the world are relying on our technology to teach, learn, and stay connected with each other. We are in the process of deploying major orders of iPads to school systems working to keep learning going strong at a distance, including tens of thousands in Ontario, Canada; Glasgow, Scotland and Puerto Rico, a 100,000 to the city of Los Angeles and 350,000 to New York City, our largest educational iPad deployment ever. Since early March, we’ve seen unprecedented demand for a pro app from students, enthusiasts and creative professionals. These folks are keeping us all entertained and inspired as we stay at home. And to help them do it, we made Final Cut Pro X and Logic Pro X available for free for 90-days for everyone. And the reaction has been overwhelming, driving software downloads and usage to record levels. And doctors and medical professionals are making even greater use of Apple Watch and other health features to communicate with patients and to treat them safely from a distance when necessary. With new FDA guidance on non-invasive remote patient monitoring, for example, the ECG app on Apple Watch is increasingly being used to facilitate remote ECG measurements and recordings for telemedicine usage, reducing patient and healthcare provider contact and exposure. Many hospitals such as Geisinger Health System, NYU Langone Health, and Stanford Health Care are using apps on iPad and iPhone to support communication and video conferences between hospitalized patients and their care teams. This enables the care teams to keep a close watch on patients without entering isolation rooms, which helps to minimize exposure and reduces some of the need for personal protective equipment. Now, when you step back and tally all this up, when you consider all the ways COVID-19 has touched Apple, our customers and the way we work, this may not have been the quarter it could have been absent this pandemic, but I don't think I can recall a quarter where I've been prouder of what we do or how we do it. As I said at the outset, we achieved revenue of $58.3 billion and underneath that was product revenue of $45 billion. The performance of our product business had three very different phases during the March quarter. Based on Apple’s performance during the first five weeks of the quarter, we were confident we were headed toward a record second quarter at the very high end of our expectations. In the next five weeks of the quarter, as COVID-19 started impacting China, iPhone supply was temporarily affected, as well as demand for our products within China. This caused us to withdraw our revenue guidance in February. At that point, demand for our products outside of China was still strong and in line with our expectations. During the last three weeks of the quarter, as the virus spread globally and social distancing measures were put in place worldwide, including the closure of all our retail stores outside of Greater China on March 13th, and many channel partner points of sales around the world, we saw downward pressure on demand, particularly for iPhone and Wearables. Given the lack of visibility and uncertainly in the near term, we will not be issuing guidance for the coming quarter. Over the long term though, we have a high degree of confidence in the enduring strength of our business. Our global supply chain is profoundly durable and resilient. We have shown the consistent ability to meet and manage temporary supply challenges like those caused by COVID-19. We have continued to deliver innovative new products across multiple categories that appeal to a broad cross-section of customers, including the all-new iPhone SE, which achieved unmatched technological capacity at an incredible value. Our teams worldwide have tackled the complexities of this moment with unmatched creativity, good humor and dedication to our customers. For a company whose business is innovation, there are real upsides in periodically having to figure out how to do just about everything in a brand new way. Our long-running investment in our Services strategy is succeeding. This business is growing and is a reflection of our enduring large and growing installed base. We expect to meet our longstanding goal of doubling our fiscal 2016 Services revenue in 2020. We have always run Apple for the long term. We entered this period with unmatched financial strain, a robust cash position and our best product pipeline ever. Major investments, including our five-year commitment to contribute $350 billion to the economy here in the United States are moving forward full speed ahead. It’s in these moments that we set ourselves apart. We’ve always managed through difficult moments by doubling down and investing in the next generation of innovation. And that’s our strategy today. And so, while we can’t say for sure how many chapters are in this book, we can have confidence that the ending will be a good one. Apple will continue to do everything we can do to help the global response and to keep our customers learning, creating, sharing, and connecting so that life can remain as normal as it can during this challenging time. With that, I’ll hand things off to Luca." }, { "speaker": "Luca Maestri", "text": "Thank you, Tim. Good afternoon, everyone. It has been a very different quarter than we were expecting when we last talked to you at the end of January. But, we could not be more proud of our Apple teams around the world, our role in supporting local communities and our partners throughout the value chain, and how resilient our business and financial performance has been during these challenging times. So, the revenue for the quarter was $58.3 billion, up 1% from a year ago, despite the extreme circumstances from the impact of COVID-19 and a headwind of a 100 basis points from foreign exchange. Products revenue was $45 billion, down 3%. After a very strong January, our performance was impacted particularly during the last three weeks of the quarter when lockdowns and point-of-sale closures increase due to COVID-19 spreading around the world and affected our product sales. However, on a demand basis, our performance was stronger than our reported results as we reduced iPhone channel inventory more than we did a year ago. Importantly, our installed base of active devices reached an all-time high in all of our geographic segments and all major product categories. Services revenue followed a different trend with very strong year-over-year growth of 17%. We set a new all-time revenue record of $13.3 billion with all-time records in many of our Services categories and in most countries we track. I’ll provide more details on this later. Company gross margin was 38.4%, flat sequentially with cost savings and mix shift towards Services offset by the seasonal loss of leverage. Products gross margin was 30.3%, decreasing 380 basis points sequentially due to loss of leverage and unfavorable mix. This drop was more pronounced than under normal circumstances due to the COVID-19 impact I mentioned earlier. Services gross margin was 65.4%, up 100 basis points sequentially, driven by favorable mix. Our reported tax rate for the quarter was 14.4%. This was lower than our 16.5% guidance due to onetime discreet items. Net income was $11.2 billion and earnings per share with $2.55, up 4%. Operating cash flow was very strong at $13.3 billion, an improvement of $2.2 billion over a year ago. Let me get into more detail for each of our revenue categories. iPhone revenue of $29 billion, declined 7% year-over-year as both iPhone supply and demand were affected by the impact of COVID-19 at some point during the quarter. On the supply side, we suffered from some temporary supply shortages during February, but we’ve been extremely pleased with the resilience and adaptability of our global supply chain, as well as its ability to get people back to work safely when circumstances allow. Our operations team and manufacturing partners put forth an extraordinary effort to restore production quickly, and we exited the quarter in a good supply position for most of our product lines. On the demand side, after very strong first five weeks, we saw the impact of COVID-19 affect demand in China for the next five weeks, and then more broadly around the world for the last three weeks of the quarter, when lockdowns and point-of-sale closures became more widespread in many countries. While we did see a slight elongation in our replacement cycle towards the end of the quarter, which we attribute to the widespread point-of-sale closures, our active installed base of iPhones has reached an all-time high. This speaks to the quality of our products and strength of our ecosystem. In fact, in the U.S., the latest survey of consumers from 451 Research indicates iPhone customer satisfaction of 99% for iPhone 11, 11 Pro and 11 Pro Max combined. Turning to Services. We set an all-time revenue record of $13.3 billion with strong performance across the board with all-time revenue records in the App Store, Apple Music, Video, cloud services, and our App Store search ad business. And we also set a March quarter record for AppleCare. Our new services, Apple TV Plus, Apple Arcade, Apple News Plus and Apple Card continue to add users, content and features while contributing to overall Services growth. As Tim mentioned, we’re well on our way to accomplishing our goal of doubling our fiscal ‘16 Services revenue during 2020. App Store revenue grew by strong double digits, thanks to robust customer demand for both in-app purchases and subscriptions. Our third-party subscription business grew across multiple categories and increased over 30% year-over-year, reaching a new all-time high. Our first party subscription services also continued to perform very well. Apple Music and cloud services, both set all-time revenue record and AppleCare set a March quarter record. Paid subscriptions for all three of these services were up strong double-digits. Customer engagement in our ecosystem continues to grow strongly, and the number of both transacting and paid accounts on our digital content stores reached a new all-time high during the March quarter. In particular, the number of paid accounts increased double digits in all of our geographic segments. We now have over 515 million paid subscriptions across the services on our platform, up 125 million from a year ago. On a sequential basis, paid subscriptions grew by over 35 million. This is the highest sequential growth we have ever experienced. With this momentum, we’re confident we will reach our increased target of 600 million paid subscriptions before the end of calendar 2020. Wearables, Home and Accessories established a new March quarter record with revenue of $6.3 billion, up 23% year-over-year with strong double digit performance across all five geographic segments. Our Wearables business is now the size of a Fortune 140 company, and we’re very excited by the many opportunities in front of us for this product category. For example, Apple Watch continues to expand its reach as over 75% of the customers purchasing Apple Watch around the world during the quarter were new to the product. Next, I’d like to talk about Mac and iPad. Mac revenue was $5.4 billion; iPad revenue was $4.4 billion. Towards the end of the quarter, we launched a brand new iPad Pro that includes a first in class LiDAR scanner with some really exciting augmented reality applications; and MacBook Air with significantly improved performance at a lower price. We’re very pleased with the strong customer interest for both products. Importantly, around half of the customers purchasing Macs and iPads around the world during the quarter were new to that product and the active installed base for both Mac and iPad reached a new all-time high. And the most recent surveys of consumers from 451 Research measured customer satisfaction at 95% for iPad and 96% for Mac. In the enterprise market businesses everywhere have been making the transition to working remotely. We’ve created content to assist our customers in this transition including an on-demand video learning series focused on topics like remote deployments of iPad and Mac and security. We’ve also realigned our own retail business and enterprise teams to provide timely and relevant support to customers as they navigate new work environments. Some of our largest customers offering Mac to employees such as IBM and SAP have been able to pivot quickly to allow employees to easily set up and secure their devices from home, benefiting from Apple Business Manager and zero-touch deployment. And we’ve seen countless examples of new projects of remote deployments implemented in just a few hours. Peloton for instance, worked with our New York teams to deploy an entire fleet of Macs overnight, so their team could work remotely. In essential sectors, such as grocery and financial services, we’ve seen organizations adopt our technology to better serve their customers safely. Leading grocers around the world, like Trader Joe’s, Woolworths, Lawson’s, Sainsbury’s, Lidl, and Carrefour offer Apple Pay so customers can use contactless payments. And as stores shift to become fulfillment centers for online orders, organizations are leveraging apps for remote shoppers and food delivery to reduce foot traffic. In banking, where safety and securities are a top priority, one way to protect company and client information is by providing corporate iOS devices to employees who use mobile phones daily as part of their jobs. As an example, Bank of America is purchasing tens of thousands of additional iOS devices for their workforce. Let me now turn to our cash position. First, I want to note that liquidity has not been an issue for us during these highly unusual financial market conditions. We have an extraordinarily strong balance sheet, very deep access to capital markets, and unmatched free cash flow generation. We ended the quarter with $193 billion in cash plus marketable securities, total debt of $110 billion. And as a result, net cash was $83 billion at the end of the quarter. We returned $22 billion to shareholders during the March quarter, including $18.5 billion through open market repurchases of 64.7 million Apple shares, and $3.4 billion in dividends and equivalents. Finally, as we move ahead into the June quarter, I’d like to provide some color on what we are seeing, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. As Tim mentioned, given the lack of visibility and certainty in the near term, we will not be issuing guidance for the coming quarter. However, based on what we have seen in April, and how we think things might play out, I would like to provide some additional insight on headwinds and tailwinds we’re facing. From a foreign exchange standpoint, the U.S. dollar has appreciated recently against most currencies around the world. And as a result, we expect our revenue to be negatively impacted by more than $1.5 billion on a year-over-year basis. Our global supply chain is back, up and running. We are in a typical supply position, including our usual ramp associated with new products recently launched. These newly launched products, iPad Pro, MacBook Air, and iPhone SE have all received outstanding customer response, even during these extreme circumstances. On iPhone and Wearables, we expect a year-over-year revenue performance to worsen in the June quarter relative to the March quarter; on iPad and Mac, we expect the year-over-year revenue performance to improve in the June quarter. On Services, we are seeing two distinct trends. First, customers are actively engaging with our ecosystem and digital services, and we believe the very strong recent performance in the App Store, Video, Music, and cloud services will continue throughout the June quarter. Second, due to the overall reduced level of economic activity, due to the lockdowns around the world, services like AppleCare and advertising are being impacted. AppleCare is comprised of our product repair business and the warranty agreements with our customers, both of which have been obviously affected by store closures and reduced level of customer traffic. Advertising, which is comprised of third-party agreements, our App Store search ads, and Apple News ads has been impacted by overall economic weakness and uncertainty on when businesses will reopen. For gross margin, sequential headwinds include foreign exchange, the mix within products, and the seasonal loss of leverage on our product business. Foreign exchange will have a 70 basis points impact sequentially and 130 basis points impact year-over-year. Regarding product mix, keep in mind the commentary we provided at the revenue level. Sequential tailwinds include cost savings and the mix shift towards services. With regard to capital allocation, our approach remains unchanged. We continue to invest confidently in our future while also returning value to our shareholders. We are in the midst of developing our most exciting pipeline of products and services ever while contributing over $350 billion to the U.S. economy and expanding our footprint in many cities around the country over a five-year period. We also continue to believe that there is great value in our stock, and we are maintaining our target of reaching a net cash neutral position over time. As a testament to the confidence we have in our business today and into the future, our Board has authorized $50 billion for share repurchases in addition to the over $40 billion authorization remaining under the current share repurchase plan. Our Board has also authorized a 6% increase in our quarterly dividend and today declared a cash dividend of $0.82 per share of common stock, payable on May 14, 2020, to shareholders of record as of May 11, 2020. Finally, and most importantly, we are managing Apple for the long term, as we’ve always done. During uncertain times historically, we have continued to invest in the business and this remains our philosophy. We will continue to stay focused on what we do best, investing in our product and service pipeline, managing the business wisely, and taking care of our teams and believe we will come out from this stronger. With that, let’s open the call to questions." }, { "speaker": "Tejas Gala", "text": "Thank you, Luca. We ask that you limit yourself to two questions. Operator, may have the first question, please?" }, { "speaker": "Operator", "text": "Yes. That will come from Shannon Cross, Cross Research." }, { "speaker": "Shannon Cross", "text": "Thank you very much for taking my question, and I hope everyone is well. Tim, you talked about seeing some improvement in the second half of April. So, I was wondering if you could just talk maybe a bit more on the segment, a geographic basis, what you’re seeing and in the various regions that you’re selling in and what you’re hearing from your customers. And then, I have a follow-up. Thank you." }, { "speaker": "Tim Cook", "text": "Sure, Shannon. If you look at -- I’ll start with China. If you look at what happened in China, we were having a really good January. The lockdown started there toward the end of January, as you know. February, we saw a steep decline in demand. We closed our stores in February. As the lockdown completed in mid-February, toward the second half of February, we begin to open stores. We opened on a staggered basis that took about 30 days until mid-March. And from a demand point of view, we saw then an improvement in March over February. And if you look at, kind of where we are today, we’ve seen further improvement in April as compared to March. And so, that’s China. If you look at the rest of the world, we were doing great in January, the first five weeks of the quarter. And we do believe that we were headed toward the sort of the top end of our expectations that we had talked to you about on the last call. The next five weeks were spent sort of reacting and getting the supply chain back up in full force and working through the sharp decline in China that I already talked about. The real thing for the rest of the world happened in March when the shelter-in-place orders went in and the work-from-home began. For those two, three weeks period, at the end of the quarter, we saw a sharp decline in demand. If you now step out into April and look at that, early April started like the end of March, but in the second half of April, we’ve seen an uptick across really across the board. It’s not just related to a certain geo or a certain product. We think, by looking at it, a part of it is due to just our new products, a part of it is due to the stimulus programs taking effect in April, and then a part of it is probably the consumer behavior of knowing this is going to go on for a little while longer and getting some devices and so forth lined up to work at home more. In particular for as I think Luca shared, we believe that iPad and Mac are going to improve on a year-over-year basis during this quarter, and that’s customers that are either taking online education or working remotely. So, complex answer to your question, but that’s what we’re seeing." }, { "speaker": "Shannon Cross", "text": "Thank you. That was helpful. Luca, unless I missed it, you talked about various puts and takes in the quarter, but didn’t really discuss operating expenses. I know you mentioned some cost savings on the COGS line. I’m curious how you’re thinking about your spending and OpEx, given some of the macro challenges that you may be facing. Thank you." }, { "speaker": "Luca Maestri", "text": "Yes. So, Shannon, as we said, we manage the Company for the long term, right? So, we know that the core of the business, the core of the Company is innovation and product and services development. So, we will continue to invest in our pipeline. We’re very excited about what we have in store. And so, we will continue to invest there. Obviously, we are aware of the environment and so, we will manage the SG&A portion of the company tightly. We are making new investments in the new services that we launched recently. As you know, we purchased the baseband activities from Intel. And obviously, we want to develop that technology because we consider it’s a core technology for us. And so, we will try to balance the need to continue to invest during difficult circumstances and the fact that we like to manage the business wisely." }, { "speaker": "Tejas Gala", "text": "Thank you, Shannon. Can we have the next question, please?" }, { "speaker": "Operator", "text": "That will be from Wamsi Mohan from Bank of America." }, { "speaker": "Wamsi Mohan", "text": "Yes. Thank you. Tim, I think I speak for everyone on the call that we’re all very appreciative of Apple’s contribution during this pandemic. We all appreciate it." }, { "speaker": "Tim Cook", "text": "Thank you very much for that." }, { "speaker": "Wamsi Mohan", "text": "Tim, in past downturns, we have not really seen Apple pull back from investing. And you as a company have largely maintained the product introduction cadence. But given these are unprecedented times and there are a lot of challenges associated with product development, during a time when you have a global footprint for such activities and unable to really do a lot of things in person, how should we think about the product development and introduction cadence as we go over the next several quarters? And I have a follow-up." }, { "speaker": "Tim Cook", "text": "Well, we’re continuing to operate. And so, as you can tell, along with everything else going on, we were able to launch and ship the iPhone SE, the iPad Pro with the Magic Keyboard, and the MacBook Air. And so, the business continues and the new products are our lifeblood. And so, we’re continuing to work. Everybody’s getting used to the work-at-home. In some areas of the Company, people maybe even more productive, in some other areas they’re not as productive. And so, it’s mixed, depending upon what the roles are. But, as you can tell from what we did this quarter, despite the environment, we have our head down, are working because we know that our customers want the products that we’ve got. They’re even more important in these times." }, { "speaker": "Wamsi Mohan", "text": "Thank you, Tim. As a follow-up, I know you’re doing a lot with both the Apple Card and financing plan for iPhones to get your products in the hands of customers. But, I was wondering, would you consider using the strength of your balance sheet maybe a little differently, structure maybe deferred payments or things like that, or do you think that there could be other steps like bundling that you will consider versus what you already currently do? Thank you." }, { "speaker": "Tim Cook", "text": "Well, as you know, we launched the payment plan earlier on Apple Card for iPhone. We’re working on doing that for other products as well. And you’ll see something on that shortly. So, we’re very-focused on the affordability point. The trade-in programs also are fairly wide across the board and act as both something great for the environment, also something great from a way to get that entry price down. In terms of deferred payments, nothing to announce today. But, as you know, having access to the card, at least in the United States, gives us more degrees of freedom. And that is not using our balance sheet. But, we play a key role in deciding what kind of programs go with the card." }, { "speaker": "Tejas Gala", "text": "Thanks, Wamsi. Can we have the next question, please?" }, { "speaker": "Operator", "text": "That will come from Morgan Stanley’s Katy Huberty." }, { "speaker": "Katy Huberty", "text": "Thank you for the question. I hope the whole team is staying healthy and safe. Tim, I want to start on a longer term question. Where do you see structural changes on the back of this health crisis that might present opportunities for new revenue streams at Apple? And I’m particularly thinking about your past comments on health and augmented reality. But I’m sure there is even more areas of inspiration and creativity coming out of the company. And then, I have a follow-up." }, { "speaker": "Tim Cook", "text": "I think, there are things from just a great reminder of how important our products are for remote work. And it’s pretty clear to me that where things will get a lot closer to normal than they are today, obviously. I think many people are finding that they can learn remotely. And so, I suspect that trend will accelerate some. I think that’s probably also true about working remotely in some areas and in some jobs. And so, I think we have significant solutions and products for all of those groups. On the health area, I gave some examples in my opening comments about the ECG being used on the Watch. You can bet that we’re looking at other areas in this. We were already doing that because we viewed that that area was a huge opportunity for the Company and a way for us to help a lot of people. And so, you will see us continue on that. I wouldn’t say that the health door opened wider. I would say, it was already opened fairly wide." }, { "speaker": "Katy Huberty", "text": "Okay. And then, as a follow-up, the $50 billion share repurchase authorization is impressive in absolute terms, but it is a bit lower than the last couple of years. So, just any context around the thought process of landing on $50 billion. And then, related to that, you have one of the strongest balance sheets in the world. Does the current environment change your thinking at all around M&A opportunities?" }, { "speaker": "Luca Maestri", "text": "Let me answer that, Katy. First of all, on the buyback. As I said, in general, our approach to capital allocation has remained the same for the last several years and it’s not changing now. Keep in mind here, we’re talking about just the authorization, right? And when you look at our actual results at the end of every quarter, you see how much we actually do in terms of share repurchases. The $50 billion is in addition to over $40 billion that is still remaining from the past authorization that we’ve received from our Board, right? So it’s the total available or outstanding in terms of authorization is over $90. And as you look at our run rate during the last several years, you know that that is a very adequate amount. And as you know, we will provide an additional update a year from now. So, nothing really has changed there. And nothing has changed on our approach for M&A. We’ve been quite active over the last several years. We purchase companies on a very regular basis. We’re always looking for ways to accelerate our product roadmaps or fill gaps in our portfolio, both on the hardware side, on the software side, on the services side. So, we will continue to do that. And so, also on the M&A front, nothing has changed." }, { "speaker": "Tejas Gala", "text": "Thanks, Katy. Can we have the next question, please?" }, { "speaker": "Operator", "text": "That will come from Amit Daryanani with Evercore." }, { "speaker": "Amit Daryanani", "text": "Thanks for taking my question. I have two as well. I guess, first off on the channel inventory. I was hoping if you could talk about how did channel inventory look like in the March quarter, because it sounds like it may be below the historical ranges. And then, the discussion you had for June quarter performance of iPhones, what are you embedding from a channel building back inventory levels in that expectation." }, { "speaker": "Tim Cook", "text": "Amit, it’s Tim. If you look at the iPhone channel inventory during Q2, the reduction of it was more than the reduction from the previous year. It’s not unusual that we reduce in Q2. In fact, if you look back, generally speaking, in the first half of the calendar year, we reduce channel inventories; during the second half of the calendar year, we generally raise channel inventories. That’s a seasonal thing. And sitting here today, I believe that will happen this year as well. So, hopefully, that answers your question. And by the way, we ended in a comfortable position. You could conclude from that that we were within a target range." }, { "speaker": "Amit Daryanani", "text": "That’s really helpful. Maybe just for follow-up. Tim, I was hoping you could maybe talk a little bit about, how do you think about Apple’s manufacturing strategy and perhaps need for some diversity, especially given everything in the Company and everyone has gone through over the last 12 months, how do you think about that? And do you feel comfortable that the supply chain and the manufacturing base is well situated today to launch the traditional fall products that they used to get from Apple?" }, { "speaker": "Tim Cook", "text": "As you know, our supply chain is global. And so, our products are truly made everywhere. And I would focus on that versus focus on one element of the manufacturing process, which tends to get more visibility, which is the final assembly. We have some final assembly in the United States; we have final assembly in China as well. I think, you’d have to conclude, or at least I conclude that if you look at the shock to the supply chain that took place this quarter, for it to come back up so quickly really demonstrates that it’s durable and resilient. And so, I feel good about where we are. That said, we’re always looking at tweaks. And it’s just not something we talk about, because if we view it as confidential and competitive information. And so, we will look at the -- as we get out of this totally, we will look to see what we learned and what we should change." }, { "speaker": "Tejas Gala", "text": "Thank you, Amit. Can we have the next question, please?" }, { "speaker": "Operator", "text": "We’ll hear from Jeriel Ong with Deutsche Bank" }, { "speaker": "Jeriel Ong", "text": "Hi, guys. Thanks for letting me ask a couple of questions. So, I want to focus my question on Services. The segment was solid in the quarter despite overall macro weakness. I can kind of see the logic behind it being strong despite product weakness overall. As you kind of look at the rest of the year, do you think that sustains or at some point does the macro impacts worldwide impact the Services line?" }, { "speaker": "Luca Maestri", "text": "Jeriel, let me take that one. We typically don’t give a lot of specifics about our categories. But I’ve said, as we look into the June quarter, we see two distinct trends in our services business overall. Our ecosystem is very strong. Our customers are very engaged. We are continuing to grow double digits, the number of transacting accounts and paid accounts. And so, we expect our digital services to continue at the same level of performance that we have seen during the March quarter. And that includes the App Store, of course, our video business, our music business, cloud services. So, we expect all these businesses to continue to grow very strongly. Given the overall economic environment, the level of demand right now, there are two businesses that we believe are going to be impacted during the June quarter. One of them is AppleCare. AppleCare is essentially comprised of our product repair business and the warranty agreements that we signed with our customers when they purchase our devices. Both these businesses have been affected obviously by the store closures. And not only our retail stores, but also our partners points of sale, and obviously, the reduced level of customer traffic because of the social distancing measures. Right? And we do expect AppleCare to be affected during the during the June quarter. The other business, which we think is going to be impacted by the overall economic weakness and the uncertainty on when businesses will reopen is advertising, which is the sum of our advertising business on the App Store, on Apple News, and the third party agreements that we have on the advertising front. So, these are two things that during the June quarter will create a headwind for the Services business." }, { "speaker": "Jeriel Ong", "text": "Got it. I appreciate that. My second question is about the overall purchasing decisions the consumers are making. So far, through April, have you seen increased perhaps downtick across your product line? So for example, somebody might have shift maybe toward the lower end of the storage mix of certain products. And do you expect that going forward, as unemployment uptick and macro impacts kind of layer on through the rest of ‘20? Thanks." }, { "speaker": "Tim Cook", "text": "I haven’t seen what you’re asking. No. I have seen a strong customer response to iPhone SE, which is our most affordable iPhone. But it appears that those customers are primarily coming from wanting a smaller form factor with the latest technology, or coming over from it from Android. So, those are the two principal kind of segments versus somebody buying down, as you’re talking about it. We’ve also seen -- we launched the iPad Pro in the midst of all of this and the reception there has also been incredibly good. And that’s obviously our top of the line iPad. And so, I’m not seeing what you’re alluding to, at least at this point." }, { "speaker": "Tejas Gala", "text": "Thanks, Jeriel. Can we have the next question, please." }, { "speaker": "Operator", "text": "That will be from JP Morgan’s Samik Chatterjee." }, { "speaker": "Samik Chatterjee", "text": "Hi. Thanks for taking my question. If I can just start with a question on kind of what you’re seeing in China. You mentioned going to the pickup in activity. But, is that driven by more kind of footfall in the stores, or what’ve you seen relative to online activity, and how much of this recovery is being driven online? Any thoughts on that, please?" }, { "speaker": "Tim Cook", "text": "Yes. What we saw in China for the full quarter -- and I’ll speak about mainland China because I think that’s the source of your question. We saw strong results in iPad and in Wearables, and in Services. And if you look up underneath the full quarter, we saw a strong January, and then a significantly reduced demand in February as the shelter-in-place orders and the lockdowns went into effect in China and the stores closed. And then, in March, as stores reopened, the recovery began. And then, we’ve seen further recovery in April. Where that goes, we will see. But that’s kind of what we’ve seen so far there. To your question about store traffic, store traffic is obviously up from where it was in February, but it is not back to where it was pre the lockdown. There has been, however, more move to online. And as I mentioned earlier in my remarks, it’s pretty phenomenal actually. Retail had a quarterly record for us during the quarter. And that’s despite stores being closed for the three-week period around the world. And ex China -- and then China was closed prior to that three weeks. And that’s partly because the online store had such a phenomenal quarter, and that included in China, but it was also other regions as well. So, there is definitely a move. And whether that’s a permanent shift, I would hesitate to go that far, because I think people like to be out and about. They just know that now is not the time to do that." }, { "speaker": "Samik Chatterjee", "text": "If I can just follow up on your previous comment about the strong demand you’re seeing for iPhone SE. Just given the price point, I’m wondering if you are expecting any change in terms of the geographic mix of where the demand comes from relative to typically what do you see for other iPhones from the line up on, just giving the lower price point?" }, { "speaker": "Tim Cook", "text": "I think, it plays in every geo, but I would expect to see it doing even better in areas where the median incomes are less. And so, we’ll see how that plays out. And I expect some fair number of people switching over to iOS. So, it’s an unbelievable offer. It’s, if you will, the engine of our top phones in a very affordable package. And I think -- and it’s faster than the fastest Android phones. And so, it’s an exceptional value." }, { "speaker": "Tejas Gala", "text": "Thank you. Can we have the next question, please?" }, { "speaker": "Operator", "text": "Certainly. Our last question today will be from Chris Caso with Raymond James." }, { "speaker": "Chris Caso", "text": "Yes. Thank you. I wanted to follow up with another question on iPhone SE and the decision to bring it back and where it sits within the total iPhone strategy. And I guess, coupled with the fact that iPhone 11, you made the decision to bring that at a lower price point. What does that tell us with respect to your approach to iPhone pricing and flexibility? Is this helping to add users and kind of bring people into the ecosystem? And if so, what does that imply for gross margins?" }, { "speaker": "Tim Cook", "text": "Chris, we’ve always been about delivering the best product at a good price. And that fundamental strategy has not changed at all. As you know, we did have an SE for a while. It’s great to bring it back. It was a beloved product. And so, I wouldn’t read anything into that other than we want to give people the best deal that we can while making the best product." }, { "speaker": "Chris Caso", "text": "Okay. As a follow-up -- the follow-up question is on commodity pricing. And I think, you had expected to see some commodity price declines through the March quarter. If you could talk about what you expect, as you go through the year, perhaps in this new environment, and again, whether that turns into a challenge or a headwind for gross margins as you go into the second half?" }, { "speaker": "Tim Cook", "text": "Yes. For March, Chris, we saw NAND pricing increase slightly while DRAM and displays and the other commodities declined. For the June quarter, we would expect NAND and DRAM pricing to remain at this historically low level, while displays and most other commodity prices we expect to decline." }, { "speaker": "Tejas Gala", "text": "Thank you, Chris. A replay of today’s call will be available for two weeks on Apple Podcasts as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 8888-203-1112 or 719-457-0820. Please enter a confirmation code 3229513. These replays will be available by approximately 5 pm Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us." }, { "speaker": "Operator", "text": "And that does conclude today’s conference. Thank you all for joining us today." } ]	Apple Inc.	24,937
AAPL	1	2,020	2020-01-28 17:00:00	Operator: Good day, everyone. Welcome to the Apple Incorporated First Quarter Fiscal Year 2020 Earnings Conference Call. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Senior Analyst, Corporate Finance and Investor Relations. Please go ahead. Tejas Gala: Thank you. Good afternoon, and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenue, gross margin, operating expenses, other income and expenses, taxes, capital allocation and future business outlook. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed periodic reports on Form 10-K and Form 10-Q and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speaks as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook: Thanks, Tejas. Good afternoon, and thanks to all of you for joining us. We're thrilled to report Apple's biggest quarter ever, which set new all-time records in both revenue and earnings. We generated revenue of $91.8 billion, which is above the high-end of our guidance range, with revenue growth accelerating for the third consecutive quarter. Geographically, we set all-time records in the Americas, Europe and rest of Asia Specific and saw Greater China return to growth. Our record performance was fueled by iPhone where December quarter revenue was up 8% year-over-year and by our fifth consecutive quarter of double-digit growth outside of iPhone including a new all-time record for services and another blowout quarter for Wearables. Our active installed base of devices has now surpassed 1.5 billion, up over 100 million in the last 12 months alone, reaching a new all-time high for each of our main product categories and geographic segments. Not only is our large and growing installed base a powerful testament to the satisfaction, engagement and loyalty of our customers, but it's also fueling our growth across the board, particularly in services. Let’s take each category one by one. On iPhone, revenue in the December quarter was $56 billion, again that’s up 8% over a year ago, thanks to the exceptional demand for the iPhone 11, iPhone 11 Pro and iPhone 11 Pro Max. In fact, iPhone 11 was our top-selling model every week during the December quarter and the three new models were our three most popular iPhones. We had double-digit growth in many developed markets, including the U.S., the UK, France and Singapore, and also grew double digits in emerging markets led by strong performances in Brazil, Mainland China, India, Thailand, and Turkey. These new models are by far the best iPhones we've ever shipped with advance technologies and unprecedented leap in battery life to easily get through the day and our best-in-class camera experience. We have been wild with the photos customers have shared in our all-new Night Mode photo challenge this month. Turning to services. Q1 revenue reached $12.7 billion, an all-time record, growing 17% over last year. Once again, we saw double-digit growth in all five of our geographic segments and established new all-time records from multiple categories including cloud services, music, payment services and our App Store search ad business, as well as setting a December quarter record for the App Store and AppleCare. 2019 was a historic year for our services business, and I’d like to touch on some highlights. For the App Store, 2020 started off strong with customers spending a new single day record $386 million on New Year's Day alone, a 20% increase over last year. Apple Arcade, our new game subscription service has been fast off the blocks with a catalog of over 100 new and exclusive games you won’t find anywhere else, all playable across Apple devices with new games and expansions added every month. Apple TV+ is off to a rousing start, and I want to congratulate the entire team at The Morning Show for their multiple Golden Globe nomination. Jennifer Aniston on her Screen Actors Guild award and Billy Crudup on his Critics Choice award. We continue to focus on telling stories that matter, like Little America, which recently premiered to widespread critical acclaim with much more great content still to come. Apple News now draws over 100 million monthly active users in the U.S., UK, Australia and Canada, and provides a curated and personalized experience using on-device intelligence to recommend stories. Apple News+ continues to add new titles, offering subscribers seamless access to the world’s top publications across all of their devices. For Apple Pay, revenue and transactions more than doubled year-over-year with the run rate exceeding 15 billion transactions a year. Apple Pay transit support expanded with customers paying for journeys on transport for London more easily with Apple Pay Express Transit. And in spring of 2020, iPhone and Apple Watch customers will be able to simply tap to ride trains and buses in even more cities including Shenzhen and Guangzhou. We are thrilled with the continued growth at Apple Card. And last month, the customers began using Apple Card monthly installments at Apple retail and online to purchase new iPhones and pay for them over 24 months. We see great promise for these recently launched services, and we're optimistic about what we've got in the pipeline for each of them. Now, turning to Wearables. We had another incredible quarter, setting an all-time record in virtually every market we track around the world, and this product category is now the size of a Fortune 150 company. Demand for AirPods continues to be phenomenal, particularly for our recently launched AirPods Pro, our new addition to the AirPods family that features active noise cancellation. Apple Watch had a great start to fiscal 2020, setting an all-time revenue record during the quarter. It continues to have a profound impact on our customers’ lives and it continues to further its reach as over 75% of the customers purchasing Apple Watch during the quarter were new to Apple Watch. Both AirPods and Apple Watch were must have holiday gifts, helping drive unprecedented results for the category, even as we face supply constraints for Apple Watch Series 3 and AirPods Pro. Mac and iPad generated $7.2 billion and $6 billion in revenue, respectively, and the high level of customer satisfaction and loyalty for both products drove the active installed base of both Mac and iPad to new records in all geographic segments. For iPad, we saw growth in key emerging markets like Mexico, India, Turkey, Poland, Thailand, Malaysia, the Philippines and Vietnam, with our current line-up of iPad Pro, iPad Air, iPad Mini and iPad, along with the new iPadOS will give the customers an unparalleled tablet experience integrating hardware, software and services in a way that only Apple can. This was also a very exciting quarter for the Mac as we launched our most powerful notebook ever. The 16-inch MacBook Pro, as well as Mac Pro and Pro Display XDR, the most powerful tools Apple has ever put into hands of Pros. And we’ve already seen a strong response from the Pro community from developers, photographers and music producers to filmmakers and scientists who rely on the Mac to create their life’s best work. We also want to take a moment to congratulate all the Grammy winning and nominated artists this past weekend who rely on Logic Pro 10 and the Mac to create incredible music we all love. I want to call out and celebrate the exceptional work of our retail and online teams. This quarter, we opened a beautiful new store in Kawasaki, Japan. And exciting things are taking place inside each and every store. Thanks in part to a doubling in iPhone trade-ins versus last year, our retail and online stores set an all-time record and delivered strong double-digit growth in iPhone. We see a very bright future for these efforts and we continue to innovate to ensure that everyone who visits an Apple retail location has a great experience. We began 2020 with our greatest product line-up ever and we are only deepening our commitment to do our part to make the world a better place. In November, we released a completely redesigned Everyone Can Code curriculum to help introduce more elementary and middle school students to the world of coding. The new curriculum includes even more resources for teachers, a brand new guide for students and updates Swift Coding Club materials. Today, millions of students in more than 5,000 schools worldwide use Everyone Can Code curriculum to bring their ideas to life and develop important skills, including creativity, collaboration, and problem-solving. November also saw the launch of our new research app, the latest in our ongoing effort to put the future of health in the hands of every user. Customers in the U.S. can enroll in three landmark multiyear health studies that we’re undertaking with leading academic and research institutions. The Apple Women's Health Study, the Apple Heart And Movement Study and the Hearing Study, as in everything we do, we build user privacy into the research app from the ground up. This quarter we also announced a $2.5 billion plan to help address the housing availability and affording crisis in our home state of California. We feel a great responsibility to help the region we have always called home stay vibrant and to ensure that it remains a great place for everyone to live and raise a family, including those who do so much to serve the community, like firefighters and teachers. In much more recent news, we’re closely following the development of the coronavirus. We're donating two groups that are working to contain the outbreak, we're working closely with our Apple team members and partners in the affected areas, and our thoughts are with all of those affected across the region. As we close the books on a record-breaking December quarter, we are already well underway on some new and exciting developments for the future. Apple’s strength will always be its boundless creativity and innovation, and this year will be no different. But for now, for more details on the results, I would like to turn the call over to Luca. Luca Maestri: Thank you, Tim. Good afternoon, everyone. Our business and financial performance in the December quarter were exceptional as we set new all-time records for revenue, net income and earnings per share. Revenue for the quarter was $91.8 billion, up $7.5 billion or 9% from a year ago, in spite of a $1 billion headwind from foreign exchange. Geographically, we established all-time revenue records in many major developed and emerging markets including, among others, the U.S., Canada, Mexico, Brazil, the UK, Germany, France, Italy, Spain, Poland, Thailand, Malaysia and Vietnam. Products revenue was $79.1 billion, up 8% as iPhone returned to growth, and we had incredibly strong results in Wearables where we set all-time records for both Apple Watch and AirPods. Services revenue grew 17% to a new all-time record, $12.7 billion with double-digit growth in every geographic segment and new all-time records across our portfolio. Company gross margin was 38.4%, up 40 basis points sequentially, driven by leverage from higher revenue, despite of a negative 60 basis-point impact from foreign exchange. Products gross margin was 34.2%, up 260 basis points sequentially, thanks to leverage and favorable mix. Services gross margin was 64.4%, up 30 basis points sequentially, driven by favorable mix. Our reported tax rate for the quarter was 14.2%. Before discrete items, the rate was 16.5%, exactly in line with our guidance. A favorable one-time item impacted the rate by 230 basis points. Net income was an all-time record of $22.2 billion, up $2.3 billion or 11% over last year. Diluted EPS was also an all-time record at $4.99, up 19% and operating cash flow was a very strong $30.5 billion, an improvement of $3.8 billion over a year ago. Let me get into more detail for each of our revenue categories. iPhone revenue of $56 billion grew 8% year-over-year, as we saw a great customer response to the launch of our newest iPhones. We set all-time revenue records in several countries, including the U.S. Mexico, the UK, France, Spain, Poland, Thailand, Malaysia and Vietnam. Our active installed base of iPhones has reached an all-time high and is growing in each of our geographic segments. In the U.S., the latest survey of consumers from 451 Research indicates iPhone customer satisfaction of 98% for iPhone 11, 11 Pro and 11 Pro Max combined. Among business buyers planning to purchase smartphones in the next quarter, 84% plan to purchase iPhones. Turning to services. We set an all-time revenue record of $12.7 billion with double-digit growth in all of our five geographic segments. As Tim mentioned, we established new all-time records for Apple Music, cloud services, payment services and our App Store search ad business and December quarter records for the App Store and AppleCare. We are well on our way to accomplishing our goal of doubling our fiscal year ‘16 services revenue during 2020. We've actually already reached that goal on a run-rate basis with the results of the December quarter. Customer engagement in our ecosystem continues to grow and the number of both, transacting and paid accounts on our digital content stores reached a new all-time high with paid accounts growing double digits in all of our geographic segments. We now have over 480 million paid subscriptions across the services on our platform, up 120 million from a year ago. And at this point, we expect to hit our goal of surpassing the 500 million mark already during the March quarter. Given the tremendous momentum we're experiencing across our services offerings, we're increasing our target for paid subscriptions and aim to reach 600 million before the end of calendar 2020. App Store revenue grew strong double digits, thanks to robust customer demand for both in-app purchases and subscriptions. Our third-party subscription business grew across multiple categories and increased almost 40% year-over-year. Our first-party subscription services also continued to perform extremely well. Apple Music set an all-time revenue record, offering a catalog of over 60 million songs to our customers. iCloud also generated an all-time revenue record, growing very-strong double digits while offering our customers a safe, secure and seamless experience across all their devices. It was a December quarter record for AppleCare, thanks to strong service agreement attach rates and expanded distribution, many of our partners have come to appreciate the strength of the AppleCare brand and our ability to deliver the very-best service and support in the world. That value resonates with both our partners and our customers, and we are very happy to see that quality of experience delivered to more and more of our users. Next, I’d like to talk about Mac and iPad. Mac revenue was $7.2 billion and iPad revenue was $6 billion. Both products had a difficult year-over-year comparison due to the launches of MacBook Air here, Mac mini and iPad Pro during the December quarter a year ago and the subsequent channels fill. Despite the tough compare, on a demand basis, our performance for both Mac and iPad was around even to last year. Importantly, around half of the customers purchasing Macs and iPads around the world during the quarter, were new to that product. And the active installed base of both Mac and iPad reached a new all-time high. The most recent surveys from 451 Research measured a 93% customer satisfaction rating for iPad from consumers and 92% from businesses, and among both consumers and businesses were planning to purchase tablets in the March quarter 78% plan to purchase iPads. Wearables, home and accessories established a new all-time record with revenue of $10 billion, up 37% year-over-year with very strong double-digit performance across all five geographic segments and growth across Wearables, accessories and home. We set all-time records for Wearables in virtually every market we track, even as we experience some product shortages due to very strong customer demand for both Apple Watch and AirPods during the quarter. We also continued to see strong demand for our products in the enterprise market as our technology solutions enable businesses to do their best work. 100% of Fortune 500 companies in the healthcare sector use Apple technology in areas such as patient experience, clinical communications and nursing workflows, and we're also seeing smaller companies in this sector drive innovation with our technology and apps. One example is Gauss Surgical, which uses Core ML in iOS to more accurately estimate blood loss during child birth and surgery. This helps clinicians have more complete and timely information on whether a patient needs an intervention, which can impact both, clinical outcomes and costs. Another example is Butterfly Network, a medical imaging company, which makes handheld ultrasound device that connects to iPhone or iPad to enable clinicians to take an ultrasound anywhere at a cost that is dramatically lower than other solutions in the market today. Let me now turn to our cash positions. We ended the quarter with $207 billion in cash plus marketable securities. We issued a 2 billion euro-denominated green bond, retired $1 billion of maturing debt and reduced commercial paper by $1 billion during the quarter, leaving us with total debt of $108 billion. As a result, net cash was $99 billion at the end of the quarter and we maintained our target of reaching a net cash neutral position over time. We returned nearly $25 billion to shareholders during the December quarter. We began a $10 billion accelerated share repurchase program in November, resulting in the initial delivery and retirement of 30.4 million shares. We also repurchased 40 million Apple shares for $10 billion, through open market transactions, and we paid $3.5 billion in dividends and equivalents. As we have done for the last several years, we would share our plans for the next phase of our capital return program when we report results for the March quarter. Finally, as we move ahead into the March quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. We expect revenue to be between $63 billion and $67 billion. The wider than usual revenue range comprehends uncertainty related to the recently unfolding public health situation in China. We expect gross margin to be between 38% and 39%. We expect OpEx to be between $9.6 billion and $9.7 billion. We expect OI&E to be about $250 million and we expect the tax rate to be about 16.5%. Also today, our Board of Directors has declared a cash dividend of $0.77 per share of common stock, payable on February 13, 2020 to shareholders of record as of February 10, 2020. With that, let's open the call to questions. Tejas Gala: Thank you, Luca. We ask that you limit yourself to two questions. Operator, may have the first question, please? Operator: Yes. That will be from Amit Daryanani with Evercore. Amit Daryanani: Thanks a lot. Good afternoon, guys. I guess, first one for me on Wearables, fairly impressive to see, it’s already a $10 billion business for you guys. Could you just touch on the growth that you are seeing on the Wearables side? How much the growth you think is coming from first time buyers of AirPods or Apple Watch versus folks that seem to be just upgrading the products that they have, because it looks to us the adoption rate is fairly low in your installed base, so there should be a long run way, but love to just understand how you see the growth divided between those two buckets. Tim Cook: Yes. Amit, it’s Tim. If you look at the Apple, the Wearables as a category within the Wearables, Home and Accessories revenue, Wearables grew 44%. So, it was very strong, as you say. Both Apple Watch and AirPods did very well in terms of collecting new customers. Apple Watch in particular, 75% of the customers are new to the Apple Watch. And so, it’s still very much a selling to new customers at this point. Amit Daryanani: Perfect. And I guess, Luca, you could just touch on gross margins. The March quarter guide I think implies gross margin of flat to actually up 10, 15 basis point. It's rare for you guys to actually guide gross margins up in March I think because you have a fairly high seasonal sales deleverage happening. So, what are the offsets that's enabling what looks like a better than seasonal guide for gross margins? Luca Maestri: Yes. That's right, Amit. It’s about flat sequentially, and by the way significantly higher on a year-over-year basis. But on a sequential basis, you are right, on one side we got the loss of leverage from the usual seasonality but we expect that that loss of leverage will be offset by better mix and cost savings. Tejas Gala: Thank you, Amit. Can we have the next question, please? Operator: That will come from Tom Forte with D.A Davidson. Tom Forte: So, congrats on the launch of Apple TV+. I wanted to know internally, how you're getting success, is it truly on critical acclaim, is it on number of consumers that are using the service, contribution and service revenue, et cetera, et cetera? Thank you. Tim Cook: Hey, Tom, it’s Tim. We are primarily measuring our sales on the number of subscribers. As you can tell from the way that we launched the product, we started with a very aggressive price at $4.99. And in addition to that we have our bundle where if you buy pretty much any device, you’re getting a year for free. And so, we're very focused on subscribers. That said, the product itself is about storytelling. And we think if we do that well, then we will find that there will be some number of those that will also be critical acclaimed. And we're seeing that with the morning show, we're seeing that with Little America and others. Tom Forte: Great. And then, my second question is I think you indicated that last month we started offering consumers the ability to use their Apple Card to buy an iPhone on an installment basis. Can you talk about how that’s had an impact on your unit sales for iPhones? Tim Cook: So, retail stores did fantastic on iPhone, very strong double-digit growth in iPhone from a year-over-year point of view. And one of the factors that enabled that was the -- getting to a monthly payments on the Apple Card to make it very simple. Of course, that’s U.S. only at this point, but the U.S. is very key market for us. And so, it was an important part of it. Tejas Gala: Thank you, Tom. Can we have the next question, please? Operator: That will come from Shannon Cross, Cross Research. Shannon Cross: Thank you very much. I wanted to go back to revisit China. Tim, can you talk about what you are seeing in the region -- what you were seeing in the region prior to the health crisis? And then, can you also update us a bit in terms of your manufacturing strategy, dual-sourcing, geographic diversification, even with the region, just so we have some idea of how this will be managed? Thank you. Tim Cook: Yes. Thanks,, Shannon. In terms of China, the results from last quarter, and then I will get into the coronavirus in a second. For the results from last quarter, we had double-digit growth for iPhone in Mainland China. So, that was an important change from where we've been running. We also had double-digit growth in services in Mainland China and we had extremely strong double-digit on Wearables. And so, really, there were a number of different factors in terms of the things that customers are responding to. iPhone 11 is doing well there, the product has been very well-received with its battery life and the camera is unbelievable. We also, as you probably know, have certain trading programs going and financing programs. These have also been well received. And so, it’s sort of the sum of all of this. And we are tracking quite a large percentage of new customers on products like the Mac. Three quarters of the customers buying a Mac in China are new, and nearly two-thirds of the customers buying iPad are new. So, it was a terrific quarter. We had three of the top four selling smartphones in urban China according to Kantar. In terms of the coronavirus, as I mentioned earlier, first and foremost, our thoughts are with all of those that are affected across the region. And as I've mentioned, we’re donating to groups that are working to contain the outbreak. We are also working very closely with our team and our partners in the affected areas, and we have limited travel to business critical situations as of last week. The situation is emerging and we're still gathering lots of data points and monitoring it very closely. As Luca had mentioned, we have a wider than usual revenue range for the second quarter due to the greater uncertainty. I'll talk about supply chain and customer demand some to give you some color. With respect to the supply chain, we do have some suppliers in the Wuhan area. All of these suppliers, they’re our ultimate sources, and we’re obviously working on mitigation plans to make up any expected production loss. We've factored best thinking and the guidance that we've provided you. With respect to supply sources that are outside the Wuhan area, the impact is less clear at this time. The reopening of those factories after Chinese New Year has been moved from the end of this month to February 10th, depending upon the supplier location, and we've attempted to account for this delayed start up through our larger range of outcomes that Luca mentioned earlier. With respect to customer demand and sales, we've currently closed one of our retail stores and a number of channel partners have also closed their store fronts. Many of the stores that remain opened have also reduced operating hours. We're taking additional precautions and frequently deep-cleaning our stores as well as conducting temperature checks for employees. While our sales within the Wuhan area itself are small, retail traffic has also been impacted outside of this area, across the country in the last few days. And again, we have attempted to account for this in our guidance range that we’ve provided you. I hope that gets you some color. Shannon Cross: Yes. That was very helpful. Luca, maybe if you could just touch on from a gross margin from perspective, the commodity pricing environment and availability. Obviously, there has been some movement on DRAM and NAND. So, if you can talk about how you are thinking about inventory levels and managing that going forward? Thank you. Luca Maestri: Yes. As I said earlier to the question around the gross margin guidance for the March quarter, we are seeing a benign commodity environment. Most commodities have been declining during the December quarter, and we expect the same to happen in the March quarter. As always, and as you probably know, we look at the way these prices move and at times when we feel it’s appropriate we buy certain commodities in advance. And so, we will continue that practice as we go through the year. Tejas Gala: Thank you, Shannon. Can we have the next question, please? Operator: That will come from Katy Huberty from Morgan Stanley. Katy Huberty: Luca, can you address the modest slowdown in services growth this quarter, 17% versus 18% in September? Which services categories accelerated versus where did you see some deceleration in the growth? Luca Maestri: Katy, let me make a couple of comments here. The 17% during the December quarter, we look at it against our fiscal year ‘19 growth rate, which was 16%. So, we feel very good about the results for the December quarter. As Tim and I mentioned during our prepared remarks, it was very broad-based growth because we grew double digits in services across all the five geographies. We set all-time records for many, many categories, music, cloud, search ads, payment services, December records for the App Store and the AppleCare. If you remember, we had set two goals for ourselves in the services segment. The first, we set a goal to double our fiscal ‘16 revenue during 2020. And when we look at it on a run rate basis, we’ve already achieved that goal with the results of the December quarter. We also set a goal to pass 500 million paid subscriptions during 2020. And given that we are already at 480 at the end of December, we expect to pass that mark during the March quarter. So, now, we are setting a new target for ourselves for paid subscriptions. And so, we are now aiming to reach 600 million before the end of calendar 2020. So, we feel that the services business is growing incredibly well. Of course, we have launched new services very recently. For example, Apple TV+ just launched in November. And so, while these services did not have a material impact in our December quarter results, we expect that over time they start contributing to the growth of the services business. But, we feel very happy with the 17%. Katy Huberty: Thank you for that. Tim, as a follow-up, at some point in the future, Apple will launch a 5G iPhone. How big of a demand driver do you view 5G capability in a handset? And what's your view as to what the killer app will be from a consumer perspective? Tim Cook: Sorry. We don’t comment on future products. And so, I will try to sidestep a bit. With respect to 5G, I think it’s -- we're in the early innings of its deployment on a global basis. We obviously couldn’t be prouder of our lineup and are very excited about our pipeline as well and wouldn’t trade our position for anybody. Tejas Gala: Thanks, Katie. Can we have the next question, please? Operator: We’ll hear from Kyle McNealy with Jefferies. Kyle McNealy: So, we were seeing some signs of new spectrum being deployed for 5G deployments and even additional 4G capacity, and it’s already having a positive impact for handset upgrades to use that new capacity? Do you get the sense that wireless carriers are getting more incentivize to upgrade handsets to get a leverage out of these new network investments? How much might this be helping, and do you think it will continue to accelerate? Tim Cook: I think that we’ve had some great partners, not only in the U.S. but also around the world that are really helpful this quarter, as partners. And so, I think that probably a part of that is the level of investments they have. And then, a part of it is probably making sure that those customer stick with them in a environment where there's a lot of trading back and forth. So, I am optimistic that it will continue. Kyle McNealy: Okay, great. And then, the comment that you made about capacity in the Wearables division with AirPods Pro and Apple Watch 3, what should we think about the timeline of when those capacity constraints might be alleviated? And will they come from capacity additions or the natural workout of unit shipments and something on the demand side? Tim Cook: I'm hopeful that the Series 3 will come in to balance during this quarter. On AirPods Pro, I don't have estimate for that for you. I just can't predict when at this point. We seem to be fairly substantially off their and we're working very hard to put in additional capacity. Tejas Gala: Thanks, Kyle. Can we have the next question, please? Operator: Yes. Wamsi Mohan, Bank of America. Wamsi Mohan: Hi. Thank you. Tim, Apple has a very valuable installed base of users. Can you see a future where Apple can become larger in the advertising market, as you build out TV+, given you could have the unique position and ability to drive targeted ads to users without compromising on privacy? Tim Cook: I think, it is possible to have advertising in a straightforward manner that doesn’t encroach on people's privacy. I wouldn’t want to conjecture about us in that business. I think for the TV+ business, we feel strongly that what the customer wants is an add-free product, and so that's not our aversion to ads, it’s what we believe that a customer wants. Wamsi Mohan: Okay. Thank you. And Luca, can you just clarify if the services revenue this quarter had any impact of deferrals associated with TV+ at all? And how can you help us maybe size the impact of the amortization of the content costs associated with TV+ as we think about the next couple of years? Thank you. Luca Maestri: Yes. So, yes. Of course, we launched the service and so there was a very small contribution to revenue from the deferral, and there was also contribution to revenue from the people, the subscribers that are actually paying for the service. When you think about what goes into the Apple TV+ revenue, at this point, there are two components. There is paid subscribers, these are the customers that pay for the service and we recognize revenue over the subscription period. And then, we got the what we call the Apple TV+ bundle subscribers. These are the customers that buy an eligible hardware device and redeem the offer for a three-year of TV+ services. We deferred revenue for this offer, based on three items, the first one is the value of the service that is being provided, the one year of Apple TV+. The second one is the number of customers that are eligible for the offer. And the third one is our estimate of the expected number of customers that will redeem the offer. So, you need to keep in mind that from our total eligible device sales, you need to make a number of reductions for family sharing, for multiple device purchases and for geographic availability. Also, the take rate can also be impacted by the availability of local content, and we also require a payment method on file. So, this estimate is reviewed quarterly and gets updated based on actual trends of the offer. So, these inputs provide us with the amount of revenue that we deferred for each device sale that then gets recognized over the one-year period that the TV plus service has provided. So, when you take the combination of paid subscribers and bundled subscribers, you get the Apple TV+ revenue. Of course because we’ve launched the service very recently, the amount of revenue that we recognized during the quarter, was immaterial to our results. With regard to the cost of developing the content, we -- essentially as we incur these costs, we put them on the balance sheet and then we amortize over a certain period of time depending on the type of content that we produce. Tejas Gala: Thanks, Wamsi. Can we have the next question, please? Operator: We’ll hear from Cowen and Company's Krish Sankar. Krish Sankar: I had two questions. First one, Tim, I just wanted to pick your brain a little bit on the overall smartphone market. There is a general view that when 5G phones come out they’re going to be more expensive due to higher component costs, but at the same time, it looks like you guys have proven that there is a market for low cost geographies to phones like iPhone SE. So, how do you see these two different segments within the smart phone market evolving over the next one to three years? And then, I had a follow-up for Luca. Tim Cook: Again, I’m going to stay away from commenting about future products. But, generally, I think it’s important when you think about 5G is to look around the world at the different deployment schedules. And some of those look very different perhaps than what you might be seen here. And so, that’s very important. In terms of the price, I wouldn’t want to comment on the price of handsets that aren’t announced. Krish Sankar: And then, a follow-up for Luca. OpEx as a percentage of sales for March looks like e about 15% higher than in your prior quarters. Kind of curious how much of that is -- part of it is driven by some of your Intel modem asset purchases or TV+ in the OpEx or how do we think about it on a go forward basis? Luca Maestri: Yes. I think we felt good about our OpEx results, because they were at the low end of our guidance range. But clearly, we want to make all the necessary investments in the business. And in terms of the new services, not only for TV+ but all the new services that we launched during 2019, this is period where we’re making the necessary investments in advertising and marketing, and that level of investment is reflected in our OpEx results. And also, as you correctly stated, we completed the acquisition of the Intel baseband business unit in December quarter. And so, we had -- we reflected the run rate of the expenses related to that business, partially during the quarter, after the completion of the transaction. And that is a very important core technology for the Company. So, we will continue to make all the necessary investments also there. There is a third category of expenses that affected the December quarter, and it’s a fact that our revenue was very strong, and we have certain valuable expenses. For example, credit card fees that are associated with the higher volume and of course impacted our OpEx results. Tejas Gala: Thanks, Krish. Can we have the next question, please? Operator: That will be from Mike Olson with Piper Sandler. Mike Olson: Good afternoon. Thanks for taking the questions. So, slightly different take on an earlier question on Wearables, and that is, what impact you think Wearables is driving people into the Apple ecosystem? You mentioned 75% watch buyers are new to the Apple Watch, but are many of them new to Apple overall? I'm sure a lot of existing iPhone, iPads or Mac users are going to Wearables customers, but do you think Wearables bring people into the ecosystem to buy other devices in a material way? Tim Cook: I think that -- Mike, it’s Tim. With each Apple product that a customer buys, I think, they get tighter into the ecosystem because they like -- that's the reason that they're buying into it, is they like the experience, the customer experience. And so from that point of view, I think each of our products can drive another product. I would think, in that case it’s more likely that the iPhone comes first, but there's no doubt in my mind that there's some people that came into the ecosystem for the Watch. Mike Olson: Okay. And then, I think you recently mentioned that augmented reality will pervade our entire lives. And I'm wondering if you could share your thoughts about how you think it starts to impact our lives most significantly. For example, will the inflection point in AR come from gaming or industrial usage or some other category? In other words, where will the average person kind of first feel that impact of AR on their lives in a significant way? Thanks. Tim Cook: I think, when you look at AR today, you would see that there are consumer applications, there are enterprise applications. This is the reason I'm so excited about it is, you rarely have a new technology where business and consumer are both see it as key to them. And so, I think, the answer is --- that's the reason, I think it’s going to pervade your lives is because it’s going to go across business and your home life. I think, these things will happen in parallel. There are already companies that are deep into enterprise business that are working on applications for the enterprise. And of course you can see -- you go on to store, see thousands of apps that are AR kit enabled at this time and would even more coming. Tejas Gala: Thank you, Mike. Can we have the next question, please? Operator: That will come from Raymond James, Chris Caso. Chris Caso: Yes. Thank you. Good afternoon. I guess, the first question is on gross margins. And you spoke about the favorable mix. Wondering if you could expand on that a little bit. And clearly, iPhone is doing well within the overall mix that growing year-on-year. But, if you could talk about what's happening to the mix within iPhone, is that improving as well and also helping margins? And is there anything else you would point to with regard to the overall mix in margins? Luca Maestri: Yes. And I think that the mix helped us both in Q1 and it’s helping us with the guidance for Q2. And as you said, some of it is mix of iPhones. The customer response for iPhone 11, 11 Pro and 11 Pro Max is being exceptional. And that clearly has helped our mix. iPhone 11 was our top selling model throughout the quarter, every single week of the quarter. And so certainly, better mix within iPhone. The other point that I would like to point out is that as we move from Q1 to Q2, the proportion of revenue coming from services increases versus the holiday quarter. And given that fact that services are accretive to gross margin for the Company, we end up getting a better mix from services as well. Chris Caso: Okay. Thank you. And I guess, follow-on question with regard to OpEx. And it has been growing at a faster rate than revenue for I guess largely over the last three years or so. Can you set us some expectation with regard to when you get a return on that investment? I understand there are new investments that are happening now. But, how should we think about potential leverage going forward? Is there a point in time where the OpEx spending tend to level off and you get some return on that or is it just the function of a faster revenue growth in future? Luca Maestri: Well, I would start by saying that our expense to revenue ratio is incredibly competitive relative to other companies in our sector. There are years when our OpEx grows faster than our revenue but we also had years in the recent past where the opposite has happened. We continue to believe that we have a lot of great opportunities in front of us. And just if you look this past year, we launched many new initiatives, for example, on the services front, which we want to support with the appropriate level of investment, and not only marketing and advertising but also in R&D. As I mentioned earlier, we closed the acquisition of the Intel baseband business because we think it’s a very important strategic core technology for the Company going forward. And I think from the results that you’ve seen during this quarter and the guidance that we provided for the March quarter, I think we’re doing a pretty good job of balancing the level of investments that we’re making on the expense front, with the level of returns that we get both in terms of revenue and in terms of profitability that we’re getting. Our net income for example was up 11% during the December quarter. Tejas Gala: Thank you. Can we have the next question, please? Operator: That will come from Samik Chatterjee with JP Morgan. Samik Chatterjee: I just wanted to kind of ask on the iPhone revenue growth, definitely good to see return to growth. Based on the velocity and momentum you’re seeing for the products exiting the quarter, how comfortable are you feeling about sustaining growth in iPhone revenues through year? And I have a follow-up. Tim Cook: We have a practice of forecasting the current quarter. And so, we’ve given you the range that we expect for the current quarter and really don't give a range beyond that. Samik Chatterjee: Okay. So, if I can just maybe then follow up in terms of -- obviously, you’ve returned to growth in most of the regions you report. One of the regions that are declining is Japan. So, if you can share your thoughts on what actions you need to take there to return that segment and that geography to grow? And what are the product trends there and what's probably the headwind that's kind of limiting growth there? Luca Maestri: Yes. So, Japan was down 10% during the December quarter. It was primarily due to iPhone performance, which was challenged because there were some regulatory changes that took effect on the 1st of October where essentially the regulators decoupled the mobile phone pricing from the two-year contract and are capping the maximum amount of carrier discounts that can be made. At the same time, I would say, within a more difficult macro environment, iPhone did incredibly well during the quarter, six of the top seven selling smart models in Japan during the December quarter were iPhones. So, it was very strong performance by iPhone in a difficult environment. Also, in Japan, we had very strong double-digit growth from services, stronger than Company average; and very strong double-digit growth in Wearables, also stronger than Company average. So, we feel very good. Japan is a country where historically we’ve had great success. The customers are very loyal and very engaged and we have very strong position there, we feel we have a very good momentum. Tejas Gala: Thank you, Samik. A replay of today's call will be available for two weeks on Apple Podcasts, as a webcast on apple.com/investor, and via telephone. The numbers for the telephone replay are 888-203-1112, or 719-457-0820. Please enter confirmation code 682-6206. These replays will be available by approximately 5:00 pm Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. Operator: Again, that will conclude today's conference. Thank you all for your participation.	[ { "speaker": "Operator", "text": "Good day, everyone. Welcome to the Apple Incorporated First Quarter Fiscal Year 2020 Earnings Conference Call. Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Senior Analyst, Corporate Finance and Investor Relations. Please go ahead." }, { "speaker": "Tejas Gala", "text": "Thank you. Good afternoon, and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenue, gross margin, operating expenses, other income and expenses, taxes, capital allocation and future business outlook. Actual results or trends could differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed periodic reports on Form 10-K and Form 10-Q and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speaks as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thanks, Tejas. Good afternoon, and thanks to all of you for joining us. We're thrilled to report Apple's biggest quarter ever, which set new all-time records in both revenue and earnings. We generated revenue of $91.8 billion, which is above the high-end of our guidance range, with revenue growth accelerating for the third consecutive quarter. Geographically, we set all-time records in the Americas, Europe and rest of Asia Specific and saw Greater China return to growth. Our record performance was fueled by iPhone where December quarter revenue was up 8% year-over-year and by our fifth consecutive quarter of double-digit growth outside of iPhone including a new all-time record for services and another blowout quarter for Wearables. Our active installed base of devices has now surpassed 1.5 billion, up over 100 million in the last 12 months alone, reaching a new all-time high for each of our main product categories and geographic segments. Not only is our large and growing installed base a powerful testament to the satisfaction, engagement and loyalty of our customers, but it's also fueling our growth across the board, particularly in services. Let’s take each category one by one. On iPhone, revenue in the December quarter was $56 billion, again that’s up 8% over a year ago, thanks to the exceptional demand for the iPhone 11, iPhone 11 Pro and iPhone 11 Pro Max. In fact, iPhone 11 was our top-selling model every week during the December quarter and the three new models were our three most popular iPhones. We had double-digit growth in many developed markets, including the U.S., the UK, France and Singapore, and also grew double digits in emerging markets led by strong performances in Brazil, Mainland China, India, Thailand, and Turkey. These new models are by far the best iPhones we've ever shipped with advance technologies and unprecedented leap in battery life to easily get through the day and our best-in-class camera experience. We have been wild with the photos customers have shared in our all-new Night Mode photo challenge this month. Turning to services. Q1 revenue reached $12.7 billion, an all-time record, growing 17% over last year. Once again, we saw double-digit growth in all five of our geographic segments and established new all-time records from multiple categories including cloud services, music, payment services and our App Store search ad business, as well as setting a December quarter record for the App Store and AppleCare. 2019 was a historic year for our services business, and I’d like to touch on some highlights. For the App Store, 2020 started off strong with customers spending a new single day record $386 million on New Year's Day alone, a 20% increase over last year. Apple Arcade, our new game subscription service has been fast off the blocks with a catalog of over 100 new and exclusive games you won’t find anywhere else, all playable across Apple devices with new games and expansions added every month. Apple TV+ is off to a rousing start, and I want to congratulate the entire team at The Morning Show for their multiple Golden Globe nomination. Jennifer Aniston on her Screen Actors Guild award and Billy Crudup on his Critics Choice award. We continue to focus on telling stories that matter, like Little America, which recently premiered to widespread critical acclaim with much more great content still to come. Apple News now draws over 100 million monthly active users in the U.S., UK, Australia and Canada, and provides a curated and personalized experience using on-device intelligence to recommend stories. Apple News+ continues to add new titles, offering subscribers seamless access to the world’s top publications across all of their devices. For Apple Pay, revenue and transactions more than doubled year-over-year with the run rate exceeding 15 billion transactions a year. Apple Pay transit support expanded with customers paying for journeys on transport for London more easily with Apple Pay Express Transit. And in spring of 2020, iPhone and Apple Watch customers will be able to simply tap to ride trains and buses in even more cities including Shenzhen and Guangzhou. We are thrilled with the continued growth at Apple Card. And last month, the customers began using Apple Card monthly installments at Apple retail and online to purchase new iPhones and pay for them over 24 months. We see great promise for these recently launched services, and we're optimistic about what we've got in the pipeline for each of them. Now, turning to Wearables. We had another incredible quarter, setting an all-time record in virtually every market we track around the world, and this product category is now the size of a Fortune 150 company. Demand for AirPods continues to be phenomenal, particularly for our recently launched AirPods Pro, our new addition to the AirPods family that features active noise cancellation. Apple Watch had a great start to fiscal 2020, setting an all-time revenue record during the quarter. It continues to have a profound impact on our customers’ lives and it continues to further its reach as over 75% of the customers purchasing Apple Watch during the quarter were new to Apple Watch. Both AirPods and Apple Watch were must have holiday gifts, helping drive unprecedented results for the category, even as we face supply constraints for Apple Watch Series 3 and AirPods Pro. Mac and iPad generated $7.2 billion and $6 billion in revenue, respectively, and the high level of customer satisfaction and loyalty for both products drove the active installed base of both Mac and iPad to new records in all geographic segments. For iPad, we saw growth in key emerging markets like Mexico, India, Turkey, Poland, Thailand, Malaysia, the Philippines and Vietnam, with our current line-up of iPad Pro, iPad Air, iPad Mini and iPad, along with the new iPadOS will give the customers an unparalleled tablet experience integrating hardware, software and services in a way that only Apple can. This was also a very exciting quarter for the Mac as we launched our most powerful notebook ever. The 16-inch MacBook Pro, as well as Mac Pro and Pro Display XDR, the most powerful tools Apple has ever put into hands of Pros. And we’ve already seen a strong response from the Pro community from developers, photographers and music producers to filmmakers and scientists who rely on the Mac to create their life’s best work. We also want to take a moment to congratulate all the Grammy winning and nominated artists this past weekend who rely on Logic Pro 10 and the Mac to create incredible music we all love. I want to call out and celebrate the exceptional work of our retail and online teams. This quarter, we opened a beautiful new store in Kawasaki, Japan. And exciting things are taking place inside each and every store. Thanks in part to a doubling in iPhone trade-ins versus last year, our retail and online stores set an all-time record and delivered strong double-digit growth in iPhone. We see a very bright future for these efforts and we continue to innovate to ensure that everyone who visits an Apple retail location has a great experience. We began 2020 with our greatest product line-up ever and we are only deepening our commitment to do our part to make the world a better place. In November, we released a completely redesigned Everyone Can Code curriculum to help introduce more elementary and middle school students to the world of coding. The new curriculum includes even more resources for teachers, a brand new guide for students and updates Swift Coding Club materials. Today, millions of students in more than 5,000 schools worldwide use Everyone Can Code curriculum to bring their ideas to life and develop important skills, including creativity, collaboration, and problem-solving. November also saw the launch of our new research app, the latest in our ongoing effort to put the future of health in the hands of every user. Customers in the U.S. can enroll in three landmark multiyear health studies that we’re undertaking with leading academic and research institutions. The Apple Women's Health Study, the Apple Heart And Movement Study and the Hearing Study, as in everything we do, we build user privacy into the research app from the ground up. This quarter we also announced a $2.5 billion plan to help address the housing availability and affording crisis in our home state of California. We feel a great responsibility to help the region we have always called home stay vibrant and to ensure that it remains a great place for everyone to live and raise a family, including those who do so much to serve the community, like firefighters and teachers. In much more recent news, we’re closely following the development of the coronavirus. We're donating two groups that are working to contain the outbreak, we're working closely with our Apple team members and partners in the affected areas, and our thoughts are with all of those affected across the region. As we close the books on a record-breaking December quarter, we are already well underway on some new and exciting developments for the future. Apple’s strength will always be its boundless creativity and innovation, and this year will be no different. But for now, for more details on the results, I would like to turn the call over to Luca." }, { "speaker": "Luca Maestri", "text": "Thank you, Tim. Good afternoon, everyone. Our business and financial performance in the December quarter were exceptional as we set new all-time records for revenue, net income and earnings per share. Revenue for the quarter was $91.8 billion, up $7.5 billion or 9% from a year ago, in spite of a $1 billion headwind from foreign exchange. Geographically, we established all-time revenue records in many major developed and emerging markets including, among others, the U.S., Canada, Mexico, Brazil, the UK, Germany, France, Italy, Spain, Poland, Thailand, Malaysia and Vietnam. Products revenue was $79.1 billion, up 8% as iPhone returned to growth, and we had incredibly strong results in Wearables where we set all-time records for both Apple Watch and AirPods. Services revenue grew 17% to a new all-time record, $12.7 billion with double-digit growth in every geographic segment and new all-time records across our portfolio. Company gross margin was 38.4%, up 40 basis points sequentially, driven by leverage from higher revenue, despite of a negative 60 basis-point impact from foreign exchange. Products gross margin was 34.2%, up 260 basis points sequentially, thanks to leverage and favorable mix. Services gross margin was 64.4%, up 30 basis points sequentially, driven by favorable mix. Our reported tax rate for the quarter was 14.2%. Before discrete items, the rate was 16.5%, exactly in line with our guidance. A favorable one-time item impacted the rate by 230 basis points. Net income was an all-time record of $22.2 billion, up $2.3 billion or 11% over last year. Diluted EPS was also an all-time record at $4.99, up 19% and operating cash flow was a very strong $30.5 billion, an improvement of $3.8 billion over a year ago. Let me get into more detail for each of our revenue categories. iPhone revenue of $56 billion grew 8% year-over-year, as we saw a great customer response to the launch of our newest iPhones. We set all-time revenue records in several countries, including the U.S. Mexico, the UK, France, Spain, Poland, Thailand, Malaysia and Vietnam. Our active installed base of iPhones has reached an all-time high and is growing in each of our geographic segments. In the U.S., the latest survey of consumers from 451 Research indicates iPhone customer satisfaction of 98% for iPhone 11, 11 Pro and 11 Pro Max combined. Among business buyers planning to purchase smartphones in the next quarter, 84% plan to purchase iPhones. Turning to services. We set an all-time revenue record of $12.7 billion with double-digit growth in all of our five geographic segments. As Tim mentioned, we established new all-time records for Apple Music, cloud services, payment services and our App Store search ad business and December quarter records for the App Store and AppleCare. We are well on our way to accomplishing our goal of doubling our fiscal year ‘16 services revenue during 2020. We've actually already reached that goal on a run-rate basis with the results of the December quarter. Customer engagement in our ecosystem continues to grow and the number of both, transacting and paid accounts on our digital content stores reached a new all-time high with paid accounts growing double digits in all of our geographic segments. We now have over 480 million paid subscriptions across the services on our platform, up 120 million from a year ago. And at this point, we expect to hit our goal of surpassing the 500 million mark already during the March quarter. Given the tremendous momentum we're experiencing across our services offerings, we're increasing our target for paid subscriptions and aim to reach 600 million before the end of calendar 2020. App Store revenue grew strong double digits, thanks to robust customer demand for both in-app purchases and subscriptions. Our third-party subscription business grew across multiple categories and increased almost 40% year-over-year. Our first-party subscription services also continued to perform extremely well. Apple Music set an all-time revenue record, offering a catalog of over 60 million songs to our customers. iCloud also generated an all-time revenue record, growing very-strong double digits while offering our customers a safe, secure and seamless experience across all their devices. It was a December quarter record for AppleCare, thanks to strong service agreement attach rates and expanded distribution, many of our partners have come to appreciate the strength of the AppleCare brand and our ability to deliver the very-best service and support in the world. That value resonates with both our partners and our customers, and we are very happy to see that quality of experience delivered to more and more of our users. Next, I’d like to talk about Mac and iPad. Mac revenue was $7.2 billion and iPad revenue was $6 billion. Both products had a difficult year-over-year comparison due to the launches of MacBook Air here, Mac mini and iPad Pro during the December quarter a year ago and the subsequent channels fill. Despite the tough compare, on a demand basis, our performance for both Mac and iPad was around even to last year. Importantly, around half of the customers purchasing Macs and iPads around the world during the quarter, were new to that product. And the active installed base of both Mac and iPad reached a new all-time high. The most recent surveys from 451 Research measured a 93% customer satisfaction rating for iPad from consumers and 92% from businesses, and among both consumers and businesses were planning to purchase tablets in the March quarter 78% plan to purchase iPads. Wearables, home and accessories established a new all-time record with revenue of $10 billion, up 37% year-over-year with very strong double-digit performance across all five geographic segments and growth across Wearables, accessories and home. We set all-time records for Wearables in virtually every market we track, even as we experience some product shortages due to very strong customer demand for both Apple Watch and AirPods during the quarter. We also continued to see strong demand for our products in the enterprise market as our technology solutions enable businesses to do their best work. 100% of Fortune 500 companies in the healthcare sector use Apple technology in areas such as patient experience, clinical communications and nursing workflows, and we're also seeing smaller companies in this sector drive innovation with our technology and apps. One example is Gauss Surgical, which uses Core ML in iOS to more accurately estimate blood loss during child birth and surgery. This helps clinicians have more complete and timely information on whether a patient needs an intervention, which can impact both, clinical outcomes and costs. Another example is Butterfly Network, a medical imaging company, which makes handheld ultrasound device that connects to iPhone or iPad to enable clinicians to take an ultrasound anywhere at a cost that is dramatically lower than other solutions in the market today. Let me now turn to our cash positions. We ended the quarter with $207 billion in cash plus marketable securities. We issued a 2 billion euro-denominated green bond, retired $1 billion of maturing debt and reduced commercial paper by $1 billion during the quarter, leaving us with total debt of $108 billion. As a result, net cash was $99 billion at the end of the quarter and we maintained our target of reaching a net cash neutral position over time. We returned nearly $25 billion to shareholders during the December quarter. We began a $10 billion accelerated share repurchase program in November, resulting in the initial delivery and retirement of 30.4 million shares. We also repurchased 40 million Apple shares for $10 billion, through open market transactions, and we paid $3.5 billion in dividends and equivalents. As we have done for the last several years, we would share our plans for the next phase of our capital return program when we report results for the March quarter. Finally, as we move ahead into the March quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. We expect revenue to be between $63 billion and $67 billion. The wider than usual revenue range comprehends uncertainty related to the recently unfolding public health situation in China. We expect gross margin to be between 38% and 39%. We expect OpEx to be between $9.6 billion and $9.7 billion. We expect OI&E to be about $250 million and we expect the tax rate to be about 16.5%. Also today, our Board of Directors has declared a cash dividend of $0.77 per share of common stock, payable on February 13, 2020 to shareholders of record as of February 10, 2020. With that, let's open the call to questions." }, { "speaker": "Tejas Gala", "text": "Thank you, Luca. We ask that you limit yourself to two questions. Operator, may have the first question, please?" }, { "speaker": "Operator", "text": "Yes. That will be from Amit Daryanani with Evercore." }, { "speaker": "Amit Daryanani", "text": "Thanks a lot. Good afternoon, guys. I guess, first one for me on Wearables, fairly impressive to see, it’s already a $10 billion business for you guys. Could you just touch on the growth that you are seeing on the Wearables side? How much the growth you think is coming from first time buyers of AirPods or Apple Watch versus folks that seem to be just upgrading the products that they have, because it looks to us the adoption rate is fairly low in your installed base, so there should be a long run way, but love to just understand how you see the growth divided between those two buckets." }, { "speaker": "Tim Cook", "text": "Yes. Amit, it’s Tim. If you look at the Apple, the Wearables as a category within the Wearables, Home and Accessories revenue, Wearables grew 44%. So, it was very strong, as you say. Both Apple Watch and AirPods did very well in terms of collecting new customers. Apple Watch in particular, 75% of the customers are new to the Apple Watch. And so, it’s still very much a selling to new customers at this point." }, { "speaker": "Amit Daryanani", "text": "Perfect. And I guess, Luca, you could just touch on gross margins. The March quarter guide I think implies gross margin of flat to actually up 10, 15 basis point. It's rare for you guys to actually guide gross margins up in March I think because you have a fairly high seasonal sales deleverage happening. So, what are the offsets that's enabling what looks like a better than seasonal guide for gross margins?" }, { "speaker": "Luca Maestri", "text": "Yes. That's right, Amit. It’s about flat sequentially, and by the way significantly higher on a year-over-year basis. But on a sequential basis, you are right, on one side we got the loss of leverage from the usual seasonality but we expect that that loss of leverage will be offset by better mix and cost savings." }, { "speaker": "Tejas Gala", "text": "Thank you, Amit. Can we have the next question, please?" }, { "speaker": "Operator", "text": "That will come from Tom Forte with D.A Davidson." }, { "speaker": "Tom Forte", "text": "So, congrats on the launch of Apple TV+. I wanted to know internally, how you're getting success, is it truly on critical acclaim, is it on number of consumers that are using the service, contribution and service revenue, et cetera, et cetera? Thank you." }, { "speaker": "Tim Cook", "text": "Hey, Tom, it’s Tim. We are primarily measuring our sales on the number of subscribers. As you can tell from the way that we launched the product, we started with a very aggressive price at $4.99. And in addition to that we have our bundle where if you buy pretty much any device, you’re getting a year for free. And so, we're very focused on subscribers. That said, the product itself is about storytelling. And we think if we do that well, then we will find that there will be some number of those that will also be critical acclaimed. And we're seeing that with the morning show, we're seeing that with Little America and others." }, { "speaker": "Tom Forte", "text": "Great. And then, my second question is I think you indicated that last month we started offering consumers the ability to use their Apple Card to buy an iPhone on an installment basis. Can you talk about how that’s had an impact on your unit sales for iPhones?" }, { "speaker": "Tim Cook", "text": "So, retail stores did fantastic on iPhone, very strong double-digit growth in iPhone from a year-over-year point of view. And one of the factors that enabled that was the -- getting to a monthly payments on the Apple Card to make it very simple. Of course, that’s U.S. only at this point, but the U.S. is very key market for us. And so, it was an important part of it." }, { "speaker": "Tejas Gala", "text": "Thank you, Tom. Can we have the next question, please?" }, { "speaker": "Operator", "text": "That will come from Shannon Cross, Cross Research." }, { "speaker": "Shannon Cross", "text": "Thank you very much. I wanted to go back to revisit China. Tim, can you talk about what you are seeing in the region -- what you were seeing in the region prior to the health crisis? And then, can you also update us a bit in terms of your manufacturing strategy, dual-sourcing, geographic diversification, even with the region, just so we have some idea of how this will be managed? Thank you." }, { "speaker": "Tim Cook", "text": "Yes. Thanks,, Shannon. In terms of China, the results from last quarter, and then I will get into the coronavirus in a second. For the results from last quarter, we had double-digit growth for iPhone in Mainland China. So, that was an important change from where we've been running. We also had double-digit growth in services in Mainland China and we had extremely strong double-digit on Wearables. And so, really, there were a number of different factors in terms of the things that customers are responding to. iPhone 11 is doing well there, the product has been very well-received with its battery life and the camera is unbelievable. We also, as you probably know, have certain trading programs going and financing programs. These have also been well received. And so, it’s sort of the sum of all of this. And we are tracking quite a large percentage of new customers on products like the Mac. Three quarters of the customers buying a Mac in China are new, and nearly two-thirds of the customers buying iPad are new. So, it was a terrific quarter. We had three of the top four selling smartphones in urban China according to Kantar. In terms of the coronavirus, as I mentioned earlier, first and foremost, our thoughts are with all of those that are affected across the region. And as I've mentioned, we’re donating to groups that are working to contain the outbreak. We are also working very closely with our team and our partners in the affected areas, and we have limited travel to business critical situations as of last week. The situation is emerging and we're still gathering lots of data points and monitoring it very closely. As Luca had mentioned, we have a wider than usual revenue range for the second quarter due to the greater uncertainty. I'll talk about supply chain and customer demand some to give you some color. With respect to the supply chain, we do have some suppliers in the Wuhan area. All of these suppliers, they’re our ultimate sources, and we’re obviously working on mitigation plans to make up any expected production loss. We've factored best thinking and the guidance that we've provided you. With respect to supply sources that are outside the Wuhan area, the impact is less clear at this time. The reopening of those factories after Chinese New Year has been moved from the end of this month to February 10th, depending upon the supplier location, and we've attempted to account for this delayed start up through our larger range of outcomes that Luca mentioned earlier. With respect to customer demand and sales, we've currently closed one of our retail stores and a number of channel partners have also closed their store fronts. Many of the stores that remain opened have also reduced operating hours. We're taking additional precautions and frequently deep-cleaning our stores as well as conducting temperature checks for employees. While our sales within the Wuhan area itself are small, retail traffic has also been impacted outside of this area, across the country in the last few days. And again, we have attempted to account for this in our guidance range that we’ve provided you. I hope that gets you some color." }, { "speaker": "Shannon Cross", "text": "Yes. That was very helpful. Luca, maybe if you could just touch on from a gross margin from perspective, the commodity pricing environment and availability. Obviously, there has been some movement on DRAM and NAND. So, if you can talk about how you are thinking about inventory levels and managing that going forward? Thank you." }, { "speaker": "Luca Maestri", "text": "Yes. As I said earlier to the question around the gross margin guidance for the March quarter, we are seeing a benign commodity environment. Most commodities have been declining during the December quarter, and we expect the same to happen in the March quarter. As always, and as you probably know, we look at the way these prices move and at times when we feel it’s appropriate we buy certain commodities in advance. And so, we will continue that practice as we go through the year." }, { "speaker": "Tejas Gala", "text": "Thank you, Shannon. Can we have the next question, please?" }, { "speaker": "Operator", "text": "That will come from Katy Huberty from Morgan Stanley." }, { "speaker": "Katy Huberty", "text": "Luca, can you address the modest slowdown in services growth this quarter, 17% versus 18% in September? Which services categories accelerated versus where did you see some deceleration in the growth?" }, { "speaker": "Luca Maestri", "text": "Katy, let me make a couple of comments here. The 17% during the December quarter, we look at it against our fiscal year ‘19 growth rate, which was 16%. So, we feel very good about the results for the December quarter. As Tim and I mentioned during our prepared remarks, it was very broad-based growth because we grew double digits in services across all the five geographies. We set all-time records for many, many categories, music, cloud, search ads, payment services, December records for the App Store and the AppleCare. If you remember, we had set two goals for ourselves in the services segment. The first, we set a goal to double our fiscal ‘16 revenue during 2020. And when we look at it on a run rate basis, we’ve already achieved that goal with the results of the December quarter. We also set a goal to pass 500 million paid subscriptions during 2020. And given that we are already at 480 at the end of December, we expect to pass that mark during the March quarter. So, now, we are setting a new target for ourselves for paid subscriptions. And so, we are now aiming to reach 600 million before the end of calendar 2020. So, we feel that the services business is growing incredibly well. Of course, we have launched new services very recently. For example, Apple TV+ just launched in November. And so, while these services did not have a material impact in our December quarter results, we expect that over time they start contributing to the growth of the services business. But, we feel very happy with the 17%." }, { "speaker": "Katy Huberty", "text": "Thank you for that. Tim, as a follow-up, at some point in the future, Apple will launch a 5G iPhone. How big of a demand driver do you view 5G capability in a handset? And what's your view as to what the killer app will be from a consumer perspective?" }, { "speaker": "Tim Cook", "text": "Sorry. We don’t comment on future products. And so, I will try to sidestep a bit. With respect to 5G, I think it’s -- we're in the early innings of its deployment on a global basis. We obviously couldn’t be prouder of our lineup and are very excited about our pipeline as well and wouldn’t trade our position for anybody." }, { "speaker": "Tejas Gala", "text": "Thanks, Katie. Can we have the next question, please?" }, { "speaker": "Operator", "text": "We’ll hear from Kyle McNealy with Jefferies." }, { "speaker": "Kyle McNealy", "text": "So, we were seeing some signs of new spectrum being deployed for 5G deployments and even additional 4G capacity, and it’s already having a positive impact for handset upgrades to use that new capacity? Do you get the sense that wireless carriers are getting more incentivize to upgrade handsets to get a leverage out of these new network investments? How much might this be helping, and do you think it will continue to accelerate?" }, { "speaker": "Tim Cook", "text": "I think that we’ve had some great partners, not only in the U.S. but also around the world that are really helpful this quarter, as partners. And so, I think that probably a part of that is the level of investments they have. And then, a part of it is probably making sure that those customer stick with them in a environment where there's a lot of trading back and forth. So, I am optimistic that it will continue." }, { "speaker": "Kyle McNealy", "text": "Okay, great. And then, the comment that you made about capacity in the Wearables division with AirPods Pro and Apple Watch 3, what should we think about the timeline of when those capacity constraints might be alleviated? And will they come from capacity additions or the natural workout of unit shipments and something on the demand side?" }, { "speaker": "Tim Cook", "text": "I'm hopeful that the Series 3 will come in to balance during this quarter. On AirPods Pro, I don't have estimate for that for you. I just can't predict when at this point. We seem to be fairly substantially off their and we're working very hard to put in additional capacity." }, { "speaker": "Tejas Gala", "text": "Thanks, Kyle. Can we have the next question, please?" }, { "speaker": "Operator", "text": "Yes. Wamsi Mohan, Bank of America." }, { "speaker": "Wamsi Mohan", "text": "Hi. Thank you. Tim, Apple has a very valuable installed base of users. Can you see a future where Apple can become larger in the advertising market, as you build out TV+, given you could have the unique position and ability to drive targeted ads to users without compromising on privacy?" }, { "speaker": "Tim Cook", "text": "I think, it is possible to have advertising in a straightforward manner that doesn’t encroach on people's privacy. I wouldn’t want to conjecture about us in that business. I think for the TV+ business, we feel strongly that what the customer wants is an add-free product, and so that's not our aversion to ads, it’s what we believe that a customer wants." }, { "speaker": "Wamsi Mohan", "text": "Okay. Thank you. And Luca, can you just clarify if the services revenue this quarter had any impact of deferrals associated with TV+ at all? And how can you help us maybe size the impact of the amortization of the content costs associated with TV+ as we think about the next couple of years? Thank you." }, { "speaker": "Luca Maestri", "text": "Yes. So, yes. Of course, we launched the service and so there was a very small contribution to revenue from the deferral, and there was also contribution to revenue from the people, the subscribers that are actually paying for the service. When you think about what goes into the Apple TV+ revenue, at this point, there are two components. There is paid subscribers, these are the customers that pay for the service and we recognize revenue over the subscription period. And then, we got the what we call the Apple TV+ bundle subscribers. These are the customers that buy an eligible hardware device and redeem the offer for a three-year of TV+ services. We deferred revenue for this offer, based on three items, the first one is the value of the service that is being provided, the one year of Apple TV+. The second one is the number of customers that are eligible for the offer. And the third one is our estimate of the expected number of customers that will redeem the offer. So, you need to keep in mind that from our total eligible device sales, you need to make a number of reductions for family sharing, for multiple device purchases and for geographic availability. Also, the take rate can also be impacted by the availability of local content, and we also require a payment method on file. So, this estimate is reviewed quarterly and gets updated based on actual trends of the offer. So, these inputs provide us with the amount of revenue that we deferred for each device sale that then gets recognized over the one-year period that the TV plus service has provided. So, when you take the combination of paid subscribers and bundled subscribers, you get the Apple TV+ revenue. Of course because we’ve launched the service very recently, the amount of revenue that we recognized during the quarter, was immaterial to our results. With regard to the cost of developing the content, we -- essentially as we incur these costs, we put them on the balance sheet and then we amortize over a certain period of time depending on the type of content that we produce." }, { "speaker": "Tejas Gala", "text": "Thanks, Wamsi. Can we have the next question, please?" }, { "speaker": "Operator", "text": "We’ll hear from Cowen and Company's Krish Sankar." }, { "speaker": "Krish Sankar", "text": "I had two questions. First one, Tim, I just wanted to pick your brain a little bit on the overall smartphone market. There is a general view that when 5G phones come out they’re going to be more expensive due to higher component costs, but at the same time, it looks like you guys have proven that there is a market for low cost geographies to phones like iPhone SE. So, how do you see these two different segments within the smart phone market evolving over the next one to three years? And then, I had a follow-up for Luca." }, { "speaker": "Tim Cook", "text": "Again, I’m going to stay away from commenting about future products. But, generally, I think it’s important when you think about 5G is to look around the world at the different deployment schedules. And some of those look very different perhaps than what you might be seen here. And so, that’s very important. In terms of the price, I wouldn’t want to comment on the price of handsets that aren’t announced." }, { "speaker": "Krish Sankar", "text": "And then, a follow-up for Luca. OpEx as a percentage of sales for March looks like e about 15% higher than in your prior quarters. Kind of curious how much of that is -- part of it is driven by some of your Intel modem asset purchases or TV+ in the OpEx or how do we think about it on a go forward basis?" }, { "speaker": "Luca Maestri", "text": "Yes. I think we felt good about our OpEx results, because they were at the low end of our guidance range. But clearly, we want to make all the necessary investments in the business. And in terms of the new services, not only for TV+ but all the new services that we launched during 2019, this is period where we’re making the necessary investments in advertising and marketing, and that level of investment is reflected in our OpEx results. And also, as you correctly stated, we completed the acquisition of the Intel baseband business unit in December quarter. And so, we had -- we reflected the run rate of the expenses related to that business, partially during the quarter, after the completion of the transaction. And that is a very important core technology for the Company. So, we will continue to make all the necessary investments also there. There is a third category of expenses that affected the December quarter, and it’s a fact that our revenue was very strong, and we have certain valuable expenses. For example, credit card fees that are associated with the higher volume and of course impacted our OpEx results." }, { "speaker": "Tejas Gala", "text": "Thanks, Krish. Can we have the next question, please?" }, { "speaker": "Operator", "text": "That will be from Mike Olson with Piper Sandler." }, { "speaker": "Mike Olson", "text": "Good afternoon. Thanks for taking the questions. So, slightly different take on an earlier question on Wearables, and that is, what impact you think Wearables is driving people into the Apple ecosystem? You mentioned 75% watch buyers are new to the Apple Watch, but are many of them new to Apple overall? I'm sure a lot of existing iPhone, iPads or Mac users are going to Wearables customers, but do you think Wearables bring people into the ecosystem to buy other devices in a material way?" }, { "speaker": "Tim Cook", "text": "I think that -- Mike, it’s Tim. With each Apple product that a customer buys, I think, they get tighter into the ecosystem because they like -- that's the reason that they're buying into it, is they like the experience, the customer experience. And so from that point of view, I think each of our products can drive another product. I would think, in that case it’s more likely that the iPhone comes first, but there's no doubt in my mind that there's some people that came into the ecosystem for the Watch." }, { "speaker": "Mike Olson", "text": "Okay. And then, I think you recently mentioned that augmented reality will pervade our entire lives. And I'm wondering if you could share your thoughts about how you think it starts to impact our lives most significantly. For example, will the inflection point in AR come from gaming or industrial usage or some other category? In other words, where will the average person kind of first feel that impact of AR on their lives in a significant way? Thanks." }, { "speaker": "Tim Cook", "text": "I think, when you look at AR today, you would see that there are consumer applications, there are enterprise applications. This is the reason I'm so excited about it is, you rarely have a new technology where business and consumer are both see it as key to them. And so, I think, the answer is --- that's the reason, I think it’s going to pervade your lives is because it’s going to go across business and your home life. I think, these things will happen in parallel. There are already companies that are deep into enterprise business that are working on applications for the enterprise. And of course you can see -- you go on to store, see thousands of apps that are AR kit enabled at this time and would even more coming." }, { "speaker": "Tejas Gala", "text": "Thank you, Mike. Can we have the next question, please?" }, { "speaker": "Operator", "text": "That will come from Raymond James, Chris Caso." }, { "speaker": "Chris Caso", "text": "Yes. Thank you. Good afternoon. I guess, the first question is on gross margins. And you spoke about the favorable mix. Wondering if you could expand on that a little bit. And clearly, iPhone is doing well within the overall mix that growing year-on-year. But, if you could talk about what's happening to the mix within iPhone, is that improving as well and also helping margins? And is there anything else you would point to with regard to the overall mix in margins?" }, { "speaker": "Luca Maestri", "text": "Yes. And I think that the mix helped us both in Q1 and it’s helping us with the guidance for Q2. And as you said, some of it is mix of iPhones. The customer response for iPhone 11, 11 Pro and 11 Pro Max is being exceptional. And that clearly has helped our mix. iPhone 11 was our top selling model throughout the quarter, every single week of the quarter. And so certainly, better mix within iPhone. The other point that I would like to point out is that as we move from Q1 to Q2, the proportion of revenue coming from services increases versus the holiday quarter. And given that fact that services are accretive to gross margin for the Company, we end up getting a better mix from services as well." }, { "speaker": "Chris Caso", "text": "Okay. Thank you. And I guess, follow-on question with regard to OpEx. And it has been growing at a faster rate than revenue for I guess largely over the last three years or so. Can you set us some expectation with regard to when you get a return on that investment? I understand there are new investments that are happening now. But, how should we think about potential leverage going forward? Is there a point in time where the OpEx spending tend to level off and you get some return on that or is it just the function of a faster revenue growth in future?" }, { "speaker": "Luca Maestri", "text": "Well, I would start by saying that our expense to revenue ratio is incredibly competitive relative to other companies in our sector. There are years when our OpEx grows faster than our revenue but we also had years in the recent past where the opposite has happened. We continue to believe that we have a lot of great opportunities in front of us. And just if you look this past year, we launched many new initiatives, for example, on the services front, which we want to support with the appropriate level of investment, and not only marketing and advertising but also in R&D. As I mentioned earlier, we closed the acquisition of the Intel baseband business because we think it’s a very important strategic core technology for the Company going forward. And I think from the results that you’ve seen during this quarter and the guidance that we provided for the March quarter, I think we’re doing a pretty good job of balancing the level of investments that we’re making on the expense front, with the level of returns that we get both in terms of revenue and in terms of profitability that we’re getting. Our net income for example was up 11% during the December quarter." }, { "speaker": "Tejas Gala", "text": "Thank you. Can we have the next question, please?" }, { "speaker": "Operator", "text": "That will come from Samik Chatterjee with JP Morgan." }, { "speaker": "Samik Chatterjee", "text": "I just wanted to kind of ask on the iPhone revenue growth, definitely good to see return to growth. Based on the velocity and momentum you’re seeing for the products exiting the quarter, how comfortable are you feeling about sustaining growth in iPhone revenues through year? And I have a follow-up." }, { "speaker": "Tim Cook", "text": "We have a practice of forecasting the current quarter. And so, we’ve given you the range that we expect for the current quarter and really don't give a range beyond that." }, { "speaker": "Samik Chatterjee", "text": "Okay. So, if I can just maybe then follow up in terms of -- obviously, you’ve returned to growth in most of the regions you report. One of the regions that are declining is Japan. So, if you can share your thoughts on what actions you need to take there to return that segment and that geography to grow? And what are the product trends there and what's probably the headwind that's kind of limiting growth there?" }, { "speaker": "Luca Maestri", "text": "Yes. So, Japan was down 10% during the December quarter. It was primarily due to iPhone performance, which was challenged because there were some regulatory changes that took effect on the 1st of October where essentially the regulators decoupled the mobile phone pricing from the two-year contract and are capping the maximum amount of carrier discounts that can be made. At the same time, I would say, within a more difficult macro environment, iPhone did incredibly well during the quarter, six of the top seven selling smart models in Japan during the December quarter were iPhones. So, it was very strong performance by iPhone in a difficult environment. Also, in Japan, we had very strong double-digit growth from services, stronger than Company average; and very strong double-digit growth in Wearables, also stronger than Company average. So, we feel very good. Japan is a country where historically we’ve had great success. The customers are very loyal and very engaged and we have very strong position there, we feel we have a very good momentum." }, { "speaker": "Tejas Gala", "text": "Thank you, Samik. A replay of today's call will be available for two weeks on Apple Podcasts, as a webcast on apple.com/investor, and via telephone. The numbers for the telephone replay are 888-203-1112, or 719-457-0820. Please enter confirmation code 682-6206. These replays will be available by approximately 5:00 pm Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at 408-974-2414. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us." }, { "speaker": "Operator", "text": "Again, that will conclude today's conference. Thank you all for your participation." } ]	Apple Inc.	24,937
AAPL	4	2,021	2021-10-28 17:00:00	Operator: Good day, and welcome to the Apple Q4 Fiscal Year 2021 Earnings Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please go ahead. Tejas Gala: Thank you. Good afternoon, and thank you for joining us. Speaking today first is Apple’s CEO, Tim Cook; and he’ll be followed by CFO, Luca Maestri. After that, we’ll open the call to questions from analysts. Please note that some of the information you’ll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the Company’s business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple’s most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. I’d like to now turn the call over to Tim for introductory remarks. Tim Cook: Thanks, Tejas, and good afternoon, everyone, and thank you for joining the call today. A year ago, I spoke to you about the atmosphere of uncertainty in which we were living and the way it had come to define our daily experience, both as people and as a company. Today, much has changed, profoundly so. And while we are still living through unprecedented times, we are encouraged by progress around the world. I’m grateful to our teams who have stayed resolutely focused on our customers and the pursuit of innovation on their behalf. We’ve aimed to help our customers navigate the world as it is while empowering them to create the world as it can be. Whether it’s public health workers managing vaccination campaigns on iPhone or students returning to classrooms full of iPads or family staying connected over FaceTime, it is an honor to know that what we make matters and to see that reflected in the world and in our performance. This fiscal year, we reported $366 billion of revenue, which represents 33% annual growth. We also achieved more than 20% growth across all of our product categories and in every geographic segment. And today, Apple is reporting another very strong quarter. Demand was very robust, and we set a new September quarter record of $83.4 billion, up 29% from last year and in line with what we discussed on our last call, despite larger-than-expected supply constraints. We estimate these constraints had around a $6 billion revenue dollar impact, driven primarily by industry-wide silicon shortages and COVID-related manufacturing disruptions. Even so, we set an all-time record for Mac and quarterly records for iPhone, iPad, Wearables, Home and Accessories, representing 30% year-over-year growth in products. Our services business performed better than we expected, where we hit an all-time record of $18.3 billion and grew 26% year-over-year. And we set quarterly records in every geographic segment with strong double-digit growth across the board. During fiscal 2021, we earned nearly one-third of our revenue from emerging markets and doubled our business in India and Vietnam. We are optimistic about the future, especially as we see strong demand for our new products. At the end of the September quarter, we introduced our iPhone 13 lineup as well as the Apple Watch Series 7, iPad and iPad mini, all of which represents significant advances. The iPhone 13 and iPhone 13 mini, alongside the iPhone 13 Pro and Pro Max, are setting a new standard with their superfast performance, advanced camera systems, longer battery life and brilliant Super Retina displays. Customers are loving the ninth generation iPad, which features a beautifully sharp display and twice the storage of the previous generation, as well as the new iPad mini, with its ultra portable design and impressive speed and performance. And we’ve been thrilled with the reviews that Apple Watch Series 7 has earned for its larger display, faster charging and refined design. And just last week, we introduced the completely reimagined MacBook Pro powered by the extraordinary M1 PRO and M1 Max chips. These are our most powerful notebooks ever with game-changing performance and battery life, and the world’s best notebook display. We think customers are going to love MacBook Pro, whether they’re editing video in Final Cut Pro or making music in Logic Pro and so much more. They’ll be able to do things never before possible on a notebook. We also announced our all-new AirPods that feature spatial audio and industry-leading sound, longer battery life and an all-new design. For the home, we added three new colors to our HomePod mini lineup, which offers seamless integration across Apple’s products and services. We also announced a new subscription tier to Apple Music called Apple Music Voice, which offers subscribers access to the services catalog of 90 million songs all through the power of Siri. Across the board, teams at Apple continue to drive unmatched innovation through the seamlessly integrated hardware, software experience we’ve long prided ourselves on. iOS 15 and iPadOS 15 have created more ways than ever to stay productive, whether choosing Focus to avoid distractions or Quick Note to capture a thought. macOS Monterey offers new ways to connect with friends and family, get more done and work fluidly across Apple devices. And watchOS 8 has made Apple Watch even more powerful and more ways than ever to stay active and to track your health on the go. We’ve never had a more diverse range of services for our customers to choose from, and we’ve been very encouraged by our performance, which reflects growing customer enthusiasm and satisfaction. In just its first two years, Apple TV+ has already proved itself to fans around the world. And I want to congratulate the incredible actors, writers, storytellers, producers and everyone else whose behind-the-scenes work has made that success possible. This quarter, Apple TV+ won 11 Emmys, including the Award for Outstanding Comedy Series for Ted Lasso. That show has continued to bring light and laughter to fans all over the world with its boundless optimism and beloved cast of characters. We couldn’t be more proud of our entire lineup of content from the gripping second seasons of The Morning Show and Truth Be Told to our newest programs, Swagger, which is out tomorrow. The response has been incredible. This quarter also saw major updates to Fitness+, including the addition of new activities like meditation and pilates, and the announcement of group workouts, a feature that brings fitness and friends together. We also shared that Fitness+ will soon be available in 15 new countries, bringing workouts for every age and skill level to millions more people around the world. And those are just two of the services our customers are loving. This quarter, Apple Card won a J.D. Power award for customer satisfaction in its very first year of eligibility. The App Store continues to help people find the apps they depend on to stay productive, creative and entertained. And on Apple News, we launched a News Partner Program that expands Apple’s support for journalism while creating an even better business opportunity for publishers. As we continue to support our customers around the world, we’re glad to report we’ve opened several new Apple Stores. This quarter, we opened a beautiful store in Changsha, which is our first store in the Hunan province of China. We also just opened our third store in Istanbul. And we recently added a store in the Bronx, which means we are now in all 5 boroughs of New York City. All of our stores are now open worldwide and have been for 7 weeks. As we enter our busiest time of year, I particularly want to share my gratitude for our retail teams. Customers have never relied on our products more, and our retail teams have truly answered the call. We meet our customers where they are with many ways to shop through our online and retail stores and can help them choose the best product for them and get it up and running. We are also excited about our education initiatives. This month, we introduced the Everyone Can Code Early Learners program, offering free resources, which helps students and elementary school learn coding. We see education not only as a fundamental good in its own right but is a great equalizing force. A world where all people can access a quality education isn’t just a smarter world. It’s a more equitable one. That desire to create a more just an equitable world is the guiding principle behind our Racial Equity and Justice Initiative. This quarter, Apple shared plans to expand our $100 million investment by an additional $30 million. Those funds will be used in a number of ways, including the creation of a new global Hispanic-serving institution equity and innovation hub. The hub will dramatically expand the technology and resources for students in the STEM fields. Those programs join our ever-expanding work with historically black colleges and universities, including the now 45 community coding centers and regional hubs, serving underrepresented communities across the United States. This month, we were also happy to welcome the inaugural class of developers and entrepreneurs to the Apple Developer Academy in Detroit. The academy is Apple’s first in the United States and is designed to help prepare students for jobs in the thriving iOS app economy, which supports more than 2.1 million jobs across all 50 states. In August, we shared our impact accelerators first cohort of black, Latinx and indigenous-owned businesses whose pioneering work in green technology and clean energy serves many of the communities most impacted by climate change. More broadly, we are already carbon-neutral as a company. And this quarter, we made new strides towards reaching our goal of carbon neutrality across our entire supply chain and the life cycle of our devices by 2030. We’ve made significant product advances in this area. iPad and iPad mini now come with 100% recycled aluminum enclosure. The antenna on iPhone 13 is made up of upcycled plastic water bottles, which marks an industry-first. And as our customers are seeing when they purchase iPhone 13, we’ve redesigned the packaging to eliminate that outer plastic wrap, which will allow us to avoid using 600 metric tons of plastic. This brings us closer to removing all plastic in our packaging by 2025. We’ve also made good progress toward our goal to one day make our products without taking anything from the earth. With Apple Watch Series 7, for example, 99% of the rare earth elements we use are recycled. Ahead of COP26, I’m also pleased to report that we have more than doubled the number of our suppliers who have committed to becoming carbon neutral by 2030. We’re very encouraged to see the growth in this area, and we will continue to drive those changes in the supply chain in the months and years to come. We’ve never viewed our environmental work as a side project. Teams across Apple are pushing this work forward in the same spirit of innovation we bring to our products and services. We are determined to be a ripple in the pond that drives a far greater change. From the pandemic to climate change to an equity and injustice, global challenges won’t abide solitary solutions, and we feel a deep sense of responsibility to help. We are incredibly proud of the product lineup we have going into the holiday season, and we are encouraged by the customer response we’ve seen. And while we cannot know exactly which path the pandemic will take the world down in the months to come, we feel quite confident that this new year will be driven by the values that guide us and by the innovation that defines us. With that, I’ll hand it over to Luca for a deeper dive on our performance this quarter. Luca? Luca Maestri: Thank you, Tim. Good afternoon, everyone. We are pleased to report very strong financial results for the September quarter, capping a record-setting fiscal year 2021. We set a September quarter revenue record of $83.4 billion, an increase of nearly $19 billion or 29% from a year ago, despite larger-than-expected supply constraints. We also reached new Q4 records in every geographic segment with strong double-digit growth in each one of them. And it was a record September quarter for both, products and services. On the product side, revenue was $65.1 billion, up 30% over a year ago as we experienced better-than-expected demand for our products, despite supply constraints that we estimated at around $6 billion. We grew in each of our product categories with an all-time record for Mac and September quarter records for iPhone, for iPad and for Wearables, Home and Accessories. This level of sales performance, combined with the unmatched loyalty of our customers and the strength of our ecosystem, drove our installed base of active devices to a new all-time record. Our services set an all-time revenue record of $18.3 billion, up 26% over a year ago, with September quarter records in every geographic segment and in every services category. Company gross margin was 42.2%, down 110 basis points from last quarter, due to higher costs and a different mix of products, partially offset by leverage. Products gross margin was 34.3%, down 170 basis points sequentially as higher cost structures were partially offset by leverage and mix. Services gross margin was 70.5%, up 70 basis points sequentially, mainly due to a different mix. Net income of $20.6 billion and diluted earnings per share of $1.24, both grew over 60% year-over-year and were September quarter records. Let me get into more detail for each of our revenue categories. iPhone revenue grew 47% year-over-year and set a September quarter record of $38.9 billion, despite supply constraints as customer demand was very strong. The iPhone 12 family continued to perform very well, and we are seeing enthusiastic customer response to the launch of our iPhone 13 family. We also grew double digits in each geographic segment, setting September quarter records in both, developed and emerging markets. The latest survey of U.S. consumers from 451 Research indicates iPhone customer satisfaction of 98% for iPhone, and our active installed base of iPhones reached a new all-time high. For Mac, we set an all-time revenue record of $9.2 billion, despite supply constraints, driven by strong demand for our M1-powered MacBook Air. In fact, our last five quarters for Mac have been the best five quarters ever for the category. iPad performance was also strong with a September quarter revenue record of $8.3 billion, up 21%, in spite of significant supply constraints as customer demand for the iPad Pro also powered by M1 was very strong. For both, Mac and iPad, we continue to see a combination of high levels of customer satisfaction and first-time buyers. Around half of the customers purchasing Mac and iPad during the quarter were new to that product. And in the most recent surveys of U.S. consumers from 451 Research, customer satisfaction was 97% for both, Mac and iPad. Our continued investment in iPad and Mac is taking computing to the next level. We have redesigned and reengineered both products to provide customers an unmatched experience, which resulted in record fiscal years for both categories. We are carrying this momentum also in the enterprise market. For example, SAP has already deployed Macs to tens of thousands of their employees to date. Following the launch of our new M1 MacBook Pro last week, SAP is planning to add it to the growing list of M1 Mac offerings available to their global workforce. Another example is France’s national railway company, SNCF, which equips all train drivers with iPads to manage their entire daily workflow and train operations, helping to lower energy and maintenance costs. In fact, the iPads have been so well received that 90% of the drivers choose to purchase them for personal use at the end of the corporate device refresh cycle. Next, Wearables, Home and Accessories set a new September quarter record of $8.8 billion. We continue to improve and expand our product offerings in this category, which we believe improve the overall customer experience and showcase the integration between our products and services. Apple Watch, AirPods and HomePod mini are powerful devices in their own right, but paired with our other products, software and services, they create unique experiences, like switching audio seamlessly between devices on your AirPods. Turning to services. As I mentioned, we reached an all-time revenue record of $18.3 billion with all-time records for cloud services, music, video, advertising, AppleCare and payment services and a September quarter record for the App Store. Our continued investment and strong execution in services has helped us deliver a record $68 billion in revenue during fiscal 2021, nearly tripling this category in six years. These impressive results reflect the positive momentum we are seeing on many fronts. First, our installed base continues to grow and reached an all-time high across each geographic segment. Next, we continue to see increased customer engagement with our services. The number of paid accounts on our digital content stores grew double digits and reached a new all-time high during the September quarter in each geographic segment. Also, paid subscriptions continued to show very strong growth. We now have more than 745 million paid subscriptions across the services on our platform, which is up more than 160 million from last year and nearly 5 times the number of paid subscriptions we had less than five years ago. And finally, as Tim mentioned earlier, we’re adding new services that we think our customers will love. And we continue to improve the breadth and quality of our current services offerings. Fiscal ‘21 was not only a big year for services but for our entire company. During the past 12 months, we grew our business by 33% or $91 billion, reaching nearly $366 billion of revenue with record level performance across the board. Every product category and every geographic segment set a new annual revenue record and was up at least 20% over fiscal 2020. Let me now turn to our cash position. We ended the quarter with $191 billion in cash plus marketable securities. We issued $6.5 billion of new term debt, retired $1.3 billion of term debt and decreased commercial paper by $2 billion, leaving us with total debt of $125 billion. As a result, net cash was $66 billion at the end of the quarter as we continue to make progress towards our goal of net cash neutral over time. As our business continues to generate very strong cash flow, we were also able to return $24 billion to shareholders during the September quarter. This included $3.6 billion in dividends and equivalents and $20 billion through open market repurchases of 137 million Apple shares. We also retired an additional 5 million shares in the final settlement of our 17th ASR. As we move ahead into the December quarter, I’d like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we are not providing revenue guidance but we are sharing some directional insights based on the assumption that the COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter. As we mentioned earlier, during the September quarter, supply constraints impacted our revenue by around $6 billion. We estimate the impact from supply constraints will be larger during the December quarter. Despite this challenge, we are seeing high demands for our products and expect to achieve very solid year-over-year revenue growth and to set a new revenue record during the December quarter. We expect revenue for each product category to grow on a year-over-year basis, except for iPad, which we expect to decline year-over-year due to supply constraints. For services, we expect our growth rate to decelerate from the September quarter but to remain strong. We expect gross margin to be between 41.5% and 42.5%. We expect OpEx to be between $12.4 billion and $12.6 billion. We expect OI&E to be around negative $50 million, excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividend of $0.22 per share of common stock payable on November 11, 2021, to shareholders of record as of November 8, 2021. With that, let’s open the call to questions. Tejas Gala: Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please? Operator: Thank you. Our first question comes from Shannon Cross from Cross Research. Shannon Cross: Thank you very much. Tim, I’m wondering, can you talk a bit more about specific supply chain issues you saw and how you’ve seen improvements I think during the current quarter, and how we should think about what products do you expect to see most impacted going forward? Just any more color you can give us on what’s going on out there because clearly, this is hitting everyone. Tim Cook: Sure. If you look at Q4 for a moment, we had about $6 billion in supply constraints, and it affected the iPhone, the iPad and the Mac. We had -- there were two causes of them for Q4. One was the chip shortages that you’ve heard a lot about from many different companies through the industry. And the second was COVID-related manufacturing disruptions in Southeast Asia. The second of those, the COVID disruptions, have improved materially across October to where we currently are. And so, for this quarter, we think that the primary cause of supply-chain-related shortages will be the chip shortage. It will affect -- it is affecting, I should say, pretty much most of our products currently and -- but from a demand point of view, demand is very robust. And so, part of this is the demand also is very strong. But we believe that by the time we finish the quarter that the constraints will be larger than the $6 billion that we experienced in Q4. Shannon Cross: Okay, great. So, you’ll sort of push forward in the next quarter as well. Can you -- just a different question because I’m curious, you’re starting to sell more and more things on a ratable basis. And how are you thinking about that? I mean, you have the new Macs and that we keep seeing. You can buy for a monthly charge in that. How do you think that’s driving sales? And how should we think about percent maybe of the portfolio that’s now available? And I don’t know if you want to tell us how much revenue is now under a recurring nature, but it definitely seems as you’re shifting more and more to maybe sort of a bundled sale or offering from a consumer standpoint where you just pay one price every month and you get all of your Apple devices and Apple services. Thank you. Tim Cook: Yes. The first product, Shannon, that really sold on a monthly basis was iPhone. And that began to happen in the U.S., as an example, shortly after the subsidy kind of world changed markedly. And so, I would say that predominantly, the mode of buying an iPhone in the United States is on a monthly kind of plan today. For the balance of the products, still the most popular would be buying them outright. But, we are seeing more and more demand for monthly payments. And so, we want to give the customer what they want. And so, you will see us do more and more things like that that will meet the customer where -- and provide the price that they want -- in a way that they want to pay for it. I don’t know the percentage of products that are sold that way today, but it is increasing. Operator: We will hear next from Amit Daryanani with Evercore. Amit Daryanani: Perfect. Thanks a lot, and good afternoon, everyone. I have two as well. I guess, when I think about the supply chain headwinds, and you’re talking about $6 billion in September, getting bigger in December. Tim, I would love to understand how do you guys comfort that this is really a demand that’s getting deferred versus potentially getting destroyed at least somewhere else. And if you think about the supply chain bottlenecks -- you were the COO. You managed a lot of the stuff. Do you feel comfortable that sort of peaks in December and alleviates it from there, or what does the trajectory look like for improvement? Tim Cook: Yes. What I feel comfortable on is I feel like we’ve made great progress on the COVID-related disruptions, and that happened across the month of October, and we’re in a materially better position today. It is difficult to predict COVID. And so, I’m not going to predict where it goes. But I can just tell you that as of today, we’re in a materially better position than we were in September and in the first several weeks of October. In terms of the chip shortage, the chip shortage is happening on legacy nodes. Primarily, we buy leading edge nodes, and we’re not having issues on leading edge nodes. But on legacy nodes, we compete with many different companies for supply. And it’s difficult to forecast when those things will balance because you’d have to know how kind of -- how the economy is going to be in ‘22 and the accuracy of everyone else’s demand projections. And so, I don’t feel comfortable in making a prediction. I think, it would be subject to too much inaccuracy. But, I do feel very comfortable with our operational team. I think, we’ve got a world-class one. And I’m sure they’re doing everything they can do to collapse cycle times and improve yields and do all the things that you can do in addition to fundamental capacity investment to remedy the situation. Amit Daryanani: Got it. And then, Luca, if I may ask you a question on gross margins for December, you’re essentially guiding gross margins to be flat to maybe down a little bit versus sort of September. Maybe just touch about it. So, I think historically, I would have expected gross margins to be up in December, given how much revenue leverage you end up with. So maybe, what are the puts and takes on gross margins that are resulting in a more flattish guide versus historical seasonality? Luca Maestri: Well, as you know, typically, obviously with December being the holiday season, we do get leverage, as you say. But, it’s also the period of the year where we launch a lot of new products. And as you know, we launch essentially in every product category. We launch new products. Demand is very strong. But as you know, when we launch these new products, we tend to have higher cost structures at the beginning of the cycle. And so, that’s what balances this out. Obviously, from a year-over-year standpoint, it’s actually a significant expansion, right? Because when you look at what we did a year ago in the December quarter, 39.8%, this clearly indicates a significant expansion. Operator: We’ll hear next from Katy Huberty with Morgan Stanley. Katy Huberty: Thank you. Given the supply chain is blurring the demand picture for iPhone 13, what data points can you share that help investors understand whether demand is tracking to a product cycle that is flat, growing or down from the very strong iPhone 12? And maybe on that front, Luca, you can also comment on where you exited the quarter from a channel inventory standpoint for iPhone relative to a normal product cycle? And then, I’ve got a follow-up. Tim Cook: Yes. Look, maybe I can take both of those. Channel inventory, as you would expect in a constrained environment, the iPhone channel inventory ended below the targeted range and is currently below it. And so, that’s that. In terms of the blurring of demand, we look at -- Katy, we look at a number of different data points. We look at demand across our online store, demand in retail. We look through to back orders on the carrier channels, the ones that do take back orders there. We look at channel orders as well. And so, we have a number of different data points that we use to conclude how strong demand is. And we feel very, very good about where demand is right now. And we’re working feverishly on the supply side of that. Katy Huberty: And Tim, as a follow-up. We recently surveyed 4,000 consumers in the U.S. and China, and the feedback is most of them don’t want to pay for apps or services direct with the developer. They value the security, privacy, ease of transactions with the App Store. So, how do you think about balancing the regulators push for more choice with a customer base that’s happy with the existing experience? And just as a follow-on to that, how are you and Luca thinking about the potential impact of services revenue growth rate as some of the changes to the App Store go into effect? Tim Cook: Katy, the main thing that we’re focused on, on the App Store is to keep our focus on privacy and security. And so, these are the two major tenets that have produced over the years a very trusted environment where consumers and developers come together and consumers can trust the developers on the developers and the apps or what they say they are and the developers get a huge audience to sell their software to. And so, that’s sort of number one on our list. Everything else is a distant second. And so, what we’re doing is working to explain the decisions that we’ve made that are key to keeping the privacy and security there, which is to not have sideloading and not have alternate ways on the iPhone, where it opens up the iPhone to unreviewed apps and also get by the privacy restrictions that we put on the App Store. And so, we’re very, very focused in discussing the privacy and security elements of the App Store with the regulators and legislators. Operator: We’ll take our next question from David Vogt with UBS. David Vogt: Great. Thank you, guys. And I just have two quick questions, one big picture, theoretical. So, you covered the supply chain in pretty extensive detail on the call. But maybe just a bigger picture on how you’re thinking about it philosophically given what you just sort of went through over the last 12 to 8 months. So, what I mean by that, is there sort of a recalibration needed or an adjustment around your supply chain philosophy either from a partner perspective or maybe a regional perspective? And how do you think about the current infrastructure and its ability to sort of rebound and sort of handle sort of these disruptions that seem to crop up from time to time? And then, I have a follow-up. Tim Cook: Yes. I don’t see a fundamental error that we’ve made, if that’s what you’re picking out, in terms of creating the environment that we’re in. It was created for a number of reasons. The pandemic came along. Some people in the industry and some people outside the industry thought that the pandemic would reduce demand. They pulled their orders down. Things reset. And what really happened was demand went up and went up even more than a straight trend would predict. And so, the industry is working through that now. I’m making it little overly simplistic. There’s some other things like yields and things like that that are happening as well. But, those things are mainly manageable in the course of time. And so, what we’re doing is working with our partners on making sure that they have supply that we need and making sure that our demand statements are accurate as we see them and so forth. And at the same time, we are reducing our lead times and cycle times, so that when you get a chip off a fab that as quickly as possible, it’s in a product and shipping and also helping the fab partners increase their yields. And so, those things are things that we’re doing. We also support the CHIPS Act and investment there to put more investment in the ground. And so, we’re spending some time advocating for the CHIPS Act as well. David Vogt: Great. And that’s helpful. And I didn’t mean to implicate that you guys had messed up, just maybe came off that way. And maybe just as a quick follow-up. When you think about purchasing devices ratably, you touched on that earlier. But maybe can you just touch on the partnerships that you have with carriers and the support that they have given you over the last couple of years. Now, it’s been a key component of your success, the tight relationships that you have globally. Do you think sort of this business model, as it’s currently sort of put together globally, is sort of a permanent structure, meaning carriers are going to be integral part of driving demand for iPhones, or is there a sense that maybe it’s a little bit more transitory depending on the part of the cycle that we’re in? Tim Cook: I think that 5G has provided a once in a decade kind of upgrade potential, and it’s a multiyear kind of thing. It’s not a one year and done. And I think that we’re motivated there. The carrier is motivated there. We have mutual interest and the customer benefits hugely from getting a new 5G phone that has 5G and a number of other features in it, too. And so, I think everybody is aligned on purpose. The model that you paint is -- I wouldn’t call it a global model because there are different variations around the world depending upon the country. But, in general, I think that the marriage, if you will, or partnership between Apple and the carrier channel has never been stronger and that it’s on very solid footing. Operator: So, we’ll take our next question from Krish Sankar with Cowen and Company. Krish Sankar: I had two of them, too. And Tim, I will give you a reprieve from the supply chain questions. I had two on services. The first one is on your new ATT, the ad tracking transparency feature, and all the headlines that have gone recently, I’m kind of curious. The feedback you’ve seen or received from your advertisers and users and how it has also impacted search ads your own ad business. Can you let us know the feedback? And then, I have a follow-up. Tim Cook: The feedback from customers is overwhelmingly positive. Customers appreciate having the option of whether they want to be tracked or not. And so, there’s an outpouring of customer satisfaction there on the customer side. And the reason that we did this is that -- as you know, if you followed us for a while, we believe strongly that privacy is a basic human right and we believe that for decades, not just in the last year or so. And we’ve historically rolled out more and more features over time for -- to place the decision of whether to share data and what data to share in the hands of the user where we believe that it belongs. We don’t think that’s Apple’s role to decide, and we don’t think that’s another company’s role to decide but rather the individual who owns the data itself. And so, that’s our motivation there. There’s no other motivation. Krish Sankar: Got it. Got it, Tim. And that’s a very fair characterization. Thank you for that. And then, as a quick follow-up, I’m just kind of curious, on the mobile gaming in your App Store, there have been some recent actions by certain governments to limit game time. Kind of curious how that affects your App Store business in those geographies. And is there a way you can quantify that, or is it too immaterial at this point? Tim Cook: You mean limiting the time on games. Is that what you’re getting at? Krish Sankar: Yes, exactly. Like you’re trying to decide to limit game time and things like that. Tim Cook: It’s very difficult to measure. Yes, with the policy that you’re talking about for those people that don’t know is there’s a policy to restrict kids below a certain age to -- I think it’s one hour on Friday, Saturday, Sunday each. And it’s very difficult to see the impact of it on the App Store at this point. Operator: We’ll take our next question from Samik Chatterjee with JP Morgan. Samik Chatterjee: I guess, Tim, I wanted to first start off on your comment about strong demand across products. And just specific to iPhone 13, if you can give us a bit more insight about what are you seeing in terms of intent, in terms of either upgrades from the installed base or even switchers rate too, if you can compare to iPhone 12 because some of the feedback we are getting is, for example, like strong switching activity in China. So just wondering if you can get a bit more granular there in terms of the -- what’s driving the demand and who is it coming from. And then, I have a follow-up, please. Tim Cook: It’s so early to talk about iPhone 13 because it’s only been on the market for less than 30 days now. What I can tell you is going into the cycle, if you look at our results from last quarter, we grew on upgraders and switchers in the double digits. And so, both were very meaningful for the iPhone results last quarter. And so, there’s significant momentum in iPhone. And I would clearly characterize the demand that we’re seeing currently as robust, as you can tell from the -- some of the quotes that we’re quoting on the online store. Samik Chatterjee: Okay. And as a follow-up, I guess, back to the supply chain but I wanted to just ask more relative to cost implications there. And what we’re hearing is not only delays but also component cost going up. So, as we look through -- as I think about this upcoming cycle, how are you looking to manage component cost related headwinds? And is that something you’re seeing coming through the supply chain? Thank you. Tim Cook: We’ve put our current thoughts in the gross margin guidance that we gave you, the 41.5% to 42.5%. I would tell you that we are seeing a significant increase in freight costs. And I would assume that that is pretty consistent across different companies. And so, we’re clearly seeing some inflation there. Operator: We’ll take our next question from Jim Suva with Citigroup. Jim Suva: Thank you. And I’ll ask both my questions at the same time. Probably the first one is for Tim. On the services revenue, much better than expected. Can you give us some details about what drove that? Was it Apple Stores more open, so more AppleCare or more Apple One or Arcade or TV or Fitness? And then, probably for Luca on supply chain, when you mentioned supply chain headwind is going to get worse and you mentioned $6 billion this quarter, there’s two ways to think about your terminology of worse. Is it the delta from $2 billion that you identified three months ago that went to $6 billion, so therefore, the delta of $4 billion gets worse, or are you just saying -- and therefore, it’s above $10 billion for December quarter. Are you just saying it just gets higher than the $6 billion that you just identified earlier in the call? Tim Cook: Jim, I’m going to take the second question that you asked, and Luca could take the first one on services, just in the reverse of the way you coined it. On the supply constraints, what we’re saying is that the amount of -- the nominal amount of supply constraints for Q1, we estimate to be larger than $6 billion. And so, it’s important to know that we’re getting a lot more supply in Q1 than we had in Q4, obviously, because our sequential growth is significant. And we have very solid growth year-over-year. And so, the amount of supply is growing dramatically. It’s just that the demand is so robust that we envision having supply constraints for the quarter. Luca Maestri: And Jim, on services, the 26% growth rate that we had was better than what we were expecting at the beginning of the quarter. And it was really across the board. It’s difficult to single out a specific area because we set all-time records on cloud. We set all-time records across the board, AppleCare, Music, video, advertising, payment services, the App Store was a September quarter, right? So, it was strong across the board. When we look at the services business, we always think about some fundamental factors that allow us to have good visibility over the sustainability of the business, right? The fact that the installed base continues to grow, that’s obviously a positive. The fact that the number of people that are actually paying on the platform continues to grow double digits. And so, that obviously increases our opportunity. The number of subscriptions that we have on the platform, we mentioned during the call, 745 million paid subs right now. It’s an increase of 160 million versus just 12 months ago, right? And obviously, the fact that we continue to launch new services, new offerings within the services that we already have, new features, that obviously gives us a lot of momentum going forward. We’re very fortunate we have a very -- now it’s a very large business, $68 billion in the last 12 months and very diversified. We sell a lot of different services and our customers seem to really enjoy the experience that they have on the platform. Operator: We’ll take our next question from Chris Caso with Raymond James. Chris Caso: For my first question, it’s a question about your ability to recapture sales that you weren’t able to fill in Q4, Q1 and Q2. And you have some experience in that from last year when the iPhone, not all the models launched at the same time and some are late, and you did recapture some of that as you went past the holidays. Do you think that we should expect similar behavior this year? And then, with that also is, will all product categories behave similarly? Meaning that are the some product categories where if you missed the holidays, you just missed the sale. Tim Cook: I think there are some products that people buy as gifts that if it’s not there that it’s perishable. But I think that we have a lot of products as well that people will wait for and would expect those to be captured in a different time period. So, it’s a combination for this certain quarter, the holiday quarter, I believe. Chris Caso: Okay. As a follow-up, could you speak to iPhone mix? And one of the things we noted is that the delivery time for all iPhones are a bit long because of the constraints. They’re a bit longer on the Pro and the Max. Is that a function of supply or demand or perhaps both? And again, I would imagine you have a little better handle on that this year, given that all the phones were launched at the same time. Tim Cook: Yes. It’s really too early to make comments on mix at this point because it has been -- we have been in a constrained environment. So, the mix becomes more obvious, once supply and demand are balanced. Operator: We’ll take our next question from Harsh Kumar with Piper Sandler. Harsh Kumar: Yes. Hey, guys, first of all, a great job managing to the supply constraints. It’s obviously affecting everybody. So congratulations. And then Tim, one for you, a strategic question. When Apple thinks about strategic areas that as a company that we own, for example, software is a high priority, but you’re also one of the largest semiconductor companies if the company would stand alone. So, curious about the kind of input that -- thinking that goes into owning some piece of technology. For example, when we survey people, they say batteries and screens are very important. So, why doesn’t Apple -- for example, what causes Apple from looking at areas like that? Tim Cook: We look at ones where we believe we can make a substantial difference and have a level of differentiation. And so, we’ve put a lot of energy in the silicon space because we have felt that we could design and develop products that we could not if we were in the -- just buying what’s available on the commercial market. And as you can see, more recently, we made that call on the Mac as well and have shifted to our own chips there. And so, it really depends on whether we see a way to do something that’s differentiated or not. And I wouldn’t want to rule anything out. It’s more of whether or not we see our way clear to doing something that is materially better. We feel like we’ve done that in the chip area. Harsh Kumar: And then, I’ve got one for Luca. I want to go back to a question that Amit asked earlier in the call about the gross margin. So, when I look at the September quarter, services obviously grew much faster than the product business, margin was down and same thing for December. But I think you’re effectively saying that there’s a lot of new product launches. Would that not go into OpEx, for example, marketing, et cetera, as opposed to COGS, or is there something that maybe needs to be clarified here? Luca Maestri: There is -- certainly, obviously, that we have launch expenses in marketing and advertising, of course, when we launch new products. But, the reality, what happens, we always make our products better and which means adding new technology and new features to the product. So, typically, when you move from one generation of products to the next one, the cost structures tend to be higher, particularly at the beginning of the cycle. And so, when you make that transition, there is always some level of margin compression from the transition to a new product. The other aspect that you need to think about is the fact that the December quarter is the holiday season, and so the percentage of products business that we have in the holiday quarter is higher than what we have in the September quarter, for example. And therefore, as you know, because the services margins are higher than the products margin. There’s also a mix between the products and services business that plays into the gross margins for the Company, right? And that’s what you see as you move sequentially from September to December. Operator: We’ll hear next from Wamsi Mohan with Bank of America. Wamsi Mohan: I had a question about -- broadly about pricing of new products. This year, Apple launched the iPhone 13 at a slightly lower price than where the 12 was launched last year in China. Can you maybe help us think through what are some of the things that you look at in deciding that? And is that an action that you could take more broadly in other regions? And I have a follow-up. Tim Cook: We look at a variety of things, including our costs, including competition, including local conditions and exchange rates and a number of different things. And so, there’s not a -- there’s no formula for determining it. It’s done by a level of judgment looking at a number of different points -- data points. And we do that region by region. Wamsi Mohan: But, we shouldn’t, as investors, think of that as something structural that you intend to use to flex demand curves more globally? Tim Cook: It’s something we’ve always done. And so, it’s not something that is new to this year and this cycle. Wamsi Mohan: Okay. And as a follow-up, you’ve introduced a lot of new services over the past few years, and these have become a much more important part of the Apple story. Can you maybe share either some metrics on some of the new Services like TV+ in terms of paid subs? And how are you measuring the success of these investments? Tim Cook: Well, we look at a number of things internally that we don’t share externally. And so, you can bet that we’re looking at subs and ARPUs and conversions and churn and all of the normal things you would look at with a subscription business. But, we’re not going to get into sharing those on an individual service basis. What we’re trying to do is give you visibility to the aggregate number of subscriptions that we’ve had, which Luca covered earlier with the 745 million across both Apple branded and third party. And so, we’re giving you an aggregated view of it instead of the -- at the individual service level. But, you can bet that we’re managing it at the individual service level. Tejas Gala: Thank you, Wamsi. A replay of today’s call will be available for two weeks on Apple Podcast as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please enter confirmation code 7141415. These replays will be available by approximately 5:00 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. Operator: This concludes today’s conference. We appreciate your participation.	[ { "speaker": "Operator", "text": "Good day, and welcome to the Apple Q4 Fiscal Year 2021 Earnings Conference Call. Today’s call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please go ahead." }, { "speaker": "Tejas Gala", "text": "Thank you. Good afternoon, and thank you for joining us. Speaking today first is Apple’s CEO, Tim Cook; and he’ll be followed by CFO, Luca Maestri. After that, we’ll open the call to questions from analysts. Please note that some of the information you’ll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the Company’s business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple’s most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. I’d like to now turn the call over to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thanks, Tejas, and good afternoon, everyone, and thank you for joining the call today. A year ago, I spoke to you about the atmosphere of uncertainty in which we were living and the way it had come to define our daily experience, both as people and as a company. Today, much has changed, profoundly so. And while we are still living through unprecedented times, we are encouraged by progress around the world. I’m grateful to our teams who have stayed resolutely focused on our customers and the pursuit of innovation on their behalf. We’ve aimed to help our customers navigate the world as it is while empowering them to create the world as it can be. Whether it’s public health workers managing vaccination campaigns on iPhone or students returning to classrooms full of iPads or family staying connected over FaceTime, it is an honor to know that what we make matters and to see that reflected in the world and in our performance. This fiscal year, we reported $366 billion of revenue, which represents 33% annual growth. We also achieved more than 20% growth across all of our product categories and in every geographic segment. And today, Apple is reporting another very strong quarter. Demand was very robust, and we set a new September quarter record of $83.4 billion, up 29% from last year and in line with what we discussed on our last call, despite larger-than-expected supply constraints. We estimate these constraints had around a $6 billion revenue dollar impact, driven primarily by industry-wide silicon shortages and COVID-related manufacturing disruptions. Even so, we set an all-time record for Mac and quarterly records for iPhone, iPad, Wearables, Home and Accessories, representing 30% year-over-year growth in products. Our services business performed better than we expected, where we hit an all-time record of $18.3 billion and grew 26% year-over-year. And we set quarterly records in every geographic segment with strong double-digit growth across the board. During fiscal 2021, we earned nearly one-third of our revenue from emerging markets and doubled our business in India and Vietnam. We are optimistic about the future, especially as we see strong demand for our new products. At the end of the September quarter, we introduced our iPhone 13 lineup as well as the Apple Watch Series 7, iPad and iPad mini, all of which represents significant advances. The iPhone 13 and iPhone 13 mini, alongside the iPhone 13 Pro and Pro Max, are setting a new standard with their superfast performance, advanced camera systems, longer battery life and brilliant Super Retina displays. Customers are loving the ninth generation iPad, which features a beautifully sharp display and twice the storage of the previous generation, as well as the new iPad mini, with its ultra portable design and impressive speed and performance. And we’ve been thrilled with the reviews that Apple Watch Series 7 has earned for its larger display, faster charging and refined design. And just last week, we introduced the completely reimagined MacBook Pro powered by the extraordinary M1 PRO and M1 Max chips. These are our most powerful notebooks ever with game-changing performance and battery life, and the world’s best notebook display. We think customers are going to love MacBook Pro, whether they’re editing video in Final Cut Pro or making music in Logic Pro and so much more. They’ll be able to do things never before possible on a notebook. We also announced our all-new AirPods that feature spatial audio and industry-leading sound, longer battery life and an all-new design. For the home, we added three new colors to our HomePod mini lineup, which offers seamless integration across Apple’s products and services. We also announced a new subscription tier to Apple Music called Apple Music Voice, which offers subscribers access to the services catalog of 90 million songs all through the power of Siri. Across the board, teams at Apple continue to drive unmatched innovation through the seamlessly integrated hardware, software experience we’ve long prided ourselves on. iOS 15 and iPadOS 15 have created more ways than ever to stay productive, whether choosing Focus to avoid distractions or Quick Note to capture a thought. macOS Monterey offers new ways to connect with friends and family, get more done and work fluidly across Apple devices. And watchOS 8 has made Apple Watch even more powerful and more ways than ever to stay active and to track your health on the go. We’ve never had a more diverse range of services for our customers to choose from, and we’ve been very encouraged by our performance, which reflects growing customer enthusiasm and satisfaction. In just its first two years, Apple TV+ has already proved itself to fans around the world. And I want to congratulate the incredible actors, writers, storytellers, producers and everyone else whose behind-the-scenes work has made that success possible. This quarter, Apple TV+ won 11 Emmys, including the Award for Outstanding Comedy Series for Ted Lasso. That show has continued to bring light and laughter to fans all over the world with its boundless optimism and beloved cast of characters. We couldn’t be more proud of our entire lineup of content from the gripping second seasons of The Morning Show and Truth Be Told to our newest programs, Swagger, which is out tomorrow. The response has been incredible. This quarter also saw major updates to Fitness+, including the addition of new activities like meditation and pilates, and the announcement of group workouts, a feature that brings fitness and friends together. We also shared that Fitness+ will soon be available in 15 new countries, bringing workouts for every age and skill level to millions more people around the world. And those are just two of the services our customers are loving. This quarter, Apple Card won a J.D. Power award for customer satisfaction in its very first year of eligibility. The App Store continues to help people find the apps they depend on to stay productive, creative and entertained. And on Apple News, we launched a News Partner Program that expands Apple’s support for journalism while creating an even better business opportunity for publishers. As we continue to support our customers around the world, we’re glad to report we’ve opened several new Apple Stores. This quarter, we opened a beautiful store in Changsha, which is our first store in the Hunan province of China. We also just opened our third store in Istanbul. And we recently added a store in the Bronx, which means we are now in all 5 boroughs of New York City. All of our stores are now open worldwide and have been for 7 weeks. As we enter our busiest time of year, I particularly want to share my gratitude for our retail teams. Customers have never relied on our products more, and our retail teams have truly answered the call. We meet our customers where they are with many ways to shop through our online and retail stores and can help them choose the best product for them and get it up and running. We are also excited about our education initiatives. This month, we introduced the Everyone Can Code Early Learners program, offering free resources, which helps students and elementary school learn coding. We see education not only as a fundamental good in its own right but is a great equalizing force. A world where all people can access a quality education isn’t just a smarter world. It’s a more equitable one. That desire to create a more just an equitable world is the guiding principle behind our Racial Equity and Justice Initiative. This quarter, Apple shared plans to expand our $100 million investment by an additional $30 million. Those funds will be used in a number of ways, including the creation of a new global Hispanic-serving institution equity and innovation hub. The hub will dramatically expand the technology and resources for students in the STEM fields. Those programs join our ever-expanding work with historically black colleges and universities, including the now 45 community coding centers and regional hubs, serving underrepresented communities across the United States. This month, we were also happy to welcome the inaugural class of developers and entrepreneurs to the Apple Developer Academy in Detroit. The academy is Apple’s first in the United States and is designed to help prepare students for jobs in the thriving iOS app economy, which supports more than 2.1 million jobs across all 50 states. In August, we shared our impact accelerators first cohort of black, Latinx and indigenous-owned businesses whose pioneering work in green technology and clean energy serves many of the communities most impacted by climate change. More broadly, we are already carbon-neutral as a company. And this quarter, we made new strides towards reaching our goal of carbon neutrality across our entire supply chain and the life cycle of our devices by 2030. We’ve made significant product advances in this area. iPad and iPad mini now come with 100% recycled aluminum enclosure. The antenna on iPhone 13 is made up of upcycled plastic water bottles, which marks an industry-first. And as our customers are seeing when they purchase iPhone 13, we’ve redesigned the packaging to eliminate that outer plastic wrap, which will allow us to avoid using 600 metric tons of plastic. This brings us closer to removing all plastic in our packaging by 2025. We’ve also made good progress toward our goal to one day make our products without taking anything from the earth. With Apple Watch Series 7, for example, 99% of the rare earth elements we use are recycled. Ahead of COP26, I’m also pleased to report that we have more than doubled the number of our suppliers who have committed to becoming carbon neutral by 2030. We’re very encouraged to see the growth in this area, and we will continue to drive those changes in the supply chain in the months and years to come. We’ve never viewed our environmental work as a side project. Teams across Apple are pushing this work forward in the same spirit of innovation we bring to our products and services. We are determined to be a ripple in the pond that drives a far greater change. From the pandemic to climate change to an equity and injustice, global challenges won’t abide solitary solutions, and we feel a deep sense of responsibility to help. We are incredibly proud of the product lineup we have going into the holiday season, and we are encouraged by the customer response we’ve seen. And while we cannot know exactly which path the pandemic will take the world down in the months to come, we feel quite confident that this new year will be driven by the values that guide us and by the innovation that defines us. With that, I’ll hand it over to Luca for a deeper dive on our performance this quarter. Luca?" }, { "speaker": "Luca Maestri", "text": "Thank you, Tim. Good afternoon, everyone. We are pleased to report very strong financial results for the September quarter, capping a record-setting fiscal year 2021. We set a September quarter revenue record of $83.4 billion, an increase of nearly $19 billion or 29% from a year ago, despite larger-than-expected supply constraints. We also reached new Q4 records in every geographic segment with strong double-digit growth in each one of them. And it was a record September quarter for both, products and services. On the product side, revenue was $65.1 billion, up 30% over a year ago as we experienced better-than-expected demand for our products, despite supply constraints that we estimated at around $6 billion. We grew in each of our product categories with an all-time record for Mac and September quarter records for iPhone, for iPad and for Wearables, Home and Accessories. This level of sales performance, combined with the unmatched loyalty of our customers and the strength of our ecosystem, drove our installed base of active devices to a new all-time record. Our services set an all-time revenue record of $18.3 billion, up 26% over a year ago, with September quarter records in every geographic segment and in every services category. Company gross margin was 42.2%, down 110 basis points from last quarter, due to higher costs and a different mix of products, partially offset by leverage. Products gross margin was 34.3%, down 170 basis points sequentially as higher cost structures were partially offset by leverage and mix. Services gross margin was 70.5%, up 70 basis points sequentially, mainly due to a different mix. Net income of $20.6 billion and diluted earnings per share of $1.24, both grew over 60% year-over-year and were September quarter records. Let me get into more detail for each of our revenue categories. iPhone revenue grew 47% year-over-year and set a September quarter record of $38.9 billion, despite supply constraints as customer demand was very strong. The iPhone 12 family continued to perform very well, and we are seeing enthusiastic customer response to the launch of our iPhone 13 family. We also grew double digits in each geographic segment, setting September quarter records in both, developed and emerging markets. The latest survey of U.S. consumers from 451 Research indicates iPhone customer satisfaction of 98% for iPhone, and our active installed base of iPhones reached a new all-time high. For Mac, we set an all-time revenue record of $9.2 billion, despite supply constraints, driven by strong demand for our M1-powered MacBook Air. In fact, our last five quarters for Mac have been the best five quarters ever for the category. iPad performance was also strong with a September quarter revenue record of $8.3 billion, up 21%, in spite of significant supply constraints as customer demand for the iPad Pro also powered by M1 was very strong. For both, Mac and iPad, we continue to see a combination of high levels of customer satisfaction and first-time buyers. Around half of the customers purchasing Mac and iPad during the quarter were new to that product. And in the most recent surveys of U.S. consumers from 451 Research, customer satisfaction was 97% for both, Mac and iPad. Our continued investment in iPad and Mac is taking computing to the next level. We have redesigned and reengineered both products to provide customers an unmatched experience, which resulted in record fiscal years for both categories. We are carrying this momentum also in the enterprise market. For example, SAP has already deployed Macs to tens of thousands of their employees to date. Following the launch of our new M1 MacBook Pro last week, SAP is planning to add it to the growing list of M1 Mac offerings available to their global workforce. Another example is France’s national railway company, SNCF, which equips all train drivers with iPads to manage their entire daily workflow and train operations, helping to lower energy and maintenance costs. In fact, the iPads have been so well received that 90% of the drivers choose to purchase them for personal use at the end of the corporate device refresh cycle. Next, Wearables, Home and Accessories set a new September quarter record of $8.8 billion. We continue to improve and expand our product offerings in this category, which we believe improve the overall customer experience and showcase the integration between our products and services. Apple Watch, AirPods and HomePod mini are powerful devices in their own right, but paired with our other products, software and services, they create unique experiences, like switching audio seamlessly between devices on your AirPods. Turning to services. As I mentioned, we reached an all-time revenue record of $18.3 billion with all-time records for cloud services, music, video, advertising, AppleCare and payment services and a September quarter record for the App Store. Our continued investment and strong execution in services has helped us deliver a record $68 billion in revenue during fiscal 2021, nearly tripling this category in six years. These impressive results reflect the positive momentum we are seeing on many fronts. First, our installed base continues to grow and reached an all-time high across each geographic segment. Next, we continue to see increased customer engagement with our services. The number of paid accounts on our digital content stores grew double digits and reached a new all-time high during the September quarter in each geographic segment. Also, paid subscriptions continued to show very strong growth. We now have more than 745 million paid subscriptions across the services on our platform, which is up more than 160 million from last year and nearly 5 times the number of paid subscriptions we had less than five years ago. And finally, as Tim mentioned earlier, we’re adding new services that we think our customers will love. And we continue to improve the breadth and quality of our current services offerings. Fiscal ‘21 was not only a big year for services but for our entire company. During the past 12 months, we grew our business by 33% or $91 billion, reaching nearly $366 billion of revenue with record level performance across the board. Every product category and every geographic segment set a new annual revenue record and was up at least 20% over fiscal 2020. Let me now turn to our cash position. We ended the quarter with $191 billion in cash plus marketable securities. We issued $6.5 billion of new term debt, retired $1.3 billion of term debt and decreased commercial paper by $2 billion, leaving us with total debt of $125 billion. As a result, net cash was $66 billion at the end of the quarter as we continue to make progress towards our goal of net cash neutral over time. As our business continues to generate very strong cash flow, we were also able to return $24 billion to shareholders during the September quarter. This included $3.6 billion in dividends and equivalents and $20 billion through open market repurchases of 137 million Apple shares. We also retired an additional 5 million shares in the final settlement of our 17th ASR. As we move ahead into the December quarter, I’d like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we are not providing revenue guidance but we are sharing some directional insights based on the assumption that the COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter. As we mentioned earlier, during the September quarter, supply constraints impacted our revenue by around $6 billion. We estimate the impact from supply constraints will be larger during the December quarter. Despite this challenge, we are seeing high demands for our products and expect to achieve very solid year-over-year revenue growth and to set a new revenue record during the December quarter. We expect revenue for each product category to grow on a year-over-year basis, except for iPad, which we expect to decline year-over-year due to supply constraints. For services, we expect our growth rate to decelerate from the September quarter but to remain strong. We expect gross margin to be between 41.5% and 42.5%. We expect OpEx to be between $12.4 billion and $12.6 billion. We expect OI&E to be around negative $50 million, excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividend of $0.22 per share of common stock payable on November 11, 2021, to shareholders of record as of November 8, 2021. With that, let’s open the call to questions." }, { "speaker": "Tejas Gala", "text": "Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please?" }, { "speaker": "Operator", "text": "Thank you. Our first question comes from Shannon Cross from Cross Research." }, { "speaker": "Shannon Cross", "text": "Thank you very much. Tim, I’m wondering, can you talk a bit more about specific supply chain issues you saw and how you’ve seen improvements I think during the current quarter, and how we should think about what products do you expect to see most impacted going forward? Just any more color you can give us on what’s going on out there because clearly, this is hitting everyone." }, { "speaker": "Tim Cook", "text": "Sure. If you look at Q4 for a moment, we had about $6 billion in supply constraints, and it affected the iPhone, the iPad and the Mac. We had -- there were two causes of them for Q4. One was the chip shortages that you’ve heard a lot about from many different companies through the industry. And the second was COVID-related manufacturing disruptions in Southeast Asia. The second of those, the COVID disruptions, have improved materially across October to where we currently are. And so, for this quarter, we think that the primary cause of supply-chain-related shortages will be the chip shortage. It will affect -- it is affecting, I should say, pretty much most of our products currently and -- but from a demand point of view, demand is very robust. And so, part of this is the demand also is very strong. But we believe that by the time we finish the quarter that the constraints will be larger than the $6 billion that we experienced in Q4." }, { "speaker": "Shannon Cross", "text": "Okay, great. So, you’ll sort of push forward in the next quarter as well. Can you -- just a different question because I’m curious, you’re starting to sell more and more things on a ratable basis. And how are you thinking about that? I mean, you have the new Macs and that we keep seeing. You can buy for a monthly charge in that. How do you think that’s driving sales? And how should we think about percent maybe of the portfolio that’s now available? And I don’t know if you want to tell us how much revenue is now under a recurring nature, but it definitely seems as you’re shifting more and more to maybe sort of a bundled sale or offering from a consumer standpoint where you just pay one price every month and you get all of your Apple devices and Apple services. Thank you." }, { "speaker": "Tim Cook", "text": "Yes. The first product, Shannon, that really sold on a monthly basis was iPhone. And that began to happen in the U.S., as an example, shortly after the subsidy kind of world changed markedly. And so, I would say that predominantly, the mode of buying an iPhone in the United States is on a monthly kind of plan today. For the balance of the products, still the most popular would be buying them outright. But, we are seeing more and more demand for monthly payments. And so, we want to give the customer what they want. And so, you will see us do more and more things like that that will meet the customer where -- and provide the price that they want -- in a way that they want to pay for it. I don’t know the percentage of products that are sold that way today, but it is increasing." }, { "speaker": "Operator", "text": "We will hear next from Amit Daryanani with Evercore." }, { "speaker": "Amit Daryanani", "text": "Perfect. Thanks a lot, and good afternoon, everyone. I have two as well. I guess, when I think about the supply chain headwinds, and you’re talking about $6 billion in September, getting bigger in December. Tim, I would love to understand how do you guys comfort that this is really a demand that’s getting deferred versus potentially getting destroyed at least somewhere else. And if you think about the supply chain bottlenecks -- you were the COO. You managed a lot of the stuff. Do you feel comfortable that sort of peaks in December and alleviates it from there, or what does the trajectory look like for improvement?" }, { "speaker": "Tim Cook", "text": "Yes. What I feel comfortable on is I feel like we’ve made great progress on the COVID-related disruptions, and that happened across the month of October, and we’re in a materially better position today. It is difficult to predict COVID. And so, I’m not going to predict where it goes. But I can just tell you that as of today, we’re in a materially better position than we were in September and in the first several weeks of October. In terms of the chip shortage, the chip shortage is happening on legacy nodes. Primarily, we buy leading edge nodes, and we’re not having issues on leading edge nodes. But on legacy nodes, we compete with many different companies for supply. And it’s difficult to forecast when those things will balance because you’d have to know how kind of -- how the economy is going to be in ‘22 and the accuracy of everyone else’s demand projections. And so, I don’t feel comfortable in making a prediction. I think, it would be subject to too much inaccuracy. But, I do feel very comfortable with our operational team. I think, we’ve got a world-class one. And I’m sure they’re doing everything they can do to collapse cycle times and improve yields and do all the things that you can do in addition to fundamental capacity investment to remedy the situation." }, { "speaker": "Amit Daryanani", "text": "Got it. And then, Luca, if I may ask you a question on gross margins for December, you’re essentially guiding gross margins to be flat to maybe down a little bit versus sort of September. Maybe just touch about it. So, I think historically, I would have expected gross margins to be up in December, given how much revenue leverage you end up with. So maybe, what are the puts and takes on gross margins that are resulting in a more flattish guide versus historical seasonality?" }, { "speaker": "Luca Maestri", "text": "Well, as you know, typically, obviously with December being the holiday season, we do get leverage, as you say. But, it’s also the period of the year where we launch a lot of new products. And as you know, we launch essentially in every product category. We launch new products. Demand is very strong. But as you know, when we launch these new products, we tend to have higher cost structures at the beginning of the cycle. And so, that’s what balances this out. Obviously, from a year-over-year standpoint, it’s actually a significant expansion, right? Because when you look at what we did a year ago in the December quarter, 39.8%, this clearly indicates a significant expansion." }, { "speaker": "Operator", "text": "We’ll hear next from Katy Huberty with Morgan Stanley." }, { "speaker": "Katy Huberty", "text": "Thank you. Given the supply chain is blurring the demand picture for iPhone 13, what data points can you share that help investors understand whether demand is tracking to a product cycle that is flat, growing or down from the very strong iPhone 12? And maybe on that front, Luca, you can also comment on where you exited the quarter from a channel inventory standpoint for iPhone relative to a normal product cycle? And then, I’ve got a follow-up." }, { "speaker": "Tim Cook", "text": "Yes. Look, maybe I can take both of those. Channel inventory, as you would expect in a constrained environment, the iPhone channel inventory ended below the targeted range and is currently below it. And so, that’s that. In terms of the blurring of demand, we look at -- Katy, we look at a number of different data points. We look at demand across our online store, demand in retail. We look through to back orders on the carrier channels, the ones that do take back orders there. We look at channel orders as well. And so, we have a number of different data points that we use to conclude how strong demand is. And we feel very, very good about where demand is right now. And we’re working feverishly on the supply side of that." }, { "speaker": "Katy Huberty", "text": "And Tim, as a follow-up. We recently surveyed 4,000 consumers in the U.S. and China, and the feedback is most of them don’t want to pay for apps or services direct with the developer. They value the security, privacy, ease of transactions with the App Store. So, how do you think about balancing the regulators push for more choice with a customer base that’s happy with the existing experience? And just as a follow-on to that, how are you and Luca thinking about the potential impact of services revenue growth rate as some of the changes to the App Store go into effect?" }, { "speaker": "Tim Cook", "text": "Katy, the main thing that we’re focused on, on the App Store is to keep our focus on privacy and security. And so, these are the two major tenets that have produced over the years a very trusted environment where consumers and developers come together and consumers can trust the developers on the developers and the apps or what they say they are and the developers get a huge audience to sell their software to. And so, that’s sort of number one on our list. Everything else is a distant second. And so, what we’re doing is working to explain the decisions that we’ve made that are key to keeping the privacy and security there, which is to not have sideloading and not have alternate ways on the iPhone, where it opens up the iPhone to unreviewed apps and also get by the privacy restrictions that we put on the App Store. And so, we’re very, very focused in discussing the privacy and security elements of the App Store with the regulators and legislators." }, { "speaker": "Operator", "text": "We’ll take our next question from David Vogt with UBS." }, { "speaker": "David Vogt", "text": "Great. Thank you, guys. And I just have two quick questions, one big picture, theoretical. So, you covered the supply chain in pretty extensive detail on the call. But maybe just a bigger picture on how you’re thinking about it philosophically given what you just sort of went through over the last 12 to 8 months. So, what I mean by that, is there sort of a recalibration needed or an adjustment around your supply chain philosophy either from a partner perspective or maybe a regional perspective? And how do you think about the current infrastructure and its ability to sort of rebound and sort of handle sort of these disruptions that seem to crop up from time to time? And then, I have a follow-up." }, { "speaker": "Tim Cook", "text": "Yes. I don’t see a fundamental error that we’ve made, if that’s what you’re picking out, in terms of creating the environment that we’re in. It was created for a number of reasons. The pandemic came along. Some people in the industry and some people outside the industry thought that the pandemic would reduce demand. They pulled their orders down. Things reset. And what really happened was demand went up and went up even more than a straight trend would predict. And so, the industry is working through that now. I’m making it little overly simplistic. There’s some other things like yields and things like that that are happening as well. But, those things are mainly manageable in the course of time. And so, what we’re doing is working with our partners on making sure that they have supply that we need and making sure that our demand statements are accurate as we see them and so forth. And at the same time, we are reducing our lead times and cycle times, so that when you get a chip off a fab that as quickly as possible, it’s in a product and shipping and also helping the fab partners increase their yields. And so, those things are things that we’re doing. We also support the CHIPS Act and investment there to put more investment in the ground. And so, we’re spending some time advocating for the CHIPS Act as well." }, { "speaker": "David Vogt", "text": "Great. And that’s helpful. And I didn’t mean to implicate that you guys had messed up, just maybe came off that way. And maybe just as a quick follow-up. When you think about purchasing devices ratably, you touched on that earlier. But maybe can you just touch on the partnerships that you have with carriers and the support that they have given you over the last couple of years. Now, it’s been a key component of your success, the tight relationships that you have globally. Do you think sort of this business model, as it’s currently sort of put together globally, is sort of a permanent structure, meaning carriers are going to be integral part of driving demand for iPhones, or is there a sense that maybe it’s a little bit more transitory depending on the part of the cycle that we’re in?" }, { "speaker": "Tim Cook", "text": "I think that 5G has provided a once in a decade kind of upgrade potential, and it’s a multiyear kind of thing. It’s not a one year and done. And I think that we’re motivated there. The carrier is motivated there. We have mutual interest and the customer benefits hugely from getting a new 5G phone that has 5G and a number of other features in it, too. And so, I think everybody is aligned on purpose. The model that you paint is -- I wouldn’t call it a global model because there are different variations around the world depending upon the country. But, in general, I think that the marriage, if you will, or partnership between Apple and the carrier channel has never been stronger and that it’s on very solid footing." }, { "speaker": "Operator", "text": "So, we’ll take our next question from Krish Sankar with Cowen and Company." }, { "speaker": "Krish Sankar", "text": "I had two of them, too. And Tim, I will give you a reprieve from the supply chain questions. I had two on services. The first one is on your new ATT, the ad tracking transparency feature, and all the headlines that have gone recently, I’m kind of curious. The feedback you’ve seen or received from your advertisers and users and how it has also impacted search ads your own ad business. Can you let us know the feedback? And then, I have a follow-up." }, { "speaker": "Tim Cook", "text": "The feedback from customers is overwhelmingly positive. Customers appreciate having the option of whether they want to be tracked or not. And so, there’s an outpouring of customer satisfaction there on the customer side. And the reason that we did this is that -- as you know, if you followed us for a while, we believe strongly that privacy is a basic human right and we believe that for decades, not just in the last year or so. And we’ve historically rolled out more and more features over time for -- to place the decision of whether to share data and what data to share in the hands of the user where we believe that it belongs. We don’t think that’s Apple’s role to decide, and we don’t think that’s another company’s role to decide but rather the individual who owns the data itself. And so, that’s our motivation there. There’s no other motivation." }, { "speaker": "Krish Sankar", "text": "Got it. Got it, Tim. And that’s a very fair characterization. Thank you for that. And then, as a quick follow-up, I’m just kind of curious, on the mobile gaming in your App Store, there have been some recent actions by certain governments to limit game time. Kind of curious how that affects your App Store business in those geographies. And is there a way you can quantify that, or is it too immaterial at this point?" }, { "speaker": "Tim Cook", "text": "You mean limiting the time on games. Is that what you’re getting at?" }, { "speaker": "Krish Sankar", "text": "Yes, exactly. Like you’re trying to decide to limit game time and things like that." }, { "speaker": "Tim Cook", "text": "It’s very difficult to measure. Yes, with the policy that you’re talking about for those people that don’t know is there’s a policy to restrict kids below a certain age to -- I think it’s one hour on Friday, Saturday, Sunday each. And it’s very difficult to see the impact of it on the App Store at this point." }, { "speaker": "Operator", "text": "We’ll take our next question from Samik Chatterjee with JP Morgan." }, { "speaker": "Samik Chatterjee", "text": "I guess, Tim, I wanted to first start off on your comment about strong demand across products. And just specific to iPhone 13, if you can give us a bit more insight about what are you seeing in terms of intent, in terms of either upgrades from the installed base or even switchers rate too, if you can compare to iPhone 12 because some of the feedback we are getting is, for example, like strong switching activity in China. So just wondering if you can get a bit more granular there in terms of the -- what’s driving the demand and who is it coming from. And then, I have a follow-up, please." }, { "speaker": "Tim Cook", "text": "It’s so early to talk about iPhone 13 because it’s only been on the market for less than 30 days now. What I can tell you is going into the cycle, if you look at our results from last quarter, we grew on upgraders and switchers in the double digits. And so, both were very meaningful for the iPhone results last quarter. And so, there’s significant momentum in iPhone. And I would clearly characterize the demand that we’re seeing currently as robust, as you can tell from the -- some of the quotes that we’re quoting on the online store." }, { "speaker": "Samik Chatterjee", "text": "Okay. And as a follow-up, I guess, back to the supply chain but I wanted to just ask more relative to cost implications there. And what we’re hearing is not only delays but also component cost going up. So, as we look through -- as I think about this upcoming cycle, how are you looking to manage component cost related headwinds? And is that something you’re seeing coming through the supply chain? Thank you." }, { "speaker": "Tim Cook", "text": "We’ve put our current thoughts in the gross margin guidance that we gave you, the 41.5% to 42.5%. I would tell you that we are seeing a significant increase in freight costs. And I would assume that that is pretty consistent across different companies. And so, we’re clearly seeing some inflation there." }, { "speaker": "Operator", "text": "We’ll take our next question from Jim Suva with Citigroup." }, { "speaker": "Jim Suva", "text": "Thank you. And I’ll ask both my questions at the same time. Probably the first one is for Tim. On the services revenue, much better than expected. Can you give us some details about what drove that? Was it Apple Stores more open, so more AppleCare or more Apple One or Arcade or TV or Fitness? And then, probably for Luca on supply chain, when you mentioned supply chain headwind is going to get worse and you mentioned $6 billion this quarter, there’s two ways to think about your terminology of worse. Is it the delta from $2 billion that you identified three months ago that went to $6 billion, so therefore, the delta of $4 billion gets worse, or are you just saying -- and therefore, it’s above $10 billion for December quarter. Are you just saying it just gets higher than the $6 billion that you just identified earlier in the call?" }, { "speaker": "Tim Cook", "text": "Jim, I’m going to take the second question that you asked, and Luca could take the first one on services, just in the reverse of the way you coined it. On the supply constraints, what we’re saying is that the amount of -- the nominal amount of supply constraints for Q1, we estimate to be larger than $6 billion. And so, it’s important to know that we’re getting a lot more supply in Q1 than we had in Q4, obviously, because our sequential growth is significant. And we have very solid growth year-over-year. And so, the amount of supply is growing dramatically. It’s just that the demand is so robust that we envision having supply constraints for the quarter." }, { "speaker": "Luca Maestri", "text": "And Jim, on services, the 26% growth rate that we had was better than what we were expecting at the beginning of the quarter. And it was really across the board. It’s difficult to single out a specific area because we set all-time records on cloud. We set all-time records across the board, AppleCare, Music, video, advertising, payment services, the App Store was a September quarter, right? So, it was strong across the board. When we look at the services business, we always think about some fundamental factors that allow us to have good visibility over the sustainability of the business, right? The fact that the installed base continues to grow, that’s obviously a positive. The fact that the number of people that are actually paying on the platform continues to grow double digits. And so, that obviously increases our opportunity. The number of subscriptions that we have on the platform, we mentioned during the call, 745 million paid subs right now. It’s an increase of 160 million versus just 12 months ago, right? And obviously, the fact that we continue to launch new services, new offerings within the services that we already have, new features, that obviously gives us a lot of momentum going forward. We’re very fortunate we have a very -- now it’s a very large business, $68 billion in the last 12 months and very diversified. We sell a lot of different services and our customers seem to really enjoy the experience that they have on the platform." }, { "speaker": "Operator", "text": "We’ll take our next question from Chris Caso with Raymond James." }, { "speaker": "Chris Caso", "text": "For my first question, it’s a question about your ability to recapture sales that you weren’t able to fill in Q4, Q1 and Q2. And you have some experience in that from last year when the iPhone, not all the models launched at the same time and some are late, and you did recapture some of that as you went past the holidays. Do you think that we should expect similar behavior this year? And then, with that also is, will all product categories behave similarly? Meaning that are the some product categories where if you missed the holidays, you just missed the sale." }, { "speaker": "Tim Cook", "text": "I think there are some products that people buy as gifts that if it’s not there that it’s perishable. But I think that we have a lot of products as well that people will wait for and would expect those to be captured in a different time period. So, it’s a combination for this certain quarter, the holiday quarter, I believe." }, { "speaker": "Chris Caso", "text": "Okay. As a follow-up, could you speak to iPhone mix? And one of the things we noted is that the delivery time for all iPhones are a bit long because of the constraints. They’re a bit longer on the Pro and the Max. Is that a function of supply or demand or perhaps both? And again, I would imagine you have a little better handle on that this year, given that all the phones were launched at the same time." }, { "speaker": "Tim Cook", "text": "Yes. It’s really too early to make comments on mix at this point because it has been -- we have been in a constrained environment. So, the mix becomes more obvious, once supply and demand are balanced." }, { "speaker": "Operator", "text": "We’ll take our next question from Harsh Kumar with Piper Sandler." }, { "speaker": "Harsh Kumar", "text": "Yes. Hey, guys, first of all, a great job managing to the supply constraints. It’s obviously affecting everybody. So congratulations. And then Tim, one for you, a strategic question. When Apple thinks about strategic areas that as a company that we own, for example, software is a high priority, but you’re also one of the largest semiconductor companies if the company would stand alone. So, curious about the kind of input that -- thinking that goes into owning some piece of technology. For example, when we survey people, they say batteries and screens are very important. So, why doesn’t Apple -- for example, what causes Apple from looking at areas like that?" }, { "speaker": "Tim Cook", "text": "We look at ones where we believe we can make a substantial difference and have a level of differentiation. And so, we’ve put a lot of energy in the silicon space because we have felt that we could design and develop products that we could not if we were in the -- just buying what’s available on the commercial market. And as you can see, more recently, we made that call on the Mac as well and have shifted to our own chips there. And so, it really depends on whether we see a way to do something that’s differentiated or not. And I wouldn’t want to rule anything out. It’s more of whether or not we see our way clear to doing something that is materially better. We feel like we’ve done that in the chip area." }, { "speaker": "Harsh Kumar", "text": "And then, I’ve got one for Luca. I want to go back to a question that Amit asked earlier in the call about the gross margin. So, when I look at the September quarter, services obviously grew much faster than the product business, margin was down and same thing for December. But I think you’re effectively saying that there’s a lot of new product launches. Would that not go into OpEx, for example, marketing, et cetera, as opposed to COGS, or is there something that maybe needs to be clarified here?" }, { "speaker": "Luca Maestri", "text": "There is -- certainly, obviously, that we have launch expenses in marketing and advertising, of course, when we launch new products. But, the reality, what happens, we always make our products better and which means adding new technology and new features to the product. So, typically, when you move from one generation of products to the next one, the cost structures tend to be higher, particularly at the beginning of the cycle. And so, when you make that transition, there is always some level of margin compression from the transition to a new product. The other aspect that you need to think about is the fact that the December quarter is the holiday season, and so the percentage of products business that we have in the holiday quarter is higher than what we have in the September quarter, for example. And therefore, as you know, because the services margins are higher than the products margin. There’s also a mix between the products and services business that plays into the gross margins for the Company, right? And that’s what you see as you move sequentially from September to December." }, { "speaker": "Operator", "text": "We’ll hear next from Wamsi Mohan with Bank of America." }, { "speaker": "Wamsi Mohan", "text": "I had a question about -- broadly about pricing of new products. This year, Apple launched the iPhone 13 at a slightly lower price than where the 12 was launched last year in China. Can you maybe help us think through what are some of the things that you look at in deciding that? And is that an action that you could take more broadly in other regions? And I have a follow-up." }, { "speaker": "Tim Cook", "text": "We look at a variety of things, including our costs, including competition, including local conditions and exchange rates and a number of different things. And so, there’s not a -- there’s no formula for determining it. It’s done by a level of judgment looking at a number of different points -- data points. And we do that region by region." }, { "speaker": "Wamsi Mohan", "text": "But, we shouldn’t, as investors, think of that as something structural that you intend to use to flex demand curves more globally?" }, { "speaker": "Tim Cook", "text": "It’s something we’ve always done. And so, it’s not something that is new to this year and this cycle." }, { "speaker": "Wamsi Mohan", "text": "Okay. And as a follow-up, you’ve introduced a lot of new services over the past few years, and these have become a much more important part of the Apple story. Can you maybe share either some metrics on some of the new Services like TV+ in terms of paid subs? And how are you measuring the success of these investments?" }, { "speaker": "Tim Cook", "text": "Well, we look at a number of things internally that we don’t share externally. And so, you can bet that we’re looking at subs and ARPUs and conversions and churn and all of the normal things you would look at with a subscription business. But, we’re not going to get into sharing those on an individual service basis. What we’re trying to do is give you visibility to the aggregate number of subscriptions that we’ve had, which Luca covered earlier with the 745 million across both Apple branded and third party. And so, we’re giving you an aggregated view of it instead of the -- at the individual service level. But, you can bet that we’re managing it at the individual service level." }, { "speaker": "Tejas Gala", "text": "Thank you, Wamsi. A replay of today’s call will be available for two weeks on Apple Podcast as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please enter confirmation code 7141415. These replays will be available by approximately 5:00 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us." }, { "speaker": "Operator", "text": "This concludes today’s conference. We appreciate your participation." } ]	Apple Inc.	24,937
AAPL	3	2,021	2021-07-27 17:00:00	Operator: Good day, and welcome to the Apple Q3 FY 2021 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Tejas Gala, Director, Investor Relations and Corporate Finance. Please go ahead. Tejas Gala: Thank you. Good afternoon, and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the Company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed Annual Report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. I'd like now to turn the call over to Tim for introductory remarks. Tim Cook: Thanks, Tejas. Good afternoon, everyone. Today, Apple is reporting a very strong quarter with double digit revenue growth across our product and services categories, and in every geographic segment. We set a new June quarter revenue record of $81.4 billion, up 36% from last year, and the vast majority of markets we tracked grew double digits, with especially strong growth in emerging markets including India, Latin America, and Vietnam. Total retail sales also set a June quarter record, and almost all of our retail stores have now opened their doors. This quarter saw a growing sense of optimism from consumers in the United States and around the world, driving renewed hope for a better future and for all that innovation can make possible. But as the last 18-months had demonstrated many times before, progress made is not progress guaranteed. An uneven recovery to the pandemic and a Delta variant surging in many countries around the world have shown us once again, that the road to recovery will be a winding one. In the midst of that enduring adversity, we are especially humbled that our technology has continued to play a key role in keeping our customers connected. Just last month, it was great to be back with our teams and customers for the opening of our newest retail store in Los Angeles, our Apple Tower Theater. It was a hopeful reminder of the energy and sense of community, shared spaces bring and how appreciative we all are now of the simple privilege of talking to one another face to face. As we look forward to more in-person interactions in the future, we're doubling down on innovation, and doing all we can to help chart a course to a healthier and more equitable world. I'll have more to say about our work in those areas a bit later on. But first, let's turn to our product and services categories. For iPhone, this quarter saw very strong double digit growth in each geographic segment, and we continue to be heartened by our customer's response to the iPhone 12 lineup. We're only in the early innings of 5G, but already its incredible performance and speed have made a significant impact on how people can get the most out of our technology. Customers love iPhone 12 for its superfast 5G speeds, A14 Bionic chip and Adobe vision camera never seen before in a phone. Users continue to rely on iPad and Mac to work, learn, create and connect. iPad had its highest June quarter in nearly a decade, while Mac set an all-time June quarter record. We've seen a great response to the new iMac and iPad Pro, both powered by the M1 chips exceptional speed and power efficient performance. The iMac’s remarkable thin design and vibrant colors have made it a favorite for users everywhere. And the iPad continues to be an incredibly versatile tool in our user's toolbox, inspiring creativity and connection and keeping us entertained and productive in equal measure. It was another very strong quarter for wearables, home and accessories, which set a new June quarter record, while helping people find more ways to stay entertained, healthy and connected at home and on the go. Apple Watch remains a go to choice for users to stay on top of their health and reach their fitness goals. And our newest accessory AirTag began shipping to an enthusiastic response from customers, making the find my network more useful than ever, while protecting user privacy. Turning to services, which set a new all-time revenue record as we continue to roll out innovative new features and programming. We're proud to be the recipients of 35 Emmy Nominations this year, which speaks to the quality of our programming, and an enthusiastic reception from customers and critics alike. Apple TV+ users are loving series like Mythic Quest, and anticipating groundbreaking films like Coda, which premieres next month. And of course, Ted Lasso kicked off season two just last week, and continues to win over viewers with its heartwarming message about the power of community, compassion and hope. We also introduced Apple Podcast subscriptions, a global marketplace for users to discover exclusive content and support their favorite creators. And we launched spatial audio for Apple Music, a cinematic listening experience that promises to change how music fans listen, and musicians create even more immersive, layered, and beautiful songs. Last month, we shared many exciting new features at WWDC. But more powerful than any of them was the incredible showing of developers from all walks of life and around the world. The new tools we announced will help developers harness cutting edge technologies, like augmented reality, reach new users and customize their experience on the App Store, or learn to update or invent an app with Swift, Apple's powerful and intuitive programming language. Today's investments in education and coding translate to tomorrow's small businesses and groundbreaking new apps. The next act of an app economy, already creating jobs and opportunity around the world. In June, a new study by the analysis group found that it was another record year for App Store developers, whose combined billings and sales increased by 24% to $643 billion in 2020. The app economy continues to be an incredible engine of prosperity and opportunity, fueled by the ceaseless striving for developers to make apps that enrich people's lives. Much like the developer community, we are diehard optimist, about technology's potential to help people live happier, healthier and more fulfilled lives, goals that shine through with powerful new updates coming to iOS, iPad OS, Mac OS, and Watch OS this fall. That begins with innovative new features that help users stay connected with one another, like share play and spatial audio for FaceTime, or disconnect when they need a break like focus, which limits distracting notifications when you're winding down for bed or concentrating at work. And new productivity features make iPad an even more useful tool for multitasking, helping users navigate across apps, split their screen or use quick note to capture a thought the moment inspiration strikes. In the health space, our new health sharing feature will make it easier than ever to securely share your health data to share your health data with loved ones. That includes new capabilities like walking steadiness, which uses sensors to assess user stability doing everyday tasks, and recommends exercises to improve stability and avoid a fall. In the belief that privacy is a fundamental human right, we share new features in iOS 15 that continue to drive our progress forward, from mail privacy protection, which stops invisible pixels and an email from tracking your mail activity to App Privacy Report, which helps users check on the apps they've granted permission to use their personal data. We also introduced some incredible next generation technologies coming to the accessibility space. From assistive touch, which helps people with limb differences navigate Apple Watch to new voiceover capabilities to help blind and low vision users, accessibility remains a bedrock principle for us, in the simple belief that the best technology for the world should be the best technology for everyone. But the responsibility to be a force for good in the lives of others extends beyond the technology we made, so the teachers and students shaping our future. This quarter as part of our racial equity and justice initiative, we awarded innovation grants to engineering schools at four historically black colleges and universities to expand their coursework, scholarships and internship opportunities in hardware engineering and silicon chip design. We see education as a great equalizing force, and we're more dedicated than ever to supporting the educators, advocates and students lining the path and leading the way. That includes the 350 swift student challenge winners, we recognized at this year's WWDC. If you ever need a dose of hope or inspiration, I can't say enough about our students' scholarship winners, whose apps bring so much good into the world, from teaching other young people to code to helping volunteers deliver groceries to people at high risk of COVID-19. Young people's innovations remind us that our collective future is bound up in the next generations' passion for solving global challenges, and of the responsibility we have to join them in building a better world. Turning to our own backyard, we're continuing to press forward in our efforts to help bring more affordable housing to the Bay Area and across California. This month, we shared that we've contributed more than $1 billion to help first time homeowners and construct 1000s of new affordable housing units across the state. And we're continuing to stay focused on supporting the global response to the pandemic and delivering the best products and services for people. Our greatest source of inspiration is a technology itself, but how people use it in their own lives, in ways great and small, to write a novel or to read one, to care for an ailing patient or see a doctor virtually, to track their heart rate on a jog or to train for the Olympics. Every day, I'm grateful for the dedication of our teams to the simple mission of creating technology that improves people's lives. And I want to thank everyone at Apple for the purpose and passion they bring to that mission. With that, I'll hand it over to Luca for a deeper dive on our performance this quarter. Luca Maestri: Thank you, Tim. Good afternoon, everyone. We're very pleased to report record June quarter financial results, which reflect the importance of our products and services in our customers lives and our strong underlying operating performance. Our revenue reached a June quarter record of $81.4 billion, an increase of nearly $22 billion or 36% from a year ago. We grew double digits in each of our product categories, with an all-time record for services, and June quarter records for iPhone, Mac, and Wearables, Home and Accessories. We also set new June quarter records in every geographic segment with very strong double digit growth in each one of them. Products revenue was a June quarter record of $63.9 billion, up 37% over a year ago. This level of sales performance, combined with the unmatched loyalty of our customers drove our installed base of active devices to a new all-time record. Our services set an all-time revenue record of $17.5 billion up 33% over a year ago, with June quarter records in each geographic segment. Company gross margin was 43.3%, up 80 basis points from last quarter driven by cost savings and a higher mix of services, partially offset by seasonal loss of leverage. Products gross margin was 36% down 10 basis points sequentially, a seasonal loss of leverage was almost entirely offset by cost savings. Services gross margin was 69.8% down 30 basis points sequentially, mainly due to a different mix. Net income of $21.7 billion, diluted earnings per share of $1.30, and operating cash flow of $21.1 billion were all June quarter records by a wide margin. Let me get into more detail for each of our revenue categories. iPhone revenue set a June quarter record of $39.6 billion growing 50% year-over-year and exceeding our own expectations, as the iPhone 12 family continued to be in very high demand. Performance was consistently strong across the world, and we grew very strong double digits in each geographic segment, setting June quarter records in most markets we track. Our active installed base of iPhones reached a new all-time high, thanks to the exceptional loyalty of our customer base and the strength of our ecosystem. In the U.S., the latest survey of consumers from 451 research indicates iPhone customer satisfaction of 97% for the iPhone 12 family. Turning to services, as I mentioned, we reach an all-time revenue record of $17.5 billion with all-time records for cloud services, music, video, advertising and payment services, and June quarter records for the App Store and Apple Care. Our newest service offerings Apple TV+, Apple Arcade, Apple News+, Apple card, Apple Fitness+ as well as the Apple One bundle, continue to scale across users, content and features and are contributing to overall services growth. The key drivers for our services business all continue to move in the right direction. First, our installed base of devices reached an all-time high across each geographic segment. Second, the number of both transacting and paid accounts on our digital content stores reached a new all-time high during the June quarter in each geographic segment, and paid accounts increased double digits. Third, paid subscriptions continue to show strong growth. We now have more than 700 million paid subscriptions across the services on our platform, which is up more than 150 million from last year, and nearly four times the number of paid subscriptions we had only four years ago. And finally, we're adding new services that we think our customers will love, while also continuing to improve the breadth and quality of our current services offerings. For example, during WWDC in June, we previewed our new iCloud+, and Apple Wallet features, which we believe will create a more secure and differentiated customer experience. Wearables, home and accessories grew 36% year-over-year to $8.8 billion, setting new June quarter revenue records in every geographic segment. We continue to improve and expand our product offerings in this category. This quarter, we began shipping our new Apple TV 4K with a redesign Siri remote and our brand new air tags, and the customer response to both products has been very strong. In addition to its outstanding sales performance globally, Apple Watch continues to extend its reach, with nearly 75% of the customers purchasing Apple Watch during the quarter being new to the product. For Mac, despite supply constraints, we set a June quarter record of $8.2 billion up 16% over last year, with June quarter revenue records in most markets we track around the world. It is remarkable that the last four quarters for Mac have been its best four quarters ever. This exceptional level of sales success has been driven by the very enthusiastic customer response to our new Macs, powered by the M1 chip, which we most recently brought to our newly redesigned iMac. iPad performance was also strong with revenue of $7.4 billion up 12% in spite of significant supply constraints. During the quarter we also started shipping our new iPad Pro powered by the M1 chip and customer response has been outstanding. Both iPad and Mac have taken computing to the next level, and when you combine their performance over the last 12-months, they're now the size of a Fortune-50 business, thanks to the best product lineups we've ever had, very high levels of customer satisfaction and a loyal growing installed base. In fact, around half of the customers purchasing Mac and iPad during the quarter were new to that product. And in most recent surveys of U.S. consumers from 451 research customer satisfaction was 92% for Mac and 95% for iPad. In enterprise, our customers are excited about the superior performance, battery life and security that the new M1 Macs bring. MassMutual for example, is offering M1 MacBook Pro to all of its employees and equipping all conference rooms with M1 Mac minis in preparation for return to work. And with its incredible performance and affordable entry price, the MacBook Air with M1 is gaining rapid adoption among many leading enterprise organizations. Italgas, Italy's largest natural gas company, which will soon be using its extensive network to distribute renewable gases is replacing every employee's Windows laptop with the new MacBook Air powered by Apple's M1 chip to bring the latest technology to its workforce. And Grab, Southeast Asia's leading super app that provides transportation, food delivery and digital payment services is adding M1 MacBook Air to its company-wide M1 Mac deployment. Let me now turn to our cash position, we ended the quarter with $194 billion in cash plus marketable securities. We retired $3 billion of term debt and increased commercial paper by $3 billion, leaving us with total debt of $122 billion. As a result, net cash was $72 billion at the end of the quarter. As our business continued to perform at a very high level, we were also able to return $29 billion to shareholders during the June quarter. This included $3.8 billion in dividends and equivalence, and $17.5 billion through open market repurchases of 136 million Apple shares. We also began a $5 billion accelerated share repurchase program in May, resulting in the initial delivery and retirement of 32 million shares. As we move ahead into the September quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near-term, we're not providing revenue guidance. But we are sharing some directional insights, assuming that the COVID-related impacts to our business do not worsen from what we're projecting today for the current quarter. We expect very strong double digit year-over-year revenue growth during the September quarter. We expect revenue growth to be lower than our June quarter year-over-year growth of 36% for three reasons. First, we expect the foreign exchange impact on our year-over-year growth rate to be three points less favorable than it was during the June quarter. Second, we expect our services growth rate to return to a more typical level. The growth rate during the June quarter benefited from a favorable compare, as certain services were significantly impacted by the COVID lockdowns a year ago. And third, we expect supply constraints during the September quarter to be greater than what we experienced during the June quarter. The constraints will primarily impact iPhone and iPad. We expect gross margin to be between 41.5% and 42.5%. We expect our OpEx to be between $11.3 billion and $11.5 billion. We expect OI&E to be around zero, excluding any potential impact from the mark to market of minority investments and our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividends with $0.22 per share of common stock payable on August 12, 2021, to shareholders of record as of August 9, 2021. With that, let's open the call to questions. Tim Cook: Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please. Operator: Thank you. Our first question comes from Katy Huberty from Morgan Stanley. Please go ahead. Katy, your line is open. Please check your mute function. We'll take our next question from Chris Caso with Raymond James. Chris Caso: Thank you. Good morning. Just dig into the commentary on guidance a little bit. Just starting with the fact that last year, obviously there was a later launch of iPhone than what was typically seen in other years. Could you talk us through that, and perhaps some of the other products, what may be different as compared to last year? Luca Maestri: Well, as I explained that, first of all, we are expecting to grow very strong double digits, that's I think Chris the starting point here. We expect this very strong level of growth that we've experienced during the course of the year, to continue into the September quarter. We said that the growth rate is going to be below 36%. And I've listed three factors. The first factor is that the dollar continues to be favorable on a year-over-year basis in the sense that it's weakened against most currencies on a year-over-year basis. But that benefit is going to be about three points less in the September quarter than what we've experienced during the June quarter, because the dollar strengthened against most currencies in recent weeks. Second, I mentioned that the services growth rate that we've experienced in the June quarter 33%, that's significantly higher than what we've had in recent history. And that was due to the fact that there were a couple of services categories, namely, our advertising business and Apple Care, that were significantly impacted a year ago, because of the COVID lock downs. And therefore, they're relatively easy compare in the June quarter. So we don't expect that to continue into the September quarter. And so we expect to see significant growth in services, but not to the level that we've seen in June. And then I mentioned that the supply constraints that we've seen in the June quarter will be higher during the September quarter. Back in when we talked here three months ago, we said that we were expecting supply constraints for the June quarter between $3 billion and $4 billion, to affect primarily iPad and Mac. We were able to mitigate some of those constraints during the June quarter, and so we came in at a number that was slightly below the low-end of that range that we accorded at the beginning of the quarter. But we expect that number to be higher for the September quarter. And so when you put all that together, again, very strong double digit growth for September, with this caveat, that I just mentioned. Chris Caso: Thank you. If I could follow-up with regard to the supply constraints, and do you expect those supply constraints to persist through the December quarter as well? What effect will that have on the holiday selling season? And then, in conjunction with that, what additional costs are you absorbing because of the supply constraints? Is that having an effect on gross margins or just product costs in general, as you perhaps pay a little more to get more supply? Tim Cook: Chris, it's Tim. In terms of the cost, we're paying more for freight than I would like to pay. But component costs continue in the aggregate to decline. In terms of supply constraints, and how long they will last, I don't want to predict that today. We're going to take it sort of one quarter at a time. And as you would guess we'll do everything we can to mitigate whatever set of circumstances were dealt. Luca Maestri: And Chris, on the cost side, as I mentioned during my comments, our results for gross margins for the June quarter 43.3%, we really saw some really nice cost savings during the quarter. And I think you've seen that we provided guidance for 41.5% to 42.5% for September, which is obviously a level that we are very pleased with. Chris Caso: Right. Thank you. Tejas Gala: Thank you, Chris. Can we have the next question please? Operator: Thank you. We'll take our next question from Jim Suva with Citigroup Investment Research. Please go ahead. Jim Suva: Thank you very much, and congratulations to you and your global team for great operations during a challenging time. Tim and Luca, I just have one question and either of you or both of you could figure out who's best to answer it. But we look at a world of pretty unprecedented whether it be COVID, the Delta variant, China floods, supply chain, components. Just wondering for your, like R&D and innovation, is it being materially impacted by that such where a normal cadence is unfair? Or, is it kind of happening during a slow time of year where you're able to empower people to work remotely, and still have the typical innovations and product launches that you've had historically in the past? Tim Cook: Jim, the company has been incredibly resilient. The employees are really doing double duty. And I could not be more pleased with the cadence that we're coming out with new things. As you can see from the software announcements that we made at WWDC, and the corresponding launches of the software that we plan on in the fall, and then all of the products that we've been able to bring out over the last 12 to 18-months, it's amazing. So I'm very pleased with it. Tejas Gala: Thanks, Jim. Can we please the next question please? Jim Suva: Thank you. Congratulations again. Tim Cook: Thank you. Operator: Thank you. We'll take our next question from Shannon Cross with Cross Research. Shannon Cross: Thank you very much, Tim, I'm curious, what have you learned from this iPhone cycle regarding customer preferences and pricing and maybe subscriptions and that? And if there's a difference, if you could talk about on a geographic basis. Thanks. Tim Cook: If you look at our results in Q3, Shannon, we had strong double digit growth for switchers and for upgraders. And, in fact, it was our largest upgrade quarter for Q3 ever. And so we feel really, really great about both categories. And as Luca kind of said, during the preamble or opening comments, our results are really strong for iPhone around the world. And so it's been a very, very strong cycle. And yet we're -- the penetration on 5G is obviously still very, very low. And so we feel really good about the future of the iPhone. Shannon Cross: Okay. And maybe if you can talk a bit about China, up 58%, where are you seeing the growth? What are you hearing from customers there? Obviously 58% is not sustainable, but how sustainable is the strength? Thank you. Tim Cook: It was an incredibly strong quarter, it set a June quarter revenue record for Greater China for us. And so we're very proud of that. And, doing the best job we can to serve customers there. We had a particularly strong response to the 12 Pro and the 12 Pro Max. Those results were particularly strong. But if you look at the balance of our products, we also set June quarter records for Wearables, Home and Accessories, for Mac and for services. So it was sort of an across the board strength. And we're seeing plenty of new customers come to the market. For example, Mac and iPad, about two-thirds of the customers who bought in the last quarter were new to that product. For the Apple Watch that number was 85%. And so, we could not be happier with the results. Shannon Cross: Was 85% China or overall? Tim Cook: 85% was China. I was talking about specifically the numbers of reference were specifically for China. Luca Maestri: And Shannon, for the world with the Watch is 75%. Shannon Cross: Right. Great. Thank you so much. Tejas Gala: Thanks, Shannon. Can we have the next question, please? Operator: Thank you. We'll take our next question from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani: Perfect. Thanks a lot for taking my question, I have two, as well. I guess first off Luca, I was hoping you could maybe talk a little bit more about the gross margins and maybe the expectations you laid out for September, I think sequentially implies down 100 basis points or so. So can you just touch on what are the puts and takes that would be helpful, because I think historically, September tends to be a flattish maybe even up a little bit gross margin number for you folks? Luca Maestri: Yeah, I think it's important to go back to the Q3 results, it's 43.3%. And one of the things that I mentioned is that in addition to getting really good cost savings on a sequential basis, we also had a very high mix of services as part of the total. And particularly with advertising doing really, really well, because of the rebound that we saw from COVID lockdowns a year ago. So as we move forward sequentially, we do expect a different mix and so that that drives the guidance that we provided which again, as you know, is significantly higher than just a year ago, for example. A year ago, we were at 38.2%, so almost 400 basis points of expansion on a year-over-year basis. And so, I think it's important to take that into account, just a different mix. Amit Daryanani: Got it. No, absolutely. I don't think anyone expected gross margins to be north of 40 this quickly for you folks. So that is impressive. As a follow-up on services, and I know you've called out the 33% growth this quarter, as a bit of an aberration that compares easier. But if you look at your services growth rate over the last four quarters, let's just say, what do you think is enabling this growth? Is it you're able to have a higher ARPU more monetization of the installed base? Or, is the installed base growing and choose which one's bigger? And then over time, how do you think those two components stack up for you? Luca Maestri: It's a combination of multiple factors. Obviously, the fact that our installed base continues to grow, and it sets new all-time highs all the time, obviously, it gives us a larger opportunity all the time. And second, we have more and more people that are engaged in our ecosystem, both transacting for free, which is a very large number, and people that are willing to pay for some of the services. And that percentage of people that are paying for our services continues to grow nicely. I mentioned, we grew double digits again this quarter. So that obviously helps on the revenue side. And of course, we continue to increase both the quality and the quantity of the services. As you know, during the last few years, we've launched a lot of new services from Apple TV+, Fitness+, Apple Arcade, News+, of course, the Apple Card. And so these are businesses that we are scaling right now, and so all that additional revenue helps. And I think it flows through our growth rates, as you said, during the last four quarters we are well into the mid-20s. So I think it's obviously very nice for us to see. Amit Daryanani: Perfect. Thank you. Tejas Gala: Thanks, Amit. Can we have the next question, please? Operator: Thank you. We’ll hear next from Katy Huberty with Morgan Stanley. Please go ahead. Katy Huberty: Thank you. Good afternoon. Can you hear me okay? Luca Maestri: Yes, we can. Katy Huberty: Okay, good. So first question, there's a debate in the market around how much Apple benefited from the pandemic, given increased spend in areas like Mac and App Store. But of course, you've mentioned over the past several quarters that there are other areas that were limited by the pandemic, and store closures and less foot traffic. When you net out all the puts and takes was your business helped? Or, was it hindered by the pandemic? Luca Maestri: Well, of course, Katy, we don't have the crystal ball that tells us exactly what these different variables, how they impacted our business. We do know that I would say on the positive side of the ledger, obviously, especially during the periods of extreme lockdowns, digital services did very well because entertainment options were limited. And so obviously, our digital services did really, really well. Obviously with more people working from home, more people studying from home, we know that iPad and Mac demand was very, very strong. On the other side we add certain services like advertising because of the reduced economic activity, Apple Care because our stores were closed, they were affected negatively. And certain products like the iPhone or the Watch that are may be more complex types of sales because of the complexity of the transaction. They were also affected because so many points of sale were closed all around the world, not only our stores but also our partner stores. It’s difficult for us to gauge because we've been constrained for quite a long period of time. And the reality is that maybe the new normal after we exit COVID may be different from the past. For example, maybe there's going to be hybrid models around work, for example. And so, it's difficult to tell you on a net basis what that is. Clearly, and this is very fluid because it tends to change over time. I can certainly tell you that we're all looking forward to a COVID free world, I think that would be very good for us and for our customers as well. Katy Huberty: And just to follow-up on iPhones, specifically, if you look historically, after a really strong product cycle, which you've experienced this year with iPhone 12. iPhone revenues come under pressure, because the upgrade rate slows, the mix often shifts to the lower end of the portfolio. Is it fair to assume a similar trend will play out over the next year? Or if not, time… [ph] Tim Cook: Katy, it's Tim. We're not predicting the next cycle. But I would point out a few things. One is we have a very large and growing installed base. As you know with the iPhones passed a billion active devices earlier this year. Two, we have loyal and satisfied customers. The customer set we're seeing on the new iPhones are just amazing. It's just jaw dropping. And the geographic response is pervasive across the world. In the U.S., we have the top three selling models. In the UK, we have four out of the top five. In Australia, we have the top two. In Japan, we have the top three. In urban China, we have the top two. And so the response from customers all around had been great. Obviously, the product itself is amazing. The 12 lineup was a huge leap that introduced 5G and have A14 Bionic and a number of other fantastic features that customers love. The next thing I think to consider is that we're in the very early innings of 5G. If you look at our 5G penetration around the world there's only a couple of countries that are in the double digits yet. And so that's an amazing thing, nine months or so into this. And the last thing is we're going to continue to deliver great products. We're going to continue to do what we do best is integrate hardware, software and services together into an amazing experience. And so those are the things that I would consider if I were coming up with forecast. Katy Huberty: That's great color. Thank you. Tejas Gala: Thanks, Katy. Can we have the next question, please? Operator: Thank you. We'll take our next question from Harsh Kumar with Piper Sandler. Harsh Kumar: Yeah. Hey, guys, first of all, congratulations, fantastic execution that resulted in consistency for your results. Tim, this is actually perfect timing for this question. You talked about your installed base of a billion odd units. I was curious if you could help us understand how all of that installed base is? And the reason that I'm asking this question is we're clearly seeing people upgrade to 5G phones. That's the case and that continues, that could be a larger force than most other forces for your revenues to continue to grow as people migrate to the 5G family of phones. So I was curious, if you can shed light on how the upgrades are happening and then also, how old that base is? Tim Cook: Yeah, what I would tell you is first of all, it's difficult to answer your question precisely. But what I would tell you is on both switchers and upgraders, we did extremely well in Q3. Both were up strong double digit, and the geographic representation of iPhone year-over-year comps looks extremely well. And so we're really pleased with it. I would remind you that the billion number that I quoted also was iPhone, where we quoted a number earlier in the year in the January call, I believe, of 1.65 billion devices is the total active devices just for clarification. And so the net is very strong switchers, very strong upgraders, best upgrade quarter for the June quarter that we've seen. And we feel really great about the momentum. But at the same time, we recognize that the 5G penetration is quite low around the world. And, they're very, very low. We're at the front end of this. Harsh Kumar: Fair enough. For my follow-up, Apple's probably one of the largest semiconductor companies in the world. How does Apple determine what's strategic, and something that Apple wants to make itself versus non-strategic? And also was curious, there's a lot of -- well, it's public news now the Arm is getting acquired by Nvidia. And I was just curious how Apple views that? Is that something that's beneficial to Apple or not meaningful or negative? Tim Cook: I think that acquisition has lots of questions that people are asking, and I'll sort of leave that up to everyone else. And in terms of us and how we decide to make silicon, we ask ourselves, if we can do something better, if we can deliver a better product, if we can buy something in the market. And it's great, and it's as good as what we could do, we're going to buy it. We will only enter where we believe we have a ability to do something better, and therefore make a better product for the user. And so the M1 is a great example of that. We have the ability within our silicon team to deliver product that we feel is appreciably better than we could buy. And so, we've taken our great hardware and software expertise, and combine those and have brought the M1 out. And the response to the M1 has been unbelievable. It's powering Mac sales that are constrained, it's powering now iPad, which also has constraints on it. And so, that's how we look at whether we should enter into a market or not. Harsh Kumar: Thank you. Tim Cook: Thanks for the question. Tejas Gala: Thank you. Can we have the next question, please? Operator: Certainly, we will take our next question from Krish Sankar with Cowen & Company. Please go ahead. Krish Sankar: Hi, thanks for taking my question, and congrats on the strong results. First one for Luca, you mentioned services growth should normalize in the September quarter. And I understand the last few quarters' services business was strong, driven by work from home, et cetera. So what is the normalized growth rate for the services business as folks return back to the office in this post-COVID world? And then I have a follow-up. Luca Maestri: Well, I think, you can go back several quarters and try to do a bit of an average and that's what we were talking about. Of course, there's always a bit of variability around results, right. But certainly, we haven't done 33% in years and so that was a bit of an anomaly. And again, I explained it's around a couple of the businesses that had a relatively easy compare during the June quarter. So our services growth has been for many, many quarters in strong double digits and we feel confident around that level. Krish Sankar: Got it. And then just a follow-up for Tim or Luca. I think, Tim, you mentioned in your prepared comments that in September quarter, there's going to be greater impact on supply constraints on the iPhone and iPad. So I'm kind of curious, this is the first time I heard you talk about component shortages impacting the iPhone. Can you be more specific? Is it display drivers? Or, what exactly is the choke point on the supply? Tim Cook: The majority of constraints we're seeing are of the variety that I think others are saying that are I would classify as industry shortage. We do have some shortages, in addition to that, that are where the demand has been so great and so beyond our own expectation that it's difficult to get the entire set of parts within the lead times that we try to get those. So it's a little bit of that as well. As I said before, I think probably maybe with the basis of your question, sort of the latest nodes, which we use in several of our products have not been as much of an issue. The legacy nodes are where the supply constraints have been on the silicon. Krish Sankar: Thanks, Tim. Tim Cook: Yeah. Tejas Gala: Thanks, Krish. Can we have the next question, please? Operator: Thank you. We’ll hear the next question from David Vogt with UBS. David Vogt: Great. Thank you guys for the question. So maybe just a point of clarification. So based on the data and the comments about upgraders and switchers being strong, as well as emerging markets were relatively strong in the quarter. What does that specific set of data points strength mean for the iPhone portfolio? And I guess my question around that is, when you think about switchers and price points, I think last year, you launched the SE2 to really address maybe some of the lower price point markets like the emerging markets. So does that mean thinking about the portfolio going forward, there's less of a need for a lower priced product going forward, and the current portfolio and the new cycle going forward would be more high-end in nature, as we currently have today? And then I have a follow-up. Tim Cook: David, we had an incredible quarter for the emerging markets in Q3. We set June quarter records in Mexico, and Brazil, and Chile, in Turkey, and UAE, and Poland and Czech Republic, India. Obviously, in China, as I've talked about before, Thailand, Malaysia, Vietnam, Cambodia, Indonesia, I could go on in the name a few more, it's a very long list. And so those results are for the entire line of products that we have. And keep in mind, we still do have SE in the line, we launched it a year ago, but it's still in the line today. And it’s sort of our entry price point. And so, I'm pleased with how all of them are doing. And I think we need to sort of that range of price points to accommodate the types of people that we want to accommodate. So we've put something for the entry buyer who really wants to get into an iPhone, and then something for the pro buyer who wants the very best iPhone that they can buy. And I think that's true in the emerging markets as good as it's true in the United States or other developed markets. David Vogt: No, that's helpful. I appreciate that, Tim. So does that mean sort of the emerging market buyer that wants to get into the iPhone is looking for a device that has 5G capability as well? Obviously, we're early innings in a lot of markets, or how do we think about that over the intermediate to longer-term in terms of consumer preference for 5G in those markets, if available from an infrastructure perspective? Tim Cook: In most of the markets I read, it is really, really, really early on 5G, really early. But I think the top end buyer is buying for the future as well, because they may hold their phone for two years or longer in some cases. So, 5G becomes an important part of their buying decision. David Vogt: Great. Thank you very much. Tejas Gala: Thank you. Can we have the next question, please? Operator: Thank you. We'll take our next question from Ben Bollin with Cleveland Research Company. Ben Bollin: Good evening, everyone. Thanks for taking the question. I wanted to start Luca or Tim, could you walk us through a little bit about how you think Apple One bundles are influencing the trajectory of services and the economics? And then a second part on services, I'm curious how you think IDFA is developing and influencing the trajectory of the advertising business within services? Tim Cook: In terms of Apple One as you know, we're offering Apple One because it makes enjoying our subscription services easier than ever before, including Apple Music and Apple TV+ and Apple Arcade and iCloud and more. And so we really put the customer at the center of that and have recently began to remind people about Apple One in a way that we probably waited a few months before doing that. And so, I'm very pleased with what we're seeing on Apple One right now. I think it's a great ramp for the future services. And more importantly, it's a great customer benefit because many of our customers like to try out more than one of these services, and it allows them to do that with one easy bundle and subscription service. In terms of IDFA or the advertising in general, I take it your question is around ATT. With ATT we've been getting quite a bit of customer positive reaction to being able to make the decision on a transparent basis about whether to be tracked or not. And it seems to be going very well from a user point of view. Tejas Gala: Thank you. Can we have a question, please? Operator: Thank you. We'll take our next question from Wamsi Mohan with Bank of America. Wamsi Mohan: Yes, thank you, I have two as well. To begin with Luca, you noted significant product revenue deleverage but yet your product gross margins were roughly flat, you know that cost savings. Can you maybe talk about whether these are tactical in nature, or more structural like vertical integration that will continue to drive benefits to product gross margins? And on services side, you noted several times about the strength in ad growth, which is obviously very high margin contributor, but the sequential trajectory on services margins was flat. So what were some of the offsets there? And I’ve a follow-up for Tim. Luca Maestri: Yeah. On the product side, I talked about cost savings. Tim mentioned that, maybe on the freight side, we're seeing some level of cost pressure that is a bit out of the norm, at this point in the cycle. For everything else, for all the major commodities and components, we continue to see a very typical cycle where we are getting good cost savings on a sequential basis. And so far, it's been very good as you can tell from the absolute level of gross margins, because on the product side, we're up more than 600 basis points on a year-over-year basis. So it feels something that we've been able to accomplish, and we were able to maintain, at least in the near-term, nothing that was abnormal during the quarter or a one-off in nature. It was pretty structural. On the services side, again, up a lot on a year-over-year basis. So, the baseline has gone up a lot. The sequential decline, as you said, it was very, very small. And as I mentioned several times in the past, we have a very large services portfolio with very different margin profiles in our services. And so even a slight change in mix can drive some sequential differences, and this was the case this quarter, just a different mix. I mentioned for example, that Apple Care has rebounded. And so the relative success of our services in the marketplace can drive some slight changes in gross margins. Again, step back for a second, 69.8% gross margin we're very, very happy with where we are with the services margin trajectory. Wamsi Mohan: Okay. Thanks, Luca. And Tim, there is increasing regulatory focus in China in particular on some of the Chinese companies. It's not a direct impact of Apple, but how should investors handicap the indirect impact, given some of these companies are pretty large contributors to Apple's App Store revenues? And also, is there -- are you seeing any impact at all from these? And is the limiting of the usage of some of these apps influencing how people are either interacting with your devices, or is there any other ancillary impact that you're seeing? Thank you. Tim Cook: For the quarter, as you can see we grew 58% so it was a strong quarter. And embedded in that was a quarterly record for services, which includes the App Store world. So, we're seeing strength in China. The economy has really bounced back there fairly quickly from COVID. In terms of the regulatory focus, what we are focusing on from our angle is to serve users there and make sure that they're very satisfied with the products and services that we’re showing. And we work with a lot of different companies to ensure that. So that's our focus. Tejas Gala: Thank you, Wamsi. A replay of today's call will be available for two weeks on Apple Podcasts as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please enter a confirmation code 9766068. These replays will be available by approximately 5 PM Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial Analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. Operator: Thank you. That does conclude today's conference. Thank you for your participation.	[ { "speaker": "Operator", "text": "Good day, and welcome to the Apple Q3 FY 2021 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Tejas Gala, Director, Investor Relations and Corporate Finance. Please go ahead." }, { "speaker": "Tejas Gala", "text": "Thank you. Good afternoon, and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the Company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed Annual Report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. I'd like now to turn the call over to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thanks, Tejas. Good afternoon, everyone. Today, Apple is reporting a very strong quarter with double digit revenue growth across our product and services categories, and in every geographic segment. We set a new June quarter revenue record of $81.4 billion, up 36% from last year, and the vast majority of markets we tracked grew double digits, with especially strong growth in emerging markets including India, Latin America, and Vietnam. Total retail sales also set a June quarter record, and almost all of our retail stores have now opened their doors. This quarter saw a growing sense of optimism from consumers in the United States and around the world, driving renewed hope for a better future and for all that innovation can make possible. But as the last 18-months had demonstrated many times before, progress made is not progress guaranteed. An uneven recovery to the pandemic and a Delta variant surging in many countries around the world have shown us once again, that the road to recovery will be a winding one. In the midst of that enduring adversity, we are especially humbled that our technology has continued to play a key role in keeping our customers connected. Just last month, it was great to be back with our teams and customers for the opening of our newest retail store in Los Angeles, our Apple Tower Theater. It was a hopeful reminder of the energy and sense of community, shared spaces bring and how appreciative we all are now of the simple privilege of talking to one another face to face. As we look forward to more in-person interactions in the future, we're doubling down on innovation, and doing all we can to help chart a course to a healthier and more equitable world. I'll have more to say about our work in those areas a bit later on. But first, let's turn to our product and services categories. For iPhone, this quarter saw very strong double digit growth in each geographic segment, and we continue to be heartened by our customer's response to the iPhone 12 lineup. We're only in the early innings of 5G, but already its incredible performance and speed have made a significant impact on how people can get the most out of our technology. Customers love iPhone 12 for its superfast 5G speeds, A14 Bionic chip and Adobe vision camera never seen before in a phone. Users continue to rely on iPad and Mac to work, learn, create and connect. iPad had its highest June quarter in nearly a decade, while Mac set an all-time June quarter record. We've seen a great response to the new iMac and iPad Pro, both powered by the M1 chips exceptional speed and power efficient performance. The iMac’s remarkable thin design and vibrant colors have made it a favorite for users everywhere. And the iPad continues to be an incredibly versatile tool in our user's toolbox, inspiring creativity and connection and keeping us entertained and productive in equal measure. It was another very strong quarter for wearables, home and accessories, which set a new June quarter record, while helping people find more ways to stay entertained, healthy and connected at home and on the go. Apple Watch remains a go to choice for users to stay on top of their health and reach their fitness goals. And our newest accessory AirTag began shipping to an enthusiastic response from customers, making the find my network more useful than ever, while protecting user privacy. Turning to services, which set a new all-time revenue record as we continue to roll out innovative new features and programming. We're proud to be the recipients of 35 Emmy Nominations this year, which speaks to the quality of our programming, and an enthusiastic reception from customers and critics alike. Apple TV+ users are loving series like Mythic Quest, and anticipating groundbreaking films like Coda, which premieres next month. And of course, Ted Lasso kicked off season two just last week, and continues to win over viewers with its heartwarming message about the power of community, compassion and hope. We also introduced Apple Podcast subscriptions, a global marketplace for users to discover exclusive content and support their favorite creators. And we launched spatial audio for Apple Music, a cinematic listening experience that promises to change how music fans listen, and musicians create even more immersive, layered, and beautiful songs. Last month, we shared many exciting new features at WWDC. But more powerful than any of them was the incredible showing of developers from all walks of life and around the world. The new tools we announced will help developers harness cutting edge technologies, like augmented reality, reach new users and customize their experience on the App Store, or learn to update or invent an app with Swift, Apple's powerful and intuitive programming language. Today's investments in education and coding translate to tomorrow's small businesses and groundbreaking new apps. The next act of an app economy, already creating jobs and opportunity around the world. In June, a new study by the analysis group found that it was another record year for App Store developers, whose combined billings and sales increased by 24% to $643 billion in 2020. The app economy continues to be an incredible engine of prosperity and opportunity, fueled by the ceaseless striving for developers to make apps that enrich people's lives. Much like the developer community, we are diehard optimist, about technology's potential to help people live happier, healthier and more fulfilled lives, goals that shine through with powerful new updates coming to iOS, iPad OS, Mac OS, and Watch OS this fall. That begins with innovative new features that help users stay connected with one another, like share play and spatial audio for FaceTime, or disconnect when they need a break like focus, which limits distracting notifications when you're winding down for bed or concentrating at work. And new productivity features make iPad an even more useful tool for multitasking, helping users navigate across apps, split their screen or use quick note to capture a thought the moment inspiration strikes. In the health space, our new health sharing feature will make it easier than ever to securely share your health data to share your health data with loved ones. That includes new capabilities like walking steadiness, which uses sensors to assess user stability doing everyday tasks, and recommends exercises to improve stability and avoid a fall. In the belief that privacy is a fundamental human right, we share new features in iOS 15 that continue to drive our progress forward, from mail privacy protection, which stops invisible pixels and an email from tracking your mail activity to App Privacy Report, which helps users check on the apps they've granted permission to use their personal data. We also introduced some incredible next generation technologies coming to the accessibility space. From assistive touch, which helps people with limb differences navigate Apple Watch to new voiceover capabilities to help blind and low vision users, accessibility remains a bedrock principle for us, in the simple belief that the best technology for the world should be the best technology for everyone. But the responsibility to be a force for good in the lives of others extends beyond the technology we made, so the teachers and students shaping our future. This quarter as part of our racial equity and justice initiative, we awarded innovation grants to engineering schools at four historically black colleges and universities to expand their coursework, scholarships and internship opportunities in hardware engineering and silicon chip design. We see education as a great equalizing force, and we're more dedicated than ever to supporting the educators, advocates and students lining the path and leading the way. That includes the 350 swift student challenge winners, we recognized at this year's WWDC. If you ever need a dose of hope or inspiration, I can't say enough about our students' scholarship winners, whose apps bring so much good into the world, from teaching other young people to code to helping volunteers deliver groceries to people at high risk of COVID-19. Young people's innovations remind us that our collective future is bound up in the next generations' passion for solving global challenges, and of the responsibility we have to join them in building a better world. Turning to our own backyard, we're continuing to press forward in our efforts to help bring more affordable housing to the Bay Area and across California. This month, we shared that we've contributed more than $1 billion to help first time homeowners and construct 1000s of new affordable housing units across the state. And we're continuing to stay focused on supporting the global response to the pandemic and delivering the best products and services for people. Our greatest source of inspiration is a technology itself, but how people use it in their own lives, in ways great and small, to write a novel or to read one, to care for an ailing patient or see a doctor virtually, to track their heart rate on a jog or to train for the Olympics. Every day, I'm grateful for the dedication of our teams to the simple mission of creating technology that improves people's lives. And I want to thank everyone at Apple for the purpose and passion they bring to that mission. With that, I'll hand it over to Luca for a deeper dive on our performance this quarter." }, { "speaker": "Luca Maestri", "text": "Thank you, Tim. Good afternoon, everyone. We're very pleased to report record June quarter financial results, which reflect the importance of our products and services in our customers lives and our strong underlying operating performance. Our revenue reached a June quarter record of $81.4 billion, an increase of nearly $22 billion or 36% from a year ago. We grew double digits in each of our product categories, with an all-time record for services, and June quarter records for iPhone, Mac, and Wearables, Home and Accessories. We also set new June quarter records in every geographic segment with very strong double digit growth in each one of them. Products revenue was a June quarter record of $63.9 billion, up 37% over a year ago. This level of sales performance, combined with the unmatched loyalty of our customers drove our installed base of active devices to a new all-time record. Our services set an all-time revenue record of $17.5 billion up 33% over a year ago, with June quarter records in each geographic segment. Company gross margin was 43.3%, up 80 basis points from last quarter driven by cost savings and a higher mix of services, partially offset by seasonal loss of leverage. Products gross margin was 36% down 10 basis points sequentially, a seasonal loss of leverage was almost entirely offset by cost savings. Services gross margin was 69.8% down 30 basis points sequentially, mainly due to a different mix. Net income of $21.7 billion, diluted earnings per share of $1.30, and operating cash flow of $21.1 billion were all June quarter records by a wide margin. Let me get into more detail for each of our revenue categories. iPhone revenue set a June quarter record of $39.6 billion growing 50% year-over-year and exceeding our own expectations, as the iPhone 12 family continued to be in very high demand. Performance was consistently strong across the world, and we grew very strong double digits in each geographic segment, setting June quarter records in most markets we track. Our active installed base of iPhones reached a new all-time high, thanks to the exceptional loyalty of our customer base and the strength of our ecosystem. In the U.S., the latest survey of consumers from 451 research indicates iPhone customer satisfaction of 97% for the iPhone 12 family. Turning to services, as I mentioned, we reach an all-time revenue record of $17.5 billion with all-time records for cloud services, music, video, advertising and payment services, and June quarter records for the App Store and Apple Care. Our newest service offerings Apple TV+, Apple Arcade, Apple News+, Apple card, Apple Fitness+ as well as the Apple One bundle, continue to scale across users, content and features and are contributing to overall services growth. The key drivers for our services business all continue to move in the right direction. First, our installed base of devices reached an all-time high across each geographic segment. Second, the number of both transacting and paid accounts on our digital content stores reached a new all-time high during the June quarter in each geographic segment, and paid accounts increased double digits. Third, paid subscriptions continue to show strong growth. We now have more than 700 million paid subscriptions across the services on our platform, which is up more than 150 million from last year, and nearly four times the number of paid subscriptions we had only four years ago. And finally, we're adding new services that we think our customers will love, while also continuing to improve the breadth and quality of our current services offerings. For example, during WWDC in June, we previewed our new iCloud+, and Apple Wallet features, which we believe will create a more secure and differentiated customer experience. Wearables, home and accessories grew 36% year-over-year to $8.8 billion, setting new June quarter revenue records in every geographic segment. We continue to improve and expand our product offerings in this category. This quarter, we began shipping our new Apple TV 4K with a redesign Siri remote and our brand new air tags, and the customer response to both products has been very strong. In addition to its outstanding sales performance globally, Apple Watch continues to extend its reach, with nearly 75% of the customers purchasing Apple Watch during the quarter being new to the product. For Mac, despite supply constraints, we set a June quarter record of $8.2 billion up 16% over last year, with June quarter revenue records in most markets we track around the world. It is remarkable that the last four quarters for Mac have been its best four quarters ever. This exceptional level of sales success has been driven by the very enthusiastic customer response to our new Macs, powered by the M1 chip, which we most recently brought to our newly redesigned iMac. iPad performance was also strong with revenue of $7.4 billion up 12% in spite of significant supply constraints. During the quarter we also started shipping our new iPad Pro powered by the M1 chip and customer response has been outstanding. Both iPad and Mac have taken computing to the next level, and when you combine their performance over the last 12-months, they're now the size of a Fortune-50 business, thanks to the best product lineups we've ever had, very high levels of customer satisfaction and a loyal growing installed base. In fact, around half of the customers purchasing Mac and iPad during the quarter were new to that product. And in most recent surveys of U.S. consumers from 451 research customer satisfaction was 92% for Mac and 95% for iPad. In enterprise, our customers are excited about the superior performance, battery life and security that the new M1 Macs bring. MassMutual for example, is offering M1 MacBook Pro to all of its employees and equipping all conference rooms with M1 Mac minis in preparation for return to work. And with its incredible performance and affordable entry price, the MacBook Air with M1 is gaining rapid adoption among many leading enterprise organizations. Italgas, Italy's largest natural gas company, which will soon be using its extensive network to distribute renewable gases is replacing every employee's Windows laptop with the new MacBook Air powered by Apple's M1 chip to bring the latest technology to its workforce. And Grab, Southeast Asia's leading super app that provides transportation, food delivery and digital payment services is adding M1 MacBook Air to its company-wide M1 Mac deployment. Let me now turn to our cash position, we ended the quarter with $194 billion in cash plus marketable securities. We retired $3 billion of term debt and increased commercial paper by $3 billion, leaving us with total debt of $122 billion. As a result, net cash was $72 billion at the end of the quarter. As our business continued to perform at a very high level, we were also able to return $29 billion to shareholders during the June quarter. This included $3.8 billion in dividends and equivalence, and $17.5 billion through open market repurchases of 136 million Apple shares. We also began a $5 billion accelerated share repurchase program in May, resulting in the initial delivery and retirement of 32 million shares. As we move ahead into the September quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near-term, we're not providing revenue guidance. But we are sharing some directional insights, assuming that the COVID-related impacts to our business do not worsen from what we're projecting today for the current quarter. We expect very strong double digit year-over-year revenue growth during the September quarter. We expect revenue growth to be lower than our June quarter year-over-year growth of 36% for three reasons. First, we expect the foreign exchange impact on our year-over-year growth rate to be three points less favorable than it was during the June quarter. Second, we expect our services growth rate to return to a more typical level. The growth rate during the June quarter benefited from a favorable compare, as certain services were significantly impacted by the COVID lockdowns a year ago. And third, we expect supply constraints during the September quarter to be greater than what we experienced during the June quarter. The constraints will primarily impact iPhone and iPad. We expect gross margin to be between 41.5% and 42.5%. We expect our OpEx to be between $11.3 billion and $11.5 billion. We expect OI&E to be around zero, excluding any potential impact from the mark to market of minority investments and our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividends with $0.22 per share of common stock payable on August 12, 2021, to shareholders of record as of August 9, 2021. With that, let's open the call to questions." }, { "speaker": "Tim Cook", "text": "Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please." }, { "speaker": "Operator", "text": "Thank you. Our first question comes from Katy Huberty from Morgan Stanley. Please go ahead. Katy, your line is open. Please check your mute function. We'll take our next question from Chris Caso with Raymond James." }, { "speaker": "Chris Caso", "text": "Thank you. Good morning. Just dig into the commentary on guidance a little bit. Just starting with the fact that last year, obviously there was a later launch of iPhone than what was typically seen in other years. Could you talk us through that, and perhaps some of the other products, what may be different as compared to last year?" }, { "speaker": "Luca Maestri", "text": "Well, as I explained that, first of all, we are expecting to grow very strong double digits, that's I think Chris the starting point here. We expect this very strong level of growth that we've experienced during the course of the year, to continue into the September quarter. We said that the growth rate is going to be below 36%. And I've listed three factors. The first factor is that the dollar continues to be favorable on a year-over-year basis in the sense that it's weakened against most currencies on a year-over-year basis. But that benefit is going to be about three points less in the September quarter than what we've experienced during the June quarter, because the dollar strengthened against most currencies in recent weeks. Second, I mentioned that the services growth rate that we've experienced in the June quarter 33%, that's significantly higher than what we've had in recent history. And that was due to the fact that there were a couple of services categories, namely, our advertising business and Apple Care, that were significantly impacted a year ago, because of the COVID lock downs. And therefore, they're relatively easy compare in the June quarter. So we don't expect that to continue into the September quarter. And so we expect to see significant growth in services, but not to the level that we've seen in June. And then I mentioned that the supply constraints that we've seen in the June quarter will be higher during the September quarter. Back in when we talked here three months ago, we said that we were expecting supply constraints for the June quarter between $3 billion and $4 billion, to affect primarily iPad and Mac. We were able to mitigate some of those constraints during the June quarter, and so we came in at a number that was slightly below the low-end of that range that we accorded at the beginning of the quarter. But we expect that number to be higher for the September quarter. And so when you put all that together, again, very strong double digit growth for September, with this caveat, that I just mentioned." }, { "speaker": "Chris Caso", "text": "Thank you. If I could follow-up with regard to the supply constraints, and do you expect those supply constraints to persist through the December quarter as well? What effect will that have on the holiday selling season? And then, in conjunction with that, what additional costs are you absorbing because of the supply constraints? Is that having an effect on gross margins or just product costs in general, as you perhaps pay a little more to get more supply?" }, { "speaker": "Tim Cook", "text": "Chris, it's Tim. In terms of the cost, we're paying more for freight than I would like to pay. But component costs continue in the aggregate to decline. In terms of supply constraints, and how long they will last, I don't want to predict that today. We're going to take it sort of one quarter at a time. And as you would guess we'll do everything we can to mitigate whatever set of circumstances were dealt." }, { "speaker": "Luca Maestri", "text": "And Chris, on the cost side, as I mentioned during my comments, our results for gross margins for the June quarter 43.3%, we really saw some really nice cost savings during the quarter. And I think you've seen that we provided guidance for 41.5% to 42.5% for September, which is obviously a level that we are very pleased with." }, { "speaker": "Chris Caso", "text": "Right. Thank you." }, { "speaker": "Tejas Gala", "text": "Thank you, Chris. Can we have the next question please?" }, { "speaker": "Operator", "text": "Thank you. We'll take our next question from Jim Suva with Citigroup Investment Research. Please go ahead." }, { "speaker": "Jim Suva", "text": "Thank you very much, and congratulations to you and your global team for great operations during a challenging time. Tim and Luca, I just have one question and either of you or both of you could figure out who's best to answer it. But we look at a world of pretty unprecedented whether it be COVID, the Delta variant, China floods, supply chain, components. Just wondering for your, like R&D and innovation, is it being materially impacted by that such where a normal cadence is unfair? Or, is it kind of happening during a slow time of year where you're able to empower people to work remotely, and still have the typical innovations and product launches that you've had historically in the past?" }, { "speaker": "Tim Cook", "text": "Jim, the company has been incredibly resilient. The employees are really doing double duty. And I could not be more pleased with the cadence that we're coming out with new things. As you can see from the software announcements that we made at WWDC, and the corresponding launches of the software that we plan on in the fall, and then all of the products that we've been able to bring out over the last 12 to 18-months, it's amazing. So I'm very pleased with it." }, { "speaker": "Tejas Gala", "text": "Thanks, Jim. Can we please the next question please?" }, { "speaker": "Jim Suva", "text": "Thank you. Congratulations again." }, { "speaker": "Tim Cook", "text": "Thank you." }, { "speaker": "Operator", "text": "Thank you. We'll take our next question from Shannon Cross with Cross Research." }, { "speaker": "Shannon Cross", "text": "Thank you very much, Tim, I'm curious, what have you learned from this iPhone cycle regarding customer preferences and pricing and maybe subscriptions and that? And if there's a difference, if you could talk about on a geographic basis. Thanks." }, { "speaker": "Tim Cook", "text": "If you look at our results in Q3, Shannon, we had strong double digit growth for switchers and for upgraders. And, in fact, it was our largest upgrade quarter for Q3 ever. And so we feel really, really great about both categories. And as Luca kind of said, during the preamble or opening comments, our results are really strong for iPhone around the world. And so it's been a very, very strong cycle. And yet we're -- the penetration on 5G is obviously still very, very low. And so we feel really good about the future of the iPhone." }, { "speaker": "Shannon Cross", "text": "Okay. And maybe if you can talk a bit about China, up 58%, where are you seeing the growth? What are you hearing from customers there? Obviously 58% is not sustainable, but how sustainable is the strength? Thank you." }, { "speaker": "Tim Cook", "text": "It was an incredibly strong quarter, it set a June quarter revenue record for Greater China for us. And so we're very proud of that. And, doing the best job we can to serve customers there. We had a particularly strong response to the 12 Pro and the 12 Pro Max. Those results were particularly strong. But if you look at the balance of our products, we also set June quarter records for Wearables, Home and Accessories, for Mac and for services. So it was sort of an across the board strength. And we're seeing plenty of new customers come to the market. For example, Mac and iPad, about two-thirds of the customers who bought in the last quarter were new to that product. For the Apple Watch that number was 85%. And so, we could not be happier with the results." }, { "speaker": "Shannon Cross", "text": "Was 85% China or overall?" }, { "speaker": "Tim Cook", "text": "85% was China. I was talking about specifically the numbers of reference were specifically for China." }, { "speaker": "Luca Maestri", "text": "And Shannon, for the world with the Watch is 75%." }, { "speaker": "Shannon Cross", "text": "Right. Great. Thank you so much." }, { "speaker": "Tejas Gala", "text": "Thanks, Shannon. Can we have the next question, please?" }, { "speaker": "Operator", "text": "Thank you. We'll take our next question from Amit Daryanani with Evercore. Please go ahead." }, { "speaker": "Amit Daryanani", "text": "Perfect. Thanks a lot for taking my question, I have two, as well. I guess first off Luca, I was hoping you could maybe talk a little bit more about the gross margins and maybe the expectations you laid out for September, I think sequentially implies down 100 basis points or so. So can you just touch on what are the puts and takes that would be helpful, because I think historically, September tends to be a flattish maybe even up a little bit gross margin number for you folks?" }, { "speaker": "Luca Maestri", "text": "Yeah, I think it's important to go back to the Q3 results, it's 43.3%. And one of the things that I mentioned is that in addition to getting really good cost savings on a sequential basis, we also had a very high mix of services as part of the total. And particularly with advertising doing really, really well, because of the rebound that we saw from COVID lockdowns a year ago. So as we move forward sequentially, we do expect a different mix and so that that drives the guidance that we provided which again, as you know, is significantly higher than just a year ago, for example. A year ago, we were at 38.2%, so almost 400 basis points of expansion on a year-over-year basis. And so, I think it's important to take that into account, just a different mix." }, { "speaker": "Amit Daryanani", "text": "Got it. No, absolutely. I don't think anyone expected gross margins to be north of 40 this quickly for you folks. So that is impressive. As a follow-up on services, and I know you've called out the 33% growth this quarter, as a bit of an aberration that compares easier. But if you look at your services growth rate over the last four quarters, let's just say, what do you think is enabling this growth? Is it you're able to have a higher ARPU more monetization of the installed base? Or, is the installed base growing and choose which one's bigger? And then over time, how do you think those two components stack up for you?" }, { "speaker": "Luca Maestri", "text": "It's a combination of multiple factors. Obviously, the fact that our installed base continues to grow, and it sets new all-time highs all the time, obviously, it gives us a larger opportunity all the time. And second, we have more and more people that are engaged in our ecosystem, both transacting for free, which is a very large number, and people that are willing to pay for some of the services. And that percentage of people that are paying for our services continues to grow nicely. I mentioned, we grew double digits again this quarter. So that obviously helps on the revenue side. And of course, we continue to increase both the quality and the quantity of the services. As you know, during the last few years, we've launched a lot of new services from Apple TV+, Fitness+, Apple Arcade, News+, of course, the Apple Card. And so these are businesses that we are scaling right now, and so all that additional revenue helps. And I think it flows through our growth rates, as you said, during the last four quarters we are well into the mid-20s. So I think it's obviously very nice for us to see." }, { "speaker": "Amit Daryanani", "text": "Perfect. Thank you." }, { "speaker": "Tejas Gala", "text": "Thanks, Amit. Can we have the next question, please?" }, { "speaker": "Operator", "text": "Thank you. We’ll hear next from Katy Huberty with Morgan Stanley. Please go ahead." }, { "speaker": "Katy Huberty", "text": "Thank you. Good afternoon. Can you hear me okay?" }, { "speaker": "Luca Maestri", "text": "Yes, we can." }, { "speaker": "Katy Huberty", "text": "Okay, good. So first question, there's a debate in the market around how much Apple benefited from the pandemic, given increased spend in areas like Mac and App Store. But of course, you've mentioned over the past several quarters that there are other areas that were limited by the pandemic, and store closures and less foot traffic. When you net out all the puts and takes was your business helped? Or, was it hindered by the pandemic?" }, { "speaker": "Luca Maestri", "text": "Well, of course, Katy, we don't have the crystal ball that tells us exactly what these different variables, how they impacted our business. We do know that I would say on the positive side of the ledger, obviously, especially during the periods of extreme lockdowns, digital services did very well because entertainment options were limited. And so obviously, our digital services did really, really well. Obviously with more people working from home, more people studying from home, we know that iPad and Mac demand was very, very strong. On the other side we add certain services like advertising because of the reduced economic activity, Apple Care because our stores were closed, they were affected negatively. And certain products like the iPhone or the Watch that are may be more complex types of sales because of the complexity of the transaction. They were also affected because so many points of sale were closed all around the world, not only our stores but also our partner stores. It’s difficult for us to gauge because we've been constrained for quite a long period of time. And the reality is that maybe the new normal after we exit COVID may be different from the past. For example, maybe there's going to be hybrid models around work, for example. And so, it's difficult to tell you on a net basis what that is. Clearly, and this is very fluid because it tends to change over time. I can certainly tell you that we're all looking forward to a COVID free world, I think that would be very good for us and for our customers as well." }, { "speaker": "Katy Huberty", "text": "And just to follow-up on iPhones, specifically, if you look historically, after a really strong product cycle, which you've experienced this year with iPhone 12. iPhone revenues come under pressure, because the upgrade rate slows, the mix often shifts to the lower end of the portfolio. Is it fair to assume a similar trend will play out over the next year? Or if not, time… [ph]" }, { "speaker": "Tim Cook", "text": "Katy, it's Tim. We're not predicting the next cycle. But I would point out a few things. One is we have a very large and growing installed base. As you know with the iPhones passed a billion active devices earlier this year. Two, we have loyal and satisfied customers. The customer set we're seeing on the new iPhones are just amazing. It's just jaw dropping. And the geographic response is pervasive across the world. In the U.S., we have the top three selling models. In the UK, we have four out of the top five. In Australia, we have the top two. In Japan, we have the top three. In urban China, we have the top two. And so the response from customers all around had been great. Obviously, the product itself is amazing. The 12 lineup was a huge leap that introduced 5G and have A14 Bionic and a number of other fantastic features that customers love. The next thing I think to consider is that we're in the very early innings of 5G. If you look at our 5G penetration around the world there's only a couple of countries that are in the double digits yet. And so that's an amazing thing, nine months or so into this. And the last thing is we're going to continue to deliver great products. We're going to continue to do what we do best is integrate hardware, software and services together into an amazing experience. And so those are the things that I would consider if I were coming up with forecast." }, { "speaker": "Katy Huberty", "text": "That's great color. Thank you." }, { "speaker": "Tejas Gala", "text": "Thanks, Katy. Can we have the next question, please?" }, { "speaker": "Operator", "text": "Thank you. We'll take our next question from Harsh Kumar with Piper Sandler." }, { "speaker": "Harsh Kumar", "text": "Yeah. Hey, guys, first of all, congratulations, fantastic execution that resulted in consistency for your results. Tim, this is actually perfect timing for this question. You talked about your installed base of a billion odd units. I was curious if you could help us understand how all of that installed base is? And the reason that I'm asking this question is we're clearly seeing people upgrade to 5G phones. That's the case and that continues, that could be a larger force than most other forces for your revenues to continue to grow as people migrate to the 5G family of phones. So I was curious, if you can shed light on how the upgrades are happening and then also, how old that base is?" }, { "speaker": "Tim Cook", "text": "Yeah, what I would tell you is first of all, it's difficult to answer your question precisely. But what I would tell you is on both switchers and upgraders, we did extremely well in Q3. Both were up strong double digit, and the geographic representation of iPhone year-over-year comps looks extremely well. And so we're really pleased with it. I would remind you that the billion number that I quoted also was iPhone, where we quoted a number earlier in the year in the January call, I believe, of 1.65 billion devices is the total active devices just for clarification. And so the net is very strong switchers, very strong upgraders, best upgrade quarter for the June quarter that we've seen. And we feel really great about the momentum. But at the same time, we recognize that the 5G penetration is quite low around the world. And, they're very, very low. We're at the front end of this." }, { "speaker": "Harsh Kumar", "text": "Fair enough. For my follow-up, Apple's probably one of the largest semiconductor companies in the world. How does Apple determine what's strategic, and something that Apple wants to make itself versus non-strategic? And also was curious, there's a lot of -- well, it's public news now the Arm is getting acquired by Nvidia. And I was just curious how Apple views that? Is that something that's beneficial to Apple or not meaningful or negative?" }, { "speaker": "Tim Cook", "text": "I think that acquisition has lots of questions that people are asking, and I'll sort of leave that up to everyone else. And in terms of us and how we decide to make silicon, we ask ourselves, if we can do something better, if we can deliver a better product, if we can buy something in the market. And it's great, and it's as good as what we could do, we're going to buy it. We will only enter where we believe we have a ability to do something better, and therefore make a better product for the user. And so the M1 is a great example of that. We have the ability within our silicon team to deliver product that we feel is appreciably better than we could buy. And so, we've taken our great hardware and software expertise, and combine those and have brought the M1 out. And the response to the M1 has been unbelievable. It's powering Mac sales that are constrained, it's powering now iPad, which also has constraints on it. And so, that's how we look at whether we should enter into a market or not." }, { "speaker": "Harsh Kumar", "text": "Thank you." }, { "speaker": "Tim Cook", "text": "Thanks for the question." }, { "speaker": "Tejas Gala", "text": "Thank you. Can we have the next question, please?" }, { "speaker": "Operator", "text": "Certainly, we will take our next question from Krish Sankar with Cowen & Company. Please go ahead." }, { "speaker": "Krish Sankar", "text": "Hi, thanks for taking my question, and congrats on the strong results. First one for Luca, you mentioned services growth should normalize in the September quarter. And I understand the last few quarters' services business was strong, driven by work from home, et cetera. So what is the normalized growth rate for the services business as folks return back to the office in this post-COVID world? And then I have a follow-up." }, { "speaker": "Luca Maestri", "text": "Well, I think, you can go back several quarters and try to do a bit of an average and that's what we were talking about. Of course, there's always a bit of variability around results, right. But certainly, we haven't done 33% in years and so that was a bit of an anomaly. And again, I explained it's around a couple of the businesses that had a relatively easy compare during the June quarter. So our services growth has been for many, many quarters in strong double digits and we feel confident around that level." }, { "speaker": "Krish Sankar", "text": "Got it. And then just a follow-up for Tim or Luca. I think, Tim, you mentioned in your prepared comments that in September quarter, there's going to be greater impact on supply constraints on the iPhone and iPad. So I'm kind of curious, this is the first time I heard you talk about component shortages impacting the iPhone. Can you be more specific? Is it display drivers? Or, what exactly is the choke point on the supply?" }, { "speaker": "Tim Cook", "text": "The majority of constraints we're seeing are of the variety that I think others are saying that are I would classify as industry shortage. We do have some shortages, in addition to that, that are where the demand has been so great and so beyond our own expectation that it's difficult to get the entire set of parts within the lead times that we try to get those. So it's a little bit of that as well. As I said before, I think probably maybe with the basis of your question, sort of the latest nodes, which we use in several of our products have not been as much of an issue. The legacy nodes are where the supply constraints have been on the silicon." }, { "speaker": "Krish Sankar", "text": "Thanks, Tim." }, { "speaker": "Tim Cook", "text": "Yeah." }, { "speaker": "Tejas Gala", "text": "Thanks, Krish. Can we have the next question, please?" }, { "speaker": "Operator", "text": "Thank you. We’ll hear the next question from David Vogt with UBS." }, { "speaker": "David Vogt", "text": "Great. Thank you guys for the question. So maybe just a point of clarification. So based on the data and the comments about upgraders and switchers being strong, as well as emerging markets were relatively strong in the quarter. What does that specific set of data points strength mean for the iPhone portfolio? And I guess my question around that is, when you think about switchers and price points, I think last year, you launched the SE2 to really address maybe some of the lower price point markets like the emerging markets. So does that mean thinking about the portfolio going forward, there's less of a need for a lower priced product going forward, and the current portfolio and the new cycle going forward would be more high-end in nature, as we currently have today? And then I have a follow-up." }, { "speaker": "Tim Cook", "text": "David, we had an incredible quarter for the emerging markets in Q3. We set June quarter records in Mexico, and Brazil, and Chile, in Turkey, and UAE, and Poland and Czech Republic, India. Obviously, in China, as I've talked about before, Thailand, Malaysia, Vietnam, Cambodia, Indonesia, I could go on in the name a few more, it's a very long list. And so those results are for the entire line of products that we have. And keep in mind, we still do have SE in the line, we launched it a year ago, but it's still in the line today. And it’s sort of our entry price point. And so, I'm pleased with how all of them are doing. And I think we need to sort of that range of price points to accommodate the types of people that we want to accommodate. So we've put something for the entry buyer who really wants to get into an iPhone, and then something for the pro buyer who wants the very best iPhone that they can buy. And I think that's true in the emerging markets as good as it's true in the United States or other developed markets." }, { "speaker": "David Vogt", "text": "No, that's helpful. I appreciate that, Tim. So does that mean sort of the emerging market buyer that wants to get into the iPhone is looking for a device that has 5G capability as well? Obviously, we're early innings in a lot of markets, or how do we think about that over the intermediate to longer-term in terms of consumer preference for 5G in those markets, if available from an infrastructure perspective?" }, { "speaker": "Tim Cook", "text": "In most of the markets I read, it is really, really, really early on 5G, really early. But I think the top end buyer is buying for the future as well, because they may hold their phone for two years or longer in some cases. So, 5G becomes an important part of their buying decision." }, { "speaker": "David Vogt", "text": "Great. Thank you very much." }, { "speaker": "Tejas Gala", "text": "Thank you. Can we have the next question, please?" }, { "speaker": "Operator", "text": "Thank you. We'll take our next question from Ben Bollin with Cleveland Research Company." }, { "speaker": "Ben Bollin", "text": "Good evening, everyone. Thanks for taking the question. I wanted to start Luca or Tim, could you walk us through a little bit about how you think Apple One bundles are influencing the trajectory of services and the economics? And then a second part on services, I'm curious how you think IDFA is developing and influencing the trajectory of the advertising business within services?" }, { "speaker": "Tim Cook", "text": "In terms of Apple One as you know, we're offering Apple One because it makes enjoying our subscription services easier than ever before, including Apple Music and Apple TV+ and Apple Arcade and iCloud and more. And so we really put the customer at the center of that and have recently began to remind people about Apple One in a way that we probably waited a few months before doing that. And so, I'm very pleased with what we're seeing on Apple One right now. I think it's a great ramp for the future services. And more importantly, it's a great customer benefit because many of our customers like to try out more than one of these services, and it allows them to do that with one easy bundle and subscription service. In terms of IDFA or the advertising in general, I take it your question is around ATT. With ATT we've been getting quite a bit of customer positive reaction to being able to make the decision on a transparent basis about whether to be tracked or not. And it seems to be going very well from a user point of view." }, { "speaker": "Tejas Gala", "text": "Thank you. Can we have a question, please?" }, { "speaker": "Operator", "text": "Thank you. We'll take our next question from Wamsi Mohan with Bank of America." }, { "speaker": "Wamsi Mohan", "text": "Yes, thank you, I have two as well. To begin with Luca, you noted significant product revenue deleverage but yet your product gross margins were roughly flat, you know that cost savings. Can you maybe talk about whether these are tactical in nature, or more structural like vertical integration that will continue to drive benefits to product gross margins? And on services side, you noted several times about the strength in ad growth, which is obviously very high margin contributor, but the sequential trajectory on services margins was flat. So what were some of the offsets there? And I’ve a follow-up for Tim." }, { "speaker": "Luca Maestri", "text": "Yeah. On the product side, I talked about cost savings. Tim mentioned that, maybe on the freight side, we're seeing some level of cost pressure that is a bit out of the norm, at this point in the cycle. For everything else, for all the major commodities and components, we continue to see a very typical cycle where we are getting good cost savings on a sequential basis. And so far, it's been very good as you can tell from the absolute level of gross margins, because on the product side, we're up more than 600 basis points on a year-over-year basis. So it feels something that we've been able to accomplish, and we were able to maintain, at least in the near-term, nothing that was abnormal during the quarter or a one-off in nature. It was pretty structural. On the services side, again, up a lot on a year-over-year basis. So, the baseline has gone up a lot. The sequential decline, as you said, it was very, very small. And as I mentioned several times in the past, we have a very large services portfolio with very different margin profiles in our services. And so even a slight change in mix can drive some sequential differences, and this was the case this quarter, just a different mix. I mentioned for example, that Apple Care has rebounded. And so the relative success of our services in the marketplace can drive some slight changes in gross margins. Again, step back for a second, 69.8% gross margin we're very, very happy with where we are with the services margin trajectory." }, { "speaker": "Wamsi Mohan", "text": "Okay. Thanks, Luca. And Tim, there is increasing regulatory focus in China in particular on some of the Chinese companies. It's not a direct impact of Apple, but how should investors handicap the indirect impact, given some of these companies are pretty large contributors to Apple's App Store revenues? And also, is there -- are you seeing any impact at all from these? And is the limiting of the usage of some of these apps influencing how people are either interacting with your devices, or is there any other ancillary impact that you're seeing? Thank you." }, { "speaker": "Tim Cook", "text": "For the quarter, as you can see we grew 58% so it was a strong quarter. And embedded in that was a quarterly record for services, which includes the App Store world. So, we're seeing strength in China. The economy has really bounced back there fairly quickly from COVID. In terms of the regulatory focus, what we are focusing on from our angle is to serve users there and make sure that they're very satisfied with the products and services that we’re showing. And we work with a lot of different companies to ensure that. So that's our focus." }, { "speaker": "Tejas Gala", "text": "Thank you, Wamsi. A replay of today's call will be available for two weeks on Apple Podcasts as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please enter a confirmation code 9766068. These replays will be available by approximately 5 PM Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial Analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us." }, { "speaker": "Operator", "text": "Thank you. That does conclude today's conference. Thank you for your participation." } ]	Apple Inc.	24,937
AAPL	2	2,021	2021-04-28 17:00:00	Operator: Good day, and welcome to the Apple Q2 FY 2021 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Tejas Gala, Director, Investor Relations and Corporate Finance. Please go ahead. Tejas Gala: Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the Company's business results of operation. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. I'd now like to turn over the call to Tim for introductory remarks. Tim Cook: Thanks, Tejas. Good afternoon, everyone, and thanks for joining the call today. Apple is proud to report another strong quarter, one where we set new March quarter records for both revenue and earnings, besting our year ago revenue performance by 54%. Reflecting both the enduring ways our products have helped our users meet this moment in their own lives as well as the optimism consumers seem to feel about better days ahead, we set new March quarter records in every geographic segment, and success was broadly distributed across our product categories. Mac and Services delivered all-time record results, and we set new March quarter records for iPhone and Wearables, Home and Accessories. To provide some color on our results, let's turn to our product categories. We saw a very strong performance for iPhone, which grew 66% year-over-year driven by the strong popularity of the iPhone 12 family. With unmatched 5G capability, the best camera system ever in an iPhone and advanced durability from ceramic shield, this family of devices is popular with both upgraders and new customers alike. And just last week, we unveiled an all-new purple finish for iPhone 12 and 12 Mini. As has been the case throughout the pandemic, iPad and Mac continue to be critically important tools for our customers. Over the past year, tens of millions of iPads and Macs have been deployed to help students learn, creators create, and to enhance remote work in all of its forms. This has helped iPad grow very strong double digits to its highest March quarter revenue in nearly a decade. On Mac, fueled by the M1, we set an all-time revenue record continuing the momentum for the product category. In fact, the last three quarters for Mac have been its three best quarters ever. Last week, both iPad and Mac took a big step forward. We debuted a radically redesigned brand-new iMac designed around M1's unmatched capabilities, and we've brought M1 to iPad for the first time in the new iPad Pro with 5G capability and a Liquid Retina XDR display. It was a quarter of sustained strength for Wearables, Home and Accessories, which grew by 25% year-over-year. Apple Watch is a global success story, and the category set March quarter records in each geographic segment, thanks to strong performance from both Apple Watch Series 6 and Apple Watch SE. It's an exciting and busy period ahead for Wearables, Home and Accessories with the launch of the next-generation Apple TV 4K and our newest accessory, AirTag. AirTag builds on the powerful and incredibly useful Find My experience, helping users privately and securely keep track of the items that matter most to them. Third-party accessories and products can also make use of the Find My network guaranteeing a great experience no matter what products you choose to use. Turning to Services. We achieved growth of 27% year-over-year and set new records for services in each of our geographic segments. We continue to enhance and improve our current service offerings from Apple Music to Apple News while continuing to launch new services that enhance our customers' lives. Just last week, we introduced Apple Card family which reinvents how you can share credit cards and build credit together. We also announced Apple Podcast subscriptions, a global marketplace for listeners to discover premium content from their favorite creators and storytellers. While we're on the topic of services, in many ways, this quarter showed the unique value to customers created by Apple's belief in the deep integration of hardware, software, and services. Across our products and throughout our software ecosystem, we continue to deploy industry-leading new tools to protect users' fundamental right to privacy. In addition to the App Store privacy nutrition labels that we discussed on last quarter's call, we're proud to have launched the full implementation of App Tracking Transparency. This powerful, yet simple idea gives users a choice over how their data is used and shared across the apps that they love and use every day. No matter what device you enjoy it from, it is a milestone period for Apple TV+, racking up many new award nominations and wins, including its first Oscar nominations. Ted Lasso, in particular, has been recognized with a multitude of awards and nominations including most recently, an AFI Program of the Year Recognition, Writers Guild of America Awards, and a clean sweep at the Critics Choice Awards. Apple TV+ also continues to be a place where we can tell stories that matter and lift up important voices and experiences like our new upcoming content partnership with Malala, our latest original documentary special The Year the Earth Changed narrated by the legendary David Attenborough and released to commemorate Earth Day. This is, of course, just one example of how Apple lives its values and operationalizes the idea that to whom much is given, much is expected. To begin with our environmental efforts, just last week, we marked a milestone Earth Day on multiple fronts. In addition to the progress we've made in our own efforts to achieve our pledge of a net zero carbon footprint by 2030 across our entire supply chain and use of our products, we're proud to play a role in the growing ripple change taking place across the private sector. As of this month, 110 of our suppliers have joined us in our renewable energy commitment, and we will bring online nearly 8 gigawatts of new clean energy, the equivalent of taking 3.4 million gas-powered vehicles off the road each year. Through Apple's $4.7 billion in green bonds and related efforts, we've supported transformative environmental projects around the world from clean energy initiatives in China to two of the world's largest onshore wind turbines in Denmark to 180-acre solar project outside Reno, Nevada and many more. We're also keenly focused on how this wave of green innovation can lead to equitably shared prosperity. Through our new $200 million Restore Fund, we're helping local and rural communities around the world build sustainable industries around working for us creating opportunities and removing up to 1 million metric tons of carbon from the atmosphere every year. And here in the United States, we started a green impact accelerator, investing and supporting minority-owned businesses at the forefront of environmental fields. As we look forward to WWDC, we're taking new steps to support and foster the unmatched community of developers we work with here in the United States and around the world. I'm particularly excited about our inaugural Entrepreneur Camp for black founders and developers. Building on the success of our Entrepreneur Camp program, which we began in 2019, this program gives this profoundly innovative community of developers the chance to develop next-level technical skills through hands-on technology labs, and with our partners at Harlem Capital, it also shares insights and mentorship on building and scaling an app business. We were proud to announce that we have expanded and accelerated our commitment to the U.S. economy. Over the next five years, we will invest $430 billion, creating 20,000 jobs in the process. The investments will support American innovation and drive economic benefits in every state, including a new North Carolina campus and job creating investments in innovative fields like silicon engineering and 5G technology. Looking forward, whether you're running a business or just hoping to see family again after more than a year, it's tempting at this moment to let hope about the end of the COVID-19 pandemic outstripped clear-eyed realism about the challenges we still face. In many places around the world, new waves of infections driven by even more infectious variants of the virus are driving new lockdowns. Instead of simply assuming that the end is in sight, we at Apple are doing our part to make it a reality. Beginning with an enduring and uncompromising commitment to the health and safety of our teams, and extending well beyond our walls into the communities where we work. We also want to do everything we can to connect users to life-saving vaccinations that are in ever greater supply. Through Apple Maps, for example, we now showcase vaccine site locations here in the United States, building on our maps of testing locations in many countries around the world. It's worth remembering for much more than financial reasons or year-ago compares, just how we felt at this time last year when everything we knew had to change. Plains set grounded, entire business districts were empty and silent. People left groceries or care packages sitting in the garage or in the hall overnight in recognition of all that we didn't know and therefore, had to imagine. Thanks to researchers and scientists, doctors and nurses, everyone who can put a shot in an arm and even just check a name off a list. We have reached new days of hopeful resolve. Our work is not done, but as I said a year ago, while we can't say for sure how many chapters are in this book, we can have confidence that the ending will be a good one. With that, I'll hand things over to Luca. Luca Maestri: Thank you, Tim. Good afternoon, everyone. We are extremely pleased to report record results for our March quarter despite continued uncertainty in the macro environment. We've been operating in new ways for over a year, and we could not be more proud of the way our team continues to execute and innovate at unprecedented levels. Our revenue reached a March quarter record of $89.6 billion, an increase of over $31 billion or 54% from a year ago. We grew very strong double digits in each of our product categories, with all-time records for Mac and for Services and March quarter records for iPhone and for Wearables, Home and Accessories. We also set new March quarter records in every geographic segment with growth of at least 35% in each one of them. Products revenue was a March quarter record of $72.7 billion, up 62% over a year ago. As a result of this level of sales performance and the unmatched loyalty of our customers, our installed base of active devices reached a new all-time record in each of our major product categories. Our services set an all-time record of $16.9 billion, growing 27% over a year ago. We established new records in each geographic segment and in most service categories. I will provide more details about the performance of our services business later. Company gross margin was 42.5%, up 270 basis points from last quarter driven by cost savings, a strong mix and favorable foreign exchange. Products gross margin was 36.1%, growing 100 basis points sequentially also thanks to cost savings and FX, partially offset by seasonal loss of leverage. Services gross margin was 70.1%, up 170 basis points sequentially and mainly due to a different mix. Net income of $23.6 billion, diluted earnings per share of $1.40 and operating cash flow of $24 billion were all March quarter records by a wide margin. Let me get into more detail for each of our revenue categories. iPhone revenues had a March quarter record of $47.9 billion, growing 66% year-over-year as the iPhone 12 family continue to be in high demand. Performance was consistently strong across the world as we grew strong double digits in each geographic segment and set March quarter records in most markets we track. Thanks to the exceptional loyalty of our customer base and strength of our ecosystem, our active installed base of iPhones reached a new all-time high. In the U.S. the latest survey of consumers from 451 Research indicates customer satisfaction of over 99% for the iPhone 12 family. Turning to Services. We reached an all-time revenue record of $16.9 billion with all-time records for the App Store, cloud services, music, video, advertising and payment services. Our new service offerings, Apple TV+, Apple Arcade, Apple News Fitness+ as well as the Apple One bundle, continue to scale across users, content and features and are contributing to overall services growth. The key drivers for our services business all continue to move in the right direction. First, our installed base growth has accelerated and reach an all-time high across each major product category. Second, the number of both transacting and paid accounts on our digital content stores reached a new all-time high during the March quarter, with paid accounts increasing double digits in each of our geographic segments. Third, paid subscriptions continued to show strong growth. During the March quarter, we added more than 40 million paid subs sequentially, and we have now reached more than 660 million paid subscriptions across the services on our platform. This is up $145 million from just a year ago and twice the number of paid subscriptions we are only 2.5 years ago. Finally, we're adding new services that we think our customers will love, while also continuing to improve the breadth and quality of our current service offerings. For example, Apple Arcade launched its biggest expansion yet adding incredibly fun games to the catalog, including new exclusive Arcade originals, along with two entirely new categories, App Store greats and timeless classics. Apple Pay continues to expand geographically, launching in Mexico and in South Africa, bringing our payment service to six continents. Wearables, Home and Accessories grew 25% year-over-year to $7.8 billion, setting new March quarter revenue records in every geographic segment. Apple Watch continues to extend its reach, with nearly 75% of the customers purchasing Apple Watch during the quarter being new to the product. We're very excited about the future of this category and believe that our integration of hardware, software and services uniquely positions us to provide great customer experiences in this category. Next, I'd like to talk about Mac. We set an all-time revenue record of $9.1 billion, up 70% over last year, and grew very strongly in each geographic segment with all-time revenue records in Europe and rest of Asia Pacific and March quarter records in the Americas, Greater China and Japan. This amazing performance was driven by the very enthusiastic customer response to our new Macs powered by the M1 chip. iPad performance was also outstanding with revenue of $7.8 billion up 79%. We grew very strongly in every geographic segment with an all-time record in Japan and a March quarter record in rest of Asia Pacific. Both Mac and iPad are incredibly relevant products for our customers in the current working and learning environments, and we are delighted that the most recent surveys of U.S. consumers from 451 Research measured customer satisfaction at 91% for Mac and 94% for iPad. With this level of customer satisfaction, and with around half of the customers purchasing Mac and iPad during the quarter being new to that product, the active installed base for both products continues to grow nicely and reached new all-time highs. In the enterprise market, customers across many industries are accelerating their adoption of iPhone 12 and 5G as a key platform for the future of their business. Delta Airlines, for example, is putting iPhone 12 and 5G connectivity into the hands of flight attendants so they can provide the best passenger service possible as air travel rebounds. Openreach in the U.K. has started equipping tens of thousands of field engineers with iPhone 12 to speed up their deployment of broadband services to homes around the country. And UCHealth, a large health care provider in Colorado, was able to reduce per patient vaccination time from 3 minutes to only 30 seconds largely by moving from PC stations to iPhones. This has allowed their staff to rapidly scan and register new patients and vastly increase their daily vaccination capacity. Let me now turn to our cash position. We ended the quarter with over $204 billion in cash plus marketable securities. We issued $14 billion of new term debt and retired $3.5 billion of term debt leaving us with total debt of almost $122 billion. As a result, net cash was $83 billion at the end of the quarter. This strong position allows us to continue to invest confidently in our future, while also returning value to our shareholders. We are innovating and investing at an unprecedented pace, including accelerating our investment in the United States with our new commitment to contribute more than $430 billion and 20,000 jobs to the country over the next five years. As we continue to execute at an extremely high level, we were also able to return nearly $23 billion to shareholders during the March quarter. This included $3.4 billion in dividends and equivalents and $19 billion through open market repurchases of 147 million Apple shares. We continue to believe there is great value in our stock and maintain our target of reaching a net cash neutral position over time. Given the confidence we have in our business today and into the future, our Board has authorized an additional $90 billion for share repurchases. We're also raising our dividend by 7% to $0.22 per share, and we continue to plan for annual increases in the dividend going forward. As we move ahead into the June quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we are not providing revenue guidance, but we are sharing some directional insights assuming that the COVID-related impacts to our business do not worsen from what we are seeing today for the current quarter. We expect our June quarter revenue to grow strong double digits year-over-year. However, we believe that the sequential revenue decline from the March quarter to the June quarter will be greater than in prior years for two reasons. First, keep in mind that due to the later launch timing and strong demand, iPhone only achieved supply-demand balance during the March quarter. This will cause a steeper sequential decline than usual. Second, we believe supply constraints will have a revenue impact of $3 billion to $4 billion in the June quarter. We expect gross margin to be between 41.5% and 42.5%. We expect OpEx to be between $11.1 billion and $11.3 billion. We expect OI&E to be around $50 million and our tax rate to be around 14.5%. Finally, reflecting the approved 7% dividend increase I just mentioned, today, our Board of Directors has declared a cash dividend of $0.22 per share of common stock payable on May 13, 2021, to shareholders of record as of May 10, 2021. With that, let's open the call to questions. Tejas Gala: Thank you, Luca. [Operator Instructions] Operator, may we have the first question, please? Operator: [Operator Instructions] We'll take our first question from Shannon Cross with Cross Research. Please go ahead. Shannon Cross: Tim, I had sort of a big picture question on iPhone. I'm just curious, there are so many different things happening in this cycle, 5G, pandemic. How are you thinking about the opportunity for refreshing the installed base and attracting new customers? And are you seeing lives shorten given some of the programs that are being put out there by the carriers and by yourself? Just kind of maybe big picture, if you can talk about what you're seeing in terms of iPhone out there in the market. Tim Cook: Sure, Shannon. We saw double-digit increases on a year-over-year basis on both the new to iPhone and upgraders. So -- and in fact, in the March quarter, there was actually a record number of upgraders for a March quarter. And so we like what we see. It's obviously the early days of 5G. Different countries are in different points. But penetration is still -- on a global level, is still low at this point. And so a lot of the 5G upgrades will be in front of us, not behind us. You see in China, things have moved quickly to 5G. They're moving quickly in the United States. But a lot of the other regions are slower to adopt and slower to gain coverage in 5G. Shannon Cross: Okay. And then, Luca, can you talk about gross margin? I mean 42% is higher than it's been that I can kind of remember actually at this point, so maybe if you talk about the drivers of gross margin, and maybe if there were any offsets from higher component costs or the logistics costs that obviously were overshadowed by currency and other things? Luca Maestri: Yes, Shannon. Yes, we did 42.5% during March, and we've guided to similar, slightly lower levels for June. So for March, we were up 270 basis points sequentially, really driven by three major factors. Cost savings, which has been good for us during the cycle. A really strong mix, a strong mix on iPhone, but in general, across all product categories, and that obviously was helpful. And foreign exchange sequentially, again, from December to March, was favorable 90 basis points. So that helped as well. So those are the three major factors there. As we transition into June, as you know, that we will expect some level of deleverage but that will be offset by cost savings. Foreign exchange doesn't have much of an impact as we go from March to June. Operator: We'll now take our next question from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani: I have two as well. First one, just on services, I think 90 days ago, the expectation was that line item would decelerate a little bit into the March quarter. It turned out it actually accelerated for us. I'd like to just understand what do you think drove that acceleration specifically? And is mid-20% sort of the growth norm as we go forward for Services? Luca Maestri: So Amit, -- our Services business did better than what we were expecting when we had the last call in January. It was stronger across the board. One of the things that we've noticed is that throughout COVID was that obviously digital services have done very well. And then we've had a couple of categories like Apple Care because many of the points of sale and stores were closed and advertising because of the reduced economic activity that were negatively affected during COVID. During the March quarter, we've seen a return to growth on Apple Care and obviously, we've reopened a lot of the stores during the course of the quarter. And advertising, obviously, consumer sentiment has improved and advertising is coming back. And so the combination of these factors really delivered this very, very strong performance during the March quarter. As we look ahead, as you know, we don't provide specific guidance for our product categories. But in general, I talked during our prepared remarks, I mean, there are a number of things that we always look at around the Services business, how many new paid accounts do we have, what number of new subscriptions do we get that -- above all, is our installed base continuing to grow? Are we adding new services? Are we improving the quality of the existing services? And so, when we look at all these fundamental vectors of our Services business, obviously we feel very good. We feel very good about it. Amit Daryanani: Got it. That's helpful. And then, Tim, if I could follow up with you, it seems like engagement with iPhones and Apple devices generally has gone up materially over the last 12 months. And I don't think replacement cycles, at least in the data we see, has shrunk or changed that much at the end of the day. I'm wondering does that combination of increased usage, replacement cycles haven't changed, end up in iPhones potentially growing on a multiyear basis, because I would imagine if I'm using something more I have to replace it more often. So, I'd love your perspective on it. Tim Cook: Yes. We're clearly seeing strong performance in both the new to iPhone or the switcher component and upgraders as I'd mentioned before. And in fact, the upgrader was the best March quarter that we've ever had in -- and so that speaks to what you're seeing, I think, a lot. It's difficult with just this far into the cycle to make a statement about the cycle in general because keep in mind that we just launched midway through the Q1 period. And so, we've only been operating for 4.5 months or so. But clearly, we like what we see right now a lot. If you look at how the iPhone did around the world, we had the top five models of smartphone in the U.S., the top selling, the top two in urban China, four out of the top five in Japan, the top four in the U.K., and the top six in Australia. And so, it was sort of across the board in some really key countries, we did really, really well. I do think that the 5G cycle is important, and we're in the early days of it, frankly. Operator: We'll take our next question from Katy Huberty from Morgan Stanley. Please go ahead. Katy Huberty: This was a pretty unbelievable quarter, and investors are going to ask about the sustainability of current demand trends, especially as you lap some of the benefits from COVID in areas like services and Mac later this year. So I know you don't guide beyond or provide an outlook beyond the next quarter. But can you talk from a high level over the next year, which segments do you see the opportunity to maintain strong revenue growth versus where is it reasonable to assume there will be some digestion as consumers shift their spending priorities? And then I have a follow-up for Luca. Tim Cook: If you sort of look at the different products, iPhone, I've already mentioned some of the great momentum that we had there. Keep in mind that the compare that we're running to would be the quarter, the Q2 of last year is the quarter that China would have entered a shutdown first and then the rest of the world entered the shutdown in middle part of March. And so part of the growth is compared -- is the comparison point. But that said, the results were fabulous across the board. The shortages that Luca spoke about in the color that he provided on the future, affect primarily the iPad and the Mac. And so we'll have some challenges in there, and challenges in meeting the demand that we've got. The demand feels very strong right now. Both on the Mac side, you have the combination of M1 and work from home and remote learning. And then iPad, you've got remote learning and work from home as well. And the product that we just announced is really killer, the iPad Pro with the M1 in it. And so there's a lot of great things of the strength of the product cycle in addition to the trends that we're seeing in the marketplace. And where this pandemic will end, it seems like many companies will be operating in a hybrid kind of mode. And so it would seem that work from home and the productivity of working from home will remain very critical. If you look at Wearables then, the watch had a fabulous quarter. And I still think we're in the early innings on the watch. The number of new -- people that are new to the watch is almost three out of four. And so this is a long way from being a mature market. And so -- and then the Services by itself has really accelerated. And so all in all, we feel very, very good. Katy Huberty: And then, Luca, as I look at inventory plus vendor nontrade receivables, that grew only about 8% this quarter which is a big deceleration from last quarter. Should we read into that as a leading indicator for how we should think about the revenue growth deceleration in the business as the world normalizes? Or were there some supply disruptions during the quarter that caused you to drain inventory and create that tightness that you're talking about for June? Luca Maestri: No. On -- as you think about the June quarter, Katy, I would point you to what we said in our prepared remarks around the two factors that will influence our normal seasonality, right? One is the fact that iPhone, we launched iPhone later than usual during this cycle. And so we reached supply-demand balance only during the March quarter, which makes obviously the sequential decline steeper than usual. And then this $3 billion or $4 billion of supply constraints that Tim just said, primarily on iPad and Mac. So as you look at your model and you obviously can look at our numbers that we've done in the past, I think you can try to gauge that. From a channel inventory standpoint, we did what we normally do during a March quarter. So we reduced inventory as it's typical on iPhone. We exited within our target range. So I would say that on the inventory side, it was pretty straightforward Obviously, given that the supply constraints are on the iPad and on the Mac, we wish we had more inventory of iPad and Mac. But this is all a function of high demand for all our products. Operator: We'll take our next question from Wamsi Mohan with Bank of America. Wamsi Mohan: Tim, your content offerings are still at very compelling price points. And you've seen other content providers, whether it be Spotify, Hulu, Netflix, all announced price increases recently. I'm just wondering how you're thinking about pricing as it pertains to your offering here? And if you could share any stats around the uptake of TV+ paid subs that would be great. And I have a follow-up for Luca. Tim Cook: TV+ -- let me start with TV+. TV+ is going very well. As you know, the objective and the philosophy that we've had on TV+ is to create high-quality original content and to be one of the most desired platforms for storytellers. And I see that happening day by day as we sign more shows and more storytellers including Malala as I'd mentioned in my opening comments. To date, we've received -- the Apple originals have received 352 award nominations and had 98 wins. And this is from Oscar nominations to Indie awards to Critic Choice awards and all the rest. And we've got some shows that are -- have gotten significant buzz like Ted Lasso and The Morning Show and Defending Jacob and many others. And so we feel really good about where we are. We're not releasing subscriber numbers. But we feel good about where we are. In terms of other services and pricing, I don't have anything to announce today. We try to give the customer a great value. And we feel that we're doing that in the -- with the prices that we've got. And we'll see where we go from here. Wamsi Mohan: Okay. As my follow-up, Luca, on the June quarter guide, when you talk about the sequential decline being a little bit about perhaps the 13% or low-teens percent that we've seen historically. Are the supply constraints of the $3 billion, $4 billion impact included in that? Or is that in addition to sort of the more than average sequential decline that you're referring to? And any color on what specifically is driving the supply constraints of the subcomponent level? Luca Maestri: So when you look at our normal seasonality, and you've mentioned a percentage that is really an average of several years, what we're saying is that we believe that the sequential decline this year is going to be higher than that. And it's a combination of the two factors, right? One is the timing of the launch and then the very high demand for iPhone during the March quarter. And the $3 billion to $4 billion supply constraints that we mentioned. Yes, and the constraints come from the semiconductor shortages that are affecting many, many industries, and it's a combination of the shortages as well as the very, very high level of demand that we are seeing for both iPad and Mac. For Mac, for example, if you just -- just to keep it into context, the last three quarters of Mac have been the best three quarters ever in the history of the product, right? So we are experiencing an incredible level of demand, which certainly is favored by working from home and learning from home environment, but also by the incredible amount of new products and innovation that we put into the products that we launched during the last couple of quarters. Operator: We'll take our next question from Aaron Rakers with Wells Fargo. Aaron Rakers: Congratulations on the great quarter. I wanted to go back to iPhone. As we think about the iPhone 12 cycle, appreciating that you guys don't give actual shipment numbers, it would appear though that the mix has been quite healthy. So I'm wondering if you could give us any context of what in this cycle you're seeing in terms of the mix relative to past cycles? Is that mix sustainable? I'm just trying to understand kind of the mix of -- within the iPhones and how that's driving, I guess, particularly gross margin. And I have a follow-up. Tim Cook: Aaron, let me give you a little color on that. The iPhone 12 of the -- the iPhone 12 family are or more broadly affect all iPhones. The iPhone 12 is the most popular. But we did see very strong sales of the Pro portion of the family as well, the Pro plus the Pro Max. And so the revenue that you're seeing is a function of unit growth and revenue per unit growth. Does that help? Aaron Rakers: Yes. Can you give any context of how that might have changed this cycle relative to the prior cycles? Have we seen kind of a structural change to the higher band of the product category that you believe can be sustained going forward? Tim Cook: We don't predict going forward other than for our internal use. But we're really happy with the results. Aaron Rakers: Okay. And then as a quick follow-up back to the supply constraints. I guess it's hard to kind of see again, looking forward beyond this quarter. But what's your best assessment of when maybe the supply constraints could ease? Do you have any views of just the industry in general, overcoming some of the supply constraint dynamics? Tim Cook: Most of our issue is on legacy nodes. And so on legacy nodes, there are many different people, not only in the same industry, but across other industries that are using legacy nodes. And so in order to really answer that question on -- accurately, we would need to know the true demand from each of these players and how that's going to change over the next few months. And so it's very, very difficult to give you good answer. I think we have a good handle on our demand. But what everybody else is doing, I don't know. And so we will do our best. That's what I can tell you. Operator: We'll take our next question from Harsh Kumar with Piper Sandler. Harsh Kumar: Congratulations on a very nice quarter. Question on semis supply as well. You just beat by a substantial margin on the top line in the March quarter. I'm curious what went in your favor to be able to secure that kind of supply that you were able to beat by, I think it was $11 million or so? And then I had a follow-up. Tim Cook: We did not have a material supply shortage in Q2. And so how are we able to do that? You wind up collapsing all of your buffers and offsets. And that happens all the way through the supply chain. And so that enables you to go a bit higher than what we were expecting to sell when we went into the quarter 90 days ago. Harsh Kumar: That's very helpful. And then for my follow-up, I know there's a lot of moving parts, Tim, but with the economy sort of reopening here in the U.S., and you mentioned about supply constraints possibly on the Mac and the iPad. I was curious if I can get your thoughts, maybe just color-wise, on what you would expect for those two categories, Macs and the iPads in the second half of this year. Tim Cook: Well, we don't predict a rev guide to product-level detail. We're not even guiding to the top level at this point because of COVID. And so I'll sidestep that question. But I would point to Luca's point earlier about the shortages and those shortages primarily affect iPad and Mac. So, we expect to be supply gated, not demand gated. Operator: We'll take our next question from Krish Sankar with Cowen & Company. Please go ahead. Krish Sankar: Congrats on a fantastic quarter. First question for Tim or Luca. The Greater China sales were very strong in the March quarter. Can you give some color on what drove this strength. Which hardware products or services enabled the solid outperformance in China. And then I had a follow-up. Tim Cook: We were very pleased with our performance in China. We set a March quarter revenue record and grew strong double digits across each of the product categories. And so the revenue growth was broad. We've been especially pleased by the customer response in China to the iPhone 12 family. And as I had mentioned earlier, you have to remember that China entered the shutdown phase earlier in Q2 of last year than other countries. And so they were relatively more affected in that quarter, and that has to be taken into account as you look at the results. As I mentioned earlier, we had the top two selling smartphones in urban China, so we're very proud of that. And iPad, Mac both had enormously positive quarters with great strength across the board. And we're seeing a strong reception to the new iPad Pro as a well that we just announced. A lot of great comments and about 2/3 of the people buying Mac and iPad were buying them for the first time. And so we're attracting some new customers in China, which is really important to us. Krish Sankar: All right. That was very helpful, Tim. And then maybe as a follow-up, I kind of have like a big picture philosophical question, and to the extent you can answer this. One of the concerns many investors have is about the overhang of regulatory risk. I understand it's very hard to handicap that. But I'm kind of curious do you think giving more public disclosure on your Services business like App Store would help alleviate some of those concerns? Or do you think that's revealing a lot of competitive details. But kind of curious to know what you think on services disclosure. Tim Cook: I think with the regulatory questions and scrutiny, we have to make sure that we're telling our story and why we do what we do, and we're very focused on doing that. If we feel that more disclosure would help, we would obviously move in that direction. The App Store and other parts of Apple are not cast in concrete. And so we can move and are flexible with the times. For example, in the App Store, as you know, just a couple of quarters ago, we lowered the commission rate for small developers to 15%. So that was an example of moving with the times, and we've gotten a great, great reception to that. And so we continue to learn, and I think it's very important that we're very clear about why we do what we do. The idea behind curating the App Store in order to get the privacy and security that our customers want, I think is very important, and we have to convey that in a very straightforward manner. Operator: We'll take our next question from Kyle McNealy with Jefferies. Kyle McNealy: One of the things we've been positive about is how growing iPhone sales can pull along Watch and AirPods sales as well as customers shop the whole store. But you mentioned through COVID that accessories do much better in a physical store environment, and that's been hard due to the shutdowns, obviously. So my question is, have you seen any improvement in the attach rate for Watch and AirPods with iPhone? And can it get a lot better from here as the environment gets closer to normalization? Tim Cook: I think we get a lot of benefit from our stores when they're open and are fully operational. And we're in better shape for parts of Q2 than we were previously, but we're still operating with a limited operational model in many stores and there's still some stores today that are closed like stores in Michigan and stores in France and so forth. And so I think it will take some amount of time, but my view would be as the stores get back up to speed, fully up to speed, we should be able to increase some of the accessory sales. Although I think we're doing fairly well at the moment. So it's not something that we're not doing well. Online has been much more beneficial and much more productive than we would have guessed going into this. Operator: We'll take our next question from David Vogt from UBS. David Vogt: Congratulations on a great quarter. Maybe if I could just ask a question. I know it's early days, but any commentary color from maybe the developer community on App track -- on ATT and kind of what the initial feedback and data might look like that you could share with us? Tim Cook: Our ATT's focus is really on the user and giving the user the ability to make a decision about whether they want to be tracked or not. And so it's putting the user in the control. Not Apple, not another company, but the user of where it should be. And so that's really the focus of it. And the feedback that we've gotten from users, both before it went live when it was in the planning stages and so forth and after, has been tremendous. And so we're really standing up on behalf of the consumer here. David Vogt: Maybe just as a quick follow-up, Tim. Can you kind of discuss any sort of -- what the downloads have looked like. I know it just rolled out earlier this week and sort of the acceptance by the consumer at this point. Any sort of metrics that you can share with us, whether it's sort of an opt-in or opt-out sort of view from the consumer perspective? Tim Cook: I don't even know the answer to that. It's not something that we would have predicted beforehand. And frankly, even if it's very low of people that don't want to be tracked, it's worth doing because of the -- those people should have the -- should make their own mind up, whether they would like to be tracked or not. Operator: We'll take our next question from Samik Chatterjee from JPMorgan. Samik Chatterjee: I have a couple and just wanted to get into the performance by geography here a bit, and Europe really exceptional results, particularly for this time of the year. Tim, I know you mentioned some of the 5G iPhone upgrades are in front of you, and I would assume Europe is kind of in that category. But curious to hear or maybe if you can double-click on what's driving the exceptional growth here in Europe, and like are consumers moving to 5G phones even though some of the service provider plans are not rolled out? Or are we still expecting that to be much more in front of us? Luca Maestri: Samik, I'll take that one. You're right. I mean we had great performance in Europe. We grew 56% during the quarter. And it was probably one of the geos where we actually saw results that were better than even our own expectations. We grew very strong double digits across the board, every product category. Particularly, I would say, iPad and Mac, they really was very, very strong. Again, obviously, Europe has been affected by lockdowns. More than most parts of the world, the lockdowns have lasted longer than here in the United States, for example. Tim was mentioning there are places in Europe still today where our stores are closed. And fortunately, we have a very strong online business that has really helped us. But working from home, learning from home, limited entertainment options, that has all played in our favor. Keep in mind that our Europe segment is a very broad version of Europe because it includes Western Europe, which has done very, very well. And then Eastern Europe and it goes into the Middle East. Even India is part of Europe. And those emerging markets have done incredibly well, significantly better than company average. So very, very pleased with some of the results in India, for example, Russia, Middle East in general. So it's been very broad, both across product categories and across countries in Europe. Samik Chatterjee: Okay. Got it. And just a quick follow-up for you, Luca. I think overall, just wanted to understand the implication of the investment plans that you announced recently for the U.S., the $430 billion over a multiyear period, getting some questions from investors of how to think about the implication on the run rate of operating expenses for the Company. Luca Maestri: If you remember, we announced back in 2018 that we were making a very sizable commitment to the United States. We -- at the time we announced $350 billion of investment over the following five years. And during these three years, since then, we've overachieved on those commitments, and we felt it was the right time to update these type of investments. And they span from, obviously, the investment that we made directly at Apple. For example, we talked about the creation of 20,000 new jobs at Apple over the next five years in the United States. And of course, our business has grown. And so our commitment, for example, to U.S. suppliers grows over time, and that shows in the higher numbers. In the meantime, we've got into new businesses, for example, Apple TV+, a lot of the content that we developed for our TV service is produced here in the United States. And so that's additional investment here in the United States. From an OpEx standpoint, I think as you've seen this year, we're getting a lot of leverage. This is one of those years we said many times, sometimes our OpEx grows faster than revenue, and there are some other cycles where the opposite happens. We are growing revenue this year much faster than our OpEx increase. But we want to continue to make all the necessary investments into the business. We will never under invest in our business. And so you will continue to see the fact that we -- we will continue to grow our operating expenses, particularly on the R&D side, which continues to be the core of the Company. Tejas Gala: Thank you, Samik. A replay of today's call will be available for two weeks on Apple Podcast as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are (888) 203-1112 or (719) 457-0820. Please enter confirmation code 5799138. These replays will be available by approximately 5:00 p.m. Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at (408) 974-2414. Financial analysts can contact me with additional questions at (669) 227-2402. Thank you again for joining us. Operator: Thank you. That does conclude today's Apple Q2 FY 2021 Earnings Conference Call. We thank you for your participation, and you may now disconnect.	[ { "speaker": "Operator", "text": "Good day, and welcome to the Apple Q2 FY 2021 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I'd like to turn the call over to Tejas Gala, Director, Investor Relations and Corporate Finance. Please go ahead." }, { "speaker": "Tejas Gala", "text": "Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the Company's business results of operation. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. I'd now like to turn over the call to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thanks, Tejas. Good afternoon, everyone, and thanks for joining the call today. Apple is proud to report another strong quarter, one where we set new March quarter records for both revenue and earnings, besting our year ago revenue performance by 54%. Reflecting both the enduring ways our products have helped our users meet this moment in their own lives as well as the optimism consumers seem to feel about better days ahead, we set new March quarter records in every geographic segment, and success was broadly distributed across our product categories. Mac and Services delivered all-time record results, and we set new March quarter records for iPhone and Wearables, Home and Accessories. To provide some color on our results, let's turn to our product categories. We saw a very strong performance for iPhone, which grew 66% year-over-year driven by the strong popularity of the iPhone 12 family. With unmatched 5G capability, the best camera system ever in an iPhone and advanced durability from ceramic shield, this family of devices is popular with both upgraders and new customers alike. And just last week, we unveiled an all-new purple finish for iPhone 12 and 12 Mini. As has been the case throughout the pandemic, iPad and Mac continue to be critically important tools for our customers. Over the past year, tens of millions of iPads and Macs have been deployed to help students learn, creators create, and to enhance remote work in all of its forms. This has helped iPad grow very strong double digits to its highest March quarter revenue in nearly a decade. On Mac, fueled by the M1, we set an all-time revenue record continuing the momentum for the product category. In fact, the last three quarters for Mac have been its three best quarters ever. Last week, both iPad and Mac took a big step forward. We debuted a radically redesigned brand-new iMac designed around M1's unmatched capabilities, and we've brought M1 to iPad for the first time in the new iPad Pro with 5G capability and a Liquid Retina XDR display. It was a quarter of sustained strength for Wearables, Home and Accessories, which grew by 25% year-over-year. Apple Watch is a global success story, and the category set March quarter records in each geographic segment, thanks to strong performance from both Apple Watch Series 6 and Apple Watch SE. It's an exciting and busy period ahead for Wearables, Home and Accessories with the launch of the next-generation Apple TV 4K and our newest accessory, AirTag. AirTag builds on the powerful and incredibly useful Find My experience, helping users privately and securely keep track of the items that matter most to them. Third-party accessories and products can also make use of the Find My network guaranteeing a great experience no matter what products you choose to use. Turning to Services. We achieved growth of 27% year-over-year and set new records for services in each of our geographic segments. We continue to enhance and improve our current service offerings from Apple Music to Apple News while continuing to launch new services that enhance our customers' lives. Just last week, we introduced Apple Card family which reinvents how you can share credit cards and build credit together. We also announced Apple Podcast subscriptions, a global marketplace for listeners to discover premium content from their favorite creators and storytellers. While we're on the topic of services, in many ways, this quarter showed the unique value to customers created by Apple's belief in the deep integration of hardware, software, and services. Across our products and throughout our software ecosystem, we continue to deploy industry-leading new tools to protect users' fundamental right to privacy. In addition to the App Store privacy nutrition labels that we discussed on last quarter's call, we're proud to have launched the full implementation of App Tracking Transparency. This powerful, yet simple idea gives users a choice over how their data is used and shared across the apps that they love and use every day. No matter what device you enjoy it from, it is a milestone period for Apple TV+, racking up many new award nominations and wins, including its first Oscar nominations. Ted Lasso, in particular, has been recognized with a multitude of awards and nominations including most recently, an AFI Program of the Year Recognition, Writers Guild of America Awards, and a clean sweep at the Critics Choice Awards. Apple TV+ also continues to be a place where we can tell stories that matter and lift up important voices and experiences like our new upcoming content partnership with Malala, our latest original documentary special The Year the Earth Changed narrated by the legendary David Attenborough and released to commemorate Earth Day. This is, of course, just one example of how Apple lives its values and operationalizes the idea that to whom much is given, much is expected. To begin with our environmental efforts, just last week, we marked a milestone Earth Day on multiple fronts. In addition to the progress we've made in our own efforts to achieve our pledge of a net zero carbon footprint by 2030 across our entire supply chain and use of our products, we're proud to play a role in the growing ripple change taking place across the private sector. As of this month, 110 of our suppliers have joined us in our renewable energy commitment, and we will bring online nearly 8 gigawatts of new clean energy, the equivalent of taking 3.4 million gas-powered vehicles off the road each year. Through Apple's $4.7 billion in green bonds and related efforts, we've supported transformative environmental projects around the world from clean energy initiatives in China to two of the world's largest onshore wind turbines in Denmark to 180-acre solar project outside Reno, Nevada and many more. We're also keenly focused on how this wave of green innovation can lead to equitably shared prosperity. Through our new $200 million Restore Fund, we're helping local and rural communities around the world build sustainable industries around working for us creating opportunities and removing up to 1 million metric tons of carbon from the atmosphere every year. And here in the United States, we started a green impact accelerator, investing and supporting minority-owned businesses at the forefront of environmental fields. As we look forward to WWDC, we're taking new steps to support and foster the unmatched community of developers we work with here in the United States and around the world. I'm particularly excited about our inaugural Entrepreneur Camp for black founders and developers. Building on the success of our Entrepreneur Camp program, which we began in 2019, this program gives this profoundly innovative community of developers the chance to develop next-level technical skills through hands-on technology labs, and with our partners at Harlem Capital, it also shares insights and mentorship on building and scaling an app business. We were proud to announce that we have expanded and accelerated our commitment to the U.S. economy. Over the next five years, we will invest $430 billion, creating 20,000 jobs in the process. The investments will support American innovation and drive economic benefits in every state, including a new North Carolina campus and job creating investments in innovative fields like silicon engineering and 5G technology. Looking forward, whether you're running a business or just hoping to see family again after more than a year, it's tempting at this moment to let hope about the end of the COVID-19 pandemic outstripped clear-eyed realism about the challenges we still face. In many places around the world, new waves of infections driven by even more infectious variants of the virus are driving new lockdowns. Instead of simply assuming that the end is in sight, we at Apple are doing our part to make it a reality. Beginning with an enduring and uncompromising commitment to the health and safety of our teams, and extending well beyond our walls into the communities where we work. We also want to do everything we can to connect users to life-saving vaccinations that are in ever greater supply. Through Apple Maps, for example, we now showcase vaccine site locations here in the United States, building on our maps of testing locations in many countries around the world. It's worth remembering for much more than financial reasons or year-ago compares, just how we felt at this time last year when everything we knew had to change. Plains set grounded, entire business districts were empty and silent. People left groceries or care packages sitting in the garage or in the hall overnight in recognition of all that we didn't know and therefore, had to imagine. Thanks to researchers and scientists, doctors and nurses, everyone who can put a shot in an arm and even just check a name off a list. We have reached new days of hopeful resolve. Our work is not done, but as I said a year ago, while we can't say for sure how many chapters are in this book, we can have confidence that the ending will be a good one. With that, I'll hand things over to Luca." }, { "speaker": "Luca Maestri", "text": "Thank you, Tim. Good afternoon, everyone. We are extremely pleased to report record results for our March quarter despite continued uncertainty in the macro environment. We've been operating in new ways for over a year, and we could not be more proud of the way our team continues to execute and innovate at unprecedented levels. Our revenue reached a March quarter record of $89.6 billion, an increase of over $31 billion or 54% from a year ago. We grew very strong double digits in each of our product categories, with all-time records for Mac and for Services and March quarter records for iPhone and for Wearables, Home and Accessories. We also set new March quarter records in every geographic segment with growth of at least 35% in each one of them. Products revenue was a March quarter record of $72.7 billion, up 62% over a year ago. As a result of this level of sales performance and the unmatched loyalty of our customers, our installed base of active devices reached a new all-time record in each of our major product categories. Our services set an all-time record of $16.9 billion, growing 27% over a year ago. We established new records in each geographic segment and in most service categories. I will provide more details about the performance of our services business later. Company gross margin was 42.5%, up 270 basis points from last quarter driven by cost savings, a strong mix and favorable foreign exchange. Products gross margin was 36.1%, growing 100 basis points sequentially also thanks to cost savings and FX, partially offset by seasonal loss of leverage. Services gross margin was 70.1%, up 170 basis points sequentially and mainly due to a different mix. Net income of $23.6 billion, diluted earnings per share of $1.40 and operating cash flow of $24 billion were all March quarter records by a wide margin. Let me get into more detail for each of our revenue categories. iPhone revenues had a March quarter record of $47.9 billion, growing 66% year-over-year as the iPhone 12 family continue to be in high demand. Performance was consistently strong across the world as we grew strong double digits in each geographic segment and set March quarter records in most markets we track. Thanks to the exceptional loyalty of our customer base and strength of our ecosystem, our active installed base of iPhones reached a new all-time high. In the U.S. the latest survey of consumers from 451 Research indicates customer satisfaction of over 99% for the iPhone 12 family. Turning to Services. We reached an all-time revenue record of $16.9 billion with all-time records for the App Store, cloud services, music, video, advertising and payment services. Our new service offerings, Apple TV+, Apple Arcade, Apple News Fitness+ as well as the Apple One bundle, continue to scale across users, content and features and are contributing to overall services growth. The key drivers for our services business all continue to move in the right direction. First, our installed base growth has accelerated and reach an all-time high across each major product category. Second, the number of both transacting and paid accounts on our digital content stores reached a new all-time high during the March quarter, with paid accounts increasing double digits in each of our geographic segments. Third, paid subscriptions continued to show strong growth. During the March quarter, we added more than 40 million paid subs sequentially, and we have now reached more than 660 million paid subscriptions across the services on our platform. This is up $145 million from just a year ago and twice the number of paid subscriptions we are only 2.5 years ago. Finally, we're adding new services that we think our customers will love, while also continuing to improve the breadth and quality of our current service offerings. For example, Apple Arcade launched its biggest expansion yet adding incredibly fun games to the catalog, including new exclusive Arcade originals, along with two entirely new categories, App Store greats and timeless classics. Apple Pay continues to expand geographically, launching in Mexico and in South Africa, bringing our payment service to six continents. Wearables, Home and Accessories grew 25% year-over-year to $7.8 billion, setting new March quarter revenue records in every geographic segment. Apple Watch continues to extend its reach, with nearly 75% of the customers purchasing Apple Watch during the quarter being new to the product. We're very excited about the future of this category and believe that our integration of hardware, software and services uniquely positions us to provide great customer experiences in this category. Next, I'd like to talk about Mac. We set an all-time revenue record of $9.1 billion, up 70% over last year, and grew very strongly in each geographic segment with all-time revenue records in Europe and rest of Asia Pacific and March quarter records in the Americas, Greater China and Japan. This amazing performance was driven by the very enthusiastic customer response to our new Macs powered by the M1 chip. iPad performance was also outstanding with revenue of $7.8 billion up 79%. We grew very strongly in every geographic segment with an all-time record in Japan and a March quarter record in rest of Asia Pacific. Both Mac and iPad are incredibly relevant products for our customers in the current working and learning environments, and we are delighted that the most recent surveys of U.S. consumers from 451 Research measured customer satisfaction at 91% for Mac and 94% for iPad. With this level of customer satisfaction, and with around half of the customers purchasing Mac and iPad during the quarter being new to that product, the active installed base for both products continues to grow nicely and reached new all-time highs. In the enterprise market, customers across many industries are accelerating their adoption of iPhone 12 and 5G as a key platform for the future of their business. Delta Airlines, for example, is putting iPhone 12 and 5G connectivity into the hands of flight attendants so they can provide the best passenger service possible as air travel rebounds. Openreach in the U.K. has started equipping tens of thousands of field engineers with iPhone 12 to speed up their deployment of broadband services to homes around the country. And UCHealth, a large health care provider in Colorado, was able to reduce per patient vaccination time from 3 minutes to only 30 seconds largely by moving from PC stations to iPhones. This has allowed their staff to rapidly scan and register new patients and vastly increase their daily vaccination capacity. Let me now turn to our cash position. We ended the quarter with over $204 billion in cash plus marketable securities. We issued $14 billion of new term debt and retired $3.5 billion of term debt leaving us with total debt of almost $122 billion. As a result, net cash was $83 billion at the end of the quarter. This strong position allows us to continue to invest confidently in our future, while also returning value to our shareholders. We are innovating and investing at an unprecedented pace, including accelerating our investment in the United States with our new commitment to contribute more than $430 billion and 20,000 jobs to the country over the next five years. As we continue to execute at an extremely high level, we were also able to return nearly $23 billion to shareholders during the March quarter. This included $3.4 billion in dividends and equivalents and $19 billion through open market repurchases of 147 million Apple shares. We continue to believe there is great value in our stock and maintain our target of reaching a net cash neutral position over time. Given the confidence we have in our business today and into the future, our Board has authorized an additional $90 billion for share repurchases. We're also raising our dividend by 7% to $0.22 per share, and we continue to plan for annual increases in the dividend going forward. As we move ahead into the June quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we are not providing revenue guidance, but we are sharing some directional insights assuming that the COVID-related impacts to our business do not worsen from what we are seeing today for the current quarter. We expect our June quarter revenue to grow strong double digits year-over-year. However, we believe that the sequential revenue decline from the March quarter to the June quarter will be greater than in prior years for two reasons. First, keep in mind that due to the later launch timing and strong demand, iPhone only achieved supply-demand balance during the March quarter. This will cause a steeper sequential decline than usual. Second, we believe supply constraints will have a revenue impact of $3 billion to $4 billion in the June quarter. We expect gross margin to be between 41.5% and 42.5%. We expect OpEx to be between $11.1 billion and $11.3 billion. We expect OI&E to be around $50 million and our tax rate to be around 14.5%. Finally, reflecting the approved 7% dividend increase I just mentioned, today, our Board of Directors has declared a cash dividend of $0.22 per share of common stock payable on May 13, 2021, to shareholders of record as of May 10, 2021. With that, let's open the call to questions." }, { "speaker": "Tejas Gala", "text": "Thank you, Luca. [Operator Instructions] Operator, may we have the first question, please?" }, { "speaker": "Operator", "text": "[Operator Instructions] We'll take our first question from Shannon Cross with Cross Research. Please go ahead." }, { "speaker": "Shannon Cross", "text": "Tim, I had sort of a big picture question on iPhone. I'm just curious, there are so many different things happening in this cycle, 5G, pandemic. How are you thinking about the opportunity for refreshing the installed base and attracting new customers? And are you seeing lives shorten given some of the programs that are being put out there by the carriers and by yourself? Just kind of maybe big picture, if you can talk about what you're seeing in terms of iPhone out there in the market." }, { "speaker": "Tim Cook", "text": "Sure, Shannon. We saw double-digit increases on a year-over-year basis on both the new to iPhone and upgraders. So -- and in fact, in the March quarter, there was actually a record number of upgraders for a March quarter. And so we like what we see. It's obviously the early days of 5G. Different countries are in different points. But penetration is still -- on a global level, is still low at this point. And so a lot of the 5G upgrades will be in front of us, not behind us. You see in China, things have moved quickly to 5G. They're moving quickly in the United States. But a lot of the other regions are slower to adopt and slower to gain coverage in 5G." }, { "speaker": "Shannon Cross", "text": "Okay. And then, Luca, can you talk about gross margin? I mean 42% is higher than it's been that I can kind of remember actually at this point, so maybe if you talk about the drivers of gross margin, and maybe if there were any offsets from higher component costs or the logistics costs that obviously were overshadowed by currency and other things?" }, { "speaker": "Luca Maestri", "text": "Yes, Shannon. Yes, we did 42.5% during March, and we've guided to similar, slightly lower levels for June. So for March, we were up 270 basis points sequentially, really driven by three major factors. Cost savings, which has been good for us during the cycle. A really strong mix, a strong mix on iPhone, but in general, across all product categories, and that obviously was helpful. And foreign exchange sequentially, again, from December to March, was favorable 90 basis points. So that helped as well. So those are the three major factors there. As we transition into June, as you know, that we will expect some level of deleverage but that will be offset by cost savings. Foreign exchange doesn't have much of an impact as we go from March to June." }, { "speaker": "Operator", "text": "We'll now take our next question from Amit Daryanani with Evercore. Please go ahead." }, { "speaker": "Amit Daryanani", "text": "I have two as well. First one, just on services, I think 90 days ago, the expectation was that line item would decelerate a little bit into the March quarter. It turned out it actually accelerated for us. I'd like to just understand what do you think drove that acceleration specifically? And is mid-20% sort of the growth norm as we go forward for Services?" }, { "speaker": "Luca Maestri", "text": "So Amit, -- our Services business did better than what we were expecting when we had the last call in January. It was stronger across the board. One of the things that we've noticed is that throughout COVID was that obviously digital services have done very well. And then we've had a couple of categories like Apple Care because many of the points of sale and stores were closed and advertising because of the reduced economic activity that were negatively affected during COVID. During the March quarter, we've seen a return to growth on Apple Care and obviously, we've reopened a lot of the stores during the course of the quarter. And advertising, obviously, consumer sentiment has improved and advertising is coming back. And so the combination of these factors really delivered this very, very strong performance during the March quarter. As we look ahead, as you know, we don't provide specific guidance for our product categories. But in general, I talked during our prepared remarks, I mean, there are a number of things that we always look at around the Services business, how many new paid accounts do we have, what number of new subscriptions do we get that -- above all, is our installed base continuing to grow? Are we adding new services? Are we improving the quality of the existing services? And so, when we look at all these fundamental vectors of our Services business, obviously we feel very good. We feel very good about it." }, { "speaker": "Amit Daryanani", "text": "Got it. That's helpful. And then, Tim, if I could follow up with you, it seems like engagement with iPhones and Apple devices generally has gone up materially over the last 12 months. And I don't think replacement cycles, at least in the data we see, has shrunk or changed that much at the end of the day. I'm wondering does that combination of increased usage, replacement cycles haven't changed, end up in iPhones potentially growing on a multiyear basis, because I would imagine if I'm using something more I have to replace it more often. So, I'd love your perspective on it." }, { "speaker": "Tim Cook", "text": "Yes. We're clearly seeing strong performance in both the new to iPhone or the switcher component and upgraders as I'd mentioned before. And in fact, the upgrader was the best March quarter that we've ever had in -- and so that speaks to what you're seeing, I think, a lot. It's difficult with just this far into the cycle to make a statement about the cycle in general because keep in mind that we just launched midway through the Q1 period. And so, we've only been operating for 4.5 months or so. But clearly, we like what we see right now a lot. If you look at how the iPhone did around the world, we had the top five models of smartphone in the U.S., the top selling, the top two in urban China, four out of the top five in Japan, the top four in the U.K., and the top six in Australia. And so, it was sort of across the board in some really key countries, we did really, really well. I do think that the 5G cycle is important, and we're in the early days of it, frankly." }, { "speaker": "Operator", "text": "We'll take our next question from Katy Huberty from Morgan Stanley. Please go ahead." }, { "speaker": "Katy Huberty", "text": "This was a pretty unbelievable quarter, and investors are going to ask about the sustainability of current demand trends, especially as you lap some of the benefits from COVID in areas like services and Mac later this year. So I know you don't guide beyond or provide an outlook beyond the next quarter. But can you talk from a high level over the next year, which segments do you see the opportunity to maintain strong revenue growth versus where is it reasonable to assume there will be some digestion as consumers shift their spending priorities? And then I have a follow-up for Luca." }, { "speaker": "Tim Cook", "text": "If you sort of look at the different products, iPhone, I've already mentioned some of the great momentum that we had there. Keep in mind that the compare that we're running to would be the quarter, the Q2 of last year is the quarter that China would have entered a shutdown first and then the rest of the world entered the shutdown in middle part of March. And so part of the growth is compared -- is the comparison point. But that said, the results were fabulous across the board. The shortages that Luca spoke about in the color that he provided on the future, affect primarily the iPad and the Mac. And so we'll have some challenges in there, and challenges in meeting the demand that we've got. The demand feels very strong right now. Both on the Mac side, you have the combination of M1 and work from home and remote learning. And then iPad, you've got remote learning and work from home as well. And the product that we just announced is really killer, the iPad Pro with the M1 in it. And so there's a lot of great things of the strength of the product cycle in addition to the trends that we're seeing in the marketplace. And where this pandemic will end, it seems like many companies will be operating in a hybrid kind of mode. And so it would seem that work from home and the productivity of working from home will remain very critical. If you look at Wearables then, the watch had a fabulous quarter. And I still think we're in the early innings on the watch. The number of new -- people that are new to the watch is almost three out of four. And so this is a long way from being a mature market. And so -- and then the Services by itself has really accelerated. And so all in all, we feel very, very good." }, { "speaker": "Katy Huberty", "text": "And then, Luca, as I look at inventory plus vendor nontrade receivables, that grew only about 8% this quarter which is a big deceleration from last quarter. Should we read into that as a leading indicator for how we should think about the revenue growth deceleration in the business as the world normalizes? Or were there some supply disruptions during the quarter that caused you to drain inventory and create that tightness that you're talking about for June?" }, { "speaker": "Luca Maestri", "text": "No. On -- as you think about the June quarter, Katy, I would point you to what we said in our prepared remarks around the two factors that will influence our normal seasonality, right? One is the fact that iPhone, we launched iPhone later than usual during this cycle. And so we reached supply-demand balance only during the March quarter, which makes obviously the sequential decline steeper than usual. And then this $3 billion or $4 billion of supply constraints that Tim just said, primarily on iPad and Mac. So as you look at your model and you obviously can look at our numbers that we've done in the past, I think you can try to gauge that. From a channel inventory standpoint, we did what we normally do during a March quarter. So we reduced inventory as it's typical on iPhone. We exited within our target range. So I would say that on the inventory side, it was pretty straightforward Obviously, given that the supply constraints are on the iPad and on the Mac, we wish we had more inventory of iPad and Mac. But this is all a function of high demand for all our products." }, { "speaker": "Operator", "text": "We'll take our next question from Wamsi Mohan with Bank of America." }, { "speaker": "Wamsi Mohan", "text": "Tim, your content offerings are still at very compelling price points. And you've seen other content providers, whether it be Spotify, Hulu, Netflix, all announced price increases recently. I'm just wondering how you're thinking about pricing as it pertains to your offering here? And if you could share any stats around the uptake of TV+ paid subs that would be great. And I have a follow-up for Luca." }, { "speaker": "Tim Cook", "text": "TV+ -- let me start with TV+. TV+ is going very well. As you know, the objective and the philosophy that we've had on TV+ is to create high-quality original content and to be one of the most desired platforms for storytellers. And I see that happening day by day as we sign more shows and more storytellers including Malala as I'd mentioned in my opening comments. To date, we've received -- the Apple originals have received 352 award nominations and had 98 wins. And this is from Oscar nominations to Indie awards to Critic Choice awards and all the rest. And we've got some shows that are -- have gotten significant buzz like Ted Lasso and The Morning Show and Defending Jacob and many others. And so we feel really good about where we are. We're not releasing subscriber numbers. But we feel good about where we are. In terms of other services and pricing, I don't have anything to announce today. We try to give the customer a great value. And we feel that we're doing that in the -- with the prices that we've got. And we'll see where we go from here." }, { "speaker": "Wamsi Mohan", "text": "Okay. As my follow-up, Luca, on the June quarter guide, when you talk about the sequential decline being a little bit about perhaps the 13% or low-teens percent that we've seen historically. Are the supply constraints of the $3 billion, $4 billion impact included in that? Or is that in addition to sort of the more than average sequential decline that you're referring to? And any color on what specifically is driving the supply constraints of the subcomponent level?" }, { "speaker": "Luca Maestri", "text": "So when you look at our normal seasonality, and you've mentioned a percentage that is really an average of several years, what we're saying is that we believe that the sequential decline this year is going to be higher than that. And it's a combination of the two factors, right? One is the timing of the launch and then the very high demand for iPhone during the March quarter. And the $3 billion to $4 billion supply constraints that we mentioned. Yes, and the constraints come from the semiconductor shortages that are affecting many, many industries, and it's a combination of the shortages as well as the very, very high level of demand that we are seeing for both iPad and Mac. For Mac, for example, if you just -- just to keep it into context, the last three quarters of Mac have been the best three quarters ever in the history of the product, right? So we are experiencing an incredible level of demand, which certainly is favored by working from home and learning from home environment, but also by the incredible amount of new products and innovation that we put into the products that we launched during the last couple of quarters." }, { "speaker": "Operator", "text": "We'll take our next question from Aaron Rakers with Wells Fargo." }, { "speaker": "Aaron Rakers", "text": "Congratulations on the great quarter. I wanted to go back to iPhone. As we think about the iPhone 12 cycle, appreciating that you guys don't give actual shipment numbers, it would appear though that the mix has been quite healthy. So I'm wondering if you could give us any context of what in this cycle you're seeing in terms of the mix relative to past cycles? Is that mix sustainable? I'm just trying to understand kind of the mix of -- within the iPhones and how that's driving, I guess, particularly gross margin. And I have a follow-up." }, { "speaker": "Tim Cook", "text": "Aaron, let me give you a little color on that. The iPhone 12 of the -- the iPhone 12 family are or more broadly affect all iPhones. The iPhone 12 is the most popular. But we did see very strong sales of the Pro portion of the family as well, the Pro plus the Pro Max. And so the revenue that you're seeing is a function of unit growth and revenue per unit growth. Does that help?" }, { "speaker": "Aaron Rakers", "text": "Yes. Can you give any context of how that might have changed this cycle relative to the prior cycles? Have we seen kind of a structural change to the higher band of the product category that you believe can be sustained going forward?" }, { "speaker": "Tim Cook", "text": "We don't predict going forward other than for our internal use. But we're really happy with the results." }, { "speaker": "Aaron Rakers", "text": "Okay. And then as a quick follow-up back to the supply constraints. I guess it's hard to kind of see again, looking forward beyond this quarter. But what's your best assessment of when maybe the supply constraints could ease? Do you have any views of just the industry in general, overcoming some of the supply constraint dynamics?" }, { "speaker": "Tim Cook", "text": "Most of our issue is on legacy nodes. And so on legacy nodes, there are many different people, not only in the same industry, but across other industries that are using legacy nodes. And so in order to really answer that question on -- accurately, we would need to know the true demand from each of these players and how that's going to change over the next few months. And so it's very, very difficult to give you good answer. I think we have a good handle on our demand. But what everybody else is doing, I don't know. And so we will do our best. That's what I can tell you." }, { "speaker": "Operator", "text": "We'll take our next question from Harsh Kumar with Piper Sandler." }, { "speaker": "Harsh Kumar", "text": "Congratulations on a very nice quarter. Question on semis supply as well. You just beat by a substantial margin on the top line in the March quarter. I'm curious what went in your favor to be able to secure that kind of supply that you were able to beat by, I think it was $11 million or so? And then I had a follow-up." }, { "speaker": "Tim Cook", "text": "We did not have a material supply shortage in Q2. And so how are we able to do that? You wind up collapsing all of your buffers and offsets. And that happens all the way through the supply chain. And so that enables you to go a bit higher than what we were expecting to sell when we went into the quarter 90 days ago." }, { "speaker": "Harsh Kumar", "text": "That's very helpful. And then for my follow-up, I know there's a lot of moving parts, Tim, but with the economy sort of reopening here in the U.S., and you mentioned about supply constraints possibly on the Mac and the iPad. I was curious if I can get your thoughts, maybe just color-wise, on what you would expect for those two categories, Macs and the iPads in the second half of this year." }, { "speaker": "Tim Cook", "text": "Well, we don't predict a rev guide to product-level detail. We're not even guiding to the top level at this point because of COVID. And so I'll sidestep that question. But I would point to Luca's point earlier about the shortages and those shortages primarily affect iPad and Mac. So, we expect to be supply gated, not demand gated." }, { "speaker": "Operator", "text": "We'll take our next question from Krish Sankar with Cowen & Company. Please go ahead." }, { "speaker": "Krish Sankar", "text": "Congrats on a fantastic quarter. First question for Tim or Luca. The Greater China sales were very strong in the March quarter. Can you give some color on what drove this strength. Which hardware products or services enabled the solid outperformance in China. And then I had a follow-up." }, { "speaker": "Tim Cook", "text": "We were very pleased with our performance in China. We set a March quarter revenue record and grew strong double digits across each of the product categories. And so the revenue growth was broad. We've been especially pleased by the customer response in China to the iPhone 12 family. And as I had mentioned earlier, you have to remember that China entered the shutdown phase earlier in Q2 of last year than other countries. And so they were relatively more affected in that quarter, and that has to be taken into account as you look at the results. As I mentioned earlier, we had the top two selling smartphones in urban China, so we're very proud of that. And iPad, Mac both had enormously positive quarters with great strength across the board. And we're seeing a strong reception to the new iPad Pro as a well that we just announced. A lot of great comments and about 2/3 of the people buying Mac and iPad were buying them for the first time. And so we're attracting some new customers in China, which is really important to us." }, { "speaker": "Krish Sankar", "text": "All right. That was very helpful, Tim. And then maybe as a follow-up, I kind of have like a big picture philosophical question, and to the extent you can answer this. One of the concerns many investors have is about the overhang of regulatory risk. I understand it's very hard to handicap that. But I'm kind of curious do you think giving more public disclosure on your Services business like App Store would help alleviate some of those concerns? Or do you think that's revealing a lot of competitive details. But kind of curious to know what you think on services disclosure." }, { "speaker": "Tim Cook", "text": "I think with the regulatory questions and scrutiny, we have to make sure that we're telling our story and why we do what we do, and we're very focused on doing that. If we feel that more disclosure would help, we would obviously move in that direction. The App Store and other parts of Apple are not cast in concrete. And so we can move and are flexible with the times. For example, in the App Store, as you know, just a couple of quarters ago, we lowered the commission rate for small developers to 15%. So that was an example of moving with the times, and we've gotten a great, great reception to that. And so we continue to learn, and I think it's very important that we're very clear about why we do what we do. The idea behind curating the App Store in order to get the privacy and security that our customers want, I think is very important, and we have to convey that in a very straightforward manner." }, { "speaker": "Operator", "text": "We'll take our next question from Kyle McNealy with Jefferies." }, { "speaker": "Kyle McNealy", "text": "One of the things we've been positive about is how growing iPhone sales can pull along Watch and AirPods sales as well as customers shop the whole store. But you mentioned through COVID that accessories do much better in a physical store environment, and that's been hard due to the shutdowns, obviously. So my question is, have you seen any improvement in the attach rate for Watch and AirPods with iPhone? And can it get a lot better from here as the environment gets closer to normalization?" }, { "speaker": "Tim Cook", "text": "I think we get a lot of benefit from our stores when they're open and are fully operational. And we're in better shape for parts of Q2 than we were previously, but we're still operating with a limited operational model in many stores and there's still some stores today that are closed like stores in Michigan and stores in France and so forth. And so I think it will take some amount of time, but my view would be as the stores get back up to speed, fully up to speed, we should be able to increase some of the accessory sales. Although I think we're doing fairly well at the moment. So it's not something that we're not doing well. Online has been much more beneficial and much more productive than we would have guessed going into this." }, { "speaker": "Operator", "text": "We'll take our next question from David Vogt from UBS." }, { "speaker": "David Vogt", "text": "Congratulations on a great quarter. Maybe if I could just ask a question. I know it's early days, but any commentary color from maybe the developer community on App track -- on ATT and kind of what the initial feedback and data might look like that you could share with us?" }, { "speaker": "Tim Cook", "text": "Our ATT's focus is really on the user and giving the user the ability to make a decision about whether they want to be tracked or not. And so it's putting the user in the control. Not Apple, not another company, but the user of where it should be. And so that's really the focus of it. And the feedback that we've gotten from users, both before it went live when it was in the planning stages and so forth and after, has been tremendous. And so we're really standing up on behalf of the consumer here." }, { "speaker": "David Vogt", "text": "Maybe just as a quick follow-up, Tim. Can you kind of discuss any sort of -- what the downloads have looked like. I know it just rolled out earlier this week and sort of the acceptance by the consumer at this point. Any sort of metrics that you can share with us, whether it's sort of an opt-in or opt-out sort of view from the consumer perspective?" }, { "speaker": "Tim Cook", "text": "I don't even know the answer to that. It's not something that we would have predicted beforehand. And frankly, even if it's very low of people that don't want to be tracked, it's worth doing because of the -- those people should have the -- should make their own mind up, whether they would like to be tracked or not." }, { "speaker": "Operator", "text": "We'll take our next question from Samik Chatterjee from JPMorgan." }, { "speaker": "Samik Chatterjee", "text": "I have a couple and just wanted to get into the performance by geography here a bit, and Europe really exceptional results, particularly for this time of the year. Tim, I know you mentioned some of the 5G iPhone upgrades are in front of you, and I would assume Europe is kind of in that category. But curious to hear or maybe if you can double-click on what's driving the exceptional growth here in Europe, and like are consumers moving to 5G phones even though some of the service provider plans are not rolled out? Or are we still expecting that to be much more in front of us?" }, { "speaker": "Luca Maestri", "text": "Samik, I'll take that one. You're right. I mean we had great performance in Europe. We grew 56% during the quarter. And it was probably one of the geos where we actually saw results that were better than even our own expectations. We grew very strong double digits across the board, every product category. Particularly, I would say, iPad and Mac, they really was very, very strong. Again, obviously, Europe has been affected by lockdowns. More than most parts of the world, the lockdowns have lasted longer than here in the United States, for example. Tim was mentioning there are places in Europe still today where our stores are closed. And fortunately, we have a very strong online business that has really helped us. But working from home, learning from home, limited entertainment options, that has all played in our favor. Keep in mind that our Europe segment is a very broad version of Europe because it includes Western Europe, which has done very, very well. And then Eastern Europe and it goes into the Middle East. Even India is part of Europe. And those emerging markets have done incredibly well, significantly better than company average. So very, very pleased with some of the results in India, for example, Russia, Middle East in general. So it's been very broad, both across product categories and across countries in Europe." }, { "speaker": "Samik Chatterjee", "text": "Okay. Got it. And just a quick follow-up for you, Luca. I think overall, just wanted to understand the implication of the investment plans that you announced recently for the U.S., the $430 billion over a multiyear period, getting some questions from investors of how to think about the implication on the run rate of operating expenses for the Company." }, { "speaker": "Luca Maestri", "text": "If you remember, we announced back in 2018 that we were making a very sizable commitment to the United States. We -- at the time we announced $350 billion of investment over the following five years. And during these three years, since then, we've overachieved on those commitments, and we felt it was the right time to update these type of investments. And they span from, obviously, the investment that we made directly at Apple. For example, we talked about the creation of 20,000 new jobs at Apple over the next five years in the United States. And of course, our business has grown. And so our commitment, for example, to U.S. suppliers grows over time, and that shows in the higher numbers. In the meantime, we've got into new businesses, for example, Apple TV+, a lot of the content that we developed for our TV service is produced here in the United States. And so that's additional investment here in the United States. From an OpEx standpoint, I think as you've seen this year, we're getting a lot of leverage. This is one of those years we said many times, sometimes our OpEx grows faster than revenue, and there are some other cycles where the opposite happens. We are growing revenue this year much faster than our OpEx increase. But we want to continue to make all the necessary investments into the business. We will never under invest in our business. And so you will continue to see the fact that we -- we will continue to grow our operating expenses, particularly on the R&D side, which continues to be the core of the Company." }, { "speaker": "Tejas Gala", "text": "Thank you, Samik. A replay of today's call will be available for two weeks on Apple Podcast as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are (888) 203-1112 or (719) 457-0820. Please enter confirmation code 5799138. These replays will be available by approximately 5:00 p.m. Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at (408) 974-2414. Financial analysts can contact me with additional questions at (669) 227-2402. Thank you again for joining us." }, { "speaker": "Operator", "text": "Thank you. That does conclude today's Apple Q2 FY 2021 Earnings Conference Call. We thank you for your participation, and you may now disconnect." } ]	Apple Inc.	24,937
AAPL	1	2,021	2021-01-27 17:00:00	Operator: Good day, and welcome to the Apple Q1 Fiscal Year 2021 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please go ahead. Tejas Gala: Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the Company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook: Thank you, Tejas. Good afternoon, everyone. Thanks for joining the call today. It's with great gratitude for the tireless and innovative work of every Apple team member worldwide that I share the results of a very strong quarter for Apple. We achieved an all-time revenue record of $111.4 billion. We saw strong double-digit growth across every product category, and we achieved all-time revenue records in each of our geographic segments. It is not far from many of our minds that this result caps off the most challenging year any of us can remember. And it is an understatement to say that the challenges it posed to Apple as a business paled in comparison to the challenge it posed to Apple as a community of individuals, to employees, to their families and to the communities we live in and love to call home. While these results show the central role that our products played in helping our users respond to these challenges, we are doubly aware that the work ahead of all of us to navigate the end of this pandemic, to restore normal life and prosperity in our neighborhoods and local economies and, to build back with a sense of justice is profound and urgent. We will speak to these needs and Apple's efforts throughout today's call, but I want to first offer the context of a detailed look at our results this quarter, including why we outperformed our expectations. Let's get started with hardware. We hit a new high watermark for our installed base of active devices, with growth accelerating as we passed 1.65 billion devices worldwide during the December quarter. iPhone grew by 17% year-over-year, driven by strong demand for the iPhone 12 family, and our active installed base of iPhones is now over 1 billion. The customer response to the new iPhone 12 models' unprecedented innovation from world-class cameras to the great and growing potential of 5G has been enthusiastic, even in light of the ongoing COVID-19 impact at retail locations. iPad and Mac grew by 41% and 21%, respectively, reflecting the continuing role these devices have played in our users' lives during the COVID-19 pandemic. During this quarter, availability began for both our new iPad Air as well as the first generation of Macs to feature our groundbreaking M1 chip. The demand for all of these products has been very strong. We have also continued our efforts to bring the latest iPads, enriching content and professional support to educators, students and parents. Educational districts and governments worldwide are continuing major deployments, including the largest iPad deployments ever to schools in Germany and Japan. Wearables, Home and Accessories grew by 30% year-over-year, driven by significant holiday demand for the latest Apple Watch, our entire AirPods lineup, including the new AirPods Max as well as the new HomePod mini. This broad strength across the category led to new revenue records for each of its three subgroups, and we're very excited about the road ahead for these products. Look no further than the great potential of Fitness+, which pairs with Apple Watch to deliver real-time on-screen fitness data alongside world-class workouts by the world's best trainers. There are new sessions added each week, and customers are loving the flexibility, challenge and fun of these classes as well as how the pairing with Apple Watch pushes you to achieve your fitness goals. This deep integration of hardware, software and services, have always defined our approach here, and it has delivered an all-time quarterly Services record of $15.8 billion. This was the first quarter of the Apple One bundle, which brings together many of our great services into an easy subscription and with new content being added to these services every day, we feel very optimistic about where we are headed. The App Store ecosystem has been so important as individuals, families and businesses worldwide evolve and adapt to the COVID-19 pandemic, and we want to make sure that this unrivaled engine of innovation and opportunity continues. This quarter, we also took a significant new step to help smaller developers continue to experiment, innovate and scale the latest great app ideas. The App Store Small Business Program reduces the commission on the sale of digital goods and services to 15% for small businesses earning less than $1 million a year. The program launched on January 1st and we are already hearing from developers about how this change represents a transformation in their potential to create and grow on the App Store. Tomorrow is International Privacy Day, and we continue to set new standards to protect users' right to privacy, not just for our own products but to be the ripple in the pond that moves the whole industry forward. Most recently, we're in the process of deploying new requirements across the App Store ecosystem that give users more knowledge about and new tools to control the ways that apps gather and share their personal data. The winter holiday season is always a busy times for us and our products, but this year was unique. We had a record number of device activations during the last week of the quarter. And as COVID-19 kept us apart, we saw the highest volume of FaceTime calls ever this Christmas. As always, we could not have made so many holidays special without our talented and dedicated retail teams who helped us achieve a new all-time revenue record for retail, driven by very strong performance in our online store. Particularly, after the events of the last few weeks, we are focused on how we can help a moment of great national need. Because none of us should have any illusions about the challenges we face as we began a new chapter in the American story. Hope for healing, for unity and for progress begins with and depends on addressing the things that continue to wound us. In our communities, we see how every burden from COVID-19, to the resulting economic challenges, to the closure of in-person learning for students, falls heaviest on those who have always faced structural barriers to opportunity and equality. This month, Apple announced major new commitments through a $100 million Racial Equity & Justice Initiative. The Propel Center, launched with a $25 million commitment and with the support of historically black colleges and universities across the country, will help support the next-generation of leaders in fields ranging from machine learning to app development to entrepreneurship and design. And our new Apple Developer Academy in Downtown Detroit will be the first of its kind in the United States. Detroit has a vibrant culture of black entrepreneurship, including over 50,000 black-owned businesses. We want to accelerate the potential of the app economy here, knowing there is no shortage of good ideas in such a creative, resilient and dedicated community. Finally, we're committing $35 million across two investments in Harlem Capital and the Clear Vision Impact Fund that support, accelerate and grow minority-owned businesses in areas of great potential and need. In December, we concluded an unmatched year of giving. Since the inception of the Apple Giving Program in 2011, Apple employees have donated nearly $600 million and volunteered more than 1.6 million hours to over 34,000 organizations of every stride. Through our partnership with Product Red, we've adapted our 14-year $250 million effort to support HIV and AIDS work globally to ensure that care of COVID. That includes delivering millions of units of personal protective equipment to health care providers in Zambia. And here in the United States, even with COVID's effects, we are ahead of schedule on our multiyear commitment to invest $350 billion throughout the American economy. As proud as this makes us, we know there is much more to be done. Looking forward, we continue to contend with the COVID-19 pandemic but we must also now work to imagine what we will inherit on the other side. When a disease recedes, we cannot simply assume that healing follows. Even now, we see the deep scars that this period has left in our communities. Trust has been compromised, opportunities have been lost, entire portions of our lives that we took for granted, schools for children, meetings with our colleagues, small businesses that have endured for generations have simply disappeared. It will take a society-wide effort across the public and private sectors as individuals and communities, every one of us, to ensure that what's ahead of us is not simply the end of a disease, but the beginning of something durable and hopeful for those who gave, suffered and endured during this time. At Apple, we have every intention to be partners in this effort, and we look forward to working in communities around the world to make it possible. And as this chapter of uncertainty continues, so will our tireless work to help our customers stay safe, connected and well. With that, I'll hand things over to Luca. Luca Maestri: Thank you, Tim. Good afternoon, everyone. We started our fiscal 2021 with exceptional business and financial performance during the December quarter, as we set all-time records for revenue, operating income, net income, earnings per share and operating cash flow. We are thrilled with the way our teams continued to innovate and execute throughout this period of elevated uncertainty. Our revenue reached an all-time record of $111.4 billion, an increase of nearly $20 billion or 21% from a year ago. We grew strong double digits in each of our product categories, with all-time records for iPhone, Wearables, Home and Accessories and services as well as a December quarter record for Mac. We also achieved double-digit growth and new all-time records in each of our five geographic segments and in the vast majority of countries that we track. Products revenue was an all-time record of $95.7 billion, up 21% over a year ago. As a consequence of this level of sales performance and the unmatched loyalty of our customers, our installed base of active devices passed 1.65 billion during the December quarter and reached an all-time record in each of our major product categories. Our Services set an all-time record of $15.8 billion, growing 24% year-over-year. We established new all-time records in most service categories and December quarter records in each geographic segment. I'll cover our Services business in more detail later. Company gross margin was 39.8%, up 160 basis points sequentially, thanks to leverage from higher sales and a strong mix. Products gross margin was 35.1%, growing 530 basis points sequentially, driven by leverage and mix. Services gross margin was 68.4%, up 150 basis points sequentially, mainly due to a different mix. Net income, diluted earnings per share and operating cash flow were all-time records. Net income was $28.8 billion, up $6.5 billion or 29% over last year. Diluted earnings per share were $1.68, up 35% over last year and operating cash flow was $38.8 billion, an improvement of $8.2 billion. Let me get into more detail for each of our revenue categories. iPhone revenue was a record $65.6 billion, growing 17% year-over-year as demand for the iPhone 12 family was very strong despite COVID-19 and social distancing measures, which have impacted store operations in a significant manner. Our active installed base of iPhones reached a new all-time high and has now surpassed 1 billion devices, thanks to the exceptional loyalty of our customer base and strength of our ecosystem. In fact, in the U.S., the latest survey of consumers from 451 Research indicates iPhone customer satisfaction of 98% for the iPhone 12 family. Turning to Services. As I said, we reached an all-time revenue record of $15.8 billion and set all-time records in App Store, cloud services, Music, advertising, AppleCare and payment services. Our new service offerings, Apple TV+, Apple Arcade, Apple News+, Apple Card, Apple Fitness+ as well as the Apple One bundle are also contributing to overall Services growth and continue to add users, content and features. The key drivers for our Services growth all continue to move in the right direction: first, our installed base growth has accelerated and each major product category; second, the number of both transacting and paid accounts on our digital content stores reached a new all-time high during the December quarter, with paid accounts increasing double digits in each of our geographic segments; third, paid subscriptions continue to grow nicely, and we exceeded our target of 600 million paid subscriptions before the end of calendar 2020. During the December quarter, we added more than 35 million sequentially, and we now have more than 620 million paid subscriptions across the services on our platform, up 140 million from just a year ago. Finally, we continue to improve the breadth and quality of our current Services offerings and are adding new services that we think our customers will love. For example, Apple Music recently released its biggest product update ever with features like Listen Now, all new Search, personal radio stations and auto play. 90% of Apple Music users on iOS 14 have already used these new features. In payment services, we continue to expand our coverage, with nearly 90% of stores in the United States now accepting Apple Pay so that customers can easily have a touchless payments experience. Wearables, Home and Accessories grew 30% year-over-year to $13 billion, setting new all-time revenue records in every geographic segment. As a result of this strong performance, our Wearables business is now the size of a Fortune 120 company. Importantly, Apple Watch continues to extend its reach, with nearly 75% of the customers purchasing Apple Watch during the quarter being new to the product. We're very excited about the future of this category and believe that our integration of hardware, software and services uniquely positions us to provide great customer experience in this category. Next, I'd like to talk about Mac. We set a December quarter record for revenue at $8.7 billion up 21% over last year. We grew strong-double-digits in each geographic segment and set all-time revenue records in Europe and rest of Asia-Pacific as well as December quarter records in the Americas, Greater China and in Japan. This performance was driven by strong demand for the new MacBook Air, MacBook Pro and Mac mini, all powered by our brand-new M1 chip. iPad performance was also very impressive with revenue of $8.4 billion, up 41%. We grew strong -- very strong double digits in every geographic segment, including an all-time record in Japan. During the quarter, the new -- the all-new iPad Air became available and customer response has been terrific. Both Mac and iPad are incredibly relevant products for our customers in the current working and learning environments. And we are delighted that the most recent surveys of consumers from 451 Research measured customer satisfaction at 93% for Mac and 94% for iPad. With this level of customer satisfaction and with around half of the customers purchasing Mac and iPad during the quarter being new to that product, the active installed base for both products continues to grow nicely and reached new all-time highs. In the enterprise market, we are seeing many businesses shifting their technology investment in response to COVID. One example is our businesses are handling their hundreds of millions of office desk phones while more employees are working remotely. Last quarter, Mitsubishi UFJ Bank, one of the largest banks in the world, announced that it will be replacing 75% of its fixed phones with iPhones. By doing so, it expects to realize significant cost savings while providing a secure mobile platform to employees. We're also pleased with the rapid adoption of the Mac Employee Choice Program among the world's leading businesses, who are seeing improved productivity, increased employee satisfaction and talent retention. With the introduction of M1-powered Macs, we're excited to extend these experiences to an even broader range of customers and employees, especially in times of increased remote working. Let me now turn to our cash position. We ended the quarter with almost $196 billion in cash plus marketable securities and retired $1 billion of maturing debt, leaving us with total debt of $112 billion. As a result, net cash was $84 billion at the end of the quarter. We returned over $30 billion to shareholders during the December quarter, including $3.6 billion in dividends and equivalents and $24 billion through open market repurchases of 200 million Apple shares as we continue on our path to reaching a net cash neutral position over time. As we move ahead into the March quarter, I'd like to provide some color on what we are seeing, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we will not be guiding to a specific revenue range. However, we are providing some directional insights, assuming that COVID-related impacts of our business do not worsen from our current assumptions for the quarter. For total company revenue, we believe growth will accelerate on a year-over-year basis, and in aggregate, follow typical seasonality on a sequential basis. At the product category level, keep in mind two items: first, during the March quarter last year, we saw elevated activity in our digital services as lockdowns occurred around the world, so our Services business faces a tougher year-over-year comparison; second, we believe the year-over-year growth in the Wearables, Home and Accessories category will decelerate compared to Q1. As you know, we were chasing demand on AirPods last year as we expanded channel inventory from Q1 to Q2. This year, we plan to decrease AirPods channel inventory as is typical after the holiday quarter. We expect gross margin to be similar to the December quarter. We expect OpEx to be between $10.7 billion and $10.9 billion. We expect OI&E to be up around $50 million and our tax rate to be around 17%. Finally, today, our Board of Directors has declared a cash dividend of $0.205 per share of common stock payable on February 11, 2021, to shareholders of record as of February 8, 2021. With that, let's open the call to questions. A - Tejas Gala: Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please? Operator: We'll go question from Katy Huberty with Morgan Stanley. Please go ahead. Katy Huberty: Congratulations on a really strong quarter. First question for Luca. The gross margin was particularly strong versus your outlook. Can you talk about whether you recognize the full impact of the weaker dollar in the December quarter, given your typical currency hedges? And then how are you thinking about the headwinds and tailwinds on gross margins as you go into the March quarter? And then I have a follow-up for Tim. Luca Maestri: Yes, Katy. So yes, the gross margin was strong, was better than we had anticipated at the beginning of the quarter. The reason for that was obviously, we had very strong leverage from higher sales. And the mix was strong, both the mix within products and the mix of services, and that was only partially offset by cost. As you know, we've launched many new products during the fall, and that always comes with new cost structures. So in total, it was very good. And from the FX standpoint, really, at the gross margin level, FX didn't play a role neither sequentially nor on a year-over-year basis for the December quarter, partially because of the hedges that you talked about but also because some currencies are still weaker against the dollar, they're still weaker than a year ago. Look specifically to emerging markets in Latin America, in Russia, in Turkey and so on. Clearly, if the dollar remains weak or continues to weaken, that can become a tailwind for us as we get into the March quarter. At current rates, we expect some level of benefit around 60 to 70 basis points for the March quarter. Katy Huberty: That's great. And Tim, one of the challenges with valuing Apple is just a limited visibility that investors have into the road map and any new categories that you might enter over time. Without, of course, commenting on any given opportunity, can you talk about the framework that you use internally to evaluate new markets that might be attractive and what you believe will determine your success as you look to enter new markets? Tim Cook: Thanks, Katy, for the question, and thanks for not asking me any specifics. The framework that we use is very much around we ask ourselves if this is a product that we would want to use ourselves or a service that we would want to use ourselves. And that's a pretty high bar. And we ask ourselves if it's a big enough market to be in unless it's an adjacency product, of which we're looking at it very much from a customer experience point of view. And so there's no set way that we're looking at it, no formula kind of thing. But we're taking into account all of those things, and the kind of things that we love to work on are those where there's a requirement for hardware, software and services to come together because we believe that the magic really occurs at that intersection. And so hopefully, that gives you a little bit of insight into how we look at it. And I think we have some good -- really good opportunities out there. And I think if you look at our current portfolio of products, we still have relatively a low share in a number of cases in very big markets. And so we feel like we have really good upside there, and we feel like we have really good upside in the Services area, too, that we've been working on for quite some time with four or five new services just coming online in the last year, year-plus, and so -- yes. Thank you. Operator: We'll hear next from Wamsi Mohan with Bank of America. Please go ahead. Wamsi Mohan: Luca, the iPhone growth exceeded your expectations despite a late launch. Can you maybe share on the unit side or the ASP side? You referred to very strong mix a couple of times on the call. And how does this change your view on the March quarter? And if you could share any color on if you're still supply constrained, and I have a follow-up for Tim. Luca Maestri: Yes. Yes, certainly, iPhone was one of the major factors why we exceeded our own internal expectations at the beginning of the quarter. We have a fantastic product lineup and we know that, and it's been fantastic to see the customer response for new models, particularly the Pro models, the Pro and the Pro Max. So, we've done very, very well both on units and on pricing because of the strong mix. And we've had some level of supply constraints as we went through the quarter, particularly on the Pro and the Pro Max. As you said correctly, we launched these products in the middle of the quarter, two models after four weeks, the other two models after seven weeks. And so obviously, we had a very steep ramp, which fortunately went very, very well. The products are doing very well all around the world. I think you've seen that our performance has been particularly strong in China, where we've seen phenomenal customer response that probably. There was also some level of pent-up demand for 5G iPhones, given that the market is moving very quickly to 5G. And so as we look ahead into the March quarter, we're very optimistic. We believe we're going to be able to be in supply-demand balance for all the models at some point during the quarter. And it's -- the product is doing very well all around the world. Wamsi Mohan: Great. And Tim, you mentioned about the strength of the installed base performance, which continues to grow very impressively at this scale. Can you maybe help us think through how the switcher versus upgrade activity has been tracking in recent quarters? I would love to get your thoughts on that. Tim Cook: Yes. Thanks for the question. If you look at this past quarter, which has -- we started selling two of the iPhones 4 weeks into the quarter and the other two, seven weeks into the quarter. And so I would caution that this is in the early going. But in looking at the iPhone 12 family, we saw both switchers and upgraders increase on a year-over-year basis. And in fact, we saw the largest number of upgraders that we've ever seen in a quarter. And so, we were very thrilled about that. Operator: We'll go ahead and take our next question from Shannon Cross with Cross Research. Shannon Cross: Tim, can you talk a bit about what you're seeing in China? Clearly, significant sequential growth, which I think has a lot to do with iPhone. But I'm curious, both from an iPhone as well as your other product categories, what you're seeing and how much back to normal you think the Chinese market is? And then I have a follow-up. Tim Cook: Yes. China was more than an iPhone story. iPhone did do very well there. And sort of like the world, if you look at both switchers and upgraders, we were up year-over-year, and China also had a record number of upgraders during the quarter, the most we've ever seen in a quarter. I think probably some portion of this was that people probably delayed purchasing in the previous quarter as rumors started appearing about an iPhone. Keep in mind that 5G in China is -- the network is well established. And the overwhelming majority of phones being sold are 5G phones. And so I think there was some level of anticipation for us delivering an iPhone with 5G. And so, iPhone did extremely well. However, the other products did as well. I mean, we could not have turned in a performance like we did with only iPhone. iPad did extremely well, far beyond the Company average. Mac was about the Company average. Wearables, Home and Accessories was above the Company average. And so if you really look at it, we did really well across the Board there. In terms of COVID, I think they're -- at least for last quarter, they were beat -- sort of beyond COVID, very much in the recovery stage. This quarter, there are different reports about some cases in some places and lockdowns occurring but we have not seen that in our business as yet. Of course, those cases are much smaller than the ones in other countries. Shannon Cross: Right. I guess the other thing I was curious about, with regard to the Services business, if we could dig a little bit more, I think this is one of the first times when Luca, you talked about Apple TV+, Arcade, Apple Pay, some of the smaller services actually kind of moving the needle. And then I was also curious, you had a number of stores closed at least later in the quarter, and that typically has impacted some of your AppleCare revenue and yet you outperformed. So, maybe if you could talk about a bit more about the drivers of the Services revenue? Luca Maestri: Yes. I mean, really, it's been strong across the Board. There are two businesses during COVID that have been impacted negatively, and then we talked about it in the past. One is AppleCare. Obviously, when the stores are closed, it's tougher, of course, for customers to have the interaction with us. And advertising, which is -- it's in line with the overall level of economic activity. What happened during the December quarter is that in-store traffic improved. And so AppleCare, we grew -- we didn't grow as much as company average but we grew in AppleCare, set an all-time record there in spite of the fact that, yes, we are running, particularly in December, we started closing a few stores, particularly here in the United States but also in Western Europe. But in total, we were able to support more customers than in past quarters. And we also saw a sequential acceleration in advertising and so that also helped the overall growth rate. Clearly, the strength was in digital services, in the App Store, in cloud services, in Music. Those were the services that really delivered very, very strong performance. It's something that we've seen happen during the COVID environment. Operator: We'll hear from Toni Sacconaghi with Bernstein. Toni Sacconaghi: I also have one for Luca and one for Tim. Luca, I was wondering if we could just probe a little bit more into iPhone. Maybe you can just -- you talked about a drawdown in channel inventory last quarter. Our iPhone channel inventory is sort of at normal levels now exiting Q1. And should we be thinking about above-seasonal iPhone growth, given that you're still not in supply-demand balance and you had fewer selling days in fiscal Q1? Should we be thinking about sort of above-seasonal iPhone growth looking into Q2? Luca Maestri: So on the December performance, as you know, Toni, this was a very different cycle because we launched at a different time than usual. And so, we had an initial part of the quarter where, obviously, we didn't have the new phones. And then as we launched the new phones, we also did the channel fill that typically happens, to a certain extent, in the September quarter. At the end of the quarter, the demand has been very strong. And so we've been constrained, as I said, on -- especially in the Pro models. At the end of December, we exited with a level of iPhone channel inventory, which was slightly below a year ago. So we -- and we still had some level of supply constraints, which we believe we're going to be able to solve during the March quarter. In terms of the sequential change, we talked about -- during the prepared remarks, we talked about total company average, and we said that we expect that sequential progression to be similar to the typical seasonality that you've seen in past years. Certainly, last year is not typical because of COVID. But if you go back, fiscal '17, '18, '19, that's our typical seasonal progression. And we mentioned a couple of product categories, Services and Wearables, where we're going to be having a slightly more difficult compare. And so I think you can draw your conclusions around the iPhone. Toni Sacconaghi: Okay. And then, Tim, I was wondering if you could just comment more broadly around growth for Apple and sources of growth. The Company this year is going to be well over $300 billion in revenue. Historically, you've issued acquisitions. And I'm wondering if you could comment whether you still feel confident that Apple has Apple organic growth opportunities and that you don't believe acquisitions are an important source of growth? And then I think perhaps most importantly, as you look out, let's say, over the next five years, what do you think is a realistic revenue growth rate for Apple going forward? Tim Cook: Yes. Toni, as you know, we give some color on the current quarter but not beyond that in terms of growth rates, so I'll punt that part of your question. But if you back up and look at the sort of the ingredients that we have at this point, we have the strongest hardware portfolio that we've ever had. And we have a great product pipeline for the future, both in products and in Services. We have an installed base that has hit new highs that we just talked about earlier in our opening comments. And we're still attracting a fair number of switchers and, of course, upgraders. We just set an all-time Services record, and we have that installed base to compound that, and particularly with the added services that we've had over the last year or so, that as they grow and mature, will contribute even more to the Services revenue stream. And on the Wearables side, we've brought this thing from zero to a Fortune 120 company, which was no small feat. But I still think that we're in the early stages of those products. If you look at our share in some of the other products, whether you look in iPhone or Mac or iPad, you find that the share numbers leave a fair amount of headroom for market share expansion. And this is particularly the case in some of the emerging markets, where we're proud of how we've done but there's a lot more headroom in those markets. Like if you take India as an example, we doubled our business last quarter compared to the year ago quarter. But our absolute level of business there is still quite low relative to the size of the opportunity. And you can kind of take that and go around the world and find other markets that are like that as well. And of course, the other thing from a market point of view is we're -- we've been on a multiyear effort in the enterprise and have gained quite a bit of traction there. You've heard some of the things in Luca's comments today and we comment some on it each quarter. We're very optimistic about what we can do in that space. And then, of course, we've got new things that we're not going to talk about that we think will contribute to the Company as well, just like other new things have contributed nicely to the Company in the past. So, we see lots of opportunity. Thank you for the question. Operator: We'll hear from Amit Daryanani with Evercore ISI. Please go ahead. Amit Daryanani: I have two questions as well. I guess, starting with you, Luca, I just wanted to go back to the gross margin discussion, and we really haven't seen gross margins at this level, high 39%, I think, since 2016. Could you maybe step back and talk, what has enabled the shift higher? What are the key drivers to get you there? And is commodity tailwind or in-sourcing of some components really a big part of this? So just love to understand the durability of the gross margin at these levels. And what are the big drivers that got us here? Luca Maestri: Well, I mean, of course, when you grow the way we've grown this quarter, 21%, it's -- obviously, we have a certain level of fixed cost in our product structures, right? And so a high level of sales helps margin expansion without a doubt, and so that has been probably the biggest factor, to be honest. And then as I was saying earlier, we've had, across the Board, in Services, in every product category, we've had a very strong mix of products, right? We were talking about the iPhone, the Pro and the Pro Max, and that's been pretty much the case in every product category. So the mix has also been very good. The commodity environment is fairly benign. And the one thing that has not affected us this time around is the FX that it's true, it has not been a tailwind yet for the reasons that I was explaining to Katy, but at the same time, it has not been a negative. And the reality is that FX for us has been a negative over the last five or six years, almost every quarter. And so that has changed. And that obviously makes a difference. Amit Daryanani: And then Tim and when I look at the growth rates on Mac and iPads, they've been in the 20% to 40% range for the last three quarters, and I suspect some of this is just folks contending with the pandemic. But love to understand, when you look at these growth rates, how much of this do you think is replacement cycle-driven folks upgrading with at home versus new customers and new folks that are coming into the Apple ecosystem? And do you see, I guess, what sort of growth rates do you think is more durable or predictable as we go forward over here? Tim Cook: If you look at the switcher or the switchers, if you look at the new to Mac and new to iPad, these numbers are still about, at a worldwide level, about half of the purchases that are coming from people that are new. And so the installed base is still expanding with new customers in it. And so that's true on both iPad and Mac. If you look at Mac, the M1, I think, gives us a new growth trajectory that we haven't had in the past. Certainly, if Q1 is a good proxy, there's lots of excitement about M1-based Macs. As you know, we're partly through the transition. We've got more -- a lot more to do there. We're early days of a two-year transition, but we're excited about what we see so far. The iPad, as we went out with the iPad Air, and we now have the best iPad lineup we've ever had, and it's clear that some people are using these as laptop replacements. Others are using them as complementary to their desktop. But the level of growth there has been phenomenal. You look at it at 41%. And yes, part of it is work from home and part of it is just learning. But I think I wouldn't underestimate how much of it is the product itself on -- in both the case of iPad and Mac. And of course, our share in the Mac is quite low. In the -- for the total personal computer market. And so there's lots of headroom there. Operator: We'll go ahead and take our next question from Samik Chatterjee with JP Morgan. Samik Chatterjee: Congrats on the record quarter from my side as well. I guess I wanted to start off with iPhone sales. I think in -- general impression we have is China and North America have more robust 5G infrastructure. I just wanted to see kind of what are you seeing in terms of customer engagement or velocity of sales for iPhone in Europe, where I think the general impression is that service providers haven't rolled out robust 5G services. Is that something that's impacting customer interest in the latest lineup in the region? And I have a follow-up. Tim Cook: If you look at the 5G rollout in Europe, it's true that Europe is not in the place of -- certainly nowhere close to where China is and nowhere close to the U.S. either. But there are other regions that 5G is -- that has very good coverage, like Korea is an example. And so the the world, I would describe it right now, is more of a patchwork more to do that we haven't had in quilt. There are places that there's really excellent coverage. There are places where -- within a country that is very good but not from a nationwide point of view. And then there are places that really haven't gotten started yet. Latin America is more closer to the last one. There's lots of opportunity ahead of us there. And I think Europe is where there are 5G implementations there. I think most of that growth is probably in front of us there as well. Samik Chatterjee: Got it. As a follow-up, if I can just ask you, I think you mentioned the momentum you're seeing for the Apple One bundle, which I think has been a couple of months now since you launched it. Any metrics to share in terms of what you're seeing for conversion rate of customers or even insights into which services are turning in that bundle, are turning out to be the anchor Services that's driving adoption of that bundle? Tim Cook: It's really too early to answer some of those questions. As you know, we just got started into the quarter in Q1 so we have less than a quarter on this right now. What we wanted to accomplish with it, we're clearly accomplishing, which is making our Services very easy to subscribe to. Our customers clearly told us that they wanted to subscribe to several services or, in some cases, all of our services. And so, we've made that very simple, and it's clear from the early going that it's working but we've just gotten started on it. Operator: We'll hear from Krish Sankar with Cowen. Krish Sankar: Congrats on the very strong results. My first question is for Tim. Tim, I want to talk a little bit about your search and advertising business. How do you think of the long-term growth opportunities in advertising? How do you think it -- how long can it grow at two times to three times the App Store growth rate? And also, are there any applications where your fundamental search technology, AI could be adapted for other parts of the Services business, that's the first question. And then I have a quick follow-up for Luca after that. Tim Cook: The search advertising business is going well. It's a -- there's lots of intent from search. And we do it in a very private kind of manner, observing great privacy policies and so forth. And I think people see so forth. And I think people see that and are willing to try it out. And we have been growing nicely in that area. It's a part of the advertising area that Luca spoke of earlier. Krish Sankar: Got it, got it. And then a follow-up for Luca. When you look at your Services segment in the March quarter, in China, you typically see a bump due to gaming downloads during Chinese New Year. So should see a similar trend this time around? But do you think with a pandemic, and people think for me at home, that kind of seasonal bump might not happen in China for gaming downloads? Luca Maestri: Yes. I mean, I think I was mentioning it during the prepared remarks. We -- clearly, in China, the March quarter is typically the strongest quarter for our Services business and for the App Store because of Chinese New Year, as you mentioned. And last year, what we saw was an increased level of activity because after Chinese New Year, the whole country went into lockdown for several weeks. And so that propensity for playing games continued for several weeks, more than a typical cycle. So, we expect to have a great quarter in China, but at the same time, you need to keep in mind that the compare is going to of what happened a year ago. Operator: We'll go ahead and take our next question from Chris Caso with Raymond James. Please go ahead. Chris Caso: The first question is on iPhone ASPs and I know you don't disclose the numbers there, but I wonder if you could speak about it qualitatively. You spoke about the richer mix, but there were also some price differences as compared to a year ago. iPhone 12 came higher price point. The Pro established a new price point. Can you speak to how that the level of benefit that you saw there? And going forward, are you confident that you can continue to improve the next in iPhone going forward? Luca Maestri: So, as I said earlier, we grew iPhone revenue 17%. That growth came from both unit sales and ASPs because of the strong mix that I mentioned before. So, I think that answers your question for the December quarter. What we've seen so far, it's very early because we launched the new products only a few weeks ago. What we've seen so far is a very high level of interest for the Pro models, the Pro and the Pro Max. We worked very hard to ramp up our supply. We've had some supply constraints during the December quarter. We think we're going to be able to solve them during the March quarter. But so far, the mix has been very strong on iPhone. Chris Caso: Okay. As a follow-up question, if you could talk a bit to the benefit that you may have seen from some of the carrier actions? We've seen very aggressive trade-ins during the quarter. Did that provide a benefit, in your view, on units or mix or perhaps both? And what would be the level of permanence that you would see in some of those actions such that if those subsidies were removed, could that potentially be a headwind going forward? Tim Cook: I think, Chris, it's Tim. I think subsidies always help, that anything that reduces the price to the customer is good for the customer and obviously good for the carrier that's doing it and good for us as well. And so, it's a win across the board. I believe that, at least based on what I see right now is that there would be probably continuing to have quite a bit of competition in the market, if you're talking about the U.S. market for customers as the carriers work to get more customers to move to 5G. Outside of the U.S., the subsidies are not used in all geographies, and so it really varies greatly by country. Some of them are separate completely, the handset and the service. And in those areas, we don't have subsidies. Operator: We'll go ahead and hear from Jim Suva with Citigroup. James Suva: It's amazing how your company has pivoted and progressed through this uncertain time in society. A lot of the pushback we get on our view on Apple is that everyone around them or that they know developed countries has an iPhone or Apple product and the market is kind of being saturated some. But when I look at other countries like India, I believe statistically, you are materially below that in market share. So are you doing active efforts there? It seems like there's been some news reports of moving supply chain there. Or you recently opened up an Apple Store. How should we think about that? Because it just seems like you're really not full market share equally around the world. Tim Cook: Yes. There are several markets, as I alluded to before. India is one of those, where our share is quite low. It did improve from the year-ago quarter. Our business roughly doubled over that period of time. And so we feel very good about the trajectory. We are doing a number of things in the area. We put the online store there, for example, and last quarter was the first full quarter of the online store. And that has gotten a great reaction to it and has helped us achieve the results that we got to last quarter. We're also going in there with retail stores in the future. And so we look for that to be another great initiative and we continue to develop the channel as well. And so there's lots of things, not only in India but in several of the other markets that you might name where our share is lower than we would like. And I -- again, I would also say, even in the developed markets, when you look at our share, definitely, everybody doesn't have an iPhone, not even close. And so, we really don't have a significant share in any market. So, there's headroom left even in those developed markets where you might hear that. James Suva: Congratulations to your team and employees. Tim Cook: Thank you, Jim. Appreciate that. Tejas Gala: Thank you. A replay of today's call will be available for two weeks on Apple Podcast, as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are (888) 203-1112 or (719) 457-0820. Please enter confirmation code 1828830. These replays will be available by approximately 5:00 PM Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at (408) 974-2414. Financial analysts can contact me with additional questions at (669) 227-2402. Thank you again for joining us. Operator: Once again, that does conclude today's conference. We do appreciate your participation.	[ { "speaker": "Operator", "text": "Good day, and welcome to the Apple Q1 Fiscal Year 2021 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please go ahead." }, { "speaker": "Tejas Gala", "text": "Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the Company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thank you, Tejas. Good afternoon, everyone. Thanks for joining the call today. It's with great gratitude for the tireless and innovative work of every Apple team member worldwide that I share the results of a very strong quarter for Apple. We achieved an all-time revenue record of $111.4 billion. We saw strong double-digit growth across every product category, and we achieved all-time revenue records in each of our geographic segments. It is not far from many of our minds that this result caps off the most challenging year any of us can remember. And it is an understatement to say that the challenges it posed to Apple as a business paled in comparison to the challenge it posed to Apple as a community of individuals, to employees, to their families and to the communities we live in and love to call home. While these results show the central role that our products played in helping our users respond to these challenges, we are doubly aware that the work ahead of all of us to navigate the end of this pandemic, to restore normal life and prosperity in our neighborhoods and local economies and, to build back with a sense of justice is profound and urgent. We will speak to these needs and Apple's efforts throughout today's call, but I want to first offer the context of a detailed look at our results this quarter, including why we outperformed our expectations. Let's get started with hardware. We hit a new high watermark for our installed base of active devices, with growth accelerating as we passed 1.65 billion devices worldwide during the December quarter. iPhone grew by 17% year-over-year, driven by strong demand for the iPhone 12 family, and our active installed base of iPhones is now over 1 billion. The customer response to the new iPhone 12 models' unprecedented innovation from world-class cameras to the great and growing potential of 5G has been enthusiastic, even in light of the ongoing COVID-19 impact at retail locations. iPad and Mac grew by 41% and 21%, respectively, reflecting the continuing role these devices have played in our users' lives during the COVID-19 pandemic. During this quarter, availability began for both our new iPad Air as well as the first generation of Macs to feature our groundbreaking M1 chip. The demand for all of these products has been very strong. We have also continued our efforts to bring the latest iPads, enriching content and professional support to educators, students and parents. Educational districts and governments worldwide are continuing major deployments, including the largest iPad deployments ever to schools in Germany and Japan. Wearables, Home and Accessories grew by 30% year-over-year, driven by significant holiday demand for the latest Apple Watch, our entire AirPods lineup, including the new AirPods Max as well as the new HomePod mini. This broad strength across the category led to new revenue records for each of its three subgroups, and we're very excited about the road ahead for these products. Look no further than the great potential of Fitness+, which pairs with Apple Watch to deliver real-time on-screen fitness data alongside world-class workouts by the world's best trainers. There are new sessions added each week, and customers are loving the flexibility, challenge and fun of these classes as well as how the pairing with Apple Watch pushes you to achieve your fitness goals. This deep integration of hardware, software and services, have always defined our approach here, and it has delivered an all-time quarterly Services record of $15.8 billion. This was the first quarter of the Apple One bundle, which brings together many of our great services into an easy subscription and with new content being added to these services every day, we feel very optimistic about where we are headed. The App Store ecosystem has been so important as individuals, families and businesses worldwide evolve and adapt to the COVID-19 pandemic, and we want to make sure that this unrivaled engine of innovation and opportunity continues. This quarter, we also took a significant new step to help smaller developers continue to experiment, innovate and scale the latest great app ideas. The App Store Small Business Program reduces the commission on the sale of digital goods and services to 15% for small businesses earning less than $1 million a year. The program launched on January 1st and we are already hearing from developers about how this change represents a transformation in their potential to create and grow on the App Store. Tomorrow is International Privacy Day, and we continue to set new standards to protect users' right to privacy, not just for our own products but to be the ripple in the pond that moves the whole industry forward. Most recently, we're in the process of deploying new requirements across the App Store ecosystem that give users more knowledge about and new tools to control the ways that apps gather and share their personal data. The winter holiday season is always a busy times for us and our products, but this year was unique. We had a record number of device activations during the last week of the quarter. And as COVID-19 kept us apart, we saw the highest volume of FaceTime calls ever this Christmas. As always, we could not have made so many holidays special without our talented and dedicated retail teams who helped us achieve a new all-time revenue record for retail, driven by very strong performance in our online store. Particularly, after the events of the last few weeks, we are focused on how we can help a moment of great national need. Because none of us should have any illusions about the challenges we face as we began a new chapter in the American story. Hope for healing, for unity and for progress begins with and depends on addressing the things that continue to wound us. In our communities, we see how every burden from COVID-19, to the resulting economic challenges, to the closure of in-person learning for students, falls heaviest on those who have always faced structural barriers to opportunity and equality. This month, Apple announced major new commitments through a $100 million Racial Equity & Justice Initiative. The Propel Center, launched with a $25 million commitment and with the support of historically black colleges and universities across the country, will help support the next-generation of leaders in fields ranging from machine learning to app development to entrepreneurship and design. And our new Apple Developer Academy in Downtown Detroit will be the first of its kind in the United States. Detroit has a vibrant culture of black entrepreneurship, including over 50,000 black-owned businesses. We want to accelerate the potential of the app economy here, knowing there is no shortage of good ideas in such a creative, resilient and dedicated community. Finally, we're committing $35 million across two investments in Harlem Capital and the Clear Vision Impact Fund that support, accelerate and grow minority-owned businesses in areas of great potential and need. In December, we concluded an unmatched year of giving. Since the inception of the Apple Giving Program in 2011, Apple employees have donated nearly $600 million and volunteered more than 1.6 million hours to over 34,000 organizations of every stride. Through our partnership with Product Red, we've adapted our 14-year $250 million effort to support HIV and AIDS work globally to ensure that care of COVID. That includes delivering millions of units of personal protective equipment to health care providers in Zambia. And here in the United States, even with COVID's effects, we are ahead of schedule on our multiyear commitment to invest $350 billion throughout the American economy. As proud as this makes us, we know there is much more to be done. Looking forward, we continue to contend with the COVID-19 pandemic but we must also now work to imagine what we will inherit on the other side. When a disease recedes, we cannot simply assume that healing follows. Even now, we see the deep scars that this period has left in our communities. Trust has been compromised, opportunities have been lost, entire portions of our lives that we took for granted, schools for children, meetings with our colleagues, small businesses that have endured for generations have simply disappeared. It will take a society-wide effort across the public and private sectors as individuals and communities, every one of us, to ensure that what's ahead of us is not simply the end of a disease, but the beginning of something durable and hopeful for those who gave, suffered and endured during this time. At Apple, we have every intention to be partners in this effort, and we look forward to working in communities around the world to make it possible. And as this chapter of uncertainty continues, so will our tireless work to help our customers stay safe, connected and well. With that, I'll hand things over to Luca." }, { "speaker": "Luca Maestri", "text": "Thank you, Tim. Good afternoon, everyone. We started our fiscal 2021 with exceptional business and financial performance during the December quarter, as we set all-time records for revenue, operating income, net income, earnings per share and operating cash flow. We are thrilled with the way our teams continued to innovate and execute throughout this period of elevated uncertainty. Our revenue reached an all-time record of $111.4 billion, an increase of nearly $20 billion or 21% from a year ago. We grew strong double digits in each of our product categories, with all-time records for iPhone, Wearables, Home and Accessories and services as well as a December quarter record for Mac. We also achieved double-digit growth and new all-time records in each of our five geographic segments and in the vast majority of countries that we track. Products revenue was an all-time record of $95.7 billion, up 21% over a year ago. As a consequence of this level of sales performance and the unmatched loyalty of our customers, our installed base of active devices passed 1.65 billion during the December quarter and reached an all-time record in each of our major product categories. Our Services set an all-time record of $15.8 billion, growing 24% year-over-year. We established new all-time records in most service categories and December quarter records in each geographic segment. I'll cover our Services business in more detail later. Company gross margin was 39.8%, up 160 basis points sequentially, thanks to leverage from higher sales and a strong mix. Products gross margin was 35.1%, growing 530 basis points sequentially, driven by leverage and mix. Services gross margin was 68.4%, up 150 basis points sequentially, mainly due to a different mix. Net income, diluted earnings per share and operating cash flow were all-time records. Net income was $28.8 billion, up $6.5 billion or 29% over last year. Diluted earnings per share were $1.68, up 35% over last year and operating cash flow was $38.8 billion, an improvement of $8.2 billion. Let me get into more detail for each of our revenue categories. iPhone revenue was a record $65.6 billion, growing 17% year-over-year as demand for the iPhone 12 family was very strong despite COVID-19 and social distancing measures, which have impacted store operations in a significant manner. Our active installed base of iPhones reached a new all-time high and has now surpassed 1 billion devices, thanks to the exceptional loyalty of our customer base and strength of our ecosystem. In fact, in the U.S., the latest survey of consumers from 451 Research indicates iPhone customer satisfaction of 98% for the iPhone 12 family. Turning to Services. As I said, we reached an all-time revenue record of $15.8 billion and set all-time records in App Store, cloud services, Music, advertising, AppleCare and payment services. Our new service offerings, Apple TV+, Apple Arcade, Apple News+, Apple Card, Apple Fitness+ as well as the Apple One bundle are also contributing to overall Services growth and continue to add users, content and features. The key drivers for our Services growth all continue to move in the right direction: first, our installed base growth has accelerated and each major product category; second, the number of both transacting and paid accounts on our digital content stores reached a new all-time high during the December quarter, with paid accounts increasing double digits in each of our geographic segments; third, paid subscriptions continue to grow nicely, and we exceeded our target of 600 million paid subscriptions before the end of calendar 2020. During the December quarter, we added more than 35 million sequentially, and we now have more than 620 million paid subscriptions across the services on our platform, up 140 million from just a year ago. Finally, we continue to improve the breadth and quality of our current Services offerings and are adding new services that we think our customers will love. For example, Apple Music recently released its biggest product update ever with features like Listen Now, all new Search, personal radio stations and auto play. 90% of Apple Music users on iOS 14 have already used these new features. In payment services, we continue to expand our coverage, with nearly 90% of stores in the United States now accepting Apple Pay so that customers can easily have a touchless payments experience. Wearables, Home and Accessories grew 30% year-over-year to $13 billion, setting new all-time revenue records in every geographic segment. As a result of this strong performance, our Wearables business is now the size of a Fortune 120 company. Importantly, Apple Watch continues to extend its reach, with nearly 75% of the customers purchasing Apple Watch during the quarter being new to the product. We're very excited about the future of this category and believe that our integration of hardware, software and services uniquely positions us to provide great customer experience in this category. Next, I'd like to talk about Mac. We set a December quarter record for revenue at $8.7 billion up 21% over last year. We grew strong-double-digits in each geographic segment and set all-time revenue records in Europe and rest of Asia-Pacific as well as December quarter records in the Americas, Greater China and in Japan. This performance was driven by strong demand for the new MacBook Air, MacBook Pro and Mac mini, all powered by our brand-new M1 chip. iPad performance was also very impressive with revenue of $8.4 billion, up 41%. We grew strong -- very strong double digits in every geographic segment, including an all-time record in Japan. During the quarter, the new -- the all-new iPad Air became available and customer response has been terrific. Both Mac and iPad are incredibly relevant products for our customers in the current working and learning environments. And we are delighted that the most recent surveys of consumers from 451 Research measured customer satisfaction at 93% for Mac and 94% for iPad. With this level of customer satisfaction and with around half of the customers purchasing Mac and iPad during the quarter being new to that product, the active installed base for both products continues to grow nicely and reached new all-time highs. In the enterprise market, we are seeing many businesses shifting their technology investment in response to COVID. One example is our businesses are handling their hundreds of millions of office desk phones while more employees are working remotely. Last quarter, Mitsubishi UFJ Bank, one of the largest banks in the world, announced that it will be replacing 75% of its fixed phones with iPhones. By doing so, it expects to realize significant cost savings while providing a secure mobile platform to employees. We're also pleased with the rapid adoption of the Mac Employee Choice Program among the world's leading businesses, who are seeing improved productivity, increased employee satisfaction and talent retention. With the introduction of M1-powered Macs, we're excited to extend these experiences to an even broader range of customers and employees, especially in times of increased remote working. Let me now turn to our cash position. We ended the quarter with almost $196 billion in cash plus marketable securities and retired $1 billion of maturing debt, leaving us with total debt of $112 billion. As a result, net cash was $84 billion at the end of the quarter. We returned over $30 billion to shareholders during the December quarter, including $3.6 billion in dividends and equivalents and $24 billion through open market repurchases of 200 million Apple shares as we continue on our path to reaching a net cash neutral position over time. As we move ahead into the March quarter, I'd like to provide some color on what we are seeing, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we will not be guiding to a specific revenue range. However, we are providing some directional insights, assuming that COVID-related impacts of our business do not worsen from our current assumptions for the quarter. For total company revenue, we believe growth will accelerate on a year-over-year basis, and in aggregate, follow typical seasonality on a sequential basis. At the product category level, keep in mind two items: first, during the March quarter last year, we saw elevated activity in our digital services as lockdowns occurred around the world, so our Services business faces a tougher year-over-year comparison; second, we believe the year-over-year growth in the Wearables, Home and Accessories category will decelerate compared to Q1. As you know, we were chasing demand on AirPods last year as we expanded channel inventory from Q1 to Q2. This year, we plan to decrease AirPods channel inventory as is typical after the holiday quarter. We expect gross margin to be similar to the December quarter. We expect OpEx to be between $10.7 billion and $10.9 billion. We expect OI&E to be up around $50 million and our tax rate to be around 17%. Finally, today, our Board of Directors has declared a cash dividend of $0.205 per share of common stock payable on February 11, 2021, to shareholders of record as of February 8, 2021. With that, let's open the call to questions." }, { "speaker": "A - Tejas Gala", "text": "Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please?" }, { "speaker": "Operator", "text": "We'll go question from Katy Huberty with Morgan Stanley. Please go ahead." }, { "speaker": "Katy Huberty", "text": "Congratulations on a really strong quarter. First question for Luca. The gross margin was particularly strong versus your outlook. Can you talk about whether you recognize the full impact of the weaker dollar in the December quarter, given your typical currency hedges? And then how are you thinking about the headwinds and tailwinds on gross margins as you go into the March quarter? And then I have a follow-up for Tim." }, { "speaker": "Luca Maestri", "text": "Yes, Katy. So yes, the gross margin was strong, was better than we had anticipated at the beginning of the quarter. The reason for that was obviously, we had very strong leverage from higher sales. And the mix was strong, both the mix within products and the mix of services, and that was only partially offset by cost. As you know, we've launched many new products during the fall, and that always comes with new cost structures. So in total, it was very good. And from the FX standpoint, really, at the gross margin level, FX didn't play a role neither sequentially nor on a year-over-year basis for the December quarter, partially because of the hedges that you talked about but also because some currencies are still weaker against the dollar, they're still weaker than a year ago. Look specifically to emerging markets in Latin America, in Russia, in Turkey and so on. Clearly, if the dollar remains weak or continues to weaken, that can become a tailwind for us as we get into the March quarter. At current rates, we expect some level of benefit around 60 to 70 basis points for the March quarter." }, { "speaker": "Katy Huberty", "text": "That's great. And Tim, one of the challenges with valuing Apple is just a limited visibility that investors have into the road map and any new categories that you might enter over time. Without, of course, commenting on any given opportunity, can you talk about the framework that you use internally to evaluate new markets that might be attractive and what you believe will determine your success as you look to enter new markets?" }, { "speaker": "Tim Cook", "text": "Thanks, Katy, for the question, and thanks for not asking me any specifics. The framework that we use is very much around we ask ourselves if this is a product that we would want to use ourselves or a service that we would want to use ourselves. And that's a pretty high bar. And we ask ourselves if it's a big enough market to be in unless it's an adjacency product, of which we're looking at it very much from a customer experience point of view. And so there's no set way that we're looking at it, no formula kind of thing. But we're taking into account all of those things, and the kind of things that we love to work on are those where there's a requirement for hardware, software and services to come together because we believe that the magic really occurs at that intersection. And so hopefully, that gives you a little bit of insight into how we look at it. And I think we have some good -- really good opportunities out there. And I think if you look at our current portfolio of products, we still have relatively a low share in a number of cases in very big markets. And so we feel like we have really good upside there, and we feel like we have really good upside in the Services area, too, that we've been working on for quite some time with four or five new services just coming online in the last year, year-plus, and so -- yes. Thank you." }, { "speaker": "Operator", "text": "We'll hear next from Wamsi Mohan with Bank of America. Please go ahead." }, { "speaker": "Wamsi Mohan", "text": "Luca, the iPhone growth exceeded your expectations despite a late launch. Can you maybe share on the unit side or the ASP side? You referred to very strong mix a couple of times on the call. And how does this change your view on the March quarter? And if you could share any color on if you're still supply constrained, and I have a follow-up for Tim." }, { "speaker": "Luca Maestri", "text": "Yes. Yes, certainly, iPhone was one of the major factors why we exceeded our own internal expectations at the beginning of the quarter. We have a fantastic product lineup and we know that, and it's been fantastic to see the customer response for new models, particularly the Pro models, the Pro and the Pro Max. So, we've done very, very well both on units and on pricing because of the strong mix. And we've had some level of supply constraints as we went through the quarter, particularly on the Pro and the Pro Max. As you said correctly, we launched these products in the middle of the quarter, two models after four weeks, the other two models after seven weeks. And so obviously, we had a very steep ramp, which fortunately went very, very well. The products are doing very well all around the world. I think you've seen that our performance has been particularly strong in China, where we've seen phenomenal customer response that probably. There was also some level of pent-up demand for 5G iPhones, given that the market is moving very quickly to 5G. And so as we look ahead into the March quarter, we're very optimistic. We believe we're going to be able to be in supply-demand balance for all the models at some point during the quarter. And it's -- the product is doing very well all around the world." }, { "speaker": "Wamsi Mohan", "text": "Great. And Tim, you mentioned about the strength of the installed base performance, which continues to grow very impressively at this scale. Can you maybe help us think through how the switcher versus upgrade activity has been tracking in recent quarters? I would love to get your thoughts on that." }, { "speaker": "Tim Cook", "text": "Yes. Thanks for the question. If you look at this past quarter, which has -- we started selling two of the iPhones 4 weeks into the quarter and the other two, seven weeks into the quarter. And so I would caution that this is in the early going. But in looking at the iPhone 12 family, we saw both switchers and upgraders increase on a year-over-year basis. And in fact, we saw the largest number of upgraders that we've ever seen in a quarter. And so, we were very thrilled about that." }, { "speaker": "Operator", "text": "We'll go ahead and take our next question from Shannon Cross with Cross Research." }, { "speaker": "Shannon Cross", "text": "Tim, can you talk a bit about what you're seeing in China? Clearly, significant sequential growth, which I think has a lot to do with iPhone. But I'm curious, both from an iPhone as well as your other product categories, what you're seeing and how much back to normal you think the Chinese market is? And then I have a follow-up." }, { "speaker": "Tim Cook", "text": "Yes. China was more than an iPhone story. iPhone did do very well there. And sort of like the world, if you look at both switchers and upgraders, we were up year-over-year, and China also had a record number of upgraders during the quarter, the most we've ever seen in a quarter. I think probably some portion of this was that people probably delayed purchasing in the previous quarter as rumors started appearing about an iPhone. Keep in mind that 5G in China is -- the network is well established. And the overwhelming majority of phones being sold are 5G phones. And so I think there was some level of anticipation for us delivering an iPhone with 5G. And so, iPhone did extremely well. However, the other products did as well. I mean, we could not have turned in a performance like we did with only iPhone. iPad did extremely well, far beyond the Company average. Mac was about the Company average. Wearables, Home and Accessories was above the Company average. And so if you really look at it, we did really well across the Board there. In terms of COVID, I think they're -- at least for last quarter, they were beat -- sort of beyond COVID, very much in the recovery stage. This quarter, there are different reports about some cases in some places and lockdowns occurring but we have not seen that in our business as yet. Of course, those cases are much smaller than the ones in other countries." }, { "speaker": "Shannon Cross", "text": "Right. I guess the other thing I was curious about, with regard to the Services business, if we could dig a little bit more, I think this is one of the first times when Luca, you talked about Apple TV+, Arcade, Apple Pay, some of the smaller services actually kind of moving the needle. And then I was also curious, you had a number of stores closed at least later in the quarter, and that typically has impacted some of your AppleCare revenue and yet you outperformed. So, maybe if you could talk about a bit more about the drivers of the Services revenue?" }, { "speaker": "Luca Maestri", "text": "Yes. I mean, really, it's been strong across the Board. There are two businesses during COVID that have been impacted negatively, and then we talked about it in the past. One is AppleCare. Obviously, when the stores are closed, it's tougher, of course, for customers to have the interaction with us. And advertising, which is -- it's in line with the overall level of economic activity. What happened during the December quarter is that in-store traffic improved. And so AppleCare, we grew -- we didn't grow as much as company average but we grew in AppleCare, set an all-time record there in spite of the fact that, yes, we are running, particularly in December, we started closing a few stores, particularly here in the United States but also in Western Europe. But in total, we were able to support more customers than in past quarters. And we also saw a sequential acceleration in advertising and so that also helped the overall growth rate. Clearly, the strength was in digital services, in the App Store, in cloud services, in Music. Those were the services that really delivered very, very strong performance. It's something that we've seen happen during the COVID environment." }, { "speaker": "Operator", "text": "We'll hear from Toni Sacconaghi with Bernstein." }, { "speaker": "Toni Sacconaghi", "text": "I also have one for Luca and one for Tim. Luca, I was wondering if we could just probe a little bit more into iPhone. Maybe you can just -- you talked about a drawdown in channel inventory last quarter. Our iPhone channel inventory is sort of at normal levels now exiting Q1. And should we be thinking about above-seasonal iPhone growth, given that you're still not in supply-demand balance and you had fewer selling days in fiscal Q1? Should we be thinking about sort of above-seasonal iPhone growth looking into Q2?" }, { "speaker": "Luca Maestri", "text": "So on the December performance, as you know, Toni, this was a very different cycle because we launched at a different time than usual. And so, we had an initial part of the quarter where, obviously, we didn't have the new phones. And then as we launched the new phones, we also did the channel fill that typically happens, to a certain extent, in the September quarter. At the end of the quarter, the demand has been very strong. And so we've been constrained, as I said, on -- especially in the Pro models. At the end of December, we exited with a level of iPhone channel inventory, which was slightly below a year ago. So we -- and we still had some level of supply constraints, which we believe we're going to be able to solve during the March quarter. In terms of the sequential change, we talked about -- during the prepared remarks, we talked about total company average, and we said that we expect that sequential progression to be similar to the typical seasonality that you've seen in past years. Certainly, last year is not typical because of COVID. But if you go back, fiscal '17, '18, '19, that's our typical seasonal progression. And we mentioned a couple of product categories, Services and Wearables, where we're going to be having a slightly more difficult compare. And so I think you can draw your conclusions around the iPhone." }, { "speaker": "Toni Sacconaghi", "text": "Okay. And then, Tim, I was wondering if you could just comment more broadly around growth for Apple and sources of growth. The Company this year is going to be well over $300 billion in revenue. Historically, you've issued acquisitions. And I'm wondering if you could comment whether you still feel confident that Apple has Apple organic growth opportunities and that you don't believe acquisitions are an important source of growth? And then I think perhaps most importantly, as you look out, let's say, over the next five years, what do you think is a realistic revenue growth rate for Apple going forward?" }, { "speaker": "Tim Cook", "text": "Yes. Toni, as you know, we give some color on the current quarter but not beyond that in terms of growth rates, so I'll punt that part of your question. But if you back up and look at the sort of the ingredients that we have at this point, we have the strongest hardware portfolio that we've ever had. And we have a great product pipeline for the future, both in products and in Services. We have an installed base that has hit new highs that we just talked about earlier in our opening comments. And we're still attracting a fair number of switchers and, of course, upgraders. We just set an all-time Services record, and we have that installed base to compound that, and particularly with the added services that we've had over the last year or so, that as they grow and mature, will contribute even more to the Services revenue stream. And on the Wearables side, we've brought this thing from zero to a Fortune 120 company, which was no small feat. But I still think that we're in the early stages of those products. If you look at our share in some of the other products, whether you look in iPhone or Mac or iPad, you find that the share numbers leave a fair amount of headroom for market share expansion. And this is particularly the case in some of the emerging markets, where we're proud of how we've done but there's a lot more headroom in those markets. Like if you take India as an example, we doubled our business last quarter compared to the year ago quarter. But our absolute level of business there is still quite low relative to the size of the opportunity. And you can kind of take that and go around the world and find other markets that are like that as well. And of course, the other thing from a market point of view is we're -- we've been on a multiyear effort in the enterprise and have gained quite a bit of traction there. You've heard some of the things in Luca's comments today and we comment some on it each quarter. We're very optimistic about what we can do in that space. And then, of course, we've got new things that we're not going to talk about that we think will contribute to the Company as well, just like other new things have contributed nicely to the Company in the past. So, we see lots of opportunity. Thank you for the question." }, { "speaker": "Operator", "text": "We'll hear from Amit Daryanani with Evercore ISI. Please go ahead." }, { "speaker": "Amit Daryanani", "text": "I have two questions as well. I guess, starting with you, Luca, I just wanted to go back to the gross margin discussion, and we really haven't seen gross margins at this level, high 39%, I think, since 2016. Could you maybe step back and talk, what has enabled the shift higher? What are the key drivers to get you there? And is commodity tailwind or in-sourcing of some components really a big part of this? So just love to understand the durability of the gross margin at these levels. And what are the big drivers that got us here?" }, { "speaker": "Luca Maestri", "text": "Well, I mean, of course, when you grow the way we've grown this quarter, 21%, it's -- obviously, we have a certain level of fixed cost in our product structures, right? And so a high level of sales helps margin expansion without a doubt, and so that has been probably the biggest factor, to be honest. And then as I was saying earlier, we've had, across the Board, in Services, in every product category, we've had a very strong mix of products, right? We were talking about the iPhone, the Pro and the Pro Max, and that's been pretty much the case in every product category. So the mix has also been very good. The commodity environment is fairly benign. And the one thing that has not affected us this time around is the FX that it's true, it has not been a tailwind yet for the reasons that I was explaining to Katy, but at the same time, it has not been a negative. And the reality is that FX for us has been a negative over the last five or six years, almost every quarter. And so that has changed. And that obviously makes a difference." }, { "speaker": "Amit Daryanani", "text": "And then Tim and when I look at the growth rates on Mac and iPads, they've been in the 20% to 40% range for the last three quarters, and I suspect some of this is just folks contending with the pandemic. But love to understand, when you look at these growth rates, how much of this do you think is replacement cycle-driven folks upgrading with at home versus new customers and new folks that are coming into the Apple ecosystem? And do you see, I guess, what sort of growth rates do you think is more durable or predictable as we go forward over here?" }, { "speaker": "Tim Cook", "text": "If you look at the switcher or the switchers, if you look at the new to Mac and new to iPad, these numbers are still about, at a worldwide level, about half of the purchases that are coming from people that are new. And so the installed base is still expanding with new customers in it. And so that's true on both iPad and Mac. If you look at Mac, the M1, I think, gives us a new growth trajectory that we haven't had in the past. Certainly, if Q1 is a good proxy, there's lots of excitement about M1-based Macs. As you know, we're partly through the transition. We've got more -- a lot more to do there. We're early days of a two-year transition, but we're excited about what we see so far. The iPad, as we went out with the iPad Air, and we now have the best iPad lineup we've ever had, and it's clear that some people are using these as laptop replacements. Others are using them as complementary to their desktop. But the level of growth there has been phenomenal. You look at it at 41%. And yes, part of it is work from home and part of it is just learning. But I think I wouldn't underestimate how much of it is the product itself on -- in both the case of iPad and Mac. And of course, our share in the Mac is quite low. In the -- for the total personal computer market. And so there's lots of headroom there." }, { "speaker": "Operator", "text": "We'll go ahead and take our next question from Samik Chatterjee with JP Morgan." }, { "speaker": "Samik Chatterjee", "text": "Congrats on the record quarter from my side as well. I guess I wanted to start off with iPhone sales. I think in -- general impression we have is China and North America have more robust 5G infrastructure. I just wanted to see kind of what are you seeing in terms of customer engagement or velocity of sales for iPhone in Europe, where I think the general impression is that service providers haven't rolled out robust 5G services. Is that something that's impacting customer interest in the latest lineup in the region? And I have a follow-up." }, { "speaker": "Tim Cook", "text": "If you look at the 5G rollout in Europe, it's true that Europe is not in the place of -- certainly nowhere close to where China is and nowhere close to the U.S. either. But there are other regions that 5G is -- that has very good coverage, like Korea is an example. And so the the world, I would describe it right now, is more of a patchwork more to do that we haven't had in quilt. There are places that there's really excellent coverage. There are places where -- within a country that is very good but not from a nationwide point of view. And then there are places that really haven't gotten started yet. Latin America is more closer to the last one. There's lots of opportunity ahead of us there. And I think Europe is where there are 5G implementations there. I think most of that growth is probably in front of us there as well." }, { "speaker": "Samik Chatterjee", "text": "Got it. As a follow-up, if I can just ask you, I think you mentioned the momentum you're seeing for the Apple One bundle, which I think has been a couple of months now since you launched it. Any metrics to share in terms of what you're seeing for conversion rate of customers or even insights into which services are turning in that bundle, are turning out to be the anchor Services that's driving adoption of that bundle?" }, { "speaker": "Tim Cook", "text": "It's really too early to answer some of those questions. As you know, we just got started into the quarter in Q1 so we have less than a quarter on this right now. What we wanted to accomplish with it, we're clearly accomplishing, which is making our Services very easy to subscribe to. Our customers clearly told us that they wanted to subscribe to several services or, in some cases, all of our services. And so, we've made that very simple, and it's clear from the early going that it's working but we've just gotten started on it." }, { "speaker": "Operator", "text": "We'll hear from Krish Sankar with Cowen." }, { "speaker": "Krish Sankar", "text": "Congrats on the very strong results. My first question is for Tim. Tim, I want to talk a little bit about your search and advertising business. How do you think of the long-term growth opportunities in advertising? How do you think it -- how long can it grow at two times to three times the App Store growth rate? And also, are there any applications where your fundamental search technology, AI could be adapted for other parts of the Services business, that's the first question. And then I have a quick follow-up for Luca after that." }, { "speaker": "Tim Cook", "text": "The search advertising business is going well. It's a -- there's lots of intent from search. And we do it in a very private kind of manner, observing great privacy policies and so forth. And I think people see so forth. And I think people see that and are willing to try it out. And we have been growing nicely in that area. It's a part of the advertising area that Luca spoke of earlier." }, { "speaker": "Krish Sankar", "text": "Got it, got it. And then a follow-up for Luca. When you look at your Services segment in the March quarter, in China, you typically see a bump due to gaming downloads during Chinese New Year. So should see a similar trend this time around? But do you think with a pandemic, and people think for me at home, that kind of seasonal bump might not happen in China for gaming downloads?" }, { "speaker": "Luca Maestri", "text": "Yes. I mean, I think I was mentioning it during the prepared remarks. We -- clearly, in China, the March quarter is typically the strongest quarter for our Services business and for the App Store because of Chinese New Year, as you mentioned. And last year, what we saw was an increased level of activity because after Chinese New Year, the whole country went into lockdown for several weeks. And so that propensity for playing games continued for several weeks, more than a typical cycle. So, we expect to have a great quarter in China, but at the same time, you need to keep in mind that the compare is going to of what happened a year ago." }, { "speaker": "Operator", "text": "We'll go ahead and take our next question from Chris Caso with Raymond James. Please go ahead." }, { "speaker": "Chris Caso", "text": "The first question is on iPhone ASPs and I know you don't disclose the numbers there, but I wonder if you could speak about it qualitatively. You spoke about the richer mix, but there were also some price differences as compared to a year ago. iPhone 12 came higher price point. The Pro established a new price point. Can you speak to how that the level of benefit that you saw there? And going forward, are you confident that you can continue to improve the next in iPhone going forward?" }, { "speaker": "Luca Maestri", "text": "So, as I said earlier, we grew iPhone revenue 17%. That growth came from both unit sales and ASPs because of the strong mix that I mentioned before. So, I think that answers your question for the December quarter. What we've seen so far, it's very early because we launched the new products only a few weeks ago. What we've seen so far is a very high level of interest for the Pro models, the Pro and the Pro Max. We worked very hard to ramp up our supply. We've had some supply constraints during the December quarter. We think we're going to be able to solve them during the March quarter. But so far, the mix has been very strong on iPhone." }, { "speaker": "Chris Caso", "text": "Okay. As a follow-up question, if you could talk a bit to the benefit that you may have seen from some of the carrier actions? We've seen very aggressive trade-ins during the quarter. Did that provide a benefit, in your view, on units or mix or perhaps both? And what would be the level of permanence that you would see in some of those actions such that if those subsidies were removed, could that potentially be a headwind going forward?" }, { "speaker": "Tim Cook", "text": "I think, Chris, it's Tim. I think subsidies always help, that anything that reduces the price to the customer is good for the customer and obviously good for the carrier that's doing it and good for us as well. And so, it's a win across the board. I believe that, at least based on what I see right now is that there would be probably continuing to have quite a bit of competition in the market, if you're talking about the U.S. market for customers as the carriers work to get more customers to move to 5G. Outside of the U.S., the subsidies are not used in all geographies, and so it really varies greatly by country. Some of them are separate completely, the handset and the service. And in those areas, we don't have subsidies." }, { "speaker": "Operator", "text": "We'll go ahead and hear from Jim Suva with Citigroup." }, { "speaker": "James Suva", "text": "It's amazing how your company has pivoted and progressed through this uncertain time in society. A lot of the pushback we get on our view on Apple is that everyone around them or that they know developed countries has an iPhone or Apple product and the market is kind of being saturated some. But when I look at other countries like India, I believe statistically, you are materially below that in market share. So are you doing active efforts there? It seems like there's been some news reports of moving supply chain there. Or you recently opened up an Apple Store. How should we think about that? Because it just seems like you're really not full market share equally around the world." }, { "speaker": "Tim Cook", "text": "Yes. There are several markets, as I alluded to before. India is one of those, where our share is quite low. It did improve from the year-ago quarter. Our business roughly doubled over that period of time. And so we feel very good about the trajectory. We are doing a number of things in the area. We put the online store there, for example, and last quarter was the first full quarter of the online store. And that has gotten a great reaction to it and has helped us achieve the results that we got to last quarter. We're also going in there with retail stores in the future. And so we look for that to be another great initiative and we continue to develop the channel as well. And so there's lots of things, not only in India but in several of the other markets that you might name where our share is lower than we would like. And I -- again, I would also say, even in the developed markets, when you look at our share, definitely, everybody doesn't have an iPhone, not even close. And so, we really don't have a significant share in any market. So, there's headroom left even in those developed markets where you might hear that." }, { "speaker": "James Suva", "text": "Congratulations to your team and employees." }, { "speaker": "Tim Cook", "text": "Thank you, Jim. Appreciate that." }, { "speaker": "Tejas Gala", "text": "Thank you. A replay of today's call will be available for two weeks on Apple Podcast, as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are (888) 203-1112 or (719) 457-0820. Please enter confirmation code 1828830. These replays will be available by approximately 5:00 PM Pacific Time today. Members of the press with additional questions can contact Kristin Huguet at (408) 974-2414. Financial analysts can contact me with additional questions at (669) 227-2402. Thank you again for joining us." }, { "speaker": "Operator", "text": "Once again, that does conclude today's conference. We do appreciate your participation." } ]	Apple Inc.	24,937
AAPL	4	2,022	2022-10-27 17:00:00	Operator: Good day, and welcome to the Apple Q4 Fiscal Year 2022 Earnings Conference Call. For your information, today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please go ahead. Tejas Gala: Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Before turning the call over to Tim, I would like to remind you that approximately once every six years, we add a week to the December quarter to realign our fiscal periods with the December calendar. So this December quarter will span 14 weeks rather than the usual 13 and will end on December 31. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expense, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook: Thank you, Tejas. Good afternoon, everyone, and thank you for joining the call today. Over the past year, despite a range of challenges facing the world, our teams have come together in incredible ways to drive unparalleled innovation and deliver again and again for our customers. For the September quarter, we reported record revenue of $90.1 billion, which was better than we anticipated despite stronger-than-expected foreign currency headwinds. We set an all-time revenue record for Mac and September quarter records for iPhone and Wearables, Home and Accessories. Services notched a September quarter record as well with revenue of $19.2 billion and more than 900 million paid subscriptions. We reached another record on our installed base of active devices, thanks to a quarterly record of upgraders and double-digit growth in switchers on iPhone. Across nearly every geographic segment, we reached a new revenue record for the quarter. And we continue to perform incredibly well in emerging markets with very strong double-digit growth in India, Southeast Asia and Latin America. I'm also happy to report that during the quarter, silicon-related supply constraints were not significant. I want to acknowledge that we are still living through unprecedented times. From war in Eastern Europe to the persistence of COVID-19, from climate disasters around the world to an increasingly difficult economic environment, a lot of people and a lot of places are struggling. Through it all, we've aimed to help our customers navigate through the challenges while giving them the tools to drive progress for themselves and their communities. At Apple, creativity and collaboration have always been at the core of who we are. That spirit of ingenuity and teamwork helped us provide our customers with incredible innovations this year and led to another yearly revenue record. In fiscal 2022, Apple achieved revenue of $394 billion, representing 8% annual growth. We set records for iPhone, Mac, Wearables, Home and Accessories and Services while growing double digits in emerging markets and setting records in the vast majority of markets we track. Customers are loving our iPhone 14 lineup. Loaded with camera upgrades for sharper photos, Action Mode for smoother videos and new safety features like Crash Detection and Emergency SOS via Satellite, iPhone is even more indispensable to our daily lives. iPhone 14 and iPhone 14 Plus come with a new dual-camera system, industry-leading durability, incredible power and amazing battery life. And our iPhone 14 Pro models are packed with even more groundbreaking innovations, including a new camera system as well as always-on display and the Dynamic Island, which offers a whole new way to interact with iPhone. Just yesterday, our most advanced iPad and iPad Pro ever landed in stores. With its all-screen design, advanced cameras and faster wireless connectivity, the tenth generation iPad looks and performs better than ever. For creatives, iPad Pro, now turbocharged by the blazingly fast M2 chip, is the perfect device to make something amazing. Our Mac customers have already been raving about the power of M2 since the arrival of our newest MacBook Air and MacBook Pro this summer. Their incredible long battery life, stunningly rich display and lightning fast speeds are a signature part of the Mac experience and helped drive an all-time record revenue for Mac during the September quarter. In Wearables, Home and Accessories a wave of innovation spurred 10% year-over-year revenue growth during the September quarter. New features in Apple Watch Series 8, including temperature sensing capabilities, retrospective ovulation estimates and crash detection are helping to keep customers healthier and safer. And the updated Apple Watch SE is a great way for users to start their Apple Watch journey, delivering advanced features at a new low price. The biggest, brightest and boldest Apple Watch ever made, Apple Watch Ultra pushes the boundaries of what a smartwatch can do. Packed with innovations like advanced navigation tools and the new Oceanic+ app, which turns it into a dive computer, Apple Watch Ultra has something for athletes and adventures on land and sea. The second generation of AirPods Pro powered by the new H2 chip are receiving rave reviews for delivering an unmatched wireless earbud audio experience, while canceling up to twice as much noise over the previous model. There's no better place to discover the rich spatial audio capabilities of AirPods Pro than Apple Music, the largest music catalog anywhere now with more than 100 million songs. And there's no other company that fuses best-in-class hardware with cutting-edge software and services to create a truly integrated and seamless experience. With iOS 16, we're giving customers more ways to personalize their iPhones through a customizable lock screen and focus filters. New features in Messages and Mail enable users to connect and collaborate like never before. Stage Manager in iPadOS 16 and macOS Ventura, helps users stay more productive with smoother multitasking. And watchOS 9 is empowering customers to live a healthier day through updates to the Sleep App, a new FDA-cleared AFib history feature and the new Medications app. Across our Services, we continue to see enthusiasm and strong engagement from our subscribers. Apple TV+ hits like Severance, Bad Sisters and Blackbird have taken center stage on screens around the world. And baseball fans were glued to their seats this season watching Friday Night Baseball. Meanwhile, Apple TV+ productions continue to earn accolades. At the 74th Primetime Emmy Awards in September, Apple brought home 9 statues, including a second consecutive win for Best Comedy Series for Ted Lasso. And soon, we're going to give audiences an even better entertainment experience when the all-new Apple TV 4K hit stores next week. We're also bringing Fitness+ to more customers than ever by making our entire library of over 3,000 studio-style workouts and meditations available to iPhone users in 21 countries, even those without an Apple Watch. These updates are arriving just in time for a new Artist Spotlight series with workouts featuring the music of Taylor Swift and a new workout program, Yoga for Every Runner featuring and design with one of the world's top ultramarathon athletes, Scott Jurek. While Fitness+ helps subscribers stay active, Apple Card is designed with our customers' financial health in mind. For the second year in a row, Apple Card has been ranked highest in customer satisfaction for midsized credit card issuers by J.D. Power. And our users' favorite Apple Card benefit just got even better with the upcoming addition of a new high-yield savings account to help them save and grow their daily cash rewards. Turning to retail. Last month, our team members welcomed customers to the all-new Apple Jamsil in South Korea. And through today at Apple Creative Studios, we partnered with non-profits in cities around the world to help young diverse creatives pursue their passions and connect with local mentors. And our retail teams have done exceptional work, helping customers explore our latest products and features. As we approach the holiday season with our product lineup set, I'd like to share my gratitude to our retail, AppleCare and channel teams for the work they are doing to support customers. At Apple, we're proud of the ways we are able to help customers be productive, get healthy, stay safe and unlock their creative potential. We also understand we have important responsibilities to the communities we serve. That's why we continue to invest in education, racial equity and justice and the environment. And we are making important progress toward a more inclusive and diverse workforce. Through our Community Education Initiative, we're working alongside more than 150 partners to help students around the world learn new science and technology skills. This summer, we joined with community partners to support coding academies across the United States from Code Academy in Nashville to One Summer Chicago to the Coding 5K Camp for Girls right next door in San Jose. We've also just expanded our racial equity and justice initiative into the UK for the first time. Alongside the South Pink Center, we're helping aspiring creators develop their own voices and position themselves for long-lasting careers. Back in the US, we welcomed a new class of Black, Latino and indigenous entrepreneurs to Apple's second Impact Accelerator. This group of innovators is focused on using green technology to mitigate the effects of climate change and serve communities most affected by it. At Apple, we care deeply about protecting the planet for future generations. To that end, in support of our 2030 environmental goals, we have asked all of our suppliers to become carbon-neutral across their entire Apple-related footprint by the end of the decade. We are also providing them with resources based on what we learned achieving net-zero carbon in our own global operations. Across our entire product lineup, we also continue to source more materials through recycling while taking less from the Earth. Every iPhone 14 is made with 100% recycled rare-earth elements in all magnets, including those used in MagSafe. And in a first for Apple Watch and iPad, we're using recycled gold in the plating of multiple printed circuit boards in our newest devices. While we're working to reduce the footprint of our hardware, we're making changes to our software to be more environmentally-friendly with the soon-to-be released Clean Energy charging feature for iPhone. Our 2030 goal is a reflection of our relentless focus on the future at Apple. The world continues to be unpredictable as old challenges evolve and new ones emerge. What remains constant is the ability of our teams to create great products, services and experiences while being a force for good in the world. Whatever challenges lie ahead in the new year, we're moving forward, as we always have, investing for the long-term to deliver incredible innovations for our customers like only Apple can. And now, I'll hand it over to Luca for more details on our performance. Luca Maestri: Thank you, Tim, and good afternoon, everyone. We are very pleased to report record financial results for the September quarter that capped another record fiscal year for Apple despite a challenging and volatile macroeconomic backdrop. We reached a September quarter revenue record of $90.1 billion, up 8% year-over-year despite over 600 basis points of negative foreign exchange impact, with new September quarter records in the Americas, Europe, Greater China and rest of Asia Pacific. Importantly, in constant currency, we grew nicely in each of our geographic segments, with strong double-digit growth outside the US. Products revenue was $71 billion, up 9% over last year despite FX headwinds and a record for the September quarter. And it was a September quarter revenue record for iPhone and Wearables, Home and Accessories and an all-time revenue record for Mac. Overall, our installed base of active devices continue to grow nicely. It reached an all-time high for all major product categories and geographic segments at the end of the quarter, thanks to extremely strong customer satisfaction and loyalty and a high number of customers that are new to our products. Our Services set a September quarter revenue record of $19.2 billion, up 5% over a year ago despite over 600 basis points of negative impact from foreign exchange. We reached September quarter revenue records in the Americas, Europe, Greater China and rest of Asia Pacific and also in many Services categories, including all-time revenue records for cloud services and payment services. Company gross margin was a September quarter record at 42.3%. It was down 100 basis points from last quarter due to unfavorable foreign exchange and a different mix, partially offset by leverage. Products gross margin was 34.6%, up 10 basis points sequentially, with improved leverage and favorable mix partially offset by foreign exchange. Services gross margin was 70.5%, down 100 basis points sequentially, primarily due to foreign exchange. Net income of $20.7 billion, diluted earnings per share of $1.29 and operating cash flow of $24.1 billion were all September quarter records. Let me now get into more detail for each of our revenue categories. iPhone revenue grew 10% year-over-year to a September quarter record of $42.6 billion, despite significant foreign exchange headwinds. We set September quarter records in the vast majority of markets we track, and our performance was particularly impressive in several large emerging markets, with India setting a new all-time revenue record and Thailand, Vietnam, Indonesia and Mexico more than doubling year-over-year. Thanks to our strong iPhone lineup, we set a quarterly record for upgraders and grew switchers double digits. This level of sales performance, along with unmatched customer loyalty, drove the active installed base of iPhones to a new all-time high across all geographic segments. And the latest survey of US consumers from 451 Research indicates iPhone customer satisfaction of 98%. It was a great quarter for Mac. We achieved an all-time revenue record of $11.5 billion, up 25% year-over-year, despite significant FX headwinds. There were three key items that helped drive this performance. First, we benefited from the launch of our new MacBook Air and MacBook Pro powered by the M2 chip. Second, we were able to satisfy pent-up demand that carried forward from the significant supply constraints we faced during the June quarter. Third, as our supply position improved, we were able to fill the channel. Importantly, our investment in the category has attracted both upgraders and customers new to Mac and helped our installed base reach an all-time high. In fact, we set a quarterly record for upgraders, while nearly half of customers buying Macs during the quarter were new to the device. iPad revenue was $7.2 billion, down 13% year-over-year due to significant negative foreign exchange and a challenging compare due to the launch of new iPads a year ago. Despite this, the iPad installed base reached a new all-time high, thanks to incredible customer loyalty and a high number of new customers. In fact, over half of the customers who purchased iPads during the quarter were new to the product. Wearables, Home and Accessories revenue was $9.7 billion, growing 10% year-over-year, driven by the launch of Apple Watch and new AirPods Pro. This level of safe performance along with very strong new tool rates, drove our installed base of devices in the category to a new all-time record. For instance, two-thirds of customers purchasing an Apple Watch during the quarter were new to the product. Moving to Services, as I mentioned, we set a September quarter record in aggregate and in most geographic segments, generating $19.2 billion in revenue in spite of very large foreign exchange headwinds. It is important to remember, that we achieved double-digit constant currency growth in Services on top of growing 26% during the September quarter a year ago. However, certain services were impacted by macroeconomic headwinds, including foreign exchange. Digital advertising and gaming are areas where we've seen some softness. Throughout the quarter, we continued to observe several trends that reflect the strength of our ecosystem and our long-term opportunity in the category. First, our continued installed base growth across each geographic segment and each major product category represents a great foundation for future expansion of our ecosystem. Second, we saw increased customer engagement with our Services during the quarter. Both our transacting accounts and paid accounts grew double digits year-over-year, each setting a new all-time record. The percentage of accounts that pay for our services continues to increase, and we still see plenty of opportunity ahead of us. Third, paid subscriptions showed very strong growth. We now have more than 900 million paid subscriptions across the Services on our platform, up more than 155 million during the last 12 months alone and double what we had just three years ago. We continue investing in new content and features, across our service offerings. For example, we added several popular sports titles to Apple Arcade. We're also excited about our global partnership with Major League Soccer, where starting next season, fans can stream every single MLS match through the Apple TV app. This momentum helped us achieve over $78 billion in Services revenue during fiscal 2022, a new record and up 14% year-over-year. We continue to invest confidently and believe strongly in the long-term potential of our Services business, which is already the size of a Fortune 50 business on its own, and has nearly doubled during the last four years. It was not only a record year for Services but also for our entire company. During the past four quarters, we grew our business by 8% or $29 billion, reaching more than $394 billion of revenue. We grew diluted earnings per share by 9% and generated over $111 billion of free cash flow, up 20% year-over-year. It was also a strong year for our enterprise business, as we set new annual records for iPhone, iPad and Mac during fiscal 2022 and grew strong double-digits year-over-year as our devices and services continue to help more-and-more companies empower their employees and serve their customers. For instance, Ford Manufacturing employees are using iPad and iPhone to help further improve the quality of its game-changing Ford F-150 Lightning electric trucks. iPhone's powerful A-series chip and advanced camera systems, along with third-party iOS apps, are enabling Ford to automate the visual quality inspection process in real-time to help address issues before they impact customers. And Cisco expanded its Macs as a choice program and is now offering it to all its employees to help attract and retain top talent. And when given this choice, employees have chosen Macs twice as often as other options. In addition, many enterprise customers are taking advantage of the high residual value of our products and simple trade-in process to standardize the refresh cycles for their fleets of Apple devices. This allows employees to upgrade to the latest devices regularly while making it highly predictable and cost effective for the business. Let me now turn to our cash position. Our business continues to generate very strong cash flow, which enabled us to return over $29 billion to shareholders during the September quarter. This included $3.7 billion in dividends and equivalents and $25.2 billion through open market repurchases of 160 million Apple shares. We ended the quarter with $169 billion in cash and marketable securities. We repaid $2.8 billion in maturing debt and decreased commercial paper by $1 billion while issuing $5.5 billion of new debt, leaving us with total debt of $120 billion. As a result, net cash was $49 billion at the end of the quarter as we continue to make progress toward our goal of becoming net cash neutral over time. As we move ahead into the December quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we are not providing revenue guidance but we are sharing some directional insights based on the assumption that the macroeconomic outlook and COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter. Overall, we believe total company year-over-year revenue performance will decelerate during the December quarter as compared to the September quarter for a number of reasons. First, we expect nearly 10 percentage points of negative year-over-year impact from foreign exchange. Second, on Mac, in addition to increasing FX headwinds, we have a very challenging compare against last year, which had the benefit of the launch and associated channel fill of our newly redesigned MacBook Pro with M1. Therefore, we expect Mac revenue to decline substantially year-over-year during the December quarter. Specifically on Services, we expect to grow but to be impacted by the macroeconomic environment increasingly affecting foreign exchange, digital advertising and gaming. We expect gross margin to be between 42.5% and 43.5%. We expect OpEx to be between $14.7 billion and $14.9 billion. We expect OI&E to be around negative $300 million, excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16.5%. Finally, today, our Board of Directors has declared a cash dividend of $0.23 per share of common stock, payable on November 10, 2022, to shareholders of record as of November 7, 2022. With that, let's open the call to questions. Tejas Gala: Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we please have the first question? Operator: We'll go ahead and take our first question from Shannon Cross calling from Credit Suisse. Please go ahead. Q – Shannon Cross: Thank you very much. It's great to talk to you on the call again. I'm wondering, can you just talk a bit about how you're thinking about this iPhone generation? On the positive side, you've raised prices. It seems to be mixing up. On the negative side, investors are concerned about impacted demand from the higher prices, what Huawei meant to you in prior years versus what could happen now. There are just some pressures out there. So I'm curious if you can kind of talk to what you're seeing initially in iPhone demand and how you think it will move through. With the caveat that I understand, things are pretty uncertain out there. And then I have a follow-up. Thank you. Tim Cook: Shannon, it's Tim. Welcome back. iPhone grew 10% in the Q4 timeframe to $42.6 billion. Customer demand was strong and better than we anticipated that it would be. And keep in mind that this is on top of a fiscal year of 2021 that had iPhone revenue grow by 39%, and so it's a tough compare as well. And so we were happy with it. In terms of the new products, the 14 and the 14 Pro and Pro Max, the -- it's still very early. But since the beginning, we've been constrained on the 14 Pro and the 14 Pro Max and we continue to be constrained today. And so we're working very hard to fulfill the demand. It's difficult to say what the mix will be until we can satisfy the demand because we don't really -- we're not able to determine the accurate mix until then. And so we -- but we're working very hard to do that. We were really pleased with the broadness of the iPhone strength last quarter. We had three of the top four smartphones in the U.S. and the UK, the top three in Urban China, the top six in Australia, four out of the top five in Germany and the top two in Japan. And customer satisfaction for the iPhone remains very, very strong at 98%. And so we feel very good about how we performed in Q4. And certainly, the start of this generation would suggest that we're going to be constrained for a little while on the 14 Pro and 14 Pro Max. But we're working very hard to try to remedy that. Shannon Cross: Thank you. And then, Luca, can you talk a bit about gross margin puts and takes? Just how we should think about, I mean, 10 basis points of currency this coming quarter is, I don't want to say unprecedented, but maybe it is. So I know you have hedges, but how do we think about it flowing through? And then what other -- components seem to be very favorable. But what else should we throw into the mix as we look forward? Luca Maestri: Yeah. Well, let me start with gross margin in Q4 and then I'll get to Q1. It was a September quarter record for the company. We did 42.3%, and that is in spite of, as you mentioned, very significant negative FX in -- for example, for Q4, on a sequential basis, FX was negative 70 basis points and on a year-over-year basis it was negative 170 basis points. Essentially every currency around the world has weakened against the dollar. Now, we have guided Q1 to 42.5% to 43.5% in spite of the fact that we have, on a year-over-year basis, 330 basis points of negative exchange. Sequentially, it's 120 basis points unfavorable. So obviously, the strong dollar makes it difficult in a number of areas. Obviously, our pricing in emerging markets makes it difficult, and the translation of that revenue back into dollars is affected. But on the positive side, we are seeing commodities behave fairly favorably for us. And so we believe we can offset the foreign exchange – the negative foreign exchange that we're seeing. And I think that the guidance that we provided reflects that. It takes into account, of course, FX. It takes into account some level of inflationary pressures. But I think the outcome is, I think, is a good one. Shannon Cross: Great. Thank you very much. Tejas Gala: Thanks, Shannon. Can we have the next question, please? Operator: Yes, sir. Our next question is coming from Erik Woodring with Morgan Stanley. Please go ahead, sir. Erik Woodring: Hey, guys, thanks very much for taking my questions. I have two as well. Maybe if we could just start. Luca, we saw quite the divergence in iPad and Mac performance this quarter. Both were relatively constrained from a supply perspective. So maybe can you just elaborate on some of the most impacted -- important factors that contributed to kind of the divergence in performance and whether after we get through the December quarter, those can reverse or normalize? And then I have a follow-up. A – Tim Cook: Yeah, Erik, it's Tim. I'll take your question. On – if you look at the Mac, the Mac, it was the best quarter we've ever had in the history of the company. It was helped by the product launch of the MacBook Air with M2. It was helped that in the previous quarter, in the June quarter, if you remember, we lost output from the factory for a significant portion of the quarter. And so we had a backlog exiting our Q3 headed into Q4. We were able to satisfy all of that demand during Q4 and filled the channel for the Mac. And so that led to an incredible Mac quarter. If you look at iPad, iPad had sort of the opposite happening from a launch point of view. The comp from a year ago, we launched iPads in September. We launched iPads this year in October. The other point to remember is that the iPad Pro had just launched before the quarter started in the year-ago quarter so it was our first full quarter of iPad Pro. So it was an exceptionally strong iPad quarter a year ago, and the launches were really key to that performance. And so that's the reason iPad contracted during this quarter. Erik Woodring: Okay, that's helpful. Thank you, Tim. And then maybe, Luca, if I were just to ask you, obviously, Tejas at the beginning of the call talked about the 14-week quarter. Maybe can you just elaborate a little bit on how you think that 14-week quarter impacts different line items, whether it's products or certain segments within the product business or the Services stand-alone? Just where we should see that 14-week quarter provide a bit more of a tailwind versus maybe not have an impact at all? And that's it for me. Thanks. Luca Maestri: In general, we have a few more days in the quarter that we're going to -- are going to affect both our revenues and our costs. Not every week is equal because obviously, we have certain peaks during the course of the quarter. Think about Black Friday or the Christmas holiday. But, in general, we're adding a few days of sale and additional OpEx as well on the cost front. So that's what happens to us every approximately six years as we need to align our weekly calendar to the fiscal calendar. Erik Woodring: Super. Thanks, guys. Tejas Gala: Thanks, Erik. Can we have the next question, please? Operator: Yes, sir. The next question is coming from Ben Bollin calling from Cleveland Research. Ben Bollin: Good afternoon, everyone. Thank you for taking the question. Tim, I was hoping we could talk a little bit about services, pieces within the portfolio. It looks like there's been some price adjustments as of late with respect to Music, TV+ and the One bundle. I'm curious how you think about balancing the consumer price versus your own costs and kind of the associated follow-through. And then I have a follow-up. Tim Cook: Yes. If you look at the price increase that you referenced, Ben, on Monday of this week, we announced a price increase on Apple Music and on Apple TV+ and then the corresponding Apple One, that is the consolidated bundle that includes both of those. On -- there's really two different situations here. With Music, the cost of licensing increased. And so we are paying more for music. The good thing about that is the artist will also get more money for their songs that are enjoyed on streaming. And so there's some bit of good news there, I suppose. And then on Apple TV+, if you look at when we first priced it, we only had a very few shows. We were at the beginning. We are very focused on originals only, and so we had four or five shows or so in the beginning and priced it quite low. We now have a lot more content and are coming out on -- with more each and every month. And so, we've increased the price to represent the value of the service. And of course, Apple One is just the consolidation of those two price changes. Ben Bollin: Okay. And then, another item. Any preliminary thoughts around capital intensity into fiscal 2023? Last couple of years, CapEx has been relatively stable. Can you talk to the big constituents of the CapEx figure and maybe any moving pieces and how we could think about that to 2023? Thank you. Luca Maestri: Yes, Ben. So when we look at our CapEx, as you correctly said, I mean, we've been fairly stable, and I think our capital intensity is really very good. We have three major buckets in CapEx for the company. We have certain dedicated tools for the manufacturing facilities. We had some spend around data centers, and we have spend around our office facilities around the world. We obviously monitor all of them. There is nothing unusual that we see for the next 12 months. Ben Bollin: Okay. Thanks, guys. Tejas Gala: Thanks, Ben. Can we have our next question, please Operator: Yes, sir. Our next question is coming from Kyle McNealy calling from Jefferies. Please go ahead. Kyle McNealy: Hi, thanks very much. Just wanted to see if you could give us a sense for what drove the Wearables result and the strength there this quarter. Was it from the maybe strong iPhone attach rates or the new products that you have available that were announced this quarter, or maybe you're still getting some benefit from customers that are more willing to come into the store now and try things on versus the pandemic when that was kind of shut down? Tim Cook: Yes. Kyle, it's Tim. The -- if you look at Wearables, we grew 10%, which we were very happy with. If you look at the individual pieces of that, Apple Watch was a contributor. And in particular, the new lineup was a contributor, including the Apple Watch Ultra and the Apple Watch Series 8 and the SE. The Ultra is -- was supply constrained and continues to be supply constrained during this quarter thus far. And so we're working hard to satisfy the demand bearing, get those products to customers. We also announced and launched the AirPods Pro in September. And the reviews for the product have just been off the charts in terms of the noise cancellation features and the sound quality. We're getting great, great reviews from there. In terms of what played the other way, the headwinds, obviously, FX was a headwind that affected Wearables, Home and Accessories, just like it affected the rest of our products and services. And we also had effect from the business in Russia, obviously, or the impact there. So that's sort of the pro and the con. The other thing that I should mention is that about two-thirds of the Apple Watches that we sold were to customers that had not previously owned an Apple Watch. And so the -- we're still very much selling to new customers here, which is very, very good for the future. Kyle McNealy: Okay, great. One more quick one on Mac. I wanted to see if you could quantify at all how much the channel fill and how much came from satisfying back orders from the June period for Mac. We're just trying to get a sense for where the baseline is, if there's any sense you can give us on that. What would it have grown if not for those factors? Anything you can give us would be great. Thanks. Tim Cook: Yes. I would just say that all three of the reasons that I gave were key in achieving the 25%. The M2 MacBook Air, the launch of the new product, the -- satisfying the back orders from the previous quarter and then filling the channel, all of those were key contributors. Kyle McNealy: Okay, Tim. Thanks. Tejas Gala: Thanks, Kyle. Can we have our next question, please Operator: Yes, sir. The next question is coming from Mr. Jim Suva calling from Citigroup. Jim Suva: Thank you and it's great to see that you talked about your suppliers going carbon-neutral, something -- a small statement I really took to heart. Thank you. My question is on the Services. Could it possibly be impacted more by FX than product, meaning the Jim Suva family has Apple One and TV+ and all that, and we pay typically on annual, but then when we go into the store to buy new Watches and iPad, the price is adjusted more quickly. So could it be that Services growth was impacted a little bit more by FX and down the road, we could see growth reaccelerate, or am I just reading too much into the FX impact that could be different from Services versus product? Thank you. Luca Maestri: Jim, it's Luca. No, you're right. Obviously, the FX impact on our business depends on the geographic mix of the sales that we do. And so yes, it can be -- Services and products can have slightly different effects on foreign exchange. And so, if we look at our Services business in constant currency, we would have grown double digits. And so we're very pleased with that. As I mentioned, there were some areas that we could see some softness in digital advertising. Of course, you know that part, and gaming on the App Store was affected. But we were very happy with what we saw in terms of the behavior of our customers with the engagement with Services. And I mentioned a number of things during the prepared remarks, the fact that, obviously, that installed base is growing, that's a positive and it's a great foundation for the future. We are seeing more transacting accounts and more paid accounts, they're both growing double digits. Paid accounts are growing faster than transacting accounts, so the penetration of paid accounts is increasing. We have a great subscription business, 900 million paid subs now on the platform and growing very fast. We doubled in 3 years. So when we look at all those dynamics, that's the part that is really interesting to us because we really believe that the engine for Services growth is there and foreign exchange is a temporary thing and – but the fundamentals are very good. Jim Suva: Thank you. Congratulations for your team. Tejas Gala: Thanks Jim. Can we have the next question, please. Operator: The next question is coming from Amit Daryanani from Evercore. Please go ahead. Amit Daryanani: Thanks for taking my question. I have 2 as well. The first 1 really is around the iPhone trajectory. There's been a fair amount of focus in terms of what's going to happen to iPhone demand, given the macro worries. It would be really helpful to understand though, given the strength you're seeing, where do you think channel inventory is for iPhones today versus where it would be from a historical perspective? And do you see the channel getting to an optimal level by end of December quarter? Because evenly right now given the lead time data, it looks like your revenue trajectory in iPhones is more driven by the supply you have versus demand. So any color on the channel inventory would be helpful. Tim Cook: Yes. If you look at where we ended, Amit, in the September quarter, we exited below our target inventory range on iPhone and that's -- that in and of itself is not too unusual in the quarter. We start the ramp and demand is robust and so forth. And so I wouldn't call it that abnormal from the past. Q – : Got it. And then I guess, Tim, you folks have been talking about digital advertising a fair bit over the last few quarters, I think. Is there any metrics, any vectors you can talk about kind of to give us a sense of how big those businesses or what vectors are you focused on? And really, if you could talk about, do you think Apple can build an advertising business at scale without sacrificing consumer privacy? Tim Cook: So our -- first and foremost, we focus on privacy and so we would not do anything that stepped away from that. We feel that privacy is a basic fundamental human right, and so that's sort of the lens that we look at it under. Our specific advertising business is not large and relative to others and so forth. But we don't release the exact numbers on it, but it's clearly not large. Tejas Gala: Thanks, Amit. Can we have the next question, please. Operator: Yes, sir. We'll now move on to Mr. Harsh Kumar calling from Piper Sandler. Please go ahead. Harsh Kumar: Yeah. Hey, thanks guys, First of all, fellows congratulations on stellar performance. There's a lot of large-cap companies that are getting ripped around, so we appreciate the steady cadence here. Tim, I wanted to ask you about inflation pressures and labor problems here in the US and globally. And maybe talk about what steps can Apple take to mitigate those? And maybe Luca, on that end, FX is becoming a pretty significant headwind. I was curious what -- if at all, if there's anything that can be done to mitigate that. Tim Cook: I'll let Luca talk about FX. In terms of the people piece, we're focused on taking care of our teams and offering them the best benefits and best compensation so that we can empower them to do the best work of their lives. And so that's what we're focused on in terms of our teams. In terms of inflation, there's clearly wage inflation. There's inflation related to logistics as well. If you compare it to pre-pandemic kind of levels, that has not returned to pre pandemic levels by any means. And there's certain silicon components that are -- have inflationary pressure as well. And so that's not an all-inclusive list of where we see it, but it gives you some ingredients of where we see inflation pressure. And we've obviously taken that into consideration in the gross margin guidance that Luca gave earlier in the call. Luca Maestri: Yes. And on foreign exchange, you're right. I mean, it's obviously a very significant factor that is affecting our results, both revenue and gross margin. What do we do about situation like this, one where we have a very strong dollar? Of course, we hedge our exposures. We try to hedge them in as many places as possible around the world. For example, I think we've been probably the first company that started hedging our exposure in China several years ago. There may be a few currency, small ones, where we don't hedge because the cost is prohibitive or the market is not there. But in general, we tend to hedge because it gives us significant level of margin stability. Obviously, over time, that protection reduces because the hedges roll over and we need to buy new contracts. But that's the primary tool that we use to offset some of the FX pressure. Of course, when we launch new products, in particular, we look at the FX situation. And in some cases, for example, customers in international markets had to -- they saw some price increases when we launched the new products, which is not something that, for example, US customers have seen. And that's unfortunately the situation that we're in right now with the strong dollar. So that's the way we try to deal with that. I have to say that one of the things that we've really appreciated the most during the quarter was the fact that in spite of this very strong dollar and the difficult FX environment, we have seen very strong performance in many international markets, particularly some very large emerging markets where even in reported currencies, so in US dollars, we're seeing very strong double-digit growth in places like India, Indonesia, Mexico, Vietnam, many places where we've done incredibly well. And obviously, in local currency, those growth rates are even higher. It's important for us to look at how these markets perform in local currency because it really gives us a good sense for the customer response to our products, the engagement with our ecosystem and in general, the strength of the brand. And I have to say, in that respect, we feel very, very good about the progress that we're making in a lot of markets around the world. Harsh Kumar: Thanks, Tim and Luca. I had a follow-up. Luca, in your prepared remarks for the guidance, you mentioned that for the December quarter, you expect the performance to decelerate relative to September. So September was a year-over-year about, call it, 8%. Should I think that, that 8% number will go down on a year-over-year basis as we look at December? Maybe you could provide some color on what you're thinking. And are we still looking -- are we looking at a positive number, or are we thinking maybe that the growth rate will be negative on a year-over-year basis? Luca Maestri: What we said is that we're going to be decelerating from September, so September was 8%, so it's going to be a lower percentage than 8%. We're not providing guidance for the reasons that we've explained. There's a lot of uncertainty there. And so we see how the quarter progresses. Keep in mind the 10 points of exchange. Certainly, in normal times, we will be talking about very different numbers, but that's where we are right now. Harsh Kumar: Thank you guys. Tejas Gala: Thanks, Harsh. Can we have the next question please. Operator: Yes, sir. Next question is coming from Krish Sankar calling from Cowen & Company. Please go ahead. Krish Sankar: Yeah. Hi. Thanks for taking my question. I had two of them. First one, either for Tim or Luca, on cash and capital allocation. Given there's some correction and valuation for some of the private and public companies, does it change your thought process on the time line to get to cash-neutral? In other words, would you be more aggressive with acquisitions, or you think holding on to more cash due to interest income becomes more attractive versus your prior investment goals? And then I had a quick follow-up. Tim Cook: This is Tim. In terms of acquisitions, we averaged about one per month, I believe, in across fiscal year 2022. And so we're constantly looking in the market. And what's out there. And what things would be synergistic. And which things would provide either intellectual property or talent or preferably both that we would need. And so we're constantly looking at acquisitions of all sizes. Luca Maestri: In terms of cash deployment, obviously, we like to look at the capital return program over the long arc of time. And we have done, since the beginning of the program we've done over $550 billion of buyback at an average repurchase price of $47. So the program has been incredibly successful. We are still in a position where we have net cash. And we said all along, we want to get to cash-neutral at some point. Our cash generation has been very, very strong over the years, particularly last year. I think, I mentioned in the prepared remarks, we did $111 billion of free cash flow. That's up 20% year-over-year. And so we will put that capital to use for investors. Krish Sankar: Got it, got it, very helpful, Tim and Luca. And then a quick follow-up for Luca on the December guidance, thanks for the color on that. I'm just kind of curious, the extra week in the quarter, is that not helping offset some of the FX, or in other words, the 10 percentage point negative impact from FX will be much higher if that's a 13-week quarter? Luca Maestri: No, I wouldn't say that because those are percentages. So yeah, no, the 10 points wouldn't be different. 13 or 14 weeks would be the same. Krish Sankar: Got it. Got it. Thanks a lot Luca. End of Q&A: Tejas Gala: Thank you, Krish. A replay of today's call will be available for two weeks on Apple Podcasts, as a Webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 7086300, followed by the pound sign. These replays will be available by approximately 5:00 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. Operator: Once again, this concludes today's conference. We do appreciate your participation.	[ { "speaker": "Operator", "text": "Good day, and welcome to the Apple Q4 Fiscal Year 2022 Earnings Conference Call. For your information, today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please go ahead." }, { "speaker": "Tejas Gala", "text": "Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Before turning the call over to Tim, I would like to remind you that approximately once every six years, we add a week to the December quarter to realign our fiscal periods with the December calendar. So this December quarter will span 14 weeks rather than the usual 13 and will end on December 31. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expense, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thank you, Tejas. Good afternoon, everyone, and thank you for joining the call today. Over the past year, despite a range of challenges facing the world, our teams have come together in incredible ways to drive unparalleled innovation and deliver again and again for our customers. For the September quarter, we reported record revenue of $90.1 billion, which was better than we anticipated despite stronger-than-expected foreign currency headwinds. We set an all-time revenue record for Mac and September quarter records for iPhone and Wearables, Home and Accessories. Services notched a September quarter record as well with revenue of $19.2 billion and more than 900 million paid subscriptions. We reached another record on our installed base of active devices, thanks to a quarterly record of upgraders and double-digit growth in switchers on iPhone. Across nearly every geographic segment, we reached a new revenue record for the quarter. And we continue to perform incredibly well in emerging markets with very strong double-digit growth in India, Southeast Asia and Latin America. I'm also happy to report that during the quarter, silicon-related supply constraints were not significant. I want to acknowledge that we are still living through unprecedented times. From war in Eastern Europe to the persistence of COVID-19, from climate disasters around the world to an increasingly difficult economic environment, a lot of people and a lot of places are struggling. Through it all, we've aimed to help our customers navigate through the challenges while giving them the tools to drive progress for themselves and their communities. At Apple, creativity and collaboration have always been at the core of who we are. That spirit of ingenuity and teamwork helped us provide our customers with incredible innovations this year and led to another yearly revenue record. In fiscal 2022, Apple achieved revenue of $394 billion, representing 8% annual growth. We set records for iPhone, Mac, Wearables, Home and Accessories and Services while growing double digits in emerging markets and setting records in the vast majority of markets we track. Customers are loving our iPhone 14 lineup. Loaded with camera upgrades for sharper photos, Action Mode for smoother videos and new safety features like Crash Detection and Emergency SOS via Satellite, iPhone is even more indispensable to our daily lives. iPhone 14 and iPhone 14 Plus come with a new dual-camera system, industry-leading durability, incredible power and amazing battery life. And our iPhone 14 Pro models are packed with even more groundbreaking innovations, including a new camera system as well as always-on display and the Dynamic Island, which offers a whole new way to interact with iPhone. Just yesterday, our most advanced iPad and iPad Pro ever landed in stores. With its all-screen design, advanced cameras and faster wireless connectivity, the tenth generation iPad looks and performs better than ever. For creatives, iPad Pro, now turbocharged by the blazingly fast M2 chip, is the perfect device to make something amazing. Our Mac customers have already been raving about the power of M2 since the arrival of our newest MacBook Air and MacBook Pro this summer. Their incredible long battery life, stunningly rich display and lightning fast speeds are a signature part of the Mac experience and helped drive an all-time record revenue for Mac during the September quarter. In Wearables, Home and Accessories a wave of innovation spurred 10% year-over-year revenue growth during the September quarter. New features in Apple Watch Series 8, including temperature sensing capabilities, retrospective ovulation estimates and crash detection are helping to keep customers healthier and safer. And the updated Apple Watch SE is a great way for users to start their Apple Watch journey, delivering advanced features at a new low price. The biggest, brightest and boldest Apple Watch ever made, Apple Watch Ultra pushes the boundaries of what a smartwatch can do. Packed with innovations like advanced navigation tools and the new Oceanic+ app, which turns it into a dive computer, Apple Watch Ultra has something for athletes and adventures on land and sea. The second generation of AirPods Pro powered by the new H2 chip are receiving rave reviews for delivering an unmatched wireless earbud audio experience, while canceling up to twice as much noise over the previous model. There's no better place to discover the rich spatial audio capabilities of AirPods Pro than Apple Music, the largest music catalog anywhere now with more than 100 million songs. And there's no other company that fuses best-in-class hardware with cutting-edge software and services to create a truly integrated and seamless experience. With iOS 16, we're giving customers more ways to personalize their iPhones through a customizable lock screen and focus filters. New features in Messages and Mail enable users to connect and collaborate like never before. Stage Manager in iPadOS 16 and macOS Ventura, helps users stay more productive with smoother multitasking. And watchOS 9 is empowering customers to live a healthier day through updates to the Sleep App, a new FDA-cleared AFib history feature and the new Medications app. Across our Services, we continue to see enthusiasm and strong engagement from our subscribers. Apple TV+ hits like Severance, Bad Sisters and Blackbird have taken center stage on screens around the world. And baseball fans were glued to their seats this season watching Friday Night Baseball. Meanwhile, Apple TV+ productions continue to earn accolades. At the 74th Primetime Emmy Awards in September, Apple brought home 9 statues, including a second consecutive win for Best Comedy Series for Ted Lasso. And soon, we're going to give audiences an even better entertainment experience when the all-new Apple TV 4K hit stores next week. We're also bringing Fitness+ to more customers than ever by making our entire library of over 3,000 studio-style workouts and meditations available to iPhone users in 21 countries, even those without an Apple Watch. These updates are arriving just in time for a new Artist Spotlight series with workouts featuring the music of Taylor Swift and a new workout program, Yoga for Every Runner featuring and design with one of the world's top ultramarathon athletes, Scott Jurek. While Fitness+ helps subscribers stay active, Apple Card is designed with our customers' financial health in mind. For the second year in a row, Apple Card has been ranked highest in customer satisfaction for midsized credit card issuers by J.D. Power. And our users' favorite Apple Card benefit just got even better with the upcoming addition of a new high-yield savings account to help them save and grow their daily cash rewards. Turning to retail. Last month, our team members welcomed customers to the all-new Apple Jamsil in South Korea. And through today at Apple Creative Studios, we partnered with non-profits in cities around the world to help young diverse creatives pursue their passions and connect with local mentors. And our retail teams have done exceptional work, helping customers explore our latest products and features. As we approach the holiday season with our product lineup set, I'd like to share my gratitude to our retail, AppleCare and channel teams for the work they are doing to support customers. At Apple, we're proud of the ways we are able to help customers be productive, get healthy, stay safe and unlock their creative potential. We also understand we have important responsibilities to the communities we serve. That's why we continue to invest in education, racial equity and justice and the environment. And we are making important progress toward a more inclusive and diverse workforce. Through our Community Education Initiative, we're working alongside more than 150 partners to help students around the world learn new science and technology skills. This summer, we joined with community partners to support coding academies across the United States from Code Academy in Nashville to One Summer Chicago to the Coding 5K Camp for Girls right next door in San Jose. We've also just expanded our racial equity and justice initiative into the UK for the first time. Alongside the South Pink Center, we're helping aspiring creators develop their own voices and position themselves for long-lasting careers. Back in the US, we welcomed a new class of Black, Latino and indigenous entrepreneurs to Apple's second Impact Accelerator. This group of innovators is focused on using green technology to mitigate the effects of climate change and serve communities most affected by it. At Apple, we care deeply about protecting the planet for future generations. To that end, in support of our 2030 environmental goals, we have asked all of our suppliers to become carbon-neutral across their entire Apple-related footprint by the end of the decade. We are also providing them with resources based on what we learned achieving net-zero carbon in our own global operations. Across our entire product lineup, we also continue to source more materials through recycling while taking less from the Earth. Every iPhone 14 is made with 100% recycled rare-earth elements in all magnets, including those used in MagSafe. And in a first for Apple Watch and iPad, we're using recycled gold in the plating of multiple printed circuit boards in our newest devices. While we're working to reduce the footprint of our hardware, we're making changes to our software to be more environmentally-friendly with the soon-to-be released Clean Energy charging feature for iPhone. Our 2030 goal is a reflection of our relentless focus on the future at Apple. The world continues to be unpredictable as old challenges evolve and new ones emerge. What remains constant is the ability of our teams to create great products, services and experiences while being a force for good in the world. Whatever challenges lie ahead in the new year, we're moving forward, as we always have, investing for the long-term to deliver incredible innovations for our customers like only Apple can. And now, I'll hand it over to Luca for more details on our performance." }, { "speaker": "Luca Maestri", "text": "Thank you, Tim, and good afternoon, everyone. We are very pleased to report record financial results for the September quarter that capped another record fiscal year for Apple despite a challenging and volatile macroeconomic backdrop. We reached a September quarter revenue record of $90.1 billion, up 8% year-over-year despite over 600 basis points of negative foreign exchange impact, with new September quarter records in the Americas, Europe, Greater China and rest of Asia Pacific. Importantly, in constant currency, we grew nicely in each of our geographic segments, with strong double-digit growth outside the US. Products revenue was $71 billion, up 9% over last year despite FX headwinds and a record for the September quarter. And it was a September quarter revenue record for iPhone and Wearables, Home and Accessories and an all-time revenue record for Mac. Overall, our installed base of active devices continue to grow nicely. It reached an all-time high for all major product categories and geographic segments at the end of the quarter, thanks to extremely strong customer satisfaction and loyalty and a high number of customers that are new to our products. Our Services set a September quarter revenue record of $19.2 billion, up 5% over a year ago despite over 600 basis points of negative impact from foreign exchange. We reached September quarter revenue records in the Americas, Europe, Greater China and rest of Asia Pacific and also in many Services categories, including all-time revenue records for cloud services and payment services. Company gross margin was a September quarter record at 42.3%. It was down 100 basis points from last quarter due to unfavorable foreign exchange and a different mix, partially offset by leverage. Products gross margin was 34.6%, up 10 basis points sequentially, with improved leverage and favorable mix partially offset by foreign exchange. Services gross margin was 70.5%, down 100 basis points sequentially, primarily due to foreign exchange. Net income of $20.7 billion, diluted earnings per share of $1.29 and operating cash flow of $24.1 billion were all September quarter records. Let me now get into more detail for each of our revenue categories. iPhone revenue grew 10% year-over-year to a September quarter record of $42.6 billion, despite significant foreign exchange headwinds. We set September quarter records in the vast majority of markets we track, and our performance was particularly impressive in several large emerging markets, with India setting a new all-time revenue record and Thailand, Vietnam, Indonesia and Mexico more than doubling year-over-year. Thanks to our strong iPhone lineup, we set a quarterly record for upgraders and grew switchers double digits. This level of sales performance, along with unmatched customer loyalty, drove the active installed base of iPhones to a new all-time high across all geographic segments. And the latest survey of US consumers from 451 Research indicates iPhone customer satisfaction of 98%. It was a great quarter for Mac. We achieved an all-time revenue record of $11.5 billion, up 25% year-over-year, despite significant FX headwinds. There were three key items that helped drive this performance. First, we benefited from the launch of our new MacBook Air and MacBook Pro powered by the M2 chip. Second, we were able to satisfy pent-up demand that carried forward from the significant supply constraints we faced during the June quarter. Third, as our supply position improved, we were able to fill the channel. Importantly, our investment in the category has attracted both upgraders and customers new to Mac and helped our installed base reach an all-time high. In fact, we set a quarterly record for upgraders, while nearly half of customers buying Macs during the quarter were new to the device. iPad revenue was $7.2 billion, down 13% year-over-year due to significant negative foreign exchange and a challenging compare due to the launch of new iPads a year ago. Despite this, the iPad installed base reached a new all-time high, thanks to incredible customer loyalty and a high number of new customers. In fact, over half of the customers who purchased iPads during the quarter were new to the product. Wearables, Home and Accessories revenue was $9.7 billion, growing 10% year-over-year, driven by the launch of Apple Watch and new AirPods Pro. This level of safe performance along with very strong new tool rates, drove our installed base of devices in the category to a new all-time record. For instance, two-thirds of customers purchasing an Apple Watch during the quarter were new to the product. Moving to Services, as I mentioned, we set a September quarter record in aggregate and in most geographic segments, generating $19.2 billion in revenue in spite of very large foreign exchange headwinds. It is important to remember, that we achieved double-digit constant currency growth in Services on top of growing 26% during the September quarter a year ago. However, certain services were impacted by macroeconomic headwinds, including foreign exchange. Digital advertising and gaming are areas where we've seen some softness. Throughout the quarter, we continued to observe several trends that reflect the strength of our ecosystem and our long-term opportunity in the category. First, our continued installed base growth across each geographic segment and each major product category represents a great foundation for future expansion of our ecosystem. Second, we saw increased customer engagement with our Services during the quarter. Both our transacting accounts and paid accounts grew double digits year-over-year, each setting a new all-time record. The percentage of accounts that pay for our services continues to increase, and we still see plenty of opportunity ahead of us. Third, paid subscriptions showed very strong growth. We now have more than 900 million paid subscriptions across the Services on our platform, up more than 155 million during the last 12 months alone and double what we had just three years ago. We continue investing in new content and features, across our service offerings. For example, we added several popular sports titles to Apple Arcade. We're also excited about our global partnership with Major League Soccer, where starting next season, fans can stream every single MLS match through the Apple TV app. This momentum helped us achieve over $78 billion in Services revenue during fiscal 2022, a new record and up 14% year-over-year. We continue to invest confidently and believe strongly in the long-term potential of our Services business, which is already the size of a Fortune 50 business on its own, and has nearly doubled during the last four years. It was not only a record year for Services but also for our entire company. During the past four quarters, we grew our business by 8% or $29 billion, reaching more than $394 billion of revenue. We grew diluted earnings per share by 9% and generated over $111 billion of free cash flow, up 20% year-over-year. It was also a strong year for our enterprise business, as we set new annual records for iPhone, iPad and Mac during fiscal 2022 and grew strong double-digits year-over-year as our devices and services continue to help more-and-more companies empower their employees and serve their customers. For instance, Ford Manufacturing employees are using iPad and iPhone to help further improve the quality of its game-changing Ford F-150 Lightning electric trucks. iPhone's powerful A-series chip and advanced camera systems, along with third-party iOS apps, are enabling Ford to automate the visual quality inspection process in real-time to help address issues before they impact customers. And Cisco expanded its Macs as a choice program and is now offering it to all its employees to help attract and retain top talent. And when given this choice, employees have chosen Macs twice as often as other options. In addition, many enterprise customers are taking advantage of the high residual value of our products and simple trade-in process to standardize the refresh cycles for their fleets of Apple devices. This allows employees to upgrade to the latest devices regularly while making it highly predictable and cost effective for the business. Let me now turn to our cash position. Our business continues to generate very strong cash flow, which enabled us to return over $29 billion to shareholders during the September quarter. This included $3.7 billion in dividends and equivalents and $25.2 billion through open market repurchases of 160 million Apple shares. We ended the quarter with $169 billion in cash and marketable securities. We repaid $2.8 billion in maturing debt and decreased commercial paper by $1 billion while issuing $5.5 billion of new debt, leaving us with total debt of $120 billion. As a result, net cash was $49 billion at the end of the quarter as we continue to make progress toward our goal of becoming net cash neutral over time. As we move ahead into the December quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we are not providing revenue guidance but we are sharing some directional insights based on the assumption that the macroeconomic outlook and COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter. Overall, we believe total company year-over-year revenue performance will decelerate during the December quarter as compared to the September quarter for a number of reasons. First, we expect nearly 10 percentage points of negative year-over-year impact from foreign exchange. Second, on Mac, in addition to increasing FX headwinds, we have a very challenging compare against last year, which had the benefit of the launch and associated channel fill of our newly redesigned MacBook Pro with M1. Therefore, we expect Mac revenue to decline substantially year-over-year during the December quarter. Specifically on Services, we expect to grow but to be impacted by the macroeconomic environment increasingly affecting foreign exchange, digital advertising and gaming. We expect gross margin to be between 42.5% and 43.5%. We expect OpEx to be between $14.7 billion and $14.9 billion. We expect OI&E to be around negative $300 million, excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16.5%. Finally, today, our Board of Directors has declared a cash dividend of $0.23 per share of common stock, payable on November 10, 2022, to shareholders of record as of November 7, 2022. With that, let's open the call to questions." }, { "speaker": "Tejas Gala", "text": "Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we please have the first question?" }, { "speaker": "Operator", "text": "We'll go ahead and take our first question from Shannon Cross calling from Credit Suisse. Please go ahead." }, { "speaker": "Q – Shannon Cross", "text": "Thank you very much. It's great to talk to you on the call again. I'm wondering, can you just talk a bit about how you're thinking about this iPhone generation? On the positive side, you've raised prices. It seems to be mixing up. On the negative side, investors are concerned about impacted demand from the higher prices, what Huawei meant to you in prior years versus what could happen now. There are just some pressures out there. So I'm curious if you can kind of talk to what you're seeing initially in iPhone demand and how you think it will move through. With the caveat that I understand, things are pretty uncertain out there. And then I have a follow-up. Thank you." }, { "speaker": "Tim Cook", "text": "Shannon, it's Tim. Welcome back. iPhone grew 10% in the Q4 timeframe to $42.6 billion. Customer demand was strong and better than we anticipated that it would be. And keep in mind that this is on top of a fiscal year of 2021 that had iPhone revenue grow by 39%, and so it's a tough compare as well. And so we were happy with it. In terms of the new products, the 14 and the 14 Pro and Pro Max, the -- it's still very early. But since the beginning, we've been constrained on the 14 Pro and the 14 Pro Max and we continue to be constrained today. And so we're working very hard to fulfill the demand. It's difficult to say what the mix will be until we can satisfy the demand because we don't really -- we're not able to determine the accurate mix until then. And so we -- but we're working very hard to do that. We were really pleased with the broadness of the iPhone strength last quarter. We had three of the top four smartphones in the U.S. and the UK, the top three in Urban China, the top six in Australia, four out of the top five in Germany and the top two in Japan. And customer satisfaction for the iPhone remains very, very strong at 98%. And so we feel very good about how we performed in Q4. And certainly, the start of this generation would suggest that we're going to be constrained for a little while on the 14 Pro and 14 Pro Max. But we're working very hard to try to remedy that." }, { "speaker": "Shannon Cross", "text": "Thank you. And then, Luca, can you talk a bit about gross margin puts and takes? Just how we should think about, I mean, 10 basis points of currency this coming quarter is, I don't want to say unprecedented, but maybe it is. So I know you have hedges, but how do we think about it flowing through? And then what other -- components seem to be very favorable. But what else should we throw into the mix as we look forward?" }, { "speaker": "Luca Maestri", "text": "Yeah. Well, let me start with gross margin in Q4 and then I'll get to Q1. It was a September quarter record for the company. We did 42.3%, and that is in spite of, as you mentioned, very significant negative FX in -- for example, for Q4, on a sequential basis, FX was negative 70 basis points and on a year-over-year basis it was negative 170 basis points. Essentially every currency around the world has weakened against the dollar. Now, we have guided Q1 to 42.5% to 43.5% in spite of the fact that we have, on a year-over-year basis, 330 basis points of negative exchange. Sequentially, it's 120 basis points unfavorable. So obviously, the strong dollar makes it difficult in a number of areas. Obviously, our pricing in emerging markets makes it difficult, and the translation of that revenue back into dollars is affected. But on the positive side, we are seeing commodities behave fairly favorably for us. And so we believe we can offset the foreign exchange – the negative foreign exchange that we're seeing. And I think that the guidance that we provided reflects that. It takes into account, of course, FX. It takes into account some level of inflationary pressures. But I think the outcome is, I think, is a good one." }, { "speaker": "Shannon Cross", "text": "Great. Thank you very much." }, { "speaker": "Tejas Gala", "text": "Thanks, Shannon. Can we have the next question, please?" }, { "speaker": "Operator", "text": "Yes, sir. Our next question is coming from Erik Woodring with Morgan Stanley. Please go ahead, sir." }, { "speaker": "Erik Woodring", "text": "Hey, guys, thanks very much for taking my questions. I have two as well. Maybe if we could just start. Luca, we saw quite the divergence in iPad and Mac performance this quarter. Both were relatively constrained from a supply perspective. So maybe can you just elaborate on some of the most impacted -- important factors that contributed to kind of the divergence in performance and whether after we get through the December quarter, those can reverse or normalize? And then I have a follow-up." }, { "speaker": "A – Tim Cook", "text": "Yeah, Erik, it's Tim. I'll take your question. On – if you look at the Mac, the Mac, it was the best quarter we've ever had in the history of the company. It was helped by the product launch of the MacBook Air with M2. It was helped that in the previous quarter, in the June quarter, if you remember, we lost output from the factory for a significant portion of the quarter. And so we had a backlog exiting our Q3 headed into Q4. We were able to satisfy all of that demand during Q4 and filled the channel for the Mac. And so that led to an incredible Mac quarter. If you look at iPad, iPad had sort of the opposite happening from a launch point of view. The comp from a year ago, we launched iPads in September. We launched iPads this year in October. The other point to remember is that the iPad Pro had just launched before the quarter started in the year-ago quarter so it was our first full quarter of iPad Pro. So it was an exceptionally strong iPad quarter a year ago, and the launches were really key to that performance. And so that's the reason iPad contracted during this quarter." }, { "speaker": "Erik Woodring", "text": "Okay, that's helpful. Thank you, Tim. And then maybe, Luca, if I were just to ask you, obviously, Tejas at the beginning of the call talked about the 14-week quarter. Maybe can you just elaborate a little bit on how you think that 14-week quarter impacts different line items, whether it's products or certain segments within the product business or the Services stand-alone? Just where we should see that 14-week quarter provide a bit more of a tailwind versus maybe not have an impact at all? And that's it for me. Thanks." }, { "speaker": "Luca Maestri", "text": "In general, we have a few more days in the quarter that we're going to -- are going to affect both our revenues and our costs. Not every week is equal because obviously, we have certain peaks during the course of the quarter. Think about Black Friday or the Christmas holiday. But, in general, we're adding a few days of sale and additional OpEx as well on the cost front. So that's what happens to us every approximately six years as we need to align our weekly calendar to the fiscal calendar." }, { "speaker": "Erik Woodring", "text": "Super. Thanks, guys." }, { "speaker": "Tejas Gala", "text": "Thanks, Erik. Can we have the next question, please?" }, { "speaker": "Operator", "text": "Yes, sir. The next question is coming from Ben Bollin calling from Cleveland Research." }, { "speaker": "Ben Bollin", "text": "Good afternoon, everyone. Thank you for taking the question. Tim, I was hoping we could talk a little bit about services, pieces within the portfolio. It looks like there's been some price adjustments as of late with respect to Music, TV+ and the One bundle. I'm curious how you think about balancing the consumer price versus your own costs and kind of the associated follow-through. And then I have a follow-up." }, { "speaker": "Tim Cook", "text": "Yes. If you look at the price increase that you referenced, Ben, on Monday of this week, we announced a price increase on Apple Music and on Apple TV+ and then the corresponding Apple One, that is the consolidated bundle that includes both of those. On -- there's really two different situations here. With Music, the cost of licensing increased. And so we are paying more for music. The good thing about that is the artist will also get more money for their songs that are enjoyed on streaming. And so there's some bit of good news there, I suppose. And then on Apple TV+, if you look at when we first priced it, we only had a very few shows. We were at the beginning. We are very focused on originals only, and so we had four or five shows or so in the beginning and priced it quite low. We now have a lot more content and are coming out on -- with more each and every month. And so, we've increased the price to represent the value of the service. And of course, Apple One is just the consolidation of those two price changes." }, { "speaker": "Ben Bollin", "text": "Okay. And then, another item. Any preliminary thoughts around capital intensity into fiscal 2023? Last couple of years, CapEx has been relatively stable. Can you talk to the big constituents of the CapEx figure and maybe any moving pieces and how we could think about that to 2023? Thank you." }, { "speaker": "Luca Maestri", "text": "Yes, Ben. So when we look at our CapEx, as you correctly said, I mean, we've been fairly stable, and I think our capital intensity is really very good. We have three major buckets in CapEx for the company. We have certain dedicated tools for the manufacturing facilities. We had some spend around data centers, and we have spend around our office facilities around the world. We obviously monitor all of them. There is nothing unusual that we see for the next 12 months." }, { "speaker": "Ben Bollin", "text": "Okay. Thanks, guys." }, { "speaker": "Tejas Gala", "text": "Thanks, Ben. Can we have our next question, please" }, { "speaker": "Operator", "text": "Yes, sir. Our next question is coming from Kyle McNealy calling from Jefferies. Please go ahead." }, { "speaker": "Kyle McNealy", "text": "Hi, thanks very much. Just wanted to see if you could give us a sense for what drove the Wearables result and the strength there this quarter. Was it from the maybe strong iPhone attach rates or the new products that you have available that were announced this quarter, or maybe you're still getting some benefit from customers that are more willing to come into the store now and try things on versus the pandemic when that was kind of shut down?" }, { "speaker": "Tim Cook", "text": "Yes. Kyle, it's Tim. The -- if you look at Wearables, we grew 10%, which we were very happy with. If you look at the individual pieces of that, Apple Watch was a contributor. And in particular, the new lineup was a contributor, including the Apple Watch Ultra and the Apple Watch Series 8 and the SE. The Ultra is -- was supply constrained and continues to be supply constrained during this quarter thus far. And so we're working hard to satisfy the demand bearing, get those products to customers. We also announced and launched the AirPods Pro in September. And the reviews for the product have just been off the charts in terms of the noise cancellation features and the sound quality. We're getting great, great reviews from there. In terms of what played the other way, the headwinds, obviously, FX was a headwind that affected Wearables, Home and Accessories, just like it affected the rest of our products and services. And we also had effect from the business in Russia, obviously, or the impact there. So that's sort of the pro and the con. The other thing that I should mention is that about two-thirds of the Apple Watches that we sold were to customers that had not previously owned an Apple Watch. And so the -- we're still very much selling to new customers here, which is very, very good for the future." }, { "speaker": "Kyle McNealy", "text": "Okay, great. One more quick one on Mac. I wanted to see if you could quantify at all how much the channel fill and how much came from satisfying back orders from the June period for Mac. We're just trying to get a sense for where the baseline is, if there's any sense you can give us on that. What would it have grown if not for those factors? Anything you can give us would be great. Thanks." }, { "speaker": "Tim Cook", "text": "Yes. I would just say that all three of the reasons that I gave were key in achieving the 25%. The M2 MacBook Air, the launch of the new product, the -- satisfying the back orders from the previous quarter and then filling the channel, all of those were key contributors." }, { "speaker": "Kyle McNealy", "text": "Okay, Tim. Thanks." }, { "speaker": "Tejas Gala", "text": "Thanks, Kyle. Can we have our next question, please" }, { "speaker": "Operator", "text": "Yes, sir. The next question is coming from Mr. Jim Suva calling from Citigroup." }, { "speaker": "Jim Suva", "text": "Thank you and it's great to see that you talked about your suppliers going carbon-neutral, something -- a small statement I really took to heart. Thank you. My question is on the Services. Could it possibly be impacted more by FX than product, meaning the Jim Suva family has Apple One and TV+ and all that, and we pay typically on annual, but then when we go into the store to buy new Watches and iPad, the price is adjusted more quickly. So could it be that Services growth was impacted a little bit more by FX and down the road, we could see growth reaccelerate, or am I just reading too much into the FX impact that could be different from Services versus product? Thank you." }, { "speaker": "Luca Maestri", "text": "Jim, it's Luca. No, you're right. Obviously, the FX impact on our business depends on the geographic mix of the sales that we do. And so yes, it can be -- Services and products can have slightly different effects on foreign exchange. And so, if we look at our Services business in constant currency, we would have grown double digits. And so we're very pleased with that. As I mentioned, there were some areas that we could see some softness in digital advertising. Of course, you know that part, and gaming on the App Store was affected. But we were very happy with what we saw in terms of the behavior of our customers with the engagement with Services. And I mentioned a number of things during the prepared remarks, the fact that, obviously, that installed base is growing, that's a positive and it's a great foundation for the future. We are seeing more transacting accounts and more paid accounts, they're both growing double digits. Paid accounts are growing faster than transacting accounts, so the penetration of paid accounts is increasing. We have a great subscription business, 900 million paid subs now on the platform and growing very fast. We doubled in 3 years. So when we look at all those dynamics, that's the part that is really interesting to us because we really believe that the engine for Services growth is there and foreign exchange is a temporary thing and – but the fundamentals are very good." }, { "speaker": "Jim Suva", "text": "Thank you. Congratulations for your team." }, { "speaker": "Tejas Gala", "text": "Thanks Jim. Can we have the next question, please." }, { "speaker": "Operator", "text": "The next question is coming from Amit Daryanani from Evercore. Please go ahead." }, { "speaker": "Amit Daryanani", "text": "Thanks for taking my question. I have 2 as well. The first 1 really is around the iPhone trajectory. There's been a fair amount of focus in terms of what's going to happen to iPhone demand, given the macro worries. It would be really helpful to understand though, given the strength you're seeing, where do you think channel inventory is for iPhones today versus where it would be from a historical perspective? And do you see the channel getting to an optimal level by end of December quarter? Because evenly right now given the lead time data, it looks like your revenue trajectory in iPhones is more driven by the supply you have versus demand. So any color on the channel inventory would be helpful." }, { "speaker": "Tim Cook", "text": "Yes. If you look at where we ended, Amit, in the September quarter, we exited below our target inventory range on iPhone and that's -- that in and of itself is not too unusual in the quarter. We start the ramp and demand is robust and so forth. And so I wouldn't call it that abnormal from the past." }, { "speaker": "Q –", "text": "Got it. And then I guess, Tim, you folks have been talking about digital advertising a fair bit over the last few quarters, I think. Is there any metrics, any vectors you can talk about kind of to give us a sense of how big those businesses or what vectors are you focused on? And really, if you could talk about, do you think Apple can build an advertising business at scale without sacrificing consumer privacy?" }, { "speaker": "Tim Cook", "text": "So our -- first and foremost, we focus on privacy and so we would not do anything that stepped away from that. We feel that privacy is a basic fundamental human right, and so that's sort of the lens that we look at it under. Our specific advertising business is not large and relative to others and so forth. But we don't release the exact numbers on it, but it's clearly not large." }, { "speaker": "Tejas Gala", "text": "Thanks, Amit. Can we have the next question, please." }, { "speaker": "Operator", "text": "Yes, sir. We'll now move on to Mr. Harsh Kumar calling from Piper Sandler. Please go ahead." }, { "speaker": "Harsh Kumar", "text": "Yeah. Hey, thanks guys, First of all, fellows congratulations on stellar performance. There's a lot of large-cap companies that are getting ripped around, so we appreciate the steady cadence here. Tim, I wanted to ask you about inflation pressures and labor problems here in the US and globally. And maybe talk about what steps can Apple take to mitigate those? And maybe Luca, on that end, FX is becoming a pretty significant headwind. I was curious what -- if at all, if there's anything that can be done to mitigate that." }, { "speaker": "Tim Cook", "text": "I'll let Luca talk about FX. In terms of the people piece, we're focused on taking care of our teams and offering them the best benefits and best compensation so that we can empower them to do the best work of their lives. And so that's what we're focused on in terms of our teams. In terms of inflation, there's clearly wage inflation. There's inflation related to logistics as well. If you compare it to pre-pandemic kind of levels, that has not returned to pre pandemic levels by any means. And there's certain silicon components that are -- have inflationary pressure as well. And so that's not an all-inclusive list of where we see it, but it gives you some ingredients of where we see inflation pressure. And we've obviously taken that into consideration in the gross margin guidance that Luca gave earlier in the call." }, { "speaker": "Luca Maestri", "text": "Yes. And on foreign exchange, you're right. I mean, it's obviously a very significant factor that is affecting our results, both revenue and gross margin. What do we do about situation like this, one where we have a very strong dollar? Of course, we hedge our exposures. We try to hedge them in as many places as possible around the world. For example, I think we've been probably the first company that started hedging our exposure in China several years ago. There may be a few currency, small ones, where we don't hedge because the cost is prohibitive or the market is not there. But in general, we tend to hedge because it gives us significant level of margin stability. Obviously, over time, that protection reduces because the hedges roll over and we need to buy new contracts. But that's the primary tool that we use to offset some of the FX pressure. Of course, when we launch new products, in particular, we look at the FX situation. And in some cases, for example, customers in international markets had to -- they saw some price increases when we launched the new products, which is not something that, for example, US customers have seen. And that's unfortunately the situation that we're in right now with the strong dollar. So that's the way we try to deal with that. I have to say that one of the things that we've really appreciated the most during the quarter was the fact that in spite of this very strong dollar and the difficult FX environment, we have seen very strong performance in many international markets, particularly some very large emerging markets where even in reported currencies, so in US dollars, we're seeing very strong double-digit growth in places like India, Indonesia, Mexico, Vietnam, many places where we've done incredibly well. And obviously, in local currency, those growth rates are even higher. It's important for us to look at how these markets perform in local currency because it really gives us a good sense for the customer response to our products, the engagement with our ecosystem and in general, the strength of the brand. And I have to say, in that respect, we feel very, very good about the progress that we're making in a lot of markets around the world." }, { "speaker": "Harsh Kumar", "text": "Thanks, Tim and Luca. I had a follow-up. Luca, in your prepared remarks for the guidance, you mentioned that for the December quarter, you expect the performance to decelerate relative to September. So September was a year-over-year about, call it, 8%. Should I think that, that 8% number will go down on a year-over-year basis as we look at December? Maybe you could provide some color on what you're thinking. And are we still looking -- are we looking at a positive number, or are we thinking maybe that the growth rate will be negative on a year-over-year basis?" }, { "speaker": "Luca Maestri", "text": "What we said is that we're going to be decelerating from September, so September was 8%, so it's going to be a lower percentage than 8%. We're not providing guidance for the reasons that we've explained. There's a lot of uncertainty there. And so we see how the quarter progresses. Keep in mind the 10 points of exchange. Certainly, in normal times, we will be talking about very different numbers, but that's where we are right now." }, { "speaker": "Harsh Kumar", "text": "Thank you guys." }, { "speaker": "Tejas Gala", "text": "Thanks, Harsh. Can we have the next question please." }, { "speaker": "Operator", "text": "Yes, sir. Next question is coming from Krish Sankar calling from Cowen & Company. Please go ahead." }, { "speaker": "Krish Sankar", "text": "Yeah. Hi. Thanks for taking my question. I had two of them. First one, either for Tim or Luca, on cash and capital allocation. Given there's some correction and valuation for some of the private and public companies, does it change your thought process on the time line to get to cash-neutral? In other words, would you be more aggressive with acquisitions, or you think holding on to more cash due to interest income becomes more attractive versus your prior investment goals? And then I had a quick follow-up." }, { "speaker": "Tim Cook", "text": "This is Tim. In terms of acquisitions, we averaged about one per month, I believe, in across fiscal year 2022. And so we're constantly looking in the market. And what's out there. And what things would be synergistic. And which things would provide either intellectual property or talent or preferably both that we would need. And so we're constantly looking at acquisitions of all sizes." }, { "speaker": "Luca Maestri", "text": "In terms of cash deployment, obviously, we like to look at the capital return program over the long arc of time. And we have done, since the beginning of the program we've done over $550 billion of buyback at an average repurchase price of $47. So the program has been incredibly successful. We are still in a position where we have net cash. And we said all along, we want to get to cash-neutral at some point. Our cash generation has been very, very strong over the years, particularly last year. I think, I mentioned in the prepared remarks, we did $111 billion of free cash flow. That's up 20% year-over-year. And so we will put that capital to use for investors." }, { "speaker": "Krish Sankar", "text": "Got it, got it, very helpful, Tim and Luca. And then a quick follow-up for Luca on the December guidance, thanks for the color on that. I'm just kind of curious, the extra week in the quarter, is that not helping offset some of the FX, or in other words, the 10 percentage point negative impact from FX will be much higher if that's a 13-week quarter?" }, { "speaker": "Luca Maestri", "text": "No, I wouldn't say that because those are percentages. So yeah, no, the 10 points wouldn't be different. 13 or 14 weeks would be the same." }, { "speaker": "Krish Sankar", "text": "Got it. Got it. Thanks a lot Luca." }, { "speaker": "End of Q&A", "text": "" }, { "speaker": "Tejas Gala", "text": "Thank you, Krish. A replay of today's call will be available for two weeks on Apple Podcasts, as a Webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 7086300, followed by the pound sign. These replays will be available by approximately 5:00 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us." }, { "speaker": "Operator", "text": "Once again, this concludes today's conference. We do appreciate your participation." } ]	Apple Inc.	24,937
AAPL	3	2,022	2022-07-28 17:00:00	Operator: Good day, and welcome to the Apple Q3 FY 2022 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please go ahead. Tejas Gala: Thank you. Good afternoon, and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during the discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company's business and results of operation. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook: Thank you, Tejas. Good afternoon, everyone, and thank you for joining us. Today, Apple is reporting another record June quarter with revenue of $83 billion, which was better than we expected despite supply constraints, strong foreign exchange headwinds and the impact of our business in Russia. We set June quarter records in the Americas, in Europe and in the rest of Asia Pacific region. We also saw June quarter revenue records in both developed and emerging markets with very strong double-digit growth in Brazil, Indonesia and Vietnam and a near doubling of revenue in India. We saw great enthusiasm for our products and services, resulting in an all-time record for our installed base of active devices. Our supply constraints were less than we anticipated at the beginning of the quarter, coming in slightly below the range we discussed during our last call. We know that this is a time of significant challenge around the world for all of us confronting new variants of COVID-19, to those experiencing a prolonged humanitarian crisis in Ukraine and everyone dealing with the consequences of an uncertain economic environment. We know that much of the world is living through uneasy times, and it is all the more reason why we are working hard to help our customers navigate the world as it is while empowering them to create the world as it can be. Turning to iPhone. We set a June quarter record for both revenue and switchers to iPhone. With its advanced performance, capability and ease of use, customers continue to find that iPhone remains the gold standard for smartphones. And they've been raving about the iPhone 13 lineup's extraordinary camera quality with features like cinematic mode and macro photography to create eye-catching content. We were also proud to celebrate the 15th anniversary of iPhone, a device that continues to change the world in profound ways with each new innovation. Last month, Apple unleashed a wave of innovation, including the completely redesigned MacBook Air and a new 13-inch MacBook Pro. Both of these systems are powered by M2, our next generation of Apple silicon for Mac. M2 delivers a faster CPU, GPU and neural engine along with higher memory bandwidth and new capabilities like Pro Res acceleration. And it continues the tremendous pace of innovation in Apple silicon for the Mac. We continue to have supply constraints with Mac, but we're encouraged by the strong response from customers to our incredible lineup. iPad, like Mac, continued to see strong demand during the June quarter despite ongoing supply constraints. Customers and developers have been especially excited about the new features we're bringing to iPad with iPadOS 16. This update was one of the many announcements we made at a truly extraordinary WWDC, where we shared a range of new features that give customers more control of their experience than ever before. This includes the ability to edit or delete sent messages, a new way of organizing apps on iPad and Mac, and an all-new customizable lock screen on iPhone and so much more. Today, iOS 16, iPadOS 16, MacOS Ventura and watchOS 9 are all in public beta, and we couldn't be more excited to see what our community of developers creates with them. We unveiled new innovations and accessibility such as door detection and live captions that support users with disabilities with navigation, health, communication and more. We also announced Apple Pay Later, which gives customers more flexibility to make purchases with their Apple devices. And with our next generation of CarPlay, we're improving the driving experience with deeper integration into vehicle hardware, allowing drivers to control their music, change the temperature and monitor their fuel levels, all from a single integrated platform. In the Wearables, Home and Accessories category, the innovation infused across our products continues to win over new customers. Apple Watch remains a great way for health-conscious customers to track their overall wellness and fitness. And we're bringing them even more data about their workouts, sleep cycles and medications with updates soon to arrive on watchOS 9. We were also pleased to get FDA approval for a new feature that will let users with irregular heart rhythms track the time they spend in Afib. Turning to Services. Customers continue to engage enthusiastically with our content across news, fitness, music, gaming and more. Services revenue rose to $19.6 billion, a June quarter record and a 12% increase year-over-year, which was in line with our expectations. We're proud of how Apple TV+ productions like Severance and Black Bird have captured the popular imagination, and we're looking forward to more exceptional content developed by extraordinary creators throughout the year. In 2.5 years since launch, Apple TV+ has now earned 250 wins and over 1,100 award nominations and counting. Just this month, we learned that Apple TV+ earned 52 Emmy Award nominations across 13 titles. In our last call, I mentioned Friday Night Baseball on Apple TV+, which is already delighting baseball fans. And last month, we announced a 10-year deal to present Major League soccer matches around the world, giving global soccer fans a whole new way of viewing their favorite sport. One of the best parts of WWDC was welcoming developers to Apple Park while continuing to connect with developers all over the world. This year, we had an incredible group of developers and more opportunities to learn from one another than ever before. It was a truly special experience and a reminder of the economic miracle the App Store represents. We are proud of the fact that the iOS app economy supports more than 2.2 million jobs here in the United States and many more around the world. It's been wonderful to see earnings by small developers more than double over the past 2 years. And as we're supporting developers, we're also doing our part to protect customers. In 2021, we prevented nearly $1.5 billion in fraudulent transactions by stopping over 1.6 million risky and vulnerable apps and app updates. Now I want to turn to retail. This quarter, we opened the doors to Apple's first store in the Hubei province in China, welcoming the community to a beautiful new space. And earlier today, we opened Apple Brompton Road, our fifth store in Central London. We also expanded today at Apple Creative Studios to reach even more young creatives from underrepresented communities to help them realize their potential and bring their best ideas to life. I'd like to take this opportunity to express my appreciation to our team members working in Apple Stores, customer care centers and channel partner stores and to our Apple Care teams for their incredible work supporting customers wherever they are. Creating innovative products and services that enrich people's lives is our mission. Leading with our values and everything we do gives that mission purpose. That includes a commitment to the environment where we continue our aggressive pursuit of our 2030 goals. It includes our focus on diversity and inclusion, where we are committed as ever to making progress. And it includes our work to promote racial equity and justice. We recently announced that the Global Equity Innovation Hub, in partnership with Cal State Northridge, will provide new community grants to Hispanic-serving institutions to help the next generation of creators and innovators build skills and pursue high-demand careers in STEM. We also celebrated the graduation of the inaugural class of our Developer Academy in Detroit from a program designed to give students the skills they need to pursue jobs in the thriving iOS app economy. Leading with our values also means leading with a steadfast commitment to privacy and security. Last month, we announced the introduction of passkey, a next-generation credential that's intended to replace passwords. A passkey can't be phished nor can it be stolen by hackers in a data breach because the information is stored on your device and your device alone. And as part of our effort to combat targeted attacks against the highest risk targets like journalists and human rights activists, we introduced Lockdown Mode, which is designed to protect those most at risk of sophisticated digital attacks. And we're committed to doing our part to address the housing crisis across California. To date, we have deployed more than $1.3 billion to a number of initiatives, including ones that provide financial assistance to low and moderate income first-time home buyers develop new affordable housing and help support vulnerable populations. This quarter has ultimately been a reflection of our resilience and our optimism. As we look forward, we're clear-eyed about the uncertainty in the macro environment. Yet we remain ever focused on the same vision that has guided us from the beginning. We strive every day to be a place where imagination ignites innovation like nowhere else, where good people come together to achieve great things, where customers are the center of everything we do. And we'll continue to execute on that vision as we always have, led by a focus on excellence and a desire to leave the world better than we found it. And with that, I'll turn it over to Luca. Luca Maestri: Thank you, Tim, and good afternoon, everyone. We are very pleased to report June quarter financial results that continue to demonstrate our ability to innovate across hardware, software and services while operating our business effectively during very challenging economic circumstances. We set a June quarter revenue record of $83 billion, up 2% year-over-year despite supply constraints, over 300 basis points of foreign exchange headwinds and the impact of our business in Russia. Around the world, we set new June quarter records in the Americas, in Europe and rest of Asia Pacific. On the product side, revenue was $63.4 billion with a June quarter revenue record for iPhone. During the quarter, our installed base of active devices continue to grow well, thanks to our unmatched levels of customer satisfaction and loyalty and reached an all-time high for all major product categories and geographic segments. Our Services set a June quarter revenue record of $19.6 billion, up 12% over a year ago, with all-time revenue records in the Americas and the rest of Asia Pacific and June quarter records in Europe and Greater China. We also achieved June quarter revenue records in each major Services category, including all-time revenue records for Music, Cloud Services, Apple Care and Payment Services. Company gross margin was 43.3%, down 40 basis points from last quarter as seasonal loss of leverage and unfavorable foreign exchange were partially offset by favorable mix. Products gross margin was 34.5%, down 190 basis points sequentially, mainly driven by seasonal loss of leverage, mix and FX. Services gross margin was 71.5%, down 110 basis points sequentially due to a different mix and foreign exchange. Net income was $19.4 billion and diluted earnings per share were $1.20, while operating cash flow of $22.9 billion was a June quarter record. Let me now get into more detail for each of our revenue categories. iPhone revenue grew 3% year-over-year to a June quarter record of $40.7 billion despite foreign exchange headwinds as customer response to our iPhone 13 family continue to be strong. We set June quarter records in both developed and emerging markets. And the iPhone active installed base reached a new all-time high across all geographies as a result of this level of sales performance combined with unmatched customer loyalty. In fact, the latest survey of U.S. consumers from 451 Research indicates iPhone customer satisfaction of 98%. We also attracted a record number of switchers for the June quarter, with strong double-digit year-over-year growth. For Mac, we generated revenue of $7.4 billion despite supply constraints and negative effects. We continue to be excited about our long-term opportunity with Mac and redefining the PC experience with our relentless innovation. Our investment focus on Mac has helped drive significant growth in our installed base, which reached an all-time high during the June quarter as nearly half of the customers purchasing a Mac were new to the product. iPad revenue was $7.2 billion, down 2% year-over-year due to supply constraints and negative foreign exchange. Customer response to our iPad lineup continue to be strong across consumer, education and enterprise markets around the world. And the iPad installed base reached a new all-time high, with over half of the customers during the quarter being new to the product. Wearables, Home and Accessories revenue was $8.1 billion, down 8% year-over-year as we faced foreign exchange headwinds, different launch timing for Home and Accessories products and supply constraints as well as the overall macroeconomic environment. Despite this, our installed base of devices in the category hit a new all-time record, thanks to very strong customer loyalty and high new tool rates. For example, Apple Watch continues to extend its reach, with over 2/3 of customers purchasing an Apple Watch during the quarter being new to the product. Services had a June quarter revenue record of $19.6 billion, up 12% despite almost 500 basis points of FX headwinds as well as impacts from our business in Russia and the macroeconomic environment. We set June quarter revenue records in both developed and emerging markets and set all-time records in many countries around the world, including the U.S., Mexico, Brazil, Korea and India. The record level of performance of our Services portfolio during the June quarter reflects the strength of our ecosystem on many fronts: First, our installed base has continued to grow, reaching an all-time high across each geographic segment and major product category. We also saw increased customer engagement with our Services during the quarter. Our transacting accounts, paid accounts and accounts with paid subscriptions all grew double digits year-over-year. And paid subscriptions showed very strong growth. We now have more than 860 million paid subscriptions across the services on our platform, which is up more than 160 million during the last 12 months alone. And finally, we continue to improve the breadth and the quality of our current Services offerings, from a constant flow of new content on Apple TV+ and Apple Arcade to great new features we recently announced for iCloud and Apple Music, which we believe our customers will love. In the enterprise market, our customers are increasingly investing in Apple products as a strategy to attract and retain talent. Bank of America is providing iPhones to all of its financial advisers so they can instantly access client information and provide timely wealth management advice from anywhere. Wipro, another large global enterprise customer, is investing in MacBook Air with M1 as a competitive advantage when recruiting new graduates globally, thanks to its superior performance and lower total cost of ownership. And with the new M2 chip powering MacBook Air and the 13-inch MacBook Pro, we expect more customers to make Mac available to their entire workforce. Let me now turn to our cash position. We ended the quarter with $179 billion in cash and marketable securities. We repaid $3 billion in maturing debt while increasing commercial paper by $4 billion, leaving us with total debt of $120 billion. As a result, net cash was nearly $60 billion at the end of the quarter. We returned over $28 billion to shareholders during the June quarter. This included $3.8 billion in dividends and equivalents and $21.7 billion through open market repurchases of 143 million Apple shares. We continue to believe there is great value in our stock and maintain our target of reaching a net cash neutral position over time. As we move ahead into the September quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we are not providing revenue guidance but we are sharing some directional insights based on the assumption that the macroeconomic outlook and COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter. Overall, we believe our year-over-year revenue growth will accelerate during the September quarter compared to the June quarter despite approximately 600 basis points of negative year-over-year impact from foreign exchange. On the product side, we expect supply constraints to be lower than what we experienced during the June quarter. Specifically related to Services, we expect revenue to grow but decelerate from the June quarter due to macroeconomic factors and foreign exchange. We expect gross margin to be between 41.5% and 42.5%. We expect OpEx to be between $12.9 billion and $13.1 billion. We expect OI&E to be around negative [indiscernible] impact from the mark-to-market of minority investments and our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividend of $0.23 per share of common stock, payable on August 11, 2022, to shareholders of record as of August 8, 2022. With that, let's open the call to questions. Tejas Gala: Thank you, Luca. [Operator Instructions]. Operator, may we have the first question, please? Operator: [Operator Instructions]. We'll take our first question from Amit Daryanani with Evercore. Amit Daryanani: I guess two from my side. Maybe to start on the gross margin discussion, Luca. You said that implying gross margin will be down I think, 130, 140 basis points sequentially and down a bit year-over-year as well in September. Maybe just what are the puts and takes here. And then very specifically, can you actually just call what the FX headwinds are embedded in the September quarter gross margin, that would be helpful. Luca Maestri: Yes, Amit. We're guiding 41.5% to 42.5%. On a sequential basis, the decline is expected to be driven by, as you mentioned, foreign exchange but also mix, which will be partially offset by better leverage. We expect foreign exchange impact on a sequential basis to be 50 basis points. If you look at it from a year-over-year standpoint, we are in the ballpark of a year ago in spite of the fact that foreign exchange is going to be 130 basis points negative to a year ago. So clearly, foreign exchange is something that is affecting us but we think we're navigating that fairly well. Amit Daryanani: Fair enough. And then if I could just ask Tim the question. There's a lot of macro worries and high inflation impacting consumer demand. Certainly doesn't seem to be very visible in your performance and your expectations. So I'm wondering if you talk about, are you seeing any implications from recession fears or inflation fears to your end demand? And really just related to that, wearables decline was notable. Is that where you would typically see initial signs of consumer softening perhaps? Tim Cook: Thanks for the question. If you -- I'm not an economist and so I'll sort of narrow my comments to what we saw in the business. And if you look at the June quarter, we do believe that we saw macroeconomic headwinds that impacted our business and our results. And so one of those is clearly the FX, which Luca has mentioned, that was over 300 basis points on year-over-year growth rates. When you look at the product categories, on iPhone, there was no obvious evidence of macroeconomic impact during the June quarter besides FX, obviously. Mac and iPad were so gated by supply that we didn't have enough product to test the demand. And Wearables, Home and Accessories, as you mentioned and as Luca mentioned, we did see some impact there that we would attribute to a macroeconomic environment. When you then look at Services, there were some Services that were impacted, for example, like digital advertising was clearly impacted by the macroeconomic environment. And so it's a mixed bag in terms of what we believe that we saw. Overall, we are very happy with the results. And when you think about the number of challenges in the quarter, we feel really good about the growth that we put up for the quarter. Operator: We'll take our next question from Harsh Kumar with Piper Sandler. Harsh Kumar: Yes. First of all, congratulations. As these are tough times, you guys are putting up tremendous results so we appreciate that as investors. My question is, when I look at your Services business, I see a $20 billion business on a quarterly basis. And you keep adding -- as a company, you keep adding very interesting and transformative features such as payments, something like that every year. So I'm struggling to find a good way to think about how to model the growth of this business, considering that you add innovative features. So now that it's fairly matured as a business, what would be a good way for us to think about as investors to model the Services business? And I do have a follow-up. Luca Maestri: Well, as you know, we don't provide guidance past the current quarter. But I think the way to think about it, certainly the way we think about it is that there's a number of levers in our Services business to take into account. The first one is installed base. Installed base is the engine for our company and it continues to grow. As I mentioned, it has reached an all-time high across every geographic segment, across every product category. And so that's very important. Then the second lever is the customer engagement. And we know that our customers are getting more and more engaged over time. Transacting accounts, paid accounts, paid subscriptions are growing, so the level of engagement continues to grow. And then as you mentioned, the breadth and the quality of the services that we offer tends to grow over time. So these are all things that tend to help us over the long term. If you go back and you look at our growth rates over a number of quarters now, they've always been very good. Of course, the macro environment can have an impact on this business. Tim has mentioned, for example, digital advertising can be affected at times. During COVID, some of the compares have been a bit lumpy because there have been lockdowns and reopenings and so on. So it's very difficult to talk about a steady state growth rate for our Services business. But when we look at the entirety of what we are doing in the Services space, we feel very good about the future of the business. Harsh Kumar: Luca, very helpful. And for my follow-up, valuations have come down in the last 18 months or so for things and companies and targets that you might look at. I guess, particularly in the Services area, would there be an appetite on behalf of Apple to accelerate the growth of its Services business by looking at external products to acquire? Tim Cook: We always look and we ask ourselves if it's -- how strategic it is, and we never buy just to buy or buy just for revenue purposes. But we would buy something that is strategic for us. To date, we have concentrated on smaller IP and people acquisitions. But I wouldn't rule anything out for the future, and obviously, we are constantly surveilling the market. Operator: We'll take our next question from Erik Woodring with Morgan Stanley. Erik Woodring: I have two as well. Maybe Tim, if I start with you, I think there's a debate in the market that if you look back over time, there's been a 3-year cadence to iPhone cycles. We're 2 years into your 5G iPhone evolution. You're on track to grow units in '21 and '22. That implies there could be some pressure next year as upgrade rates slow. But your comments really suggest no slowdown. You're seeing double-digit growth in customers new to iPhone. So can you just walk us through some of the various factors you believe are driving this continued iPhone strength? And then I have a follow-up. Tim Cook: Today, the product and the innovation within the product that is driving it. And of course, the other key variables are some things that Luca mentioned earlier where the size of the installed base has been growing significantly. We also, just in this quarter, the June quarter, set a June quarter record for switchers with strong double-digit growth. And so this is fueling the additional installed base even more. And we continue to execute across some significant geographies where there's a very low penetration of iPhone. Some of those were called out in the opening remarks between Indonesia and Vietnam and India, where we did quite well, and iPhone tends to be the engine for those markets, particularly at the beginning of creating the market there for Apple products. And so we're really looking at all of these things from the installed base to the number of switchers to the geographic distribution. Of course, the most important thing for us is to maintain an incredible customer satisfaction and loyalty from the customers. And we're really pleased that it's currently at 98% for the latest iPhones. And so those are the things that underpin it. 5G has been an accelerant. And the 5G penetration, particularly if you look at it globally, is still quite low. In some geographies, it's obviously higher, but around the world, 5G penetration is still low. And so I think there's reason to be optimistic. Erik Woodring: Okay, that's helpful. And then maybe, Luca, for you. As we move from the June to the September quarter, maybe can you dig a level deeper and kind of help us understand some of the moving pieces in the Services business? Meaning where do you think we could see an acceleration or maybe a deceleration? And should we still expect double-digit growth? If you could just frame that for us, that would be great. Luca Maestri: Yes, Erik. I mentioned in my prepared remarks that we expect some deceleration from the 12% that we've had in the June quarter. Keep in mind, we're going to see, on a year-over-year basis, 600 basis points, 6% impact from foreign exchange so that is a big element for us. Also keep in mind that we're still lapping the impact of our business in Russia in these numbers. And Tim mentioned that there are some pockets of weakness, primarily in digital advertising that we will need to work through. But at the same time, our Services business a year ago grew a lot and so also the compare is a bit challenging. So we don't have a very specific number to give out today. Of course, we expect to grow. We will see how the quarter develops. Operator: We'll take our next question from Richard Kramer with Arete Research. Richard Kramer: Tim, you cited growth in Apple apps in the past, and clearly, the privacy policies you've taken have really reshaped the mobile ad market. Can you give us a sense of how you see Apple's role as an ad network and perhaps helping developers to monetize not just app sales but also growing ad monetization over time? Tim Cook: Yes. Richard, we view privacy as a fundamental human right. And so what we try to do with all of our features on privacy is put the decision back at the user where we believe it belongs as to whether they want to share their data or not. And so that was what was behind application tracking transparency and a number of other features. We're trying to empower the user to own their data and make their own choices. In terms of us selling ads, we have a search ad business across the App Store that we believe represents a great way for discovery for small and large developers. And so I see that we play a role in that. Richard Kramer: And then maybe my follow-up for Luca. Can you give us a sense, especially now that you're launching Pay Later, what steps you might be taking to improve affordability of Apple products? We know that it's going to be a tight time economically for people around the world. And how do you see the evolution of various payment plans out of the -- you see in the U.S. now into other markets, especially emerging markets? Luca Maestri: Yes. I mean, obviously, affordability is a very important topic for us. It's been for many years. Buy now, pay later is the latest that we are doing on this front. Fundamentally, we are working on 2 major initiatives for affordability. One is installment plans and installment plans have become more widespread around the world, not only here in the United States but in most markets, particularly in emerging markets. Incredibly important in terms of reducing the affordability threshold. And trading programs. Trading programs are available in a number of markets. We can do better in other markets. They're incredibly important because the residual value of our products is a huge differentiator for our users. After they use our devices, they can bring them back and they retain much more value than other platforms. And therefore, it's important for us to raise that awareness. And so we will continue to expand those programs around the world. So installments and trade-ins, very, very important on affordability. Operator: We'll take our next question from David Vogt with UBS. David Vogt: I just wanted to circle back on sort of the macro and sort of the demand signals that you're seeing versus sort of the supply chains that you're facing. I know that there's been a couple of U.S. carriers that have talked about some of their customers having some difficulty paying bills. And you mentioned in your prepared remarks that you saw sort of the record number of switchers in the quarter. So just wanted to kind of get a sense for what you're seeing in that particular channel without naming a specific customer. And are you seeing any sort of issues from a spin-down effect maybe because customers are having some difficulty because of inflation? And then I have a follow-up on Macs. Tim Cook: On the -- from an aggregate point of view, looking at it worldwide, looking at the data on iPhone for the June quarter, there's not obvious evidence in there that there's a macroeconomic headwind. I'm not saying that there's not one. I'm saying that the data doesn't show it where we can clearly see that in the Wearables, Home and Accessories area. And so I would differentiate those 2. David Vogt: Great. And then on the Mac business, I know that you are severely supply chain constrained. But is there a way to kind of think about the impact of the market overall on the Mac business versus the supply chain? It sounds like -- I guess, it sounds like it's almost effectively 100% supply chain constrained, but we're obviously hearing, like I'm sure you guys are seeing, anecdotal evidence and some quantifiable evidence that the broader PC market is slowing. And I think about 90 days ago, you were pretty confident with the new M2 chip that you could continue to grow throughout a potential drawdown in that particular market. Do you still feel that way? And if you can kind of share how you're thinking about the different sort of components of your growth versus the market. Tim Cook: Yes, I wouldn't want to project into this quarter. But for last quarter, what we saw was the -- when the COVID restrictions hit in the Shanghai corridor, we lost the primary source of supply for Mac units. And that was either running at a reduced rate or down completely for the majority of the quarter. And so it was a very big impact to the Mac business. We felt good, frankly, that we were able to, by the end of the quarter, get this back to where we were down 10 points. But the negative 10 I would classify as being driven by supply. And of course, FX feeds into this as well because of the translation issues around the world. There's also some impact because of the business in Russia. But those are the 3 kind of reasons that I would tell you. In terms of testing the demand, you can't really test the demand unless you have the supply. And we were so far from that last quarter that we have an estimate of what we believe demand was. But it is an estimate. We recognize how the industry is doing. We think that we've got a great story with the Mac with getting M1 out and now M2 out. We have a very, very strong offering for the back-to-school season and we'll see how we do this quarter. We'll report back in October. Operator: We'll take our next question from Ben Bollin with Cleveland Research. Benjamin Bollin: Tim, I was hoping you could share a little bit more about how you're thinking about the supply headwinds. You said less severe or less worse supply challenges into September. I'm interested when you think you find balance across products. And also, any thoughts on how or when that might influence replenishment of supply into your retail channels? Tim Cook: To give you a little more color on what we saw in the June quarter, we came in slightly below, from a constraint point of view, the $4 billion number that we had put, at the 4 to 8 are the low end of that range. And the majority of that constraint last quarter was coming out of the COVID restrictions that occurred, that resulted in plant closures and plants running at less than full utilization for some amount of the quarter, in some cases, the majority of the quarter. And then the other component that is the minority part of it is the silicon shortage that has affected our results for several quarters now. If you look into the future, the silicon shortage, we're not forecasting when that will end. We think that in the aggregate, our constraint numbers for the September quarter will be less than they were in the June quarter. But of the 2 -- there are these 2 components, and of course, we're optimistic about the COVID restriction piece of this. Benjamin Bollin: Okay. The other item. Tim, any thoughts on how you're thinking strategy is evolving with respect to progress in AR, VR in your existing products? Anything you're learning about content or how you're thinking about that opportunity? Tim Cook: We're thrilled right now to have over 14,000 ARKit apps in the App Store. And they're providing incredible AR experiences for millions of people. And that's utilizing iPhone and iPad. And of course, we are in the business of innovation so we're always exploring new and emerging technologies. But I wouldn't want to say anything beyond that. Operator: We'll take our next question from Wamsi Mohan with Bank of America. Wamsi Mohan: Luca, you mentioned revenues to accelerate year-over-year overall in September versus your June growth rate. Would you say that it would be reasonable to assume normal quarter-on-quarter seasonality of about $7 billion or so? Or would you say there are additional puts and takes this time around that could drive upside and downside to that? I know you noted 600 bps year-over-year on FX as potentially one of those. But maybe help us think through, on a sequential basis, how much of a normal versus abnormal seasonality we should expect? And I have a follow-up. Luca Maestri: Yes, Wamsi, as you know, as we said earlier, we're not providing guidance because of all the uncertainty out there. But we have given a few data points. So one of them, which you've mentioned, approximately 600 basis points of negative foreign exchange. I mean, you do a rough math, it's around $5 billion. That's a big number right there that is going to affect us, that we are having some impact from the situation in Russia and that is obviously different from normal seasonality as well. Our supply constraints, as Tim just said, are going to be lower than what we've seen in the June quarter but they're still going to be there. So when you look at those 3 headwinds and you combine them with the acceleration that we talked about, we feel that, that is pretty remarkable. Wamsi Mohan: Okay, Luca. And Tim, I wanted to follow up on your comment about the macro impact that you've seen on wearables. Your wearables portfolio is probably at the lowest ASP range across your product portfolio. As you're giving this guidance or directional guidance here, how much of an impact are you assuming in potentially any macro-related slowdowns across the rest of the portfolio? Why would investors not think that it would be prudent to assume some sort of creep-up of some of these -- some of the hesitation maybe that the macro environment is driving, particularly as it pertains to your higher ASP products? Tim Cook: Yes. Let me expand a little bit on Wearables, Home and Accessories so that I clearly communicate what we saw. We saw sort of a cocktail of headwinds on Wearables, Home and Accessories. We saw FX, which we've talked about. We saw supply constraints, which we've talked about. Of course, there was an impact from the business in Russia. But in addition to those things, which -- those things affected all the products to some degree, we also had a different launch timing for certain home and accessory products. Like in the year-ago quarter, I think, had AirTag in it. That's just 1 example of something that announced last year that didn't announce this -- that we didn't have a comparable announcement this year. And in -- so in addition to those 4 items, we believe, based on the data, that there was also a macroeconomic environment hit. And whether or not that is because they're lower ASPs versus the higher ASPs of a phone, I can't tell you that. I can just tell you that looking at the numbers, there does appear to be headwinds in addition to the 4 items that we can articulate and we believe those to be macroeconomic headwinds. Operator: We'll take our next question from Samik Chatterjee with JPMorgan. Samik Chatterjee: Great. And congrats on the results in this tough macro. I guess I wanted to start with China smartphone market here a bit. Tim, I thought you said in response to earlier question that you haven't really seen a material impact from the macro on iPhone yet. But wondering, did you see an impact of the COVID lockdowns there on demand itself? Or was there a snapback fall in that? If you can comment about the sort of exit run rate that you saw in that market, following the COVID shutdowns ending there. And I have a follow-up. Tim Cook: Yes, both things are true. We did see a lower demand based on the COVID lockdowns in the cities the COVID lockdowns affected. And we did see a rebound in those same cities toward the end of the quarter in the June time frame. And in particular, in the run-up to June 18, which as you know, is a major shopping holiday in China. We think that the net of that was still a negative, but some of it did rebound by June time frame. The restrictions begin to come off toward the beginning of June, if my memory is correct. Samik Chatterjee: Okay. And for my follow-up, I know you said you don't want to sort of predict the macro here or be an economist. But if I go back and look at the sort of OpEx for the last few years, you've been increasing that by a double-digit percentage. And just given the uncertainty that you've talked about in the macro further on this call a lot, how are you thinking about sort of that investment base going forward? Are you trying to look at areas that where you can sort of pull back? I mean, just in terms of how you're preparing for the uncertainty is I guess the question. Tim Cook: We believe in investing through the downturn. And so we'll continue to hire people and invest in areas, but we are being more deliberate in doing so in recognition of the realities of the environment. Operator: We'll take our next question from Jim Suva with Citigroup. James Suva: While I'm calling you on my iPhone 13 Max Pro and loving it, I just wanted to ask you, though, with replacement cycles, have you noticed any change now that we've been through like 2.5 years of COVID where people upgrading at a different rate and kind of post COVID, hopefully, upgrade cycles or replacement cycles, how we should kind of think about that? Obviously, when I drop and break my phone, I replace it immediately. But a normal replacement, have they changed at all? Any insights from that would be great. Tim Cook: It's challenging to measure the replacement cycle at any point in time with exact precision, and so I'm going to punt on the question a bit. However, our key task is to make a product that everybody loves and that they want to trade in their current phone to get. And so that's what we are focused on is innovating like crazy and giving somebody something that they really want and see themselves using. James Suva: Okay, that makes sense. Well, then maybe I can ask Luca a question more on the gross margins. As you look ahead, the supply chain issues, expedited shipping and all of that, do you think probably the September quarter is kind of the worst of FX and all those headwinds and things? Or is there a little bit of timing delays due to your contractual purchase commitments that you do, that maybe your suppliers are looking at higher costs and you're benefiting from some lower contracts or maybe that has already caught up? If you could give us some insights on the kind of longer-term nature of the directions or the gross margin impacts. Luca Maestri: Jim, I would say we provide guidance for the current quarter. But if we look ahead, there's always a couple of elements in gross margin that are a bit outside of our control and we need to be mindful of that. One of them is the foreign exchange environment. That is having an impact already for the September quarter, had an impact on June. And obviously, strong dollar tends to be a headwind for us. As you know, we have a hedging program and so we mitigate that impact. But over time, those hedges roll off and so it becomes more challenging for us. We'll see what happens with foreign exchange rates over time. That is going to be a variable that we need to track. The other one that has an impact on the aggregate gross margin is our mix of products and services. As you know, they have different margin profiles for very different reasons, different businesses, even different accounting treatment at times. And so that is also something that we will need to track over time. What matters to us, I think it goes back to Tim was saying earlier, is we want to make sure that people love our products and services, and we want all of them to be equally successful in the marketplace. Certainly, as you've seen over the last year, we've had a significant expansion in gross margins in spite of very difficult economic circumstances from COVID to inflation, interest rates going up and our margins have expanded. From a commodity standpoint, I think you were asking a question around components. Commodities are behaving okay. We're seeing some price pressure on some silicon components. But other than that, we've -- actually commodities are behaving well. James Suva: Congratulations to you and all your team members. Tim Cook: Thank you. Operator: We'll take our next question from Krish Sankar with Cowen and Company. Krish Sankar: And Tim, I apologize, it's also macro-related. You mentioned that it impacted digital advertising within Services. I'm just kind of curious, if the macro does worsen, do you worry about subscriber growth, App Store purchases, et cetera? And conversely, are there any parts of the Service business that you consider recession-proof, like maybe a buy now, pay later or something else? And then I have a quick follow-up for Luca. Tim Cook: We have incorporated all of our thoughts in the guidance that Luca gave, which says that we think in the aggregate, we're going to accelerate revenues in the September quarter as compared to the June quarter and will decelerate on the Services side. And so we see the digital advertising cloud, if you will, continuing in the current quarter. Krish Sankar: Got it, got it. Very helpful. And then a quick follow-up on the lockdown in China during the June quarter. Do you actually see any noticeable negative effects on your App Store revenue for the region or any positive effects like maybe more gaming downloads? Tim Cook: China had very good results on Services last quarter. And so they grew strong double digit better than the company average, and they set a new June quarter revenue record during the quarter. Tejas Gala: Thank you. A replay of today's call will be available for 2 weeks as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please enter confirmation code 8820355. These replays will be available by approximately 5 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. Operator: This concludes today's conference. We appreciate your participation.	[ { "speaker": "Operator", "text": "Good day, and welcome to the Apple Q3 FY 2022 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please go ahead." }, { "speaker": "Tejas Gala", "text": "Thank you. Good afternoon, and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during the discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company's business and results of operation. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thank you, Tejas. Good afternoon, everyone, and thank you for joining us. Today, Apple is reporting another record June quarter with revenue of $83 billion, which was better than we expected despite supply constraints, strong foreign exchange headwinds and the impact of our business in Russia. We set June quarter records in the Americas, in Europe and in the rest of Asia Pacific region. We also saw June quarter revenue records in both developed and emerging markets with very strong double-digit growth in Brazil, Indonesia and Vietnam and a near doubling of revenue in India. We saw great enthusiasm for our products and services, resulting in an all-time record for our installed base of active devices. Our supply constraints were less than we anticipated at the beginning of the quarter, coming in slightly below the range we discussed during our last call. We know that this is a time of significant challenge around the world for all of us confronting new variants of COVID-19, to those experiencing a prolonged humanitarian crisis in Ukraine and everyone dealing with the consequences of an uncertain economic environment. We know that much of the world is living through uneasy times, and it is all the more reason why we are working hard to help our customers navigate the world as it is while empowering them to create the world as it can be. Turning to iPhone. We set a June quarter record for both revenue and switchers to iPhone. With its advanced performance, capability and ease of use, customers continue to find that iPhone remains the gold standard for smartphones. And they've been raving about the iPhone 13 lineup's extraordinary camera quality with features like cinematic mode and macro photography to create eye-catching content. We were also proud to celebrate the 15th anniversary of iPhone, a device that continues to change the world in profound ways with each new innovation. Last month, Apple unleashed a wave of innovation, including the completely redesigned MacBook Air and a new 13-inch MacBook Pro. Both of these systems are powered by M2, our next generation of Apple silicon for Mac. M2 delivers a faster CPU, GPU and neural engine along with higher memory bandwidth and new capabilities like Pro Res acceleration. And it continues the tremendous pace of innovation in Apple silicon for the Mac. We continue to have supply constraints with Mac, but we're encouraged by the strong response from customers to our incredible lineup. iPad, like Mac, continued to see strong demand during the June quarter despite ongoing supply constraints. Customers and developers have been especially excited about the new features we're bringing to iPad with iPadOS 16. This update was one of the many announcements we made at a truly extraordinary WWDC, where we shared a range of new features that give customers more control of their experience than ever before. This includes the ability to edit or delete sent messages, a new way of organizing apps on iPad and Mac, and an all-new customizable lock screen on iPhone and so much more. Today, iOS 16, iPadOS 16, MacOS Ventura and watchOS 9 are all in public beta, and we couldn't be more excited to see what our community of developers creates with them. We unveiled new innovations and accessibility such as door detection and live captions that support users with disabilities with navigation, health, communication and more. We also announced Apple Pay Later, which gives customers more flexibility to make purchases with their Apple devices. And with our next generation of CarPlay, we're improving the driving experience with deeper integration into vehicle hardware, allowing drivers to control their music, change the temperature and monitor their fuel levels, all from a single integrated platform. In the Wearables, Home and Accessories category, the innovation infused across our products continues to win over new customers. Apple Watch remains a great way for health-conscious customers to track their overall wellness and fitness. And we're bringing them even more data about their workouts, sleep cycles and medications with updates soon to arrive on watchOS 9. We were also pleased to get FDA approval for a new feature that will let users with irregular heart rhythms track the time they spend in Afib. Turning to Services. Customers continue to engage enthusiastically with our content across news, fitness, music, gaming and more. Services revenue rose to $19.6 billion, a June quarter record and a 12% increase year-over-year, which was in line with our expectations. We're proud of how Apple TV+ productions like Severance and Black Bird have captured the popular imagination, and we're looking forward to more exceptional content developed by extraordinary creators throughout the year. In 2.5 years since launch, Apple TV+ has now earned 250 wins and over 1,100 award nominations and counting. Just this month, we learned that Apple TV+ earned 52 Emmy Award nominations across 13 titles. In our last call, I mentioned Friday Night Baseball on Apple TV+, which is already delighting baseball fans. And last month, we announced a 10-year deal to present Major League soccer matches around the world, giving global soccer fans a whole new way of viewing their favorite sport. One of the best parts of WWDC was welcoming developers to Apple Park while continuing to connect with developers all over the world. This year, we had an incredible group of developers and more opportunities to learn from one another than ever before. It was a truly special experience and a reminder of the economic miracle the App Store represents. We are proud of the fact that the iOS app economy supports more than 2.2 million jobs here in the United States and many more around the world. It's been wonderful to see earnings by small developers more than double over the past 2 years. And as we're supporting developers, we're also doing our part to protect customers. In 2021, we prevented nearly $1.5 billion in fraudulent transactions by stopping over 1.6 million risky and vulnerable apps and app updates. Now I want to turn to retail. This quarter, we opened the doors to Apple's first store in the Hubei province in China, welcoming the community to a beautiful new space. And earlier today, we opened Apple Brompton Road, our fifth store in Central London. We also expanded today at Apple Creative Studios to reach even more young creatives from underrepresented communities to help them realize their potential and bring their best ideas to life. I'd like to take this opportunity to express my appreciation to our team members working in Apple Stores, customer care centers and channel partner stores and to our Apple Care teams for their incredible work supporting customers wherever they are. Creating innovative products and services that enrich people's lives is our mission. Leading with our values and everything we do gives that mission purpose. That includes a commitment to the environment where we continue our aggressive pursuit of our 2030 goals. It includes our focus on diversity and inclusion, where we are committed as ever to making progress. And it includes our work to promote racial equity and justice. We recently announced that the Global Equity Innovation Hub, in partnership with Cal State Northridge, will provide new community grants to Hispanic-serving institutions to help the next generation of creators and innovators build skills and pursue high-demand careers in STEM. We also celebrated the graduation of the inaugural class of our Developer Academy in Detroit from a program designed to give students the skills they need to pursue jobs in the thriving iOS app economy. Leading with our values also means leading with a steadfast commitment to privacy and security. Last month, we announced the introduction of passkey, a next-generation credential that's intended to replace passwords. A passkey can't be phished nor can it be stolen by hackers in a data breach because the information is stored on your device and your device alone. And as part of our effort to combat targeted attacks against the highest risk targets like journalists and human rights activists, we introduced Lockdown Mode, which is designed to protect those most at risk of sophisticated digital attacks. And we're committed to doing our part to address the housing crisis across California. To date, we have deployed more than $1.3 billion to a number of initiatives, including ones that provide financial assistance to low and moderate income first-time home buyers develop new affordable housing and help support vulnerable populations. This quarter has ultimately been a reflection of our resilience and our optimism. As we look forward, we're clear-eyed about the uncertainty in the macro environment. Yet we remain ever focused on the same vision that has guided us from the beginning. We strive every day to be a place where imagination ignites innovation like nowhere else, where good people come together to achieve great things, where customers are the center of everything we do. And we'll continue to execute on that vision as we always have, led by a focus on excellence and a desire to leave the world better than we found it. And with that, I'll turn it over to Luca." }, { "speaker": "Luca Maestri", "text": "Thank you, Tim, and good afternoon, everyone. We are very pleased to report June quarter financial results that continue to demonstrate our ability to innovate across hardware, software and services while operating our business effectively during very challenging economic circumstances. We set a June quarter revenue record of $83 billion, up 2% year-over-year despite supply constraints, over 300 basis points of foreign exchange headwinds and the impact of our business in Russia. Around the world, we set new June quarter records in the Americas, in Europe and rest of Asia Pacific. On the product side, revenue was $63.4 billion with a June quarter revenue record for iPhone. During the quarter, our installed base of active devices continue to grow well, thanks to our unmatched levels of customer satisfaction and loyalty and reached an all-time high for all major product categories and geographic segments. Our Services set a June quarter revenue record of $19.6 billion, up 12% over a year ago, with all-time revenue records in the Americas and the rest of Asia Pacific and June quarter records in Europe and Greater China. We also achieved June quarter revenue records in each major Services category, including all-time revenue records for Music, Cloud Services, Apple Care and Payment Services. Company gross margin was 43.3%, down 40 basis points from last quarter as seasonal loss of leverage and unfavorable foreign exchange were partially offset by favorable mix. Products gross margin was 34.5%, down 190 basis points sequentially, mainly driven by seasonal loss of leverage, mix and FX. Services gross margin was 71.5%, down 110 basis points sequentially due to a different mix and foreign exchange. Net income was $19.4 billion and diluted earnings per share were $1.20, while operating cash flow of $22.9 billion was a June quarter record. Let me now get into more detail for each of our revenue categories. iPhone revenue grew 3% year-over-year to a June quarter record of $40.7 billion despite foreign exchange headwinds as customer response to our iPhone 13 family continue to be strong. We set June quarter records in both developed and emerging markets. And the iPhone active installed base reached a new all-time high across all geographies as a result of this level of sales performance combined with unmatched customer loyalty. In fact, the latest survey of U.S. consumers from 451 Research indicates iPhone customer satisfaction of 98%. We also attracted a record number of switchers for the June quarter, with strong double-digit year-over-year growth. For Mac, we generated revenue of $7.4 billion despite supply constraints and negative effects. We continue to be excited about our long-term opportunity with Mac and redefining the PC experience with our relentless innovation. Our investment focus on Mac has helped drive significant growth in our installed base, which reached an all-time high during the June quarter as nearly half of the customers purchasing a Mac were new to the product. iPad revenue was $7.2 billion, down 2% year-over-year due to supply constraints and negative foreign exchange. Customer response to our iPad lineup continue to be strong across consumer, education and enterprise markets around the world. And the iPad installed base reached a new all-time high, with over half of the customers during the quarter being new to the product. Wearables, Home and Accessories revenue was $8.1 billion, down 8% year-over-year as we faced foreign exchange headwinds, different launch timing for Home and Accessories products and supply constraints as well as the overall macroeconomic environment. Despite this, our installed base of devices in the category hit a new all-time record, thanks to very strong customer loyalty and high new tool rates. For example, Apple Watch continues to extend its reach, with over 2/3 of customers purchasing an Apple Watch during the quarter being new to the product. Services had a June quarter revenue record of $19.6 billion, up 12% despite almost 500 basis points of FX headwinds as well as impacts from our business in Russia and the macroeconomic environment. We set June quarter revenue records in both developed and emerging markets and set all-time records in many countries around the world, including the U.S., Mexico, Brazil, Korea and India. The record level of performance of our Services portfolio during the June quarter reflects the strength of our ecosystem on many fronts: First, our installed base has continued to grow, reaching an all-time high across each geographic segment and major product category. We also saw increased customer engagement with our Services during the quarter. Our transacting accounts, paid accounts and accounts with paid subscriptions all grew double digits year-over-year. And paid subscriptions showed very strong growth. We now have more than 860 million paid subscriptions across the services on our platform, which is up more than 160 million during the last 12 months alone. And finally, we continue to improve the breadth and the quality of our current Services offerings, from a constant flow of new content on Apple TV+ and Apple Arcade to great new features we recently announced for iCloud and Apple Music, which we believe our customers will love. In the enterprise market, our customers are increasingly investing in Apple products as a strategy to attract and retain talent. Bank of America is providing iPhones to all of its financial advisers so they can instantly access client information and provide timely wealth management advice from anywhere. Wipro, another large global enterprise customer, is investing in MacBook Air with M1 as a competitive advantage when recruiting new graduates globally, thanks to its superior performance and lower total cost of ownership. And with the new M2 chip powering MacBook Air and the 13-inch MacBook Pro, we expect more customers to make Mac available to their entire workforce. Let me now turn to our cash position. We ended the quarter with $179 billion in cash and marketable securities. We repaid $3 billion in maturing debt while increasing commercial paper by $4 billion, leaving us with total debt of $120 billion. As a result, net cash was nearly $60 billion at the end of the quarter. We returned over $28 billion to shareholders during the June quarter. This included $3.8 billion in dividends and equivalents and $21.7 billion through open market repurchases of 143 million Apple shares. We continue to believe there is great value in our stock and maintain our target of reaching a net cash neutral position over time. As we move ahead into the September quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we are not providing revenue guidance but we are sharing some directional insights based on the assumption that the macroeconomic outlook and COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter. Overall, we believe our year-over-year revenue growth will accelerate during the September quarter compared to the June quarter despite approximately 600 basis points of negative year-over-year impact from foreign exchange. On the product side, we expect supply constraints to be lower than what we experienced during the June quarter. Specifically related to Services, we expect revenue to grow but decelerate from the June quarter due to macroeconomic factors and foreign exchange. We expect gross margin to be between 41.5% and 42.5%. We expect OpEx to be between $12.9 billion and $13.1 billion. We expect OI&E to be around negative [indiscernible] impact from the mark-to-market of minority investments and our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividend of $0.23 per share of common stock, payable on August 11, 2022, to shareholders of record as of August 8, 2022. With that, let's open the call to questions." }, { "speaker": "Tejas Gala", "text": "Thank you, Luca. [Operator Instructions]. Operator, may we have the first question, please?" }, { "speaker": "Operator", "text": "[Operator Instructions]. We'll take our first question from Amit Daryanani with Evercore." }, { "speaker": "Amit Daryanani", "text": "I guess two from my side. Maybe to start on the gross margin discussion, Luca. You said that implying gross margin will be down I think, 130, 140 basis points sequentially and down a bit year-over-year as well in September. Maybe just what are the puts and takes here. And then very specifically, can you actually just call what the FX headwinds are embedded in the September quarter gross margin, that would be helpful." }, { "speaker": "Luca Maestri", "text": "Yes, Amit. We're guiding 41.5% to 42.5%. On a sequential basis, the decline is expected to be driven by, as you mentioned, foreign exchange but also mix, which will be partially offset by better leverage. We expect foreign exchange impact on a sequential basis to be 50 basis points. If you look at it from a year-over-year standpoint, we are in the ballpark of a year ago in spite of the fact that foreign exchange is going to be 130 basis points negative to a year ago. So clearly, foreign exchange is something that is affecting us but we think we're navigating that fairly well." }, { "speaker": "Amit Daryanani", "text": "Fair enough. And then if I could just ask Tim the question. There's a lot of macro worries and high inflation impacting consumer demand. Certainly doesn't seem to be very visible in your performance and your expectations. So I'm wondering if you talk about, are you seeing any implications from recession fears or inflation fears to your end demand? And really just related to that, wearables decline was notable. Is that where you would typically see initial signs of consumer softening perhaps?" }, { "speaker": "Tim Cook", "text": "Thanks for the question. If you -- I'm not an economist and so I'll sort of narrow my comments to what we saw in the business. And if you look at the June quarter, we do believe that we saw macroeconomic headwinds that impacted our business and our results. And so one of those is clearly the FX, which Luca has mentioned, that was over 300 basis points on year-over-year growth rates. When you look at the product categories, on iPhone, there was no obvious evidence of macroeconomic impact during the June quarter besides FX, obviously. Mac and iPad were so gated by supply that we didn't have enough product to test the demand. And Wearables, Home and Accessories, as you mentioned and as Luca mentioned, we did see some impact there that we would attribute to a macroeconomic environment. When you then look at Services, there were some Services that were impacted, for example, like digital advertising was clearly impacted by the macroeconomic environment. And so it's a mixed bag in terms of what we believe that we saw. Overall, we are very happy with the results. And when you think about the number of challenges in the quarter, we feel really good about the growth that we put up for the quarter." }, { "speaker": "Operator", "text": "We'll take our next question from Harsh Kumar with Piper Sandler." }, { "speaker": "Harsh Kumar", "text": "Yes. First of all, congratulations. As these are tough times, you guys are putting up tremendous results so we appreciate that as investors. My question is, when I look at your Services business, I see a $20 billion business on a quarterly basis. And you keep adding -- as a company, you keep adding very interesting and transformative features such as payments, something like that every year. So I'm struggling to find a good way to think about how to model the growth of this business, considering that you add innovative features. So now that it's fairly matured as a business, what would be a good way for us to think about as investors to model the Services business? And I do have a follow-up." }, { "speaker": "Luca Maestri", "text": "Well, as you know, we don't provide guidance past the current quarter. But I think the way to think about it, certainly the way we think about it is that there's a number of levers in our Services business to take into account. The first one is installed base. Installed base is the engine for our company and it continues to grow. As I mentioned, it has reached an all-time high across every geographic segment, across every product category. And so that's very important. Then the second lever is the customer engagement. And we know that our customers are getting more and more engaged over time. Transacting accounts, paid accounts, paid subscriptions are growing, so the level of engagement continues to grow. And then as you mentioned, the breadth and the quality of the services that we offer tends to grow over time. So these are all things that tend to help us over the long term. If you go back and you look at our growth rates over a number of quarters now, they've always been very good. Of course, the macro environment can have an impact on this business. Tim has mentioned, for example, digital advertising can be affected at times. During COVID, some of the compares have been a bit lumpy because there have been lockdowns and reopenings and so on. So it's very difficult to talk about a steady state growth rate for our Services business. But when we look at the entirety of what we are doing in the Services space, we feel very good about the future of the business." }, { "speaker": "Harsh Kumar", "text": "Luca, very helpful. And for my follow-up, valuations have come down in the last 18 months or so for things and companies and targets that you might look at. I guess, particularly in the Services area, would there be an appetite on behalf of Apple to accelerate the growth of its Services business by looking at external products to acquire?" }, { "speaker": "Tim Cook", "text": "We always look and we ask ourselves if it's -- how strategic it is, and we never buy just to buy or buy just for revenue purposes. But we would buy something that is strategic for us. To date, we have concentrated on smaller IP and people acquisitions. But I wouldn't rule anything out for the future, and obviously, we are constantly surveilling the market." }, { "speaker": "Operator", "text": "We'll take our next question from Erik Woodring with Morgan Stanley." }, { "speaker": "Erik Woodring", "text": "I have two as well. Maybe Tim, if I start with you, I think there's a debate in the market that if you look back over time, there's been a 3-year cadence to iPhone cycles. We're 2 years into your 5G iPhone evolution. You're on track to grow units in '21 and '22. That implies there could be some pressure next year as upgrade rates slow. But your comments really suggest no slowdown. You're seeing double-digit growth in customers new to iPhone. So can you just walk us through some of the various factors you believe are driving this continued iPhone strength? And then I have a follow-up." }, { "speaker": "Tim Cook", "text": "Today, the product and the innovation within the product that is driving it. And of course, the other key variables are some things that Luca mentioned earlier where the size of the installed base has been growing significantly. We also, just in this quarter, the June quarter, set a June quarter record for switchers with strong double-digit growth. And so this is fueling the additional installed base even more. And we continue to execute across some significant geographies where there's a very low penetration of iPhone. Some of those were called out in the opening remarks between Indonesia and Vietnam and India, where we did quite well, and iPhone tends to be the engine for those markets, particularly at the beginning of creating the market there for Apple products. And so we're really looking at all of these things from the installed base to the number of switchers to the geographic distribution. Of course, the most important thing for us is to maintain an incredible customer satisfaction and loyalty from the customers. And we're really pleased that it's currently at 98% for the latest iPhones. And so those are the things that underpin it. 5G has been an accelerant. And the 5G penetration, particularly if you look at it globally, is still quite low. In some geographies, it's obviously higher, but around the world, 5G penetration is still low. And so I think there's reason to be optimistic." }, { "speaker": "Erik Woodring", "text": "Okay, that's helpful. And then maybe, Luca, for you. As we move from the June to the September quarter, maybe can you dig a level deeper and kind of help us understand some of the moving pieces in the Services business? Meaning where do you think we could see an acceleration or maybe a deceleration? And should we still expect double-digit growth? If you could just frame that for us, that would be great." }, { "speaker": "Luca Maestri", "text": "Yes, Erik. I mentioned in my prepared remarks that we expect some deceleration from the 12% that we've had in the June quarter. Keep in mind, we're going to see, on a year-over-year basis, 600 basis points, 6% impact from foreign exchange so that is a big element for us. Also keep in mind that we're still lapping the impact of our business in Russia in these numbers. And Tim mentioned that there are some pockets of weakness, primarily in digital advertising that we will need to work through. But at the same time, our Services business a year ago grew a lot and so also the compare is a bit challenging. So we don't have a very specific number to give out today. Of course, we expect to grow. We will see how the quarter develops." }, { "speaker": "Operator", "text": "We'll take our next question from Richard Kramer with Arete Research." }, { "speaker": "Richard Kramer", "text": "Tim, you cited growth in Apple apps in the past, and clearly, the privacy policies you've taken have really reshaped the mobile ad market. Can you give us a sense of how you see Apple's role as an ad network and perhaps helping developers to monetize not just app sales but also growing ad monetization over time?" }, { "speaker": "Tim Cook", "text": "Yes. Richard, we view privacy as a fundamental human right. And so what we try to do with all of our features on privacy is put the decision back at the user where we believe it belongs as to whether they want to share their data or not. And so that was what was behind application tracking transparency and a number of other features. We're trying to empower the user to own their data and make their own choices. In terms of us selling ads, we have a search ad business across the App Store that we believe represents a great way for discovery for small and large developers. And so I see that we play a role in that." }, { "speaker": "Richard Kramer", "text": "And then maybe my follow-up for Luca. Can you give us a sense, especially now that you're launching Pay Later, what steps you might be taking to improve affordability of Apple products? We know that it's going to be a tight time economically for people around the world. And how do you see the evolution of various payment plans out of the -- you see in the U.S. now into other markets, especially emerging markets?" }, { "speaker": "Luca Maestri", "text": "Yes. I mean, obviously, affordability is a very important topic for us. It's been for many years. Buy now, pay later is the latest that we are doing on this front. Fundamentally, we are working on 2 major initiatives for affordability. One is installment plans and installment plans have become more widespread around the world, not only here in the United States but in most markets, particularly in emerging markets. Incredibly important in terms of reducing the affordability threshold. And trading programs. Trading programs are available in a number of markets. We can do better in other markets. They're incredibly important because the residual value of our products is a huge differentiator for our users. After they use our devices, they can bring them back and they retain much more value than other platforms. And therefore, it's important for us to raise that awareness. And so we will continue to expand those programs around the world. So installments and trade-ins, very, very important on affordability." }, { "speaker": "Operator", "text": "We'll take our next question from David Vogt with UBS." }, { "speaker": "David Vogt", "text": "I just wanted to circle back on sort of the macro and sort of the demand signals that you're seeing versus sort of the supply chains that you're facing. I know that there's been a couple of U.S. carriers that have talked about some of their customers having some difficulty paying bills. And you mentioned in your prepared remarks that you saw sort of the record number of switchers in the quarter. So just wanted to kind of get a sense for what you're seeing in that particular channel without naming a specific customer. And are you seeing any sort of issues from a spin-down effect maybe because customers are having some difficulty because of inflation? And then I have a follow-up on Macs." }, { "speaker": "Tim Cook", "text": "On the -- from an aggregate point of view, looking at it worldwide, looking at the data on iPhone for the June quarter, there's not obvious evidence in there that there's a macroeconomic headwind. I'm not saying that there's not one. I'm saying that the data doesn't show it where we can clearly see that in the Wearables, Home and Accessories area. And so I would differentiate those 2." }, { "speaker": "David Vogt", "text": "Great. And then on the Mac business, I know that you are severely supply chain constrained. But is there a way to kind of think about the impact of the market overall on the Mac business versus the supply chain? It sounds like -- I guess, it sounds like it's almost effectively 100% supply chain constrained, but we're obviously hearing, like I'm sure you guys are seeing, anecdotal evidence and some quantifiable evidence that the broader PC market is slowing. And I think about 90 days ago, you were pretty confident with the new M2 chip that you could continue to grow throughout a potential drawdown in that particular market. Do you still feel that way? And if you can kind of share how you're thinking about the different sort of components of your growth versus the market." }, { "speaker": "Tim Cook", "text": "Yes, I wouldn't want to project into this quarter. But for last quarter, what we saw was the -- when the COVID restrictions hit in the Shanghai corridor, we lost the primary source of supply for Mac units. And that was either running at a reduced rate or down completely for the majority of the quarter. And so it was a very big impact to the Mac business. We felt good, frankly, that we were able to, by the end of the quarter, get this back to where we were down 10 points. But the negative 10 I would classify as being driven by supply. And of course, FX feeds into this as well because of the translation issues around the world. There's also some impact because of the business in Russia. But those are the 3 kind of reasons that I would tell you. In terms of testing the demand, you can't really test the demand unless you have the supply. And we were so far from that last quarter that we have an estimate of what we believe demand was. But it is an estimate. We recognize how the industry is doing. We think that we've got a great story with the Mac with getting M1 out and now M2 out. We have a very, very strong offering for the back-to-school season and we'll see how we do this quarter. We'll report back in October." }, { "speaker": "Operator", "text": "We'll take our next question from Ben Bollin with Cleveland Research." }, { "speaker": "Benjamin Bollin", "text": "Tim, I was hoping you could share a little bit more about how you're thinking about the supply headwinds. You said less severe or less worse supply challenges into September. I'm interested when you think you find balance across products. And also, any thoughts on how or when that might influence replenishment of supply into your retail channels?" }, { "speaker": "Tim Cook", "text": "To give you a little more color on what we saw in the June quarter, we came in slightly below, from a constraint point of view, the $4 billion number that we had put, at the 4 to 8 are the low end of that range. And the majority of that constraint last quarter was coming out of the COVID restrictions that occurred, that resulted in plant closures and plants running at less than full utilization for some amount of the quarter, in some cases, the majority of the quarter. And then the other component that is the minority part of it is the silicon shortage that has affected our results for several quarters now. If you look into the future, the silicon shortage, we're not forecasting when that will end. We think that in the aggregate, our constraint numbers for the September quarter will be less than they were in the June quarter. But of the 2 -- there are these 2 components, and of course, we're optimistic about the COVID restriction piece of this." }, { "speaker": "Benjamin Bollin", "text": "Okay. The other item. Tim, any thoughts on how you're thinking strategy is evolving with respect to progress in AR, VR in your existing products? Anything you're learning about content or how you're thinking about that opportunity?" }, { "speaker": "Tim Cook", "text": "We're thrilled right now to have over 14,000 ARKit apps in the App Store. And they're providing incredible AR experiences for millions of people. And that's utilizing iPhone and iPad. And of course, we are in the business of innovation so we're always exploring new and emerging technologies. But I wouldn't want to say anything beyond that." }, { "speaker": "Operator", "text": "We'll take our next question from Wamsi Mohan with Bank of America." }, { "speaker": "Wamsi Mohan", "text": "Luca, you mentioned revenues to accelerate year-over-year overall in September versus your June growth rate. Would you say that it would be reasonable to assume normal quarter-on-quarter seasonality of about $7 billion or so? Or would you say there are additional puts and takes this time around that could drive upside and downside to that? I know you noted 600 bps year-over-year on FX as potentially one of those. But maybe help us think through, on a sequential basis, how much of a normal versus abnormal seasonality we should expect? And I have a follow-up." }, { "speaker": "Luca Maestri", "text": "Yes, Wamsi, as you know, as we said earlier, we're not providing guidance because of all the uncertainty out there. But we have given a few data points. So one of them, which you've mentioned, approximately 600 basis points of negative foreign exchange. I mean, you do a rough math, it's around $5 billion. That's a big number right there that is going to affect us, that we are having some impact from the situation in Russia and that is obviously different from normal seasonality as well. Our supply constraints, as Tim just said, are going to be lower than what we've seen in the June quarter but they're still going to be there. So when you look at those 3 headwinds and you combine them with the acceleration that we talked about, we feel that, that is pretty remarkable." }, { "speaker": "Wamsi Mohan", "text": "Okay, Luca. And Tim, I wanted to follow up on your comment about the macro impact that you've seen on wearables. Your wearables portfolio is probably at the lowest ASP range across your product portfolio. As you're giving this guidance or directional guidance here, how much of an impact are you assuming in potentially any macro-related slowdowns across the rest of the portfolio? Why would investors not think that it would be prudent to assume some sort of creep-up of some of these -- some of the hesitation maybe that the macro environment is driving, particularly as it pertains to your higher ASP products?" }, { "speaker": "Tim Cook", "text": "Yes. Let me expand a little bit on Wearables, Home and Accessories so that I clearly communicate what we saw. We saw sort of a cocktail of headwinds on Wearables, Home and Accessories. We saw FX, which we've talked about. We saw supply constraints, which we've talked about. Of course, there was an impact from the business in Russia. But in addition to those things, which -- those things affected all the products to some degree, we also had a different launch timing for certain home and accessory products. Like in the year-ago quarter, I think, had AirTag in it. That's just 1 example of something that announced last year that didn't announce this -- that we didn't have a comparable announcement this year. And in -- so in addition to those 4 items, we believe, based on the data, that there was also a macroeconomic environment hit. And whether or not that is because they're lower ASPs versus the higher ASPs of a phone, I can't tell you that. I can just tell you that looking at the numbers, there does appear to be headwinds in addition to the 4 items that we can articulate and we believe those to be macroeconomic headwinds." }, { "speaker": "Operator", "text": "We'll take our next question from Samik Chatterjee with JPMorgan." }, { "speaker": "Samik Chatterjee", "text": "Great. And congrats on the results in this tough macro. I guess I wanted to start with China smartphone market here a bit. Tim, I thought you said in response to earlier question that you haven't really seen a material impact from the macro on iPhone yet. But wondering, did you see an impact of the COVID lockdowns there on demand itself? Or was there a snapback fall in that? If you can comment about the sort of exit run rate that you saw in that market, following the COVID shutdowns ending there. And I have a follow-up." }, { "speaker": "Tim Cook", "text": "Yes, both things are true. We did see a lower demand based on the COVID lockdowns in the cities the COVID lockdowns affected. And we did see a rebound in those same cities toward the end of the quarter in the June time frame. And in particular, in the run-up to June 18, which as you know, is a major shopping holiday in China. We think that the net of that was still a negative, but some of it did rebound by June time frame. The restrictions begin to come off toward the beginning of June, if my memory is correct." }, { "speaker": "Samik Chatterjee", "text": "Okay. And for my follow-up, I know you said you don't want to sort of predict the macro here or be an economist. But if I go back and look at the sort of OpEx for the last few years, you've been increasing that by a double-digit percentage. And just given the uncertainty that you've talked about in the macro further on this call a lot, how are you thinking about sort of that investment base going forward? Are you trying to look at areas that where you can sort of pull back? I mean, just in terms of how you're preparing for the uncertainty is I guess the question." }, { "speaker": "Tim Cook", "text": "We believe in investing through the downturn. And so we'll continue to hire people and invest in areas, but we are being more deliberate in doing so in recognition of the realities of the environment." }, { "speaker": "Operator", "text": "We'll take our next question from Jim Suva with Citigroup." }, { "speaker": "James Suva", "text": "While I'm calling you on my iPhone 13 Max Pro and loving it, I just wanted to ask you, though, with replacement cycles, have you noticed any change now that we've been through like 2.5 years of COVID where people upgrading at a different rate and kind of post COVID, hopefully, upgrade cycles or replacement cycles, how we should kind of think about that? Obviously, when I drop and break my phone, I replace it immediately. But a normal replacement, have they changed at all? Any insights from that would be great." }, { "speaker": "Tim Cook", "text": "It's challenging to measure the replacement cycle at any point in time with exact precision, and so I'm going to punt on the question a bit. However, our key task is to make a product that everybody loves and that they want to trade in their current phone to get. And so that's what we are focused on is innovating like crazy and giving somebody something that they really want and see themselves using." }, { "speaker": "James Suva", "text": "Okay, that makes sense. Well, then maybe I can ask Luca a question more on the gross margins. As you look ahead, the supply chain issues, expedited shipping and all of that, do you think probably the September quarter is kind of the worst of FX and all those headwinds and things? Or is there a little bit of timing delays due to your contractual purchase commitments that you do, that maybe your suppliers are looking at higher costs and you're benefiting from some lower contracts or maybe that has already caught up? If you could give us some insights on the kind of longer-term nature of the directions or the gross margin impacts." }, { "speaker": "Luca Maestri", "text": "Jim, I would say we provide guidance for the current quarter. But if we look ahead, there's always a couple of elements in gross margin that are a bit outside of our control and we need to be mindful of that. One of them is the foreign exchange environment. That is having an impact already for the September quarter, had an impact on June. And obviously, strong dollar tends to be a headwind for us. As you know, we have a hedging program and so we mitigate that impact. But over time, those hedges roll off and so it becomes more challenging for us. We'll see what happens with foreign exchange rates over time. That is going to be a variable that we need to track. The other one that has an impact on the aggregate gross margin is our mix of products and services. As you know, they have different margin profiles for very different reasons, different businesses, even different accounting treatment at times. And so that is also something that we will need to track over time. What matters to us, I think it goes back to Tim was saying earlier, is we want to make sure that people love our products and services, and we want all of them to be equally successful in the marketplace. Certainly, as you've seen over the last year, we've had a significant expansion in gross margins in spite of very difficult economic circumstances from COVID to inflation, interest rates going up and our margins have expanded. From a commodity standpoint, I think you were asking a question around components. Commodities are behaving okay. We're seeing some price pressure on some silicon components. But other than that, we've -- actually commodities are behaving well." }, { "speaker": "James Suva", "text": "Congratulations to you and all your team members." }, { "speaker": "Tim Cook", "text": "Thank you." }, { "speaker": "Operator", "text": "We'll take our next question from Krish Sankar with Cowen and Company." }, { "speaker": "Krish Sankar", "text": "And Tim, I apologize, it's also macro-related. You mentioned that it impacted digital advertising within Services. I'm just kind of curious, if the macro does worsen, do you worry about subscriber growth, App Store purchases, et cetera? And conversely, are there any parts of the Service business that you consider recession-proof, like maybe a buy now, pay later or something else? And then I have a quick follow-up for Luca." }, { "speaker": "Tim Cook", "text": "We have incorporated all of our thoughts in the guidance that Luca gave, which says that we think in the aggregate, we're going to accelerate revenues in the September quarter as compared to the June quarter and will decelerate on the Services side. And so we see the digital advertising cloud, if you will, continuing in the current quarter." }, { "speaker": "Krish Sankar", "text": "Got it, got it. Very helpful. And then a quick follow-up on the lockdown in China during the June quarter. Do you actually see any noticeable negative effects on your App Store revenue for the region or any positive effects like maybe more gaming downloads?" }, { "speaker": "Tim Cook", "text": "China had very good results on Services last quarter. And so they grew strong double digit better than the company average, and they set a new June quarter revenue record during the quarter." }, { "speaker": "Tejas Gala", "text": "Thank you. A replay of today's call will be available for 2 weeks as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are 888-203-1112 or 719-457-0820. Please enter confirmation code 8820355. These replays will be available by approximately 5 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us." }, { "speaker": "Operator", "text": "This concludes today's conference. We appreciate your participation." } ]	Apple Inc.	24,937
AAPL	2	2,022	2022-04-28 17:00:00	Operator: Good day and welcome to the Apple Q2 FY 2022 Earnings Conference Call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please, go ahead. Tejas Gala: Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that we'll open the call to questions from analysts. Please note that some of the information you'll hear during today's discussion will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information please refer to the risk factors discussed in Apple's most recently filed annual Report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook: Thank you, Tejas. Good afternoon, everyone, and thank you for joining us today. Apple is proud to report another record quarter, with a March quarter revenue record of $97.3 billion, up 9% from a year ago and better than we anticipated. iPhone, Mac and Wearables, Home and Accessories had their best ever March quarter and Services set an all-time record on the strength of subscription growth over the past year. Before I get into details, I want to take a moment to acknowledge the humanitarian tragedy unfolding in Ukraine. We're continuing to do everything we can to support our teams in the region and we are donating to humanitarian efforts on the ground. We've also committed to donating products to support refugees arriving here in the United States. I also want to speak to the unpredictable nature of the pandemic. We are excited to be welcoming employees back to the offices in the US and Europe. At the same time, we are monitoring COVID-related disruptions in China. Our thoughts are with all those in the path of the virus and we remain as committed as ever to doing our part to help protect people and their communities. These times remind us that we cannot know what the future may hold. But they remind us too, that technology infused with humanity makes a real difference in the world. And that's where our focus has remained, on driving the innovations that can enrich people's lives. Throughout the quarter, Apple continued its streak of unparalleled innovation at an unmatched pace. With Apple Silicon our teams are pushing the limits of what we once thought possible and we are seeing leaps and bounds in performance and efficiency. Last month we announced another breakthrough with M1 Ultra, the world's most powerful chip for a personal computer. The incredible customer response to our M1-powered Macs helped propel a 15% year-over-year increase in revenue, despite supply constraints. We now have our most powerful Mac lineup ever, with the addition of the entirely new Mac Studio. Paired with the new studio display, a 5K resolution display equipped with its own A13 Bionic chip, this new desktop and display transform any workspace into a creative powerhouse. As we release the groundbreaking M1 Ultra, we also expanded our iPhone offerings adding two beautiful green finishes to the iPhone 13 lineup and introducing the new 5G-enabled iPhone SE, which is great for our existing users who want a smaller iPhone and a great value for people buying an iPhone for the first time. They love how much power and performance we've injected into such an affordable device and rave about its incredible camera and its lightning fast speeds. In the March quarter, iPhone revenue grew 5% over the previous year despite a challenging compare as we saw strong demand from our customers for the iPhone 13 family. And with the all-new iPad Air supercharged by M1, iPad brings more power and more versatility across the entire iPad lineup. For customers around the world, iPad continues to be essential for education, creativity and entertainment. That's why we're continuing to see such a strong demand for iPad even while navigating the significant supply constraint we predicted at the start of the quarter. Turning to Wearables Home and Accessories, we are pleased to see these products continue to delight our users growing 12% year-over-year. Customers are enthusiastically taking charge of their health with Apple Watch Series 7 and Apple Watch SE. The rich sound, beautiful colors and compact design of HomePod mini continue to make it a hit with customers. And there's still no better companion to Apple Music than AirPods with spatial audio that transforms the way we listen putting our customers right in the center of the music. The seamless integration of hardware software and services is at the center of our work and philosophy at Apple. Apple Services are designed to be easy to use with expert curation that brings our users compelling content from talented developers, creators, storytellers and artists. These principles are reflected in all of the services we've developed which continue to generate incredible enthusiasm from our customers. Services revenue rose to $19.8 billion in the March quarter reflecting a 17% increase from a year ago. We were especially excited to cheer on CODA as it won the Academy Award for Best Picture making Apple TV+ the first streaming service to win in this category. We were honored to be stewards of this incredibly powerful deeply moving film. In a little over two years Apple TV+ shows and movies have earned over 240 awards and more than 960 nominations from Severance to WeCrashed to Pachinko new Apple originals are connecting with audiences and earning praise from critics. We're also winning over sports fans with Friday Night Baseball, which debuted earlier this month and They Call Me Magic, a four-part documentary that premiered last week tracing the life of the iconic Magic Johnson. Fitness+ is helping users channel their inner athlete with a range of workout routines for any fitness level. We recently introduced a postpartum routine designed by mothers for mothers. And with our Apple heart and movement study, we are helping researchers glean new insights into cardiovascular fitness. As our products and services entertain customers and help them stay healthy, we're also working to make their lives easier. Arizona for example is the first state to enable its citizens to securely add their driver's license and state IDs to Apple Wallet. More states in the territory of Puerto Rico will soon follow. We've also announced plans to introduce Tap to Pay on iPhone a simple and secure way for businesses to accept contactless payments launching across the US later this year. To meet the needs of customers wherever they are, our Apple retail teams are constantly adapting to better serve them. We opened a new store in the United Arab Emirates this quarter at a unique waterfront location with panoramic views of the Abu Dhabi skyline. And earlier this month we opened a new store in Korea, our third and largest store in the heart of Seoul. And across the US we marked the return of in-person today at Apple Sessions with a special program featuring music from pop icon Lady Gaga. I'd like to thank our team members working in Apple stores, customer care centers, channel partner stores and our Apple Care teams for bringing customers the best of Apple. As we look to the environment, we are making good progress on our commitment to achieve carbon neutrality across our products and supply chain by 2030. Through our Green Bonds program, we're investing in breakthrough technologies like low-carbon aluminum which we will be integrating into the new iPhone SE. And we were pleased to announce recently that we've nearly doubled the number of our top suppliers who have committed to accelerating the transition to clean energy. We are also investing in renewable energy projects in communities most impacted by climate change around the world. As we do our part to protect our planet, we're also prioritizing people. As part of our long-standing commitment to inclusion and diversity, we're continuing to build a better, stronger Apple, rooted in a culture where everyone belongs. Last month we published an update on the progress we've made with inclusion and diversity at Apple. We've hired more women than ever into leadership roles. And in the US nearly 60% of all leadership openings were filled by people from underrepresented communities in 2021. We also recently announced a $50 million Supplier Employee Development Fund that will help workers in our supply chain discover additional educational opportunities and build new skills. And through our Racial Equity and Justice initiative, we're continuing to advance our work to support underrepresented communities and help build a more just and equitable world. Before I hand it over to Luca, I want to acknowledge the challenges we are seeing from supply chain disruptions driven by both COVID and silicon shortages to the devastation from the war in Ukraine. We are not immune to these challenges, but we have great confidence in our teams, in our products and services and in our strategy. Fundamentally our work is about making technology that enriches people's lives and unlocks the full creative potential of humanity. And though the twists and turns of the future may be uncertain what is certain is that we will never stop striving to be a force for good in the world in everything we do and everything we are. With that I'll turn it over to Luca. Luca Maestri: Thank you, Tim and good afternoon everyone. We are pleased to report very strong financial results for the March quarter during which we set a revenue record of $97.3 billion, up 9% year-over-year. We also set new March quarter records in the Americas, in Europe and in Greater China. On the product side, revenue was $77.5 billion, up 7% over a year ago and a March quarter record. We grew in each of our product categories except iPad, which remains significantly supply constrained throughout the quarter. And we set March quarter records for iPhone, Mac and Wearables Home and Accessories. This level of sales performance combined with unmatched customer satisfaction and loyalty, helped our installed base of active devices, reach an all-time high for all major product categories, as well as geographic segments. Our Services set an all-time revenue record of $19.8 billion, up 17% over a year ago, with March quarter records in every geographic segment and services category. Company gross margin was 43.7%, down 10 basis points from last quarter. A seasonal loss of leverage and unfavorable foreign exchange were partially offset by favorable mix. Products gross margin was 36.4%, down 200 basis points sequentially, mainly driven by seasonal loss of leverage and FX. Services gross margin was 72.6%, up 20 basis points sequentially due to a different mix. Operating cash flow of $28.2 billion, net income of $25 billion and diluted earnings per share of $1.52 were all March quarter records. These strong March quarter results capped a record first half of the fiscal year in the midst of a challenging macroeconomic environment. We generated over $220 billion in revenue growing 10% year-over-year and set all-time records for iPhone, Mac, Wearables Home and Accessories and Services. These record sales results drove strong double-digit growth in operating income and earnings per share. Let me now get into more detail for each of our revenue categories during the March quarter. iPhone revenue grew 5% year-over-year to a March quarter record of $50.6 billion despite supply constraints. Thanks to our continued strong customer response to our iPhone 13 family and the launch of our new iPhone SE. We set March quarter records in both developed and emerging markets and the latest survey of US consumers from 451 Research indicates iPhone customer satisfaction of 99% for the iPhone 13 family. As a result of this level of sales performance combined with unmatched customer loyalty, the iPhone active installed base reached a new all-time high across all geographies. For Mac, revenue of $10.4 billion was a March quarter record despite supply constraints with 15% year-over-year growth, driven by strong demand for our M1-powered MacBook Pro. As Tim mentioned earlier, our continued innovation and investment in Apple Silicon has clearly shown in our Mac results as the last seven quarters have been the best seven quarter ever for Mac. Our investment focus on Mac has also helped drive significant activity in our growing installed base. In fact, we had a March quarter record for upgraders, while at the same time, nearly half of the customers purchasing Mac were new to the product. iPad revenue was $7.6 billion, down 2% year-over-year due to continued supply constraints. Customer response to our iPad lineup including our new M1-powered iPad Air, remains very strong and our installed base of iPads reached a new all-time high during the quarter, with over half of the customers purchasing an iPad during the quarter being new to the product. Wearables, Home and Accessories set a March quarter record of $8.8 billion, up 12% year-over-year. And we set March quarter revenue records in both developed and emerging markets. In particular, our Wearables business has doubled in three years and is mainly the size of a Fortune 100 business, as we continue to attract many customers who are new to Wearables. For instance, Apple Watch continues to extend its reach, with over two-thirds of customers purchasing an Apple Watch during the quarter being new to the product. Turning to Services. As I mentioned we reached an all-time revenue record of $19.8 billion, up 17%, with all-time records for the App Store, Music, Cloud Services and Apple Care and March quarter records for video, advertising and payment services. These impressive results reflect the impact of our continued investment in improving and expanding our Services portfolio and the positive momentum that we're seeing on many fronts. First, our installed base has continued to grow, reaching an all-time high across each geographic segment and major product category. Next, we continue to see increased customer engagement with our services. Our transacting accounts, paid accounts and accounts with paid subscriptions, all reached all-time highs during the March quarter in every geographic segment. Also, paid subscriptions continued to show very strong growth. We now have more than 825 million paid subscriptions across the services on our platform, which is up more than 165 million during the last 12 months alone. And finally, as Tim highlighted before, we continue to improve the breadth and the quality of our current service offerings while launching new services. In the enterprise market, many businesses and government organizations continue to turn to Apple for the latest technologies, to deliver innovative services to customers and employees. In March, Alaska Airlines began to replace the conventional airport self-service kiosks with iPad Pros for faster passenger check-in and self bag drop. Also, last month, the Western Australia Police Force completed the world's first commercial deployment of CarPlay across their entire fleet of vehicles, to complement the iPhone 13 issued to each officer. This allows officers to access critical information faster on the road and enhance public safety for the community. We also unveiled the general availability of Apple Business Essentials in the US, adding a new subscription services designed to help small businesses manage every aspect of their Apple device life cycle. Let me now turn to our cash position. As we continue to generate very strong cash flow, we ended the quarter with $193 billion in cash and marketable securities. We repaid $3.8 billion in maturing debt, while increasing commercial paper by $2 billion, leaving us with total debt of $120 billion. As a result, net cash was $73 billion at the end of the quarter. We returned nearly $27 billion to shareholders, during the March quarter. This included $3.6 billion in dividends and equivalents and $22.9 billion through open market repurchases of 137 million Apple shares. We also retired an additional 5 million shares in the final settlement of our 18th ASR. Given the continued confidence we have in our business now and into the future, today our Board has authorized an additional $90 billion for share repurchases, as we maintain our goal of getting to net cash neutral, overtime. We're also raising our dividend by 5% to $0.23 a share and we continue to plan for annual increases in the dividend going forward. As we move ahead into the June quarter, I'd like to review our outlook which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near-term, we are not providing revenue guidance, but we are sharing some directional insights, based on the assumption that the COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter. We believe our year-over-year revenue performance during the June quarter will be impacted by a number of factors. Supply constraints caused by COVID-related disruptions and industry-wide silicon shortages are impacting our ability to meet customer demand for our products. We expect these constraints to be in the range of $4 billion to $8 billion which is substantially larger than what we experienced during the March quarter. The COVID-related disruptions are also having some impact on customer demand in China. With respect to foreign exchange, we expect it to be a nearly 300 basis point headwind to our year-over-year growth rate. Additionally, we paused, all sales in Russia during the March quarter. This will impact our year-over-year growth rate by approximately 150 basis points. Specifically related to Services, we expect to continue to grow double-digits, but decelerate from our March quarter performance, due to some of the factors I just described. We expect gross margin to be between 42% and 43%. We expect OpEx to be between $12.7 billion and $12.9 billion. We expect OI&E to be around negative $100 million excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16%. Finally, reflecting the dividend increase I mentioned earlier, today our Board of Directors has declared a cash dividend of $0.23 per share of common stock, payable on May 12th 2022 to shareholders of record as of May 9th, 2022. With that, let's open the call to questions. Tejas Gala: Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please? Operator: Absolutely. We'll take our first question from Katy Huberty with Morgan Stanley. Katy Huberty: Yes. Thank you. Congrats on the quarter. A couple of macro-related questions, just given everything that's going on in the market, the first is on how you're thinking about consumer spending, as we see more stock market volatility, rising interest rates, inflation. What metrics are you watching either internal to your business or external at the macro level to understand whether you'll ultimately start to see some demand impact particularly on the product side of your business? And then, I have a follow-up. Tim Cook: Katy, hi, it's Tim. We're obviously monitoring our daily sales very closely. From an inflation point of view, we are seeing inflation. It is or was evident in our gross margin last quarter and in our OpEx last quarter and it is assumed in the guidance that Luca gave for this quarter as well. So we're definitely seeing some level of inflation that I think everybody is seeing. Katy Huberty: And how are – just as a follow-up to that how are you thinking about how that might impact the consumers in your business and whether it influences their ability to purchase at the same level? Tim Cook: Well we're monitoring that closely and we've sort of – but right now our main focus frankly speaking is on the supply side. Katy Huberty: Okay. And as it relates to that in China, how should we think about lockdowns from an impact on supply and an impact on demand? And what products in your portfolio should we expect to be most impacted? Thank you. Tim Cook: Yes. Good question. For Q2 so the quarter that we just finished, the restrictions in China had not started yet. And so Q2, we did have supply constraints. They were significantly lower than what we had experienced during the December quarter. They were driven by industry-wide silicon shortages. And specifically, the issue that I talked about on previous calls with the legacy nodes. But looking ahead, we see two causes of supply constraints. One is the COVID-related disruptions; and there's the industry-wide silicon shortages that will continue. We've estimated the constraints to be in the range of $4 billion to $8 billion. And if you – these constraints are primarily centered around the Shanghai corridor. And the – on a positive front, almost all of the affected final assembly factories have now restarted. And so the range – the $4 billion to $8 billion range reflects various ramps of getting back up and running. We're also encouraged that the COVID case count that's been reported in Shanghai has decreased over the last few days. And so there's – there's some reason for optimism there. Katy Huberty: Thank you. Pretty amazing how the team has navigated all the cross currents. Congrats again on the quarter. Tim Cook: Thanks so much. Tejas Gala: Thank you, Katy. Can we have a next question please. Operator: Thank you. We'll take our next question from Amit Daryanani with Evercore. Amit Daryanani: Good afternoon. Thanks for taking my questions. I guess I have two as well. First of all I was hoping you just touched a little bit on the geographic growth vectors that you saw. And I think Americas grew really well 19%, 20%. But Europe and China had much more muted growth if you may. I know your compares are fairly difficult but I'm curious if anything you would call out in terms of spillover effect on the macro side from Russia, Ukraine in Europe that's seeing some impact to consumer spend or even in China. Just help us understand what happened geographically there. Luca Maestri: So Amit, as you said in the Americas, we had a very strong quarter up 19% very happy across the board there. Europe, again was a really good quarter for us. We grew 5% in spite of the fact that of course as you know during the month of March, we paused our sales in Russia. So we had an impact to our sales results there for a month of the quarter. But a number of European countries particularly in Western Europe did really-really well for us. And so it was a very good quarter for us pretty much in line with our expectations. Americas was better than our expectations. China was again a March quarter record for us. Keep in mind and this affected every geographic segment for us the different launch timing for the iPhone this year versus a year ago had an impact on the March quarter results because we launched the product later a year ago than we did this year. So some of the channel fill for the new products happened during the March quarter a year ago. Japan and Asia Pacific were affected by foreign exchange. Japan would have grown in line with company average in constant currency terms. Asia Pacific as well was affected by foreign exchange with the dollar appreciating against most currencies. And then again this difference in the launch timing for the iPhone made a difference. Keep in mind again the supply constraints that we had during the quarter our results would have been obviously better without the supply constraints. Overall we felt very good about the performance around the world. Amit Daryanani: If I could just follow up on the supply chain the $4 billion to $8 billion impact that you folks talked about. Do you think this is demand that's deferred out, or demand that's essentially destroyed because you have a product cycle that's going to come out in the year at some point soon this year? How do you think about demand deferred versus demand destroyed on that front? And then is there a sense of which product categories are most impacted by this versus not? Tim Cook: It will affect most of the product categories. And in terms of whether it's -- whether we can recapture or not we believe that there's a percentage of it that is recapturable and a percentage of it that is likely not where somebody needs something quickly. And that ratio or that percentage is very difficult to estimate. We obviously, try to do that internally in order to demand plan but it's not something that we share. Amit Daryanani: Got it. Thank you. Tejas Gala: Thanks Amit. Can we have the next question please. Operator: We'll take our next question from Chris Caso with Raymond James. Chris Caso : Yes. Thank you. Good evening. Also just wanted to dig in on the supply constraints a bit. And I guess one of the things you said is that the $4 billion to $8 billion range reflects some reopening of facilities during the quarter. I know obviously it's tough to predict as you go forward into the second half of launch of new products. But at that point would you expect the constraints to still be mainly on the component side? And then hopefully if things don't get worse in China then the facilities are open and the constraints are only the component constraints as you go into the second half of the year. Tim Cook: Yes. Chris it's hard to answer a question about unannounced products. And so I'll try to not do that. But the— Chris Caso : For all products yes. Tim Cook: The $4 billion to $8 billion is simply as I had mentioned that if you look at the Shanghai corridor -- we have some final assembly plants in this area. And almost all of them have restarted as the good news of it working with local officials. But we planned various ramps for these. And that's the range of 4% to 8% that we've estimated. Kobi is difficult to predict. For sure for sure. Chris Caso: As a follow-up I wanted to also follow on some of your comments regarding inflation and how Apple is dealing with it. Obviously component costs have been going up in many different areas. And then specifically in the semiconductor side costs have been going up but perhaps for some different reasons because of the additional cost of going up to new process nodes that it's higher than it has been in the past. How is Apple planning to deal with that? And is it possible for you to get through that without either raising prices on your product or affecting gross margins? Tim Cook: Well, some of what you said is in the results for the last quarter that we've announced. And obviously we've put our current thinking in the current quarter guidance that Luca listed earlier. There are component costs that are falling and ones that are rising. And so not all of them are moving in the same direction. And so we really try to manage to the net of these. And I think we're doing a reasonable job currently navigating the what is a challenging environment. Tejas Gala: Thanks Chris. Can we have the next question please? Operator: Thank you. We'll take our next question from David Vogt with UBS. David Vogt: Great. Thank you guys for taking my question. I just want to dig in a little bit on the product disruption the $4 billion to $8 billion. In the past you kind of gave us a sense for how it would affect each different product lines. And should we expect it to have similar pro rata impacts? And is there an opportunity to maybe reallocate resources to limit maybe some of the impact on the iPhone line and then maybe versus the iPad line? And then I have a quick follow-up. Tim Cook: It will affect most of the product categories. And we obviously will look to do any kind of optimization that we can do to minimize the effect on the user. David Vogt: Great. And then maybe just as a follow-up. You talked about potential COVID-related demand issues in China and taking at 150 basis points from Russia. But when you look at the other geographies is there anything that you can share with us whether it's in Western Europe or the US that you're seeing from a demand perspective that may be sort of out of the ordinary or outside of sort of the disruptions and the lack of product demand seems to be sort of where you would think it would be at this point in the cycle. Thank you. Tim Cook: We were happy with the iPhone growth last quarter, particularly when you think about the comp that it was going against because we had very different timing on the launches in the year ago quarter where we launched in Q1. And therefore naturally Q2 is at a different place on the new product curve. And so, it was a very difficult comp. And so we were pleased with it. And as Luca said, the Americas geography did quite well last quarter. And the US, of course, is the major geography within there. And so the US was quite strong last quarter. David Vogt: Thank you. Tejas Gala: Thanks, David. Can we have the next question please? Operator: We'll take our next question from Jim Suva with Citigroup. Jim Suva: Thank you. Tim and your entire company has done a great job at navigating through all the issues in the past several years whether it be COVID, power outages, trade wars, shipping challenges and all that. When we hopefully someday get past all of these and the supply constraints in society and turmoil hopefully across the world, do you start to reconsider the way you do the supply chain albeit just-in-time ordering and outsourcing so much of your chips? Or do you actually consider like holding more buffer inventory internally, because right now letting $4 billion to $8 billion go away it'd be nice to have that to be able to sell. So do you consider holding more buffer inventory or maybe even doing your own chips by outsourcing your own chips to control them more, or how should we think about strategically when hopefully the world is in a better place from today? Tim Cook: Well, I'm looking forward to that day as I know all of you are. Our supply chain is truly global. And so the products are made everywhere. And we do a lot in the U.S. We'll probably be doing even more here as more chips are produced here. And we continue to look at optimizing. We learn something every day and make changes. But when you back up and kind of zoom out and look to see how the supply chain has done within the environment that you eloquently talked about, I think it's been very resilient with -- the top issue we've had clearly is the silicon shortage that I think everybody is struggling with. And I think we've done a really good job of managing through the COVID piece of it. And so -- but we are learning and we're making some changes as we go, we don't have a tenure. And so, to the degree that we learn something that we should change, you can bet that we're doing that. In this business you don't want to hold a ton of inventory. And so you want to work on cycle times and so forth to do things very quickly and take strategic inventory in places where you need to buffer for interruptions and so forth. And so we're constantly thinking about where those places are. In today's world it's not really possible for us to have buffer on silicon. And so, today silicon rolls off the fab and it's into a final assembly plant very, very quickly and we try to make that as short a time as possible. Jim Suva: And then my quick follow-up. We've been talking about supply chain issues for multiple quarters now. Are you kind of hearing from your suppliers that maybe later half of this year, or is it actually going to go into kind of 2013 for some closer equilibrium time period? Tim Cook: Yeah. I wouldn't – you're talking about for the silicon shortage in particular I assume. I don't want to predict that, because the – that entails knowing how worldwide demand and supply are for the whole – for industries outside of even the industry we're in. And I don't proclaim to be an expert in that. That also heavily is influenced by how strong the economies are in the different markets. And so I think there are varying levels of outcomes. And what we're focused on is doing – trying to do very well regardless of how that question is answered. Jim Suva: Thank you. And congratulations to you and your entire team. Tim Cook: Thanks so much. Tejas Gala: Thanks, Jim. Can we have the next question, please. Operator: We'll take our next question from Samik Chatterjee with JPMorgan. Samik Chatterjee : Hi. Thanks for taking my question and congrats on the results as well. I'll stick to two more micro level questions here. Firstly, Tim you talked about the iPhone SE three demand that you the product that you just launched. I was hoping you could compare what you're seeing in terms of momentum to previous iPhone SE cycles? Particularly I think in the past North America has been the largest region in terms of demand what are you seeing with the current product in terms of demand by geography? And I have a quick follow-up for Luca? Thank you. Tim Cook: Yeah. We don't get to that level of granularity because we view it to be sensitive data that our competitors would love to have. And so I'm going to punt on answering that question. I would just say that, when you zoom out and look at iPhone, as a total we could not be happier with the iPhone 13 family of products and the strength we've seen for this cycle. And really, it's those products that have powered the line and given us the overall results that we've had on iPhone, which for the first half the revenues were $120 billion and we feel very, very good about those results. Samik Chatterjee: And my follow-up for Luca. Luca we are seeing sort of a settling in terms of growth rate for the Services business on the tough comps that you have. We're also seeing the gross margins there settling around this sort of 72% range. And I understand there are a lot of moving pieces beneath that. But is this sort of a good range for Services longer term, or are there sort of moving pieces there that as they scale they can take – there is an opportunity for more upside? Luca Maestri : Well we feel really great about the momentum for our Services business. I was looking at the absolute numbers here. This run rate of almost $20 billion is essentially double what we had just four years ago. So we've done really, really well with Services. We have a lot of momentum for a variety of reasons. The first one is the fact that our installed base of active devices continues to grow very nicely. And so that is obviously a big engine for our Services business. The second thing is that the level of engagement that we see on our platform continues to grow. We have more transacting accounts, more paying accounts, more accounts with subscriptions. The absolute amount of paid subscriptions on our platform is pretty impressive 825 million. It's an increase of 165 million in the last 12 months alone. So you can tell that this is great growth. And of course, as you've seen over the last few years, we've added a lot of new services and we plan to add new services and new features that we believe that our customers would love. And so we think that's a great -- absolute great momentum. The growth rates can change a bit, especially during COVID because we've gone through some cycles of lockdowns and then reopenings and so on. And so sometimes the comps can be a bit deceiving. We are looking at it from the lens of continuing to satisfy our customers, adding to the portfolio, improving the quality of the services and that has served us very well, because in the last 12 months, we've generated $75 billion of Services revenue. And you've seen the margins are obviously accretive to company margin. So we feel good, we feel good about the Services business. I mentioned in my prepared remarks that the growth rate for the June quarter, we expect it to be less than the 17% that we've reported in March for some of the reasons that I described. Of course, foreign exchange is an issue with the dollar being strong at this point. And of course we paused, our sales in Russia. So we need to take that into account. But in general, when we look across the board, we set all-time records and quarterly records for each one of our categories. Samik Chatterjee: Thank you. Tejas Gala: Thanks, Samik. Can we have the next question please. Operator: We'll take our next question from Krish Sankar with Cowen and Company. Krish Sankar: Yeah. Hi. Thanks for taking my question and congrats on the really strong results. I have two questions too and I do apologize. The first one is on supply constraints. Luca, if I tried to read the deal based on June quarter guidance revenue is being impacted kind of implies year-over-year down revenue. And you also spoke about a $4 billion to $8 billion supply constraint which is a large amount compared to the revenue. And I understand you have the supply constraints and the China shutdowns. I'm just kind of curious, do you think the last three quarters Apple supply chain had a better buffer inventory of semis that kind of got used up and now you're kind of more tied to whatever the true supply contains of legacy semis, or is there something else going on? And then I had a follow-up. Luca Maestri: What has happened obviously during COVID has change over the quarters. Recently, for example during the March quarter, the constraints that we had were limited to silicon shortages. When we are giving out this range of $4 billion to $8 billion, it's not only silicon but it's the restrictions in China that we're seeing right now. So they are different. There's additional constraints at this point that we are seeing because of the COVID situation. So it's -- that is the fundamental difference there. Krish Sankar: Got it. Got it. Very helpful. And then as a quick follow-up with the shutdowns, especially in places like China, have you seen actually the App Stores or your Services business actually inflect positively, or is it too short a time frame to make a judgment call on that? Luca Maestri: Yes, I think, it's early to tell. The restrictions in China started at the very end of March. So, it's very, very early to tell. Krish Sankar: Got it. Got it. Thank you Luca. Thank you very much. Tejas Gala: Thanks, Krish. Can we have the next question, please? Operator: We'll take our next question from Wamsi Mohan with Bank of America. Wamsi Mohan : Yes. Thank you. Luca, thanks for the color around the impacts to the revenue guidance. But I was wondering if you could share a if you expect to grow overall revenue in the June quarter on a year-on-year basis. And just to be clear on these impacts that you gave those are on a year-on-year basis. Can you also tell us how much FX is a headwind if any on a quarter-on-quarter basis and incremental Russia impact quarter-on-quarter basis and incremental supply chain impact also on a quarter-on-quarter basis? And I have a follow-up. Luca Maestri: Well, as we said, we're not guiding to a specific revenue number. And -- but just to repeat what I said during the prepared remarks, we're having supply constraints that are caused by the COVID-related disruptions and by the silicon shortages. And that is what is creating the constraints. We expect them to be in the range of $4 billion to $8 billion. This is substantially larger than what we've had during the March quarter. Again, let me repeat the COVID-related disruptions did not affect the March quarter. So you need to keep that in mind. With respect to foreign exchange, we expect it to be nearly 300 basis points headwind. It was about 200 basis points headwind during the March quarter. For Russia, we said that the impact on a year-over-year basis is approximately 150 basis points, that reflects the three months of the quarter. We paused sales in Russia at the beginning of March. So it was a partial impact on the March quarter. So, obviously, on a sequential basis, it's an incremental factor to keep in mind. I would say on the positive side here is that the demand for both our products and services is solid. Tim has mentioned a number of times the iPhone 13 family is having a really strong year. We -- when we look at top-selling smartphones around the world, we've had pretty incredible results during the March quarter. The top six models in the United States are iPhones, the top four in Japan, the top five in Australia, five of the top six in urban China and so on and so forth. So the iPhone 13 has been truly a global success. And as you know and as you can tell even from our website, most of the iPad and Mac models are constrained today. They've been constrained for several quarters, because the demand is very good for those products. And the Services business as you know is growing double digits. So that's what gives us confidence for the June quarter and going forward. Wamsi Mohan : Okay. Thank you, Luca. And if I could follow-up, Tim you're in a really enviable place of being pretty far from your net cash neutral objective. At the same time, you're generating a significant amount of cash flow every year. So your capital return strategy has been an extremely successful program in the past, but $90 billion is 3% of your market cap. And on the other hand there are just a lot of assets that arguably have a lot of synergies with Apple in the health care space, the fitness area like Teladoc or [indiscernible] or Netflix in the content area. Why is this not the right time for Apple to perhaps look at such assets instead of buying back stock or maybe do both? Tim Cook: We're always looking and we continue to look. But we would only acquire something that were strategic. We acquire a lot of smaller companies today and we'll continue to do that for IP and for great talent. And -- but we don't discount doing something larger either if the opportunity presents itself. And so -- but I don't want to go through my list with you on the phone, but we're always looking. Wamsi Mohan: Thanks. Tejas Gala: Great. Thanks Wamsi. Can we have the next question please? Operator: We'll take our next question from Kyle McNealy with Jefferies. Kyle McNealy: Hi, thanks very much for the question. This one is regarding Mac. Great quarter with the results by the way, some exciting products coming out for sure. We're noticing that there's the lead times are longer for Mac's now ordered today with some available now but many not shipping until June. Just wanted to get your insight on how much of that you think is driven by the strong March results with the product launch and likely sellout conditions versus just real tightness in the supply chain? And the obvious follow-on to that is when do you expect you might catch up and get Mac lead times back within a week? Tim Cook: Well, we're working hard. We've got lots of customers that we want to get the new Macs too. And so we're working hard on them. They are a result of the combination of the COVID disruptions and the silicon shortage that we've talked about before. And when we might remedy that, I don't -- we're not really forecasting when we can be out of the silicon shortage, so that would be a difficult answer. I think the COVID piece of it I hope is a transitory kind of issue. And so I would hope that it would get better over time. Kyle McNealy: Great. Thanks a lot. Tim Cook: Yeah. Tejas Gala: Great. Thanks Kyle. Can we have the next question please? Operator: Thank you. We’ll take our next question from Ben Bollin with Cleveland Research. Ben Bollin: Good afternoon, everyone. Thanks for taking the question. The first one is on services. Luca, I was hoping you could share a little bit of perspective on maybe how much of the services contribution is purely consumer versus enterprise? And how you think about the longer term opportunity to monetize the enterprise community? And then Tim for you as a follow-up, I think Jim Suva had asked a question earlier about some of your strategy. I was curious how strategy might have evolved since everything has been going on, what changes you might have seen as of late with respect to freight and some of the geographic production footprint? And any evolution that has happened as of late? Thank you. Luca Maestri: So Ben on the services side, of course, the vast majority of what we do in services is to final consumers. We do understand and appreciate the fact that the enterprise is a great opportunity for us. Very recently, for example, we launched this new subscription service here in the United States which we call Apple Business Essentials where essentially we provide support to small and medium-sized businesses in terms of 24/7 support device management for small business owners which we think small companies will value and appreciate. Obviously, we sell Apple Care to enterprises already today. But we know enterprise in general as a market is a very interesting market for us and we're putting a lot of effort and focus on it and we believe we have really good opportunities to grow. Tim Cook: Ben, you brought up freight. Freight is a huge challenge in today both from an inflationary point of view and from an availability point of view. And so right now the focus is on moving the freight to customers any way that we can do that. Over time, we'll do that much more efficiently. And I would hope that the fundamental rates reset some both -- and I'm talking about both ocean and air. And so both of them have come under some significant inflationary pressure partly due to COVID and some other reasons as well I would guess. And in terms of geo production we are constantly making tweaks here and there. And I don't want to go into the details of those because we view it as to be sensitive kind of information, but we're constantly making moves to optimize in the current environment. Ben Bollin: Thank you both. Tim Cook: Thank you. Tejas Gala: Thank you, Ben. A replay of today's call will be available for two weeks on Apple Podcast as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are in 888-203-1112 or 719-457-0820. Please enter confirmation code 1807633. These replays will be available by approximately 5 P.M. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. Operator: This concludes today's conference. We appreciate your participation.	[ { "speaker": "Operator", "text": "Good day and welcome to the Apple Q2 FY 2022 Earnings Conference Call. Today's call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please, go ahead." }, { "speaker": "Tejas Gala", "text": "Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that we'll open the call to questions from analysts. Please note that some of the information you'll hear during today's discussion will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information please refer to the risk factors discussed in Apple's most recently filed annual Report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thank you, Tejas. Good afternoon, everyone, and thank you for joining us today. Apple is proud to report another record quarter, with a March quarter revenue record of $97.3 billion, up 9% from a year ago and better than we anticipated. iPhone, Mac and Wearables, Home and Accessories had their best ever March quarter and Services set an all-time record on the strength of subscription growth over the past year. Before I get into details, I want to take a moment to acknowledge the humanitarian tragedy unfolding in Ukraine. We're continuing to do everything we can to support our teams in the region and we are donating to humanitarian efforts on the ground. We've also committed to donating products to support refugees arriving here in the United States. I also want to speak to the unpredictable nature of the pandemic. We are excited to be welcoming employees back to the offices in the US and Europe. At the same time, we are monitoring COVID-related disruptions in China. Our thoughts are with all those in the path of the virus and we remain as committed as ever to doing our part to help protect people and their communities. These times remind us that we cannot know what the future may hold. But they remind us too, that technology infused with humanity makes a real difference in the world. And that's where our focus has remained, on driving the innovations that can enrich people's lives. Throughout the quarter, Apple continued its streak of unparalleled innovation at an unmatched pace. With Apple Silicon our teams are pushing the limits of what we once thought possible and we are seeing leaps and bounds in performance and efficiency. Last month we announced another breakthrough with M1 Ultra, the world's most powerful chip for a personal computer. The incredible customer response to our M1-powered Macs helped propel a 15% year-over-year increase in revenue, despite supply constraints. We now have our most powerful Mac lineup ever, with the addition of the entirely new Mac Studio. Paired with the new studio display, a 5K resolution display equipped with its own A13 Bionic chip, this new desktop and display transform any workspace into a creative powerhouse. As we release the groundbreaking M1 Ultra, we also expanded our iPhone offerings adding two beautiful green finishes to the iPhone 13 lineup and introducing the new 5G-enabled iPhone SE, which is great for our existing users who want a smaller iPhone and a great value for people buying an iPhone for the first time. They love how much power and performance we've injected into such an affordable device and rave about its incredible camera and its lightning fast speeds. In the March quarter, iPhone revenue grew 5% over the previous year despite a challenging compare as we saw strong demand from our customers for the iPhone 13 family. And with the all-new iPad Air supercharged by M1, iPad brings more power and more versatility across the entire iPad lineup. For customers around the world, iPad continues to be essential for education, creativity and entertainment. That's why we're continuing to see such a strong demand for iPad even while navigating the significant supply constraint we predicted at the start of the quarter. Turning to Wearables Home and Accessories, we are pleased to see these products continue to delight our users growing 12% year-over-year. Customers are enthusiastically taking charge of their health with Apple Watch Series 7 and Apple Watch SE. The rich sound, beautiful colors and compact design of HomePod mini continue to make it a hit with customers. And there's still no better companion to Apple Music than AirPods with spatial audio that transforms the way we listen putting our customers right in the center of the music. The seamless integration of hardware software and services is at the center of our work and philosophy at Apple. Apple Services are designed to be easy to use with expert curation that brings our users compelling content from talented developers, creators, storytellers and artists. These principles are reflected in all of the services we've developed which continue to generate incredible enthusiasm from our customers. Services revenue rose to $19.8 billion in the March quarter reflecting a 17% increase from a year ago. We were especially excited to cheer on CODA as it won the Academy Award for Best Picture making Apple TV+ the first streaming service to win in this category. We were honored to be stewards of this incredibly powerful deeply moving film. In a little over two years Apple TV+ shows and movies have earned over 240 awards and more than 960 nominations from Severance to WeCrashed to Pachinko new Apple originals are connecting with audiences and earning praise from critics. We're also winning over sports fans with Friday Night Baseball, which debuted earlier this month and They Call Me Magic, a four-part documentary that premiered last week tracing the life of the iconic Magic Johnson. Fitness+ is helping users channel their inner athlete with a range of workout routines for any fitness level. We recently introduced a postpartum routine designed by mothers for mothers. And with our Apple heart and movement study, we are helping researchers glean new insights into cardiovascular fitness. As our products and services entertain customers and help them stay healthy, we're also working to make their lives easier. Arizona for example is the first state to enable its citizens to securely add their driver's license and state IDs to Apple Wallet. More states in the territory of Puerto Rico will soon follow. We've also announced plans to introduce Tap to Pay on iPhone a simple and secure way for businesses to accept contactless payments launching across the US later this year. To meet the needs of customers wherever they are, our Apple retail teams are constantly adapting to better serve them. We opened a new store in the United Arab Emirates this quarter at a unique waterfront location with panoramic views of the Abu Dhabi skyline. And earlier this month we opened a new store in Korea, our third and largest store in the heart of Seoul. And across the US we marked the return of in-person today at Apple Sessions with a special program featuring music from pop icon Lady Gaga. I'd like to thank our team members working in Apple stores, customer care centers, channel partner stores and our Apple Care teams for bringing customers the best of Apple. As we look to the environment, we are making good progress on our commitment to achieve carbon neutrality across our products and supply chain by 2030. Through our Green Bonds program, we're investing in breakthrough technologies like low-carbon aluminum which we will be integrating into the new iPhone SE. And we were pleased to announce recently that we've nearly doubled the number of our top suppliers who have committed to accelerating the transition to clean energy. We are also investing in renewable energy projects in communities most impacted by climate change around the world. As we do our part to protect our planet, we're also prioritizing people. As part of our long-standing commitment to inclusion and diversity, we're continuing to build a better, stronger Apple, rooted in a culture where everyone belongs. Last month we published an update on the progress we've made with inclusion and diversity at Apple. We've hired more women than ever into leadership roles. And in the US nearly 60% of all leadership openings were filled by people from underrepresented communities in 2021. We also recently announced a $50 million Supplier Employee Development Fund that will help workers in our supply chain discover additional educational opportunities and build new skills. And through our Racial Equity and Justice initiative, we're continuing to advance our work to support underrepresented communities and help build a more just and equitable world. Before I hand it over to Luca, I want to acknowledge the challenges we are seeing from supply chain disruptions driven by both COVID and silicon shortages to the devastation from the war in Ukraine. We are not immune to these challenges, but we have great confidence in our teams, in our products and services and in our strategy. Fundamentally our work is about making technology that enriches people's lives and unlocks the full creative potential of humanity. And though the twists and turns of the future may be uncertain what is certain is that we will never stop striving to be a force for good in the world in everything we do and everything we are. With that I'll turn it over to Luca." }, { "speaker": "Luca Maestri", "text": "Thank you, Tim and good afternoon everyone. We are pleased to report very strong financial results for the March quarter during which we set a revenue record of $97.3 billion, up 9% year-over-year. We also set new March quarter records in the Americas, in Europe and in Greater China. On the product side, revenue was $77.5 billion, up 7% over a year ago and a March quarter record. We grew in each of our product categories except iPad, which remains significantly supply constrained throughout the quarter. And we set March quarter records for iPhone, Mac and Wearables Home and Accessories. This level of sales performance combined with unmatched customer satisfaction and loyalty, helped our installed base of active devices, reach an all-time high for all major product categories, as well as geographic segments. Our Services set an all-time revenue record of $19.8 billion, up 17% over a year ago, with March quarter records in every geographic segment and services category. Company gross margin was 43.7%, down 10 basis points from last quarter. A seasonal loss of leverage and unfavorable foreign exchange were partially offset by favorable mix. Products gross margin was 36.4%, down 200 basis points sequentially, mainly driven by seasonal loss of leverage and FX. Services gross margin was 72.6%, up 20 basis points sequentially due to a different mix. Operating cash flow of $28.2 billion, net income of $25 billion and diluted earnings per share of $1.52 were all March quarter records. These strong March quarter results capped a record first half of the fiscal year in the midst of a challenging macroeconomic environment. We generated over $220 billion in revenue growing 10% year-over-year and set all-time records for iPhone, Mac, Wearables Home and Accessories and Services. These record sales results drove strong double-digit growth in operating income and earnings per share. Let me now get into more detail for each of our revenue categories during the March quarter. iPhone revenue grew 5% year-over-year to a March quarter record of $50.6 billion despite supply constraints. Thanks to our continued strong customer response to our iPhone 13 family and the launch of our new iPhone SE. We set March quarter records in both developed and emerging markets and the latest survey of US consumers from 451 Research indicates iPhone customer satisfaction of 99% for the iPhone 13 family. As a result of this level of sales performance combined with unmatched customer loyalty, the iPhone active installed base reached a new all-time high across all geographies. For Mac, revenue of $10.4 billion was a March quarter record despite supply constraints with 15% year-over-year growth, driven by strong demand for our M1-powered MacBook Pro. As Tim mentioned earlier, our continued innovation and investment in Apple Silicon has clearly shown in our Mac results as the last seven quarters have been the best seven quarter ever for Mac. Our investment focus on Mac has also helped drive significant activity in our growing installed base. In fact, we had a March quarter record for upgraders, while at the same time, nearly half of the customers purchasing Mac were new to the product. iPad revenue was $7.6 billion, down 2% year-over-year due to continued supply constraints. Customer response to our iPad lineup including our new M1-powered iPad Air, remains very strong and our installed base of iPads reached a new all-time high during the quarter, with over half of the customers purchasing an iPad during the quarter being new to the product. Wearables, Home and Accessories set a March quarter record of $8.8 billion, up 12% year-over-year. And we set March quarter revenue records in both developed and emerging markets. In particular, our Wearables business has doubled in three years and is mainly the size of a Fortune 100 business, as we continue to attract many customers who are new to Wearables. For instance, Apple Watch continues to extend its reach, with over two-thirds of customers purchasing an Apple Watch during the quarter being new to the product. Turning to Services. As I mentioned we reached an all-time revenue record of $19.8 billion, up 17%, with all-time records for the App Store, Music, Cloud Services and Apple Care and March quarter records for video, advertising and payment services. These impressive results reflect the impact of our continued investment in improving and expanding our Services portfolio and the positive momentum that we're seeing on many fronts. First, our installed base has continued to grow, reaching an all-time high across each geographic segment and major product category. Next, we continue to see increased customer engagement with our services. Our transacting accounts, paid accounts and accounts with paid subscriptions, all reached all-time highs during the March quarter in every geographic segment. Also, paid subscriptions continued to show very strong growth. We now have more than 825 million paid subscriptions across the services on our platform, which is up more than 165 million during the last 12 months alone. And finally, as Tim highlighted before, we continue to improve the breadth and the quality of our current service offerings while launching new services. In the enterprise market, many businesses and government organizations continue to turn to Apple for the latest technologies, to deliver innovative services to customers and employees. In March, Alaska Airlines began to replace the conventional airport self-service kiosks with iPad Pros for faster passenger check-in and self bag drop. Also, last month, the Western Australia Police Force completed the world's first commercial deployment of CarPlay across their entire fleet of vehicles, to complement the iPhone 13 issued to each officer. This allows officers to access critical information faster on the road and enhance public safety for the community. We also unveiled the general availability of Apple Business Essentials in the US, adding a new subscription services designed to help small businesses manage every aspect of their Apple device life cycle. Let me now turn to our cash position. As we continue to generate very strong cash flow, we ended the quarter with $193 billion in cash and marketable securities. We repaid $3.8 billion in maturing debt, while increasing commercial paper by $2 billion, leaving us with total debt of $120 billion. As a result, net cash was $73 billion at the end of the quarter. We returned nearly $27 billion to shareholders, during the March quarter. This included $3.6 billion in dividends and equivalents and $22.9 billion through open market repurchases of 137 million Apple shares. We also retired an additional 5 million shares in the final settlement of our 18th ASR. Given the continued confidence we have in our business now and into the future, today our Board has authorized an additional $90 billion for share repurchases, as we maintain our goal of getting to net cash neutral, overtime. We're also raising our dividend by 5% to $0.23 a share and we continue to plan for annual increases in the dividend going forward. As we move ahead into the June quarter, I'd like to review our outlook which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near-term, we are not providing revenue guidance, but we are sharing some directional insights, based on the assumption that the COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter. We believe our year-over-year revenue performance during the June quarter will be impacted by a number of factors. Supply constraints caused by COVID-related disruptions and industry-wide silicon shortages are impacting our ability to meet customer demand for our products. We expect these constraints to be in the range of $4 billion to $8 billion which is substantially larger than what we experienced during the March quarter. The COVID-related disruptions are also having some impact on customer demand in China. With respect to foreign exchange, we expect it to be a nearly 300 basis point headwind to our year-over-year growth rate. Additionally, we paused, all sales in Russia during the March quarter. This will impact our year-over-year growth rate by approximately 150 basis points. Specifically related to Services, we expect to continue to grow double-digits, but decelerate from our March quarter performance, due to some of the factors I just described. We expect gross margin to be between 42% and 43%. We expect OpEx to be between $12.7 billion and $12.9 billion. We expect OI&E to be around negative $100 million excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16%. Finally, reflecting the dividend increase I mentioned earlier, today our Board of Directors has declared a cash dividend of $0.23 per share of common stock, payable on May 12th 2022 to shareholders of record as of May 9th, 2022. With that, let's open the call to questions." }, { "speaker": "Tejas Gala", "text": "Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please?" }, { "speaker": "Operator", "text": "Absolutely. We'll take our first question from Katy Huberty with Morgan Stanley." }, { "speaker": "Katy Huberty", "text": "Yes. Thank you. Congrats on the quarter. A couple of macro-related questions, just given everything that's going on in the market, the first is on how you're thinking about consumer spending, as we see more stock market volatility, rising interest rates, inflation. What metrics are you watching either internal to your business or external at the macro level to understand whether you'll ultimately start to see some demand impact particularly on the product side of your business? And then, I have a follow-up." }, { "speaker": "Tim Cook", "text": "Katy, hi, it's Tim. We're obviously monitoring our daily sales very closely. From an inflation point of view, we are seeing inflation. It is or was evident in our gross margin last quarter and in our OpEx last quarter and it is assumed in the guidance that Luca gave for this quarter as well. So we're definitely seeing some level of inflation that I think everybody is seeing." }, { "speaker": "Katy Huberty", "text": "And how are – just as a follow-up to that how are you thinking about how that might impact the consumers in your business and whether it influences their ability to purchase at the same level?" }, { "speaker": "Tim Cook", "text": "Well we're monitoring that closely and we've sort of – but right now our main focus frankly speaking is on the supply side." }, { "speaker": "Katy Huberty", "text": "Okay. And as it relates to that in China, how should we think about lockdowns from an impact on supply and an impact on demand? And what products in your portfolio should we expect to be most impacted? Thank you." }, { "speaker": "Tim Cook", "text": "Yes. Good question. For Q2 so the quarter that we just finished, the restrictions in China had not started yet. And so Q2, we did have supply constraints. They were significantly lower than what we had experienced during the December quarter. They were driven by industry-wide silicon shortages. And specifically, the issue that I talked about on previous calls with the legacy nodes. But looking ahead, we see two causes of supply constraints. One is the COVID-related disruptions; and there's the industry-wide silicon shortages that will continue. We've estimated the constraints to be in the range of $4 billion to $8 billion. And if you – these constraints are primarily centered around the Shanghai corridor. And the – on a positive front, almost all of the affected final assembly factories have now restarted. And so the range – the $4 billion to $8 billion range reflects various ramps of getting back up and running. We're also encouraged that the COVID case count that's been reported in Shanghai has decreased over the last few days. And so there's – there's some reason for optimism there." }, { "speaker": "Katy Huberty", "text": "Thank you. Pretty amazing how the team has navigated all the cross currents. Congrats again on the quarter." }, { "speaker": "Tim Cook", "text": "Thanks so much." }, { "speaker": "Tejas Gala", "text": "Thank you, Katy. Can we have a next question please." }, { "speaker": "Operator", "text": "Thank you. We'll take our next question from Amit Daryanani with Evercore." }, { "speaker": "Amit Daryanani", "text": "Good afternoon. Thanks for taking my questions. I guess I have two as well. First of all I was hoping you just touched a little bit on the geographic growth vectors that you saw. And I think Americas grew really well 19%, 20%. But Europe and China had much more muted growth if you may. I know your compares are fairly difficult but I'm curious if anything you would call out in terms of spillover effect on the macro side from Russia, Ukraine in Europe that's seeing some impact to consumer spend or even in China. Just help us understand what happened geographically there." }, { "speaker": "Luca Maestri", "text": "So Amit, as you said in the Americas, we had a very strong quarter up 19% very happy across the board there. Europe, again was a really good quarter for us. We grew 5% in spite of the fact that of course as you know during the month of March, we paused our sales in Russia. So we had an impact to our sales results there for a month of the quarter. But a number of European countries particularly in Western Europe did really-really well for us. And so it was a very good quarter for us pretty much in line with our expectations. Americas was better than our expectations. China was again a March quarter record for us. Keep in mind and this affected every geographic segment for us the different launch timing for the iPhone this year versus a year ago had an impact on the March quarter results because we launched the product later a year ago than we did this year. So some of the channel fill for the new products happened during the March quarter a year ago. Japan and Asia Pacific were affected by foreign exchange. Japan would have grown in line with company average in constant currency terms. Asia Pacific as well was affected by foreign exchange with the dollar appreciating against most currencies. And then again this difference in the launch timing for the iPhone made a difference. Keep in mind again the supply constraints that we had during the quarter our results would have been obviously better without the supply constraints. Overall we felt very good about the performance around the world." }, { "speaker": "Amit Daryanani", "text": "If I could just follow up on the supply chain the $4 billion to $8 billion impact that you folks talked about. Do you think this is demand that's deferred out, or demand that's essentially destroyed because you have a product cycle that's going to come out in the year at some point soon this year? How do you think about demand deferred versus demand destroyed on that front? And then is there a sense of which product categories are most impacted by this versus not?" }, { "speaker": "Tim Cook", "text": "It will affect most of the product categories. And in terms of whether it's -- whether we can recapture or not we believe that there's a percentage of it that is recapturable and a percentage of it that is likely not where somebody needs something quickly. And that ratio or that percentage is very difficult to estimate. We obviously, try to do that internally in order to demand plan but it's not something that we share." }, { "speaker": "Amit Daryanani", "text": "Got it. Thank you." }, { "speaker": "Tejas Gala", "text": "Thanks Amit. Can we have the next question please." }, { "speaker": "Operator", "text": "We'll take our next question from Chris Caso with Raymond James." }, { "speaker": "Chris Caso", "text": "Yes. Thank you. Good evening. Also just wanted to dig in on the supply constraints a bit. And I guess one of the things you said is that the $4 billion to $8 billion range reflects some reopening of facilities during the quarter. I know obviously it's tough to predict as you go forward into the second half of launch of new products. But at that point would you expect the constraints to still be mainly on the component side? And then hopefully if things don't get worse in China then the facilities are open and the constraints are only the component constraints as you go into the second half of the year." }, { "speaker": "Tim Cook", "text": "Yes. Chris it's hard to answer a question about unannounced products. And so I'll try to not do that. But the—" }, { "speaker": "Chris Caso", "text": "For all products yes." }, { "speaker": "Tim Cook", "text": "The $4 billion to $8 billion is simply as I had mentioned that if you look at the Shanghai corridor -- we have some final assembly plants in this area. And almost all of them have restarted as the good news of it working with local officials. But we planned various ramps for these. And that's the range of 4% to 8% that we've estimated. Kobi is difficult to predict. For sure for sure." }, { "speaker": "Chris Caso", "text": "As a follow-up I wanted to also follow on some of your comments regarding inflation and how Apple is dealing with it. Obviously component costs have been going up in many different areas. And then specifically in the semiconductor side costs have been going up but perhaps for some different reasons because of the additional cost of going up to new process nodes that it's higher than it has been in the past. How is Apple planning to deal with that? And is it possible for you to get through that without either raising prices on your product or affecting gross margins?" }, { "speaker": "Tim Cook", "text": "Well, some of what you said is in the results for the last quarter that we've announced. And obviously we've put our current thinking in the current quarter guidance that Luca listed earlier. There are component costs that are falling and ones that are rising. And so not all of them are moving in the same direction. And so we really try to manage to the net of these. And I think we're doing a reasonable job currently navigating the what is a challenging environment." }, { "speaker": "Tejas Gala", "text": "Thanks Chris. Can we have the next question please?" }, { "speaker": "Operator", "text": "Thank you. We'll take our next question from David Vogt with UBS." }, { "speaker": "David Vogt", "text": "Great. Thank you guys for taking my question. I just want to dig in a little bit on the product disruption the $4 billion to $8 billion. In the past you kind of gave us a sense for how it would affect each different product lines. And should we expect it to have similar pro rata impacts? And is there an opportunity to maybe reallocate resources to limit maybe some of the impact on the iPhone line and then maybe versus the iPad line? And then I have a quick follow-up." }, { "speaker": "Tim Cook", "text": "It will affect most of the product categories. And we obviously will look to do any kind of optimization that we can do to minimize the effect on the user." }, { "speaker": "David Vogt", "text": "Great. And then maybe just as a follow-up. You talked about potential COVID-related demand issues in China and taking at 150 basis points from Russia. But when you look at the other geographies is there anything that you can share with us whether it's in Western Europe or the US that you're seeing from a demand perspective that may be sort of out of the ordinary or outside of sort of the disruptions and the lack of product demand seems to be sort of where you would think it would be at this point in the cycle. Thank you." }, { "speaker": "Tim Cook", "text": "We were happy with the iPhone growth last quarter, particularly when you think about the comp that it was going against because we had very different timing on the launches in the year ago quarter where we launched in Q1. And therefore naturally Q2 is at a different place on the new product curve. And so, it was a very difficult comp. And so we were pleased with it. And as Luca said, the Americas geography did quite well last quarter. And the US, of course, is the major geography within there. And so the US was quite strong last quarter." }, { "speaker": "David Vogt", "text": "Thank you." }, { "speaker": "Tejas Gala", "text": "Thanks, David. Can we have the next question please?" }, { "speaker": "Operator", "text": "We'll take our next question from Jim Suva with Citigroup." }, { "speaker": "Jim Suva", "text": "Thank you. Tim and your entire company has done a great job at navigating through all the issues in the past several years whether it be COVID, power outages, trade wars, shipping challenges and all that. When we hopefully someday get past all of these and the supply constraints in society and turmoil hopefully across the world, do you start to reconsider the way you do the supply chain albeit just-in-time ordering and outsourcing so much of your chips? Or do you actually consider like holding more buffer inventory internally, because right now letting $4 billion to $8 billion go away it'd be nice to have that to be able to sell. So do you consider holding more buffer inventory or maybe even doing your own chips by outsourcing your own chips to control them more, or how should we think about strategically when hopefully the world is in a better place from today?" }, { "speaker": "Tim Cook", "text": "Well, I'm looking forward to that day as I know all of you are. Our supply chain is truly global. And so the products are made everywhere. And we do a lot in the U.S. We'll probably be doing even more here as more chips are produced here. And we continue to look at optimizing. We learn something every day and make changes. But when you back up and kind of zoom out and look to see how the supply chain has done within the environment that you eloquently talked about, I think it's been very resilient with -- the top issue we've had clearly is the silicon shortage that I think everybody is struggling with. And I think we've done a really good job of managing through the COVID piece of it. And so -- but we are learning and we're making some changes as we go, we don't have a tenure. And so, to the degree that we learn something that we should change, you can bet that we're doing that. In this business you don't want to hold a ton of inventory. And so you want to work on cycle times and so forth to do things very quickly and take strategic inventory in places where you need to buffer for interruptions and so forth. And so we're constantly thinking about where those places are. In today's world it's not really possible for us to have buffer on silicon. And so, today silicon rolls off the fab and it's into a final assembly plant very, very quickly and we try to make that as short a time as possible." }, { "speaker": "Jim Suva", "text": "And then my quick follow-up. We've been talking about supply chain issues for multiple quarters now. Are you kind of hearing from your suppliers that maybe later half of this year, or is it actually going to go into kind of 2013 for some closer equilibrium time period?" }, { "speaker": "Tim Cook", "text": "Yeah. I wouldn't – you're talking about for the silicon shortage in particular I assume. I don't want to predict that, because the – that entails knowing how worldwide demand and supply are for the whole – for industries outside of even the industry we're in. And I don't proclaim to be an expert in that. That also heavily is influenced by how strong the economies are in the different markets. And so I think there are varying levels of outcomes. And what we're focused on is doing – trying to do very well regardless of how that question is answered." }, { "speaker": "Jim Suva", "text": "Thank you. And congratulations to you and your entire team." }, { "speaker": "Tim Cook", "text": "Thanks so much." }, { "speaker": "Tejas Gala", "text": "Thanks, Jim. Can we have the next question, please." }, { "speaker": "Operator", "text": "We'll take our next question from Samik Chatterjee with JPMorgan." }, { "speaker": "Samik Chatterjee", "text": "Hi. Thanks for taking my question and congrats on the results as well. I'll stick to two more micro level questions here. Firstly, Tim you talked about the iPhone SE three demand that you the product that you just launched. I was hoping you could compare what you're seeing in terms of momentum to previous iPhone SE cycles? Particularly I think in the past North America has been the largest region in terms of demand what are you seeing with the current product in terms of demand by geography? And I have a quick follow-up for Luca? Thank you." }, { "speaker": "Tim Cook", "text": "Yeah. We don't get to that level of granularity because we view it to be sensitive data that our competitors would love to have. And so I'm going to punt on answering that question. I would just say that, when you zoom out and look at iPhone, as a total we could not be happier with the iPhone 13 family of products and the strength we've seen for this cycle. And really, it's those products that have powered the line and given us the overall results that we've had on iPhone, which for the first half the revenues were $120 billion and we feel very, very good about those results." }, { "speaker": "Samik Chatterjee", "text": "And my follow-up for Luca. Luca we are seeing sort of a settling in terms of growth rate for the Services business on the tough comps that you have. We're also seeing the gross margins there settling around this sort of 72% range. And I understand there are a lot of moving pieces beneath that. But is this sort of a good range for Services longer term, or are there sort of moving pieces there that as they scale they can take – there is an opportunity for more upside?" }, { "speaker": "Luca Maestri", "text": "Well we feel really great about the momentum for our Services business. I was looking at the absolute numbers here. This run rate of almost $20 billion is essentially double what we had just four years ago. So we've done really, really well with Services. We have a lot of momentum for a variety of reasons. The first one is the fact that our installed base of active devices continues to grow very nicely. And so that is obviously a big engine for our Services business. The second thing is that the level of engagement that we see on our platform continues to grow. We have more transacting accounts, more paying accounts, more accounts with subscriptions. The absolute amount of paid subscriptions on our platform is pretty impressive 825 million. It's an increase of 165 million in the last 12 months alone. So you can tell that this is great growth. And of course, as you've seen over the last few years, we've added a lot of new services and we plan to add new services and new features that we believe that our customers would love. And so we think that's a great -- absolute great momentum. The growth rates can change a bit, especially during COVID because we've gone through some cycles of lockdowns and then reopenings and so on. And so sometimes the comps can be a bit deceiving. We are looking at it from the lens of continuing to satisfy our customers, adding to the portfolio, improving the quality of the services and that has served us very well, because in the last 12 months, we've generated $75 billion of Services revenue. And you've seen the margins are obviously accretive to company margin. So we feel good, we feel good about the Services business. I mentioned in my prepared remarks that the growth rate for the June quarter, we expect it to be less than the 17% that we've reported in March for some of the reasons that I described. Of course, foreign exchange is an issue with the dollar being strong at this point. And of course we paused, our sales in Russia. So we need to take that into account. But in general, when we look across the board, we set all-time records and quarterly records for each one of our categories." }, { "speaker": "Samik Chatterjee", "text": "Thank you." }, { "speaker": "Tejas Gala", "text": "Thanks, Samik. Can we have the next question please." }, { "speaker": "Operator", "text": "We'll take our next question from Krish Sankar with Cowen and Company." }, { "speaker": "Krish Sankar", "text": "Yeah. Hi. Thanks for taking my question and congrats on the really strong results. I have two questions too and I do apologize. The first one is on supply constraints. Luca, if I tried to read the deal based on June quarter guidance revenue is being impacted kind of implies year-over-year down revenue. And you also spoke about a $4 billion to $8 billion supply constraint which is a large amount compared to the revenue. And I understand you have the supply constraints and the China shutdowns. I'm just kind of curious, do you think the last three quarters Apple supply chain had a better buffer inventory of semis that kind of got used up and now you're kind of more tied to whatever the true supply contains of legacy semis, or is there something else going on? And then I had a follow-up." }, { "speaker": "Luca Maestri", "text": "What has happened obviously during COVID has change over the quarters. Recently, for example during the March quarter, the constraints that we had were limited to silicon shortages. When we are giving out this range of $4 billion to $8 billion, it's not only silicon but it's the restrictions in China that we're seeing right now. So they are different. There's additional constraints at this point that we are seeing because of the COVID situation. So it's -- that is the fundamental difference there." }, { "speaker": "Krish Sankar", "text": "Got it. Got it. Very helpful. And then as a quick follow-up with the shutdowns, especially in places like China, have you seen actually the App Stores or your Services business actually inflect positively, or is it too short a time frame to make a judgment call on that?" }, { "speaker": "Luca Maestri", "text": "Yes, I think, it's early to tell. The restrictions in China started at the very end of March. So, it's very, very early to tell." }, { "speaker": "Krish Sankar", "text": "Got it. Got it. Thank you Luca. Thank you very much." }, { "speaker": "Tejas Gala", "text": "Thanks, Krish. Can we have the next question, please?" }, { "speaker": "Operator", "text": "We'll take our next question from Wamsi Mohan with Bank of America." }, { "speaker": "Wamsi Mohan", "text": "Yes. Thank you. Luca, thanks for the color around the impacts to the revenue guidance. But I was wondering if you could share a if you expect to grow overall revenue in the June quarter on a year-on-year basis. And just to be clear on these impacts that you gave those are on a year-on-year basis. Can you also tell us how much FX is a headwind if any on a quarter-on-quarter basis and incremental Russia impact quarter-on-quarter basis and incremental supply chain impact also on a quarter-on-quarter basis? And I have a follow-up." }, { "speaker": "Luca Maestri", "text": "Well, as we said, we're not guiding to a specific revenue number. And -- but just to repeat what I said during the prepared remarks, we're having supply constraints that are caused by the COVID-related disruptions and by the silicon shortages. And that is what is creating the constraints. We expect them to be in the range of $4 billion to $8 billion. This is substantially larger than what we've had during the March quarter. Again, let me repeat the COVID-related disruptions did not affect the March quarter. So you need to keep that in mind. With respect to foreign exchange, we expect it to be nearly 300 basis points headwind. It was about 200 basis points headwind during the March quarter. For Russia, we said that the impact on a year-over-year basis is approximately 150 basis points, that reflects the three months of the quarter. We paused sales in Russia at the beginning of March. So it was a partial impact on the March quarter. So, obviously, on a sequential basis, it's an incremental factor to keep in mind. I would say on the positive side here is that the demand for both our products and services is solid. Tim has mentioned a number of times the iPhone 13 family is having a really strong year. We -- when we look at top-selling smartphones around the world, we've had pretty incredible results during the March quarter. The top six models in the United States are iPhones, the top four in Japan, the top five in Australia, five of the top six in urban China and so on and so forth. So the iPhone 13 has been truly a global success. And as you know and as you can tell even from our website, most of the iPad and Mac models are constrained today. They've been constrained for several quarters, because the demand is very good for those products. And the Services business as you know is growing double digits. So that's what gives us confidence for the June quarter and going forward." }, { "speaker": "Wamsi Mohan", "text": "Okay. Thank you, Luca. And if I could follow-up, Tim you're in a really enviable place of being pretty far from your net cash neutral objective. At the same time, you're generating a significant amount of cash flow every year. So your capital return strategy has been an extremely successful program in the past, but $90 billion is 3% of your market cap. And on the other hand there are just a lot of assets that arguably have a lot of synergies with Apple in the health care space, the fitness area like Teladoc or [indiscernible] or Netflix in the content area. Why is this not the right time for Apple to perhaps look at such assets instead of buying back stock or maybe do both?" }, { "speaker": "Tim Cook", "text": "We're always looking and we continue to look. But we would only acquire something that were strategic. We acquire a lot of smaller companies today and we'll continue to do that for IP and for great talent. And -- but we don't discount doing something larger either if the opportunity presents itself. And so -- but I don't want to go through my list with you on the phone, but we're always looking." }, { "speaker": "Wamsi Mohan", "text": "Thanks." }, { "speaker": "Tejas Gala", "text": "Great. Thanks Wamsi. Can we have the next question please?" }, { "speaker": "Operator", "text": "We'll take our next question from Kyle McNealy with Jefferies." }, { "speaker": "Kyle McNealy", "text": "Hi, thanks very much for the question. This one is regarding Mac. Great quarter with the results by the way, some exciting products coming out for sure. We're noticing that there's the lead times are longer for Mac's now ordered today with some available now but many not shipping until June. Just wanted to get your insight on how much of that you think is driven by the strong March results with the product launch and likely sellout conditions versus just real tightness in the supply chain? And the obvious follow-on to that is when do you expect you might catch up and get Mac lead times back within a week?" }, { "speaker": "Tim Cook", "text": "Well, we're working hard. We've got lots of customers that we want to get the new Macs too. And so we're working hard on them. They are a result of the combination of the COVID disruptions and the silicon shortage that we've talked about before. And when we might remedy that, I don't -- we're not really forecasting when we can be out of the silicon shortage, so that would be a difficult answer. I think the COVID piece of it I hope is a transitory kind of issue. And so I would hope that it would get better over time." }, { "speaker": "Kyle McNealy", "text": "Great. Thanks a lot." }, { "speaker": "Tim Cook", "text": "Yeah." }, { "speaker": "Tejas Gala", "text": "Great. Thanks Kyle. Can we have the next question please?" }, { "speaker": "Operator", "text": "Thank you. We’ll take our next question from Ben Bollin with Cleveland Research." }, { "speaker": "Ben Bollin", "text": "Good afternoon, everyone. Thanks for taking the question. The first one is on services. Luca, I was hoping you could share a little bit of perspective on maybe how much of the services contribution is purely consumer versus enterprise? And how you think about the longer term opportunity to monetize the enterprise community? And then Tim for you as a follow-up, I think Jim Suva had asked a question earlier about some of your strategy. I was curious how strategy might have evolved since everything has been going on, what changes you might have seen as of late with respect to freight and some of the geographic production footprint? And any evolution that has happened as of late? Thank you." }, { "speaker": "Luca Maestri", "text": "So Ben on the services side, of course, the vast majority of what we do in services is to final consumers. We do understand and appreciate the fact that the enterprise is a great opportunity for us. Very recently, for example, we launched this new subscription service here in the United States which we call Apple Business Essentials where essentially we provide support to small and medium-sized businesses in terms of 24/7 support device management for small business owners which we think small companies will value and appreciate. Obviously, we sell Apple Care to enterprises already today. But we know enterprise in general as a market is a very interesting market for us and we're putting a lot of effort and focus on it and we believe we have really good opportunities to grow." }, { "speaker": "Tim Cook", "text": "Ben, you brought up freight. Freight is a huge challenge in today both from an inflationary point of view and from an availability point of view. And so right now the focus is on moving the freight to customers any way that we can do that. Over time, we'll do that much more efficiently. And I would hope that the fundamental rates reset some both -- and I'm talking about both ocean and air. And so both of them have come under some significant inflationary pressure partly due to COVID and some other reasons as well I would guess. And in terms of geo production we are constantly making tweaks here and there. And I don't want to go into the details of those because we view it as to be sensitive kind of information, but we're constantly making moves to optimize in the current environment." }, { "speaker": "Ben Bollin", "text": "Thank you both." }, { "speaker": "Tim Cook", "text": "Thank you." }, { "speaker": "Tejas Gala", "text": "Thank you, Ben. A replay of today's call will be available for two weeks on Apple Podcast as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are in 888-203-1112 or 719-457-0820. Please enter confirmation code 1807633. These replays will be available by approximately 5 P.M. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us." }, { "speaker": "Operator", "text": "This concludes today's conference. We appreciate your participation." } ]	Apple Inc.	24,937
AAPL	1	2,022	2022-01-27 17:00:00	Operator: Good day, and welcome to the Apple Q1 FY 2022 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please go ahead. Tejas Gala: Thank you. Good afternoon, and thank you for joining us. Speaking today first is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that, some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd like to now turn the call over to Tim for introductory remarks. Tim Cook: Thank you, Tejas, and good afternoon. Today, we are proud to announce Apple's biggest quarter ever. Through the busy holiday season, we set an all-time revenue record of nearly $124 billion, up 11% from last year and better than we had expected at the beginning of the quarter. And we are pleased to see that our active installed base of devices is now at a new record with more than 1.8 billion devices. We set all-time records for both developed and emerging markets and saw revenue growth across all of our product categories, except for iPad, which we said would be supply constrained. As expected, in the aggregate, we experienced supply constraints that were higher than the September quarter. Before I discuss our results in greater detail, I want to first acknowledge the toll that COVID continues to have on communities around the world. In many places, case counts are higher and health systems more strained than at any point throughout the pandemic. On behalf of all of us at Apple, I want to extend our deep gratitude to the scientists, doctors, nurses and so many others on the front lines of combating COVID-19. This is our eighth quarter reporting results in the shadow of the pandemic. And while I can't say it gets any easier, I can say I'm incredibly proud of the way our teams have come together and continue to innovate on behalf of our customers. A few weeks ago, we marked the 15th anniversary of the day Steve revealed iPhone to the world. We knew that we had the beginnings of something fundamentally transformative, though none of us could have predicted the incredible and meaningful impact it would have on all of our lives. The creative spirit that made the first iPhone possible has thrived at Apple every day since. We never stop creating. We never stop innovating. You can see that spirit reflected throughout our products from the incredible performance and capability of our M1 chips to our powerful yet easy to use operating systems to our unrivaled iPhone camera systems to the beauty and magic of AirPods. That's why each of our major products leads the industry in customer satisfaction for their respective category. People expect Apple to solve hard problems with easy to use products. And iPhone has never been more popular. During the December quarter, we set an all-time revenue record for iPhone, thanks to the strength of our incredible iPhone 13 lineup. This is the best iPhone lineup we've ever had and the reaction from the press and our users have been off the charts. This past quarter, we also set another all-time revenue record for Mac with customers eager to get their hands on an M1-powered MacBook Air, iMac or MacBook Pro. We've been thrilled with the response from Pro users to the M1 Pro and M1 Max chips and to see how Apple silicon is blowing them away with its power, performance and efficiency. Despite the constraints I mentioned earlier, our iPad lineup continues to be indispensable to tens of millions of people, from teachers and students to artists and creators. Customers are eager to get their hands on our ninth generation iPad, which features a beautiful display and double the storage capacity, as well as the new iPad Mini with its ultra portable design. Wearable, Home and Accessories, meanwhile, set an all-time revenue record. Customers are loving the Apple Watch Series 7, with its cutting edge health and fitness tracking features. Nearly every day, I get notes from customers who share how a heart alert led to a life saving appointment with a cardiologist. And more recently, I've been hearing from people who tell me that their Apple Watch saved their lives by calling 911, when they couldn't. As I've said, we're still in the early innings with our health work that every day I'm encouraged by our positive impact. We are also making great advancements in audio and are seeing strong demand from customers as a result. The HomePod Mini continues to earn praise for combining the intelligence of Siri with an immersive room filling audio experience. And our customers have responded with a lot of excitement to the magic of spatial audio on AirPods which packs the acoustics of a concert hall. As always, the deep integration of hardware, software and services is a hallmark of everything Apple makes. It's a principle you can see at work in the introduction of SharePlay, a feature that offers a whole new way to create shared experiences by letting users watch and listen to their favorite content together on FaceTime. And we continue to invest in innovation across our services business, which set another all-time revenue record last quarter and performed even better than we had anticipated. The App Store continues to be an economic miracle for developers around the world and a safe and trusted place for consumers to discover their favorite apps. Since its launch, we have paid developers selling digital goods and services more than $260 billion, with 2021 setting a new record for their earnings. I'm also happy to report that in its first 2 years, Apple TV+ shows and movies have earned 200 award wins and more than 890 nominations. Among the powerful lineup are feature films like The Tragedy of Macbeth, CODA and Swan Song, along with many gripping new series coming up, including Severance and The Afterparty. Each one is a tremendous credit to all the storytellers in front of the cameras and behind them who touched audiences all over the world. Fitness+, meanwhile, continues to inspire customers to reach their health and fitness goals. We recently introduced Time to Run, an extension of our popular series Time to Walk, as well as new collections of workouts and meditations to help users make more intentional training choices. Despite the pandemic, our retail businesses saw its highest revenue in Apple's history, and we also earned our highest ever customer satisfaction scores. That is a testament to the incredible adaptability our teams have shown as we've reimagined [digital] experience. I also want to take a moment to thank our retail employees and AppleCare teams for the deep care you've given to our customers as they look to get the most out of our products, learn new skills or track down the perfect gift. We have always led with our values and with compassion and care and never has that been more needed than during the pandemic. Last quarter, we celebrated 10 years of our Employee Giving program, which we started to help our employees identify and support the causes they care most deeply about. We pledged to match their contributions to organizations doing important work at every level from their local food pantry to global humanitarian non-profits. In the last decade, this program has contributed nearly $725 million to charitable organizations. We also celebrated 15 years of Apple's partnership with a global fund on Project RED supporting their life-saving work to expand healthcare services in Sub-Saharan Africa for people living with HIV/AIDS. With the support of our customers, we've now raised nearly $270 million to fund prevention, testing and counseling services for people impacted by HIV/AIDS. And in keeping with our abiding belief in and commitment to education, we also launched a new partnership with the Boys & Girls Club of America. This initiative will help young people across the U.S. learn to code on iPad using our Everyone Can Code curriculum. And we are continuing to drive innovations to help combat climate change. We are already carbon neutral across our own operations, and we are working intensely to meet our 2030 goal of carbon neutrality across our supply chain and the life cycle of our products. To celebrate Black History Month, we will be releasing a special edition Apple Watch Black Unity Braided Solo Loop and a matching Unity Lights Watch Face. And through our racial equity and justice initiative, we are continuing to support organizations blazing trails to a more equitable world in our economies, our classrooms and our criminal justice system. We recognize, as ever, that it takes all of us to confront our most profound challenges. And at Apple, we are determined to do our part. That includes our own work and inclusion and diversity, which we are advancing every day. Let me close by saying that despite the uncertainty of the world, there is one thing of which I am certain: Apple will continue to [innovate] every day and in every way to deliver on the promise of technology at its best. I will now turn it over to Luca to go over our quarterly results in more detail. Luca Maestri: Thank you, Tim, and good afternoon, everyone. We are very pleased to report record financial results for the December quarter. We set an all-time revenue record of $123.9 billion, an 11% increase from a year ago. We reached new all-time records in the Americas, Europe, Greater China and the rest of Asia Pacific. And it was also an all-time record quarter for both products and services. On the product side, revenue was $104.4 billion, up 9% over a year ago, despite significant supply constraints. We grew in each of our product categories, except iPad, where supply constraints were particularly pronounced, and set all-time records for iPhone, Mac and Wearables, Home and Accessories. The strong level of sales performance, the unmatched loyalty of our customers and the strength of our ecosystem have driven our current installed base of active devices to a new all-time record of 1.8 billion devices. The growth in the installed base were broad-based as we set all-time records in each major product category and in each geographic segment. Our Services set an all-time revenue record of $19.5 billion, up 24% over a year ago, with December quarter records in every geographic segment. Company gross margin was 43.8%, up 160 basis points from last quarter due to volume leverage and favorable mix, partially offset by higher cost structures. Products gross margin was 38.4%, up 410 basis points sequentially, driven by leverage and mix. Services gross margin was 72.4%, up 190 basis points sequentially, mainly due to a different mix. Net income of $34.6 billion and diluted earnings per share of $2.10 both grew more than 20% year-over-year and were all-time records. Operating cash flow of $47 billion was also an all-time record. Let me get into more detail for each of our revenue categories. iPhone revenue grew 9% year-over-year to an all-time record of $71.6 billion despite supply constraints, thanks to a remarkable customer response to our new iPhone 13 family. We set all-time records in both developed and emerging markets, reached all-time high in the iPhone active installed base and the latest survey of U.S. consumers from 451 Research indicates iPhone customer satisfaction of 98%. For Mac, revenue of $10.9 billion was an all-time record with growth of 25% year-over-year driven by strong demand for our newly redesigned MacBook Pro powered by M1 despite supply constraints. We are 1 year into our transition to Apple silicon and already, the vast majority of our Mac sales are from M1-powered devices, which helped drive a record number of upgraders during the December quarter. Our momentum in this category is very impressive as the last 6 quarters have been the best 6 quarters ever for Mac. iPad generated $7.2 billion in revenue, down 14% year-over-year due to very significant supply constraints, but customer demand was very strong across all models. Despite the supply shortages, our installed base of iPads reached a new all-time high during the quarter, thanks to a high number of customers that are new to iPad. In fact, around half of the customers purchasing an iPad during the quarter were new to the product. Wearables, Home and Accessories set a new all-time record of $14.7 billion, up 13% year-over-year. And we set all-time revenue records in each geographic segment. We also continue to improve and expand our product offerings in this category to create unique experiences showcasing our deep integration of hardware, software and services. In addition to an outstanding level of sales performance globally, Apple Watch continues to extend its reach, with over 2/3 of customers purchasing an Apple Watch during the quarter being new to the product. Turning to services. As I mentioned, we reached an all-time revenue record of $19.5 billion, up 24%, with all-time records for cloud services, for music, video, advertising and payment services and a December quarter record for the App Store. These impressive results reflect the positive momentum we are seeing on many fronts. First, as I mentioned before, our installed base has continued to grow and has reached an all-time high across each geographic segment and major product category. Next, we continue to see increased customer engagement with our services. The number of paid accounts on our digital content stores grew double digits and reached a new all-time high during the December quarter in every geographic segment. Also, paid subscriptions continue to show very strong growth. We now have more than 785 million paid subscriptions across the services on our platform, which is up 165 million during the last 12 months alone. And finally, we're adding new services that we think our customers will love, and we continue to improve the breadth and quality of our current service offerings. Just in this last quarter, we have added incredible new content on Apple TV+, on Fitness+ and Apple Arcade and a brand-new way to listen to music with Apple Music Voice. We also announced in November the beta program for Apple Business Essentials, a new service offering that brings together device management 24/7 support and iCloud storage to our small businesses, manage the end-to-end life cycle of their employees' Apple devices. We are very excited that many thousands of small business customers are already actively participating in the beta program. This announcement is just one of many ways we are expanding our support for enterprise and business customers. With the latest MacBook Pros that we've introduced last October, the new M1-powered Mac lineup has quickly become the preferred choice of Macs among enterprise customers. Shopify, for example, is upgrading its entire global workforce to M1-powered MacBook Pro and MacBook Air. By standardizing on M1 Max, Shopify continues its commitment to providing the best tools to help its employees work productively and securely from anywhere. And Deloitte Consulting is expanding the deployment of the Mac Employee Choice program, including offering the new M1 MacBook Pro to empower their professionals to choose devices that work best for them in delivering consulting services. Let me now turn to our cash position. Due to our strong operating performance and holiday quarter seasonality, we ended the quarter with $203 billion in cash, plus marketable securities. We decreased commercial paper by $1 billion, leaving us with total debt of $123 billion. As a result, net cash was $80 billion at the end of the quarter. Our business continues to generate very strong cash flow, and we were able to return nearly $27 billion to shareholders during the December quarter. This included $3.7 billion in dividends and equivalents and $14.4 billion through open market repurchases of 93 million Apple shares. Our business continues to generate very strong cash flow, and we're also able to return nearly $27 billion to shareholders during the December quarter. This included $3.7 billion in dividends and equivalents and $14.4 billion through open market repurchases of 93 million Apple shares. We also began $6 billion accelerated share repurchase program in November, resulting in the initial delivery and retirement of 30 million shares. As we move ahead into the March quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we are not providing revenue guidance, but we are sharing some directional insights based on the assumption that the COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter. We expect to achieve solid year-over-year revenue growth and set a March quarter revenue record despite significant supply constraints, which we estimate to be less than what we experienced during the December quarter. We expect our revenue growth rate to decelerate from the December quarter, primarily due to 2 factors. First, during the March quarter a year ago, we grew revenue by 54%. Remember that last year, we launched our new iPhones during the December quarter. While this year, we launched them during the September quarter. Due to the later launch a year ago, some of the associated channel inventory fill occurred during the March quarter last year. As a result of the different launch timing, we will face a more challenging year-over-year compare. Second, we expect foreign exchange to be a 3-point headwind when compared to the December quarter growth rate. We currently expect FX to have a negative impact on growth of 2 points in the March quarter, while it represented a 1 point benefit during the December quarter. Specifically related to Services, we expect to grow strong double digits but decelerate from the December quarter performance. This is due to a more challenging compare because a higher level of lockdowns around the world last year led to increased usage of digital content and services. We expect gross margin to be between 42.5% and 43.5%. We expect OpEx to be between $12.5 billion and $12.7 billion. We expect OI&E to be around negative $150 million, excluding any potential impact from the mark-to-market of minority investments, and our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividend of $0.22 per share of common stock payable on February 10, 2022, to shareholders of record as of February 7, 2022. And with that, let's open the call to questions. Tejas Gala: Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please? Operator: Absolutely. We'll take our first question from Katie Huberty with Morgan Stanley. Hearing no response, we'll take our next question from Wamsi Mohan with Bank of America. Wamsi Mohan: Yes. Thank you. Your margins have clearly been very impressive. So I have one question each on product and one on services gross margins. On product gross margins, that's clearly benefiting from a very strong mix. So Tim, I'm curious how sustainable do you think these mix trends are from the data that you see? And can you share any thoughts across how the Pro and Pro Max mix compared to prior cycles? And on the services side, if I could just ask that, too. When you look at the gross margins there, that's been really impressive. Can you give us some sense of where within services, you're seeing particularly favorable mix trends? And how should investors think about the trajectory of these margins given some of the sizable investments you're making to drive very successful areas like content for TV+ as an example? Tim Cook: Wamsi, it's Tim. In terms of the mix, we don't comment directly on mix. But what I would tell you is that we saw strong demand across the iPhone 13 family. And in fact, we had several of the top-selling models in various markets, including the top 5 in the U.S. and Australia, the top 4 in Urban China, 2 of the top 3 in the UK, 3 of the top 4 in France and Germany and 4 of the top 6 in Japan. And certainly, based on some external data that I've seen, it does seem to say that we are gaining share as well. So we feel quite good about the momentum of iPhone. And I should add that we were constrained during the quarter. Luca Maestri: Wamsi, on the services side, you were asking about gross margin there. As you know, our services business in aggregate is accretive to overall company margin. And as you know, our services portfolio is very broad, and it contains businesses with very different margin profiles. The difference in margin profile is due in part to the nature of those businesses and in part to the way that we account for them, in some cases, we account on a net basis as opposed to a gross basis. And so as a result, the services gross margin percentage over time will be influenced by the relative growth of the different businesses within the portfolio. We do not guide at the product and services level, but I think you've seen the guidance that we provided for the March quarter at the total company level, 42.5% to 43.5%, obviously very strong compared to our recent history. And so we're very pleased with that. Operator: We'll take our next question from Kyle McNealy with Jefferies. Kyle McNealy: Congrats on the solid iPhone result. That's very good. I assume that you may have prioritized iPhone to the extent there may be similar components that are used for iPhone and iPad. Can you just level set me on that if that's not the case? And if it is, should we see a recovery in iPad as you move past your prime iPhone selling season and you may have better access to components or better supply as we move through the next few months of the year? Tim Cook: Yes. Kyle, it's Tim. From a supply constraint point of view, as you recall, we said that in Q1, the December quarter, that would have constraints more than 6, and we clearly did have constraints more than 6. On March, we're saying that where we will have -- we will do better or have less constraints than we had in the December quarter. If you look at the commonality between different products, there is some. But generally, the challenge is on legacy nodes. And these legacy nodes are by supplier. And so it's much more focused on the supplier than anything else and versus us behind the curtain finding a place to take it. There's not -- none of that, but there is some of that. But largely, we have to take it where the shortages are. Kyle McNealy: Okay. Great. Can you give us any other color on kind of the trajectory of iPad and what's impacting this quarter and where it might go in the March and the June quarter? Tim Cook: Yes. The issue with iPad, and it was a very significant constraint in the December quarter, was very much on these legacy nodes that I had talked about. Virtually all of the problem was in that area. And so overall, we're not guiding by product constraint -- by product level. But at the -- but overall, we do see an improvement in the March quarter in terms of the constraints going down versus what they were in the December quarter. Operator: We'll take our next question from Shannon Cross with Cross Research. Shannon Cross: Tim, could you talk a bit about the Mac business? Looking back, it's up about 50% from the calendar 2019 revenue. You did almost $11 billion this quarter, and you're still working through the M1 transition. So can you talk about where you see the opportunity to gain share? What are really sort of the target markets that you think you can go after in order to grow this beyond think it was about $37 billion in the last 12 months? And then I have a follow-up. Tim Cook: Yes. Shannon, thank you for the question. Mac set an all-time revenue record at $10.9 billion for the quarter. That was up 25%. And as you point out, the last 6 quarters for the Mac have been the top 6 revenue quarters of all time. And what's further very good about this is we set all-time revenue records in Americas, in Europe and the rest of Asia Pacific. And we set a December quarter record in Greater China. And so it's not narrowed to a particular geographic area that we're doing well in. It's almost -- about almost across the board. The response is very much because of M1. And we got even more response with the MacBook Pro that we launched in the -- during the Q1 time frame. The -- both the upgraders, which we had a record number of upgraders for the December quarter, but also in markets like China, 6 out of 10 sales are people new to the Mac. And so it's powered by both upgraders and switchers. Customer satisfaction is off the charts. And so what I see this as is a -- that will -- a product that will be very successful in a number of different markets from education, to business, to the creative industry and in all geographic markets. We're not limiting ourselves. Shannon Cross : Great. And then, Luca, can you talk a bit more on services? Just obviously outperformed your guidance or your expectations as well as certainly where we were at. Where were the -- what were the things that really outperformed? And maybe what trends are you seeing that is driving the extra revenue? Luca Maestri : Yes, Shannon. It was -- I mean it was really great on all fronts. We said December quarter records in every geographic segment. And then as I mentioned earlier, an all-time record for cloud, for music, for video, for advertising, for payment services. December quarter record in the App Store. So we've done, as you said, better than we were expecting at the beginning of the quarter. This overperformance has been spread around the world and spread around our services categories. And the reality is this combination of factors, the fact that the installed base is growing, the fact that we continue to have more and more engagement of our customers on all the services -- paid subscriptions is a phenomenal story, right? We now have 785 million paid subs. We just -- we've increased 165 million in the last 12 months alone, right? And so all these things combined are really powering the business. Very, very pleased with the performance. Operator: We'll hear next from Katy Huberty with Morgan Stanley. Kathryn Huberty : So first question just as it relates to some of the disruption you've seen on the component side, manufacturing and logistics over the past couple of years, are you starting to rethink your broader supply chain strategy or the manufacturing footprint on the back of the significant disruption? Are you happy with the overall geographic exposure that you see in the supply chain today? Tim Cook: Katy, if you sort of step back and look at how we've done, our largest issue by far has been the chip shortage. That is industry-wide and on these legacy nodes, as I had mentioned earlier. And I think our supply chain actually does very good considering the shortages because it's a fast-moving supply chain. The cycle times are very short. There's very little distance between a chip being fabricated and packaged and a product being -- going out of factory. And so, no, I don't see that it makes a fundamental change in the supply chain. Kathryn Huberty : Okay. And how are you thinking about the metaverse opportunity and Apple's role in that market? Tim Cook: Well, that's a big question. But we're a company in the business of innovation. So we're always exploring new and emerging technologies. And I -- you've spoken at length about how this area is very interesting to us. Right now, we have over 14,000 AR kit apps in the App Store, which provide incredible AR experiences for millions of people today. And so we see a lot of potential in this space and are investing accordingly. Operator: We'll take our next question from Amit Daryani with Evercore. Amit Daryanani : I have 2 as well. I guess both up on the supply chain side, I think these continue to be fairly volatile. I'd love to get your perspective, if you feel, if things or supply chain issues are starting to alleviate or they still remain challenging? And then maybe I missed this, but could you perhaps tell us how much revenue was left on the table in December because of the supply chain issues? And how does that number shake up in March? Tim Cook: Yes. Amit, what we've said in terms of December and March was that it's very difficult to estimate with great precision the constraints. But we said that they would be more than the Q4 or more than the September quarter, and we're saying that March will be less than the December quarter. And so that's the kind of verbiage that we’ve placed around it. In terms of is it still challenging? Yes, it is challenging. And for us, we pride ourselves on getting products to customers who really want them and try to do that in a fast basis. And so it's frustrating that we can't always do that at the speed that we would like. However, March is better than December. And so there's some encouraging sign there. We're not predicting, [which we do not know] overall, obviously because of the number of variables that go into such a prediction. Amit Daryanani: Fair enough. Tim, I think one of the topics investors can struggle a fair a bit with Apple is really just sort of understand visibility around your product road map, and I think some of your tech peers tend to be more vocal about their initiative. Some of them go change their name when they find an initiative that’s attractive I feel. You folks are spending, I think, $23 billion on R&D in '21. So you're really spending a fair amount. And maybe without telling us the road map, could you just talk about how do you think about where to focus your R&D resources on? And to some extent, is the way to think about this R&D spend, how much of it is really done on things that are more evolutionary in products that are out in the marketplace versus things that we haven't seen yet are on potential new offerings? Tim Cook: We have a little different model. We try to announce things when they're ready or close to ready and try to maintain an element of surprise in there. And so that explains hopefully what we do with our road map. And I think that's proven successful for us, and other people can do it differently, of course, but it's pretty been good for us over time to do that. So we're going to continue to do that. In terms of deciding where we invest in, we look at areas that are sort of at the intersection of hardware, software and services. And because we think that, that's where the magic really happens and it brings out the best in Apple. And so there are areas that have more than peaked our interest, and we are investing in those. And you can tell through time that we've ramped our R&D spend even more than we were before. And so there's quite a bit of investment going into things that are not on the market at this point as there always are. Operator: We'll hear next from David Vogt with UBS. David Vogt: I just wanted to dive in perspective on China and sort of the macro climate there and how that sort of pertains to your business as we think about it going forward. And the reason why I'm asking is we've heard some concerns that current policies might have caused a pause in this market and smartphone inventory. Maybe more specifically the local vendors could be a little bit elevated going into Chinese New Year. So we just want to get your thoughts on what you're seeing in this market around, the sort of potential development and then maybe touch on sell-in versus sell-through in that market. And then I have a follow-up. Tim Cook: Well, I can only comment on, for us. Our sales grew 21% there in the last quarter, and we're very proud of that. I'll stay away and let other people be the economist and make the macro determinations. But what we're seeing there was super impressive with all-time revenue records and a record number of upgraders and strong double-digit growth in switchers on iPhone, which is very important to us. And as I've mentioned before, we had the top 4 selling phones in urban China. And so there's a lot of good there. And I would remind you that iPhone was constrained in the quarter. And so I'm not sure where the statements are coming around about inventory, and I can't comment on whether other people have more or not, I don't know the answer to that. Thanks for the question. David Vogt: That's helpful, Tim. And then maybe just on the supply chain. Obviously, you've been managing it incredibly well over the last 12 to 18 months. And gross margins have actually performed relatively well, mix driven both between products and services. Can you help us think about sort of the quantifiable impact or maybe the costs that you're carrying due to the supply chain that may be sort of -- I don't want to use the word transitory, but we'd expect over the longer term, that might be sort of abate a little bit and you'll get a little bit of a benefit as we get past some of these supply chain issues over the next 12 months or so? Tim Cook: We're seeing inflation, and it's factored into our gross margin and OpEx that Luca reviewed with you earlier. Logistics, as I've mentioned on a previous call, is very elevated in terms of the cost of moving things around. I would hope that at least a portion of that is transitory, but the world is -- the world has changed, and so we'll see. Operator: We'll take the question from Samik Chatterjee with JPMorgan. Samik Chatterjee: I had a couple. The first question that I had was really on Apple TV+, and I know some of the other players in this market have talked about slowing subscriber growth as we exit the pandemic. So curious if you can share what trends you're seeing in Apple TV and Apple TV+ and how similar or dissimilar they are and how your content is maybe helping you on that aspect? And I have a follow-up. Tim Cook: We don't give out subscriber numbers for Apple TV+. What we do, do is give out a subscriber number for our subscription number for the total number of subscriptions that we had. And I think Luca mentioned earlier we ended the quarter at 785 million. And so we were incredibly pleased with that. That's a huge growth on a year-over-year basis of 165 million. And it counts, as you recall, both Apple branded and third party. In terms of how we're doing with TV+, we've been honored with 200 wins and 890 nominations. We're doing exactly like we had wanted to. We’re giving storytellers a place to tell original stories and feel really good about where we are competitively and strategic position of the product. Samik Chatterjee: And if I can just follow up, and similarly on Apple Pay, can you just help us think about when you think about the next few years, where are the biggest opportunities, either be it in terms of like geographies or either segments -- customer segments that you may not be tapping into currently and have an opportunity in. Tim Cook: Well, putting aside any kind of thing that sits on our road map for a second in that area, which we obviously wouldn't talk about in the call, I would say that I think Apple Card has a great runway ahead of us. It was rated to the #1 midsized credit carding customer set by J.D. Power and is getting -- has fast become people's main credit card for many, many people. And the growth of Apple Pay has just been stunning. It's been absolutely stunning. And there's still obviously a lot more there to go and because there's still a lot of cash in the environment. And so I think that both of these and whatever else we might do have a great future ahead. Operator: We'll take our next question from Chris Caso with Raymond James. Christopher Caso: Yes. So the first question is just a little bit of help in interpreting the guidance. And if you could speak to the March quarter, perhaps in terms of seasonality and seasonal performance. And Luca, as you mentioned last year, because of the later launch of the phone that some of that came into the March quarter, and that was better than seasonal performance in March. Should we interpret because the supply constraints are easing somewhat as you go into the March quarter that we should see something similar that March quarter would get some better than seasonal performance? Is that the correct way to interpret your guidance? Luca Maestri : Well, and we talked about it on a year-over-year basis because that's probably how most people look at it. And so just to recap what we said. First of all, we expect a record for the March quarter. We expect solid growth on a year-over-year basis. And -- but as Tim was saying, we still expect significant supply constraints but less than what we've seen in December. So I think on that basis, you can do the math around sequential. But given where we are in the environment, given the difficult compare both on iPhone, and as I mentioned on -- during my prepared remarks, on services, we're very, very happy with the way we're guiding and the way the business is going right now. Christopher Caso : Okay. As a follow-up, a follow-up question is on perhaps the sustainability and repeatability of the growth in iPhone after 2 very good years, well-received product and the 5G upgrade cycle. And I think there was a point in time when perhaps there's a view from some that iPhone was ex growth, and that's been proven wrong. Off of these very strong results, maybe you can speak to your level of confidence that iPhone continues to grow in the future? And kind of what are the avenues for that growth? Tim Cook: Yes. Chris, it's Tim. What I would say is that iPhone has become an integral part of so many people's lives now more than ever. And the active installed base of iPhone continues to grow and is now at an all-time high. And during December, as we had mentioned, we had a record number of upgraders and grew switchers strong double-digit, which I think speaks to the strength of the product. And that's all baked into some -- an enormous customer satisfaction rating of 98% and doing well throughout the geographies. And I've mentioned some of the geos that we track and how many units that we have on the top-selling model charts. And so -- and even though this is the second product announcement that has 5G in it, we're still really in the early innings of 5G, meaning if you look at the installed base and look at how many people are on 5G versus not, and we don't release those exact numbers, but you can do some math and estimate those, we maintain a very optimistic view on iPhone long term. Operator: We'll take our next question from Ben Bollin with Cleveland Research. Benjamin Bollin : Tim, I'm interested in how you think about the relationship between the total iOS installed base and then the subsequent performance you see within the services or the paid subscriptions. And a second part to that is, how do you look at the existing services business in terms of the growth you get from customers who are already subscribers versus completely net new or greenfield subscribers? Tim Cook: I think I'll let Luca comment on the second part of that. But if you back up and sort of look at how we're doing, even though we have 785 million subs, relative to the total number of products offered and the customers that's offered in, there's still a lot of room to grow there. And so I -- the way that I look at it is that we -- there's a lot more greenfield in front of us. Luca Maestri : And Ben, on the services engagement and how we think about customers, right, obviously, it's important for us that customers are engaged on our services platforms. And the ones that we have, we know that the more engaged they are, they're more likely to stay with Apple for the long term. So we just obviously track all those metrics, and they're very important for us. And that's why we continue to improve the quality of our offerings and the quantity over time. As you've seen, we launched a lot of new services. We obviously care a lot about new customers as well, and that's why we keep track of the installed base and a lot of other metrics on that front. It's very similar to what we do with products. I mean, also for products, we care a lot about upgraders. We care a lot about switchers. It's obviously the combination of the 2 that when you put it together provides the level of growth that you've actually seen in our Services business. I mean the last 12 months, we've done over $72 billion of revenue on Services. It's the size of a Fortune 50 company. It couldn't happen with our contribution from both existing and new customers. Operator: We'll take our next question from Harsh Kumar with Piper Sandler. Harsh Kumar : First of all, congratulations on stellar quarter in December and all the records that the Apple community has set. Tim, I had a question on the content on Apple TV. When we look at the Apple content that you guys put all on TV original content, it's typically very socially responsible and healthy, for example, Ted Lasso. Has this, in effect, created a constraint or a hesitancy of some sort for Apple to go and purchase studios when they come up? Or have those decisions be primarily financial or otherwise? Tim Cook: We don't make purely financial decisions about the content. We try to find great content that has a reason for being. And we love shows like Ted Lasso and several of the other shows as well that have reason for existing and may have a good message and may make people feel better at the end of it. But we're -- but I don't view that we've narrowed our universe, the things we're selecting from. There's plenty to pick from out there. And I think that we're doing a pretty good job of it as we speak. Harsh Kumar : Fair enough. And then my follow-up was the Apple vision of healthcare in the future. So you guys have sort of cautiously approached healthcare with iWatch and iPhone. It's mostly a preventative sort of approach. It provides you updates. But do you see a situation down the line where Apple perhaps plays a more active role, either through the Watch or some of the device where perhaps a doctor or a hospital mandates that the watch we want for effectively for critical and vital monitoring? And I was curious if you could just give us some color on how you guys think about health care and iWatch and that confluence? Tim Cook: Well, the -- with the Apple Watch, there's literally not days that go by without me getting notes about someone that's received a health alert. Maybe it's to do with their cardiovascular health. Or more recently, a lot of people have told me that they fell and was knocked unconscious and couldn't respond and the watch responded for them to emergency contacts and emergency personnel. And so there's a lot that we're doing today. My sense has always been that there's more here. I don't want to get into a road map discussion in the call. But we continue to kind of pull the string and see where it takes us. But we're really satisfied with how we're doing in this area because we are fundamentally changing people's lives and, in some cases, saving people's lives. So it's an area of great interest. Tejas Gala: Thank you. A replay of today's call will be available for 2 weeks on Apple Podcast as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are (888) 203-1112 or (719) 457-0820. Please enter confirmation code 3599903. These replays will be available by approximately 5 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at (408) 862-1142. Financial analysts can contact me with additional questions at (669) 227-2402. Thank you again for joining us. Operator: This concludes today's conference. We do appreciate your participation.	[ { "speaker": "Operator", "text": "Good day, and welcome to the Apple Q1 FY 2022 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please go ahead." }, { "speaker": "Tejas Gala", "text": "Thank you. Good afternoon, and thank you for joining us. Speaking today first is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that, some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd like to now turn the call over to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thank you, Tejas, and good afternoon. Today, we are proud to announce Apple's biggest quarter ever. Through the busy holiday season, we set an all-time revenue record of nearly $124 billion, up 11% from last year and better than we had expected at the beginning of the quarter. And we are pleased to see that our active installed base of devices is now at a new record with more than 1.8 billion devices. We set all-time records for both developed and emerging markets and saw revenue growth across all of our product categories, except for iPad, which we said would be supply constrained. As expected, in the aggregate, we experienced supply constraints that were higher than the September quarter. Before I discuss our results in greater detail, I want to first acknowledge the toll that COVID continues to have on communities around the world. In many places, case counts are higher and health systems more strained than at any point throughout the pandemic. On behalf of all of us at Apple, I want to extend our deep gratitude to the scientists, doctors, nurses and so many others on the front lines of combating COVID-19. This is our eighth quarter reporting results in the shadow of the pandemic. And while I can't say it gets any easier, I can say I'm incredibly proud of the way our teams have come together and continue to innovate on behalf of our customers. A few weeks ago, we marked the 15th anniversary of the day Steve revealed iPhone to the world. We knew that we had the beginnings of something fundamentally transformative, though none of us could have predicted the incredible and meaningful impact it would have on all of our lives. The creative spirit that made the first iPhone possible has thrived at Apple every day since. We never stop creating. We never stop innovating. You can see that spirit reflected throughout our products from the incredible performance and capability of our M1 chips to our powerful yet easy to use operating systems to our unrivaled iPhone camera systems to the beauty and magic of AirPods. That's why each of our major products leads the industry in customer satisfaction for their respective category. People expect Apple to solve hard problems with easy to use products. And iPhone has never been more popular. During the December quarter, we set an all-time revenue record for iPhone, thanks to the strength of our incredible iPhone 13 lineup. This is the best iPhone lineup we've ever had and the reaction from the press and our users have been off the charts. This past quarter, we also set another all-time revenue record for Mac with customers eager to get their hands on an M1-powered MacBook Air, iMac or MacBook Pro. We've been thrilled with the response from Pro users to the M1 Pro and M1 Max chips and to see how Apple silicon is blowing them away with its power, performance and efficiency. Despite the constraints I mentioned earlier, our iPad lineup continues to be indispensable to tens of millions of people, from teachers and students to artists and creators. Customers are eager to get their hands on our ninth generation iPad, which features a beautiful display and double the storage capacity, as well as the new iPad Mini with its ultra portable design. Wearable, Home and Accessories, meanwhile, set an all-time revenue record. Customers are loving the Apple Watch Series 7, with its cutting edge health and fitness tracking features. Nearly every day, I get notes from customers who share how a heart alert led to a life saving appointment with a cardiologist. And more recently, I've been hearing from people who tell me that their Apple Watch saved their lives by calling 911, when they couldn't. As I've said, we're still in the early innings with our health work that every day I'm encouraged by our positive impact. We are also making great advancements in audio and are seeing strong demand from customers as a result. The HomePod Mini continues to earn praise for combining the intelligence of Siri with an immersive room filling audio experience. And our customers have responded with a lot of excitement to the magic of spatial audio on AirPods which packs the acoustics of a concert hall. As always, the deep integration of hardware, software and services is a hallmark of everything Apple makes. It's a principle you can see at work in the introduction of SharePlay, a feature that offers a whole new way to create shared experiences by letting users watch and listen to their favorite content together on FaceTime. And we continue to invest in innovation across our services business, which set another all-time revenue record last quarter and performed even better than we had anticipated. The App Store continues to be an economic miracle for developers around the world and a safe and trusted place for consumers to discover their favorite apps. Since its launch, we have paid developers selling digital goods and services more than $260 billion, with 2021 setting a new record for their earnings. I'm also happy to report that in its first 2 years, Apple TV+ shows and movies have earned 200 award wins and more than 890 nominations. Among the powerful lineup are feature films like The Tragedy of Macbeth, CODA and Swan Song, along with many gripping new series coming up, including Severance and The Afterparty. Each one is a tremendous credit to all the storytellers in front of the cameras and behind them who touched audiences all over the world. Fitness+, meanwhile, continues to inspire customers to reach their health and fitness goals. We recently introduced Time to Run, an extension of our popular series Time to Walk, as well as new collections of workouts and meditations to help users make more intentional training choices. Despite the pandemic, our retail businesses saw its highest revenue in Apple's history, and we also earned our highest ever customer satisfaction scores. That is a testament to the incredible adaptability our teams have shown as we've reimagined [digital] experience. I also want to take a moment to thank our retail employees and AppleCare teams for the deep care you've given to our customers as they look to get the most out of our products, learn new skills or track down the perfect gift. We have always led with our values and with compassion and care and never has that been more needed than during the pandemic. Last quarter, we celebrated 10 years of our Employee Giving program, which we started to help our employees identify and support the causes they care most deeply about. We pledged to match their contributions to organizations doing important work at every level from their local food pantry to global humanitarian non-profits. In the last decade, this program has contributed nearly $725 million to charitable organizations. We also celebrated 15 years of Apple's partnership with a global fund on Project RED supporting their life-saving work to expand healthcare services in Sub-Saharan Africa for people living with HIV/AIDS. With the support of our customers, we've now raised nearly $270 million to fund prevention, testing and counseling services for people impacted by HIV/AIDS. And in keeping with our abiding belief in and commitment to education, we also launched a new partnership with the Boys & Girls Club of America. This initiative will help young people across the U.S. learn to code on iPad using our Everyone Can Code curriculum. And we are continuing to drive innovations to help combat climate change. We are already carbon neutral across our own operations, and we are working intensely to meet our 2030 goal of carbon neutrality across our supply chain and the life cycle of our products. To celebrate Black History Month, we will be releasing a special edition Apple Watch Black Unity Braided Solo Loop and a matching Unity Lights Watch Face. And through our racial equity and justice initiative, we are continuing to support organizations blazing trails to a more equitable world in our economies, our classrooms and our criminal justice system. We recognize, as ever, that it takes all of us to confront our most profound challenges. And at Apple, we are determined to do our part. That includes our own work and inclusion and diversity, which we are advancing every day. Let me close by saying that despite the uncertainty of the world, there is one thing of which I am certain: Apple will continue to [innovate] every day and in every way to deliver on the promise of technology at its best. I will now turn it over to Luca to go over our quarterly results in more detail." }, { "speaker": "Luca Maestri", "text": "Thank you, Tim, and good afternoon, everyone. We are very pleased to report record financial results for the December quarter. We set an all-time revenue record of $123.9 billion, an 11% increase from a year ago. We reached new all-time records in the Americas, Europe, Greater China and the rest of Asia Pacific. And it was also an all-time record quarter for both products and services. On the product side, revenue was $104.4 billion, up 9% over a year ago, despite significant supply constraints. We grew in each of our product categories, except iPad, where supply constraints were particularly pronounced, and set all-time records for iPhone, Mac and Wearables, Home and Accessories. The strong level of sales performance, the unmatched loyalty of our customers and the strength of our ecosystem have driven our current installed base of active devices to a new all-time record of 1.8 billion devices. The growth in the installed base were broad-based as we set all-time records in each major product category and in each geographic segment. Our Services set an all-time revenue record of $19.5 billion, up 24% over a year ago, with December quarter records in every geographic segment. Company gross margin was 43.8%, up 160 basis points from last quarter due to volume leverage and favorable mix, partially offset by higher cost structures. Products gross margin was 38.4%, up 410 basis points sequentially, driven by leverage and mix. Services gross margin was 72.4%, up 190 basis points sequentially, mainly due to a different mix. Net income of $34.6 billion and diluted earnings per share of $2.10 both grew more than 20% year-over-year and were all-time records. Operating cash flow of $47 billion was also an all-time record. Let me get into more detail for each of our revenue categories. iPhone revenue grew 9% year-over-year to an all-time record of $71.6 billion despite supply constraints, thanks to a remarkable customer response to our new iPhone 13 family. We set all-time records in both developed and emerging markets, reached all-time high in the iPhone active installed base and the latest survey of U.S. consumers from 451 Research indicates iPhone customer satisfaction of 98%. For Mac, revenue of $10.9 billion was an all-time record with growth of 25% year-over-year driven by strong demand for our newly redesigned MacBook Pro powered by M1 despite supply constraints. We are 1 year into our transition to Apple silicon and already, the vast majority of our Mac sales are from M1-powered devices, which helped drive a record number of upgraders during the December quarter. Our momentum in this category is very impressive as the last 6 quarters have been the best 6 quarters ever for Mac. iPad generated $7.2 billion in revenue, down 14% year-over-year due to very significant supply constraints, but customer demand was very strong across all models. Despite the supply shortages, our installed base of iPads reached a new all-time high during the quarter, thanks to a high number of customers that are new to iPad. In fact, around half of the customers purchasing an iPad during the quarter were new to the product. Wearables, Home and Accessories set a new all-time record of $14.7 billion, up 13% year-over-year. And we set all-time revenue records in each geographic segment. We also continue to improve and expand our product offerings in this category to create unique experiences showcasing our deep integration of hardware, software and services. In addition to an outstanding level of sales performance globally, Apple Watch continues to extend its reach, with over 2/3 of customers purchasing an Apple Watch during the quarter being new to the product. Turning to services. As I mentioned, we reached an all-time revenue record of $19.5 billion, up 24%, with all-time records for cloud services, for music, video, advertising and payment services and a December quarter record for the App Store. These impressive results reflect the positive momentum we are seeing on many fronts. First, as I mentioned before, our installed base has continued to grow and has reached an all-time high across each geographic segment and major product category. Next, we continue to see increased customer engagement with our services. The number of paid accounts on our digital content stores grew double digits and reached a new all-time high during the December quarter in every geographic segment. Also, paid subscriptions continue to show very strong growth. We now have more than 785 million paid subscriptions across the services on our platform, which is up 165 million during the last 12 months alone. And finally, we're adding new services that we think our customers will love, and we continue to improve the breadth and quality of our current service offerings. Just in this last quarter, we have added incredible new content on Apple TV+, on Fitness+ and Apple Arcade and a brand-new way to listen to music with Apple Music Voice. We also announced in November the beta program for Apple Business Essentials, a new service offering that brings together device management 24/7 support and iCloud storage to our small businesses, manage the end-to-end life cycle of their employees' Apple devices. We are very excited that many thousands of small business customers are already actively participating in the beta program. This announcement is just one of many ways we are expanding our support for enterprise and business customers. With the latest MacBook Pros that we've introduced last October, the new M1-powered Mac lineup has quickly become the preferred choice of Macs among enterprise customers. Shopify, for example, is upgrading its entire global workforce to M1-powered MacBook Pro and MacBook Air. By standardizing on M1 Max, Shopify continues its commitment to providing the best tools to help its employees work productively and securely from anywhere. And Deloitte Consulting is expanding the deployment of the Mac Employee Choice program, including offering the new M1 MacBook Pro to empower their professionals to choose devices that work best for them in delivering consulting services. Let me now turn to our cash position. Due to our strong operating performance and holiday quarter seasonality, we ended the quarter with $203 billion in cash, plus marketable securities. We decreased commercial paper by $1 billion, leaving us with total debt of $123 billion. As a result, net cash was $80 billion at the end of the quarter. Our business continues to generate very strong cash flow, and we were able to return nearly $27 billion to shareholders during the December quarter. This included $3.7 billion in dividends and equivalents and $14.4 billion through open market repurchases of 93 million Apple shares. Our business continues to generate very strong cash flow, and we're also able to return nearly $27 billion to shareholders during the December quarter. This included $3.7 billion in dividends and equivalents and $14.4 billion through open market repurchases of 93 million Apple shares. We also began $6 billion accelerated share repurchase program in November, resulting in the initial delivery and retirement of 30 million shares. As we move ahead into the March quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we are not providing revenue guidance, but we are sharing some directional insights based on the assumption that the COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter. We expect to achieve solid year-over-year revenue growth and set a March quarter revenue record despite significant supply constraints, which we estimate to be less than what we experienced during the December quarter. We expect our revenue growth rate to decelerate from the December quarter, primarily due to 2 factors. First, during the March quarter a year ago, we grew revenue by 54%. Remember that last year, we launched our new iPhones during the December quarter. While this year, we launched them during the September quarter. Due to the later launch a year ago, some of the associated channel inventory fill occurred during the March quarter last year. As a result of the different launch timing, we will face a more challenging year-over-year compare. Second, we expect foreign exchange to be a 3-point headwind when compared to the December quarter growth rate. We currently expect FX to have a negative impact on growth of 2 points in the March quarter, while it represented a 1 point benefit during the December quarter. Specifically related to Services, we expect to grow strong double digits but decelerate from the December quarter performance. This is due to a more challenging compare because a higher level of lockdowns around the world last year led to increased usage of digital content and services. We expect gross margin to be between 42.5% and 43.5%. We expect OpEx to be between $12.5 billion and $12.7 billion. We expect OI&E to be around negative $150 million, excluding any potential impact from the mark-to-market of minority investments, and our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividend of $0.22 per share of common stock payable on February 10, 2022, to shareholders of record as of February 7, 2022. And with that, let's open the call to questions." }, { "speaker": "Tejas Gala", "text": "Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please?" }, { "speaker": "Operator", "text": "Absolutely. We'll take our first question from Katie Huberty with Morgan Stanley. Hearing no response, we'll take our next question from Wamsi Mohan with Bank of America." }, { "speaker": "Wamsi Mohan", "text": "Yes. Thank you. Your margins have clearly been very impressive. So I have one question each on product and one on services gross margins. On product gross margins, that's clearly benefiting from a very strong mix. So Tim, I'm curious how sustainable do you think these mix trends are from the data that you see? And can you share any thoughts across how the Pro and Pro Max mix compared to prior cycles? And on the services side, if I could just ask that, too. When you look at the gross margins there, that's been really impressive. Can you give us some sense of where within services, you're seeing particularly favorable mix trends? And how should investors think about the trajectory of these margins given some of the sizable investments you're making to drive very successful areas like content for TV+ as an example?" }, { "speaker": "Tim Cook", "text": "Wamsi, it's Tim. In terms of the mix, we don't comment directly on mix. But what I would tell you is that we saw strong demand across the iPhone 13 family. And in fact, we had several of the top-selling models in various markets, including the top 5 in the U.S. and Australia, the top 4 in Urban China, 2 of the top 3 in the UK, 3 of the top 4 in France and Germany and 4 of the top 6 in Japan. And certainly, based on some external data that I've seen, it does seem to say that we are gaining share as well. So we feel quite good about the momentum of iPhone. And I should add that we were constrained during the quarter." }, { "speaker": "Luca Maestri", "text": "Wamsi, on the services side, you were asking about gross margin there. As you know, our services business in aggregate is accretive to overall company margin. And as you know, our services portfolio is very broad, and it contains businesses with very different margin profiles. The difference in margin profile is due in part to the nature of those businesses and in part to the way that we account for them, in some cases, we account on a net basis as opposed to a gross basis. And so as a result, the services gross margin percentage over time will be influenced by the relative growth of the different businesses within the portfolio. We do not guide at the product and services level, but I think you've seen the guidance that we provided for the March quarter at the total company level, 42.5% to 43.5%, obviously very strong compared to our recent history. And so we're very pleased with that." }, { "speaker": "Operator", "text": "We'll take our next question from Kyle McNealy with Jefferies." }, { "speaker": "Kyle McNealy", "text": "Congrats on the solid iPhone result. That's very good. I assume that you may have prioritized iPhone to the extent there may be similar components that are used for iPhone and iPad. Can you just level set me on that if that's not the case? And if it is, should we see a recovery in iPad as you move past your prime iPhone selling season and you may have better access to components or better supply as we move through the next few months of the year?" }, { "speaker": "Tim Cook", "text": "Yes. Kyle, it's Tim. From a supply constraint point of view, as you recall, we said that in Q1, the December quarter, that would have constraints more than 6, and we clearly did have constraints more than 6. On March, we're saying that where we will have -- we will do better or have less constraints than we had in the December quarter. If you look at the commonality between different products, there is some. But generally, the challenge is on legacy nodes. And these legacy nodes are by supplier. And so it's much more focused on the supplier than anything else and versus us behind the curtain finding a place to take it. There's not -- none of that, but there is some of that. But largely, we have to take it where the shortages are." }, { "speaker": "Kyle McNealy", "text": "Okay. Great. Can you give us any other color on kind of the trajectory of iPad and what's impacting this quarter and where it might go in the March and the June quarter?" }, { "speaker": "Tim Cook", "text": "Yes. The issue with iPad, and it was a very significant constraint in the December quarter, was very much on these legacy nodes that I had talked about. Virtually all of the problem was in that area. And so overall, we're not guiding by product constraint -- by product level. But at the -- but overall, we do see an improvement in the March quarter in terms of the constraints going down versus what they were in the December quarter." }, { "speaker": "Operator", "text": "We'll take our next question from Shannon Cross with Cross Research." }, { "speaker": "Shannon Cross", "text": "Tim, could you talk a bit about the Mac business? Looking back, it's up about 50% from the calendar 2019 revenue. You did almost $11 billion this quarter, and you're still working through the M1 transition. So can you talk about where you see the opportunity to gain share? What are really sort of the target markets that you think you can go after in order to grow this beyond think it was about $37 billion in the last 12 months? And then I have a follow-up." }, { "speaker": "Tim Cook", "text": "Yes. Shannon, thank you for the question. Mac set an all-time revenue record at $10.9 billion for the quarter. That was up 25%. And as you point out, the last 6 quarters for the Mac have been the top 6 revenue quarters of all time. And what's further very good about this is we set all-time revenue records in Americas, in Europe and the rest of Asia Pacific. And we set a December quarter record in Greater China. And so it's not narrowed to a particular geographic area that we're doing well in. It's almost -- about almost across the board. The response is very much because of M1. And we got even more response with the MacBook Pro that we launched in the -- during the Q1 time frame. The -- both the upgraders, which we had a record number of upgraders for the December quarter, but also in markets like China, 6 out of 10 sales are people new to the Mac. And so it's powered by both upgraders and switchers. Customer satisfaction is off the charts. And so what I see this as is a -- that will -- a product that will be very successful in a number of different markets from education, to business, to the creative industry and in all geographic markets. We're not limiting ourselves." }, { "speaker": "Shannon Cross", "text": "Great. And then, Luca, can you talk a bit more on services? Just obviously outperformed your guidance or your expectations as well as certainly where we were at. Where were the -- what were the things that really outperformed? And maybe what trends are you seeing that is driving the extra revenue?" }, { "speaker": "Luca Maestri", "text": "Yes, Shannon. It was -- I mean it was really great on all fronts. We said December quarter records in every geographic segment. And then as I mentioned earlier, an all-time record for cloud, for music, for video, for advertising, for payment services. December quarter record in the App Store. So we've done, as you said, better than we were expecting at the beginning of the quarter. This overperformance has been spread around the world and spread around our services categories. And the reality is this combination of factors, the fact that the installed base is growing, the fact that we continue to have more and more engagement of our customers on all the services -- paid subscriptions is a phenomenal story, right? We now have 785 million paid subs. We just -- we've increased 165 million in the last 12 months alone, right? And so all these things combined are really powering the business. Very, very pleased with the performance." }, { "speaker": "Operator", "text": "We'll hear next from Katy Huberty with Morgan Stanley." }, { "speaker": "Kathryn Huberty", "text": "So first question just as it relates to some of the disruption you've seen on the component side, manufacturing and logistics over the past couple of years, are you starting to rethink your broader supply chain strategy or the manufacturing footprint on the back of the significant disruption? Are you happy with the overall geographic exposure that you see in the supply chain today?" }, { "speaker": "Tim Cook", "text": "Katy, if you sort of step back and look at how we've done, our largest issue by far has been the chip shortage. That is industry-wide and on these legacy nodes, as I had mentioned earlier. And I think our supply chain actually does very good considering the shortages because it's a fast-moving supply chain. The cycle times are very short. There's very little distance between a chip being fabricated and packaged and a product being -- going out of factory. And so, no, I don't see that it makes a fundamental change in the supply chain." }, { "speaker": "Kathryn Huberty", "text": "Okay. And how are you thinking about the metaverse opportunity and Apple's role in that market?" }, { "speaker": "Tim Cook", "text": "Well, that's a big question. But we're a company in the business of innovation. So we're always exploring new and emerging technologies. And I -- you've spoken at length about how this area is very interesting to us. Right now, we have over 14,000 AR kit apps in the App Store, which provide incredible AR experiences for millions of people today. And so we see a lot of potential in this space and are investing accordingly." }, { "speaker": "Operator", "text": "We'll take our next question from Amit Daryani with Evercore." }, { "speaker": "Amit Daryanani", "text": "I have 2 as well. I guess both up on the supply chain side, I think these continue to be fairly volatile. I'd love to get your perspective, if you feel, if things or supply chain issues are starting to alleviate or they still remain challenging? And then maybe I missed this, but could you perhaps tell us how much revenue was left on the table in December because of the supply chain issues? And how does that number shake up in March?" }, { "speaker": "Tim Cook", "text": "Yes. Amit, what we've said in terms of December and March was that it's very difficult to estimate with great precision the constraints. But we said that they would be more than the Q4 or more than the September quarter, and we're saying that March will be less than the December quarter. And so that's the kind of verbiage that we’ve placed around it. In terms of is it still challenging? Yes, it is challenging. And for us, we pride ourselves on getting products to customers who really want them and try to do that in a fast basis. And so it's frustrating that we can't always do that at the speed that we would like. However, March is better than December. And so there's some encouraging sign there. We're not predicting, [which we do not know] overall, obviously because of the number of variables that go into such a prediction." }, { "speaker": "Amit Daryanani", "text": "Fair enough. Tim, I think one of the topics investors can struggle a fair a bit with Apple is really just sort of understand visibility around your product road map, and I think some of your tech peers tend to be more vocal about their initiative. Some of them go change their name when they find an initiative that’s attractive I feel. You folks are spending, I think, $23 billion on R&D in '21. So you're really spending a fair amount. And maybe without telling us the road map, could you just talk about how do you think about where to focus your R&D resources on? And to some extent, is the way to think about this R&D spend, how much of it is really done on things that are more evolutionary in products that are out in the marketplace versus things that we haven't seen yet are on potential new offerings?" }, { "speaker": "Tim Cook", "text": "We have a little different model. We try to announce things when they're ready or close to ready and try to maintain an element of surprise in there. And so that explains hopefully what we do with our road map. And I think that's proven successful for us, and other people can do it differently, of course, but it's pretty been good for us over time to do that. So we're going to continue to do that. In terms of deciding where we invest in, we look at areas that are sort of at the intersection of hardware, software and services. And because we think that, that's where the magic really happens and it brings out the best in Apple. And so there are areas that have more than peaked our interest, and we are investing in those. And you can tell through time that we've ramped our R&D spend even more than we were before. And so there's quite a bit of investment going into things that are not on the market at this point as there always are." }, { "speaker": "Operator", "text": "We'll hear next from David Vogt with UBS." }, { "speaker": "David Vogt", "text": "I just wanted to dive in perspective on China and sort of the macro climate there and how that sort of pertains to your business as we think about it going forward. And the reason why I'm asking is we've heard some concerns that current policies might have caused a pause in this market and smartphone inventory. Maybe more specifically the local vendors could be a little bit elevated going into Chinese New Year. So we just want to get your thoughts on what you're seeing in this market around, the sort of potential development and then maybe touch on sell-in versus sell-through in that market. And then I have a follow-up." }, { "speaker": "Tim Cook", "text": "Well, I can only comment on, for us. Our sales grew 21% there in the last quarter, and we're very proud of that. I'll stay away and let other people be the economist and make the macro determinations. But what we're seeing there was super impressive with all-time revenue records and a record number of upgraders and strong double-digit growth in switchers on iPhone, which is very important to us. And as I've mentioned before, we had the top 4 selling phones in urban China. And so there's a lot of good there. And I would remind you that iPhone was constrained in the quarter. And so I'm not sure where the statements are coming around about inventory, and I can't comment on whether other people have more or not, I don't know the answer to that. Thanks for the question." }, { "speaker": "David Vogt", "text": "That's helpful, Tim. And then maybe just on the supply chain. Obviously, you've been managing it incredibly well over the last 12 to 18 months. And gross margins have actually performed relatively well, mix driven both between products and services. Can you help us think about sort of the quantifiable impact or maybe the costs that you're carrying due to the supply chain that may be sort of -- I don't want to use the word transitory, but we'd expect over the longer term, that might be sort of abate a little bit and you'll get a little bit of a benefit as we get past some of these supply chain issues over the next 12 months or so?" }, { "speaker": "Tim Cook", "text": "We're seeing inflation, and it's factored into our gross margin and OpEx that Luca reviewed with you earlier. Logistics, as I've mentioned on a previous call, is very elevated in terms of the cost of moving things around. I would hope that at least a portion of that is transitory, but the world is -- the world has changed, and so we'll see." }, { "speaker": "Operator", "text": "We'll take the question from Samik Chatterjee with JPMorgan." }, { "speaker": "Samik Chatterjee", "text": "I had a couple. The first question that I had was really on Apple TV+, and I know some of the other players in this market have talked about slowing subscriber growth as we exit the pandemic. So curious if you can share what trends you're seeing in Apple TV and Apple TV+ and how similar or dissimilar they are and how your content is maybe helping you on that aspect? And I have a follow-up." }, { "speaker": "Tim Cook", "text": "We don't give out subscriber numbers for Apple TV+. What we do, do is give out a subscriber number for our subscription number for the total number of subscriptions that we had. And I think Luca mentioned earlier we ended the quarter at 785 million. And so we were incredibly pleased with that. That's a huge growth on a year-over-year basis of 165 million. And it counts, as you recall, both Apple branded and third party. In terms of how we're doing with TV+, we've been honored with 200 wins and 890 nominations. We're doing exactly like we had wanted to. We’re giving storytellers a place to tell original stories and feel really good about where we are competitively and strategic position of the product." }, { "speaker": "Samik Chatterjee", "text": "And if I can just follow up, and similarly on Apple Pay, can you just help us think about when you think about the next few years, where are the biggest opportunities, either be it in terms of like geographies or either segments -- customer segments that you may not be tapping into currently and have an opportunity in." }, { "speaker": "Tim Cook", "text": "Well, putting aside any kind of thing that sits on our road map for a second in that area, which we obviously wouldn't talk about in the call, I would say that I think Apple Card has a great runway ahead of us. It was rated to the #1 midsized credit carding customer set by J.D. Power and is getting -- has fast become people's main credit card for many, many people. And the growth of Apple Pay has just been stunning. It's been absolutely stunning. And there's still obviously a lot more there to go and because there's still a lot of cash in the environment. And so I think that both of these and whatever else we might do have a great future ahead." }, { "speaker": "Operator", "text": "We'll take our next question from Chris Caso with Raymond James." }, { "speaker": "Christopher Caso", "text": "Yes. So the first question is just a little bit of help in interpreting the guidance. And if you could speak to the March quarter, perhaps in terms of seasonality and seasonal performance. And Luca, as you mentioned last year, because of the later launch of the phone that some of that came into the March quarter, and that was better than seasonal performance in March. Should we interpret because the supply constraints are easing somewhat as you go into the March quarter that we should see something similar that March quarter would get some better than seasonal performance? Is that the correct way to interpret your guidance?" }, { "speaker": "Luca Maestri", "text": "Well, and we talked about it on a year-over-year basis because that's probably how most people look at it. And so just to recap what we said. First of all, we expect a record for the March quarter. We expect solid growth on a year-over-year basis. And -- but as Tim was saying, we still expect significant supply constraints but less than what we've seen in December. So I think on that basis, you can do the math around sequential. But given where we are in the environment, given the difficult compare both on iPhone, and as I mentioned on -- during my prepared remarks, on services, we're very, very happy with the way we're guiding and the way the business is going right now." }, { "speaker": "Christopher Caso", "text": "Okay. As a follow-up, a follow-up question is on perhaps the sustainability and repeatability of the growth in iPhone after 2 very good years, well-received product and the 5G upgrade cycle. And I think there was a point in time when perhaps there's a view from some that iPhone was ex growth, and that's been proven wrong. Off of these very strong results, maybe you can speak to your level of confidence that iPhone continues to grow in the future? And kind of what are the avenues for that growth?" }, { "speaker": "Tim Cook", "text": "Yes. Chris, it's Tim. What I would say is that iPhone has become an integral part of so many people's lives now more than ever. And the active installed base of iPhone continues to grow and is now at an all-time high. And during December, as we had mentioned, we had a record number of upgraders and grew switchers strong double-digit, which I think speaks to the strength of the product. And that's all baked into some -- an enormous customer satisfaction rating of 98% and doing well throughout the geographies. And I've mentioned some of the geos that we track and how many units that we have on the top-selling model charts. And so -- and even though this is the second product announcement that has 5G in it, we're still really in the early innings of 5G, meaning if you look at the installed base and look at how many people are on 5G versus not, and we don't release those exact numbers, but you can do some math and estimate those, we maintain a very optimistic view on iPhone long term." }, { "speaker": "Operator", "text": "We'll take our next question from Ben Bollin with Cleveland Research." }, { "speaker": "Benjamin Bollin", "text": "Tim, I'm interested in how you think about the relationship between the total iOS installed base and then the subsequent performance you see within the services or the paid subscriptions. And a second part to that is, how do you look at the existing services business in terms of the growth you get from customers who are already subscribers versus completely net new or greenfield subscribers?" }, { "speaker": "Tim Cook", "text": "I think I'll let Luca comment on the second part of that. But if you back up and sort of look at how we're doing, even though we have 785 million subs, relative to the total number of products offered and the customers that's offered in, there's still a lot of room to grow there. And so I -- the way that I look at it is that we -- there's a lot more greenfield in front of us." }, { "speaker": "Luca Maestri", "text": "And Ben, on the services engagement and how we think about customers, right, obviously, it's important for us that customers are engaged on our services platforms. And the ones that we have, we know that the more engaged they are, they're more likely to stay with Apple for the long term. So we just obviously track all those metrics, and they're very important for us. And that's why we continue to improve the quality of our offerings and the quantity over time. As you've seen, we launched a lot of new services. We obviously care a lot about new customers as well, and that's why we keep track of the installed base and a lot of other metrics on that front. It's very similar to what we do with products. I mean, also for products, we care a lot about upgraders. We care a lot about switchers. It's obviously the combination of the 2 that when you put it together provides the level of growth that you've actually seen in our Services business. I mean the last 12 months, we've done over $72 billion of revenue on Services. It's the size of a Fortune 50 company. It couldn't happen with our contribution from both existing and new customers." }, { "speaker": "Operator", "text": "We'll take our next question from Harsh Kumar with Piper Sandler." }, { "speaker": "Harsh Kumar", "text": "First of all, congratulations on stellar quarter in December and all the records that the Apple community has set. Tim, I had a question on the content on Apple TV. When we look at the Apple content that you guys put all on TV original content, it's typically very socially responsible and healthy, for example, Ted Lasso. Has this, in effect, created a constraint or a hesitancy of some sort for Apple to go and purchase studios when they come up? Or have those decisions be primarily financial or otherwise?" }, { "speaker": "Tim Cook", "text": "We don't make purely financial decisions about the content. We try to find great content that has a reason for being. And we love shows like Ted Lasso and several of the other shows as well that have reason for existing and may have a good message and may make people feel better at the end of it. But we're -- but I don't view that we've narrowed our universe, the things we're selecting from. There's plenty to pick from out there. And I think that we're doing a pretty good job of it as we speak." }, { "speaker": "Harsh Kumar", "text": "Fair enough. And then my follow-up was the Apple vision of healthcare in the future. So you guys have sort of cautiously approached healthcare with iWatch and iPhone. It's mostly a preventative sort of approach. It provides you updates. But do you see a situation down the line where Apple perhaps plays a more active role, either through the Watch or some of the device where perhaps a doctor or a hospital mandates that the watch we want for effectively for critical and vital monitoring? And I was curious if you could just give us some color on how you guys think about health care and iWatch and that confluence?" }, { "speaker": "Tim Cook", "text": "Well, the -- with the Apple Watch, there's literally not days that go by without me getting notes about someone that's received a health alert. Maybe it's to do with their cardiovascular health. Or more recently, a lot of people have told me that they fell and was knocked unconscious and couldn't respond and the watch responded for them to emergency contacts and emergency personnel. And so there's a lot that we're doing today. My sense has always been that there's more here. I don't want to get into a road map discussion in the call. But we continue to kind of pull the string and see where it takes us. But we're really satisfied with how we're doing in this area because we are fundamentally changing people's lives and, in some cases, saving people's lives. So it's an area of great interest." }, { "speaker": "Tejas Gala", "text": "Thank you. A replay of today's call will be available for 2 weeks on Apple Podcast as a webcast on apple.com/investor and via telephone. The numbers for the telephone replay are (888) 203-1112 or (719) 457-0820. Please enter confirmation code 3599903. These replays will be available by approximately 5 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at (408) 862-1142. Financial analysts can contact me with additional questions at (669) 227-2402. Thank you again for joining us." }, { "speaker": "Operator", "text": "This concludes today's conference. We do appreciate your participation." } ]	Apple Inc.	24,937
AAPL	4	2,023	2023-11-02 17:00:00	Operator: Good day, and welcome to the Apple Q4 Fiscal Year 2023 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Suhasini Chandramouli, Director of Investor Relations. Please go ahead. Suhasini Chandramouli: Thank you. Good afternoon, and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook. And he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook: Thank you, Suhasini. Good afternoon, everyone, and thanks for joining the call. Today, Apple is reporting revenue of $89.5 billion for the September quarter. We achieved an all-time revenue record in India, as well as September quarter records in several countries, including Brazil, Canada, France, Indonesia, Mexico, the Philippines, Saudi Arabia, Turkey, the UAE, Vietnam and more. iPhone revenue came in ahead of our expectations, setting a September quarter record, as well as quarterly records in many markets, including China mainland, Latin America, the Middle-East, South Asia and an all-time record in India. In services, we set an all-time revenue record with double-digit growth and ahead of our expectations. During the September quarter, we continue to face an uneven macroeconomic environment, including foreign exchange headwinds and we've navigated these challenges by following the same principles that have always guided us. We've continued to invest in the future and manage for the long-term. We've adapted continuously to circumstances beyond our control, while being thoughtful and deliberate on spending. And we've carved a path of groundbreaking innovations and delivered with excellence every step of the way. That includes Apple Vision Pro, which has gotten such an amazing response from developers who are currently creating truly incredible apps. We're excited to get this magical product in the hands of customers early next year. Now let me share more about our products, beginning with iPhone. iPhone revenue came in at $43.8 billion, 3% higher than a year ago, and a new record for the September quarter. This fall, we were thrilled to debut the iPhone 15 lineup. The all-new iPhone 15 and iPhone 15 Plus feature a gorgeous design, powerful cameras and the intuitive Dynamic Island. Powered by the industry-leading A17 Pro, our iPhone15 Pro lineup has a beautiful strong and durable titanium design and the best iPhone camera system ever, including a 5X Telephoto lens on iPhone 15 Pro Max. Customers are loving the entire iPhone 15 family and reviews have been off the charts. In Mac, revenue came in at $7.6 billion, down 34% year-over-year from the prior year's record quarter. This was due to challenging market conditions, as well as difficult compares against the supply disruptions and subsequent demand recapture we experienced a year ago. Earlier this week, we were excited to unveil the next generation of Apple silicon with our incredible family of M3 chips, M3; M3 Pro; and M3 Max. We're continuing to innovate at a tremendous pace. And our industry-leading lineup of personal computers just got even better. The new MacBook Pro lineup brings our most advanced technology to our Pro users, while iMac, the world's best-selling all-in-one, just got faster and more capable. And according to the latest data from Student Monitor, nearly two out of three college students chose a Mac. We couldn't be more excited about the future. Turning to iPad. Revenue for the September quarter was $6.4 billion. iPad sets the gold standard for tablets and our competitors are unable to match the iPad experience that is enabled by our seamless integration of hardware and software. iPad is also our most versatile product. In classrooms around the world, it's helping educators bring lessons to life, while giving students a window into the world around them. And in artist workshops, design studios and everywhere else, creative minds come together, iPad supercharges the creative process, helping users take their ideas farther than they ever could before. Across wearables, home and accessories, revenue came in at $9.3 billion. Apple Watch has become essential in our lives and this is our best Apple Watch lineup ever. With Apple Watch Series 9 and Apple Watch Ultra 2, we're giving people even more tools to stay safe and live healthy, active lives. With the new double tap gesture, users can easily control Apple Watch Series 9 and Apple Watch Ultra 2 using just one hand and without touching the display. It feels like magic. Our latest Apple Watch lineup also includes our first-ever carbon-neutral products, a significant achievement of innovation and determination. Apple's unique ecosystem of hardware, software, and services delivers an unparalleled user experience. During the quarter, we also had the chance to introduce a range of exciting new updates to our software that will allow users to get even more out of their devices. Whether it's personalized contact posters and new face time features in iOS 17, new tools for users to make their experience their own in macOS Sonoma and iPadOS 17, or a bold new look in watchOS 10 that lets you see and do more, faster than ever, Apple is delivering an even better, richer experience that users are loving. Services revenue set an all-time record of $22.3 billion, a 16% year-over-year increase. We achieved all-time revenue records across App Store, advertising, AppleCare, iCloud, payment services, and video, as well as the September quarter revenue record in Apple Music. Whether subscribers are waking up to headlines on Apple News+, getting their morning workout in with Fitness+, feeling the beat with Apple Music on their way to work or school, or unwinding at the end of the day with Apple Arcade, we have so many different services to enrich their day. Apple TV+ continues to delight customers as well, with new and returning shows like the Morning Show, Lessons in Chemistry and Monarch. We're telling impactful stories that inspire imagination and stir the soul. Making movies that make a difference is also at the heart of Apple TV+ and we were thrilled to produce Martin Scorsese's Killers of the Flower Moon, a powerful work of cinema that premiered in theaters around the world last month. We're proud to say that since launch, just over four years ago, Apple TV+ has earned nearly 1,600 award nominations and nearly 400 wins. We also offer subscribers an unprecedented live sports experience with MLS Season Pass. We couldn't be more pleased with how our partnership with Major League Soccer has gone in its first year. Subscriptions to MLS Season Pass have exceeded our expectations and we're excited to continue that momentum next year. With the playoffs now underway, we can't wait to see who takes home MLS cup. And nowhere does the magic of Apple come alive more than it does in our stores. Over the past year, we've continued to find ways to connect with even more customers. We welcomed customers to our first-ever retail locations in India. We also opened doors to new stores in Korea, China and the UK and expanded the Apple store online to Vietnam and Chile. And we have another store opening in China this week. In September, I joined our team at Apple Fifth Avenue on launch day and the energy and excitement were unbelievable. Every time we connect with the customer, we're reminded why we do what we do. From simple joys of creating and sharing memories, to lifesaving features like emergency SoS via satellite, we're enriching lives in ways large and small. And whether we're working to safeguard user privacy, ensure technology made by Apple is accessible for everyone, or build an even more inclusive workplace, we're determined to lead with our values. Our environmental efforts are a great example of the intersection of our work and our values. Across Apple, we act on a simple premise, the best products in the world should be the best products for the world. We've made our environmental work a central focus of our innovation, because we feel a responsibility to leave the world better than we found it and because we know that climate change cannot be stopped, unless everyone steps up and does their part. Our first ever carbon-neutral products represent a major milestone and we're going to go even further. We plan to make every product across our lineup carbon neutral by the end of the decade. And we're not doing it alone. Over 300 of our suppliers have committed to using a 100% clean energy for Apple production by 2030. We also continue to invest in entrepreneurs who are lighting the way for a greener, more equitable future. Through our third impact accelerator class, we're proud to support a new class of diverse innovators on the cutting edge of green technology and clean energy. Apple is always looking forward, driven in equal measure by a sense a possibility and a deep belief in our purpose. We're motivated by the meaningful difference we can make for our customers and keenly determined to push the limits of technology even further. And that's why I'm so confident that Apple's future is bright. With that, I'll turn it over to Luca. Luca Maestri: Thank you, Tim, and good afternoon, everyone. Revenue for the September quarter was $89.5 billion, down less than 1% from last year. Foreign exchange had a negative impact of over 2 percentage points. And on a constant-currency basis, our revenue grew year-over-year in total, and in each geographic segment. We set a September quarter record in the Americas and saw strong performance across our emerging markets, where both iPhone and Services grew double digits. Products revenue was $67.2 billion, down 5% from last year, due to very challenging compares on both Mac and iPad, which I will discuss in more detail later on. At the same time, we reached a September quarter record on iPhone, driven by strength in emerging markets. Our total installed-base of active devices reached an all-time high across all products and all geographic segments, thanks to our high levels of customer satisfaction and many new customers joining our ecosystem. Our Services revenue set an all-time record of $22.3 billion, up 16% year-over-year, with growth accelerating sequentially from the June quarter. Our performance in Services were broad based, as we reached all-time revenue records in the Americas, Europe and rest of Asia-Pacific and a September quarter record in Greater China. We also set new records in every Services category. Company gross margin set a September quarter record at 45.2%, up 70 basis points sequentially, driven by leverage and favorable mix, partially offset by foreign exchange. Products gross margin was 36.6%, up 120 basis points sequentially, also driven by leverage and mix, partially offset by foreign exchange. Services gross margin was 70.9%, up 40 basis points from last quarter due to a different mix. Operating expenses of $13.5 billion were at the low end of the guidance range we provided, up 2% year-over-year. Net income was $23 billion, diluted earnings per share was $1.46, up 13% versus last year and a September quarter record, and operating cash flow was strong at $21.6 billion. Let me now provide more detail for each of our revenue categories. iPhone revenue was $43.8 billion, up 3% year-over-year and a new September quarter record. We had strong performance in several markets, including an all-time record in India as September quarter records in Canada, Latin America, the Middle East, and South Asia . Our iPhone active installed base grew to a new all-time high and fiscal 2023 was another record year for switches. We continue to see extremely high levels of customer satisfaction which 451 Research recently measured at 98% in the U.S. Mac revenue was $7.6 billion, down 34% year-over-year, driven by challenging market conditions and compounded by a difficult compare in our own business, whereby last year we experienced supply disruptions from factory shutdowns in the June quarter and were subsequently able to fulfill significant pent-up demand during the September quarter. We also had a difference in launch timing with the MacBook Air launching earlier this year in the June quarter compared to the September quarter last year. We have great confidence in our Mac lineup and are excited about the recently announced iMac and MacBook Pro powered by our M3 chips. Our installed base is at an all-time high and half of Mac buyers during the quarter were new to the product, driven by MacBook Air. Also, we saw reported customer satisfaction of 97% for Mac in the U.S. iPad generated $6.4 billion in revenue, down 10% year-over-year. Similar to Mac, these results were a function of a difficult compare from the supply disruptions in the June quarter a year ago and the subsequent fulfillment of pent-up demand in the September quarter. iPad continues to attract a large number of new customers to the installed base with over half of the customers who purchase iPads during the quarter being new to the product and the latest reports from 451 Research indicate customer satisfaction of 98% in the U.S. Wearables, Home and Accessories revenue was $9.3 billion, down 3% year-over-year. We had a September quarter record in Europe and we saw strong performance in several emerging markets around the world. Apple Watch continues to expand its reach with nearly two-thirds of customers purchasing Apple Watch during the quarter being new to the product and customer satisfaction for the Watch was recently measured at 97% in the U.S. Services had a great quarter. We reached a new all-time revenue record of $22.3 billion, up 16% year-over-year. And we're happy to see growth coming from all categories and every geographic segment, which is a direct result of the strength of our ecosystem. Our installed base of over 2 billion active devices continues to grow at a nice pace and establishes a solid foundation for the future expansion of the ecosystem. And we continue to see increased customer engagement with our Services. Both transacting accounts and paid accounts grew double-digits year-over-year, each reaching a new all-time high. Also our paid subscriptions showed strong growth. We have well over 1 billion paid subscriptions across the services on our platform, nearly double the number we had only three years ago. And finally, we continue to improve the breadth and quality of our current services from exciting new content on Apple TV+ and Apple Arcade to additional storage tiers on iCloud. We believe our customers will love this new offering. Turning to enterprise. We are excited to see our business customers in both developed and emerging markets expand their deployment of Apple products and technologies to drive business innovation and employee satisfaction. Starbucks continuously invest in Apple technology to bring the best experience to the customers and employees, including tens of thousands of iPads across all retail stores to help their teams streamline order management, operations and training. In addition, Starbucks recently refreshed over 10,000 Macs to the latest M2-powered MacBook Air for all store managers, enabling them to do their best work and improve productivity. And in Indonesia, popular technology company GoTo is offering Mac as a choice, so that employees can have the best tools to be most productive. Today, more than half of its workforce are already choosing Mac for work. Let me now turn to our cash position and capital return program. We ended the quarter with over $162 billion in cash and marketable securities. We increased commercial paper by $2 billion, leaving us with total debt of $111 billion. As a result, net cash was $51 billion at the end of the quarter. And our goal of becoming net cash-neutral over time remains unchanged. During the quarter, we returned nearly $25 billion to shareholders, including $3.8 billion in dividends and equivalents and $15.5 billion through open market repurchases of 85 million Apple shares. We also began a $5 billion accelerated share repurchase program in August, resulting in the initial delivery and retirement of 22 million shares. Taking a step back, as we close our 2023 fiscal year, our annual revenue was $383 billion. While it was down 3% from the prior year, it grew on a constant-currency basis despite the volatile and uneven macroeconomic environment. Our year-over-year revenue performance improved each quarter as we went through the year, and so did our earnings per share performance, as we reported double-digit EPS growth in the September quarter. We are particularly pleased with our performance in emerging markets with revenue reaching an all-time record in fiscal 2023 and double-digit growth in constant currency. We are expanding our direct presence in these markets from new Apple retail stores in India to online stores in Vietnam and Chile. And we continue to work with our partners to offer a wide range of affordability programs so that we can best serve our customers. We're very excited about the momentum we have in these markets and the opportunity ahead of us. As we move ahead into the December quarter, I'd like to review our outlook, which includes the types of forward-looking information that Suhasini referred to at the beginning of the call. The color we are providing today assumes that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter. Also, on foreign exchange, we expect a negative year-over-year revenue impact of about 1 percentage point. As a reminder, the December quarter this year will last the usual 13 weeks, whereas the December quarter a year ago spanned 14 weeks. For clarity, revenue from the extra week last year added approximately 7 percentage points to the quarter's total revenue. Despite having one less week this year, we expect our December quarter, total company revenue to be similar to last year. We expect iPhone revenue to grow year-over-year on an absolute basis. We also expect to grow after normalizing for both last year's supply disruptions and the one extra week. We expect Mac year-over-year performance to significantly accelerate from the September quarter. We expect the year-over-year revenue performance for both iPad and Wearables, Home and Accessories to decelerate significantly from the September quarter due to a different timing of product launches. On iPad, we launched a new iPad Pro and iPad 10th Generation during the December quarter a year ago. For the Wearable category, last year we had the full December quarter benefit from the launches of the AirPods Pro 2nd Generation, the Watch SE, and the first Watch Ultra. For our Services business, we expect the average revenue per week to grow at a similar strong double-digit rate as it did during the September quarter. We expect gross margin to be between 45% and 46%. We expect OpEx to be between $14.4 billion and $14.6 billion. We expect OI&E to be around negative $200 million, excluding any potential impact from the mark-to-market of minority investments and our tax-rate to be around 16%. Finally, today our Board of Directors has declared a cash dividend of $0.24 per share of common stock, payable on November 16, 2023, to shareholders of record as of November 13, 2023. With that, let's open the call to questions. Suhasini Chandramouli: Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please? Operator: Certainly. We will go ahead and take our first question from Mike Ng of Goldman Sachs. Please go ahead. Michael Ng: Hey. Good afternoon, and thank you very much for the questions. I just have a question on iPhone storage and demand versus iCloud. As demand for storage grows, are you seeing a mix-shift towards higher storage iPhone models or are consumers mostly opting for the same because of increased uptake of iCloud+? What are some of the strategic and financial considerations here and trade-offs, as you think about the mix shift towards higher storage models versus iCloud penetration? Thanks. Tim Cook: Michael, it's Tim. As you probably know, we started the line with the iPhone Pro Max at 256, and so we are seeing a different mix, if you will, this year than last year. Outside of that, not significant changes. Michael Ng: Great. Thank you. And as a separate follow-up, I was just wondering if you could talk a little bit about the market conditions on notebooks and desktops, and then any color that you can share regarding the timing of the Mac -- M3 MacBook Pros this year versus the M2 earlier in the calendar year? Thank you. Tim Cook: Yeah. We're thrilled to have announced the M3 lineup and get the new MacBook Pro, the new iMac out there. We couldn't be more excited about it. We -- as Luca said, with the lineup that we've got and the compare issue that we don't have during Q1, we anticipate a significant acceleration in the Mac space for Q1. To just repeat a little bit about the circumstances of the performance last quarter, in the year-ago June quarter, we had a factory disruption that lasted several weeks. The pent-up demand that resulted from that was filled in the September quarter, and that made the September quarter not only a record, but a substantial record. And obviously, we're now comparing against that for '23 and so that, I wouldn't look at the negative 34% as representative of the underlying business performance. It's sort of the net of it. Michael Ng: Excellent. That's very clear. Thank you, Tim. Tim Cook: Yeah. Suhasini Chandramouli: All right. Thanks, Mike. Can we have the next question, please? Operator: Our next question is from Aaron Rakers with Wells Fargo. Please go ahead. Aaron Rakers: Yeah. Thanks for taking the question and congratulations on the execution in the quarter. I'm curious, if you could help us characterize what the demand environment you're seeing in China looks like. How has the reception been to the iPhone 15? And kind of similar question to the prior one, how would you characterize the mix within China as you go through this current product cycle? And I have a follow-up. Tim Cook: Yeah. If you look at how we did in Greater China for the quarter, we came in at, on a revenue basis, minus 2. But one thing to keep in mind here is that the FX impact was nearly 6 points. So we grew in constant currency. And underneath that, if you look at the different -- the categories, iPhone actually set a September quarter record in mainland China. And the -- what pulled down the performance was a combination, largely of Mac and iPad. Services also grew during the quarter and the Mac and iPad suffered from the same issues that the company did with the compare issues to factory disruptions in Q3 that were filled subsequently in Q4 of '22. We had the -- in addition to that, we had the top four selling phones in urban China for last year, and I was -- I just took a trip over there and could not be more excited about the interactions I had with the customers and employees and others. Aaron Rakers: Yeah. And then, as a quick follow-up, I'm curious as we move towards more of an inflationary component pricing environment. Luca, how do we think about that effect? How you're thinking about the gross margin at the product level, as maybe component pricing starts to turn, what's been clearly very favorable over the last several quarters to more of an inflationary environment? Thank you. Luca Maestri: Well, as you've seen from our results in Q4 and the guidance for Q1, we're obviously experiencing very strong levels of gross margin. The 45.2% was a record for the September quarter. And then, the guidance for Q1 is obviously strong at 45% to 46%. Our gross margins are affected by multiple factors. Obviously, the commodity environment is one of them, as you mentioned. It's been a good environment in recent quarters. But equally important is the mix of what we sell. And obviously, growth in Services for us is favorable, and that has helped our company gross margin. Foreign exchange, on the other hand, has been a drag for us for several quarters, given the strength of the dollar. We don't provide guidance past the December quarter, which is a very important one for us because it's the beginning of the product cycle for many products. And so we feel very good, very confident about, this coming year, and I think the gross margin guidance reflects that. Aaron Rakers: Thank you. Suhasini Chandramouli: Thanks, Aaron. Can we have the next question, please? Operator: Our next question is from Erik Woodring with Morgan Stanley. Please go ahead. Erik Woodring: Awesome. Thank you very much for taking my questions. Maybe if I start, Luca, I know that the iPhone 15 Pro and Pro Max are constrained today, but I think some of your comments suggests you should be back to supply demand balance before quarter end. So, I guess, my question is, does your December quarter revenue guidance account for any supply constraints? And if so, is there any way to kind of quantify how much supply would be limiting your December quarter revenue performance? And then, I have a follow-up. Thank you. Luca Maestri: Yes. It's correct. We are constrained today on iPhone 15 Pro and iPhone 15 Pro Max. We're working very hard to get the product in the hands of all the customers that have ordered it. We expect, as of today, that we're going to be in supply demand balance by the end of the quarter. So the guidance reflects that. Erik Woodring: Okay, very clear. Thanks. And then, maybe for you and Tim. You guys have been on the leading end of -- edge of innovation across hardware, software, silicon, services. And I'm sure there's plenty of technology in kind of longer-term projects that you're investing in. How should we think about your capital intensity as we look to fiscal year '24, just given over the last few years, CapEx as a percentage of revenue had been relatively low compared to the eight years prior? So should we expect a step-up or kind of similar capital intensity? And what are the more notable moving pieces, if any, that we should be thinking about? Thanks. Luca Maestri: Well, the big areas of investment for us are tooling and equipment for manufacturing plants. Our investments in data centers and our investments in our own facilities, both corporate facilities and retail stores. And so, both for the tooling in our plants and our data center investments, we tend to have a bit of a hybrid model where we share some of the investments with our partners and suppliers and so maybe that's why you see sometimes a bit of variability. But over the last few years, we've made all the investments that we needed to make. And obviously, we're planning to make all the investments that we believe are needed and appropriate in order to continue to innovate. Erik Woodring: Great. Thanks so much for the color, guys. Suhasini Chandramouli: Thanks, Eric. Can we have the next question, please? Operator: Our next question is from David Vogt with UBS. Please go ahead. David Vogt: Great. Thanks, guys for taking my question. I know you covered China. I want to pivot to the US for a second. Obviously, iPhone and the business looks like it returned to growth in the quarter. But it's still relatively softer kind of where I thought it would be at this point in the cycle and some of the U.S. carriers obviously haven't been that particularly aggressive in promoting upgrades. So just wanted to kind of get a sense, first, what you're seeing from your partners in the U.S. kind of currently and going forward and what do you expect? And then, second, Luca, on the margins, I mean, is it fair to say that the mix in Q1 from a product versus services dynamic is kind of the key driver of the better gross margin guide as a whole relative to, let's say, the December quarter? Or is there anything else? I know you mentioned there's a lot of moving pieces, but is that the primary driver of the uplift in the margin? Thanks. Tim Cook: On the U.S. carriers and the U.S. business in general, it's really too early to call the iPhone cycle, particularly with the constraint around the Pro and the Pro Max and the U.S. tends to do quite well with those products. It's really too early to tell what the upgrade rates will be and what the switcher rates will be. Luca Maestri: On the margin side, if I understood your question correctly about the December quarter guidance, keep in mind that actually December is the quarter where our products business is tends to be very heavy because of the holiday season. And so the services gross margins that are accretive to total company had an impact, but not as meaningful as other quarters during the year and so I think that the main drivers of the guidance that we provided are the fact that we are seeing improved costs, and improved mix on our -- on the product side of the business, partially offset by foreign exchange, which continues to be a drag, both sequentially and on a year-over-year basis. David Vogt: Got it. So the weakness in iPad and Wearables are less of an impact on sort of the margin trajectory in the December quarter? Luca Maestri: That's correct. David Vogt: I guess? Luca Maestri: That's correct. David Vogt: Got it. Thanks, Luca. Suhasini Chandramouli: All right. Thanks, David. We'll take our next question, please. Operator: Our next question is from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani: Yeah. Good afternoon. Thanks for taking my question. I have two as well. I guess, first off, just the Services growth rate, there's a tremendous acceleration I think in September quarter, the 16% growth. And it sounds like it’s going to hold there pretty well into December. Can you just talk about what is driving this acceleration? Are there a couple of products that have just stepped up in a very meaningful way? Just maybe flush out like what is driving this acceleration because it's fairly notable compared to what you've been seeing in the last few quarters. Luca Maestri: We had a really strong quarter across the border, Amit, because both geographically and from a product category standpoint, we saw very significant growth, I mentioned the records on a geographic basis. And from a category standpoint, literally, we set records in each one of the big categories. We had all-time record for App Store, for advertising, for cloud, video, AppleCare, payments and a September quarter record for Music. So it's hard to pick, one in particular because they all did well. And really then, we step back and we think about why is it that our Services business is doing well and it's because we have an installed base of customers that continues to grow at a very nice space and the engagement in our ecosystem continues to grow. We have more transacting accounts, we have more paid accounts, we have more subscriptions on the platform and we continue to add. We continue to add content and features. We're adding a lot of content on TV+, new games on Apple Arcade, new features, new storage plans for iCloud. So it's a combination of all these things and the fact that the engagement in the ecosystem is improving, and therefore, it benefits every service category. Amit Daryanani: Got it. That's really helpful. And then, maybe if I could ask you about Vision Pro, which I believe is supposed to be launched more broadly sometime in 2024, in the early part of the year. I'm curious how different do you think the launch and the consumer education of this product or a new category will be versus other things like AirPods or Apple Watch that you've done. And then, perhaps any themes I think that's set out to you from the developers that have been able to use this and the developer labs, what feedback have you gotten from them? Tim Cook: Yeah. That's a great question. There is a tremendous amount of excitement around the Vision Pro and we're -- we've been very happy to share it with developers, and we have developer labs set up in different parts of the world so that they can actually get their hands on it and are working on apps and I've been fortunate enough to see a number of those. And there is some real blow away kinds of things that are coming out, and so that all looks good. To answer your question about is it similar to AirPods or Apple Watch, I would say, no. There's never been a product like the Vision Pro. And so, we're purposely bringing it out in our stores only, so we can really put a great deal of attention on the last mile of it. We'll be offering demos in the stores and it will be very different process than the -- a normal grab-and-go kind of process. Amit Daryanani: Perfect. Thank you. Suhasini Chandramouli: Thanks, Amit. We'll take the next question, please. Operator: Our next question is from Harsh Kumar with Piper Sandler. Please go ahead. Harsh Kumar: Yeah. Hey, thanks for the question and congratulations on tremendous execution in a very tough macro. Actually, Tim, the last question is a perfect segue here, given what you are doing with your Vision Pro. So lots of companies are experimenting with generative AI. I'm curious about what kind of efforts you have. I'm sure there are segues into Pro Vision that you have, but I was curious about if you can give us a glimpse on how you might be able to monetize some of these efforts of generative AI. Tim Cook: If you kind of zoom out and look at what we've done on AI and machine learning and how we've used it, we view AI and machine learning as fundamental technologies, and they're integral to virtually every product that we ship. And so just recently, when we shipped iOS 17, it had features like Personal Voice and Live Voicemail. AI is at the heart of these features. And then, you can go all the way to then lifesaving features on the launch end of phone like fall detection, crash detection, ECG on the watch. These would not be possible without AI. And so, we don't label them as such, if you will. We label them as to what their consumer benefit is. But at the fundamental technology behind it is AI and machine learning. In terms of generative AI, we have -- obviously, we have work going on. I'm not going to get into details about what it is, because -- as you know, we don't -- we really don't do that. But you can bet that we're investing, we're investing quite a bit, we're going to do it responsibly and it will -- you will see product advancements over time that where the -- those technologies are at the heart of them. Harsh Kumar: Thanks, Tim. Very clear. And for my follow-up, I had a philosophical question. So, you guys always try to provide the best experience for consumers. To that end, I think, over the last decade you in-sourced a lot of important chips in your phones, in your Macs, iPads, so on and so forth. And that was, I think, a function that ARM wasn't around in the industry from a merchant angle. But now, we see these the silicon guys, the chip guys moving to ARM architecture. So my question to you is, has the move to internal silicon been economically profitable proposition for Apple? Or is it -- or is it a strategic one, where you simply need to own this and it's vital to your products for the consumer experience or maybe there's a path back to chip vendors at some point in time? Tim Cook: It's really enabled us to build products that we could not build without doing it ourselves. And as you know, we like to own the primary technologies in the products that we ship and arguably, the silicon is at the heart of the primary technologies, and so, no, I don't see going back. I am happier today than I was yesterday, than I was last week that we made the transition that we've made, and I see that benefit every day of it. Harsh Kumar: Thanks, Tim. Tim Cook: Yeah. Suhasini Chandramouli: Thank you, Harsh. We'll take the next question, please. Operator: Our next question is from Wamsi Mohan from Bank of America. Please go ahead. Wamsi Mohan: Yes. Thank you so much. Tim, over the last decade, pretty much you've gained a lot of share in China. As you look, your -- some of the domestic players are starting to re-emerge, especially in the high-end phone space. I know you touched on China. But how would you see Apple's positioning and opportunity for continued share gains, particularly in China? And how was the linearity in China from a demand perspective? And I have a follow-up, please. Tim Cook: In the September quarter, we set an iPhone record -- revenue record in China and we're very proud of that and we obviously grew. The market predictions that I've seen, we've had the market contracting. And so if that's -- if those are correct, then we gained share last quarter. And so we are very proud of that, I don't know what every quarter will hold. And obviously, we just give a bit of color on the current quarter. But over the long term, I view China as an incredibly important market and I'm very optimistic about it. Wamsi Mohan: Okay. Thanks, Tim. And as a follow-up, you obviously had a great Services quarter and part of your Services business has these licensing relationships with research partners, where you serve a very important distribution function for them. Can you talk about how you think about these relationships and potentially some of the options maybe Apple has to mitigate some of the risks, given some of the scrutiny on with some of the research partners? Thank you so much. Luca Maestri: They are important relationships. And as you know, we don't get into our commercial relationships in the call. I see them as important and we make decisions that are in the best interest of our users or what we feel is in the best interest of our users. And that's kind of what we've done in the past and how we've -- how we'll run the show in the future as well. Wamsi Mohan: Okay. Thank you, Tim. Suhasini Chandramouli: Thank you, Wamsi. Can we have the next question, please. Operator: Our next question comes from Krish Sankar with TD Cowen. Please go ahead. Krish Sankar: Yeah. Hi. Thanks for taking the question. I had two of them too. First one, Luca, thanks for the color on gross margin. And when I look at it over the last four quarters, even if on a year-over-year basis revenue declined, the gross margins have improved. And I understand Services definitely helped. I'm just kind of curious, when you look at on a go forward basis, are most of the big step functions and cost reductions like the Mac Silicon conversion, et cetera, that are done or is there more room for margin expansion from here? And then, I had a follow-up. Luca Maestri: Well, on the product side, as you know, we -- when we launch new products, the cost structures of those products tend to be higher than the products that they replace. It happens because we are always adding new technologies, new features, and then, we worked through the cost curve over the lifecycle of the product and we tend to get benefits as time goes by. The guidance that we provided for December reflects all that and so we're starting from a better position than a year ago or than, in the past, in general. There are other factors that play a role. For example, the mix of products that we sell. Not every product has the same gross margin profile, and so our guidance, our results are reflective of that. And also, within a specific product category, a lot depends on the kind of models that we sell because they have different margin profiles. I think one of the things that we've done well over the last few years is to offer more affordability solutions to our customers in the form of instalment plans, trading options, and spend -- low-cost financing in general. And what that has accomplished is reduced the affordability threshold for our customers and therefore, they can, buy at the top of our product ranges. That has been a big factor in the reason for our margin expansion. We don't provide guidance or color past the current quarter because there's so many different variables that affect gross margins, but we obviously feel very good about the trajectory that we've had in 2023 and now, the guidance that we provide for the beginning of our fiscal '24. And we need some of these things because, obviously, their foreign exchange environment has been difficult and has been a bit of a drag for us. But net-net, we're very pleased where we are. Krish Sankar: Got it. Thanks for that, Luca. And then, I have a follow-up for Tim. Obviously, you're seeing amazing momentum in India. I'm just kind of curious how do you look at -- when you look at the India growth opportunity on these hardware units, how to think about ASP relative to that versus like the rest of the geographies? And is there a way to compare or contrast India, growth momentum versus China maybe a decade ago or so at the same point in the rollout of, the share gains in that geography? Tim Cook: Yeah. It's a great question. We had an all-time revenue record in India. We grew very strong double-digits. It's an incredibly exciting market for us and a major focus of ours. We have low share in a large market, and so it would seem there's a lot of headroom there. The ASPs, I haven't looked at them most recently, but I'm sure that they're lower than the worldwide. But that doesn't bother us at all. It just -- and in terms of the similarity, I would say, each country has its own journey. And I wouldn't want to play the comparison game. But we see an extraordinary market, a lot of people moving into the middle class, distribution is getting better, lots of positives. We put two retail stores there, as you know. They're doing better than we anticipated. It's still early going, but they're off to a good start and I couldn't be happier with how things are going at the moment. Krish Sankar: Thanks, Tim. Suhasini Chandramouli: Thank you, Krish. We'll now take our next question, please. Operator: Our next question is from Ben Reitzes with Melius Research. Please go ahead. Ben Reitzes: Hey. Thanks a lot. I appreciate the question. Tim, I appreciate all your commentary around China. It was great to kind of hear about the growth potential there, your optimism. I wanted to also ask about the supply chain and where is your priority? Do you have a priority to diversify your supply chain? How do you feel about Apple's supply chain around the world? And in particular, what do you think about further investments in the U.S. as well? Tim Cook: Our supply chain is truly global, and so we're investing all over the world, including in the United States, we were very focused on advanced manufacturing for the U.S. and have worked on a number of different projects in the U.S., whether that's our venture with Corning on the glass or Face ID module or semiconductors. And so all of these are our advanced manufacturing and I think exactly the kinds of things that the U.S. would be and are very, very good at. We also invested in other regions of the world and we're continually optimizing the chain. And so we -- the moment we learned something that didn't work exactly right, we are tweaking it. And so we're going to continue to do that. But at the end of day, it will still be a global supply chain. Ben Reitzes: Got it. Thanks. Tim Cook: Yeah. Ben Reitzes: Next one for Luca. Just really quick on the extra week dynamic. There was also last year an issue with the iPhone production, where there was the COVID lockdowns in China. Is it possible to give some color around what that -- I guess, having a normalized supply chain somewhat this year, what that benefit is this year and maybe contrast that with the 7 point hit from the extra week? Thanks a lot. Luca Maestri: Yeah. Thanks for the question, Ben. I mentioned during the prepared remarks the extra week is 7 points of revenue. We did have disruptions, supply disruptions last year on the phone, on the 14 Pro and Pro Max in the December quarter a year ago. And when we normalize for those two factors, and I said it during the call, we still expect to grow on iPhone. So you take into account the, the loss of the extra week, you compare it with the supply disruptions that are not going to repeat, hopefully, this year. And when you normalize for those two things, we still expect to grow on iPhone. Ben Reitzes: Thanks a lot everybody. Appreciate it, Luca. Suhasini Chandramouli: Thank you, Ben. And we'll take the last question now. Operator: Our last question comes from Richard Kramer with Arete Research. Please go ahead. Richard Kramer: Thank you very much. Tim, first off, if we look over the past two years, Apple sales are about $18 billion higher and R&D is up by about 8% -- $8 billion or over a third higher. Can you give us a sense of some of the main components or drivers behind that increase in innovation spend? Is it Apple Silicon, is it new products like Vision Pro or is it content to support new services? I think that's one of the top questions investors have. Thanks. Tim Cook: Sure. It's a number of things, Richard. It's the -- some things I can't talk about, its Vision Pro, it's AI and ML, it's the silicon investment that we're making, the transition with the Mac and other silicon. It's sort of all of those things and -- but I think you would find that the R&D expenditure in the aggregate looks very competitive versus others. Luca Maestri: And I would add, Richard, on this front. Some of the investments that we're making in R&D are also one of the drivers for the gross margin expansion. So I think it's important to think about it that way. Richard Kramer: That's great. And Luca, you mentioned -- or Tim mentioned college students choosing Mac. Then, you mentioned the record Services revenue. What other metrics do you think you could provide to help investors understand how Apple measures and increases customer lifetime value, especially when we see a lot of users entering the ecosystem with a relatively lower-priced products or even refurbished devices? So you're growing your ecosystem, but how do you think about growing customer lifetime value over the long run? Luca Maestri: Well, some of the metrics that I mentioned before, obviously, we look at the installed base of active devices. We see, we want to make sure that, the customers that we acquire remain with us and so we have good visibility over that, and we pay a lot of attention to the behavior of the installed base, both by product and by geography. And then, we look at the daily engagement in the ecosystem. So that's why we pay a lot of attention on things like transacting accounts, paid accounts, we want to see if, in fact, we are able to move our customers from a free model to a paid model over time. That's obviously very, very important for us. And so, on this, we keep track of all these things and that's -- and then what we do, because I think it's really important is that over time, we add new services and that, obviously, like, for example, the progress that we've made in payments in recent years, very, very important because we've attracted more and more people that are actually now using additional features on our devices and we are able to monetize that, right. So we take all that into account, we understand what happens when a customer joins us, when they buy a primary device versus a used device, we understand their behavior, in different markets and so on. So we have, I think, pretty good visibility. And I think the progress that we're making in Services, we did $85 billion in the last 12 months. It's -- that's a size of a Fortune 50 and significantly bigger than it was just a couple of years ago. Richard Kramer: Absolutely. Thanks very much. Suhasini Chandramouli: Thank you, Richard. A replay of today's call will be available for two weeks on Apple Podcasts, as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 0106234 followed by the pound sign. These replays will be available by approximately 5 PM Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142 and financial analysts can contact me, Suhasini Chandramouli, with additional questions at 408-974-3123. Thank you again for joining us today. Operator: Once again, this does conclude today's conference. We do appreciate your participation.	[ { "speaker": "Operator", "text": "Good day, and welcome to the Apple Q4 Fiscal Year 2023 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Suhasini Chandramouli, Director of Investor Relations. Please go ahead." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you. Good afternoon, and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook. And he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thank you, Suhasini. Good afternoon, everyone, and thanks for joining the call. Today, Apple is reporting revenue of $89.5 billion for the September quarter. We achieved an all-time revenue record in India, as well as September quarter records in several countries, including Brazil, Canada, France, Indonesia, Mexico, the Philippines, Saudi Arabia, Turkey, the UAE, Vietnam and more. iPhone revenue came in ahead of our expectations, setting a September quarter record, as well as quarterly records in many markets, including China mainland, Latin America, the Middle-East, South Asia and an all-time record in India. In services, we set an all-time revenue record with double-digit growth and ahead of our expectations. During the September quarter, we continue to face an uneven macroeconomic environment, including foreign exchange headwinds and we've navigated these challenges by following the same principles that have always guided us. We've continued to invest in the future and manage for the long-term. We've adapted continuously to circumstances beyond our control, while being thoughtful and deliberate on spending. And we've carved a path of groundbreaking innovations and delivered with excellence every step of the way. That includes Apple Vision Pro, which has gotten such an amazing response from developers who are currently creating truly incredible apps. We're excited to get this magical product in the hands of customers early next year. Now let me share more about our products, beginning with iPhone. iPhone revenue came in at $43.8 billion, 3% higher than a year ago, and a new record for the September quarter. This fall, we were thrilled to debut the iPhone 15 lineup. The all-new iPhone 15 and iPhone 15 Plus feature a gorgeous design, powerful cameras and the intuitive Dynamic Island. Powered by the industry-leading A17 Pro, our iPhone15 Pro lineup has a beautiful strong and durable titanium design and the best iPhone camera system ever, including a 5X Telephoto lens on iPhone 15 Pro Max. Customers are loving the entire iPhone 15 family and reviews have been off the charts. In Mac, revenue came in at $7.6 billion, down 34% year-over-year from the prior year's record quarter. This was due to challenging market conditions, as well as difficult compares against the supply disruptions and subsequent demand recapture we experienced a year ago. Earlier this week, we were excited to unveil the next generation of Apple silicon with our incredible family of M3 chips, M3; M3 Pro; and M3 Max. We're continuing to innovate at a tremendous pace. And our industry-leading lineup of personal computers just got even better. The new MacBook Pro lineup brings our most advanced technology to our Pro users, while iMac, the world's best-selling all-in-one, just got faster and more capable. And according to the latest data from Student Monitor, nearly two out of three college students chose a Mac. We couldn't be more excited about the future. Turning to iPad. Revenue for the September quarter was $6.4 billion. iPad sets the gold standard for tablets and our competitors are unable to match the iPad experience that is enabled by our seamless integration of hardware and software. iPad is also our most versatile product. In classrooms around the world, it's helping educators bring lessons to life, while giving students a window into the world around them. And in artist workshops, design studios and everywhere else, creative minds come together, iPad supercharges the creative process, helping users take their ideas farther than they ever could before. Across wearables, home and accessories, revenue came in at $9.3 billion. Apple Watch has become essential in our lives and this is our best Apple Watch lineup ever. With Apple Watch Series 9 and Apple Watch Ultra 2, we're giving people even more tools to stay safe and live healthy, active lives. With the new double tap gesture, users can easily control Apple Watch Series 9 and Apple Watch Ultra 2 using just one hand and without touching the display. It feels like magic. Our latest Apple Watch lineup also includes our first-ever carbon-neutral products, a significant achievement of innovation and determination. Apple's unique ecosystem of hardware, software, and services delivers an unparalleled user experience. During the quarter, we also had the chance to introduce a range of exciting new updates to our software that will allow users to get even more out of their devices. Whether it's personalized contact posters and new face time features in iOS 17, new tools for users to make their experience their own in macOS Sonoma and iPadOS 17, or a bold new look in watchOS 10 that lets you see and do more, faster than ever, Apple is delivering an even better, richer experience that users are loving. Services revenue set an all-time record of $22.3 billion, a 16% year-over-year increase. We achieved all-time revenue records across App Store, advertising, AppleCare, iCloud, payment services, and video, as well as the September quarter revenue record in Apple Music. Whether subscribers are waking up to headlines on Apple News+, getting their morning workout in with Fitness+, feeling the beat with Apple Music on their way to work or school, or unwinding at the end of the day with Apple Arcade, we have so many different services to enrich their day. Apple TV+ continues to delight customers as well, with new and returning shows like the Morning Show, Lessons in Chemistry and Monarch. We're telling impactful stories that inspire imagination and stir the soul. Making movies that make a difference is also at the heart of Apple TV+ and we were thrilled to produce Martin Scorsese's Killers of the Flower Moon, a powerful work of cinema that premiered in theaters around the world last month. We're proud to say that since launch, just over four years ago, Apple TV+ has earned nearly 1,600 award nominations and nearly 400 wins. We also offer subscribers an unprecedented live sports experience with MLS Season Pass. We couldn't be more pleased with how our partnership with Major League Soccer has gone in its first year. Subscriptions to MLS Season Pass have exceeded our expectations and we're excited to continue that momentum next year. With the playoffs now underway, we can't wait to see who takes home MLS cup. And nowhere does the magic of Apple come alive more than it does in our stores. Over the past year, we've continued to find ways to connect with even more customers. We welcomed customers to our first-ever retail locations in India. We also opened doors to new stores in Korea, China and the UK and expanded the Apple store online to Vietnam and Chile. And we have another store opening in China this week. In September, I joined our team at Apple Fifth Avenue on launch day and the energy and excitement were unbelievable. Every time we connect with the customer, we're reminded why we do what we do. From simple joys of creating and sharing memories, to lifesaving features like emergency SoS via satellite, we're enriching lives in ways large and small. And whether we're working to safeguard user privacy, ensure technology made by Apple is accessible for everyone, or build an even more inclusive workplace, we're determined to lead with our values. Our environmental efforts are a great example of the intersection of our work and our values. Across Apple, we act on a simple premise, the best products in the world should be the best products for the world. We've made our environmental work a central focus of our innovation, because we feel a responsibility to leave the world better than we found it and because we know that climate change cannot be stopped, unless everyone steps up and does their part. Our first ever carbon-neutral products represent a major milestone and we're going to go even further. We plan to make every product across our lineup carbon neutral by the end of the decade. And we're not doing it alone. Over 300 of our suppliers have committed to using a 100% clean energy for Apple production by 2030. We also continue to invest in entrepreneurs who are lighting the way for a greener, more equitable future. Through our third impact accelerator class, we're proud to support a new class of diverse innovators on the cutting edge of green technology and clean energy. Apple is always looking forward, driven in equal measure by a sense a possibility and a deep belief in our purpose. We're motivated by the meaningful difference we can make for our customers and keenly determined to push the limits of technology even further. And that's why I'm so confident that Apple's future is bright. With that, I'll turn it over to Luca." }, { "speaker": "Luca Maestri", "text": "Thank you, Tim, and good afternoon, everyone. Revenue for the September quarter was $89.5 billion, down less than 1% from last year. Foreign exchange had a negative impact of over 2 percentage points. And on a constant-currency basis, our revenue grew year-over-year in total, and in each geographic segment. We set a September quarter record in the Americas and saw strong performance across our emerging markets, where both iPhone and Services grew double digits. Products revenue was $67.2 billion, down 5% from last year, due to very challenging compares on both Mac and iPad, which I will discuss in more detail later on. At the same time, we reached a September quarter record on iPhone, driven by strength in emerging markets. Our total installed-base of active devices reached an all-time high across all products and all geographic segments, thanks to our high levels of customer satisfaction and many new customers joining our ecosystem. Our Services revenue set an all-time record of $22.3 billion, up 16% year-over-year, with growth accelerating sequentially from the June quarter. Our performance in Services were broad based, as we reached all-time revenue records in the Americas, Europe and rest of Asia-Pacific and a September quarter record in Greater China. We also set new records in every Services category. Company gross margin set a September quarter record at 45.2%, up 70 basis points sequentially, driven by leverage and favorable mix, partially offset by foreign exchange. Products gross margin was 36.6%, up 120 basis points sequentially, also driven by leverage and mix, partially offset by foreign exchange. Services gross margin was 70.9%, up 40 basis points from last quarter due to a different mix. Operating expenses of $13.5 billion were at the low end of the guidance range we provided, up 2% year-over-year. Net income was $23 billion, diluted earnings per share was $1.46, up 13% versus last year and a September quarter record, and operating cash flow was strong at $21.6 billion. Let me now provide more detail for each of our revenue categories. iPhone revenue was $43.8 billion, up 3% year-over-year and a new September quarter record. We had strong performance in several markets, including an all-time record in India as September quarter records in Canada, Latin America, the Middle East, and South Asia . Our iPhone active installed base grew to a new all-time high and fiscal 2023 was another record year for switches. We continue to see extremely high levels of customer satisfaction which 451 Research recently measured at 98% in the U.S. Mac revenue was $7.6 billion, down 34% year-over-year, driven by challenging market conditions and compounded by a difficult compare in our own business, whereby last year we experienced supply disruptions from factory shutdowns in the June quarter and were subsequently able to fulfill significant pent-up demand during the September quarter. We also had a difference in launch timing with the MacBook Air launching earlier this year in the June quarter compared to the September quarter last year. We have great confidence in our Mac lineup and are excited about the recently announced iMac and MacBook Pro powered by our M3 chips. Our installed base is at an all-time high and half of Mac buyers during the quarter were new to the product, driven by MacBook Air. Also, we saw reported customer satisfaction of 97% for Mac in the U.S. iPad generated $6.4 billion in revenue, down 10% year-over-year. Similar to Mac, these results were a function of a difficult compare from the supply disruptions in the June quarter a year ago and the subsequent fulfillment of pent-up demand in the September quarter. iPad continues to attract a large number of new customers to the installed base with over half of the customers who purchase iPads during the quarter being new to the product and the latest reports from 451 Research indicate customer satisfaction of 98% in the U.S. Wearables, Home and Accessories revenue was $9.3 billion, down 3% year-over-year. We had a September quarter record in Europe and we saw strong performance in several emerging markets around the world. Apple Watch continues to expand its reach with nearly two-thirds of customers purchasing Apple Watch during the quarter being new to the product and customer satisfaction for the Watch was recently measured at 97% in the U.S. Services had a great quarter. We reached a new all-time revenue record of $22.3 billion, up 16% year-over-year. And we're happy to see growth coming from all categories and every geographic segment, which is a direct result of the strength of our ecosystem. Our installed base of over 2 billion active devices continues to grow at a nice pace and establishes a solid foundation for the future expansion of the ecosystem. And we continue to see increased customer engagement with our Services. Both transacting accounts and paid accounts grew double-digits year-over-year, each reaching a new all-time high. Also our paid subscriptions showed strong growth. We have well over 1 billion paid subscriptions across the services on our platform, nearly double the number we had only three years ago. And finally, we continue to improve the breadth and quality of our current services from exciting new content on Apple TV+ and Apple Arcade to additional storage tiers on iCloud. We believe our customers will love this new offering. Turning to enterprise. We are excited to see our business customers in both developed and emerging markets expand their deployment of Apple products and technologies to drive business innovation and employee satisfaction. Starbucks continuously invest in Apple technology to bring the best experience to the customers and employees, including tens of thousands of iPads across all retail stores to help their teams streamline order management, operations and training. In addition, Starbucks recently refreshed over 10,000 Macs to the latest M2-powered MacBook Air for all store managers, enabling them to do their best work and improve productivity. And in Indonesia, popular technology company GoTo is offering Mac as a choice, so that employees can have the best tools to be most productive. Today, more than half of its workforce are already choosing Mac for work. Let me now turn to our cash position and capital return program. We ended the quarter with over $162 billion in cash and marketable securities. We increased commercial paper by $2 billion, leaving us with total debt of $111 billion. As a result, net cash was $51 billion at the end of the quarter. And our goal of becoming net cash-neutral over time remains unchanged. During the quarter, we returned nearly $25 billion to shareholders, including $3.8 billion in dividends and equivalents and $15.5 billion through open market repurchases of 85 million Apple shares. We also began a $5 billion accelerated share repurchase program in August, resulting in the initial delivery and retirement of 22 million shares. Taking a step back, as we close our 2023 fiscal year, our annual revenue was $383 billion. While it was down 3% from the prior year, it grew on a constant-currency basis despite the volatile and uneven macroeconomic environment. Our year-over-year revenue performance improved each quarter as we went through the year, and so did our earnings per share performance, as we reported double-digit EPS growth in the September quarter. We are particularly pleased with our performance in emerging markets with revenue reaching an all-time record in fiscal 2023 and double-digit growth in constant currency. We are expanding our direct presence in these markets from new Apple retail stores in India to online stores in Vietnam and Chile. And we continue to work with our partners to offer a wide range of affordability programs so that we can best serve our customers. We're very excited about the momentum we have in these markets and the opportunity ahead of us. As we move ahead into the December quarter, I'd like to review our outlook, which includes the types of forward-looking information that Suhasini referred to at the beginning of the call. The color we are providing today assumes that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter. Also, on foreign exchange, we expect a negative year-over-year revenue impact of about 1 percentage point. As a reminder, the December quarter this year will last the usual 13 weeks, whereas the December quarter a year ago spanned 14 weeks. For clarity, revenue from the extra week last year added approximately 7 percentage points to the quarter's total revenue. Despite having one less week this year, we expect our December quarter, total company revenue to be similar to last year. We expect iPhone revenue to grow year-over-year on an absolute basis. We also expect to grow after normalizing for both last year's supply disruptions and the one extra week. We expect Mac year-over-year performance to significantly accelerate from the September quarter. We expect the year-over-year revenue performance for both iPad and Wearables, Home and Accessories to decelerate significantly from the September quarter due to a different timing of product launches. On iPad, we launched a new iPad Pro and iPad 10th Generation during the December quarter a year ago. For the Wearable category, last year we had the full December quarter benefit from the launches of the AirPods Pro 2nd Generation, the Watch SE, and the first Watch Ultra. For our Services business, we expect the average revenue per week to grow at a similar strong double-digit rate as it did during the September quarter. We expect gross margin to be between 45% and 46%. We expect OpEx to be between $14.4 billion and $14.6 billion. We expect OI&E to be around negative $200 million, excluding any potential impact from the mark-to-market of minority investments and our tax-rate to be around 16%. Finally, today our Board of Directors has declared a cash dividend of $0.24 per share of common stock, payable on November 16, 2023, to shareholders of record as of November 13, 2023. With that, let's open the call to questions." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please?" }, { "speaker": "Operator", "text": "Certainly. We will go ahead and take our first question from Mike Ng of Goldman Sachs. Please go ahead." }, { "speaker": "Michael Ng", "text": "Hey. Good afternoon, and thank you very much for the questions. I just have a question on iPhone storage and demand versus iCloud. As demand for storage grows, are you seeing a mix-shift towards higher storage iPhone models or are consumers mostly opting for the same because of increased uptake of iCloud+? What are some of the strategic and financial considerations here and trade-offs, as you think about the mix shift towards higher storage models versus iCloud penetration? Thanks." }, { "speaker": "Tim Cook", "text": "Michael, it's Tim. As you probably know, we started the line with the iPhone Pro Max at 256, and so we are seeing a different mix, if you will, this year than last year. Outside of that, not significant changes." }, { "speaker": "Michael Ng", "text": "Great. Thank you. And as a separate follow-up, I was just wondering if you could talk a little bit about the market conditions on notebooks and desktops, and then any color that you can share regarding the timing of the Mac -- M3 MacBook Pros this year versus the M2 earlier in the calendar year? Thank you." }, { "speaker": "Tim Cook", "text": "Yeah. We're thrilled to have announced the M3 lineup and get the new MacBook Pro, the new iMac out there. We couldn't be more excited about it. We -- as Luca said, with the lineup that we've got and the compare issue that we don't have during Q1, we anticipate a significant acceleration in the Mac space for Q1. To just repeat a little bit about the circumstances of the performance last quarter, in the year-ago June quarter, we had a factory disruption that lasted several weeks. The pent-up demand that resulted from that was filled in the September quarter, and that made the September quarter not only a record, but a substantial record. And obviously, we're now comparing against that for '23 and so that, I wouldn't look at the negative 34% as representative of the underlying business performance. It's sort of the net of it." }, { "speaker": "Michael Ng", "text": "Excellent. That's very clear. Thank you, Tim." }, { "speaker": "Tim Cook", "text": "Yeah." }, { "speaker": "Suhasini Chandramouli", "text": "All right. Thanks, Mike. Can we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Aaron Rakers with Wells Fargo. Please go ahead." }, { "speaker": "Aaron Rakers", "text": "Yeah. Thanks for taking the question and congratulations on the execution in the quarter. I'm curious, if you could help us characterize what the demand environment you're seeing in China looks like. How has the reception been to the iPhone 15? And kind of similar question to the prior one, how would you characterize the mix within China as you go through this current product cycle? And I have a follow-up." }, { "speaker": "Tim Cook", "text": "Yeah. If you look at how we did in Greater China for the quarter, we came in at, on a revenue basis, minus 2. But one thing to keep in mind here is that the FX impact was nearly 6 points. So we grew in constant currency. And underneath that, if you look at the different -- the categories, iPhone actually set a September quarter record in mainland China. And the -- what pulled down the performance was a combination, largely of Mac and iPad. Services also grew during the quarter and the Mac and iPad suffered from the same issues that the company did with the compare issues to factory disruptions in Q3 that were filled subsequently in Q4 of '22. We had the -- in addition to that, we had the top four selling phones in urban China for last year, and I was -- I just took a trip over there and could not be more excited about the interactions I had with the customers and employees and others." }, { "speaker": "Aaron Rakers", "text": "Yeah. And then, as a quick follow-up, I'm curious as we move towards more of an inflationary component pricing environment. Luca, how do we think about that effect? How you're thinking about the gross margin at the product level, as maybe component pricing starts to turn, what's been clearly very favorable over the last several quarters to more of an inflationary environment? Thank you." }, { "speaker": "Luca Maestri", "text": "Well, as you've seen from our results in Q4 and the guidance for Q1, we're obviously experiencing very strong levels of gross margin. The 45.2% was a record for the September quarter. And then, the guidance for Q1 is obviously strong at 45% to 46%. Our gross margins are affected by multiple factors. Obviously, the commodity environment is one of them, as you mentioned. It's been a good environment in recent quarters. But equally important is the mix of what we sell. And obviously, growth in Services for us is favorable, and that has helped our company gross margin. Foreign exchange, on the other hand, has been a drag for us for several quarters, given the strength of the dollar. We don't provide guidance past the December quarter, which is a very important one for us because it's the beginning of the product cycle for many products. And so we feel very good, very confident about, this coming year, and I think the gross margin guidance reflects that." }, { "speaker": "Aaron Rakers", "text": "Thank you." }, { "speaker": "Suhasini Chandramouli", "text": "Thanks, Aaron. Can we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Erik Woodring with Morgan Stanley. Please go ahead." }, { "speaker": "Erik Woodring", "text": "Awesome. Thank you very much for taking my questions. Maybe if I start, Luca, I know that the iPhone 15 Pro and Pro Max are constrained today, but I think some of your comments suggests you should be back to supply demand balance before quarter end. So, I guess, my question is, does your December quarter revenue guidance account for any supply constraints? And if so, is there any way to kind of quantify how much supply would be limiting your December quarter revenue performance? And then, I have a follow-up. Thank you." }, { "speaker": "Luca Maestri", "text": "Yes. It's correct. We are constrained today on iPhone 15 Pro and iPhone 15 Pro Max. We're working very hard to get the product in the hands of all the customers that have ordered it. We expect, as of today, that we're going to be in supply demand balance by the end of the quarter. So the guidance reflects that." }, { "speaker": "Erik Woodring", "text": "Okay, very clear. Thanks. And then, maybe for you and Tim. You guys have been on the leading end of -- edge of innovation across hardware, software, silicon, services. And I'm sure there's plenty of technology in kind of longer-term projects that you're investing in. How should we think about your capital intensity as we look to fiscal year '24, just given over the last few years, CapEx as a percentage of revenue had been relatively low compared to the eight years prior? So should we expect a step-up or kind of similar capital intensity? And what are the more notable moving pieces, if any, that we should be thinking about? Thanks." }, { "speaker": "Luca Maestri", "text": "Well, the big areas of investment for us are tooling and equipment for manufacturing plants. Our investments in data centers and our investments in our own facilities, both corporate facilities and retail stores. And so, both for the tooling in our plants and our data center investments, we tend to have a bit of a hybrid model where we share some of the investments with our partners and suppliers and so maybe that's why you see sometimes a bit of variability. But over the last few years, we've made all the investments that we needed to make. And obviously, we're planning to make all the investments that we believe are needed and appropriate in order to continue to innovate." }, { "speaker": "Erik Woodring", "text": "Great. Thanks so much for the color, guys." }, { "speaker": "Suhasini Chandramouli", "text": "Thanks, Eric. Can we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from David Vogt with UBS. Please go ahead." }, { "speaker": "David Vogt", "text": "Great. Thanks, guys for taking my question. I know you covered China. I want to pivot to the US for a second. Obviously, iPhone and the business looks like it returned to growth in the quarter. But it's still relatively softer kind of where I thought it would be at this point in the cycle and some of the U.S. carriers obviously haven't been that particularly aggressive in promoting upgrades. So just wanted to kind of get a sense, first, what you're seeing from your partners in the U.S. kind of currently and going forward and what do you expect? And then, second, Luca, on the margins, I mean, is it fair to say that the mix in Q1 from a product versus services dynamic is kind of the key driver of the better gross margin guide as a whole relative to, let's say, the December quarter? Or is there anything else? I know you mentioned there's a lot of moving pieces, but is that the primary driver of the uplift in the margin? Thanks." }, { "speaker": "Tim Cook", "text": "On the U.S. carriers and the U.S. business in general, it's really too early to call the iPhone cycle, particularly with the constraint around the Pro and the Pro Max and the U.S. tends to do quite well with those products. It's really too early to tell what the upgrade rates will be and what the switcher rates will be." }, { "speaker": "Luca Maestri", "text": "On the margin side, if I understood your question correctly about the December quarter guidance, keep in mind that actually December is the quarter where our products business is tends to be very heavy because of the holiday season. And so the services gross margins that are accretive to total company had an impact, but not as meaningful as other quarters during the year and so I think that the main drivers of the guidance that we provided are the fact that we are seeing improved costs, and improved mix on our -- on the product side of the business, partially offset by foreign exchange, which continues to be a drag, both sequentially and on a year-over-year basis." }, { "speaker": "David Vogt", "text": "Got it. So the weakness in iPad and Wearables are less of an impact on sort of the margin trajectory in the December quarter?" }, { "speaker": "Luca Maestri", "text": "That's correct." }, { "speaker": "David Vogt", "text": "I guess?" }, { "speaker": "Luca Maestri", "text": "That's correct." }, { "speaker": "David Vogt", "text": "Got it. Thanks, Luca." }, { "speaker": "Suhasini Chandramouli", "text": "All right. Thanks, David. We'll take our next question, please." }, { "speaker": "Operator", "text": "Our next question is from Amit Daryanani with Evercore. Please go ahead." }, { "speaker": "Amit Daryanani", "text": "Yeah. Good afternoon. Thanks for taking my question. I have two as well. I guess, first off, just the Services growth rate, there's a tremendous acceleration I think in September quarter, the 16% growth. And it sounds like it’s going to hold there pretty well into December. Can you just talk about what is driving this acceleration? Are there a couple of products that have just stepped up in a very meaningful way? Just maybe flush out like what is driving this acceleration because it's fairly notable compared to what you've been seeing in the last few quarters." }, { "speaker": "Luca Maestri", "text": "We had a really strong quarter across the border, Amit, because both geographically and from a product category standpoint, we saw very significant growth, I mentioned the records on a geographic basis. And from a category standpoint, literally, we set records in each one of the big categories. We had all-time record for App Store, for advertising, for cloud, video, AppleCare, payments and a September quarter record for Music. So it's hard to pick, one in particular because they all did well. And really then, we step back and we think about why is it that our Services business is doing well and it's because we have an installed base of customers that continues to grow at a very nice space and the engagement in our ecosystem continues to grow. We have more transacting accounts, we have more paid accounts, we have more subscriptions on the platform and we continue to add. We continue to add content and features. We're adding a lot of content on TV+, new games on Apple Arcade, new features, new storage plans for iCloud. So it's a combination of all these things and the fact that the engagement in the ecosystem is improving, and therefore, it benefits every service category." }, { "speaker": "Amit Daryanani", "text": "Got it. That's really helpful. And then, maybe if I could ask you about Vision Pro, which I believe is supposed to be launched more broadly sometime in 2024, in the early part of the year. I'm curious how different do you think the launch and the consumer education of this product or a new category will be versus other things like AirPods or Apple Watch that you've done. And then, perhaps any themes I think that's set out to you from the developers that have been able to use this and the developer labs, what feedback have you gotten from them?" }, { "speaker": "Tim Cook", "text": "Yeah. That's a great question. There is a tremendous amount of excitement around the Vision Pro and we're -- we've been very happy to share it with developers, and we have developer labs set up in different parts of the world so that they can actually get their hands on it and are working on apps and I've been fortunate enough to see a number of those. And there is some real blow away kinds of things that are coming out, and so that all looks good. To answer your question about is it similar to AirPods or Apple Watch, I would say, no. There's never been a product like the Vision Pro. And so, we're purposely bringing it out in our stores only, so we can really put a great deal of attention on the last mile of it. We'll be offering demos in the stores and it will be very different process than the -- a normal grab-and-go kind of process." }, { "speaker": "Amit Daryanani", "text": "Perfect. Thank you." }, { "speaker": "Suhasini Chandramouli", "text": "Thanks, Amit. We'll take the next question, please." }, { "speaker": "Operator", "text": "Our next question is from Harsh Kumar with Piper Sandler. Please go ahead." }, { "speaker": "Harsh Kumar", "text": "Yeah. Hey, thanks for the question and congratulations on tremendous execution in a very tough macro. Actually, Tim, the last question is a perfect segue here, given what you are doing with your Vision Pro. So lots of companies are experimenting with generative AI. I'm curious about what kind of efforts you have. I'm sure there are segues into Pro Vision that you have, but I was curious about if you can give us a glimpse on how you might be able to monetize some of these efforts of generative AI." }, { "speaker": "Tim Cook", "text": "If you kind of zoom out and look at what we've done on AI and machine learning and how we've used it, we view AI and machine learning as fundamental technologies, and they're integral to virtually every product that we ship. And so just recently, when we shipped iOS 17, it had features like Personal Voice and Live Voicemail. AI is at the heart of these features. And then, you can go all the way to then lifesaving features on the launch end of phone like fall detection, crash detection, ECG on the watch. These would not be possible without AI. And so, we don't label them as such, if you will. We label them as to what their consumer benefit is. But at the fundamental technology behind it is AI and machine learning. In terms of generative AI, we have -- obviously, we have work going on. I'm not going to get into details about what it is, because -- as you know, we don't -- we really don't do that. But you can bet that we're investing, we're investing quite a bit, we're going to do it responsibly and it will -- you will see product advancements over time that where the -- those technologies are at the heart of them." }, { "speaker": "Harsh Kumar", "text": "Thanks, Tim. Very clear. And for my follow-up, I had a philosophical question. So, you guys always try to provide the best experience for consumers. To that end, I think, over the last decade you in-sourced a lot of important chips in your phones, in your Macs, iPads, so on and so forth. And that was, I think, a function that ARM wasn't around in the industry from a merchant angle. But now, we see these the silicon guys, the chip guys moving to ARM architecture. So my question to you is, has the move to internal silicon been economically profitable proposition for Apple? Or is it -- or is it a strategic one, where you simply need to own this and it's vital to your products for the consumer experience or maybe there's a path back to chip vendors at some point in time?" }, { "speaker": "Tim Cook", "text": "It's really enabled us to build products that we could not build without doing it ourselves. And as you know, we like to own the primary technologies in the products that we ship and arguably, the silicon is at the heart of the primary technologies, and so, no, I don't see going back. I am happier today than I was yesterday, than I was last week that we made the transition that we've made, and I see that benefit every day of it." }, { "speaker": "Harsh Kumar", "text": "Thanks, Tim." }, { "speaker": "Tim Cook", "text": "Yeah." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Harsh. We'll take the next question, please." }, { "speaker": "Operator", "text": "Our next question is from Wamsi Mohan from Bank of America. Please go ahead." }, { "speaker": "Wamsi Mohan", "text": "Yes. Thank you so much. Tim, over the last decade, pretty much you've gained a lot of share in China. As you look, your -- some of the domestic players are starting to re-emerge, especially in the high-end phone space. I know you touched on China. But how would you see Apple's positioning and opportunity for continued share gains, particularly in China? And how was the linearity in China from a demand perspective? And I have a follow-up, please." }, { "speaker": "Tim Cook", "text": "In the September quarter, we set an iPhone record -- revenue record in China and we're very proud of that and we obviously grew. The market predictions that I've seen, we've had the market contracting. And so if that's -- if those are correct, then we gained share last quarter. And so we are very proud of that, I don't know what every quarter will hold. And obviously, we just give a bit of color on the current quarter. But over the long term, I view China as an incredibly important market and I'm very optimistic about it." }, { "speaker": "Wamsi Mohan", "text": "Okay. Thanks, Tim. And as a follow-up, you obviously had a great Services quarter and part of your Services business has these licensing relationships with research partners, where you serve a very important distribution function for them. Can you talk about how you think about these relationships and potentially some of the options maybe Apple has to mitigate some of the risks, given some of the scrutiny on with some of the research partners? Thank you so much." }, { "speaker": "Luca Maestri", "text": "They are important relationships. And as you know, we don't get into our commercial relationships in the call. I see them as important and we make decisions that are in the best interest of our users or what we feel is in the best interest of our users. And that's kind of what we've done in the past and how we've -- how we'll run the show in the future as well." }, { "speaker": "Wamsi Mohan", "text": "Okay. Thank you, Tim." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Wamsi. Can we have the next question, please." }, { "speaker": "Operator", "text": "Our next question comes from Krish Sankar with TD Cowen. Please go ahead." }, { "speaker": "Krish Sankar", "text": "Yeah. Hi. Thanks for taking the question. I had two of them too. First one, Luca, thanks for the color on gross margin. And when I look at it over the last four quarters, even if on a year-over-year basis revenue declined, the gross margins have improved. And I understand Services definitely helped. I'm just kind of curious, when you look at on a go forward basis, are most of the big step functions and cost reductions like the Mac Silicon conversion, et cetera, that are done or is there more room for margin expansion from here? And then, I had a follow-up." }, { "speaker": "Luca Maestri", "text": "Well, on the product side, as you know, we -- when we launch new products, the cost structures of those products tend to be higher than the products that they replace. It happens because we are always adding new technologies, new features, and then, we worked through the cost curve over the lifecycle of the product and we tend to get benefits as time goes by. The guidance that we provided for December reflects all that and so we're starting from a better position than a year ago or than, in the past, in general. There are other factors that play a role. For example, the mix of products that we sell. Not every product has the same gross margin profile, and so our guidance, our results are reflective of that. And also, within a specific product category, a lot depends on the kind of models that we sell because they have different margin profiles. I think one of the things that we've done well over the last few years is to offer more affordability solutions to our customers in the form of instalment plans, trading options, and spend -- low-cost financing in general. And what that has accomplished is reduced the affordability threshold for our customers and therefore, they can, buy at the top of our product ranges. That has been a big factor in the reason for our margin expansion. We don't provide guidance or color past the current quarter because there's so many different variables that affect gross margins, but we obviously feel very good about the trajectory that we've had in 2023 and now, the guidance that we provide for the beginning of our fiscal '24. And we need some of these things because, obviously, their foreign exchange environment has been difficult and has been a bit of a drag for us. But net-net, we're very pleased where we are." }, { "speaker": "Krish Sankar", "text": "Got it. Thanks for that, Luca. And then, I have a follow-up for Tim. Obviously, you're seeing amazing momentum in India. I'm just kind of curious how do you look at -- when you look at the India growth opportunity on these hardware units, how to think about ASP relative to that versus like the rest of the geographies? And is there a way to compare or contrast India, growth momentum versus China maybe a decade ago or so at the same point in the rollout of, the share gains in that geography?" }, { "speaker": "Tim Cook", "text": "Yeah. It's a great question. We had an all-time revenue record in India. We grew very strong double-digits. It's an incredibly exciting market for us and a major focus of ours. We have low share in a large market, and so it would seem there's a lot of headroom there. The ASPs, I haven't looked at them most recently, but I'm sure that they're lower than the worldwide. But that doesn't bother us at all. It just -- and in terms of the similarity, I would say, each country has its own journey. And I wouldn't want to play the comparison game. But we see an extraordinary market, a lot of people moving into the middle class, distribution is getting better, lots of positives. We put two retail stores there, as you know. They're doing better than we anticipated. It's still early going, but they're off to a good start and I couldn't be happier with how things are going at the moment." }, { "speaker": "Krish Sankar", "text": "Thanks, Tim." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Krish. We'll now take our next question, please." }, { "speaker": "Operator", "text": "Our next question is from Ben Reitzes with Melius Research. Please go ahead." }, { "speaker": "Ben Reitzes", "text": "Hey. Thanks a lot. I appreciate the question. Tim, I appreciate all your commentary around China. It was great to kind of hear about the growth potential there, your optimism. I wanted to also ask about the supply chain and where is your priority? Do you have a priority to diversify your supply chain? How do you feel about Apple's supply chain around the world? And in particular, what do you think about further investments in the U.S. as well?" }, { "speaker": "Tim Cook", "text": "Our supply chain is truly global, and so we're investing all over the world, including in the United States, we were very focused on advanced manufacturing for the U.S. and have worked on a number of different projects in the U.S., whether that's our venture with Corning on the glass or Face ID module or semiconductors. And so all of these are our advanced manufacturing and I think exactly the kinds of things that the U.S. would be and are very, very good at. We also invested in other regions of the world and we're continually optimizing the chain. And so we -- the moment we learned something that didn't work exactly right, we are tweaking it. And so we're going to continue to do that. But at the end of day, it will still be a global supply chain." }, { "speaker": "Ben Reitzes", "text": "Got it. Thanks." }, { "speaker": "Tim Cook", "text": "Yeah." }, { "speaker": "Ben Reitzes", "text": "Next one for Luca. Just really quick on the extra week dynamic. There was also last year an issue with the iPhone production, where there was the COVID lockdowns in China. Is it possible to give some color around what that -- I guess, having a normalized supply chain somewhat this year, what that benefit is this year and maybe contrast that with the 7 point hit from the extra week? Thanks a lot." }, { "speaker": "Luca Maestri", "text": "Yeah. Thanks for the question, Ben. I mentioned during the prepared remarks the extra week is 7 points of revenue. We did have disruptions, supply disruptions last year on the phone, on the 14 Pro and Pro Max in the December quarter a year ago. And when we normalize for those two factors, and I said it during the call, we still expect to grow on iPhone. So you take into account the, the loss of the extra week, you compare it with the supply disruptions that are not going to repeat, hopefully, this year. And when you normalize for those two things, we still expect to grow on iPhone." }, { "speaker": "Ben Reitzes", "text": "Thanks a lot everybody. Appreciate it, Luca." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Ben. And we'll take the last question now." }, { "speaker": "Operator", "text": "Our last question comes from Richard Kramer with Arete Research. Please go ahead." }, { "speaker": "Richard Kramer", "text": "Thank you very much. Tim, first off, if we look over the past two years, Apple sales are about $18 billion higher and R&D is up by about 8% -- $8 billion or over a third higher. Can you give us a sense of some of the main components or drivers behind that increase in innovation spend? Is it Apple Silicon, is it new products like Vision Pro or is it content to support new services? I think that's one of the top questions investors have. Thanks." }, { "speaker": "Tim Cook", "text": "Sure. It's a number of things, Richard. It's the -- some things I can't talk about, its Vision Pro, it's AI and ML, it's the silicon investment that we're making, the transition with the Mac and other silicon. It's sort of all of those things and -- but I think you would find that the R&D expenditure in the aggregate looks very competitive versus others." }, { "speaker": "Luca Maestri", "text": "And I would add, Richard, on this front. Some of the investments that we're making in R&D are also one of the drivers for the gross margin expansion. So I think it's important to think about it that way." }, { "speaker": "Richard Kramer", "text": "That's great. And Luca, you mentioned -- or Tim mentioned college students choosing Mac. Then, you mentioned the record Services revenue. What other metrics do you think you could provide to help investors understand how Apple measures and increases customer lifetime value, especially when we see a lot of users entering the ecosystem with a relatively lower-priced products or even refurbished devices? So you're growing your ecosystem, but how do you think about growing customer lifetime value over the long run?" }, { "speaker": "Luca Maestri", "text": "Well, some of the metrics that I mentioned before, obviously, we look at the installed base of active devices. We see, we want to make sure that, the customers that we acquire remain with us and so we have good visibility over that, and we pay a lot of attention to the behavior of the installed base, both by product and by geography. And then, we look at the daily engagement in the ecosystem. So that's why we pay a lot of attention on things like transacting accounts, paid accounts, we want to see if, in fact, we are able to move our customers from a free model to a paid model over time. That's obviously very, very important for us. And so, on this, we keep track of all these things and that's -- and then what we do, because I think it's really important is that over time, we add new services and that, obviously, like, for example, the progress that we've made in payments in recent years, very, very important because we've attracted more and more people that are actually now using additional features on our devices and we are able to monetize that, right. So we take all that into account, we understand what happens when a customer joins us, when they buy a primary device versus a used device, we understand their behavior, in different markets and so on. So we have, I think, pretty good visibility. And I think the progress that we're making in Services, we did $85 billion in the last 12 months. It's -- that's a size of a Fortune 50 and significantly bigger than it was just a couple of years ago." }, { "speaker": "Richard Kramer", "text": "Absolutely. Thanks very much." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Richard. A replay of today's call will be available for two weeks on Apple Podcasts, as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 0106234 followed by the pound sign. These replays will be available by approximately 5 PM Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142 and financial analysts can contact me, Suhasini Chandramouli, with additional questions at 408-974-3123. Thank you again for joining us today." }, { "speaker": "Operator", "text": "Once again, this does conclude today's conference. We do appreciate your participation." } ]	Apple Inc.	24,937
AAPL	3	2,023	2023-08-03 17:00:00	Operator: Good day, and welcome to the Apple Q3 Fiscal Year 2023 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Saori Casey, Vice President of Finance. Please go ahead. Saori Casey: Thank you. Good afternoon, and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of macroeconomic conditions on the company's business and the results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook: Thank you, Saori. Good afternoon, everyone, and thanks for joining us. Today, Apple is reporting revenue of $81.8 billion for the June quarter, better than our expectations. We continued to see strong results in emerging markets, driven by robust sales of iPhone with June quarter total revenue records in India, Indonesia, Mexico, the Philippines, Poland, Saudi Arabia, Turkey and the UAE. We set June quarter records in a number of other countries as well, including France, the Netherlands and Austria. And we set an all-time revenue record in Services driven by more than $1 billion paid subscriptions. We continued to face an uneven macroeconomic environment, including nearly 4 percentage points of foreign exchange headwinds. On a constant currency basis, we grew compared to the prior year's quarter in aggregate and in the majority of markets we track. We continue to manage deliberately and innovate relentlessly, and we are driven by the sense of possibility those efforts inspire. To that end, before I turn to the quarter in more detail, I want to take a moment to acknowledge the unprecedented innovations we were proud to announce at our Worldwide Developers Conference. In addition to extraordinary new Macs and incredible updates to our software platforms, we had the chance to introduce the world to spatial computing. We were so pleased to share the revolutionary Apple Vision Pro with the world, a bold new product unlike anything else created before. Apple Vision Pro is a marvel of engineering, built on decades of innovation only possible at Apple. It is the most advanced personal electronic device ever created, and we've been thrilled by the reaction from press, analysts, developers and content creators who've had the chance to try it. We can't wait to get it into customers' hands early next year. Now let me share more with you on our June quarter results beginning with iPhone. iPhone revenue came in at $39.7 billion for the quarter, down 2% from the year ago quarter's record performance. On a constant currency basis, iPhone revenue grew, and we had a June quarter record for switchers, reflecting the popularity of the iPhone lineup. iPhone 14 customers continue to praise the exceptional battery life and essential health and safety features, while iPhone 14 Plus users are loving the new larger screen size. And with Dynamic Island, Always-On display and the most powerful camera system ever in an iPhone, the iPhone 14 Pro lineup is our best ever. Turning to Mac. We recorded $6.8 billion in revenue, down 7% year-over-year. We are proud to have completed the transition of our entire Mac lineup to run exclusively on Apple silicon. We are also excited to have introduced the new 15-inch MacBook Air during the quarter, the world's best 15-inch laptop and one of the best Macs we've ever made. And we launched 2 new powerhouses in computing, Mac Studio with M2 Max and M2 Ultra and Mac Pro with M2 Ultra, which are the most powerful Macs we've ever made. iPad revenue was $5.8 billion for the June quarter, down 20% year-over-year, in part due to a difficult compare because of the timing of the iPad Air launch last year. Customers are loving iPad's versatility and exceptional value. There was a great deal of excitement from creatives when we brought Final Cut Pro and Logic Pro to iPad this spring. And with the back-to-school season in full swing, iPad has the power to help students tackle the toughest assignments. Across Wearables, Home and Accessories, revenue was $8.3 billion, up 2% year-over-year and in line with our expectations. Packed with features to empower users to live a healthier life, Apple Watch and Apple Watch Ultra continue to help people take the next step on their wellness journey. As I mentioned earlier, last quarter, we held our biggest and most exciting WWDC yet. We were thrilled to welcome developers from across the globe to Apple Park, both in person and virtually, and to share some stunning new announcements with the world. In addition to Apple Vision Pro and the new Macs that we introduced, we had the chance to reveal some truly remarkable new innovations to our software platforms. From exciting new features like Live Voicemail and StandBy in iOS 17, to new tools for users to work, play and personalize their experience in macOS Sonoma and iPadOS 17, to a fresh design and new workout capabilities in watchOS 10, there's so much coming later this year to empower users to get more out of their devices, and we think they're going to instantly love these new features. It was also an exciting quarter for Services where revenue reached $21.2 billion and saw a sequential acceleration to an 8% year-over-year increase, better than we expected. We set an all-time revenue record for total services and in a number of categories, including video, AppleCare, cloud and payment services. Since we introduced Apple Pay almost a decade ago, customers have been loving how easy it is to make purchases online, in apps and in stores. We're also pleased to see Apple Card build on the success of Apple Pay. Designed with our users' financial health in mind, Apple Card has become one of the most successful credit card programs in the U.S. with award-winning customer satisfaction. And this spring, we introduced a new high-yield savings account for Apple Card customers, which has become incredibly popular, with customers already making more than $10 billion in deposits. Meanwhile, Apple TV+ continues to provide a spectacular showcase of imaginative storytelling. Recently, fans welcomed new series like Hijack and Silo as well as returning fan favorites like Foundation and The Afterparty. In the few years since its launch, Apple TV+ has earned more than 1,500 nominations and 370 wins. That includes the 54 Emmy Award nominations across 13 titles that Apple TV+ received last month. It's also been an exciting time for sports on Apple TV+. Soccer legend Lionel Messi made his debut with Major League Soccer last month, and fans all over the world tuned in with MLS Season Pass. We are excited about our MLS partnership, and we're thrilled to see Messi suiting up with Inter Miami. And just in time for summer concert season, Apple Music launched new discovery features celebrating live music, including venue guides in Apple Maps and set lists from tours of major artists. These new features and others join a lineup of updates coming later this year to make Services more powerful, more useful and more fun than ever. Everything we do is in service of our customers, and retail is where we bring the best of Apple. During the quarter, we opened the Apple Store online in Vietnam, and we're excited to connect with more customers there. We also redesigned our first-ever Apple Store located in Tysons Corner, Northern Virginia, with inclusive, innovative and sustainable design enhancements. We opened a beautiful new store beneath our new London headquarters in the historic Battersea Power Station. And the performance of the stores we opened in India this spring exceeded our initial expectations. With every product we create, every feature we develop and every interaction we share with our customers, we lead with the values we stand for. We believe in creating technology that serves all of humanity, which is why accessibility has always been a core value that we embed in everything we do. On Global Accessibility Awareness Day, we unveiled some extraordinary new tools for cognitive, vision, hearing and mobile accessibility that will be available later this year, including Assistive Access, which distills apps to their most essential features, and Personal Voice, which allows users to create a synthesized voice that sounds just like them. Building technology and service of our customers also means protecting their privacy, which we believe is a fundamental human right. That's why we were pleased to announce major updates to Safari Private Browsing, Communication Safety and Lockdown Mode to further safeguard our users. And as part of our efforts to build a better world, we announced that we've more than doubled our initial commitment to our Racial Equity and Justice Initiative to more than $200 million. We will continue to do our part to support education, economic empowerment and criminal justice reform work. And while supporting efforts to advance equity and opportunity, we continue to build a culture of belonging at Apple and a workforce that reflects the communities we serve. Through our environmental work, we're making strides in our commitment to leave the world better than we found it. Last month, Apple joined with global nonprofit Acumen in a new effort to improve livelihoods in India through clean energy innovation, and we are as committed as ever to our Apple 2030 goal to be carbon neutral across our entire supply chain and the life cycle of our products. We've long held that education is the great equalizer. With that in mind, we're expanding Apple Learning Coach, a free professional learning program that teaches educators how to get more out of Apple technology in the classroom. Today, we welcome more than 1,900 educators across the U.S. to the program. By the end of the year, we'll offer Apple Learning Coach in 12 more countries. As we're connecting with teachers, we're also celebrating the graduations of students at our app developer academies around the world. From Detroit, to Naples, to Riyadh and more, we're excited to watch these talented developers embark on careers in coding and find ways to make a positive difference in their communities. Apple remains a champion of innovation, a company fueled by boundless creativity, driven by a deep sense of mission and guided by the unshakable belief that a great idea can change the world. Looking ahead, we'll continue to manage for the long term, always pushing the limits of what's possible and always putting the customer at the center of everything we do. With that, I'll turn it over to Luca. Luca Maestri: Thank you, Tim, and good afternoon, everyone. Revenue for the June quarter was $81.8 billion, down 1% from last year and better than our expectations despite nearly 4 percentage points of negative impact from foreign exchange. On a constant currency basis, our revenue grew year-over-year in total and in the majority of the markets we track. We set June quarter records in both Europe and Greater China and continue to see strong performance across our emerging markets driven by iPhone. Products revenue was $60.6 billion, down 4% from last year, as we faced FX headwinds and an uneven macroeconomic environment. However, our installed base reached an all-time high across all geographic segments, driven by a June quarter record for iPhone switchers and high new-to rates in Mac, iPad and Watch, coupled with very high levels of customer satisfaction and loyalty. Our Services revenue set an all-time record of $21.2 billion, up 8% year-over-year and grew double digits in constant currency. Our performance was strong around the world as we reach all-time Services revenue records in Americas and Europe and June quarter records in Greater China and rest of Asia Pacific. Company gross margin was 44.5%, a record level for the June quarter and up 20 basis points sequentially, driven by cost savings and favorable mix shift towards Services, partially offset by a seasonal loss of leverage. Products gross margin was 35.4%, down 130 basis points from last quarter due to seasonal loss of leverage and mix, partially offset by favorable costs. Services gross margin was 70.5%, decreasing 50 basis points sequentially. Operating expenses of $13.4 billion were below the low end of the guidance range we provided at the beginning of the quarter and decelerated from the March quarter. We continue to take a deliberate approach in managing our spend with strong focus on innovation and new product development. The results of these actions delivered net income of $19.9 billion, diluted earnings per share of $1.26, up 5% versus last year, and very strong operating cash flow of $26.4 billion. Let me now provide more detail for each of our revenue categories. iPhone revenue was $39.7 billion, down 2% year-over-year but grew on a constant currency basis. We set revenue records in several markets around the world, including an all-time record in India and June quarter records in Latin America, the Middle East and Africa, Indonesia, the Philippines, Italy, the Netherlands and the U.K. Our iPhone active installed base grew to a new all-time high, thanks to a June quarter record in switchers. This is a testament to our extremely high levels of customer satisfaction, which 451 Research recently measured at 98% for the iPhone 14 family in the U.S. Mac generated $6.8 billion in revenue, down 7% year-over-year. We continue to invest in our Mac portfolio. And this past quarter, we were pleased to complete the transition to Apple silicon for the entire lineup. This transition has driven both strong upgrade activity and a high number of new customers. In fact, almost half of Mac buyers during the quarter were new to the product. We also saw reported customer satisfaction of 96% for Mac in the U.S. iPad revenue was $5.8 billion, down 20% year-over-year and in line with our expectations. These results were driven by a difficult compare against the full quarter impact of the iPad Air launch in the prior year. At the same time, we continue to attract a large number of new customers to the iPad installed base with over half of the customers who purchased iPads during the quarter being new to the product. And the latest reports from 451 Research indicate customer satisfaction of 96% in the U.S. Wearables, Home and Accessories revenue was $8.3 billion, up 2% year-over-year, with a June quarter record in Greater China and strong performance in several emerging markets. We continue to see Apple Watch expand its reach with about 2/3 of customers purchasing an Apple Watch during the quarter being new to the product. And this is combined with very high levels of customer satisfaction, which was recently reported at 98% in the United States. Moving on to Services. We reached a new all-time revenue record of $21.2 billion with year-over-year growth accelerating sequentially to 8% and up double digits in constant currency. In addition to the all-time records Tim mentioned earlier, we also set June quarter records for advertising, App Store and Music. We are very pleased with our performance in Services, which is a direct reflection of our ecosystem's strength. First, our installed base of over 2 billion active devices continues to grow at a nice pace and establishes a solid foundation for the future expansion of our ecosystem. Second, we see increased customer engagement with our services. Both our transacting accounts and paid accounts grew double digits year-over-year, each reaching a new all-time high. Third, our paid subscriptions showed strong growth. This past quarter, we reached an important milestone and passed 1 billion paid subscriptions across the services on our platform, up 150 million during the last 12 months and nearly double the number of paid subscriptions we had only 3 years ago. And finally, we continue to improve the breadth and the quality of our current services. From 20 new games on Apple Arcade, to brand-new content on Apple TV+, to the launch of our high-yield savings account with Apple Card, our customers are loving these enhanced offerings. Turning to the enterprise market. Our customers are leveraging Apple products every day to help improve productivity and attract talent. Blackstone, a global investment management firm, is expanding its Apple footprint from their corporate iPhone fleet to now offering the MacBook Air powered by M2 to all of their corporate employees and portfolio companies. Gilead, a leading biopharmaceutical company, has deployed thousands of iPads globally to their sales team. Over the last 6 months, they have also doubled their Mac user base by making MacBook Air available to more employees with a focus on user experience and strong security. Let me now turn to our cash position and capital return program. We ended the quarter with over $166 billion in cash and marketable securities. We repaid $7.5 billion in maturing debt while issuing $5.2 billion of new debt and increasing commercial paper by $2 billion, leaving us with total debt of $109 billion. As a result, net cash was $57 billion at the end of the quarter. During the quarter, we returned over $24 billion to shareholders, including $3.8 billion in dividends and equivalents and $18 billion through open market repurchases of 103 million Apple shares. We continue to believe there is great value in our stock and maintain our target of reaching a net cash neutral position over time. As we move ahead into the September quarter, I'd like to review our outlook, which includes the types of forward-looking information that Saori referred to at the beginning of the call. We expect our September quarter year-over-year revenue performance to be similar to the June quarter, assuming that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter. Foreign exchange will continue to be a headwind, and we expect a negative year-over-year revenue impact of over 2 percentage points. We expect iPhone and Services year-over-year performance to accelerate from the June quarter. Also, we expect the revenue for both Mac and iPad to decline by double digits year-over-year due to difficult compares, particularly on the Mac. For both products, we experienced supply disruptions from factory shutdowns in the June quarter a year ago and were able to fulfill significant pent-up demand in the year ago September quarter. We expect gross margin to be between 44% and 45%. We expect OpEx to be between $13.5 billion and $13.7 billion. We expect OI&E to be around negative $250 million, excluding any potential impact from the mark-to-market of minority investments, and our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividend of $0.24 per share of common stock payable on August 17, 2023, to shareholders of record as of August 14, 2023. With that, let's open the call to questions. Saori Casey: Thank you, Luca. [Operator Instructions]. Operator, may we have the first question, please? Operator: [Operator Instructions]. We will go ahead and take our first question from Shannon Cross with Credit Suisse. Shannon Cross: Tim, you mentioned -- and actually, Luca, too, you mentioned an uneven macro environment during the quarter several times on the call. I'm wondering if you can talk on a geographic basis about some of the trends you're seeing in iPhone. I'm specifically wondering how demand is trending within... Luca Maestri: Sure. Shannon, I'll answer it. I didn't get the end of your question. Operator: I think she has dropped. Luca Maestri: Okay. Well, let me answer the question for the part that I could follow. So on a geographic basis, we've had great performance for iPhone in emerging markets. We set June quarter records in many of the emerging markets. We grew in total double digits. And the performance was strong across the board in emerging markets from China, where our performance improved from minus 3% to plus 8% in the June quarter and we grew double digits in constant currency, to many other areas around the world from India, where, again, we set a June quarter record with very strong performance there, Indonesia, Southeast Asia, in general, Latin America, Middle East. And so it's been really good there. We -- also, as you can see from our geographic segments, we had a slight acceleration of performance in the Americas, primarily in the United States, but we declined there because the smartphone market has been in a decline for the last couple of quarters in the United States. Shannon Cross: Sorry about that. I'm not sure why I cut off. In terms of gross margin, you were at the high end of the range [Technical Difficulty] and you guided to 45% at the high end, which is, I think, higher than I remember in 20 years of covering you. So how should we think about puts and takes of gross margin? And it seems like there's like a perfect storm of good things. So I just -- maybe if you can talk about how you're thinking about it more holistically. Luca Maestri: I think you remember correctly, Shannon, because the 44.5% for the June quarter is an all-time record for us in June. We were up 20 basis points sequentially. It was driven by cost savings and a mix shift towards Services, which obviously helps company gross margins, partially offset by the seasonal loss of leverage. We have a commodity environment that is favorable to us. Our product mix is quite strong at this point. And so with the exception of foreign exchange, which continues to be a drag, and it was a significant drag on a year-over-year basis, yes, we are in a good position right now. We are in a good position for the June quarter. And as I mentioned, we expect similar level of gross margins for the same reasons, frankly, for the September quarter. Operator: Our next question comes from Wamsi Mohan of Bank of America. Wamsi Mohan: Luca, can you just give us a little more color around the guidance? Your overall revenue performance, you called out similar. Obviously, you absorbed a higher FX impact this quarter versus your guide. And you also noted Services acceleration. So just wondering, when you think about that comment on iPhone acceleration, is that on a reported basis? Is that constant currency basis? And is there something that's changing in terms of seasonality perhaps for you that is causing not as much step-up in product revenue as typical on a sequential basis? And I have a follow-up. Luca Maestri: Yes. So all our comments are in reported currency, not in constant currency in relation to the outlook. And we said acceleration sequentially for iPhone and for Services. But we're also pointing out -- and this is where I think, Wamsi, you're referring to some seasonality issues. We also said that for Mac and iPad, we expect to decline double digits. And the reason for that is that we have a very difficult compare versus last year. You remember that a year ago, in the June quarter, we had factory shutdowns for both Mac and iPad. And so we were able to fill the pent-up demand from those shutdowns during the September quarter. So an unusual level of activity that we had a year ago. And so now, obviously, the compare is difficult. So we expect both iPad and Mac to be down double digits, which offset the acceleration that I mentioned for iPhone and Services. Wamsi Mohan: Okay. And Tim, I was wondering if you could update us on what percent of iPhones are sold on some type of installment basis now versus full upfront payment on a global basis. And maybe some thoughts on if you expect similar promotional activity from carriers, especially in the U.S., that seem to be grappling with a lot of cash flow issues this particular year. Luca Maestri: Wamsi, I'll take it. We've done a really good job over the last few years with affordability programs around the world directly in our direct channel and with our partners around the world. The majority of iPhones, at this point, are sold using some kind of a program, trade-ins, installments, some kind of financing. And that percentage, which again, it's well over 50%, is very similar across developed and emerging markets. We want to do more of that because we think it really helps reduce the affordability threshold for our products. And we think it is also one of the reasons why our product mix has been very strong during the last couple of cycles. So we will continue to push on that front. Operator: Our next question is from David Vogt with UBS. David Vogt: I just wanted to follow up on 2 points that both you, Tim, and Luca made about growth and maybe commodities. So just to be clear, I know you're talking about an acceleration in iPhone, but the comp is about 2 points easier from FX. So I just want to understand, is that on a like-for-like basis, excluding the currency improvement of about 2 points from the June quarter to the September quarter? And from a commodity perspective, I know last quarter, you talked about buying a lot of inventory at favorable prices, which was an incredibly smart strategy. Where do you sit today? And what's sort of the timing or the duration of that commodity sort of backlog that you have as we think about next quarter and the subsequent quarters? How far does that get you out into the future from this favorable cost dynamic? Luca Maestri: Let me start again. I just want to be clear about the guidance, the outlook guidance that we provided. We're referring entirely to reported numbers. So they take into account the fact that we have a slight improvement in foreign exchange. So when I talk about similar performance, I refer to reported performance in the June quarter and then the reported performance in the September quarter. And again, we expect, on a reported basis, our iPhone performance to accelerate, our Services performance to accelerate, and iPad and Mac to decline double digits. On the commodity front, as I mentioned, the environment is favorable. We always make sure that we take advantage of the opportunities that are available in the market, and we will continue to do that going forward. David Vogt: Luca, any sense of how long that gives you a run rate today based on what you currently have? Can you give us a sense for at least the short-term tailwind? Luca Maestri: I don't want to speculate past the September quarter because that's the horizon where we provide guidance. And I've said that the guidance for September is 44% to 45%, which you know is historically very high. And so obviously, that reflects a favorable environment for us. Operator: Our next question is from Erik Woodring with Morgan Stanley. Erik Woodring: I have 2 as well. Maybe if we just start kind of big picture, Tim or Luca. I was wondering if you could just kind of share some incremental color on how you think the consumer is behaving today versus 90 days ago and maybe how that differs by region. Meaning, are there any signs that consumer is incrementally more willing to spend on things like consumer electronics? Or is there still relative caution in the market? Are there any regions where you're seeing more strength in the consumer? And how sustainable do you think some of that strength or weakness could be based on some of the KPIs you track? And then I have a follow-up. Tim Cook: Yes. David, it's Tim. If you sort of step around the world, we did exceptionally well in emerging markets last quarter and even better on a constant currency basis. And so emerging markets were -- was a strength. If you look at China, in China, we went from a negative 3% in Q2 to a plus 8% in Q3. And so in China, we had an acceleration. If you look at the U.S., which is in the -- obviously in the Americas segment, it is the vast majority of what's in there, there was also a slight acceleration sequentially, although the Americas is still declining somewhat year-over-year, as you can see on the data sheet. The primary reason for that is that it's a challenging smartphone market in the U.S. currently. And then in Europe, Europe saw a record quarter and -- for the June quarter, a record. And so some really good signs in most places in the world. Erik Woodring: Awesome. And then maybe, Luca, a question for you. I think it's been about 3 quarters now where we've seen OpEx either grow below historical seasonality or come in below your expectations. I think this is the first time we've seen R&D grow less than 10% year-over-year since fiscal 2Q 2007. So can you maybe just talk about some of the cost actions you're taking? And as you look forward, what are the indicators that you're really evaluating that would give you greater confidence in perhaps returning back to a more seasonal cadence of OpEx spending? Or is this just a new normal that we should be expecting? That's it for me. Luca Maestri: Obviously, we look at the environment, and we know that this has been an uncertain period for the last few quarters. And so we decided to be deliberate in what we do in terms of controlling our spend, and there's many areas across the company that we're working on and we've been quite effective at slowing down the spend. We slowed down also the hiring within the company in several areas. And we're very pleased with our ability to decelerate some of the expense growth taking into account the overall macro situation. We will continue to manage deliberately. You can see that we continue to grow our R&D costs faster than the rest of the company. SG&A is actually growing at a much slower pace because obviously, our focus continues to be in innovation and product development, and we'll continue to do that. Operator: Our next question is from Michael Ng with Goldman Sachs. Michael Ng: I just have 2 questions as well. First, it was encouraging to see the Services outperformance in the quarter, up double digits on an FX-neutral basis, and more Services acceleration next quarter on a reported basis. I was just wondering if you could just talk a little bit more about key underlying drivers for the confidence in the Services acceleration next quarter, understanding that FX a little bit. But anything to call out as it relates to things in Apple Search Ads that's helping. You're obviously making a lot of investments in Apple TV+ between MLS and the Canal+ deal. So any thoughts there would be great. Luca Maestri: Yes, Michael, you're correct. I mean clearly, we've seen an improvement in the June quarter, and we expect further improvement in the September quarter. In June, the performance was across the board. Tim and I mentioned we set records really across the board. We had all-time records in cloud, in video, in AppleCare, in payments and June quarter records in App Store, advertising and Music. So we saw improvement in all our Services categories. We think the situation will continue to improve as we go through September. And that's very positive because not only good for the financial results, but obviously, it shows a high level of engagement of our customers in the ecosystem, which is very important for us. And it's really the sum of all the things that I mentioned in my prepared remarks. It goes from the fact that our installed base continues to grow, so we've got a larger pool of customers, to the fact that our customers are more engaged as we have more transacting accounts and paid accounts on the ecosystem. And the subscriptions business is very healthy with growth of 150 million paid subscriptions just in the last 12 months. It's almost double to what we had 3 years ago. And of course, we are providing more and more content to our users. And so the combination of all these things gives us good confidence for September. Michael Ng: Great. And just as a related follow-up, it's about the hardware installed base and Services ARPU. I was curious when you talked about the Services strength, you talked about the 2 billion-plus installed base. When you think about the opportunity to increase the Services ARPU, do you really think about it internally on a per-active-iPhone user basis or on a per-device basis? Said differently, I'm just curious where you think about -- whether you think there's an incremental opportunity for those users that have multiple devices. Do you really see a big Services ARPU uplift in that respect? Luca Maestri: Well, we know that customers that own more than one device are typically more engaged in our ecosystem. And so obviously, they tend to also spend more on the Services front. I would say the biggest opportunity is that we know that there's a lot of customers that we have that are very familiar with our ecosystem. They are engaged in the ecosystem. But still today, they're using only the portion of the ecosystem that is free. And so we think that by offering better content and more content over time, we're going to be able to attract more of them as paid customers. Operator: Our next question is from Amit Daryanani with Evercore. Amit Daryanani: I have 2 as well. I guess, Luca, maybe if you can talk about Wearables a bit. The growth over there, I think, in constant currency was fairly impressive at plus 6%. Can you just touch on maybe what's driving that? And then how do we think about the Wearables segment heading into the September quarter? I know you talked about a bunch of other ones, but how do we think about Wearables into September as well? Luca Maestri: Sorry, Amit, I didn't get the -- what are you referring to? Amit Daryanani: Yes. Sorry. I was hoping you could talk a bit about the Wearables segment because the growth over there was fairly impressive. And then how do you think about it into September as well? Luca Maestri: Yes. On the Wearables front, we had really good performance in Greater China. And that's, again, very important for us. It was a June quarter record for Greater China. Very important for us because, again, it shows that the engagement with the ecosystem in a market that is so important for us like China continues to grow. It means that there's more and more customers that are owning more than the iPhone. Also, we continue to grow the installed base of the category very quickly because, as I mentioned, 2/3 of every buyer of Apple Watch during the course of the June quarter was new to the product. And so that is all additive to the installed base. So it's just great to see that the AirPods continue to be a great success in the marketplace for us. And so things are moving in the right direction there. It's become a very large business for us in Wearables, Home and Accessories. The last 12 months, we've done $40 billion of business, which is nearly the size of a Fortune 100 company. So it's become very important, and it's allowed us to diversify both our revenues and our earnings. Amit Daryanani: That's really helpful. And then if I could just follow up, the Europe growth, the growth in Europe at up 5% is totally notable as well. I think you have a few emerging markets that you put in Europe as well. But I would love to understand what's happening in Europe and if there's a way to think about sort of Western Europe or developed world versus emerging markets over there. Luca Maestri: Yes. It's been very good, primarily on the emerging market side of Europe. We include India and the Middle East and Central and Eastern Europe into the Europe segment. But as we mentioned at the beginning of the call, we had a number of markets that did very well, like France, like Italy, the Netherlands, Austria. So it was a good quarter for Europe. Operator: Our next question is from Harsh Kumar with Piper Sandler. Harsh Kumar: I have one for Luca and then later on one for Tim. So Luca, for some time now, for many quarters, you've had a currency headwind or foreign exchange currency headwind. It's conceivable that as rates start to come down, hopefully next year that the dollar weakens. Could you take us through the mechanism of how that will work on your revenues and for your costs? Luca Maestri: So we tend -- we try to hedge our foreign exchange exposures because we think it's the right approach for the company in terms of minimizing the volatility that necessarily happens from the movements of currencies. We cannot effectively hedge every single exposure around the world because in some cases, it is not possible. In other cases, it is prohibitively expensive. But we tend to cover all the major currency payers that we have. About 60% of our business is outside the United States. So it's a very, very large and, I would say, very effective hedging program. And so we set up these hedges, and they tend to roll over very regularly. And then we replace them with new hedges at the new spot rate. So the impact that we're going to have on revenue and cost will depend on where the spot rates are at different points in time. And therefore, because of the way the program works, tends to be a bit of a lag in both directions as the foreign exchange moves over time. Harsh Kumar: Understood. Very helpful. And for Tim, Tim, historically, for the last many years, carriers in at least the U.S., which I think is your largest market for iPhone, have had programs to help folks upgrade, whether they give a cash rebate or you bring in your old phone, something like that. I was curious, as you get into your peak December quarter, if you're aware of these programs are in place. And the reason why I'm asking is I think earlier, you mentioned that more than 50% of your phones are sold through some kind of program. I assume the number is even higher in the U.S. Tim Cook: I don't want to get into revealing specifics in the different carriers. But generally speaking, I would think that it would be quite easy to find a promotion on a phone, provided you're hooking up to a service and either switching services, carriers or upgrading your phone at the same carrier. I think both of those cases today that you can find promotions out there, and I would expect that you'd be able to do that in the December time frame as well. Operator: Our next question is from Aaron Rakers with Wells Fargo. Aaron Rakers: I have two as well. So first of all, I just want to kind of ask Tim. Strategically, as we think about the Services growth and kind of the content expansion behind that, I'm curious if you could help us maybe appreciate what you've seen from a sporting perspective in terms of the engagement with MLS, the engagement with Major League Baseball, and how strategically you're thinking about expansion in sports as a key driver of Services growth going forward. Tim Cook: We're focused on original content, as you know, with TV+. And so we're all about giving great storytellers the venue to tell great stories and hopefully get us all to think a little deeper. And sport is a part of that because sport is the ultimate original story. And for MLS, we're -- we could not be happier with how the partnership is going. It's clearly in the early days, but we are beating our expectation in terms of subscribers, and the fact that Messi went to Inter Miami helped us out there a bit. And so we're very excited about it. Aaron Rakers: Yes. And as a quick follow-up, I'm just curious, an update on -- you mentioned in your prepared remarks the continued growth that you've seen in India. I'm curious how we think about that market opportunity looking forward. Is there anything that you see evolving that could accelerate the opportunity for iPhone in that large mobile market? Tim Cook: We did hit a June quarter revenue record in India, and we grew strong double digits. We also opened our first 2 retail stores during the quarter. And it's -- of course, it's early going currently, but they're currently beating our expectation in terms of how they're doing. We continue to work on building out the channel and putting more investment in our direct-to-consumer offers as well. And so I think if you look at it, it's the second largest smartphone market in the world. And it's -- so we ought to be doing really well there. And where I'm really pleased with our growth there, we're still -- we still have a very, very modest and low share in the smartphone market. And so I think that it's a huge opportunity for us. And we're putting the -- all of our energies in making that occur. Operator: Our next question comes from Sidney Ho with Deutsche Bank. Sidney Ho: Your -- I just wanted to ask about the AI side of things. Your strategy on AI seems quite different than many of your peers, at least you don't talk too much about that, how much you invest in it. Maybe you can elaborate a little bit on that. But related to that, how do you see your investment in this area turning into financial performance in the future? Is it mainly through faster upgrade cycle, maybe higher ASP? Or are you thinking about maybe additional services that you can capitalize on that? And then I have a follow-up. Tim Cook: If you take a step back, we view AI and machine learning as core fundamental technologies that are integral to virtually every product that we build. And so if you think about WWDC in June, we announced some features that will be coming in iOS 17 this fall, like Personal Voice and Live Voicemail. Previously, we had announced lifesaving features like fall detection and crash detection and ECG. None of these features that I just mentioned and many, many more would be possible without AI and machine learning. And so it's absolutely critical to us. And of course, we've been doing research across a wide range of AI technologies, including generative AI for years. We're going to continue investing and innovating and responsibly advancing our products with these technologies with the goal of enriching people's lives. And so that's what it's all about for us. And as you know, we tend to announce things as they come to market, and that's our MO, and I'd like to stick to that. Sidney Ho: Okay. That's fair. Maybe as a follow-up is related to -- you talked about WWDC, where you actually introduced Vision Pro there. Clearly, a very big announcement there. How should we think about the revenue ramp related to the Vision Pro? Is there any catalysts that we should be thinking about that will drive an inflection of that product? Tim Cook: Yes. There's enormous excitement around the Vision Pro. We're excited internally. Everybody that's been through the demos are blown away, whether you're talking about press or analysts or developers. We are now shipping units to the developer community for them to begin working on their apps. And we're looking forward to shipping early next year. And so we could not be more excited with that. I'm using the product daily. And so we're not going to forecast revenues and so forth on the call today, but we're very excited about it. Operator: We will take our last question from Krish Sankar with TD Cowen. Krish Sankar: I have two of them as well. Number one, on iPhone, Tim, you mentioned about the record number of switchers in the quarter. I'm kind of curious how to think about, given the weak macro and consumer spending, how is the replacement cycle for iPhone? Is it similar, longer, shorter versus prior years? And can you talk a little bit about the demand linearity of iPhone during the June quarter? And then I have a follow-up. Tim Cook: Switchers were a very key part of our iPhone results for the quarter. We did set a record. We set a record in Greater China, in particular, and it was at the heart of our results there. And we continue to try to convince more and more people to switch because of our -- the experience and the ecosystem and -- that we can offer them. And so I think switching is a huge opportunity for us. In terms of the upgrade cycle and so forth, it's very difficult to estimate real time what is going on with the upgrade cycle. I would say, if you think about the iPhone results year-over-year, you have to think about the SE announcement in the year ago quarter, the iPhone SE announcement in the year ago quarter. And so that provides a bit of a headwind on the comp. But as Luca said, as he talked about how we're viewing Q4, the September quarter, we see iPhone accelerating in Q4. Krish Sankar: Got it. Very helpful, Tim. And then my final question is on your retail stores, you obviously have a very large retail footprint and many of your stores seem to have been open for over a year now. How is the foot traffic there? And how do you think about sales or the retail trends in the June quarter and implications for the back half of this year on a seasonality basis? Tim Cook: I'm sorry, are you talking about our retail stores? Krish Sankar: Yes, yes, your retail stores. Tim Cook: Yes. The -- if you look at retail, it's a key part of our go-to-market approach, and it will be so key and such a competitive advantage with Vision Pro. It will give us the opportunity to launch a new product and demo to many people in the stores. And so it has many advantages in it. And we continue to roll out more stores. As you know, we just opened 2 in India last quarter. We're -- there's still a lot of countries out there that don't have Apple stores that we would like to go into. And so we continue to see it as a key part of how we go to market and love the experience that we can provide customers there. Saori Casey: A replay of today's call will be available for two weeks on Apple Podcasts, at a webcast of apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter the confirmation code 2553017, followed by the pound sign. These replays will be available by approximately 5 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial analysts can contact me, Saori Casey, with additional questions at 408-974-3123 while Suhasini Chandramouli is on her maternity leave. Thank you again for joining us. Operator: Once again, this does conclude today's conference. We do appreciate your participation.	[ { "speaker": "Operator", "text": "Good day, and welcome to the Apple Q3 Fiscal Year 2023 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Saori Casey, Vice President of Finance. Please go ahead." }, { "speaker": "Saori Casey", "text": "Thank you. Good afternoon, and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of macroeconomic conditions on the company's business and the results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thank you, Saori. Good afternoon, everyone, and thanks for joining us. Today, Apple is reporting revenue of $81.8 billion for the June quarter, better than our expectations. We continued to see strong results in emerging markets, driven by robust sales of iPhone with June quarter total revenue records in India, Indonesia, Mexico, the Philippines, Poland, Saudi Arabia, Turkey and the UAE. We set June quarter records in a number of other countries as well, including France, the Netherlands and Austria. And we set an all-time revenue record in Services driven by more than $1 billion paid subscriptions. We continued to face an uneven macroeconomic environment, including nearly 4 percentage points of foreign exchange headwinds. On a constant currency basis, we grew compared to the prior year's quarter in aggregate and in the majority of markets we track. We continue to manage deliberately and innovate relentlessly, and we are driven by the sense of possibility those efforts inspire. To that end, before I turn to the quarter in more detail, I want to take a moment to acknowledge the unprecedented innovations we were proud to announce at our Worldwide Developers Conference. In addition to extraordinary new Macs and incredible updates to our software platforms, we had the chance to introduce the world to spatial computing. We were so pleased to share the revolutionary Apple Vision Pro with the world, a bold new product unlike anything else created before. Apple Vision Pro is a marvel of engineering, built on decades of innovation only possible at Apple. It is the most advanced personal electronic device ever created, and we've been thrilled by the reaction from press, analysts, developers and content creators who've had the chance to try it. We can't wait to get it into customers' hands early next year. Now let me share more with you on our June quarter results beginning with iPhone. iPhone revenue came in at $39.7 billion for the quarter, down 2% from the year ago quarter's record performance. On a constant currency basis, iPhone revenue grew, and we had a June quarter record for switchers, reflecting the popularity of the iPhone lineup. iPhone 14 customers continue to praise the exceptional battery life and essential health and safety features, while iPhone 14 Plus users are loving the new larger screen size. And with Dynamic Island, Always-On display and the most powerful camera system ever in an iPhone, the iPhone 14 Pro lineup is our best ever. Turning to Mac. We recorded $6.8 billion in revenue, down 7% year-over-year. We are proud to have completed the transition of our entire Mac lineup to run exclusively on Apple silicon. We are also excited to have introduced the new 15-inch MacBook Air during the quarter, the world's best 15-inch laptop and one of the best Macs we've ever made. And we launched 2 new powerhouses in computing, Mac Studio with M2 Max and M2 Ultra and Mac Pro with M2 Ultra, which are the most powerful Macs we've ever made. iPad revenue was $5.8 billion for the June quarter, down 20% year-over-year, in part due to a difficult compare because of the timing of the iPad Air launch last year. Customers are loving iPad's versatility and exceptional value. There was a great deal of excitement from creatives when we brought Final Cut Pro and Logic Pro to iPad this spring. And with the back-to-school season in full swing, iPad has the power to help students tackle the toughest assignments. Across Wearables, Home and Accessories, revenue was $8.3 billion, up 2% year-over-year and in line with our expectations. Packed with features to empower users to live a healthier life, Apple Watch and Apple Watch Ultra continue to help people take the next step on their wellness journey. As I mentioned earlier, last quarter, we held our biggest and most exciting WWDC yet. We were thrilled to welcome developers from across the globe to Apple Park, both in person and virtually, and to share some stunning new announcements with the world. In addition to Apple Vision Pro and the new Macs that we introduced, we had the chance to reveal some truly remarkable new innovations to our software platforms. From exciting new features like Live Voicemail and StandBy in iOS 17, to new tools for users to work, play and personalize their experience in macOS Sonoma and iPadOS 17, to a fresh design and new workout capabilities in watchOS 10, there's so much coming later this year to empower users to get more out of their devices, and we think they're going to instantly love these new features. It was also an exciting quarter for Services where revenue reached $21.2 billion and saw a sequential acceleration to an 8% year-over-year increase, better than we expected. We set an all-time revenue record for total services and in a number of categories, including video, AppleCare, cloud and payment services. Since we introduced Apple Pay almost a decade ago, customers have been loving how easy it is to make purchases online, in apps and in stores. We're also pleased to see Apple Card build on the success of Apple Pay. Designed with our users' financial health in mind, Apple Card has become one of the most successful credit card programs in the U.S. with award-winning customer satisfaction. And this spring, we introduced a new high-yield savings account for Apple Card customers, which has become incredibly popular, with customers already making more than $10 billion in deposits. Meanwhile, Apple TV+ continues to provide a spectacular showcase of imaginative storytelling. Recently, fans welcomed new series like Hijack and Silo as well as returning fan favorites like Foundation and The Afterparty. In the few years since its launch, Apple TV+ has earned more than 1,500 nominations and 370 wins. That includes the 54 Emmy Award nominations across 13 titles that Apple TV+ received last month. It's also been an exciting time for sports on Apple TV+. Soccer legend Lionel Messi made his debut with Major League Soccer last month, and fans all over the world tuned in with MLS Season Pass. We are excited about our MLS partnership, and we're thrilled to see Messi suiting up with Inter Miami. And just in time for summer concert season, Apple Music launched new discovery features celebrating live music, including venue guides in Apple Maps and set lists from tours of major artists. These new features and others join a lineup of updates coming later this year to make Services more powerful, more useful and more fun than ever. Everything we do is in service of our customers, and retail is where we bring the best of Apple. During the quarter, we opened the Apple Store online in Vietnam, and we're excited to connect with more customers there. We also redesigned our first-ever Apple Store located in Tysons Corner, Northern Virginia, with inclusive, innovative and sustainable design enhancements. We opened a beautiful new store beneath our new London headquarters in the historic Battersea Power Station. And the performance of the stores we opened in India this spring exceeded our initial expectations. With every product we create, every feature we develop and every interaction we share with our customers, we lead with the values we stand for. We believe in creating technology that serves all of humanity, which is why accessibility has always been a core value that we embed in everything we do. On Global Accessibility Awareness Day, we unveiled some extraordinary new tools for cognitive, vision, hearing and mobile accessibility that will be available later this year, including Assistive Access, which distills apps to their most essential features, and Personal Voice, which allows users to create a synthesized voice that sounds just like them. Building technology and service of our customers also means protecting their privacy, which we believe is a fundamental human right. That's why we were pleased to announce major updates to Safari Private Browsing, Communication Safety and Lockdown Mode to further safeguard our users. And as part of our efforts to build a better world, we announced that we've more than doubled our initial commitment to our Racial Equity and Justice Initiative to more than $200 million. We will continue to do our part to support education, economic empowerment and criminal justice reform work. And while supporting efforts to advance equity and opportunity, we continue to build a culture of belonging at Apple and a workforce that reflects the communities we serve. Through our environmental work, we're making strides in our commitment to leave the world better than we found it. Last month, Apple joined with global nonprofit Acumen in a new effort to improve livelihoods in India through clean energy innovation, and we are as committed as ever to our Apple 2030 goal to be carbon neutral across our entire supply chain and the life cycle of our products. We've long held that education is the great equalizer. With that in mind, we're expanding Apple Learning Coach, a free professional learning program that teaches educators how to get more out of Apple technology in the classroom. Today, we welcome more than 1,900 educators across the U.S. to the program. By the end of the year, we'll offer Apple Learning Coach in 12 more countries. As we're connecting with teachers, we're also celebrating the graduations of students at our app developer academies around the world. From Detroit, to Naples, to Riyadh and more, we're excited to watch these talented developers embark on careers in coding and find ways to make a positive difference in their communities. Apple remains a champion of innovation, a company fueled by boundless creativity, driven by a deep sense of mission and guided by the unshakable belief that a great idea can change the world. Looking ahead, we'll continue to manage for the long term, always pushing the limits of what's possible and always putting the customer at the center of everything we do. With that, I'll turn it over to Luca." }, { "speaker": "Luca Maestri", "text": "Thank you, Tim, and good afternoon, everyone. Revenue for the June quarter was $81.8 billion, down 1% from last year and better than our expectations despite nearly 4 percentage points of negative impact from foreign exchange. On a constant currency basis, our revenue grew year-over-year in total and in the majority of the markets we track. We set June quarter records in both Europe and Greater China and continue to see strong performance across our emerging markets driven by iPhone. Products revenue was $60.6 billion, down 4% from last year, as we faced FX headwinds and an uneven macroeconomic environment. However, our installed base reached an all-time high across all geographic segments, driven by a June quarter record for iPhone switchers and high new-to rates in Mac, iPad and Watch, coupled with very high levels of customer satisfaction and loyalty. Our Services revenue set an all-time record of $21.2 billion, up 8% year-over-year and grew double digits in constant currency. Our performance was strong around the world as we reach all-time Services revenue records in Americas and Europe and June quarter records in Greater China and rest of Asia Pacific. Company gross margin was 44.5%, a record level for the June quarter and up 20 basis points sequentially, driven by cost savings and favorable mix shift towards Services, partially offset by a seasonal loss of leverage. Products gross margin was 35.4%, down 130 basis points from last quarter due to seasonal loss of leverage and mix, partially offset by favorable costs. Services gross margin was 70.5%, decreasing 50 basis points sequentially. Operating expenses of $13.4 billion were below the low end of the guidance range we provided at the beginning of the quarter and decelerated from the March quarter. We continue to take a deliberate approach in managing our spend with strong focus on innovation and new product development. The results of these actions delivered net income of $19.9 billion, diluted earnings per share of $1.26, up 5% versus last year, and very strong operating cash flow of $26.4 billion. Let me now provide more detail for each of our revenue categories. iPhone revenue was $39.7 billion, down 2% year-over-year but grew on a constant currency basis. We set revenue records in several markets around the world, including an all-time record in India and June quarter records in Latin America, the Middle East and Africa, Indonesia, the Philippines, Italy, the Netherlands and the U.K. Our iPhone active installed base grew to a new all-time high, thanks to a June quarter record in switchers. This is a testament to our extremely high levels of customer satisfaction, which 451 Research recently measured at 98% for the iPhone 14 family in the U.S. Mac generated $6.8 billion in revenue, down 7% year-over-year. We continue to invest in our Mac portfolio. And this past quarter, we were pleased to complete the transition to Apple silicon for the entire lineup. This transition has driven both strong upgrade activity and a high number of new customers. In fact, almost half of Mac buyers during the quarter were new to the product. We also saw reported customer satisfaction of 96% for Mac in the U.S. iPad revenue was $5.8 billion, down 20% year-over-year and in line with our expectations. These results were driven by a difficult compare against the full quarter impact of the iPad Air launch in the prior year. At the same time, we continue to attract a large number of new customers to the iPad installed base with over half of the customers who purchased iPads during the quarter being new to the product. And the latest reports from 451 Research indicate customer satisfaction of 96% in the U.S. Wearables, Home and Accessories revenue was $8.3 billion, up 2% year-over-year, with a June quarter record in Greater China and strong performance in several emerging markets. We continue to see Apple Watch expand its reach with about 2/3 of customers purchasing an Apple Watch during the quarter being new to the product. And this is combined with very high levels of customer satisfaction, which was recently reported at 98% in the United States. Moving on to Services. We reached a new all-time revenue record of $21.2 billion with year-over-year growth accelerating sequentially to 8% and up double digits in constant currency. In addition to the all-time records Tim mentioned earlier, we also set June quarter records for advertising, App Store and Music. We are very pleased with our performance in Services, which is a direct reflection of our ecosystem's strength. First, our installed base of over 2 billion active devices continues to grow at a nice pace and establishes a solid foundation for the future expansion of our ecosystem. Second, we see increased customer engagement with our services. Both our transacting accounts and paid accounts grew double digits year-over-year, each reaching a new all-time high. Third, our paid subscriptions showed strong growth. This past quarter, we reached an important milestone and passed 1 billion paid subscriptions across the services on our platform, up 150 million during the last 12 months and nearly double the number of paid subscriptions we had only 3 years ago. And finally, we continue to improve the breadth and the quality of our current services. From 20 new games on Apple Arcade, to brand-new content on Apple TV+, to the launch of our high-yield savings account with Apple Card, our customers are loving these enhanced offerings. Turning to the enterprise market. Our customers are leveraging Apple products every day to help improve productivity and attract talent. Blackstone, a global investment management firm, is expanding its Apple footprint from their corporate iPhone fleet to now offering the MacBook Air powered by M2 to all of their corporate employees and portfolio companies. Gilead, a leading biopharmaceutical company, has deployed thousands of iPads globally to their sales team. Over the last 6 months, they have also doubled their Mac user base by making MacBook Air available to more employees with a focus on user experience and strong security. Let me now turn to our cash position and capital return program. We ended the quarter with over $166 billion in cash and marketable securities. We repaid $7.5 billion in maturing debt while issuing $5.2 billion of new debt and increasing commercial paper by $2 billion, leaving us with total debt of $109 billion. As a result, net cash was $57 billion at the end of the quarter. During the quarter, we returned over $24 billion to shareholders, including $3.8 billion in dividends and equivalents and $18 billion through open market repurchases of 103 million Apple shares. We continue to believe there is great value in our stock and maintain our target of reaching a net cash neutral position over time. As we move ahead into the September quarter, I'd like to review our outlook, which includes the types of forward-looking information that Saori referred to at the beginning of the call. We expect our September quarter year-over-year revenue performance to be similar to the June quarter, assuming that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter. Foreign exchange will continue to be a headwind, and we expect a negative year-over-year revenue impact of over 2 percentage points. We expect iPhone and Services year-over-year performance to accelerate from the June quarter. Also, we expect the revenue for both Mac and iPad to decline by double digits year-over-year due to difficult compares, particularly on the Mac. For both products, we experienced supply disruptions from factory shutdowns in the June quarter a year ago and were able to fulfill significant pent-up demand in the year ago September quarter. We expect gross margin to be between 44% and 45%. We expect OpEx to be between $13.5 billion and $13.7 billion. We expect OI&E to be around negative $250 million, excluding any potential impact from the mark-to-market of minority investments, and our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividend of $0.24 per share of common stock payable on August 17, 2023, to shareholders of record as of August 14, 2023. With that, let's open the call to questions." }, { "speaker": "Saori Casey", "text": "Thank you, Luca. [Operator Instructions]. Operator, may we have the first question, please?" }, { "speaker": "Operator", "text": "[Operator Instructions]. We will go ahead and take our first question from Shannon Cross with Credit Suisse." }, { "speaker": "Shannon Cross", "text": "Tim, you mentioned -- and actually, Luca, too, you mentioned an uneven macro environment during the quarter several times on the call. I'm wondering if you can talk on a geographic basis about some of the trends you're seeing in iPhone. I'm specifically wondering how demand is trending within..." }, { "speaker": "Luca Maestri", "text": "Sure. Shannon, I'll answer it. I didn't get the end of your question." }, { "speaker": "Operator", "text": "I think she has dropped." }, { "speaker": "Luca Maestri", "text": "Okay. Well, let me answer the question for the part that I could follow. So on a geographic basis, we've had great performance for iPhone in emerging markets. We set June quarter records in many of the emerging markets. We grew in total double digits. And the performance was strong across the board in emerging markets from China, where our performance improved from minus 3% to plus 8% in the June quarter and we grew double digits in constant currency, to many other areas around the world from India, where, again, we set a June quarter record with very strong performance there, Indonesia, Southeast Asia, in general, Latin America, Middle East. And so it's been really good there. We -- also, as you can see from our geographic segments, we had a slight acceleration of performance in the Americas, primarily in the United States, but we declined there because the smartphone market has been in a decline for the last couple of quarters in the United States." }, { "speaker": "Shannon Cross", "text": "Sorry about that. I'm not sure why I cut off. In terms of gross margin, you were at the high end of the range [Technical Difficulty] and you guided to 45% at the high end, which is, I think, higher than I remember in 20 years of covering you. So how should we think about puts and takes of gross margin? And it seems like there's like a perfect storm of good things. So I just -- maybe if you can talk about how you're thinking about it more holistically." }, { "speaker": "Luca Maestri", "text": "I think you remember correctly, Shannon, because the 44.5% for the June quarter is an all-time record for us in June. We were up 20 basis points sequentially. It was driven by cost savings and a mix shift towards Services, which obviously helps company gross margins, partially offset by the seasonal loss of leverage. We have a commodity environment that is favorable to us. Our product mix is quite strong at this point. And so with the exception of foreign exchange, which continues to be a drag, and it was a significant drag on a year-over-year basis, yes, we are in a good position right now. We are in a good position for the June quarter. And as I mentioned, we expect similar level of gross margins for the same reasons, frankly, for the September quarter." }, { "speaker": "Operator", "text": "Our next question comes from Wamsi Mohan of Bank of America." }, { "speaker": "Wamsi Mohan", "text": "Luca, can you just give us a little more color around the guidance? Your overall revenue performance, you called out similar. Obviously, you absorbed a higher FX impact this quarter versus your guide. And you also noted Services acceleration. So just wondering, when you think about that comment on iPhone acceleration, is that on a reported basis? Is that constant currency basis? And is there something that's changing in terms of seasonality perhaps for you that is causing not as much step-up in product revenue as typical on a sequential basis? And I have a follow-up." }, { "speaker": "Luca Maestri", "text": "Yes. So all our comments are in reported currency, not in constant currency in relation to the outlook. And we said acceleration sequentially for iPhone and for Services. But we're also pointing out -- and this is where I think, Wamsi, you're referring to some seasonality issues. We also said that for Mac and iPad, we expect to decline double digits. And the reason for that is that we have a very difficult compare versus last year. You remember that a year ago, in the June quarter, we had factory shutdowns for both Mac and iPad. And so we were able to fill the pent-up demand from those shutdowns during the September quarter. So an unusual level of activity that we had a year ago. And so now, obviously, the compare is difficult. So we expect both iPad and Mac to be down double digits, which offset the acceleration that I mentioned for iPhone and Services." }, { "speaker": "Wamsi Mohan", "text": "Okay. And Tim, I was wondering if you could update us on what percent of iPhones are sold on some type of installment basis now versus full upfront payment on a global basis. And maybe some thoughts on if you expect similar promotional activity from carriers, especially in the U.S., that seem to be grappling with a lot of cash flow issues this particular year." }, { "speaker": "Luca Maestri", "text": "Wamsi, I'll take it. We've done a really good job over the last few years with affordability programs around the world directly in our direct channel and with our partners around the world. The majority of iPhones, at this point, are sold using some kind of a program, trade-ins, installments, some kind of financing. And that percentage, which again, it's well over 50%, is very similar across developed and emerging markets. We want to do more of that because we think it really helps reduce the affordability threshold for our products. And we think it is also one of the reasons why our product mix has been very strong during the last couple of cycles. So we will continue to push on that front." }, { "speaker": "Operator", "text": "Our next question is from David Vogt with UBS." }, { "speaker": "David Vogt", "text": "I just wanted to follow up on 2 points that both you, Tim, and Luca made about growth and maybe commodities. So just to be clear, I know you're talking about an acceleration in iPhone, but the comp is about 2 points easier from FX. So I just want to understand, is that on a like-for-like basis, excluding the currency improvement of about 2 points from the June quarter to the September quarter? And from a commodity perspective, I know last quarter, you talked about buying a lot of inventory at favorable prices, which was an incredibly smart strategy. Where do you sit today? And what's sort of the timing or the duration of that commodity sort of backlog that you have as we think about next quarter and the subsequent quarters? How far does that get you out into the future from this favorable cost dynamic?" }, { "speaker": "Luca Maestri", "text": "Let me start again. I just want to be clear about the guidance, the outlook guidance that we provided. We're referring entirely to reported numbers. So they take into account the fact that we have a slight improvement in foreign exchange. So when I talk about similar performance, I refer to reported performance in the June quarter and then the reported performance in the September quarter. And again, we expect, on a reported basis, our iPhone performance to accelerate, our Services performance to accelerate, and iPad and Mac to decline double digits. On the commodity front, as I mentioned, the environment is favorable. We always make sure that we take advantage of the opportunities that are available in the market, and we will continue to do that going forward." }, { "speaker": "David Vogt", "text": "Luca, any sense of how long that gives you a run rate today based on what you currently have? Can you give us a sense for at least the short-term tailwind?" }, { "speaker": "Luca Maestri", "text": "I don't want to speculate past the September quarter because that's the horizon where we provide guidance. And I've said that the guidance for September is 44% to 45%, which you know is historically very high. And so obviously, that reflects a favorable environment for us." }, { "speaker": "Operator", "text": "Our next question is from Erik Woodring with Morgan Stanley." }, { "speaker": "Erik Woodring", "text": "I have 2 as well. Maybe if we just start kind of big picture, Tim or Luca. I was wondering if you could just kind of share some incremental color on how you think the consumer is behaving today versus 90 days ago and maybe how that differs by region. Meaning, are there any signs that consumer is incrementally more willing to spend on things like consumer electronics? Or is there still relative caution in the market? Are there any regions where you're seeing more strength in the consumer? And how sustainable do you think some of that strength or weakness could be based on some of the KPIs you track? And then I have a follow-up." }, { "speaker": "Tim Cook", "text": "Yes. David, it's Tim. If you sort of step around the world, we did exceptionally well in emerging markets last quarter and even better on a constant currency basis. And so emerging markets were -- was a strength. If you look at China, in China, we went from a negative 3% in Q2 to a plus 8% in Q3. And so in China, we had an acceleration. If you look at the U.S., which is in the -- obviously in the Americas segment, it is the vast majority of what's in there, there was also a slight acceleration sequentially, although the Americas is still declining somewhat year-over-year, as you can see on the data sheet. The primary reason for that is that it's a challenging smartphone market in the U.S. currently. And then in Europe, Europe saw a record quarter and -- for the June quarter, a record. And so some really good signs in most places in the world." }, { "speaker": "Erik Woodring", "text": "Awesome. And then maybe, Luca, a question for you. I think it's been about 3 quarters now where we've seen OpEx either grow below historical seasonality or come in below your expectations. I think this is the first time we've seen R&D grow less than 10% year-over-year since fiscal 2Q 2007. So can you maybe just talk about some of the cost actions you're taking? And as you look forward, what are the indicators that you're really evaluating that would give you greater confidence in perhaps returning back to a more seasonal cadence of OpEx spending? Or is this just a new normal that we should be expecting? That's it for me." }, { "speaker": "Luca Maestri", "text": "Obviously, we look at the environment, and we know that this has been an uncertain period for the last few quarters. And so we decided to be deliberate in what we do in terms of controlling our spend, and there's many areas across the company that we're working on and we've been quite effective at slowing down the spend. We slowed down also the hiring within the company in several areas. And we're very pleased with our ability to decelerate some of the expense growth taking into account the overall macro situation. We will continue to manage deliberately. You can see that we continue to grow our R&D costs faster than the rest of the company. SG&A is actually growing at a much slower pace because obviously, our focus continues to be in innovation and product development, and we'll continue to do that." }, { "speaker": "Operator", "text": "Our next question is from Michael Ng with Goldman Sachs." }, { "speaker": "Michael Ng", "text": "I just have 2 questions as well. First, it was encouraging to see the Services outperformance in the quarter, up double digits on an FX-neutral basis, and more Services acceleration next quarter on a reported basis. I was just wondering if you could just talk a little bit more about key underlying drivers for the confidence in the Services acceleration next quarter, understanding that FX a little bit. But anything to call out as it relates to things in Apple Search Ads that's helping. You're obviously making a lot of investments in Apple TV+ between MLS and the Canal+ deal. So any thoughts there would be great." }, { "speaker": "Luca Maestri", "text": "Yes, Michael, you're correct. I mean clearly, we've seen an improvement in the June quarter, and we expect further improvement in the September quarter. In June, the performance was across the board. Tim and I mentioned we set records really across the board. We had all-time records in cloud, in video, in AppleCare, in payments and June quarter records in App Store, advertising and Music. So we saw improvement in all our Services categories. We think the situation will continue to improve as we go through September. And that's very positive because not only good for the financial results, but obviously, it shows a high level of engagement of our customers in the ecosystem, which is very important for us. And it's really the sum of all the things that I mentioned in my prepared remarks. It goes from the fact that our installed base continues to grow, so we've got a larger pool of customers, to the fact that our customers are more engaged as we have more transacting accounts and paid accounts on the ecosystem. And the subscriptions business is very healthy with growth of 150 million paid subscriptions just in the last 12 months. It's almost double to what we had 3 years ago. And of course, we are providing more and more content to our users. And so the combination of all these things gives us good confidence for September." }, { "speaker": "Michael Ng", "text": "Great. And just as a related follow-up, it's about the hardware installed base and Services ARPU. I was curious when you talked about the Services strength, you talked about the 2 billion-plus installed base. When you think about the opportunity to increase the Services ARPU, do you really think about it internally on a per-active-iPhone user basis or on a per-device basis? Said differently, I'm just curious where you think about -- whether you think there's an incremental opportunity for those users that have multiple devices. Do you really see a big Services ARPU uplift in that respect?" }, { "speaker": "Luca Maestri", "text": "Well, we know that customers that own more than one device are typically more engaged in our ecosystem. And so obviously, they tend to also spend more on the Services front. I would say the biggest opportunity is that we know that there's a lot of customers that we have that are very familiar with our ecosystem. They are engaged in the ecosystem. But still today, they're using only the portion of the ecosystem that is free. And so we think that by offering better content and more content over time, we're going to be able to attract more of them as paid customers." }, { "speaker": "Operator", "text": "Our next question is from Amit Daryanani with Evercore." }, { "speaker": "Amit Daryanani", "text": "I have 2 as well. I guess, Luca, maybe if you can talk about Wearables a bit. The growth over there, I think, in constant currency was fairly impressive at plus 6%. Can you just touch on maybe what's driving that? And then how do we think about the Wearables segment heading into the September quarter? I know you talked about a bunch of other ones, but how do we think about Wearables into September as well?" }, { "speaker": "Luca Maestri", "text": "Sorry, Amit, I didn't get the -- what are you referring to?" }, { "speaker": "Amit Daryanani", "text": "Yes. Sorry. I was hoping you could talk a bit about the Wearables segment because the growth over there was fairly impressive. And then how do you think about it into September as well?" }, { "speaker": "Luca Maestri", "text": "Yes. On the Wearables front, we had really good performance in Greater China. And that's, again, very important for us. It was a June quarter record for Greater China. Very important for us because, again, it shows that the engagement with the ecosystem in a market that is so important for us like China continues to grow. It means that there's more and more customers that are owning more than the iPhone. Also, we continue to grow the installed base of the category very quickly because, as I mentioned, 2/3 of every buyer of Apple Watch during the course of the June quarter was new to the product. And so that is all additive to the installed base. So it's just great to see that the AirPods continue to be a great success in the marketplace for us. And so things are moving in the right direction there. It's become a very large business for us in Wearables, Home and Accessories. The last 12 months, we've done $40 billion of business, which is nearly the size of a Fortune 100 company. So it's become very important, and it's allowed us to diversify both our revenues and our earnings." }, { "speaker": "Amit Daryanani", "text": "That's really helpful. And then if I could just follow up, the Europe growth, the growth in Europe at up 5% is totally notable as well. I think you have a few emerging markets that you put in Europe as well. But I would love to understand what's happening in Europe and if there's a way to think about sort of Western Europe or developed world versus emerging markets over there." }, { "speaker": "Luca Maestri", "text": "Yes. It's been very good, primarily on the emerging market side of Europe. We include India and the Middle East and Central and Eastern Europe into the Europe segment. But as we mentioned at the beginning of the call, we had a number of markets that did very well, like France, like Italy, the Netherlands, Austria. So it was a good quarter for Europe." }, { "speaker": "Operator", "text": "Our next question is from Harsh Kumar with Piper Sandler." }, { "speaker": "Harsh Kumar", "text": "I have one for Luca and then later on one for Tim. So Luca, for some time now, for many quarters, you've had a currency headwind or foreign exchange currency headwind. It's conceivable that as rates start to come down, hopefully next year that the dollar weakens. Could you take us through the mechanism of how that will work on your revenues and for your costs?" }, { "speaker": "Luca Maestri", "text": "So we tend -- we try to hedge our foreign exchange exposures because we think it's the right approach for the company in terms of minimizing the volatility that necessarily happens from the movements of currencies. We cannot effectively hedge every single exposure around the world because in some cases, it is not possible. In other cases, it is prohibitively expensive. But we tend to cover all the major currency payers that we have. About 60% of our business is outside the United States. So it's a very, very large and, I would say, very effective hedging program. And so we set up these hedges, and they tend to roll over very regularly. And then we replace them with new hedges at the new spot rate. So the impact that we're going to have on revenue and cost will depend on where the spot rates are at different points in time. And therefore, because of the way the program works, tends to be a bit of a lag in both directions as the foreign exchange moves over time." }, { "speaker": "Harsh Kumar", "text": "Understood. Very helpful. And for Tim, Tim, historically, for the last many years, carriers in at least the U.S., which I think is your largest market for iPhone, have had programs to help folks upgrade, whether they give a cash rebate or you bring in your old phone, something like that. I was curious, as you get into your peak December quarter, if you're aware of these programs are in place. And the reason why I'm asking is I think earlier, you mentioned that more than 50% of your phones are sold through some kind of program. I assume the number is even higher in the U.S." }, { "speaker": "Tim Cook", "text": "I don't want to get into revealing specifics in the different carriers. But generally speaking, I would think that it would be quite easy to find a promotion on a phone, provided you're hooking up to a service and either switching services, carriers or upgrading your phone at the same carrier. I think both of those cases today that you can find promotions out there, and I would expect that you'd be able to do that in the December time frame as well." }, { "speaker": "Operator", "text": "Our next question is from Aaron Rakers with Wells Fargo." }, { "speaker": "Aaron Rakers", "text": "I have two as well. So first of all, I just want to kind of ask Tim. Strategically, as we think about the Services growth and kind of the content expansion behind that, I'm curious if you could help us maybe appreciate what you've seen from a sporting perspective in terms of the engagement with MLS, the engagement with Major League Baseball, and how strategically you're thinking about expansion in sports as a key driver of Services growth going forward." }, { "speaker": "Tim Cook", "text": "We're focused on original content, as you know, with TV+. And so we're all about giving great storytellers the venue to tell great stories and hopefully get us all to think a little deeper. And sport is a part of that because sport is the ultimate original story. And for MLS, we're -- we could not be happier with how the partnership is going. It's clearly in the early days, but we are beating our expectation in terms of subscribers, and the fact that Messi went to Inter Miami helped us out there a bit. And so we're very excited about it." }, { "speaker": "Aaron Rakers", "text": "Yes. And as a quick follow-up, I'm just curious, an update on -- you mentioned in your prepared remarks the continued growth that you've seen in India. I'm curious how we think about that market opportunity looking forward. Is there anything that you see evolving that could accelerate the opportunity for iPhone in that large mobile market?" }, { "speaker": "Tim Cook", "text": "We did hit a June quarter revenue record in India, and we grew strong double digits. We also opened our first 2 retail stores during the quarter. And it's -- of course, it's early going currently, but they're currently beating our expectation in terms of how they're doing. We continue to work on building out the channel and putting more investment in our direct-to-consumer offers as well. And so I think if you look at it, it's the second largest smartphone market in the world. And it's -- so we ought to be doing really well there. And where I'm really pleased with our growth there, we're still -- we still have a very, very modest and low share in the smartphone market. And so I think that it's a huge opportunity for us. And we're putting the -- all of our energies in making that occur." }, { "speaker": "Operator", "text": "Our next question comes from Sidney Ho with Deutsche Bank." }, { "speaker": "Sidney Ho", "text": "Your -- I just wanted to ask about the AI side of things. Your strategy on AI seems quite different than many of your peers, at least you don't talk too much about that, how much you invest in it. Maybe you can elaborate a little bit on that. But related to that, how do you see your investment in this area turning into financial performance in the future? Is it mainly through faster upgrade cycle, maybe higher ASP? Or are you thinking about maybe additional services that you can capitalize on that? And then I have a follow-up." }, { "speaker": "Tim Cook", "text": "If you take a step back, we view AI and machine learning as core fundamental technologies that are integral to virtually every product that we build. And so if you think about WWDC in June, we announced some features that will be coming in iOS 17 this fall, like Personal Voice and Live Voicemail. Previously, we had announced lifesaving features like fall detection and crash detection and ECG. None of these features that I just mentioned and many, many more would be possible without AI and machine learning. And so it's absolutely critical to us. And of course, we've been doing research across a wide range of AI technologies, including generative AI for years. We're going to continue investing and innovating and responsibly advancing our products with these technologies with the goal of enriching people's lives. And so that's what it's all about for us. And as you know, we tend to announce things as they come to market, and that's our MO, and I'd like to stick to that." }, { "speaker": "Sidney Ho", "text": "Okay. That's fair. Maybe as a follow-up is related to -- you talked about WWDC, where you actually introduced Vision Pro there. Clearly, a very big announcement there. How should we think about the revenue ramp related to the Vision Pro? Is there any catalysts that we should be thinking about that will drive an inflection of that product?" }, { "speaker": "Tim Cook", "text": "Yes. There's enormous excitement around the Vision Pro. We're excited internally. Everybody that's been through the demos are blown away, whether you're talking about press or analysts or developers. We are now shipping units to the developer community for them to begin working on their apps. And we're looking forward to shipping early next year. And so we could not be more excited with that. I'm using the product daily. And so we're not going to forecast revenues and so forth on the call today, but we're very excited about it." }, { "speaker": "Operator", "text": "We will take our last question from Krish Sankar with TD Cowen." }, { "speaker": "Krish Sankar", "text": "I have two of them as well. Number one, on iPhone, Tim, you mentioned about the record number of switchers in the quarter. I'm kind of curious how to think about, given the weak macro and consumer spending, how is the replacement cycle for iPhone? Is it similar, longer, shorter versus prior years? And can you talk a little bit about the demand linearity of iPhone during the June quarter? And then I have a follow-up." }, { "speaker": "Tim Cook", "text": "Switchers were a very key part of our iPhone results for the quarter. We did set a record. We set a record in Greater China, in particular, and it was at the heart of our results there. And we continue to try to convince more and more people to switch because of our -- the experience and the ecosystem and -- that we can offer them. And so I think switching is a huge opportunity for us. In terms of the upgrade cycle and so forth, it's very difficult to estimate real time what is going on with the upgrade cycle. I would say, if you think about the iPhone results year-over-year, you have to think about the SE announcement in the year ago quarter, the iPhone SE announcement in the year ago quarter. And so that provides a bit of a headwind on the comp. But as Luca said, as he talked about how we're viewing Q4, the September quarter, we see iPhone accelerating in Q4." }, { "speaker": "Krish Sankar", "text": "Got it. Very helpful, Tim. And then my final question is on your retail stores, you obviously have a very large retail footprint and many of your stores seem to have been open for over a year now. How is the foot traffic there? And how do you think about sales or the retail trends in the June quarter and implications for the back half of this year on a seasonality basis?" }, { "speaker": "Tim Cook", "text": "I'm sorry, are you talking about our retail stores?" }, { "speaker": "Krish Sankar", "text": "Yes, yes, your retail stores." }, { "speaker": "Tim Cook", "text": "Yes. The -- if you look at retail, it's a key part of our go-to-market approach, and it will be so key and such a competitive advantage with Vision Pro. It will give us the opportunity to launch a new product and demo to many people in the stores. And so it has many advantages in it. And we continue to roll out more stores. As you know, we just opened 2 in India last quarter. We're -- there's still a lot of countries out there that don't have Apple stores that we would like to go into. And so we continue to see it as a key part of how we go to market and love the experience that we can provide customers there." }, { "speaker": "Saori Casey", "text": "A replay of today's call will be available for two weeks on Apple Podcasts, at a webcast of apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter the confirmation code 2553017, followed by the pound sign. These replays will be available by approximately 5 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial analysts can contact me, Saori Casey, with additional questions at 408-974-3123 while Suhasini Chandramouli is on her maternity leave. Thank you again for joining us." }, { "speaker": "Operator", "text": "Once again, this does conclude today's conference. We do appreciate your participation." } ]	Apple Inc.	24,937
AAPL	2	2,023	2023-05-04 17:00:00	Operator: Good day, and welcome to the Apple’s Q2 Fiscal Year 2023 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Suhasini Chandramouli, Director of Investor Relations. Please go ahead. Suhasini Chandramouli : Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expense, other income and expense, taxes, capital allocation, and future business outlook, including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook: Thank you, Suhasini. Good afternoon, everyone, and thanks for joining us. Today, we're reporting revenue of $94.8 billion for the March quarter, which was better than our expectations. We set an all-time record for Services and a March quarter record for iPhone. We were particularly pleased with the performance we saw in emerging markets and achieved all-time records in Mexico, Indonesia, the Philippines, Saudi Arabia, Turkey and the UAE, as well as a number of March quarter records, including in Brazil, Malaysia and India. This result is a testament, first and foremost to our teams around the world who are engaged every day in the work of bringing new innovations to life. It speaks to the incredible power of Apple products and services to enrich people's lives in indispensable ways. And whether it's in the design lab in Cupertino, or in one of the brand new retail stores in India, I am constantly inspired by the way our people come together to make a real difference in the world. During the March quarter, we continued to face foreign exchange headwinds, which had an impact of more than 500 basis points, as well as ongoing challenges related to the macroeconomic environment. Revenue was down 3% year-over-year as a result, while on a constant currency basis, we grew in total and in the vast majority of the markets we tried. Despite these challenges, we continue to manage for the long term and to push the limits of what's possible, always on behalf of the customers who depend on our products whether it's students exploring new frontiers, developers dreaming up their next big idea, or artists taking their creativity to a whole new level. Let me share how these results showed up across our lineup of products and services. Let's start with iPhone, which set a new March quarter record with revenue of $51.3 billion. The iPhone 14 and 14 plus continue to delight users with their long lasting battery and advanced camera. And our pro users continue to rave about the most powerful camera system ever in an iPhone. This March, we were excited to expand emergency SOS via satellite to six new countries, bringing this important safety feature to even more users. We now offer this vital service in 12 countries, and I'm grateful for every note I've received from around the world about the life saving impact of our safety features. Now let's turn to Mac, which recorded $7.2 billion in revenue for the March quarter in line with our expectations. As we noted during our last call, Mac faced a very difficult compare because of the incredibly successful rollout of our M1 chip throughout the Mac lineup last year. And like our other product lines, Mac is facing some macroeconomic and foreign exchange headwinds as well. That said, the advancements we've made in power efficient performance continue to amaze our users. Our M2 Mac Mini customers are raving about the pro level powerhouse packed into an ultra-compact design, and users are marveling at the power and speed at the heart of every M2 powered MacBook Air and MacBook Pro, which allowed them to sustain even the most demanding workloads. iPad revenue was $6.7 billion, which was also in line with our expectations. Similar to Mac, iPad revenue performance was impacted by macroeconomic challenges, foreign exchange headwinds, and a difficult compare with last year when we launched the M1 powered iPad Air. iPad's versatility continues to be its greatest strength as we're helping students learn on the same family of devices artists use to create their next masterpiece. Across wearables, home and accessories, revenue was $8.8 billion. With its exceptional range of game changing health and safety features, Apple Watch becomes more and more indispensable every day. Apple Watch Ultra is attracting adventures, athletes and everyday users with its breakthrough features built for endurance and exploration. And with summer travel season soon heating up, there's no better companion in the air or on the road than AirPods, the best and most popular headphones in the world. Meanwhile, Services set an all-time record with $20.9 billion in revenue for the March quarter. We achieved all time revenue records across App Store, Apple Music, iCloud and payment services. And now, with more than 975 million paid subscriptions, we're reaching even more people with our lineup of services. Apple TV Plus continues to draw praise from customers and reviewers alike. During the past quarter, fans tuned in to incredible new series like Shrinking and The Big Door Prize and got to welcome Ted Lasso back into their homes for a third season. Movies like Tetris are captivating viewers with many more to come, including Martin Scorsese’s Killers of the Flower Moon later this year. Three years since its launch, Apple TV Plus programming has been celebrated across the globe, with over 1,450 nominations and more than 350 wins. Recently, we were thrilled to cheer on The Boy, the Mole, the Fox and the Horse, which won an Academy Award for best Animated Short Film. The first season of our historic tenure partnership with Major League Soccer is well underway with MLS season pass, we've created the ultimate destination for soccer fans, offering subscribers the ability to watch every match with no blackouts. And with baseball season in full swing, Apple TV Plus subscribers can watch their favorite teams with the return of Friday night baseball. This quarter, we launched Apple Music Classical, a standalone app that gives something special to classical music lovers. Apple Music Classical packs the largest library of classical music on Earth into a thoughtful and intuitive design that strikes all the right notes. Whether you're listening with AirPods or HomePod, the premium sound experience of Apple Music Classical will leave you with a feeling of being front row at the symphony just behind the conductor. In March, we also launched Apple Pay Later designed with users privacy and financial health in mind. Apple Pay Later allows users to split purchases into multiple payments with no interest or fees. And last month, we introduced Apple Card Savings Accounts to give users even more value out of their daily cash Apple Card Benefit. At Apple, our customers are at the center of everything we do. Nowhere is that more evident than retail, where our teams are dedicated to sharing the best of Apple with our customers. And we're constantly innovating to deliver exceptional experiences and meet our customers where they are. In the US, we launch Shop with a specialist over video, a new way for customers to learn about iPhone and find the one that's just right for them. And as I noted earlier, in a milestone for Apple, we just opened our first two Apple stores in India, in Mumbai and Delhi. I was there to see it for myself, and I couldn't have been more delighted by the excitement and enthusiasm of the customers, developers, creators and team members I got to spend time with. I've had the chance to connect with customers and teams all around the world in recent months, so many people shared with me that they were fans of Apple, not just because of the innovations we create, but because of the values that guide us, and that means a great deal to us. We're constantly striving to make a positive difference in people's lives and be a force for progress. We're investing in education to give students the skills they need to shape the future. We're helping to create pathways of opportunity for communities of color through our Racial Equity and justice initiative. And every day we're building an even more inclusive and diverse Apple rooted in our culture of belonging. To better understand how our work intersects with our values, look no further than what we're doing for the environment. We just celebrated Earth Day in April, and during that month, Apple announced that its global manufacturing partners now support over 13 gigawatts of renewable energy, a nearly 30% increase in just the last year. This translates to 17.4 million metric tons of avoided carbon emissions, the equivalent of removing nearly 3.8 million cars from the road. We're all investing up to an additional $200 million in our Restore Fund, which is designed to support innovative, scalable, nature based carbon removal projects, with the goal of removing 1 million metric tons of carbon every year. These are just the latest steps on our journey toward our 2030 goal to be carbon neutral across our supply chain and lifecycle of our devices. At the same time, we're advancing renewable energy across our supply chain, we're also sourcing more recycled materials in our products. Last month, we announced our plans to have all Apple design batteries include 100% certified recycled cobalt by 2025, and we remain committed to one day using only recycled and renewable materials in our products. We have a deep sense of mission here at Apple. We believe in the power of innovation to build a better world. We are determined to do our best work on behalf of our customers and to give them the tools that can enrich lives. So we will manage for the long term, just as we always have, with our eyes to the horizon, with limitless creativity, and with a deep belief that we can achieve anything we put our minds to. With that, I'll turn it over to Luca. Luca Maestri: Thank you, Tim, and good afternoon, everyone. Revenue for the March quarter was $94.8 billion, down 3% from last year and better than our expectations. Foreign exchange had a negative impact of over five percentage points on our results, in line with what we had expected. On a constant currency basis, our revenue grew year-over-year in total and in the majority of the markets we track. In addition to the records in emerging markets that Tim mentioned, we also set March quarter records in Australia, Canada, Spain and Switzerland, among others. Products revenue was $73.9 billion, down 5% from last year, due to challenging compares on Mac and iPad. iPhone, however, reached a March quarter revenue record thanks to very strong performance in emerging markets from South Asia and India to Latin America and the Middle East. During the quarter, our installed base of active devices continued to grow at a nice pace thanks to extremely high levels of customer satisfaction and loyalty, and reached an all-time high for all major product categories and geographic segments. Our Services set an all-time revenue record of $20.9 billion, up 5% year-over-year, on top of growing 17% in the March quarter a year ago. We reached an all-time services revenue record in Greater China and March quarter records in Americas, Europe and Rest of Asia Pacific. Company gross margin was 44.3%, up 130 basis points from last quarter, driven by cost savings and favorable mix shift towards services partially offset by leverage. Products gross margin was 36.7%, decreasing 30 basis points sequentially due to seasonal loss of leverage and mix, partially offset by favorable costs. Services gross margin was 71%, up 20 basis points sequentially. Operating expenses of $13.7 billion were at the low end of the guidance range we provided at the beginning of the quarter and continued to decelerate from the December quarter. We are closely managing our spend, but remain focused on long term growth with continued investment in innovation and product development. Net income was $24.2 billion. Diluted earnings per share were a $1.52, unchanged versus last year, and we generated very strong operating cash flow of $28.6 billion. Let me now provide more detail for each of our revenue categories. iPhone revenue set a March quarter record of $51.3 billion, up 2% year-over-year despite significant foreign exchange headwinds and a challenging macroeconomic environment. We set March quarter records in several developed and emerging markets with India, Indonesia, Turkey and the UAE doubling on a year-over-year basis. Our active installed base of iPhone grew to a new all-time high and was up in all our geographic segments. We are very pleased by the results of the latest survey of US Consumers from 451 Research, which measured customer satisfaction at 99% for the iPhone 14 family. Mac revenue was $7.2 billion, down 31% year-over-year and in line with our expectations. These results were driven by the challenging macroeconomic environment coupled with a difficult compare against last year's launch of the completely reimagined M1 MacBook Pros. Despite this, the installed base of active Macs reached an all-time high across all geographic segments and we continue to see strong upgraded activity to Apple silicon. Also, the latest survey of US Consumers from 451 Research reported customer satisfaction at 96% for Mac. iPad generated $6.7 billion in revenue, down 13% year-over-year and in line with our expectations. This performance was due to two key factors, a tough compare against the launch of iPad Air powered by the M1 chip in the year ago quarter and headwinds from the macroeconomic environment. The iPad installed base reached a new all-time high in all geographic segments thanks to exceptional customer loyalty and a high number of new customers. In fact, over half of the customers who purchased iPads during the quarter were new to the product. Wearables, home and accessories revenue was $8.8 billion, down 1% year-over-year as the category experienced the impact from the macroeconomic environment. However, we did set March quarter records both in the US and in Greater China. We continue to see strength in our Watch installed base, which set a new all-time record, thanks to very high customer loyalty and new two rates, nearly two thirds of customers purchasing an Apple Watch during the quarter were new to the product. Moving to Services, we reached a new all-time revenue record of $20.9 billion. And in addition to the all-time records Tim mentioned earlier, we set March quarter records for advertising Apple Care and Video. Despite these records, as we saw in recent quarters, certain services offerings such as digital advertising and mobile gaming continue to be affected by the current macroeconomic environment. Stepping back, however, the continued growth in Services is the reflection of our ecosystem strength and the positive momentum we are seeing across several key metrics. First, our growing installed base of over 2 billion active devices represents a great foundation for future expansion of our ecosystem. We continue to grow across every major product category and geographic segment, thanks to very high levels of customer loyalty and satisfaction. Second, we saw increased customer engagement with our services during the quarter. Both our transacting accounts and paid accounts grew double digits year-over-year, each setting a new all-time record. Third, paid subscriptions showed strong growth. We now have more than $975 million paid subscriptions across the Services on our platform, up 150 million during the last 12 months and nearly double the number of paid subscriptions we had only three years ago. And finally, we continue to improve the breadth and the quality of our current services offerings from new content on Apple TV Plus to great new features available in Apple Pay and Apple Music, which we believe our customers will love. Turning to the enterprise market, we see business customers continuing to invest in the Apple platform to drive higher employee productivity and satisfaction. In Brazil, Boticario Group, the world's largest cosmetics franchiser, originally starting with iPhone, 12 employees manage operations across a network of retail stores, franchisees and resellers. As it continues to digitize its business, Boticario has chosen to move all software development in house and adopted Mac as the standard device for all of their developer teams across the world. In small business, we see an increasing number of customers relying on Apple hardware, software and services to power their businesses forward, from accepting payments on iPhone, to tracking inventory on Mac or iPad, to managing employee devices with Apple Business Essentials. As we celebrate National Small Business week here in the US, we are proud to continue supporting the small business community. Let me now turn to our cash position and capital return program. We ended the quarter with over $166 billion in cash and marketable securities. We repaid $2.3 billion in maturing debt and increased commercial paper by about $300 million, leaving us with total debt of $110 billion. As a result, net cash was $57 billion at the end of the quarter. During the March quarter, we returned over $23 billion to shareholders, including $3.7 billion in dividends and equivalents and $19.1 billion through open market repurchases of $129 million Apple shares. Given the continued confidence we have in our business now and into the future, today our Board has authorized an additional $90 billion for share repurchases as we maintain our goal of getting to net cash neutral over time. We're also raising our dividend by 4% to $0.24 a share, and we continue to plan for annual increases in the dividend going forward. As we move ahead into the June quarter, I'd like to review our outlook, which includes the types of forward looking information that Suhasini referred to at the beginning of the call. We expect our June quarter year-over-year revenue performance to be similar to the March quarter, assuming that the macroeconomic outlook does not worsen from what we are projecting today for the current quarter. Foreign exchange will continue to be a headwind and we expect a negative year-over-year impact of nearly four percentage points. For Services, we expect our June quarter year-over-year revenue growth to be similar to the March quarter, while continuing to face macroeconomic headwinds in areas such as digital advertising and mobile gaming. We expect gross margin to be between 44% and 44.5%. We expect OpEx to be between $13.6 billion and $13.8 billion. We expect OINE to be around negative $250 million excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16%. Finally reflecting the dividend increase I mentioned earlier, today, our Board of Directors has declared a cash dividend of $0.24 per share of common stock payable on May 18, 2023, to shareholders of record as on May 15, 2023. With that, let's open the call to questions. Operator: [Operator Instructions] We will go ahead and take our first question from Erik Woodring of Morgan Stanley. Erik Woodring: Hey, good afternoon, guys. Thank you so much for taking the questions. Tim, maybe if we start with you. If we go back to the December quarter and the shutdowns, the production shutdowns around the time I think the question a lot of us were asking was how should we think about the deferral of demand versus destruction of demand? March quarter was quite strong 2% year-over-year iPhone growth. And so as we sit here in May, how have you seen that customers that weren't able to purchase during the December quarter behave? Meaning, are you seeing that they deferred purchases to March and June? Could they be deferring purchases to later and hopes of buying a new iPhone? Just how should maybe we think about the cadence of that and then I have a follow up. Thanks. Tim Cook: Yes. Hi, Erik. It's hard to quantify this, but we do believe we did recapture some amount of sales in the March quarter as we did see the iPhone performance accelerate relative to the December quarter. The production levels for the whole quarter were where we wanted them to be. So supply was not an issue during Q2. Erik Woodring: Okay, perfect. Thank you for that color. And then, Tim, maybe to follow up, it's been three or four quarters now that you've mentioned emerging markets like India and others. And I imagine, having just opened two new stores in the country, clearly an important market for you. So maybe can you just talk about why you see India as such an important market and others, how you think about monetization trends in the country and specifically what you have to do within the country to really ensure that India becomes maybe a more material mix of your business? And that's it for me. Thanks so much. Tim Cook: Yes, sure. Looking at the business in India, we did set a quarterly record, grew very strong, double digits year-over-year. So it was quite a good quarter for us, taking a step back, India is an incredibly exciting market. It's a major focus for us. I was just there, and the Dynamism in the market, the vibrancy is unbelievable. Over time, we've been expanding our operations there to serve more customers, and three years ago, we launched the Apple Store online, and then, as you just mentioned, we launched two stores just a few weeks ago, and they're off to a great start, one in Mumbai and one in Delhi. We've got a number of channel partners in the country as well that we're partnering with, and we're very happy with how that's going overall. Overall, I couldn't be more delighted and excited by the enthusiasm I'm seeing for the brand there. There are a lot of people coming into the middle class, and I really feel that India is at a tipping point, and it's great to be there. On other emerging markets, we had a stellar quarter in emerging markets overall, as I had mentioned, with records set in a number of different places, including Indonesia and Mexico, the Philippines, Saudi Arabia, Turkey, UAE, and then quarterly records in Brazil, India and Malaysia. And so it was a great quarter for emerging markets in general, despite the headwinds of the currency that Luca mentioned. And so we're putting efforts in a number of these markets and really see, particularly given our low share and the dynamics of the demographics, et cetera, a great opportunity for us in those markets. Operator: Our next question is from Mike Ng of Goldman Sachs. Mike Ng: Hey, good afternoon. Thank you very much for the question. It was encouraging to hear about the record installed base across iPhone and across all devices. It's been, I think, double digit growth over the last few years across the active devices. I was just wondering, is that a good way to think about the installed base growth going forward? And then for the iPhone installed base specifically, I was just wondering if you could provide a little bit of texture around how you think about the growth there, whether regionally or by first, smartphones versus switchers. And then I have a quick follow up. Tim Cook: Yes. If you look at the installed base of active devices now, overall it's more than $2 billion. As you know, we announced in January that we surpassed that. And this quarter, our Q2 rather we set new records across each of the geographic segments and each of the major product categories. And that's despite declines in current quarter sales, in particular in Mac and iPad. This is a huge asset for us, and it's a testament to the overall customer satisfaction and engagement and loyalty of our customers. And so we view this as a major asset for us. The iPhone base is well over a $1 billion active devices. We see this as upgrade rates, and these sorts of things may change quarter-to-quarter depending upon macroeconomic. But if you back up and look at the installed base, we feel great about the size of it and the rate that it's growing. Mike Ng: Great. Excellent. And then it was also encouraging to see the number of devices per iPhone user continue to grow. I was just wondering if you could talk about the opportunity to continue to increase that number of Apple devices per iPhone user and if you have any color around how the monetization per user may differ from those, for lack of better words, super users versus those that may not be as deep into the ecosystem. Thanks. Tim Cook: We try really hard to design our products in such a way that they work seamlessly together, and so whether that's the watch or the Mac, so that you can start working on one device and finish it on the other. And so there are a good deal of people out there that have multiple Apple devices, and I think this is a testament to the customer satisfaction and loyalty that we've been able to get from the incredible design that our engineering teams do on our products. Operator: Our next question is from Shannon Cross of Credit Suisse. Shannon Cross: Thank you very much. Thank you for taking my question. Tim, can you talk a bit about AI? It's obviously more than the topic of the day. It seems like the topic of the year. Just how you think about it through your products and services. I know you use it in different ways, but also if you can just give us any thoughts you have on generative AI and I don't know where you see it going, not sure what you want to say on it, but I'm really curious for your take. Thank you. Tim Cook: Yes, thanks for the question, Shannon. As you know, we don't comment on product roadmaps. I do think it's very important to be deliberate and thoughtful in how you approach these things. And there's a number of issues that need to be sorted, as is being talked about in a number of different places. But the potential is certainly very interesting. And we've obviously made enormous progress integrating AI and machine learning throughout our ecosystem and we weaved it into products and features for many years as you probably know. You can see that in things like fall detection and crash detection and ECG, these things are not only great features, they're saving people's lives out there. And so it's absolutely remarkable. And so we are, we view AI as huge and we'll continue weaving it in our products on a very thoughtful basis. Shannon Cross: Okay. Thank you. And then can you talk a bit about your shift of manufacturing and diversification of manufacturing footprint? I'm curious. Obviously, you have a very tight network in China. So how is it going to move to some of these other regions? Are you seeing any impact from a margin perspective or just any thoughts you have on what you've seen as you started to shift more and more outside of China? Whether it's growth or it's actual production? Thank you. Tim Cook: Our supply chain is truly global and we're investing all over the world. We're investing in the US. We're investing in a number of other countries as well. So we make products everywhere. We'll continue to invest everywhere, and we'll continue to look for ways to optimize the supply chain based on what we learn each and every day and week and so forth, to ensure that we can deliver the best products and services for our customers. If you sort of step back and look at how we've performed over the last three years on the supply chain, despite this parade of horribles, if you will, between the pandemic and the chip shortages and macroeconomic kind of factors, the supply chain has been incredibly resilient, and we feel good about what we are and what our plans are. Operator: Our next question is from Wamsi Mohan of Bank of America. Wamsi Mohan: Yes. Thank you. Tim, you had called out on December quarter earnings that Pro models were significantly constrained. Do you see a catch up on the Pro model specifically in the March quarter? And was the mix better than typical? And do you see that mix renormalizing here in the June quarter? And maybe you can comment on the channel inventory levels as well for iPhones, and I have a follow up. Tim Cook: Sure. It's hard to quantify Wamsi, but we do believe we did recapture some amount of sales in the March quarter, and obviously we had to set the channel at the right levels. And we're very comfortable with the channel inventory that we have on a forward basis. So we do think there were some, but it's difficult to quantify it. Wamsi Mohan: Okay. Thanks, Tim. And Tim, as a follow up, you launched so many services around Apple Pay most recently, you mentioned Buy Now Pay Later high yield savings account. Where do you see the expansion and the payments ecosystem over time? And do you look at the payments ecosystem as a standalone revenue opportunity? Or is it more about making the devices even more inseparable from us? Thank you. Tim Cook: What we're trying to do with our payments work is that sort of like we've done on the watch, where we're focused on helping people live a healthier day on our financial products. We're helping people have a better financial health and so things like the Apple Card and the fact that it has no fees, like the savings account, which has, as you mentioned, it's very attractive yield. So we're trying to help our users, but these things have to stand on their own, obviously. But we're very user focused, and so we're listening to them at what things provide them pinch points and orchestrate our roadmaps around that. Buy Now Pay Later is another one that we've just gotten out of the shoot. But on the savings account specifically, we are very pleased with the initial response on it. It's been incredible. Operator: Our next question is from David Vogt of UBS. David Vogt: Great. Thanks for taking my question. Tim, I just wanted to go back to maybe kind of dig into the restocking of inventory in the channel versus what we're hearing from a demand perspective that appears to be a little bit softer in the March quarter from some of your larger carriers. That exhibited relatively weak upgrade rates. So I just want to kind of get a sense for where you're seeing demand signals today vis-à-vis how you were thinking about it maybe a month ago or even three months ago. And is there sort of an acceleration in demand or any sort of signals that you might want to share with us at this point? And then I have a follow up. Tim Cook: I don't want to go into what we're seeing in Q3 other than the guidance that Luca has given. But for Q2, I think you're probably referencing primarily US carriers. And if you look at our geographic distribution of our performance, it was lower in the Americas, which is primarily predominantly the United States. And a part of that is, I believe it's macroeconomic. A part is that there was more promotional activity in the year ago quarter. And so I think that's what you're seeing there, where our results were really stellar during this quarter, was really in the emerging markets, and we couldn't be prouder of the results that we had there. David Vogt: Great. That's helpful. And then just quickly on Services, are you seeing anything in terms of consumers behavior other than sort of the macro that you mentioned and tough comps on digital advertising and mobile gaming? Are you seeing users of all the disparate services change and what they're using and how they're using it and time spent with an Apple Service? Now that we're technically, hopefully fully past COVID, with China almost fully reopened, I'm just trying to get a sense for how user or consumer behavior has changed over the last three to six months. Thanks. Luca Maestri: David, it’s Luca. As you said, of course we got the issue around the macroeconomic environment, particularly in advertising and in mobile gaming, but outside of those areas the behavior of customers continues to be pretty consistent. We are doing particularly well, obviously in some of the services that we've launched more recently, like payments where our growth rates are very strong as the adoption of Apple Pay and Apple Card and now the new services that Tim mentioned, the adoption continues to increase. Cloud is an area that continues to grow very consistently. Users want to store more photos and videos and more content on their devices and so they adopt our cloud services and in general the model in the App Store around paid subscriptions continues to grow very strongly. I mentioned we now have more than 975 million paid subscriptions on the platform and that's almost twice as much what we had only three years ago. So obviously, the growth in subscriptions is very strong. Operator: Our next question is from Samik Chatterjee of JPMorgan. Samik Chatterjee: Hi, thanks for taking my questions. I guess maybe I can follow up on David's question here on services. And in the past, pre-pandemic the growth rate there was more about sort of mid-teens. The growth rates today, where you stand, even if I back out FX impact is more about low double digit. So one of the questions that we get often from investors and want to get your thoughts on is even as the installed base growth seems to have accelerated, are these more cyclical drivers that are depressing growth at this point from returning to that level or do you see more of a rollout on the monetization that you have need to do to get back to those growth levels. and I have a follow up, please. Luca Maestri: Samik, that the areas where we are seeing the impact on the macroenvironment, as I mentioned, is digital advertising. As you know, obviously the macroenvironment is not helping on that front. And mobile gaming, where we've seen a bit of a slowdown, partly due to the macroenvironment, partly due to the fact that we had very elevated usage during the COVID years. But outside of those areas, we continue to see very healthy growth rates. Samik Chatterjee: Okay. And maybe if I can just follow up and this is more of a macro question. I don't know if Luca, you or Tim want to take this, but obviously the macro is not sort of helpful at this point. But what you're sort of implying in terms of your guide is momentum for your products remains pretty stable. You're actually guiding to a modest uptick FX for the overall business. I mean, what are you seeing in terms of customer sort of spending trends? And overall, does the consumer sort of continue to deteriorate in terms of spending patterns? And is your sort of momentum here just a function of share gains? How should we think about sort of where the consumer is versus what your products are doing independent of that? Luca Maestri: Part of Samik is what Tim was talking about. We're having great momentum in emerging markets, and those are markets where our share is low, gives us a great opportunity to grow over time. It also helps us with the growth of the installed base, because you can imagine that in places where our market share is low, we tend to add a lot of switchers people that are new to the Apple ecosystem. That increases the install base. And over the longer term, it obviously improves our ability to monetize on services as well. Operator: Our next question is from Amit Daryanani of Evercore. Amit Daryanani: I have to as well. I guess, first off on gross margins for the June quarter. They seem to be holding up fairly well, especially given the fact that sales are going down on a sequential basis. So, Luca, I'm wondering if you can just touch on what's driving the strength in gross margin sequentially. It's offsetting the lack of leverage, if you may. And then I also noticed that the range of your gross margin guide is 50 basis points, it's typically 100. What does that entail? What does that mean? Luca Maestri: So you're right. I mean we are guiding to a fairly stable level of gross margins at a very high level. We're very happy with the gross margins that we're having this cycle. For the first time in several quarters, foreign exchange, we expect foreign exchange to be flat on a sequential basis at the gross margin level. Unfortunately, it's still a headwind at the revenue level, but at gross margin level, sequentially, we expect foreign exchange not to be a factor. And so the seasonal loss of leverage that you're referring to, we expect to be offset by cost savings. And so that should give us that level of margins. As you know, you were asking about the 50 basis points. We have guided to 50 basis points of a range before as well, this year in particular, because of the 14th week during the December quarter, we're a bit late in the calendar year, right. And so we have a bit more visibility around margins for the June quarter. Amit Daryanani: Got it. That's helpful. And then I guess, Tim, if I just go back to the India discussion a bit, perhaps you could just contrast what you're seeing in India at today versus what you saw in China maybe a decade or so ago. Is that a reasonable ramp to think India would have, or could it be different from the lessons you've seen in China? Tim Cook: I think each country is different and has their own journey, so I hesitate to compare too much. But what I do see in India is a lot of people entering the middle class, and I'm hopeful that we can convince some number of them to buy an iPhone and we'll see how that works out. But right now, it's working out well. Operator: Our next question is from Krish Sankar of TD Cowen. Krish Sankar: Hi, thanks for taking my question. The first question I had is for Tim. Tim, you're primarily been a consumer centric company, but it seems like the line is blurring with the iPhone, iPad, the hardware products being used for corporate applications. So is there a way to segment how much of your revenues today are coming from enterprise versus consumer? And does the slower corporate IT spend impact your outlook for iPhone, iPad, Mac, et cetera, and then I have a follow up. Tim Cook: Internally, we have our estimates for how much is enterprise versus consumer. And the enterprise business is growing. We have been focusing a lot on BYOD programs and there's more and more companies that are leaning into those and given employees the ability to select which is plays to our benefit, I believe, because I think a lot of people want to use a Mac at work or an iPad at work. And so but we're certainly primarily a consumer company in terms of our revenues, obviously. Krish Sankar: Got it, Tim. Thanks for that. And then just as a follow up, obviously a lot of questions on the India retail opening. I'm just kind of curious. You also mentioned that you hope to convert a lot of folks into iPhone there. Where do you think the biggest opportunity? Is it like primarily a hardware business like the iPhone, iPad wearables, et cetera? Or do you think there is a service opportunity in India longer term too? Thank you very much. Tim Cook: I think there's an opportunity across the board, including in services. Obviously, the ARPUs are lower in India for whether you're talking about TV and movie streaming or music, the ARPUs are much lower than other regions. But if you look at it over a long arc of time, I think there's a good opportunity across the board. Operator: Our next question is from Aaron Rakers of Wells Fargo. Aaron Rakers: Yes, thanks for taking the questions. I guess my first question is that I want to go back to kind of the geographical dynamics. I'm curious, as we all think about the reopening attributes of China, just how you would characterize the shaping of demand you saw through the course of this last quarter and kind of how you're thinking about the impact of that reopening playing out over the next couple of quarters. Tim Cook: If you look at China, our revenue came in at negative three for the quarter year-over-year, but we actually grew on a constant currency basis, and we also accelerate rated as compared to the December quarter, which, as you know, had 14 weeks in it and was a negative seven on a reported basis. And so we were pleased with how we did and with the acceleration that we saw with the reopening, and we'll see how we do this quarter. But if you look at the top selling smartphones in urban China, based on a survey from Kantar, we have four out of the top five. And I think in all of the third party data I've seen on the market itself, in the smartphone space, we believe we gained share during Q2. So we feel good about it. Also, China has a lot of very good metrics in terms of new buyers. For example, on the Mac, about six out of ten customers are buying the Mac for the first time. Same thing on iPad. If you look over at the watch, it's more than three out of four customers are buying the watch for the first time. And so the buyer metrics, if you will, are very, very good. And our services business hit an all-time record in China during the quarter. Aaron Rakers: Very helpful, Tim. As a quick follow up, I want to go back to Amit’s question on gross margin. You talked about FX, the lessening impact there. I'm just curious when you look at your gross margin, obviously got mixed attributes, kind of potentially continuing to drive that higher. But I'm curious on the current environment, how you would characterize the component pricing dynamics and what you're thinking about in this current quarter's Guidance. Luca Maestri: The environment on the component side is favorable. We've seen component prices decline during the March quarter, and we expect the same during the June quarter. Operator: Our next is from Sydney Ho of Deutsche Bank. Sydney Ho: Great. Thanks for taking my question. I was hoping you can talk about the linearity of the March quarter and perhaps the first four and a half weeks of the current quarter. It looks like things are slowing down quite a bit elsewhere, but if my math is right, your fiscal third quarter guidance implied product revenue will be a little bit lower than seasonal average on a sequential basis, any color would be helpful. Thanks. Luca Maestri: We said that we expect our performance during the June quarter at the revenue level to be similar to the one that we just reported for the March quarter. Keep in mind, we always have differences in the launch timing across our products, and also that especially over the last few years, we've seen a certain amount of supply disruptions. Sometimes it was COVID related, sometimes it was related to specific component shortages. Just to remind you, in the June quarter a year ago, at the full quarter impact of the launch for both of the iPhone SE and the iPad Air, which leads to a more difficult compare. So I think it's important to keep those things in mind. Sydney Ho: Okay, that's helpful. Maybe a quick follow up. You talk about Apple Pay Later. How has the feedback been so far? And how do you expect the adoption of that service over the next few quarters? Thank you. Tim Cook: The feedback for both Apple Pay Later and the savings products have both been really good. And we think both of them help customers live a better or healthier financial life. And so we're very excited about the first days of both of them. Operator: Our next question is from Harsh Kumar of Piper Sandler. Harsh Kumar: Yes. Hey, guys. Thanks for squeezing me in. Tim, you're one of the largest chip companies. You're not a component maker. You actually use your own products. But we almost never hear in any context of you guys being a beneficiary, Apple being a beneficiary for either the Chip Act money or the R&D tax credit that's being proposed. I was just curious if you are eligible for any of those. And then I've got a follow up. Tim Cook: I don't see Apple participating in the Chips Act directly, but we would be a beneficiary indirectly because some of our partners would hopefully be recipients of it and therefore put in additional capacity. And so on that sort of indirect basis, we would have a benefit. Harsh Kumar: Understood. And thanks for clarification. Luca, I wanted to clarify your comments about June. When you're saying June performance will be similar to March, I assume on a year-on-year basis, which would be June should be down about two something odd percent. Is that a fair way? And then my question that I wanted to ask, maybe another one for Tim was where do you think is the largest opportunity in your services offering? You're doing a great job, you just set a record. But surely there must be areas where you think you can do better. Luca Maestri: Yes. So to your question around the June performance yes, on a year-over-year basis, so comparable to the March quarter on year-over-year basis. Tim Cook: Harsh, I think we can do better on everything. And so I wouldn't just point to one of them. If you look at the number of active devices and the growth of active devices, I think, our services are underpenetrated in a number of different ways. And so the way that I look at it is there's opportunity in many of them. Suhasini Chandramouli : All right. Thank you, Harsh. A replay of today's call will be available for two weeks on Apple podcasts, as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-⁠583-⁠1035. Please enter confirmation code 493-⁠4362, followed by the pound sign. These replays will be available by approximately 05:00 P.M. Pacific time today. Members of the press with additional questions can contact Josh Rosenstock at 488-⁠62-⁠1142 and financial analysts can contact me with additional questions at 408-⁠862-⁠5119. Thanks again for joining us. Operator: Once again, this does conclude today's conference. We do appreciate your participation.	[ { "speaker": "Operator", "text": "Good day, and welcome to the Apple’s Q2 Fiscal Year 2023 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions, I would like to turn the call over to Suhasini Chandramouli, Director of Investor Relations. Please go ahead." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you. Good afternoon and thank you for joining us. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expense, other income and expense, taxes, capital allocation, and future business outlook, including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information, which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thank you, Suhasini. Good afternoon, everyone, and thanks for joining us. Today, we're reporting revenue of $94.8 billion for the March quarter, which was better than our expectations. We set an all-time record for Services and a March quarter record for iPhone. We were particularly pleased with the performance we saw in emerging markets and achieved all-time records in Mexico, Indonesia, the Philippines, Saudi Arabia, Turkey and the UAE, as well as a number of March quarter records, including in Brazil, Malaysia and India. This result is a testament, first and foremost to our teams around the world who are engaged every day in the work of bringing new innovations to life. It speaks to the incredible power of Apple products and services to enrich people's lives in indispensable ways. And whether it's in the design lab in Cupertino, or in one of the brand new retail stores in India, I am constantly inspired by the way our people come together to make a real difference in the world. During the March quarter, we continued to face foreign exchange headwinds, which had an impact of more than 500 basis points, as well as ongoing challenges related to the macroeconomic environment. Revenue was down 3% year-over-year as a result, while on a constant currency basis, we grew in total and in the vast majority of the markets we tried. Despite these challenges, we continue to manage for the long term and to push the limits of what's possible, always on behalf of the customers who depend on our products whether it's students exploring new frontiers, developers dreaming up their next big idea, or artists taking their creativity to a whole new level. Let me share how these results showed up across our lineup of products and services. Let's start with iPhone, which set a new March quarter record with revenue of $51.3 billion. The iPhone 14 and 14 plus continue to delight users with their long lasting battery and advanced camera. And our pro users continue to rave about the most powerful camera system ever in an iPhone. This March, we were excited to expand emergency SOS via satellite to six new countries, bringing this important safety feature to even more users. We now offer this vital service in 12 countries, and I'm grateful for every note I've received from around the world about the life saving impact of our safety features. Now let's turn to Mac, which recorded $7.2 billion in revenue for the March quarter in line with our expectations. As we noted during our last call, Mac faced a very difficult compare because of the incredibly successful rollout of our M1 chip throughout the Mac lineup last year. And like our other product lines, Mac is facing some macroeconomic and foreign exchange headwinds as well. That said, the advancements we've made in power efficient performance continue to amaze our users. Our M2 Mac Mini customers are raving about the pro level powerhouse packed into an ultra-compact design, and users are marveling at the power and speed at the heart of every M2 powered MacBook Air and MacBook Pro, which allowed them to sustain even the most demanding workloads. iPad revenue was $6.7 billion, which was also in line with our expectations. Similar to Mac, iPad revenue performance was impacted by macroeconomic challenges, foreign exchange headwinds, and a difficult compare with last year when we launched the M1 powered iPad Air. iPad's versatility continues to be its greatest strength as we're helping students learn on the same family of devices artists use to create their next masterpiece. Across wearables, home and accessories, revenue was $8.8 billion. With its exceptional range of game changing health and safety features, Apple Watch becomes more and more indispensable every day. Apple Watch Ultra is attracting adventures, athletes and everyday users with its breakthrough features built for endurance and exploration. And with summer travel season soon heating up, there's no better companion in the air or on the road than AirPods, the best and most popular headphones in the world. Meanwhile, Services set an all-time record with $20.9 billion in revenue for the March quarter. We achieved all time revenue records across App Store, Apple Music, iCloud and payment services. And now, with more than 975 million paid subscriptions, we're reaching even more people with our lineup of services. Apple TV Plus continues to draw praise from customers and reviewers alike. During the past quarter, fans tuned in to incredible new series like Shrinking and The Big Door Prize and got to welcome Ted Lasso back into their homes for a third season. Movies like Tetris are captivating viewers with many more to come, including Martin Scorsese’s Killers of the Flower Moon later this year. Three years since its launch, Apple TV Plus programming has been celebrated across the globe, with over 1,450 nominations and more than 350 wins. Recently, we were thrilled to cheer on The Boy, the Mole, the Fox and the Horse, which won an Academy Award for best Animated Short Film. The first season of our historic tenure partnership with Major League Soccer is well underway with MLS season pass, we've created the ultimate destination for soccer fans, offering subscribers the ability to watch every match with no blackouts. And with baseball season in full swing, Apple TV Plus subscribers can watch their favorite teams with the return of Friday night baseball. This quarter, we launched Apple Music Classical, a standalone app that gives something special to classical music lovers. Apple Music Classical packs the largest library of classical music on Earth into a thoughtful and intuitive design that strikes all the right notes. Whether you're listening with AirPods or HomePod, the premium sound experience of Apple Music Classical will leave you with a feeling of being front row at the symphony just behind the conductor. In March, we also launched Apple Pay Later designed with users privacy and financial health in mind. Apple Pay Later allows users to split purchases into multiple payments with no interest or fees. And last month, we introduced Apple Card Savings Accounts to give users even more value out of their daily cash Apple Card Benefit. At Apple, our customers are at the center of everything we do. Nowhere is that more evident than retail, where our teams are dedicated to sharing the best of Apple with our customers. And we're constantly innovating to deliver exceptional experiences and meet our customers where they are. In the US, we launch Shop with a specialist over video, a new way for customers to learn about iPhone and find the one that's just right for them. And as I noted earlier, in a milestone for Apple, we just opened our first two Apple stores in India, in Mumbai and Delhi. I was there to see it for myself, and I couldn't have been more delighted by the excitement and enthusiasm of the customers, developers, creators and team members I got to spend time with. I've had the chance to connect with customers and teams all around the world in recent months, so many people shared with me that they were fans of Apple, not just because of the innovations we create, but because of the values that guide us, and that means a great deal to us. We're constantly striving to make a positive difference in people's lives and be a force for progress. We're investing in education to give students the skills they need to shape the future. We're helping to create pathways of opportunity for communities of color through our Racial Equity and justice initiative. And every day we're building an even more inclusive and diverse Apple rooted in our culture of belonging. To better understand how our work intersects with our values, look no further than what we're doing for the environment. We just celebrated Earth Day in April, and during that month, Apple announced that its global manufacturing partners now support over 13 gigawatts of renewable energy, a nearly 30% increase in just the last year. This translates to 17.4 million metric tons of avoided carbon emissions, the equivalent of removing nearly 3.8 million cars from the road. We're all investing up to an additional $200 million in our Restore Fund, which is designed to support innovative, scalable, nature based carbon removal projects, with the goal of removing 1 million metric tons of carbon every year. These are just the latest steps on our journey toward our 2030 goal to be carbon neutral across our supply chain and lifecycle of our devices. At the same time, we're advancing renewable energy across our supply chain, we're also sourcing more recycled materials in our products. Last month, we announced our plans to have all Apple design batteries include 100% certified recycled cobalt by 2025, and we remain committed to one day using only recycled and renewable materials in our products. We have a deep sense of mission here at Apple. We believe in the power of innovation to build a better world. We are determined to do our best work on behalf of our customers and to give them the tools that can enrich lives. So we will manage for the long term, just as we always have, with our eyes to the horizon, with limitless creativity, and with a deep belief that we can achieve anything we put our minds to. With that, I'll turn it over to Luca." }, { "speaker": "Luca Maestri", "text": "Thank you, Tim, and good afternoon, everyone. Revenue for the March quarter was $94.8 billion, down 3% from last year and better than our expectations. Foreign exchange had a negative impact of over five percentage points on our results, in line with what we had expected. On a constant currency basis, our revenue grew year-over-year in total and in the majority of the markets we track. In addition to the records in emerging markets that Tim mentioned, we also set March quarter records in Australia, Canada, Spain and Switzerland, among others. Products revenue was $73.9 billion, down 5% from last year, due to challenging compares on Mac and iPad. iPhone, however, reached a March quarter revenue record thanks to very strong performance in emerging markets from South Asia and India to Latin America and the Middle East. During the quarter, our installed base of active devices continued to grow at a nice pace thanks to extremely high levels of customer satisfaction and loyalty, and reached an all-time high for all major product categories and geographic segments. Our Services set an all-time revenue record of $20.9 billion, up 5% year-over-year, on top of growing 17% in the March quarter a year ago. We reached an all-time services revenue record in Greater China and March quarter records in Americas, Europe and Rest of Asia Pacific. Company gross margin was 44.3%, up 130 basis points from last quarter, driven by cost savings and favorable mix shift towards services partially offset by leverage. Products gross margin was 36.7%, decreasing 30 basis points sequentially due to seasonal loss of leverage and mix, partially offset by favorable costs. Services gross margin was 71%, up 20 basis points sequentially. Operating expenses of $13.7 billion were at the low end of the guidance range we provided at the beginning of the quarter and continued to decelerate from the December quarter. We are closely managing our spend, but remain focused on long term growth with continued investment in innovation and product development. Net income was $24.2 billion. Diluted earnings per share were a $1.52, unchanged versus last year, and we generated very strong operating cash flow of $28.6 billion. Let me now provide more detail for each of our revenue categories. iPhone revenue set a March quarter record of $51.3 billion, up 2% year-over-year despite significant foreign exchange headwinds and a challenging macroeconomic environment. We set March quarter records in several developed and emerging markets with India, Indonesia, Turkey and the UAE doubling on a year-over-year basis. Our active installed base of iPhone grew to a new all-time high and was up in all our geographic segments. We are very pleased by the results of the latest survey of US Consumers from 451 Research, which measured customer satisfaction at 99% for the iPhone 14 family. Mac revenue was $7.2 billion, down 31% year-over-year and in line with our expectations. These results were driven by the challenging macroeconomic environment coupled with a difficult compare against last year's launch of the completely reimagined M1 MacBook Pros. Despite this, the installed base of active Macs reached an all-time high across all geographic segments and we continue to see strong upgraded activity to Apple silicon. Also, the latest survey of US Consumers from 451 Research reported customer satisfaction at 96% for Mac. iPad generated $6.7 billion in revenue, down 13% year-over-year and in line with our expectations. This performance was due to two key factors, a tough compare against the launch of iPad Air powered by the M1 chip in the year ago quarter and headwinds from the macroeconomic environment. The iPad installed base reached a new all-time high in all geographic segments thanks to exceptional customer loyalty and a high number of new customers. In fact, over half of the customers who purchased iPads during the quarter were new to the product. Wearables, home and accessories revenue was $8.8 billion, down 1% year-over-year as the category experienced the impact from the macroeconomic environment. However, we did set March quarter records both in the US and in Greater China. We continue to see strength in our Watch installed base, which set a new all-time record, thanks to very high customer loyalty and new two rates, nearly two thirds of customers purchasing an Apple Watch during the quarter were new to the product. Moving to Services, we reached a new all-time revenue record of $20.9 billion. And in addition to the all-time records Tim mentioned earlier, we set March quarter records for advertising Apple Care and Video. Despite these records, as we saw in recent quarters, certain services offerings such as digital advertising and mobile gaming continue to be affected by the current macroeconomic environment. Stepping back, however, the continued growth in Services is the reflection of our ecosystem strength and the positive momentum we are seeing across several key metrics. First, our growing installed base of over 2 billion active devices represents a great foundation for future expansion of our ecosystem. We continue to grow across every major product category and geographic segment, thanks to very high levels of customer loyalty and satisfaction. Second, we saw increased customer engagement with our services during the quarter. Both our transacting accounts and paid accounts grew double digits year-over-year, each setting a new all-time record. Third, paid subscriptions showed strong growth. We now have more than $975 million paid subscriptions across the Services on our platform, up 150 million during the last 12 months and nearly double the number of paid subscriptions we had only three years ago. And finally, we continue to improve the breadth and the quality of our current services offerings from new content on Apple TV Plus to great new features available in Apple Pay and Apple Music, which we believe our customers will love. Turning to the enterprise market, we see business customers continuing to invest in the Apple platform to drive higher employee productivity and satisfaction. In Brazil, Boticario Group, the world's largest cosmetics franchiser, originally starting with iPhone, 12 employees manage operations across a network of retail stores, franchisees and resellers. As it continues to digitize its business, Boticario has chosen to move all software development in house and adopted Mac as the standard device for all of their developer teams across the world. In small business, we see an increasing number of customers relying on Apple hardware, software and services to power their businesses forward, from accepting payments on iPhone, to tracking inventory on Mac or iPad, to managing employee devices with Apple Business Essentials. As we celebrate National Small Business week here in the US, we are proud to continue supporting the small business community. Let me now turn to our cash position and capital return program. We ended the quarter with over $166 billion in cash and marketable securities. We repaid $2.3 billion in maturing debt and increased commercial paper by about $300 million, leaving us with total debt of $110 billion. As a result, net cash was $57 billion at the end of the quarter. During the March quarter, we returned over $23 billion to shareholders, including $3.7 billion in dividends and equivalents and $19.1 billion through open market repurchases of $129 million Apple shares. Given the continued confidence we have in our business now and into the future, today our Board has authorized an additional $90 billion for share repurchases as we maintain our goal of getting to net cash neutral over time. We're also raising our dividend by 4% to $0.24 a share, and we continue to plan for annual increases in the dividend going forward. As we move ahead into the June quarter, I'd like to review our outlook, which includes the types of forward looking information that Suhasini referred to at the beginning of the call. We expect our June quarter year-over-year revenue performance to be similar to the March quarter, assuming that the macroeconomic outlook does not worsen from what we are projecting today for the current quarter. Foreign exchange will continue to be a headwind and we expect a negative year-over-year impact of nearly four percentage points. For Services, we expect our June quarter year-over-year revenue growth to be similar to the March quarter, while continuing to face macroeconomic headwinds in areas such as digital advertising and mobile gaming. We expect gross margin to be between 44% and 44.5%. We expect OpEx to be between $13.6 billion and $13.8 billion. We expect OINE to be around negative $250 million excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16%. Finally reflecting the dividend increase I mentioned earlier, today, our Board of Directors has declared a cash dividend of $0.24 per share of common stock payable on May 18, 2023, to shareholders of record as on May 15, 2023. With that, let's open the call to questions." }, { "speaker": "Operator", "text": "[Operator Instructions] We will go ahead and take our first question from Erik Woodring of Morgan Stanley." }, { "speaker": "Erik Woodring", "text": "Hey, good afternoon, guys. Thank you so much for taking the questions. Tim, maybe if we start with you. If we go back to the December quarter and the shutdowns, the production shutdowns around the time I think the question a lot of us were asking was how should we think about the deferral of demand versus destruction of demand? March quarter was quite strong 2% year-over-year iPhone growth. And so as we sit here in May, how have you seen that customers that weren't able to purchase during the December quarter behave? Meaning, are you seeing that they deferred purchases to March and June? Could they be deferring purchases to later and hopes of buying a new iPhone? Just how should maybe we think about the cadence of that and then I have a follow up. Thanks." }, { "speaker": "Tim Cook", "text": "Yes. Hi, Erik. It's hard to quantify this, but we do believe we did recapture some amount of sales in the March quarter as we did see the iPhone performance accelerate relative to the December quarter. The production levels for the whole quarter were where we wanted them to be. So supply was not an issue during Q2." }, { "speaker": "Erik Woodring", "text": "Okay, perfect. Thank you for that color. And then, Tim, maybe to follow up, it's been three or four quarters now that you've mentioned emerging markets like India and others. And I imagine, having just opened two new stores in the country, clearly an important market for you. So maybe can you just talk about why you see India as such an important market and others, how you think about monetization trends in the country and specifically what you have to do within the country to really ensure that India becomes maybe a more material mix of your business? And that's it for me. Thanks so much." }, { "speaker": "Tim Cook", "text": "Yes, sure. Looking at the business in India, we did set a quarterly record, grew very strong, double digits year-over-year. So it was quite a good quarter for us, taking a step back, India is an incredibly exciting market. It's a major focus for us. I was just there, and the Dynamism in the market, the vibrancy is unbelievable. Over time, we've been expanding our operations there to serve more customers, and three years ago, we launched the Apple Store online, and then, as you just mentioned, we launched two stores just a few weeks ago, and they're off to a great start, one in Mumbai and one in Delhi. We've got a number of channel partners in the country as well that we're partnering with, and we're very happy with how that's going overall. Overall, I couldn't be more delighted and excited by the enthusiasm I'm seeing for the brand there. There are a lot of people coming into the middle class, and I really feel that India is at a tipping point, and it's great to be there. On other emerging markets, we had a stellar quarter in emerging markets overall, as I had mentioned, with records set in a number of different places, including Indonesia and Mexico, the Philippines, Saudi Arabia, Turkey, UAE, and then quarterly records in Brazil, India and Malaysia. And so it was a great quarter for emerging markets in general, despite the headwinds of the currency that Luca mentioned. And so we're putting efforts in a number of these markets and really see, particularly given our low share and the dynamics of the demographics, et cetera, a great opportunity for us in those markets." }, { "speaker": "Operator", "text": "Our next question is from Mike Ng of Goldman Sachs." }, { "speaker": "Mike Ng", "text": "Hey, good afternoon. Thank you very much for the question. It was encouraging to hear about the record installed base across iPhone and across all devices. It's been, I think, double digit growth over the last few years across the active devices. I was just wondering, is that a good way to think about the installed base growth going forward? And then for the iPhone installed base specifically, I was just wondering if you could provide a little bit of texture around how you think about the growth there, whether regionally or by first, smartphones versus switchers. And then I have a quick follow up." }, { "speaker": "Tim Cook", "text": "Yes. If you look at the installed base of active devices now, overall it's more than $2 billion. As you know, we announced in January that we surpassed that. And this quarter, our Q2 rather we set new records across each of the geographic segments and each of the major product categories. And that's despite declines in current quarter sales, in particular in Mac and iPad. This is a huge asset for us, and it's a testament to the overall customer satisfaction and engagement and loyalty of our customers. And so we view this as a major asset for us. The iPhone base is well over a $1 billion active devices. We see this as upgrade rates, and these sorts of things may change quarter-to-quarter depending upon macroeconomic. But if you back up and look at the installed base, we feel great about the size of it and the rate that it's growing." }, { "speaker": "Mike Ng", "text": "Great. Excellent. And then it was also encouraging to see the number of devices per iPhone user continue to grow. I was just wondering if you could talk about the opportunity to continue to increase that number of Apple devices per iPhone user and if you have any color around how the monetization per user may differ from those, for lack of better words, super users versus those that may not be as deep into the ecosystem. Thanks." }, { "speaker": "Tim Cook", "text": "We try really hard to design our products in such a way that they work seamlessly together, and so whether that's the watch or the Mac, so that you can start working on one device and finish it on the other. And so there are a good deal of people out there that have multiple Apple devices, and I think this is a testament to the customer satisfaction and loyalty that we've been able to get from the incredible design that our engineering teams do on our products." }, { "speaker": "Operator", "text": "Our next question is from Shannon Cross of Credit Suisse." }, { "speaker": "Shannon Cross", "text": "Thank you very much. Thank you for taking my question. Tim, can you talk a bit about AI? It's obviously more than the topic of the day. It seems like the topic of the year. Just how you think about it through your products and services. I know you use it in different ways, but also if you can just give us any thoughts you have on generative AI and I don't know where you see it going, not sure what you want to say on it, but I'm really curious for your take. Thank you." }, { "speaker": "Tim Cook", "text": "Yes, thanks for the question, Shannon. As you know, we don't comment on product roadmaps. I do think it's very important to be deliberate and thoughtful in how you approach these things. And there's a number of issues that need to be sorted, as is being talked about in a number of different places. But the potential is certainly very interesting. And we've obviously made enormous progress integrating AI and machine learning throughout our ecosystem and we weaved it into products and features for many years as you probably know. You can see that in things like fall detection and crash detection and ECG, these things are not only great features, they're saving people's lives out there. And so it's absolutely remarkable. And so we are, we view AI as huge and we'll continue weaving it in our products on a very thoughtful basis." }, { "speaker": "Shannon Cross", "text": "Okay. Thank you. And then can you talk a bit about your shift of manufacturing and diversification of manufacturing footprint? I'm curious. Obviously, you have a very tight network in China. So how is it going to move to some of these other regions? Are you seeing any impact from a margin perspective or just any thoughts you have on what you've seen as you started to shift more and more outside of China? Whether it's growth or it's actual production? Thank you." }, { "speaker": "Tim Cook", "text": "Our supply chain is truly global and we're investing all over the world. We're investing in the US. We're investing in a number of other countries as well. So we make products everywhere. We'll continue to invest everywhere, and we'll continue to look for ways to optimize the supply chain based on what we learn each and every day and week and so forth, to ensure that we can deliver the best products and services for our customers. If you sort of step back and look at how we've performed over the last three years on the supply chain, despite this parade of horribles, if you will, between the pandemic and the chip shortages and macroeconomic kind of factors, the supply chain has been incredibly resilient, and we feel good about what we are and what our plans are." }, { "speaker": "Operator", "text": "Our next question is from Wamsi Mohan of Bank of America." }, { "speaker": "Wamsi Mohan", "text": "Yes. Thank you. Tim, you had called out on December quarter earnings that Pro models were significantly constrained. Do you see a catch up on the Pro model specifically in the March quarter? And was the mix better than typical? And do you see that mix renormalizing here in the June quarter? And maybe you can comment on the channel inventory levels as well for iPhones, and I have a follow up." }, { "speaker": "Tim Cook", "text": "Sure. It's hard to quantify Wamsi, but we do believe we did recapture some amount of sales in the March quarter, and obviously we had to set the channel at the right levels. And we're very comfortable with the channel inventory that we have on a forward basis. So we do think there were some, but it's difficult to quantify it." }, { "speaker": "Wamsi Mohan", "text": "Okay. Thanks, Tim. And Tim, as a follow up, you launched so many services around Apple Pay most recently, you mentioned Buy Now Pay Later high yield savings account. Where do you see the expansion and the payments ecosystem over time? And do you look at the payments ecosystem as a standalone revenue opportunity? Or is it more about making the devices even more inseparable from us? Thank you." }, { "speaker": "Tim Cook", "text": "What we're trying to do with our payments work is that sort of like we've done on the watch, where we're focused on helping people live a healthier day on our financial products. We're helping people have a better financial health and so things like the Apple Card and the fact that it has no fees, like the savings account, which has, as you mentioned, it's very attractive yield. So we're trying to help our users, but these things have to stand on their own, obviously. But we're very user focused, and so we're listening to them at what things provide them pinch points and orchestrate our roadmaps around that. Buy Now Pay Later is another one that we've just gotten out of the shoot. But on the savings account specifically, we are very pleased with the initial response on it. It's been incredible." }, { "speaker": "Operator", "text": "Our next question is from David Vogt of UBS." }, { "speaker": "David Vogt", "text": "Great. Thanks for taking my question. Tim, I just wanted to go back to maybe kind of dig into the restocking of inventory in the channel versus what we're hearing from a demand perspective that appears to be a little bit softer in the March quarter from some of your larger carriers. That exhibited relatively weak upgrade rates. So I just want to kind of get a sense for where you're seeing demand signals today vis-à-vis how you were thinking about it maybe a month ago or even three months ago. And is there sort of an acceleration in demand or any sort of signals that you might want to share with us at this point? And then I have a follow up." }, { "speaker": "Tim Cook", "text": "I don't want to go into what we're seeing in Q3 other than the guidance that Luca has given. But for Q2, I think you're probably referencing primarily US carriers. And if you look at our geographic distribution of our performance, it was lower in the Americas, which is primarily predominantly the United States. And a part of that is, I believe it's macroeconomic. A part is that there was more promotional activity in the year ago quarter. And so I think that's what you're seeing there, where our results were really stellar during this quarter, was really in the emerging markets, and we couldn't be prouder of the results that we had there." }, { "speaker": "David Vogt", "text": "Great. That's helpful. And then just quickly on Services, are you seeing anything in terms of consumers behavior other than sort of the macro that you mentioned and tough comps on digital advertising and mobile gaming? Are you seeing users of all the disparate services change and what they're using and how they're using it and time spent with an Apple Service? Now that we're technically, hopefully fully past COVID, with China almost fully reopened, I'm just trying to get a sense for how user or consumer behavior has changed over the last three to six months. Thanks." }, { "speaker": "Luca Maestri", "text": "David, it’s Luca. As you said, of course we got the issue around the macroeconomic environment, particularly in advertising and in mobile gaming, but outside of those areas the behavior of customers continues to be pretty consistent. We are doing particularly well, obviously in some of the services that we've launched more recently, like payments where our growth rates are very strong as the adoption of Apple Pay and Apple Card and now the new services that Tim mentioned, the adoption continues to increase. Cloud is an area that continues to grow very consistently. Users want to store more photos and videos and more content on their devices and so they adopt our cloud services and in general the model in the App Store around paid subscriptions continues to grow very strongly. I mentioned we now have more than 975 million paid subscriptions on the platform and that's almost twice as much what we had only three years ago. So obviously, the growth in subscriptions is very strong." }, { "speaker": "Operator", "text": "Our next question is from Samik Chatterjee of JPMorgan." }, { "speaker": "Samik Chatterjee", "text": "Hi, thanks for taking my questions. I guess maybe I can follow up on David's question here on services. And in the past, pre-pandemic the growth rate there was more about sort of mid-teens. The growth rates today, where you stand, even if I back out FX impact is more about low double digit. So one of the questions that we get often from investors and want to get your thoughts on is even as the installed base growth seems to have accelerated, are these more cyclical drivers that are depressing growth at this point from returning to that level or do you see more of a rollout on the monetization that you have need to do to get back to those growth levels. and I have a follow up, please." }, { "speaker": "Luca Maestri", "text": "Samik, that the areas where we are seeing the impact on the macroenvironment, as I mentioned, is digital advertising. As you know, obviously the macroenvironment is not helping on that front. And mobile gaming, where we've seen a bit of a slowdown, partly due to the macroenvironment, partly due to the fact that we had very elevated usage during the COVID years. But outside of those areas, we continue to see very healthy growth rates." }, { "speaker": "Samik Chatterjee", "text": "Okay. And maybe if I can just follow up and this is more of a macro question. I don't know if Luca, you or Tim want to take this, but obviously the macro is not sort of helpful at this point. But what you're sort of implying in terms of your guide is momentum for your products remains pretty stable. You're actually guiding to a modest uptick FX for the overall business. I mean, what are you seeing in terms of customer sort of spending trends? And overall, does the consumer sort of continue to deteriorate in terms of spending patterns? And is your sort of momentum here just a function of share gains? How should we think about sort of where the consumer is versus what your products are doing independent of that?" }, { "speaker": "Luca Maestri", "text": "Part of Samik is what Tim was talking about. We're having great momentum in emerging markets, and those are markets where our share is low, gives us a great opportunity to grow over time. It also helps us with the growth of the installed base, because you can imagine that in places where our market share is low, we tend to add a lot of switchers people that are new to the Apple ecosystem. That increases the install base. And over the longer term, it obviously improves our ability to monetize on services as well." }, { "speaker": "Operator", "text": "Our next question is from Amit Daryanani of Evercore." }, { "speaker": "Amit Daryanani", "text": "I have to as well. I guess, first off on gross margins for the June quarter. They seem to be holding up fairly well, especially given the fact that sales are going down on a sequential basis. So, Luca, I'm wondering if you can just touch on what's driving the strength in gross margin sequentially. It's offsetting the lack of leverage, if you may. And then I also noticed that the range of your gross margin guide is 50 basis points, it's typically 100. What does that entail? What does that mean?" }, { "speaker": "Luca Maestri", "text": "So you're right. I mean we are guiding to a fairly stable level of gross margins at a very high level. We're very happy with the gross margins that we're having this cycle. For the first time in several quarters, foreign exchange, we expect foreign exchange to be flat on a sequential basis at the gross margin level. Unfortunately, it's still a headwind at the revenue level, but at gross margin level, sequentially, we expect foreign exchange not to be a factor. And so the seasonal loss of leverage that you're referring to, we expect to be offset by cost savings. And so that should give us that level of margins. As you know, you were asking about the 50 basis points. We have guided to 50 basis points of a range before as well, this year in particular, because of the 14th week during the December quarter, we're a bit late in the calendar year, right. And so we have a bit more visibility around margins for the June quarter." }, { "speaker": "Amit Daryanani", "text": "Got it. That's helpful. And then I guess, Tim, if I just go back to the India discussion a bit, perhaps you could just contrast what you're seeing in India at today versus what you saw in China maybe a decade or so ago. Is that a reasonable ramp to think India would have, or could it be different from the lessons you've seen in China?" }, { "speaker": "Tim Cook", "text": "I think each country is different and has their own journey, so I hesitate to compare too much. But what I do see in India is a lot of people entering the middle class, and I'm hopeful that we can convince some number of them to buy an iPhone and we'll see how that works out. But right now, it's working out well." }, { "speaker": "Operator", "text": "Our next question is from Krish Sankar of TD Cowen." }, { "speaker": "Krish Sankar", "text": "Hi, thanks for taking my question. The first question I had is for Tim. Tim, you're primarily been a consumer centric company, but it seems like the line is blurring with the iPhone, iPad, the hardware products being used for corporate applications. So is there a way to segment how much of your revenues today are coming from enterprise versus consumer? And does the slower corporate IT spend impact your outlook for iPhone, iPad, Mac, et cetera, and then I have a follow up." }, { "speaker": "Tim Cook", "text": "Internally, we have our estimates for how much is enterprise versus consumer. And the enterprise business is growing. We have been focusing a lot on BYOD programs and there's more and more companies that are leaning into those and given employees the ability to select which is plays to our benefit, I believe, because I think a lot of people want to use a Mac at work or an iPad at work. And so but we're certainly primarily a consumer company in terms of our revenues, obviously." }, { "speaker": "Krish Sankar", "text": "Got it, Tim. Thanks for that. And then just as a follow up, obviously a lot of questions on the India retail opening. I'm just kind of curious. You also mentioned that you hope to convert a lot of folks into iPhone there. Where do you think the biggest opportunity? Is it like primarily a hardware business like the iPhone, iPad wearables, et cetera? Or do you think there is a service opportunity in India longer term too? Thank you very much." }, { "speaker": "Tim Cook", "text": "I think there's an opportunity across the board, including in services. Obviously, the ARPUs are lower in India for whether you're talking about TV and movie streaming or music, the ARPUs are much lower than other regions. But if you look at it over a long arc of time, I think there's a good opportunity across the board." }, { "speaker": "Operator", "text": "Our next question is from Aaron Rakers of Wells Fargo." }, { "speaker": "Aaron Rakers", "text": "Yes, thanks for taking the questions. I guess my first question is that I want to go back to kind of the geographical dynamics. I'm curious, as we all think about the reopening attributes of China, just how you would characterize the shaping of demand you saw through the course of this last quarter and kind of how you're thinking about the impact of that reopening playing out over the next couple of quarters." }, { "speaker": "Tim Cook", "text": "If you look at China, our revenue came in at negative three for the quarter year-over-year, but we actually grew on a constant currency basis, and we also accelerate rated as compared to the December quarter, which, as you know, had 14 weeks in it and was a negative seven on a reported basis. And so we were pleased with how we did and with the acceleration that we saw with the reopening, and we'll see how we do this quarter. But if you look at the top selling smartphones in urban China, based on a survey from Kantar, we have four out of the top five. And I think in all of the third party data I've seen on the market itself, in the smartphone space, we believe we gained share during Q2. So we feel good about it. Also, China has a lot of very good metrics in terms of new buyers. For example, on the Mac, about six out of ten customers are buying the Mac for the first time. Same thing on iPad. If you look over at the watch, it's more than three out of four customers are buying the watch for the first time. And so the buyer metrics, if you will, are very, very good. And our services business hit an all-time record in China during the quarter." }, { "speaker": "Aaron Rakers", "text": "Very helpful, Tim. As a quick follow up, I want to go back to Amit’s question on gross margin. You talked about FX, the lessening impact there. I'm just curious when you look at your gross margin, obviously got mixed attributes, kind of potentially continuing to drive that higher. But I'm curious on the current environment, how you would characterize the component pricing dynamics and what you're thinking about in this current quarter's Guidance." }, { "speaker": "Luca Maestri", "text": "The environment on the component side is favorable. We've seen component prices decline during the March quarter, and we expect the same during the June quarter." }, { "speaker": "Operator", "text": "Our next is from Sydney Ho of Deutsche Bank." }, { "speaker": "Sydney Ho", "text": "Great. Thanks for taking my question. I was hoping you can talk about the linearity of the March quarter and perhaps the first four and a half weeks of the current quarter. It looks like things are slowing down quite a bit elsewhere, but if my math is right, your fiscal third quarter guidance implied product revenue will be a little bit lower than seasonal average on a sequential basis, any color would be helpful. Thanks." }, { "speaker": "Luca Maestri", "text": "We said that we expect our performance during the June quarter at the revenue level to be similar to the one that we just reported for the March quarter. Keep in mind, we always have differences in the launch timing across our products, and also that especially over the last few years, we've seen a certain amount of supply disruptions. Sometimes it was COVID related, sometimes it was related to specific component shortages. Just to remind you, in the June quarter a year ago, at the full quarter impact of the launch for both of the iPhone SE and the iPad Air, which leads to a more difficult compare. So I think it's important to keep those things in mind." }, { "speaker": "Sydney Ho", "text": "Okay, that's helpful. Maybe a quick follow up. You talk about Apple Pay Later. How has the feedback been so far? And how do you expect the adoption of that service over the next few quarters? Thank you." }, { "speaker": "Tim Cook", "text": "The feedback for both Apple Pay Later and the savings products have both been really good. And we think both of them help customers live a better or healthier financial life. And so we're very excited about the first days of both of them." }, { "speaker": "Operator", "text": "Our next question is from Harsh Kumar of Piper Sandler." }, { "speaker": "Harsh Kumar", "text": "Yes. Hey, guys. Thanks for squeezing me in. Tim, you're one of the largest chip companies. You're not a component maker. You actually use your own products. But we almost never hear in any context of you guys being a beneficiary, Apple being a beneficiary for either the Chip Act money or the R&D tax credit that's being proposed. I was just curious if you are eligible for any of those. And then I've got a follow up." }, { "speaker": "Tim Cook", "text": "I don't see Apple participating in the Chips Act directly, but we would be a beneficiary indirectly because some of our partners would hopefully be recipients of it and therefore put in additional capacity. And so on that sort of indirect basis, we would have a benefit." }, { "speaker": "Harsh Kumar", "text": "Understood. And thanks for clarification. Luca, I wanted to clarify your comments about June. When you're saying June performance will be similar to March, I assume on a year-on-year basis, which would be June should be down about two something odd percent. Is that a fair way? And then my question that I wanted to ask, maybe another one for Tim was where do you think is the largest opportunity in your services offering? You're doing a great job, you just set a record. But surely there must be areas where you think you can do better." }, { "speaker": "Luca Maestri", "text": "Yes. So to your question around the June performance yes, on a year-over-year basis, so comparable to the March quarter on year-over-year basis." }, { "speaker": "Tim Cook", "text": "Harsh, I think we can do better on everything. And so I wouldn't just point to one of them. If you look at the number of active devices and the growth of active devices, I think, our services are underpenetrated in a number of different ways. And so the way that I look at it is there's opportunity in many of them." }, { "speaker": "Suhasini Chandramouli", "text": "All right. Thank you, Harsh. A replay of today's call will be available for two weeks on Apple podcasts, as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-⁠583-⁠1035. Please enter confirmation code 493-⁠4362, followed by the pound sign. These replays will be available by approximately 05:00 P.M. Pacific time today. Members of the press with additional questions can contact Josh Rosenstock at 488-⁠62-⁠1142 and financial analysts can contact me with additional questions at 408-⁠862-⁠5119. Thanks again for joining us." }, { "speaker": "Operator", "text": "Once again, this does conclude today's conference. We do appreciate your participation." } ]	Apple Inc.	24,937
AAPL	1	2,023	2023-02-02 08:00:00	Operator: Good day, everyone, and welcome to the Apple Q1 Fiscal Year 2023 Earnings Conference Call. Today's call is being recorded. And now at this time, for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please go ahead. Tejas Gala: Thank you. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Before turning the call over to Tim, I would like to remind everyone that the December quarter spanned 14 weeks, while the March quarter, as usual, has 13 weeks. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks. Timothy Cook: Thank you, Tejas. Good afternoon, everyone, and thanks for joining us. Today, we're reporting revenue of $117.2 billion for the December quarter. We set all-time revenue records in a number of markets, including Canada, Indonesia, Mexico, Spain, Turkey and Vietnam, along with quarterly records in Brazil and India. As a result of a challenging environment, our revenue was down 5% year-over-year. But I'm proud of the way we have navigated circumstances, seen and unforeseen, over the past several years, and I remain incredibly confident in our team and our mission and in the work we do every day. Let me discuss the 3 factors that impacted our revenue performance during the quarter. The first was foreign exchange headwinds, which had a nearly 800 basis point impact. On a constant currency basis, we grew year-over-year and would have grown in the vast majority of the markets we track. The second factor, which we described in a November 6 update was COVID-19-related challenges, which significantly impacted the supply of iPhone 14 Pro and iPhone 14 Pro Max and lasted through most of December. Because of these constraints, we had significantly less iPhone 14 Pro and iPhone 14 Pro Max supply than we planned, causing ship times to extend far beyond what we had anticipated. As we always have every step of the way throughout the pandemic, we continued to prioritize people and worked with our suppliers to ensure the health and safety of every worker. Production is now back where we want it to be. The third factor was a challenging macroeconomic environment as the world continues to face unprecedented circumstances, from inflation to war in Eastern Europe, to the enduring impacts of the pandemic. And we know that Apple is not immune to it. But whatever conditions we face, our approach is always the same. We are thoughtful and deliberate. We manage for the long term. We adapt quickly to circumstances outside our control while delivering with excellence in the things we can. We invest in innovation, in people and in the positive difference we can make in the world. And we do it all to provide our customers with technology that will enrich their lives and help unlock their full creative potential. It's a wonderful thing to be a part of, and it's so rewarding for all of us at Apple when we hear how much our customers are loving what we create. Let me talk now about what we saw across our product categories. Starting with iPhone. Revenue came in at $65.8 billion for the quarter, down 8% year-over-year. However, on a constant currency basis, iPhone revenue was roughly flat. Our customers continue to rave about the astounding camera capabilities and unprecedented battery life and the groundbreaking suite of health and safety features. The iPhone 14 lineup pushes the limits of what users can do with a smartphone. During the quarter, Mac revenue came in at $7.7 billion, which was in line with what we had expected. We had a difficult compare because this time last year, we had the extremely successful launch of the redesigned M1 MacBook Pros. We also faced a challenging macroeconomic environment and foreign exchange headwinds. We remain confident in and focused on the long-term opportunity for Mac. Just last month, we introduced new MacBook Pro models powered by our latest developments in Apple silicon, M2 Pro and M2 Max. These chips enable unprecedented performance and do so with less energy, which is not only good for the environment but gives the newest MacBook Pro the longest battery life ever in a Mac. We also introduced the M2-powered Mac mini, which will supercharge productivity for users of all kinds and leave them stunned by just how powerful a Mac mini can be. During the quarter, iPad revenue grew 30% to a total of $9.4 billion. The very strong growth was due in part to a favorable compare to the December quarter a year ago when we experienced significant supply constraints. Customers continue to praise our new lineup for its versatility, whether it's the new iPad Pro now powered by the M2 or the newly designed iPad 10th Generation with its stunning liquid retina display and beautiful colors. Revenue for Wearables, Home and Accessories was $13.5 billion, which was down 8% year-over-year driven by foreign exchange headwinds and a challenging macroeconomic environment. We remain excited about the long-term opportunity in the category. As an example, a few weeks ago, we announced the next-generation HomePod, which is an indispensable addition to the smart home. This powerful smart speaker relies on advanced computational audio to produce an incredible listening experience. We're also helping users make their homes safer with sound recognition. This feature, arriving later this spring, allows HomePod to send a notification directly to a user's iPhone if a smoke or carbon monoxide alarm sound is identified. We continue to hear wide praise for Apple Watch Series 8 and Apple Watch Ultra, which has set a new standard for what's possible with a wearable. From a whole host of health and safety features to incredible new capabilities for extreme athletes, there is something for everyone in these amazing products. Customers are excited about some phenomenal new features we've made available across many of our products as well. One of the highlights is emergency SOS via satellite, which launched for iPhone 14 customers in the U.S. and Canada in November and for customers in France, Germany, Ireland and the U.K. in December. This is a feature we hope our users will never need, but it is incredibly heartening to get e-mails from people describing the life-saving impact our new safety features have had on them. We're always looking for new ways to empower people to create and collaborate. In December, we released Freeform, a brand-new app that lets users take their ideas wherever they want, anywhere they are, all while collaborating in real time. Freeform has already received praise from reviewers for its flexibility and simplicity as it works seamlessly across iPhone, iPad and Mac. Today, we are very excited to announce that we've achieved a truly incredible milestone. Thanks to our deep commitment to innovation, incredible customer loyalty and satisfaction and a large number of switchers, we now have more than 2 billion active devices as part of our growing installed base, double what it was just 7 years ago. This is an incredible testament to our products and services and the strength of our ecosystem. We set an all-time revenue record of $20.8 billion in services, which was better than what we had expected. We achieved double-digit revenue growth from App Store subscriptions and set all-time revenue records across a number of categories, including cloud and payment services. All told, Apple now has more than 935 million paid subscriptions. Apple has also just begun a historic 10-year partnership with Major League Soccer. Just yesterday, we launched MLS Season Pass, which will give fans in more than 100 countries access to every live MLS regular season game as well as the playoffs and MLS Cup, all with no blackouts. And while we're providing more content to sports fans than ever before, Apple TV+ continues to showcase powerful characters and moving storytelling. We were thrilled to celebrate the holidays alongside our Apple TV+ subscribers with the hit movie Spirited. And we're delighted to see how much people are enjoying new and returning series like Shrinking, Slow Horses and Truth Be Told. And we have some great upcoming movies in Sharper and Tetris, along with Emmy Award winner Ted Lasso returning this spring. During the quarter, we made some great updates to Fitness+ as well, expanding our catalog of more than 3,500 workouts and meditations to include a new kickboxing category and a new sleep theme for meditations. Our latest artist spotlight series features the music of the incomparable Beyonce, and we're excited to take a stroll with guests appearing on our fifth season of Time to Walk. And we continue to build on our decades-long commitment to helping small businesses thrive when we announced Apple Business Connect. This new tool gives business owners even more control over how billions of people see and engage with their products and services every day. Businesses of all sizes can now customize key information for users across Apple Maps, Messages, Wallet, Siri and other apps. Meanwhile, in retail, we celebrated 25 years of the Apple online store and also opened Apple Pacific Centre in Vancouver and Apple American Dream in New Jersey. And I'm grateful to all the teams who helped our customers throughout the busy holiday season. At Apple, we spend a lot of time focused on creating an unparalleled experience for our customers and every product and service that we offer. We're also just as dedicated to leading with our values in everything we do. As part of that work, we strengthened our deep commitment to privacy and security, giving users 3 new tools to protect their most sensitive data: iMessage contact key verification, security keys for Apple ID and advanced data protection for iCloud. At Apple, we feel a deep sense of responsibility to leave the world better than we found it. We're also a year closer to 2030, and we were ever focused on the environmental commitments we set out for the end of the decade. As an example, the latest Mac mini and MacBook Pro models all use 100% recycled aluminum in the enclosure and recycled rare earth elements in all magnets. And in a first for HomePod, we're using 100% recycled gold in the plating of multiple printed circuit boards. In honor of Black History Month, we released the Black Unity collection, including the Special Edition Apple Watch Black Unity Sport Loop, a new matching watch face and iPhone wallpaper. Through our racial, equity and justice initiative, we're expanding our support of 5 organizations focused on lifting up communities of color through technology. And we are committed as ever to building on our progress around inclusion and diversity. During the quarter, we also announced that since the inception of our Giving program 11 years ago, we've donated more than $880 million to humanitarian efforts, disaster relief, childhood education and more. And over the last 16 years through our partnership with (RED), Apple-supported grants have helped more than 11 million people get the care and support services they need. As we look ahead in 2023, we are excited about the year to come. At Apple, we are always looking forward, always focused on the next challenge, always determined to do great things with unmatched creativity and unrivaled innovation. And that makes me more confident about the future of Apple than I have ever been. With that, I'll turn it over to Luca. Luca Maestri: Thank you, Tim, and good afternoon, everyone. As Tim mentioned, revenue for the December quarter was $117.2 billion, down 5% from last year. A number of factors had a significant impact on our results. First, we faced a very difficult foreign exchange environment, which affected our performance by nearly 800 basis points. In other words, we grew revenue on a constant currency basis. And in fact, we did so in the vast majority of markets. Second, the macroeconomic environment this past quarter was markedly more challenging than 12 months ago. Third, we experienced significant supply shortages for iPhone 14 Pro and iPhone 14 Pro Max in November and through December. On the other hand, we had the positive impact of the 14th week in the quarter that Tejas just mentioned at the beginning of the call. Products revenue was $96.4 billion, down 8% from last year due to the factors I just called out. At the same time, however, our installed base of active devices grew double digits and achieved all-time records in each geographic segment and in each major product category. We're proud to now have over 2 billion active devices in our installed base. This continued growth in the installed base is due to extremely strong levels of customer satisfaction and loyalty and a high number of customers who are new to our products. The installed base growth also helped our services set an all-time revenue record of $20.8 billion, up 6% over a year ago. We achieved this new milestone despite more than 700 basis points of negative impact from foreign exchange. We reached all-time services revenue records in the Americas, Europe and rest of Asia Pacific and a December quarter record in Greater China. We also set records in many Services categories, including all-time revenue records for cloud services, payment services and music and December quarter records for the App Store and AppleCare. Company gross margin was 43%, up 70 basis points from last quarter due to leverage and favorable mix, partially offset by foreign exchange. Products gross margin was 37%, up 240 basis points sequentially. And Services gross margin was 70.8%, up 30 basis points sequentially, both due to the same factors that impacted total company gross margin. Operating expenses of $14.3 billion were significantly below the guidance range we provided at the beginning of the quarter and grew at a slower pace than in the past as we took actions to respond to the current macro environment. Net income was $30 billion. Diluted earnings per share were $1.88, and we generated very strong operating cash flow of $34 billion. Let me now get into more detail for each of our revenue categories. iPhone revenue was $65.8 billion despite significant foreign exchange headwinds, supply constraints on iPhone 14 Pro and iPhone 14 Pro Max and a challenging macroeconomic environment. In spite of these circumstances, we set all-time iPhone revenue records in Canada, Italy and Spain, and saw strong growth in several emerging markets, including all-time iPhone revenue records for India and Vietnam. Importantly, the installed base of active iPhones continues to grow nicely and is at an all-time high across all geographic segments. In emerging markets, in particular, the installed base grew double digits, and we had record levels of switchers in India and in Mexico. Our customers continue to love their experience with our products with the latest survey of U.S. consumers from 451 Research indicating customer satisfaction of 98% for the iPhone 14 family. Mac revenue was $7.7 billion, down 29% year-over-year and in line with our expectations. There were 3 key drivers for our Mac results. First, we had a challenging compare against last year's launch of the completely reimagined MacBook Pros, our first notebooks with M1 Pro and M1 Max. Second, we believe that the macro environment impacted our Mac performance. And third, we faced significant foreign exchange headwinds. At the same time, however, the installed base of active Macs reached an all-time high across all geographic segments, and we continue to see very strong upgraded activity to Apple silicon. Customer satisfaction with Mac remains very strong at 96% based on the latest survey of U.S. consumers from 451 Research. iPad revenue was $9.4 billion, up 30% year-over-year despite significant FX headwinds. This performance was driven by 2 key items. First, during the December quarter a year ago, we experienced significant supply constraints, while this year, we had enough supply to meet demand. Second, we launched our new iPad and the iPad Pro powered by the M2 chip during the quarter. The iPad installed base reached a new all-time high, thanks to incredible customer loyalty and a high number of new customers. In fact, over half of the customers who purchased iPads during the quarter were new to the product. Wearables, Home and Accessories revenue was $13.5 billion, down 8% year-over-year. The year-over-year decline was driven by significant FX headwinds and a challenging macroeconomic environment. However, our installed base of devices in the category set a new all-time record thanks to the largest number of customers new to our smartwatch that we've ever had in a given quarter. In fact, nearly 2/3 of customers purchasing an Apple Watch during the quarter were new to the product. Moving to Services. We generated $20.8 billion in revenue, a new all-time record in total and for many Services offerings in spite of a difficult foreign exchange environment, and macroeconomic headwinds impacting certain categories such as digital advertising and mobile gaming. In constant currency, we grew Services revenue double digits on top of growing 24% during the December quarter a year ago. We remain focused on the large long-term opportunity in this category, and we continue to observe several trends that reflect the strength of our ecosystem. For example, we saw increased customer engagement with our Services during the quarter. Both our transacting accounts and paid accounts grew double digits year-over-year, each setting a new all-time record. Paid subscriptions also continued to grow nicely. We now have more than 935 million paid subscriptions across the services on our platform, up more than 150 million during the last 12 months alone and nearly 4x what we had just 5 years ago. And we continue to increase the reach and improve the quality of our offerings. For instance, Apple Pay is now available to millions of merchants in nearly 70 countries and regions. And we saw a record-breaking number of purchases made using Apple Pay globally during the holiday shopping season. Finally, our installed base of over 2 billion active devices represents a great foundation for future expansion of our ecosystem, and it continues to grow even during difficult macroeconomic conditions, which speaks to the exceptionally high levels of customer loyalty and satisfaction and our ability to attract new customers to our platform. The growth is coming from every major product category and geographic segment, with strong double-digit increases in emerging markets such as Brazil, Mexico, India, Indonesia, Thailand and Vietnam. Turning to the enterprise market. we are seeing continued adoption of our Services for business like Apple Business Essentials, AppleCare, Tap to Pay and Apple Financial Services. For example, Mars Incorporated has expanded its use of AppleCare for Enterprise to provide timely device support and assurance for iPads deployed across their manufacturing sites. Meanwhile, HCA Healthcare has leveraged Apple Financial Services to manage the annual refresh of its entire fleet of iPhones. This not only ensures that their staff stay current on the latest Apple technology, but also provides them with significant annual savings in the process. Let me now turn to our capital return program and our cash position. We returned over $25 billion to shareholders during the December quarter as our business continues to generate very strong cash flow. This included $3.8 billion in dividends and equivalents and $19 billion through open market repurchases of 133 million Apple shares. We ended the quarter with $165 billion in cash and marketable securities. We repaid $1.4 billion in maturing debt and decreased commercial paper by $8.2 billion, leaving us with total debt of $111 billion. As a result, net cash was $54 billion at the end of the quarter, and we maintain our goal of becoming net cash-neutral over time. As we move into the March quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we are not providing revenue guidance, but we are sharing some directional insights based on the assumption that the macroeconomic outlook and COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter. In total, we expect our March quarter year-over-year revenue performance to be similar to the December quarter. This represents an acceleration in our underlying year-over-year business performance as the December quarter benefited from an extra week. Foreign exchange will continue to be a headwind, and we expect a negative year-over-year impact of 5 percentage points. For Services, we expect revenue to grow year-over-year while continuing to face macroeconomic headwinds in areas such as digital advertising and mobile gaming. For iPhone, we expect our March quarter year-over-year revenue performance to accelerate relative to the December quarter year-over-year revenue performance. For Mac and iPad, we expect revenue for both product categories to decline double digits year-over-year because of challenging compares and macroeconomic headwinds. We expect gross margin to be between 43.5% and 44.5%. We expect OpEx to be between $13.7 billion and $13.9 billion. We expect OI&E to be around negative $100 million, excluding any potential impact from the mark-to-market of minority investments, and our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividend of $0.23 per share of common stock payable on February 16, 2023, to shareholders of record as of February 13, 2023. With that, let's open the call to questions. Tejas Gala: Thank you, Luca. [Operator Instructions]. Operator, may we have the first question, please. Operator: [Operator Instructions]. Certainly. We will go ahead and take our first question from David Vogt with UBS. David Vogt: So Tim, and maybe this is for Luca as well. You talked about the supply chain returning back to normal after a very difficult October, November, but we're still seeing some disruptions across tech products, whether it's enterprise or consumer-facing. How do you think about your supply chain and maybe the levels of inventory or builds that you might need as we go forward to sort of insulate your business from these sort of episodic disruptions? Have you changed your view? And if so, how does that affect ultimately margins and sort of your balance sheet and cash flow items going forward? Timothy Cook: This is Tim, David. From a supply point of view, we did see disruption from early November through most of December. And from a supply chain point of view, we're now at a point where production is what we need it to be. And so the problem is behind us. In terms of going forward in the supply chain, we build our products everywhere. There are component parts coming from many different countries in the world, and the final assembly coming from 3 countries in the world on just iPhone. And so we continue to optimize it. We'll continue to optimize it over time and change it to continue to improve. I think when you sort of zoom out and back up from it, the last 3 years have been a pretty difficult time between COVID and silicon shortages and the like. And I think it's -- I think we have had a very resilient supply chain in the aggregate. In terms of supply for this quarter, which I think was one of your points, I think we're in decent supply on most products for the quarter currently. Operator: Our next question is from Shannon Cross of Credit Suisse. Shannon Cross: Luca, I wanted to dig a bit more into the commentary on gross margins. The guidance, especially at 43.5% to 44.5%, is obviously quite strong. So I'm wondering what's helping you out there, assume mix and some other things. And then how should we think about what currency and hedge is going to do as we look forward? And then I have a follow-up. Luca Maestri: Shannon, yes, I mean, we've had good margin for the December quarter to start with. We reported 43%. Obviously, in December, we have the benefit of leverage because of the seasonality of the business, but we also had favorable mix across the board. Of course, foreign exchange is an issue right now. In the December quarter on a sequential basis, foreign exchange was a negative 110 basis points for us. And on a year-over-year basis, it's 300 basis points. So obviously, the FX environment has changed a lot during the last 12 months. For March, yes, we've seen a margin expansion, 43.5% to 44.5%. We're doing a lot of work around cost, of course. Mix will continue to help, both within categories and services mix as we move away from the holiday season. But we're doing a lot of work on the cost structure, and that is paying off. Foreign exchange is still a negative, about 50 basis points sequentially, but it's mitigating. The last couple of weeks, the dollar has weakened a bit. And so hopefully, as we go through the year, hopefully, things will improve. But for now, as you correctly state, we are in a good position on margins. Shannon Cross: And then, Tim, can you talk a bit about China? What you're seeing -- obviously, you've had the issues with production, but I mean more on the demand side. As we've gotten through Chinese New Year and the opening, I'm just wondering, are you seeing the Chinese consumer come back? What are they buying? And how are you thinking about your position there? Timothy Cook: Shannon, last quarter, we declined by 7% on a reported basis, but we actually grew on a constant currency basis. And that was despite some significant -- the supply constraints that we talked about earlier. And obviously, the sort of the COVID restrictions throughout China that happened in various different places throughout the country also impacted the demand during the quarter. When you look at the opening that started happening in December, we saw a marked change in traffic in our stores as compared to November. And that followed through to demand as well. And I don't want to get into January. We've obviously -- January is included in the guidance, or the color rather, that Luca provided earlier. But we did see a marked change from December compared to November. Operator: Our next question is from Erik Woodring of Morgan Stanley. Erik Woodring: Maybe, Tim, first one for you. That 2 billion installed base -- device installed base figure, that's up, I believe, 200 million units year-over-year. That implies the strongest annual gain in new devices in your installed base basically as far back as you've provided those data points. And so I guess my 2 questions are: one, do you -- can you provide the installed base for the iPhone at year-end? And then two, is there anything that you see in this new cohort of users that might look different or similar to past cohorts, either by demographic or regions or monetization ramp? And then I have a follow-up. Timothy Cook: Yes. The installed base is now over 2 billion active devices, as you mentioned. And we set records across each geographic segment and major product category. And so it was a broad-based change. Two -- I'll correct one thing you said, it's up over 150 million year-over-year. The last report we reported to be over 1.85. And so it's 150 million, which we're very proud of. We also saw strong double-digit in several of the emerging markets, which is very important to us. For example, India and Brazil as just 2 examples. So very, very strong. And obviously, it bodes well for the future. Erik Woodring: And then, Luca, obviously, the December quarter was negatively impacted by the production challenges. Can you just maybe unpackage where channel inventory levels are today kind of across the iPhone broadly? And then what the data that you're seeing so far this quarter is telling you about iPhone demand deferral versus kind of iPhone demand destruction and perhaps pushing some upgrades later into the year rather than into the March quarter? And that's it for me. Timothy Cook: Yes. Erik, I'll take that one as well. The channel inventory levels on iPhone, we obviously ended the December quarter below our target range given the supply challenges on iPhone 14 Pro and iPhone 14 Pro Max. But as you think about this, keep in mind that a year ago, we also exited the December quarter below our target inventory range because of supply challenges in the year ago quarter. Not related -- not the same issue, but just as a point. And so that hopefully gives you some flavor of that. In terms of what we're seeing in January, we've included in our color that Luca provided kind of our thinking. It's very hard to estimate the recapture because you have to know exactly what would have happened and how many people bought down. And it takes a while to get that -- to get those reports in during the quarter. And so we've made our best guess at it. In terms of the sizing of the constraint in Q1, what we estimate, although not with precision, is that we would -- I thought we believe iPhone would have grown during the quarter had it not been for the supply shortages. So hopefully, that provides you a little bit of color. Operator: Our next question comes from Aaron Rakers of Wells Fargo. Aaron Rakers: I have two as well, if I can. I guess the first kind of question, just going back on the gross margin line. Pretty good guidance into this March quarter. I'm curious if you unpack that a little bit specific around what you're seeing as far as maybe benefits from component pricing in the guidance, if you're embedding any of that at this point. Luca Maestri: Yes. Of course, with our guidance, we try to capture every aspect of our cost structure. And obviously, components are a big portion of that. So definitely, that's included. And keep in mind, again, that foreign exchange -- I mentioned earlier, I think to Shannon, that the sequential negative on FX is 50 basis points, versus a year ago, it's 270 basis points. Obviously, the U.S. dollar has moved a lot over the last 12 months. So obviously, we need to find offsets and more to the negative FX in order to be able to provide this kind of guidance. And so obviously, components are a big part of that. Aaron Rakers: Yes. And then kind of from a strategic perspective, given kind of the things that we're seeing out in some of your peer group, I'm curious, Tim, how you think about the role of AI in your strategy as far as particularly in the Services segment, whether you're not -- you see opportunities to excel monetization abilities within the paid subscriber base and whether or not AI, is it something that you're implementing a bit more strategically there. Timothy Cook: Yes. It is a major focus of ours. It's incredible in terms of how it can enrich customers' lives. And you can look no further than some of the things that we announced in the fall with crash detection and fall detection or back a ways with ECG. I mean these things have literally saved people's lives. And so we see an enormous potential in this space to affect virtually everything we do. It's obviously a horizontal technology, not a vertical. And so it will affect every product and every service that we have. Operator: Our next question comes from Amit Daryanani of Evercore. Amit Daryanani: I guess the first one I have is, Tim, I think based on your earlier comments that iPhones would have grown ex the production issue that implied that maybe it's a $7 billion or so impact that you had in December quarter from the production challenges on the high-end models. I'm sure it's tough to see what happens this time around. But I think historically, when you've had production issues or things like this happen, what has the consumer behavior being typically? Do they tend to go down towards the lower end models and get the phone they want quickly? Or do they just defer the production? Just from a historical perspective, I think do you typically recover what's deferred out or no? Timothy Cook: It's very hard to estimate is the real answer because you have to know a lot of data, and it's usually only in hindsight that you have a more reasonable view of it. And so we put our best views in the color that Luca provided. That's kind of what I would say. Amit Daryanani: All right. And then I guess maybe if I think about Services as you go forward. I know you had really good growth in Services, I think, over the last several years. But as you go forward in Services, what do you think drives the growth more so? Is it the expansion of your installed base? Or is it more going to be driven by ARPU going higher for you? I'm just curious, how do you think about those 2 buckets as you go forward? Luca Maestri: Amit, there's a number of things, and I've mentioned a few of them during the call. The first step is always the installed base. Installed base is the engine for Services growth. And the fact that the installed base is growing very nicely, and it's growing in a lot of emerging markets, it's growing even faster, that gives us a larger addressable pool of customers. So that's incredibly important. The second one is that we are seeing that the level of engagement of our customers already in our ecosystem continues to grow. We -- I mentioned that both transacting accounts and paid accounts grew double digits. And so that bodes very well for the future. And we have a lot of transacting accounts that kind of moved to paid accounts over time. The other aspect that is very important for us is to continue constantly to improve the reach and the quality of our services. And I give the example of Apple Pay, which it's a great example because we started off primarily in the United States. Now we've taken it to 70 markets, millions of merchants. And so obviously, payment services are -- continue to set new highs all the time for us. And then as you've seen over the last few years, we also launched new services over time, and that obviously contributes to the growth. We're very excited. And when we look at the behavior of our installed base, we think it's very promising for the continued growth of our Services business. Operator: Our next question comes from Harsh Kumar of Piper Sandler. Harsh Kumar: Tim, I had a quick question on emerging markets. Seems like you're making a lot of strides in India. Potentially wanted to understand the kind of share you have in China and India. And relative to that, what would be your aspirational but sort of achievable share in iPhones in those territories, whether it's units or revenues? And I was hoping to draw on your experience and maybe what you've seen in other countries where you've had some longer presence. Timothy Cook: And looking at the business in India, we set a quarterly revenue record and grew very strong double digits year-over-year. And so we feel very good about how we performed, and that was -- that's despite the headwinds that we've talked about. Taking a step back, India is a hugely exciting market for us and is a major focus. We brought the online store there in 2020. We will soon bring Apple retail there. So we're putting a lot of emphasis on the market. There's been a lot done from a financing options and trade-ins to make products more affordable and give people more options to buy. And so there's a lot going on there. We are, in essence, taking what we learned in China years ago and how we scale to China and bringing that to bear. And I don't have the exact market shares in front of me, but I think you would see that from a market share point of view that we grew around the world last quarter despite -- on iPhone despite the challenges that we've had on the supply side. And I wouldn't expect to have a difference in those 2 markets. Harsh Kumar: Understood. And for my follow-up, I had a sort of interesting theoretical question on pricing. Assuming we get the CHIPS Act passed, and there's a whole bunch of manufacturing that happens in U.S. and other territories that are potentially somewhat more expensive than the ones you might be now, have you -- has the company done any studies to gauge the elasticity of demand relative to small price increases in your products? Timothy Cook: We have experience in that, but I wouldn't necessarily draw the same conclusion that you have in terms of the cost of the product. I -- we don't know at this point exactly what that will be, but we're all in, in terms of being the largest customer for TSMC in Arizona. I'm very proud to take part in that. That's what I would say about that. Operator: Our next question comes from Wamsi Mohan of Bank of America. Wamsi Mohan: Tim, you've done a phenomenal job of driving consumer choice towards higher-end products within your portfolio. How would you compare this cycle for iPhones if you were to segment the Pro versus non-Pro models versus the cycles from the past few years? And do you think this move to higher ASPs is sustainable? Or do you think it reverses in a tighter consumer spending environment? And I have a follow-up. Timothy Cook: The Pro has been a -- the 14 Pro and the 14 Pro Max have done extremely well up until the point where we had a supply shortage and couldn't provide them -- couldn't provide the total of the demand. And so it's definitely a strong Pro cycle. I think there's a number of reasons for that, but the most important one is always the product. And I think the innovations and the product speak for themselves. And we feel very good about the product that we announced back in September and are happy to now be at a point where we're shipping to the demand. Wamsi Mohan: And Tim, do you think that this move to sort of higher ASPs that has happened over the last few years is sustainable? Or could it sustain in this very tough macro environment that you've cited? Timothy Cook: I wouldn't want to predict, but I would say that the smartphone for us, the iPhone has become so integral into people's lives. It contains their contacts and their health information and their banking information and their smart home and so many different parts of their lives, their payment vehicle and -- for many people. And so I think people are willing to really stretch to get the best they can afford in that category. Wamsi Mohan: Okay. Great. And Tim, you clearly emphasize the focus and importance of the installed base. If we think about the absolute grit of the installed base from 1 billion to 2 billion over 7 years from a device standpoint, how should we think about the penetration of services or the growth in paying customers on services or that time frame? Is that penetration rate increasing or decreasing? How fast is that growing relative to the growth of the overall installed base? Luca Maestri: Wamsi, it's Luca. Yes, of course, we keep track of that. It's really important for us. Over the last 7 years, as we doubled the installed base, we've seen a growing engagement of our customers on the platform. That happens, first of all, by customers transacting on the platform and then moving to paid accounts. So starting to pay for some of the services. That percentage of paid accounts tends to grow over time. We've seen it in developed markets. We see it in emerging markets. And that is due to some of the reasons that I was explaining earlier, including the fact that we made it easier for our customers to get engaged on the platform. For example, we offer multiple payment methods in many countries. And we've made it easier to explore for more services because we've added a lot of services on the platform over the last 7 years. So to your question, of course, higher engagement means a higher percentage of paid accounts over time. Operator: Our next question comes from Richard Kramer of Arete Research LLP. Tejas Gala: Operator, can we move on to the next? Operator: Next, we'll hear from Jim Suva of Citigroup. James Suva: Tim and Luca, you both mentioned earlier on the Q&A a little bit about India. I was wondering if we're now entering a situation of even more opportunity because we've exited COVID, we've exited countries with different COVID criteria. We've also seen India build out its higher speed transmissions. And your market is -- shares tremendously underrepresented there. And it appears with the supply chain, you're looking at diversifying kind of operational risk not specific to any country, but just overall. Now you look at potentially opening up stores and stuff. Am I right that, that's the way you look at it is it's even more prime for opportunity now than ever? And once you start opening up stores there, you could just see a complete green shoot of adoptions or any additional commentary on your view on India as now we've navigated COVID and supply chain and so many challenges over the past 2 years? Timothy Cook: Yes. Jim, we actually did fairly well through COVID in India. And I'm even more bullish now on the other side of it, or hopefully, on the other side of it. And that's the reason why we're investing there. We're bringing retail there and bringing the online store there and putting a significant amount of energy there. I'm very bullish on India. James Suva: And then as my quick follow-up, you had mentioned that Services, not necessarily specific to India, but Services overall were better than expected. And of course, supply chain was more challenged than expected. So what was the bridge factor of Services being better than expected on upside? Was it like advertising or apps or paid monthly subscriptions? Or what were kind of the things that really surprised you to the upside on Services? Luca Maestri: It was -- Jim, it's Luca. It's primarily the -- this level of engagement we saw, which then reflects into the, as you said, the paid subscriptions. We saw very good results in our cloud services business in payment services. Music was very strong. So we had a number of categories that set new records, all-time records. And they did a bit better than we were expecting at the beginning of the quarter. And so Tim mentioned that during, I think, his prepared remarks that when you look at it in constant currency, we grew services double digits. And that was on top of a 24% increase a year ago. So it's very sustained growth that we're seeing. Operator: Our next question will come from Krish Sankar of Cowen and Company. Krish Sankar: I have 2. The first one, Tim and Luca, you mentioned how the macro did soften, and it has an impact. And as consumers tighten their belt, when you look across your hardware products and service businesses, where are you seeing the biggest impact and where are you seeing the least impact from the softening macro? And then I had a quick follow-up. Timothy Cook: We think there were some impact across the products and in Services. Probably, the ones that we saw the most impact on were Mac and Wearables. You can see that in those numbers. And probably, the least would have been iPhone. Krish Sankar: Got it. Got it. Very helpful, Tim. And then just a quick follow-up on the Mac. The PC industry is expecting a decline in PC shipments this year also. How do you think about the Mac relative to kind of like where the PC industry as a whole is expecting the shipments to end up? Is there any color you can give on that? Timothy Cook: The industry is very challenged, as you say. It's -- the industry is contracting. I think from us, though, is -- and I don't know how this year will play out, so I don't want to predict the year. But over the long run, we have a market that is a reasonable-sized market, a big market. And we have low share, and we have a competitive advantage with Apple silicon. And so strategically, I think we're well positioned in the market, albeit I think it will be a little rough in the short term. Tejas Gala: A replay of today's call will be available for 2 weeks on Apple Podcasts, as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 6541285, followed by the pound sign. These replays will be available by approximately 5 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us. Operator: And once again, this does conclude today's conference. We do appreciate your participation.	[ { "speaker": "Operator", "text": "Good day, everyone, and welcome to the Apple Q1 Fiscal Year 2023 Earnings Conference Call. Today's call is being recorded. And now at this time, for opening remarks and introductions, I would like to turn the call over to Tejas Gala, Director of Investor Relations and Corporate Finance. Please go ahead." }, { "speaker": "Tejas Gala", "text": "Thank you. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Before turning the call over to Tim, I would like to remind everyone that the December quarter spanned 14 weeks, while the March quarter, as usual, has 13 weeks. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of COVID-19 on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements or information which speak as of their respective dates. I'd now like to turn the call over to Tim for introductory remarks." }, { "speaker": "Timothy Cook", "text": "Thank you, Tejas. Good afternoon, everyone, and thanks for joining us. Today, we're reporting revenue of $117.2 billion for the December quarter. We set all-time revenue records in a number of markets, including Canada, Indonesia, Mexico, Spain, Turkey and Vietnam, along with quarterly records in Brazil and India. As a result of a challenging environment, our revenue was down 5% year-over-year. But I'm proud of the way we have navigated circumstances, seen and unforeseen, over the past several years, and I remain incredibly confident in our team and our mission and in the work we do every day. Let me discuss the 3 factors that impacted our revenue performance during the quarter. The first was foreign exchange headwinds, which had a nearly 800 basis point impact. On a constant currency basis, we grew year-over-year and would have grown in the vast majority of the markets we track. The second factor, which we described in a November 6 update was COVID-19-related challenges, which significantly impacted the supply of iPhone 14 Pro and iPhone 14 Pro Max and lasted through most of December. Because of these constraints, we had significantly less iPhone 14 Pro and iPhone 14 Pro Max supply than we planned, causing ship times to extend far beyond what we had anticipated. As we always have every step of the way throughout the pandemic, we continued to prioritize people and worked with our suppliers to ensure the health and safety of every worker. Production is now back where we want it to be. The third factor was a challenging macroeconomic environment as the world continues to face unprecedented circumstances, from inflation to war in Eastern Europe, to the enduring impacts of the pandemic. And we know that Apple is not immune to it. But whatever conditions we face, our approach is always the same. We are thoughtful and deliberate. We manage for the long term. We adapt quickly to circumstances outside our control while delivering with excellence in the things we can. We invest in innovation, in people and in the positive difference we can make in the world. And we do it all to provide our customers with technology that will enrich their lives and help unlock their full creative potential. It's a wonderful thing to be a part of, and it's so rewarding for all of us at Apple when we hear how much our customers are loving what we create. Let me talk now about what we saw across our product categories. Starting with iPhone. Revenue came in at $65.8 billion for the quarter, down 8% year-over-year. However, on a constant currency basis, iPhone revenue was roughly flat. Our customers continue to rave about the astounding camera capabilities and unprecedented battery life and the groundbreaking suite of health and safety features. The iPhone 14 lineup pushes the limits of what users can do with a smartphone. During the quarter, Mac revenue came in at $7.7 billion, which was in line with what we had expected. We had a difficult compare because this time last year, we had the extremely successful launch of the redesigned M1 MacBook Pros. We also faced a challenging macroeconomic environment and foreign exchange headwinds. We remain confident in and focused on the long-term opportunity for Mac. Just last month, we introduced new MacBook Pro models powered by our latest developments in Apple silicon, M2 Pro and M2 Max. These chips enable unprecedented performance and do so with less energy, which is not only good for the environment but gives the newest MacBook Pro the longest battery life ever in a Mac. We also introduced the M2-powered Mac mini, which will supercharge productivity for users of all kinds and leave them stunned by just how powerful a Mac mini can be. During the quarter, iPad revenue grew 30% to a total of $9.4 billion. The very strong growth was due in part to a favorable compare to the December quarter a year ago when we experienced significant supply constraints. Customers continue to praise our new lineup for its versatility, whether it's the new iPad Pro now powered by the M2 or the newly designed iPad 10th Generation with its stunning liquid retina display and beautiful colors. Revenue for Wearables, Home and Accessories was $13.5 billion, which was down 8% year-over-year driven by foreign exchange headwinds and a challenging macroeconomic environment. We remain excited about the long-term opportunity in the category. As an example, a few weeks ago, we announced the next-generation HomePod, which is an indispensable addition to the smart home. This powerful smart speaker relies on advanced computational audio to produce an incredible listening experience. We're also helping users make their homes safer with sound recognition. This feature, arriving later this spring, allows HomePod to send a notification directly to a user's iPhone if a smoke or carbon monoxide alarm sound is identified. We continue to hear wide praise for Apple Watch Series 8 and Apple Watch Ultra, which has set a new standard for what's possible with a wearable. From a whole host of health and safety features to incredible new capabilities for extreme athletes, there is something for everyone in these amazing products. Customers are excited about some phenomenal new features we've made available across many of our products as well. One of the highlights is emergency SOS via satellite, which launched for iPhone 14 customers in the U.S. and Canada in November and for customers in France, Germany, Ireland and the U.K. in December. This is a feature we hope our users will never need, but it is incredibly heartening to get e-mails from people describing the life-saving impact our new safety features have had on them. We're always looking for new ways to empower people to create and collaborate. In December, we released Freeform, a brand-new app that lets users take their ideas wherever they want, anywhere they are, all while collaborating in real time. Freeform has already received praise from reviewers for its flexibility and simplicity as it works seamlessly across iPhone, iPad and Mac. Today, we are very excited to announce that we've achieved a truly incredible milestone. Thanks to our deep commitment to innovation, incredible customer loyalty and satisfaction and a large number of switchers, we now have more than 2 billion active devices as part of our growing installed base, double what it was just 7 years ago. This is an incredible testament to our products and services and the strength of our ecosystem. We set an all-time revenue record of $20.8 billion in services, which was better than what we had expected. We achieved double-digit revenue growth from App Store subscriptions and set all-time revenue records across a number of categories, including cloud and payment services. All told, Apple now has more than 935 million paid subscriptions. Apple has also just begun a historic 10-year partnership with Major League Soccer. Just yesterday, we launched MLS Season Pass, which will give fans in more than 100 countries access to every live MLS regular season game as well as the playoffs and MLS Cup, all with no blackouts. And while we're providing more content to sports fans than ever before, Apple TV+ continues to showcase powerful characters and moving storytelling. We were thrilled to celebrate the holidays alongside our Apple TV+ subscribers with the hit movie Spirited. And we're delighted to see how much people are enjoying new and returning series like Shrinking, Slow Horses and Truth Be Told. And we have some great upcoming movies in Sharper and Tetris, along with Emmy Award winner Ted Lasso returning this spring. During the quarter, we made some great updates to Fitness+ as well, expanding our catalog of more than 3,500 workouts and meditations to include a new kickboxing category and a new sleep theme for meditations. Our latest artist spotlight series features the music of the incomparable Beyonce, and we're excited to take a stroll with guests appearing on our fifth season of Time to Walk. And we continue to build on our decades-long commitment to helping small businesses thrive when we announced Apple Business Connect. This new tool gives business owners even more control over how billions of people see and engage with their products and services every day. Businesses of all sizes can now customize key information for users across Apple Maps, Messages, Wallet, Siri and other apps. Meanwhile, in retail, we celebrated 25 years of the Apple online store and also opened Apple Pacific Centre in Vancouver and Apple American Dream in New Jersey. And I'm grateful to all the teams who helped our customers throughout the busy holiday season. At Apple, we spend a lot of time focused on creating an unparalleled experience for our customers and every product and service that we offer. We're also just as dedicated to leading with our values in everything we do. As part of that work, we strengthened our deep commitment to privacy and security, giving users 3 new tools to protect their most sensitive data: iMessage contact key verification, security keys for Apple ID and advanced data protection for iCloud. At Apple, we feel a deep sense of responsibility to leave the world better than we found it. We're also a year closer to 2030, and we were ever focused on the environmental commitments we set out for the end of the decade. As an example, the latest Mac mini and MacBook Pro models all use 100% recycled aluminum in the enclosure and recycled rare earth elements in all magnets. And in a first for HomePod, we're using 100% recycled gold in the plating of multiple printed circuit boards. In honor of Black History Month, we released the Black Unity collection, including the Special Edition Apple Watch Black Unity Sport Loop, a new matching watch face and iPhone wallpaper. Through our racial, equity and justice initiative, we're expanding our support of 5 organizations focused on lifting up communities of color through technology. And we are committed as ever to building on our progress around inclusion and diversity. During the quarter, we also announced that since the inception of our Giving program 11 years ago, we've donated more than $880 million to humanitarian efforts, disaster relief, childhood education and more. And over the last 16 years through our partnership with (RED), Apple-supported grants have helped more than 11 million people get the care and support services they need. As we look ahead in 2023, we are excited about the year to come. At Apple, we are always looking forward, always focused on the next challenge, always determined to do great things with unmatched creativity and unrivaled innovation. And that makes me more confident about the future of Apple than I have ever been. With that, I'll turn it over to Luca." }, { "speaker": "Luca Maestri", "text": "Thank you, Tim, and good afternoon, everyone. As Tim mentioned, revenue for the December quarter was $117.2 billion, down 5% from last year. A number of factors had a significant impact on our results. First, we faced a very difficult foreign exchange environment, which affected our performance by nearly 800 basis points. In other words, we grew revenue on a constant currency basis. And in fact, we did so in the vast majority of markets. Second, the macroeconomic environment this past quarter was markedly more challenging than 12 months ago. Third, we experienced significant supply shortages for iPhone 14 Pro and iPhone 14 Pro Max in November and through December. On the other hand, we had the positive impact of the 14th week in the quarter that Tejas just mentioned at the beginning of the call. Products revenue was $96.4 billion, down 8% from last year due to the factors I just called out. At the same time, however, our installed base of active devices grew double digits and achieved all-time records in each geographic segment and in each major product category. We're proud to now have over 2 billion active devices in our installed base. This continued growth in the installed base is due to extremely strong levels of customer satisfaction and loyalty and a high number of customers who are new to our products. The installed base growth also helped our services set an all-time revenue record of $20.8 billion, up 6% over a year ago. We achieved this new milestone despite more than 700 basis points of negative impact from foreign exchange. We reached all-time services revenue records in the Americas, Europe and rest of Asia Pacific and a December quarter record in Greater China. We also set records in many Services categories, including all-time revenue records for cloud services, payment services and music and December quarter records for the App Store and AppleCare. Company gross margin was 43%, up 70 basis points from last quarter due to leverage and favorable mix, partially offset by foreign exchange. Products gross margin was 37%, up 240 basis points sequentially. And Services gross margin was 70.8%, up 30 basis points sequentially, both due to the same factors that impacted total company gross margin. Operating expenses of $14.3 billion were significantly below the guidance range we provided at the beginning of the quarter and grew at a slower pace than in the past as we took actions to respond to the current macro environment. Net income was $30 billion. Diluted earnings per share were $1.88, and we generated very strong operating cash flow of $34 billion. Let me now get into more detail for each of our revenue categories. iPhone revenue was $65.8 billion despite significant foreign exchange headwinds, supply constraints on iPhone 14 Pro and iPhone 14 Pro Max and a challenging macroeconomic environment. In spite of these circumstances, we set all-time iPhone revenue records in Canada, Italy and Spain, and saw strong growth in several emerging markets, including all-time iPhone revenue records for India and Vietnam. Importantly, the installed base of active iPhones continues to grow nicely and is at an all-time high across all geographic segments. In emerging markets, in particular, the installed base grew double digits, and we had record levels of switchers in India and in Mexico. Our customers continue to love their experience with our products with the latest survey of U.S. consumers from 451 Research indicating customer satisfaction of 98% for the iPhone 14 family. Mac revenue was $7.7 billion, down 29% year-over-year and in line with our expectations. There were 3 key drivers for our Mac results. First, we had a challenging compare against last year's launch of the completely reimagined MacBook Pros, our first notebooks with M1 Pro and M1 Max. Second, we believe that the macro environment impacted our Mac performance. And third, we faced significant foreign exchange headwinds. At the same time, however, the installed base of active Macs reached an all-time high across all geographic segments, and we continue to see very strong upgraded activity to Apple silicon. Customer satisfaction with Mac remains very strong at 96% based on the latest survey of U.S. consumers from 451 Research. iPad revenue was $9.4 billion, up 30% year-over-year despite significant FX headwinds. This performance was driven by 2 key items. First, during the December quarter a year ago, we experienced significant supply constraints, while this year, we had enough supply to meet demand. Second, we launched our new iPad and the iPad Pro powered by the M2 chip during the quarter. The iPad installed base reached a new all-time high, thanks to incredible customer loyalty and a high number of new customers. In fact, over half of the customers who purchased iPads during the quarter were new to the product. Wearables, Home and Accessories revenue was $13.5 billion, down 8% year-over-year. The year-over-year decline was driven by significant FX headwinds and a challenging macroeconomic environment. However, our installed base of devices in the category set a new all-time record thanks to the largest number of customers new to our smartwatch that we've ever had in a given quarter. In fact, nearly 2/3 of customers purchasing an Apple Watch during the quarter were new to the product. Moving to Services. We generated $20.8 billion in revenue, a new all-time record in total and for many Services offerings in spite of a difficult foreign exchange environment, and macroeconomic headwinds impacting certain categories such as digital advertising and mobile gaming. In constant currency, we grew Services revenue double digits on top of growing 24% during the December quarter a year ago. We remain focused on the large long-term opportunity in this category, and we continue to observe several trends that reflect the strength of our ecosystem. For example, we saw increased customer engagement with our Services during the quarter. Both our transacting accounts and paid accounts grew double digits year-over-year, each setting a new all-time record. Paid subscriptions also continued to grow nicely. We now have more than 935 million paid subscriptions across the services on our platform, up more than 150 million during the last 12 months alone and nearly 4x what we had just 5 years ago. And we continue to increase the reach and improve the quality of our offerings. For instance, Apple Pay is now available to millions of merchants in nearly 70 countries and regions. And we saw a record-breaking number of purchases made using Apple Pay globally during the holiday shopping season. Finally, our installed base of over 2 billion active devices represents a great foundation for future expansion of our ecosystem, and it continues to grow even during difficult macroeconomic conditions, which speaks to the exceptionally high levels of customer loyalty and satisfaction and our ability to attract new customers to our platform. The growth is coming from every major product category and geographic segment, with strong double-digit increases in emerging markets such as Brazil, Mexico, India, Indonesia, Thailand and Vietnam. Turning to the enterprise market. we are seeing continued adoption of our Services for business like Apple Business Essentials, AppleCare, Tap to Pay and Apple Financial Services. For example, Mars Incorporated has expanded its use of AppleCare for Enterprise to provide timely device support and assurance for iPads deployed across their manufacturing sites. Meanwhile, HCA Healthcare has leveraged Apple Financial Services to manage the annual refresh of its entire fleet of iPhones. This not only ensures that their staff stay current on the latest Apple technology, but also provides them with significant annual savings in the process. Let me now turn to our capital return program and our cash position. We returned over $25 billion to shareholders during the December quarter as our business continues to generate very strong cash flow. This included $3.8 billion in dividends and equivalents and $19 billion through open market repurchases of 133 million Apple shares. We ended the quarter with $165 billion in cash and marketable securities. We repaid $1.4 billion in maturing debt and decreased commercial paper by $8.2 billion, leaving us with total debt of $111 billion. As a result, net cash was $54 billion at the end of the quarter, and we maintain our goal of becoming net cash-neutral over time. As we move into the March quarter, I'd like to review our outlook, which includes the types of forward-looking information that Tejas referred to at the beginning of the call. Given the continued uncertainty around the world in the near term, we are not providing revenue guidance, but we are sharing some directional insights based on the assumption that the macroeconomic outlook and COVID-related impacts to our business do not worsen from what we are projecting today for the current quarter. In total, we expect our March quarter year-over-year revenue performance to be similar to the December quarter. This represents an acceleration in our underlying year-over-year business performance as the December quarter benefited from an extra week. Foreign exchange will continue to be a headwind, and we expect a negative year-over-year impact of 5 percentage points. For Services, we expect revenue to grow year-over-year while continuing to face macroeconomic headwinds in areas such as digital advertising and mobile gaming. For iPhone, we expect our March quarter year-over-year revenue performance to accelerate relative to the December quarter year-over-year revenue performance. For Mac and iPad, we expect revenue for both product categories to decline double digits year-over-year because of challenging compares and macroeconomic headwinds. We expect gross margin to be between 43.5% and 44.5%. We expect OpEx to be between $13.7 billion and $13.9 billion. We expect OI&E to be around negative $100 million, excluding any potential impact from the mark-to-market of minority investments, and our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividend of $0.23 per share of common stock payable on February 16, 2023, to shareholders of record as of February 13, 2023. With that, let's open the call to questions." }, { "speaker": "Tejas Gala", "text": "Thank you, Luca. [Operator Instructions]. Operator, may we have the first question, please." }, { "speaker": "Operator", "text": "[Operator Instructions]. Certainly. We will go ahead and take our first question from David Vogt with UBS." }, { "speaker": "David Vogt", "text": "So Tim, and maybe this is for Luca as well. You talked about the supply chain returning back to normal after a very difficult October, November, but we're still seeing some disruptions across tech products, whether it's enterprise or consumer-facing. How do you think about your supply chain and maybe the levels of inventory or builds that you might need as we go forward to sort of insulate your business from these sort of episodic disruptions? Have you changed your view? And if so, how does that affect ultimately margins and sort of your balance sheet and cash flow items going forward?" }, { "speaker": "Timothy Cook", "text": "This is Tim, David. From a supply point of view, we did see disruption from early November through most of December. And from a supply chain point of view, we're now at a point where production is what we need it to be. And so the problem is behind us. In terms of going forward in the supply chain, we build our products everywhere. There are component parts coming from many different countries in the world, and the final assembly coming from 3 countries in the world on just iPhone. And so we continue to optimize it. We'll continue to optimize it over time and change it to continue to improve. I think when you sort of zoom out and back up from it, the last 3 years have been a pretty difficult time between COVID and silicon shortages and the like. And I think it's -- I think we have had a very resilient supply chain in the aggregate. In terms of supply for this quarter, which I think was one of your points, I think we're in decent supply on most products for the quarter currently." }, { "speaker": "Operator", "text": "Our next question is from Shannon Cross of Credit Suisse." }, { "speaker": "Shannon Cross", "text": "Luca, I wanted to dig a bit more into the commentary on gross margins. The guidance, especially at 43.5% to 44.5%, is obviously quite strong. So I'm wondering what's helping you out there, assume mix and some other things. And then how should we think about what currency and hedge is going to do as we look forward? And then I have a follow-up." }, { "speaker": "Luca Maestri", "text": "Shannon, yes, I mean, we've had good margin for the December quarter to start with. We reported 43%. Obviously, in December, we have the benefit of leverage because of the seasonality of the business, but we also had favorable mix across the board. Of course, foreign exchange is an issue right now. In the December quarter on a sequential basis, foreign exchange was a negative 110 basis points for us. And on a year-over-year basis, it's 300 basis points. So obviously, the FX environment has changed a lot during the last 12 months. For March, yes, we've seen a margin expansion, 43.5% to 44.5%. We're doing a lot of work around cost, of course. Mix will continue to help, both within categories and services mix as we move away from the holiday season. But we're doing a lot of work on the cost structure, and that is paying off. Foreign exchange is still a negative, about 50 basis points sequentially, but it's mitigating. The last couple of weeks, the dollar has weakened a bit. And so hopefully, as we go through the year, hopefully, things will improve. But for now, as you correctly state, we are in a good position on margins." }, { "speaker": "Shannon Cross", "text": "And then, Tim, can you talk a bit about China? What you're seeing -- obviously, you've had the issues with production, but I mean more on the demand side. As we've gotten through Chinese New Year and the opening, I'm just wondering, are you seeing the Chinese consumer come back? What are they buying? And how are you thinking about your position there?" }, { "speaker": "Timothy Cook", "text": "Shannon, last quarter, we declined by 7% on a reported basis, but we actually grew on a constant currency basis. And that was despite some significant -- the supply constraints that we talked about earlier. And obviously, the sort of the COVID restrictions throughout China that happened in various different places throughout the country also impacted the demand during the quarter. When you look at the opening that started happening in December, we saw a marked change in traffic in our stores as compared to November. And that followed through to demand as well. And I don't want to get into January. We've obviously -- January is included in the guidance, or the color rather, that Luca provided earlier. But we did see a marked change from December compared to November." }, { "speaker": "Operator", "text": "Our next question is from Erik Woodring of Morgan Stanley." }, { "speaker": "Erik Woodring", "text": "Maybe, Tim, first one for you. That 2 billion installed base -- device installed base figure, that's up, I believe, 200 million units year-over-year. That implies the strongest annual gain in new devices in your installed base basically as far back as you've provided those data points. And so I guess my 2 questions are: one, do you -- can you provide the installed base for the iPhone at year-end? And then two, is there anything that you see in this new cohort of users that might look different or similar to past cohorts, either by demographic or regions or monetization ramp? And then I have a follow-up." }, { "speaker": "Timothy Cook", "text": "Yes. The installed base is now over 2 billion active devices, as you mentioned. And we set records across each geographic segment and major product category. And so it was a broad-based change. Two -- I'll correct one thing you said, it's up over 150 million year-over-year. The last report we reported to be over 1.85. And so it's 150 million, which we're very proud of. We also saw strong double-digit in several of the emerging markets, which is very important to us. For example, India and Brazil as just 2 examples. So very, very strong. And obviously, it bodes well for the future." }, { "speaker": "Erik Woodring", "text": "And then, Luca, obviously, the December quarter was negatively impacted by the production challenges. Can you just maybe unpackage where channel inventory levels are today kind of across the iPhone broadly? And then what the data that you're seeing so far this quarter is telling you about iPhone demand deferral versus kind of iPhone demand destruction and perhaps pushing some upgrades later into the year rather than into the March quarter? And that's it for me." }, { "speaker": "Timothy Cook", "text": "Yes. Erik, I'll take that one as well. The channel inventory levels on iPhone, we obviously ended the December quarter below our target range given the supply challenges on iPhone 14 Pro and iPhone 14 Pro Max. But as you think about this, keep in mind that a year ago, we also exited the December quarter below our target inventory range because of supply challenges in the year ago quarter. Not related -- not the same issue, but just as a point. And so that hopefully gives you some flavor of that. In terms of what we're seeing in January, we've included in our color that Luca provided kind of our thinking. It's very hard to estimate the recapture because you have to know exactly what would have happened and how many people bought down. And it takes a while to get that -- to get those reports in during the quarter. And so we've made our best guess at it. In terms of the sizing of the constraint in Q1, what we estimate, although not with precision, is that we would -- I thought we believe iPhone would have grown during the quarter had it not been for the supply shortages. So hopefully, that provides you a little bit of color." }, { "speaker": "Operator", "text": "Our next question comes from Aaron Rakers of Wells Fargo." }, { "speaker": "Aaron Rakers", "text": "I have two as well, if I can. I guess the first kind of question, just going back on the gross margin line. Pretty good guidance into this March quarter. I'm curious if you unpack that a little bit specific around what you're seeing as far as maybe benefits from component pricing in the guidance, if you're embedding any of that at this point." }, { "speaker": "Luca Maestri", "text": "Yes. Of course, with our guidance, we try to capture every aspect of our cost structure. And obviously, components are a big portion of that. So definitely, that's included. And keep in mind, again, that foreign exchange -- I mentioned earlier, I think to Shannon, that the sequential negative on FX is 50 basis points, versus a year ago, it's 270 basis points. Obviously, the U.S. dollar has moved a lot over the last 12 months. So obviously, we need to find offsets and more to the negative FX in order to be able to provide this kind of guidance. And so obviously, components are a big part of that." }, { "speaker": "Aaron Rakers", "text": "Yes. And then kind of from a strategic perspective, given kind of the things that we're seeing out in some of your peer group, I'm curious, Tim, how you think about the role of AI in your strategy as far as particularly in the Services segment, whether you're not -- you see opportunities to excel monetization abilities within the paid subscriber base and whether or not AI, is it something that you're implementing a bit more strategically there." }, { "speaker": "Timothy Cook", "text": "Yes. It is a major focus of ours. It's incredible in terms of how it can enrich customers' lives. And you can look no further than some of the things that we announced in the fall with crash detection and fall detection or back a ways with ECG. I mean these things have literally saved people's lives. And so we see an enormous potential in this space to affect virtually everything we do. It's obviously a horizontal technology, not a vertical. And so it will affect every product and every service that we have." }, { "speaker": "Operator", "text": "Our next question comes from Amit Daryanani of Evercore." }, { "speaker": "Amit Daryanani", "text": "I guess the first one I have is, Tim, I think based on your earlier comments that iPhones would have grown ex the production issue that implied that maybe it's a $7 billion or so impact that you had in December quarter from the production challenges on the high-end models. I'm sure it's tough to see what happens this time around. But I think historically, when you've had production issues or things like this happen, what has the consumer behavior being typically? Do they tend to go down towards the lower end models and get the phone they want quickly? Or do they just defer the production? Just from a historical perspective, I think do you typically recover what's deferred out or no?" }, { "speaker": "Timothy Cook", "text": "It's very hard to estimate is the real answer because you have to know a lot of data, and it's usually only in hindsight that you have a more reasonable view of it. And so we put our best views in the color that Luca provided. That's kind of what I would say." }, { "speaker": "Amit Daryanani", "text": "All right. And then I guess maybe if I think about Services as you go forward. I know you had really good growth in Services, I think, over the last several years. But as you go forward in Services, what do you think drives the growth more so? Is it the expansion of your installed base? Or is it more going to be driven by ARPU going higher for you? I'm just curious, how do you think about those 2 buckets as you go forward?" }, { "speaker": "Luca Maestri", "text": "Amit, there's a number of things, and I've mentioned a few of them during the call. The first step is always the installed base. Installed base is the engine for Services growth. And the fact that the installed base is growing very nicely, and it's growing in a lot of emerging markets, it's growing even faster, that gives us a larger addressable pool of customers. So that's incredibly important. The second one is that we are seeing that the level of engagement of our customers already in our ecosystem continues to grow. We -- I mentioned that both transacting accounts and paid accounts grew double digits. And so that bodes very well for the future. And we have a lot of transacting accounts that kind of moved to paid accounts over time. The other aspect that is very important for us is to continue constantly to improve the reach and the quality of our services. And I give the example of Apple Pay, which it's a great example because we started off primarily in the United States. Now we've taken it to 70 markets, millions of merchants. And so obviously, payment services are -- continue to set new highs all the time for us. And then as you've seen over the last few years, we also launched new services over time, and that obviously contributes to the growth. We're very excited. And when we look at the behavior of our installed base, we think it's very promising for the continued growth of our Services business." }, { "speaker": "Operator", "text": "Our next question comes from Harsh Kumar of Piper Sandler." }, { "speaker": "Harsh Kumar", "text": "Tim, I had a quick question on emerging markets. Seems like you're making a lot of strides in India. Potentially wanted to understand the kind of share you have in China and India. And relative to that, what would be your aspirational but sort of achievable share in iPhones in those territories, whether it's units or revenues? And I was hoping to draw on your experience and maybe what you've seen in other countries where you've had some longer presence." }, { "speaker": "Timothy Cook", "text": "And looking at the business in India, we set a quarterly revenue record and grew very strong double digits year-over-year. And so we feel very good about how we performed, and that was -- that's despite the headwinds that we've talked about. Taking a step back, India is a hugely exciting market for us and is a major focus. We brought the online store there in 2020. We will soon bring Apple retail there. So we're putting a lot of emphasis on the market. There's been a lot done from a financing options and trade-ins to make products more affordable and give people more options to buy. And so there's a lot going on there. We are, in essence, taking what we learned in China years ago and how we scale to China and bringing that to bear. And I don't have the exact market shares in front of me, but I think you would see that from a market share point of view that we grew around the world last quarter despite -- on iPhone despite the challenges that we've had on the supply side. And I wouldn't expect to have a difference in those 2 markets." }, { "speaker": "Harsh Kumar", "text": "Understood. And for my follow-up, I had a sort of interesting theoretical question on pricing. Assuming we get the CHIPS Act passed, and there's a whole bunch of manufacturing that happens in U.S. and other territories that are potentially somewhat more expensive than the ones you might be now, have you -- has the company done any studies to gauge the elasticity of demand relative to small price increases in your products?" }, { "speaker": "Timothy Cook", "text": "We have experience in that, but I wouldn't necessarily draw the same conclusion that you have in terms of the cost of the product. I -- we don't know at this point exactly what that will be, but we're all in, in terms of being the largest customer for TSMC in Arizona. I'm very proud to take part in that. That's what I would say about that." }, { "speaker": "Operator", "text": "Our next question comes from Wamsi Mohan of Bank of America." }, { "speaker": "Wamsi Mohan", "text": "Tim, you've done a phenomenal job of driving consumer choice towards higher-end products within your portfolio. How would you compare this cycle for iPhones if you were to segment the Pro versus non-Pro models versus the cycles from the past few years? And do you think this move to higher ASPs is sustainable? Or do you think it reverses in a tighter consumer spending environment? And I have a follow-up." }, { "speaker": "Timothy Cook", "text": "The Pro has been a -- the 14 Pro and the 14 Pro Max have done extremely well up until the point where we had a supply shortage and couldn't provide them -- couldn't provide the total of the demand. And so it's definitely a strong Pro cycle. I think there's a number of reasons for that, but the most important one is always the product. And I think the innovations and the product speak for themselves. And we feel very good about the product that we announced back in September and are happy to now be at a point where we're shipping to the demand." }, { "speaker": "Wamsi Mohan", "text": "And Tim, do you think that this move to sort of higher ASPs that has happened over the last few years is sustainable? Or could it sustain in this very tough macro environment that you've cited?" }, { "speaker": "Timothy Cook", "text": "I wouldn't want to predict, but I would say that the smartphone for us, the iPhone has become so integral into people's lives. It contains their contacts and their health information and their banking information and their smart home and so many different parts of their lives, their payment vehicle and -- for many people. And so I think people are willing to really stretch to get the best they can afford in that category." }, { "speaker": "Wamsi Mohan", "text": "Okay. Great. And Tim, you clearly emphasize the focus and importance of the installed base. If we think about the absolute grit of the installed base from 1 billion to 2 billion over 7 years from a device standpoint, how should we think about the penetration of services or the growth in paying customers on services or that time frame? Is that penetration rate increasing or decreasing? How fast is that growing relative to the growth of the overall installed base?" }, { "speaker": "Luca Maestri", "text": "Wamsi, it's Luca. Yes, of course, we keep track of that. It's really important for us. Over the last 7 years, as we doubled the installed base, we've seen a growing engagement of our customers on the platform. That happens, first of all, by customers transacting on the platform and then moving to paid accounts. So starting to pay for some of the services. That percentage of paid accounts tends to grow over time. We've seen it in developed markets. We see it in emerging markets. And that is due to some of the reasons that I was explaining earlier, including the fact that we made it easier for our customers to get engaged on the platform. For example, we offer multiple payment methods in many countries. And we've made it easier to explore for more services because we've added a lot of services on the platform over the last 7 years. So to your question, of course, higher engagement means a higher percentage of paid accounts over time." }, { "speaker": "Operator", "text": "Our next question comes from Richard Kramer of Arete Research LLP." }, { "speaker": "Tejas Gala", "text": "Operator, can we move on to the next?" }, { "speaker": "Operator", "text": "Next, we'll hear from Jim Suva of Citigroup." }, { "speaker": "James Suva", "text": "Tim and Luca, you both mentioned earlier on the Q&A a little bit about India. I was wondering if we're now entering a situation of even more opportunity because we've exited COVID, we've exited countries with different COVID criteria. We've also seen India build out its higher speed transmissions. And your market is -- shares tremendously underrepresented there. And it appears with the supply chain, you're looking at diversifying kind of operational risk not specific to any country, but just overall. Now you look at potentially opening up stores and stuff. Am I right that, that's the way you look at it is it's even more prime for opportunity now than ever? And once you start opening up stores there, you could just see a complete green shoot of adoptions or any additional commentary on your view on India as now we've navigated COVID and supply chain and so many challenges over the past 2 years?" }, { "speaker": "Timothy Cook", "text": "Yes. Jim, we actually did fairly well through COVID in India. And I'm even more bullish now on the other side of it, or hopefully, on the other side of it. And that's the reason why we're investing there. We're bringing retail there and bringing the online store there and putting a significant amount of energy there. I'm very bullish on India." }, { "speaker": "James Suva", "text": "And then as my quick follow-up, you had mentioned that Services, not necessarily specific to India, but Services overall were better than expected. And of course, supply chain was more challenged than expected. So what was the bridge factor of Services being better than expected on upside? Was it like advertising or apps or paid monthly subscriptions? Or what were kind of the things that really surprised you to the upside on Services?" }, { "speaker": "Luca Maestri", "text": "It was -- Jim, it's Luca. It's primarily the -- this level of engagement we saw, which then reflects into the, as you said, the paid subscriptions. We saw very good results in our cloud services business in payment services. Music was very strong. So we had a number of categories that set new records, all-time records. And they did a bit better than we were expecting at the beginning of the quarter. And so Tim mentioned that during, I think, his prepared remarks that when you look at it in constant currency, we grew services double digits. And that was on top of a 24% increase a year ago. So it's very sustained growth that we're seeing." }, { "speaker": "Operator", "text": "Our next question will come from Krish Sankar of Cowen and Company." }, { "speaker": "Krish Sankar", "text": "I have 2. The first one, Tim and Luca, you mentioned how the macro did soften, and it has an impact. And as consumers tighten their belt, when you look across your hardware products and service businesses, where are you seeing the biggest impact and where are you seeing the least impact from the softening macro? And then I had a quick follow-up." }, { "speaker": "Timothy Cook", "text": "We think there were some impact across the products and in Services. Probably, the ones that we saw the most impact on were Mac and Wearables. You can see that in those numbers. And probably, the least would have been iPhone." }, { "speaker": "Krish Sankar", "text": "Got it. Got it. Very helpful, Tim. And then just a quick follow-up on the Mac. The PC industry is expecting a decline in PC shipments this year also. How do you think about the Mac relative to kind of like where the PC industry as a whole is expecting the shipments to end up? Is there any color you can give on that?" }, { "speaker": "Timothy Cook", "text": "The industry is very challenged, as you say. It's -- the industry is contracting. I think from us, though, is -- and I don't know how this year will play out, so I don't want to predict the year. But over the long run, we have a market that is a reasonable-sized market, a big market. And we have low share, and we have a competitive advantage with Apple silicon. And so strategically, I think we're well positioned in the market, albeit I think it will be a little rough in the short term." }, { "speaker": "Tejas Gala", "text": "A replay of today's call will be available for 2 weeks on Apple Podcasts, as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 6541285, followed by the pound sign. These replays will be available by approximately 5 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. Financial analysts can contact me with additional questions at 669-227-2402. Thank you again for joining us." }, { "speaker": "Operator", "text": "And once again, this does conclude today's conference. We do appreciate your participation." } ]	Apple Inc.	24,937
AAPL	4	2,024	2024-10-31 17:00:00	Suhasini Chandramouli: Good afternoon, and welcome to the Apple Q4 Fiscal Year 2024 Earnings Conference Call. My name is Suhasini Chandramouli, Director of Investor Relations. Today's call is being recorded. Speaking first today are Apple CEO, Tim Cook, and CFO, Luca Maestri, and they'll be joined by Kevan Parekh, Vice President of Financial Planning and Analysis. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, and future business outlook, including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. Additionally, today's discussion will refer to certain non-GAAP financial measures. You can find a reconciliation of these measures in our fourth quarter and full year 2024 earnings release, which is available on our Investor Relations website. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook: Thank you, Suhasini. Good afternoon, everyone, and thanks for joining the call. Today, Apple is reporting revenue of $94.9 billion, a September quarter record and up 6% from a year ago. iPhone grew in every geographic segment, marking a new September quarter revenue record for the category, and Services set an all-time revenue record, up 12% year-over-year. We also set September quarter segment revenue records in the Americas, Europe, and the Rest of Asia Pacific, as well as in a large number of countries, including the United States, Brazil, Mexico, France, the UK, Korea, Malaysia, Thailand, Saudi Arabia, and the UAE. And we continue to be excited by the enthusiasm we're seeing in India, where we set an all-time revenue record. This has been an extraordinary year of innovation at Apple. We brought the revolutionary Apple Vision Pro to customers in February, which brings users tomorrow's technology today. And in June, we announced Apple Intelligence, a remarkable personal intelligence system that combines the power of generative models with personal context to deliver intelligence that is incredibly useful and relevant. Apple Intelligence marks the beginning of a new chapter for Apple innovation and redefines privacy and AI by extending our groundbreaking approach to privacy into the cloud with Private Cloud Compute. Earlier this week, we made the first set of Apple Intelligence features available in US English for iPhone, iPad, and Mac users, with systemwide Writing Tools that help you refine your writing, a more natural and conversational Siri, a more intelligent Photos app, including the ability to create movies simply by typing a description, and new ways to prioritize and stay in the moment with notification summaries and priority messages. And we look forward to additional intelligence features in December, with even more powerful Writing Tools, a new visual intelligence experience that builds on Apple Intelligence, and ChatGPT integration, as well as localized English in several countries, including the UK, Australia, and Canada. These features have already been provided to developers and we're getting great feedback. More features will be rolling out in the coming months, as well as support for more languages, and this is just the beginning. Now, I'll turn to our results for the quarter, beginning with iPhone. iPhone revenues set a September quarter record of $46.2 billion, up 6% from a year ago, with growth in every geographic segment. With the introduction of Apple Intelligence, we're beginning a new era for iPhone. iPhone 16, powered by A18, is equipped with an incredible new 48-megapixel Fusion camera, fantastic photo experiences, and the addition of the action button and camera control. An iPhone 16 Pro is the most advanced iPhone we've ever made, powered by A18 Pro and featuring even larger displays, an industry-leading pro camera system with camera control, and studio quality mics, all with a huge leap in battery life. Turning to Mac, revenue was $7.7 billion, up 2% from a year ago. Just this week, we brought a new generation of Apple Silicon to Mac, M4, M4 Pro, and M4 Max. From blazing fast performance to Apple's most advanced neural engine yet, our latest chips can easily tackle incredibly complex workflows, and they ensure our newest Macs will be the best personal computers for AI the instant they hit stores. With the newest additions to our Mac lineup, customers can choose the Mac that's just right for them, whether that's iMac, the world's best and most beautiful all-in-one; MacBook Air, the world's most popular laptop now with double the starting memory; MacBook Pro, the best Pro notebook anywhere; or the incredible, mighty new Mac mini, our first-ever carbon-neutral Mac. iPad revenue was $7 billion, 8% higher year-over-year. iPad is unlike any other product on the market today, and it's become an essential device in homes, schools, and businesses of all sizes. Recently, we were thrilled to introduce the newest iPad mini, featuring an ultra-compact design built for Apple Intelligence with support for Apple Pencil Pro. It's been a big year for iPad. iPad Air was popular with students and teachers as they got back to school this year, while creators are pushing the boundaries of what's possible with the M4-powered iPad Pro. In Wearables, Home and Accessories, revenue was $9 billion, down 3% from a year ago. During the quarter, we launched the all-new Apple Watch Series 10, bringing a beautiful new design and new capabilities to the world's most popular watch that make it even more powerful, intelligent, and sophisticated. It's the thinnest Apple Watch yet, making it more comfortable than ever, while offering the biggest, most advanced display. watchOS 11 brings some huge new health and fitness insights to users, including sleep apnea notifications, which help to alert people with a potentially serious but often undiagnosed condition. We're proud of the impact we make through our health innovations on watch, and I'm grateful for every note I receive about the importance of watch in people's lives. With AirPods 4, we broke a new ground in comfort and design with our best-ever open-ear headphones available for the first time with active noise cancellation. And we were especially pleased to unveil revolutionary end-to-end hearing health capabilities for AirPods Pro 2 with hearing protection, hearing test, and hearing aid features. These just became available in a software update this week, and we believe this will make a meaningful difference in our users' lives. I've already started getting notes from customers calling the experience life changing. And Apple Vision Pro continues to deliver spatial experiences that weren't possible before, including immersive entertainment like the new short film, Submerged, which gives people a view into the unique storytelling power made possible by spatial computing. Vision Pro has more than 2,500 native spatial apps and 1.5 million compatible apps for visionOS 2, as well as applications companies are building to reimagine how they work. Vision Pro continues to inspire awe in its users, and we're just scratching the surface of what's possible. And just yesterday, we announced we're bringing Vision Pro to Korea and the UAE. As I mentioned earlier, Services achieved an all-time revenue record of $25 billion, up 12% from a year ago, and with all-time revenue records across most of our categories. With Apple TV+, we love celebrating the craft of great storytellers who know how to put on a show. Audiences love to discover new movies like Wolfs, explore acclaimed new series like Disclaimer, and dive back into returning favorites like Slow Horses and Shrinking. Apple TV+ productions have become fixtures at award shows, earning more than 2,300 nominations and more than 500 wins today. Apple also offers a live sports experience in a league of its own with MLS Season Pass, and subscribers have been cheering on their favorite teams in the MLS Cup playoffs. This month, we also marked 10 years of Apple Pay. There's always something magical about being able to buy groceries or pay for movie tickets seamlessly with your Apple device. Today, users choose Apple Pay for purchases across tens of millions of retailers worldwide. And we're excited to make the Apple Pay experience even better, with the option to redeem rewards and access loans from credit cards, debit cards, and other lenders right at checkout. Whenever we celebrate big moments, Apple Stores are the best places to share them with customers. I had an incredible time during launch day in September alongside our team at Apple Fifth Avenue, where energy and enthusiasm filled the air. And in stores all over the world, customers are eager to get a closer look at our latest innovations. We also opened two new stores during the quarter and we can't wait to bring four new stores to customers in India. We're passionate about education and believe technology has a vital role to play in both helping teachers to inspire their students and students to learn about the world around them. In honor of World Teachers' Day, Apple was proud to share new resources for teachers to engage their students in ways that aim to make learning easy and fun. Additionally, we've expanded our education grant program into 100 new schools and communities, helping with everything from access to technology, to educator resources, to scholarships and financial support. As we near the end of the year, we're proud of the progress we've made in our efforts to be carbon-neutral across our entire footprint by the end of the decade. As I mentioned earlier, we were thrilled to introduce our first-ever carbon-neutral Mac with the latest Mac mini. And in another milestone, customers can choose a carbon-neutral option of any Apple Watch. These achievements are amazing for all of us at Apple, and we are determined to reach our 2030 goal. At Apple, across everything we do, we manage for the long term, because we're always thinking about what comes next, the next great challenge, the next innovative idea, the next big breakthrough. As we close out the year, we have the best lineup we've ever had going into the holiday season, including Apple Intelligence, which marks the start of a new chapter for our products. This is just the beginning of what we believe generative AI can do, and I couldn't be more excited for what's to come. Before I hand it over to Luca, with Luca transitioning to a new role with Apple, this will be the final time he's joining our call. So, I just wanted to take a moment to recognize his extraordinary service as Apple's CFO and to thank him for his partnership. I am deeply grateful. In his 10 years in the role, Luca has done truly exceptional work in shaping Apple as we know it today. He has helped manage Apple for the long term, thoughtfully and deliberately. He has helped us enrich the lives of so many around the world, and he has been a leader that people look up to and have learned so much from. I have incredible confidence in our incoming CFO, Kevan Parekh, and we look forward to more of you meeting and working with him going forward. With that, I'll turn it over to Luca. Luca Maestri: Good afternoon, everyone. And thank you, Tim, for the very kind words. Serving as Apple's CFO has been a real privilege and an amazing journey, and I've greatly appreciated the support from our investors and the analyst community over the years. Kevan is exceptional, and I know you will enjoy interacting with him going forward. Let me now turn to the results for the fourth quarter of our fiscal year. We're very pleased to report a new September quarter revenue record of $94.9 billion, up 6% year-over-year. We grew in the vast majority of the markets we track and achieved September quarter revenue records in the Americas, Europe and Rest of Asia Pacific. Products revenue was $70 billion, up 4% year-over-year, driven by growth in iPhone, iPad and Mac. Our installed base of active devices reached an all-time high across all products and geographic segments, thanks to very high levels of customer satisfaction and loyalty and a large number of customers who are new to our products. Services revenue reached an all-time record of $25 billion, up 12% year-over-year. We saw broad-based strength around the world, reaching all-time records in both developed and emerging markets with double-digit growth and record results across most services categories. Company gross margin was 46.2%, near the high end of our guidance range. Products gross margin was 36.3%, up 100 basis points sequentially, primarily driven by favorable mix. Services gross margin was 74%, unchanged from the prior quarter. Operating expenses of $14.3 billion were at the midpoint of the guidance range we provided at the beginning of the quarter and up 6% year-over-year. During the quarter, we recorded a one-time income tax charge of $10.2 billion, which relates to the impact of the reversal of the European General Court's State Aid decision. When we exclude this one-time charge, net income was $25 billion and diluted earnings per share were a $1.64, up 12% year-over-year, and a September quarter record. Operating cash flow was very strong at $26.8 billion, a new September quarter record. Let me now get into more detail for each of our revenue categories. iPhone revenue was $46.2 billion, up 6% year-over-year, and a September quarter record in total and across several markets, including the US, the Middle East, Korea, and South Asia. The iPhone active installed base grew to a new all-time high in total and in every geographic segment. During the September quarter, many iPhone models were among the top-selling smartphones around the world. In fact, according to a survey from Kantar, iPhone was the top-selling model in the US, Urban China, the UK, Australia, and Japan. We continue to see high levels of customer satisfaction for the iPhone 15 family, with 451 Research recently measuring it at 98% in the US. Mac revenue was $7.7 billion, up 2% year-over-year, driven by the strength in MacBook Air. Customers have been loving the performance of Apple Silicon on Mac and we are very excited to bring the latest M4 family of chips to the lineup. The Mac installed base reached an all-time high with about half of customers in the quarter being new to Mac. And in the latest reports from 451 Research, customer satisfaction was 95% in the US. iPad generated $7 billion in revenue, up 8% year-over-year. In addition to growth in developed markets, we also saw strong performance in many emerging markets, with double-digit growth in Mexico, Brazil, the Middle East, India and South Asia. The iPad installed base reached another all-time high, and over half of the customers who purchased iPads during the quarter were new to the product. Also, customer satisfaction was recently measured at 97% in the US. Wearables, Home and Accessories revenue was $9 billion, down 3% year-over-year. The Apple Watch installed base reached a new all-time high, with over half of customers purchasing an Apple Watch during the quarter being new to the product. And the latest reports from 451 Research indicated customer satisfaction of 96% for watch in the US. Our Services revenue reached an all-time record of $25 billion, growing 12% year-over-year. Services continue to see strong momentum with the growth of our installed base of active devices setting a solid foundation for the future expansion of our ecosystem. And we see increased customer engagement with our services offerings. Both transacting accounts and paid accounts reached a new all-time high, with paid accounts growing double-digits year-over-year. Paid subscriptions also grew double-digits. We have well over 1 billion paid subscriptions across the services on our platform, more than double the number we had only four years ago. And as always, we remain focused on improving the breadth and quality of our services from new games on Apple Arcade to new features like Tap to Cash and pay with installments using Apple Pay to many successful new and returning shows on Apple TV+. This past quarter, we celebrated the five-year anniversary of Apple Card, which was ranked #1 in customer satisfaction among co-branded credit cards by J.D. Power for the fourth year in a row. Turning to enterprise, we continue to see strong demand across our products and services. NVIDIA launched its Mac as a choice program supported by AppleCare for Enterprise and Apple Professional Services with over 10,000 Macs deployed worldwide. And Novartis, a leading global pharmaceutical company, recently chose iPhone 16 as the standard mobile device for all employees. We also see continued momentum with Apple Vision Pro in the enterprise space. UC San Diego Health is the first hospital in the world to test spatial computing apps on Apple Vision Pro in clinical trials for patient surgery in the operating room. Let me now turn to our cash position and capital return program. We ended the quarter with $157 billion in cash and marketable securities. We repaid $2.6 billion in maturing debt and increased commercial paper by $7 billion, leaving us with total debt of $107 billion. As a result, net cash was $50 billion at the end of the quarter. During the quarter, we returned over $29 billion to shareholders, including $3.8 billion in dividends and equivalents and $25 billion through open market repurchases of 112 million Apple shares. As we move ahead into the December quarter, I'd like to review our outlook, which includes the types of forward-looking information that Suhasini referred to at the beginning of the call. The color we're providing today assumes that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter. We expect our December quarter total company revenue to grow low- to mid-single digits year-over-year. We expect Services revenue to grow double-digits at a rate similar to what we reported in the fiscal year 2024. We expect gross margin to be between 46% and 47%. We expect OpEx to be between $15.3 billion and $15.5 billion. We expect OI&E to be around negative $250 million, excluding any potential impact from the mark to market of minority investments. And our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividend of $0.25 per share of common stock payable on November 14, 2024 to shareholders of record as of November 11, 2024. With that, let us open the call to questions. Suhasini Chandramouli: Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please? Operator: Certainly. We will go ahead and take our first question from Michael Ng with Goldman Sachs. Please go ahead. Michael Ng: Hey, good afternoon. I just have two. The first one is for Tim on Apple Intelligence. I was wondering if you could just expand a little bit on some of the early feedback to Apple Intelligence both for iOS 18.1, but also the developer beta so far, and whether you would attribute Apple Intelligence to any of the strong iPhone performance that we've seen to date. Thanks. Tim Cook: Thanks, Michael. As I noted in my comments, just this week on Monday, we made the first set of Apple Intelligence features available in US English for iPhone, iPad, and Mac. This includes things like systemwide Writing Tools that help you refine your writing, a more natural conversational Siri, more intelligent Photos app, including the ability to create movies, simply by typing a description, which is really cool, and new ways to prioritize and stay in the moment with notification summaries and priority messages. There's also email summaries and email priority. We're getting a lot of positive feedback from developers and customers. And in fact, if you just look at the first three days, which is all we have obviously from Monday, the 18.1 adoption is twice as fast as the 17.1 adoption was in the year-ago quarter. And so, there's definitely interest out there for Apple Intelligence. Carrying on in the quarter, we are looking forward to bringing even more features in December, and this will include even more powerful Writing Tools and visual intelligence experience that builds on Apple Intelligence, and ChatGPT integration in addition to other features, as well as we'll bring localized English to several countries that include the UK, Australia, and Canada. So, it's going to be quite a software quarter between the release on Monday and the release in December. And then, as we turn the corner to '25, we'll have more languages rolling out, starting in April as well and more features as well. And so, it's a very strong drumbeat, and we couldn't be more excited about it. Michael Ng: Great. Thank you very much. And my second one just for Luca. First, congratulations again, Luca, on the new role and it's been a real privilege being able to spend some time with you. A question that I think will overlap with your new role as well. Could you just talk a little bit about the CapEx outlook and whether investments in things like Private Cloud Compute could change the historical CapEx range of roughly $10 billion a year? Thank you very much. Luca Maestri: Thank you, Michael. On the CapEx front, I've mentioned before a number of times, we have a bit of a hybrid model in the way we run our data centers. In some cases, we use our own data centers. In some cases, we use, third-party providers. So, our CapEx numbers may not be fully comparable with others. But, obviously, we are rolling out these features, Apple Intelligence features already now, and so we are making all the capacity that is needed available for these features. You will see in our 10-K the amount of CapEx that we've incurred during the course of fiscal '24, and we will -- in fiscal '25, we will continue to make all the investments that are necessary, and of course, the investments in AI-related CapEx will be made. Michael Ng: Great. Thank you, Tim. Thank you, Luca. Suhasini Chandramouli: All right. Thanks, Mike. Can we have the next question, please? Operator: Our next question is from Erik Woodring with Morgan Stanley. Please go ahead. Erik Woodring: Great. Thanks so much for taking my questions. I have two as well. Tim, maybe if we start with you, I think each of the last four years you've exited the December quarter with iPhone demand outpacing supply. As we look to this quarter in the iPhone 16 cycle, lead times are relatively short. There are no known supply shortages. And I'm just curious whether you've been able to maybe get a better read on early cycle iPhone demand this year relative to past years. And if so, what you've learned about upgrade rates, switching rates, trade-ups versus trading down and being more price sensitive? And overall, any impact that Apple Intelligence may have on iPhone 16 sales? And then, I have a follow-up. Thank you. Tim Cook: There's a lot there. On Apple Intelligence, we believe it's a compelling upgrade reason. And we'll -- but we just launched it three days ago and so what we've got now from a data point point of view is the number I just referenced that 18.1 has twice the adoption rate of 17.1. So, that clearly shows a level of interest out there. In terms of exiting the December quarter with demand greater than supply, that's not my recollection that, that happened for all four of the years. We clearly had cases during COVID where there were disruptions and that's the some spilled over, but in a more regular environment where we're not having something, a 100-year flood kind of thing, we would -- our desire is to get into balance as quickly as possible. We don't want customers having to wait for products. And so, if you look at how we've done this year, we did that very quickly on the 16, on the 16 Pro family, the Pro and the Pro Max, we've been constrained in October, but we believe that soon we'll be out of constraint. And so, that's a good sign from our point of view. Keep in mind that, that's a function of supply and demand, not one side or the other. And we've been preparing for the quarter for a while. So that's what I would say there. Erik Woodring: Okay. That's really helpful. Thank you, Tim. Tim Cook: Yeah, thank you. Erik Woodring: And then, Luca, if I just turn to you, obviously, it's been a pleasure working with you, and we wish you all the best in the next role. There's plenty of debate in the market right now about input costs and commodity prices, and the impact that will have on gross margins. Historically, you do guide gross margins up 50 basis points sequentially, which you just told us about for the December quarter. So, can you maybe just help us understand your view of component prices and broadly whether you still see those as tailwinds to gross margins and how sustainable that tailwind might be, or whether that should become a headwind as we look forward? Thanks so much. Luca Maestri: Yes, Erik. As you know, our gross margins are a factor of many, many variables. Commodities, of course, are important. They're not the only factor. But specifically on commodities, I can tell you that both for the September quarter and what we expect for the December quarter, most commodities are going to move down in price, while NAND and DRAM increased during the course of the September quarter and we expect them to increase during the December quarter. We are very pleased with the level of gross margins that we've reported during the course of the year. The entire fiscal year of '24, they're really, for our company, record levels of gross margin, and obviously guiding to 46% to 47% for the December quarter with all the new technologies that we've included in the products, with all the new features that Tim has talked about, a lot of new products across the board, I think it's a very good sign. Erik Woodring: Great. Thanks so much, Luca. Suhasini Chandramouli: Thank you, Erik. Can we have the next question, please? Operator: Our next question is from Ben Reitzes from Melius. Please go ahead. Ben Reitzes: Hey, thanks a lot. And I'll echo those comments about Luca. Miss you, and good luck. And my question is with regard to iPhone again, and with regard to the fourth quarter, is my first question -- or sorry, the fourth calendar quarter, your first quarter. When you look at mid- to low-single-digit revenue growth, do you expect the iPhone to grow faster? And what are you thinking about in the answer to that question with regard to China, which keeps improving each quarter? Thanks very much. And then, I have just a follow-up. Thanks. Luca Maestri: Ben, we are not providing that level of color today. Yes, we've said that we expect total company revenue to grow low- to mid-single digits. Keep in mind, Apple Intelligence, as Tim said, is rolling out over time, both features and languages. And we just had a number of exciting launches just this week from the Apple Intelligence feature to the new Mac. So, we leave it at that. We've given you the total for the company and some pretty good direction on Services, which we expect to continue to grow at a similar rate than what we've seen in fiscal '24. Ben Reitzes: Great. Thanks, Luca. Hey, Tim, I wanted to ask you, I mean, you guys are well aware a lot of the noise out there, people chattering about builds, lead times, and you guys are guiding for mid- to low-single-digit growth. That certainly doesn't sound like alarm bells here, vis-a-vis what you guys must be hearing. And I know you guys are just running your business and doing the best you can, but you have a lot of perspective now, Tim. What are people missing here? And it certainly just sounds like -- you guys are typically conservative. That guide for revenue is certainly sounds like [this guy is certainly not falling] (ph), and you have a pretty good product cycle. So, what do you think people are missing and what are you excited about? Thanks so much, Tim. Tim Cook: Ben, I could not be more excited about Apple Intelligence and the rollout that we've got in front of us. I'm on the -- I'm obviously on future releases as well, working on it and it's changing my daily life. I'm super excited about the health features that we're rolling out. If the number of emails I'm already getting from customers that have taken a hearing test and are using their AirPods Pro 2 as a hearing aid, are just -- are staggering and heartwarming to read. I'm also thrilled about sleep apnea and the notification there that we'll have through the watch. This week is a very exciting week for us because we just rolled out three days -- three launches of different, Macs and desktops and laptops. And so, we have a lot of things on the docket and it's definitely the strongest lineup we've ever had going into the holiday season. In terms of the noise, I tune it out, because if not, it would just be, deafening. And so that that's what I do, I can't speak for everybody else, but that's what I do. Ben Reitzes: Thanks a lot, Tim. Appreciate it. Tim Cook: Thanks, Ben. Suhasini Chandramouli: Thank you, Ben. Can we have the next question, please? Operator: Our next question is from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani: Good afternoon. Thanks for taking my questions. I have two as well. And Luca, best of luck in the future. It's been a pleasure working with you. I guess the first one I have is, away from iPhones, on the Services side, you're adding $100 billion run rate with Services today, which is a phenomenal achievement by itself. As you look at the Services portfolio today, can you just talk about how much of this business do you think is reoccurring versus transactional? And are the growth rates different between the subscription portfolio over here versus transactional portfolio? Luca Maestri: Yes, Amit, I'll take this one. Yes, we are, first of all, very, very happy with -- it's an important milestone. Of course, we've got to a run rate of $100 billion. You look back just a few years ago, and the growth has been phenomenal. We're very pleased. We've got a very diversified portfolio of services. And over the years, the amount that is recurring in nature has grown and is growing faster than the transactional piece. We have well over 1 billion paid subscriptions on our platform right now between our own services and third-party services. That continues to grow strong double-digits. So, we feel very, very good. And, essentially, to your question, yes, the recurring portion is growing faster than the transactional one. Amit Daryanani: Got it. If I can just follow-up, if I look at the growth rates across the different geographies, there's always concern around China when it comes to iPhone demand, I feel, but the performance in September looks fairly good. I wonder if you just touch on, what are you seeing from a demand perspective in China? If the recent stimulus plan in China could essentially be a catalyst for iPhone? And then, EMEA really stood out with double-digit growth. Maybe you can just flush that out as well for us. Thank you. Tim Cook: Yeah, I'll take the China question. If you look at how we did for the quarter, we were relatively flat year-over-year. And a key component of that improvement relative to the year-over-year performance that we had been achieving is that there was a sequential improvement in foreign exchange. And so that helped us out. As you know, it's been a headwind that we've been reporting for a period of time. And -- but the other parts that are -- what else is going on there is that our installed base of the active devices reached an all-time high. We had the top two selling, smartphones in Urban China according to Kantar. The level of new customers that we have buying the products like Mac and iPad are well over 50%. Watch is over three quarters that are new to the product. And so, there's several positive signs there. In terms of the stimulus, it's a clear focus of the team there, but I'm not an economist and don't want to ad lib on the effect of it. Luca Maestri: On the Europe side, Amit, a number of things. As you see from our results during the quarter, Europe grew double-digits, 11%, and really, it was really good growth across the board, the different segments. They all did well. Keep in mind, our definition of Europe in our segment reporting includes a number of emerging markets, like Turkey, where we've grown very strongly, the Middle East. Tim mentioned a number of records in Saudi, in UAE, and we also include India where we set an all-time revenue record during the September quarter. But I have to say also Western Europe grew nicely. So, we've seen very good results for us in the entire segment. Amit Daryanani: Great. Thank you very much. Suhasini Chandramouli: Thanks, Amit. Can we have the next question, please? Operator: Our next question is from David Vogt with UBS. Please go ahead. David Vogt: Great. Thanks everyone for taking my question, and congratulations, Luca. I know Luca, and I know Tim, you don't want to give a lot of granularity, but if I just try to pull together your comments about what the demand environment looks like, are we to assume based on sort of the commentary that there is a risk that maybe the product revenue portfolio could be down in the December quarter if I take your numbers at face value? And if that's the risk, is that more iPhone-related, Mac-related, given the strength that you've seen in iPad related? Just trying to get a handle on kind of what potentially is giving you that degree of, I don't want to say caution, but maybe balanced for you going into the December quarter. And then, I have a follow-up. Luca Maestri: As I said, David, we're not providing that level of color. We're giving you some data on services. I would repeat what I said earlier. We're very early in the cycle, very early in the cycle with a lot of new products and features that that we are launching. And we're very excited about them, but it's early. And the Apple Intelligence rollout is going to happen over time, not across the world as normally we do with software releases. David Vogt: Right. Okay. So maybe a follow-up for, Tim. When you think about to Luca's point about the rollout being staged over the next several quarters across the world, do you think that has any impact on sort of the normal historical demand cadence across different regions? So, should we see something different, let's say, in the December quarter, the March quarter, the June quarter, et cetera, relative to history, given the timing of the rollout and where customers are probably waiting for the devices to be enabled to have the operating system? Would just love to kind of get your perspective on how we think about the demand cadence, how it might be different than maybe historically? Thank you. Tim Cook: Yeah, David. It's clearly, as you point out, a different cadence, if you will, than we would normally do. As we talked about at WWDC, we wanted to give a comprehensive vision of Apple Intelligence, and we said then that it would rollout over time. And we're right on the, what we said, at WWDC, and so we're executing well. In terms of the demand curve, I would just say that what we believe here is that it's a compelling reason for upgrading. And, it's -- that's both my personal experience and feedback that I'm getting and so we'll see. We're not projecting, beyond the current quarter obviously. We just don't do that. David Vogt: Great. Thanks, Tim, and best of luck, Luca. Luca Maestri: Thank you very much. Suhasini Chandramouli: Thank you, David. We'll take the next question, please. Operator: Our next question is from Wamsi Mohan with Bank of America. Please go ahead. Wamsi Mohan: Yes, thank you so much. Luca, we will miss you on these calls. Tim, maybe for you, as you think about this staggered rollout of Apple Intelligence, can you help us think through potentially how much of the global installed base of phones will have access to Apple Intelligence in their native language, in their region within the next year or maybe in the next two years? And what are some of the gating factors in the rollout? And I have a follow-up. Tim Cook: If you look at our schedule, we started in the -- with US English, that started on Monday. There's another release coming that adds additional features that I had referenced in December in not only US English but also localized for UK, Australia, Canada, Ireland, and New Zealand. And then, we will add more languages in April. We haven't set the specifics yet in terms of the languages, but we'll add more in April and then more as we step through the year. And so, we're moving just as fast as possible while ensuring quality. That's what we're doing. Wamsi Mohan: Okay. Thanks, Tim. Tim Cook: Yeah. Wamsi Mohan: And then, as a follow-up, maybe this is a little premature, but how is Apple at a high level prepared to potentially deal with any tariffs that might come post the selection cycle? And if not exactly how, perhaps you can just help investors think about some of the things Apple has done already to try to insulate from some of these impacts, potential impacts? Tim Cook: I wouldn't want to speculate about those sorts of things. And so, I'm going to punt on that one. Wamsi Mohan: Okay. Thank you, Tim. Tim Cook: Yeah. Thank you. Suhasini Chandramouli: Thank you, Wamsi. May we have the next question, please? Operator: Our next question is from Krish Sankar from TD Cowen. Please go ahead. Krish Sankar: Yeah. Hi, thanks for taking my question. And again, thanks Luca for all your help with analyts and investors. My first question is on R&D. Given how much your tech peers are spending on AI, does this new era of Apple Intelligence actually require Apple to invest more in R&D beyond your current 7% to 8% of sales to capture this opportunity? And then, I had a follow-up. Luca Maestri: Krish, as you know, we've been investing heavily in R&D over the last several years. Our R&D growth has been significant during the last several years. And obviously, as we move through the course of fiscal '24, we've also reallocated some of the existing resources to this new technology to AI. And so, the level of intensity that we're putting into AI has increased a lot, and you maybe don't see the full extent of it because we've also had some internal reallocation of the base of engineering resources that we have within the company. Krish Sankar: Got it. Thanks for that, Luca. And then, another quick follow-up. I understand Apple Intelligence is a feature on the phone today, but do you think that, in the future, it could potentially have or benefit the services growth business, or is that too -- are these too bifurcated to even make a call on the [indiscernible]? Thank you. Tim Cook: I think, just to keep it in mind, Apple Intelligence is also available on the Mac for the M-series products and on certain models of iPad, and in addition to the phone. And so, it's on all three. You're quite -- what was your follow-on question? Krish Sankar: Tim, it does on -- can the Apple Intelligence actually help the Services growth rate? Tim Cook: Keep in mind that we were have released a lot of APIs and developers will be taking advantage of those APIs. That release has occurred as well and of course more are coming. And so I, definitely believe that a lot of developers will be taking advantage of Apple Intelligence in a big way. And what that does to Services, I'll not forecast, but I would say that from an ecosystem point of view, I think it will be great for the user and the user experience. Krish Sankar: Got it. Thanks, Tim. Tim Cook: Yeah. Suhasini Chandramouli: All right. Thank you, Krish. Can we have the next question, please? Operator: Our next question comes from Samik Chatterjee with JPMorgan. Please go ahead. Samik Chatterjee: Great. Thank you. Thanks for taking my questions. And Luca, congrats on the new role and pleasure working with you these years. I guess, if I could, for my first one, start with mix on the iPhone side? And what I'm really curious about if you have any thoughts given that Apple Intelligence is now going to be a consistent feature set across all the four sort of iPhones on the iPhone 16 series that you launched and going back to iPhone 15 Pro and Pro Max. Are you seeing any change in behavior from a consumer perspective in terms of which sort of on the mix front within the iPhone series where consumer adoption is given that there's more consistency of the features when it comes to Apple Intelligence across the board? And I have a follow-up. Thank you. Tim Cook: It's tough to answer your question, because we've been constrained in October on the Pro and the Pro Max. And so, it's really too early in the curve to call the precise mix on the consumer versus the Pro. So, we'll see. Samik Chatterjee: Okay. And for my follow-up, Tim, during the quarter I think over the last 90 days, we had the quotes come out in relation to the DOJ relative to the Google sort of revenue sharing agreement that you have with them. How do you sort of look at it going forward in terms of emphasizing the role that Apple has in that ecosystem with Safari and sort of the potential outcomes that you're looking at? Thank you. Tim Cook: I don't want to speculate on that from a legal point of view. It's an ongoing case, and I will save that for another day. Samik Chatterjee: Okay. Thank you. I'll leave it there. Thank you. Suhasini Chandramouli: All right. Thank you, Samik. Operator, may we have the next question, please? Operator: Our next question comes from Richard Kramer with Arete Research. Please go ahead. Richard Kramer: Thanks very much. My first one, Tim, I'd like to ask about some of the components in Services where despite your installed base, some parts of the Apple One bundle, like Music and News and Arcade and Fitness, are not obviously the market-leading offerings. And maybe what might change that and what other services could you call out as growing faster, having wider -- widening addressable markets like we've seen in pay or advertising? Tim Cook: The way that I view it is that we have lots of opportunity in all of those. And so, there's lots of customers to try to convince to take advantage of it, and we're going to continue investing in the Services and adding new features and -- whether it's News+ or Music or Arcade, that's what we're going to do. Keep in mind that for us, we're more focused on being best than being most. And so, in some cases, not in every case, some of the services that you -- the majority of the services that you mentioned are not cross platform. We make them for our customers only and so that in some cases changes the person who's going to sell the most perhaps, but that's -- our objective is to make the best. Richard Kramer: Okay, thanks. And then, Luca, one piece of unfinished business was your pledge to get to a net-neutral cash position. And over the last two years, you stayed around $50 billion of net cash. We've clearly seen instances in the past where elevated marketing spend or other programs brought increases in market share. I guess my question looking back on your tenure is, at your scale now of $57 billion of OpEx, do you still see incremental ways to put that cash to work in the business? Or will we just continue to see increased shareholder returns? Luca Maestri: Well, obviously, as you've seen, our OpEx has gone up over the years. We've also seen at the same time a significant expansion in gross margin, maybe to a level that I would have not expected a few years ago, but we've done a very good job on a number of fronts. And so, I would say we -- when we plan -- every time we plan for the upcoming year, we think about all the different areas where we can deploy our resources and we make them available to grow the business. I think we've done very well over the long term and -- but our fundamental philosophy is to look after the business first. And then, if we have excess cash, we will continue to return it to our shareholders and the plan has worked quite well so far. Richard Kramer: Okay. Thank you very much. Suhasini Chandramouli: Thank you, Richard. We'll take our last question, please, operator? Operator: Our last question comes from Atif Malik with Citi. Please go ahead. Atif Malik: Thank you for squeezing me in. It seems to us that the spec differentiation between iPhone 16 Pro and base model isn't as big as prior years. All iPhones have new A18, A18 Pro chips and there wasn't an increase in ASPs versus last year. Can you share with us if there is a shift in your strategy in terms of... Operator: Unfortunately, Mr. Malik's line has dropped. Suhasini Chandramouli: All right. Sorry, Atif. We'll connect offline. Thank you, everybody. A replay of today's call will be available for two weeks on Apple Podcasts as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 0331536 followed by the pound sign. These replays will be available by approximately 5 pm Pacific today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. And financial analysts can contact me, Suhasini Chandramouli, with additional questions at 408-974-3123 Thank you again for joining us. Operator: Once again, this does conclude today's conference. We do appreciate your participation.	[ { "speaker": "Suhasini Chandramouli", "text": "Good afternoon, and welcome to the Apple Q4 Fiscal Year 2024 Earnings Conference Call. My name is Suhasini Chandramouli, Director of Investor Relations. Today's call is being recorded. Speaking first today are Apple CEO, Tim Cook, and CFO, Luca Maestri, and they'll be joined by Kevan Parekh, Vice President of Financial Planning and Analysis. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, and future business outlook, including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. Additionally, today's discussion will refer to certain non-GAAP financial measures. You can find a reconciliation of these measures in our fourth quarter and full year 2024 earnings release, which is available on our Investor Relations website. I'd now like to turn the call over to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thank you, Suhasini. Good afternoon, everyone, and thanks for joining the call. Today, Apple is reporting revenue of $94.9 billion, a September quarter record and up 6% from a year ago. iPhone grew in every geographic segment, marking a new September quarter revenue record for the category, and Services set an all-time revenue record, up 12% year-over-year. We also set September quarter segment revenue records in the Americas, Europe, and the Rest of Asia Pacific, as well as in a large number of countries, including the United States, Brazil, Mexico, France, the UK, Korea, Malaysia, Thailand, Saudi Arabia, and the UAE. And we continue to be excited by the enthusiasm we're seeing in India, where we set an all-time revenue record. This has been an extraordinary year of innovation at Apple. We brought the revolutionary Apple Vision Pro to customers in February, which brings users tomorrow's technology today. And in June, we announced Apple Intelligence, a remarkable personal intelligence system that combines the power of generative models with personal context to deliver intelligence that is incredibly useful and relevant. Apple Intelligence marks the beginning of a new chapter for Apple innovation and redefines privacy and AI by extending our groundbreaking approach to privacy into the cloud with Private Cloud Compute. Earlier this week, we made the first set of Apple Intelligence features available in US English for iPhone, iPad, and Mac users, with systemwide Writing Tools that help you refine your writing, a more natural and conversational Siri, a more intelligent Photos app, including the ability to create movies simply by typing a description, and new ways to prioritize and stay in the moment with notification summaries and priority messages. And we look forward to additional intelligence features in December, with even more powerful Writing Tools, a new visual intelligence experience that builds on Apple Intelligence, and ChatGPT integration, as well as localized English in several countries, including the UK, Australia, and Canada. These features have already been provided to developers and we're getting great feedback. More features will be rolling out in the coming months, as well as support for more languages, and this is just the beginning. Now, I'll turn to our results for the quarter, beginning with iPhone. iPhone revenues set a September quarter record of $46.2 billion, up 6% from a year ago, with growth in every geographic segment. With the introduction of Apple Intelligence, we're beginning a new era for iPhone. iPhone 16, powered by A18, is equipped with an incredible new 48-megapixel Fusion camera, fantastic photo experiences, and the addition of the action button and camera control. An iPhone 16 Pro is the most advanced iPhone we've ever made, powered by A18 Pro and featuring even larger displays, an industry-leading pro camera system with camera control, and studio quality mics, all with a huge leap in battery life. Turning to Mac, revenue was $7.7 billion, up 2% from a year ago. Just this week, we brought a new generation of Apple Silicon to Mac, M4, M4 Pro, and M4 Max. From blazing fast performance to Apple's most advanced neural engine yet, our latest chips can easily tackle incredibly complex workflows, and they ensure our newest Macs will be the best personal computers for AI the instant they hit stores. With the newest additions to our Mac lineup, customers can choose the Mac that's just right for them, whether that's iMac, the world's best and most beautiful all-in-one; MacBook Air, the world's most popular laptop now with double the starting memory; MacBook Pro, the best Pro notebook anywhere; or the incredible, mighty new Mac mini, our first-ever carbon-neutral Mac. iPad revenue was $7 billion, 8% higher year-over-year. iPad is unlike any other product on the market today, and it's become an essential device in homes, schools, and businesses of all sizes. Recently, we were thrilled to introduce the newest iPad mini, featuring an ultra-compact design built for Apple Intelligence with support for Apple Pencil Pro. It's been a big year for iPad. iPad Air was popular with students and teachers as they got back to school this year, while creators are pushing the boundaries of what's possible with the M4-powered iPad Pro. In Wearables, Home and Accessories, revenue was $9 billion, down 3% from a year ago. During the quarter, we launched the all-new Apple Watch Series 10, bringing a beautiful new design and new capabilities to the world's most popular watch that make it even more powerful, intelligent, and sophisticated. It's the thinnest Apple Watch yet, making it more comfortable than ever, while offering the biggest, most advanced display. watchOS 11 brings some huge new health and fitness insights to users, including sleep apnea notifications, which help to alert people with a potentially serious but often undiagnosed condition. We're proud of the impact we make through our health innovations on watch, and I'm grateful for every note I receive about the importance of watch in people's lives. With AirPods 4, we broke a new ground in comfort and design with our best-ever open-ear headphones available for the first time with active noise cancellation. And we were especially pleased to unveil revolutionary end-to-end hearing health capabilities for AirPods Pro 2 with hearing protection, hearing test, and hearing aid features. These just became available in a software update this week, and we believe this will make a meaningful difference in our users' lives. I've already started getting notes from customers calling the experience life changing. And Apple Vision Pro continues to deliver spatial experiences that weren't possible before, including immersive entertainment like the new short film, Submerged, which gives people a view into the unique storytelling power made possible by spatial computing. Vision Pro has more than 2,500 native spatial apps and 1.5 million compatible apps for visionOS 2, as well as applications companies are building to reimagine how they work. Vision Pro continues to inspire awe in its users, and we're just scratching the surface of what's possible. And just yesterday, we announced we're bringing Vision Pro to Korea and the UAE. As I mentioned earlier, Services achieved an all-time revenue record of $25 billion, up 12% from a year ago, and with all-time revenue records across most of our categories. With Apple TV+, we love celebrating the craft of great storytellers who know how to put on a show. Audiences love to discover new movies like Wolfs, explore acclaimed new series like Disclaimer, and dive back into returning favorites like Slow Horses and Shrinking. Apple TV+ productions have become fixtures at award shows, earning more than 2,300 nominations and more than 500 wins today. Apple also offers a live sports experience in a league of its own with MLS Season Pass, and subscribers have been cheering on their favorite teams in the MLS Cup playoffs. This month, we also marked 10 years of Apple Pay. There's always something magical about being able to buy groceries or pay for movie tickets seamlessly with your Apple device. Today, users choose Apple Pay for purchases across tens of millions of retailers worldwide. And we're excited to make the Apple Pay experience even better, with the option to redeem rewards and access loans from credit cards, debit cards, and other lenders right at checkout. Whenever we celebrate big moments, Apple Stores are the best places to share them with customers. I had an incredible time during launch day in September alongside our team at Apple Fifth Avenue, where energy and enthusiasm filled the air. And in stores all over the world, customers are eager to get a closer look at our latest innovations. We also opened two new stores during the quarter and we can't wait to bring four new stores to customers in India. We're passionate about education and believe technology has a vital role to play in both helping teachers to inspire their students and students to learn about the world around them. In honor of World Teachers' Day, Apple was proud to share new resources for teachers to engage their students in ways that aim to make learning easy and fun. Additionally, we've expanded our education grant program into 100 new schools and communities, helping with everything from access to technology, to educator resources, to scholarships and financial support. As we near the end of the year, we're proud of the progress we've made in our efforts to be carbon-neutral across our entire footprint by the end of the decade. As I mentioned earlier, we were thrilled to introduce our first-ever carbon-neutral Mac with the latest Mac mini. And in another milestone, customers can choose a carbon-neutral option of any Apple Watch. These achievements are amazing for all of us at Apple, and we are determined to reach our 2030 goal. At Apple, across everything we do, we manage for the long term, because we're always thinking about what comes next, the next great challenge, the next innovative idea, the next big breakthrough. As we close out the year, we have the best lineup we've ever had going into the holiday season, including Apple Intelligence, which marks the start of a new chapter for our products. This is just the beginning of what we believe generative AI can do, and I couldn't be more excited for what's to come. Before I hand it over to Luca, with Luca transitioning to a new role with Apple, this will be the final time he's joining our call. So, I just wanted to take a moment to recognize his extraordinary service as Apple's CFO and to thank him for his partnership. I am deeply grateful. In his 10 years in the role, Luca has done truly exceptional work in shaping Apple as we know it today. He has helped manage Apple for the long term, thoughtfully and deliberately. He has helped us enrich the lives of so many around the world, and he has been a leader that people look up to and have learned so much from. I have incredible confidence in our incoming CFO, Kevan Parekh, and we look forward to more of you meeting and working with him going forward. With that, I'll turn it over to Luca." }, { "speaker": "Luca Maestri", "text": "Good afternoon, everyone. And thank you, Tim, for the very kind words. Serving as Apple's CFO has been a real privilege and an amazing journey, and I've greatly appreciated the support from our investors and the analyst community over the years. Kevan is exceptional, and I know you will enjoy interacting with him going forward. Let me now turn to the results for the fourth quarter of our fiscal year. We're very pleased to report a new September quarter revenue record of $94.9 billion, up 6% year-over-year. We grew in the vast majority of the markets we track and achieved September quarter revenue records in the Americas, Europe and Rest of Asia Pacific. Products revenue was $70 billion, up 4% year-over-year, driven by growth in iPhone, iPad and Mac. Our installed base of active devices reached an all-time high across all products and geographic segments, thanks to very high levels of customer satisfaction and loyalty and a large number of customers who are new to our products. Services revenue reached an all-time record of $25 billion, up 12% year-over-year. We saw broad-based strength around the world, reaching all-time records in both developed and emerging markets with double-digit growth and record results across most services categories. Company gross margin was 46.2%, near the high end of our guidance range. Products gross margin was 36.3%, up 100 basis points sequentially, primarily driven by favorable mix. Services gross margin was 74%, unchanged from the prior quarter. Operating expenses of $14.3 billion were at the midpoint of the guidance range we provided at the beginning of the quarter and up 6% year-over-year. During the quarter, we recorded a one-time income tax charge of $10.2 billion, which relates to the impact of the reversal of the European General Court's State Aid decision. When we exclude this one-time charge, net income was $25 billion and diluted earnings per share were a $1.64, up 12% year-over-year, and a September quarter record. Operating cash flow was very strong at $26.8 billion, a new September quarter record. Let me now get into more detail for each of our revenue categories. iPhone revenue was $46.2 billion, up 6% year-over-year, and a September quarter record in total and across several markets, including the US, the Middle East, Korea, and South Asia. The iPhone active installed base grew to a new all-time high in total and in every geographic segment. During the September quarter, many iPhone models were among the top-selling smartphones around the world. In fact, according to a survey from Kantar, iPhone was the top-selling model in the US, Urban China, the UK, Australia, and Japan. We continue to see high levels of customer satisfaction for the iPhone 15 family, with 451 Research recently measuring it at 98% in the US. Mac revenue was $7.7 billion, up 2% year-over-year, driven by the strength in MacBook Air. Customers have been loving the performance of Apple Silicon on Mac and we are very excited to bring the latest M4 family of chips to the lineup. The Mac installed base reached an all-time high with about half of customers in the quarter being new to Mac. And in the latest reports from 451 Research, customer satisfaction was 95% in the US. iPad generated $7 billion in revenue, up 8% year-over-year. In addition to growth in developed markets, we also saw strong performance in many emerging markets, with double-digit growth in Mexico, Brazil, the Middle East, India and South Asia. The iPad installed base reached another all-time high, and over half of the customers who purchased iPads during the quarter were new to the product. Also, customer satisfaction was recently measured at 97% in the US. Wearables, Home and Accessories revenue was $9 billion, down 3% year-over-year. The Apple Watch installed base reached a new all-time high, with over half of customers purchasing an Apple Watch during the quarter being new to the product. And the latest reports from 451 Research indicated customer satisfaction of 96% for watch in the US. Our Services revenue reached an all-time record of $25 billion, growing 12% year-over-year. Services continue to see strong momentum with the growth of our installed base of active devices setting a solid foundation for the future expansion of our ecosystem. And we see increased customer engagement with our services offerings. Both transacting accounts and paid accounts reached a new all-time high, with paid accounts growing double-digits year-over-year. Paid subscriptions also grew double-digits. We have well over 1 billion paid subscriptions across the services on our platform, more than double the number we had only four years ago. And as always, we remain focused on improving the breadth and quality of our services from new games on Apple Arcade to new features like Tap to Cash and pay with installments using Apple Pay to many successful new and returning shows on Apple TV+. This past quarter, we celebrated the five-year anniversary of Apple Card, which was ranked #1 in customer satisfaction among co-branded credit cards by J.D. Power for the fourth year in a row. Turning to enterprise, we continue to see strong demand across our products and services. NVIDIA launched its Mac as a choice program supported by AppleCare for Enterprise and Apple Professional Services with over 10,000 Macs deployed worldwide. And Novartis, a leading global pharmaceutical company, recently chose iPhone 16 as the standard mobile device for all employees. We also see continued momentum with Apple Vision Pro in the enterprise space. UC San Diego Health is the first hospital in the world to test spatial computing apps on Apple Vision Pro in clinical trials for patient surgery in the operating room. Let me now turn to our cash position and capital return program. We ended the quarter with $157 billion in cash and marketable securities. We repaid $2.6 billion in maturing debt and increased commercial paper by $7 billion, leaving us with total debt of $107 billion. As a result, net cash was $50 billion at the end of the quarter. During the quarter, we returned over $29 billion to shareholders, including $3.8 billion in dividends and equivalents and $25 billion through open market repurchases of 112 million Apple shares. As we move ahead into the December quarter, I'd like to review our outlook, which includes the types of forward-looking information that Suhasini referred to at the beginning of the call. The color we're providing today assumes that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter. We expect our December quarter total company revenue to grow low- to mid-single digits year-over-year. We expect Services revenue to grow double-digits at a rate similar to what we reported in the fiscal year 2024. We expect gross margin to be between 46% and 47%. We expect OpEx to be between $15.3 billion and $15.5 billion. We expect OI&E to be around negative $250 million, excluding any potential impact from the mark to market of minority investments. And our tax rate to be around 16%. Finally, today, our Board of Directors has declared a cash dividend of $0.25 per share of common stock payable on November 14, 2024 to shareholders of record as of November 11, 2024. With that, let us open the call to questions." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please?" }, { "speaker": "Operator", "text": "Certainly. We will go ahead and take our first question from Michael Ng with Goldman Sachs. Please go ahead." }, { "speaker": "Michael Ng", "text": "Hey, good afternoon. I just have two. The first one is for Tim on Apple Intelligence. I was wondering if you could just expand a little bit on some of the early feedback to Apple Intelligence both for iOS 18.1, but also the developer beta so far, and whether you would attribute Apple Intelligence to any of the strong iPhone performance that we've seen to date. Thanks." }, { "speaker": "Tim Cook", "text": "Thanks, Michael. As I noted in my comments, just this week on Monday, we made the first set of Apple Intelligence features available in US English for iPhone, iPad, and Mac. This includes things like systemwide Writing Tools that help you refine your writing, a more natural conversational Siri, more intelligent Photos app, including the ability to create movies, simply by typing a description, which is really cool, and new ways to prioritize and stay in the moment with notification summaries and priority messages. There's also email summaries and email priority. We're getting a lot of positive feedback from developers and customers. And in fact, if you just look at the first three days, which is all we have obviously from Monday, the 18.1 adoption is twice as fast as the 17.1 adoption was in the year-ago quarter. And so, there's definitely interest out there for Apple Intelligence. Carrying on in the quarter, we are looking forward to bringing even more features in December, and this will include even more powerful Writing Tools and visual intelligence experience that builds on Apple Intelligence, and ChatGPT integration in addition to other features, as well as we'll bring localized English to several countries that include the UK, Australia, and Canada. So, it's going to be quite a software quarter between the release on Monday and the release in December. And then, as we turn the corner to '25, we'll have more languages rolling out, starting in April as well and more features as well. And so, it's a very strong drumbeat, and we couldn't be more excited about it." }, { "speaker": "Michael Ng", "text": "Great. Thank you very much. And my second one just for Luca. First, congratulations again, Luca, on the new role and it's been a real privilege being able to spend some time with you. A question that I think will overlap with your new role as well. Could you just talk a little bit about the CapEx outlook and whether investments in things like Private Cloud Compute could change the historical CapEx range of roughly $10 billion a year? Thank you very much." }, { "speaker": "Luca Maestri", "text": "Thank you, Michael. On the CapEx front, I've mentioned before a number of times, we have a bit of a hybrid model in the way we run our data centers. In some cases, we use our own data centers. In some cases, we use, third-party providers. So, our CapEx numbers may not be fully comparable with others. But, obviously, we are rolling out these features, Apple Intelligence features already now, and so we are making all the capacity that is needed available for these features. You will see in our 10-K the amount of CapEx that we've incurred during the course of fiscal '24, and we will -- in fiscal '25, we will continue to make all the investments that are necessary, and of course, the investments in AI-related CapEx will be made." }, { "speaker": "Michael Ng", "text": "Great. Thank you, Tim. Thank you, Luca." }, { "speaker": "Suhasini Chandramouli", "text": "All right. Thanks, Mike. Can we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Erik Woodring with Morgan Stanley. Please go ahead." }, { "speaker": "Erik Woodring", "text": "Great. Thanks so much for taking my questions. I have two as well. Tim, maybe if we start with you, I think each of the last four years you've exited the December quarter with iPhone demand outpacing supply. As we look to this quarter in the iPhone 16 cycle, lead times are relatively short. There are no known supply shortages. And I'm just curious whether you've been able to maybe get a better read on early cycle iPhone demand this year relative to past years. And if so, what you've learned about upgrade rates, switching rates, trade-ups versus trading down and being more price sensitive? And overall, any impact that Apple Intelligence may have on iPhone 16 sales? And then, I have a follow-up. Thank you." }, { "speaker": "Tim Cook", "text": "There's a lot there. On Apple Intelligence, we believe it's a compelling upgrade reason. And we'll -- but we just launched it three days ago and so what we've got now from a data point point of view is the number I just referenced that 18.1 has twice the adoption rate of 17.1. So, that clearly shows a level of interest out there. In terms of exiting the December quarter with demand greater than supply, that's not my recollection that, that happened for all four of the years. We clearly had cases during COVID where there were disruptions and that's the some spilled over, but in a more regular environment where we're not having something, a 100-year flood kind of thing, we would -- our desire is to get into balance as quickly as possible. We don't want customers having to wait for products. And so, if you look at how we've done this year, we did that very quickly on the 16, on the 16 Pro family, the Pro and the Pro Max, we've been constrained in October, but we believe that soon we'll be out of constraint. And so, that's a good sign from our point of view. Keep in mind that, that's a function of supply and demand, not one side or the other. And we've been preparing for the quarter for a while. So that's what I would say there." }, { "speaker": "Erik Woodring", "text": "Okay. That's really helpful. Thank you, Tim." }, { "speaker": "Tim Cook", "text": "Yeah, thank you." }, { "speaker": "Erik Woodring", "text": "And then, Luca, if I just turn to you, obviously, it's been a pleasure working with you, and we wish you all the best in the next role. There's plenty of debate in the market right now about input costs and commodity prices, and the impact that will have on gross margins. Historically, you do guide gross margins up 50 basis points sequentially, which you just told us about for the December quarter. So, can you maybe just help us understand your view of component prices and broadly whether you still see those as tailwinds to gross margins and how sustainable that tailwind might be, or whether that should become a headwind as we look forward? Thanks so much." }, { "speaker": "Luca Maestri", "text": "Yes, Erik. As you know, our gross margins are a factor of many, many variables. Commodities, of course, are important. They're not the only factor. But specifically on commodities, I can tell you that both for the September quarter and what we expect for the December quarter, most commodities are going to move down in price, while NAND and DRAM increased during the course of the September quarter and we expect them to increase during the December quarter. We are very pleased with the level of gross margins that we've reported during the course of the year. The entire fiscal year of '24, they're really, for our company, record levels of gross margin, and obviously guiding to 46% to 47% for the December quarter with all the new technologies that we've included in the products, with all the new features that Tim has talked about, a lot of new products across the board, I think it's a very good sign." }, { "speaker": "Erik Woodring", "text": "Great. Thanks so much, Luca." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Erik. Can we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Ben Reitzes from Melius. Please go ahead." }, { "speaker": "Ben Reitzes", "text": "Hey, thanks a lot. And I'll echo those comments about Luca. Miss you, and good luck. And my question is with regard to iPhone again, and with regard to the fourth quarter, is my first question -- or sorry, the fourth calendar quarter, your first quarter. When you look at mid- to low-single-digit revenue growth, do you expect the iPhone to grow faster? And what are you thinking about in the answer to that question with regard to China, which keeps improving each quarter? Thanks very much. And then, I have just a follow-up. Thanks." }, { "speaker": "Luca Maestri", "text": "Ben, we are not providing that level of color today. Yes, we've said that we expect total company revenue to grow low- to mid-single digits. Keep in mind, Apple Intelligence, as Tim said, is rolling out over time, both features and languages. And we just had a number of exciting launches just this week from the Apple Intelligence feature to the new Mac. So, we leave it at that. We've given you the total for the company and some pretty good direction on Services, which we expect to continue to grow at a similar rate than what we've seen in fiscal '24." }, { "speaker": "Ben Reitzes", "text": "Great. Thanks, Luca. Hey, Tim, I wanted to ask you, I mean, you guys are well aware a lot of the noise out there, people chattering about builds, lead times, and you guys are guiding for mid- to low-single-digit growth. That certainly doesn't sound like alarm bells here, vis-a-vis what you guys must be hearing. And I know you guys are just running your business and doing the best you can, but you have a lot of perspective now, Tim. What are people missing here? And it certainly just sounds like -- you guys are typically conservative. That guide for revenue is certainly sounds like [this guy is certainly not falling] (ph), and you have a pretty good product cycle. So, what do you think people are missing and what are you excited about? Thanks so much, Tim." }, { "speaker": "Tim Cook", "text": "Ben, I could not be more excited about Apple Intelligence and the rollout that we've got in front of us. I'm on the -- I'm obviously on future releases as well, working on it and it's changing my daily life. I'm super excited about the health features that we're rolling out. If the number of emails I'm already getting from customers that have taken a hearing test and are using their AirPods Pro 2 as a hearing aid, are just -- are staggering and heartwarming to read. I'm also thrilled about sleep apnea and the notification there that we'll have through the watch. This week is a very exciting week for us because we just rolled out three days -- three launches of different, Macs and desktops and laptops. And so, we have a lot of things on the docket and it's definitely the strongest lineup we've ever had going into the holiday season. In terms of the noise, I tune it out, because if not, it would just be, deafening. And so that that's what I do, I can't speak for everybody else, but that's what I do." }, { "speaker": "Ben Reitzes", "text": "Thanks a lot, Tim. Appreciate it." }, { "speaker": "Tim Cook", "text": "Thanks, Ben." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Ben. Can we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Amit Daryanani with Evercore. Please go ahead." }, { "speaker": "Amit Daryanani", "text": "Good afternoon. Thanks for taking my questions. I have two as well. And Luca, best of luck in the future. It's been a pleasure working with you. I guess the first one I have is, away from iPhones, on the Services side, you're adding $100 billion run rate with Services today, which is a phenomenal achievement by itself. As you look at the Services portfolio today, can you just talk about how much of this business do you think is reoccurring versus transactional? And are the growth rates different between the subscription portfolio over here versus transactional portfolio?" }, { "speaker": "Luca Maestri", "text": "Yes, Amit, I'll take this one. Yes, we are, first of all, very, very happy with -- it's an important milestone. Of course, we've got to a run rate of $100 billion. You look back just a few years ago, and the growth has been phenomenal. We're very pleased. We've got a very diversified portfolio of services. And over the years, the amount that is recurring in nature has grown and is growing faster than the transactional piece. We have well over 1 billion paid subscriptions on our platform right now between our own services and third-party services. That continues to grow strong double-digits. So, we feel very, very good. And, essentially, to your question, yes, the recurring portion is growing faster than the transactional one." }, { "speaker": "Amit Daryanani", "text": "Got it. If I can just follow-up, if I look at the growth rates across the different geographies, there's always concern around China when it comes to iPhone demand, I feel, but the performance in September looks fairly good. I wonder if you just touch on, what are you seeing from a demand perspective in China? If the recent stimulus plan in China could essentially be a catalyst for iPhone? And then, EMEA really stood out with double-digit growth. Maybe you can just flush that out as well for us. Thank you." }, { "speaker": "Tim Cook", "text": "Yeah, I'll take the China question. If you look at how we did for the quarter, we were relatively flat year-over-year. And a key component of that improvement relative to the year-over-year performance that we had been achieving is that there was a sequential improvement in foreign exchange. And so that helped us out. As you know, it's been a headwind that we've been reporting for a period of time. And -- but the other parts that are -- what else is going on there is that our installed base of the active devices reached an all-time high. We had the top two selling, smartphones in Urban China according to Kantar. The level of new customers that we have buying the products like Mac and iPad are well over 50%. Watch is over three quarters that are new to the product. And so, there's several positive signs there. In terms of the stimulus, it's a clear focus of the team there, but I'm not an economist and don't want to ad lib on the effect of it." }, { "speaker": "Luca Maestri", "text": "On the Europe side, Amit, a number of things. As you see from our results during the quarter, Europe grew double-digits, 11%, and really, it was really good growth across the board, the different segments. They all did well. Keep in mind, our definition of Europe in our segment reporting includes a number of emerging markets, like Turkey, where we've grown very strongly, the Middle East. Tim mentioned a number of records in Saudi, in UAE, and we also include India where we set an all-time revenue record during the September quarter. But I have to say also Western Europe grew nicely. So, we've seen very good results for us in the entire segment." }, { "speaker": "Amit Daryanani", "text": "Great. Thank you very much." }, { "speaker": "Suhasini Chandramouli", "text": "Thanks, Amit. Can we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from David Vogt with UBS. Please go ahead." }, { "speaker": "David Vogt", "text": "Great. Thanks everyone for taking my question, and congratulations, Luca. I know Luca, and I know Tim, you don't want to give a lot of granularity, but if I just try to pull together your comments about what the demand environment looks like, are we to assume based on sort of the commentary that there is a risk that maybe the product revenue portfolio could be down in the December quarter if I take your numbers at face value? And if that's the risk, is that more iPhone-related, Mac-related, given the strength that you've seen in iPad related? Just trying to get a handle on kind of what potentially is giving you that degree of, I don't want to say caution, but maybe balanced for you going into the December quarter. And then, I have a follow-up." }, { "speaker": "Luca Maestri", "text": "As I said, David, we're not providing that level of color. We're giving you some data on services. I would repeat what I said earlier. We're very early in the cycle, very early in the cycle with a lot of new products and features that that we are launching. And we're very excited about them, but it's early. And the Apple Intelligence rollout is going to happen over time, not across the world as normally we do with software releases." }, { "speaker": "David Vogt", "text": "Right. Okay. So maybe a follow-up for, Tim. When you think about to Luca's point about the rollout being staged over the next several quarters across the world, do you think that has any impact on sort of the normal historical demand cadence across different regions? So, should we see something different, let's say, in the December quarter, the March quarter, the June quarter, et cetera, relative to history, given the timing of the rollout and where customers are probably waiting for the devices to be enabled to have the operating system? Would just love to kind of get your perspective on how we think about the demand cadence, how it might be different than maybe historically? Thank you." }, { "speaker": "Tim Cook", "text": "Yeah, David. It's clearly, as you point out, a different cadence, if you will, than we would normally do. As we talked about at WWDC, we wanted to give a comprehensive vision of Apple Intelligence, and we said then that it would rollout over time. And we're right on the, what we said, at WWDC, and so we're executing well. In terms of the demand curve, I would just say that what we believe here is that it's a compelling reason for upgrading. And, it's -- that's both my personal experience and feedback that I'm getting and so we'll see. We're not projecting, beyond the current quarter obviously. We just don't do that." }, { "speaker": "David Vogt", "text": "Great. Thanks, Tim, and best of luck, Luca." }, { "speaker": "Luca Maestri", "text": "Thank you very much." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, David. We'll take the next question, please." }, { "speaker": "Operator", "text": "Our next question is from Wamsi Mohan with Bank of America. Please go ahead." }, { "speaker": "Wamsi Mohan", "text": "Yes, thank you so much. Luca, we will miss you on these calls. Tim, maybe for you, as you think about this staggered rollout of Apple Intelligence, can you help us think through potentially how much of the global installed base of phones will have access to Apple Intelligence in their native language, in their region within the next year or maybe in the next two years? And what are some of the gating factors in the rollout? And I have a follow-up." }, { "speaker": "Tim Cook", "text": "If you look at our schedule, we started in the -- with US English, that started on Monday. There's another release coming that adds additional features that I had referenced in December in not only US English but also localized for UK, Australia, Canada, Ireland, and New Zealand. And then, we will add more languages in April. We haven't set the specifics yet in terms of the languages, but we'll add more in April and then more as we step through the year. And so, we're moving just as fast as possible while ensuring quality. That's what we're doing." }, { "speaker": "Wamsi Mohan", "text": "Okay. Thanks, Tim." }, { "speaker": "Tim Cook", "text": "Yeah." }, { "speaker": "Wamsi Mohan", "text": "And then, as a follow-up, maybe this is a little premature, but how is Apple at a high level prepared to potentially deal with any tariffs that might come post the selection cycle? And if not exactly how, perhaps you can just help investors think about some of the things Apple has done already to try to insulate from some of these impacts, potential impacts?" }, { "speaker": "Tim Cook", "text": "I wouldn't want to speculate about those sorts of things. And so, I'm going to punt on that one." }, { "speaker": "Wamsi Mohan", "text": "Okay. Thank you, Tim." }, { "speaker": "Tim Cook", "text": "Yeah. Thank you." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Wamsi. May we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Krish Sankar from TD Cowen. Please go ahead." }, { "speaker": "Krish Sankar", "text": "Yeah. Hi, thanks for taking my question. And again, thanks Luca for all your help with analyts and investors. My first question is on R&D. Given how much your tech peers are spending on AI, does this new era of Apple Intelligence actually require Apple to invest more in R&D beyond your current 7% to 8% of sales to capture this opportunity? And then, I had a follow-up." }, { "speaker": "Luca Maestri", "text": "Krish, as you know, we've been investing heavily in R&D over the last several years. Our R&D growth has been significant during the last several years. And obviously, as we move through the course of fiscal '24, we've also reallocated some of the existing resources to this new technology to AI. And so, the level of intensity that we're putting into AI has increased a lot, and you maybe don't see the full extent of it because we've also had some internal reallocation of the base of engineering resources that we have within the company." }, { "speaker": "Krish Sankar", "text": "Got it. Thanks for that, Luca. And then, another quick follow-up. I understand Apple Intelligence is a feature on the phone today, but do you think that, in the future, it could potentially have or benefit the services growth business, or is that too -- are these too bifurcated to even make a call on the [indiscernible]? Thank you." }, { "speaker": "Tim Cook", "text": "I think, just to keep it in mind, Apple Intelligence is also available on the Mac for the M-series products and on certain models of iPad, and in addition to the phone. And so, it's on all three. You're quite -- what was your follow-on question?" }, { "speaker": "Krish Sankar", "text": "Tim, it does on -- can the Apple Intelligence actually help the Services growth rate?" }, { "speaker": "Tim Cook", "text": "Keep in mind that we were have released a lot of APIs and developers will be taking advantage of those APIs. That release has occurred as well and of course more are coming. And so I, definitely believe that a lot of developers will be taking advantage of Apple Intelligence in a big way. And what that does to Services, I'll not forecast, but I would say that from an ecosystem point of view, I think it will be great for the user and the user experience." }, { "speaker": "Krish Sankar", "text": "Got it. Thanks, Tim." }, { "speaker": "Tim Cook", "text": "Yeah." }, { "speaker": "Suhasini Chandramouli", "text": "All right. Thank you, Krish. Can we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question comes from Samik Chatterjee with JPMorgan. Please go ahead." }, { "speaker": "Samik Chatterjee", "text": "Great. Thank you. Thanks for taking my questions. And Luca, congrats on the new role and pleasure working with you these years. I guess, if I could, for my first one, start with mix on the iPhone side? And what I'm really curious about if you have any thoughts given that Apple Intelligence is now going to be a consistent feature set across all the four sort of iPhones on the iPhone 16 series that you launched and going back to iPhone 15 Pro and Pro Max. Are you seeing any change in behavior from a consumer perspective in terms of which sort of on the mix front within the iPhone series where consumer adoption is given that there's more consistency of the features when it comes to Apple Intelligence across the board? And I have a follow-up. Thank you." }, { "speaker": "Tim Cook", "text": "It's tough to answer your question, because we've been constrained in October on the Pro and the Pro Max. And so, it's really too early in the curve to call the precise mix on the consumer versus the Pro. So, we'll see." }, { "speaker": "Samik Chatterjee", "text": "Okay. And for my follow-up, Tim, during the quarter I think over the last 90 days, we had the quotes come out in relation to the DOJ relative to the Google sort of revenue sharing agreement that you have with them. How do you sort of look at it going forward in terms of emphasizing the role that Apple has in that ecosystem with Safari and sort of the potential outcomes that you're looking at? Thank you." }, { "speaker": "Tim Cook", "text": "I don't want to speculate on that from a legal point of view. It's an ongoing case, and I will save that for another day." }, { "speaker": "Samik Chatterjee", "text": "Okay. Thank you. I'll leave it there. Thank you." }, { "speaker": "Suhasini Chandramouli", "text": "All right. Thank you, Samik. Operator, may we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question comes from Richard Kramer with Arete Research. Please go ahead." }, { "speaker": "Richard Kramer", "text": "Thanks very much. My first one, Tim, I'd like to ask about some of the components in Services where despite your installed base, some parts of the Apple One bundle, like Music and News and Arcade and Fitness, are not obviously the market-leading offerings. And maybe what might change that and what other services could you call out as growing faster, having wider -- widening addressable markets like we've seen in pay or advertising?" }, { "speaker": "Tim Cook", "text": "The way that I view it is that we have lots of opportunity in all of those. And so, there's lots of customers to try to convince to take advantage of it, and we're going to continue investing in the Services and adding new features and -- whether it's News+ or Music or Arcade, that's what we're going to do. Keep in mind that for us, we're more focused on being best than being most. And so, in some cases, not in every case, some of the services that you -- the majority of the services that you mentioned are not cross platform. We make them for our customers only and so that in some cases changes the person who's going to sell the most perhaps, but that's -- our objective is to make the best." }, { "speaker": "Richard Kramer", "text": "Okay, thanks. And then, Luca, one piece of unfinished business was your pledge to get to a net-neutral cash position. And over the last two years, you stayed around $50 billion of net cash. We've clearly seen instances in the past where elevated marketing spend or other programs brought increases in market share. I guess my question looking back on your tenure is, at your scale now of $57 billion of OpEx, do you still see incremental ways to put that cash to work in the business? Or will we just continue to see increased shareholder returns?" }, { "speaker": "Luca Maestri", "text": "Well, obviously, as you've seen, our OpEx has gone up over the years. We've also seen at the same time a significant expansion in gross margin, maybe to a level that I would have not expected a few years ago, but we've done a very good job on a number of fronts. And so, I would say we -- when we plan -- every time we plan for the upcoming year, we think about all the different areas where we can deploy our resources and we make them available to grow the business. I think we've done very well over the long term and -- but our fundamental philosophy is to look after the business first. And then, if we have excess cash, we will continue to return it to our shareholders and the plan has worked quite well so far." }, { "speaker": "Richard Kramer", "text": "Okay. Thank you very much." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Richard. We'll take our last question, please, operator?" }, { "speaker": "Operator", "text": "Our last question comes from Atif Malik with Citi. Please go ahead." }, { "speaker": "Atif Malik", "text": "Thank you for squeezing me in. It seems to us that the spec differentiation between iPhone 16 Pro and base model isn't as big as prior years. All iPhones have new A18, A18 Pro chips and there wasn't an increase in ASPs versus last year. Can you share with us if there is a shift in your strategy in terms of..." }, { "speaker": "Operator", "text": "Unfortunately, Mr. Malik's line has dropped." }, { "speaker": "Suhasini Chandramouli", "text": "All right. Sorry, Atif. We'll connect offline. Thank you, everybody. A replay of today's call will be available for two weeks on Apple Podcasts as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 0331536 followed by the pound sign. These replays will be available by approximately 5 pm Pacific today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. And financial analysts can contact me, Suhasini Chandramouli, with additional questions at 408-974-3123 Thank you again for joining us." }, { "speaker": "Operator", "text": "Once again, this does conclude today's conference. We do appreciate your participation." } ]	Apple Inc.	24,937
AAPL	3	2,024	2024-08-01 17:00:00	Suhasini Chandramouli: Good afternoon and welcome to the Apple Q3 Fiscal Year 2024 Earnings Conference Call. My name is Suhasini Chandramouli, Director of Investor Relations. Today's call is being recorded. Speaking first today is Apple’s CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, and future business outlook including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed Annual Report on Form 10-K and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook : Thank you Suhasini. Good afternoon everyone and thanks for joining the call. Today, Apple is reporting a new June quarter revenue record of $85.8 billion, up 5% from a year ago and better than we had expected. EPS grew double digits to $1.40 and achieved a record for the June quarter. We also set quarterly revenue records in more than two dozen countries and regions, including Canada, Mexico, France, Germany, the UK, India, Indonesia, the Philippines, and Thailand. And we set an all-time revenue record in services which grew 14%. At our Worldwide Developers Conference, we were thrilled to unveil game-changing updates across our platforms, including Apple Intelligence. Apple Intelligence builds on years of innovation and investment in AI and Machine Learning. It will transform how users interact with technology, from writing tools to help you express yourself, to image playground, which gives you the ability to create fun images and communicate in new ways, to powerful tools for summarizing and prioritizing notifications. Siri also becomes more natural, more useful, and more personal than ever. Apple Intelligence is built on a foundation of privacy, both through on-device processing that does not collect users' data and through private cloud compute, a groundbreaking new approach to using the cloud, while protecting users' information powered by Apple silicon. We are also integrating ChatGPT into experiences within iPhone, Mac, and iPad, enabling users to draw on a broad base of world knowledge. We are very excited about Apple Intelligence and we remain incredibly optimistic about the extraordinary possibilities of AI and its ability to enrich customers' lives. We will continue to make significant investments in this technology and dedicate ourselves to the innovation that will unlock its full potential. Recently, we've also been excited to bring Apple Vision Pro to more countries, giving customers the chance to discover the remarkable capabilities of this magical device. Vision Pro users are customizing their own workspaces, watching movies on 100-foot screens, and exploring entire worlds with just a pinch of their fingertips. With more than 2,500 native spatial apps and 1.5 million compatible apps for Vision OS, the developer community continues to pioneer stunning spatial experiences that are only possible with Vision Pro. Last month, we announced that we're bringing some amazing new immersive content to Vision Pro, including new series, concerts, films, and more. And we've seen great interest for Vision Pro in the enterprise, where it can empower companies large and small to pursue their best ideas like never before. With each innovation, we're unlocking new ways of working, new ways of learning, and new ways of tapping into the unlimited promise of human potential. We are doing that across every product and every service. Now let me share more detail in our June quarter results, beginning with iPhone. iPhone revenue was $39.3 billion, down 1% year-over-year. On a constant currency basis, we grew compared to last year. Customers continue to praise the iPhone 15 lineup for its incredible battery life, exceptional cameras, and unmatched power and performance. And we are excited to bring incredible new features to the iPhone with iOS 18, making it more personal, capable, and intelligent than ever before. This update includes the biggest redesign of the Photos app, new customization options for the home screen, messages over satellite, and the introduction of Apple Intelligence. Apple Intelligence utilizes the power of our most advanced iPhones, the iPhone 15 Pro and Pro Max, offering a transformative set of capabilities. Mac revenue was $7 billion, up 2% from a year ago. Customers are loving the latest M3-powered 13 and 15 inch MacBook Air. With back-to-school season upon us, MacBook Air is the perfect companion for students on campus and small business owners, developers, and creatives of all kinds depend on Mac to do more than they ever could before. Powered by Apple silicon with its neural engine and privacy built in at the chip level, Macs are simply the best personal computers for AI. And every Mac we've shipped with Apple silicon since 2020, is capable of taking advantage of Apple Intelligence with Mac OS Sequoia. We also know the importance of security for our users and enterprises so we continue to advance protections across our products. Turning to iPad, revenue was $7.2 billion, 24% higher year-over-year. During the quarter, we had an incredible launch where we unveiled the all-new 11 and 13 inch iPad Air, the perfect device for education, entertainment, and so much more. And With the new iPad Pro, we pushed the boundaries of power-efficient performance with the remarkable M4 chip, the engine behind this incredibly thin device. By leveraging the latest in Apple silicon, Video Editors and Musicians can take advantage of the cutting edge AI features in Final Cut Pro and Logic Pro. And we're very excited that iPad Pro and iPad Air models powered by the M series of Apple silicon will be able to utilize the powerful capabilities of Apple Intelligence. In wearables, home, and accessories, revenue was $8.1 billion, down 2% from a year ago. Apple Watch is empowering users to live a healthier day with a range of tools to take charge of their wellness journeys. At the core of Apple Watch, are powerful AI features that are helping users get help when they need it most, from irregular heart rhythm notifications to walking steadiness to crash detection and fall detection. I've heard time and again how meaningful these features are for users and their loved ones, and their stories motivate us to keep pushing forward on this vital work. As I mentioned earlier, in services, we set an all-time revenue record of $24.2 billion with paid subscriptions climbing to an all-time high. We achieve revenue records in the majority of the services categories with all-time revenue records in advertising, cloud, and payment services. Apple TV+ productions are delighting audiences on screens large and small. We're sharing powerful works of imagination with series and movies like Presumed Innocent, the Upcoming Disclaimer, and The Instigators starring Matt Damon. And we can't wait for returning fan favorites with new seasons of The Morning Show, Slow Horses, and Severance. Apple TV+ productions also continue to earn accolades with nearly 2,300 nominations and 500 wins to-date. That includes 72 Emmy Award nominations across 16 programs our best ever showing for the upcoming awards event. During the quarter, we also expanded Tap to Pay on iPhone to more markets including Japan, Canada, Italy, and Germany, enabling more businesses to use the power of iPhone to accept contactless payments. And we announced new updates to our services coming this fall, including US national park hikes and custom walk routes and Apple Maps, the ability to pay with rewards using Apple Pay, collaborative listening with Apple Music, and a redesigned Apple Fitness+ experience to help users make the most of our library of workouts and meditations. Turning to retail, we continue to expand in emerging markets with our first ever location in Malaysia. Customers from all over the country came together with our team members to celebrate this special moment. Elsewhere in the world, our teams have been sharing the magic of Apple Vision Pro and demos that delight, inspire, and deeply move customers exploring the wonders of spatial computing for the first time. At the heart of all of our innovations are the values that guide everything we do. We believe fundamentally that the best technology is technology that works for everyone. And in honor of Global Accessibility Awareness Day, we introduced all new capabilities to give users more ways to take advantage of all our products can do. These include eye tracking for users to control iPhone or iPad visually, music haptics to give those who are deaf or hard of hearing a tangible way to experience music, and vocal shortcuts that tie task to a user's voice. And we are committed as ever to shipping products that offer the highest standards of privacy for our users. With everything we do, whether it's offering a browser like Safari that prevents third-parties from tracking you across the internet or providing new features like the ability to lock and hide apps, we are determined to keep our users in control of their own data. And we are just as dedicated to ensuring the security of our users' data. That's why we work to minimize the amount of data we collect and work to maximize how much is processed directly on people's devices, a foundational principle that is at the core of all we build, including Apple Intelligence. And we continue to make significant progress on the environment. We are proud to say that all of our data centers, including those that will run private cloud compute, operate on 100% renewable energy. At Apple, we're constantly accelerating our pace of innovation. We are a company in relentless pursuit of big ideas. Time and again, we've seen how a spark of creativity can reach breakthrough velocity, reach across previously unexplored dimensions, and ultimately take flight in ways that can change the world. It's why we're going to keep investing in the meaningful innovation that enriches the lives of all of our customers. We have a busy time ahead of us, and I couldn't be more excited for all the amazing things yet to come. With that, I'll turn it over to Luca. Luca Maestri : Thank you, Tim, and good afternoon, everyone. We are very pleased to report a new June quarter revenue record of $85.8 billion, up 5% year-over-year, despite 230 basis points of negative foreign exchange impact. We achieved growth in the vast majority of our markets, with June quarter revenue records in the Americas, Europe, and rest of Asia Pacific. Products revenue was $61.6 billion, up 2% year-over-year, driven by the launch of the new iPad Pro and iPad Air. Our installed base of active devices reach an all-time high across all products and geographic segments, thanks to our unmatched levels of customer satisfaction and loyalty and a large number of customers who are new to our products. Services revenue reached an all-time record of $24.2 billion, up 14% year-over-year, with an all-time record in developed markets and a June quarter record in emerging markets. Company gross margin was 46.3% near the high end of our guidance range and down 30 basis points sequentially driven by a different mix within products which was partially offset by a favorable mix shift towards services and cost savings. Products gross margin was 35.3%, down 130 basis points sequentially, primarily driven by mix, partially offset by favorable costs. Services gross margin was 74% down 60 basis points from last quarter. Operating expenses of $14.3 billion were at the low end of the guidance range we provided and up 7% year-over-year. Net income was $21.4 billion, diluted EPS of $1.40 was up 11% year-over-year and set a June quarter record. And operating cash flow was very strong at $28.9 billion, also a June quarter record. Let me get into more detail for each of our revenue categories. iPhone revenue was $39.3 billion, down 1% year-over-year, but grew on a constant currency basis. We set June quarter records across several countries, including the UK, Spain, Poland, Mexico, Indonesia, and the Philippines. And the iPhone Active installed base grew to a new all-time high in total and in every geographic segment. During the June quarter, many iPhone models were among the top selling smartphones around the world. In fact, according to a survey from Kantar, iPhone was the top selling model in the US, urban China, the UK, Germany, Australia, and Japan. Customer satisfaction on the iPhone 15 family continues to be extremely high, with 451 Research measuring it at 98% in the US in their latest reports. Mac generated $7 billion in revenue, up 2% year-over-year, driven by the MacBook Air powered by the M3 chip. We saw particularly strong performance in our emerging markets, with June quarter records for Mac in Latin America, India, and South Asia. The Mac installed base reached an all-time high with half of MacBook Air customers in the quarter being new to Mac. And customer satisfaction for Mac was recently reported at 96% in the US. iPad revenue was $7.2 billion, up 24% year-over-year, driven by the launch of the new iPad Pro and iPad Air. Customers are loving the latest iPad lineup for its new design and display, unparalleled performance, AI capabilities and much more. The iPad install base has continued to grow and is an all-time high, as half of the customers who purchased iPads during the quarter were new to the product. Also, customer satisfaction was recently measured at 97% in the US. Wearables, home and accessories revenue was $8.1 billion, down 2% year-over-year, a sequential acceleration from the March quarter. Watch and AirPods continue to face a difficult compare against prior year launches of the AirPods Pro second generation, the Watch SE and the first Watch Ultra. Apple Watch continues to attract new customers, with almost two-thirds of customers purchasing an Apple Watch during the quarter being new to the product, sending the Apple Watch install base to a new all-time high. And the latest reports from 451 Research indicate a customer satisfaction of 97% for watch in the US. In services, total revenue reached an all-time record of $24.2 billion, growing 14% year-over-year. We continue to have great momentum in services, as the growth of our installed base of active devices, sets a strong foundation for the future expansion of our ecosystem. And we see increased customer engagement with our services offerings. Both transacting accounts and paid accounts reach a new all-time high with paid accounts growing double digits year-over-year. Also, paid subscriptions showed strong double digit growth. We have well over 1 billion paid subscriptions across the services on our platform, more than double the number that we had only four years ago. And we are constantly focused on improving the breadth and quality of our services. From critically acclaimed new content on Apple TV+ to new games on Apple Arcade and the many latest features we previewed during WWDC for iCloud, Apple Pay, Apple Cash, Apple Music, and more. Turning to enterprise, we continue to see businesses, leveraging our entire suite of products to drive productivity and creativity for their teams and customers. USAA, a leading insurance and financial services company, recently expanded beyond their existing iPhone and iPad deployments to provide their employees with the latest MacBook Air. And American Express has continued to add to their fleet of over 10,000 Macs to enhance their employees' productivity, security, and collaboration. We're also excited to see leading organizations such as Boston Children's Hospital and Lufthansa using Apple Vision Pro to build innovative spatial computing experiences to transform the training of their workforces. Let me now turn to our cash position and capital return program. We ended the quarter with $153 billion in cash and marketable securities. We repaid $4.3 billion in maturing debt and increased commercial paper by $1 billion, leaving us with total debt of $101 billion. As a result, net cash was $52 billion at the end of the quarter. During the quarter, we returned over $32 billion to shareholders, including $3.9 billion in dividends and equivalents and $26 billion through open market repurchases of 139 million Apple shares. As we move ahead into the September quarter, I'd like to review our outlook, which includes the types of forward-looking information that Suhasini referred to at the beginning of the call. The color we are providing today assumes that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter. We expect foreign exchange to continue to be a headwind and to have a negative impact on revenue of about 1.5 percentage points on a year-over-year basis. We expect our September quarter total company revenue to grow year-over-year at a rate similar to the June quarter. We expect services revenue to grow double digits at a rate similar to what we reported in the first three quarters of this fiscal year. We expect gross margin to be between 45.5% and 46.5%. We expect OpEx to be between $14.2 billion and $14.4 billion. We expect OI&E to be around negative $50 million, excluding any potential impact from the mark to market of minority investments, and our tax rate to be around 16.5%. Finally, today our Board of Directors has declared a cash dividend of $0.25 per share of common stock payable on August 15, 2024, to shareholders of record as of August 12, 2024. With that, let's open the call to questions. Suhasini Chandramouli : Thank you Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please? Operator: Certainly. We will go ahead and take our first question from Erik Woodring with Morgan Stanley. Please go ahead. Erik Woodring: Great. Thank you very much for taking my question. Maybe Tim, if we start with you, you know, I thought some of the color you provided before the call about iPhone 15 performing better than the iPhone 14 was interesting. So just with that context, can you maybe help us understand where you see iPhone replacement cycles today, where you think the size of the base of iPhones that are aged and likely to upgrade are, and what that translates to in potential pent-up demand, as we enter a new iPhone cycle. And I have a follow-up, thank you. Tim Cook: Yes, hi Eric. The installed base hit an all-time high during the quarter and so we were very happy about that. iPhone in general grew in constant currency. And the 15, as you point out, if you look at the same number of weeks of the 15 from launch and compare that to the 14, the 15 is doing better than the 14. And so that's kind of a state of where we currently are. In terms of upgrade rates, it's very difficult mid-cycle to call upgrade rates. I would just say that with Apple Intelligence, we are very excited about the level of value that we're going to provide to users. And we believe that -- that presents another reason for a compelling upgrade. Erik Woodring: Okay, that's very helpful. Thanks, Tim. And then second, can you maybe dig into the China dynamics a bit? Sales down 6% this quarter, 3% in constant currency, an improvement from last quarter on a tougher compare that came on the back of some iPhone discounting. So can you maybe just share color on the China market as a whole how much you believe promotions helped in the quarter, how sustainable this improvement is, and if this performance really changes any of your approach to the China market as we look forward. Thanks so much. Tim Cook: Yeah, Erik, as you point out, we decreased by 6.5% year-over-year for the whole of Greater China. And if you look at it on a constant currency basis, we declined by less than 3%. So over 50% of the decline year-over-year is currency related. That is an improvement from the first half of the fiscal year, and so we're happy to see the acceleration. If you look at iPhone in particular for Greater China, the installed base set a record. We also in Mainland China set a June quarter record for upgraders and so that's a very strong signal and in fact from Kantar -- the survey from Kantar this quarter showed that iPhones were the top three models in urban China. Also, if you look at -- one of the things we look at is the 15 family compared to the 14 family for the same number of weeks from launch. So this goes all the way back to the September of 2023. If you look at that, the 15 is outperforming the 14. And so those are some of the color I would provide. In addition, one of the things that we're very focused on is the level of new customers buying our products. And so if you look at this on the Mac and iPad, in Mainland China, the majority of customers buying or buying for the first time, buying that product for the first time and the watch, the vast, vast majority of people are buying a product for the first time. And during the quarter, I should say also that iPad returned to growth in Greater China, as it did around the world. And so we continue to be confident in the long-term opportunity in China. I don't know how every chapter of the book reads, but we're very confident in the long-term. Erik Woodring: Great. Thanks so much. Tim Cook: Yeah. Suhasini Chandramouli: Thank you, Erik. Operator, may we have the next question, please? Operator: Our next question is from Ben Reitzes with Melius. Please go ahead. Ben Reitzes: Hey, thanks a lot. Appreciate it. Hey, Tim, you know, now that you've launched or announced Apple intelligence, do you have any ideas on how it may impact services. Would it – do you feel like it'll accelerate your Services business augmented? And maybe folks will need to buy more storage and some other things. How are you thinking about it as a catalyst for Services into next year? And I have a follow-up. Thanks. Tim Cook: We started the rollout of Apple Intelligence this week with developers, so some of the features are out there as of Monday. And we couldn't be more excited about getting them out there. Obviously, this will enable developers to take their apps to the next level. And so we are taking the first step in getting the beta out there, and we can't wait to see what kind of amazing things they do with it. Ben Reitzes: Okay. Thanks. And then Luca, with regard to gross margin, it's been -- there's been some component price inflation and mix. Do you mind just giving us a little more color on how you are managing that sequentially and how you feel about the current component environment as an impact on margins? Thanks. Luca Maestri: Sure, Ben. I think I'll give you a bit of the walk for the June quarter and then get into the outlook that we provided for the September quarter. At the total company level, we've reported 46.3%. It is down 30 basis points sequentially, and it was really driven by a different mix. Within products, of course, we launched very important products like the iPad during the course of the quarter. But we had an offset from a shift in mix towards Services, and we got some good cost savings. And so when you look at it on a year-over-year basis, we are up significantly on the margin front. And keep in mind that foreign exchange continues to be a bit of a headwind for us. As we go into the September quarter, we are guiding 45.5% to 46.5%, which is kind of within the guidance that we provided last quarter. Again similar dynamics, we expect a slightly different mix. We expect foreign exchange to have a minimal impact sequentially, although a more significant impact on a year-over-year basis. On the commodity side, I think that is what you are referring to, yes we have seen some increases on the memory front, but the rest of the commodities, we see a continuous decline. So in general, we feel -- we're well positioned. And as you know well, these are very high levels of gross margin for us and we are pleased where we are. Ben Reitzes: Okay. Thanks a lot. Suhasini Chandramouli: Thank you Ben. Operator may we have the next question please. Operator: Our next question is from Mike Ng with Goldman Sachs. Please go ahead. Mike Ng: Hi, good afternoon. I just have two questions. First, I was wondering if you could talk about whether or not you've seen a shift in demand for iPhone 15 Pro, Pro Max models since WWDC that could potentially foreshadow consumer demand for Apple Intelligence enabled phones? Tim Cook: We just announced the sort of the requirements at the system and the silicon level in June. And so we had very limited time during the quarter. So it's really too early to tell. Mike Ng: That's fair. And then with the focus on upgrader potential over the next several years, I was just wondering if you could talk about what you are expecting from the US promotional environment from your channel partners, whether that's US wireless carriers, given the importance of device sales for those partners during an upgrade cycle. Or any retail support on what could be a very strong smartphone upgrade period? Thank you. Tim Cook: We are very excited about Apple Intelligence and what it brings, and it is another compelling reason for an upgrade. I'd leave the promotional question for the sort of the carriers themselves to answer. But I believe it will be a very key time for -- and a compelling upgrade cycle. Mike Ng: Great. Thank you Tim. Suhasini Chandramouli: Thanks Mike. Operator, can we have the next question please. Operator: Our next question is from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani: Good afternoon everyone. And I have two as well. I guess, Tim, maybe back to the Apple Intelligence dynamic. There's clearly a lot of excitement from consumers around what Apple Intelligence could mean for them. Can you just touch on your -- do you think the intent is to launch all the Apple Intelligence features at the same time to consumers, or do you think they end up getting staggered a bit? And if they are staggered, do you think it impacts how consumers come out and buy the next-generation iPhone? Tim Cook: The rollout, as we mentioned in June, sort of -- we've actually started with developers this week. We started with some features of Apple Intelligence, not the complete suite. There are other features like languages beyond US English that will happen over the course of the year, and there are other features that will happen over the course of the year. And ChatGPT is integrated by the end of the calendar year. And so yes, so it’s a staggered launch. Amit Daryanani: Got it. And then I guess your Services growth rates have been extremely impressive for several quarters and it seems like it is accelerated recently. Can you just touch -- talk about when you look at this double-digit growth, how much of that do you think is coming from the installed base growth versus better ARPU or better monetization of the installed base? And how do you kind of see that mix changing as you go forward? Luca Maestri: Yes, Amit, it is Luca. It's a combination of a number of factors. The installed base growth is very important of course, because we have a larger pool of customers that uses the ecosystem and uses our Services. We are seeing and we've seen this consistently for many, many quarters now. We see continued growth in the level of engagement that our customers have with our ecosystem. We have more transacting accounts every quarter, so more people using the ecosystem both the free elements of the ecosystem and the paid elements. We see paid accounts growing double digits, and we've seen that for many, many quarters. Now we look at our paid subscriptions on our platform, and they are growing strong double digits as well. So obviously, the growing level of engagement helps us both from an ARPU standpoint and just a volume standpoint. Obviously, as you've seen over the last several years, we launched new services over time, and we've launched many new services, fairly recently. Obviously, our payments business is relatively new, Apple TV+, Apple Arcade, Fitness+, so many other services we've added. And so we are providing more and more opportunities for our customers to interact with the ecosystem. And we believe we are doing also a very good job at improving the quality of these services and improving the amount of content that we make available. We continue to make significant investments on TV+, on Apple Arcade. We are launching new shows, new games all the time. And I think you will continue to see that as we go forward. We are very, very happy with the 14% growth that we had this quarter because, particularly if you look at the performance that we had in Services a year ago, the compares for us tend to get a bit more challenging in the second half of our fiscal year. But in spite of that, we delivered a level of growth that was better than what we were expecting at the beginning of the quarter. Suhasini Chandramouli: Thanks Amit. Operator we will take the next question please. Operator: Our next question is from Wamsi Mohan with Bank of America. Please go ahead. Wamsi Mohan: Yes. Thank you so much. Tim, you announced Apple Intelligence, but you also announced partnerships with OpenAI and presumably more coming down the road. How should investors think about the monetization models around these partnerships where the CapEx investments are clearly being made by these potential partners. But you're obviously -- they're leveraging your distribution to your very attractive installed base. So in the long-term, do you see the Apple Intelligence part -- the Services growth from Apple Intelligence being the larger contributor over time? Or do you see these partnerships becoming a larger contributor over time? And I have a follow-up. Tim Cook: I think the way that I look at it is that Apple Intelligence is the on-device processing and the Private Cloud Compute. And a lot of that will be things with a personal context. And then for world knowledge, we are integrating with ChatGPT initially, and that will be focused on world knowledge as I said. And so the monetization model, I don't want to get into the terms of the commercial agreements because they are confidential between the parties. But I see both aspects as being very important. People want both. Wamsi Mohan: Okay. Thanks. As a follow-up maybe for Luca. Just stepping back to the gross margin discussion again. If I look at calendar 2023, you had on average 150 basis points increase in product gross margins on a year-on-year basis. In 2024 so far, it had been more flat year-on-year. When we think about that, is the incremental headwind, I mean there was FX headwinds throughout the last several years. So ex-FX, are there other incremental headwinds that are either temporary or structural in nature that are perhaps limiting further upside to what are obviously very strong gross margins? Thank you. Luca Maestri: Yes. Of course, as you said, the foreign exchange continues to be -- this is incremental on a year-over-year basis. And it is one of those things that is outside of our control. We try to hedge our exposures. But it is what it is. We know that when the dollar is strong, our gross margins are affected. The other element that I think it's always important to keep in mind is that within the Products business, our products have different margin profiles. And depending on the relative success in the marketplace, our products' gross margin tends to move. And so the mix of our products has an impact on gross margins, right? And so we need to pay attention to that. Of course, we just launched an iPad and that is one of the factors. But we want all our products to be very successful in the marketplace. And that's why we always look at gross margin dollars as the first order of priority, and gross margin percentage tends to follow from that. The other factor that obviously has an impact, a significant impact is the state of the commodity markets, and they tend to go in cycles. And so we will see how that plays out over time. But in general, we feel good about the level of gross margins that we have for our products business, and we think we are in a good position there. Suhasini Chandramouli: Thanks Wamsi. Operator, can we have the next question please. Operator: Our next question is from Krish Sankar with TD Cowen. Please go ahead. Krish Sankar: Hi, thanks for taking my question. And congrats on the strong results. The first one for Luca or Tim. We keep hearing about these increasing silicon content for AI edge devices. And also, I think, Luca you spoke about increasing commodity costs. So I'm curious how to think about margins for these new AI devices. And Tim, do any of these Apple Intelligence features need more hardware updates than what we have today? And then I have a quick follow-up. Tim Cook: Maybe I'll take the second one first and then pass it over to Luca. In terms of the requirements to run Apple Intelligence, there are system requirements and there are silicon requirements. And so from an iPhone point of view, the iPhone 15 Pro and Pro Max will run Apple Intelligence and the successor products obviously. If you look at the Mac, it starts with the M series of silicon that started in 2020. And the iPad is the same, and so it starts with the M series of silicon. And so there are system requirements and silicon requirements that go with each of those. Luca Maestri: And from a gross margin standpoint, as you know, we don't provide any color past the current quarter, and we just provided guidance for the quarter 45.5% to 46.5%. It is essentially broadly in line with what we reported for the June quarter. So we'll take it quarter by quarter and we will report as the time goes by. Krish Sankar: Got it. Very helpful. And then a quick follow-up for Tim. Thanks for the color on China. We also see many other consumer discretionary and luxury brands talk about a weak China. And I think Tim, you said half the details was FX related. I'm curious, the other half of the weakness, was that more China macro related or do you think it is kind of like specific to Apple with domestic competitors? Any other color you could give would be very helpful. Thank you very much. Tim Cook: Well, certainly, the competitive environment there is the most competitive in the world. I've said that before and that remains to be the case. The macroeconomic factors have been in the press too, and I'm not an expert on those. I can only tell you what we're seeing. And we were pleased that the business showed improvement from the first half of the year. Krish Sankar: Thanks Tim. Suhasini Chandramouli: Thank you Krish. Operator, can we have the next question please. Operator: Our next question is from David Vogt with UBS. Please go ahead. David Vogt: Great. Two, if I may also. Tim, first one for you. I know it is early days, and you talked about the developers just getting their hands on Apple Intelligence. But when you think about the categories that are currently in the App Store and kind of what you think app developers could do with this new technology, what's your instinct say in terms of -- are these going to be iterative applications to currently available applications? Is there any sort of category that you think lends itself more naturally to Apple Intelligence? Is it games? Is it more creative? I'm just trying to get a sense of how you're thinking about it. And then I have a follow-up for Luca. Thanks. Tim Cook: If you look at how we've deployed Apple Intelligence or are deploying Apple Intelligence, we've really thought about it at pretty much all of the apps that you use every day. And so we've thought about it from Notes to Mail to Messages and all the rest. And so there is been a deep level of thinking about how it affects those apps. And that's going to surface Apple Intelligence in a way that is natural to the user, in a way that will I think, get them very excited about it and get usage. Similarly, I think the developers will do that on a broad basis with their apps as well. And so I think, it is profound and we'll see what the developers do. But we're very excited to get the initial seed out there this week and see what they do. I think it will be amazing, yes. David Vogt: Yes. No, that's helpful. I appreciate it. And Luca, just maybe -- I know you didn't give a full rundown of product categories in your prepared remarks. But if I kind of take your comments at face value, I guess what I'm trying to think about is for the next quarter, it sounds like with Services being relatively strong and FX easing a little bit. You are effectively saying that product revenue in the September quarter is going to basically be flat with the September quarter last year ahead of a product launch. And so I'm just trying to get a sense for, what are the puts and takes in that sort of outlook particularly as you have Apple Intelligence hopefully stoking the fire for demand going forward? Thanks. Luca Maestri: Well, we have provided -- let me repeat what we provided. We think that we are going to be growing total company revenue at a rate that is similar to what we reported, so the plus 5%, right? In spite of the fact that we are going to have some foreign exchange headwinds, and we said about 150 basis points in the December quarter. And we said that we will grow Services double digits at a rate that is similar to what we've reported for the first three quarters of the fiscal year. We are not going into the other categories. I think there is a lot of good math that you can do from what we've given you here. Keep in mind on the Mac that we will have a challenging compare from a year ago, given the fact that we launched and we had the full quarter impact of the launch of the MacBook Air 15-inch a year ago. And also on the iPad, we reported 24% growth in the June quarter. Clearly we had the benefit from the launch in the June quarter of the new products, the iPad Air and the iPad Pro. So important to keep that in mind on a sequential basis. David Vogt: Great. Thank you very much. Suhasini Chandramouli: Thank you David. Operator may we have the next question please. Operator: Our next question is from Atif Malik with Citi. Please go ahead. Atif Malik: Hi, thank you for taking my question. The first one is for Tim. I know it's early days. The feedback on Apple Intelligence software features like notification summary and reduced interruption focus from the developers who have tried the iOS 18.1 beta version this week is very positive. My question is in response to an earlier question, you talked about a staggered launch on some of these software features. So are you expecting most of the features that you announced at WWDC to be part of iOS 18? Or we should be thinking that some of these features could potentially be part of iOS 19 next year? Tim Cook: Our objective that we said in June is to roll out US English starting in the fall and that is to users, and then proceed with more functionality, more features, if you will, and more languages and regions coverage as we proceed across the next year. And so we sort of gave a time frame that -- and we're tracking to that. Atif Malik: Understand. And the next one for Luca. Luca the Services growth momentum seems very strong. Are you seeing any impact from changes made to comply with the DMA rules? Luca Maestri: Well, as you know we have introduced some changes to the way we run the App Store in Europe already in March. And we are seeing a good level of adoption from developers on those changes. We are on an ongoing basis, discussing with the European Commission how to ensure full compliance with the DMA. It is obviously early stage, but in general, our results for the Services business and for the App Store have been pretty good until now. Again to just provide you a frame of reference, the percentage of revenue that we generate from the European Union on the App Store is about 7% of the total. Atif Malik: Very helpful. Thank you. Suhasini Chandramouli : Thank you Atif. Operator may we have the next question please. Operator: Our next question is from Samik Chatterjee with JPMorgan. Please go ahead. Samik Chatterjee: Yes. Hi. Thanks for taking my question. I guess, Tim, if I can just ask you about Apple Intelligence as well. There is a regulatory aspect as well in certain geographies. You mentioned the staggered launch that you are aiming for and the timelines you're thinking. How are you thinking about the complexity of the regulatory process, in particular like EU and maybe China? And does -- in terms of your timelines of the rollout, are you sort of embedding in the regulatory aspect here? And how should we think about timing then including that? And I have a follow-up. Thank you. Tim Cook: We are engaged as you would guess, with both regulatory bodies that you mentioned. And our objective is to move as fast as we can, obviously because our objective is always to get features out there for everyone. We have to understand the regulatory requirements before we can commit to doing that and commit a schedule to doing that. But we're very constructively engaged with both. Samik Chatterjee: Okay, got it. And a quick one on the Wearables category, Luca. I know you mentioned the acceleration there on a sequential basis. Maybe you can just sort of parse that out in terms of what -- which categories drove the acceleration because that's been a category that has been lagging a bit in terms of revenue trends for the past couple of quarters. So just curious what is starting to sort of drive it to accelerate on a sequential basis? Thank you. Tim Cook: Yes, I'll take that one. I think the important thing to remember when you look at the Wearables, Home and Accessories categories is that we have a difficult launch compare. And we've been running that for a few quarters and we still have that because last year had the continued benefit from the AirPods Pro second generation, the Watch SE and the very first Watch Ultra. And so it is important to keep that in mind. If you sort of take a step back, however and look at the business across the trailing 12 months, it is grown -- the Wearables, Home and Accessories business has grown to almost $40 billion, which is double what it was five years ago. Samik Chatterjee: Thank you. Suhasini Chandramouli: Thank you Samik. Operator, may we have the last question please. Operator: Our last question is from Richard Kramer with Arete Research. Please go ahead. Richard Kramer: Thanks. Thanks very much. Tim, you referenced the investment in innovation, and your R&D sales ratio reached what I think was a June quarter record even before launching Apple Intelligence. Do you see the rollout of these features requiring further increases in R&D or increases in OpEx or CapEx for cloud compute capacity? And is it even possible to forecast the Services usage as they roll out, given that they are so new for consumers? Thanks. Tim Cook: Clearly, we have increased R&D over time. We have been investing in AI and ML for years. And in addition to investing more, we've also redeployed certain skills onto AI and ML. And so the growth in sort of embedded in our numbers that we've shared here, it is increasing year-over-year. On the CapEx part, it is important to remember that we employ a hybrid kind of approach, where we do things internally and we have certain partners that we do business with externally where the CapEx would appear in their respective businesses. But yes, I mean you can expect that there is -- we will continue to invest and increase it year-on-year. Richard Kramer: Okay. And maybe a quick follow-up for Luca. When we look at the free cash flow margins for the first nine months, they are up materially. And given this year's product mix, can you describe to us what exactly in the Services mix or cost control is driving what seems to be structurally higher free cash flow margins across the business? Luca Maestri: Yes, I'm glad you noticed that. We are pretty pleased with that fact. And I think you probably also noticed that we've increased our return of capital to shareholders this quarter. This one was a record quarter for us. Well, it's a combination of a number of things. Of course, an improvement in the top-line helps the margin expansion that we've had over the last several years and several quarters obviously has helped. And so that is driving better operating cash flow. On the CapEx front as Tim said, we employ a hybrid model. Some of the investments show up on our balance sheet and some other investments show up somewhere else and we pay, as we go. But in general, we try to run the company efficiently. We continue to think that capital efficiency is a good thing. And therefore, we are pleased with the fact that our free cash flow is doing well this year. Richard Kramer: Okay. Thanks. Suhasini Chandramouli: Thank you, Richard. A replay of today's call will be available for two weeks on Apple Podcasts, as a webcast on apple.com/investor, and via telephone. The number for the telephone replay is (866)-583-1035. Please enter confirmation code 1969407 followed by the pound sign. These replays will be available by approximately 5 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at (408)-862-1142. And financial analysts can contact me, Suhasini Chandramouli with additional questions at (408)-974-3123. Thank you again for joining us today. Operator: Once again this does conclude today's conference. We do appreciate your participation.	[ { "speaker": "Suhasini Chandramouli", "text": "Good afternoon and welcome to the Apple Q3 Fiscal Year 2024 Earnings Conference Call. My name is Suhasini Chandramouli, Director of Investor Relations. Today's call is being recorded. Speaking first today is Apple’s CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, and future business outlook including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed Annual Report on Form 10-K and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thank you Suhasini. Good afternoon everyone and thanks for joining the call. Today, Apple is reporting a new June quarter revenue record of $85.8 billion, up 5% from a year ago and better than we had expected. EPS grew double digits to $1.40 and achieved a record for the June quarter. We also set quarterly revenue records in more than two dozen countries and regions, including Canada, Mexico, France, Germany, the UK, India, Indonesia, the Philippines, and Thailand. And we set an all-time revenue record in services which grew 14%. At our Worldwide Developers Conference, we were thrilled to unveil game-changing updates across our platforms, including Apple Intelligence. Apple Intelligence builds on years of innovation and investment in AI and Machine Learning. It will transform how users interact with technology, from writing tools to help you express yourself, to image playground, which gives you the ability to create fun images and communicate in new ways, to powerful tools for summarizing and prioritizing notifications. Siri also becomes more natural, more useful, and more personal than ever. Apple Intelligence is built on a foundation of privacy, both through on-device processing that does not collect users' data and through private cloud compute, a groundbreaking new approach to using the cloud, while protecting users' information powered by Apple silicon. We are also integrating ChatGPT into experiences within iPhone, Mac, and iPad, enabling users to draw on a broad base of world knowledge. We are very excited about Apple Intelligence and we remain incredibly optimistic about the extraordinary possibilities of AI and its ability to enrich customers' lives. We will continue to make significant investments in this technology and dedicate ourselves to the innovation that will unlock its full potential. Recently, we've also been excited to bring Apple Vision Pro to more countries, giving customers the chance to discover the remarkable capabilities of this magical device. Vision Pro users are customizing their own workspaces, watching movies on 100-foot screens, and exploring entire worlds with just a pinch of their fingertips. With more than 2,500 native spatial apps and 1.5 million compatible apps for Vision OS, the developer community continues to pioneer stunning spatial experiences that are only possible with Vision Pro. Last month, we announced that we're bringing some amazing new immersive content to Vision Pro, including new series, concerts, films, and more. And we've seen great interest for Vision Pro in the enterprise, where it can empower companies large and small to pursue their best ideas like never before. With each innovation, we're unlocking new ways of working, new ways of learning, and new ways of tapping into the unlimited promise of human potential. We are doing that across every product and every service. Now let me share more detail in our June quarter results, beginning with iPhone. iPhone revenue was $39.3 billion, down 1% year-over-year. On a constant currency basis, we grew compared to last year. Customers continue to praise the iPhone 15 lineup for its incredible battery life, exceptional cameras, and unmatched power and performance. And we are excited to bring incredible new features to the iPhone with iOS 18, making it more personal, capable, and intelligent than ever before. This update includes the biggest redesign of the Photos app, new customization options for the home screen, messages over satellite, and the introduction of Apple Intelligence. Apple Intelligence utilizes the power of our most advanced iPhones, the iPhone 15 Pro and Pro Max, offering a transformative set of capabilities. Mac revenue was $7 billion, up 2% from a year ago. Customers are loving the latest M3-powered 13 and 15 inch MacBook Air. With back-to-school season upon us, MacBook Air is the perfect companion for students on campus and small business owners, developers, and creatives of all kinds depend on Mac to do more than they ever could before. Powered by Apple silicon with its neural engine and privacy built in at the chip level, Macs are simply the best personal computers for AI. And every Mac we've shipped with Apple silicon since 2020, is capable of taking advantage of Apple Intelligence with Mac OS Sequoia. We also know the importance of security for our users and enterprises so we continue to advance protections across our products. Turning to iPad, revenue was $7.2 billion, 24% higher year-over-year. During the quarter, we had an incredible launch where we unveiled the all-new 11 and 13 inch iPad Air, the perfect device for education, entertainment, and so much more. And With the new iPad Pro, we pushed the boundaries of power-efficient performance with the remarkable M4 chip, the engine behind this incredibly thin device. By leveraging the latest in Apple silicon, Video Editors and Musicians can take advantage of the cutting edge AI features in Final Cut Pro and Logic Pro. And we're very excited that iPad Pro and iPad Air models powered by the M series of Apple silicon will be able to utilize the powerful capabilities of Apple Intelligence. In wearables, home, and accessories, revenue was $8.1 billion, down 2% from a year ago. Apple Watch is empowering users to live a healthier day with a range of tools to take charge of their wellness journeys. At the core of Apple Watch, are powerful AI features that are helping users get help when they need it most, from irregular heart rhythm notifications to walking steadiness to crash detection and fall detection. I've heard time and again how meaningful these features are for users and their loved ones, and their stories motivate us to keep pushing forward on this vital work. As I mentioned earlier, in services, we set an all-time revenue record of $24.2 billion with paid subscriptions climbing to an all-time high. We achieve revenue records in the majority of the services categories with all-time revenue records in advertising, cloud, and payment services. Apple TV+ productions are delighting audiences on screens large and small. We're sharing powerful works of imagination with series and movies like Presumed Innocent, the Upcoming Disclaimer, and The Instigators starring Matt Damon. And we can't wait for returning fan favorites with new seasons of The Morning Show, Slow Horses, and Severance. Apple TV+ productions also continue to earn accolades with nearly 2,300 nominations and 500 wins to-date. That includes 72 Emmy Award nominations across 16 programs our best ever showing for the upcoming awards event. During the quarter, we also expanded Tap to Pay on iPhone to more markets including Japan, Canada, Italy, and Germany, enabling more businesses to use the power of iPhone to accept contactless payments. And we announced new updates to our services coming this fall, including US national park hikes and custom walk routes and Apple Maps, the ability to pay with rewards using Apple Pay, collaborative listening with Apple Music, and a redesigned Apple Fitness+ experience to help users make the most of our library of workouts and meditations. Turning to retail, we continue to expand in emerging markets with our first ever location in Malaysia. Customers from all over the country came together with our team members to celebrate this special moment. Elsewhere in the world, our teams have been sharing the magic of Apple Vision Pro and demos that delight, inspire, and deeply move customers exploring the wonders of spatial computing for the first time. At the heart of all of our innovations are the values that guide everything we do. We believe fundamentally that the best technology is technology that works for everyone. And in honor of Global Accessibility Awareness Day, we introduced all new capabilities to give users more ways to take advantage of all our products can do. These include eye tracking for users to control iPhone or iPad visually, music haptics to give those who are deaf or hard of hearing a tangible way to experience music, and vocal shortcuts that tie task to a user's voice. And we are committed as ever to shipping products that offer the highest standards of privacy for our users. With everything we do, whether it's offering a browser like Safari that prevents third-parties from tracking you across the internet or providing new features like the ability to lock and hide apps, we are determined to keep our users in control of their own data. And we are just as dedicated to ensuring the security of our users' data. That's why we work to minimize the amount of data we collect and work to maximize how much is processed directly on people's devices, a foundational principle that is at the core of all we build, including Apple Intelligence. And we continue to make significant progress on the environment. We are proud to say that all of our data centers, including those that will run private cloud compute, operate on 100% renewable energy. At Apple, we're constantly accelerating our pace of innovation. We are a company in relentless pursuit of big ideas. Time and again, we've seen how a spark of creativity can reach breakthrough velocity, reach across previously unexplored dimensions, and ultimately take flight in ways that can change the world. It's why we're going to keep investing in the meaningful innovation that enriches the lives of all of our customers. We have a busy time ahead of us, and I couldn't be more excited for all the amazing things yet to come. With that, I'll turn it over to Luca." }, { "speaker": "Luca Maestri", "text": "Thank you, Tim, and good afternoon, everyone. We are very pleased to report a new June quarter revenue record of $85.8 billion, up 5% year-over-year, despite 230 basis points of negative foreign exchange impact. We achieved growth in the vast majority of our markets, with June quarter revenue records in the Americas, Europe, and rest of Asia Pacific. Products revenue was $61.6 billion, up 2% year-over-year, driven by the launch of the new iPad Pro and iPad Air. Our installed base of active devices reach an all-time high across all products and geographic segments, thanks to our unmatched levels of customer satisfaction and loyalty and a large number of customers who are new to our products. Services revenue reached an all-time record of $24.2 billion, up 14% year-over-year, with an all-time record in developed markets and a June quarter record in emerging markets. Company gross margin was 46.3% near the high end of our guidance range and down 30 basis points sequentially driven by a different mix within products which was partially offset by a favorable mix shift towards services and cost savings. Products gross margin was 35.3%, down 130 basis points sequentially, primarily driven by mix, partially offset by favorable costs. Services gross margin was 74% down 60 basis points from last quarter. Operating expenses of $14.3 billion were at the low end of the guidance range we provided and up 7% year-over-year. Net income was $21.4 billion, diluted EPS of $1.40 was up 11% year-over-year and set a June quarter record. And operating cash flow was very strong at $28.9 billion, also a June quarter record. Let me get into more detail for each of our revenue categories. iPhone revenue was $39.3 billion, down 1% year-over-year, but grew on a constant currency basis. We set June quarter records across several countries, including the UK, Spain, Poland, Mexico, Indonesia, and the Philippines. And the iPhone Active installed base grew to a new all-time high in total and in every geographic segment. During the June quarter, many iPhone models were among the top selling smartphones around the world. In fact, according to a survey from Kantar, iPhone was the top selling model in the US, urban China, the UK, Germany, Australia, and Japan. Customer satisfaction on the iPhone 15 family continues to be extremely high, with 451 Research measuring it at 98% in the US in their latest reports. Mac generated $7 billion in revenue, up 2% year-over-year, driven by the MacBook Air powered by the M3 chip. We saw particularly strong performance in our emerging markets, with June quarter records for Mac in Latin America, India, and South Asia. The Mac installed base reached an all-time high with half of MacBook Air customers in the quarter being new to Mac. And customer satisfaction for Mac was recently reported at 96% in the US. iPad revenue was $7.2 billion, up 24% year-over-year, driven by the launch of the new iPad Pro and iPad Air. Customers are loving the latest iPad lineup for its new design and display, unparalleled performance, AI capabilities and much more. The iPad install base has continued to grow and is an all-time high, as half of the customers who purchased iPads during the quarter were new to the product. Also, customer satisfaction was recently measured at 97% in the US. Wearables, home and accessories revenue was $8.1 billion, down 2% year-over-year, a sequential acceleration from the March quarter. Watch and AirPods continue to face a difficult compare against prior year launches of the AirPods Pro second generation, the Watch SE and the first Watch Ultra. Apple Watch continues to attract new customers, with almost two-thirds of customers purchasing an Apple Watch during the quarter being new to the product, sending the Apple Watch install base to a new all-time high. And the latest reports from 451 Research indicate a customer satisfaction of 97% for watch in the US. In services, total revenue reached an all-time record of $24.2 billion, growing 14% year-over-year. We continue to have great momentum in services, as the growth of our installed base of active devices, sets a strong foundation for the future expansion of our ecosystem. And we see increased customer engagement with our services offerings. Both transacting accounts and paid accounts reach a new all-time high with paid accounts growing double digits year-over-year. Also, paid subscriptions showed strong double digit growth. We have well over 1 billion paid subscriptions across the services on our platform, more than double the number that we had only four years ago. And we are constantly focused on improving the breadth and quality of our services. From critically acclaimed new content on Apple TV+ to new games on Apple Arcade and the many latest features we previewed during WWDC for iCloud, Apple Pay, Apple Cash, Apple Music, and more. Turning to enterprise, we continue to see businesses, leveraging our entire suite of products to drive productivity and creativity for their teams and customers. USAA, a leading insurance and financial services company, recently expanded beyond their existing iPhone and iPad deployments to provide their employees with the latest MacBook Air. And American Express has continued to add to their fleet of over 10,000 Macs to enhance their employees' productivity, security, and collaboration. We're also excited to see leading organizations such as Boston Children's Hospital and Lufthansa using Apple Vision Pro to build innovative spatial computing experiences to transform the training of their workforces. Let me now turn to our cash position and capital return program. We ended the quarter with $153 billion in cash and marketable securities. We repaid $4.3 billion in maturing debt and increased commercial paper by $1 billion, leaving us with total debt of $101 billion. As a result, net cash was $52 billion at the end of the quarter. During the quarter, we returned over $32 billion to shareholders, including $3.9 billion in dividends and equivalents and $26 billion through open market repurchases of 139 million Apple shares. As we move ahead into the September quarter, I'd like to review our outlook, which includes the types of forward-looking information that Suhasini referred to at the beginning of the call. The color we are providing today assumes that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter. We expect foreign exchange to continue to be a headwind and to have a negative impact on revenue of about 1.5 percentage points on a year-over-year basis. We expect our September quarter total company revenue to grow year-over-year at a rate similar to the June quarter. We expect services revenue to grow double digits at a rate similar to what we reported in the first three quarters of this fiscal year. We expect gross margin to be between 45.5% and 46.5%. We expect OpEx to be between $14.2 billion and $14.4 billion. We expect OI&E to be around negative $50 million, excluding any potential impact from the mark to market of minority investments, and our tax rate to be around 16.5%. Finally, today our Board of Directors has declared a cash dividend of $0.25 per share of common stock payable on August 15, 2024, to shareholders of record as of August 12, 2024. With that, let's open the call to questions." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please?" }, { "speaker": "Operator", "text": "Certainly. We will go ahead and take our first question from Erik Woodring with Morgan Stanley. Please go ahead." }, { "speaker": "Erik Woodring", "text": "Great. Thank you very much for taking my question. Maybe Tim, if we start with you, you know, I thought some of the color you provided before the call about iPhone 15 performing better than the iPhone 14 was interesting. So just with that context, can you maybe help us understand where you see iPhone replacement cycles today, where you think the size of the base of iPhones that are aged and likely to upgrade are, and what that translates to in potential pent-up demand, as we enter a new iPhone cycle. And I have a follow-up, thank you." }, { "speaker": "Tim Cook", "text": "Yes, hi Eric. The installed base hit an all-time high during the quarter and so we were very happy about that. iPhone in general grew in constant currency. And the 15, as you point out, if you look at the same number of weeks of the 15 from launch and compare that to the 14, the 15 is doing better than the 14. And so that's kind of a state of where we currently are. In terms of upgrade rates, it's very difficult mid-cycle to call upgrade rates. I would just say that with Apple Intelligence, we are very excited about the level of value that we're going to provide to users. And we believe that -- that presents another reason for a compelling upgrade." }, { "speaker": "Erik Woodring", "text": "Okay, that's very helpful. Thanks, Tim. And then second, can you maybe dig into the China dynamics a bit? Sales down 6% this quarter, 3% in constant currency, an improvement from last quarter on a tougher compare that came on the back of some iPhone discounting. So can you maybe just share color on the China market as a whole how much you believe promotions helped in the quarter, how sustainable this improvement is, and if this performance really changes any of your approach to the China market as we look forward. Thanks so much." }, { "speaker": "Tim Cook", "text": "Yeah, Erik, as you point out, we decreased by 6.5% year-over-year for the whole of Greater China. And if you look at it on a constant currency basis, we declined by less than 3%. So over 50% of the decline year-over-year is currency related. That is an improvement from the first half of the fiscal year, and so we're happy to see the acceleration. If you look at iPhone in particular for Greater China, the installed base set a record. We also in Mainland China set a June quarter record for upgraders and so that's a very strong signal and in fact from Kantar -- the survey from Kantar this quarter showed that iPhones were the top three models in urban China. Also, if you look at -- one of the things we look at is the 15 family compared to the 14 family for the same number of weeks from launch. So this goes all the way back to the September of 2023. If you look at that, the 15 is outperforming the 14. And so those are some of the color I would provide. In addition, one of the things that we're very focused on is the level of new customers buying our products. And so if you look at this on the Mac and iPad, in Mainland China, the majority of customers buying or buying for the first time, buying that product for the first time and the watch, the vast, vast majority of people are buying a product for the first time. And during the quarter, I should say also that iPad returned to growth in Greater China, as it did around the world. And so we continue to be confident in the long-term opportunity in China. I don't know how every chapter of the book reads, but we're very confident in the long-term." }, { "speaker": "Erik Woodring", "text": "Great. Thanks so much." }, { "speaker": "Tim Cook", "text": "Yeah." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Erik. Operator, may we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Ben Reitzes with Melius. Please go ahead." }, { "speaker": "Ben Reitzes", "text": "Hey, thanks a lot. Appreciate it. Hey, Tim, you know, now that you've launched or announced Apple intelligence, do you have any ideas on how it may impact services. Would it – do you feel like it'll accelerate your Services business augmented? And maybe folks will need to buy more storage and some other things. How are you thinking about it as a catalyst for Services into next year? And I have a follow-up. Thanks." }, { "speaker": "Tim Cook", "text": "We started the rollout of Apple Intelligence this week with developers, so some of the features are out there as of Monday. And we couldn't be more excited about getting them out there. Obviously, this will enable developers to take their apps to the next level. And so we are taking the first step in getting the beta out there, and we can't wait to see what kind of amazing things they do with it." }, { "speaker": "Ben Reitzes", "text": "Okay. Thanks. And then Luca, with regard to gross margin, it's been -- there's been some component price inflation and mix. Do you mind just giving us a little more color on how you are managing that sequentially and how you feel about the current component environment as an impact on margins? Thanks." }, { "speaker": "Luca Maestri", "text": "Sure, Ben. I think I'll give you a bit of the walk for the June quarter and then get into the outlook that we provided for the September quarter. At the total company level, we've reported 46.3%. It is down 30 basis points sequentially, and it was really driven by a different mix. Within products, of course, we launched very important products like the iPad during the course of the quarter. But we had an offset from a shift in mix towards Services, and we got some good cost savings. And so when you look at it on a year-over-year basis, we are up significantly on the margin front. And keep in mind that foreign exchange continues to be a bit of a headwind for us. As we go into the September quarter, we are guiding 45.5% to 46.5%, which is kind of within the guidance that we provided last quarter. Again similar dynamics, we expect a slightly different mix. We expect foreign exchange to have a minimal impact sequentially, although a more significant impact on a year-over-year basis. On the commodity side, I think that is what you are referring to, yes we have seen some increases on the memory front, but the rest of the commodities, we see a continuous decline. So in general, we feel -- we're well positioned. And as you know well, these are very high levels of gross margin for us and we are pleased where we are." }, { "speaker": "Ben Reitzes", "text": "Okay. Thanks a lot." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you Ben. Operator may we have the next question please." }, { "speaker": "Operator", "text": "Our next question is from Mike Ng with Goldman Sachs. Please go ahead." }, { "speaker": "Mike Ng", "text": "Hi, good afternoon. I just have two questions. First, I was wondering if you could talk about whether or not you've seen a shift in demand for iPhone 15 Pro, Pro Max models since WWDC that could potentially foreshadow consumer demand for Apple Intelligence enabled phones?" }, { "speaker": "Tim Cook", "text": "We just announced the sort of the requirements at the system and the silicon level in June. And so we had very limited time during the quarter. So it's really too early to tell." }, { "speaker": "Mike Ng", "text": "That's fair. And then with the focus on upgrader potential over the next several years, I was just wondering if you could talk about what you are expecting from the US promotional environment from your channel partners, whether that's US wireless carriers, given the importance of device sales for those partners during an upgrade cycle. Or any retail support on what could be a very strong smartphone upgrade period? Thank you." }, { "speaker": "Tim Cook", "text": "We are very excited about Apple Intelligence and what it brings, and it is another compelling reason for an upgrade. I'd leave the promotional question for the sort of the carriers themselves to answer. But I believe it will be a very key time for -- and a compelling upgrade cycle." }, { "speaker": "Mike Ng", "text": "Great. Thank you Tim." }, { "speaker": "Suhasini Chandramouli", "text": "Thanks Mike. Operator, can we have the next question please." }, { "speaker": "Operator", "text": "Our next question is from Amit Daryanani with Evercore. Please go ahead." }, { "speaker": "Amit Daryanani", "text": "Good afternoon everyone. And I have two as well. I guess, Tim, maybe back to the Apple Intelligence dynamic. There's clearly a lot of excitement from consumers around what Apple Intelligence could mean for them. Can you just touch on your -- do you think the intent is to launch all the Apple Intelligence features at the same time to consumers, or do you think they end up getting staggered a bit? And if they are staggered, do you think it impacts how consumers come out and buy the next-generation iPhone?" }, { "speaker": "Tim Cook", "text": "The rollout, as we mentioned in June, sort of -- we've actually started with developers this week. We started with some features of Apple Intelligence, not the complete suite. There are other features like languages beyond US English that will happen over the course of the year, and there are other features that will happen over the course of the year. And ChatGPT is integrated by the end of the calendar year. And so yes, so it’s a staggered launch." }, { "speaker": "Amit Daryanani", "text": "Got it. And then I guess your Services growth rates have been extremely impressive for several quarters and it seems like it is accelerated recently. Can you just touch -- talk about when you look at this double-digit growth, how much of that do you think is coming from the installed base growth versus better ARPU or better monetization of the installed base? And how do you kind of see that mix changing as you go forward?" }, { "speaker": "Luca Maestri", "text": "Yes, Amit, it is Luca. It's a combination of a number of factors. The installed base growth is very important of course, because we have a larger pool of customers that uses the ecosystem and uses our Services. We are seeing and we've seen this consistently for many, many quarters now. We see continued growth in the level of engagement that our customers have with our ecosystem. We have more transacting accounts every quarter, so more people using the ecosystem both the free elements of the ecosystem and the paid elements. We see paid accounts growing double digits, and we've seen that for many, many quarters. Now we look at our paid subscriptions on our platform, and they are growing strong double digits as well. So obviously, the growing level of engagement helps us both from an ARPU standpoint and just a volume standpoint. Obviously, as you've seen over the last several years, we launched new services over time, and we've launched many new services, fairly recently. Obviously, our payments business is relatively new, Apple TV+, Apple Arcade, Fitness+, so many other services we've added. And so we are providing more and more opportunities for our customers to interact with the ecosystem. And we believe we are doing also a very good job at improving the quality of these services and improving the amount of content that we make available. We continue to make significant investments on TV+, on Apple Arcade. We are launching new shows, new games all the time. And I think you will continue to see that as we go forward. We are very, very happy with the 14% growth that we had this quarter because, particularly if you look at the performance that we had in Services a year ago, the compares for us tend to get a bit more challenging in the second half of our fiscal year. But in spite of that, we delivered a level of growth that was better than what we were expecting at the beginning of the quarter." }, { "speaker": "Suhasini Chandramouli", "text": "Thanks Amit. Operator we will take the next question please." }, { "speaker": "Operator", "text": "Our next question is from Wamsi Mohan with Bank of America. Please go ahead." }, { "speaker": "Wamsi Mohan", "text": "Yes. Thank you so much. Tim, you announced Apple Intelligence, but you also announced partnerships with OpenAI and presumably more coming down the road. How should investors think about the monetization models around these partnerships where the CapEx investments are clearly being made by these potential partners. But you're obviously -- they're leveraging your distribution to your very attractive installed base. So in the long-term, do you see the Apple Intelligence part -- the Services growth from Apple Intelligence being the larger contributor over time? Or do you see these partnerships becoming a larger contributor over time? And I have a follow-up." }, { "speaker": "Tim Cook", "text": "I think the way that I look at it is that Apple Intelligence is the on-device processing and the Private Cloud Compute. And a lot of that will be things with a personal context. And then for world knowledge, we are integrating with ChatGPT initially, and that will be focused on world knowledge as I said. And so the monetization model, I don't want to get into the terms of the commercial agreements because they are confidential between the parties. But I see both aspects as being very important. People want both." }, { "speaker": "Wamsi Mohan", "text": "Okay. Thanks. As a follow-up maybe for Luca. Just stepping back to the gross margin discussion again. If I look at calendar 2023, you had on average 150 basis points increase in product gross margins on a year-on-year basis. In 2024 so far, it had been more flat year-on-year. When we think about that, is the incremental headwind, I mean there was FX headwinds throughout the last several years. So ex-FX, are there other incremental headwinds that are either temporary or structural in nature that are perhaps limiting further upside to what are obviously very strong gross margins? Thank you." }, { "speaker": "Luca Maestri", "text": "Yes. Of course, as you said, the foreign exchange continues to be -- this is incremental on a year-over-year basis. And it is one of those things that is outside of our control. We try to hedge our exposures. But it is what it is. We know that when the dollar is strong, our gross margins are affected. The other element that I think it's always important to keep in mind is that within the Products business, our products have different margin profiles. And depending on the relative success in the marketplace, our products' gross margin tends to move. And so the mix of our products has an impact on gross margins, right? And so we need to pay attention to that. Of course, we just launched an iPad and that is one of the factors. But we want all our products to be very successful in the marketplace. And that's why we always look at gross margin dollars as the first order of priority, and gross margin percentage tends to follow from that. The other factor that obviously has an impact, a significant impact is the state of the commodity markets, and they tend to go in cycles. And so we will see how that plays out over time. But in general, we feel good about the level of gross margins that we have for our products business, and we think we are in a good position there." }, { "speaker": "Suhasini Chandramouli", "text": "Thanks Wamsi. Operator, can we have the next question please." }, { "speaker": "Operator", "text": "Our next question is from Krish Sankar with TD Cowen. Please go ahead." }, { "speaker": "Krish Sankar", "text": "Hi, thanks for taking my question. And congrats on the strong results. The first one for Luca or Tim. We keep hearing about these increasing silicon content for AI edge devices. And also, I think, Luca you spoke about increasing commodity costs. So I'm curious how to think about margins for these new AI devices. And Tim, do any of these Apple Intelligence features need more hardware updates than what we have today? And then I have a quick follow-up." }, { "speaker": "Tim Cook", "text": "Maybe I'll take the second one first and then pass it over to Luca. In terms of the requirements to run Apple Intelligence, there are system requirements and there are silicon requirements. And so from an iPhone point of view, the iPhone 15 Pro and Pro Max will run Apple Intelligence and the successor products obviously. If you look at the Mac, it starts with the M series of silicon that started in 2020. And the iPad is the same, and so it starts with the M series of silicon. And so there are system requirements and silicon requirements that go with each of those." }, { "speaker": "Luca Maestri", "text": "And from a gross margin standpoint, as you know, we don't provide any color past the current quarter, and we just provided guidance for the quarter 45.5% to 46.5%. It is essentially broadly in line with what we reported for the June quarter. So we'll take it quarter by quarter and we will report as the time goes by." }, { "speaker": "Krish Sankar", "text": "Got it. Very helpful. And then a quick follow-up for Tim. Thanks for the color on China. We also see many other consumer discretionary and luxury brands talk about a weak China. And I think Tim, you said half the details was FX related. I'm curious, the other half of the weakness, was that more China macro related or do you think it is kind of like specific to Apple with domestic competitors? Any other color you could give would be very helpful. Thank you very much." }, { "speaker": "Tim Cook", "text": "Well, certainly, the competitive environment there is the most competitive in the world. I've said that before and that remains to be the case. The macroeconomic factors have been in the press too, and I'm not an expert on those. I can only tell you what we're seeing. And we were pleased that the business showed improvement from the first half of the year." }, { "speaker": "Krish Sankar", "text": "Thanks Tim." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you Krish. Operator, can we have the next question please." }, { "speaker": "Operator", "text": "Our next question is from David Vogt with UBS. Please go ahead." }, { "speaker": "David Vogt", "text": "Great. Two, if I may also. Tim, first one for you. I know it is early days, and you talked about the developers just getting their hands on Apple Intelligence. But when you think about the categories that are currently in the App Store and kind of what you think app developers could do with this new technology, what's your instinct say in terms of -- are these going to be iterative applications to currently available applications? Is there any sort of category that you think lends itself more naturally to Apple Intelligence? Is it games? Is it more creative? I'm just trying to get a sense of how you're thinking about it. And then I have a follow-up for Luca. Thanks." }, { "speaker": "Tim Cook", "text": "If you look at how we've deployed Apple Intelligence or are deploying Apple Intelligence, we've really thought about it at pretty much all of the apps that you use every day. And so we've thought about it from Notes to Mail to Messages and all the rest. And so there is been a deep level of thinking about how it affects those apps. And that's going to surface Apple Intelligence in a way that is natural to the user, in a way that will I think, get them very excited about it and get usage. Similarly, I think the developers will do that on a broad basis with their apps as well. And so I think, it is profound and we'll see what the developers do. But we're very excited to get the initial seed out there this week and see what they do. I think it will be amazing, yes." }, { "speaker": "David Vogt", "text": "Yes. No, that's helpful. I appreciate it. And Luca, just maybe -- I know you didn't give a full rundown of product categories in your prepared remarks. But if I kind of take your comments at face value, I guess what I'm trying to think about is for the next quarter, it sounds like with Services being relatively strong and FX easing a little bit. You are effectively saying that product revenue in the September quarter is going to basically be flat with the September quarter last year ahead of a product launch. And so I'm just trying to get a sense for, what are the puts and takes in that sort of outlook particularly as you have Apple Intelligence hopefully stoking the fire for demand going forward? Thanks." }, { "speaker": "Luca Maestri", "text": "Well, we have provided -- let me repeat what we provided. We think that we are going to be growing total company revenue at a rate that is similar to what we reported, so the plus 5%, right? In spite of the fact that we are going to have some foreign exchange headwinds, and we said about 150 basis points in the December quarter. And we said that we will grow Services double digits at a rate that is similar to what we've reported for the first three quarters of the fiscal year. We are not going into the other categories. I think there is a lot of good math that you can do from what we've given you here. Keep in mind on the Mac that we will have a challenging compare from a year ago, given the fact that we launched and we had the full quarter impact of the launch of the MacBook Air 15-inch a year ago. And also on the iPad, we reported 24% growth in the June quarter. Clearly we had the benefit from the launch in the June quarter of the new products, the iPad Air and the iPad Pro. So important to keep that in mind on a sequential basis." }, { "speaker": "David Vogt", "text": "Great. Thank you very much." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you David. Operator may we have the next question please." }, { "speaker": "Operator", "text": "Our next question is from Atif Malik with Citi. Please go ahead." }, { "speaker": "Atif Malik", "text": "Hi, thank you for taking my question. The first one is for Tim. I know it's early days. The feedback on Apple Intelligence software features like notification summary and reduced interruption focus from the developers who have tried the iOS 18.1 beta version this week is very positive. My question is in response to an earlier question, you talked about a staggered launch on some of these software features. So are you expecting most of the features that you announced at WWDC to be part of iOS 18? Or we should be thinking that some of these features could potentially be part of iOS 19 next year?" }, { "speaker": "Tim Cook", "text": "Our objective that we said in June is to roll out US English starting in the fall and that is to users, and then proceed with more functionality, more features, if you will, and more languages and regions coverage as we proceed across the next year. And so we sort of gave a time frame that -- and we're tracking to that." }, { "speaker": "Atif Malik", "text": "Understand. And the next one for Luca. Luca the Services growth momentum seems very strong. Are you seeing any impact from changes made to comply with the DMA rules?" }, { "speaker": "Luca Maestri", "text": "Well, as you know we have introduced some changes to the way we run the App Store in Europe already in March. And we are seeing a good level of adoption from developers on those changes. We are on an ongoing basis, discussing with the European Commission how to ensure full compliance with the DMA. It is obviously early stage, but in general, our results for the Services business and for the App Store have been pretty good until now. Again to just provide you a frame of reference, the percentage of revenue that we generate from the European Union on the App Store is about 7% of the total." }, { "speaker": "Atif Malik", "text": "Very helpful. Thank you." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you Atif. Operator may we have the next question please." }, { "speaker": "Operator", "text": "Our next question is from Samik Chatterjee with JPMorgan. Please go ahead." }, { "speaker": "Samik Chatterjee", "text": "Yes. Hi. Thanks for taking my question. I guess, Tim, if I can just ask you about Apple Intelligence as well. There is a regulatory aspect as well in certain geographies. You mentioned the staggered launch that you are aiming for and the timelines you're thinking. How are you thinking about the complexity of the regulatory process, in particular like EU and maybe China? And does -- in terms of your timelines of the rollout, are you sort of embedding in the regulatory aspect here? And how should we think about timing then including that? And I have a follow-up. Thank you." }, { "speaker": "Tim Cook", "text": "We are engaged as you would guess, with both regulatory bodies that you mentioned. And our objective is to move as fast as we can, obviously because our objective is always to get features out there for everyone. We have to understand the regulatory requirements before we can commit to doing that and commit a schedule to doing that. But we're very constructively engaged with both." }, { "speaker": "Samik Chatterjee", "text": "Okay, got it. And a quick one on the Wearables category, Luca. I know you mentioned the acceleration there on a sequential basis. Maybe you can just sort of parse that out in terms of what -- which categories drove the acceleration because that's been a category that has been lagging a bit in terms of revenue trends for the past couple of quarters. So just curious what is starting to sort of drive it to accelerate on a sequential basis? Thank you." }, { "speaker": "Tim Cook", "text": "Yes, I'll take that one. I think the important thing to remember when you look at the Wearables, Home and Accessories categories is that we have a difficult launch compare. And we've been running that for a few quarters and we still have that because last year had the continued benefit from the AirPods Pro second generation, the Watch SE and the very first Watch Ultra. And so it is important to keep that in mind. If you sort of take a step back, however and look at the business across the trailing 12 months, it is grown -- the Wearables, Home and Accessories business has grown to almost $40 billion, which is double what it was five years ago." }, { "speaker": "Samik Chatterjee", "text": "Thank you." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you Samik. Operator, may we have the last question please." }, { "speaker": "Operator", "text": "Our last question is from Richard Kramer with Arete Research. Please go ahead." }, { "speaker": "Richard Kramer", "text": "Thanks. Thanks very much. Tim, you referenced the investment in innovation, and your R&D sales ratio reached what I think was a June quarter record even before launching Apple Intelligence. Do you see the rollout of these features requiring further increases in R&D or increases in OpEx or CapEx for cloud compute capacity? And is it even possible to forecast the Services usage as they roll out, given that they are so new for consumers? Thanks." }, { "speaker": "Tim Cook", "text": "Clearly, we have increased R&D over time. We have been investing in AI and ML for years. And in addition to investing more, we've also redeployed certain skills onto AI and ML. And so the growth in sort of embedded in our numbers that we've shared here, it is increasing year-over-year. On the CapEx part, it is important to remember that we employ a hybrid kind of approach, where we do things internally and we have certain partners that we do business with externally where the CapEx would appear in their respective businesses. But yes, I mean you can expect that there is -- we will continue to invest and increase it year-on-year." }, { "speaker": "Richard Kramer", "text": "Okay. And maybe a quick follow-up for Luca. When we look at the free cash flow margins for the first nine months, they are up materially. And given this year's product mix, can you describe to us what exactly in the Services mix or cost control is driving what seems to be structurally higher free cash flow margins across the business?" }, { "speaker": "Luca Maestri", "text": "Yes, I'm glad you noticed that. We are pretty pleased with that fact. And I think you probably also noticed that we've increased our return of capital to shareholders this quarter. This one was a record quarter for us. Well, it's a combination of a number of things. Of course, an improvement in the top-line helps the margin expansion that we've had over the last several years and several quarters obviously has helped. And so that is driving better operating cash flow. On the CapEx front as Tim said, we employ a hybrid model. Some of the investments show up on our balance sheet and some other investments show up somewhere else and we pay, as we go. But in general, we try to run the company efficiently. We continue to think that capital efficiency is a good thing. And therefore, we are pleased with the fact that our free cash flow is doing well this year." }, { "speaker": "Richard Kramer", "text": "Okay. Thanks." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Richard. A replay of today's call will be available for two weeks on Apple Podcasts, as a webcast on apple.com/investor, and via telephone. The number for the telephone replay is (866)-583-1035. Please enter confirmation code 1969407 followed by the pound sign. These replays will be available by approximately 5 p.m. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at (408)-862-1142. And financial analysts can contact me, Suhasini Chandramouli with additional questions at (408)-974-3123. Thank you again for joining us today." }, { "speaker": "Operator", "text": "Once again this does conclude today's conference. We do appreciate your participation." } ]	Apple Inc.	24,937
AAPL	2	2,024	2024-05-02 17:00:00	Suhasini Chandramouli: Good Afternoon, and welcome to the Apple Q2 Fiscal Year 2024 Earnings Conference Call. My name is Suhasini Chandramouli, Director of Investor Relations. Today's call is being recorded. Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed Annual Report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook: Thank you, Suhasini. Good afternoon, everyone, and thanks for joining the call. Today, Apple is reporting revenue of $90.8 billion and an EPS record of $1.53 for the March quarter. We set revenue records in more than a dozen countries and regions. These include, among others, March quarter records in Latin-America and the Middle East, as well as Canada, India, Spain and Turkey. We also achieved an all-time revenue record in Indonesia, one of the many markets where we continue to see so much potential. In services, we set an all-time revenue record, up 14% over the past year. Keep in mind, as we described on the last call, in the March quarter a year-ago, we were able to replenish iPhone channel inventory and fulfill significant pent-up demand from the December quarter COVID-related supply disruptions on the iPhone 14 Pro and 14 Pro Max. We estimate this one-time impact added close to $5 billion to the March quarter revenue last year. If we remove this from last year's results, our March quarter total company revenue this year would have grown. Despite this impact, we were still able to deliver the records I described. Of course, this past quarter, we were thrilled to launch Apple Vision Pro and it has been so wonderful to hear from people who now get to experience the magic of spatial computing. They describe the impossible becoming possible right before their eyes and they share their amazement and their emotions about what they can do now, whether it's reliving their most treasured memories or having a movie theater experience right in their living room. It's also great to see the enthusiasm from the enterprise market. For example, more than half of the Fortune 100 companies have already bought Apple Vision Pro units and are exploring innovative ways to use it to do things that weren't possible before, and this is just the beginning. Looking ahead, we're getting ready for an exciting product announcement next week that we think our customers will love. And next month, we have our Worldwide Developers Conference, which has generated enormous enthusiasm from our developers. We can't wait to reveal what we have in-store. We continue to feel very bullish about our opportunity in Generative AI. We are making significant investments, and we're looking forward to sharing some very exciting things with our customers soon. We believe in the transformative power and promise of AI, and we believe we have advantages that will differentiate us in this new era, including Apple's unique combination of seamless hardware, software and services integration, groundbreaking Apple's silicon, with our industry-leading neural engines and our unwavering focus on privacy, which underpins everything we create. As we push innovation forward, we continue to manage thoughtfully and deliberately through an uneven macroeconomic environment and remain focused on putting our users at the center of everything we do. Now let's turn to our results for the March quarter across each product category, beginning with iPhone. iPhone revenue for the March quarter was $46 billion, down 10% year-over-year. We faced a difficult compare over the previous year due to the $5 billion impact that I mentioned earlier. However, we still saw growth on iPhone in some markets, including Mainland China, and according to Kantar during the quarter, the two best-selling smartphones in Urban China were the iPhone 15 and iPhone 15 Pro Max. I was in China recently where I had the chance to meet with developers and creators who are doing remarkable things with iPhone. And just a couple of weeks ago, I visited Vietnam, Indonesia and Singapore, where it was incredible to see all the ways customers and communities are using our products and services to do amazing things. Everywhere I travel, people have such a great affinity for Apple, and it's one of the many reasons I'm so optimistic about the future. Turning to Mac. March quarter revenue was $7.5 billion, up 4% from a year ago. We had an amazing launch in early March with the new 13-inch and 15-inch MacBook Air. The world's most popular laptop is the best consumer laptop for AI with breakthrough performance of the M3 chip and it’s even more powerful neural engine. Whether it's an entrepreneur starting a new business or a college student finishing their degree, users depend on the power and portability of MacBook Air to take them places they couldn't have gone without it. In iPad, revenue for the March quarter was $5.6 billion, 17% lower year-over-year, due to a difficult compare with the momentum following the launch of M2 iPad Pro and the 10th Generation iPad last fiscal year. iPad continues to stand apart for its versatility, power and performance. For video editors, music makers and creatives of all kinds, iPad is empowering users to do more than they ever could with a tablet. Across Wearables, Home and Accessories, March quarter revenue was $7.9 billion, down 10% from a year-ago due to a difficult launch compare on Watch and AirPods. Apple Watch is helping runners go the extra mile on their wellness journeys, keeping hikers on course with the latest navigation capabilities in watchOS 10, and enabling users of all fitness levels to live a healthier day. Across our watch lineup, we're harnessing AI and machine-learning to power lifesaving features like a regular rhythm notifications and fall detection. I often hear about how much these features mean to users and their loved ones and I'm thankful that so many people are able to get help in their time of greatest need. As I shared earlier, we set an all-time revenue record in services with $23.9 billion, up 14% year-over-year. We also achieved all-time revenue records across several categories and geographic segments. Audiences are tuning in on screens large, small and spatial and are enjoying Apple TV+ Originals like Palm Royale and Sugar. And we have some incredible theatrical releases coming this year, including Wolves, which reunites George Clooney and Brad Pitt. Apple TV+ productions continue to be celebrated as major awards contenders. Since launch, Apple TV+ productions have earned more than 2,100 award nominations and 480 wins. Meanwhile, we're enhancing the live sports experience with a new iPhone app, Apple Sports. This free app allows fans to follow their favorite teams and leagues with real-time scores, stats and more. Apple Sports is the perfect companion for MLS Season Pass subscribers. Turning to retail, our stores continued to be vital spaces for connection and innovation. I was delighted to be in Shanghai for the opening of our latest flagship store. The energy and enthusiasm from our customers was truly something to behold. And across the United States, our incredible retail teams have been sharing Vision Pro demos with customers, delighting them with a profound and emotional experience of using it for the very first time. Everywhere we operate and everything we do, we're guided by our mission to enrich users' lives and lead the world better than we found it, whether we're making Apple podcasts more accessible with a new transcripts feature or helping to safeguard iMessage users' privacy with new protections that can defend against advances in quantum computing. Our environmental work is another great example of how innovation and our values come together. As we work toward our goal of being carbon-neutral across all of our products by 2030, we are proud of how we've been able to innovate and do more for our customers while taking less from the planet. Since 2015, Apple has cut our overall emissions by more than half, while revenue grew nearly 65% during that same time period. And we're now using more recycled materials in our products than ever before. Earlier this spring, we launched our first-ever product to use 50% recycled materials with a new M3-powered MacBook Air. We're also investing in new solar and wind power in the U.S. and Europe, both to power our growing operations and our users' devices. And we're working with partners in India and the U.S. to replenish 100% of the water we use in places that need it most with the goal of delivering billions of gallons of water benefits over the next two decades. Through our Restore Fund, Apple has committed $200 million to nature-based carbon removal projects. And last month, we welcomed two supplier partners as new investors, who will together invest up to an additional $80 million in the fund. Whether we're enriching lives of users across the globe or doing our part to be a force for good in the world, we do everything with a deep sense of purpose at Apple. And I'm proud of the impact we've already made at the halfway point in a year of unprecedented innovation. I couldn't be more excited for the future we have ahead of us, driven by the imagination and innovation of our teams and the enduring importance of our products and services in people's lives. With that, I'll turn it over to Luca. Luca Maestri: Thank you, Tim, and good afternoon, everyone. Revenue for the March quarter was $90.8 billion, down 4% from last year. Foreign exchange had a negative year-over-year impact of 140 basis points on our results. Products revenue was $66.9 billion, down 10% year-over-year due to the challenging compare on iPhone that Tim described earlier, which was partially offset by strength from Mac. And thanks to our unparalleled customer satisfaction and loyalty and a high number of customers who are new to our products, our installed base of active devices reached an all-time high across all products and all geographic segments. Services revenue set an all-time record of $23.9 billion, up 14% year-over-year with record performance in both developed and emerging markets. Company gross margin was 46.6%, up 70 basis points sequentially, driven by cost savings and favorable mix to services, partially offset by leverage. Products gross margin was 36.6%, down 280 basis points sequentially, primarily driven by seasonal loss of leverage and mix, partially offset by favorable costs. Services gross margin was 74.6%, up 180 basis points from last quarter due to a more favorable mix. Operating expenses of $14.4 billion were at the midpoint of the guidance range we provided and up 5% year-over-year. Net income was $23.6 billion, diluted EPS was $1.53 and a March quarter record, and operating cash flow was strong at $22.7 billion. Let me now provide more detail for each of our revenue categories. iPhone revenue was $46 billion, down 10% year-over-year, due to the almost $5 billion impact from a year ago that Tim described earlier. Adjusting for this one-time impact, iPhone revenue would be roughly flat to last year. Our iPhone active installed base grew to a new all-time high in total and in every geographic segment. And during the March quarter, we saw many iPhone models as the top-selling smartphones around the world. In fact, according to a survey from Kantar, an iPhone was the top-selling model in the U.S., Urban China, Australia, the U.K., France, Germany and Japan. And the iPhone 15 family continues to be very popular with customers. 451 Research recently measured customer satisfaction at 99% in the U.S. Mac revenue was $7.5 billion, up 4% year-over-year, driven by the strength of our new MacBook Air, powered by the M3 chip. Customers are loving the incredible AI performance of the latest MacBook Air and MacBook Pro models. And our Mac installed base reached an all-time high with half of our MacBook Air buyers during the quarter being new to Mac. Also customer satisfaction for Mac was recently reported at 96% in the U.S. iPad generated $5.6 billion in revenue, down 17% year-over-year. iPad continued to face a challenging compare against the launch of the M2 iPad Pro and iPad 10th Generation from last year. At the same time, the iPad installed base has continued to grow and is at an all-time high as over half of the customers who purchased iPads during the quarter were new to the product. In addition, the latest reports from 451 Research indicated customer satisfaction of 96% for iPad in the US. Wearables, Home and Accessories revenue was $7.9 billion, down 10% year-over-year due to a difficult launch compare. Last year, we had the continued benefit from the launches of the AirPods Pro second-generation, the Watch SE and the first Watch Ultra. Apple Watch continues to attract new customers, with almost two-thirds of customers purchasing an Apple Watch during the quarter being new to the product, sending the Apple Watch installed base to a new all-time high and customer satisfaction was recently measured at 95% in the U.S. In services, as I mentioned, total revenue reached an all-time record of $23.9 billion, growing 14% year-over-year with our installed-base of active devices continuing to grow at a nice pace. This provides a strong foundation for the future growth of the services business as we continued to see increased customer engagement with our ecosystem. Both transacting accounts and paid accounts reached a new all-time high with paid accounts growing double-digits year-over-year. And paid subscriptions showed strong double-digit growth. We have well over $1 billion paid subscriptions across the services on our platform, more than double the number that we had only four years ago. We continued to improve the breadth and quality of our current services from creating new games on Arcade and great new shows on TV+ to launching additional countries and partners for Apple Pay. Turning to enterprise, our customers continued to invest in Apple products to drive productivity and innovation. We see more and more enterprise customers embracing the Mac. In Healthcare, Epic Systems, the world's largest electronic medical record provider, recently launched its native app for the Mac, making it easier for healthcare organizations like Emory Health to transition thousands of PCs to the Mac for clinical use. And since the launch of Vision Pro last quarter, many leading enterprise customers have been investing in this amazing new product to bring spatial computing apps and experiences to life. We are seeing so many compelling use cases from aircraft engine maintenance training at KLM Airlines to real-time team collaboration for racing at Porsche to immersive kitchen design at Lowe's. We couldn't be more excited about the spatial computing opportunity in enterprise. Taking a quick step back, when we look at our performance during the first-half of our fiscal year, total company revenue was roughly flat to the prior year in spite of having one less week of sales during the period and some foreign exchange headwinds. We were particularly pleased with our strong momentum in emerging markets, as we set first-half revenue records in several countries and regions, including Latin-America, the Middle East, India, Indonesia, the Philippines and Turkey. These results, coupled with double-digit growth in services and strong levels of gross margin, drove a first half diluted EPS record of $3.71, up 9% from last year. Let me now turn to our cash position and capital return program. We ended the quarter with $162 billion in cash and marketable securities. We repaid $3.2 billion in maturing debt and commercial paper was unchanged sequentially, leaving us with total debt of $105 billion. As a result, net cash was $58 billion at the end of the quarter. During the quarter, we returned over $27 billion to shareholders, including $3.7 billion in dividends and equivalents and $23.5 billion through open-market repurchases of $130 million Apple's shares. Given the continued confidence we have in our business now and into the future, our Board has authorized today an additional $110 billion for share repurchases, as we maintain our goal of getting to net cash-neutral over time. We are also raising our dividend by 4% to $0.25 per share of common stock, and we continued to plan for annual increases in the dividend going forward as we've done for the last 12 years. This cash dividend will be payable on May 16, 2024 to shareholders of record as of May 13, 2024. As we move ahead into the June quarter, I'd like to review our outlook, which includes the types of forward-looking information that Suhasini referred to at the beginning of the call. The color we are providing today assumes that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter. We expect our June quarter total company revenue to grow low-single-digits year-over-year in spite of a foreign exchange headwind of about 2.5 percentage points. We expect our services business to grow double-digits at a rate similar to the growth we reported for the first-half of the fiscal year. And we expect iPad revenue to grow double-digits. We expect gross margin to be between 45.5% to -- and 46.5%. We expect OpEx to be between $14.3 billion and $14.5 billion. We expect OI&E to be around $50 million, excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16%. With that, let's open the call to questions. Suhasini Chandramouli: Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please? Operator: Certainly. We will go ahead and take our first question from Mike Ng with Goldman Sachs. Please go ahead. Mike Ng: Hey, good afternoon. Thank you very much for the question. I have two, first, I'll ask about the June quarter guidance. The revenue outlook for low-single digits growth, I was wondering if you could run through some of the product assumptions, iPhone, like what kind of gives you confidence around that? And then on the service momentum, what was better than expected in the quarter? And then I just have a quick follow-up. Luca Maestri: Hey, Mike. It's Luca. On the outlook, what we said is we expect to grow low-single-digits in total for the company. We expect services to grow double-digits at a rate that is similar to what we've done in the first-half of our fiscal year. And we've also mentioned that iPad should grow double-digits. This is the color that we're providing for the June quarter. In services, we've seen a very strong performance across the board. We've mentioned, we've had records in several categories, in several geographic segments. It's very broad based, our subscription business is going well. Transacting accounts and paid accounts are growing double-digits. And also we've seen a really strong performance both in developed and emerging markets. So very pleased with the way the services business is going. Mike Ng: Great. Thank you. And I wanted to ask about, as Apple leans more into AI and Generative AI, should we expect any changes to the historical CapEx cadence that we've seen in the last few years of about $10 billion to $11 billion per year or any changes to, you know, how we may have historically thought about the split between tooling, data center and facilities? Thank you very much. Luca Maestri: Yes. We are obviously very excited about the opportunity with Gen AI. We obviously are pushing very hard on innovation on every front and we've been doing that for many, many years. Just during the last five years, we spent more than a $100 billion in research and development. As you know, on the CapEx front, we have a bit of a hybrid model where we make some of the investments ourselves. In other cases, we share them with our suppliers and partners on the manufacturing side, we purchased some of the tools and manufacturing equipment. In some of the cases, our suppliers make the investment. On the -- and we do something similar on the data center side. We have our own data center capacity and then we use capacity from third parties. It's a model that has worked well for us historically and we plan to continue along the same lines going forward. Mike Ng: Excellent. Thank you very much. Suhasini Chandramouli: Awesome. Thank you, Mike. Operator, can we have the next question, please? Operator: Our next question is from Wamsi Mohan with Bank of America. Please go ahead. Wamsi Mohan: Yes, thank you so much. Tim, can you talk about the implications to Apple from the changes driven by EU DMA? You've had to open up third-party app stores, clearly disposes some security risks on the one-hand, which can dilute the experience, but also lower payments from developers to Apple. What are you seeing developers choose in these early days and consumers choose in terms of these third-party app stores? And I have a follow-up. Tim Cook: It's really too early to answer the question. We just implemented in March, as you probably know, in the European Union, the alternate app stores and alternate billing, et cetera. So we're focused on complying while mitigating the impacts to user privacy and security that you mentioned. And so that's our focus. Wamsi Mohan: Okay. Thank you, Tim. And Luca, I was wondering if you could comment a bit on the product gross margins, the sequential step down. You noted both mix and leverage. Any more color on the mix, if you could share if customers are at all starting to mix down across product lines or is this more a mix across product lines? Just trying to get some color on customer behavior given some of the broader inflationary pressures. Thank you so much. Luca Maestri: On a sequential basis, yes, we were down. It's primarily the fact that we had a slightly different mix of products than the previous one. Obviously, leverage plays a big role as we move from the holiday quarter into the -- into, you know, a more typical quarter. So I would say primarily leverage in a different mix of products. I mean, we haven't seen anything different in terms within the product categories, we haven't seen anything particular. Wamsi Mohan: Thank you so much. Suhasini Chandramouli: Thanks, Wamsi. We'll take the next question, please. Operator: Our next question is from Erik Woodring with Morgan Stanley. Please go ahead. Erik Woodring: Great. Thanks so much for taking my questions. Maybe my first one, Tim, you've obviously mentioned your excitement around Generative AI multiple times. I'm just curious how Apple is thinking about the different ways in which you can monetize this technology because historically software upgrades haven't been a big factor in driving product cycles. And so could AI be potentially different? And how could that impact replacement cycles? Is there any services angle you'd be thinking? Any early color that you can share on that? And then I have a follow up, please. Thanks. Tim Cook: I don't want to get in front of our announcements, obviously. I would just say that we see Generative AI as a very key opportunity across our products. And we believe that we have advantages that set us apart there. And we'll be talking more about it in as we go through the weeks ahead. Erik Woodring: Okay. Very fair. Thank you. And then Luca, maybe to just follow up on Wamsi's comments or question. There's a broad concern about the headwind that rising commodity costs have on your product gross margins. Wondering if you could just clarify for us if we take a step back and look at all of the components and commodities that go into your products kind of collectively, are we -- are you seeing these costs rising? Are they falling? What tools do you have to try to help and mitigate some rising costs if at all, rising input costs if at all? Thank you so much. Luca Maestri: Yes. I mean during the last quarter, commodity costs, and in general, component costs have behaved favorably to us. On the memory front, prices are starting to go up. They've gone up slightly during the March quarter. But in general, I think it's been a period not only this quarter, but the last several quarters where, you know, commodities have behaved well for us. Commodities going cycles and so there's obviously always that possibility. Keep in mind that we are starting from a very high level of gross margins. We reported 46.6%, which is something that we haven't seen in our company in decades. And so we're starting from a good point. As you know, we try to buy ahead when the cycles are favorable to us. And so we will try to mitigate if there are headwinds. But in general, we feel particularly for this cycle, we are in good shape. Erik Woodring: Thank you so much. Suhasini Chandramouli: Great. Thank you, Erik. Operator, we'll take the next question, please. Operator: Our next question is from Ben Reitzes with Melius. Please go ahead. Ben Reitzes: Hey, thanks for the question. And hey, Tim, I was wondering if I could ask the China question again. Is there any more color from your visit there that gives you confidence that you've reached a bottom there and that it's turning? And I know you've been -- you've continued to be confident there in the long-term. Just wondering if there was any color as to when you think that the tide turns there? Thanks a lot. And I have a follow-up. Tim Cook: Yes, Ben, if you look at our results in Q2 for Greater China, we were down 8%. That's an acceleration from the previous quarter in Q1. And the primary driver of the acceleration was iPhone. And if you then look at iPhone within Mainland China, we grew on a reported basis. That's before any kind of normalization for the supply disruption that we mentioned earlier. And if you look at the top-selling smartphones, the Top 2 in Urban China are iPhones. And while I was there, it was a great visit and we opened a new store in Shanghai and the reception was very warm and highly energetic, and so I left there having a fantastic trip and enjoyed being there. And so I maintain a great view of China in the long-term. I don't know how each and every quarter goes and each and every week. But over the long haul, I have a very positive viewpoint. Ben Reitzes: Okay. Hey, thanks, Tim. And then my follow-up, I want to ask this carefully though. It's a -- there's a fear out there that, you may lose some traffic acquisition revenue. And I was wondering if you thought AI from big picture and it doesn't have to be on a long-term basis, I mean from a big picture, if AI is an opportunity for you to continue to monetize your mobile real estate, just how you -- how maybe investors can think about that from a big picture, just given that's been one of the concerns that's potentially been an overhang, of course, due to, you know, a lot of the news and the media around some of the legal cases? And I was wondering if there's just a big-picture color you could give that makes us kind of think about it better and your ability to sort of continue to monetize that real estate? Thanks a lot. Tim Cook: I think AI, Generative AI and AI, both are big opportunities for us across our products. And we'll talk more about it in the coming weeks. I think there are numerous ways there that are great for us. And we think that we're well-positioned. Ben Reitzes: Thanks, Tim. Tim Cook: Yes. Suhasini Chandramouli: Thanks, Ben. Can we have the next question, please? Operator: Thank you. Our next question is from Krish Sankar with TD Cowen. Please go ahead. Krish Sankar: Yes, hi. Thanks for taking my question. Again, sorry to beat the AI haul. But Tim, I know you don't want to like reveal a lot. But I'm just kind of curious, because last quarter you spoke about how you're getting traction in enterprise. Is the AI strategy going to be both consumer and enterprise or is it going to be one after the other? Any color would be helpful? And then, I have a follow-up for Luca. Tim Cook: Our focus on enterprise has been and you know through the quarter and the quarters that preceded it on selling iPhones and iPads and Macs and we recently added Vision Pro to that. And we're thrilled with what we see there in terms of interest from big companies buying some to explore ways they can use it. And so I see enormous opportunity in the enterprise. I wouldn't want to cabin that to AI only. I think there's a great opportunity for us around the world in the enterprise. Krish Sankar: Got it. Very helpful. And then for Luca, you know, I'm kind of curious on -- given the macro-environment, on the hardware side, are you seeing a bias towards like standard iPhone versus the Pro model? The reason I'm asking the question is that there's a weaker consumer spending environment, yet your services business is still growing and has amazing gross margins. So I'm just trying to like square the circle over there. Thank you. Luca Maestri: I'm not sure I fully understand the question, but in general, what we are seeing on the product side, we continued to see a lot of interest at the top of the range of our products. And I think it's a combination of consumers wanting to purchase the best product that we offer in the different categories and our ability to make those purchases more affordable over time. We've introduced several financing solutions from installment plans to trading programs that reduce the affordability threshold and therefore, customers tend to buy -- want to buy at the top of the range that is very valuable for us in developed markets, but particularly in emerging markets where the affordability issues are more pronounced. But in general, over the last several years and that is also reflected in our gross margins, over the last several years, we've seen this trend, which we think is pretty sustainable. Krish Sankar: Got it. Thank you very much, Luca, and thanks, Tim. Suhasini Chandramouli: Thank you, Krish. Operator, we'll have the next question, please. Operator: Our next question is from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani: Thanks for taking my question. I have two as well. You know, I guess, first off on capital allocation, you folks have about $58 billion of net cash right now. As you think about eventually getting to this net cash-neutral target, do you think at some point, Apple would be open to taking on leverage on the balance sheet and continuing the buyback program? Or is it more like once you get to this neutral position, it's going to be about returning free cash flow back to shareholders? I'm just wondering, how do you think about leverage on your balance sheet over time and what sort of leverage do you think you'd be comfortable taking on? Luca Maestri: Hey, Amit. This is Luca. I would say one step at a time, we have put out this target of getting to net cash-neutral several years ago and we're working very hard to get there. Our free cash flow generation has been very strong over the years, particularly in the last few years. And so as you've seen this year, we've increased the amount that we're allocating to the buyback. For the last couple of years, we were doing $90 billion, now we're doing $110 billion. So let's get there first. It's going to take a while still. And then when we are there, we're going to reassess and see what is the optimal capital structure for the company at that point in time. Obviously, there's going to be a number of considerations that we will need to look at when we get there. Amit Daryanani: Fair enough. I figure it's worth trying anyway. If I go back to this China discussion a bit and, you know, Tim, I think your comments around growth in iPhones in Mainland China is really notable. Could you step back, I mean, these numbers are still declining at least Greater China on a year-over-year basis in aggregate. Maybe just talk about what are you seeing from a macro basis in China and then at least annual decline -- or year-over-year declines that we're seeing. Do you think it's more macro driven or more competitive driven over there? That would be helpful. Tim Cook: Yes, I can only tell you what we're seeing. And so I don't want to present myself as a economist. So I'll steer clear of that. From what we saw was an acceleration from Q1, and it was driven by iPhone and iPhone in Mainland China before we adjust for this $5 billion impact that we talked about earlier did grow. That means the other products didn't fare as well. And so we clearly have work there to do. I think it has been and is through last quarter, the most competitive market in the world. And I -- so I, you know, wouldn't say anything other than that. I've said that before, and I believe that it was last quarter as well. And -- but if you step back from the 90-day cycle, what I see is a lot of people moving into the middle class, a -- we try to serve customers very well there and have a lot of happy customers and you can kind of see that in the latest store opening over there. And so I continue to feel very optimistic. Amit Daryanani: Great. Thank you. Suhasini Chandramouli: Thanks, Amit. Operator, we'll take the next question, please. Operator: Our next question is from David Vogt with UBS. Please go ahead. David Vogt: Great. Thanks guys for taking my question. I'm going to roll the two together, so you guys have them both. So Luca obviously, I'm trying to parse through the outlook for the June quarter. And just based on the quick math, it looks like all things being equal, given what you said, the iPhone business is going to be down mid-single-digits again in the June quarter. And if that's the case and maybe this is for Tim obviously, how are you thinking about the competitive landscape in the context of what you just said maybe outside of China and what changes sort of, the consumer demand or receptivity to new devices because we've been in this malaise for a while. Is it really this AI initiative that a lot of companies are pursuing? And do you think that changes sort of the demand drivers going forward? Or is it just really more of a timing issue in terms of the replacement cycle is a little bit long in the tooth, and we see a bit of an upgrade cycle at some point, maybe later this year into next year? Thanks. Tim Cook: I do see a key opportunity, as I've mentioned before with Generative AI with all of our devices or the vast majority of our devices. And so I think that if you look out that that's not within the next quarter or so and we don't guide at the product level, but I'm extremely optimistic. And so that -- that's kind of how I view it. In terms of the -- I'll let Luca comment on the outlook portion of it. I think if you step back on iPhone though and you make this adjustment from the previous year, our Q2 results would be flattish on iPhone. And so that's how we performed in Q2. Luca Maestri: Yes, David, on the outlook, I'll only repeat what we said before, and this is the color that we're providing for the quarter. We do expect to grow in total, low-single-digits. And we do expect services to grow double-digits, and we expect iPad to grow double-digits for the rest. I'll let you make assumptions and then we will report three months from now. David Vogt: Great. Thanks guys. I'll get back in the queue. Suhasini Chandramouli: Thanks, David. Operator, we'll take the next question, please. Operator: Our next question is from Samik Chatterjee with JPMorgan. Please go ahead. Samik Chatterjee: Hi, thanks for taking my question, and I have a couple as well. Maybe for the first one, your services growth accelerated from 11% growth to 14%. If you can sort of dig into the drivers of where or which parts of services did you really see that acceleration? And why it isn't a bit more sustainable as we think about the next quarter? Because I believe you're guiding more to sort of averaging out the first half of the year for the next quarter. So just curious what were the drivers and why not have it a bit more sustainably sort of improve as we go through the remainder of the year? And I have a quick follow-up. Thank you. Luca Maestri: So a number of things on services. First of all, the overall performance was very strong. As I said earlier, all-time records in both developed and emerging markets. So we see our services do well across the world. Records in many of our services categories. There are some categories that are growing very fast also because they are relatively smaller in the scheme of our services business like cloud, video, payment services. You know, those all set all-time revenue records. And so we feel very good about the progress that we're making in services. As we go forward, I'll just point out that if you look at our growth rates a year ago, they improved during the course of the fiscal year last year. So the comps for the services business become a bit more challenging as we go through the year. But in general, as I mentioned, we still expect to grow double-digits in the June quarter at a rate that is very similar to what we've done in the first half. Samik Chatterjee: Got it. Got it. And for my follow up, if I can ask you more specifically about the India market. Obviously, you continue to make new records in terms of revenue in that market. How much of the momentum you're seeing would you associate with your sort of retail strategy in that market, retail expansion relative to maybe some of the supply change or the sort of manufacturing changes or strategy you've undergone or taken in that market itself. Any thoughts around that would be helpful? Tim Cook: Sure. We did grow strong double-digit. And so we were very, very pleased about it. It was a new March quarter revenue record for us. As you know, as I've said before, I see it as an incredibly exciting market and it's a major focus for us. In terms of the operational side or supply chain side, we are producing there, from a pragmatic point of view, you need to produce there to be competitive. And so yes, there the two things are linked from that point of view. But we have both operational things going on and we have go-to-market, and initiatives going on. We just opened a couple of stores as last year, as you know, and we see enormous opportunity there. We're continuing to expand our channels, and also working on the developer ecosystem as well. And we've been very pleased that there is a rapidly-growing base of developers there. And so, we're working all of the entire ecosystem from developer to the market to operations, the whole thing. And I just -- I could not be more excited and enthusiastic about it. Samik Chatterjee: Got it. Thank you. Thanks for that. Tim Cook: Yes. Suhasini Chandramouli: Thank you, Samik. Operator, we'll have the next question, please. Operator: Our next question is from. Please go ahead. Aaron Rakers: Yes, thanks for taking the questions, and I think I have to have two as well like everybody else. I guess, I'm going to go back to the China question. I guess, at a high level, the simple question is, when we look at the data points that have been repeatedly reported throughout the course of this quarter, I'm curious, Tim, you know, what are we missing? Like where do you think people are missing, Apple's iPhone traction within the China market, just at a high level, you know, given the data points that were reported throughout this course of the last quarter? Tim Cook: I can't address the data points. I can only address what our results are. And we did accelerate last quarter, and the iPhone grew in Mainland China. So that's what the results were. I can't bridge to numbers we didn't come up with. Aaron Rakers: Okay. And then as a quick follow-up, I know you guys haven't talked about this, you know, quantified it in quite some time. But I'm curious how we would characterize the channel inventory dynamics for iPhone? Tim Cook: Sure. The -- for the March quarter, we decreased channel inventory during the quarter. We usually decreased channel inventory during the Q2 timeframe. So that's not unusual. And we're very comfortable with the overall channel inventory. Aaron Rakers: Thank you. Tim Cook: Yes. Suhasini Chandramouli: Thank you, Aaron. Operator, we'll take the next question, please. Operator: Our next question is from Richard Kramer with Arete Research. Please go ahead. Richard Kramer: Thanks very much. I'm not going to ask about China, but you regularly call out all the rapid growth in many other emerging markets. So is Apple approaching a point where all of those other emerging markets in aggregate might crossover to become larger than your current $70 billion Greater China segments, and maybe investors could look at that for driving growth for the wider business? And then I have a follow-up for Luca. Thanks. Luca Maestri: I think, Richard, you're asking a really interesting question. We were looking at something similar recently. Obviously, China is by far the largest emerging market that we have. But when we started looking at places like India, like Saudi, like Mexico, Turkey, of course, Brazil and Mexico and Indonesia, the numbers are getting large, and we're very happy because these are markets where our market share is low, the populations are large and growing. And our products are really making a lot of progress with the -- in those markets. The level of excitement for the brand is very high. Tim was in Southeast Asia recently, and the level of excitement is incredibly high. So it is very good for us. And then -- and certainly, the numbers are getting larger all the time. And so the gap as you compare it to the numbers in China is reducing, and hopefully, that trajectory continues for a long time. Richard Kramer: Okay. And then as a follow-up, maybe for either of you, I mean, you're coming up on four years from what was incredibly popular iPhone 12 cycle. And, you know, given you're struggling to reduce your net -- your -- reach your net neutral cash position and your margins are sort of near highs, do you see ways to deploy capital more to spur replacement demand in your installed base either with greater device financing, more investment in marketing, more promotions. I mean, do you feel like you needed to produce those sort of margins or is it a more important to spur growth with replacement? Thanks. Tim Cook: I think innovation spurs the upgrade cycle, and as one thing, of course, there's economic factors as well that play in there. And what kind of offerings there are from our carrier partners and so forth. And so there's a number of variables in there. But we work all of those, and you know, we price our products for the value that we're delivering. And so that's how we look at it. Luca Maestri: And if I can add to Tim's comments, Richard, one of the things that when you look over the long arc of time that maybe is not fully understood is that we've gone through a long period of very strong dollar. And what that means given that our company sells more than 60% of our revenue is outside the United States. The demand for our products in those markets is stronger than the results that we report just because of the translation of those local currencies into dollars, right? And so that is something to keep in mind as you look at our results, right? And so we are making all the investments that are needed and Tim has talked about innovation. Obviously, we made a lot of progress with financing solutions, with trading programs and so on, and we will continue to make all those investments. Richard Kramer: Okay. Super. Thanks, guys. Suhasini Chandramouli: Thank you, Richard. Operator, can we take our last question, please. Operator: Our next question is from Atif Malik with Citi. Please go ahead. Atif Malik: Hi. Thank you for taking my questions, and I have two questions as well. First for Tim, for enterprise, specifically, what are some of the top two or three use cases on Vision Pro you're hearing most excitement? And then I have a follow-up for Luca. Tim Cook: Yes, the great thing is, I'm hearing about so many of them. I wouldn't say that one has emerged as the top, right now. The most impressive thing is that similar to the way people use a Mac, you use it for everything. People are using it for many different things in enterprise, and that varies from field service to training to healthcare related things like preparing a doctor for pre-op surgery or advanced imaging. And so the -- it commands control centers. And so it's an enormous number of different verticals. And you know our focus is on -- is growing that ecosystem and getting more apps and more and more enterprises engaged. And the event that we had recently, I can't overstate the enthusiasm in the room. It was extraordinary. And so we're off to a good start, I think, with the enterprise. Atif Malik: Great. And then Luca, I believe you mentioned that for the March quarter, the commodity pricing environment was favorable. Can you talk about what you're assuming for commodity pricing on memory and et cetera for the June quarter and maybe for the full-year? Luca Maestri: Yes, we provide guidance just for the current quarter. So I'll tell you about the, you know, the guidance. We're guiding to again to a very high level of gross margins, 45.5% to 46.5%. Within that guidance, we expect memory to be a slight headwind, not a very large one, but a slight headwind. And the same applies for foreign exchange. Foreign exchange will have a negative impact sequentially of about 30 basis points. Atif Malik: Thank you. Suhasini Chandramouli: Thank you, Atif. A replay of today's call will be available for two weeks on Apple podcasts as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 0467138 followed by the pound sign. These replays will be available by approximately 5:00 P.M. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142, and financial analysts can contact me, Suhasini Chandramouli, with additional questions at 408-974-3123. Thank you again for joining us.	[ { "speaker": "Suhasini Chandramouli", "text": "Good Afternoon, and welcome to the Apple Q2 Fiscal Year 2024 Earnings Conference Call. My name is Suhasini Chandramouli, Director of Investor Relations. Today's call is being recorded. Speaking first today is Apple's CEO, Tim Cook, and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed Annual Report on Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thank you, Suhasini. Good afternoon, everyone, and thanks for joining the call. Today, Apple is reporting revenue of $90.8 billion and an EPS record of $1.53 for the March quarter. We set revenue records in more than a dozen countries and regions. These include, among others, March quarter records in Latin-America and the Middle East, as well as Canada, India, Spain and Turkey. We also achieved an all-time revenue record in Indonesia, one of the many markets where we continue to see so much potential. In services, we set an all-time revenue record, up 14% over the past year. Keep in mind, as we described on the last call, in the March quarter a year-ago, we were able to replenish iPhone channel inventory and fulfill significant pent-up demand from the December quarter COVID-related supply disruptions on the iPhone 14 Pro and 14 Pro Max. We estimate this one-time impact added close to $5 billion to the March quarter revenue last year. If we remove this from last year's results, our March quarter total company revenue this year would have grown. Despite this impact, we were still able to deliver the records I described. Of course, this past quarter, we were thrilled to launch Apple Vision Pro and it has been so wonderful to hear from people who now get to experience the magic of spatial computing. They describe the impossible becoming possible right before their eyes and they share their amazement and their emotions about what they can do now, whether it's reliving their most treasured memories or having a movie theater experience right in their living room. It's also great to see the enthusiasm from the enterprise market. For example, more than half of the Fortune 100 companies have already bought Apple Vision Pro units and are exploring innovative ways to use it to do things that weren't possible before, and this is just the beginning. Looking ahead, we're getting ready for an exciting product announcement next week that we think our customers will love. And next month, we have our Worldwide Developers Conference, which has generated enormous enthusiasm from our developers. We can't wait to reveal what we have in-store. We continue to feel very bullish about our opportunity in Generative AI. We are making significant investments, and we're looking forward to sharing some very exciting things with our customers soon. We believe in the transformative power and promise of AI, and we believe we have advantages that will differentiate us in this new era, including Apple's unique combination of seamless hardware, software and services integration, groundbreaking Apple's silicon, with our industry-leading neural engines and our unwavering focus on privacy, which underpins everything we create. As we push innovation forward, we continue to manage thoughtfully and deliberately through an uneven macroeconomic environment and remain focused on putting our users at the center of everything we do. Now let's turn to our results for the March quarter across each product category, beginning with iPhone. iPhone revenue for the March quarter was $46 billion, down 10% year-over-year. We faced a difficult compare over the previous year due to the $5 billion impact that I mentioned earlier. However, we still saw growth on iPhone in some markets, including Mainland China, and according to Kantar during the quarter, the two best-selling smartphones in Urban China were the iPhone 15 and iPhone 15 Pro Max. I was in China recently where I had the chance to meet with developers and creators who are doing remarkable things with iPhone. And just a couple of weeks ago, I visited Vietnam, Indonesia and Singapore, where it was incredible to see all the ways customers and communities are using our products and services to do amazing things. Everywhere I travel, people have such a great affinity for Apple, and it's one of the many reasons I'm so optimistic about the future. Turning to Mac. March quarter revenue was $7.5 billion, up 4% from a year ago. We had an amazing launch in early March with the new 13-inch and 15-inch MacBook Air. The world's most popular laptop is the best consumer laptop for AI with breakthrough performance of the M3 chip and it’s even more powerful neural engine. Whether it's an entrepreneur starting a new business or a college student finishing their degree, users depend on the power and portability of MacBook Air to take them places they couldn't have gone without it. In iPad, revenue for the March quarter was $5.6 billion, 17% lower year-over-year, due to a difficult compare with the momentum following the launch of M2 iPad Pro and the 10th Generation iPad last fiscal year. iPad continues to stand apart for its versatility, power and performance. For video editors, music makers and creatives of all kinds, iPad is empowering users to do more than they ever could with a tablet. Across Wearables, Home and Accessories, March quarter revenue was $7.9 billion, down 10% from a year-ago due to a difficult launch compare on Watch and AirPods. Apple Watch is helping runners go the extra mile on their wellness journeys, keeping hikers on course with the latest navigation capabilities in watchOS 10, and enabling users of all fitness levels to live a healthier day. Across our watch lineup, we're harnessing AI and machine-learning to power lifesaving features like a regular rhythm notifications and fall detection. I often hear about how much these features mean to users and their loved ones and I'm thankful that so many people are able to get help in their time of greatest need. As I shared earlier, we set an all-time revenue record in services with $23.9 billion, up 14% year-over-year. We also achieved all-time revenue records across several categories and geographic segments. Audiences are tuning in on screens large, small and spatial and are enjoying Apple TV+ Originals like Palm Royale and Sugar. And we have some incredible theatrical releases coming this year, including Wolves, which reunites George Clooney and Brad Pitt. Apple TV+ productions continue to be celebrated as major awards contenders. Since launch, Apple TV+ productions have earned more than 2,100 award nominations and 480 wins. Meanwhile, we're enhancing the live sports experience with a new iPhone app, Apple Sports. This free app allows fans to follow their favorite teams and leagues with real-time scores, stats and more. Apple Sports is the perfect companion for MLS Season Pass subscribers. Turning to retail, our stores continued to be vital spaces for connection and innovation. I was delighted to be in Shanghai for the opening of our latest flagship store. The energy and enthusiasm from our customers was truly something to behold. And across the United States, our incredible retail teams have been sharing Vision Pro demos with customers, delighting them with a profound and emotional experience of using it for the very first time. Everywhere we operate and everything we do, we're guided by our mission to enrich users' lives and lead the world better than we found it, whether we're making Apple podcasts more accessible with a new transcripts feature or helping to safeguard iMessage users' privacy with new protections that can defend against advances in quantum computing. Our environmental work is another great example of how innovation and our values come together. As we work toward our goal of being carbon-neutral across all of our products by 2030, we are proud of how we've been able to innovate and do more for our customers while taking less from the planet. Since 2015, Apple has cut our overall emissions by more than half, while revenue grew nearly 65% during that same time period. And we're now using more recycled materials in our products than ever before. Earlier this spring, we launched our first-ever product to use 50% recycled materials with a new M3-powered MacBook Air. We're also investing in new solar and wind power in the U.S. and Europe, both to power our growing operations and our users' devices. And we're working with partners in India and the U.S. to replenish 100% of the water we use in places that need it most with the goal of delivering billions of gallons of water benefits over the next two decades. Through our Restore Fund, Apple has committed $200 million to nature-based carbon removal projects. And last month, we welcomed two supplier partners as new investors, who will together invest up to an additional $80 million in the fund. Whether we're enriching lives of users across the globe or doing our part to be a force for good in the world, we do everything with a deep sense of purpose at Apple. And I'm proud of the impact we've already made at the halfway point in a year of unprecedented innovation. I couldn't be more excited for the future we have ahead of us, driven by the imagination and innovation of our teams and the enduring importance of our products and services in people's lives. With that, I'll turn it over to Luca." }, { "speaker": "Luca Maestri", "text": "Thank you, Tim, and good afternoon, everyone. Revenue for the March quarter was $90.8 billion, down 4% from last year. Foreign exchange had a negative year-over-year impact of 140 basis points on our results. Products revenue was $66.9 billion, down 10% year-over-year due to the challenging compare on iPhone that Tim described earlier, which was partially offset by strength from Mac. And thanks to our unparalleled customer satisfaction and loyalty and a high number of customers who are new to our products, our installed base of active devices reached an all-time high across all products and all geographic segments. Services revenue set an all-time record of $23.9 billion, up 14% year-over-year with record performance in both developed and emerging markets. Company gross margin was 46.6%, up 70 basis points sequentially, driven by cost savings and favorable mix to services, partially offset by leverage. Products gross margin was 36.6%, down 280 basis points sequentially, primarily driven by seasonal loss of leverage and mix, partially offset by favorable costs. Services gross margin was 74.6%, up 180 basis points from last quarter due to a more favorable mix. Operating expenses of $14.4 billion were at the midpoint of the guidance range we provided and up 5% year-over-year. Net income was $23.6 billion, diluted EPS was $1.53 and a March quarter record, and operating cash flow was strong at $22.7 billion. Let me now provide more detail for each of our revenue categories. iPhone revenue was $46 billion, down 10% year-over-year, due to the almost $5 billion impact from a year ago that Tim described earlier. Adjusting for this one-time impact, iPhone revenue would be roughly flat to last year. Our iPhone active installed base grew to a new all-time high in total and in every geographic segment. And during the March quarter, we saw many iPhone models as the top-selling smartphones around the world. In fact, according to a survey from Kantar, an iPhone was the top-selling model in the U.S., Urban China, Australia, the U.K., France, Germany and Japan. And the iPhone 15 family continues to be very popular with customers. 451 Research recently measured customer satisfaction at 99% in the U.S. Mac revenue was $7.5 billion, up 4% year-over-year, driven by the strength of our new MacBook Air, powered by the M3 chip. Customers are loving the incredible AI performance of the latest MacBook Air and MacBook Pro models. And our Mac installed base reached an all-time high with half of our MacBook Air buyers during the quarter being new to Mac. Also customer satisfaction for Mac was recently reported at 96% in the U.S. iPad generated $5.6 billion in revenue, down 17% year-over-year. iPad continued to face a challenging compare against the launch of the M2 iPad Pro and iPad 10th Generation from last year. At the same time, the iPad installed base has continued to grow and is at an all-time high as over half of the customers who purchased iPads during the quarter were new to the product. In addition, the latest reports from 451 Research indicated customer satisfaction of 96% for iPad in the US. Wearables, Home and Accessories revenue was $7.9 billion, down 10% year-over-year due to a difficult launch compare. Last year, we had the continued benefit from the launches of the AirPods Pro second-generation, the Watch SE and the first Watch Ultra. Apple Watch continues to attract new customers, with almost two-thirds of customers purchasing an Apple Watch during the quarter being new to the product, sending the Apple Watch installed base to a new all-time high and customer satisfaction was recently measured at 95% in the U.S. In services, as I mentioned, total revenue reached an all-time record of $23.9 billion, growing 14% year-over-year with our installed-base of active devices continuing to grow at a nice pace. This provides a strong foundation for the future growth of the services business as we continued to see increased customer engagement with our ecosystem. Both transacting accounts and paid accounts reached a new all-time high with paid accounts growing double-digits year-over-year. And paid subscriptions showed strong double-digit growth. We have well over $1 billion paid subscriptions across the services on our platform, more than double the number that we had only four years ago. We continued to improve the breadth and quality of our current services from creating new games on Arcade and great new shows on TV+ to launching additional countries and partners for Apple Pay. Turning to enterprise, our customers continued to invest in Apple products to drive productivity and innovation. We see more and more enterprise customers embracing the Mac. In Healthcare, Epic Systems, the world's largest electronic medical record provider, recently launched its native app for the Mac, making it easier for healthcare organizations like Emory Health to transition thousands of PCs to the Mac for clinical use. And since the launch of Vision Pro last quarter, many leading enterprise customers have been investing in this amazing new product to bring spatial computing apps and experiences to life. We are seeing so many compelling use cases from aircraft engine maintenance training at KLM Airlines to real-time team collaboration for racing at Porsche to immersive kitchen design at Lowe's. We couldn't be more excited about the spatial computing opportunity in enterprise. Taking a quick step back, when we look at our performance during the first-half of our fiscal year, total company revenue was roughly flat to the prior year in spite of having one less week of sales during the period and some foreign exchange headwinds. We were particularly pleased with our strong momentum in emerging markets, as we set first-half revenue records in several countries and regions, including Latin-America, the Middle East, India, Indonesia, the Philippines and Turkey. These results, coupled with double-digit growth in services and strong levels of gross margin, drove a first half diluted EPS record of $3.71, up 9% from last year. Let me now turn to our cash position and capital return program. We ended the quarter with $162 billion in cash and marketable securities. We repaid $3.2 billion in maturing debt and commercial paper was unchanged sequentially, leaving us with total debt of $105 billion. As a result, net cash was $58 billion at the end of the quarter. During the quarter, we returned over $27 billion to shareholders, including $3.7 billion in dividends and equivalents and $23.5 billion through open-market repurchases of $130 million Apple's shares. Given the continued confidence we have in our business now and into the future, our Board has authorized today an additional $110 billion for share repurchases, as we maintain our goal of getting to net cash-neutral over time. We are also raising our dividend by 4% to $0.25 per share of common stock, and we continued to plan for annual increases in the dividend going forward as we've done for the last 12 years. This cash dividend will be payable on May 16, 2024 to shareholders of record as of May 13, 2024. As we move ahead into the June quarter, I'd like to review our outlook, which includes the types of forward-looking information that Suhasini referred to at the beginning of the call. The color we are providing today assumes that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter. We expect our June quarter total company revenue to grow low-single-digits year-over-year in spite of a foreign exchange headwind of about 2.5 percentage points. We expect our services business to grow double-digits at a rate similar to the growth we reported for the first-half of the fiscal year. And we expect iPad revenue to grow double-digits. We expect gross margin to be between 45.5% to -- and 46.5%. We expect OpEx to be between $14.3 billion and $14.5 billion. We expect OI&E to be around $50 million, excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16%. With that, let's open the call to questions." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question, please?" }, { "speaker": "Operator", "text": "Certainly. We will go ahead and take our first question from Mike Ng with Goldman Sachs. Please go ahead." }, { "speaker": "Mike Ng", "text": "Hey, good afternoon. Thank you very much for the question. I have two, first, I'll ask about the June quarter guidance. The revenue outlook for low-single digits growth, I was wondering if you could run through some of the product assumptions, iPhone, like what kind of gives you confidence around that? And then on the service momentum, what was better than expected in the quarter? And then I just have a quick follow-up." }, { "speaker": "Luca Maestri", "text": "Hey, Mike. It's Luca. On the outlook, what we said is we expect to grow low-single-digits in total for the company. We expect services to grow double-digits at a rate that is similar to what we've done in the first-half of our fiscal year. And we've also mentioned that iPad should grow double-digits. This is the color that we're providing for the June quarter. In services, we've seen a very strong performance across the board. We've mentioned, we've had records in several categories, in several geographic segments. It's very broad based, our subscription business is going well. Transacting accounts and paid accounts are growing double-digits. And also we've seen a really strong performance both in developed and emerging markets. So very pleased with the way the services business is going." }, { "speaker": "Mike Ng", "text": "Great. Thank you. And I wanted to ask about, as Apple leans more into AI and Generative AI, should we expect any changes to the historical CapEx cadence that we've seen in the last few years of about $10 billion to $11 billion per year or any changes to, you know, how we may have historically thought about the split between tooling, data center and facilities? Thank you very much." }, { "speaker": "Luca Maestri", "text": "Yes. We are obviously very excited about the opportunity with Gen AI. We obviously are pushing very hard on innovation on every front and we've been doing that for many, many years. Just during the last five years, we spent more than a $100 billion in research and development. As you know, on the CapEx front, we have a bit of a hybrid model where we make some of the investments ourselves. In other cases, we share them with our suppliers and partners on the manufacturing side, we purchased some of the tools and manufacturing equipment. In some of the cases, our suppliers make the investment. On the -- and we do something similar on the data center side. We have our own data center capacity and then we use capacity from third parties. It's a model that has worked well for us historically and we plan to continue along the same lines going forward." }, { "speaker": "Mike Ng", "text": "Excellent. Thank you very much." }, { "speaker": "Suhasini Chandramouli", "text": "Awesome. Thank you, Mike. Operator, can we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Wamsi Mohan with Bank of America. Please go ahead." }, { "speaker": "Wamsi Mohan", "text": "Yes, thank you so much. Tim, can you talk about the implications to Apple from the changes driven by EU DMA? You've had to open up third-party app stores, clearly disposes some security risks on the one-hand, which can dilute the experience, but also lower payments from developers to Apple. What are you seeing developers choose in these early days and consumers choose in terms of these third-party app stores? And I have a follow-up." }, { "speaker": "Tim Cook", "text": "It's really too early to answer the question. We just implemented in March, as you probably know, in the European Union, the alternate app stores and alternate billing, et cetera. So we're focused on complying while mitigating the impacts to user privacy and security that you mentioned. And so that's our focus." }, { "speaker": "Wamsi Mohan", "text": "Okay. Thank you, Tim. And Luca, I was wondering if you could comment a bit on the product gross margins, the sequential step down. You noted both mix and leverage. Any more color on the mix, if you could share if customers are at all starting to mix down across product lines or is this more a mix across product lines? Just trying to get some color on customer behavior given some of the broader inflationary pressures. Thank you so much." }, { "speaker": "Luca Maestri", "text": "On a sequential basis, yes, we were down. It's primarily the fact that we had a slightly different mix of products than the previous one. Obviously, leverage plays a big role as we move from the holiday quarter into the -- into, you know, a more typical quarter. So I would say primarily leverage in a different mix of products. I mean, we haven't seen anything different in terms within the product categories, we haven't seen anything particular." }, { "speaker": "Wamsi Mohan", "text": "Thank you so much." }, { "speaker": "Suhasini Chandramouli", "text": "Thanks, Wamsi. We'll take the next question, please." }, { "speaker": "Operator", "text": "Our next question is from Erik Woodring with Morgan Stanley. Please go ahead." }, { "speaker": "Erik Woodring", "text": "Great. Thanks so much for taking my questions. Maybe my first one, Tim, you've obviously mentioned your excitement around Generative AI multiple times. I'm just curious how Apple is thinking about the different ways in which you can monetize this technology because historically software upgrades haven't been a big factor in driving product cycles. And so could AI be potentially different? And how could that impact replacement cycles? Is there any services angle you'd be thinking? Any early color that you can share on that? And then I have a follow up, please. Thanks." }, { "speaker": "Tim Cook", "text": "I don't want to get in front of our announcements, obviously. I would just say that we see Generative AI as a very key opportunity across our products. And we believe that we have advantages that set us apart there. And we'll be talking more about it in as we go through the weeks ahead." }, { "speaker": "Erik Woodring", "text": "Okay. Very fair. Thank you. And then Luca, maybe to just follow up on Wamsi's comments or question. There's a broad concern about the headwind that rising commodity costs have on your product gross margins. Wondering if you could just clarify for us if we take a step back and look at all of the components and commodities that go into your products kind of collectively, are we -- are you seeing these costs rising? Are they falling? What tools do you have to try to help and mitigate some rising costs if at all, rising input costs if at all? Thank you so much." }, { "speaker": "Luca Maestri", "text": "Yes. I mean during the last quarter, commodity costs, and in general, component costs have behaved favorably to us. On the memory front, prices are starting to go up. They've gone up slightly during the March quarter. But in general, I think it's been a period not only this quarter, but the last several quarters where, you know, commodities have behaved well for us. Commodities going cycles and so there's obviously always that possibility. Keep in mind that we are starting from a very high level of gross margins. We reported 46.6%, which is something that we haven't seen in our company in decades. And so we're starting from a good point. As you know, we try to buy ahead when the cycles are favorable to us. And so we will try to mitigate if there are headwinds. But in general, we feel particularly for this cycle, we are in good shape." }, { "speaker": "Erik Woodring", "text": "Thank you so much." }, { "speaker": "Suhasini Chandramouli", "text": "Great. Thank you, Erik. Operator, we'll take the next question, please." }, { "speaker": "Operator", "text": "Our next question is from Ben Reitzes with Melius. Please go ahead." }, { "speaker": "Ben Reitzes", "text": "Hey, thanks for the question. And hey, Tim, I was wondering if I could ask the China question again. Is there any more color from your visit there that gives you confidence that you've reached a bottom there and that it's turning? And I know you've been -- you've continued to be confident there in the long-term. Just wondering if there was any color as to when you think that the tide turns there? Thanks a lot. And I have a follow-up." }, { "speaker": "Tim Cook", "text": "Yes, Ben, if you look at our results in Q2 for Greater China, we were down 8%. That's an acceleration from the previous quarter in Q1. And the primary driver of the acceleration was iPhone. And if you then look at iPhone within Mainland China, we grew on a reported basis. That's before any kind of normalization for the supply disruption that we mentioned earlier. And if you look at the top-selling smartphones, the Top 2 in Urban China are iPhones. And while I was there, it was a great visit and we opened a new store in Shanghai and the reception was very warm and highly energetic, and so I left there having a fantastic trip and enjoyed being there. And so I maintain a great view of China in the long-term. I don't know how each and every quarter goes and each and every week. But over the long haul, I have a very positive viewpoint." }, { "speaker": "Ben Reitzes", "text": "Okay. Hey, thanks, Tim. And then my follow-up, I want to ask this carefully though. It's a -- there's a fear out there that, you may lose some traffic acquisition revenue. And I was wondering if you thought AI from big picture and it doesn't have to be on a long-term basis, I mean from a big picture, if AI is an opportunity for you to continue to monetize your mobile real estate, just how you -- how maybe investors can think about that from a big picture, just given that's been one of the concerns that's potentially been an overhang, of course, due to, you know, a lot of the news and the media around some of the legal cases? And I was wondering if there's just a big-picture color you could give that makes us kind of think about it better and your ability to sort of continue to monetize that real estate? Thanks a lot." }, { "speaker": "Tim Cook", "text": "I think AI, Generative AI and AI, both are big opportunities for us across our products. And we'll talk more about it in the coming weeks. I think there are numerous ways there that are great for us. And we think that we're well-positioned." }, { "speaker": "Ben Reitzes", "text": "Thanks, Tim." }, { "speaker": "Tim Cook", "text": "Yes." }, { "speaker": "Suhasini Chandramouli", "text": "Thanks, Ben. Can we have the next question, please?" }, { "speaker": "Operator", "text": "Thank you. Our next question is from Krish Sankar with TD Cowen. Please go ahead." }, { "speaker": "Krish Sankar", "text": "Yes, hi. Thanks for taking my question. Again, sorry to beat the AI haul. But Tim, I know you don't want to like reveal a lot. But I'm just kind of curious, because last quarter you spoke about how you're getting traction in enterprise. Is the AI strategy going to be both consumer and enterprise or is it going to be one after the other? Any color would be helpful? And then, I have a follow-up for Luca." }, { "speaker": "Tim Cook", "text": "Our focus on enterprise has been and you know through the quarter and the quarters that preceded it on selling iPhones and iPads and Macs and we recently added Vision Pro to that. And we're thrilled with what we see there in terms of interest from big companies buying some to explore ways they can use it. And so I see enormous opportunity in the enterprise. I wouldn't want to cabin that to AI only. I think there's a great opportunity for us around the world in the enterprise." }, { "speaker": "Krish Sankar", "text": "Got it. Very helpful. And then for Luca, you know, I'm kind of curious on -- given the macro-environment, on the hardware side, are you seeing a bias towards like standard iPhone versus the Pro model? The reason I'm asking the question is that there's a weaker consumer spending environment, yet your services business is still growing and has amazing gross margins. So I'm just trying to like square the circle over there. Thank you." }, { "speaker": "Luca Maestri", "text": "I'm not sure I fully understand the question, but in general, what we are seeing on the product side, we continued to see a lot of interest at the top of the range of our products. And I think it's a combination of consumers wanting to purchase the best product that we offer in the different categories and our ability to make those purchases more affordable over time. We've introduced several financing solutions from installment plans to trading programs that reduce the affordability threshold and therefore, customers tend to buy -- want to buy at the top of the range that is very valuable for us in developed markets, but particularly in emerging markets where the affordability issues are more pronounced. But in general, over the last several years and that is also reflected in our gross margins, over the last several years, we've seen this trend, which we think is pretty sustainable." }, { "speaker": "Krish Sankar", "text": "Got it. Thank you very much, Luca, and thanks, Tim." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Krish. Operator, we'll have the next question, please." }, { "speaker": "Operator", "text": "Our next question is from Amit Daryanani with Evercore. Please go ahead." }, { "speaker": "Amit Daryanani", "text": "Thanks for taking my question. I have two as well. You know, I guess, first off on capital allocation, you folks have about $58 billion of net cash right now. As you think about eventually getting to this net cash-neutral target, do you think at some point, Apple would be open to taking on leverage on the balance sheet and continuing the buyback program? Or is it more like once you get to this neutral position, it's going to be about returning free cash flow back to shareholders? I'm just wondering, how do you think about leverage on your balance sheet over time and what sort of leverage do you think you'd be comfortable taking on?" }, { "speaker": "Luca Maestri", "text": "Hey, Amit. This is Luca. I would say one step at a time, we have put out this target of getting to net cash-neutral several years ago and we're working very hard to get there. Our free cash flow generation has been very strong over the years, particularly in the last few years. And so as you've seen this year, we've increased the amount that we're allocating to the buyback. For the last couple of years, we were doing $90 billion, now we're doing $110 billion. So let's get there first. It's going to take a while still. And then when we are there, we're going to reassess and see what is the optimal capital structure for the company at that point in time. Obviously, there's going to be a number of considerations that we will need to look at when we get there." }, { "speaker": "Amit Daryanani", "text": "Fair enough. I figure it's worth trying anyway. If I go back to this China discussion a bit and, you know, Tim, I think your comments around growth in iPhones in Mainland China is really notable. Could you step back, I mean, these numbers are still declining at least Greater China on a year-over-year basis in aggregate. Maybe just talk about what are you seeing from a macro basis in China and then at least annual decline -- or year-over-year declines that we're seeing. Do you think it's more macro driven or more competitive driven over there? That would be helpful." }, { "speaker": "Tim Cook", "text": "Yes, I can only tell you what we're seeing. And so I don't want to present myself as a economist. So I'll steer clear of that. From what we saw was an acceleration from Q1, and it was driven by iPhone and iPhone in Mainland China before we adjust for this $5 billion impact that we talked about earlier did grow. That means the other products didn't fare as well. And so we clearly have work there to do. I think it has been and is through last quarter, the most competitive market in the world. And I -- so I, you know, wouldn't say anything other than that. I've said that before, and I believe that it was last quarter as well. And -- but if you step back from the 90-day cycle, what I see is a lot of people moving into the middle class, a -- we try to serve customers very well there and have a lot of happy customers and you can kind of see that in the latest store opening over there. And so I continue to feel very optimistic." }, { "speaker": "Amit Daryanani", "text": "Great. Thank you." }, { "speaker": "Suhasini Chandramouli", "text": "Thanks, Amit. Operator, we'll take the next question, please." }, { "speaker": "Operator", "text": "Our next question is from David Vogt with UBS. Please go ahead." }, { "speaker": "David Vogt", "text": "Great. Thanks guys for taking my question. I'm going to roll the two together, so you guys have them both. So Luca obviously, I'm trying to parse through the outlook for the June quarter. And just based on the quick math, it looks like all things being equal, given what you said, the iPhone business is going to be down mid-single-digits again in the June quarter. And if that's the case and maybe this is for Tim obviously, how are you thinking about the competitive landscape in the context of what you just said maybe outside of China and what changes sort of, the consumer demand or receptivity to new devices because we've been in this malaise for a while. Is it really this AI initiative that a lot of companies are pursuing? And do you think that changes sort of the demand drivers going forward? Or is it just really more of a timing issue in terms of the replacement cycle is a little bit long in the tooth, and we see a bit of an upgrade cycle at some point, maybe later this year into next year? Thanks." }, { "speaker": "Tim Cook", "text": "I do see a key opportunity, as I've mentioned before with Generative AI with all of our devices or the vast majority of our devices. And so I think that if you look out that that's not within the next quarter or so and we don't guide at the product level, but I'm extremely optimistic. And so that -- that's kind of how I view it. In terms of the -- I'll let Luca comment on the outlook portion of it. I think if you step back on iPhone though and you make this adjustment from the previous year, our Q2 results would be flattish on iPhone. And so that's how we performed in Q2." }, { "speaker": "Luca Maestri", "text": "Yes, David, on the outlook, I'll only repeat what we said before, and this is the color that we're providing for the quarter. We do expect to grow in total, low-single-digits. And we do expect services to grow double-digits, and we expect iPad to grow double-digits for the rest. I'll let you make assumptions and then we will report three months from now." }, { "speaker": "David Vogt", "text": "Great. Thanks guys. I'll get back in the queue." }, { "speaker": "Suhasini Chandramouli", "text": "Thanks, David. Operator, we'll take the next question, please." }, { "speaker": "Operator", "text": "Our next question is from Samik Chatterjee with JPMorgan. Please go ahead." }, { "speaker": "Samik Chatterjee", "text": "Hi, thanks for taking my question, and I have a couple as well. Maybe for the first one, your services growth accelerated from 11% growth to 14%. If you can sort of dig into the drivers of where or which parts of services did you really see that acceleration? And why it isn't a bit more sustainable as we think about the next quarter? Because I believe you're guiding more to sort of averaging out the first half of the year for the next quarter. So just curious what were the drivers and why not have it a bit more sustainably sort of improve as we go through the remainder of the year? And I have a quick follow-up. Thank you." }, { "speaker": "Luca Maestri", "text": "So a number of things on services. First of all, the overall performance was very strong. As I said earlier, all-time records in both developed and emerging markets. So we see our services do well across the world. Records in many of our services categories. There are some categories that are growing very fast also because they are relatively smaller in the scheme of our services business like cloud, video, payment services. You know, those all set all-time revenue records. And so we feel very good about the progress that we're making in services. As we go forward, I'll just point out that if you look at our growth rates a year ago, they improved during the course of the fiscal year last year. So the comps for the services business become a bit more challenging as we go through the year. But in general, as I mentioned, we still expect to grow double-digits in the June quarter at a rate that is very similar to what we've done in the first half." }, { "speaker": "Samik Chatterjee", "text": "Got it. Got it. And for my follow up, if I can ask you more specifically about the India market. Obviously, you continue to make new records in terms of revenue in that market. How much of the momentum you're seeing would you associate with your sort of retail strategy in that market, retail expansion relative to maybe some of the supply change or the sort of manufacturing changes or strategy you've undergone or taken in that market itself. Any thoughts around that would be helpful?" }, { "speaker": "Tim Cook", "text": "Sure. We did grow strong double-digit. And so we were very, very pleased about it. It was a new March quarter revenue record for us. As you know, as I've said before, I see it as an incredibly exciting market and it's a major focus for us. In terms of the operational side or supply chain side, we are producing there, from a pragmatic point of view, you need to produce there to be competitive. And so yes, there the two things are linked from that point of view. But we have both operational things going on and we have go-to-market, and initiatives going on. We just opened a couple of stores as last year, as you know, and we see enormous opportunity there. We're continuing to expand our channels, and also working on the developer ecosystem as well. And we've been very pleased that there is a rapidly-growing base of developers there. And so, we're working all of the entire ecosystem from developer to the market to operations, the whole thing. And I just -- I could not be more excited and enthusiastic about it." }, { "speaker": "Samik Chatterjee", "text": "Got it. Thank you. Thanks for that." }, { "speaker": "Tim Cook", "text": "Yes." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Samik. Operator, we'll have the next question, please." }, { "speaker": "Operator", "text": "Our next question is from. Please go ahead." }, { "speaker": "Aaron Rakers", "text": "Yes, thanks for taking the questions, and I think I have to have two as well like everybody else. I guess, I'm going to go back to the China question. I guess, at a high level, the simple question is, when we look at the data points that have been repeatedly reported throughout the course of this quarter, I'm curious, Tim, you know, what are we missing? Like where do you think people are missing, Apple's iPhone traction within the China market, just at a high level, you know, given the data points that were reported throughout this course of the last quarter?" }, { "speaker": "Tim Cook", "text": "I can't address the data points. I can only address what our results are. And we did accelerate last quarter, and the iPhone grew in Mainland China. So that's what the results were. I can't bridge to numbers we didn't come up with." }, { "speaker": "Aaron Rakers", "text": "Okay. And then as a quick follow-up, I know you guys haven't talked about this, you know, quantified it in quite some time. But I'm curious how we would characterize the channel inventory dynamics for iPhone?" }, { "speaker": "Tim Cook", "text": "Sure. The -- for the March quarter, we decreased channel inventory during the quarter. We usually decreased channel inventory during the Q2 timeframe. So that's not unusual. And we're very comfortable with the overall channel inventory." }, { "speaker": "Aaron Rakers", "text": "Thank you." }, { "speaker": "Tim Cook", "text": "Yes." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Aaron. Operator, we'll take the next question, please." }, { "speaker": "Operator", "text": "Our next question is from Richard Kramer with Arete Research. Please go ahead." }, { "speaker": "Richard Kramer", "text": "Thanks very much. I'm not going to ask about China, but you regularly call out all the rapid growth in many other emerging markets. So is Apple approaching a point where all of those other emerging markets in aggregate might crossover to become larger than your current $70 billion Greater China segments, and maybe investors could look at that for driving growth for the wider business? And then I have a follow-up for Luca. Thanks." }, { "speaker": "Luca Maestri", "text": "I think, Richard, you're asking a really interesting question. We were looking at something similar recently. Obviously, China is by far the largest emerging market that we have. But when we started looking at places like India, like Saudi, like Mexico, Turkey, of course, Brazil and Mexico and Indonesia, the numbers are getting large, and we're very happy because these are markets where our market share is low, the populations are large and growing. And our products are really making a lot of progress with the -- in those markets. The level of excitement for the brand is very high. Tim was in Southeast Asia recently, and the level of excitement is incredibly high. So it is very good for us. And then -- and certainly, the numbers are getting larger all the time. And so the gap as you compare it to the numbers in China is reducing, and hopefully, that trajectory continues for a long time." }, { "speaker": "Richard Kramer", "text": "Okay. And then as a follow-up, maybe for either of you, I mean, you're coming up on four years from what was incredibly popular iPhone 12 cycle. And, you know, given you're struggling to reduce your net -- your -- reach your net neutral cash position and your margins are sort of near highs, do you see ways to deploy capital more to spur replacement demand in your installed base either with greater device financing, more investment in marketing, more promotions. I mean, do you feel like you needed to produce those sort of margins or is it a more important to spur growth with replacement? Thanks." }, { "speaker": "Tim Cook", "text": "I think innovation spurs the upgrade cycle, and as one thing, of course, there's economic factors as well that play in there. And what kind of offerings there are from our carrier partners and so forth. And so there's a number of variables in there. But we work all of those, and you know, we price our products for the value that we're delivering. And so that's how we look at it." }, { "speaker": "Luca Maestri", "text": "And if I can add to Tim's comments, Richard, one of the things that when you look over the long arc of time that maybe is not fully understood is that we've gone through a long period of very strong dollar. And what that means given that our company sells more than 60% of our revenue is outside the United States. The demand for our products in those markets is stronger than the results that we report just because of the translation of those local currencies into dollars, right? And so that is something to keep in mind as you look at our results, right? And so we are making all the investments that are needed and Tim has talked about innovation. Obviously, we made a lot of progress with financing solutions, with trading programs and so on, and we will continue to make all those investments." }, { "speaker": "Richard Kramer", "text": "Okay. Super. Thanks, guys." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Richard. Operator, can we take our last question, please." }, { "speaker": "Operator", "text": "Our next question is from Atif Malik with Citi. Please go ahead." }, { "speaker": "Atif Malik", "text": "Hi. Thank you for taking my questions, and I have two questions as well. First for Tim, for enterprise, specifically, what are some of the top two or three use cases on Vision Pro you're hearing most excitement? And then I have a follow-up for Luca." }, { "speaker": "Tim Cook", "text": "Yes, the great thing is, I'm hearing about so many of them. I wouldn't say that one has emerged as the top, right now. The most impressive thing is that similar to the way people use a Mac, you use it for everything. People are using it for many different things in enterprise, and that varies from field service to training to healthcare related things like preparing a doctor for pre-op surgery or advanced imaging. And so the -- it commands control centers. And so it's an enormous number of different verticals. And you know our focus is on -- is growing that ecosystem and getting more apps and more and more enterprises engaged. And the event that we had recently, I can't overstate the enthusiasm in the room. It was extraordinary. And so we're off to a good start, I think, with the enterprise." }, { "speaker": "Atif Malik", "text": "Great. And then Luca, I believe you mentioned that for the March quarter, the commodity pricing environment was favorable. Can you talk about what you're assuming for commodity pricing on memory and et cetera for the June quarter and maybe for the full-year?" }, { "speaker": "Luca Maestri", "text": "Yes, we provide guidance just for the current quarter. So I'll tell you about the, you know, the guidance. We're guiding to again to a very high level of gross margins, 45.5% to 46.5%. Within that guidance, we expect memory to be a slight headwind, not a very large one, but a slight headwind. And the same applies for foreign exchange. Foreign exchange will have a negative impact sequentially of about 30 basis points." }, { "speaker": "Atif Malik", "text": "Thank you." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Atif. A replay of today's call will be available for two weeks on Apple podcasts as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 0467138 followed by the pound sign. These replays will be available by approximately 5:00 P.M. Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142, and financial analysts can contact me, Suhasini Chandramouli, with additional questions at 408-974-3123. Thank you again for joining us." } ]	Apple Inc.	24,937
AAPL	1	2,024	2024-02-01 17:00:00	Operator: Good day, and welcome to the Apple Q1 Fiscal Year 2024 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions. I would like to turn the call over to Suhasini Chandramouli, Director of Investor Relations. Please go ahead. Suhasini Chandramouli: Thank you for joining us. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Before turning the call over to Tim, I would like to remind everyone that the quarter we're reporting today included 13 weeks, whereas the quarter we reported a year ago included 14 weeks. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook: Thank you. Suhasini. Good afternoon, everyone, and thanks for joining the call. Today, Apple is reporting revenue of $119.6 billion for the December quarter, up 2% from a year ago despite having one less week in the quarter. EPS was $2.18, up 16% from a year ago and an all-time record. We achieved revenue records across more than two dozen countries and regions including all-time records in Europe and rest of Asia-Pacific. We also continue to see strong double-digit growth in many emerging markets with all-time records in Malaysia, Mexico, The Philippines, Poland, and Turkey, as well as December quarter records in India, Indonesia, Saudi Arabia, and Chile. In Services, we set an all-time revenue record with paid subscriptions growing double-digits year-over-year. And I'm pleased to announce today that we have set a new record for our installed base, which has now surpassed 2.2 billion active devices. We are announcing these results on the eve of what is sure to be a historic day as we enter the era of spatial computing. Starting tomorrow, Apple Vision Pro, the most advanced personal electronics device ever, will be available in Apple stores for customers in the U.S. with expansion to other countries later this year. Apple Vision Pro is a revolutionary device built on decades of Apple innovation and it's years ahead of anything else. Apple Vision Pro has a groundbreaking new input system and thousands of innovations, and it will unlock incredible experiences for users and developers that are simply not possible on any other device. There is already so much excitement behind this product from reviewers, customers, and developers. They are praising everything from the incredible experience of watching a movie on a 100-foot screen to remarkable new machine learning capabilities like hand tracking and room mapping. We can't wait for people to experience the magic for themselves. Moments like these are what we live for at Apple. They're why we do what we do. They're why we're so unflinchingly dedicated to groundbreaking innovation and why we're so focused on pushing technology to its limits as we work to enrich the lives of our users. As we look ahead, we will continue to invest in these and other technologies that will shape the future. That includes artificial intelligence where we continue to spend a tremendous amount of time and effort, and we're excited to share the details of our ongoing work in that space later this year. Now, let's turn to the results for the December quarter, beginning with iPhone. We are proud to report that revenue came in at $69.7 billion, 6% higher than a year ago. The iPhone 15 lineup has earned glowing reviews and been embraced by customers. The iPhone 15 and iPhone 15 Plus feature a gorgeous new design with color-infused back glass and contoured edges, Dynamic Island, A16 Bionic, and a new 48 megapixel camera system. And the iPhone 15 Pro and iPhone 15 Pro Max set the gold standard for smartphones with a beautiful and lighter titanium design, industry-leading performance with A17 Pro and our most advanced camera system with the equivalent of seven pro lenses and the ability to record spatial video. Features like Emergency SoS and roadside assistance via satellite bring peace of mind to users when they travel, and I'm grateful for every note I've received about their lifesaving impact. Turning to Mac. Revenue came in at $7.8 billion, up 1% year-over-year, driven by the strength of our latest M3-powered MacBook Pro models in spite of having one less week of sales. Just last week, we got to wish Mac a happy 40th birthday. When it was introduced 40 years ago, Mac changed everything, and through the years, it has done so again and again. Recently, we have been on a tremendous pace of innovation. Since the introduction of Apple silicon in 2020, we've been proud to offer our users unmatched performance and power along with a remarkable Neural Engine for artificial intelligence and machine learning. This past fall, we had an amazing launch of the latest generation of Apple silicon for Mac, M3, M3 Pro, and M3 Max. These chips break new ground in power and performance empowering users to do more than they ever could before, whether they're making a musical masterpiece using the latest features in Logic Pro, or beating their high score in a graphics intensive game. A favorite amongst students, business owners, artists, and video editors, our MacBook Pro lineup is the world's best pro notebook family. And iMac, the world's most capable and best-selling all-in one, is now faster than ever, thanks to M3. In iPad, revenue for the December quarter was $7 billion, down 25% year-over-year due to a difficult compare with the launch of the M2 iPad Pro and the 10th generation iPad during the December quarter last year and one less week of sales. iPad remains the most versatile, capable, and elegant tablet on the market today. It continues to be the go-to-device for students, creators, and more with customers loving iPad's incredible combination of portability and performance. Powerful apps like Final Cut Pro and Logic Pro for iPad allow video and music creators to unleash their creativity in new ways that are only possible on iPad. iPad continues to push the boundaries of what's possible on a tablet. In Wearables, Home and Accessories, revenue came in at $12 billion, down 11% from a year ago due to a difficult compare with the launch timing of several products in this category and the impact of the 14th week last year. Across our latest Apple Watch lineup, we're enabling and encouraging our users to live a healthier day, while making Apple Watch even more intuitive to use. The new double tap gesture on Apple Watch Series 9 and Apple Watch Ultra 2 make it easier to answer calls, play and pause music or take a photo with iPhone. I've been deeply moved by the many touching stories about how features like a regular rhythm notification and fall detection helped Apple Watch users when they needed it most. And for the first time ever, users can choose a carbon-neutral option of any new Apple Watch. Meanwhile, our AirPods lineup continue to be a holiday favorite. In Services, we set an all-time revenue record of $23.1 billion and an 11% year-over-year increase. Because we had one less week this quarter, this growth represents an acceleration from the September quarter, and we achieved all-time revenue records across advertising, cloud services, payment services and video, as well as December quarter records in App Store and AppleCare. Across our services, we're constantly growing our offerings to give users even more to love. With the redesigned Apple TV app, we've made it easier for subscribers to enjoy all their favorite shows, movies and sports, including Apple TV+ hits like Masters of the Air, Monarch, and Slow Horses. We're proud to be a part of Martin Scorsese's Killers of the Flower Moon, a film that has moved audiences and earned more than 200 accolades including Best Film of the Year from the New York Film Critics Circle, nine BAFTA nominations, a Golden Globe win, and 10 Oscar nominations, including Best Picture. Across all Apple TV+ productions, we've now earned 2050 award nominations and 450 wins since we've introduced the service. We're also excited to have a new season of Major League Soccer kicking off this month. We're looking forward to seeing Lionel Messi return to the field and to following all of our favorite teams in what is sure to be an incredible season. And we're counting down to the Apple Music Super Bowl halftime show, featuring Usher. Turning to Retail. In recent months, we opened three stores, including our 100th store in Asia-Pacific. Throughout the holidays, our team members pulled out all the stops to help customers find the perfect gift. And I know our U.S. team members are especially excited to begin demoing Apple Vision Pro for our customers tomorrow. At Apple, we live and breathe innovation. We are driven to pioneer new technology that can enrich our customers' lives, and we're just as intentional about showing up with our values and being a force for good in the world. February is Black History Month, and to honor it, we've launched our new Black Unity Collection, which includes the Black Unity Sport Loop band. This year's designs reflect a lasting commitment to working toward a more equitable world. We also continue to do a central work through our Racial Equity and Justice Initiative, and we're proud to continue providing grants to organizations that are making a real impact in the world. In recent months, we've also taken significant strides in our environmental work. We're partnering with suppliers to bring more clean energy online for Apple production. We're using more recycled materials than ever before and more energy-efficient transportation than ever before. And each day, we are taking more and more steps toward becoming 100% carbon-neutral across all of our products by 2030. Apple is a company that has never shied away from big challenges. That's because we are grounded by a deep sense of purpose and guided by core belief in the transformative power of innovation. And so, we are optimistic about the future, confident in the long-term, and as excited as we've ever been to deliver for our users like only Apple can. With that, I'll turn it over to Luca. Luca Maestri: Thank you, Tim, and good afternoon, everyone. Revenue for the December quarter was $119.6 billion, up 2% from last year. During the December quarter a year ago, two unique factors affected our results. First, we had an additional week in the quarter. And second, we had COVID-related factory shutdowns that limited iPhone supply. We estimate that the net impact of these two factors resulted in a 2 percentage point headwind to our revenue performance this quarter. We set all-time revenue records in Europe and rest of Asia-Pacific, and continue to see strong performance across our emerging markets with double-digit growth in the majority of the emerging markets we track. Products revenue was $96.5 billion, flat compared to last year, driven by strength in iPhone, offset by challenging compares for iPad and Wearables, Home and Accessories and one less week of sales this year across the entire portfolio. Thanks to our unparalleled customer loyalty and very strong levels of customer satisfaction, our total installed base of active devices set a new record across all products and all geographic segments, and is now over 2.2 billion active devices. Services revenue set an all-time record of $23.1 billion, up 11% year-over-year. When we take into account the extra week last year, this represents a sequential acceleration of growth from the September quarter. We are very pleased with our Services performance in both developed and emerging markets with all-time revenue records in the Americas, Europe, and rest of Asia-Pacific. Company gross margin was 45.9%, up 70 basis points sequentially, driven by leverage and favorable mix, partially offset by foreign exchange. Products gross margin was 39.4%, up 280 basis points sequentially, also driven by leverage and mix, partially offset by foreign exchange. Services gross margin was 72.8%, up 190 basis points from last quarter, due to a more favorable mix. Operating expenses of $14.5 billion were at the midpoint of the guidance range we provided and up 1% year-over-year. Net income was $33.9 billion, up $3.9 billion from last year. Diluted EPS was $2.18, up 16% versus last year and an all-time record. And operating cash flow was very strong at $39.9 billion. Let me now provide more detail for each of our revenue categories. iPhone revenue was $69.7 billion, up 6% year-over-year. We set all-time records in several countries and regions, including Latin America, Western Europe, the Middle East, and Korea, as well as December quarter records in India and Indonesia. Our iPhone active installed base grew to a new all-time high, and we had an all-time record number of iPhone upgraders during the quarter. Customers are loving their new iPhone 15 family, with the latest reports from 451 Research indicating customer satisfaction of 99% in the U.S. In fact, many iPhone models were among the top-selling smartphones around the world during the quarter. According to a survey from Kantar, iPhones were four out of the top five models in the U.S. and Japan, four out of the top six models in urban China and the UK, and all top five models in Australia. Mac generated revenue of $7.8 billion and return to growth, despite one less week of sales this year. This represents a significant acceleration from the September quarter when we faced a challenging compare due to the supply disruptions and subsequent demand recapture we experienced a year ago. Customer response to our latest iMac and MacBook Pro models powered by the M3 chips has been great. And our Mac installed base reached an all-time high with almost half of Mac buyers during the quarter being new to the product. Also, 451 Research recently reported customer satisfaction of 97% for Mac in the U.S. iPad was $7 billion in revenue, down 25% year-over-year. iPad faced a difficult compare because during the December quarter last year, we launched the new iPad Pro and iPad 10 generation, and we had an extra week of sales. However, the iPad installed base continues to grow and is an all-time high with over half of the customers who purchased iPads during the quarter being new to the product, and customer satisfaction for iPad was recently measured at 98% in the U.S. Wearables, Home and Accessories revenue was $12 billion, down 11% year-over-year due to a challenging launch compare and the extra week a year ago. This time last year, we had the full quarter benefit from the launches of the AirPods Pro 2nd generation, the Watch SE, and the first Watch Ultra. We continue to attract new customers to Apple Watch. Nearly two-thirds of customers purchasing an Apple Watch during the quarter were new to the product, and the latest reports from 451 Research indicate customer satisfaction of 96% in the U.S. And in Services, we were very pleased with our double-digit growth, which was driven by the strength of our ecosystem. Our installed base is now over 2.2 billion active devices and continues to grow nicely, establishing a solid foundation for the future expansion of our Services business. And we continue to see increased customer engagement with our services. Both transacting accounts and paid accounts reached a new all-time high, with paid accounts growing double-digits year-over-year. Also, our paid subscriptions showed strong double-digit growth. We have well over 1 billion paid subscriptions across the services on our platform, more than double the number that we had only four years ago. Finally, we continue to build on the breadth and the quality of our current services. From Oscar-nominated theatrical releases with Apple TV+ to more publications or News+ like The Atlantic and exciting new games on Arcade. Turning to Enterprise, we continue to see many business customers leverage Apple products to improve productivity and drive innovation. Target recently added the latest M3 MacBook Pro to their existing deployment of thousands of Mac’s, enabling employees across various departments to do their best work. In emerging markets, Zoho, a leading technology company headquartered in India, offers its 15,000 plus global employees a choice of devices, with 80% of their workforce using iPhone for work and nearly two-thirds of them choosing Mac as their primary computer. With the upcoming launch of Apple Vision Pro, we are seeing strong excitement in Enterprise. Leading organizations across many industries such as Walmart, Nike, Vanguard, Stryker, Bloomberg, and SAP have started leveraging and investing in Apple Vision Pro as their new platform to bring innovative spatial computing experiences to their customers and employees. From everyday productivity to collaborative product design to immersive training, we cannot wait to see the amazing things our enterprise customers will create in the months and years to come. Let me now turn to our cash position and capital return program. We ended the quarter with $173 billion in cash and marketable securities. We decreased commercial paper by $4 billion, leaving us with total debt of $108 billion. As a result, net cash was $65 billion at the end of the quarter, and our goal of becoming net cash-neutral over time remains unchanged. During the quarter, we returned nearly $27 billion to shareholders, including $3.8 billion in dividends and equivalents and $20.5 billion through open market repurchases of 112 million Apple shares. We also retired an additional 6 million shares in the final settlement of our 19th ASR. As usual, we will provide an update to our capital return program when we report results at the end of this quarter. As we move ahead into the March quarter, I'd like to review our outlook, which includes the types of forward-looking information that Suhasini referred to at the beginning of the call. The color we are providing today assumes that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter. And we expect foreign exchange to be a revenue headwind of about 2 percentage points on a year-over-year basis. As a reminder, in the December quarter a year ago, we faced significant supply constraints on the iPhone 14 Pro and 14 Pro Max due to COVID-19 factory shutdowns. And in the March quarter a year ago, we were able to replenish channel inventory and fulfill significant pent-up demand from the constraints. We estimate that this impact added close to $5 billion to the March quarter's total revenue last year. When we remove this impact from last year's revenue, we expect both our March quarter total company revenue and iPhone revenue to be similar to a year ago. For our Services business, we expect a similar double-digit growth rate to what we reported in the December quarter. We expect gross margin to be between 46% and 47%. We expect OpEx to be between $14.3 billion and $14.5 billion. We expect OI&E to be around $50 million, excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16%. Finally, today our Board of Directors has declared a cash dividend of $0.24 per share of common stock payable on February 15, 2024, to shareholders of record as of February 12, 2024. With that, let's open the call to questions. Suhasini Chandramouli: Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question please? Operator: Certainly. We'll go ahead and take our first question from Erik Woodring with Morgan Stanley. Please go ahead. Erik Woodring: Hey guys, good evening. Thank you for taking my questions. I have two. And congrats on the nice quarter here. Luca, maybe if we start with you. Can you unpackage some of the Services drivers a bit for us. Obviously, really nice outperformance in the December quarter versus your expectations. A record gross margin implies your higher margin businesses were likely the sources of outperformance. But can you maybe just clarify a bit how we should think about Services growth for the March quarter? And then, speak to some of those underlying drivers in the December quarter and then in the March quarter, what the different puts and takes would be? And then, I have a follow-up please. Thank you. Luca Maestri: Thanks, Erik, for the question. Let's start with the December quarter. As we said, up 11%, $23.1 billion is an all-time record for us, with all-time records in The Americas, in Europe, and the rest of Asia Pac. So it was pretty broad-based geographically, and very strong across all the Services categories, because we had all-time revenue records for cloud, for payments, for video, and for advertising and December quarter records for the App Store and for AppleCare. Obviously, last year, we had an extra week, so the 11% is stronger than -- the underlying performance is stronger than the 11% that we have reported. I think the entire ecosystem is doing well because we continue to see growth and new all-time highs in both transacting accounts and paid accounts, which is obviously very important. And paid subscriptions continue to grow strong double-digits. Just as a reference, we have more than a billion paid subscriptions across all the services on our platform. This is more than double the number of paid subscriptions that we had only four years ago. So, obviously, very significant growth there. What I said during the prepared remarks around the March quarter, I mentioned that we will continue to grow double-digits at a percentage that is similar to what we reported for the December quarter. We don't provide guidance around the different services categories. So, we will provide more color when we report in three months. Erik Woodring: Okay. Thank you, Luca. And then, Tim, really nice to see your installed base reach a record high, again, against all products and geos. I'm wondering if you could share a bit more detail about the new users you were able to on-board over the last 12 months. Meaning, how might this new cohort look different from past cohorts, either in terms of geographic representation or SKU to certain products or even how their monetization trends might differ from past cohorts. And that's it from me. Thanks so much. Tim Cook: Yes. Hi, Erik. I would say emerging markets are -- have been a very key area of strength for us. If you look at it, India grew -- in revenue terms grew strong double-digits in the December quarter and hit a quarter revenue record. The other emerging markets like Indonesia also hit a quarterly record. And we had several regions, with records from Latin America to the Middle East. And that theme has been pretty consistent across the other quarters that -- of the year as well. And so, emerging markets, very, very important. And I feel like we are doing a great job there. Suhasini Chandramouli: Thanks, Erik. Operator, can we have the next question please? Operator: Our next question is from Mike Ng with Goldman Sachs. Please go ahead. Mike Ng: Hey, good afternoon. I just have two questions as well. First, on Services. Just on the outlook for the March quarter for a similar double-digit growth rate as of December quarter. I'm just wondering why not -- why won't it be potentially faster, given that the December quarter obviously had a headwind from the extra week comp, and I'd also think that some of the pricing uplifts on select Apple One services that were implemented last winter should help in the March quarter? Any additional thoughts there would be great in terms of what some of your assumptions are. And then, I have a quick follow-up. Luca Maestri: Yes. We'll see how the quarter develops. I would point to two things. One is the fact that we mentioned that we expect a couple of points of negative foreign exchange in the March quarter, and foreign exchange was essentially flat for us in the December quarter. So, you've got a bit of a headwind there. And then, when you look at our other progression of our Services business over the last few quarters, the compares for March are slightly more difficult than the compares for December. Mike Ng: Great. Thank you, Luca. And then, my second question. It was very interesting to hear about some of the enterprise customer investments into Vision Pro. Could you maybe just talk about some of the efforts to support Vision Pro developer ecosystem. And it was also good to hear about the potential upcoming announcements on AI. So any thoughts there would also be helpful. Thank you. Tim Cook: Yeah. Hi. It's -- we are incredibly excited about the Enterprise opportunities with Vision Pro. I've seen several demos from different companies. Luca mentioned several in his opening remarks, but Walmart has a very cool merchandising app. There are firms that are doing collaboration -- design collaboration apps. There are field service applications. Really all over the map, there are applications that are for control center, command center kind of things. SAP has really gotten behind it and, of course, SAP is in so many of companies. I think there will be a great opportunity for us in Enterprise, and we couldn't be more excited about where things are right now. We are obviously looking forward to tomorrow. This has been multiple years of efforts from so many people across Apple. And really, it took a whole of company effort to bring it to this far. In terms of generative AI, which, I'd guess, is your focus, we have a lot of work going on internally as I've alluded to before. Our MO, if you will, has always been to do work and then talk about work and not to get out in front of ourselves. And so, we're going to hold that to this as well. But we've got some things that we are incredibly excited about that we'll be talking about later this year. Mike Ng: Wonderful. Thank you, Tim. Tim Cook: Yes. Suhasini Chandramouli: Thank you, Mike. Operator, can we have the next question please? Operator: Our next question is from Wamsi Mohan with Bank of America. Please go ahead. Wamsi Mohan: Yes, thank you so much. I have two questions as well. First on iPhone. There have been concerns around replacement cycles lengthening, China competition intensifying, and you still beat iPhone revenues despite the weaker performance in China. Curious how you're thinking about the 15 cycle overall, given what you saw in the December quarter. And I've a follow-up. Tim Cook: Hi, it's Tim. The -- we were up 6%, as we mentioned in the opening remarks. We are happy with that performance. Underneath there, we had really strong performance in several parts of the world with all-time records in Europe and rest of Asia-Pacific. As I mentioned earlier, we did particularly well in several emerging markets from Latin America to the Middle East. And we set December quarter records in India and Indonesia. And so, really some spectacular broad-based reactions to iPhone. We also importantly set an all-time record worldwide for iPhone upgraders. And the installed base hit a new all-time high consistent with the -- our overall devices. And so, there's lot of good things. Luca mentioned in his opening comments that iPhones were four out of the top five smartphone models in the U.S. and Japan and four out of the top six in urban China and the UK, and all top five in Australia, and the customer satisfaction level for iPhone 15 hit 99%. If you look at iPhone 15 since the announcement of it and shipment in September, so this is including some of Q4 and you compare that to iPhone 14 over the same period of time, iPhone 15 is outselling iPhone 14. And so, we feel very good about that, and the upgraders hitting a record is particularly exciting for us. Wamsi Mohan: Great. Thank you, Tim. And as a follow-up, obviously, you're just launching the Vision Pro and it's an entirely new category. It's a price point that's a much higher starting price point relative to most of your other, probably over the last decade, product introductions, but just wondering how would you measure the success of Vision Pro over time and which Apple products adoption curve would you look at as potentially the most similar? And is there a way in which we could think Vision Pro could eclipse maybe something like the iPad in revenue over time. Thank you. Tim Cook: You know, each product has its own journey. And so, I wouldn't want to compare it to any one in particular. I would just say we couldn't be more excited. Internally, we've got an incredible amount of excitement from developers and from customers that can't wait till tomorrow to pick up their units. And we are incredibly proud to be able to demo the unit in so many of our stores in the U.S. starting tomorrow for people that are -- that want to check it out. And so, we'll see and report the results of it in the Wearables category that you're familiar with. I think that if you look at it from a price point of view, there's an incredible amount of technology that's packed into the product. There's 5,000 patents in the product and it's, of course, built on many innovations that Apple has spent multiple years on, from silicon to displays and significant AI and machine learning. All the hand tracking, the room mapping, all of this stuff is driven by AI. And so, we're incredibly excited about it. I can't wait to be in the store for tomorrow and see the reaction myself. Wamsi Mohan: Thank you so much, Tim. Suhasini Chandramouli: Thanks, Wamsi. Operator, we'll take the next question please. Operator: Our next question is from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani: Good afternoon. I have two as well. I guess, first off, I was hoping you could talk a little bit about what you're seeing in China right now. I think from a geographic basis, one of the few places that was down double-digits, while everything else was growing. So, I'm hoping you spend a bit of time discussing what are you seeing there from a competitive perspective and more importantly, from a demand perspective in China? Tim Cook: Yeah. If you look at iPhone in China Mainland, which I think has been the focus of a lot of interest, and you look at it in constant currency, so more of an operational view, we were down mid-single digits on iPhone. And so, it was the other things that drove the larger contraction year-over-year. On the good news side, we had solid growth on upgraders year-over-year in Mainland China and we had four of the top six smartphone models in urban China. Also, IDC just put out a note, that you may have seen, that we were the top brand in -- for the full year and for the December quarter. And so, there's some good news along with – obviously, we'd prefer not to [contract] (ph). Amit Daryanani: Fair enough. And then, as a follow-up, you folks have implemented a fair bit of changes around the App Store in Europe post the DMA implementation there. Can you just touch on what are some of the key updates? And then, Luca, as a net of it all, do you see it having any significant impact financially to your services or a broader Apple P&L statement? Thank you. Tim Cook: Yes. You know, the -- let me try to answer a little bit of both and then Luca can add some comments to it. We announced a number of changes last week in Europe that would be in effect beginning in March. So, the last month of the first calendar quarter, the second fiscal quarter. Those are -- some of the things that we announced include alternate billing opportunities, alternate app stores, our marketplaces, if you will. We're also opening NFC for new capabilities for banking and wallet apps. And so, these are some of the things we announced. The -- if you think about what we've done over the years is, we've really majored on privacy, security, and usability. And we've tried our best to get as close to the past in terms of the things that are -- that people love about our ecosystem as we can, but we are going to fall short of providing the maximum amount that we could supply, because we need to comply with the regulation. And so, in terms of predicting the choices that developers and users will make, it's very difficult to do that with precision. And so, I will see what happens in March. Luca Maestri: Yes, Amit. As Tim said, these are changes that we're going to be implementing in March. A lot will depend on the choices that will be made. Just to keep it in context, the changes applied to the EU market, which represents roughly 7% of our global app store revenue. Amit Daryanani: Perfect. That's a really good perspective to have. Thank you very much. Suhasini Chandramouli: Thank you, Amit. Operator, can we have the next question please? Operator: Our next question is from Aaron Rakers with Wells Fargo. Please go ahead. Aaron Rakers: Yes. Thanks for taking the question. I have two as well as you would imagine. I guess, the first question I wanted to just ask maybe unpack a little bit more, just remarkable trends that we're seeing in your product gross margin specifically. So, I'm curious as we look forward, I guess on this last quarter, where there any kind of benefits you're seeing from like just the purchase component, obligations that you've put in place, let's say, a year ago, and that flowing through. And how are you thinking about the component pricing environment as we think about that gross margin into the March quarter and looking-forward? Luca Maestri: Yes. On the product side and then maybe I'll make a comment in total for the company. On the product side, our gross margins increased sequentially 280 basis points. So, obviously, a very significant increase. I would say the two primary components of the increase are a favorable mix. Of course, iPhone did very well. We did very well with our high-end models. And leverage, of course, it's the biggest quarter of the year for us and so we get the leverage effect. We had a partial offset, negative impact from foreign exchange. But net-net, obviously, very significant improvement. And we had very similar dynamics on the Services side where we increased sequentially 190 basis points, also, in this case, due to a more favorable mix. And so, the combined effect of the two businesses gave us the 45.9% at the total company level, which is up 70% sequentially. You've heard from my prepared remarks that we are guiding total company gross margin to 46% to 47%, which is an additional expansion of margins compared to the already very strong results of the December quarter. Aaron Rakers: Okay. And then, the second question I was just going to ask. Tim, you alluded to kind of your excitement around generative AI and some announcements that we should think about maybe later this year. One of the things that stands out for me is that, your capital expenditures has actually come down this last year. I'm curious as you look to lean in more to generative AI, is there something we should consider about the CapEx intensity at Apple to make investments to really set the table for generative AI, kind of platform as we move forward? Just given some of the things that we've seen from some other large tech companies. Luca Maestri: I'll take the question, Aaron. We've always said, we will never underinvest in the business. So, we are making all the investments that are necessary throughout our product development, software development, services development. And so, we will continue to invest in every area of the business and at the appropriate level. And we're very excited about what's in store for us for the rest of the year. Aaron Rakers: Thank you. Suhasini Chandramouli: Thanks, Aaron. Operator, can we have the next question please? Operator: Our next question is from Krish Sankar with TD Cowen. Please go ahead. Krish Sankar: Yes. Hi. Thanks for taking my question. I have two of them. First one for Luca, a clarification on a question. The $5 billion impact in March quarter, is that for product revenue or is that total company revenue. And along the same part, you highlighted the strong gross margins. And I understand last year, some of the commodity costs were deflationary, buy looks like it’s going to be inflationary right now. And also you've done some of the Mac conversions that -- the silicon conversions. So I'm just trying to figure out how much juice is there more to squeeze on the gross margin side? And then I'll follow up for Tim. Luca Maestri: Yes. The -- so the first part of the question was around -- oh, the $5 billion. The $5 billion, as I mentioned, a year ago we had this disruption of supply on iPhone 14 Pro and Pro Max because of the factory shutdown due to the COVID-19 situation. And so, essentially there was pent up demand as we exited December quarter, they got fulfilled and we also did the channel fill associated with it during the March quarter. So close to $5 billion that I mentioned is entirely related to iPhone. On the gross margin side, obviously, we are at very high levels of gross margin. And I'll repeat what I said before, we've had good expansion over the last few quarters and now we are guiding to 46% to 47% and that takes into account everything that is going on, which is, the commodity environment, which is the foreign exchange situation, and obviously the product and services mix. And the outcome of this is the guidance, which obviously is very strong and we're very happy with it. Krish Sankar: Thanks a lot, Luca. And then I have a follow-up for Tim. Tim, it was very interesting to hear your comments on enterprise. And historically, Apple has been a consumer centric company. And now with Vision Pro, Mac, it's sort of penetrating more into the enterprise. I'm kind of curious how to think about Apple of the future? Would it still be consumer centric or do you think it's going to be more enterprise focused also as we get into the future? Thank you very much. Tim Cook: We've really concluded that we can do both. That if you look at it, what has happened over the last several years is that, employees are in a position in many companies to choose their own technology that is the best for them. And so, it sort of took some of the central command from the traditional company and decentralized the decision-making. That is a huge advantage for Apple, because there's a lot of people out there that want to use a Mac. They're using a Mac at home. They'd like to use one in the office as well. iPad has also benefited from that. Vision Pro, it's -- when you look at the ton of use cases, I mean, we're starting with a million apps and 600 plus that are -- have been designed particularly for Vision Pro. When I look at what is coming out of Enterprise, it's some of the most innovative things I've seen come out of Enterprise in a long time. And so, I think there's a like there is for the Mac and iPad, and of course, iPhone has been in enterprise since the early days of iPhone. I think there's a nice opportunity there for Vision Pro as well. Krish Sankar: Great. Thanks a lot Tim. Very interesting to hear. Thank you. Suhasini Chandramouli: Thank you, Krish. Operator, can we have the next question, please? Operator: Our next question is from David Vogt with UBS. Please go ahead. David Vogt: Great. Thanks guys. And I have two questions as well. So, Tim and Luke, I appreciate the strength in the emerging markets like India and the other names that you kind of listed on the call, but can you maybe spend some time on the Americas? Obviously, that was relatively flat, you touched on China, but what are you seeing in that market from the carriers here in the States? And is the sales cycle elongating or the replacement cycle elongating? And in your view what has to change to kind of maybe re-accelerate that business in the America's, particular in the iPhone business? And then on sort of -- I just want to make sure I understand sort of the guide. So when I think about the $5 billion pull forward last year in the March quarter from a channel fill perspective, even if I back it out last quarter or I back it up this quarter, the March quarter, this would be sort of the softest quarter since the COVID pandemic. Obviously, I know the Americas as I just touched on is a little bit softer than China, which you cleared up earlier. But how do you think about the differences in sort of the macro conditions by region? And again, do you have a sense for are we nearing a trough from a macro demand perspective or how long do you think this particular weakness persists? Thanks. Tim Cook: Let me take the first part of your question about America. If you look at the U.S., which obviously drives the vast, vast majority of the revenue in America, we grew in the December quarter from an iPhone business point of view and the install base hit an all-time high. If you look at the replacement cycle, it's very difficult to measure the replacement cycle at any given point. And so, what we focus on internally a lot is the active install base and the -- obviously, the sales over usually a cycle and we feel better about those things. If you look at the -- who's selling what in the U.S., the iPhone is four out of the top five selling smartphones in the US. And of course, the customer satisfaction in the U.S. as we alluded to earlier is 99%. So we feel very, very good about what our position is in the U.S. Luca Maestri: And I would add to that, keep in mind, obviously, the extra week that we had a year ago that obviously makes the compare more -- a bit distorted. On the March quarter guide, I would point to you that, obviously, the COVID years had a lot of, let's say, turmoil in it, a lot of volatility that typically you wouldn't see. If you look at our sequential progression from December to March this year versus pre-COVID versus like a more normal environment, it's actually stronger than those years. David Vogt: Got it. Thanks, guys. Suhasini Chandramouli: Thank you, David. Operator, can we have the last question, please? Operator: Thank you. Our last question is from Ben Reitzes with Melius Research. Please go ahead. Ben Reitzes: Yes. Hi. Thanks. Appreciate it. Two questions, if I can sneak them in. Just wanted to clarify on China. Tim, I think last quarter you still thought it was a growth market. Obviously, there's some concerns with the -- recently and given what we saw in the quarter, is there something that we can kind of point to where you feel that that market can resume growth in the future? And I'm wondering if you're still upbeat about that prospect. And then I just have a quick follow up. Tim Cook: Ben, we've been in China for 30 years. And I remain very optimistic about China over the long term. And I feel good about hitting a new install base number, high watermark and very good about the growth in upgraders year-over-year during the quarter. Ben Reitzes: Great. Thanks Tim. And just in terms of AI, I know you're not going to talk about your plans, but do you believe -- are you a believer in the edge thesis that AI and processing on smartphones and devices like yours is going to have a huge role in AI and AI apps and that it's something you guys can take advantage of. Tim Cook: Let me just say that, I think there's a huge opportunity for Apple with GenAI and AI. And without getting into to more details and getting out in front of myself. Ben Reitzes: Thanks Tim. Tim Cook: Yes, Thanks, Ben. Suhasini Chandramouli: All right. Thank you Ben. A replay of today's call will be available for two weeks on Apple Podcasts, as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 0106234 followed by the pound sign. These replays will be available by approximately 5 p.m. Pacific time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142 and financial analysts can contact me, Suhasini Chandramouli, with additional questions at 408-974-3123. Thanks again for joining us. Operator: Once again, this does conclude today's conference. We do appreciate your participation.	[ { "speaker": "Operator", "text": "Good day, and welcome to the Apple Q1 Fiscal Year 2024 Earnings Conference Call. Today's call is being recorded. At this time, for opening remarks and introductions. I would like to turn the call over to Suhasini Chandramouli, Director of Investor Relations. Please go ahead." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you for joining us. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Luca Maestri. After that, we'll open the call to questions from analysts. Before turning the call over to Tim, I would like to remind everyone that the quarter we're reporting today included 13 weeks, whereas the quarter we reported a year ago included 14 weeks. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thank you. Suhasini. Good afternoon, everyone, and thanks for joining the call. Today, Apple is reporting revenue of $119.6 billion for the December quarter, up 2% from a year ago despite having one less week in the quarter. EPS was $2.18, up 16% from a year ago and an all-time record. We achieved revenue records across more than two dozen countries and regions including all-time records in Europe and rest of Asia-Pacific. We also continue to see strong double-digit growth in many emerging markets with all-time records in Malaysia, Mexico, The Philippines, Poland, and Turkey, as well as December quarter records in India, Indonesia, Saudi Arabia, and Chile. In Services, we set an all-time revenue record with paid subscriptions growing double-digits year-over-year. And I'm pleased to announce today that we have set a new record for our installed base, which has now surpassed 2.2 billion active devices. We are announcing these results on the eve of what is sure to be a historic day as we enter the era of spatial computing. Starting tomorrow, Apple Vision Pro, the most advanced personal electronics device ever, will be available in Apple stores for customers in the U.S. with expansion to other countries later this year. Apple Vision Pro is a revolutionary device built on decades of Apple innovation and it's years ahead of anything else. Apple Vision Pro has a groundbreaking new input system and thousands of innovations, and it will unlock incredible experiences for users and developers that are simply not possible on any other device. There is already so much excitement behind this product from reviewers, customers, and developers. They are praising everything from the incredible experience of watching a movie on a 100-foot screen to remarkable new machine learning capabilities like hand tracking and room mapping. We can't wait for people to experience the magic for themselves. Moments like these are what we live for at Apple. They're why we do what we do. They're why we're so unflinchingly dedicated to groundbreaking innovation and why we're so focused on pushing technology to its limits as we work to enrich the lives of our users. As we look ahead, we will continue to invest in these and other technologies that will shape the future. That includes artificial intelligence where we continue to spend a tremendous amount of time and effort, and we're excited to share the details of our ongoing work in that space later this year. Now, let's turn to the results for the December quarter, beginning with iPhone. We are proud to report that revenue came in at $69.7 billion, 6% higher than a year ago. The iPhone 15 lineup has earned glowing reviews and been embraced by customers. The iPhone 15 and iPhone 15 Plus feature a gorgeous new design with color-infused back glass and contoured edges, Dynamic Island, A16 Bionic, and a new 48 megapixel camera system. And the iPhone 15 Pro and iPhone 15 Pro Max set the gold standard for smartphones with a beautiful and lighter titanium design, industry-leading performance with A17 Pro and our most advanced camera system with the equivalent of seven pro lenses and the ability to record spatial video. Features like Emergency SoS and roadside assistance via satellite bring peace of mind to users when they travel, and I'm grateful for every note I've received about their lifesaving impact. Turning to Mac. Revenue came in at $7.8 billion, up 1% year-over-year, driven by the strength of our latest M3-powered MacBook Pro models in spite of having one less week of sales. Just last week, we got to wish Mac a happy 40th birthday. When it was introduced 40 years ago, Mac changed everything, and through the years, it has done so again and again. Recently, we have been on a tremendous pace of innovation. Since the introduction of Apple silicon in 2020, we've been proud to offer our users unmatched performance and power along with a remarkable Neural Engine for artificial intelligence and machine learning. This past fall, we had an amazing launch of the latest generation of Apple silicon for Mac, M3, M3 Pro, and M3 Max. These chips break new ground in power and performance empowering users to do more than they ever could before, whether they're making a musical masterpiece using the latest features in Logic Pro, or beating their high score in a graphics intensive game. A favorite amongst students, business owners, artists, and video editors, our MacBook Pro lineup is the world's best pro notebook family. And iMac, the world's most capable and best-selling all-in one, is now faster than ever, thanks to M3. In iPad, revenue for the December quarter was $7 billion, down 25% year-over-year due to a difficult compare with the launch of the M2 iPad Pro and the 10th generation iPad during the December quarter last year and one less week of sales. iPad remains the most versatile, capable, and elegant tablet on the market today. It continues to be the go-to-device for students, creators, and more with customers loving iPad's incredible combination of portability and performance. Powerful apps like Final Cut Pro and Logic Pro for iPad allow video and music creators to unleash their creativity in new ways that are only possible on iPad. iPad continues to push the boundaries of what's possible on a tablet. In Wearables, Home and Accessories, revenue came in at $12 billion, down 11% from a year ago due to a difficult compare with the launch timing of several products in this category and the impact of the 14th week last year. Across our latest Apple Watch lineup, we're enabling and encouraging our users to live a healthier day, while making Apple Watch even more intuitive to use. The new double tap gesture on Apple Watch Series 9 and Apple Watch Ultra 2 make it easier to answer calls, play and pause music or take a photo with iPhone. I've been deeply moved by the many touching stories about how features like a regular rhythm notification and fall detection helped Apple Watch users when they needed it most. And for the first time ever, users can choose a carbon-neutral option of any new Apple Watch. Meanwhile, our AirPods lineup continue to be a holiday favorite. In Services, we set an all-time revenue record of $23.1 billion and an 11% year-over-year increase. Because we had one less week this quarter, this growth represents an acceleration from the September quarter, and we achieved all-time revenue records across advertising, cloud services, payment services and video, as well as December quarter records in App Store and AppleCare. Across our services, we're constantly growing our offerings to give users even more to love. With the redesigned Apple TV app, we've made it easier for subscribers to enjoy all their favorite shows, movies and sports, including Apple TV+ hits like Masters of the Air, Monarch, and Slow Horses. We're proud to be a part of Martin Scorsese's Killers of the Flower Moon, a film that has moved audiences and earned more than 200 accolades including Best Film of the Year from the New York Film Critics Circle, nine BAFTA nominations, a Golden Globe win, and 10 Oscar nominations, including Best Picture. Across all Apple TV+ productions, we've now earned 2050 award nominations and 450 wins since we've introduced the service. We're also excited to have a new season of Major League Soccer kicking off this month. We're looking forward to seeing Lionel Messi return to the field and to following all of our favorite teams in what is sure to be an incredible season. And we're counting down to the Apple Music Super Bowl halftime show, featuring Usher. Turning to Retail. In recent months, we opened three stores, including our 100th store in Asia-Pacific. Throughout the holidays, our team members pulled out all the stops to help customers find the perfect gift. And I know our U.S. team members are especially excited to begin demoing Apple Vision Pro for our customers tomorrow. At Apple, we live and breathe innovation. We are driven to pioneer new technology that can enrich our customers' lives, and we're just as intentional about showing up with our values and being a force for good in the world. February is Black History Month, and to honor it, we've launched our new Black Unity Collection, which includes the Black Unity Sport Loop band. This year's designs reflect a lasting commitment to working toward a more equitable world. We also continue to do a central work through our Racial Equity and Justice Initiative, and we're proud to continue providing grants to organizations that are making a real impact in the world. In recent months, we've also taken significant strides in our environmental work. We're partnering with suppliers to bring more clean energy online for Apple production. We're using more recycled materials than ever before and more energy-efficient transportation than ever before. And each day, we are taking more and more steps toward becoming 100% carbon-neutral across all of our products by 2030. Apple is a company that has never shied away from big challenges. That's because we are grounded by a deep sense of purpose and guided by core belief in the transformative power of innovation. And so, we are optimistic about the future, confident in the long-term, and as excited as we've ever been to deliver for our users like only Apple can. With that, I'll turn it over to Luca." }, { "speaker": "Luca Maestri", "text": "Thank you, Tim, and good afternoon, everyone. Revenue for the December quarter was $119.6 billion, up 2% from last year. During the December quarter a year ago, two unique factors affected our results. First, we had an additional week in the quarter. And second, we had COVID-related factory shutdowns that limited iPhone supply. We estimate that the net impact of these two factors resulted in a 2 percentage point headwind to our revenue performance this quarter. We set all-time revenue records in Europe and rest of Asia-Pacific, and continue to see strong performance across our emerging markets with double-digit growth in the majority of the emerging markets we track. Products revenue was $96.5 billion, flat compared to last year, driven by strength in iPhone, offset by challenging compares for iPad and Wearables, Home and Accessories and one less week of sales this year across the entire portfolio. Thanks to our unparalleled customer loyalty and very strong levels of customer satisfaction, our total installed base of active devices set a new record across all products and all geographic segments, and is now over 2.2 billion active devices. Services revenue set an all-time record of $23.1 billion, up 11% year-over-year. When we take into account the extra week last year, this represents a sequential acceleration of growth from the September quarter. We are very pleased with our Services performance in both developed and emerging markets with all-time revenue records in the Americas, Europe, and rest of Asia-Pacific. Company gross margin was 45.9%, up 70 basis points sequentially, driven by leverage and favorable mix, partially offset by foreign exchange. Products gross margin was 39.4%, up 280 basis points sequentially, also driven by leverage and mix, partially offset by foreign exchange. Services gross margin was 72.8%, up 190 basis points from last quarter, due to a more favorable mix. Operating expenses of $14.5 billion were at the midpoint of the guidance range we provided and up 1% year-over-year. Net income was $33.9 billion, up $3.9 billion from last year. Diluted EPS was $2.18, up 16% versus last year and an all-time record. And operating cash flow was very strong at $39.9 billion. Let me now provide more detail for each of our revenue categories. iPhone revenue was $69.7 billion, up 6% year-over-year. We set all-time records in several countries and regions, including Latin America, Western Europe, the Middle East, and Korea, as well as December quarter records in India and Indonesia. Our iPhone active installed base grew to a new all-time high, and we had an all-time record number of iPhone upgraders during the quarter. Customers are loving their new iPhone 15 family, with the latest reports from 451 Research indicating customer satisfaction of 99% in the U.S. In fact, many iPhone models were among the top-selling smartphones around the world during the quarter. According to a survey from Kantar, iPhones were four out of the top five models in the U.S. and Japan, four out of the top six models in urban China and the UK, and all top five models in Australia. Mac generated revenue of $7.8 billion and return to growth, despite one less week of sales this year. This represents a significant acceleration from the September quarter when we faced a challenging compare due to the supply disruptions and subsequent demand recapture we experienced a year ago. Customer response to our latest iMac and MacBook Pro models powered by the M3 chips has been great. And our Mac installed base reached an all-time high with almost half of Mac buyers during the quarter being new to the product. Also, 451 Research recently reported customer satisfaction of 97% for Mac in the U.S. iPad was $7 billion in revenue, down 25% year-over-year. iPad faced a difficult compare because during the December quarter last year, we launched the new iPad Pro and iPad 10 generation, and we had an extra week of sales. However, the iPad installed base continues to grow and is an all-time high with over half of the customers who purchased iPads during the quarter being new to the product, and customer satisfaction for iPad was recently measured at 98% in the U.S. Wearables, Home and Accessories revenue was $12 billion, down 11% year-over-year due to a challenging launch compare and the extra week a year ago. This time last year, we had the full quarter benefit from the launches of the AirPods Pro 2nd generation, the Watch SE, and the first Watch Ultra. We continue to attract new customers to Apple Watch. Nearly two-thirds of customers purchasing an Apple Watch during the quarter were new to the product, and the latest reports from 451 Research indicate customer satisfaction of 96% in the U.S. And in Services, we were very pleased with our double-digit growth, which was driven by the strength of our ecosystem. Our installed base is now over 2.2 billion active devices and continues to grow nicely, establishing a solid foundation for the future expansion of our Services business. And we continue to see increased customer engagement with our services. Both transacting accounts and paid accounts reached a new all-time high, with paid accounts growing double-digits year-over-year. Also, our paid subscriptions showed strong double-digit growth. We have well over 1 billion paid subscriptions across the services on our platform, more than double the number that we had only four years ago. Finally, we continue to build on the breadth and the quality of our current services. From Oscar-nominated theatrical releases with Apple TV+ to more publications or News+ like The Atlantic and exciting new games on Arcade. Turning to Enterprise, we continue to see many business customers leverage Apple products to improve productivity and drive innovation. Target recently added the latest M3 MacBook Pro to their existing deployment of thousands of Mac’s, enabling employees across various departments to do their best work. In emerging markets, Zoho, a leading technology company headquartered in India, offers its 15,000 plus global employees a choice of devices, with 80% of their workforce using iPhone for work and nearly two-thirds of them choosing Mac as their primary computer. With the upcoming launch of Apple Vision Pro, we are seeing strong excitement in Enterprise. Leading organizations across many industries such as Walmart, Nike, Vanguard, Stryker, Bloomberg, and SAP have started leveraging and investing in Apple Vision Pro as their new platform to bring innovative spatial computing experiences to their customers and employees. From everyday productivity to collaborative product design to immersive training, we cannot wait to see the amazing things our enterprise customers will create in the months and years to come. Let me now turn to our cash position and capital return program. We ended the quarter with $173 billion in cash and marketable securities. We decreased commercial paper by $4 billion, leaving us with total debt of $108 billion. As a result, net cash was $65 billion at the end of the quarter, and our goal of becoming net cash-neutral over time remains unchanged. During the quarter, we returned nearly $27 billion to shareholders, including $3.8 billion in dividends and equivalents and $20.5 billion through open market repurchases of 112 million Apple shares. We also retired an additional 6 million shares in the final settlement of our 19th ASR. As usual, we will provide an update to our capital return program when we report results at the end of this quarter. As we move ahead into the March quarter, I'd like to review our outlook, which includes the types of forward-looking information that Suhasini referred to at the beginning of the call. The color we are providing today assumes that the macroeconomic outlook doesn't worsen from what we are projecting today for the current quarter. And we expect foreign exchange to be a revenue headwind of about 2 percentage points on a year-over-year basis. As a reminder, in the December quarter a year ago, we faced significant supply constraints on the iPhone 14 Pro and 14 Pro Max due to COVID-19 factory shutdowns. And in the March quarter a year ago, we were able to replenish channel inventory and fulfill significant pent-up demand from the constraints. We estimate that this impact added close to $5 billion to the March quarter's total revenue last year. When we remove this impact from last year's revenue, we expect both our March quarter total company revenue and iPhone revenue to be similar to a year ago. For our Services business, we expect a similar double-digit growth rate to what we reported in the December quarter. We expect gross margin to be between 46% and 47%. We expect OpEx to be between $14.3 billion and $14.5 billion. We expect OI&E to be around $50 million, excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16%. Finally, today our Board of Directors has declared a cash dividend of $0.24 per share of common stock payable on February 15, 2024, to shareholders of record as of February 12, 2024. With that, let's open the call to questions." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Luca. We ask that you limit yourself to two questions. Operator, may we have the first question please?" }, { "speaker": "Operator", "text": "Certainly. We'll go ahead and take our first question from Erik Woodring with Morgan Stanley. Please go ahead." }, { "speaker": "Erik Woodring", "text": "Hey guys, good evening. Thank you for taking my questions. I have two. And congrats on the nice quarter here. Luca, maybe if we start with you. Can you unpackage some of the Services drivers a bit for us. Obviously, really nice outperformance in the December quarter versus your expectations. A record gross margin implies your higher margin businesses were likely the sources of outperformance. But can you maybe just clarify a bit how we should think about Services growth for the March quarter? And then, speak to some of those underlying drivers in the December quarter and then in the March quarter, what the different puts and takes would be? And then, I have a follow-up please. Thank you." }, { "speaker": "Luca Maestri", "text": "Thanks, Erik, for the question. Let's start with the December quarter. As we said, up 11%, $23.1 billion is an all-time record for us, with all-time records in The Americas, in Europe, and the rest of Asia Pac. So it was pretty broad-based geographically, and very strong across all the Services categories, because we had all-time revenue records for cloud, for payments, for video, and for advertising and December quarter records for the App Store and for AppleCare. Obviously, last year, we had an extra week, so the 11% is stronger than -- the underlying performance is stronger than the 11% that we have reported. I think the entire ecosystem is doing well because we continue to see growth and new all-time highs in both transacting accounts and paid accounts, which is obviously very important. And paid subscriptions continue to grow strong double-digits. Just as a reference, we have more than a billion paid subscriptions across all the services on our platform. This is more than double the number of paid subscriptions that we had only four years ago. So, obviously, very significant growth there. What I said during the prepared remarks around the March quarter, I mentioned that we will continue to grow double-digits at a percentage that is similar to what we reported for the December quarter. We don't provide guidance around the different services categories. So, we will provide more color when we report in three months." }, { "speaker": "Erik Woodring", "text": "Okay. Thank you, Luca. And then, Tim, really nice to see your installed base reach a record high, again, against all products and geos. I'm wondering if you could share a bit more detail about the new users you were able to on-board over the last 12 months. Meaning, how might this new cohort look different from past cohorts, either in terms of geographic representation or SKU to certain products or even how their monetization trends might differ from past cohorts. And that's it from me. Thanks so much." }, { "speaker": "Tim Cook", "text": "Yes. Hi, Erik. I would say emerging markets are -- have been a very key area of strength for us. If you look at it, India grew -- in revenue terms grew strong double-digits in the December quarter and hit a quarter revenue record. The other emerging markets like Indonesia also hit a quarterly record. And we had several regions, with records from Latin America to the Middle East. And that theme has been pretty consistent across the other quarters that -- of the year as well. And so, emerging markets, very, very important. And I feel like we are doing a great job there." }, { "speaker": "Suhasini Chandramouli", "text": "Thanks, Erik. Operator, can we have the next question please?" }, { "speaker": "Operator", "text": "Our next question is from Mike Ng with Goldman Sachs. Please go ahead." }, { "speaker": "Mike Ng", "text": "Hey, good afternoon. I just have two questions as well. First, on Services. Just on the outlook for the March quarter for a similar double-digit growth rate as of December quarter. I'm just wondering why not -- why won't it be potentially faster, given that the December quarter obviously had a headwind from the extra week comp, and I'd also think that some of the pricing uplifts on select Apple One services that were implemented last winter should help in the March quarter? Any additional thoughts there would be great in terms of what some of your assumptions are. And then, I have a quick follow-up." }, { "speaker": "Luca Maestri", "text": "Yes. We'll see how the quarter develops. I would point to two things. One is the fact that we mentioned that we expect a couple of points of negative foreign exchange in the March quarter, and foreign exchange was essentially flat for us in the December quarter. So, you've got a bit of a headwind there. And then, when you look at our other progression of our Services business over the last few quarters, the compares for March are slightly more difficult than the compares for December." }, { "speaker": "Mike Ng", "text": "Great. Thank you, Luca. And then, my second question. It was very interesting to hear about some of the enterprise customer investments into Vision Pro. Could you maybe just talk about some of the efforts to support Vision Pro developer ecosystem. And it was also good to hear about the potential upcoming announcements on AI. So any thoughts there would also be helpful. Thank you." }, { "speaker": "Tim Cook", "text": "Yeah. Hi. It's -- we are incredibly excited about the Enterprise opportunities with Vision Pro. I've seen several demos from different companies. Luca mentioned several in his opening remarks, but Walmart has a very cool merchandising app. There are firms that are doing collaboration -- design collaboration apps. There are field service applications. Really all over the map, there are applications that are for control center, command center kind of things. SAP has really gotten behind it and, of course, SAP is in so many of companies. I think there will be a great opportunity for us in Enterprise, and we couldn't be more excited about where things are right now. We are obviously looking forward to tomorrow. This has been multiple years of efforts from so many people across Apple. And really, it took a whole of company effort to bring it to this far. In terms of generative AI, which, I'd guess, is your focus, we have a lot of work going on internally as I've alluded to before. Our MO, if you will, has always been to do work and then talk about work and not to get out in front of ourselves. And so, we're going to hold that to this as well. But we've got some things that we are incredibly excited about that we'll be talking about later this year." }, { "speaker": "Mike Ng", "text": "Wonderful. Thank you, Tim." }, { "speaker": "Tim Cook", "text": "Yes." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Mike. Operator, can we have the next question please?" }, { "speaker": "Operator", "text": "Our next question is from Wamsi Mohan with Bank of America. Please go ahead." }, { "speaker": "Wamsi Mohan", "text": "Yes, thank you so much. I have two questions as well. First on iPhone. There have been concerns around replacement cycles lengthening, China competition intensifying, and you still beat iPhone revenues despite the weaker performance in China. Curious how you're thinking about the 15 cycle overall, given what you saw in the December quarter. And I've a follow-up." }, { "speaker": "Tim Cook", "text": "Hi, it's Tim. The -- we were up 6%, as we mentioned in the opening remarks. We are happy with that performance. Underneath there, we had really strong performance in several parts of the world with all-time records in Europe and rest of Asia-Pacific. As I mentioned earlier, we did particularly well in several emerging markets from Latin America to the Middle East. And we set December quarter records in India and Indonesia. And so, really some spectacular broad-based reactions to iPhone. We also importantly set an all-time record worldwide for iPhone upgraders. And the installed base hit a new all-time high consistent with the -- our overall devices. And so, there's lot of good things. Luca mentioned in his opening comments that iPhones were four out of the top five smartphone models in the U.S. and Japan and four out of the top six in urban China and the UK, and all top five in Australia, and the customer satisfaction level for iPhone 15 hit 99%. If you look at iPhone 15 since the announcement of it and shipment in September, so this is including some of Q4 and you compare that to iPhone 14 over the same period of time, iPhone 15 is outselling iPhone 14. And so, we feel very good about that, and the upgraders hitting a record is particularly exciting for us." }, { "speaker": "Wamsi Mohan", "text": "Great. Thank you, Tim. And as a follow-up, obviously, you're just launching the Vision Pro and it's an entirely new category. It's a price point that's a much higher starting price point relative to most of your other, probably over the last decade, product introductions, but just wondering how would you measure the success of Vision Pro over time and which Apple products adoption curve would you look at as potentially the most similar? And is there a way in which we could think Vision Pro could eclipse maybe something like the iPad in revenue over time. Thank you." }, { "speaker": "Tim Cook", "text": "You know, each product has its own journey. And so, I wouldn't want to compare it to any one in particular. I would just say we couldn't be more excited. Internally, we've got an incredible amount of excitement from developers and from customers that can't wait till tomorrow to pick up their units. And we are incredibly proud to be able to demo the unit in so many of our stores in the U.S. starting tomorrow for people that are -- that want to check it out. And so, we'll see and report the results of it in the Wearables category that you're familiar with. I think that if you look at it from a price point of view, there's an incredible amount of technology that's packed into the product. There's 5,000 patents in the product and it's, of course, built on many innovations that Apple has spent multiple years on, from silicon to displays and significant AI and machine learning. All the hand tracking, the room mapping, all of this stuff is driven by AI. And so, we're incredibly excited about it. I can't wait to be in the store for tomorrow and see the reaction myself." }, { "speaker": "Wamsi Mohan", "text": "Thank you so much, Tim." }, { "speaker": "Suhasini Chandramouli", "text": "Thanks, Wamsi. Operator, we'll take the next question please." }, { "speaker": "Operator", "text": "Our next question is from Amit Daryanani with Evercore. Please go ahead." }, { "speaker": "Amit Daryanani", "text": "Good afternoon. I have two as well. I guess, first off, I was hoping you could talk a little bit about what you're seeing in China right now. I think from a geographic basis, one of the few places that was down double-digits, while everything else was growing. So, I'm hoping you spend a bit of time discussing what are you seeing there from a competitive perspective and more importantly, from a demand perspective in China?" }, { "speaker": "Tim Cook", "text": "Yeah. If you look at iPhone in China Mainland, which I think has been the focus of a lot of interest, and you look at it in constant currency, so more of an operational view, we were down mid-single digits on iPhone. And so, it was the other things that drove the larger contraction year-over-year. On the good news side, we had solid growth on upgraders year-over-year in Mainland China and we had four of the top six smartphone models in urban China. Also, IDC just put out a note, that you may have seen, that we were the top brand in -- for the full year and for the December quarter. And so, there's some good news along with – obviously, we'd prefer not to [contract] (ph)." }, { "speaker": "Amit Daryanani", "text": "Fair enough. And then, as a follow-up, you folks have implemented a fair bit of changes around the App Store in Europe post the DMA implementation there. Can you just touch on what are some of the key updates? And then, Luca, as a net of it all, do you see it having any significant impact financially to your services or a broader Apple P&L statement? Thank you." }, { "speaker": "Tim Cook", "text": "Yes. You know, the -- let me try to answer a little bit of both and then Luca can add some comments to it. We announced a number of changes last week in Europe that would be in effect beginning in March. So, the last month of the first calendar quarter, the second fiscal quarter. Those are -- some of the things that we announced include alternate billing opportunities, alternate app stores, our marketplaces, if you will. We're also opening NFC for new capabilities for banking and wallet apps. And so, these are some of the things we announced. The -- if you think about what we've done over the years is, we've really majored on privacy, security, and usability. And we've tried our best to get as close to the past in terms of the things that are -- that people love about our ecosystem as we can, but we are going to fall short of providing the maximum amount that we could supply, because we need to comply with the regulation. And so, in terms of predicting the choices that developers and users will make, it's very difficult to do that with precision. And so, I will see what happens in March." }, { "speaker": "Luca Maestri", "text": "Yes, Amit. As Tim said, these are changes that we're going to be implementing in March. A lot will depend on the choices that will be made. Just to keep it in context, the changes applied to the EU market, which represents roughly 7% of our global app store revenue." }, { "speaker": "Amit Daryanani", "text": "Perfect. That's a really good perspective to have. Thank you very much." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Amit. Operator, can we have the next question please?" }, { "speaker": "Operator", "text": "Our next question is from Aaron Rakers with Wells Fargo. Please go ahead." }, { "speaker": "Aaron Rakers", "text": "Yes. Thanks for taking the question. I have two as well as you would imagine. I guess, the first question I wanted to just ask maybe unpack a little bit more, just remarkable trends that we're seeing in your product gross margin specifically. So, I'm curious as we look forward, I guess on this last quarter, where there any kind of benefits you're seeing from like just the purchase component, obligations that you've put in place, let's say, a year ago, and that flowing through. And how are you thinking about the component pricing environment as we think about that gross margin into the March quarter and looking-forward?" }, { "speaker": "Luca Maestri", "text": "Yes. On the product side and then maybe I'll make a comment in total for the company. On the product side, our gross margins increased sequentially 280 basis points. So, obviously, a very significant increase. I would say the two primary components of the increase are a favorable mix. Of course, iPhone did very well. We did very well with our high-end models. And leverage, of course, it's the biggest quarter of the year for us and so we get the leverage effect. We had a partial offset, negative impact from foreign exchange. But net-net, obviously, very significant improvement. And we had very similar dynamics on the Services side where we increased sequentially 190 basis points, also, in this case, due to a more favorable mix. And so, the combined effect of the two businesses gave us the 45.9% at the total company level, which is up 70% sequentially. You've heard from my prepared remarks that we are guiding total company gross margin to 46% to 47%, which is an additional expansion of margins compared to the already very strong results of the December quarter." }, { "speaker": "Aaron Rakers", "text": "Okay. And then, the second question I was just going to ask. Tim, you alluded to kind of your excitement around generative AI and some announcements that we should think about maybe later this year. One of the things that stands out for me is that, your capital expenditures has actually come down this last year. I'm curious as you look to lean in more to generative AI, is there something we should consider about the CapEx intensity at Apple to make investments to really set the table for generative AI, kind of platform as we move forward? Just given some of the things that we've seen from some other large tech companies." }, { "speaker": "Luca Maestri", "text": "I'll take the question, Aaron. We've always said, we will never underinvest in the business. So, we are making all the investments that are necessary throughout our product development, software development, services development. And so, we will continue to invest in every area of the business and at the appropriate level. And we're very excited about what's in store for us for the rest of the year." }, { "speaker": "Aaron Rakers", "text": "Thank you." }, { "speaker": "Suhasini Chandramouli", "text": "Thanks, Aaron. Operator, can we have the next question please?" }, { "speaker": "Operator", "text": "Our next question is from Krish Sankar with TD Cowen. Please go ahead." }, { "speaker": "Krish Sankar", "text": "Yes. Hi. Thanks for taking my question. I have two of them. First one for Luca, a clarification on a question. The $5 billion impact in March quarter, is that for product revenue or is that total company revenue. And along the same part, you highlighted the strong gross margins. And I understand last year, some of the commodity costs were deflationary, buy looks like it’s going to be inflationary right now. And also you've done some of the Mac conversions that -- the silicon conversions. So I'm just trying to figure out how much juice is there more to squeeze on the gross margin side? And then I'll follow up for Tim." }, { "speaker": "Luca Maestri", "text": "Yes. The -- so the first part of the question was around -- oh, the $5 billion. The $5 billion, as I mentioned, a year ago we had this disruption of supply on iPhone 14 Pro and Pro Max because of the factory shutdown due to the COVID-19 situation. And so, essentially there was pent up demand as we exited December quarter, they got fulfilled and we also did the channel fill associated with it during the March quarter. So close to $5 billion that I mentioned is entirely related to iPhone. On the gross margin side, obviously, we are at very high levels of gross margin. And I'll repeat what I said before, we've had good expansion over the last few quarters and now we are guiding to 46% to 47% and that takes into account everything that is going on, which is, the commodity environment, which is the foreign exchange situation, and obviously the product and services mix. And the outcome of this is the guidance, which obviously is very strong and we're very happy with it." }, { "speaker": "Krish Sankar", "text": "Thanks a lot, Luca. And then I have a follow-up for Tim. Tim, it was very interesting to hear your comments on enterprise. And historically, Apple has been a consumer centric company. And now with Vision Pro, Mac, it's sort of penetrating more into the enterprise. I'm kind of curious how to think about Apple of the future? Would it still be consumer centric or do you think it's going to be more enterprise focused also as we get into the future? Thank you very much." }, { "speaker": "Tim Cook", "text": "We've really concluded that we can do both. That if you look at it, what has happened over the last several years is that, employees are in a position in many companies to choose their own technology that is the best for them. And so, it sort of took some of the central command from the traditional company and decentralized the decision-making. That is a huge advantage for Apple, because there's a lot of people out there that want to use a Mac. They're using a Mac at home. They'd like to use one in the office as well. iPad has also benefited from that. Vision Pro, it's -- when you look at the ton of use cases, I mean, we're starting with a million apps and 600 plus that are -- have been designed particularly for Vision Pro. When I look at what is coming out of Enterprise, it's some of the most innovative things I've seen come out of Enterprise in a long time. And so, I think there's a like there is for the Mac and iPad, and of course, iPhone has been in enterprise since the early days of iPhone. I think there's a nice opportunity there for Vision Pro as well." }, { "speaker": "Krish Sankar", "text": "Great. Thanks a lot Tim. Very interesting to hear. Thank you." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Krish. Operator, can we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from David Vogt with UBS. Please go ahead." }, { "speaker": "David Vogt", "text": "Great. Thanks guys. And I have two questions as well. So, Tim and Luke, I appreciate the strength in the emerging markets like India and the other names that you kind of listed on the call, but can you maybe spend some time on the Americas? Obviously, that was relatively flat, you touched on China, but what are you seeing in that market from the carriers here in the States? And is the sales cycle elongating or the replacement cycle elongating? And in your view what has to change to kind of maybe re-accelerate that business in the America's, particular in the iPhone business? And then on sort of -- I just want to make sure I understand sort of the guide. So when I think about the $5 billion pull forward last year in the March quarter from a channel fill perspective, even if I back it out last quarter or I back it up this quarter, the March quarter, this would be sort of the softest quarter since the COVID pandemic. Obviously, I know the Americas as I just touched on is a little bit softer than China, which you cleared up earlier. But how do you think about the differences in sort of the macro conditions by region? And again, do you have a sense for are we nearing a trough from a macro demand perspective or how long do you think this particular weakness persists? Thanks." }, { "speaker": "Tim Cook", "text": "Let me take the first part of your question about America. If you look at the U.S., which obviously drives the vast, vast majority of the revenue in America, we grew in the December quarter from an iPhone business point of view and the install base hit an all-time high. If you look at the replacement cycle, it's very difficult to measure the replacement cycle at any given point. And so, what we focus on internally a lot is the active install base and the -- obviously, the sales over usually a cycle and we feel better about those things. If you look at the -- who's selling what in the U.S., the iPhone is four out of the top five selling smartphones in the US. And of course, the customer satisfaction in the U.S. as we alluded to earlier is 99%. So we feel very, very good about what our position is in the U.S." }, { "speaker": "Luca Maestri", "text": "And I would add to that, keep in mind, obviously, the extra week that we had a year ago that obviously makes the compare more -- a bit distorted. On the March quarter guide, I would point to you that, obviously, the COVID years had a lot of, let's say, turmoil in it, a lot of volatility that typically you wouldn't see. If you look at our sequential progression from December to March this year versus pre-COVID versus like a more normal environment, it's actually stronger than those years." }, { "speaker": "David Vogt", "text": "Got it. Thanks, guys." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, David. Operator, can we have the last question, please?" }, { "speaker": "Operator", "text": "Thank you. Our last question is from Ben Reitzes with Melius Research. Please go ahead." }, { "speaker": "Ben Reitzes", "text": "Yes. Hi. Thanks. Appreciate it. Two questions, if I can sneak them in. Just wanted to clarify on China. Tim, I think last quarter you still thought it was a growth market. Obviously, there's some concerns with the -- recently and given what we saw in the quarter, is there something that we can kind of point to where you feel that that market can resume growth in the future? And I'm wondering if you're still upbeat about that prospect. And then I just have a quick follow up." }, { "speaker": "Tim Cook", "text": "Ben, we've been in China for 30 years. And I remain very optimistic about China over the long term. And I feel good about hitting a new install base number, high watermark and very good about the growth in upgraders year-over-year during the quarter." }, { "speaker": "Ben Reitzes", "text": "Great. Thanks Tim. And just in terms of AI, I know you're not going to talk about your plans, but do you believe -- are you a believer in the edge thesis that AI and processing on smartphones and devices like yours is going to have a huge role in AI and AI apps and that it's something you guys can take advantage of." }, { "speaker": "Tim Cook", "text": "Let me just say that, I think there's a huge opportunity for Apple with GenAI and AI. And without getting into to more details and getting out in front of myself." }, { "speaker": "Ben Reitzes", "text": "Thanks Tim." }, { "speaker": "Tim Cook", "text": "Yes, Thanks, Ben." }, { "speaker": "Suhasini Chandramouli", "text": "All right. Thank you Ben. A replay of today's call will be available for two weeks on Apple Podcasts, as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 0106234 followed by the pound sign. These replays will be available by approximately 5 p.m. Pacific time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142 and financial analysts can contact me, Suhasini Chandramouli, with additional questions at 408-974-3123. Thanks again for joining us." }, { "speaker": "Operator", "text": "Once again, this does conclude today's conference. We do appreciate your participation." } ]	Apple Inc.	24,937
AAPL	2	2,025	2025-05-01 19:13:00	Suhasini Chandramouli: Good afternoon, and welcome to the Apple Q2 Fiscal Year 2025 Earnings Conference Call. My name is Suhasini Chandramouli, Director of Investor Relations. Today's call is being recorded. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Kevan Parekh. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of tariffs and other trade measures and macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed reports on Form 10-Q and Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Additional information will also be in our report on Form 10-Q for the quarter ended March 29, 2025 to be filed tomorrow and in other reports and filings we make with the SEC. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook: Thank you, Suhasini. Good afternoon, everyone, and thanks for joining the call. Today, we are reporting 95.4 billion in revenue, up 5% from a year ago and at the high end of the range we provided last quarter. Diluted EPS was $1.65, up 8% year-over-year and a March quarter record. Services achieved an all-time revenue record, growing 12% compared to the prior year. We also set a number of quarterly records in countries and regions across the world, including the UK, Spain, Finland, Brazil, Chile, Turkey, Poland, India, and the Philippines. We are as dedicated as ever to the innovation and ingenuity that will enrich our customers' lives and help us leave the world better than we found it. And we are proud to increase our impact around the world, including here in the United States, where we recently announced plans to spend $500 billion over the next four years. We're going to be expanding our teams in our facilities in several states, including Michigan, Texas, California, Arizona, Nevada, Iowa, Oregon, North Carolina, and Washington. And we're going to be opening a new factory for advanced server manufacturing in Texas. During calendar year 2025, we expect to source more than 19 billion chips from a dozen states, including tens of millions of advanced chips being made in Arizona this year. We also source glass used in iPhone from an American company. All told, we have more than 9,000 suppliers in the U.S. across all 50 states. Now I'll turn to products, starting with iPhone. iPhone revenue was $46.8 billion, up 2% from a year ago. During the quarter, we introduced iPhone 16e, a great new entry-level addition to our iPhone 16 lineup. It's powered by our latest generation A18 chip and includes the all-new Apple-designed C1 modem, the most energy-efficient modem ever in an iPhone, allowing iPhone 16e to have the longest battery life of any 6.1-inch iPhone. Meanwhile, iPhone 16 and iPhone 16 Plus users are exploring how they can use Camera Control, whether capturing stunning images or exploring the world with Visual Intelligence. And our iPhone 16 Pro models continue to be a hit with our users. They are turbocharged by the remarkable capabilities and efficiency of A18 Pro and feature larger displays, an advanced camera system and a beautiful design. Mac revenue was $7.9 billion, 7% higher year-over-year, another great quarter for Mac. During the quarter, we introduced significant new updates to our lineup. The world's most popular laptop just got even better. The M4-powered MacBook Air features a 12-megapixel Center Stage camera and delivers a massive boost in performance. And now it comes in a beautiful new sky blue color. The new Mac Studio is the most powerful Mac we've ever shipped, equipped with M4 Max and our new M3 Ultra chip. It's a true AI powerhouse capable of running large language models with over 600 billion parameters entirely in memory. Apple Intelligence brings great capabilities to the Mac with features like Writing Tools and Notification Summaries that help users stay focused and get more done. Turning to iPad. Revenue for the quarter was $6.4 billion, up 15% from a year ago, another strong quarter of double digit growth. Our iPad lineup continues to help users learn, work, play, and go wherever their imaginations take them. The new iPad Air with M3 combines powerful performance and exceptional portability, whether you're taking it across the street or around the world. And Apple Intelligence and Apple Pencil Pro are a perfect match, with features like the Clean Up Tool in Photos to remove distractions, and Image Wand in the Notes app to elevate simple sketches into polished illustrations. Across Wearables, Home and Accessories, revenue was $7.5 billion, down 5% from a year ago. From walking trails to bike paths, Apple Watch Series 10 is an essential partner wherever you are on the health and fitness journey. And AirPods 4 with active noise cancellation delivers an extraordinary experience in an open-ear design. Customers continue to tell me how important our Hearing Health features for AirPods Pro 2 are to them, and we've been expanding their availability to reach even more users around the world. Millions have already taken hearing tests and the stories we received about the new hearing aid feature are deeply moving, showing how these innovations are making a real difference in people's daily lives. It's a powerful reminder of the impact technology can have when it's designed with care. Meanwhile, Apple Vision Pro takes the concert experience to a whole new level with Metallica, our latest Apple immersive video, which you have to see to believe. And visionOS 2.4 unlocks the first set of Apple Intelligence features for Vision Pro users while inviting them to explore a curated and regularly updated collection of spatial experiences with the Spatial Gallery app. In retail, in addition to the two stores we opened during the quarter, we're also looking forward to a new retail store in the UAE, the arrival of the online store in Saudi Arabia and new retail stores in India starting later this year. Let's now turn to Services, where we achieved an all-time revenue record of $26.6 billion, up 12% from a year ago with strong performance across all of our categories. From starting their morning with their podcast of choice to buying a coffee with Apple Pay to spending an afternoon reading the latest bestseller on Apple Books to using their favorite app from the App Store or an evening workout with Fitness+, Apple Services are enriching our users' lives all throughout their day. With incredible shows like The Studio, Your Friends & Neighbors and the culture-shaping Severance, Apple TV+ has become a must-see destination with record viewership during the quarter. And we're excited for our upcoming movie F1 starring Brad Pitt, which will hit theaters this summer and gives an incredible inside look at one of the most intense sports on Earth. And there is so much more to come this year. It's no wonder Apple TV+ has earned more than 2,500 award nominations and 560 wins. We're also reaching sports fans in more ways than ever, from watching our favorite teams go to bat on Friday Night Baseball to cheering on their local team with MLS Season Pass to following the results of every Grand Prix with Formula 1 now on the Apple Sports app. Turning to software. We just released iOS 18.4, which brought Apple Intelligence to more languages, including French, German, Italian, Portuguese, Spanish, Japanese, Korean, and simplified Chinese as well as localized English to Singapore and India. AI and machine learning are core to so many profound features we've rolled out over the years to help our users live a better day. It's why we designed Apple Silicon with a neural engine that powers so many AI features across our products and third-party apps. It's also what makes Apple products the best devices for generative AI. At WWDC 24, we announced Apple Intelligence and shared our vision for integrating generative AI across our ecosystem into the apps and features our users rely on every day. To achieve this goal, we built our own highly capable foundation models that are specialized for everyday tasks. We designed helpful features that are right where our users need them and are easy to use. And we went to great lengths to build a system that protects user privacy, whether requests are processed on-device or in the cloud with Private Cloud Compute, an extraordinary step forward for privacy and AI. Since we launched iOS 18, we've released a number of Apple Intelligence features from helpful Writing Tools to Genmoji, Image Playground, Image Wand, Clean Up, Visual Intelligence and a seamless connection to ChatGPT, we made it possible for users to create movies of their memories with a simple prompt and added AI-powered photo search, smart replies, priority notifications, summaries for mail, messages and more. We've also expanded these capabilities to more languages and regions. With regard to the more personal Siri features we announced, we need more time to complete our work on these features so they meet our high-quality bar. We are making progress and we look forward to getting these features into customers' hands. Turning to sustainability. We just celebrated Earth Day, and we were proud to announce that we've cut our emissions by 60% from our 2015 levels. Today, we're using more clean energy across our operations and more recycled materials in our products than ever. We have worked with suppliers to bring 17.8 gigawatts of renewable electricity online. We're also saving billions of gallons of freshwater and redirecting millions of metric tons of waste from landfills. All of this will help us make important progress towards our goal of carbon neutrality across our supply chain and the life cycle of our products by 2030. Now let me walk you through the impacts of tariffs in the March quarter and give you some color on what we expect for the June quarter. For the March quarter, we had a limited impact from tariffs as we were able to optimize our supply chain and inventory. For the June quarter, currently, we are not able to precisely estimate the impact of tariffs as we are uncertain of potential future actions prior to the end of the quarter. However, for some color, assuming the current global tariff rates, policies and applications do not change for the balance of the quarter and no new tariffs are added, we estimate the impact to add $900 million to our costs. This estimate should not be used to make projections for future quarters as there are certain unique factors that benefit the June quarter. For our part, we will manage the company the way we always have, with thoughtful and deliberate decisions, with a focus on investing for the long term, and with dedication to innovation and the possibilities it creates. As we look ahead, we remain confident, confident that we will continue to build the world's best products and services, confident in our ability to innovate and enrich our users' lives, and confident that we can continue to run our business in a way that has always set Apple apart. Next month, we can't wait to welcome our developer community for the Worldwide Developers Conference, and we look forward to revealing some exciting announcements. With that, I'll turn it over to Kevan. Kevan Parekh: Thanks, Tim, and good afternoon, everyone. Our March quarter revenue of $95.4 billion was up 5% year-over-year despite a headwind of almost 2.5 percentage points from foreign exchange. We also grew in the majority of the markets we track. Products revenue was $68.7 billion, up 3% year-over-year, driven by growth in iPhone, iPad, and Mac. And thanks to our high levels of customer satisfaction and strong loyalty, our installed base of active devices reached an all-time high across all product categories and geographic segments. Services revenue was $26.6 billion, up 12% year-over-year despite over 2 percentage points of foreign exchange headwinds. And as Tim mentioned, this was an all-time revenue record. We also grew in every geographic segment and saw double-digit growth in both developed and emerging markets. Company gross margin was 47.1%, in the middle of our guidance range and up 20 basis points sequentially primarily driven by favorable mix. Products gross margin was 35.9%, down 340 basis points sequentially, driven by mix, foreign exchange and a seasonal loss of leverage. Services gross margin was 75.7%, up 70 basis points sequentially, primarily driven by a different mix, partly offset by foreign exchange. Operating expenses landed at $15.3 billion, up 6% year-over-year. Net income was $24.8 billion and diluted earnings per share was $1.65, up 8% year-over-year and a March quarter record. Operating cash flow was also strong at $24 billion. Now I'm going to provide some more details for each of our revenue categories. iPhone revenue was $46.8 billion, up 2% year- over-year driven by the iPhone 16 family. The iPhone Active installed base grew to an all-time high in total and in every geographic segment, and iPhone upgraders grew double-digits year-over-year. According to a recent survey from Kantar, during the March quarter, iPhone was a top-selling model in the U.S., urban China, the UK, Germany, Australia, and Japan. And we continue to see high levels of customer satisfaction in the U.S. at 97% as measured by 451 Research. Mac revenue was $7.9 billion, up 7% year-over-year, driven by the latest MacBook Air, MacBook Pro and Mac Mini models. This performance was broad-based with every geographic segment growing year-over-year. Mac installed base reached an all-time high and we saw strong growth for both upgraders and customers new to the Mac. Customer satisfaction was reported at 95% in the U.S. iPad revenue was $6.4 billion, up 15% year-over-year, driven by the new M3-powered iPad Air. The iPad installed base reached another all-time high, and over half the customers who purchased an iPad during the quarter were new to the product. Based on the latest reports from 451 Research, customer satisfaction was 97% in the U.S. Wearables, Home and Accessories revenue was $7.5 billion, down 5% year-over-year. Keep in mind, we did face a more difficult compare against the launch of the Apple Vision Pro in the year ago quarter as well as the Watch Ultra 2 launched last year. At the same time, the Apple Watch installed base reached a new all-time high with over half of customers purchasing an Apple Watch during the quarter being new to the product. And customer satisfaction for Watch in the U.S. was recently measured at 95%. Our Services revenue reached an all-time high of $26.6 billion, up 12% year-over-year. This growth rate was comparable to the December quarter year-over-year growth rate when we removed the negative impact from foreign exchange. We saw strong momentum in the March quarter and the growth of our installed base of active devices gives us great opportunities for the future. Customer engagement across our Services offerings also continue to grow. Both transacting and paid accounts reached new all-time highs, with paid accounts growing double-digits year-over-year. Paid subscriptions also grew double-digits. We have well over 1 billion paid subscriptions across the services on our platform. We continue to improve the quality and breadth of our service offerings from additional features in News+ to new games available on Arcade. Apple Pay continues to help our customers with an easy, secure and private payment solution, and we were pleased to see that our active users in Apple Pay reached an all-time record, up double-digits year-over-year. Turning to enterprise. Organizations are investing more on Apple products and services to drive productivity and employee engagement. For example, KPMG recently rolled out iPhone 16 for all U.S. employees, reflecting their confidence in Apple's security and privacy features. We also continue to see strong Mac performance in enterprise. New Bank, the largest digital bank in Latin America has selected MacBook Air as a standard computer for their thousands of employees. With Vision Pro, companies are continuing to find new and innovative ways to leverage this technology. Dassault Systèmes, a leading provider for engineering and 3D design software has natively integrated Apple Vision Pro into their next-generation platform, bringing a powerful and immersive spatial experience to thousands of enterprise customers. Now let's turn to our cash position and capital return program. We ended the quarter with $133 billion in cash and marketable securities. We had $3 billion in debt maturities and increased commercial paper by $4 billion, resulting in $98 billion in total debt. Therefore, at the end of the quarter, net cash was $35 billion. During the quarter, we returned $29 billion to shareholders. This included $3.8 billion in dividends and equivalents and $25 billion through open market repurchases of 108 million Apple shares. Given the continued confidence we have in our business now and into the future, today, our Board authorized an additional $100 billion for share repurchases as we maintain our goal of getting to net cash neutral. We're also raising our dividend by 4% to $0.26 per share of common stock, and we continue to plan for annual increases in the dividend going forward as we have done for the last 13 years. This cash dividend will be payable on May 15, 2025, to shareholders of record as of May 12, 2025. As we move ahead into the June quarter, I'd like to review our outlook, which includes the types of forward-looking information that Suhasini referred to. Importantly, the color we're providing assumes that global tariff rates, policies and application remain in effect as of this call. And the global macroeconomic outlook doesn't worsen from today for the current quarter. Despite the overall uncertain environment, we will still be providing color at the total company level, subject to these assumptions and the risk factors that we referred to at the beginning of the call. We expect our June quarter total company revenue to grow low to mid-single digits year-over-year. We expect gross margin to be between 45.5% and 46.5%, which includes the estimated impact of the $900 million of tariff-related costs that Tim referred to earlier. We expect operating expenses to be between $15.3 billion and $15.5 billion. We expect OI&E to be around negative $300 million, excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16%. With that, let's open the call to questions. Suhasini Chandramouli: We ask that you limit yourself to two questions. Operator, may we have the first question, please? Operator: Certainly. We'll go ahead and take our first question from Erik Woodring with Morgan Stanley. Erik Woodring: Great, thanks so much guys for taking my questions. Tim, I'd love to maybe touch on the tariff point first. There were comments from you earlier on CNBC talking about 50% of iPhones for the U.S. currently coming from India. Where do you expect the mix of India-sourced iPhones for the U.S. to be by the end of your fiscal year? And is it the goal to source 100% of your U.S.-bound iPhones from India? Can you just help us understand kind of how we should expect that to trend as we look beyond just the June quarter? And then I have a follow-up. Thank you. Tim Cook: Yes, Erik, hi. It's Tim. The existing tariffs that apply to Apple today are based on the product's country of origin as you alluded to. For the June quarter, we do expect the majority of iPhones sold in the U.S. will have India as their country of origin and Vietnam to be the country of origin for almost all iPad, Mac, Apple Watch, and AirPods products sold in the -- also sold in the U.S. China would continue to be the country of origin for the vast majority of total product sales outside the U.S. And so if you look at the categories of tariffs that are applicable to us today, for the June quarter, most of our tariff exposure relates to the February IEEPA-related tariff at the rate of 20%, which applies to imports to the U.S. for products that have China as their country of origin. In addition, for China, there was an additional 125% tariff for imports of certain categories of products announced in April. And for us, that's some of our U.S. AppleCare and Accessories businesses and brings the total rate in China for these products to at least 145%. Also for transparency and clarity, the vast majority of our products, including iPhone, Mac, iPad, Apple Watch, and Vision Pro, are currently not subject to the global reciprocal tariffs that were announced in April as the Commerce Department has initiated a Section 232 investigation into imports of semiconductors, semiconductor manufacturing equipment and downstream products that contain semiconductors. And so if you -- for the June quarter, as I talked about in the -- in my opening comments, we estimate the impact, assuming that the current global tariff, rates, policies and applications don't change for the balance of the quarter, to be 900 million to our costs. I wouldn't want to predict the mix of production in the future, but I wanted to give you clarity for the June quarter of where the country of origins are so you can use that for your modeling. Erik Woodring: Okay. I appreciate that color. Thank, Tim. And then maybe my follow-up is there were a number of reports during the quarter that Apple had pulled forward sell-in into the channel to get ahead of tariffs. So can you just help us better kind of understand or clarify if sell-in and sell-through were aligned in the March quarter? If you're assuming that they would be aligned in the June quarter guide? And ultimately, do you believe that consumers are accelerating hardware purchases to get ahead of any potential pricing increases or was behavior normal? Thank you so much, Tim. Tim Cook: Yes. Thanks, Erik, for the question. There are several questions there. One, in terms of the pull forward in demand, if you look at the March quarter, we don't believe that we saw obvious evidence of a significant pull forward in demand in the March quarter due to tariffs. If you look at our channel inventory, from the beginning of the quarter to the end of the quarter, the unit channel inventory was similar, not only for iPhone but for the balance of our products. Again, for transparency, you will see that we did build ahead inventory, and that's reflected in our manufacturing purchase obligations that you'll see on the quarterly filing when it comes out. So I hope that makes the -- answers all your questions. Erik Woodring: Thank you so much, Tim. Good Luck. Tim Cook: Thanks. Suhasini Chandramouli: Thank you, Eric. Operator, could we have the next question, please? Operator: Our next question is from Ben Reitzes with Melius. Please go ahead. Ben Reitzes: Hi, thanks a lot. Tim, if you had told me that on April 2 that your hit from tariffs was only a nickel-ish a quarter at 900 million, that would have been a pretty good outcome, given the panic that ensued. I'm surprised that it's that low. But then you did make a comment about after the June quarter, and sorry to push you on that, but could it be a multiple of that figure or is it just completely unknown? We're all just trying to figure out what happens after June. And if there's just any guidance you guys can possibly give that it's bigger, smaller or what? And hoping you can just give us a little color on that. Thanks. Tim Cook: Yes, Ben. Thanks for the question. I tried to give you some information in the previous question about the country of origin, which currently is the key factor in determining the tariffs that we're paying. I don't want to predict the future because I'm not sure what will happen with the tariffs, and there is the Section 232 investigation going on. And so it's very difficult to predict beyond June. And June has the assumptions in it that I had mentioned earlier. Ben Reitzes: All right, Tim. And then just with regard to China down 2%, I mean, you intuitively would have thought there would have been an increased nationalism there and perhaps it would have been worse than that. And the trajectory there improving even with subsidies because subsidies benefited your competitors, too. Just wondering if I could get a little more color there. Can it keep improving? What are you thinking with regard to that trajectory in China, given all the geopolitical tensions? Thanks. Tim Cook: Yes, we were down 2%, as you point out, for the March quarter. And to provide a little more transparency around that, we were roughly flat when you remove the headwinds from foreign exchange. And so we did see quite a bit of sequential improvement from the December quarter, which was down 11. And again, for going out of the way for transparency, the channel inventory at the end of March, the unit channel inventory was similar to where we started the quarter. So there wasn't a build of channel inventory in there. I do believe that the subsidies played a favorable impact on the results. It's difficult to estimate with precision as to exactly how much, but I think it was positive. Some of our products are included. Some of them are not. Generally, on iPhone, if something is priced above RMB6,000, it is not eligible for the subsidy and the other products have different rules. But I do think it helped. And I think it's helping others as well, I'm sure. iPhone was the key driver of the improvement sequentially. And so hopefully, that provides you some color. The other thing I would say is that the Mac, the iPad, and the Watch are attracting a majority of customers new to that product. And so that continues to look quite good in China. And iPhone was the top two models in urban China, and iPad was the top two tablets in urban China. So there's some positive nuggets there. Ben Reitzes: Thanks a lot, Tim. Tim Cook: Yes. Thank you, Ben. Suhasini Chandramouli: Thank you, Ben. Operator, may we have the next question, please? Operator: Our next question is from Michael Ng with Goldman Sachs. Please go ahead. Michael Ng: Hi, good afternoon. Thank you very much for the question. I was just wondering if you could talk a little bit about your responses on some of this trade policy uncertainty. I appreciated the transparency around building ahead with inventory. Will you continue to do that in this interim period until we get some clarity on Section 232 investigation? And could you talk a little bit about your philosophy on pricing, elevated costs to the extent that comes through, whether that be to resellers or end consumers and other efficiency efforts that you might be able to pursue? Thank you. Tim Cook: Yes. Obviously, we're very engaged on the tariff discussions. We believe in engagement and we'll continue to engage. On the pricing piece, we have nothing to announce today. And I'll just say that the operational team has done an incredible job around optimizing the supply chain and the inventory. And we'll obviously continue to do those things to the degree that we can. Michael Ng: Great. Thanks. And just as a quick follow-up for Kevan, on product gross margins, I was just wondering if you could provide a little bit more color on some of the factors that may have impacted product gross margins in the quarter. Obviously, down sequentially on seasonal factors but there was a year-over-year decline as well. So any additional color would be helpful? Thank you. Kevan Parekh: Yes, Michael, thanks. This is Kevan. So on the sequential, as we mentioned in the prepared remarks, we had a decrease in the product gross margin by 340 basis points sequentially. That was primarily driven by mix, seasonal loss of leverage, foreign exchange and that was partly offset by cost savings. And when we look at the year-on-year performance, we were down 70 basis points on a year-on- year basis. And that was driven by a different mix and foreign exchange. Michael Ng: Thank you. Kevan Parekh: Thank you. Suhasini Chandramouli: Thank you, Mike. Operator, could we have the next question, please? Operator: Our next question is from Amit Daryanani with Evercore. Please go ahead. Amit Daryanani: Thanks a lot. I guess I'll have to start with a tariff question as well. Tim, I think when you talked about the 900 million impact to your cost of goods sold, you sort of had a statement that there are certain unique factors that benefit you in the June quarter related to that number. Can you just talk about what are these unique factors that are benefiting you in the June quarter? And what would the impact be without those benefits essentially? Tim Cook: I wouldn't want to go through all of them. But as an example, the build ahead that is -- I mentioned earlier that's in the manufacturing purchase obligations is -- were helpful. Amit Daryanani: Got it. And then as I think about the June quarter guide of low to mid-single-digit revenue growth, I was wondering, do you folks expect services growth to remain in the double-digit range as you go into the back half of the year? I imagine FX is a bit of a benefit as you go to the back half. I would love to just understand, within that framework, how do you think services stacks up as you go through the June quarter? Kevan Parekh: Yes, Amit. Hi, it's Kevan. So I think when we talk about the overall June quarter, we talk about the low to mid-single digits year- over-year. We do expect foreign exchange in the June quarter to improve sequentially. However, we are expecting it to be a slight headwind to revenue on a year-on-year basis. With respect to services, given the uncertainty we see from several factors, we aren't providing the category level of color today. Amit Daryanani: Got it. Thank you. Kevan Parekh: Thank you. Suhasini Chandramouli: Thanks, Amit. Operator, could we have the next question, please? Operator: Our next question is from Wamsi Mohan with Bank of America. Please go ahead. Wamsi Mohan: Yes. Thank you. Tim or Kevan, how should investors think about the gross margin trajectory as you source more from the U.S. in particular or other supply chain changes that you are making, including in India? How should those kind of play into the cost structure and how should we think about that gross margin trajectory and I will follow-up? Tim Cook: We're excited about bringing more production to the U.S. As you know, we've been very key in the TSMC project in Arizona and are the largest and first customer getting product out of that. And that's the SoC that's coming out of there. We also have glass coming out of the U.S. and the Face ID module and loads of chips. In fact, there's 19 billion chips coming out across 12 states. This is down to the resistor and capacitor level, obviously. And so there's some that is already built into the margins that Kevan has quoted. And we don't really forecast beyond the current quarter as you know. Kevan Parekh: Yes, maybe I'll add a couple of more points as we think about just the margin going forward. A couple of observations I'd mention is every product cycle is different and over the years we have managed gross margin well. We've made good decisions balancing units revenue margins. When we launch new products, they tend to have a higher cost structure than the products they replace as we introduce new features and technologies. We do have a good track record of reducing those costs and structures over the life of the product. And our products and services all have different levels of profitability and their relative success in the marketplace has an impact on the overall gross margin. So I hope that's helpful color and context for you. Wamsi Mohan: No, that's super helpful. Thank you. I guess you just noted that you weren't going to give services maybe a growth forecast here in light of some of the uncertain news. But maybe, Tim, could you share any color around what you have seen in developer behavior in areas like Europe where there has now been emergence of alternate app stores for a little more time? What have you seen anecdotally or within your data in terms of maybe develop a behavior, whether it's large or small? Any color you can share on what has like actually happened? Tim Cook: It's embedded in our results that Kevan talked about earlier and embedded in the overall company color that was provided. But as you know, the Digital Markets Act went into effect in, I believe it was March of last year. And so the Digital Markets Act has been enacted for a bit over a year and there's been alternate app stores for some period of time of that. And so it's -- at this point in Europe, there are some embedded in the actuals. There may be more to come and so forth. I don't want to predict beyond the current quarter. Wamsi Mohan: Okay. Thank you, Tim. Suhasini Chandramouli: Thank you, Wamsi. Operator, could we have the next question, please? Operator: Our next question is from David Vogt with UBS. Please go ahead. David Vogt: Great. Thanks, guys. Thanks for taking my question. So I've got two as well, and Tim, this is more of a big picture supply chain philosophical question. So can you maybe update us on your thoughts on how you're thinking about your resiliency and redundancy, following the change that you guys talked about earlier on the call? I guess what I'm trying to understand is how do we think about where your supply chain is two to three years from now? And is there any risk, at least in the near term, of maybe some export control issues in your outlook for the balance of this year? And I'll give you my second one at the same time. You quantified a $900 million hit from tariffs. Or Kevan, is there any impact in how you're thinking about the demand backdrop in your outlook for the June quarter on the revenue line holistically? Thanks. Tim Cook: In terms of the resiliency and risk, et cetera, there -- we have a complex supply chain. There's always risk in the supply chain. And so I wouldn't tell you anything different than that. What we learned some time ago was that having everything in one location had too much risk with it. And so we have, over time, with certain parts of the supply chain, not the whole thing, but certain parts of it opened up new sources of supply. And you could see that kind of thing continuing in the future. I'll let Kevan answer the other question. Kevan Parekh: Hi, David. On the other question, I would say that our best thinking is captured in the outlook that we provided. However, I did want to reemphasize the point that the assumptions we made on the outlook do assume that the global tariff rates, the policies and application remain the same as they are today as of this call and that the global macroeconomic outlook doesn't worsen from today. David Vogt: Okay. But no quantifiable impact on demand to date, at least from where we are over the last month? Is there a way to kind of think about that from early April to early May? Kevan Parekh: I would say our best thinking is reflected in the range that we provided. David Vogt: Okay. Thanks, Kevan. Thanks, guys. Kevan Parekh: Thank you. Suhasini Chandramouli: Thank you, David. Operator, could we have the next question, please? Operator: Our next question is from Samik Chatterjee with JPMorgan. Please go ahead. Samik Chatterjee: Hi. Good afternoon. Thanks for taking my questions. I guess, Tim, you made a comment on the last earnings call about Apple Intelligence making a visible impact on iPhone sales in the countries where it was available. I'm just curious if you continue to see that play out similarly in the more broader number of countries you've rolled that out. Or the delays that you talked about related to Siri, personalized Siri features, has that had an impact in terms of consumer willingness to upgrade? And I have a follow-up. Thank you. Tim Cook: Yes, thank you for the question. During the March quarter, we saw that in markets where we had rolled out Apple Intelligence, that the year-over-year performance on the iPhone 16 family was stronger than those where Apple Intelligence was not available. A lot of the languages that I think you're referring to rolled out in April and so they actually rolled out in Q3. Samik Chatterjee: Okay, got it. Then maybe for my follow-up, I mean, you have a lot of insights now in terms of what consumers or how consumers are reacting to the overall macro. And I know you prefaced all your guidance with macro remaining consistent. But how -- what are you seeing in terms of the U.S. consumer? And what's the reaction there in terms of the tariff impact? We saw U.S. GDP also shrink here in 1Q. When you look at velocity at the stores or trade down within the iPhone portfolio mix, what are you seeing in terms of how the consumer is reacting to the macro at this point? Thank you. Tim Cook: I'm not an economist and so I'd start by saying that. In terms of the -- as you can see from a total company point of view, our results accelerated sequentially to the 5% level. And the U.S. is obviously the vast majority of the Americas segment, and you can see how the Americas performed during the quarter. And so that's all I want to say about that. I don't want to try to predict what happens in the months from now. The past, I'm quite pleased with the results from Q2. Samik Chatterjee: Thank you. Thanks for taking the questions. Tim Cook: Yes. Suhasini Chandramouli: Thank you, Samik. Operator, could we have the next question, please? Operator: Our next question is from Krish Sankar with TD Cowen. Please go ahead. Krish Sankar: Yes, hi. Thanks for taking my question. I have two of them, too. Tim, thanks for that information on the $500 billion U.S. investment. I'm kind of curious how to think about the composition of that? How much is CapEx versus R&D? How much is going into like the Texas server? How much is going into maybe TSMC Arizona? Any kind of color you can give on that $500 billion investment would be helpful. And then I had a follow-up. Tim Cook: Well, there's lots of all of it is what I would say. We're not giving out the exact split, but as we expand facilities in the different states from Michigan to Texas to California and Arizona and Nevada and Iowa and Oregon and North Carolina and Washington, there will be CapEx involved in that and OpEx involved in it. And standing up a server -- advanced server manufacturing in Texas, we did that through a partner. We do our manufacturing through a partner, but we'll be putting a fair amount in cost of goods sold to do that and some OpEx as well, and I'm sure some CapEx as well. And so it's a bit of all of it. Krish Sankar: Got it, got it. And then kind of had like a long term, more like a philosophical question. When you look at -- in the past, you've spoken about AI on the Edge. Obviously, it's very topical to hear from both the iPhone angle and the Mac angle. But I'm just kind of curious, when you look at AI on Edge, are the current smartphone specs or improved hardware and silicon specs good enough to meet future Edge LLM for inference? Or do you think you need somewhat of a whole new different kind of device? Just kind of curious how to think about the evolution of the Edge devices from here. Tim Cook: Yes. As you know, we're shipping an LLM on the iPhone 16 today. And there are -- some of the queries that are being used by our customers are on-device, and then others go to the private cloud where we've essentially mimicked the security and privacy of the device into the cloud. And then others, for world knowledge, are with the integration with ChatGPT. And so there's -- we continue to be very excited about the opportunities here. We are very excited about the road map, and we are pleased with the progress that we're making. Krish Sankar: Thanks, sir. Suhasini Chandramouli: Thank you, Krish. Operator, could we get the next question, please? Operator: Our next question is from Richard Kramer with Arete Research. Please go ahead. Richard Kramer: Thank you very much. Wanted to ask about tariffs. Tim, given your recognition that a new Siri system is taking longer than you thought to deliver, I'd like to go back to my question from the last call and ask about what some of the learnings you had from those delays and whether you attribute them to organizational factors, to your legacy software stack? Or is it a matter of R&D spending? And what are some of the key gating factors investors should look for either at WWDC or beyond to have a sense that Apple can deliver on some of the promises of the announcements of the prior WWDC? Thanks. Tim Cook: Yes. If you sort of step back from what we said at WWDC, we talked about a number of different features that would launch with iOS 18. And we've released a slew of those from Writing Tools to seamlessly connecting to ChatGPT to Genmoji to Image Playground to Image Wand to Clean Up and Visual Intelligence, making movies or movies of your memories with a simple prompt, AI-powered photo search, smart replies, priority notifications, the list goes on. And so we've delivered a lot, and we've just recently, just a few weeks ago, expanded it into several different languages, including French, German, Italian, Portuguese, Spanish, Japanese, Korean, simplified Chinese as well as localized English for both Singapore and India. So we've delivered a lot. However, with regard to the more personal Siri, as you mentioned, we just need more time to complete the work so they meet our high-quality bar. And there's not a lot of other reason for it. It's just taking a bit longer than we thought. But we are making progress, and we're extremely excited to get the more personal Siri features out there. Kevan Parekh: And Richard, I'll just add that on your question about investment that we don't underestimate -- underinvest in our business. We make significant investments in R&D. That continues to grow. We're continuing to grow our R&D investment. And so we definitely are making all the investments we think we need to enable our road map. Richard Kramer: Thanks. And Kevan, 1 for you. I mean, it's hard to ignore some of the ongoing very high-profile legal cases that touch on Apple, be it yesterday's Epic case injunction or the Google antitrust trial touching on default search. And investors are clearly concerned that these might have material impacts on your Services business. Do you feel now that you have ample ways in which you might be able to mitigate some of the potential negative impacts on Apple Services business that might come about from what's been proposed or might come about in legal rather than commercial pressures that the business faces? Tim Cook: Let me make a couple of comments on that before Kevan. The case yesterday, we strongly disagree with. We've complied with the court's order and we're going to appeal. In the DOJ case that you referenced with Google, that case is ongoing and I don't really have anything to add beyond that. And so we're monitoring these closely. But there -- as you point out, there's risk associated with them and the outcome is unclear. Kevan Parekh: Yes, I think Tim answered it really well. I don't have anything to add to that. Richard Kramer: Thank you. Suhasini Chandramouli: Thank you, Richard. Operator, we will take our last question, please. Operator: We'll go ahead and take our last question from Aaron Rakers with Wells Fargo. Please go ahead. Aaron Rakers: Yes, thanks for taking the question. I want to go back to the AI strategy a little bit. I know, Tim, in your prepared comments, you had mentioned building some of your own foundational models. And I'm curious of how important you think it is for Apple to have their own foundational models. And kind of dovetailed with that is that, how do you think about your data center footprint when we look at Apple spending, call it, 3 billion a quarter relative to some of these other companies spending multiples of that. How does the strategy play out in your opinion? Tim Cook: Well, we -- on the data center side, we have a hybrid strategy. And so we utilize third parties in addition to the data center investments that we're making. And as I've mentioned in the 500 billion, there's a number of states that we're expanding in. Some of those are data center investments. And so we do plan on making investments in that area and we're not gating it. We invest in the business first, as Kevan talked about, is our most important thing to do. In terms of the foundation models, we want to have certain models and we'll partner as well. And so I don't view it as a -- all of one or all of the other. We've been working on foundation models for quite some time and are shipping some today, obviously, with what's on-device and what's in the Private Cloud Compute. Aaron Rakers: Yes. And then as a follow-up, I'm curious with the iPhone 16e launching this quarter, internalizing your C1 modem, I'm curious of how you see kind of the modem strategy playing out or maybe just the continual deepening of that internal silicon opportunity for Apple? Tim Cook: We're super excited to ship the first 1 and get it out there and it's gone well. We love that we can produce better products from a point of view of really focusing on battery life and other things that customers want. And so we're -- we have started on a journey is the way I would put it. Aaron Rakers: Thank you. Tim Cook: Yes. Suhasini Chandramouli: Thank you, Aaron. A replay of today's call will be available for two weeks on Apple Podcasts, as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 3729688 followed by the pound sign. These replays will be available by approximately 5 PM Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142, and financial analysts can contact me, Suhasini Chandramouli with additional questions at 408-974-3123. Thank you again for joining us today. Operator: Once again, this does conclude today's conference. We do appreciate your participation.	[ { "speaker": "Suhasini Chandramouli", "text": "Good afternoon, and welcome to the Apple Q2 Fiscal Year 2025 Earnings Conference Call. My name is Suhasini Chandramouli, Director of Investor Relations. Today's call is being recorded. Speaking first today is Apple's CEO, Tim Cook; and he'll be followed by CFO, Kevan Parekh. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including without limitation those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation and future business outlook, including the potential impact of tariffs and other trade measures and macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed reports on Form 10-Q and Form 10-K and the Form 8-K filed with the SEC today, along with the associated press release. Additional information will also be in our report on Form 10-Q for the quarter ended March 29, 2025 to be filed tomorrow and in other reports and filings we make with the SEC. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thank you, Suhasini. Good afternoon, everyone, and thanks for joining the call. Today, we are reporting 95.4 billion in revenue, up 5% from a year ago and at the high end of the range we provided last quarter. Diluted EPS was $1.65, up 8% year-over-year and a March quarter record. Services achieved an all-time revenue record, growing 12% compared to the prior year. We also set a number of quarterly records in countries and regions across the world, including the UK, Spain, Finland, Brazil, Chile, Turkey, Poland, India, and the Philippines. We are as dedicated as ever to the innovation and ingenuity that will enrich our customers' lives and help us leave the world better than we found it. And we are proud to increase our impact around the world, including here in the United States, where we recently announced plans to spend $500 billion over the next four years. We're going to be expanding our teams in our facilities in several states, including Michigan, Texas, California, Arizona, Nevada, Iowa, Oregon, North Carolina, and Washington. And we're going to be opening a new factory for advanced server manufacturing in Texas. During calendar year 2025, we expect to source more than 19 billion chips from a dozen states, including tens of millions of advanced chips being made in Arizona this year. We also source glass used in iPhone from an American company. All told, we have more than 9,000 suppliers in the U.S. across all 50 states. Now I'll turn to products, starting with iPhone. iPhone revenue was $46.8 billion, up 2% from a year ago. During the quarter, we introduced iPhone 16e, a great new entry-level addition to our iPhone 16 lineup. It's powered by our latest generation A18 chip and includes the all-new Apple-designed C1 modem, the most energy-efficient modem ever in an iPhone, allowing iPhone 16e to have the longest battery life of any 6.1-inch iPhone. Meanwhile, iPhone 16 and iPhone 16 Plus users are exploring how they can use Camera Control, whether capturing stunning images or exploring the world with Visual Intelligence. And our iPhone 16 Pro models continue to be a hit with our users. They are turbocharged by the remarkable capabilities and efficiency of A18 Pro and feature larger displays, an advanced camera system and a beautiful design. Mac revenue was $7.9 billion, 7% higher year-over-year, another great quarter for Mac. During the quarter, we introduced significant new updates to our lineup. The world's most popular laptop just got even better. The M4-powered MacBook Air features a 12-megapixel Center Stage camera and delivers a massive boost in performance. And now it comes in a beautiful new sky blue color. The new Mac Studio is the most powerful Mac we've ever shipped, equipped with M4 Max and our new M3 Ultra chip. It's a true AI powerhouse capable of running large language models with over 600 billion parameters entirely in memory. Apple Intelligence brings great capabilities to the Mac with features like Writing Tools and Notification Summaries that help users stay focused and get more done. Turning to iPad. Revenue for the quarter was $6.4 billion, up 15% from a year ago, another strong quarter of double digit growth. Our iPad lineup continues to help users learn, work, play, and go wherever their imaginations take them. The new iPad Air with M3 combines powerful performance and exceptional portability, whether you're taking it across the street or around the world. And Apple Intelligence and Apple Pencil Pro are a perfect match, with features like the Clean Up Tool in Photos to remove distractions, and Image Wand in the Notes app to elevate simple sketches into polished illustrations. Across Wearables, Home and Accessories, revenue was $7.5 billion, down 5% from a year ago. From walking trails to bike paths, Apple Watch Series 10 is an essential partner wherever you are on the health and fitness journey. And AirPods 4 with active noise cancellation delivers an extraordinary experience in an open-ear design. Customers continue to tell me how important our Hearing Health features for AirPods Pro 2 are to them, and we've been expanding their availability to reach even more users around the world. Millions have already taken hearing tests and the stories we received about the new hearing aid feature are deeply moving, showing how these innovations are making a real difference in people's daily lives. It's a powerful reminder of the impact technology can have when it's designed with care. Meanwhile, Apple Vision Pro takes the concert experience to a whole new level with Metallica, our latest Apple immersive video, which you have to see to believe. And visionOS 2.4 unlocks the first set of Apple Intelligence features for Vision Pro users while inviting them to explore a curated and regularly updated collection of spatial experiences with the Spatial Gallery app. In retail, in addition to the two stores we opened during the quarter, we're also looking forward to a new retail store in the UAE, the arrival of the online store in Saudi Arabia and new retail stores in India starting later this year. Let's now turn to Services, where we achieved an all-time revenue record of $26.6 billion, up 12% from a year ago with strong performance across all of our categories. From starting their morning with their podcast of choice to buying a coffee with Apple Pay to spending an afternoon reading the latest bestseller on Apple Books to using their favorite app from the App Store or an evening workout with Fitness+, Apple Services are enriching our users' lives all throughout their day. With incredible shows like The Studio, Your Friends & Neighbors and the culture-shaping Severance, Apple TV+ has become a must-see destination with record viewership during the quarter. And we're excited for our upcoming movie F1 starring Brad Pitt, which will hit theaters this summer and gives an incredible inside look at one of the most intense sports on Earth. And there is so much more to come this year. It's no wonder Apple TV+ has earned more than 2,500 award nominations and 560 wins. We're also reaching sports fans in more ways than ever, from watching our favorite teams go to bat on Friday Night Baseball to cheering on their local team with MLS Season Pass to following the results of every Grand Prix with Formula 1 now on the Apple Sports app. Turning to software. We just released iOS 18.4, which brought Apple Intelligence to more languages, including French, German, Italian, Portuguese, Spanish, Japanese, Korean, and simplified Chinese as well as localized English to Singapore and India. AI and machine learning are core to so many profound features we've rolled out over the years to help our users live a better day. It's why we designed Apple Silicon with a neural engine that powers so many AI features across our products and third-party apps. It's also what makes Apple products the best devices for generative AI. At WWDC 24, we announced Apple Intelligence and shared our vision for integrating generative AI across our ecosystem into the apps and features our users rely on every day. To achieve this goal, we built our own highly capable foundation models that are specialized for everyday tasks. We designed helpful features that are right where our users need them and are easy to use. And we went to great lengths to build a system that protects user privacy, whether requests are processed on-device or in the cloud with Private Cloud Compute, an extraordinary step forward for privacy and AI. Since we launched iOS 18, we've released a number of Apple Intelligence features from helpful Writing Tools to Genmoji, Image Playground, Image Wand, Clean Up, Visual Intelligence and a seamless connection to ChatGPT, we made it possible for users to create movies of their memories with a simple prompt and added AI-powered photo search, smart replies, priority notifications, summaries for mail, messages and more. We've also expanded these capabilities to more languages and regions. With regard to the more personal Siri features we announced, we need more time to complete our work on these features so they meet our high-quality bar. We are making progress and we look forward to getting these features into customers' hands. Turning to sustainability. We just celebrated Earth Day, and we were proud to announce that we've cut our emissions by 60% from our 2015 levels. Today, we're using more clean energy across our operations and more recycled materials in our products than ever. We have worked with suppliers to bring 17.8 gigawatts of renewable electricity online. We're also saving billions of gallons of freshwater and redirecting millions of metric tons of waste from landfills. All of this will help us make important progress towards our goal of carbon neutrality across our supply chain and the life cycle of our products by 2030. Now let me walk you through the impacts of tariffs in the March quarter and give you some color on what we expect for the June quarter. For the March quarter, we had a limited impact from tariffs as we were able to optimize our supply chain and inventory. For the June quarter, currently, we are not able to precisely estimate the impact of tariffs as we are uncertain of potential future actions prior to the end of the quarter. However, for some color, assuming the current global tariff rates, policies and applications do not change for the balance of the quarter and no new tariffs are added, we estimate the impact to add $900 million to our costs. This estimate should not be used to make projections for future quarters as there are certain unique factors that benefit the June quarter. For our part, we will manage the company the way we always have, with thoughtful and deliberate decisions, with a focus on investing for the long term, and with dedication to innovation and the possibilities it creates. As we look ahead, we remain confident, confident that we will continue to build the world's best products and services, confident in our ability to innovate and enrich our users' lives, and confident that we can continue to run our business in a way that has always set Apple apart. Next month, we can't wait to welcome our developer community for the Worldwide Developers Conference, and we look forward to revealing some exciting announcements. With that, I'll turn it over to Kevan." }, { "speaker": "Kevan Parekh", "text": "Thanks, Tim, and good afternoon, everyone. Our March quarter revenue of $95.4 billion was up 5% year-over-year despite a headwind of almost 2.5 percentage points from foreign exchange. We also grew in the majority of the markets we track. Products revenue was $68.7 billion, up 3% year-over-year, driven by growth in iPhone, iPad, and Mac. And thanks to our high levels of customer satisfaction and strong loyalty, our installed base of active devices reached an all-time high across all product categories and geographic segments. Services revenue was $26.6 billion, up 12% year-over-year despite over 2 percentage points of foreign exchange headwinds. And as Tim mentioned, this was an all-time revenue record. We also grew in every geographic segment and saw double-digit growth in both developed and emerging markets. Company gross margin was 47.1%, in the middle of our guidance range and up 20 basis points sequentially primarily driven by favorable mix. Products gross margin was 35.9%, down 340 basis points sequentially, driven by mix, foreign exchange and a seasonal loss of leverage. Services gross margin was 75.7%, up 70 basis points sequentially, primarily driven by a different mix, partly offset by foreign exchange. Operating expenses landed at $15.3 billion, up 6% year-over-year. Net income was $24.8 billion and diluted earnings per share was $1.65, up 8% year-over-year and a March quarter record. Operating cash flow was also strong at $24 billion. Now I'm going to provide some more details for each of our revenue categories. iPhone revenue was $46.8 billion, up 2% year- over-year driven by the iPhone 16 family. The iPhone Active installed base grew to an all-time high in total and in every geographic segment, and iPhone upgraders grew double-digits year-over-year. According to a recent survey from Kantar, during the March quarter, iPhone was a top-selling model in the U.S., urban China, the UK, Germany, Australia, and Japan. And we continue to see high levels of customer satisfaction in the U.S. at 97% as measured by 451 Research. Mac revenue was $7.9 billion, up 7% year-over-year, driven by the latest MacBook Air, MacBook Pro and Mac Mini models. This performance was broad-based with every geographic segment growing year-over-year. Mac installed base reached an all-time high and we saw strong growth for both upgraders and customers new to the Mac. Customer satisfaction was reported at 95% in the U.S. iPad revenue was $6.4 billion, up 15% year-over-year, driven by the new M3-powered iPad Air. The iPad installed base reached another all-time high, and over half the customers who purchased an iPad during the quarter were new to the product. Based on the latest reports from 451 Research, customer satisfaction was 97% in the U.S. Wearables, Home and Accessories revenue was $7.5 billion, down 5% year-over-year. Keep in mind, we did face a more difficult compare against the launch of the Apple Vision Pro in the year ago quarter as well as the Watch Ultra 2 launched last year. At the same time, the Apple Watch installed base reached a new all-time high with over half of customers purchasing an Apple Watch during the quarter being new to the product. And customer satisfaction for Watch in the U.S. was recently measured at 95%. Our Services revenue reached an all-time high of $26.6 billion, up 12% year-over-year. This growth rate was comparable to the December quarter year-over-year growth rate when we removed the negative impact from foreign exchange. We saw strong momentum in the March quarter and the growth of our installed base of active devices gives us great opportunities for the future. Customer engagement across our Services offerings also continue to grow. Both transacting and paid accounts reached new all-time highs, with paid accounts growing double-digits year-over-year. Paid subscriptions also grew double-digits. We have well over 1 billion paid subscriptions across the services on our platform. We continue to improve the quality and breadth of our service offerings from additional features in News+ to new games available on Arcade. Apple Pay continues to help our customers with an easy, secure and private payment solution, and we were pleased to see that our active users in Apple Pay reached an all-time record, up double-digits year-over-year. Turning to enterprise. Organizations are investing more on Apple products and services to drive productivity and employee engagement. For example, KPMG recently rolled out iPhone 16 for all U.S. employees, reflecting their confidence in Apple's security and privacy features. We also continue to see strong Mac performance in enterprise. New Bank, the largest digital bank in Latin America has selected MacBook Air as a standard computer for their thousands of employees. With Vision Pro, companies are continuing to find new and innovative ways to leverage this technology. Dassault Systèmes, a leading provider for engineering and 3D design software has natively integrated Apple Vision Pro into their next-generation platform, bringing a powerful and immersive spatial experience to thousands of enterprise customers. Now let's turn to our cash position and capital return program. We ended the quarter with $133 billion in cash and marketable securities. We had $3 billion in debt maturities and increased commercial paper by $4 billion, resulting in $98 billion in total debt. Therefore, at the end of the quarter, net cash was $35 billion. During the quarter, we returned $29 billion to shareholders. This included $3.8 billion in dividends and equivalents and $25 billion through open market repurchases of 108 million Apple shares. Given the continued confidence we have in our business now and into the future, today, our Board authorized an additional $100 billion for share repurchases as we maintain our goal of getting to net cash neutral. We're also raising our dividend by 4% to $0.26 per share of common stock, and we continue to plan for annual increases in the dividend going forward as we have done for the last 13 years. This cash dividend will be payable on May 15, 2025, to shareholders of record as of May 12, 2025. As we move ahead into the June quarter, I'd like to review our outlook, which includes the types of forward-looking information that Suhasini referred to. Importantly, the color we're providing assumes that global tariff rates, policies and application remain in effect as of this call. And the global macroeconomic outlook doesn't worsen from today for the current quarter. Despite the overall uncertain environment, we will still be providing color at the total company level, subject to these assumptions and the risk factors that we referred to at the beginning of the call. We expect our June quarter total company revenue to grow low to mid-single digits year-over-year. We expect gross margin to be between 45.5% and 46.5%, which includes the estimated impact of the $900 million of tariff-related costs that Tim referred to earlier. We expect operating expenses to be between $15.3 billion and $15.5 billion. We expect OI&E to be around negative $300 million, excluding any potential impact from the mark-to-market of minority investments and our tax rate to be around 16%. With that, let's open the call to questions." }, { "speaker": "Suhasini Chandramouli", "text": "We ask that you limit yourself to two questions. Operator, may we have the first question, please?" }, { "speaker": "Operator", "text": "Certainly. We'll go ahead and take our first question from Erik Woodring with Morgan Stanley." }, { "speaker": "Erik Woodring", "text": "Great, thanks so much guys for taking my questions. Tim, I'd love to maybe touch on the tariff point first. There were comments from you earlier on CNBC talking about 50% of iPhones for the U.S. currently coming from India. Where do you expect the mix of India-sourced iPhones for the U.S. to be by the end of your fiscal year? And is it the goal to source 100% of your U.S.-bound iPhones from India? Can you just help us understand kind of how we should expect that to trend as we look beyond just the June quarter? And then I have a follow-up. Thank you." }, { "speaker": "Tim Cook", "text": "Yes, Erik, hi. It's Tim. The existing tariffs that apply to Apple today are based on the product's country of origin as you alluded to. For the June quarter, we do expect the majority of iPhones sold in the U.S. will have India as their country of origin and Vietnam to be the country of origin for almost all iPad, Mac, Apple Watch, and AirPods products sold in the -- also sold in the U.S. China would continue to be the country of origin for the vast majority of total product sales outside the U.S. And so if you look at the categories of tariffs that are applicable to us today, for the June quarter, most of our tariff exposure relates to the February IEEPA-related tariff at the rate of 20%, which applies to imports to the U.S. for products that have China as their country of origin. In addition, for China, there was an additional 125% tariff for imports of certain categories of products announced in April. And for us, that's some of our U.S. AppleCare and Accessories businesses and brings the total rate in China for these products to at least 145%. Also for transparency and clarity, the vast majority of our products, including iPhone, Mac, iPad, Apple Watch, and Vision Pro, are currently not subject to the global reciprocal tariffs that were announced in April as the Commerce Department has initiated a Section 232 investigation into imports of semiconductors, semiconductor manufacturing equipment and downstream products that contain semiconductors. And so if you -- for the June quarter, as I talked about in the -- in my opening comments, we estimate the impact, assuming that the current global tariff, rates, policies and applications don't change for the balance of the quarter, to be 900 million to our costs. I wouldn't want to predict the mix of production in the future, but I wanted to give you clarity for the June quarter of where the country of origins are so you can use that for your modeling." }, { "speaker": "Erik Woodring", "text": "Okay. I appreciate that color. Thank, Tim. And then maybe my follow-up is there were a number of reports during the quarter that Apple had pulled forward sell-in into the channel to get ahead of tariffs. So can you just help us better kind of understand or clarify if sell-in and sell-through were aligned in the March quarter? If you're assuming that they would be aligned in the June quarter guide? And ultimately, do you believe that consumers are accelerating hardware purchases to get ahead of any potential pricing increases or was behavior normal? Thank you so much, Tim." }, { "speaker": "Tim Cook", "text": "Yes. Thanks, Erik, for the question. There are several questions there. One, in terms of the pull forward in demand, if you look at the March quarter, we don't believe that we saw obvious evidence of a significant pull forward in demand in the March quarter due to tariffs. If you look at our channel inventory, from the beginning of the quarter to the end of the quarter, the unit channel inventory was similar, not only for iPhone but for the balance of our products. Again, for transparency, you will see that we did build ahead inventory, and that's reflected in our manufacturing purchase obligations that you'll see on the quarterly filing when it comes out. So I hope that makes the -- answers all your questions." }, { "speaker": "Erik Woodring", "text": "Thank you so much, Tim. Good Luck." }, { "speaker": "Tim Cook", "text": "Thanks." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Eric. Operator, could we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Ben Reitzes with Melius. Please go ahead." }, { "speaker": "Ben Reitzes", "text": "Hi, thanks a lot. Tim, if you had told me that on April 2 that your hit from tariffs was only a nickel-ish a quarter at 900 million, that would have been a pretty good outcome, given the panic that ensued. I'm surprised that it's that low. But then you did make a comment about after the June quarter, and sorry to push you on that, but could it be a multiple of that figure or is it just completely unknown? We're all just trying to figure out what happens after June. And if there's just any guidance you guys can possibly give that it's bigger, smaller or what? And hoping you can just give us a little color on that. Thanks." }, { "speaker": "Tim Cook", "text": "Yes, Ben. Thanks for the question. I tried to give you some information in the previous question about the country of origin, which currently is the key factor in determining the tariffs that we're paying. I don't want to predict the future because I'm not sure what will happen with the tariffs, and there is the Section 232 investigation going on. And so it's very difficult to predict beyond June. And June has the assumptions in it that I had mentioned earlier." }, { "speaker": "Ben Reitzes", "text": "All right, Tim. And then just with regard to China down 2%, I mean, you intuitively would have thought there would have been an increased nationalism there and perhaps it would have been worse than that. And the trajectory there improving even with subsidies because subsidies benefited your competitors, too. Just wondering if I could get a little more color there. Can it keep improving? What are you thinking with regard to that trajectory in China, given all the geopolitical tensions? Thanks." }, { "speaker": "Tim Cook", "text": "Yes, we were down 2%, as you point out, for the March quarter. And to provide a little more transparency around that, we were roughly flat when you remove the headwinds from foreign exchange. And so we did see quite a bit of sequential improvement from the December quarter, which was down 11. And again, for going out of the way for transparency, the channel inventory at the end of March, the unit channel inventory was similar to where we started the quarter. So there wasn't a build of channel inventory in there. I do believe that the subsidies played a favorable impact on the results. It's difficult to estimate with precision as to exactly how much, but I think it was positive. Some of our products are included. Some of them are not. Generally, on iPhone, if something is priced above RMB6,000, it is not eligible for the subsidy and the other products have different rules. But I do think it helped. And I think it's helping others as well, I'm sure. iPhone was the key driver of the improvement sequentially. And so hopefully, that provides you some color. The other thing I would say is that the Mac, the iPad, and the Watch are attracting a majority of customers new to that product. And so that continues to look quite good in China. And iPhone was the top two models in urban China, and iPad was the top two tablets in urban China. So there's some positive nuggets there." }, { "speaker": "Ben Reitzes", "text": "Thanks a lot, Tim." }, { "speaker": "Tim Cook", "text": "Yes. Thank you, Ben." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Ben. Operator, may we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Michael Ng with Goldman Sachs. Please go ahead." }, { "speaker": "Michael Ng", "text": "Hi, good afternoon. Thank you very much for the question. I was just wondering if you could talk a little bit about your responses on some of this trade policy uncertainty. I appreciated the transparency around building ahead with inventory. Will you continue to do that in this interim period until we get some clarity on Section 232 investigation? And could you talk a little bit about your philosophy on pricing, elevated costs to the extent that comes through, whether that be to resellers or end consumers and other efficiency efforts that you might be able to pursue? Thank you." }, { "speaker": "Tim Cook", "text": "Yes. Obviously, we're very engaged on the tariff discussions. We believe in engagement and we'll continue to engage. On the pricing piece, we have nothing to announce today. And I'll just say that the operational team has done an incredible job around optimizing the supply chain and the inventory. And we'll obviously continue to do those things to the degree that we can." }, { "speaker": "Michael Ng", "text": "Great. Thanks. And just as a quick follow-up for Kevan, on product gross margins, I was just wondering if you could provide a little bit more color on some of the factors that may have impacted product gross margins in the quarter. Obviously, down sequentially on seasonal factors but there was a year-over-year decline as well. So any additional color would be helpful? Thank you." }, { "speaker": "Kevan Parekh", "text": "Yes, Michael, thanks. This is Kevan. So on the sequential, as we mentioned in the prepared remarks, we had a decrease in the product gross margin by 340 basis points sequentially. That was primarily driven by mix, seasonal loss of leverage, foreign exchange and that was partly offset by cost savings. And when we look at the year-on-year performance, we were down 70 basis points on a year-on- year basis. And that was driven by a different mix and foreign exchange." }, { "speaker": "Michael Ng", "text": "Thank you." }, { "speaker": "Kevan Parekh", "text": "Thank you." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Mike. Operator, could we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Amit Daryanani with Evercore. Please go ahead." }, { "speaker": "Amit Daryanani", "text": "Thanks a lot. I guess I'll have to start with a tariff question as well. Tim, I think when you talked about the 900 million impact to your cost of goods sold, you sort of had a statement that there are certain unique factors that benefit you in the June quarter related to that number. Can you just talk about what are these unique factors that are benefiting you in the June quarter? And what would the impact be without those benefits essentially?" }, { "speaker": "Tim Cook", "text": "I wouldn't want to go through all of them. But as an example, the build ahead that is -- I mentioned earlier that's in the manufacturing purchase obligations is -- were helpful." }, { "speaker": "Amit Daryanani", "text": "Got it. And then as I think about the June quarter guide of low to mid-single-digit revenue growth, I was wondering, do you folks expect services growth to remain in the double-digit range as you go into the back half of the year? I imagine FX is a bit of a benefit as you go to the back half. I would love to just understand, within that framework, how do you think services stacks up as you go through the June quarter?" }, { "speaker": "Kevan Parekh", "text": "Yes, Amit. Hi, it's Kevan. So I think when we talk about the overall June quarter, we talk about the low to mid-single digits year- over-year. We do expect foreign exchange in the June quarter to improve sequentially. However, we are expecting it to be a slight headwind to revenue on a year-on-year basis. With respect to services, given the uncertainty we see from several factors, we aren't providing the category level of color today." }, { "speaker": "Amit Daryanani", "text": "Got it. Thank you." }, { "speaker": "Kevan Parekh", "text": "Thank you." }, { "speaker": "Suhasini Chandramouli", "text": "Thanks, Amit. Operator, could we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Wamsi Mohan with Bank of America. Please go ahead." }, { "speaker": "Wamsi Mohan", "text": "Yes. Thank you. Tim or Kevan, how should investors think about the gross margin trajectory as you source more from the U.S. in particular or other supply chain changes that you are making, including in India? How should those kind of play into the cost structure and how should we think about that gross margin trajectory and I will follow-up?" }, { "speaker": "Tim Cook", "text": "We're excited about bringing more production to the U.S. As you know, we've been very key in the TSMC project in Arizona and are the largest and first customer getting product out of that. And that's the SoC that's coming out of there. We also have glass coming out of the U.S. and the Face ID module and loads of chips. In fact, there's 19 billion chips coming out across 12 states. This is down to the resistor and capacitor level, obviously. And so there's some that is already built into the margins that Kevan has quoted. And we don't really forecast beyond the current quarter as you know." }, { "speaker": "Kevan Parekh", "text": "Yes, maybe I'll add a couple of more points as we think about just the margin going forward. A couple of observations I'd mention is every product cycle is different and over the years we have managed gross margin well. We've made good decisions balancing units revenue margins. When we launch new products, they tend to have a higher cost structure than the products they replace as we introduce new features and technologies. We do have a good track record of reducing those costs and structures over the life of the product. And our products and services all have different levels of profitability and their relative success in the marketplace has an impact on the overall gross margin. So I hope that's helpful color and context for you." }, { "speaker": "Wamsi Mohan", "text": "No, that's super helpful. Thank you. I guess you just noted that you weren't going to give services maybe a growth forecast here in light of some of the uncertain news. But maybe, Tim, could you share any color around what you have seen in developer behavior in areas like Europe where there has now been emergence of alternate app stores for a little more time? What have you seen anecdotally or within your data in terms of maybe develop a behavior, whether it's large or small? Any color you can share on what has like actually happened?" }, { "speaker": "Tim Cook", "text": "It's embedded in our results that Kevan talked about earlier and embedded in the overall company color that was provided. But as you know, the Digital Markets Act went into effect in, I believe it was March of last year. And so the Digital Markets Act has been enacted for a bit over a year and there's been alternate app stores for some period of time of that. And so it's -- at this point in Europe, there are some embedded in the actuals. There may be more to come and so forth. I don't want to predict beyond the current quarter." }, { "speaker": "Wamsi Mohan", "text": "Okay. Thank you, Tim." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Wamsi. Operator, could we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from David Vogt with UBS. Please go ahead." }, { "speaker": "David Vogt", "text": "Great. Thanks, guys. Thanks for taking my question. So I've got two as well, and Tim, this is more of a big picture supply chain philosophical question. So can you maybe update us on your thoughts on how you're thinking about your resiliency and redundancy, following the change that you guys talked about earlier on the call? I guess what I'm trying to understand is how do we think about where your supply chain is two to three years from now? And is there any risk, at least in the near term, of maybe some export control issues in your outlook for the balance of this year? And I'll give you my second one at the same time. You quantified a $900 million hit from tariffs. Or Kevan, is there any impact in how you're thinking about the demand backdrop in your outlook for the June quarter on the revenue line holistically? Thanks." }, { "speaker": "Tim Cook", "text": "In terms of the resiliency and risk, et cetera, there -- we have a complex supply chain. There's always risk in the supply chain. And so I wouldn't tell you anything different than that. What we learned some time ago was that having everything in one location had too much risk with it. And so we have, over time, with certain parts of the supply chain, not the whole thing, but certain parts of it opened up new sources of supply. And you could see that kind of thing continuing in the future. I'll let Kevan answer the other question." }, { "speaker": "Kevan Parekh", "text": "Hi, David. On the other question, I would say that our best thinking is captured in the outlook that we provided. However, I did want to reemphasize the point that the assumptions we made on the outlook do assume that the global tariff rates, the policies and application remain the same as they are today as of this call and that the global macroeconomic outlook doesn't worsen from today." }, { "speaker": "David Vogt", "text": "Okay. But no quantifiable impact on demand to date, at least from where we are over the last month? Is there a way to kind of think about that from early April to early May?" }, { "speaker": "Kevan Parekh", "text": "I would say our best thinking is reflected in the range that we provided." }, { "speaker": "David Vogt", "text": "Okay. Thanks, Kevan. Thanks, guys." }, { "speaker": "Kevan Parekh", "text": "Thank you." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, David. Operator, could we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Samik Chatterjee with JPMorgan. Please go ahead." }, { "speaker": "Samik Chatterjee", "text": "Hi. Good afternoon. Thanks for taking my questions. I guess, Tim, you made a comment on the last earnings call about Apple Intelligence making a visible impact on iPhone sales in the countries where it was available. I'm just curious if you continue to see that play out similarly in the more broader number of countries you've rolled that out. Or the delays that you talked about related to Siri, personalized Siri features, has that had an impact in terms of consumer willingness to upgrade? And I have a follow-up. Thank you." }, { "speaker": "Tim Cook", "text": "Yes, thank you for the question. During the March quarter, we saw that in markets where we had rolled out Apple Intelligence, that the year-over-year performance on the iPhone 16 family was stronger than those where Apple Intelligence was not available. A lot of the languages that I think you're referring to rolled out in April and so they actually rolled out in Q3." }, { "speaker": "Samik Chatterjee", "text": "Okay, got it. Then maybe for my follow-up, I mean, you have a lot of insights now in terms of what consumers or how consumers are reacting to the overall macro. And I know you prefaced all your guidance with macro remaining consistent. But how -- what are you seeing in terms of the U.S. consumer? And what's the reaction there in terms of the tariff impact? We saw U.S. GDP also shrink here in 1Q. When you look at velocity at the stores or trade down within the iPhone portfolio mix, what are you seeing in terms of how the consumer is reacting to the macro at this point? Thank you." }, { "speaker": "Tim Cook", "text": "I'm not an economist and so I'd start by saying that. In terms of the -- as you can see from a total company point of view, our results accelerated sequentially to the 5% level. And the U.S. is obviously the vast majority of the Americas segment, and you can see how the Americas performed during the quarter. And so that's all I want to say about that. I don't want to try to predict what happens in the months from now. The past, I'm quite pleased with the results from Q2." }, { "speaker": "Samik Chatterjee", "text": "Thank you. Thanks for taking the questions." }, { "speaker": "Tim Cook", "text": "Yes." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Samik. Operator, could we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Krish Sankar with TD Cowen. Please go ahead." }, { "speaker": "Krish Sankar", "text": "Yes, hi. Thanks for taking my question. I have two of them, too. Tim, thanks for that information on the $500 billion U.S. investment. I'm kind of curious how to think about the composition of that? How much is CapEx versus R&D? How much is going into like the Texas server? How much is going into maybe TSMC Arizona? Any kind of color you can give on that $500 billion investment would be helpful. And then I had a follow-up." }, { "speaker": "Tim Cook", "text": "Well, there's lots of all of it is what I would say. We're not giving out the exact split, but as we expand facilities in the different states from Michigan to Texas to California and Arizona and Nevada and Iowa and Oregon and North Carolina and Washington, there will be CapEx involved in that and OpEx involved in it. And standing up a server -- advanced server manufacturing in Texas, we did that through a partner. We do our manufacturing through a partner, but we'll be putting a fair amount in cost of goods sold to do that and some OpEx as well, and I'm sure some CapEx as well. And so it's a bit of all of it." }, { "speaker": "Krish Sankar", "text": "Got it, got it. And then kind of had like a long term, more like a philosophical question. When you look at -- in the past, you've spoken about AI on the Edge. Obviously, it's very topical to hear from both the iPhone angle and the Mac angle. But I'm just kind of curious, when you look at AI on Edge, are the current smartphone specs or improved hardware and silicon specs good enough to meet future Edge LLM for inference? Or do you think you need somewhat of a whole new different kind of device? Just kind of curious how to think about the evolution of the Edge devices from here." }, { "speaker": "Tim Cook", "text": "Yes. As you know, we're shipping an LLM on the iPhone 16 today. And there are -- some of the queries that are being used by our customers are on-device, and then others go to the private cloud where we've essentially mimicked the security and privacy of the device into the cloud. And then others, for world knowledge, are with the integration with ChatGPT. And so there's -- we continue to be very excited about the opportunities here. We are very excited about the road map, and we are pleased with the progress that we're making." }, { "speaker": "Krish Sankar", "text": "Thanks, sir." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Krish. Operator, could we get the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Richard Kramer with Arete Research. Please go ahead." }, { "speaker": "Richard Kramer", "text": "Thank you very much. Wanted to ask about tariffs. Tim, given your recognition that a new Siri system is taking longer than you thought to deliver, I'd like to go back to my question from the last call and ask about what some of the learnings you had from those delays and whether you attribute them to organizational factors, to your legacy software stack? Or is it a matter of R&D spending? And what are some of the key gating factors investors should look for either at WWDC or beyond to have a sense that Apple can deliver on some of the promises of the announcements of the prior WWDC? Thanks." }, { "speaker": "Tim Cook", "text": "Yes. If you sort of step back from what we said at WWDC, we talked about a number of different features that would launch with iOS 18. And we've released a slew of those from Writing Tools to seamlessly connecting to ChatGPT to Genmoji to Image Playground to Image Wand to Clean Up and Visual Intelligence, making movies or movies of your memories with a simple prompt, AI-powered photo search, smart replies, priority notifications, the list goes on. And so we've delivered a lot, and we've just recently, just a few weeks ago, expanded it into several different languages, including French, German, Italian, Portuguese, Spanish, Japanese, Korean, simplified Chinese as well as localized English for both Singapore and India. So we've delivered a lot. However, with regard to the more personal Siri, as you mentioned, we just need more time to complete the work so they meet our high-quality bar. And there's not a lot of other reason for it. It's just taking a bit longer than we thought. But we are making progress, and we're extremely excited to get the more personal Siri features out there." }, { "speaker": "Kevan Parekh", "text": "And Richard, I'll just add that on your question about investment that we don't underestimate -- underinvest in our business. We make significant investments in R&D. That continues to grow. We're continuing to grow our R&D investment. And so we definitely are making all the investments we think we need to enable our road map." }, { "speaker": "Richard Kramer", "text": "Thanks. And Kevan, 1 for you. I mean, it's hard to ignore some of the ongoing very high-profile legal cases that touch on Apple, be it yesterday's Epic case injunction or the Google antitrust trial touching on default search. And investors are clearly concerned that these might have material impacts on your Services business. Do you feel now that you have ample ways in which you might be able to mitigate some of the potential negative impacts on Apple Services business that might come about from what's been proposed or might come about in legal rather than commercial pressures that the business faces?" }, { "speaker": "Tim Cook", "text": "Let me make a couple of comments on that before Kevan. The case yesterday, we strongly disagree with. We've complied with the court's order and we're going to appeal. In the DOJ case that you referenced with Google, that case is ongoing and I don't really have anything to add beyond that. And so we're monitoring these closely. But there -- as you point out, there's risk associated with them and the outcome is unclear." }, { "speaker": "Kevan Parekh", "text": "Yes, I think Tim answered it really well. I don't have anything to add to that." }, { "speaker": "Richard Kramer", "text": "Thank you." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Richard. Operator, we will take our last question, please." }, { "speaker": "Operator", "text": "We'll go ahead and take our last question from Aaron Rakers with Wells Fargo. Please go ahead." }, { "speaker": "Aaron Rakers", "text": "Yes, thanks for taking the question. I want to go back to the AI strategy a little bit. I know, Tim, in your prepared comments, you had mentioned building some of your own foundational models. And I'm curious of how important you think it is for Apple to have their own foundational models. And kind of dovetailed with that is that, how do you think about your data center footprint when we look at Apple spending, call it, 3 billion a quarter relative to some of these other companies spending multiples of that. How does the strategy play out in your opinion?" }, { "speaker": "Tim Cook", "text": "Well, we -- on the data center side, we have a hybrid strategy. And so we utilize third parties in addition to the data center investments that we're making. And as I've mentioned in the 500 billion, there's a number of states that we're expanding in. Some of those are data center investments. And so we do plan on making investments in that area and we're not gating it. We invest in the business first, as Kevan talked about, is our most important thing to do. In terms of the foundation models, we want to have certain models and we'll partner as well. And so I don't view it as a -- all of one or all of the other. We've been working on foundation models for quite some time and are shipping some today, obviously, with what's on-device and what's in the Private Cloud Compute." }, { "speaker": "Aaron Rakers", "text": "Yes. And then as a follow-up, I'm curious with the iPhone 16e launching this quarter, internalizing your C1 modem, I'm curious of how you see kind of the modem strategy playing out or maybe just the continual deepening of that internal silicon opportunity for Apple?" }, { "speaker": "Tim Cook", "text": "We're super excited to ship the first 1 and get it out there and it's gone well. We love that we can produce better products from a point of view of really focusing on battery life and other things that customers want. And so we're -- we have started on a journey is the way I would put it." }, { "speaker": "Aaron Rakers", "text": "Thank you." }, { "speaker": "Tim Cook", "text": "Yes." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Aaron. A replay of today's call will be available for two weeks on Apple Podcasts, as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 3729688 followed by the pound sign. These replays will be available by approximately 5 PM Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142, and financial analysts can contact me, Suhasini Chandramouli with additional questions at 408-974-3123. Thank you again for joining us today." }, { "speaker": "Operator", "text": "Once again, this does conclude today's conference. We do appreciate your participation." } ]	Apple Inc.	24,937
AAPL	1	2,025	2025-01-30 17:00:00	Suhasini Chandramouli: Good afternoon, and welcome to the Apple Q1 Fiscal Year 2025 Earnings Conference Call. My name is Suhasini Chandramouli, Director of Investor Relations. Today's call is being recorded. Speaking first today are Apple CEO, Tim Cook, and he will be followed by CFO, Kevan Parekh. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, and future business outlook, including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks. Tim Cook: Thank you, Suhasini. Good afternoon, everyone, and thanks for joining the call. Before I talk about our results I'd like to take a moment to acknowledge the devastating wildfires that impacted the Los Angeles area this month. From our retail teams to Apple TV+, Apple Music, Fitness Plus, Beats and more LA is home to many of our team members. Our thoughts are with everyone who is beginning the road to recovery. For our part, we are contributing to the relief efforts and we will continue to support our teams and the local community. Now turning to the quarter. Today, Apple is reporting revenue of $124.3 billion for the December quarter, up 4% from a year ago, and an all-time record. EPS also set an all-time record of $2.40, 10% higher year-over-year. We achieved all-time revenue records across the majority of the countries and regions we track, including the Americas, Europe, Japan, and the rest of Asia Pacific. We also continue to see momentum in emerging markets, setting all-time revenue records in a number of markets, including Latin America, the Middle East, and South Asia, among others. In services, we achieved an all-time revenue record, and in the past year, we've seen nearly $100 billion in revenue from our services business. I'm also pleased to announce that we reached a new record for our installed base with over 2.35 billion active devices. In October, we released the first set of Apple Intelligence features in U.S. English for iPhone, iPad, and Mac, and we rolled out more features and expanded to more countries in December. Now users can discover the benefits of these new features in the things they do every day. They can use writing tools to help find just the right words, create fun and unique images with Image Playground and Genmoji, handle daily tasks and seek out information with a more natural and conversational Siri, create movies of their memories with a simple prompt, and touch up their photos with clean up. We introduced visual intelligence with camera control to help users instantly learn about their surroundings. Users can also seamlessly access chat GPT across iOS, iPadOS and MacOS. And we were excited to recently begin our international expansion with Apple Intelligence now available in Australia, Canada, New Zealand, South Africa, and the U.K. We're working hard to take Apple Intelligence even further. In April, we're bringing Apple Intelligence to more languages, including French, German, Italian, Portuguese, Spanish, Japanese, Korean, and simplified Chinese, as well as localized English to Singapore and India. And we'll continue to roll out more features in the future, including an even more capable Siri. Apple Intelligence builds on years of innovations we've made across hardware and software to transform how users experience our products. Apple Intelligence also empowers users by delivering personal context that's relevant to them. And importantly, Apple Intelligence is a breakthrough for privacy and AI with innovations like Private Cloud Compute, which extends the industry-leading security and privacy of Apple devices into the cloud. Apple Intelligence opens up an exciting new frontier and is already elevating experiences across iPhone, iPad, and Mac. We're going to keep investing in innovation and in transformative tools that help users in their everyday lives. Let me now turn to our results for the quarter, starting with iPhone. iPhone revenue came in at $69.1 billion, reaching all-time iPhone revenue records in dozens of markets and regions. Our iPhone 16 lineup takes the smartphone experience to the next level in so many ways, and Apple Intelligence is one of many reasons why customers are excited. With the A18 powered iPhone 16 and iPhone 16 Plus, users are getting a big boost in battery life and incredible camera experiences with camera control. Our amazingly powerful iPhone 16 Pro models go even further with larger-than-ever displays and a pro camera system so advanced it can turn moments into masterpieces. In Mac, revenue was $9 billion for the December quarter, 16% higher year-over-year, driven by significant excitement around the world for our latest Mac lineup. The Mac is more than just a powerful tool. It's a launchpad to enable users to bring their best ideas and boldest creations to life. And there are so many reasons to choose Mac, from the breathtaking performance of the M4 family of chips to the groundbreaking and growing capabilities of Apple Intelligence. Every product in the Mac lineup offers something extraordinary, whether that's the super portable MacBook Air, the powerhouse MacBook Pro, the world's best all-in-one iMac, or the small wonder that is the Mac Mini, which is not only stunningly capable, but is our first carbon neutral Mac. All of this is enabled by the unparalleled power of Apple Silicon. iPad revenue was $8.1 billion, up 15% from a year ago, driven by strong interest for our latest products. We love hearing from customers, who are discovering for the first time the versatility of iPad from the ultra-portal iPad Mini, built from the ground up for Apple intelligence, to the powerful M4 iPad Pro in a stunningly thin and light design. iPad is there for our users whenever they need it and wherever they go and we are pleased to see so much excitement and enthusiasm for our lineup. Wearables home and accessories revenue came in at $11.7 billion. With its most advanced display yet and a thinner more comfortable design, the all-new Apple Watch Series 10 is the perfect companion to help users pursue their health and fitness goals this year. From the powerful Vitals app to more customizable activity rings, users have an ever-increasing set of innovative health tools at their fingertips and watchOS 11. Health innovation has long been a focus for us, and we're committed to continuing to advance this work, because we know how much it matters to our users. We've introduced new hearing health features on AirPods Pro 2, and new sleep apnea notifications on Apple Watch are also helping users learn of a potentially serious condition that's thought to affect up to a billion people worldwide. During the quarter, we also brought Apple Vision Pro to even more countries, enabling more customers to discover the magic of spatial computing. Users are enjoying incredible immersive entertainment experiences and powerful new features and enhancements to Mac virtual display. Vision Pro is also supercharging the creative process and the incredibly talented director John M. Chu recently shared how its extraordinary capabilities helped him bring the movie Wicked to life. Turning to services, we set an all-time revenue record of $26.3 billion for the December quarter, growing 14% from a year ago. We set all-time records in the Americas, Europe, and rest of Asia-Pacific, and a December quarter record in Japan. Five years since launch, Apple TV+ continues to be home to incredible storytelling that viewers love. There's nothing quite like the anticipation that comes when a fan favorite returns, and we were thrilled to debut the second season of Severance earlier this month. We have so much in store for our subscribers this year with new shows like The Studio and Your Friends and Neighbors. And we can't wait for the premiere of Formula 1 starring Brad Pitt on June 27, which will take viewers inside the sport in a truly unprecedented way. We're excited that Apple TV+ continues to draw attention and accolades. To-date, Apple TV+ productions have earned more than 2,500 nominations and 538 wins. During the quarter, we were also excited to launch a new Find My Service that can help our users when they lose their luggage. For the first time, if you put an air tag in your suitcase, you'll be able to share its location information with many major airlines, so they can quickly track down your bags if they get lost. Turning to retail, our teams went above and beyond to help customers find the perfect gift throughout the holiday season. We also celebrated openings of new stores in China, Spain, and the U.S. and we were excited to announce plans to connect with even more customers this year by adding a fifth store in the UAE and bringing our online store to Saudi Arabia this summer. We can't wait to welcome customers to the first of several flagship store locations in Saudi Arabia that were opening beginning in 2026. I just had the chance to visit both countries last month, and I had a great time meeting with customers and team members. There's an incredible energy and passion for technology in these growing markets. Every day, I get deeply moving notes about the many ways our technology is enriching our users' lives. I recently got a note from a customer who put his watch on his father's wrist when he feared something was wrong with him. The watch alerted them that the father was an AFib and they were able to get him to the hospital for potentially life-saving treatment. Another user put his new watch on for the first time and within 15 minutes was notified of a low heart rate that led to a necessary pacemaker. And there are so many touching notes around the profound impact of our new hearing health feature like a recent user who told me it had changed her life, allowing her to take part in conversations with her children and grandchildren. These are the kind of stories that remind us of how profoundly important our work is, and it drives us to innovate each and every day. At Apple, the future is full of promise and potential. We're always searching across a world of possibilities, finding those places where we can do the most good and putting all of our energy and ingenuity into making something special. With that, I'll turn it over to Kevin. Kevan Parekh: Thanks Tim, and good afternoon everyone. I'm going to cover the results for the first quarter of our fiscal year. We are very pleased to report an all-time high for revenue with December quarter revenue of $124.3 billion, up 4% year-over-year. We achieved all-time revenue records in the Americas, Europe, Japan, and rest of Asia Pacific and grew in the vast majority of markets we track. Products revenue was $98 billion, up 2% year-over-year, driven by growth from iPad and Mac. Thanks to our incredible customer satisfaction and strong loyalty, our installed base of active devices reached an all-time high across all products and geographic segments and is now over 2.35 billion active devices. Services revenue reached an all-time record of $26.3 billion, up 14% year-over-year. We grew in every geographic segment and achieved all-time records in both developed and emerging markets. Company gross margin was 46.9% at the high-end of our guidance range and up 70 basis points sequentially, primarily driven by favorable mix. Products gross margin was 39.3%, up 300 basis points sequentially, primarily driven by favorable mix and leverage. Services gross margin was 75%, up 100 basis points sequentially, primarily driven by mix. Operating expenses of $15.4 billion landed at the midpoint of our guidance range and up 7% year-over-year. This strong business performance resulted in all-time records for both net income at $36.3 billion and diluted earnings per share of $2.40, up 10% year-over-year. Operating cash flow was also strong at $29.9 billion, which included the impact of the $11.9 billion we paid during the quarter in connection with the state aid decision. Now, I'm going to provide some more details for each of our revenue categories. iPhone revenue was $69.1 billion, roughly flat to the prior year. We grew in the majority of markets we track and reached all-time revenue records in several developed markets, including Canada, Western Europe, and Japan and in emerging markets like Latin America, the Middle East, and South Asia. The iPhone Active installed base grew to an all-time high in total in an average geographic segment. We also set an all-time record for upgraders. According to a recent survey from Kantar during the December quarter, iPhone was a top-selling model in the U.S., Urban China, India, the U.K., France, Australia, and Japan. We continue to see high levels of customer satisfaction in the U.S. at 96% as measured by 451 research. Mac generated $9 billion in revenue, up 16% year-over-year. We saw strength across our lineup from the new Mac Mini to the latest MacBook Air and MacBook Pro models. This incredible performance was broad-based with double-digit growth in every geographic segment. With our latest advances in Apple Silicon and our fastest neural engine ever, customers are able to take advantage of the full capabilities of AI and Mac. The Mac installed base reached an all-time high and we saw a double-digit growth for both upgraders and customers new to the Mac. Additionally, customer satisfaction in the U.S. was recently measured at 94%. iPad revenue was $8.1 billion, up 15% year-over-year, driven by the new iPad Mini and latest iPad Air. The iPad installed base reached another all-time high, and over half of the customers who purchased an iPad during the quarter were new to the product. Customer satisfaction was at 96% in the U.S. based on the latest reports from 451 Research. Wearable's home and accessories revenue was $11.7 billion, down 2% year-over-year. Customers are excited about the new AirPods 4 and the latest hearing health features in AirPods Pro 2. On watch, although we face a difficult compare against the watch Ultra 2 launch last year, the Apple Watch installed base reached a new all-time high, with over half of customers purchasing an Apple Watch during the quarter being new to the product. Customer satisfaction for watch in the U.S. was reported at 94%. Our services revenue reached an all-time high of $26.3 billion, up 14% year-over-year. Services continues to see strong momentum, and the growth of our installed base of active devices gives us great opportunities for the future. We also see increased customer engagement with our services offerings. Both transacting and paid accounts reached new all-time highs, with paid accounts growing double-digits year-over-year. Paid subscriptions also grew double-digits. We have well over 1 billion paid subscriptions across the services on our platform. We remain focused on improving the breadth and quality of our services offerings, from new games on Apple Arcade to exciting new programming on Fitness Plus, and the continued expansion of features like Tap to Pay, now live in 20 markets. Turning to enterprise, we have seen businesses continue to expand their deployments of our products and services. Deutsche Bank launched its Mac as Choice program for the developers and also issued the latest MacBook Air as a standard computer for their entire mortgage lending division. And we're excited to see leading enterprises such as SAP leverage Apple Intelligence in the U.S., with features like writing tools, summarize, and priority notifications to enhance both their employee and customer experiences. We also see strong demand in our emerging markets. For example, Zomato, a leading food ordering and delivery company in India, has deployed 1,000 of Macs across their workforce to foster innovation. In Vision Pro continues to see more use cases in enterprise, with Cisco's new spatial meetings delivering a fully immersive video conferencing experience for remote collaboration and learning. Let me quickly summarize our cash position and capital return program. We ended the quarter with $141 billion in cash and marketable securities. We repaid $1 billion in maturing debt and decreased commercial paper by $8 billion, resulting in $97 billion in total debt. Therefore, net cash at the end of the quarter was $45 billion. During the quarter, we returned over $30 billion to shareholders. This included $3.9 billion in dividends and equivalents and $23.3 billion through open market repurchases of 100 million Apple shares. As usual, we will provide an update to our capital return program when we report results for the March quarter. As we move ahead into the March quarter, I'd like to review our outlook which includes the types of forward-looking information that Suhasini referred to at the beginning of the call. The color we're providing today assumes that the macroeconomic outlook doesn't worsen from what we're projecting today for the current quarter. As the dollar is strengthened significantly, we expect foreign exchange to be a headwind and to have a negative impact on revenue of about 2.5 percentage points on a year-over-year basis. Despite that headwind, we expect our March quarter total company revenue to grow low to mid-single-digits year-over-year. We expect services revenue to grow low-double-digits year-over-year. When you remove the negative impact of the foreign exchange headwinds I described earlier, the year-over-year growth rate would be comparable to that of the December quarter. We expect gross margin to be between 46.5% and 47.5%. We expect operating expenses to be between $15.1 billion and $15.3 billion. We expect OI&E to be around negative $300 million, excluding any potential impact from the mark-to-market of minority investments, and our tax rate to be around 16%. Finally, today our Board of Directors has declared a cash dividend of $0.25 per share of common stock payable on February 13, 2025, to shareholders of record as of February 10, 2025. With that, let's open to call the questions. Suhasini Chandramouli: Thank you, Kevin. We ask that you limit yourself to two questions. Operator, may we have the first question please? Operator: Certainly, we will go ahead and take our first question from Erik Woodring with Morgan Stanley. Please go ahead. Erik Woodring: Great guys, Thanks so much for taking my questions. Tim, in your prepared remarks, you had noted that iPhone 16 models are selling better in markets where Apple Intelligence is available? And I'm just wondering if you could double-click on that comment a bit and share any other details you believe could better help us understand how Apple Intelligence is really impacting iPhone demand and/or what features you find that users are using most often already? And then I just have a quick follow-up. Thank you. Tim Cook: Yes, Eric. Hi, it's Tim. The -- we did see that the markets where we had rolled out Apple Intelligence, that the year-over-year performance on the iPhone 16 family was stronger than those where Apple Intelligence was not available. In terms of the features that people are using, they're using all of the ones that I'd referenced in my opening comments from writing tools to image playground and Genmoji to visual intelligence and more. And so we see all of those being used. The cleanup is another one that is popular and people love seeing that one demoed in the stores as well. We only had 2, 2.5 weeks or so during the December quarter of the second release of [18.2] (ph) and then only had the U.K. and the other English language countries for the 2.5 weeks. And so we've got just the early indications at the moment, but we were glad… Erik Woodring: Okay, that's really helpful. Tim Cook: Yes. Erik Woodring: Okay, thank you for that, Tim. It's helpful. And then, you know, if we just touch on China, obviously, in the news fairly frequently, if we set aside China Macro, which I understand is still challenging, can you maybe talk about the headwinds that that Apple faces, whether that's, you know, shifting preferences for Western technology brands in favor of domestic vendors, or is this just a function of not necessarily having Apple intelligence available with the iPhone 16, which is, you know, not necessarily helping replacement cycles. Just maybe double clicking on, on what you think and what you're hearing in China as a regard as it relates to the iPhone. Thanks so much. Tim Cook: Yes, sure. If you look at our greater China revenue for the quarter, we were down 11% year-over-year. And over half of the decline that we experienced was driven by change in channel inventory from the beginning to the end of the quarter. And of course on the Apple intelligence side we have not rolled out in China and as we just talked about we did see better results in the markets that we had rolled out in than markets we hadn't rolled out in. And of course, it's the most competitive market in the world. And so all of those things are true. In terms of the macro situation, there was a fiscal stimulus or subsidy announced in very recently in January that did not affect the December quarter. There were some provincial subsidies in the December quarter, but the national program was announced, I believe, on January 20. And it does cover the categories that we have products in from smartphones to tablets and PCs and smart watches up to a certain, a maximum price point. And so we do see fiscal stimulus occurring and we'll be glad to talk about what that looks like on the next call. Erik Woodring: Great. Thanks so much, Tim. Good luck. Tim Cook: Thank you. Suhasini Chandramouli: Thank you, Eric. Operator, can we have the next question, please? Operator: Our next question is from Ben Reitzes with Melius. Please go ahead. Ben Reitzes: Hey, guys. Thanks a lot for the question. And, hey, Tim, I wanted to ask you who -- you knew this one was coming, but there's a perception that you're a big beneficiary of lower cost of compute and I was wondering if you could give your worldly perspective here on the DeepSeek situation and if you are going to, if you, if anything's happened to change your views in terms of a tailwind to margins and your ability to execute even due to the potential for cost to come down due to that development and probably what was going to happen anyway. But I'd love your perspective on that and then have a quick follow-up. Thanks. Tim Cook: Sure. In general, I think innovation that drives efficiency is a good thing. And that's what you see in that model. Our tight integration of silicon and software, I think, will continue to serve us very well. As you know, we do things on the device, and we do things in the private cloud and which mimics from a architectural point of view the -- what happens on the device. And from a CapEx point of view, we've always taken a very prudent and deliberate approach to our expenditure and we continue to leverage a hybrid model, which I think continues to serve us well. Ben Reitzes: Oh, great. All right. Thanks, Tim. And then, you know, just with regard to, you know, the iPhone trajectory, do you feel like, I guess, what is -- you obviously don't talk about new products and stuff like that, but do you feel that there's a lot of room for form factor innovation in the future? Or do you feel that the current lineup kind of it shows where you're going? I guess without pulling punches wondering if you, you thought you know in terms of the phone innovation if there's a lot more to come and you could see the kind of current market changing a bit over the next two to three years. Thanks. Tim Cook: I think, Ben, I think there's a lot more to come and I could not feel more optimistic about our product pipeline. So I think there's a lot of innovation left on the smartphone. Ben Reitzes: Thanks a lot, Tim. Tim Cook: Yes, thank you. Suhasini Chandramouli: Thank you, Ben. Operator, could we have the next question, please? Operator: Our next question is from Michael Ng with Goldman Sachs. Please go ahead. Michael Ng: Good afternoon. Thank you for the question. I have two as well. First, it was encouraging to hear about the record for iPhone upgraders, which I think is something you haven't said for about a year now. I was wondering if you could talk a little bit about what you would attribute this upgrade strength to? Has Apple Intelligence played a role in helping upgrades in the markets that you've launched in? Thanks. Tim Cook: Yes, thank you for the question. If you look at iPhone, we did set an all-time record for upgraders, so we've never seen a higher level of upgraders before. The installed base hit a new all-time high as well. And if you look at the 16, compared to the 15 from launch, which occurred, as you know, in September, so this is across now two quarters from September to the end of the December fiscal quarter, the 16 outperformed the 15. And so I think you can conclude from that, that there are compelling reasons to upgrade. And in the markets where we had launched Apple Intelligence, they outperformed the markets that we did not. So lots… Michael Ng: Great, thank you, Tim. That's… Tim Cook: Yes, lots of good color there. Michael Ng: Great, thank you, Tim. That's very clear. And then I had one about the iPad Pro and for the thinner version. I was just wondering if you could talk about that thin form factor for the iPad Pro. How did it help iPad sales overall and what did your kind of marketing consumer research tell you about how consumers valued that thin product form factor? Thank you. Tim Cook: It's a good question. iPad overall grew 15% for the quarter and it was more driven by iPad Air and the entry level iPad than it was the top level iPad. But overall we could not be more pleased with the iPad category growing 15%. It's a great achievement for the quarter. And probably what is most important is that over half of the sales in the December quarter went to customers who were new to the iPad. So that tells us that there's a good amount of customers there to attract. Michael Ng: Thank you very much, Tim. Tim Cook: Yes. Thank you. Suhasini Chandramouli: Thanks, Mike. Operator, could we have the next question, please? Operator: Our next question is from Amit Daryanani from Evercore. Please go ahead. Amit Daryanani: Good afternoon, everyone. I have two as well. Maybe to start with, you folks are seeing some very robust growth trends in emerging markets right now for Apple products? Can you just add a high level, just talk about the durability of growth that you see in emerging markets? And then do you think the summation of these emerging markets are starting to get big enough or perhaps starting to grow fast enough that it can actually offset some of the China headwinds you're going through? Tim Cook: We have great results in a number of emerging markets. And as you know from past calls, I'm particularly keen on India. India set a December quarter record during the quarter. And we're opening more stores there. We've announced that we're going to open four new stores there. We also, the iPhone was the top selling model in India for the quarter. And it's the second largest smartphone market in the world and the third largest for PCs and tablets and so there's a huge market and we are -- we have very modest share in these markets. And so I think there's lots of upside there. And that's just one of the emerging markets. Kevan Parekh: Yes, maybe I'll add, Amit, that in emerging markets we're also seeing double-digit growth on the install base, both in total and for the iPhone as well. So that's also an encouraging sign. Amit Daryanani: Perfect. Thank you. And then, you know, just a question on gross margins for the March quarter. You folks are guiding gross margin is flattish on a sequential basis. Typically, I think it tends to be guided up a little bit, 50 basis points, so sequentially. Can we just touch on like, what are the offsets of the puts and takes you see here on gross margins? And Kevan, maybe you can just talked about its FX having an outsized impact in your margin profile as well in March? Kevan Parekh: Yes, Amit, let me take that One. You know, as we mentioned in my remarks, we're guiding to 46.5% to 47.5%. So we think it's, you know, we're very pleased with that level of guidance. As you mentioned, there's always puts and takes. We do think there's going to be some FX headwinds, which we talked about, that's going to affect, you know, our revenue growth as well. You know, it'll have an impact here on the margin, a sequential impact on margins. But we think that's going to be offset by favorable costs and the relative mix of services. We also, as you know, when we move from Q1 to Q2, especially on the product side, because Q1 is such a large quarter for a products business, we do have a loss of leverage. So there are some puts and takes, and I think we feel good about the range. We think it's a very, very strong guide for gross margin. Suhasini Chandramouli: Thanks, Amit. Operator, could we get the next question, please? Operator: Our next question is from Wamsi Mohan with Bank of America. Please go ahead. Wamsi Mohan: Yes, thank you so much. Tim, I want to follow-up on your comment about channel inventory in China. I was wondering if you could maybe address more broadly if channel inventory across your different product lines and regions? Do you feel they're elevated or out of range in any other regions? And given the clearing event that kind of happened in China, I guess in the quarter, should we think of a more normal progression quarter-on-quarter into the March quarter in China in particular, and I will follow. Tim Cook: Yes, I don't want to project sales for the current quarter by region, but if you if you look at the channel inventory and look at iPhone in the aggregate, so on a worldwide basis we're very comfortable with our channel inventory position in the -- in China my point was that our channel inventory reduced from the beginning of the quarter to the end of the quarter, and that was over half of the reduction in the reported results. And so if you look, part of the reason for that is that our sales were a bit higher than we forecasted them to be toward the end of the quarter. And so we ended a little leaner than we had expected to. Wamsi Mohan: Okay, that's very clear. Thank you. Tim Cook: Yes, thank you. Wamsi Mohan: And then maybe as my follow-up, your services growth has been very strong and I know you've kind of been navigating some pretty challenging regulatory burdens on the business globally. So how should investors think about maybe either a top line or margin headwind that let's say you're currently absorbing in your results that could potentially maybe reverse in a more balanced regulatory environment? Thank you so much. Kevan Parekh: Yes. So I think one, I just wanted to kind of reiterate the fact that, you know, our services business had an all-time record for December quarter of 14%. And that was a one strength that we saw across all geographic segments and also was very broad base across all of our services. So we have, as you know, a very broad services portfolio. And so we do see, you know, good momentum across the board. And as well, we continue to see increasing engagement across the customer base, across all of the service offerings, both transacting and paid accounts. We talked about reaching all-time highs, and we have over now 1 billion paid subscriptions across the services platform. Suhasini Chandramouli: All right. Thanks, Wamsi. Operator, could we get the next question, please? Operator: Our next question is from Samik Chatterjee with JPMorgan. Please go ahead. Samik Chatterjee: Hi. Thanks for taking my questions. I guess for the first one, if I -- I mean, you had a great quarter on Macs and iPads both. And I'm just curious, in terms of if you can help us think about the sustainability of this double-digit growth that you saw in both the product lines, and more interest are also here, we are talking about Apple Intelligence sort of influencing volumes on iPhones, but any thoughts on sort of how -- what does that influence look like in terms of volumes for Macs, for example, where I think there's a lot of conversation on AI PCs, how you're thinking about the impact there? And I have a quick follow-up. Thank you. Tim Cook: Yes. If you look at Mac, Mac was up 16% and on iPad, we were up 15%. The Mac was driven by the very strong uptake on our new products during the quarter and the continued success of the MacBook Air. And so as you know, we've launched an M4-based MacBook Pro, an iMac and a Mac Mini during the quarter. We believe we've got the best AI PC out there for running workloads. The silicon in the Mac is, and it has been for several years now, designed by us and really designed for these workloads. And so I don't want to project at the category level for the future, but we're incredibly pleased with both the Mac and the iPad for the quarter. Samik Chatterjee: Okay. And Tim, I'm going to use your earlier discussion about India as a strong emerging market to sort of ask you about the supply chain planning there in terms of how much of the supply chain planning there that you're doing is more of a reflection of the growth expectations from that market relative to in terms of diversification of the supply chain? And how should we sort of think about that strategy in terms of that particular country? Thank you. Tim Cook: Yes. If you look at the manufacturing we do there, we do manufacturing both for the domestic market, and we export. And so in -- our business needs a certain economies of scale for it to make sense to manufacture in country. And so that really means that we're going to be both a use for the domestic market and an export market. Samik Chatterjee: Great. Thank you. Tim Cook: Yes, thanks. Suhasini Chandramouli: Thank you, Samik. Operator, could we get the next question, please? Operator: Our next question is from David Vogt with UBS. Please go ahead. David Vogt: Great, thanks, guys, for taking my question. So maybe, Tim, this is for you. I'm trying to think about your commentary around Apple Intelligence being sort of a momentum driver for the iPhone business. But when I think about your kind of framework for the March quarter, if I kind of adjust for channel inventory over the last couple of years, kind of, feels like your iPhone revenue for the March quarter is going to be relatively similar to the quarter two years ago and even the quarter last year? So how do we square kind of the momentum versus kind of the iPhone business effectively really kind of unchanged over the last couple of years? And then second, when I think about kind of the gross margin profile of the business, obviously, you've done a great job in taking gross margins up. Where do you think we sit in terms of, on the services side at least, where margins could go? It looks like the 75% margin has been incredibly successful quarter. But just trying to get a sense for where do you think this number could go over the intermediate term? Thank you. Tim Cook: Yes. If you look at Apple Intelligence, what my point earlier was, that markets where we had rolled out Apple Intelligence during the Q1 period performed better on a year-over-year basis than markets where we had not. And so that gives us -- it's a positive indicator that we were pleased with. There are many compelling reasons to upgrade. And the other thing I would say, that I think I mentioned earlier, is that if you look at it from a launch to the end of the December quarter, and so that goes back to September, the 16 family is outperforming the 15 family. And so I think those are two good data points. Our next round of language rollouts will be in April. And so it will be at the -- in our Q3 quarter. And I'll let Kevan take the gross margin question. David Vogt: Yes, great. Kevan Parekh: Hi, David. How are you? So on the Services gross margin, I think maybe just stepping back a second. Services business in general in aggregate is accretive to the overall company margin. And one of the things, as an important reminder, is we've got a very broad services portfolio. And those businesses have very different margin profiles. And so I think, one, it's because of the nature of those businesses and in part also because of the way we account for them. And so one of the big factors that drive the Services gross margins and relative performance of those different businesses within the portfolio. We also have the dynamic of some scale businesses like payment services, iCloud, that are actually growing. And there, when we add incremental users, those end up being accretive to margins as well. And so in general, what we saw in the December quarter was nice momentum across our entire services business that allows us to deliver that 75% margin at the services level. And I think our guidance takes into consideration what we think we're going to land from a company standpoint of 46.5% to 47.5%, which again, we think is a strong guide. David Vogt: Great, thanks, guys. Suhasini Chandramouli: All right, thank you, David. Operator, could we have the next question, please? Operator: Our next question is from Krish Sankar with TD Cowen. Please go ahead. Krish Sankar: Yes, thanks for taking my question. I also had two of them. One, the first one for Tim. You had very strong Mac growth, 16% year-over-year last quarter. Just wondering how much of that was driven by some of the Mac silicon innovation versus a replacement cycle for Macs? Tim Cook: I don't know the answer to your question precisely, but I think it is a combination of these products are so compelling, the M4-based products are so compelling, that it's driving both upgrades at the double-digit level and it's driving switchers at a double-digit level. And so we're seeing both come out, and I think it's just because of the compelling products. Krish Sankar: Got it. Got it. Thanks for that, Tim. And then a follow-up for Kevan on the gross margin. I want to ask you on the product side. Last quarter, you had 39.3%, which is very strong, similar to a year ago period. I'm kind of curious how much more levels do you have on the product side to improve the gross margin? Or do you think with some of the more new AI-related devices, there's more upside to gross margin from here on the product hardware side? Kevan Parekh: Yes. Thanks, Krish, for the question. So on the product side, as you mentioned, we had pretty strong sequential improvement, 300 basis points, for the December quarter. That was really driven by, we talked about, favorable mix and leverage. As you know, in Q1, again, it's a launch quarter for many products, and so we tend to benefit from the leverage that we get from that higher volume. I would say, in general, our gross margin on products is driven by a number of factors. One of them is the various product launches that we have. Different products do have different margin profiles. And so that mix does make a difference. And in particular, what we're seeing is, for example, many of our mix is across like phone, for example, we're seeing customers gravitate towards our Pro products because of things like affordability that allows our customers to get into our best products, which have favorable gross margins. So we're continuing to see that trend, that impacted us in the December quarter. As well, I think we're in a favorable commodity environment from a cost standpoint. And so we're benefiting from that as well in the December quarter. And then that's going to be, as we talked about, we're going to have a foreign exchange headwind heading into the March quarter, but we figured that's contemplated in the guidance range that we gave, the 46.5% to 47.5%. Krish Sankar: Thanks, Kevan. Thanks, Tim. Suhasini Chandramouli: Thank you, Krish. Operator, could we get the next question, please? Operator: Our next question is from Richard Kramer with Arete Research. Please go ahead. Richard Kramer: Thanks very much. My first question is for Tim. I'd like to ask about what might accelerate the pace of Apple Intelligence adoption. I guess do you see this simply as a question of time i.e., to launch more markets and languages or increase the percentage of installed base devices that can support it? Or is it a question of money, i.e., shifting R&D or marketing spend towards AI? And based on other prior Apple services, do you expect a sort of tipping point where adoption will go mainstream? Thanks. Tim Cook: I do believe it will go mainstream. I'm getting feedback from people using different features today. And this is -- keep in mind that on the iPhone side of our business, you either have to have an iPhone 15 Pro or iPhone 16 to use Apple Intelligence. And so the -- as that base grows, I think the usage will continue to grow. And I think -- I know from my own personal experience, once you start using the features, you can't imagine not using them anymore. I know I get 100s of e-mails a day, and the summarization function is so important. So I think it's a combination of that. And of course, in April, we roll out a whole series of new languages that we had mentioned, and so the base grows further. Richard Kramer: Okay, thank you. And then, Kevan, one of Luca's legacies was really getting Apple to record margin levels and also maintaining very consistent pricing across the product range. But taking the current high levels of profitability as fairly stable, what observations might you share about price sensitivity of users and whether having a wider range of pricing across the products might unlocks potentially further market share gains or boost overall product growth? Kevan Parekh: Yes, it's a good question. I think one, I don't think we're going to really depart from what served us pretty well to now. I mean we always take it into consideration, looking at short-term -- comparison between the short term and the long term. I think we've had a pretty disciplined pricing strategy, which would serve us pretty well. And I think we're going to continually kind of stick with that as far as I can tell. Richard Kramer: Okay, thanks. Suhasini Chandramouli: Thank you, Richard. Operator, could we get the next question, please? Operator: Our next question is from Atif Malik with Citi. Please go ahead. Atif Malik: Hi, thank you for taking my question. How do you guys see the potential tariff impact to your product for consumer demand under Trump 2.0 you guys did find under Trump 1.0? Tim Cook: We are monitoring the situation and don't have anything more to add than that. Atif Malik: Great. And Tim, as a follow-up, there is a lot of discussion on agentic AI, the use of agents. Do you guys see the upgraded series expected in April as something that will, let's say, be the killer application among the suite of features that you have announced in Apple Intelligence? Tim Cook: I think the killer feature is different for different people. But I think for most, they're going to find that they're going to use many of the features every day. And certainly, one of those is the -- is Siri, and that will be coming over the next several months. Atif Malik: Thank you. Suhasini Chandramouli: All right. Thank you, Atif. Operator, could we please get the last question? Operator: Our last question is from Ben Bollin from Cleveland Research Company. Please go ahead. Ben Bollin: Good evening, everyone. Thanks for taking the question. Tim, I'm interested in your thoughts and how you would have us think about the average useful life of these devices in the wild. And in particular, curious, if you look at the strength you saw in fiscal ‘21 and how that might support accelerated refresh opportunity into the future? Tim Cook: Yes. Ben, I think it's different for different types of users. I mean you have very early adopter kind of users that are very quick to jump on the latest technology that upgrade very frequently. And then you have people that are on the entire opposite side of that barbell. And most people are between those two points. And so I do think there were lots of units that are sold during the COVID period of time, and it's a huge opportunity for us as a company to -- for more than one of the product categories. Ben Bollin: That’s it from me. Thanks, Tim. Tim Cook: Thank you. Suhasini Chandramouli: All right. Thanks, Ben. A replay of today's call will be available for two weeks on Apple Podcasts or as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 7398532 followed by the pound sign. These replays will be available by approximately 5 p.m. at Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. And financial analysts can contact me, Suhasini Chandramouli, with additional questions at 408-974-3123. Thanks again for joining us here today. Operator: Once again, this does conclude today's conference. We do appreciate your participation.	[ { "speaker": "Suhasini Chandramouli", "text": "Good afternoon, and welcome to the Apple Q1 Fiscal Year 2025 Earnings Conference Call. My name is Suhasini Chandramouli, Director of Investor Relations. Today's call is being recorded. Speaking first today are Apple CEO, Tim Cook, and he will be followed by CFO, Kevan Parekh. After that, we'll open the call to questions from analysts. Please note that some of the information you'll hear during our discussion today will consist of forward-looking statements, including, without limitation, those regarding revenue, gross margin, operating expenses, other income and expense, taxes, capital allocation, and future business outlook, including the potential impact of macroeconomic conditions on the company's business and results of operations. These statements involve risks and uncertainties that may cause actual results or trends to differ materially from our forecast. For more information, please refer to the risk factors discussed in Apple's most recently filed annual report on Form 10-K and the Form 8-K filed with the SEC today along with the associated press release. Apple assumes no obligation to update any forward-looking statements, which speak only as of the date they are made. I'd now like to turn the call over to Tim for introductory remarks." }, { "speaker": "Tim Cook", "text": "Thank you, Suhasini. Good afternoon, everyone, and thanks for joining the call. Before I talk about our results I'd like to take a moment to acknowledge the devastating wildfires that impacted the Los Angeles area this month. From our retail teams to Apple TV+, Apple Music, Fitness Plus, Beats and more LA is home to many of our team members. Our thoughts are with everyone who is beginning the road to recovery. For our part, we are contributing to the relief efforts and we will continue to support our teams and the local community. Now turning to the quarter. Today, Apple is reporting revenue of $124.3 billion for the December quarter, up 4% from a year ago, and an all-time record. EPS also set an all-time record of $2.40, 10% higher year-over-year. We achieved all-time revenue records across the majority of the countries and regions we track, including the Americas, Europe, Japan, and the rest of Asia Pacific. We also continue to see momentum in emerging markets, setting all-time revenue records in a number of markets, including Latin America, the Middle East, and South Asia, among others. In services, we achieved an all-time revenue record, and in the past year, we've seen nearly $100 billion in revenue from our services business. I'm also pleased to announce that we reached a new record for our installed base with over 2.35 billion active devices. In October, we released the first set of Apple Intelligence features in U.S. English for iPhone, iPad, and Mac, and we rolled out more features and expanded to more countries in December. Now users can discover the benefits of these new features in the things they do every day. They can use writing tools to help find just the right words, create fun and unique images with Image Playground and Genmoji, handle daily tasks and seek out information with a more natural and conversational Siri, create movies of their memories with a simple prompt, and touch up their photos with clean up. We introduced visual intelligence with camera control to help users instantly learn about their surroundings. Users can also seamlessly access chat GPT across iOS, iPadOS and MacOS. And we were excited to recently begin our international expansion with Apple Intelligence now available in Australia, Canada, New Zealand, South Africa, and the U.K. We're working hard to take Apple Intelligence even further. In April, we're bringing Apple Intelligence to more languages, including French, German, Italian, Portuguese, Spanish, Japanese, Korean, and simplified Chinese, as well as localized English to Singapore and India. And we'll continue to roll out more features in the future, including an even more capable Siri. Apple Intelligence builds on years of innovations we've made across hardware and software to transform how users experience our products. Apple Intelligence also empowers users by delivering personal context that's relevant to them. And importantly, Apple Intelligence is a breakthrough for privacy and AI with innovations like Private Cloud Compute, which extends the industry-leading security and privacy of Apple devices into the cloud. Apple Intelligence opens up an exciting new frontier and is already elevating experiences across iPhone, iPad, and Mac. We're going to keep investing in innovation and in transformative tools that help users in their everyday lives. Let me now turn to our results for the quarter, starting with iPhone. iPhone revenue came in at $69.1 billion, reaching all-time iPhone revenue records in dozens of markets and regions. Our iPhone 16 lineup takes the smartphone experience to the next level in so many ways, and Apple Intelligence is one of many reasons why customers are excited. With the A18 powered iPhone 16 and iPhone 16 Plus, users are getting a big boost in battery life and incredible camera experiences with camera control. Our amazingly powerful iPhone 16 Pro models go even further with larger-than-ever displays and a pro camera system so advanced it can turn moments into masterpieces. In Mac, revenue was $9 billion for the December quarter, 16% higher year-over-year, driven by significant excitement around the world for our latest Mac lineup. The Mac is more than just a powerful tool. It's a launchpad to enable users to bring their best ideas and boldest creations to life. And there are so many reasons to choose Mac, from the breathtaking performance of the M4 family of chips to the groundbreaking and growing capabilities of Apple Intelligence. Every product in the Mac lineup offers something extraordinary, whether that's the super portable MacBook Air, the powerhouse MacBook Pro, the world's best all-in-one iMac, or the small wonder that is the Mac Mini, which is not only stunningly capable, but is our first carbon neutral Mac. All of this is enabled by the unparalleled power of Apple Silicon. iPad revenue was $8.1 billion, up 15% from a year ago, driven by strong interest for our latest products. We love hearing from customers, who are discovering for the first time the versatility of iPad from the ultra-portal iPad Mini, built from the ground up for Apple intelligence, to the powerful M4 iPad Pro in a stunningly thin and light design. iPad is there for our users whenever they need it and wherever they go and we are pleased to see so much excitement and enthusiasm for our lineup. Wearables home and accessories revenue came in at $11.7 billion. With its most advanced display yet and a thinner more comfortable design, the all-new Apple Watch Series 10 is the perfect companion to help users pursue their health and fitness goals this year. From the powerful Vitals app to more customizable activity rings, users have an ever-increasing set of innovative health tools at their fingertips and watchOS 11. Health innovation has long been a focus for us, and we're committed to continuing to advance this work, because we know how much it matters to our users. We've introduced new hearing health features on AirPods Pro 2, and new sleep apnea notifications on Apple Watch are also helping users learn of a potentially serious condition that's thought to affect up to a billion people worldwide. During the quarter, we also brought Apple Vision Pro to even more countries, enabling more customers to discover the magic of spatial computing. Users are enjoying incredible immersive entertainment experiences and powerful new features and enhancements to Mac virtual display. Vision Pro is also supercharging the creative process and the incredibly talented director John M. Chu recently shared how its extraordinary capabilities helped him bring the movie Wicked to life. Turning to services, we set an all-time revenue record of $26.3 billion for the December quarter, growing 14% from a year ago. We set all-time records in the Americas, Europe, and rest of Asia-Pacific, and a December quarter record in Japan. Five years since launch, Apple TV+ continues to be home to incredible storytelling that viewers love. There's nothing quite like the anticipation that comes when a fan favorite returns, and we were thrilled to debut the second season of Severance earlier this month. We have so much in store for our subscribers this year with new shows like The Studio and Your Friends and Neighbors. And we can't wait for the premiere of Formula 1 starring Brad Pitt on June 27, which will take viewers inside the sport in a truly unprecedented way. We're excited that Apple TV+ continues to draw attention and accolades. To-date, Apple TV+ productions have earned more than 2,500 nominations and 538 wins. During the quarter, we were also excited to launch a new Find My Service that can help our users when they lose their luggage. For the first time, if you put an air tag in your suitcase, you'll be able to share its location information with many major airlines, so they can quickly track down your bags if they get lost. Turning to retail, our teams went above and beyond to help customers find the perfect gift throughout the holiday season. We also celebrated openings of new stores in China, Spain, and the U.S. and we were excited to announce plans to connect with even more customers this year by adding a fifth store in the UAE and bringing our online store to Saudi Arabia this summer. We can't wait to welcome customers to the first of several flagship store locations in Saudi Arabia that were opening beginning in 2026. I just had the chance to visit both countries last month, and I had a great time meeting with customers and team members. There's an incredible energy and passion for technology in these growing markets. Every day, I get deeply moving notes about the many ways our technology is enriching our users' lives. I recently got a note from a customer who put his watch on his father's wrist when he feared something was wrong with him. The watch alerted them that the father was an AFib and they were able to get him to the hospital for potentially life-saving treatment. Another user put his new watch on for the first time and within 15 minutes was notified of a low heart rate that led to a necessary pacemaker. And there are so many touching notes around the profound impact of our new hearing health feature like a recent user who told me it had changed her life, allowing her to take part in conversations with her children and grandchildren. These are the kind of stories that remind us of how profoundly important our work is, and it drives us to innovate each and every day. At Apple, the future is full of promise and potential. We're always searching across a world of possibilities, finding those places where we can do the most good and putting all of our energy and ingenuity into making something special. With that, I'll turn it over to Kevin." }, { "speaker": "Kevan Parekh", "text": "Thanks Tim, and good afternoon everyone. I'm going to cover the results for the first quarter of our fiscal year. We are very pleased to report an all-time high for revenue with December quarter revenue of $124.3 billion, up 4% year-over-year. We achieved all-time revenue records in the Americas, Europe, Japan, and rest of Asia Pacific and grew in the vast majority of markets we track. Products revenue was $98 billion, up 2% year-over-year, driven by growth from iPad and Mac. Thanks to our incredible customer satisfaction and strong loyalty, our installed base of active devices reached an all-time high across all products and geographic segments and is now over 2.35 billion active devices. Services revenue reached an all-time record of $26.3 billion, up 14% year-over-year. We grew in every geographic segment and achieved all-time records in both developed and emerging markets. Company gross margin was 46.9% at the high-end of our guidance range and up 70 basis points sequentially, primarily driven by favorable mix. Products gross margin was 39.3%, up 300 basis points sequentially, primarily driven by favorable mix and leverage. Services gross margin was 75%, up 100 basis points sequentially, primarily driven by mix. Operating expenses of $15.4 billion landed at the midpoint of our guidance range and up 7% year-over-year. This strong business performance resulted in all-time records for both net income at $36.3 billion and diluted earnings per share of $2.40, up 10% year-over-year. Operating cash flow was also strong at $29.9 billion, which included the impact of the $11.9 billion we paid during the quarter in connection with the state aid decision. Now, I'm going to provide some more details for each of our revenue categories. iPhone revenue was $69.1 billion, roughly flat to the prior year. We grew in the majority of markets we track and reached all-time revenue records in several developed markets, including Canada, Western Europe, and Japan and in emerging markets like Latin America, the Middle East, and South Asia. The iPhone Active installed base grew to an all-time high in total in an average geographic segment. We also set an all-time record for upgraders. According to a recent survey from Kantar during the December quarter, iPhone was a top-selling model in the U.S., Urban China, India, the U.K., France, Australia, and Japan. We continue to see high levels of customer satisfaction in the U.S. at 96% as measured by 451 research. Mac generated $9 billion in revenue, up 16% year-over-year. We saw strength across our lineup from the new Mac Mini to the latest MacBook Air and MacBook Pro models. This incredible performance was broad-based with double-digit growth in every geographic segment. With our latest advances in Apple Silicon and our fastest neural engine ever, customers are able to take advantage of the full capabilities of AI and Mac. The Mac installed base reached an all-time high and we saw a double-digit growth for both upgraders and customers new to the Mac. Additionally, customer satisfaction in the U.S. was recently measured at 94%. iPad revenue was $8.1 billion, up 15% year-over-year, driven by the new iPad Mini and latest iPad Air. The iPad installed base reached another all-time high, and over half of the customers who purchased an iPad during the quarter were new to the product. Customer satisfaction was at 96% in the U.S. based on the latest reports from 451 Research. Wearable's home and accessories revenue was $11.7 billion, down 2% year-over-year. Customers are excited about the new AirPods 4 and the latest hearing health features in AirPods Pro 2. On watch, although we face a difficult compare against the watch Ultra 2 launch last year, the Apple Watch installed base reached a new all-time high, with over half of customers purchasing an Apple Watch during the quarter being new to the product. Customer satisfaction for watch in the U.S. was reported at 94%. Our services revenue reached an all-time high of $26.3 billion, up 14% year-over-year. Services continues to see strong momentum, and the growth of our installed base of active devices gives us great opportunities for the future. We also see increased customer engagement with our services offerings. Both transacting and paid accounts reached new all-time highs, with paid accounts growing double-digits year-over-year. Paid subscriptions also grew double-digits. We have well over 1 billion paid subscriptions across the services on our platform. We remain focused on improving the breadth and quality of our services offerings, from new games on Apple Arcade to exciting new programming on Fitness Plus, and the continued expansion of features like Tap to Pay, now live in 20 markets. Turning to enterprise, we have seen businesses continue to expand their deployments of our products and services. Deutsche Bank launched its Mac as Choice program for the developers and also issued the latest MacBook Air as a standard computer for their entire mortgage lending division. And we're excited to see leading enterprises such as SAP leverage Apple Intelligence in the U.S., with features like writing tools, summarize, and priority notifications to enhance both their employee and customer experiences. We also see strong demand in our emerging markets. For example, Zomato, a leading food ordering and delivery company in India, has deployed 1,000 of Macs across their workforce to foster innovation. In Vision Pro continues to see more use cases in enterprise, with Cisco's new spatial meetings delivering a fully immersive video conferencing experience for remote collaboration and learning. Let me quickly summarize our cash position and capital return program. We ended the quarter with $141 billion in cash and marketable securities. We repaid $1 billion in maturing debt and decreased commercial paper by $8 billion, resulting in $97 billion in total debt. Therefore, net cash at the end of the quarter was $45 billion. During the quarter, we returned over $30 billion to shareholders. This included $3.9 billion in dividends and equivalents and $23.3 billion through open market repurchases of 100 million Apple shares. As usual, we will provide an update to our capital return program when we report results for the March quarter. As we move ahead into the March quarter, I'd like to review our outlook which includes the types of forward-looking information that Suhasini referred to at the beginning of the call. The color we're providing today assumes that the macroeconomic outlook doesn't worsen from what we're projecting today for the current quarter. As the dollar is strengthened significantly, we expect foreign exchange to be a headwind and to have a negative impact on revenue of about 2.5 percentage points on a year-over-year basis. Despite that headwind, we expect our March quarter total company revenue to grow low to mid-single-digits year-over-year. We expect services revenue to grow low-double-digits year-over-year. When you remove the negative impact of the foreign exchange headwinds I described earlier, the year-over-year growth rate would be comparable to that of the December quarter. We expect gross margin to be between 46.5% and 47.5%. We expect operating expenses to be between $15.1 billion and $15.3 billion. We expect OI&E to be around negative $300 million, excluding any potential impact from the mark-to-market of minority investments, and our tax rate to be around 16%. Finally, today our Board of Directors has declared a cash dividend of $0.25 per share of common stock payable on February 13, 2025, to shareholders of record as of February 10, 2025. With that, let's open to call the questions." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Kevin. We ask that you limit yourself to two questions. Operator, may we have the first question please?" }, { "speaker": "Operator", "text": "Certainly, we will go ahead and take our first question from Erik Woodring with Morgan Stanley. Please go ahead." }, { "speaker": "Erik Woodring", "text": "Great guys, Thanks so much for taking my questions. Tim, in your prepared remarks, you had noted that iPhone 16 models are selling better in markets where Apple Intelligence is available? And I'm just wondering if you could double-click on that comment a bit and share any other details you believe could better help us understand how Apple Intelligence is really impacting iPhone demand and/or what features you find that users are using most often already? And then I just have a quick follow-up. Thank you." }, { "speaker": "Tim Cook", "text": "Yes, Eric. Hi, it's Tim. The -- we did see that the markets where we had rolled out Apple Intelligence, that the year-over-year performance on the iPhone 16 family was stronger than those where Apple Intelligence was not available. In terms of the features that people are using, they're using all of the ones that I'd referenced in my opening comments from writing tools to image playground and Genmoji to visual intelligence and more. And so we see all of those being used. The cleanup is another one that is popular and people love seeing that one demoed in the stores as well. We only had 2, 2.5 weeks or so during the December quarter of the second release of [18.2] (ph) and then only had the U.K. and the other English language countries for the 2.5 weeks. And so we've got just the early indications at the moment, but we were glad…" }, { "speaker": "Erik Woodring", "text": "Okay, that's really helpful." }, { "speaker": "Tim Cook", "text": "Yes." }, { "speaker": "Erik Woodring", "text": "Okay, thank you for that, Tim. It's helpful. And then, you know, if we just touch on China, obviously, in the news fairly frequently, if we set aside China Macro, which I understand is still challenging, can you maybe talk about the headwinds that that Apple faces, whether that's, you know, shifting preferences for Western technology brands in favor of domestic vendors, or is this just a function of not necessarily having Apple intelligence available with the iPhone 16, which is, you know, not necessarily helping replacement cycles. Just maybe double clicking on, on what you think and what you're hearing in China as a regard as it relates to the iPhone. Thanks so much." }, { "speaker": "Tim Cook", "text": "Yes, sure. If you look at our greater China revenue for the quarter, we were down 11% year-over-year. And over half of the decline that we experienced was driven by change in channel inventory from the beginning to the end of the quarter. And of course on the Apple intelligence side we have not rolled out in China and as we just talked about we did see better results in the markets that we had rolled out in than markets we hadn't rolled out in. And of course, it's the most competitive market in the world. And so all of those things are true. In terms of the macro situation, there was a fiscal stimulus or subsidy announced in very recently in January that did not affect the December quarter. There were some provincial subsidies in the December quarter, but the national program was announced, I believe, on January 20. And it does cover the categories that we have products in from smartphones to tablets and PCs and smart watches up to a certain, a maximum price point. And so we do see fiscal stimulus occurring and we'll be glad to talk about what that looks like on the next call." }, { "speaker": "Erik Woodring", "text": "Great. Thanks so much, Tim. Good luck." }, { "speaker": "Tim Cook", "text": "Thank you." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Eric. Operator, can we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Ben Reitzes with Melius. Please go ahead." }, { "speaker": "Ben Reitzes", "text": "Hey, guys. Thanks a lot for the question. And, hey, Tim, I wanted to ask you who -- you knew this one was coming, but there's a perception that you're a big beneficiary of lower cost of compute and I was wondering if you could give your worldly perspective here on the DeepSeek situation and if you are going to, if you, if anything's happened to change your views in terms of a tailwind to margins and your ability to execute even due to the potential for cost to come down due to that development and probably what was going to happen anyway. But I'd love your perspective on that and then have a quick follow-up. Thanks." }, { "speaker": "Tim Cook", "text": "Sure. In general, I think innovation that drives efficiency is a good thing. And that's what you see in that model. Our tight integration of silicon and software, I think, will continue to serve us very well. As you know, we do things on the device, and we do things in the private cloud and which mimics from a architectural point of view the -- what happens on the device. And from a CapEx point of view, we've always taken a very prudent and deliberate approach to our expenditure and we continue to leverage a hybrid model, which I think continues to serve us well." }, { "speaker": "Ben Reitzes", "text": "Oh, great. All right. Thanks, Tim. And then, you know, just with regard to, you know, the iPhone trajectory, do you feel like, I guess, what is -- you obviously don't talk about new products and stuff like that, but do you feel that there's a lot of room for form factor innovation in the future? Or do you feel that the current lineup kind of it shows where you're going? I guess without pulling punches wondering if you, you thought you know in terms of the phone innovation if there's a lot more to come and you could see the kind of current market changing a bit over the next two to three years. Thanks." }, { "speaker": "Tim Cook", "text": "I think, Ben, I think there's a lot more to come and I could not feel more optimistic about our product pipeline. So I think there's a lot of innovation left on the smartphone." }, { "speaker": "Ben Reitzes", "text": "Thanks a lot, Tim." }, { "speaker": "Tim Cook", "text": "Yes, thank you." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Ben. Operator, could we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Michael Ng with Goldman Sachs. Please go ahead." }, { "speaker": "Michael Ng", "text": "Good afternoon. Thank you for the question. I have two as well. First, it was encouraging to hear about the record for iPhone upgraders, which I think is something you haven't said for about a year now. I was wondering if you could talk a little bit about what you would attribute this upgrade strength to? Has Apple Intelligence played a role in helping upgrades in the markets that you've launched in? Thanks." }, { "speaker": "Tim Cook", "text": "Yes, thank you for the question. If you look at iPhone, we did set an all-time record for upgraders, so we've never seen a higher level of upgraders before. The installed base hit a new all-time high as well. And if you look at the 16, compared to the 15 from launch, which occurred, as you know, in September, so this is across now two quarters from September to the end of the December fiscal quarter, the 16 outperformed the 15. And so I think you can conclude from that, that there are compelling reasons to upgrade. And in the markets where we had launched Apple Intelligence, they outperformed the markets that we did not. So lots…" }, { "speaker": "Michael Ng", "text": "Great, thank you, Tim. That's…" }, { "speaker": "Tim Cook", "text": "Yes, lots of good color there." }, { "speaker": "Michael Ng", "text": "Great, thank you, Tim. That's very clear. And then I had one about the iPad Pro and for the thinner version. I was just wondering if you could talk about that thin form factor for the iPad Pro. How did it help iPad sales overall and what did your kind of marketing consumer research tell you about how consumers valued that thin product form factor? Thank you." }, { "speaker": "Tim Cook", "text": "It's a good question. iPad overall grew 15% for the quarter and it was more driven by iPad Air and the entry level iPad than it was the top level iPad. But overall we could not be more pleased with the iPad category growing 15%. It's a great achievement for the quarter. And probably what is most important is that over half of the sales in the December quarter went to customers who were new to the iPad. So that tells us that there's a good amount of customers there to attract." }, { "speaker": "Michael Ng", "text": "Thank you very much, Tim." }, { "speaker": "Tim Cook", "text": "Yes. Thank you." }, { "speaker": "Suhasini Chandramouli", "text": "Thanks, Mike. Operator, could we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Amit Daryanani from Evercore. Please go ahead." }, { "speaker": "Amit Daryanani", "text": "Good afternoon, everyone. I have two as well. Maybe to start with, you folks are seeing some very robust growth trends in emerging markets right now for Apple products? Can you just add a high level, just talk about the durability of growth that you see in emerging markets? And then do you think the summation of these emerging markets are starting to get big enough or perhaps starting to grow fast enough that it can actually offset some of the China headwinds you're going through?" }, { "speaker": "Tim Cook", "text": "We have great results in a number of emerging markets. And as you know from past calls, I'm particularly keen on India. India set a December quarter record during the quarter. And we're opening more stores there. We've announced that we're going to open four new stores there. We also, the iPhone was the top selling model in India for the quarter. And it's the second largest smartphone market in the world and the third largest for PCs and tablets and so there's a huge market and we are -- we have very modest share in these markets. And so I think there's lots of upside there. And that's just one of the emerging markets." }, { "speaker": "Kevan Parekh", "text": "Yes, maybe I'll add, Amit, that in emerging markets we're also seeing double-digit growth on the install base, both in total and for the iPhone as well. So that's also an encouraging sign." }, { "speaker": "Amit Daryanani", "text": "Perfect. Thank you. And then, you know, just a question on gross margins for the March quarter. You folks are guiding gross margin is flattish on a sequential basis. Typically, I think it tends to be guided up a little bit, 50 basis points, so sequentially. Can we just touch on like, what are the offsets of the puts and takes you see here on gross margins? And Kevan, maybe you can just talked about its FX having an outsized impact in your margin profile as well in March?" }, { "speaker": "Kevan Parekh", "text": "Yes, Amit, let me take that One. You know, as we mentioned in my remarks, we're guiding to 46.5% to 47.5%. So we think it's, you know, we're very pleased with that level of guidance. As you mentioned, there's always puts and takes. We do think there's going to be some FX headwinds, which we talked about, that's going to affect, you know, our revenue growth as well. You know, it'll have an impact here on the margin, a sequential impact on margins. But we think that's going to be offset by favorable costs and the relative mix of services. We also, as you know, when we move from Q1 to Q2, especially on the product side, because Q1 is such a large quarter for a products business, we do have a loss of leverage. So there are some puts and takes, and I think we feel good about the range. We think it's a very, very strong guide for gross margin." }, { "speaker": "Suhasini Chandramouli", "text": "Thanks, Amit. Operator, could we get the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Wamsi Mohan with Bank of America. Please go ahead." }, { "speaker": "Wamsi Mohan", "text": "Yes, thank you so much. Tim, I want to follow-up on your comment about channel inventory in China. I was wondering if you could maybe address more broadly if channel inventory across your different product lines and regions? Do you feel they're elevated or out of range in any other regions? And given the clearing event that kind of happened in China, I guess in the quarter, should we think of a more normal progression quarter-on-quarter into the March quarter in China in particular, and I will follow." }, { "speaker": "Tim Cook", "text": "Yes, I don't want to project sales for the current quarter by region, but if you if you look at the channel inventory and look at iPhone in the aggregate, so on a worldwide basis we're very comfortable with our channel inventory position in the -- in China my point was that our channel inventory reduced from the beginning of the quarter to the end of the quarter, and that was over half of the reduction in the reported results. And so if you look, part of the reason for that is that our sales were a bit higher than we forecasted them to be toward the end of the quarter. And so we ended a little leaner than we had expected to." }, { "speaker": "Wamsi Mohan", "text": "Okay, that's very clear. Thank you." }, { "speaker": "Tim Cook", "text": "Yes, thank you." }, { "speaker": "Wamsi Mohan", "text": "And then maybe as my follow-up, your services growth has been very strong and I know you've kind of been navigating some pretty challenging regulatory burdens on the business globally. So how should investors think about maybe either a top line or margin headwind that let's say you're currently absorbing in your results that could potentially maybe reverse in a more balanced regulatory environment? Thank you so much." }, { "speaker": "Kevan Parekh", "text": "Yes. So I think one, I just wanted to kind of reiterate the fact that, you know, our services business had an all-time record for December quarter of 14%. And that was a one strength that we saw across all geographic segments and also was very broad base across all of our services. So we have, as you know, a very broad services portfolio. And so we do see, you know, good momentum across the board. And as well, we continue to see increasing engagement across the customer base, across all of the service offerings, both transacting and paid accounts. We talked about reaching all-time highs, and we have over now 1 billion paid subscriptions across the services platform." }, { "speaker": "Suhasini Chandramouli", "text": "All right. Thanks, Wamsi. Operator, could we get the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Samik Chatterjee with JPMorgan. Please go ahead." }, { "speaker": "Samik Chatterjee", "text": "Hi. Thanks for taking my questions. I guess for the first one, if I -- I mean, you had a great quarter on Macs and iPads both. And I'm just curious, in terms of if you can help us think about the sustainability of this double-digit growth that you saw in both the product lines, and more interest are also here, we are talking about Apple Intelligence sort of influencing volumes on iPhones, but any thoughts on sort of how -- what does that influence look like in terms of volumes for Macs, for example, where I think there's a lot of conversation on AI PCs, how you're thinking about the impact there? And I have a quick follow-up. Thank you." }, { "speaker": "Tim Cook", "text": "Yes. If you look at Mac, Mac was up 16% and on iPad, we were up 15%. The Mac was driven by the very strong uptake on our new products during the quarter and the continued success of the MacBook Air. And so as you know, we've launched an M4-based MacBook Pro, an iMac and a Mac Mini during the quarter. We believe we've got the best AI PC out there for running workloads. The silicon in the Mac is, and it has been for several years now, designed by us and really designed for these workloads. And so I don't want to project at the category level for the future, but we're incredibly pleased with both the Mac and the iPad for the quarter." }, { "speaker": "Samik Chatterjee", "text": "Okay. And Tim, I'm going to use your earlier discussion about India as a strong emerging market to sort of ask you about the supply chain planning there in terms of how much of the supply chain planning there that you're doing is more of a reflection of the growth expectations from that market relative to in terms of diversification of the supply chain? And how should we sort of think about that strategy in terms of that particular country? Thank you." }, { "speaker": "Tim Cook", "text": "Yes. If you look at the manufacturing we do there, we do manufacturing both for the domestic market, and we export. And so in -- our business needs a certain economies of scale for it to make sense to manufacture in country. And so that really means that we're going to be both a use for the domestic market and an export market." }, { "speaker": "Samik Chatterjee", "text": "Great. Thank you." }, { "speaker": "Tim Cook", "text": "Yes, thanks." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Samik. Operator, could we get the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from David Vogt with UBS. Please go ahead." }, { "speaker": "David Vogt", "text": "Great, thanks, guys, for taking my question. So maybe, Tim, this is for you. I'm trying to think about your commentary around Apple Intelligence being sort of a momentum driver for the iPhone business. But when I think about your kind of framework for the March quarter, if I kind of adjust for channel inventory over the last couple of years, kind of, feels like your iPhone revenue for the March quarter is going to be relatively similar to the quarter two years ago and even the quarter last year? So how do we square kind of the momentum versus kind of the iPhone business effectively really kind of unchanged over the last couple of years? And then second, when I think about kind of the gross margin profile of the business, obviously, you've done a great job in taking gross margins up. Where do you think we sit in terms of, on the services side at least, where margins could go? It looks like the 75% margin has been incredibly successful quarter. But just trying to get a sense for where do you think this number could go over the intermediate term? Thank you." }, { "speaker": "Tim Cook", "text": "Yes. If you look at Apple Intelligence, what my point earlier was, that markets where we had rolled out Apple Intelligence during the Q1 period performed better on a year-over-year basis than markets where we had not. And so that gives us -- it's a positive indicator that we were pleased with. There are many compelling reasons to upgrade. And the other thing I would say, that I think I mentioned earlier, is that if you look at it from a launch to the end of the December quarter, and so that goes back to September, the 16 family is outperforming the 15 family. And so I think those are two good data points. Our next round of language rollouts will be in April. And so it will be at the -- in our Q3 quarter. And I'll let Kevan take the gross margin question." }, { "speaker": "David Vogt", "text": "Yes, great." }, { "speaker": "Kevan Parekh", "text": "Hi, David. How are you? So on the Services gross margin, I think maybe just stepping back a second. Services business in general in aggregate is accretive to the overall company margin. And one of the things, as an important reminder, is we've got a very broad services portfolio. And those businesses have very different margin profiles. And so I think, one, it's because of the nature of those businesses and in part also because of the way we account for them. And so one of the big factors that drive the Services gross margins and relative performance of those different businesses within the portfolio. We also have the dynamic of some scale businesses like payment services, iCloud, that are actually growing. And there, when we add incremental users, those end up being accretive to margins as well. And so in general, what we saw in the December quarter was nice momentum across our entire services business that allows us to deliver that 75% margin at the services level. And I think our guidance takes into consideration what we think we're going to land from a company standpoint of 46.5% to 47.5%, which again, we think is a strong guide." }, { "speaker": "David Vogt", "text": "Great, thanks, guys." }, { "speaker": "Suhasini Chandramouli", "text": "All right, thank you, David. Operator, could we have the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Krish Sankar with TD Cowen. Please go ahead." }, { "speaker": "Krish Sankar", "text": "Yes, thanks for taking my question. I also had two of them. One, the first one for Tim. You had very strong Mac growth, 16% year-over-year last quarter. Just wondering how much of that was driven by some of the Mac silicon innovation versus a replacement cycle for Macs?" }, { "speaker": "Tim Cook", "text": "I don't know the answer to your question precisely, but I think it is a combination of these products are so compelling, the M4-based products are so compelling, that it's driving both upgrades at the double-digit level and it's driving switchers at a double-digit level. And so we're seeing both come out, and I think it's just because of the compelling products." }, { "speaker": "Krish Sankar", "text": "Got it. Got it. Thanks for that, Tim. And then a follow-up for Kevan on the gross margin. I want to ask you on the product side. Last quarter, you had 39.3%, which is very strong, similar to a year ago period. I'm kind of curious how much more levels do you have on the product side to improve the gross margin? Or do you think with some of the more new AI-related devices, there's more upside to gross margin from here on the product hardware side?" }, { "speaker": "Kevan Parekh", "text": "Yes. Thanks, Krish, for the question. So on the product side, as you mentioned, we had pretty strong sequential improvement, 300 basis points, for the December quarter. That was really driven by, we talked about, favorable mix and leverage. As you know, in Q1, again, it's a launch quarter for many products, and so we tend to benefit from the leverage that we get from that higher volume. I would say, in general, our gross margin on products is driven by a number of factors. One of them is the various product launches that we have. Different products do have different margin profiles. And so that mix does make a difference. And in particular, what we're seeing is, for example, many of our mix is across like phone, for example, we're seeing customers gravitate towards our Pro products because of things like affordability that allows our customers to get into our best products, which have favorable gross margins. So we're continuing to see that trend, that impacted us in the December quarter. As well, I think we're in a favorable commodity environment from a cost standpoint. And so we're benefiting from that as well in the December quarter. And then that's going to be, as we talked about, we're going to have a foreign exchange headwind heading into the March quarter, but we figured that's contemplated in the guidance range that we gave, the 46.5% to 47.5%." }, { "speaker": "Krish Sankar", "text": "Thanks, Kevan. Thanks, Tim." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Krish. Operator, could we get the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Richard Kramer with Arete Research. Please go ahead." }, { "speaker": "Richard Kramer", "text": "Thanks very much. My first question is for Tim. I'd like to ask about what might accelerate the pace of Apple Intelligence adoption. I guess do you see this simply as a question of time i.e., to launch more markets and languages or increase the percentage of installed base devices that can support it? Or is it a question of money, i.e., shifting R&D or marketing spend towards AI? And based on other prior Apple services, do you expect a sort of tipping point where adoption will go mainstream? Thanks." }, { "speaker": "Tim Cook", "text": "I do believe it will go mainstream. I'm getting feedback from people using different features today. And this is -- keep in mind that on the iPhone side of our business, you either have to have an iPhone 15 Pro or iPhone 16 to use Apple Intelligence. And so the -- as that base grows, I think the usage will continue to grow. And I think -- I know from my own personal experience, once you start using the features, you can't imagine not using them anymore. I know I get 100s of e-mails a day, and the summarization function is so important. So I think it's a combination of that. And of course, in April, we roll out a whole series of new languages that we had mentioned, and so the base grows further." }, { "speaker": "Richard Kramer", "text": "Okay, thank you. And then, Kevan, one of Luca's legacies was really getting Apple to record margin levels and also maintaining very consistent pricing across the product range. But taking the current high levels of profitability as fairly stable, what observations might you share about price sensitivity of users and whether having a wider range of pricing across the products might unlocks potentially further market share gains or boost overall product growth?" }, { "speaker": "Kevan Parekh", "text": "Yes, it's a good question. I think one, I don't think we're going to really depart from what served us pretty well to now. I mean we always take it into consideration, looking at short-term -- comparison between the short term and the long term. I think we've had a pretty disciplined pricing strategy, which would serve us pretty well. And I think we're going to continually kind of stick with that as far as I can tell." }, { "speaker": "Richard Kramer", "text": "Okay, thanks." }, { "speaker": "Suhasini Chandramouli", "text": "Thank you, Richard. Operator, could we get the next question, please?" }, { "speaker": "Operator", "text": "Our next question is from Atif Malik with Citi. Please go ahead." }, { "speaker": "Atif Malik", "text": "Hi, thank you for taking my question. How do you guys see the potential tariff impact to your product for consumer demand under Trump 2.0 you guys did find under Trump 1.0?" }, { "speaker": "Tim Cook", "text": "We are monitoring the situation and don't have anything more to add than that." }, { "speaker": "Atif Malik", "text": "Great. And Tim, as a follow-up, there is a lot of discussion on agentic AI, the use of agents. Do you guys see the upgraded series expected in April as something that will, let's say, be the killer application among the suite of features that you have announced in Apple Intelligence?" }, { "speaker": "Tim Cook", "text": "I think the killer feature is different for different people. But I think for most, they're going to find that they're going to use many of the features every day. And certainly, one of those is the -- is Siri, and that will be coming over the next several months." }, { "speaker": "Atif Malik", "text": "Thank you." }, { "speaker": "Suhasini Chandramouli", "text": "All right. Thank you, Atif. Operator, could we please get the last question?" }, { "speaker": "Operator", "text": "Our last question is from Ben Bollin from Cleveland Research Company. Please go ahead." }, { "speaker": "Ben Bollin", "text": "Good evening, everyone. Thanks for taking the question. Tim, I'm interested in your thoughts and how you would have us think about the average useful life of these devices in the wild. And in particular, curious, if you look at the strength you saw in fiscal ‘21 and how that might support accelerated refresh opportunity into the future?" }, { "speaker": "Tim Cook", "text": "Yes. Ben, I think it's different for different types of users. I mean you have very early adopter kind of users that are very quick to jump on the latest technology that upgrade very frequently. And then you have people that are on the entire opposite side of that barbell. And most people are between those two points. And so I do think there were lots of units that are sold during the COVID period of time, and it's a huge opportunity for us as a company to -- for more than one of the product categories." }, { "speaker": "Ben Bollin", "text": "That’s it from me. Thanks, Tim." }, { "speaker": "Tim Cook", "text": "Thank you." }, { "speaker": "Suhasini Chandramouli", "text": "All right. Thanks, Ben. A replay of today's call will be available for two weeks on Apple Podcasts or as a webcast on apple.com/investor and via telephone. The number for the telephone replay is 866-583-1035. Please enter confirmation code 7398532 followed by the pound sign. These replays will be available by approximately 5 p.m. at Pacific Time today. Members of the press with additional questions can contact Josh Rosenstock at 408-862-1142. And financial analysts can contact me, Suhasini Chandramouli, with additional questions at 408-974-3123. Thanks again for joining us here today." }, { "speaker": "Operator", "text": "Once again, this does conclude today's conference. We do appreciate your participation." } ]	Apple Inc.	24,937
ABBV	4	2,020	2021-02-03 09:00:00	Operator: Good morning, and thank you for standing by. Welcome to the AbbVie Fourth Quarter 2020 Earnings Conference Call. All participants will be able to listen only until the question-and-answer portion of this call. [Operator Instructions] I would now like to introduce Ms. Liz Shea, Vice President of Investor Relations. Liz Shea: Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Vice Chairman and President; and Rob Michael, Executive Vice President and Chief Financial Officer. Joining us for the Q&A portion of the call is Jeff Stewart, Executive Vice President, Commercial Operations. Before we get started, I remind you that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties, including the impact of the COVID-19 pandemic on AbbVie's operations and financial results that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our 2019 Annual Report on Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand AbbVie's ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Unless otherwise noted, our commentary on sales growth is on a comparable basis, which includes full year -- full current year and historical results for Allergan. For this comparison of underlying performance, all historically reported Allergan revenues have been recast to conform to AbbVie's revenue recognition accounting policies and exclude the divestitures of Zenpep and Viokace. References to operational growth further excludes the impact of exchange. Following our prepared remarks, we'll take your questions. So with that, I'll now turn the call over to Rick. Richard Gonzalez: Thank you, Liz. Good morning, everyone, and thank you for joining us today. I'll discuss our fourth quarter and full-year 2020 performance as well as our expectations for 2021. Mike will then provide an update on recent advancements across our pipeline, and Rob will discuss the quarter and our 2021 guidance in more detail. Following our remarks, we'll take your questions. We delivered another strong quarter with adjusted earnings per share of $2.92, exceeding the midpoint of our guidance by $0.08. Fourth quarter total net revenues were up nearly 7% on a comparable operational basis. This performance was driven by robust double-digit sales growth from our immunology, hem/onc and neuroscience franchises, as well as 9% comparable operational sales growth of Botox Cosmetic, which is demonstrating a rapid recovery. Our fourth quarter performance topped off another excellent and truly transformational year for AbbVie, which included the successful acquisition and integration of Allergan, creating a stronger and much more diverse AbbVie with leadership across numerous attractive high-growth markets. Significant contributions from our two new best in category immunology medicines, RINVOQ and SKYRIZI , which combined for more than $2.3 billion in 2020 sales, their first full year on the market. We expect the combined contribution from RINVOQ and SKYRIZI to nearly double in 2021 to approximately $4.6 billion based on their continued strong uptake in RA and psoriasis as well as RINVOQ’s anticipated approvals in PSA, ankylosing spondylitis and atopic dermatitis later this year. We delivered continued robust growth from our leading hem/onc portfolio, with IMBRUVICA and VENCLEXTA contributing more than $6.6 billion in combined 2020 sales. We expect our hem/onc franchise to grow double digits again in 2021. We also added two compelling oncology pipeline assets, Epcoritamab, a potential best-in-class CD3xCD20 bispecific antibody in development for B-cell malignancies and lemzoparlimab, an anti-CD47 monoclonal antibody being studied in multiple cancers. These two assets will further support the growth of our hem/onc franchise across our long-range plan. The acquisition of Allergan brought us a substantial neuroscience portfolio with compelling therapies for migraine and psychiatric conditions augmenting our already existing neuro franchise. The newly combined neuroscience franchise delivered nearly $4.9 billion in comparable 2020 revenue and is expected to grow double digits in 2021. We also added the leading global Aesthetics franchise, a largely cash pay portfolio with roughly $3.5 billion in comparable 2020 revenues. As I previously noted, this portfolio has demonstrated a rapid V-shape recovery and we view Aesthetics as an extremely attractive long-term growth opportunity. And importantly, we made excellent progress in 2020 with our pipeline. We expect our R&D pipeline advancements to lead to the approval of more than a dozen new products or indications over the next two years, including a total of six additional indications for RINVOQ and SKYRIZI, which will cover all of Humira's major indications plus new significant disease areas, including atopic dermatitis, expanded indications for VENCLEXTA and Vraylar and several new product approvals, including Atogepant for episodic migraine, Navitoclax for myelofibrosis and ABBV-951, a potentially transformative next-generation therapy for advanced Parkinson's disease. These new opportunities will collectively add meaningful revenue growth in advance of the U.S. Humira LOE. We've entered 2021 in a strong position, which is reflected in our revenue and earnings per share guidance. Based on the recent outperformance of our business, we expect full-year 2021 comparable operational sales growth of approximately 9.4% with total AbbVie sales expected to be approximately $1.7 billion above current consensus, and we anticipate 2021 adjusted earnings per share of $12.32 to $12.52, representing growth of 17.6% at the midpoint. This level of guidance represents impressive performance with nearly all aspects of our business expected to perform at or above current consensus for 2021. The Allergan integration continues to go very well. The transition has been seamless despite the size of the transaction and the timing of the COVID pandemic. While we're making excellent progress against our expense synergies, which Rob will cover in more detail here momentarily, it remains increasingly clear to us that there are significant opportunities for long-term revenue contributions across numerous Allergan growth platforms. As we recently disclosed, we believe UBRELVY , the first-to-market in leading oral CGRP for acute migraine, represents a $1 billion-plus peak sales opportunity. Atogepant, a potential once-daily oral treatment for the prevention of episodic and chronic migraine also represents a $1 billion-plus peak sales opportunity. We expect Vraylar's peak sales to approach $4 billion within its currently approved indications of schizophrenia, bipolar I disorder and bipolar depression with major depressive disorder or MDD, representing a potentially significant incremental growth opportunity. Aesthetics, which is poised to regain its growth trajectory this year is expected to generate high single-digit revenue growth over the next decade. We continue to closely monitor the COVID dynamics, which will have an impact on our business again in 2021, predominantly in the first half of the year, but significantly moderated from the 2020 impact. And despite the recent COVID resurgence within select geographies, we feel the global healthcare system is much better equipped with COVID treatment protocols in PPE to safely see and treat patients throughout the current year. That said, some therapeutic areas continue to be more impacted than others, like CLL, HCV, certain hospital-based procedures, among others, which we have contemplated in our 2021 guidance. Overall, we've been pleased with the rate of recovery across our business, a testament to our differentiated product profiles and our commercial execution. So in summary, we've assembled an impressive set of growth assets and the outlook for AbbVie's business remains strong. With RINVOQ and SKYRIZI expected to contribute more than $15 billion in risk-adjusted sales by 2025 and our expectations for continued robust growth across hem/onc, neuroscience, and aesthetics, we have a high degree of confidence that we will be able to successfully absorb the Humira LOE impact in 2023, support an immediate return to total sales growth in 2024 and produce compelling high single-digit compounded annual total sales growth in 2025 through the remainder of the decade with the diversified portfolio and pipeline that we have today. With that, I'll turn the call over to Mike for additional comments on our R&D programs. Mike? Michael Severino: Thank you, Rick. We've clearly made significant progress with our pipeline over the past few years, particularly our late-stage programs in hematologic oncology with IMBRUVICA and VENCLEXTA, and in immunology with RINVOQ and SKYRIZI. Since inception, our R&D organization has delivered an impressive set of new products, which collectively contributed approximately $11 billion in revenue in 2020. We also continue to see significant evolution of our early and mid-stage clinical programs with many assets expected to transition to late-stage registrational studies over the next several years. We will continue to replenish our late-stage pipeline with innovative assets that have the potential to drive additional growth for AbbVie in the second half of the decade. At our recent immunology investor event in December, we provided a detailed overview of our immunology programs, highlighting the robust data generated to-date for RINVOQ and SKYRIZI across approved and pipeline indications. Included in this event, we presented positive topline data from two new Phase 3 studies for RINVOQ . Results from the first induction study in ulcerative colitis and results from the head-to-head study versus dupilumab in atopic dermatitis. We expect to see results from the second Phase 3 UC induction study later this quarter, and from the UC maintenance study in the middle of this year with regulatory submissions anticipated in the second half of 2021. Our regulatory applications for RINVOQ in atopic dermatitis are currently under review and we expect an approval decision in the US in the second quarter based on priority review and in Europe in the second half of the year. We recently received European Commission approval for RINVOQ in psoriatic arthritis and ankylosing spondylitis and expect approval decisions for those indications in the US in the first half of this year. I want to take a moment to address the topic of safety, specifically MACE and malignancies following the results from tofacitinib's post-marketing safety study. At present, there are no data to suggest the safety outcomes from their study applied to a specific JAK1 inhibitor such as RINVOQ. We are not aware of any signal for an elevated risk of MACE or malignancies with the RINVOQ or any JAK inhibitor other than Xeljanz. We conducted a pooled database analysis across our clinical trials for DVT, MACE and malignancies at the time of RINVOQ’s regulatory submission and have updated it periodically including up to the present. Rates with RINVOQ have not been elevated relative to competitors or to expected baseline rates. Importantly, there has been no increase or meaningful change in those rates over time. Additionally, we adjudicate events for MACE and DVT, which is considered the highest standard of evidence. If we look across our long-term database in RA, a population that is at increased risk for MACE events, our rates remain low. At the approved dose in RA, we have followed more than 3,700 treated patients totaling more than 9,000 patient-years' experience. Our rate of MACE events is 0.4 per 100 patient-years, which compares favorably to the expected rate of 1.0 to 1.7 events for 100 patient-years. In addition, there is no evidence of a dose-response between the 15 and 30-milligram doses. Similarly, the rate of malignancy, excluding non-melanoma skin cancer with similar follow-up is 0.8 events per100 patient-years. This rate is also consistent with the expected range of rates of 0.86 to 0.94 per 100 patient-years. And again, we see no evidence of a dose-response between 15 and 30-milligrams. Moving now to SKYRIZI; we also recently reported top-line results from the Phase 3 programs for SKYRIZI in Crohn's disease and psoriatic arthritis. In the two Crohn's induction studies, SKYRIZI demonstrated significant improvements in clinical remission and endoscopic endpoints compared to placebo with symptom improvement seen as early as week four. Based on the data generated to date, we believe SKYRIZI has the potential to become an important new treatment option for patients with moderate to severe Crohn's disease. We expect to see results from the maintenance study in Crohn's disease later this year with regulatory submissions anticipated in the second half of 2021. We're also very pleased with SKYRIZI’s results in the Phase 3 studies in psoriatic arthritis, where we saw significant improvements in disease activity across both skin and joint endpoints compared to placebo. We believe that the activity we have seen on joint disease and the impressive skin clearance that is a hallmark of the SKYRIZI program make it a compelling offering for patients with mixed joint and skin involvement. We plan to submit our regulatory applications for SKYRIZI in psoriatic arthritis in the first half of this year. We're making good progress with our early and mid-stage immunology programs as well where we expect several data readouts and phase transitions in 2021. We expect to begin three new studies for ABBV-154, our TNF steroid conjugate including a Phase 2b dose-ranging study in RA as well as Phase 2 studies in Crohn's disease and polymyalgia rheumatica. And we'll see proof-of-concept data in the second quarter for ravagalimab, our CD40 antagonist in Phase 2 for ulcerative colitis, and for ABBV-157, our oral ROR-gamma T inhibitor in Phase 1 for psoriasis. Both of these programs experienced slight COVID-related delays with results now expected for both in the second quarter of this year. In oncology, we continue to make significant progress advancing our pipeline with numerous data readouts and regulatory milestones last year. As well as the addition of several new assets brought in through our in-licensing efforts, including Genmab's CD3xCD20 epcoritamab and I-Mab's anti-CD47 lemzoparlimab. We showcased new data from several programs at the recent ASH meeting where we presented nearly 40 abstracts from eight different assets. Notable presentations included data from the Phase 2 CAPTIVATE trial evaluating IMBRUVICA plus VENCLEXTA in frontline CLL, which showed patients who achieved undetectable MRD following this combination maintain their deep remission at the one-year mark after stopping therapy with a 95% rate of disease free survival. We also presented new five-year data from VENCLEXTA’s Murano trial demonstrating the benefits of fixed duration VENCLEXTA combinations and helping patients achieve sustained progression-free survival. The latest results from Murano in the relapsed refractory CLL setting showed a median progression-free survival of 54 months in the VENCLEXTA and rituximab group, compared to 17 months in the bendamustine-rituximab group, three or more years after stopping treatment. Updated dose-escalation data from a Phase 1 study evaluating epcoritamab in B-cell malignancies were also presented at ASH. Epcoritamab is a subcutaneously delivered bispecific CD3xCD20 antibody being developed in collaboration with Genmab. In the Phase 1 study, epcoritamab demonstrated encouraging single agent anti-tumor activity in heavily pretreated patients with a consistent and favorable safety profile showing no Grade 3 or higher CRS events as well as limited neurotoxicity. We believe epcoritamab has the potential to become a best-in-class therapy across a number of B-cell malignancies including diffuse large B-cell lymphoma and follicular lymphoma. The Phase 3 trial in relapsed-refractory DLBCL recently began and we will provide updates on epcoritamab as its development program progresses. Initial results were also presented from a Phase 1 study evaluating TNB-383B in relapsed-refractory multiple myeloma. TNB-383B is a novel bispecific T-cell engaging immunotherapy targeting BCMA and CD3 being developed in collaboration with TeneoBio. These Phase 1 results demonstrated that the BCMA/CD3 bispecific provided overall response rates of 80% with a large number of patients achieving a very good partial response or better despite having received multiple prior lines of therapy. TNB-383B was well tolerated at all doses tested with a few off-target toxicities and no Grade 3 or higher CRS observed. With its safety profile efficacy and the convenience of once every three-week dosing, this agent has the potential to become a promising treatment option for myeloma patients. And our partner I-Mab published an abstract with initial results from a Phase 1 study evaluating lemzoparlimab in AML and MDS. These results demonstrated encouraging activity in relapsed-refractory AML patients and lemzoparlimab was well tolerated with no serious hematological adverse events reported today. Based on these promising initial results, we plan to begin new studies this year for lemzoparlimab in AML, MDS and in multiple myeloma. We also recently saw data from an interim analysis of a Phase 2 study evaluating Teliso-V in heavily pretreated non-squamous, non-small cell lung cancer patients. The encouraging results from Stage 1 of this study met the criteria for advancing the program. With Teliso-V demonstrating a 54% objective response rate in patients with wild-type EGFR with highly expressed c-MET. In EGFR wild-type patients with over-expressed c-MET, which includes both high and intermediate expression, the objective response rate was 35%. Based on these results, we believe that there is an important role for Teliso-V in this target population, which represents roughly 25% of the non-squamous, non-small cell lung cancer population. We will be opening the second stage of the study and are planning discussions with regulators regarding the potential of this study to support an accelerated filing. We expect 2021 to be another important year for our oncology pipeline with several regulatory submissions as well as data readouts across all stages of development. This year, we expect to see data for IMBRUVICA in the Phase 3 SHINE study in frontline MCL with regulatory submissions expected in the second half of the year. Data for IMBRUVICA in combination with VENCLEXTA in second line or greater MCL and frontline CLL with regulatory submission for frontline CLL expected in the second half of the year. We also expect to see data from registration enabling studies for VENCLEXTA in high-risk MDS and navitoclax in relapsed-refractory myelofibrosis. And we expect to see data from numerous programs in our early-stage oncology pipeline. In addition, the programs under collaboration with Calico are also progressing well. Our partnered effort is comprised of a strong pipeline of novel targets, which includes more than 20 active programs in discovery or preclinical development. Importantly, we currently have programs, which have advanced into clinical development in two areas immuno-oncology and neurodegeneration. The lead Calico program in oncology is focused on PTPN2 inhibitors, which act at multiple steps in the cancer immunity cycle and have potential applicability in a broad variety of tumor types. The discovery of novel orally bio-available PTPN2 inhibitors represents a significant breakthrough and a target class that has historically been considered un-druggable. We currently have two assets in Phase 1 development ABBV-CLS-579 and 484. We've seen evidence of immune activation in the clinic with this pathway and we expect to see proof-of-concept data from this program in 2022. The lead Calico program in neuroscience is an eIF2B activator, which targets a key regulator of the highly conserved integrated stress response pathway. Inhibition of this pathway has the potential to prevent pathology and restore function in a number of neurodegenerative diseases such as ALS and Parkinson's disease as well as in traumatic brain injury. Our lead eIF2B activator ABBV-CLS-7262 is currently progressing through Phase 1 and we plan to begin a study later this year in patients with ALS. In other neuroscience updates, last year, we completed our registrational program for atogepant in episodic migraine prevention and we recently submitted our regulatory application to the FDA. We expect an approval decision by the end of the third quarter. The data generated in our Phase 3 programs support a strong benefit-risk profile and we believe that atogepant has the potential to offer meaningful benefits to patients as a safe, effective, oral treatment option for the prevention of episodic migraine. In 2021, we expect to see data from several late-stage neuroscience assets, including results from two Phase 3 studies for Vraylar in major depressive disorder and results from the pivotal program for ABBV-951 in advanced Parkinson's disease with regulatory submissions for 951 expected in the second half of the year. We also expect to see proof-of-concept data for Elezanumab in a Phase 2 study in multiple sclerosis and ABBV-8E12, our lead anti-tau antibody in a Phase 2 study in Alzheimer's disease. In addition to 8E12, we have a number of promising approaches in Alzheimer's, including our neuroinflammation programs aimed at TREM2 and CD33, currently in clinical development, as well as other tau approaches in preclinical development. These include tau antibodies with different epitope specificity as well as approaches to clear intracellular tau. In Aesthetics, we continue to make excellent progress with our portfolio of facial toxins and dermal fillers with several regulatory submissions, data readouts and pivotal study starts expected this year. Our programs include new indications for Botox as well as innovative toxins such as new liquid formulations and both the long and short-acting toxins. We also have programs to develop new indications for the Juvederm Collection as well as novel dermal fillers such as HArmonyCa, which will be entering registration enabling studies in the U.S. And in eye care, based on the positive results from the Phase 3 studies evaluating our topical eye drop AGN-190584 for the treatment of symptoms associated with presbyopia. We plan to submit our regulatory application later this month and expect an approval decision in the fourth quarter of this year. So in summary, our R&D productivity remained high last year despite multiple COVID-related challenges and we were able to maintain steady continuity and minimize delays. We're entering 2021 well-positioned for continued success and we expect significant program advancement across all stages of our pipeline, again this year. This includes five new asset or major indication approvals, half a dozen regulatory submissions, more than 10 pivotal study readouts, and more than 15 data readouts from early and mid-stage programs. With that, I'll turn the call over to Rob for additional comments on our fourth quarter performance and our 2021 guidance. Rob? Robert Michael: Thank you, Mike. Starting with fourth quarter results, we once again delivered strong top and bottom-line performance. We reported adjusted earnings per share of $2.92 above our guidance midpoint by $0.08. Total net revenues were approximately $13.9 billion, up 6.8% on a comparable operational basis and ahead of our expectations. Immunology global sales were approximately $6 billion, up 14.8% on an operational basis. Within immunology, Humira sales were approximately $5.2 billion, up 4.4% on an operational basis with continued high single-digit growth in the US offset by biosimilar competition across international markets. SKYRIZI sales were $525 million and RINVOQ sales were $281 million with both products demonstrating strong sequential growth above expectations. Hematologic Oncology delivered another strong quarter with revenue of approximately $1.8 billion, up 15.5% on an operational basis with solid growth from IMBRUVICA and VENCLEXTA. Aesthetic sales were more than $1.1 billion with Botox Cosmetic and Juvederm both experiencing a rapid recovery from the COVID pandemic. Neuroscience revenues were nearly $1.4 billion, up 14.9% on a comparable operational basis, led by Vraylar and our migraine portfolio. We also saw a significant contribution from eye care, which had sales of more than $900 million. Turning now to the P&L profile for the fourth quarter. Adjusted gross margin was 81.8% of sales, adjusted R&D investment was 12.6% of sales, and adjusted SG&A expense was 22.3% of sales. The adjusted operating margin ratio was 46.9% of sales, an improvement of 230 basis points versus the prior year. Net interest expense was $618 million and the adjusted tax rate was 11.6%. As we look ahead to 2021, our full year adjusted earnings per share guidance is between $12.32 and $12.52, reflecting growth of 17.6% at the midpoint. Excluded from this guidance is $5.63 of known intangible amortization and specified items. We expect adjusted net revenue of approximately $55.7 billion. At current rates, we expect foreign exchange to have a 1% favorable impact on full year comparable sales growth. This forecast comprehends the following assumptions for our key products and therapeutic areas. We expect immunology global sales of approximately $25 billion, including US Humira growth of approximately 8%, internationally Humira revenue of approximately $3 billion at current exchange rates, SKYRIZI global sales of approximately $2.9 billion, and RINVOQ global sales of approximately $1.7 billion. We expect hematologic oncology to grow double-digits with IMBRUVICA global revenue of approximately $5.7 billion and VENCLEXTA global sales of approximately $1.8 billion. For Aesthetics, we expect global sales of approximately $4.5 billion, including approximately $1.8 billion from Botox Cosmetic and approximately $1.3 billion from Juvederm. For neuroscience, we expect global revenue of approximately $5.7 billion, including Botox Therapeutic sales of approximately $2.3 billion, Vraylar sales of approximately $1.8 billion, and UBRELVY sales of approximately $400 million. For eye care, we expect global sales of approximately $2.9 billion, including approximately $550 million from RESTASIS, which assumes no generic competition in the first half of 2021. For women's health, we expect global revenue of approximately $1.1 billion. For remaining larger products, we expect global sales of approximately $2 billion from Mavyret, $1.2 billion from Creon, $1 billion from Linzess, $800 million from Synthroid, and $750 million from Lupron. Looking at the P&L for 2021, we are forecasting full year adjusted gross margin of approximately 83% of sales, adjusted R&D investment of approximately $6.6 billion and adjusted SG&A expense of approximately $11.8 billion. This guidance includes approximately $1.7 billion in expense synergies from the Allergan acquisition. We are forecasting an adjusted operating margin ratio of approximately 50% of sales, which represents an improvement of roughly 200 basis points versus 2020. We expect adjusted net interest expense of approximately $2.4 billion. Our non-GAAP tax rate to be approximately 12.5% and our share count to be roughly flat to Q4 2020. As we look ahead to the first quarter, we anticipate net revenue approaching $12.7 billion. At current rates, we expect foreign exchange to have a 1% favorable impact on comparable sales growth. We are forecasting an adjusted operating margin ratio of approximately 50% of sales. And we model a non-GAAP tax rate of 12.3%. We expect adjusted earnings per share between $2.79 and $2.83, excluding approximately $1.32 of known intangible amortization and specified items. Finally, AbbVie's strong business performance and outlook continues to support our capital allocation priorities. Our cash balance at the end of December was $8.4 billion and we expect to generate free cash flow of approximately $21 billion in 2021. This fully supports a strong and growing dividend, which we have more than tripled since inception, as well as rapid debt repayment where we expect to pay down $17 billion of combined company debt by the end of 2021, including the $8.6 billion that was repaid in 2020. We expect to achieve a net debt to EBITDA ratio just below 2.5 times by the end of 2021 with further deleveraging through 2023. We anticipate that our net leverage ratio will be approximately 2 times by the end of 2022. Our strong cash flow also allows for continued business development with approximately $2 billion allocated annually to augment our pipeline with the most promising external technologies and innovative mid to late-stage assets. In closing, we are very pleased with AbbVie's strong performance in 2020. We've driven top tier growth while also advancing our strategic priorities and we expect to deliver robust performance in 2021 and over the long term. With that, I'll turn the call back over to Liz. Liz Shea: Thanks, Rob. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, first question, please. Operator: [Operator Instructions] And our first question today is from Geoffrey Porges from SVB Leerink. Geoffrey Porges: Thank you very much. And as usual, appreciate all the detail in the guidance, and congratulations on the results. A quick question on SKYRIZI and one on RINVOQ. First, one of your competitors had a negative result of a post-marketing study recently. I'm just wondering if you've had any discussions with regulators about conducting any other studies for RINVOQ or updating the label for RINVOQ as a result of that negative signal? And then, secondly on SKYRIZI, a commercial question. Your current price for the 150-milligram dose is about $85,000 and you're using 4x, the dose for ulcerative colitis. Could you just tell us how you can manage that? And is it feasible to have sort of different prices despite the big difference in dosing? Thanks. Michael Severino: Okay, this is Mike. I will take your second question first and then we can cover the SKYRIZI question. With respect to RINVOQ, I assume you're talking about the tofacitinib safety study, which top line results fairly recently in the last several days and showed in that program that they were unable to exclude a risk of MACE or malignancy based on the criteria that were used to analyze that data sets. As I said in my prepared remarks, we've kept a very, very close eye on our data, both at the time of the NDA and in an ongoing manner since that time and we've not seen a signal. Our rates have not been elevated with respect to comparator or baseline rates and the rates overall remain low. With respect to your specific question about whether we've had discussions with regulators, regulators have not asked us to do long-term safety study in the way that Pfizer was asked. So that has not been discussed with regulators and we have not had any contact with regulators around labeling updates up to the present time. Geoffrey Porges: Great. Michael Severino: And with respect to SKYRIZI?... Jeffrey Stewart: Yes. Hi, it's Jeff. It's Jeff Stewart on the commercial question. We have anticipated the different markets and how we will approach the pricing. Now, it's important that we're just starting to see the SKYRIZI data. We saw the induction data, we'll see the maintenance data. I think it's important that as we look at our strategy that we're honing is for SKYRIZI, you're going to -- for Crohn's, you're going to have an induction dose, which is an IV at a different dose and we know that based on the form and some things we can believe we can price that to market. And also, we are coming with a unique approach for the maintenance as well depending on where that dosing falls out. And we would be using at that point, which is known as on-body injector. So the combination of the forms as well as basically the ways that we will deliver the medication when we get there, we believe that we can price effectively to the market and manage it across the indications. Richard Gonzalez: So this is Rick. So I think the bottom line is, we've contemplated that. It's a good question, Geoff, but I think we have a strategy that will allow us to deal with that and impact the market in an appropriate way. Liz Shea: Thanks, Geoff. Operator, next question, please. Operator: And our next question is from Vamil Divan from Mizuho Securities. Vamil Divan: Hi, great. Thanks so much for taking the questions. And maybe two if I could. So I want to appreciate the long-term guidance you've given recently on the top line. I'm just wondering how we should maybe think about the margin progression as we think about the Humira LOE in a couple of years? And then as we sort of get past that and your sales touch ramp up again, if you could maybe give us some sense of where you think your margins could sort of come back to? And then, the other one I have is just on Vraylar. Again, appreciate the guidance you've given there. I think one of the big events for you guys this year will be the Phase 3 data in MDD. I’m just curious kind of what gives you confidence that maybe you can just talk about whether it's around the drug or the study design, sort of, what gives you confidence or why should we be confident sort of going into that data readout? Thanks. Robert Michael: Vamil, this is Rob. I'll take your question on margin progression. I think when you consider the greater than $2 billion expense synergies from Allergan by next year and the P&L leverage that will come from the sales growth, we also expect for next year, you should expect that our operating margin will continue to expand through 2022. Upon the entry of U.S. biosimilars in 2023 and given Humira's profitability, it is reasonable to expect operating margin pull back. We've indicated before the 45% range based on our current LRP, I think it'll be a little bit higher than that. But then we've returned to growth immediately – in 2024, we'll return to revenue growth, a very strong revenue growth starting in 2025, you can expect then operating margins once again expand. We've had a long history of expanding operating margin by leveraging the P&L. And I would expect that to continue as we start to see very strong revenue growth starting in 2025 and beyond. Richard Gonzalez: Yes, Vamil, this is Rick. Mike and I'll cover the second question on Vraylar. It's important to recognize that what we've communicated in long-term guidance on Vraylar is based on the three currently approved indications. So it doesn't count on the fact that MDD would be successful. Now having said that, I think we do have -- I'd say, we're cautiously optimistic about the MDD indication and I'll let Mike kind of walk through how we look at it and what gives us that level of confidence. But in the event, it weren't to play out, that doesn't impact the guidance that we gave. Michael Severino: So, this is Mike. I'll pick up from here. I think that our optimism and I think that's the right way to express it in a disease like MDD, which is a challenging disease to work and is based on a couple of features. One is based on the basic pharmacology of Vraylar, which has a unique mix of D3, D2 specificity and other features that lead clinically to what's been described as a brightening effect, which seems to be beneficial in a number of settings. It's also driven by the results that we have from the MDD study that is positive that we already have in hand. So with one positive study, we would need only one -- at least one or, of course, both of the next two studies to read out positive, either of those outcomes would support a filing. We've done a deep dive into the study design and the patient population. We think it's a well-designed study. And we think the patient characteristics with respect to baseline factors and other elements are all very appropriate for this sort of study and we can assess that in a blinded aggregate way in a way that's completely consistent with the study rules for the conduct of the study. And so all of those things make us feel optimistic that it's a molecule with a good chance to work, well-designed study, well-conducted study, and we look forward to seeing the results. But as I mentioned, MDD is a challenging area. And for that reason, we didn't build into our deal model and we didn't factor it into our guidance, as Rick said, so we view this as upside. Liz Shea: Thanks, Vamil. Operator, next question, please. Operator: Thank you. And our next question is from Randall Stanicky from RBC Capital Markets. Randall Stanicky: Great. Back to RINVOQ in atopic derm, how quickly do you guys expect that launch to ramp? And maybe just help us with expectations given coinciding JAK competition from abrocitinib , the timing to payer ramp and coverage. And then we sense of a lot of patient warehousing, maybe if you could help quantify your thinking around that opportunity within the $1.7 billion outlook for the year, that would be helpful? And then a quick follow-up, Rick. You don't get asked about eye care a lot. It's a $3 billion global franchise. You have some pipeline behind it. It could be a good growth business, but it's declining. Any appetite to strategically add to that business or reposition it? Or should we view it more as a mature cash flow generator? Thanks. Jeffrey Stewart: Yes, hi. It's Jeff Stewart. I'll start off with the atopic derm commercial question. We're very encouraged with the market that we're about to enter and I'll give you some context there. So when we look at the population, we see that just on the moderate to severe atopic derm patients that the market size or the potential is at least 2 times and probably closer to 3 times the size of the psoriasis market. And so this is very, very encouraging in terms of our ability to enter. It's also significantly under-penetrated. I mean if you look at the psoriasis market, you're talking about far greater than 10% or 12% penetration and in the single-digit, the low-single digits, where we are right now with the one biologic dupilumab. So it's very, very attractive. The other thing that I would say is that we see from our go-to-market approach that we know the HCPs very intimately. So about 85% of the market is driven by the derms, we know the derms very well and there is a 90% -- roughly 90% overlap with the big prescribers of dupilumab and drugs like SKYRIZI and our Humira. So we are very, very encouraged at the ability for this segment to rapidly expand, despite the fact there will be multiple new entrants coming in. To get to your specific question about the access ramp, we have a very strong position, as you know with RINVOQ right now in the existing indication of RA. We had greater than 95% commercial access, that's the dominant channel for atopic derm and our anticipation is we will have very strong access that we'll build to that level over the course of '21. Obviously, it's going to take some time, once we get the approval to go through the final approvals on the big commercial plans and so we see it's starting off slow, but then building into the middle of the year and certainly getting to a significant level at the end of the year. So the combination of the market, the asset itself, which looks very, very strong, as you've seen from the data and the way that we will play in our derm segment as well as the allergy segment give us a lot of confidence for a strong ramp in '21 and beyond. Richard Gonzalez: The only thing I would add to Jeff's comments, I mean if you look at RINVOQ did $731 million last year. Obviously, if you look at the running rate out of the fourth quarter had [ph] strong running rate coming out of the fourth quarter but that's a $1 billion worth of growth from '20 to '21. The majority of that growth is going to come from continued performance in RA. I think where you will see the most significant impact from atopic dermatitis will be as we flow into '22, much like as you saw what happened in the RA market, it takes time for physicians to start to get adapted. Once they do, their momentum picks up. So, I don't remember the specific number. I'm not sure we gave that guidance anyway, but I would be thinking about it more than its continued penetration and growth in RA which drive in the bulk of that growth. Rob, anything you want to add? Robert Michael: Yes, I just -- on your question regarding warehouse patients who have a very modest amount of warehouse patients assumed [ph] in the forecast. So we're not count -- the $1.7 billion doesn't really count on that. And keep in mind that RINVOQ was of the product that was lesser impacted by COVID and so there's not really significant how warehousing in that forecast. Richard Gonzalez: And then, Randall, on your second question; I would say we absolutely agree with your point of view. I think eye care is a very attractive market. The kinds of markets that I think we look for and that we are the very best at is where there are specialized physicians who really drive the use of medications based on the clinical data and being able to restate markets and improve standard-of-care in those markets, and certainly, eye-care, I think it fits that description. And so we would have a strong appetite to look for opportunities and we are looking for opportunities now that we could add to that eye care business to be able to drive growth. Obviously, RESTASIS, as Rob indicated in his formal remarks, we've built in a half a year that's still an unknown of when that product will go generic or if it will go generic. But I think even aside from that regardless of what happens with RESTASIS longer-term, this is an area that we would have interest in and if we could find the right kind of assets to add to it, we would enthusiastically do that. Liz Shea: Thanks, Randall. Operator, next question, please. Operator: And our next question is from Chris Schott from JPMorgan. Chris Schott: Great. Thanks so much for the questions. Can you just elaborate a little bit more on Aesthetics and maybe some of the learnings you've had in that franchise since you've acquired it? Have there been changes in the way you think about approaching the business commercially in your levels of investment? I'm just trying to get my hands around that high single-digit growth over time does seem healthier than the street have been anticipating. I'm just trying to get a little bit more color of what you're seeing in the market that gives you confidence in that. And then, my second question was just on IMBRUVICA, the growth has slowed here a bit. Can you just elaborate a bit more and how much of this is -- is there any COVID related dynamics playing out here? How much of this is competitive? I'm just trying to [ph] sense of just how you're seeing that the health of that franchise over time? Thanks so much. Richard Gonzalez: Yes, Chris, this is Rick. So I'll cover the Aesthetics question for you. I'd say as we've studied the Aesthetics market and had an opportunity to be able to operate the business now for some time, I think we're even more enthusiastic about the long-term ability to be able to grow this market. I would say some of the areas that were a bit of a surprise to us is the responsiveness of this market to patient activation, and I would say that the strategy that we've put in place is one where we are funding the business on a very -- on a continuous basis at a high level to achieve the level of activation that we're looking for and we think that will, certainly, you can see, the response I guess an example in Botox already, we are seeing a very aggressive response in being able to grow the market, you saw the Botox grew -- Botox Cosmetic grew in the fourth quarter to 9%. I would expect that we can continue to drive that level of growth. And as part of legacy Allergan, I think it was much more episodic in the way this was funded quarter-to-quarter where we basically built a funding plan that will allow them to continue to drive activation over a longer term [ph]. I'd say the second thing that's it's of interest to us is, I think this is a market where you can drive significant innovation. If you fund that innovation in a way, again on a more continuous basis and advance those programs more aggressively, and have a well thought out strategic roadmap as to where you're trying to drive some of these markets. As Mike mentioned in his comments, our goal is to basically try to advance the level of performance of the toxin market significantly over time. And the same with the filler market. There are certainly things that we can do to expand the areas that you could use fillers, both within the US and globally and that's a significant opportunity. But long term, we think there is an opportunity to take some of the biologic expertise that we have here at AbbVie and create more biologically active fillers, and not only do physical filling but also improve collagen, improve elastin, and other kinds of characteristics that will improve skin quality. And we think that will be -- if we're successful, we think that will be a significant opportunity to drive long-term growth. And then, the last thing I'd say is the geographic footprint that AbbVie has. We obviously have a very broad geographic footprint and the structure that we've set up is this totally integrated global unit that we're operating the Aesthetics business really gives them the freedom to go out and expand or more aggressively fund areas around the globe that they think there is a significant opportunity. A good case in point is I believe it was in the fourth quarter, we funded a significant expansion in China to be able to increase the sales force there to be able to drive it more deeply into a broader set of the cities in China to the next level down and we are already seeing the benefits of that, China is already back to growing much like it did pre-COVID. So I think there's a lot of attractive attributes about that. On IMBRUVICA maybe Jeff and I will tag team on that one. What we're clearly seeing is the COVID is having an impact on patient starts in CLL. We're not only seeing it IMBRUVICA, but we're seeing in VENCLEXTA as well. And then somewhat logical when you think about these oncology practices of trying to reduce density and CLL is a disease where you can, in many patients' cases, you can delay therapy for some period of time. I would say that's the vast majority of it. When we look at -- when I look at the overall share. And the reason why I'm talking about the overall share is VENCLEXTA is now gaining a significant level of momentum in this market as well. When I look at our overall shares in first line, second line or third line, we continue to have the dominant share position. And I'd say probably, partially due to your question, if I look at Calico [ph] I'd say it's performing at the expectation we have. I think the first line share is about 12%, slightly higher in second line maybe 14%, and I don't recall the third line share... Jeffrey Stewart: Very similar, yes. Richard Gonzalez: So I'd say that's within the range or we saw with MCL, it's within the range of what we had modeled. So it's not really a competitive issue that we're dealing with. It's more a function of getting those patients starts back up to the level they were before. Anything, you want to add, Jeff? Jeffrey Stewart: No, I think Rick, that's exactly right. The only thing I would say in terms of our forecast, we think that in the first part of the year, the early part of the year, we continue to see some suppression in the new patient starts. But as we hit the second and third quarter, we anticipate that the market will recover. Liz Shea: Thanks, Chris. Operator, next question, please. Operator: And our next question is from Tim Anderson from Wolfe Research. Nicole Maher: Hi. Can you hear me? This is Nicole Maher on for Tim Anderson. What does your long-term guidance assume for potential austerity measures in the ex-U.S. countries in 2021 and beyond, similar to what we saw in the post-2008 time period except this time around, it would be the fall from the COVID impact? Richard Gonzalez: Hey, Nicole. This is Rick. I think this is something we've got experience with, if you think about the economic crisis, I thought we saw a similar kind of uptick in price erosion outside the United States and in particular, I'd say in the European Union, we have factored in a reasonable assumption into our guidance for 2021, I feel good about that. I think it is reflective of what we're likely to see. So I think we're covered from that perspective. Anything you want to add Rob? Robert Michael: No, that covered it. Liz Shea: Thanks, Nicole. Operator, next question, please. Operator: And our next question is from Steve Scala from Cowen. Steve Scala: Thank you. Two questions. AbbVie delivered one of the first completely clean and compelling quarters in pharma this cycle, and I have to believe, has something in reserve for upside as the year unfolds. I'm sure you monitor the competition, so beyond the AbbVie management team itself, what about your business do you think is allowing you to execute in this way? Would you attribute it to -- mainly to the products themselves, the payer strategies, geographic mix, or is there something else? And the second question is the ongoing Vraylar Phase 3 trials utilize doses up to 3-milligrams while the successful prior trials were up to 4.5-milligrams, so why were the doses lowered in the first place? And what placebo response mitigation methods are included in the ongoing trials? Thank you. Richard Gonzalez: Okay. Steve, this is Rick, I'll cover the first one, and Mike can cover the second one. I would say, first and foremost, we are a very disciplined organization in how we approach execution in the marketplace. We tend to probably, in [ph] some extent, obsessively plan and then go out and try to execute against that plan and I think in times of difficulties that kind of discipline tends to demonstrate itself and that's when you see the biggest differences. So that's not say [ph] other people don't do it like that. I'm not that familiar with how others operate, but I know how we operate and I know how we contingency plan and we look at. Okay, if that doesn't work, what are we going to do and we do that ahead of time, if that doesn't work, what are we going to do. And I think that kind of contingency planning and focus on execution is helpful. I'd say the second thing is, if I look at our business, we put a strategy in place and I feel very good about how the business is performing overall. I mean I would say the business is firing on all cylinders. And you can look at our fourth quarter performance, to your point, and I think it demonstrates that and you can look at our guidance and it demonstrates that almost every single product area is performing at or above, most of them above what consensus was and then I think it's another indicator for you and we have a much more diverse business now. We have four major growth platforms that are helping us drive that level of growth. Our new product launches are doing extremely well. Obviously, SKYRIZI and RINVOQ are, but I'd also say UBRELVY and Vraylar are performing extremely well and the pipeline, I would say one of the things gives me the most confidence is when I look at the pipeline behind that. It's designed to be able to drive our long-term growth because one of the things that we focus on is how we're going to make sure that we continue to drive this business to perform at the level its performing over the long term. And so if I look at the SKYRIZI and RINVOQ R&D execution around the follow-on indications, it's been nothing less than spectacular both from a timing standpoint and the kind of data that we have been able to produce. When I look at our hem/onc strategy, we've had a very disciplined strategy there ensuring that we have enough assets to continue to grow. What has become a very large franchise for us. Our franchise is $6.6 billion as we said, we're going to grow in double digits. Over the long term, what's going to allow us to do that? Well obviously IMBRUVICA is going to continue to drive share, VENCLEXTA is going to continue to drive share in CLL but VENCLEXTA has indication expansions in the area of potential, in the areas of T1114 and a broader AML population and several other areas. Then I look at Navitoclax. We should get that product approved and give us an opportunity in myelofibrosis and then you look at Genmab and you look at our CD47, those will all allow us to ensure that we can sustain that growth profile over the long term. In neuroscience, same thing, atogepant will allow us to expand into the broader migraine population. So I feel very good about what we put in place and our ability to execute against that. So I think there is not one silver bullet that I can point to. I think it's all of those things, certainly, our ability in market access has helped a lot in the US. I think we're very good at that, but you have to have the right kinds of assets in order to execute that. You have to have assets that are differentiative like SKYRIZI and RINVOQ. So it's the combination of all of that gives you this performance and gives you the long-term sustainable ability to deliver that kind of performance and I feel awfully good about where we are. Michael Severino: So, this is Mike. I'll take the Vraylar question. I believe you're talking about the ongoing MDD studies and what I would say there is that the dose selection was based on everything we know about dose-response, not only from the prior MDD studies but across the program and we've done a deep dive into that and we're confident that we're at a dose that ought to have optimal effect in these indications -- in this indication. With respect to your question about placebo response rate, managing or controlling the placebo response is extremely important in all studies, but particularly in depression studies and other studies in psychiatry. And I would say that there are many different approaches that are taken that are complementary to each other. The first and most important is appropriate site selection, one has to select sites with an appropriate patient population with experienced investigators who are also experienced evaluators in a clinical trial setting and that's one of the most important things to getting high-quality data to determine whether a drug works. The next element has to do with investigator training, investigator manuals, protocol design and also with respect to inclusion and exclusion criteria to make sure that you have a patient population that is representative of the population that you would expect to treat post-registration if the study is successful. And we've taken a look at all of these things, we've taken a look at the blinded aggregate data and we feel good that the measures that we have in place will effectively control the placebo response and give us a quality readout. Steve Scala: Thank you. Liz Shea: Thanks, Steve. Operator, next question, please. Operator: Thank you. Our next question is from Gary Nachman from BMO Capital Markets. Gary Nachman: Hi, good morning. Could you talk about how much more you plan on investing behind the neuroscience franchise to accelerate growth there to get to the long-term targets you talked about like the $4 billion in Vraylar even with that MDD, and how you see the long-term potential in Botox Therapeutic? And then how are you thinking about the launch for atogepant later this year? And how will you leverage the work that you've done so far with Ubrelvy? And how do you think that product will take off in the migraine market? Thank you. Richard Gonzalez: Well, I'd say, on the neuroscience investment, I mean we obviously have a very broad neuroscience investment. I mean we have a significant investment from an R&D standpoint. And in disease-modifying approaches for a number of different neurological diseases that Mike has talked about and mentioned in his comments earlier. So I'd say we have a significant R&D investment. We obviously are investing in Vraylar to continue to expand that asset. Again, our goal will be to invest in these areas where you can get maximum capture -- market share capture. I think if you look at Vraylar and you look at the projections that we made over time, if you look at the sequential year-over-year dollar growth of that business, that's how you get to that number. And basically, we're going to be able to sustain that, we expect to continue to sustain it as relatively low market share, but that's not unusual. And in this market, because there's a lot of generic products that psychiatrists, cycle patients through and sometimes in combination with patients. So we're going to invest in the business to be able to drive the maximum level of profitable share as we do in any other segment that we're in. Same thing on Botox Therapeutics, obviously, we have R&D programs in there to continue to expand the opportunities in therapeutics. Anything you want to add from an investment standpoint, Rob? Robert Michael: I think if you look at the overall portfolio, we've detailed out what we expect for Vraylar and that's without the additional indication. We think we can get to approaching $4 billion. When you look at the migraine portfolio, peak sales are greater than $1 billion for both the UBRELVY and Atogepant. We have 951 in the pipeline that we think can be a significant contributor, obviously, Botox Therapeutic will continue to grow. So we feel pretty good about the portfolio we have and that double-digit growth outlook is supported by a number of very promising assets. Jeffrey Stewart: Yes, hi. And it's Jeff, I'll take the second question on atogepant. I think first, the asset itself is very, very attractive. And when you look at the response on the migraine free days at the 10 to 60-milligram, it's really impressive data, very impressive data as this very strong oral. And so we think that we can come at this in a couple of different ways. Obviously, you highlighted the leveraging Ubrelvy. We've got a dedicated sales force that calls on the specialty organization, the neurologists as well as the headache specialists will actually carry both UBRELVY and atogepant in their call plan to really leverage the knowledge of a very established sales force and as well as focus on the big primary care writers that see a lot of migraine sufferers. So this is -- this is an important dynamic that will, we'll be able to leverage when we get into the market towards the end of the year. Also, we are looking at the ability to see how you look on the back end of the migraine journey so patients are on Botox Therapeutics, for example, which is very substantial. It's the leading in play share for chronic migraine. But many of those patients don't get full efficacy results. So ultimately the combination of Botox plus atogepant as a way to get really migraine freedom in the toughest patients is another area over the long term that we think can leverage these assets across the board, whether it's you UBRELVY on the front end with acute atogepant in the middle, oral for episodic and chronic or Botox on the back end. We think it's a nice portfolio that we can commercially manage over time to hit our ambitions that Rob described. Liz Shea: Thanks, Gary. Operator, next question, please. Operator: Thank you. And our next question is from Naveen Jacob from UBS. Naveen Jacob: Hi Naveen from UBS. Thanks for taking the question. So first on the ADC steroid you see for inflammatory conditions. Just wanted to get an update there, it's been, I believe you said delayed for COVID-19 do you still believe that this approach can lead to success for refractory RA or other inflammatory conditions. Just wondering about your confidence in this technology understanding, it's still early in development. And then secondly, as it relates to your current state of affairs with RINVOQ and SKYRIZI, could you remind us of what the current in-play market share for our RINVOQ is in RA and SKYRIZI in psoriasis. Thank you so much. Michael Severino: Okay. This is Mike, I'll take your first question on ABBV 154 our TNF steroid conjugate has not been delayed because of COVID. There were some delays in other early immunology programs. Our CD 40 and our ROR gamma-T program experienced modest delays but 154 did not. As we said at the time of the COVID peak over the course of last summer, there were a small number of studies that we delayed initiation and delayed enrollment, is the programs that I'm talking about TD 40 and ROR gamma T were impacted modestly in that time period but 154 was not so that remains on-track. We remain confident in it. We have selected 154 as the agent to go forward. Remember that we had two 3373 and 154 and we selected 154 because of advantages it had in linker technology, we're planning to initiate a large Phase 2 B study in the first half of this year and then today, we're now saying that we will also be studying Phase 2 Crohn's disease, as well as polymyalgia rheumatica, and that's an important set of indication that covers a wide range of opportunities, RA and Crohn's disease areas where we are very active, PMR polymyalgia rheumatica is a new area where there is not a lot of therapeutics, unfortunately, it is a well-established area in medicine but there is very little in terms of treatment for these patients, they have considerable pain and suffering from their condition and it's -- and it's particularly steroid responsive. So we think it is a very attractive target for our steroid ADC approach. The 154 remains on track and we continue to have confidence. Jeffrey Stewart: Thanks, Mike. It's Jeff, I'll take the in-play [ph] share. So if we look at the psoriasis market and SKYRIZI we have on our latest data point 33% of in-play share, which is of course is new patients coming in or newly switch patients. If you look at the total AbbVie share, it's approximately 45%, so very remarkable when you add Humira plus SKYRIZI in the dermatology space. If you look at the RA space, our latest data points are between 15% and 16% in terms of in-play share for RINVOQ in RA and that's basically neck and neck with Humira, so for a total AbbVie share of roughly a third of the RA market. Richard Gonzalez: This is, Rick. The only thing I'd add on that is when you look at that SKYRIZI 33% in-play share, it's almost double what the next closest competitor is, I mean it's impressive. The gap between SKYRIZI and the number two player and the other thing is, as these brands get more experience in the market, we'll also start to talk about the total TRx share and I think SKYRIZI is at that point now. I think it's total TRx share now is 14% [indiscernible] or something like that. That's right. And that's pretty impressive for this short period of time and it is close to number two in the market in TRx share. So they are both doing very, very well. Liz Shea: Thanks, Naveen. Operator, next question, please. Operator: And the next question is from Chris Raymond from Piper Sandler. Chris Raymond: Hi, thanks. Just a couple of questions. First, on the relationship with BI and SKYRIZI. We had a few inbound questions on the treatment of the royalty and I know you've answered this question a little bit in the past, but also just noticing the big non-cash GAAP charge you took this quarter, you back out a non-GAAP earnings. So I know you have described accounting for this as a business combination. But can you maybe give a little bit more color on the rationale and the accounting behind that non-cash charge and then is there also some threshold number or other event where you'd add this royalty expense back to non-GAAP. And then, on AbbVie 951; we picked up a decent amount of KOL excitement around this asset in Parkinson's. I know Phase 3 is expected later this year, but I wonder if you could maybe talk about the launch -- your launch expectations on this and maybe contrast it to the Duodopa experience just from our feedback, it seems like this could expand the addressable PD population pretty sizably and Rick maybe frame how this sort of factors into your long range $10 billion neuroscience guidance. Thanks. Richard Gonzalez: Yes, Chris, I'll take your question on Contingent considerations and yes, we did account for this as a business combination. So that means each quarter we do a mark-to-market, the fair value of the future milestone royalty payments and you did see us take a fair value write up this quarter. Based on the higher sales outlook as we communicated during the Immunology Day event in December and you see in the guidance provided today, obviously the outlook for SKYRIZI continue to increase. And so we're recognizing that liability going forward. We also take into a consideration because it's a fair value measure what the market is assuming. So it's not just our own forecast. It's also what street expectations are and those have also increased as we've seen a very nice ramp. We are starting to see obviously the confidence from the street increase that's translated into a higher outlook for SKYRIZI which then translates in a higher future potential royalties. One of the reasons I wanted to stress, also on the free cash flow in my remarks today is because there is some confusion over that's how we account for, but it's important to keep in mind that when I talk about free cash flow of $21 billion this year, that accounts for the royalty payments of - to BI. And so you can look at a few different ways, you can look at it from a – if you can track the consideration accretion that we're recording and the liability on the balance sheet as an indicator of the future outlook, but also as we monitor our cash flow pretty carefully what does that contribute to overall cash flow. So we would not be going back, we made a determination as a business combination. We don't -- should not anticipate that we would reverse that but we'll provide obviously more clarity on what those royalties look like going forward given the size of the asset. Michael Severino: I also say in that time period when we did BI it was an absolute requirement on the account, right. Well, that was really, it wasn't like a judgment call or something thing to desire to do the accounting, said to be accounted for in that fashion. It's since been changed going forward. But the window in which we that occurred that was the required accounting treatment. So number two, Jeff and I will cover number two, sort of a high level look and then Jeff, maybe can give more specificity around that. If you look at Duodopa I mean this is a -- this is a therapy that has absolutely phenomenal efficacy and you can see these patients who cannot move early and you turn on the pump and you start giving them the drug and within a very short period of time, they will gain their motion. The challenge is a very difficult treatment to the patient to basically deal with and the caregiver to deal with on a long term sustainable basis; you have to do surgery, insert a G-Tube, you got to maintain that G-Tube opened, so that does somewhat limit the population is able to use it. And so we view this as a way to significantly expand the market. Jeff is obviously far more familiar with it. So I'll let him, give you a little more specific, but that's the general concept. I think this could be a significant -- wanting to be a significant treatment for these patients who need this kind of therapy. And two, I think we could expand the market pretty significantly. Jeffrey Stewart: Yes, I think just to add on that. Rick, it's we hear the same thing from our KOLs, they're very, very encouraged and with the perspective you look at Duopa or Duodopa, about $0.5 billion product with a really difficult challenge on on-boarding for these patients. Right. You have to do the J-Peg surgery. You have challenges with the size of the pump. Nonetheless, it's still remarkable that we do get that level of sales. So if I give you some perspective on the market. If you look at the advanced Parkinson disease market, 90% of it is really old generic orals where the patients just have to take more and more oral medication before they can have any -- any relief. And then, they are still in big trouble. So, only a minority about 10% ever get to let's say more advanced device-aided therapy, which is Duopa or Duodopa and deep brain stimulation. So, as we studied the market we agree that as we look at the ability to sort of move from a more convenient way a simple way for neurologists to get a more advanced therapy without doing a procedure, whether it's brain surgery or the -- or the GI surgery we think we can start to move upstream into that 90% of really non-workable oral segment. So, we are encouraged at the recent feedback from our KOLs and our study sites and are anticipating and planning for launch in the coming years. Liz Shea: Thanks, Chris. Operator, next question, please. Operator: And our next question is from Gregg Gilbert from Truist. Gregg Gilbert: Yes, hi, I was curious if your Botox Cosmetic guidance in the US assumes that as you've always on the market or off the market this year and then longer-term curious about Botox Cosmetic versus therapeutic many years ago Allergan started to explore the idea of separating the two from a reimbursement and pricing standpoint, I believe it involved litigation with the government at one point, but I don't know if that's still ongoing or if you're still thinking through that possibility since it has implications longer-term about keeping those that together possibly spending Aesthetics someday if conditions warrant. Thank you. Richard Gonzalez: Yes, so I don't know that we're going to specifically comment on what we've assumed as it relates to [indiscernible]. I just don't think it's probably appropriate. First of all, it's not that large of a product to begin with. So wouldn't have a material impact on Botox Cosmetics. I'd say on the -- on the -- on your second question, I will tell you emphatically we have no interest in spinning off the Aesthetics business. We have a program in place where we manage the differences between the reimbursement associated with Botox Therapeutics and the cash pay portion of the Cosmetics business, it's been in place for quite some time. We're quite comfortable that we can manage it quite effectively. So It's an important thing that you -- that you track carefully, but we have a good system in place to be able to do that, but we have no interest in getting off the Aesthetics business or any aspects of the of the Aesthetics business. Liz Shea: Thanks, Gregg. Operator, next question please. Operator: Our next question is from Geoff Meacham from Bank of America. Unidentified Analyst: Hey guys, it's Austin [ph] on for Geoff. Thanks so much for the questions. A couple of quick ones. So -- and within the context of the Xeljanz's data, do you guys have an early view from the field as to whether docs are differentiating RINVOQ and -- sorry, RINVOQ and Xeljanz's safety profiles? And then quickly on the mid to early stage pipeline there's obviously a lot going on in your Heme-onc space but just going to want to get a sense of how strategically important some more newer disruptive technologies are to AbbVie such as cell or gene therapy. Thanks. Jeffrey Stewart: Yes, I'll take the early view from the field. I think it's important, at least, we've heard from our teams that some of this data is not really new. It was available in the interim analysis that helped -- led to the label that we have and so really the early reports from our -- from our field particularly from the KOLs and the big prescribers is a little bit of a shoulder shrug like not that, not that new news. I would say, from the standpoint of the comparison between RINVOQ and Xeljanz. I mean if you look at the penetration of the jack-class really across the world, and particularly in the U.S., there has been a significant lift that we just talked about with that in play share. And so really what we're -- what we're hearing from the -- from the field and from the prescribers are they view RINVOQ as a differentiated asset in terms of the overall risk benefit and that's why that share is moving so quickly and so that's really what we -- what we hear in the early days from our -- from our teams that are connected to those big rheumatologists. Michael Severino: So, this is Mike. I'll take the question on the heme-onc portfolio mid stage and newer technologies, but I would say is there is a lot going on in our heme-onc portfolio. Obviously with our late-stage molecules in the mid-stage. I think you'll see a focus on T-cell redirection, which is of course a newer technology. And I think a very attractive approach to harness the immune system to control these cancers and you see good progress with our CD3 by CD20 and our BCMA T cell redirecting therapies. And so, that is clearly an area of focus for us now and I think we'll continue to be in the future. With respect to gene therapy, gene therapy is not a single thing it can be used in different ways. Gene replacement is not an area that we've been focused on. Gene delivery is an enabling technology for other therapeutic approaches like cell-based therapies and we have early programs and cell-based therapies in heme-onc and in other areas. Solid tumor oncology and potentially other areas in the future. And so that's something that we are keeping a close eye on and making sure that we have access to the enabling technologies we need to prosecute those targets. I think that for those sorts of approaches we're probably one generation away from things that are broadly applicable. But we are exploring possibilities that we think can fulfill that next generation need. And so we are keeping up a broad eye and are essentially therapeutically agnostic. What I mean by that is we look for the best tool to do the job. We don't find it tool and then figure out how to use it. And so in each of these cases we're going after strong biology. We're going after things that we think will raise the bar on the standard of care. And I think a number of the newer technologies that I mentioned fit that bill. Liz Shea: Thanks. Operator, we have time for one final question. Operator: Thank you. Our final question today is from Luisa Hector from Berenberg. Luisa Hector: Hello, thank you for taking my question and thank you for the guidance on the cost lines. And I just wondered given that we have various layers to consider with COVID and then the Allergan inclusion and the synergies could you comment on the implied cost ratio for 2021 and how representative are the combined entity. And is there anything else we should be thinking about for those cost line as we look out to 22 COVID related savings may be sticky ones that may reverse? And could you tell us the level of synergies you achieved already in 2020? Thank you. Robert Michael: Hi, Luis. This is Rob. So I think now that we have first full year with combined company and you're looking at these profiles. I think you could assume they're indicative in the range of what you'd expect going forward. And so that is a cleaner guide then say when you have a partial year like we had in 2020 as it relates to the synergies we achieved in 2020 which is about $600 million of synergies about $400 million that was an R&D and $200 million SG&A and you see we've now increased that to $1.7 billion in 2021 with about a little bit roughly half of that coming from R&D about in the 40% range SG&A and about 10% from cost of goods. Liz Shea: Thanks, Luisa. And that concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.AbbVie.com. Thanks again for joining us. Operator: Thank you. This does conclude today's conference. You may disconnect at this time.	[ { "speaker": "Operator", "text": "Good morning, and thank you for standing by. Welcome to the AbbVie Fourth Quarter 2020 Earnings Conference Call. All participants will be able to listen only until the question-and-answer portion of this call. [Operator Instructions] I would now like to introduce Ms. Liz Shea, Vice President of Investor Relations." }, { "speaker": "Liz Shea", "text": "Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Vice Chairman and President; and Rob Michael, Executive Vice President and Chief Financial Officer. Joining us for the Q&A portion of the call is Jeff Stewart, Executive Vice President, Commercial Operations. Before we get started, I remind you that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties, including the impact of the COVID-19 pandemic on AbbVie's operations and financial results that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our 2019 Annual Report on Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand AbbVie's ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Unless otherwise noted, our commentary on sales growth is on a comparable basis, which includes full year -- full current year and historical results for Allergan. For this comparison of underlying performance, all historically reported Allergan revenues have been recast to conform to AbbVie's revenue recognition accounting policies and exclude the divestitures of Zenpep and Viokace. References to operational growth further excludes the impact of exchange. Following our prepared remarks, we'll take your questions. So with that, I'll now turn the call over to Rick." }, { "speaker": "Richard Gonzalez", "text": "Thank you, Liz. Good morning, everyone, and thank you for joining us today. I'll discuss our fourth quarter and full-year 2020 performance as well as our expectations for 2021. Mike will then provide an update on recent advancements across our pipeline, and Rob will discuss the quarter and our 2021 guidance in more detail. Following our remarks, we'll take your questions. We delivered another strong quarter with adjusted earnings per share of $2.92, exceeding the midpoint of our guidance by $0.08. Fourth quarter total net revenues were up nearly 7% on a comparable operational basis. This performance was driven by robust double-digit sales growth from our immunology, hem/onc and neuroscience franchises, as well as 9% comparable operational sales growth of Botox Cosmetic, which is demonstrating a rapid recovery. Our fourth quarter performance topped off another excellent and truly transformational year for AbbVie, which included the successful acquisition and integration of Allergan, creating a stronger and much more diverse AbbVie with leadership across numerous attractive high-growth markets. Significant contributions from our two new best in category immunology medicines, RINVOQ and SKYRIZI , which combined for more than $2.3 billion in 2020 sales, their first full year on the market. We expect the combined contribution from RINVOQ and SKYRIZI to nearly double in 2021 to approximately $4.6 billion based on their continued strong uptake in RA and psoriasis as well as RINVOQ’s anticipated approvals in PSA, ankylosing spondylitis and atopic dermatitis later this year. We delivered continued robust growth from our leading hem/onc portfolio, with IMBRUVICA and VENCLEXTA contributing more than $6.6 billion in combined 2020 sales. We expect our hem/onc franchise to grow double digits again in 2021. We also added two compelling oncology pipeline assets, Epcoritamab, a potential best-in-class CD3xCD20 bispecific antibody in development for B-cell malignancies and lemzoparlimab, an anti-CD47 monoclonal antibody being studied in multiple cancers. These two assets will further support the growth of our hem/onc franchise across our long-range plan. The acquisition of Allergan brought us a substantial neuroscience portfolio with compelling therapies for migraine and psychiatric conditions augmenting our already existing neuro franchise. The newly combined neuroscience franchise delivered nearly $4.9 billion in comparable 2020 revenue and is expected to grow double digits in 2021. We also added the leading global Aesthetics franchise, a largely cash pay portfolio with roughly $3.5 billion in comparable 2020 revenues. As I previously noted, this portfolio has demonstrated a rapid V-shape recovery and we view Aesthetics as an extremely attractive long-term growth opportunity. And importantly, we made excellent progress in 2020 with our pipeline. We expect our R&D pipeline advancements to lead to the approval of more than a dozen new products or indications over the next two years, including a total of six additional indications for RINVOQ and SKYRIZI, which will cover all of Humira's major indications plus new significant disease areas, including atopic dermatitis, expanded indications for VENCLEXTA and Vraylar and several new product approvals, including Atogepant for episodic migraine, Navitoclax for myelofibrosis and ABBV-951, a potentially transformative next-generation therapy for advanced Parkinson's disease. These new opportunities will collectively add meaningful revenue growth in advance of the U.S. Humira LOE. We've entered 2021 in a strong position, which is reflected in our revenue and earnings per share guidance. Based on the recent outperformance of our business, we expect full-year 2021 comparable operational sales growth of approximately 9.4% with total AbbVie sales expected to be approximately $1.7 billion above current consensus, and we anticipate 2021 adjusted earnings per share of $12.32 to $12.52, representing growth of 17.6% at the midpoint. This level of guidance represents impressive performance with nearly all aspects of our business expected to perform at or above current consensus for 2021. The Allergan integration continues to go very well. The transition has been seamless despite the size of the transaction and the timing of the COVID pandemic. While we're making excellent progress against our expense synergies, which Rob will cover in more detail here momentarily, it remains increasingly clear to us that there are significant opportunities for long-term revenue contributions across numerous Allergan growth platforms. As we recently disclosed, we believe UBRELVY , the first-to-market in leading oral CGRP for acute migraine, represents a $1 billion-plus peak sales opportunity. Atogepant, a potential once-daily oral treatment for the prevention of episodic and chronic migraine also represents a $1 billion-plus peak sales opportunity. We expect Vraylar's peak sales to approach $4 billion within its currently approved indications of schizophrenia, bipolar I disorder and bipolar depression with major depressive disorder or MDD, representing a potentially significant incremental growth opportunity. Aesthetics, which is poised to regain its growth trajectory this year is expected to generate high single-digit revenue growth over the next decade. We continue to closely monitor the COVID dynamics, which will have an impact on our business again in 2021, predominantly in the first half of the year, but significantly moderated from the 2020 impact. And despite the recent COVID resurgence within select geographies, we feel the global healthcare system is much better equipped with COVID treatment protocols in PPE to safely see and treat patients throughout the current year. That said, some therapeutic areas continue to be more impacted than others, like CLL, HCV, certain hospital-based procedures, among others, which we have contemplated in our 2021 guidance. Overall, we've been pleased with the rate of recovery across our business, a testament to our differentiated product profiles and our commercial execution. So in summary, we've assembled an impressive set of growth assets and the outlook for AbbVie's business remains strong. With RINVOQ and SKYRIZI expected to contribute more than $15 billion in risk-adjusted sales by 2025 and our expectations for continued robust growth across hem/onc, neuroscience, and aesthetics, we have a high degree of confidence that we will be able to successfully absorb the Humira LOE impact in 2023, support an immediate return to total sales growth in 2024 and produce compelling high single-digit compounded annual total sales growth in 2025 through the remainder of the decade with the diversified portfolio and pipeline that we have today. With that, I'll turn the call over to Mike for additional comments on our R&D programs. Mike?" }, { "speaker": "Michael Severino", "text": "Thank you, Rick. We've clearly made significant progress with our pipeline over the past few years, particularly our late-stage programs in hematologic oncology with IMBRUVICA and VENCLEXTA, and in immunology with RINVOQ and SKYRIZI. Since inception, our R&D organization has delivered an impressive set of new products, which collectively contributed approximately $11 billion in revenue in 2020. We also continue to see significant evolution of our early and mid-stage clinical programs with many assets expected to transition to late-stage registrational studies over the next several years. We will continue to replenish our late-stage pipeline with innovative assets that have the potential to drive additional growth for AbbVie in the second half of the decade. At our recent immunology investor event in December, we provided a detailed overview of our immunology programs, highlighting the robust data generated to-date for RINVOQ and SKYRIZI across approved and pipeline indications. Included in this event, we presented positive topline data from two new Phase 3 studies for RINVOQ . Results from the first induction study in ulcerative colitis and results from the head-to-head study versus dupilumab in atopic dermatitis. We expect to see results from the second Phase 3 UC induction study later this quarter, and from the UC maintenance study in the middle of this year with regulatory submissions anticipated in the second half of 2021. Our regulatory applications for RINVOQ in atopic dermatitis are currently under review and we expect an approval decision in the US in the second quarter based on priority review and in Europe in the second half of the year. We recently received European Commission approval for RINVOQ in psoriatic arthritis and ankylosing spondylitis and expect approval decisions for those indications in the US in the first half of this year. I want to take a moment to address the topic of safety, specifically MACE and malignancies following the results from tofacitinib's post-marketing safety study. At present, there are no data to suggest the safety outcomes from their study applied to a specific JAK1 inhibitor such as RINVOQ. We are not aware of any signal for an elevated risk of MACE or malignancies with the RINVOQ or any JAK inhibitor other than Xeljanz. We conducted a pooled database analysis across our clinical trials for DVT, MACE and malignancies at the time of RINVOQ’s regulatory submission and have updated it periodically including up to the present. Rates with RINVOQ have not been elevated relative to competitors or to expected baseline rates. Importantly, there has been no increase or meaningful change in those rates over time. Additionally, we adjudicate events for MACE and DVT, which is considered the highest standard of evidence. If we look across our long-term database in RA, a population that is at increased risk for MACE events, our rates remain low. At the approved dose in RA, we have followed more than 3,700 treated patients totaling more than 9,000 patient-years' experience. Our rate of MACE events is 0.4 per 100 patient-years, which compares favorably to the expected rate of 1.0 to 1.7 events for 100 patient-years. In addition, there is no evidence of a dose-response between the 15 and 30-milligram doses. Similarly, the rate of malignancy, excluding non-melanoma skin cancer with similar follow-up is 0.8 events per100 patient-years. This rate is also consistent with the expected range of rates of 0.86 to 0.94 per 100 patient-years. And again, we see no evidence of a dose-response between 15 and 30-milligrams. Moving now to SKYRIZI; we also recently reported top-line results from the Phase 3 programs for SKYRIZI in Crohn's disease and psoriatic arthritis. In the two Crohn's induction studies, SKYRIZI demonstrated significant improvements in clinical remission and endoscopic endpoints compared to placebo with symptom improvement seen as early as week four. Based on the data generated to date, we believe SKYRIZI has the potential to become an important new treatment option for patients with moderate to severe Crohn's disease. We expect to see results from the maintenance study in Crohn's disease later this year with regulatory submissions anticipated in the second half of 2021. We're also very pleased with SKYRIZI’s results in the Phase 3 studies in psoriatic arthritis, where we saw significant improvements in disease activity across both skin and joint endpoints compared to placebo. We believe that the activity we have seen on joint disease and the impressive skin clearance that is a hallmark of the SKYRIZI program make it a compelling offering for patients with mixed joint and skin involvement. We plan to submit our regulatory applications for SKYRIZI in psoriatic arthritis in the first half of this year. We're making good progress with our early and mid-stage immunology programs as well where we expect several data readouts and phase transitions in 2021. We expect to begin three new studies for ABBV-154, our TNF steroid conjugate including a Phase 2b dose-ranging study in RA as well as Phase 2 studies in Crohn's disease and polymyalgia rheumatica. And we'll see proof-of-concept data in the second quarter for ravagalimab, our CD40 antagonist in Phase 2 for ulcerative colitis, and for ABBV-157, our oral ROR-gamma T inhibitor in Phase 1 for psoriasis. Both of these programs experienced slight COVID-related delays with results now expected for both in the second quarter of this year. In oncology, we continue to make significant progress advancing our pipeline with numerous data readouts and regulatory milestones last year. As well as the addition of several new assets brought in through our in-licensing efforts, including Genmab's CD3xCD20 epcoritamab and I-Mab's anti-CD47 lemzoparlimab. We showcased new data from several programs at the recent ASH meeting where we presented nearly 40 abstracts from eight different assets. Notable presentations included data from the Phase 2 CAPTIVATE trial evaluating IMBRUVICA plus VENCLEXTA in frontline CLL, which showed patients who achieved undetectable MRD following this combination maintain their deep remission at the one-year mark after stopping therapy with a 95% rate of disease free survival. We also presented new five-year data from VENCLEXTA’s Murano trial demonstrating the benefits of fixed duration VENCLEXTA combinations and helping patients achieve sustained progression-free survival. The latest results from Murano in the relapsed refractory CLL setting showed a median progression-free survival of 54 months in the VENCLEXTA and rituximab group, compared to 17 months in the bendamustine-rituximab group, three or more years after stopping treatment. Updated dose-escalation data from a Phase 1 study evaluating epcoritamab in B-cell malignancies were also presented at ASH. Epcoritamab is a subcutaneously delivered bispecific CD3xCD20 antibody being developed in collaboration with Genmab. In the Phase 1 study, epcoritamab demonstrated encouraging single agent anti-tumor activity in heavily pretreated patients with a consistent and favorable safety profile showing no Grade 3 or higher CRS events as well as limited neurotoxicity. We believe epcoritamab has the potential to become a best-in-class therapy across a number of B-cell malignancies including diffuse large B-cell lymphoma and follicular lymphoma. The Phase 3 trial in relapsed-refractory DLBCL recently began and we will provide updates on epcoritamab as its development program progresses. Initial results were also presented from a Phase 1 study evaluating TNB-383B in relapsed-refractory multiple myeloma. TNB-383B is a novel bispecific T-cell engaging immunotherapy targeting BCMA and CD3 being developed in collaboration with TeneoBio. These Phase 1 results demonstrated that the BCMA/CD3 bispecific provided overall response rates of 80% with a large number of patients achieving a very good partial response or better despite having received multiple prior lines of therapy. TNB-383B was well tolerated at all doses tested with a few off-target toxicities and no Grade 3 or higher CRS observed. With its safety profile efficacy and the convenience of once every three-week dosing, this agent has the potential to become a promising treatment option for myeloma patients. And our partner I-Mab published an abstract with initial results from a Phase 1 study evaluating lemzoparlimab in AML and MDS. These results demonstrated encouraging activity in relapsed-refractory AML patients and lemzoparlimab was well tolerated with no serious hematological adverse events reported today. Based on these promising initial results, we plan to begin new studies this year for lemzoparlimab in AML, MDS and in multiple myeloma. We also recently saw data from an interim analysis of a Phase 2 study evaluating Teliso-V in heavily pretreated non-squamous, non-small cell lung cancer patients. The encouraging results from Stage 1 of this study met the criteria for advancing the program. With Teliso-V demonstrating a 54% objective response rate in patients with wild-type EGFR with highly expressed c-MET. In EGFR wild-type patients with over-expressed c-MET, which includes both high and intermediate expression, the objective response rate was 35%. Based on these results, we believe that there is an important role for Teliso-V in this target population, which represents roughly 25% of the non-squamous, non-small cell lung cancer population. We will be opening the second stage of the study and are planning discussions with regulators regarding the potential of this study to support an accelerated filing. We expect 2021 to be another important year for our oncology pipeline with several regulatory submissions as well as data readouts across all stages of development. This year, we expect to see data for IMBRUVICA in the Phase 3 SHINE study in frontline MCL with regulatory submissions expected in the second half of the year. Data for IMBRUVICA in combination with VENCLEXTA in second line or greater MCL and frontline CLL with regulatory submission for frontline CLL expected in the second half of the year. We also expect to see data from registration enabling studies for VENCLEXTA in high-risk MDS and navitoclax in relapsed-refractory myelofibrosis. And we expect to see data from numerous programs in our early-stage oncology pipeline. In addition, the programs under collaboration with Calico are also progressing well. Our partnered effort is comprised of a strong pipeline of novel targets, which includes more than 20 active programs in discovery or preclinical development. Importantly, we currently have programs, which have advanced into clinical development in two areas immuno-oncology and neurodegeneration. The lead Calico program in oncology is focused on PTPN2 inhibitors, which act at multiple steps in the cancer immunity cycle and have potential applicability in a broad variety of tumor types. The discovery of novel orally bio-available PTPN2 inhibitors represents a significant breakthrough and a target class that has historically been considered un-druggable. We currently have two assets in Phase 1 development ABBV-CLS-579 and 484. We've seen evidence of immune activation in the clinic with this pathway and we expect to see proof-of-concept data from this program in 2022. The lead Calico program in neuroscience is an eIF2B activator, which targets a key regulator of the highly conserved integrated stress response pathway. Inhibition of this pathway has the potential to prevent pathology and restore function in a number of neurodegenerative diseases such as ALS and Parkinson's disease as well as in traumatic brain injury. Our lead eIF2B activator ABBV-CLS-7262 is currently progressing through Phase 1 and we plan to begin a study later this year in patients with ALS. In other neuroscience updates, last year, we completed our registrational program for atogepant in episodic migraine prevention and we recently submitted our regulatory application to the FDA. We expect an approval decision by the end of the third quarter. The data generated in our Phase 3 programs support a strong benefit-risk profile and we believe that atogepant has the potential to offer meaningful benefits to patients as a safe, effective, oral treatment option for the prevention of episodic migraine. In 2021, we expect to see data from several late-stage neuroscience assets, including results from two Phase 3 studies for Vraylar in major depressive disorder and results from the pivotal program for ABBV-951 in advanced Parkinson's disease with regulatory submissions for 951 expected in the second half of the year. We also expect to see proof-of-concept data for Elezanumab in a Phase 2 study in multiple sclerosis and ABBV-8E12, our lead anti-tau antibody in a Phase 2 study in Alzheimer's disease. In addition to 8E12, we have a number of promising approaches in Alzheimer's, including our neuroinflammation programs aimed at TREM2 and CD33, currently in clinical development, as well as other tau approaches in preclinical development. These include tau antibodies with different epitope specificity as well as approaches to clear intracellular tau. In Aesthetics, we continue to make excellent progress with our portfolio of facial toxins and dermal fillers with several regulatory submissions, data readouts and pivotal study starts expected this year. Our programs include new indications for Botox as well as innovative toxins such as new liquid formulations and both the long and short-acting toxins. We also have programs to develop new indications for the Juvederm Collection as well as novel dermal fillers such as HArmonyCa, which will be entering registration enabling studies in the U.S. And in eye care, based on the positive results from the Phase 3 studies evaluating our topical eye drop AGN-190584 for the treatment of symptoms associated with presbyopia. We plan to submit our regulatory application later this month and expect an approval decision in the fourth quarter of this year. So in summary, our R&D productivity remained high last year despite multiple COVID-related challenges and we were able to maintain steady continuity and minimize delays. We're entering 2021 well-positioned for continued success and we expect significant program advancement across all stages of our pipeline, again this year. This includes five new asset or major indication approvals, half a dozen regulatory submissions, more than 10 pivotal study readouts, and more than 15 data readouts from early and mid-stage programs. With that, I'll turn the call over to Rob for additional comments on our fourth quarter performance and our 2021 guidance. Rob?" }, { "speaker": "Robert Michael", "text": "Thank you, Mike. Starting with fourth quarter results, we once again delivered strong top and bottom-line performance. We reported adjusted earnings per share of $2.92 above our guidance midpoint by $0.08. Total net revenues were approximately $13.9 billion, up 6.8% on a comparable operational basis and ahead of our expectations. Immunology global sales were approximately $6 billion, up 14.8% on an operational basis. Within immunology, Humira sales were approximately $5.2 billion, up 4.4% on an operational basis with continued high single-digit growth in the US offset by biosimilar competition across international markets. SKYRIZI sales were $525 million and RINVOQ sales were $281 million with both products demonstrating strong sequential growth above expectations. Hematologic Oncology delivered another strong quarter with revenue of approximately $1.8 billion, up 15.5% on an operational basis with solid growth from IMBRUVICA and VENCLEXTA. Aesthetic sales were more than $1.1 billion with Botox Cosmetic and Juvederm both experiencing a rapid recovery from the COVID pandemic. Neuroscience revenues were nearly $1.4 billion, up 14.9% on a comparable operational basis, led by Vraylar and our migraine portfolio. We also saw a significant contribution from eye care, which had sales of more than $900 million. Turning now to the P&L profile for the fourth quarter. Adjusted gross margin was 81.8% of sales, adjusted R&D investment was 12.6% of sales, and adjusted SG&A expense was 22.3% of sales. The adjusted operating margin ratio was 46.9% of sales, an improvement of 230 basis points versus the prior year. Net interest expense was $618 million and the adjusted tax rate was 11.6%. As we look ahead to 2021, our full year adjusted earnings per share guidance is between $12.32 and $12.52, reflecting growth of 17.6% at the midpoint. Excluded from this guidance is $5.63 of known intangible amortization and specified items. We expect adjusted net revenue of approximately $55.7 billion. At current rates, we expect foreign exchange to have a 1% favorable impact on full year comparable sales growth. This forecast comprehends the following assumptions for our key products and therapeutic areas. We expect immunology global sales of approximately $25 billion, including US Humira growth of approximately 8%, internationally Humira revenue of approximately $3 billion at current exchange rates, SKYRIZI global sales of approximately $2.9 billion, and RINVOQ global sales of approximately $1.7 billion. We expect hematologic oncology to grow double-digits with IMBRUVICA global revenue of approximately $5.7 billion and VENCLEXTA global sales of approximately $1.8 billion. For Aesthetics, we expect global sales of approximately $4.5 billion, including approximately $1.8 billion from Botox Cosmetic and approximately $1.3 billion from Juvederm. For neuroscience, we expect global revenue of approximately $5.7 billion, including Botox Therapeutic sales of approximately $2.3 billion, Vraylar sales of approximately $1.8 billion, and UBRELVY sales of approximately $400 million. For eye care, we expect global sales of approximately $2.9 billion, including approximately $550 million from RESTASIS, which assumes no generic competition in the first half of 2021. For women's health, we expect global revenue of approximately $1.1 billion. For remaining larger products, we expect global sales of approximately $2 billion from Mavyret, $1.2 billion from Creon, $1 billion from Linzess, $800 million from Synthroid, and $750 million from Lupron. Looking at the P&L for 2021, we are forecasting full year adjusted gross margin of approximately 83% of sales, adjusted R&D investment of approximately $6.6 billion and adjusted SG&A expense of approximately $11.8 billion. This guidance includes approximately $1.7 billion in expense synergies from the Allergan acquisition. We are forecasting an adjusted operating margin ratio of approximately 50% of sales, which represents an improvement of roughly 200 basis points versus 2020. We expect adjusted net interest expense of approximately $2.4 billion. Our non-GAAP tax rate to be approximately 12.5% and our share count to be roughly flat to Q4 2020. As we look ahead to the first quarter, we anticipate net revenue approaching $12.7 billion. At current rates, we expect foreign exchange to have a 1% favorable impact on comparable sales growth. We are forecasting an adjusted operating margin ratio of approximately 50% of sales. And we model a non-GAAP tax rate of 12.3%. We expect adjusted earnings per share between $2.79 and $2.83, excluding approximately $1.32 of known intangible amortization and specified items. Finally, AbbVie's strong business performance and outlook continues to support our capital allocation priorities. Our cash balance at the end of December was $8.4 billion and we expect to generate free cash flow of approximately $21 billion in 2021. This fully supports a strong and growing dividend, which we have more than tripled since inception, as well as rapid debt repayment where we expect to pay down $17 billion of combined company debt by the end of 2021, including the $8.6 billion that was repaid in 2020. We expect to achieve a net debt to EBITDA ratio just below 2.5 times by the end of 2021 with further deleveraging through 2023. We anticipate that our net leverage ratio will be approximately 2 times by the end of 2022. Our strong cash flow also allows for continued business development with approximately $2 billion allocated annually to augment our pipeline with the most promising external technologies and innovative mid to late-stage assets. In closing, we are very pleased with AbbVie's strong performance in 2020. We've driven top tier growth while also advancing our strategic priorities and we expect to deliver robust performance in 2021 and over the long term. With that, I'll turn the call back over to Liz." }, { "speaker": "Liz Shea", "text": "Thanks, Rob. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, first question, please." }, { "speaker": "Operator", "text": "[Operator Instructions] And our first question today is from Geoffrey Porges from SVB Leerink." }, { "speaker": "Geoffrey Porges", "text": "Thank you very much. And as usual, appreciate all the detail in the guidance, and congratulations on the results. A quick question on SKYRIZI and one on RINVOQ. First, one of your competitors had a negative result of a post-marketing study recently. I'm just wondering if you've had any discussions with regulators about conducting any other studies for RINVOQ or updating the label for RINVOQ as a result of that negative signal? And then, secondly on SKYRIZI, a commercial question. Your current price for the 150-milligram dose is about $85,000 and you're using 4x, the dose for ulcerative colitis. Could you just tell us how you can manage that? And is it feasible to have sort of different prices despite the big difference in dosing? Thanks." }, { "speaker": "Michael Severino", "text": "Okay, this is Mike. I will take your second question first and then we can cover the SKYRIZI question. With respect to RINVOQ, I assume you're talking about the tofacitinib safety study, which top line results fairly recently in the last several days and showed in that program that they were unable to exclude a risk of MACE or malignancy based on the criteria that were used to analyze that data sets. As I said in my prepared remarks, we've kept a very, very close eye on our data, both at the time of the NDA and in an ongoing manner since that time and we've not seen a signal. Our rates have not been elevated with respect to comparator or baseline rates and the rates overall remain low. With respect to your specific question about whether we've had discussions with regulators, regulators have not asked us to do long-term safety study in the way that Pfizer was asked. So that has not been discussed with regulators and we have not had any contact with regulators around labeling updates up to the present time." }, { "speaker": "Geoffrey Porges", "text": "Great." }, { "speaker": "Michael Severino", "text": "And with respect to SKYRIZI?..." }, { "speaker": "Jeffrey Stewart", "text": "Yes. Hi, it's Jeff. It's Jeff Stewart on the commercial question. We have anticipated the different markets and how we will approach the pricing. Now, it's important that we're just starting to see the SKYRIZI data. We saw the induction data, we'll see the maintenance data. I think it's important that as we look at our strategy that we're honing is for SKYRIZI, you're going to -- for Crohn's, you're going to have an induction dose, which is an IV at a different dose and we know that based on the form and some things we can believe we can price that to market. And also, we are coming with a unique approach for the maintenance as well depending on where that dosing falls out. And we would be using at that point, which is known as on-body injector. So the combination of the forms as well as basically the ways that we will deliver the medication when we get there, we believe that we can price effectively to the market and manage it across the indications." }, { "speaker": "Richard Gonzalez", "text": "So this is Rick. So I think the bottom line is, we've contemplated that. It's a good question, Geoff, but I think we have a strategy that will allow us to deal with that and impact the market in an appropriate way." }, { "speaker": "Liz Shea", "text": "Thanks, Geoff. Operator, next question, please." }, { "speaker": "Operator", "text": "And our next question is from Vamil Divan from Mizuho Securities." }, { "speaker": "Vamil Divan", "text": "Hi, great. Thanks so much for taking the questions. And maybe two if I could. So I want to appreciate the long-term guidance you've given recently on the top line. I'm just wondering how we should maybe think about the margin progression as we think about the Humira LOE in a couple of years? And then as we sort of get past that and your sales touch ramp up again, if you could maybe give us some sense of where you think your margins could sort of come back to? And then, the other one I have is just on Vraylar. Again, appreciate the guidance you've given there. I think one of the big events for you guys this year will be the Phase 3 data in MDD. I’m just curious kind of what gives you confidence that maybe you can just talk about whether it's around the drug or the study design, sort of, what gives you confidence or why should we be confident sort of going into that data readout? Thanks." }, { "speaker": "Robert Michael", "text": "Vamil, this is Rob. I'll take your question on margin progression. I think when you consider the greater than $2 billion expense synergies from Allergan by next year and the P&L leverage that will come from the sales growth, we also expect for next year, you should expect that our operating margin will continue to expand through 2022. Upon the entry of U.S. biosimilars in 2023 and given Humira's profitability, it is reasonable to expect operating margin pull back. We've indicated before the 45% range based on our current LRP, I think it'll be a little bit higher than that. But then we've returned to growth immediately – in 2024, we'll return to revenue growth, a very strong revenue growth starting in 2025, you can expect then operating margins once again expand. We've had a long history of expanding operating margin by leveraging the P&L. And I would expect that to continue as we start to see very strong revenue growth starting in 2025 and beyond." }, { "speaker": "Richard Gonzalez", "text": "Yes, Vamil, this is Rick. Mike and I'll cover the second question on Vraylar. It's important to recognize that what we've communicated in long-term guidance on Vraylar is based on the three currently approved indications. So it doesn't count on the fact that MDD would be successful. Now having said that, I think we do have -- I'd say, we're cautiously optimistic about the MDD indication and I'll let Mike kind of walk through how we look at it and what gives us that level of confidence. But in the event, it weren't to play out, that doesn't impact the guidance that we gave." }, { "speaker": "Michael Severino", "text": "So, this is Mike. I'll pick up from here. I think that our optimism and I think that's the right way to express it in a disease like MDD, which is a challenging disease to work and is based on a couple of features. One is based on the basic pharmacology of Vraylar, which has a unique mix of D3, D2 specificity and other features that lead clinically to what's been described as a brightening effect, which seems to be beneficial in a number of settings. It's also driven by the results that we have from the MDD study that is positive that we already have in hand. So with one positive study, we would need only one -- at least one or, of course, both of the next two studies to read out positive, either of those outcomes would support a filing. We've done a deep dive into the study design and the patient population. We think it's a well-designed study. And we think the patient characteristics with respect to baseline factors and other elements are all very appropriate for this sort of study and we can assess that in a blinded aggregate way in a way that's completely consistent with the study rules for the conduct of the study. And so all of those things make us feel optimistic that it's a molecule with a good chance to work, well-designed study, well-conducted study, and we look forward to seeing the results. But as I mentioned, MDD is a challenging area. And for that reason, we didn't build into our deal model and we didn't factor it into our guidance, as Rick said, so we view this as upside." }, { "speaker": "Liz Shea", "text": "Thanks, Vamil. Operator, next question, please." }, { "speaker": "Operator", "text": "Thank you. And our next question is from Randall Stanicky from RBC Capital Markets." }, { "speaker": "Randall Stanicky", "text": "Great. Back to RINVOQ in atopic derm, how quickly do you guys expect that launch to ramp? And maybe just help us with expectations given coinciding JAK competition from abrocitinib , the timing to payer ramp and coverage. And then we sense of a lot of patient warehousing, maybe if you could help quantify your thinking around that opportunity within the $1.7 billion outlook for the year, that would be helpful? And then a quick follow-up, Rick. You don't get asked about eye care a lot. It's a $3 billion global franchise. You have some pipeline behind it. It could be a good growth business, but it's declining. Any appetite to strategically add to that business or reposition it? Or should we view it more as a mature cash flow generator? Thanks." }, { "speaker": "Jeffrey Stewart", "text": "Yes, hi. It's Jeff Stewart. I'll start off with the atopic derm commercial question. We're very encouraged with the market that we're about to enter and I'll give you some context there. So when we look at the population, we see that just on the moderate to severe atopic derm patients that the market size or the potential is at least 2 times and probably closer to 3 times the size of the psoriasis market. And so this is very, very encouraging in terms of our ability to enter. It's also significantly under-penetrated. I mean if you look at the psoriasis market, you're talking about far greater than 10% or 12% penetration and in the single-digit, the low-single digits, where we are right now with the one biologic dupilumab. So it's very, very attractive. The other thing that I would say is that we see from our go-to-market approach that we know the HCPs very intimately. So about 85% of the market is driven by the derms, we know the derms very well and there is a 90% -- roughly 90% overlap with the big prescribers of dupilumab and drugs like SKYRIZI and our Humira. So we are very, very encouraged at the ability for this segment to rapidly expand, despite the fact there will be multiple new entrants coming in. To get to your specific question about the access ramp, we have a very strong position, as you know with RINVOQ right now in the existing indication of RA. We had greater than 95% commercial access, that's the dominant channel for atopic derm and our anticipation is we will have very strong access that we'll build to that level over the course of '21. Obviously, it's going to take some time, once we get the approval to go through the final approvals on the big commercial plans and so we see it's starting off slow, but then building into the middle of the year and certainly getting to a significant level at the end of the year. So the combination of the market, the asset itself, which looks very, very strong, as you've seen from the data and the way that we will play in our derm segment as well as the allergy segment give us a lot of confidence for a strong ramp in '21 and beyond." }, { "speaker": "Richard Gonzalez", "text": "The only thing I would add to Jeff's comments, I mean if you look at RINVOQ did $731 million last year. Obviously, if you look at the running rate out of the fourth quarter had [ph] strong running rate coming out of the fourth quarter but that's a $1 billion worth of growth from '20 to '21. The majority of that growth is going to come from continued performance in RA. I think where you will see the most significant impact from atopic dermatitis will be as we flow into '22, much like as you saw what happened in the RA market, it takes time for physicians to start to get adapted. Once they do, their momentum picks up. So, I don't remember the specific number. I'm not sure we gave that guidance anyway, but I would be thinking about it more than its continued penetration and growth in RA which drive in the bulk of that growth. Rob, anything you want to add?" }, { "speaker": "Robert Michael", "text": "Yes, I just -- on your question regarding warehouse patients who have a very modest amount of warehouse patients assumed [ph] in the forecast. So we're not count -- the $1.7 billion doesn't really count on that. And keep in mind that RINVOQ was of the product that was lesser impacted by COVID and so there's not really significant how warehousing in that forecast." }, { "speaker": "Richard Gonzalez", "text": "And then, Randall, on your second question; I would say we absolutely agree with your point of view. I think eye care is a very attractive market. The kinds of markets that I think we look for and that we are the very best at is where there are specialized physicians who really drive the use of medications based on the clinical data and being able to restate markets and improve standard-of-care in those markets, and certainly, eye-care, I think it fits that description. And so we would have a strong appetite to look for opportunities and we are looking for opportunities now that we could add to that eye care business to be able to drive growth. Obviously, RESTASIS, as Rob indicated in his formal remarks, we've built in a half a year that's still an unknown of when that product will go generic or if it will go generic. But I think even aside from that regardless of what happens with RESTASIS longer-term, this is an area that we would have interest in and if we could find the right kind of assets to add to it, we would enthusiastically do that." }, { "speaker": "Liz Shea", "text": "Thanks, Randall. Operator, next question, please." }, { "speaker": "Operator", "text": "And our next question is from Chris Schott from JPMorgan." }, { "speaker": "Chris Schott", "text": "Great. Thanks so much for the questions. Can you just elaborate a little bit more on Aesthetics and maybe some of the learnings you've had in that franchise since you've acquired it? Have there been changes in the way you think about approaching the business commercially in your levels of investment? I'm just trying to get my hands around that high single-digit growth over time does seem healthier than the street have been anticipating. I'm just trying to get a little bit more color of what you're seeing in the market that gives you confidence in that. And then, my second question was just on IMBRUVICA, the growth has slowed here a bit. Can you just elaborate a bit more and how much of this is -- is there any COVID related dynamics playing out here? How much of this is competitive? I'm just trying to [ph] sense of just how you're seeing that the health of that franchise over time? Thanks so much." }, { "speaker": "Richard Gonzalez", "text": "Yes, Chris, this is Rick. So I'll cover the Aesthetics question for you. I'd say as we've studied the Aesthetics market and had an opportunity to be able to operate the business now for some time, I think we're even more enthusiastic about the long-term ability to be able to grow this market. I would say some of the areas that were a bit of a surprise to us is the responsiveness of this market to patient activation, and I would say that the strategy that we've put in place is one where we are funding the business on a very -- on a continuous basis at a high level to achieve the level of activation that we're looking for and we think that will, certainly, you can see, the response I guess an example in Botox already, we are seeing a very aggressive response in being able to grow the market, you saw the Botox grew -- Botox Cosmetic grew in the fourth quarter to 9%. I would expect that we can continue to drive that level of growth. And as part of legacy Allergan, I think it was much more episodic in the way this was funded quarter-to-quarter where we basically built a funding plan that will allow them to continue to drive activation over a longer term [ph]. I'd say the second thing that's it's of interest to us is, I think this is a market where you can drive significant innovation. If you fund that innovation in a way, again on a more continuous basis and advance those programs more aggressively, and have a well thought out strategic roadmap as to where you're trying to drive some of these markets. As Mike mentioned in his comments, our goal is to basically try to advance the level of performance of the toxin market significantly over time. And the same with the filler market. There are certainly things that we can do to expand the areas that you could use fillers, both within the US and globally and that's a significant opportunity. But long term, we think there is an opportunity to take some of the biologic expertise that we have here at AbbVie and create more biologically active fillers, and not only do physical filling but also improve collagen, improve elastin, and other kinds of characteristics that will improve skin quality. And we think that will be -- if we're successful, we think that will be a significant opportunity to drive long-term growth. And then, the last thing I'd say is the geographic footprint that AbbVie has. We obviously have a very broad geographic footprint and the structure that we've set up is this totally integrated global unit that we're operating the Aesthetics business really gives them the freedom to go out and expand or more aggressively fund areas around the globe that they think there is a significant opportunity. A good case in point is I believe it was in the fourth quarter, we funded a significant expansion in China to be able to increase the sales force there to be able to drive it more deeply into a broader set of the cities in China to the next level down and we are already seeing the benefits of that, China is already back to growing much like it did pre-COVID. So I think there's a lot of attractive attributes about that. On IMBRUVICA maybe Jeff and I will tag team on that one. What we're clearly seeing is the COVID is having an impact on patient starts in CLL. We're not only seeing it IMBRUVICA, but we're seeing in VENCLEXTA as well. And then somewhat logical when you think about these oncology practices of trying to reduce density and CLL is a disease where you can, in many patients' cases, you can delay therapy for some period of time. I would say that's the vast majority of it. When we look at -- when I look at the overall share. And the reason why I'm talking about the overall share is VENCLEXTA is now gaining a significant level of momentum in this market as well. When I look at our overall shares in first line, second line or third line, we continue to have the dominant share position. And I'd say probably, partially due to your question, if I look at Calico [ph] I'd say it's performing at the expectation we have. I think the first line share is about 12%, slightly higher in second line maybe 14%, and I don't recall the third line share..." }, { "speaker": "Jeffrey Stewart", "text": "Very similar, yes." }, { "speaker": "Richard Gonzalez", "text": "So I'd say that's within the range or we saw with MCL, it's within the range of what we had modeled. So it's not really a competitive issue that we're dealing with. It's more a function of getting those patients starts back up to the level they were before. Anything, you want to add, Jeff?" }, { "speaker": "Jeffrey Stewart", "text": "No, I think Rick, that's exactly right. The only thing I would say in terms of our forecast, we think that in the first part of the year, the early part of the year, we continue to see some suppression in the new patient starts. But as we hit the second and third quarter, we anticipate that the market will recover." }, { "speaker": "Liz Shea", "text": "Thanks, Chris. Operator, next question, please." }, { "speaker": "Operator", "text": "And our next question is from Tim Anderson from Wolfe Research." }, { "speaker": "Nicole Maher", "text": "Hi. Can you hear me? This is Nicole Maher on for Tim Anderson. What does your long-term guidance assume for potential austerity measures in the ex-U.S. countries in 2021 and beyond, similar to what we saw in the post-2008 time period except this time around, it would be the fall from the COVID impact?" }, { "speaker": "Richard Gonzalez", "text": "Hey, Nicole. This is Rick. I think this is something we've got experience with, if you think about the economic crisis, I thought we saw a similar kind of uptick in price erosion outside the United States and in particular, I'd say in the European Union, we have factored in a reasonable assumption into our guidance for 2021, I feel good about that. I think it is reflective of what we're likely to see. So I think we're covered from that perspective. Anything you want to add Rob?" }, { "speaker": "Robert Michael", "text": "No, that covered it." }, { "speaker": "Liz Shea", "text": "Thanks, Nicole. Operator, next question, please." }, { "speaker": "Operator", "text": "And our next question is from Steve Scala from Cowen." }, { "speaker": "Steve Scala", "text": "Thank you. Two questions. AbbVie delivered one of the first completely clean and compelling quarters in pharma this cycle, and I have to believe, has something in reserve for upside as the year unfolds. I'm sure you monitor the competition, so beyond the AbbVie management team itself, what about your business do you think is allowing you to execute in this way? Would you attribute it to -- mainly to the products themselves, the payer strategies, geographic mix, or is there something else? And the second question is the ongoing Vraylar Phase 3 trials utilize doses up to 3-milligrams while the successful prior trials were up to 4.5-milligrams, so why were the doses lowered in the first place? And what placebo response mitigation methods are included in the ongoing trials? Thank you." }, { "speaker": "Richard Gonzalez", "text": "Okay. Steve, this is Rick, I'll cover the first one, and Mike can cover the second one. I would say, first and foremost, we are a very disciplined organization in how we approach execution in the marketplace. We tend to probably, in [ph] some extent, obsessively plan and then go out and try to execute against that plan and I think in times of difficulties that kind of discipline tends to demonstrate itself and that's when you see the biggest differences. So that's not say [ph] other people don't do it like that. I'm not that familiar with how others operate, but I know how we operate and I know how we contingency plan and we look at. Okay, if that doesn't work, what are we going to do and we do that ahead of time, if that doesn't work, what are we going to do. And I think that kind of contingency planning and focus on execution is helpful. I'd say the second thing is, if I look at our business, we put a strategy in place and I feel very good about how the business is performing overall. I mean I would say the business is firing on all cylinders. And you can look at our fourth quarter performance, to your point, and I think it demonstrates that and you can look at our guidance and it demonstrates that almost every single product area is performing at or above, most of them above what consensus was and then I think it's another indicator for you and we have a much more diverse business now. We have four major growth platforms that are helping us drive that level of growth. Our new product launches are doing extremely well. Obviously, SKYRIZI and RINVOQ are, but I'd also say UBRELVY and Vraylar are performing extremely well and the pipeline, I would say one of the things gives me the most confidence is when I look at the pipeline behind that. It's designed to be able to drive our long-term growth because one of the things that we focus on is how we're going to make sure that we continue to drive this business to perform at the level its performing over the long term. And so if I look at the SKYRIZI and RINVOQ R&D execution around the follow-on indications, it's been nothing less than spectacular both from a timing standpoint and the kind of data that we have been able to produce. When I look at our hem/onc strategy, we've had a very disciplined strategy there ensuring that we have enough assets to continue to grow. What has become a very large franchise for us. Our franchise is $6.6 billion as we said, we're going to grow in double digits. Over the long term, what's going to allow us to do that? Well obviously IMBRUVICA is going to continue to drive share, VENCLEXTA is going to continue to drive share in CLL but VENCLEXTA has indication expansions in the area of potential, in the areas of T1114 and a broader AML population and several other areas. Then I look at Navitoclax. We should get that product approved and give us an opportunity in myelofibrosis and then you look at Genmab and you look at our CD47, those will all allow us to ensure that we can sustain that growth profile over the long term. In neuroscience, same thing, atogepant will allow us to expand into the broader migraine population. So I feel very good about what we put in place and our ability to execute against that. So I think there is not one silver bullet that I can point to. I think it's all of those things, certainly, our ability in market access has helped a lot in the US. I think we're very good at that, but you have to have the right kinds of assets in order to execute that. You have to have assets that are differentiative like SKYRIZI and RINVOQ. So it's the combination of all of that gives you this performance and gives you the long-term sustainable ability to deliver that kind of performance and I feel awfully good about where we are." }, { "speaker": "Michael Severino", "text": "So, this is Mike. I'll take the Vraylar question. I believe you're talking about the ongoing MDD studies and what I would say there is that the dose selection was based on everything we know about dose-response, not only from the prior MDD studies but across the program and we've done a deep dive into that and we're confident that we're at a dose that ought to have optimal effect in these indications -- in this indication. With respect to your question about placebo response rate, managing or controlling the placebo response is extremely important in all studies, but particularly in depression studies and other studies in psychiatry. And I would say that there are many different approaches that are taken that are complementary to each other. The first and most important is appropriate site selection, one has to select sites with an appropriate patient population with experienced investigators who are also experienced evaluators in a clinical trial setting and that's one of the most important things to getting high-quality data to determine whether a drug works. The next element has to do with investigator training, investigator manuals, protocol design and also with respect to inclusion and exclusion criteria to make sure that you have a patient population that is representative of the population that you would expect to treat post-registration if the study is successful. And we've taken a look at all of these things, we've taken a look at the blinded aggregate data and we feel good that the measures that we have in place will effectively control the placebo response and give us a quality readout." }, { "speaker": "Steve Scala", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Thanks, Steve. Operator, next question, please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Gary Nachman from BMO Capital Markets." }, { "speaker": "Gary Nachman", "text": "Hi, good morning. Could you talk about how much more you plan on investing behind the neuroscience franchise to accelerate growth there to get to the long-term targets you talked about like the $4 billion in Vraylar even with that MDD, and how you see the long-term potential in Botox Therapeutic? And then how are you thinking about the launch for atogepant later this year? And how will you leverage the work that you've done so far with Ubrelvy? And how do you think that product will take off in the migraine market? Thank you." }, { "speaker": "Richard Gonzalez", "text": "Well, I'd say, on the neuroscience investment, I mean we obviously have a very broad neuroscience investment. I mean we have a significant investment from an R&D standpoint. And in disease-modifying approaches for a number of different neurological diseases that Mike has talked about and mentioned in his comments earlier. So I'd say we have a significant R&D investment. We obviously are investing in Vraylar to continue to expand that asset. Again, our goal will be to invest in these areas where you can get maximum capture -- market share capture. I think if you look at Vraylar and you look at the projections that we made over time, if you look at the sequential year-over-year dollar growth of that business, that's how you get to that number. And basically, we're going to be able to sustain that, we expect to continue to sustain it as relatively low market share, but that's not unusual. And in this market, because there's a lot of generic products that psychiatrists, cycle patients through and sometimes in combination with patients. So we're going to invest in the business to be able to drive the maximum level of profitable share as we do in any other segment that we're in. Same thing on Botox Therapeutics, obviously, we have R&D programs in there to continue to expand the opportunities in therapeutics. Anything you want to add from an investment standpoint, Rob?" }, { "speaker": "Robert Michael", "text": "I think if you look at the overall portfolio, we've detailed out what we expect for Vraylar and that's without the additional indication. We think we can get to approaching $4 billion. When you look at the migraine portfolio, peak sales are greater than $1 billion for both the UBRELVY and Atogepant. We have 951 in the pipeline that we think can be a significant contributor, obviously, Botox Therapeutic will continue to grow. So we feel pretty good about the portfolio we have and that double-digit growth outlook is supported by a number of very promising assets." }, { "speaker": "Jeffrey Stewart", "text": "Yes, hi. And it's Jeff, I'll take the second question on atogepant. I think first, the asset itself is very, very attractive. And when you look at the response on the migraine free days at the 10 to 60-milligram, it's really impressive data, very impressive data as this very strong oral. And so we think that we can come at this in a couple of different ways. Obviously, you highlighted the leveraging Ubrelvy. We've got a dedicated sales force that calls on the specialty organization, the neurologists as well as the headache specialists will actually carry both UBRELVY and atogepant in their call plan to really leverage the knowledge of a very established sales force and as well as focus on the big primary care writers that see a lot of migraine sufferers. So this is -- this is an important dynamic that will, we'll be able to leverage when we get into the market towards the end of the year. Also, we are looking at the ability to see how you look on the back end of the migraine journey so patients are on Botox Therapeutics, for example, which is very substantial. It's the leading in play share for chronic migraine. But many of those patients don't get full efficacy results. So ultimately the combination of Botox plus atogepant as a way to get really migraine freedom in the toughest patients is another area over the long term that we think can leverage these assets across the board, whether it's you UBRELVY on the front end with acute atogepant in the middle, oral for episodic and chronic or Botox on the back end. We think it's a nice portfolio that we can commercially manage over time to hit our ambitions that Rob described." }, { "speaker": "Liz Shea", "text": "Thanks, Gary. Operator, next question, please." }, { "speaker": "Operator", "text": "Thank you. And our next question is from Naveen Jacob from UBS." }, { "speaker": "Naveen Jacob", "text": "Hi Naveen from UBS. Thanks for taking the question. So first on the ADC steroid you see for inflammatory conditions. Just wanted to get an update there, it's been, I believe you said delayed for COVID-19 do you still believe that this approach can lead to success for refractory RA or other inflammatory conditions. Just wondering about your confidence in this technology understanding, it's still early in development. And then secondly, as it relates to your current state of affairs with RINVOQ and SKYRIZI, could you remind us of what the current in-play market share for our RINVOQ is in RA and SKYRIZI in psoriasis. Thank you so much." }, { "speaker": "Michael Severino", "text": "Okay. This is Mike, I'll take your first question on ABBV 154 our TNF steroid conjugate has not been delayed because of COVID. There were some delays in other early immunology programs. Our CD 40 and our ROR gamma-T program experienced modest delays but 154 did not. As we said at the time of the COVID peak over the course of last summer, there were a small number of studies that we delayed initiation and delayed enrollment, is the programs that I'm talking about TD 40 and ROR gamma T were impacted modestly in that time period but 154 was not so that remains on-track. We remain confident in it. We have selected 154 as the agent to go forward. Remember that we had two 3373 and 154 and we selected 154 because of advantages it had in linker technology, we're planning to initiate a large Phase 2 B study in the first half of this year and then today, we're now saying that we will also be studying Phase 2 Crohn's disease, as well as polymyalgia rheumatica, and that's an important set of indication that covers a wide range of opportunities, RA and Crohn's disease areas where we are very active, PMR polymyalgia rheumatica is a new area where there is not a lot of therapeutics, unfortunately, it is a well-established area in medicine but there is very little in terms of treatment for these patients, they have considerable pain and suffering from their condition and it's -- and it's particularly steroid responsive. So we think it is a very attractive target for our steroid ADC approach. The 154 remains on track and we continue to have confidence." }, { "speaker": "Jeffrey Stewart", "text": "Thanks, Mike. It's Jeff, I'll take the in-play [ph] share. So if we look at the psoriasis market and SKYRIZI we have on our latest data point 33% of in-play share, which is of course is new patients coming in or newly switch patients. If you look at the total AbbVie share, it's approximately 45%, so very remarkable when you add Humira plus SKYRIZI in the dermatology space. If you look at the RA space, our latest data points are between 15% and 16% in terms of in-play share for RINVOQ in RA and that's basically neck and neck with Humira, so for a total AbbVie share of roughly a third of the RA market." }, { "speaker": "Richard Gonzalez", "text": "This is, Rick. The only thing I'd add on that is when you look at that SKYRIZI 33% in-play share, it's almost double what the next closest competitor is, I mean it's impressive. The gap between SKYRIZI and the number two player and the other thing is, as these brands get more experience in the market, we'll also start to talk about the total TRx share and I think SKYRIZI is at that point now. I think it's total TRx share now is 14% [indiscernible] or something like that. That's right. And that's pretty impressive for this short period of time and it is close to number two in the market in TRx share. So they are both doing very, very well." }, { "speaker": "Liz Shea", "text": "Thanks, Naveen. Operator, next question, please." }, { "speaker": "Operator", "text": "And the next question is from Chris Raymond from Piper Sandler." }, { "speaker": "Chris Raymond", "text": "Hi, thanks. Just a couple of questions. First, on the relationship with BI and SKYRIZI. We had a few inbound questions on the treatment of the royalty and I know you've answered this question a little bit in the past, but also just noticing the big non-cash GAAP charge you took this quarter, you back out a non-GAAP earnings. So I know you have described accounting for this as a business combination. But can you maybe give a little bit more color on the rationale and the accounting behind that non-cash charge and then is there also some threshold number or other event where you'd add this royalty expense back to non-GAAP. And then, on AbbVie 951; we picked up a decent amount of KOL excitement around this asset in Parkinson's. I know Phase 3 is expected later this year, but I wonder if you could maybe talk about the launch -- your launch expectations on this and maybe contrast it to the Duodopa experience just from our feedback, it seems like this could expand the addressable PD population pretty sizably and Rick maybe frame how this sort of factors into your long range $10 billion neuroscience guidance. Thanks." }, { "speaker": "Richard Gonzalez", "text": "Yes, Chris, I'll take your question on Contingent considerations and yes, we did account for this as a business combination. So that means each quarter we do a mark-to-market, the fair value of the future milestone royalty payments and you did see us take a fair value write up this quarter. Based on the higher sales outlook as we communicated during the Immunology Day event in December and you see in the guidance provided today, obviously the outlook for SKYRIZI continue to increase. And so we're recognizing that liability going forward. We also take into a consideration because it's a fair value measure what the market is assuming. So it's not just our own forecast. It's also what street expectations are and those have also increased as we've seen a very nice ramp. We are starting to see obviously the confidence from the street increase that's translated into a higher outlook for SKYRIZI which then translates in a higher future potential royalties. One of the reasons I wanted to stress, also on the free cash flow in my remarks today is because there is some confusion over that's how we account for, but it's important to keep in mind that when I talk about free cash flow of $21 billion this year, that accounts for the royalty payments of - to BI. And so you can look at a few different ways, you can look at it from a – if you can track the consideration accretion that we're recording and the liability on the balance sheet as an indicator of the future outlook, but also as we monitor our cash flow pretty carefully what does that contribute to overall cash flow. So we would not be going back, we made a determination as a business combination. We don't -- should not anticipate that we would reverse that but we'll provide obviously more clarity on what those royalties look like going forward given the size of the asset." }, { "speaker": "Michael Severino", "text": "I also say in that time period when we did BI it was an absolute requirement on the account, right. Well, that was really, it wasn't like a judgment call or something thing to desire to do the accounting, said to be accounted for in that fashion. It's since been changed going forward. But the window in which we that occurred that was the required accounting treatment. So number two, Jeff and I will cover number two, sort of a high level look and then Jeff, maybe can give more specificity around that. If you look at Duodopa I mean this is a -- this is a therapy that has absolutely phenomenal efficacy and you can see these patients who cannot move early and you turn on the pump and you start giving them the drug and within a very short period of time, they will gain their motion. The challenge is a very difficult treatment to the patient to basically deal with and the caregiver to deal with on a long term sustainable basis; you have to do surgery, insert a G-Tube, you got to maintain that G-Tube opened, so that does somewhat limit the population is able to use it. And so we view this as a way to significantly expand the market. Jeff is obviously far more familiar with it. So I'll let him, give you a little more specific, but that's the general concept. I think this could be a significant -- wanting to be a significant treatment for these patients who need this kind of therapy. And two, I think we could expand the market pretty significantly." }, { "speaker": "Jeffrey Stewart", "text": "Yes, I think just to add on that. Rick, it's we hear the same thing from our KOLs, they're very, very encouraged and with the perspective you look at Duopa or Duodopa, about $0.5 billion product with a really difficult challenge on on-boarding for these patients. Right. You have to do the J-Peg surgery. You have challenges with the size of the pump. Nonetheless, it's still remarkable that we do get that level of sales. So if I give you some perspective on the market. If you look at the advanced Parkinson disease market, 90% of it is really old generic orals where the patients just have to take more and more oral medication before they can have any -- any relief. And then, they are still in big trouble. So, only a minority about 10% ever get to let's say more advanced device-aided therapy, which is Duopa or Duodopa and deep brain stimulation. So, as we studied the market we agree that as we look at the ability to sort of move from a more convenient way a simple way for neurologists to get a more advanced therapy without doing a procedure, whether it's brain surgery or the -- or the GI surgery we think we can start to move upstream into that 90% of really non-workable oral segment. So, we are encouraged at the recent feedback from our KOLs and our study sites and are anticipating and planning for launch in the coming years." }, { "speaker": "Liz Shea", "text": "Thanks, Chris. Operator, next question, please." }, { "speaker": "Operator", "text": "And our next question is from Gregg Gilbert from Truist." }, { "speaker": "Gregg Gilbert", "text": "Yes, hi, I was curious if your Botox Cosmetic guidance in the US assumes that as you've always on the market or off the market this year and then longer-term curious about Botox Cosmetic versus therapeutic many years ago Allergan started to explore the idea of separating the two from a reimbursement and pricing standpoint, I believe it involved litigation with the government at one point, but I don't know if that's still ongoing or if you're still thinking through that possibility since it has implications longer-term about keeping those that together possibly spending Aesthetics someday if conditions warrant. Thank you." }, { "speaker": "Richard Gonzalez", "text": "Yes, so I don't know that we're going to specifically comment on what we've assumed as it relates to [indiscernible]. I just don't think it's probably appropriate. First of all, it's not that large of a product to begin with. So wouldn't have a material impact on Botox Cosmetics. I'd say on the -- on the -- on your second question, I will tell you emphatically we have no interest in spinning off the Aesthetics business. We have a program in place where we manage the differences between the reimbursement associated with Botox Therapeutics and the cash pay portion of the Cosmetics business, it's been in place for quite some time. We're quite comfortable that we can manage it quite effectively. So It's an important thing that you -- that you track carefully, but we have a good system in place to be able to do that, but we have no interest in getting off the Aesthetics business or any aspects of the of the Aesthetics business." }, { "speaker": "Liz Shea", "text": "Thanks, Gregg. Operator, next question please." }, { "speaker": "Operator", "text": "Our next question is from Geoff Meacham from Bank of America." }, { "speaker": "Unidentified Analyst", "text": "Hey guys, it's Austin [ph] on for Geoff. Thanks so much for the questions. A couple of quick ones. So -- and within the context of the Xeljanz's data, do you guys have an early view from the field as to whether docs are differentiating RINVOQ and -- sorry, RINVOQ and Xeljanz's safety profiles? And then quickly on the mid to early stage pipeline there's obviously a lot going on in your Heme-onc space but just going to want to get a sense of how strategically important some more newer disruptive technologies are to AbbVie such as cell or gene therapy. Thanks." }, { "speaker": "Jeffrey Stewart", "text": "Yes, I'll take the early view from the field. I think it's important, at least, we've heard from our teams that some of this data is not really new. It was available in the interim analysis that helped -- led to the label that we have and so really the early reports from our -- from our field particularly from the KOLs and the big prescribers is a little bit of a shoulder shrug like not that, not that new news. I would say, from the standpoint of the comparison between RINVOQ and Xeljanz. I mean if you look at the penetration of the jack-class really across the world, and particularly in the U.S., there has been a significant lift that we just talked about with that in play share. And so really what we're -- what we're hearing from the -- from the field and from the prescribers are they view RINVOQ as a differentiated asset in terms of the overall risk benefit and that's why that share is moving so quickly and so that's really what we -- what we hear in the early days from our -- from our teams that are connected to those big rheumatologists." }, { "speaker": "Michael Severino", "text": "So, this is Mike. I'll take the question on the heme-onc portfolio mid stage and newer technologies, but I would say is there is a lot going on in our heme-onc portfolio. Obviously with our late-stage molecules in the mid-stage. I think you'll see a focus on T-cell redirection, which is of course a newer technology. And I think a very attractive approach to harness the immune system to control these cancers and you see good progress with our CD3 by CD20 and our BCMA T cell redirecting therapies. And so, that is clearly an area of focus for us now and I think we'll continue to be in the future. With respect to gene therapy, gene therapy is not a single thing it can be used in different ways. Gene replacement is not an area that we've been focused on. Gene delivery is an enabling technology for other therapeutic approaches like cell-based therapies and we have early programs and cell-based therapies in heme-onc and in other areas. Solid tumor oncology and potentially other areas in the future. And so that's something that we are keeping a close eye on and making sure that we have access to the enabling technologies we need to prosecute those targets. I think that for those sorts of approaches we're probably one generation away from things that are broadly applicable. But we are exploring possibilities that we think can fulfill that next generation need. And so we are keeping up a broad eye and are essentially therapeutically agnostic. What I mean by that is we look for the best tool to do the job. We don't find it tool and then figure out how to use it. And so in each of these cases we're going after strong biology. We're going after things that we think will raise the bar on the standard of care. And I think a number of the newer technologies that I mentioned fit that bill." }, { "speaker": "Liz Shea", "text": "Thanks. Operator, we have time for one final question." }, { "speaker": "Operator", "text": "Thank you. Our final question today is from Luisa Hector from Berenberg." }, { "speaker": "Luisa Hector", "text": "Hello, thank you for taking my question and thank you for the guidance on the cost lines. And I just wondered given that we have various layers to consider with COVID and then the Allergan inclusion and the synergies could you comment on the implied cost ratio for 2021 and how representative are the combined entity. And is there anything else we should be thinking about for those cost line as we look out to 22 COVID related savings may be sticky ones that may reverse? And could you tell us the level of synergies you achieved already in 2020? Thank you." }, { "speaker": "Robert Michael", "text": "Hi, Luis. This is Rob. So I think now that we have first full year with combined company and you're looking at these profiles. I think you could assume they're indicative in the range of what you'd expect going forward. And so that is a cleaner guide then say when you have a partial year like we had in 2020 as it relates to the synergies we achieved in 2020 which is about $600 million of synergies about $400 million that was an R&D and $200 million SG&A and you see we've now increased that to $1.7 billion in 2021 with about a little bit roughly half of that coming from R&D about in the 40% range SG&A and about 10% from cost of goods." }, { "speaker": "Liz Shea", "text": "Thanks, Luisa. And that concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.AbbVie.com. Thanks again for joining us." }, { "speaker": "Operator", "text": "Thank you. This does conclude today's conference. You may disconnect at this time." } ]	AbbVie Inc.	141,885,706
ABBV	3	2,020	2020-10-30 09:00:00	Operator: Good morning and thank you for standing by. Welcome to the AbbVie Third Quarter 2020 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion [Operator Instructions] And I would now like to introduce Ms. Liz Shea, Vice President of Investor Relations. Liz Shea: Good morning and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Vice Chairman and President; Rob Michael, Executive Vice President and Chief Financial Officer; and joining us for the Q&A portion of the call is Laura Schumacher, Vice Chairman, External Affairs, Chief Legal Officer and Corporate Secretary. Before we get started, I remind you that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties, including the impact of the COVID-19 pandemic on AbbVie’s operations, results and financial results that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our 2019 annual report on Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today’s conference call, as in the past, non-GAAP financial measures will be used to help investors understand AbbVie’s ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Unless otherwise noted, our commentary on sales growth is on a comparable operational basis, which includes full current year and historical results for Allergan and excludes the impact of exchange. For this comparison of underlying performance, all historically reported Allergan revenues have been recast to conform to AbbVie’s revenue recognition accounting policies and excludes the divestitures of Zenpep and Viokace. Following our prepared remarks, we will take your questions. So, with that, I will now turn the call over to Rick. Rick Gonzalez: Thank you, Liz. Good morning, everyone, and thank you for joining us today. I will discuss our third quarter performance and highlights, as well as our full year guidance, which we are raising again this quarter. Mike will then provide an update on recent advancements across our R&D programs and Rob will discuss the quarter in more detail. Following our remarks, we will take your questions. AbbVie delivered another excellent quarter with adjusted earnings per share of $2.83, exceeding the midpoint of our guidance range by $0.08. When I look at our business and the actions we have taken to position AbbVie for sustainable performance, including the acquisition of Allergan, I feel very good about our long-term outlook. The fundamentals are strong and there is considerable momentum across our legacy and new portfolios, which are both demonstrating robust growth, despite the COVID pandemic and together have the potential for significant long-term value creation. I’d like to specifically highlight our recent progress across several aspects of our business, including the launches of RINVOQ and SKYRIZI, which are performing well ahead of all comparable launch analogs in their initial indications and continue to exceed our expectations. Our hem/onc franchise continues to deliver robust performance and is expected to generate more than $6.5 billion in revenue this year, representing strong double-digit growth. New indications and novel combinations, including our recently announced collaboration with Genmab and I-Mab provide opportunities for further revenue expansion. While it is still relatively early in the integration of Allergan, the strategic merits of the combination have never been more evident. We are already demonstrating that we have created a stronger, more diverse company, with robust cash flows and multiple new growth vehicles for the long-term. We now have the leading aesthetics franchise, which is demonstrating a strong V-shaped recovery, as well as a highly attractive neuroscience portfolio which delivered double-digit growth on a comparable operational basis this quarter and has significant momentum with VRAYLAR and our expanding migraine franchise. And our pipeline is advancing nicely, with numerous attractive late-stage programs that we believe will allow us to maintain a growing and vibrant business. We are on track for the approval of more than a dozen new products for major indications over the next two years, which will collectively add meaningful revenue growth. This includes a total of six additional indications for RINVOQ and SKYRIZI, expanded indications for VENCLEXTA and several other near-term product -- new product approvals, including atogepant, Navitoclax and 951. Clearly, this is a very exciting time for AbbVie and I am pleased with the progress that we are making towards our long-term strategy for sustainable growth. I remain confident that we will continue to execute as we have in the past and deliver outstanding shareholder value going forward. I’d like to look further at our business performance. I am pleased with the recent trends across our key growth areas. I will start with immunology, where we established strong trajectories for RINVOQ and SKYRIZI. As I previously noted, both continue to perform well-above expectations. In their initial indications, these two brands have clearly demonstrated superior efficacy to HUMIRA, as well as other novel agents on the market or in development, resulting in significant in-play market shares, a leading indicator for long-term commercial performance. The in-play share for RINVOQ in RA, which includes both new and switching patients remains strong at approximately 16% and has now reached parity with our market leading HUMIRA. In psoriasis, SKYRIZI has already achieved the leading in-play market share at 33%. This level of share capture at this stage of the launch is unprecedented, and if sustained, will ultimately lead to total market share well in excess of what was contemplated when we communicated our expectations for 2025 sales. This strong performance and trajectory, despite the impact of the COVID-19 pandemic is a testament to our differentiated product profile and our commercial execution. Our focus since the pandemic has been on driving accelerated patient activation and we remain encouraged by our current prescription trends. Our recent performance continues to give us confidence in the near- and long-term potential for both RINVOQ and SKYRIZI, which we now expect will deliver $2.2 billion in combined revenue for full year 2020, well exceeding our original projections for this year. In addition to outstanding commercial momentum, we are also making excellent progress with RINVOQ and SKYRIZI in new indications, which we expect will further strengthen our leadership position. We have already started planning and preparing for the forthcoming approval of three additional RINVOQ indications next year, including psoriatic arthritis and ankylosing spondylitis, giving us complete coverage across the more than $40 billion rheumatology segment. We also expect approval in atopic dermatitis, another large and growing market that has the potential to be multi-billion dollar peak revenues for RINVOQ. In the coming year, we also intend to submit regulatory applications for SKYRIZI in psoriatic arthritis and both agents in the area of inflammatory bowel disease, a more than $20 billion market today with high unmet need. Overall, I am extremely pleased with the progress we are making on both RINVOQ and SKYRIZI. I’d also like to take this opportunity to announce that we will be hosting an immunology focused Investor Day in December, where we intend to further discuss our strategy, progress, and expectations for this important growth area. Additional details will be forthcoming. Turning now to hem/onc, which delivered robust double-digit growth again this quarter and remains an important therapeutic area for AbbVie’s long-term performance. IMBRUVICA has a strong position across multiple indications including CLL, where it remains the clear market share leader across all lines of therapy. IMBRUVICA sales increased 9% on an operational basis this quarter, despite lower new patient starts within CLL, where the market remains below pre-COVID levels. VENCLEXTA sales increased nearly 60% on an operational basis this quarter. The penetration across our approved indications remains strong, especially in AML, given the potential aggressive disease progression of that cancer. In the quarter, we also announced a strategic collaboration with I-Mab, further expanding our oncology portfolio with anti-CD47 monoclonal antibody, which has potential across a wide range of blood cancers. The I-Mab opportunity adds to our already-attractive oncology pipeline, which includes Navitoclax, Genmab CD3xCD20, expanded indications for VENCLEXTA and several promising early-stage programs. We also now have another high performing franchise in neuroscience, which further diversifies AbbVie’s sources of long-term growth. VRAYLAR sales increased strong double-digits again this quarter on a comparable operational basis, with annualized revenues of more than $1.4 billion. Given VRAYLAR’s benefit/risk profile relative to other atypical anti-psychotics, we remain confident in its long-term growth potential, which we believe is multi-billion dollars across the currently approved indications of bipolar disorder and schizophrenia. BOTOX Therapeutics, which has nearly a dozen medical treatment indications, including chronic migraine, is also performing very well. Revenues were up nearly $100 million sequentially on a comparable operational basis, demonstrating a rapid COVID recovery. The launch of UBRELVY, our leading oral CGRP for acute migraine, is exceeding our expectations. Commercial access is ramping strongly and increasing DTC investments have resulted in encouraging new patient starts and market expansion. When you consider our overall scale with BOTOX Therapeutics, UBRELVY’s acute treatment profile and the promising development of atogepant for the prevention of episodic and chronic migraine, we see substantial room for long-term revenue growth with this best-in-class migraine portfolio. Within aesthetics, our fourth major growth platform, we are seeing robust demand trends and a rapid V-shaped recovery. Total global aesthetics revenues of more than $950 million were up 70% sequentially on a comparable operational basis, illustrating the significant underlying demand for both BOTOX cosmetics and JUVÉDERM. We remain focused on supporting clinics through the COVID pandemic and expect consistent investment in consumer promotion to expand the aesthetics market, which remains under penetrated globally. Our dedicated R&D and business development are expected to sustain new innovation and rapidly expand our aesthetics portfolio for long-term growth, including the recently announced acquisition of Luminera, which provides us with a complementary dermal filler portfolio and pipeline. Overall, we are very pleased with the momentum that we are seeing with our aesthetics franchise. AbbVie’s business continues to remain resilient and demonstrates strong underlying growth throughout the pandemic. Based on the performance this quarter and our progress year-to-date, we are raising our full year 2020 EPS guidance. We now expect adjusted earnings per share of $10.47 to $10.49, reflecting growth of more than 17% at the midpoint. In addition to the excellent progress we are making across the portfolio, the integration of Allergan continues to go very well. Despite the size of this transaction and the timing of the COVID pandemic, the transition has been seamless. We are performing very well against both our synergy and accretion targets, and it is becoming increasingly clear to us that there are also opportunities for revenue synergies across various aspects of the business. We are now six months post-close and the strategic merits of the transaction are extremely evident. Allergan is providing additional growth platforms, robust financial benefits and greater diversity of our business. We remain confident that the newly combined business will generate significant earnings and cash flow to support continued investment in our innovative R&D platform, as well as a strong and growing dividend, while also allowing us to rapidly pay down debt. To that end, as noted in our news release, today we are announcing a 10.2% increase in our quarterly cash dividend from $1.18 per share to $1.30 per share beginning with the dividend payable in February 2021. Since inception, we have grown our quarterly dividend by 225%. So, in summary, we continue to demonstrate strong execution across our portfolio and remain encouraged by the overall recovery trends. We have assembled an impressive set of diversified growth assets with significant growth potential giving us a high degree of confidence in the long-term outlook for our business. With that, I will turn the call over to Mike. Michael Severino: Thank you, Rick. We continue to make great progress across all stages of our pipeline and this morning I will highlight key events since our last earnings call. Starting with immunology, where we achieved several major milestones, including submission of our U.S. and European regulatory applications for RINVOQ in ankylosing spondylitis and atopic dermatitis. We expect regulatory decisions in the first half of 2021 for both indications, as well as for psoriatic arthritis which was submitted for regulatory review earlier this year. Within the rheumatology segment, both psoriatic arthritis and ankylosing spondylitis are large and important markets and represent a significant growth opportunity for RINVOQ. We will highlight the growing body of data from our rheumatology portfolio and the -- at the upcoming virtual ACR Congress, where we will present 35 abstracts from multiple assets across our portfolio, including six selected for oral presentation. Atopic dermatitis is a new disease area for AbbVie and also represents an important area of growth for our immunology franchise going forward. Based on the data generated in our registrational program, we remain very confident in the benefit/risk profile for RINVOQ in atopic dermatitis and believe it will offer meaningful advantages over products on the market today or in development. Beyond the Phase 3 studies that support our regulatory submission, we are also evaluating RINVOQ in a head-to-head Phase 3 trial against dupilumab, which if successful, will help further support RINVOQ as a highly differentiated therapeutic option for patients with atopic dermatitis. We look forward to seeing data from this head-to-head study later this quarter. In the area of inflammatory bowel diseases, we remain on track to see induction data later this quarter from our Phase 3 program for RINVOQ in ulcerative colitis. We will see data from a second induction study in ulcerative colitis, as well as results from the maintenance portion of these studies next year. We expect to file our regulatory applications in 2021 as well. We are also making great progress with the development programs for SKYRIZI and later this quarter we expect data from several new indications across rheumatology and gastroenterology. We will see data from two Phase 3 studies in psoriatic arthritis and results from the first Phase 3 induction study in Crohn’s disease, supporting regulatory applications for both indications in 2021. Outside of immunology, SKYRIZI will also be evaluated as a potential treatment for COVID-19 as part of the NIH ACTIV program, which is a public private partnership aimed at accelerating potential therapies and vaccines for COVID-19. SKYRIZI was selected through a prioritization process that evaluated immunomodulators with acceptable safety profiles as potential treatments for COVID-19 complications caused by the cytokine storm observed in some patients. SKYRIZI will be included in the ACTIV-5 Big Effect trial, which is a Phase 2 study designed to evaluate a number of drugs that are either approved or in late-stage development as potential treatments for COVID-19. In our early-stage immunology pipeline, earlier this year, we toplined positive results from a proof-of-concept study evaluating our novel TNF steroid conjugate, ABBV-3373 in RA. We recently completed the Phase 1 PK and safety study for our second TNF steroid conjugate, ABBV-154. Based on these data, we have selected 154 to move forward into larger scale trials. We expect to begin a Phase 2b definitive dose ranging study for 154 in RA for the first half of 2021. As Rick mentioned, we will be hosting an Immunology Day for investors in December, where we will provide an update on our immunology strategy and long-term outlook for the franchise. We look forward to providing additional updates on our immunology pipeline at that time. In oncology, we continue to advance our portfolio with several important Phase 3 studies beginning in the quarter, including VENCLEXTA in high-risk myelodysplastic syndrome and navitoclax in myelofibrosis. We also recently received full FDA approval of VENCLEXTA in combination with azacitidine, decitabine or low-dose cytarabine in newly diagnosed AML patients, who are ineligible for intensive induction chemotherapy. This approval is supported by the Phase 3 VIALE-A and VIALE-C studies. Updated efficacy and safety results from VIALE-A were recently published in the New England Journal of Medicine and showed that the combination of VENCLEXTA and azacitidine extended overall survival compared to azacitidine plus placebo. Additionally, following the publication of the VIALE-A results, the NCCN guidelines were updated to recommend the VENCLEXTA and azacitidine combination as the Category 1 preferred treatment for AML patients who are ineligible for intensive chemotherapy. Importantly, the VENCLEXTA combination has the Category 1 designation irrespective of mutational status. Also in the quarter, we announced a collaboration with I-Mab to develop and commercialize the anti-CD47 monoclonal antibody, lemzoparlimab. The emerging data for lemzoparlimab is very encouraging and provides AbbVie access to another potentially differentiated asset in the immuno-oncology space. The data generated to date show that lemzoparlimab effectively blocks tumor-specific CD47 interactions, but with much lower binding to red blood cells, potentially leading to a better safety profile. Lemzoparlimab is being studied in multiple cancers with a focus on hematological malignancies. In neuroscience, we recently presented new data from several clinical programs at the virtual Migraine Trust International Symposium, showcasing the breadth and strength of our migraine portfolio and demonstrating AbbVie’s commitment to providing multiple treatment options for the acute and preventive treatment of migraine. In total, 15 abstracts were presented for BOTOX, UBRELVY and atogepant. Included in the MTIS presentation were the detailed results for atogepant in the Phase 3 advanced study, which demonstrated a clinically meaningful and statistically significant improvement over placebo, with all atogepant doses for the primary endpoint of reduction in mean monthly migraine days. Significant improvements were also observed for all secondary endpoints in the 30-milligram and 60-milligram dose groups. Treatment with atogepant resulted in 56% to 61% of subjects achieving at least a 50% reduction in monthly migraine days, compared to 29% for the placebo group. We are very encouraged by the strong benefit/risk profile that has been demonstrated for atogepant in migraine prevention and believe that once approved, this new oral treatment option will be competitively positioned in the prevention market. Together with BOTOX for chronic migraine prevention and UBRELVY for acute migraine treatment, the addition of atogepant creates a market leading portfolio in migraine that represents significant long-term value for AbbVie. In aesthetics, we continue to make good progress with our portfolio of facial toxins and dermal fillers. We have several ongoing programs for new indications for BOTOX and for the JUVÉDERM collection, as well as a pipeline of innovative toxins and dermal fillers, which we expect to reach the market over the course of the next five years. BOTOX has been the leading neurotoxin for over two decades, with R&D efforts in aesthetics primarily focused on the upper face. To support expansion to the lower face region, we have several programs ongoing, including studies in masseter and platysma prominence. We recently had a positive data readout for our Phase 2 study for the reduction of masseter prominence in the lower face. This study met all primary and secondary endpoints, demonstrating that the severity of prominence was reduced following a single treatment of BOTOX. Based on these results, we plan to begin Phase 3 development next year, which will support registration in the U.S. and Europe. We also recently announced the acquisition of Luminera’s dermal filler portfolio led by HArmonyCa, which is an innovative dermal filler developed for facial soft tissue augmentation. Luminera’s assets are highly complementary to our JUVÉDERM filler franchise and we look forward to expanding their development to markets around the world. And in eye care, we recently announced positive topline results from the Phase 3 GEMINI 1 and GEMINI 2 studies, which evaluated our topical eye drop, AGN-190584 for the treatment of symptoms associated with presbyopia. In both studies, 584 met the primary endpoint and the majority of secondary endpoints, with data from both studies demonstrating that treatment with 584 resulted in significant near-vision gains in low lighting conditions without a loss of distance vision. Based on these results, we plan to submit our regulatory application to the FDA in the first half of next year. So, in summary, we have continued to make significant progress advancing and accelerating our programs this quarter, and we look forward to many more important pipeline milestones in the coming months and through 2021. With that, I will turn the call over to Rob for additional comments on our third quarter performance and financial outlook. Rob? Rob Michael: Thank you, Mike. Starting with third quarter results, we delivered strong top and bottomline performance. We reported adjusted earnings per share of $2.83, above our guidance midpoint by $0.08. Total adjusted net revenues were approximately $12.9 billion, up 4.1% on a comparable operational basis and ahead of our expectations. Immunology global sales were approximately $5.8 billion, up 15% on an operational basis, despite the impact of COVID on new patient starts across the immunology market. U.S. HUMIRA sales were approximately $4.2 billion, up 7.7% compared to prior year, reflecting continued demand growth plus price. Wholesaler inventory levels remain below half a month in the quarter. International HUMIRA sales were $951 million, down 8% operationally, reflecting biosimilar competition across Europe and other international markets. SKYRIZI sales were $435 million with leading in-play share in the U.S. psoriasis market and robust sequential growth internationally. RINVOQ sales were $215 million with continued strong in-play share in the U.S. RA market. Hematologic oncology delivered another strong quarter, with sales of $1.7 billion, up 16.4% on an operational basis. IMBRUVICA net revenues were approximately $1.4 billion, up 9% driven by our leading share in CLL. VENCLEXTA revenues were $352 million, with strong demand across all approved indications. MAVYRET sales were $414 million, down 41.1% on an operational basis, as treated patient volumes have remained below pre-COVID levels. Aesthetic sales were $967 million with BOTOX cosmetic and JUVÉDERM both experiencing a faster than expected recovery from the COVID pandemic. Neuroscience revenues were more than $1.2 billion led by VRAYLAR and our migraine portfolio. VRAYLAR once again delivered strong growth with revenues of $358 million. BOTOX Therapeutic continues to experience a rapid recovery from the COVID pandemic, with sales of $523 million in the quarter. The launch of UBRELVY is also going very well with recent direct-to-consumer promotion driving new prescription growth. Sales of UBRELVY were $38 million. We also saw a significant contribution from eye care, which had sales of $840 million. Turning now to the P&L profile for the third quarter. Adjusted gross margin was 81.7% of sales, adjusted R&D investment was 11.7% of sales and adjusted SG&A expense was 21.1% of sales. The adjusted operating margin ratio was 48.8% of sales, an improvement of 40 basis points versus the prior year. Net interest expense was $620 million and the adjusted tax rate was 11.7%. As Rick previously mentioned, we are raising our full year adjusted earnings per share guidance to between $10.47 and $10.49, including accretion from the Allergan transaction of 12% on an annualized basis. Excluded from this guidance is $6.58 of known intangible amortization and specified items. This guidance now contemplates 2020 adjusted net revenue of approximately $45.7 billion, representing an increase of $200 million from our previous estimate. At current rates, we now expect foreign exchange to have a modest unfavorable impact on fully reported sales growth. Included in this guidance are the following updated 2020 assumptions. We now expect international HUMIRA sales approaching $3.7 billion. For SKYRIZI, we now expect revenues of approximately $1.5 billion. For RINVOQ, we now expect sales of approximately $700 million. For IMBRIVICA, we now expect revenue of approximately $5.3 billion, as new patient starts in the CLL market remain below pre-COVID levels. For Aesthetics, we now expect post-close sales of approximately $2.5 billion with BOTOX cosmetic and JUVÉDERM both demonstrating a fast recovery. For MAVYRET, we now expect sales of approximately $1.9 billion, as treatments remain below pre-COVID levels. We now expect LUPRON revenues of approximately $750 million, as we work to resolve a near-term supply issue, which has impacted availability of certain formulations. Moving to the P&L, we continue to forecast full year adjusted gross margin just above 82% of sales and adjusted operating margin of approximately 48% of sales. This guidance includes approximately $600 million in expense synergies for the partial year in 2020. We remain on track to deliver greater than $2 billion in expense synergies by 2022. As we look ahead to the fourth quarter, we anticipate adjusted net revenue approaching $13.8 billion. At current rates, we expect foreign exchange to have a modest favorable impact on reported sales growth. We are forecasting an adjusted operating margin ratio of approximately 46.5% of sales. We model a non-GAAP tax rate of 11.6% and we expect the average share count to be similar to Q3. We expect adjusted earnings per share between $2.83 and $2.85, excluding approximately $1.73 of known intangible amortization and specified items. Finally, AbbVie’s strong business performance continues to support our capital allocation priorities. We generated $12.7 billion of operating cash flow in the first nine months of the year, and our cash and investments balance at the end of September was $8 billion. Underscoring our confidence in AbbVie’s long-term outlook, today we announced a 10.2% increase in our quarterly cash dividend, beginning with the dividend payable in February 2021. We also remain on track to pay down $15 billion to $18 billion of combined company debt by the end of 2021 and expect to achieve a net debt-to-EBITDA ratio of 2.5 times by the end of next year, with further deleveraging through 2023. With that, I will turn the call back over to Liz. Liz Shea: Thanks, Rob. We will now open the call for questions. Operator, first question, please? Operator: Thank you. [Operator Instructions] Our first question today is from Chris Schott from JPMorgan. Chris Schott: Great. Thanks so much for the questions and congrats on the results. I guess just two for me. First, 2021, I know you are not giving guidance yet, but can you just talk through some of the pushes and pulls we should keep in mind as we think about next year’s numbers and it seems like the core business obviously has a lot of traction here. I am just trying to get a sense of from your perspective what are the uncertainties as you think about that guidance number for next year? And my second question was on RINVOQ in atopic derm. Can you just elaborate a bit more on how you are thinking about the size of that opportunity? I know one of your peers has a single indication JAK in AD they think is a $3 billion peak sales opportunity. I know that’s well above your risk adjusted numbers you had a few years ago. It sounds like now you are talking about potential multi-billion dollar opportunity. But just help us flesh out a little bit about how big of an opportunity could this be for the product? Thank you. Rick Gonzalez: Okay. So, Chris, this is Rick. I will talk a little bit about 2021 and then Mike maybe can talk a little bit about how we view RINVOQ in AD and Rob. So when we look at 2021, I think, you have to step back and say, how are we performing this year? And obviously we are performing very well. There’s still some COVID impact built in. It varies a bit by therapeutic areas, some areas are impacted more than others. So as an example, CLL has been impacted more than other areas, HCV has been impacted more than other areas. It’s usually places where the therapy can be delayed without significant consequence for the patient is where we are seeing most significant delays. So as we move through the fourth quarter, we will see whether or not that recovers more and that’s certainly one aspect of it. I would say, even without much recovery, the underlying performance of the business looks good. I think you can look at the dividend increase that we put through and that should give you some flavor for the level of confidence that we have, because obviously, we would want to tie that to what we assumed that we could deliver from an overall performance standpoint. I’d also say that, as we look to consensus, we are comfortable with what we see in consensus in 2021. So we want to see a few other things just play out primarily around COVID, how much improvement we get. We have launched a number of programs over the course of the last couple of months to try to activate patients more, to go to their physicians and seek treatment out. I think those programs, some of those programs will be successful and we will see some of those increase, particularly in immunology, because dermatology is another one of those areas that the new patient starts are still off a little bit. Now, obviously, SKYRIZI is performing extremely well and HUMIRA continues to perform well. So, I’d say that’s the single biggest issue. Rob, Mike, do you want to talk about RINVOQ? Michael Severino: Certainly. I will start and then pass it over to Rob, if he wants to add a little bit more detail. We view atopic dermatitis as a very attractive and a very substantial opportunity overall. It’s an indication that I think for many years was underappreciated by the industry. Now that’s changed recently and you have seen a lot of focus in drug development in atopic dermatitis. We feel very good about the profile that we have demonstrated, coming out of Phase 2, when we made those statements about the risk-adjusted potential in atopic dermatitis, we felt good about our data and those data were sufficient to get a breakthrough therapy designation. We are in the fortunate and not always that common situation where our Phase 3 results have actually outperformed our expectations based on Phase 2. And if you look at the Phase 3 results, they are really strong across the board. They are strong in total response. They are strong in repeated response and they are strong on components like itch, which is the most troublesome symptom to patients in the majority of cases. And so, when you couple that with the safety profile that we have demonstrated, which we think is very favorable. We see this as something that has very real potential and when we look across studies, we feel very good about our results. And of course, we have a head-to-head study with dupilumab, which is coming up later on this quarter and so that will be important additional information, and we are very optimistic about those results. Rob, I don’t know if you would like to add anything further? Rob Michael: Chris, this is Rob. So if you think about atopic dermatitis, it’s a $3 billion global market with very strong growth potential. In our 2025 risk adjusted guidance of greater than $10 billion for RINVOQ and SKYRIZI, we included $1 billion of revenue for RINVOQ AD, but we feel pretty good that we can achieve that expectation. Rick Gonzalez: And the only other thing I’d add is, I think atopic derm is a market very similar to several others, in fact, psoriasis, I would say, is a similar type of market. But as you get more competitors in the market driving promotion, it has a very large population of patients. So the question is, activating those patients and getting them to go into the physician’s offices to seek treatment. And so, obviously, when you have one company doing that, they have the capacity to drive a certain amount. When you have more than one company, you are doubling or tripling the amount of promotion activity, particularly here in the U.S. and that tends to activate more patients to seek treatment. I think if you looked at the total available market of patients who would qualify, it’s a huge market, it’s north of $5 billion easily. So the question is, how fast can you activate them and how broadly can you activate those patients? From a profile standpoint of our drug, I think we will compete quite effectively, and I think, in particular, the performance around itch is going to give us an advantage. So it’s a very attractive market and it’s certainly one that we will focus a lot of attention on to drive. Rob Michael: And Chris, this is Rob again. Just to clarify, I said exceed or achieve, but we expect to exceed that $1 billion risk-adjusted number for RINVOQ AD in 2025. Liz Shea: Thanks, Chris. Operator, next question, please? Operator: Thank you. And our next question is from Geoffrey Porges from SVB Leerink. Geoffrey Porges: Thanks. Rick a question to you. With the dividend going up, it looks like you have got about a 6.5% dividend yield. The core business is performing well. And my question is, what are the -- and you are now a $50 billion to $55 billion topline company. What are the pipeline assets that can really move the needle, I know all the new indications for the existing NMEs, but what new NMEs can be really substantial to move the needle on a $55 billion topline, because I think, that’s part of why you have got an industry high dividend yield? Rick Gonzalez: So, Geoff, this is Rick. I think if you look at the business, you have to look at it in phases, right? So I’d say the phase between now and call it 2025, 2026. That growth is going to be driven by expansion of RINVOQ and SKYRIZI, continued strong growth in the neuroscience pipeline, continued strong growth in the aesthetics pipeline and continued strong growth in the hem/onc. Starting in that 2025 timeframe and beyond, that’s where the earlier to mid-stage pipeline will drive a significant amount of growth. Now there will be assets like Navitoclax, like 951, atogepant, that will come in prior to that and help boost growth right around ‘23 and ‘24. But I can tell you, we are very confident that we have now built a portfolio that can sustain growth and drive growth on the other side of the LOE. In fact, I would tell you that, when I look at RINVOQ and SKYRIZI, and I look at the in-play market shares that we see with those assets today, when we gave guidance of 2025, we assumed that on average, we would achieve high single-digit market share across the indications. So as an example, if you look at SKYRIZI right now, SKYRIZI’s in-play share is 33%, the market leader by a wide margin. The next closest product is at 16% in-play share. And its TRX share is now at 11% and climbing rapidly. So it’s already above what we had assumed the peak would have been out in 2025 from a market share standpoint. And if we maintain that 33% by then, it will have an overall share of about 33%, so it will be three times what we had assumed for psoriasis. So when you look at the speed at which we are bringing the new indications, when you look at the breadth of those indications across the revenue base that HUMIRA has today, we have covered all of the major indications for HUMIRA plus one more that HUMIRA doesn’t have, which is atopic derm. And if we can achieve that kind of market share in each of these indications, then we will obviously double what we assumed that 2025 number was and that gets you pretty close to covering all of HUMIRA in the U.S. So I am very encouraged about that. And I think that, along with the other assets and the four major growth platforms, gives us a tremendous amount of confidence that we can drive growth on a sustainable basis at a very high level. Liz Shea: Thanks, Geoff. Operator, next question, please? Operator: Thank you. And our next question is from Vamil Divan from Mizuho. Vamil Divan: Hi. Thanks so much for taking my questions. So maybe just sort of following up on what has been asked. For 2021 on Chris’ question, can you just talk a little bit about how you are thinking about drug pricing pressure, either U.S. or globally just to think about our modeling for next year, I think, that would be helpful? And then maybe building on Geoff’s question, I think one of the other concerns that investors have is around potential tax reform that may come out of D.C. depending on how the election plays out. I know it’s tough to ask just a few days before the election. But I guess based on what you are seeing especially from the Biden side, I guess the Biden plan right now. Is there anything you can share with investors at this point in terms of how your tax rate may change going forward and I appreciate there’s probably not much that you can give, but any insights I think would be helpful, because I think it is investors seem very concerned about at this point? Thank you. Rick Gonzalez: Yeah. Well, Vamil, obviously, it’s still unclear as to what the landscape will be on the other side of the election, so we obviously have to let that play out. Having said that, I think, we assume that there will be continued pressure on the industry as it relates to drug pricing. As far as what our expectations would be in 2021, I think our expectations in 2021 from a price standpoint will be similar to what they were in ‘19 and ‘20, and is we weren’t reliant on price. I mean, fortunately our business is primarily a volume-driven business. It’s typically in areas that are very serious diseases and have strong value propositions. And so that gives me confidence that we will be able to fare reasonably well even if there are changes. I’d say the second thing is, it’s unlikely that you will get changes that have a significant impact early on in ‘21, because there’s going to be a lot of debate here about what those changes are. What I would hope the debate ultimately transitions to is co-pays and out-of-pocket costs for patients, because that is the fundamental issue and it’s particularly the issue when you look at Part D patients. They have to pay far too much of the burden of the cost from an out-of-pocket cost standpoint. And they are really the only group of patients in the U.S. that have that kind of burden associated with them. If you look at the overall performance from a cost standpoint of Medicare Part D. It’s performed very well. In fact, if you go back to the original CBO estimates over the last 10 years, it’s come in 45% below the original estimates for what it would grow. And if you look at Part D, it’s grown at about the rate of other healthcare services inflation, not significantly higher. And so the affordability problem is really around those co-pays. We have to drive those co-pays. And then I think the other thing that has to be played in here is, I would hope as this debate goes on, they are going to look very carefully at our industry and the value of our industry both from a societal standpoint, as well as an economic standpoint and this is tremendously value industry. Just look at what we have done as an industry as it relates to this pandemic, whether you are talking about vaccines or you are talking about therapeutics, look at what we have done in advancements with cancer. And then from an economic standpoint, this industry supports directly or indirectly 4 million jobs in the United States, typically high paying jobs. It produces a tremendous amount of economic output for the U.S. And so it’s an industry that you don’t want to damage in the process and I think that has to be part of the debate. But the short answer to your question is, I think, you should -- we should -- we are not assuming we will get a lot of benefit from price in ‘21. We are also not assuming that across that year we would see a significant change that would have a dramatic impact on that calendar year. Tax reform was your next question. Rob Michael: Vamil, It’s Rob. So based on a very high level of information on the Biden proposal, we would see an increase in our tax rate like most U,S, companies, but it’s really difficult to provide a rate impact without the details. That said, AbbVie would still have a favorable profile versus our peers and we wouldn’t have raised our dividend if we were overly concerned about the implications. Rick Gonzalez: And the only thing I’d add, Vamil, on that one is, we obviously did flex what we thought the tax rate could be and we just don’t know that much about it, we know what has been said. But we flexed it against this dividend increase and made sure we were absolutely comfortable with payout ratios based on that and we are or we wouldn’t have moved forward with the 10.2% increase. Liz Shea: Thanks, Vamil. Operator, next question, please? Operator: Thank you. And our next question is from Steve Scala from Cowen. Steve Scala: Thank you so much, and congratulations on another impressive quarter. I have several questions, but three of them are short. Can you be more specific on where SKYRIZI patients are coming from? I think it’s notable that COSENTYX was a bit light this quarter and Novartis cited competition? Secondly, what was the non-GAAP interest expense number in the quarter? Third, you provided guidance for HUMIRA OUS, but I don’t think U.S. So can you tell us what you think the U.S. guidance would look like? And then, lastly, we have tracked clinical trial activity during the pandemic and it shows AbbVie recruiting trials were up 14% year-to-date. That is industry-leading two times greater than the next closest competitor and much better than the average, which is down, and I am just curious, what accounts for this? Is it a deliberate strategy to capture patients when other companies are taking a wait-and-see approach or is it something else? Thank you. Rick Gonzalez: Yeah. So, Steve, I will handle your first question. Rob will handle two and three, and Mike can handle number four. So if you look at the in-play share, about 25% of that in-play share is coming -- on SKYRIZI is coming from HUMIRA. The other 75% is coming from competitors. I’d say it’s primarily the 17s but some coming from the other 12, 23s or 23s, but I’d say the bulk of it is coming from the 17s. So that might answer your question about COSENTYX. If you look at the capture of the type of patient that we are getting with SKYRIZI, it’s very balanced. It’s about 50/50 between first-line and then second-line. So that’s a nice balance between IE patients and patients who have failed other therapies. So I think the asset is performing the way you would expect a high-performing, high-efficacy asset to be able to perform, is -- it has quickly become the preferred product by prescribing physicians. It has a great profile. It’s quarterly dosing. It’s got great efficacy. The efficacy improves over time. There aren’t any assets that have that kind of a profile on the market. So I would expect that SKYRIZI will continue to increase its in-play share. It’s jumped about 3 points over the last maybe two months and I would expect it will continue to increase. Rob Michael: Hey. Steve, this is Rob. On your question on interest expense, for non-GAAP and GAAP, it’s the same number. It’s $620 million in the third quarter. We are no longer specifying any interest expense, because we have now closed the transaction, so that negative carry on the bond is no longer is applicable for the specified. So $620 million is the number for both non-GAAP and GAAP. On the U.S. HUMIRA question, so we did not change our guidance, it continues to be 8 -- for the U.S. HUMIRA 8% growth with a low single-digit price contribution. Michael Severino: This is Mike. I will take your last question on clinical trial activity. The first thing that, I would say is, the increase in clinical trial activity reflects what’s going on in our pipeline and there’s a lot of activity in our pipeline, and a large number of molecules that we are advancing, and so that’s a big part of it. Another part is that, we made the conscious decision to leave decisions around enrollment in the hands of investigators rather than making them centrally, because they understand the situation in their hospital in their community better than we do. And there was a small group of studies that we paused at the time of the initial COVID impact, but the majority we allowed to continue. That doesn’t mean that there weren’t disruptions from COVID. But it does mean that investigators decided when it was time to pause enrollment and when it was time to resume enrollment. And I think the evidence shows that they made those decisions better than they could have been made centrally. And that has allowed us to advance our portfolio, to advance our clinical trials with minimal disruption and with safe conduct for patients and the staff at the site, which are also critically important considerations. And so, I’d say, it’s a combination of those factors. Liz Shea: Thanks, Steve. Operator, next question, please? Operator: Thank you. And our next question is from Navin Jacob from UBS. Rick Gonzalez: Hi. How are you? Jon Lim: This is Jon Lim on for Navin Jacob. Rick Gonzalez: Hi, Jon. Yeah. Sorry… Jon Lim: We just had a few questions. Rick Gonzalez: You guys pass along [ph]. Jon Lim: We just had a few questions. First, regarding the HUMIRA question in the U.S., within the markets in which a biosimilar is out there, what percent of the molecule is now brand versus biosimilars? With now almost two years of biosimilar experience, how does that affect things? And next for SKYRIZI and RINVOQ, can achieve the type of uptake that you have been seeing in the U.S. and in the international markets? We would appreciate any commentary around in-play market share achieved in markets you have been approved in. And lastly, if we could talk about VRAYLAR MDD timing? Thank you. Rob Michael: Okay. This is Rob. Just to clarify, the first question was on international HUMIRA, how much of that is now a biosimilar? Jon Lim: Right. Within the markets where there’s a biosimilar, how much is… Rob Michael: Yeah. Jon Lim: … brand versus biosimilar, help us visualize that question… Rick Gonzalez: I think he wants what’s the molecule… Rob Michael: [Inaudible] Rick Gonzalez: Yeah. Rob Michael: Yeah. We are at about 60% molecule share across the Board. So that’s of all of the international markets, on average, it’s about 60% molecule share. Rick Gonzalez: And then on SKYRIZI and RINVOQ, I don’t have the numbers right in front of me on each of the markets. I would say typically in the international market, it is a slightly slower uptake than it is in the U.S., but still doing very well. So maybe the best thing would be to get back to you with some more specifics around that. But I think you can assume that the in-play share there probably averages between 20% and 30%. But it depends obviously on the country that you are talking about. And then on VRAYLAR MDD timing, Mike? Michael Severino: Yes. On VRAYLAR MDD, we would expect to have the study’s readout in the second half of next year and be prepared for regulatory submissions shortly thereafter. So it’s possible we would have an approval in ‘22. Rick Gonzalez: And I think that’s an important point to make here. If we look at VRAYLAR, VRAYLAR is growing very rapidly. And as you know, the atypical anti-psychotic market is very, very large. I think VRAYLAR’s share is something like 3% and it’s tracking at $1.4 billion at 3%. So if we look at the current indications, as we indicated in the comments, of bipolar and schizophrenia, we think we can drive VRAYLAR alone in those indications to a multi-billion dollar product and that’s just driving that market share penetration up to like 5% or so. And I think that’s very doable based on the profile of VRAYLAR. VRAYLAR has a very unique profile in that market. So MDD, if we are successful, obviously, will open up a whole other channel and allow you to increase that market share even more significantly. And so typically, many of the drugs that achieved MDD were drugs that had $5 billion, $6 billion of annual revenues. So this is a nice opportunity. Without MDD, VRAYLAR is still going to be a very important product and a very significant product. With MDD, it becomes a major product. And so we will see how those next two studies play out. The first study was positive and I think we are hopeful that we will be able to get it. Liz Shea: Thanks, Sriker [ph]. I think that was you. Operator, next question, please? Operator: Thank you. Our next question is from Randall Stanicky from RBC Capital Markets. Randall Stanicky: Great. Thanks. Rick, early in the pandemic, you were one of the few to identify or build an impact for potential headwinds from higher unemployment associated with loss of health coverage. What are you currently seeing right now and anything on the patient assistance program numbers that help you inform on that? And then secondly, I just wanted to ask on BOTOX migraine. This has been historically a roughly $600 million high margin product for Allergan. We have been watching CGRP inhibitors now been in the market a couple of years. Do you see this as a growth product or opportunity for you and what are you seeing overall with respect to BOTOX in migraine? Thanks. Rick Gonzalez: So on the unemployment, we did identify back, I guess, it was in the first quarter call, that we were going to build in a level of risk associated with patients who would have to move to some type of an assistance program, because they lost their jobs. We have not seen that impact play out to any significant level. We have not seen it in our patient assistance program and right around the pandemic we made a decision to proactively go out and advertise our patient assistance program just to make sure that patients knew that if they couldn’t afford their AbbVie drugs that they could get them from us. So I think we proactively tried to drive it in an effort to make sure that patients were not exposed, but we haven’t seen very much at all. We still have some coverage left in the fourth quarter for it. But I’d say at this point, I think, we are questioning whether or not we are going to see it. Now, I can’t tell you exactly why. But I can tell you we are monitoring it carefully and it’s definitely not happening, at least in our business, because we would see it in the patient assistance program. On BOTOX migraine, if you actually look at what is happening with patients on BOTOX migraine, when the injectable CGRPs came into the market, you did see a tick down in patients, but then BOTOX recovered. And it has roughly the same number of patients that it had back then. It’s slightly lower than it had back then. So what the CGRPs ended up doing was expanding the market to some extent. And we are seeing a very similar phenomenon on the acute therapies as well. If you look at the scripts, the NBRxs for the acute CGRPs, you can see that it’s actually almost doubling every quarter the number of patients. In the last quarter, it was about 90,000 to 100,000 NBRxs. So I think these assets can significantly expand the market. I think two-thirds of our patients are patients that have switched on the acute, have switched from triptans to our agent and one-third of them are naive patients that we are bringing into the category. And again, that’s all about making it visible to patients who have this condition so that they go to their physician and ask for the therapy. It’s all about building markets essentially. And so I think one of the things these assets will do is they will expand the market. Now, I think as you expand the market, obviously BOTOX therapeutics, some of those patients will ultimately if they don’t get the kind of relief that they are looking for on an injectable CGRP or the acute therapy, they would eventually probably try injectable BOTOX. So we could see a little bit of growth there, but the biggest part of the growth that we are going to see in this market is from UBRELVY and ultimately atogepant. It’s a big market and I think these agents will allow us to be able to significantly expand the market and I think this is clearly a multi-billion dollar market. Liz Shea: Thank, Randall. Operator, next question, please? Operator: Thank you. Our next question is from David Risinger from Morgan Stanley. David Risinger: Thanks very much. Excuse me, so I want to start with a high-level question, Rick. Could you please discuss long-term immunology net pricing and formulary positioning prospects in the face of increasing competition in coming years? And then second, just had a high level question about cash flow, I was hoping that you could discuss prospects for operating cash flow, CapEx and free cash flow? Thank you very much. Rick Gonzalez: Yeah. Thanks, David. I will take the first one. Rob will answer the second one for you. So if I look at long-term immunology, what’s critically important is that you have the kinds of assets that allow that managed care organization or PBM to be able to cover the greatest number of patients. This is a category where not every drug works on every patient. So you have to have multiple options that are available in the formulary and that’s just -- that is the appropriate thing to do to make sure that patients have the drugs that they need to be able to be treated. I would say, we typically do very well with formulary access. That’s driven primarily by the fact that our assets tend to be very attractive assets from a clinical profile. They establish significant market share positions and that’s important for the managed care organization or the PBM. So I don’t see anything significantly impacting that going forward. I would assume we will maintain very high levels of formulary access. Net pricing, there’s always some level of impact on pricing when you renegotiate the contracts. I don’t anticipate that you will see a significant change going forward. So I think it’s more of the normal kinds of competitive activities that we see in the marketplace. Rob Michael: And David, this is Rob. I will answer your question on cash flow, so if you look at AbbVie and Allergan in 2019 on a combined basis, generated about $19 billion almost $20 billion of operating cash flow. CapEx runs close to $1 billion, and so if you look at this year, again, we have a partial year of Allergan, we are probably trending towards the $16 billion operating cash flow number with a little bit less than $1 billion of CapEx. So you need to annualize that and also consider the fact that we are going to generate earnings growth going forward, but that should give you a good number to work with. David Risinger: Thank you. Liz Shea: Thanks, David. Operator, next question, please? Operator: Thank you. Our next question is from Terence Flynn from Goldman Sachs. Terence Flynn: Hi. Thanks for taking the questions. I was just wondering first, maybe on the IBD front, I know you have a number of readouts coming up for RINVOQ and SKYRIZI here. Maybe you could just outline what current usage of targeted drugs in IBD is on a percentage basis and how that compares to rheumatology and dermatology? And what you see is a potential here to boost that uptake in IBD further? And then to your TNF steroid conjugate program, what were the criteria that were key that led to your choice of 154 as a go-forward asset? And then lastly, on the Allergan integration, I know you said everything is on track there. It’s going really well. You talked about some revenue synergy opportunity, Rick, and I know you have laid out your expense synergy target of $2 billion in 2022. Maybe you could just talk about some of the puts and takes for 2021 as we think about the Allergan synergies on both sides? Thank you. Rick Gonzalez: Okay. Great. On IBD usage, if you look at the penetration, I’d say, IBD is an area where you have reasonable levels of biologic penetration, because the disease particularly Crohn’s is the disease is a pretty severe. I think the challenge in IBD is that, with the current therapies that are available, you still get sub-optimal clinical efficacy for these patients and durability of that efficacy. And so what physicians tend to do is they rotate patients through various treatments to try to maintain them in control for a longer period of time. So it is a market that is right for higher efficacy agents and a market that is right for more agents to be available to allow for better treatment of those patients and that’s the key driver in that segment of what gives significant uptake. So when we see the data around IBD that will be important for us, obviously the early data looks good. And ultimately I think these assets, along with HUMIRA, will be able to provide the market with a significant new alternative and I think that uptake will be good based on that. Michael Severino: This is Mike. I will take the question about 154. So, 3373 and 154 represent our TNF steroid conjugate molecules that are in the clinic. They are very similar, similar to the extent that we view the biology as being translatable between the two. But 154 includes some improvements in linker technology that relate to manufacturability and ability to formulate at high concentration, ease of formulation. And so those can be very important advantages for a successful molecule. We previously toplined the positive results from 3373. We wanted to see that 154 gave us the PK performance and the exposure to achieve the pharmacodynamic coverage we think we need in the next stage of development. And as I said, we viewed the biology as translatable between the two. So once we saw that PK performance and it matched our expectations and showed that 154 would give us the coverage that we were seeking at acceptable doses in the clinic, we made the decision to advance that molecule into larger scale trials. Rob Michael: Hey. Terence, this is Rob. I will take your question on synergies. So while we are not providing guidance for 2021 today. I think a good way to think about the expense synergies is to run rate the $600 million in partial year synergies, which gets to about $1 billion. And then, as you think about that ramp to greater than $2 billion by 2022, I think it’s reasonable to straight line that. So if you think about what’s going to drive the ramp? It’s things like systems integration, leveraging procurement spend, will result in more synergies over time, as well as network optimization. In the near-term, it’s really driven more from immediate redundancies like corporate infrastructure and R&D portfolio optimization. As it relates to the revenue synergies, look, as we have now had a few months with the combined company, we see opportunities as we think about investment in aesthetics, where we have really amped up our DTC investment for JUVÉDERM and BOTOX cosmetic, it give o the ability to invest more in aesthetics. Similarly, invest more in neuroscience, whether that’s VRAYLAR, BOTOX therapeutic. And then we look internationally given the infrastructure we have, the integrated brand team approach, we think there’s opportunity to really leverage our market access capability, our international affiliate structure to really drive that international growth for the company going forward for those Allergan brands as well. Rick Gonzalez: Terence, the only thing I would add, maybe to give you some perspective on the investment side. Allergan tended to what I would describe as pulse invest in particularly DTC, but even in social media. So they didn’t -- and typically what we do with brands when we want to drive maximum speed of market penetration is we invest at a steady state and continue to do that for an extended period of time. So they might have invested heavily in one quarter and then gone dark in the next quarter and then invested again and gone dark again. We don’t use that kind of a strategy. We tend to invest for the full year. And in our experience, what that does is it gives you, the fact that you have constant coverage, gives you maximum speed of penetration. So we clearly think that’s going to be an advantage, particularly in areas like aesthetics and neuroscience. Liz Shea: Thanks, Terence. Operator, next question, please? Operator: Thank you. Our next question is from Gregg Gilbert from Truist. Gregg Gilbert: Thank you for getting me in. Good morning. Rick, it sounds like you think the neuroscience franchise might be one of the sleepers of the Allergan deal and you have already framed the potential for VRAYLAR particularly if depression hits. But I was curious if this development in neuroscience has taken on sort of a new sense of urgency given the heft that you have now in that franchise or whether you think you have enough going on there already? And for Mike, I was hoping you could let us know when we will see Phase 3 data for 951 in Parkinson’s and give us a sneak preview of what you are looking for there profile wise? And lastly, can you frame for BOTOX therapeutics, Mike, what you have decided to pursue in terms of indications versus ones that you have taken off the table now that you have had some time to work with that? Thanks. Rick Gonzalez: I’d say on neuroscience, the way to think about it is or at least the way we are thinking about it is, there’s a significant opportunity to drive VRAYLAR to be a very large product, I mean, doubling or more depending upon the ability to get MDD. And I’d also say in migraine, when we get the full portfolio of migraine assets. The migraine market is a big market. If you look at the acute market today, it’s probably about $1.5 billion. We believe it can grow to $4 billion or $5 billion by 2025 with the right kinds of assets and the right kind of promotion. And then if you look at the preventative market, it’s about $3 billion, so we believe that one in real high-single to low-double digits with the right kinds of assets and the right kinds of promotion. So the first phase of neuroscience is nothing more than taking the assets we have now, getting atogepant to the marketplace and then we have a full portfolio of migraine products, and then maximizing the market share position of those assets in the market, that’s sort of Phase 1. But I would say now that we have infrastructure in place, Mike’s BD team has been now been starting to look at assets that would be complementary to that. And we didn’t in the past because for a single anti-psychotic, we wouldn’t have wanted to build-out the infrastructure, it just wouldn’t have made sense for us. But now we can basically add those kinds of assets to the infrastructure we have. So it does give us another opportunity from a BD standpoint to be able to build the business longer term. Michael Severino: I will take the second question and agree with everything Rick said, the only thing I’d add on BD in neuroscience is neuropsychiatry is now clearly an area of strength for us and can be an area of interest and that can go beyond the anti-psychotics as well. There’s tremendous potential and unmet need in areas like generalized anxiety disorder, still in depression despite there are many agents on the market, many, many patients remain inadequately treated, so we would look broadly across that space. With respect to 951 and data timing, we would expect to see results from our Phase 3 study in the second half of next year. And what we are looking for is really DUOPA like efficacy, because DUOPA is a transformational product but it’s also a product that is challenging to administer, and the nature of that product, the fact that it requires the placement of a gastric tube that’s then threaded into the small bowel and has to be maintained limits the size of what’s effectively an addressable market. Not the market by the labeled indication, but the proportion of patients within that population that would consider a therapy like that. And 951 has the potential to substantially expand that. It has an insulin pump-like device, subcutaneous delivery device. We think it will broaden the number of patients within that labeled population, who would consider such a therapy and this is really a very substantial market. So for example, if you look at DUOPA, despite all of its challenges, it does about $0.5 billion in sales. If you look across similar therapies for advanced Parkinson’s disease, the market is probably $1.5 billion or more and that probably represents only a small part of the potential because much of it remains untapped. So we think that 951 can address that and we think the profile that it will take to address that is DUOPA like efficacy with a more patient-friendly subcutaneous delivery device. With respect to BOTOX indications, there are a number of indications, both for BOTOX and for other toxins, for novel toxins that we are considering in the therapeutic space. I think there’s more work that we can do in the migraine space. Although, that has been an area of strength, episodic migraine has patients that may benefit from a therapy like BOTOX and there’s still much more to do on the neurology side with respect to specificity disorders that might be secondary to stroke or other conditions where there is still room to expand those indications. When we look more broadly, there are a number of potential interesting indications for neurotoxins. They might not be BOTOX. They may be novel toxins. Those could be things like prevention of afib, for example, and we are continuing to explore indications beyond that. Liz Shea: Thanks, Gregg. Operator, next question, please? Operator: Thank you. And our next question is from Tim Anderson from Wolfe Research. Tim Anderson: Thank you. A high level question for Rick, despite Allergan being a very reasonable solution to upcoming U.S. HUMIRA LOE in 2023, the multiple on AbbVie is lower than it’s ever been. The entire drug group is out of favor, but your multiple is about half of the peer group average. To me what that multiple says is that investors remain worried about what AbbVie looks like past 2023. So two questions related to this, the first is why not give updated granular extended guidance that goes beyond 2023? You have given long-term guidance in the past sometimes and that’s resonated well with the market. So can we expect you might do this at some point soon? And second question, why not go do more M&A in the near-term, we just saw Bristol do a $13 billion deal not far after closing Celgene and layering more product into your pipeline would help give investors assurances that there’s life beyond 2023. And by virtue of how you answered an earlier question, you yourself basically said there’s not much new NME flow until 2025 and beyond? Thank you. Rick Gonzalez: Yeah. I think if you look -- Tim, this is Rick. If you look at the PE of the whole sector, obviously, the sector is under pressure from the political environment and concerns about the political environment. And you are correct, we are at the lower end of that PE and I think that is driven by uncertainty about what the growth rate will be on the other side of the LOE. What I would tell you is obviously, we have a 10-year LLP, so we know what we think that growth rate is on the other side of the LOE. And I can tell you that when I look at that growth rate, it’s robust. Now, the market has to come around to that point of view. I’d say, we haven’t always been right, but in total revenue, we have always been right. In fact, we have always beat for the most part what our expectations were. And so we obviously challenge it pretty hard and we have knowledge of what we believe the erosion curve will look like. We have knowledge of what we think our pipeline will deliver and what the additional indications will deliver. And look, I remember there was a tremendous amount of skepticism about when we gave it was either $10 billion or $11 billion of risk adjusted revenues for RINVOQ and SKYRIZI back a year or two ago, something like that. There was a tremendous amount of skepticism, that’s impossible. I don’t hear very much of that now that these two assets are $2 billion and growing like rockets. So I’d say our ability to assess what we can do with our assets is pretty high. Now, that doesn’t mean you shouldn’t go out and get more things and we constantly look and where we find opportunity, we will clearly go pursue those. They have to be opportunities that make sense and fit into our portfolio. You have seen us do transactions to continue to build the long-term future of our hem/onc business with Genmab and I-Mab. And those two assets combined with what VENCLEXTA and IMBRUVICA can continue to do, I think it is going to give us a very robust long-term performance in that franchise. I think in immunology, we are in pretty good shape between our internal pipeline both the additional indications on SKYRIZI and RINVOQ and then what we have earlier on that we think will play out in a positive way. When we look at neuroscience, we just talked about that we have the ability to be able to grow that. Certainly, we are going to invest heavily in aesthetics. We have a tremendous amount of assets, new toxins that we are working on and we are going to accelerate many of those, new fillers and other kinds of opportunities that will build that aesthetics business to be able to grow rapidly. And so I feel pretty good about where we are. In fact, I’d tell you I feel very good about where we are six months into the Allergan transaction. Certainly Allergan has given us more growth as we mentioned a moment ago. When we look at neuroscience, neuroscience has clearly been I think a nice positive upside for us and one that I think we can execute very well. As far as guidance is concerned, I am not saying, we will never give guidance, but we want to give guidance when we are able to do it with a high degree of certainty. Because the last thing we want to do is provide a level of guidance that you don’t have a high degree of certainty and you know it’s going to, it has some variability to it. You probably remember, we did that on the international biosimilars and we were off by not that much, but we were off by some and the market didn’t like the fact that we were off. So you need to be awfully careful about how you provide that guidance in a way to make sure that you meet or exceed the guidance, and at the point which we have that level of confidence, we may go out with longer term guidance. Tim Anderson: Thank you. Liz Shea: Thanks, Tim. Operator, next -- we have time for one final question. Operator: Thank you. And our final question today is from Josh Schimmer from Evercore. Josh Schimmer: Last question. Thanks for squeezing me in. Just a couple of quick ones, can you provide any color on the SKYRIZI royalty and can you comment on what you see as the incremental markets for the lower face toxins, the new dermal filler and presbyopia, if you view any of those as material? Thank you. Rob Michael: Yeah. Josh, so on the SKYRIZI royalty, well, keep in mind that we account for this as a business combination, so it comes through consideration so you don’t see it on a non-GAAP P&L. We don’t disclose our royalty rates but a good way to think about it is reasonable royalty you would pay for a late-stage asset is probably a good way to think about what the royalty burn would be on -- the cash royalty burn will be on SKYRIZI. Rick Gonzalez: And I’d say the lower face toxins and the lower face fillers that we are working on, probably the best way, rather than trying to characterize individual indications for toxins or fillers is, we are trying to build a portfolio and a market activation strategy that will allow us to grow the aesthetics business at a consistent double-digit rate. And it is both that internal pipeline and activating more patients, and some BD effort that will give us that. So, certainly those lower face toxins and fillers are designed to be able to support that growth going forward. The eye care product, I would call that product sort of a modest product. I don’t remember the specifics. Do you, Rob? Rob Michael: Yeah. Rick Gonzalez: I’d call it sort of a modest size product. Rob Michael: Yeah. Josh Schimmer: Thank you. Liz Shea: Thanks, Josh. That concludes today’s conference call. If you’d like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. Operator: Thank you. This does conclude today’s conference. You may disconnect at this time.	[ { "speaker": "Operator", "text": "Good morning and thank you for standing by. Welcome to the AbbVie Third Quarter 2020 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion [Operator Instructions] And I would now like to introduce Ms. Liz Shea, Vice President of Investor Relations." }, { "speaker": "Liz Shea", "text": "Good morning and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Vice Chairman and President; Rob Michael, Executive Vice President and Chief Financial Officer; and joining us for the Q&A portion of the call is Laura Schumacher, Vice Chairman, External Affairs, Chief Legal Officer and Corporate Secretary. Before we get started, I remind you that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties, including the impact of the COVID-19 pandemic on AbbVie’s operations, results and financial results that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our 2019 annual report on Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today’s conference call, as in the past, non-GAAP financial measures will be used to help investors understand AbbVie’s ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Unless otherwise noted, our commentary on sales growth is on a comparable operational basis, which includes full current year and historical results for Allergan and excludes the impact of exchange. For this comparison of underlying performance, all historically reported Allergan revenues have been recast to conform to AbbVie’s revenue recognition accounting policies and excludes the divestitures of Zenpep and Viokace. Following our prepared remarks, we will take your questions. So, with that, I will now turn the call over to Rick." }, { "speaker": "Rick Gonzalez", "text": "Thank you, Liz. Good morning, everyone, and thank you for joining us today. I will discuss our third quarter performance and highlights, as well as our full year guidance, which we are raising again this quarter. Mike will then provide an update on recent advancements across our R&D programs and Rob will discuss the quarter in more detail. Following our remarks, we will take your questions. AbbVie delivered another excellent quarter with adjusted earnings per share of $2.83, exceeding the midpoint of our guidance range by $0.08. When I look at our business and the actions we have taken to position AbbVie for sustainable performance, including the acquisition of Allergan, I feel very good about our long-term outlook. The fundamentals are strong and there is considerable momentum across our legacy and new portfolios, which are both demonstrating robust growth, despite the COVID pandemic and together have the potential for significant long-term value creation. I’d like to specifically highlight our recent progress across several aspects of our business, including the launches of RINVOQ and SKYRIZI, which are performing well ahead of all comparable launch analogs in their initial indications and continue to exceed our expectations. Our hem/onc franchise continues to deliver robust performance and is expected to generate more than $6.5 billion in revenue this year, representing strong double-digit growth. New indications and novel combinations, including our recently announced collaboration with Genmab and I-Mab provide opportunities for further revenue expansion. While it is still relatively early in the integration of Allergan, the strategic merits of the combination have never been more evident. We are already demonstrating that we have created a stronger, more diverse company, with robust cash flows and multiple new growth vehicles for the long-term. We now have the leading aesthetics franchise, which is demonstrating a strong V-shaped recovery, as well as a highly attractive neuroscience portfolio which delivered double-digit growth on a comparable operational basis this quarter and has significant momentum with VRAYLAR and our expanding migraine franchise. And our pipeline is advancing nicely, with numerous attractive late-stage programs that we believe will allow us to maintain a growing and vibrant business. We are on track for the approval of more than a dozen new products for major indications over the next two years, which will collectively add meaningful revenue growth. This includes a total of six additional indications for RINVOQ and SKYRIZI, expanded indications for VENCLEXTA and several other near-term product -- new product approvals, including atogepant, Navitoclax and 951. Clearly, this is a very exciting time for AbbVie and I am pleased with the progress that we are making towards our long-term strategy for sustainable growth. I remain confident that we will continue to execute as we have in the past and deliver outstanding shareholder value going forward. I’d like to look further at our business performance. I am pleased with the recent trends across our key growth areas. I will start with immunology, where we established strong trajectories for RINVOQ and SKYRIZI. As I previously noted, both continue to perform well-above expectations. In their initial indications, these two brands have clearly demonstrated superior efficacy to HUMIRA, as well as other novel agents on the market or in development, resulting in significant in-play market shares, a leading indicator for long-term commercial performance. The in-play share for RINVOQ in RA, which includes both new and switching patients remains strong at approximately 16% and has now reached parity with our market leading HUMIRA. In psoriasis, SKYRIZI has already achieved the leading in-play market share at 33%. This level of share capture at this stage of the launch is unprecedented, and if sustained, will ultimately lead to total market share well in excess of what was contemplated when we communicated our expectations for 2025 sales. This strong performance and trajectory, despite the impact of the COVID-19 pandemic is a testament to our differentiated product profile and our commercial execution. Our focus since the pandemic has been on driving accelerated patient activation and we remain encouraged by our current prescription trends. Our recent performance continues to give us confidence in the near- and long-term potential for both RINVOQ and SKYRIZI, which we now expect will deliver $2.2 billion in combined revenue for full year 2020, well exceeding our original projections for this year. In addition to outstanding commercial momentum, we are also making excellent progress with RINVOQ and SKYRIZI in new indications, which we expect will further strengthen our leadership position. We have already started planning and preparing for the forthcoming approval of three additional RINVOQ indications next year, including psoriatic arthritis and ankylosing spondylitis, giving us complete coverage across the more than $40 billion rheumatology segment. We also expect approval in atopic dermatitis, another large and growing market that has the potential to be multi-billion dollar peak revenues for RINVOQ. In the coming year, we also intend to submit regulatory applications for SKYRIZI in psoriatic arthritis and both agents in the area of inflammatory bowel disease, a more than $20 billion market today with high unmet need. Overall, I am extremely pleased with the progress we are making on both RINVOQ and SKYRIZI. I’d also like to take this opportunity to announce that we will be hosting an immunology focused Investor Day in December, where we intend to further discuss our strategy, progress, and expectations for this important growth area. Additional details will be forthcoming. Turning now to hem/onc, which delivered robust double-digit growth again this quarter and remains an important therapeutic area for AbbVie’s long-term performance. IMBRUVICA has a strong position across multiple indications including CLL, where it remains the clear market share leader across all lines of therapy. IMBRUVICA sales increased 9% on an operational basis this quarter, despite lower new patient starts within CLL, where the market remains below pre-COVID levels. VENCLEXTA sales increased nearly 60% on an operational basis this quarter. The penetration across our approved indications remains strong, especially in AML, given the potential aggressive disease progression of that cancer. In the quarter, we also announced a strategic collaboration with I-Mab, further expanding our oncology portfolio with anti-CD47 monoclonal antibody, which has potential across a wide range of blood cancers. The I-Mab opportunity adds to our already-attractive oncology pipeline, which includes Navitoclax, Genmab CD3xCD20, expanded indications for VENCLEXTA and several promising early-stage programs. We also now have another high performing franchise in neuroscience, which further diversifies AbbVie’s sources of long-term growth. VRAYLAR sales increased strong double-digits again this quarter on a comparable operational basis, with annualized revenues of more than $1.4 billion. Given VRAYLAR’s benefit/risk profile relative to other atypical anti-psychotics, we remain confident in its long-term growth potential, which we believe is multi-billion dollars across the currently approved indications of bipolar disorder and schizophrenia. BOTOX Therapeutics, which has nearly a dozen medical treatment indications, including chronic migraine, is also performing very well. Revenues were up nearly $100 million sequentially on a comparable operational basis, demonstrating a rapid COVID recovery. The launch of UBRELVY, our leading oral CGRP for acute migraine, is exceeding our expectations. Commercial access is ramping strongly and increasing DTC investments have resulted in encouraging new patient starts and market expansion. When you consider our overall scale with BOTOX Therapeutics, UBRELVY’s acute treatment profile and the promising development of atogepant for the prevention of episodic and chronic migraine, we see substantial room for long-term revenue growth with this best-in-class migraine portfolio. Within aesthetics, our fourth major growth platform, we are seeing robust demand trends and a rapid V-shaped recovery. Total global aesthetics revenues of more than $950 million were up 70% sequentially on a comparable operational basis, illustrating the significant underlying demand for both BOTOX cosmetics and JUVÉDERM. We remain focused on supporting clinics through the COVID pandemic and expect consistent investment in consumer promotion to expand the aesthetics market, which remains under penetrated globally. Our dedicated R&D and business development are expected to sustain new innovation and rapidly expand our aesthetics portfolio for long-term growth, including the recently announced acquisition of Luminera, which provides us with a complementary dermal filler portfolio and pipeline. Overall, we are very pleased with the momentum that we are seeing with our aesthetics franchise. AbbVie’s business continues to remain resilient and demonstrates strong underlying growth throughout the pandemic. Based on the performance this quarter and our progress year-to-date, we are raising our full year 2020 EPS guidance. We now expect adjusted earnings per share of $10.47 to $10.49, reflecting growth of more than 17% at the midpoint. In addition to the excellent progress we are making across the portfolio, the integration of Allergan continues to go very well. Despite the size of this transaction and the timing of the COVID pandemic, the transition has been seamless. We are performing very well against both our synergy and accretion targets, and it is becoming increasingly clear to us that there are also opportunities for revenue synergies across various aspects of the business. We are now six months post-close and the strategic merits of the transaction are extremely evident. Allergan is providing additional growth platforms, robust financial benefits and greater diversity of our business. We remain confident that the newly combined business will generate significant earnings and cash flow to support continued investment in our innovative R&D platform, as well as a strong and growing dividend, while also allowing us to rapidly pay down debt. To that end, as noted in our news release, today we are announcing a 10.2% increase in our quarterly cash dividend from $1.18 per share to $1.30 per share beginning with the dividend payable in February 2021. Since inception, we have grown our quarterly dividend by 225%. So, in summary, we continue to demonstrate strong execution across our portfolio and remain encouraged by the overall recovery trends. We have assembled an impressive set of diversified growth assets with significant growth potential giving us a high degree of confidence in the long-term outlook for our business. With that, I will turn the call over to Mike." }, { "speaker": "Michael Severino", "text": "Thank you, Rick. We continue to make great progress across all stages of our pipeline and this morning I will highlight key events since our last earnings call. Starting with immunology, where we achieved several major milestones, including submission of our U.S. and European regulatory applications for RINVOQ in ankylosing spondylitis and atopic dermatitis. We expect regulatory decisions in the first half of 2021 for both indications, as well as for psoriatic arthritis which was submitted for regulatory review earlier this year. Within the rheumatology segment, both psoriatic arthritis and ankylosing spondylitis are large and important markets and represent a significant growth opportunity for RINVOQ. We will highlight the growing body of data from our rheumatology portfolio and the -- at the upcoming virtual ACR Congress, where we will present 35 abstracts from multiple assets across our portfolio, including six selected for oral presentation. Atopic dermatitis is a new disease area for AbbVie and also represents an important area of growth for our immunology franchise going forward. Based on the data generated in our registrational program, we remain very confident in the benefit/risk profile for RINVOQ in atopic dermatitis and believe it will offer meaningful advantages over products on the market today or in development. Beyond the Phase 3 studies that support our regulatory submission, we are also evaluating RINVOQ in a head-to-head Phase 3 trial against dupilumab, which if successful, will help further support RINVOQ as a highly differentiated therapeutic option for patients with atopic dermatitis. We look forward to seeing data from this head-to-head study later this quarter. In the area of inflammatory bowel diseases, we remain on track to see induction data later this quarter from our Phase 3 program for RINVOQ in ulcerative colitis. We will see data from a second induction study in ulcerative colitis, as well as results from the maintenance portion of these studies next year. We expect to file our regulatory applications in 2021 as well. We are also making great progress with the development programs for SKYRIZI and later this quarter we expect data from several new indications across rheumatology and gastroenterology. We will see data from two Phase 3 studies in psoriatic arthritis and results from the first Phase 3 induction study in Crohn’s disease, supporting regulatory applications for both indications in 2021. Outside of immunology, SKYRIZI will also be evaluated as a potential treatment for COVID-19 as part of the NIH ACTIV program, which is a public private partnership aimed at accelerating potential therapies and vaccines for COVID-19. SKYRIZI was selected through a prioritization process that evaluated immunomodulators with acceptable safety profiles as potential treatments for COVID-19 complications caused by the cytokine storm observed in some patients. SKYRIZI will be included in the ACTIV-5 Big Effect trial, which is a Phase 2 study designed to evaluate a number of drugs that are either approved or in late-stage development as potential treatments for COVID-19. In our early-stage immunology pipeline, earlier this year, we toplined positive results from a proof-of-concept study evaluating our novel TNF steroid conjugate, ABBV-3373 in RA. We recently completed the Phase 1 PK and safety study for our second TNF steroid conjugate, ABBV-154. Based on these data, we have selected 154 to move forward into larger scale trials. We expect to begin a Phase 2b definitive dose ranging study for 154 in RA for the first half of 2021. As Rick mentioned, we will be hosting an Immunology Day for investors in December, where we will provide an update on our immunology strategy and long-term outlook for the franchise. We look forward to providing additional updates on our immunology pipeline at that time. In oncology, we continue to advance our portfolio with several important Phase 3 studies beginning in the quarter, including VENCLEXTA in high-risk myelodysplastic syndrome and navitoclax in myelofibrosis. We also recently received full FDA approval of VENCLEXTA in combination with azacitidine, decitabine or low-dose cytarabine in newly diagnosed AML patients, who are ineligible for intensive induction chemotherapy. This approval is supported by the Phase 3 VIALE-A and VIALE-C studies. Updated efficacy and safety results from VIALE-A were recently published in the New England Journal of Medicine and showed that the combination of VENCLEXTA and azacitidine extended overall survival compared to azacitidine plus placebo. Additionally, following the publication of the VIALE-A results, the NCCN guidelines were updated to recommend the VENCLEXTA and azacitidine combination as the Category 1 preferred treatment for AML patients who are ineligible for intensive chemotherapy. Importantly, the VENCLEXTA combination has the Category 1 designation irrespective of mutational status. Also in the quarter, we announced a collaboration with I-Mab to develop and commercialize the anti-CD47 monoclonal antibody, lemzoparlimab. The emerging data for lemzoparlimab is very encouraging and provides AbbVie access to another potentially differentiated asset in the immuno-oncology space. The data generated to date show that lemzoparlimab effectively blocks tumor-specific CD47 interactions, but with much lower binding to red blood cells, potentially leading to a better safety profile. Lemzoparlimab is being studied in multiple cancers with a focus on hematological malignancies. In neuroscience, we recently presented new data from several clinical programs at the virtual Migraine Trust International Symposium, showcasing the breadth and strength of our migraine portfolio and demonstrating AbbVie’s commitment to providing multiple treatment options for the acute and preventive treatment of migraine. In total, 15 abstracts were presented for BOTOX, UBRELVY and atogepant. Included in the MTIS presentation were the detailed results for atogepant in the Phase 3 advanced study, which demonstrated a clinically meaningful and statistically significant improvement over placebo, with all atogepant doses for the primary endpoint of reduction in mean monthly migraine days. Significant improvements were also observed for all secondary endpoints in the 30-milligram and 60-milligram dose groups. Treatment with atogepant resulted in 56% to 61% of subjects achieving at least a 50% reduction in monthly migraine days, compared to 29% for the placebo group. We are very encouraged by the strong benefit/risk profile that has been demonstrated for atogepant in migraine prevention and believe that once approved, this new oral treatment option will be competitively positioned in the prevention market. Together with BOTOX for chronic migraine prevention and UBRELVY for acute migraine treatment, the addition of atogepant creates a market leading portfolio in migraine that represents significant long-term value for AbbVie. In aesthetics, we continue to make good progress with our portfolio of facial toxins and dermal fillers. We have several ongoing programs for new indications for BOTOX and for the JUVÉDERM collection, as well as a pipeline of innovative toxins and dermal fillers, which we expect to reach the market over the course of the next five years. BOTOX has been the leading neurotoxin for over two decades, with R&D efforts in aesthetics primarily focused on the upper face. To support expansion to the lower face region, we have several programs ongoing, including studies in masseter and platysma prominence. We recently had a positive data readout for our Phase 2 study for the reduction of masseter prominence in the lower face. This study met all primary and secondary endpoints, demonstrating that the severity of prominence was reduced following a single treatment of BOTOX. Based on these results, we plan to begin Phase 3 development next year, which will support registration in the U.S. and Europe. We also recently announced the acquisition of Luminera’s dermal filler portfolio led by HArmonyCa, which is an innovative dermal filler developed for facial soft tissue augmentation. Luminera’s assets are highly complementary to our JUVÉDERM filler franchise and we look forward to expanding their development to markets around the world. And in eye care, we recently announced positive topline results from the Phase 3 GEMINI 1 and GEMINI 2 studies, which evaluated our topical eye drop, AGN-190584 for the treatment of symptoms associated with presbyopia. In both studies, 584 met the primary endpoint and the majority of secondary endpoints, with data from both studies demonstrating that treatment with 584 resulted in significant near-vision gains in low lighting conditions without a loss of distance vision. Based on these results, we plan to submit our regulatory application to the FDA in the first half of next year. So, in summary, we have continued to make significant progress advancing and accelerating our programs this quarter, and we look forward to many more important pipeline milestones in the coming months and through 2021. With that, I will turn the call over to Rob for additional comments on our third quarter performance and financial outlook. Rob?" }, { "speaker": "Rob Michael", "text": "Thank you, Mike. Starting with third quarter results, we delivered strong top and bottomline performance. We reported adjusted earnings per share of $2.83, above our guidance midpoint by $0.08. Total adjusted net revenues were approximately $12.9 billion, up 4.1% on a comparable operational basis and ahead of our expectations. Immunology global sales were approximately $5.8 billion, up 15% on an operational basis, despite the impact of COVID on new patient starts across the immunology market. U.S. HUMIRA sales were approximately $4.2 billion, up 7.7% compared to prior year, reflecting continued demand growth plus price. Wholesaler inventory levels remain below half a month in the quarter. International HUMIRA sales were $951 million, down 8% operationally, reflecting biosimilar competition across Europe and other international markets. SKYRIZI sales were $435 million with leading in-play share in the U.S. psoriasis market and robust sequential growth internationally. RINVOQ sales were $215 million with continued strong in-play share in the U.S. RA market. Hematologic oncology delivered another strong quarter, with sales of $1.7 billion, up 16.4% on an operational basis. IMBRUVICA net revenues were approximately $1.4 billion, up 9% driven by our leading share in CLL. VENCLEXTA revenues were $352 million, with strong demand across all approved indications. MAVYRET sales were $414 million, down 41.1% on an operational basis, as treated patient volumes have remained below pre-COVID levels. Aesthetic sales were $967 million with BOTOX cosmetic and JUVÉDERM both experiencing a faster than expected recovery from the COVID pandemic. Neuroscience revenues were more than $1.2 billion led by VRAYLAR and our migraine portfolio. VRAYLAR once again delivered strong growth with revenues of $358 million. BOTOX Therapeutic continues to experience a rapid recovery from the COVID pandemic, with sales of $523 million in the quarter. The launch of UBRELVY is also going very well with recent direct-to-consumer promotion driving new prescription growth. Sales of UBRELVY were $38 million. We also saw a significant contribution from eye care, which had sales of $840 million. Turning now to the P&L profile for the third quarter. Adjusted gross margin was 81.7% of sales, adjusted R&D investment was 11.7% of sales and adjusted SG&A expense was 21.1% of sales. The adjusted operating margin ratio was 48.8% of sales, an improvement of 40 basis points versus the prior year. Net interest expense was $620 million and the adjusted tax rate was 11.7%. As Rick previously mentioned, we are raising our full year adjusted earnings per share guidance to between $10.47 and $10.49, including accretion from the Allergan transaction of 12% on an annualized basis. Excluded from this guidance is $6.58 of known intangible amortization and specified items. This guidance now contemplates 2020 adjusted net revenue of approximately $45.7 billion, representing an increase of $200 million from our previous estimate. At current rates, we now expect foreign exchange to have a modest unfavorable impact on fully reported sales growth. Included in this guidance are the following updated 2020 assumptions. We now expect international HUMIRA sales approaching $3.7 billion. For SKYRIZI, we now expect revenues of approximately $1.5 billion. For RINVOQ, we now expect sales of approximately $700 million. For IMBRIVICA, we now expect revenue of approximately $5.3 billion, as new patient starts in the CLL market remain below pre-COVID levels. For Aesthetics, we now expect post-close sales of approximately $2.5 billion with BOTOX cosmetic and JUVÉDERM both demonstrating a fast recovery. For MAVYRET, we now expect sales of approximately $1.9 billion, as treatments remain below pre-COVID levels. We now expect LUPRON revenues of approximately $750 million, as we work to resolve a near-term supply issue, which has impacted availability of certain formulations. Moving to the P&L, we continue to forecast full year adjusted gross margin just above 82% of sales and adjusted operating margin of approximately 48% of sales. This guidance includes approximately $600 million in expense synergies for the partial year in 2020. We remain on track to deliver greater than $2 billion in expense synergies by 2022. As we look ahead to the fourth quarter, we anticipate adjusted net revenue approaching $13.8 billion. At current rates, we expect foreign exchange to have a modest favorable impact on reported sales growth. We are forecasting an adjusted operating margin ratio of approximately 46.5% of sales. We model a non-GAAP tax rate of 11.6% and we expect the average share count to be similar to Q3. We expect adjusted earnings per share between $2.83 and $2.85, excluding approximately $1.73 of known intangible amortization and specified items. Finally, AbbVie’s strong business performance continues to support our capital allocation priorities. We generated $12.7 billion of operating cash flow in the first nine months of the year, and our cash and investments balance at the end of September was $8 billion. Underscoring our confidence in AbbVie’s long-term outlook, today we announced a 10.2% increase in our quarterly cash dividend, beginning with the dividend payable in February 2021. We also remain on track to pay down $15 billion to $18 billion of combined company debt by the end of 2021 and expect to achieve a net debt-to-EBITDA ratio of 2.5 times by the end of next year, with further deleveraging through 2023. With that, I will turn the call back over to Liz." }, { "speaker": "Liz Shea", "text": "Thanks, Rob. We will now open the call for questions. Operator, first question, please?" }, { "speaker": "Operator", "text": "Thank you. [Operator Instructions] Our first question today is from Chris Schott from JPMorgan." }, { "speaker": "Chris Schott", "text": "Great. Thanks so much for the questions and congrats on the results. I guess just two for me. First, 2021, I know you are not giving guidance yet, but can you just talk through some of the pushes and pulls we should keep in mind as we think about next year’s numbers and it seems like the core business obviously has a lot of traction here. I am just trying to get a sense of from your perspective what are the uncertainties as you think about that guidance number for next year? And my second question was on RINVOQ in atopic derm. Can you just elaborate a bit more on how you are thinking about the size of that opportunity? I know one of your peers has a single indication JAK in AD they think is a $3 billion peak sales opportunity. I know that’s well above your risk adjusted numbers you had a few years ago. It sounds like now you are talking about potential multi-billion dollar opportunity. But just help us flesh out a little bit about how big of an opportunity could this be for the product? Thank you." }, { "speaker": "Rick Gonzalez", "text": "Okay. So, Chris, this is Rick. I will talk a little bit about 2021 and then Mike maybe can talk a little bit about how we view RINVOQ in AD and Rob. So when we look at 2021, I think, you have to step back and say, how are we performing this year? And obviously we are performing very well. There’s still some COVID impact built in. It varies a bit by therapeutic areas, some areas are impacted more than others. So as an example, CLL has been impacted more than other areas, HCV has been impacted more than other areas. It’s usually places where the therapy can be delayed without significant consequence for the patient is where we are seeing most significant delays. So as we move through the fourth quarter, we will see whether or not that recovers more and that’s certainly one aspect of it. I would say, even without much recovery, the underlying performance of the business looks good. I think you can look at the dividend increase that we put through and that should give you some flavor for the level of confidence that we have, because obviously, we would want to tie that to what we assumed that we could deliver from an overall performance standpoint. I’d also say that, as we look to consensus, we are comfortable with what we see in consensus in 2021. So we want to see a few other things just play out primarily around COVID, how much improvement we get. We have launched a number of programs over the course of the last couple of months to try to activate patients more, to go to their physicians and seek treatment out. I think those programs, some of those programs will be successful and we will see some of those increase, particularly in immunology, because dermatology is another one of those areas that the new patient starts are still off a little bit. Now, obviously, SKYRIZI is performing extremely well and HUMIRA continues to perform well. So, I’d say that’s the single biggest issue. Rob, Mike, do you want to talk about RINVOQ?" }, { "speaker": "Michael Severino", "text": "Certainly. I will start and then pass it over to Rob, if he wants to add a little bit more detail. We view atopic dermatitis as a very attractive and a very substantial opportunity overall. It’s an indication that I think for many years was underappreciated by the industry. Now that’s changed recently and you have seen a lot of focus in drug development in atopic dermatitis. We feel very good about the profile that we have demonstrated, coming out of Phase 2, when we made those statements about the risk-adjusted potential in atopic dermatitis, we felt good about our data and those data were sufficient to get a breakthrough therapy designation. We are in the fortunate and not always that common situation where our Phase 3 results have actually outperformed our expectations based on Phase 2. And if you look at the Phase 3 results, they are really strong across the board. They are strong in total response. They are strong in repeated response and they are strong on components like itch, which is the most troublesome symptom to patients in the majority of cases. And so, when you couple that with the safety profile that we have demonstrated, which we think is very favorable. We see this as something that has very real potential and when we look across studies, we feel very good about our results. And of course, we have a head-to-head study with dupilumab, which is coming up later on this quarter and so that will be important additional information, and we are very optimistic about those results. Rob, I don’t know if you would like to add anything further?" }, { "speaker": "Rob Michael", "text": "Chris, this is Rob. So if you think about atopic dermatitis, it’s a $3 billion global market with very strong growth potential. In our 2025 risk adjusted guidance of greater than $10 billion for RINVOQ and SKYRIZI, we included $1 billion of revenue for RINVOQ AD, but we feel pretty good that we can achieve that expectation." }, { "speaker": "Rick Gonzalez", "text": "And the only other thing I’d add is, I think atopic derm is a market very similar to several others, in fact, psoriasis, I would say, is a similar type of market. But as you get more competitors in the market driving promotion, it has a very large population of patients. So the question is, activating those patients and getting them to go into the physician’s offices to seek treatment. And so, obviously, when you have one company doing that, they have the capacity to drive a certain amount. When you have more than one company, you are doubling or tripling the amount of promotion activity, particularly here in the U.S. and that tends to activate more patients to seek treatment. I think if you looked at the total available market of patients who would qualify, it’s a huge market, it’s north of $5 billion easily. So the question is, how fast can you activate them and how broadly can you activate those patients? From a profile standpoint of our drug, I think we will compete quite effectively, and I think, in particular, the performance around itch is going to give us an advantage. So it’s a very attractive market and it’s certainly one that we will focus a lot of attention on to drive." }, { "speaker": "Rob Michael", "text": "And Chris, this is Rob again. Just to clarify, I said exceed or achieve, but we expect to exceed that $1 billion risk-adjusted number for RINVOQ AD in 2025." }, { "speaker": "Liz Shea", "text": "Thanks, Chris. Operator, next question, please?" }, { "speaker": "Operator", "text": "Thank you. And our next question is from Geoffrey Porges from SVB Leerink." }, { "speaker": "Geoffrey Porges", "text": "Thanks. Rick a question to you. With the dividend going up, it looks like you have got about a 6.5% dividend yield. The core business is performing well. And my question is, what are the -- and you are now a $50 billion to $55 billion topline company. What are the pipeline assets that can really move the needle, I know all the new indications for the existing NMEs, but what new NMEs can be really substantial to move the needle on a $55 billion topline, because I think, that’s part of why you have got an industry high dividend yield?" }, { "speaker": "Rick Gonzalez", "text": "So, Geoff, this is Rick. I think if you look at the business, you have to look at it in phases, right? So I’d say the phase between now and call it 2025, 2026. That growth is going to be driven by expansion of RINVOQ and SKYRIZI, continued strong growth in the neuroscience pipeline, continued strong growth in the aesthetics pipeline and continued strong growth in the hem/onc. Starting in that 2025 timeframe and beyond, that’s where the earlier to mid-stage pipeline will drive a significant amount of growth. Now there will be assets like Navitoclax, like 951, atogepant, that will come in prior to that and help boost growth right around ‘23 and ‘24. But I can tell you, we are very confident that we have now built a portfolio that can sustain growth and drive growth on the other side of the LOE. In fact, I would tell you that, when I look at RINVOQ and SKYRIZI, and I look at the in-play market shares that we see with those assets today, when we gave guidance of 2025, we assumed that on average, we would achieve high single-digit market share across the indications. So as an example, if you look at SKYRIZI right now, SKYRIZI’s in-play share is 33%, the market leader by a wide margin. The next closest product is at 16% in-play share. And its TRX share is now at 11% and climbing rapidly. So it’s already above what we had assumed the peak would have been out in 2025 from a market share standpoint. And if we maintain that 33% by then, it will have an overall share of about 33%, so it will be three times what we had assumed for psoriasis. So when you look at the speed at which we are bringing the new indications, when you look at the breadth of those indications across the revenue base that HUMIRA has today, we have covered all of the major indications for HUMIRA plus one more that HUMIRA doesn’t have, which is atopic derm. And if we can achieve that kind of market share in each of these indications, then we will obviously double what we assumed that 2025 number was and that gets you pretty close to covering all of HUMIRA in the U.S. So I am very encouraged about that. And I think that, along with the other assets and the four major growth platforms, gives us a tremendous amount of confidence that we can drive growth on a sustainable basis at a very high level." }, { "speaker": "Liz Shea", "text": "Thanks, Geoff. Operator, next question, please?" }, { "speaker": "Operator", "text": "Thank you. And our next question is from Vamil Divan from Mizuho." }, { "speaker": "Vamil Divan", "text": "Hi. Thanks so much for taking my questions. So maybe just sort of following up on what has been asked. For 2021 on Chris’ question, can you just talk a little bit about how you are thinking about drug pricing pressure, either U.S. or globally just to think about our modeling for next year, I think, that would be helpful? And then maybe building on Geoff’s question, I think one of the other concerns that investors have is around potential tax reform that may come out of D.C. depending on how the election plays out. I know it’s tough to ask just a few days before the election. But I guess based on what you are seeing especially from the Biden side, I guess the Biden plan right now. Is there anything you can share with investors at this point in terms of how your tax rate may change going forward and I appreciate there’s probably not much that you can give, but any insights I think would be helpful, because I think it is investors seem very concerned about at this point? Thank you." }, { "speaker": "Rick Gonzalez", "text": "Yeah. Well, Vamil, obviously, it’s still unclear as to what the landscape will be on the other side of the election, so we obviously have to let that play out. Having said that, I think, we assume that there will be continued pressure on the industry as it relates to drug pricing. As far as what our expectations would be in 2021, I think our expectations in 2021 from a price standpoint will be similar to what they were in ‘19 and ‘20, and is we weren’t reliant on price. I mean, fortunately our business is primarily a volume-driven business. It’s typically in areas that are very serious diseases and have strong value propositions. And so that gives me confidence that we will be able to fare reasonably well even if there are changes. I’d say the second thing is, it’s unlikely that you will get changes that have a significant impact early on in ‘21, because there’s going to be a lot of debate here about what those changes are. What I would hope the debate ultimately transitions to is co-pays and out-of-pocket costs for patients, because that is the fundamental issue and it’s particularly the issue when you look at Part D patients. They have to pay far too much of the burden of the cost from an out-of-pocket cost standpoint. And they are really the only group of patients in the U.S. that have that kind of burden associated with them. If you look at the overall performance from a cost standpoint of Medicare Part D. It’s performed very well. In fact, if you go back to the original CBO estimates over the last 10 years, it’s come in 45% below the original estimates for what it would grow. And if you look at Part D, it’s grown at about the rate of other healthcare services inflation, not significantly higher. And so the affordability problem is really around those co-pays. We have to drive those co-pays. And then I think the other thing that has to be played in here is, I would hope as this debate goes on, they are going to look very carefully at our industry and the value of our industry both from a societal standpoint, as well as an economic standpoint and this is tremendously value industry. Just look at what we have done as an industry as it relates to this pandemic, whether you are talking about vaccines or you are talking about therapeutics, look at what we have done in advancements with cancer. And then from an economic standpoint, this industry supports directly or indirectly 4 million jobs in the United States, typically high paying jobs. It produces a tremendous amount of economic output for the U.S. And so it’s an industry that you don’t want to damage in the process and I think that has to be part of the debate. But the short answer to your question is, I think, you should -- we should -- we are not assuming we will get a lot of benefit from price in ‘21. We are also not assuming that across that year we would see a significant change that would have a dramatic impact on that calendar year. Tax reform was your next question." }, { "speaker": "Rob Michael", "text": "Vamil, It’s Rob. So based on a very high level of information on the Biden proposal, we would see an increase in our tax rate like most U,S, companies, but it’s really difficult to provide a rate impact without the details. That said, AbbVie would still have a favorable profile versus our peers and we wouldn’t have raised our dividend if we were overly concerned about the implications." }, { "speaker": "Rick Gonzalez", "text": "And the only thing I’d add, Vamil, on that one is, we obviously did flex what we thought the tax rate could be and we just don’t know that much about it, we know what has been said. But we flexed it against this dividend increase and made sure we were absolutely comfortable with payout ratios based on that and we are or we wouldn’t have moved forward with the 10.2% increase." }, { "speaker": "Liz Shea", "text": "Thanks, Vamil. Operator, next question, please?" }, { "speaker": "Operator", "text": "Thank you. And our next question is from Steve Scala from Cowen." }, { "speaker": "Steve Scala", "text": "Thank you so much, and congratulations on another impressive quarter. I have several questions, but three of them are short. Can you be more specific on where SKYRIZI patients are coming from? I think it’s notable that COSENTYX was a bit light this quarter and Novartis cited competition? Secondly, what was the non-GAAP interest expense number in the quarter? Third, you provided guidance for HUMIRA OUS, but I don’t think U.S. So can you tell us what you think the U.S. guidance would look like? And then, lastly, we have tracked clinical trial activity during the pandemic and it shows AbbVie recruiting trials were up 14% year-to-date. That is industry-leading two times greater than the next closest competitor and much better than the average, which is down, and I am just curious, what accounts for this? Is it a deliberate strategy to capture patients when other companies are taking a wait-and-see approach or is it something else? Thank you." }, { "speaker": "Rick Gonzalez", "text": "Yeah. So, Steve, I will handle your first question. Rob will handle two and three, and Mike can handle number four. So if you look at the in-play share, about 25% of that in-play share is coming -- on SKYRIZI is coming from HUMIRA. The other 75% is coming from competitors. I’d say it’s primarily the 17s but some coming from the other 12, 23s or 23s, but I’d say the bulk of it is coming from the 17s. So that might answer your question about COSENTYX. If you look at the capture of the type of patient that we are getting with SKYRIZI, it’s very balanced. It’s about 50/50 between first-line and then second-line. So that’s a nice balance between IE patients and patients who have failed other therapies. So I think the asset is performing the way you would expect a high-performing, high-efficacy asset to be able to perform, is -- it has quickly become the preferred product by prescribing physicians. It has a great profile. It’s quarterly dosing. It’s got great efficacy. The efficacy improves over time. There aren’t any assets that have that kind of a profile on the market. So I would expect that SKYRIZI will continue to increase its in-play share. It’s jumped about 3 points over the last maybe two months and I would expect it will continue to increase." }, { "speaker": "Rob Michael", "text": "Hey. Steve, this is Rob. On your question on interest expense, for non-GAAP and GAAP, it’s the same number. It’s $620 million in the third quarter. We are no longer specifying any interest expense, because we have now closed the transaction, so that negative carry on the bond is no longer is applicable for the specified. So $620 million is the number for both non-GAAP and GAAP. On the U.S. HUMIRA question, so we did not change our guidance, it continues to be 8 -- for the U.S. HUMIRA 8% growth with a low single-digit price contribution." }, { "speaker": "Michael Severino", "text": "This is Mike. I will take your last question on clinical trial activity. The first thing that, I would say is, the increase in clinical trial activity reflects what’s going on in our pipeline and there’s a lot of activity in our pipeline, and a large number of molecules that we are advancing, and so that’s a big part of it. Another part is that, we made the conscious decision to leave decisions around enrollment in the hands of investigators rather than making them centrally, because they understand the situation in their hospital in their community better than we do. And there was a small group of studies that we paused at the time of the initial COVID impact, but the majority we allowed to continue. That doesn’t mean that there weren’t disruptions from COVID. But it does mean that investigators decided when it was time to pause enrollment and when it was time to resume enrollment. And I think the evidence shows that they made those decisions better than they could have been made centrally. And that has allowed us to advance our portfolio, to advance our clinical trials with minimal disruption and with safe conduct for patients and the staff at the site, which are also critically important considerations. And so, I’d say, it’s a combination of those factors." }, { "speaker": "Liz Shea", "text": "Thanks, Steve. Operator, next question, please?" }, { "speaker": "Operator", "text": "Thank you. And our next question is from Navin Jacob from UBS." }, { "speaker": "Rick Gonzalez", "text": "Hi. How are you?" }, { "speaker": "Jon Lim", "text": "This is Jon Lim on for Navin Jacob." }, { "speaker": "Rick Gonzalez", "text": "Hi, Jon. Yeah. Sorry…" }, { "speaker": "Jon Lim", "text": "We just had a few questions." }, { "speaker": "Rick Gonzalez", "text": "You guys pass along [ph]." }, { "speaker": "Jon Lim", "text": "We just had a few questions. First, regarding the HUMIRA question in the U.S., within the markets in which a biosimilar is out there, what percent of the molecule is now brand versus biosimilars? With now almost two years of biosimilar experience, how does that affect things? And next for SKYRIZI and RINVOQ, can achieve the type of uptake that you have been seeing in the U.S. and in the international markets? We would appreciate any commentary around in-play market share achieved in markets you have been approved in. And lastly, if we could talk about VRAYLAR MDD timing? Thank you." }, { "speaker": "Rob Michael", "text": "Okay. This is Rob. Just to clarify, the first question was on international HUMIRA, how much of that is now a biosimilar?" }, { "speaker": "Jon Lim", "text": "Right. Within the markets where there’s a biosimilar, how much is…" }, { "speaker": "Rob Michael", "text": "Yeah." }, { "speaker": "Jon Lim", "text": "… brand versus biosimilar, help us visualize that question…" }, { "speaker": "Rick Gonzalez", "text": "I think he wants what’s the molecule…" }, { "speaker": "Rob Michael", "text": "[Inaudible]" }, { "speaker": "Rick Gonzalez", "text": "Yeah." }, { "speaker": "Rob Michael", "text": "Yeah. We are at about 60% molecule share across the Board. So that’s of all of the international markets, on average, it’s about 60% molecule share." }, { "speaker": "Rick Gonzalez", "text": "And then on SKYRIZI and RINVOQ, I don’t have the numbers right in front of me on each of the markets. I would say typically in the international market, it is a slightly slower uptake than it is in the U.S., but still doing very well. So maybe the best thing would be to get back to you with some more specifics around that. But I think you can assume that the in-play share there probably averages between 20% and 30%. But it depends obviously on the country that you are talking about. And then on VRAYLAR MDD timing, Mike?" }, { "speaker": "Michael Severino", "text": "Yes. On VRAYLAR MDD, we would expect to have the study’s readout in the second half of next year and be prepared for regulatory submissions shortly thereafter. So it’s possible we would have an approval in ‘22." }, { "speaker": "Rick Gonzalez", "text": "And I think that’s an important point to make here. If we look at VRAYLAR, VRAYLAR is growing very rapidly. And as you know, the atypical anti-psychotic market is very, very large. I think VRAYLAR’s share is something like 3% and it’s tracking at $1.4 billion at 3%. So if we look at the current indications, as we indicated in the comments, of bipolar and schizophrenia, we think we can drive VRAYLAR alone in those indications to a multi-billion dollar product and that’s just driving that market share penetration up to like 5% or so. And I think that’s very doable based on the profile of VRAYLAR. VRAYLAR has a very unique profile in that market. So MDD, if we are successful, obviously, will open up a whole other channel and allow you to increase that market share even more significantly. And so typically, many of the drugs that achieved MDD were drugs that had $5 billion, $6 billion of annual revenues. So this is a nice opportunity. Without MDD, VRAYLAR is still going to be a very important product and a very significant product. With MDD, it becomes a major product. And so we will see how those next two studies play out. The first study was positive and I think we are hopeful that we will be able to get it." }, { "speaker": "Liz Shea", "text": "Thanks, Sriker [ph]. I think that was you. Operator, next question, please?" }, { "speaker": "Operator", "text": "Thank you. Our next question is from Randall Stanicky from RBC Capital Markets." }, { "speaker": "Randall Stanicky", "text": "Great. Thanks. Rick, early in the pandemic, you were one of the few to identify or build an impact for potential headwinds from higher unemployment associated with loss of health coverage. What are you currently seeing right now and anything on the patient assistance program numbers that help you inform on that? And then secondly, I just wanted to ask on BOTOX migraine. This has been historically a roughly $600 million high margin product for Allergan. We have been watching CGRP inhibitors now been in the market a couple of years. Do you see this as a growth product or opportunity for you and what are you seeing overall with respect to BOTOX in migraine? Thanks." }, { "speaker": "Rick Gonzalez", "text": "So on the unemployment, we did identify back, I guess, it was in the first quarter call, that we were going to build in a level of risk associated with patients who would have to move to some type of an assistance program, because they lost their jobs. We have not seen that impact play out to any significant level. We have not seen it in our patient assistance program and right around the pandemic we made a decision to proactively go out and advertise our patient assistance program just to make sure that patients knew that if they couldn’t afford their AbbVie drugs that they could get them from us. So I think we proactively tried to drive it in an effort to make sure that patients were not exposed, but we haven’t seen very much at all. We still have some coverage left in the fourth quarter for it. But I’d say at this point, I think, we are questioning whether or not we are going to see it. Now, I can’t tell you exactly why. But I can tell you we are monitoring it carefully and it’s definitely not happening, at least in our business, because we would see it in the patient assistance program. On BOTOX migraine, if you actually look at what is happening with patients on BOTOX migraine, when the injectable CGRPs came into the market, you did see a tick down in patients, but then BOTOX recovered. And it has roughly the same number of patients that it had back then. It’s slightly lower than it had back then. So what the CGRPs ended up doing was expanding the market to some extent. And we are seeing a very similar phenomenon on the acute therapies as well. If you look at the scripts, the NBRxs for the acute CGRPs, you can see that it’s actually almost doubling every quarter the number of patients. In the last quarter, it was about 90,000 to 100,000 NBRxs. So I think these assets can significantly expand the market. I think two-thirds of our patients are patients that have switched on the acute, have switched from triptans to our agent and one-third of them are naive patients that we are bringing into the category. And again, that’s all about making it visible to patients who have this condition so that they go to their physician and ask for the therapy. It’s all about building markets essentially. And so I think one of the things these assets will do is they will expand the market. Now, I think as you expand the market, obviously BOTOX therapeutics, some of those patients will ultimately if they don’t get the kind of relief that they are looking for on an injectable CGRP or the acute therapy, they would eventually probably try injectable BOTOX. So we could see a little bit of growth there, but the biggest part of the growth that we are going to see in this market is from UBRELVY and ultimately atogepant. It’s a big market and I think these agents will allow us to be able to significantly expand the market and I think this is clearly a multi-billion dollar market." }, { "speaker": "Liz Shea", "text": "Thank, Randall. Operator, next question, please?" }, { "speaker": "Operator", "text": "Thank you. Our next question is from David Risinger from Morgan Stanley." }, { "speaker": "David Risinger", "text": "Thanks very much. Excuse me, so I want to start with a high-level question, Rick. Could you please discuss long-term immunology net pricing and formulary positioning prospects in the face of increasing competition in coming years? And then second, just had a high level question about cash flow, I was hoping that you could discuss prospects for operating cash flow, CapEx and free cash flow? Thank you very much." }, { "speaker": "Rick Gonzalez", "text": "Yeah. Thanks, David. I will take the first one. Rob will answer the second one for you. So if I look at long-term immunology, what’s critically important is that you have the kinds of assets that allow that managed care organization or PBM to be able to cover the greatest number of patients. This is a category where not every drug works on every patient. So you have to have multiple options that are available in the formulary and that’s just -- that is the appropriate thing to do to make sure that patients have the drugs that they need to be able to be treated. I would say, we typically do very well with formulary access. That’s driven primarily by the fact that our assets tend to be very attractive assets from a clinical profile. They establish significant market share positions and that’s important for the managed care organization or the PBM. So I don’t see anything significantly impacting that going forward. I would assume we will maintain very high levels of formulary access. Net pricing, there’s always some level of impact on pricing when you renegotiate the contracts. I don’t anticipate that you will see a significant change going forward. So I think it’s more of the normal kinds of competitive activities that we see in the marketplace." }, { "speaker": "Rob Michael", "text": "And David, this is Rob. I will answer your question on cash flow, so if you look at AbbVie and Allergan in 2019 on a combined basis, generated about $19 billion almost $20 billion of operating cash flow. CapEx runs close to $1 billion, and so if you look at this year, again, we have a partial year of Allergan, we are probably trending towards the $16 billion operating cash flow number with a little bit less than $1 billion of CapEx. So you need to annualize that and also consider the fact that we are going to generate earnings growth going forward, but that should give you a good number to work with." }, { "speaker": "David Risinger", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Thanks, David. Operator, next question, please?" }, { "speaker": "Operator", "text": "Thank you. Our next question is from Terence Flynn from Goldman Sachs." }, { "speaker": "Terence Flynn", "text": "Hi. Thanks for taking the questions. I was just wondering first, maybe on the IBD front, I know you have a number of readouts coming up for RINVOQ and SKYRIZI here. Maybe you could just outline what current usage of targeted drugs in IBD is on a percentage basis and how that compares to rheumatology and dermatology? And what you see is a potential here to boost that uptake in IBD further? And then to your TNF steroid conjugate program, what were the criteria that were key that led to your choice of 154 as a go-forward asset? And then lastly, on the Allergan integration, I know you said everything is on track there. It’s going really well. You talked about some revenue synergy opportunity, Rick, and I know you have laid out your expense synergy target of $2 billion in 2022. Maybe you could just talk about some of the puts and takes for 2021 as we think about the Allergan synergies on both sides? Thank you." }, { "speaker": "Rick Gonzalez", "text": "Okay. Great. On IBD usage, if you look at the penetration, I’d say, IBD is an area where you have reasonable levels of biologic penetration, because the disease particularly Crohn’s is the disease is a pretty severe. I think the challenge in IBD is that, with the current therapies that are available, you still get sub-optimal clinical efficacy for these patients and durability of that efficacy. And so what physicians tend to do is they rotate patients through various treatments to try to maintain them in control for a longer period of time. So it is a market that is right for higher efficacy agents and a market that is right for more agents to be available to allow for better treatment of those patients and that’s the key driver in that segment of what gives significant uptake. So when we see the data around IBD that will be important for us, obviously the early data looks good. And ultimately I think these assets, along with HUMIRA, will be able to provide the market with a significant new alternative and I think that uptake will be good based on that." }, { "speaker": "Michael Severino", "text": "This is Mike. I will take the question about 154. So, 3373 and 154 represent our TNF steroid conjugate molecules that are in the clinic. They are very similar, similar to the extent that we view the biology as being translatable between the two. But 154 includes some improvements in linker technology that relate to manufacturability and ability to formulate at high concentration, ease of formulation. And so those can be very important advantages for a successful molecule. We previously toplined the positive results from 3373. We wanted to see that 154 gave us the PK performance and the exposure to achieve the pharmacodynamic coverage we think we need in the next stage of development. And as I said, we viewed the biology as translatable between the two. So once we saw that PK performance and it matched our expectations and showed that 154 would give us the coverage that we were seeking at acceptable doses in the clinic, we made the decision to advance that molecule into larger scale trials." }, { "speaker": "Rob Michael", "text": "Hey. Terence, this is Rob. I will take your question on synergies. So while we are not providing guidance for 2021 today. I think a good way to think about the expense synergies is to run rate the $600 million in partial year synergies, which gets to about $1 billion. And then, as you think about that ramp to greater than $2 billion by 2022, I think it’s reasonable to straight line that. So if you think about what’s going to drive the ramp? It’s things like systems integration, leveraging procurement spend, will result in more synergies over time, as well as network optimization. In the near-term, it’s really driven more from immediate redundancies like corporate infrastructure and R&D portfolio optimization. As it relates to the revenue synergies, look, as we have now had a few months with the combined company, we see opportunities as we think about investment in aesthetics, where we have really amped up our DTC investment for JUVÉDERM and BOTOX cosmetic, it give o the ability to invest more in aesthetics. Similarly, invest more in neuroscience, whether that’s VRAYLAR, BOTOX therapeutic. And then we look internationally given the infrastructure we have, the integrated brand team approach, we think there’s opportunity to really leverage our market access capability, our international affiliate structure to really drive that international growth for the company going forward for those Allergan brands as well." }, { "speaker": "Rick Gonzalez", "text": "Terence, the only thing I would add, maybe to give you some perspective on the investment side. Allergan tended to what I would describe as pulse invest in particularly DTC, but even in social media. So they didn’t -- and typically what we do with brands when we want to drive maximum speed of market penetration is we invest at a steady state and continue to do that for an extended period of time. So they might have invested heavily in one quarter and then gone dark in the next quarter and then invested again and gone dark again. We don’t use that kind of a strategy. We tend to invest for the full year. And in our experience, what that does is it gives you, the fact that you have constant coverage, gives you maximum speed of penetration. So we clearly think that’s going to be an advantage, particularly in areas like aesthetics and neuroscience." }, { "speaker": "Liz Shea", "text": "Thanks, Terence. Operator, next question, please?" }, { "speaker": "Operator", "text": "Thank you. Our next question is from Gregg Gilbert from Truist." }, { "speaker": "Gregg Gilbert", "text": "Thank you for getting me in. Good morning. Rick, it sounds like you think the neuroscience franchise might be one of the sleepers of the Allergan deal and you have already framed the potential for VRAYLAR particularly if depression hits. But I was curious if this development in neuroscience has taken on sort of a new sense of urgency given the heft that you have now in that franchise or whether you think you have enough going on there already? And for Mike, I was hoping you could let us know when we will see Phase 3 data for 951 in Parkinson’s and give us a sneak preview of what you are looking for there profile wise? And lastly, can you frame for BOTOX therapeutics, Mike, what you have decided to pursue in terms of indications versus ones that you have taken off the table now that you have had some time to work with that? Thanks." }, { "speaker": "Rick Gonzalez", "text": "I’d say on neuroscience, the way to think about it is or at least the way we are thinking about it is, there’s a significant opportunity to drive VRAYLAR to be a very large product, I mean, doubling or more depending upon the ability to get MDD. And I’d also say in migraine, when we get the full portfolio of migraine assets. The migraine market is a big market. If you look at the acute market today, it’s probably about $1.5 billion. We believe it can grow to $4 billion or $5 billion by 2025 with the right kinds of assets and the right kind of promotion. And then if you look at the preventative market, it’s about $3 billion, so we believe that one in real high-single to low-double digits with the right kinds of assets and the right kinds of promotion. So the first phase of neuroscience is nothing more than taking the assets we have now, getting atogepant to the marketplace and then we have a full portfolio of migraine products, and then maximizing the market share position of those assets in the market, that’s sort of Phase 1. But I would say now that we have infrastructure in place, Mike’s BD team has been now been starting to look at assets that would be complementary to that. And we didn’t in the past because for a single anti-psychotic, we wouldn’t have wanted to build-out the infrastructure, it just wouldn’t have made sense for us. But now we can basically add those kinds of assets to the infrastructure we have. So it does give us another opportunity from a BD standpoint to be able to build the business longer term." }, { "speaker": "Michael Severino", "text": "I will take the second question and agree with everything Rick said, the only thing I’d add on BD in neuroscience is neuropsychiatry is now clearly an area of strength for us and can be an area of interest and that can go beyond the anti-psychotics as well. There’s tremendous potential and unmet need in areas like generalized anxiety disorder, still in depression despite there are many agents on the market, many, many patients remain inadequately treated, so we would look broadly across that space. With respect to 951 and data timing, we would expect to see results from our Phase 3 study in the second half of next year. And what we are looking for is really DUOPA like efficacy, because DUOPA is a transformational product but it’s also a product that is challenging to administer, and the nature of that product, the fact that it requires the placement of a gastric tube that’s then threaded into the small bowel and has to be maintained limits the size of what’s effectively an addressable market. Not the market by the labeled indication, but the proportion of patients within that population that would consider a therapy like that. And 951 has the potential to substantially expand that. It has an insulin pump-like device, subcutaneous delivery device. We think it will broaden the number of patients within that labeled population, who would consider such a therapy and this is really a very substantial market. So for example, if you look at DUOPA, despite all of its challenges, it does about $0.5 billion in sales. If you look across similar therapies for advanced Parkinson’s disease, the market is probably $1.5 billion or more and that probably represents only a small part of the potential because much of it remains untapped. So we think that 951 can address that and we think the profile that it will take to address that is DUOPA like efficacy with a more patient-friendly subcutaneous delivery device. With respect to BOTOX indications, there are a number of indications, both for BOTOX and for other toxins, for novel toxins that we are considering in the therapeutic space. I think there’s more work that we can do in the migraine space. Although, that has been an area of strength, episodic migraine has patients that may benefit from a therapy like BOTOX and there’s still much more to do on the neurology side with respect to specificity disorders that might be secondary to stroke or other conditions where there is still room to expand those indications. When we look more broadly, there are a number of potential interesting indications for neurotoxins. They might not be BOTOX. They may be novel toxins. Those could be things like prevention of afib, for example, and we are continuing to explore indications beyond that." }, { "speaker": "Liz Shea", "text": "Thanks, Gregg. Operator, next question, please?" }, { "speaker": "Operator", "text": "Thank you. And our next question is from Tim Anderson from Wolfe Research." }, { "speaker": "Tim Anderson", "text": "Thank you. A high level question for Rick, despite Allergan being a very reasonable solution to upcoming U.S. HUMIRA LOE in 2023, the multiple on AbbVie is lower than it’s ever been. The entire drug group is out of favor, but your multiple is about half of the peer group average. To me what that multiple says is that investors remain worried about what AbbVie looks like past 2023. So two questions related to this, the first is why not give updated granular extended guidance that goes beyond 2023? You have given long-term guidance in the past sometimes and that’s resonated well with the market. So can we expect you might do this at some point soon? And second question, why not go do more M&A in the near-term, we just saw Bristol do a $13 billion deal not far after closing Celgene and layering more product into your pipeline would help give investors assurances that there’s life beyond 2023. And by virtue of how you answered an earlier question, you yourself basically said there’s not much new NME flow until 2025 and beyond? Thank you." }, { "speaker": "Rick Gonzalez", "text": "Yeah. I think if you look -- Tim, this is Rick. If you look at the PE of the whole sector, obviously, the sector is under pressure from the political environment and concerns about the political environment. And you are correct, we are at the lower end of that PE and I think that is driven by uncertainty about what the growth rate will be on the other side of the LOE. What I would tell you is obviously, we have a 10-year LLP, so we know what we think that growth rate is on the other side of the LOE. And I can tell you that when I look at that growth rate, it’s robust. Now, the market has to come around to that point of view. I’d say, we haven’t always been right, but in total revenue, we have always been right. In fact, we have always beat for the most part what our expectations were. And so we obviously challenge it pretty hard and we have knowledge of what we believe the erosion curve will look like. We have knowledge of what we think our pipeline will deliver and what the additional indications will deliver. And look, I remember there was a tremendous amount of skepticism about when we gave it was either $10 billion or $11 billion of risk adjusted revenues for RINVOQ and SKYRIZI back a year or two ago, something like that. There was a tremendous amount of skepticism, that’s impossible. I don’t hear very much of that now that these two assets are $2 billion and growing like rockets. So I’d say our ability to assess what we can do with our assets is pretty high. Now, that doesn’t mean you shouldn’t go out and get more things and we constantly look and where we find opportunity, we will clearly go pursue those. They have to be opportunities that make sense and fit into our portfolio. You have seen us do transactions to continue to build the long-term future of our hem/onc business with Genmab and I-Mab. And those two assets combined with what VENCLEXTA and IMBRUVICA can continue to do, I think it is going to give us a very robust long-term performance in that franchise. I think in immunology, we are in pretty good shape between our internal pipeline both the additional indications on SKYRIZI and RINVOQ and then what we have earlier on that we think will play out in a positive way. When we look at neuroscience, we just talked about that we have the ability to be able to grow that. Certainly, we are going to invest heavily in aesthetics. We have a tremendous amount of assets, new toxins that we are working on and we are going to accelerate many of those, new fillers and other kinds of opportunities that will build that aesthetics business to be able to grow rapidly. And so I feel pretty good about where we are. In fact, I’d tell you I feel very good about where we are six months into the Allergan transaction. Certainly Allergan has given us more growth as we mentioned a moment ago. When we look at neuroscience, neuroscience has clearly been I think a nice positive upside for us and one that I think we can execute very well. As far as guidance is concerned, I am not saying, we will never give guidance, but we want to give guidance when we are able to do it with a high degree of certainty. Because the last thing we want to do is provide a level of guidance that you don’t have a high degree of certainty and you know it’s going to, it has some variability to it. You probably remember, we did that on the international biosimilars and we were off by not that much, but we were off by some and the market didn’t like the fact that we were off. So you need to be awfully careful about how you provide that guidance in a way to make sure that you meet or exceed the guidance, and at the point which we have that level of confidence, we may go out with longer term guidance." }, { "speaker": "Tim Anderson", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Thanks, Tim. Operator, next -- we have time for one final question." }, { "speaker": "Operator", "text": "Thank you. And our final question today is from Josh Schimmer from Evercore." }, { "speaker": "Josh Schimmer", "text": "Last question. Thanks for squeezing me in. Just a couple of quick ones, can you provide any color on the SKYRIZI royalty and can you comment on what you see as the incremental markets for the lower face toxins, the new dermal filler and presbyopia, if you view any of those as material? Thank you." }, { "speaker": "Rob Michael", "text": "Yeah. Josh, so on the SKYRIZI royalty, well, keep in mind that we account for this as a business combination, so it comes through consideration so you don’t see it on a non-GAAP P&L. We don’t disclose our royalty rates but a good way to think about it is reasonable royalty you would pay for a late-stage asset is probably a good way to think about what the royalty burn would be on -- the cash royalty burn will be on SKYRIZI." }, { "speaker": "Rick Gonzalez", "text": "And I’d say the lower face toxins and the lower face fillers that we are working on, probably the best way, rather than trying to characterize individual indications for toxins or fillers is, we are trying to build a portfolio and a market activation strategy that will allow us to grow the aesthetics business at a consistent double-digit rate. And it is both that internal pipeline and activating more patients, and some BD effort that will give us that. So, certainly those lower face toxins and fillers are designed to be able to support that growth going forward. The eye care product, I would call that product sort of a modest product. I don’t remember the specifics. Do you, Rob?" }, { "speaker": "Rob Michael", "text": "Yeah." }, { "speaker": "Rick Gonzalez", "text": "I’d call it sort of a modest size product." }, { "speaker": "Rob Michael", "text": "Yeah." }, { "speaker": "Josh Schimmer", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Thanks, Josh. That concludes today’s conference call. If you’d like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us." }, { "speaker": "Operator", "text": "Thank you. This does conclude today’s conference. You may disconnect at this time." } ]	AbbVie Inc.	141,885,706
ABBV	2	2,020	2020-07-31 09:00:00	Operator: Good morning. And thank you for standing by. Welcome to the AbbVie Second Quarter 2020 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion. [Operator Instructions] I would now like to introduce Ms. Liz Shea, Vice President of Investor Relations. Liz Shea: Good morning, and thanks for joining us. Also, on the call with me today are, Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Vice Chairman and President; and Rob Michael, Executive Vice President and Chief Financial Officer. Joining us for the Q&A portion of the call is Laura Schumacher, Vice Chairman External Affairs, Chief Legal Officer and Corporate Secretary. Before we get started, I remind you that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties, including the impact of the COVID-19 pandemic on AbbVie's operations, results and financial results that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our 2019 annual report on Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today's conference call as in the past, non-GAAP financial measures will be used to help investors understand AbbVie's ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Please note that, the second quarter financial results and guidance provided on today's call for sales EPS and line items of the P&L reflect a full period of legacy AbbVie operations and a partial year of contribution from the Allergan portfolio since the transaction closed in early May of this year. In addition, we have provided a quarterly comparable historical trend analysis for key product revenues of the newly combined company, as a supplemental table in our earnings release this quarter. This table supports the comparison of sales growth on a comparable operational basis, including full quarter current year and historical results for Allergan on a pro forma basis. Comparable operational percent changes are presented at a constant – at constant currency rate. For this comparison of underlying performance, all historically reported Allergan revenues have been recast informed to conform to AbbVie's revenue recognition accounting policies, and exclude the recent divestitures of ZENPEP and VIOKACE. Following our prepared remarks, we'll take your questions. So with that, I will now turn the call over to Rick. Rick Gonzalez: Thank you, Liz. Good morning, everyone, and thank you for joining us. Today, I'll discuss our second quarter performance and highlights. And for the first time, I'll provide our 2020 outlook for the newly combined company. Mike will then discuss recent advancements across R&D programs. And Rob, will review the quarter and our updated guidance in more detail. Following our remarks, we'll take your questions. I'd like to start off by recognizing all of our employees, including those joining AbbVie from Allergan for all of their hard work and dedication during this pandemic. The AbbVie team has been working diligently and carefully, within our facilities and remotely, to ensure that our business continues to operate properly and our patients continue to receive their medicines. Before I speak to the strong financial performance this quarter, I'd like to characterize the state of the recovery of the business from the COVID crisis. Let me start with the legacy AbbVie side of the business, which has demonstrated robust performance leading into the pandemic and has remained resilient. The impact on continuing patients for HUMIRA and new patients for RINVOQ, SKYRIZI and VENCLEXTA, were not as pronounced as we had previously anticipated. While patient flow has not recovered, in most therapeutic segments we're encouraged by the level of stabilization, and the recent positive demand trends. Overall, the legacy AbbVie business continues to perform very well, with stand-alone revenue growth in the second quarter of approximately 8.5% on an operational basis, excluding the negative impact from COVID. On the legacy Allergan side of the business, we saw significant COVID-related impacts on BOTOX Therapeutic and our aesthetics business in the second quarter. Both businesses are seeing a rapid recovery and are now performing near pre-COVID levels. Other key brands, such as, VRAYLAR and UBRELVY were impacted in a manner similar to the AbbVie-based business. And we're pleased with the recent trends and progress. Overall, COVID had a substantial impact on second quarter reported revenues with an estimated net unfavorable impact of more than $900 million. However, by the end of June the total business had recovered to more than 90% of pre-COVID levels. So I'm pleased with the resilience and the rapid recovery across our portfolio. And I'm confident in the continued strong underlying demand and performance of the combined new company. Despite the impact from COVID, we delivered a strong second quarter performance. Adjusted earnings per share of $2.34 were well above our expectations. The $0.21 beat included $0.11 of net accretion from Allergan, as well as $0.10 of favorable performance versus the midpoint of our stand-alone guidance. Total revenues were $10.4 billion, including approximately $8.4 billion of legacy AbbVie sales significantly above our expectations for the standalone portfolio with continued robust performance in both hem/onc and immunology, despite the impact from COVID. Hem/onc revenues of approximately $1.6 billion were up strong double digits again this quarter. IMBRUVICA sales grew approximately 17% on an operational basis, reflecting continued strong performance in CLL, where we remain the clear market leader. VENCLEXTA sales were up more than 80% on an operational basis with strong growth in CLL and AML. During the quarter, we also announced a strategic collaboration with Genmab to further build our oncology portfolio with a CD3xCD20 bispecific antibody. It has the potential to be a best-in-class therapy across B-cell malignancies. Our leading immunology business delivered revenues of more than $5.3 billion, reflecting growth of more than 8.5% on an operational basis. U.S. HUMIRA revenue growth remained strong, up 5% with continued demand from the large installed patient base, partially offset by the impact of COVID-19. International HUMIRA biosimilar dynamics in the quarter were better than our expectations. SKYRIZI continues to perform well and has maintained its leading in-play psoriasis patient share, which includes both new and switching patients at more than 30%. As expected, we saw modest delays to new patient starts during the quarter, as a result of the COVID-19 dynamics. However, recent prescription trends and increasing enrollment in our ambassador program two leading indicators demonstrate a strong growth trajectory and support our full year guidance of $1.4 billion. We're also seeing very encouraging trends for RINVOQ, where rheumatology office visits are approaching pre-COVID levels. RINVOQ revenues were up more than 70% on a sequential basis and currently reflect 15% in-play RA patient share, which is now nearly at parity to HUMIRA, the market leader in in-play share and above all other agents in the segment. We're also making excellent progress with our immunology pipeline, which Mike will discuss further momentarily. As I noted during the quarter, we successfully completed the acquisition of Allergan creating a stronger and a more diverse AbbVie. The transaction significantly expands and diversifies AbbVie's revenue base and complements our existing leadership positions in immunology and hematological oncology with additional growth franchises in aesthetics and neuroscience. We have growth opportunities in neuroscience with BOTOX Therapeutics, VRAYLAR and UBRELVY. And we have the leading global aesthetics business with flagship brands including BOTOX Cosmetics and JUVÉDERM. I'll start with neuroscience, which had sales of roughly $735 million to AbbVie in the second quarter. VRAYLAR continues to demonstrate rapid growth and is well on its way to surpassing $1 billion in annual revenues. Underlying demand has remained resilient despite the COVID-19 pandemic with strong double-digit growth again this quarter. We see significant room for continued expansion within VRAYLAR's existing indications bipolar disorder and schizophrenia. Major depressive disorder or MDD represents another potential large indication with two Phase 3 trials well underway. Also within neuroscience, we now have a portfolio of migraine therapies that have the potential to support long-term growth in a highly attractive and underserved market. Our migraine portfolio is anchored with BOTOX Therapeutic, which had revenues of roughly $300 million to AbbVie in the second quarter. Despite multiple new competitive entrants, BOTOX Therapeutic has largely retained its total treated patient base, a testament to its efficacy, safety and brand recognition. Like many physician-administered products, BOTOX Therapeutics saw a significant impact from COVID-19 in the second quarter with global sales down approximately 20% on a comparable operational basis. However, we're pleased by the recent data trends, which demonstrate a fast recovery and performance is now close to pre-COVID levels. The launch of UBRELVY, the first-to-market in leading oral CGRP for acute migraine is off to an excellent start. Feedback from physicians has been very positive given UBRELVY's efficacy, safety and convenient dosing profile relative to current standards of care. Commercial access for UBRELVY is now at 70%, which along with increased consumer promotion will further support the product's launch trajectory. We're also developing atogepant for the prevention of episodic and chronic migraine. We recently disclosed positive top line results from a Phase 3 study in episodic migraine, which will support regulatory submission early next year. As a fourth pillar of growth we now have the world's leading global aesthetics franchise, which generated sales of roughly $480 million to AbbVie in second quarter. As anticipated, we saw a decline in year-over-year comparable operational growth with aesthetics health care providers closed during the initial phase of COVID. It's now been roughly two months since most major geographies have begun to reopen. And we're pleased with the strong recovery trends we're seeing. As of the end of June, the vast majority of our aesthetics accounts have reopened in the U.S. and we're seeing considerable pent-up demand. Current U.S. aesthetic revenues have recovered and are approaching 95% of pre-COVID levels. Outside the U.S., we're also seeing steady recovery trends in China and Western Europe. Current international aesthetics revenues have recovered to approximately 90% of pre-COVID levels. Overall, we're very pleased with the momentum we're seeing on our aesthetics franchise. More broadly, we see aesthetics as a durable cash pay business with an opportunity for significant market growth, as well as continued new innovation driving long-term performance. While strategically important, the acquisition of Allergan will also drive strong financial benefits. Integration has been relatively seamless and we're impressed by the caliber of talent that we've welcomed into AbbVie. We remain on track with our synergy target of more than $2 billion in expense rationalization by the third year from transaction closing, which Rob will discuss further in his prepared remarks here momentarily. When you take these synergies into consideration along with the continued P&L leverage from our expected sales growth, we expect further operating margin expansion over the next couple of years. While the COVID crisis remains a fluid situation, our business continues to remain resilient and demonstrate strong underlying growth. Although we continue to carefully watch COVID-related events in the U.S., we're pleased with our recent business trends and the progress we're making towards recovery. And we expect performance will continue to ramp to normalized levels over the course of the second half of 2020. With these current assumptions and based on our recent outperformance of our base business, today we're issuing full year 2020 adjusted earnings per share guidance for our new combined company of $10.35 to $10.45, reflecting growth of 16.3% at the midpoint. This guidance assumes $0.70 of net accretion from the Allergan transaction in 2020, which represents 11% accretion on an annualized basis ahead of our initial projections for the transaction despite the COVID impact that I outlined earlier. Overall, we continue to see good momentum across our total portfolio and across our pipeline. We reported a very strong second quarter performance and remain encouraged by the recent recovery trends, which are faster than we expected. We continue to expect the COVID pandemic will have a transient impact on our business with further recovery continuing through the second half of 2020. With the closing of the Allergan transaction, AbbVie is well-positioned for enhanced long-term growth potential, a growing dividend, rapid debt repayment and strong investment in innovation across our therapeutic categories. With that, I'll turn the call over to Mike. Mike? Michael Severino: Thank you Rick. We had a very productive quarter with continued progress across all stages of our pipeline. Additionally with the recent closing of the Allergan acquisition, we added promising pipeline assets in the areas of aesthetics and neuroscience. We look forward to sharing updates as those programs progress through development. In immunology, we continue to advance our programs for RINVOQ and SKYRIZI in several new disease areas. This year, we intend to submit regulatory applications for three additional indications for RINVOQ. In June, we submitted applications for RINVOQ in psoriatic arthritis. And we expect to file applications for atopic dermatitis and ankylosing spondylitis later this year. We also recently reported topline results from our three registrational trials for RINVOQ in atopic dermatitis. Two of these Phase III studies Measure Up 1 and Measure Up 2 evaluated RINVOQ as a monotherapy for the treatment of adolescent and adult subjects with moderate to severe atopic dermatitis for candidates for systemic therapy. In the Measure Up one and Measure Up two studies, both doses of RINVOQ met all primary and secondary endpoints, demonstrating significant improvement in skin clearance and itch compared to placebo. In Measure Up 1, roughly 70% of patients receiving the 15-milligram dose and 80% of patients on the 30-milligram dose achieved a 75% or greater improvement in skin lesions by week 16. We saw a similar rates of skin clearance in the Measure Up two study, with roughly 60% of patients receiving the low dose and 73% of patients on the high dose, achieving a 75% or greater improvement by week 16. We also saw very rapid responses in these studies with clinically meaningful reductions in itch observed as early as one day after the first dose in patients receiving 30 milligrams and two days after the first dose in patients receiving 15 milligrams in both studies. We also saw very strong results in our third registrational trial, the AD Up study which evaluated RINVOQ in combination with topical corticosteroids. Similar to the results from the two Measure Up trials, RINVOQ met all primary and secondary endpoints in the AD Up study with patients who received RINVOQ showing significant improvements in skin clearance and reduction in itch compared to patients receiving placebo plus topical steroids following 16 weeks of treatment. Treatment with RINVOQ also led to a significant increase in the number of steroid-free days. And more patients receiving RINVOQ were able to stop topical corticosteroids altogether. We're very encouraged by both the level of efficacy and the safety profile we've seen across all three Phase III atopic dermatitis studies. And we remain very confident that RINVOQ has the potential to provide a strong benefit-risk profile in moderate to severe atopic dermatitis. In addition to these three registrational studies, we are also evaluating RINVOQ in a head-to-head Phase III trial against dupilumab and expect to see data from this study later this year. In the area of inflammatory bowel disease, our Phase III program for RINVOQ in ulcerative colitis is progressing ahead of schedule. And we now expect to see topline data from the first Phase III induction study later this year. We also recently reported topline results from a proof-of-concept study, evaluating our novel TNF steroid conjugate ABBV-3373 in RA. In this study, our goal is to drive a greater reduction in disease activity beyond the levels that can be achieved with HUMIRA or other high-efficacy agents such as RINVOQ. To achieve adequate statistical power, we used preplanned historical HUMIRA data in combination with in-trial data when comparing ABBV-3373 to HUMIRA. The study used two analyses for the primary endpoint which evaluated improvement from baseline in DAS28 score. The first analysis used a propensity matching strategy to compare 3373 with historical HUMIRA data. This analysis showed a greater change in DAS28 from baseline to week 12 for 3373 compared to the prespecified HUMIRA data. The second analysis used the Bayesian approach to compare 3373 to a combined in-trial and historical HUMIRA data set. And this analysis predicted with a 90% probability that 3373 was associated with a greater improvement in DAS28. Based on these encouraging results, we plan to advance the TNF steroid conjugate program in RA with a Phase IIb dose-ranging study expected to begin in the first half of 2021. We also plan to begin clinical studies next year in other immune-mediated diseases. Also, in the area of immunology we're making good progress advancing the programs for SKYRIZI in new disease areas. We expect to see data from Phase III studies in psoriatic arthritis later this year and in Crohn's disease at the end of this year or early next year, with regulatory submissions for both indications expected in 2021. In oncology, we continue to advance our hem/onc strategy with several important data readouts and study starts occurring this year. We've established a leading hem/onc portfolio with IMBRUVICA and VENCLEXTA in areas such as CLL and AML. And we will continue to generate data to demonstrate the utility of both drugs across a wide range of patient populations and cancer types. At the recent EHA Congress, detailed results from the Phase III VIALE-A study were reported which showed the treatment with a combination of VENCLEXTA plus azacitidine resulted in a 34% reduction in the risk of death compared to azacitidine plus placebo in AML patients who are ineligible for intensive chemotherapy. The median overall survival for patients in the VENCLEXTA arm was 14.7 months versus 9.6 months in the placebo arm. Patients in the VENCLEXTA arm also showed more than double the rate of composite complete remission compared to those treated with azacitidine alone. This filing is currently being reviewed by the FDA under the real-time oncology review program in Project Orbis. To-date, the AML program has focused on VENCLEXTA's use as a frontline treatment in transplant-ineligible patients. This year, we are expanding the program into other patient segments with the goal of establishing VENCLEXTA as a gold standard across the AML patient spectrum. Earlier this year, we initiated two Phase III studies, evaluating VENCLEXTA as a maintenance therapy in AML. One trial in fit patients with AML who have received stem cell transplant, but remain at high-risk for relapse; and a second trial, in patients with AML who are in first remission after receiving conventional induction and consolidation chemotherapies. In addition, building upon the survival advantage observed in the transplant-ineligible population, we are planning to initiate a new randomized study later this year testing VENCLEXTA in combination with intensive chemotherapy in patients who are eligible for more intensive induction regimens. Our comprehensive development program will position VENCLEXTA as a foundation for combination therapies in AML across all patient segments We also recently announced a broad oncology collaboration with Genmab to jointly develop and commercialize three next-generation bispecific antibody products and establish a discovery collaboration to create additional differentiated antibody-based therapeutics for cancer. The lead asset in this partnership epcoritamab a CD3xCD20 bispecific antibody has demonstrated a strong efficacy profile, favorable safety and a more convenient dosing regimen in early phase trials. We believe epcoritamab has the potential to become a best-in-class therapy across a number of B-cell malignancies, including diffuse large B-cell lymphoma and follicular lymphoma. And we are rapidly advancing it to Phase III trials. And lastly a few updates from other areas of our pipeline. We previously presented positive progression-free survival data from two Phase III studies for veliparib in frontline ovarian cancer and BRCA breast cancer. Based on developments in the field and additional discussions with the FDA, we will not be submitting regulatory applications without mature overall survival data. We will continue to follow patients in the ongoing trials as overall survival data mature. In Eye care, we recently announced receipt of a complete response letter from the FDA for the abicipar BLA. The CRL indicated that the rate of intraocular inflammation observed in the Phase III program, resulted in an unfavorable benefit-risk ratio. We are currently reviewing the abicipar program to determine next steps and will provide updates as they become available. In women's health, in the quarter we received FDA approval of ORIAHNN as the first nonsurgical oral treatment for the management of heavy menstrual bleeding associated with uterine fibroids in premenopausal women. This new nonsurgical treatment represents an important therapeutic option for women suffering from uterine fibroids. And in neuroscience, we recently reported top line results from a Phase III study evaluating atogepant for the prevention of episodic migraine. In this study all three doses of atogepant met the primary endpoint evaluating the change from baseline in mean monthly migraine days across the 12-week treatment period. The two higher doses, 30 milligrams and 60 milligrams also met all secondary endpoints, while the 10-milligram dose met four out of six of the secondaries. Allergan had previously reported positive results from one registration-enabling study. And following this second positive study, we plan to submit our regulatory applications in episodic migraine prevention in the first quarter of 2021. In summary, we've seen tremendous progress across all stages of our pipeline in the first half of the year and we remain on-track for further advancements in the remainder of 2020. With that I'll turn the call over to Rob for additional comments on our second quarter performance and financial outlook. Rob? Rob Michael: Thank you, Mike. Starting with second quarter results, we delivered top and bottom line performance ahead of expectations. We reported adjusted earnings per share of $2.34 above our guidance midpoint by $0.21. This includes $0.10 of stronger performance from legacy AbbVie and $0.11 of accretion from Allergan. Total net revenues were $10.4 billion, including $2 billion in sales contribution from the Allergan portfolio. Legacy AbbVie was approximately $300 million ahead of our stand-alone sales guidance driven by RINVOQ, SKYRIZI and HUMIRA. COVID-related inventory stocking for the first quarter largely reversed as expected. U.S. HUMIRA sales were approximately $4 billion ahead of expectations due to the lower impact from COVID on continuing patient prescriptions. Wholesaler inventory levels remained below 0.5 month in the quarter. International HUMIRA sales were $863 million, down 17.4% operationally reflecting biosimilar competition across Europe and other international markets and ahead of our expectations. SKYRIZI global sales were $330 million with continued strong U.S. in-play market share. We also continue to see robust demand for RINVOQ with sales of $149 million in the quarter and a rapid increase in U.S. in-play market share. Hematologic oncology global sales were nearly $1.6 billion, up 25.8% on an operational basis with continued strong performance of both IMBRUVICA and VENCLEXTA. IMBRUVICA global net revenues were approximately $1.3 billion, up 17.2% driven by continued strong performance in CLL. VENCLEXTA revenues were $303 million with strong demand across all approved indications. Global MAVYRET sales were $376 million down 51.4% on an operational basis as treated patient volumes have declined during the COVID pandemic. Allergan Aesthetics contributed sales of $481 million in the quarter. BOTOX Cosmetic with sales of $226 million and JUVÉDERM with sales of $113 million are both seeing a faster-than-expected recovery from the COVID pandemic. Neuroscience global revenues were $734 million. These results were led by BOTOX Therapeutic VRAYLAR and UBRELVY with combined sales of more than $500 million. We also saw a significant contribution from our eye care business which had global sales of $417 million. Turning now to the P&L profile for the second quarter. Adjusted gross margin was 82.8% of sales adjusted, R&D investment was 12.8% of sales and adjusted SG&A expense was 22.9% of sales. The adjusted operating margin ratio was 47% of sales including a negative impact of 70 basis points due to the reversal of COVID-related inventory stocking from the first quarter. Adjusted net interest expense was $484 million and the adjusted tax rate was 11.4%. Today we are issuing combined company guidance for the first time. As Rick previously discussed, we are closely monitoring the impact of the COVID pandemic and have factored the latest trends into our updated forecast. We now expect full year adjusted earnings per share between $10.35 and $10.45 including $0.70 of accretion from the Allergan transaction. which represents an annualized contribution of 11%. Excluded from this guidance is $6.23 of known intangible amortization and specified items. This guidance now contemplates full year revenue of approximately $45.5 billion. At current rates, we now expect foreign exchange to have a 30 basis point unfavorable impact on full year reported sales growth. Included in this revenue guidance are the following updated full year assumptions. We now expect U.S. HUMIRA sales growth of approximately 8%. We now expect international HUMIRA sales of approximately $3.5 billion. For RINVOQ we now expect global revenues of approximately $600 million. For global HCV, we now expect sales of approximately $2.1 billion as treatments remain below pre-COVID levels. For aesthetics, we expect global sales of approximately $2.4 billion, including approximately $1 billion from BOTOX Cosmetic and approximately $650 million from JUVÉDERM. For neuroscience, we expect global sales of approximately $3.5 billion, including approximately $1.4 billion from BOTOX Therapeutic and approximately $950 million from VRAYLAR. For eye care, we expect global revenues of approximately $2.1 billion, including approximately $700 million from RESTASIS, which assumes no generic competition in 2020. And for women's health, we expect global revenues of approximately $700 million. All other full year product guidance assumptions remain unchanged. Moving to the P&L. We now forecast adjusted gross margin just above 82% of sales, adjusted R&D investment to be approximately $5.8 billion, adjusted SG&A expense to be approximately $9.9 billion, and adjusted operating margin of approximately 48% of sales. This P&L guidance includes approximately $600 million in expense synergies for the partial year in 2020. We remain on track to deliver greater than $2 billion in expense synergies by 2022. We now expect adjusted net interest expense of approximately $2 billion, which includes the cost of financing the Allergan transaction. We now model a non-GAAP tax rate of just above 11% for the newly combined company. Finally, we now expect our full year average share count to approach 1.7 billion shares, including the equity issue to finance the Allergan acquisition. As we look ahead to the third quarter, we anticipate adjusted revenue of approximately $12.8 billion. At current rates, we expect foreign exchange to have a modest unfavorable impact on reported sales growth. We are forecasting an adjusted operating margin ratio of just above 48% of sales. We model a non-GAAP tax rate of 11.6%, and we expect the average share count to approach 1.8 billion shares. We expect adjusted earnings per share between $2.73 and $2.77, excluding approximately $1.59 of known intangible amortization and specified items. AbbVie remains well positioned to execute on our capital allocation priorities, including rapidly paying down debt, supporting a strong and growing dividend, and pursuing additional innovative mid to late-stage pipeline assets. We generated $6.9 billion of operating cash flow in the first half of the year. And our cash balance at the end of June was $6 billion. We are on track to pay down $15 billion to $18 billion of combined company debt by the end of 2021, of which nearly $7 billion has already been repaid. We expect to achieve a net debt-to-EBITDA ratio of 2.5 times by the end of 2021 with further deleveraging through 2023. In closing, AbbVie's performance and financial condition remain strong. We are very pleased with the momentum of the business heading into the second half of 2020. With that, I'll turn the call back over to Liz. Liz Shea: Thanks Rob. We will now open the call for questions. Operator, first question please. Operator: Thank you. [Operator Instructions] Our first question today is from Randall Stanicky from RBC Capital Markets. Randall Stanicky: Great. Thanks guys. I just have two one for Rick and one for Rob. Rick, a bigger-picture question a huge part of the AbbVie story is… Liz Shea: Randall, sorry to interrupt. We can't hear you very well. Is there any way you can turn up your mic or speak up? Randall Stanicky: Great. Is that better? Liz Shea: Quiet clear. Yes. Rick Gonzalez: It's okay. Randall Stanicky: Great. Rick I wanted to ask a big part of the AbbVie story is growth on the other side of HUMIRA in 2023. There's still some trepidation with -- from investors in getting comfortable with the step-down. What would you say to those investors to get people comfortable that there's a growth story on the other side of HUMIRA? And what do you need to do specifically between now and then strategically to position the business for that? Rick Gonzalez: Okay. Randall, did you have a second question? Or is that… Randall Stanicky: Yes. The second question I'll ask it upfront for Rob. Just if you could help us understand the steady state the run rate for R&D. I think you said $5.8 billion for this year that will go higher on an annualized basis. But you're also pulling $1 billion of R&D synergies out of that as well. Rick Gonzalez: Okay. I'll cover your first question, Randall, and then Rob can jump in and talk through the R&D funding question that you had. So, look, I think it's a great question. It is one that obviously the vast majority of investors are interested in. We have described I think to investors the rationale of why we were excited about doing the Allergan transaction. It obviously gives us a tremendous amount of ability to be able to manage our way through the loss of exclusivity in the U.S. of HUMIRA. It provides us with two more major growth franchises for the company to help drive growth. And it allows us to continue to invest aggressively both in internal R&D as well as external. And so I think it provides the framework to allow us to continue to perform, as we have performed over the last number of years. I mean, clearly, we have -- we certainly have a track record of showing that we can grow this business and we can build on this business. We've demonstrated that since 2013 when we spun out. So what makes me excited and what makes me comfortable that I can ultimately grow the business through the LOE? I think it starts with, look, we have six, yes, six major growth assets in our business today, if you step back and you look at them, six medicines that have tremendous opportunity to be able to grow: SKYRIZI, RINVOQ, IMBRUVICA, VENCLEXTA, VRAYLAR, UBRELVY. We'll probably have atogepant here in the not-too-distant future. So we'll have a seventh asset all in markets that have a significant opportunity to be able to grow. When I look at our R&D productivity both in the indication expansion area as well as new assets, and I'll talk about that here in a second, I'm very comfortable with our ability to be able to continue to drive the pipeline. When you look at the projections that we made for RINVOQ and SKYRIZI as an example, when we made those projections a year or two ago, those peak projections for 2025, we based those projections on the fact that those assets had to achieve roughly high single-digit market share positions. As we mentioned right now if you look at SKYRIZI, it's achieving in-play share of 30%. RINVOQ has really stood up and rapidly started to capture share. It's at 15% and growing at a very aggressive clip. I would predict that it will quickly become the in-play market leader above HUMIRA here in the not-too-distant future. But they're already significantly above what those estimates were. The longer you stay at in-play shares that look like that obviously the greater you're going to exceed that. If you get to 20% instead of high single-digits, obviously, the revenue will be approximately two times what we had originally projected. So that gives me a high level of comfort. When I look at VENCLEXTA as an example there's still a significant opportunity to grow there. If we get an indication expansion both broadening AML as well as the t(11;14) in multiple myeloma those are two significant opportunities that we'll continue to be able to drive growth. IMBRUVICA still has significant opportunity to be able to drive growth. When I look at VRAYLAR as an example, that's a very interesting asset, has a great profile in that market, the drug does. It's obviously growing significantly. I mean it's been growing now at the rate of about 80% to 90% year-over-year. There's still plenty of room to grow in bipolar and schizophrenia. And if one of those two Phase III studies plays out effectively, MDD will be a very large additional indication which will allow us to be able to drive significant growth there. And then there's the migraine franchise. I think migraine is something that's underappreciated. If you look at the penetration right now of oral agents in the acute area, it's running about 12% to 14% of total scripts. So, obviously, there's a significant opportunity to be able to continue to expand that market. We think we have the asset to be able to do that. And obviously, we think we have the promotional ability to do it. So, I think we have the tools right now to be able to drive significant growth through the LOE. On the other side of the LOE, obviously, our pipeline will continue to play out with the additional indications. You're starting to see assets like our TNF steroid. Of all I think the Genmab collaboration is an important collaboration to continue to build out. Our hem/onc can potentially sell two more platforms. And so there's a lot of exciting opportunities. So, I feel very confident in one how the business is running now despite all of the disruption associated with COVID. But I look at the part of the business that we control directly I feel very good about how the business is running. And so I believe we will navigate our way through it. And I think as we get a little closer investors will gain an even greater appreciation of that. Rob Michael: So, Randall this is Rob. On your question on R&D, so if you think through the partial year synergies the $600 million, about $400 million of that comes from R&D. And by 2022, about 50% of the greater than $2 billion in synergies will come from R&D. So, while I would expect the expenses to annualize obviously with the partial year close we'll also see those synergies ramp up. So, the best way to think about it is a steady-state R&D level in the $6 billion range. Randall Stanicky: Great. Thanks. Liz Shea: Thanks Randall. Operator, next question please. Operator: Thank you. Our next question is from Navin Jacob from UBS. Navin Jacob: Hi, thanks for taking the question. Just wanted to expand on some of the opportunities that Rick had just mentioned. Liz Shea: Again Navin, can you speak up a little bit? Rick Gonzalez: Well, let's see if we can turn our end up. Navin Jacob: Sure. So, is this okay? Can you hear me okay? Rick Gonzalez: That's better. Liz Shea: Better. Thank you. Navin Jacob: Okay. I will yell. So, with regard to-- Rick Gonzalez: We turned our end up. So, you don't need to yell. Navin Jacob: All right. Fair enough. With regards to the VENCLEXTA opportunity in multiple myeloma the CANOVA trial wondering if you could give us an update there and how large could that potential opportunity be. Obviously, relapsed/refractory multiple myeloma is pretty competitive. So, just wondering what sort of -- how we should be thinking about that where that excitement is coming from. And then if you could remind us also about your subcutaneous version -- pump version of DUOPA that's supposed to read out in the first half of 2021. How should we be thinking about that opportunity? Could that be a blockbuster opportunity? Michael Severino: This is Mike. I'll take those. With respect to VENCLEXTA we see very real potential in the t(11;14) multiple myeloma population. If we look across our trials early phase trials and then some set analyses of later phase trials where we have data from t(11;14), we see very consistent responses. We see high response rates and we see long progression-free survival in the t(11;14) population. And that makes sense because that t(11;14) population has a transformed cell that has a B-cell-like phenotype and it's BCL-2 high. So, it would be expected to be uniquely sensitive to VENCLEXTA and to BCL-2 inhibition. So, we have the Phase III study well underway now. It's an event-driven trial. But we would hope to have data in the near future in 2021. And that study is designed to confirm those earlier observations. In terms of how large an opportunity it can be, the t(11;14) population is about 20% of multiple myeloma. And multiple myeloma is a big indication. So, 20% of that is a lot. Now, as you mentioned it's becoming a competitive space. But one of the advantages of having a biomarker-driven therapy is that we can identify and physicians can identify in practice what patients are likely to respond to VENCLEXTA. So, we'll know what a VENCLEXTA patient looks like. And we think that will be a real opportunity and a real advantage. So, we're very optimistic about that aspect of the program and we think it represents an important additional role for VENCLEXTA. With respect to 951, that is a program that's designed to deliver DUOPA-like efficacy through a subcutaneous insulin pump-like device. And so to do that we had to develop two novel prodrugs. These are NMEs that are rapidly converted to the active agents in circulation. And they allow delivery of levodopa and carbidopa ultimately through this insulin pump-like device that you just can't do with the parent compounds because of their physical properties and chemical limitations and local tolerability limitations. So, it really does represent a real breakthrough. What we know about the efficacy of DUOPA is that it is very, very strong. It really is transformational. But it takes a lot to get that efficacy. Patients have to have a gastric tube placed to then thread it down into the small bowel. They have to maintain that. So, this is a much more patient-accessible patient-friendly if you will way to deliver the same sort of efficacy. And so we think that has a potential to really expand the number of patients who would be willing to consider a therapy such as 951 and it's a big market. If you look at DUOPA despite all the limitations, it's doing about $0.5 billion in sales. If you look at deep brain stimulation, there's also considerable use. In aggregate, this market today is well over $1 billion, probably $1.5 billion. And not all patients who would qualify by their patient profile are willing to undergo these therapies. So, we think that 951 can be a very real opportunity and can be quite substantial. Liz Shea: Thanks Navin. Operator, next question please. Operator: Thank you. And our next question is from Chris Schott from JPMorgan. Chris Schott: Great. Thanks so much for the questions. So, just two for me. The first can you just elaborate a little bit more about how you're thinking about the size of the opportunity for RINVOQ in atopic derm now that we have the Phase III? I guess just a little bit more just how you see this fitting into the treatment paradigm. And then my second question was on the 2020 guidance. If I back out the $0.70 of Allergan accretion, it seems like the base AbbVie numbers are unchanged despite what looked like very, very strong results in the first half of the year. So, just help me understand a little bit the dynamics that are happening with that kind of underlying AbbVie set of assumptions. Thanks so much. Michael Severino: This is Mike. I'll take the first one and then I'll hand it over to Rick for the second one. With respect to atopic dermatitis, we're very pleased with the results that we demonstrated across the Phase 3 trials. They actually exceeded our expectations based on the Phase 2b results. And those 2b results were very strong and had earned us a breakthrough therapy designation. And we're pleased not only with the efficacy, but also with the safety profile. We've said for quite some time that one needs to look at the safety of a drug in the intended population. Because things like background therapies, risk factors in the population can have a substantial influence on what that profile looks like not only for the active agent, but for the comparator or for placebo. And if you look at the profile in the AD studies, it looks very favorable to our eye. And these were substantial studies and a substantial program overall. This wasn't a quick study to get an indication expansion. We ran a Phase 3 program for atopic dermatitis that could standalone for an additional submission. So we think that very strong data package will be a real advantage when we bring this indication to market. If you look at the size of the market overall, I think, it's been underappreciated for years. Now that's changing now. There are a large number of patients who would be eligible for systemic therapy. Obviously, dupilumab is off to a good start over the past several years in that indication. But if you look at their efficacy only about half of patients achieve an adequate response if you consider that adequate response in EASI 75. And so in our study we drove very good numbers there higher than that roughly 50% albeit there through cross-trial comparisons. So we think that there is a real opportunity for a high-efficacy agent in this space. And so it really can play on both ends of the spectrum. Patients who don't achieve an adequate response with earlier therapies this is an obvious choice. But with the efficacy and the safety profile that we've observed, we see no reason why it wouldn't be used upfront as well. And of course, we'll have head-to-head data against dupilumab later on this year as we said in our prepared remarks. Rob Michael: So Chris, this is Rob. I'll take your question on guidance. So if you take that $0.70 of accretion and you back-off the midpoint of $10.40 it gives you a standalone of $9.70 EPS, which is $0.04 higher than our previous guidance. And it's really driven by the sales changes that we've made today. So for U.S. HUMIRA we took that up 1%, which equals about $150 million because we're seeing less impact of COVID on continuing patients. HUMIRA OUS we've taken up $100 million. We're seeing less erosion than we initially had planned. On RINVOQ that's up $100 million as well really driven by the rapid in-play share that we're seeing. And that's partially offset by MAVYRET as we've seen the market really decline during COVID. But net-net revenue is up about $150 million EPS up $0.04 versus our previous guidance for stand-alone AbbVie. Rick Gonzalez: And the only thing I'd add on that is obviously we were more favorable on base AbbVie in the quarter than the $0.04. But there's still uncertainty as it relates to COVID. And so we're keeping some coverage there to see how things play out in the third quarter. Liz Shea: Thanks, Chris. Operator, next question please. Operator: Thank you. And our next question is from Steve Scala from Cowen. Steve Scala: Thank you. First congratulations on delivering ahead of expectations in the midst of a major integration, new launches and a global pandemic. It's really impressive. Rick you stated that the impact of the pandemic was less than expected. That certainly hasn't been the case at other companies. You also said that you're seeing recovery in the aesthetics portfolio, which sounds as though it snapped back faster than the legacy AbbVie. So I'm just curious to what do you attribute these dynamics? And do you expect the second half of the year to look more like the first half or more like May and June relative to patient volumes, clinic traffic and so forth? And then secondly, you stated that you expect margin improvement over the next few years. Could you provide some parameters around that expectation? Thank you. Rick Gonzalez: Okay. So this is Rick. I'll take the first one. Your observation is correct. So I think the way to think about it is that both in the second quarter many of the assets didn't drop as far as we expected. That was part of the favorability. I'd say that was particularly, the case in a number of areas in the legacy AbbVie portfolio associated with the business. On the aesthetics it is pretty much the way you're describing it. What we saw happening in the aesthetics business and to a very similar extent to BOTOX Therapeutic is that we saw a rapid drop in the case of aesthetics as those practices virtually closed. I'd say almost all if not all of the practices had closed. So aesthetic revenues dropped significantly for a period of time in that mid-April time frame. As we started to see geographies remove the shelter-in-place orders around the U.S., we saw the aesthetics practices quickly put in place safety measures to be able to allow patients to come back into their offices. And I'd say the vast majority of those practices ramped back up and went back into doing procedures fairly quickly. As we approached that mid-May time frame we actually saw -- let's take BOTOX as an example. And BOTOX would be the leading indicator because it's the procedure -- BOTOX Cosmetic it is the procedure that people would go to first. It ramped back up went well over 100% of pre-COVID levels to around 120% 125%. And then it and that was obviously pent-up demand that was coming back into the channel so patients returned quickly. And then as that pent-up demand started to burn off as we got through June, you started to see it drop back down. And now it's settled in sort of in the mid-90s right now. We think it will reach -- it will stabilize back up over the course of third quarter back close to pre-COVID levels and then start growing again. And so I can tell you I'm extremely pleased with how both aesthetics and BOTOX Therapeutics had returned. I think it's a testament of those brands and those patients. As far as the assumptions we made in the second half obviously, we're assuming the second half performs a lot better than the first half. We're not assuming any kind of a broad-based shelter in-place activity. And we'll continue to see more and more patients come back into physicians offices. On the AbbVie side of the business, we are monitoring those patients by individual practice. It's appropriate for our particular businesses. And I'd say for the most part they are returning close to pre-COVID levels. They do vary a little bit by specialty. As an example, rheum and GI have come back faster than medical derm has. But medical derm has returned as well to some extent and we're continuing to see it return. Oncology practices in certain conditions we've seen -- we saw some tailing off of CLL treatment in the second quarter. That's now returning back to normalized levels. So I think the second half will, obviously, be much better than the first half. And I think we should return to normalized levels as we proceed through the second half of the year. Rob anything you want to add on that? Rob Michael: I can answer the question on margin. Steve this is Rob. On operating margin, I think when you think about we have a partial year of synergies and a top-line that's been pressured by COVID we have a 48% operating margin profile. As you think about 2021 and 2022, we're going to obviously run -- we're going to ramp those synergies as well as we'll see top-line growth and where you'd see the P&L leverage that we've demonstrated in past year. So, I would expect to see our operating margin expand in 2021 and 2022. With 2023 with the U.S. HUMIRA event, obviously, we would see operating margin pulled back. But I would expect it to be in the 45% range, which still puts us top tier in the industry. Steve Scala: Thank you. Liz Shea: Thanks, Steve. Operator, next question please. Operator: Thank you. Our next question is from Geoffrey Porges from Leerink. Geoffrey Porges: Thank you very much. Hi, Rick congratulations. Very helpful to get the guidance. Could you talk a little bit about atogepant? Particularly what's the size of the addressable opportunity for the full portfolio of oral migraine medicines? And perhaps how much of an issue is the constipation data that you've seen? And then Rick look there's a massive economic disruption going on. And I'd be interested in your commentary about how consumers and payers are reacting to that disruption and how that's factored into your guidance. Are we seeing switches from IV to oral from generic to brand? How is that playing out in your experience and observation? Thanks. Rick Gonzalez: All right. Great. So maybe we'll have Mike talk a little bit about the profile of the drug. And what I'd say is I think we probably want to come back at a later date once we've had a little better opportunity to analyze the chronic migraine market. And it's going to depend to a great extent on the profile of the drug obviously. But it's a very large market a very significant market. And -- but Mike maybe if you want to talk a little bit about constipation and then I'll come back and talk about the payer dynamics. Michael Severino: Sure. I'll talk about atogepant. We're very pleased with the data we've seen. And of course this fits into an important part of our migraine portfolio with UBRELVY for acute migraine now with atogepant with two data readouts in episodic migraine and an ongoing program in chronic migraine. And, of course, there's BOTOX Therapeutic in chronic migraine, so it really rounds out our portfolio. The efficacy that we saw was very strong. As we said in our prepared remarks, we hit the primary and all secondary’s across the two upper doses and the primary and four out of six secondary’s for the lowest dose studied. So that is an efficacy profile that I think exceeded our expectations going into the study. With respect to the safety, our view of the safety profile looks very favorable. The constipation that was observed in the overwhelming majority of cases was mild or moderate. It didn't limit treatment. So patients stayed on treatment. They could be managed easily with interventions like stool softeners or fiber supplementation. So we don't see it as something that is limiting particularly in light of the very strong efficacy that we have demonstrated. And the only other point I'd add is that we have a good understanding of it and it's on target. So it comes with the efficacy you get a very strong efficacy and you have this manageable tolerability profile that I described. Rick Gonzalez: Geoff on the -- on your second question, you probably recall back on our first quarter guidance when we outlined that we had built in to our forecast for the remainder of the year some impact for some channels shifting that we thought could occur due to the high unemployment. And essentially we haven't seen much of that at all. In fact I would tell you, we haven't seen any of it to any material effect right now. And one of the things that we do to watch that carefully is our PAP program. We've been advertising extensively to consumers to make sure that they know if they lost their insurance or they lost their jobs and they don't have insurance coverage and they can't afford their AbbVie medicines to come to us. We have a very extensive patient assistance program. And we're not seeing any significant increase in those requests. It could be because of the furloughs. We're not 100% sure yet. And potentially we could see some increase as we go further here depending upon what happens with stimulus programs going forward. We have still maintained some level of coverage in our forecast that we're providing now. So we believe we have sufficient coverage to deal with it and we'll just have to see how it sorts itself out. Liz Shea: Thanks, Geoffrey. Operator, next question please. Operator: Thank you. Our next question is from Vamil Divan from Mizuho. Vamil Divan: Hi, great. Thank you so much for taking my question. Maybe just to continue on the migraine question. You mentioned UBRELVY and the potential there. Can you maybe just talk a little bit about the net pricing that you're thinking about in that space? I guess, maybe relative to the injectable antibodies that are helpful for prevention already there's only the two players it sounds like here between you and Biohaven -- or on the injectable side. So just trying to get a sense how you see this pricing dynamic play out? We're getting a lot of questions on that front. And then maybe for Rick I'm just curious around some of the executive orders we've seen on the drug pricing side for the administration. I don't know if I may have missed your comments earlier but just curious if you have any additional thoughts about what you heard from some of your peers on this issue this week on their calls. But every company, obviously, has a different product mix and maybe some different perspectives. So curious what your views are especially as it relates to the rebate rule order? Thanks so much. Rick Gonzalez: Right. Okay. I'll cover both of those questions. So on migraine, I mean obviously we don't publicly talk about our net price. We have fairly significant managed care coverage on the asset already. I think it's about 70%. And obviously it had to be priced in a way that was appropriate to be able to get that level of coverage. This is a market where market expansion is important. As I said, I think if you look at the penetration right now of acute migraine products against the -- or at least the oral CGRPs against the total migraine acute market, it's about 12% penetrated right now. So there's a significant opportunity to be able to grow that market. And it gives you some idea of the magnitude of this market. So you certainly want it to be in a position where it can have access to be able to allow patients, to be able to use the products. These products certainly have demonstrated that they have strong demand from patients to be able to provide them appropriate levels of relief. And so I would just tell you that that's an important aspect of the overall strategy here is to be able to grow this market over the long term. On the executive orders as you have probably seen they're pretty high level at this point and they provide some high-level direction. So I think, until we see them, sort of, start to sort out I think it's a little difficult to give you a lot of specificity around what they look like. Now I will say, if I look at them in the backdrop of AbbVie's business, I would say, I don't think they will have a significant impact on our business. If you look at Part B as an example, we have a very small Part B business. I think it's around 2% to 3%. 3%, I guess, is the right number now. So it's a very insignificant part. If you look at the importation bill or executive order, it's very similar to what's already been given out to the states. And it excludes biologics, which obviously is an important part of our business. If you look at the third one, it's insulin and EpiPen. We're not in that business. And then the rebate rule. Certainly, as we look at rebates, we're absolutely supportive of patients being able to get the benefit of the discount associated with the rebate or discount. As we've said many times before for us whether it's a rebate or a discount is not very material to us. What I would say is when I look at that executive order it does say that you have to be able to implement it without increasing premiums. And everything I know about how rebates are redistributed, I would say that I think that that will be difficult to do. So I don't know how that will ultimately play out. So -- I mean at a high-level look at what we think about them right now. But I think right now, I wouldn't anticipate that they have a significant risk associated with AbbVie. Liz Shea: Thanks, Vamil. Operator, next question please. Operator: Thank you. And our next question is from David Risinger from Morgan Stanley. David Risinger: Great. Thanks so much. And congrats on all of the encouraging updates. So first Rick, could you please discuss maybe in a little bit more detail the most significant revenue synergy opportunities you see as a result of the combination with Allergan? I know that the combined company can do more with certain franchise, but if you could put some finer points on that that would be very helpful. Then second with respect to next year's readouts, AbbVie has a very large pipeline of Phase 2 candidates with proof-of-concept readouts in 2021. But could you point us to the ones that have the biggest commercial potential? So if there is validation in 2021 what are the biggest product opportunities that we should be paying attention to? And then one little tidbit. The UBRELVY number was $22 million in the quarter. That was strong. How much stocking was in there? Thank you. Rick Gonzalez: Okay. So I'll cover the first one and then I'll have Mike cover the second and Rob can cover the third. So if I look at the business overall I said that the integration has gone very seamlessly. And I think that's a tribute to all the planning that we did. We had some extra time to be able to do it and I think that benefited us. And so I think the two organizations have come together in a way that's been quite good. Now I would say, I think, the places where we have an opportunity to be able to provide some synergy and benefit certainly when you look at our therapeutic businesses, when you look at our -- many of the tactical kinds of execution techniques that we use in the marketplace I think many of those are applicable to the Allergan therapeutic portfolio. Certainly when you look at managed care that's an area that we have demonstrated that we're quite skilled at being able to effectively manage our way through that. And then the third area, I'd say is if I look at aesthetics, aesthetics is a very attractive market. It has a significant opportunity to be able to grow that market, which I mean by bringing in more people into the market more quickly. You can do that several different ways. Obviously, some of it is driven by promotional activity. I'd say Allergan is very skilled from a social media standpoint. And I think that's an area that's probably been underfunded. Historically, it's an area that we have a high level of interest in funding to a greater extent. And we obviously have the financial wherewithal to be able to do that. The second thing is being able to bring more new innovation more rapidly into that market. And I think that's an area that we'll also be able to provide a benefit both in the way we operate R&D and the ability to be able to rapidly innovate. I think that will be a benefit to the overall business. And I think we have an opportunity to be able to accelerate the growth of that business in a meaningful way over time. And it's a market I like a lot. I think both based on demographics the cash pay aspects of it and how it responds to appropriate innovation in that market. So that's an area that I think over time you can expect us to continue to make sure that we're doing what we know how to do to be able to ultimately grow that market over the long term. Those would be some of the things I'd tell you at a high level. Mike? Michael Severino: I'll take the second question. So we do as you point out have a number of data readouts from Phase 2 studies or other proof-of-concept studies in 2021 and also in the following years in 2022 and beyond. And a number of these are very large opportunities. I'd point to our oncology programs. We have a number of immuno-oncology programs that would be large opportunities, if they hit. Our GARP program I think is a very good example of that. Our bispecifics I think are a very good example of that. We just brought in through the Genmab collaboration epcoritamab, which is a large opportunity. Obviously, that's post proof of concept. But there are two additional molecules there that are just a little bit earlier in development that could be large opportunities. We have bispecifics in BCMA more than one program that could be very large opportunities, if they were in fact best-in-class. And we think they have the potential to be best-in-class. The last thing, I would point to in oncology is our novel so targeted ADC technology with ABBV-155 being in the lead in non-small cell lung cancer. That is a BCL-XL warhead targeted by a B7-H3 antibody. If that were to hit and we'd see those data next year that would be a large opportunity. Obviously in immunology we're advancing our TNF steroid program. But I think those are data that we've already reported out. And then the last thing that, I would mention is in our neuroscience portfolio. Obviously, Alzheimer's disease if those programs were to hit they would be a very large opportunity given the enormous unmet medical need. Now obviously, in Alzheimer's disease it's higher risk higher reward. But if we got favorable data it would be a very, very meaningful opportunity. Rob Michael: And David, this is Rob. On UBRELVY, if you look at just the full quarter revenue of $27 million it really follows the prescription growth on a sequential basis. So there's really a negligible stocking impact. And we'd expect to see continued sequential growth for that product. Liz Shea: Operator, next question, please. Operator: Our next question is from Chris Raymond from Piper Sandler. Chris Raymond: Thanks. Just back to atogepant in sort of a competitive setup. So Rick I heard your comments on how this is underappreciated. We've done some checks to see, if it indicated that that's the case. And I know this – it's not approved yet. So pardon if you don't mind the commercial question here. But there's been some chatter out there especially from some Biohaven bulls that placebo-adjusted migraine days maybe don't matter as much as absolute days. And so just maybe you're in the field with UBRELVY from a rep-to-doc dialogue perspective, what do you guys see as the most important attribute especially as you'll be positioning this in the prevention setting versus subcus and the other oral therapies – or the other oral therapy that happens to be a dissolving tablet? Michael Severino: Well, this is Mike. I'll take the first part of that and then Rick may want to add. With respect to efficacy, the most important attribute is the placebo-adjusted migraine days. If one were solely to look at the total days one could conclude that placebo is in fact a good therapy for these patients, because we see reductions. And so you have to account for that. And there are differences from study-to-study based on design, population enrolled and what that placebo difference is. So it absolutely has to be taken into account. And when you look at our placebo-adjusted results, they're very strong. They range between 1.2 and 1.7 days, which in this disease area is a very meaningful response rate. And it's higher than what has been reported with other oral agents obviously with the caveat of a cross-trial comparison. So we think that on the most important efficacy parameter we performed very, very well. And of course we've hit all the secondaries across two of those three doses as I've described. And as we get the data out into the public domain you'll get more color on that. Rick Gonzalez: Yeah. I would just reiterate what Mike says. I mean, physicians are well skilled in understanding what placebo rates are. And I just don't even think, it's appropriate not to represent a product's efficacy without looking at the placebo rate. So, I mean, I think that will be the way doctors look at it. And I think that is the way the products will be marketed. And certainly, if I had a lower rate, I may have an interest in that. But at the end of the day I think that is the appropriate way to look at it. Chris Raymond: Thank you. Liz Shea : Thanks, Chris. Operator, next question please. Operator: Thank you. Our next question is from Tim Anderson from Wolfe Research. Tim Anderson: Hi. Thank you. A few pipeline questions please. On the TNF steroid conjugate some KOLs have a mixed view of that approach. For those that are skeptical what's the most common reason that you hear? Second question on VRAYLAR, what are your odds of regulatory success in depression? Even just qualitatively is this a high-risk, medium-risk or low-risk endeavor? And then can you clarify why your Genmab CD3xCD20 would be best-in-class? Michael Severino: Okay. I'll take those questions. With respect to the TNF steroid conjugate what I would say is, it's important to keep in mind that this is an early phase trial and this was intended to be a proof-of-concept trial. One can't do a fully powered head-to-head against an active competitor like HUMIRA in Phase I or Phase II because that typically requires or always requires essentially a large Phase III study. Head-to-head studies are often amongst the largest studies in a Phase III program. So what we were looking for was evidence to support the profile that I described which is that we had a high probability of success in those trials downstream. If folks have a mixed view then what we hear is they'd like to see those later data. And what I would say is, we're well on the path to generating them. We're pleased with the results that we've seen and we think it's a very promising platform and we're going to be advancing into larger-scale trials and people will get the data that they're looking for. With respect to VRAYLAR in the adjunctive treatment of major depressive disorder, I think the question was how would I characterize the risk there? There already is one positive study in hand. And so of the two studies that are underway, we would need one additional study to read out positive to support the indication. I think that historically this has been a challenging indication. But I think the -- both the rationale and the data from earlier studies in the VRAYLAR program are strong. So I would probably put it in the moderate probability range. We didn't build it into our model. Our success with VRAYLAR was not dependent on it. But we think it represents a very attractive upside opportunity if in fact it hits. And with respect to why Genmab CD3xCD20 has the potential to be best-in-class? I would point to two things. One is the efficacy data reported from the early phase trials, particularly in DLBCL, which is a very difficult-to-treat tumor type, puts it at the higher end of efficacy. And the safety profile has been very favorable in terms of what's been observed to date both with respect to cytokine release syndrome and the lack of occurrence in the early phase trials of higher-grade CRS and also with respect to the neurological symptoms that can accompany this class of therapy. So it seems to have threaded that sweet spot between achieving very strong efficacy with a good safety profile. It also has subcu administration with its existing formulation. Others are working towards that. But Genmab already has the data in hand. And the dosing schedule fits very well into the regimens that will be used in the diseases that we'd study particularly DLBCL and follicular lymphoma. So we see aggregate of that that we think gives it a very, very strong profile. Tim Anderson: Thank you. Liz Shea: Thanks, Tim. Operator, we have time for one final question please. Operator: Thank you. Our final question today is from Terence Flynn from Goldman Sachs. Terence Flynn: Great. Thanks for taking the question and congrats on the Allergan integration. You mentioned in your comments that RINVOQ uptakes accelerating here was just wondering if you could provide a little bit more color on that. Is that being driven by COVID and maybe teleprescribing having an advantage over some of the injectables? And if so, do you see that as being a durable change here as we come out of the pandemic? And then the second one I had was just on VENCLEXTA. I noticed you're running some trials for solid tumors. Maybe just remind us of the rationale here behind that approach. And how optimistic are you there as you move into later stages? Thank you. Rick Gonzalez: Okay. Thanks. I'll take the first question. Mike can cover the second one. So RINVOQ clearly has started to ramp in a fairly significant way. I think it's associated with two things. One is any time you see a pro -- it's about eight months into its launch, you typically start to see that inflection point on successful products. As you go out and you present the data to physicians and start to educate physicians and they start to get some use, you tend to see that inflection point start to happen around six months. So I think it's the natural inflection point that we would have expected if the product was being successfully accepted into the marketplace the way we hoped as a high-efficacy agent. I think there is some benefit that we're seeing during the COVID crisis that it is an oral, so it's a little easier to prescribe than an injectable might be. So we're probably getting some collateral benefit associated with that. But I don't think that's the fundamental benefit that we're seeing. Mike? Michael Severino: Right. So I'll take the question with respect to VENCLEXTA in solid tumors. I think there's two different lines of evidence. In breast cancer, there are -- there is an investigator-sponsored study that showed promise in breast cancer. And so there's a follow-up study there to confirm that. And if that were confirmed, it would be obviously a substantial opportunity given the unmet need there. And then there are other solid tumors such as both small cell lung cancer and non-small cell lung cancer where there's preclinical rationale that warrants exploration. And so I would characterize the solid tumor program as higher risk but high reward worthy of exploration. The solid tumor program in VENCLEXTA has not been baked into our thinking and isn't necessary for any of the success that we have talked about with the molecule. But if something were to hit there represents very nice upside. And I think there's enough rationale to warrant the exploration. Liz Shea: Okay. Thank you. So that concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. Operator: Thank you. This does conclude today's conference. You may disconnect at this time.	[ { "speaker": "Operator", "text": "Good morning. And thank you for standing by. Welcome to the AbbVie Second Quarter 2020 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion. [Operator Instructions] I would now like to introduce Ms. Liz Shea, Vice President of Investor Relations." }, { "speaker": "Liz Shea", "text": "Good morning, and thanks for joining us. Also, on the call with me today are, Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Vice Chairman and President; and Rob Michael, Executive Vice President and Chief Financial Officer. Joining us for the Q&A portion of the call is Laura Schumacher, Vice Chairman External Affairs, Chief Legal Officer and Corporate Secretary. Before we get started, I remind you that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties, including the impact of the COVID-19 pandemic on AbbVie's operations, results and financial results that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our 2019 annual report on Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today's conference call as in the past, non-GAAP financial measures will be used to help investors understand AbbVie's ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Please note that, the second quarter financial results and guidance provided on today's call for sales EPS and line items of the P&L reflect a full period of legacy AbbVie operations and a partial year of contribution from the Allergan portfolio since the transaction closed in early May of this year. In addition, we have provided a quarterly comparable historical trend analysis for key product revenues of the newly combined company, as a supplemental table in our earnings release this quarter. This table supports the comparison of sales growth on a comparable operational basis, including full quarter current year and historical results for Allergan on a pro forma basis. Comparable operational percent changes are presented at a constant – at constant currency rate. For this comparison of underlying performance, all historically reported Allergan revenues have been recast informed to conform to AbbVie's revenue recognition accounting policies, and exclude the recent divestitures of ZENPEP and VIOKACE. Following our prepared remarks, we'll take your questions. So with that, I will now turn the call over to Rick." }, { "speaker": "Rick Gonzalez", "text": "Thank you, Liz. Good morning, everyone, and thank you for joining us. Today, I'll discuss our second quarter performance and highlights. And for the first time, I'll provide our 2020 outlook for the newly combined company. Mike will then discuss recent advancements across R&D programs. And Rob, will review the quarter and our updated guidance in more detail. Following our remarks, we'll take your questions. I'd like to start off by recognizing all of our employees, including those joining AbbVie from Allergan for all of their hard work and dedication during this pandemic. The AbbVie team has been working diligently and carefully, within our facilities and remotely, to ensure that our business continues to operate properly and our patients continue to receive their medicines. Before I speak to the strong financial performance this quarter, I'd like to characterize the state of the recovery of the business from the COVID crisis. Let me start with the legacy AbbVie side of the business, which has demonstrated robust performance leading into the pandemic and has remained resilient. The impact on continuing patients for HUMIRA and new patients for RINVOQ, SKYRIZI and VENCLEXTA, were not as pronounced as we had previously anticipated. While patient flow has not recovered, in most therapeutic segments we're encouraged by the level of stabilization, and the recent positive demand trends. Overall, the legacy AbbVie business continues to perform very well, with stand-alone revenue growth in the second quarter of approximately 8.5% on an operational basis, excluding the negative impact from COVID. On the legacy Allergan side of the business, we saw significant COVID-related impacts on BOTOX Therapeutic and our aesthetics business in the second quarter. Both businesses are seeing a rapid recovery and are now performing near pre-COVID levels. Other key brands, such as, VRAYLAR and UBRELVY were impacted in a manner similar to the AbbVie-based business. And we're pleased with the recent trends and progress. Overall, COVID had a substantial impact on second quarter reported revenues with an estimated net unfavorable impact of more than $900 million. However, by the end of June the total business had recovered to more than 90% of pre-COVID levels. So I'm pleased with the resilience and the rapid recovery across our portfolio. And I'm confident in the continued strong underlying demand and performance of the combined new company. Despite the impact from COVID, we delivered a strong second quarter performance. Adjusted earnings per share of $2.34 were well above our expectations. The $0.21 beat included $0.11 of net accretion from Allergan, as well as $0.10 of favorable performance versus the midpoint of our stand-alone guidance. Total revenues were $10.4 billion, including approximately $8.4 billion of legacy AbbVie sales significantly above our expectations for the standalone portfolio with continued robust performance in both hem/onc and immunology, despite the impact from COVID. Hem/onc revenues of approximately $1.6 billion were up strong double digits again this quarter. IMBRUVICA sales grew approximately 17% on an operational basis, reflecting continued strong performance in CLL, where we remain the clear market leader. VENCLEXTA sales were up more than 80% on an operational basis with strong growth in CLL and AML. During the quarter, we also announced a strategic collaboration with Genmab to further build our oncology portfolio with a CD3xCD20 bispecific antibody. It has the potential to be a best-in-class therapy across B-cell malignancies. Our leading immunology business delivered revenues of more than $5.3 billion, reflecting growth of more than 8.5% on an operational basis. U.S. HUMIRA revenue growth remained strong, up 5% with continued demand from the large installed patient base, partially offset by the impact of COVID-19. International HUMIRA biosimilar dynamics in the quarter were better than our expectations. SKYRIZI continues to perform well and has maintained its leading in-play psoriasis patient share, which includes both new and switching patients at more than 30%. As expected, we saw modest delays to new patient starts during the quarter, as a result of the COVID-19 dynamics. However, recent prescription trends and increasing enrollment in our ambassador program two leading indicators demonstrate a strong growth trajectory and support our full year guidance of $1.4 billion. We're also seeing very encouraging trends for RINVOQ, where rheumatology office visits are approaching pre-COVID levels. RINVOQ revenues were up more than 70% on a sequential basis and currently reflect 15% in-play RA patient share, which is now nearly at parity to HUMIRA, the market leader in in-play share and above all other agents in the segment. We're also making excellent progress with our immunology pipeline, which Mike will discuss further momentarily. As I noted during the quarter, we successfully completed the acquisition of Allergan creating a stronger and a more diverse AbbVie. The transaction significantly expands and diversifies AbbVie's revenue base and complements our existing leadership positions in immunology and hematological oncology with additional growth franchises in aesthetics and neuroscience. We have growth opportunities in neuroscience with BOTOX Therapeutics, VRAYLAR and UBRELVY. And we have the leading global aesthetics business with flagship brands including BOTOX Cosmetics and JUVÉDERM. I'll start with neuroscience, which had sales of roughly $735 million to AbbVie in the second quarter. VRAYLAR continues to demonstrate rapid growth and is well on its way to surpassing $1 billion in annual revenues. Underlying demand has remained resilient despite the COVID-19 pandemic with strong double-digit growth again this quarter. We see significant room for continued expansion within VRAYLAR's existing indications bipolar disorder and schizophrenia. Major depressive disorder or MDD represents another potential large indication with two Phase 3 trials well underway. Also within neuroscience, we now have a portfolio of migraine therapies that have the potential to support long-term growth in a highly attractive and underserved market. Our migraine portfolio is anchored with BOTOX Therapeutic, which had revenues of roughly $300 million to AbbVie in the second quarter. Despite multiple new competitive entrants, BOTOX Therapeutic has largely retained its total treated patient base, a testament to its efficacy, safety and brand recognition. Like many physician-administered products, BOTOX Therapeutics saw a significant impact from COVID-19 in the second quarter with global sales down approximately 20% on a comparable operational basis. However, we're pleased by the recent data trends, which demonstrate a fast recovery and performance is now close to pre-COVID levels. The launch of UBRELVY, the first-to-market in leading oral CGRP for acute migraine is off to an excellent start. Feedback from physicians has been very positive given UBRELVY's efficacy, safety and convenient dosing profile relative to current standards of care. Commercial access for UBRELVY is now at 70%, which along with increased consumer promotion will further support the product's launch trajectory. We're also developing atogepant for the prevention of episodic and chronic migraine. We recently disclosed positive top line results from a Phase 3 study in episodic migraine, which will support regulatory submission early next year. As a fourth pillar of growth we now have the world's leading global aesthetics franchise, which generated sales of roughly $480 million to AbbVie in second quarter. As anticipated, we saw a decline in year-over-year comparable operational growth with aesthetics health care providers closed during the initial phase of COVID. It's now been roughly two months since most major geographies have begun to reopen. And we're pleased with the strong recovery trends we're seeing. As of the end of June, the vast majority of our aesthetics accounts have reopened in the U.S. and we're seeing considerable pent-up demand. Current U.S. aesthetic revenues have recovered and are approaching 95% of pre-COVID levels. Outside the U.S., we're also seeing steady recovery trends in China and Western Europe. Current international aesthetics revenues have recovered to approximately 90% of pre-COVID levels. Overall, we're very pleased with the momentum we're seeing on our aesthetics franchise. More broadly, we see aesthetics as a durable cash pay business with an opportunity for significant market growth, as well as continued new innovation driving long-term performance. While strategically important, the acquisition of Allergan will also drive strong financial benefits. Integration has been relatively seamless and we're impressed by the caliber of talent that we've welcomed into AbbVie. We remain on track with our synergy target of more than $2 billion in expense rationalization by the third year from transaction closing, which Rob will discuss further in his prepared remarks here momentarily. When you take these synergies into consideration along with the continued P&L leverage from our expected sales growth, we expect further operating margin expansion over the next couple of years. While the COVID crisis remains a fluid situation, our business continues to remain resilient and demonstrate strong underlying growth. Although we continue to carefully watch COVID-related events in the U.S., we're pleased with our recent business trends and the progress we're making towards recovery. And we expect performance will continue to ramp to normalized levels over the course of the second half of 2020. With these current assumptions and based on our recent outperformance of our base business, today we're issuing full year 2020 adjusted earnings per share guidance for our new combined company of $10.35 to $10.45, reflecting growth of 16.3% at the midpoint. This guidance assumes $0.70 of net accretion from the Allergan transaction in 2020, which represents 11% accretion on an annualized basis ahead of our initial projections for the transaction despite the COVID impact that I outlined earlier. Overall, we continue to see good momentum across our total portfolio and across our pipeline. We reported a very strong second quarter performance and remain encouraged by the recent recovery trends, which are faster than we expected. We continue to expect the COVID pandemic will have a transient impact on our business with further recovery continuing through the second half of 2020. With the closing of the Allergan transaction, AbbVie is well-positioned for enhanced long-term growth potential, a growing dividend, rapid debt repayment and strong investment in innovation across our therapeutic categories. With that, I'll turn the call over to Mike. Mike?" }, { "speaker": "Michael Severino", "text": "Thank you Rick. We had a very productive quarter with continued progress across all stages of our pipeline. Additionally with the recent closing of the Allergan acquisition, we added promising pipeline assets in the areas of aesthetics and neuroscience. We look forward to sharing updates as those programs progress through development. In immunology, we continue to advance our programs for RINVOQ and SKYRIZI in several new disease areas. This year, we intend to submit regulatory applications for three additional indications for RINVOQ. In June, we submitted applications for RINVOQ in psoriatic arthritis. And we expect to file applications for atopic dermatitis and ankylosing spondylitis later this year. We also recently reported topline results from our three registrational trials for RINVOQ in atopic dermatitis. Two of these Phase III studies Measure Up 1 and Measure Up 2 evaluated RINVOQ as a monotherapy for the treatment of adolescent and adult subjects with moderate to severe atopic dermatitis for candidates for systemic therapy. In the Measure Up one and Measure Up two studies, both doses of RINVOQ met all primary and secondary endpoints, demonstrating significant improvement in skin clearance and itch compared to placebo. In Measure Up 1, roughly 70% of patients receiving the 15-milligram dose and 80% of patients on the 30-milligram dose achieved a 75% or greater improvement in skin lesions by week 16. We saw a similar rates of skin clearance in the Measure Up two study, with roughly 60% of patients receiving the low dose and 73% of patients on the high dose, achieving a 75% or greater improvement by week 16. We also saw very rapid responses in these studies with clinically meaningful reductions in itch observed as early as one day after the first dose in patients receiving 30 milligrams and two days after the first dose in patients receiving 15 milligrams in both studies. We also saw very strong results in our third registrational trial, the AD Up study which evaluated RINVOQ in combination with topical corticosteroids. Similar to the results from the two Measure Up trials, RINVOQ met all primary and secondary endpoints in the AD Up study with patients who received RINVOQ showing significant improvements in skin clearance and reduction in itch compared to patients receiving placebo plus topical steroids following 16 weeks of treatment. Treatment with RINVOQ also led to a significant increase in the number of steroid-free days. And more patients receiving RINVOQ were able to stop topical corticosteroids altogether. We're very encouraged by both the level of efficacy and the safety profile we've seen across all three Phase III atopic dermatitis studies. And we remain very confident that RINVOQ has the potential to provide a strong benefit-risk profile in moderate to severe atopic dermatitis. In addition to these three registrational studies, we are also evaluating RINVOQ in a head-to-head Phase III trial against dupilumab and expect to see data from this study later this year. In the area of inflammatory bowel disease, our Phase III program for RINVOQ in ulcerative colitis is progressing ahead of schedule. And we now expect to see topline data from the first Phase III induction study later this year. We also recently reported topline results from a proof-of-concept study, evaluating our novel TNF steroid conjugate ABBV-3373 in RA. In this study, our goal is to drive a greater reduction in disease activity beyond the levels that can be achieved with HUMIRA or other high-efficacy agents such as RINVOQ. To achieve adequate statistical power, we used preplanned historical HUMIRA data in combination with in-trial data when comparing ABBV-3373 to HUMIRA. The study used two analyses for the primary endpoint which evaluated improvement from baseline in DAS28 score. The first analysis used a propensity matching strategy to compare 3373 with historical HUMIRA data. This analysis showed a greater change in DAS28 from baseline to week 12 for 3373 compared to the prespecified HUMIRA data. The second analysis used the Bayesian approach to compare 3373 to a combined in-trial and historical HUMIRA data set. And this analysis predicted with a 90% probability that 3373 was associated with a greater improvement in DAS28. Based on these encouraging results, we plan to advance the TNF steroid conjugate program in RA with a Phase IIb dose-ranging study expected to begin in the first half of 2021. We also plan to begin clinical studies next year in other immune-mediated diseases. Also, in the area of immunology we're making good progress advancing the programs for SKYRIZI in new disease areas. We expect to see data from Phase III studies in psoriatic arthritis later this year and in Crohn's disease at the end of this year or early next year, with regulatory submissions for both indications expected in 2021. In oncology, we continue to advance our hem/onc strategy with several important data readouts and study starts occurring this year. We've established a leading hem/onc portfolio with IMBRUVICA and VENCLEXTA in areas such as CLL and AML. And we will continue to generate data to demonstrate the utility of both drugs across a wide range of patient populations and cancer types. At the recent EHA Congress, detailed results from the Phase III VIALE-A study were reported which showed the treatment with a combination of VENCLEXTA plus azacitidine resulted in a 34% reduction in the risk of death compared to azacitidine plus placebo in AML patients who are ineligible for intensive chemotherapy. The median overall survival for patients in the VENCLEXTA arm was 14.7 months versus 9.6 months in the placebo arm. Patients in the VENCLEXTA arm also showed more than double the rate of composite complete remission compared to those treated with azacitidine alone. This filing is currently being reviewed by the FDA under the real-time oncology review program in Project Orbis. To-date, the AML program has focused on VENCLEXTA's use as a frontline treatment in transplant-ineligible patients. This year, we are expanding the program into other patient segments with the goal of establishing VENCLEXTA as a gold standard across the AML patient spectrum. Earlier this year, we initiated two Phase III studies, evaluating VENCLEXTA as a maintenance therapy in AML. One trial in fit patients with AML who have received stem cell transplant, but remain at high-risk for relapse; and a second trial, in patients with AML who are in first remission after receiving conventional induction and consolidation chemotherapies. In addition, building upon the survival advantage observed in the transplant-ineligible population, we are planning to initiate a new randomized study later this year testing VENCLEXTA in combination with intensive chemotherapy in patients who are eligible for more intensive induction regimens. Our comprehensive development program will position VENCLEXTA as a foundation for combination therapies in AML across all patient segments We also recently announced a broad oncology collaboration with Genmab to jointly develop and commercialize three next-generation bispecific antibody products and establish a discovery collaboration to create additional differentiated antibody-based therapeutics for cancer. The lead asset in this partnership epcoritamab a CD3xCD20 bispecific antibody has demonstrated a strong efficacy profile, favorable safety and a more convenient dosing regimen in early phase trials. We believe epcoritamab has the potential to become a best-in-class therapy across a number of B-cell malignancies, including diffuse large B-cell lymphoma and follicular lymphoma. And we are rapidly advancing it to Phase III trials. And lastly a few updates from other areas of our pipeline. We previously presented positive progression-free survival data from two Phase III studies for veliparib in frontline ovarian cancer and BRCA breast cancer. Based on developments in the field and additional discussions with the FDA, we will not be submitting regulatory applications without mature overall survival data. We will continue to follow patients in the ongoing trials as overall survival data mature. In Eye care, we recently announced receipt of a complete response letter from the FDA for the abicipar BLA. The CRL indicated that the rate of intraocular inflammation observed in the Phase III program, resulted in an unfavorable benefit-risk ratio. We are currently reviewing the abicipar program to determine next steps and will provide updates as they become available. In women's health, in the quarter we received FDA approval of ORIAHNN as the first nonsurgical oral treatment for the management of heavy menstrual bleeding associated with uterine fibroids in premenopausal women. This new nonsurgical treatment represents an important therapeutic option for women suffering from uterine fibroids. And in neuroscience, we recently reported top line results from a Phase III study evaluating atogepant for the prevention of episodic migraine. In this study all three doses of atogepant met the primary endpoint evaluating the change from baseline in mean monthly migraine days across the 12-week treatment period. The two higher doses, 30 milligrams and 60 milligrams also met all secondary endpoints, while the 10-milligram dose met four out of six of the secondaries. Allergan had previously reported positive results from one registration-enabling study. And following this second positive study, we plan to submit our regulatory applications in episodic migraine prevention in the first quarter of 2021. In summary, we've seen tremendous progress across all stages of our pipeline in the first half of the year and we remain on-track for further advancements in the remainder of 2020. With that I'll turn the call over to Rob for additional comments on our second quarter performance and financial outlook. Rob?" }, { "speaker": "Rob Michael", "text": "Thank you, Mike. Starting with second quarter results, we delivered top and bottom line performance ahead of expectations. We reported adjusted earnings per share of $2.34 above our guidance midpoint by $0.21. This includes $0.10 of stronger performance from legacy AbbVie and $0.11 of accretion from Allergan. Total net revenues were $10.4 billion, including $2 billion in sales contribution from the Allergan portfolio. Legacy AbbVie was approximately $300 million ahead of our stand-alone sales guidance driven by RINVOQ, SKYRIZI and HUMIRA. COVID-related inventory stocking for the first quarter largely reversed as expected. U.S. HUMIRA sales were approximately $4 billion ahead of expectations due to the lower impact from COVID on continuing patient prescriptions. Wholesaler inventory levels remained below 0.5 month in the quarter. International HUMIRA sales were $863 million, down 17.4% operationally reflecting biosimilar competition across Europe and other international markets and ahead of our expectations. SKYRIZI global sales were $330 million with continued strong U.S. in-play market share. We also continue to see robust demand for RINVOQ with sales of $149 million in the quarter and a rapid increase in U.S. in-play market share. Hematologic oncology global sales were nearly $1.6 billion, up 25.8% on an operational basis with continued strong performance of both IMBRUVICA and VENCLEXTA. IMBRUVICA global net revenues were approximately $1.3 billion, up 17.2% driven by continued strong performance in CLL. VENCLEXTA revenues were $303 million with strong demand across all approved indications. Global MAVYRET sales were $376 million down 51.4% on an operational basis as treated patient volumes have declined during the COVID pandemic. Allergan Aesthetics contributed sales of $481 million in the quarter. BOTOX Cosmetic with sales of $226 million and JUVÉDERM with sales of $113 million are both seeing a faster-than-expected recovery from the COVID pandemic. Neuroscience global revenues were $734 million. These results were led by BOTOX Therapeutic VRAYLAR and UBRELVY with combined sales of more than $500 million. We also saw a significant contribution from our eye care business which had global sales of $417 million. Turning now to the P&L profile for the second quarter. Adjusted gross margin was 82.8% of sales adjusted, R&D investment was 12.8% of sales and adjusted SG&A expense was 22.9% of sales. The adjusted operating margin ratio was 47% of sales including a negative impact of 70 basis points due to the reversal of COVID-related inventory stocking from the first quarter. Adjusted net interest expense was $484 million and the adjusted tax rate was 11.4%. Today we are issuing combined company guidance for the first time. As Rick previously discussed, we are closely monitoring the impact of the COVID pandemic and have factored the latest trends into our updated forecast. We now expect full year adjusted earnings per share between $10.35 and $10.45 including $0.70 of accretion from the Allergan transaction. which represents an annualized contribution of 11%. Excluded from this guidance is $6.23 of known intangible amortization and specified items. This guidance now contemplates full year revenue of approximately $45.5 billion. At current rates, we now expect foreign exchange to have a 30 basis point unfavorable impact on full year reported sales growth. Included in this revenue guidance are the following updated full year assumptions. We now expect U.S. HUMIRA sales growth of approximately 8%. We now expect international HUMIRA sales of approximately $3.5 billion. For RINVOQ we now expect global revenues of approximately $600 million. For global HCV, we now expect sales of approximately $2.1 billion as treatments remain below pre-COVID levels. For aesthetics, we expect global sales of approximately $2.4 billion, including approximately $1 billion from BOTOX Cosmetic and approximately $650 million from JUVÉDERM. For neuroscience, we expect global sales of approximately $3.5 billion, including approximately $1.4 billion from BOTOX Therapeutic and approximately $950 million from VRAYLAR. For eye care, we expect global revenues of approximately $2.1 billion, including approximately $700 million from RESTASIS, which assumes no generic competition in 2020. And for women's health, we expect global revenues of approximately $700 million. All other full year product guidance assumptions remain unchanged. Moving to the P&L. We now forecast adjusted gross margin just above 82% of sales, adjusted R&D investment to be approximately $5.8 billion, adjusted SG&A expense to be approximately $9.9 billion, and adjusted operating margin of approximately 48% of sales. This P&L guidance includes approximately $600 million in expense synergies for the partial year in 2020. We remain on track to deliver greater than $2 billion in expense synergies by 2022. We now expect adjusted net interest expense of approximately $2 billion, which includes the cost of financing the Allergan transaction. We now model a non-GAAP tax rate of just above 11% for the newly combined company. Finally, we now expect our full year average share count to approach 1.7 billion shares, including the equity issue to finance the Allergan acquisition. As we look ahead to the third quarter, we anticipate adjusted revenue of approximately $12.8 billion. At current rates, we expect foreign exchange to have a modest unfavorable impact on reported sales growth. We are forecasting an adjusted operating margin ratio of just above 48% of sales. We model a non-GAAP tax rate of 11.6%, and we expect the average share count to approach 1.8 billion shares. We expect adjusted earnings per share between $2.73 and $2.77, excluding approximately $1.59 of known intangible amortization and specified items. AbbVie remains well positioned to execute on our capital allocation priorities, including rapidly paying down debt, supporting a strong and growing dividend, and pursuing additional innovative mid to late-stage pipeline assets. We generated $6.9 billion of operating cash flow in the first half of the year. And our cash balance at the end of June was $6 billion. We are on track to pay down $15 billion to $18 billion of combined company debt by the end of 2021, of which nearly $7 billion has already been repaid. We expect to achieve a net debt-to-EBITDA ratio of 2.5 times by the end of 2021 with further deleveraging through 2023. In closing, AbbVie's performance and financial condition remain strong. We are very pleased with the momentum of the business heading into the second half of 2020. With that, I'll turn the call back over to Liz." }, { "speaker": "Liz Shea", "text": "Thanks Rob. We will now open the call for questions. Operator, first question please." }, { "speaker": "Operator", "text": "Thank you. [Operator Instructions] Our first question today is from Randall Stanicky from RBC Capital Markets." }, { "speaker": "Randall Stanicky", "text": "Great. Thanks guys. I just have two one for Rick and one for Rob. Rick, a bigger-picture question a huge part of the AbbVie story is…" }, { "speaker": "Liz Shea", "text": "Randall, sorry to interrupt. We can't hear you very well. Is there any way you can turn up your mic or speak up?" }, { "speaker": "Randall Stanicky", "text": "Great. Is that better?" }, { "speaker": "Liz Shea", "text": "Quiet clear. Yes." }, { "speaker": "Rick Gonzalez", "text": "It's okay." }, { "speaker": "Randall Stanicky", "text": "Great. Rick I wanted to ask a big part of the AbbVie story is growth on the other side of HUMIRA in 2023. There's still some trepidation with -- from investors in getting comfortable with the step-down. What would you say to those investors to get people comfortable that there's a growth story on the other side of HUMIRA? And what do you need to do specifically between now and then strategically to position the business for that?" }, { "speaker": "Rick Gonzalez", "text": "Okay. Randall, did you have a second question? Or is that…" }, { "speaker": "Randall Stanicky", "text": "Yes. The second question I'll ask it upfront for Rob. Just if you could help us understand the steady state the run rate for R&D. I think you said $5.8 billion for this year that will go higher on an annualized basis. But you're also pulling $1 billion of R&D synergies out of that as well." }, { "speaker": "Rick Gonzalez", "text": "Okay. I'll cover your first question, Randall, and then Rob can jump in and talk through the R&D funding question that you had. So, look, I think it's a great question. It is one that obviously the vast majority of investors are interested in. We have described I think to investors the rationale of why we were excited about doing the Allergan transaction. It obviously gives us a tremendous amount of ability to be able to manage our way through the loss of exclusivity in the U.S. of HUMIRA. It provides us with two more major growth franchises for the company to help drive growth. And it allows us to continue to invest aggressively both in internal R&D as well as external. And so I think it provides the framework to allow us to continue to perform, as we have performed over the last number of years. I mean, clearly, we have -- we certainly have a track record of showing that we can grow this business and we can build on this business. We've demonstrated that since 2013 when we spun out. So what makes me excited and what makes me comfortable that I can ultimately grow the business through the LOE? I think it starts with, look, we have six, yes, six major growth assets in our business today, if you step back and you look at them, six medicines that have tremendous opportunity to be able to grow: SKYRIZI, RINVOQ, IMBRUVICA, VENCLEXTA, VRAYLAR, UBRELVY. We'll probably have atogepant here in the not-too-distant future. So we'll have a seventh asset all in markets that have a significant opportunity to be able to grow. When I look at our R&D productivity both in the indication expansion area as well as new assets, and I'll talk about that here in a second, I'm very comfortable with our ability to be able to continue to drive the pipeline. When you look at the projections that we made for RINVOQ and SKYRIZI as an example, when we made those projections a year or two ago, those peak projections for 2025, we based those projections on the fact that those assets had to achieve roughly high single-digit market share positions. As we mentioned right now if you look at SKYRIZI, it's achieving in-play share of 30%. RINVOQ has really stood up and rapidly started to capture share. It's at 15% and growing at a very aggressive clip. I would predict that it will quickly become the in-play market leader above HUMIRA here in the not-too-distant future. But they're already significantly above what those estimates were. The longer you stay at in-play shares that look like that obviously the greater you're going to exceed that. If you get to 20% instead of high single-digits, obviously, the revenue will be approximately two times what we had originally projected. So that gives me a high level of comfort. When I look at VENCLEXTA as an example there's still a significant opportunity to grow there. If we get an indication expansion both broadening AML as well as the t(11;14) in multiple myeloma those are two significant opportunities that we'll continue to be able to drive growth. IMBRUVICA still has significant opportunity to be able to drive growth. When I look at VRAYLAR as an example, that's a very interesting asset, has a great profile in that market, the drug does. It's obviously growing significantly. I mean it's been growing now at the rate of about 80% to 90% year-over-year. There's still plenty of room to grow in bipolar and schizophrenia. And if one of those two Phase III studies plays out effectively, MDD will be a very large additional indication which will allow us to be able to drive significant growth there. And then there's the migraine franchise. I think migraine is something that's underappreciated. If you look at the penetration right now of oral agents in the acute area, it's running about 12% to 14% of total scripts. So, obviously, there's a significant opportunity to be able to continue to expand that market. We think we have the asset to be able to do that. And obviously, we think we have the promotional ability to do it. So, I think we have the tools right now to be able to drive significant growth through the LOE. On the other side of the LOE, obviously, our pipeline will continue to play out with the additional indications. You're starting to see assets like our TNF steroid. Of all I think the Genmab collaboration is an important collaboration to continue to build out. Our hem/onc can potentially sell two more platforms. And so there's a lot of exciting opportunities. So, I feel very confident in one how the business is running now despite all of the disruption associated with COVID. But I look at the part of the business that we control directly I feel very good about how the business is running. And so I believe we will navigate our way through it. And I think as we get a little closer investors will gain an even greater appreciation of that." }, { "speaker": "Rob Michael", "text": "So, Randall this is Rob. On your question on R&D, so if you think through the partial year synergies the $600 million, about $400 million of that comes from R&D. And by 2022, about 50% of the greater than $2 billion in synergies will come from R&D. So, while I would expect the expenses to annualize obviously with the partial year close we'll also see those synergies ramp up. So, the best way to think about it is a steady-state R&D level in the $6 billion range." }, { "speaker": "Randall Stanicky", "text": "Great. Thanks." }, { "speaker": "Liz Shea", "text": "Thanks Randall. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Navin Jacob from UBS." }, { "speaker": "Navin Jacob", "text": "Hi, thanks for taking the question. Just wanted to expand on some of the opportunities that Rick had just mentioned." }, { "speaker": "Liz Shea", "text": "Again Navin, can you speak up a little bit?" }, { "speaker": "Rick Gonzalez", "text": "Well, let's see if we can turn our end up." }, { "speaker": "Navin Jacob", "text": "Sure. So, is this okay? Can you hear me okay?" }, { "speaker": "Rick Gonzalez", "text": "That's better." }, { "speaker": "Liz Shea", "text": "Better. Thank you." }, { "speaker": "Navin Jacob", "text": "Okay. I will yell. So, with regard to--" }, { "speaker": "Rick Gonzalez", "text": "We turned our end up. So, you don't need to yell." }, { "speaker": "Navin Jacob", "text": "All right. Fair enough. With regards to the VENCLEXTA opportunity in multiple myeloma the CANOVA trial wondering if you could give us an update there and how large could that potential opportunity be. Obviously, relapsed/refractory multiple myeloma is pretty competitive. So, just wondering what sort of -- how we should be thinking about that where that excitement is coming from. And then if you could remind us also about your subcutaneous version -- pump version of DUOPA that's supposed to read out in the first half of 2021. How should we be thinking about that opportunity? Could that be a blockbuster opportunity?" }, { "speaker": "Michael Severino", "text": "This is Mike. I'll take those. With respect to VENCLEXTA we see very real potential in the t(11;14) multiple myeloma population. If we look across our trials early phase trials and then some set analyses of later phase trials where we have data from t(11;14), we see very consistent responses. We see high response rates and we see long progression-free survival in the t(11;14) population. And that makes sense because that t(11;14) population has a transformed cell that has a B-cell-like phenotype and it's BCL-2 high. So, it would be expected to be uniquely sensitive to VENCLEXTA and to BCL-2 inhibition. So, we have the Phase III study well underway now. It's an event-driven trial. But we would hope to have data in the near future in 2021. And that study is designed to confirm those earlier observations. In terms of how large an opportunity it can be, the t(11;14) population is about 20% of multiple myeloma. And multiple myeloma is a big indication. So, 20% of that is a lot. Now, as you mentioned it's becoming a competitive space. But one of the advantages of having a biomarker-driven therapy is that we can identify and physicians can identify in practice what patients are likely to respond to VENCLEXTA. So, we'll know what a VENCLEXTA patient looks like. And we think that will be a real opportunity and a real advantage. So, we're very optimistic about that aspect of the program and we think it represents an important additional role for VENCLEXTA. With respect to 951, that is a program that's designed to deliver DUOPA-like efficacy through a subcutaneous insulin pump-like device. And so to do that we had to develop two novel prodrugs. These are NMEs that are rapidly converted to the active agents in circulation. And they allow delivery of levodopa and carbidopa ultimately through this insulin pump-like device that you just can't do with the parent compounds because of their physical properties and chemical limitations and local tolerability limitations. So, it really does represent a real breakthrough. What we know about the efficacy of DUOPA is that it is very, very strong. It really is transformational. But it takes a lot to get that efficacy. Patients have to have a gastric tube placed to then thread it down into the small bowel. They have to maintain that. So, this is a much more patient-accessible patient-friendly if you will way to deliver the same sort of efficacy. And so we think that has a potential to really expand the number of patients who would be willing to consider a therapy such as 951 and it's a big market. If you look at DUOPA despite all the limitations, it's doing about $0.5 billion in sales. If you look at deep brain stimulation, there's also considerable use. In aggregate, this market today is well over $1 billion, probably $1.5 billion. And not all patients who would qualify by their patient profile are willing to undergo these therapies. So, we think that 951 can be a very real opportunity and can be quite substantial." }, { "speaker": "Liz Shea", "text": "Thanks Navin. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. And our next question is from Chris Schott from JPMorgan." }, { "speaker": "Chris Schott", "text": "Great. Thanks so much for the questions. So, just two for me. The first can you just elaborate a little bit more about how you're thinking about the size of the opportunity for RINVOQ in atopic derm now that we have the Phase III? I guess just a little bit more just how you see this fitting into the treatment paradigm. And then my second question was on the 2020 guidance. If I back out the $0.70 of Allergan accretion, it seems like the base AbbVie numbers are unchanged despite what looked like very, very strong results in the first half of the year. So, just help me understand a little bit the dynamics that are happening with that kind of underlying AbbVie set of assumptions. Thanks so much." }, { "speaker": "Michael Severino", "text": "This is Mike. I'll take the first one and then I'll hand it over to Rick for the second one. With respect to atopic dermatitis, we're very pleased with the results that we demonstrated across the Phase 3 trials. They actually exceeded our expectations based on the Phase 2b results. And those 2b results were very strong and had earned us a breakthrough therapy designation. And we're pleased not only with the efficacy, but also with the safety profile. We've said for quite some time that one needs to look at the safety of a drug in the intended population. Because things like background therapies, risk factors in the population can have a substantial influence on what that profile looks like not only for the active agent, but for the comparator or for placebo. And if you look at the profile in the AD studies, it looks very favorable to our eye. And these were substantial studies and a substantial program overall. This wasn't a quick study to get an indication expansion. We ran a Phase 3 program for atopic dermatitis that could standalone for an additional submission. So we think that very strong data package will be a real advantage when we bring this indication to market. If you look at the size of the market overall, I think, it's been underappreciated for years. Now that's changing now. There are a large number of patients who would be eligible for systemic therapy. Obviously, dupilumab is off to a good start over the past several years in that indication. But if you look at their efficacy only about half of patients achieve an adequate response if you consider that adequate response in EASI 75. And so in our study we drove very good numbers there higher than that roughly 50% albeit there through cross-trial comparisons. So we think that there is a real opportunity for a high-efficacy agent in this space. And so it really can play on both ends of the spectrum. Patients who don't achieve an adequate response with earlier therapies this is an obvious choice. But with the efficacy and the safety profile that we've observed, we see no reason why it wouldn't be used upfront as well. And of course, we'll have head-to-head data against dupilumab later on this year as we said in our prepared remarks." }, { "speaker": "Rob Michael", "text": "So Chris, this is Rob. I'll take your question on guidance. So if you take that $0.70 of accretion and you back-off the midpoint of $10.40 it gives you a standalone of $9.70 EPS, which is $0.04 higher than our previous guidance. And it's really driven by the sales changes that we've made today. So for U.S. HUMIRA we took that up 1%, which equals about $150 million because we're seeing less impact of COVID on continuing patients. HUMIRA OUS we've taken up $100 million. We're seeing less erosion than we initially had planned. On RINVOQ that's up $100 million as well really driven by the rapid in-play share that we're seeing. And that's partially offset by MAVYRET as we've seen the market really decline during COVID. But net-net revenue is up about $150 million EPS up $0.04 versus our previous guidance for stand-alone AbbVie." }, { "speaker": "Rick Gonzalez", "text": "And the only thing I'd add on that is obviously we were more favorable on base AbbVie in the quarter than the $0.04. But there's still uncertainty as it relates to COVID. And so we're keeping some coverage there to see how things play out in the third quarter." }, { "speaker": "Liz Shea", "text": "Thanks, Chris. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. And our next question is from Steve Scala from Cowen." }, { "speaker": "Steve Scala", "text": "Thank you. First congratulations on delivering ahead of expectations in the midst of a major integration, new launches and a global pandemic. It's really impressive. Rick you stated that the impact of the pandemic was less than expected. That certainly hasn't been the case at other companies. You also said that you're seeing recovery in the aesthetics portfolio, which sounds as though it snapped back faster than the legacy AbbVie. So I'm just curious to what do you attribute these dynamics? And do you expect the second half of the year to look more like the first half or more like May and June relative to patient volumes, clinic traffic and so forth? And then secondly, you stated that you expect margin improvement over the next few years. Could you provide some parameters around that expectation? Thank you." }, { "speaker": "Rick Gonzalez", "text": "Okay. So this is Rick. I'll take the first one. Your observation is correct. So I think the way to think about it is that both in the second quarter many of the assets didn't drop as far as we expected. That was part of the favorability. I'd say that was particularly, the case in a number of areas in the legacy AbbVie portfolio associated with the business. On the aesthetics it is pretty much the way you're describing it. What we saw happening in the aesthetics business and to a very similar extent to BOTOX Therapeutic is that we saw a rapid drop in the case of aesthetics as those practices virtually closed. I'd say almost all if not all of the practices had closed. So aesthetic revenues dropped significantly for a period of time in that mid-April time frame. As we started to see geographies remove the shelter-in-place orders around the U.S., we saw the aesthetics practices quickly put in place safety measures to be able to allow patients to come back into their offices. And I'd say the vast majority of those practices ramped back up and went back into doing procedures fairly quickly. As we approached that mid-May time frame we actually saw -- let's take BOTOX as an example. And BOTOX would be the leading indicator because it's the procedure -- BOTOX Cosmetic it is the procedure that people would go to first. It ramped back up went well over 100% of pre-COVID levels to around 120% 125%. And then it and that was obviously pent-up demand that was coming back into the channel so patients returned quickly. And then as that pent-up demand started to burn off as we got through June, you started to see it drop back down. And now it's settled in sort of in the mid-90s right now. We think it will reach -- it will stabilize back up over the course of third quarter back close to pre-COVID levels and then start growing again. And so I can tell you I'm extremely pleased with how both aesthetics and BOTOX Therapeutics had returned. I think it's a testament of those brands and those patients. As far as the assumptions we made in the second half obviously, we're assuming the second half performs a lot better than the first half. We're not assuming any kind of a broad-based shelter in-place activity. And we'll continue to see more and more patients come back into physicians offices. On the AbbVie side of the business, we are monitoring those patients by individual practice. It's appropriate for our particular businesses. And I'd say for the most part they are returning close to pre-COVID levels. They do vary a little bit by specialty. As an example, rheum and GI have come back faster than medical derm has. But medical derm has returned as well to some extent and we're continuing to see it return. Oncology practices in certain conditions we've seen -- we saw some tailing off of CLL treatment in the second quarter. That's now returning back to normalized levels. So I think the second half will, obviously, be much better than the first half. And I think we should return to normalized levels as we proceed through the second half of the year. Rob anything you want to add on that?" }, { "speaker": "Rob Michael", "text": "I can answer the question on margin. Steve this is Rob. On operating margin, I think when you think about we have a partial year of synergies and a top-line that's been pressured by COVID we have a 48% operating margin profile. As you think about 2021 and 2022, we're going to obviously run -- we're going to ramp those synergies as well as we'll see top-line growth and where you'd see the P&L leverage that we've demonstrated in past year. So, I would expect to see our operating margin expand in 2021 and 2022. With 2023 with the U.S. HUMIRA event, obviously, we would see operating margin pulled back. But I would expect it to be in the 45% range, which still puts us top tier in the industry." }, { "speaker": "Steve Scala", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Thanks, Steve. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Geoffrey Porges from Leerink." }, { "speaker": "Geoffrey Porges", "text": "Thank you very much. Hi, Rick congratulations. Very helpful to get the guidance. Could you talk a little bit about atogepant? Particularly what's the size of the addressable opportunity for the full portfolio of oral migraine medicines? And perhaps how much of an issue is the constipation data that you've seen? And then Rick look there's a massive economic disruption going on. And I'd be interested in your commentary about how consumers and payers are reacting to that disruption and how that's factored into your guidance. Are we seeing switches from IV to oral from generic to brand? How is that playing out in your experience and observation? Thanks." }, { "speaker": "Rick Gonzalez", "text": "All right. Great. So maybe we'll have Mike talk a little bit about the profile of the drug. And what I'd say is I think we probably want to come back at a later date once we've had a little better opportunity to analyze the chronic migraine market. And it's going to depend to a great extent on the profile of the drug obviously. But it's a very large market a very significant market. And -- but Mike maybe if you want to talk a little bit about constipation and then I'll come back and talk about the payer dynamics." }, { "speaker": "Michael Severino", "text": "Sure. I'll talk about atogepant. We're very pleased with the data we've seen. And of course this fits into an important part of our migraine portfolio with UBRELVY for acute migraine now with atogepant with two data readouts in episodic migraine and an ongoing program in chronic migraine. And, of course, there's BOTOX Therapeutic in chronic migraine, so it really rounds out our portfolio. The efficacy that we saw was very strong. As we said in our prepared remarks, we hit the primary and all secondary’s across the two upper doses and the primary and four out of six secondary’s for the lowest dose studied. So that is an efficacy profile that I think exceeded our expectations going into the study. With respect to the safety, our view of the safety profile looks very favorable. The constipation that was observed in the overwhelming majority of cases was mild or moderate. It didn't limit treatment. So patients stayed on treatment. They could be managed easily with interventions like stool softeners or fiber supplementation. So we don't see it as something that is limiting particularly in light of the very strong efficacy that we have demonstrated. And the only other point I'd add is that we have a good understanding of it and it's on target. So it comes with the efficacy you get a very strong efficacy and you have this manageable tolerability profile that I described." }, { "speaker": "Rick Gonzalez", "text": "Geoff on the -- on your second question, you probably recall back on our first quarter guidance when we outlined that we had built in to our forecast for the remainder of the year some impact for some channels shifting that we thought could occur due to the high unemployment. And essentially we haven't seen much of that at all. In fact I would tell you, we haven't seen any of it to any material effect right now. And one of the things that we do to watch that carefully is our PAP program. We've been advertising extensively to consumers to make sure that they know if they lost their insurance or they lost their jobs and they don't have insurance coverage and they can't afford their AbbVie medicines to come to us. We have a very extensive patient assistance program. And we're not seeing any significant increase in those requests. It could be because of the furloughs. We're not 100% sure yet. And potentially we could see some increase as we go further here depending upon what happens with stimulus programs going forward. We have still maintained some level of coverage in our forecast that we're providing now. So we believe we have sufficient coverage to deal with it and we'll just have to see how it sorts itself out." }, { "speaker": "Liz Shea", "text": "Thanks, Geoffrey. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Vamil Divan from Mizuho." }, { "speaker": "Vamil Divan", "text": "Hi, great. Thank you so much for taking my question. Maybe just to continue on the migraine question. You mentioned UBRELVY and the potential there. Can you maybe just talk a little bit about the net pricing that you're thinking about in that space? I guess, maybe relative to the injectable antibodies that are helpful for prevention already there's only the two players it sounds like here between you and Biohaven -- or on the injectable side. So just trying to get a sense how you see this pricing dynamic play out? We're getting a lot of questions on that front. And then maybe for Rick I'm just curious around some of the executive orders we've seen on the drug pricing side for the administration. I don't know if I may have missed your comments earlier but just curious if you have any additional thoughts about what you heard from some of your peers on this issue this week on their calls. But every company, obviously, has a different product mix and maybe some different perspectives. So curious what your views are especially as it relates to the rebate rule order? Thanks so much." }, { "speaker": "Rick Gonzalez", "text": "Right. Okay. I'll cover both of those questions. So on migraine, I mean obviously we don't publicly talk about our net price. We have fairly significant managed care coverage on the asset already. I think it's about 70%. And obviously it had to be priced in a way that was appropriate to be able to get that level of coverage. This is a market where market expansion is important. As I said, I think if you look at the penetration right now of acute migraine products against the -- or at least the oral CGRPs against the total migraine acute market, it's about 12% penetrated right now. So there's a significant opportunity to be able to grow that market. And it gives you some idea of the magnitude of this market. So you certainly want it to be in a position where it can have access to be able to allow patients, to be able to use the products. These products certainly have demonstrated that they have strong demand from patients to be able to provide them appropriate levels of relief. And so I would just tell you that that's an important aspect of the overall strategy here is to be able to grow this market over the long term. On the executive orders as you have probably seen they're pretty high level at this point and they provide some high-level direction. So I think, until we see them, sort of, start to sort out I think it's a little difficult to give you a lot of specificity around what they look like. Now I will say, if I look at them in the backdrop of AbbVie's business, I would say, I don't think they will have a significant impact on our business. If you look at Part B as an example, we have a very small Part B business. I think it's around 2% to 3%. 3%, I guess, is the right number now. So it's a very insignificant part. If you look at the importation bill or executive order, it's very similar to what's already been given out to the states. And it excludes biologics, which obviously is an important part of our business. If you look at the third one, it's insulin and EpiPen. We're not in that business. And then the rebate rule. Certainly, as we look at rebates, we're absolutely supportive of patients being able to get the benefit of the discount associated with the rebate or discount. As we've said many times before for us whether it's a rebate or a discount is not very material to us. What I would say is when I look at that executive order it does say that you have to be able to implement it without increasing premiums. And everything I know about how rebates are redistributed, I would say that I think that that will be difficult to do. So I don't know how that will ultimately play out. So -- I mean at a high-level look at what we think about them right now. But I think right now, I wouldn't anticipate that they have a significant risk associated with AbbVie." }, { "speaker": "Liz Shea", "text": "Thanks, Vamil. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. And our next question is from David Risinger from Morgan Stanley." }, { "speaker": "David Risinger", "text": "Great. Thanks so much. And congrats on all of the encouraging updates. So first Rick, could you please discuss maybe in a little bit more detail the most significant revenue synergy opportunities you see as a result of the combination with Allergan? I know that the combined company can do more with certain franchise, but if you could put some finer points on that that would be very helpful. Then second with respect to next year's readouts, AbbVie has a very large pipeline of Phase 2 candidates with proof-of-concept readouts in 2021. But could you point us to the ones that have the biggest commercial potential? So if there is validation in 2021 what are the biggest product opportunities that we should be paying attention to? And then one little tidbit. The UBRELVY number was $22 million in the quarter. That was strong. How much stocking was in there? Thank you." }, { "speaker": "Rick Gonzalez", "text": "Okay. So I'll cover the first one and then I'll have Mike cover the second and Rob can cover the third. So if I look at the business overall I said that the integration has gone very seamlessly. And I think that's a tribute to all the planning that we did. We had some extra time to be able to do it and I think that benefited us. And so I think the two organizations have come together in a way that's been quite good. Now I would say, I think, the places where we have an opportunity to be able to provide some synergy and benefit certainly when you look at our therapeutic businesses, when you look at our -- many of the tactical kinds of execution techniques that we use in the marketplace I think many of those are applicable to the Allergan therapeutic portfolio. Certainly when you look at managed care that's an area that we have demonstrated that we're quite skilled at being able to effectively manage our way through that. And then the third area, I'd say is if I look at aesthetics, aesthetics is a very attractive market. It has a significant opportunity to be able to grow that market, which I mean by bringing in more people into the market more quickly. You can do that several different ways. Obviously, some of it is driven by promotional activity. I'd say Allergan is very skilled from a social media standpoint. And I think that's an area that's probably been underfunded. Historically, it's an area that we have a high level of interest in funding to a greater extent. And we obviously have the financial wherewithal to be able to do that. The second thing is being able to bring more new innovation more rapidly into that market. And I think that's an area that we'll also be able to provide a benefit both in the way we operate R&D and the ability to be able to rapidly innovate. I think that will be a benefit to the overall business. And I think we have an opportunity to be able to accelerate the growth of that business in a meaningful way over time. And it's a market I like a lot. I think both based on demographics the cash pay aspects of it and how it responds to appropriate innovation in that market. So that's an area that I think over time you can expect us to continue to make sure that we're doing what we know how to do to be able to ultimately grow that market over the long term. Those would be some of the things I'd tell you at a high level. Mike?" }, { "speaker": "Michael Severino", "text": "I'll take the second question. So we do as you point out have a number of data readouts from Phase 2 studies or other proof-of-concept studies in 2021 and also in the following years in 2022 and beyond. And a number of these are very large opportunities. I'd point to our oncology programs. We have a number of immuno-oncology programs that would be large opportunities, if they hit. Our GARP program I think is a very good example of that. Our bispecifics I think are a very good example of that. We just brought in through the Genmab collaboration epcoritamab, which is a large opportunity. Obviously, that's post proof of concept. But there are two additional molecules there that are just a little bit earlier in development that could be large opportunities. We have bispecifics in BCMA more than one program that could be very large opportunities, if they were in fact best-in-class. And we think they have the potential to be best-in-class. The last thing, I would point to in oncology is our novel so targeted ADC technology with ABBV-155 being in the lead in non-small cell lung cancer. That is a BCL-XL warhead targeted by a B7-H3 antibody. If that were to hit and we'd see those data next year that would be a large opportunity. Obviously in immunology we're advancing our TNF steroid program. But I think those are data that we've already reported out. And then the last thing that, I would mention is in our neuroscience portfolio. Obviously, Alzheimer's disease if those programs were to hit they would be a very large opportunity given the enormous unmet medical need. Now obviously, in Alzheimer's disease it's higher risk higher reward. But if we got favorable data it would be a very, very meaningful opportunity." }, { "speaker": "Rob Michael", "text": "And David, this is Rob. On UBRELVY, if you look at just the full quarter revenue of $27 million it really follows the prescription growth on a sequential basis. So there's really a negligible stocking impact. And we'd expect to see continued sequential growth for that product." }, { "speaker": "Liz Shea", "text": "Operator, next question, please." }, { "speaker": "Operator", "text": "Our next question is from Chris Raymond from Piper Sandler." }, { "speaker": "Chris Raymond", "text": "Thanks. Just back to atogepant in sort of a competitive setup. So Rick I heard your comments on how this is underappreciated. We've done some checks to see, if it indicated that that's the case. And I know this – it's not approved yet. So pardon if you don't mind the commercial question here. But there's been some chatter out there especially from some Biohaven bulls that placebo-adjusted migraine days maybe don't matter as much as absolute days. And so just maybe you're in the field with UBRELVY from a rep-to-doc dialogue perspective, what do you guys see as the most important attribute especially as you'll be positioning this in the prevention setting versus subcus and the other oral therapies – or the other oral therapy that happens to be a dissolving tablet?" }, { "speaker": "Michael Severino", "text": "Well, this is Mike. I'll take the first part of that and then Rick may want to add. With respect to efficacy, the most important attribute is the placebo-adjusted migraine days. If one were solely to look at the total days one could conclude that placebo is in fact a good therapy for these patients, because we see reductions. And so you have to account for that. And there are differences from study-to-study based on design, population enrolled and what that placebo difference is. So it absolutely has to be taken into account. And when you look at our placebo-adjusted results, they're very strong. They range between 1.2 and 1.7 days, which in this disease area is a very meaningful response rate. And it's higher than what has been reported with other oral agents obviously with the caveat of a cross-trial comparison. So we think that on the most important efficacy parameter we performed very, very well. And of course we've hit all the secondaries across two of those three doses as I've described. And as we get the data out into the public domain you'll get more color on that." }, { "speaker": "Rick Gonzalez", "text": "Yeah. I would just reiterate what Mike says. I mean, physicians are well skilled in understanding what placebo rates are. And I just don't even think, it's appropriate not to represent a product's efficacy without looking at the placebo rate. So, I mean, I think that will be the way doctors look at it. And I think that is the way the products will be marketed. And certainly, if I had a lower rate, I may have an interest in that. But at the end of the day I think that is the appropriate way to look at it." }, { "speaker": "Chris Raymond", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Thanks, Chris. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Tim Anderson from Wolfe Research." }, { "speaker": "Tim Anderson", "text": "Hi. Thank you. A few pipeline questions please. On the TNF steroid conjugate some KOLs have a mixed view of that approach. For those that are skeptical what's the most common reason that you hear? Second question on VRAYLAR, what are your odds of regulatory success in depression? Even just qualitatively is this a high-risk, medium-risk or low-risk endeavor? And then can you clarify why your Genmab CD3xCD20 would be best-in-class?" }, { "speaker": "Michael Severino", "text": "Okay. I'll take those questions. With respect to the TNF steroid conjugate what I would say is, it's important to keep in mind that this is an early phase trial and this was intended to be a proof-of-concept trial. One can't do a fully powered head-to-head against an active competitor like HUMIRA in Phase I or Phase II because that typically requires or always requires essentially a large Phase III study. Head-to-head studies are often amongst the largest studies in a Phase III program. So what we were looking for was evidence to support the profile that I described which is that we had a high probability of success in those trials downstream. If folks have a mixed view then what we hear is they'd like to see those later data. And what I would say is, we're well on the path to generating them. We're pleased with the results that we've seen and we think it's a very promising platform and we're going to be advancing into larger-scale trials and people will get the data that they're looking for. With respect to VRAYLAR in the adjunctive treatment of major depressive disorder, I think the question was how would I characterize the risk there? There already is one positive study in hand. And so of the two studies that are underway, we would need one additional study to read out positive to support the indication. I think that historically this has been a challenging indication. But I think the -- both the rationale and the data from earlier studies in the VRAYLAR program are strong. So I would probably put it in the moderate probability range. We didn't build it into our model. Our success with VRAYLAR was not dependent on it. But we think it represents a very attractive upside opportunity if in fact it hits. And with respect to why Genmab CD3xCD20 has the potential to be best-in-class? I would point to two things. One is the efficacy data reported from the early phase trials, particularly in DLBCL, which is a very difficult-to-treat tumor type, puts it at the higher end of efficacy. And the safety profile has been very favorable in terms of what's been observed to date both with respect to cytokine release syndrome and the lack of occurrence in the early phase trials of higher-grade CRS and also with respect to the neurological symptoms that can accompany this class of therapy. So it seems to have threaded that sweet spot between achieving very strong efficacy with a good safety profile. It also has subcu administration with its existing formulation. Others are working towards that. But Genmab already has the data in hand. And the dosing schedule fits very well into the regimens that will be used in the diseases that we'd study particularly DLBCL and follicular lymphoma. So we see aggregate of that that we think gives it a very, very strong profile." }, { "speaker": "Tim Anderson", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Thanks, Tim. Operator, we have time for one final question please." }, { "speaker": "Operator", "text": "Thank you. Our final question today is from Terence Flynn from Goldman Sachs." }, { "speaker": "Terence Flynn", "text": "Great. Thanks for taking the question and congrats on the Allergan integration. You mentioned in your comments that RINVOQ uptakes accelerating here was just wondering if you could provide a little bit more color on that. Is that being driven by COVID and maybe teleprescribing having an advantage over some of the injectables? And if so, do you see that as being a durable change here as we come out of the pandemic? And then the second one I had was just on VENCLEXTA. I noticed you're running some trials for solid tumors. Maybe just remind us of the rationale here behind that approach. And how optimistic are you there as you move into later stages? Thank you." }, { "speaker": "Rick Gonzalez", "text": "Okay. Thanks. I'll take the first question. Mike can cover the second one. So RINVOQ clearly has started to ramp in a fairly significant way. I think it's associated with two things. One is any time you see a pro -- it's about eight months into its launch, you typically start to see that inflection point on successful products. As you go out and you present the data to physicians and start to educate physicians and they start to get some use, you tend to see that inflection point start to happen around six months. So I think it's the natural inflection point that we would have expected if the product was being successfully accepted into the marketplace the way we hoped as a high-efficacy agent. I think there is some benefit that we're seeing during the COVID crisis that it is an oral, so it's a little easier to prescribe than an injectable might be. So we're probably getting some collateral benefit associated with that. But I don't think that's the fundamental benefit that we're seeing. Mike?" }, { "speaker": "Michael Severino", "text": "Right. So I'll take the question with respect to VENCLEXTA in solid tumors. I think there's two different lines of evidence. In breast cancer, there are -- there is an investigator-sponsored study that showed promise in breast cancer. And so there's a follow-up study there to confirm that. And if that were confirmed, it would be obviously a substantial opportunity given the unmet need there. And then there are other solid tumors such as both small cell lung cancer and non-small cell lung cancer where there's preclinical rationale that warrants exploration. And so I would characterize the solid tumor program as higher risk but high reward worthy of exploration. The solid tumor program in VENCLEXTA has not been baked into our thinking and isn't necessary for any of the success that we have talked about with the molecule. But if something were to hit there represents very nice upside. And I think there's enough rationale to warrant the exploration." }, { "speaker": "Liz Shea", "text": "Okay. Thank you. So that concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us." }, { "speaker": "Operator", "text": "Thank you. This does conclude today's conference. You may disconnect at this time." } ]	AbbVie Inc.	141,885,706
ABBV	1	2,020	2020-05-01 09:00:00	Operator: Good morning and thank you for standing by. Welcome to the AbbVie First Quarter 2020 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion. [Operator Instructions] I would now like to introduce Ms. Liz Shea, Vice President of Investor Relations. Liz Shea: Good morning, and thanks for joining us. Also, on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Vice Chairman and President; and Rob Michael, Executive Vice President and Chief Financial Officer. Joining us for the Q&A portion of the call is Laura Schumacher, Vice Chairman External Affairs, Chief Legal Officer and Corporate Secretary. Before we get started, I'll remind you that some statements we make today may be considered forward-looking statements for the purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties including the impact of the COVID-19 pandemic on AbbVie's operations, results and financial results that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our 2019 Annual Report and Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today's conference call as in the past, non-GAAP financial measures will be used to help investors understand AbbVie's ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks we'll take your questions. So with that I'll now turn the call over to Rick. Rick Gonzalez: Thank you, Liz. Good morning everyone and thank you for joining us. I'd like to start my remarks by acknowledging the tragic nature of the COVID-19 crisis, which has touched all elements of our -- in our lives in ways we never thought possible. The human toll that this pandemic has inflicted is unprecedented and the suffering unimaginable. During this very challenging time, I want to assure you that across AbbVie we are working carefully to ensure that our business continues to operate properly, our employees remain safe, our patients continue to receive their medicines and we are providing aid including product donations and financial assistance to address some of the critical needs of health care systems and underserved communities across the globe. As a matter of priority, we continue to closely manage manufacturing and supply chain resources around the world to ensure that our patients receive an uninterrupted supply of their medicines. Our manufacturing sites remain operational. And we have implemented additional measures at these facilities to ensure the safety of our employees and to protect our supply of API and finish medicines. We have adequate supplies in inventory to meet the expected demand for all AbbVie key medicines including KALETRA and NIMBEX, two therapies that have experienced a significant increase in demand directly related to COVID patient treatment. And we currently do not anticipate any product supply issues. AbbVie is also committed to supporting clinical research efforts for COVID-19. We have provided product donations to many health authorities and institutions globally so that AbbVie products may be further evaluated externally as potential treatments for this difficult disease. In times of crisis, it is our nature as individuals and our culture as a company to give back in any way we can. We recently announced that AbbVie has donated $35 million to help meet some of the critical needs around the world. We've partnered with several non-for-profit organizations who are on the front lines of the battle against COVID-19. And our donations have helped to support several important initiatives including the creation and operation of 20 mobile field hospitals in U.S. cities most impacted by the pandemic; the procurement and delivery of oxygen concentrators ventilators and personal protective equipment to health care systems in Europe; and various other essential programs including a donation to Feeding America to provide food and household supplies for those most in need including the elderly. We have donated a significant portion of AbbVie's own personal protective equipment supplies including N95 and surgical masks to hospitals near our facilities throughout the U.S. and Europe. We have also converted some of our own facilities including a pilot plant and several research laboratories to manufacture culture media and provide COVID-19 patient testing to supplement several public health departments. We are honored and committed to do what is in our power to help with this devastating pandemic and we will continue to look for ways where we are able to help. Now turning back to our business. I want to further discuss how the crisis is impacting our performance and expectations for the full year 2020. Today, I'm pleased to report strong results. For the first quarter, AbbVie's total revenues were up more than 10.5% on an operational basis and adjusted earnings per share of $2.42 was up more than 13% versus the prior year. These metrics were significantly above consensus and our initial expectations. Fortunately, we had very robust demand across our product portfolio heading into the COVID crisis. As the U.S. and other major countries around the world started implementing stay-at-home orders and social distancing strategies in late February, AbbVie as well as most of our customers started restricting face-to-face interactions resulting in reduced physician and patient contacts. These limitations which are still in effect for most major countries created two fundamental impacts on our business in the quarter. First, patients and pharmacies built up some additional inventory of our medicines to ensure they had adequate supply. And second, we saw fewer new patients visiting physician's offices, which had a modest impact on the number of new patient starts. Adjusting for COVID inventory dynamics, AbbVie's first quarter underlying operational sales growth was roughly 8.3%, significantly above expectations with double-digit underlying performance in both hem/onc and immunology, demonstrating the strong underlying performance of our business. Within hem/onc IMBRUVICA the market-leading treatment for CLL grew strong double-digits, driven by increased demand in the frontline setting where we recently received another important label update which Mike will discuss momentarily. VENCLEXTA also performed very well in the quarter with global revenues of $300 million, roughly double the first quarter of last year, following share expansion in both CLL and AML. Turning to our immunology business. HUMIRA continues to generate significant revenue. HUMIRA benefits from a substantial installed patient base, representing more than 80% of current demand. Globally, HUMIRA revenues were up nearly 6.5% on an operational basis in the quarter including strong double-digit growth in the U.S. The international biosimilar trends and dynamics remain largely consistent with our expectations. SKYRIZI Global revenues of $300 million were also significantly above expectations. Since the launch late last April, we have quickly established and expanded our leading in-play psoriasis patient share, which includes both new and switching patients and now exceeds 30%. This launch trend is truly remarkable and a testament to SKYRIZI's strong efficacy compared to other novel agents in the psoriasis category including HUMIRA and COSENTYX. RINVOQ is also performing at a very high level in the RA segment with global revenues of $86 million in the quarter. We estimate more than 17,500 prescriptions were filled including both paid and bridge, which is more than double the activity we saw in the prior quarter and now reflects approximately 11% in-play RA patient share. As demonstrated by our first quarter results, the underlying performance of our business remains very strong. We've now also begun to return to ordinary operations in select geographies around the world, where health authorities have deemed it safe to do so. And although early, we are seeing those countries ramp towards a normal operation and expected performance. This is obviously a challenging time to forecast, given the unique nature of the COVID pandemic including its global scope and unknown duration, and it is difficult to predict precisely when major countries around the world will return to normalcy. Despite this uncertainty, we believe it's important to provide a clear set of updated assumptions that reflect the latest view of our full year performance. We based our forecast on the best estimates we have at this time. And we will make updates if necessary on our next quarterly call. As I indicated earlier, our business was performing robustly, above expectations and above our guidance prior to the COVID-related impacts. We have spent considerable time, carefully evaluating the COVID dynamics from late March and April. Based on this analysis, COVID appears to be having two fundamental impacts on our business. First, there has been a variable impact on new patient starts due to physician's offices restricting patients' visits and patients adhering to stay-at-home orders. As an example, many dermatology offices are currently closed. AbbVie has a strong frontline position in dermatology with HUMIRA and SKYRIZI. And here we see new patient starts for these two brands were lower by approximately 30% to 40% over this time frame. Once these offices reopen, patient volume should return back to normalized levels. Second, we've also seen lower new patient utilization of hospital-based treatments, such as VENCLEXTA and HCV internationally, due to many hospitals limiting access to non-emergency, non-COVID patients. We have carefully modeled these COVID-related dynamics and incorporated the expected impact on our full year results. Our current forecast now assumes the following: Stay-at-home orders will be gradually lifted starting in May across Europe and the United States. 60 days after geography lifts stay-at-home orders, we expect physician offices and hospitals will reopen for more routine patient diagnosis and care and we expect patients will start returning to physicians' offices for routine treatment in that time frame. We have also factored in a modest increase to our patient assistance programs as well as a shift in our U.S. payer mix due to increased unemployment. Based on these specific assumptions, we are confident we can maintain our current full year 2020 adjusted earnings per share guidance. We will learn more as the second quarter progresses and we will continuously evaluate our current assumptions relative to how the environment evolves and the updates will be provided on our next quarterly call. On a related note, while we have not yet completed the Allergan transaction we have also been actively working to assess the impact of the COVID crisis on the Allergan business. It's important to highlight that Allergan has both a therapeutic business which is similar to the AbbVie business and represents approximately two-thirds of their revenues and profits; and an aesthetics business which represents roughly one-third of their revenues and profits. Based on the differences in the nature of these two portfolios, we expect them to be impacted differently as a result of the COVID pandemic. We expect Allergan's therapeutic business except for BOTOX Therapeutics to be impacted and recover from the COVID crisis in a manner very similar to the AbbVie business I outlined earlier. We expect BOTOX Therapeutics, which has a substantial hospital base to experience a more significant impact given that patients are being discouraged from going into the hospital for non-emergency procedures during the pandemic as I mentioned earlier. We also expect to see a more pronounced impact on Allergan's aesthetics business as many of their customers including plastic surgeons med spas and dermatology offices are closed and therefore not performing procedures. However, after carefully analyzing the aesthetics business performance during the 2008-2009 recession, which experienced a rapid V-shape recovery, the recent trends we are observing in China as clinics have reopened locally and procedures have started to ramp significantly and taking into account the household income and employment status of the aesthetics patient base, we remain confident that the expected near-term impact while likely substantial will be transient with the aesthetics business quickly ramping back to normalized trends following the relaxation of quarantine restrictions in the U.S. and major European markets. As it relates to the closing of the Allergan transaction, we have completed all requirements with the FTC and they are in the final stages of their review process. Following the FTC process, the last step is the Irish High Court approval. Based on everything we know today, we continue to expect the transaction should close in May. We remain confident that the AbbVie-Allergan combination will generate significant cash flows which will support our strong and growing dividend and rapid debt repayment and we remain highly committed to both of those priorities. So, in summary, we reported a very strong first quarter performance. The COVID crisis is truly unprecedented and we expect it will have a transient impact on our business, primarily affecting our second quarter performance. However, based on our analysis of the situation as well as reasonable timing assumptions for the return to a more normalized environment, we are confident in maintaining our full year adjusted earnings guidance which speaks volumes about the strength of AbbVie's business momentum entering the COVID crisis. With that, I'll turn the call over to Mike for some additional comments. Mike? Michael Severino: Thank you, Rick. Let me begin by echoing Rick's sentiment about how proud I am of our colleagues as our teams work to ensure our business continues with minimal disruption and our patients receive their essential medicines. The entire organization including our colleagues deemed on-site essential who continue to come into work every day and the individuals who have effectively adapted to working remotely have demonstrated resiliency, dedication, and compassion throughout this time of crisis. It's a testament to the culture we've built at AbbVie. Today, I'll focus my commentary on the ongoing efforts within AbbVie's R&D organization, to address COVID-19, and provide updates regarding our key development programs. As a leading global biopharmaceutical company, AbbVie is committed to supporting relief efforts for the coronavirus pandemic. In addition to the efforts highlighted by Rick, we have deployed our scientific and medical resources to help fight COVID-19 on several fronts. There is an urgent need to increase testing capacity within the United States. Public health authorities are actively working to address the issues that have limited capacity to-date including instrument availability, availability of diagnostic kits and reagents, and CLIA-certified lab capacity. Given the unprecedented nature of this pandemic and the need to significantly increase access to testing, AbbVie is working with health authorities here in Illinois, where we are headquartered and in Ludwigshafen in Germany, where we operate a major site, to create a clinical COVID testing capability. This will allow us to use our laboratory expertise to expand the COVID-19 testing capacity in both jurisdictions. We have also used our GMP capabilities to manufacture viral transport medium, which is necessary to preserve swabs prior to lab testing for the Illinois Department of Health and a number of academic medical centers. Like many companies in our industry, we recognize the extreme burden being placed on our hospitals, public health systems and medical professionals by this crisis. And in response, we have created programs to allow our employees, who have relevant medical, scientific or public health expertise to volunteer to support the fight against this pandemic. AbbVie has tremendous resources and we are doing everything we can to make these resources available in the fight against COVID-19. In addition to the efforts, I just described, our R&D team is looking at our existing medicines and pipeline assets to assess their potential for the treatment of COVID-19. AbbVie is collaborating with health authorities and academic institutions globally to support clinical trials of KALETRA, a protease inhibitor approved for the treatment of HIV infection to determine whether it has potential use in COVID-19. Two notable ongoing trials are the solidarity study being run by the World Health Organization and the discovery study being led by a consortium in France. We expect to see data from these studies very soon and we'll continue to monitor and update as information becomes available. We have also initiated a Phase II study of IMBRUVICA in patients with COVID-19 infection. The goal of this study is to determine whether IMBRUVICA is able to improve outcomes by blunting the overly exuberant immune response often referred to as the cytokine storm that contributes to the morbidity and mortality in COVID-19. Lastly, we are also collaborating with a number of groups to screen our internal libraries for compounds with activity against COVID-19. Clearly, this is a rapidly evolving situation and we will provide updates as additional information becomes available. Turning now to an update on the status of our clinical development programs. Our top priorities in the R&D organization are ensuring the safety of patients, investigators and our employees around the world maintaining the integrity of our clinical studies and continuing to advance our pipeline. We are carefully monitoring the situation and taking appropriate precautions to protect the safety of our study participants, clinical site staff and our employees. We understand that health care systems are under extreme pressure because of the need to respond to the COVID-19 pandemic. In many instances, hospital-based research staff have been redeployed to other duties and aren't available to address clinical trial-related matters. AbbVie is doing everything possible to avoid creating an additional burden to our clinical trial sites. Given the current environment, we have delayed on-site start-up activities for new clinical studies. Start-up activities that can be performed remotely will continue and we will resume on-site activities and new study initiations on a case-by-case basis as local conditions allow. We also paused screening of new patient recruitment for a small minority of non-critical ongoing studies representing approximately 15% of our clinical trials, but are already in the process of reactivating screening in some of these studies again as local conditions allow. The remainder of our studies continue to enroll, although we have seen decreased screening rates in the short term as would be expected in the current environment. At this time, we expect limited impact to clinical trials that are already fully enrolled. Across our portfolio, we've implemented measures to ensure study continuity and minimize delays. These include actions such as shipping study drug directly to patients to avoid unnecessary study visits; conducting virtual study visits and remote data collection wherever possible; and shifting enrollment to geographies and clinical centers that are either less impacted or are already entering recovery. Based on these efforts, we currently expect minimal impact to the overall timing of our critical programs and to our key regulatory submissions. In immunology, we expect limited impact to the programs for RINVOQ and SKYRIZI in new disease areas. We are on track to submit our regulatory applications for RINVOQ in psoriatic arthritis in the second quarter and our filings for atopic dermatitis and ankylosing spondylitis are planned for the second half of this year. The data from our Phase 3 studies evaluating RINVOQ in atopic dermatitis are also expected in the middle of the year. The programs for SKYRIZI in new disease areas are also advancing very well. We continue to expect to see data from Phase 3 studies in both psoriatic arthritis and Crohn's disease in the second half of the year, with regulatory submissions for both indications expected in 2021. We continue to make good progress with our early-stage immunology pipeline as well and we expect to be able to share results from the proof-of-concept study, evaluating our novel TNF steroid conjugate in RA patients very soon. We recently completed the Phase 2 proof-of-concept study evaluating ABBV-599 in RA patients, where our JAK-BTK inhibitor combination demonstrated superior efficacy compared to placebo, but the efficacy results did not prove differentiated from monotherapy with RINVOQ. Based on these results, we are discontinuing development of ABBV-599 in rheumatoid arthritis. We plan to continue development in other autoimmune diseases where there is a greater B-cell contribution, such as lupus and systemic sclerosis in which dual JAK-BTK inhibition could provide superior benefit over current standard of care. In the area of oncology, we continue to make good progress with our hem/onc programs where we achieved several important milestones in the first part of the year. We recently received a label update for IMBRUVICA based on results from the E1912 study, which demonstrated the superiority of IMBRUVICA to FCR in frontline fit patients with CLL. For patients who could tolerate it the FCR regimen had been considered the gold standard for efficacy in frontline treatment for more than a decade. Demonstrating a strong progression-free survival benefit over FCR and incorporating these data into the label is another important addition to the breadth of data supporting IMBRUVICA use in frontline CLL. Continuing with our hem/onc programs, we recently announced positive top line results for VENCLEXTA in the Phase 3 VIALE-A study in AML. In this study, VENCLEXTA, in combination with azacitidine, demonstrated a statistically significant improvement in overall survival and in composite complete remission rate versus azacitidine alone in patients with previously untreated AML, who are ineligible for intensive chemotherapy. The VIALE-A study was stopped early due to positive efficacy results at the first interim analysis of overall survival, demonstrating VENCLEXTA's clinical benefit to these patients, for whom there are a few treatment options. We also announced the results from a second smaller Phase 3 study in frontline ineligible AML patients, the VIALE-C trial, which evaluated VENCLEXTA in combination with low-dose cytarabine. While the study did not meet its primary endpoint of overall survival, treatment with the VENCLEXTA combination showed an observed 25% reduction in the risk of death compared to low-dose cytarabine alone. We believe that the failure to hit statistical significance on the survival endpoint in this trial was due to limitations on the sample size of the study. With an additional six months of follow-up in the VIALE-C study, the VENCLEXTA combination demonstrated a median overall survival of 8.4 months, compared to 4.1 months for low-dose cytarabine alone, with a hazard ratio of 0.7 and a nominal p-value of 0.04. All secondary endpoints were in favor of the VENCLEXTA combination as well, including higher rates of response, earlier remissions increased transfusion independence and longer event-free survival. The data from both Phase 3 studies in AML will be submitted to the FDA and global health authorities in the coming months with regulatory approvals beginning later this year or early next year. We also remain on track to start several additional Phase 3 studies in Bcl-2 driven diseases later this year, including VENCLEXTA in fit patients with AML and in high-risk Myelodysplastic Syndrome, as well as navitoclax in frontline and second-line myelofibrosis. So in summary, we've continued to make good progress with our development programs, despite the challenges associated with the coronavirus pandemic. Once the situation is stabilized, we will work to restart paused clinical studies and evaluate the impact to our portfolio. But at this point, we do not expect the global pandemic to have long-term or significant impacts on our R&D programs. Our pipeline remains very robust and we expect many important milestones over the course of the next several years, which will support AbbVie's strong growth over the long term. With that, I'll turn the call over to Rob for additional comments on our first quarter performance. Rob? Rob Michael: Thank you, Mike. Starting with our first quarter results, we delivered strong top and bottom line performance. Total net revenues were $8.6 billion, up 10.7% on an operational basis, excluding a 0.6% unfavorable impact from foreign exchange. These results include approximately $190 million of inventory stocking related to the COVID-19 pandemic. We reported adjusted earnings per share of $2.42, reflecting growth of 13.1% compared to prior year and above our guidance midpoint by $0.13, including $0.04 from underlying business strength and $0.09 related to COVID-19 inventory stocking. Several key products contributed to growth in the first quarter. U.S. HUMIRA sales were $3.7 billion, up 13.7% compared to prior year, reflecting double-digit volume growth plus price. These results include approximately $65 million of COVID-19 inventory stocking. Internationally, HUMIRA sales were $1 billion, down 12.8% operationally, reflecting biosimilar competition across Europe and other international markets and ahead of our expectations. These results include approximately $35 million of COVID-19 inventory stocking. SKYRIZI is performing extremely well and above our expectations. Global sales were $300 million with U.S. in-market -- in-play market share now exceeding 30%. We also continue to see robust demand for RINVOQ with sales of $86 million in the quarter. Hematologic oncology global sales were more than $1.5 billion, up 32.3% on an operational basis, driven by continued strong performance of both IMBRUVICA and VENCLEXTA. IMBRUVICA global net revenues were $1.2 billion, up 20.6% driven by strong share in all lines of therapy in CLL. These results include approximately $45 million of COVID-19 inventory stocking. VENCLEXTA revenues were $317 million, driven by continued share gains across all approved indications. Global HCV sales were $564 million, down 30.2% on an operational basis, driven by lower treated patient volumes in select international markets and increased competition within the U.S. Managed Medicaid segment. We also saw continued strong operational sales growth for Creon and Duodopa. Turning now to the P&L profile for the first quarter. Adjusted gross margin was 82.7% of sales ahead of our full year guidance due to sales mix and currency hedges in place. Adjusted R&D investment was 14.3% of sales, supporting our pipeline programs in oncology immunology and other areas. Adjusted SG&A expense was 18.6% of sales, reflecting continued investment in our on-market products and newly launched assets. The adjusted operating margin ratio was 49.8% of sales, an improvement of 170 basis points versus prior year, including a 70 basis point benefit from inventory stocking. Adjusted net interest expense was $284 million and the adjusted tax rate was 9.7%. As Rick previously discussed, we are closely monitoring the impact of the COVID-19 pandemic. Given the momentum of the business heading into the pandemic and our current assumptions regarding timing of the recovery, we remain confident in our previously communicated full year adjusted earnings per share guidance of between $9.61 to $9.71 for stand-alone AbbVie. Excluded from this guidance is $2.01 of known intangible amortization and specified items. This guidance now contemplates full year revenue growth of approximately 7% on an operational basis. At current rates, we now expect foreign exchange to have a 70 basis point unfavorable impact on full year reported sales growth. Included in this guidance are the following updated full year assumptions. We now expect U.S. HUMIRA sales growth of approximately 7%. For SKYRIZI, we now expect global revenues of approximately $1.4 billion. And for global HCV, we now expect sales of approximately $2.3 billion. Moving to the P&L. We now forecast adjusted gross margin approaching 82% of sales SG&A expense to be approximately 19% of sales and adjusted operating margin approaching 49% of sales, an improvement of 140 basis points versus 2019. All other full year 2020 guidance assumptions remain unchanged. As we look ahead to the second quarter, we anticipate adjusted revenue of approximately $8.1 billion for stand-alone AbbVie. This guidance assumes reversal of inventory stocking from the first quarter as well as slower new patient starts due to COVID-19. At current rates, we expect foreign exchange to have an 80 basis point unfavorable impact on reported sales growth. We are forecasting an adjusted operating margin ratio of approximately 47.5% of sales, including a reversal of the 70 basis point benefit from inventory stocking in the first quarter. We expect adjusted earnings per share between $2.10 and $2.16 excluding approximately $0.53 of known intangible amortization and specified items. AbbVie remains well positioned to execute on our capital allocation priorities. We generated $3.8 billion of operating cash flow in the first quarter. Our cash balance at the end of March was $41 billion, including funding designated for the Allergan acquisition. The robust cash flow generation of the combined company will be used to rapidly pay down debt, support a strong and growing dividend and pursue additional innovative mid to late-stage pipeline assets. We have committed to paying down $15 billion to $18 billion of combined company debt by the end of 2021 of which nearly $7 billion will be repaid by the end of May 2020. We expect to achieve a net debt-to-EBITDA ratio of 2.5 times by the end of 2021 with further deleveraging through 2023. In closing, AbbVie's performance and financial condition remains strong. Given the nature of the important therapies in our portfolio and the ongoing efforts of the people within our organization, our business is well positioned to navigate the current COVID-19 related challenges. With that, I'll turn the call back over to Liz. Liz Shea: Thanks Rob. We will now open the call for questions. Operator, first question please. Operator: [Operator Instructions] And our first question today is from Vamil Divan from Mizuho. Vamil Divan: Great. Thanks so much for taking the questions and all the color that you've provided in your comments. And maybe just a couple if I could. One, you talked about the Allergan deal and obviously some of the assumptions there. I'm just thinking big picture -- and I guess this is for Rick just in terms of your -- kind of where you see the value of that deal. I know you -- obviously some of the assumptions in the near-term have changed and you mentioned the esthetics impact is probably more transient. But just to confirm for investors, do you see any changes over the longer term value of this transaction? We're obviously getting a lot of questions just given the nature of the esthetics business right now. And then second one on the dividend. You mentioned, obviously, your support for a strong and growing dividend. Is there also just any change as to how you think about dividend growth going forward given the current environment? Obviously you've still been growing but is there maybe growing at a lower rate, or any change at all there just – it would be great to clarify. Thanks again. Rick Gonzalez: Vamil this is Rick. I mean, I'll take those two questions. Let me do the second one, because it will be shorter first. So we don't see any changes in the assumptions we're making from the standpoint of the growth of the dividend based on everything that we have analyzed and I would say the robust performance of our business going into the COVID crisis and how we view the COVID crisis being a transient situation that, although difficult to predict exactly when all the geographies will reach some level of normalcy, we know that will occur at some point. And so we don't view any significant change there. On the value of the Allergan transaction, I would tell you that we don't see any change, fundamental change in the long-term value of the transaction. The benefits that we were trying to derive by acquiring the Allergan business are the same. And the long-term valuation I believe is the same. Now I think what some of the investors are probably concerned about is, obviously, the esthetics business is an important franchise as I indicated before represents about one-third of the revenues and about one-third of the profits. And it's an attractive franchise. And so I think the question that investors have, is how is it going to recover? And how long will it take to recover? And I think look those are reasonable questions. And as you can probably imagine, we have been doing a tremendous amount of work to try to evaluate not only the impact of COVID on our business, but also the impact of COVID on the Allergan business. And specifically I'd say, we've spent a considerable amount of time looking at the esthetics business. So I'm going to take a couple of minutes here and walk you through what that data looks like, so that you have a good perspective of at least the data that we're operating against to make the assumptions that we're making. Now what I am going to say is because of the Irish takeover code, we can't talk about the specific financials of Allergan until they are public and they're not public right now. So I'm not going to talk about their financial performance in any way. But I think, I can give you a pretty good characterization as to the work that we've done here and the conclusions that we've drawn. So I think if you step back and you look at the situation, it is clearly a situation, one, it's a complex situation. And two it's not a situation that any of us have ever experienced before meaning that this has both an economic disruption factor built in and it has a supply and demand disruption factor that's built in. We've certainly seen economic impacts on this business before and we know how it behaved in those circumstances. So as we try to approach understanding what the recovery will likely look like, we've essentially looked at four fundamental issues. Number one is, are there any analogs that would tell us what that recovery curve's going to look like? Number two, what is it going to be -- what is it going to take in order for the supply side? And when I say supply side what I mean is plastic surgeons, med spas, dermatology offices, which are the primary providers of those procedures. What is it going to take for the supply side to get back to where it was? And then number two -- or number three rather, what is going to be necessary on the demand side? And demand, I mean, consumer’s users of these procedures. And then finally, will there be a change in the situation from a competitive standpoint? Those are the four fundamentals that we looked at. We've looked at this both in conjunction with Allergan and we also have done an independent analysis with the same consulting firm that we used when we were considering acquiring the Allergan business. So we did two independent work streams to come to our conclusions. So let me start with the analogs. There are two right? There is the 2008, 2009 recession. And as I've said in my comments, there we saw a very sharp D-shaped recovery. And in fact the business recovered and actually grew faster on the other side of that The second analog is China. China has reopened most of its geographies not all, but most and they've been open for approximately seven or eight weeks now. If we look at the data from China what it says is 86% of the clinics have reopened. Patient traffic is back to about 55%. Volume is just under 50%, like 45% to 48%, slightly lower because those clinics are also burning off some of their inventory. So it doesn't outdate. So, I'd say the two analogs that we came up with looked pretty encouraging. Now let's look at the supply side. So, on the supply side, what we're trying to understand here is, what is the intent? And what is the preparation for these offices to reopen? And I think there's a couple of important facts here that help support and guide us to what that might look like. First the major medical societies like the plastic surgery society, the aesthetic society and others have now issued guidelines to these practices on the procedures that they should use to restart. And they include things like temperature checks, masks, gloves, face shields, lower densities in their offices. So why is that important? Well, why that's important is, this gives those offices a guideline as to how they should reopen. And probably more importantly, it gives them confidence on how they should reopen. Allergan has worked with their customers. A number of their customers, a large percentage of their customers requested the U.S. government stimulus funds. And so what we do know is that a significant portion of those practices should be in a position where financially they can reopen fairly quickly. And finally, Allergan has done a number of surveys with a large group of customers that show that the demand to reopen upon lifting of the stay-at-home orders and implementation of these patient safety guidelines is very high. And we anticipate that they will start reopening in May, and that's what our data told us, and the survey data told us. I'd say if anything, it seems to be moving faster than what we originally anticipated, because some states in the U.S. have opened up more quickly. So, then the next question is the demand side, what's that going to look like? And here I'd say, again, Allergan did some very good work. If you look at the brilliant distinctions database, which has about two million active members, represents about 70% of Allergan's users, it shows that 70% of the growing distinction consumers have household incomes of greater than $100,000, and 50% have incomes -- household incomes of greater than $150,000 a year, and it shows that 60% of those consumers work for corporations not small businesses. Allergan also conducted a recent user survey that had just under 450 consumers that they interviewed. And it showed that 80% of the consumers said that the COVID crisis would have no or little impact on their household incomes. 94% of those consumers said, they would reschedule an appointment for procedures in the next 90 days, and two-thirds of them said upon restrictions being lifted they with schedule an appointment in 30 days. So now you turn to the competitive environment. Allergan competes mostly against smaller less financially strong companies. I'd also say that, Allergan has done an excellent job. I give a tremendous amount of credit to Carrie Strom and Bill Meury. They responded quickly and aggressively to this crisis with their customers. They extended payment terms. They converted credits to checks to help with cash flow at these offices. They protected the customers' volume discounts. They facilitated online sales of Allergan skin medical products, again to get those offices some cash flow. And they changed the product return policy so the customers are protected from any product outdating. I'd also say from a competitive standpoint, Allergan didn't have any layoffs. They maintained or accelerated their R&D programs. And you have to remember Allergan has the largest commercial footprint by a significant margin compared to anyone else in this business. So what the data tells me is this, the analog show the business bounces back and it's resilient. The supply side should ramp quickly when the environment allows. Consumers have a strong desire to restart treatments, and they have the financial capacity to do so. And I think Allergan did a nice job of creating loyalty with these practices, and should come out of this in a very strong competitive position, maybe even stronger than they were before. The independent analysis that we did also surveyed customers and providers. And I would say, it looks very similar to what the Allergan analysis looks like. So, look, we can't predict is exactly how long it will take in every state and in every country around the world, but I think we can predict with a pretty high degree of certainty that the business will bounce back. So, those are some of the keys that I think make us feel confident in the valuation. Liz Shea: Thanks Vamil. Operator, next question please. Operator: Thank you. Our next question is from Geoffrey Porges from SVB Leerink. Geoffrey Porges: Thank you very much for taking the question. First, there are a number of things that are obviously affecting the environment right now Rick and I just want to ask about SKYRIZI and RINVOQ. You've previously given some longer-term aspirational revenue targets. I'm just wondering how you'd feel about those targets. Now we've seen a few quarters for each product. And also I understand you're going to have a little bit of COVID disruption. And then could you just talk a little bit more -- I think that's very helpful coverage of the plastic surgeon context. Can you just talk a little bit more about the other specialties and products where you're expecting impairment in Q2 and how quickly they could bounce back? Thank you. Rick Gonzalez: Yes. So fundamentally I would tell you we don't have any change in the long-term forecast for SKYRIZI and RINVOQ. I think one of the things that's impressive when we look at both SKYRIZI and RINVOQ is both the speed and acceleration of the ramp that we're seeing in the share capture of these assets. So let me give you a perspective on it. If you look at SKYRIZI as an example SKYRIZI within about three months achieved the number one position in psoriasis in-play psoriasis share. And then the rate of capture has actually accelerated from there. It achieved it at about 20%. If you look at the January data which is the most recent independent data that we have we have internal data that we also use to project. But the January data showed that it's at 31% and the slope of that line is accelerating and accelerating at a pretty good clip. And it is widening the range between it and the number 2 player in a significant way. And so this thing has tremendous momentum. Yes obviously the COVID crisis has created a disruption. As I mentioned in my comments if a dermatology office is closed obviously they're not prescribing anything including SKYRIZI. But that's a temporary phenomenon and we'll see these offices start to open back up. And I have no reason to believe that that momentum won't come back as patients feel comfortable to go back into their offices. RINVOQ obviously launched -- SKYRIZI launched in April and RINVOQ launched in August. So it launched later. But I'd say we've also seen on RINVOQ now a similar acceleration of its capture rate of share in -- in-play share in RA. And it too is accelerating going into this. It's about 11.3% on the last data point. And I'd say based on once things settle back out from COVID, it would take it probably three months to pass. There's a whole group of players at number two. HUMIRA is number one, but it would take probably three months for it to pass that group that's in number two. And I would expect it moves into the number two -- position shortly after that, after the disruption has subsided and we have a chance to continue to drive it. And so I feel very good about both of those assets and what the long-term performance of those look like, I think as I look at the R&D programs for both of them and the ability to expand the indications much like we did with HUMIRA, these assets have tremendous opportunities. So I feel good about it. Other -- by other specialties I believe what you're asking is what's going to happen to the other aspects of the business? Because what I was referencing on aesthetics really covered the range of supply side. So it was plastic surgeries derms and med spas. So again, we can't talk about the numbers, but as I indicated in my comments, I would expect the therapeutic side of Allergan to recover very similar to RSI a temporary disruption. There is likely to be a more significant impact on BOTOX therapeutic because about half of its volume comes from hospitals. And -- but we would expect that to bounce back once those hospitals start accepting non-emergency non-COVID patients. So we don't see anything in the data as we analyze it that would suggest that there's anything that's happening to any of their products that would impair the original assumptions we made about those products. Liz Shea: Thank you. Next question please, operator. Operator: Our next question is from Steve Scala from Cowen. Steve Scala: Thank you. I have a couple of questions. But first congratulations on a very strong quarter under very difficult conditions. So the first question is even pre-pandemic AbbVie seem to have embraced digital marketing. I think the company previously said that pre-pandemic 40% of commercial activities were already virtual. What does AbbVie do differently than peers? And does this expertise explain in part the strength of SKYRIZI and RINVOQ in the first quarter? And then the second question is just a housekeeping question. Just curious do you expect that Allergan will publicly report its first quarter? Thank you. Rick Gonzalez: I mean on the digital marketing, I mean obviously we have a significant expertise in that area. And I honestly can't tell you how differentiated that is versus other competitors because I think many companies like our have gone to a significant portion of their commercial messagings through digital marketing. I mean, I think we're very effective at it. I don't think that is what's driving the RINVOQ SKYRIZI performance. I think what's driving it is really, two fundamental things. One is obviously these assets have very strong clinical profiles. They fit a need in the market an unmet need that's in the market that was consistent with what we originally assumed when we were trying to develop replacements for HUMIRA. And I think we're all extremely pleased that these assets are doing a very good job of demonstrating superiority to the gold standard HUMIRA. The second thing is I think obviously, this is a market we know how to execute in at a very high level. We have a tremendous level of experience in this market, a tremendous reputation in this market. And I think our commercial organization executes at a very high level in this market. I think that's what's driving the performance and it makes me feel good about what the future looks like for these assets. As far as Allergan is concerned, I don't know if they're going to -- well think of it with this way. I don't think I should comment on when they're going to publicly report their first quarter results. I think that's something they should probably respond to not us. Steve Scala: Thank you. Liz Shea: Thanks, Steve. Operator, next question please. Operator: Thank you. Our next question is from Navin Jacob from UBS. Navin Jacob: Hi. Navin from UBS. Thanks for taking the question. So I heard the $1.4 billion for SKYRIZI an upgrade versus the $1.2 billion. Just wondering if you had an update on RINVOQ as well. I think you had said $500 million for the full year. Maybe I missed it, but just wondering if you could provide an update on that guidance as well. And then with regards to the slight lowering of the full year HUMIRA guidance, wondering if there's any color on what's driving that, obviously COVID-19 impacting things. But is it because of -- any color as to whether it's COVID-19 specifically or if it's increased in gross to net or if it's an increase in the switching to SKYRIZI and RINVOQ? Any of that would be helpful. Thank you so much. Rick Gonzalez: Okay. Thank you. So let me talk about it at a little higher level and I'm going to hand it over to Rob to give you more specifics. I think the way to think about this is we came into this first quarter. If you look at our first quarter performance had COVID not happen, we would have been sitting here contemplating how we raised guidance. But because of the uncertainty of what's going to happen in the second quarter, we obviously had to make an assessment of what we thought that impact would be. And that's why I outlined what those assumptions are. So you can think about it this way. We're essentially assuming the business is overperforming and the data clearly supports the business is overperforming. We're going to have somewhat of a negative impact in the second quarter that we're basically saying, we can overcome. And we had to estimate where that would occur. We're raising SKYRIZI, because the momentum is such that even with some caution about second quarter, we know we're going to beat that number. RINVOQ, we feel good about RINVOQ as well, but we don't need to raise that at this point. We need to give it probably another three four months and then we'll make a decision what that looks like. HUMIRA has a very large installed base. And so, I indicated that we are making some adjustments to what we think will happen with channel mix specifically Medicaid. We've worked diligently to try to understand what that looks like. And as you probably know during the 2008, 2009 recession, which is probably the best thing that we had to be able to compare it to, Medicaid went up about two points from 2007 to 2009, two percentage points. So we have factored in some potential shift in HUMIRA and that's primarily what we're reflecting. Rob can give you a little bit more color, but I'd say that's a significant part of what we're trying to reflect there. We also took down MAVYRET. And MAVYRET is two things. One it is COVID-related. Probably about half of it's COVID related there, where HCV internationally is administered through hospitals and they've clearly been disrupted. And we need that disruption to play through before we can get back to the same momentum. In the U.S. though I would say, it's primarily driven by price. That month is still under price pressure and some share pressure. So those are the two most significant ones. Rob? Rob Michael: Yes. Navin, so if you look at the guidance we gave of approximately 7% growth, so that translates in about a $300 million change for U.S. HUMIRA. I'd split it really in the three buckets evenly. So as we think about unemployment, higher PAP volume, Medicaid channel mix each of those say one-third and one-third from those two. And then the remaining one-third would be just lower new patient starts during the stay-at-home period. So that will be most acute in the second quarter. As it relates to SKYRIZI -- and look the momentum from SKYRIZI is very, very strong. And we would have raised it even higher had it not been for the disruption in Q2 on new patient starts. So despite having that disruption on new patient starts, we're still taking the guidance up. We would have taken up higher without that. And I think Rick characterized the HCV change very well. Liz Shea: Thank you, Navin. Operator, next question please. Operator: Thank you. Our next question is from Randall Stanicky from RBC Capital Markets. Randall Stanicky: Great. Thanks guys. Rick focus is going to shift pretty quickly here to pro forma 2021 earnings. You've had more time to prepare for the integration given COVID-19, but can you just talk about does COVID-19 impact those integration plans at all? And then, how are you thinking about the synergies and specifically, how quickly you can realize those $2 billion plus in cost synergies? I know they're third-party verified under Irish law, but at the same time it's -- 90% of that is operating expenses. So the question is why couldn't we see more of that realized early on? Thanks. Rick Gonzalez: Yeah. I think as it relates to pro forma earnings, I mean, once we close the transaction at that point we will evaluate the business again and make a decision at which point we're going to provide pro forma earnings. As far as integration is, concerned I would tell you that, we're not – we have done all the integration work. We're well prepared and have been prepared now for several months to do the final integration. And I don't believe -- we're operating AbbVie at a very high level of effectiveness as we're operating today where a significant number of people are working remotely. I wouldn't say it's the ideal scenario. I'd much prefer we can all get back to operating the way, we did before. But look it's not practical right now. And I don't believe that anything will change the performance of the integration as it relates to COVID. So I'm not overly concerned about that. Synergies, obviously, we have built a synergy plan that we are very comfortable with. And we haven't – I don't believe we've given the gating of that yet right? We have not. Okay. That was Rob shaking his head no because you can't see Rob. So we've obviously gated that. I wouldn't say, we have changed the gating because of COVID one way or another, but we feel good about achieving those synergies. And obviously, everyone that does transactions like ours tries to overachieve their synergies. And we won't be any different than that, but we'll give you an update on what that gating looks like once we've gated the pro forma guidance. Liz Shea: Thanks, Randall. Operator, next question please. Operator: Our next question is from Terence Flynn from Goldman Sachs. Terence Flynn: Hi. Thanks for all the color today. I really appreciate it. Just wondering if – first question is if COVID has impacted the rate of uptake of biosimilars in Europe at all either on the positive side or the negative side. And then for ABBV-3373, I know you mentioned the data is coming out in the near term. Maybe just can you remind us what you're hoping to see here on the efficacy side to advance this into further studies? Thank you. Rick Gonzalez: Yeah. So this is Rick. I'll cover the first one. I may hand it over to Rob to give you a little more specifics, and then Mike will cover the second question. So I probably saw in the quarter, we did better internationally than we had projected initially. And so that is related to a great extent that we have seen less biosimilar conversion than we originally anticipated. It's a little difficult to tell at this point whether or not that is COVID-related. In other words one hypothesis could be and it is nothing, but a hypothesis is that because people are staying at home they can't get converted to biosimilars as rapidly. I think it's not the one that, our area organizations think is happening. It just appears that we're performing better than we had expected. But I think to know that for sure, we'll have to see a little more time play out. But overall, we feel pretty good. And so I'm not giving you a very good answer, because I don't know the answer totally. So I'm giving you the best information that I have available to me. Rob anything you'd add on? Rob Michael: I think if you look at our beat versus guidance it's about approximately $140 million. Keep in mind that, we have about $35 million of COVID-related inventory stocking. We did have some tender timing in Brazil. It's about $30 million. So the balance of that you'd call $75 million of favorability. Could there be some COVID-related impact there? Possibly. If you look, we didn't change our full year guidance even though we have the U.S. dollar strengthening. So that's inherently about a $70 million $75 million operational upside that we've baked in that's offsetting that foreign exchange headwind. So it is going better so far than we expected, which is great but it's hard to pinpoint whether it's COVID-related or not. Michael Severino: This is Mike. I'll take the question on 3373, which is our TNF steroid conjugate. It's in a proof-of-concept study in rheumatoid arthritis. And what we'd like to see there is efficacy that is greater than what can be achieved with currently available agents really across the board, but also with a particular focus on higher levels of response. Obviously, we're going to want to see that with an appropriate safety profile recognizing that a proof-of-concept study is a relatively limited safety database. And importantly, we're going to want to confirm that we can deliver that without impacting the pituitary access as a measure for systemic steroid effects. We have stated in other settings that from the 1b portion of this trial in healthy volunteers, we've shown we can deliver this construct without those steroid effects without impacting the pituitary axis. So we would expect to be able to do the same thing in RA patients in treatment, but we'd want to confirm that obviously. Liz Shea: Thanks, Terence. Operator, next question please. Operator: Thank you. Our next question is from Andrew Baum from Citi. Andrew Baum: Thank you. A question on the long-term impacts of COVID-19. I'm interested in what's the prescription rate for both SKYRIZI and RINVOQ among private practice versus salaried dermatologists or rheumatologists? I guess, what I'm thoughtful about is the extent to which the economic pressures that COVID-19 may force many private practice physicians to become salaried with perhaps more constraints on their prescribing or switch frequency? Many thanks. Rick Gonzalez: Andrew, I would say I don't know the answer to your question to be honest. I can tell you that we don't see a -- today we don't see a significant difference across practices from a behavior standpoint. But future behavior I think that will be a little more difficult to predict. I think most physicians prescribe a medicine that they believe -- in the United States, that they believe is fundamentally the right medicine for that patient. And I would say that the profile of the drug is what tends to drive their prescribing habits more than anything else. So I would say, I would be surprised if there's any difference in the behavior. We'll go back to our commercial group and see if they have any data on it. And if so, we'll provide something back to you. Liz Shea: Thanks, Andrew. Operator next question please. Operator: Thank you. Our next question is from Tim Anderson from Wolfe Research. Tim Anderson: Thank you. A couple of questions please. The first is on business development. And Allergan certainly helps fill the long-term hole from HUMIRA going off patent, but I still view it as M&A is going to be a likely continued part of the story. So my question here is the time frame for AbbVie being actively back in the marketplace to do additional acquisitions, and I'm defining those acquisitions as smaller bolt-ons single-digit billion-dollar types of deals, could that start to happen as soon as the current year in 2020? Second question is on RINVOQ. In atopic derm, you are running a head-to-head study versus DUPIXENT called heads up similar to what Pfizer has done with its JADE COMPARE trial. And I think your results come out in early 2021. The Pfizer results were perceived as being a bit underwhelming. I'm wondering, if you expect RINVOQ results would be any different from Pfizer's? Thank you. Rick Gonzalez: On the BD front, we haven't changed from what we have talked about historically. Our capital allocation strategy is -- support a strong and growing dividend, pay down debt aggressively. And we've allocated approximately $2 billion per year that we can do more bolt-on kinds of transactions. I can tell you that Mike and the BD team have been very actively pursuing what we think fits strategically and doing the work that's necessary to determine, is it an asset that we want to add to our portfolio and where we find those opportunities? And we believe they're a good return for the company. We're aggressively pursuing those. And so I think you will see over the course of time here, you will see us do deals that are consistent with that strategy. And clearly there's a lot of focus on oncology that we have interest, but other areas as well. Mike? Michael Severino: So this is Mike. I'll cover the question on atopic dermatitis. Obviously, we're well aware of the Pfizer data from their program in atopic dermatitis at least at the top-line level that are currently available. And what I would say is we're going to have to look at each of these programs individually, although there are some mechanistic similarities factors such as dose selection ability to cover the relevant pathways are important when you are trying to predict the results that you're likely to see. We feel good about the pharmacodynamic coverage we've been able to drive with RINVOQ really across the board, but particularly in AD. We had very strong Phase 2b results. So we feel that our program will stand on its own merits and we look forward to those head-to-head data as we look forward to all the data from the Phase 3 program in atopic dermatitis. Tim Anderson: Thank you. Liz Shea: Thanks, Tim. Operator, next question please. Operator: Thank you. Our next question is from Carter Gould from Barclays. Carter Gould: Great. Good morning. Congrats on the quarter. A few questions. Rick, I appreciate the color on the Allergan aesthetic business. Maybe just a follow-up. Just trying to understand the sensitivity around your deleveraging forecast to the return of the aesthetics business in line with your assumptions? And I guess also based on your survey work, maybe you read on the rate -- not so much the rate, but like the ultimate return of the med spas and any view on I guess what percentage of those may not return given, I guess there's a view that that's somewhat of a more economically sensitive population relative to the broader BOTOX community. And then apologies if you already commented on this. On the pro forma guide that's going to come is the expectation that will come upon deal closing, or we'll have to wait to 2Q? And then maybe just given all the uncertainty around COVID, your latest thoughts about also providing longer-term guide at that point? Thank you. Rob Michael: Carter this is Rob. I'll take your question on deleveraging. Look, if you think about the amount of cash flow that the combined business generates, it's a tremendous amount of cash flow that we feel very confident in our ability to deliver on our deleveraging commitments. As I mentioned in my remarks, we still expect to pay down $15 billion, $18 billion of debt. We're going to have $7 billion paid down by the end of this month, and we still will be able to support a strong growing dividend. So even as we flex various scenarios, we feel very confident we've reaffirmed those commitments on deleveraging. Rick Gonzalez: As it relates to the med spa question, I would say, across the board, we looked at what kind of assumptions should we make about any consolidation in the industry. And the one thing I would say is, it does appear that these businesses fairly aggressively participated in the U.S. government stimulus programs, the Payroll Protection Programs and the other programs that were available. And so, I think, the data would suggest to us now that that won't be a massive impact. And if there were any consolidation across any of the channels and I don't know that any one channel really stands out in a significant way, we believe that there -- all we'll see is a shift of that capacity to other players, meaning they get bigger. And so, we're not assuming any significant reduction in the supply side of the channel that can't be absorbed through consolidation if necessary. On the pro forma guide, obviously, we're going to wait for the business to close. We're going to do some work on the business and then we'll provide the pro forma guidance after that. So depending upon the timing of when it closes and how close we are in the second quarter it could come on the second quarter call. So we're not really in a position right now where we can give you total clarity on that. Liz Shea: Thanks, Cater. Operator, we have time for one final question. Operator: Thank you. And our final question today is from Damien Conover from Morningstar. Damien Conover: Great. Thanks for taking the question. I just want to ask a question on the strength of SKYRIZI and RINVOQ. We're seeing great growth there. And both these drugs have shown excellent data. But I also want to ask, is there any ability to leverage the competitive positioning of HUMIRA here? And I guess I asked that, because I think about the recent launch of the IL-17s, which those competitors used to complain about the strong entrenchment of the TNF class and some of the rebating that was going on there. So I was just wondering, the two growth of, SKYRIZI and RINVOQ, is that really coming from the medicines themselves? So that's question one. And then the second question is, when thinking about the shift back towards normal and sort of the transient impact that we're likely to see from COVID, I wanted to ask about the thoughts around the potential second wave of coronavirus patients as some of the stay-at-home orders lessen up and doctor's office reopen? Is it the view of AbbVie that the second wave won't be that large, or that when the second wave comes we'll have strong treatment options and triaging that we'll be able to get to more business-as-normal operations? Thank you. Rick Gonzalez: Yes. I think, as we look at the strength of SKYRIZI and RINVOQ, it's driven by a couple of factors, right? Particularly, I'd say in the U.S., it's driven by a couple of factors. As I said a few minutes ago, certainly the clinical profile of the drug is first and foremost. The second is, you have to have broad-based managed care access in the United States to be successful. It doesn't matter how you much you convince the physician to use the product based on its clinical profile. If they can't get it reimbursed, they obviously can't prescribe it to their patients. And so that takes a company that has strong expertise in being able to deliver high levels of managed care access, which obviously we can. And then the third is just the effectiveness of your commercial and medical affairs organization. And I think in this area we have one of the best, if not the best. So I think those are the things that really drive it. In our business, you can't really leverage one product against the other specifically. So I don't believe it's a leverage issue. As far as the second wave, I'm going to let Mike cover most of that. The only thing I would say is we have not assumed another major shelter in place order in the fall in our assumptions. So we have assumed that we'll be able to manage through any increase in infections in the way we've built this forecast. Michael Severino: That's correct, Rick. And so, I think it's very hard to make exact predictions about the longer-term nature of the coronavirus infection rates. But what we are assuming, as Rick said is that, there will not be a major second wave in lockdown. And I think the factors that would play into that would be a much greater understanding of surveillance, broader access to testing, the ability to respond much more quickly based on experience. And based on those factors that I just mentioned, if small pockets of new infection do pop up, as well as hopefully the availability of some treatment options, although, I think, treatment options will continue to evolve over some period of time and renewed capacity or relief from the overcapacity status that the healthcare systems are currently operating under. So, I think, it's all of those features together that lead us to the view that supported the assumptions that Rick outlined in our thinking on this. Liz Shea: Thanks, Damien. And that concludes today's conference call. If you'd like to listen to a replay of the call please visit our website at investors.abbvie.com. Thanks again for joining us. Operator: Thank you. This does conclude today's conference. You may disconnect at this time.	[ { "speaker": "Operator", "text": "Good morning and thank you for standing by. Welcome to the AbbVie First Quarter 2020 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion. [Operator Instructions] I would now like to introduce Ms. Liz Shea, Vice President of Investor Relations." }, { "speaker": "Liz Shea", "text": "Good morning, and thanks for joining us. Also, on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Vice Chairman and President; and Rob Michael, Executive Vice President and Chief Financial Officer. Joining us for the Q&A portion of the call is Laura Schumacher, Vice Chairman External Affairs, Chief Legal Officer and Corporate Secretary. Before we get started, I'll remind you that some statements we make today may be considered forward-looking statements for the purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties including the impact of the COVID-19 pandemic on AbbVie's operations, results and financial results that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our 2019 Annual Report and Form 10-K and in our other SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today's conference call as in the past, non-GAAP financial measures will be used to help investors understand AbbVie's ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks we'll take your questions. So with that I'll now turn the call over to Rick." }, { "speaker": "Rick Gonzalez", "text": "Thank you, Liz. Good morning everyone and thank you for joining us. I'd like to start my remarks by acknowledging the tragic nature of the COVID-19 crisis, which has touched all elements of our -- in our lives in ways we never thought possible. The human toll that this pandemic has inflicted is unprecedented and the suffering unimaginable. During this very challenging time, I want to assure you that across AbbVie we are working carefully to ensure that our business continues to operate properly, our employees remain safe, our patients continue to receive their medicines and we are providing aid including product donations and financial assistance to address some of the critical needs of health care systems and underserved communities across the globe. As a matter of priority, we continue to closely manage manufacturing and supply chain resources around the world to ensure that our patients receive an uninterrupted supply of their medicines. Our manufacturing sites remain operational. And we have implemented additional measures at these facilities to ensure the safety of our employees and to protect our supply of API and finish medicines. We have adequate supplies in inventory to meet the expected demand for all AbbVie key medicines including KALETRA and NIMBEX, two therapies that have experienced a significant increase in demand directly related to COVID patient treatment. And we currently do not anticipate any product supply issues. AbbVie is also committed to supporting clinical research efforts for COVID-19. We have provided product donations to many health authorities and institutions globally so that AbbVie products may be further evaluated externally as potential treatments for this difficult disease. In times of crisis, it is our nature as individuals and our culture as a company to give back in any way we can. We recently announced that AbbVie has donated $35 million to help meet some of the critical needs around the world. We've partnered with several non-for-profit organizations who are on the front lines of the battle against COVID-19. And our donations have helped to support several important initiatives including the creation and operation of 20 mobile field hospitals in U.S. cities most impacted by the pandemic; the procurement and delivery of oxygen concentrators ventilators and personal protective equipment to health care systems in Europe; and various other essential programs including a donation to Feeding America to provide food and household supplies for those most in need including the elderly. We have donated a significant portion of AbbVie's own personal protective equipment supplies including N95 and surgical masks to hospitals near our facilities throughout the U.S. and Europe. We have also converted some of our own facilities including a pilot plant and several research laboratories to manufacture culture media and provide COVID-19 patient testing to supplement several public health departments. We are honored and committed to do what is in our power to help with this devastating pandemic and we will continue to look for ways where we are able to help. Now turning back to our business. I want to further discuss how the crisis is impacting our performance and expectations for the full year 2020. Today, I'm pleased to report strong results. For the first quarter, AbbVie's total revenues were up more than 10.5% on an operational basis and adjusted earnings per share of $2.42 was up more than 13% versus the prior year. These metrics were significantly above consensus and our initial expectations. Fortunately, we had very robust demand across our product portfolio heading into the COVID crisis. As the U.S. and other major countries around the world started implementing stay-at-home orders and social distancing strategies in late February, AbbVie as well as most of our customers started restricting face-to-face interactions resulting in reduced physician and patient contacts. These limitations which are still in effect for most major countries created two fundamental impacts on our business in the quarter. First, patients and pharmacies built up some additional inventory of our medicines to ensure they had adequate supply. And second, we saw fewer new patients visiting physician's offices, which had a modest impact on the number of new patient starts. Adjusting for COVID inventory dynamics, AbbVie's first quarter underlying operational sales growth was roughly 8.3%, significantly above expectations with double-digit underlying performance in both hem/onc and immunology, demonstrating the strong underlying performance of our business. Within hem/onc IMBRUVICA the market-leading treatment for CLL grew strong double-digits, driven by increased demand in the frontline setting where we recently received another important label update which Mike will discuss momentarily. VENCLEXTA also performed very well in the quarter with global revenues of $300 million, roughly double the first quarter of last year, following share expansion in both CLL and AML. Turning to our immunology business. HUMIRA continues to generate significant revenue. HUMIRA benefits from a substantial installed patient base, representing more than 80% of current demand. Globally, HUMIRA revenues were up nearly 6.5% on an operational basis in the quarter including strong double-digit growth in the U.S. The international biosimilar trends and dynamics remain largely consistent with our expectations. SKYRIZI Global revenues of $300 million were also significantly above expectations. Since the launch late last April, we have quickly established and expanded our leading in-play psoriasis patient share, which includes both new and switching patients and now exceeds 30%. This launch trend is truly remarkable and a testament to SKYRIZI's strong efficacy compared to other novel agents in the psoriasis category including HUMIRA and COSENTYX. RINVOQ is also performing at a very high level in the RA segment with global revenues of $86 million in the quarter. We estimate more than 17,500 prescriptions were filled including both paid and bridge, which is more than double the activity we saw in the prior quarter and now reflects approximately 11% in-play RA patient share. As demonstrated by our first quarter results, the underlying performance of our business remains very strong. We've now also begun to return to ordinary operations in select geographies around the world, where health authorities have deemed it safe to do so. And although early, we are seeing those countries ramp towards a normal operation and expected performance. This is obviously a challenging time to forecast, given the unique nature of the COVID pandemic including its global scope and unknown duration, and it is difficult to predict precisely when major countries around the world will return to normalcy. Despite this uncertainty, we believe it's important to provide a clear set of updated assumptions that reflect the latest view of our full year performance. We based our forecast on the best estimates we have at this time. And we will make updates if necessary on our next quarterly call. As I indicated earlier, our business was performing robustly, above expectations and above our guidance prior to the COVID-related impacts. We have spent considerable time, carefully evaluating the COVID dynamics from late March and April. Based on this analysis, COVID appears to be having two fundamental impacts on our business. First, there has been a variable impact on new patient starts due to physician's offices restricting patients' visits and patients adhering to stay-at-home orders. As an example, many dermatology offices are currently closed. AbbVie has a strong frontline position in dermatology with HUMIRA and SKYRIZI. And here we see new patient starts for these two brands were lower by approximately 30% to 40% over this time frame. Once these offices reopen, patient volume should return back to normalized levels. Second, we've also seen lower new patient utilization of hospital-based treatments, such as VENCLEXTA and HCV internationally, due to many hospitals limiting access to non-emergency, non-COVID patients. We have carefully modeled these COVID-related dynamics and incorporated the expected impact on our full year results. Our current forecast now assumes the following: Stay-at-home orders will be gradually lifted starting in May across Europe and the United States. 60 days after geography lifts stay-at-home orders, we expect physician offices and hospitals will reopen for more routine patient diagnosis and care and we expect patients will start returning to physicians' offices for routine treatment in that time frame. We have also factored in a modest increase to our patient assistance programs as well as a shift in our U.S. payer mix due to increased unemployment. Based on these specific assumptions, we are confident we can maintain our current full year 2020 adjusted earnings per share guidance. We will learn more as the second quarter progresses and we will continuously evaluate our current assumptions relative to how the environment evolves and the updates will be provided on our next quarterly call. On a related note, while we have not yet completed the Allergan transaction we have also been actively working to assess the impact of the COVID crisis on the Allergan business. It's important to highlight that Allergan has both a therapeutic business which is similar to the AbbVie business and represents approximately two-thirds of their revenues and profits; and an aesthetics business which represents roughly one-third of their revenues and profits. Based on the differences in the nature of these two portfolios, we expect them to be impacted differently as a result of the COVID pandemic. We expect Allergan's therapeutic business except for BOTOX Therapeutics to be impacted and recover from the COVID crisis in a manner very similar to the AbbVie business I outlined earlier. We expect BOTOX Therapeutics, which has a substantial hospital base to experience a more significant impact given that patients are being discouraged from going into the hospital for non-emergency procedures during the pandemic as I mentioned earlier. We also expect to see a more pronounced impact on Allergan's aesthetics business as many of their customers including plastic surgeons med spas and dermatology offices are closed and therefore not performing procedures. However, after carefully analyzing the aesthetics business performance during the 2008-2009 recession, which experienced a rapid V-shape recovery, the recent trends we are observing in China as clinics have reopened locally and procedures have started to ramp significantly and taking into account the household income and employment status of the aesthetics patient base, we remain confident that the expected near-term impact while likely substantial will be transient with the aesthetics business quickly ramping back to normalized trends following the relaxation of quarantine restrictions in the U.S. and major European markets. As it relates to the closing of the Allergan transaction, we have completed all requirements with the FTC and they are in the final stages of their review process. Following the FTC process, the last step is the Irish High Court approval. Based on everything we know today, we continue to expect the transaction should close in May. We remain confident that the AbbVie-Allergan combination will generate significant cash flows which will support our strong and growing dividend and rapid debt repayment and we remain highly committed to both of those priorities. So, in summary, we reported a very strong first quarter performance. The COVID crisis is truly unprecedented and we expect it will have a transient impact on our business, primarily affecting our second quarter performance. However, based on our analysis of the situation as well as reasonable timing assumptions for the return to a more normalized environment, we are confident in maintaining our full year adjusted earnings guidance which speaks volumes about the strength of AbbVie's business momentum entering the COVID crisis. With that, I'll turn the call over to Mike for some additional comments. Mike?" }, { "speaker": "Michael Severino", "text": "Thank you, Rick. Let me begin by echoing Rick's sentiment about how proud I am of our colleagues as our teams work to ensure our business continues with minimal disruption and our patients receive their essential medicines. The entire organization including our colleagues deemed on-site essential who continue to come into work every day and the individuals who have effectively adapted to working remotely have demonstrated resiliency, dedication, and compassion throughout this time of crisis. It's a testament to the culture we've built at AbbVie. Today, I'll focus my commentary on the ongoing efforts within AbbVie's R&D organization, to address COVID-19, and provide updates regarding our key development programs. As a leading global biopharmaceutical company, AbbVie is committed to supporting relief efforts for the coronavirus pandemic. In addition to the efforts highlighted by Rick, we have deployed our scientific and medical resources to help fight COVID-19 on several fronts. There is an urgent need to increase testing capacity within the United States. Public health authorities are actively working to address the issues that have limited capacity to-date including instrument availability, availability of diagnostic kits and reagents, and CLIA-certified lab capacity. Given the unprecedented nature of this pandemic and the need to significantly increase access to testing, AbbVie is working with health authorities here in Illinois, where we are headquartered and in Ludwigshafen in Germany, where we operate a major site, to create a clinical COVID testing capability. This will allow us to use our laboratory expertise to expand the COVID-19 testing capacity in both jurisdictions. We have also used our GMP capabilities to manufacture viral transport medium, which is necessary to preserve swabs prior to lab testing for the Illinois Department of Health and a number of academic medical centers. Like many companies in our industry, we recognize the extreme burden being placed on our hospitals, public health systems and medical professionals by this crisis. And in response, we have created programs to allow our employees, who have relevant medical, scientific or public health expertise to volunteer to support the fight against this pandemic. AbbVie has tremendous resources and we are doing everything we can to make these resources available in the fight against COVID-19. In addition to the efforts, I just described, our R&D team is looking at our existing medicines and pipeline assets to assess their potential for the treatment of COVID-19. AbbVie is collaborating with health authorities and academic institutions globally to support clinical trials of KALETRA, a protease inhibitor approved for the treatment of HIV infection to determine whether it has potential use in COVID-19. Two notable ongoing trials are the solidarity study being run by the World Health Organization and the discovery study being led by a consortium in France. We expect to see data from these studies very soon and we'll continue to monitor and update as information becomes available. We have also initiated a Phase II study of IMBRUVICA in patients with COVID-19 infection. The goal of this study is to determine whether IMBRUVICA is able to improve outcomes by blunting the overly exuberant immune response often referred to as the cytokine storm that contributes to the morbidity and mortality in COVID-19. Lastly, we are also collaborating with a number of groups to screen our internal libraries for compounds with activity against COVID-19. Clearly, this is a rapidly evolving situation and we will provide updates as additional information becomes available. Turning now to an update on the status of our clinical development programs. Our top priorities in the R&D organization are ensuring the safety of patients, investigators and our employees around the world maintaining the integrity of our clinical studies and continuing to advance our pipeline. We are carefully monitoring the situation and taking appropriate precautions to protect the safety of our study participants, clinical site staff and our employees. We understand that health care systems are under extreme pressure because of the need to respond to the COVID-19 pandemic. In many instances, hospital-based research staff have been redeployed to other duties and aren't available to address clinical trial-related matters. AbbVie is doing everything possible to avoid creating an additional burden to our clinical trial sites. Given the current environment, we have delayed on-site start-up activities for new clinical studies. Start-up activities that can be performed remotely will continue and we will resume on-site activities and new study initiations on a case-by-case basis as local conditions allow. We also paused screening of new patient recruitment for a small minority of non-critical ongoing studies representing approximately 15% of our clinical trials, but are already in the process of reactivating screening in some of these studies again as local conditions allow. The remainder of our studies continue to enroll, although we have seen decreased screening rates in the short term as would be expected in the current environment. At this time, we expect limited impact to clinical trials that are already fully enrolled. Across our portfolio, we've implemented measures to ensure study continuity and minimize delays. These include actions such as shipping study drug directly to patients to avoid unnecessary study visits; conducting virtual study visits and remote data collection wherever possible; and shifting enrollment to geographies and clinical centers that are either less impacted or are already entering recovery. Based on these efforts, we currently expect minimal impact to the overall timing of our critical programs and to our key regulatory submissions. In immunology, we expect limited impact to the programs for RINVOQ and SKYRIZI in new disease areas. We are on track to submit our regulatory applications for RINVOQ in psoriatic arthritis in the second quarter and our filings for atopic dermatitis and ankylosing spondylitis are planned for the second half of this year. The data from our Phase 3 studies evaluating RINVOQ in atopic dermatitis are also expected in the middle of the year. The programs for SKYRIZI in new disease areas are also advancing very well. We continue to expect to see data from Phase 3 studies in both psoriatic arthritis and Crohn's disease in the second half of the year, with regulatory submissions for both indications expected in 2021. We continue to make good progress with our early-stage immunology pipeline as well and we expect to be able to share results from the proof-of-concept study, evaluating our novel TNF steroid conjugate in RA patients very soon. We recently completed the Phase 2 proof-of-concept study evaluating ABBV-599 in RA patients, where our JAK-BTK inhibitor combination demonstrated superior efficacy compared to placebo, but the efficacy results did not prove differentiated from monotherapy with RINVOQ. Based on these results, we are discontinuing development of ABBV-599 in rheumatoid arthritis. We plan to continue development in other autoimmune diseases where there is a greater B-cell contribution, such as lupus and systemic sclerosis in which dual JAK-BTK inhibition could provide superior benefit over current standard of care. In the area of oncology, we continue to make good progress with our hem/onc programs where we achieved several important milestones in the first part of the year. We recently received a label update for IMBRUVICA based on results from the E1912 study, which demonstrated the superiority of IMBRUVICA to FCR in frontline fit patients with CLL. For patients who could tolerate it the FCR regimen had been considered the gold standard for efficacy in frontline treatment for more than a decade. Demonstrating a strong progression-free survival benefit over FCR and incorporating these data into the label is another important addition to the breadth of data supporting IMBRUVICA use in frontline CLL. Continuing with our hem/onc programs, we recently announced positive top line results for VENCLEXTA in the Phase 3 VIALE-A study in AML. In this study, VENCLEXTA, in combination with azacitidine, demonstrated a statistically significant improvement in overall survival and in composite complete remission rate versus azacitidine alone in patients with previously untreated AML, who are ineligible for intensive chemotherapy. The VIALE-A study was stopped early due to positive efficacy results at the first interim analysis of overall survival, demonstrating VENCLEXTA's clinical benefit to these patients, for whom there are a few treatment options. We also announced the results from a second smaller Phase 3 study in frontline ineligible AML patients, the VIALE-C trial, which evaluated VENCLEXTA in combination with low-dose cytarabine. While the study did not meet its primary endpoint of overall survival, treatment with the VENCLEXTA combination showed an observed 25% reduction in the risk of death compared to low-dose cytarabine alone. We believe that the failure to hit statistical significance on the survival endpoint in this trial was due to limitations on the sample size of the study. With an additional six months of follow-up in the VIALE-C study, the VENCLEXTA combination demonstrated a median overall survival of 8.4 months, compared to 4.1 months for low-dose cytarabine alone, with a hazard ratio of 0.7 and a nominal p-value of 0.04. All secondary endpoints were in favor of the VENCLEXTA combination as well, including higher rates of response, earlier remissions increased transfusion independence and longer event-free survival. The data from both Phase 3 studies in AML will be submitted to the FDA and global health authorities in the coming months with regulatory approvals beginning later this year or early next year. We also remain on track to start several additional Phase 3 studies in Bcl-2 driven diseases later this year, including VENCLEXTA in fit patients with AML and in high-risk Myelodysplastic Syndrome, as well as navitoclax in frontline and second-line myelofibrosis. So in summary, we've continued to make good progress with our development programs, despite the challenges associated with the coronavirus pandemic. Once the situation is stabilized, we will work to restart paused clinical studies and evaluate the impact to our portfolio. But at this point, we do not expect the global pandemic to have long-term or significant impacts on our R&D programs. Our pipeline remains very robust and we expect many important milestones over the course of the next several years, which will support AbbVie's strong growth over the long term. With that, I'll turn the call over to Rob for additional comments on our first quarter performance. Rob?" }, { "speaker": "Rob Michael", "text": "Thank you, Mike. Starting with our first quarter results, we delivered strong top and bottom line performance. Total net revenues were $8.6 billion, up 10.7% on an operational basis, excluding a 0.6% unfavorable impact from foreign exchange. These results include approximately $190 million of inventory stocking related to the COVID-19 pandemic. We reported adjusted earnings per share of $2.42, reflecting growth of 13.1% compared to prior year and above our guidance midpoint by $0.13, including $0.04 from underlying business strength and $0.09 related to COVID-19 inventory stocking. Several key products contributed to growth in the first quarter. U.S. HUMIRA sales were $3.7 billion, up 13.7% compared to prior year, reflecting double-digit volume growth plus price. These results include approximately $65 million of COVID-19 inventory stocking. Internationally, HUMIRA sales were $1 billion, down 12.8% operationally, reflecting biosimilar competition across Europe and other international markets and ahead of our expectations. These results include approximately $35 million of COVID-19 inventory stocking. SKYRIZI is performing extremely well and above our expectations. Global sales were $300 million with U.S. in-market -- in-play market share now exceeding 30%. We also continue to see robust demand for RINVOQ with sales of $86 million in the quarter. Hematologic oncology global sales were more than $1.5 billion, up 32.3% on an operational basis, driven by continued strong performance of both IMBRUVICA and VENCLEXTA. IMBRUVICA global net revenues were $1.2 billion, up 20.6% driven by strong share in all lines of therapy in CLL. These results include approximately $45 million of COVID-19 inventory stocking. VENCLEXTA revenues were $317 million, driven by continued share gains across all approved indications. Global HCV sales were $564 million, down 30.2% on an operational basis, driven by lower treated patient volumes in select international markets and increased competition within the U.S. Managed Medicaid segment. We also saw continued strong operational sales growth for Creon and Duodopa. Turning now to the P&L profile for the first quarter. Adjusted gross margin was 82.7% of sales ahead of our full year guidance due to sales mix and currency hedges in place. Adjusted R&D investment was 14.3% of sales, supporting our pipeline programs in oncology immunology and other areas. Adjusted SG&A expense was 18.6% of sales, reflecting continued investment in our on-market products and newly launched assets. The adjusted operating margin ratio was 49.8% of sales, an improvement of 170 basis points versus prior year, including a 70 basis point benefit from inventory stocking. Adjusted net interest expense was $284 million and the adjusted tax rate was 9.7%. As Rick previously discussed, we are closely monitoring the impact of the COVID-19 pandemic. Given the momentum of the business heading into the pandemic and our current assumptions regarding timing of the recovery, we remain confident in our previously communicated full year adjusted earnings per share guidance of between $9.61 to $9.71 for stand-alone AbbVie. Excluded from this guidance is $2.01 of known intangible amortization and specified items. This guidance now contemplates full year revenue growth of approximately 7% on an operational basis. At current rates, we now expect foreign exchange to have a 70 basis point unfavorable impact on full year reported sales growth. Included in this guidance are the following updated full year assumptions. We now expect U.S. HUMIRA sales growth of approximately 7%. For SKYRIZI, we now expect global revenues of approximately $1.4 billion. And for global HCV, we now expect sales of approximately $2.3 billion. Moving to the P&L. We now forecast adjusted gross margin approaching 82% of sales SG&A expense to be approximately 19% of sales and adjusted operating margin approaching 49% of sales, an improvement of 140 basis points versus 2019. All other full year 2020 guidance assumptions remain unchanged. As we look ahead to the second quarter, we anticipate adjusted revenue of approximately $8.1 billion for stand-alone AbbVie. This guidance assumes reversal of inventory stocking from the first quarter as well as slower new patient starts due to COVID-19. At current rates, we expect foreign exchange to have an 80 basis point unfavorable impact on reported sales growth. We are forecasting an adjusted operating margin ratio of approximately 47.5% of sales, including a reversal of the 70 basis point benefit from inventory stocking in the first quarter. We expect adjusted earnings per share between $2.10 and $2.16 excluding approximately $0.53 of known intangible amortization and specified items. AbbVie remains well positioned to execute on our capital allocation priorities. We generated $3.8 billion of operating cash flow in the first quarter. Our cash balance at the end of March was $41 billion, including funding designated for the Allergan acquisition. The robust cash flow generation of the combined company will be used to rapidly pay down debt, support a strong and growing dividend and pursue additional innovative mid to late-stage pipeline assets. We have committed to paying down $15 billion to $18 billion of combined company debt by the end of 2021 of which nearly $7 billion will be repaid by the end of May 2020. We expect to achieve a net debt-to-EBITDA ratio of 2.5 times by the end of 2021 with further deleveraging through 2023. In closing, AbbVie's performance and financial condition remains strong. Given the nature of the important therapies in our portfolio and the ongoing efforts of the people within our organization, our business is well positioned to navigate the current COVID-19 related challenges. With that, I'll turn the call back over to Liz." }, { "speaker": "Liz Shea", "text": "Thanks Rob. We will now open the call for questions. Operator, first question please." }, { "speaker": "Operator", "text": "[Operator Instructions] And our first question today is from Vamil Divan from Mizuho." }, { "speaker": "Vamil Divan", "text": "Great. Thanks so much for taking the questions and all the color that you've provided in your comments. And maybe just a couple if I could. One, you talked about the Allergan deal and obviously some of the assumptions there. I'm just thinking big picture -- and I guess this is for Rick just in terms of your -- kind of where you see the value of that deal. I know you -- obviously some of the assumptions in the near-term have changed and you mentioned the esthetics impact is probably more transient. But just to confirm for investors, do you see any changes over the longer term value of this transaction? We're obviously getting a lot of questions just given the nature of the esthetics business right now. And then second one on the dividend. You mentioned, obviously, your support for a strong and growing dividend. Is there also just any change as to how you think about dividend growth going forward given the current environment? Obviously you've still been growing but is there maybe growing at a lower rate, or any change at all there just – it would be great to clarify. Thanks again." }, { "speaker": "Rick Gonzalez", "text": "Vamil this is Rick. I mean, I'll take those two questions. Let me do the second one, because it will be shorter first. So we don't see any changes in the assumptions we're making from the standpoint of the growth of the dividend based on everything that we have analyzed and I would say the robust performance of our business going into the COVID crisis and how we view the COVID crisis being a transient situation that, although difficult to predict exactly when all the geographies will reach some level of normalcy, we know that will occur at some point. And so we don't view any significant change there. On the value of the Allergan transaction, I would tell you that we don't see any change, fundamental change in the long-term value of the transaction. The benefits that we were trying to derive by acquiring the Allergan business are the same. And the long-term valuation I believe is the same. Now I think what some of the investors are probably concerned about is, obviously, the esthetics business is an important franchise as I indicated before represents about one-third of the revenues and about one-third of the profits. And it's an attractive franchise. And so I think the question that investors have, is how is it going to recover? And how long will it take to recover? And I think look those are reasonable questions. And as you can probably imagine, we have been doing a tremendous amount of work to try to evaluate not only the impact of COVID on our business, but also the impact of COVID on the Allergan business. And specifically I'd say, we've spent a considerable amount of time looking at the esthetics business. So I'm going to take a couple of minutes here and walk you through what that data looks like, so that you have a good perspective of at least the data that we're operating against to make the assumptions that we're making. Now what I am going to say is because of the Irish takeover code, we can't talk about the specific financials of Allergan until they are public and they're not public right now. So I'm not going to talk about their financial performance in any way. But I think, I can give you a pretty good characterization as to the work that we've done here and the conclusions that we've drawn. So I think if you step back and you look at the situation, it is clearly a situation, one, it's a complex situation. And two it's not a situation that any of us have ever experienced before meaning that this has both an economic disruption factor built in and it has a supply and demand disruption factor that's built in. We've certainly seen economic impacts on this business before and we know how it behaved in those circumstances. So as we try to approach understanding what the recovery will likely look like, we've essentially looked at four fundamental issues. Number one is, are there any analogs that would tell us what that recovery curve's going to look like? Number two, what is it going to be -- what is it going to take in order for the supply side? And when I say supply side what I mean is plastic surgeons, med spas, dermatology offices, which are the primary providers of those procedures. What is it going to take for the supply side to get back to where it was? And then number two -- or number three rather, what is going to be necessary on the demand side? And demand, I mean, consumer’s users of these procedures. And then finally, will there be a change in the situation from a competitive standpoint? Those are the four fundamentals that we looked at. We've looked at this both in conjunction with Allergan and we also have done an independent analysis with the same consulting firm that we used when we were considering acquiring the Allergan business. So we did two independent work streams to come to our conclusions. So let me start with the analogs. There are two right? There is the 2008, 2009 recession. And as I've said in my comments, there we saw a very sharp D-shaped recovery. And in fact the business recovered and actually grew faster on the other side of that The second analog is China. China has reopened most of its geographies not all, but most and they've been open for approximately seven or eight weeks now. If we look at the data from China what it says is 86% of the clinics have reopened. Patient traffic is back to about 55%. Volume is just under 50%, like 45% to 48%, slightly lower because those clinics are also burning off some of their inventory. So it doesn't outdate. So, I'd say the two analogs that we came up with looked pretty encouraging. Now let's look at the supply side. So, on the supply side, what we're trying to understand here is, what is the intent? And what is the preparation for these offices to reopen? And I think there's a couple of important facts here that help support and guide us to what that might look like. First the major medical societies like the plastic surgery society, the aesthetic society and others have now issued guidelines to these practices on the procedures that they should use to restart. And they include things like temperature checks, masks, gloves, face shields, lower densities in their offices. So why is that important? Well, why that's important is, this gives those offices a guideline as to how they should reopen. And probably more importantly, it gives them confidence on how they should reopen. Allergan has worked with their customers. A number of their customers, a large percentage of their customers requested the U.S. government stimulus funds. And so what we do know is that a significant portion of those practices should be in a position where financially they can reopen fairly quickly. And finally, Allergan has done a number of surveys with a large group of customers that show that the demand to reopen upon lifting of the stay-at-home orders and implementation of these patient safety guidelines is very high. And we anticipate that they will start reopening in May, and that's what our data told us, and the survey data told us. I'd say if anything, it seems to be moving faster than what we originally anticipated, because some states in the U.S. have opened up more quickly. So, then the next question is the demand side, what's that going to look like? And here I'd say, again, Allergan did some very good work. If you look at the brilliant distinctions database, which has about two million active members, represents about 70% of Allergan's users, it shows that 70% of the growing distinction consumers have household incomes of greater than $100,000, and 50% have incomes -- household incomes of greater than $150,000 a year, and it shows that 60% of those consumers work for corporations not small businesses. Allergan also conducted a recent user survey that had just under 450 consumers that they interviewed. And it showed that 80% of the consumers said that the COVID crisis would have no or little impact on their household incomes. 94% of those consumers said, they would reschedule an appointment for procedures in the next 90 days, and two-thirds of them said upon restrictions being lifted they with schedule an appointment in 30 days. So now you turn to the competitive environment. Allergan competes mostly against smaller less financially strong companies. I'd also say that, Allergan has done an excellent job. I give a tremendous amount of credit to Carrie Strom and Bill Meury. They responded quickly and aggressively to this crisis with their customers. They extended payment terms. They converted credits to checks to help with cash flow at these offices. They protected the customers' volume discounts. They facilitated online sales of Allergan skin medical products, again to get those offices some cash flow. And they changed the product return policy so the customers are protected from any product outdating. I'd also say from a competitive standpoint, Allergan didn't have any layoffs. They maintained or accelerated their R&D programs. And you have to remember Allergan has the largest commercial footprint by a significant margin compared to anyone else in this business. So what the data tells me is this, the analog show the business bounces back and it's resilient. The supply side should ramp quickly when the environment allows. Consumers have a strong desire to restart treatments, and they have the financial capacity to do so. And I think Allergan did a nice job of creating loyalty with these practices, and should come out of this in a very strong competitive position, maybe even stronger than they were before. The independent analysis that we did also surveyed customers and providers. And I would say, it looks very similar to what the Allergan analysis looks like. So, look, we can't predict is exactly how long it will take in every state and in every country around the world, but I think we can predict with a pretty high degree of certainty that the business will bounce back. So, those are some of the keys that I think make us feel confident in the valuation." }, { "speaker": "Liz Shea", "text": "Thanks Vamil. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Geoffrey Porges from SVB Leerink." }, { "speaker": "Geoffrey Porges", "text": "Thank you very much for taking the question. First, there are a number of things that are obviously affecting the environment right now Rick and I just want to ask about SKYRIZI and RINVOQ. You've previously given some longer-term aspirational revenue targets. I'm just wondering how you'd feel about those targets. Now we've seen a few quarters for each product. And also I understand you're going to have a little bit of COVID disruption. And then could you just talk a little bit more -- I think that's very helpful coverage of the plastic surgeon context. Can you just talk a little bit more about the other specialties and products where you're expecting impairment in Q2 and how quickly they could bounce back? Thank you." }, { "speaker": "Rick Gonzalez", "text": "Yes. So fundamentally I would tell you we don't have any change in the long-term forecast for SKYRIZI and RINVOQ. I think one of the things that's impressive when we look at both SKYRIZI and RINVOQ is both the speed and acceleration of the ramp that we're seeing in the share capture of these assets. So let me give you a perspective on it. If you look at SKYRIZI as an example SKYRIZI within about three months achieved the number one position in psoriasis in-play psoriasis share. And then the rate of capture has actually accelerated from there. It achieved it at about 20%. If you look at the January data which is the most recent independent data that we have we have internal data that we also use to project. But the January data showed that it's at 31% and the slope of that line is accelerating and accelerating at a pretty good clip. And it is widening the range between it and the number 2 player in a significant way. And so this thing has tremendous momentum. Yes obviously the COVID crisis has created a disruption. As I mentioned in my comments if a dermatology office is closed obviously they're not prescribing anything including SKYRIZI. But that's a temporary phenomenon and we'll see these offices start to open back up. And I have no reason to believe that that momentum won't come back as patients feel comfortable to go back into their offices. RINVOQ obviously launched -- SKYRIZI launched in April and RINVOQ launched in August. So it launched later. But I'd say we've also seen on RINVOQ now a similar acceleration of its capture rate of share in -- in-play share in RA. And it too is accelerating going into this. It's about 11.3% on the last data point. And I'd say based on once things settle back out from COVID, it would take it probably three months to pass. There's a whole group of players at number two. HUMIRA is number one, but it would take probably three months for it to pass that group that's in number two. And I would expect it moves into the number two -- position shortly after that, after the disruption has subsided and we have a chance to continue to drive it. And so I feel very good about both of those assets and what the long-term performance of those look like, I think as I look at the R&D programs for both of them and the ability to expand the indications much like we did with HUMIRA, these assets have tremendous opportunities. So I feel good about it. Other -- by other specialties I believe what you're asking is what's going to happen to the other aspects of the business? Because what I was referencing on aesthetics really covered the range of supply side. So it was plastic surgeries derms and med spas. So again, we can't talk about the numbers, but as I indicated in my comments, I would expect the therapeutic side of Allergan to recover very similar to RSI a temporary disruption. There is likely to be a more significant impact on BOTOX therapeutic because about half of its volume comes from hospitals. And -- but we would expect that to bounce back once those hospitals start accepting non-emergency non-COVID patients. So we don't see anything in the data as we analyze it that would suggest that there's anything that's happening to any of their products that would impair the original assumptions we made about those products." }, { "speaker": "Liz Shea", "text": "Thank you. Next question please, operator." }, { "speaker": "Operator", "text": "Our next question is from Steve Scala from Cowen." }, { "speaker": "Steve Scala", "text": "Thank you. I have a couple of questions. But first congratulations on a very strong quarter under very difficult conditions. So the first question is even pre-pandemic AbbVie seem to have embraced digital marketing. I think the company previously said that pre-pandemic 40% of commercial activities were already virtual. What does AbbVie do differently than peers? And does this expertise explain in part the strength of SKYRIZI and RINVOQ in the first quarter? And then the second question is just a housekeeping question. Just curious do you expect that Allergan will publicly report its first quarter? Thank you." }, { "speaker": "Rick Gonzalez", "text": "I mean on the digital marketing, I mean obviously we have a significant expertise in that area. And I honestly can't tell you how differentiated that is versus other competitors because I think many companies like our have gone to a significant portion of their commercial messagings through digital marketing. I mean, I think we're very effective at it. I don't think that is what's driving the RINVOQ SKYRIZI performance. I think what's driving it is really, two fundamental things. One is obviously these assets have very strong clinical profiles. They fit a need in the market an unmet need that's in the market that was consistent with what we originally assumed when we were trying to develop replacements for HUMIRA. And I think we're all extremely pleased that these assets are doing a very good job of demonstrating superiority to the gold standard HUMIRA. The second thing is I think obviously, this is a market we know how to execute in at a very high level. We have a tremendous level of experience in this market, a tremendous reputation in this market. And I think our commercial organization executes at a very high level in this market. I think that's what's driving the performance and it makes me feel good about what the future looks like for these assets. As far as Allergan is concerned, I don't know if they're going to -- well think of it with this way. I don't think I should comment on when they're going to publicly report their first quarter results. I think that's something they should probably respond to not us." }, { "speaker": "Steve Scala", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Thanks, Steve. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Navin Jacob from UBS." }, { "speaker": "Navin Jacob", "text": "Hi. Navin from UBS. Thanks for taking the question. So I heard the $1.4 billion for SKYRIZI an upgrade versus the $1.2 billion. Just wondering if you had an update on RINVOQ as well. I think you had said $500 million for the full year. Maybe I missed it, but just wondering if you could provide an update on that guidance as well. And then with regards to the slight lowering of the full year HUMIRA guidance, wondering if there's any color on what's driving that, obviously COVID-19 impacting things. But is it because of -- any color as to whether it's COVID-19 specifically or if it's increased in gross to net or if it's an increase in the switching to SKYRIZI and RINVOQ? Any of that would be helpful. Thank you so much." }, { "speaker": "Rick Gonzalez", "text": "Okay. Thank you. So let me talk about it at a little higher level and I'm going to hand it over to Rob to give you more specifics. I think the way to think about this is we came into this first quarter. If you look at our first quarter performance had COVID not happen, we would have been sitting here contemplating how we raised guidance. But because of the uncertainty of what's going to happen in the second quarter, we obviously had to make an assessment of what we thought that impact would be. And that's why I outlined what those assumptions are. So you can think about it this way. We're essentially assuming the business is overperforming and the data clearly supports the business is overperforming. We're going to have somewhat of a negative impact in the second quarter that we're basically saying, we can overcome. And we had to estimate where that would occur. We're raising SKYRIZI, because the momentum is such that even with some caution about second quarter, we know we're going to beat that number. RINVOQ, we feel good about RINVOQ as well, but we don't need to raise that at this point. We need to give it probably another three four months and then we'll make a decision what that looks like. HUMIRA has a very large installed base. And so, I indicated that we are making some adjustments to what we think will happen with channel mix specifically Medicaid. We've worked diligently to try to understand what that looks like. And as you probably know during the 2008, 2009 recession, which is probably the best thing that we had to be able to compare it to, Medicaid went up about two points from 2007 to 2009, two percentage points. So we have factored in some potential shift in HUMIRA and that's primarily what we're reflecting. Rob can give you a little bit more color, but I'd say that's a significant part of what we're trying to reflect there. We also took down MAVYRET. And MAVYRET is two things. One it is COVID-related. Probably about half of it's COVID related there, where HCV internationally is administered through hospitals and they've clearly been disrupted. And we need that disruption to play through before we can get back to the same momentum. In the U.S. though I would say, it's primarily driven by price. That month is still under price pressure and some share pressure. So those are the two most significant ones. Rob?" }, { "speaker": "Rob Michael", "text": "Yes. Navin, so if you look at the guidance we gave of approximately 7% growth, so that translates in about a $300 million change for U.S. HUMIRA. I'd split it really in the three buckets evenly. So as we think about unemployment, higher PAP volume, Medicaid channel mix each of those say one-third and one-third from those two. And then the remaining one-third would be just lower new patient starts during the stay-at-home period. So that will be most acute in the second quarter. As it relates to SKYRIZI -- and look the momentum from SKYRIZI is very, very strong. And we would have raised it even higher had it not been for the disruption in Q2 on new patient starts. So despite having that disruption on new patient starts, we're still taking the guidance up. We would have taken up higher without that. And I think Rick characterized the HCV change very well." }, { "speaker": "Liz Shea", "text": "Thank you, Navin. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Randall Stanicky from RBC Capital Markets." }, { "speaker": "Randall Stanicky", "text": "Great. Thanks guys. Rick focus is going to shift pretty quickly here to pro forma 2021 earnings. You've had more time to prepare for the integration given COVID-19, but can you just talk about does COVID-19 impact those integration plans at all? And then, how are you thinking about the synergies and specifically, how quickly you can realize those $2 billion plus in cost synergies? I know they're third-party verified under Irish law, but at the same time it's -- 90% of that is operating expenses. So the question is why couldn't we see more of that realized early on? Thanks." }, { "speaker": "Rick Gonzalez", "text": "Yeah. I think as it relates to pro forma earnings, I mean, once we close the transaction at that point we will evaluate the business again and make a decision at which point we're going to provide pro forma earnings. As far as integration is, concerned I would tell you that, we're not – we have done all the integration work. We're well prepared and have been prepared now for several months to do the final integration. And I don't believe -- we're operating AbbVie at a very high level of effectiveness as we're operating today where a significant number of people are working remotely. I wouldn't say it's the ideal scenario. I'd much prefer we can all get back to operating the way, we did before. But look it's not practical right now. And I don't believe that anything will change the performance of the integration as it relates to COVID. So I'm not overly concerned about that. Synergies, obviously, we have built a synergy plan that we are very comfortable with. And we haven't – I don't believe we've given the gating of that yet right? We have not. Okay. That was Rob shaking his head no because you can't see Rob. So we've obviously gated that. I wouldn't say, we have changed the gating because of COVID one way or another, but we feel good about achieving those synergies. And obviously, everyone that does transactions like ours tries to overachieve their synergies. And we won't be any different than that, but we'll give you an update on what that gating looks like once we've gated the pro forma guidance." }, { "speaker": "Liz Shea", "text": "Thanks, Randall. Operator, next question please." }, { "speaker": "Operator", "text": "Our next question is from Terence Flynn from Goldman Sachs." }, { "speaker": "Terence Flynn", "text": "Hi. Thanks for all the color today. I really appreciate it. Just wondering if – first question is if COVID has impacted the rate of uptake of biosimilars in Europe at all either on the positive side or the negative side. And then for ABBV-3373, I know you mentioned the data is coming out in the near term. Maybe just can you remind us what you're hoping to see here on the efficacy side to advance this into further studies? Thank you." }, { "speaker": "Rick Gonzalez", "text": "Yeah. So this is Rick. I'll cover the first one. I may hand it over to Rob to give you a little more specifics, and then Mike will cover the second question. So I probably saw in the quarter, we did better internationally than we had projected initially. And so that is related to a great extent that we have seen less biosimilar conversion than we originally anticipated. It's a little difficult to tell at this point whether or not that is COVID-related. In other words one hypothesis could be and it is nothing, but a hypothesis is that because people are staying at home they can't get converted to biosimilars as rapidly. I think it's not the one that, our area organizations think is happening. It just appears that we're performing better than we had expected. But I think to know that for sure, we'll have to see a little more time play out. But overall, we feel pretty good. And so I'm not giving you a very good answer, because I don't know the answer totally. So I'm giving you the best information that I have available to me. Rob anything you'd add on?" }, { "speaker": "Rob Michael", "text": "I think if you look at our beat versus guidance it's about approximately $140 million. Keep in mind that, we have about $35 million of COVID-related inventory stocking. We did have some tender timing in Brazil. It's about $30 million. So the balance of that you'd call $75 million of favorability. Could there be some COVID-related impact there? Possibly. If you look, we didn't change our full year guidance even though we have the U.S. dollar strengthening. So that's inherently about a $70 million $75 million operational upside that we've baked in that's offsetting that foreign exchange headwind. So it is going better so far than we expected, which is great but it's hard to pinpoint whether it's COVID-related or not." }, { "speaker": "Michael Severino", "text": "This is Mike. I'll take the question on 3373, which is our TNF steroid conjugate. It's in a proof-of-concept study in rheumatoid arthritis. And what we'd like to see there is efficacy that is greater than what can be achieved with currently available agents really across the board, but also with a particular focus on higher levels of response. Obviously, we're going to want to see that with an appropriate safety profile recognizing that a proof-of-concept study is a relatively limited safety database. And importantly, we're going to want to confirm that we can deliver that without impacting the pituitary access as a measure for systemic steroid effects. We have stated in other settings that from the 1b portion of this trial in healthy volunteers, we've shown we can deliver this construct without those steroid effects without impacting the pituitary axis. So we would expect to be able to do the same thing in RA patients in treatment, but we'd want to confirm that obviously." }, { "speaker": "Liz Shea", "text": "Thanks, Terence. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Andrew Baum from Citi." }, { "speaker": "Andrew Baum", "text": "Thank you. A question on the long-term impacts of COVID-19. I'm interested in what's the prescription rate for both SKYRIZI and RINVOQ among private practice versus salaried dermatologists or rheumatologists? I guess, what I'm thoughtful about is the extent to which the economic pressures that COVID-19 may force many private practice physicians to become salaried with perhaps more constraints on their prescribing or switch frequency? Many thanks." }, { "speaker": "Rick Gonzalez", "text": "Andrew, I would say I don't know the answer to your question to be honest. I can tell you that we don't see a -- today we don't see a significant difference across practices from a behavior standpoint. But future behavior I think that will be a little more difficult to predict. I think most physicians prescribe a medicine that they believe -- in the United States, that they believe is fundamentally the right medicine for that patient. And I would say that the profile of the drug is what tends to drive their prescribing habits more than anything else. So I would say, I would be surprised if there's any difference in the behavior. We'll go back to our commercial group and see if they have any data on it. And if so, we'll provide something back to you." }, { "speaker": "Liz Shea", "text": "Thanks, Andrew. Operator next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Tim Anderson from Wolfe Research." }, { "speaker": "Tim Anderson", "text": "Thank you. A couple of questions please. The first is on business development. And Allergan certainly helps fill the long-term hole from HUMIRA going off patent, but I still view it as M&A is going to be a likely continued part of the story. So my question here is the time frame for AbbVie being actively back in the marketplace to do additional acquisitions, and I'm defining those acquisitions as smaller bolt-ons single-digit billion-dollar types of deals, could that start to happen as soon as the current year in 2020? Second question is on RINVOQ. In atopic derm, you are running a head-to-head study versus DUPIXENT called heads up similar to what Pfizer has done with its JADE COMPARE trial. And I think your results come out in early 2021. The Pfizer results were perceived as being a bit underwhelming. I'm wondering, if you expect RINVOQ results would be any different from Pfizer's? Thank you." }, { "speaker": "Rick Gonzalez", "text": "On the BD front, we haven't changed from what we have talked about historically. Our capital allocation strategy is -- support a strong and growing dividend, pay down debt aggressively. And we've allocated approximately $2 billion per year that we can do more bolt-on kinds of transactions. I can tell you that Mike and the BD team have been very actively pursuing what we think fits strategically and doing the work that's necessary to determine, is it an asset that we want to add to our portfolio and where we find those opportunities? And we believe they're a good return for the company. We're aggressively pursuing those. And so I think you will see over the course of time here, you will see us do deals that are consistent with that strategy. And clearly there's a lot of focus on oncology that we have interest, but other areas as well. Mike?" }, { "speaker": "Michael Severino", "text": "So this is Mike. I'll cover the question on atopic dermatitis. Obviously, we're well aware of the Pfizer data from their program in atopic dermatitis at least at the top-line level that are currently available. And what I would say is we're going to have to look at each of these programs individually, although there are some mechanistic similarities factors such as dose selection ability to cover the relevant pathways are important when you are trying to predict the results that you're likely to see. We feel good about the pharmacodynamic coverage we've been able to drive with RINVOQ really across the board, but particularly in AD. We had very strong Phase 2b results. So we feel that our program will stand on its own merits and we look forward to those head-to-head data as we look forward to all the data from the Phase 3 program in atopic dermatitis." }, { "speaker": "Tim Anderson", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Thanks, Tim. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Carter Gould from Barclays." }, { "speaker": "Carter Gould", "text": "Great. Good morning. Congrats on the quarter. A few questions. Rick, I appreciate the color on the Allergan aesthetic business. Maybe just a follow-up. Just trying to understand the sensitivity around your deleveraging forecast to the return of the aesthetics business in line with your assumptions? And I guess also based on your survey work, maybe you read on the rate -- not so much the rate, but like the ultimate return of the med spas and any view on I guess what percentage of those may not return given, I guess there's a view that that's somewhat of a more economically sensitive population relative to the broader BOTOX community. And then apologies if you already commented on this. On the pro forma guide that's going to come is the expectation that will come upon deal closing, or we'll have to wait to 2Q? And then maybe just given all the uncertainty around COVID, your latest thoughts about also providing longer-term guide at that point? Thank you." }, { "speaker": "Rob Michael", "text": "Carter this is Rob. I'll take your question on deleveraging. Look, if you think about the amount of cash flow that the combined business generates, it's a tremendous amount of cash flow that we feel very confident in our ability to deliver on our deleveraging commitments. As I mentioned in my remarks, we still expect to pay down $15 billion, $18 billion of debt. We're going to have $7 billion paid down by the end of this month, and we still will be able to support a strong growing dividend. So even as we flex various scenarios, we feel very confident we've reaffirmed those commitments on deleveraging." }, { "speaker": "Rick Gonzalez", "text": "As it relates to the med spa question, I would say, across the board, we looked at what kind of assumptions should we make about any consolidation in the industry. And the one thing I would say is, it does appear that these businesses fairly aggressively participated in the U.S. government stimulus programs, the Payroll Protection Programs and the other programs that were available. And so, I think, the data would suggest to us now that that won't be a massive impact. And if there were any consolidation across any of the channels and I don't know that any one channel really stands out in a significant way, we believe that there -- all we'll see is a shift of that capacity to other players, meaning they get bigger. And so, we're not assuming any significant reduction in the supply side of the channel that can't be absorbed through consolidation if necessary. On the pro forma guide, obviously, we're going to wait for the business to close. We're going to do some work on the business and then we'll provide the pro forma guidance after that. So depending upon the timing of when it closes and how close we are in the second quarter it could come on the second quarter call. So we're not really in a position right now where we can give you total clarity on that." }, { "speaker": "Liz Shea", "text": "Thanks, Cater. Operator, we have time for one final question." }, { "speaker": "Operator", "text": "Thank you. And our final question today is from Damien Conover from Morningstar." }, { "speaker": "Damien Conover", "text": "Great. Thanks for taking the question. I just want to ask a question on the strength of SKYRIZI and RINVOQ. We're seeing great growth there. And both these drugs have shown excellent data. But I also want to ask, is there any ability to leverage the competitive positioning of HUMIRA here? And I guess I asked that, because I think about the recent launch of the IL-17s, which those competitors used to complain about the strong entrenchment of the TNF class and some of the rebating that was going on there. So I was just wondering, the two growth of, SKYRIZI and RINVOQ, is that really coming from the medicines themselves? So that's question one. And then the second question is, when thinking about the shift back towards normal and sort of the transient impact that we're likely to see from COVID, I wanted to ask about the thoughts around the potential second wave of coronavirus patients as some of the stay-at-home orders lessen up and doctor's office reopen? Is it the view of AbbVie that the second wave won't be that large, or that when the second wave comes we'll have strong treatment options and triaging that we'll be able to get to more business-as-normal operations? Thank you." }, { "speaker": "Rick Gonzalez", "text": "Yes. I think, as we look at the strength of SKYRIZI and RINVOQ, it's driven by a couple of factors, right? Particularly, I'd say in the U.S., it's driven by a couple of factors. As I said a few minutes ago, certainly the clinical profile of the drug is first and foremost. The second is, you have to have broad-based managed care access in the United States to be successful. It doesn't matter how you much you convince the physician to use the product based on its clinical profile. If they can't get it reimbursed, they obviously can't prescribe it to their patients. And so that takes a company that has strong expertise in being able to deliver high levels of managed care access, which obviously we can. And then the third is just the effectiveness of your commercial and medical affairs organization. And I think in this area we have one of the best, if not the best. So I think those are the things that really drive it. In our business, you can't really leverage one product against the other specifically. So I don't believe it's a leverage issue. As far as the second wave, I'm going to let Mike cover most of that. The only thing I would say is we have not assumed another major shelter in place order in the fall in our assumptions. So we have assumed that we'll be able to manage through any increase in infections in the way we've built this forecast." }, { "speaker": "Michael Severino", "text": "That's correct, Rick. And so, I think it's very hard to make exact predictions about the longer-term nature of the coronavirus infection rates. But what we are assuming, as Rick said is that, there will not be a major second wave in lockdown. And I think the factors that would play into that would be a much greater understanding of surveillance, broader access to testing, the ability to respond much more quickly based on experience. And based on those factors that I just mentioned, if small pockets of new infection do pop up, as well as hopefully the availability of some treatment options, although, I think, treatment options will continue to evolve over some period of time and renewed capacity or relief from the overcapacity status that the healthcare systems are currently operating under. So, I think, it's all of those features together that lead us to the view that supported the assumptions that Rick outlined in our thinking on this." }, { "speaker": "Liz Shea", "text": "Thanks, Damien. And that concludes today's conference call. If you'd like to listen to a replay of the call please visit our website at investors.abbvie.com. Thanks again for joining us." }, { "speaker": "Operator", "text": "Thank you. This does conclude today's conference. You may disconnect at this time." } ]	AbbVie Inc.	141,885,706
ABBV	4	2,021	2022-02-02 09:00:00	Liz Shea: Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Vice Chairman and President; Rob Michael, Vice Chairman, Finance and Commercial Operations and Chief Financial Officer; and Jeff Stewart, Executive Vice President, Chief Commercial Officer. Joining us for the Q&A portion of the call is Laura Schumacher, Vice Chairman, External Affairs, Chief Legal Officer, and Corporate Secretary. Before we get started, some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today’s conference call non-GAAP financial measures will be used to help investors understand AbbVie’s business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today which can be found on our website. Unless otherwise noted, our commentary on sales growth is on a comparable basis, which includes full current year and historical results for Allergan. For this comparison of underlying performance, all historically reported Allergan revenues have been recast to conform to AbbVie’s revenue recognition accounting policies, and exclude the divestitures of Zenpep and Viokace. References to operational growth further exclude the impact of exchange. Following our prepared remarks, we’ll take your questions. So with that, I’ll now turn the call over to Rick. Rick Gonzalez: Thank you, Liz. Good morning, everyone. And thank you for joining us today. I’ll provide perspective on our overall performance and outlook, and then Jeff, Mike and Rob will review our quarterly business highlights, pipeline progress, financial results and guidance for 2022 in more detail. Our performances this quarter tops off another excellent year for AbbVie with results well above our initial expectations. We delivered full year 2021 adjusted earnings per share of $12.70, representing growth of more than 20% versus the prior year. Full-year adjusted net revenues were more than $56 billion, up 10.5% on a comparable operational basis. These results demonstrate balanced performance across each of our major growth franchises, including double-digit comparable operational revenue growth from immunology, aesthetics, and neuroscience. I’m extremely pleased with our momentum, and we’ve entered this year in a strong position, which is reflected in our guidance. We anticipate 2022 adjusted earnings per share of $14 to $14.20, representing growth of 11% at the midpoint. Longer-term, we remain well positioned with an impressive set of diversified growth assets. In immunology, Skyrizi and Rinvoq are already contributing meaningful revenue, including $4.6 billion in combined sales last year with substantial growth anticipated in 2022 and beyond. Over the next few months, we expect to add several new indications to the list of approved uses for these two assets, at which point, Skyrizi and Rinvoq will be commercialized across all of Humira’s major indications, plus atopic dermatitis. With the strong performance that we’re seeing in their initial indications and the robust data we’ve demonstrated across our broad development programs, we expect combined peak sales for Skyrizi and Rinvoq to exceed the peak revenues achieved by Humira. In hematological oncology, we’ve established a leading position with Imbruvica and Venclexta, which were both expected to remain important revenue contributors through the decade. To support our next wave of growth, we also have an exciting and diverse pipeline of promising new therapies to address critical unmet needs in both blood cancers and solid tumors. Notable opportunities from our mid to late stage oncology pipeline include Navitoclax for myelofibrosis, which has the potential to provide disease modification in a market where current treatments only address symptoms. At Epcoritamab, a potentially best-in-class CD3XCD20 for B-cell malignancies, including DLBCL and follicular lymphoma; ABBV-383, our BCMA CD3 bispecific, which has the potential to become a best-in-class treatment in multiple myeloma; and Teliso-V, our promising c-Met ADC being studied for nonsquamous non-small cell lung cancer, which was recently granted breakthrough therapy designation. In neuroscience, we have a portfolio of compelling and differentiated therapies to support robust long-term growth in migraine, Parkinson’s disease and psychiatric conditions. Ubrelvy and Qulipta are both demonstrating strong launch trajectories in migraine, with each treatment expected to contribute more than $1 billion in peak sales. Vraylar continues to have a significant opportunity with currently approved indications with peak sales expected to approach $4 billion. An approval in major depressive disorder represents upside to our current projections. And 951, a potentially transformative improvement to our current treatment options for patients with advanced Parkinson’s disease with peak sales also anticipated to be more than $1 billion. Our leading aesthetics portfolio represents another extremely attractive growth opportunity. This business is performing well above expectations, delivering full year 2021 sales of more than $5.2 billion, $700 million higher than our initial guidance. AbbVie’s increased promotional investments are driving accelerated category growth, especially in toxins and fillers, where there is substantial room for additional market penetration globally. Dedicated resources are also of focused on delivering new product innovation within aesthetics, with several exciting R&D programs internally, including both short-acting and long-acting toxins, as well as novel fillers with biostimulatory or regenerative features. And we remain active with business development to pursue promising external technologies and complementary opportunities, including the recently closed Soliton acquisition, which further expands our body contouring portfolio. Given this focus and investment, we expect our aesthetics franchise to deliver high single digit revenue growth, through the end of the decade, including sales of more than $9 billion in 2029. Lastly, we’ve developed a robust pipeline, including numerous attractive late-stage programs, novel early stage therapies in a growing range of potential platform technologies, which we expect will collectively contribute to our growth through the decade. With the actions that we’ve taken to diversify our sources of growth, we remain very confident in the long-term outlook for our business. Following the U.S. Humira LOE event in 2023, we expect to quickly return to growth in 2024 and deliver high-single-digit growth from 2025 to the end of the decade. This is a testament to the strength of AbbVie’s broad and balanced portfolio. In summary, this is an exciting time for our Company. We’re demonstrating excellent execution across our portfolio, and our long-term growth prospects remain very strong. With that, I’ll turn the call over to Jeff. Jeff? Jeff Stewart: Thank you, Rick. Looking at our quarterly results, we continue to demonstrate excellent commercial execution across our therapeutic portfolio. I’ll start with immunology, which delivered global revenues of more than $6.7 billion, reflecting growth of 13.3% on an operational basis. Global Humira sales were $5.3 billion, up 3.5%, with 6% revenue growth in the U.S. offset by biosimilar competition across the international markets, where revenues were down 8.8% on an operational basis. Skyrizi is performing extremely well. Global sales of nearly $900 million were up 12.4% on a sequential basis, reflecting continued market share gains. Skyrizi has now surpassed Humira as the leader for total prescriptions in the U.S. psoriasis biological market, with share of approximately 20%. We are also now leading the market in several international geographies, including Japan. Total in-place share, which includes both new and switching patients, remains very and now, reflects roughly 37% patient share in the U.S. as well as leadership in nearly 20 key countries around the world. Skyrizi is also now approved for its second major indication, to treat adults with active psoriatic arthritis, further enhancing its compelling profile in dermatology. Field promotion is now active globally and early feedback from physicians has been very positive. Given Skyrizi’s demonstrated skin clearance and joint efficacy in our PSA clinical program, with nearly 30% of patients visiting dermatologists, having both, skin and joint involvement, this new approval will sustain Skyrizi’s strong momentum. In addition, we are preparing for the launch of Skyrizi’s in Crohn’s disease, an indication with very meaningful long-term revenue potential, with regulatory approvals in both, the U.S. and Europe anticipated this year. Rinvoq also continues to demonstrate robust growth. Global sales of more than $500 million were up 14% on a sequential basis. Prescriptions in RA remain strong with a total market share of more than 5.5% in the U.S. and nearly 5% across key international markets. We’re very pleased with the competitive labels for both PSA and atopic dermatitis, where we are making excellent progress with their launches globally. In atopic dermatitis, dermatologists appreciate key elements of Rinvoq’s new label, including the incorporation of stringent skin and itch endpoints, reflective of the performance in our registrational trials, as well as an adolescent indication and dosing flexibility. Managed care access is expected to ramp fairly quickly for both atopic dermatitis and PSA in the U.S. We are also preparing for the launches of Rinvoq in ulcerative colitis and axial SpA with regulatory approvals for both indications anticipated this year as well. Overall, we continue to feel very good about the performance and progress we’re making with both, Rinvoq and Skyrizi, which are expected to contribute more than $15 billion in combined risk adjusted global sales in 2025. In hematologic oncology, global revenues were nearly $1.9 billion, up 4.7% on an operational basis. Venclexta once again, delivered robust growth. Sales were up 34% on an operational basis with strong share performance across all approved indications. Imbruvica global revenues were down 2.7%, reflecting a slower than anticipated market recovery in CLL and increased share pressure from newer therapies. In neuroscience, revenues were more than $1.6 billion, up 19% on an operational basis, including robust double-digit growth for both, Vraylar and Botox Therapeutic. I’m also very pleased with our performance in migraine, where we have a portfolio of multiple distinct therapies to address the full spectrum of this disease. This includes our two leading oral CGRP therapies. Ubrelvy for acute migraine, which delivered total sales of $183 million, up 13% on a sequential basis, we anticipate robust sales growth again this year based on Ubrelvy’s competitive profile, continued strong new patient starts and a rapidly expanding CGRP segment. And we also have Qulipta, the only oral CGRP treatment specifically developed for the prevention of episodic migraine. The launch is going extremely well. When considering both paid and bridge volume Qulipta is already capturing nearly 20% of the new-to-brand share in the preventative CGRP class. Roughly three months post-launch, this is an incredible accomplishment and it’s a testament to Qulipta’s demonstrated efficacy, including rapid and meaningful reduction in migraine days. We expect commercial access for Qulipta to ramp quickly in the first half of this year. In eye care, revenues of $960 million were up 3.9% on an operational basis, including $364 million in sales from Restasis. Lastly, Mavyret were $427 million, down 10.1% on an operational basis, as treated patient volumes remained suppressed compared to pre-COVID levels. Overall, I’m very pleased with the performance and the momentum across the therapeutic portfolio. And with that, I’ll turn the call over to Mike for additional comments on our R&D programs. Mike? Michael Severino: Thank you, Jeff. We made significant advancement across all stages of our pipeline in 2021, and we expect continued progress again this year. In immunology, we had several recent important regulatory updates. We implemented safety and indication updates to our RA label for Rinvoq, and also received FDA approval in psoriatic arthritis and atopic dermatitis to curing strong labels that highlight Rinvoq’s favorable benefit risk profile in both new indications. In atopic dermatitis, we received approval for both the 15 milligram and 30 milligram doses, and based on the impressive levels of skin clearance and itch reduction demonstrated in our development program, we believe Rinvoq will be an important new treatment option for adult and adolescent patients with moderate to severe atopic dermatitis, who have not responded well to other systemic agents, such as cyclosporine, methotrexate, azathioprine, or biologics. We also have regulatory applications under review for Rinvoq in ulcerative colitis, ankylosing spondylitis, and non-radiographic axial SpA. We expect an FDA approval decision next month for ulcerative colitis, in the second quarter for ankylosing spondylitis, and in the fourth quarter for non-radiographic axial SpA. In Europe, we anticipate approval decisions for ulcerative colitis and non-radiographic axial SpA in the second half of the year. We’re nearing completion of Rinvoq’s registrational program in Crohn’s disease, which is the last major indication expansion program for Rinvoq. We recently announced positive top-line results from the first Phase 3 Crohn’s induction study, where Rinvoq demonstrated a very impact on clinical remission and endoscopic response in a difficult-to-treat refractory patient population. We expect to see results from the second Phase 3 Crohn’s induction study and from the maintenance study in the first half of this year with regulatory submissions anticipated in the second half of 2022. Also in immunology, we recently received FDA approval for Skyrizi in psoriatic arthritis, an important indication expansion for this asset. Based on the strong joint efficacy and the high level of skin clearance that Skyrizi provided in our registrational trials, we believe Skyrizi will be very competitively positioned as an effective new treatment option for psoriatic arthritis patients. We also have regulatory applications under review for Skyrizi in Crohn’s disease with approval decisions expected in the U.S. next month and in Europe, later this year. We’ve seen impressive results in our Crohn’s disease program, and we believe Skyrizi has the potential to become an important new therapy in this market, where there continues to be considerable unmet need. We’re making very good progress with our early-stage immunology pipeline as well, where we are developing novel agents with the goal of significantly advancing the standard-of-care across our core areas, by providing deeper and more durable responses. Our anti-TNF steroid ADC ABBV-154 is a novel approach for delivering a potent steroid that has the potential to provide durable remission in diseases such as RA, PMR and Crohn’s disease. We expect to see preliminary data from our Phase 2 dose ranging study in RA in the fourth quarter of this year. We also expect to see Phase 2 proof-of-concept data in PMR and Crohn’s disease in 2023. In dermatology, our early-stage efforts are focused on developing oral agents that can provide clear skin with durable responses. Our RoRγT inverse agonist, ABBV-157 is designed to more effectively inhibit IL-17 production compared to pure antagonists, which has the potential to result in a greater impact on skin inflammation. We’ve recently been again a Phase 2 dose ranging study for 157 in psoriasis. Moving to oncology, where we continue to make good progress across all stages of our pipeline. We recently received an FDA breakthrough therapy designation for Teliso-V in second line plus advanced or metastatic nonsquamous, non-small cell lung cancer, based on the encouraging results we’ve seen to-date in our clinical program. Treatment options for patients who have exhausted platinum-based chemotherapy, immunotherapy and targeted therapy are limited to single agent chemo, which typically provides response rates of only 15% to 20%, with a median overall survival of less than one year. Prognosis for these patients is very poor. While targeted therapies have been approved by the FDA for the 3% to 4% of non-small cell lung cancer patients, harboring MET exon 14 skipping mutations, there are currently no therapies approved, specifically for the much larger group of patients, who exhibit c-Met protein overexpression. Patients with overexpressed c-Met represents about 25% to 30% of the advanced or metastatic nonsquamous, non-small cell lung cancer population with wild-type EGFR, which corresponds to an incidence of approximately 35,000 patients each year in the U.S. In stage 1 of our Phase 2 study, we saw promising efficacy in heavily pretreated patients who received Teliso-V, including a 54% objective response rate in those with highly expressed c-Met. The second stage of the Phase 2 study is ongoing and has the potential to support an accelerated approval in second-line plus advanced metastatic nonsquamous non-small cell lung cancer. We expect to see additional data from this study next year. We also recently began the clinical program for our next-generation c-Met ADC, ABBV-400, which utilizes a more potent topoisomerase inhibitor payload to potentially drive deeper tumor responses in patients with both, intermediate and high levels of c-Met expression. We also expect to see data this year from several important indication expansion programs for Venclexta, including results from the Phase 3 CANOVA trial in relapsed/refractory multiple myeloma patients with a t(11;14) mutation as well as results from our program for Venclexta in previously untreated higher-risk MDS patients, where we received a breakthrough therapy designation. We plan to submit our regulatory applications to the FDA in the first half of this year for an accelerated approval in MDS, and late in ‘22 or early ‘23 for multiple myeloma. Both indications represent important expansion opportunities for Venclexta and will help drive long-term growth for our oncology portfolio. We are also making very good progress with epcoritamab, where we continue to generate strong data in early-stage studies to support our view that epcoritamab has the potential to become a differentiated and best-in-class CD3xCD20 bispecific across several B-cell malignancies including diffuse B cell and follicular lymphomas. We’ll see monotherapy data in the third quarter from the Phase 2 expansion cohort in DLBCL, which has the potential to support a submission for accelerated approval in the second half of this year. We also have a Phase 3 study ongoing in third-line relapsed/refractory DLBCL and we plan to initiate several additional Phase 3 trials this year, including studies in earlier lines of therapy for diffuse B-cell lymphoma in multiple combinations, as well as in follicular lymphoma in combination with rituximab and Revlimid. This year, we’ll also see additional data maturing from our cohort expansion studies for ABBV-383, both as a monotherapy and in combination with standard-of-care and novel agents in multiple myeloma. We believe our BCMA-CD3 bispecific has the potential to be differentiated on efficacy, safety and dosing interval and can be best-in-class across multiple lines of therapy. We plan to initiate Phase 3 studies later this year in relapsed/refractory multiple myeloma. We also continue to make good progress with Navitoclax in myelofibrosis, where we’ve seen strong mid-stage data supporting our view that Navitoclax has the potential to provide disease modification, which we believe will lead to improved and durable clinical outcomes for patients. We expect a Phase 3 data readout and regulatory submissions in the first half of next year, with approval anticipated near the end of 2023. Moving to neuroscience, where we expect several important pipeline events in 2022 as well. We recently completed discussions with the FDA and are preparing to submit our application for Vraylar as an adjunctive treatment for major depressive disorder. Based on the totality of the data and the strong benefit-risk profile demonstrated in our clinical program, we believe Vraylar has the potential to be competitively positioned as an adjunctive treatment for major depressive disorder. We expect a submission in the first quarter and an approval decision by the end of the year. We’ve also completed our registration-enabling program for ABBV-951, our novel subcutaneous levodopa/carbidopa delivery system for treatment of advanced Parkinson’s disease. In our Phase 3 studies, 951 proved superior to oral levodopa/carbidopa in reducing motor fluctuations in this advanced population, and we believe our innovative new delivery system represents a potentially transformative improvement to current treatment options. We remain on track to submit our regulatory applications in the first half of this year in the U.S. and Europe, with both approval decisions anticipated in early 2023. And we expect to see Phase 3 data for Qulipta in chronic migraine prevention later in the first quarter and plan to submit our regulatory applications in both, the U.S. and Europe this summer, with approval decisions expected in the first half of 2023. So, in summary, we remain focused on continuing to execute on our pipeline programs and anticipate numerous important regulatory and clinical milestones across all stages of our pipeline in 2022. This includes important indication expansion for on-market drugs and data readouts and regulatory actions for key late-stage assets as well as proof-of-concept data from several early-stage NME programs. With that, I’ll turn the call over to Rob for additional comments on our fourth quarter performance and our 2022 financial outlook. Rob? Rob Michael: Thank you, Mike. AbbVie once again delivered outstanding performance while also advancing our strategic priorities. The strong results across our portfolio continue to support AbbVie’s long-term growth outlook. Starting with fourth quarter results. We reported adjusted earnings per share of $3.31, up 13.4% compared to prior year and $0.05 above our guidance midpoint. Total adjusted net revenues were $14.9 billion, up 7.5% on an operational basis, excluding a 0.1% unfavorable impact from foreign exchange. The adjusted operating margin ratio was 49.3% of sales, an improvement of 240 basis points versus the prior year. This includes adjusted gross margin of 83.6% of sales, adjusted R&D investment of 12.1% of sales, and adjusted SG&A expense of 22.2% of sales. Net interest expense was $571 million, and the adjusted tax rate was 12.5%. Shifting to 2022, our full year adjusted earnings per share guidance is between $14 and $14.20, reflecting growth of 11% at the midpoint. Excluded from this guidance is $4.74 of known intangible amortization and specified items. We expect adjusted net revenue of approximately $60 billion. At current rates, we expect foreign exchange to have a 0.8% unfavorable impact on full year sales growth. This revenue forecast comprehends the following approximate assumptions for our key products and therapeutic areas. We expect Immunology Global sales to grow double digits, including U.S. Humira growth of 8%, International Humira revenue of $2.6 billion at current exchange rates, Skyrizi Global sales of $4.4 billion and Rinvoq Global sales of $2.7 billion. In hematologic oncology, we expect Venclexta global sales of $2.3 billion and Imbruvica global revenue of $5.4 billion. The Imbruvica forecast assumes market recovery in CLL, offset by share erosion from increased competition. For aesthetics, we expect global sales of $5.9 billion, including $2.6 billion for Botox Cosmetic and $1.7 billion from Juvederm. For neuroscience, we expect global revenue of $6.9 billion, including Botox Therapeutic sales of $2.7 billion, Vraylar sales of $2.2 billion, Ubrelvy sales of $800 million and Qulipta sales of $200 million with commercial access increasing rapidly in the first half of the year. For eye care, we expect global sales of $2.9 billion, including $700 million from Restasis, which assumes no generic competition in the first half of 2022. Lastly, we expect Mavyret global revenue of $1.7 billion. Looking at the P&L for 2022, we are forecasting full year adjusted gross margin of approximately 84% of sales, adjusted R&D investment of approximately $6.8 billion and adjusted SG&A expense of approximately $12.7 billion. This guidance includes approximately $2.5 billion in expense synergies from the Allergan acquisition. We are forecasting the adjusted operating margin ratio to expand by 120 basis points to approximately 51.5% of sales. We expect adjusted net interest expense approaching $2.2 billion, our non-GAAP tax rate to be approximately 12.7% and our share count to be roughly flat to 2021. Turning to the first quarter, we anticipate net revenue approaching $13.5 billion. At current rates, we expect foreign exchange to have a 1.3% unfavorable impact on sales growth. This revenue forecast comprehends the following approximate assumptions for our key therapeutic areas: Immunology sales of $6.2 billion, HemOnc revenue of $1.7 billion, aesthetic sales of $1.3 billion, neuroscience revenue of $1.5 billion and eye care sales of $900 million. We are forecasting an adjusted operating margin ratio of approximately 51% of sales, and we model a non-GAAP tax rate of 12.4%. We expect adjusted earnings per share between $3.10 and $3.14, excluding approximately $1.22 of known intangible amortization and specified items. Finally, AbbVie’s strong business performance and outlook continue to support our capital allocation priorities. We expect to generate adjusted free cash flow of approximately $24 billion in 2022, which is net of roughly $1 billion in Skyrizi royalty payments. This cash flow will fully support a strong and growing dividend, which we have increased by more than 250% since inception; continued debt repayment, where we expect to pay down just above $12 billion of debt in 2022 and estimate a net leverage ratio of 1.8 times by the end of the year. Our strong cash flow also allows for continued business development, with approximately $2 billion allocated annually to augment our pipeline with the most promising external technologies and innovative therapies. In closing, we are very pleased to AbbVie’s strong results in 2021. And we expect to deliver robust performance in 2022 and over the long term. With that, I’ll turn the call back over to Liz. Liz Shea: Thanks, Rob. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, we’ll take the first question. Operator: Thank you. Our first question comes from Chris Schott with JP Morgan. Chris Schott: Great. Thanks so much for the questions. I just have a couple here digging into Rinvoq in a little bit more detail. I guess, first in rheumatoid arthritis, can you just -- it looks like volumes have plateaued a little bit. It’s probably not hugely surprising given label revision, but just elaborate a little bit more on the feedback you’re getting from physicians there. And when you anticipate you’ll start to see sequential growth again in that indication? The second question I had on Rinvoq was then on atopic derm. Just elaborate again a little bit more on the ramp you’re expecting here. Is this something that’s going to take some time, or do you view that there’s some low-hanging fruit maybe with some of the DP failures? I’m really just trying to get to with all of these is, I guess, the $2.7 billion guidance, how much of that’s RA? How much of it is new indication? Just a little bit more color on that front. Thanks so much. Jeff Stewart: Yes. Thanks. Hi. It’s Jeff. I’ll give you some sense on what’s happening with RA. So, the RA market after the drug safety and label is progressing as we anticipated. So, I’ll give you some sense, and I’ll refer to sort of in-play share because you have to be a little bit careful in the December, January time frame with overall volumes in the market. But right before the Drug Safety Communication, we had about a 16% in-place share in RA, which was just right behind Humira. So very, very strong. If we look at where that’s trended over the fourth quarter, it’s dropped about 20%. Okay? So, it’s about 14 reported in October, just over 13 in November, very consistent with what we thought would happen. So, about a 20% shift in new-to-brand starts over that time period. And what we see from the market is it’s exactly as we would expect, very, very stable, no change really in second-line plus and doctors start to suppress their starts in first-line consistent with the label. So, what we’re going to see is that as basically the promotion kicks back in here after December in the first quarter, we’re going to see that type of stability, which we can see is very, very clear from our overall share in our weeklies and start to progress as we shift and pivot towards that second-line plus. So, the market is responding very similar to our expectations that we’ve been talking about in terms of overall RA. Obviously, PsA is going to help build upon that RA dynamic and then ultimately, later in the year, the big axial approvals as well. So, everything is progressing as we thought it would progress from a market perspective. In terms of atopic dermatitis, listen, I said in my prepared remarks, we’re very pleased with the label. We have those stringent endpoints of the EASI 90, the high skin clearance, very powerful itch reduction are reflected in our label. We obviously have both doses approved. The market, I can tell you, has been very pleasantly surprised about the adolescent indication, which is -- it’s very important. So, that’s basically -- we’re going to start to see that ramp. It won’t -- we don’t think it’s going to be slow. And to your point, in terms of our ability to start to capture patients, it’s happening already. We obviously haven’t reported any of the TRxs yet, but we can see it in the market. And typically, it’s falling into a couple of areas. First, dupi failures, not a surprise, and there’s a reasonably significant number of people after 4 or 5 years that just have failed and exited the market. They’re going to come back in. We have reports from our research and our teams over partial responders to dupi that just aren’t doing well, in particular with the itch. We see some early starts there. And then, of course, challenging patients in general, we are seeing starts there as well with those higher levels of skin involvement. So the market seems to be progressing as we expected. It’s not surprising that as we look at the development of the second-line market, we’re going to see initially most of the starts in the dupi partial responders or the nonresponders, which is a fairly significant population. Also, as I mentioned, that we will start to see our access ramp fairly quickly here over the first part of the year. So, we’re encouraged. Maybe I can turn it over to Rob to give a sense over the relative magnitude of the sales. Rob Michael: Thanks, Jeff. Chris, this is Rob. So of the Rinvoq guidance of $2.7 billion, the AD and spine indications will each contribute a couple of hundred million dollars, while UC will contribute around $100 million. And to keep in mind in terms of sequential growth, keep in mind, in the U.S., you tend to see from Q4 to Q1, it’s a sequential decline. So that’s just a seasonal dynamic that we see across the business. So you would see sequential growth resume in Q2 and beyond. Operator: Our next question comes from Ronny Gal from Bernstein. Ronny Gal: First question is around Humira. I was wondering if you guys will be in a position to give us some sort of a floor number in 2023 based on payer contracts. Sometimes this year, obviously, the market is looking for that. And then, when I talk to payers, it seems a lot of the decisions about what product they would use longer term will not happen in 2023. That will happen in 2024. You kind of talked about kind of like a decline and then a quick ramp-up. Do you see the floor here in 2023, or do you see it in 2024? And then, if I could sneak one more. You have one of the largest differences between GAAP and non-GAAP earnings in the industry because of that Allergan acquisition. As you look at the amortization period and so forth, when do you think this thing will begin to narrow in a significant way just because that’s a concern for some investors? Rick Gonzalez: Okay. Ronny, this is Rick Gonzalez. I’ll take the Humira questions. I think if you look at the guidance we provided thus far, I mean, I think that’s consistent with how we see the market playing out overall. We’ve said basically you should be thinking about 45% erosion, plus or minus 10%, that’s probably a reasonable range. Nothing has really given us any indication that it should be different than that at this point. I think we will be in a position as we move later on this year to potentially be able to provide some more specificity around that. We should be through all of the contracting at that point, in a better position to be able to understand the ramp and the change that will occur over that period of time, and we certainly want to provide guidance when we have confidence that we can give you a high degree of specificity of what that guidance looks like. As it relates to your question about floor for Humira, I think your question is, will the floor for Humira be in ‘23 or ‘24. And I believe you’ll see further erosion from ‘23 to ‘24 on the Humira business alone. But what we have described is we returned to growth on the overall business. So, you have to think about it from the perspective of this underlying growth engine that gets suppressed in ‘23 by the significant erosion that you see around Humira, both price and some volume. And then, as that continues, it continues at a slower pace when we get into ‘24. So, the overall business has the ability to be able to drive growth for the total Company. But yes, Humira would continue to decline in ‘24. And then Rob, why don’t you cover the third one? Rob Michael: Sure, Ronny, this is Rob. So when you look at our adjustments to specified intangible amortization, I’d say intangible amortization is like 70% of it and this is on the $4.74 guidance that we’ve given this year. And that will continue. Obviously, those things fall off over a number of years. But I would say that’s probably a level that I would assume would be present for the next several years. Another big component is kind of the contingent consideration given that we’re -- that’s purchase accounting, and we record that accretion as such, that will certainly fluctuate over time. But I’d say those are the two biggest components of the guide this year. And certainly, integration costs are starting to wind down, so you would expect to see those come down. But it is going down from last year. And so you would expect it potentially trend down. But overall, I think you can model this level going forward. Operator: Our next question comes from Andrew Baum with Citi. Andrew Baum: A couple of questions. Firstly, on Imbruvica. As we move into 2022 and the COVID dynamic shakes out, we’ll be able to see the impact of competition versus COVID. Assuming that a significant chunk of the U.S. slowing growth rate or decline is due to competition, what can be done to recoup the momentum against the narrative, particularly of Calquence? And then second, in terms of your aesthetics business, you terminated your contract with Medytox liquid formulation. There are competitive products coming to market as well as increasing price competition. How much of that is concerned or as your franchise and the breadth of the portfolio enough to minimize any impact of novel formulations? Thank you. Jeff Stewart: Yes. Hi, Andrew, it’s Jeff. So, thanks. And you’re right that we still have the continuing lingering effect with COVID, and Rob addressed that in his comments. So, we still see the market versus ‘19 levels down about 10% and even marginally down from 2020 in Q4. So we anticipate that that will moderate go forward. And then we’re left to manage the competitive impact. So, we are seeing competitive BTKs have some impact on Imbruvica, but we’re also seeing the competitive impact from our own Venclexta. So we have to start to think about looking at the combination of the AbbVie position, which is still very, very strong. To give you some sense in second-line, we have 45% share of the market, and it’s even higher in third-line, and it’s in the 30s for frontline. So, we have to continue, which is our strategy to highlight where we have a lot of distinction, which is the strength of our data across every comparator in CLL, the overall survival benefit, and then also bring the strength of our overall portfolio. So, that’s how we plan to mitigate it. As Rob mentioned, we see market recovery offset by some share pressure on Imbruvica, mitigated by positive Ven impact. So, that’s how we see the market develop as we go into 2022. We also are seeing some pricing pressure in some select segments that are also contributing to the share loss for Imbruvica. And obviously, we -- as much as we can, we keep the pricing discipline in the market moving forward. So, I hope that context helps. Rick Gonzalez: Andrew, this is Rick. I’ll cover the Aesthetics questions for you. And certainly, as you look at Botox, both here in the U.S. and internationally, it competes today against a significant number of competitive alternatives that are available. I think it’s a pretty impressive position that Botox has in the market. When you look at the brand equity that it has, when you look at the confidence that injectors have in using the product, they tend to describe it as the most forgiving of all the toxins that they have experience with. And then there’s obviously a fairly significant customer loyalty aspect to Botox with the loyalty programs and Allergan has a very significant loyalty program that offers patients incentives to be able to use the product and to go back and get repeat procedures. Having said all of that, we feel confident in the position that we have competitively against the competitive alternatives that we see out there and those that we see coming. We have a very active R&D effort in the aesthetics R&D group now that’s looking at next-generation toxins. Two in particular that we highlighted in the comments earlier are we had a short-acting toxin that’s in development that’s progressing very nicely, and we have a true long-acting toxin that’s in development as well. And we believe that those will help grow the market. But, if I look at the market now, obviously, we’ve seen significant acceleration in the market since we’ve activated many of the strategies that we put in place after acquiring Allergan. But if I look at our overall share, overall share has stayed very steady, in fact, might have ticked up one point in the latest set of data. So, that tells you that we’re not only growing the market very rapidly but we’re continuing to compete quite effectively against the alternatives that are out there. So, I’m not overly concerned about what I see on the horizon. I think, we have the opportunity to build the market even larger with some of the next generation toxins that we’re working on when we bring those to the marketplace. So, I feel good about our position in toxins and in fillers as we move forward. Operator: Our next question comes from Vamil Divan from Mizuho Securities. Vamil Divan: So, a couple. I always appreciate all the guidance. You guys gave both near term and longer term. Just a couple of questions I have related to more of the longer-term guidance you’ve given. In the past, you had talked about your HemOnc franchise sort of in peak sales or sales I guess in 2025 of around $13 billion. When you updated some of your numbers earlier last month, I don’t think you updated that one. So, I’m just curious if you still think that that’s a reasonable sort of 2025 expectation? And then, the other one is around Ubrelvy, where you’ve sort of stayed with this guidance of sort of more than $1 billion in peak sales. But you’re already guiding to $800 million of sales just in this current year, pretty early in the launch. So, I’m just wondering if you can maybe give a little better sense of how you’re viewing sort of the longer-term opportunity for Ubrelvy and maybe if you want to mention Qulipta, I know that’s early, but at least for Ubrelvy, do you think there’s significant upside to that $1 billion number you’ve mentioned before? Thank you. Rick Gonzalez: Vamil, this is Rick. So, I’ll cover the first one, and then I’m going to have Jeff cover the Ubrelvy question that you’ve asked. So, it’s a good question. Obviously, the HemOnc market in the areas that we participate in, in particular, I would say CLL has changed over the last several years. I think one of the -- certainly, one of the things that was not ever anticipated in that guidance was the impact that COVID would have on the market and the reduction that we saw in the number of new patients, which was quite sizable. And that obviously wasn’t contemplated in it. And the second thing is we are seeing certainly more competitive pressure, both from price and some volume than we anticipated in that time frame. Having said all of that and -- well, I’d say a third item is, certainly, Venclexta is performing well as well. And I’d say, it’s tended to exceed some of our expectations, at least at this point within the launch trajectory of the brand. So, all of those have factors in what we’re describing here. I’d also say we have done a nice job of building out our HemOnc portfolio from an R&D standpoint. When I look at some of those assets that I described in my opening comments, I think they’re going to have a very significant opportunity. As an example, one that I didn’t mention there would be Venclexta and the t(11;14) multiple myeloma population. That could be a very significant opportunity, we feel good about that. We should get a readout on that. And we think that could be a significant contributor to both improvement in in-patient therapy, but also a significant improvement in the overall revenue in the franchise. And then, you have things like Navitoclax and epcoritamab and 383, those are all significant opportunities to be able to drive growth. So, I still feel confident in the overall ability for us to grow our HemOnc franchise. Having said that, I would say, Imbruvica is under more pressure than we anticipated. When we put that guidance out, at that point, we didn’t even contemplate a follow-on BTKs in any meaningful way. But we do see more competitive pressure there. But overall, I’d say, I still feel very confident in our ability to be able to grow that, that will be a growth franchise for the Company over the long term. Jeff Stewart: Yes. Hi Vamil, it’s Jeff. So, just to answer your question on Ubrelvy in the overall market. Certainly, we’re very pleased, as I mentioned in my remarks, over the momentum on Ubrelvy. We continue to lead in that acute space. And the early results for Qulipta are also very strong. Now, a lot of it is going to depend on how that CGRP market develops. So, if you think about it in this way, and this is how we think about it is, is it’s about in terms of new patient capture for the total Ubrelvy market, where we also compete with another player from Biohaven. It’s about 18% to 19% of the market. And the market is also with the expanded triptan market, of course. So, if you look at that, the payers certainly like you to step through one or more triptans. When you look at the population that may not be eligible for a triptan or fails a triptan, the estimates are typically up to 30% to 35%. And so, the market has potential room to sort of double into that epidemiology. So, you can kind of run the numbers there. I mean, we often get the question, is it over $1 billion? Is it closer to $1 billion or is it closer to a higher number. But nonetheless, we’re pleased. Certainly, it’s exceeded our expectations so far, and Qulipta has as well. So, I think there’s more room for the market to run, but we’ll have to see. I mean, there are payer pressures in the market, as I mentioned, in terms of the step-through therapy. Operator: Our next question comes from Steve Scala from Cowen. Steve Scala: I have a couple of questions. At a high level, I struggle to understand why 2022 won’t be a stronger year than the guide on the earnings line. Skyrizi and Botox are doing phenomenally. Rinvoq is holding its own. Humira will still be exclusive in the U.S. for the whole year and should be at peak profitability and the pandemic less an obstacle. So, why won’t 2022 look more like or even better than 2021 in terms of earnings power? And secondly, there was no mention of the CF program even in the upcoming milestones. Any thoughts on the timing of the triplet data? In the past, I would describe AbbVie confidence as being no more than moderate. Has it changed one way or the other? Rick Gonzalez: Steve, this is Rick. Maybe Rob and I will tag team your first question, and then Michael will cover your second question. I think if I look at 2022 and I look at our overall performance coming off of a strong year in 2021, it’s pretty impressive performance. When I look at the EPS growth, certainly, do we have an opportunity to drive it harder? I can tell you, every year, we endeavor to drive it as hard as we can drive it. And when I look at all of the businesses individually, and I look at their ability to be able to perform, I’m extremely confident in the trajectory that we have going forward. Specifically, we’re assuming as an example, in HCV that there’s still a COVID impact in HCV. So, I wouldn’t say the pandemic is completely gone in 2022. But, I’d say, overall, the brands are performing well. We’re investing in the business to ensure that we continue to be able to drive long-term performance. And so certainly, that obviously drives some expectations around what the EPS growth will be year-over-year. I don’t know, Rob, anything you’d like to add? Rob Michael: I mean, I think it’s a good point and that we are fully investing to support the long-term growth. If you think about we’re launching AD, that’s a new area for us. Qulipta and Vuity, we’re also going to fully invest there. Aesthetics, we’ve seen that the strength of the investment in aesthetics in the way we’ve been able to grow the market. So that’s really important. At the same time, we’re expanding operating margin. We’re exceeding our expectations for synergies. And so, you’re seeing us deliver another year of operating margin expansion. So, I’d say, we’re top tier in operating margin, very healthy P&L profile. And then, the other thing that you probably have to factor in here is that we’ve assumed half year Restasis as well. We don’t really have visibility to the generic until we make an assumption every time we update guidance six months out. So that’s something that if you look at year-over-year that you should figure into your comparisons. But overall, we’re very pleased with delivering double-digit growth in earnings and seeing another year of very strong operating margin expansion while fully investing to support the growth of the business. Michael Severino: And this is Mike. I’ll take the question on CF. I think, it’s important to keep in mind that this is a pre proof-of-concept program that doesn’t contribute in any meaningful way to our long-term outlook and doesn’t factor into our thinking about the long-term potential in the pipeline. And the way we have discussed it is consistent with that view. We’ve always said that it represents significant upside if it were to hit, but it’s an early program. With respect to the timing of the data, we continue to track towards the timing that we’ve described previously. We would expect to have data from the triple, sufficient to enable a go/no-go decision later on this quarter. Operator: Our next question comes from Tim Anderson with Wolfe Research. Tim Anderson: A couple of questions. I’m guessing that as we move through 2022, investors are going to start to have some concerns about 2023 earnings, what the impact from Humira could be, and you talked about having more visibility on Humira contracting later this year. My question is, is it possible you’ll actually give us 2023 earnings guidance sometime this year, like at Q3 results as an example? And then, my second question, just going back to CF data. You said in mid-November that you would actually have that data in-house by the end of the year. So, here we are four weeks later, we haven’t really seen anything. My question is, do you actually have that data in-house? Did you hit that timeline of end of year, if not, what’s going on? And what changed in that short window? Rick Gonzalez: Okay. Tim, this is Rick. I’ll cover your first question. Mike can address the second one. We certainly are in a position now to be able to commit that we would give earnings guidance in the third quarter. I think clearly, we’ll be able to give a better feel for what that erosion curve looks like. And could that ultimately end up being at least a pretty good perspective for us to be able to build off of what earnings guidance would look like. It might. I think if we’re in a position where we can confidently provide that guidance, we would provide it. But I certainly think we’ll be in a position where we have very good visibility as to what that erosion curve will look like. And at that point, we can tighten it a bit and be able to provide a higher level of specificity. We understand it’s an important issue for investors. As far as EPS is concerned, in 2023, we have said that we expect EPS to decline in 2023. So, I don’t think any investor is -- that would be a surprise to any investor. But obviously, it’s important for us to be able to frame it as accurately as we can for the investment community and be able to provide direction around that. And at the point at which we think we can do that in a reliable way, we’re committed to be able to do that. So, let’s see how it plays out. And certainly, as we get to the third quarter call, that would be the position at -- the point at which I think we’d be in a position to be able to provide more clarity. Mike? Michael Severino: So, on CF, what we said towards the end of last year is that data would begin to come in-house around the end of the year, and we would have sufficient data to make a go/no-go in the first quarter. And we’re still tracking to that overall timeline. There were some challenges towards the end of the year, where a number of patients were expected from Australia, for example, and Australia shut down because of COVID and we had to shift that enrollment. So, we perhaps have slightly less data than we would have hoped to have had at this point in the year. But again, we’re still tracking to be able to make that go/no-go decision by the end of the year, because it’s important to keep in mind that these are short studies. And so once you get those patients in, you can turn the data around and make a decision pretty quickly. But the overall timing hasn’t changed substantially from what we described at the end of last year. Operator: Our next question comes from Mohit Bansal from Wells Fargo. Mohit Bansal: Congrats on the quarter. Maybe a question on Rinvoq and other oral competition and competitors in IBD, where do you see Rinvoq fitting versus other orals such as SNP [ph] inhibitor? I mean, now they are more than -- there could be more than one. And KOL, I mean they kind of suggested some kind of induction with one drug in maintenance with other drugs, a kind of treatment paradigm in IBD. Do you think it is even a possibility in any of these diseases? Thank you. Michael Severino: I think -- this is Mike. I’ll take that question. If you look at the performance of Rinvoq and inflammatory bowel diseases, both in UC where we have the full data set and in Crohn’s disease, where we have an important component of the induction data set, the performance across the board is very, very strong. Not only in terms of just overall response rates that are measured, but particularly when one looks at deeper measures of response, clinical remission, mucosal healing, major clinical response, which is the combination of remission and endoscopic improvement. And across the board, we’re driving very high levels of disease control. And we think that feature of the drug, combined with the overall benefit risk position us to compete very effectively against not only oral competitors but many competitors, all competitors in the field. When we look at those data to our eye, given the limitations of cross-study comparisons, we see response rates that just aren’t paralleled in the field. And so we think that there is a very real opportunity for Rinvoq and our view of its role in IBD reflects that. With respect to mixed induction and maintenance regimens, it’s important to keep in mind that there are no data to support those sorts of regimens. All of the programs look at induction, followed by maintenance, which is usually a step-down in dose from the induction dose. And that’s the data set that physicians will have. Now, it’s important to keep in mind that in the long term, patients often lose control and then they need to be reinduced with a new agent. And one of the very strong features of Rinvoq and quite frankly, Skyrizi also shares this characteristic, is it has very durable response. So, it does maintain response for a very long period of time in the studies that we have continued to follow, including our long-term extensions from Phase 2 and our Phase 3 program. So, we think those are also very strong attributes to the products. Operator: Our next question comes from Gary Nachman from BMO Capital Markets. Gary Nachman: Aesthetics has been a big source of upside in 2021. So, I’m curious, did you see any real impact from Omicron in the fourth quarter? Do you see a tailwind maybe from that further recovery this year? Is that baked into the aesthetics guidance of $5.9 billion that you have for 2022? And you’ve talked about high-single-digit long-term aesthetics guidance, but this year should be double digits. So, should we be thinking more along the lines of double-digit growth maybe for the next few years if you’re still investing a lot in that space? And then, just one other quick one on Qulipta for the chronic migraine prevention indication. That data is coming soon sometime this quarter. So, just talk about how meaningful you think that indication will be and how that’s factored into the peak targets that you talked about. Thank you. Rick Gonzalez: Gary, it’s a good question on Omicron in new studies because it is something we track very carefully in every major geography around the world as well as by state here in the United States. And I will tell you that at least as far as the U.S. is concerned, there has not been much of an impact on aesthetic volume, unlike what we saw when there was an actual shutdown. And obviously, you would think shutdown, you’re going to see the volume go down. But I’d say here, we’re seeing very little impact on the volume. So, we have factored in that we don’t expect a major disruption going forward. And I think the data would clearly support that that’s a reasonable position to take. And as far as the business overall, I mean, I can tell you, we’re very pleased with how the business is performing. I think that group is executing at a very high level. And certainly, the resourcing and the dedicated structure that we put in place, I think, are helping a lot in major geographies like the U.S. and China. We’re obviously comfortable with the guide that we provided. It is an area that we’re going to continue to invest in and continue to drive. And I think it’s a market that I think is extremely attractive. And it’s going to require both us to continue to execute and invest in it appropriately to grow the market, but also to build out more assets that meet patients’ needs to be able to expand the market. And so, we’ve almost doubled the R&D investment that we have in aesthetics since we took it over. And we have a number of programs that I think are very exciting programs. Some of the biostimulatory and regenerative fillers that we’re working on now, I think, could be exciting opportunities like tropoelastin to be able to stimulate tropoelastin in patients using fillers is an exciting program that continues to advance. And so, it’s going to require both. It’s something that we’re absolutely committed to continue to drive. And I think this can be, as we indicated in our comments, I think this can be a strong business for AbbVie over the long term. Jeff, do you want to cover Qulipta? Jeff Stewart: Yes. Thanks Gary for you question on Qulipta. It’s an important new indication if we see -- when we see the data and it were to be approved. And I’ll give you some perspective. Obviously, we’ve talked about how much we really like our portfolio of migraine. You got Botox on chronic with the injectors. Obviously, you have Qulipta right now in episodic and of course, Ubrelvy in acute. So, the Qulipta chronic gives us quite a bit of flexibility, and it’s a nice catalyst. Even though episodic is a bigger market in terms of patients, obviously, chronic patients do consume a lot of medication. Largely, if you think about the market structure, you’ve got injectors, meaning they inject Botox or you have non-injectors. So, to bring in the first oral that -- for people that don’t choose to have a Botox-injectable practice, that’s quite attractive. And we think it builds in our story over the strength of Qulipta first-in-class designed specifically for these indications. So, it’s a very nice catalyst if it were to be approved. And so, we’re anxiously looking forward to that. The other thing I would note, which is further off and it’s obviously something that would have to play out through the studies in Mike’s organization, was chronic migraine is so difficult that the potential for patients to have combination treatment. So, in other words, a Botox Therapeutic plus a simple oral drug like Qulipta could bring this concept to that segment of the market called migraine freedom where you’re really trying to get the headaches down to as low as possible. And so, again, it’s further off, but it shows you the flexibility that we have as we continue to build out Qulipta across our migraine portfolio. So, we’re pretty excited about the potential for CM. Operator: Our next question is from Geoff Meacham from Bank of America. Geoff Meacham: I just had a couple of quick ones for Rick -- or for Rob. The first one is when you look at your our modified 2025 guidance for Skyrizi and Rinvoq, were there any changes to your assumptions on duration of therapy or the pricing environment? I’m just thinking about the payer landscape with many more biosimilars coming up and what impact that could have on switching or price increases. And then, the second question is on the BD front. We’ve obviously seen valuations come down quite a bit in SMID cap biotech in the past six months. And I know you’ve usually talked about $2 billion earmarked for BD, but does the current environment make things like bringing new TAs or newer technologies in-house more attractive? Thanks so much. Rick Gonzalez: Rob? Rob Michael: Yes, Geoff. So obviously, when we go through our long-range plan, we consider the various dynamics of the pricing environment. So, we factor that into our 2025 guidance. I would not say that there’s really been an assumption change for duration of therapy. But we did -- we certainly took into account the impact of label on RA, AD and SpA, but then that was offset by the stronger performance at OUS as well as the stronger IBD data that we saw for Rinvoq and just the overall performance of Skyrizi in psoriasis. It was all factored into that updated guidance, but we did not make an assumption change for duration of therapy, and we certainly factor in various pricing assumptions as we go through our long-range plan. Rick Gonzalez: Yes. And maybe Mike and I will tag team number two. I mean, certainly, as we -- you’ve seen us pay down debt at a very significant pace. We’re continuing to commit to pay down significant debt this year. And we’ll certainly be in a position where we could do larger opportunities if that was something that we desired and we thought it was the right kind of opportunity as we move forward in ‘23 and ‘24. Certainly, the $2 billion that we’ve allocated has been sufficient to be able to cover the things that we’re looking for. Mike has responsibility for business development. So, I think it’s probably a little closer to the valuation question. Mike? Michael Severino: Well, what I would say is that valuations have certainly come down, and that brings opportunities into the focus that might previously been outside of that range of $2 billion a year that we had contemplated. And as Rick said, as we pay down debt, we have some more flexibility. But we’re going to continue to look at BD in the same way that we always have, which is that it is an important component of adding innovation to our pipeline and needs to be coupled with our internal innovation. So, we’re going to match what’s out there. The innovation we see, the therapeutic areas that are most promising with what’s going on in our early pipeline and use that to make sure that, overall, we have a very strong and very innovative pipeline. And you can see that, for example, in the way that we have built our HemOnc franchise, where we have a nice blend of internally discovered and partnered programs from Venclexta and Imbruvica, obviously, our lead programs to the significant programs behind that, things like Navitoclax, epcoritamab, 383 and now Teliso-V demonstrating extremely strong data in non-small cell lung cancer. So, that’s a blend of internal and external innovation. And we’re going to continue to look at areas in that same way. And it’s principally going to be the fit for our overall situation, the strength of the innovation and that balance between internal and external innovation that we look at. Operator: Our next question comes from Josh Schimmer from Evercore. Josh Schimmer: First, I’m a little surprised the contingent consideration adjustment is not higher considering your recently revised Skyrizi forecast. Am I not understanding that line correctly, or should we be expecting a more meaningful revision in the first quarter? And then, you mentioned a couple of times the novel biostimulatory dermal fillers you have in the aesthetics pipeline. Can you elaborate on how you expect those to differentiate versus the current offering and whether you expect those to expand the market for fillers? Rob Michael: Josh, this is Rob. I’ll take your first question. So, we did actually record in Q2 of last year, additional accretion for higher sales forecast for Skyrizi, and that was really tied to both our long-range plan as well as because it’s a fair value measure. You have to take external forecast into account. And obviously, Street numbers had moved up as well. We came out with publicly with the updated guidance in December, but we already contemplated that in our contingent consideration accretion in Q2 of last year. So, that’s already accounted for. Rick Gonzalez: So, on the biostimulatory fillers, I think the way to think about it, there are multiple programs, but I’ll talk about two areas specifically. Certainly, one of the areas that you want to be able to look at is your ability to be able to stimulate collagen so that your own body can produce collagen to be able to provide support and filling in a specific area that you desire. And there are some products on the market today that provide that. One of the negatives of those products is you don’t get the immediate filling effect that you normally get with a filler, where you get physical filling immediately upon the procedure. You get a little bit of swelling that occurs. So, for a very short period of time, you will get what looks to be filling, but then that swelling goes down. And then for a period of time, the patient has to wait in order for them to get the collagen impact, and that takes a significant period of time. So we have a technology in-house that we acquired, and we’re further developing that combines both physical filling and collagen stimulation in one product. So, you get the immediate filling effect of a normal filler. And then, as that starts to resolve over time, you get the collagen impact that’s building over that same period of time to provide long-term filling. So, I would say that most of these technologies that we’re working on are market expansion opportunities, so that’s one example. The second example would be one of the areas that is important for patients is what we describe as skin quality, the smoothness of your skin essentially. And one of the things that provides smoothness of your skin is the elasticity of the skin. So, tropoelastin is an example of a product that we have in development that will allow the body to be able to produce more elastin. So, you can inject this product and it will provide, we believe, we have to prove this in the clinical studies, that would provide not only some level, not a dramatic level of filling but an ability to be able to provide elastin information along those areas and be able to smooth the skin out. That would clearly be a market expansion opportunity, today there really aren’t fillers that do that. They can stretch the skin with the physical filling, but they don’t really provide smoothing of the skin. And so, those are two examples of what we’re working on. Operator: Our next question comes from Chris Raymond with Piper Sandler. Chris Raymond: Just two questions. First on the migraine franchise. I noticed that you have a Phase 3 trial looking at Qulipta in Botox in a combo therapy for migraine -- for chronic migraine prevention. Our doc checks indicate actually growing interest, docs sort of highlight that as proactively is something they’re interested in. I guess, was this trial in response to that feedback or maybe just talk about the rationale and how you’re looking at combo in the space? And then, just a question on a drug that doesn’t come up that you just launched, Vuity. Presbyopia represents a huge TAM. Maybe just talk about initial uptake trends and what is it about this market, I guess, that you’re seeing that you’re not making a bigger deal out of this launch? Thanks. Michael Severino: So, this is Mike. I’ll start with the question on Qulipta and Botox combo use and then Jeff may want to add and take the second question. With respect to that combination, it really goes back to what Jeff said before, this concept of migraine freedom. If you think about chronic migraine, these are patients who have 15 or more migraine days a month. That’s a migraine every other day, and these are debilitating attacks. So a substantial reduction in that is great. But, what patients and physicians are really seeking is an elimination of the migraine so that they can be free to go across their daily lives, to go about their daily lives. And given the options that are out there today to really get to that level in those most severely affected patients. Combination therapy is an obvious place to go, particularly when it’s complementary approaches that work through different mechanisms. And so you would expect their effects to be independent and additive. And where you have a treatment like Botox, it has a long track record, is infrequently administered and has a long duration. So, it’s that thinking that led to that combination trial. And I do think we would also agree that there is significant interest in treating physicians around these approaches. Jeff Stewart: Yes. Just to add to that, that’s exactly right, is the -- it’s so logical and there’s so much unmet need, to Mike’s point, in chronic migraine with half a month, sometimes these migraines last for days. And so there’s a lot of desperation. And when the thought leaders and the headache specialists see the impact of Botox and how simple Qulipta is and how strong that is, they go right there. So I think we are encouraged, as Mike mentioned, to sort of see the outcome of those studies for migraine freedom. It would -- if it works, it would be a real advance for patients. Rick Gonzalez: And so on Vuity, you’re right, we didn’t comment on this meeting. You typically wouldn’t comment on a product that’s -- of this size. And I mean, it’s a very interesting product. I think it clearly has a unique fit in the market. I’ll have -- I’ll let Jeff talk a little bit about the total available market, what we see as far as the size of that market going forward. But the reason we didn’t highlight it is, like I said, if we look at what we think peak sales will be here, it’s not a product of the magnitude that we would typically highlight. Jeff Stewart: Yes. And what we see is that there is excitement about Vuity. I mean it’s different than the -- obviously, the market is basically over-the-counter or prescription high glasses or readers, right? So, this is the first ever product that basically is a drop or a reading drop, right? So, when we start to break down the data and you take a really, really big market, tens and tens of millions of patients with presbyopia. But we also largely see from the clinical study, it really works the best for moderate to severe younger people, not older people. So, as we basically make the cuts, it’s still a substantial market size, but it’s not as large as you might think if you just look at all the presbyopes that are better in the United States. But nonetheless, it’s early days where we have a sales force that’s calling on our optometrist, also ophthalmologists. What we see from the early results is significant interest. We haven’t started our big consumer push, which will come later, later in this quarter. It is an older glaucoma product that’s been reformulated. So, there’s a little bit of learning from the ophthalmologists who really understand glaucoma products. But overall, the early results are it works, it works as anticipated. It works quickly within 15 minutes. It lasts for 6 to 8 hours. And so, again, when we look at the price point, it’s not a reimbursed product. It’s a cash pay product. We have, to Rick’s point, fairly modest expectations. And we’ll continue to watch the trajectory here over the next quarter or so. Rick Gonzalez: I think the big assumption that you have to look at here is, what is the utilization per month the patient would actually use it for. I mean, as an example, I keep bugging the guys that I have to go get a prescription for it. Now, what do I want it for? When I go to a restaurant, I have trouble reading in low light. So, I’ll use it for that purpose. And so, it’s very difficult to come up with what the frequency at which it will be used. If it’s used in a high frequency, it will obviously be a bigger product. If it’s used at a relatively low frequency, it will be smaller product. So, we’ll have to see how it plays out. Liz Shea: Operator, we have time for one final question. Operator: Thank you. Our final question comes from Matthew Harrison from Morgan Stanley. Matthew Harrison: Thanks for fitting me in. I guess, two for me, if I may. So first, on epco, could you just comment around your confidence around accelerated approval here in DLBCL and how you’re thinking about that opportunity in the near term? And then, on Vraylar, maybe just comment on what FDA conversations are ongoing there and how you’re thinking about the potential for an AdCom or not. Michael Severino: So, on epco, we have a high degree of confidence in epco overall. It continues to deliver very strong results, high overall response rates, very deep responses, good complete response rates across a number of indications, DLBCL and follicular lymphoma both. With respect to the confidence in accelerated approval for diffuse large B-cell lymphoma, when we look at the data, we think it clearly exceeds the benchmarks of available therapies in highly pre-treated refractory patients. So, we would think that accelerated approval should be supported by those data, will allow the data to continue to mature from the expansion cohorts and have our final regulatory discussions later on this year to set up that accelerated approval submission. So, it certainly is in our planning, and we think it’s very supportable based on the data. With respect to confidence in Vraylar and MDD, we’re confident in that -- we’ve been confident. We were confident when we saw the data and looked at the strength of those data and looked at the relevant precedents for molecules that have achieved indications, not only in depression, broadly speaking, but in adjunctive treatment of major depressive disorder. We’ve completed all of the regulatory discussions that we need to have for the submission, and we’re planning the submission shortly as we described in my prepared remarks. In terms of potential for an AdCom, it’s really too early to comment on that. We typically start to have those conversations with the agency a few months into the review process. But, based on the data and based on the precedence, it’s not something that we would anticipate. However, if the agency were to have one, it wouldn’t concern us either. We think the data package is very strong and would hold its own. Liz Shea: Thanks, Matthew. That concludes today’s conference call. If you’d like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. Operator: Thank you. That concludes today’s conference call. Thank you for your participation. You may disconnect at this time.	[ { "speaker": "Liz Shea", "text": "Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Vice Chairman and President; Rob Michael, Vice Chairman, Finance and Commercial Operations and Chief Financial Officer; and Jeff Stewart, Executive Vice President, Chief Commercial Officer. Joining us for the Q&A portion of the call is Laura Schumacher, Vice Chairman, External Affairs, Chief Legal Officer, and Corporate Secretary. Before we get started, some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today’s conference call non-GAAP financial measures will be used to help investors understand AbbVie’s business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today which can be found on our website. Unless otherwise noted, our commentary on sales growth is on a comparable basis, which includes full current year and historical results for Allergan. For this comparison of underlying performance, all historically reported Allergan revenues have been recast to conform to AbbVie’s revenue recognition accounting policies, and exclude the divestitures of Zenpep and Viokace. References to operational growth further exclude the impact of exchange. Following our prepared remarks, we’ll take your questions. So with that, I’ll now turn the call over to Rick." }, { "speaker": "Rick Gonzalez", "text": "Thank you, Liz. Good morning, everyone. And thank you for joining us today. I’ll provide perspective on our overall performance and outlook, and then Jeff, Mike and Rob will review our quarterly business highlights, pipeline progress, financial results and guidance for 2022 in more detail. Our performances this quarter tops off another excellent year for AbbVie with results well above our initial expectations. We delivered full year 2021 adjusted earnings per share of $12.70, representing growth of more than 20% versus the prior year. Full-year adjusted net revenues were more than $56 billion, up 10.5% on a comparable operational basis. These results demonstrate balanced performance across each of our major growth franchises, including double-digit comparable operational revenue growth from immunology, aesthetics, and neuroscience. I’m extremely pleased with our momentum, and we’ve entered this year in a strong position, which is reflected in our guidance. We anticipate 2022 adjusted earnings per share of $14 to $14.20, representing growth of 11% at the midpoint. Longer-term, we remain well positioned with an impressive set of diversified growth assets. In immunology, Skyrizi and Rinvoq are already contributing meaningful revenue, including $4.6 billion in combined sales last year with substantial growth anticipated in 2022 and beyond. Over the next few months, we expect to add several new indications to the list of approved uses for these two assets, at which point, Skyrizi and Rinvoq will be commercialized across all of Humira’s major indications, plus atopic dermatitis. With the strong performance that we’re seeing in their initial indications and the robust data we’ve demonstrated across our broad development programs, we expect combined peak sales for Skyrizi and Rinvoq to exceed the peak revenues achieved by Humira. In hematological oncology, we’ve established a leading position with Imbruvica and Venclexta, which were both expected to remain important revenue contributors through the decade. To support our next wave of growth, we also have an exciting and diverse pipeline of promising new therapies to address critical unmet needs in both blood cancers and solid tumors. Notable opportunities from our mid to late stage oncology pipeline include Navitoclax for myelofibrosis, which has the potential to provide disease modification in a market where current treatments only address symptoms. At Epcoritamab, a potentially best-in-class CD3XCD20 for B-cell malignancies, including DLBCL and follicular lymphoma; ABBV-383, our BCMA CD3 bispecific, which has the potential to become a best-in-class treatment in multiple myeloma; and Teliso-V, our promising c-Met ADC being studied for nonsquamous non-small cell lung cancer, which was recently granted breakthrough therapy designation. In neuroscience, we have a portfolio of compelling and differentiated therapies to support robust long-term growth in migraine, Parkinson’s disease and psychiatric conditions. Ubrelvy and Qulipta are both demonstrating strong launch trajectories in migraine, with each treatment expected to contribute more than $1 billion in peak sales. Vraylar continues to have a significant opportunity with currently approved indications with peak sales expected to approach $4 billion. An approval in major depressive disorder represents upside to our current projections. And 951, a potentially transformative improvement to our current treatment options for patients with advanced Parkinson’s disease with peak sales also anticipated to be more than $1 billion. Our leading aesthetics portfolio represents another extremely attractive growth opportunity. This business is performing well above expectations, delivering full year 2021 sales of more than $5.2 billion, $700 million higher than our initial guidance. AbbVie’s increased promotional investments are driving accelerated category growth, especially in toxins and fillers, where there is substantial room for additional market penetration globally. Dedicated resources are also of focused on delivering new product innovation within aesthetics, with several exciting R&D programs internally, including both short-acting and long-acting toxins, as well as novel fillers with biostimulatory or regenerative features. And we remain active with business development to pursue promising external technologies and complementary opportunities, including the recently closed Soliton acquisition, which further expands our body contouring portfolio. Given this focus and investment, we expect our aesthetics franchise to deliver high single digit revenue growth, through the end of the decade, including sales of more than $9 billion in 2029. Lastly, we’ve developed a robust pipeline, including numerous attractive late-stage programs, novel early stage therapies in a growing range of potential platform technologies, which we expect will collectively contribute to our growth through the decade. With the actions that we’ve taken to diversify our sources of growth, we remain very confident in the long-term outlook for our business. Following the U.S. Humira LOE event in 2023, we expect to quickly return to growth in 2024 and deliver high-single-digit growth from 2025 to the end of the decade. This is a testament to the strength of AbbVie’s broad and balanced portfolio. In summary, this is an exciting time for our Company. We’re demonstrating excellent execution across our portfolio, and our long-term growth prospects remain very strong. With that, I’ll turn the call over to Jeff. Jeff?" }, { "speaker": "Jeff Stewart", "text": "Thank you, Rick. Looking at our quarterly results, we continue to demonstrate excellent commercial execution across our therapeutic portfolio. I’ll start with immunology, which delivered global revenues of more than $6.7 billion, reflecting growth of 13.3% on an operational basis. Global Humira sales were $5.3 billion, up 3.5%, with 6% revenue growth in the U.S. offset by biosimilar competition across the international markets, where revenues were down 8.8% on an operational basis. Skyrizi is performing extremely well. Global sales of nearly $900 million were up 12.4% on a sequential basis, reflecting continued market share gains. Skyrizi has now surpassed Humira as the leader for total prescriptions in the U.S. psoriasis biological market, with share of approximately 20%. We are also now leading the market in several international geographies, including Japan. Total in-place share, which includes both new and switching patients, remains very and now, reflects roughly 37% patient share in the U.S. as well as leadership in nearly 20 key countries around the world. Skyrizi is also now approved for its second major indication, to treat adults with active psoriatic arthritis, further enhancing its compelling profile in dermatology. Field promotion is now active globally and early feedback from physicians has been very positive. Given Skyrizi’s demonstrated skin clearance and joint efficacy in our PSA clinical program, with nearly 30% of patients visiting dermatologists, having both, skin and joint involvement, this new approval will sustain Skyrizi’s strong momentum. In addition, we are preparing for the launch of Skyrizi’s in Crohn’s disease, an indication with very meaningful long-term revenue potential, with regulatory approvals in both, the U.S. and Europe anticipated this year. Rinvoq also continues to demonstrate robust growth. Global sales of more than $500 million were up 14% on a sequential basis. Prescriptions in RA remain strong with a total market share of more than 5.5% in the U.S. and nearly 5% across key international markets. We’re very pleased with the competitive labels for both PSA and atopic dermatitis, where we are making excellent progress with their launches globally. In atopic dermatitis, dermatologists appreciate key elements of Rinvoq’s new label, including the incorporation of stringent skin and itch endpoints, reflective of the performance in our registrational trials, as well as an adolescent indication and dosing flexibility. Managed care access is expected to ramp fairly quickly for both atopic dermatitis and PSA in the U.S. We are also preparing for the launches of Rinvoq in ulcerative colitis and axial SpA with regulatory approvals for both indications anticipated this year as well. Overall, we continue to feel very good about the performance and progress we’re making with both, Rinvoq and Skyrizi, which are expected to contribute more than $15 billion in combined risk adjusted global sales in 2025. In hematologic oncology, global revenues were nearly $1.9 billion, up 4.7% on an operational basis. Venclexta once again, delivered robust growth. Sales were up 34% on an operational basis with strong share performance across all approved indications. Imbruvica global revenues were down 2.7%, reflecting a slower than anticipated market recovery in CLL and increased share pressure from newer therapies. In neuroscience, revenues were more than $1.6 billion, up 19% on an operational basis, including robust double-digit growth for both, Vraylar and Botox Therapeutic. I’m also very pleased with our performance in migraine, where we have a portfolio of multiple distinct therapies to address the full spectrum of this disease. This includes our two leading oral CGRP therapies. Ubrelvy for acute migraine, which delivered total sales of $183 million, up 13% on a sequential basis, we anticipate robust sales growth again this year based on Ubrelvy’s competitive profile, continued strong new patient starts and a rapidly expanding CGRP segment. And we also have Qulipta, the only oral CGRP treatment specifically developed for the prevention of episodic migraine. The launch is going extremely well. When considering both paid and bridge volume Qulipta is already capturing nearly 20% of the new-to-brand share in the preventative CGRP class. Roughly three months post-launch, this is an incredible accomplishment and it’s a testament to Qulipta’s demonstrated efficacy, including rapid and meaningful reduction in migraine days. We expect commercial access for Qulipta to ramp quickly in the first half of this year. In eye care, revenues of $960 million were up 3.9% on an operational basis, including $364 million in sales from Restasis. Lastly, Mavyret were $427 million, down 10.1% on an operational basis, as treated patient volumes remained suppressed compared to pre-COVID levels. Overall, I’m very pleased with the performance and the momentum across the therapeutic portfolio. And with that, I’ll turn the call over to Mike for additional comments on our R&D programs. Mike?" }, { "speaker": "Michael Severino", "text": "Thank you, Jeff. We made significant advancement across all stages of our pipeline in 2021, and we expect continued progress again this year. In immunology, we had several recent important regulatory updates. We implemented safety and indication updates to our RA label for Rinvoq, and also received FDA approval in psoriatic arthritis and atopic dermatitis to curing strong labels that highlight Rinvoq’s favorable benefit risk profile in both new indications. In atopic dermatitis, we received approval for both the 15 milligram and 30 milligram doses, and based on the impressive levels of skin clearance and itch reduction demonstrated in our development program, we believe Rinvoq will be an important new treatment option for adult and adolescent patients with moderate to severe atopic dermatitis, who have not responded well to other systemic agents, such as cyclosporine, methotrexate, azathioprine, or biologics. We also have regulatory applications under review for Rinvoq in ulcerative colitis, ankylosing spondylitis, and non-radiographic axial SpA. We expect an FDA approval decision next month for ulcerative colitis, in the second quarter for ankylosing spondylitis, and in the fourth quarter for non-radiographic axial SpA. In Europe, we anticipate approval decisions for ulcerative colitis and non-radiographic axial SpA in the second half of the year. We’re nearing completion of Rinvoq’s registrational program in Crohn’s disease, which is the last major indication expansion program for Rinvoq. We recently announced positive top-line results from the first Phase 3 Crohn’s induction study, where Rinvoq demonstrated a very impact on clinical remission and endoscopic response in a difficult-to-treat refractory patient population. We expect to see results from the second Phase 3 Crohn’s induction study and from the maintenance study in the first half of this year with regulatory submissions anticipated in the second half of 2022. Also in immunology, we recently received FDA approval for Skyrizi in psoriatic arthritis, an important indication expansion for this asset. Based on the strong joint efficacy and the high level of skin clearance that Skyrizi provided in our registrational trials, we believe Skyrizi will be very competitively positioned as an effective new treatment option for psoriatic arthritis patients. We also have regulatory applications under review for Skyrizi in Crohn’s disease with approval decisions expected in the U.S. next month and in Europe, later this year. We’ve seen impressive results in our Crohn’s disease program, and we believe Skyrizi has the potential to become an important new therapy in this market, where there continues to be considerable unmet need. We’re making very good progress with our early-stage immunology pipeline as well, where we are developing novel agents with the goal of significantly advancing the standard-of-care across our core areas, by providing deeper and more durable responses. Our anti-TNF steroid ADC ABBV-154 is a novel approach for delivering a potent steroid that has the potential to provide durable remission in diseases such as RA, PMR and Crohn’s disease. We expect to see preliminary data from our Phase 2 dose ranging study in RA in the fourth quarter of this year. We also expect to see Phase 2 proof-of-concept data in PMR and Crohn’s disease in 2023. In dermatology, our early-stage efforts are focused on developing oral agents that can provide clear skin with durable responses. Our RoRγT inverse agonist, ABBV-157 is designed to more effectively inhibit IL-17 production compared to pure antagonists, which has the potential to result in a greater impact on skin inflammation. We’ve recently been again a Phase 2 dose ranging study for 157 in psoriasis. Moving to oncology, where we continue to make good progress across all stages of our pipeline. We recently received an FDA breakthrough therapy designation for Teliso-V in second line plus advanced or metastatic nonsquamous, non-small cell lung cancer, based on the encouraging results we’ve seen to-date in our clinical program. Treatment options for patients who have exhausted platinum-based chemotherapy, immunotherapy and targeted therapy are limited to single agent chemo, which typically provides response rates of only 15% to 20%, with a median overall survival of less than one year. Prognosis for these patients is very poor. While targeted therapies have been approved by the FDA for the 3% to 4% of non-small cell lung cancer patients, harboring MET exon 14 skipping mutations, there are currently no therapies approved, specifically for the much larger group of patients, who exhibit c-Met protein overexpression. Patients with overexpressed c-Met represents about 25% to 30% of the advanced or metastatic nonsquamous, non-small cell lung cancer population with wild-type EGFR, which corresponds to an incidence of approximately 35,000 patients each year in the U.S. In stage 1 of our Phase 2 study, we saw promising efficacy in heavily pretreated patients who received Teliso-V, including a 54% objective response rate in those with highly expressed c-Met. The second stage of the Phase 2 study is ongoing and has the potential to support an accelerated approval in second-line plus advanced metastatic nonsquamous non-small cell lung cancer. We expect to see additional data from this study next year. We also recently began the clinical program for our next-generation c-Met ADC, ABBV-400, which utilizes a more potent topoisomerase inhibitor payload to potentially drive deeper tumor responses in patients with both, intermediate and high levels of c-Met expression. We also expect to see data this year from several important indication expansion programs for Venclexta, including results from the Phase 3 CANOVA trial in relapsed/refractory multiple myeloma patients with a t(11;14) mutation as well as results from our program for Venclexta in previously untreated higher-risk MDS patients, where we received a breakthrough therapy designation. We plan to submit our regulatory applications to the FDA in the first half of this year for an accelerated approval in MDS, and late in ‘22 or early ‘23 for multiple myeloma. Both indications represent important expansion opportunities for Venclexta and will help drive long-term growth for our oncology portfolio. We are also making very good progress with epcoritamab, where we continue to generate strong data in early-stage studies to support our view that epcoritamab has the potential to become a differentiated and best-in-class CD3xCD20 bispecific across several B-cell malignancies including diffuse B cell and follicular lymphomas. We’ll see monotherapy data in the third quarter from the Phase 2 expansion cohort in DLBCL, which has the potential to support a submission for accelerated approval in the second half of this year. We also have a Phase 3 study ongoing in third-line relapsed/refractory DLBCL and we plan to initiate several additional Phase 3 trials this year, including studies in earlier lines of therapy for diffuse B-cell lymphoma in multiple combinations, as well as in follicular lymphoma in combination with rituximab and Revlimid. This year, we’ll also see additional data maturing from our cohort expansion studies for ABBV-383, both as a monotherapy and in combination with standard-of-care and novel agents in multiple myeloma. We believe our BCMA-CD3 bispecific has the potential to be differentiated on efficacy, safety and dosing interval and can be best-in-class across multiple lines of therapy. We plan to initiate Phase 3 studies later this year in relapsed/refractory multiple myeloma. We also continue to make good progress with Navitoclax in myelofibrosis, where we’ve seen strong mid-stage data supporting our view that Navitoclax has the potential to provide disease modification, which we believe will lead to improved and durable clinical outcomes for patients. We expect a Phase 3 data readout and regulatory submissions in the first half of next year, with approval anticipated near the end of 2023. Moving to neuroscience, where we expect several important pipeline events in 2022 as well. We recently completed discussions with the FDA and are preparing to submit our application for Vraylar as an adjunctive treatment for major depressive disorder. Based on the totality of the data and the strong benefit-risk profile demonstrated in our clinical program, we believe Vraylar has the potential to be competitively positioned as an adjunctive treatment for major depressive disorder. We expect a submission in the first quarter and an approval decision by the end of the year. We’ve also completed our registration-enabling program for ABBV-951, our novel subcutaneous levodopa/carbidopa delivery system for treatment of advanced Parkinson’s disease. In our Phase 3 studies, 951 proved superior to oral levodopa/carbidopa in reducing motor fluctuations in this advanced population, and we believe our innovative new delivery system represents a potentially transformative improvement to current treatment options. We remain on track to submit our regulatory applications in the first half of this year in the U.S. and Europe, with both approval decisions anticipated in early 2023. And we expect to see Phase 3 data for Qulipta in chronic migraine prevention later in the first quarter and plan to submit our regulatory applications in both, the U.S. and Europe this summer, with approval decisions expected in the first half of 2023. So, in summary, we remain focused on continuing to execute on our pipeline programs and anticipate numerous important regulatory and clinical milestones across all stages of our pipeline in 2022. This includes important indication expansion for on-market drugs and data readouts and regulatory actions for key late-stage assets as well as proof-of-concept data from several early-stage NME programs. With that, I’ll turn the call over to Rob for additional comments on our fourth quarter performance and our 2022 financial outlook. Rob?" }, { "speaker": "Rob Michael", "text": "Thank you, Mike. AbbVie once again delivered outstanding performance while also advancing our strategic priorities. The strong results across our portfolio continue to support AbbVie’s long-term growth outlook. Starting with fourth quarter results. We reported adjusted earnings per share of $3.31, up 13.4% compared to prior year and $0.05 above our guidance midpoint. Total adjusted net revenues were $14.9 billion, up 7.5% on an operational basis, excluding a 0.1% unfavorable impact from foreign exchange. The adjusted operating margin ratio was 49.3% of sales, an improvement of 240 basis points versus the prior year. This includes adjusted gross margin of 83.6% of sales, adjusted R&D investment of 12.1% of sales, and adjusted SG&A expense of 22.2% of sales. Net interest expense was $571 million, and the adjusted tax rate was 12.5%. Shifting to 2022, our full year adjusted earnings per share guidance is between $14 and $14.20, reflecting growth of 11% at the midpoint. Excluded from this guidance is $4.74 of known intangible amortization and specified items. We expect adjusted net revenue of approximately $60 billion. At current rates, we expect foreign exchange to have a 0.8% unfavorable impact on full year sales growth. This revenue forecast comprehends the following approximate assumptions for our key products and therapeutic areas. We expect Immunology Global sales to grow double digits, including U.S. Humira growth of 8%, International Humira revenue of $2.6 billion at current exchange rates, Skyrizi Global sales of $4.4 billion and Rinvoq Global sales of $2.7 billion. In hematologic oncology, we expect Venclexta global sales of $2.3 billion and Imbruvica global revenue of $5.4 billion. The Imbruvica forecast assumes market recovery in CLL, offset by share erosion from increased competition. For aesthetics, we expect global sales of $5.9 billion, including $2.6 billion for Botox Cosmetic and $1.7 billion from Juvederm. For neuroscience, we expect global revenue of $6.9 billion, including Botox Therapeutic sales of $2.7 billion, Vraylar sales of $2.2 billion, Ubrelvy sales of $800 million and Qulipta sales of $200 million with commercial access increasing rapidly in the first half of the year. For eye care, we expect global sales of $2.9 billion, including $700 million from Restasis, which assumes no generic competition in the first half of 2022. Lastly, we expect Mavyret global revenue of $1.7 billion. Looking at the P&L for 2022, we are forecasting full year adjusted gross margin of approximately 84% of sales, adjusted R&D investment of approximately $6.8 billion and adjusted SG&A expense of approximately $12.7 billion. This guidance includes approximately $2.5 billion in expense synergies from the Allergan acquisition. We are forecasting the adjusted operating margin ratio to expand by 120 basis points to approximately 51.5% of sales. We expect adjusted net interest expense approaching $2.2 billion, our non-GAAP tax rate to be approximately 12.7% and our share count to be roughly flat to 2021. Turning to the first quarter, we anticipate net revenue approaching $13.5 billion. At current rates, we expect foreign exchange to have a 1.3% unfavorable impact on sales growth. This revenue forecast comprehends the following approximate assumptions for our key therapeutic areas: Immunology sales of $6.2 billion, HemOnc revenue of $1.7 billion, aesthetic sales of $1.3 billion, neuroscience revenue of $1.5 billion and eye care sales of $900 million. We are forecasting an adjusted operating margin ratio of approximately 51% of sales, and we model a non-GAAP tax rate of 12.4%. We expect adjusted earnings per share between $3.10 and $3.14, excluding approximately $1.22 of known intangible amortization and specified items. Finally, AbbVie’s strong business performance and outlook continue to support our capital allocation priorities. We expect to generate adjusted free cash flow of approximately $24 billion in 2022, which is net of roughly $1 billion in Skyrizi royalty payments. This cash flow will fully support a strong and growing dividend, which we have increased by more than 250% since inception; continued debt repayment, where we expect to pay down just above $12 billion of debt in 2022 and estimate a net leverage ratio of 1.8 times by the end of the year. Our strong cash flow also allows for continued business development, with approximately $2 billion allocated annually to augment our pipeline with the most promising external technologies and innovative therapies. In closing, we are very pleased to AbbVie’s strong results in 2021. And we expect to deliver robust performance in 2022 and over the long term. With that, I’ll turn the call back over to Liz." }, { "speaker": "Liz Shea", "text": "Thanks, Rob. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, we’ll take the first question." }, { "speaker": "Operator", "text": "Thank you. Our first question comes from Chris Schott with JP Morgan." }, { "speaker": "Chris Schott", "text": "Great. Thanks so much for the questions. I just have a couple here digging into Rinvoq in a little bit more detail. I guess, first in rheumatoid arthritis, can you just -- it looks like volumes have plateaued a little bit. It’s probably not hugely surprising given label revision, but just elaborate a little bit more on the feedback you’re getting from physicians there. And when you anticipate you’ll start to see sequential growth again in that indication? The second question I had on Rinvoq was then on atopic derm. Just elaborate again a little bit more on the ramp you’re expecting here. Is this something that’s going to take some time, or do you view that there’s some low-hanging fruit maybe with some of the DP failures? I’m really just trying to get to with all of these is, I guess, the $2.7 billion guidance, how much of that’s RA? How much of it is new indication? Just a little bit more color on that front. Thanks so much." }, { "speaker": "Jeff Stewart", "text": "Yes. Thanks. Hi. It’s Jeff. I’ll give you some sense on what’s happening with RA. So, the RA market after the drug safety and label is progressing as we anticipated. So, I’ll give you some sense, and I’ll refer to sort of in-play share because you have to be a little bit careful in the December, January time frame with overall volumes in the market. But right before the Drug Safety Communication, we had about a 16% in-place share in RA, which was just right behind Humira. So very, very strong. If we look at where that’s trended over the fourth quarter, it’s dropped about 20%. Okay? So, it’s about 14 reported in October, just over 13 in November, very consistent with what we thought would happen. So, about a 20% shift in new-to-brand starts over that time period. And what we see from the market is it’s exactly as we would expect, very, very stable, no change really in second-line plus and doctors start to suppress their starts in first-line consistent with the label. So, what we’re going to see is that as basically the promotion kicks back in here after December in the first quarter, we’re going to see that type of stability, which we can see is very, very clear from our overall share in our weeklies and start to progress as we shift and pivot towards that second-line plus. So, the market is responding very similar to our expectations that we’ve been talking about in terms of overall RA. Obviously, PsA is going to help build upon that RA dynamic and then ultimately, later in the year, the big axial approvals as well. So, everything is progressing as we thought it would progress from a market perspective. In terms of atopic dermatitis, listen, I said in my prepared remarks, we’re very pleased with the label. We have those stringent endpoints of the EASI 90, the high skin clearance, very powerful itch reduction are reflected in our label. We obviously have both doses approved. The market, I can tell you, has been very pleasantly surprised about the adolescent indication, which is -- it’s very important. So, that’s basically -- we’re going to start to see that ramp. It won’t -- we don’t think it’s going to be slow. And to your point, in terms of our ability to start to capture patients, it’s happening already. We obviously haven’t reported any of the TRxs yet, but we can see it in the market. And typically, it’s falling into a couple of areas. First, dupi failures, not a surprise, and there’s a reasonably significant number of people after 4 or 5 years that just have failed and exited the market. They’re going to come back in. We have reports from our research and our teams over partial responders to dupi that just aren’t doing well, in particular with the itch. We see some early starts there. And then, of course, challenging patients in general, we are seeing starts there as well with those higher levels of skin involvement. So the market seems to be progressing as we expected. It’s not surprising that as we look at the development of the second-line market, we’re going to see initially most of the starts in the dupi partial responders or the nonresponders, which is a fairly significant population. Also, as I mentioned, that we will start to see our access ramp fairly quickly here over the first part of the year. So, we’re encouraged. Maybe I can turn it over to Rob to give a sense over the relative magnitude of the sales." }, { "speaker": "Rob Michael", "text": "Thanks, Jeff. Chris, this is Rob. So of the Rinvoq guidance of $2.7 billion, the AD and spine indications will each contribute a couple of hundred million dollars, while UC will contribute around $100 million. And to keep in mind in terms of sequential growth, keep in mind, in the U.S., you tend to see from Q4 to Q1, it’s a sequential decline. So that’s just a seasonal dynamic that we see across the business. So you would see sequential growth resume in Q2 and beyond." }, { "speaker": "Operator", "text": "Our next question comes from Ronny Gal from Bernstein." }, { "speaker": "Ronny Gal", "text": "First question is around Humira. I was wondering if you guys will be in a position to give us some sort of a floor number in 2023 based on payer contracts. Sometimes this year, obviously, the market is looking for that. And then, when I talk to payers, it seems a lot of the decisions about what product they would use longer term will not happen in 2023. That will happen in 2024. You kind of talked about kind of like a decline and then a quick ramp-up. Do you see the floor here in 2023, or do you see it in 2024? And then, if I could sneak one more. You have one of the largest differences between GAAP and non-GAAP earnings in the industry because of that Allergan acquisition. As you look at the amortization period and so forth, when do you think this thing will begin to narrow in a significant way just because that’s a concern for some investors?" }, { "speaker": "Rick Gonzalez", "text": "Okay. Ronny, this is Rick Gonzalez. I’ll take the Humira questions. I think if you look at the guidance we provided thus far, I mean, I think that’s consistent with how we see the market playing out overall. We’ve said basically you should be thinking about 45% erosion, plus or minus 10%, that’s probably a reasonable range. Nothing has really given us any indication that it should be different than that at this point. I think we will be in a position as we move later on this year to potentially be able to provide some more specificity around that. We should be through all of the contracting at that point, in a better position to be able to understand the ramp and the change that will occur over that period of time, and we certainly want to provide guidance when we have confidence that we can give you a high degree of specificity of what that guidance looks like. As it relates to your question about floor for Humira, I think your question is, will the floor for Humira be in ‘23 or ‘24. And I believe you’ll see further erosion from ‘23 to ‘24 on the Humira business alone. But what we have described is we returned to growth on the overall business. So, you have to think about it from the perspective of this underlying growth engine that gets suppressed in ‘23 by the significant erosion that you see around Humira, both price and some volume. And then, as that continues, it continues at a slower pace when we get into ‘24. So, the overall business has the ability to be able to drive growth for the total Company. But yes, Humira would continue to decline in ‘24. And then Rob, why don’t you cover the third one?" }, { "speaker": "Rob Michael", "text": "Sure, Ronny, this is Rob. So when you look at our adjustments to specified intangible amortization, I’d say intangible amortization is like 70% of it and this is on the $4.74 guidance that we’ve given this year. And that will continue. Obviously, those things fall off over a number of years. But I would say that’s probably a level that I would assume would be present for the next several years. Another big component is kind of the contingent consideration given that we’re -- that’s purchase accounting, and we record that accretion as such, that will certainly fluctuate over time. But I’d say those are the two biggest components of the guide this year. And certainly, integration costs are starting to wind down, so you would expect to see those come down. But it is going down from last year. And so you would expect it potentially trend down. But overall, I think you can model this level going forward." }, { "speaker": "Operator", "text": "Our next question comes from Andrew Baum with Citi." }, { "speaker": "Andrew Baum", "text": "A couple of questions. Firstly, on Imbruvica. As we move into 2022 and the COVID dynamic shakes out, we’ll be able to see the impact of competition versus COVID. Assuming that a significant chunk of the U.S. slowing growth rate or decline is due to competition, what can be done to recoup the momentum against the narrative, particularly of Calquence? And then second, in terms of your aesthetics business, you terminated your contract with Medytox liquid formulation. There are competitive products coming to market as well as increasing price competition. How much of that is concerned or as your franchise and the breadth of the portfolio enough to minimize any impact of novel formulations? Thank you." }, { "speaker": "Jeff Stewart", "text": "Yes. Hi, Andrew, it’s Jeff. So, thanks. And you’re right that we still have the continuing lingering effect with COVID, and Rob addressed that in his comments. So, we still see the market versus ‘19 levels down about 10% and even marginally down from 2020 in Q4. So we anticipate that that will moderate go forward. And then we’re left to manage the competitive impact. So, we are seeing competitive BTKs have some impact on Imbruvica, but we’re also seeing the competitive impact from our own Venclexta. So we have to start to think about looking at the combination of the AbbVie position, which is still very, very strong. To give you some sense in second-line, we have 45% share of the market, and it’s even higher in third-line, and it’s in the 30s for frontline. So, we have to continue, which is our strategy to highlight where we have a lot of distinction, which is the strength of our data across every comparator in CLL, the overall survival benefit, and then also bring the strength of our overall portfolio. So, that’s how we plan to mitigate it. As Rob mentioned, we see market recovery offset by some share pressure on Imbruvica, mitigated by positive Ven impact. So, that’s how we see the market develop as we go into 2022. We also are seeing some pricing pressure in some select segments that are also contributing to the share loss for Imbruvica. And obviously, we -- as much as we can, we keep the pricing discipline in the market moving forward. So, I hope that context helps." }, { "speaker": "Rick Gonzalez", "text": "Andrew, this is Rick. I’ll cover the Aesthetics questions for you. And certainly, as you look at Botox, both here in the U.S. and internationally, it competes today against a significant number of competitive alternatives that are available. I think it’s a pretty impressive position that Botox has in the market. When you look at the brand equity that it has, when you look at the confidence that injectors have in using the product, they tend to describe it as the most forgiving of all the toxins that they have experience with. And then there’s obviously a fairly significant customer loyalty aspect to Botox with the loyalty programs and Allergan has a very significant loyalty program that offers patients incentives to be able to use the product and to go back and get repeat procedures. Having said all of that, we feel confident in the position that we have competitively against the competitive alternatives that we see out there and those that we see coming. We have a very active R&D effort in the aesthetics R&D group now that’s looking at next-generation toxins. Two in particular that we highlighted in the comments earlier are we had a short-acting toxin that’s in development that’s progressing very nicely, and we have a true long-acting toxin that’s in development as well. And we believe that those will help grow the market. But, if I look at the market now, obviously, we’ve seen significant acceleration in the market since we’ve activated many of the strategies that we put in place after acquiring Allergan. But if I look at our overall share, overall share has stayed very steady, in fact, might have ticked up one point in the latest set of data. So, that tells you that we’re not only growing the market very rapidly but we’re continuing to compete quite effectively against the alternatives that are out there. So, I’m not overly concerned about what I see on the horizon. I think, we have the opportunity to build the market even larger with some of the next generation toxins that we’re working on when we bring those to the marketplace. So, I feel good about our position in toxins and in fillers as we move forward." }, { "speaker": "Operator", "text": "Our next question comes from Vamil Divan from Mizuho Securities." }, { "speaker": "Vamil Divan", "text": "So, a couple. I always appreciate all the guidance. You guys gave both near term and longer term. Just a couple of questions I have related to more of the longer-term guidance you’ve given. In the past, you had talked about your HemOnc franchise sort of in peak sales or sales I guess in 2025 of around $13 billion. When you updated some of your numbers earlier last month, I don’t think you updated that one. So, I’m just curious if you still think that that’s a reasonable sort of 2025 expectation? And then, the other one is around Ubrelvy, where you’ve sort of stayed with this guidance of sort of more than $1 billion in peak sales. But you’re already guiding to $800 million of sales just in this current year, pretty early in the launch. So, I’m just wondering if you can maybe give a little better sense of how you’re viewing sort of the longer-term opportunity for Ubrelvy and maybe if you want to mention Qulipta, I know that’s early, but at least for Ubrelvy, do you think there’s significant upside to that $1 billion number you’ve mentioned before? Thank you." }, { "speaker": "Rick Gonzalez", "text": "Vamil, this is Rick. So, I’ll cover the first one, and then I’m going to have Jeff cover the Ubrelvy question that you’ve asked. So, it’s a good question. Obviously, the HemOnc market in the areas that we participate in, in particular, I would say CLL has changed over the last several years. I think one of the -- certainly, one of the things that was not ever anticipated in that guidance was the impact that COVID would have on the market and the reduction that we saw in the number of new patients, which was quite sizable. And that obviously wasn’t contemplated in it. And the second thing is we are seeing certainly more competitive pressure, both from price and some volume than we anticipated in that time frame. Having said all of that and -- well, I’d say a third item is, certainly, Venclexta is performing well as well. And I’d say, it’s tended to exceed some of our expectations, at least at this point within the launch trajectory of the brand. So, all of those have factors in what we’re describing here. I’d also say we have done a nice job of building out our HemOnc portfolio from an R&D standpoint. When I look at some of those assets that I described in my opening comments, I think they’re going to have a very significant opportunity. As an example, one that I didn’t mention there would be Venclexta and the t(11;14) multiple myeloma population. That could be a very significant opportunity, we feel good about that. We should get a readout on that. And we think that could be a significant contributor to both improvement in in-patient therapy, but also a significant improvement in the overall revenue in the franchise. And then, you have things like Navitoclax and epcoritamab and 383, those are all significant opportunities to be able to drive growth. So, I still feel confident in the overall ability for us to grow our HemOnc franchise. Having said that, I would say, Imbruvica is under more pressure than we anticipated. When we put that guidance out, at that point, we didn’t even contemplate a follow-on BTKs in any meaningful way. But we do see more competitive pressure there. But overall, I’d say, I still feel very confident in our ability to be able to grow that, that will be a growth franchise for the Company over the long term." }, { "speaker": "Jeff Stewart", "text": "Yes. Hi Vamil, it’s Jeff. So, just to answer your question on Ubrelvy in the overall market. Certainly, we’re very pleased, as I mentioned in my remarks, over the momentum on Ubrelvy. We continue to lead in that acute space. And the early results for Qulipta are also very strong. Now, a lot of it is going to depend on how that CGRP market develops. So, if you think about it in this way, and this is how we think about it is, is it’s about in terms of new patient capture for the total Ubrelvy market, where we also compete with another player from Biohaven. It’s about 18% to 19% of the market. And the market is also with the expanded triptan market, of course. So, if you look at that, the payers certainly like you to step through one or more triptans. When you look at the population that may not be eligible for a triptan or fails a triptan, the estimates are typically up to 30% to 35%. And so, the market has potential room to sort of double into that epidemiology. So, you can kind of run the numbers there. I mean, we often get the question, is it over $1 billion? Is it closer to $1 billion or is it closer to a higher number. But nonetheless, we’re pleased. Certainly, it’s exceeded our expectations so far, and Qulipta has as well. So, I think there’s more room for the market to run, but we’ll have to see. I mean, there are payer pressures in the market, as I mentioned, in terms of the step-through therapy." }, { "speaker": "Operator", "text": "Our next question comes from Steve Scala from Cowen." }, { "speaker": "Steve Scala", "text": "I have a couple of questions. At a high level, I struggle to understand why 2022 won’t be a stronger year than the guide on the earnings line. Skyrizi and Botox are doing phenomenally. Rinvoq is holding its own. Humira will still be exclusive in the U.S. for the whole year and should be at peak profitability and the pandemic less an obstacle. So, why won’t 2022 look more like or even better than 2021 in terms of earnings power? And secondly, there was no mention of the CF program even in the upcoming milestones. Any thoughts on the timing of the triplet data? In the past, I would describe AbbVie confidence as being no more than moderate. Has it changed one way or the other?" }, { "speaker": "Rick Gonzalez", "text": "Steve, this is Rick. Maybe Rob and I will tag team your first question, and then Michael will cover your second question. I think if I look at 2022 and I look at our overall performance coming off of a strong year in 2021, it’s pretty impressive performance. When I look at the EPS growth, certainly, do we have an opportunity to drive it harder? I can tell you, every year, we endeavor to drive it as hard as we can drive it. And when I look at all of the businesses individually, and I look at their ability to be able to perform, I’m extremely confident in the trajectory that we have going forward. Specifically, we’re assuming as an example, in HCV that there’s still a COVID impact in HCV. So, I wouldn’t say the pandemic is completely gone in 2022. But, I’d say, overall, the brands are performing well. We’re investing in the business to ensure that we continue to be able to drive long-term performance. And so certainly, that obviously drives some expectations around what the EPS growth will be year-over-year. I don’t know, Rob, anything you’d like to add?" }, { "speaker": "Rob Michael", "text": "I mean, I think it’s a good point and that we are fully investing to support the long-term growth. If you think about we’re launching AD, that’s a new area for us. Qulipta and Vuity, we’re also going to fully invest there. Aesthetics, we’ve seen that the strength of the investment in aesthetics in the way we’ve been able to grow the market. So that’s really important. At the same time, we’re expanding operating margin. We’re exceeding our expectations for synergies. And so, you’re seeing us deliver another year of operating margin expansion. So, I’d say, we’re top tier in operating margin, very healthy P&L profile. And then, the other thing that you probably have to factor in here is that we’ve assumed half year Restasis as well. We don’t really have visibility to the generic until we make an assumption every time we update guidance six months out. So that’s something that if you look at year-over-year that you should figure into your comparisons. But overall, we’re very pleased with delivering double-digit growth in earnings and seeing another year of very strong operating margin expansion while fully investing to support the growth of the business." }, { "speaker": "Michael Severino", "text": "And this is Mike. I’ll take the question on CF. I think, it’s important to keep in mind that this is a pre proof-of-concept program that doesn’t contribute in any meaningful way to our long-term outlook and doesn’t factor into our thinking about the long-term potential in the pipeline. And the way we have discussed it is consistent with that view. We’ve always said that it represents significant upside if it were to hit, but it’s an early program. With respect to the timing of the data, we continue to track towards the timing that we’ve described previously. We would expect to have data from the triple, sufficient to enable a go/no-go decision later on this quarter." }, { "speaker": "Operator", "text": "Our next question comes from Tim Anderson with Wolfe Research." }, { "speaker": "Tim Anderson", "text": "A couple of questions. I’m guessing that as we move through 2022, investors are going to start to have some concerns about 2023 earnings, what the impact from Humira could be, and you talked about having more visibility on Humira contracting later this year. My question is, is it possible you’ll actually give us 2023 earnings guidance sometime this year, like at Q3 results as an example? And then, my second question, just going back to CF data. You said in mid-November that you would actually have that data in-house by the end of the year. So, here we are four weeks later, we haven’t really seen anything. My question is, do you actually have that data in-house? Did you hit that timeline of end of year, if not, what’s going on? And what changed in that short window?" }, { "speaker": "Rick Gonzalez", "text": "Okay. Tim, this is Rick. I’ll cover your first question. Mike can address the second one. We certainly are in a position now to be able to commit that we would give earnings guidance in the third quarter. I think clearly, we’ll be able to give a better feel for what that erosion curve looks like. And could that ultimately end up being at least a pretty good perspective for us to be able to build off of what earnings guidance would look like. It might. I think if we’re in a position where we can confidently provide that guidance, we would provide it. But I certainly think we’ll be in a position where we have very good visibility as to what that erosion curve will look like. And at that point, we can tighten it a bit and be able to provide a higher level of specificity. We understand it’s an important issue for investors. As far as EPS is concerned, in 2023, we have said that we expect EPS to decline in 2023. So, I don’t think any investor is -- that would be a surprise to any investor. But obviously, it’s important for us to be able to frame it as accurately as we can for the investment community and be able to provide direction around that. And at the point at which we think we can do that in a reliable way, we’re committed to be able to do that. So, let’s see how it plays out. And certainly, as we get to the third quarter call, that would be the position at -- the point at which I think we’d be in a position to be able to provide more clarity. Mike?" }, { "speaker": "Michael Severino", "text": "So, on CF, what we said towards the end of last year is that data would begin to come in-house around the end of the year, and we would have sufficient data to make a go/no-go in the first quarter. And we’re still tracking to that overall timeline. There were some challenges towards the end of the year, where a number of patients were expected from Australia, for example, and Australia shut down because of COVID and we had to shift that enrollment. So, we perhaps have slightly less data than we would have hoped to have had at this point in the year. But again, we’re still tracking to be able to make that go/no-go decision by the end of the year, because it’s important to keep in mind that these are short studies. And so once you get those patients in, you can turn the data around and make a decision pretty quickly. But the overall timing hasn’t changed substantially from what we described at the end of last year." }, { "speaker": "Operator", "text": "Our next question comes from Mohit Bansal from Wells Fargo." }, { "speaker": "Mohit Bansal", "text": "Congrats on the quarter. Maybe a question on Rinvoq and other oral competition and competitors in IBD, where do you see Rinvoq fitting versus other orals such as SNP [ph] inhibitor? I mean, now they are more than -- there could be more than one. And KOL, I mean they kind of suggested some kind of induction with one drug in maintenance with other drugs, a kind of treatment paradigm in IBD. Do you think it is even a possibility in any of these diseases? Thank you." }, { "speaker": "Michael Severino", "text": "I think -- this is Mike. I’ll take that question. If you look at the performance of Rinvoq and inflammatory bowel diseases, both in UC where we have the full data set and in Crohn’s disease, where we have an important component of the induction data set, the performance across the board is very, very strong. Not only in terms of just overall response rates that are measured, but particularly when one looks at deeper measures of response, clinical remission, mucosal healing, major clinical response, which is the combination of remission and endoscopic improvement. And across the board, we’re driving very high levels of disease control. And we think that feature of the drug, combined with the overall benefit risk position us to compete very effectively against not only oral competitors but many competitors, all competitors in the field. When we look at those data to our eye, given the limitations of cross-study comparisons, we see response rates that just aren’t paralleled in the field. And so we think that there is a very real opportunity for Rinvoq and our view of its role in IBD reflects that. With respect to mixed induction and maintenance regimens, it’s important to keep in mind that there are no data to support those sorts of regimens. All of the programs look at induction, followed by maintenance, which is usually a step-down in dose from the induction dose. And that’s the data set that physicians will have. Now, it’s important to keep in mind that in the long term, patients often lose control and then they need to be reinduced with a new agent. And one of the very strong features of Rinvoq and quite frankly, Skyrizi also shares this characteristic, is it has very durable response. So, it does maintain response for a very long period of time in the studies that we have continued to follow, including our long-term extensions from Phase 2 and our Phase 3 program. So, we think those are also very strong attributes to the products." }, { "speaker": "Operator", "text": "Our next question comes from Gary Nachman from BMO Capital Markets." }, { "speaker": "Gary Nachman", "text": "Aesthetics has been a big source of upside in 2021. So, I’m curious, did you see any real impact from Omicron in the fourth quarter? Do you see a tailwind maybe from that further recovery this year? Is that baked into the aesthetics guidance of $5.9 billion that you have for 2022? And you’ve talked about high-single-digit long-term aesthetics guidance, but this year should be double digits. So, should we be thinking more along the lines of double-digit growth maybe for the next few years if you’re still investing a lot in that space? And then, just one other quick one on Qulipta for the chronic migraine prevention indication. That data is coming soon sometime this quarter. So, just talk about how meaningful you think that indication will be and how that’s factored into the peak targets that you talked about. Thank you." }, { "speaker": "Rick Gonzalez", "text": "Gary, it’s a good question on Omicron in new studies because it is something we track very carefully in every major geography around the world as well as by state here in the United States. And I will tell you that at least as far as the U.S. is concerned, there has not been much of an impact on aesthetic volume, unlike what we saw when there was an actual shutdown. And obviously, you would think shutdown, you’re going to see the volume go down. But I’d say here, we’re seeing very little impact on the volume. So, we have factored in that we don’t expect a major disruption going forward. And I think the data would clearly support that that’s a reasonable position to take. And as far as the business overall, I mean, I can tell you, we’re very pleased with how the business is performing. I think that group is executing at a very high level. And certainly, the resourcing and the dedicated structure that we put in place, I think, are helping a lot in major geographies like the U.S. and China. We’re obviously comfortable with the guide that we provided. It is an area that we’re going to continue to invest in and continue to drive. And I think it’s a market that I think is extremely attractive. And it’s going to require both us to continue to execute and invest in it appropriately to grow the market, but also to build out more assets that meet patients’ needs to be able to expand the market. And so, we’ve almost doubled the R&D investment that we have in aesthetics since we took it over. And we have a number of programs that I think are very exciting programs. Some of the biostimulatory and regenerative fillers that we’re working on now, I think, could be exciting opportunities like tropoelastin to be able to stimulate tropoelastin in patients using fillers is an exciting program that continues to advance. And so, it’s going to require both. It’s something that we’re absolutely committed to continue to drive. And I think this can be, as we indicated in our comments, I think this can be a strong business for AbbVie over the long term. Jeff, do you want to cover Qulipta?" }, { "speaker": "Jeff Stewart", "text": "Yes. Thanks Gary for you question on Qulipta. It’s an important new indication if we see -- when we see the data and it were to be approved. And I’ll give you some perspective. Obviously, we’ve talked about how much we really like our portfolio of migraine. You got Botox on chronic with the injectors. Obviously, you have Qulipta right now in episodic and of course, Ubrelvy in acute. So, the Qulipta chronic gives us quite a bit of flexibility, and it’s a nice catalyst. Even though episodic is a bigger market in terms of patients, obviously, chronic patients do consume a lot of medication. Largely, if you think about the market structure, you’ve got injectors, meaning they inject Botox or you have non-injectors. So, to bring in the first oral that -- for people that don’t choose to have a Botox-injectable practice, that’s quite attractive. And we think it builds in our story over the strength of Qulipta first-in-class designed specifically for these indications. So, it’s a very nice catalyst if it were to be approved. And so, we’re anxiously looking forward to that. The other thing I would note, which is further off and it’s obviously something that would have to play out through the studies in Mike’s organization, was chronic migraine is so difficult that the potential for patients to have combination treatment. So, in other words, a Botox Therapeutic plus a simple oral drug like Qulipta could bring this concept to that segment of the market called migraine freedom where you’re really trying to get the headaches down to as low as possible. And so, again, it’s further off, but it shows you the flexibility that we have as we continue to build out Qulipta across our migraine portfolio. So, we’re pretty excited about the potential for CM." }, { "speaker": "Operator", "text": "Our next question is from Geoff Meacham from Bank of America." }, { "speaker": "Geoff Meacham", "text": "I just had a couple of quick ones for Rick -- or for Rob. The first one is when you look at your our modified 2025 guidance for Skyrizi and Rinvoq, were there any changes to your assumptions on duration of therapy or the pricing environment? I’m just thinking about the payer landscape with many more biosimilars coming up and what impact that could have on switching or price increases. And then, the second question is on the BD front. We’ve obviously seen valuations come down quite a bit in SMID cap biotech in the past six months. And I know you’ve usually talked about $2 billion earmarked for BD, but does the current environment make things like bringing new TAs or newer technologies in-house more attractive? Thanks so much." }, { "speaker": "Rick Gonzalez", "text": "Rob?" }, { "speaker": "Rob Michael", "text": "Yes, Geoff. So obviously, when we go through our long-range plan, we consider the various dynamics of the pricing environment. So, we factor that into our 2025 guidance. I would not say that there’s really been an assumption change for duration of therapy. But we did -- we certainly took into account the impact of label on RA, AD and SpA, but then that was offset by the stronger performance at OUS as well as the stronger IBD data that we saw for Rinvoq and just the overall performance of Skyrizi in psoriasis. It was all factored into that updated guidance, but we did not make an assumption change for duration of therapy, and we certainly factor in various pricing assumptions as we go through our long-range plan." }, { "speaker": "Rick Gonzalez", "text": "Yes. And maybe Mike and I will tag team number two. I mean, certainly, as we -- you’ve seen us pay down debt at a very significant pace. We’re continuing to commit to pay down significant debt this year. And we’ll certainly be in a position where we could do larger opportunities if that was something that we desired and we thought it was the right kind of opportunity as we move forward in ‘23 and ‘24. Certainly, the $2 billion that we’ve allocated has been sufficient to be able to cover the things that we’re looking for. Mike has responsibility for business development. So, I think it’s probably a little closer to the valuation question. Mike?" }, { "speaker": "Michael Severino", "text": "Well, what I would say is that valuations have certainly come down, and that brings opportunities into the focus that might previously been outside of that range of $2 billion a year that we had contemplated. And as Rick said, as we pay down debt, we have some more flexibility. But we’re going to continue to look at BD in the same way that we always have, which is that it is an important component of adding innovation to our pipeline and needs to be coupled with our internal innovation. So, we’re going to match what’s out there. The innovation we see, the therapeutic areas that are most promising with what’s going on in our early pipeline and use that to make sure that, overall, we have a very strong and very innovative pipeline. And you can see that, for example, in the way that we have built our HemOnc franchise, where we have a nice blend of internally discovered and partnered programs from Venclexta and Imbruvica, obviously, our lead programs to the significant programs behind that, things like Navitoclax, epcoritamab, 383 and now Teliso-V demonstrating extremely strong data in non-small cell lung cancer. So, that’s a blend of internal and external innovation. And we’re going to continue to look at areas in that same way. And it’s principally going to be the fit for our overall situation, the strength of the innovation and that balance between internal and external innovation that we look at." }, { "speaker": "Operator", "text": "Our next question comes from Josh Schimmer from Evercore." }, { "speaker": "Josh Schimmer", "text": "First, I’m a little surprised the contingent consideration adjustment is not higher considering your recently revised Skyrizi forecast. Am I not understanding that line correctly, or should we be expecting a more meaningful revision in the first quarter? And then, you mentioned a couple of times the novel biostimulatory dermal fillers you have in the aesthetics pipeline. Can you elaborate on how you expect those to differentiate versus the current offering and whether you expect those to expand the market for fillers?" }, { "speaker": "Rob Michael", "text": "Josh, this is Rob. I’ll take your first question. So, we did actually record in Q2 of last year, additional accretion for higher sales forecast for Skyrizi, and that was really tied to both our long-range plan as well as because it’s a fair value measure. You have to take external forecast into account. And obviously, Street numbers had moved up as well. We came out with publicly with the updated guidance in December, but we already contemplated that in our contingent consideration accretion in Q2 of last year. So, that’s already accounted for." }, { "speaker": "Rick Gonzalez", "text": "So, on the biostimulatory fillers, I think the way to think about it, there are multiple programs, but I’ll talk about two areas specifically. Certainly, one of the areas that you want to be able to look at is your ability to be able to stimulate collagen so that your own body can produce collagen to be able to provide support and filling in a specific area that you desire. And there are some products on the market today that provide that. One of the negatives of those products is you don’t get the immediate filling effect that you normally get with a filler, where you get physical filling immediately upon the procedure. You get a little bit of swelling that occurs. So, for a very short period of time, you will get what looks to be filling, but then that swelling goes down. And then for a period of time, the patient has to wait in order for them to get the collagen impact, and that takes a significant period of time. So we have a technology in-house that we acquired, and we’re further developing that combines both physical filling and collagen stimulation in one product. So, you get the immediate filling effect of a normal filler. And then, as that starts to resolve over time, you get the collagen impact that’s building over that same period of time to provide long-term filling. So, I would say that most of these technologies that we’re working on are market expansion opportunities, so that’s one example. The second example would be one of the areas that is important for patients is what we describe as skin quality, the smoothness of your skin essentially. And one of the things that provides smoothness of your skin is the elasticity of the skin. So, tropoelastin is an example of a product that we have in development that will allow the body to be able to produce more elastin. So, you can inject this product and it will provide, we believe, we have to prove this in the clinical studies, that would provide not only some level, not a dramatic level of filling but an ability to be able to provide elastin information along those areas and be able to smooth the skin out. That would clearly be a market expansion opportunity, today there really aren’t fillers that do that. They can stretch the skin with the physical filling, but they don’t really provide smoothing of the skin. And so, those are two examples of what we’re working on." }, { "speaker": "Operator", "text": "Our next question comes from Chris Raymond with Piper Sandler." }, { "speaker": "Chris Raymond", "text": "Just two questions. First on the migraine franchise. I noticed that you have a Phase 3 trial looking at Qulipta in Botox in a combo therapy for migraine -- for chronic migraine prevention. Our doc checks indicate actually growing interest, docs sort of highlight that as proactively is something they’re interested in. I guess, was this trial in response to that feedback or maybe just talk about the rationale and how you’re looking at combo in the space? And then, just a question on a drug that doesn’t come up that you just launched, Vuity. Presbyopia represents a huge TAM. Maybe just talk about initial uptake trends and what is it about this market, I guess, that you’re seeing that you’re not making a bigger deal out of this launch? Thanks." }, { "speaker": "Michael Severino", "text": "So, this is Mike. I’ll start with the question on Qulipta and Botox combo use and then Jeff may want to add and take the second question. With respect to that combination, it really goes back to what Jeff said before, this concept of migraine freedom. If you think about chronic migraine, these are patients who have 15 or more migraine days a month. That’s a migraine every other day, and these are debilitating attacks. So a substantial reduction in that is great. But, what patients and physicians are really seeking is an elimination of the migraine so that they can be free to go across their daily lives, to go about their daily lives. And given the options that are out there today to really get to that level in those most severely affected patients. Combination therapy is an obvious place to go, particularly when it’s complementary approaches that work through different mechanisms. And so you would expect their effects to be independent and additive. And where you have a treatment like Botox, it has a long track record, is infrequently administered and has a long duration. So, it’s that thinking that led to that combination trial. And I do think we would also agree that there is significant interest in treating physicians around these approaches." }, { "speaker": "Jeff Stewart", "text": "Yes. Just to add to that, that’s exactly right, is the -- it’s so logical and there’s so much unmet need, to Mike’s point, in chronic migraine with half a month, sometimes these migraines last for days. And so there’s a lot of desperation. And when the thought leaders and the headache specialists see the impact of Botox and how simple Qulipta is and how strong that is, they go right there. So I think we are encouraged, as Mike mentioned, to sort of see the outcome of those studies for migraine freedom. It would -- if it works, it would be a real advance for patients." }, { "speaker": "Rick Gonzalez", "text": "And so on Vuity, you’re right, we didn’t comment on this meeting. You typically wouldn’t comment on a product that’s -- of this size. And I mean, it’s a very interesting product. I think it clearly has a unique fit in the market. I’ll have -- I’ll let Jeff talk a little bit about the total available market, what we see as far as the size of that market going forward. But the reason we didn’t highlight it is, like I said, if we look at what we think peak sales will be here, it’s not a product of the magnitude that we would typically highlight." }, { "speaker": "Jeff Stewart", "text": "Yes. And what we see is that there is excitement about Vuity. I mean it’s different than the -- obviously, the market is basically over-the-counter or prescription high glasses or readers, right? So, this is the first ever product that basically is a drop or a reading drop, right? So, when we start to break down the data and you take a really, really big market, tens and tens of millions of patients with presbyopia. But we also largely see from the clinical study, it really works the best for moderate to severe younger people, not older people. So, as we basically make the cuts, it’s still a substantial market size, but it’s not as large as you might think if you just look at all the presbyopes that are better in the United States. But nonetheless, it’s early days where we have a sales force that’s calling on our optometrist, also ophthalmologists. What we see from the early results is significant interest. We haven’t started our big consumer push, which will come later, later in this quarter. It is an older glaucoma product that’s been reformulated. So, there’s a little bit of learning from the ophthalmologists who really understand glaucoma products. But overall, the early results are it works, it works as anticipated. It works quickly within 15 minutes. It lasts for 6 to 8 hours. And so, again, when we look at the price point, it’s not a reimbursed product. It’s a cash pay product. We have, to Rick’s point, fairly modest expectations. And we’ll continue to watch the trajectory here over the next quarter or so." }, { "speaker": "Rick Gonzalez", "text": "I think the big assumption that you have to look at here is, what is the utilization per month the patient would actually use it for. I mean, as an example, I keep bugging the guys that I have to go get a prescription for it. Now, what do I want it for? When I go to a restaurant, I have trouble reading in low light. So, I’ll use it for that purpose. And so, it’s very difficult to come up with what the frequency at which it will be used. If it’s used in a high frequency, it will obviously be a bigger product. If it’s used at a relatively low frequency, it will be smaller product. So, we’ll have to see how it plays out." }, { "speaker": "Liz Shea", "text": "Operator, we have time for one final question." }, { "speaker": "Operator", "text": "Thank you. Our final question comes from Matthew Harrison from Morgan Stanley." }, { "speaker": "Matthew Harrison", "text": "Thanks for fitting me in. I guess, two for me, if I may. So first, on epco, could you just comment around your confidence around accelerated approval here in DLBCL and how you’re thinking about that opportunity in the near term? And then, on Vraylar, maybe just comment on what FDA conversations are ongoing there and how you’re thinking about the potential for an AdCom or not." }, { "speaker": "Michael Severino", "text": "So, on epco, we have a high degree of confidence in epco overall. It continues to deliver very strong results, high overall response rates, very deep responses, good complete response rates across a number of indications, DLBCL and follicular lymphoma both. With respect to the confidence in accelerated approval for diffuse large B-cell lymphoma, when we look at the data, we think it clearly exceeds the benchmarks of available therapies in highly pre-treated refractory patients. So, we would think that accelerated approval should be supported by those data, will allow the data to continue to mature from the expansion cohorts and have our final regulatory discussions later on this year to set up that accelerated approval submission. So, it certainly is in our planning, and we think it’s very supportable based on the data. With respect to confidence in Vraylar and MDD, we’re confident in that -- we’ve been confident. We were confident when we saw the data and looked at the strength of those data and looked at the relevant precedents for molecules that have achieved indications, not only in depression, broadly speaking, but in adjunctive treatment of major depressive disorder. We’ve completed all of the regulatory discussions that we need to have for the submission, and we’re planning the submission shortly as we described in my prepared remarks. In terms of potential for an AdCom, it’s really too early to comment on that. We typically start to have those conversations with the agency a few months into the review process. But, based on the data and based on the precedence, it’s not something that we would anticipate. However, if the agency were to have one, it wouldn’t concern us either. We think the data package is very strong and would hold its own." }, { "speaker": "Liz Shea", "text": "Thanks, Matthew. That concludes today’s conference call. If you’d like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us." }, { "speaker": "Operator", "text": "Thank you. That concludes today’s conference call. Thank you for your participation. You may disconnect at this time." } ]	AbbVie Inc.	141,885,706
ABBV	3	2,021	2021-10-29 09:00:00	Operator: Good morning. Thank you for standing by. Welcome to the AbbVie Third Quarter 2021 Earnings Conference Call. All participants will be on a listen-only until the question-and-answer portion of the call. [Operator instructions]. I would now like to introduce Ms. Liz Shea, Vice President of Investor Relations. Ma'am, you may proceed. Liz Shea: Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer, Michael Severino, Vice Chairman and President. Rob Michael, Executive Vice President and Chief Financial Officer, and Jeff Stewart, Executive Vice President Commercial Operations. Before we get started, some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today's conference call non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today which can be found on our website. Unless otherwise noted, our commentary on sales growth is on a comparable basis, which includes full current year and historical results for Allergan. For this comparison of underlying performance, all historically reported Allergan revenues have been recast to conform to AbbVie's revenue recognition accounting policies, and exclude the divestitures of ZENPEP and Bio case. References to operational growth further exclude the impact of exchange. Following our prepared remarks, we'll take your questions. So with that, I will now turn the call over to Rick. Rick Gonzalez: Thank you, Liz. Good morning, everyone, and thank you for joining us today. I'll discuss our third quarter performance and outlook and then Jeff, Mike and Rob will review our business highlights, pipeline progress and financial results in more detail. AbbVie continues to perform very well. We once again delivered an outstanding quarter with adjusted earnings per share of $3.33, exceeding the midpoint of our guidance by $0.13. Total adjusted net revenues of more than $14.3 billion was up 10.8% on an operational basis, with balance growth across each of the major growth platforms. We continue to see double-digit revenue growth in immunology, where Skyrizi and Rinvoq have established very strong launch trajectories. These 2 assets are either approved, under regulatory review, or in late-stage development across all of Humira's major indications. And we remain confident that they will both be significant contributors to AbbVie 's long-term growth. Aesthetics is also demonstrating impressive double-digit operational sales growth. Our dedicated global aesthetics structure and increased investment are driving accelerated category growth across both toxins and fillers, where there is substantial room for additional market penetration. Our strategic investments and targeted field force expansions have improved overall our customer retention rates and significantly increased the number of first-time patients to our leading brands. We are once again raising our full-year guidance for aesthetics this quarter. And we view these portfolio as an extremely attractive growth opportunity over the long term with high single-digit compounded annual growth rates expected through the end of the decade. Our Neuroscience business drove robust double-digit revenue performance again this quarter. And we added a compelling new product to our migraine portfolio with the approval of Qulipta, a once-daily oral medication for the preventative treatment of episodic migraine. Our Hematological Oncology portfolio delivered operational sales growth of approximately 8% this quarter, despite a protracted market recovery in CLL, which remains below pre -COVID levels. Beyond the significant contributions of Imbruvica and Venclexta, we have an exciting oncology pipeline with several promising programs in development for blood cancers and solid tumors, to support sustainable long-term growth. These include Navitoclax for myelofibrosis, Epcoritamab for B-cell malignancies, ABBV383 for multiple myeloma, lemzoparlimab for AML and MDS, as well as Teliso -V for non-squamous, non-small cell lung cancer. Lastly, we continue to make excellent progress with the integration of Allergan. Our financial results show that we have created a stronger and much more diverse Company with numerous products across our newly combined portfolio, delivering robust growth. Overall, I'm extremely pleased with our momentum and we are once again raising our full-year 2021 EPS guidance. We now expect adjusted earnings per share of $12.63 to $12.67, reflecting growth of nearly 20% at the midpoint. Additionally, as noted in our news release, today, we are announcing an 8.5% increase in our quarterly cash dividend, from a $1.30 per share to a $1.41 per share, beginning with the dividend payable in February 2022. Since our inception, we've grown our quarterly dividend by more than 250%. In summary, we're demonstrating strong execution across our portfolio. We've assembled an impressive set of diversified assets with significant growth potential giving us a high degree of confidence in the long-term outlook for our business. With that, I'll turn the call over to Jeff, Jeff. Jeff Stewart: Thank you, Rick. We continue to demonstrate strong and balanced growth across our therapeutic portfolio. I'll start with Immunology, where we remain well-positioned for sustained leadership with a portfolio of best-in-class medicines. Total immunology revenues were approximately $6.7 billion, up 14.9% on an operational basis. Global Humira sales were more than $5.4 billion up 5.2% on an operational basis, with 10.1% revenue growth in the U.S., offset by biosimilar competition across the international markets, where revenues were down 16.7% on an operational basis. SKYRIZI is performing extremely well. Global sales of nearly $800 million were up 18.1% on a sequential basis, reflecting continued market share gains. In the U.S. SKYRIZI's leading in-play psoriasis patient share, which includes both new and switching patients, is now roughly 36% more than double the share capture of the next nearest biologic competitor. SKYRIZI total prescription share in the U.S. psoriasis biologic market is now nearly 20%, second only to HUMIRA. Internationally, SKYRIZI continues to ramp nicely, having also achieved in-play patient share leadership in more than a dozen key markets. This compelling share performance will be further supported by 2 important near-term enhancements. The availability of more simple delivery forms for SKYRIZI, as well as the potential indication expansion in psoriatic arthritis. First, we recently launched the new and convenient SKYRIZI single-dose, 150 milligrams, self - injectable pen and syringe in major territories around the world. The market response has been very favorable, and the approval now makes SKYRIZI the only quarterly dosed brand that is available in a single self - injectable pen for patients. Second, we are preparing for the global launch of SKYRIZI in psoriatic arthritis, as we near approval decisions in both the U.S. and Europe. We received a CHMP positive opinion earlier this month, with anticipated approval in Europe by year-end. And we continue to expect FDA approval early next year. The addition of this indication, once approved, will round out Skyrizi's dermatology label, and give patients with PSA access to a new compelling therapeutic option. We're also making excellent progress with Skyrizi's development in Crohn's disease, which was recently submitted for U.S. regulatory review, with commercialization expected next year. Rinvoq also continues to demonstrate robust growth. Global sales of more than $450 million were up nearly 20% on a sequential basis. Total in-play RA share remains strong and now reflects approximately 17% patient share in the U.S., as well as leadership in a half a dozen key countries around the world. Internationally, RINVOQ share continues to ramp in RA. And we're making excellent progress with the recent commercial launches of PSA, AS and atopic dermatitis, where we have secured strong labels for each of these indications. As many of you are aware, the FDA issued a safety communication regarding new and updated warnings for JAK inhibitors, including RINVOQ in early September. While we do not yet have an updated label, we are closely monitoring prescription trends and feedback from the field. And we have not observed a significant impact to RINVOQ utilization at this time. That said, should the updated label restrict to use the TNF inadequate responders, we would certainly expect a near-term impact to new patient starts in RA. Based on the robust data we have generated across our development program against multiple biologics and later lines of RA therapy, we do expect that RINVOQ will ultimately attain higher share growth in the second line-plus setting, as most patients ultimately fail TNF therapies over time. Overall, we continue to feel very good about the performance and profile of RINVOQ and remain confident this asset will be a major contributor to AbbVie's long-term growth. In Hematologic Oncology, global revenues were nearly $1.9 billion, up 8.1% on an operational basis. Imbruvica and Venclexta have a strong position across multiple heme -indications, including CLL, where AbbVie's combined portfolio remains the clear market share leader across all lines of therapy. Global Imbruvica revenues were approximately $1.4 billion, up 0.3%. In the U.S., performance continues to be primarily impacted by a slower-than-expected market recovery in CLL, as well as some modest share erosion from newer therapies, including Venclexta and other BTK inhibitors. New patients starts in CLL remain below pre -COVID levels, and it is difficult to predict when this dynamic may fully recover. Venclexta sales were up 38.7% on an operational basis with increasing momentum across all indications, including a strong AML launch trajectory in the international markets. In neuroscience, revenues were nearly $1.6 billion up 25% on an operational basis. I'm particularly pleased with the results and outlook for our emerging migraine portfolio, where we are now the only Company to have a portfolio of distinctive therapies to address the spectrum of this common complex and debilitating disease, including Botox Therapeutic, a unique foundational treatment for the prevention of chronic migraine, which is performing very well. Total sales of $645 million for all the Therapeutic Botox uses were up 22.5% on an operational basis. Ubrelvy, our leading oral CGRP treatment for acute migraine is also demonstrating rapid growth. Total sales of a $162 million were up nearly 30% on a sequential basis. Based on Ubrelvy's competitive profile, continued strong new patients starts, and a rapidly expanding market, we remain confident that Ubrelvy represents a $1 billion plus peak sales opportunity. And now we're just launching Qulipta, the only oral CGRP specifically developed for the preventative treatment of migraine, which is already off to an excellent start. Early feedback from our physicians has been very positive given QULIPTA 's strong efficacy, safety, and convenient dosing profile relative to the current standards of care. The QULIPTA launch is being supported by our existing migraine sales force with commercial access expected to ramp strongly through the first half of 2022. QULIPTA also represents a $1 billion plus peak sales opportunity. Now we believe having 3 distinct and competitively positioned therapies across the spectrum of migraine conditions with Botox Therapeutic, UBRELVY and QULIPTA, which each have been optimized for a specific migraine indication, enables physicians to tailor treatment for the broadest range of patients. Our portfolio of migraine therapy puts us in a very strong position to capture growth in this dynamic market. Turning to psychiatry, we also see robust performance with Vraylar, which remains the fastest-growing atypical anti-psychotic. Total revenues of $461 million were up 29% on an operational basis, with continued strong demand across schizophrenia, bipolar I disorder, and bipolar depression. Lastly, in our other key therapeutic areas, we saw a significant contribution from eye care, which had revenues of $871 million up 2.9% on an operational basis. Mavyret sales were $426 million up 2.9% on an operational basis as treated patient volumes still remain suppressed compared to pre -COVID levels. And we saw double-digit growth operationally for both Creon and Lupron. So overall, I'm pleased with our continued execution across the Therapeutic portfolio, which is demonstrating strong revenue growth. And with that, I'll turn the call over to Mike for additional comments on our R&D programs. Mike. Michael Severino: Thank you, Jeff. I'll start with immunology, where we had several regulatory updates and data readouts for both Rinvoq and Skyrizi across therapeutic areas. Following successful completion of the registrational programs for Rinvoq in ulcerative colitis, and Skyrizi in Crohn's disease, we submitted our regulatory applications for each asset in their respected indications. We saw a very strong data for both Rinvoq and Skyrizi as induction and maintenance treatments in UC and Crohn's respectively. And based on these results, we believe both drugs have the potential to become a highly effective, differentiated therapies in these indications. We anticipate approval decisions for both in 2022. Earlier this month, we announced positive top line results from our Phase 3 SELECT-AXIS 2 program for Rinvoq in axial SpA, which included data from 2 standalone studies. One for ankylosing spondylitis patients who had an inadequate response to biologics. And another for patients with non-radiographic axial SpA. In the ankylosing spondylitis biorefractory study, RINVOQ performed very well, demonstrating significantly greater improvements in signs and symptoms, as well as physical function and imaging endpoints compared to placebo. We saw levels of efficacy in this difficult to treat refractory population similar to those more typically observed in bio-naive patients. These results will be added to our submission package for RINVOQ in AS which is currently under review by the FDA. In a non - radiographic axial spot study, RINVOQ also performed very well, meeting the primary and key secondary endpoints. We plan to submit our regulatory applications in this indication later this quarter as well. RINVOQ's safety profile in these actual spot trials was consistent with previous studies, and there was no evidence for increased risk of DVT, PE, MACE events, or malignancies in either study. Based on the data generated in the select access program, we believe RINVOQ has the potential to improve care for patients suffering from Axial SpondyloArthritis by providing sustained disease control and rapid and durable pain reduction as well as improving function. As you're likely aware, in September, the FDA communicated that they will require new warnings for JAK inhibitors, including RINVOQ and their use will be limited to certain patients who have not responded to or cannot tolerate anti - TNFs. We continue to work with the FDA regarding updated labeling language for the RA indication, while simultaneously engaging with the agency on our files for atopic dermatitis, psoriatic arthritis, and ankylosing spondylitis. We remain confident in our submission packages for these 3 new indications and continue to expect approvals following completion of the RA label update. In the area of oncology, we continue to make good progress advancing all stages of our pipeline. We're nearing completion of several indication expansion programs for VENCLEXTA. In our study in previously untreated higher-risk MDS patients, which recently received a breakthrough therapy designation, we expect to make a data cut early next year to include 6-month follow-up data for duration of response. Based on this data cut, we plan to submit our regulatory applications to the FDA in the first half of 2022, for an accelerated approval. We continue to make good progress with Venclexta in the Canova trial, which is evaluating Venclexta in relapsed refractory multiple myeloma patients with a t(11;14) mutation. VENCLEXTA has shown strong anti - myeloma activity in this biomarker-defined population and if successful, has an opportunity to play an important role in the treatment paradigm for multiple myeloma. We expect a data readout from this event-driven trial next year. In our early to mid-stage hem/onc pipeline, we continue to expand the cohorts in the aducanumab Phase 1 2 studies in diffuse large B-cell lymphoma and follicular lymphoma. And we're evaluating aducanumab as both a monotherapy and in combinations. We expect to see data from both the monotherapy and combo studies next year. And we will discuss the monotherapy data with regulators regarding a file for accelerated approval. We also recently began the dose escalation stage of the Phase 1b studies for [Indiscernible] in AML, MDS and multiple myeloma. And ABBV -383, our BCMA-CD3 bispecific antibody, is currently in the expansion stage of its Phase 1 study in multiple myeloma patients. And we expect to begin registrational phase 3 studies next year. Moving to Neuroscience, where we had several notable pipeline events since our last earnings call. In September, we received FDA approval for Qulipta, the only oral CGRP specifically designed as a preventative treatment for migraine. We're very pleased with the label, which reflects Qulipta a strong benefit risk profile, and is supported by a robust clinical development program. In our registrational program, which evaluated Qulipta in nearly 2,000 patients suffering from episodic migraine, treatment with Qulipta resulted in a significant reduction in mean monthly migraine days compared to placebo. And approximately 60% of patients achieved at least a 50% reduction in the migraine days. We think these data compare favorably to other preventative migraine treatments on the market, and believe our new oral treatment option will be competitively positioned in the prevention market. Our migraine portfolio now includes Ubrelvy for acute treatment of migraine, Qulipta for preventative treatment of episodic migraine, and Botox for preventative treatment of chronic migraine. With this distinct portfolio, AbbVie is uniquely positioned to address the full spectrum of this complex and debilitating disease. This morning, we announced top-line results from two Phase 3 studies evaluating Vraylar as an adjunctive treatment in major depressive disorder. In the 301 study, a 1.5 milligram a day Vraylar dose met the primary endpoint demonstrating a clinically meaningful improvement in total MADRS score compared to placebo at Week 6 with a highly statistically significant p-value of 0.005. In this study, the 3 milligram Vraylar dose did not reach statistical significance, but it did show a clear trend toward improvement with a nominal p-value of approximately 0.073 at Week 6. In the second phase 3 trial, the 302 study, neither Vraylar doses met the primary endpoint of change in total MADRS score at week 6. But both the 1.5 and 3 milligram doses demonstrated clear trends toward a clinically meaningful benefit at weeks 2 and 4, with nominal P values less than 0.05 for a number of comparisons. Additionally, as a reminder, we had 1 prior positive registrational Phase 2B study where Vraylar demonstrated efficacy in MDD when added to ongoing antidepressant treatment. Based on precedent in the field and the totality of the data, we believe we have a viable regulatory pathway for Vraylar as an adjunctive treatment in major depressive disorder. We plan to engage with regulatory agencies to discuss these results and expect to spend our regulatory application to the FDA in the first half of next year. We also recently announced positive top-line results from a phase 3 study comparing our novel subcutaneous levodopa/carbidopa delivery system, ABBV -951 to oral levodopa/carbidopa in patients with advanced Parkinson's disease. In this pivotal study, treatment with 951 resulted in clinically meaningful improvements in on time without troublesome dyskinesia, as well as similar improvements in normalized off time compared to oral Levodopa or Carbidopa. We're very pleased with these results, which we believe support our view that 951 has the potential to become a transformative improvement to current treatment options for patients with advanced Parkinson's disease. We plan to submit our regulatory application next year with approval decisions anticipated in the U.S. and Europe in early 2023. And in Eye Care, we announced the partnership with REGENXBIO to develop and commercialize RGX -314, a potential gene therapy for the treatment of wet AMD, diabetic retinopathy, and other chronic retinal diseases. RGX-314 is a very attractive addition to our pipeline, and complements our Eye Care portfolio with a potential flagship product in retinal disease. REGENXBIO recently presented initial data from 2 Phase 2 studies evaluating RGX -314 in wet AMD and diabetic retinopathy, using in-office suprachoroidal delivering. While early, these results are encouraging, with RGX -314 demonstrating efficacy at the lowest dose. And the study showing that the drug and delivery method both appear to be well tolerated. Also, in eye care, we continue to expect approval for [Viewty] (ph) shortly, formerly known as AGN-190584 for the treatment of symptoms associated with Presbyopia. This once-daily eye-drop was developed to help address presbyopia that is often corrected through reading glasses. And once approved via convenient on-demand solution for patients with mild-to-moderate presbyopia who may not want to wear reading glasses. This has been a very productive year thus far for our R&D organization, and we anticipate several additional milestones in the coming months. We expect this momentum to continue into next year, which is looking to be a milestone filled year for AbbVie as well. With that, I'll turn the call over to Rob for additional comments on our third quarter performance and financial outlook. Rob. Rob Michael: Thank you, Mike. As you have heard from Rick, Jeff, and Mike, we once again delivered outstanding performance this quarter, while also advancing our strategic priorities. Our results demonstrate the strong momentum of the business, and support AbbVie's long-term financial outlook. Turning to third quarter results, we reported adjusted earnings per share of $3.33 up 17.7% compared to prior year, and $0.13 above our guidance midpoint. This includes $0.05 from accelerated synergies, and $0.03 from mark-to-market equity gains. Total adjusted net revenues were $14.3 billion, up 10.8% on an operational basis, excluding a 0.5% favorable impact from foreign exchange. The adjusted operating margin ratio was 51.1% of sales, an improvement of 230 basis points versus the prior year. This includes adjusted gross margin of 83.2% of sales, adjusted R&D investment of 11.4% of sales, and adjusted SG&A expense of 20.6% of sales. Net interest expense was $585 million, and the adjusted tax rate was 12.6% as Rick previously mentioned, we are raising our full-year adjusted earnings per share guidance to between $12.63 and $12.67 reflecting growth of 19.8% at the midpoint. Excluded from this guidance is $6.34 of known intangible amortization and specified items. This guidance continues to contemplate full-year revenue growth of 10.7% on a comparable operational basis. At current rates, we now expect foreign exchange at a 0.7% favorable impact on full-year comparable sales growth. This implies a full-year revenue forecast of approximately $56.2 billion. Included in this guidance are the following updated full-year assumptions. We now expect Aesthetics global revenue of approximately $5.1 billion. We now expect international HUMIRA sales of approximately $3.3 billion. For IMBRUVICA, we now expect global revenue of approximately $5.5 billion, reflecting slower recovery of the CLL market. For Mavyret, we now expect global sales of approximately $1.7 billion. And we now expect Allergan expense synergies of approximately $1.8 billion. As we look ahead to the fourth quarter, we anticipate net revenue approaching $15 billion. At current rates, we expect foreign exchange to have a modest unfavorable impact on sales growth. We expect adjusted earnings per share between $3.24 and $3.28, excluding approximately $1.14 of known intangible amortization and specified items. Finally, AbbVie's strong business performance continues to support our capital allocation priorities. We generated $17 billion of free cash flow in the first 9 months of the year, and our cash balance at the end of September was $12 billion Underscoring our confidence in AbbVie's long-term outlook, today we announce an 8.5% increase in our quarterly cash dividend, beginning with the dividend payable in February 2022. And we remain on track to achieve $17 billion of cumulative debt paydown by the end of this year, with further deleveraging through 2023. This will bring our net leverage ratio to 2.3 times by the end of 2021, and approximately 2 times by the end of 2022. In closing, AbbVie has once again delivered outstanding results and our financial outlook remains very strong. With that, I will turn the call back over to Liz. Liz Shea: Thanks, Rob. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, we'll take the first question. Operator: Thank you Ms. Shea. Our first question comes from Geoffrey Porges with Leerink. Your line is open, sir. Geoffrey Porges: Thank you very much. Rick, I guess I'll jump in with the big one that I think is still the overhang for the stock, which is the RINVOQ outlook. You have $15 billion out there for 2025 in combined SKYRIZI, RINVOQ forecast guidance. And I'm just wondering if you could give us a sense of the puts and takes. SKYRIZI doing really well but some overhangs for RINVOQ. Is that $15 billion still achievable, do you think you're trending above that, or do you have to make up a shortfall. Thanks. Rick Gonzalez: Geoffrey, this is Rick. It's a great question. What I'd say is the following: If I look at SKYRIZI, I would say that SKYRIZI performance is very, very impressive. Jeff outlined what the in-play share is and what the total TRxs are and it's very close to the passing HUMIRA now, which in this short period of time is frankly a surprise, how quickly it has ramped. I think that's a very positive case. If I look at RINVOQ, actually the in-place share looks very good. Now, we would expect if the label gets changed and restricts the label to behind TNFs, that that will have some impact on the front line patients -- the naïve patients that we're capturing now. And so we will see that impact. Having said that, I would say that when I look at RINVOQ's performance overall and how durable it's been throughout this situation, we'll obviously shift more towards second line patients and beyond, which was originally in the plan, but the emphasis would have occurred a year or 2 later than this, where we would have driven that. We have very good data to be able to support that. The other thing I'd say is if you look at the indications that we have coming out for these two assets, we have AD, which is a very significant opportunity for us. We have PSA and is a very significant opportunity. But next year we have the IVD indications that are coming out. And I'd say there, when we gave the $15 billion forecast, the performance that was in our TPP or our target product profile that we had assumed, we have outperformed that in the clinical trials that we've submitted. And so I think that's a very significant opportunity for us, and a significant opportunity for us to outperform. Having said all of that, we don't want to reconfirm the guidance yet. We want to see what the final label looks like from the agency. And then we'll be in a position, I think, to come out and tell the investor community exactly what we think. The only other thing I'd say is, I think if you go back 5, 6 years ago, what we're trying to accomplish with the Company, we were basically trying to accomplish with the Company, build a set of assets that could ultimately significantly replace HUMIRA in the marketplace and be superior to HUMIRA. These 2 assets already are at $5 billion and growing very rapidly. So I think everything I know about these 2 assets, they'll be able to do exactly what we expect of them. Even in the most negative outcome from a label standpoint that we would expect. Second thing is we built a significant heme/onc portfolio, that when I look at the pipeline behind IMBRUVICA and VENCLEXTA I think there's a significant opportunity to drive significant growth in that portfolio. And then with the Allergan acquisition, I couldn't be more pleased. Aesthetics franchise is performing at an outstanding level, the neuroscience franchise is performing an outstanding level. I think migraine is a very significant opportunity for us to be able to drive, and eye care is another one. And so we now have multiple assets, and multiple portfolios to be able to drive the growth. And our goal is still what we described to the analysts early on, we expect to see the impact of the LOE on Humira in '23, and immediately be able to grow beyond that starting in '24, return to growth, sales growth at that point. And regardless of what happens with RINVOQ'S label, I have a high-level of confidence we can continue to do that. Rob, anything you’d add? Rob Michael: I would just add that obviously with the confidence we have and the dividend increase we announced today, we feel very strong about the long-term outlook. We haven't backed off on the high single-digit growth on 25 and beyond. You look at the portfolio we've assembled, you look at the assets we have today, you look at our pipeline, you look at the BD work we've been doing over the last couple of years, that was some nice licensing deals and we still feel very confident in the outlook for this business. Geoffrey Porges: Great. Thank you. Liz Shea: Thanks Geoffrey. Operator, next question, please. Operator: Thank you. Our next question is from Andrew Baum with Citi. Your line is open sir. Andrew Baum: Yes, thank you. Can you flip back to the other side of RINVOQ, SKYRIZI and just talk HUMIRA. Could you talk to your comfort level with where consensus currently has HUMIRA pegged and the anticipated scale and scope of the erosion? And then second, in relation to your ongoing Alvotech pending court case, could you just confirm whether if they prevail that would effectively invalidate the signed settlements with the other biosimilar players, meaning that you would have a number of players coming that much quicker onto the market with anticipated pricing volume impact. Thank you. Rick Gonzalez: Okay. Andrew, this is Rick. So I will cover the second one, the Alvotech one. I'm going to have Rob cover the first one. Rob Michael: We've seen movement in terms of consensus numbers since we've given just some direction on how to model it. I think right now, consensus in '23 sell-side consensus has about 41% erosion in the U.S. in '23. And we've said, think about it in terms of 45% based on what we saw in Europe in year 1, plus or minus 10% given the differences in the payer landscape in the U.S. versus other markets. So we have seen the Humira consensus move. Today, it's at 41%, so it's a lot closer than it was a year ago. Rick Gonzalez: Okay, Andrew, this is Rick. I'll cover the Alvotech situation. As you know, we're in litigation with Alvotech. I think it's important to understand the nuances behind that litigation. In this first set of litigation, this first wave of litigation, we are basically applying 10 patents in HUMIRA. And as you know, we have a very robust patent portfolio around HUMIRA, but these 10 patents are both formulation patents and indication patents. Many of these patents were challenged through the IPR process and upheld by the patent office. I'll give you some idea of the strength of these patents. The first thing I'd say to you is, we have a high level of confidence that we will prevail in this litigation. There will be a second wave of litigation that occurs after that, which will bring into the portfolio the rest of the patents that we think Alvotech infringes. So there could be another phase of litigation that occurs after this one, but I can tell you we're highly confident that we will prevail in this first set of litigation based on the strength of those patents. To specifically answer your question, if they were to prevail, which I don't believe they will, then it would accelerate the other patent settlements. Yes, that is correct. Liz Shea: Thank you, Andrew. Operator, next question, please. Operator: Thank you. It comes from Chris Schott with JPMorgan. Your line is open, sir. Chris Schott: All right, great, thanks so much. Just one quick follow-up on RINVOQ and the upcoming indications. I guess do you see a scenario where you are unable to get the drug approved in these pending indications particularly AD over the next few months, or is your review based on all the interactions, etc. that this is largely, I guess, a label and maybe a line of therapy discussion and decision with the agency? And my second question was on Botox aesthetics, a very healthy growth we're seeing here, we're now coming up against even some more normalized comps and you're still seeing the growth rate very, very healthy. Just -- are we still seeing catch-up usage in this, or is this just really underlying demand at this point. And just a little bit more color about just how you're thinking about the near-term growth trajectory. I know you talked about high single-digits over time, but just as you maybe look out to 22-23, could this remain a mid-teens type of growth rate product over that window. Thanks so much. Rick Gonzalez: Mike. Michael Severino: Okay. Thanks, Chris. This is Mike. I will take the first one, and then Rick will take the second part of your question. With respect to RINVOQ in the 3 new indications. So psoriatic arthritis, atopic dermatitis, and ankylosing spondylitis. We remain very confident in those files, and we remain very confident in approval decisions. The gating factor here is really getting to the specifics of the language around RA, which is a process that is well underway. And we would expect to be in a position to gain approvals after that is completed. And again, we hope that's completed in the near future, certainly this year. The psoriatic arthritis and atopic dermatitis filings, we would expect to follow fairly closely on the heels of that RA decision for ankylosing spondylitis. As I mentioned in my prepared remarks, we rolled in a new study, which is a positive study and a very strong study in ankylosing spondylitis into that submission. And so that one might be on a slightly different time-frame, but we remain very confident in that approval as well. Rick Gonzalez: This is Rick. On Botox, I think one of the things when we first went through the integration process that was compelling to us was the amount of penetration in these markets and Allergan's ability to be able to reach out and touch consumers and activate those consumers. And that's part of what drove our decision globally to go with this fully integrated, totally dedicated Aesthetics organization. Because in many other markets around the world, although the data is not quite as good as it is here in the U.S., but in China as an example you see is very similar kinds of dynamics. And so focusing that team purely on Aesthetics was part of the effort here to be able to drive accelerated growth. The second was, when we looked at the ability to be able to use various methods to be able to activate consumers. We believe that the business was being underfunded in a way, both in the way it was being funded and the total amount that was being funded. And so we did some early work to determine whether or not that funding could drive incremental market growth, and it showed a positive result. And then when we saw that, we applied significantly greater funding to it. And what you're actually seeing now, I think, is we are driving the market. We're bringing more patients into the category, and obviously because we have the leadership position from a market share standpoint, we get the vast majority of those patients. Is there still some pent-up demand? I would tell you it's hard to believe at this point that there can be a lot of it, but there has to be some of it. Remember those practices reopened in the U.S. in the summer of 2020. That's a long time to have pent-up demand, but it's impossible to tell one way or another. I would say the majority of it is certainly being driven by us activating patients and retaining more patients. One of the other things we saw was the retention rate was relatively low once you activated a patient. And so we spent some time working with the team to figure out how could you retain those patients at a higher rate, meaning they repeat their procedures. They don't just do it once and then disappear, but they come back for a second procedure or plus going to fillers as an example. So the data is very clear. If you look at the U.S. as an example, toxins and fillers are growing high 30% of the market. We're growing at about the same rate, maybe a little bit lower on fillers but about that rate on toxins. When we look at globally, the overall brands are growing at about that rate. And so, I think this is a business that is sustainable over the long term. When we say across the decade high single-digits, obviously, if we keep this growth rates. The business is getting bigger and bigger. So therefore, the percentage will come down a bit. But I'd tell you, I'm very optimistic about this market, and our ability to be able to bring new assets into this market. They can change the standard of care going forward and us being able to drive market growth at the same time. It's a very good business. Liz Shea: Thank you, Chris. Operator, we'll take the next question, please. Operator: Thank you. That comes from Tim Anderson with Wolfe Research. Your line is open, sir. Tim Anderson: Thank you. I wanted to ask a question on HUMIRA in 2023, I'm just really trying to nail down what's in that erosion guidance of 45% plus or minus 10. That's sales erosion, not volume, correct? I'm trying to think through what happens to the U.S. rebate stream in 2023, which is likely in the billions of dollars. Do you think you'll retain favorable formulae positioning even with biosimilars, in which case you keep paying that rebate, but you also would have less volume loss, or do you think it becomes disadvantage on formulary, in which case you pull back those billions of dollars in rebates, and that flows through the bottom-line. To me, I just wonder if your guidance on aversion is frankly too conservative or, I should say too aggressive because those rebate dynamics in the U.S., they make us a more durable market than ex-U.S. for those rebate dynamics don't exist. Rick Gonzalez: Tim, this is Rick, maybe Rob and I will tag team this one. I'll start. I think the guidance we laid out of 45% or 48%, whichever is the latest number plus or -10%, is still guidance that we feel pretty comfortable with. To your point about, is the bulk of it priced? It is. Even if you look at the international market it's about 1/3, 2/3, or maybe slightly higher than that. I mean, 2/3 of its price, 1/3 of it is volume. And I would expect that we will maintain a significant part of the volume. Obviously, we don't talk publicly about what our manage care strategy is, but what I would tell you is we're close enough now to that 23 time-frame that you would expect us to be starting the work to ensure formulary access on all of our products, and certainly HUMIRA is one of those for 2023. And I think it is logical to assume that we will maintain that formulary position. And we've been pretty effective at doing that historically, so I believe will be pretty effective at doing it again. Rob, anything you want to add? Rob Michael: Just as a reminder. I mean, so we gave that and we're using Europe as an analog, but keep in mind that the U.S. system is very, very different. This is why we gave you a range. And so as we get closer to '23, obviously we'll give more specific guidance on the U.S. But we are communicating as more directional information based on the experience we saw with Europe. Keep in mind there were 4 biosimilars that came in the market at that time, and there will be more biosimilars coming to the U.S. markets. So there's a different level of competitive intensity, but also it's a very different payer landscape. So it's something to keep in mind. Tim Anderson: Okay. Thank you. Liz Shea: Thank you, Tim. Operator, next question, please. Operator: Thank you. It comes from Gary Nachman with BMO Capital Markets. Your line is open, sir. Gary Nachman: Thanks. Good morning. A couple on neuro that had some recent wins. So first on Vraylar the Phase 2 studies and MDD. In 1 study, you hit on the 1.5 milligram dose, but not the 3 milligram dose, it was close, but not statistically significant. Will that matter to the FDA, maybe you could remind us what those who sit in the previous Phase 3. And now that you have the full dataset, how do you think Vraylar will stack up competitively at the NDD space? And then just quickly on migrating, a little bit more how the initial launch has gone to lift, and how has that been rolled in to the Botox in UBRELVY offering, and just your confidence about the reimbursement you said going into the first half of next year. Thanks. Michael Severino: Okay. This is Mike. I'll take the first part of your question, and then Jeff will take the second part of your of your question. With respect to Vraylar MDD, in the study that you described the 1.5 milligram dose medicine point and met it with a highly statistically significant P-value of 0.005, so 0005. And that's important in terms of strength of evidence overall and weight of evidence overall. And then as you point out, in the 3 milligram arm in that same study, we didn't hit significance, but we had a P-value that was very small. The nominal P-value is 0.073, if we around. When you look at that overall study to RA clearly shows an effect in NDD. Now, the second Phase 3 study that we just read out did not reach statistical significance for either dose group, but there were favorable trends and across a number of comparisons, there were nominal p-values that were quite small and many of them were out lower than 0.05. And I'll just remind the listeners that it's very common in depression studies, even with classes of medicines that have firmly established efficacy to have some study that read out positive and some studies that are negative. And so we think that overall package that we announced today is very strong. And it's also important to keep in mind that we did have a prior study that was conducted several years ago that was also positive that demonstrated a statistically significant effect. And that study -- look at different dosing, there were dose ranges that were studied in that trial with titration. It was the upper 2 of the dose ranges that was significant, but it did show both a clinically meaningful and significant benefit. So we have 2 positive studies and that's important because the way these studies are typically looked at is an overall weight of evidence, do you have a convincingly positive phase 3 study? And is there other evidence within the overall data package that is supportive and we feel comfortable that that is the case here. And lastly, what I'd say is, if you look at the precedent, and you look at other approvals, findings like the ones that we described on not a long time, and, in fact, that's the very common amongst approved agents in this space, including some of the more recent approvals in adjunctive NDD like resulting. So overall we think it is a strong package that has a viable regulatory pathway. And we will stack up very nicely to competitors. So we're going to begin those regulatory discussions shortly. So without I'll turn it over to Jeff. Jeff Stewart: Yeah, thank you, Mike. Look, it's a meaningful opportunity for sure. When we look at the market sizes, about 60 million total prescriptions for the adjunctive MDD market. And that's very similar to the bipolar market that we operate in now, so it's a very meaningful opportunity for us. If you think about the -- what Mike was saying in terms of the competitive profile, I think we have to remember that while it's got a fairly low share, the -- Vraylar is very attractive, which is why it's the fasting growing agent. So the efficacy is viewed very, very nicely overall, and I think that if approved, this also has competitive efficacy of very gentle metabolic profile, minimal weight gain, very tolerable, and also very simple dosing for the psychiatrists and the primary care doctors that look at this. So when you start to see the potential for an agent like Vraylar that's got the full spectrum across bipolar disease in terms of mania, mixed episodes and depression. And then the adjunctive depression indication, if approved, it will be very attractive. So we anticipate a nice catalyst here and certainly a nice add to Vraylar's overall profile. Gary Nachman: If you want to cover the second question. Jeff Stewart: Yeah. Perfect. The second question you had was QULIPTA. And QULIPTA, its very early, we just introduced the product with our full commercial promotion. As I mentioned in my prepared remarks, we have now as of this quarter, a dedicated migraine sales force which shows you how important we think that this franchise is and what we can do with this franchise. So we have an entire sales team out there that is launching QULIPTA and now also focused on UBRELVY. And the early feedback has been very strong. What we hear qualitatively from our field and certainly from our research in the first few weeks of launch is, first, the simplicity and strength of QULIPTA for prevention. We see very, very nice response to our efficacy data, which is -- Mike has said before, and I've said before is on the very high end of preventative performance. So 60% of patients in our trials achieved greater than 50% reduction in migraine days, which is viewed as very significant. And almost 30% have a complete control. A 100% decrease in their migraine days. That's very compelling in terms of this Qulipta power. Also, physicians like the simple, everyday dosing, once a day. And so things are quite strong in terms of our early qualitative feedback. So we do obviously anticipate that the majority of our prescriptions will be bridged prescriptions until are -- we get the full ramp of our market access, which as I mentioned, we're quite confident by the first half of the year, we should ramp similar to Ubrelvy, where ultimately, as you remember, we achieved about a 90% access in the U.S. So quite good early feedback on the launch, and again we think that the 3 assets together are unique competitive positioning for AbbVie. Liz Shea: Thank you, Gary. Operator, next question, please. Operator: Our next question is from Matthew Harrison with Morgan Stanley. Your line is open, sir. Matthew Harrison: Great, good morning. Thanks for taking the questions. I guess two for me. 1. If I could just follow up on CGRP, I'm curious, obviously, you have a different strategy than your competitor when it comes to the prophylactic market. I'm just wondering how you think where your source of the patients are going to come from. Are you expecting more transitions from injectables or do you think they're going to be more de novo patients, and if you could just talk about that a little bit. And then secondly, on REGENXBIO, could you just talk about your confidence in the data there. Obviously there was some inflammation there though it did seem self-limiting. I'm just curious how you think about that impacting the profile, because obviously in other gene therapy products in the eye inflammation has sometimes proven to be pretty significant as a long-term sequelae. Thanks. Rick Gonzalez: Jeff lunge. Jeff Stewart: Yeah, I'll take the first one, thanks. So in terms of the source of business, we think that QULIPTA is going to source business from 2 primary areas. First is, the big headache specialists, the big neurologists. We think absolutely from our research and feedback that you'll start to see an early trade-off of the injectable MABS in favor of the orals and certainly in favor of QULIPTA. I think that this is viewed as very attractive. In many cases, some people have spontaneously highlighted wow it looks like a very strong MAB in a single oral pill. So that's a source of business in terms of market share trade-off. I think the other insight that we have from the market is that we are going to a -- calling on a substantial amount of high prescribing primary care physicians who don't write a lot of MABS, but they certainly write a lot of generic topiramate and some other older agents. And so we also see that we have a unique opportunity in a wider audience to source from physicians that really don't lean towards the MABS because of the injectable nature of those, etc. So we think we're going to have a good balance between those two sources of business and that's quite attractive for us right now. Michael Severino: This is Mike. I'll take the question regarding REGENX. We're very encouraged by the recent data. If we take a step back and look at the program overall, they have very strong efficacy data already demonstrated with sub-retinal delivery and that's in a lot of procedure. But it gives us clear proof-of-concept for the approach, and shows that we can get durable control. And that component of the program is already in Phase 3. And then the more recent data that were presented just about a month ago, several weeks ago, looked at suprachoroidal delivery. So that is a delivery method that can be done in-office. It's a specialized form of injection, but it is a form of injection. And that is also showing very good promise. We're already seeing signs of efficacy in the first cohort, which is the lowest dose cohort, which quite frankly is sooner than we expected to see them before that study had started to deliver results. And the tolerability is very good. If one looks at the inflammation that has reported in the [Indiscernible] trials, it's very different in its nature and its [Indiscernible] than that, that has been seen with other agents. It's principally anterior, chamber is exclusively anterior chamber, there's no vasculitis, no more significant inflammation. It is readily treated with topical steroids, and generally resolves without any difficulty, and in fact, quite rapidly. And it's also important to remember that there's no prophylactic steroids being used here. Other approaches have required that. So these are patients who have no prophylaxis upfront in responding to what's often a brief course of topical steroids. And the reason why there's no prophylactic steroids, given as they're just not felt to be needed given the very mild nature of the inflammation that's being observed. So we're very confident with it. And again, we feel it's qualitatively very different than what has been seen in other agents. And we've obviously talked to retinal specialists as well who are quite familiar with the program, and the views we've heard from them are supportive of what I just described. Liz Shea: Thank you, Matthew. Operator, next question, please. Operator: Thank you. Our next question is from Steve Scala with Cowen. Your line is open, sir. Steve Scala: Thank you. I have a few questions, a couple of follow-ups. How would you describe the nature and the tone of conversations with FDA regarding RINVOQ's new label in RA, would you say you're pleased with how things are going, is the outcome unclear to AbbVie at this juncture, or is the outcome obvious sending in line with what the FDA had an it's statement in September? That's the first question. Second question: To my knowledge, Vraylar has shown superiority to placebo but not generics in MDD. How would AbbVie establish it as a leading MDD agent given the presence of lower cost alternatives? And then lastly, any thoughts on Soliton acquisition relative to its closing? Thank you. Michael Severino: Okay. This is Mike. I'll start And then Rick will take the question regarding Soliton. With respect to the tone of conversations with the FDA for RINVOQ, I would describe them as productive. With respect to your question specifically about the RA label, those discussions are productive as well. I would assume the base case is what they announced conceptually back in early September, but we are working through the specifics of how that translates into labeling language. And I would characterize the discussions around the other indications as being very productive and very positive as well. And so as I mentioned earlier in this call, we remain very confident in the files for those new indications for all three of them. With respect to Vraylar, head-to-head superiority studies are not typically done in this space. They are very challenging. It is challenging to show an impact even with established classes period in major depressive disorder and particularly in this space, because this is the adjunctive treatment of major depressive disorder. So these are patients who aren't responding to the current therapies, and require an add-on and atypical antipsychotics with pharmacology similar to Vraylar, our one of the most commonly used agents in this space. So we think the very strong data that we have from the study that we described, and the fact that we have prior supportive evidence as well from the earlier study, will position it very well to be competitive in that marketplace. Jeff Stewart: And Steve, it's Jeff. Just to build on Mike's point, if you think about the size of Vraylar now approaching $1.8 billion it has a 2.5 share in terms of the anti-psychotic market. It's a low share, high-value in growth area. When you think about most of our business is already stepped through in some cases one or two of the generics. The problem is that these patients are so fragile, they just don't respond well. We would still anticipate that with the new approval for MDD, you're still going to have step therapy and other approaches in the marketplace, but there is still a very nice commercial opportunity. That's just the way the markets work today. Steve Scala: Alright, thanks. Rick Gonzalez: So this is Rick, Steve. On Soliton, as you know, we obviously announced the -- our intention to acquire the Company and submitted it for approval. We did receive a second request. Maybe just to frame a bit why we're interested in this area. We tend to look at this market where the third major leg of the stool in a stage is body contouring. And this is a good fit with CoolSculpting, and CoolTones. Obviously, CoolSculpting is focused more on reduction of fat in targeted areas, and CoolTones more focused on the area of enhancing muscle tone in specific areas. This particular asset is designed to reduce cellulite. We don't have a position in cellulite now so there's not any kind of competitive overlap in that area. Having said that, we are responding to the FTC's inquiry. We believe that's going reasonably well, so we would expect this to be resolved at some point here in the future. I can't tell you a specific date, but I would expect it to have a positive outcome over a period of time here. Steve Scala: Thank you. Liz Shea: Thank, you, Steve. Operator, next question, please. Operator: Thank you. Our next question is from Vamil Divan with Mizuho Securities. Your line is open. Vamil Divan: Great. Thanks so much for taking my question. So just maybe 1 more just on Vraylar following up on the other comments. I think before you talked about it being as maybe sort of multi-billion-dollar type opportunity in MDD. Is that still the lines you're thinking now that you've seen the data that you've disclosed today? And then the second one, just going back to RINVOQ and obvious sounds like you're still pretty confident on that products outlook. But I'm just curious if that's changed any of your priorities hitting about business development, specifically in immunology? The need for maybe look at other oral agents that might be in development there, just so how you're thinking about the broader BD landscape there. Thank you. Rick Gonzalez: Yes, Jeff. Jeff Stewart: Yeah. I think if you look at the -- as I highlighted, that the market sizes are roughly the same. However, the competitive context is quite a bit different and the competitive set is a little bit different. So we view it again as an important incremental opportunity that even with low incremental share, that we can drive Vraylar to the -- that multibillion dollar guidance that we look at it. We do think it's an incremental catalyst, and an exciting approach if it were to be approved. Michael Severino: So this is Mike. I'll take the Rinvoq question. So as you pointed out, yes, we are very confident in Rinvoq as a molecule overall. We've talked about the progress on the RA indication, and our confidence in the new indications, both those that are under review. And indications where we have data, but have not yet submitted like the IBD indications. And so we feel that it's going to be an important part of our portfolio, and the treatment armamentarium going forward. So having said that, immunology is always an area where we are scouring the landscape to look for the best opportunities. So I wouldn't say it's changed our focus in any way or changed our approach, but we will continue to look for novel therapies that can raise the bar on the standard of care. Across a number of areas, the current indications where we are already playing and new indications that have fewer treatment options, areas like lupus and scleroderma. So the RINVOQ situation has not changed that strategy in anyway. Liz Shea: Thanks, Vamil. Operator, we'll take the next question, please. Operator: Thank you. It's from Ronny Gal with Bernstein. Your line is open, sir. Ronny Gal: Good morning and thank you for taking my questions. I've got a clarification and then a couple of questions. First, Rick, you mentioned regarding Alphatec about the acceleration clauses. And I just want to clarify if this is on District Court decision or appeal, given the timing it actually makes quite a bit of difference. Then the two questions I have first are interchangeability for HUMIRA. Do you think this will matter in the marketplace? We are hearing different things from the large payers. What is your take here and what is going to be AbbVie's position about this? And the second question is, the last draft we've seen from this year regarding the infrastructure bill does not include a reduction of out-of-pocket costs in Medicare. We're still hearing from context, this still might be the case if it's still included. If you can comment on this issue, do you expect it to be included, and the impact it might have on AbbVie's business. Rick Gonzalez: So Ronny, this is Rick. On Alvotech, obviously these agreements that we have with the other biosimilar players are confidential, I'm not going to delve into some of the specifics around those. What I can tell you is what I said before. I mean, we are highly confident in our position with this IP. This IP has been challenged multiple times and we have a high degree of confidence that we will prevail. So I think it's obviously a hypothetical scenario, but I don't -- I wouldn't give it a lot of merit. Second on interchangeable HUMIRA s as we've discussed previously, when we built the erosion model that we described a couple of years ago, or certainly a year-and-a-half or so ago, we did assume at that point that they were going to be 2 interchangeable biosimilars. It does matter from a pricing standpoint to some extent. So I think it will have an impact but it's consistent with what we had assumed. And so we've essentially taken that into consideration in the forecast that we provided you, and the estimates that we provided you. On drug pricing in the U.S., I would say it's a very fluid situation. It's a little difficult to truly understand exactly where we are. You are correct, if you look at this framework that came out yesterday [Indiscernible] talked about repeal of the rebate rule being eliminated. And it didn't talk about much else. Look, the things that we're focused on and things that we think would make a difference on our out-of-pocket costs for patients, and making them lower for Medicare patients, making them something that they can spread over a period of time -- a 12-month period of time to make the cash flow easier to deal with. And as we've said before, we think industry will play a role in that as one of the participants. And we would hope that we will get back to that, because I think -- we think that is the most fundamental issue is reducing the out-of-pocket costs for these patients. Liz Shea: Thank you, Ronny. Operator, next question, please. Operator: Thank you. Our next question is from Geoff Meacham with Bank of America. Your line is open, sir. Geoff Meacham: Great. Hey guys. Thanks so much for the question. I just have 2 quick ones, and probably for Mike. The follow-up on Rinvoq. I know it's been asked a lot, but you have a number of labeling scenarios that could play out just with respect to dose, or TNF requirement, or language on black box, or any maybe -- any limit on duration. Is there one of those items that has more of an impact than the others. I'm just trying to think about what informs your assumptions. The second question on cystic fibrosis. When you look to the upcoming proof-of-concept data readout, is there a minimal effect size, or profile that you're looking for that would justify moving to a larger scale Phase 3. Thanks so much. Michael Severino: I will take the RINVOQ question first and then make some comments on CF. What I would say about RINVOQ is our assumptions around the labeling at a base case are based on what the agency announced in their safety communication in September. That principally updates to the black box warnings that all of these agents have in fact all agents in immunology have some degree of this. They treat similar conditions to RINVOQ, for example, the TNS have some of the same but not all of the same warnings. Updating that section label is part of our base case and then the restriction that the agency described for certain patients around TNF inadequate response forms our base case. And those are the two factors that we're considering. We would not anticipate any limit into ration of therapy, for example. And the question those principally applies to the atopic dermatitis file, because we have just a single dose in the other files, in the files that are in the rheumatology space. And we feel confident about both doses in terms of the benefit risk that we've demonstrated in that atopic dermatitis program. It's really those two dimensions and how those translate into specific language in RA. And then of course, how they translate to the other indications, because TNFs are not the standard of care in all indications, they are not used in atopic dermatitis. So then it's how do those concepts get translated into the label in other indications. Those are the principal dimensions that we're looking at when we think about those programs. And again, we feel very confident in the files that we've put forward, and feel very good about how discussions have gone to date. With respect to CF and what we're looking for, we're looking for something that has demonstrated benefit compared to what's already out there, what will be out there at the time our agents come to market. Obviously the principal competitor, the only group with a marketed product right now in this space is Vertex so that's what we would be benchmark ourselves against. I would say at an absolute minimum, you'd have to have efficacy that was just as good with other meaningful advantages. But what we're striving for is something that has an efficacy advantage of a small number of absolute FEV1 points. A small number of absolute FEV1 points might not sound like much, but it can translate into real benefit for patients in this disease. Liz Shea: Thank you, Jeff. Operator, next question, please. Operator: Thank you. Our next question is from Luisa Hector with Berenberg. Your line is open, ma'am. Luisa Hector: Thank you. Good morning. And sorry. I still have a couple more on RINVOQ. I just wanted to understand whether the label updates in RA and then the approvals in the new indications can essentially all happen on the same day? Or is the gating item the RA update? And then there's still a bit more work to be done for the new indications. And then looking on to the UC filing. Is the acceptance of that filing in any way dependent on the RA label being resolved first or that's free to be accepted as a filing while the label update is still outstanding? Thank you. Michael Severino: This is Mike. I'll take those 2 questions. So with respect to the ongoing reviews, what I would say is the discussions around the RA label update, and the new indications that are under our review are going on simultaneously. And there is some level of interdependence. In other words, we need to understand where the RA label will land, because some of those elements, like the warnings and precautions, will translate over to the other indications because in the U.S. you get 1 label for the molecule that applies across all of the indications. So there's some interdependency, that's why getting the RA label update resolved is a gating factor. Whether it could happen on the same day or in close succession, I think it's too early to call with that fine level of detail, but we would expect the psoriatic arthritis and atopic dermatitis filings to follow in a very reasonable time-frame after that label update. As I mentioned, we're adding new data to the ankylosing spondylitis submission, which is the smallest of the three indications. And so that one might be on a slightly different time-frame as the agency reviews those new data. With respect to the SEC filings, the RA label update is not on critical path to file acceptance. What the agency looks at when they look at file acceptance is, have you provided sufficient data for them to evaluate the file, is it in an appropriate format that they can review, are there any significant deficiencies. And of course, we're very confident in the file that we've submitted, so we would not in any way anticipate any challenges there. And the RA safety label update is not a gating factor for that file acceptance. Liz Shea: Thank you, Luisa. Operator, next question please. Operator: Thank you. Our next question is from Chris Raymond with Piper Sandler. Your line is open. Allie Braculon: Hi, good morning. This is Allie Braculon for Chris. Thanks for taking the question. So on ABBV -951 and Parkinson's, we're just hoping you could put some of those safety findings from the Phase 3 trial in context, particularly the imbalance in hallucination psychosis and the 22%, I think, treatment discontinuation rate. Basically, just how did that safety profile stack up against your expectations and how could this translate into real-world use of 951. Thanks. Michael Severino: So this is Mike. I'll take that question. With respect to the data for 951, we're very pleased with the data. There is very strong efficacy, and the safety is within our expectations, it matches our expectations across essentially all important areas. What's important to keep in mind is this agent delivers transformative benefit to patients who have extremely difficult to control Parkinson's disease through other measures, and to have a very, very difficult time controlling their disease. For example, with orals or with other approaches. And so the overall picture has to be looked at in that context. With respect to treatment discontinuations, what I would say is the treatment discontinuations, The rate of that overall is very similar to what you see with similar devices with insulin pump like devices used across a range of conditions. Most of these were driven by either local tolerability issues like injection site reactions, which were principally erythema or technical usability issues because these are older patient populations with limited mobility and dexterity in many cases, and there's always a subset of patients who find that they have difficulty using any device under those circumstances. Again, those rates of discontinuation are very similar to what you see with similar insulin pump-like devices. And keep in mind this is a very, very large population. This advanced Parkinson's population, only a very small proportion of which currently get advanced treatments because it's so limited in how that can be delivered. We think there's a big opportunity here and that treatment discontinuation rate doesn't change that and is in line with our expectations. With respect to hallucinations. We know that that is on mechanism. Or Levodopa and Carbidopa and it's essentially evidenced that we are delivering Levodopa and Carbidopa in a way that's more effective than can be done through other methods. And it's something that can be titrated and something that can be managed. And what I would point to is in the other direction. The oral group, the control group that got oral Levodopa and Carbidopa had more falls. And that to our eye shows a lower degree of control, which matches the clinical efficacy data, because we know falls are common in Parkinson's disease patients. So we need to keep that in mind. And with the efficacy that we've delivered, we think these are all very attractive profiles and ones that will translate into significant real-world use. When we look at how this will impact overall use, again and keep in mind that the very broad population, only a very small segment which can access the therapies that they need to control their disease. Therapies like DUOPA, which is transformative, that takes us surgical gastric tube actually threaded into the small bow to get deep brain stimulation and other types of measures. This is a much less invasive approach that delivers very strong efficacy and we think that will translate very, very effectively into the real world. Liz Shea: Thanks, Allie. Operator, we have time for 1 final question. Operator: That will come from Josh Schimmer with Evercore ISI. Your line is open, sir. Josh Schimmer: Thanks for squeezing me in. Can you talk about the current contracting season with payers for Humira, and whether you think you'll be able to lock in multi-year contracts either now to extend to 2023, or next year to extend to 2024. And then I'm surprised you're not more bullish with your guidance for the migraine franchise, given the strong trajectory it's on already. Any reason to think there's going to be a significant plateau in the years ahead. Thank you. Jeff Stewart: Yes. Hi, it's Jeff. So typically, when -- we start to negotiate with the payers in the spring of the year for the following year. And typically those contracts can be multiyear contracts, maybe 2-year contract. So really that's the season where we'll have as Rob and Rick said, we'll have probably some more guidance over how things are shaping up for '23 and possibly '24 depending on the posture of the payers and how those things work out. So we're not quite there yet. I think that what I can say is we're quite confident based on the timing that I described in terms of general cycles, in terms of where we're going to be for our portfolio certainly in '22. In terms of QULIPTA, look, we are off to a very good start. I can tell you that UBRELVY continues to run a pace, that total oral CGRP market is upwards of maybe 18% of new prescriptions. And it's still early and that would be us and neurotech in the acute segment. And at a theoretical peak level, you could see maybe 30% or 40% based on cardiovascular issues with Triptan's or some other issues. But we still have clear -- clearly some runway to go. It's probably a little early to sort of determine how that preventative segment will really grow because you've only seen really the MABS so far. They certainly tripled the market size. How will both of these orals and particularly in oral like QULIPTA in terms of the market development run a pace? It's encouraging for sure, particularly, if you have all 3 of these agents in the market and the investment behind it. Right now though we feel quite comfortable with the billion-dollar opportunity for both of the orals. Liz Shea: Thanks, Josh. And that concludes today's conference call. If you would like to listen to a replay of the call, please visit our website at investors. abbVie.com. Thanks again for joining us. Operator: This does conclude today's conference call. We thank you all for participating. You may now disconnect and have a great rest of your day.	[ { "speaker": "Operator", "text": "Good morning. Thank you for standing by. Welcome to the AbbVie Third Quarter 2021 Earnings Conference Call. All participants will be on a listen-only until the question-and-answer portion of the call. [Operator instructions]. I would now like to introduce Ms. Liz Shea, Vice President of Investor Relations. Ma'am, you may proceed." }, { "speaker": "Liz Shea", "text": "Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer, Michael Severino, Vice Chairman and President. Rob Michael, Executive Vice President and Chief Financial Officer, and Jeff Stewart, Executive Vice President Commercial Operations. Before we get started, some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today's conference call non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today which can be found on our website. Unless otherwise noted, our commentary on sales growth is on a comparable basis, which includes full current year and historical results for Allergan. For this comparison of underlying performance, all historically reported Allergan revenues have been recast to conform to AbbVie's revenue recognition accounting policies, and exclude the divestitures of ZENPEP and Bio case. References to operational growth further exclude the impact of exchange. Following our prepared remarks, we'll take your questions. So with that, I will now turn the call over to Rick." }, { "speaker": "Rick Gonzalez", "text": "Thank you, Liz. Good morning, everyone, and thank you for joining us today. I'll discuss our third quarter performance and outlook and then Jeff, Mike and Rob will review our business highlights, pipeline progress and financial results in more detail. AbbVie continues to perform very well. We once again delivered an outstanding quarter with adjusted earnings per share of $3.33, exceeding the midpoint of our guidance by $0.13. Total adjusted net revenues of more than $14.3 billion was up 10.8% on an operational basis, with balance growth across each of the major growth platforms. We continue to see double-digit revenue growth in immunology, where Skyrizi and Rinvoq have established very strong launch trajectories. These 2 assets are either approved, under regulatory review, or in late-stage development across all of Humira's major indications. And we remain confident that they will both be significant contributors to AbbVie 's long-term growth. Aesthetics is also demonstrating impressive double-digit operational sales growth. Our dedicated global aesthetics structure and increased investment are driving accelerated category growth across both toxins and fillers, where there is substantial room for additional market penetration. Our strategic investments and targeted field force expansions have improved overall our customer retention rates and significantly increased the number of first-time patients to our leading brands. We are once again raising our full-year guidance for aesthetics this quarter. And we view these portfolio as an extremely attractive growth opportunity over the long term with high single-digit compounded annual growth rates expected through the end of the decade. Our Neuroscience business drove robust double-digit revenue performance again this quarter. And we added a compelling new product to our migraine portfolio with the approval of Qulipta, a once-daily oral medication for the preventative treatment of episodic migraine. Our Hematological Oncology portfolio delivered operational sales growth of approximately 8% this quarter, despite a protracted market recovery in CLL, which remains below pre -COVID levels. Beyond the significant contributions of Imbruvica and Venclexta, we have an exciting oncology pipeline with several promising programs in development for blood cancers and solid tumors, to support sustainable long-term growth. These include Navitoclax for myelofibrosis, Epcoritamab for B-cell malignancies, ABBV383 for multiple myeloma, lemzoparlimab for AML and MDS, as well as Teliso -V for non-squamous, non-small cell lung cancer. Lastly, we continue to make excellent progress with the integration of Allergan. Our financial results show that we have created a stronger and much more diverse Company with numerous products across our newly combined portfolio, delivering robust growth. Overall, I'm extremely pleased with our momentum and we are once again raising our full-year 2021 EPS guidance. We now expect adjusted earnings per share of $12.63 to $12.67, reflecting growth of nearly 20% at the midpoint. Additionally, as noted in our news release, today, we are announcing an 8.5% increase in our quarterly cash dividend, from a $1.30 per share to a $1.41 per share, beginning with the dividend payable in February 2022. Since our inception, we've grown our quarterly dividend by more than 250%. In summary, we're demonstrating strong execution across our portfolio. We've assembled an impressive set of diversified assets with significant growth potential giving us a high degree of confidence in the long-term outlook for our business. With that, I'll turn the call over to Jeff, Jeff." }, { "speaker": "Jeff Stewart", "text": "Thank you, Rick. We continue to demonstrate strong and balanced growth across our therapeutic portfolio. I'll start with Immunology, where we remain well-positioned for sustained leadership with a portfolio of best-in-class medicines. Total immunology revenues were approximately $6.7 billion, up 14.9% on an operational basis. Global Humira sales were more than $5.4 billion up 5.2% on an operational basis, with 10.1% revenue growth in the U.S., offset by biosimilar competition across the international markets, where revenues were down 16.7% on an operational basis. SKYRIZI is performing extremely well. Global sales of nearly $800 million were up 18.1% on a sequential basis, reflecting continued market share gains. In the U.S. SKYRIZI's leading in-play psoriasis patient share, which includes both new and switching patients, is now roughly 36% more than double the share capture of the next nearest biologic competitor. SKYRIZI total prescription share in the U.S. psoriasis biologic market is now nearly 20%, second only to HUMIRA. Internationally, SKYRIZI continues to ramp nicely, having also achieved in-play patient share leadership in more than a dozen key markets. This compelling share performance will be further supported by 2 important near-term enhancements. The availability of more simple delivery forms for SKYRIZI, as well as the potential indication expansion in psoriatic arthritis. First, we recently launched the new and convenient SKYRIZI single-dose, 150 milligrams, self - injectable pen and syringe in major territories around the world. The market response has been very favorable, and the approval now makes SKYRIZI the only quarterly dosed brand that is available in a single self - injectable pen for patients. Second, we are preparing for the global launch of SKYRIZI in psoriatic arthritis, as we near approval decisions in both the U.S. and Europe. We received a CHMP positive opinion earlier this month, with anticipated approval in Europe by year-end. And we continue to expect FDA approval early next year. The addition of this indication, once approved, will round out Skyrizi's dermatology label, and give patients with PSA access to a new compelling therapeutic option. We're also making excellent progress with Skyrizi's development in Crohn's disease, which was recently submitted for U.S. regulatory review, with commercialization expected next year. Rinvoq also continues to demonstrate robust growth. Global sales of more than $450 million were up nearly 20% on a sequential basis. Total in-play RA share remains strong and now reflects approximately 17% patient share in the U.S., as well as leadership in a half a dozen key countries around the world. Internationally, RINVOQ share continues to ramp in RA. And we're making excellent progress with the recent commercial launches of PSA, AS and atopic dermatitis, where we have secured strong labels for each of these indications. As many of you are aware, the FDA issued a safety communication regarding new and updated warnings for JAK inhibitors, including RINVOQ in early September. While we do not yet have an updated label, we are closely monitoring prescription trends and feedback from the field. And we have not observed a significant impact to RINVOQ utilization at this time. That said, should the updated label restrict to use the TNF inadequate responders, we would certainly expect a near-term impact to new patient starts in RA. Based on the robust data we have generated across our development program against multiple biologics and later lines of RA therapy, we do expect that RINVOQ will ultimately attain higher share growth in the second line-plus setting, as most patients ultimately fail TNF therapies over time. Overall, we continue to feel very good about the performance and profile of RINVOQ and remain confident this asset will be a major contributor to AbbVie's long-term growth. In Hematologic Oncology, global revenues were nearly $1.9 billion, up 8.1% on an operational basis. Imbruvica and Venclexta have a strong position across multiple heme -indications, including CLL, where AbbVie's combined portfolio remains the clear market share leader across all lines of therapy. Global Imbruvica revenues were approximately $1.4 billion, up 0.3%. In the U.S., performance continues to be primarily impacted by a slower-than-expected market recovery in CLL, as well as some modest share erosion from newer therapies, including Venclexta and other BTK inhibitors. New patients starts in CLL remain below pre -COVID levels, and it is difficult to predict when this dynamic may fully recover. Venclexta sales were up 38.7% on an operational basis with increasing momentum across all indications, including a strong AML launch trajectory in the international markets. In neuroscience, revenues were nearly $1.6 billion up 25% on an operational basis. I'm particularly pleased with the results and outlook for our emerging migraine portfolio, where we are now the only Company to have a portfolio of distinctive therapies to address the spectrum of this common complex and debilitating disease, including Botox Therapeutic, a unique foundational treatment for the prevention of chronic migraine, which is performing very well. Total sales of $645 million for all the Therapeutic Botox uses were up 22.5% on an operational basis. Ubrelvy, our leading oral CGRP treatment for acute migraine is also demonstrating rapid growth. Total sales of a $162 million were up nearly 30% on a sequential basis. Based on Ubrelvy's competitive profile, continued strong new patients starts, and a rapidly expanding market, we remain confident that Ubrelvy represents a $1 billion plus peak sales opportunity. And now we're just launching Qulipta, the only oral CGRP specifically developed for the preventative treatment of migraine, which is already off to an excellent start. Early feedback from our physicians has been very positive given QULIPTA 's strong efficacy, safety, and convenient dosing profile relative to the current standards of care. The QULIPTA launch is being supported by our existing migraine sales force with commercial access expected to ramp strongly through the first half of 2022. QULIPTA also represents a $1 billion plus peak sales opportunity. Now we believe having 3 distinct and competitively positioned therapies across the spectrum of migraine conditions with Botox Therapeutic, UBRELVY and QULIPTA, which each have been optimized for a specific migraine indication, enables physicians to tailor treatment for the broadest range of patients. Our portfolio of migraine therapy puts us in a very strong position to capture growth in this dynamic market. Turning to psychiatry, we also see robust performance with Vraylar, which remains the fastest-growing atypical anti-psychotic. Total revenues of $461 million were up 29% on an operational basis, with continued strong demand across schizophrenia, bipolar I disorder, and bipolar depression. Lastly, in our other key therapeutic areas, we saw a significant contribution from eye care, which had revenues of $871 million up 2.9% on an operational basis. Mavyret sales were $426 million up 2.9% on an operational basis as treated patient volumes still remain suppressed compared to pre -COVID levels. And we saw double-digit growth operationally for both Creon and Lupron. So overall, I'm pleased with our continued execution across the Therapeutic portfolio, which is demonstrating strong revenue growth. And with that, I'll turn the call over to Mike for additional comments on our R&D programs. Mike." }, { "speaker": "Michael Severino", "text": "Thank you, Jeff. I'll start with immunology, where we had several regulatory updates and data readouts for both Rinvoq and Skyrizi across therapeutic areas. Following successful completion of the registrational programs for Rinvoq in ulcerative colitis, and Skyrizi in Crohn's disease, we submitted our regulatory applications for each asset in their respected indications. We saw a very strong data for both Rinvoq and Skyrizi as induction and maintenance treatments in UC and Crohn's respectively. And based on these results, we believe both drugs have the potential to become a highly effective, differentiated therapies in these indications. We anticipate approval decisions for both in 2022. Earlier this month, we announced positive top line results from our Phase 3 SELECT-AXIS 2 program for Rinvoq in axial SpA, which included data from 2 standalone studies. One for ankylosing spondylitis patients who had an inadequate response to biologics. And another for patients with non-radiographic axial SpA. In the ankylosing spondylitis biorefractory study, RINVOQ performed very well, demonstrating significantly greater improvements in signs and symptoms, as well as physical function and imaging endpoints compared to placebo. We saw levels of efficacy in this difficult to treat refractory population similar to those more typically observed in bio-naive patients. These results will be added to our submission package for RINVOQ in AS which is currently under review by the FDA. In a non - radiographic axial spot study, RINVOQ also performed very well, meeting the primary and key secondary endpoints. We plan to submit our regulatory applications in this indication later this quarter as well. RINVOQ's safety profile in these actual spot trials was consistent with previous studies, and there was no evidence for increased risk of DVT, PE, MACE events, or malignancies in either study. Based on the data generated in the select access program, we believe RINVOQ has the potential to improve care for patients suffering from Axial SpondyloArthritis by providing sustained disease control and rapid and durable pain reduction as well as improving function. As you're likely aware, in September, the FDA communicated that they will require new warnings for JAK inhibitors, including RINVOQ and their use will be limited to certain patients who have not responded to or cannot tolerate anti - TNFs. We continue to work with the FDA regarding updated labeling language for the RA indication, while simultaneously engaging with the agency on our files for atopic dermatitis, psoriatic arthritis, and ankylosing spondylitis. We remain confident in our submission packages for these 3 new indications and continue to expect approvals following completion of the RA label update. In the area of oncology, we continue to make good progress advancing all stages of our pipeline. We're nearing completion of several indication expansion programs for VENCLEXTA. In our study in previously untreated higher-risk MDS patients, which recently received a breakthrough therapy designation, we expect to make a data cut early next year to include 6-month follow-up data for duration of response. Based on this data cut, we plan to submit our regulatory applications to the FDA in the first half of 2022, for an accelerated approval. We continue to make good progress with Venclexta in the Canova trial, which is evaluating Venclexta in relapsed refractory multiple myeloma patients with a t(11;14) mutation. VENCLEXTA has shown strong anti - myeloma activity in this biomarker-defined population and if successful, has an opportunity to play an important role in the treatment paradigm for multiple myeloma. We expect a data readout from this event-driven trial next year. In our early to mid-stage hem/onc pipeline, we continue to expand the cohorts in the aducanumab Phase 1 2 studies in diffuse large B-cell lymphoma and follicular lymphoma. And we're evaluating aducanumab as both a monotherapy and in combinations. We expect to see data from both the monotherapy and combo studies next year. And we will discuss the monotherapy data with regulators regarding a file for accelerated approval. We also recently began the dose escalation stage of the Phase 1b studies for [Indiscernible] in AML, MDS and multiple myeloma. And ABBV -383, our BCMA-CD3 bispecific antibody, is currently in the expansion stage of its Phase 1 study in multiple myeloma patients. And we expect to begin registrational phase 3 studies next year. Moving to Neuroscience, where we had several notable pipeline events since our last earnings call. In September, we received FDA approval for Qulipta, the only oral CGRP specifically designed as a preventative treatment for migraine. We're very pleased with the label, which reflects Qulipta a strong benefit risk profile, and is supported by a robust clinical development program. In our registrational program, which evaluated Qulipta in nearly 2,000 patients suffering from episodic migraine, treatment with Qulipta resulted in a significant reduction in mean monthly migraine days compared to placebo. And approximately 60% of patients achieved at least a 50% reduction in the migraine days. We think these data compare favorably to other preventative migraine treatments on the market, and believe our new oral treatment option will be competitively positioned in the prevention market. Our migraine portfolio now includes Ubrelvy for acute treatment of migraine, Qulipta for preventative treatment of episodic migraine, and Botox for preventative treatment of chronic migraine. With this distinct portfolio, AbbVie is uniquely positioned to address the full spectrum of this complex and debilitating disease. This morning, we announced top-line results from two Phase 3 studies evaluating Vraylar as an adjunctive treatment in major depressive disorder. In the 301 study, a 1.5 milligram a day Vraylar dose met the primary endpoint demonstrating a clinically meaningful improvement in total MADRS score compared to placebo at Week 6 with a highly statistically significant p-value of 0.005. In this study, the 3 milligram Vraylar dose did not reach statistical significance, but it did show a clear trend toward improvement with a nominal p-value of approximately 0.073 at Week 6. In the second phase 3 trial, the 302 study, neither Vraylar doses met the primary endpoint of change in total MADRS score at week 6. But both the 1.5 and 3 milligram doses demonstrated clear trends toward a clinically meaningful benefit at weeks 2 and 4, with nominal P values less than 0.05 for a number of comparisons. Additionally, as a reminder, we had 1 prior positive registrational Phase 2B study where Vraylar demonstrated efficacy in MDD when added to ongoing antidepressant treatment. Based on precedent in the field and the totality of the data, we believe we have a viable regulatory pathway for Vraylar as an adjunctive treatment in major depressive disorder. We plan to engage with regulatory agencies to discuss these results and expect to spend our regulatory application to the FDA in the first half of next year. We also recently announced positive top-line results from a phase 3 study comparing our novel subcutaneous levodopa/carbidopa delivery system, ABBV -951 to oral levodopa/carbidopa in patients with advanced Parkinson's disease. In this pivotal study, treatment with 951 resulted in clinically meaningful improvements in on time without troublesome dyskinesia, as well as similar improvements in normalized off time compared to oral Levodopa or Carbidopa. We're very pleased with these results, which we believe support our view that 951 has the potential to become a transformative improvement to current treatment options for patients with advanced Parkinson's disease. We plan to submit our regulatory application next year with approval decisions anticipated in the U.S. and Europe in early 2023. And in Eye Care, we announced the partnership with REGENXBIO to develop and commercialize RGX -314, a potential gene therapy for the treatment of wet AMD, diabetic retinopathy, and other chronic retinal diseases. RGX-314 is a very attractive addition to our pipeline, and complements our Eye Care portfolio with a potential flagship product in retinal disease. REGENXBIO recently presented initial data from 2 Phase 2 studies evaluating RGX -314 in wet AMD and diabetic retinopathy, using in-office suprachoroidal delivering. While early, these results are encouraging, with RGX -314 demonstrating efficacy at the lowest dose. And the study showing that the drug and delivery method both appear to be well tolerated. Also, in eye care, we continue to expect approval for [Viewty] (ph) shortly, formerly known as AGN-190584 for the treatment of symptoms associated with Presbyopia. This once-daily eye-drop was developed to help address presbyopia that is often corrected through reading glasses. And once approved via convenient on-demand solution for patients with mild-to-moderate presbyopia who may not want to wear reading glasses. This has been a very productive year thus far for our R&D organization, and we anticipate several additional milestones in the coming months. We expect this momentum to continue into next year, which is looking to be a milestone filled year for AbbVie as well. With that, I'll turn the call over to Rob for additional comments on our third quarter performance and financial outlook. Rob." }, { "speaker": "Rob Michael", "text": "Thank you, Mike. As you have heard from Rick, Jeff, and Mike, we once again delivered outstanding performance this quarter, while also advancing our strategic priorities. Our results demonstrate the strong momentum of the business, and support AbbVie's long-term financial outlook. Turning to third quarter results, we reported adjusted earnings per share of $3.33 up 17.7% compared to prior year, and $0.13 above our guidance midpoint. This includes $0.05 from accelerated synergies, and $0.03 from mark-to-market equity gains. Total adjusted net revenues were $14.3 billion, up 10.8% on an operational basis, excluding a 0.5% favorable impact from foreign exchange. The adjusted operating margin ratio was 51.1% of sales, an improvement of 230 basis points versus the prior year. This includes adjusted gross margin of 83.2% of sales, adjusted R&D investment of 11.4% of sales, and adjusted SG&A expense of 20.6% of sales. Net interest expense was $585 million, and the adjusted tax rate was 12.6% as Rick previously mentioned, we are raising our full-year adjusted earnings per share guidance to between $12.63 and $12.67 reflecting growth of 19.8% at the midpoint. Excluded from this guidance is $6.34 of known intangible amortization and specified items. This guidance continues to contemplate full-year revenue growth of 10.7% on a comparable operational basis. At current rates, we now expect foreign exchange at a 0.7% favorable impact on full-year comparable sales growth. This implies a full-year revenue forecast of approximately $56.2 billion. Included in this guidance are the following updated full-year assumptions. We now expect Aesthetics global revenue of approximately $5.1 billion. We now expect international HUMIRA sales of approximately $3.3 billion. For IMBRUVICA, we now expect global revenue of approximately $5.5 billion, reflecting slower recovery of the CLL market. For Mavyret, we now expect global sales of approximately $1.7 billion. And we now expect Allergan expense synergies of approximately $1.8 billion. As we look ahead to the fourth quarter, we anticipate net revenue approaching $15 billion. At current rates, we expect foreign exchange to have a modest unfavorable impact on sales growth. We expect adjusted earnings per share between $3.24 and $3.28, excluding approximately $1.14 of known intangible amortization and specified items. Finally, AbbVie's strong business performance continues to support our capital allocation priorities. We generated $17 billion of free cash flow in the first 9 months of the year, and our cash balance at the end of September was $12 billion Underscoring our confidence in AbbVie's long-term outlook, today we announce an 8.5% increase in our quarterly cash dividend, beginning with the dividend payable in February 2022. And we remain on track to achieve $17 billion of cumulative debt paydown by the end of this year, with further deleveraging through 2023. This will bring our net leverage ratio to 2.3 times by the end of 2021, and approximately 2 times by the end of 2022. In closing, AbbVie has once again delivered outstanding results and our financial outlook remains very strong. With that, I will turn the call back over to Liz." }, { "speaker": "Liz Shea", "text": "Thanks, Rob. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, we'll take the first question." }, { "speaker": "Operator", "text": "Thank you Ms. Shea. Our first question comes from Geoffrey Porges with Leerink. Your line is open, sir." }, { "speaker": "Geoffrey Porges", "text": "Thank you very much. Rick, I guess I'll jump in with the big one that I think is still the overhang for the stock, which is the RINVOQ outlook. You have $15 billion out there for 2025 in combined SKYRIZI, RINVOQ forecast guidance. And I'm just wondering if you could give us a sense of the puts and takes. SKYRIZI doing really well but some overhangs for RINVOQ. Is that $15 billion still achievable, do you think you're trending above that, or do you have to make up a shortfall. Thanks." }, { "speaker": "Rick Gonzalez", "text": "Geoffrey, this is Rick. It's a great question. What I'd say is the following: If I look at SKYRIZI, I would say that SKYRIZI performance is very, very impressive. Jeff outlined what the in-play share is and what the total TRxs are and it's very close to the passing HUMIRA now, which in this short period of time is frankly a surprise, how quickly it has ramped. I think that's a very positive case. If I look at RINVOQ, actually the in-place share looks very good. Now, we would expect if the label gets changed and restricts the label to behind TNFs, that that will have some impact on the front line patients -- the naïve patients that we're capturing now. And so we will see that impact. Having said that, I would say that when I look at RINVOQ's performance overall and how durable it's been throughout this situation, we'll obviously shift more towards second line patients and beyond, which was originally in the plan, but the emphasis would have occurred a year or 2 later than this, where we would have driven that. We have very good data to be able to support that. The other thing I'd say is if you look at the indications that we have coming out for these two assets, we have AD, which is a very significant opportunity for us. We have PSA and is a very significant opportunity. But next year we have the IVD indications that are coming out. And I'd say there, when we gave the $15 billion forecast, the performance that was in our TPP or our target product profile that we had assumed, we have outperformed that in the clinical trials that we've submitted. And so I think that's a very significant opportunity for us, and a significant opportunity for us to outperform. Having said all of that, we don't want to reconfirm the guidance yet. We want to see what the final label looks like from the agency. And then we'll be in a position, I think, to come out and tell the investor community exactly what we think. The only other thing I'd say is, I think if you go back 5, 6 years ago, what we're trying to accomplish with the Company, we were basically trying to accomplish with the Company, build a set of assets that could ultimately significantly replace HUMIRA in the marketplace and be superior to HUMIRA. These 2 assets already are at $5 billion and growing very rapidly. So I think everything I know about these 2 assets, they'll be able to do exactly what we expect of them. Even in the most negative outcome from a label standpoint that we would expect. Second thing is we built a significant heme/onc portfolio, that when I look at the pipeline behind IMBRUVICA and VENCLEXTA I think there's a significant opportunity to drive significant growth in that portfolio. And then with the Allergan acquisition, I couldn't be more pleased. Aesthetics franchise is performing at an outstanding level, the neuroscience franchise is performing an outstanding level. I think migraine is a very significant opportunity for us to be able to drive, and eye care is another one. And so we now have multiple assets, and multiple portfolios to be able to drive the growth. And our goal is still what we described to the analysts early on, we expect to see the impact of the LOE on Humira in '23, and immediately be able to grow beyond that starting in '24, return to growth, sales growth at that point. And regardless of what happens with RINVOQ'S label, I have a high-level of confidence we can continue to do that. Rob, anything you’d add?" }, { "speaker": "Rob Michael", "text": "I would just add that obviously with the confidence we have and the dividend increase we announced today, we feel very strong about the long-term outlook. We haven't backed off on the high single-digit growth on 25 and beyond. You look at the portfolio we've assembled, you look at the assets we have today, you look at our pipeline, you look at the BD work we've been doing over the last couple of years, that was some nice licensing deals and we still feel very confident in the outlook for this business." }, { "speaker": "Geoffrey Porges", "text": "Great. Thank you." }, { "speaker": "Liz Shea", "text": "Thanks Geoffrey. Operator, next question, please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Andrew Baum with Citi. Your line is open sir." }, { "speaker": "Andrew Baum", "text": "Yes, thank you. Can you flip back to the other side of RINVOQ, SKYRIZI and just talk HUMIRA. Could you talk to your comfort level with where consensus currently has HUMIRA pegged and the anticipated scale and scope of the erosion? And then second, in relation to your ongoing Alvotech pending court case, could you just confirm whether if they prevail that would effectively invalidate the signed settlements with the other biosimilar players, meaning that you would have a number of players coming that much quicker onto the market with anticipated pricing volume impact. Thank you." }, { "speaker": "Rick Gonzalez", "text": "Okay. Andrew, this is Rick. So I will cover the second one, the Alvotech one. I'm going to have Rob cover the first one." }, { "speaker": "Rob Michael", "text": "We've seen movement in terms of consensus numbers since we've given just some direction on how to model it. I think right now, consensus in '23 sell-side consensus has about 41% erosion in the U.S. in '23. And we've said, think about it in terms of 45% based on what we saw in Europe in year 1, plus or minus 10% given the differences in the payer landscape in the U.S. versus other markets. So we have seen the Humira consensus move. Today, it's at 41%, so it's a lot closer than it was a year ago." }, { "speaker": "Rick Gonzalez", "text": "Okay, Andrew, this is Rick. I'll cover the Alvotech situation. As you know, we're in litigation with Alvotech. I think it's important to understand the nuances behind that litigation. In this first set of litigation, this first wave of litigation, we are basically applying 10 patents in HUMIRA. And as you know, we have a very robust patent portfolio around HUMIRA, but these 10 patents are both formulation patents and indication patents. Many of these patents were challenged through the IPR process and upheld by the patent office. I'll give you some idea of the strength of these patents. The first thing I'd say to you is, we have a high level of confidence that we will prevail in this litigation. There will be a second wave of litigation that occurs after that, which will bring into the portfolio the rest of the patents that we think Alvotech infringes. So there could be another phase of litigation that occurs after this one, but I can tell you we're highly confident that we will prevail in this first set of litigation based on the strength of those patents. To specifically answer your question, if they were to prevail, which I don't believe they will, then it would accelerate the other patent settlements. Yes, that is correct." }, { "speaker": "Liz Shea", "text": "Thank you, Andrew. Operator, next question, please." }, { "speaker": "Operator", "text": "Thank you. It comes from Chris Schott with JPMorgan. Your line is open, sir." }, { "speaker": "Chris Schott", "text": "All right, great, thanks so much. Just one quick follow-up on RINVOQ and the upcoming indications. I guess do you see a scenario where you are unable to get the drug approved in these pending indications particularly AD over the next few months, or is your review based on all the interactions, etc. that this is largely, I guess, a label and maybe a line of therapy discussion and decision with the agency? And my second question was on Botox aesthetics, a very healthy growth we're seeing here, we're now coming up against even some more normalized comps and you're still seeing the growth rate very, very healthy. Just -- are we still seeing catch-up usage in this, or is this just really underlying demand at this point. And just a little bit more color about just how you're thinking about the near-term growth trajectory. I know you talked about high single-digits over time, but just as you maybe look out to 22-23, could this remain a mid-teens type of growth rate product over that window. Thanks so much." }, { "speaker": "Rick Gonzalez", "text": "Mike." }, { "speaker": "Michael Severino", "text": "Okay. Thanks, Chris. This is Mike. I will take the first one, and then Rick will take the second part of your question. With respect to RINVOQ in the 3 new indications. So psoriatic arthritis, atopic dermatitis, and ankylosing spondylitis. We remain very confident in those files, and we remain very confident in approval decisions. The gating factor here is really getting to the specifics of the language around RA, which is a process that is well underway. And we would expect to be in a position to gain approvals after that is completed. And again, we hope that's completed in the near future, certainly this year. The psoriatic arthritis and atopic dermatitis filings, we would expect to follow fairly closely on the heels of that RA decision for ankylosing spondylitis. As I mentioned in my prepared remarks, we rolled in a new study, which is a positive study and a very strong study in ankylosing spondylitis into that submission. And so that one might be on a slightly different time-frame, but we remain very confident in that approval as well." }, { "speaker": "Rick Gonzalez", "text": "This is Rick. On Botox, I think one of the things when we first went through the integration process that was compelling to us was the amount of penetration in these markets and Allergan's ability to be able to reach out and touch consumers and activate those consumers. And that's part of what drove our decision globally to go with this fully integrated, totally dedicated Aesthetics organization. Because in many other markets around the world, although the data is not quite as good as it is here in the U.S., but in China as an example you see is very similar kinds of dynamics. And so focusing that team purely on Aesthetics was part of the effort here to be able to drive accelerated growth. The second was, when we looked at the ability to be able to use various methods to be able to activate consumers. We believe that the business was being underfunded in a way, both in the way it was being funded and the total amount that was being funded. And so we did some early work to determine whether or not that funding could drive incremental market growth, and it showed a positive result. And then when we saw that, we applied significantly greater funding to it. And what you're actually seeing now, I think, is we are driving the market. We're bringing more patients into the category, and obviously because we have the leadership position from a market share standpoint, we get the vast majority of those patients. Is there still some pent-up demand? I would tell you it's hard to believe at this point that there can be a lot of it, but there has to be some of it. Remember those practices reopened in the U.S. in the summer of 2020. That's a long time to have pent-up demand, but it's impossible to tell one way or another. I would say the majority of it is certainly being driven by us activating patients and retaining more patients. One of the other things we saw was the retention rate was relatively low once you activated a patient. And so we spent some time working with the team to figure out how could you retain those patients at a higher rate, meaning they repeat their procedures. They don't just do it once and then disappear, but they come back for a second procedure or plus going to fillers as an example. So the data is very clear. If you look at the U.S. as an example, toxins and fillers are growing high 30% of the market. We're growing at about the same rate, maybe a little bit lower on fillers but about that rate on toxins. When we look at globally, the overall brands are growing at about that rate. And so, I think this is a business that is sustainable over the long term. When we say across the decade high single-digits, obviously, if we keep this growth rates. The business is getting bigger and bigger. So therefore, the percentage will come down a bit. But I'd tell you, I'm very optimistic about this market, and our ability to be able to bring new assets into this market. They can change the standard of care going forward and us being able to drive market growth at the same time. It's a very good business." }, { "speaker": "Liz Shea", "text": "Thank you, Chris. Operator, we'll take the next question, please." }, { "speaker": "Operator", "text": "Thank you. That comes from Tim Anderson with Wolfe Research. Your line is open, sir." }, { "speaker": "Tim Anderson", "text": "Thank you. I wanted to ask a question on HUMIRA in 2023, I'm just really trying to nail down what's in that erosion guidance of 45% plus or minus 10. That's sales erosion, not volume, correct? I'm trying to think through what happens to the U.S. rebate stream in 2023, which is likely in the billions of dollars. Do you think you'll retain favorable formulae positioning even with biosimilars, in which case you keep paying that rebate, but you also would have less volume loss, or do you think it becomes disadvantage on formulary, in which case you pull back those billions of dollars in rebates, and that flows through the bottom-line. To me, I just wonder if your guidance on aversion is frankly too conservative or, I should say too aggressive because those rebate dynamics in the U.S., they make us a more durable market than ex-U.S. for those rebate dynamics don't exist." }, { "speaker": "Rick Gonzalez", "text": "Tim, this is Rick, maybe Rob and I will tag team this one. I'll start. I think the guidance we laid out of 45% or 48%, whichever is the latest number plus or -10%, is still guidance that we feel pretty comfortable with. To your point about, is the bulk of it priced? It is. Even if you look at the international market it's about 1/3, 2/3, or maybe slightly higher than that. I mean, 2/3 of its price, 1/3 of it is volume. And I would expect that we will maintain a significant part of the volume. Obviously, we don't talk publicly about what our manage care strategy is, but what I would tell you is we're close enough now to that 23 time-frame that you would expect us to be starting the work to ensure formulary access on all of our products, and certainly HUMIRA is one of those for 2023. And I think it is logical to assume that we will maintain that formulary position. And we've been pretty effective at doing that historically, so I believe will be pretty effective at doing it again. Rob, anything you want to add?" }, { "speaker": "Rob Michael", "text": "Just as a reminder. I mean, so we gave that and we're using Europe as an analog, but keep in mind that the U.S. system is very, very different. This is why we gave you a range. And so as we get closer to '23, obviously we'll give more specific guidance on the U.S. But we are communicating as more directional information based on the experience we saw with Europe. Keep in mind there were 4 biosimilars that came in the market at that time, and there will be more biosimilars coming to the U.S. markets. So there's a different level of competitive intensity, but also it's a very different payer landscape. So it's something to keep in mind." }, { "speaker": "Tim Anderson", "text": "Okay. Thank you." }, { "speaker": "Liz Shea", "text": "Thank you, Tim. Operator, next question, please." }, { "speaker": "Operator", "text": "Thank you. It comes from Gary Nachman with BMO Capital Markets. Your line is open, sir." }, { "speaker": "Gary Nachman", "text": "Thanks. Good morning. A couple on neuro that had some recent wins. So first on Vraylar the Phase 2 studies and MDD. In 1 study, you hit on the 1.5 milligram dose, but not the 3 milligram dose, it was close, but not statistically significant. Will that matter to the FDA, maybe you could remind us what those who sit in the previous Phase 3. And now that you have the full dataset, how do you think Vraylar will stack up competitively at the NDD space? And then just quickly on migrating, a little bit more how the initial launch has gone to lift, and how has that been rolled in to the Botox in UBRELVY offering, and just your confidence about the reimbursement you said going into the first half of next year. Thanks." }, { "speaker": "Michael Severino", "text": "Okay. This is Mike. I'll take the first part of your question, and then Jeff will take the second part of your of your question. With respect to Vraylar MDD, in the study that you described the 1.5 milligram dose medicine point and met it with a highly statistically significant P-value of 0.005, so 0005. And that's important in terms of strength of evidence overall and weight of evidence overall. And then as you point out, in the 3 milligram arm in that same study, we didn't hit significance, but we had a P-value that was very small. The nominal P-value is 0.073, if we around. When you look at that overall study to RA clearly shows an effect in NDD. Now, the second Phase 3 study that we just read out did not reach statistical significance for either dose group, but there were favorable trends and across a number of comparisons, there were nominal p-values that were quite small and many of them were out lower than 0.05. And I'll just remind the listeners that it's very common in depression studies, even with classes of medicines that have firmly established efficacy to have some study that read out positive and some studies that are negative. And so we think that overall package that we announced today is very strong. And it's also important to keep in mind that we did have a prior study that was conducted several years ago that was also positive that demonstrated a statistically significant effect. And that study -- look at different dosing, there were dose ranges that were studied in that trial with titration. It was the upper 2 of the dose ranges that was significant, but it did show both a clinically meaningful and significant benefit. So we have 2 positive studies and that's important because the way these studies are typically looked at is an overall weight of evidence, do you have a convincingly positive phase 3 study? And is there other evidence within the overall data package that is supportive and we feel comfortable that that is the case here. And lastly, what I'd say is, if you look at the precedent, and you look at other approvals, findings like the ones that we described on not a long time, and, in fact, that's the very common amongst approved agents in this space, including some of the more recent approvals in adjunctive NDD like resulting. So overall we think it is a strong package that has a viable regulatory pathway. And we will stack up very nicely to competitors. So we're going to begin those regulatory discussions shortly. So without I'll turn it over to Jeff." }, { "speaker": "Jeff Stewart", "text": "Yeah, thank you, Mike. Look, it's a meaningful opportunity for sure. When we look at the market sizes, about 60 million total prescriptions for the adjunctive MDD market. And that's very similar to the bipolar market that we operate in now, so it's a very meaningful opportunity for us. If you think about the -- what Mike was saying in terms of the competitive profile, I think we have to remember that while it's got a fairly low share, the -- Vraylar is very attractive, which is why it's the fasting growing agent. So the efficacy is viewed very, very nicely overall, and I think that if approved, this also has competitive efficacy of very gentle metabolic profile, minimal weight gain, very tolerable, and also very simple dosing for the psychiatrists and the primary care doctors that look at this. So when you start to see the potential for an agent like Vraylar that's got the full spectrum across bipolar disease in terms of mania, mixed episodes and depression. And then the adjunctive depression indication, if approved, it will be very attractive. So we anticipate a nice catalyst here and certainly a nice add to Vraylar's overall profile." }, { "speaker": "Gary Nachman", "text": "If you want to cover the second question." }, { "speaker": "Jeff Stewart", "text": "Yeah. Perfect. The second question you had was QULIPTA. And QULIPTA, its very early, we just introduced the product with our full commercial promotion. As I mentioned in my prepared remarks, we have now as of this quarter, a dedicated migraine sales force which shows you how important we think that this franchise is and what we can do with this franchise. So we have an entire sales team out there that is launching QULIPTA and now also focused on UBRELVY. And the early feedback has been very strong. What we hear qualitatively from our field and certainly from our research in the first few weeks of launch is, first, the simplicity and strength of QULIPTA for prevention. We see very, very nice response to our efficacy data, which is -- Mike has said before, and I've said before is on the very high end of preventative performance. So 60% of patients in our trials achieved greater than 50% reduction in migraine days, which is viewed as very significant. And almost 30% have a complete control. A 100% decrease in their migraine days. That's very compelling in terms of this Qulipta power. Also, physicians like the simple, everyday dosing, once a day. And so things are quite strong in terms of our early qualitative feedback. So we do obviously anticipate that the majority of our prescriptions will be bridged prescriptions until are -- we get the full ramp of our market access, which as I mentioned, we're quite confident by the first half of the year, we should ramp similar to Ubrelvy, where ultimately, as you remember, we achieved about a 90% access in the U.S. So quite good early feedback on the launch, and again we think that the 3 assets together are unique competitive positioning for AbbVie." }, { "speaker": "Liz Shea", "text": "Thank you, Gary. Operator, next question, please." }, { "speaker": "Operator", "text": "Our next question is from Matthew Harrison with Morgan Stanley. Your line is open, sir." }, { "speaker": "Matthew Harrison", "text": "Great, good morning. Thanks for taking the questions. I guess two for me. 1. If I could just follow up on CGRP, I'm curious, obviously, you have a different strategy than your competitor when it comes to the prophylactic market. I'm just wondering how you think where your source of the patients are going to come from. Are you expecting more transitions from injectables or do you think they're going to be more de novo patients, and if you could just talk about that a little bit. And then secondly, on REGENXBIO, could you just talk about your confidence in the data there. Obviously there was some inflammation there though it did seem self-limiting. I'm just curious how you think about that impacting the profile, because obviously in other gene therapy products in the eye inflammation has sometimes proven to be pretty significant as a long-term sequelae. Thanks." }, { "speaker": "Rick Gonzalez", "text": "Jeff lunge." }, { "speaker": "Jeff Stewart", "text": "Yeah, I'll take the first one, thanks. So in terms of the source of business, we think that QULIPTA is going to source business from 2 primary areas. First is, the big headache specialists, the big neurologists. We think absolutely from our research and feedback that you'll start to see an early trade-off of the injectable MABS in favor of the orals and certainly in favor of QULIPTA. I think that this is viewed as very attractive. In many cases, some people have spontaneously highlighted wow it looks like a very strong MAB in a single oral pill. So that's a source of business in terms of market share trade-off. I think the other insight that we have from the market is that we are going to a -- calling on a substantial amount of high prescribing primary care physicians who don't write a lot of MABS, but they certainly write a lot of generic topiramate and some other older agents. And so we also see that we have a unique opportunity in a wider audience to source from physicians that really don't lean towards the MABS because of the injectable nature of those, etc. So we think we're going to have a good balance between those two sources of business and that's quite attractive for us right now." }, { "speaker": "Michael Severino", "text": "This is Mike. I'll take the question regarding REGENX. We're very encouraged by the recent data. If we take a step back and look at the program overall, they have very strong efficacy data already demonstrated with sub-retinal delivery and that's in a lot of procedure. But it gives us clear proof-of-concept for the approach, and shows that we can get durable control. And that component of the program is already in Phase 3. And then the more recent data that were presented just about a month ago, several weeks ago, looked at suprachoroidal delivery. So that is a delivery method that can be done in-office. It's a specialized form of injection, but it is a form of injection. And that is also showing very good promise. We're already seeing signs of efficacy in the first cohort, which is the lowest dose cohort, which quite frankly is sooner than we expected to see them before that study had started to deliver results. And the tolerability is very good. If one looks at the inflammation that has reported in the [Indiscernible] trials, it's very different in its nature and its [Indiscernible] than that, that has been seen with other agents. It's principally anterior, chamber is exclusively anterior chamber, there's no vasculitis, no more significant inflammation. It is readily treated with topical steroids, and generally resolves without any difficulty, and in fact, quite rapidly. And it's also important to remember that there's no prophylactic steroids being used here. Other approaches have required that. So these are patients who have no prophylaxis upfront in responding to what's often a brief course of topical steroids. And the reason why there's no prophylactic steroids, given as they're just not felt to be needed given the very mild nature of the inflammation that's being observed. So we're very confident with it. And again, we feel it's qualitatively very different than what has been seen in other agents. And we've obviously talked to retinal specialists as well who are quite familiar with the program, and the views we've heard from them are supportive of what I just described." }, { "speaker": "Liz Shea", "text": "Thank you, Matthew. Operator, next question, please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Steve Scala with Cowen. Your line is open, sir." }, { "speaker": "Steve Scala", "text": "Thank you. I have a few questions, a couple of follow-ups. How would you describe the nature and the tone of conversations with FDA regarding RINVOQ's new label in RA, would you say you're pleased with how things are going, is the outcome unclear to AbbVie at this juncture, or is the outcome obvious sending in line with what the FDA had an it's statement in September? That's the first question. Second question: To my knowledge, Vraylar has shown superiority to placebo but not generics in MDD. How would AbbVie establish it as a leading MDD agent given the presence of lower cost alternatives? And then lastly, any thoughts on Soliton acquisition relative to its closing? Thank you." }, { "speaker": "Michael Severino", "text": "Okay. This is Mike. I'll start And then Rick will take the question regarding Soliton. With respect to the tone of conversations with the FDA for RINVOQ, I would describe them as productive. With respect to your question specifically about the RA label, those discussions are productive as well. I would assume the base case is what they announced conceptually back in early September, but we are working through the specifics of how that translates into labeling language. And I would characterize the discussions around the other indications as being very productive and very positive as well. And so as I mentioned earlier in this call, we remain very confident in the files for those new indications for all three of them. With respect to Vraylar, head-to-head superiority studies are not typically done in this space. They are very challenging. It is challenging to show an impact even with established classes period in major depressive disorder and particularly in this space, because this is the adjunctive treatment of major depressive disorder. So these are patients who aren't responding to the current therapies, and require an add-on and atypical antipsychotics with pharmacology similar to Vraylar, our one of the most commonly used agents in this space. So we think the very strong data that we have from the study that we described, and the fact that we have prior supportive evidence as well from the earlier study, will position it very well to be competitive in that marketplace." }, { "speaker": "Jeff Stewart", "text": "And Steve, it's Jeff. Just to build on Mike's point, if you think about the size of Vraylar now approaching $1.8 billion it has a 2.5 share in terms of the anti-psychotic market. It's a low share, high-value in growth area. When you think about most of our business is already stepped through in some cases one or two of the generics. The problem is that these patients are so fragile, they just don't respond well. We would still anticipate that with the new approval for MDD, you're still going to have step therapy and other approaches in the marketplace, but there is still a very nice commercial opportunity. That's just the way the markets work today." }, { "speaker": "Steve Scala", "text": "Alright, thanks." }, { "speaker": "Rick Gonzalez", "text": "So this is Rick, Steve. On Soliton, as you know, we obviously announced the -- our intention to acquire the Company and submitted it for approval. We did receive a second request. Maybe just to frame a bit why we're interested in this area. We tend to look at this market where the third major leg of the stool in a stage is body contouring. And this is a good fit with CoolSculpting, and CoolTones. Obviously, CoolSculpting is focused more on reduction of fat in targeted areas, and CoolTones more focused on the area of enhancing muscle tone in specific areas. This particular asset is designed to reduce cellulite. We don't have a position in cellulite now so there's not any kind of competitive overlap in that area. Having said that, we are responding to the FTC's inquiry. We believe that's going reasonably well, so we would expect this to be resolved at some point here in the future. I can't tell you a specific date, but I would expect it to have a positive outcome over a period of time here." }, { "speaker": "Steve Scala", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Thank, you, Steve. Operator, next question, please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Vamil Divan with Mizuho Securities. Your line is open." }, { "speaker": "Vamil Divan", "text": "Great. Thanks so much for taking my question. So just maybe 1 more just on Vraylar following up on the other comments. I think before you talked about it being as maybe sort of multi-billion-dollar type opportunity in MDD. Is that still the lines you're thinking now that you've seen the data that you've disclosed today? And then the second one, just going back to RINVOQ and obvious sounds like you're still pretty confident on that products outlook. But I'm just curious if that's changed any of your priorities hitting about business development, specifically in immunology? The need for maybe look at other oral agents that might be in development there, just so how you're thinking about the broader BD landscape there. Thank you." }, { "speaker": "Rick Gonzalez", "text": "Yes, Jeff." }, { "speaker": "Jeff Stewart", "text": "Yeah. I think if you look at the -- as I highlighted, that the market sizes are roughly the same. However, the competitive context is quite a bit different and the competitive set is a little bit different. So we view it again as an important incremental opportunity that even with low incremental share, that we can drive Vraylar to the -- that multibillion dollar guidance that we look at it. We do think it's an incremental catalyst, and an exciting approach if it were to be approved." }, { "speaker": "Michael Severino", "text": "So this is Mike. I'll take the Rinvoq question. So as you pointed out, yes, we are very confident in Rinvoq as a molecule overall. We've talked about the progress on the RA indication, and our confidence in the new indications, both those that are under review. And indications where we have data, but have not yet submitted like the IBD indications. And so we feel that it's going to be an important part of our portfolio, and the treatment armamentarium going forward. So having said that, immunology is always an area where we are scouring the landscape to look for the best opportunities. So I wouldn't say it's changed our focus in any way or changed our approach, but we will continue to look for novel therapies that can raise the bar on the standard of care. Across a number of areas, the current indications where we are already playing and new indications that have fewer treatment options, areas like lupus and scleroderma. So the RINVOQ situation has not changed that strategy in anyway." }, { "speaker": "Liz Shea", "text": "Thanks, Vamil. Operator, we'll take the next question, please." }, { "speaker": "Operator", "text": "Thank you. It's from Ronny Gal with Bernstein. Your line is open, sir." }, { "speaker": "Ronny Gal", "text": "Good morning and thank you for taking my questions. I've got a clarification and then a couple of questions. First, Rick, you mentioned regarding Alphatec about the acceleration clauses. And I just want to clarify if this is on District Court decision or appeal, given the timing it actually makes quite a bit of difference. Then the two questions I have first are interchangeability for HUMIRA. Do you think this will matter in the marketplace? We are hearing different things from the large payers. What is your take here and what is going to be AbbVie's position about this? And the second question is, the last draft we've seen from this year regarding the infrastructure bill does not include a reduction of out-of-pocket costs in Medicare. We're still hearing from context, this still might be the case if it's still included. If you can comment on this issue, do you expect it to be included, and the impact it might have on AbbVie's business." }, { "speaker": "Rick Gonzalez", "text": "So Ronny, this is Rick. On Alvotech, obviously these agreements that we have with the other biosimilar players are confidential, I'm not going to delve into some of the specifics around those. What I can tell you is what I said before. I mean, we are highly confident in our position with this IP. This IP has been challenged multiple times and we have a high degree of confidence that we will prevail. So I think it's obviously a hypothetical scenario, but I don't -- I wouldn't give it a lot of merit. Second on interchangeable HUMIRA s as we've discussed previously, when we built the erosion model that we described a couple of years ago, or certainly a year-and-a-half or so ago, we did assume at that point that they were going to be 2 interchangeable biosimilars. It does matter from a pricing standpoint to some extent. So I think it will have an impact but it's consistent with what we had assumed. And so we've essentially taken that into consideration in the forecast that we provided you, and the estimates that we provided you. On drug pricing in the U.S., I would say it's a very fluid situation. It's a little difficult to truly understand exactly where we are. You are correct, if you look at this framework that came out yesterday [Indiscernible] talked about repeal of the rebate rule being eliminated. And it didn't talk about much else. Look, the things that we're focused on and things that we think would make a difference on our out-of-pocket costs for patients, and making them lower for Medicare patients, making them something that they can spread over a period of time -- a 12-month period of time to make the cash flow easier to deal with. And as we've said before, we think industry will play a role in that as one of the participants. And we would hope that we will get back to that, because I think -- we think that is the most fundamental issue is reducing the out-of-pocket costs for these patients." }, { "speaker": "Liz Shea", "text": "Thank you, Ronny. Operator, next question, please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Geoff Meacham with Bank of America. Your line is open, sir." }, { "speaker": "Geoff Meacham", "text": "Great. Hey guys. Thanks so much for the question. I just have 2 quick ones, and probably for Mike. The follow-up on Rinvoq. I know it's been asked a lot, but you have a number of labeling scenarios that could play out just with respect to dose, or TNF requirement, or language on black box, or any maybe -- any limit on duration. Is there one of those items that has more of an impact than the others. I'm just trying to think about what informs your assumptions. The second question on cystic fibrosis. When you look to the upcoming proof-of-concept data readout, is there a minimal effect size, or profile that you're looking for that would justify moving to a larger scale Phase 3. Thanks so much." }, { "speaker": "Michael Severino", "text": "I will take the RINVOQ question first and then make some comments on CF. What I would say about RINVOQ is our assumptions around the labeling at a base case are based on what the agency announced in their safety communication in September. That principally updates to the black box warnings that all of these agents have in fact all agents in immunology have some degree of this. They treat similar conditions to RINVOQ, for example, the TNS have some of the same but not all of the same warnings. Updating that section label is part of our base case and then the restriction that the agency described for certain patients around TNF inadequate response forms our base case. And those are the two factors that we're considering. We would not anticipate any limit into ration of therapy, for example. And the question those principally applies to the atopic dermatitis file, because we have just a single dose in the other files, in the files that are in the rheumatology space. And we feel confident about both doses in terms of the benefit risk that we've demonstrated in that atopic dermatitis program. It's really those two dimensions and how those translate into specific language in RA. And then of course, how they translate to the other indications, because TNFs are not the standard of care in all indications, they are not used in atopic dermatitis. So then it's how do those concepts get translated into the label in other indications. Those are the principal dimensions that we're looking at when we think about those programs. And again, we feel very confident in the files that we've put forward, and feel very good about how discussions have gone to date. With respect to CF and what we're looking for, we're looking for something that has demonstrated benefit compared to what's already out there, what will be out there at the time our agents come to market. Obviously the principal competitor, the only group with a marketed product right now in this space is Vertex so that's what we would be benchmark ourselves against. I would say at an absolute minimum, you'd have to have efficacy that was just as good with other meaningful advantages. But what we're striving for is something that has an efficacy advantage of a small number of absolute FEV1 points. A small number of absolute FEV1 points might not sound like much, but it can translate into real benefit for patients in this disease." }, { "speaker": "Liz Shea", "text": "Thank you, Jeff. Operator, next question, please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Luisa Hector with Berenberg. Your line is open, ma'am." }, { "speaker": "Luisa Hector", "text": "Thank you. Good morning. And sorry. I still have a couple more on RINVOQ. I just wanted to understand whether the label updates in RA and then the approvals in the new indications can essentially all happen on the same day? Or is the gating item the RA update? And then there's still a bit more work to be done for the new indications. And then looking on to the UC filing. Is the acceptance of that filing in any way dependent on the RA label being resolved first or that's free to be accepted as a filing while the label update is still outstanding? Thank you." }, { "speaker": "Michael Severino", "text": "This is Mike. I'll take those 2 questions. So with respect to the ongoing reviews, what I would say is the discussions around the RA label update, and the new indications that are under our review are going on simultaneously. And there is some level of interdependence. In other words, we need to understand where the RA label will land, because some of those elements, like the warnings and precautions, will translate over to the other indications because in the U.S. you get 1 label for the molecule that applies across all of the indications. So there's some interdependency, that's why getting the RA label update resolved is a gating factor. Whether it could happen on the same day or in close succession, I think it's too early to call with that fine level of detail, but we would expect the psoriatic arthritis and atopic dermatitis filings to follow in a very reasonable time-frame after that label update. As I mentioned, we're adding new data to the ankylosing spondylitis submission, which is the smallest of the three indications. And so that one might be on a slightly different time-frame as the agency reviews those new data. With respect to the SEC filings, the RA label update is not on critical path to file acceptance. What the agency looks at when they look at file acceptance is, have you provided sufficient data for them to evaluate the file, is it in an appropriate format that they can review, are there any significant deficiencies. And of course, we're very confident in the file that we've submitted, so we would not in any way anticipate any challenges there. And the RA safety label update is not a gating factor for that file acceptance." }, { "speaker": "Liz Shea", "text": "Thank you, Luisa. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Chris Raymond with Piper Sandler. Your line is open." }, { "speaker": "Allie Braculon", "text": "Hi, good morning. This is Allie Braculon for Chris. Thanks for taking the question. So on ABBV -951 and Parkinson's, we're just hoping you could put some of those safety findings from the Phase 3 trial in context, particularly the imbalance in hallucination psychosis and the 22%, I think, treatment discontinuation rate. Basically, just how did that safety profile stack up against your expectations and how could this translate into real-world use of 951. Thanks." }, { "speaker": "Michael Severino", "text": "So this is Mike. I'll take that question. With respect to the data for 951, we're very pleased with the data. There is very strong efficacy, and the safety is within our expectations, it matches our expectations across essentially all important areas. What's important to keep in mind is this agent delivers transformative benefit to patients who have extremely difficult to control Parkinson's disease through other measures, and to have a very, very difficult time controlling their disease. For example, with orals or with other approaches. And so the overall picture has to be looked at in that context. With respect to treatment discontinuations, what I would say is the treatment discontinuations, The rate of that overall is very similar to what you see with similar devices with insulin pump like devices used across a range of conditions. Most of these were driven by either local tolerability issues like injection site reactions, which were principally erythema or technical usability issues because these are older patient populations with limited mobility and dexterity in many cases, and there's always a subset of patients who find that they have difficulty using any device under those circumstances. Again, those rates of discontinuation are very similar to what you see with similar insulin pump-like devices. And keep in mind this is a very, very large population. This advanced Parkinson's population, only a very small proportion of which currently get advanced treatments because it's so limited in how that can be delivered. We think there's a big opportunity here and that treatment discontinuation rate doesn't change that and is in line with our expectations. With respect to hallucinations. We know that that is on mechanism. Or Levodopa and Carbidopa and it's essentially evidenced that we are delivering Levodopa and Carbidopa in a way that's more effective than can be done through other methods. And it's something that can be titrated and something that can be managed. And what I would point to is in the other direction. The oral group, the control group that got oral Levodopa and Carbidopa had more falls. And that to our eye shows a lower degree of control, which matches the clinical efficacy data, because we know falls are common in Parkinson's disease patients. So we need to keep that in mind. And with the efficacy that we've delivered, we think these are all very attractive profiles and ones that will translate into significant real-world use. When we look at how this will impact overall use, again and keep in mind that the very broad population, only a very small segment which can access the therapies that they need to control their disease. Therapies like DUOPA, which is transformative, that takes us surgical gastric tube actually threaded into the small bow to get deep brain stimulation and other types of measures. This is a much less invasive approach that delivers very strong efficacy and we think that will translate very, very effectively into the real world." }, { "speaker": "Liz Shea", "text": "Thanks, Allie. Operator, we have time for 1 final question." }, { "speaker": "Operator", "text": "That will come from Josh Schimmer with Evercore ISI. Your line is open, sir." }, { "speaker": "Josh Schimmer", "text": "Thanks for squeezing me in. Can you talk about the current contracting season with payers for Humira, and whether you think you'll be able to lock in multi-year contracts either now to extend to 2023, or next year to extend to 2024. And then I'm surprised you're not more bullish with your guidance for the migraine franchise, given the strong trajectory it's on already. Any reason to think there's going to be a significant plateau in the years ahead. Thank you." }, { "speaker": "Jeff Stewart", "text": "Yes. Hi, it's Jeff. So typically, when -- we start to negotiate with the payers in the spring of the year for the following year. And typically those contracts can be multiyear contracts, maybe 2-year contract. So really that's the season where we'll have as Rob and Rick said, we'll have probably some more guidance over how things are shaping up for '23 and possibly '24 depending on the posture of the payers and how those things work out. So we're not quite there yet. I think that what I can say is we're quite confident based on the timing that I described in terms of general cycles, in terms of where we're going to be for our portfolio certainly in '22. In terms of QULIPTA, look, we are off to a very good start. I can tell you that UBRELVY continues to run a pace, that total oral CGRP market is upwards of maybe 18% of new prescriptions. And it's still early and that would be us and neurotech in the acute segment. And at a theoretical peak level, you could see maybe 30% or 40% based on cardiovascular issues with Triptan's or some other issues. But we still have clear -- clearly some runway to go. It's probably a little early to sort of determine how that preventative segment will really grow because you've only seen really the MABS so far. They certainly tripled the market size. How will both of these orals and particularly in oral like QULIPTA in terms of the market development run a pace? It's encouraging for sure, particularly, if you have all 3 of these agents in the market and the investment behind it. Right now though we feel quite comfortable with the billion-dollar opportunity for both of the orals." }, { "speaker": "Liz Shea", "text": "Thanks, Josh. And that concludes today's conference call. If you would like to listen to a replay of the call, please visit our website at investors. abbVie.com. Thanks again for joining us." }, { "speaker": "Operator", "text": "This does conclude today's conference call. We thank you all for participating. You may now disconnect and have a great rest of your day." } ]	AbbVie Inc.	141,885,706
ABBV	2	2,021	2021-07-30 09:00:00	Operator: Good morning. Thank you for standing by, and welcome to the AbbVie's Second Quarter 2021 Earnings Conference Call. All participants will be able to listen only until the question-and-answer portion of this call. [Operator Instructions] I would now like to introduce Ms. Liz Shea, Vice President of Investor Relations. Ma’am, you may proceed. Liz Shea: Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Vice Chairman and President; Rob Michael, Executive Vice President and Chief Financial Officer and Jeff Stewart, Executive Vice President, Commercial Operations. Joining us for the Q&A portion of the call is Laura Schumacher, Vice Chairman, External Affairs Chief Legal Officer and Corporate Secretary. Before we get started, I remind you that some statements we make today may be considered forward looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today's conference call non-GAAP financial measures will be used to help investors understand AbbVie’s business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Unless otherwise noted, our commentary on sales growth is on a comparable basis, which includes full current year and historical results for Allergan. For this comparison of underlying performance all historically reported Allergan revenues has been recast to conform to AbbVie’s revenue recognition accounting policies, and exclude the divestitures Zenpep and Viokace. References to operational growth further exclude the impact of exchange. Following our prepared remarks, we'll take your questions. So, with that, I'll now turn the call over to Rick. Rick Gonzalez: Thank you, Liz. Good morning, everyone, and thank you for joining us today. I'll discuss our second quarter performance and outlook. And then Jeff, Mike and Rob will do our business highlights, pipeline progress and financial results in more detail. AbbVie delivered another excellent quarter with adjusted earnings per share of $3.11, exceeding the midpoint of our guidance by $0.04. Total adjusted net revenues of nearly $14 billion were up 19.3% on a comparable operational basis, approximately $375 million ahead of our expectations. These results demonstrate our strong and balanced performance across each of our major growth franchises, including double-digit comparable operational revenue growth from immunology, hem/onc, neuroscience and aesthetics. Looking at the most recent trends, the vast majority of our portfolio is well into the recovery phase from the pandemic. In immunology, we continue to see strong recovery across the room, derm and gastro segments with positive trends across all key indicators, including new patient starts. SKYRIZI and RINVOQ continue to ramp nicely in their initial indications, with both products demonstrating robust double-digit sequential revenue growth. In neuroscience, Vraylar is demonstrating strong new prescription volume in the atypical antipsychotic market and the launch of Ubrelvy, the leading oral CGRP for acute migraine continues to exceed our expectations. Aesthetics continues to perform well above pre-COVID levels exceeding our internal expectations. We're pleased with the rapid market growth in both toxins and fillers, driven by our increased promotional resources globally, brand strength and COVID-related pent-up demand. Rapid global market demand is expected to remain well above historical levels in the near to medium-term and we are raising our full year guidance once again for aesthetics. While the recovery across the AbbVie portfolio is going very well in aggregate, in certain disease areas like CLL and HCV, we continue to see a residual impact from the pandemic. We expect these specialty areas to further recover as the year progresses. One of AbbVie’s greatest strengths is the dedication and engagement of our people. Across AbbVie, the majority of our employees have safely returned to the workplace. And our field teams are now predominantly conducting live engagements with physicians and customers, where protocols and guidelines permit. I'm extremely proud of the teamwork and collaboration our people have demonstrated throughout this pandemic, to bring our medicines to patients and keep our business performing at a strong level. As an organization, we have also made a tremendous amount of progress with the Allergan transaction and integration. We just recently completed our first full year as a combined company, which I'd say has gone exceptionally well. We're tracking well against the operational and financial commitments we outlined at the time of the transaction, with a crucian performing above our original projections. But I'm particularly pleased with the robust revenue performance that we've been able to drive since acquiring Allergan. With 2021 sales tracking to grow significantly faster than legacy Allergan’s historical performance. Our results continue to show that we have created a stronger and much more diverse company with numerous products within our newly combined portfolio delivering robust growth. Based on the continued strong momentum of our business in the quarter and our progress year-to-date, we are once again raising our full year 2021 EPS guidance. We now expect adjusted earnings per share of $12.52 to $12.62, reflecting growth of 19% at the midpoint. Our strong performance allows us to continue to fully invest in the business for long-term growth. As you'll hear from Mike momentarily, we continue to make excellent progress across all stages of our research and development programs. In closing, I'm extremely pleased with our performance in the quarter and with our continued strong momentum of the business, which has positioned as well for the remainder of 2021 and many years to come. With that, I'll turn the call over to Jeff for additional comments on commercial highlights. Jeff? Jeff Stewart: Thank you, Rick. I'll start with immunology, which delivered global revenues of more than $6.1 billion, reflecting growth of 13.8% on an operational basis. SKYRIZI and RINVOQ continue to have significant impact on AbbVie’s growth and performance, contributing more than $1 billion in combined sales this quarter. SKYRIZI global revenues were up 17.4% on a sequential basis, reflecting increasing market share globally. In the U.S., SKYRIZI continues to perform well and has maintained its leading in-play psoriasis patient share, which includes both new and switching patients at approximately 34%. SKYRIZI’s total prescription share capture is now approaching 20%, second only to Humira. Internationally, SKYRIZI has achieved in-play patient share leadership in 13 markets, including Canada, France and Japan. RINVOQ is also demonstrating robust growth with global sales up nearly 25% on a sequential basis. We continue to see in-play patient share of approximately 15% in the U.S. RA market, where physician and patient feedback remain very positive on RINVOQ’s strong benefit risk profile. Internationally, RINVOQ access and share continue to ramp nicely in RA, with in-play market leadership now in half a dozen key countries. We are also making excellent progress with the regulatory approval and commercial launch of PSA and AS across several OUS countries. And we look forward to the approval and commercialization of RINVOQ in atopic dermatitis later this year following the recent CHMP positive opinion for both the 15-milligram and 30-milligram doses. Humira global sales were approximately $5.1 billion, up 3.6% on an operational basis, with continued high single-digit revenue growth in the U.S., offset by biosimilar competition across the international markets, where revenues were down 12.6% on an operational basis. In hematologic oncology, sales were approximately $1.8 billion, up 13.2% on an operational basis. AbbVie maintains a strong leadership position in CLL with a combined portfolio, including both Imbruvica and Venclexta, new patient share of approximately 42% and total patient share of approximately 72% across all lines of therapy. Imbruvica global revenues were approximately $1.4 billion, up 7.2%. In the U.S., performance continues to be impacted by lower new patient starts in CLL, which remain below pre-COVID levels as well as increasing competitive dynamics from newer therapies, including Venclexta and other BTK inhibitors. Venclexta sales increased 38.3% on an operational basis with strong demand across all approved indications. We're particularly pleased with the performance in AML with robust share in the U.S. and increasing momentum internationally following recent approvals in the EU and Asia. In neuroscience, revenues were more than $1.4 billion, up 29.6% on a comparable operational basis. We continue to see strong momentum with Vraylar, which recently achieved multiple all-time highs in weekly prescriptions and market share. Vraylar revenues of $432 million were up more than 25% on a comparable operational basis. And Ubrelvy once again delivered robust results. Sales of our leading acute migraine treatment were $126 million, exceeding our expectations. Feedback from physicians remains very positive, highlighting Ubrelvy’s rapid and sustained pain relief, safety, convenient and flexible dosing profile and overall commercial access. Ubrelvy is now capturing roughly 9% of new prescriptions in the large acute migraine market, with more than 1 million cumulative total prescriptions since the launch. We continue to believe there is substantial room for long term growth in this rapidly expanding acute market based on unmet need and strong patient demand. In migraine prevention, we've also been planning and preparing for the forthcoming regulatory approval and commercial launch of Atogepant, our oral CGRP for episodic migraine. We're very encouraged with the efficacy profile of Atogepant, including reduction in migraine days versus placebo, as well as the overall percentage of response rates in patients. Now the launch of Atogepant will be supported by our existing migraine sales force with commercial access expected to ramp strongly, we remain on track for a U.S. regulatory decision in September. Botox Therapeutics continues to perform well across nearly a dozen medical indications, with a total sales of $603 million, up more than 38% on an operational basis. In chronic migraine, Botox Therapeutic remains a foundational prevention treatment, and the clear branded leader in new patient starts. Lastly, in our other therapeutic areas, we saw significant contribution from eyecare, which had revenues of $919 million, up 24.1% on a comparable operational basis. Mavyret sales were $442 million, up 13.9% on an operational basis, although treated patient volumes remain suppressed versus pre COVID levels. And we also saw double digit comparable operational revenue growth for both Creon and Linzess. So, overall I'm pleased with the momentum of our therapeutic portfolio, which is demonstrating a strong recovery as well as our progress with new recent product launches. And with that, I'll turn the call over to Mike for additional comments on our R&D programs. Mike? Michael Severino: Thank you, Jeff. I'll start with immunology where we had several notable pipeline events in the quarter. In the area of inflammatory bowel disease, we reported positive top line results from the Phase 3 maintenance studies for RINVOQ in ulcerative colitis, and SKYRIZI in Crohn's disease. In the RINVOQ UC maintenance study, both the 15 and 30 milligram doses met the primary and all secondary endpoints at week 52. In the induction portion of the program, RINVOQ demonstrated a very strong impact on the disease. And the results from this maintenance study demonstrate that patients continuing treatment with RINVOQ maintain high levels of clinical remission, clinical response and endoscopic improvement at the one-year mark. In fact, maintenance treatment with either dose of RINVOQ resulted in some of the highest rates of remission and endoscopic improvements seen in UC clinical studies. With the 30 milligram RINVOQ dose 52% of patients achieved clinical remission, 62% achieved endoscopic improvement, 49% achieved histologic endoscopic mucosal improvement, and 68% achieved steroid free remission. We are very pleased with how RINVOQ performed from a safety perspective as well. In this maintenance study, the exposure adjusted event rates for overall adverse events including serious and severe events were higher in the placebo group than in either RINVOQ dose group. Additionally, the exposure adjusted rates for MACE, VTE and malignancies, excluding non-melanoma skin cancer were comparable between RINVOQ groups and placebo. These results provide further evidence that RINVOQ has the potential to become a highly effective therapy for patients with moderate to severe ulcerative colitis. We're also nearing completion of the Crohn's disease program for RINVOQ and expect to see data from the first Phase 3 induction study later this year. Results from the second induction study and the maintenance study are expected in the first half of next year, with regulatory submissions also anticipated in 2022. We also saw very impressive results from SKYRIZI in the maintenance phase of our Crohn's disease program, particularly with the 360 milligram maintenance dose, which met the co-primary endpoints of clinical remission and endoscopic response versus the withdrawal arm at week 52. Importantly, when we look at the most stringent endpoints, we see strong separation between SKYRIZI 360 milligrams and control with the response rates of 39% for endoscopic remission, and 29% for deep remission, compared to 13% and 10% for the withdrawal group at week 52. We remain on track to submit our regulatory applications for RINVOQ in UC and SKYRIZI in Crohn’s in the coming months. In the quarter, we also announced updates regarding our regulatory applications for RINVOQ in atopic dermatitis, psoriatic arthritis and ankylosing spondylitis. In June, RINVOQ received a positive CHMP opinion in Europe recommending both the 15 milligram and 30 milligram doses in moderate to severe atopic dermatitis. This CHMP opinion puts us on track for European approval in August. When approved atopic dermatitis will be the fourth indication for RINVOQ in Europe. Regarding our supplemental NDAs in the U.S., we recently announced that we were notified by the FDA that they would not need our PDUFA action dates for RINVOQ in psoriatic arthritis, ankylosing spondylitis, and atopic dermatitis, which were in late June for psoriatic arthritis and AS and mid-July for atopic dermatitis. The agency cited their ongoing review of the tofacitinib ORAL surveillance study indicating that they needed more time to complete their reviews of the data. The FDA has not requested any additional safety analyses for RINVOQ since the PDUFA dates were missed. While there are no new action dates, based on our discussions with the agency, we expect decisions on our regulatory applications in the next few months. Following completion of the agency's review of the tofacitinib ORAL surveillance data. We remain confident in the benefit risk profile for RINVOQ across all indications. And we'll continue to work with the FDA to bring RINVOQ to market in these new disease areas. In our early-stage immunology pipeline, we recently began two new trials for ABBV-154 our TNF-steroid conjugate. We initiated a definitive dose ranging study in patients with RA and also started our Phase 2 study in polymyalgia rheumatica. Later this year, we expect to begin the Phase 2 study for 154 in Crohn's disease. Also in the quarter, we completed the induction stage of a Phase 2 proof-of-concept study evaluating ravagalimab in ulcerative colitis patients. While this CD 40 antagonists demonstrated greater efficacy compared to historical control, the efficacy results did not meet our prespecified criteria. As a result, we will not be advancing ravagalimab in ulcerative colitis. In oncology, we continue to make good progress across all stages of our pipeline. At the recent ASCO and EHA meetings, data were presented from the GLOW and CAPTIVATE studies evaluating a Fixed Duration Imbruvica and Venclexta regimen in CLL patients. Results from these two studies demonstrated that the all oral Fixed Duration Imbruvica plus Venclexta regimen has the potential to provide deeper and more durable remission and extends progression free survival as a frontline treatment across the spectrum for the age and fitness status for CLL patients. We plan to submit these data to regulatory agencies and look forward to bringing this new Fixed Duration treatment option to CLL patients once approved. Earlier this month, we received a breakthrough therapy designation for Venclexta in combination with azacitidine for previously untreated higher risk MDS patients, based on the strong data demonstrated thus far in our ongoing Phase 1b study. We expect to see final results from this study in the coming months and plan to discuss the data with regulators regarding the potential to support an accelerated approval for Venclexta in MDS. Also in the quarter, we saw interim results from a Phase 1 study evaluating the BCMA CD3 bispecific antibody TNB-383B in multiple myeloma patients who have received at least three prior lines of therapy. 383 performed very well as a monotherapy in these heavily pretreated patients, demonstrating an objective response rate of nearly 80% and a very good partial response or better rate of 63% and a complete response rate of nearly 30% at doses greater than 40 milligrams in the dose escalation cohort. Based on these promising results, we exercise our right to acquire TNB-383B from Teneobio. We expected the transaction to close in the coming months, and we’ll provide more information on our development plan for 383 in multiple myeloma later this year. This is a highly competitive area. But based on the data to-date, we believe this BCMA CD3 bispecific has the potential to be differentiated on efficacy, safety and dosing interval and could be best in class as both a monotherapy and combination therapy across lines of treatment in multiple myeloma. We continue to make good progress with navitoclax program in myelofibrosis, which consists of randomized Phase 3 trials in both the frontline and relapsed refractory setting, as well as a single arm Phase 2 study. Based on feedback from the FDA, we intend to submit our regulatory application with randomized Phase 3 data together with the Phase 2 trial results. We expect the Phase 3 data readout and regulatory submissions in the second half of 2022 with navitoclax approval in myelofibrosis anticipated in 2023. In neuroscience, we recently completed the Phase 2 proof of concept studies for two assets, elezanumab in multiple sclerosis and ABB-8E12 in Alzheimer’s disease. In the respective studies either assay meet the efficacy endpoints of the trial. And we will be discontinuing the development of elezanumab and MS and 8E12 in Alzheimer's disease. Given the enormous unmet need in Alzheimer's disease, we remain committed to finding disease modifying therapies. And we continue to pursue a range of approaches. We have several additional programs that are either in the clinic today or are in preclinical development. These include programs that modulate the neuroinflammatory response in Alzheimer's disease, such as our TREM2 and CD33 programs that are both in clinical development and programs that target pathologic tau through novel mechanisms, such as approaches that target intracellular aggregates for clearance that are in preclinical development. Following the accelerated approval of aducanumab in the U.S., there has been an increased focus on a-Beta directed programs. We have monitored this area closely over the last several years. And based on all of the available data, we believe there is a continued opportunity for an a-Beta directed monoclonal antibody that clears plaque more rapidly than existing agents with a reduced risk of amyloid related imaging abnormalities or area. We have profile the number of a-Beta antibodies preclinically. And we have a candidate with the potential to meet these requirements. We expect to introduce this candidate into the clinic by the end of this year or early next year. Also in neuroscience, we're nearing completion of our registrational program for a ABBV-951 in advanced Parkinson's disease. We recently completed an interim analysis in the first of two Phase 3 studies where our subcutaneous Levodopa Carbidopa delivery system demonstrated safety and efficacy, comparable to DUOPA after six months of treatment. The primary objective of this trial was safety, but efficacy was also evaluated as secondary endpoints. In this analysis, 951 performed very well, demonstrating a 52% reduction in normalized off time, and a 41% increase in normalized on time without troublesome dyskinesia. Patients also benefited from 915s 24 hour continuous Levodopa Carbidopa infusion, with patients experiencing substantial benefits in sleep and reduction in mourning off time. Full data from this six month interim analysis will be presented at a medical meeting later this year. Data from a second Phase 3 study are expected in the fourth quarter with our regulatory submissions anticipated later this year, or early next year. And lastly, in eyecare at the recent meeting for the American Society for cataract and refractive surgery, we presented results from the Phase 3 Gemini 1 study evaluating our topical eye drop AGN-190584 for the treatment of symptoms associated with presbyopia. In this study, 584 demonstrated improved near vision without impacting distance vision, with a rapid onset of action within 15 minutes, and sustained vision improvements for up to six hours. 584 has the potential to be convenient, on demand solution for patients with mild to moderate presbyopia, and we look forward to an approval decision later this year. So, in summary, we've made great progress with our pipeline in the first half of this year. And we look forward to several additional data readouts, regulatory submissions and approvals throughout the remainder of 2021. With that, I'll turn the call over to Rob for additional comments on our second quarter performance and financial outlook. Rob? Rob Michael: Thank you, Mike. Starting with second quarter results, we reported adjusted earnings per share of $3.11 up 32.9% compared to prior year and above our guidance midpoint. Total adjusted net revenues were nearly $14 billion 19.3% on a comparable operational basis, excluding a 1.6% favorable impact from foreign exchange. The adjusted operating margin ratio was 49.7% of sales, an improvement of 260 basis points versus the prior year. This includes adjusted gross margin of 82.2% of sales, adjusted R&D investment of 11.3% of sales and adjusted SG&A expense of 21.2% of sales. Net interest expense was $606 million, and the adjusted tax rate was 12.6%. As Rick previously mentioned, we are raising our full year adjusted earnings per share guidance to between $12.52 and $12.62, reflecting growth of 19% at the midpoint. Excluded from this guidance is $6.48 of known intangible amortization and specified items. This guidance now contemplates full year revenue growth of 10.7% on a comparable operational basis. At current rates, we now expect foreign exchange have 0.9% favorable impact on full year comparable sales growth. This implies a full year revenue forecast of approximately $56.3 billion. Included in this guidance are the following updated full year assumptions. We now expect aesthetics global revenue of approximately $4.9 billion, including approximately $2 billion from Botox Cosmetic, and approximately $1.4 billion from Juvederm. We now expect Restasis sales of approximately $1.1 billion and assume no generic competition in 2021. For Ubrelvy, we now expect sales of approximately $500 million. For women's health, we now expect global revenue of approximately $900 million. And for Mavyret, we now expect global sales of approximately $1.9 billion. Looking at the P&L for 2021, we are now forecasting adjusted R&D investment of approximately $6.7 billion and adjusted SGA expense of approximately $11.9 billion. All other full year assumptions remain unchanged. As we look ahead to the third quarter, we anticipate net revenue of approximately $14.3 billion. At current rates, we expect foreign exchange to have 0.5% favorable impact on comparable sales growth. We expect adjusted earnings per share between $3.18 and $3.22, excluding approximately $1.64 of known intangible amortization and specified items. Finally, we continue to make great progress on our Allergan transaction commitments. We are exceeding our revenue expectations in several areas, including Botox, Vraylar, Ubrelvy and eyecare. We've also delivered expense synergies of almost $800 million during the first half of this year, and are on track to deliver synergies of approximately $1.7 billion in 2021 and greater than $2 billion in 2022. And we have already paid down $12 billion of combined company debt. We expect to achieve $17 billion of cumulative debt paid down by the end of this year, with further deleveraging through 2023. This will bring our net leverage ratio to 2.4 times by the end of 2021. And approximately two times by the end of 2022. In closing, AbbVie has once again delivered outstanding performance. And we are very pleased with the strong momentum of the business heading into the second half of the year. With that, I'll turn the call back over to Liz. Liz Shea: Thanks, Rob. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, first question please. Operator: Thank you, Ms. Shea. Our first question is from Vamil Divan with Mizuho Securities. Your line is open, sir. Vamil Divan: Great. Thanks very much for taking my questions. So maybe two if I could. So one, Rick, you mentioned some of the Allergan products, maybe doing better than your expectation. Can you maybe, I mean, I know you don’t want to share your secret sauce. But in terms of what is it that you've noticed that has helped to drive those products? Because it seems like it's pretty much across the Board, from an aesthetic to Vraylar, Ubrelvy. So, is it around promotion efforts? Is it around some payor dynamics? Or anything you could share would be helpful there? And then the second one on Imbruvica. I just want to confirm, I think you guys said that the new patient share across all indications now is 42%. So, I just want to see you guys are in line with what you expect at this point. Obviously, there's been questions around some like competitors that have entered the market. And maybe you can just talk about the patients who are not studying on Imbruvica. So, what are you seeing as the reasons why they might be choosing a competitor? Thank you. Rick Gonzalez: Yeah, Vamil, this is Rick. I'll cover certain part of the first question, and maybe I'll ask Jeff to jump in and cover any additional thoughts that he might have. I think as you look at this business, one of the things that I think AbbVie is sort of known for is that, we tend to operate in a very focused and disciplined way, especially across what we consider to be growth franchises. We expect every one of our major businesses to develop plans, to be able to maximize the value of their assets, both from a strategic long-term basis, but also from a short-term tactical basis. And I'll use aesthetics as the example. Early on, we made the decision that we were going to fully integrate the aesthetics business to make sure that it had the focus and attention there it needed because we believe this business had a significant opportunity to be able to grow. We did that globally. So, if you look at Allergan in the past internationally, those people representing those products also had to represent eyecare and other therapeutic products. So, we moved those out into the therapeutic areas of AbbVie internationally and solely dedicated the aesthetics group internationally to just their products. And then in the U.S., we operate with a similar structure and a fully integrated R&D organization is totally committed to just developing aesthetics products and reports directly to Mike and then the Head of the Business for aesthetics reports directly to me. And we had them develop a plan that they are now executing against to be able to deliver against that. So, I think it's really three aspects of it from my perspective. It's one the structure we put in place. And that was a thoughtful, planned out structure. Two, it's the discipline processes that we use to be able to execute across all of our businesses. And then third, I'd say we have consistently invested and we do invest in businesses that we think have the opportunity to be able to drive long-term growth and performance in a way that we can drive that at maximum speed. And certainly, as you look at aesthetics, we've increased the investment in SG&A and we've increased the investment in R&D. Jeff, anything you'd add? Jeff Stewart: I think, Rick, the – I would agree, I think, big piece Vamil, was the - is the level of the investment. So, as we looked at the - particularly the neuroscience compounds, Vraylar and Ubrelvy, we were able to structure the sales forces a little differently, which was important from commercial execution and also really upgrade and drive some of the investment around patient activation. So, I think that all of these brands are spectacular brands leadership position. And when we got that investment profile right, we've seen the response, so nothing that beyond that. Going back to your question on the hematology share, the 42% that I referred to was the combined AbbVie shares. So that's Imbruvica plus Venclexta across all lines of CLL. So, if you take a look - if I give you a little bit more color on the latest data that we have, for example, in frontline, we have 35% total AbbVie share, which is made up around 24% for Imbruvica and 11% for Venclexta. For second line share, for example, we have a 48% total AbbVie position, which is approximately 33% for Imbruvica and 15% for Venclexta. So, both of these brands are now operating at a very significant share level across CLL. I'll give you some more thoughts as you ask for in terms of color in the market. Beyond that leadership level that we have across the CLL indication, we do see that the CLL market is still suppressed. So, for example, patient starts year-to-date are down in the high single digits. And even within the quarter, they were down in the low single digits. We see that improving. And so that outlook looks to improve over the second part of the year. In terms of overall share dynamics, over the last several quarters, we have lost a few share points to Calquence, within the range of our expectations as they've ramped with their CLL ramp. But also interesting, we've seen that there's been some share increases in monotherapy CD20, which we think is also a COVID type of effect that will ultimately revert back to normality as we go along through the pandemic. So overall, the franchise is performing very, very well. And as you heard from Mike, we're tremendously excited about the future of the hem/onc franchises as we move forward. Rob Michael: And Vamil, this is Rob. I'm going to come back to your first question. Just one more thing we should mention is, we've been able to really leverage our international infrastructure. And so, we set up this business. We have the aesthetics franchise, focus fully internationally on that business whereas Allergan had combined with therapeutics. So, we've been able to bring that focus and the level of investment. I think we've also been able to leverage our market access prowess. So, we’re very strong across the globe. And so, when you think about the opportunities for us going forward, I think, international certainly plays a big role as we leverage the Allergan business. Liz Shea: Thanks, Vamil. Operator, next question please. Operator: Thank you for your question. Our next question is from Chris Schott with JPMorgan. You may ask your question. Chris Schott: Great. Thanks so much. Just another one on aesthetics. Obviously, some incredibly strong numbers here. Can you just elaborate a little bit more on sustainability of this growth? So, I guess I’m just trying to get a better sense of how much of what we're seeing right now is catch up as we exit lockdowns versus a more sustained step up in sales going forward? Just any color on that would be appreciated. My second question was RINVOQ in UC. Can you just put some of this data into context as you think about the competitive landscape, and particularly relative to what you had anticipated in your long-term guidance for this indication? I think you’re about $1 billion in IBD sales by 2025. And is that we've seen more of this data set, just how comfortable are you feeling with that target and ultimately the role RINVOQ’s going to play in this space? Thanks so much. Rick Gonzalez: Hey, Chris, this is Rick. I'll take the aesthetics question and then Mike can maybe cover the second question that you had. So, it's a great question. And it's one that we have been looking at very carefully. I mean, if you just step back and you look at the performance of the business, we've done a number of things to drive the business. We believe this business is significantly underpenetrated when you look at the available patient population here and your ability to drive long-term penetration is tremendous. And so, that's why we've done the things that we've done to try to drive that demand. Globally, the aesthetic sales were up 31%. If we look at the U.S. toxin and filler business, the markets up about 40% versus 2019. So, but it's hard to evaluate, I can tell you the vast majority of it is driven by fundamental demand. And we can see that through the funnel that we see patients coming in and how many of them are activated to go get procedures. But we just conducted a fairly robust market research study to try to understand how much of it was COVID related. And we looked at things like how many of those patients got stimulus checks, how many of them were affected from an employment standpoint, and are now back at work? I'd say that study, if you looked at the data in that study, the conclusion that you withdraw from that is very little of it is COVID related. Now, I think the flaw is this, most patients are not going to say they use stimulus money for these kinds of procedures or other kinds of things. So, I think to the best of our ability, what I would tell you is about two thirds of the performance, I think, is fundamental demand, and maybe one-third of it is pent up demand. We're going to need a couple more quarters, I think to see how that plays out. But I'd say that's our best assessment right now. So, very robust growth either way, and it could sustain a little bit better than that. But I think, you can pretty well count on two thirds of it being fundamental demand at sustainable longer term. Mike? Michael Severino: I'll take the question on RINVOQ UC. What I would say is the data that we've seen from RINVOQ UC has exceeded our expectations from an episode perspective, and the results they are very strong. UC has been very difficult to treat pharmacologically and getting high rates of permission. And this response has been challenging and both has delivered those now account just across number of studies. And I think from a safety perspective, it's also performed very well. I commented in my remarks, fact that overall rates of these serious AEs are actually lower with RINVOQ [ph]. Now the reason for that is that many of these AEs are driven by self and with the improvement in the ease to use UC then improve as well. And with respect to events of interest, the safety profile has worked very, very well with their segment A, segment B and other events rates have been comparable to controls. And so overall, we feel very confident in the long term guidance that we put out. But one thing that's important to keep in mind is that long term guidance is 2025 guidance. And our IBD assets will be in relatively early stage of launch by that time. But the profiles that I've talked about not only for RINVOQ, but also for SKYRIZI bode well, not only 2025 guidance, but for the long term growth of that aesthetic as opportunity there as well. Liz Shea: Thanks Chris. Operator, next question, please. Operator: Thank you. Our next question will be from Ronny Gal with Bernstein. You may ask your question sir. Ronny Gal: Good morning, and thank you for taking the questions. First one is on ABBV-951. You've mentioned the efficacy rates. I was wondering if you can talk a little bit about the skin safety profile as compared to the neogen product or the apomorphine IV from Europe, especially when it comes to the some more severe effects like Abscess and Okta? The second question is staying with a pipeline is a little bit of budget a-Beta. Didn't take long for you guys to walk into that. I was kind of wondering if you can talk a little bit about the science that you're discovering, is the right approach to get to the best effect with minimal side effects to try to remove as much flak as possible in a very targeted manner? Or should the approach be to go after soluble [indiscernible] and approach to removal of plaque indirectly? Michael Severino: Okay, so this is Mike, I'll take both of those questions. With respect to 951 we’ll publish full data from the Phase 3 study that I described at a medical meeting and then ultimately, in peer reviewed journals as well. But what I can say is the skin safety has looked good to our eye and is within our expectations well within our expectations. As one would expect with a cutaneous device, there are some local reactions, but those have generally been mild and resolved with continuing treatment. We've not seen significant issues with more severe types of skin about the safety profile, and we think the patient friendly aspects of subcutaneous delivery that has some parallels to an insulin pump like device will be a real advantage here because it allows patients to get that to open like efficacy that's transformative without the need for placement of a gastric tube that's unthreaded in the small bowel and very, very difficult to manage. And so, we feel very good about the potential for 951. With respect to a-Beta, I think if one looks at all of the data, it's quite clear that if you can remove plaque rapidly, then there will be a benefit, and the key parameter that we would need to see is deep reductions in level of plaque and rapid reductions in the level of plaque, because you won't start to see a cognitive benefit, we believe until you get to that amyloid negativity level bypass, which is 20 centroids, until you reduce patients to that level. So, the goal would be to get them there as rapidly as possible. And to do that, while minimizing the impact of area. And we think that that can be done through epitopes selection. There are slight differences in the amyloid forms that are present in vessel wall compared to plaque. And with appropriate epitopes selection, we believe that our preclinical data would support that you can do that with reduced risk of area. And of course, we now need to see whether the clinical data supports that as well. But those are the basic principles that we're following. We've obviously had these candidates before the aducanumab approval, because as I said, we've been monitoring this area quite closely. But we think this is a good time to advance those candidates and to determine whether the science I described plays out in the clinic. But our approaches with respect to a-Beta are based on plaque, not soluble forms of [Indiscernible]. Ronny Gal: Thank you. Liz Shea: Thanks, Ronnie. Operator, next question, please. Operator: Thank you. Our next question is from Andrew Baum with Citi. You may ask your question. Andrew Baum: Many thanks. A few question, Jeff. Firstly, on the outlook for rebaiting and oncology, this is somewhat of a novelty, at least historically. I know that yes, excluded Calquence from their formulary, there's obviously increased therapeutic competition in the space. How should we be thinking about the rebaiting outlook and oncology going forward more broadly? Second, on the U.S. paybacks through COVID and now in the recovery stage, could you outline the magnitude of which you've had to increase and then decrease the Medicaid components in the patient assistance programs? Or whether you're seeing that improvements, some sense of scale and direction there? Many thanks. Michael Severino: Yeah, thank you, Andrew. And to start with oncology. I mean, largely, as you know the rebaiting has been done through the sort of the GPO channel. And particularly with the physician in office dynamics that are in that sector, we don't see significant rebaiting happening at the PDM level. And if it is, it's quite modest. I think the certainly from the ESI standpoint that you highlighted, that was an ESI decision. That was not certainly something that AbbVie approach that particular payer with any sort of deal. Our philosophy is that these drugs are very important for oncologists to have basically open access for all of these agents. So, I think it is something that we've seen some of these lights that have started to turn on. But they've been quite modest. And I don't think that they're going to be a super accelerant that we should be overly worried about. That's my position on that. I think this the second approach in terms of sorry, that was the question on the magnitude of the Medicaid. Yeah, this has been quite interesting. We've seen, certainly on all of the data, the fact that the enrollment in Medicaid has gone up. When we look across our businesses at let's say, acute channel shifts in terms of the utilization, they're relatively modest. They're there, so we don't see massive movements around our channels shifting that link to the magnitude of what you might see in terms of the enrollments. So it's relatively modest, certainly manageable. And I think, certainly, as we see the jobs positioned come back and that could be quite strong, I think we'll see any modest movement will be corrected over the next several quarters. Rick Gonzalez: And this is Rick. Going ahead I'd add to the second question is so we have a very extensive and I would say generous PAP program in place that's really designed to ensure that patients who can't afford our medicines, have the ability to be able to access those medicines free of charge in many cases. As an example, 99% of the applications we get for uninsured patients we approve we actually just increased the program to 600% of the federal poverty level across all of our brands. And so, it's a program that I think is designed to fulfill the mission that I just described. And that is that patients who need our medicines can get them from us if they can't afford to pay for them, or whatever system that they operate in. And but we have not seen and much to our surprise, we have not seen that program increased dramatically, even through COVID. And we advertise directly to patients that if they lost their job during COVID, that we would provide our medicines to them. But I wouldn't say, as I said, much to our surprise we didn't see the volume go up dramatically. Liz Shea: Thank you, Andrew. Next question, please. Operator: Thank you. Our next question is from Geoffrey Porges with Leerink. Your line is open, sir. Geoffrey Porges: Thank you very much. Lots of questions. But I'll focus first on RINVOQ. Rick, you've given the long term guidance of recall $7 billion in revenue by 2025. I think and by means correct me if I don't recall correctly. But if you only get the 15 milligram dose approved, if that's the outcome of the deliberations of the FDA, but you get the approvals in Europe, can you achieve that revenue guidance? You’re confident enough in the 15 milligram program? And then secondly, for Mike. You'll see us development program seems to have been sort of reactivated. And could you talk a little bit about your conviction, a little bit more detail on a 119? We don't know much about that. Are you confident that it can be active see through correct that matches up to your competition? Because clearly that's a big revenue opportunity that we have reflected in. Thanks. Rick Gonzalez: So, Jeffrey, this is Rick, on your first question. Yes, the guidance for RINVOQ is $8 billion. And I would say we're confident that even with a 15 milligram, we will sustain that guidance. If you look at the performance of the 15 milligram is quite remarkable. And so, we feel good about the performance of RINVOQ, we continue to see strong uptake of RINVOQ, and physician interest and is consistent with what we would expect. So, I think we're fine now. Michael Severino: This is my context, a question on the CF program. When we restructured the collaboration with Galapagos. A few years ago, to take direct operational control of that program, we had a couple of goals. One is we wanted to make sure that we're optimizing the potentiator in C1 components of the regimen. We felt we had a best in class, C1 in Q2. But we believed we needed to make a switch in the potentiator to one that we already had in hand. And we've done that. We also believe that we needed a C2 corrector. That’s in that time period a few years ago did not exist. So, we needed a C2 corrector that had the potential to be best in class. And so, what we did is we put a significant internal chemistry effort to come up with a number of compounds. 119 is the most advanced and a very promising one that we believe fit that bill. And based on all the preclinical profiling, we think 119 can be a best in class C2 corrector. And with the other components of or triple, we think we can deliver best in class efficacy with appropriate pharmacological properties, dosing, low DDIs, et cetera. And so, we are now in a proof-of-concept Phase 2 study in the clinic to determine whether those preclinical data will in fact spare out. What I would say here is the preclinical assays are good. They're much more predictive than they are in other areas because we fundamentally know what the defect is in CF, and we can study it in appropriate tissues in human tissues in vitro. But ultimately, we're going to need to see the clinical data. By right around the end of the year, we'll see internally proof of concept results for that triple. We'd probably be in a position to announce them externally early next year, and those will be data that will include impact on FET1 with a triple. And so that will tell us whether we can be best in class. And I agree if we are best in class, I think it's a very significant opportunity and we will progress it rapidly. Now, it's a proof-of-concept study. So, if it's successful, we'd have some additional dose ranging to do. We're studying the highest dose of 119, to determine whether it can have that effect we'd have to do some additional dose ranging to determine the optimal dose of 119, but that can be done rapidly. And then we would, if successful move into Phase 3 development. Geoffrey Porges: All right. Thanks Mike. Liz Shea: Thanks, Geoff. Operator next question, please. Operator: Thank you. Our next question is from 6 Geoff Meacham with Bank of America. Your line is open, sir. Geoff Meacham: Morning, everyone. Thanks for the question. Just had a few quick ones. Another one on JAK safety. And Mike you mentioned you expect regulatory action in the next few months? Can you just give us some perspective on that? Is there any data that you're still waiting on to submit? And is there still the potential for an advisory panel? And then the second one is on Ubrelvy. Maybe just give us some color on the on the new start dynamic? What are the patients recapturing? What share are you getting from and maybe just help us with kind of the -- what other wins do you have to make with respect to formulary access and share? Thank you. Michael Severino: I'll take the first question and then Jeff will take the second question on Ubrelvy. So, with respect to JAK safety, we have indicated that we believe that an action is possible in the next few months. That's based on our discussions with the agency and what timing we think is reasonable. It's not a specific action date, like the PDUFA dates that had been set in the past. So, we will continue to monitor it as the process continues to move along. But the rate limiting factor, as we understand it is the agency's review of the tofacitinib oral surveillance data. And I think once that is completed, we will be able to move forward with Goodspeed with arm review. But there are no additional data from a safety perspective or no other substantial analysis that the agency is waiting on for us. We provided our updated benefit risk quite some time ago, as we announced publicly. And the agency has not requested any additional data. So, it's really that review of the tofacitinib oral surveillance is gaining as we understand it. With respect to an advisory panel, the agency always has the authority to call one if they desire to have one. But what I would say is, if they were planning on having an advisory committee. I would expect them to already be preparing for that and already have that process in motion. And we would know that, and there's no indication that that is underway at this time. Jeff Stewart: Right, and I'll take the Ubrelvy question. As I mentioned, we're very, very pleased with Ubrelvy and really our overall migraine portfolio that we're rapidly developing here. To give you some sense, it's quite remarkable. I mean, if you look at the total acute oral CGRP category, so that's us and the competitor. It's about 18% of all new prescriptions, and it continues to grow very, very quickly. So again, it shows you how hard patients and physicians are. Are looking for the adoption of these particular agents, even though you have to step through a Triptan, some cases two Triptan. So, the market demand is very, very substantial. When we look to the overall performance, we can see that roughly the two agents are sort of splitting the acute indication. Some of the more weeklies are now being a little confounded by the new preventative episodic approval from Neurotech. But nonetheless, I think that's a small piece of the story. When we sort of peel out some of their new preventative scripts, we still have the leadership position for the acute market. But I really think the bigger picture is how fast that segment will expand over time? And we anticipate that will continue to lead that based on Ubrelvy’s overall profile. Our overall access dynamics are quite good. So, we really have roughly a 90% access. Again, some of that access demands a step through a Triptan. But overall, when you look at how fast that category is going, we don't really anticipate that there's major new plans that we need to achieve any sort of incremental access position. And so, basically our commercial strategy continues to be how hard can we drive this acute segment and lead that acute segment. And as I mentioned in my prepared remark, anticipating the arrival in the late third quarter for Atogepant, which has just a spectacular profile for episodic migraine. So, thank you. Liz Shea: Thanks Geoff. Operator next question, please. Operator: Our next question is from Tim Anderson with Wolfe Research. You may ask your question. Tim Anderson: Thank you. It's well known that AbbVie rebates heavily on Humira in the U.S. So, when biosimilars launch, won’t you potentially have room to pull back on those rebates, which could mean, basically the meaningful offset to last Humira volumes. It seems like it could end up being in the billions of dollars that you could pull back in house. And I realized there's RINVOQ and SKYRIZI dynamic to consider. And related to that line of questioning how does the prospect of interchangeability biosimilars impact your thinking on this front? If interchangeable, generics are allowed or not allowed? How does that impact what you might do with those rebate dollars? And then second question, quick one, just the range of outcomes for when Imbruvica might face generics in the U.S. Is it in the realm of possibilities that AbbVie enters into settlement agreements with legal challengers that could push out generic timing? Rick Gonzalez: Hi Jim, it’s Rick. So, I'll cover the first two questions that you have there. I would say let me start with interchangeability. We've outlined now over the last year or two, I think pretty specifically what we view the biosimilar impact in the U.S. to be and we are assuming that there will be two interchangeable biosimilars. And that's in the thought process of the erosion models that we have described many, many times now. So, we are assuming there will be interchangeability. We're certainly not in a position where we're going to talk about what we're going to do from the standpoint of rebates. We've always competed very effectively in these markets. Certainly, the focus for us going forward is the next generation assets, SKYRIZI and RINVOQ. And you can see now, those two assets this year will do $4.6 billion. So, call it $5 billion. They're rapidly growing. And they're doing exactly what we had hoped they would do. They have higher levels of efficacy, and they're ramping dramatically. And they will buffer the impact of biosimilar impact in the U.S. And so, what I'd say is the strategy is going exactly the way we had hoped it would go. We'll fill out the range of indications on SKYRIZI and RINVOQ. And continue to drive those assets into the marketplace effectively. On Imbruvica? Laura Schumacher: Yeah, hi. This is Laura Schumacher. Our Imbruvica composition of matter patent expires in May of 2028 assuming that we get the pediatric extension. We do have later expiring IP covering methods of use formulations, crystal forms, and the like. Our long-range plan currently assumes the loss of exclusivity in the U.S. in May of 2028 when the composition of matter of patent expires. There is litigation ongoing with one remaining and a filer. And we're awaiting a decision on that. Tim Anderson: Thank you. Liz Shea: Great, thank you Tim. Operator next question, please. Operator: Thank you. Our next question is from Matthew Harrison with Morgan Stanley. You may ask your question. Matthew Harrison: Great. Good morning. Thanks for taking the question. Just a follow up question on CFP, I guess first two parts here. First, are you confident that you have a potentiator that's active and improve versus the Galapagos compound? Because I think we've seen a lot of issues with people trying to develop potentiators. They're as good as Kaleidoco. And then, second, I know you talked about FPV 1, have you looked at sweat chloride at all? Obviously, you need a larger patient sample size to get a good directional view on FPV 1. I'm wondering if we looked at smaller patient numbers on sweat chloride. Thanks. Michael Severino: So, this is Mike. I’ll take that. With respect to the potentiator, we are convinced that we have a potentiator that has activity and we've changed the potentiator from some of those prior combinations that were pursued earlier on in the Galapagos collaboration. We think that, that potentiator it has clear signs of activity, we think the C1 character is very good and probably best in class based on the data that we have seen that were generated earlier in the collaboration. We put this up, the principal piece that was missing was that CTO and we think we have a good one. With respect to the endpoints while it does take a larger sample size, to look at FPV 1 we feel like FPV 1 is what really matters here. That's what's going to translate into clinical benefit for patients. And so, our proof-of-concept study will show us FPV 1 and that's the primary measure that we are going to use to determine whether to advance the triple or not. Liz Shea: Thank you, Matthew. Operator, next question, please. Operator: Thank you. Our next question is from Steve Scala with Cowen. Your line is open, sir. Steve Scala: Thank you, a couple questions. Many of the questions so far suggests concerns around RINVOQ. But I'm wondering if this could all turn into be a positive. So, to what extent do you believe RINVOQ prescribing might be being held back by competitor product concerns? So, once those concerns are resolved and or RINVOQ emerges unscathed, if it does. RINVOQ could even do better. And we could be looking at a sharp acceleration in share gains and prescription trends in Q4. So that's the first question. And secondly, on Humira contract renewals that will be signed in coming months for 2022. What is the typical duration of those contracts? Are they typically 12 months? 24 months, 36 months? If you can give us an idea of that that would be helpful. Thank you. Michael Severino: Yeah, it's a very good question. And this question we fought a lot about, let me give you some perspective on RINVOQ. So, if you look at our, let's say, our demand performance, and I think I mentioned my prepared remarks, we've been very consistent about 15% in place share in the large RA market, which is just under Humira, which has grown a little bit over the COVID times and since January to about 18%. So, we're very, very stable. And I do believe that there is some overhang on certain segments of prescribers that have, let's say, going back a little bit to the TNF, really our own product, Humira. So, it's not outside of the realm of possibility as this resolves and really largely, as you probably heard, or seen Xeljanz has lost in play share over that period. So, I do believe there's a little overhang in certain, probably significant segments of Rheumatology. So, we are anxiously awaiting the resolution here of oral surveillance, which obviously has delayed our regulatory submissions. But it's not outside of the realm of possibility, given the very significant and differentiated data that we have in our packages, that we can see an acceleration as things resolve. But we're going to anxiously be monitoring. And certainly, be prepared to anticipate any outcome there. Rick Gonzalez: And see, this is Rick. On the contracting question, I'll handle that one. It varies quite a bit based on product and by managed care organization, but I'd say typically, so it can be some of them can be as short as 12 months, it's probably more common to be in a 24 month range from a contracting standpoint. Steve Scala: Thank you. Liz Shea: Thanks, Steve. Operator next question, please. Operator: Q - Chris Raymond: Chris Raymond: Thanks. Just on the a-Beta program and you answered a few questions. But I think I heard you describe the product that you're targeting the plaques and not the cybil forms of a-Beta. Just kind of maybe if you, wonder if you can give a little bit more color on the driver of that have gone forward with that. Did you guys -- does your science sort of tell you that amyloid beta oligomers, for example, are not a driver of the disease or this is more of a decision that's driven by the regulatory precedents of approving targeting the a-Beta plaques. And then maybe also, if you can get a little more detail on this molecule is likely an IV, or possibly subcue delivered antibody? Thanks. Michael Severino: So, this is Mike, I'll take that. With respect to the focus on plaque, I think when one looks at all of the data, you can conclude that if you can reduce plaque rapidly, from that point forward, you can see a benefit. So, in other words, getting the majority of patients to a level where they are amyloid negative by PET, so below 20 [ph] centoloids. And doing that rapidly is what's required to see a benefit emerge over time. And part of the importance of speed is that you're not going to see that benefit until you get to that level. So, if you spend the entire period of a trial, getting to that level, you don't then have an opportunity within that trial to see an improvement in cognition. And of course, for patients, if you don't get to that level fast enough, they're not going to drive benefit for a period of sometimes too many years. And they need really faster than that. So, that's our focus on plaque. With respect to different components and the role of oligomers. I think it's hard to tease that apart right now, what we know from the data is what I said that getting patients to amyloid negativity, but reducing plaque is what seems to drive a clinical benefit, whether there are upstream steps that one could try to impact to achieve the same result. I think it's an open question. And we're going where the science tells us to go today. With respect to IV or subcue, I think it's early to answer that question. It's going to relate to ultimately the delivered dose. And then dose forms that can be delivered. So, for example, there are on body injectors and other things that can deliver more than the traditional one or two and those of a solution containing a monoclonal antibody. So, there are approaches that could be IV or subcue, but I think it's a little bit early to make predictions on how that will all play out. Chris Raymond: Thank you. Liz Shea: Thanks, Chris. Operator, next question please. Operator: Thank you. It comes from Luisa Hector with Berenberg. Your line is open. Luisa Hector: Hello, thank you for taking my question. Sorry, going back to RINVOQ again, but I just wanted to check that the approval of the pending indications isn't a particular gating item for your filing in UC. And then I see that you haven't changed your guidance for RINVOQ for this year. And I know previously, you've stated that maybe would only ever be a small contribution this year. But rather than self, I just wonder whether there's any particular savings on your launch costs this year due to the delay? And then maybe on TMB-383. Again, I think I've understood this is now 100% belonging to you. So just to check, no impact from the Amgen acquisition? And then when might we see a Phase 2 start looks like you have a dose data very compelling. So how soon could we be looking out for that trial starting data? Thank you. Michael Severino: Okay, this is Mike. I'll start with the RINVOQ question and pass it to Rob. And then I'll come back or the 383 question. With respect to the UC filing, the UC filing is not dependent on the approvals in the other indications. And obviously, the timing of release of review of the UC filing would carry it out to a point where those matters where I think, based on any reasonable expectation be resolved. Rob Michael: Yeah, and your question regarding the guidance for RINVOQ. So you're right, we did give guidance to $1.7 billion early this year, assuming we would have a new indications approved. We said that would be a minor contribution, think of it in that couple of hundred-million-dollar range. But given the strong performance out of the RA indication, we've maintained that guidance, despite the fact that those approvals are delayed. There is some level of savings in terms of SG&A related to approvals being delayed. But at the same time, we're investing the business you'd look at, we're doing the aesthetics. Obviously, other parts of Allergan business, there's opportunity to invest more broadly. So overall, SG&A is up because we are investing for long term growth, but there is some level of savings associated with the RINVOQ delays. Michael Severino: With respect to 383, the BCMA, CD3 bispecific, you're correct, there is no impact of the Amgen acquisition of Teneobio on that. The asset would be ours and it would be unencumbered by anything related to the Amgen acquisition. In terms of Phase 2 timing, we plan to move forward very rapidly, not only with Phase 2, but with Phase 3 studies. With this asset, we think the data that have been generated are very strong, very high levels of response, good levels at the DGPR were better thresholds with a very good safety profile as well and a profile that would fit well with combination therapy and move to earlier lines of therapy. So, we'll advance the program aggressively and we'll update on the specifics a little bit later on in the year. Liz Shea: Thanks, Luisa. Operator next question, please. Operator: Our next question will come from Daniel Busby with RBC Capital Markets. You may proceed with your question. Daniel Busby: Good morning. I've got two questions. First, a bigger picture question on SKYRIZI and RINVOQ. You've got to do peak sales for both products in the early 2030s. There's been a lot of focus on near term regulatory hurdles, particularly for RINVOQ. But there's also a lot that could happen competitively between now and then. So, with that said, what do you view is the biggest potential longer term competitive threats for both of those drugs, and particularly given the ongoing emergence and maturation of new drug modalities? And second, can you talk a little bit about the assumptions you've built into overall guidance relating to the Delta variant, and whether that's changed at all the way you think about the second half recovery? Thank you. Michael Severino: We go through a fairly rigorous and by that I'd say a very rigorous long range planning process where we evaluate what we think the comparative alternatives might be and the profile of our assets versus other assets. And I would say as we look at RINVOQ and SKYRIZI, and the clinical data that has been generated is certainly achieving or exceeding the expectations that we had for those assets. I don't see anything on the horizon, that would make it in a timeframe that would have a material impact on those assets based on the guidance that we provided, or even longer-term guidance out to typically do a 10-year long range planning process. So yes, there are certainly many, many modalities that are available today across many of these therapeutic areas. It's having the right kind of asset, and the right kind of clinical performance. And then everything else that wraps around that market access and all the other things you have to be effective at in order to achieve the level of performance that these assets are achieving. And so, bottom line is, I think we feel very confident in our assumptions here. As it relates to the Delta variant. I think as we look at the guidance that we are providing in the second half, it certainly is reflective of what we assume -- we don't assume dramatic changes in the U.S. or other major markets around the world and where we are today. We're assuming major levels of recovery in certain markets, either that are currently in lockdown, like Australia as an example, or in many of the Asian markets outside of outside of China and Singapore. So, I think we've properly represented it. I think the healthcare system in the U.S. in particular has experienced that we have last year tells us that the healthcare system can much better treat these patients. And we're not assuming that we see anything that would be significant in this shift in the U.S. from a lockdown standpoint. Liz Shea: Thanks, Daniel. Operator, we have time for one final question. Operator: It will come from Gary Nachman with BMO Capital Markets. Your line is open, sir. Gary Nachman: Hi. Good morning. And thanks for squeezing me in. Sorry, but one more RINVOQ first. Curious why you think Europe doesn't seem as concerned with JAK class the way the FDA has been since you got the positive opinion on atopic derm for both doses there? And how you see uptake in Europe versus the U.S. overall? Is there a difference in perception, you think in those regions with the class? And then regarding Vraylar for MDD? How are the Phase 3 studies gone overall? Did you change anything with respect to enrollment numbers or sites during the course of the pandemic since these Phase 3 data are coming soon? And have you done any more work sizing up the potential market opportunity, where you think it would be used most for MDD? What types of patients? Thank you. Michael Severino: So, this is Mike, I'll start and then I'll pass it over to Jeff for some initial additional comments. With respect to RINVOQ and the regulatory environment in the prescriber perception prescriber environment, between Europe and the U.S., we do see differences. And the European authorities, and the European prescribing base seems to place less emphasis on these signals and view them more specifically to the molecules that generated the data then the EU have. Why that is? I can't give you a single reason other than these are both very large, competent jurisdictions that have come to their own impressions of the data. And those impressions have different somewhat. As you've said, for atopic derm we got the positive opinion from the CHMP for both the 15 and 30 milligram doses. We think the data are very supportive of that decision. And we look forward to launching that indication in Europe. And we think it's going to be an important additional indication, as it will be in the U.S. when we do get to approval. With respect to uptake in Europe, Jeff, I don't know if you want to comment? Jeff Stewart: Yeah, as I mentioned in my remarks, the uptake on RINVOQ in many major markets is very, very strong. Now, as you know, waiting for reimbursement takes a little bit more time than the U.S. but as I highlighted, we have in play leadership and this is including the TNF to biosimilars in Germany, France, Canada, for example. So, it's quite strong. I think another point that I'd like to make, and we certainly see it in some of the early launch countries with PSA and AS. There appears to be a synergistic effect which makes some sense from a commercial standpoint. As countries like Germany start to introduce PSA and AS, the entire RINVOQ molecule starts to accelerate and move faster. And so again, given the last question I answered, we're actually anxiously awaiting the approval of those extra room indications there. So it's quite strong. And as I highlighted again and Mike mentioned, our label here in atopic derm is going to look quite strong in the European markets. Mike, maybe you can hit on MDD and then I'll address the market structure there. Michael Severino: With respect to Vraylar and MDD, we did a deep dive on the Phase 3 studies shortly after closing the acquisition of Allergan. And what I would say is, we found that the studies were very well designed. We were comfortable with important considerations like patient selection, selection of sites that we believe would give quality data. We looked at the blinded aggregate characteristics of the population roles. You look at the baseline characteristics, and you don't know who's on active or placebo, but you can just see if you're enrolling the right patient population, and we believe we were. All of the measures are designed and seem to be behaving appropriately. And so, we feel good about the design characteristics of that study. And we did not feel that it was necessary to make any changes. But we did do that deep dive to be sure of that as I said, what we found was in fact reassuring. With respect to the market opportunity, I'll just make a couple of comments. And I'll hand it off to Jeff, for some more detail. But what I would say is, depression obviously is a substantial indication. And it's one that is very difficult to treat with existing agents. About 50% of patients don't achieve adequate control with monotherapy with frontline agents like SSRIs, or SNRIs. And so, there is an important opportunity for adjunctive therapy. And obviously, this is an adjunctive MDD indication. So, that would be the population that we would be looking at. Jeff, do you want to comment in more detail on that? Jeff Stewart: Yeah, I mean, if we look at the market structure, obviously, you have schizophrenia, which is a relatively modest market, and we have a good growing position there with our existing indication. And then you have the prescriptions and really the different bipolar segments. And what I would say about not the big depression market, but the adjunctive MDD market that Mike spoke about. It's about the same size in terms of a prescription value to the bipolar segment. So, adjunctive MDD, if the studies were to progress as we see is really gives us a chance to access a market that's equally sized for the one that we're competing in today. So, it's quite attractive as we continue to look for the final readout of those trials. Liz Shea: Thanks, Gary. That concludes today's conference call. If you'd like to listen to replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. Operator: That does conclude today's conference call. We thank you all for participating. You may now disconnect and have a great rest of your day.	[ { "speaker": "Operator", "text": "Good morning. Thank you for standing by, and welcome to the AbbVie's Second Quarter 2021 Earnings Conference Call. All participants will be able to listen only until the question-and-answer portion of this call. [Operator Instructions] I would now like to introduce Ms. Liz Shea, Vice President of Investor Relations. Ma’am, you may proceed." }, { "speaker": "Liz Shea", "text": "Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Vice Chairman and President; Rob Michael, Executive Vice President and Chief Financial Officer and Jeff Stewart, Executive Vice President, Commercial Operations. Joining us for the Q&A portion of the call is Laura Schumacher, Vice Chairman, External Affairs Chief Legal Officer and Corporate Secretary. Before we get started, I remind you that some statements we make today may be considered forward looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today's conference call non-GAAP financial measures will be used to help investors understand AbbVie’s business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Unless otherwise noted, our commentary on sales growth is on a comparable basis, which includes full current year and historical results for Allergan. For this comparison of underlying performance all historically reported Allergan revenues has been recast to conform to AbbVie’s revenue recognition accounting policies, and exclude the divestitures Zenpep and Viokace. References to operational growth further exclude the impact of exchange. Following our prepared remarks, we'll take your questions. So, with that, I'll now turn the call over to Rick." }, { "speaker": "Rick Gonzalez", "text": "Thank you, Liz. Good morning, everyone, and thank you for joining us today. I'll discuss our second quarter performance and outlook. And then Jeff, Mike and Rob will do our business highlights, pipeline progress and financial results in more detail. AbbVie delivered another excellent quarter with adjusted earnings per share of $3.11, exceeding the midpoint of our guidance by $0.04. Total adjusted net revenues of nearly $14 billion were up 19.3% on a comparable operational basis, approximately $375 million ahead of our expectations. These results demonstrate our strong and balanced performance across each of our major growth franchises, including double-digit comparable operational revenue growth from immunology, hem/onc, neuroscience and aesthetics. Looking at the most recent trends, the vast majority of our portfolio is well into the recovery phase from the pandemic. In immunology, we continue to see strong recovery across the room, derm and gastro segments with positive trends across all key indicators, including new patient starts. SKYRIZI and RINVOQ continue to ramp nicely in their initial indications, with both products demonstrating robust double-digit sequential revenue growth. In neuroscience, Vraylar is demonstrating strong new prescription volume in the atypical antipsychotic market and the launch of Ubrelvy, the leading oral CGRP for acute migraine continues to exceed our expectations. Aesthetics continues to perform well above pre-COVID levels exceeding our internal expectations. We're pleased with the rapid market growth in both toxins and fillers, driven by our increased promotional resources globally, brand strength and COVID-related pent-up demand. Rapid global market demand is expected to remain well above historical levels in the near to medium-term and we are raising our full year guidance once again for aesthetics. While the recovery across the AbbVie portfolio is going very well in aggregate, in certain disease areas like CLL and HCV, we continue to see a residual impact from the pandemic. We expect these specialty areas to further recover as the year progresses. One of AbbVie’s greatest strengths is the dedication and engagement of our people. Across AbbVie, the majority of our employees have safely returned to the workplace. And our field teams are now predominantly conducting live engagements with physicians and customers, where protocols and guidelines permit. I'm extremely proud of the teamwork and collaboration our people have demonstrated throughout this pandemic, to bring our medicines to patients and keep our business performing at a strong level. As an organization, we have also made a tremendous amount of progress with the Allergan transaction and integration. We just recently completed our first full year as a combined company, which I'd say has gone exceptionally well. We're tracking well against the operational and financial commitments we outlined at the time of the transaction, with a crucian performing above our original projections. But I'm particularly pleased with the robust revenue performance that we've been able to drive since acquiring Allergan. With 2021 sales tracking to grow significantly faster than legacy Allergan’s historical performance. Our results continue to show that we have created a stronger and much more diverse company with numerous products within our newly combined portfolio delivering robust growth. Based on the continued strong momentum of our business in the quarter and our progress year-to-date, we are once again raising our full year 2021 EPS guidance. We now expect adjusted earnings per share of $12.52 to $12.62, reflecting growth of 19% at the midpoint. Our strong performance allows us to continue to fully invest in the business for long-term growth. As you'll hear from Mike momentarily, we continue to make excellent progress across all stages of our research and development programs. In closing, I'm extremely pleased with our performance in the quarter and with our continued strong momentum of the business, which has positioned as well for the remainder of 2021 and many years to come. With that, I'll turn the call over to Jeff for additional comments on commercial highlights. Jeff?" }, { "speaker": "Jeff Stewart", "text": "Thank you, Rick. I'll start with immunology, which delivered global revenues of more than $6.1 billion, reflecting growth of 13.8% on an operational basis. SKYRIZI and RINVOQ continue to have significant impact on AbbVie’s growth and performance, contributing more than $1 billion in combined sales this quarter. SKYRIZI global revenues were up 17.4% on a sequential basis, reflecting increasing market share globally. In the U.S., SKYRIZI continues to perform well and has maintained its leading in-play psoriasis patient share, which includes both new and switching patients at approximately 34%. SKYRIZI’s total prescription share capture is now approaching 20%, second only to Humira. Internationally, SKYRIZI has achieved in-play patient share leadership in 13 markets, including Canada, France and Japan. RINVOQ is also demonstrating robust growth with global sales up nearly 25% on a sequential basis. We continue to see in-play patient share of approximately 15% in the U.S. RA market, where physician and patient feedback remain very positive on RINVOQ’s strong benefit risk profile. Internationally, RINVOQ access and share continue to ramp nicely in RA, with in-play market leadership now in half a dozen key countries. We are also making excellent progress with the regulatory approval and commercial launch of PSA and AS across several OUS countries. And we look forward to the approval and commercialization of RINVOQ in atopic dermatitis later this year following the recent CHMP positive opinion for both the 15-milligram and 30-milligram doses. Humira global sales were approximately $5.1 billion, up 3.6% on an operational basis, with continued high single-digit revenue growth in the U.S., offset by biosimilar competition across the international markets, where revenues were down 12.6% on an operational basis. In hematologic oncology, sales were approximately $1.8 billion, up 13.2% on an operational basis. AbbVie maintains a strong leadership position in CLL with a combined portfolio, including both Imbruvica and Venclexta, new patient share of approximately 42% and total patient share of approximately 72% across all lines of therapy. Imbruvica global revenues were approximately $1.4 billion, up 7.2%. In the U.S., performance continues to be impacted by lower new patient starts in CLL, which remain below pre-COVID levels as well as increasing competitive dynamics from newer therapies, including Venclexta and other BTK inhibitors. Venclexta sales increased 38.3% on an operational basis with strong demand across all approved indications. We're particularly pleased with the performance in AML with robust share in the U.S. and increasing momentum internationally following recent approvals in the EU and Asia. In neuroscience, revenues were more than $1.4 billion, up 29.6% on a comparable operational basis. We continue to see strong momentum with Vraylar, which recently achieved multiple all-time highs in weekly prescriptions and market share. Vraylar revenues of $432 million were up more than 25% on a comparable operational basis. And Ubrelvy once again delivered robust results. Sales of our leading acute migraine treatment were $126 million, exceeding our expectations. Feedback from physicians remains very positive, highlighting Ubrelvy’s rapid and sustained pain relief, safety, convenient and flexible dosing profile and overall commercial access. Ubrelvy is now capturing roughly 9% of new prescriptions in the large acute migraine market, with more than 1 million cumulative total prescriptions since the launch. We continue to believe there is substantial room for long term growth in this rapidly expanding acute market based on unmet need and strong patient demand. In migraine prevention, we've also been planning and preparing for the forthcoming regulatory approval and commercial launch of Atogepant, our oral CGRP for episodic migraine. We're very encouraged with the efficacy profile of Atogepant, including reduction in migraine days versus placebo, as well as the overall percentage of response rates in patients. Now the launch of Atogepant will be supported by our existing migraine sales force with commercial access expected to ramp strongly, we remain on track for a U.S. regulatory decision in September. Botox Therapeutics continues to perform well across nearly a dozen medical indications, with a total sales of $603 million, up more than 38% on an operational basis. In chronic migraine, Botox Therapeutic remains a foundational prevention treatment, and the clear branded leader in new patient starts. Lastly, in our other therapeutic areas, we saw significant contribution from eyecare, which had revenues of $919 million, up 24.1% on a comparable operational basis. Mavyret sales were $442 million, up 13.9% on an operational basis, although treated patient volumes remain suppressed versus pre COVID levels. And we also saw double digit comparable operational revenue growth for both Creon and Linzess. So, overall I'm pleased with the momentum of our therapeutic portfolio, which is demonstrating a strong recovery as well as our progress with new recent product launches. And with that, I'll turn the call over to Mike for additional comments on our R&D programs. Mike?" }, { "speaker": "Michael Severino", "text": "Thank you, Jeff. I'll start with immunology where we had several notable pipeline events in the quarter. In the area of inflammatory bowel disease, we reported positive top line results from the Phase 3 maintenance studies for RINVOQ in ulcerative colitis, and SKYRIZI in Crohn's disease. In the RINVOQ UC maintenance study, both the 15 and 30 milligram doses met the primary and all secondary endpoints at week 52. In the induction portion of the program, RINVOQ demonstrated a very strong impact on the disease. And the results from this maintenance study demonstrate that patients continuing treatment with RINVOQ maintain high levels of clinical remission, clinical response and endoscopic improvement at the one-year mark. In fact, maintenance treatment with either dose of RINVOQ resulted in some of the highest rates of remission and endoscopic improvements seen in UC clinical studies. With the 30 milligram RINVOQ dose 52% of patients achieved clinical remission, 62% achieved endoscopic improvement, 49% achieved histologic endoscopic mucosal improvement, and 68% achieved steroid free remission. We are very pleased with how RINVOQ performed from a safety perspective as well. In this maintenance study, the exposure adjusted event rates for overall adverse events including serious and severe events were higher in the placebo group than in either RINVOQ dose group. Additionally, the exposure adjusted rates for MACE, VTE and malignancies, excluding non-melanoma skin cancer were comparable between RINVOQ groups and placebo. These results provide further evidence that RINVOQ has the potential to become a highly effective therapy for patients with moderate to severe ulcerative colitis. We're also nearing completion of the Crohn's disease program for RINVOQ and expect to see data from the first Phase 3 induction study later this year. Results from the second induction study and the maintenance study are expected in the first half of next year, with regulatory submissions also anticipated in 2022. We also saw very impressive results from SKYRIZI in the maintenance phase of our Crohn's disease program, particularly with the 360 milligram maintenance dose, which met the co-primary endpoints of clinical remission and endoscopic response versus the withdrawal arm at week 52. Importantly, when we look at the most stringent endpoints, we see strong separation between SKYRIZI 360 milligrams and control with the response rates of 39% for endoscopic remission, and 29% for deep remission, compared to 13% and 10% for the withdrawal group at week 52. We remain on track to submit our regulatory applications for RINVOQ in UC and SKYRIZI in Crohn’s in the coming months. In the quarter, we also announced updates regarding our regulatory applications for RINVOQ in atopic dermatitis, psoriatic arthritis and ankylosing spondylitis. In June, RINVOQ received a positive CHMP opinion in Europe recommending both the 15 milligram and 30 milligram doses in moderate to severe atopic dermatitis. This CHMP opinion puts us on track for European approval in August. When approved atopic dermatitis will be the fourth indication for RINVOQ in Europe. Regarding our supplemental NDAs in the U.S., we recently announced that we were notified by the FDA that they would not need our PDUFA action dates for RINVOQ in psoriatic arthritis, ankylosing spondylitis, and atopic dermatitis, which were in late June for psoriatic arthritis and AS and mid-July for atopic dermatitis. The agency cited their ongoing review of the tofacitinib ORAL surveillance study indicating that they needed more time to complete their reviews of the data. The FDA has not requested any additional safety analyses for RINVOQ since the PDUFA dates were missed. While there are no new action dates, based on our discussions with the agency, we expect decisions on our regulatory applications in the next few months. Following completion of the agency's review of the tofacitinib ORAL surveillance data. We remain confident in the benefit risk profile for RINVOQ across all indications. And we'll continue to work with the FDA to bring RINVOQ to market in these new disease areas. In our early-stage immunology pipeline, we recently began two new trials for ABBV-154 our TNF-steroid conjugate. We initiated a definitive dose ranging study in patients with RA and also started our Phase 2 study in polymyalgia rheumatica. Later this year, we expect to begin the Phase 2 study for 154 in Crohn's disease. Also in the quarter, we completed the induction stage of a Phase 2 proof-of-concept study evaluating ravagalimab in ulcerative colitis patients. While this CD 40 antagonists demonstrated greater efficacy compared to historical control, the efficacy results did not meet our prespecified criteria. As a result, we will not be advancing ravagalimab in ulcerative colitis. In oncology, we continue to make good progress across all stages of our pipeline. At the recent ASCO and EHA meetings, data were presented from the GLOW and CAPTIVATE studies evaluating a Fixed Duration Imbruvica and Venclexta regimen in CLL patients. Results from these two studies demonstrated that the all oral Fixed Duration Imbruvica plus Venclexta regimen has the potential to provide deeper and more durable remission and extends progression free survival as a frontline treatment across the spectrum for the age and fitness status for CLL patients. We plan to submit these data to regulatory agencies and look forward to bringing this new Fixed Duration treatment option to CLL patients once approved. Earlier this month, we received a breakthrough therapy designation for Venclexta in combination with azacitidine for previously untreated higher risk MDS patients, based on the strong data demonstrated thus far in our ongoing Phase 1b study. We expect to see final results from this study in the coming months and plan to discuss the data with regulators regarding the potential to support an accelerated approval for Venclexta in MDS. Also in the quarter, we saw interim results from a Phase 1 study evaluating the BCMA CD3 bispecific antibody TNB-383B in multiple myeloma patients who have received at least three prior lines of therapy. 383 performed very well as a monotherapy in these heavily pretreated patients, demonstrating an objective response rate of nearly 80% and a very good partial response or better rate of 63% and a complete response rate of nearly 30% at doses greater than 40 milligrams in the dose escalation cohort. Based on these promising results, we exercise our right to acquire TNB-383B from Teneobio. We expected the transaction to close in the coming months, and we’ll provide more information on our development plan for 383 in multiple myeloma later this year. This is a highly competitive area. But based on the data to-date, we believe this BCMA CD3 bispecific has the potential to be differentiated on efficacy, safety and dosing interval and could be best in class as both a monotherapy and combination therapy across lines of treatment in multiple myeloma. We continue to make good progress with navitoclax program in myelofibrosis, which consists of randomized Phase 3 trials in both the frontline and relapsed refractory setting, as well as a single arm Phase 2 study. Based on feedback from the FDA, we intend to submit our regulatory application with randomized Phase 3 data together with the Phase 2 trial results. We expect the Phase 3 data readout and regulatory submissions in the second half of 2022 with navitoclax approval in myelofibrosis anticipated in 2023. In neuroscience, we recently completed the Phase 2 proof of concept studies for two assets, elezanumab in multiple sclerosis and ABB-8E12 in Alzheimer’s disease. In the respective studies either assay meet the efficacy endpoints of the trial. And we will be discontinuing the development of elezanumab and MS and 8E12 in Alzheimer's disease. Given the enormous unmet need in Alzheimer's disease, we remain committed to finding disease modifying therapies. And we continue to pursue a range of approaches. We have several additional programs that are either in the clinic today or are in preclinical development. These include programs that modulate the neuroinflammatory response in Alzheimer's disease, such as our TREM2 and CD33 programs that are both in clinical development and programs that target pathologic tau through novel mechanisms, such as approaches that target intracellular aggregates for clearance that are in preclinical development. Following the accelerated approval of aducanumab in the U.S., there has been an increased focus on a-Beta directed programs. We have monitored this area closely over the last several years. And based on all of the available data, we believe there is a continued opportunity for an a-Beta directed monoclonal antibody that clears plaque more rapidly than existing agents with a reduced risk of amyloid related imaging abnormalities or area. We have profile the number of a-Beta antibodies preclinically. And we have a candidate with the potential to meet these requirements. We expect to introduce this candidate into the clinic by the end of this year or early next year. Also in neuroscience, we're nearing completion of our registrational program for a ABBV-951 in advanced Parkinson's disease. We recently completed an interim analysis in the first of two Phase 3 studies where our subcutaneous Levodopa Carbidopa delivery system demonstrated safety and efficacy, comparable to DUOPA after six months of treatment. The primary objective of this trial was safety, but efficacy was also evaluated as secondary endpoints. In this analysis, 951 performed very well, demonstrating a 52% reduction in normalized off time, and a 41% increase in normalized on time without troublesome dyskinesia. Patients also benefited from 915s 24 hour continuous Levodopa Carbidopa infusion, with patients experiencing substantial benefits in sleep and reduction in mourning off time. Full data from this six month interim analysis will be presented at a medical meeting later this year. Data from a second Phase 3 study are expected in the fourth quarter with our regulatory submissions anticipated later this year, or early next year. And lastly, in eyecare at the recent meeting for the American Society for cataract and refractive surgery, we presented results from the Phase 3 Gemini 1 study evaluating our topical eye drop AGN-190584 for the treatment of symptoms associated with presbyopia. In this study, 584 demonstrated improved near vision without impacting distance vision, with a rapid onset of action within 15 minutes, and sustained vision improvements for up to six hours. 584 has the potential to be convenient, on demand solution for patients with mild to moderate presbyopia, and we look forward to an approval decision later this year. So, in summary, we've made great progress with our pipeline in the first half of this year. And we look forward to several additional data readouts, regulatory submissions and approvals throughout the remainder of 2021. With that, I'll turn the call over to Rob for additional comments on our second quarter performance and financial outlook. Rob?" }, { "speaker": "Rob Michael", "text": "Thank you, Mike. Starting with second quarter results, we reported adjusted earnings per share of $3.11 up 32.9% compared to prior year and above our guidance midpoint. Total adjusted net revenues were nearly $14 billion 19.3% on a comparable operational basis, excluding a 1.6% favorable impact from foreign exchange. The adjusted operating margin ratio was 49.7% of sales, an improvement of 260 basis points versus the prior year. This includes adjusted gross margin of 82.2% of sales, adjusted R&D investment of 11.3% of sales and adjusted SG&A expense of 21.2% of sales. Net interest expense was $606 million, and the adjusted tax rate was 12.6%. As Rick previously mentioned, we are raising our full year adjusted earnings per share guidance to between $12.52 and $12.62, reflecting growth of 19% at the midpoint. Excluded from this guidance is $6.48 of known intangible amortization and specified items. This guidance now contemplates full year revenue growth of 10.7% on a comparable operational basis. At current rates, we now expect foreign exchange have 0.9% favorable impact on full year comparable sales growth. This implies a full year revenue forecast of approximately $56.3 billion. Included in this guidance are the following updated full year assumptions. We now expect aesthetics global revenue of approximately $4.9 billion, including approximately $2 billion from Botox Cosmetic, and approximately $1.4 billion from Juvederm. We now expect Restasis sales of approximately $1.1 billion and assume no generic competition in 2021. For Ubrelvy, we now expect sales of approximately $500 million. For women's health, we now expect global revenue of approximately $900 million. And for Mavyret, we now expect global sales of approximately $1.9 billion. Looking at the P&L for 2021, we are now forecasting adjusted R&D investment of approximately $6.7 billion and adjusted SGA expense of approximately $11.9 billion. All other full year assumptions remain unchanged. As we look ahead to the third quarter, we anticipate net revenue of approximately $14.3 billion. At current rates, we expect foreign exchange to have 0.5% favorable impact on comparable sales growth. We expect adjusted earnings per share between $3.18 and $3.22, excluding approximately $1.64 of known intangible amortization and specified items. Finally, we continue to make great progress on our Allergan transaction commitments. We are exceeding our revenue expectations in several areas, including Botox, Vraylar, Ubrelvy and eyecare. We've also delivered expense synergies of almost $800 million during the first half of this year, and are on track to deliver synergies of approximately $1.7 billion in 2021 and greater than $2 billion in 2022. And we have already paid down $12 billion of combined company debt. We expect to achieve $17 billion of cumulative debt paid down by the end of this year, with further deleveraging through 2023. This will bring our net leverage ratio to 2.4 times by the end of 2021. And approximately two times by the end of 2022. In closing, AbbVie has once again delivered outstanding performance. And we are very pleased with the strong momentum of the business heading into the second half of the year. With that, I'll turn the call back over to Liz." }, { "speaker": "Liz Shea", "text": "Thanks, Rob. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, first question please." }, { "speaker": "Operator", "text": "Thank you, Ms. Shea. Our first question is from Vamil Divan with Mizuho Securities. Your line is open, sir." }, { "speaker": "Vamil Divan", "text": "Great. Thanks very much for taking my questions. So maybe two if I could. So one, Rick, you mentioned some of the Allergan products, maybe doing better than your expectation. Can you maybe, I mean, I know you don’t want to share your secret sauce. But in terms of what is it that you've noticed that has helped to drive those products? Because it seems like it's pretty much across the Board, from an aesthetic to Vraylar, Ubrelvy. So, is it around promotion efforts? Is it around some payor dynamics? Or anything you could share would be helpful there? And then the second one on Imbruvica. I just want to confirm, I think you guys said that the new patient share across all indications now is 42%. So, I just want to see you guys are in line with what you expect at this point. Obviously, there's been questions around some like competitors that have entered the market. And maybe you can just talk about the patients who are not studying on Imbruvica. So, what are you seeing as the reasons why they might be choosing a competitor? Thank you." }, { "speaker": "Rick Gonzalez", "text": "Yeah, Vamil, this is Rick. I'll cover certain part of the first question, and maybe I'll ask Jeff to jump in and cover any additional thoughts that he might have. I think as you look at this business, one of the things that I think AbbVie is sort of known for is that, we tend to operate in a very focused and disciplined way, especially across what we consider to be growth franchises. We expect every one of our major businesses to develop plans, to be able to maximize the value of their assets, both from a strategic long-term basis, but also from a short-term tactical basis. And I'll use aesthetics as the example. Early on, we made the decision that we were going to fully integrate the aesthetics business to make sure that it had the focus and attention there it needed because we believe this business had a significant opportunity to be able to grow. We did that globally. So, if you look at Allergan in the past internationally, those people representing those products also had to represent eyecare and other therapeutic products. So, we moved those out into the therapeutic areas of AbbVie internationally and solely dedicated the aesthetics group internationally to just their products. And then in the U.S., we operate with a similar structure and a fully integrated R&D organization is totally committed to just developing aesthetics products and reports directly to Mike and then the Head of the Business for aesthetics reports directly to me. And we had them develop a plan that they are now executing against to be able to deliver against that. So, I think it's really three aspects of it from my perspective. It's one the structure we put in place. And that was a thoughtful, planned out structure. Two, it's the discipline processes that we use to be able to execute across all of our businesses. And then third, I'd say we have consistently invested and we do invest in businesses that we think have the opportunity to be able to drive long-term growth and performance in a way that we can drive that at maximum speed. And certainly, as you look at aesthetics, we've increased the investment in SG&A and we've increased the investment in R&D. Jeff, anything you'd add?" }, { "speaker": "Jeff Stewart", "text": "I think, Rick, the – I would agree, I think, big piece Vamil, was the - is the level of the investment. So, as we looked at the - particularly the neuroscience compounds, Vraylar and Ubrelvy, we were able to structure the sales forces a little differently, which was important from commercial execution and also really upgrade and drive some of the investment around patient activation. So, I think that all of these brands are spectacular brands leadership position. And when we got that investment profile right, we've seen the response, so nothing that beyond that. Going back to your question on the hematology share, the 42% that I referred to was the combined AbbVie shares. So that's Imbruvica plus Venclexta across all lines of CLL. So, if you take a look - if I give you a little bit more color on the latest data that we have, for example, in frontline, we have 35% total AbbVie share, which is made up around 24% for Imbruvica and 11% for Venclexta. For second line share, for example, we have a 48% total AbbVie position, which is approximately 33% for Imbruvica and 15% for Venclexta. So, both of these brands are now operating at a very significant share level across CLL. I'll give you some more thoughts as you ask for in terms of color in the market. Beyond that leadership level that we have across the CLL indication, we do see that the CLL market is still suppressed. So, for example, patient starts year-to-date are down in the high single digits. And even within the quarter, they were down in the low single digits. We see that improving. And so that outlook looks to improve over the second part of the year. In terms of overall share dynamics, over the last several quarters, we have lost a few share points to Calquence, within the range of our expectations as they've ramped with their CLL ramp. But also interesting, we've seen that there's been some share increases in monotherapy CD20, which we think is also a COVID type of effect that will ultimately revert back to normality as we go along through the pandemic. So overall, the franchise is performing very, very well. And as you heard from Mike, we're tremendously excited about the future of the hem/onc franchises as we move forward." }, { "speaker": "Rob Michael", "text": "And Vamil, this is Rob. I'm going to come back to your first question. Just one more thing we should mention is, we've been able to really leverage our international infrastructure. And so, we set up this business. We have the aesthetics franchise, focus fully internationally on that business whereas Allergan had combined with therapeutics. So, we've been able to bring that focus and the level of investment. I think we've also been able to leverage our market access prowess. So, we’re very strong across the globe. And so, when you think about the opportunities for us going forward, I think, international certainly plays a big role as we leverage the Allergan business." }, { "speaker": "Liz Shea", "text": "Thanks, Vamil. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you for your question. Our next question is from Chris Schott with JPMorgan. You may ask your question." }, { "speaker": "Chris Schott", "text": "Great. Thanks so much. Just another one on aesthetics. Obviously, some incredibly strong numbers here. Can you just elaborate a little bit more on sustainability of this growth? So, I guess I’m just trying to get a better sense of how much of what we're seeing right now is catch up as we exit lockdowns versus a more sustained step up in sales going forward? Just any color on that would be appreciated. My second question was RINVOQ in UC. Can you just put some of this data into context as you think about the competitive landscape, and particularly relative to what you had anticipated in your long-term guidance for this indication? I think you’re about $1 billion in IBD sales by 2025. And is that we've seen more of this data set, just how comfortable are you feeling with that target and ultimately the role RINVOQ’s going to play in this space? Thanks so much." }, { "speaker": "Rick Gonzalez", "text": "Hey, Chris, this is Rick. I'll take the aesthetics question and then Mike can maybe cover the second question that you had. So, it's a great question. And it's one that we have been looking at very carefully. I mean, if you just step back and you look at the performance of the business, we've done a number of things to drive the business. We believe this business is significantly underpenetrated when you look at the available patient population here and your ability to drive long-term penetration is tremendous. And so, that's why we've done the things that we've done to try to drive that demand. Globally, the aesthetic sales were up 31%. If we look at the U.S. toxin and filler business, the markets up about 40% versus 2019. So, but it's hard to evaluate, I can tell you the vast majority of it is driven by fundamental demand. And we can see that through the funnel that we see patients coming in and how many of them are activated to go get procedures. But we just conducted a fairly robust market research study to try to understand how much of it was COVID related. And we looked at things like how many of those patients got stimulus checks, how many of them were affected from an employment standpoint, and are now back at work? I'd say that study, if you looked at the data in that study, the conclusion that you withdraw from that is very little of it is COVID related. Now, I think the flaw is this, most patients are not going to say they use stimulus money for these kinds of procedures or other kinds of things. So, I think to the best of our ability, what I would tell you is about two thirds of the performance, I think, is fundamental demand, and maybe one-third of it is pent up demand. We're going to need a couple more quarters, I think to see how that plays out. But I'd say that's our best assessment right now. So, very robust growth either way, and it could sustain a little bit better than that. But I think, you can pretty well count on two thirds of it being fundamental demand at sustainable longer term. Mike?" }, { "speaker": "Michael Severino", "text": "I'll take the question on RINVOQ UC. What I would say is the data that we've seen from RINVOQ UC has exceeded our expectations from an episode perspective, and the results they are very strong. UC has been very difficult to treat pharmacologically and getting high rates of permission. And this response has been challenging and both has delivered those now account just across number of studies. And I think from a safety perspective, it's also performed very well. I commented in my remarks, fact that overall rates of these serious AEs are actually lower with RINVOQ [ph]. Now the reason for that is that many of these AEs are driven by self and with the improvement in the ease to use UC then improve as well. And with respect to events of interest, the safety profile has worked very, very well with their segment A, segment B and other events rates have been comparable to controls. And so overall, we feel very confident in the long term guidance that we put out. But one thing that's important to keep in mind is that long term guidance is 2025 guidance. And our IBD assets will be in relatively early stage of launch by that time. But the profiles that I've talked about not only for RINVOQ, but also for SKYRIZI bode well, not only 2025 guidance, but for the long term growth of that aesthetic as opportunity there as well." }, { "speaker": "Liz Shea", "text": "Thanks Chris. Operator, next question, please." }, { "speaker": "Operator", "text": "Thank you. Our next question will be from Ronny Gal with Bernstein. You may ask your question sir." }, { "speaker": "Ronny Gal", "text": "Good morning, and thank you for taking the questions. First one is on ABBV-951. You've mentioned the efficacy rates. I was wondering if you can talk a little bit about the skin safety profile as compared to the neogen product or the apomorphine IV from Europe, especially when it comes to the some more severe effects like Abscess and Okta? The second question is staying with a pipeline is a little bit of budget a-Beta. Didn't take long for you guys to walk into that. I was kind of wondering if you can talk a little bit about the science that you're discovering, is the right approach to get to the best effect with minimal side effects to try to remove as much flak as possible in a very targeted manner? Or should the approach be to go after soluble [indiscernible] and approach to removal of plaque indirectly?" }, { "speaker": "Michael Severino", "text": "Okay, so this is Mike, I'll take both of those questions. With respect to 951 we’ll publish full data from the Phase 3 study that I described at a medical meeting and then ultimately, in peer reviewed journals as well. But what I can say is the skin safety has looked good to our eye and is within our expectations well within our expectations. As one would expect with a cutaneous device, there are some local reactions, but those have generally been mild and resolved with continuing treatment. We've not seen significant issues with more severe types of skin about the safety profile, and we think the patient friendly aspects of subcutaneous delivery that has some parallels to an insulin pump like device will be a real advantage here because it allows patients to get that to open like efficacy that's transformative without the need for placement of a gastric tube that's unthreaded in the small bowel and very, very difficult to manage. And so, we feel very good about the potential for 951. With respect to a-Beta, I think if one looks at all of the data, it's quite clear that if you can remove plaque rapidly, then there will be a benefit, and the key parameter that we would need to see is deep reductions in level of plaque and rapid reductions in the level of plaque, because you won't start to see a cognitive benefit, we believe until you get to that amyloid negativity level bypass, which is 20 centroids, until you reduce patients to that level. So, the goal would be to get them there as rapidly as possible. And to do that, while minimizing the impact of area. And we think that that can be done through epitopes selection. There are slight differences in the amyloid forms that are present in vessel wall compared to plaque. And with appropriate epitopes selection, we believe that our preclinical data would support that you can do that with reduced risk of area. And of course, we now need to see whether the clinical data supports that as well. But those are the basic principles that we're following. We've obviously had these candidates before the aducanumab approval, because as I said, we've been monitoring this area quite closely. But we think this is a good time to advance those candidates and to determine whether the science I described plays out in the clinic. But our approaches with respect to a-Beta are based on plaque, not soluble forms of [Indiscernible]." }, { "speaker": "Ronny Gal", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Thanks, Ronnie. Operator, next question, please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Andrew Baum with Citi. You may ask your question." }, { "speaker": "Andrew Baum", "text": "Many thanks. A few question, Jeff. Firstly, on the outlook for rebaiting and oncology, this is somewhat of a novelty, at least historically. I know that yes, excluded Calquence from their formulary, there's obviously increased therapeutic competition in the space. How should we be thinking about the rebaiting outlook and oncology going forward more broadly? Second, on the U.S. paybacks through COVID and now in the recovery stage, could you outline the magnitude of which you've had to increase and then decrease the Medicaid components in the patient assistance programs? Or whether you're seeing that improvements, some sense of scale and direction there? Many thanks." }, { "speaker": "Michael Severino", "text": "Yeah, thank you, Andrew. And to start with oncology. I mean, largely, as you know the rebaiting has been done through the sort of the GPO channel. And particularly with the physician in office dynamics that are in that sector, we don't see significant rebaiting happening at the PDM level. And if it is, it's quite modest. I think the certainly from the ESI standpoint that you highlighted, that was an ESI decision. That was not certainly something that AbbVie approach that particular payer with any sort of deal. Our philosophy is that these drugs are very important for oncologists to have basically open access for all of these agents. So, I think it is something that we've seen some of these lights that have started to turn on. But they've been quite modest. And I don't think that they're going to be a super accelerant that we should be overly worried about. That's my position on that. I think this the second approach in terms of sorry, that was the question on the magnitude of the Medicaid. Yeah, this has been quite interesting. We've seen, certainly on all of the data, the fact that the enrollment in Medicaid has gone up. When we look across our businesses at let's say, acute channel shifts in terms of the utilization, they're relatively modest. They're there, so we don't see massive movements around our channels shifting that link to the magnitude of what you might see in terms of the enrollments. So it's relatively modest, certainly manageable. And I think, certainly, as we see the jobs positioned come back and that could be quite strong, I think we'll see any modest movement will be corrected over the next several quarters." }, { "speaker": "Rick Gonzalez", "text": "And this is Rick. Going ahead I'd add to the second question is so we have a very extensive and I would say generous PAP program in place that's really designed to ensure that patients who can't afford our medicines, have the ability to be able to access those medicines free of charge in many cases. As an example, 99% of the applications we get for uninsured patients we approve we actually just increased the program to 600% of the federal poverty level across all of our brands. And so, it's a program that I think is designed to fulfill the mission that I just described. And that is that patients who need our medicines can get them from us if they can't afford to pay for them, or whatever system that they operate in. And but we have not seen and much to our surprise, we have not seen that program increased dramatically, even through COVID. And we advertise directly to patients that if they lost their job during COVID, that we would provide our medicines to them. But I wouldn't say, as I said, much to our surprise we didn't see the volume go up dramatically." }, { "speaker": "Liz Shea", "text": "Thank you, Andrew. Next question, please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Geoffrey Porges with Leerink. Your line is open, sir." }, { "speaker": "Geoffrey Porges", "text": "Thank you very much. Lots of questions. But I'll focus first on RINVOQ. Rick, you've given the long term guidance of recall $7 billion in revenue by 2025. I think and by means correct me if I don't recall correctly. But if you only get the 15 milligram dose approved, if that's the outcome of the deliberations of the FDA, but you get the approvals in Europe, can you achieve that revenue guidance? You’re confident enough in the 15 milligram program? And then secondly, for Mike. You'll see us development program seems to have been sort of reactivated. And could you talk a little bit about your conviction, a little bit more detail on a 119? We don't know much about that. Are you confident that it can be active see through correct that matches up to your competition? Because clearly that's a big revenue opportunity that we have reflected in. Thanks." }, { "speaker": "Rick Gonzalez", "text": "So, Jeffrey, this is Rick, on your first question. Yes, the guidance for RINVOQ is $8 billion. And I would say we're confident that even with a 15 milligram, we will sustain that guidance. If you look at the performance of the 15 milligram is quite remarkable. And so, we feel good about the performance of RINVOQ, we continue to see strong uptake of RINVOQ, and physician interest and is consistent with what we would expect. So, I think we're fine now." }, { "speaker": "Michael Severino", "text": "This is my context, a question on the CF program. When we restructured the collaboration with Galapagos. A few years ago, to take direct operational control of that program, we had a couple of goals. One is we wanted to make sure that we're optimizing the potentiator in C1 components of the regimen. We felt we had a best in class, C1 in Q2. But we believed we needed to make a switch in the potentiator to one that we already had in hand. And we've done that. We also believe that we needed a C2 corrector. That’s in that time period a few years ago did not exist. So, we needed a C2 corrector that had the potential to be best in class. And so, what we did is we put a significant internal chemistry effort to come up with a number of compounds. 119 is the most advanced and a very promising one that we believe fit that bill. And based on all the preclinical profiling, we think 119 can be a best in class C2 corrector. And with the other components of or triple, we think we can deliver best in class efficacy with appropriate pharmacological properties, dosing, low DDIs, et cetera. And so, we are now in a proof-of-concept Phase 2 study in the clinic to determine whether those preclinical data will in fact spare out. What I would say here is the preclinical assays are good. They're much more predictive than they are in other areas because we fundamentally know what the defect is in CF, and we can study it in appropriate tissues in human tissues in vitro. But ultimately, we're going to need to see the clinical data. By right around the end of the year, we'll see internally proof of concept results for that triple. We'd probably be in a position to announce them externally early next year, and those will be data that will include impact on FET1 with a triple. And so that will tell us whether we can be best in class. And I agree if we are best in class, I think it's a very significant opportunity and we will progress it rapidly. Now, it's a proof-of-concept study. So, if it's successful, we'd have some additional dose ranging to do. We're studying the highest dose of 119, to determine whether it can have that effect we'd have to do some additional dose ranging to determine the optimal dose of 119, but that can be done rapidly. And then we would, if successful move into Phase 3 development." }, { "speaker": "Geoffrey Porges", "text": "All right. Thanks Mike." }, { "speaker": "Liz Shea", "text": "Thanks, Geoff. Operator next question, please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from 6 Geoff Meacham with Bank of America. Your line is open, sir." }, { "speaker": "Geoff Meacham", "text": "Morning, everyone. Thanks for the question. Just had a few quick ones. Another one on JAK safety. And Mike you mentioned you expect regulatory action in the next few months? Can you just give us some perspective on that? Is there any data that you're still waiting on to submit? And is there still the potential for an advisory panel? And then the second one is on Ubrelvy. Maybe just give us some color on the on the new start dynamic? What are the patients recapturing? What share are you getting from and maybe just help us with kind of the -- what other wins do you have to make with respect to formulary access and share? Thank you." }, { "speaker": "Michael Severino", "text": "I'll take the first question and then Jeff will take the second question on Ubrelvy. So, with respect to JAK safety, we have indicated that we believe that an action is possible in the next few months. That's based on our discussions with the agency and what timing we think is reasonable. It's not a specific action date, like the PDUFA dates that had been set in the past. So, we will continue to monitor it as the process continues to move along. But the rate limiting factor, as we understand it is the agency's review of the tofacitinib oral surveillance data. And I think once that is completed, we will be able to move forward with Goodspeed with arm review. But there are no additional data from a safety perspective or no other substantial analysis that the agency is waiting on for us. We provided our updated benefit risk quite some time ago, as we announced publicly. And the agency has not requested any additional data. So, it's really that review of the tofacitinib oral surveillance is gaining as we understand it. With respect to an advisory panel, the agency always has the authority to call one if they desire to have one. But what I would say is, if they were planning on having an advisory committee. I would expect them to already be preparing for that and already have that process in motion. And we would know that, and there's no indication that that is underway at this time." }, { "speaker": "Jeff Stewart", "text": "Right, and I'll take the Ubrelvy question. As I mentioned, we're very, very pleased with Ubrelvy and really our overall migraine portfolio that we're rapidly developing here. To give you some sense, it's quite remarkable. I mean, if you look at the total acute oral CGRP category, so that's us and the competitor. It's about 18% of all new prescriptions, and it continues to grow very, very quickly. So again, it shows you how hard patients and physicians are. Are looking for the adoption of these particular agents, even though you have to step through a Triptan, some cases two Triptan. So, the market demand is very, very substantial. When we look to the overall performance, we can see that roughly the two agents are sort of splitting the acute indication. Some of the more weeklies are now being a little confounded by the new preventative episodic approval from Neurotech. But nonetheless, I think that's a small piece of the story. When we sort of peel out some of their new preventative scripts, we still have the leadership position for the acute market. But I really think the bigger picture is how fast that segment will expand over time? And we anticipate that will continue to lead that based on Ubrelvy’s overall profile. Our overall access dynamics are quite good. So, we really have roughly a 90% access. Again, some of that access demands a step through a Triptan. But overall, when you look at how fast that category is going, we don't really anticipate that there's major new plans that we need to achieve any sort of incremental access position. And so, basically our commercial strategy continues to be how hard can we drive this acute segment and lead that acute segment. And as I mentioned in my prepared remark, anticipating the arrival in the late third quarter for Atogepant, which has just a spectacular profile for episodic migraine. So, thank you." }, { "speaker": "Liz Shea", "text": "Thanks Geoff. Operator next question, please." }, { "speaker": "Operator", "text": "Our next question is from Tim Anderson with Wolfe Research. You may ask your question." }, { "speaker": "Tim Anderson", "text": "Thank you. It's well known that AbbVie rebates heavily on Humira in the U.S. So, when biosimilars launch, won’t you potentially have room to pull back on those rebates, which could mean, basically the meaningful offset to last Humira volumes. It seems like it could end up being in the billions of dollars that you could pull back in house. And I realized there's RINVOQ and SKYRIZI dynamic to consider. And related to that line of questioning how does the prospect of interchangeability biosimilars impact your thinking on this front? If interchangeable, generics are allowed or not allowed? How does that impact what you might do with those rebate dollars? And then second question, quick one, just the range of outcomes for when Imbruvica might face generics in the U.S. Is it in the realm of possibilities that AbbVie enters into settlement agreements with legal challengers that could push out generic timing?" }, { "speaker": "Rick Gonzalez", "text": "Hi Jim, it’s Rick. So, I'll cover the first two questions that you have there. I would say let me start with interchangeability. We've outlined now over the last year or two, I think pretty specifically what we view the biosimilar impact in the U.S. to be and we are assuming that there will be two interchangeable biosimilars. And that's in the thought process of the erosion models that we have described many, many times now. So, we are assuming there will be interchangeability. We're certainly not in a position where we're going to talk about what we're going to do from the standpoint of rebates. We've always competed very effectively in these markets. Certainly, the focus for us going forward is the next generation assets, SKYRIZI and RINVOQ. And you can see now, those two assets this year will do $4.6 billion. So, call it $5 billion. They're rapidly growing. And they're doing exactly what we had hoped they would do. They have higher levels of efficacy, and they're ramping dramatically. And they will buffer the impact of biosimilar impact in the U.S. And so, what I'd say is the strategy is going exactly the way we had hoped it would go. We'll fill out the range of indications on SKYRIZI and RINVOQ. And continue to drive those assets into the marketplace effectively. On Imbruvica?" }, { "speaker": "Laura Schumacher", "text": "Yeah, hi. This is Laura Schumacher. Our Imbruvica composition of matter patent expires in May of 2028 assuming that we get the pediatric extension. We do have later expiring IP covering methods of use formulations, crystal forms, and the like. Our long-range plan currently assumes the loss of exclusivity in the U.S. in May of 2028 when the composition of matter of patent expires. There is litigation ongoing with one remaining and a filer. And we're awaiting a decision on that." }, { "speaker": "Tim Anderson", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Great, thank you Tim. Operator next question, please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Matthew Harrison with Morgan Stanley. You may ask your question." }, { "speaker": "Matthew Harrison", "text": "Great. Good morning. Thanks for taking the question. Just a follow up question on CFP, I guess first two parts here. First, are you confident that you have a potentiator that's active and improve versus the Galapagos compound? Because I think we've seen a lot of issues with people trying to develop potentiators. They're as good as Kaleidoco. And then, second, I know you talked about FPV 1, have you looked at sweat chloride at all? Obviously, you need a larger patient sample size to get a good directional view on FPV 1. I'm wondering if we looked at smaller patient numbers on sweat chloride. Thanks." }, { "speaker": "Michael Severino", "text": "So, this is Mike. I’ll take that. With respect to the potentiator, we are convinced that we have a potentiator that has activity and we've changed the potentiator from some of those prior combinations that were pursued earlier on in the Galapagos collaboration. We think that, that potentiator it has clear signs of activity, we think the C1 character is very good and probably best in class based on the data that we have seen that were generated earlier in the collaboration. We put this up, the principal piece that was missing was that CTO and we think we have a good one. With respect to the endpoints while it does take a larger sample size, to look at FPV 1 we feel like FPV 1 is what really matters here. That's what's going to translate into clinical benefit for patients. And so, our proof-of-concept study will show us FPV 1 and that's the primary measure that we are going to use to determine whether to advance the triple or not." }, { "speaker": "Liz Shea", "text": "Thank you, Matthew. Operator, next question, please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Steve Scala with Cowen. Your line is open, sir." }, { "speaker": "Steve Scala", "text": "Thank you, a couple questions. Many of the questions so far suggests concerns around RINVOQ. But I'm wondering if this could all turn into be a positive. So, to what extent do you believe RINVOQ prescribing might be being held back by competitor product concerns? So, once those concerns are resolved and or RINVOQ emerges unscathed, if it does. RINVOQ could even do better. And we could be looking at a sharp acceleration in share gains and prescription trends in Q4. So that's the first question. And secondly, on Humira contract renewals that will be signed in coming months for 2022. What is the typical duration of those contracts? Are they typically 12 months? 24 months, 36 months? If you can give us an idea of that that would be helpful. Thank you." }, { "speaker": "Michael Severino", "text": "Yeah, it's a very good question. And this question we fought a lot about, let me give you some perspective on RINVOQ. So, if you look at our, let's say, our demand performance, and I think I mentioned my prepared remarks, we've been very consistent about 15% in place share in the large RA market, which is just under Humira, which has grown a little bit over the COVID times and since January to about 18%. So, we're very, very stable. And I do believe that there is some overhang on certain segments of prescribers that have, let's say, going back a little bit to the TNF, really our own product, Humira. So, it's not outside of the realm of possibility as this resolves and really largely, as you probably heard, or seen Xeljanz has lost in play share over that period. So, I do believe there's a little overhang in certain, probably significant segments of Rheumatology. So, we are anxiously awaiting the resolution here of oral surveillance, which obviously has delayed our regulatory submissions. But it's not outside of the realm of possibility, given the very significant and differentiated data that we have in our packages, that we can see an acceleration as things resolve. But we're going to anxiously be monitoring. And certainly, be prepared to anticipate any outcome there." }, { "speaker": "Rick Gonzalez", "text": "And see, this is Rick. On the contracting question, I'll handle that one. It varies quite a bit based on product and by managed care organization, but I'd say typically, so it can be some of them can be as short as 12 months, it's probably more common to be in a 24 month range from a contracting standpoint." }, { "speaker": "Steve Scala", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Thanks, Steve. Operator next question, please." }, { "speaker": "Operator", "text": "" }, { "speaker": "Q - Chris Raymond", "text": "" }, { "speaker": "Chris Raymond", "text": "Thanks. Just on the a-Beta program and you answered a few questions. But I think I heard you describe the product that you're targeting the plaques and not the cybil forms of a-Beta. Just kind of maybe if you, wonder if you can give a little bit more color on the driver of that have gone forward with that. Did you guys -- does your science sort of tell you that amyloid beta oligomers, for example, are not a driver of the disease or this is more of a decision that's driven by the regulatory precedents of approving targeting the a-Beta plaques. And then maybe also, if you can get a little more detail on this molecule is likely an IV, or possibly subcue delivered antibody? Thanks." }, { "speaker": "Michael Severino", "text": "So, this is Mike, I'll take that. With respect to the focus on plaque, I think when one looks at all of the data, you can conclude that if you can reduce plaque rapidly, from that point forward, you can see a benefit. So, in other words, getting the majority of patients to a level where they are amyloid negative by PET, so below 20 [ph] centoloids. And doing that rapidly is what's required to see a benefit emerge over time. And part of the importance of speed is that you're not going to see that benefit until you get to that level. So, if you spend the entire period of a trial, getting to that level, you don't then have an opportunity within that trial to see an improvement in cognition. And of course, for patients, if you don't get to that level fast enough, they're not going to drive benefit for a period of sometimes too many years. And they need really faster than that. So, that's our focus on plaque. With respect to different components and the role of oligomers. I think it's hard to tease that apart right now, what we know from the data is what I said that getting patients to amyloid negativity, but reducing plaque is what seems to drive a clinical benefit, whether there are upstream steps that one could try to impact to achieve the same result. I think it's an open question. And we're going where the science tells us to go today. With respect to IV or subcue, I think it's early to answer that question. It's going to relate to ultimately the delivered dose. And then dose forms that can be delivered. So, for example, there are on body injectors and other things that can deliver more than the traditional one or two and those of a solution containing a monoclonal antibody. So, there are approaches that could be IV or subcue, but I think it's a little bit early to make predictions on how that will all play out." }, { "speaker": "Chris Raymond", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Thanks, Chris. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. It comes from Luisa Hector with Berenberg. Your line is open." }, { "speaker": "Luisa Hector", "text": "Hello, thank you for taking my question. Sorry, going back to RINVOQ again, but I just wanted to check that the approval of the pending indications isn't a particular gating item for your filing in UC. And then I see that you haven't changed your guidance for RINVOQ for this year. And I know previously, you've stated that maybe would only ever be a small contribution this year. But rather than self, I just wonder whether there's any particular savings on your launch costs this year due to the delay? And then maybe on TMB-383. Again, I think I've understood this is now 100% belonging to you. So just to check, no impact from the Amgen acquisition? And then when might we see a Phase 2 start looks like you have a dose data very compelling. So how soon could we be looking out for that trial starting data? Thank you." }, { "speaker": "Michael Severino", "text": "Okay, this is Mike. I'll start with the RINVOQ question and pass it to Rob. And then I'll come back or the 383 question. With respect to the UC filing, the UC filing is not dependent on the approvals in the other indications. And obviously, the timing of release of review of the UC filing would carry it out to a point where those matters where I think, based on any reasonable expectation be resolved." }, { "speaker": "Rob Michael", "text": "Yeah, and your question regarding the guidance for RINVOQ. So you're right, we did give guidance to $1.7 billion early this year, assuming we would have a new indications approved. We said that would be a minor contribution, think of it in that couple of hundred-million-dollar range. But given the strong performance out of the RA indication, we've maintained that guidance, despite the fact that those approvals are delayed. There is some level of savings in terms of SG&A related to approvals being delayed. But at the same time, we're investing the business you'd look at, we're doing the aesthetics. Obviously, other parts of Allergan business, there's opportunity to invest more broadly. So overall, SG&A is up because we are investing for long term growth, but there is some level of savings associated with the RINVOQ delays." }, { "speaker": "Michael Severino", "text": "With respect to 383, the BCMA, CD3 bispecific, you're correct, there is no impact of the Amgen acquisition of Teneobio on that. The asset would be ours and it would be unencumbered by anything related to the Amgen acquisition. In terms of Phase 2 timing, we plan to move forward very rapidly, not only with Phase 2, but with Phase 3 studies. With this asset, we think the data that have been generated are very strong, very high levels of response, good levels at the DGPR were better thresholds with a very good safety profile as well and a profile that would fit well with combination therapy and move to earlier lines of therapy. So, we'll advance the program aggressively and we'll update on the specifics a little bit later on in the year." }, { "speaker": "Liz Shea", "text": "Thanks, Luisa. Operator next question, please." }, { "speaker": "Operator", "text": "Our next question will come from Daniel Busby with RBC Capital Markets. You may proceed with your question." }, { "speaker": "Daniel Busby", "text": "Good morning. I've got two questions. First, a bigger picture question on SKYRIZI and RINVOQ. You've got to do peak sales for both products in the early 2030s. There's been a lot of focus on near term regulatory hurdles, particularly for RINVOQ. But there's also a lot that could happen competitively between now and then. So, with that said, what do you view is the biggest potential longer term competitive threats for both of those drugs, and particularly given the ongoing emergence and maturation of new drug modalities? And second, can you talk a little bit about the assumptions you've built into overall guidance relating to the Delta variant, and whether that's changed at all the way you think about the second half recovery? Thank you." }, { "speaker": "Michael Severino", "text": "We go through a fairly rigorous and by that I'd say a very rigorous long range planning process where we evaluate what we think the comparative alternatives might be and the profile of our assets versus other assets. And I would say as we look at RINVOQ and SKYRIZI, and the clinical data that has been generated is certainly achieving or exceeding the expectations that we had for those assets. I don't see anything on the horizon, that would make it in a timeframe that would have a material impact on those assets based on the guidance that we provided, or even longer-term guidance out to typically do a 10-year long range planning process. So yes, there are certainly many, many modalities that are available today across many of these therapeutic areas. It's having the right kind of asset, and the right kind of clinical performance. And then everything else that wraps around that market access and all the other things you have to be effective at in order to achieve the level of performance that these assets are achieving. And so, bottom line is, I think we feel very confident in our assumptions here. As it relates to the Delta variant. I think as we look at the guidance that we are providing in the second half, it certainly is reflective of what we assume -- we don't assume dramatic changes in the U.S. or other major markets around the world and where we are today. We're assuming major levels of recovery in certain markets, either that are currently in lockdown, like Australia as an example, or in many of the Asian markets outside of outside of China and Singapore. So, I think we've properly represented it. I think the healthcare system in the U.S. in particular has experienced that we have last year tells us that the healthcare system can much better treat these patients. And we're not assuming that we see anything that would be significant in this shift in the U.S. from a lockdown standpoint." }, { "speaker": "Liz Shea", "text": "Thanks, Daniel. Operator, we have time for one final question." }, { "speaker": "Operator", "text": "It will come from Gary Nachman with BMO Capital Markets. Your line is open, sir." }, { "speaker": "Gary Nachman", "text": "Hi. Good morning. And thanks for squeezing me in. Sorry, but one more RINVOQ first. Curious why you think Europe doesn't seem as concerned with JAK class the way the FDA has been since you got the positive opinion on atopic derm for both doses there? And how you see uptake in Europe versus the U.S. overall? Is there a difference in perception, you think in those regions with the class? And then regarding Vraylar for MDD? How are the Phase 3 studies gone overall? Did you change anything with respect to enrollment numbers or sites during the course of the pandemic since these Phase 3 data are coming soon? And have you done any more work sizing up the potential market opportunity, where you think it would be used most for MDD? What types of patients? Thank you." }, { "speaker": "Michael Severino", "text": "So, this is Mike, I'll start and then I'll pass it over to Jeff for some initial additional comments. With respect to RINVOQ and the regulatory environment in the prescriber perception prescriber environment, between Europe and the U.S., we do see differences. And the European authorities, and the European prescribing base seems to place less emphasis on these signals and view them more specifically to the molecules that generated the data then the EU have. Why that is? I can't give you a single reason other than these are both very large, competent jurisdictions that have come to their own impressions of the data. And those impressions have different somewhat. As you've said, for atopic derm we got the positive opinion from the CHMP for both the 15 and 30 milligram doses. We think the data are very supportive of that decision. And we look forward to launching that indication in Europe. And we think it's going to be an important additional indication, as it will be in the U.S. when we do get to approval. With respect to uptake in Europe, Jeff, I don't know if you want to comment?" }, { "speaker": "Jeff Stewart", "text": "Yeah, as I mentioned in my remarks, the uptake on RINVOQ in many major markets is very, very strong. Now, as you know, waiting for reimbursement takes a little bit more time than the U.S. but as I highlighted, we have in play leadership and this is including the TNF to biosimilars in Germany, France, Canada, for example. So, it's quite strong. I think another point that I'd like to make, and we certainly see it in some of the early launch countries with PSA and AS. There appears to be a synergistic effect which makes some sense from a commercial standpoint. As countries like Germany start to introduce PSA and AS, the entire RINVOQ molecule starts to accelerate and move faster. And so again, given the last question I answered, we're actually anxiously awaiting the approval of those extra room indications there. So it's quite strong. And as I highlighted again and Mike mentioned, our label here in atopic derm is going to look quite strong in the European markets. Mike, maybe you can hit on MDD and then I'll address the market structure there." }, { "speaker": "Michael Severino", "text": "With respect to Vraylar and MDD, we did a deep dive on the Phase 3 studies shortly after closing the acquisition of Allergan. And what I would say is, we found that the studies were very well designed. We were comfortable with important considerations like patient selection, selection of sites that we believe would give quality data. We looked at the blinded aggregate characteristics of the population roles. You look at the baseline characteristics, and you don't know who's on active or placebo, but you can just see if you're enrolling the right patient population, and we believe we were. All of the measures are designed and seem to be behaving appropriately. And so, we feel good about the design characteristics of that study. And we did not feel that it was necessary to make any changes. But we did do that deep dive to be sure of that as I said, what we found was in fact reassuring. With respect to the market opportunity, I'll just make a couple of comments. And I'll hand it off to Jeff, for some more detail. But what I would say is, depression obviously is a substantial indication. And it's one that is very difficult to treat with existing agents. About 50% of patients don't achieve adequate control with monotherapy with frontline agents like SSRIs, or SNRIs. And so, there is an important opportunity for adjunctive therapy. And obviously, this is an adjunctive MDD indication. So, that would be the population that we would be looking at. Jeff, do you want to comment in more detail on that?" }, { "speaker": "Jeff Stewart", "text": "Yeah, I mean, if we look at the market structure, obviously, you have schizophrenia, which is a relatively modest market, and we have a good growing position there with our existing indication. And then you have the prescriptions and really the different bipolar segments. And what I would say about not the big depression market, but the adjunctive MDD market that Mike spoke about. It's about the same size in terms of a prescription value to the bipolar segment. So, adjunctive MDD, if the studies were to progress as we see is really gives us a chance to access a market that's equally sized for the one that we're competing in today. So, it's quite attractive as we continue to look for the final readout of those trials." }, { "speaker": "Liz Shea", "text": "Thanks, Gary. That concludes today's conference call. If you'd like to listen to replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us." }, { "speaker": "Operator", "text": "That does conclude today's conference call. We thank you all for participating. You may now disconnect and have a great rest of your day." } ]	AbbVie Inc.	141,885,706
ABBV	1	2,021	2021-04-30 09:00:00	Operator: Good morning and thank you for standing by. Welcome to the AbbVie first quarter 2021 earnings conference call. All participants will be able to listen-only until the question and answer portion of this call. You may ask a question by pressing star, one on your phone. I would now like to introduce Ms. Liz Shea, Vice President of Investor Relations. You may begin. Liz Shea: Good morning and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Vice Chairman and President; Rob Michael, Executive Vice President and Chief Financial Officer; and Jeff Stewart, Executive Vice President, Commercial Operations. Joining us for the Q&A portion of the call is Laura Schumacher, Vice Chairman, External Affairs, Chief Legal Officer and Corporate Secretary. Before we get started, I remind you that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today’s conference call, non-GAAP financial measures will be used to help investors understand AbbVie’s business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Unless otherwise noted, our commentary on sales growth is on a comparable basis, which includes full current year and historical results for Allergan. For this comparison of underlying performance, all historically reported Allergan revenues have been recast to conform to AbbVie’s revenue recognition accounting policies and exclude the divestitures of Zenpep and Viokace. References to operational growth further excludes the impact of exchange. Following our prepared remarks, we’ll take your questions. With that, I’ll now turn the call over to Rick. Rick Gonzalez: Thank you Liz. Good morning everyone and thank you for joining us today. I’ll discuss our first quarter performance and outlook, and then Jeff, Mike and Rob will review our business highlights, pipeline progress and financial results in more detail. We’re off to an excellent start this year, delivering strong top and bottom line first quarter performance. We reported adjusted earnings per share of $2.95, exceeding the midpoint of our guidance by $0.14. Total adjusted net revenue of $12.9 billion was up 5.2% on a comparable operational basis, nearly $250 million ahead of our expectations. These results include strong performance across each of our core therapeutic areas, including double-digit comparable operational revenue growth from immunology, neuroscience, and esthetics, as well as high single digit operational growth from hematological oncology. Additionally, we continue to see robust sales from our key and newly launched products. Skyrizi and Rinvoq contributed nearly $900 million in combined revenues this quarter, more than double the sales versus the prior year as both products continue to ramp in their initial indications. Imbruvica and Venclexta delivered combined sales of approximately $1.7 billion, reflecting continued leadership in CLL and other hematological malignancies. Vraylar, which remains one of the fastest growing medicines in psychiatry, delivered more than 20% comparable operational growth. Ubrelvy, the leading oral CGRP for acute migraine, generated revenue growth of approximately 25% on a sequential basis, and within our leading esthetics portfolio, which is performing well above pre-COVID levels, Botox cosmetics and Juvederm are demonstrating robust performance. Both of these brands grew more than 40% on a comparable operational basis. The integration of Allergan also continues to go very well. As illustrated by our balanced results this quarter, we are clearly demonstrating that we have created a stronger and much more diverse company with the scale and flexibility to fully invest in the business for long term growth. While the pandemic has categorically impacted our day-to-day lives, we are encouraged by the latest recovery trends. We see market growth and new patient activity increasing overall, especially in March, although certain markets continue to remain below pre-COVID levels, including CLL and HCV in particular. We expect that increasing vaccinations globally will continue to support a fully recovery across our therapeutic areas as we progress through the remainder of this year. Based on our robust performance this quarter and the continued strong outlook for our business, we are raising our full year 2021 EPS guidance and we now expect adjusted earnings per share between $12.37 and $12.57, reflecting growth of more than 18% at the midpoint. I’m also extremely pleased with our R&D prospects, including the number and potential of the opportunities especially within our late stage pipeline. We’re on the cusp of the potential commercial approval of more than a dozen new products or indications over the next two years, including five total expected approvals in 2021. This includes Atogepant, a novel oral CGRP for episodic migraine, adding to our already attractive migraine portfolio; a new eye drop for the treatment of presbyopia, as well as expanded indications for Rinvoq in psoriatic arthritis, ankylosing spondylitis, and atopic dermatitis, and we expect more than half a dozen new product or indication launches in 2022, including Navitoclax for myelofibrosis, ABBV-951 for advanced Parkinson’s disease, Skyrizi for psoriatic arthritis and Crohn’s disease, Rinvoq for ulcerative colitis, Vraylar for major depressive disorder, and initial indications for Imbruvica and Venclexta. With these collective new growth opportunities and the continued momentum of our underlying portfolio, our long term outlook remains very strong. In closing, our focus remains on strong commercial and operational execution as well as pipeline advancement. I’m pleased with the financial results for the quarter and the overall pace of the recovery across our portfolio. We’re off to another excellent start in 2021. With that, I’ll turn the call over to Jeff for additional comments on our commercial highlights. Jeff? Jeff Stewart: Thank you Rick. We demonstrated strong and balanced growth across our therapeutic portfolio this quarter, a testament to our differentiated product profiles and commercial execution. Our immunology portfolio delivered global revenues of more than $5.7 billion, reflecting growth of nearly 12% on an operational basis. Humira sales were approximately $4.9 billion, up 2.6% on an operational basis with continued high single digit growth in the U.S. offset by biosimilar competition across our international markets, where the unfavorable impact was more moderate than expected in the quarter. Our new immunology agents, Skyrizi and Rinvoq, are both demonstrating robust prescription growth well above all comparable launches. Skyrizi sales were $574 million, reflecting 34% in-play patient share, which includes new and switching patients. This is more than double the share capture of the next nearest biologic competitor. Skyrizi total prescription share in the U.S. psoriasis biologic market is now approximately 15%, second only to Humira. Additionally, we recently received approval for a single dose prefilled pen for Skyrizi which will reduce the number of injections per treatment. Skyrizi is now the only quarterly dose psoriasis treatment available in an auto injector, further improving the patient experience. Rinvoq sales were $303 million with strong in-play patient share of approximately 15% in the U.S. RA market. Physician and patient feedback remains very positive on Rinvoq’s level of efficacy, speed of response, and strong benefit-risk profile. Internationally, both of these new assets delivered strong double-digit sequential growth with ramping access in share. Skyrizi has now also achieved in-play patient share leadership in the EU 5 psoriasis market, exceeding Tremfya and Cosentyx and at parity with Taltz. As Mike will discuss momentarily, we are also making considerable progress to expand the uses of Skyrizi and Rinvoq in several immune-mediated diseases with half a dozen additional indication approvals expected later this year and in 2022. In hematologic oncology, sales were approximately $1.7 billion, up 7.3% on an operational basis. Imbruvica continues to perform well across multiple indications, including CLL, where it remains the clear market share leader across all lines of therapy. Imbruvica sales increased 2.9% on an operational basis this quarter with performance impacted by lower new patient starts within CLL, where the market remains below pre-COVID levels. Imbruvica growth was also unfavorably impacted by the COVID-relating stocking benefit that we saw in the first quarter of 2020. Venclexta sales were $405 million, up 24.5% on an operational basis with increasing share in frontline CLL and continued strong performance in AML. In neuroscience, revenues were more than $1.2 billion, up 10.9% on a comparable operational basis. Vraylar once again delivered strong growth. Sales of $346 million were up 21.2% on a comparable operational basis, reflecting a nearly 2.5% total prescription share of the U.S. atypical antipsychotic market. Within migraine, the launch of Ubrelvy is exceeding our expectations with $81 million of revenue in the quarter. Feedback from physicians has been very positive, highlighting Ubrelvy’s efficacy, safety, convenient dosing profile, and overall commercial access. Ubrelvy is the number one branded acute treatment for migraine based on both new patient share and prescription growth. The oral CGRP therapies, including our leading Ubrelvy, now represent roughly 16% of new prescriptions in the large acute migraine market. We believe there is substantial room for long term growth in this rapidly expanding segment based on unmet need and strong patient demand. We also look forward to the expected commercial approval of Atogepant, our oral CGRP for episodic migraine later this year. Botox therapeutic is seeing a very nice recovery in chronic migraine as well as its other indications, with total sales of $532 million, up 7% on a comparable operational basis. Lastly in our other key therapeutic areas, we saw significant contribution from eye care, which had revenues of $817 million. Mavyret sales were $450 million, down 28.4% on an operational basis as treated patient volumes have remained below pre-COVID levels, and we also saw double-digit comparable growth from Linzess, the leading branded prescription medicine in the U.S. for the treatment of adults with IBSC, or chronic idiopathic constipation. Overall, I’m extremely pleased with our execution across the therapeutic portfolio, including the progress we are making with recent new product launches. We remain on track to deliver very strong revenue growth in 2021. With that, I’ll turn the call over to Mike for additional comments on our R&D programs. Mike? Mike Severino: Thank you Jeff. I’ll start with immunology, where we continue to make good progress with Rinvoq and Skyrizi in new disease areas, as well as in our early and mid-stage immunology programs. We recently reported positive top line results from the second induction study for Rinvoq in ulcerative colitis. Similar to results from the first induction study, in this Phase III trial Rinvoq demonstrated a very strong impact on disease activity as measured by clinical remission, clinical response, and endoscopic improvement. The 45 milligram induction dose was well tolerated and the safety profile was consistent with previous Rinvoq studies. In these induction trials, we saw no DVT, PE, MACE events, or malignancies in the Rinvoq groups, and the rates of serious adverse events were numerically lower than placebo. We believe these induction data compare very favorably to other UC treatments on the market or in development and based on the data generated to date, Rinvoq has the potential to become one of the most highly effective therapies for patients with moderate to severe ulcerative colitis. We expect to see results from the UC maintenance study this summer with regulatory submissions anticipated in the second half of the year. The Rinvoq program in Crohn’s disease is also progressing very well, and we expect to see induction data from the first of two Phase III trials in the fourth quarter, followed by induction data from a second Phase III trial and maintenance data in the first half of 2022. We’re also nearing completion of our pivotal program for Skyrizi in Crohn’s disease. Earlier this year, we reported positive results from the two Crohn’s induction studies and we expect to see maintenance data this summer. Our regulatory submissions for Skyrizi and Crohn’s disease remain on track for the second half of 2021. Following completion of our registrational program for Skyrizi in psoriatic arthritis, we recently submitted our regulatory applications in the U.S. and Europe with approval decisions expected in the first half of 2022. We’re very pleased with the level of activity we saw with Skyrizi on both joint disease and skin clearance in our Phase III program and look forward to providing this new treatment to patients suffering from psoriatic arthritis. Our regulatory submissions are currently under review for Rinvoq in three new indications in the U.S.: ankylosing spondylitis, psoriatic arthritis, and atopic dermatitis. As we’ve previously announced, the FDA recently extended the review periods for Rinvoq in psoriatic arthritis and atopic dermatitis following a request for an updated assessment of the benefit-risk profile for Rinvoq in these indications. In response to the FDA request, we provided updated data from across Rinvoq programs in RA, psoriatic arthritis, and atopic dermatitis. Based on the review extensions, we now expect approval decisions for psoriatic arthritis in June and for atopic dermatitis in July. The regulatory action date for Rinvoq in ankylosing spondylitis is unchanged and remains on track for June. We remain confident in the benefit-risk profile of Rinvoq across all indications and will work with the FDA to bring Rinvoq to market in these new disease areas. Earlier this year, we received European approval for Rinvoq in psoriatic arthritis and AS. Our European regulatory application for Rinvoq in atopic dermatitis is under review and we remain on track for a CHMP opinion this summer with an approval decision anticipated in the third quarter. We also recently saw results from a four-week Phase Ib study evaluating our novel small molecule RORγT inverse agonist, ABBV-157, in patients with psoriasis. By targeting RORγT with an inverse agonist rather than an antagonist, we believe we can more effectively inhibit IL-17 production, thus resulting in a greater impact on skin inflammation. In our Phase 1b study, 157 showed promising activity as an oral psoriasis agent and we plan to move the asset forward to a larger Phase IIb dose ranging study in the second half of this year. Moving now to our oncology portfolio, we continue to make very good progress with our late stage programs for Imbruvica, Venclexta and Navitoclax, as well as with our early stage oncology assets. We remain on track for several key regulatory submissions, data presentations, and phase transitions this year. At the upcoming ASCO and EHA meetings, we will be presenting more than 40 abstracts, including results from the Imbruvica plus Venclexta CAPTIVATE trial fixed duration cohort in treatment-naïve CLL patients. The Imbruvica-Venclexta combination is an important element of our hema-on strategy to provide a differentiated fixed duration treatment that offers deeper levels of response. Data from our Imbruvica-Venclexta combination studies will support regulatory submissions in frontline CLL later this year. We will also be presenting four-year follow-up data from Venclexta’s CLL14 trial in frontline CLL as well as updated efficacy and safety data from a Phase Ib study evaluating Venclexta plus azacitidine in treatment-naïve, high risk MDS patients. We expect this MDS study to complete in the second half of this year and, if positive, it could support a submission in the first half of 2022 to seek an accelerated approval. In the area of solid tumors, at the recent AACR meeting we presented Phase II results for Teliso-V in non-squamous, non-small cell lung cancer. In this study, Teliso-V demonstrated promising response rates in heavily pretreated patients, particularly in patients with highly expressed c-Met where we saw a 54% objective response rate. c-Met is an attractive target across multiple tumor types, particularly in non-small cell lung cancer where approximately 30% of patients have over-expressed c-Met. Approaches in this area have historically focused on small molecule kinase inhibitors and anti c-Met antibodies, both of which have shown only limited efficacy in this patient population that has not been sufficient for approval. In contrast our c-Met antibody drug conjugate is a novel approach that we believe will have broader applicability and will provide enhanced efficacy compared to previous approaches. We recently began the second stage of our Phase II study which has the potential to support an accelerated approval in second line plus metastatic non-squamous, non-small cell lung cancer. We also plan to evaluate Teliso-V in the frontline setting, including in combination with other agents, as well as in other c-Met positive tumor types. We also have a next-generation c-Met ADC program that will be entering the clinic later this year. Our new c-Met ADC, ABBV-400, utilizes a topoisomerase inhibitor payload which we believe will provide greater anti-tumor efficacy against both amplified Met and over-expressed c-Met subtypes, thus providing deeper responses with broader applicability than other anti c-Met targeting agents. In neuroscience, we recently presented data from several key programs at the American Academy of Neurology annual meeting. A total of 33 abstracts were presented, including data from the Phase III ADVANCE study in episodic migraine prevention, showing that Atogepant has the potential to be a highly effective, safe and well tolerated oral treatment option with a rapid onset of action. The FDA recently accepted our NDA for Atogepant for the prevention of episodic migraine and an approval decision is expected in September of this year. We also presented results from an open label Phase III study evaluating Ubrelvy in perimenstrual migraine which showed that Ubrelvy has potential as a safe and efficacious treatment of migraine attacks that occur during or near menstruation. Menstrual-related migraine attacks can be more difficult to treat because they are often longer in duration, more severe, and often resistant to treatment. We presented data from a Phase I study demonstrating that ABBV-951 subcutaneous infusions maintain an equivalent Levodopa exposure to Duopa in advanced Parkinson’s patients. Results from the pivotal program for ABBV-951 are expected this summer with the regulatory submissions anticipated in the second half of this year. We also remain on track for readouts in the fourth quarter from two Phase III studies for Vraylar in adjunctive major depressive disorder and, if successful, we would anticipate regulatory submissions in the first half of 2022. In eye care, we submitted our regulatory application in the U.S. for AGN-190584 for the treatment of symptoms associated with presbyopia. 584 is a once-daily eye drop being developed to help address symptoms that are often corrected through reading glasses. This new technology represents a complementary product to reading glasses and would be a convenient on-demand solution for patients with mild to moderate presbyopia. An approval decision is expected in the fourth quarter of this year. In esthetics, we are investing to accelerate key next generation toxins and filler programs. By combining the esthetic team’s deep expertise with AbbVie’s breadth and scale of resources, we’ll be able to bring novel products to market significantly faster. Looking across our portfolio, we’ve identified a number of programs to accelerate, including our short acting and long acting toxins, as well as our next generation bio-stimulatory tropoelastin and collagen fillers. Acceleration of these programs is expected to drive significant long term growth for the esthetics franchise. In summary, we continue to make significant progress with our pipeline to start the year and we look forward to many more data readouts, regulatory submissions and approvals throughout the remainder of 2021. With that, I’ll turn the call over to Rob for additional comments on our first quarter performance and financial outlook. Rob? Rob Michael: Thank you Mike. Starting with first quarter results, we reported adjusted earnings per share of $2.95, up 21.9% compared to prior year and above our guidance midpoint. Total adjusted net revenues were $12.9 billion, up 5.2% on a comparable operational basis excluding a 1.1% favorable impact from foreign exchange. The adjusted operating margin ratio was 51% of sales, an improvement of 120 basis points versus the prior year. This includes adjusted gross margin of 83.9% of sales, adjusted R&D investment of 11.6% of sales, and adjusted SG&A expense of 21.2% of sales. Net interest expense was $622 million and the adjusted tax rate was 12.3%. As Rick previously mentioned, we are raising our full year adjusted earnings per share guidance to between $12.37 and $12.57, reflecting growth of 18.8% at the midpoint. Excluded from this guidance is $5.10 of known intangible amortization and specified items. This guidance now contemplates full year revenue growth of 9.8% on a comparable operational basis. At current rates, we continue to expect foreign exchange to have a 1% favorable impact on full year comparable sales growth. This implies a full year revenue forecast of approximately $55.9 billion. Included in this guidance are the following updated full year assumptions. We now expect international Humira revenue of approximately $3.1 billion and we now expect Botox cosmetic sales of approximately $1.9 billion. All other full year assumptions remain unchanged. As we look ahead to the second quarter, we anticipate net revenue approaching $13.6 billion. At current rates, we expect foreign exchange to have a 1.6% favorable impact on comparable sales growth. We expect adjusted earnings per share between $3.05 and $3.09, excluding approximately $1.78 of known intangible amortization and specified items. Finally, we continue to make great progress on our Allergan transaction commitments. We realized over $360 million in expense synergies in the first quarter and are on track to deliver synergies of approximately $1.7 billion in 2021 and greater than $2 billion in 2022. We have already paid down $10.4 billion of combined company debt. We continue to expect cumulative debt pay down of $17 billion by the end of 2021 with further deleveraging through 2023. This will bring our net leverage ratio to 2.4 times by the end of 2021 and approximately two times by the end of 2022. In closing, we are off to an excellent start to the year with strong performance across the portfolio and financial results ahead of our expectations. With that, I’ll turn the call back over to Liz. Liz Shea: Thanks Rob. We will now open the call for questions. In the interests of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, first question please? Operator: Our first question comes from Chris Schott with JP Morgan. Your line is open. Chris Schott: Great, thanks so much for the questions. The first one from me was on Rinvoq and dose. As we think about FDA balancing lowest effective dose versus incremental efficacy and safety risks, what would the impact of only having a 15 milligram versus a 15 and 30 milligram approval have on your view on the atopic derm opportunity, which I think you talked about is about a $2 billion sales potential previously? Then my second question was just a little bit more color on the esthetic dynamics. Is there anything we’re seeing with the results we’re seeing--very, very strong here, is there any catch-up type event as the world reopens that we’re seeing with these results, or are these sustainable underlying trends that are kind of coming in above expectations for that business? I’m trying to get a sense of just how to think about that progressing as we go through the rest of the year. Thanks so much. Mike Severino: Thanks Chris, this is Mike. I’ll take the first question and then Rick will take the second question that you asked. With respect to Rinvoq, we feel very confident in the benefit-risk profile across indications and across the doses that we study. Having said that, both the 15 and 30 milligram doses have performed very well, both from an efficacy and a safety perspective, and so if you look at the efficacy results that we drove with 15 in atopic dermatitis, we drove high levels of response, very rapid response, and had a very prominent impact on itch, which is one of the most bothersome symptoms, with 15 as well as with 30. With the 15 milligram dose, for example, we saw statistically significant and clinically significant reduction in itch after only two days, which is really quite remarkable in this disease. Again, that’s really one of the most bothersome symptoms to patients. We think we could be successful with either dose, to answer your question specifically, but we also remain confident in the benefit-risk of both doses. Rick Gonzalez: Chris, this is Rick. I’ll cover the esthetics one for you, as Mike said. I think if you look at the underlying performance of the esthetics business, in particular the market growth in the U.S. and in China, it’s driving the fundamental growth that we see through the business. Certainly there is some impacts still from COVID, so we’re seeing some impact there, but I think the majority of it is when we took over Allergan, we made a decision to really invest in promotion at a much higher level than they were investing in it prior, and they had an approach that was more of an episodic investment approach where we have basically made a decision that we’ll fund across the entire year at a relatively significant level to drive demand, because the data clearly supports that you can grow this market. I think the best comparison is to start to look at what it looked like versus 2019, because you obviously had the COVID impact in 2020, but you take for example Botox - Botox versus 2019, cosmetic Botox versus 2019, it’s up about 27%. The market’s growing very robustly. Some of that is probably COVID-driven - these are U.S. numbers I’m describing right now. Some of that is probably COVID-driven, but I wouldn’t say a lot of it at this point is COVID-driven in the U.S. China continues to grow very well - in fact, I’d say China is back to the level of growth, and we have expanded the sales force in China once, about four or five months ago. We’re in the process now of going through a second expansion in China and we expect that China will continue to drive significant growth going forward. The one area that still is being impacted in a fairly significant way from COVID is the European market. We still see it--we see it starting to emerge in areas like the U.K., but there are other areas in Europe that are still in lockdown. I would expect that Europe and Brazil as well will hopefully start to see some recovery as we get into the second half of this year and they can start to contribute, which would add additional growth to the overall business. But I would tell you I’m very pleased with the decisions we’ve made around driving more promotion, and I’m pleased with the execution of this team. This team has done extremely well in executing and driving the kind of share position that we want and the growth that we want, so I think it is sustainable going forward. Chris Schott: Thank you. Liz Shea: Thanks Chris. Operator, next question please. Operator: Our next question comes from Geoffrey Porges with SVB Leerink. Your line is open. Geoffrey Porges: Thank you very much, appreciate the couple questions. First Rick, something we don’t talk about a lot, which is the neuroscience portfolio, and you’ve started reporting it combined. I know there’s four products in there, but adding them up, the long term guidance you provided previously was about $8.3 billion, I think, and you’re already annualizing it close to $6 billion. Could you give us a sense of how much upside that portfolio has, given the trends that you’re seeing? Then on a related question, I hate to harp on the JAK question, but obviously there’s a lot coming to us from what this impact might be, so if you were confined to the 15 milligram dose not because of any signal but because of the regulators’ view of the safety of the class, how much impact would that have on the $8 billion long term guidance, and do you have other levers which you could pull to fill whatever shortfall that would cause? Thanks. Rick Gonzalez: On the neuroscience portfolio, it is an area that we’re very excited about, so maybe Jeff and I will tag team here. But I think when you look at the two major growth franchises there, being the migraine franchise and the anti-psychotic franchise with Vraylar, both of those, we think, have significant opportunity to continue to grow. You’re obviously seeing Ubrelvy now perform extremely well in the marketplace - I think Jeff can probably give you a little more color on that, and Vraylar is continuing to perform very well as well. I think if we are able to achieve one positive study on MDD, I think that will give us significant growth going forward. This is a franchise that we’re excited about. I think it will be a meaningful franchise for us over the long term scenario where we continue to look at assets that we could potentially add to it, and I think it will be a nice growth driver for us. Jeff? Jeff Stewart: Yes, I think just to reiterate, as I mentioned in my comments, the oral CGRP market is moving very nicely. It’s hit, I mentioned 16% for the quarter, but now on the weeklies it’s 17% or above on just the penetration of that segment, so we see a lot of runway in that segment over our long range planning. Certainly the availability of another oral CGRP, in this case for episodic migraine, allows us to compete in a much larger segment beyond the acute, and to Rick’s point, remember we have the big anchor asset with Botox therapeutic in migraine on the back end for chronic migraine and we have plans in place to expand that upstream also into episodic migraine. This is actually in some ways non-overlapping because we have a big injector base for Botox and then we can have the neurologist and primary care base for Atogepant, and so when you look basically really across the waterfront - you know, leading acute agent, oral, very, very potent and active oral agent in the middle with episodic, and then on the back end with Botox, it’s a very nice portfolio for us that will drive growth. As Rick mentioned, we are encouraged on the potential for adjunctive MDD, and that segment itself when we do the market analysis is about as large, the adjunctive MDD segment, as bipolar depression, and so this basically has the opportunity for us to really double the potential penetration over our long range plans, so we’re very encouraged over this set of assets. Rob Michael: And Geoff, this is Rob. I would just add, if you can take the pieces we’ve given in terms of long term guidance, for Vraylar we’ve talked about approaching $4 billion with the current approved indications. For migraine, both Ubrelvy and Atogepant, we’ve talked about peak potential greater than a billion for each of those assets, and then we have Duopa plus we have 951 in the pipeline, that I think can drive significant growth in addition to our early stage pipeline in neuroscience, so I do see that as a therapeutic area that will drive long term growth for the company going forward. Geoffrey Porges: Great, thanks. Then the JAKs? Rick Gonzalez: On the JAKs, we’ve obviously evaluated carefully the positioning of the product. I think if we look at where we are today, one, we’re confident in the high dose that has a good risk-benefit profile, but I would tell you it wouldn’t change our guidance going forward. The assumptions that we have made in areas like atopic dermatitis, we believe we can get to those assumptions without the high dose. That doesn’t mean that we don’t want the high dose, but at the end of the day I believe we will maintain the guidance that we have based on that. Jeff Stewart: The other thing that I would point out is that we’ve had additional data on upadacitinib Rinvoq across a number of areas since that guidance, including IBD, so we’ve had the UC data that have come largely since that guidance, and those have exceeded our expectations, and so we remain confident overall in the performance of Rinvoq. Geoffrey Porges: Great, thanks Jeff. Liz Shea: Thanks Geoffrey. Operator, next question please. Operator: Thank you. Our next question comes from Andrew Baum with Citi. Your line is open. Andrew Baum: Many thanks. A couple of questions, please. There’s not much bipartisan agreement in the U.S. over drug price reform but there seems to be a lot when it come to antitrust in relation to the pharmaceutical industry. Perhaps Rick could comment, following last night’s House Committee on the Judiciary, where there was lots of pointed talk from both sides focusing firstly on patent thickets, second on having a presumption of anticompetitive behavior in terms of assessment of large scale in particular M&A, meaning that it would impact future business development for the industry, so that’s the first question. Then the second question, rather more positive, in terms of the JAK, when I look at consensus, the forecasts for Rinvoq are about $6 billion. When you look at the size of the opportunity in RA alone, let alone psoriatic arthritis, atopic dermatitis, UC, and the other indications you have, is it conceivable to you, short of this drug effectively or the class being heavily limited or pulled from the market, that that $6 billion looks like an incredibly conservative estimate for what this drug could do? Rick Gonzalez: Andrew, this is Rick. I’ll comment maybe on your point of view around the antitrust discussions. Clearly I’ve accepted the invitation to be able to testify to the Committee on May 18. We certainly feel absolutely comfortable and confident in the way we operate in this market. This is a highly competitive market where Humira competes, and certainly as we look at the patents that were issued for Humira, they went through a rigorous process in order to be issued. They represent true innovation to the product. They were challenged by competitors, just like every competitor has a right to challenge a patent if they don’t believe it’s valid or appropriate, and those patents were challenged and the vast majority of those patents survived that challenge. What I’d say is when we look at our behavior in this market, I think our behavior was absolutely pro competitive. We had patents that went all the way out to 2034 in that portfolio and yet we chose to license every single biosimilar player in 2023, literally 11 years before the last patent would have expired. I feel highly confident in the position that we have taken in this marketplace, that we have operated totally appropriately. Your next question on Rinvoq--I’m sorry, I was thinking about the first one. Can you repeat your question? Andrew Baum: I will. Just finishing on the first, so you reference your future testimony. I guess it was more general rather than just AbbVie-centric, how it would impact BD and the ability of the industry to operate if pricing can’t get resolved. But moving onto the second question, my question was whether consensus forecasts for Rinvoq look unrealistically conservative given the scale of the opportunity and given in RA alone, looking at the size of that market, it’s a progressive disease, that you don’t actually need atopic dermatitis to get in excess of where consensus currently pegs forecasts, which when look, about $6 billion. Rob Michael: Andrew, this is Rob. I’ll start and then I’ll hand it over to Jeff. I think we agree with you - we do think consensus is conservative. We’ve given 2025 guidance of $8 billion for Rinvoq, and we would expect it to grow beyond 2025. When I look at the current consensus, obviously as you quoted, it’s a little bit--just a little bit above $6 billion from the numbers that I’m looking at, and I look at the growth beyond ’25, it’s nowhere near what we’re expecting, so we feel very good about the opportunity there. I think what we covered with you in December still holds as we’ve broken out the contribution by indication. We still feel very good about that, but we would agree that consensus is very conservative right now. Jeff Stewart: Yes, thanks Rob, this is Jeff. Agree - these are spectacular assets with incredibly dynamic market, so we see across the rheumatology markets, the atopic derm market, we see the IBD market which with both assets we think is underappreciated. I mean, even expansion in second and third lines as new assets come in that are really breakthrough assets with higher levels of efficacy, and so we clearly believe that consensus is conservative here. Just a comment on atopic derm - this is an explosive market. I mean, it is significantly underdeveloped in terms of the penetration, so it’s going to grow substantially, and even if you look at conservative assumptions on where we source business - you know, the growth of the second line, that’s not to say that we’re not going to be very competitive in front line. It’s a very, very attractive space. Again, I think the performance that we’ve seen, the clinical performance that we’ve seen right now, primarily on the induction trials for Skyrizi and Rinvoq, Skyrizi in Crohn’s, Rinvoq in UC, is very, very encouraging, so we see that cascading over our long range plans as well. We are very, very bullish and agree that consensus is conservative. Andrew Baum: Many thanks. Liz Shea: Thank you Andrew. Operator, next question please. Operator: Our next question comes from Vamil Divan with Mizuho Securities. Your line is open. Vamil Divan: Great, thanks so much for taking my questions. Maybe a couple, if I could, on the migraine side. First on Ubrelvy, you mentioned it looks like the class is doing very well and gaining share. It also looks like over the last few weeks or so, you’ve been gaining a little share within the class relative to Nurtec, so I’m just wondering if you can share your perspective on what you think is driving that. Some of us thought it might be due to pricing and access, but based on our calculations, it looks like your gross to net is actually lower than what it is from the Biohaven side, so any perspective would be helpful. Then on Atogepant, maybe just a little more, if you could talk to your go-to-market strategy, assuming approval in September, especially given Nurtec will likely have an indication for both treatment and prevention. How do you see coming in with two separate drugs - you know, could be two co-pays, could be just a different message relative to a single drug, so just any perspective on how competing with that would be helpful as well. Thank you. Jeff Stewart: It’s Jeff. In terms of the acute market, as I mentioned, the penetration of the overall segment is increasing very, very nicely, as I highlighted. If you look at the mix between Ubrelvy and Nurtec, we have gained a little bit over the last few weeks, but it’s very close. We typically run at 51%, 52%, 53% of the new prescription basis. I think you are quite perceptive over the value creation that’s taking place there, and I clearly don’t have full insight into the Biohaven fall through, but we’ve been quite disciplined. We have over 90% commercial access, so we’re quite comfortable where we are from an overall access perspective, and our team remains quite disciplined in terms of making sure that we both drive the right type of volume with our positioning but also the right type of profitability over time. We’re encouraged with our continued momentum with Ubrelvy. In terms of Atogepant, I think what’s quite impressive about our program there is just the sheer level of efficacy that we have, and I think this is very important in terms of sometimes the narrative over simple or easy versus, look, how do you think about the best drug for episodic prevention, particularly when you choose an oral, so we are at the very, very high end of the migraine freedom or the days of migraine control with this new asset, and we think that frankly you need to take care of the migraine and Atogepant will be very well positioned to do that. We also think that we’ll have nice synergies. Obviously we have a fairly significant sales force that is promoting Ubrelvy to both neurologist and high prescribing general practitioners, and it will fit in very well as we put Atogepant into that sales fleet, so we’re set up well, we think, for our go-to-market. Vamil Divan: Okay, thank you very much. Liz Shea: Thanks Vamil. Operator, next question please. Operator: Our next question comes from Tim Anderson with Wolfe Research. Your line is open. Tim Anderson: Thank you. A couple of questions please. I haven’t heard really any drug company this reporting season talk about future potential austerity measures in ex-U.S. geographies, meaning broad-based price cuts following the impact of COVID. As a company, as one of the few companies that’s given detailed long term financial guidance, I’m guessing you have been thinking about this, and I’m wondering how you are currently viewing this in terms of its likelihood of occurring, what the magnitude could be and what the timing might be. Then second question just on an early stage pipeline asset, your TNF-steroid antibody drug conjugate, I believe you have in-house probably a fair amount of data that the markets haven’t seen yet. I’m wondering when we might see additional human data and what your current level of enthusiasm is towards that platform. Rick Gonzalez: Tim, this is Rick. I’ll cover the OUS austerity measures. Certainly if we go back to 2008, we saw that kind of an impact, so as we were building out our long range plan, we have made some sets of assumptions around that. I would expect that we will see some pressure outside the U.S. going forward over the next couple of years. It’s certainly manageable within the expectations that we have built for the business going forward, certainly based on that level of experience that we’ve seen historically - it’s manageable. It is something that we have contemplated and I would frankly expect to see some level of pressure going forward. Mike Severino: This is Mike, I’ll take the second question. With respect to the TNF-steroid conjugate program, we’re obviously advancing ABBV-154. We have a large Phase IIb RA study that will start this quarter, and then we’re starting studies in additional immune-mediated conditions as well over the course of the year. With respect to publication of the data from 3373, which is the closely related compound from the same platform that we top line results some time ago, I think you can expect to see more detailed data over the course of the summer. Liz Shea: Thanks Tim. Operator, next question please. Operator: Thank you. Our next question comes from Steve Scala with Cowen. Your line is open. Steve Scala: Many thanks. First on Rinvoq, I’m curious what additional safety data has FDA been provided that it did not have previously, and has all of it been previously presented and if not, what was the conclusion of what now has been submitted, so that’s the first question. Secondly regarding Imbruvica, to what extent can AbbVie tease out COVID impact on new patient starts versus competition from new frontline agents? Thank you. Mike Severino: This is Mike, I’ll take the first question, and then Rick will handle the second. With respect to Rinvoq, the additional safety data that were presented to the FDA or provided to the FDA are essentially a roll forward of the analysis that we did at the time of the NDA submission. Obviously our database continues to grow, we accumulate patient years experience, and so there weren’t fundamentally new analyses but we did an updated assessment with the additional data that have accrued in the time between submission and when we submitted those responses. What I would say is the data that we reviewed have not changed our impression of benefit-risk in any way. I think they’re very consistent with all of the data that have been publicly presented. Obviously since they represent data that were current up to the time that we submitted just a few weeks ago, not all of these data have been presented in the public domain, but I would say that our response is very consistent with what we have described publicly in the past. Rick Gonzalez: On your second question - this is Rick, we get data on new patient starts, so we have relatively, I think, accurate data. It’s offset by a couple of months - I’ll have Jeff maybe talk about it in a little more detail, so we know any CLL patient, when they start, regardless of therapy, we can measure that, and obviously we can measure again what type of therapy they start on, so I think the level of data integrity that we operate with from a market standpoint here is pretty good. It’s offset by a few months, and maybe Jeff can speak to the time offset. Jeff Stewart: Yes, so Steve, it’s Jeff. We have pretty good visibility to what’s happening from the share perspective versus the market start perspective. I’ll give you some flavor. With regard to Calquence, we can see the impact of the approvals in the front and second line CLL, and it’s largely consistent with what our expectations were, so they’re ramping in a similar fashion to what we saw in the MCL or NHL, so we know that there’s some impact on Imbruvica there. The largest impact has been, unfortunately, into the market, and unfortunately I mean for the patient. I’ll give you a little bit of the numbers. Typically the CLL market, which is the largest driver, it grows sort of at a population level, like 2% every year. If you look at the impact from COVID, we can see almost three different waves - we can see a wave where the new patient starts in the market, we’re down in the high teens in the first part. Then it started to claw back a little bit into the single digits down, and then it got hit again into the teens in the August period and we saw it down again in early January, about 18%. We can see what’s happening, and as I mentioned in my remarks, the biggest impact here has been on continued market suppression due to COVID. Rob Michael: Steve, this is Rob. I would just remind you also on the first quarter that we had the stocking impact from COVID last year, so if you adjust for that, it’s about a four point impact on Imbruvica’s growth year-over-year due to the prior year comp with the stocking impact. Steve Scala: Thank you. Liz Shea: Thanks Steve. Operator, next question please. Operator: Thank you. Our next question comes from David Risinger with Morgan Stanley. Your line is open. David Risinger: Yes, thanks very much, and congrats on the results and updates. I have two questions. First, just to follow on, on that comment, could you just help us understand a little bit more about why Imbruvica is such an outlier in the cancer market, why the pandemic is hitting Imbruvica very hard whereas the pandemic is not hitting other cancer agents so hard? Then second, with respect to esthetics, it’s obviously booming, and it is validating your acquisition of Allergan. But I think that you updated guidance for the year for Botox cosmetic to $1.9 billion, and that implies flat sequential sales from the $477 million that you booked in the first quarter, so if you could explain that please. Thank you. Mike Severino: This is Mike. I’ll take the first question and then others will comment on your second question. With respect to why Imbruvica is being hit harder than other anti-cancer agents in the pandemic, I think it has to do with the underlying rate of progression CLL. CLL, while it is a very significant limiter of long-term function and survival, in the short term there’s a sense that therapy can be delayed if necessary because the rate of progression is relatively slower than other forms of cancer, for example certainly much slower than AML, another indication that we are very active in, in the hema-on space. I think in the setting of the pandemic, that’s why you are seeing more deferrals for start-up therapy and, in some cases, longer time to switch a therapy, which would explain why Imbruvica dynamics are different than other anti-cancer agents that treat other diseases. Rob Michael: David, this is Rob. On your question regarding Botox cosmetic, we did see in the first quarter, if you just look at toxins market growth, it’s over 30% in the first quarter. There is some impact from pent-up demand as we come out of the pandemic, but we feel very good about the forecast we put forward. We obviously took it up $100 million, so it’s essentially pass through to beat in the quarter. I’d say your math on flat sequentially, I think it’s up a little bit, but really if you consider that we did have some level of pent-up demand come through in the quarter, you’ve got to back that out to truly understand the underlying demand dynamics. David Risinger: Thank you. Liz Shea: Thanks David. Operator, next question please. Operator: The next question comes from Ronny Gal with Bernstein. Your line is open. Ronny Gal: Hi everybody. Congratulations on a very nice quarter, and thank you for fitting me in. Two questions, if I may. First, there was data presented from Richter about negative symptom improvement using Vraylar. I was wondering what was your take on the data in terms of your ability to use it in the United States, is it something that you’re considering doing with [indiscernible], could this potentially be added to the label, and so forth. Second, the growth in Botox neurology is really impressive. It seems relatively odd that there was such a big jump in the middle of a wave of the epidemic in January-February for a physician-administered product. Can you just give us a flavor of what’s the underlying trends there, is there just a lot more success that you’re having in pushing first patients who failed [indiscernible] into Botox? How should we think about this? Mike Severino: This is Mike. I’ll take the first question and then others will comment on your second question. With respect to negative symptoms and the treatment of those negative symptoms in schizophrenia, it’s a very challenging area, it’s a very important area because they’re responsible for much of the long term loss of function in patients who suffer from schizophrenia. It has been a very difficult are to approach in general, and we believe Vraylar has a good profile there and has a good overall impact on the disease, a very strong overall impact on the disease, but it’s also one that’s been very challenging from a labeling perspective in the U.S. It’s been a very difficult claim to get in the U.S. It’s not clear that there is a specific path to negative symptoms in the label, but I do think the overall profile of Vraylar in schizophrenia, both with respect to symptom control and benefit risk, are viewed very positively by treating physicians, and I think the overall benefits are well understood by treating physicians and I think that is reflected in Vraylar’s overall strong performance. Jeff Stewart: It’s Jeff. In regard to Botox, it’s insightful because we are seeing some robust activity, particularly in migraine. I think there’s a couple reasons for that. One, Rick highlighted the sales force dynamics in China. We’ve definitely focused our sales team on the migraine component. The other thing that’s taken place is a little bit, I think, of an investment approach. We’ve had more consistent consumer investment since we had the integration than previously at the legacy Allergan, so I think the combination of the consumer investment, new waves where if patients access an injector at a neurologist, they can get a sample of Botox right at their first appointment rather than wait for many months. There are various commercial reasons, we think, that give us a lot of encouragement on the therapeutic Botox performance, again specifically and particularly in migraine. Ronny Gal: Thank you. Liz Shea: Thanks Ronny. Operator, next question please. Operator: Our next question comes from Terence Flynn with Goldman Sachs. Your line is open. Terence Flynn: Great, thanks for taking the question. Maybe two for me. I recognize there are still a lot of unknowns here, but how are you thinking about the potential headwind from any changes to corporate tax rates and guilty? Then given the progress you outlined on debt pay down, you’ll be back to about a two times leverage ratio, you mentioned. How are you thinking about capital allocation into the end of this year and into 2022? What types of assets are you focused on for BD and M&A? Thank you. Rick Gonzalez: This is Rick. I’ll cover the tax. As you said, it’s certainly early in the process and we obviously know what’s being proposed, but we don’t necessarily know where we will end up. I think one of the important things that we need to continue to think through is if we go back to--you know, one of the reasons why back in 2017 tax reform was passed was to make sure that two things happened: one, that U.S.-based companies were competitive with their foreign competitors, and two, it encouraged companies like ours to invest in the United States. I can certainly talk about the AbbVie example. I think it’s pretty compelling when you sit back and look at--you know, we were able to go out and acquire a Irish company, re-domicile it back to the United States. AbbVie today has 24,000 jobs in the United States. We’ve also increased investment significantly in the U.S. since tax reform. Over the last three years, we’ve invested $1.5 billion, we committed that we’d do $2.5 billion over time. We’re going to exceed that commitment. We’ve added about 1,500 jobs over that period of time. Companies like ours clearly took the benefit of tax reform and that has allowed us to be able to be more competitive and certainly in the acquisition of a company like Allergan, I think that was clearly demonstrated, but we also have invested much more aggressively in the U.S. I think going forward, one of the things that important for policymakers to balance is to make sure that we don’t go back to where we were, and that is where U.S. companies aren’t as competitive against their foreign competitors. The current proposal would make the U.S. have the highest rate of all developed countries - I’m not sure that’s the position you’d want to be in, so hopefully as we go forward, there will be a balance that’s looked at in raising taxes but also making companies maintain a competitive position and continue to be incented to invest in the U.S. Rob Michael: Terence, this is Rob. On your question regarding capital allocation, I’ll start and then Mike will add more color in terms of BD. We’ve said all along that we will continue to de-lever through 2023, so think about that net leverage ratio getting to two times in ‘22, the balance sheet would be in very good shape, but we want to continue to pay down the debt through ’23. During that period, we’ve allocated $2 billion of capital for business development. You’ve seen us do some very nice deals, whether you look at Genmab, I-Mab, we’ve done a number of nice transactions in this space with that amount of capital. I’ll let Mike speak to future opportunities as well. Mike Severino: In terms of the areas in which we would expect to be active between now and the end of 2022, we’ll continue to be active in oncology, both in hematological oncology and in solid tumors. That has been an area of focus for us, and I see that continuing as an area of focus. We would certainly like to add to the esthetics franchise - we’ve talked about how we will invest and continue to drive that franchise, and from a business development perspective, I think there are a number of opportunities there that could present themselves in that time frame. There are other areas that opportunistically we would certainly like to add to - I would point to neuroscience, if we could find the right opportunities, and eye care as additional areas where we could be investing. Liz Shea: Thanks Terence. Operator, next question please. Operator: Our next question comes from Daniel Busby with RBC Capital Markets. Your line is open. Daniel Busby: Hi, good morning. I’d like to ask a follow-up on esthetics and your high single digit annual growth target for that business over the next decade. Broadly speaking, how much of that growth is dependent on bringing new products to market, such as long and short acting toxins, versus driving continued growth from the esthetics portfolio that you have today? Second, as we near the one-year anniversary of your acquisition of Allergan, can you provide updated thoughts on your appetite for potential divestitures of non-core products or therapeutic areas now that you’ve had about a year to digest that transaction? Thank you. Rick Gonzalez: This is Rick. I’ll cover that, and maybe Rob can tag team along here. I think if you look at our overall estimate of high single digit growth on esthetics, it’s not heavily reliant on a large number of new products. There will be new products that come in - they’re probably closer towards the back end of the long range plan so they don’t have a significant impact on that overall growth rate, so I think we fundamentally believe that the market dynamics are such and the brands are competitive, highly competitive in this market, that we have the ability to grow the market and continue to maintain our share position in that market, and that will allow us to be able to drive that level of growth or higher. Rob Michael: This is Rob. I would just add that if you look at the esthetics business, we’ll see significant growth not just from toxins and fillers, but also in body contouring, so as we think about the potential for that leg of the stool, we think we’ve got really three key drivers of growth within esthetics that will help us get to that high single digit long term expectation. Again, as Rick mentioned, we’re not counting on a significant contribution to the pipeline, although we will continue to drive innovation particularly with toxins and fillers, and of course as you’ve heard before, it’s important within body contouring to continue to drive innovation there as well, so we feel very good about that outlook and we’re not counting on a ton from the pipeline there. Rick Gonzalez: And your second question, I would say even before the Allergan acquisition, we constantly looked at our portfolio and determined whether or not there were areas of our business that we ultimately though we were interested in divesting. I’d say that’s a process that we go through on a fairly consistent basis to ensure that we’re maximizing the value of the assets that we have within our portfolio, and so we will continue to do that. When we find opportunities where we think that’s the right strategy, then we’ll execute against that strategy. Liz Shea: Thanks Daniel. Operator, next question please. Operator: Our next question comes from Gary Nachman with BMO Capital Markets. Your line is open. Gary Nachman: Thanks. A couple more from me in Rinvoq. Are you hearing anecdotally any physicians that may be switching patients from Xeljanz to Rinvoq in RA, if there is a perceived safety benefit with Rinvoq as a more selective JAK, are you able to take advantage of that at all? Then secondly, if Rinvoq gets approved for atopic derm, how will you look to build out your presence with dermatologists? Will you leverage your current footprint on the esthetics side, or will you have a completely different medical derm team? Just talk about how you go after that opportunity and how you’re preparing for it, given your clear level of excitement there. Thank you. Jeff Stewart: Hi, it’s Jeff, and I’ll take both of those. We’re actually not hearing physicians, from our intelligence, from our field teams, actively thinking to switch patients from Xeljanz to Rinvoq. I mean, that’s a big decision for a physician. What we have heard is when we do some of our research and our ear to the ground, we clearly see that oral surveillance is perceived as a Xeljanz issue, so typically what will happen is you may see people take their foot off the gas on some new starts, but we don’t see or hear certainly any widespread news of active switching, so that’s basically our intelligence on your first question. In terms of your second question, we will not be using the esthetics sales force. We will basically leverage our existing infrastructure that we have with some expansion we’ve taken place for Rinvoq in atopic dermatitis. I think as you know, in terms of our reputation amongst the medical derms is extremely strong. We have the number one reputation because of the years of Humira in psoriasis and psoriatic arthritis and HS, and obviously we have a very, very strong impression and launch from Skyrizi, so we’ve basically designed a sales force that through our management, which has been connected to these derms for more than a decade, and existing reps with some new reps in there, we are building--we have built a sales force that will work seamlessly with our Skyrizi teams to give a very nice offering to those dermatologists. An important fact is that basically the overlap of those dermatologists that drive basically the atopic derm market is about 90% between the atopic derm market and the psoriasis market, so we feel we’re well positioned in terms of how we’ve set up our go-to-market approach with the segment. Liz Shea: Thanks Gary. Operator, next question please. Operator: Our next question comes from Gregg Gilbert with Truist Securities. Your line is open. Gregg Gilbert: Thank you. Mike, I was interested in your oral psoriasis commentary. Are you assuming that a new bar has been set by deucravacitinib in terms of efficacy versus Otezla, and is that something you’re very mindful of as you consider your own programs? Secondly for Rick, I realize AbbVie was born out of a company that had devices and pharma under one roof, but clearly you’ve embraced esthetics, for example, that good franchise building could involve drugs and devices or drugs that need to be delivered by device. Does that apply as you think ahead about ophthalmology or other areas when you consider long term BD? Thank you. Mike Severino: This is Mike. I’ll take the first question. With respect to oral psoriasis agents, we would want to come in from an efficacy perspective with something that clearly exceeded the threshold that existed in the past with Otezla, and I think coming in a range that is Humira-like or better would be our goal. I think if you look at BMS’ Tyk2, they sort of come in at that Humira-like efficacy, and so I think that is generally the range that we’re talking about. I think when one talks about a direct comparison in terms of where a bar is set, we have to look not only at efficacy but at safety and at the totality of the data. Obviously it’s extremely early for our RORγT agent, but we think it is a molecule, because it impacts very well understood biology with a good understanding of where to go from an efficacy perspective and a good understanding of safety, that we can get in a range that’s very competitive there, so I think we’d be looking for that Humira-like efficacy or greater as something that we would like to use to enter the space with in oral, obviously coupled with a strong safety profile. Rick Gonzalez: On your second question, this is Rick. I think the way we approach the markets that we operate in is we look for areas where there is significant unmet need and then we ultimately try to come up with solutions for those needs. Sometimes it’s drug only - in fact, I’d say the majority of our historical experience as AbbVie has been drug-only, but as an example, 951 is a good example of where it’s a combination product, right - a device and a drug. Certainly as we look at ophthalmology, we have implantable devices that were part of the Allergan acquisition that are important therapeutic options, that are available for physicians and patients. I’d say we tend to go at it and we’re certainly not opposed to devices being part of it if they can add to the ability to be able to provide for an advancement in the standard of care. In esthetics, as Rob indicated a moment ago, we’re looking at what is that big third leg on the stool, and we believe that is body. I would say in the area of body, devices are going to play a much more critical role, and so that’s an area where I think you’ll see us embrace even device-only kinds of strategies because they provide the right solution for that particular improvement. It’s an area that historically many of us know well because of our experience, as you pointed out, in our previous life, but I’d say also the teams in the organization itself tend to look for broad-based solutions that can meet the unmet need. Gregg Gilbert: Thank you. Liz Shea: Thanks Gregg. Operator, we have time for one final question. Operator: Thank you. Our last question comes from Navin Jacob with UBS. Your line is open. Navin Jacob: Hi, thanks so much for squeezing me in here. A couple if I may, if we have time. Just on Vraylar, you have strong long term guidance of $4 billion with just the existing indications, but the script trends at least seem to have slowed down, obviously in part because neuro has been weak as an overall therapeutic area during the pandemic. But just wondering--and just given that the quarter itself was a little bit weaker, I think, versus expectations, can you talk about the broader neuro market? Is that weakness there, because we do see strength with Ubrelvy and with Botox therapeutics, so just wondering if there’s something going on specifically with Vraylar? Has the bipolar depression opportunity been tapped out for some reason, and what can you and need to do to accelerate growth for Vraylar with the existing indication? That’s number one. Number two on Rinvoq, I think understands the rates around DVTP and MACE, but if you could give a little bit more clarity, based on the updated data that you’ve filed with the agency, what the rate of malignancy is across the indications, and whether that’s any different between the strengths and how that compares to the background rate. Thank you so much. Jeff Stewart: Hi, it’s Jeff. I’ll take the Vraylar comment. The macro prescription market has been down a little bit versus historical trends, but we really think it’s simply a timing issue, and I’ll give you some numbers that support that. Before COVID hit, right in the first quarter of last year, the new to brand, or NBRx for Vraylar was about 3,500 new to brand prescriptions a week, and what we saw is during COVID, that dropped down all the way to about 2,700 - that was the nadir, and then it’s consistently come back up. Towards the end of March, we started to hit or recover that pre-COVID historical rate, so progress is there, and ultimately the way we see these markets function, as you recover your NBRx momentum, the TRx’s will start to come, so we’re encouraged on the latest trends. But your point is right - it has been a little bit soft on the market, and certainly as a brand Vraylar dropped because of COVID, but is now really fully recovered and so we should see continued recovery of the momentum there. Hopefully that helps. Mike Severino: This is Mike. I’ll take your second question. With respect to the rates of malignancies, excluding non-melanoma skin cancer because that’s the way these rates are typically reviewed, I recently described a rate across Rinvoq studies with roughly 10,000 patient years experience of 0.8 events per 100 patient years experience, and that compared to an expected rate that was 0.9 or higher, depending on the estimate, so we’ll call it in the range of about 0.9 events, so not different from that expected rate and without any difference between doses, so no evidence of a dose response, and nothing that we’ve seen in the recent work that we’ve done changes that view in any way. Liz Shea: Thanks Navin. That concludes today’s conference call. If you’d like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. Operator: Thank you for your participation. Participants, you may disconnect at this time.	[ { "speaker": "Operator", "text": "Good morning and thank you for standing by. Welcome to the AbbVie first quarter 2021 earnings conference call. All participants will be able to listen-only until the question and answer portion of this call. You may ask a question by pressing star, one on your phone. I would now like to introduce Ms. Liz Shea, Vice President of Investor Relations. You may begin." }, { "speaker": "Liz Shea", "text": "Good morning and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Michael Severino, Vice Chairman and President; Rob Michael, Executive Vice President and Chief Financial Officer; and Jeff Stewart, Executive Vice President, Commercial Operations. Joining us for the Q&A portion of the call is Laura Schumacher, Vice Chairman, External Affairs, Chief Legal Officer and Corporate Secretary. Before we get started, I remind you that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today’s conference call, non-GAAP financial measures will be used to help investors understand AbbVie’s business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Unless otherwise noted, our commentary on sales growth is on a comparable basis, which includes full current year and historical results for Allergan. For this comparison of underlying performance, all historically reported Allergan revenues have been recast to conform to AbbVie’s revenue recognition accounting policies and exclude the divestitures of Zenpep and Viokace. References to operational growth further excludes the impact of exchange. Following our prepared remarks, we’ll take your questions. With that, I’ll now turn the call over to Rick." }, { "speaker": "Rick Gonzalez", "text": "Thank you Liz. Good morning everyone and thank you for joining us today. I’ll discuss our first quarter performance and outlook, and then Jeff, Mike and Rob will review our business highlights, pipeline progress and financial results in more detail. We’re off to an excellent start this year, delivering strong top and bottom line first quarter performance. We reported adjusted earnings per share of $2.95, exceeding the midpoint of our guidance by $0.14. Total adjusted net revenue of $12.9 billion was up 5.2% on a comparable operational basis, nearly $250 million ahead of our expectations. These results include strong performance across each of our core therapeutic areas, including double-digit comparable operational revenue growth from immunology, neuroscience, and esthetics, as well as high single digit operational growth from hematological oncology. Additionally, we continue to see robust sales from our key and newly launched products. Skyrizi and Rinvoq contributed nearly $900 million in combined revenues this quarter, more than double the sales versus the prior year as both products continue to ramp in their initial indications. Imbruvica and Venclexta delivered combined sales of approximately $1.7 billion, reflecting continued leadership in CLL and other hematological malignancies. Vraylar, which remains one of the fastest growing medicines in psychiatry, delivered more than 20% comparable operational growth. Ubrelvy, the leading oral CGRP for acute migraine, generated revenue growth of approximately 25% on a sequential basis, and within our leading esthetics portfolio, which is performing well above pre-COVID levels, Botox cosmetics and Juvederm are demonstrating robust performance. Both of these brands grew more than 40% on a comparable operational basis. The integration of Allergan also continues to go very well. As illustrated by our balanced results this quarter, we are clearly demonstrating that we have created a stronger and much more diverse company with the scale and flexibility to fully invest in the business for long term growth. While the pandemic has categorically impacted our day-to-day lives, we are encouraged by the latest recovery trends. We see market growth and new patient activity increasing overall, especially in March, although certain markets continue to remain below pre-COVID levels, including CLL and HCV in particular. We expect that increasing vaccinations globally will continue to support a fully recovery across our therapeutic areas as we progress through the remainder of this year. Based on our robust performance this quarter and the continued strong outlook for our business, we are raising our full year 2021 EPS guidance and we now expect adjusted earnings per share between $12.37 and $12.57, reflecting growth of more than 18% at the midpoint. I’m also extremely pleased with our R&D prospects, including the number and potential of the opportunities especially within our late stage pipeline. We’re on the cusp of the potential commercial approval of more than a dozen new products or indications over the next two years, including five total expected approvals in 2021. This includes Atogepant, a novel oral CGRP for episodic migraine, adding to our already attractive migraine portfolio; a new eye drop for the treatment of presbyopia, as well as expanded indications for Rinvoq in psoriatic arthritis, ankylosing spondylitis, and atopic dermatitis, and we expect more than half a dozen new product or indication launches in 2022, including Navitoclax for myelofibrosis, ABBV-951 for advanced Parkinson’s disease, Skyrizi for psoriatic arthritis and Crohn’s disease, Rinvoq for ulcerative colitis, Vraylar for major depressive disorder, and initial indications for Imbruvica and Venclexta. With these collective new growth opportunities and the continued momentum of our underlying portfolio, our long term outlook remains very strong. In closing, our focus remains on strong commercial and operational execution as well as pipeline advancement. I’m pleased with the financial results for the quarter and the overall pace of the recovery across our portfolio. We’re off to another excellent start in 2021. With that, I’ll turn the call over to Jeff for additional comments on our commercial highlights. Jeff?" }, { "speaker": "Jeff Stewart", "text": "Thank you Rick. We demonstrated strong and balanced growth across our therapeutic portfolio this quarter, a testament to our differentiated product profiles and commercial execution. Our immunology portfolio delivered global revenues of more than $5.7 billion, reflecting growth of nearly 12% on an operational basis. Humira sales were approximately $4.9 billion, up 2.6% on an operational basis with continued high single digit growth in the U.S. offset by biosimilar competition across our international markets, where the unfavorable impact was more moderate than expected in the quarter. Our new immunology agents, Skyrizi and Rinvoq, are both demonstrating robust prescription growth well above all comparable launches. Skyrizi sales were $574 million, reflecting 34% in-play patient share, which includes new and switching patients. This is more than double the share capture of the next nearest biologic competitor. Skyrizi total prescription share in the U.S. psoriasis biologic market is now approximately 15%, second only to Humira. Additionally, we recently received approval for a single dose prefilled pen for Skyrizi which will reduce the number of injections per treatment. Skyrizi is now the only quarterly dose psoriasis treatment available in an auto injector, further improving the patient experience. Rinvoq sales were $303 million with strong in-play patient share of approximately 15% in the U.S. RA market. Physician and patient feedback remains very positive on Rinvoq’s level of efficacy, speed of response, and strong benefit-risk profile. Internationally, both of these new assets delivered strong double-digit sequential growth with ramping access in share. Skyrizi has now also achieved in-play patient share leadership in the EU 5 psoriasis market, exceeding Tremfya and Cosentyx and at parity with Taltz. As Mike will discuss momentarily, we are also making considerable progress to expand the uses of Skyrizi and Rinvoq in several immune-mediated diseases with half a dozen additional indication approvals expected later this year and in 2022. In hematologic oncology, sales were approximately $1.7 billion, up 7.3% on an operational basis. Imbruvica continues to perform well across multiple indications, including CLL, where it remains the clear market share leader across all lines of therapy. Imbruvica sales increased 2.9% on an operational basis this quarter with performance impacted by lower new patient starts within CLL, where the market remains below pre-COVID levels. Imbruvica growth was also unfavorably impacted by the COVID-relating stocking benefit that we saw in the first quarter of 2020. Venclexta sales were $405 million, up 24.5% on an operational basis with increasing share in frontline CLL and continued strong performance in AML. In neuroscience, revenues were more than $1.2 billion, up 10.9% on a comparable operational basis. Vraylar once again delivered strong growth. Sales of $346 million were up 21.2% on a comparable operational basis, reflecting a nearly 2.5% total prescription share of the U.S. atypical antipsychotic market. Within migraine, the launch of Ubrelvy is exceeding our expectations with $81 million of revenue in the quarter. Feedback from physicians has been very positive, highlighting Ubrelvy’s efficacy, safety, convenient dosing profile, and overall commercial access. Ubrelvy is the number one branded acute treatment for migraine based on both new patient share and prescription growth. The oral CGRP therapies, including our leading Ubrelvy, now represent roughly 16% of new prescriptions in the large acute migraine market. We believe there is substantial room for long term growth in this rapidly expanding segment based on unmet need and strong patient demand. We also look forward to the expected commercial approval of Atogepant, our oral CGRP for episodic migraine later this year. Botox therapeutic is seeing a very nice recovery in chronic migraine as well as its other indications, with total sales of $532 million, up 7% on a comparable operational basis. Lastly in our other key therapeutic areas, we saw significant contribution from eye care, which had revenues of $817 million. Mavyret sales were $450 million, down 28.4% on an operational basis as treated patient volumes have remained below pre-COVID levels, and we also saw double-digit comparable growth from Linzess, the leading branded prescription medicine in the U.S. for the treatment of adults with IBSC, or chronic idiopathic constipation. Overall, I’m extremely pleased with our execution across the therapeutic portfolio, including the progress we are making with recent new product launches. We remain on track to deliver very strong revenue growth in 2021. With that, I’ll turn the call over to Mike for additional comments on our R&D programs. Mike?" }, { "speaker": "Mike Severino", "text": "Thank you Jeff. I’ll start with immunology, where we continue to make good progress with Rinvoq and Skyrizi in new disease areas, as well as in our early and mid-stage immunology programs. We recently reported positive top line results from the second induction study for Rinvoq in ulcerative colitis. Similar to results from the first induction study, in this Phase III trial Rinvoq demonstrated a very strong impact on disease activity as measured by clinical remission, clinical response, and endoscopic improvement. The 45 milligram induction dose was well tolerated and the safety profile was consistent with previous Rinvoq studies. In these induction trials, we saw no DVT, PE, MACE events, or malignancies in the Rinvoq groups, and the rates of serious adverse events were numerically lower than placebo. We believe these induction data compare very favorably to other UC treatments on the market or in development and based on the data generated to date, Rinvoq has the potential to become one of the most highly effective therapies for patients with moderate to severe ulcerative colitis. We expect to see results from the UC maintenance study this summer with regulatory submissions anticipated in the second half of the year. The Rinvoq program in Crohn’s disease is also progressing very well, and we expect to see induction data from the first of two Phase III trials in the fourth quarter, followed by induction data from a second Phase III trial and maintenance data in the first half of 2022. We’re also nearing completion of our pivotal program for Skyrizi in Crohn’s disease. Earlier this year, we reported positive results from the two Crohn’s induction studies and we expect to see maintenance data this summer. Our regulatory submissions for Skyrizi and Crohn’s disease remain on track for the second half of 2021. Following completion of our registrational program for Skyrizi in psoriatic arthritis, we recently submitted our regulatory applications in the U.S. and Europe with approval decisions expected in the first half of 2022. We’re very pleased with the level of activity we saw with Skyrizi on both joint disease and skin clearance in our Phase III program and look forward to providing this new treatment to patients suffering from psoriatic arthritis. Our regulatory submissions are currently under review for Rinvoq in three new indications in the U.S.: ankylosing spondylitis, psoriatic arthritis, and atopic dermatitis. As we’ve previously announced, the FDA recently extended the review periods for Rinvoq in psoriatic arthritis and atopic dermatitis following a request for an updated assessment of the benefit-risk profile for Rinvoq in these indications. In response to the FDA request, we provided updated data from across Rinvoq programs in RA, psoriatic arthritis, and atopic dermatitis. Based on the review extensions, we now expect approval decisions for psoriatic arthritis in June and for atopic dermatitis in July. The regulatory action date for Rinvoq in ankylosing spondylitis is unchanged and remains on track for June. We remain confident in the benefit-risk profile of Rinvoq across all indications and will work with the FDA to bring Rinvoq to market in these new disease areas. Earlier this year, we received European approval for Rinvoq in psoriatic arthritis and AS. Our European regulatory application for Rinvoq in atopic dermatitis is under review and we remain on track for a CHMP opinion this summer with an approval decision anticipated in the third quarter. We also recently saw results from a four-week Phase Ib study evaluating our novel small molecule RORγT inverse agonist, ABBV-157, in patients with psoriasis. By targeting RORγT with an inverse agonist rather than an antagonist, we believe we can more effectively inhibit IL-17 production, thus resulting in a greater impact on skin inflammation. In our Phase 1b study, 157 showed promising activity as an oral psoriasis agent and we plan to move the asset forward to a larger Phase IIb dose ranging study in the second half of this year. Moving now to our oncology portfolio, we continue to make very good progress with our late stage programs for Imbruvica, Venclexta and Navitoclax, as well as with our early stage oncology assets. We remain on track for several key regulatory submissions, data presentations, and phase transitions this year. At the upcoming ASCO and EHA meetings, we will be presenting more than 40 abstracts, including results from the Imbruvica plus Venclexta CAPTIVATE trial fixed duration cohort in treatment-naïve CLL patients. The Imbruvica-Venclexta combination is an important element of our hema-on strategy to provide a differentiated fixed duration treatment that offers deeper levels of response. Data from our Imbruvica-Venclexta combination studies will support regulatory submissions in frontline CLL later this year. We will also be presenting four-year follow-up data from Venclexta’s CLL14 trial in frontline CLL as well as updated efficacy and safety data from a Phase Ib study evaluating Venclexta plus azacitidine in treatment-naïve, high risk MDS patients. We expect this MDS study to complete in the second half of this year and, if positive, it could support a submission in the first half of 2022 to seek an accelerated approval. In the area of solid tumors, at the recent AACR meeting we presented Phase II results for Teliso-V in non-squamous, non-small cell lung cancer. In this study, Teliso-V demonstrated promising response rates in heavily pretreated patients, particularly in patients with highly expressed c-Met where we saw a 54% objective response rate. c-Met is an attractive target across multiple tumor types, particularly in non-small cell lung cancer where approximately 30% of patients have over-expressed c-Met. Approaches in this area have historically focused on small molecule kinase inhibitors and anti c-Met antibodies, both of which have shown only limited efficacy in this patient population that has not been sufficient for approval. In contrast our c-Met antibody drug conjugate is a novel approach that we believe will have broader applicability and will provide enhanced efficacy compared to previous approaches. We recently began the second stage of our Phase II study which has the potential to support an accelerated approval in second line plus metastatic non-squamous, non-small cell lung cancer. We also plan to evaluate Teliso-V in the frontline setting, including in combination with other agents, as well as in other c-Met positive tumor types. We also have a next-generation c-Met ADC program that will be entering the clinic later this year. Our new c-Met ADC, ABBV-400, utilizes a topoisomerase inhibitor payload which we believe will provide greater anti-tumor efficacy against both amplified Met and over-expressed c-Met subtypes, thus providing deeper responses with broader applicability than other anti c-Met targeting agents. In neuroscience, we recently presented data from several key programs at the American Academy of Neurology annual meeting. A total of 33 abstracts were presented, including data from the Phase III ADVANCE study in episodic migraine prevention, showing that Atogepant has the potential to be a highly effective, safe and well tolerated oral treatment option with a rapid onset of action. The FDA recently accepted our NDA for Atogepant for the prevention of episodic migraine and an approval decision is expected in September of this year. We also presented results from an open label Phase III study evaluating Ubrelvy in perimenstrual migraine which showed that Ubrelvy has potential as a safe and efficacious treatment of migraine attacks that occur during or near menstruation. Menstrual-related migraine attacks can be more difficult to treat because they are often longer in duration, more severe, and often resistant to treatment. We presented data from a Phase I study demonstrating that ABBV-951 subcutaneous infusions maintain an equivalent Levodopa exposure to Duopa in advanced Parkinson’s patients. Results from the pivotal program for ABBV-951 are expected this summer with the regulatory submissions anticipated in the second half of this year. We also remain on track for readouts in the fourth quarter from two Phase III studies for Vraylar in adjunctive major depressive disorder and, if successful, we would anticipate regulatory submissions in the first half of 2022. In eye care, we submitted our regulatory application in the U.S. for AGN-190584 for the treatment of symptoms associated with presbyopia. 584 is a once-daily eye drop being developed to help address symptoms that are often corrected through reading glasses. This new technology represents a complementary product to reading glasses and would be a convenient on-demand solution for patients with mild to moderate presbyopia. An approval decision is expected in the fourth quarter of this year. In esthetics, we are investing to accelerate key next generation toxins and filler programs. By combining the esthetic team’s deep expertise with AbbVie’s breadth and scale of resources, we’ll be able to bring novel products to market significantly faster. Looking across our portfolio, we’ve identified a number of programs to accelerate, including our short acting and long acting toxins, as well as our next generation bio-stimulatory tropoelastin and collagen fillers. Acceleration of these programs is expected to drive significant long term growth for the esthetics franchise. In summary, we continue to make significant progress with our pipeline to start the year and we look forward to many more data readouts, regulatory submissions and approvals throughout the remainder of 2021. With that, I’ll turn the call over to Rob for additional comments on our first quarter performance and financial outlook. Rob?" }, { "speaker": "Rob Michael", "text": "Thank you Mike. Starting with first quarter results, we reported adjusted earnings per share of $2.95, up 21.9% compared to prior year and above our guidance midpoint. Total adjusted net revenues were $12.9 billion, up 5.2% on a comparable operational basis excluding a 1.1% favorable impact from foreign exchange. The adjusted operating margin ratio was 51% of sales, an improvement of 120 basis points versus the prior year. This includes adjusted gross margin of 83.9% of sales, adjusted R&D investment of 11.6% of sales, and adjusted SG&A expense of 21.2% of sales. Net interest expense was $622 million and the adjusted tax rate was 12.3%. As Rick previously mentioned, we are raising our full year adjusted earnings per share guidance to between $12.37 and $12.57, reflecting growth of 18.8% at the midpoint. Excluded from this guidance is $5.10 of known intangible amortization and specified items. This guidance now contemplates full year revenue growth of 9.8% on a comparable operational basis. At current rates, we continue to expect foreign exchange to have a 1% favorable impact on full year comparable sales growth. This implies a full year revenue forecast of approximately $55.9 billion. Included in this guidance are the following updated full year assumptions. We now expect international Humira revenue of approximately $3.1 billion and we now expect Botox cosmetic sales of approximately $1.9 billion. All other full year assumptions remain unchanged. As we look ahead to the second quarter, we anticipate net revenue approaching $13.6 billion. At current rates, we expect foreign exchange to have a 1.6% favorable impact on comparable sales growth. We expect adjusted earnings per share between $3.05 and $3.09, excluding approximately $1.78 of known intangible amortization and specified items. Finally, we continue to make great progress on our Allergan transaction commitments. We realized over $360 million in expense synergies in the first quarter and are on track to deliver synergies of approximately $1.7 billion in 2021 and greater than $2 billion in 2022. We have already paid down $10.4 billion of combined company debt. We continue to expect cumulative debt pay down of $17 billion by the end of 2021 with further deleveraging through 2023. This will bring our net leverage ratio to 2.4 times by the end of 2021 and approximately two times by the end of 2022. In closing, we are off to an excellent start to the year with strong performance across the portfolio and financial results ahead of our expectations. With that, I’ll turn the call back over to Liz." }, { "speaker": "Liz Shea", "text": "Thanks Rob. We will now open the call for questions. In the interests of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, first question please?" }, { "speaker": "Operator", "text": "Our first question comes from Chris Schott with JP Morgan. Your line is open." }, { "speaker": "Chris Schott", "text": "Great, thanks so much for the questions. The first one from me was on Rinvoq and dose. As we think about FDA balancing lowest effective dose versus incremental efficacy and safety risks, what would the impact of only having a 15 milligram versus a 15 and 30 milligram approval have on your view on the atopic derm opportunity, which I think you talked about is about a $2 billion sales potential previously? Then my second question was just a little bit more color on the esthetic dynamics. Is there anything we’re seeing with the results we’re seeing--very, very strong here, is there any catch-up type event as the world reopens that we’re seeing with these results, or are these sustainable underlying trends that are kind of coming in above expectations for that business? I’m trying to get a sense of just how to think about that progressing as we go through the rest of the year. Thanks so much." }, { "speaker": "Mike Severino", "text": "Thanks Chris, this is Mike. I’ll take the first question and then Rick will take the second question that you asked. With respect to Rinvoq, we feel very confident in the benefit-risk profile across indications and across the doses that we study. Having said that, both the 15 and 30 milligram doses have performed very well, both from an efficacy and a safety perspective, and so if you look at the efficacy results that we drove with 15 in atopic dermatitis, we drove high levels of response, very rapid response, and had a very prominent impact on itch, which is one of the most bothersome symptoms, with 15 as well as with 30. With the 15 milligram dose, for example, we saw statistically significant and clinically significant reduction in itch after only two days, which is really quite remarkable in this disease. Again, that’s really one of the most bothersome symptoms to patients. We think we could be successful with either dose, to answer your question specifically, but we also remain confident in the benefit-risk of both doses." }, { "speaker": "Rick Gonzalez", "text": "Chris, this is Rick. I’ll cover the esthetics one for you, as Mike said. I think if you look at the underlying performance of the esthetics business, in particular the market growth in the U.S. and in China, it’s driving the fundamental growth that we see through the business. Certainly there is some impacts still from COVID, so we’re seeing some impact there, but I think the majority of it is when we took over Allergan, we made a decision to really invest in promotion at a much higher level than they were investing in it prior, and they had an approach that was more of an episodic investment approach where we have basically made a decision that we’ll fund across the entire year at a relatively significant level to drive demand, because the data clearly supports that you can grow this market. I think the best comparison is to start to look at what it looked like versus 2019, because you obviously had the COVID impact in 2020, but you take for example Botox - Botox versus 2019, cosmetic Botox versus 2019, it’s up about 27%. The market’s growing very robustly. Some of that is probably COVID-driven - these are U.S. numbers I’m describing right now. Some of that is probably COVID-driven, but I wouldn’t say a lot of it at this point is COVID-driven in the U.S. China continues to grow very well - in fact, I’d say China is back to the level of growth, and we have expanded the sales force in China once, about four or five months ago. We’re in the process now of going through a second expansion in China and we expect that China will continue to drive significant growth going forward. The one area that still is being impacted in a fairly significant way from COVID is the European market. We still see it--we see it starting to emerge in areas like the U.K., but there are other areas in Europe that are still in lockdown. I would expect that Europe and Brazil as well will hopefully start to see some recovery as we get into the second half of this year and they can start to contribute, which would add additional growth to the overall business. But I would tell you I’m very pleased with the decisions we’ve made around driving more promotion, and I’m pleased with the execution of this team. This team has done extremely well in executing and driving the kind of share position that we want and the growth that we want, so I think it is sustainable going forward." }, { "speaker": "Chris Schott", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Thanks Chris. Operator, next question please." }, { "speaker": "Operator", "text": "Our next question comes from Geoffrey Porges with SVB Leerink. Your line is open." }, { "speaker": "Geoffrey Porges", "text": "Thank you very much, appreciate the couple questions. First Rick, something we don’t talk about a lot, which is the neuroscience portfolio, and you’ve started reporting it combined. I know there’s four products in there, but adding them up, the long term guidance you provided previously was about $8.3 billion, I think, and you’re already annualizing it close to $6 billion. Could you give us a sense of how much upside that portfolio has, given the trends that you’re seeing? Then on a related question, I hate to harp on the JAK question, but obviously there’s a lot coming to us from what this impact might be, so if you were confined to the 15 milligram dose not because of any signal but because of the regulators’ view of the safety of the class, how much impact would that have on the $8 billion long term guidance, and do you have other levers which you could pull to fill whatever shortfall that would cause? Thanks." }, { "speaker": "Rick Gonzalez", "text": "On the neuroscience portfolio, it is an area that we’re very excited about, so maybe Jeff and I will tag team here. But I think when you look at the two major growth franchises there, being the migraine franchise and the anti-psychotic franchise with Vraylar, both of those, we think, have significant opportunity to continue to grow. You’re obviously seeing Ubrelvy now perform extremely well in the marketplace - I think Jeff can probably give you a little more color on that, and Vraylar is continuing to perform very well as well. I think if we are able to achieve one positive study on MDD, I think that will give us significant growth going forward. This is a franchise that we’re excited about. I think it will be a meaningful franchise for us over the long term scenario where we continue to look at assets that we could potentially add to it, and I think it will be a nice growth driver for us. Jeff?" }, { "speaker": "Jeff Stewart", "text": "Yes, I think just to reiterate, as I mentioned in my comments, the oral CGRP market is moving very nicely. It’s hit, I mentioned 16% for the quarter, but now on the weeklies it’s 17% or above on just the penetration of that segment, so we see a lot of runway in that segment over our long range planning. Certainly the availability of another oral CGRP, in this case for episodic migraine, allows us to compete in a much larger segment beyond the acute, and to Rick’s point, remember we have the big anchor asset with Botox therapeutic in migraine on the back end for chronic migraine and we have plans in place to expand that upstream also into episodic migraine. This is actually in some ways non-overlapping because we have a big injector base for Botox and then we can have the neurologist and primary care base for Atogepant, and so when you look basically really across the waterfront - you know, leading acute agent, oral, very, very potent and active oral agent in the middle with episodic, and then on the back end with Botox, it’s a very nice portfolio for us that will drive growth. As Rick mentioned, we are encouraged on the potential for adjunctive MDD, and that segment itself when we do the market analysis is about as large, the adjunctive MDD segment, as bipolar depression, and so this basically has the opportunity for us to really double the potential penetration over our long range plans, so we’re very encouraged over this set of assets." }, { "speaker": "Rob Michael", "text": "And Geoff, this is Rob. I would just add, if you can take the pieces we’ve given in terms of long term guidance, for Vraylar we’ve talked about approaching $4 billion with the current approved indications. For migraine, both Ubrelvy and Atogepant, we’ve talked about peak potential greater than a billion for each of those assets, and then we have Duopa plus we have 951 in the pipeline, that I think can drive significant growth in addition to our early stage pipeline in neuroscience, so I do see that as a therapeutic area that will drive long term growth for the company going forward." }, { "speaker": "Geoffrey Porges", "text": "Great, thanks. Then the JAKs?" }, { "speaker": "Rick Gonzalez", "text": "On the JAKs, we’ve obviously evaluated carefully the positioning of the product. I think if we look at where we are today, one, we’re confident in the high dose that has a good risk-benefit profile, but I would tell you it wouldn’t change our guidance going forward. The assumptions that we have made in areas like atopic dermatitis, we believe we can get to those assumptions without the high dose. That doesn’t mean that we don’t want the high dose, but at the end of the day I believe we will maintain the guidance that we have based on that." }, { "speaker": "Jeff Stewart", "text": "The other thing that I would point out is that we’ve had additional data on upadacitinib Rinvoq across a number of areas since that guidance, including IBD, so we’ve had the UC data that have come largely since that guidance, and those have exceeded our expectations, and so we remain confident overall in the performance of Rinvoq." }, { "speaker": "Geoffrey Porges", "text": "Great, thanks Jeff." }, { "speaker": "Liz Shea", "text": "Thanks Geoffrey. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Andrew Baum with Citi. Your line is open." }, { "speaker": "Andrew Baum", "text": "Many thanks. A couple of questions, please. There’s not much bipartisan agreement in the U.S. over drug price reform but there seems to be a lot when it come to antitrust in relation to the pharmaceutical industry. Perhaps Rick could comment, following last night’s House Committee on the Judiciary, where there was lots of pointed talk from both sides focusing firstly on patent thickets, second on having a presumption of anticompetitive behavior in terms of assessment of large scale in particular M&A, meaning that it would impact future business development for the industry, so that’s the first question. Then the second question, rather more positive, in terms of the JAK, when I look at consensus, the forecasts for Rinvoq are about $6 billion. When you look at the size of the opportunity in RA alone, let alone psoriatic arthritis, atopic dermatitis, UC, and the other indications you have, is it conceivable to you, short of this drug effectively or the class being heavily limited or pulled from the market, that that $6 billion looks like an incredibly conservative estimate for what this drug could do?" }, { "speaker": "Rick Gonzalez", "text": "Andrew, this is Rick. I’ll comment maybe on your point of view around the antitrust discussions. Clearly I’ve accepted the invitation to be able to testify to the Committee on May 18. We certainly feel absolutely comfortable and confident in the way we operate in this market. This is a highly competitive market where Humira competes, and certainly as we look at the patents that were issued for Humira, they went through a rigorous process in order to be issued. They represent true innovation to the product. They were challenged by competitors, just like every competitor has a right to challenge a patent if they don’t believe it’s valid or appropriate, and those patents were challenged and the vast majority of those patents survived that challenge. What I’d say is when we look at our behavior in this market, I think our behavior was absolutely pro competitive. We had patents that went all the way out to 2034 in that portfolio and yet we chose to license every single biosimilar player in 2023, literally 11 years before the last patent would have expired. I feel highly confident in the position that we have taken in this marketplace, that we have operated totally appropriately. Your next question on Rinvoq--I’m sorry, I was thinking about the first one. Can you repeat your question?" }, { "speaker": "Andrew Baum", "text": "I will. Just finishing on the first, so you reference your future testimony. I guess it was more general rather than just AbbVie-centric, how it would impact BD and the ability of the industry to operate if pricing can’t get resolved. But moving onto the second question, my question was whether consensus forecasts for Rinvoq look unrealistically conservative given the scale of the opportunity and given in RA alone, looking at the size of that market, it’s a progressive disease, that you don’t actually need atopic dermatitis to get in excess of where consensus currently pegs forecasts, which when look, about $6 billion." }, { "speaker": "Rob Michael", "text": "Andrew, this is Rob. I’ll start and then I’ll hand it over to Jeff. I think we agree with you - we do think consensus is conservative. We’ve given 2025 guidance of $8 billion for Rinvoq, and we would expect it to grow beyond 2025. When I look at the current consensus, obviously as you quoted, it’s a little bit--just a little bit above $6 billion from the numbers that I’m looking at, and I look at the growth beyond ’25, it’s nowhere near what we’re expecting, so we feel very good about the opportunity there. I think what we covered with you in December still holds as we’ve broken out the contribution by indication. We still feel very good about that, but we would agree that consensus is very conservative right now." }, { "speaker": "Jeff Stewart", "text": "Yes, thanks Rob, this is Jeff. Agree - these are spectacular assets with incredibly dynamic market, so we see across the rheumatology markets, the atopic derm market, we see the IBD market which with both assets we think is underappreciated. I mean, even expansion in second and third lines as new assets come in that are really breakthrough assets with higher levels of efficacy, and so we clearly believe that consensus is conservative here. Just a comment on atopic derm - this is an explosive market. I mean, it is significantly underdeveloped in terms of the penetration, so it’s going to grow substantially, and even if you look at conservative assumptions on where we source business - you know, the growth of the second line, that’s not to say that we’re not going to be very competitive in front line. It’s a very, very attractive space. Again, I think the performance that we’ve seen, the clinical performance that we’ve seen right now, primarily on the induction trials for Skyrizi and Rinvoq, Skyrizi in Crohn’s, Rinvoq in UC, is very, very encouraging, so we see that cascading over our long range plans as well. We are very, very bullish and agree that consensus is conservative." }, { "speaker": "Andrew Baum", "text": "Many thanks." }, { "speaker": "Liz Shea", "text": "Thank you Andrew. Operator, next question please." }, { "speaker": "Operator", "text": "Our next question comes from Vamil Divan with Mizuho Securities. Your line is open." }, { "speaker": "Vamil Divan", "text": "Great, thanks so much for taking my questions. Maybe a couple, if I could, on the migraine side. First on Ubrelvy, you mentioned it looks like the class is doing very well and gaining share. It also looks like over the last few weeks or so, you’ve been gaining a little share within the class relative to Nurtec, so I’m just wondering if you can share your perspective on what you think is driving that. Some of us thought it might be due to pricing and access, but based on our calculations, it looks like your gross to net is actually lower than what it is from the Biohaven side, so any perspective would be helpful. Then on Atogepant, maybe just a little more, if you could talk to your go-to-market strategy, assuming approval in September, especially given Nurtec will likely have an indication for both treatment and prevention. How do you see coming in with two separate drugs - you know, could be two co-pays, could be just a different message relative to a single drug, so just any perspective on how competing with that would be helpful as well. Thank you." }, { "speaker": "Jeff Stewart", "text": "It’s Jeff. In terms of the acute market, as I mentioned, the penetration of the overall segment is increasing very, very nicely, as I highlighted. If you look at the mix between Ubrelvy and Nurtec, we have gained a little bit over the last few weeks, but it’s very close. We typically run at 51%, 52%, 53% of the new prescription basis. I think you are quite perceptive over the value creation that’s taking place there, and I clearly don’t have full insight into the Biohaven fall through, but we’ve been quite disciplined. We have over 90% commercial access, so we’re quite comfortable where we are from an overall access perspective, and our team remains quite disciplined in terms of making sure that we both drive the right type of volume with our positioning but also the right type of profitability over time. We’re encouraged with our continued momentum with Ubrelvy. In terms of Atogepant, I think what’s quite impressive about our program there is just the sheer level of efficacy that we have, and I think this is very important in terms of sometimes the narrative over simple or easy versus, look, how do you think about the best drug for episodic prevention, particularly when you choose an oral, so we are at the very, very high end of the migraine freedom or the days of migraine control with this new asset, and we think that frankly you need to take care of the migraine and Atogepant will be very well positioned to do that. We also think that we’ll have nice synergies. Obviously we have a fairly significant sales force that is promoting Ubrelvy to both neurologist and high prescribing general practitioners, and it will fit in very well as we put Atogepant into that sales fleet, so we’re set up well, we think, for our go-to-market." }, { "speaker": "Vamil Divan", "text": "Okay, thank you very much." }, { "speaker": "Liz Shea", "text": "Thanks Vamil. Operator, next question please." }, { "speaker": "Operator", "text": "Our next question comes from Tim Anderson with Wolfe Research. Your line is open." }, { "speaker": "Tim Anderson", "text": "Thank you. A couple of questions please. I haven’t heard really any drug company this reporting season talk about future potential austerity measures in ex-U.S. geographies, meaning broad-based price cuts following the impact of COVID. As a company, as one of the few companies that’s given detailed long term financial guidance, I’m guessing you have been thinking about this, and I’m wondering how you are currently viewing this in terms of its likelihood of occurring, what the magnitude could be and what the timing might be. Then second question just on an early stage pipeline asset, your TNF-steroid antibody drug conjugate, I believe you have in-house probably a fair amount of data that the markets haven’t seen yet. I’m wondering when we might see additional human data and what your current level of enthusiasm is towards that platform." }, { "speaker": "Rick Gonzalez", "text": "Tim, this is Rick. I’ll cover the OUS austerity measures. Certainly if we go back to 2008, we saw that kind of an impact, so as we were building out our long range plan, we have made some sets of assumptions around that. I would expect that we will see some pressure outside the U.S. going forward over the next couple of years. It’s certainly manageable within the expectations that we have built for the business going forward, certainly based on that level of experience that we’ve seen historically - it’s manageable. It is something that we have contemplated and I would frankly expect to see some level of pressure going forward." }, { "speaker": "Mike Severino", "text": "This is Mike, I’ll take the second question. With respect to the TNF-steroid conjugate program, we’re obviously advancing ABBV-154. We have a large Phase IIb RA study that will start this quarter, and then we’re starting studies in additional immune-mediated conditions as well over the course of the year. With respect to publication of the data from 3373, which is the closely related compound from the same platform that we top line results some time ago, I think you can expect to see more detailed data over the course of the summer." }, { "speaker": "Liz Shea", "text": "Thanks Tim. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Steve Scala with Cowen. Your line is open." }, { "speaker": "Steve Scala", "text": "Many thanks. First on Rinvoq, I’m curious what additional safety data has FDA been provided that it did not have previously, and has all of it been previously presented and if not, what was the conclusion of what now has been submitted, so that’s the first question. Secondly regarding Imbruvica, to what extent can AbbVie tease out COVID impact on new patient starts versus competition from new frontline agents? Thank you." }, { "speaker": "Mike Severino", "text": "This is Mike, I’ll take the first question, and then Rick will handle the second. With respect to Rinvoq, the additional safety data that were presented to the FDA or provided to the FDA are essentially a roll forward of the analysis that we did at the time of the NDA submission. Obviously our database continues to grow, we accumulate patient years experience, and so there weren’t fundamentally new analyses but we did an updated assessment with the additional data that have accrued in the time between submission and when we submitted those responses. What I would say is the data that we reviewed have not changed our impression of benefit-risk in any way. I think they’re very consistent with all of the data that have been publicly presented. Obviously since they represent data that were current up to the time that we submitted just a few weeks ago, not all of these data have been presented in the public domain, but I would say that our response is very consistent with what we have described publicly in the past." }, { "speaker": "Rick Gonzalez", "text": "On your second question - this is Rick, we get data on new patient starts, so we have relatively, I think, accurate data. It’s offset by a couple of months - I’ll have Jeff maybe talk about it in a little more detail, so we know any CLL patient, when they start, regardless of therapy, we can measure that, and obviously we can measure again what type of therapy they start on, so I think the level of data integrity that we operate with from a market standpoint here is pretty good. It’s offset by a few months, and maybe Jeff can speak to the time offset." }, { "speaker": "Jeff Stewart", "text": "Yes, so Steve, it’s Jeff. We have pretty good visibility to what’s happening from the share perspective versus the market start perspective. I’ll give you some flavor. With regard to Calquence, we can see the impact of the approvals in the front and second line CLL, and it’s largely consistent with what our expectations were, so they’re ramping in a similar fashion to what we saw in the MCL or NHL, so we know that there’s some impact on Imbruvica there. The largest impact has been, unfortunately, into the market, and unfortunately I mean for the patient. I’ll give you a little bit of the numbers. Typically the CLL market, which is the largest driver, it grows sort of at a population level, like 2% every year. If you look at the impact from COVID, we can see almost three different waves - we can see a wave where the new patient starts in the market, we’re down in the high teens in the first part. Then it started to claw back a little bit into the single digits down, and then it got hit again into the teens in the August period and we saw it down again in early January, about 18%. We can see what’s happening, and as I mentioned in my remarks, the biggest impact here has been on continued market suppression due to COVID." }, { "speaker": "Rob Michael", "text": "Steve, this is Rob. I would just remind you also on the first quarter that we had the stocking impact from COVID last year, so if you adjust for that, it’s about a four point impact on Imbruvica’s growth year-over-year due to the prior year comp with the stocking impact." }, { "speaker": "Steve Scala", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Thanks Steve. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from David Risinger with Morgan Stanley. Your line is open." }, { "speaker": "David Risinger", "text": "Yes, thanks very much, and congrats on the results and updates. I have two questions. First, just to follow on, on that comment, could you just help us understand a little bit more about why Imbruvica is such an outlier in the cancer market, why the pandemic is hitting Imbruvica very hard whereas the pandemic is not hitting other cancer agents so hard? Then second, with respect to esthetics, it’s obviously booming, and it is validating your acquisition of Allergan. But I think that you updated guidance for the year for Botox cosmetic to $1.9 billion, and that implies flat sequential sales from the $477 million that you booked in the first quarter, so if you could explain that please. Thank you." }, { "speaker": "Mike Severino", "text": "This is Mike. I’ll take the first question and then others will comment on your second question. With respect to why Imbruvica is being hit harder than other anti-cancer agents in the pandemic, I think it has to do with the underlying rate of progression CLL. CLL, while it is a very significant limiter of long-term function and survival, in the short term there’s a sense that therapy can be delayed if necessary because the rate of progression is relatively slower than other forms of cancer, for example certainly much slower than AML, another indication that we are very active in, in the hema-on space. I think in the setting of the pandemic, that’s why you are seeing more deferrals for start-up therapy and, in some cases, longer time to switch a therapy, which would explain why Imbruvica dynamics are different than other anti-cancer agents that treat other diseases." }, { "speaker": "Rob Michael", "text": "David, this is Rob. On your question regarding Botox cosmetic, we did see in the first quarter, if you just look at toxins market growth, it’s over 30% in the first quarter. There is some impact from pent-up demand as we come out of the pandemic, but we feel very good about the forecast we put forward. We obviously took it up $100 million, so it’s essentially pass through to beat in the quarter. I’d say your math on flat sequentially, I think it’s up a little bit, but really if you consider that we did have some level of pent-up demand come through in the quarter, you’ve got to back that out to truly understand the underlying demand dynamics." }, { "speaker": "David Risinger", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Thanks David. Operator, next question please." }, { "speaker": "Operator", "text": "The next question comes from Ronny Gal with Bernstein. Your line is open." }, { "speaker": "Ronny Gal", "text": "Hi everybody. Congratulations on a very nice quarter, and thank you for fitting me in. Two questions, if I may. First, there was data presented from Richter about negative symptom improvement using Vraylar. I was wondering what was your take on the data in terms of your ability to use it in the United States, is it something that you’re considering doing with [indiscernible], could this potentially be added to the label, and so forth. Second, the growth in Botox neurology is really impressive. It seems relatively odd that there was such a big jump in the middle of a wave of the epidemic in January-February for a physician-administered product. Can you just give us a flavor of what’s the underlying trends there, is there just a lot more success that you’re having in pushing first patients who failed [indiscernible] into Botox? How should we think about this?" }, { "speaker": "Mike Severino", "text": "This is Mike. I’ll take the first question and then others will comment on your second question. With respect to negative symptoms and the treatment of those negative symptoms in schizophrenia, it’s a very challenging area, it’s a very important area because they’re responsible for much of the long term loss of function in patients who suffer from schizophrenia. It has been a very difficult are to approach in general, and we believe Vraylar has a good profile there and has a good overall impact on the disease, a very strong overall impact on the disease, but it’s also one that’s been very challenging from a labeling perspective in the U.S. It’s been a very difficult claim to get in the U.S. It’s not clear that there is a specific path to negative symptoms in the label, but I do think the overall profile of Vraylar in schizophrenia, both with respect to symptom control and benefit risk, are viewed very positively by treating physicians, and I think the overall benefits are well understood by treating physicians and I think that is reflected in Vraylar’s overall strong performance." }, { "speaker": "Jeff Stewart", "text": "It’s Jeff. In regard to Botox, it’s insightful because we are seeing some robust activity, particularly in migraine. I think there’s a couple reasons for that. One, Rick highlighted the sales force dynamics in China. We’ve definitely focused our sales team on the migraine component. The other thing that’s taken place is a little bit, I think, of an investment approach. We’ve had more consistent consumer investment since we had the integration than previously at the legacy Allergan, so I think the combination of the consumer investment, new waves where if patients access an injector at a neurologist, they can get a sample of Botox right at their first appointment rather than wait for many months. There are various commercial reasons, we think, that give us a lot of encouragement on the therapeutic Botox performance, again specifically and particularly in migraine." }, { "speaker": "Ronny Gal", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Thanks Ronny. Operator, next question please." }, { "speaker": "Operator", "text": "Our next question comes from Terence Flynn with Goldman Sachs. Your line is open." }, { "speaker": "Terence Flynn", "text": "Great, thanks for taking the question. Maybe two for me. I recognize there are still a lot of unknowns here, but how are you thinking about the potential headwind from any changes to corporate tax rates and guilty? Then given the progress you outlined on debt pay down, you’ll be back to about a two times leverage ratio, you mentioned. How are you thinking about capital allocation into the end of this year and into 2022? What types of assets are you focused on for BD and M&A? Thank you." }, { "speaker": "Rick Gonzalez", "text": "This is Rick. I’ll cover the tax. As you said, it’s certainly early in the process and we obviously know what’s being proposed, but we don’t necessarily know where we will end up. I think one of the important things that we need to continue to think through is if we go back to--you know, one of the reasons why back in 2017 tax reform was passed was to make sure that two things happened: one, that U.S.-based companies were competitive with their foreign competitors, and two, it encouraged companies like ours to invest in the United States. I can certainly talk about the AbbVie example. I think it’s pretty compelling when you sit back and look at--you know, we were able to go out and acquire a Irish company, re-domicile it back to the United States. AbbVie today has 24,000 jobs in the United States. We’ve also increased investment significantly in the U.S. since tax reform. Over the last three years, we’ve invested $1.5 billion, we committed that we’d do $2.5 billion over time. We’re going to exceed that commitment. We’ve added about 1,500 jobs over that period of time. Companies like ours clearly took the benefit of tax reform and that has allowed us to be able to be more competitive and certainly in the acquisition of a company like Allergan, I think that was clearly demonstrated, but we also have invested much more aggressively in the U.S. I think going forward, one of the things that important for policymakers to balance is to make sure that we don’t go back to where we were, and that is where U.S. companies aren’t as competitive against their foreign competitors. The current proposal would make the U.S. have the highest rate of all developed countries - I’m not sure that’s the position you’d want to be in, so hopefully as we go forward, there will be a balance that’s looked at in raising taxes but also making companies maintain a competitive position and continue to be incented to invest in the U.S." }, { "speaker": "Rob Michael", "text": "Terence, this is Rob. On your question regarding capital allocation, I’ll start and then Mike will add more color in terms of BD. We’ve said all along that we will continue to de-lever through 2023, so think about that net leverage ratio getting to two times in ‘22, the balance sheet would be in very good shape, but we want to continue to pay down the debt through ’23. During that period, we’ve allocated $2 billion of capital for business development. You’ve seen us do some very nice deals, whether you look at Genmab, I-Mab, we’ve done a number of nice transactions in this space with that amount of capital. I’ll let Mike speak to future opportunities as well." }, { "speaker": "Mike Severino", "text": "In terms of the areas in which we would expect to be active between now and the end of 2022, we’ll continue to be active in oncology, both in hematological oncology and in solid tumors. That has been an area of focus for us, and I see that continuing as an area of focus. We would certainly like to add to the esthetics franchise - we’ve talked about how we will invest and continue to drive that franchise, and from a business development perspective, I think there are a number of opportunities there that could present themselves in that time frame. There are other areas that opportunistically we would certainly like to add to - I would point to neuroscience, if we could find the right opportunities, and eye care as additional areas where we could be investing." }, { "speaker": "Liz Shea", "text": "Thanks Terence. Operator, next question please." }, { "speaker": "Operator", "text": "Our next question comes from Daniel Busby with RBC Capital Markets. Your line is open." }, { "speaker": "Daniel Busby", "text": "Hi, good morning. I’d like to ask a follow-up on esthetics and your high single digit annual growth target for that business over the next decade. Broadly speaking, how much of that growth is dependent on bringing new products to market, such as long and short acting toxins, versus driving continued growth from the esthetics portfolio that you have today? Second, as we near the one-year anniversary of your acquisition of Allergan, can you provide updated thoughts on your appetite for potential divestitures of non-core products or therapeutic areas now that you’ve had about a year to digest that transaction? Thank you." }, { "speaker": "Rick Gonzalez", "text": "This is Rick. I’ll cover that, and maybe Rob can tag team along here. I think if you look at our overall estimate of high single digit growth on esthetics, it’s not heavily reliant on a large number of new products. There will be new products that come in - they’re probably closer towards the back end of the long range plan so they don’t have a significant impact on that overall growth rate, so I think we fundamentally believe that the market dynamics are such and the brands are competitive, highly competitive in this market, that we have the ability to grow the market and continue to maintain our share position in that market, and that will allow us to be able to drive that level of growth or higher." }, { "speaker": "Rob Michael", "text": "This is Rob. I would just add that if you look at the esthetics business, we’ll see significant growth not just from toxins and fillers, but also in body contouring, so as we think about the potential for that leg of the stool, we think we’ve got really three key drivers of growth within esthetics that will help us get to that high single digit long term expectation. Again, as Rick mentioned, we’re not counting on a significant contribution to the pipeline, although we will continue to drive innovation particularly with toxins and fillers, and of course as you’ve heard before, it’s important within body contouring to continue to drive innovation there as well, so we feel very good about that outlook and we’re not counting on a ton from the pipeline there." }, { "speaker": "Rick Gonzalez", "text": "And your second question, I would say even before the Allergan acquisition, we constantly looked at our portfolio and determined whether or not there were areas of our business that we ultimately though we were interested in divesting. I’d say that’s a process that we go through on a fairly consistent basis to ensure that we’re maximizing the value of the assets that we have within our portfolio, and so we will continue to do that. When we find opportunities where we think that’s the right strategy, then we’ll execute against that strategy." }, { "speaker": "Liz Shea", "text": "Thanks Daniel. Operator, next question please." }, { "speaker": "Operator", "text": "Our next question comes from Gary Nachman with BMO Capital Markets. Your line is open." }, { "speaker": "Gary Nachman", "text": "Thanks. A couple more from me in Rinvoq. Are you hearing anecdotally any physicians that may be switching patients from Xeljanz to Rinvoq in RA, if there is a perceived safety benefit with Rinvoq as a more selective JAK, are you able to take advantage of that at all? Then secondly, if Rinvoq gets approved for atopic derm, how will you look to build out your presence with dermatologists? Will you leverage your current footprint on the esthetics side, or will you have a completely different medical derm team? Just talk about how you go after that opportunity and how you’re preparing for it, given your clear level of excitement there. Thank you." }, { "speaker": "Jeff Stewart", "text": "Hi, it’s Jeff, and I’ll take both of those. We’re actually not hearing physicians, from our intelligence, from our field teams, actively thinking to switch patients from Xeljanz to Rinvoq. I mean, that’s a big decision for a physician. What we have heard is when we do some of our research and our ear to the ground, we clearly see that oral surveillance is perceived as a Xeljanz issue, so typically what will happen is you may see people take their foot off the gas on some new starts, but we don’t see or hear certainly any widespread news of active switching, so that’s basically our intelligence on your first question. In terms of your second question, we will not be using the esthetics sales force. We will basically leverage our existing infrastructure that we have with some expansion we’ve taken place for Rinvoq in atopic dermatitis. I think as you know, in terms of our reputation amongst the medical derms is extremely strong. We have the number one reputation because of the years of Humira in psoriasis and psoriatic arthritis and HS, and obviously we have a very, very strong impression and launch from Skyrizi, so we’ve basically designed a sales force that through our management, which has been connected to these derms for more than a decade, and existing reps with some new reps in there, we are building--we have built a sales force that will work seamlessly with our Skyrizi teams to give a very nice offering to those dermatologists. An important fact is that basically the overlap of those dermatologists that drive basically the atopic derm market is about 90% between the atopic derm market and the psoriasis market, so we feel we’re well positioned in terms of how we’ve set up our go-to-market approach with the segment." }, { "speaker": "Liz Shea", "text": "Thanks Gary. Operator, next question please." }, { "speaker": "Operator", "text": "Our next question comes from Gregg Gilbert with Truist Securities. Your line is open." }, { "speaker": "Gregg Gilbert", "text": "Thank you. Mike, I was interested in your oral psoriasis commentary. Are you assuming that a new bar has been set by deucravacitinib in terms of efficacy versus Otezla, and is that something you’re very mindful of as you consider your own programs? Secondly for Rick, I realize AbbVie was born out of a company that had devices and pharma under one roof, but clearly you’ve embraced esthetics, for example, that good franchise building could involve drugs and devices or drugs that need to be delivered by device. Does that apply as you think ahead about ophthalmology or other areas when you consider long term BD? Thank you." }, { "speaker": "Mike Severino", "text": "This is Mike. I’ll take the first question. With respect to oral psoriasis agents, we would want to come in from an efficacy perspective with something that clearly exceeded the threshold that existed in the past with Otezla, and I think coming in a range that is Humira-like or better would be our goal. I think if you look at BMS’ Tyk2, they sort of come in at that Humira-like efficacy, and so I think that is generally the range that we’re talking about. I think when one talks about a direct comparison in terms of where a bar is set, we have to look not only at efficacy but at safety and at the totality of the data. Obviously it’s extremely early for our RORγT agent, but we think it is a molecule, because it impacts very well understood biology with a good understanding of where to go from an efficacy perspective and a good understanding of safety, that we can get in a range that’s very competitive there, so I think we’d be looking for that Humira-like efficacy or greater as something that we would like to use to enter the space with in oral, obviously coupled with a strong safety profile." }, { "speaker": "Rick Gonzalez", "text": "On your second question, this is Rick. I think the way we approach the markets that we operate in is we look for areas where there is significant unmet need and then we ultimately try to come up with solutions for those needs. Sometimes it’s drug only - in fact, I’d say the majority of our historical experience as AbbVie has been drug-only, but as an example, 951 is a good example of where it’s a combination product, right - a device and a drug. Certainly as we look at ophthalmology, we have implantable devices that were part of the Allergan acquisition that are important therapeutic options, that are available for physicians and patients. I’d say we tend to go at it and we’re certainly not opposed to devices being part of it if they can add to the ability to be able to provide for an advancement in the standard of care. In esthetics, as Rob indicated a moment ago, we’re looking at what is that big third leg on the stool, and we believe that is body. I would say in the area of body, devices are going to play a much more critical role, and so that’s an area where I think you’ll see us embrace even device-only kinds of strategies because they provide the right solution for that particular improvement. It’s an area that historically many of us know well because of our experience, as you pointed out, in our previous life, but I’d say also the teams in the organization itself tend to look for broad-based solutions that can meet the unmet need." }, { "speaker": "Gregg Gilbert", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Thanks Gregg. Operator, we have time for one final question." }, { "speaker": "Operator", "text": "Thank you. Our last question comes from Navin Jacob with UBS. Your line is open." }, { "speaker": "Navin Jacob", "text": "Hi, thanks so much for squeezing me in here. A couple if I may, if we have time. Just on Vraylar, you have strong long term guidance of $4 billion with just the existing indications, but the script trends at least seem to have slowed down, obviously in part because neuro has been weak as an overall therapeutic area during the pandemic. But just wondering--and just given that the quarter itself was a little bit weaker, I think, versus expectations, can you talk about the broader neuro market? Is that weakness there, because we do see strength with Ubrelvy and with Botox therapeutics, so just wondering if there’s something going on specifically with Vraylar? Has the bipolar depression opportunity been tapped out for some reason, and what can you and need to do to accelerate growth for Vraylar with the existing indication? That’s number one. Number two on Rinvoq, I think understands the rates around DVTP and MACE, but if you could give a little bit more clarity, based on the updated data that you’ve filed with the agency, what the rate of malignancy is across the indications, and whether that’s any different between the strengths and how that compares to the background rate. Thank you so much." }, { "speaker": "Jeff Stewart", "text": "Hi, it’s Jeff. I’ll take the Vraylar comment. The macro prescription market has been down a little bit versus historical trends, but we really think it’s simply a timing issue, and I’ll give you some numbers that support that. Before COVID hit, right in the first quarter of last year, the new to brand, or NBRx for Vraylar was about 3,500 new to brand prescriptions a week, and what we saw is during COVID, that dropped down all the way to about 2,700 - that was the nadir, and then it’s consistently come back up. Towards the end of March, we started to hit or recover that pre-COVID historical rate, so progress is there, and ultimately the way we see these markets function, as you recover your NBRx momentum, the TRx’s will start to come, so we’re encouraged on the latest trends. But your point is right - it has been a little bit soft on the market, and certainly as a brand Vraylar dropped because of COVID, but is now really fully recovered and so we should see continued recovery of the momentum there. Hopefully that helps." }, { "speaker": "Mike Severino", "text": "This is Mike. I’ll take your second question. With respect to the rates of malignancies, excluding non-melanoma skin cancer because that’s the way these rates are typically reviewed, I recently described a rate across Rinvoq studies with roughly 10,000 patient years experience of 0.8 events per 100 patient years experience, and that compared to an expected rate that was 0.9 or higher, depending on the estimate, so we’ll call it in the range of about 0.9 events, so not different from that expected rate and without any difference between doses, so no evidence of a dose response, and nothing that we’ve seen in the recent work that we’ve done changes that view in any way." }, { "speaker": "Liz Shea", "text": "Thanks Navin. That concludes today’s conference call. If you’d like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us." }, { "speaker": "Operator", "text": "Thank you for your participation. Participants, you may disconnect at this time." } ]	AbbVie Inc.	141,885,706
ABBV	4	2,022	2023-02-09 09:00:00	Operator: Good morning. Thank you for standing by. Welcome to the AbbVie Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to turn -- introduce the call to Ms. Liz Shea, Senior Vice President of Investor Relations. You may proceed. Liz Shea: Good morning and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Rob Michael, Vice Chairman and President; Jeff Stewart, Executive Vice President, Chief Commercial Officer; Carrie Strom, Senior Vice President and President, Allergan Aesthetics; and Tom Hudson, Senior Vice President, R&D and Chief Scientific Officer. Joining us for the Q&A portion of the call are Scott Reents, Senior Vice President and Chief Financial Officer; and Roopal Thakkar, Vice President, Global Regulatory Affairs. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings release and regulatory filings from today which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll now turn the call over to Rick. Rick Gonzalez: Thank you, Liz. Good morning, everyone and thank you for joining us today. I'll provide perspective on our overall performance and outlook and then Jeff, Carrie, Tom and Rob, who will review our business highlights pipeline progress financial results and 2023 guidance in more detail. Today, we reported another strong quarter and a highly productive year for AbbVie. We delivered full year 2022 adjusted earnings per share of $13.77 reflecting double-digit growth. Total net revenues of more than $58 billion were up by 5.1% on an operational basis, driven by impressive growth from SKYRIZI and RINVOQ which generated nearly $7.7 billion of combined sales in 2022. As I reflect on our 10 years as an independent company, we have made excellent progress evolving AbbVie into a leading biopharmaceutical company. We have successfully created a well-diversified portfolio with multiple growth platforms in attractive and sustainable markets. This includes the rapid development and launch of SKYRIZI and RINVOQ across all of HUMIRA's major indications, plus a distinct new indication, atopic dermatitis. We anticipate these 2 products will collectively exceed the peak revenues achieved by HUMIRA by 2027 with significant growth expected through the end of the decade. We are also building a substantial portfolio of novel, heme and solid tumor assays for oncology. The anticipated launches and indication ramp of several new products like venetoclax in multiple myeloma and MDS, epacritumab across B-cell malignancies and Teliso-V, a new treatment option in non-small cell lung cancer will collectively support growth in the middle of the decade. We expect continued robust performance in neuroscience with our leading on-market portfolio to address migraine and psychiatric conditions as well as a promising pipeline for neurodegenerative diseases. And we see significant long-term growth potential for aesthetics, an extremely attractive market which is underpenetrated, where we have the leading position in toxins with BOTOX cosmetic and Fillers Rejuvido [ph]. Second, we've established a productive innovation-driven R&D organization with a robust pipeline. Our R&D engine has discovered and developed Five major billion-plus medicines over the past decade. We are committed to pursuing new ways to address patients' most serious health issues and have more than doubled our annual R&D investment since our inception. The breadth and the depth of our pipeline which now includes more than 80 programs across all development stages, further supports our long-term growth outlook. Lastly, we have maintained a strong financial position. to fully invest in innovative science and commercial initiatives across our therapeutic categories to drive long-term growth. We've also used that financial position to support a robust and growing dividend which we have increased by 270% since our inception. And we have also used it as capacity to pursue value-enhancing business development to augment our existing portfolio and pipeline. With these strong operating characteristics, we remain well positioned to absorb the impact of the HUMIRA LLE and quickly return to robust sales growth in 2025. As it pertains to AbbVie's near-term outlook, we anticipate 2023 adjusted earnings per share of $10.70 to $11.10. This guidance range contemplates, we expected headwind from direct biosimilar competition with U.S. HUMIRA sales down approximately 37% which is at the lower end of our previous erosion projection of 35% to 55%. Robust performance from SKYRIZI and RINVOQ which we expect will collectively generate $11.1 billion of revenue, reflecting year-over-year growth of nearly 45%. Revenue pressure in [indiscernible] with recent challenging market and share dynamics impacting IMBLUVICA, partially offset by strong sales growth of venetoclax. Double-digit revenue growth of neuroscience including accelerating sales of Vraylar with our recent MDD approval. Our guidance also contemplates the transient economic impact primarily in the U.S. on aesthetic procedure growth, affecting near-term performance for toxins, fillers and body contouring. Given that it's difficult to predict the duration of economic and inflationary pressures, we have not assumed the recovery in 2023. And finally, this guidance reflects increasing investments in both R&D and SG&A to support our long-term growth opportunities. It's also important to note that while it is possible 2023 could outperform our guidance, depending upon the shape of the HUMIRA erosion curve. We don't anticipate that 2024 earnings will be lower than the $10.70 for of the 2023 adjusted earnings per share guidance which we are issuing today. In summary, we are executing well across our business and see numerous opportunities for our diverse portfolio to drive long-term growth. With that, I'll turn the call over to Jeff. Jeff? Jeff Stewart: Thank you, Rick. I'll start with the quarterly results for immunology which delivered total revenues of more than $7.9 billion, up 19.5% on an operational basis. SKYRIZI and RINVOQ are performing exceptionally well, contributing more than $2.3 billion in combined sales this quarter, reflecting operational growth of 70%. SKYRIZI continues to exceed our expectations, outperforming our initial full year guidance by more than $750 million. Global revenues this quarter were nearly $1.6 billion, up 12.8% on a sequential basis. SKYRIZI is achieving strong market share momentum globally with in-play psoriatic disease leadership in 24 countries and total market share leadership in more than a dozen key markets. In psoriasis, SKYRIZI's total prescription share of the U.S. biologic psoriasis market has increased to more than 28%. And there is substantial room for continued growth in psoriasis based on SKYRIZI's leading in-play share of new and switching patients which remains at nearly 50%. Psoriatic arthritis is also providing a nice inflection to SKYRIZI sales, especially in the U.S. Dermatology segment, where we have achieved approximately 10% share of the total biologic market. And we are also seeing encouraging SKYRIZI new patient starts in the U.S. room segment as well which accounts for more than 80% of all PSA treatments. SKYRIZI is being co-positioned with RINVO to rheumatologists where these 2 products combined have already achieved a leading in-play PSA room share of approximately 16%. In Crohn's disease, we are making excellent progress with the U.S. launch. Feedback from gastroenterologists has been very positive, especially as it relates to SKYRIZI's novel dosing and overall clinical profile. We recently started DTC promotion for this indication and are already achieving a total in-play patient share of more than 15%. Turning now to invoke which delivered global sales of $770 million, representing double-digit sequential growth. In rheumatology, global prescriptions are ramping nicely across RINVOQ's 4 approved indications, RA, PSA, ankylosing spondylitis and non-radiographic axial SpA. We continue to see positive market share momentum in both the U.S. and across key international geographies. In atopic dermatitis, RINVOQ is demonstrating strong uptake in both treatment naive and second-line patients globally. Feedback from the global derm community supports the importance of RINVOQ as a long-term chronic therapy to control atopic dermatitis, especially as it relates to skin clearance and rapid itch relief. RINVOQ AD prescriptions are trending up globally with 20% to 35% in-place shares across our major international markets and a mid-teens in-place share in the U.S. which are both tracking in line with our expectations. In gastroenterology, the launch trends for RINVOQ in ulcerative colitis are very strong. Physicians have been pleased with RINVOQ's high rates of endoscopic healing as well as the speed of onset which has quickly resulted in RINVOQ achieving approximately 20% in-play share in the U.S. second line plus setting. Internationally, RINVOQ UC is now approved in 50 countries with reimbursement discussions progressing in line with our expectations. This strong adoption in UC amongst gastroenterologists is very encouraging for RINVOQ's potential in Crohn's disease as well. We are on track for U.S. and EMA regulatory decisions in the second quarter and are preparing for the commercial launch. Global HUMIRA sales were approximately $5.6 billion, up 6% on an operational basis with 9.9% growth in the U.S. partially offset by international, where revenues were down 16.9% operationally due to biosimilar competition. In the U.S., we have secured broad formulary access for HUMIRA encompassing more than 90% of all covered lives which enables us to compete for patient volume at parity to biosimilars. Turning now to hematologic oncology, where total revenues were $1.6 billion, down 11.2% on an operational basis. Imbruvica [ph] global revenues were approximately $1.1 billion, down 19.5%. The U.S. performance continues to be impacted by challenging market and share dynamics attributed to the pace of COVID recovery as well as increasing competition. Venclexta global sales were $56 million, up 12.2% on an operational basis, with continued strong demand in both AML and CLL. We are particularly pleased with the international performance driven by robust share gains in the EU and across Asia. In neuroscience, revenues were $1.7 billion, up 5.1% on an operational basis. Vraylar continues to demonstrate robust growth. Sales of $565 million were up 15.5% on an operational basis, reflecting increasing market share, primarily in bipolar 1 disorder. Vraylar was also recently approved as an adjunctive treatment for major depressive disorder, marking its fourth approved indication and adding a new substantial opportunity for long-term growth. We are very pleased with the AMDD label which confirms Vraylar's strong benefit risk profile, dosing flexibility with positive efficacy results for both the 1.5 and 3-milligram dose and the ability to reduce depressive symptoms as an add-on for the partial responders who present and this is important, with or without symptoms of anxiety. The AMDD launch is off to a strong start and we are already seeing a nice inflection in total new prescriptions in the marketplace. Within migraine, our leading oral CGRP portfolio contributed $249 million in combined sales this quarter, reflecting growth of nearly 30% as we continue to see strong prescription demand for both Ubrelvy and QULIPTA. We are also pursuing in the U.S. commercial approval for QULIPTA as a preventative treatment for patients with chronic migraine which would further strengthen our competitive profile and uniquely position QULIPTA as the only oral CGRP available as a preventative treatment for patients with both chronic and episodic migraine. Rounding out the migraine portfolio is BOTOX Therapeutic, a unique treatment with a dozen approved therapeutic indications and the clear branded leader in chronic migraine prevention. Total BOTOX Therapeutic sales were $728 million, up 10.7% on an operational basis. And last, we continue to prepare for the launch of ABBV-951 in both the U.S., Europe and Japan later this year. 951 represents a potentially transformative next-generation therapy for advanced Parkinson's disease and a $1 billion-plus peak sales opportunity. So overall, I'm pleased with the performance and the momentum across the therapeutic portfolio. And with that, I'll turn the call over to Carrie for additional comments on aesthetics. Carrie? Carrie Strom: Thank you, Jeff. Full year 2022, global aesthetic sales were approximately $5.3 billion, reflecting growth of 5% on an operational basis. Global Botox cosmetic sales were approximately $2.6 billion, up nearly 21% operationally and global Juvederm sales were approximately $1.4 billion, down roughly 2% operationally. Our global aesthetics portfolio grew in 2022 despite several headwinds, most notably inflationary dynamics in the U.S., COVID-related lockdowns in China and suspension of our operations in Russia. In the U.S. we began to see a slowdown in aesthetic procedures in the second quarter of last year which coincided with the softening in economic metrics. These trends continued through the end of the year with the most significant impact on higher priced more deferrable procedures, including fillers and body contouring. Despite these economic pressures, U.S. Botox cosmetic sales grew approximately 16% in 2022, driven by strong first half sales with growth moderating over the remainder of the year. Similarly, U.S. Juvederm saw strong growth in the first quarter of the year but filler market declines throughout the second half of the year resulted in full year sales being down approximately 17% versus a robust 2021. We continue to track a number of key external economic metrics, including real personal consumption and the U.S. Consumer Confidence Index. While we have not seen major improvements in these metrics, data over the course of the last several months has shown stabilization. It remains difficult to predict the duration of these economic headwinds. But as Rick noted, we have modeled them to persist through the end of 2023. Our international aesthetics portfolio continued to demonstrate robust growth with the strong performance in most major markets, offsetting impacts from China and Russia. International Botox cosmetic sales of nearly $1 billion were up approximately 29% operationally and international Juvederm sales grew approximately 9% on an operational basis. We delivered this performance despite the significant headwinds we faced last year in our 2 largest international filler market, China and Russia. While our aesthetics portfolio in China continues to be impacted by COVID-related headwinds -- the current wave appears to have peaked. We expect the situation to improve through the first half of 2023 with full recovery in China beginning in the third quarter. Despite the transitory challenges we're facing, we remain confident in the long-term outlook for our aesthetics portfolio. Consumers continue to be very interested in the aesthetics category and in our brands. We see substantial room for further market penetration across each of our aesthetics categories and are continuing to invest to support long-term growth. Our promotional efforts are focused on driving more consumers into our customers' offices while increasing retention and productivity of existing patients. We have built a best-in-class commercial technology team known for developing our consumer loyalty program, Eli. We have over 5 million consumers who use Eli and more than 20,000 of our customers' offices. We have a series of new technology products launching this year to drive growth in the aesthetics market and support our customers and consumers. Internationally, we are focused on markets with significant growth potential. We have increased investments in injector training and expanded our field force in China which is our second largest market. Latin America which is very aesthetically oriented and Japan which is growing rapidly and is expected to be one of our fastest-growing markets in 2023. Additionally, we are focused on delivering new product innovation. This year, we're launching 2 new fillers in the U.S., VOLUX for improvement of jawline which was approved late last year and Skin Vive for enhanced skin quality attributes, including hydration which is expected to be approved in the first half of 2023. We're also continuing to launch Harmonica, our hybrid bio-stimulatory HA filler in several international markets. The investments we're making to support long-term growth for our aesthetics portfolio, along with the stabilizing economic outlook and improving tobidynamics in China, leave us well positioned for future growth. With that, I'll turn the call over to Tom. Tom Hudson: Thank you, Carrie. We expect significant program advancement across all stages of our pipeline this year. In immunology, we continue to make very good progress with programs in our core diseases as well as in adjacent areas of rheumatology and dermatology, where we are expanding our portfolio. We're nearing completion of SKYRIZI's registrational program in ulcerative colitis which is the last major indication expansion program for SKYRIZI. In the first half of this year, we'll see data from the Phase III induction and maintenance studies for SKYRIZI in ulcerative colitis with our regulatory submissions anticipated later this year. We'll also see data this year from our head-to-head comparison studies evaluating SKYRIZI versus other commonly used agents which we expect will further distinguish its profile from competitive offerings. These studies include our Phase III trial in Crohn's disease versus STELARA and our Phase III trial in psoriasis versus Otezla. Results from these studies will add to the body of evidence supporting SKARIZI as a best-in-category agent in these indications. We're also nearing completion of the core indication expansion programs for RINVOQ. Our regulatory applications for RINVOQ and Crohn's disease are under review and we anticipate approval decisions in the second quarter. RINVOQ demonstrated very strong rates of remission and endoscopic improvement in our Phase III induction and maintenance studies and we believe RINVOQ will be an important new treatment option once approved in Crohn's disease. This is a market where approximately 80% of bioexperience patients have used the TNF inhibitor and there remains considerable unmet need for therapies that can deliver high rates of response and long-term remission. Beyond our core immunology indications, we're developing RINVOQ in several diseases where we've seen strong evidence that our JAK inhibitor has the potential to become a highly effective therapy. Our Phase III program is already underway in 1 of these indications, giant cell arteritis. And later this year, we plan to begin Phase III studies for 4 additional diseases, systemic lupus, hidradenitis suppurativa, vitiligo and alopecia areata. Moving now to our oncology portfolio, where we expect several important regulatory and clinical milestones this year. In the area of hematology oncology, we'll see data from several Phase III studies, including results from Venclexta's event-driven de novo trial in relapsed/refractory multiple myeloma patients with a T114 mutation and Navitoclax' TRANSFORM-1 trial in frontline myelofibrosis. Results from these studies are expected to support regulatory submissions in the second half of the year for Venclexta and navitoclax in their respective indications. We also anticipate regulatory approval this year for epcoritamab in relapsed/refractory large B-cell lymphoma in several major geographies, including the U.S. in the second quarter and in Europe and Japan in the second half of the year. Based on the very deep and drillable responses demonstrated thus far in our clinical program, we believe that epcoritamab has the potential to significantly improve upon treatment options for these patients. We believe that epcoritamab has the potential to become a core therapy for B-cell malignancies. And we continue to make very good progress, expanding our development programs for epcoritamab across several indications. Over the course of 2023, we expect to begin several new studies, including a Phase III study in frontline DLBCL in combination with R-CHOP and multiple Phase II studies in CLL and MCL. We remain very excited about epcroritumab's potential to become a best-in-class therapy across multiple B-cell malignancies and look forward to providing updates on these programs as the data mature. Now moving our solid tumor pipeline. We remain on track to see data later this year from our Phase II study evaluating Teliso-V in second-line plus advanced non-squamous non-small cell lung cancer. As a reminder, we received a breakthrough therapy designation for Teliso-V, our c-Met ADC, based on the encouraging results from Stage 1 of this Phase II study and the data we'll see later this year has the potential to support an accelerated approval. Our Phase III confirmatory study in patients with overexpressed c-MET is also ongoing. Treatment options for these cancer patients who have exhausted platinum-based chemotherapy, immunotherapy and targeted therapy are very limited and prognosis for these patients is extremely poor. As a targeted therapy for patients with overexpressed cement which represents approximately 25% of the non-squamous non-small cell lung cancer population, we believe Teliso-V has the potential to become an important new treatment option for these patients. We're also making good progress with our next-generation c-MET ADC, ABBV-400 which utilizes a more potent topoisomerase inhibitor payload, to potentially drive deeper tumor responses as well as broaden the range of solid tumors where c-MET therapies can be used such as gastroesophageal and colorectal tumors. We expect to see early data from our Phase I program in 2024. Elsewhere in the solid tumor pipeline, we have begun to see encouraging data from several programs which we plan to advance into Phase II studies this year. Our anti-GARP antibody, ABBV-151 is showing strong signals of activity, including deep responses with prolonged durability. Based on this preliminary efficacy, we plan to initiate Phase II studies in several tumor types. We also plan to advance ABBV-647 into Phase II dose optimizing studies this year based on the promising results from our early stage program. This ADC targets PTK7 which is a subset of non-squamous non-small cell lung cancer and represents approximately 25% of patients and has little overlap with c-MetSo our c-Met ADCs and PTK7 ADC combined will target approximately 45% of non-squamous non-small cell lung cancer patients. Now moving to neuroscience, where we recently received FDA approval for Vraylar as an adjunctive treatment for major depressive disorder which marks its fourth indication approval. We're very excited by this approval and pleased with the label which highlights Real or strong benefit risk profile in this indication. Vraylar is an important new treatment option for patients who are currently taking an antidepressant but continue to have unresolved depression symptoms. We also recently received approval in Japan for ABBV-951, our novel subcutaneous levodopa carbidopa delivery system for treatment of advanced Parkinson's disease. This innovative approach to delivering DUOPA-LIKE efficacy through a subcutaneous delivery system represents a potentially transformative improvement to current treatment options. With a less invasive, nonsurgical delivery system, it also has the potential to significantly expand the patient population currently addressed by DUOPA or other more invasive therapies for advanced PD patients such as deep brain stimulation. We remain on track for approval decisions this year in both the U.S. and Europe. In the U.S., we anticipate approval in the first half of the year, with product launch expected in the second half after we secured reimbursement. And in Europe, we anticipate approval in the fourth quarter of this year. And in the area of migraine, we remain on track for an FDA approval decision in the second quarter of this year for QULIPTA as a preventive treatment for patients with chronic migraine. In Europe, we anticipate an approval decision in the third quarter for atogepant as a preventive treatment for patients with both chronic and episodic migraine. If approved, this would be another differentiating feature for Lipa as it would be the only oral CGRP approved for prevention in patients with chronic migraine. This is a common and debilitating disease that significantly impacts quality of life and we look forward to make this new oral treatment option available to patients once approved. And in our aesthetics pipeline, we expect to see results this year from several toxin programs including data from our Phase III study for Botox in platysma prominence with regulatory submission in the U.S. expected near the end of 2023 as well as data from our Phase III study for BOTOX in masseter muscle prominence, where we expect to submit regulatory applications in certain international markets in the second half of the year, including China and Canada. These 2 novel indications for prominent neck and jaw muscles will help to further build our portfolio in the lower phase segment. We'll also see data from our Phase III trial for Bot-AE or short-acting toxin in glabellar lines near the end of this year with regulatory applications plan for 2024. So in summary, we continue to demonstrate significant progress across all stages of our pipeline and anticipate numerous important regulatory and clinical milestones again in 2023. With that, I'll turn the call over to Rob for additional comments on our fourth quarter performance and our 2023 financial outlook. Rob? Rob Michael: Thank you, Tom. AbbVie's performance and financial foundation remains strong with our leadership positions across a diverse portfolio, we are well positioned to return to robust growth by 2025. Starting with fourth quarter results, we reported adjusted earnings per share of $3.60 which is $0.07 above our guidance midpoint. These results include a $0.13 unfavorable impact from acquired IPR&D expense. Total net revenues were $15.1 billion, up 3.8% on an operational basis, excluding a 2.2% unfavorable impact from foreign exchange. The adjusted operating margin ratio was 52.1% of sales. This includes adjusted gross margin of 86% of sales, adjusted R&D investment of 11.5% of sales, acquired IPR&D expense of 1.6% of sales and adjusted SG&A expense of 20.8% of sales. Net interest expense was $476 million and the adjusted tax rate was 13.4%. Turning to our financial outlook for 2023. Our full year adjusted earnings per share guidance is between $10.70 and $11.10. This earnings per share guidance does not include an estimate for acquired IPR&D expense that may be incurred throughout the year. We expect net revenues of approximately $52 billion. At current rates, we expect foreign exchange to have a neutral impact on full year sales growth. This revenue forecast comprehends the following approximate assumptions for our key products and therapeutic areas. We expect immunology sales of $24.8 billion, including SKYRIZI sales of $7.4 billion, reflecting growth of more than $2.2 billion due to strong market share performance across all approved indications. RINVOQ revenue of $3.7 billion, reflecting growth of more than 45% with continued indication expansion and HUMIRA sales of $13.7 billion, including U.S. erosion of 37% and following a loss of exclusivity in late January. With 1 biosimilar currently in the market and potentially 9 more biosimilars available in the middle of the year, we anticipate that sales erosion will be more heavily weighted towards the second half of 2023. In hematologic oncology, we expect VENCLEXTA sales of $2.2 billion and [indiscernible] revenue of $3.5 billion. For aesthetics, we expect sales of $5.2 billion, including $2.5 billion from Botox Cosmetic and $1.4 billion from Juvederm, with growth rates expected to improve when we lap the market slowdown in the middle of the year. For neuroscience, we expect revenue of $7.2 billion representing growth of more than 10%, including Botox Therapeutic sales of $2.8 billion, Vraylar sales of $2.5 billion and total oral CGRP revenue of $1.1 billion, including Ubrelvy growth of approximately 17.5%. For eye care, we expect sales of $2.2 billion and we expect Mavyret revenue of $1.4 billion. Moving to the P&L for 2023. We are forecasting full year adjusted gross margin of 84% of sales, adjusted R&D investment of $6.8 billion and adjusted SG&A expense of $12.4 billion. We forecast an adjusted operating margin ratio of 47% of sales. This profile includes a 70 basis point benefit that is fully offset in tax expense given the transition of Puerto Rico's excise tax to an income tax effective at the beginning of this year. We expect adjusted net interest expense of $1.8 billion and we forecast our non-GAAP tax rate to be 15.3%, including an impact of 1.3 points from the Puerto Rico tax transition. Finally, we expect our share count to be roughly flat to 2022. Turning to the first quarter. We anticipate net revenues of $11.8 billion. At current rates, we expect foreign exchange to have a 1% unfavorable impact on sales growth. This revenue forecast comprehends the following approximate assumptions for our key therapeutic areas. Immunology sales of $5.5 billion which includes U.S. HUMIRA erosion of 27%, Oncology revenue of $1.4 billion. Aesthetic sales approaching $1.2 billion; Neuroscience revenue of $1.5 billion; and eye care sales approaching $600 million. We are forecasting an adjusted operating margin ratio of 46% of sales and we model a non-GAAP tax rate of 13.3%. We expect adjusted earnings per share between $2.39 and $2.49. This guidance does not include acquired IPR&D expense that may be incurred in the quarter. Finally, AbbVie's strong business performance and outlook continues to support our capital allocation priorities. We expect to generate adjusted free cash flow of nearly $19 billion in 2023 which is net of $1.4 billion in SKYRIZI royalty payments. This cash flow will fully support a strong and growing dividend which we have increased by 270% since inception, continued debt repayment, where we expect to pay down $4 billion in maturities this year bringing our cumulative debt reduction to $34 billion. Our strong cash flow also provides capacity for continued business development to further augment our portfolio. In closing, we are very pleased with AbbVie's strong results in 2022. And with our diverse portfolio, we continue to be well positioned to deliver long-term growth. With that, I'll turn the call back over to Liz. Liz Shea: Thanks, Rob. We will now open the call for questions. [Operator Instructions] Operator? Operator: Our first question comes from Mohit Bansal with Wells Fargo. Mohit Bansal: And so maybe a question -- a bigger question for Rick. So AbbVie -- when we talk to investors, AbbVie has always been 1 of those. The R&D as a percent of sales has always been low. And right now, even it is still less than 15% and that's the pushback we get that the company cannot grow organically. And in some ways, you have always been playing defensive given that since inception, HUMIRA has always been an issue. Now that you're beginning to get past that, do you think something you'll change -- you want to change fundamentally with the company and the way you allocate internal versus external R&D spend? That would be very helpful. Rick Gonzalez: Okay. This is Rick. So it's a good question. We've obviously heard that question. I think there's a number of dynamics that play into it. when you look at our R&D expense as a profile. One is, obviously, we have a large volume of HUMIRA revenue that requires relatively little R&D support. And so that obviously dilutes out the profile of the business. As we see biosimilar impact, obviously, there will be some impact on that as you know, our revenues were to go down. The second thing is the aesthetics business, we're funding it aggressively to grow it. But by definition, it's not that expensive to be able to fund many of those programs. So it has a much lower profile. So some of it is mix when you think about it. The second thing I'd say is we obviously fund R&D at a level that we believe we can drive productivity. And I think if you look at our productivity over the last 10 years, the data I've seen suggests we are 1 of the most productive R&D engines in the industry. Certainly, when you look at products like SKYRIZI and RINVOQ, the return on those assets is tremendous. The third thing I'd say is, look, what drives R&D expense to the greatest extent is when you have large volumes of Phase III programs. And we're coming into a phase as we move forward over the next 3 or 4 years, where we have a number of programs that if they are successful, they will create a scenario where we will increase R&D. So an example of that would be our GARP program. We've seen some incredibly encouraging data out of that program thus far to next-generation immuno-oncology program. That combines with checkpoint inhibitors. And if that program continues to advance the way we see it now, we would want to expand our as our Phase II and then Phase III trials in that program significantly across the relatively broad range of solid tumors. That will require a significant increase in investment to be able to do that. So we tend to drive R&D based on programs that we have a high level of confidence can be productive and can be successful. And we don't constrain R&D in any way from that perspective. Another program will be our AbbVie program. If that program proves to deliver high rates of amyloid reduction and low REA. That will be another program that we want to rapidly move into Phase III. And so I can tell you, I'm very comfortable with the productivity we're getting out of R&D. Certainly, we will want to continue to increase that and that's 1 of our objectives. We always look at programs on the outside to bring them in. And in fact, I'd say over the last couple of years, we brought in a number of programs that are earlier stage programs. And we're fortunate from the standpoint that we have the ability to drive very strong growth, as we've indicated to investors between now and the end of this decade. We can drive high single-digit growth. We're going to return to robust growth in '25. So we're looking mostly for assets that will allow us to drive growth in that late 20s and early 30s time frame. So again, as those mature and they're successful and they go into later-stage development programs, they will drive further need for investment. Rob Michael: Mohit, this is Rob. I'll just add that. If you look at this year's guide, it's a great example of our willingness to increase R&D investment where it's needed. So if you look at we're increasing it from $6.4 billion to $6.8 billion. Those increases are focused on epcoritamab as well as midstage assets such as GARP and PTK7. We also have several new Phase III studies for additional RINVOQ indications which could contribute several billion dollars of revenue in the latter half of the decade. So even in the year where we're seeing a decline in the top line, we're increasing R&D investments. We're very committed to increasing innovation investment, whether it's internal or external. Operator: Our next question is from Terence Flynn with Morgan Stanley. Terence Flynn: I guess, I just wondered, high level, if there was anything different, Rick, or Rob, about your approach to guidance on the revenue side this year versus last year. I think last year, performance was choppy across a number of different franchises. So as you thought about the guidance this year, anything different as you approached it? And then my second question is any other details you can provide on how you're thinking about HUMIRA in 2024. Obviously, I appreciate the color this year but how should we think about 2024 dynamics in the U.S. Rick Gonzalez: Okay. So maybe I'll start and then Rob can fill in anything that I might miss. I think whenever we look at guidance, we look at it and I think this has been our historical practice. We obviously look at guidance as something that we have a very high level that we can execute against that guidance. I would say this year, you've seen that the range is a little bit wider than what we normally project. And we did that based on the fact that as HUMIRA goes biosimilar, obviously, very small changes in the assumptions we're making on erosion for HUMIRA can have a fairly significant impact. So we're right in the range by about $0.10. and that's reflected in this guidance. And so I would say that as we have in historically, we have a high level of confidence we're going to deliver on this guidance. As it relates to 2024, we have provided as part of this guidance, what we are projecting to be a floor because we've gotten a lot of requests from investors about when will we hit the trough and will it be '23 or will it be '24? So maybe to give you a little color around how we think about that. One, the $10.70 is a floor. That doesn't mean that we will go down to $10.70 but it means that we would say to investors that, that's what you should assume is the absolute floor. Now when will that or if it were to occur, when we occur? Will we see the drop in 2023? Or will we see the trough in 2024. And I would tell you that our expectations would be based on this plan, the trough should occur in 2023. But what I would tell you is if we significantly overachieved this plan into 2023 and there's obviously somewhat greater risk it could move into '24. The reason why it is in '23 versus '24 based on our current planning assumptions, is because the strength of the growth platform has the ability between where it will grow in '23 and where we're growing 24% to offset what will obviously be further erosion of HUMIRA in 2024. 2024, you will basically have to impacts on HUMIRA. You will have the annualization of this year. And as Rob said in his remarks, we expect more of an impact in the second half of '23. So when you annualize that, you're going to have an impact that flows through to '24. And then we would expect further erosion of HUMIRA, both price and probably to a greater extent, volume in 2024. But the growth platform has the ability to grow through that based on those assumptions. And so that's the philosophy that we operate with on the guidance. Rob, anything you'd add? Rob Michael: I think if you reflect back on the history of AbbVie, we've had a long track record at delivering exceeding our guidance. I think 2022 is an exception. And if you look at on the top line now, we didn't make earnings. So that's important to highlight. If you look at the top line, the 2 biggest factors that drove the miss versus original guidance in 2022 were with Imbruvica and Venclexta, the CLO market, we did not anticipate that, that market would actually not recover. I mean that's -- it's down 20% versus pre-pandemic levels. And then we did see some additional share impact on IMBRUVICA. And then aesthetics, we saw, obviously, in the month of May, we started to see a slowdown in the economy. We had a very strong first quarter. So both of those things really are what drove the top line miss, we made earnings. Now we have factored both those things in the 2023 guidance to give investors confidence that we said it appropriately. But we always look to set the most responsible guidance we can and we feel good about where we set 2023. Operator: Our next question comes from Chris Schott with JPMorgan. Chris Schott: Just 2 for me. Maybe just following up on the 2023 guidance being a trough number. It seems like you're still going to have about a $12 billion U.S. HUMIRA franchise here. So can you just provide maybe a little bit more color of what you're envisioning 2024 to look like for HUMIRA? Like is it reasonable to think about the down 35% to 40% year as we look out to '24. I think we just turn your hands around just the how much growth in that core platform and how much of a headwind, I guess, HUMIRA is going to be facing at the same time. My second question was just on aesthetics trends as we move through this year. You've talked about some signs of at least sequential stability the last few quarters. You're talking about stepping up investments. You've got a couple of new products launching. I guess why shouldn't we think about some recovery in this business as we look out to the second half of the year? Rick Gonzalez: Chris, this is Rick. Let me talk a little bit about HUMIRA and the trough. We're 2 weeks into the biosimilar activity. So it's a little difficult to give you precise predictions or 2024. I think the way to think about HUMIRA going forward is what we would expect is the most significant impact on HUMIRA is going to be price. And obviously, we're trying to predict going forward what that price will look like. Certainly, as we look at this year, the most significant impact is clearly price. So that's more predictable because we obviously know what the pricing is in the contracts that we've put together. And so I think that's something that we have a high level of confidence. There will be further pressure on price as we move into '24 and there'll probably be further pressure on volume in '24d. But I would say, at the end of '24, I would expect HUMIRA to start to develop a more stable tail of revenue. It will still have some pressure as we move in '25 but '25 and '26 is where we should see that more stable tail for HUMIRA emerge. And that's 1 of the things that allows us to be able to see the underlying growth from the growth platform. So a number of things happen between '23 and '24 and then '25 as we move forward. As you mentioned in your second comment, we would certainly expect that the U.S. economy will start to recover in '24. It may recover earlier than that. And if it does, that would be great. We don't want to put a plan together to assume that because obviously, that's difficult for us to predict. But I think we would all expect that 24 will see a recovery in the U.S. economy. And we would fully expect for the aesthetics business to return back to historical growth rates very quickly when that happens. And so that will be another opportunity for that business to be able to grow. And then I would say Imbruvica is the other key issue for us. as we move forward. We would expect the majority of the erosion that we see on Imbruvica will occur this year and there will be less downward pressure as we move to '24. So that's what allows the growth to be able to come up. What I would tell you even though I don't want to make a; prediction in '24 of what HUMIRA will look like. I think we have a high level of confidence that we have the ability if the erosion curve looks like how we've modeled it now between '23 and '24 that we have the ability to be able to have the growth platform and go through that. So we can absorb that impact. And so far, like I said, it's early on but I'd say so far, we're comfortable with how things are playing out. Rob, anything you want to add on the first question and Carrie, maybe you can give a little more color. Rob Michael: I think you characterized it well, Rick. I mean the thing to highlight for this year for '23, the way you think about HUMIRA really in the first half of the year, the vast majority of that erosion will be priced. In the second half, you'll see because we've contracted rebates, you'll see a step-up in the price erosion, although you also will see more volume with biosimilars coming in the market in the middle of the year, we would expect more volume erosion. I think as we think about '24, we would expect, based on the contract to see a step up in price but albeit not at the same level as we see in '23 but '24 would be more volume. It's probably the best way to think about it right now. We're not going to give you guidance but if you think about how to model HUMIRA '23, '24, that's the way to think through it. Rick Gonzalez: Okay. Carrie, anything you want to add on aesthetics? Carrie Strom: Yes. This is Carrie. The -- in terms of the aesthetics market and how we're thinking about it for 2023, I mean, first, I'd say, yes, this is still a very strong fundamental market with consumers who are very interested in entering the category. And so that remains a strong opportunity the now and in the future. But what we saw as we exited 2022 is as these economic metrics were softening, we also saw that reflected in demand for aesthetic procedures. And in our conversations with customers, we saw that reflected in their practices, market research with consumers, where they said, yes, we're interested in the category but we want to see what's going on with the economy, perhaps before a new patient might want to enter the category. And based on that, we are modeling for those trends to continue in 2023. And what that means for U.S. toxin market is the market growth would be around a mid-single-digit decline for U.S. filler market around a 10% decline. And like we said, those growth rates would be different by quarter as we lap a strong first part of the year. Now of course, if there is a scenario like a deep recession, where unemployment skyrockets, that is not something that we've contemplated. Or on the other hand, if the macroeconomic environment stabilizes or improve that would represent favorability to our plan. Operator: Our next question is from Gary Nachman with BMO Capital Markets. Gary Nachman: First question is on neuro in the quarter. It's actually weaker than we thought. So was there any additional pressure on gross to net, maybe for the oral CGRPs? And what sort of inflection are you expecting for Vraylar and MDD, how rapid do you think that adoption might be this year? And then, Rick, you recently said that you would be in an article that you would be lifting the self-imposed $2 billion annual cap on business development that you have more capacity to do deals. So how much capacity do you guys have what areas are you looking to be most aggressive? And how important is it to add sizable marketed products into the mix? Or would it be mostly focused on pipeline? Jeff Stewart: Yes. I'll take the first one, it's Jeff. Thanks for the question. No, we did not see material incremental pressure on the gross to net -- we did see a little softening versus our expectation on the overall preventative marketplace but it was quite modest. So no, fairly consistent trending. I mean if you look at our new prescription capture and the oral market, it's basically a 50-50 shared capture rate between ourselves and the major competitor. In terms of the Vraylar adoption trend, we had discussed previously because we really have very, very strong access for Vraylar that we would anticipate a pretty rapid inflection in adoption for the depression indication, the adjunctive depression indication. As I mentioned in my remarks, that's what we've seen. So we're quite encouraged. I mean we can see a significant trend break on the new prescription adoption versus what was already a very nice growth rate for the bipolar 1 indication. So I think the early dynamics and again, it's only really been a month here in January where our sales force has been out promoting the new indication. We're quite encouraged in terms of the market response, both from the metrics in terms of IQVIA, the scripts we see but also the qualitative feedback from the customers. Rick Gonzalez: And on deal capacity, we obviously look at business development based on what we believe are -- we're trying to accomplish strategically in each of the therapeutic areas that we're operating in. we identify areas that we think would be good opportunities for us and then we look to see if we can find those kinds of assets. As I mentioned before, I think we're in the fortune of a position that we can drive very strong growth. with the assets that we have on the market today as well as what's coming out of our pipeline over the next 3 or 4 years. That gives us the ability to be able to return to growth and then drive that high single-digit growth through the end of the decade. And we're also fortunate that after HUMIRA, we have a -- relative to our peers, we have a very low LOE [ph] exposure. So we don't have a lot of downward pressure on the business. Now having said that, we've done an excellent job of paying down the incremental debt from the Allergan transaction, we put that $2 billion cap in place when we did the Allergan acquisition that allowed us to focus again on some earlier-stage assets. And I'd remind everyone that was about 4x what our historical practice has been for those kinds of assets. So there was plenty of capacity to do that. But we're certainly in a position now that if the right thing were to come along, we could do a transaction that would be much larger. We certainly have the financial wherewithal to be able to do that. And we've certainly shown that we were able to do that and create value in the assets that we bring in. The areas that we typically look at are aligned with our therapeutic growth areas. So immunology, oncology, certain areas of neuroscience and eye care, I would say, are the predominant areas as well as aesthetics. We obviously continue to look for opportunities in the states. They tend to be smaller acquisitions, though. And so at the end of the day, I feel good about where we are and we've been quite active. We have a very active business development group. And we'll continue to look at those. And like I said, we find something that's of interest and it could really help us round out a category that we're in, then you should expect us to act on that. Operator: It comes from Carter Gould with Barclays. Carter Gould: Maybe to come back to aesthetics. It does sound like you built in conservatism on a number of fronts. I wanted to also -- you didn't touch much around sort of China reopening and how you expect that sort of business to -- as it comes back, if you expect it to sort of return to how it was? Or if that will evolve differently. And then in the -- I guess as we think then around the guidance for '23 and the link you've drawn to as you sort of maybe if the guidance potentially evolves over '23, should we think about that link remaining intact? Or is that sort of a near-term phenomenon and that will sort of, I guess, disappear going forward. Rick Gonzalez: Carrie, why don't you touch on the aesthetics question. Carrie Strom: Yes. So your question around China and I'd say China is our second largest global business. It has demonstrated significant growth in the past few years and proven to be very responsive to the increased promotion that we're putting into that market. Of course, in 2022, China COVID-related issues did impact the aesthetics market, especially in the second and fourth quarters. Now, as we look at the year beginning in China and as everyone is returning from the Chinese New Year, it does look like the current wave has peaked. And that the situation is beginning to improve and will continue to improve through the first half of 2023 and we're expecting a full recovery in the market in Q3 and for the second half the year. So despite the challenges in 2022, China still posted positive growth and we will definitely be continuing our investments in China in 2023 and beyond. Rob Michael: And Carter, this is Rob. I'll try to answer your second question. I think the way to think about '24 -- clearly, as we go through the year, we always look at the trends and contemplate what that could mean for flow through in '24. But the reason we gave you that guidance range, we mentioned the $10.70 [ph] being the way to think about it as a floor for '24 is because of the dynamics around the HUMIRA erosion. So if we do better in '23 and more of it happens in '24, then you can at least anchor back to we're not going to fall below that $10.70 EPS floor in our guidance range. So we always would factor in trends but that's the way to think about it. If it's just the erosion on HUMIRA is better this year than we have in this guidance. We want to make sure you understood that what it means potentially for '24. So that's again, always factor in trends. But as we sit here today, that's the best way to think about it. Rick Gonzalez: Maybe just let me add 1 thing that might help clarify it. I think you should think about HUMIRA in '24. We believe we're going to get to a certain level of price and volume in '24, almost regardless of what happens in 2013 because of the competitive dynamic. And so when we talk about the shift, what we're really talking about is inflating '23. If you anchor '24 is a solid point that we have a high level of confidence of where HUMIRA's tail will be in '24. And the only thing that happens to shift it between '23 and '24 is that we do much better in '23 than we expected, right? So that inflates but it still anchors against the '24 point [ph]. That's the way to think about this. Operator: It comes from Steve Scala with Cowen. Steve Scala: The low end of 2023 guidance implies 22% EPS erosion, the high end of Q1 guidance assumes 21% EPS erosion. How is it possible that Q1 could be in line with the full year and not appreciably better? It seems as though the Q1 guide is low? Or is that because AbbVie believes the floor on HUMIRA price is already reached? Maybe another way to restate the question. What should be our anticipation for the quarterly cadence of EPS as we go through the year? Rob Michael: So Steve, so I think the best way is 1 anchor on the guidance we gave you on U.S. HUMIRA today. So we said for the first quarter, we said it would be 27% erosion. And so -- and that's going to -- the vast majority of that will be priced. And we said because there'll be 9 biosimilars coming to market in the middle of the year, we would expect more of the erosion to come in the second half of the year. So you have to factor that dynamic into the way you look at the quarters that there'll be more erosion in the second half of the year for HUMIRA versus the first half of the year. Then you also have to factor in that you've got things like aesthetics, we haven't quite lapped the economic impact yet, right? So in the first quarter, you have a dynamic where you will see aesthetics still down, right? But when we get into the middle of the year, when we lap it, that also affects your year-over-year growth rates. And then, the underlying performance of the growth platform as we continue to drive those brands, you'll see those growth rates accelerate. So those are all the things that would factor as you look at the quarterly -- really, we've given you Q1 and then full year. We haven't given you Q2, 3 and 4. But that -- those are the variables I would look at. There's not really a whole lot in terms of if you look at investment, for example, that you have to flex. We do tend to see some higher levels typically in the fourth quarter. So, you could -- you could look at historically our investment patterns and use that as a proxy. But those are the variables to consider as you think about the first quarter versus the rest of the year. Operator: It will come from Tim Anderson with Wolfe Research. Tim Anderson: I'm going to torch you with a couple more questions on the same subject as others. The U.S. HUMIRA erosion guidance of minus 37% in '23. How much of that is price versus volume? If I look at what your Q1 U.S. HUMIRA erosion is, so the guidance is minus 27%. Given that volumes for HUMIRA are, call it, 5% positive, that would suggest the price cuts may be in the 30% to 35% range. So can we triangulate off of the Q1 guidance to understand what percent of that minus 37% comes from price? And then the second question, again, goes back to 2024. I know there's lots of uncertainty on the exact rate of erosion for HUMIRA '23. But if you hit that minus 37% right on the nose, would 2024 erosion likely be slower or faster than net minus 37%. Rob Michael: So Tim, on your question related to price and volume. The way to think about it is in the first half of the year, the 27% in the first quarter, is the vast majority of that is price, right? So there is some volume impact but not very much. it's in the second half, what you'll see is in the second half, the overall erosion will step up and think of it as equivalent between price and volume because you're going to have -- we know we'll have rebate rates in some cases, increasing as well as the biosimilars coming to market, we expect to see more volume erosion. So as you think about -- as you're trying to triangulate the price volume with the guidance you've given, 27% vast majority's price, second half of the year, you'll have some more volume kicking in. That's I think the best way to think about the price volume split. And then your question on '24, is your question in terms of the percentage or the absolute percentage [ph]? Tim Anderson: So, if you hit the minus 37% this year which is your guidance for U.S. HUMIRA, the rate of erosion in '24 would be greater or less than that 37%? Rob Michael: So we're not going to give you a 2024 guidance, Tim. I think the way to think about '24 is we would expect to see additional price but albeit not at the same level as '23 and more volume coming through because you're going to have up to 10 biosimilars in the market for the full year. So we would expect to see more of a volume impact in '24 that we would expect to see in '23. Operator: It comes from Chris Shibutani with Goldman Sachs. Chris Shibutani: You previously commented about the operating margin trajectory of '23 into '24. I believe characterizing them is basically flattish. Is that still the case? And then across the immunology category broadly, we're seeing some -- a lot of cross-currency [ph] mix dynamics, clearly, with your portfolio being part of that. What is your expectation about the potential for some of the newer mechanisms that are emerging with clinical data. Are you keen to figure out whether you want to invoke those as part of your portfolio? What do you see the outlook for novel mechanisms, given that we're going to have some biosimilars to some of the most standard of care approaches PNSIL-23. Rob Michael: Chris, this is Rob. I'll take your first question. I think for modeling purposes, I would expect operating margins stay roughly at this level in '24 and then begin expanding again in with our return to robust sales growth. I think the pace of that expansion will depend on investment needs as we will always prioritize R&D and SG&A investment to drive long-term growth but that's the best way to think through '24 and then what the operating margin will look like in '25 and beyond. Jeff Stewart: And Chris, it's Jeff. I'll maybe kick off on your immunology question and then ask Tom to comment on some dynamics as well. So it is very, very clear that certainly in the midterm, the most excitement across these immunology categories are for SKYRIZI and RINVOQ. It's quite striking. And I think Tom mentioned there's still incredible interest in a next wave of dermatologic indications that follow on for atopic dermatitis that he highlighted. And really, as I noted in my remarks, I mean, the amount of excitement around the IL-23 and particularly our IL-23 across these indications is really profound. Now having said that, we are watching the competitive landscape for some maybe potentially some novel orals. We don't see them as major players. As we look deeper in the pipeline, we can see that there is the possibility for combination use of novel biologics or biomarker-driven approaches, particularly in IBD. And we monitor those very carefully as we look at our long-range plan. And Tom, I don't know if you want to address some of the things that are back in our pipeline in terms of immunology. Tom Hudson: Sure. I mean I think the -- I just want to start saying that with SKYRIZI and RINVOQ really raised the bar in terms of efficacy and you see it in mucosal healing, for example. So the bar is getting higher and we will continue to do that. But even to show that we're raising the bar, we're also going to do -- we're going to read out head-to-head studies this year with STELARA and Otezla. So another way to kind of show that what we have is really very profound in terms of responses we're seeing with patients. And we continue -- I mean, honestly, we look at the field. We look at competitors. We're hearing data of S1P1 inhibitors but the data appears to be less effective based on a number of patients which are discontinuing treatment and the signals that we see cardiovascular and others that are similar to what we've seen with previous ones. So I mean, again, without having seen the data, it's all difficult to kind of predict how they'll be able to do accept that our data with RINVOQ and SKYRIZI are very strong, durable and again, very strong at the level of endoscopy also. So we think we have already a competitive edge. We continue we'll see PMR data later this year. We have talked about our RIPK1 inhibitor, again, from the coal healing that's in the clinic right now. We're looking at additional indications. So over time, obviously, we're going to look at additional mechanisms. But not necessarily just pushing down on the same cytokines as JAKs but looking at other target pathways of things that happen in the scan or in GI, again, mucosal healing being an tool pathway. And this is where we think a combination of our immunomodulators like RINVOQ and SKYRIZI with other mechanisms will combine well to give even more profound responses. Operator: It comes from Colin Bristow with UBS. Colin Bristow: For all the helpful color so far. So maybe a broader question just with regards to HUMIRA biosimilars. I just I'm curious like, what is the broader impact you anticipate on the I&I market just in terms of net price has been sort of a question we've been getting a lot of people are trying to wrap their heads around -- and then maybe just one on your CF triple. I know that the trial is ongoing. Can you give us an update here? How is the progress? Should we still expect data later this year? Jeff Stewart: Yes, I'll take the one on the immunology marketplace. I think that the impact overall in the category for net price would be modest. And I think a lot of it has to do what Tom and I've discussed before which is the -- just the pure profile of some of these agents particularly SKYRIZI and RINVOQ and either others in the pipeline that are coming. I mean they really are setting different standards of care versus what they've seen in the past. And certainly, the physicians and the payers are recognizing this. I'll give a really quick example on 1 of our major products which is RINVOQ. I mean RINVOQ, based on the label changes that have taken place is already a post-TNF type of dynamic. And so the pricing is going to be the pricing there's no incremental ability to step it, for example. The other thing I would note is on SKYRIZI, we have 4 head-to-head trials against all the major competitors and another one coming with Otezla, as Tom noted. So you start to see that level of performance, whether it's against STELARA, multiple TNFs. Otezla, as I said, that's pending here. And it just becomes very clear that you're just going to achieve much higher levels of clearance and relief. So we feel pretty confident that the pricing impact over time, particularly in the U.S. market will be very modest. And certainly, we can navigate that based on the power of the performance of the portfolio. Tom Hudson: This is Tom. I'll just answer about the cystic fibrosis program. Again, this program continues. And just to remind you, we're working on a triplet and where we believe that 2 of the 3 components of -- for this drug, this triplet, we have best-in-class assets. But we were looking for another part of the triple called the C2 corrector, where last year, the previous ones basically didn't give the meaningful improvement we were expecting in FEV1 sweat chloride. So we've actually, in our discovery groups, continue to develop new ones. In the last year, we've moved our ABBV-576 forward. in SAD in Phase I studies. We continue to see these, again, safety, high exposures, good PK, things that with -- if you combine with our preclinical data, makes us think it will, it has a potential to be best-in-class -- and that's triplet again with -- is -- first of all, to being tested, we'll have data this year to actually show how they behave together. And later at this part of this year, I'll be able to give an update. Operator: Our next question is from [indiscernible] with Credit Suisse. Unidentified Analyst: Trung [ph] from Credit Suisse. Two, if I may. So I was just wondering on your thoughts more broadly on the pricing dynamics in the EU and U.S. So in the EU, you recently exited the U.K. pricing agreement. In Europe, it does feel like there's -- it's just becoming an increasingly complicated pricing environment. There are a number of reforms being proposed in Europe. So I guess my first question is, is do you see these changes being material or any headwinds to you in your growth ex U.S.? And then secondly, can you just perhaps talk about your reasons you decided not to renew your membership for pharma and bio. How are you going to remain engaged in D.C. and have a voice when it comes to things like IRA and pricing controls. Jeff Stewart: Yes. Thanks for the question. I'll take the first one there in terms of the EU. We do see some movement there, particularly in the, let's say, industry tax and I'll comment on the so-called VPaaS [ph] in the U.K. In some ways, whether or not we were in that voluntary program or outside of the voluntary program, the impact is about the same. And frankly, it was a policy decision because we really think that the U.K. government needs to reform that VPaaS. They didn't plan properly for how things might dynamically evolve in the U.K. and it's a very substantial part of the revenue now that is causing problems, I think, across all of the company. So it was a position of policy position, net neutral. It didn't matter, frankly, whether we were in or not and the U.K. is a relatively modest business for us. We are seeing perhaps more importantly, some changes in the German law, as you're probably aware of. And that is, I think, a modest net pressure that will come in Europe in Germany, in particular, because there's the move, as you may know, from 1 year of free pricing to 6 months. There's a modest increase in rebates, for example. So we do see some austerity impact. But on the bigger scheme, it's -- I wouldn't say it's material to our growth platform that we've been discussing. Rob Michael: And Trung [ph], this is Rob. In terms of international prices, I mean, typically, we see year-over-year decline of low to mid-single digits and that's the way we're modeling it for '23 as well. Rick Gonzalez: And then on pharma, this is Rick. Obviously, every year, we evaluate any kind of significant investment that we're going to make. And we make a decision as to whether or not we believe that investment is appropriate and is going to have the right level of return at that point in time. And ultimately, we made the decision around pharma based on that. We have a very significant government affairs group that's been active and been in place ever since we came into existence. Back in 2013, we've grown that organization. We did grow it somewhat this year as well in anticipation of not being part of pharma. We plan on being active as we have been in the past to try to appropriately advocate for things that we think are appropriate for patients. And I think that group is quite capable of being able to do that. And I would tell you that at a point in the future, we might decide to go back into pharma. But at this point, we've made the decision that we think that investment could be used elsewhere to be more effective. It's as simple as that. Operator: Our next question is from Geoff Meacham with Bank of America. Geoffrey Meacham: I appreciate all the perspective on guidance. I just had a follow-up on it. Rick, on your comments on the HUMIRA scale for starting next year in the U.S. I think when you look at other geographies, international revenues, you're still seeing double-digit declines after 4 years or so. Maybe just give us some context for what you're seeing there broadly versus what we could expect for the U.S. And just to be clear, when you see next year the impact from all the HUMIRA biosimilars, how much do you think that biosimilar STELARA may play a role here when you look at your assumptions for HUMIRA erosion? And then second question, just on the BD front, you guys talked about some of the therapeutic categories that you're interested in. But with the appetite to expand to expand the menu here and to say more orphan indications, I think across the landscape, some companies in the I&I space are getting into more niche indication. I wasn't sure if that was something that you guys would consider? Rick Gonzalez: So I think on the HUMIRA tail, just to maybe clarify what I said is I would expect that as we move through 2024 then in 2025 and 2026, we would start to see a more stable tail for HUMIRA. In other words, we're going to see erosion in 2024. I want to make sure I didn't somehow communicate that, that wasn't the case. So if you look at OUS, I think what's probably deceiving to you is you had different countries going biosimilar at different periods in time. So you can't necessarily look at that as an analog because it's so heterogeneous in the year that those countries went biosimilars. So you are correct. Yes, it is still experiencing double-digit decline but it's been driven by the fact that those countries have not -- some of those countries haven't reached stability yet. But typically -- and the U.S. market is a little different because you have all a large number -- you have a small number of large payers who drive the bulk of the activity in this market. So, it's more like some of the countries that did other kinds of government-wide activity, like in Germany as an example. And there, we do see after a couple of years, we've seen stability. So I think what's misleading you is you're looking at the overall number but you're not factoring into that, the fact that these countries went biosimilar across a number of years. Rob Michael: Jeff, this is Rob. Just to add to that. So if you just look at this year, so about half of the erosion is going to come from newer markets like Puerto Rico, Canada and Mexico. So that, as Rick mentioned, we have different waves. And so you're still seeing some of those waves come through. You also have some volume going to new agents like SKYRIZI and RINVOQ, right? So that's something to keep in mind that that's a dynamic that's also playing out for HUMIRA in those markets. And then you typically see negative price trends in international markets, again, low to mid-single digits. So you're going to see some level of pressure there. So those are all factoring into the year-over-year on international HUMIRA something to make sure you're keeping in mind. Jeff Stewart: And if you look at the STELARA dynamic with the biosimilar, I think there's a couple of dynamics that we're watching. And it does go back to my prior comments over the clinical differentiation. The first is that there will be less biosimilar competitive intensity against STELARA. Certainly, we've not seen anything like the 9 that we were -- 9 or 10 [ph] that we're going to see on HUMIRA. And so -- and that price point is quite high actually. If you look at where Stellar is now with the branded program. Now I think maybe more importantly, as we've highlighted before, we've anticipated that entry. And certainly, in Crohn's, we have an ongoing head-to-head trial against STELARA that will read out towards the end of the year. We plan on putting that into promotion if and we believe it will be positive, particularly what we're studying which is that endoscopic endpoint which is really becoming the standard in the gastroenterology space. So we think we can carry quite well with the ultimate arrival of that IL -- the 12/23 [ph] versus our Pure '23. So I hope that helps. Rick Gonzalez: I think on your third question, again, what tends to drive our BD strategy is the long-term strategic road map that we put in place across the branch. So if you think about it, you mentioned immunology as an example. I would say in immunology, we have 2 fundamental objectives that we're trying to drive. There are still areas within immunology, where we believe we can significantly raise the effectiveness of the therapies that are used on patients to drive higher levels of remission or higher levels of endoscopic healing. In other words, better clinical outcomes within the areas that we're in. And so we have a tremendous amount of effort in those areas to bring next-generation assets or as Tom mentioned in his comments, there are opportunities to potentially combine 2 mechanisms together to achieve that level of therapeutic benefit. But then we look outside those areas at the adjacencies. And we look for where are the opportunities for us to be able to bring in either an existing mechanism or something we can either develop within our own discovery group or something that we can acquire on the outside as a mechanism that we don't currently have. But we tend to look for where there are areas of large unmet needs and relatively significant patient populations. So, I use 2 examples to illustrate. Vitiligo. Vitiligo is a disease that's very prevalent. There aren't good therapeutic options in it today at all. We do believe there are mechanisms that will allow you to effectively treat vitiligo. If those are effective, that could be a very significant opportunity overtime. Alopecia is another good example of that. So that's how we focus BD in these areas. That's not to say we would never look at a more much opportunity or an orphan opportunity but I wouldn't say orphan is something that is core to our strategy. Operator: It comes from Robyn Karnauskas with Truist. Robyn Karnauskas: It was great with all the color you've given. I just had some -- I want to follow up on, you mentioned Vitiligo. With the competition with topical rux [ph] which might have a first mover advantage and then they have an oral as well in Pfizer. How do you see the opportunity for you in vitiligo for RINVOQ? Can it compete? And then my second question last earnings call, you highlighted your GARP TGF beta. So that's 151. And I know there's been a lot of cardio-tox [ph] in the space. So what gives you some confidence what features and what indications, like how do you focus on this? And how do you view the competition profile? Rick Gonzalez: On vitiligo, maybe Jeff and I will tag team on it. I would certainly say a topical has a place but it is difficult for people that have large areas of their bodies that are impacted by something like vitiligo for a topical to be a manageable therapy for those patients. So an oral for those patients that have more severe disease typically has greater benefit and frankly, better compliance among those patients which ultimately gives you better clinical outcomes. So I think the RINVOQ will stack up against whoever the competitive alternatives are based on the data. Based on how we've seen RINVOQ perform in other areas, I think we feel pretty good about what the potential is. But the data will speak for itself, see what the data looks like Jeff and Tom, would you add anything? Jeff Stewart: Just to build on that. When we look at the valuation of, for example, that indication or HS or alopecia which again are those derm oriented indications that will follow on pretty quickly in the middle of the decade on top of atopic dermatitis. We do exactly what Rick highlighted. We will segment the patients based on the body surface area. We know that the topicals will be important for a certain percentage of population. For example, if it's maybe highly located to the face, that might be more appropriate, at least as the first course of action. But we do believe that in almost all indications that we've looked at for RINVOQ, it just performs exceptionally well in the clinic. And we would anticipate that as well above a base case scenario. Perfect example is Crohn's disease. There will not be another JAK inhibitor in Crohn's disease for the United States just because they just don't work. And you have spectacular results with the selective JAK with RINVOQ. So We take that all into that competitive context all into our calculations as we look forward to return for those future derm indications. Tom Hudson: If I can just continue with. I mean, we will have readouts for our Phase II study this year and we've mostly been looking at those cases where there's more extensive body coverage disease -- or the face. So I think it would be a different -- it's a much better to take an oral than a cream when you actually have significant body coverage. Again, we'll see the data, we will report on another quarter call. Thank you, Robin, for the second question. Yes, TGF-beta is a known tumor suppressive pathway and people have tried to drug it to increase the response to immunotherapies. The first-generation TGF-beta because the target is so many parts of the body, you actually have effects, the cardiovascular effects having related to the TGF-beta activity in some of the endothelial cells in the valves and so on of the heart. Here, we're using GARP as our target. GARP is actually a receptor for TGF-beta that's called latent inactive that GARP sound only on Treg cells, a little bit on some fiber some store sales but it's not some in the heart or other tissues. That's what gives us our safety profile and the ability to causing a suppression on Treg cells found in tumor cells as opposed to other places in the body. So that we felt from the beginning was the attribute we needed to go to target this pathway would be something that will be tumor selective and that's what we've been able to see so far. Rick Gonzalez: She asked about what tumors potentially. Tom Hudson: Tumors. So in our -- initially, we focused on tumors. So this pathway is found on almost every solid tumor has some subset tumors which express TGF-beta and GARP. We started off thinking that we'd do a Phase I SAC [ph] study which we did well that we will expand. And we had picked liver and bladder because we saw a lot of TGF-beta pathway in those indications. And we also -- although we knew there was 7 CRC, we saw in patients in our Phase I study which were unselected in terms of tumor type. We saw responses. So we've actually continued expanding studying CRC but we did see responses in liver cancer where we expected to see it based on expression of TGF-beta. We did see it in bladder cancer and we're expanding in those indications at this point. Given the fact that I said earlier that we TGF-beta in all types of tumors, both tumors called hot or cold, we're actually expanding in other tumors to get signals right now. And again, we have we'll have baskets to actually continue to explore its indication space. But right now, we're expanding when we're going to Phase II dose rating studies that's indications where we've actually seen data in our Phase I study. Operator: It comes from Simon Baker with Redburn. Simon Baker: Two, if I may, please. Just going back to U.S. HUMIRA. Giving us the expected erosion is extremely helpful. It's also extremely impressive that you confident enough to give a point estimate for the percentage erosion in '23. So notwithstanding that, I wonder if you could give us what the likely pushes and pulls are. Is this something where we should be thinking more about the being upside risk due to inability of those additional generics biosimilars to supply the market. So any color pushes and pulls there and also into 2024 and your confidence around the erosion curve in '24? And then a question on tax. One question topic that's been raised by some of your peers has been an impact from the OECD minimum global tax rate initiatives in '23. Your guidance would suggest that isn't a factor for you. I just wonder if you could give us any color on when and if you expect those initiatives to impact your tax rate? Rob Michael: Simon, this is Rob. I'll take your first question. So when we give guidance, we typically give approximate assumptions and we do use point estimates. We don't typically give product level range. So it has been our practice. So we said approximately 37% erosion for U.S. HUMIRA. We have confidence in that number, obviously. But I think in terms of the pushes and pulls, it's really going to be about volume erosion, right? I think that's -- if you think over the course of the year, we made assumptions around volume erosion. We have good visibility of the price. Now it's a question of what will the volume erosion look like? And obviously, as we go through the year, we'll update you on that. Scott Reents: This is Scott. I'll give you some thoughts on the OECD question that you asked regarding tax. So you're right. For 2023, we do not see any impact from this. In our view, there's a lot of things to be worked out with respect to the global minimum tax you mentioned. We have, in the U.S., as you know, a minimum tax we see ultimately this OECD tax being a top-up on that if that does occur but there's a lot of details to be worked out and we wouldn't anticipate any impact there until 2025, if there is an impact. Operator: It comes from Navann Ty with BNP Parabas. Navann Ty: I have 3 quick follow-ups, please. The first 1 on aesthetics, in addition to the macro impact. Are you seeing or do you expect increasing competition from your smaller competitors, DTC campaigns and new products? The second question is on HUMIRA. Was AMGEVITA in line with your expectation. And the third follow-up is on capital allocation. So can we think of 2x as a soft net leverage target which is relevant for AbbVie to consider material business development. Rick Gonzalez: Carrie? Carrie Strom: I'll take that first question on aesthetic competition. So in terms of U.S. BOTOX [ph] Cosmetics, this is a product that's around for 20 years and has based increased competition and still commands market-leading market share in the high 60s. And we know though that the competitive market will expand as new entrants are coming and have entered and in terms of a revamped toxin at the end of last year. What we've seen in the aesthetics market is that, of course, customers are going to try these new products. It's highly kind of newness driven and there's a novelty factor and trial and competitive trial is to be expected. And what we see is that these products and past aesthetic launches that we've watched, the share ramps for the first 12 to 18 months and then tends to stabilize. And so, of course, we don't underestimate any of our competitors. And so in 2023, we are modeling what we think is a competitive amount of share erosion in terms of our Botox business. And we'd expect that in '23 and beyond that U.S. BOTOX [ph] cosmetic will continue to be the clear number 1 market leader. And the new toxins that enter the market will be competing for their position number 2, 3 or 4 in our customers' offices. Jeff Stewart: And it's Jeff. On your comment on AMGEVITA, the range of pricings that were released were not really a surprise. There's been some external thoughts that this is of interest where there were 2 different AMGEVITAs, 1 high WACC and on low WACC. But again, we've seen this across very different categories and studied it very carefully, as you would expect. So we've seen variably priced WACC products in our own HCV market with authorized generics from competitors. We've seen it in the diabetes space across multiple competitors, including biosimilar competitors. And certainly, with the -- with Amgen and the other segments of their own business. They were often moving around the list prices as well. So all in all, within the range that we would expect from Amgen. Yes. Rob Michael: This is Rob. I'll take the question on net leverage. So the 2x is -- think about it as our sustainable target. So as long as there's a path back to net leverage of 2x, could take us in some cases, it could take 2 to 3 years to get back to that. But as long as there's a path, a very clear path to get back to net leverage of 2x, that's the best way to think about how we would evaluate it. Operator: Our final question will come from Gavin Clark-Gartner with Evercore ISI. Gavin Clark-Gartner: Wanted to confirm if you were planning to submit the Imbruvica plus Venclexta frontline CLL combination to the FDA following the ASH this year? And then on 951 in Parkinson's, we saw top line data from competitors from last month. I don't have the full data yet. One thing that sticks out is that they have lower discontinuation rates. So just wondering if there's any insight on devices or trial design that may explain this. Rob Michael: It's Roopal. I'll take those. So for the ISV that you referenced, we have that in Europe and I think you're talking about the ASH data, overall survival. There as it clears couple of years is 0.5% or less and the PFS still stays low. At this time, we're not submitting here at the FDA. They would like to see a little more prospective data in another trial setting. So that's the hype. On 951, this is interesting on the competitors you bring up. So the when you run these patients in, you could have discontinuation rates. And if you include them or not include them, it's going to impact what happens post run in. So for example, when you see our data set, we count the run-in discontinuation and post run-in as you get into the main part of the trial. So you see that in the 20 percentile range or so. And that's fairly consistent with what you would see with a subcutaneous infusion. And it's not clear to us how that data, as you're speaking about is reported. Also, we don't know if that's more than 1 injection is that 2 injections and is it rotated daily. I can tell you about 951. We have dosing exposure that gets up to DUOPA unique from DUOPA to 24 hours. It's a single injection and you can leave it in for 72 hours. Liz Shea: Thanks, Gavin. That concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. Operator: This does conclude today's conference call. We thank you all for participating. You may now disconnect and have a great rest of your day.	[ { "speaker": "Operator", "text": "Good morning. Thank you for standing by. Welcome to the AbbVie Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] I would now like to turn -- introduce the call to Ms. Liz Shea, Senior Vice President of Investor Relations. You may proceed." }, { "speaker": "Liz Shea", "text": "Good morning and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Rob Michael, Vice Chairman and President; Jeff Stewart, Executive Vice President, Chief Commercial Officer; Carrie Strom, Senior Vice President and President, Allergan Aesthetics; and Tom Hudson, Senior Vice President, R&D and Chief Scientific Officer. Joining us for the Q&A portion of the call are Scott Reents, Senior Vice President and Chief Financial Officer; and Roopal Thakkar, Vice President, Global Regulatory Affairs. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings release and regulatory filings from today which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll now turn the call over to Rick." }, { "speaker": "Rick Gonzalez", "text": "Thank you, Liz. Good morning, everyone and thank you for joining us today. I'll provide perspective on our overall performance and outlook and then Jeff, Carrie, Tom and Rob, who will review our business highlights pipeline progress financial results and 2023 guidance in more detail. Today, we reported another strong quarter and a highly productive year for AbbVie. We delivered full year 2022 adjusted earnings per share of $13.77 reflecting double-digit growth. Total net revenues of more than $58 billion were up by 5.1% on an operational basis, driven by impressive growth from SKYRIZI and RINVOQ which generated nearly $7.7 billion of combined sales in 2022. As I reflect on our 10 years as an independent company, we have made excellent progress evolving AbbVie into a leading biopharmaceutical company. We have successfully created a well-diversified portfolio with multiple growth platforms in attractive and sustainable markets. This includes the rapid development and launch of SKYRIZI and RINVOQ across all of HUMIRA's major indications, plus a distinct new indication, atopic dermatitis. We anticipate these 2 products will collectively exceed the peak revenues achieved by HUMIRA by 2027 with significant growth expected through the end of the decade. We are also building a substantial portfolio of novel, heme and solid tumor assays for oncology. The anticipated launches and indication ramp of several new products like venetoclax in multiple myeloma and MDS, epacritumab across B-cell malignancies and Teliso-V, a new treatment option in non-small cell lung cancer will collectively support growth in the middle of the decade. We expect continued robust performance in neuroscience with our leading on-market portfolio to address migraine and psychiatric conditions as well as a promising pipeline for neurodegenerative diseases. And we see significant long-term growth potential for aesthetics, an extremely attractive market which is underpenetrated, where we have the leading position in toxins with BOTOX cosmetic and Fillers Rejuvido [ph]. Second, we've established a productive innovation-driven R&D organization with a robust pipeline. Our R&D engine has discovered and developed Five major billion-plus medicines over the past decade. We are committed to pursuing new ways to address patients' most serious health issues and have more than doubled our annual R&D investment since our inception. The breadth and the depth of our pipeline which now includes more than 80 programs across all development stages, further supports our long-term growth outlook. Lastly, we have maintained a strong financial position. to fully invest in innovative science and commercial initiatives across our therapeutic categories to drive long-term growth. We've also used that financial position to support a robust and growing dividend which we have increased by 270% since our inception. And we have also used it as capacity to pursue value-enhancing business development to augment our existing portfolio and pipeline. With these strong operating characteristics, we remain well positioned to absorb the impact of the HUMIRA LLE and quickly return to robust sales growth in 2025. As it pertains to AbbVie's near-term outlook, we anticipate 2023 adjusted earnings per share of $10.70 to $11.10. This guidance range contemplates, we expected headwind from direct biosimilar competition with U.S. HUMIRA sales down approximately 37% which is at the lower end of our previous erosion projection of 35% to 55%. Robust performance from SKYRIZI and RINVOQ which we expect will collectively generate $11.1 billion of revenue, reflecting year-over-year growth of nearly 45%. Revenue pressure in [indiscernible] with recent challenging market and share dynamics impacting IMBLUVICA, partially offset by strong sales growth of venetoclax. Double-digit revenue growth of neuroscience including accelerating sales of Vraylar with our recent MDD approval. Our guidance also contemplates the transient economic impact primarily in the U.S. on aesthetic procedure growth, affecting near-term performance for toxins, fillers and body contouring. Given that it's difficult to predict the duration of economic and inflationary pressures, we have not assumed the recovery in 2023. And finally, this guidance reflects increasing investments in both R&D and SG&A to support our long-term growth opportunities. It's also important to note that while it is possible 2023 could outperform our guidance, depending upon the shape of the HUMIRA erosion curve. We don't anticipate that 2024 earnings will be lower than the $10.70 for of the 2023 adjusted earnings per share guidance which we are issuing today. In summary, we are executing well across our business and see numerous opportunities for our diverse portfolio to drive long-term growth. With that, I'll turn the call over to Jeff. Jeff?" }, { "speaker": "Jeff Stewart", "text": "Thank you, Rick. I'll start with the quarterly results for immunology which delivered total revenues of more than $7.9 billion, up 19.5% on an operational basis. SKYRIZI and RINVOQ are performing exceptionally well, contributing more than $2.3 billion in combined sales this quarter, reflecting operational growth of 70%. SKYRIZI continues to exceed our expectations, outperforming our initial full year guidance by more than $750 million. Global revenues this quarter were nearly $1.6 billion, up 12.8% on a sequential basis. SKYRIZI is achieving strong market share momentum globally with in-play psoriatic disease leadership in 24 countries and total market share leadership in more than a dozen key markets. In psoriasis, SKYRIZI's total prescription share of the U.S. biologic psoriasis market has increased to more than 28%. And there is substantial room for continued growth in psoriasis based on SKYRIZI's leading in-play share of new and switching patients which remains at nearly 50%. Psoriatic arthritis is also providing a nice inflection to SKYRIZI sales, especially in the U.S. Dermatology segment, where we have achieved approximately 10% share of the total biologic market. And we are also seeing encouraging SKYRIZI new patient starts in the U.S. room segment as well which accounts for more than 80% of all PSA treatments. SKYRIZI is being co-positioned with RINVO to rheumatologists where these 2 products combined have already achieved a leading in-play PSA room share of approximately 16%. In Crohn's disease, we are making excellent progress with the U.S. launch. Feedback from gastroenterologists has been very positive, especially as it relates to SKYRIZI's novel dosing and overall clinical profile. We recently started DTC promotion for this indication and are already achieving a total in-play patient share of more than 15%. Turning now to invoke which delivered global sales of $770 million, representing double-digit sequential growth. In rheumatology, global prescriptions are ramping nicely across RINVOQ's 4 approved indications, RA, PSA, ankylosing spondylitis and non-radiographic axial SpA. We continue to see positive market share momentum in both the U.S. and across key international geographies. In atopic dermatitis, RINVOQ is demonstrating strong uptake in both treatment naive and second-line patients globally. Feedback from the global derm community supports the importance of RINVOQ as a long-term chronic therapy to control atopic dermatitis, especially as it relates to skin clearance and rapid itch relief. RINVOQ AD prescriptions are trending up globally with 20% to 35% in-place shares across our major international markets and a mid-teens in-place share in the U.S. which are both tracking in line with our expectations. In gastroenterology, the launch trends for RINVOQ in ulcerative colitis are very strong. Physicians have been pleased with RINVOQ's high rates of endoscopic healing as well as the speed of onset which has quickly resulted in RINVOQ achieving approximately 20% in-play share in the U.S. second line plus setting. Internationally, RINVOQ UC is now approved in 50 countries with reimbursement discussions progressing in line with our expectations. This strong adoption in UC amongst gastroenterologists is very encouraging for RINVOQ's potential in Crohn's disease as well. We are on track for U.S. and EMA regulatory decisions in the second quarter and are preparing for the commercial launch. Global HUMIRA sales were approximately $5.6 billion, up 6% on an operational basis with 9.9% growth in the U.S. partially offset by international, where revenues were down 16.9% operationally due to biosimilar competition. In the U.S., we have secured broad formulary access for HUMIRA encompassing more than 90% of all covered lives which enables us to compete for patient volume at parity to biosimilars. Turning now to hematologic oncology, where total revenues were $1.6 billion, down 11.2% on an operational basis. Imbruvica [ph] global revenues were approximately $1.1 billion, down 19.5%. The U.S. performance continues to be impacted by challenging market and share dynamics attributed to the pace of COVID recovery as well as increasing competition. Venclexta global sales were $56 million, up 12.2% on an operational basis, with continued strong demand in both AML and CLL. We are particularly pleased with the international performance driven by robust share gains in the EU and across Asia. In neuroscience, revenues were $1.7 billion, up 5.1% on an operational basis. Vraylar continues to demonstrate robust growth. Sales of $565 million were up 15.5% on an operational basis, reflecting increasing market share, primarily in bipolar 1 disorder. Vraylar was also recently approved as an adjunctive treatment for major depressive disorder, marking its fourth approved indication and adding a new substantial opportunity for long-term growth. We are very pleased with the AMDD label which confirms Vraylar's strong benefit risk profile, dosing flexibility with positive efficacy results for both the 1.5 and 3-milligram dose and the ability to reduce depressive symptoms as an add-on for the partial responders who present and this is important, with or without symptoms of anxiety. The AMDD launch is off to a strong start and we are already seeing a nice inflection in total new prescriptions in the marketplace. Within migraine, our leading oral CGRP portfolio contributed $249 million in combined sales this quarter, reflecting growth of nearly 30% as we continue to see strong prescription demand for both Ubrelvy and QULIPTA. We are also pursuing in the U.S. commercial approval for QULIPTA as a preventative treatment for patients with chronic migraine which would further strengthen our competitive profile and uniquely position QULIPTA as the only oral CGRP available as a preventative treatment for patients with both chronic and episodic migraine. Rounding out the migraine portfolio is BOTOX Therapeutic, a unique treatment with a dozen approved therapeutic indications and the clear branded leader in chronic migraine prevention. Total BOTOX Therapeutic sales were $728 million, up 10.7% on an operational basis. And last, we continue to prepare for the launch of ABBV-951 in both the U.S., Europe and Japan later this year. 951 represents a potentially transformative next-generation therapy for advanced Parkinson's disease and a $1 billion-plus peak sales opportunity. So overall, I'm pleased with the performance and the momentum across the therapeutic portfolio. And with that, I'll turn the call over to Carrie for additional comments on aesthetics. Carrie?" }, { "speaker": "Carrie Strom", "text": "Thank you, Jeff. Full year 2022, global aesthetic sales were approximately $5.3 billion, reflecting growth of 5% on an operational basis. Global Botox cosmetic sales were approximately $2.6 billion, up nearly 21% operationally and global Juvederm sales were approximately $1.4 billion, down roughly 2% operationally. Our global aesthetics portfolio grew in 2022 despite several headwinds, most notably inflationary dynamics in the U.S., COVID-related lockdowns in China and suspension of our operations in Russia. In the U.S. we began to see a slowdown in aesthetic procedures in the second quarter of last year which coincided with the softening in economic metrics. These trends continued through the end of the year with the most significant impact on higher priced more deferrable procedures, including fillers and body contouring. Despite these economic pressures, U.S. Botox cosmetic sales grew approximately 16% in 2022, driven by strong first half sales with growth moderating over the remainder of the year. Similarly, U.S. Juvederm saw strong growth in the first quarter of the year but filler market declines throughout the second half of the year resulted in full year sales being down approximately 17% versus a robust 2021. We continue to track a number of key external economic metrics, including real personal consumption and the U.S. Consumer Confidence Index. While we have not seen major improvements in these metrics, data over the course of the last several months has shown stabilization. It remains difficult to predict the duration of these economic headwinds. But as Rick noted, we have modeled them to persist through the end of 2023. Our international aesthetics portfolio continued to demonstrate robust growth with the strong performance in most major markets, offsetting impacts from China and Russia. International Botox cosmetic sales of nearly $1 billion were up approximately 29% operationally and international Juvederm sales grew approximately 9% on an operational basis. We delivered this performance despite the significant headwinds we faced last year in our 2 largest international filler market, China and Russia. While our aesthetics portfolio in China continues to be impacted by COVID-related headwinds -- the current wave appears to have peaked. We expect the situation to improve through the first half of 2023 with full recovery in China beginning in the third quarter. Despite the transitory challenges we're facing, we remain confident in the long-term outlook for our aesthetics portfolio. Consumers continue to be very interested in the aesthetics category and in our brands. We see substantial room for further market penetration across each of our aesthetics categories and are continuing to invest to support long-term growth. Our promotional efforts are focused on driving more consumers into our customers' offices while increasing retention and productivity of existing patients. We have built a best-in-class commercial technology team known for developing our consumer loyalty program, Eli. We have over 5 million consumers who use Eli and more than 20,000 of our customers' offices. We have a series of new technology products launching this year to drive growth in the aesthetics market and support our customers and consumers. Internationally, we are focused on markets with significant growth potential. We have increased investments in injector training and expanded our field force in China which is our second largest market. Latin America which is very aesthetically oriented and Japan which is growing rapidly and is expected to be one of our fastest-growing markets in 2023. Additionally, we are focused on delivering new product innovation. This year, we're launching 2 new fillers in the U.S., VOLUX for improvement of jawline which was approved late last year and Skin Vive for enhanced skin quality attributes, including hydration which is expected to be approved in the first half of 2023. We're also continuing to launch Harmonica, our hybrid bio-stimulatory HA filler in several international markets. The investments we're making to support long-term growth for our aesthetics portfolio, along with the stabilizing economic outlook and improving tobidynamics in China, leave us well positioned for future growth. With that, I'll turn the call over to Tom." }, { "speaker": "Tom Hudson", "text": "Thank you, Carrie. We expect significant program advancement across all stages of our pipeline this year. In immunology, we continue to make very good progress with programs in our core diseases as well as in adjacent areas of rheumatology and dermatology, where we are expanding our portfolio. We're nearing completion of SKYRIZI's registrational program in ulcerative colitis which is the last major indication expansion program for SKYRIZI. In the first half of this year, we'll see data from the Phase III induction and maintenance studies for SKYRIZI in ulcerative colitis with our regulatory submissions anticipated later this year. We'll also see data this year from our head-to-head comparison studies evaluating SKYRIZI versus other commonly used agents which we expect will further distinguish its profile from competitive offerings. These studies include our Phase III trial in Crohn's disease versus STELARA and our Phase III trial in psoriasis versus Otezla. Results from these studies will add to the body of evidence supporting SKARIZI as a best-in-category agent in these indications. We're also nearing completion of the core indication expansion programs for RINVOQ. Our regulatory applications for RINVOQ and Crohn's disease are under review and we anticipate approval decisions in the second quarter. RINVOQ demonstrated very strong rates of remission and endoscopic improvement in our Phase III induction and maintenance studies and we believe RINVOQ will be an important new treatment option once approved in Crohn's disease. This is a market where approximately 80% of bioexperience patients have used the TNF inhibitor and there remains considerable unmet need for therapies that can deliver high rates of response and long-term remission. Beyond our core immunology indications, we're developing RINVOQ in several diseases where we've seen strong evidence that our JAK inhibitor has the potential to become a highly effective therapy. Our Phase III program is already underway in 1 of these indications, giant cell arteritis. And later this year, we plan to begin Phase III studies for 4 additional diseases, systemic lupus, hidradenitis suppurativa, vitiligo and alopecia areata. Moving now to our oncology portfolio, where we expect several important regulatory and clinical milestones this year. In the area of hematology oncology, we'll see data from several Phase III studies, including results from Venclexta's event-driven de novo trial in relapsed/refractory multiple myeloma patients with a T114 mutation and Navitoclax' TRANSFORM-1 trial in frontline myelofibrosis. Results from these studies are expected to support regulatory submissions in the second half of the year for Venclexta and navitoclax in their respective indications. We also anticipate regulatory approval this year for epcoritamab in relapsed/refractory large B-cell lymphoma in several major geographies, including the U.S. in the second quarter and in Europe and Japan in the second half of the year. Based on the very deep and drillable responses demonstrated thus far in our clinical program, we believe that epcoritamab has the potential to significantly improve upon treatment options for these patients. We believe that epcoritamab has the potential to become a core therapy for B-cell malignancies. And we continue to make very good progress, expanding our development programs for epcoritamab across several indications. Over the course of 2023, we expect to begin several new studies, including a Phase III study in frontline DLBCL in combination with R-CHOP and multiple Phase II studies in CLL and MCL. We remain very excited about epcroritumab's potential to become a best-in-class therapy across multiple B-cell malignancies and look forward to providing updates on these programs as the data mature. Now moving our solid tumor pipeline. We remain on track to see data later this year from our Phase II study evaluating Teliso-V in second-line plus advanced non-squamous non-small cell lung cancer. As a reminder, we received a breakthrough therapy designation for Teliso-V, our c-Met ADC, based on the encouraging results from Stage 1 of this Phase II study and the data we'll see later this year has the potential to support an accelerated approval. Our Phase III confirmatory study in patients with overexpressed c-MET is also ongoing. Treatment options for these cancer patients who have exhausted platinum-based chemotherapy, immunotherapy and targeted therapy are very limited and prognosis for these patients is extremely poor. As a targeted therapy for patients with overexpressed cement which represents approximately 25% of the non-squamous non-small cell lung cancer population, we believe Teliso-V has the potential to become an important new treatment option for these patients. We're also making good progress with our next-generation c-MET ADC, ABBV-400 which utilizes a more potent topoisomerase inhibitor payload, to potentially drive deeper tumor responses as well as broaden the range of solid tumors where c-MET therapies can be used such as gastroesophageal and colorectal tumors. We expect to see early data from our Phase I program in 2024. Elsewhere in the solid tumor pipeline, we have begun to see encouraging data from several programs which we plan to advance into Phase II studies this year. Our anti-GARP antibody, ABBV-151 is showing strong signals of activity, including deep responses with prolonged durability. Based on this preliminary efficacy, we plan to initiate Phase II studies in several tumor types. We also plan to advance ABBV-647 into Phase II dose optimizing studies this year based on the promising results from our early stage program. This ADC targets PTK7 which is a subset of non-squamous non-small cell lung cancer and represents approximately 25% of patients and has little overlap with c-MetSo our c-Met ADCs and PTK7 ADC combined will target approximately 45% of non-squamous non-small cell lung cancer patients. Now moving to neuroscience, where we recently received FDA approval for Vraylar as an adjunctive treatment for major depressive disorder which marks its fourth indication approval. We're very excited by this approval and pleased with the label which highlights Real or strong benefit risk profile in this indication. Vraylar is an important new treatment option for patients who are currently taking an antidepressant but continue to have unresolved depression symptoms. We also recently received approval in Japan for ABBV-951, our novel subcutaneous levodopa carbidopa delivery system for treatment of advanced Parkinson's disease. This innovative approach to delivering DUOPA-LIKE efficacy through a subcutaneous delivery system represents a potentially transformative improvement to current treatment options. With a less invasive, nonsurgical delivery system, it also has the potential to significantly expand the patient population currently addressed by DUOPA or other more invasive therapies for advanced PD patients such as deep brain stimulation. We remain on track for approval decisions this year in both the U.S. and Europe. In the U.S., we anticipate approval in the first half of the year, with product launch expected in the second half after we secured reimbursement. And in Europe, we anticipate approval in the fourth quarter of this year. And in the area of migraine, we remain on track for an FDA approval decision in the second quarter of this year for QULIPTA as a preventive treatment for patients with chronic migraine. In Europe, we anticipate an approval decision in the third quarter for atogepant as a preventive treatment for patients with both chronic and episodic migraine. If approved, this would be another differentiating feature for Lipa as it would be the only oral CGRP approved for prevention in patients with chronic migraine. This is a common and debilitating disease that significantly impacts quality of life and we look forward to make this new oral treatment option available to patients once approved. And in our aesthetics pipeline, we expect to see results this year from several toxin programs including data from our Phase III study for Botox in platysma prominence with regulatory submission in the U.S. expected near the end of 2023 as well as data from our Phase III study for BOTOX in masseter muscle prominence, where we expect to submit regulatory applications in certain international markets in the second half of the year, including China and Canada. These 2 novel indications for prominent neck and jaw muscles will help to further build our portfolio in the lower phase segment. We'll also see data from our Phase III trial for Bot-AE or short-acting toxin in glabellar lines near the end of this year with regulatory applications plan for 2024. So in summary, we continue to demonstrate significant progress across all stages of our pipeline and anticipate numerous important regulatory and clinical milestones again in 2023. With that, I'll turn the call over to Rob for additional comments on our fourth quarter performance and our 2023 financial outlook. Rob?" }, { "speaker": "Rob Michael", "text": "Thank you, Tom. AbbVie's performance and financial foundation remains strong with our leadership positions across a diverse portfolio, we are well positioned to return to robust growth by 2025. Starting with fourth quarter results, we reported adjusted earnings per share of $3.60 which is $0.07 above our guidance midpoint. These results include a $0.13 unfavorable impact from acquired IPR&D expense. Total net revenues were $15.1 billion, up 3.8% on an operational basis, excluding a 2.2% unfavorable impact from foreign exchange. The adjusted operating margin ratio was 52.1% of sales. This includes adjusted gross margin of 86% of sales, adjusted R&D investment of 11.5% of sales, acquired IPR&D expense of 1.6% of sales and adjusted SG&A expense of 20.8% of sales. Net interest expense was $476 million and the adjusted tax rate was 13.4%. Turning to our financial outlook for 2023. Our full year adjusted earnings per share guidance is between $10.70 and $11.10. This earnings per share guidance does not include an estimate for acquired IPR&D expense that may be incurred throughout the year. We expect net revenues of approximately $52 billion. At current rates, we expect foreign exchange to have a neutral impact on full year sales growth. This revenue forecast comprehends the following approximate assumptions for our key products and therapeutic areas. We expect immunology sales of $24.8 billion, including SKYRIZI sales of $7.4 billion, reflecting growth of more than $2.2 billion due to strong market share performance across all approved indications. RINVOQ revenue of $3.7 billion, reflecting growth of more than 45% with continued indication expansion and HUMIRA sales of $13.7 billion, including U.S. erosion of 37% and following a loss of exclusivity in late January. With 1 biosimilar currently in the market and potentially 9 more biosimilars available in the middle of the year, we anticipate that sales erosion will be more heavily weighted towards the second half of 2023. In hematologic oncology, we expect VENCLEXTA sales of $2.2 billion and [indiscernible] revenue of $3.5 billion. For aesthetics, we expect sales of $5.2 billion, including $2.5 billion from Botox Cosmetic and $1.4 billion from Juvederm, with growth rates expected to improve when we lap the market slowdown in the middle of the year. For neuroscience, we expect revenue of $7.2 billion representing growth of more than 10%, including Botox Therapeutic sales of $2.8 billion, Vraylar sales of $2.5 billion and total oral CGRP revenue of $1.1 billion, including Ubrelvy growth of approximately 17.5%. For eye care, we expect sales of $2.2 billion and we expect Mavyret revenue of $1.4 billion. Moving to the P&L for 2023. We are forecasting full year adjusted gross margin of 84% of sales, adjusted R&D investment of $6.8 billion and adjusted SG&A expense of $12.4 billion. We forecast an adjusted operating margin ratio of 47% of sales. This profile includes a 70 basis point benefit that is fully offset in tax expense given the transition of Puerto Rico's excise tax to an income tax effective at the beginning of this year. We expect adjusted net interest expense of $1.8 billion and we forecast our non-GAAP tax rate to be 15.3%, including an impact of 1.3 points from the Puerto Rico tax transition. Finally, we expect our share count to be roughly flat to 2022. Turning to the first quarter. We anticipate net revenues of $11.8 billion. At current rates, we expect foreign exchange to have a 1% unfavorable impact on sales growth. This revenue forecast comprehends the following approximate assumptions for our key therapeutic areas. Immunology sales of $5.5 billion which includes U.S. HUMIRA erosion of 27%, Oncology revenue of $1.4 billion. Aesthetic sales approaching $1.2 billion; Neuroscience revenue of $1.5 billion; and eye care sales approaching $600 million. We are forecasting an adjusted operating margin ratio of 46% of sales and we model a non-GAAP tax rate of 13.3%. We expect adjusted earnings per share between $2.39 and $2.49. This guidance does not include acquired IPR&D expense that may be incurred in the quarter. Finally, AbbVie's strong business performance and outlook continues to support our capital allocation priorities. We expect to generate adjusted free cash flow of nearly $19 billion in 2023 which is net of $1.4 billion in SKYRIZI royalty payments. This cash flow will fully support a strong and growing dividend which we have increased by 270% since inception, continued debt repayment, where we expect to pay down $4 billion in maturities this year bringing our cumulative debt reduction to $34 billion. Our strong cash flow also provides capacity for continued business development to further augment our portfolio. In closing, we are very pleased with AbbVie's strong results in 2022. And with our diverse portfolio, we continue to be well positioned to deliver long-term growth. With that, I'll turn the call back over to Liz." }, { "speaker": "Liz Shea", "text": "Thanks, Rob. We will now open the call for questions. [Operator Instructions] Operator?" }, { "speaker": "Operator", "text": "Our first question comes from Mohit Bansal with Wells Fargo." }, { "speaker": "Mohit Bansal", "text": "And so maybe a question -- a bigger question for Rick. So AbbVie -- when we talk to investors, AbbVie has always been 1 of those. The R&D as a percent of sales has always been low. And right now, even it is still less than 15% and that's the pushback we get that the company cannot grow organically. And in some ways, you have always been playing defensive given that since inception, HUMIRA has always been an issue. Now that you're beginning to get past that, do you think something you'll change -- you want to change fundamentally with the company and the way you allocate internal versus external R&D spend? That would be very helpful." }, { "speaker": "Rick Gonzalez", "text": "Okay. This is Rick. So it's a good question. We've obviously heard that question. I think there's a number of dynamics that play into it. when you look at our R&D expense as a profile. One is, obviously, we have a large volume of HUMIRA revenue that requires relatively little R&D support. And so that obviously dilutes out the profile of the business. As we see biosimilar impact, obviously, there will be some impact on that as you know, our revenues were to go down. The second thing is the aesthetics business, we're funding it aggressively to grow it. But by definition, it's not that expensive to be able to fund many of those programs. So it has a much lower profile. So some of it is mix when you think about it. The second thing I'd say is we obviously fund R&D at a level that we believe we can drive productivity. And I think if you look at our productivity over the last 10 years, the data I've seen suggests we are 1 of the most productive R&D engines in the industry. Certainly, when you look at products like SKYRIZI and RINVOQ, the return on those assets is tremendous. The third thing I'd say is, look, what drives R&D expense to the greatest extent is when you have large volumes of Phase III programs. And we're coming into a phase as we move forward over the next 3 or 4 years, where we have a number of programs that if they are successful, they will create a scenario where we will increase R&D. So an example of that would be our GARP program. We've seen some incredibly encouraging data out of that program thus far to next-generation immuno-oncology program. That combines with checkpoint inhibitors. And if that program continues to advance the way we see it now, we would want to expand our as our Phase II and then Phase III trials in that program significantly across the relatively broad range of solid tumors. That will require a significant increase in investment to be able to do that. So we tend to drive R&D based on programs that we have a high level of confidence can be productive and can be successful. And we don't constrain R&D in any way from that perspective. Another program will be our AbbVie program. If that program proves to deliver high rates of amyloid reduction and low REA. That will be another program that we want to rapidly move into Phase III. And so I can tell you, I'm very comfortable with the productivity we're getting out of R&D. Certainly, we will want to continue to increase that and that's 1 of our objectives. We always look at programs on the outside to bring them in. And in fact, I'd say over the last couple of years, we brought in a number of programs that are earlier stage programs. And we're fortunate from the standpoint that we have the ability to drive very strong growth, as we've indicated to investors between now and the end of this decade. We can drive high single-digit growth. We're going to return to robust growth in '25. So we're looking mostly for assets that will allow us to drive growth in that late 20s and early 30s time frame. So again, as those mature and they're successful and they go into later-stage development programs, they will drive further need for investment." }, { "speaker": "Rob Michael", "text": "Mohit, this is Rob. I'll just add that. If you look at this year's guide, it's a great example of our willingness to increase R&D investment where it's needed. So if you look at we're increasing it from $6.4 billion to $6.8 billion. Those increases are focused on epcoritamab as well as midstage assets such as GARP and PTK7. We also have several new Phase III studies for additional RINVOQ indications which could contribute several billion dollars of revenue in the latter half of the decade. So even in the year where we're seeing a decline in the top line, we're increasing R&D investments. We're very committed to increasing innovation investment, whether it's internal or external." }, { "speaker": "Operator", "text": "Our next question is from Terence Flynn with Morgan Stanley." }, { "speaker": "Terence Flynn", "text": "I guess, I just wondered, high level, if there was anything different, Rick, or Rob, about your approach to guidance on the revenue side this year versus last year. I think last year, performance was choppy across a number of different franchises. So as you thought about the guidance this year, anything different as you approached it? And then my second question is any other details you can provide on how you're thinking about HUMIRA in 2024. Obviously, I appreciate the color this year but how should we think about 2024 dynamics in the U.S." }, { "speaker": "Rick Gonzalez", "text": "Okay. So maybe I'll start and then Rob can fill in anything that I might miss. I think whenever we look at guidance, we look at it and I think this has been our historical practice. We obviously look at guidance as something that we have a very high level that we can execute against that guidance. I would say this year, you've seen that the range is a little bit wider than what we normally project. And we did that based on the fact that as HUMIRA goes biosimilar, obviously, very small changes in the assumptions we're making on erosion for HUMIRA can have a fairly significant impact. So we're right in the range by about $0.10. and that's reflected in this guidance. And so I would say that as we have in historically, we have a high level of confidence we're going to deliver on this guidance. As it relates to 2024, we have provided as part of this guidance, what we are projecting to be a floor because we've gotten a lot of requests from investors about when will we hit the trough and will it be '23 or will it be '24? So maybe to give you a little color around how we think about that. One, the $10.70 is a floor. That doesn't mean that we will go down to $10.70 but it means that we would say to investors that, that's what you should assume is the absolute floor. Now when will that or if it were to occur, when we occur? Will we see the drop in 2023? Or will we see the trough in 2024. And I would tell you that our expectations would be based on this plan, the trough should occur in 2023. But what I would tell you is if we significantly overachieved this plan into 2023 and there's obviously somewhat greater risk it could move into '24. The reason why it is in '23 versus '24 based on our current planning assumptions, is because the strength of the growth platform has the ability between where it will grow in '23 and where we're growing 24% to offset what will obviously be further erosion of HUMIRA in 2024. 2024, you will basically have to impacts on HUMIRA. You will have the annualization of this year. And as Rob said in his remarks, we expect more of an impact in the second half of '23. So when you annualize that, you're going to have an impact that flows through to '24. And then we would expect further erosion of HUMIRA, both price and probably to a greater extent, volume in 2024. But the growth platform has the ability to grow through that based on those assumptions. And so that's the philosophy that we operate with on the guidance. Rob, anything you'd add?" }, { "speaker": "Rob Michael", "text": "I think if you reflect back on the history of AbbVie, we've had a long track record at delivering exceeding our guidance. I think 2022 is an exception. And if you look at on the top line now, we didn't make earnings. So that's important to highlight. If you look at the top line, the 2 biggest factors that drove the miss versus original guidance in 2022 were with Imbruvica and Venclexta, the CLO market, we did not anticipate that, that market would actually not recover. I mean that's -- it's down 20% versus pre-pandemic levels. And then we did see some additional share impact on IMBRUVICA. And then aesthetics, we saw, obviously, in the month of May, we started to see a slowdown in the economy. We had a very strong first quarter. So both of those things really are what drove the top line miss, we made earnings. Now we have factored both those things in the 2023 guidance to give investors confidence that we said it appropriately. But we always look to set the most responsible guidance we can and we feel good about where we set 2023." }, { "speaker": "Operator", "text": "Our next question comes from Chris Schott with JPMorgan." }, { "speaker": "Chris Schott", "text": "Just 2 for me. Maybe just following up on the 2023 guidance being a trough number. It seems like you're still going to have about a $12 billion U.S. HUMIRA franchise here. So can you just provide maybe a little bit more color of what you're envisioning 2024 to look like for HUMIRA? Like is it reasonable to think about the down 35% to 40% year as we look out to '24. I think we just turn your hands around just the how much growth in that core platform and how much of a headwind, I guess, HUMIRA is going to be facing at the same time. My second question was just on aesthetics trends as we move through this year. You've talked about some signs of at least sequential stability the last few quarters. You're talking about stepping up investments. You've got a couple of new products launching. I guess why shouldn't we think about some recovery in this business as we look out to the second half of the year?" }, { "speaker": "Rick Gonzalez", "text": "Chris, this is Rick. Let me talk a little bit about HUMIRA and the trough. We're 2 weeks into the biosimilar activity. So it's a little difficult to give you precise predictions or 2024. I think the way to think about HUMIRA going forward is what we would expect is the most significant impact on HUMIRA is going to be price. And obviously, we're trying to predict going forward what that price will look like. Certainly, as we look at this year, the most significant impact is clearly price. So that's more predictable because we obviously know what the pricing is in the contracts that we've put together. And so I think that's something that we have a high level of confidence. There will be further pressure on price as we move into '24 and there'll probably be further pressure on volume in '24d. But I would say, at the end of '24, I would expect HUMIRA to start to develop a more stable tail of revenue. It will still have some pressure as we move in '25 but '25 and '26 is where we should see that more stable tail for HUMIRA emerge. And that's 1 of the things that allows us to be able to see the underlying growth from the growth platform. So a number of things happen between '23 and '24 and then '25 as we move forward. As you mentioned in your second comment, we would certainly expect that the U.S. economy will start to recover in '24. It may recover earlier than that. And if it does, that would be great. We don't want to put a plan together to assume that because obviously, that's difficult for us to predict. But I think we would all expect that 24 will see a recovery in the U.S. economy. And we would fully expect for the aesthetics business to return back to historical growth rates very quickly when that happens. And so that will be another opportunity for that business to be able to grow. And then I would say Imbruvica is the other key issue for us. as we move forward. We would expect the majority of the erosion that we see on Imbruvica will occur this year and there will be less downward pressure as we move to '24. So that's what allows the growth to be able to come up. What I would tell you even though I don't want to make a; prediction in '24 of what HUMIRA will look like. I think we have a high level of confidence that we have the ability if the erosion curve looks like how we've modeled it now between '23 and '24 that we have the ability to be able to have the growth platform and go through that. So we can absorb that impact. And so far, like I said, it's early on but I'd say so far, we're comfortable with how things are playing out. Rob, anything you want to add on the first question and Carrie, maybe you can give a little more color." }, { "speaker": "Rob Michael", "text": "I think you characterized it well, Rick. I mean the thing to highlight for this year for '23, the way you think about HUMIRA really in the first half of the year, the vast majority of that erosion will be priced. In the second half, you'll see because we've contracted rebates, you'll see a step-up in the price erosion, although you also will see more volume with biosimilars coming in the market in the middle of the year, we would expect more volume erosion. I think as we think about '24, we would expect, based on the contract to see a step up in price but albeit not at the same level as we see in '23 but '24 would be more volume. It's probably the best way to think about it right now. We're not going to give you guidance but if you think about how to model HUMIRA '23, '24, that's the way to think through it." }, { "speaker": "Rick Gonzalez", "text": "Okay. Carrie, anything you want to add on aesthetics?" }, { "speaker": "Carrie Strom", "text": "Yes. This is Carrie. The -- in terms of the aesthetics market and how we're thinking about it for 2023, I mean, first, I'd say, yes, this is still a very strong fundamental market with consumers who are very interested in entering the category. And so that remains a strong opportunity the now and in the future. But what we saw as we exited 2022 is as these economic metrics were softening, we also saw that reflected in demand for aesthetic procedures. And in our conversations with customers, we saw that reflected in their practices, market research with consumers, where they said, yes, we're interested in the category but we want to see what's going on with the economy, perhaps before a new patient might want to enter the category. And based on that, we are modeling for those trends to continue in 2023. And what that means for U.S. toxin market is the market growth would be around a mid-single-digit decline for U.S. filler market around a 10% decline. And like we said, those growth rates would be different by quarter as we lap a strong first part of the year. Now of course, if there is a scenario like a deep recession, where unemployment skyrockets, that is not something that we've contemplated. Or on the other hand, if the macroeconomic environment stabilizes or improve that would represent favorability to our plan." }, { "speaker": "Operator", "text": "Our next question is from Gary Nachman with BMO Capital Markets." }, { "speaker": "Gary Nachman", "text": "First question is on neuro in the quarter. It's actually weaker than we thought. So was there any additional pressure on gross to net, maybe for the oral CGRPs? And what sort of inflection are you expecting for Vraylar and MDD, how rapid do you think that adoption might be this year? And then, Rick, you recently said that you would be in an article that you would be lifting the self-imposed $2 billion annual cap on business development that you have more capacity to do deals. So how much capacity do you guys have what areas are you looking to be most aggressive? And how important is it to add sizable marketed products into the mix? Or would it be mostly focused on pipeline?" }, { "speaker": "Jeff Stewart", "text": "Yes. I'll take the first one, it's Jeff. Thanks for the question. No, we did not see material incremental pressure on the gross to net -- we did see a little softening versus our expectation on the overall preventative marketplace but it was quite modest. So no, fairly consistent trending. I mean if you look at our new prescription capture and the oral market, it's basically a 50-50 shared capture rate between ourselves and the major competitor. In terms of the Vraylar adoption trend, we had discussed previously because we really have very, very strong access for Vraylar that we would anticipate a pretty rapid inflection in adoption for the depression indication, the adjunctive depression indication. As I mentioned in my remarks, that's what we've seen. So we're quite encouraged. I mean we can see a significant trend break on the new prescription adoption versus what was already a very nice growth rate for the bipolar 1 indication. So I think the early dynamics and again, it's only really been a month here in January where our sales force has been out promoting the new indication. We're quite encouraged in terms of the market response, both from the metrics in terms of IQVIA, the scripts we see but also the qualitative feedback from the customers." }, { "speaker": "Rick Gonzalez", "text": "And on deal capacity, we obviously look at business development based on what we believe are -- we're trying to accomplish strategically in each of the therapeutic areas that we're operating in. we identify areas that we think would be good opportunities for us and then we look to see if we can find those kinds of assets. As I mentioned before, I think we're in the fortune of a position that we can drive very strong growth. with the assets that we have on the market today as well as what's coming out of our pipeline over the next 3 or 4 years. That gives us the ability to be able to return to growth and then drive that high single-digit growth through the end of the decade. And we're also fortunate that after HUMIRA, we have a -- relative to our peers, we have a very low LOE [ph] exposure. So we don't have a lot of downward pressure on the business. Now having said that, we've done an excellent job of paying down the incremental debt from the Allergan transaction, we put that $2 billion cap in place when we did the Allergan acquisition that allowed us to focus again on some earlier-stage assets. And I'd remind everyone that was about 4x what our historical practice has been for those kinds of assets. So there was plenty of capacity to do that. But we're certainly in a position now that if the right thing were to come along, we could do a transaction that would be much larger. We certainly have the financial wherewithal to be able to do that. And we've certainly shown that we were able to do that and create value in the assets that we bring in. The areas that we typically look at are aligned with our therapeutic growth areas. So immunology, oncology, certain areas of neuroscience and eye care, I would say, are the predominant areas as well as aesthetics. We obviously continue to look for opportunities in the states. They tend to be smaller acquisitions, though. And so at the end of the day, I feel good about where we are and we've been quite active. We have a very active business development group. And we'll continue to look at those. And like I said, we find something that's of interest and it could really help us round out a category that we're in, then you should expect us to act on that." }, { "speaker": "Operator", "text": "It comes from Carter Gould with Barclays." }, { "speaker": "Carter Gould", "text": "Maybe to come back to aesthetics. It does sound like you built in conservatism on a number of fronts. I wanted to also -- you didn't touch much around sort of China reopening and how you expect that sort of business to -- as it comes back, if you expect it to sort of return to how it was? Or if that will evolve differently. And then in the -- I guess as we think then around the guidance for '23 and the link you've drawn to as you sort of maybe if the guidance potentially evolves over '23, should we think about that link remaining intact? Or is that sort of a near-term phenomenon and that will sort of, I guess, disappear going forward." }, { "speaker": "Rick Gonzalez", "text": "Carrie, why don't you touch on the aesthetics question." }, { "speaker": "Carrie Strom", "text": "Yes. So your question around China and I'd say China is our second largest global business. It has demonstrated significant growth in the past few years and proven to be very responsive to the increased promotion that we're putting into that market. Of course, in 2022, China COVID-related issues did impact the aesthetics market, especially in the second and fourth quarters. Now, as we look at the year beginning in China and as everyone is returning from the Chinese New Year, it does look like the current wave has peaked. And that the situation is beginning to improve and will continue to improve through the first half of 2023 and we're expecting a full recovery in the market in Q3 and for the second half the year. So despite the challenges in 2022, China still posted positive growth and we will definitely be continuing our investments in China in 2023 and beyond." }, { "speaker": "Rob Michael", "text": "And Carter, this is Rob. I'll try to answer your second question. I think the way to think about '24 -- clearly, as we go through the year, we always look at the trends and contemplate what that could mean for flow through in '24. But the reason we gave you that guidance range, we mentioned the $10.70 [ph] being the way to think about it as a floor for '24 is because of the dynamics around the HUMIRA erosion. So if we do better in '23 and more of it happens in '24, then you can at least anchor back to we're not going to fall below that $10.70 EPS floor in our guidance range. So we always would factor in trends but that's the way to think about it. If it's just the erosion on HUMIRA is better this year than we have in this guidance. We want to make sure you understood that what it means potentially for '24. So that's again, always factor in trends. But as we sit here today, that's the best way to think about it." }, { "speaker": "Rick Gonzalez", "text": "Maybe just let me add 1 thing that might help clarify it. I think you should think about HUMIRA in '24. We believe we're going to get to a certain level of price and volume in '24, almost regardless of what happens in 2013 because of the competitive dynamic. And so when we talk about the shift, what we're really talking about is inflating '23. If you anchor '24 is a solid point that we have a high level of confidence of where HUMIRA's tail will be in '24. And the only thing that happens to shift it between '23 and '24 is that we do much better in '23 than we expected, right? So that inflates but it still anchors against the '24 point [ph]. That's the way to think about this." }, { "speaker": "Operator", "text": "It comes from Steve Scala with Cowen." }, { "speaker": "Steve Scala", "text": "The low end of 2023 guidance implies 22% EPS erosion, the high end of Q1 guidance assumes 21% EPS erosion. How is it possible that Q1 could be in line with the full year and not appreciably better? It seems as though the Q1 guide is low? Or is that because AbbVie believes the floor on HUMIRA price is already reached? Maybe another way to restate the question. What should be our anticipation for the quarterly cadence of EPS as we go through the year?" }, { "speaker": "Rob Michael", "text": "So Steve, so I think the best way is 1 anchor on the guidance we gave you on U.S. HUMIRA today. So we said for the first quarter, we said it would be 27% erosion. And so -- and that's going to -- the vast majority of that will be priced. And we said because there'll be 9 biosimilars coming to market in the middle of the year, we would expect more of the erosion to come in the second half of the year. So you have to factor that dynamic into the way you look at the quarters that there'll be more erosion in the second half of the year for HUMIRA versus the first half of the year. Then you also have to factor in that you've got things like aesthetics, we haven't quite lapped the economic impact yet, right? So in the first quarter, you have a dynamic where you will see aesthetics still down, right? But when we get into the middle of the year, when we lap it, that also affects your year-over-year growth rates. And then, the underlying performance of the growth platform as we continue to drive those brands, you'll see those growth rates accelerate. So those are all the things that would factor as you look at the quarterly -- really, we've given you Q1 and then full year. We haven't given you Q2, 3 and 4. But that -- those are the variables I would look at. There's not really a whole lot in terms of if you look at investment, for example, that you have to flex. We do tend to see some higher levels typically in the fourth quarter. So, you could -- you could look at historically our investment patterns and use that as a proxy. But those are the variables to consider as you think about the first quarter versus the rest of the year." }, { "speaker": "Operator", "text": "It will come from Tim Anderson with Wolfe Research." }, { "speaker": "Tim Anderson", "text": "I'm going to torch you with a couple more questions on the same subject as others. The U.S. HUMIRA erosion guidance of minus 37% in '23. How much of that is price versus volume? If I look at what your Q1 U.S. HUMIRA erosion is, so the guidance is minus 27%. Given that volumes for HUMIRA are, call it, 5% positive, that would suggest the price cuts may be in the 30% to 35% range. So can we triangulate off of the Q1 guidance to understand what percent of that minus 37% comes from price? And then the second question, again, goes back to 2024. I know there's lots of uncertainty on the exact rate of erosion for HUMIRA '23. But if you hit that minus 37% right on the nose, would 2024 erosion likely be slower or faster than net minus 37%." }, { "speaker": "Rob Michael", "text": "So Tim, on your question related to price and volume. The way to think about it is in the first half of the year, the 27% in the first quarter, is the vast majority of that is price, right? So there is some volume impact but not very much. it's in the second half, what you'll see is in the second half, the overall erosion will step up and think of it as equivalent between price and volume because you're going to have -- we know we'll have rebate rates in some cases, increasing as well as the biosimilars coming to market, we expect to see more volume erosion. So as you think about -- as you're trying to triangulate the price volume with the guidance you've given, 27% vast majority's price, second half of the year, you'll have some more volume kicking in. That's I think the best way to think about the price volume split. And then your question on '24, is your question in terms of the percentage or the absolute percentage [ph]?" }, { "speaker": "Tim Anderson", "text": "So, if you hit the minus 37% this year which is your guidance for U.S. HUMIRA, the rate of erosion in '24 would be greater or less than that 37%?" }, { "speaker": "Rob Michael", "text": "So we're not going to give you a 2024 guidance, Tim. I think the way to think about '24 is we would expect to see additional price but albeit not at the same level as '23 and more volume coming through because you're going to have up to 10 biosimilars in the market for the full year. So we would expect to see more of a volume impact in '24 that we would expect to see in '23." }, { "speaker": "Operator", "text": "It comes from Chris Shibutani with Goldman Sachs." }, { "speaker": "Chris Shibutani", "text": "You previously commented about the operating margin trajectory of '23 into '24. I believe characterizing them is basically flattish. Is that still the case? And then across the immunology category broadly, we're seeing some -- a lot of cross-currency [ph] mix dynamics, clearly, with your portfolio being part of that. What is your expectation about the potential for some of the newer mechanisms that are emerging with clinical data. Are you keen to figure out whether you want to invoke those as part of your portfolio? What do you see the outlook for novel mechanisms, given that we're going to have some biosimilars to some of the most standard of care approaches PNSIL-23." }, { "speaker": "Rob Michael", "text": "Chris, this is Rob. I'll take your first question. I think for modeling purposes, I would expect operating margins stay roughly at this level in '24 and then begin expanding again in with our return to robust sales growth. I think the pace of that expansion will depend on investment needs as we will always prioritize R&D and SG&A investment to drive long-term growth but that's the best way to think through '24 and then what the operating margin will look like in '25 and beyond." }, { "speaker": "Jeff Stewart", "text": "And Chris, it's Jeff. I'll maybe kick off on your immunology question and then ask Tom to comment on some dynamics as well. So it is very, very clear that certainly in the midterm, the most excitement across these immunology categories are for SKYRIZI and RINVOQ. It's quite striking. And I think Tom mentioned there's still incredible interest in a next wave of dermatologic indications that follow on for atopic dermatitis that he highlighted. And really, as I noted in my remarks, I mean, the amount of excitement around the IL-23 and particularly our IL-23 across these indications is really profound. Now having said that, we are watching the competitive landscape for some maybe potentially some novel orals. We don't see them as major players. As we look deeper in the pipeline, we can see that there is the possibility for combination use of novel biologics or biomarker-driven approaches, particularly in IBD. And we monitor those very carefully as we look at our long-range plan. And Tom, I don't know if you want to address some of the things that are back in our pipeline in terms of immunology." }, { "speaker": "Tom Hudson", "text": "Sure. I mean I think the -- I just want to start saying that with SKYRIZI and RINVOQ really raised the bar in terms of efficacy and you see it in mucosal healing, for example. So the bar is getting higher and we will continue to do that. But even to show that we're raising the bar, we're also going to do -- we're going to read out head-to-head studies this year with STELARA and Otezla. So another way to kind of show that what we have is really very profound in terms of responses we're seeing with patients. And we continue -- I mean, honestly, we look at the field. We look at competitors. We're hearing data of S1P1 inhibitors but the data appears to be less effective based on a number of patients which are discontinuing treatment and the signals that we see cardiovascular and others that are similar to what we've seen with previous ones. So I mean, again, without having seen the data, it's all difficult to kind of predict how they'll be able to do accept that our data with RINVOQ and SKYRIZI are very strong, durable and again, very strong at the level of endoscopy also. So we think we have already a competitive edge. We continue we'll see PMR data later this year. We have talked about our RIPK1 inhibitor, again, from the coal healing that's in the clinic right now. We're looking at additional indications. So over time, obviously, we're going to look at additional mechanisms. But not necessarily just pushing down on the same cytokines as JAKs but looking at other target pathways of things that happen in the scan or in GI, again, mucosal healing being an tool pathway. And this is where we think a combination of our immunomodulators like RINVOQ and SKYRIZI with other mechanisms will combine well to give even more profound responses." }, { "speaker": "Operator", "text": "It comes from Colin Bristow with UBS." }, { "speaker": "Colin Bristow", "text": "For all the helpful color so far. So maybe a broader question just with regards to HUMIRA biosimilars. I just I'm curious like, what is the broader impact you anticipate on the I&I market just in terms of net price has been sort of a question we've been getting a lot of people are trying to wrap their heads around -- and then maybe just one on your CF triple. I know that the trial is ongoing. Can you give us an update here? How is the progress? Should we still expect data later this year?" }, { "speaker": "Jeff Stewart", "text": "Yes, I'll take the one on the immunology marketplace. I think that the impact overall in the category for net price would be modest. And I think a lot of it has to do what Tom and I've discussed before which is the -- just the pure profile of some of these agents particularly SKYRIZI and RINVOQ and either others in the pipeline that are coming. I mean they really are setting different standards of care versus what they've seen in the past. And certainly, the physicians and the payers are recognizing this. I'll give a really quick example on 1 of our major products which is RINVOQ. I mean RINVOQ, based on the label changes that have taken place is already a post-TNF type of dynamic. And so the pricing is going to be the pricing there's no incremental ability to step it, for example. The other thing I would note is on SKYRIZI, we have 4 head-to-head trials against all the major competitors and another one coming with Otezla, as Tom noted. So you start to see that level of performance, whether it's against STELARA, multiple TNFs. Otezla, as I said, that's pending here. And it just becomes very clear that you're just going to achieve much higher levels of clearance and relief. So we feel pretty confident that the pricing impact over time, particularly in the U.S. market will be very modest. And certainly, we can navigate that based on the power of the performance of the portfolio." }, { "speaker": "Tom Hudson", "text": "This is Tom. I'll just answer about the cystic fibrosis program. Again, this program continues. And just to remind you, we're working on a triplet and where we believe that 2 of the 3 components of -- for this drug, this triplet, we have best-in-class assets. But we were looking for another part of the triple called the C2 corrector, where last year, the previous ones basically didn't give the meaningful improvement we were expecting in FEV1 sweat chloride. So we've actually, in our discovery groups, continue to develop new ones. In the last year, we've moved our ABBV-576 forward. in SAD in Phase I studies. We continue to see these, again, safety, high exposures, good PK, things that with -- if you combine with our preclinical data, makes us think it will, it has a potential to be best-in-class -- and that's triplet again with -- is -- first of all, to being tested, we'll have data this year to actually show how they behave together. And later at this part of this year, I'll be able to give an update." }, { "speaker": "Operator", "text": "Our next question is from [indiscernible] with Credit Suisse." }, { "speaker": "Unidentified Analyst", "text": "Trung [ph] from Credit Suisse. Two, if I may. So I was just wondering on your thoughts more broadly on the pricing dynamics in the EU and U.S. So in the EU, you recently exited the U.K. pricing agreement. In Europe, it does feel like there's -- it's just becoming an increasingly complicated pricing environment. There are a number of reforms being proposed in Europe. So I guess my first question is, is do you see these changes being material or any headwinds to you in your growth ex U.S.? And then secondly, can you just perhaps talk about your reasons you decided not to renew your membership for pharma and bio. How are you going to remain engaged in D.C. and have a voice when it comes to things like IRA and pricing controls." }, { "speaker": "Jeff Stewart", "text": "Yes. Thanks for the question. I'll take the first one there in terms of the EU. We do see some movement there, particularly in the, let's say, industry tax and I'll comment on the so-called VPaaS [ph] in the U.K. In some ways, whether or not we were in that voluntary program or outside of the voluntary program, the impact is about the same. And frankly, it was a policy decision because we really think that the U.K. government needs to reform that VPaaS. They didn't plan properly for how things might dynamically evolve in the U.K. and it's a very substantial part of the revenue now that is causing problems, I think, across all of the company. So it was a position of policy position, net neutral. It didn't matter, frankly, whether we were in or not and the U.K. is a relatively modest business for us. We are seeing perhaps more importantly, some changes in the German law, as you're probably aware of. And that is, I think, a modest net pressure that will come in Europe in Germany, in particular, because there's the move, as you may know, from 1 year of free pricing to 6 months. There's a modest increase in rebates, for example. So we do see some austerity impact. But on the bigger scheme, it's -- I wouldn't say it's material to our growth platform that we've been discussing." }, { "speaker": "Rob Michael", "text": "And Trung [ph], this is Rob. In terms of international prices, I mean, typically, we see year-over-year decline of low to mid-single digits and that's the way we're modeling it for '23 as well." }, { "speaker": "Rick Gonzalez", "text": "And then on pharma, this is Rick. Obviously, every year, we evaluate any kind of significant investment that we're going to make. And we make a decision as to whether or not we believe that investment is appropriate and is going to have the right level of return at that point in time. And ultimately, we made the decision around pharma based on that. We have a very significant government affairs group that's been active and been in place ever since we came into existence. Back in 2013, we've grown that organization. We did grow it somewhat this year as well in anticipation of not being part of pharma. We plan on being active as we have been in the past to try to appropriately advocate for things that we think are appropriate for patients. And I think that group is quite capable of being able to do that. And I would tell you that at a point in the future, we might decide to go back into pharma. But at this point, we've made the decision that we think that investment could be used elsewhere to be more effective. It's as simple as that." }, { "speaker": "Operator", "text": "Our next question is from Geoff Meacham with Bank of America." }, { "speaker": "Geoffrey Meacham", "text": "I appreciate all the perspective on guidance. I just had a follow-up on it. Rick, on your comments on the HUMIRA scale for starting next year in the U.S. I think when you look at other geographies, international revenues, you're still seeing double-digit declines after 4 years or so. Maybe just give us some context for what you're seeing there broadly versus what we could expect for the U.S. And just to be clear, when you see next year the impact from all the HUMIRA biosimilars, how much do you think that biosimilar STELARA may play a role here when you look at your assumptions for HUMIRA erosion? And then second question, just on the BD front, you guys talked about some of the therapeutic categories that you're interested in. But with the appetite to expand to expand the menu here and to say more orphan indications, I think across the landscape, some companies in the I&I space are getting into more niche indication. I wasn't sure if that was something that you guys would consider?" }, { "speaker": "Rick Gonzalez", "text": "So I think on the HUMIRA tail, just to maybe clarify what I said is I would expect that as we move through 2024 then in 2025 and 2026, we would start to see a more stable tail for HUMIRA. In other words, we're going to see erosion in 2024. I want to make sure I didn't somehow communicate that, that wasn't the case. So if you look at OUS, I think what's probably deceiving to you is you had different countries going biosimilar at different periods in time. So you can't necessarily look at that as an analog because it's so heterogeneous in the year that those countries went biosimilars. So you are correct. Yes, it is still experiencing double-digit decline but it's been driven by the fact that those countries have not -- some of those countries haven't reached stability yet. But typically -- and the U.S. market is a little different because you have all a large number -- you have a small number of large payers who drive the bulk of the activity in this market. So, it's more like some of the countries that did other kinds of government-wide activity, like in Germany as an example. And there, we do see after a couple of years, we've seen stability. So I think what's misleading you is you're looking at the overall number but you're not factoring into that, the fact that these countries went biosimilar across a number of years." }, { "speaker": "Rob Michael", "text": "Jeff, this is Rob. Just to add to that. So if you just look at this year, so about half of the erosion is going to come from newer markets like Puerto Rico, Canada and Mexico. So that, as Rick mentioned, we have different waves. And so you're still seeing some of those waves come through. You also have some volume going to new agents like SKYRIZI and RINVOQ, right? So that's something to keep in mind that that's a dynamic that's also playing out for HUMIRA in those markets. And then you typically see negative price trends in international markets, again, low to mid-single digits. So you're going to see some level of pressure there. So those are all factoring into the year-over-year on international HUMIRA something to make sure you're keeping in mind." }, { "speaker": "Jeff Stewart", "text": "And if you look at the STELARA dynamic with the biosimilar, I think there's a couple of dynamics that we're watching. And it does go back to my prior comments over the clinical differentiation. The first is that there will be less biosimilar competitive intensity against STELARA. Certainly, we've not seen anything like the 9 that we were -- 9 or 10 [ph] that we're going to see on HUMIRA. And so -- and that price point is quite high actually. If you look at where Stellar is now with the branded program. Now I think maybe more importantly, as we've highlighted before, we've anticipated that entry. And certainly, in Crohn's, we have an ongoing head-to-head trial against STELARA that will read out towards the end of the year. We plan on putting that into promotion if and we believe it will be positive, particularly what we're studying which is that endoscopic endpoint which is really becoming the standard in the gastroenterology space. So we think we can carry quite well with the ultimate arrival of that IL -- the 12/23 [ph] versus our Pure '23. So I hope that helps." }, { "speaker": "Rick Gonzalez", "text": "I think on your third question, again, what tends to drive our BD strategy is the long-term strategic road map that we put in place across the branch. So if you think about it, you mentioned immunology as an example. I would say in immunology, we have 2 fundamental objectives that we're trying to drive. There are still areas within immunology, where we believe we can significantly raise the effectiveness of the therapies that are used on patients to drive higher levels of remission or higher levels of endoscopic healing. In other words, better clinical outcomes within the areas that we're in. And so we have a tremendous amount of effort in those areas to bring next-generation assets or as Tom mentioned in his comments, there are opportunities to potentially combine 2 mechanisms together to achieve that level of therapeutic benefit. But then we look outside those areas at the adjacencies. And we look for where are the opportunities for us to be able to bring in either an existing mechanism or something we can either develop within our own discovery group or something that we can acquire on the outside as a mechanism that we don't currently have. But we tend to look for where there are areas of large unmet needs and relatively significant patient populations. So, I use 2 examples to illustrate. Vitiligo. Vitiligo is a disease that's very prevalent. There aren't good therapeutic options in it today at all. We do believe there are mechanisms that will allow you to effectively treat vitiligo. If those are effective, that could be a very significant opportunity overtime. Alopecia is another good example of that. So that's how we focus BD in these areas. That's not to say we would never look at a more much opportunity or an orphan opportunity but I wouldn't say orphan is something that is core to our strategy." }, { "speaker": "Operator", "text": "It comes from Robyn Karnauskas with Truist." }, { "speaker": "Robyn Karnauskas", "text": "It was great with all the color you've given. I just had some -- I want to follow up on, you mentioned Vitiligo. With the competition with topical rux [ph] which might have a first mover advantage and then they have an oral as well in Pfizer. How do you see the opportunity for you in vitiligo for RINVOQ? Can it compete? And then my second question last earnings call, you highlighted your GARP TGF beta. So that's 151. And I know there's been a lot of cardio-tox [ph] in the space. So what gives you some confidence what features and what indications, like how do you focus on this? And how do you view the competition profile?" }, { "speaker": "Rick Gonzalez", "text": "On vitiligo, maybe Jeff and I will tag team on it. I would certainly say a topical has a place but it is difficult for people that have large areas of their bodies that are impacted by something like vitiligo for a topical to be a manageable therapy for those patients. So an oral for those patients that have more severe disease typically has greater benefit and frankly, better compliance among those patients which ultimately gives you better clinical outcomes. So I think the RINVOQ will stack up against whoever the competitive alternatives are based on the data. Based on how we've seen RINVOQ perform in other areas, I think we feel pretty good about what the potential is. But the data will speak for itself, see what the data looks like Jeff and Tom, would you add anything?" }, { "speaker": "Jeff Stewart", "text": "Just to build on that. When we look at the valuation of, for example, that indication or HS or alopecia which again are those derm oriented indications that will follow on pretty quickly in the middle of the decade on top of atopic dermatitis. We do exactly what Rick highlighted. We will segment the patients based on the body surface area. We know that the topicals will be important for a certain percentage of population. For example, if it's maybe highly located to the face, that might be more appropriate, at least as the first course of action. But we do believe that in almost all indications that we've looked at for RINVOQ, it just performs exceptionally well in the clinic. And we would anticipate that as well above a base case scenario. Perfect example is Crohn's disease. There will not be another JAK inhibitor in Crohn's disease for the United States just because they just don't work. And you have spectacular results with the selective JAK with RINVOQ. So We take that all into that competitive context all into our calculations as we look forward to return for those future derm indications." }, { "speaker": "Tom Hudson", "text": "If I can just continue with. I mean, we will have readouts for our Phase II study this year and we've mostly been looking at those cases where there's more extensive body coverage disease -- or the face. So I think it would be a different -- it's a much better to take an oral than a cream when you actually have significant body coverage. Again, we'll see the data, we will report on another quarter call. Thank you, Robin, for the second question. Yes, TGF-beta is a known tumor suppressive pathway and people have tried to drug it to increase the response to immunotherapies. The first-generation TGF-beta because the target is so many parts of the body, you actually have effects, the cardiovascular effects having related to the TGF-beta activity in some of the endothelial cells in the valves and so on of the heart. Here, we're using GARP as our target. GARP is actually a receptor for TGF-beta that's called latent inactive that GARP sound only on Treg cells, a little bit on some fiber some store sales but it's not some in the heart or other tissues. That's what gives us our safety profile and the ability to causing a suppression on Treg cells found in tumor cells as opposed to other places in the body. So that we felt from the beginning was the attribute we needed to go to target this pathway would be something that will be tumor selective and that's what we've been able to see so far." }, { "speaker": "Rick Gonzalez", "text": "She asked about what tumors potentially." }, { "speaker": "Tom Hudson", "text": "Tumors. So in our -- initially, we focused on tumors. So this pathway is found on almost every solid tumor has some subset tumors which express TGF-beta and GARP. We started off thinking that we'd do a Phase I SAC [ph] study which we did well that we will expand. And we had picked liver and bladder because we saw a lot of TGF-beta pathway in those indications. And we also -- although we knew there was 7 CRC, we saw in patients in our Phase I study which were unselected in terms of tumor type. We saw responses. So we've actually continued expanding studying CRC but we did see responses in liver cancer where we expected to see it based on expression of TGF-beta. We did see it in bladder cancer and we're expanding in those indications at this point. Given the fact that I said earlier that we TGF-beta in all types of tumors, both tumors called hot or cold, we're actually expanding in other tumors to get signals right now. And again, we have we'll have baskets to actually continue to explore its indication space. But right now, we're expanding when we're going to Phase II dose rating studies that's indications where we've actually seen data in our Phase I study." }, { "speaker": "Operator", "text": "It comes from Simon Baker with Redburn." }, { "speaker": "Simon Baker", "text": "Two, if I may, please. Just going back to U.S. HUMIRA. Giving us the expected erosion is extremely helpful. It's also extremely impressive that you confident enough to give a point estimate for the percentage erosion in '23. So notwithstanding that, I wonder if you could give us what the likely pushes and pulls are. Is this something where we should be thinking more about the being upside risk due to inability of those additional generics biosimilars to supply the market. So any color pushes and pulls there and also into 2024 and your confidence around the erosion curve in '24? And then a question on tax. One question topic that's been raised by some of your peers has been an impact from the OECD minimum global tax rate initiatives in '23. Your guidance would suggest that isn't a factor for you. I just wonder if you could give us any color on when and if you expect those initiatives to impact your tax rate?" }, { "speaker": "Rob Michael", "text": "Simon, this is Rob. I'll take your first question. So when we give guidance, we typically give approximate assumptions and we do use point estimates. We don't typically give product level range. So it has been our practice. So we said approximately 37% erosion for U.S. HUMIRA. We have confidence in that number, obviously. But I think in terms of the pushes and pulls, it's really going to be about volume erosion, right? I think that's -- if you think over the course of the year, we made assumptions around volume erosion. We have good visibility of the price. Now it's a question of what will the volume erosion look like? And obviously, as we go through the year, we'll update you on that." }, { "speaker": "Scott Reents", "text": "This is Scott. I'll give you some thoughts on the OECD question that you asked regarding tax. So you're right. For 2023, we do not see any impact from this. In our view, there's a lot of things to be worked out with respect to the global minimum tax you mentioned. We have, in the U.S., as you know, a minimum tax we see ultimately this OECD tax being a top-up on that if that does occur but there's a lot of details to be worked out and we wouldn't anticipate any impact there until 2025, if there is an impact." }, { "speaker": "Operator", "text": "It comes from Navann Ty with BNP Parabas." }, { "speaker": "Navann Ty", "text": "I have 3 quick follow-ups, please. The first 1 on aesthetics, in addition to the macro impact. Are you seeing or do you expect increasing competition from your smaller competitors, DTC campaigns and new products? The second question is on HUMIRA. Was AMGEVITA in line with your expectation. And the third follow-up is on capital allocation. So can we think of 2x as a soft net leverage target which is relevant for AbbVie to consider material business development." }, { "speaker": "Rick Gonzalez", "text": "Carrie?" }, { "speaker": "Carrie Strom", "text": "I'll take that first question on aesthetic competition. So in terms of U.S. BOTOX [ph] Cosmetics, this is a product that's around for 20 years and has based increased competition and still commands market-leading market share in the high 60s. And we know though that the competitive market will expand as new entrants are coming and have entered and in terms of a revamped toxin at the end of last year. What we've seen in the aesthetics market is that, of course, customers are going to try these new products. It's highly kind of newness driven and there's a novelty factor and trial and competitive trial is to be expected. And what we see is that these products and past aesthetic launches that we've watched, the share ramps for the first 12 to 18 months and then tends to stabilize. And so, of course, we don't underestimate any of our competitors. And so in 2023, we are modeling what we think is a competitive amount of share erosion in terms of our Botox business. And we'd expect that in '23 and beyond that U.S. BOTOX [ph] cosmetic will continue to be the clear number 1 market leader. And the new toxins that enter the market will be competing for their position number 2, 3 or 4 in our customers' offices." }, { "speaker": "Jeff Stewart", "text": "And it's Jeff. On your comment on AMGEVITA, the range of pricings that were released were not really a surprise. There's been some external thoughts that this is of interest where there were 2 different AMGEVITAs, 1 high WACC and on low WACC. But again, we've seen this across very different categories and studied it very carefully, as you would expect. So we've seen variably priced WACC products in our own HCV market with authorized generics from competitors. We've seen it in the diabetes space across multiple competitors, including biosimilar competitors. And certainly, with the -- with Amgen and the other segments of their own business. They were often moving around the list prices as well. So all in all, within the range that we would expect from Amgen. Yes." }, { "speaker": "Rob Michael", "text": "This is Rob. I'll take the question on net leverage. So the 2x is -- think about it as our sustainable target. So as long as there's a path back to net leverage of 2x, could take us in some cases, it could take 2 to 3 years to get back to that. But as long as there's a path, a very clear path to get back to net leverage of 2x, that's the best way to think about how we would evaluate it." }, { "speaker": "Operator", "text": "Our final question will come from Gavin Clark-Gartner with Evercore ISI." }, { "speaker": "Gavin Clark-Gartner", "text": "Wanted to confirm if you were planning to submit the Imbruvica plus Venclexta frontline CLL combination to the FDA following the ASH this year? And then on 951 in Parkinson's, we saw top line data from competitors from last month. I don't have the full data yet. One thing that sticks out is that they have lower discontinuation rates. So just wondering if there's any insight on devices or trial design that may explain this." }, { "speaker": "Rob Michael", "text": "It's Roopal. I'll take those. So for the ISV that you referenced, we have that in Europe and I think you're talking about the ASH data, overall survival. There as it clears couple of years is 0.5% or less and the PFS still stays low. At this time, we're not submitting here at the FDA. They would like to see a little more prospective data in another trial setting. So that's the hype. On 951, this is interesting on the competitors you bring up. So the when you run these patients in, you could have discontinuation rates. And if you include them or not include them, it's going to impact what happens post run in. So for example, when you see our data set, we count the run-in discontinuation and post run-in as you get into the main part of the trial. So you see that in the 20 percentile range or so. And that's fairly consistent with what you would see with a subcutaneous infusion. And it's not clear to us how that data, as you're speaking about is reported. Also, we don't know if that's more than 1 injection is that 2 injections and is it rotated daily. I can tell you about 951. We have dosing exposure that gets up to DUOPA unique from DUOPA to 24 hours. It's a single injection and you can leave it in for 72 hours." }, { "speaker": "Liz Shea", "text": "Thanks, Gavin. That concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us." }, { "speaker": "Operator", "text": "This does conclude today's conference call. We thank you all for participating. You may now disconnect and have a great rest of your day." } ]	AbbVie Inc.	141,885,706
ABBV	3	2,022	2022-10-28 09:00:00	Liz Shea: Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Rob Michael, Vice Chairman and President; Jeff Stewart, Executive Vice President, Chief Commercial Officer; and Tom Hudson, Senior Vice President, R&D and Chief Scientific Officer. Joining us for the Q&A portion of the call are Carrie Strom, Senior Vice President and President, Global Allergan Aesthetics; Scott Reents, Senior Vice President and Chief Financial Officer; Neil Gallagher, Vice President, Development and Chief Medical Officer; and Roopal Thakkar, Vice President, Global Regulatory Affairs. Before we get started, I will note that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll now turn the call over to Rick. Rick Gonzalez: Thank you, Liz. Good morning, everyone, and thank you for joining us today. I'll briefly comment on our overall performance then Jeff, Tom and Rob will review our third quarter business highlights, pipeline progress and financial results in more detail. AbbVie continues to perform very well, a testament to the strength of our broad, diversified portfolio. I'm especially pleased with the performance of our immunology assets, Skyrizi and Rinvoq. We delivered adjusted earnings per share of $3.66, exceeding our expectations. Total net revenues of $14.8 billion were up 5.4% on an operational basis, in line with our expectations. Immunology once again demonstrated impressive results with Skyrizi and Rinvoq now on pace to deliver more than $7.5 billion in combined sales this year, well ahead of our initial expectations. This performance is especially encouraging, recognizing that we're in the early launch phase for both assets in IBD and PSA, as well as Rinvoq in atopic dermatitis. Skyrizi and Rinvoq have established outstanding launch trajectories across existing and new indications, giving us a high degree of confidence in the collective potential of these two assets to ultimately exceed the peak revenues achieved by Humira, achieving the strategic objective we had for replacing Humira. We also saw a continued strong double-digit operational sales growth from several additional key products, including Botox Cosmetic, Vraylar, Venclexta and Botox Therapeutic. This strong momentum is helping us offset some of the interim economic pressure we now see in our Aesthetics portfolio. Based on these results, we remain confident in the outlook of our business and are reaffirming the midpoint of our full year 2022 EPS guidance at $13.86, which represents strong double-digit growth. As many of you are aware, we have a leading consumer-facing aesthetics portfolio, which is largely cash pay. We have been monitoring the global economic situation. Based on all the data we have been observing, especially in the U.S. with both the consumer confidence index and real personal consumption expenditures trending down and continued high inflation, these factors are putting pressure on consumers' discretionary spending. This metric correlates with a slowdown in treatment procedures that we're seeing across the aesthetics markets, impacting the growth rates for toxins, fillers and body contouring. While our U.S. aesthetics market share remains stable across both toxins and fillers, we now believe it's prudent to adjust our full year aesthetics forecast to reflect the moderating market growth over the near to medium term, which is expected to predominantly impact Juvederm as well as our body contouring portfolio products, which represent higher price points for consumers. While it's difficult to predict the duration of these economic dynamics, we expect these conditions to persist into 2023. As consumer confidence improves, we would once again expect the market growth to accelerate. Our aesthetics portfolio experienced a rapid and sustained recovery following the 2008-2009 recession, so we anticipate any impact will be transient. Over the long-term, the aesthetics business continues to be an extremely attractive, underpenetrated market with significant growth potential. The current market dynamics do not change our long-term guidance for aesthetics and we remain confident in our ability to achieve total sales of more than $9 billion in 2029. I also want to provide a brief update on the outlook for 2023. With regards to the status of contracting for Humira, our intent has always been to maintain broad formulary access so that we can compete effectively with forthcoming biosimilars. We are making very good progress consistent with this objective, and are currently projecting formulary access for at least 80% of all U.S. covered lives. We expect this percentage to increase further as we conclude additional contract discussions between now and the end of the year. As a result, we anticipate strong access for U.S. Humira throughout 2023, and project biosimilars will share access as they become available. We will provide sales guidance for Humira on our fourth quarter call. While we're not issuing 2023 guidance today, it is important to note that when we issue our EPS outlook, we expect the lower end of the range to represent for earnings. So while it's possible 2023 could outperform our guidance regardless of the shape of the erosion curve, we don't anticipate 2024 earnings will be lower than the initial 2023 EPS guidance given the momentum and growth from another year of our ex-Humira portfolio, which is expected to more than offset any incremental Humira erosion in 2024. We know that many investors have an interest in the timing of AbbVie's trough earnings, whether that would be 2023 or 2024. The guidance range will provide and give investors additional clarity regarding our expectations for the company's core EPS. In summary, we continue to deliver strong results and see numerous opportunities for our diverse portfolio to drive long-term growth. To that end, as noted in our news release, today we're announcing a 5% increase in our quarterly cash dividend from $1.41 per share to $1.48 per share, beginning with the dividend payable in February 2023. Since our inception, we have grown our quarterly dividend by 270%. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff? Jeff Stewart: Thank you, Rick. We once again demonstrated strong and balanced growth across our therapeutic portfolio this quarter. I'll start with Immunology, where we are well positioned for sustained leadership in this extremely attractive market. Total Immunology revenues were more than $7.6 billion, up 16.4% on an operational basis. We remain very excited about the long-term potential for Skyrizi and Rinvoq which are already having a significant impact on AbbVie's growth and performance, contributing approximately $2.1 billion in combined sales this quarter, representing nearly 15% of total company net revenues. Skyrizi continues to exceed our expectations. Global revenues were $1.4 billion, up 12% on a sequential basis. In psoriasis, Skyrizi is capturing nearly one out of every two new and switching patients in the U.S. biologic market, with our leading total prescription share increasing to approximately 27%. We have also achieved total market share leadership in a dozen key international markets, including Japan, Canada and France. Psoriatic arthritis is ramping very nicely, with an expected global sales contribution of approximately $500 million just this year. Our PSA performance is especially strong in the U.S. Dermatology segment, where we have already achieved 10% total market share. Lastly, our launch of Skyrizi for Crohn's disease in the U.S. is progressing very well. Early prescription trends as well as feedback from gastroenterologists has been overwhelmingly positive, especially given Skyrizi's convenient dosing and strong clinical profile. Importantly, commercial access for Skyrizi Crohn's is now equal to psoriasis and PSA with sales in this indication expected to ramp significantly over the next several quarters. Given the momentum we are seeing across the indications; we will be raising our full year sales guidance once again for Skyrizi. Turning now to Rinvoq, which delivered global sales of $695 million, demonstrating more than 17% sequential growth, we continue to see positive momentum in RA, with total market share increasing to more than 6% in both the U.S. and across key international geographies. Global prescriptions are also ramping nicely in PSA ankylosing spondylitis and non-radiographic axial SpA, a testament to the strong clinical profile Rinvoq has demonstrated across the broader rheumatology segment. Rinvoq is now the only JAK inhibitor with global approval for all four major Rheum indications. In atopic dermatitis, we continue to see strong demand for Rinvoq, particularly in the second-line setting. U.S. in-play market share is tracking in line with our expectations and we were making excellent progress internationally, with in-place share ranging now from approximately 20% to 35% across our major markets. AD remains a highly underpenetrated market globally and an attractive long-term growth opportunity for Rinvoq. Lastly, in ulcerative colitis, we are very excited by the early prescription trends in the U.S. In the second line plus setting, Rinvoq is already achieving the second highest in-place share, which is now approaching 20% in just a few months’ post launch. Physicians have been pleased with Rinvoq's high rates of endoscopic healing as well as the speed of onset. With over 70% of bioexperience UC patients currently on or having used TNF therapy, the second line plus opportunity for Rinvoq in UC is substantial. This strong adoption in UC among gastroenterologists is also encouraging for Rinvoq's potential in Crohn's disease as well. We are on track for U.S. and EMA regulatory decisions in the first half of 2023. Global Humira sales were approximately $5.6 billion, up 3.9% on an operational basis with 7.4% growth in the U.S., partially offset by international performance where revenues were down 16.8% operationally due to biosimilar competition. Turning now to hematologic oncology, where total revenues were $1.65 billion, down 9.9% on an operational basis. Imbruvica global revenues were approximately $1.1 billion, down 17.4%. The U.S. performance continues to be impacted by an incrementally challenging CLL market, with new patient starts down approximately 20% relative to pre-COVID levels. Given the U.S. CLL market has been consistently lower than our expectation in the past several quarters, we are now reducing our view of the total size of the addressable patient population for this indication going forward. We also anticipate further share erosion following the recent unfavorable change to the NCCN guideline preference for Imbruvica in CLL, as well as increasing existing and new competition. These market and shared dynamics are expected to have a flow through impact on Imbruvica’s 2023 performance. Venclexta global sales were $550 million up 11.3% on an operational basis. Continued share gains across both approved indications are being partially offset by a softer CLL market in the U.S. and a higher foreign exchange impact on international revenues. As a result, we will be adjusting our full year sales guidance for Venclexta. Longer term, we anticipate our oncology portfolio will return a growth driven by several promising new products and indications such as epcoritamab for DLBCL, and follicular lymphoma, Venclexta new indications for multiple myeloma and high-risk MDs; navitoclax for myelofibrosis; and Teliso-V for nonsquamous non-small-cell lung cancer. We are beginning launch preparedness activities for several of these important opportunities and look forward to bringing new treatment options to patients. In neuroscience revenues were nearly $1.7 billion, up 8.3% on an operational basis. Vraylar once again delivered strong growth. Sales of 554 million were up 20.2% on an operational basis reflecting continued market share momentum. We continue to anticipate the regulatory approval and the commercial launch of Vraylar as an adjunctive treatment for major depressive disorder this quarter, which would make Vraylar the only antipsychotic, as a dual partial agonist approved to treat the most common forms of depression, both bipolar I, and adjunctive, and DD. Within migraine, our market leading oral CGRP portfolio contribute $222 million in combined sales this quarter. Ubrelvy prescriptions increased high single digits sequentially while total revenues were unfavorably impacted by a one-time prior period accrual adjustment of $40 million related to patient access program costs. Excluding this one-time adjustment, Ubrelvy sales were up more than 20% versus the prior year. Qulipta revenues nearly doubled sequentially as we continue to make very good progress with commercial access. Potential label expansion in the U.S. as a preventative treatment in patients with chronic migraine and new therapy approvals in Europe represent additional opportunities to support Qulipta's strong momentum. Botox Therapeutic is also performing very well with total sales of $699 million, up 10% on an operational basis. In chronic migraine, which accounts for roughly 45% of our therapeutic sales, Botox remains a foundational preventative treatment, and the clear branded leader for existing as well as new patient starts. Lastly, our launch preparations are underway for ABBV-951, a potentially transformative next-generation therapy for advanced Parkinson's. We anticipate approval in the first half of next year and believe ABBV-951 has the potential to achieve peak sales in excess of $1 billion. So overall, I'm very pleased with the momentum across the therapeutic portfolio, which is demonstrating strong revenue growth. And with that, I'll turn the call over to Tom for additional comments on our R&D programs. Tom? Tom Hudson: Thank you, Jeff. In the area of immunology, we had several important regulatory milestones since our last earnings call, receiving FDA approval for Rinvoq in non-radiographic axial SpA and positive CHMP opinion for Skyrizi in Crohn's disease. These developments demonstrate the continued progress we are making with a global indication expansion of our next-generation immunology assets. In the quarter, we also saw longer term data from our Phase 2 study for Rinvoq in systemic lupus, where strong responses and flare reductions continued through 48 weeks of treatment. Based on these results, we plan to advance Rinvoq development in this indication and will be discussing our Phase 3 program with regulatory agencies in the coming months. Now, I would like to provide a few updates on our earlier stage immunology pipeline. We recently began a Phase 2 study in ulcerative colitis for our RIPK1 inhibitor, ABBV-668. This small molecule inhibitor is designed to address chronic inflammatory diseases by preventing necroptosis and reducing TLR4-driven inflammation. This could be a differentiated approach that has a potential to provide significantly improved efficacy to patients suffering from ulcerative colitis. We look forward to providing updates as data mature. Turning now to ABBV-154, our anti-TNF steroid conjugate, which is being evaluated in multiple indications. We recently completed the primary analysis for the Phase 2 dose-ranging study in RA patients. The hypothesis for this program was that by delivering the steroid directly to the site of inflammation, you could drive higher rates of efficacy with limited or no effects of systemic steroid exposure. In this study, all doses of ABBV-154 met the primary endpoint of ACR50, as well as the majority of secondary endpoints at week 12. At the medium and high doses, ABBV-154 delivered ACR scores that are similar to Rinvoq or slightly better, which validates the platform's ability to drive high levels of efficacy. The safety profile for ABBV-154 was generally consistent with the safety profile for adalimumab. As part of our safety assessment in this study, we analyze metabolic parameters including cortisol levels. The data showed minor decreases in cortisol levels at the higher exposures, which are consistent with evidence of systemic steroid effects. Given the number of effective therapies available in RA and a more limited use of steroids in these patients, we do not plan to move forward in development for the RA indication. However, we continue to believe ABBV-154 has the potential to provide a benefit in other diseases such as PMR and Crohn's disease, where steroid use is part of the typical treatment paradigm. Our exploratory Phase 2 studies in these two indications are ongoing and we expect to see data from the PMR study in 2023 and from the Crohn's study in 2024. Also in the area of immunology, we recently made the decision to stop the clinical studies and discontinue development for ABBV-157, our RORγt inverse agonist. This decision was made due to new findings observed in our preclinical chronic toxicology study. Moving now to our oncology portfolio where we continue to make excellent progress across all stages of our pipeline. We recently submitted our regulatory application in Europe and our partner, Genmab, submitted an application in the U.S. for epcoritamab in relapse-refractory large B-cell lymphoma. We're seeking accelerated approval based on the positive Phase 2 study results for epcoritamab in this indication where we saw very deep and durable responses in these highly refractory patients. We expect decisions in both U.S. and Europe in 2023. We are also nearing completion of the registrational studies for two additional key programs in our heme/onc portfolio; Venclexta in multiple myeloma; and navitoclax in myelofibrosis. We remain on track to see results from the Phase 3 CANOVA trial in relapsed/refractory multiple myeloma patients with a t(11;14) mutation near the end of this year. Following the event-driven data readout, we anticipate submitting our regulatory applications in the first half of next year. For navitoclax, we remain on track to see data in the first half of next year from both the Phase 2 REFINE and the Phase 3 TRANSFORM-1 trials. Results from both studies will be included in our regulatory submissions, which we expect in the second half of 2023. Moving to neuroscience where we have applications under active review for several key assets. We anticipate a decision from the FDA in December for Vraylar as an adjunctive treatment for major depressive disorder. We believe Vraylar has a potential to be an important new therapy in this patient population and we look forward to bringing this new treatment option to patients. We also expect a decision from the FDA in the first half of next year for a ABBV-951, our innovative, subcutaneous level levodopa/carbidopa delivery system for treatment of advanced Parkinson's disease. And in the area of migraine, we have regulatory applications under review in both the U.S. and Europe for Qulipta as a preventive treatment for patients with chronic migraine with decisions expected in the first half of next year. If approved, this would be another differentiating future for Qulipta as it would be the only oral CGRP approved for prevention in patients with chronic migraine. This is a common and debilitating disease that significantly impacts quality of life, and we look forward to making this new oral treatment option available to patients once approved. And in eye care, our partner REGENXBIO recently announced positive interim data from the Phase 2, AAV8 dose escalation trial for RGX-314 using in-office, suprachoroidal delivery for the treatment of wet AMD. RGX-314 continues to be well tolerated with no drug-related serious adverse events, and a meaningful reduction in treatment burden was observed at six months across all dose levels. Two pivotal trials evaluating RGX-314 for wet AMD using subretinal delivery are active and enrolling patients. So in summary, we've continued to make significant progress advancing our programs this year and we look forward to many more important pipeline milestones in the remainder of this year and into 2023. With that, I'll turn the call over to Rob for additional comments on our third quarter performance and financial outlook. Rob? Rob Michael: Thank you, Tom. AbbVie’s third quarter results demonstrate the strength of our broad portfolio. The continued robust performance from Skyrizi and Rinvoq are helping offset the impact from higher inflation and the stronger U.S. dollar. We reported adjusted earnings per share of $3.66, which is $0.11 above our guidance midpoint. These results include a $0.02 unfavorable impact from acquired IPR&D expense. Total net revenues were $14.8 billion, in line with our guidance and up 5.4% on an operational basis, excluding a 2.1% unfavorable impact from foreign exchange. The adjusted operating margin ratio was 53.4% of sales. This includes adjusted gross margin of 85.4% of sales, adjusted R&D investment of 10.8% of sales, acquired IPR&D expense of 0.3% of sales, and adjusted SG&A expense up 20.9% of sales. Net interest expense was $497 million, and the adjusted tax rate was 12.9%. Turning to our financial outlook. We are narrowing our full year adjusted earnings per share guidance to between $13.84 and $13.88. This earnings per share guidance does not include an estimate for acquired IPR&D expense that may be incurred beyond the third quarter. We now expect net revenues of approximately $58.2 billion, reflecting growth of 5.5% on an operational basis. At current rates, we expect foreign exchange to have a 1.9% unfavorable impact on full year sales growth. Included in this guidance are the following updated assumptions. We now expect Skyrizi global sales of approximately $5.1 billion, an increase of $300 million due to strong market share performance. For Venclexta, we now expect global revenue of approximately $2 billion, based on a lower market outlook in CLL and unfavorable foreign exchange. For Aesthetics, we now expect global revenue of approximately $5.3 billion, given the impact of higher inflation on near-term market growth and due to unfavorable foreign exchange. Moving to P&L, we now expect adjusted gross margin of approximately 85% of sales and forecast an adjusted operating margin ratio of approximately 52% of sales. Turning to the fourth quarter, we anticipate net revenues of approximately $15.2 billion. At current rates, we expect foreign exchange to have a 2.5% unfavorable impact on sales growth. We expect adjusted earnings per share between $3.65 and $3.69. This guidance does not include acquired IPR&D expense that may be incurred in the quarter. Finally, AbbVie’s strong business performance continues to support our capital allocation priorities. We generated $17 billion of free cash flow in the first nine months of the year, and our cash balance at the end of September was $11.8 billion. Underscoring our confidence in AbbVie’s long-term outlook, today we announced a 5% increase in our quarterly cash dividend, beginning with the dividend payable in February 2023. And we remain on track to achieve $30 billion of cumulative debt paydown by the end of this year, bringing our net leverage ratio to 1.8 times. In closing, AbbVie’s strong performance allows us to reaffirm earnings expectations in the face of economic pressure. And with our diverse portfolio, we continue to be well positioned to deliver long-term growth. With that, I’ll turn the call back over to Liz. Liz Shea: Thanks, Rob. We will now open the call for questions. [Operator Instructions] Operator, we’ll take the first question. Operator: Thank you. Our first question is from Chris Schott from JPMorgan. Chris Schott: Great. Thanks so much. Just my question is really centered around Humira. And I know you – appreciate some of the access commentary you made at beginning of the call, but are there any surprises so far in these discussions as we think about where either rebates or price is settling out for Humira? And I’m really sure I was trying to get my hands around, I think previously, you’ve commented you expected U.S. Humira erosion to be down roughly 45%, plus or minus 10%. And I just was wondering if that range holds given what you know today about the negotiations? And if I could just do a quick follow up, second question, immunology. There was a European JAK update out this morning, and I just was wondering any impact you expect to the Rinvoq franchise for that? Just maybe some context about how relevant, I guess, Europe was as part of the mix? And does that label update kind of impact your outlook at all? Thanks so much. Rick Gonzalez: Okay, Chris, this is Rick. I’ll cover part of that question, and then I’ll have Jeff fill in on any additional commentary around the contracting. I think first, if we talk about the 45%, plus or minus 10%, that is the range that we gave. We’re obviously working on doing the final forecasting for 2023. As we’ve said in the past, there are two major components, which will play into that forecast. One is how are the biosimilars priced, that will certainly have some impact. We won’t know that until we actually get into the market and start to see some of that activity. But the other big component is obviously our coverage, our access coverage for Humira and the position that Humira has on those formularies. I would say that negotiating by Jeff’s team is going very well. As I mentioned in my comments, we’re at about 80% of all covered lives now, and I would expect that to rise to a level that’s above 90% as we move towards the end of the year. Once we have a final number there, it will allow us to do the final modeling for 2023, and that’s at the point where we’ll be able to refine that 45% plus or minus 10%. I’d tell you it’s going on track. I would say there’s no surprises, and I’d say I feel good about how the negotiations are going with all the major managed care organizations and PBMs. Jeff, anything you’d add there? Jeff Stewart: No. Just to confirm, Rick, that no real surprises in terms of where we’ve been. And as we’ve communicated before, our principles of co-existing over time with one or more biosimilars seems to be the way that the market will play out. And certainly, like we saw in Europe that we had the principle of – for patient continuity to concede pricing to maintain that patient access. So Chris, no major surprises that we’ve seen so far. Rick Gonzalez: And then do you want to talk about PRAC? You and Roopal, can talk about PRAC. Jeff Stewart: Maybe, Roopal, you could address the procedure and where we are in the procedure, and I’ll cover the commercial. Roopal Thakkar: Yes. Thanks, Jeff. I’ll give some context. So the next step here after PRAC would be moving to the CHMP here in November, and then the European Commission should finalize this. We expect December or January. So PRAC completed their review, and what we see in the labeling is an update in warnings, and this is related to outcomes of the oral surveillance study. And in particular, in Section 4.4, which is the warnings, there’s a list of subgroups that were found to be at risk based on analysis from oral surveillance. For example, patients greater than equal to the age of 65, those that are at risk for cardiac events, smokers, for example. And in these patients, the use of JAK inhibitors would be after a consideration of other therapies, if I’m paraphrasing, if no suitable alternatives. So this is consistent with the practice of medicine. It provides specific guidance, and we would say pragmatic at this stage. Jeff Stewart: And Chris, to that point, I mean, this is largely consistent with what we see from oral surveillance and the Xeljanz label, which is widely sort of understood by the European physicians. And so to cut to the quick, we don’t anticipate a material impact as this continues through the process. Liz Shea: Thanks, Chris. Operator, next question please. Operator: Thank you. Our next question is from Tim Anderson from Wolfe Research. Tim Anderson: Thank you. I was under the impression that we’d get more granularity on Humira erosion this quarter, and you’re saying that’s really going to come in Q4. So, I’m wondering did I kind of not hear it right before, or has something changed? And then second question is just on contracting in general, my understanding is that payer contracts, really not rock solid. They can be reopened when there’s a change in the marketplace on things like pricing, in this case of biosimilars. So, when we do kind of get whatever next level of guidance we get from you, isn’t that going to continue to remain fluid? Because market dynamics won’t all play out as of January, we’ll get to mid next year, you’ll get more entrants, you’ll know pricing better and that sort of thing? Thank you. Rick Gonzalez: Yes, Tim, this is Rick. I’ll cover that one. So, I think we’ve talked a number of times on these calls about what we project in the third quarter call, and I believe what we said is that we would ultimately provide you an update on where we were in the process. And so that’s what we attempted to do. I can’t give you a number for 2023 until I know what the total access is, and not all those contracts are done yet. They’re proceeding well, so I feel good about that. But until we actually know that the contract is solid and we know what that access looks like, we can’t give you an accurate projection. And I understand the desire by the investment community. I understand what that number is, but I think you probably also understand that we want to give you the most accurate number that we can give you, and we don’t want to give you a number that’s not accurate. And so it is going to require us until we get to the fourth quarter call to provide that for you. You are correct, in a sense, about the way you describe how these contracts work. They can be reopened at some point in time. I wouldn’t say that’s all that common usually, and in particular, I’d say around this kind of a situation, you’re going to anticipate what you think is going to happen in the second half of the year and try to position the contract in a way that it can ultimately deal with those changes going forward. But you are correct to say that they could reopen a contract if they chose to do that. There are various kinds of contracts that we use. In some cases, there are penalties or repercussions that would have to come into consideration if a contract got reopened at some point in time. They’re not all like that, but many are like that. So it varies. And I’d say generally speaking, your concept is valid. But I would say it’s probably a little less fluid than the way you necessarily described it, particularly in this environment where we know there will be a number of biosimilars coming in. So you anticipate that we’ve built the contracts around that set of assumptions. Jeff, anything you’d add? Jeff Stewart: No, I think, Tim, Rick described it in the right way. While there are typically, there are typically out clauses based on timing or other dynamics I think one of the considerations is obviously, as we’ve highlighted before, most of the biosimilars are going to be coming in the second half of the year. So to some degree, that actually limits if it was a rare case. And they typically are rare where a contract is blown up or renegotiated in the middle of the year. That length of time that’s left in 2023 for some of those payers to let’s take a negative action puts some natural constraint on them in terms of when they would time that out. But Rick highlighted it very nicely in terms of the dynamics. Liz Shea: Thanks, Tim. Operator, next question please. Operator: Thank you. And our next question comes from Mohit Bansal from Wells Fargo. Mohit Bansal: Great, thanks for taking my question. And maybe one more question on the contracting side. Could you help us understand if the pricing part of the contracts is something that you have a good handle on at this point? And then a follow-up question is that how do you think about the cadence of BD activity once you hit the mark of less than two times leveraged by end of the year? Thank you. Rick Gonzalez: Jeff, do you want to cover that? Jeff Stewart: Yes, so look, in terms of what Rick had highlighted in terms of our confidence in projecting the 80%. Obviously, there’s a couple components to that. So we have – while all the contracts aren’t fully complete with the ones that we’ve done. We’ve done some significant modeling work to understand if we’re retaining the ability to stay on the formulary. We would model our volume like how much would we retain versus would go to one or more biosimilars. That’s something that we can understand. And we have made base case, both first half and second half pricing assumptions based on those contracts. Now what’s been highlighted in the last couple of questions is there’s still uncertainty on the rest of the contracts that are yet to been secured and also a bid on that second half price dynamic. So those are the elements that are going to give us more confidence as we go to the fourth quarter call to give everyone a secure number for next year. Rick Gonzalez: This is Rick. I’ll cover your business development question. I think if I step back and I look at where are we today. We have been for the last several years operating with an approach of roughly $2 billion to add incremental pieces to the business. We’ve effectively used that over the last several years to be able to build some additional, particularly, I’d say early stage pipeline assets to the company. We’re continuing on that same approach right now. Now having said that, we obviously have paid down debt very rapidly. We will be in a position where if we chose to do something, we could do something. I’d say if I look at the business today and I look at how it’s performing around the expectations that we had for the business going forward, I would say there’s no need for us to be able to do anything in that area. And I’d go back to the original premise of what we described to the investment community of what we believed would happen when biosimilars entered the U.S. market for Humira. What we said was that we believe the bulk of the erosion would occur in 2023, some additional erosion in 2024, in 2025 and beyond. We would return to significant growth. We’d be able to deliver high single digit growth from that point forward through the end of the decade. That’s what we said. Everything I know about the business today would suggest to me that we are able to do just that. And we’re confident that we’re able to do that with the portfolio we have and the late-stage pipeline and additional indications that we have coming forward. Having said that, I can also tell you that, over the last 10 years, we’ve demonstrated to ourselves and hopefully to you that we can acquire businesses and assets and we can integrate those and we can successfully drive those. And so if we found something that we thought was very important to add to the business, we certainly have the financial wherewithal and this business has tremendous cash flow. We could do that. I can tell you we don’t see that right now. So I wouldn’t assume that. And the other thing I’d point out is, as an example, the most important thing, and I know everyone is focused on what that erosion curve is going to look like, including us, to be honest, but – and I know why. But probably the single most important thing for us going forward to hit what I described to you a moment ago is that underlying non Humira business growing at a rate that it can drive those expectations. And that’s key and I’d say there’s two factors that are most important around that. The first is that Skyrizi and Rinvoq grow fast enough that they can more than offset that they can essentially grow through all of the erosion that occurs on Humira and deliver incremental performance of above and beyond that. And I feel highly confident in that. I mean, when you can look at the trajectories of those assets now in the early phase we’re in right now in IBD and PSA. I would say, I have a very high level of confidence that they will perform at that level or well above that level. Then the second thing is all the other growth assets they have to be growing fast enough that they can get us to be able to grow at that rate that I described. And if you take this quarter as an example, and you look at the business without Humira, the underlying growth is about 6.5%. And remember that 6.5% is absorbing the economic impact we see in the aesthetics business and the market and competitive dynamics that we see in Imbruvica. So that’s – that tells you that underlying growth is pretty strong. And so I think those are the important things that investors have to focus on. And the erosion curve is certainly one of those. And I’m sensitive to the fact that you want to know when you’re going to hit trough earnings, and I recognize that. And that’s why we wanted to provide you some assurance of what that trough earnings is going to look like. Liz Shea: Thanks, Mohit. Operator, next question, please. Operator: Thank you. Our next question comes from Terence Flynn from Morgan Stanley. Terence Flynn: Hi, thanks for taking the questions. Maybe two for me. Rick, I appreciate your comments on 2023 and the aesthetics business. No, you don’t want to give guidance. But I guess at a high level, do you think you can grow that franchise next year versus this year? And then on epcoritamab, congratulations on the filing there. Just wondering what you’re expecting regarding the requirement for inpatient administration. J&J recently got approval of their bispecific and myeloma and looks like there’s a requirement there for inpatient administration of the drug during the step up period. So just wondering how we should think about inpatient versus outpatient dosing of epco? Thank you. Rick Gonzalez: Okay, excellent. Thanks, Terence. I’ll cover the first one. So if I look at the aesthetics business, we’re clearly seeing this economic pressure in the U.S. And I would expect that we will see that to continue into 2023. Certainly, it’s difficult to predict what will happen in the U.S., will it get worse? Will we go into a recession? Will it stay about the same? I’d say, we’re looking at this extremely carefully. But good news right now I would say is that the factors that we’re looking at that seem to be driving this consumer confidence and behavior the most in the U.S., appeared to have stabilized at the levels that they’re at. And so I would say that’s a positive thing. Now it’s fluid because obviously if the economic situation got worse in the U.S., my guess is they would trend down again. And so – but at least it appears right now that they’ve stabilized and maybe even ticked up just a little bit, moved in a positive direction just a little bit. I think it’s very difficult to predict. Here’s what I would assume. I would assume that a significant part of 2023 we will have an impact on it. Now also recognize that we saw this phenomena as we said in the last call start in May. We weren’t sure at the time whether it was the summer season starting a month early or it was the economic impact, because we had been watching the indicators and they trend down several months ahead of that. But we didn’t see an impact until the month of May. So the point is, when we hit May and beyond, we’re going to be lapping the impact. So the negative impact will be softened on the business. So we’ll return to better growth rates no matter what just mathematically, right. So – but I think the best prediction we can have is it’s going to have an impact in a good part of 2023. I think it’s the best way for us to think about it. Now again, the rest of the business has an opportunity to be able to offset that as we saw in this quarter. Rob Michael: And this is Rob. I would just add that if you think about more long term. If you think about what happened in 2008 and 2009, the business declined high single digits and then we saw, after that very robust growth in the mid-teen to the next decade. So given that penetration rates are still very low today. There’s clearly ample opportunity to grow this market. I think once you get on the other side of the economic impact which we expect to be transient. We still expect as business to deliver long-term growth as Rick highlighted earlier, we’re still on track for that. Long-term high single digit growth getting to greater than $9 billion by 2029. So we’ll have to navigate, obviously, the short-term economic impact. But we still have tremendous confidence in the long-term outlook for aesthetics. Rick Gonzalez: Epco? Neil Gallagher: Hey, this is Neil Gallagher. I will take the epco question. So the first thing I just want to caution, put a word of caution before I answer your question directly around inpatient stay, which is that the patient population that our competitors studied with the BCMA, CD3 is quite different in terms of overall benefit risk. So the indication that was granted was in fifth line plus multiple myeloma, which is very heavily pretreated and frail population. So to extrapolate any interpretation of benefit risk from that population into the relapsed/refractory DLBCL population that we have studied and filed for with epcoritamab would not be valid, so just a word of caution there. That said the study that we have filed had required for a 24-hour patient stay overnight – one overnight stay. However, in subsequent studies we are aiming to remove that requirements so patients would not require – be required to remain overnight. And we do believe because of the emergent and stable overall benefit risk for epcoritamab, a couple of things that we believe that it has the potential to be best-in-class, and we also believe that our strategy to remove overnight stays is a very valid one and reasonable one to pursue. Hope that answered your question. Liz Shea: Thanks Terence. Operator, next question please. Operator: Thank you. Our next question is from Andrew Baum from Citigroup Global. Andrew Baum: Thank you. A couple of questions please. First on in Imbruvica, I'm assuming that Imbruvica is going to be included in the Top 10 CMS lists for price negotiation under Medicare next year. Assuming that's correct what do you think about the impact on net pricing from Imbruvica. Do you anticipate pricing – net pricing coming under pressure prior to 2026, given the contracting that's expecting to take place among your competitors to secure favorable positions given their catastrophic coverage burden on PBMs post the IRA implementation? So is the impact going to get brought forward for the class including for Imbruvica before you actually get the price cut coming? And then then seconds with epcoritamab, there's been some interesting data on the importance of profound B-cell depletion in lupus using CAR T assets, as CD20 bispecific could get to a similar level. I'm wondering whether you have interest in pivoting epcoritamab and exploring it in refractory lupus as one of your competitors already is particularly given you have a subcu administration, which obviously has some advantages? Thank you. Jeff Stewart: Yes. Hi Andrew, it's Jeff. I'll take your – I'll take your first question. So when we – obviously we're still studying very carefully the IRA and we're also discussing directly with CMS not just through pharma, but our own company in terms of how they're going to basically select the different drugs that will be negotiated. That's a little bit unclear at this point. It's not unreasonable based on the size of Imbruvica to suspect it will be one of the earlier drugs that could potentially be negotiated, so just to clear that. In terms of what may take place before that potential negotiation in 2026, I would expect to see some modest changes in rebate. We see very small levels at this point now but we do have a third competitor coming. So that would be something that we would continue to plan – to plan for as we move into that potential event. Tom Hudson: Yes. This is Tom. Maybe I'll answer the lupus question. First, I'll say it's actually was very exciting to see that paper showing that B-cell depletion can actually put patients with very severe lupus in remission. It's a very small study. Some five patients, but everyone's looking at this as a, even with is a surprise because we used to think we had to affect many mechanisms themselves in lupus. So that was one of the reasons it's so difficult. I used to be part of a lupus clinic in Montreal, so I know the challenges with patients. So what we're looking at right now is we're asking yes, the answer to your question is can we use our existing assets and collaborations to see if we can do B-cell depletion, for as a treatment for lupus? The answer is yes. And the type of questions we're asking ourselves is, do we have to have as deeper depletion as we have with in heme malignancies? Nobody knows the answer. That might be important because if you have to have a very deep depletion it might be restricted more to more of the severe patients and again that would be an advantage. But if we want to go to all lupus patients because not all lupus patients are, are flaring all the time. The majority have a normal life. Go to the clinic once a year and just see their physicians when they have flares. So going to a very deep regimen for B-cell depletion might be deemed to too severe. So the questions is yes we're looking at it and trying to figure out what's the right regimen and how to approach that in lupus is very exciting questions, which we're obviously looking into. Liz Shea: Thanks Andrew. Operator, next question please. Operator: Thank you. Our next question comes from Steve Scala from Cowen. Steve Scala: Thank you. What is your level of confidence in a positive outcome for Vraylar in MDD at the end of the year? I imagine the review is well along, so you probably have good visibility. So for instance our labeling discussions underway, is the sales force being trained, et cetera. This is a very large opportunity that does not seem to be a point of external focus as far as I could tell. So I'm wondering what you could tell us about how things are going? Thank you, Roopal Thakkar: Hi, it's Roopal. Thanks for the question. Maybe I'll go and then Jeff can talk about the opportunity. You're correct, the review is proceeding per our expectations. We have two positive studies in the space. I mean, recall, we also have the same endpoint – the depression endpoint that's read out in three other bipolar depression studies that are already within label. So there's quite a bit of evidence that's already been generated, that's in front of the agency now. So I would say it's proceeding well and we still anticipate a decision by year end. And I'll pass it to Jeff. Jeff Stewart: Yes. Steve, and just in terms of your salesforce question, I mean, we are very encouraged and excited about this potential approval. I mean, obviously we continue to gain share week-by-week sequentially for our base indication – the bipolar indications. And we know that based on the profile that we have with Vraylar. So very, very strong efficacy – proven efficacy of a very good tolerability profile for an antipsychotic, no material weight gain, low metabolic effects, and I think importantly maybe not as appreciated it's, there's no titration. You have a very simple starting dose of 1.5 milligrams. So as we do our research, we see that that profile is very strong as this potential add-on therapy and depression. In the last decade there's been only one drug that's been approved for this indication and that's Rexulti, and we think that's a branded drug, obviously, and we think we can compete very, very well. So we have a big existing sales force and infrastructure. We are gearing up in terms of training. We have the established relationships across the big primary care doctors as well as the psychiatrist. So we are – we agree with your approach. That's a meaningful commercial opportunity that could evolve very quickly here once we get the approval. Liz Shea: Thanks, Steve. Operator, next question please. Operator: Thank you. Our next question is from Gary Nachman from BMO Capital Markets. Gary Nachman: Thanks. Good morning. First could you just provide some more color on how much of a benefit you're seeing for Skyrizi and Rinvoq and IBD? As you've been spending more time with the GIs, and have your outlooks changed on a potential there as major contributors to the long-term growth for those franchises? So were both of those being used in the treatment paradigms for the respective indications in Crohn's and ulcerative colitis? So that's one. And then secondly, just OpEx came in much lower than we expected, so you seem to be getting better operating leverage than what you originally guided. Are there areas where you've scaled back in spending, whether in Aesthetics or heme/onc if there's pressures there? And how will you be thinking about that into the Humira LOE next year? So how much additional flexibility might you have on the spending side? Thanks. Rick Gonzalez: Jeff? Jeff Stewart: Yes. I'll take the IBD question. I think we've mentioned before that the IBD has been a very important part of our long range plan and when we gave the 2025 guidance, it looks relatively small because they're just ramping down. I would say that as AbbVie we are very, very encouraged. As I mentioned in my prepared remarks on the launch, and maybe I'll start with what we're hearing from the gastroenterologists. I think first is they, they look at both assets and the global guidelines, the impressions and the clinical approach that we hear from the top leaders and also the community gastros is this idea over – I have to start to think about endoscopic healing, higher basically rates of efficacy and more significant clarity on what it's doing in the bowel versus just symptoms. And that seems straightforward, but we see the market moving very, very fast there in terms of understanding and that's what we can deliver, whether it's the Skyrizi data on the endoscopic healing rates with a very, very convenient and strong safety profile, or similar on the Rinvoq side in second line in the U.S. second line for patients that aren't doing well in UC. So we see rapid adoption already as I mentioned, that in the Rinvoq in the United States will be a second line plus based on the label. And we see very, very fast adoption. I'll give you some color on it. Xeljanz had been approved and is approved in UC in the United States, but basically it had very low adoption. We're seeing now in the community that 70% of the prescriptions are coming from physicians that have never written a JAK before. So it shows you that the clinical profile of Rinvoq in terms of its speed and the depth of the response is being viewed very, very well. So not only is that encouraging for Rinvoq, you see as I mentioned we're going to have the approval for Crohn's for Rinvoq in later lines next year as well. Skyrizi continues to surprise us to the upside, as you've heard from the call today. This is viewed increasingly as the preferred frontline drug coming straight out of the gate for Crohn's in the U.S. And the qualitative data that we're starting to see, and we are seeing some quantitative data that looks very strong, too, is that this is viewed as a already as a best-in-class product for Crohn’s, which is a very, very substantial market. So we are very encouraged. We continue to say that the IBD is probably underappreciated, and we’ll continue to give updates as these launches progress. Rob Michael: So Gary, this is Rob. I’ll take your question on OpEx. If you look at the benefit we’re seeing, about half of it is actually coming from the stronger U.S. dollar, so it’s more of an FX impact. The other half is spend productivity. We always look for opportunities to drive more productivity in our spend. It’s not so much about scaling back in parts of the business, we always look for ways to spend better, buy better. And ultimately, that helps us. In many cases also, over the long-term, redeploy that investment to drive growth. If you think about 2023, I’ve said – given that 46% to 47% operating margin directional input. I’ve also said we’re not going to cut back investment. We’ll obviously be prudent given that you will see a decline in gross margins next year, but we’re not going to be cutting back investment because we expect to return to growth quickly. So you’ll see us not necessarily cut back, but certainly put more behind this business to drive that long-term growth that we expect to be industry-leading over the long term. Liz Shea: Thanks, Gary. Operator, next question please? Operator: And our next question comes from Colin Bristow from UBS. Colin Bristow: Hey, good morning. Thanks for taking the questions. So first on CF, you recently posted an updated clinical trials for your new C2 corrector-based regimen. I just wondered if you could walk us through what gives you confidence that this has a higher probability of success versus your last deterioration? And then second one for Rick, I just wanted to touch base on your succession plan. It’s been an increasingly sort of important or a frequent topic with investors. You’ve been the architect of AbbVie’s success inception, and so just wanted to confirm specifically how long you expect to stay in the seat? And then how should we think about the time lines around the process of identifying your successor? Thank you. Tom Hudson: Well, this is Tom, I’ll answer the CF question. Again, this is very challenging to actually make that abnormal CF protein get to the membrane and act as a chloride channel, and it takes three different drugs to make it effectively to get it to the cell membrane and open up in the right way. And so we all felt that we had – intakes we call them Corrector 1, Corrector 2 and Potentiator, these three different compounds. We always see good results with double our C1 corrector. We think it’s best-in-class. Our potentiator is very good. What we had difficulty is to get a good C2 corrector, and what I presented earlier this year was that it wasn’t good enough. But what we’ve done since then, we will continue to look at better ones and we came out with a differentiated product, 576 [ph], which is structurally different and the data supports higher safety margin, higher exposures, good PK. Hopefully, a single pill. And then we’d be able to get to this – to be able to have this triplet which is really important to be competitive. So again, our doublet, the data we had was very strong. But we need that third piece, and that third piece seems to be coming along really well. That’s what you really saw on the website at ct.gov is moving to evaluate this triple combo with our new C2 corrector. Rick Gonzalez: And this is Rick on the succession question. I’d say that, we obviously have a very experienced Board, and we’ve had an active approach on succession going back to about 2016, 2017. And that process has proceeded extremely well in developing internal candidates to ultimately assume the role when I do retire. I can tell you that there are no plans at all for me to retire in 2023. The most important thing to me and to the Board is to make sure that the business is performing exactly as we expect going forward, and we’re not going to make any transition until we’ve gone through the biosimilar event, and we’re confident in the performance of the overall business. That would be the appropriate time once we’re confident to make a transition at that point. We’ve also had discussions with the Board of what that transition would look like. And assuming it’s an internal candidate, the transition will essentially work where we will name a new CEO. And at that point, I will assume the role of Executive Chair for a period of time thereafter. So I think we have a well-thought-out succession approach. I feel very comfortable with the approach, I feel comfortable with the work we’re doing to develop the internal candidates. And I think the transition when it occurs, I think, will go smoothly and be successful. So hopefully, that answers your question. Liz Shea: Thanks, Colin. Operator, next question please? Operator: Thank you. Our next question comes from Chris Shibutani from Goldman Sachs. Liz Shea: Chris, are you there? We can’t hear you. Operator: Please check your mute feature, Chris? Chris Shibutani: Yes, apologies. Two questions, if I may. On Rinvoq, you had previously commented that you were seeing some use in the first-line setting. Can you update us at all with any color there? Secondly, for Skyrizi, obviously, a very attractive market and an opportunity in Crohn’s disease. Can you show us how you’re thinking about the potential impact given the LOE in 2023 of a major branded players, STELARA? Thank you. Jeff Stewart: Chris, it’s Jeff. Just to clarify in terms of your Rinvoq question, was there a specific question related to a certain indication on the front line? Or I’m not sure I fully appreciate that one. Chris Shibutani: Yes, no. In AD. Jeff Stewart: In AD, okay, right. So yes, we do see frontline use across the globe and even in the U.S. And what we’re seeing is now, as I mentioned in my remarks, we’re seeing in-line in-play share, which is in the high mid-teens right now in the U.S., and it’s higher in the international markets. So there seems to be, as we look to the research and we look to our market – end market performance, there’s really two segments of dermatologists. There’s very cautious dermatologists that are slow to adopt JAKs, and typically, they’ll start in the later line, a second line plus. There is an emerging cohort of a significant group of dermatologists as well that basically are looking at the underlying high efficacy parameters, so basically like the EZ90 skin clearance and almost no discernible itch for the product. They typically are starting to use more and more in the frontline. So the overall balance is leaning towards the second line, but we do see increasing frontline utilization based on the profile of the drug in atopic dermatitis. In terms of the Skyrizi for Crohn’s, we think we’re very, very well positioned for a couple of reasons. One is the overall profile of the medicine is really exceptional, as I’ve highlighted, and we’re going to see very, very rapid adoption both in the U.S. and the external market. In addition, we have anticipated the STELARA LOE. We see that we have an ongoing head-to-head trial versus STELARA to make sure that we can continue to differentiate with direct data that will come over the next year or so, so we’re anticipating that. And we think we’re going to have a good setup to maintain the early momentum that we’re seeing with Skyrizi. Liz Shea: Thanks, Chris. Operator, next question please? Operator: Thank you. Our next question is from Geoff Meacham from Bank of America. Geoff Meacham: Hey guys. Thanks so much for taking the question. I just have one quick one. Rick, lots of questions on Humira for next year, but I wanted to ask at a high level environment beyond that. I know there are formal treatment guidelines in I&I, but what’s the risk that payers mandate cycling through one or more biosimilars? And what’s the risk – the pricing environment doesn’t really recover in 2024 and beyond? Just obviously thinking about the Skyrizi and Rinvoq franchises over the long term? Thank you. Rick Gonzalez: So I’m actually going to have Jeff walk you through that. He’s probably the closest to that environment. Jeff Stewart: Yes, so thank you for the question. I mean, one of the things that we see certainly in the near term is that the formularies in I&I are actually expanding. So many years ago, you might have six or seven preferred agents. The payers are now requesting sometimes up to 11 or 12 preferred agents, so you’re seeing an expansive nature in the short term. Now as you go forward, maybe middle of the decade or later where you have more and more biosimilars, could the U.S. environment move towards sort of a step through? I mean, it’s possible. But we have, again, as I mentioned in my last statement, we have anticipated that with the right types of data, the trials. We have five head-to-head studies in Skyrizi in psoriasis; we have more coming in Crohn’s. And so we think that basically, we have a data-driven approach that’s going to continue to allow us to significantly differentiate our products. The other dynamic that we watch very carefully, and we talked about this during the Immunology Investor Day, is the lines of therapy as there’s more and more high efficacy products that get introduced, continue to expand. So in the middle of the decade or longer, the second plus and the third line markets are going to be very, very significant at that point. So when we put all of that into the calculus we feel again, we have a pretty set up for the middle of the decade and longer. Rick Gonzalez: And this is Rick. I agree with everything Jeff said. The one thing I would add that as you think about even under a scenario where if we did get to some kind of a step at it, you have to go back and remember that most of these mechanisms, most patients fail, and they fail at a relatively high level and over a relatively short period of time. So even if you had to rotate through you’re going to get to second line relatively quickly, and recycling somebody back through another TNF typically doesn’t work very well for those patients. And I’d say the domain now with the kind of agents that we have in the market now and the level of remission that they can create, the demand among physicians is much higher to get patients into remission as rapidly as they possibly can. And so I think all those dynamics tell us that this model should continue to work over the long-haul. Liz Shea: Thanks, Geoff. I believe we have taken all the questions in the queue, so that concludes today’s conference call. If you’d like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. Operator: Thank you. This does conclude today’s conference. You may disconnect at this time.	[ { "speaker": "Liz Shea", "text": "Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Rob Michael, Vice Chairman and President; Jeff Stewart, Executive Vice President, Chief Commercial Officer; and Tom Hudson, Senior Vice President, R&D and Chief Scientific Officer. Joining us for the Q&A portion of the call are Carrie Strom, Senior Vice President and President, Global Allergan Aesthetics; Scott Reents, Senior Vice President and Chief Financial Officer; Neil Gallagher, Vice President, Development and Chief Medical Officer; and Roopal Thakkar, Vice President, Global Regulatory Affairs. Before we get started, I will note that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll now turn the call over to Rick." }, { "speaker": "Rick Gonzalez", "text": "Thank you, Liz. Good morning, everyone, and thank you for joining us today. I'll briefly comment on our overall performance then Jeff, Tom and Rob will review our third quarter business highlights, pipeline progress and financial results in more detail. AbbVie continues to perform very well, a testament to the strength of our broad, diversified portfolio. I'm especially pleased with the performance of our immunology assets, Skyrizi and Rinvoq. We delivered adjusted earnings per share of $3.66, exceeding our expectations. Total net revenues of $14.8 billion were up 5.4% on an operational basis, in line with our expectations. Immunology once again demonstrated impressive results with Skyrizi and Rinvoq now on pace to deliver more than $7.5 billion in combined sales this year, well ahead of our initial expectations. This performance is especially encouraging, recognizing that we're in the early launch phase for both assets in IBD and PSA, as well as Rinvoq in atopic dermatitis. Skyrizi and Rinvoq have established outstanding launch trajectories across existing and new indications, giving us a high degree of confidence in the collective potential of these two assets to ultimately exceed the peak revenues achieved by Humira, achieving the strategic objective we had for replacing Humira. We also saw a continued strong double-digit operational sales growth from several additional key products, including Botox Cosmetic, Vraylar, Venclexta and Botox Therapeutic. This strong momentum is helping us offset some of the interim economic pressure we now see in our Aesthetics portfolio. Based on these results, we remain confident in the outlook of our business and are reaffirming the midpoint of our full year 2022 EPS guidance at $13.86, which represents strong double-digit growth. As many of you are aware, we have a leading consumer-facing aesthetics portfolio, which is largely cash pay. We have been monitoring the global economic situation. Based on all the data we have been observing, especially in the U.S. with both the consumer confidence index and real personal consumption expenditures trending down and continued high inflation, these factors are putting pressure on consumers' discretionary spending. This metric correlates with a slowdown in treatment procedures that we're seeing across the aesthetics markets, impacting the growth rates for toxins, fillers and body contouring. While our U.S. aesthetics market share remains stable across both toxins and fillers, we now believe it's prudent to adjust our full year aesthetics forecast to reflect the moderating market growth over the near to medium term, which is expected to predominantly impact Juvederm as well as our body contouring portfolio products, which represent higher price points for consumers. While it's difficult to predict the duration of these economic dynamics, we expect these conditions to persist into 2023. As consumer confidence improves, we would once again expect the market growth to accelerate. Our aesthetics portfolio experienced a rapid and sustained recovery following the 2008-2009 recession, so we anticipate any impact will be transient. Over the long-term, the aesthetics business continues to be an extremely attractive, underpenetrated market with significant growth potential. The current market dynamics do not change our long-term guidance for aesthetics and we remain confident in our ability to achieve total sales of more than $9 billion in 2029. I also want to provide a brief update on the outlook for 2023. With regards to the status of contracting for Humira, our intent has always been to maintain broad formulary access so that we can compete effectively with forthcoming biosimilars. We are making very good progress consistent with this objective, and are currently projecting formulary access for at least 80% of all U.S. covered lives. We expect this percentage to increase further as we conclude additional contract discussions between now and the end of the year. As a result, we anticipate strong access for U.S. Humira throughout 2023, and project biosimilars will share access as they become available. We will provide sales guidance for Humira on our fourth quarter call. While we're not issuing 2023 guidance today, it is important to note that when we issue our EPS outlook, we expect the lower end of the range to represent for earnings. So while it's possible 2023 could outperform our guidance regardless of the shape of the erosion curve, we don't anticipate 2024 earnings will be lower than the initial 2023 EPS guidance given the momentum and growth from another year of our ex-Humira portfolio, which is expected to more than offset any incremental Humira erosion in 2024. We know that many investors have an interest in the timing of AbbVie's trough earnings, whether that would be 2023 or 2024. The guidance range will provide and give investors additional clarity regarding our expectations for the company's core EPS. In summary, we continue to deliver strong results and see numerous opportunities for our diverse portfolio to drive long-term growth. To that end, as noted in our news release, today we're announcing a 5% increase in our quarterly cash dividend from $1.41 per share to $1.48 per share, beginning with the dividend payable in February 2023. Since our inception, we have grown our quarterly dividend by 270%. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff?" }, { "speaker": "Jeff Stewart", "text": "Thank you, Rick. We once again demonstrated strong and balanced growth across our therapeutic portfolio this quarter. I'll start with Immunology, where we are well positioned for sustained leadership in this extremely attractive market. Total Immunology revenues were more than $7.6 billion, up 16.4% on an operational basis. We remain very excited about the long-term potential for Skyrizi and Rinvoq which are already having a significant impact on AbbVie's growth and performance, contributing approximately $2.1 billion in combined sales this quarter, representing nearly 15% of total company net revenues. Skyrizi continues to exceed our expectations. Global revenues were $1.4 billion, up 12% on a sequential basis. In psoriasis, Skyrizi is capturing nearly one out of every two new and switching patients in the U.S. biologic market, with our leading total prescription share increasing to approximately 27%. We have also achieved total market share leadership in a dozen key international markets, including Japan, Canada and France. Psoriatic arthritis is ramping very nicely, with an expected global sales contribution of approximately $500 million just this year. Our PSA performance is especially strong in the U.S. Dermatology segment, where we have already achieved 10% total market share. Lastly, our launch of Skyrizi for Crohn's disease in the U.S. is progressing very well. Early prescription trends as well as feedback from gastroenterologists has been overwhelmingly positive, especially given Skyrizi's convenient dosing and strong clinical profile. Importantly, commercial access for Skyrizi Crohn's is now equal to psoriasis and PSA with sales in this indication expected to ramp significantly over the next several quarters. Given the momentum we are seeing across the indications; we will be raising our full year sales guidance once again for Skyrizi. Turning now to Rinvoq, which delivered global sales of $695 million, demonstrating more than 17% sequential growth, we continue to see positive momentum in RA, with total market share increasing to more than 6% in both the U.S. and across key international geographies. Global prescriptions are also ramping nicely in PSA ankylosing spondylitis and non-radiographic axial SpA, a testament to the strong clinical profile Rinvoq has demonstrated across the broader rheumatology segment. Rinvoq is now the only JAK inhibitor with global approval for all four major Rheum indications. In atopic dermatitis, we continue to see strong demand for Rinvoq, particularly in the second-line setting. U.S. in-play market share is tracking in line with our expectations and we were making excellent progress internationally, with in-place share ranging now from approximately 20% to 35% across our major markets. AD remains a highly underpenetrated market globally and an attractive long-term growth opportunity for Rinvoq. Lastly, in ulcerative colitis, we are very excited by the early prescription trends in the U.S. In the second line plus setting, Rinvoq is already achieving the second highest in-place share, which is now approaching 20% in just a few months’ post launch. Physicians have been pleased with Rinvoq's high rates of endoscopic healing as well as the speed of onset. With over 70% of bioexperience UC patients currently on or having used TNF therapy, the second line plus opportunity for Rinvoq in UC is substantial. This strong adoption in UC among gastroenterologists is also encouraging for Rinvoq's potential in Crohn's disease as well. We are on track for U.S. and EMA regulatory decisions in the first half of 2023. Global Humira sales were approximately $5.6 billion, up 3.9% on an operational basis with 7.4% growth in the U.S., partially offset by international performance where revenues were down 16.8% operationally due to biosimilar competition. Turning now to hematologic oncology, where total revenues were $1.65 billion, down 9.9% on an operational basis. Imbruvica global revenues were approximately $1.1 billion, down 17.4%. The U.S. performance continues to be impacted by an incrementally challenging CLL market, with new patient starts down approximately 20% relative to pre-COVID levels. Given the U.S. CLL market has been consistently lower than our expectation in the past several quarters, we are now reducing our view of the total size of the addressable patient population for this indication going forward. We also anticipate further share erosion following the recent unfavorable change to the NCCN guideline preference for Imbruvica in CLL, as well as increasing existing and new competition. These market and shared dynamics are expected to have a flow through impact on Imbruvica’s 2023 performance. Venclexta global sales were $550 million up 11.3% on an operational basis. Continued share gains across both approved indications are being partially offset by a softer CLL market in the U.S. and a higher foreign exchange impact on international revenues. As a result, we will be adjusting our full year sales guidance for Venclexta. Longer term, we anticipate our oncology portfolio will return a growth driven by several promising new products and indications such as epcoritamab for DLBCL, and follicular lymphoma, Venclexta new indications for multiple myeloma and high-risk MDs; navitoclax for myelofibrosis; and Teliso-V for nonsquamous non-small-cell lung cancer. We are beginning launch preparedness activities for several of these important opportunities and look forward to bringing new treatment options to patients. In neuroscience revenues were nearly $1.7 billion, up 8.3% on an operational basis. Vraylar once again delivered strong growth. Sales of 554 million were up 20.2% on an operational basis reflecting continued market share momentum. We continue to anticipate the regulatory approval and the commercial launch of Vraylar as an adjunctive treatment for major depressive disorder this quarter, which would make Vraylar the only antipsychotic, as a dual partial agonist approved to treat the most common forms of depression, both bipolar I, and adjunctive, and DD. Within migraine, our market leading oral CGRP portfolio contribute $222 million in combined sales this quarter. Ubrelvy prescriptions increased high single digits sequentially while total revenues were unfavorably impacted by a one-time prior period accrual adjustment of $40 million related to patient access program costs. Excluding this one-time adjustment, Ubrelvy sales were up more than 20% versus the prior year. Qulipta revenues nearly doubled sequentially as we continue to make very good progress with commercial access. Potential label expansion in the U.S. as a preventative treatment in patients with chronic migraine and new therapy approvals in Europe represent additional opportunities to support Qulipta's strong momentum. Botox Therapeutic is also performing very well with total sales of $699 million, up 10% on an operational basis. In chronic migraine, which accounts for roughly 45% of our therapeutic sales, Botox remains a foundational preventative treatment, and the clear branded leader for existing as well as new patient starts. Lastly, our launch preparations are underway for ABBV-951, a potentially transformative next-generation therapy for advanced Parkinson's. We anticipate approval in the first half of next year and believe ABBV-951 has the potential to achieve peak sales in excess of $1 billion. So overall, I'm very pleased with the momentum across the therapeutic portfolio, which is demonstrating strong revenue growth. And with that, I'll turn the call over to Tom for additional comments on our R&D programs. Tom?" }, { "speaker": "Tom Hudson", "text": "Thank you, Jeff. In the area of immunology, we had several important regulatory milestones since our last earnings call, receiving FDA approval for Rinvoq in non-radiographic axial SpA and positive CHMP opinion for Skyrizi in Crohn's disease. These developments demonstrate the continued progress we are making with a global indication expansion of our next-generation immunology assets. In the quarter, we also saw longer term data from our Phase 2 study for Rinvoq in systemic lupus, where strong responses and flare reductions continued through 48 weeks of treatment. Based on these results, we plan to advance Rinvoq development in this indication and will be discussing our Phase 3 program with regulatory agencies in the coming months. Now, I would like to provide a few updates on our earlier stage immunology pipeline. We recently began a Phase 2 study in ulcerative colitis for our RIPK1 inhibitor, ABBV-668. This small molecule inhibitor is designed to address chronic inflammatory diseases by preventing necroptosis and reducing TLR4-driven inflammation. This could be a differentiated approach that has a potential to provide significantly improved efficacy to patients suffering from ulcerative colitis. We look forward to providing updates as data mature. Turning now to ABBV-154, our anti-TNF steroid conjugate, which is being evaluated in multiple indications. We recently completed the primary analysis for the Phase 2 dose-ranging study in RA patients. The hypothesis for this program was that by delivering the steroid directly to the site of inflammation, you could drive higher rates of efficacy with limited or no effects of systemic steroid exposure. In this study, all doses of ABBV-154 met the primary endpoint of ACR50, as well as the majority of secondary endpoints at week 12. At the medium and high doses, ABBV-154 delivered ACR scores that are similar to Rinvoq or slightly better, which validates the platform's ability to drive high levels of efficacy. The safety profile for ABBV-154 was generally consistent with the safety profile for adalimumab. As part of our safety assessment in this study, we analyze metabolic parameters including cortisol levels. The data showed minor decreases in cortisol levels at the higher exposures, which are consistent with evidence of systemic steroid effects. Given the number of effective therapies available in RA and a more limited use of steroids in these patients, we do not plan to move forward in development for the RA indication. However, we continue to believe ABBV-154 has the potential to provide a benefit in other diseases such as PMR and Crohn's disease, where steroid use is part of the typical treatment paradigm. Our exploratory Phase 2 studies in these two indications are ongoing and we expect to see data from the PMR study in 2023 and from the Crohn's study in 2024. Also in the area of immunology, we recently made the decision to stop the clinical studies and discontinue development for ABBV-157, our RORγt inverse agonist. This decision was made due to new findings observed in our preclinical chronic toxicology study. Moving now to our oncology portfolio where we continue to make excellent progress across all stages of our pipeline. We recently submitted our regulatory application in Europe and our partner, Genmab, submitted an application in the U.S. for epcoritamab in relapse-refractory large B-cell lymphoma. We're seeking accelerated approval based on the positive Phase 2 study results for epcoritamab in this indication where we saw very deep and durable responses in these highly refractory patients. We expect decisions in both U.S. and Europe in 2023. We are also nearing completion of the registrational studies for two additional key programs in our heme/onc portfolio; Venclexta in multiple myeloma; and navitoclax in myelofibrosis. We remain on track to see results from the Phase 3 CANOVA trial in relapsed/refractory multiple myeloma patients with a t(11;14) mutation near the end of this year. Following the event-driven data readout, we anticipate submitting our regulatory applications in the first half of next year. For navitoclax, we remain on track to see data in the first half of next year from both the Phase 2 REFINE and the Phase 3 TRANSFORM-1 trials. Results from both studies will be included in our regulatory submissions, which we expect in the second half of 2023. Moving to neuroscience where we have applications under active review for several key assets. We anticipate a decision from the FDA in December for Vraylar as an adjunctive treatment for major depressive disorder. We believe Vraylar has a potential to be an important new therapy in this patient population and we look forward to bringing this new treatment option to patients. We also expect a decision from the FDA in the first half of next year for a ABBV-951, our innovative, subcutaneous level levodopa/carbidopa delivery system for treatment of advanced Parkinson's disease. And in the area of migraine, we have regulatory applications under review in both the U.S. and Europe for Qulipta as a preventive treatment for patients with chronic migraine with decisions expected in the first half of next year. If approved, this would be another differentiating future for Qulipta as it would be the only oral CGRP approved for prevention in patients with chronic migraine. This is a common and debilitating disease that significantly impacts quality of life, and we look forward to making this new oral treatment option available to patients once approved. And in eye care, our partner REGENXBIO recently announced positive interim data from the Phase 2, AAV8 dose escalation trial for RGX-314 using in-office, suprachoroidal delivery for the treatment of wet AMD. RGX-314 continues to be well tolerated with no drug-related serious adverse events, and a meaningful reduction in treatment burden was observed at six months across all dose levels. Two pivotal trials evaluating RGX-314 for wet AMD using subretinal delivery are active and enrolling patients. So in summary, we've continued to make significant progress advancing our programs this year and we look forward to many more important pipeline milestones in the remainder of this year and into 2023. With that, I'll turn the call over to Rob for additional comments on our third quarter performance and financial outlook. Rob?" }, { "speaker": "Rob Michael", "text": "Thank you, Tom. AbbVie’s third quarter results demonstrate the strength of our broad portfolio. The continued robust performance from Skyrizi and Rinvoq are helping offset the impact from higher inflation and the stronger U.S. dollar. We reported adjusted earnings per share of $3.66, which is $0.11 above our guidance midpoint. These results include a $0.02 unfavorable impact from acquired IPR&D expense. Total net revenues were $14.8 billion, in line with our guidance and up 5.4% on an operational basis, excluding a 2.1% unfavorable impact from foreign exchange. The adjusted operating margin ratio was 53.4% of sales. This includes adjusted gross margin of 85.4% of sales, adjusted R&D investment of 10.8% of sales, acquired IPR&D expense of 0.3% of sales, and adjusted SG&A expense up 20.9% of sales. Net interest expense was $497 million, and the adjusted tax rate was 12.9%. Turning to our financial outlook. We are narrowing our full year adjusted earnings per share guidance to between $13.84 and $13.88. This earnings per share guidance does not include an estimate for acquired IPR&D expense that may be incurred beyond the third quarter. We now expect net revenues of approximately $58.2 billion, reflecting growth of 5.5% on an operational basis. At current rates, we expect foreign exchange to have a 1.9% unfavorable impact on full year sales growth. Included in this guidance are the following updated assumptions. We now expect Skyrizi global sales of approximately $5.1 billion, an increase of $300 million due to strong market share performance. For Venclexta, we now expect global revenue of approximately $2 billion, based on a lower market outlook in CLL and unfavorable foreign exchange. For Aesthetics, we now expect global revenue of approximately $5.3 billion, given the impact of higher inflation on near-term market growth and due to unfavorable foreign exchange. Moving to P&L, we now expect adjusted gross margin of approximately 85% of sales and forecast an adjusted operating margin ratio of approximately 52% of sales. Turning to the fourth quarter, we anticipate net revenues of approximately $15.2 billion. At current rates, we expect foreign exchange to have a 2.5% unfavorable impact on sales growth. We expect adjusted earnings per share between $3.65 and $3.69. This guidance does not include acquired IPR&D expense that may be incurred in the quarter. Finally, AbbVie’s strong business performance continues to support our capital allocation priorities. We generated $17 billion of free cash flow in the first nine months of the year, and our cash balance at the end of September was $11.8 billion. Underscoring our confidence in AbbVie’s long-term outlook, today we announced a 5% increase in our quarterly cash dividend, beginning with the dividend payable in February 2023. And we remain on track to achieve $30 billion of cumulative debt paydown by the end of this year, bringing our net leverage ratio to 1.8 times. In closing, AbbVie’s strong performance allows us to reaffirm earnings expectations in the face of economic pressure. And with our diverse portfolio, we continue to be well positioned to deliver long-term growth. With that, I’ll turn the call back over to Liz." }, { "speaker": "Liz Shea", "text": "Thanks, Rob. We will now open the call for questions. [Operator Instructions] Operator, we’ll take the first question." }, { "speaker": "Operator", "text": "Thank you. Our first question is from Chris Schott from JPMorgan." }, { "speaker": "Chris Schott", "text": "Great. Thanks so much. Just my question is really centered around Humira. And I know you – appreciate some of the access commentary you made at beginning of the call, but are there any surprises so far in these discussions as we think about where either rebates or price is settling out for Humira? And I’m really sure I was trying to get my hands around, I think previously, you’ve commented you expected U.S. Humira erosion to be down roughly 45%, plus or minus 10%. And I just was wondering if that range holds given what you know today about the negotiations? And if I could just do a quick follow up, second question, immunology. There was a European JAK update out this morning, and I just was wondering any impact you expect to the Rinvoq franchise for that? Just maybe some context about how relevant, I guess, Europe was as part of the mix? And does that label update kind of impact your outlook at all? Thanks so much." }, { "speaker": "Rick Gonzalez", "text": "Okay, Chris, this is Rick. I’ll cover part of that question, and then I’ll have Jeff fill in on any additional commentary around the contracting. I think first, if we talk about the 45%, plus or minus 10%, that is the range that we gave. We’re obviously working on doing the final forecasting for 2023. As we’ve said in the past, there are two major components, which will play into that forecast. One is how are the biosimilars priced, that will certainly have some impact. We won’t know that until we actually get into the market and start to see some of that activity. But the other big component is obviously our coverage, our access coverage for Humira and the position that Humira has on those formularies. I would say that negotiating by Jeff’s team is going very well. As I mentioned in my comments, we’re at about 80% of all covered lives now, and I would expect that to rise to a level that’s above 90% as we move towards the end of the year. Once we have a final number there, it will allow us to do the final modeling for 2023, and that’s at the point where we’ll be able to refine that 45% plus or minus 10%. I’d tell you it’s going on track. I would say there’s no surprises, and I’d say I feel good about how the negotiations are going with all the major managed care organizations and PBMs. Jeff, anything you’d add there?" }, { "speaker": "Jeff Stewart", "text": "No. Just to confirm, Rick, that no real surprises in terms of where we’ve been. And as we’ve communicated before, our principles of co-existing over time with one or more biosimilars seems to be the way that the market will play out. And certainly, like we saw in Europe that we had the principle of – for patient continuity to concede pricing to maintain that patient access. So Chris, no major surprises that we’ve seen so far." }, { "speaker": "Rick Gonzalez", "text": "And then do you want to talk about PRAC? You and Roopal, can talk about PRAC." }, { "speaker": "Jeff Stewart", "text": "Maybe, Roopal, you could address the procedure and where we are in the procedure, and I’ll cover the commercial." }, { "speaker": "Roopal Thakkar", "text": "Yes. Thanks, Jeff. I’ll give some context. So the next step here after PRAC would be moving to the CHMP here in November, and then the European Commission should finalize this. We expect December or January. So PRAC completed their review, and what we see in the labeling is an update in warnings, and this is related to outcomes of the oral surveillance study. And in particular, in Section 4.4, which is the warnings, there’s a list of subgroups that were found to be at risk based on analysis from oral surveillance. For example, patients greater than equal to the age of 65, those that are at risk for cardiac events, smokers, for example. And in these patients, the use of JAK inhibitors would be after a consideration of other therapies, if I’m paraphrasing, if no suitable alternatives. So this is consistent with the practice of medicine. It provides specific guidance, and we would say pragmatic at this stage." }, { "speaker": "Jeff Stewart", "text": "And Chris, to that point, I mean, this is largely consistent with what we see from oral surveillance and the Xeljanz label, which is widely sort of understood by the European physicians. And so to cut to the quick, we don’t anticipate a material impact as this continues through the process." }, { "speaker": "Liz Shea", "text": "Thanks, Chris. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Tim Anderson from Wolfe Research." }, { "speaker": "Tim Anderson", "text": "Thank you. I was under the impression that we’d get more granularity on Humira erosion this quarter, and you’re saying that’s really going to come in Q4. So, I’m wondering did I kind of not hear it right before, or has something changed? And then second question is just on contracting in general, my understanding is that payer contracts, really not rock solid. They can be reopened when there’s a change in the marketplace on things like pricing, in this case of biosimilars. So, when we do kind of get whatever next level of guidance we get from you, isn’t that going to continue to remain fluid? Because market dynamics won’t all play out as of January, we’ll get to mid next year, you’ll get more entrants, you’ll know pricing better and that sort of thing? Thank you." }, { "speaker": "Rick Gonzalez", "text": "Yes, Tim, this is Rick. I’ll cover that one. So, I think we’ve talked a number of times on these calls about what we project in the third quarter call, and I believe what we said is that we would ultimately provide you an update on where we were in the process. And so that’s what we attempted to do. I can’t give you a number for 2023 until I know what the total access is, and not all those contracts are done yet. They’re proceeding well, so I feel good about that. But until we actually know that the contract is solid and we know what that access looks like, we can’t give you an accurate projection. And I understand the desire by the investment community. I understand what that number is, but I think you probably also understand that we want to give you the most accurate number that we can give you, and we don’t want to give you a number that’s not accurate. And so it is going to require us until we get to the fourth quarter call to provide that for you. You are correct, in a sense, about the way you describe how these contracts work. They can be reopened at some point in time. I wouldn’t say that’s all that common usually, and in particular, I’d say around this kind of a situation, you’re going to anticipate what you think is going to happen in the second half of the year and try to position the contract in a way that it can ultimately deal with those changes going forward. But you are correct to say that they could reopen a contract if they chose to do that. There are various kinds of contracts that we use. In some cases, there are penalties or repercussions that would have to come into consideration if a contract got reopened at some point in time. They’re not all like that, but many are like that. So it varies. And I’d say generally speaking, your concept is valid. But I would say it’s probably a little less fluid than the way you necessarily described it, particularly in this environment where we know there will be a number of biosimilars coming in. So you anticipate that we’ve built the contracts around that set of assumptions. Jeff, anything you’d add?" }, { "speaker": "Jeff Stewart", "text": "No, I think, Tim, Rick described it in the right way. While there are typically, there are typically out clauses based on timing or other dynamics I think one of the considerations is obviously, as we’ve highlighted before, most of the biosimilars are going to be coming in the second half of the year. So to some degree, that actually limits if it was a rare case. And they typically are rare where a contract is blown up or renegotiated in the middle of the year. That length of time that’s left in 2023 for some of those payers to let’s take a negative action puts some natural constraint on them in terms of when they would time that out. But Rick highlighted it very nicely in terms of the dynamics." }, { "speaker": "Liz Shea", "text": "Thanks, Tim. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. And our next question comes from Mohit Bansal from Wells Fargo." }, { "speaker": "Mohit Bansal", "text": "Great, thanks for taking my question. And maybe one more question on the contracting side. Could you help us understand if the pricing part of the contracts is something that you have a good handle on at this point? And then a follow-up question is that how do you think about the cadence of BD activity once you hit the mark of less than two times leveraged by end of the year? Thank you." }, { "speaker": "Rick Gonzalez", "text": "Jeff, do you want to cover that?" }, { "speaker": "Jeff Stewart", "text": "Yes, so look, in terms of what Rick had highlighted in terms of our confidence in projecting the 80%. Obviously, there’s a couple components to that. So we have – while all the contracts aren’t fully complete with the ones that we’ve done. We’ve done some significant modeling work to understand if we’re retaining the ability to stay on the formulary. We would model our volume like how much would we retain versus would go to one or more biosimilars. That’s something that we can understand. And we have made base case, both first half and second half pricing assumptions based on those contracts. Now what’s been highlighted in the last couple of questions is there’s still uncertainty on the rest of the contracts that are yet to been secured and also a bid on that second half price dynamic. So those are the elements that are going to give us more confidence as we go to the fourth quarter call to give everyone a secure number for next year." }, { "speaker": "Rick Gonzalez", "text": "This is Rick. I’ll cover your business development question. I think if I step back and I look at where are we today. We have been for the last several years operating with an approach of roughly $2 billion to add incremental pieces to the business. We’ve effectively used that over the last several years to be able to build some additional, particularly, I’d say early stage pipeline assets to the company. We’re continuing on that same approach right now. Now having said that, we obviously have paid down debt very rapidly. We will be in a position where if we chose to do something, we could do something. I’d say if I look at the business today and I look at how it’s performing around the expectations that we had for the business going forward, I would say there’s no need for us to be able to do anything in that area. And I’d go back to the original premise of what we described to the investment community of what we believed would happen when biosimilars entered the U.S. market for Humira. What we said was that we believe the bulk of the erosion would occur in 2023, some additional erosion in 2024, in 2025 and beyond. We would return to significant growth. We’d be able to deliver high single digit growth from that point forward through the end of the decade. That’s what we said. Everything I know about the business today would suggest to me that we are able to do just that. And we’re confident that we’re able to do that with the portfolio we have and the late-stage pipeline and additional indications that we have coming forward. Having said that, I can also tell you that, over the last 10 years, we’ve demonstrated to ourselves and hopefully to you that we can acquire businesses and assets and we can integrate those and we can successfully drive those. And so if we found something that we thought was very important to add to the business, we certainly have the financial wherewithal and this business has tremendous cash flow. We could do that. I can tell you we don’t see that right now. So I wouldn’t assume that. And the other thing I’d point out is, as an example, the most important thing, and I know everyone is focused on what that erosion curve is going to look like, including us, to be honest, but – and I know why. But probably the single most important thing for us going forward to hit what I described to you a moment ago is that underlying non Humira business growing at a rate that it can drive those expectations. And that’s key and I’d say there’s two factors that are most important around that. The first is that Skyrizi and Rinvoq grow fast enough that they can more than offset that they can essentially grow through all of the erosion that occurs on Humira and deliver incremental performance of above and beyond that. And I feel highly confident in that. I mean, when you can look at the trajectories of those assets now in the early phase we’re in right now in IBD and PSA. I would say, I have a very high level of confidence that they will perform at that level or well above that level. Then the second thing is all the other growth assets they have to be growing fast enough that they can get us to be able to grow at that rate that I described. And if you take this quarter as an example, and you look at the business without Humira, the underlying growth is about 6.5%. And remember that 6.5% is absorbing the economic impact we see in the aesthetics business and the market and competitive dynamics that we see in Imbruvica. So that’s – that tells you that underlying growth is pretty strong. And so I think those are the important things that investors have to focus on. And the erosion curve is certainly one of those. And I’m sensitive to the fact that you want to know when you’re going to hit trough earnings, and I recognize that. And that’s why we wanted to provide you some assurance of what that trough earnings is going to look like." }, { "speaker": "Liz Shea", "text": "Thanks, Mohit. Operator, next question, please." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Terence Flynn from Morgan Stanley." }, { "speaker": "Terence Flynn", "text": "Hi, thanks for taking the questions. Maybe two for me. Rick, I appreciate your comments on 2023 and the aesthetics business. No, you don’t want to give guidance. But I guess at a high level, do you think you can grow that franchise next year versus this year? And then on epcoritamab, congratulations on the filing there. Just wondering what you’re expecting regarding the requirement for inpatient administration. J&J recently got approval of their bispecific and myeloma and looks like there’s a requirement there for inpatient administration of the drug during the step up period. So just wondering how we should think about inpatient versus outpatient dosing of epco? Thank you." }, { "speaker": "Rick Gonzalez", "text": "Okay, excellent. Thanks, Terence. I’ll cover the first one. So if I look at the aesthetics business, we’re clearly seeing this economic pressure in the U.S. And I would expect that we will see that to continue into 2023. Certainly, it’s difficult to predict what will happen in the U.S., will it get worse? Will we go into a recession? Will it stay about the same? I’d say, we’re looking at this extremely carefully. But good news right now I would say is that the factors that we’re looking at that seem to be driving this consumer confidence and behavior the most in the U.S., appeared to have stabilized at the levels that they’re at. And so I would say that’s a positive thing. Now it’s fluid because obviously if the economic situation got worse in the U.S., my guess is they would trend down again. And so – but at least it appears right now that they’ve stabilized and maybe even ticked up just a little bit, moved in a positive direction just a little bit. I think it’s very difficult to predict. Here’s what I would assume. I would assume that a significant part of 2023 we will have an impact on it. Now also recognize that we saw this phenomena as we said in the last call start in May. We weren’t sure at the time whether it was the summer season starting a month early or it was the economic impact, because we had been watching the indicators and they trend down several months ahead of that. But we didn’t see an impact until the month of May. So the point is, when we hit May and beyond, we’re going to be lapping the impact. So the negative impact will be softened on the business. So we’ll return to better growth rates no matter what just mathematically, right. So – but I think the best prediction we can have is it’s going to have an impact in a good part of 2023. I think it’s the best way for us to think about it. Now again, the rest of the business has an opportunity to be able to offset that as we saw in this quarter." }, { "speaker": "Rob Michael", "text": "And this is Rob. I would just add that if you think about more long term. If you think about what happened in 2008 and 2009, the business declined high single digits and then we saw, after that very robust growth in the mid-teen to the next decade. So given that penetration rates are still very low today. There’s clearly ample opportunity to grow this market. I think once you get on the other side of the economic impact which we expect to be transient. We still expect as business to deliver long-term growth as Rick highlighted earlier, we’re still on track for that. Long-term high single digit growth getting to greater than $9 billion by 2029. So we’ll have to navigate, obviously, the short-term economic impact. But we still have tremendous confidence in the long-term outlook for aesthetics." }, { "speaker": "Rick Gonzalez", "text": "Epco?" }, { "speaker": "Neil Gallagher", "text": "Hey, this is Neil Gallagher. I will take the epco question. So the first thing I just want to caution, put a word of caution before I answer your question directly around inpatient stay, which is that the patient population that our competitors studied with the BCMA, CD3 is quite different in terms of overall benefit risk. So the indication that was granted was in fifth line plus multiple myeloma, which is very heavily pretreated and frail population. So to extrapolate any interpretation of benefit risk from that population into the relapsed/refractory DLBCL population that we have studied and filed for with epcoritamab would not be valid, so just a word of caution there. That said the study that we have filed had required for a 24-hour patient stay overnight – one overnight stay. However, in subsequent studies we are aiming to remove that requirements so patients would not require – be required to remain overnight. And we do believe because of the emergent and stable overall benefit risk for epcoritamab, a couple of things that we believe that it has the potential to be best-in-class, and we also believe that our strategy to remove overnight stays is a very valid one and reasonable one to pursue. Hope that answered your question." }, { "speaker": "Liz Shea", "text": "Thanks Terence. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Andrew Baum from Citigroup Global." }, { "speaker": "Andrew Baum", "text": "Thank you. A couple of questions please. First on in Imbruvica, I'm assuming that Imbruvica is going to be included in the Top 10 CMS lists for price negotiation under Medicare next year. Assuming that's correct what do you think about the impact on net pricing from Imbruvica. Do you anticipate pricing – net pricing coming under pressure prior to 2026, given the contracting that's expecting to take place among your competitors to secure favorable positions given their catastrophic coverage burden on PBMs post the IRA implementation? So is the impact going to get brought forward for the class including for Imbruvica before you actually get the price cut coming? And then then seconds with epcoritamab, there's been some interesting data on the importance of profound B-cell depletion in lupus using CAR T assets, as CD20 bispecific could get to a similar level. I'm wondering whether you have interest in pivoting epcoritamab and exploring it in refractory lupus as one of your competitors already is particularly given you have a subcu administration, which obviously has some advantages? Thank you." }, { "speaker": "Jeff Stewart", "text": "Yes. Hi Andrew, it's Jeff. I'll take your – I'll take your first question. So when we – obviously we're still studying very carefully the IRA and we're also discussing directly with CMS not just through pharma, but our own company in terms of how they're going to basically select the different drugs that will be negotiated. That's a little bit unclear at this point. It's not unreasonable based on the size of Imbruvica to suspect it will be one of the earlier drugs that could potentially be negotiated, so just to clear that. In terms of what may take place before that potential negotiation in 2026, I would expect to see some modest changes in rebate. We see very small levels at this point now but we do have a third competitor coming. So that would be something that we would continue to plan – to plan for as we move into that potential event." }, { "speaker": "Tom Hudson", "text": "Yes. This is Tom. Maybe I'll answer the lupus question. First, I'll say it's actually was very exciting to see that paper showing that B-cell depletion can actually put patients with very severe lupus in remission. It's a very small study. Some five patients, but everyone's looking at this as a, even with is a surprise because we used to think we had to affect many mechanisms themselves in lupus. So that was one of the reasons it's so difficult. I used to be part of a lupus clinic in Montreal, so I know the challenges with patients. So what we're looking at right now is we're asking yes, the answer to your question is can we use our existing assets and collaborations to see if we can do B-cell depletion, for as a treatment for lupus? The answer is yes. And the type of questions we're asking ourselves is, do we have to have as deeper depletion as we have with in heme malignancies? Nobody knows the answer. That might be important because if you have to have a very deep depletion it might be restricted more to more of the severe patients and again that would be an advantage. But if we want to go to all lupus patients because not all lupus patients are, are flaring all the time. The majority have a normal life. Go to the clinic once a year and just see their physicians when they have flares. So going to a very deep regimen for B-cell depletion might be deemed to too severe. So the questions is yes we're looking at it and trying to figure out what's the right regimen and how to approach that in lupus is very exciting questions, which we're obviously looking into." }, { "speaker": "Liz Shea", "text": "Thanks Andrew. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Steve Scala from Cowen." }, { "speaker": "Steve Scala", "text": "Thank you. What is your level of confidence in a positive outcome for Vraylar in MDD at the end of the year? I imagine the review is well along, so you probably have good visibility. So for instance our labeling discussions underway, is the sales force being trained, et cetera. This is a very large opportunity that does not seem to be a point of external focus as far as I could tell. So I'm wondering what you could tell us about how things are going? Thank you," }, { "speaker": "Roopal Thakkar", "text": "Hi, it's Roopal. Thanks for the question. Maybe I'll go and then Jeff can talk about the opportunity. You're correct, the review is proceeding per our expectations. We have two positive studies in the space. I mean, recall, we also have the same endpoint – the depression endpoint that's read out in three other bipolar depression studies that are already within label. So there's quite a bit of evidence that's already been generated, that's in front of the agency now. So I would say it's proceeding well and we still anticipate a decision by year end. And I'll pass it to Jeff." }, { "speaker": "Jeff Stewart", "text": "Yes. Steve, and just in terms of your salesforce question, I mean, we are very encouraged and excited about this potential approval. I mean, obviously we continue to gain share week-by-week sequentially for our base indication – the bipolar indications. And we know that based on the profile that we have with Vraylar. So very, very strong efficacy – proven efficacy of a very good tolerability profile for an antipsychotic, no material weight gain, low metabolic effects, and I think importantly maybe not as appreciated it's, there's no titration. You have a very simple starting dose of 1.5 milligrams. So as we do our research, we see that that profile is very strong as this potential add-on therapy and depression. In the last decade there's been only one drug that's been approved for this indication and that's Rexulti, and we think that's a branded drug, obviously, and we think we can compete very, very well. So we have a big existing sales force and infrastructure. We are gearing up in terms of training. We have the established relationships across the big primary care doctors as well as the psychiatrist. So we are – we agree with your approach. That's a meaningful commercial opportunity that could evolve very quickly here once we get the approval." }, { "speaker": "Liz Shea", "text": "Thanks, Steve. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Gary Nachman from BMO Capital Markets." }, { "speaker": "Gary Nachman", "text": "Thanks. Good morning. First could you just provide some more color on how much of a benefit you're seeing for Skyrizi and Rinvoq and IBD? As you've been spending more time with the GIs, and have your outlooks changed on a potential there as major contributors to the long-term growth for those franchises? So were both of those being used in the treatment paradigms for the respective indications in Crohn's and ulcerative colitis? So that's one. And then secondly, just OpEx came in much lower than we expected, so you seem to be getting better operating leverage than what you originally guided. Are there areas where you've scaled back in spending, whether in Aesthetics or heme/onc if there's pressures there? And how will you be thinking about that into the Humira LOE next year? So how much additional flexibility might you have on the spending side? Thanks." }, { "speaker": "Rick Gonzalez", "text": "Jeff?" }, { "speaker": "Jeff Stewart", "text": "Yes. I'll take the IBD question. I think we've mentioned before that the IBD has been a very important part of our long range plan and when we gave the 2025 guidance, it looks relatively small because they're just ramping down. I would say that as AbbVie we are very, very encouraged. As I mentioned in my prepared remarks on the launch, and maybe I'll start with what we're hearing from the gastroenterologists. I think first is they, they look at both assets and the global guidelines, the impressions and the clinical approach that we hear from the top leaders and also the community gastros is this idea over – I have to start to think about endoscopic healing, higher basically rates of efficacy and more significant clarity on what it's doing in the bowel versus just symptoms. And that seems straightforward, but we see the market moving very, very fast there in terms of understanding and that's what we can deliver, whether it's the Skyrizi data on the endoscopic healing rates with a very, very convenient and strong safety profile, or similar on the Rinvoq side in second line in the U.S. second line for patients that aren't doing well in UC. So we see rapid adoption already as I mentioned, that in the Rinvoq in the United States will be a second line plus based on the label. And we see very, very fast adoption. I'll give you some color on it. Xeljanz had been approved and is approved in UC in the United States, but basically it had very low adoption. We're seeing now in the community that 70% of the prescriptions are coming from physicians that have never written a JAK before. So it shows you that the clinical profile of Rinvoq in terms of its speed and the depth of the response is being viewed very, very well. So not only is that encouraging for Rinvoq, you see as I mentioned we're going to have the approval for Crohn's for Rinvoq in later lines next year as well. Skyrizi continues to surprise us to the upside, as you've heard from the call today. This is viewed increasingly as the preferred frontline drug coming straight out of the gate for Crohn's in the U.S. And the qualitative data that we're starting to see, and we are seeing some quantitative data that looks very strong, too, is that this is viewed as a already as a best-in-class product for Crohn’s, which is a very, very substantial market. So we are very encouraged. We continue to say that the IBD is probably underappreciated, and we’ll continue to give updates as these launches progress." }, { "speaker": "Rob Michael", "text": "So Gary, this is Rob. I’ll take your question on OpEx. If you look at the benefit we’re seeing, about half of it is actually coming from the stronger U.S. dollar, so it’s more of an FX impact. The other half is spend productivity. We always look for opportunities to drive more productivity in our spend. It’s not so much about scaling back in parts of the business, we always look for ways to spend better, buy better. And ultimately, that helps us. In many cases also, over the long-term, redeploy that investment to drive growth. If you think about 2023, I’ve said – given that 46% to 47% operating margin directional input. I’ve also said we’re not going to cut back investment. We’ll obviously be prudent given that you will see a decline in gross margins next year, but we’re not going to be cutting back investment because we expect to return to growth quickly. So you’ll see us not necessarily cut back, but certainly put more behind this business to drive that long-term growth that we expect to be industry-leading over the long term." }, { "speaker": "Liz Shea", "text": "Thanks, Gary. Operator, next question please?" }, { "speaker": "Operator", "text": "And our next question comes from Colin Bristow from UBS." }, { "speaker": "Colin Bristow", "text": "Hey, good morning. Thanks for taking the questions. So first on CF, you recently posted an updated clinical trials for your new C2 corrector-based regimen. I just wondered if you could walk us through what gives you confidence that this has a higher probability of success versus your last deterioration? And then second one for Rick, I just wanted to touch base on your succession plan. It’s been an increasingly sort of important or a frequent topic with investors. You’ve been the architect of AbbVie’s success inception, and so just wanted to confirm specifically how long you expect to stay in the seat? And then how should we think about the time lines around the process of identifying your successor? Thank you." }, { "speaker": "Tom Hudson", "text": "Well, this is Tom, I’ll answer the CF question. Again, this is very challenging to actually make that abnormal CF protein get to the membrane and act as a chloride channel, and it takes three different drugs to make it effectively to get it to the cell membrane and open up in the right way. And so we all felt that we had – intakes we call them Corrector 1, Corrector 2 and Potentiator, these three different compounds. We always see good results with double our C1 corrector. We think it’s best-in-class. Our potentiator is very good. What we had difficulty is to get a good C2 corrector, and what I presented earlier this year was that it wasn’t good enough. But what we’ve done since then, we will continue to look at better ones and we came out with a differentiated product, 576 [ph], which is structurally different and the data supports higher safety margin, higher exposures, good PK. Hopefully, a single pill. And then we’d be able to get to this – to be able to have this triplet which is really important to be competitive. So again, our doublet, the data we had was very strong. But we need that third piece, and that third piece seems to be coming along really well. That’s what you really saw on the website at ct.gov is moving to evaluate this triple combo with our new C2 corrector." }, { "speaker": "Rick Gonzalez", "text": "And this is Rick on the succession question. I’d say that, we obviously have a very experienced Board, and we’ve had an active approach on succession going back to about 2016, 2017. And that process has proceeded extremely well in developing internal candidates to ultimately assume the role when I do retire. I can tell you that there are no plans at all for me to retire in 2023. The most important thing to me and to the Board is to make sure that the business is performing exactly as we expect going forward, and we’re not going to make any transition until we’ve gone through the biosimilar event, and we’re confident in the performance of the overall business. That would be the appropriate time once we’re confident to make a transition at that point. We’ve also had discussions with the Board of what that transition would look like. And assuming it’s an internal candidate, the transition will essentially work where we will name a new CEO. And at that point, I will assume the role of Executive Chair for a period of time thereafter. So I think we have a well-thought-out succession approach. I feel very comfortable with the approach, I feel comfortable with the work we’re doing to develop the internal candidates. And I think the transition when it occurs, I think, will go smoothly and be successful. So hopefully, that answers your question." }, { "speaker": "Liz Shea", "text": "Thanks, Colin. Operator, next question please?" }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Chris Shibutani from Goldman Sachs." }, { "speaker": "Liz Shea", "text": "Chris, are you there? We can’t hear you." }, { "speaker": "Operator", "text": "Please check your mute feature, Chris?" }, { "speaker": "Chris Shibutani", "text": "Yes, apologies. Two questions, if I may. On Rinvoq, you had previously commented that you were seeing some use in the first-line setting. Can you update us at all with any color there? Secondly, for Skyrizi, obviously, a very attractive market and an opportunity in Crohn’s disease. Can you show us how you’re thinking about the potential impact given the LOE in 2023 of a major branded players, STELARA? Thank you." }, { "speaker": "Jeff Stewart", "text": "Chris, it’s Jeff. Just to clarify in terms of your Rinvoq question, was there a specific question related to a certain indication on the front line? Or I’m not sure I fully appreciate that one." }, { "speaker": "Chris Shibutani", "text": "Yes, no. In AD." }, { "speaker": "Jeff Stewart", "text": "In AD, okay, right. So yes, we do see frontline use across the globe and even in the U.S. And what we’re seeing is now, as I mentioned in my remarks, we’re seeing in-line in-play share, which is in the high mid-teens right now in the U.S., and it’s higher in the international markets. So there seems to be, as we look to the research and we look to our market – end market performance, there’s really two segments of dermatologists. There’s very cautious dermatologists that are slow to adopt JAKs, and typically, they’ll start in the later line, a second line plus. There is an emerging cohort of a significant group of dermatologists as well that basically are looking at the underlying high efficacy parameters, so basically like the EZ90 skin clearance and almost no discernible itch for the product. They typically are starting to use more and more in the frontline. So the overall balance is leaning towards the second line, but we do see increasing frontline utilization based on the profile of the drug in atopic dermatitis. In terms of the Skyrizi for Crohn’s, we think we’re very, very well positioned for a couple of reasons. One is the overall profile of the medicine is really exceptional, as I’ve highlighted, and we’re going to see very, very rapid adoption both in the U.S. and the external market. In addition, we have anticipated the STELARA LOE. We see that we have an ongoing head-to-head trial versus STELARA to make sure that we can continue to differentiate with direct data that will come over the next year or so, so we’re anticipating that. And we think we’re going to have a good setup to maintain the early momentum that we’re seeing with Skyrizi." }, { "speaker": "Liz Shea", "text": "Thanks, Chris. Operator, next question please?" }, { "speaker": "Operator", "text": "Thank you. Our next question is from Geoff Meacham from Bank of America." }, { "speaker": "Geoff Meacham", "text": "Hey guys. Thanks so much for taking the question. I just have one quick one. Rick, lots of questions on Humira for next year, but I wanted to ask at a high level environment beyond that. I know there are formal treatment guidelines in I&I, but what’s the risk that payers mandate cycling through one or more biosimilars? And what’s the risk – the pricing environment doesn’t really recover in 2024 and beyond? Just obviously thinking about the Skyrizi and Rinvoq franchises over the long term? Thank you." }, { "speaker": "Rick Gonzalez", "text": "So I’m actually going to have Jeff walk you through that. He’s probably the closest to that environment." }, { "speaker": "Jeff Stewart", "text": "Yes, so thank you for the question. I mean, one of the things that we see certainly in the near term is that the formularies in I&I are actually expanding. So many years ago, you might have six or seven preferred agents. The payers are now requesting sometimes up to 11 or 12 preferred agents, so you’re seeing an expansive nature in the short term. Now as you go forward, maybe middle of the decade or later where you have more and more biosimilars, could the U.S. environment move towards sort of a step through? I mean, it’s possible. But we have, again, as I mentioned in my last statement, we have anticipated that with the right types of data, the trials. We have five head-to-head studies in Skyrizi in psoriasis; we have more coming in Crohn’s. And so we think that basically, we have a data-driven approach that’s going to continue to allow us to significantly differentiate our products. The other dynamic that we watch very carefully, and we talked about this during the Immunology Investor Day, is the lines of therapy as there’s more and more high efficacy products that get introduced, continue to expand. So in the middle of the decade or longer, the second plus and the third line markets are going to be very, very significant at that point. So when we put all of that into the calculus we feel again, we have a pretty set up for the middle of the decade and longer." }, { "speaker": "Rick Gonzalez", "text": "And this is Rick. I agree with everything Jeff said. The one thing I would add that as you think about even under a scenario where if we did get to some kind of a step at it, you have to go back and remember that most of these mechanisms, most patients fail, and they fail at a relatively high level and over a relatively short period of time. So even if you had to rotate through you’re going to get to second line relatively quickly, and recycling somebody back through another TNF typically doesn’t work very well for those patients. And I’d say the domain now with the kind of agents that we have in the market now and the level of remission that they can create, the demand among physicians is much higher to get patients into remission as rapidly as they possibly can. And so I think all those dynamics tell us that this model should continue to work over the long-haul." }, { "speaker": "Liz Shea", "text": "Thanks, Geoff. I believe we have taken all the questions in the queue, so that concludes today’s conference call. If you’d like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us." }, { "speaker": "Operator", "text": "Thank you. This does conclude today’s conference. You may disconnect at this time." } ]	AbbVie Inc.	141,885,706
ABBV	2	2,022	2022-07-29 09:00:00	Operator: Good morning, and thank you for standing by. Welcome to the AbbVie Second Quarter 2022 Earnings Conference Call. All participants will be able to listen only until the question-and-answer portion of this call. [Operator Instructions] I would now like to introduce Ms. Liz Shea, Vice President, Head of Investor Relations. Liz Shea: Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Rob Michael, Vice Chairman and President; Jeff Stewart, Executive Vice President, Chief Commercial Officer; and Tom Hudson, Senior Vice President, R&D, and Chief Scientific Officer. Joining us for the Q&A portion of the call are Laura Schumacher, Vice Chairman, External Affairs, Chief Legal Officer and Corporate Secretary; Carrie Strom, Senior Vice President and President of Global Allergan Aesthetics; Scott Reents, Senior Vice President and Chief Financial Officer; Neil Gallagher, Vice President and Chief Medical Officer; and Roopal Thakkar, Vice President, Global Regulatory Affairs. Before we get started, I’ll note that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today’s conference call, non-GAAP financial measures will be used to help investors understand AbbVie’s business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we’ll take your questions. So with that, I’ll now turn the call over to Rick. Rick Gonzalez: Thank you, Liz. Good morning, everyone, and thank you for joining us today. I’ll briefly comment on our overall performance. Then Jeff, Tom, and Rob will review our second quarter business highlights, pipeline progress and financial results in more detail. AbbVie delivered another strong quarter with adjusted earnings per share of $3.37, exceeding our expectations. Total net revenues of approximately $14.6 billion was up 6.1% on an operational basis, in line with our expectations. This performance reflects robust double-digit operational sales growth from immunology, where Skyrizi is exceeding our expectations with impressive market share gains in both psoriasis and PSA. Skyrizi’s recent U.S. approval in Crohn’s disease will add yet another source of long-term growth. As a result of the strong performance we’ve seen in the first half of the year, we are raising our full year guidance for Skyrizi. Rinvoq is also demonstrating strong growth. RA continues to perform in line with our expectations, following the label update, and we’re making very good progress with all of the newly launched indications, including PSA, AS, atopic dermatitis and ulcerative colitis, which collectively represent a significant long-term growth opportunity. Neuroscience is another area with outstanding performance Vraylar, Botox Therapeutic and Ubrelvy and Qulipta each demonstrated double-digit sequential sales growth. Pending regulatory approvals for Vraylar in major depressive disorder, Qulipta in chronic migraine and 951 for the treatment of advanced Parkinson’s disease represent additional near-term growth opportunities for our neuroscience portfolio. Turning now to aesthetics, Botox Cosmetics once again performed very well with sales up more than 20% on an operational basis. Demand for toxins remains strong with high teens growth in the U.S., despite inflation dynamics. As expected, Juvederm performance was negatively impacted by COVID-related lockdowns in China, as well as the suspension of our operations in Russia. Additionally, in the U.S., we had a difficult prior year comparison with a promotional event that we ran last year. We also saw a modest impact in the quarter due to economic pressures. We continue to expect positive full year growth for Juvederm driven by the lessening COVID impact in China and two new filler launches in the U.S. which will benefit growth in the second half of the year. In hematological oncology, Imbruvica continues to be unfavorably impacted by a delayed market recovery for new patients starting therapy in CLL and increasing competition. These ongoing dynamics will have an impact on Imbruvica’s projected 2022 revenues. As a result, we will be adjusting our full-year guidance to reflect these impacts. Venclexta to continues to demonstrate robust share performance in both CLL and AML, with sales up double digits on an operational basis. Venclexta also has registrational studies ongoing in additional attractive indication, such as multiple myeloma in the t(11;14) patient population with Phase 3 data forthcoming, as well as high risk MDS. Additionally, we have an exciting and diverse pipeline of promising new therapies to address critical unmet needs in both, blood cancers and solid tumors, which are expected to support the next wave of AbbVie’s growth in oncology. In summary, the diversity of our portfolio, once again allowed us to deliver another strong performance, despite the challenges we see in the CLL market and increasing Imbruvica competition. Skyrizi and Rinvoq are performing exceptionally well and are on pace to deliver approximately $7.5 billion in combined sales this year. Neuroscience demonstrated balanced double-digit growth driven by migraine and Vraylar and continued robust Botox cosmetic growth offset some of the U.S. inflationary impact to our filler and body contouring portfolios. As a result, we are confirming our full year 2022 adjusted earnings per share guidance of $13.78 to $13.98, representing growth of more than 17% at the midpoint. With that, I’ll turn the call over to Jeff for additional comments on commercial highlights. Jeff? Jeff Stewart: Thank you, Rick. I’m very pleased with the momentum across our therapeutic portfolio, including the continued progress we’re making with new product and recent indication launches. I’ll start with our immunology portfolio, which delivered total revenues of $7.2 billion, reflecting growth of 19.2% on an operational basis. Global Humira sales were approximately $5.4 billion, up 6.8% on an operational basis with 9.6% growth in the U.S., partially offset by international performance where revenues were down 7.3% operationally due to biosimilar competition. Skyrizi is performing extremely well, well ahead of our expectations. Global revenues were more than $1.2 billion, up 33% on a sequential basis. We continue to advance our leadership position in psoriasis where Skyrizi’s total prescription share of the U.S. biological market has increased to approximately 26%, driven by an in-play share of new and switching patients that is now approaching 50%. We have also achieved in-play market share leadership in 23 key international markets, including Japan, Germany, France, Canada, and Australia. Psoriatic arthritis is also adding significantly to Skyrizi’s momentum, where we are now approved in 54 countries. In the U.S. dermatology segment, where approximately 30% of patients exhibit both skin and joint involvement, Skyrizi is already achieving an in-play patient share of nearly 20%. We have also launched Skyrizi for PSA in rheumatology, where we’re seeing strong utilization, which is driving accelerated share growth. Our recent launch of Skyrizi for Crohn’s disease in the U.S. represents the first new biologic approval in six years for an area where there continues to be considerable unmet need. We believe Skyrizi represents a highly effective and differentiated treatment option for Crohn’s patients, including the potential to provide meaningful levels of endoscopic improvement with novel and infrequent dosing. Managed care access is expected to ramp strongly for this indication in the coming months. Turning now to Rinvoq, where we’re seeing good momentum across each of the approved indications. Global sales of $592 million were up more than 27% on a sequential basis. Prescriptions in RA remained strong with a total market share of 5.8% in the U.S. and approximately 6% across key international markets. Rinvoq is now achieving an in-play RA share of approximately 13% in the U.S. In PSA, Rinvoq continues to see nice uptake, especially in the room segment with commercial access now equal to RA. We also recently received FDA approval for ankylosing spondylitis and European approval for non-radiographic Axial SpA, further expanding Rinvoq’s potential across rheumatology. In atopic dermatitis, new patient starts are tracking in line with our expectations with Rinvoq’s in-play patient share in the mid-teens. Strong commercial access in AD, which is also now equal to RA and PSA, is expected to considerably increase paid prescription volume in this highly underpenetrated market over the remainder of the year. Lastly, our recent launch of Rinvoq for ulcerative colitis in the U.S. is progressing well. And we recently just received European approval for the same indication. Commercial access in the U.S. is ramping strongly, and we are seeing encouraging new patient starts. Physician feedback regarding Rinvoq’s approved profile in UC has been favorable, especially given the very high rates of remission and endoscopic improvement demonstrated across our UC development program. The addressable patient population for Rinvoq in UC is substantial, with nearly 50% of patients currently on or having used TNF therapy. Turning now to hematologic oncology, where total revenues were $1.65 billion, down 7.9% on an operational basis. Imbruvica global revenues were approximately $1.1 billion, down 17.1% and below our expectations. The CLO market continues to remain challenging in the U.S. with new patient starts down double digits relative to pre-pandemic levels. Now, as you may recall, our initial 2022 Imbruvica sales guidance contemplated a partial market recovery, which, unfortunately, we have not yet observed. In fact, the latest data reflects new patient starts in the U.S. were actually down high single digits versus last year. So, based on recent trends, we no longer believe it’s prudent to anticipate a meaningful market recovery in CLL over the second half of this year. Therefore, we will be removing this assumption from our 2022 guidance. In addition, increasing competition from newer therapies, including other BTK inhibitors as well as our own Venclexta also continue to lower Imbruvica’s share of new patient starts, especially in frontline CLL. Despite this increasing competitive pressure, Imbruvica continues to be the total market share leader across all lines of therapy in CLL. Venclexta global sales were $505 million, up 21.2% on an operational basis. In CLL, we continue to see share gains in the U.S. and across all major international markets. We’re also seeing continued strong performance in AML. Venclexta is now approved in 80 countries and in many markets is already considered the new standard of care for frontline AML patients who are ineligible for intensive chemotherapy. As a result, we are seeing ramping market share throughout the countries where we have launched. In neuroscience, revenues were more than $1.6 billion, up 15.2% on an operational basis. Vraylar once again delivered strong growth. Sales of $492 million were up 13.9% on an operational basis, reflecting continued share gains in the U.S. atypical antipsychotic market. Our launch preparations remain well underway in anticipation of our MDD approval in the fourth quarter. This is a potentially large indication that would represent incremental upside to our current projections for Vraylar. Within migraine, Ubrelvy remains the market-leading oral CGRP treatment for acute migraine with revenue of $185 million, up 34% on a sequential basis. Qulipta continues to increase its leading new-to-brand share in the U.S. preventative CGRP class when we consider both, paid and bridge volume. We continue to make good progress with expanded commercial access, which will support strong Qulipta sales growth over the remainder of this year. We are also pursuing the commercial approval for Qulipta as a preventative treatment in patients with chronic migraine in the U.S. as well as a new therapy for Europe, potentially further strengthening our competitive product profile and long-term growth opportunity. Botox Therapeutic is also performing well in chronic migraine as well as its other indications with total sales of $678 million, up 14.5% on an operational basis. So overall, I’m pleased with the commercial execution across the therapeutic business. Our broad portfolio of differentiated therapies and new launches is demonstrating strong revenue growth. And with that, I’ll turn the call over to Tom for additional comments on our R&D programs. Tom? Tom Hudson: Thank you, Jeff. I’ll start with immunology where we had several notable pipeline updates in our inflammatory bowel disease programs for both, Skyrizi and Rinvoq. We recently received FDA approval for Skyrizi in Crohn’s disease, and we’re very pleased with the label which reflects a strong benefit risk profile that Skyrizi demonstrated as an induction and maintenance treatment for this condition. Based on its profile, we believe Skyrizi will be a highly effective and differentiated treatment option for patients with Crohn’s disease. Our regulatory application for Skyrizi in Crohn’s disease remains under review in Europe with an approval decision expected near the end of this year. Also in the area of inflammatory bowel disease, we recently received European approval for Rinvoq in ulcerative colitis. And we’re excited to bring this new, highly efficacious oral option to patients suffering from this often debilitating disease. In the quarter, we also completed a registrational program for Rinvoq in Crohn’s disease, reporting positive top line results from our Phase 3 maintenance study. We recently submitted our regulatory applications for Rinvoq in this indication and expect approval decisions next year. Once approved for Crohn’s disease, Rinvoq will have completed development programs for all the major rheum and gastro indications covered by Humira plus atopic dermatitis. The strength of the data generated in our clinical programs should position Rinvoq as a highly differentiated treatment across this broad indication set and enable Rinvoq to deliver significant value to AbbVie over the long term. And just this morning, we announced that we received European approval for Rinvoq in non-radiographic Axial SpA, which rounds out Rinvoq’s label in rheumatology. Moving now to our oncology portfolio, where we continue to make excellent progress across all stages of our pipeline. At the recent EHA meeting, we presented results from the large B-cell lymphoma expansion cohort in the Phase 2 study evaluating epcoritamab in patients who have received at least two prior lines of therapy. In this study, epcoritamab was well tolerated and drove very deep and durable responses in challenging to treat highly refractory patients with large B-cell lymphoma. We recently discussed these results with regulatory agencies and based on the strength of the data, we intend to submit regulatory applications later this year for accelerated approval of epcoritamab in patients with relapsed/refractory large B-cell lymphoma. We expect approval decisions in 2023. We continue to make good progress with the indication expansion programs for Venclexta and remain on track to see results from the Phase 3 CANOVA trial in relapsed/refractory multiple myeloma patients with a t(11;14) mutation in the second half of this year. As a reminder, we’ve seen very promising results in this population in prior clinical studies with Venclexta showing high overall response rates and meaningful trends towards prolonged progression-free survival. The level of efficacy we’ve seen suggests that t(11;14) patients may be particularly responsive to Venclexta and this agent has the potential to become an important biomarker-driven treatment option in the multiple myeloma market. In neuroscience, following successful completion of our Phase 3 chronic migraine prevention study, we submitted our regulatory application to the FDA for Qulipta in chronic migraine. Chronic migraine is defined as 15 or more headache days per month with at least 8 of those days associated with migraines. This is a debilitating disease that affects nearly 10% of people suffering from migraine, significantly impacting their quality of life. If approved, this would be another differentiating feature for Qulipta as it would be the only oral CGRP approved for prevention in patients with chronic migraine. We also submitted data from our Phase 3 prevention studies in both, chronic and episodic migraine to support regulatory applications in markets outside the U.S. We expect approval decisions in the U.S. and in Europe in 2023. In the quarter, we submitted our regulatory application in the U.S. for ABBV-951, our novel subcutaneous levodopa/carbidopa delivery system for treatment of advanced Parkinson’s disease. This innovative delivery system has the potential to become a transformative treatment option for patients with advanced Parkinson’s disease by providing DUOPA-like efficacy with less invasive nonsurgical administration. We also expect to submit our regulatory application in Europe later this year with approval decisions anticipated in both, the U.S. and Europe in 2023. Now, I’d like to provide a few updates on some earlier-stage programs where we have new data and are advancing programs in development. In immunology, we recently obtained encouraging data in a Phase 2 study evaluating Rinvoq in systemic lupus, an autoimmune multisystem disease. In our study, Rinvoq demonstrated greater response rates as well as a reduction in flares compared with placebo. We’ll see longer-term data in the coming months, which will allow us to make a decision on moving Rinvoq into Phase 3 for lupus. In oncology, where we have a pipeline of promising early-stage programs aimed at solid tumors, we are beginning to see very exciting data from several programs. Our anti-GARP antibody, ABBV-151 is designed to block the immunosuppressive activity of regulatory T cells, which leads to increased T cell effector functions in the tumor microenvironment. This reactivates the immune system against tumors, enhancing the antitumor immune response triggered by a PD-1 inhibitor. In our Phase 1 program, we’re combining 151 with a PD-1 checkpoint inhibitor in cancer patients who are refractory to or relapsed after PD-1 as well as evaluating this combination in PD-1 nonresponsive tumors. Based on the preliminary efficacy we’ve seen in the dose expansion cohorts for multiple solid tumors, including a deepening of responses over time and prolonged durability, we recently declared proof-of-concept for 151. We plan to advance to Phase 2 in several solid tumors, starting with urothelial cancer. We’re also expecting additional data readouts later this year in other solid tumor indications, including colorectal cancer, which may enable further expansion studies in this hard-to-treat cancer type. We will also begin new studies to explore a broader set of solid tumors where GARP is implicated as a critical immunosuppressive pathway, based on tumor tissue analyses. We’re also making excellent progress with our next-generation c-Met ABBV-400, where the emerging clinical data is very promising in several solid tumors. This asset is similar to Teliso-V as c-MET ADC that uses a microtubulin inhibitor payload. Teliso-V received breakthrough therapy designation for the treatment of patients with a subtype of lung cancer with high levels of c-Met overexpression. The toxin warhead for 400 uses a more potent topoisomerase inhibitor payload, which is similar to irinotecan, a chemotherapy that is used in the treatment of colorectal cancer. By targeting c-MET positive tumors with ADCs bearing different warheads we believe we can broaden the range of solid tumors where c-MET therapies can be used. In our Phase 1 program, we are seeing good responses in patients with advanced colorectal cancer and remain encouraged by these early efficacy signals. So in summary, we’ve seen tremendous progress across all stages of our pipeline in the first half of the year, and we remain on track for further advancements in the remainder of 2022. So, with that, I’ll turn the call over to Rob for additional comments on our second quarter performance and financial outlook. Rob? Rob Michael: Thank you, Tom. AbbVie’s second quarter results demonstrate the strength of our diversified portfolio. Momentum from new products and recently launched indications allows us to maintain our earnings outlook despite market dynamics for Imbruvica, higher inflation and the stronger U.S. dollar. We reported adjusted earnings per share of $3.37, reflecting growth of 11.2% compared to prior year and $0.11 above our guidance midpoint. These results include a $0.14 unfavorable impact from acquired IPR&D expense. Total net revenues were $14.6 billion, up 6.1% on an operational basis, excluding a 1.6% unfavorable impact from foreign exchange. The adjusted operating margin ratio was 51% of sales, an improvement of 220 basis points versus the prior year. This includes adjusted gross margin of 84.7% of sales, adjusted R&D investment of 11% of sales, acquired IPR&D expense of 1.8% of sales and adjusted SG&A expense of 20.8% of sales. Net interest expense was $532 million, and the adjusted tax rate was 13.4%. Turning to our financial outlook. We are confirming our full year adjusted earnings per share guidance between $13.78 and $13.98. This earnings per share guidance does not include an estimate for acquired IPR&D expense that may be incurred beyond the second quarter. We now expect net revenues of approximately $58.9 billion, reflecting growth of 6.5% on an operational basis. At current rates, we expect foreign exchange to have a 1.7% unfavorable impact on full year sales growth. Included in this guidance are the following updated assumptions. We now expect Skyrizi global sales of approximately $4.8 billion, an increase of $400 million due to strong market share performance. For Imbruvica, we now expect global revenue of approximately $4.7 billion, given the lack of recovery in the CLL market and increasing competition. Moving to the P&L, we now expect adjusted gross margin of 84.7% of sales and continue to forecast an adjusted operating margin ratio of 51.8% of sales. Turning to the third quarter. We anticipate net revenues of approximately $14.8 billion. At current rates, we expect foreign exchange to have a 2.1% unfavorable impact on sales growth. We expect adjusted earnings per share between $3.55 and $3.59. This guidance does not include acquired IPR&D expense that may be incurred in the quarter. In closing, we delivered strong performance again this quarter, including meaningful contributions from new products and recently launched indications. Given the momentum of our business as well as our pipeline advancements, we are well positioned for the long term. With that, I’ll turn the call back over to Liz. Liz Shea: Thanks, Rob. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, we’ll take the first question. Operator: Thank you. Our first question is Andrew Baum, Citi. Your line is open. Andrew Baum: First question is on the guidance range you’ve given for anticipated trajectory of Humira in the U.S., presumably you’re finishing contracting, both with Medicare and commercial. Could you provide any guidance further on ‘23 and even ‘24 [indiscernible] contracts? And then second, a pipeline question in relation to your anti-GARP monoclonal, which you’ve taken a long time to sort of optimize or move forward. I’m just curious whether you’re using any molecular markers in order to minimize risk given the failures of other TGF-beta targeted agents, particularly in colorectal using CMS 4 or a subgroup of the total population, or are you putting it in all comers, the suggestion that what’s an all comers or is this again informed biomarkers? Thank you. Rick Gonzalez: Okay. Andrew, this is Rick. Thank you for the questions. I’ll cover the first one, and then Tom can cover the second one. So, we are in the process now, as we’ve indicated before, of negotiating with the managed care organizations and the PBMs to establish our contract position for Humira in 2023. This is a normal time that you would go through that. It is progressing as we would expect. I would say we’re midway through that process right now. I would expect it to conclude near the end of the third quarter, early the fourth quarter. At that point, that’s an important part of refining our model for 2023 in particular. And what that will tell us is that the positions that we have formulary status for 2023 in for Humira, and that will help us define clearly the volume aspect of it. And so, that’s going well, and that’s going to be an important part of us being able to refine that model. And so, as we get further along in that process, that will give us the ability to be able to potentially refine the model that we have. Now, the one thing that’s important to remember in all of this is price is the other key aspect here. And there, we won’t know real pricing until the actual event starts to occur. So, we will make assumptions around what that price looks like. And I think those will be informed assumptions, but they are just that they’re assumptions. And so, that’s the one piece that will still be somewhat of an unknown until we see the landscape start to play out in 2023, and particularly in midway through 2023 when more biosimilars enter the market. So, as we get more information and we can provide more clarity, we’ll certainly try to do that, but I think that’s where we are right now. Tom? Tom Hudson: Thank you. Andrew, I’ll try to break down the question in different parts because you’re right, there are many TGF-beta assets. This one is unique, GARP. Most of the TGF-beta assets work either antibodies against receptors to be active for TGF-beta or TGF-beta itself that’s in circulation on cells. But GARP blocks the inactive form of TGF-beta before it’s released from TGF-beta. And we believe that actually is a differentiated mechanism, also allows that specificity to what’s happening in TGF-beta in the tumor as opposed to other systems in the body. At the beginning of this, we thought -- we had already had people that published that they are very good TGF-beta signatures that exist. And I can tell you that GARP signature follows tracks with TGF-beta signatures. And that’s often seen in all solid tumors as susceptive tumors that express these pathways. It’s a very common immunosuppressive mechanism. That’s why people and us are interested in it. We learned -- initially, from data, we kind of suspected that people who actually had a nice hot tumors but were not responding to PD-1, often had, at least from published work -- actually had a higher TGF-beta signature. So, we thought that was a reason to mechanism why these patients with hot tumors were not responding. And a lot of our initial clinical strategy there was actually to go after hot tumors where PD-1s had relapsed or refractory. And we thought we could augment the PD-1 checkpoint response by doing this combination. We did not see monotherapy activity, but in combination, we did. And that’s why our first data sets and expansions like I’ve just discussed in urothelial cancer, this project started earlier, we’re seeing data that’s suggesting that this is correct that you need to reflect both the pathway of TGF-beta and PD-1, to get a response. And those, again, in multiple tumor types we’re seeing these responses and we’re moving forward. At the same time, to bring it to colon, we could also see the same signatures of TGF-beta and GARP in cold tumors, but we weren’t sure that since they’re not IO responsive, whether we’d get a response, we would get a clinical response. So, we did start some investigations. And yes, we did see some responses in cold tumors. They happen over time, sometimes they appear, the tumors are stable for 3 months, maybe 6 months, and then you see these responses appear. They’re very durable, 1 year, 2 year, very unusual. These are patients with advanced disease that have very poor prognosis in Phase 1 studies. So, we saw some, I would say -- we sometimes say in academic column exceptional responders. And so, we decided to expand. So, those data sets are newer, are happening right now. I probably will have the data at the end of this year. But yes, we’ve seen responses to this combination. And to answer your question, so the signatures we’re looking at are not the CMS or kind of histology-based signatures on the tumor. It’s more signatures of the inflammatory response that we can measure in the tumor, and it has to do with both, inflammatory T cells, which are there for the killing, but also the inhibitory TGF-beta signatures. And of course, we’re going to continue to investigate this. I don’t have all the answers for you today, but it certainly has been exciting to see how this program has evolved. Liz Shea: Thanks, Andrew. Operator: Thank you. Our next question is Terence Flynn with Morgan Stanley. Terence Flynn: Maybe two for me. Just wanted to make sure that you are maintaining your 2022 aesthetics guidance of $5.9 billion. Rob, I didn’t hear you call it out, so I’m assuming that was a reiteration, just given what you’re seeing with Juvederm in the U.S. And then the second question I had relates more of a, I guess, strategic one, Rick. I know you’re still going through the conversations with 2023 for Humira. But, as you think about providing an update to guidance, whether that happens with the 3Q results or with the 4Q results, do you think you’ll be able to provide some outlook on 2024 because I think something investors are discussing now is just if the possibility of the impact is more in ‘24, how we should think about revenue margins in ‘24 versus ‘23. So, just wondering strategically how you’re thinking about that at this point, not asking for guidance, more just thought process. Rick Gonzalez: Okay. So, Terence, I’ll take both of those questions, and then Rob can certainly jump in here if he has something he wants to add. We are maintaining the aesthetic guidance as we’ve indicated. Certainly, we have seen good, strong performance on the toxin side of the business, and we would expect it to continue. As we look at the filler side of the business, as you’ve noted, it was lighter this quarter than we’ve seen historically. And I’d say that was driven by a couple of issues. It was certainly driven by the China- Russia issue outside the U.S. In the U.S., we did have a very successful promotional program that we ran last year. So, it was a tough comparison versus last year. But I’d also say, we have seen some glimpses of what could be inflationary pressure on that business or it could be pent-up demand for vacations. And Carrie can certainly go through more detail if there’s a follow-up question. But I think as we look at the business overall, we’re comfortable maintaining the guidance now. We believe that Botox will continue to perform very well. And obviously, we’re doing more things to be able to drive the toxin side of the business. It’s at a price point where it should be less sensitive to inflationary pressures. The price point for toxin is about $500, I think, right, Gary? And where fillers are almost twice that or maybe even a little more than twice that. So clearly, from a disposable income standpoint, fillers are more challenging for people than toxins are. And so that’s the rationale behind it. And certainly, as we look at the overall performance of the AbbVie business, we have plenty of opportunities with the diversity of our portfolio to cover any potential shortfall if we ended up having an issue. So, that’s why we’re comfortable maintaining the guidance. And I think we need to see more time play out here to see exactly where we are from a U.S. inflationary impact. On the second question, as it relates to an update on ‘23 and potentially something on ‘24. I think the way you’ve described it is accurate. When we have more information, we’ll try to provide that. And when we’ve gotten to a point that certainly by the fourth quarter call, we’re going to provide you guidance on what we think will happen in 2023. But if we can provide something on the third quarter call, I wouldn’t be looking for guidance. I think that’s not a good expectation. But certainly, potentially a little more clarification on what our contracting status looks like at that point and how that will translate into what we think. And if we can refine the model to a greater degree, we would certainly provide that. As it relates to 2024, certainly, I’m not going to -- we’re not in a position we’re going to talk about 2024 right now. And I think that would be a little bit unlikely because not all these contracts will be two-year contracts. And so, you really won’t know what your volume position is at that point. And as I said, you won’t know what the pricing is going to be, particularly midway through the year. And so, I think those will be important things to be able to dial in to where the forecast is going. I’d say, overall, we feel good about the contracting position that we’re in. And then, I’d say, the other thing is, I know investors really want to try to model this between ‘23 and ‘24. I understand why you want to do that. Certainly, we obviously would like to do that to the greatest degree possible. But, when you step back and you actually look at the performance of AbbVie and how you will value AbbVie and what AbbVie means going forward, it has relatively little to do with Humira, and that shape of that curve between ‘23 and ‘24. And certainly, by the end of ‘24, we should reach a point where we’ve achieved some level of stability on the tail of Humira. What AbbVie is all about is these other products like Skyrizi and Rinvoq and Vraylar and Ubrelvy, the aesthetics business, Qulipta. Those are going to be the things that drive it. So, if you want to focus on something and it’s what we focus on internally is that underlying growth engine that will emerge on the other side of whatever erosion Humira ends up suffering before it hit some level of stability and tail is those assets and then what comes out of the pipeline. Those are the key things that are going to create that growth between 25% and 30%. And that’s the part that we -- I would say, we’re obviously managing Humira to the greatest extent we can. But that’s the part that we as a team are focusing on. And I think that’s the most important part because that is the AbbVie going forward. Operator: Our next question is Mohit Bansal with Wells Fargo. Mohit Bansal: Maybe dwelling a little bit more on the Humira question for Rick and Jeff. So, you said that pricing from the competition will be key unknown for next year. As you get into contracts this year, for the next year, how rigid or flexible these contracts are from the pricing point of view when PBMs realize that the biosimilar is giving an X or Y pricing, or would that be more of a 2024 issue rather than 2023? Thank you. Rick Gonzalez: Well, let me take a shot at that, and certainly, Jeff is closer to it. So, Jeff, if you want to add anything in, feel free to jump in and add. Typically, when you contract for an asset like Humira, you’re contracting for a formulary position. And there aren’t volume requirements or other kinds of requirements. I think it’s also -- it would be prudent to assume that biosimilars will be on these contracts, whether it’s one or more than one that will coexist with Humira. So, price plays an important role in that because they will coexist. And so, I’d say -- and as that becomes fluid, you would have to make decisions around how you try to deal with that to maintain the kinds of volumes that you want to maintain. And we’ve said all along, the strategy that we’ll have in the U.S. is similar to the strategy that we had internationally, and that is maintain as much volume as we can at the highest level of profit that we can maintain it at. And that is the logic that we will employ. But that doesn’t mean we won’t have to be somewhat responsive to prices in the marketplace on Humira. Jeff, anything you’d add? Jeff Stewart: No, I think that’s -- Rick, that’s a very reasonable way to look at it in terms of how these negotiations are going and how we see ‘23 playing out. I mean, the real big ones in terms of how we look at it is the two big scenarios are you are likely coexisting with one or more biosimilars or if the negotiations don’t go the way that we anticipate that were excluded in favor of biosimilars. And that’s basically where price and volume -- in terms of refining our model, for ‘23. That’s the work that we’re doing over the summer and then into the fall. Operator: Next question is Gary Nachman with BMO Capital Markets. Gary Nachman: So, Skyrizi was very strong in the second quarter, and you raised guidance nicely. How much of a benefit are you getting from the psoriatic arthritis indication thus far? What are you expecting Crohn’s to contribute this year? How much are those playing into the raised guidance? And are you revisiting the long-term guidance on Skyrizi at this point, given the strong performance? And then just on the hem/onc franchise. Are you keeping the infrastructure intact preparing for new products to contribute? And maybe you could talk about the near-term opportunities you see for products like epcoritamab and navitoclax, how much of those could contribute and potentially offset some of the pressure you’ve been seeing from Imbruvica? Thanks. Jeff Stewart: Yes. Thank you. It’s Jeff. Thanks for the question. So, your instinct and observation is right. The big dynamic change for Skyrizi here, largely what you’re seeing is from the psoriatic arthritis indication. And obviously saw very, very large sequential moves. And let me give you some sense of what we’re looking at. So, we’re seeing that we’re putting more and more basically headroom into the overall share position, first in psoriatic disease, so that’s psoriasis plus PSA. So, we’re at 26% in terms of total TRx share and moving very, very nicely up. So, that’s being driven by this PSA acceleration. So first, remember that the PSA indication, we were the -- really the last large product that didn’t have that indication. So first, what happens is it starts to interact very positively in the dermatology segment. So, as I mentioned, about 30% of patients both have skin and joint involvement. And so we actually had a lower despite the fact that we had the leading psoriasis share, we had a lower psoriasis share because we weren’t covered with the joints with that indication. So, you see an immediate, very rapid acceleration of our overall derm business that I highlighted. Secondly, strategically important to the performance is that we’re able to launch the PSA indication for Skyrizi in rheumatology. So, it starts to work together with the Rinvoq PSA indication, and the rheum segment is 3 times as large as the derm segment. So, it’s a very, very good dynamic in terms of our momentum in two large segments, even before we get to Crohn’s. Now, I would say that as we’ve talked about before, I mean, Skyrizi is a very special product, very unique dosing, very stable, incredible efficacy. And so, we are encouraged on the early results of Crohn’s. It’s too early to start to see numbers or et cetera. But all of that is playing into the raise that Rob talked about. Rob Michael: And Gary, this is Rob. Just on the guidance. So, if you recall, earlier in the year, we got asked the question, I said PSA for Skyrizi was going to contribute about $200 million this year. It’s probably closer to $400 million now with the guidance range, given the very nice uptick we’ve seen in PSA. But part of that guidance raise is also the strong share performance in psoriasis. So, it includes both. In terms of Crohn’s, that hasn’t changed. We’ve set approximately $100 million this year as we ramp access for Crohn’s. But obviously, the long-term potential for it is tremendous, and we’re very excited about that. Jeff Stewart: And maybe I can also then chime in on the second question. Certainly, that is a -- the new assets are a very important part of our growth story for hem/onc. Certainly, as I mentioned, we’re still continuing to ramp around the world with CLL. We have more and more impressive data, particularly in the unfit frontline population. We have five years of data in the fit population for frontline for Venclexta. We’re encouraged with the myeloma data, which is very unique in terms of biomarker driven approach for the (11;14). Navitoclax would be really one of the first new entrants for myelofibrosis, where there’s really only been rocks in terms of that market. Epcoritamab, increasingly encouraging data in terms of the simple subcu, very rapid ways to get this medication in later lines and then building into frontline. So we are very, very encouraged while we see some pressure on Imbruvica, the new indications in base for Venclexta helps to offset that. And then we start to build with those near-term hem assets and super encouraged in terms of what we’re seeing in terms of the probability that we can get there. Operator: Our next question is from Chris Schott J.P. Morgan. Chris Schott: First one, I just wanted to come back to dynamics on the U.S. dermal filler market. I guess specifically, can you just quantify how much of the weakness we saw this -- or the decline year-over-year was due to the promotion events last year versus the impact from the economic pressures that you’re seeing? And I guess, in the same context, are you seeing any signs of weakness in the European business? I’m just -- and what I was just trying get your hands around, what type of magnitude of impact you’re talking about here in terms of either of its inflation or economic sensitivity to that business. My second question was just thinking about Rinvoq and Skyrizi formulary and pricing dynamics going forward as biosimilar Humira enters the market. I guess, are you expecting or are you hearing through discussions, any major shifts in the way payers are thinking about those products as we think about pricing coming down and obviously the largest kind of product in the space there. Carrie Strom: Hi. This is Carrie. I’ll take your first question around Juvederm. And as Rick said, there was a onetime promotional event that we ran in the U.S. for Juvederm in Q2 of last year, and it was highly successful, and it increased sales in the sales space, which created the challenging prior year comparison. So, that was the key driver. But as you noted, there is also this impact -- economic impact that is suggestive of some early changes in consumer behavior. And that really isn’t surprising in light of the inflationary pressures that we’re seeing on discretionary income. And as Rick said, the filler market is likely more sensitive to that than toxins for a few reasons. We mentioned the price point. So a price point of closer to $1,000 versus $500 for toxin, also the nature of the filler business is different than toxin from a patient dynamic and treatment dynamic and that there are more -- there’s a longer interval between treatments for fillers versus toxin, which is sort of like a more regular treatment paradigm a few times a year. Also, the patient bases are different. When you think about the toxin patient base and Botox Cosmetic, the majority of the patient base is continuing patients versus more of a reliance on new patient acquisition. And so, those are some of the factors we’re thinking about when we think about the deceleration of the filler market in Q2 but while the market has slowed and despite the performance in Q2, we do continue to expect a positive second half growth for U.S. Juvederm, really weighted more in the fourth quarter as we’re going to launch two new fillers in the fourth quarter. And those two new fillers will get us into incremental categories for HA fillers, including jawline and skin quality, which will help to drive some incremental demand at the end of the year. And in terms of your question around economic impact outside of the U.S., we are watching that very closely, and we really have not seen that yet outside of the U.S. Jeff Stewart: In terms of your second question, again, it’s Jeff. Thanks for that. We’re -- we don’t see some significant pressures on Skyrizi and Rinvoq. Now, we always have discussions with the payers, we look at our contracting strategy. But I think we fall back on our clinical evidence that we have on these two major assets. I mean, we have four head-to-head trials against other major competitors with Skyrizi, where we have just really growth superiority versus whether it’s an IL-17, whether it’s Humira, which one day will be biosimilar, STELARA, et cetera. So just the pure performance there and the momentum, it’s clearly a distinguished asset. We’re going to be first in terms of Crohn’s to start to establish that new area and build the market there. And I think on Rinvoq to some degree, there’s only one other JAK inhibitor that is not going to have the scope of indications and it’s Xeljanz. And Xeljanz has been significantly wounded based on the oral surveillance data. So, in terms of our ability to build and protect and grow Skyrizi and Rinvoq into the next stage of development, we’re quite confident that we have the assets to be able to do that. Operator: Our next question is from Steve Scala, Cowen. Steve Scala: Two questions. First, Rick, in the past, you have laid out four factors that will dictate Humira’s trajectory in 2023. The first two were Humira access and biosimilar price, and it’s clear it’s too early for any news on either of those points. But the second two were competitiveness of biosimilars, which you said in part was interchangeability and also the biosimilar ability to supply the market. So, those two factors, three and four are things that won’t fluctuate and presumably, you have some visibility on that now. So, I’m just wondering if there’s anything unusual occurring there. And in discussions, how important is interchangeability with payers. The second question is, and I apologize if I missed it, but are there any updates on the TNF steroid conjugate and is Phase 2 RA data still expected this year? Thank you. Rick Gonzalez: All right. Thanks, Steve. This is Rick. I’ll cover the first one. And Roopal can cover the second one. So, you are correct. That is what I described a meeting or two ago as the four variables. I would say, when you think about interchangeability, I think you have to think about it in the backdrop of not just interchangeability, but also what is the profile that is the closest to Humira today? And we can look at all the biosimilars and have -- we have pretty good visibility as to what that profile looks like. And what I would say is, to get a profile that is interchangeable and is consistent with the current Humira that’s predominantly in the marketplace today, that’s probably going to occur in the summer of 2023. There should be one or two biosimilars that have a profile that looks like that. And that would make it somewhat easier for an organization to make a switch. So, I think that will play an important variable. Nothing has changed in the last few months in what that profile looks like. And then obviously, supply is an important aspect that certainly anyone that we’re looking at making a significant change in their position with Humira is going to want to make sure that they’re going with a company that has the ability to be able to produce at volume, at significant volumes, Humira, and they can do it sustainably. So, there are certain players that I would say clearly have that ability to be able to do it, similar to us. Certainly, no one does it at the scale of us or anywhere close to the scale of us. But there are also a lot of small players that I think supply is going to be an important aspect and going to somewhat limit the ability to be able to have broad market impact. And so, those are going to be important dynamics as we negotiate with the various managed care organizations. I can tell you that we’re talking through those kinds of things with them. Roopal? Roopal Thakkar: Yes. Thanks. Yes. So, 154 is our anti-TNF conjugated steroid, as you mentioned, and it’s enabled to target delivery of steroid directly to inflammatory cells. So, we do have that Phase 2 running several hundred patients, and we still anticipate getting read later this year and then further data to follow next year. Operator: Our next question is Chris Raymond, Piper Sadler. Chris Raymond: Two questions. Maybe one that’s more broad policy and then another one that’s maybe a little bit more detailed. So, maybe first for Rick. I know you guys keep pretty close tabs on healthcare policy. Just on the most recent Senate Democrat drug pricing language in the reconciliation bill. The provisions on the face of it seemed pretty manageable in terms of direct impact from pricing controls, but there’s been some concern around this being just the start of something larger in terms of price controls. Any thoughts from you guys on this would be appreciated. And then, maybe a more detailed question on ABBV-951. I know you guys haven’t provided specific guidance on this or on Duodopa, but there seems to be a lot of recognition of 951 among movement disorder KOLs as a real improvement in terms of overcoming reticence around Duodopa. Just how should we be thinking about 951 vis-à-vis Duodopa, if approved? Thanks. Rick Gonzalez: Okay. So, I’ll take the first question. I mean, I think if you look at the drug pricing proposal that’s out there, it’s certainly an important issue for us, and I think it’s an important issue for patients. I think if I look at that bill, and I’m assuming that if there were something that were to pass, it would be somewhat consistent with what was in the build back better for the Senate Finance text. And so far, it looks like that, but obviously evolving a bit here as we go along. And if I look at it in total, what I’d say is there’s a couple of positive things in there. Certainly, most notably, the $2,000 cap out-of-pocket costs for patients and the ability to be able to smooth, I think that’s an important step in increasing affordability, especially for patients in Medicare Part D. And so, that’s something we’ve been supportive of. We’ve been vocal that we think that’s an important step forward. What I’d say on balance, this is a bill that has far more negatives than it has positives in it. And I think although it may not be short term that challenging from a financial standpoint, I think the long-term implications of this bill are pretty significant. And they really hinge around this so-called negotiation clause that’s in there and how that’s being implemented, particularly for small molecules. And if you’re familiar with it, essentially what it says is that CMS or we’re assuming it will be CMS, has the ability at a certain point in time to be able to negotiate a price on a set of drugs. And by the time you get there, it will be a big set of drugs that they’ll have the ability to be able to negotiate on. And the key issue is this. Essentially, they have full latitude to basically decide whatever price they want the drug to be. And I wouldn’t necessarily call it a negotiation because the only alternative that the manufacturer has is to accept a 95% penalty on their revenues or, in essence, take a 95% discount. So, it’s not a negotiation. We should just call it what it is. It’s price controls is what they’re basically putting in place if the language stays the same. And ultimately, I think the real challenge is how we invest in this as an industry in innovation. If you take small molecules as an example, I’ll walk you through an example that illustrates the point that I’m going to raise here. If you take a small molecule, it says at year nine after the first approval, CMS has the right to be able to negotiate the price on that drug. So, if you take an oncology drug as an example, how do we develop oncology drugs in this industry? And what do the regulatory authorities typically require us to do, to be able to develop an oncology drug. Well, they typically require you to do and what we typically do is we go to patients who have failed on all the existing therapies, fourth-line patients, fifth-line patients. And we take whatever drug we have and we determine, do we have a positive benefit risk in that patient population. If we find that we do, then we seek approval for that drug in that patient population, so that those patients will get the benefit of that drug. And then, we start to work our way up towards front line. Those who refractory patients are typically very small populations of patients, right? And you can never get a return on a drug just on that patient population. And then, you work your way up to front line, or second line, or wherever you end up. That process typically takes 7 to 9 years because of the length of the trials. So essentially, with this, by the time you got to the larger populations, you’d be within a year or two of when CMS could change the price. But one, it’s impossible to figure out what the return is going to be, so how do you invest? Two, it really puts negative pressure on you not to continue to develop new indications. But the most detrimental part of it is to patients who need these drugs or small indications or in later stage. Because you’re faced with the dilemma -- and this is a horrible dilemma, right, as a company and for patients. You’re faced with a dilemma of do I choose not to seek approval in those late-stage patients, so I don’t start the clock and wait until I’m closer to frontline before I start the clock. That is not the right policy. And I would say, on balance, this bill will have a couple of things that are good for patients that I’m fully supportive of. But unless Congress wants to harm patients and harm innovation in this industry, they need to change that part of it. It doesn’t make sense. It’s shortsighted. Now, they can change it in a couple of different ways. They can determine, okay, what is a floor price or a maximum discount by year and then you can calculate the return on investment that you’re going to have on the drug or they can at least make it consistent with biologics that are out 13 years. Otherwise, the investment in small molecule oncology drugs or neuroscience drugs, which Medicare patient populations are highly dependent on new innovative drugs in those areas because they’re elderly patients, are going to suffer. And the CBO report that was published back in April of last year clearly pointed that out. So, this isn’t something I’m just saying or industry is just saying. And in fact, if anything, I’d say, they probably undercall the magnitude of the impact. So, this is an important issue. We all know the affordability and access for Medicare patients is important. But you don’t need to destroy the innovation model in the process in order to provide that. And so, I’m hopeful that we’ll see some movement here and some rationality will play out. Jeff Stewart: Okay. And to address your 951 -- hi, it’s Jeff. Thanks for the question. So, I think some perspective is globally, DUOPA is about $0.5 billion brand. And certainly, we’ve said that we believe that 951 could certainly double that up or more. I’ll give you the perspective of why we think that way. So, if you look at the advanced Parkinson’s patients, about 85% sort of cycle when they stay on these generic orals that become less and less and less effective. And the only thing they can really do, and that’s about 15% of the market, the advanced Parkinson market, is they can move to either deep brain stimulation or DUOPA. But you got to go through a surgical barrier. So, the families and the patients are forced to think if I need to get improvement in my symptoms and my quality of life, I’m forced to basically think about do I get a hole in my head or a hole in my stomach with a gastric surgery. This is going to be a subcu. And so, we see in our market research that at least 40% to 60% of people never want to move towards DBS or DUOPA. So, we think this is a way where we can start to expand and create a new market segment, in essence, a subcutaneous segment where you don’t have to take that risk on the surgery. And like you mentioned in the movement disorder centers, there’s a significant amount of experts that are excited about this new option, and we believe that it’s going to be a real innovation for patients without having the surgery. Rob Michael: And Chris, this is Rob. As Jeff said, I mean, we expect this to be market expanding. At the JPMorgan conference earlier this year, we did give peak revenue guidance for 951 greater than $1 billion. Obviously, DUOPA is $0.5 billion now. If you’re modeling it, obviously, there’ll be some level of cannibalization, I’d say, minor level of cannibalization on Duodopa. But when you think about the combination between 951 and Duodopa, obviously, it’s going to grow the revenue for the Company and expand the market. Liz Shea: Thanks, Chris. Operator, next question, please? Operator: Thank you. It’s Tim Anderson with Wolfe Research. Tim Anderson: Hi. If I could just go back to the whole ‘23 versus ‘24 thing, am I -- I thought that in the past, you guys have said earnings would trough in 2023 and then return to growth in 2024. Is that still the case, or is that off the table? And then, second question goes back to the 154 compound, your antibody drug conjugate. We understand that the timing is still on track, but I just -- it feels like to me there’s a distinct lack of enthusiasm towards this program, you don’t seem to mention that much or at all really, despite its novelty and despite it being in your most critical franchise of immunology. So, has the enthusiasm waned over, let’s say, the last couple of years? Rob Michael: So Tim, this is Rob. On your first question, what we’ve said -- we’ve talked about this 45% with a range around that plus or minus 10% and using, obviously, the Europe analog as an example. And in that case, with the steep erosion year one and ‘23, you would expect then the trough to be in ‘23 and return to growth in ‘24. As this plays out, we’ll see how that shakes out. Ultimately, if more of it happens in ‘24, you obviously have another year of growth for all your growth brands. And so, you have a different floor in that scenario. But most importantly, it’s what happens in ‘25 and beyond. When you look at this company with the growth drivers we have, we’ll be delivering high-single-digit growth in ‘25 and beyond, which is industry-leading. We’ll have the lowest LOE exposure in the industry in the second half of this decade. And so, we’re focused on the long term, we feel very good about the prospects of this business. But as it stands now, the most recent direction we’ve given is expect that first year erosion, so that 45% plus or minus 10%, which then play out to a return to growth in ‘24. We’ll obviously update the market as we see it play out next year. Tom Hudson: Maybe I’ll take this one. This is Tom Hudson. I’m a clinical immunologist, and I know how we’ve been using steroids, they can give very profound and deep immunosuppression, decrease inflammation, and that’s often used in severe cases when patient shows up. So, we know that the response is very strong, but there are a lot of side effects. And, when our problem is always weaning, the steroid’s out in the clinic. So here, again, the combination of immunomodulator like TNF and steroid have that potential of giving us that deep, deep response very quickly to remove the immunosuppression. And based on the data we’ve seen preclinically in our Phase 1 studies, we’re not seeing those biomarkers or side effects in the bone or brain, a cortisol or others. So we’ve already demonstrated that, and we have nice data. The other -- so that’s my enthusiasm. We expect to see deep responses, durable responses with much well better tolerated than steroids. Our program -- and we’ve shown this also is that we’ve actually believed in the platform and we’re developing steroid ADCs for other targets to target other immune systems -- other immune cells, more specifically around some T cells or some B cells or some fibroblasts. These programs are coming forward. We think this is a profound platform in immunology to go after different biologies -- in very targeted steroid suppression of different specific immune cell types, and that’s going to play out over the next couple of years. So, based on the data we saw, we expanded the platform to other biomarkers getting into other specific immune cell types. Of course, we’re quiet because we need to see the data, all -- the study has been fully recruited, actually moved faster than we expected. And the day was randomized. We’re just going to see the data in the fall because it’s a blinded study. But the enthusiasm is there. And we’re also, of course, seeing that data, and then we have PMR because we also started studies there in Crohn’s disease. We’ll see that data later, but the more data we have, the more likely we’re going to expand this program to other indications where we believe that deep steroid suppression with TNF might actually bring new solutions for patients. Operator: Our next question is Geoff Meacham, Bank of America. Your line is open. Geoff Meacham: Great. Thank you so much for the question. Not to belabor the point on Humira, but I wanted to ask you, is the long-term, meaning the four-year kind of trend that we saw this quarter for Humira in Europe, is that still a good proxy for how you guys are thinking about the tail for Humira, just given we’re coming up on four years in Europe and we’re talking about high single-digit erosion still. So, I wanted to kind of ask you about the tail piece of what you expect in the U.S. And the second question, just on Rinvoq, I wanted to ask you also on the -- since the FDA labeling change, you just seen any changes with regard to persistent rates or new starts just on your feedback from the field and how docs view the safety of the JAK class. Thank you. Rob Michael: Jeff, this is Rob. I’ll take your first question. So, the way we’ve talked about Humira erosion, it’s played out in Europe as we saw that steep erosion in year one, more moderate erosion years beyond. In our modeling now, that’s probably the best way to think about it is deep erosion year one, more moderate. You’ll have an annualization impact in year two, but more moderate beyond that. And specifically within the Wave 1 countries, when we look at Europe, and the level of revenue we have this year relative to pre-LOE, we still have about 30% of the revenue footprint. So, it gives you a sense of where Europe is after four years. Obviously, as we model the U.S. out, and it will be more specific in the future, but right now, we’re using Europe as an analog. Jeff Stewart: And regarding Rinvoq in terms of perceptions from the field or what we’re seeing. It’s largely developing as we predicted. So, we do see segments of physicians that are more wary of the JAKs after the label change. However, we anticipated that. So, we are starting to see a recovery in second line plus in RA as we anticipated. And the new indications because really we’ll be the only JAK inhibitor with the four big indications of RA, PSA, AS and then non-radiographic ultimately in the fall. That just builds upon the confidence level of the physician. So, that’s what we’re feeling from the field. I’ll mention maybe some color on ulcerative colitis. I mentioned that we’re encouraged on the ulcerative colitis start. So, we saw in the quarter because we launched in early April. We saw 600 unique gastroenterologists start to write prescriptions, which is quite interesting and good, a positive. And about half of those customers had never written a JAK inhibitor. So, Xeljanz was approved. And so, we’re seeing, obviously, the ability of these customers to understand the overall risk benefit of Rinvoq relative to, let’s say, another JAK inhibitor. So I feel that our communication is on track, and we’re seeing positive feedback as we build the indications that we’ve highlighted in the call. Operator: Our next question is Colin Bristow with UBS. Colin Bristow: Another one on the ‘23 Humira guidance. Could you just walk us through -- at the point at the end of 3Q, what percentage of contracts or volume will you have confirmed at that point? And then, it sounds like that by the -- by the time you have the full year results, you’re still anticipating that there could be a meaningful change. Could you just confirm that’s a fair characterization? And then just on ABBV-154, what are you hoping to see with the Phase 2 data that we’re going to get at year-end? And what’s the threshold here that you need to surpass to move forward? Thanks. Tom Hudson: Yes. So, if we look at the discussions that we’ve highlighted and Rick highlighted, I think and they’re progressing as we would expect. So typically, they start in the late spring. And look, these are complex negotiations. They go on for many, many months. In many years, we would have completed the -- at least the large PBM negotiations, which is the vast majority of the volume by that October time frame. In some cases, as you probably know, the payers would publish this information. But very often, not always, the immunology an inflammatory segment, those negotiations can go on longer, and they’re very often published as a TBD in what used to be called the exclusionary formulary. So, we would -- as Rick mentioned, we would have visibility to sort of the status on the volume in that October time frame. That’s a reasonable assumption. Again, I don’t know for sure, given the complexity of biosimilar negotiation, which has never taken place before. But that’s a reasonable way to think about when we’d start to have the visibility to the volume component, as Rick highlighted. Roopal Thakkar: Yes. And it’s Roopal on the 154 question. Dovetailing on what Tom just walked through, things that we want to see are consistent with how we develop in immunology, certainly raising standard of care. So, the way this was designed was to have that anti-TNF and then that direct delivery to avoid systemic side effects of the steroids. So, you’d see sort of that one-two punch as Tom was describing and see that depth of response. So, once we see that type of information along with how it looks from a steroid standpoint, metabolic effects, bone effects taken together will give us a great sense of where it could fit before anti-TNFs, even after we’re studying patients that have failed anti-TNFs in this Phase 2 study. So, taken together, that will give us a really good sense of where to go. And then remember, we’re also going to get data in polymyalgia rheumatic. It’s not an uncommon disease, and these patients are -- many of them are steroid-dependent, 50% or so three years and going and they can’t withdraw from steroids and maybe a third can be 5 plus 6 years. They’re stuck on steroids. So we’ll see that data where we’re able to prevent them from flaring and to be able to reduce their systemic steroid dose. So, there’s multiple facets to this and potentially a number of opportunities and then later on in Crohn’s disease as well. Liz Shea: Thanks, Colin. Operator: Our next question is from Chris Shibutani with Goldman Sachs. Chris Shibutani: Two questions, if I could. For Skyrizi, if I could just return to this question of how you’re thinking about the long-term guidance. I think on Skyrizi, recalling that you said $7.5 billion, consisting of about 6 from the psoriatic complex. And yet you’re almost already approaching something close to $5 billion. So, can you tell us how you’re thinking about how that could factor in any long-term thinking? And then, for epcoritamab, positioning of that treatment in the overall treatment paradigm. How are you thinking about that in relation to, for instance, CAR-T therapy treatment options before, after? Thank you. Rob Michael: Chris, this is Rob. I’ll take that question. So look, we’re very encouraged by Skyrizi’s continued strong performance. We remain confident in our ability to achieve or exceed that 2025 guidance. Now, keep in mind, I mean, the Street also reflects that too. Street is about $400 million higher than that $7.5 billion. That said, we don’t intend on frequently updating that guidance. Obviously, we’ll provide that guidance update every few years or if there’s an event or there’s a major disconnect. So obviously, if the Street was way off, we want to point that out. But overall, we’re very encouraged about the uptake for Skyrizi. It’s clearly demonstrating its ability to drive long-term growth for AbbVie, and we’ll provide an update for long-term guidance at the appropriate time. Neil Gallagher: Thanks. And on the epcoritamab question. So I’m not going to go through all of the data points again, we’ve described them several times in the public domain. What I would remind you of is that we’ve observed extremely robust efficacy in a heavily pretreated population. Now it’s true to say that 40% of those patients have sailed CAR-Ts, but 60% of those patients didn’t sail CAR-T. Therefore, our expectation, our intention, rather, and as we’ve mentioned earlier on in Tom’s prepared remarks, we are anticipating filing for accelerated approval during the second half of this year. And I think that what you can expect is that we believe that the total population, the total relapsed/refractory population, whether or not they sail CAR-Ts should have access to epcoritamab because of the strength of the data overall. In terms of future positioning, we’ve also discussed in the past our intention of initiating multiple phase -- additional Phase 3, the confirmatory study for the DLBCL application what would be the confirmatory study, the Phase 3 study is ongoing. That’s in the relapsed/refractory setting. And our anticipation is that we will initiate multiple additional Phase 3s, both in DLBCL and other indications over the coming 12 to 18 months. Jeff Stewart: Maybe I could just build on that. Chris, it’s Jeff. So, we’ve started to talk to different types of physicians, whether they’re in the CAR-T centers or certainly the community centers. We’re increasingly believing that this lymphoma is treated in the community centers. And so, what we hear, at least at a high level from our research so far is wow, that efficacy is incredibly impressive, even after CAR-T. But where they go is this simple subcu of epcoritamab may be the fastest way to deliver T cells to my patients I’m dealing with. So to build on Neil’s point, that data doesn’t look like it’s niching the drug. In fact, it looks like it’s sort of contributing to the idea of like this is a democratized type of medication for the lymphoma. So, it’s very encouraging from our initial work that we’re doing with physicians. Liz Shea: Thanks, Chris. Operator, we have time for one final question. Operator: And that question comes from David Risinger with SVB Securities. David Risinger: Yes. Thanks very much, and thanks for all the details on today’s call. Rick, I was hoping that you could help us to understand the current M&A landscape, how would you characterize it broadly? And then, if you could also comment more specifically on AbbVie with respect to the transaction opportunity set for AbbVie. Thanks very much. Rick Gonzalez: I think, if you look at the M&A environment, I think many players are trying to add to their portfolios. I think there’s less of an appetite for larger transactions right now in general across the industry. Some of that’s probably predicated on the fact that the FTC has been pretty tough in their language around larger kinds of transactions and your ability to be able to get those through. And I think as it relates to us, I mean, we have continued to execute the strategy that we put in place after the Allergan transaction. Allergan, obviously brought us a tremendous amount of diversity. That transaction has been highly successful and has really changed the look and the shape of AbbVie and it has clearly enhanced our performance, and we’ve done quite well. Our focus is continuing to look for opportunities to be able to fill out our portfolio in areas that we believe there are opportunities to bring in strategic assets. We’re probably working more on earlier-stage assets add to our R&D pipeline. Epcoritamab is a good example of the kinds of things that we’re out looking for and finding, to supplement the overall pipeline. I think that strategy has worked well, and it’s a strategy that we’ll continue to do going forward. Liz Shea: Thanks, David. That concludes today’s conference call. If you’d like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. Operator: And thank you. This does conclude the call. You may disconnect your line. And thank you for your participation.	[ { "speaker": "Operator", "text": "Good morning, and thank you for standing by. Welcome to the AbbVie Second Quarter 2022 Earnings Conference Call. All participants will be able to listen only until the question-and-answer portion of this call. [Operator Instructions] I would now like to introduce Ms. Liz Shea, Vice President, Head of Investor Relations." }, { "speaker": "Liz Shea", "text": "Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Rob Michael, Vice Chairman and President; Jeff Stewart, Executive Vice President, Chief Commercial Officer; and Tom Hudson, Senior Vice President, R&D, and Chief Scientific Officer. Joining us for the Q&A portion of the call are Laura Schumacher, Vice Chairman, External Affairs, Chief Legal Officer and Corporate Secretary; Carrie Strom, Senior Vice President and President of Global Allergan Aesthetics; Scott Reents, Senior Vice President and Chief Financial Officer; Neil Gallagher, Vice President and Chief Medical Officer; and Roopal Thakkar, Vice President, Global Regulatory Affairs. Before we get started, I’ll note that some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today’s conference call, non-GAAP financial measures will be used to help investors understand AbbVie’s business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we’ll take your questions. So with that, I’ll now turn the call over to Rick." }, { "speaker": "Rick Gonzalez", "text": "Thank you, Liz. Good morning, everyone, and thank you for joining us today. I’ll briefly comment on our overall performance. Then Jeff, Tom, and Rob will review our second quarter business highlights, pipeline progress and financial results in more detail. AbbVie delivered another strong quarter with adjusted earnings per share of $3.37, exceeding our expectations. Total net revenues of approximately $14.6 billion was up 6.1% on an operational basis, in line with our expectations. This performance reflects robust double-digit operational sales growth from immunology, where Skyrizi is exceeding our expectations with impressive market share gains in both psoriasis and PSA. Skyrizi’s recent U.S. approval in Crohn’s disease will add yet another source of long-term growth. As a result of the strong performance we’ve seen in the first half of the year, we are raising our full year guidance for Skyrizi. Rinvoq is also demonstrating strong growth. RA continues to perform in line with our expectations, following the label update, and we’re making very good progress with all of the newly launched indications, including PSA, AS, atopic dermatitis and ulcerative colitis, which collectively represent a significant long-term growth opportunity. Neuroscience is another area with outstanding performance Vraylar, Botox Therapeutic and Ubrelvy and Qulipta each demonstrated double-digit sequential sales growth. Pending regulatory approvals for Vraylar in major depressive disorder, Qulipta in chronic migraine and 951 for the treatment of advanced Parkinson’s disease represent additional near-term growth opportunities for our neuroscience portfolio. Turning now to aesthetics, Botox Cosmetics once again performed very well with sales up more than 20% on an operational basis. Demand for toxins remains strong with high teens growth in the U.S., despite inflation dynamics. As expected, Juvederm performance was negatively impacted by COVID-related lockdowns in China, as well as the suspension of our operations in Russia. Additionally, in the U.S., we had a difficult prior year comparison with a promotional event that we ran last year. We also saw a modest impact in the quarter due to economic pressures. We continue to expect positive full year growth for Juvederm driven by the lessening COVID impact in China and two new filler launches in the U.S. which will benefit growth in the second half of the year. In hematological oncology, Imbruvica continues to be unfavorably impacted by a delayed market recovery for new patients starting therapy in CLL and increasing competition. These ongoing dynamics will have an impact on Imbruvica’s projected 2022 revenues. As a result, we will be adjusting our full-year guidance to reflect these impacts. Venclexta to continues to demonstrate robust share performance in both CLL and AML, with sales up double digits on an operational basis. Venclexta also has registrational studies ongoing in additional attractive indication, such as multiple myeloma in the t(11;14) patient population with Phase 3 data forthcoming, as well as high risk MDS. Additionally, we have an exciting and diverse pipeline of promising new therapies to address critical unmet needs in both, blood cancers and solid tumors, which are expected to support the next wave of AbbVie’s growth in oncology. In summary, the diversity of our portfolio, once again allowed us to deliver another strong performance, despite the challenges we see in the CLL market and increasing Imbruvica competition. Skyrizi and Rinvoq are performing exceptionally well and are on pace to deliver approximately $7.5 billion in combined sales this year. Neuroscience demonstrated balanced double-digit growth driven by migraine and Vraylar and continued robust Botox cosmetic growth offset some of the U.S. inflationary impact to our filler and body contouring portfolios. As a result, we are confirming our full year 2022 adjusted earnings per share guidance of $13.78 to $13.98, representing growth of more than 17% at the midpoint. With that, I’ll turn the call over to Jeff for additional comments on commercial highlights. Jeff?" }, { "speaker": "Jeff Stewart", "text": "Thank you, Rick. I’m very pleased with the momentum across our therapeutic portfolio, including the continued progress we’re making with new product and recent indication launches. I’ll start with our immunology portfolio, which delivered total revenues of $7.2 billion, reflecting growth of 19.2% on an operational basis. Global Humira sales were approximately $5.4 billion, up 6.8% on an operational basis with 9.6% growth in the U.S., partially offset by international performance where revenues were down 7.3% operationally due to biosimilar competition. Skyrizi is performing extremely well, well ahead of our expectations. Global revenues were more than $1.2 billion, up 33% on a sequential basis. We continue to advance our leadership position in psoriasis where Skyrizi’s total prescription share of the U.S. biological market has increased to approximately 26%, driven by an in-play share of new and switching patients that is now approaching 50%. We have also achieved in-play market share leadership in 23 key international markets, including Japan, Germany, France, Canada, and Australia. Psoriatic arthritis is also adding significantly to Skyrizi’s momentum, where we are now approved in 54 countries. In the U.S. dermatology segment, where approximately 30% of patients exhibit both skin and joint involvement, Skyrizi is already achieving an in-play patient share of nearly 20%. We have also launched Skyrizi for PSA in rheumatology, where we’re seeing strong utilization, which is driving accelerated share growth. Our recent launch of Skyrizi for Crohn’s disease in the U.S. represents the first new biologic approval in six years for an area where there continues to be considerable unmet need. We believe Skyrizi represents a highly effective and differentiated treatment option for Crohn’s patients, including the potential to provide meaningful levels of endoscopic improvement with novel and infrequent dosing. Managed care access is expected to ramp strongly for this indication in the coming months. Turning now to Rinvoq, where we’re seeing good momentum across each of the approved indications. Global sales of $592 million were up more than 27% on a sequential basis. Prescriptions in RA remained strong with a total market share of 5.8% in the U.S. and approximately 6% across key international markets. Rinvoq is now achieving an in-play RA share of approximately 13% in the U.S. In PSA, Rinvoq continues to see nice uptake, especially in the room segment with commercial access now equal to RA. We also recently received FDA approval for ankylosing spondylitis and European approval for non-radiographic Axial SpA, further expanding Rinvoq’s potential across rheumatology. In atopic dermatitis, new patient starts are tracking in line with our expectations with Rinvoq’s in-play patient share in the mid-teens. Strong commercial access in AD, which is also now equal to RA and PSA, is expected to considerably increase paid prescription volume in this highly underpenetrated market over the remainder of the year. Lastly, our recent launch of Rinvoq for ulcerative colitis in the U.S. is progressing well. And we recently just received European approval for the same indication. Commercial access in the U.S. is ramping strongly, and we are seeing encouraging new patient starts. Physician feedback regarding Rinvoq’s approved profile in UC has been favorable, especially given the very high rates of remission and endoscopic improvement demonstrated across our UC development program. The addressable patient population for Rinvoq in UC is substantial, with nearly 50% of patients currently on or having used TNF therapy. Turning now to hematologic oncology, where total revenues were $1.65 billion, down 7.9% on an operational basis. Imbruvica global revenues were approximately $1.1 billion, down 17.1% and below our expectations. The CLO market continues to remain challenging in the U.S. with new patient starts down double digits relative to pre-pandemic levels. Now, as you may recall, our initial 2022 Imbruvica sales guidance contemplated a partial market recovery, which, unfortunately, we have not yet observed. In fact, the latest data reflects new patient starts in the U.S. were actually down high single digits versus last year. So, based on recent trends, we no longer believe it’s prudent to anticipate a meaningful market recovery in CLL over the second half of this year. Therefore, we will be removing this assumption from our 2022 guidance. In addition, increasing competition from newer therapies, including other BTK inhibitors as well as our own Venclexta also continue to lower Imbruvica’s share of new patient starts, especially in frontline CLL. Despite this increasing competitive pressure, Imbruvica continues to be the total market share leader across all lines of therapy in CLL. Venclexta global sales were $505 million, up 21.2% on an operational basis. In CLL, we continue to see share gains in the U.S. and across all major international markets. We’re also seeing continued strong performance in AML. Venclexta is now approved in 80 countries and in many markets is already considered the new standard of care for frontline AML patients who are ineligible for intensive chemotherapy. As a result, we are seeing ramping market share throughout the countries where we have launched. In neuroscience, revenues were more than $1.6 billion, up 15.2% on an operational basis. Vraylar once again delivered strong growth. Sales of $492 million were up 13.9% on an operational basis, reflecting continued share gains in the U.S. atypical antipsychotic market. Our launch preparations remain well underway in anticipation of our MDD approval in the fourth quarter. This is a potentially large indication that would represent incremental upside to our current projections for Vraylar. Within migraine, Ubrelvy remains the market-leading oral CGRP treatment for acute migraine with revenue of $185 million, up 34% on a sequential basis. Qulipta continues to increase its leading new-to-brand share in the U.S. preventative CGRP class when we consider both, paid and bridge volume. We continue to make good progress with expanded commercial access, which will support strong Qulipta sales growth over the remainder of this year. We are also pursuing the commercial approval for Qulipta as a preventative treatment in patients with chronic migraine in the U.S. as well as a new therapy for Europe, potentially further strengthening our competitive product profile and long-term growth opportunity. Botox Therapeutic is also performing well in chronic migraine as well as its other indications with total sales of $678 million, up 14.5% on an operational basis. So overall, I’m pleased with the commercial execution across the therapeutic business. Our broad portfolio of differentiated therapies and new launches is demonstrating strong revenue growth. And with that, I’ll turn the call over to Tom for additional comments on our R&D programs. Tom?" }, { "speaker": "Tom Hudson", "text": "Thank you, Jeff. I’ll start with immunology where we had several notable pipeline updates in our inflammatory bowel disease programs for both, Skyrizi and Rinvoq. We recently received FDA approval for Skyrizi in Crohn’s disease, and we’re very pleased with the label which reflects a strong benefit risk profile that Skyrizi demonstrated as an induction and maintenance treatment for this condition. Based on its profile, we believe Skyrizi will be a highly effective and differentiated treatment option for patients with Crohn’s disease. Our regulatory application for Skyrizi in Crohn’s disease remains under review in Europe with an approval decision expected near the end of this year. Also in the area of inflammatory bowel disease, we recently received European approval for Rinvoq in ulcerative colitis. And we’re excited to bring this new, highly efficacious oral option to patients suffering from this often debilitating disease. In the quarter, we also completed a registrational program for Rinvoq in Crohn’s disease, reporting positive top line results from our Phase 3 maintenance study. We recently submitted our regulatory applications for Rinvoq in this indication and expect approval decisions next year. Once approved for Crohn’s disease, Rinvoq will have completed development programs for all the major rheum and gastro indications covered by Humira plus atopic dermatitis. The strength of the data generated in our clinical programs should position Rinvoq as a highly differentiated treatment across this broad indication set and enable Rinvoq to deliver significant value to AbbVie over the long term. And just this morning, we announced that we received European approval for Rinvoq in non-radiographic Axial SpA, which rounds out Rinvoq’s label in rheumatology. Moving now to our oncology portfolio, where we continue to make excellent progress across all stages of our pipeline. At the recent EHA meeting, we presented results from the large B-cell lymphoma expansion cohort in the Phase 2 study evaluating epcoritamab in patients who have received at least two prior lines of therapy. In this study, epcoritamab was well tolerated and drove very deep and durable responses in challenging to treat highly refractory patients with large B-cell lymphoma. We recently discussed these results with regulatory agencies and based on the strength of the data, we intend to submit regulatory applications later this year for accelerated approval of epcoritamab in patients with relapsed/refractory large B-cell lymphoma. We expect approval decisions in 2023. We continue to make good progress with the indication expansion programs for Venclexta and remain on track to see results from the Phase 3 CANOVA trial in relapsed/refractory multiple myeloma patients with a t(11;14) mutation in the second half of this year. As a reminder, we’ve seen very promising results in this population in prior clinical studies with Venclexta showing high overall response rates and meaningful trends towards prolonged progression-free survival. The level of efficacy we’ve seen suggests that t(11;14) patients may be particularly responsive to Venclexta and this agent has the potential to become an important biomarker-driven treatment option in the multiple myeloma market. In neuroscience, following successful completion of our Phase 3 chronic migraine prevention study, we submitted our regulatory application to the FDA for Qulipta in chronic migraine. Chronic migraine is defined as 15 or more headache days per month with at least 8 of those days associated with migraines. This is a debilitating disease that affects nearly 10% of people suffering from migraine, significantly impacting their quality of life. If approved, this would be another differentiating feature for Qulipta as it would be the only oral CGRP approved for prevention in patients with chronic migraine. We also submitted data from our Phase 3 prevention studies in both, chronic and episodic migraine to support regulatory applications in markets outside the U.S. We expect approval decisions in the U.S. and in Europe in 2023. In the quarter, we submitted our regulatory application in the U.S. for ABBV-951, our novel subcutaneous levodopa/carbidopa delivery system for treatment of advanced Parkinson’s disease. This innovative delivery system has the potential to become a transformative treatment option for patients with advanced Parkinson’s disease by providing DUOPA-like efficacy with less invasive nonsurgical administration. We also expect to submit our regulatory application in Europe later this year with approval decisions anticipated in both, the U.S. and Europe in 2023. Now, I’d like to provide a few updates on some earlier-stage programs where we have new data and are advancing programs in development. In immunology, we recently obtained encouraging data in a Phase 2 study evaluating Rinvoq in systemic lupus, an autoimmune multisystem disease. In our study, Rinvoq demonstrated greater response rates as well as a reduction in flares compared with placebo. We’ll see longer-term data in the coming months, which will allow us to make a decision on moving Rinvoq into Phase 3 for lupus. In oncology, where we have a pipeline of promising early-stage programs aimed at solid tumors, we are beginning to see very exciting data from several programs. Our anti-GARP antibody, ABBV-151 is designed to block the immunosuppressive activity of regulatory T cells, which leads to increased T cell effector functions in the tumor microenvironment. This reactivates the immune system against tumors, enhancing the antitumor immune response triggered by a PD-1 inhibitor. In our Phase 1 program, we’re combining 151 with a PD-1 checkpoint inhibitor in cancer patients who are refractory to or relapsed after PD-1 as well as evaluating this combination in PD-1 nonresponsive tumors. Based on the preliminary efficacy we’ve seen in the dose expansion cohorts for multiple solid tumors, including a deepening of responses over time and prolonged durability, we recently declared proof-of-concept for 151. We plan to advance to Phase 2 in several solid tumors, starting with urothelial cancer. We’re also expecting additional data readouts later this year in other solid tumor indications, including colorectal cancer, which may enable further expansion studies in this hard-to-treat cancer type. We will also begin new studies to explore a broader set of solid tumors where GARP is implicated as a critical immunosuppressive pathway, based on tumor tissue analyses. We’re also making excellent progress with our next-generation c-Met ABBV-400, where the emerging clinical data is very promising in several solid tumors. This asset is similar to Teliso-V as c-MET ADC that uses a microtubulin inhibitor payload. Teliso-V received breakthrough therapy designation for the treatment of patients with a subtype of lung cancer with high levels of c-Met overexpression. The toxin warhead for 400 uses a more potent topoisomerase inhibitor payload, which is similar to irinotecan, a chemotherapy that is used in the treatment of colorectal cancer. By targeting c-MET positive tumors with ADCs bearing different warheads we believe we can broaden the range of solid tumors where c-MET therapies can be used. In our Phase 1 program, we are seeing good responses in patients with advanced colorectal cancer and remain encouraged by these early efficacy signals. So in summary, we’ve seen tremendous progress across all stages of our pipeline in the first half of the year, and we remain on track for further advancements in the remainder of 2022. So, with that, I’ll turn the call over to Rob for additional comments on our second quarter performance and financial outlook. Rob?" }, { "speaker": "Rob Michael", "text": "Thank you, Tom. AbbVie’s second quarter results demonstrate the strength of our diversified portfolio. Momentum from new products and recently launched indications allows us to maintain our earnings outlook despite market dynamics for Imbruvica, higher inflation and the stronger U.S. dollar. We reported adjusted earnings per share of $3.37, reflecting growth of 11.2% compared to prior year and $0.11 above our guidance midpoint. These results include a $0.14 unfavorable impact from acquired IPR&D expense. Total net revenues were $14.6 billion, up 6.1% on an operational basis, excluding a 1.6% unfavorable impact from foreign exchange. The adjusted operating margin ratio was 51% of sales, an improvement of 220 basis points versus the prior year. This includes adjusted gross margin of 84.7% of sales, adjusted R&D investment of 11% of sales, acquired IPR&D expense of 1.8% of sales and adjusted SG&A expense of 20.8% of sales. Net interest expense was $532 million, and the adjusted tax rate was 13.4%. Turning to our financial outlook. We are confirming our full year adjusted earnings per share guidance between $13.78 and $13.98. This earnings per share guidance does not include an estimate for acquired IPR&D expense that may be incurred beyond the second quarter. We now expect net revenues of approximately $58.9 billion, reflecting growth of 6.5% on an operational basis. At current rates, we expect foreign exchange to have a 1.7% unfavorable impact on full year sales growth. Included in this guidance are the following updated assumptions. We now expect Skyrizi global sales of approximately $4.8 billion, an increase of $400 million due to strong market share performance. For Imbruvica, we now expect global revenue of approximately $4.7 billion, given the lack of recovery in the CLL market and increasing competition. Moving to the P&L, we now expect adjusted gross margin of 84.7% of sales and continue to forecast an adjusted operating margin ratio of 51.8% of sales. Turning to the third quarter. We anticipate net revenues of approximately $14.8 billion. At current rates, we expect foreign exchange to have a 2.1% unfavorable impact on sales growth. We expect adjusted earnings per share between $3.55 and $3.59. This guidance does not include acquired IPR&D expense that may be incurred in the quarter. In closing, we delivered strong performance again this quarter, including meaningful contributions from new products and recently launched indications. Given the momentum of our business as well as our pipeline advancements, we are well positioned for the long term. With that, I’ll turn the call back over to Liz." }, { "speaker": "Liz Shea", "text": "Thanks, Rob. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, we’ll take the first question." }, { "speaker": "Operator", "text": "Thank you. Our first question is Andrew Baum, Citi. Your line is open." }, { "speaker": "Andrew Baum", "text": "First question is on the guidance range you’ve given for anticipated trajectory of Humira in the U.S., presumably you’re finishing contracting, both with Medicare and commercial. Could you provide any guidance further on ‘23 and even ‘24 [indiscernible] contracts? And then second, a pipeline question in relation to your anti-GARP monoclonal, which you’ve taken a long time to sort of optimize or move forward. I’m just curious whether you’re using any molecular markers in order to minimize risk given the failures of other TGF-beta targeted agents, particularly in colorectal using CMS 4 or a subgroup of the total population, or are you putting it in all comers, the suggestion that what’s an all comers or is this again informed biomarkers? Thank you." }, { "speaker": "Rick Gonzalez", "text": "Okay. Andrew, this is Rick. Thank you for the questions. I’ll cover the first one, and then Tom can cover the second one. So, we are in the process now, as we’ve indicated before, of negotiating with the managed care organizations and the PBMs to establish our contract position for Humira in 2023. This is a normal time that you would go through that. It is progressing as we would expect. I would say we’re midway through that process right now. I would expect it to conclude near the end of the third quarter, early the fourth quarter. At that point, that’s an important part of refining our model for 2023 in particular. And what that will tell us is that the positions that we have formulary status for 2023 in for Humira, and that will help us define clearly the volume aspect of it. And so, that’s going well, and that’s going to be an important part of us being able to refine that model. And so, as we get further along in that process, that will give us the ability to be able to potentially refine the model that we have. Now, the one thing that’s important to remember in all of this is price is the other key aspect here. And there, we won’t know real pricing until the actual event starts to occur. So, we will make assumptions around what that price looks like. And I think those will be informed assumptions, but they are just that they’re assumptions. And so, that’s the one piece that will still be somewhat of an unknown until we see the landscape start to play out in 2023, and particularly in midway through 2023 when more biosimilars enter the market. So, as we get more information and we can provide more clarity, we’ll certainly try to do that, but I think that’s where we are right now. Tom?" }, { "speaker": "Tom Hudson", "text": "Thank you. Andrew, I’ll try to break down the question in different parts because you’re right, there are many TGF-beta assets. This one is unique, GARP. Most of the TGF-beta assets work either antibodies against receptors to be active for TGF-beta or TGF-beta itself that’s in circulation on cells. But GARP blocks the inactive form of TGF-beta before it’s released from TGF-beta. And we believe that actually is a differentiated mechanism, also allows that specificity to what’s happening in TGF-beta in the tumor as opposed to other systems in the body. At the beginning of this, we thought -- we had already had people that published that they are very good TGF-beta signatures that exist. And I can tell you that GARP signature follows tracks with TGF-beta signatures. And that’s often seen in all solid tumors as susceptive tumors that express these pathways. It’s a very common immunosuppressive mechanism. That’s why people and us are interested in it. We learned -- initially, from data, we kind of suspected that people who actually had a nice hot tumors but were not responding to PD-1, often had, at least from published work -- actually had a higher TGF-beta signature. So, we thought that was a reason to mechanism why these patients with hot tumors were not responding. And a lot of our initial clinical strategy there was actually to go after hot tumors where PD-1s had relapsed or refractory. And we thought we could augment the PD-1 checkpoint response by doing this combination. We did not see monotherapy activity, but in combination, we did. And that’s why our first data sets and expansions like I’ve just discussed in urothelial cancer, this project started earlier, we’re seeing data that’s suggesting that this is correct that you need to reflect both the pathway of TGF-beta and PD-1, to get a response. And those, again, in multiple tumor types we’re seeing these responses and we’re moving forward. At the same time, to bring it to colon, we could also see the same signatures of TGF-beta and GARP in cold tumors, but we weren’t sure that since they’re not IO responsive, whether we’d get a response, we would get a clinical response. So, we did start some investigations. And yes, we did see some responses in cold tumors. They happen over time, sometimes they appear, the tumors are stable for 3 months, maybe 6 months, and then you see these responses appear. They’re very durable, 1 year, 2 year, very unusual. These are patients with advanced disease that have very poor prognosis in Phase 1 studies. So, we saw some, I would say -- we sometimes say in academic column exceptional responders. And so, we decided to expand. So, those data sets are newer, are happening right now. I probably will have the data at the end of this year. But yes, we’ve seen responses to this combination. And to answer your question, so the signatures we’re looking at are not the CMS or kind of histology-based signatures on the tumor. It’s more signatures of the inflammatory response that we can measure in the tumor, and it has to do with both, inflammatory T cells, which are there for the killing, but also the inhibitory TGF-beta signatures. And of course, we’re going to continue to investigate this. I don’t have all the answers for you today, but it certainly has been exciting to see how this program has evolved." }, { "speaker": "Liz Shea", "text": "Thanks, Andrew." }, { "speaker": "Operator", "text": "Thank you. Our next question is Terence Flynn with Morgan Stanley." }, { "speaker": "Terence Flynn", "text": "Maybe two for me. Just wanted to make sure that you are maintaining your 2022 aesthetics guidance of $5.9 billion. Rob, I didn’t hear you call it out, so I’m assuming that was a reiteration, just given what you’re seeing with Juvederm in the U.S. And then the second question I had relates more of a, I guess, strategic one, Rick. I know you’re still going through the conversations with 2023 for Humira. But, as you think about providing an update to guidance, whether that happens with the 3Q results or with the 4Q results, do you think you’ll be able to provide some outlook on 2024 because I think something investors are discussing now is just if the possibility of the impact is more in ‘24, how we should think about revenue margins in ‘24 versus ‘23. So, just wondering strategically how you’re thinking about that at this point, not asking for guidance, more just thought process." }, { "speaker": "Rick Gonzalez", "text": "Okay. So, Terence, I’ll take both of those questions, and then Rob can certainly jump in here if he has something he wants to add. We are maintaining the aesthetic guidance as we’ve indicated. Certainly, we have seen good, strong performance on the toxin side of the business, and we would expect it to continue. As we look at the filler side of the business, as you’ve noted, it was lighter this quarter than we’ve seen historically. And I’d say that was driven by a couple of issues. It was certainly driven by the China- Russia issue outside the U.S. In the U.S., we did have a very successful promotional program that we ran last year. So, it was a tough comparison versus last year. But I’d also say, we have seen some glimpses of what could be inflationary pressure on that business or it could be pent-up demand for vacations. And Carrie can certainly go through more detail if there’s a follow-up question. But I think as we look at the business overall, we’re comfortable maintaining the guidance now. We believe that Botox will continue to perform very well. And obviously, we’re doing more things to be able to drive the toxin side of the business. It’s at a price point where it should be less sensitive to inflationary pressures. The price point for toxin is about $500, I think, right, Gary? And where fillers are almost twice that or maybe even a little more than twice that. So clearly, from a disposable income standpoint, fillers are more challenging for people than toxins are. And so that’s the rationale behind it. And certainly, as we look at the overall performance of the AbbVie business, we have plenty of opportunities with the diversity of our portfolio to cover any potential shortfall if we ended up having an issue. So, that’s why we’re comfortable maintaining the guidance. And I think we need to see more time play out here to see exactly where we are from a U.S. inflationary impact. On the second question, as it relates to an update on ‘23 and potentially something on ‘24. I think the way you’ve described it is accurate. When we have more information, we’ll try to provide that. And when we’ve gotten to a point that certainly by the fourth quarter call, we’re going to provide you guidance on what we think will happen in 2023. But if we can provide something on the third quarter call, I wouldn’t be looking for guidance. I think that’s not a good expectation. But certainly, potentially a little more clarification on what our contracting status looks like at that point and how that will translate into what we think. And if we can refine the model to a greater degree, we would certainly provide that. As it relates to 2024, certainly, I’m not going to -- we’re not in a position we’re going to talk about 2024 right now. And I think that would be a little bit unlikely because not all these contracts will be two-year contracts. And so, you really won’t know what your volume position is at that point. And as I said, you won’t know what the pricing is going to be, particularly midway through the year. And so, I think those will be important things to be able to dial in to where the forecast is going. I’d say, overall, we feel good about the contracting position that we’re in. And then, I’d say, the other thing is, I know investors really want to try to model this between ‘23 and ‘24. I understand why you want to do that. Certainly, we obviously would like to do that to the greatest degree possible. But, when you step back and you actually look at the performance of AbbVie and how you will value AbbVie and what AbbVie means going forward, it has relatively little to do with Humira, and that shape of that curve between ‘23 and ‘24. And certainly, by the end of ‘24, we should reach a point where we’ve achieved some level of stability on the tail of Humira. What AbbVie is all about is these other products like Skyrizi and Rinvoq and Vraylar and Ubrelvy, the aesthetics business, Qulipta. Those are going to be the things that drive it. So, if you want to focus on something and it’s what we focus on internally is that underlying growth engine that will emerge on the other side of whatever erosion Humira ends up suffering before it hit some level of stability and tail is those assets and then what comes out of the pipeline. Those are the key things that are going to create that growth between 25% and 30%. And that’s the part that we -- I would say, we’re obviously managing Humira to the greatest extent we can. But that’s the part that we as a team are focusing on. And I think that’s the most important part because that is the AbbVie going forward." }, { "speaker": "Operator", "text": "Our next question is Mohit Bansal with Wells Fargo." }, { "speaker": "Mohit Bansal", "text": "Maybe dwelling a little bit more on the Humira question for Rick and Jeff. So, you said that pricing from the competition will be key unknown for next year. As you get into contracts this year, for the next year, how rigid or flexible these contracts are from the pricing point of view when PBMs realize that the biosimilar is giving an X or Y pricing, or would that be more of a 2024 issue rather than 2023? Thank you." }, { "speaker": "Rick Gonzalez", "text": "Well, let me take a shot at that, and certainly, Jeff is closer to it. So, Jeff, if you want to add anything in, feel free to jump in and add. Typically, when you contract for an asset like Humira, you’re contracting for a formulary position. And there aren’t volume requirements or other kinds of requirements. I think it’s also -- it would be prudent to assume that biosimilars will be on these contracts, whether it’s one or more than one that will coexist with Humira. So, price plays an important role in that because they will coexist. And so, I’d say -- and as that becomes fluid, you would have to make decisions around how you try to deal with that to maintain the kinds of volumes that you want to maintain. And we’ve said all along, the strategy that we’ll have in the U.S. is similar to the strategy that we had internationally, and that is maintain as much volume as we can at the highest level of profit that we can maintain it at. And that is the logic that we will employ. But that doesn’t mean we won’t have to be somewhat responsive to prices in the marketplace on Humira. Jeff, anything you’d add?" }, { "speaker": "Jeff Stewart", "text": "No, I think that’s -- Rick, that’s a very reasonable way to look at it in terms of how these negotiations are going and how we see ‘23 playing out. I mean, the real big ones in terms of how we look at it is the two big scenarios are you are likely coexisting with one or more biosimilars or if the negotiations don’t go the way that we anticipate that were excluded in favor of biosimilars. And that’s basically where price and volume -- in terms of refining our model, for ‘23. That’s the work that we’re doing over the summer and then into the fall." }, { "speaker": "Operator", "text": "Next question is Gary Nachman with BMO Capital Markets." }, { "speaker": "Gary Nachman", "text": "So, Skyrizi was very strong in the second quarter, and you raised guidance nicely. How much of a benefit are you getting from the psoriatic arthritis indication thus far? What are you expecting Crohn’s to contribute this year? How much are those playing into the raised guidance? And are you revisiting the long-term guidance on Skyrizi at this point, given the strong performance? And then just on the hem/onc franchise. Are you keeping the infrastructure intact preparing for new products to contribute? And maybe you could talk about the near-term opportunities you see for products like epcoritamab and navitoclax, how much of those could contribute and potentially offset some of the pressure you’ve been seeing from Imbruvica? Thanks." }, { "speaker": "Jeff Stewart", "text": "Yes. Thank you. It’s Jeff. Thanks for the question. So, your instinct and observation is right. The big dynamic change for Skyrizi here, largely what you’re seeing is from the psoriatic arthritis indication. And obviously saw very, very large sequential moves. And let me give you some sense of what we’re looking at. So, we’re seeing that we’re putting more and more basically headroom into the overall share position, first in psoriatic disease, so that’s psoriasis plus PSA. So, we’re at 26% in terms of total TRx share and moving very, very nicely up. So, that’s being driven by this PSA acceleration. So first, remember that the PSA indication, we were the -- really the last large product that didn’t have that indication. So first, what happens is it starts to interact very positively in the dermatology segment. So, as I mentioned, about 30% of patients both have skin and joint involvement. And so we actually had a lower despite the fact that we had the leading psoriasis share, we had a lower psoriasis share because we weren’t covered with the joints with that indication. So, you see an immediate, very rapid acceleration of our overall derm business that I highlighted. Secondly, strategically important to the performance is that we’re able to launch the PSA indication for Skyrizi in rheumatology. So, it starts to work together with the Rinvoq PSA indication, and the rheum segment is 3 times as large as the derm segment. So, it’s a very, very good dynamic in terms of our momentum in two large segments, even before we get to Crohn’s. Now, I would say that as we’ve talked about before, I mean, Skyrizi is a very special product, very unique dosing, very stable, incredible efficacy. And so, we are encouraged on the early results of Crohn’s. It’s too early to start to see numbers or et cetera. But all of that is playing into the raise that Rob talked about." }, { "speaker": "Rob Michael", "text": "And Gary, this is Rob. Just on the guidance. So, if you recall, earlier in the year, we got asked the question, I said PSA for Skyrizi was going to contribute about $200 million this year. It’s probably closer to $400 million now with the guidance range, given the very nice uptick we’ve seen in PSA. But part of that guidance raise is also the strong share performance in psoriasis. So, it includes both. In terms of Crohn’s, that hasn’t changed. We’ve set approximately $100 million this year as we ramp access for Crohn’s. But obviously, the long-term potential for it is tremendous, and we’re very excited about that." }, { "speaker": "Jeff Stewart", "text": "And maybe I can also then chime in on the second question. Certainly, that is a -- the new assets are a very important part of our growth story for hem/onc. Certainly, as I mentioned, we’re still continuing to ramp around the world with CLL. We have more and more impressive data, particularly in the unfit frontline population. We have five years of data in the fit population for frontline for Venclexta. We’re encouraged with the myeloma data, which is very unique in terms of biomarker driven approach for the (11;14). Navitoclax would be really one of the first new entrants for myelofibrosis, where there’s really only been rocks in terms of that market. Epcoritamab, increasingly encouraging data in terms of the simple subcu, very rapid ways to get this medication in later lines and then building into frontline. So we are very, very encouraged while we see some pressure on Imbruvica, the new indications in base for Venclexta helps to offset that. And then we start to build with those near-term hem assets and super encouraged in terms of what we’re seeing in terms of the probability that we can get there." }, { "speaker": "Operator", "text": "Our next question is from Chris Schott J.P. Morgan." }, { "speaker": "Chris Schott", "text": "First one, I just wanted to come back to dynamics on the U.S. dermal filler market. I guess specifically, can you just quantify how much of the weakness we saw this -- or the decline year-over-year was due to the promotion events last year versus the impact from the economic pressures that you’re seeing? And I guess, in the same context, are you seeing any signs of weakness in the European business? I’m just -- and what I was just trying get your hands around, what type of magnitude of impact you’re talking about here in terms of either of its inflation or economic sensitivity to that business. My second question was just thinking about Rinvoq and Skyrizi formulary and pricing dynamics going forward as biosimilar Humira enters the market. I guess, are you expecting or are you hearing through discussions, any major shifts in the way payers are thinking about those products as we think about pricing coming down and obviously the largest kind of product in the space there." }, { "speaker": "Carrie Strom", "text": "Hi. This is Carrie. I’ll take your first question around Juvederm. And as Rick said, there was a onetime promotional event that we ran in the U.S. for Juvederm in Q2 of last year, and it was highly successful, and it increased sales in the sales space, which created the challenging prior year comparison. So, that was the key driver. But as you noted, there is also this impact -- economic impact that is suggestive of some early changes in consumer behavior. And that really isn’t surprising in light of the inflationary pressures that we’re seeing on discretionary income. And as Rick said, the filler market is likely more sensitive to that than toxins for a few reasons. We mentioned the price point. So a price point of closer to $1,000 versus $500 for toxin, also the nature of the filler business is different than toxin from a patient dynamic and treatment dynamic and that there are more -- there’s a longer interval between treatments for fillers versus toxin, which is sort of like a more regular treatment paradigm a few times a year. Also, the patient bases are different. When you think about the toxin patient base and Botox Cosmetic, the majority of the patient base is continuing patients versus more of a reliance on new patient acquisition. And so, those are some of the factors we’re thinking about when we think about the deceleration of the filler market in Q2 but while the market has slowed and despite the performance in Q2, we do continue to expect a positive second half growth for U.S. Juvederm, really weighted more in the fourth quarter as we’re going to launch two new fillers in the fourth quarter. And those two new fillers will get us into incremental categories for HA fillers, including jawline and skin quality, which will help to drive some incremental demand at the end of the year. And in terms of your question around economic impact outside of the U.S., we are watching that very closely, and we really have not seen that yet outside of the U.S." }, { "speaker": "Jeff Stewart", "text": "In terms of your second question, again, it’s Jeff. Thanks for that. We’re -- we don’t see some significant pressures on Skyrizi and Rinvoq. Now, we always have discussions with the payers, we look at our contracting strategy. But I think we fall back on our clinical evidence that we have on these two major assets. I mean, we have four head-to-head trials against other major competitors with Skyrizi, where we have just really growth superiority versus whether it’s an IL-17, whether it’s Humira, which one day will be biosimilar, STELARA, et cetera. So just the pure performance there and the momentum, it’s clearly a distinguished asset. We’re going to be first in terms of Crohn’s to start to establish that new area and build the market there. And I think on Rinvoq to some degree, there’s only one other JAK inhibitor that is not going to have the scope of indications and it’s Xeljanz. And Xeljanz has been significantly wounded based on the oral surveillance data. So, in terms of our ability to build and protect and grow Skyrizi and Rinvoq into the next stage of development, we’re quite confident that we have the assets to be able to do that." }, { "speaker": "Operator", "text": "Our next question is from Steve Scala, Cowen." }, { "speaker": "Steve Scala", "text": "Two questions. First, Rick, in the past, you have laid out four factors that will dictate Humira’s trajectory in 2023. The first two were Humira access and biosimilar price, and it’s clear it’s too early for any news on either of those points. But the second two were competitiveness of biosimilars, which you said in part was interchangeability and also the biosimilar ability to supply the market. So, those two factors, three and four are things that won’t fluctuate and presumably, you have some visibility on that now. So, I’m just wondering if there’s anything unusual occurring there. And in discussions, how important is interchangeability with payers. The second question is, and I apologize if I missed it, but are there any updates on the TNF steroid conjugate and is Phase 2 RA data still expected this year? Thank you." }, { "speaker": "Rick Gonzalez", "text": "All right. Thanks, Steve. This is Rick. I’ll cover the first one. And Roopal can cover the second one. So, you are correct. That is what I described a meeting or two ago as the four variables. I would say, when you think about interchangeability, I think you have to think about it in the backdrop of not just interchangeability, but also what is the profile that is the closest to Humira today? And we can look at all the biosimilars and have -- we have pretty good visibility as to what that profile looks like. And what I would say is, to get a profile that is interchangeable and is consistent with the current Humira that’s predominantly in the marketplace today, that’s probably going to occur in the summer of 2023. There should be one or two biosimilars that have a profile that looks like that. And that would make it somewhat easier for an organization to make a switch. So, I think that will play an important variable. Nothing has changed in the last few months in what that profile looks like. And then obviously, supply is an important aspect that certainly anyone that we’re looking at making a significant change in their position with Humira is going to want to make sure that they’re going with a company that has the ability to be able to produce at volume, at significant volumes, Humira, and they can do it sustainably. So, there are certain players that I would say clearly have that ability to be able to do it, similar to us. Certainly, no one does it at the scale of us or anywhere close to the scale of us. But there are also a lot of small players that I think supply is going to be an important aspect and going to somewhat limit the ability to be able to have broad market impact. And so, those are going to be important dynamics as we negotiate with the various managed care organizations. I can tell you that we’re talking through those kinds of things with them. Roopal?" }, { "speaker": "Roopal Thakkar", "text": "Yes. Thanks. Yes. So, 154 is our anti-TNF conjugated steroid, as you mentioned, and it’s enabled to target delivery of steroid directly to inflammatory cells. So, we do have that Phase 2 running several hundred patients, and we still anticipate getting read later this year and then further data to follow next year." }, { "speaker": "Operator", "text": "Our next question is Chris Raymond, Piper Sadler." }, { "speaker": "Chris Raymond", "text": "Two questions. Maybe one that’s more broad policy and then another one that’s maybe a little bit more detailed. So, maybe first for Rick. I know you guys keep pretty close tabs on healthcare policy. Just on the most recent Senate Democrat drug pricing language in the reconciliation bill. The provisions on the face of it seemed pretty manageable in terms of direct impact from pricing controls, but there’s been some concern around this being just the start of something larger in terms of price controls. Any thoughts from you guys on this would be appreciated. And then, maybe a more detailed question on ABBV-951. I know you guys haven’t provided specific guidance on this or on Duodopa, but there seems to be a lot of recognition of 951 among movement disorder KOLs as a real improvement in terms of overcoming reticence around Duodopa. Just how should we be thinking about 951 vis-à-vis Duodopa, if approved? Thanks." }, { "speaker": "Rick Gonzalez", "text": "Okay. So, I’ll take the first question. I mean, I think if you look at the drug pricing proposal that’s out there, it’s certainly an important issue for us, and I think it’s an important issue for patients. I think if I look at that bill, and I’m assuming that if there were something that were to pass, it would be somewhat consistent with what was in the build back better for the Senate Finance text. And so far, it looks like that, but obviously evolving a bit here as we go along. And if I look at it in total, what I’d say is there’s a couple of positive things in there. Certainly, most notably, the $2,000 cap out-of-pocket costs for patients and the ability to be able to smooth, I think that’s an important step in increasing affordability, especially for patients in Medicare Part D. And so, that’s something we’ve been supportive of. We’ve been vocal that we think that’s an important step forward. What I’d say on balance, this is a bill that has far more negatives than it has positives in it. And I think although it may not be short term that challenging from a financial standpoint, I think the long-term implications of this bill are pretty significant. And they really hinge around this so-called negotiation clause that’s in there and how that’s being implemented, particularly for small molecules. And if you’re familiar with it, essentially what it says is that CMS or we’re assuming it will be CMS, has the ability at a certain point in time to be able to negotiate a price on a set of drugs. And by the time you get there, it will be a big set of drugs that they’ll have the ability to be able to negotiate on. And the key issue is this. Essentially, they have full latitude to basically decide whatever price they want the drug to be. And I wouldn’t necessarily call it a negotiation because the only alternative that the manufacturer has is to accept a 95% penalty on their revenues or, in essence, take a 95% discount. So, it’s not a negotiation. We should just call it what it is. It’s price controls is what they’re basically putting in place if the language stays the same. And ultimately, I think the real challenge is how we invest in this as an industry in innovation. If you take small molecules as an example, I’ll walk you through an example that illustrates the point that I’m going to raise here. If you take a small molecule, it says at year nine after the first approval, CMS has the right to be able to negotiate the price on that drug. So, if you take an oncology drug as an example, how do we develop oncology drugs in this industry? And what do the regulatory authorities typically require us to do, to be able to develop an oncology drug. Well, they typically require you to do and what we typically do is we go to patients who have failed on all the existing therapies, fourth-line patients, fifth-line patients. And we take whatever drug we have and we determine, do we have a positive benefit risk in that patient population. If we find that we do, then we seek approval for that drug in that patient population, so that those patients will get the benefit of that drug. And then, we start to work our way up towards front line. Those who refractory patients are typically very small populations of patients, right? And you can never get a return on a drug just on that patient population. And then, you work your way up to front line, or second line, or wherever you end up. That process typically takes 7 to 9 years because of the length of the trials. So essentially, with this, by the time you got to the larger populations, you’d be within a year or two of when CMS could change the price. But one, it’s impossible to figure out what the return is going to be, so how do you invest? Two, it really puts negative pressure on you not to continue to develop new indications. But the most detrimental part of it is to patients who need these drugs or small indications or in later stage. Because you’re faced with the dilemma -- and this is a horrible dilemma, right, as a company and for patients. You’re faced with a dilemma of do I choose not to seek approval in those late-stage patients, so I don’t start the clock and wait until I’m closer to frontline before I start the clock. That is not the right policy. And I would say, on balance, this bill will have a couple of things that are good for patients that I’m fully supportive of. But unless Congress wants to harm patients and harm innovation in this industry, they need to change that part of it. It doesn’t make sense. It’s shortsighted. Now, they can change it in a couple of different ways. They can determine, okay, what is a floor price or a maximum discount by year and then you can calculate the return on investment that you’re going to have on the drug or they can at least make it consistent with biologics that are out 13 years. Otherwise, the investment in small molecule oncology drugs or neuroscience drugs, which Medicare patient populations are highly dependent on new innovative drugs in those areas because they’re elderly patients, are going to suffer. And the CBO report that was published back in April of last year clearly pointed that out. So, this isn’t something I’m just saying or industry is just saying. And in fact, if anything, I’d say, they probably undercall the magnitude of the impact. So, this is an important issue. We all know the affordability and access for Medicare patients is important. But you don’t need to destroy the innovation model in the process in order to provide that. And so, I’m hopeful that we’ll see some movement here and some rationality will play out." }, { "speaker": "Jeff Stewart", "text": "Okay. And to address your 951 -- hi, it’s Jeff. Thanks for the question. So, I think some perspective is globally, DUOPA is about $0.5 billion brand. And certainly, we’ve said that we believe that 951 could certainly double that up or more. I’ll give you the perspective of why we think that way. So, if you look at the advanced Parkinson’s patients, about 85% sort of cycle when they stay on these generic orals that become less and less and less effective. And the only thing they can really do, and that’s about 15% of the market, the advanced Parkinson market, is they can move to either deep brain stimulation or DUOPA. But you got to go through a surgical barrier. So, the families and the patients are forced to think if I need to get improvement in my symptoms and my quality of life, I’m forced to basically think about do I get a hole in my head or a hole in my stomach with a gastric surgery. This is going to be a subcu. And so, we see in our market research that at least 40% to 60% of people never want to move towards DBS or DUOPA. So, we think this is a way where we can start to expand and create a new market segment, in essence, a subcutaneous segment where you don’t have to take that risk on the surgery. And like you mentioned in the movement disorder centers, there’s a significant amount of experts that are excited about this new option, and we believe that it’s going to be a real innovation for patients without having the surgery." }, { "speaker": "Rob Michael", "text": "And Chris, this is Rob. As Jeff said, I mean, we expect this to be market expanding. At the JPMorgan conference earlier this year, we did give peak revenue guidance for 951 greater than $1 billion. Obviously, DUOPA is $0.5 billion now. If you’re modeling it, obviously, there’ll be some level of cannibalization, I’d say, minor level of cannibalization on Duodopa. But when you think about the combination between 951 and Duodopa, obviously, it’s going to grow the revenue for the Company and expand the market." }, { "speaker": "Liz Shea", "text": "Thanks, Chris. Operator, next question, please?" }, { "speaker": "Operator", "text": "Thank you. It’s Tim Anderson with Wolfe Research." }, { "speaker": "Tim Anderson", "text": "Hi. If I could just go back to the whole ‘23 versus ‘24 thing, am I -- I thought that in the past, you guys have said earnings would trough in 2023 and then return to growth in 2024. Is that still the case, or is that off the table? And then, second question goes back to the 154 compound, your antibody drug conjugate. We understand that the timing is still on track, but I just -- it feels like to me there’s a distinct lack of enthusiasm towards this program, you don’t seem to mention that much or at all really, despite its novelty and despite it being in your most critical franchise of immunology. So, has the enthusiasm waned over, let’s say, the last couple of years?" }, { "speaker": "Rob Michael", "text": "So Tim, this is Rob. On your first question, what we’ve said -- we’ve talked about this 45% with a range around that plus or minus 10% and using, obviously, the Europe analog as an example. And in that case, with the steep erosion year one and ‘23, you would expect then the trough to be in ‘23 and return to growth in ‘24. As this plays out, we’ll see how that shakes out. Ultimately, if more of it happens in ‘24, you obviously have another year of growth for all your growth brands. And so, you have a different floor in that scenario. But most importantly, it’s what happens in ‘25 and beyond. When you look at this company with the growth drivers we have, we’ll be delivering high-single-digit growth in ‘25 and beyond, which is industry-leading. We’ll have the lowest LOE exposure in the industry in the second half of this decade. And so, we’re focused on the long term, we feel very good about the prospects of this business. But as it stands now, the most recent direction we’ve given is expect that first year erosion, so that 45% plus or minus 10%, which then play out to a return to growth in ‘24. We’ll obviously update the market as we see it play out next year." }, { "speaker": "Tom Hudson", "text": "Maybe I’ll take this one. This is Tom Hudson. I’m a clinical immunologist, and I know how we’ve been using steroids, they can give very profound and deep immunosuppression, decrease inflammation, and that’s often used in severe cases when patient shows up. So, we know that the response is very strong, but there are a lot of side effects. And, when our problem is always weaning, the steroid’s out in the clinic. So here, again, the combination of immunomodulator like TNF and steroid have that potential of giving us that deep, deep response very quickly to remove the immunosuppression. And based on the data we’ve seen preclinically in our Phase 1 studies, we’re not seeing those biomarkers or side effects in the bone or brain, a cortisol or others. So we’ve already demonstrated that, and we have nice data. The other -- so that’s my enthusiasm. We expect to see deep responses, durable responses with much well better tolerated than steroids. Our program -- and we’ve shown this also is that we’ve actually believed in the platform and we’re developing steroid ADCs for other targets to target other immune systems -- other immune cells, more specifically around some T cells or some B cells or some fibroblasts. These programs are coming forward. We think this is a profound platform in immunology to go after different biologies -- in very targeted steroid suppression of different specific immune cell types, and that’s going to play out over the next couple of years. So, based on the data we saw, we expanded the platform to other biomarkers getting into other specific immune cell types. Of course, we’re quiet because we need to see the data, all -- the study has been fully recruited, actually moved faster than we expected. And the day was randomized. We’re just going to see the data in the fall because it’s a blinded study. But the enthusiasm is there. And we’re also, of course, seeing that data, and then we have PMR because we also started studies there in Crohn’s disease. We’ll see that data later, but the more data we have, the more likely we’re going to expand this program to other indications where we believe that deep steroid suppression with TNF might actually bring new solutions for patients." }, { "speaker": "Operator", "text": "Our next question is Geoff Meacham, Bank of America. Your line is open." }, { "speaker": "Geoff Meacham", "text": "Great. Thank you so much for the question. Not to belabor the point on Humira, but I wanted to ask you, is the long-term, meaning the four-year kind of trend that we saw this quarter for Humira in Europe, is that still a good proxy for how you guys are thinking about the tail for Humira, just given we’re coming up on four years in Europe and we’re talking about high single-digit erosion still. So, I wanted to kind of ask you about the tail piece of what you expect in the U.S. And the second question, just on Rinvoq, I wanted to ask you also on the -- since the FDA labeling change, you just seen any changes with regard to persistent rates or new starts just on your feedback from the field and how docs view the safety of the JAK class. Thank you." }, { "speaker": "Rob Michael", "text": "Jeff, this is Rob. I’ll take your first question. So, the way we’ve talked about Humira erosion, it’s played out in Europe as we saw that steep erosion in year one, more moderate erosion years beyond. In our modeling now, that’s probably the best way to think about it is deep erosion year one, more moderate. You’ll have an annualization impact in year two, but more moderate beyond that. And specifically within the Wave 1 countries, when we look at Europe, and the level of revenue we have this year relative to pre-LOE, we still have about 30% of the revenue footprint. So, it gives you a sense of where Europe is after four years. Obviously, as we model the U.S. out, and it will be more specific in the future, but right now, we’re using Europe as an analog." }, { "speaker": "Jeff Stewart", "text": "And regarding Rinvoq in terms of perceptions from the field or what we’re seeing. It’s largely developing as we predicted. So, we do see segments of physicians that are more wary of the JAKs after the label change. However, we anticipated that. So, we are starting to see a recovery in second line plus in RA as we anticipated. And the new indications because really we’ll be the only JAK inhibitor with the four big indications of RA, PSA, AS and then non-radiographic ultimately in the fall. That just builds upon the confidence level of the physician. So, that’s what we’re feeling from the field. I’ll mention maybe some color on ulcerative colitis. I mentioned that we’re encouraged on the ulcerative colitis start. So, we saw in the quarter because we launched in early April. We saw 600 unique gastroenterologists start to write prescriptions, which is quite interesting and good, a positive. And about half of those customers had never written a JAK inhibitor. So, Xeljanz was approved. And so, we’re seeing, obviously, the ability of these customers to understand the overall risk benefit of Rinvoq relative to, let’s say, another JAK inhibitor. So I feel that our communication is on track, and we’re seeing positive feedback as we build the indications that we’ve highlighted in the call." }, { "speaker": "Operator", "text": "Our next question is Colin Bristow with UBS." }, { "speaker": "Colin Bristow", "text": "Another one on the ‘23 Humira guidance. Could you just walk us through -- at the point at the end of 3Q, what percentage of contracts or volume will you have confirmed at that point? And then, it sounds like that by the -- by the time you have the full year results, you’re still anticipating that there could be a meaningful change. Could you just confirm that’s a fair characterization? And then just on ABBV-154, what are you hoping to see with the Phase 2 data that we’re going to get at year-end? And what’s the threshold here that you need to surpass to move forward? Thanks." }, { "speaker": "Tom Hudson", "text": "Yes. So, if we look at the discussions that we’ve highlighted and Rick highlighted, I think and they’re progressing as we would expect. So typically, they start in the late spring. And look, these are complex negotiations. They go on for many, many months. In many years, we would have completed the -- at least the large PBM negotiations, which is the vast majority of the volume by that October time frame. In some cases, as you probably know, the payers would publish this information. But very often, not always, the immunology an inflammatory segment, those negotiations can go on longer, and they’re very often published as a TBD in what used to be called the exclusionary formulary. So, we would -- as Rick mentioned, we would have visibility to sort of the status on the volume in that October time frame. That’s a reasonable assumption. Again, I don’t know for sure, given the complexity of biosimilar negotiation, which has never taken place before. But that’s a reasonable way to think about when we’d start to have the visibility to the volume component, as Rick highlighted." }, { "speaker": "Roopal Thakkar", "text": "Yes. And it’s Roopal on the 154 question. Dovetailing on what Tom just walked through, things that we want to see are consistent with how we develop in immunology, certainly raising standard of care. So, the way this was designed was to have that anti-TNF and then that direct delivery to avoid systemic side effects of the steroids. So, you’d see sort of that one-two punch as Tom was describing and see that depth of response. So, once we see that type of information along with how it looks from a steroid standpoint, metabolic effects, bone effects taken together will give us a great sense of where it could fit before anti-TNFs, even after we’re studying patients that have failed anti-TNFs in this Phase 2 study. So, taken together, that will give us a really good sense of where to go. And then remember, we’re also going to get data in polymyalgia rheumatic. It’s not an uncommon disease, and these patients are -- many of them are steroid-dependent, 50% or so three years and going and they can’t withdraw from steroids and maybe a third can be 5 plus 6 years. They’re stuck on steroids. So we’ll see that data where we’re able to prevent them from flaring and to be able to reduce their systemic steroid dose. So, there’s multiple facets to this and potentially a number of opportunities and then later on in Crohn’s disease as well." }, { "speaker": "Liz Shea", "text": "Thanks, Colin." }, { "speaker": "Operator", "text": "Our next question is from Chris Shibutani with Goldman Sachs." }, { "speaker": "Chris Shibutani", "text": "Two questions, if I could. For Skyrizi, if I could just return to this question of how you’re thinking about the long-term guidance. I think on Skyrizi, recalling that you said $7.5 billion, consisting of about 6 from the psoriatic complex. And yet you’re almost already approaching something close to $5 billion. So, can you tell us how you’re thinking about how that could factor in any long-term thinking? And then, for epcoritamab, positioning of that treatment in the overall treatment paradigm. How are you thinking about that in relation to, for instance, CAR-T therapy treatment options before, after? Thank you." }, { "speaker": "Rob Michael", "text": "Chris, this is Rob. I’ll take that question. So look, we’re very encouraged by Skyrizi’s continued strong performance. We remain confident in our ability to achieve or exceed that 2025 guidance. Now, keep in mind, I mean, the Street also reflects that too. Street is about $400 million higher than that $7.5 billion. That said, we don’t intend on frequently updating that guidance. Obviously, we’ll provide that guidance update every few years or if there’s an event or there’s a major disconnect. So obviously, if the Street was way off, we want to point that out. But overall, we’re very encouraged about the uptake for Skyrizi. It’s clearly demonstrating its ability to drive long-term growth for AbbVie, and we’ll provide an update for long-term guidance at the appropriate time." }, { "speaker": "Neil Gallagher", "text": "Thanks. And on the epcoritamab question. So I’m not going to go through all of the data points again, we’ve described them several times in the public domain. What I would remind you of is that we’ve observed extremely robust efficacy in a heavily pretreated population. Now it’s true to say that 40% of those patients have sailed CAR-Ts, but 60% of those patients didn’t sail CAR-T. Therefore, our expectation, our intention, rather, and as we’ve mentioned earlier on in Tom’s prepared remarks, we are anticipating filing for accelerated approval during the second half of this year. And I think that what you can expect is that we believe that the total population, the total relapsed/refractory population, whether or not they sail CAR-Ts should have access to epcoritamab because of the strength of the data overall. In terms of future positioning, we’ve also discussed in the past our intention of initiating multiple phase -- additional Phase 3, the confirmatory study for the DLBCL application what would be the confirmatory study, the Phase 3 study is ongoing. That’s in the relapsed/refractory setting. And our anticipation is that we will initiate multiple additional Phase 3s, both in DLBCL and other indications over the coming 12 to 18 months." }, { "speaker": "Jeff Stewart", "text": "Maybe I could just build on that. Chris, it’s Jeff. So, we’ve started to talk to different types of physicians, whether they’re in the CAR-T centers or certainly the community centers. We’re increasingly believing that this lymphoma is treated in the community centers. And so, what we hear, at least at a high level from our research so far is wow, that efficacy is incredibly impressive, even after CAR-T. But where they go is this simple subcu of epcoritamab may be the fastest way to deliver T cells to my patients I’m dealing with. So to build on Neil’s point, that data doesn’t look like it’s niching the drug. In fact, it looks like it’s sort of contributing to the idea of like this is a democratized type of medication for the lymphoma. So, it’s very encouraging from our initial work that we’re doing with physicians." }, { "speaker": "Liz Shea", "text": "Thanks, Chris. Operator, we have time for one final question." }, { "speaker": "Operator", "text": "And that question comes from David Risinger with SVB Securities." }, { "speaker": "David Risinger", "text": "Yes. Thanks very much, and thanks for all the details on today’s call. Rick, I was hoping that you could help us to understand the current M&A landscape, how would you characterize it broadly? And then, if you could also comment more specifically on AbbVie with respect to the transaction opportunity set for AbbVie. Thanks very much." }, { "speaker": "Rick Gonzalez", "text": "I think, if you look at the M&A environment, I think many players are trying to add to their portfolios. I think there’s less of an appetite for larger transactions right now in general across the industry. Some of that’s probably predicated on the fact that the FTC has been pretty tough in their language around larger kinds of transactions and your ability to be able to get those through. And I think as it relates to us, I mean, we have continued to execute the strategy that we put in place after the Allergan transaction. Allergan, obviously brought us a tremendous amount of diversity. That transaction has been highly successful and has really changed the look and the shape of AbbVie and it has clearly enhanced our performance, and we’ve done quite well. Our focus is continuing to look for opportunities to be able to fill out our portfolio in areas that we believe there are opportunities to bring in strategic assets. We’re probably working more on earlier-stage assets add to our R&D pipeline. Epcoritamab is a good example of the kinds of things that we’re out looking for and finding, to supplement the overall pipeline. I think that strategy has worked well, and it’s a strategy that we’ll continue to do going forward." }, { "speaker": "Liz Shea", "text": "Thanks, David. That concludes today’s conference call. If you’d like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us." }, { "speaker": "Operator", "text": "And thank you. This does conclude the call. You may disconnect your line. And thank you for your participation." } ]	AbbVie Inc.	141,885,706
ABBV	1	2,022	2022-04-29 09:00:00	Operator: Good morning and thank you for standing by. Welcome to the AbbVie First Quarter 2022 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion of this call. [Operator Instructions] Today’ conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Ms. Liz Shea, Vice President, Head of Investor Relations. Liz Shea: Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Rob Michael, Vice Chairman, Finance and Commercial Operations and Chief Financial Officer; Jeff Stewart, Executive Vice President, Chief Commercial Officer; and Tom Hudson, Senior Vice President, R&D, and Chief Scientific Officer. Joining us for the Q&A portion of the call are Carrie Strom, Senior Vice President and President, Global Allergan Aesthetics; Neil Gallagher, Vice President and Chief Medical Officer; and Roopal Thakkar, Vice President, Global Regulatory Affairs. Before we get started, some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today’s conference call, non-GAAP financial measures will be used to help investors understand AbbVie’s business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll now turn the call over to Rick. Rick Gonzalez: Thank you, Liz. Good morning, everyone, and thank you for joining us today. I'll briefly comment on our overall performance, then Jeff, Tom and Rob will review our first quarter business highlights, pipeline progress and financial results in more detail. I'm pleased with the excellent start to 2022. It further reinforces our confidence in the long-term fundamentals of the business. We reported adjusted earnings per share of $3.16, exceeding our expectations. Total net revenue of more than $13.5 billion was up 5.4% on an operational basis, also above our expectations. These results demonstrate strong momentum across several key products and portfolios, including robust double-digit operational revenue growth from Skyrizi, Rinvoq, Neuroscience and Aesthetics. Skyrizi is performing exceptionally well. We are achieving impressive market share gains in psoriasis, which remains a significant market opportunity. Skyrizi's recent launch in psoriatic arthritis as well as the anticipated regulatory approval in Crohn's disease should also serve as important growth drivers over the long-term. Rinvoq is also contributing compelling sales growth. Subscription trends in RA have recently stabilized as we expected and we are making excellent progress repositioning the brand as the leading second-line agent based on the robust data generated across our broad development programs. The early launch trends for Rinvoq in both atopic dermatitis and psoriatic arthritis are highly encouraging, with commercial access and paid prescriptions expected to ramp significantly over the coming months. We anticipate that these two new indications, along with the recent U.S. approval in ulcerative colitis, should add substantial revenue growth for Rinvoq over the long-term. Neuroscience remains an exciting opportunity for our company. Vraylar continues to have strong momentum across our currently approved indications and the pending regulatory approval in major depressive disorder represents a significant upside to current projections. In migraine, our portfolio of distinct therapies with Ubrelvy, Qulipta and Botox Therapeutic is demonstrating robust double-digit sales growth. With the migraine market anticipated to roughly double in size over the next several years, there is significant headroom for continued revenue growth with these compelling therapies. Aesthetics is once again exceeding expectations. The category continues to grow robust double digits, especially in toxins and fillers, where there is substantial opportunity for further market penetration. Our commercial team is executing at a high level with targeted promotion and enhanced digital services, including our Alle loyalty program driving strong market share performance across our major brands. In summary, this is an exciting time for AbbVie, and I'm extremely pleased with the evolution and momentum of our diverse portfolio. We're making excellent progress with the launches of several new products and indications, which will collectively add meaningful revenue for AbbVie as commercial access ramps for each of these opportunities over the remainder of this year. We're off to another exceptional start, and our long-term growth prospects remain strong. I'd now like to take a brief moment to thank Mike Severino for his contributions to the success of AbbVie over the last eight years. As you know, Mike has decided to leave AbbVie at the end of May to pursue another career opportunity, and we wish him all the best. I'd also like to take this opportunity to formally introduce to you Tom Hudson. Tom joined AbbVie back in 2016 as the Head of Discovery and Early Development. In 2018, Tom undertook responsibilities for AbbVie's entire discovery organization. Then in 2019, was promoted to the Head of AbbVie R&D and Chief Scientific Officer, where he assumed responsibility for all of AbbVie's R&D. Tom has an impressive background as a clinical scientist. His medical specialty is in clinical immunology and allergy. Tom played a critical role in the human genome project while working at both the Whitehead Institute and MIT, where Tom led the team that mapped the human genome. Tom was also instrumental in the international half map project to refine the genetic architecture of the human genome. Tom went on to further lead the Ontario Institute for Cancer Research, which included discovery and translational cancer research with a clinical network of more than 1,000 investigators. Tom will be providing an update on our continued pipeline progress to you later in the call. But first, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff? Jeff Stewart: Thank you, Rick. We continue to demonstrate strong commercial execution across our therapeutic portfolio. I'll start with Immunology, which delivered global revenues of more than $6.1 billion, reflecting growth of 8.1% on an operational basis. Humira global sales were approximately $4.7 billion, down 1.8% on an operational basis with low single-digit revenue growth in the U.S., offset by biosimilar competition across international markets, where revenues were down 17.9% operationally. Skyrizi global revenues were $940 million, reflecting positive momentum in both approved indications. In psoriasis, Skyrizi is demonstrating impressive market share gains globally. Skyrizi now accounts for approximately 23% of the total prescription share in the U.S. biologic market. Skyrizi's in-play psoriasis share, which includes both new and switching patients, also remains very, very strong and now reflects roughly 40% patient share in the U.S. and a clear number one leadership position. Skyrizi is performing exceptionally well internationally, where we have now achieved approximately 10% psoriasis share across our top 12 markets, as well as in-play share leadership in more than 20 key countries. While we were early in our launch in psoriatic arthritis, we are encouraged by the uptake in this indication. In the dermatology segment, Skyrizi has already achieved in-play patient share of more than 10% in the U.S. Internationally, Skyrizi PSA is now approved in 45 countries, with reimbursement expected to increase throughout the year. Importantly, we are also preparing for the launch of Skyrizi in Crohn's disease, which represents another important long-term growth driver with approval decisions anticipated this year. Turning now to Rinvoq, which delivered global sales of $465 million, demonstrating continued strong growth. As anticipated, we have seen an impact on new patient starts following the label update and Rinvoq prescriptions have now stabilized in the U.S., with in-play market share currently 12% in RA. We expect growth in the second line plus RA setting going forward where our field force is now focused on leveraging compelling data from two important Phase III trials. First, SELECT-CHOICE, which demonstrated Rinvoq's superiority versus ORENCIA across key efficacy parameters, including clinical remission in previously treated RA patients. And second, the open-label extension of SELECT-COMPARE which demonstrated that many RA patients with an inadequate response to Humira are able to achieve remission after switching to Rinvoq. Early feedback suggests this updated Rinvoq RA messaging is resonating very well with healthcare practitioners. Internationally, Rinvoq share continues to ramp in RA with a total market share of approximately 5.5% across key geographies. We are also making excellent progress with Rinvoq's newly launched indications, including atopic dermatitis, psoriatic arthritis and ulcerative colitis. Managed care access is expected to ramp strongly for each of these indications over the coming months. As we build access, initial prescriptions are covered by our BRIDGE program. which provides free patients or free goods to patients until formulary coverage is established. As a reminder, the volume from our BRIDGE program is not captured in third-party prescription data. I'll start with atopic dermatitis. We are seeing new patient starts accelerating as we build access. When you include prescriptions from our Bridge program, Rinvoq total in-play AD share is already in the mid-teens. So, we are pleased with the early adoption and repeating prescribers. As an oral option that provides significant skin clearance and itch relief, we believe Rinvoq has a strong differentiated position in this highly underpenetrated AD market. In PSA, we are seeing a nice uptake in Rinvoq's in-play share, especially in the rheum segment, where the severity of joint or skin manifestations of the disease can vary significantly by patients. And importantly, we have also launched Skyrizi in the rheum-PSA segment this quarter, giving us two very compelling therapies to address the wide range of PSA patient types, regardless of how their symptoms present. We have also launched our first indication in the IBD segment, Rinvoq for ulcerative colitis, where we are seeing a significant long-term opportunity in the second-line plus setting. Nearly 50% of UC patients are currently on or have used TNF therapy, so the addressable patient population is substantial. Given the strong benefit risk in this indication, we believe Rinvoq will be a welcome therapeutic option for UC patients and physicians. Turning now to hematologic oncology. Global revenues were more than $1.6 billion, down 0.6% on an operational basis. Imbruvica global revenues were approximately $1.2 billion, down 7.4%. There are two factors impacting our Imbruvica results. First, we are seeing greater market share erosion in new patient starts than originally anticipated from newer therapy, including other BTK inhibitors, as well as our own Venclexta. Second, we continue to see higher-than-expected COVID suppression on new patient starts in CLL, which as a treat-to-progression therapy, has impacted the total BTK treated patient market. Our guidance assumes a market recovery over the course of this year, but it's too early to determine exactly how this may play out, given the continued impact from recent COVID variant. Despite these dynamics, Imbruvica remains the market-leading therapy for total patients across CLL and several other major blood cancers. Based on the magnitude of clinical data and real-world evidence generated for Imbruvica, showing sustained disease control as well as overall patient survival, we are confident it will continue to be a meaningful product for AbbVie over the long term. Venclexta, however, is helping to offset some of the headwinds facing Imbruvica. Global sales were $473 million, up 21.1% on an operational basis. In the US, Venclexta's the clear market share leader in frontline AML, among patients who are ineligible for intensive induction chemotherapy and recently achieved leading new patient share in second line plus PLL. We are also seeing robust momentum internationally, with strong performance across all approved indications. Additionally, we continue to make excellent progress building out our hem/onc portfolio, with several compelling late-stage assets, such as epcoritamab for B-cell malignancies, Navitoclax for myelofibrosis and ABBV-383 for multiple myeloma, expected support -- expected to support sustainable long-term growth. Turning now to neuroscience, where revenues were approximately $1.5 billion, up more than 20% on an operational basis, including robust double-digit growth from Vraylar, Botox Therapeutic and Ubrelvy. Ubrelvy is performing very well and continues to be the market-leading oral CGRP treatment for acute migraine, with sequential demand growth observed. Qulipta is also demonstrating exceptional uptake in migraine prevention, with recent total prescriptions performing ahead of comparable branded launches. Qulipta is now capturing nearly 25% on of the new-to-brand share in the US preventative CGRP class when we consider both paid and bridge volume. We expect commercial access to continue to ramp strongly over the remainder of the year. Qulipta has also recently demonstrated positive results from a registration-enabling study for the preventative treatment of chronic migraine, which we plan to submit to the agency for potential expanded use in the US as well as to support regulatory applications across the international market. This indication, if approved, will provided added differentiation for Qulipta as the only oral CGRP therapy for the preventative treatment of both episodic and chronic migraine. In our other notable therapeutic, eye care revenues of $771 million were down 2.8% on an operational basis with recent generic competition for Restasis unfavorably impacting our results. Mavyret sales were $380 million, down 4.6% on an operational basis as treated patient volumes remain depressed compared to pre-COVID levels. So, overall, I'm extremely pleased with our execution across the therapeutic portfolio, including the progress we are making with recent new product launches. We remain on-track to deliver strong revenue growth once again in 2022. And with that, I'll turn the call over to Tom for additional comments on our R&D program. Tom? Tom Hudson: Thank you, Jeff. I'll start with immunology. We recently received FDA approval for Rinvoq in ulcerative colitis, a disease where there continues to be a significant unmet need for therapies that can provide high response rates and durable remission. In our UC development program, Rinvoq demonstrated some of the highest rates of remission and endoscopic improvements seen in Phase 3 studies. Importantly, Rinvoq also provided durable responses sustained through one year of treatment. Given the strong benefit risk profile, we believe Rinvoq will be an important new medicine for patients. Our regulatory applications for Rinvoq in UC remain under review in Europe and Japan, with approval decisions expected in the second half of this year. Also in the area of inflammatory bowel disease, we recently reported positive topline results from the second Phase 3 induction study for Rinvoq in Crohn's disease. Similar to results from the first induction trial, in this induction study, Rinvoq demonstrated a very strong impact on the disease as measured by clinical remission and endoscopic response. We expect to see results from the Phase 3 maintenance study later in the quarter with our regulatory submissions for Rinvoq and Crohn's disease expected in the third quarter and approval decisions anticipated in 2023. Rounding out Rinvoq's development programs in rheumatology, we also have regulatory applications under review in ankylosing spondylitis and non-radiographic axial SpA. We expect an FDA approval decision in the second quarter for AS and decisions in the fourth quarter for non-radiographic axial SpA. Moving to Skyrizi, where in the quarter, we announced an update regarding our regulatory application for Crohn's disease in the US. Following an FDA request for additional information, primarily related to the on-body injection device used for maintenance dosing, we provided additional data for the device from an ongoing real-life use study, which showed that patients can safely and effectively use the on-body device to self-administer Skyrizi. After responding to the agency's request, we received a 3-month extension of our Skyrizi submission in Crohn's disease. We remain confident in a strong benefit risk profile for Skyrizi in Crohn's disease and we now expect a decision in June. Moving now to our Oncology Portfolio, where we continue to make excellent progress across all stages of our heme and solid tumor pipeline. We recently announced positive top line results from the first expansion cohort of the Phase II study, evaluating epcoritamab in patients with aggressive B-cell lymphoma who have received at least two prior lines of therapy. Epcoritamab performed extremely well as a monotherapy in these heavily pretreated and high-risk patients, demonstrating an overall response rate of 63% with a median duration of response of 12 months. These results are particularly encouraging, given that nearly 40% of patients had failed CAR-T therapy. We plan to discuss these results with regulatory agencies about the potential to support submission for accelerated approval in the second half of this year. We continue to make good progress with the indication expansion programs for Venclexta and remain on-track to see results from the Phase III CANOVA trial in relapsed/refractory multiple myeloma patients with a t(11;14) mutation in the second half of this year. In our Venclexta MDS program, based on feedback from the FDA, we have recently modified our regulatory strategy and now intend to submit data from our ongoing Phase III program. Venclexta remains under Breakthrough Therapy Designation for MDS and we continue to have a high degree of enthusiasm for Venclexta in this indication. We expect data readout from the Phase III study and our regulatory submission for MDS in 2024. In Neuroscience, the FDA recently accepted our application for Vraylar as an adjunctive treatment for major depressive disorder. Based on the strong benefit-risk profile demonstrated in our clinical program, we believe Vraylar will be an important new therapy in this patient population, and we look forward to bringing this new treatment option to patients suffering from major depressive disorders. In the area of migraine, we recently reported positive topline results from a Phase III study evaluating Qulipta for the prevention of chronic migraine. Qulipta performed very well in this study with both doses meeting the primary and all secondary endpoints, demonstrating Qulipta's ability to significantly reduce migraine days for patients suffering from chronic migraine. This summer, we plan to submit our regulatory application to the FDA for Qulipta in chronic migraine and also plan to submit data from our Phase III studies in both chronic migraine and episodic migraine to support regulatory applications in markets outside the US. In our cystic fibrosis program, we recently completed an interim analysis of a Phase II proof-of-concept study evaluating our triple combination therapy. The results – the efficacy results from this interim analysis did not meet our prespecified criteria for advancing this triple therapy in development. This study was designed with a 28-day run-in treatment period, with a dual combination therapy containing our C1 corrector and potentiator, followed by a 28-day treatment period, with a triple combination, which included the addition of our C2 corrector, ABBV-119. This allowed us to independently assess the therapeutic potential of our C2 corrector. The results showed that the addition of 119 did not provide a meaningful improvement in FEV1 or reduction in sweat chloride concentration over our dual combination therapy. During the run-in treatment period, we were able to again assess the efficacy of our dual therapy, which performed well, providing efficacy consistent with results for the existing dual accommodation therapy. So based on the performance of our dual therapy, we plan to continue our CF program. We have an additional C2 corrector, ABBV-576 in Phase 1 studies that we plan to advance into a new triple therapy with our existing C1 corrector and potentiator. 576 is structurally distinct from our previous C2 corrector 119 and has a better PK profile and provides higher drug exposure, which has the potential to deliver better efficacy. Our plan is to begin a Phase 2 study for this new triple combo by early next year. And in Aesthetics, we recently began the Phase 3 program for our short-acting toxin in Glabellar Lines. This novel toxin is designed to provide rapid onset of action and a short duration of effect, which would lower the barrier for adoption for certain segment of consumers. We expect to see data from this program next year with regulatory applications also anticipated in 2023. So in summary, we've continued to make significant progress with our pipeline to start the year, and we look forward to many more data readouts, regulatory submissions and approvals throughout the remainder of 2022. With that, I'll turn the call over to Rob for additional comments on our first quarter performance and financial outlook. Rob? Rob Michael: Thank you, Tom. AbbVie's first quarter results demonstrate the strength of our broad portfolio, including double-digit growth from Skyrizi, Rinvoq, Venclexta, Neuroscience and Aesthetics. We also continue to deliver strong P&L performance, with another quarter of robust operating margin expansion, while fully funding the business for long-term growth. We reported adjusted earnings per share of $3.16, reflecting growth of 9.3% compared to prior year and $0.04 above our guidance midpoint. This includes an $0.08 unfavorable impact of acquired IPR&D expense that was not factored into our original guidance. Total net revenues were more than $13.5 billion, up 5.4% on an operational basis, excluding a 1.3% unfavorable impact from foreign exchange. Net revenues came in above our guidance despite the entry of generic competition for Restasis. The adjusted operating margin ratio was 51.4% of sales, an improvement of 150 basis points versus the prior year. This includes adjusted gross margin of 84.5% of sales, adjusted R&D investment of 10.9% of sales, acquired IPR&D expense of 1.1% of sales, and adjusted SG&A expense of 21.1% of sales. Net interest expense was $539 million, and the adjusted tax rate was 12.1%. Turning to our financial outlook, we are updating our full year adjusted earnings per share guidance to include the $0.08 for acquired IPR&D expense that was incurred during the first quarter. As a result, we now expect full year adjusted earnings per share between $13.92 and $14.12. This earnings per share guidance does not include an estimate for acquired IPR&D expense that may be incurred beyond the first quarter. We now expect net revenues of approximately $59.4 billion. At current rates, we expect foreign exchange to have a 1.4% unfavorable impact on full year sales growth. This revenue guidance includes updated Restasis sales of approximately $400 million. Moving to the P&L, we now expect adjusted gross margin of 84.5% of sales, adjusted SG&A expense of $12.5 billion, and an adjusted operating margin ratio of 51.8% of sales. Turning to the second quarter, we anticipate net revenues of approximately $14.6 billion. At current rates, we expect foreign exchange to have a 1.5% unfavorable impact on sales growth. We expect adjusted earnings per share between $3.38 and $3.42. This guidance does not include acquired IPR&D expense that may be incurred in the quarter. In closing, we are off to an excellent start to the year with strong performance across multiple areas. We are making significant progress with new product launches and the pipeline, underscoring our confidence in AbbVie's long-term growth outlook. With that, I'll turn the call back over to Liz. Liz Shea: Thanks, Rob. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, we'll take the first question, please. Operator: Thank you. Our first question comes from Mohit Bansal from Wells Fargo. Your line is open Mohit Bansal: Great. Thanks for taking my question. And maybe to begin with on Imbruvica. So, I mean, the script trends are down, and you mentioned that we are -- for new starts, you are losing some share to the competition. When you think -- can you please characterize how much share you are losing? And do you think it will stabilize over time? And when you look at Imbruvica and Venclexta combined, do you think the franchise can grow going forward from here? Thank you. Jeff Stewart: Yes. Thank you for the question. So, as I mentioned in my comments, we are seeing greater share erosion. Imbruvica continues to be the leading share in the later lines, although we have lost our frontline share position to Calquence. And obviously, Venclexta is also moving there. So we see a couple of things that are taking place. So, we have that share erosion that's putting some pressure on the brand. And then clearly, we see the continued suppression of the market. So, it's kind of like a double hit. If we think of this over the short, mid and longer-term, what I would say would be this. So, in the short-term, meaning this year, we projected the share decline and that includes some stabilization, but we still think the brand is under some pressure from other BTKs and Venclexta. And basically, we have flat guidance this year. And some of that includes a recovery of the market back to sort of more normal levels and we'll have to see how that progresses over the year. If I think more about the midterm, I think what's important context there is, new patient starts essentially make up roughly 13% to 15% of Imbruvica. So it's got a very, very large installed base, about 85%, maybe a little bit more in terms of what that's going to happen. We're not seeing any changes in persistency or items like that. So we think that we have a very good sense of stability for the brand over time in terms of what this may mean. And so that's basically how we think about it. To answer your other question, if you look at the combined share, AbbVie has quite a strong position. We have roughly 33% of total share in the front line and we have between 42% and 46% of second-line plus. So clearly, Venclexta is able to offset as I commented in my remarks some of those pressures. So it's very important for AbbVie. It's going to be a very big brand over the long-term. In the short-term here in midterm, the growth is going to be more challenged moving forward. Mohit Bansal: Thank you. Liz Shea: Thanks, Mohit. Operator, next question, please. Operator: Thank you. Our next question comes from Terence Flynn from Morgan Stanley. Your line is open. Terence Flynn: Hi, thanks for taking the question. I was just wondering, obviously, you guys have been speaking with payers about the Humira positioning for 2023. Are you willing to give us any update in terms of how you're thinking about that guidance figure that you put out a couple of years ago? Any change in thinking there? And then are you able to disclose the CR rate for the recent epcoritamab Phase II trial? Just wondering how that factors into the decision about whether to seek accelerated approval here? Thank you. Rick Gonzalez: So Terence, this is Rick. I'll take the first question for you. And I'm probably going to answer a little broader because I think it is important. I understand the interest in trying to understand how to model 2023, it's obviously important to us to model 2023 as accurately as possible. And I think if you step back, obviously, contracting is one portion of a variable that will impact the speed at which biosimilars are able to adopt – be adopted in the market. If you step back and look, there's probably four key variables that will impact, what that adoption rate looks like. One of them is obviously, what will Humira's access be post biosimilars entering the marketplace? And this is the period where you would normally be doing the contracting around that. I think we'll do well in being able to be co-positioned versus biosimilars in the vast majority of covered lives here in the United States. But that process isn't done, and we're not in a position to be able to ultimately, give you any further update until we're a little further along in that process. The second variable that will impact what 2023 looks like is, how will the biosimilars price? We don't know that. Obviously, we have seen how they price in markets outside the U.S., but there's no market exactly like the U.S. internationally. And so that's a variable. We're making some projections of what we believe that pricing will look like. But that's ultimately something we're going to have to see how it plays out. I'd say the third variable is, how competitive will these biosimilars be? It's going to be by the summer of 2023, there's going to be a lot of biosimilars in the U.S. market, but they're not all the same. And how competitive will they be against what is Humira today? And what are the bulk of patients use as it relates to Humira. And what I mean by that is interchangeability and a number of other factors are going to play into the competitiveness of those biosimilars. And I'd say the fourth variable, and it's not something that people think about that much, and that is the ability of a biosimilar to be able to supply the U.S. market. There's no market like the United States for Humira anywhere around the world. In the United States, it's significantly larger than any other market around the world. There are certainly biosimilar players that are like an AbbVie, and I would expect them to have manufacturing capacity. There are generic players that could have sufficient manufacturing capacity, and then there are very small companies. But I think anybody -- any payer that's going to want to convert in any significant way to a biosimilar, they're going to want confidence that they can have a reliability of supply of that biosimilar and we've spent years building the network that we have. We have full redundancy of every aspect of the manufacturing process on Humira. And we've never had a problem supplying the U.S. market. So, I think we can be viewed as kind of the gold standard. So, those are the variables that are going to impact what this transition looks like. The guidance we've given so far is this 45%, plus or minus 10%. I think at this point, that's still the best information that we can provide. Later this year, I think some of these variables will be clearer to it. And we may be in a position to be able to provide some more information to investors, and we would do that. Some will not. Pricing will not be clear at that point. We're not going to know how they're going to price until we actually get into -- they actually get into the marketplace. So, I think that's the way to think about these variables. Rob, anything you'd add? Rob Michael: Yes. So, this is Rob. I would just add that we've been trying to give investors some directional guidance on how to think about 2023 beyond just the Humira, 45% plus or minus 10%. We've talked about Aesthetics growing high single digits annually over the next decade. You can get a sense based on Jeff's response today and the way to think about Imbruvica. In terms of operating margin, I've talked about that pulling back to the 46% to 47% range with no cuts to investment because we're going to return to growth very quickly. So, we're going to continue to invest in this business. And as I look at Street consensus, I see modeling of cuts in SG&A not necessarily reflecting the appropriate operating margin levels. So, it's something just to keep in mind. And then even -- we've talked about the tax rate growing one point per year on average. Obviously, you saw this year, it only grew 0.2 points. Other years, it may go higher. So, we've tried to give the Street some ideas of the way to think about 2023 model in advance of our formal guidance. Rick Gonzalez: Okay. Number two, Neil? Neil Gallagher: Hi, this is Neil Gallagher. I'll take the question regarding epcoritamab. So, we recently reported data from the expansion cohort of relapsed/refractory DLBCL patients. We reported an overall response rate of 63% with a median duration of response of 12 months. One thing that's really important to bear in mind is that this is a pretty refractory patient population with a median number of prior therapies of 3.5 in a range up to 11 in at the upper end. And importantly, just under 40% of these patients have failed prior therapy with the CAR-T. Overall, the safety profile remains manageable with the vast majority of the cases of CRS at class effect with these agents being Grade 1 and 2. To directly address your question, we are not yet ready to reveal additional detail about the data. They will be revealed at a forthcoming medical meeting. And in fact, I was just in contact with the team yesterday and I know that they're working very diligently to get those data on a podium in a meeting in the very near future. Liz Shea: Thank you. Terrence. Operator we’ll take the next please. Operator: Thank you. Our next question is from Tim Anderson from Wolfe Research. Your line is open. Q – UnidentifiedAnalyst: Hello, thanks for taking our question. This is Alice Nicholson [ph] on for Tim Anderson. A question on Rinvoq. Where could in-play market share in atopic eventually get in your view? And are you seeing any switching away from Dupixent at all? Thank you. Jeff Stewart: Yes. Thank you for the question. I'll give you some context. I mentioned that we see roughly in the mid-teens now after about three months, which we're very pleased in and some more flavor on that. If you think about the HCPs and the doctors that prescribe in the US now, you've got about 9, 000. Those are the dermatologists and some allergists. There's about 3,000 of those physicians that are the big prescribers. They're very productive. Those 3,000 are the ones that are driving Skyrizi, for example, or other big brands in psoriasis. So we see, after just about three months, we see almost 1,000 doctors that have prescribed Rinvoq. And so that's driving that 15%. Some of it depends in terms of where the in-play share ends up, how many of the competitors come in. We're not really sure that baricitinib will come into the market. We'll have to see. We haven't seen much Pfizer activity yet. To give you some sort of international perspective in the Canadian market, we're seeing where there's really just Dupi and Rinvoq at this point after a couple of quarters, we're seeing a 30% in-play share in Canada. So we are, as I mentioned, very, very encouraged with the early adoption. In particular, my comment around, how fast once you see the first prescription take place with some of those productive doctors, how fast they go to the second or third. To give you some flavor of what we see in the US, and again, the data is early, we see, as expected, the majority of our use so far in that dynamic market are not switches necessarily. We see about, let's say, 1/3, believe it or not, that are not even exposed to Dupi. And the doctors are saying, look, I've already given another oral systemic, for example, but the itch and the skin is so severe that they're going to go -- I'm going to go right and get the relief with Rinvoq. And then maybe the other two-third, you see Dupi partial responders, particularly related to the itch, just isn't suppressed as much, and they still have some skin involvement. Or there is, as we've highlighted before, a warehouse of Dupi non-responders that has been built up over the last four years. So that's the behavior that we see. Again, I'm very encouraged on the early results, not just in the US but around the world. Rinvoq is going to be a real player in this underserved market. Liz Shea: Thank you, Alice. Operator, next question please. Operator: Thank you. Our next question is from Steve Scala from Cowen. Your line is open. Q – Steve Scala: Thank you. Two questions. First on epcoritamab, the data looks great. Could this molecule immediately start taking share from CAR-T, or do you think physicians will want to see durability data before selecting a bispecific ahead of a cell therapy? So that's the first question. The second question is, I'm trying to sift through the answer to the Humira question just a moment ago. On the one hand, it seems we need to consider that Humira could be more resilient in 2023 than expected. On the other hand, the Street needs to raise spending assumptions. So, would you object to either of those conclusions based on what was stated? Thank you. Neil Gallagher: Thanks Steve. This is Neil. I'll take the first question on epcoritamab. The fact that we saw such remarkable activity in a patient population that had failed CAR-T does not imply that the medicine should be positioned after failure of CAR-T. I think they are two very different classes of medicines, as you know. CAR-T has significant challenges with respect to the need for -- to be prior to administration. Whereas the safety profile with epcoritamab is extremely manageable. And again, I don't want to repeat what I said earlier on around CRS. So, overall, we see a very strong benefit risk profile emerging for the medicine. And therefore, our intention is to move the medicine into earlier lines of therapy initially gain an approval with respect to -- gain approval in refractory DLBCL and after that move the medicine into earlier lines of therapy. Rick Gonzalez: Steve, this is Rick. I think Rob and I will handle the second question for you. Yes, look, I think it's a great question, and we've gotten that question a lot. What's the erosion going to be in 2023? And is it going to be lighter in 2023 and therefore, spill more into 2024. And I think that's a reasonable question to start to think through. I'd say as I step back and look at it, I would tell you this. Look, at the end of the day, it could be lighter in 2023. That would force more of it out into 2024. If I look at the business, that's a good thing. We give us higher cash flows in 2023 than what we would be projecting now. Ultimately, I think there will be a settling out between 2023 and 2024. We'll still get to the levels that we have described or at least that we are modeling. And I think the important thing is, look, Humira is going to play out over these two-year period of time. What's important to AbbVie, though, is what's that underlying growth that's driving the business and is going to sustain the growth on the other side of the LOE. That's the critical aspect of it. The Skyrizi, the Rinvoqs, our Neuroscience pipeline, Aesthetics, it's all of those major growth drivers that we have because that growth is going to be suppressed in 2023 and somewhat maybe in 2024. But as soon as that pressure is off, that's when it reemerge and be able to deliver growth on the other side of it. And so what we're focused on is, obviously, we're going to try to manage the 2023-2024 dynamic to the extent that we're able to. But that's not the most critical part for the business. The most critical part is driving these growth brands and delivering on the pipeline. Rob Michael: This is Rob. What I would add, Steve, just to clarify, I mean, we have a business that's going to deliver high single-digit growth during 2025. It doesn't make sense to be cutting investment in 2023. And that's what the Street consensus is modeling currently. So, we expect to invest in this business, invest in R&D, invest in SG&A to drive that long-term growth. And given how quickly we'll return to that growth, I wouldn't expect us to be cutting investment in 2023. Steve Scala: Thank you. Liz Shea: Thanks Steve. Operator, next question please. Operator: Thank you. Our next question comes from Andrew Baum from Citi. Your line is open. Andrew Baum: Thank you. Question for Jeff. Perhaps you could comment on the impact of IL-31 inhibitor in atopic dermatitis where we're expecting additional Phase 2 data, which obviously don't have the JAK labeling associated with how you think it's going to impact the market in terms of delaying the onset of JAK therapy? And then second for Neil, could you talk to how large the commercial potential for Venclexta in t(11;14) myeloma, which is due to reported Phase III this year anytime? Jeff Stewart: Yes. Thank you, Andrew. So important question. So the way that we see the market for the other ILs, I do think that there will be a segment of conservative dermatologists that will attempt to sequence. And I think that largely that they'll be disappointed because it seems the newer agents are very, very difficult to distinguish from Dupixent. I think certainly, there could be market access dynamics that start to appear with subsequent ILs, I think that's something that we will watch and you would want to watch. I think what's, again, maybe not appreciated as we watch the early quarters of performance in Europe and the first quarter of performance here in the US, is that there's significant amount of early adopters and dermatologists that will go right to a JAK inhibitor, as I mentioned. They're not always sequencing through Dupi. And it's because the severity of some of these patients and the level of the clinical involvement is very, very significant. And so, we do see what you would call a significant amount of naive use based on the profile of the JAK inhibitor. Now these are early adopters. These are people that have already contemplated the risk benefit and I think that's important. And so, the way that we see the market developing is that, when physicians would start with Dupi, which will be in a significant proportion of patients, it's not clear at all that their next step will be another IL that has been approved or will be approved. In fact, we think it's more likely that they will move towards the best JAK that can get to these high levels of skin clearance, the EZ 90 plus almost no perceived itch. And I think that's the endpoint that this market is going to move towards and Rinvoq is the drug that clearly can deliver on that promise. And so that's how we see the market developing, and that's why we remain encouraged on the early results around the world from what we're seeing with the agent. Neil Gallagher: This is Neil. With respect to the question on Venclexta, venetoclax CANOVA. So the CANOVA study is a study of venetoclax in multiple myeloma patients with a particular translocation, t(11;14). We're making extremely good progress with the study, and we fully anticipate having a Phase III data from the study during the course of 2022. We know from this particular patient population that were included in earlier studies with Venclexta that they are explicitly sensitive to treatment with the medicines in various combinations. The prevalence of this population is around 20% of multiple myeloma and multiple myeloma, as you know, is the common of [indiscernible] malignancy. So, this is a very significant proportion of the multiple myeloma population that could gain benefit from Venclexta. And as mentioned, we're looking forward to being able to communicate the Phase III data during the course of 2022. Thanks for the question. Liz Shea: Thank you, Andrew. Operator, next question please. Operator: Thank you. Our next question comes from Chris Schott from JPMorgan. Your line is open. Chris Schott: Great. Thanks very much for the question. First one for me is just can you elaborate a bit more on Rinvoq coverage, both in AD and UC. I guess just trying to get a sense of where we are today and what's the outlook for the next few quarters? And maybe as part of that, it seems like you're seeing some nice uptake in your BRIDGE programs. Can you just comment when you expect we should start to think about those translating over to third-party Rxs and that would be maybe more visible to the outside world in terms of how that uptick you're seeing? And then my second question was just on Q1 itself. Were there any notable either payer adjustments or gross to net issues? I guess Humira, for example, it seems like the low single-digit growth was a departure from recent trends. I'm just trying understand a little bit better what happened in the quarter. Is there anything we should just be kind of keeping in mind as we consider the Q1 results? Thanks. Jeff Stewart: Yes. Thank you, Chris. It's Jeff. So, with your first question is -- we're very confident that we are going to get to high levels of paid access for Rinvoq and Skyrizi's new indications. So, typically, what we'll see based on the approval timeline, we'll be ramping up into the -- by the middle of the year up in the high 90s in terms of our access -- for commercial access. So, I think that everyone should be confident that, that's where you're going to start to see this bridge program start to fully convert as the months go by into the paid prescription. So, typically, that's the timing we're looking at. You're going to see very strong momentum on paid access by -- towards the end of next quarter is what we've guided towards. So, that's the answer to your first question. I think if you think about -- and maybe just to frame the Humira question. The Humira fundamentals are -- and the market fundamentals are quite strong. You see the markets are performing nicely. Our market share growth trends, we haven't seen any trend shift. They've been largely stable. There's some sequential decline based on the size of the market and actually our own brand, Skyrizi and Rinvoq that are playing very strongly into these markets. What I would say is that, in some cases, Q1 can be quite unique over the years. You've got the issue with the plans resetting their deductibles, you've got issues with doctors that have to put in another prior authorization for the year. And so you do see some co-pay and sort of deductible dynamic. But we think that's really a first quarter type of event, and it's largely been very consistent with what we expected. So, maybe I don't know, Rob, if you want to build on that a little bit. Rob Michael: Yes, I would just add that if you look back to our guidance for the quarter and we gave guidance to the therapeutic area level, we pretty much came in line with that guidance. And so we expected this dynamic, and we're also we're not changing our full year outlook for US Humira, 8% growth. And that, again, will be driven by market driving volume growth. And so -- it's in line with our expectations. I understand Street consensus had a different point of view, but we weren't surprised by that. Liz Shea: Thanks Chris. Operator, next question please. Operator: Thank you. Our next question comes from Chris Shibutani from Goldman Sachs. Your line is open. Chris Shibutani: Thank you. Good morning. If I could ask on Vraylar, the product, I think you comment expectations for an MDD approval and yet they'll frame it as potential for upside. Can you help us understand perhaps some of the potential there? Just thinking back to some of the scale of the peak sales opportunity that, that drug was characterized previously, MDD certainly seems as if it's a potential significant opportunity. Thanks. Jeff Stewart: Yes, Thank you for the question. And it is a significant opportunity. So, as we highlighted and Tom highlighted, the NDA has been accepted, and we're confident in the approval. I think what we said in the past is that just with the base indication. So, before we get that approval, I mean, the FDA has to still approve it towards the end of the year. We believe that we can ramp towards a $4 billion opportunity. So, that would mean our share just in the base indications of a unique profile with the mania, the mix manian depression, the bipolar depression, we moved somewhere up sort of doubling our share penetration. So right now, we're at about 2.7% TRx share. So we we'd really get close to doubling that based on the momentum. And then MDD would build on top of that. And so it's significant. I mean, the physicians that we've talked to when we show them the profile are very pleased. First, they know Vraylar, they like Vraylar, they like the strong efficacy, they highlight nonsedating, they highlight at least verbally a brightening effect of the agent, minimal weight gain, metabolic effects. And so as they think about that, how that would translate to adjunctive MDD, they like that profile. The other piece that we hear is they like the starting dose. They like that starting dose of the 1.5 milligram dose, which is what we believe that ultimately will be approved. We'll have to see. So easy to start, easy to take, well tolerated. And so to your point, we believe that MDD will offer some upside and acceleration to the brand's momentum when we achieve it. A – Liz Shea: Thanks Chris. Operator, next question please. Operator: Thank you. Our next question comes from Vamil Divan from Mizuho Securities. Your line is open. Vamil Divan: Hi, great. Thanks for taking my question. So just maybe get back to some of what we were just talking about around the pricing in 1Q. But I had a couple of questions regarding the migraine franchise. So, the Ubrelvy scripts from a legacy publicly out third-party data, it looks like the gross to net – some net pricing is back to where we were in 1Q '21. And just trying to understand if this is just a seasonality of things or 4Q to 1Q dynamic or maybe there might be something broader where net pricing for these products is going down. And then tied to that, with Qulipta, as you mentioned, look, the prescription numbers are pretty good as it builds up here. I'm curious now that you have sort of two products in that market, does that impact how you're thinking about the opportunity, especially from a pricing side or sort of payer negotiation side? Is there any thoughts on sort of bundling the two other in any way to present to get even better active than what you have right now? So, any thoughts you could share there would be helpful as well? Thank you. Rob Michael: So Vamil, this is Rob. I'll take your first question. So when you look at that there is seasonality in this market in the US, and so you do see a shift from Q4 to Q1. If you look at year-over-year, you'd see that in Q4, as you mentioned, Q1 year-over-year is relatively flat. I would think about it that way for the full year as well. So, you do tend to see a suppression in Q1 because of plans resetting that dynamic we see in the US market. But then over the course of the rest of the year, you do see higher pricing. So, on average, the way to think about it is price is relatively stable. Jeff Stewart: And Vamil, it's Jeff now. So I think -- look, we are pleased with the Ubrelvy momentum. I mean, actually, since we launched Qulipta, Ubrelvy has accelerated. So, we have to -- because we can't see the competitor because you can see the whole thing. But when we factor Nurtec by 8 versus 16, and we try to understand the acute dynamic, we can see that we're clearly the market-leading acute CGRP and that's nice to see. The physicians really like Ubrelvy, the markets are robust. I think what you're seeing is what Rob highlighted in terms of the overall performance. I didn't really fully appreciate your second question in terms of the access. I can give you a broad overview. Obviously, we're seeing great momentum with the brand. Much of the brand is still because the access is ramping is still bridged, just like we discussed there with the immunology agent. So we think, again, by the middle of the year, we're going to see commercial access really start to ramp, and you'll see the conversion start to take place. What's nice is that we're confident in that. We think that our price points and net price or negotiations are going well. And because of its unique profile, as an agent, basically, the strength of the drug is really significant in terms of its performance against episodic migraine. We feel like we're in good shape. And we're going to build on top of that basically 25% in-play share, which is right now at the top of the league table. So, that's how we see it. We're confident in the access ramp. Vamil Divan: Maybe just to clarify the second question then just -- thank you for all that. Is there any advantage of another strategy you might have now because you have two approved migraine oral therapies, or is it pretty much similar it would be if you had one or the other? Jeff Stewart: Yes. It's pretty similar based on the way that the pricing and the different dynamics work on the other CGRP. It's not -- it's just sort of a straight -- it's a straight play on the access there. Vamil Divan: Okay. Thank you so much. Liz Shea: Thank you, Vamil. Operator, next question please. Operator: Thank you. Our next question comes from Geoff Meacham from Bank of America. Your line is open. Geoff Meacham: Hey guys. Morning. Thanks for the question. I just had another one on the INI landscape. Rick, when you look at the market disruption that you'll see in 2023 and 2024, presumably, that's going to have an indirect effect on Skyrizi and Rinvoq when you think pricing and share. What would you guys view as a win over this period from a new start or switch perspective or a growth perspective is the first question. And the second part of it is, what gives you guys confidence in the market really normalizing after a 2024 period? Thank you. Rick Gonzalez: I think as we look at our long-range plan, we don't see or anticipate a dramatic impact. We've provided that 2025 guidance and I think it's reflective of significant growth of Skyrizi and Rinvoq. If you look at those assets and you look at their clinical performance, they really stand out. And that's what's driving the kind of volume and growth that we're seeing. And I think you will see obvious price disruption in the Humira market from biosimilars. But I don't anticipate that you're going to see that bleed over in a significant way to those other assets. Jeff, do you see any differently? Jeff Stewart: Yes, I don't see, Geoff, much difference. I mean if you think of it in some ways, even on -- let's take Rinvoq, for example. I mean, you could say, wow, in prior viewpoints, maybe everyone will step behind a biosimilar at some point in the future. Well, one, we didn't think that, that would happen wide scale as the market develops anyway. But even if it did, our label is already behind a TNF. And so when you look at the level of efficacy that Rinvoq's bringing in those later lines, I mean it's -- we're really quite insulated from that, I would put forth. And second Skyrizi is just -- is a phenomenal asset. I mean the level of performance and what it's doing to transform certainly psoriasis today, PSA right now and what we think will happen with Crohn's and ultimately, IBD, when you look at the level of healing and sort of restating that standard of care, we think the assets themselves are quite well positioned for the middle part of the decade, and that sort of goes to the elements of the planning that Rick talked about. Liz Shea: Thanks Geoff. Operator, next question please. Operator: Thank you. Our next question comes from Gary Nachman from BMO Capital Markets. Your line is open. Gary Nachman: Hi thanks. First, just following on that last response. Can you talk more broadly about how you see the expansion of Rinvoq and Skyrizi into the IBD indication? So how is the initial launch for Rinvoq for ulcerative colitis going? I know it's early days, but what's the outlook there given physician receptivity around the product? Are physicians saying they're excited to have Rinvoq for Crohn's as well? And also, how do you see Skyrizi fitting in with Crohn's versus Rinvoq? And then secondly, on Aesthetics, it was strong in the first quarter, but did you see any impact in the early part of 1Q from Omicron? And what have the trends been more recently in March and April in the Aesthetics business? Jeff Stewart: Yes. Thank you for the question. It's Jeff again. So we are very, very encouraged by the IBD momentum that we can build. And we're right on the cusp of it. And to give some sense is basically this market -- the market of Crohn's and you see that – it actually has fairly high biologic penetration. When we do our research and our engagement with the physicians, what they typically have done for more than a decade since the availability of Remicade and then Humira, they really hang on as much as possible to their first-line use. They try to intensify, they do all sorts of things because it's quite scary for the physicians and the patients because no one set a different standard of care. So when you start to look at the healing rates that we start to see with Rinvoq in UC, the healing of the bowel, the remission rate, the combination of what we can see, this market looks very, very good to have both of those assets come in with higher standards of care. So we're very, very encouraged and we think that the IBD market is probably underappreciated in terms of what that looks like. And the patients are so challenged with their disease because it's quite severe with the bowel preparations, the hospitalizations, all of these things, having two assets is a great thing to bring to the market. Certainly, in the US, it's likely we see that with UC today that you're going to have later line use based on the labeling. Skyrizi is not going to have that limitation. So, you can imagine that you have an ability to co-position to sequence appropriately to think about how you bring that whole portfolio around the world and that's how we see it. We're quite encouraged that we would have both Rinvoq for Crohn's and Rinvoq for Skyrizi in the market. And it's kind of very similar to my comments I made on what's happening with PSA today in rheumatology, where both of those assets Rinvoq for PSA and Skyrizi PSA are in the market together working as a portfolio. To get to your first point, it's been only a month or so with our UC launch, but the physicians, gastros are very encouraged with the profile. They've not seen the level of remission or the level of healing before in any asset. So, there's quite a wow reaction to the efficacy profile. They realize that they have to think about, I've got to think through my patients that are not doing well on TNF or have cycled through a TNF and are struggling. And I mentioned that's a pretty large addressable population. It's at least 50% of the market today. So early qualitative results are quite strong. And the BRIDGE results are also quite strong. So, we're pleased with the gastro launches thus far. Rick Gonzalez: Carrie? Carrie Strom: Gary, this is Carrie Strom, President of Global Allergan Aesthetics, and I'll take your question about the aesthetics market. And in Q1, we did see US toxin and filler markets, both growing in the mid-20s percent. And we expect that sort of growth to continue for the rest of 2022. And the way to think about it is similar amount of absolute volume growth as 2021, but of course, off of a larger base. And in terms of what's driving that market growth, we're seeing very strong demand trends supported by our increased commercial investments, for example, increased consumer activation for acquisition and retention, field force expansions in key markets. And we see these trends also supported just by fundamentals and aesthetics that will continue in the long-term. People think about aesthetics more like health and wellness. It's been much more destigmatized, and we see factors like social media and word of mouth continuing to drive aesthetics in the future. Your question around the pandemic, I would say that we are seeing an impact right now in China, and we anticipate that this recent surge of COVID cases in China which has resulted in lockdowns across several major cities, has reduced patient traffic into aesthetic offices in China. And China is a top market for aesthetics. So, we expect this to impact our near-term international performance for both toxins and fillers. I should also mention that Russia is a key market for fillers globally. And as the tragic events in the Ukraine have unfolded, we have suspended operations for our Aesthetics business in Russia. So, although absolute aesthetic sales in Russia are modest, like I said, Russia is among one of the largest filler markets in the world. So, we expect to see an impact on our filler performance in coming quarters. But despite these dynamics, we do not need to change our total guidance for Aesthetics. So, we see our continued robust toxin performance in the US to offset this anticipated transitory impact in both China and Russia. Gary Nachman: Great. Thank you. Liz Shea: Thanks Gary. Operator, next question please. Operator: Thank you. Our next question comes from Robyn Karnauskas from Truist Securities. Your line is open. Robyn Karnauskas: Great. Thanks for taking my questions. So, for epcoritamab, I just have a question on approval. Given the recent FDA discussion around the PI3 kinase class and sort of hinting that they want controlled data for accelerated approval, how do you view that in light of that panel, the likelihood of accelerated approval? And then second. Just a little bit more questions around the Bridge program. I think you said that you're going to expect more payment reimbursement coming online in the middle of the year. Just talk to me how long people stay in the Bridge program and how you expect that Bridge program to continue? And what -- how many people might continue to use it after payers and online? Thanks. Neil Gallagher: Hey Robyn, it's Neil, I'll start off with the question around epcoritamab, but maybe just a comment -- a general comment on accelerated approval overall. I think as we're all aware, it prompted your question that the agencies in the course of -- in the process of updating its guidance with respect to accelerated approval. We haven't seen the totality of that guidance, but we anticipate hearing more from them during the course of 2022. As I alluded to, and I'm not going to repeat what I said earlier on about the epco data, but we are extremely pleased with how the molecule is performing, and it is our intent to engage with the agency based on the data that we've toplined recently. It is our intent to engage with the agency in a conversation to explore a path to accelerated approval. And likewise, with some of our other programs, we recently got a BTD designation for Teliso-V, for example, earlier this year with a 54% response rate in c-Met high non-small-cell lung cancer. Again, it is our intent when we have data that are these strong to continue to engage with the agency on those programs to explore potential costs to accelerated approval. So thanks for the question. Jeff Stewart: Okay. It's Jeff. Just to comment on your BRIDGE question. Thank you for that. So the BRIDGE transition will be very efficient. So, what I mean by that is because of the connections that we have with the payers and our specialty pharmacy network, we're able to – once access is achieved rapidly and appropriately transition patients from the BRIDGE to basically their paid pharmacy in their prescription. So, there's not going to be lingering bridge effects, particularly in the immunology space. So, once it starts to move and that access ramps, the BRIDGE transition is quite fast. And that can be within weeks or a month. And we know that that's the case because we have the model from our earlier launches from Skyrizi and Rinvoq. So ultimately, once you start to achieve those high levels of access, BRIDGE programs drop very, very fast, and the vast majority, the very vast majority is paid prescriptions. So it's very efficient, and I hope that helps. Liz Shea: Thanks Robyn. Operator, we have time for one final question. Operator: Thank you. Our final question comes from Josh Schimmer from Evercore ISI. Your line is open. Josh Schimmer: Thanks for putting me in and congrats to both Mike and Tom. For Skyrizi, did your long-term outlook improve again, or am I misunderstanding the contingent consideration line item? Thanks so much. Rob Michael: So Josh, it's Rob. If you look at the continued consideration, actually, it's a fair value liability, it went down this quarter because of discount rate. So we always have to pay attention to discount rate movement. So we saw the average discount rate increase by about 130 basis points. You're seeing, obviously, as rising interest rates are taking hold of the market. That's something we have to take into account because we had to mark this to market every quarter. If you look at our release, we had a similar – we had a decrease last year as well. Again, we had discount rates increase in Q1 of last year, albeit to a lesser extent. So that's what you're seeing is just really the discount rate movement. No other real fundamental changes to the valuation of that liability. Josh Schimmer: Got it. Thanks for clarifying. Liz Shea: Well, thank you, Josh. That concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. Operator: Thank you. That concludes today's conference call. Thank you for your participation. You may disconnect at this time.	[ { "speaker": "Operator", "text": "Good morning and thank you for standing by. Welcome to the AbbVie First Quarter 2022 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion of this call. [Operator Instructions] Today’ conference is being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Ms. Liz Shea, Vice President, Head of Investor Relations." }, { "speaker": "Liz Shea", "text": "Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Rob Michael, Vice Chairman, Finance and Commercial Operations and Chief Financial Officer; Jeff Stewart, Executive Vice President, Chief Commercial Officer; and Tom Hudson, Senior Vice President, R&D, and Chief Scientific Officer. Joining us for the Q&A portion of the call are Carrie Strom, Senior Vice President and President, Global Allergan Aesthetics; Neil Gallagher, Vice President and Chief Medical Officer; and Roopal Thakkar, Vice President, Global Regulatory Affairs. Before we get started, some statements we make today may be considered forward-looking statements for purposes of the Private Securities Litigation Reform Act of 1995. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today’s conference call, non-GAAP financial measures will be used to help investors understand AbbVie’s business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll now turn the call over to Rick." }, { "speaker": "Rick Gonzalez", "text": "Thank you, Liz. Good morning, everyone, and thank you for joining us today. I'll briefly comment on our overall performance, then Jeff, Tom and Rob will review our first quarter business highlights, pipeline progress and financial results in more detail. I'm pleased with the excellent start to 2022. It further reinforces our confidence in the long-term fundamentals of the business. We reported adjusted earnings per share of $3.16, exceeding our expectations. Total net revenue of more than $13.5 billion was up 5.4% on an operational basis, also above our expectations. These results demonstrate strong momentum across several key products and portfolios, including robust double-digit operational revenue growth from Skyrizi, Rinvoq, Neuroscience and Aesthetics. Skyrizi is performing exceptionally well. We are achieving impressive market share gains in psoriasis, which remains a significant market opportunity. Skyrizi's recent launch in psoriatic arthritis as well as the anticipated regulatory approval in Crohn's disease should also serve as important growth drivers over the long-term. Rinvoq is also contributing compelling sales growth. Subscription trends in RA have recently stabilized as we expected and we are making excellent progress repositioning the brand as the leading second-line agent based on the robust data generated across our broad development programs. The early launch trends for Rinvoq in both atopic dermatitis and psoriatic arthritis are highly encouraging, with commercial access and paid prescriptions expected to ramp significantly over the coming months. We anticipate that these two new indications, along with the recent U.S. approval in ulcerative colitis, should add substantial revenue growth for Rinvoq over the long-term. Neuroscience remains an exciting opportunity for our company. Vraylar continues to have strong momentum across our currently approved indications and the pending regulatory approval in major depressive disorder represents a significant upside to current projections. In migraine, our portfolio of distinct therapies with Ubrelvy, Qulipta and Botox Therapeutic is demonstrating robust double-digit sales growth. With the migraine market anticipated to roughly double in size over the next several years, there is significant headroom for continued revenue growth with these compelling therapies. Aesthetics is once again exceeding expectations. The category continues to grow robust double digits, especially in toxins and fillers, where there is substantial opportunity for further market penetration. Our commercial team is executing at a high level with targeted promotion and enhanced digital services, including our Alle loyalty program driving strong market share performance across our major brands. In summary, this is an exciting time for AbbVie, and I'm extremely pleased with the evolution and momentum of our diverse portfolio. We're making excellent progress with the launches of several new products and indications, which will collectively add meaningful revenue for AbbVie as commercial access ramps for each of these opportunities over the remainder of this year. We're off to another exceptional start, and our long-term growth prospects remain strong. I'd now like to take a brief moment to thank Mike Severino for his contributions to the success of AbbVie over the last eight years. As you know, Mike has decided to leave AbbVie at the end of May to pursue another career opportunity, and we wish him all the best. I'd also like to take this opportunity to formally introduce to you Tom Hudson. Tom joined AbbVie back in 2016 as the Head of Discovery and Early Development. In 2018, Tom undertook responsibilities for AbbVie's entire discovery organization. Then in 2019, was promoted to the Head of AbbVie R&D and Chief Scientific Officer, where he assumed responsibility for all of AbbVie's R&D. Tom has an impressive background as a clinical scientist. His medical specialty is in clinical immunology and allergy. Tom played a critical role in the human genome project while working at both the Whitehead Institute and MIT, where Tom led the team that mapped the human genome. Tom was also instrumental in the international half map project to refine the genetic architecture of the human genome. Tom went on to further lead the Ontario Institute for Cancer Research, which included discovery and translational cancer research with a clinical network of more than 1,000 investigators. Tom will be providing an update on our continued pipeline progress to you later in the call. But first, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff?" }, { "speaker": "Jeff Stewart", "text": "Thank you, Rick. We continue to demonstrate strong commercial execution across our therapeutic portfolio. I'll start with Immunology, which delivered global revenues of more than $6.1 billion, reflecting growth of 8.1% on an operational basis. Humira global sales were approximately $4.7 billion, down 1.8% on an operational basis with low single-digit revenue growth in the U.S., offset by biosimilar competition across international markets, where revenues were down 17.9% operationally. Skyrizi global revenues were $940 million, reflecting positive momentum in both approved indications. In psoriasis, Skyrizi is demonstrating impressive market share gains globally. Skyrizi now accounts for approximately 23% of the total prescription share in the U.S. biologic market. Skyrizi's in-play psoriasis share, which includes both new and switching patients, also remains very, very strong and now reflects roughly 40% patient share in the U.S. and a clear number one leadership position. Skyrizi is performing exceptionally well internationally, where we have now achieved approximately 10% psoriasis share across our top 12 markets, as well as in-play share leadership in more than 20 key countries. While we were early in our launch in psoriatic arthritis, we are encouraged by the uptake in this indication. In the dermatology segment, Skyrizi has already achieved in-play patient share of more than 10% in the U.S. Internationally, Skyrizi PSA is now approved in 45 countries, with reimbursement expected to increase throughout the year. Importantly, we are also preparing for the launch of Skyrizi in Crohn's disease, which represents another important long-term growth driver with approval decisions anticipated this year. Turning now to Rinvoq, which delivered global sales of $465 million, demonstrating continued strong growth. As anticipated, we have seen an impact on new patient starts following the label update and Rinvoq prescriptions have now stabilized in the U.S., with in-play market share currently 12% in RA. We expect growth in the second line plus RA setting going forward where our field force is now focused on leveraging compelling data from two important Phase III trials. First, SELECT-CHOICE, which demonstrated Rinvoq's superiority versus ORENCIA across key efficacy parameters, including clinical remission in previously treated RA patients. And second, the open-label extension of SELECT-COMPARE which demonstrated that many RA patients with an inadequate response to Humira are able to achieve remission after switching to Rinvoq. Early feedback suggests this updated Rinvoq RA messaging is resonating very well with healthcare practitioners. Internationally, Rinvoq share continues to ramp in RA with a total market share of approximately 5.5% across key geographies. We are also making excellent progress with Rinvoq's newly launched indications, including atopic dermatitis, psoriatic arthritis and ulcerative colitis. Managed care access is expected to ramp strongly for each of these indications over the coming months. As we build access, initial prescriptions are covered by our BRIDGE program. which provides free patients or free goods to patients until formulary coverage is established. As a reminder, the volume from our BRIDGE program is not captured in third-party prescription data. I'll start with atopic dermatitis. We are seeing new patient starts accelerating as we build access. When you include prescriptions from our Bridge program, Rinvoq total in-play AD share is already in the mid-teens. So, we are pleased with the early adoption and repeating prescribers. As an oral option that provides significant skin clearance and itch relief, we believe Rinvoq has a strong differentiated position in this highly underpenetrated AD market. In PSA, we are seeing a nice uptake in Rinvoq's in-play share, especially in the rheum segment, where the severity of joint or skin manifestations of the disease can vary significantly by patients. And importantly, we have also launched Skyrizi in the rheum-PSA segment this quarter, giving us two very compelling therapies to address the wide range of PSA patient types, regardless of how their symptoms present. We have also launched our first indication in the IBD segment, Rinvoq for ulcerative colitis, where we are seeing a significant long-term opportunity in the second-line plus setting. Nearly 50% of UC patients are currently on or have used TNF therapy, so the addressable patient population is substantial. Given the strong benefit risk in this indication, we believe Rinvoq will be a welcome therapeutic option for UC patients and physicians. Turning now to hematologic oncology. Global revenues were more than $1.6 billion, down 0.6% on an operational basis. Imbruvica global revenues were approximately $1.2 billion, down 7.4%. There are two factors impacting our Imbruvica results. First, we are seeing greater market share erosion in new patient starts than originally anticipated from newer therapy, including other BTK inhibitors, as well as our own Venclexta. Second, we continue to see higher-than-expected COVID suppression on new patient starts in CLL, which as a treat-to-progression therapy, has impacted the total BTK treated patient market. Our guidance assumes a market recovery over the course of this year, but it's too early to determine exactly how this may play out, given the continued impact from recent COVID variant. Despite these dynamics, Imbruvica remains the market-leading therapy for total patients across CLL and several other major blood cancers. Based on the magnitude of clinical data and real-world evidence generated for Imbruvica, showing sustained disease control as well as overall patient survival, we are confident it will continue to be a meaningful product for AbbVie over the long term. Venclexta, however, is helping to offset some of the headwinds facing Imbruvica. Global sales were $473 million, up 21.1% on an operational basis. In the US, Venclexta's the clear market share leader in frontline AML, among patients who are ineligible for intensive induction chemotherapy and recently achieved leading new patient share in second line plus PLL. We are also seeing robust momentum internationally, with strong performance across all approved indications. Additionally, we continue to make excellent progress building out our hem/onc portfolio, with several compelling late-stage assets, such as epcoritamab for B-cell malignancies, Navitoclax for myelofibrosis and ABBV-383 for multiple myeloma, expected support -- expected to support sustainable long-term growth. Turning now to neuroscience, where revenues were approximately $1.5 billion, up more than 20% on an operational basis, including robust double-digit growth from Vraylar, Botox Therapeutic and Ubrelvy. Ubrelvy is performing very well and continues to be the market-leading oral CGRP treatment for acute migraine, with sequential demand growth observed. Qulipta is also demonstrating exceptional uptake in migraine prevention, with recent total prescriptions performing ahead of comparable branded launches. Qulipta is now capturing nearly 25% on of the new-to-brand share in the US preventative CGRP class when we consider both paid and bridge volume. We expect commercial access to continue to ramp strongly over the remainder of the year. Qulipta has also recently demonstrated positive results from a registration-enabling study for the preventative treatment of chronic migraine, which we plan to submit to the agency for potential expanded use in the US as well as to support regulatory applications across the international market. This indication, if approved, will provided added differentiation for Qulipta as the only oral CGRP therapy for the preventative treatment of both episodic and chronic migraine. In our other notable therapeutic, eye care revenues of $771 million were down 2.8% on an operational basis with recent generic competition for Restasis unfavorably impacting our results. Mavyret sales were $380 million, down 4.6% on an operational basis as treated patient volumes remain depressed compared to pre-COVID levels. So, overall, I'm extremely pleased with our execution across the therapeutic portfolio, including the progress we are making with recent new product launches. We remain on-track to deliver strong revenue growth once again in 2022. And with that, I'll turn the call over to Tom for additional comments on our R&D program. Tom?" }, { "speaker": "Tom Hudson", "text": "Thank you, Jeff. I'll start with immunology. We recently received FDA approval for Rinvoq in ulcerative colitis, a disease where there continues to be a significant unmet need for therapies that can provide high response rates and durable remission. In our UC development program, Rinvoq demonstrated some of the highest rates of remission and endoscopic improvements seen in Phase 3 studies. Importantly, Rinvoq also provided durable responses sustained through one year of treatment. Given the strong benefit risk profile, we believe Rinvoq will be an important new medicine for patients. Our regulatory applications for Rinvoq in UC remain under review in Europe and Japan, with approval decisions expected in the second half of this year. Also in the area of inflammatory bowel disease, we recently reported positive topline results from the second Phase 3 induction study for Rinvoq in Crohn's disease. Similar to results from the first induction trial, in this induction study, Rinvoq demonstrated a very strong impact on the disease as measured by clinical remission and endoscopic response. We expect to see results from the Phase 3 maintenance study later in the quarter with our regulatory submissions for Rinvoq and Crohn's disease expected in the third quarter and approval decisions anticipated in 2023. Rounding out Rinvoq's development programs in rheumatology, we also have regulatory applications under review in ankylosing spondylitis and non-radiographic axial SpA. We expect an FDA approval decision in the second quarter for AS and decisions in the fourth quarter for non-radiographic axial SpA. Moving to Skyrizi, where in the quarter, we announced an update regarding our regulatory application for Crohn's disease in the US. Following an FDA request for additional information, primarily related to the on-body injection device used for maintenance dosing, we provided additional data for the device from an ongoing real-life use study, which showed that patients can safely and effectively use the on-body device to self-administer Skyrizi. After responding to the agency's request, we received a 3-month extension of our Skyrizi submission in Crohn's disease. We remain confident in a strong benefit risk profile for Skyrizi in Crohn's disease and we now expect a decision in June. Moving now to our Oncology Portfolio, where we continue to make excellent progress across all stages of our heme and solid tumor pipeline. We recently announced positive top line results from the first expansion cohort of the Phase II study, evaluating epcoritamab in patients with aggressive B-cell lymphoma who have received at least two prior lines of therapy. Epcoritamab performed extremely well as a monotherapy in these heavily pretreated and high-risk patients, demonstrating an overall response rate of 63% with a median duration of response of 12 months. These results are particularly encouraging, given that nearly 40% of patients had failed CAR-T therapy. We plan to discuss these results with regulatory agencies about the potential to support submission for accelerated approval in the second half of this year. We continue to make good progress with the indication expansion programs for Venclexta and remain on-track to see results from the Phase III CANOVA trial in relapsed/refractory multiple myeloma patients with a t(11;14) mutation in the second half of this year. In our Venclexta MDS program, based on feedback from the FDA, we have recently modified our regulatory strategy and now intend to submit data from our ongoing Phase III program. Venclexta remains under Breakthrough Therapy Designation for MDS and we continue to have a high degree of enthusiasm for Venclexta in this indication. We expect data readout from the Phase III study and our regulatory submission for MDS in 2024. In Neuroscience, the FDA recently accepted our application for Vraylar as an adjunctive treatment for major depressive disorder. Based on the strong benefit-risk profile demonstrated in our clinical program, we believe Vraylar will be an important new therapy in this patient population, and we look forward to bringing this new treatment option to patients suffering from major depressive disorders. In the area of migraine, we recently reported positive topline results from a Phase III study evaluating Qulipta for the prevention of chronic migraine. Qulipta performed very well in this study with both doses meeting the primary and all secondary endpoints, demonstrating Qulipta's ability to significantly reduce migraine days for patients suffering from chronic migraine. This summer, we plan to submit our regulatory application to the FDA for Qulipta in chronic migraine and also plan to submit data from our Phase III studies in both chronic migraine and episodic migraine to support regulatory applications in markets outside the US. In our cystic fibrosis program, we recently completed an interim analysis of a Phase II proof-of-concept study evaluating our triple combination therapy. The results – the efficacy results from this interim analysis did not meet our prespecified criteria for advancing this triple therapy in development. This study was designed with a 28-day run-in treatment period, with a dual combination therapy containing our C1 corrector and potentiator, followed by a 28-day treatment period, with a triple combination, which included the addition of our C2 corrector, ABBV-119. This allowed us to independently assess the therapeutic potential of our C2 corrector. The results showed that the addition of 119 did not provide a meaningful improvement in FEV1 or reduction in sweat chloride concentration over our dual combination therapy. During the run-in treatment period, we were able to again assess the efficacy of our dual therapy, which performed well, providing efficacy consistent with results for the existing dual accommodation therapy. So based on the performance of our dual therapy, we plan to continue our CF program. We have an additional C2 corrector, ABBV-576 in Phase 1 studies that we plan to advance into a new triple therapy with our existing C1 corrector and potentiator. 576 is structurally distinct from our previous C2 corrector 119 and has a better PK profile and provides higher drug exposure, which has the potential to deliver better efficacy. Our plan is to begin a Phase 2 study for this new triple combo by early next year. And in Aesthetics, we recently began the Phase 3 program for our short-acting toxin in Glabellar Lines. This novel toxin is designed to provide rapid onset of action and a short duration of effect, which would lower the barrier for adoption for certain segment of consumers. We expect to see data from this program next year with regulatory applications also anticipated in 2023. So in summary, we've continued to make significant progress with our pipeline to start the year, and we look forward to many more data readouts, regulatory submissions and approvals throughout the remainder of 2022. With that, I'll turn the call over to Rob for additional comments on our first quarter performance and financial outlook. Rob?" }, { "speaker": "Rob Michael", "text": "Thank you, Tom. AbbVie's first quarter results demonstrate the strength of our broad portfolio, including double-digit growth from Skyrizi, Rinvoq, Venclexta, Neuroscience and Aesthetics. We also continue to deliver strong P&L performance, with another quarter of robust operating margin expansion, while fully funding the business for long-term growth. We reported adjusted earnings per share of $3.16, reflecting growth of 9.3% compared to prior year and $0.04 above our guidance midpoint. This includes an $0.08 unfavorable impact of acquired IPR&D expense that was not factored into our original guidance. Total net revenues were more than $13.5 billion, up 5.4% on an operational basis, excluding a 1.3% unfavorable impact from foreign exchange. Net revenues came in above our guidance despite the entry of generic competition for Restasis. The adjusted operating margin ratio was 51.4% of sales, an improvement of 150 basis points versus the prior year. This includes adjusted gross margin of 84.5% of sales, adjusted R&D investment of 10.9% of sales, acquired IPR&D expense of 1.1% of sales, and adjusted SG&A expense of 21.1% of sales. Net interest expense was $539 million, and the adjusted tax rate was 12.1%. Turning to our financial outlook, we are updating our full year adjusted earnings per share guidance to include the $0.08 for acquired IPR&D expense that was incurred during the first quarter. As a result, we now expect full year adjusted earnings per share between $13.92 and $14.12. This earnings per share guidance does not include an estimate for acquired IPR&D expense that may be incurred beyond the first quarter. We now expect net revenues of approximately $59.4 billion. At current rates, we expect foreign exchange to have a 1.4% unfavorable impact on full year sales growth. This revenue guidance includes updated Restasis sales of approximately $400 million. Moving to the P&L, we now expect adjusted gross margin of 84.5% of sales, adjusted SG&A expense of $12.5 billion, and an adjusted operating margin ratio of 51.8% of sales. Turning to the second quarter, we anticipate net revenues of approximately $14.6 billion. At current rates, we expect foreign exchange to have a 1.5% unfavorable impact on sales growth. We expect adjusted earnings per share between $3.38 and $3.42. This guidance does not include acquired IPR&D expense that may be incurred in the quarter. In closing, we are off to an excellent start to the year with strong performance across multiple areas. We are making significant progress with new product launches and the pipeline, underscoring our confidence in AbbVie's long-term growth outlook. With that, I'll turn the call back over to Liz." }, { "speaker": "Liz Shea", "text": "Thanks, Rob. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, we'll take the first question, please." }, { "speaker": "Operator", "text": "Thank you. Our first question comes from Mohit Bansal from Wells Fargo. Your line is open" }, { "speaker": "Mohit Bansal", "text": "Great. Thanks for taking my question. And maybe to begin with on Imbruvica. So, I mean, the script trends are down, and you mentioned that we are -- for new starts, you are losing some share to the competition. When you think -- can you please characterize how much share you are losing? And do you think it will stabilize over time? And when you look at Imbruvica and Venclexta combined, do you think the franchise can grow going forward from here? Thank you." }, { "speaker": "Jeff Stewart", "text": "Yes. Thank you for the question. So, as I mentioned in my comments, we are seeing greater share erosion. Imbruvica continues to be the leading share in the later lines, although we have lost our frontline share position to Calquence. And obviously, Venclexta is also moving there. So we see a couple of things that are taking place. So, we have that share erosion that's putting some pressure on the brand. And then clearly, we see the continued suppression of the market. So, it's kind of like a double hit. If we think of this over the short, mid and longer-term, what I would say would be this. So, in the short-term, meaning this year, we projected the share decline and that includes some stabilization, but we still think the brand is under some pressure from other BTKs and Venclexta. And basically, we have flat guidance this year. And some of that includes a recovery of the market back to sort of more normal levels and we'll have to see how that progresses over the year. If I think more about the midterm, I think what's important context there is, new patient starts essentially make up roughly 13% to 15% of Imbruvica. So it's got a very, very large installed base, about 85%, maybe a little bit more in terms of what that's going to happen. We're not seeing any changes in persistency or items like that. So we think that we have a very good sense of stability for the brand over time in terms of what this may mean. And so that's basically how we think about it. To answer your other question, if you look at the combined share, AbbVie has quite a strong position. We have roughly 33% of total share in the front line and we have between 42% and 46% of second-line plus. So clearly, Venclexta is able to offset as I commented in my remarks some of those pressures. So it's very important for AbbVie. It's going to be a very big brand over the long-term. In the short-term here in midterm, the growth is going to be more challenged moving forward." }, { "speaker": "Mohit Bansal", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Thanks, Mohit. Operator, next question, please." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Terence Flynn from Morgan Stanley. Your line is open." }, { "speaker": "Terence Flynn", "text": "Hi, thanks for taking the question. I was just wondering, obviously, you guys have been speaking with payers about the Humira positioning for 2023. Are you willing to give us any update in terms of how you're thinking about that guidance figure that you put out a couple of years ago? Any change in thinking there? And then are you able to disclose the CR rate for the recent epcoritamab Phase II trial? Just wondering how that factors into the decision about whether to seek accelerated approval here? Thank you." }, { "speaker": "Rick Gonzalez", "text": "So Terence, this is Rick. I'll take the first question for you. And I'm probably going to answer a little broader because I think it is important. I understand the interest in trying to understand how to model 2023, it's obviously important to us to model 2023 as accurately as possible. And I think if you step back, obviously, contracting is one portion of a variable that will impact the speed at which biosimilars are able to adopt – be adopted in the market. If you step back and look, there's probably four key variables that will impact, what that adoption rate looks like. One of them is obviously, what will Humira's access be post biosimilars entering the marketplace? And this is the period where you would normally be doing the contracting around that. I think we'll do well in being able to be co-positioned versus biosimilars in the vast majority of covered lives here in the United States. But that process isn't done, and we're not in a position to be able to ultimately, give you any further update until we're a little further along in that process. The second variable that will impact what 2023 looks like is, how will the biosimilars price? We don't know that. Obviously, we have seen how they price in markets outside the U.S., but there's no market exactly like the U.S. internationally. And so that's a variable. We're making some projections of what we believe that pricing will look like. But that's ultimately something we're going to have to see how it plays out. I'd say the third variable is, how competitive will these biosimilars be? It's going to be by the summer of 2023, there's going to be a lot of biosimilars in the U.S. market, but they're not all the same. And how competitive will they be against what is Humira today? And what are the bulk of patients use as it relates to Humira. And what I mean by that is interchangeability and a number of other factors are going to play into the competitiveness of those biosimilars. And I'd say the fourth variable, and it's not something that people think about that much, and that is the ability of a biosimilar to be able to supply the U.S. market. There's no market like the United States for Humira anywhere around the world. In the United States, it's significantly larger than any other market around the world. There are certainly biosimilar players that are like an AbbVie, and I would expect them to have manufacturing capacity. There are generic players that could have sufficient manufacturing capacity, and then there are very small companies. But I think anybody -- any payer that's going to want to convert in any significant way to a biosimilar, they're going to want confidence that they can have a reliability of supply of that biosimilar and we've spent years building the network that we have. We have full redundancy of every aspect of the manufacturing process on Humira. And we've never had a problem supplying the U.S. market. So, I think we can be viewed as kind of the gold standard. So, those are the variables that are going to impact what this transition looks like. The guidance we've given so far is this 45%, plus or minus 10%. I think at this point, that's still the best information that we can provide. Later this year, I think some of these variables will be clearer to it. And we may be in a position to be able to provide some more information to investors, and we would do that. Some will not. Pricing will not be clear at that point. We're not going to know how they're going to price until we actually get into -- they actually get into the marketplace. So, I think that's the way to think about these variables. Rob, anything you'd add?" }, { "speaker": "Rob Michael", "text": "Yes. So, this is Rob. I would just add that we've been trying to give investors some directional guidance on how to think about 2023 beyond just the Humira, 45% plus or minus 10%. We've talked about Aesthetics growing high single digits annually over the next decade. You can get a sense based on Jeff's response today and the way to think about Imbruvica. In terms of operating margin, I've talked about that pulling back to the 46% to 47% range with no cuts to investment because we're going to return to growth very quickly. So, we're going to continue to invest in this business. And as I look at Street consensus, I see modeling of cuts in SG&A not necessarily reflecting the appropriate operating margin levels. So, it's something just to keep in mind. And then even -- we've talked about the tax rate growing one point per year on average. Obviously, you saw this year, it only grew 0.2 points. Other years, it may go higher. So, we've tried to give the Street some ideas of the way to think about 2023 model in advance of our formal guidance." }, { "speaker": "Rick Gonzalez", "text": "Okay. Number two, Neil?" }, { "speaker": "Neil Gallagher", "text": "Hi, this is Neil Gallagher. I'll take the question regarding epcoritamab. So, we recently reported data from the expansion cohort of relapsed/refractory DLBCL patients. We reported an overall response rate of 63% with a median duration of response of 12 months. One thing that's really important to bear in mind is that this is a pretty refractory patient population with a median number of prior therapies of 3.5 in a range up to 11 in at the upper end. And importantly, just under 40% of these patients have failed prior therapy with the CAR-T. Overall, the safety profile remains manageable with the vast majority of the cases of CRS at class effect with these agents being Grade 1 and 2. To directly address your question, we are not yet ready to reveal additional detail about the data. They will be revealed at a forthcoming medical meeting. And in fact, I was just in contact with the team yesterday and I know that they're working very diligently to get those data on a podium in a meeting in the very near future." }, { "speaker": "Liz Shea", "text": "Thank you. Terrence. Operator we’ll take the next please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Tim Anderson from Wolfe Research. Your line is open." }, { "speaker": "Q – UnidentifiedAnalyst", "text": "Hello, thanks for taking our question. This is Alice Nicholson [ph] on for Tim Anderson. A question on Rinvoq. Where could in-play market share in atopic eventually get in your view? And are you seeing any switching away from Dupixent at all? Thank you." }, { "speaker": "Jeff Stewart", "text": "Yes. Thank you for the question. I'll give you some context. I mentioned that we see roughly in the mid-teens now after about three months, which we're very pleased in and some more flavor on that. If you think about the HCPs and the doctors that prescribe in the US now, you've got about 9, 000. Those are the dermatologists and some allergists. There's about 3,000 of those physicians that are the big prescribers. They're very productive. Those 3,000 are the ones that are driving Skyrizi, for example, or other big brands in psoriasis. So we see, after just about three months, we see almost 1,000 doctors that have prescribed Rinvoq. And so that's driving that 15%. Some of it depends in terms of where the in-play share ends up, how many of the competitors come in. We're not really sure that baricitinib will come into the market. We'll have to see. We haven't seen much Pfizer activity yet. To give you some sort of international perspective in the Canadian market, we're seeing where there's really just Dupi and Rinvoq at this point after a couple of quarters, we're seeing a 30% in-play share in Canada. So we are, as I mentioned, very, very encouraged with the early adoption. In particular, my comment around, how fast once you see the first prescription take place with some of those productive doctors, how fast they go to the second or third. To give you some flavor of what we see in the US, and again, the data is early, we see, as expected, the majority of our use so far in that dynamic market are not switches necessarily. We see about, let's say, 1/3, believe it or not, that are not even exposed to Dupi. And the doctors are saying, look, I've already given another oral systemic, for example, but the itch and the skin is so severe that they're going to go -- I'm going to go right and get the relief with Rinvoq. And then maybe the other two-third, you see Dupi partial responders, particularly related to the itch, just isn't suppressed as much, and they still have some skin involvement. Or there is, as we've highlighted before, a warehouse of Dupi non-responders that has been built up over the last four years. So that's the behavior that we see. Again, I'm very encouraged on the early results, not just in the US but around the world. Rinvoq is going to be a real player in this underserved market." }, { "speaker": "Liz Shea", "text": "Thank you, Alice. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question is from Steve Scala from Cowen. Your line is open." }, { "speaker": "Q – Steve Scala", "text": "Thank you. Two questions. First on epcoritamab, the data looks great. Could this molecule immediately start taking share from CAR-T, or do you think physicians will want to see durability data before selecting a bispecific ahead of a cell therapy? So that's the first question. The second question is, I'm trying to sift through the answer to the Humira question just a moment ago. On the one hand, it seems we need to consider that Humira could be more resilient in 2023 than expected. On the other hand, the Street needs to raise spending assumptions. So, would you object to either of those conclusions based on what was stated? Thank you." }, { "speaker": "Neil Gallagher", "text": "Thanks Steve. This is Neil. I'll take the first question on epcoritamab. The fact that we saw such remarkable activity in a patient population that had failed CAR-T does not imply that the medicine should be positioned after failure of CAR-T. I think they are two very different classes of medicines, as you know. CAR-T has significant challenges with respect to the need for -- to be prior to administration. Whereas the safety profile with epcoritamab is extremely manageable. And again, I don't want to repeat what I said earlier on around CRS. So, overall, we see a very strong benefit risk profile emerging for the medicine. And therefore, our intention is to move the medicine into earlier lines of therapy initially gain an approval with respect to -- gain approval in refractory DLBCL and after that move the medicine into earlier lines of therapy." }, { "speaker": "Rick Gonzalez", "text": "Steve, this is Rick. I think Rob and I will handle the second question for you. Yes, look, I think it's a great question, and we've gotten that question a lot. What's the erosion going to be in 2023? And is it going to be lighter in 2023 and therefore, spill more into 2024. And I think that's a reasonable question to start to think through. I'd say as I step back and look at it, I would tell you this. Look, at the end of the day, it could be lighter in 2023. That would force more of it out into 2024. If I look at the business, that's a good thing. We give us higher cash flows in 2023 than what we would be projecting now. Ultimately, I think there will be a settling out between 2023 and 2024. We'll still get to the levels that we have described or at least that we are modeling. And I think the important thing is, look, Humira is going to play out over these two-year period of time. What's important to AbbVie, though, is what's that underlying growth that's driving the business and is going to sustain the growth on the other side of the LOE. That's the critical aspect of it. The Skyrizi, the Rinvoqs, our Neuroscience pipeline, Aesthetics, it's all of those major growth drivers that we have because that growth is going to be suppressed in 2023 and somewhat maybe in 2024. But as soon as that pressure is off, that's when it reemerge and be able to deliver growth on the other side of it. And so what we're focused on is, obviously, we're going to try to manage the 2023-2024 dynamic to the extent that we're able to. But that's not the most critical part for the business. The most critical part is driving these growth brands and delivering on the pipeline." }, { "speaker": "Rob Michael", "text": "This is Rob. What I would add, Steve, just to clarify, I mean, we have a business that's going to deliver high single-digit growth during 2025. It doesn't make sense to be cutting investment in 2023. And that's what the Street consensus is modeling currently. So, we expect to invest in this business, invest in R&D, invest in SG&A to drive that long-term growth. And given how quickly we'll return to that growth, I wouldn't expect us to be cutting investment in 2023." }, { "speaker": "Steve Scala", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Thanks Steve. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Andrew Baum from Citi. Your line is open." }, { "speaker": "Andrew Baum", "text": "Thank you. Question for Jeff. Perhaps you could comment on the impact of IL-31 inhibitor in atopic dermatitis where we're expecting additional Phase 2 data, which obviously don't have the JAK labeling associated with how you think it's going to impact the market in terms of delaying the onset of JAK therapy? And then second for Neil, could you talk to how large the commercial potential for Venclexta in t(11;14) myeloma, which is due to reported Phase III this year anytime?" }, { "speaker": "Jeff Stewart", "text": "Yes. Thank you, Andrew. So important question. So the way that we see the market for the other ILs, I do think that there will be a segment of conservative dermatologists that will attempt to sequence. And I think that largely that they'll be disappointed because it seems the newer agents are very, very difficult to distinguish from Dupixent. I think certainly, there could be market access dynamics that start to appear with subsequent ILs, I think that's something that we will watch and you would want to watch. I think what's, again, maybe not appreciated as we watch the early quarters of performance in Europe and the first quarter of performance here in the US, is that there's significant amount of early adopters and dermatologists that will go right to a JAK inhibitor, as I mentioned. They're not always sequencing through Dupi. And it's because the severity of some of these patients and the level of the clinical involvement is very, very significant. And so, we do see what you would call a significant amount of naive use based on the profile of the JAK inhibitor. Now these are early adopters. These are people that have already contemplated the risk benefit and I think that's important. And so, the way that we see the market developing is that, when physicians would start with Dupi, which will be in a significant proportion of patients, it's not clear at all that their next step will be another IL that has been approved or will be approved. In fact, we think it's more likely that they will move towards the best JAK that can get to these high levels of skin clearance, the EZ 90 plus almost no perceived itch. And I think that's the endpoint that this market is going to move towards and Rinvoq is the drug that clearly can deliver on that promise. And so that's how we see the market developing, and that's why we remain encouraged on the early results around the world from what we're seeing with the agent." }, { "speaker": "Neil Gallagher", "text": "This is Neil. With respect to the question on Venclexta, venetoclax CANOVA. So the CANOVA study is a study of venetoclax in multiple myeloma patients with a particular translocation, t(11;14). We're making extremely good progress with the study, and we fully anticipate having a Phase III data from the study during the course of 2022. We know from this particular patient population that were included in earlier studies with Venclexta that they are explicitly sensitive to treatment with the medicines in various combinations. The prevalence of this population is around 20% of multiple myeloma and multiple myeloma, as you know, is the common of [indiscernible] malignancy. So, this is a very significant proportion of the multiple myeloma population that could gain benefit from Venclexta. And as mentioned, we're looking forward to being able to communicate the Phase III data during the course of 2022. Thanks for the question." }, { "speaker": "Liz Shea", "text": "Thank you, Andrew. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Chris Schott from JPMorgan. Your line is open." }, { "speaker": "Chris Schott", "text": "Great. Thanks very much for the question. First one for me is just can you elaborate a bit more on Rinvoq coverage, both in AD and UC. I guess just trying to get a sense of where we are today and what's the outlook for the next few quarters? And maybe as part of that, it seems like you're seeing some nice uptake in your BRIDGE programs. Can you just comment when you expect we should start to think about those translating over to third-party Rxs and that would be maybe more visible to the outside world in terms of how that uptick you're seeing? And then my second question was just on Q1 itself. Were there any notable either payer adjustments or gross to net issues? I guess Humira, for example, it seems like the low single-digit growth was a departure from recent trends. I'm just trying understand a little bit better what happened in the quarter. Is there anything we should just be kind of keeping in mind as we consider the Q1 results? Thanks." }, { "speaker": "Jeff Stewart", "text": "Yes. Thank you, Chris. It's Jeff. So, with your first question is -- we're very confident that we are going to get to high levels of paid access for Rinvoq and Skyrizi's new indications. So, typically, what we'll see based on the approval timeline, we'll be ramping up into the -- by the middle of the year up in the high 90s in terms of our access -- for commercial access. So, I think that everyone should be confident that, that's where you're going to start to see this bridge program start to fully convert as the months go by into the paid prescription. So, typically, that's the timing we're looking at. You're going to see very strong momentum on paid access by -- towards the end of next quarter is what we've guided towards. So, that's the answer to your first question. I think if you think about -- and maybe just to frame the Humira question. The Humira fundamentals are -- and the market fundamentals are quite strong. You see the markets are performing nicely. Our market share growth trends, we haven't seen any trend shift. They've been largely stable. There's some sequential decline based on the size of the market and actually our own brand, Skyrizi and Rinvoq that are playing very strongly into these markets. What I would say is that, in some cases, Q1 can be quite unique over the years. You've got the issue with the plans resetting their deductibles, you've got issues with doctors that have to put in another prior authorization for the year. And so you do see some co-pay and sort of deductible dynamic. But we think that's really a first quarter type of event, and it's largely been very consistent with what we expected. So, maybe I don't know, Rob, if you want to build on that a little bit." }, { "speaker": "Rob Michael", "text": "Yes, I would just add that if you look back to our guidance for the quarter and we gave guidance to the therapeutic area level, we pretty much came in line with that guidance. And so we expected this dynamic, and we're also we're not changing our full year outlook for US Humira, 8% growth. And that, again, will be driven by market driving volume growth. And so -- it's in line with our expectations. I understand Street consensus had a different point of view, but we weren't surprised by that." }, { "speaker": "Liz Shea", "text": "Thanks Chris. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Chris Shibutani from Goldman Sachs. Your line is open." }, { "speaker": "Chris Shibutani", "text": "Thank you. Good morning. If I could ask on Vraylar, the product, I think you comment expectations for an MDD approval and yet they'll frame it as potential for upside. Can you help us understand perhaps some of the potential there? Just thinking back to some of the scale of the peak sales opportunity that, that drug was characterized previously, MDD certainly seems as if it's a potential significant opportunity. Thanks." }, { "speaker": "Jeff Stewart", "text": "Yes, Thank you for the question. And it is a significant opportunity. So, as we highlighted and Tom highlighted, the NDA has been accepted, and we're confident in the approval. I think what we said in the past is that just with the base indication. So, before we get that approval, I mean, the FDA has to still approve it towards the end of the year. We believe that we can ramp towards a $4 billion opportunity. So, that would mean our share just in the base indications of a unique profile with the mania, the mix manian depression, the bipolar depression, we moved somewhere up sort of doubling our share penetration. So right now, we're at about 2.7% TRx share. So we we'd really get close to doubling that based on the momentum. And then MDD would build on top of that. And so it's significant. I mean, the physicians that we've talked to when we show them the profile are very pleased. First, they know Vraylar, they like Vraylar, they like the strong efficacy, they highlight nonsedating, they highlight at least verbally a brightening effect of the agent, minimal weight gain, metabolic effects. And so as they think about that, how that would translate to adjunctive MDD, they like that profile. The other piece that we hear is they like the starting dose. They like that starting dose of the 1.5 milligram dose, which is what we believe that ultimately will be approved. We'll have to see. So easy to start, easy to take, well tolerated. And so to your point, we believe that MDD will offer some upside and acceleration to the brand's momentum when we achieve it." }, { "speaker": "A – Liz Shea", "text": "Thanks Chris. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Vamil Divan from Mizuho Securities. Your line is open." }, { "speaker": "Vamil Divan", "text": "Hi, great. Thanks for taking my question. So just maybe get back to some of what we were just talking about around the pricing in 1Q. But I had a couple of questions regarding the migraine franchise. So, the Ubrelvy scripts from a legacy publicly out third-party data, it looks like the gross to net – some net pricing is back to where we were in 1Q '21. And just trying to understand if this is just a seasonality of things or 4Q to 1Q dynamic or maybe there might be something broader where net pricing for these products is going down. And then tied to that, with Qulipta, as you mentioned, look, the prescription numbers are pretty good as it builds up here. I'm curious now that you have sort of two products in that market, does that impact how you're thinking about the opportunity, especially from a pricing side or sort of payer negotiation side? Is there any thoughts on sort of bundling the two other in any way to present to get even better active than what you have right now? So, any thoughts you could share there would be helpful as well? Thank you." }, { "speaker": "Rob Michael", "text": "So Vamil, this is Rob. I'll take your first question. So when you look at that there is seasonality in this market in the US, and so you do see a shift from Q4 to Q1. If you look at year-over-year, you'd see that in Q4, as you mentioned, Q1 year-over-year is relatively flat. I would think about it that way for the full year as well. So, you do tend to see a suppression in Q1 because of plans resetting that dynamic we see in the US market. But then over the course of the rest of the year, you do see higher pricing. So, on average, the way to think about it is price is relatively stable." }, { "speaker": "Jeff Stewart", "text": "And Vamil, it's Jeff now. So I think -- look, we are pleased with the Ubrelvy momentum. I mean, actually, since we launched Qulipta, Ubrelvy has accelerated. So, we have to -- because we can't see the competitor because you can see the whole thing. But when we factor Nurtec by 8 versus 16, and we try to understand the acute dynamic, we can see that we're clearly the market-leading acute CGRP and that's nice to see. The physicians really like Ubrelvy, the markets are robust. I think what you're seeing is what Rob highlighted in terms of the overall performance. I didn't really fully appreciate your second question in terms of the access. I can give you a broad overview. Obviously, we're seeing great momentum with the brand. Much of the brand is still because the access is ramping is still bridged, just like we discussed there with the immunology agent. So we think, again, by the middle of the year, we're going to see commercial access really start to ramp, and you'll see the conversion start to take place. What's nice is that we're confident in that. We think that our price points and net price or negotiations are going well. And because of its unique profile, as an agent, basically, the strength of the drug is really significant in terms of its performance against episodic migraine. We feel like we're in good shape. And we're going to build on top of that basically 25% in-play share, which is right now at the top of the league table. So, that's how we see it. We're confident in the access ramp." }, { "speaker": "Vamil Divan", "text": "Maybe just to clarify the second question then just -- thank you for all that. Is there any advantage of another strategy you might have now because you have two approved migraine oral therapies, or is it pretty much similar it would be if you had one or the other?" }, { "speaker": "Jeff Stewart", "text": "Yes. It's pretty similar based on the way that the pricing and the different dynamics work on the other CGRP. It's not -- it's just sort of a straight -- it's a straight play on the access there." }, { "speaker": "Vamil Divan", "text": "Okay. Thank you so much." }, { "speaker": "Liz Shea", "text": "Thank you, Vamil. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Geoff Meacham from Bank of America. Your line is open." }, { "speaker": "Geoff Meacham", "text": "Hey guys. Morning. Thanks for the question. I just had another one on the INI landscape. Rick, when you look at the market disruption that you'll see in 2023 and 2024, presumably, that's going to have an indirect effect on Skyrizi and Rinvoq when you think pricing and share. What would you guys view as a win over this period from a new start or switch perspective or a growth perspective is the first question. And the second part of it is, what gives you guys confidence in the market really normalizing after a 2024 period? Thank you." }, { "speaker": "Rick Gonzalez", "text": "I think as we look at our long-range plan, we don't see or anticipate a dramatic impact. We've provided that 2025 guidance and I think it's reflective of significant growth of Skyrizi and Rinvoq. If you look at those assets and you look at their clinical performance, they really stand out. And that's what's driving the kind of volume and growth that we're seeing. And I think you will see obvious price disruption in the Humira market from biosimilars. But I don't anticipate that you're going to see that bleed over in a significant way to those other assets. Jeff, do you see any differently?" }, { "speaker": "Jeff Stewart", "text": "Yes, I don't see, Geoff, much difference. I mean if you think of it in some ways, even on -- let's take Rinvoq, for example. I mean, you could say, wow, in prior viewpoints, maybe everyone will step behind a biosimilar at some point in the future. Well, one, we didn't think that, that would happen wide scale as the market develops anyway. But even if it did, our label is already behind a TNF. And so when you look at the level of efficacy that Rinvoq's bringing in those later lines, I mean it's -- we're really quite insulated from that, I would put forth. And second Skyrizi is just -- is a phenomenal asset. I mean the level of performance and what it's doing to transform certainly psoriasis today, PSA right now and what we think will happen with Crohn's and ultimately, IBD, when you look at the level of healing and sort of restating that standard of care, we think the assets themselves are quite well positioned for the middle part of the decade, and that sort of goes to the elements of the planning that Rick talked about." }, { "speaker": "Liz Shea", "text": "Thanks Geoff. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Gary Nachman from BMO Capital Markets. Your line is open." }, { "speaker": "Gary Nachman", "text": "Hi thanks. First, just following on that last response. Can you talk more broadly about how you see the expansion of Rinvoq and Skyrizi into the IBD indication? So how is the initial launch for Rinvoq for ulcerative colitis going? I know it's early days, but what's the outlook there given physician receptivity around the product? Are physicians saying they're excited to have Rinvoq for Crohn's as well? And also, how do you see Skyrizi fitting in with Crohn's versus Rinvoq? And then secondly, on Aesthetics, it was strong in the first quarter, but did you see any impact in the early part of 1Q from Omicron? And what have the trends been more recently in March and April in the Aesthetics business?" }, { "speaker": "Jeff Stewart", "text": "Yes. Thank you for the question. It's Jeff again. So we are very, very encouraged by the IBD momentum that we can build. And we're right on the cusp of it. And to give some sense is basically this market -- the market of Crohn's and you see that – it actually has fairly high biologic penetration. When we do our research and our engagement with the physicians, what they typically have done for more than a decade since the availability of Remicade and then Humira, they really hang on as much as possible to their first-line use. They try to intensify, they do all sorts of things because it's quite scary for the physicians and the patients because no one set a different standard of care. So when you start to look at the healing rates that we start to see with Rinvoq in UC, the healing of the bowel, the remission rate, the combination of what we can see, this market looks very, very good to have both of those assets come in with higher standards of care. So we're very, very encouraged and we think that the IBD market is probably underappreciated in terms of what that looks like. And the patients are so challenged with their disease because it's quite severe with the bowel preparations, the hospitalizations, all of these things, having two assets is a great thing to bring to the market. Certainly, in the US, it's likely we see that with UC today that you're going to have later line use based on the labeling. Skyrizi is not going to have that limitation. So, you can imagine that you have an ability to co-position to sequence appropriately to think about how you bring that whole portfolio around the world and that's how we see it. We're quite encouraged that we would have both Rinvoq for Crohn's and Rinvoq for Skyrizi in the market. And it's kind of very similar to my comments I made on what's happening with PSA today in rheumatology, where both of those assets Rinvoq for PSA and Skyrizi PSA are in the market together working as a portfolio. To get to your first point, it's been only a month or so with our UC launch, but the physicians, gastros are very encouraged with the profile. They've not seen the level of remission or the level of healing before in any asset. So, there's quite a wow reaction to the efficacy profile. They realize that they have to think about, I've got to think through my patients that are not doing well on TNF or have cycled through a TNF and are struggling. And I mentioned that's a pretty large addressable population. It's at least 50% of the market today. So early qualitative results are quite strong. And the BRIDGE results are also quite strong. So, we're pleased with the gastro launches thus far." }, { "speaker": "Rick Gonzalez", "text": "Carrie?" }, { "speaker": "Carrie Strom", "text": "Gary, this is Carrie Strom, President of Global Allergan Aesthetics, and I'll take your question about the aesthetics market. And in Q1, we did see US toxin and filler markets, both growing in the mid-20s percent. And we expect that sort of growth to continue for the rest of 2022. And the way to think about it is similar amount of absolute volume growth as 2021, but of course, off of a larger base. And in terms of what's driving that market growth, we're seeing very strong demand trends supported by our increased commercial investments, for example, increased consumer activation for acquisition and retention, field force expansions in key markets. And we see these trends also supported just by fundamentals and aesthetics that will continue in the long-term. People think about aesthetics more like health and wellness. It's been much more destigmatized, and we see factors like social media and word of mouth continuing to drive aesthetics in the future. Your question around the pandemic, I would say that we are seeing an impact right now in China, and we anticipate that this recent surge of COVID cases in China which has resulted in lockdowns across several major cities, has reduced patient traffic into aesthetic offices in China. And China is a top market for aesthetics. So, we expect this to impact our near-term international performance for both toxins and fillers. I should also mention that Russia is a key market for fillers globally. And as the tragic events in the Ukraine have unfolded, we have suspended operations for our Aesthetics business in Russia. So, although absolute aesthetic sales in Russia are modest, like I said, Russia is among one of the largest filler markets in the world. So, we expect to see an impact on our filler performance in coming quarters. But despite these dynamics, we do not need to change our total guidance for Aesthetics. So, we see our continued robust toxin performance in the US to offset this anticipated transitory impact in both China and Russia." }, { "speaker": "Gary Nachman", "text": "Great. Thank you." }, { "speaker": "Liz Shea", "text": "Thanks Gary. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Robyn Karnauskas from Truist Securities. Your line is open." }, { "speaker": "Robyn Karnauskas", "text": "Great. Thanks for taking my questions. So, for epcoritamab, I just have a question on approval. Given the recent FDA discussion around the PI3 kinase class and sort of hinting that they want controlled data for accelerated approval, how do you view that in light of that panel, the likelihood of accelerated approval? And then second. Just a little bit more questions around the Bridge program. I think you said that you're going to expect more payment reimbursement coming online in the middle of the year. Just talk to me how long people stay in the Bridge program and how you expect that Bridge program to continue? And what -- how many people might continue to use it after payers and online? Thanks." }, { "speaker": "Neil Gallagher", "text": "Hey Robyn, it's Neil, I'll start off with the question around epcoritamab, but maybe just a comment -- a general comment on accelerated approval overall. I think as we're all aware, it prompted your question that the agencies in the course of -- in the process of updating its guidance with respect to accelerated approval. We haven't seen the totality of that guidance, but we anticipate hearing more from them during the course of 2022. As I alluded to, and I'm not going to repeat what I said earlier on about the epco data, but we are extremely pleased with how the molecule is performing, and it is our intent to engage with the agency based on the data that we've toplined recently. It is our intent to engage with the agency in a conversation to explore a path to accelerated approval. And likewise, with some of our other programs, we recently got a BTD designation for Teliso-V, for example, earlier this year with a 54% response rate in c-Met high non-small-cell lung cancer. Again, it is our intent when we have data that are these strong to continue to engage with the agency on those programs to explore potential costs to accelerated approval. So thanks for the question." }, { "speaker": "Jeff Stewart", "text": "Okay. It's Jeff. Just to comment on your BRIDGE question. Thank you for that. So the BRIDGE transition will be very efficient. So, what I mean by that is because of the connections that we have with the payers and our specialty pharmacy network, we're able to – once access is achieved rapidly and appropriately transition patients from the BRIDGE to basically their paid pharmacy in their prescription. So, there's not going to be lingering bridge effects, particularly in the immunology space. So, once it starts to move and that access ramps, the BRIDGE transition is quite fast. And that can be within weeks or a month. And we know that that's the case because we have the model from our earlier launches from Skyrizi and Rinvoq. So ultimately, once you start to achieve those high levels of access, BRIDGE programs drop very, very fast, and the vast majority, the very vast majority is paid prescriptions. So it's very efficient, and I hope that helps." }, { "speaker": "Liz Shea", "text": "Thanks Robyn. Operator, we have time for one final question." }, { "speaker": "Operator", "text": "Thank you. Our final question comes from Josh Schimmer from Evercore ISI. Your line is open." }, { "speaker": "Josh Schimmer", "text": "Thanks for putting me in and congrats to both Mike and Tom. For Skyrizi, did your long-term outlook improve again, or am I misunderstanding the contingent consideration line item? Thanks so much." }, { "speaker": "Rob Michael", "text": "So Josh, it's Rob. If you look at the continued consideration, actually, it's a fair value liability, it went down this quarter because of discount rate. So we always have to pay attention to discount rate movement. So we saw the average discount rate increase by about 130 basis points. You're seeing, obviously, as rising interest rates are taking hold of the market. That's something we have to take into account because we had to mark this to market every quarter. If you look at our release, we had a similar – we had a decrease last year as well. Again, we had discount rates increase in Q1 of last year, albeit to a lesser extent. So that's what you're seeing is just really the discount rate movement. No other real fundamental changes to the valuation of that liability." }, { "speaker": "Josh Schimmer", "text": "Got it. Thanks for clarifying." }, { "speaker": "Liz Shea", "text": "Well, thank you, Josh. That concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us." }, { "speaker": "Operator", "text": "Thank you. That concludes today's conference call. Thank you for your participation. You may disconnect at this time." } ]	AbbVie Inc.	141,885,706
ABBV	4	2,023	2024-02-02 09:00:00	Operator: Good morning, and thank you for standing by. Welcome to the AbbVie Fourth Quarter 2023 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion of this call. [Operator Instructions] Today's call is also being recorded. If you have any objection, you may disconnect at this time. I would now like to introduce Ms. Liz Shea, Senior Vice President, Investor Relations. Thank you. You may begin. Liz Shea: Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Rob Michael, President and Chief Operating Officer; Jeff Stewart, Executive Vice President, Chief Commercial Officer; Scott Reents, Executive Vice President, Chief Financial Officer; Carrie Strom, Senior Vice President, AbbVie and President, Global Allergan Aesthetics; and Roopal Thakkar, Senior Vice President, Chief Medical Officer, Global Therapeutics. Joining us for the Q&A portion of the call is Tom Hudson, Senior Vice President, Chief Scientific Officer, Global Research. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. In addition to the news release issued this morning, we have also posted slides on our website at investors.abbvie.com that supplement some of the content we'll be covering this morning. Following our prepared remarks, we'll take your questions. So with that, I'll turn the call over to Rick. Rick Gonzalez: Thank you, Liz. Good morning, everyone, and thank you for joining us today. Our performance this quarter tops off another excellent year for AbbVie, with results well above our initial expectations. I'm particularly pleased with the performance of our growth platform, the base business excluding Humira, which delivered full year sales growth of more than 8%, with revenue growth accelerating to more than 15% in the fourth quarter. The strength of our diversified growth platform has not only enabled us to successfully absorb the largest loss of exclusivity event to date across our industry, but it's also supported continued investment in our business for long term growth. These investments include: higher adjusted R&D expense, which was increased by nearly $600 million in 2023 and will be ranged substantially again in 2024 to support several promising pipeline programs like 383 in multiple myeloma. 400, our next-generation ADC for several solid tumor types and [Moodi] for HS, as well as inflammatory bowel disease. The proposed acquisition of ImmunoGen and their portfolio of ADCs accelerating our entry into the solid tumor space and strengthening our oncology pipeline, as well as the proposed acquisition of Cerevel, a unique opportunity to augment our presence in neuroscience with the pipeline of differentiated assets. We also increased our quarterly dividend which we announced in October. Since our inception, we have grown our dividend by more than 285%. In summary, our operational execution has been outstanding and we have considerable momentum heading into 2024, including an expected return to operational sales growth just one year following the US Humira loss of exclusivity, driven by our growth platform. We remain confident in our long-term outlook, including a return to robust growth in 2025 with a high single-digit CAGR through the end of the decade. With that, I'll turn the call over to Rob for additional comments on our business performance. Rob? Rob Michael: Thank you, Rick. Today we reported another strong quarter and highly productive year for AbbVie. We delivered full year adjusted earnings per share of $11.11, which is $0.63 above our initial guidance midpoint, excluding the impact of IPR&D expense. Total net revenues were $54.3 billion, roughly $2.3 billion ahead of our initial guidance. Most importantly, each of our five key growth areas outperformed our initial expectations. As it pertains to AbbVie's near-term outlook, we are focused on three key priorities. First, driving strong performance of our ex- Humira Growth Platform. This platform is the critical driver of our return to robust growth in 2025 and beyond. In our therapeutic portfolio, we have several key brands including Skyrizi, Rinvoq, Vraylar, Ubrelvy, and Qulipta, which are each expected to contribute double-digit sales growth in 2024. We also expect meaningful growth for aesthetics this year, driven by improving market trends in the US and continued execution across our international business. We are well positioned to drive strong long-term growth in this highly under-penetrated market. Second, we are focused on prioritizing investment in our pipeline, which encompasses numerous opportunities to elevate the standard of care for patients. We anticipate updates this year from several important R&D programs including approvals for Skyrizi in UC, 951 in the U.S., and potentially accelerated approval for Epkinly in third line plus follicular lymphoma. We also anticipate regulatory submissions for BoNT/E, our novel short-acting toxin, and potentially Teliso-V, an advanced non-squamous non-small cell lung cancer. And third, we are focused on closing and integrating ImmunoGen and Cerevel. These two exciting opportunities represent substantial sources of revenue growth well into the next decade. We remain on track with the anticipated closing of both deals in the middle of the year. Today, we are also reaffirming our long-term sales outlook, which includes a return to robust revenue growth in 2025 with a high single digit CAGR through the end of the decade. Included in this outlook is an updated forecast for Skyrizi and Rinvoq. Based on the impressive growth of both therapies, which we expect will collectively generate approximately $16 billion of revenue in 2024, we now anticipate Skyrizi and Rinvoq will collectively exceed more than $27 billion in sales by 2027 with robust growth continuing into the next decade. This updated forecast reflects an increase of more than $6 billion in revenue compared to our prior 2027 guidance. We expect global sales for Skyrizi to reach more than $17 billion in 2027, reflecting continued share capture in psoriasis where we are the clear market leader, as well as strong uptake in IBD. And we expect Rinvoq to achieve more than $10 billion of global sales in 2027, reflecting continued market growth and share momentum across each of Rinvoq's approved indications, including four in rheumatology, two in IBD, and atopic dermatitis. This forecast comprehends modest contributions from several new disease areas for Rinvoq, which we anticipate will be launching in the second half of the decade. These new indications have a collective peak sales potential of several billion dollars. Our updated forecast also includes higher estimates for Ubrelvy and Qulipta. We now expect total oral CGRP peak revenue of more than $3 billion, reflecting an increase of more than $1 billion. Our previously issued long-term forecasts for aesthetics, Vraylar, and 951 remain unchanged. In summary, this is an exciting time for AbbVie. We are demonstrating outstanding execution across our portfolio and our long-term outlook remains very strong. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff? Jeff Stewart: Thank you, Rob. I'll start with the quarterly results for immunology, which delivered total revenues of more than $6.9 billion, exceeding our expectations. Skyrizi total sales were approximately $2.4 billion, reflecting operational growth of 51.6%. Rinvoq total sales were more than $1.2 billion, reflecting operational growth of 62.8%. On a full-year basis, Skyrizi and Rinvoq delivered more than $11.7 billion in total combined revenue, an impressive increase of $4 billion year-over-year. And as Rob just described, we see substantial room for continued growth across each of their currently approved indications. You can get a good sense for this momentum by looking at the relationship between the current in-place share, which includes new and switching patients, and the total prescription share just today. For example, our performance in IBD has been very strong for both Skyrizi and Rinvoq. In Crohn’s disease, these two treatments together are already capturing roughly one out of every three in-play patients across all lines of therapy in the United States, while their combined total prescription share is only in the mid-single digits. You see a similar trend happening in ulcerative colitis for Rinvoq, and we anticipate launching Skyrizi for this indication later this year. So significant opportunity remains for revenue inflection in IBD, especially given their respective efficacy, safety, and dosing profiles. Across some of the other notable indications, Skyrizi is capturing roughly half of the in-place psoriasis patients in the U.S. biologic market relative to a total prescription share, which is in the mid-30s percent. Rinvoq is capturing high teens in-play share in the atopic dermatitis market, while total share is in the high single digits. Similarly, in rheumatoid arthritis, Rinvoq is capturing mid-teens in-play share, while total share is roughly 7%. So, again, we see substantial headroom for share gains in addition to the typical robust market growth across rheum, derm, and gastro. Plus, we are planning to have up to five additional indications for Rinvoq across several sizable markets that will potentially provide another significant revenue inflection in the second half of this decade and into the 2030s. Turning now to Humira, which delivered global sales of $3.3 billion, down 40.8% due to biosimilar competition. The erosion impact in the U.S. played out largely in line with our expectations this quarter, while performance across our international markets continues to trend better than expected. In the U.S., we have once again secured broad formulary access for Humira in 2024. While there will be some step down in coverage year-over-year, we will still have parity access to biosimilars for the vast majority of U.S. patient lives. Turning now to oncology, where total revenues were $1.5 billion. Imbruvica global revenues were $903 million, down 19% reflecting continued pressure in new patient starts. Venclexta global sales were $589 million, up 13.7% on an operational basis, with strong demand for both CLL and AML across our key countries. The early prescription trends for Epkinly in third line plus DLBCL have been encouraging with commercialization now underway in the US, Europe and Japan. We also anticipate the potential label expansion for follicular lymphoma later this year. Lastly, we have two new and exciting opportunities in oncology. Pending completion of the transaction, we will add Elahere to our portfolio. Elahere is a first-in-class ADC therapy approved for ovarian cancer, which is already demonstrating impressive uptake in the U.S. market. I look forward to welcoming the ImmunoGen commercial team to AbbVie. And Teliso-V, another novel ADC which has demonstrated very promising data in lung cancer. Teliso-V would further expand our scale and growth potential in solid tumors. In neuroscience, our second largest therapeutic area, total full year revenues were more than $7.7 billion, reflecting impressive absolute sales growth of nearly $1.2 billion. In the quarter, total revenues were approximately $2.1 billion, up 22.4% on an operational basis. Vraylar continues to demonstrate robust growth. Global sales of $789 million were up nearly 40%. We continue to see significant momentum in new prescriptions across all indications following the approval as an adjunctive treatment for major depressive disorder just over a year ago. And our leading oral CGRP portfolio for migraine contributed $348 million in combined sales this quarter, reflecting growth of approximately 40%. We anticipate continued robust demand for both Ubrelvy and Qulipta this year, including the expansion of Qulipta, the only once daily oral CGRP for prevention of both episodic and chronic migraine into the international markets. Based on the strong momentum, we have raised the outlook for our CGRP portfolio and now expect total peak sales from Ubrelvy and Qulipta combined to exceed $3 billion. Total Botox therapeutic global sales were $776 million, up 6.7% on an operational basis, reflecting momentum in chronic migraine, as well as other approved indications. And lastly, we recently launched 951 in both Japan and Europe, and we are pursuing commercial approval in the U.S. later this year. This treatment represents a potentially transformative next generation therapy for advanced Parkinson's disease and $1 billion plus peak sales opportunity. So overall, I'm extremely pleased with the commercial execution across our diversified portfolio, especially the growth platform, which is demonstrating very strong momentum as we head into 2024. And with that, I'll turn the call over to Carrie for additional comments on aesthetics. Carrie? Carrie Strom: Thank you, Jeff. Fourth quarter global aesthetic sales were approximately $1.4 billion, an operational increase of 6.9%. In the U.S., aesthetic sales of $884 million increased 5.7%, marked by accelerating market growth and strong key product performance. Fourth quarter U.S. Botox Cosmetic sales were $453 million, an increase of 7.3%. We continue to see sustained momentum in the recovery of the U.S. facial toxin market, which was a primary driver of growth in the fourth quarter. Botox Cosmetic remains the clear market leader with strong and stable share, despite new competitive entrants. U.S. Juvederm sales were $156 million in the fourth quarter, an increase of more than 20% versus the prior year. This robust growth was driven by the strong launches of Volux and SkinVive, which continue to drive new consumers and greater penetration in the dermal filler category. Consistent with our expectations, the U.S. filler market recovery trails out of toxins, but it's continuing to show improvement as year-over-year growth was roughly flat in the fourth quarter. As we look at 2024, we are pleased with the momentum of our U.S. aesthetics portfolio. We expect full year sales growth as our market leadership positions us very well from a competitive perspective, and we anticipate continued recovery in both toxin and filler markets. Internationally, fourth quarter aesthetic sales were $487 million, representing an operational increase of 9%. We experienced strong performance in most regions and growth benefited from the impact of China's COVID lockdowns in late 2022. Within China, the softening economic conditions that emerged in the third quarter continued to impact results. Consistent with what we experienced in the US, the economic slowdown has impacted fillers more than toxins, based upon their relatively higher price. We anticipate economic headwinds will continue in China over the near term, balanced against our expectations for continued strong performance in other international regions. Looking to the long-term, Aesthetics remains an area with very low market penetration. And we have demonstrated our ability to drive growth through investments in our customers, consumers, and innovation. As such, we anticipate Aesthetics will be a strong growth portfolio for years to come and remain confident in our ability to deliver more than $9 billion of sales by the end of the decade. With that, I'll turn the call over to Roopal. Roopal Thakkar: Thank you, Carrie. In 2023, we saw significant evolution of our pipeline with multiple data readouts, regulatory submissions and approvals, as well as expansion of our R&D efforts with the announced ImmunoGen and Cerevel transactions. We expect to continue this progress with numerous important clinical and regulatory milestones anticipated this year. In immunology, we recently announced positive topline results for lutikizumab our anti-IL-1 alpha beta bispecific being evaluated in hidradenitis suppurativa. In the Phase 2 study, lutikizumab demonstrated higher, high score of 50 and high score of 75 measures, as well as improvement in skin pain compared to placebo. These are very impressive results considering all patients who were inadequate responders to anti-TNF therapy. And 70% of the patients were early stage three, which is the most advanced stage of the disease. Based on these results, we plan to begin a Phase 3 program in HF later this year. We also plan to evaluate lutikizumab in ulcerative colitis and Crohn's, given the role that IL-1 likely plays in these diseases. Patients with UC who have an IL-1 beta signature have shown resistance to anti-TNF and other biologics, providing strong rationale for a potential biomarker approach. Additionally, we believe lutikizumab has the potential to be used in combinations to provide transformational levels of efficacy in IBD. We plan to evaluate combo approaches with lutikizumab and Skyrizi, as well as with other pipeline assets in Crohn's. Our Phase 2 studies in IBD are expected to begin later this year. Our regulatory applications are under review for Skyrizi in ulcerative colitis. With approval decisions expected in the US and Europe later this year. Once Skyrizi is approved in UC, along with Rinvoq, we will have two assets with different mechanisms of action in IBD, both offering very high levels of efficacy. AbbVie will be very well-positioned with an industry-leading suite of treatment options for patients suffering from moderate to severe ulcerative colitis and Crohn's disease. We continued to make very good progress with the second wave of development programs for Rinvoq. With Phase 3 studies underway in five new indications, giant cell arteritis, lupus, HF, alopecia areata and vitiligo. We anticipate data readouts for these programs over the next three years, beginning with data from our GCA study this year. Moving to oncology, where we continue to make very good progress across our heme and solid tumor programs. In the area of hematologic oncology, we'll see data in the second half of this year from the Venclexta Phase 3 VERONA trial in treatment-naive higher-risk MDS patients, with regulatory submissions and approvals, anticipated in 2025. For Epkinly, we anticipate regulatory approvals in third-line or greater follicular lymphoma later this year in both the US and Europe. We also expect to begin several new Phase 3 studies in 2024, including studies in second-line DLBCL and frontline follicular lymphoma. At the recent ASH Meeting, we presented new data for our BCMA CD3 bispecific ABBV-383 in multiple myeloma. 383 is engineered for high-affinity binding to BCMA on malignant cells, and low affinity binding to a unique CD3 epitope on T-Cells, which has the potential to mitigate some of the adverse events associated with other T-Cell engaging BCMA-based therapies, while preserving high levels of efficacy. We're very encouraged by the data emerging from our Phase 1b study, which show treatment with 383 is yielding deep and durable responses. With a lower incidence and severity of CRS. With this profile, we believe 383 can be a highly effective and tolerable treatment for multiple myeloma. While potentially allowing for outpatient administration, limited or no step-up dosing and monthly administration from the beginning of treatment. All attributes, which would make it very appealing to both patients and physicians. We remain on track to begin a Phase 3 monotherapy study in third-line multiple myeloma this year. And we plan to begin combination trials in earlier lines of therapy in 2025. In the area of solid tumors, we recently announced positive topline results from the Teliso-V Phase 2 LUMINOSITY study in previously treated non-small cell lung cancer. Teliso-V demonstrated strong clinical benefits across key endpoints, including, overall response rate, duration of response and overall survival, with a tolerable safety profile. We believe these results have the potential to support accelerated approval. And we plan to discuss the data with regulators in the coming months. Pending alignment with the FDA, our submission is planned for the second half of this year. We're also making good progress with our next-generation c-Met ADC ABBV-400, which utilizes the same c-Met blocking antibody as Teliso-V, but has a proprietary Topo-1 warhead to afford deeper and more durable responses with an improved therapeutic index. We remain on track to see data this year from the non-small cell lung cancer and gastroesophageal cohorts from our Phase 1 study. And based on the progress we're making in our colorectal program, we plan to begin a Phase 3 study later this year in third-line CRC. We also continue to make very good progress with our anti-GARP antibody ABBV-151. Our Phase 2 study in second-line hepatocellular carcinoma is underway, and we plan to begin several additional Phase 2 studies this year, including frontline HCC, frontline lung cancer and metastatic urothelial cancer. We look forward to providing updates on these programs as the data mature. Now moving to Neuroscience where we recently announced the European launch of ABBV-951 for patients with advanced Parkinson's disease. We also recently provided our complete response submission to the FDA for 951 with an approval decision anticipated in the second quarter. Our novel subcutaneous levodopa, carbidopa delivery system has the potential to offer meaningful benefits over current treatment options and others that are in development. 951 delivers significant improvements in off-time and on-time with a less invasive non-surgical system. It can deliver high levodopa doses similar to the amount provided by DUOPA. And it doesn't require combination with oral drugs to achieve high efficacy. 951 also provides a full 24-hour benefit, which should result in less morning akinesia. We're extremely excited to bring this transformative therapeutic option to patients in Europe and the US once approved. In our Aesthetics pipeline, we recently submitted our regulatory application in the US for Botox in platysma prominence. We anticipate an approval decision in the second half of this year. And we remain on track to complete the remaining CMC work this year for BoNT/E, our rapid onset short-acting novel toxin. Following completion of the remaining work, we plan to submit our regulatory application in the second half of the year, with approval anticipated near the end of 2025. So in summary, we continue to demonstrate significant progress across all stages of our pipeline and anticipate numerous regulatory and clinical milestones again in 2024. I also look forward to integrating the ImmunoGen and Cerevel teams and pipeline assets into our R&D organization once those transactions close this year. These two transactions significantly strengthened our oncology and neuroscience pipelines with the addition of several novel assets that have the potential to become innovative new therapies for many patients. With that, I'll turn the call over to Scott. Scott Reents: Thank you, Roopal. I'm very pleased with AbbVie's strong performance in 2023. We have substantial momentum across the portfolio to support our long-term growth outlook. Starting with our fourth quarter results, we reported adjusted earnings per share of $2.79, which is $0.05 above our guidance midpoint. These results include a $0.15 unfavorable impact from acquired IPR&D expense. Total net revenues were $14.3 billion, $300 million ahead of our guidance, and down 5.4%. Most notably, these results reflect 15.3% sales growth from our ex-Humira growth platform. The adjusted operating margin ratio was 43.8% of sales. This includes adjusted gross margin of 83.9% of sales, adjusted R&D expense of 13.4% of sales, acquired IPR&D expense of 2% of sales, and adjusted SG&A expense of 24.7% of sales. Adjusted net interest expense was $363 million, the adjusted tax-rate was 17.2%. Turning to our financial outlook for 2024, our full year adjusted earnings per share guidance is between $11.05 and $11.25. This earnings per share guidance includes dilution related to the ImmunoGen and Cerevel acquisitions of $0.32, which assumes closing in the middle of the year. Please note this guidance does not include an estimate for required IPR&D expense that may be incurred throughout the year. We expect total net revenues of approximately $54.2 billion, reflecting a return to modest operational growth. At current rates, we expect foreign-exchange to have a 0.5% unfavorable impact on full year sales growth. This revenue forecast contemplates the following approximate assumptions for our key products in therapeutic areas. We expect global immunology sales of $25.6 billion, including Humira sales of $9.6 billion, including US erosion of roughly 36%. Skyrizi revenue of $10.5 billion, reflecting growth of more than $2.7 billion due to strong market-share performance in psoriasis, as well as robust uptake in IBD. And Rinvoq sales of $5.5 billion, reflecting growth of nearly 40% with continued market growth and share momentum across all approved indications. On a full-year basis, we anticipate that our strong volume growth for Skyrizi and Rinvoq will be modestly offset by low-single digit negative net price. In oncology, we expect sales of $5.7 billion, including Imbruvica revenue of $2.9 billion and Venclexta sales of $2.4 billion. As well as contributions from Epkinly, and partial year sales from Elahere. For Aesthetics, we expect sales of $5.7 billion. Including $2.9 billion from Botox Cosmetic and mid-single-digit revenue growth from Juvederm. For Neuroscience, we expect revenue of $8.9 billion, representing growth of more than 15%, including Vraylar sales of $3.4 billion, Botox Therapeutic sales of $3.2 billion and total oral CGRP revenue of $1.6 billion. For eye care, we expect sales of $2.2 billion. Moving to the P&L for 2024, we are forecasting full-year adjusted gross margin of 84% of sales. Adjusted R&D investment of 14% of sales, adjusted SG&A expense of 23.5% of sales, and adjusted operating margin ratio of roughly 46.5% of sales. We expect adjusted net interest expense of $2.1 billion, which includes the partial year cost in 2024 to finance the ImmunoGen and Cerevel transactions. We forecast our non-GAAP tax rate to be approximately 15.7%. Finally, we expect share count to be roughly flat to 2023. Turning to the first quarter, we anticipate net revenues of approximately $11.9 billion. At current rates, we expect foreign exchange to have a 0.5% unfavorable impact on sales growth. This revenue forecast comprehends the following approximate assumptions for our key therapeutic areas. Immunology sales of $5.1 billion, including Skyrizi sales of $1.9 billion, and Rinvoq revenue of $1 billion. These estimates reflect typical first quarter seasonality as well as low single digit unfavorable net price. We expect Humira global revenue of $2.2 billion, including US sales of $1.7 billion. We also anticipate oncology revenue just above $1.3 billion, Aesthetic sales of $1.3 billion, Neuroscience revenue of $1.9 billion, and eye care sales of $600 million. We are forecasting an adjusted gross margin of approximately 83.5% of sales and an adjusted operating margin ratio of roughly 44.5% of sales. We also model a non-GAAP tax rate of 14.8%. We expect adjusted earnings per share between $2.30 and $2.34. This guidance does not include acquired IPR&D expense that may be incurred in the quarter. Finally, AbbVie's strong business performance and outlook continues to support our capital allocation priorities. Our cash balance at the end of December was $12.8 billion. And we expect to generate free cash flow of approximately $18 billion in 2024, which includes roughly $1.9 billion in Skyrizi royalty payments. The strong free cash flow will fully support a strong growing dividend, which we have increased by more than 285% since inception, continued debt repayment, where we expect to pay down the approximately $7 billion of maturities this year, and also provides capacity for continued business development to further augment our portfolio. In closing, AbbVie has once again delivered outstanding results and our financial outlook remains very strong. We'll turn the call back over to Liz. Liz Shea: Thanks, Scott. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, first question, please. Operator: Yes, the first question comes from Chris Schott with JP Morgan. Your line is open. Chris Schott: Hi, great. Thanks so much for the questions. Just I was looking for a little bit more color on the longer-term immunology outlook. You're targeting $27 billion plus by 2027 and highlighting growth from there. So, I guess my question was just can you elaborate on how mature the existing indications, these products are going to be by 2027? And what type of growth can we anticipate longer-term? And maybe as part of that, it seems like from the comments that the growth beyond 2027 is more skewed towards Rinvoq given the new indications, but [indiscernible] like is it balanced Rinvoq and Skyrizi, or has it become more of a Rinvoq driven franchise in terms of the growth drivers over time? Thanks so much. Jeff Stewart: Yes. Hi, Chris. It's Jeff. Maybe I'll walk through a little bit of the process there and answer your questions. So we can see historically actuals and sort of fast forward in terms of the first thing we look at is the bio penetration of these big indications. And there still remain significant headroom in terms of the ability for moderate to severe patients with these diseases to continue to be exposed to these biologics and these advanced orals, absolutely. And we can see for sure that psoriasis still in -- even in the US is about 15%, it's relatively modest, atopic dermatitis, the penetration rate is only about 7%. And then you have higher penetrated markets like IBD and I'll talk about what's interesting about IBD, that’s somewhere in the 40% or 50% range across those. And then we can see clearly as these markets develop and I've highlighted this before that you see line of therapy expansion. So first-line becomes less and less important, as you move towards second and third-line over time. And right now, IBD is a big story about that, that we calculate into our long-term estimates, because it's still largely despite the severity a frontline oriented market, because physicians, just kind of hang on to their frontline agents, that's going to change quite dramatically believe over this mid-term and even in the long-term perspective. We have a good peg on the market growth rates. Many of these market growth rates are very significant, very stable. And we'll have good growth rates going into the next decade because of these dynamics around bio penetration and line of therapy expansion. I highlighted in my remarks around share, share we -- we have a very good competitive position, very high capture rates. And we're really in the sort of low end of the range in terms of the total prescription share, that will feed up and catch up to that. Pricing, I think we talked a little bit. We're not going to give detailed pricing. But certainly, you can see based on Scott's comments that, the idea of a high CAGR on high single-digit pricing is not something we've contemplated. So, we believe that there is significant room for growth even past 2027. Especially, as we'll have more Rinvoq indications coming that we've talked through. So we think that we're going to see robust growth based on our share capture and also how dynamic these markets are into the next decade. Rob Michael: And Chris, this is Rob. I'll just add, you think about the markets, the rheum market is growing low-single digits, atopic dermatitis is growing mid-teens and IBD is growing high-single-digits. So they're very strong market, they will continue to be strong markets for us. And we're also seeing, as Jeff mentioned, there's a lot of headroom in terms of share capture. So we do expect that robust growth to continue beyond 2027 into early part of the next decade. I think your observation is correct. Given that we would expect up to five new indications for Rinvoq. If you look at the rate of growth, Rinvoq versus Skyrizi, I think it's reasonable to assume that Rinvoq would have a higher rate of growth given the new indications, but both will grow very nicely. So, I would certainly encourage you to look at more robust expectations for both therapies with Rinvoq a little bit higher because of the new indications. Liz Shea: Thanks, Chris. Operator, next question, please. Operator: Yes, the next question comes from Terence Flynn with Morgan Stanley. Your line is open. Terence Flynn: Great. Thanks so much for taking the questions. Maybe two for me. Rick, I was just wondering if you could give us an update on succession planning and timing, we've been fielding that question from a number of investors recently, given you're now pass the Humira LOE. And positioned the company very well here given Skyrizi and Rinvoq commercial success and also some of the recent pipeline build-out. And then the second question I have was on our pipeline on lutikizumab. I know you guys have highlighted this, not a lot of focus from the investor side yet. Maybe if you could just talk about the size of the commercial opportunity in HS. And then why you're confident that, that Phase 2 HS data will translate into success in the IBD side. Thank you. Rick Gonzalez: All right, Terence. This is Rick. So I'll cover the first one. I guess what I would say is, I have nothing new to report today, but what I'd indicate is, we've talked about the criteria that we're going to use to make the decision when we're going to make the transition. That criteria is the same, when we believe that we are comfortable, we've navigated the LOE, and the rest of the business is performing at high level. That's the point at which we want to make the transition, because we think that's the best time to be able to transition the CEO position. So I understand there's a lot of interest from investors here, that's logical and clear. Maybe what I can do is, give you a little better perspective on the process that we're going to use in order to make the decision with the Board. I would say, the Board has been actively involved for the last four or five years with a lot of emphasis around ensuring that our internal candidate would get the experiences that we thought were needed prior to making the transition. I can tell you from my perspective, that's gone extremely well. We have regularly scheduled Board meetings several times a year where we specifically talk about succession and the progress that we're making. At the point at which the business has achieved that criteria that I described before, at the next regularly scheduled Board meeting, then I would make a recommendation to the Board that this is the proper time to be able to make the transition. The Board would vote on that recommendation. At the end of that vote, we would send out an announcement to investors. And what you can expect when you get that announcement is that, we would make an announcement that we were going to make the transition out at some point in the future, in all likelihood four months to six months in the future. And the purpose of that is to make the final transition between myself and that person. And that'll take four months to five months in order to be able to do that. I would say it's also very likely at that time, based on the discussions I've been having with the Board, is that, I will be named the Executive Chair for a period of time, and the purpose of that will be to make the transition of the full position over a period of time. So I think it's a very well thought out, I think very well managed process. And I think that's what you can expect going forward. Jeff Stewart: And Terence, this is Jeff, I'll start-off and have Roopal will address the second part of your second question. So we established many years ago now this HS market with the approval of Humira. And we thought it was a relatively small market, and it turned out to be quite a surprise. There is a significant amount of patients around the world that suffer from HS, it's already a multi-billion dollar category. And we think it's going to continue to expand. And I say that, because we can see that like IBD, there's just some new approvals just coming. So, everyone sort of holds on Humira as long as they can if they're exposed to a biologic. And so we see the same dynamic as you start to see IL-17s come into this space, and certainly, we're very excited about lutikizumab because of the profile that we're seeing emerge in the clinic. So it's a significant commercial opportunity. And I would say that when we look back over all the Humira indications, over the last decade or more, HS was one of the most rapid indications that moved to $1 billion plus business. So it's an exciting opportunity, both commercially and certainly for patients. And Roopal can address your comment on IBD. Roopal Thakkar: Yes. Hi, Terence. Part of it starts, I would say, almost 15 years ago with our insights in Crohn's disease with Humira, as Jeff was discussing, where we started to see efficacy in patients that had HS. We saw a good amount of overlap between Crohn's and HS. So that's part of it. Now that doesn't really pan out for IL-17, but what we've observed with IL-1 beta in particular is that, our internal data and external data do show elevated expression signals with one beta. So we think we have that opportunity with luti, because it also covers 1 beta and we have two shots at this, right. One is, to go specifically and look at a biomarker-driven targeted profile where we would be able to distinguish which patients actually have that higher expression. And the other approach, which we maybe weren't talking about years ago because we didn't have a product like Skyrizi which have high efficacy and very strong safety profile in Crohn's. What we have now is the opportunity to also look at in combination. So a biomarker approach and a combo approach, our insights from Humira and preclinical or biopsy-based insights that we have externally and internally. Liz Shea: Thanks, Terence. Operator, next question, please. Operator: Yes, the next question comes from Andrew Baum with Citi. Your line is open. Andrew Baum: Hi, many thanks. Couple of questions. One, given AbbVie's strength in market access in managed market, I'd be curious the extensive future contagion from RNA IRA-mediated price cuts on the Medicare book spending over onto the commercial book of business. How much of concern do you think this is, given that has basically the same. And then second question on lutikizumab, if I remember from the canakinumab trials secondary to neutropenia, there was an increase in fatal infections. If you lay on this on top of another immunosuppressive, how are you thinking about the safety concerns in these IBD patients? Jeff Stewart: Yes. Hi, Andrew. Thanks for your question. It's Jeff. We think that the, particularly the negotiation aspects of the IRA will be very contained on the Medicare side. And as you can imagine with government programs over the years -- when we had discussion with payers, they'll often say things over, well we know what the FSS price is for the VA or demand mandated discounts and supplemental discounts in the Medicaid channel. But we think those are really government actions and government rules. And so, we see that the market we believe will play out largely like it has with the other government channels, that it's a unique dynamic in terms of essentially a forced negotiation that we think will be contained largely in the Medicare space. So that's how we view the world. Roopal Thakkar: Hi it's Roopal, I'll talk about luti and your question around neutrophils. Yes, we do see impact on neutrophils, it's dose-driven. However, I think we think about inflammatory bowel disease, probably lupus, others to have a different tolerance for benefit-risk, because today in those disease states despite the success that we've seen with Skyrizi and Rinvoq, there's still substantial headroom to lead to more transformational efficacy, not every patient is getting into remission, though high levels, not every patient. So we still believe that a combo can get to that and break that efficacy threshold. The other opportunity there is what we'll do with the combination is obviously optimize the dose to assure safety. And thus far in the HS trial, even at the highest dose we saw very little infections. Liz Shea: Thanks, Andrew. Operator, next question, please. Operator: Yes, the next question comes from Mohit Bansal with Wells Fargo. Your line is open. Mohit Bansal: Great. Thank you very much for taking my questions. Congrats on all the progress. I just want to go back to the ImmunoGen acquisition and the comments you made before. Can you talk a little bit about the plans to move the drug into earlier lines of ovarian cancer. You talked about maintenance setting, but more we are reading it, I mean, in first-line maintenance, the PFS and OS tends to be really long. So could you talk a little bit about the strategy there and how do you overcome the existing OS benefit that these drugs provide? Thank you. Roopal Thakkar: Hi, Mohit. It's Roopal, I'll take that. So, I think as you've seen in resistance we've seen that overall survival benefit, a very substantial one, unprecedented thus far. And to your point, the plan is to move into earlier lines of therapy. Secondly, it's also part of the strategy to move into sensitive populations, which is around 55% of the population, resistance is around 45%. And then the third aspect is, we've seen encouraging data in medium expressers of FR alpha. And those are approximately 30% of the patients, high is around 35%. So those are the three strategies to go forward. Now how do we get into earlier lines of therapy? Well, a couple of things, insights that we've seen. One is, we've seen Elahere been able to combine at full dose with carbo-platinum. So that's encouraging, that gives you an opportunity to upfront combine. And then as you stated, maintain on Elahere or with Elahere plus BEV. So the other approaches that we would do getting to earlier line of maintenance is have that upfront therapy and then we see patients that go onto BEV, we can combine with BEV at that time point. And we'll be looking at combinations with PARP inhibitors, which is about the other half of the patient populations, which are HRD deficient. So, taken altogether, we see there is an opportunity. Now, the PFS is going to be a little bit longer, along with OS. So that is something that we're planning for, we'll start these studies as soon as possible, but they will read out in the later part of the decade and into 2030. Liz Shea: Thanks, Mohit. Operator, next question, please. Operator: Our next question comes from Vamil Divan with Guggenheim Securities. Your line is open. Unidentified Analyst: This is (inaudible) on for Vamil. Thanks for taking my question. So my question is on Humira. I was curious, given the recent performance of company has had with the erosion since the introduction of biosimilars. I was wondering if you can now provide maybe a better sense around the company's expectations on Humira's longer-term tail revenues in both the US and ex-US markets. Thank you. Rob Michael: Hi, it's Rob. I'll take that question. So we do expect that in the US tail will start to emerge in 2025 or 2026 timeframe. Keep in mind 2024 is the first full year for US biosimilars. We'll have to see what happens with volume uptake this year and also where interchangeability lands. And ultimately, what does contracting look like next year. So, I wouldn't expect us to quantify the tail this year. But it's certainly possible, something we would do either in 2025 or 2026. As it relates to international, you're seeing, I think this year, it's a step-down of about $400 million. Half of that is really the last wave of markets like Canada, Puerto Rico where we're seeing, I'd say, some incremental erosion we would expect this year. And then the other half would be your typical international price erosion you see across therapeutic areas. So not really specific to biosimilars. And then the other quarter of it would be what we're seeing is just the strength of Skyrizi and Rinvoq as these newer agents elevate standard-of-care, you see some share go to those newer agents. And so, probably the best way to think about international would be, if you want to adjust for half of the erosion this year as being more of the final waves, and then you get a sense of what could potentially be the ongoing beyond that. But we'll be more specific, I think we need to see really how the US plays out with this being the first full year for biosimilars, before we can really give you more color. But we're very, very pleased with the progress we've made so far. Liz Shea: Thanks, Dan. Operator, next question, please. Operator: The next question comes from Carter Gould with Barclays. Your line is open. Carter Gould: Great. Good morning, thanks for taking the questions. Two on the neuroscience portfolio. I guess first on 951. How should we think about that? Is that more sort of on growing the overall pie of device data therapies versus taking share from apomorphine and gels. And then, maybe looking a little bit longer-term, AbbVie has sort of three Phase 2 Alzheimer's studies that are going to readout later this year or by early next year. Fully acknowledging the commercial challenges by the players in the market today and that's some of these targets are now validated. How should investors think about these assets either individually or collectively and your level of excitement? Thank you. Jeff Stewart: Yes. Hi, it's Jeff. I'll take the first question. So what we look at when we see this market at a macro -- at a macro-level, you have a significant number of patients, 85% of patients are just on these oral medication. So, oral [indiscernible]. Okay. And they essentially need to consume more and more and more orals, and sometimes at the end of it they're taken 12 pills a day, it's very, very difficult to manage. But then they're faced with a very difficult decision, which we kind of call like a surgical barrier. And that surgical barrier is to get any sort of more advanced relief, you either have to think about deep brain stimulation, which is a brain surgery or our own DUOPA, which is a GI surgery. So the way we see this market developing is we see that 951 starts to establish a very nice transition zone, because you don't have -- it's a subcu. So a new market segment that starts to emerge before bigger interventions like DBS or DUOPA. And obviously, the ability to basically move quicker to more relief from these chronic oral basically over treatment. So that's how we see it. And as Roopal highlighted, we're seeing some very nice uptake in Japan, where we launched late last year, and also in Germany and some of the first European launches. So that's how the market is exactly playing out. We're establishing essentially a new high efficacy category here with 24 hours of ongoing relief. You can do super specific dosing titration and the pump is much smaller and again, it's a subcu injection that you move around every three days. So it's a nice -- it's a nice opportunity for the company. Roopal Thakkar: And maybe I'll talk about the other assets that you mentioned in Alzheimers. First, 916, that's our A beta antibody. What we like about that one thus far, the profile we've seen is a long half-life, which would be good to space out dosing. Potentially higher potency if that holds, and we see robust reductions in beta amyloid that could allow for subcutaneous dosing that's spaced apart. And the other thing we are looking at is potentially lower ARIA. So if we see those three things over the course, I would say, end of this year, early next year, I think that, that would be quite exciting, because it would be a differentiated profile, again a better convenience and potentially better benefit-risk profile. So that's 916. 552 is our SV2A that's our oral medication in cognition that's currently in Phase 2. And we anticipate readout at the end of this year, early next year. Now, that one is being studied in a setting where patient can be on a therapy already like an [Aricept] (ph), or nothing. And we would use the typical ADAS-Cog assessments along with a variety of others including other neuropsychiatric symptoms, like depression. So that's another nice one that could combine with a variety of different assets in Alzheimers. The third one I'll mention is around Emraclidine, which comes from Cerevel. They are at early stages right now in elderly patients. And the goal there would be an Alzheimer's disease psychosis of the six million or so diagnoses, I would say around 40% of these patients present with symptoms of psychosis. So with all the therapies that are in the clinic, we think we have a very nice complementary suite of options that could address numerous symptoms of Alzheimers, because it won't be just one therapy that's going to solve this. But more to come end of this year and into next year. Liz Shea: Thanks, Carter. Operator, next question, please. Operator: The next question comes from [Technical Difficulty]. Your line is open. Unidentified Analyst: Thanks for the question. Just on the reaffirmed long-term guide, can I clarify if the Cerevel and ImmunoGen deals are in this 2029 guide given you included them in the 2024 guide? And you up Skyrizi and Rinvoq by $6 billion, migraine by $1 billion. If these are the pushes, what are the pulls in reaffirming that long-term guidance? Rob Michael: So, this is Rob. I'll take that question. Yes, we did include ImmunoGen and Cerevel in our long-term guide. The thing to keep in mind is, high-single-digits, when you think about the range that could represent, that's around $10 billion between the low-end of the high-single-digits and the high-end of the high-single-digits. And so, there aren't any pulls, what we've updated as we walk you through it is, we've increased the oral CGRP peak revenue, we've increased Skyrizi, Rinvoq and we've reaffirmed the others. So there's nothing that we took down. But just keep in mind that you've got a pretty, pretty wide range. If you look at Street consensus, we're encouraged that it continues to move up. It has moved up over the course of the last quarter, about $3 billion in 2029. It's nice to see that upward movement. But it's still below what we expect. If you think that, that growth rate for the Street is just under 5%, we expect high-single-digits. And so, even with this update, as well as ImmunoGen and Cerevel, we're still high-single-digits. But keep in mind, it's a pretty wide range. And it would be, regardless industry-leading growth and we're set up very well to continue delivering a very strong growth, and we're setting ourselves very well to grow very nicely in the next decade as well. Liz Shea: Thanks, [indiscernible]. Operator, next question, please. Operator: Thank you. And our next question comes from Gary Nachman with Raymond James. Your line is open. Gary Nachman: Thanks and good morning. First on Aesthetics, could you talk a bit more why you're confident in what seems to be a pretty decent return to growth in 2024. So how much of a headwind could China be offsetting the US growth. And what are other regions will you be getting some somewhat of a lift this year. Just talk about the dynamics on that front. And then secondly, just -- as you return to more robust revenue growth in 2025, what are reasonable expectations for operating margins directionally in 2025. Can that expand at all or is it more likely to be depressed from the ImmunoGen and Cerevel deals? Just give us some directional way to think about that for next year. Thank you. Carrie Strom: Hi, this is Carrie, I'll take your first question on Aesthetics and the Aesthetics market recovery. So I'll start with the US and we have started to see the US toxin market recover the end of 2023. We expect that recovery to continue. And for the market growth for toxins to continue to improve in 2024. For fillers, in the US, in Q4, after multiple quarters of decline, the filler market in the US was somewhat flat. And so, that dynamic of the filler market recovery lagging the toxin market recovery is playing out. And we do expect that recovery on fillers to also continue -- to a lesser degree than toxins, more of a modest growth, positive growth for 2024. And as we look at the beginning of the year here in 2024, we are seeing our patient demand metrics and Google metrics really supporting our expectations here. In terms of China, we do expect the economic headwinds that we saw beginning mid-year 2023 to continue in the near-term with China. And we expect the China Aesthetics market to be flat overall in 2024. That would look like negative market in the first half of the year until the China market starts to recover in the second half of 2024. And we expect that China performance to be balanced against expectations for strong performance in other international regions, including Japan, which has become an important market for Aesthetics and areas of Latin America, like Brazil, which is a highly aesthetically oriented market. It's also important to know in terms of Q1 of 2024, in terms of our guidance there that the growth in the US will be offset by that international decline, specifically in China. So not only the China economic headwinds, but also a difficult year-over-year comp in Q1, because recall, in Q1 of 2023, there was the post-pandemic reopening in China. So that's really how we see the market growth factors in US, China and other parts of the world playing out in 2024. Rob Michael: And Gary, this is Rob. To build on the Aesthetics story, I said in the past to get to our guidance of greater than $9 billion, we need to deliver annual growth of high-single-digits on average. And as Carrie just walked you through, we haven't quite seen the recovery for the fillers market yet this year. And we will, but it's not going to be a normal year, we'll see a ramping. And we also had a slowdown in China. But despite that we're still delivering high single digit growth. And given how under penetrated these markets are, we can drive that market growth that's required to achieve the long-term guidance. And then on top of that, we have several innovations that will further support that growth. I've said this before, but the masseter and platysma indications for Botox will add a few $100 million each. Our novel short-acting toxin BoNT/E has the potential to activate new patients who have not started toxin due to fear of an unnatural look. So that could drive an inflection in market growth and market share. And then our region, our fillers pipeline is really aimed at providing both short and long-term treatment benefits for consumers. So we have several avenues to get to our greater than $9 billion guide. I have seen consensus estimates at $8 billion for 2029, but we're very confident in our guidance of greater than $9 billion by that period. Scott Reents: Gary, this is Scott. I'll take your question regarding operating margin expansion. So for 2024, as I mentioned in my remarks, we've guided to 46.5%. When we do return to robust growth in 2025, we do see that operating margin will expand, and will continue to expand as we grow through the decade. I think that when we think about the pace of that expansion, it will be a relatively steady over several years. I would though, if you're modeling that, I would kind of peak it out at around 50%. I think that's where we'll hit a peak at the operating margin. But we do see expansion both in 2025 on that return to robust growth, including the impact of the two transactions ImmunoGen and Cerevel, which should presumably be a full-year at that point in time. But at the full year impact, we see that expansion. And I do think it's worth noting, even at our current levels, we have industry-leading operating margin. And certainly with the future expansion we will continue to have that and only grow that position. Liz Shea: Thanks, Gary. Operator, next question, please. Operator: Yes, our next question comes from Steve Scala with TD Cowen. Your line is open. Steve Scala: Thank you very much. Two questions. Is the current tax rate fully reflecting likely tax changes in the US and outside the US? So, it represents a high watermark for the foreseeable future. Previously the company spoke to a 16% tax rate. And we're pretty much there. So I am wondering if the increases are kind of behind us? And then Rick, a slightly different kind of question, but there are clear, obvious reasons such as the success of Skyrizi and Rinvoq, but I'm curious if you would share with us a few of the externally less visible factors that are leading to AbbVie's success traversing the Humira patent expiration that your pharma peers missed when dealing with their own pressures. I would assume contracting formulary management, allocation of overhead are all part of it. But what would you be willing to share with us? Thank you. Scott Reents: Steve, this is Scott. I'll start with your tax rate question. So with respect to the tax rate, we were essentially flat between this year and last year at 15.7%. We do see that tax rate over the three year period including this year increasing about 1% on average. Now that's not going to be a 1% per year. What you'll see is a step up in a couple of years when the US tax rates do increase the GILTI rate in particular, will increase. So we see that over a three year period about 1% per year on average. That does include all the impacts of a number of things going on globally with the OECD and some of these -- OECD minimum taxes and other things. I would say the one thing it does not include, you saw just this week, the House passed a tax bill that includes the provision regarding the R&D expensing. So if that bill were to pass, as it's written, we would see a slight step down in our tax rate, about 80 basis points from the impact of that on an ongoing basis. Rick Gonzalez: Steve, this is Rick. I think if you step back and you look over the last, I'd say, 10 years, we were trying to develop a strategy that we fundamentally believed will allow us to be able to offset the Humira LOE and continue to deliver top-tier financial performance as we have for the past 10 years. That was the whole objective. And we knew we had to build a very diversified growth platform in order to be able to do that, to be able to absorb that impact and return to growth as rapidly as possible. And so, we as an executive team focused a lot of energy around how do we do that, how do we build it, how do we do it in the right markets. I think AbbVie, I'm obviously biased, I guess, but I would say our commercial execution has always been exceptional in my opinion. We understand the markets we're in extremely well. We understand the competitive environment that we compete in those markets extremely well. We understand the patient journey and how that patient journey is affected by access to medicines to ensure that patients can get their medicines routinely and be able to get the benefit of those medicines. It takes all of those things I think to end up with kind of success that we see with assets like Skyrizi and Rinvoq. But it also takes I think a company that is very good at what I describe as read and react. There are always challenges in businesses as big and as complex as this. And I think the difference between companies that can continue to perform at the top tier, year in and year out is they're good at seeing issues, and then quickly reacting to how they're going to either offset those, or deal with those. We had many of those examples. I'd say the label change on Rinvoq was a great example. But look at where Rinvoq is growing now. And despite that label change many would not have predicted that. Migraine, was a very challenging market for a period of time. We look at how we've operated with Ubrelvy and Qulipta. And the kind of success we've seen against the competitors in those markets. Neuroscience, very different kind of market with Vraylar. That's all about trying to grow market-share and expand your position there with a very good asset. And so, we're good at that, and I think that is the real differentiator. The other thing I'd say is, I think we have been very efficient at our R&D investment. We obviously don't have the largest R&D investment in the industry. But we produced a tremendous amount of return against that R&D investment. Now having said that, as we go forward, we know we need to increase R&D as I've said in my comments. We did a fairly significant increase last year despite dealing with the Humira LOE. And we're going to do another fairly significant increase this year because we had some assets that had very, very significant opportunities like 383 and like 400 and several others. They are going to require a large Phase 3 -- multiple large Phase 3 studies to be able to get the kind of label that we need, and that's another thing, I'd say, we're good at. Understanding how you have a competitive label and building your clinical programs to get that. So, I think it requires all of those things. I don't think there is one magic formula. I think those are the kinds of things that we have honed here at AbbVie an executive team. And we execute very well against those. Liz Shea: Thanks, Steve. Operator, next question, please. Operator: Yes, our next question comes from Evan Seigerman with BMO Capital Markets. Your line is open. Unidentified Analyst: Hi, guys. It’s [Nachman] (ph) for Evan. I wanted to ask -- thinking about the upcoming approval for Skyrizi, and you see how is management thinking about how that may or may not impact Rinvoq sales, obviously combined AbbVie offers some immpresive suite of inflammatory assets. But what is the expectation of cannibalism across these assets potentially? Thanks. Jeff Stewart: Yes. Hi, it's Jeff. I'll take that one. We've learned a lot from watching Skyrizi and Rinvoq in Crohn's. And to Rick's points, look, we're very careful about how we position these assets, you know how we basically represent them with our medical teams and our commercial teams. And so what we see certainly in our biggest markets, we see that they are actually complementary positioning. So, Rick highlighted the label change, right. So Rinvoq, in the US, is basically indicated for use after a TNF. So it's basically a later-line therapy. Skyrizi, if you look at the Skyrizi, you see results, it's very, very impressive. We've studied some very, very tough patients there. The bio-naive patients, the efficacy is just outstanding. I would say it's best-in-class. So we can see that based on the profile of the agents for many of our representatives, we're able to talk to physicians about the consideration for Skyrizi frontline. And then in later lines Rinvoq. So the cannibalization or the overlap is very manageable and minimal. And what happens is you start to see this, this very significant build for total AbbVie share because of that complementary positioning. So we're quite confident that we'll be able to navigate this very well just as we see in the larger Crohn's market. Liz Shea: Thanks for the question. Operator next call -- next question, please. Operator: Yes, our next question comes from Tim Anderson with Wolfe Research. Your line is open. Tim Anderson: Hi, I have a question on obesity drug impact on AbbVie's Aesthetics business. So the uptake for obesity drugs could be a headwind or a tailwind. That's a potential headwind if patients only have so many dollars to spend on Aesthetics and they reallocate their out-of-pocket spending away from dermal fillers and toxins towards obesity drugs? Or it's a tailwind if patients using obesity drugs get things like the so-called Ozempic face and they end up using more toxins and fillers. So, what's been the experience thus far. And what do you expect going forward over the next handful of years? Thank you. Carrie Strom: Hi, this is Carrie. So the short answer is, we have not seen an impact on our Aesthetics business positive or negative so far. That said, absolutely, our customers and our consumers are participating in this market. We are seeing it integrated into some of these Aesthetics practices. And to your point, there are instances where a patient will make a trade-off in terms of her share of wallet. But that said, we do see it as a long-term tailwind anytime people are getting more engaged in their appearance, that's a positive thing for Aesthetics. And as we ask our consumers and our customers about it, really that -- what we've learned is that it does reinforce its long-term tailwind because the majority of people who engage in these medical weight-loss products are more interested in Aesthetics afterwards than they never before. So, that's really how we see it in terms of the that dynamic impacting Aesthetics. Liz Shea: Thanks, Tim. Operator, next question, please. Operator: Yes. Our next question comes from Tim Lugo with William Blair. Your line is open. Tim Lugo: Thanks for taking the question. After the two announced acquisitions in December, what are the team's thoughts on M&A in 2024. Some of your peers have given guidance on expected deal sizes. Is that something you can provide the Street or at least talk about your capacity at this point? Rob Michael: Hi, Tim, it's Rob. I'll take that question. So our BD efforts continue to be focused on identifying assets, really that can drive growth in the next decade across immunology, oncology, neuroscience, aesthetics and eye care. But we have what we need in our current portfolio to deliver on growth expectations in this decade. So our external efforts are really aimed at early-stage opportunities, which are typically smaller-sized deals. As we look across the growth areas, if you think about immunology Skyrizi and Rinvoq will drive robust growth into the next decade. So our focus in immunology in terms of BD is really looking for new mechanisms of action that can elevate standard-of-care whether monotherapy or in combination. I'd say there's a lot of interest in combination. In oncology, ImmunoGen really nicely complements our efforts with ADCs, it gives us a head start, an entry in the solid tumor space, that we're not in today. But in addition to ADCs, we're focused on bispecific, multi- specifics immuno onc agents. We also recently announced a collaboration with Umoja studying insight to CAR-T therapy. So a lot of focus in oncology, but these again would be earlier-stage smaller-sized deals. In Neuroscience, Cerevel adds depth to our neuropsych pipeline, but we also have a focus on migraine and neurodegeneration. In eye care, we're extremely excited about the REGENXBIO program in wet-AMD and diabetic retinopathy. But we continue to look for innovation in glaucoma and retinal disease. So we certainly have an interest there. And then in Aesthetics, it's always about looking for innovation that can drive new consumers into our providers practices. So our BD group is still very active. We certainly have the financial wherewithal to pursue those opportunities to further bolster our pipeline. But those are the areas that we're most interested in. Liz Shea: Thanks Tim. Operator, next question, please. Operator: Yes, the next question comes from James Shin with Deutsche Bank. Your line is open. James Shin: Hi. Good morning. I had a question on ovarian cancer and it's going to be more competitive with [indiscernible]. How do you feel about [indiscernible] interacting? And how do you feel that market landscape looks going forward? Liz Shea: Unfortunately. Your line is not very clear. Can you maybe try to repeat the question one time. James Shin: Sorry about that. [indiscernible] better now. Liz Shea: It's still little echoey, it's a little bit better, but go ahead. James Shin: Okay, I was asking about [indiscernible] and the competitive dynamics in ovarian cancer. Liz Shea: Yes, unfortunately, it's just not coming clear -- coming through clearly. Happy to address the question following the call. Apologies for that. Operator, next question please. Operator: Yes, the next question comes from David Risinger with Leerink Partners. Your line is open. David Risinger: Yes, thanks very much, and congrats on the long term updates. So with respect to the Alzheimers commentary, a product was left out of the TREM2 AL002, which has an estimated primary completion in September. If you could comment on that as well. That would be helpful. And then with respect to the GILTI tax change that's coming, so can you please provide some more color on that, including the timing and the potential impact? Thanks very much. Tom Hudson: Hi, this is Tom Hudson. I'll answer the question, the first question, yes, we do have a partnered program with Alector on the TREM2 target. TREM2 was identified in Alzheimers disease through genetic studies, several years ago, very strong link. We have a program which -- TREM2 modulates and no inflammatory response in AD. All patients are enrolled in the Phase 2, we will have data later this year. So again it's an early clinical development, but we will expect to see key data later. Scott Reents: Sure, this is Scott. Regarding the GILTI tax. So this is the US tax, the foreign minimum tax on foreign earnings that the US supplies. That tax rate today is at 10.5%, it's going to move up to 13.1% a little bit more than that. That will occur -- the implementation date is a little bit mixed, because it depends on fiscal year-ends of legal entities, but let's call it 2026 is when we can look at that. And only part of our income is subject to that rate. So, I would say that's approximately a 1.5% impact to our tax rate that you would see. And that's baked into my 1% on average over the next three years. Liz Shea: Thanks, David. Operator we have time for one final question. Operator: Okay. And our final question is Luisa Hector with Berenberg. Your line is open. Luisa Hector: Thank you for taking my question. I wanted to touch on the Part-D restructure an IRA. So you have a number of drugs that are likely to be impacted by this. And obviously, you talk about your strong rebound in 2025. So I'd just love to hear your thoughts on how that restructure will impact. And perhaps to what extent that is already baked into your expectations of the rebound? And maybe just to check, have you now received the initial offer from CMS owned Imbruvica? Thank you. Jeff Stewart: Yea. Thank you, Luisa. It's Jeff. And we have we have contemplated in our planning and long-term guidance, both the Part-D redesign and of course the IRA impacts based on our projections over when some of our drugs might be negotiated. To give you some color on the Part-D redesign, we have clearly a very good visibility over the pricing dynamics that will take place as you say, many of our brands basically will be under the catastrophic redesign component. Now we've also understood based on one of the policy items, which is the cap and smooth, we've also countered some of that price with volume offsets based on patients having the ability to acquire these. Now that volume does not fully offset the pricing impact. But suffice it to say that, that's been very much contemplated into that. I'll let Rob comment over how that sort of feeds into the growth rates. Rob Michael: Luisa you asked a very good question. This is Rob. Clearly, and we have contemplated that in the high single digit CAGR, the impacts of IRA. But as you think about the annual progression, it is important to note that Part-D benefit redesign starts in 2025. So that is certainly something you should consider for modeling of annual sales. I mean, that impact by itself, on a net basis could be worth a few points of growth. As Jeff mentioned, the higher cost share with an offset in volume, we have studied the improvement in abandonment rates as we look at the low-income subsidy part of Part-D which doesn't have the out of pocket burden that the standard benefit does. And when we compare the abandonment rates and as you address this issue of out of pocket burden, we would expect the abandonment rates to improve across Medicare Part-D, but not enough to fully offset the higher-cost share. That was something we certainly contemplated. But as you think about the progression of growth, the rate of growth will accelerate starting next year through 2029. So we'll deliver a high-single-digit CAGR. But it's important to note that in 2025, you do have that beginning of Part-D benefit redesign, which adds, I'd say a couple of points of growth headwind that will still allow us to deliver robust growth, but it won't -- you shouldn't think about the same amount of growth every year, it's going to accelerate over the long-range plan. Rick Gonzalez: And then, this is Rick on the Imbruvica price, yes, we have received the initial offer on Imbruvica recently. As you know, there is a process that CMS is going through here to set pricing. And because none of us have any experience with this, we don't know exactly how that process will proceed. There will be some back and forth between the manufacturer and CMS. CMS has indicated that they'll have the final price by September 1st. It's certainly premature for us to talk about the price now, because it's not the final price. I don't know that we'll know the final price until very close to the point at which they are prepared to publish that price, having not had any experience here. So, I wouldn't anticipate we will get any updates until that date or very close to that date. Liz Shea: Thanks, Luisa. And that concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us.	[ { "speaker": "Operator", "text": "Good morning, and thank you for standing by. Welcome to the AbbVie Fourth Quarter 2023 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion of this call. [Operator Instructions] Today's call is also being recorded. If you have any objection, you may disconnect at this time. I would now like to introduce Ms. Liz Shea, Senior Vice President, Investor Relations. Thank you. You may begin." }, { "speaker": "Liz Shea", "text": "Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Rob Michael, President and Chief Operating Officer; Jeff Stewart, Executive Vice President, Chief Commercial Officer; Scott Reents, Executive Vice President, Chief Financial Officer; Carrie Strom, Senior Vice President, AbbVie and President, Global Allergan Aesthetics; and Roopal Thakkar, Senior Vice President, Chief Medical Officer, Global Therapeutics. Joining us for the Q&A portion of the call is Tom Hudson, Senior Vice President, Chief Scientific Officer, Global Research. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. In addition to the news release issued this morning, we have also posted slides on our website at investors.abbvie.com that supplement some of the content we'll be covering this morning. Following our prepared remarks, we'll take your questions. So with that, I'll turn the call over to Rick." }, { "speaker": "Rick Gonzalez", "text": "Thank you, Liz. Good morning, everyone, and thank you for joining us today. Our performance this quarter tops off another excellent year for AbbVie, with results well above our initial expectations. I'm particularly pleased with the performance of our growth platform, the base business excluding Humira, which delivered full year sales growth of more than 8%, with revenue growth accelerating to more than 15% in the fourth quarter. The strength of our diversified growth platform has not only enabled us to successfully absorb the largest loss of exclusivity event to date across our industry, but it's also supported continued investment in our business for long term growth. These investments include: higher adjusted R&D expense, which was increased by nearly $600 million in 2023 and will be ranged substantially again in 2024 to support several promising pipeline programs like 383 in multiple myeloma. 400, our next-generation ADC for several solid tumor types and [Moodi] for HS, as well as inflammatory bowel disease. The proposed acquisition of ImmunoGen and their portfolio of ADCs accelerating our entry into the solid tumor space and strengthening our oncology pipeline, as well as the proposed acquisition of Cerevel, a unique opportunity to augment our presence in neuroscience with the pipeline of differentiated assets. We also increased our quarterly dividend which we announced in October. Since our inception, we have grown our dividend by more than 285%. In summary, our operational execution has been outstanding and we have considerable momentum heading into 2024, including an expected return to operational sales growth just one year following the US Humira loss of exclusivity, driven by our growth platform. We remain confident in our long-term outlook, including a return to robust growth in 2025 with a high single-digit CAGR through the end of the decade. With that, I'll turn the call over to Rob for additional comments on our business performance. Rob?" }, { "speaker": "Rob Michael", "text": "Thank you, Rick. Today we reported another strong quarter and highly productive year for AbbVie. We delivered full year adjusted earnings per share of $11.11, which is $0.63 above our initial guidance midpoint, excluding the impact of IPR&D expense. Total net revenues were $54.3 billion, roughly $2.3 billion ahead of our initial guidance. Most importantly, each of our five key growth areas outperformed our initial expectations. As it pertains to AbbVie's near-term outlook, we are focused on three key priorities. First, driving strong performance of our ex- Humira Growth Platform. This platform is the critical driver of our return to robust growth in 2025 and beyond. In our therapeutic portfolio, we have several key brands including Skyrizi, Rinvoq, Vraylar, Ubrelvy, and Qulipta, which are each expected to contribute double-digit sales growth in 2024. We also expect meaningful growth for aesthetics this year, driven by improving market trends in the US and continued execution across our international business. We are well positioned to drive strong long-term growth in this highly under-penetrated market. Second, we are focused on prioritizing investment in our pipeline, which encompasses numerous opportunities to elevate the standard of care for patients. We anticipate updates this year from several important R&D programs including approvals for Skyrizi in UC, 951 in the U.S., and potentially accelerated approval for Epkinly in third line plus follicular lymphoma. We also anticipate regulatory submissions for BoNT/E, our novel short-acting toxin, and potentially Teliso-V, an advanced non-squamous non-small cell lung cancer. And third, we are focused on closing and integrating ImmunoGen and Cerevel. These two exciting opportunities represent substantial sources of revenue growth well into the next decade. We remain on track with the anticipated closing of both deals in the middle of the year. Today, we are also reaffirming our long-term sales outlook, which includes a return to robust revenue growth in 2025 with a high single digit CAGR through the end of the decade. Included in this outlook is an updated forecast for Skyrizi and Rinvoq. Based on the impressive growth of both therapies, which we expect will collectively generate approximately $16 billion of revenue in 2024, we now anticipate Skyrizi and Rinvoq will collectively exceed more than $27 billion in sales by 2027 with robust growth continuing into the next decade. This updated forecast reflects an increase of more than $6 billion in revenue compared to our prior 2027 guidance. We expect global sales for Skyrizi to reach more than $17 billion in 2027, reflecting continued share capture in psoriasis where we are the clear market leader, as well as strong uptake in IBD. And we expect Rinvoq to achieve more than $10 billion of global sales in 2027, reflecting continued market growth and share momentum across each of Rinvoq's approved indications, including four in rheumatology, two in IBD, and atopic dermatitis. This forecast comprehends modest contributions from several new disease areas for Rinvoq, which we anticipate will be launching in the second half of the decade. These new indications have a collective peak sales potential of several billion dollars. Our updated forecast also includes higher estimates for Ubrelvy and Qulipta. We now expect total oral CGRP peak revenue of more than $3 billion, reflecting an increase of more than $1 billion. Our previously issued long-term forecasts for aesthetics, Vraylar, and 951 remain unchanged. In summary, this is an exciting time for AbbVie. We are demonstrating outstanding execution across our portfolio and our long-term outlook remains very strong. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff?" }, { "speaker": "Jeff Stewart", "text": "Thank you, Rob. I'll start with the quarterly results for immunology, which delivered total revenues of more than $6.9 billion, exceeding our expectations. Skyrizi total sales were approximately $2.4 billion, reflecting operational growth of 51.6%. Rinvoq total sales were more than $1.2 billion, reflecting operational growth of 62.8%. On a full-year basis, Skyrizi and Rinvoq delivered more than $11.7 billion in total combined revenue, an impressive increase of $4 billion year-over-year. And as Rob just described, we see substantial room for continued growth across each of their currently approved indications. You can get a good sense for this momentum by looking at the relationship between the current in-place share, which includes new and switching patients, and the total prescription share just today. For example, our performance in IBD has been very strong for both Skyrizi and Rinvoq. In Crohn’s disease, these two treatments together are already capturing roughly one out of every three in-play patients across all lines of therapy in the United States, while their combined total prescription share is only in the mid-single digits. You see a similar trend happening in ulcerative colitis for Rinvoq, and we anticipate launching Skyrizi for this indication later this year. So significant opportunity remains for revenue inflection in IBD, especially given their respective efficacy, safety, and dosing profiles. Across some of the other notable indications, Skyrizi is capturing roughly half of the in-place psoriasis patients in the U.S. biologic market relative to a total prescription share, which is in the mid-30s percent. Rinvoq is capturing high teens in-play share in the atopic dermatitis market, while total share is in the high single digits. Similarly, in rheumatoid arthritis, Rinvoq is capturing mid-teens in-play share, while total share is roughly 7%. So, again, we see substantial headroom for share gains in addition to the typical robust market growth across rheum, derm, and gastro. Plus, we are planning to have up to five additional indications for Rinvoq across several sizable markets that will potentially provide another significant revenue inflection in the second half of this decade and into the 2030s. Turning now to Humira, which delivered global sales of $3.3 billion, down 40.8% due to biosimilar competition. The erosion impact in the U.S. played out largely in line with our expectations this quarter, while performance across our international markets continues to trend better than expected. In the U.S., we have once again secured broad formulary access for Humira in 2024. While there will be some step down in coverage year-over-year, we will still have parity access to biosimilars for the vast majority of U.S. patient lives. Turning now to oncology, where total revenues were $1.5 billion. Imbruvica global revenues were $903 million, down 19% reflecting continued pressure in new patient starts. Venclexta global sales were $589 million, up 13.7% on an operational basis, with strong demand for both CLL and AML across our key countries. The early prescription trends for Epkinly in third line plus DLBCL have been encouraging with commercialization now underway in the US, Europe and Japan. We also anticipate the potential label expansion for follicular lymphoma later this year. Lastly, we have two new and exciting opportunities in oncology. Pending completion of the transaction, we will add Elahere to our portfolio. Elahere is a first-in-class ADC therapy approved for ovarian cancer, which is already demonstrating impressive uptake in the U.S. market. I look forward to welcoming the ImmunoGen commercial team to AbbVie. And Teliso-V, another novel ADC which has demonstrated very promising data in lung cancer. Teliso-V would further expand our scale and growth potential in solid tumors. In neuroscience, our second largest therapeutic area, total full year revenues were more than $7.7 billion, reflecting impressive absolute sales growth of nearly $1.2 billion. In the quarter, total revenues were approximately $2.1 billion, up 22.4% on an operational basis. Vraylar continues to demonstrate robust growth. Global sales of $789 million were up nearly 40%. We continue to see significant momentum in new prescriptions across all indications following the approval as an adjunctive treatment for major depressive disorder just over a year ago. And our leading oral CGRP portfolio for migraine contributed $348 million in combined sales this quarter, reflecting growth of approximately 40%. We anticipate continued robust demand for both Ubrelvy and Qulipta this year, including the expansion of Qulipta, the only once daily oral CGRP for prevention of both episodic and chronic migraine into the international markets. Based on the strong momentum, we have raised the outlook for our CGRP portfolio and now expect total peak sales from Ubrelvy and Qulipta combined to exceed $3 billion. Total Botox therapeutic global sales were $776 million, up 6.7% on an operational basis, reflecting momentum in chronic migraine, as well as other approved indications. And lastly, we recently launched 951 in both Japan and Europe, and we are pursuing commercial approval in the U.S. later this year. This treatment represents a potentially transformative next generation therapy for advanced Parkinson's disease and $1 billion plus peak sales opportunity. So overall, I'm extremely pleased with the commercial execution across our diversified portfolio, especially the growth platform, which is demonstrating very strong momentum as we head into 2024. And with that, I'll turn the call over to Carrie for additional comments on aesthetics. Carrie?" }, { "speaker": "Carrie Strom", "text": "Thank you, Jeff. Fourth quarter global aesthetic sales were approximately $1.4 billion, an operational increase of 6.9%. In the U.S., aesthetic sales of $884 million increased 5.7%, marked by accelerating market growth and strong key product performance. Fourth quarter U.S. Botox Cosmetic sales were $453 million, an increase of 7.3%. We continue to see sustained momentum in the recovery of the U.S. facial toxin market, which was a primary driver of growth in the fourth quarter. Botox Cosmetic remains the clear market leader with strong and stable share, despite new competitive entrants. U.S. Juvederm sales were $156 million in the fourth quarter, an increase of more than 20% versus the prior year. This robust growth was driven by the strong launches of Volux and SkinVive, which continue to drive new consumers and greater penetration in the dermal filler category. Consistent with our expectations, the U.S. filler market recovery trails out of toxins, but it's continuing to show improvement as year-over-year growth was roughly flat in the fourth quarter. As we look at 2024, we are pleased with the momentum of our U.S. aesthetics portfolio. We expect full year sales growth as our market leadership positions us very well from a competitive perspective, and we anticipate continued recovery in both toxin and filler markets. Internationally, fourth quarter aesthetic sales were $487 million, representing an operational increase of 9%. We experienced strong performance in most regions and growth benefited from the impact of China's COVID lockdowns in late 2022. Within China, the softening economic conditions that emerged in the third quarter continued to impact results. Consistent with what we experienced in the US, the economic slowdown has impacted fillers more than toxins, based upon their relatively higher price. We anticipate economic headwinds will continue in China over the near term, balanced against our expectations for continued strong performance in other international regions. Looking to the long-term, Aesthetics remains an area with very low market penetration. And we have demonstrated our ability to drive growth through investments in our customers, consumers, and innovation. As such, we anticipate Aesthetics will be a strong growth portfolio for years to come and remain confident in our ability to deliver more than $9 billion of sales by the end of the decade. With that, I'll turn the call over to Roopal." }, { "speaker": "Roopal Thakkar", "text": "Thank you, Carrie. In 2023, we saw significant evolution of our pipeline with multiple data readouts, regulatory submissions and approvals, as well as expansion of our R&D efforts with the announced ImmunoGen and Cerevel transactions. We expect to continue this progress with numerous important clinical and regulatory milestones anticipated this year. In immunology, we recently announced positive topline results for lutikizumab our anti-IL-1 alpha beta bispecific being evaluated in hidradenitis suppurativa. In the Phase 2 study, lutikizumab demonstrated higher, high score of 50 and high score of 75 measures, as well as improvement in skin pain compared to placebo. These are very impressive results considering all patients who were inadequate responders to anti-TNF therapy. And 70% of the patients were early stage three, which is the most advanced stage of the disease. Based on these results, we plan to begin a Phase 3 program in HF later this year. We also plan to evaluate lutikizumab in ulcerative colitis and Crohn's, given the role that IL-1 likely plays in these diseases. Patients with UC who have an IL-1 beta signature have shown resistance to anti-TNF and other biologics, providing strong rationale for a potential biomarker approach. Additionally, we believe lutikizumab has the potential to be used in combinations to provide transformational levels of efficacy in IBD. We plan to evaluate combo approaches with lutikizumab and Skyrizi, as well as with other pipeline assets in Crohn's. Our Phase 2 studies in IBD are expected to begin later this year. Our regulatory applications are under review for Skyrizi in ulcerative colitis. With approval decisions expected in the US and Europe later this year. Once Skyrizi is approved in UC, along with Rinvoq, we will have two assets with different mechanisms of action in IBD, both offering very high levels of efficacy. AbbVie will be very well-positioned with an industry-leading suite of treatment options for patients suffering from moderate to severe ulcerative colitis and Crohn's disease. We continued to make very good progress with the second wave of development programs for Rinvoq. With Phase 3 studies underway in five new indications, giant cell arteritis, lupus, HF, alopecia areata and vitiligo. We anticipate data readouts for these programs over the next three years, beginning with data from our GCA study this year. Moving to oncology, where we continue to make very good progress across our heme and solid tumor programs. In the area of hematologic oncology, we'll see data in the second half of this year from the Venclexta Phase 3 VERONA trial in treatment-naive higher-risk MDS patients, with regulatory submissions and approvals, anticipated in 2025. For Epkinly, we anticipate regulatory approvals in third-line or greater follicular lymphoma later this year in both the US and Europe. We also expect to begin several new Phase 3 studies in 2024, including studies in second-line DLBCL and frontline follicular lymphoma. At the recent ASH Meeting, we presented new data for our BCMA CD3 bispecific ABBV-383 in multiple myeloma. 383 is engineered for high-affinity binding to BCMA on malignant cells, and low affinity binding to a unique CD3 epitope on T-Cells, which has the potential to mitigate some of the adverse events associated with other T-Cell engaging BCMA-based therapies, while preserving high levels of efficacy. We're very encouraged by the data emerging from our Phase 1b study, which show treatment with 383 is yielding deep and durable responses. With a lower incidence and severity of CRS. With this profile, we believe 383 can be a highly effective and tolerable treatment for multiple myeloma. While potentially allowing for outpatient administration, limited or no step-up dosing and monthly administration from the beginning of treatment. All attributes, which would make it very appealing to both patients and physicians. We remain on track to begin a Phase 3 monotherapy study in third-line multiple myeloma this year. And we plan to begin combination trials in earlier lines of therapy in 2025. In the area of solid tumors, we recently announced positive topline results from the Teliso-V Phase 2 LUMINOSITY study in previously treated non-small cell lung cancer. Teliso-V demonstrated strong clinical benefits across key endpoints, including, overall response rate, duration of response and overall survival, with a tolerable safety profile. We believe these results have the potential to support accelerated approval. And we plan to discuss the data with regulators in the coming months. Pending alignment with the FDA, our submission is planned for the second half of this year. We're also making good progress with our next-generation c-Met ADC ABBV-400, which utilizes the same c-Met blocking antibody as Teliso-V, but has a proprietary Topo-1 warhead to afford deeper and more durable responses with an improved therapeutic index. We remain on track to see data this year from the non-small cell lung cancer and gastroesophageal cohorts from our Phase 1 study. And based on the progress we're making in our colorectal program, we plan to begin a Phase 3 study later this year in third-line CRC. We also continue to make very good progress with our anti-GARP antibody ABBV-151. Our Phase 2 study in second-line hepatocellular carcinoma is underway, and we plan to begin several additional Phase 2 studies this year, including frontline HCC, frontline lung cancer and metastatic urothelial cancer. We look forward to providing updates on these programs as the data mature. Now moving to Neuroscience where we recently announced the European launch of ABBV-951 for patients with advanced Parkinson's disease. We also recently provided our complete response submission to the FDA for 951 with an approval decision anticipated in the second quarter. Our novel subcutaneous levodopa, carbidopa delivery system has the potential to offer meaningful benefits over current treatment options and others that are in development. 951 delivers significant improvements in off-time and on-time with a less invasive non-surgical system. It can deliver high levodopa doses similar to the amount provided by DUOPA. And it doesn't require combination with oral drugs to achieve high efficacy. 951 also provides a full 24-hour benefit, which should result in less morning akinesia. We're extremely excited to bring this transformative therapeutic option to patients in Europe and the US once approved. In our Aesthetics pipeline, we recently submitted our regulatory application in the US for Botox in platysma prominence. We anticipate an approval decision in the second half of this year. And we remain on track to complete the remaining CMC work this year for BoNT/E, our rapid onset short-acting novel toxin. Following completion of the remaining work, we plan to submit our regulatory application in the second half of the year, with approval anticipated near the end of 2025. So in summary, we continue to demonstrate significant progress across all stages of our pipeline and anticipate numerous regulatory and clinical milestones again in 2024. I also look forward to integrating the ImmunoGen and Cerevel teams and pipeline assets into our R&D organization once those transactions close this year. These two transactions significantly strengthened our oncology and neuroscience pipelines with the addition of several novel assets that have the potential to become innovative new therapies for many patients. With that, I'll turn the call over to Scott." }, { "speaker": "Scott Reents", "text": "Thank you, Roopal. I'm very pleased with AbbVie's strong performance in 2023. We have substantial momentum across the portfolio to support our long-term growth outlook. Starting with our fourth quarter results, we reported adjusted earnings per share of $2.79, which is $0.05 above our guidance midpoint. These results include a $0.15 unfavorable impact from acquired IPR&D expense. Total net revenues were $14.3 billion, $300 million ahead of our guidance, and down 5.4%. Most notably, these results reflect 15.3% sales growth from our ex-Humira growth platform. The adjusted operating margin ratio was 43.8% of sales. This includes adjusted gross margin of 83.9% of sales, adjusted R&D expense of 13.4% of sales, acquired IPR&D expense of 2% of sales, and adjusted SG&A expense of 24.7% of sales. Adjusted net interest expense was $363 million, the adjusted tax-rate was 17.2%. Turning to our financial outlook for 2024, our full year adjusted earnings per share guidance is between $11.05 and $11.25. This earnings per share guidance includes dilution related to the ImmunoGen and Cerevel acquisitions of $0.32, which assumes closing in the middle of the year. Please note this guidance does not include an estimate for required IPR&D expense that may be incurred throughout the year. We expect total net revenues of approximately $54.2 billion, reflecting a return to modest operational growth. At current rates, we expect foreign-exchange to have a 0.5% unfavorable impact on full year sales growth. This revenue forecast contemplates the following approximate assumptions for our key products in therapeutic areas. We expect global immunology sales of $25.6 billion, including Humira sales of $9.6 billion, including US erosion of roughly 36%. Skyrizi revenue of $10.5 billion, reflecting growth of more than $2.7 billion due to strong market-share performance in psoriasis, as well as robust uptake in IBD. And Rinvoq sales of $5.5 billion, reflecting growth of nearly 40% with continued market growth and share momentum across all approved indications. On a full-year basis, we anticipate that our strong volume growth for Skyrizi and Rinvoq will be modestly offset by low-single digit negative net price. In oncology, we expect sales of $5.7 billion, including Imbruvica revenue of $2.9 billion and Venclexta sales of $2.4 billion. As well as contributions from Epkinly, and partial year sales from Elahere. For Aesthetics, we expect sales of $5.7 billion. Including $2.9 billion from Botox Cosmetic and mid-single-digit revenue growth from Juvederm. For Neuroscience, we expect revenue of $8.9 billion, representing growth of more than 15%, including Vraylar sales of $3.4 billion, Botox Therapeutic sales of $3.2 billion and total oral CGRP revenue of $1.6 billion. For eye care, we expect sales of $2.2 billion. Moving to the P&L for 2024, we are forecasting full-year adjusted gross margin of 84% of sales. Adjusted R&D investment of 14% of sales, adjusted SG&A expense of 23.5% of sales, and adjusted operating margin ratio of roughly 46.5% of sales. We expect adjusted net interest expense of $2.1 billion, which includes the partial year cost in 2024 to finance the ImmunoGen and Cerevel transactions. We forecast our non-GAAP tax rate to be approximately 15.7%. Finally, we expect share count to be roughly flat to 2023. Turning to the first quarter, we anticipate net revenues of approximately $11.9 billion. At current rates, we expect foreign exchange to have a 0.5% unfavorable impact on sales growth. This revenue forecast comprehends the following approximate assumptions for our key therapeutic areas. Immunology sales of $5.1 billion, including Skyrizi sales of $1.9 billion, and Rinvoq revenue of $1 billion. These estimates reflect typical first quarter seasonality as well as low single digit unfavorable net price. We expect Humira global revenue of $2.2 billion, including US sales of $1.7 billion. We also anticipate oncology revenue just above $1.3 billion, Aesthetic sales of $1.3 billion, Neuroscience revenue of $1.9 billion, and eye care sales of $600 million. We are forecasting an adjusted gross margin of approximately 83.5% of sales and an adjusted operating margin ratio of roughly 44.5% of sales. We also model a non-GAAP tax rate of 14.8%. We expect adjusted earnings per share between $2.30 and $2.34. This guidance does not include acquired IPR&D expense that may be incurred in the quarter. Finally, AbbVie's strong business performance and outlook continues to support our capital allocation priorities. Our cash balance at the end of December was $12.8 billion. And we expect to generate free cash flow of approximately $18 billion in 2024, which includes roughly $1.9 billion in Skyrizi royalty payments. The strong free cash flow will fully support a strong growing dividend, which we have increased by more than 285% since inception, continued debt repayment, where we expect to pay down the approximately $7 billion of maturities this year, and also provides capacity for continued business development to further augment our portfolio. In closing, AbbVie has once again delivered outstanding results and our financial outlook remains very strong. We'll turn the call back over to Liz." }, { "speaker": "Liz Shea", "text": "Thanks, Scott. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, first question, please." }, { "speaker": "Operator", "text": "Yes, the first question comes from Chris Schott with JP Morgan. Your line is open." }, { "speaker": "Chris Schott", "text": "Hi, great. Thanks so much for the questions. Just I was looking for a little bit more color on the longer-term immunology outlook. You're targeting $27 billion plus by 2027 and highlighting growth from there. So, I guess my question was just can you elaborate on how mature the existing indications, these products are going to be by 2027? And what type of growth can we anticipate longer-term? And maybe as part of that, it seems like from the comments that the growth beyond 2027 is more skewed towards Rinvoq given the new indications, but [indiscernible] like is it balanced Rinvoq and Skyrizi, or has it become more of a Rinvoq driven franchise in terms of the growth drivers over time? Thanks so much." }, { "speaker": "Jeff Stewart", "text": "Yes. Hi, Chris. It's Jeff. Maybe I'll walk through a little bit of the process there and answer your questions. So we can see historically actuals and sort of fast forward in terms of the first thing we look at is the bio penetration of these big indications. And there still remain significant headroom in terms of the ability for moderate to severe patients with these diseases to continue to be exposed to these biologics and these advanced orals, absolutely. And we can see for sure that psoriasis still in -- even in the US is about 15%, it's relatively modest, atopic dermatitis, the penetration rate is only about 7%. And then you have higher penetrated markets like IBD and I'll talk about what's interesting about IBD, that’s somewhere in the 40% or 50% range across those. And then we can see clearly as these markets develop and I've highlighted this before that you see line of therapy expansion. So first-line becomes less and less important, as you move towards second and third-line over time. And right now, IBD is a big story about that, that we calculate into our long-term estimates, because it's still largely despite the severity a frontline oriented market, because physicians, just kind of hang on to their frontline agents, that's going to change quite dramatically believe over this mid-term and even in the long-term perspective. We have a good peg on the market growth rates. Many of these market growth rates are very significant, very stable. And we'll have good growth rates going into the next decade because of these dynamics around bio penetration and line of therapy expansion. I highlighted in my remarks around share, share we -- we have a very good competitive position, very high capture rates. And we're really in the sort of low end of the range in terms of the total prescription share, that will feed up and catch up to that. Pricing, I think we talked a little bit. We're not going to give detailed pricing. But certainly, you can see based on Scott's comments that, the idea of a high CAGR on high single-digit pricing is not something we've contemplated. So, we believe that there is significant room for growth even past 2027. Especially, as we'll have more Rinvoq indications coming that we've talked through. So we think that we're going to see robust growth based on our share capture and also how dynamic these markets are into the next decade." }, { "speaker": "Rob Michael", "text": "And Chris, this is Rob. I'll just add, you think about the markets, the rheum market is growing low-single digits, atopic dermatitis is growing mid-teens and IBD is growing high-single-digits. So they're very strong market, they will continue to be strong markets for us. And we're also seeing, as Jeff mentioned, there's a lot of headroom in terms of share capture. So we do expect that robust growth to continue beyond 2027 into early part of the next decade. I think your observation is correct. Given that we would expect up to five new indications for Rinvoq. If you look at the rate of growth, Rinvoq versus Skyrizi, I think it's reasonable to assume that Rinvoq would have a higher rate of growth given the new indications, but both will grow very nicely. So, I would certainly encourage you to look at more robust expectations for both therapies with Rinvoq a little bit higher because of the new indications." }, { "speaker": "Liz Shea", "text": "Thanks, Chris. Operator, next question, please." }, { "speaker": "Operator", "text": "Yes, the next question comes from Terence Flynn with Morgan Stanley. Your line is open." }, { "speaker": "Terence Flynn", "text": "Great. Thanks so much for taking the questions. Maybe two for me. Rick, I was just wondering if you could give us an update on succession planning and timing, we've been fielding that question from a number of investors recently, given you're now pass the Humira LOE. And positioned the company very well here given Skyrizi and Rinvoq commercial success and also some of the recent pipeline build-out. And then the second question I have was on our pipeline on lutikizumab. I know you guys have highlighted this, not a lot of focus from the investor side yet. Maybe if you could just talk about the size of the commercial opportunity in HS. And then why you're confident that, that Phase 2 HS data will translate into success in the IBD side. Thank you." }, { "speaker": "Rick Gonzalez", "text": "All right, Terence. This is Rick. So I'll cover the first one. I guess what I would say is, I have nothing new to report today, but what I'd indicate is, we've talked about the criteria that we're going to use to make the decision when we're going to make the transition. That criteria is the same, when we believe that we are comfortable, we've navigated the LOE, and the rest of the business is performing at high level. That's the point at which we want to make the transition, because we think that's the best time to be able to transition the CEO position. So I understand there's a lot of interest from investors here, that's logical and clear. Maybe what I can do is, give you a little better perspective on the process that we're going to use in order to make the decision with the Board. I would say, the Board has been actively involved for the last four or five years with a lot of emphasis around ensuring that our internal candidate would get the experiences that we thought were needed prior to making the transition. I can tell you from my perspective, that's gone extremely well. We have regularly scheduled Board meetings several times a year where we specifically talk about succession and the progress that we're making. At the point at which the business has achieved that criteria that I described before, at the next regularly scheduled Board meeting, then I would make a recommendation to the Board that this is the proper time to be able to make the transition. The Board would vote on that recommendation. At the end of that vote, we would send out an announcement to investors. And what you can expect when you get that announcement is that, we would make an announcement that we were going to make the transition out at some point in the future, in all likelihood four months to six months in the future. And the purpose of that is to make the final transition between myself and that person. And that'll take four months to five months in order to be able to do that. I would say it's also very likely at that time, based on the discussions I've been having with the Board, is that, I will be named the Executive Chair for a period of time, and the purpose of that will be to make the transition of the full position over a period of time. So I think it's a very well thought out, I think very well managed process. And I think that's what you can expect going forward." }, { "speaker": "Jeff Stewart", "text": "And Terence, this is Jeff, I'll start-off and have Roopal will address the second part of your second question. So we established many years ago now this HS market with the approval of Humira. And we thought it was a relatively small market, and it turned out to be quite a surprise. There is a significant amount of patients around the world that suffer from HS, it's already a multi-billion dollar category. And we think it's going to continue to expand. And I say that, because we can see that like IBD, there's just some new approvals just coming. So, everyone sort of holds on Humira as long as they can if they're exposed to a biologic. And so we see the same dynamic as you start to see IL-17s come into this space, and certainly, we're very excited about lutikizumab because of the profile that we're seeing emerge in the clinic. So it's a significant commercial opportunity. And I would say that when we look back over all the Humira indications, over the last decade or more, HS was one of the most rapid indications that moved to $1 billion plus business. So it's an exciting opportunity, both commercially and certainly for patients. And Roopal can address your comment on IBD." }, { "speaker": "Roopal Thakkar", "text": "Yes. Hi, Terence. Part of it starts, I would say, almost 15 years ago with our insights in Crohn's disease with Humira, as Jeff was discussing, where we started to see efficacy in patients that had HS. We saw a good amount of overlap between Crohn's and HS. So that's part of it. Now that doesn't really pan out for IL-17, but what we've observed with IL-1 beta in particular is that, our internal data and external data do show elevated expression signals with one beta. So we think we have that opportunity with luti, because it also covers 1 beta and we have two shots at this, right. One is, to go specifically and look at a biomarker-driven targeted profile where we would be able to distinguish which patients actually have that higher expression. And the other approach, which we maybe weren't talking about years ago because we didn't have a product like Skyrizi which have high efficacy and very strong safety profile in Crohn's. What we have now is the opportunity to also look at in combination. So a biomarker approach and a combo approach, our insights from Humira and preclinical or biopsy-based insights that we have externally and internally." }, { "speaker": "Liz Shea", "text": "Thanks, Terence. Operator, next question, please." }, { "speaker": "Operator", "text": "Yes, the next question comes from Andrew Baum with Citi. Your line is open." }, { "speaker": "Andrew Baum", "text": "Hi, many thanks. Couple of questions. One, given AbbVie's strength in market access in managed market, I'd be curious the extensive future contagion from RNA IRA-mediated price cuts on the Medicare book spending over onto the commercial book of business. How much of concern do you think this is, given that has basically the same. And then second question on lutikizumab, if I remember from the canakinumab trials secondary to neutropenia, there was an increase in fatal infections. If you lay on this on top of another immunosuppressive, how are you thinking about the safety concerns in these IBD patients?" }, { "speaker": "Jeff Stewart", "text": "Yes. Hi, Andrew. Thanks for your question. It's Jeff. We think that the, particularly the negotiation aspects of the IRA will be very contained on the Medicare side. And as you can imagine with government programs over the years -- when we had discussion with payers, they'll often say things over, well we know what the FSS price is for the VA or demand mandated discounts and supplemental discounts in the Medicaid channel. But we think those are really government actions and government rules. And so, we see that the market we believe will play out largely like it has with the other government channels, that it's a unique dynamic in terms of essentially a forced negotiation that we think will be contained largely in the Medicare space. So that's how we view the world." }, { "speaker": "Roopal Thakkar", "text": "Hi it's Roopal, I'll talk about luti and your question around neutrophils. Yes, we do see impact on neutrophils, it's dose-driven. However, I think we think about inflammatory bowel disease, probably lupus, others to have a different tolerance for benefit-risk, because today in those disease states despite the success that we've seen with Skyrizi and Rinvoq, there's still substantial headroom to lead to more transformational efficacy, not every patient is getting into remission, though high levels, not every patient. So we still believe that a combo can get to that and break that efficacy threshold. The other opportunity there is what we'll do with the combination is obviously optimize the dose to assure safety. And thus far in the HS trial, even at the highest dose we saw very little infections." }, { "speaker": "Liz Shea", "text": "Thanks, Andrew. Operator, next question, please." }, { "speaker": "Operator", "text": "Yes, the next question comes from Mohit Bansal with Wells Fargo. Your line is open." }, { "speaker": "Mohit Bansal", "text": "Great. Thank you very much for taking my questions. Congrats on all the progress. I just want to go back to the ImmunoGen acquisition and the comments you made before. Can you talk a little bit about the plans to move the drug into earlier lines of ovarian cancer. You talked about maintenance setting, but more we are reading it, I mean, in first-line maintenance, the PFS and OS tends to be really long. So could you talk a little bit about the strategy there and how do you overcome the existing OS benefit that these drugs provide? Thank you." }, { "speaker": "Roopal Thakkar", "text": "Hi, Mohit. It's Roopal, I'll take that. So, I think as you've seen in resistance we've seen that overall survival benefit, a very substantial one, unprecedented thus far. And to your point, the plan is to move into earlier lines of therapy. Secondly, it's also part of the strategy to move into sensitive populations, which is around 55% of the population, resistance is around 45%. And then the third aspect is, we've seen encouraging data in medium expressers of FR alpha. And those are approximately 30% of the patients, high is around 35%. So those are the three strategies to go forward. Now how do we get into earlier lines of therapy? Well, a couple of things, insights that we've seen. One is, we've seen Elahere been able to combine at full dose with carbo-platinum. So that's encouraging, that gives you an opportunity to upfront combine. And then as you stated, maintain on Elahere or with Elahere plus BEV. So the other approaches that we would do getting to earlier line of maintenance is have that upfront therapy and then we see patients that go onto BEV, we can combine with BEV at that time point. And we'll be looking at combinations with PARP inhibitors, which is about the other half of the patient populations, which are HRD deficient. So, taken altogether, we see there is an opportunity. Now, the PFS is going to be a little bit longer, along with OS. So that is something that we're planning for, we'll start these studies as soon as possible, but they will read out in the later part of the decade and into 2030." }, { "speaker": "Liz Shea", "text": "Thanks, Mohit. Operator, next question, please." }, { "speaker": "Operator", "text": "Our next question comes from Vamil Divan with Guggenheim Securities. Your line is open." }, { "speaker": "Unidentified Analyst", "text": "This is (inaudible) on for Vamil. Thanks for taking my question. So my question is on Humira. I was curious, given the recent performance of company has had with the erosion since the introduction of biosimilars. I was wondering if you can now provide maybe a better sense around the company's expectations on Humira's longer-term tail revenues in both the US and ex-US markets. Thank you." }, { "speaker": "Rob Michael", "text": "Hi, it's Rob. I'll take that question. So we do expect that in the US tail will start to emerge in 2025 or 2026 timeframe. Keep in mind 2024 is the first full year for US biosimilars. We'll have to see what happens with volume uptake this year and also where interchangeability lands. And ultimately, what does contracting look like next year. So, I wouldn't expect us to quantify the tail this year. But it's certainly possible, something we would do either in 2025 or 2026. As it relates to international, you're seeing, I think this year, it's a step-down of about $400 million. Half of that is really the last wave of markets like Canada, Puerto Rico where we're seeing, I'd say, some incremental erosion we would expect this year. And then the other half would be your typical international price erosion you see across therapeutic areas. So not really specific to biosimilars. And then the other quarter of it would be what we're seeing is just the strength of Skyrizi and Rinvoq as these newer agents elevate standard-of-care, you see some share go to those newer agents. And so, probably the best way to think about international would be, if you want to adjust for half of the erosion this year as being more of the final waves, and then you get a sense of what could potentially be the ongoing beyond that. But we'll be more specific, I think we need to see really how the US plays out with this being the first full year for biosimilars, before we can really give you more color. But we're very, very pleased with the progress we've made so far." }, { "speaker": "Liz Shea", "text": "Thanks, Dan. Operator, next question, please." }, { "speaker": "Operator", "text": "The next question comes from Carter Gould with Barclays. Your line is open." }, { "speaker": "Carter Gould", "text": "Great. Good morning, thanks for taking the questions. Two on the neuroscience portfolio. I guess first on 951. How should we think about that? Is that more sort of on growing the overall pie of device data therapies versus taking share from apomorphine and gels. And then, maybe looking a little bit longer-term, AbbVie has sort of three Phase 2 Alzheimer's studies that are going to readout later this year or by early next year. Fully acknowledging the commercial challenges by the players in the market today and that's some of these targets are now validated. How should investors think about these assets either individually or collectively and your level of excitement? Thank you." }, { "speaker": "Jeff Stewart", "text": "Yes. Hi, it's Jeff. I'll take the first question. So what we look at when we see this market at a macro -- at a macro-level, you have a significant number of patients, 85% of patients are just on these oral medication. So, oral [indiscernible]. Okay. And they essentially need to consume more and more and more orals, and sometimes at the end of it they're taken 12 pills a day, it's very, very difficult to manage. But then they're faced with a very difficult decision, which we kind of call like a surgical barrier. And that surgical barrier is to get any sort of more advanced relief, you either have to think about deep brain stimulation, which is a brain surgery or our own DUOPA, which is a GI surgery. So the way we see this market developing is we see that 951 starts to establish a very nice transition zone, because you don't have -- it's a subcu. So a new market segment that starts to emerge before bigger interventions like DBS or DUOPA. And obviously, the ability to basically move quicker to more relief from these chronic oral basically over treatment. So that's how we see it. And as Roopal highlighted, we're seeing some very nice uptake in Japan, where we launched late last year, and also in Germany and some of the first European launches. So that's how the market is exactly playing out. We're establishing essentially a new high efficacy category here with 24 hours of ongoing relief. You can do super specific dosing titration and the pump is much smaller and again, it's a subcu injection that you move around every three days. So it's a nice -- it's a nice opportunity for the company." }, { "speaker": "Roopal Thakkar", "text": "And maybe I'll talk about the other assets that you mentioned in Alzheimers. First, 916, that's our A beta antibody. What we like about that one thus far, the profile we've seen is a long half-life, which would be good to space out dosing. Potentially higher potency if that holds, and we see robust reductions in beta amyloid that could allow for subcutaneous dosing that's spaced apart. And the other thing we are looking at is potentially lower ARIA. So if we see those three things over the course, I would say, end of this year, early next year, I think that, that would be quite exciting, because it would be a differentiated profile, again a better convenience and potentially better benefit-risk profile. So that's 916. 552 is our SV2A that's our oral medication in cognition that's currently in Phase 2. And we anticipate readout at the end of this year, early next year. Now, that one is being studied in a setting where patient can be on a therapy already like an [Aricept] (ph), or nothing. And we would use the typical ADAS-Cog assessments along with a variety of others including other neuropsychiatric symptoms, like depression. So that's another nice one that could combine with a variety of different assets in Alzheimers. The third one I'll mention is around Emraclidine, which comes from Cerevel. They are at early stages right now in elderly patients. And the goal there would be an Alzheimer's disease psychosis of the six million or so diagnoses, I would say around 40% of these patients present with symptoms of psychosis. So with all the therapies that are in the clinic, we think we have a very nice complementary suite of options that could address numerous symptoms of Alzheimers, because it won't be just one therapy that's going to solve this. But more to come end of this year and into next year." }, { "speaker": "Liz Shea", "text": "Thanks, Carter. Operator, next question, please." }, { "speaker": "Operator", "text": "The next question comes from [Technical Difficulty]. Your line is open." }, { "speaker": "Unidentified Analyst", "text": "Thanks for the question. Just on the reaffirmed long-term guide, can I clarify if the Cerevel and ImmunoGen deals are in this 2029 guide given you included them in the 2024 guide? And you up Skyrizi and Rinvoq by $6 billion, migraine by $1 billion. If these are the pushes, what are the pulls in reaffirming that long-term guidance?" }, { "speaker": "Rob Michael", "text": "So, this is Rob. I'll take that question. Yes, we did include ImmunoGen and Cerevel in our long-term guide. The thing to keep in mind is, high-single-digits, when you think about the range that could represent, that's around $10 billion between the low-end of the high-single-digits and the high-end of the high-single-digits. And so, there aren't any pulls, what we've updated as we walk you through it is, we've increased the oral CGRP peak revenue, we've increased Skyrizi, Rinvoq and we've reaffirmed the others. So there's nothing that we took down. But just keep in mind that you've got a pretty, pretty wide range. If you look at Street consensus, we're encouraged that it continues to move up. It has moved up over the course of the last quarter, about $3 billion in 2029. It's nice to see that upward movement. But it's still below what we expect. If you think that, that growth rate for the Street is just under 5%, we expect high-single-digits. And so, even with this update, as well as ImmunoGen and Cerevel, we're still high-single-digits. But keep in mind, it's a pretty wide range. And it would be, regardless industry-leading growth and we're set up very well to continue delivering a very strong growth, and we're setting ourselves very well to grow very nicely in the next decade as well." }, { "speaker": "Liz Shea", "text": "Thanks, [indiscernible]. Operator, next question, please." }, { "speaker": "Operator", "text": "Thank you. And our next question comes from Gary Nachman with Raymond James. Your line is open." }, { "speaker": "Gary Nachman", "text": "Thanks and good morning. First on Aesthetics, could you talk a bit more why you're confident in what seems to be a pretty decent return to growth in 2024. So how much of a headwind could China be offsetting the US growth. And what are other regions will you be getting some somewhat of a lift this year. Just talk about the dynamics on that front. And then secondly, just -- as you return to more robust revenue growth in 2025, what are reasonable expectations for operating margins directionally in 2025. Can that expand at all or is it more likely to be depressed from the ImmunoGen and Cerevel deals? Just give us some directional way to think about that for next year. Thank you." }, { "speaker": "Carrie Strom", "text": "Hi, this is Carrie, I'll take your first question on Aesthetics and the Aesthetics market recovery. So I'll start with the US and we have started to see the US toxin market recover the end of 2023. We expect that recovery to continue. And for the market growth for toxins to continue to improve in 2024. For fillers, in the US, in Q4, after multiple quarters of decline, the filler market in the US was somewhat flat. And so, that dynamic of the filler market recovery lagging the toxin market recovery is playing out. And we do expect that recovery on fillers to also continue -- to a lesser degree than toxins, more of a modest growth, positive growth for 2024. And as we look at the beginning of the year here in 2024, we are seeing our patient demand metrics and Google metrics really supporting our expectations here. In terms of China, we do expect the economic headwinds that we saw beginning mid-year 2023 to continue in the near-term with China. And we expect the China Aesthetics market to be flat overall in 2024. That would look like negative market in the first half of the year until the China market starts to recover in the second half of 2024. And we expect that China performance to be balanced against expectations for strong performance in other international regions, including Japan, which has become an important market for Aesthetics and areas of Latin America, like Brazil, which is a highly aesthetically oriented market. It's also important to know in terms of Q1 of 2024, in terms of our guidance there that the growth in the US will be offset by that international decline, specifically in China. So not only the China economic headwinds, but also a difficult year-over-year comp in Q1, because recall, in Q1 of 2023, there was the post-pandemic reopening in China. So that's really how we see the market growth factors in US, China and other parts of the world playing out in 2024." }, { "speaker": "Rob Michael", "text": "And Gary, this is Rob. To build on the Aesthetics story, I said in the past to get to our guidance of greater than $9 billion, we need to deliver annual growth of high-single-digits on average. And as Carrie just walked you through, we haven't quite seen the recovery for the fillers market yet this year. And we will, but it's not going to be a normal year, we'll see a ramping. And we also had a slowdown in China. But despite that we're still delivering high single digit growth. And given how under penetrated these markets are, we can drive that market growth that's required to achieve the long-term guidance. And then on top of that, we have several innovations that will further support that growth. I've said this before, but the masseter and platysma indications for Botox will add a few $100 million each. Our novel short-acting toxin BoNT/E has the potential to activate new patients who have not started toxin due to fear of an unnatural look. So that could drive an inflection in market growth and market share. And then our region, our fillers pipeline is really aimed at providing both short and long-term treatment benefits for consumers. So we have several avenues to get to our greater than $9 billion guide. I have seen consensus estimates at $8 billion for 2029, but we're very confident in our guidance of greater than $9 billion by that period." }, { "speaker": "Scott Reents", "text": "Gary, this is Scott. I'll take your question regarding operating margin expansion. So for 2024, as I mentioned in my remarks, we've guided to 46.5%. When we do return to robust growth in 2025, we do see that operating margin will expand, and will continue to expand as we grow through the decade. I think that when we think about the pace of that expansion, it will be a relatively steady over several years. I would though, if you're modeling that, I would kind of peak it out at around 50%. I think that's where we'll hit a peak at the operating margin. But we do see expansion both in 2025 on that return to robust growth, including the impact of the two transactions ImmunoGen and Cerevel, which should presumably be a full-year at that point in time. But at the full year impact, we see that expansion. And I do think it's worth noting, even at our current levels, we have industry-leading operating margin. And certainly with the future expansion we will continue to have that and only grow that position." }, { "speaker": "Liz Shea", "text": "Thanks, Gary. Operator, next question, please." }, { "speaker": "Operator", "text": "Yes, our next question comes from Steve Scala with TD Cowen. Your line is open." }, { "speaker": "Steve Scala", "text": "Thank you very much. Two questions. Is the current tax rate fully reflecting likely tax changes in the US and outside the US? So, it represents a high watermark for the foreseeable future. Previously the company spoke to a 16% tax rate. And we're pretty much there. So I am wondering if the increases are kind of behind us? And then Rick, a slightly different kind of question, but there are clear, obvious reasons such as the success of Skyrizi and Rinvoq, but I'm curious if you would share with us a few of the externally less visible factors that are leading to AbbVie's success traversing the Humira patent expiration that your pharma peers missed when dealing with their own pressures. I would assume contracting formulary management, allocation of overhead are all part of it. But what would you be willing to share with us? Thank you." }, { "speaker": "Scott Reents", "text": "Steve, this is Scott. I'll start with your tax rate question. So with respect to the tax rate, we were essentially flat between this year and last year at 15.7%. We do see that tax rate over the three year period including this year increasing about 1% on average. Now that's not going to be a 1% per year. What you'll see is a step up in a couple of years when the US tax rates do increase the GILTI rate in particular, will increase. So we see that over a three year period about 1% per year on average. That does include all the impacts of a number of things going on globally with the OECD and some of these -- OECD minimum taxes and other things. I would say the one thing it does not include, you saw just this week, the House passed a tax bill that includes the provision regarding the R&D expensing. So if that bill were to pass, as it's written, we would see a slight step down in our tax rate, about 80 basis points from the impact of that on an ongoing basis." }, { "speaker": "Rick Gonzalez", "text": "Steve, this is Rick. I think if you step back and you look over the last, I'd say, 10 years, we were trying to develop a strategy that we fundamentally believed will allow us to be able to offset the Humira LOE and continue to deliver top-tier financial performance as we have for the past 10 years. That was the whole objective. And we knew we had to build a very diversified growth platform in order to be able to do that, to be able to absorb that impact and return to growth as rapidly as possible. And so, we as an executive team focused a lot of energy around how do we do that, how do we build it, how do we do it in the right markets. I think AbbVie, I'm obviously biased, I guess, but I would say our commercial execution has always been exceptional in my opinion. We understand the markets we're in extremely well. We understand the competitive environment that we compete in those markets extremely well. We understand the patient journey and how that patient journey is affected by access to medicines to ensure that patients can get their medicines routinely and be able to get the benefit of those medicines. It takes all of those things I think to end up with kind of success that we see with assets like Skyrizi and Rinvoq. But it also takes I think a company that is very good at what I describe as read and react. There are always challenges in businesses as big and as complex as this. And I think the difference between companies that can continue to perform at the top tier, year in and year out is they're good at seeing issues, and then quickly reacting to how they're going to either offset those, or deal with those. We had many of those examples. I'd say the label change on Rinvoq was a great example. But look at where Rinvoq is growing now. And despite that label change many would not have predicted that. Migraine, was a very challenging market for a period of time. We look at how we've operated with Ubrelvy and Qulipta. And the kind of success we've seen against the competitors in those markets. Neuroscience, very different kind of market with Vraylar. That's all about trying to grow market-share and expand your position there with a very good asset. And so, we're good at that, and I think that is the real differentiator. The other thing I'd say is, I think we have been very efficient at our R&D investment. We obviously don't have the largest R&D investment in the industry. But we produced a tremendous amount of return against that R&D investment. Now having said that, as we go forward, we know we need to increase R&D as I've said in my comments. We did a fairly significant increase last year despite dealing with the Humira LOE. And we're going to do another fairly significant increase this year because we had some assets that had very, very significant opportunities like 383 and like 400 and several others. They are going to require a large Phase 3 -- multiple large Phase 3 studies to be able to get the kind of label that we need, and that's another thing, I'd say, we're good at. Understanding how you have a competitive label and building your clinical programs to get that. So, I think it requires all of those things. I don't think there is one magic formula. I think those are the kinds of things that we have honed here at AbbVie an executive team. And we execute very well against those." }, { "speaker": "Liz Shea", "text": "Thanks, Steve. Operator, next question, please." }, { "speaker": "Operator", "text": "Yes, our next question comes from Evan Seigerman with BMO Capital Markets. Your line is open." }, { "speaker": "Unidentified Analyst", "text": "Hi, guys. It’s [Nachman] (ph) for Evan. I wanted to ask -- thinking about the upcoming approval for Skyrizi, and you see how is management thinking about how that may or may not impact Rinvoq sales, obviously combined AbbVie offers some immpresive suite of inflammatory assets. But what is the expectation of cannibalism across these assets potentially? Thanks." }, { "speaker": "Jeff Stewart", "text": "Yes. Hi, it's Jeff. I'll take that one. We've learned a lot from watching Skyrizi and Rinvoq in Crohn's. And to Rick's points, look, we're very careful about how we position these assets, you know how we basically represent them with our medical teams and our commercial teams. And so what we see certainly in our biggest markets, we see that they are actually complementary positioning. So, Rick highlighted the label change, right. So Rinvoq, in the US, is basically indicated for use after a TNF. So it's basically a later-line therapy. Skyrizi, if you look at the Skyrizi, you see results, it's very, very impressive. We've studied some very, very tough patients there. The bio-naive patients, the efficacy is just outstanding. I would say it's best-in-class. So we can see that based on the profile of the agents for many of our representatives, we're able to talk to physicians about the consideration for Skyrizi frontline. And then in later lines Rinvoq. So the cannibalization or the overlap is very manageable and minimal. And what happens is you start to see this, this very significant build for total AbbVie share because of that complementary positioning. So we're quite confident that we'll be able to navigate this very well just as we see in the larger Crohn's market." }, { "speaker": "Liz Shea", "text": "Thanks for the question. Operator next call -- next question, please." }, { "speaker": "Operator", "text": "Yes, our next question comes from Tim Anderson with Wolfe Research. Your line is open." }, { "speaker": "Tim Anderson", "text": "Hi, I have a question on obesity drug impact on AbbVie's Aesthetics business. So the uptake for obesity drugs could be a headwind or a tailwind. That's a potential headwind if patients only have so many dollars to spend on Aesthetics and they reallocate their out-of-pocket spending away from dermal fillers and toxins towards obesity drugs? Or it's a tailwind if patients using obesity drugs get things like the so-called Ozempic face and they end up using more toxins and fillers. So, what's been the experience thus far. And what do you expect going forward over the next handful of years? Thank you." }, { "speaker": "Carrie Strom", "text": "Hi, this is Carrie. So the short answer is, we have not seen an impact on our Aesthetics business positive or negative so far. That said, absolutely, our customers and our consumers are participating in this market. We are seeing it integrated into some of these Aesthetics practices. And to your point, there are instances where a patient will make a trade-off in terms of her share of wallet. But that said, we do see it as a long-term tailwind anytime people are getting more engaged in their appearance, that's a positive thing for Aesthetics. And as we ask our consumers and our customers about it, really that -- what we've learned is that it does reinforce its long-term tailwind because the majority of people who engage in these medical weight-loss products are more interested in Aesthetics afterwards than they never before. So, that's really how we see it in terms of the that dynamic impacting Aesthetics." }, { "speaker": "Liz Shea", "text": "Thanks, Tim. Operator, next question, please." }, { "speaker": "Operator", "text": "Yes. Our next question comes from Tim Lugo with William Blair. Your line is open." }, { "speaker": "Tim Lugo", "text": "Thanks for taking the question. After the two announced acquisitions in December, what are the team's thoughts on M&A in 2024. Some of your peers have given guidance on expected deal sizes. Is that something you can provide the Street or at least talk about your capacity at this point?" }, { "speaker": "Rob Michael", "text": "Hi, Tim, it's Rob. I'll take that question. So our BD efforts continue to be focused on identifying assets, really that can drive growth in the next decade across immunology, oncology, neuroscience, aesthetics and eye care. But we have what we need in our current portfolio to deliver on growth expectations in this decade. So our external efforts are really aimed at early-stage opportunities, which are typically smaller-sized deals. As we look across the growth areas, if you think about immunology Skyrizi and Rinvoq will drive robust growth into the next decade. So our focus in immunology in terms of BD is really looking for new mechanisms of action that can elevate standard-of-care whether monotherapy or in combination. I'd say there's a lot of interest in combination. In oncology, ImmunoGen really nicely complements our efforts with ADCs, it gives us a head start, an entry in the solid tumor space, that we're not in today. But in addition to ADCs, we're focused on bispecific, multi- specifics immuno onc agents. We also recently announced a collaboration with Umoja studying insight to CAR-T therapy. So a lot of focus in oncology, but these again would be earlier-stage smaller-sized deals. In Neuroscience, Cerevel adds depth to our neuropsych pipeline, but we also have a focus on migraine and neurodegeneration. In eye care, we're extremely excited about the REGENXBIO program in wet-AMD and diabetic retinopathy. But we continue to look for innovation in glaucoma and retinal disease. So we certainly have an interest there. And then in Aesthetics, it's always about looking for innovation that can drive new consumers into our providers practices. So our BD group is still very active. We certainly have the financial wherewithal to pursue those opportunities to further bolster our pipeline. But those are the areas that we're most interested in." }, { "speaker": "Liz Shea", "text": "Thanks Tim. Operator, next question, please." }, { "speaker": "Operator", "text": "Yes, the next question comes from James Shin with Deutsche Bank. Your line is open." }, { "speaker": "James Shin", "text": "Hi. Good morning. I had a question on ovarian cancer and it's going to be more competitive with [indiscernible]. How do you feel about [indiscernible] interacting? And how do you feel that market landscape looks going forward?" }, { "speaker": "Liz Shea", "text": "Unfortunately. Your line is not very clear. Can you maybe try to repeat the question one time." }, { "speaker": "James Shin", "text": "Sorry about that. [indiscernible] better now." }, { "speaker": "Liz Shea", "text": "It's still little echoey, it's a little bit better, but go ahead." }, { "speaker": "James Shin", "text": "Okay, I was asking about [indiscernible] and the competitive dynamics in ovarian cancer." }, { "speaker": "Liz Shea", "text": "Yes, unfortunately, it's just not coming clear -- coming through clearly. Happy to address the question following the call. Apologies for that. Operator, next question please." }, { "speaker": "Operator", "text": "Yes, the next question comes from David Risinger with Leerink Partners. Your line is open." }, { "speaker": "David Risinger", "text": "Yes, thanks very much, and congrats on the long term updates. So with respect to the Alzheimers commentary, a product was left out of the TREM2 AL002, which has an estimated primary completion in September. If you could comment on that as well. That would be helpful. And then with respect to the GILTI tax change that's coming, so can you please provide some more color on that, including the timing and the potential impact? Thanks very much." }, { "speaker": "Tom Hudson", "text": "Hi, this is Tom Hudson. I'll answer the question, the first question, yes, we do have a partnered program with Alector on the TREM2 target. TREM2 was identified in Alzheimers disease through genetic studies, several years ago, very strong link. We have a program which -- TREM2 modulates and no inflammatory response in AD. All patients are enrolled in the Phase 2, we will have data later this year. So again it's an early clinical development, but we will expect to see key data later." }, { "speaker": "Scott Reents", "text": "Sure, this is Scott. Regarding the GILTI tax. So this is the US tax, the foreign minimum tax on foreign earnings that the US supplies. That tax rate today is at 10.5%, it's going to move up to 13.1% a little bit more than that. That will occur -- the implementation date is a little bit mixed, because it depends on fiscal year-ends of legal entities, but let's call it 2026 is when we can look at that. And only part of our income is subject to that rate. So, I would say that's approximately a 1.5% impact to our tax rate that you would see. And that's baked into my 1% on average over the next three years." }, { "speaker": "Liz Shea", "text": "Thanks, David. Operator we have time for one final question." }, { "speaker": "Operator", "text": "Okay. And our final question is Luisa Hector with Berenberg. Your line is open." }, { "speaker": "Luisa Hector", "text": "Thank you for taking my question. I wanted to touch on the Part-D restructure an IRA. So you have a number of drugs that are likely to be impacted by this. And obviously, you talk about your strong rebound in 2025. So I'd just love to hear your thoughts on how that restructure will impact. And perhaps to what extent that is already baked into your expectations of the rebound? And maybe just to check, have you now received the initial offer from CMS owned Imbruvica? Thank you." }, { "speaker": "Jeff Stewart", "text": "Yea. Thank you, Luisa. It's Jeff. And we have we have contemplated in our planning and long-term guidance, both the Part-D redesign and of course the IRA impacts based on our projections over when some of our drugs might be negotiated. To give you some color on the Part-D redesign, we have clearly a very good visibility over the pricing dynamics that will take place as you say, many of our brands basically will be under the catastrophic redesign component. Now we've also understood based on one of the policy items, which is the cap and smooth, we've also countered some of that price with volume offsets based on patients having the ability to acquire these. Now that volume does not fully offset the pricing impact. But suffice it to say that, that's been very much contemplated into that. I'll let Rob comment over how that sort of feeds into the growth rates." }, { "speaker": "Rob Michael", "text": "Luisa you asked a very good question. This is Rob. Clearly, and we have contemplated that in the high single digit CAGR, the impacts of IRA. But as you think about the annual progression, it is important to note that Part-D benefit redesign starts in 2025. So that is certainly something you should consider for modeling of annual sales. I mean, that impact by itself, on a net basis could be worth a few points of growth. As Jeff mentioned, the higher cost share with an offset in volume, we have studied the improvement in abandonment rates as we look at the low-income subsidy part of Part-D which doesn't have the out of pocket burden that the standard benefit does. And when we compare the abandonment rates and as you address this issue of out of pocket burden, we would expect the abandonment rates to improve across Medicare Part-D, but not enough to fully offset the higher-cost share. That was something we certainly contemplated. But as you think about the progression of growth, the rate of growth will accelerate starting next year through 2029. So we'll deliver a high-single-digit CAGR. But it's important to note that in 2025, you do have that beginning of Part-D benefit redesign, which adds, I'd say a couple of points of growth headwind that will still allow us to deliver robust growth, but it won't -- you shouldn't think about the same amount of growth every year, it's going to accelerate over the long-range plan." }, { "speaker": "Rick Gonzalez", "text": "And then, this is Rick on the Imbruvica price, yes, we have received the initial offer on Imbruvica recently. As you know, there is a process that CMS is going through here to set pricing. And because none of us have any experience with this, we don't know exactly how that process will proceed. There will be some back and forth between the manufacturer and CMS. CMS has indicated that they'll have the final price by September 1st. It's certainly premature for us to talk about the price now, because it's not the final price. I don't know that we'll know the final price until very close to the point at which they are prepared to publish that price, having not had any experience here. So, I wouldn't anticipate we will get any updates until that date or very close to that date." }, { "speaker": "Liz Shea", "text": "Thanks, Luisa. And that concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us." } ]	AbbVie Inc.	141,885,706
ABBV	3	2,023	2023-10-27 09:00:00	Operator: Good morning and thank you for standing by. Welcome to the AbbVie Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer portion of this call. [Operator Instructions] I would now like to introduce Ms. Liz Shea, Senior Vice President, Investor Relations. Thank you. You may begin. Liz Shea: Good morning and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Rob Michael, President and Chief Operating Officer; Jeff Stewart, Executive Vice President and Chief Commercial Officer; Scott Reents, Executive Vice President and Chief Financial Officer; Carrie Strom, Senior Vice President, AbbVie and President, Global Allergan aesthetics; and Tom Hudson, Senior Vice President, R&D and Chief Scientific Officer. Joining us for the Q&A portion of the call is Roopal Thakkar, Senior Vice President, Development and Regulatory Affairs and Chief Medical Officer. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we will take your questions. So with that, I will turn the call over to Rick. Rick Gonzalez: Thank you, Liz. Good morning, everyone, and thank you for joining us today. AbbVie continues to perform exceptionally well. We once again delivered an excellent quarter with results ahead of our expectations. We are now several quarters into the U.S. biosimilar event for Humira and continue to effectively manage erosion. We have been able to maintain significant volume with the majority of the impact to date driven by lower price. Importantly, our growth platform, the base business excluding Humira, which includes a well-diversified portfolio with multiple leading products in highly attractive markets across immunology, neuroscience, oncology, and aesthetics continues to demonstrate robust performance and outperform expectations. This platform, which is the critical driver in our return to rapid growth in 2025 and beyond, delivered strong double digit revenue growth this quarter, a considerable acceleration from the first half of this year. We anticipate this platform, which is led by Skyrizi, Rinvoq, Vraylar, and Botox will continue to drive significant revenue growth going forward. At the same time, we have several promising R&D programs with the potential to contribute meaningfully in the latter part of this decade and into the 2030s. This includes next generation approaches in immunology, a focus on bispecifics, ADCs, and novel I-O in oncology, as well as innovative therapies to potentially treat a range of neuropsychiatric and neurodegenerative disorders. In summary, I'm extremely pleased with the continued strong momentum and execution across our business. The growth platform is substantially outperforming our expectations, giving us the confidence to once again raise our financial outlook, including upgraded guidance for floor earnings, which Rob will share momentarily. And further underscoring our confidence in AbbVie's long-term outlook, today, we also announced an increase in our quarterly dividend, which we have grown by more than 285% since our inception. With that, I'll turn the call over to Rob for additional comments on our business performance. Rob? Rob Michael: Thank you, Rick. Our results once again demonstrate the strength of our broad portfolio and support AbbVie's long-term growth outlook. We reported adjusted earnings per share of $2.95, which is $0.14 above our guidance midpoint. Total net revenues were $13.9 billion, roughly $225 million ahead of our guidance. The performance of our ex-Humira growth platform continues to be very strong with revenue growth above 12% this quarter, including more than 50% growth from both Skyrizi and Rinvoq, our best in category immunology medicines. We continue to anticipate that these two products will collectively exceed Humira peak revenues by 2027 with robust growth expected into the next decade. Neuroscience also delivered strong performance with operational sales growth of more than 20% this quarter, driven by our leading portfolio for migraine and psychiatric conditions. And lastly, aesthetics performance was highlighted by the return to growth of the U.S. toxin market. This outstanding execution across our well-diversified portfolio gives us the confidence to once again raise our near-term financial outlook. We are increasing our full year revenue guidance by $600 million and have now raised total revenue by $2 billion since our initial guidance in February, including more than $1.4 billion from our ex-Humira growth platform. As a result, we are also raising our full year adjusted earnings per share guidance by $0.25, and now expect adjusted EPS between $11.19 and $11.23. Given the strong momentum of our growth platform, which is significantly outperforming our expectations this year, we are now raising the floor guidance for 2024 adjusted EPS to $11, which is $0.30 better than our previous expectations. This floor guidance continues to exclude any impact from IPR&D expense. As is our typical practice, we'll provide our formal EPS guidance range for 2024 on the fourth quarter call. Finally, today, we are announcing a 4.7% increase in our quarterly cash dividend from $1.48 to $1.55, beginning with a dividend payable in February 2024. Since inception, we have grown our quarterly dividend by more than 285%. In summary, I'm very pleased with the strong execution across our portfolio. We remain confident in our long-term outlook, including a return to robust revenue growth in 2025 with a high single digit CAGR to the end of the decade. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff? Jeff Stewart : Thank you, Rob. We once again delivered strong results across our therapeutic portfolio this quarter. I'll start with immunology, which delivered total revenues of nearly $6.8 billion exceeding our expectations. Skyrizi and Rinvoq continue to demonstrate impressive growth and are now on pace to deliver approximately $11.6 billion in combined sales this year. This performance is especially encouraging, recognizing that we are still in the early launch phase for both assets and IBD, an area of high unmet need where we are very competitively positioned with two complementary assets, each having generated strong response rates and durable remission across our development programs. Skyrizi total sales were $2.1 billion, reflecting operational growth of more than 50%. This robust performance includes further share gains in psoriasis, where we remain the clear market leader, capturing roughly one-third of the total prescriptions in the U.S. biologic market, and approximately 50% of in-play patients who are either new to therapy or switching. Increasing momentum in psoriatic arthritis, where Skyrizi is now the leading in-play biologic therapy in the U.S. dermatology segment, as well as continued rapid uptake in Crohn's disease where we are capturing roughly one out of every four in-play patients. Importantly, we recently announced positive results from SEQUENCE the ninth and perhaps the most impactful head-to-head study across our development program for Skyrizi and Rinvoq. SEQUENCE is a Phase 3 head-to-head study in Crohn's, which demonstrated Skyrizi's superiority versus Stelara across key efficacy parameters, including impressive, statistically significant differences in both clinical and endoscopic remission. The detailed data from this trial were presented earlier this month, and we plan to share the findings more broadly now via our medical personnel and representatives in the field. We anticipate these strong head-to-head results will clearly support Skyrizi as the best in category therapy for Crohn's, which is important for continued rapid share capture. So based on this very positive data as well as our continued momentum, we will be once again raising the full year sales outlook for Skyrizi. Moving now to Rinvoq, which delivered global sales of $1.1 billion, reflecting operational growth of nearly 60% with increasing prescriptions across each of the approved indications. In particular, I am very excited about Rinvoq's growth potential in gastroenterology, where uptake is exceeding our expectations. In ulcerative colitis, Rinvoq is now capturing more than 25% total in-play patient share in the U.S. second-line plus setting, nearly at parity to the current market-leading therapy. And in Crohn's disease, Rinvoq is ramping very significantly. The inflection we are seeing is even faster when compared to our time aligned launch in UC just last year. Given this impressive momentum in IBD, we will now be raising our full year sales outlook for Rinvoq. Global Humira sales were more than $3.5 billion, down 36.2% due to biosimilar competition. The erosion impact in the U.S. played out largely in line with our expectations this quarter, while performance across our international markets is trending better-than-expected. Turning now to oncology, where total revenues were $1.5 billion. Imbruvica global revenues were $908 million down 20% and consistent with our expectations. Venclexta global sales were $590 million, up 14% on an operational basis with strong demand for CLL and AML across our key countries. The U.S. launch of at EPKINLY in third line plus DLBCL is also tracking well with commercialization also now underway in Europe and Japan, following the recent respective approvals. In neuroscience, total revenues were more than $2 billion, up 22% on an operational basis. Vraylar continues to demonstrate robust growth. Global sales of $751 million were up 35.4% and we have seen a significant uplift in new prescriptions across all indications, following the approval as an adjunctive treatment for major depressive disorder late last year. Our leading oral CGRP portfolio for migraine contributed $365 million in combined sales this quarter, reflecting growth of nearly 65%, as we continue to see strong demand for both Ubrelvy and Qulipta. Atogepant was also recently approved as a new therapy in Europe branded as Aquipta, where it is the only once-daily oral CGRP for prevention of both episodic and chronic migraine, further strengthening our competitive product profile and long-term growth opportunity. Lastly, total Botox Therapeutic global sales were $748 million, up 7.4% on an operational basis, reflecting momentum in chronic migraine as well as other approved indications. So overall, I am extremely pleased with commercial execution across the therapeutic portfolio, especially with our growth platform, which is demonstrating strong revenue growth. And with that, I'll turn the call over to Carrie for additional comments on aesthetics. Carrie? Carrie Strom: Thank you, Jeff. Third quarter global aesthetics sales were approximately $1.2 billion, an operational decline of 4%. In the U.S., aesthetic sales of $759 million were roughly flat to last year as growth for Botox Cosmetic was offset by declines in other brands that continue to be impacted by lower consumer spending related to inflationary pressures. U.S. Botox Cosmetic sales were $388 million, an increase of 5%. We are beginning to see a recovery in the U.S. toxin market, which posted positive year-over-year growth in the third quarter following three consecutive quarters of declines due to economic pressures. Botox continues to perform very well despite increasing competition. It remains the clear market leader with a strong and stable share, and we have seen little to no share impact from new competitive entrants. U.S. Juvederm sales were $116 million in the third quarter, a decline of 6.4% versus prior year as recovery in the facial filler market continues to lag the cosmetic toxin market. The filler market is improving, however, as a higher priced, more deferrable procedure relative to toxins. The segment of the aesthetics market continues to be suppressed by lower consumer spending. In the third quarter, the U.S. facial filler market was down low teens percentage compared to the prior year. Juvederm remains the market-leading facial seller in the U.S. and share was stable in the quarter. While the U.S. facial injectable markets continue to be impacted by lower consumer spending in this inflationary environment, we are seeing signs of stabilization and even a return to growth in the cosmetic toxin segment. This gives us confidence in a stable to improving outlook in the U.S. as we end this year and enter 2024. Internationally, third quarter aesthetic sales were $480 million, representing an operational decline of 9.7%. As anticipated, year-over-year performance in the quarter was impacted by a shipment timing benefit we experienced in the third quarter of last year. Results were also impacted by softening economic conditions across major international aesthetic markets, primarily China. Despite the economic pressures that are currently impacting our aesthetics portfolio, we remain very confident in its long-term growth outlook. In September, we began launching Skin Vive in the U.S. And in the next few years, we plan to launch new indications for Botox in the lower face segment, and our novel fast-onset, short-duration toxin BoNT/E. In addition to our R&D programs, we have a robust Alle technology pipeline, which will bring new tech products into the U.S. market to help our customers acquire, retain and cross-sell more aesthetic patients. Our strong leadership positions in both cosmetic toxins and facial fillers combined with the significant investments we're making to drive market acceleration will position us for strong growth going forward. With that, I'll turn the call over to Tom. Tom Hudson : Thank you, Carrie. In immunology, we had two important milestones in the third quarter for Skyrizi in inflammatory bowel disease. Following completion of the Phase 3 maintenance trial in ulcerative colitis. We submitted our regulatory applications for Scares in this indication in the U.S. and Europe with approvals anticipated in 2024. We also recently presented results from the SEQUENCE head-to-head trial comparing Skyrizi to Stelara in patients with moderate to severe Crohn's disease. We're extremely pleased with how Skyrizi performed in this study, which enrolled very difficult-to-treat patients who all failed anti-TNF therapy. Skyrizi met the primary and all secondary endpoints in the trial, demonstrating clear superiority to Stelara on all endpoints at week 48 and with a more than doubling of effect in endoscopic remission at 32% of Skyrizi versus 16% for Stelara and endoscopic response at 45% versus 22% for Stelara. Furthermore, steroid-free clinical remission was 61% for Scares versus 40% for Stelara. So these compelling head-to-head Crohn's data combined with the additional indication approval for ulcerative colitis expected next year will further position Skyrizi as a highly effective, durable, safe and well-tolerated treatment option for patients with moderate to severe inflammatory bowel disease. We continue to make very good progress with the second wave of Rinvoq development programs as well in addition to the ongoing Phase 3 programs in GCA, lupus and HS, we recently began the Phase 3 program for Rinvoq in Alopecia Areata. We also recently announced positive top line results from a Phase 2 study for Rinvoq in vitiligo. In this study, Rinvoq met the primary and all secondary endpoints at week 24 and demonstrating a significant improvement in both facial and total body vitiligo scoring measures compared to placebo. Importantly, these results continued to improve through week 52 of the study illustrating Rinvoq's potential to provide significant skin repigmentation to patients suffering from vitiligo. Based on these results, we're advancing Rinvoq to Phase 3 in this indication with studies expected to begin soon. Moving to oncology, where in the quarter, we received approval in Europe and Japan for epcoritamab as a monotherapy treatment for patients with relapsed or refractory DLBCL, were received two or more systemic therapies. These approvals represent important regulatory milestones for EPCO, and we look forward to bringing this new subcutaneous treatment option to patients in these international markets. We also continue to make good progress with the development programs in earlier lines of DLBCL and follicular lymphoma and we look forward to providing updates on these programs as the data mature. In our Venclexta multiple myeloma program, we recently announced top line results of a Phase 3 CANOVA trial evaluating Venclexta plus dexamethasone compared to PomDex in relapsed/refractory patients with a T114 mutation. In this study, the primary endpoint of IR CSS PFS was longer with VenDex versus PomDex but did not meet statistical significance. accommodation also resulted in numerically higher response rates and longer overall survival compared to PomDex. While the differences in efficacy measures were not statistically significant, we believe the totality of the data show a benefit with the Venclexta combination and we plan to discuss the results with regulatory agencies. We'll provide updates on the program as they become available. Behind Venclexta, we have several exciting multiple myeloma programs emerging from our earlier stage pipeline. We continue to make good progress with our BCMA CD3 bispecific ABBV-383 and where we're nearing completion of the dose optimization work and are on track to begin Phase 3 studies in the first half of next year. At an upcoming medical meeting, we plan to present updated Phase 1 efficacy and safety results as well as monthly administration dose data. We're also making good progress with our next-generation BCL2 inhibitor, ABBV-53, which is currently in Phase 1 studies and we'll provide updates as the data become available. Now moving to Neuroscience, where in the quarter, we received approval for Aquipta in Europe, which is now the only oral CGRP antagonist approved in Europe for prevention of both episodic and chronic migraine. And lastly, in our aesthetics pipeline, we recently announced top line results from a second Phase 3 study evaluating Botox in platysma prominence, similar to results from the first Phase 3 study, all primary and secondary endpoints were met with Botox demonstrating a significant reduction in platysma prominence and vertical neckband. We anticipate a regulatory submission in the U.S. here the end of the year. In addition to indication expansion for Botox, we continue to advance our novel toxin pipeline. We recently announced positive top line results from two Phase 3 trials evaluating BoNT/E, our rapid onset, short-acting novel toxin in glabellar lines. BoNT/E performed very well in both studies meeting the primary and all secondary endpoints compared to placebo. BoNT/E was well tolerated and no safety concerns were identified. We're very pleased with these results, which demonstrate this toxin's rapid onset of action and short duration of effect. Patients treated with BoNT/E showed an improvement in glabellar lines as early as 8 hours following injection and a duration of effect of 2 to 3 weeks. This highly differentiated clinical profile could offer patients a novel option compared to currently available neurotoxins. We plan to complete the remaining development work over the course of the next few quarters and anticipate submitting our regulatory applications in the second half of next year. So in summary, we continue to make good progress across all stages and therapeutic areas of our pipeline, and we look forward to several more important milestones in the remainder of this year, including Phase 2 data for Teliso-V and second line plus advanced non-squamous non-small cell lung cancer, which has the potential to support an accelerated approval. Phase 2 proof-of-concept data for our anti-IL-1 alpha beta bispecific antibody, lutikizumab in hidradenitis suprativa, and regulatory approval in Europe for ABBV-951, our novel subcutaneous levodopa, carbidopa delivery system for advanced Parkinson's disease. We also plan to submit updated 951 data in the U.S. near the end of the year. With that, I'll turn the call over to Scott. Scott Reents : Thank you, Tom. I'm very pleased with the momentum of our business. The strong performance we are demonstrating from our ex Humira growth platform continues to support AbbVie's long-term growth outlook. Starting with our third quarter results. We reported adjusted earnings per share of $2.95, which is $0.14 above our guidance midpoint. These results include a $0.04 unfavorable impact from acquired IP R&D expense. Total net revenues were $13.9 billion, roughly $225 million ahead of our guidance and down 5.8% on an operational basis excluding a 0.2% unfavorable impact from foreign exchange. Importantly, these results reflect double-digit sales growth from our ex-Humira growth platform. The adjusted operating margin ratio was 46.7% of sales. This includes adjusted gross margin of 83.5% of sales, adjusted R&D investment of 12.4% of sales acquired IP R&D expense of 0.5% of sales and adjusted SG&A expense of 23.9% of sales. Net interest expense was $398 million. The adjusted tax rate was 15.7%. Turning to our financial outlook. We are raising the midpoint of our full year adjusted earnings per share guidance by $0.25 and now expect adjusted earnings per share between $11.19 and $11.23. This guidance does not include an estimate for acquired IP R&D expense that may be incurred in the fourth quarter. We now expect total net revenues of approximately $54 billion, an increase of $600 million. At current rates, we expect foreign exchange to have a 0.5% and unfavorable impact on full year sales growth. The updated revenue forecast contemplates a full year sales increase of $300 million roughly split evenly between Skyrizi and Rinvoq, reflecting strong uptake in IBD. The remaining $300 million full year sales increase is primarily attributed to better-than-expected performance of international Humira and Restasis. Moving to the P&L. We continue to forecast an adjusted operating margin ratio of approximately 46.5% of sales. We now expect adjusted net interest expense of roughly $1.7 billion. And we forecast our non-GAAP tax rate to be approximately 15.5%, reflecting IP R&D occurred through the third quarter. Turning to the fourth quarter. We anticipate net revenues of approximately $14 billion. At current rates, we expect foreign exchange to have a modest unfavorable impact on sales growth. We expect adjusted earnings per share between $2.87 and $2.91. This guidance does not include acquired IP R&D expense that may be incurred in the quarter. Finally, AbbVie's strong business performance continues to support our capital allocation priorities. We generated more than $16.5 billion of adjusted free cash flow which is net of approximately $1.1 billion of Skyrizi royalty payments in the first 9 months of the year. And our cash balance at the end of September was approximately $13.3 billion. Underscoring our confidence in AbbVie's long-term outlook, today we announced a 4.7% increase in our quarterly cash dividend, beginning with the dividend payment in February of 2024, and we remain on track to achieve by the end of this year, $34 billion of cumulative debt paydown since the Allergan transaction, maintaining a net leverage ratio around 1.8x. In closing, AbbVie has once again delivered outstanding results and our financial outlook remains very strong. With that, I'll turn the call over to Liz. Liz Shea : Thanks, Scott. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, we'll take the first question, please. Operator: First question comes from Chris Shibutani with Goldman Sachs. Chris Shibutani : The 2024 earnings guidance, it seems as if you were quite confident heading in that $11 floor. As we await further details from top line and other margin structures, can you maybe identify some of the key push pulls that actually gave you that conviction to go to above and where directionally we should be thinking about the source of further growth on the forward? Rob Michael : Chris, it's Rob. I'll take that question. So since we provided that guidance in February, recall we gave a $10.70 EPS floor to really help investors model earnings regardless of whether the trough recurred in '23 or '24 we've raised growth platform sales by $1.4 billion covering immunology, neuroscience and aesthetics. We're seeing the IBD indications for Skyrizi and Rinvoq very nicely, and we continue to capture more share in their other indications, both Vraylar and our migraine portfolio have outperformed our share forecast and the strong recovery of Botox has led us to raise guidance for aesthetics twice this year. So given the clear over-performance of the growth platform, we decided to raise the floor to $11 ex IPR&D. We hope this provides investors the view of the low end of the 2024 guidance range and also confirms that '24 will indeed be the trough year. And given that we expect to deliver a high single-digit CAGR from '24 to the end of the decade, it should allow investors to value the company with a better growth multiple. Operator: Our next question comes from Mohit Banse with Wells Fargo. Mohit Bansal : And I have a question regarding aesthetic. So it seems like you are keeping the guidance here. So the first part of the question is it seems like across the board, there is a 10% quarter-over-quarter decline on all the products. Can you help us understand what's happening sequentially? And then if you are keeping the guidance, it seems like there would be quite a bump in fourth quarter. So how should we think about that? Rob Michael : Maybe I'll start -- this is Rob. I'll start with your question. So one thing to keep in mind is that we mentioned in the last call that we had some dynamics in the international market when you look at the growth rates where we had more difficult comparison because of some of the -- some stocking that occurred in the prior year, that's something to keep in mind. We also do have a certain amount of seasonality that occurs in our business in the U.S. in particular. So those are things to keep in mind. I'd say as we look at it, we're very encouraged by the return to growth of the U.S. toxin market. Botox is performing very well, and we're certainly doing a very nice job maintaining our share position despite competitive pressure. So I'd say we're very pleased there. I'd say on fillers, what we're seeing is probably more of a lag in the recovery. And if we've studied this market historically, we do tend to see a lag and that's really relative to thinking about the price point for fillers versus toxins. It's natural to assume that the recovery will take a little bit longer. So we are seeing that recovery take a little bit longer. We're still very, very encouraged by the trends we're seeing. We're very excited about the new fillers we've launched, both SkinVive and Volux. We're starting to see some nice share momentum come from those new introductions. And so from that standpoint, we feel very good. And then as we've been monitoring the situation in China, as all of you I'm sure have been watching very carefully. We saw, as you recall, a very strong recovery in the first half of the year. We've seen it moderate, and we're keeping a close eye on that. And so that's something we're obviously paying a lot of attention to. Now we look at the rest of the international business, it's growing nicely. And so as I think about the guidance for this year, I'd say we're fairly close. We're not overly concerned. We don't adjust guidance for plus or minus $100 million. If it was greater than that, we would consider it. So that's something to keep in mind. But as we look at this, the long-term outlook for this business, we're very confident. When you think about the U.S. toxin market, it's historically grown in the mid-teens and it's still heavily underpenetrated in the low single digits. And market growth is really the key to deliver on our long-term outlook. We've seen this market rebound very strongly following a period of economic pressure, and we've demonstrated time and again that we can increase new patient starts for our promotional efforts. And something I think probably isn't appreciated is that we do have several innovations that can accelerate that growth. And when you think about the master and platysma indications for Botox, those can each add a few hundred million dollars. Our novel short-acting toxin BoNT/E has the potential to activate new patients that could really drive an inflection in market growth. As you think about one of the biggest barriers for new patients is fear of an unnatural look, and the short-acting toxin opportunity is a great way to unlock that. And then if you look at our regenerative fillers pipeline, those are aimed at providing both short- and long-term treatment benefits for consumers. And as I mentioned, we're also very excited about the new fillers we've launched both SkinVive and Volux. So with this business, you see us go through some cycles with economic pressure. But over the long term, we feel very confident that we can certainly deliver very robust growth and deliver on that real than $9 billion expectation for 2029. Rick Gonzalez : Lee, this is Rick. The other thing that you're looking at sequentially, you have to keep in mind is we do Botox today in the fourth quarter. So that elevates revenue in the fourth quarter, and that occurs every year. So if you're looking at third quarter to fourth quarter and trying to understand why is there a big step up, part of that step-up is that. Liz Shea : Operator next question please. Operator: Our next question comes from Chris Schott with JPMorgan. Christopher Schott : Just maybe a two-parter really focused on immunology for 2024. So maybe first on Skyrizi and Rinvoq, I guess, with more of the '24 formula discussions complete, we're seeing some great volume trends. But are you still comfortable that we should expect more normalized price erosion for those two products versus the high single digits we're seeing this year? And then the second one was on Humira for 2024. And I think, Rob, you might have commented last quarter of your comfort with where consensus sits. And again, maybe a similar question with maybe more color about formulary for next year. Is that something you're still comfortable? And just how should we think about dynamics there? Jeff Stewart : Yes. It's Jeff. I'll take the first question. Yes, we're very comfortable as we see things start to evolve and close here as we move into 2024. I mean if you think about all the indications that we've had 7 over the last 18 months, I highlighted in my remarks, 9 head-to-head trials. We're just a very, very nice position for Skyrizi and Rinvoq as we move into '24 to continue some very strong momentum that we're seeing in the actual. So quite confident in terms of how we're looking at that. And to your key point there on the price, we continue to see that we're not going to have a repeat of what we saw this year. And remember, the background there were those 7 indications that came very fast all on top of each other. And so that was the root cause of that -- of those concessions that won't repeat. Next year, we have really one more big indication, not 7, and that's Skyrizi you see that Tom highlighted. So we'll see the normalized price erosion more in line with industry forms versus what we saw this year. Rob Michael : And then, Chris, this is Rob. On HUMIRA, I think if you think about the annualization rebates that given the rest increase in the second half of this year, so you have an annualization impact, and the additional rebates to secure parity access next year, really price should be the main driver of the erosion in '24. I mean volume will have an impact, particularly in wax sensitive accounts, but price will make up the vast majority of the erosion next year. And while we're not giving '24 guidance today, as you've mentioned, Chris, I've highlighted the average, it was about $7 billion when I mentioned that was a reasonable expectation for U.S. Humira next year. Now there are a few animals who have forecasted U.S. Humira above $8 billion next year, which is just not a reasonable expectation given the price dynamic. Operator: Next question comes from Terence Flynn with Morgan Stanley. Terence Flynn : Obviously, you guys are very well positioned coming out of the Humira LOE in terms of the growth franchise. But I think there's focus from investors on maybe bolstering the pipeline. So as you guys think about M&A and business development, maybe you could just walk us through your latest thoughts and anything in terms of therapeutic areas of interest and stated development. Rick Gonzalez : Okay. Terence, this is Rick. I'll cover it. That question for you. Yes, I think as we look at the business, as Rob indicated, we're extremely comfortable with how the growth platform is performing. And I'd say how we're managing the biosimilar erosion, which gives us a lot of confidence that we can deliver this high single-digit going forward. From '25 -- going forward through the end of the decade. So I'd say the bulk of what we're looking at, and we're in a fortunate position from that standpoint. There are many companies in our sector we need to go out and do lots of BD to be able to drive the growth that they're trying to achieve. We're not in that position. But I'd say the bulk of what we're looking at is we're looking to add assets that could give us incremental pipeline and revenue growth towards the end of this decade and into the 30s. That's what our -- the bulk of our focus is on. . And I'd say if I look at AbbVie's track record, certainly, BD has been a critical part of how we've grown this company over the last 11 years. And I'd say, for the most part, we have done a pretty good job when we acquire assets and bring them in we can make them perform quite well. Skyrizi is a good example of that. Certainly, Allergan was another good example of that, and there are many others. So I'd say we value BD as a very important tool and how we should grow the business and how we should position our leadership positions in these franchises. Our primary focus is within the franchises that we're operating in. So let's take immunology as an example. I would say our greatest focus in immunology is to continue to add additional mechanisms in particular, that could be used in combination in order to create deeper levels of clinical response in areas like IBD, rheumatology and other areas. So we continue to look for those. We have several already that are in development now, like Luti, like RIPK1 and several others in our pipeline, but we'll continue to look for additional assets that we could add to that. And like I said, especially focused on combination therapy because we think that is the way to get much deeper clinical remission or responses in those patients who aren't responding to things like Skyrizi, Rinvoq, which obviously performed exceptionally well. So that's a big area. Oncology is another big area. We have a high level of interest in next-generation CAR-T technology. We have a high level of interest in T cell engagers beyond our BCMA product. I think as we look at that asset continue to develop, we are very convinced it has a best-in-class profile. And it shows us that for the right indication, T cell engagers can be extremely effective, and they're much easier to use and can be much more broadly brought to patients and CAR-Ts, at least the current version of CAR-Ts. So I'd say that's an area that we have a high level -- in psychiatry, we're interested in additional assets in anxiety and mood, and a variety of other assets, but that gives you some feel for it. And we obviously have the financial wherewithal to go out and do transactions. We need to make sure we find the right transaction. So it's a value-enhancing asset for the company. And when we find them, we will act on and we will act on quickly. Operator: Next question comes from Tim Anderson with Wolfe Research. Alice Nettleton : This is Alice Nettleton on for Tim Anderson. A question on obesity and its interface with I&I and a lot of other drug categories, frankly, are views that payers have to cover OBD medicines. And if that's correct, it's a big expense, and payers will be looking for offsets. One-off that would be for payers to squeeze other therapeutic areas as hard as they can. An example could be I&I, where there's now a really good product, your own HUMIRA at a much lower price. So we're wondering how much payers might start to force a step edit for products like Skyrizi? It's a relevant question because yesterday, one of the issues Bristol noted with its TYK2 product is step edits and they cite biosimilar Humira as the reason. Jeff Stewart : Thank you for the question. It's Jeff. And I think you've got to take a step back regardless of the obesity issues and think about the overall strategy that we pursued, which was 1 of fundamental distinction. And I'll take your point over some of these head-to-head trials, and there's 9 of them, right? So if you take Skyrizi, just in psoriasis, we have gross superiority versus every mechanism in the category. So a head-to-head of gross superiority versus Humira versus the leading IL-17 COSENTYX versus the oral Otezla, and we also have versus Stelara. So fundamentally, when payers think about stepping or not stepping or how they would think about that, there's a medical dynamic there and that distinctiveness that we have across our program is very, very important to help manage maybe the urge of the payers to think of formulary structures like that. If you think about your comments that you have -- that you heard yesterday or the day before, that's a very different dynamic. I mean, if you're not that different or you have the same efficacy as a Humira, it's not going to go that well on some of these formularies. And so I think you got to take a step back and look at the fundamental distinctiveness that we have on both Skyrizi and Rinvoq. And I think my last comment would be, let's take Reno, which is growing very fast, 60%, okay? All of that is in the second-line plus setting. So from a strategic standpoint, it's already stepped. And so when you take a look at those dynamics, we remain quite confident that as we rely on the power of raising the standard of care, that will help us navigate any of these scenarios, whether it's related to obesity or not. Operator: Next question comes from Vamil Divan with Guggenheim Securities. Vamil Divan : I mean, transit right now. But the two questions I have actually, one is maybe building on Terence's question around business development base in the pipeline. I think we get a lot of other questions just around sort of the underappreciated assets within your pipeline. I don't know if you can maybe just comment on that. I know there's a couple of assets that you plan out things people are overlooking where they might be some underappreciated upside? And then the second one is just on the charge you took today or this quarter on Imbruvica regarding the Medicare drug pricing program. And obviously, I understand why you did. I'm curious on the amount and the timing of why you're doing now, I suppose I may be willing to see how the losses play out or negotiation process plays out. And then in terms of the amount or how you -- what your assumptions were that you can share on the competitive dynamics for sort of what you're assuming around the impact this program would have on the pricing of Imbruvica…? Rick Gonzalez : Divan, this is Rick. I'll take the first question, and then Scott will take the second question. So on the pipeline, I think as I look at the pipeline and how we built the pipeline and how it's playing out, I think -- I don't know that I would call it underappreciated because you don't necessarily have access to all the data that we have on some of these programs. But we obviously invested significantly over the last several years in rapidly developing the indications for Rinvoq and Skyrizi and a lot of our focus had been built around that. But in parallel, we were advancing a number of other programs along the way. And I would say the investment that we made on Skyrizi and Rinvoq are pretty clear the kind of return that we are getting for those assets. I mean, they're growing at a phenomenal rate. In fact, in the not-too-distant future, the combination of those two products on a running rate basis will be larger than Humira, to give you some idea of how rapidly those products are growing and how large they are. But if I look at our pipeline, the real meaningful programs that we have in our pipeline that will be true needle movers for the company, there are several of them that are advancing now I think we have a high level of confidence in 400, our topo warhead platform with our c-Met version of that, we're seeing very encouraging data in CRC. We'll follow that with non-small cell lung cancer. And that platform is demonstrating to us that it is a broad-based platform that we can expand to a number of other areas. And that should be a fairly significant opportunity for us going forward. Later sort of the '27, '28 timeframe, I think it's going well have meaningful benefit play through. And then I'd say the second one is 383, our BCMA bispecific. As we indicated earlier, we're seeing more and more data out of that program that clearly tells us this has a best-in-class profile, high levels of efficacy and very good safety and very convenient dosing. We think it has that ideal profile to be able to enter this market. And as you know, multiple myeloma is a very large market. There are very significant products in this market. So those are two opportunities. I would obviously say, $16 million. And some of our TA programs are also exciting programs that are running in parallel to these. We'll be getting more data on those next year. And I think those have significant opportunities as well. The third program I talked about is in our eye care business. It's our REGENXBIO program for both wet AMD and diabetic retinopathy. We're seeing some very, very encouraging data out of that program, and that could be a nice opportunity for us as well, and it continues to advance. So there are a number of important programs that you'll start to see more and more data as we go through '24 and into '25 that I think will give the market an opportunity to be able to better assess those. Scott Reents: Vam, this is Scott. With respect to your question on the Imbruvica charge. So I think a couple of things. As we have signaled in some of our regulatory filings, our last 10-Q, for instance, we had indicated that if we were to be selected in the negotiation process under the Inflation Reduction Act, that there would likely trigger an impairment. And so we had anticipated that this would be happy. And so the timing really relates to the fact that under the rules, you have to look at the fair value of that intangible asset with respect to future cash flows. And so the accounting rules would require that we would make that analysis upon selection as we had kind of previewed in our filings. And so we went through the process under that triggering event to determine what the impairment should be. And I would say that when you look at that impairment, the magnitude of the impairment is driven by a number of factors, but really, one of the biggest factors that you're seeing there is it requires you to discount the future cash flow. So as we calculate the future cash flows, looked at what we had assumed was a reasonable assumption on the price, you discount those back. And so that creates part of the magnitude of this adjustment. In terms of the negotiated price that we assumed, I think we're in the middle of these negotiations, and it really wouldn't be appropriate for us to talk about what that is. But we looked at a number of factors, and we think that process is going to play out. Certainly, we will see on February 1 in a private conversation with CMS what they anticipate at least an initial thought on price, but it won't be finalized until September 1 of next year. And so we will see what that price is as the process plays out. Operator: Next question comes from Steve Scala with TD Cowen. Steve Scala : I have two questions and one clarification. First, a clarification. Is the base year for the high single-digit revenue growth to the end of the decade? Is the base year 2023 -- or excuse me, 2024 or 2025. I think it's '25, but maybe you can clarify that. Second, given AbbVie's stated interest in building the oncology business, I assume that AbbVie took a hard look at the ADC deal that Merck signed with Daiichi. I'm just curious what about it didn't you like -- was it the profile of the products? Was it the price? Or do you feel you have everything you need already? And then the last question is at least 1 other company has changed its tax rate guidance stemming from a recent IRS document clarifying Section 174 tax legislation. Do you have any perspective on this update and why it doesn't impact AbbVie? Rob Michael : Steve, this is Rob. I'll take your first question. So the base year is '24. And if you think about it, we signaled that we expect to return a robust growth in '25. And so that high single-digit CAGR really would pick up that first year of robust growth of 25%. If you start in '25, you miss that your growth. So our intention has always been '24 is a base year and that high single-digit CAGR starts from '24 to the end of the decade. Rick Gonzalez : Steve, this is Rick. I'll take the second question. Obviously, I'm not going to comment on whether we looked at that same transaction and that probably wouldn't be appropriate. But what I can tell you is we knew it was there. So maybe that gives you some idea of our perspective on it. But the reality is, we believe we have what we need with 400. We believe that platform, and we own that platform, we developed it internally. We give us everything that we need in that area. And so it wasn't something that we were looking at. Scott? Scott Reents : Yes. It's Scott. So with respect to the tax legislation, I certainly when can talk about what our facts are. But when we've looked at -- certainly, this results out of tax reform legislation a few years ago. The tax rules, there's always a little bit of uncertainty. And what happened this quarter, there was guidance that came out that, I would say, clarified a certain approach in treatment. Prior to that guidance, though, there was a little bit of a diversity of opinion amongst advisors as to -- and ourselves as to how we might implement. So I would tell you that we were already implementing consistent with how that guidance ultimately came out, and that's why you're not seeing any impact to us on our tax rate. Operator: The next question comes from Gary Nachman with Raymond James. Gary Nachman : So first, back to the trough raise in 2024. How are you thinking about spending levels for both SG&A and R&D into the trough year next year to set up for growth in '21 and beyond? Do you have a better sense of where the operating margin might end up next year? And then secondly, Scares and Rinvoq have been doing very well in the IBD indications talk about how much headroom you see for those products in UC and Crohn's with that landscape likely getting more competitive in the coming years? And any updated thoughts on 2025 guidance for those products? Scott Reents: Gary, it's Scott. I'll start with your question regarding operating margin. So when we've looked at the operating margins we talked about in the past, for '23 and '24, we talked about those being very, very similar. So when you think about the operating margin that we've talked about for this year and next year, it's really about 46% to 47% range. This year, our guidance is 46.5% and we would expect operating margin in '24 to be very similar to what we're seeing this year. And then I think as a result, roughly the gross margin is going to be in line in '24 with what we're seeing this year as well as the expense profile. So very consistent with this year. And of course, we'll refine that when we come out with guidance. Jeff Stewart : Yes. This is Jeff. I'll highlight the -- your comment on the head space and IBD. I mean the IBD market is very, very attractive. If we think back historically, we were always, frankly, a little surprised at how fast Humira back in the day grew when we started to achieve the UC and the Chrome's indications. And again, I would say we're very, very pleasantly encouraged about the momentum. The momentum is very, very significant. So there is significant headroom. And what we see in the market dynamic is that unlike what you might think that patients would always want to rotate off of their medications because of the severity of the disease, actually physicians haven't been able to really move the market very much over the years, simply because it's very dangerous to try to go to another drug that hasn't provided any increase in benefit for those patients. It puts those patients at risk. So when you look at what Tom had highlighted, our ability with two complementary assets -- for example, in the U.S., Skyrizi position in the early lines, Rinvoq position in later lines, both of which have exceptional performance criteria versus the market. That gives us a lot of confidence. The other thing that gives us a lot of confidence because there will be more competitive entries in the future is we think our profiles are going to hold up exceptionally well. And then there's the commercial executional component in most of the countries around the world, we have dual sales forces that basically will carry two products with four big indications. So our ability to compete in the market for share even as it gets a little more competitive over time, is still going to be very, very strong. So lots of headroom in the market, lots of unmet need in the market, and we believe we have the best position in the market for the foreseeable future. Rob Michael : And Gary, this is Rob. On your question regarding 2025 guidance, we do periodically update the long-term guidance for our portfolio. We're obviously very pleased with the momentum we're seeing both from Skyrizi and RNA, particularly in -- if you recall when we provided -- last time we provided guidance for Skyrizi, we had about $2.5 billion of revenue in IBD in 2025 and it was $1.8 billion for Rinvoq. And those are obviously ramping very nicely. We have a lot of confidence. We periodically update that guidance, we'll find the right time to provide a holistic update to our long-term guy. But clearly, the momentum is there. And the Street reflects that, too. I mean if I look at consensus, not for Skyrizi, I think it's around $11 billion. So it's $1 billion higher than our 2025 guide. So I think the market is recognizing the strong momentum, and we'll update that long-term guide holistically at the appropriate time. Operator: Next question comes from Luisa Hector with Berenberg. Luisa Hector : To continue with IBD, I just wondered if you could talk a little bit more about the AbbVie pipeline emerging behind Skyrizi and Rinvoq and how we think about that and maybe potential combinations with Skyrizi? And with the recent competitor launch in psoriasis with a label where the FDA has asked to mention anti-TNF safety warnings. I wondered whether the FDA has mentioned anything to you about the review of labor in that regard. . Roopal Thakkar: It's Roople. I'll take the IBD question. So you've heard already some mention of Lutikizumab. That's our IL-1 alpha beta bispecific antibody. That's an in-house antibody. And we have observed data where there's resistance to anti-TNF and other biologics with patients with 1 beta signal. So we'll be entering into ulcerative colitis looking at a potential biomarker approach. But in addition to that, we will also be looking at a set of combinations as was already mentioned, for example, with Skyrizi, we have Lutikizumab. We have other agents as well. RIPK1 was also mentioned. There's also some partnerships that we have is another mechanism we're interested in. And another one I'll mention is an IL-2 mutein. All of these are under assessment. And we do believe either you find a biomarker approach where you can see the high efficacy or if you want to see real transformational efficacy, you're going to have to go a combination approach. So those are the assets we'll be looking at. Now moving on to the question, I think it was around depression and suicidal ideation if I heard it correctly. This was in an IL-17 class agent that was recently approved. We've also observed a similar warning and precaution previously also in the IL-17 class. In fact, that previous asset, in fact, had a REMS in place. Remember, Skyrizi is an anti-IL-23 very different class. And to date, with all the data that's been generated across numerous indications, we don't see that type of signal at all nor do we have any of that in our label. And as we look at psoriasis therapy, that particular agent that's been mentioned has been available in Europe and our physicians really don't tell us that there's much of an uptake there. So Skyrizi continues to perform well. Also, our label does not have the high rate of fungal infections that have been observed with the new 1 in the '17 class -- and also, we've talked a lot about IBD. We -- the Skyrizi doesn't also lead to IBD, which is another risk for the IL-17 class. And also with our dosing regimen -- you get it at 0 and week 4, and then it's quarterly after that. With the new one, I think there's 5 doses that are required and potentially every 8 weeks or in heavier patients every 4 weeks. So we're very confident in Skyrizi's position across indications, especially in psoriasis. Operator: Our next question comes from David Risinger with Leerink Partners. David Risinger : Upon your vision for oncology, clearly, the company has compelling assets. But in light of an increasingly complex and competitive oncology landscape, could you just paint a picture of how you see your portfolio evolving and opportunities to acquire assets when it may be difficult to see what's around the corner from, let's say, an emerging oncology competitor in 3 to 4 years? Tom Hudson : This is Tom Hudson. We've been -- we certainly -- when we talk about 400, we're also talking about going in different space than lung and breast, where there's a lot of competition, like colon cancer, gastric cancer, pancreas. So c-Met is a target that's expressed in many other tumors, and that's why we've developed this with topo warhead, so we can go to a broader set of tumors. And that's where we're seeing a very good data with ABBV-400 even unselected patient population, third line plus, we saw a 22% response versus 2% to 3%. What's also interesting about this is -- it's not just for colon cancer, but most chemos, most treatments and GI tumors have a lot of toxicity, a lot of diarrhea. And one of the things that excite the clinicians about this program is actually a very low rate of diarrhea. So what makes that not only can we see some efficacy in third line, but it sees we can move to earlier lines and combined with other therapies have higher efficacy. So there's a lot of unmet need in GI tumors. And so this data, again, we're going to have more data in our next cohort at the end of this year. In CRC will have different doses, and we'll also have potential cutoffs of biomarkers. So moving very well, but we're actually in a big space, in GI tumors, as I've mentioned, even our GARP program, also where we've shown the best data is in liver cancer, where c-Met is also expressed. We have opportunities to go explore places where there's a big unmet need and the competition is not the same. Now the other targets because we talked about topo platform. We have others, 706, which is already in the clinic with 6. Next year, we'll be going to 2 other indications, which for which there's less competition in terms of ADC space. So our strategy is actually to go and bring this in offering to a lot more cancer patients. I'll stop there, and I'll stop there. Roopal Thakkar : It's Roopal. Let me add on a little bit. I think you may be also reflecting on some of the ESMO data that came out I will mention long a little bit, we still see an opportunity with Teliso-V. We're going to get data later this year. But what we've already observed is 50% ORRs in a biomarker-selected population in the EGFR wild type. If you look at some of the data that has come out, the ORRs are probably right around 20% to 30%. We don't have all the breakdown of all the different lung subtypes. But 1 approach is to use a biomarker and then select the patient population rather than going so broadly that was observed at ESMO. The other thing I would say reflecting on the data that came out, if you looked at EGFR mutants in lung, you see some higher levels of efficacy, either in the frontline or second line in that space. But that comes at a cost, and that's a chemo-like adverse event profile. And those are things like nausea, vomiting, stomatitis, alopecia, fatigue. These are things that you may see slight increases in efficacy, but clearly, patients don't want that. And like -- as Tom was mentioning with our platform and including Teliso-V, we have an opportunity there in the mutant side to combine with osimertinib, which has a nice profile. And those mutant patients when they progress, half of them have highly expressed c-Met. So that's where a combo looks good. And then we're also seeing 50% ORR in that segment as well. And we have a plan to get into Phase 3 into that next year. And then as we think about heme, we spoke about 383, which we feel has best-in-class potential. And one of the things that we're observing with that one is the high level of efficacy. [PRFs], we're driving down past grade 3 and now driving down to get past grade 2. So that enables the potential where you may not need hospitalization. And what you see now with the BCMA dual engagers is not just hospitalization but a REMS. And what we would add to that is dose spacing potentially every other month. So that one is a very nice profile, and we're moving into Phase 3 with that one, and we continue to conduct a variety of combinations there so we can move into earlier lines of therapy in multiple myeloma. We are still moving into earlier lines in Phase 3s with EPKINLY in heme, which is another dual engager. We have an asset called 453, which is our next-gen BCL2 blocker. And then we have a BTK degrader called 101 that's also in clinic. So quite a comprehensive approach across oncology. Operator: Our next question comes from Geoff Meacham with Bank of America. Geoff Meacham : Just have a couple of quick ones, one on immunology. So you guys have evaluated the impact from Humira biosimilars beyond even 25%, is it your view that tail revenues are likely to be better than you initially modeled. And what, if anything, do Stelara, the delay in Stelara biosimilars impact this. And the second question, just on capital deployment. Just given your higher guidance, I know you guys just raised the dividend, but would you also say that the deal capacity is higher. I know you recently raised kind of M&A range and wondering if that's even going higher. Jeff Stewart : Yes. Geoff, it's Jeff here. And we continue to study the tail. I mean it's something that we're -- we look very closely at -- we continue to think that the Humira tail will emerge sometime in '25 or '26. And that's looking at some of the international analogs, how we think we see pricing may move I mean the one thing that we do believe is that you're not going to have a small molecule like tail, which is virtually nothing. There's going to be a sub-segment of patients that are going to stay on Humira. It's going to be modest, whether it's low price or low volume, but it will be there even in an interchangeable world. We don't necessarily believe that since we've outperformed here in volume in '23 that that's going to fundamentally change our view on the tail at this point. And again, we're still highlighting that. In terms of Stelara, obviously, we think in the U.S. that will not come until -- and I think it was recently confirmed this week until sometime in '25. And so overall, we think that's a modest net positive for AbbVie in terms of how that may play out. But that's not the primary driver of our strategy. Our primary driver of the strategy is how distinctive we are across our indications with Skyrizi versus Stelara, which I've already highlighted. So I hope that helps. Rob Michael : And Jeff, this is Rob. You're right. We did lift the cap. We had put that $2 billion BD cap in place, although we are rapidly paying down debt. And we lifted that at the beginning of this year because we essentially -- by the end of this year, we're going to have paid off all the incremental financing from the Allergan transaction. As Scott mentioned, our net leverage ratio is around 1.8x. And I have said previously that as long as we're going to pass back to 2x that leverage in 2 to 3 years, that's the way we're thinking about balance sheet capacity. So as we look at it, there's nothing from a balance capacity standpoint that would limit us today for pursuing the opportunities we'd be interested in. So that's not a limiting factor. And to the extent that we continue to raise guidance and perform more strongly. That just means there's even more capacity. But there's -- at this point, that's not a rate limiter for the types of opportunities we'd be interested in. Operator: Our next question comes from Evan Seigerman with BMO Capital Markets. Evan Seigerman : Congrats on a progress. I just wanted to touch on the dividend growth. So at first line, it seems that your dividend growth, while impressive, is slowing a bit relative to other recent periods. Maybe you could help us understand kind of what's driving this dynamic at play? Is it concerns around near-term performance of key products you Humira erosion continuing next year? Or are you preserving capital for you to help further? Maybe some color on that would be very helpful. Rob Michael : So Evan, it's Rob. If you think about it, we're delivering dividend growth both in '23 and '24, while earnings are not growing, right? So then you look at the payout ratio we're at, we're going to be in the mid-50s. And we have said that over the long term, if you look at just across the industry as well, I'd say a good target is in, say, the mid- to high 40% payout ratio, which would mean that during this period where you see our payout ratio go up in the future, we're very committed to growing the dividend. We'll continue to grow the dividend, but we would expect then earnings would grow faster than dividend increases. So I would say we've gone through this period for a couple of years where we are still delivering a very nice dividend growth despite earnings declining. But given our commitment to that dividend, we're going to continue growing it. We'll likely see it step up from here, but not at the same rate as earnings growth because that payout ratio right now will be sitting in. So that's the way we think about it. Over the long term, we want to deliver a healthy, sustainable, growing dividend. And so we have a long view on this, and we are committed to delivering that growth to investors. And so that's the way we're thinking about it. We're going through a period of a couple of years here where earnings aren't growing. And then we see us return a robust growth, we'll step up that dividend again, but it's -- that's a dynamic that we're balancing here. Operator: Our last question comes from [Jon Hung] with UBS. Unidentified Analyst: I've got two. Just one confirmation on the trough and then one on aesthetics. So -- on the trough in '24, you mentioned that costs you will have the same margin in '24 is '23. So is it going to be a trough year on sales rather than the trough being driven by costs? And then second, again, just lots of noise on GLP-1s impacting aesthetics. You've commented before on fillers and Ozempic face in the past, but there's potential impact on body scope in -- is this actually anything that you're seeing coming through yet in the sales? And overall, is this trend a net positive or a net negative for you? Rob Michael : This is Rob. So clearly, we've communicated a floor for earnings. And Scott previously mentioned that I expect a similar level of operating margin year-over-year. And so you can model the sales accordingly. It should be fairly clear. Rick Gonzalez : Operating margin profile. Rob Michael : Operating margin profile, yes. So we said the 46% to 47% is the way to think about operating margin profile in '23 and '24. We've given you the $11 EPS ex IPR&D as a floor for next year. So I was just using those parameters to model revenue. . Rick Gonzalez : Carrie? Carrie Strom : And this is Carrie. For your question around the weight loss products and the impact on the aesthetics business, I mean as we look at the long-term view of this market, we continue to think that anything that gets a subset of patients engaged in their appearance, which these weight loss products can do, that is a positive tailwind for our business. And we hear that from our customers and many of our customers are bringing these GLP-1s into their practice, and they see it as a natural opportunity to cross-sell. Now that said, in the short term, especially in an environment where discretionary spending is pressured and there could be trade-offs for higher-priced products such as fillers or body contouring. Now we're not necessarily seeing that as a driver. Right now, what we're seeing is the broader macroeconomic dynamics. But in the short term, that could be a trade-off in terms of share of wallet. But absolutely long term, this is something that is going to help patients get engaged in aesthetics and be an opportunity for cross-selling. Liz Shea : And that concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. . Operator: Thank you, and that concludes today's conference. You may all disconnect at this time.	[ { "speaker": "Operator", "text": "Good morning and thank you for standing by. Welcome to the AbbVie Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer portion of this call. [Operator Instructions] I would now like to introduce Ms. Liz Shea, Senior Vice President, Investor Relations. Thank you. You may begin." }, { "speaker": "Liz Shea", "text": "Good morning and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Rob Michael, President and Chief Operating Officer; Jeff Stewart, Executive Vice President and Chief Commercial Officer; Scott Reents, Executive Vice President and Chief Financial Officer; Carrie Strom, Senior Vice President, AbbVie and President, Global Allergan aesthetics; and Tom Hudson, Senior Vice President, R&D and Chief Scientific Officer. Joining us for the Q&A portion of the call is Roopal Thakkar, Senior Vice President, Development and Regulatory Affairs and Chief Medical Officer. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we will take your questions. So with that, I will turn the call over to Rick." }, { "speaker": "Rick Gonzalez", "text": "Thank you, Liz. Good morning, everyone, and thank you for joining us today. AbbVie continues to perform exceptionally well. We once again delivered an excellent quarter with results ahead of our expectations. We are now several quarters into the U.S. biosimilar event for Humira and continue to effectively manage erosion. We have been able to maintain significant volume with the majority of the impact to date driven by lower price. Importantly, our growth platform, the base business excluding Humira, which includes a well-diversified portfolio with multiple leading products in highly attractive markets across immunology, neuroscience, oncology, and aesthetics continues to demonstrate robust performance and outperform expectations. This platform, which is the critical driver in our return to rapid growth in 2025 and beyond, delivered strong double digit revenue growth this quarter, a considerable acceleration from the first half of this year. We anticipate this platform, which is led by Skyrizi, Rinvoq, Vraylar, and Botox will continue to drive significant revenue growth going forward. At the same time, we have several promising R&D programs with the potential to contribute meaningfully in the latter part of this decade and into the 2030s. This includes next generation approaches in immunology, a focus on bispecifics, ADCs, and novel I-O in oncology, as well as innovative therapies to potentially treat a range of neuropsychiatric and neurodegenerative disorders. In summary, I'm extremely pleased with the continued strong momentum and execution across our business. The growth platform is substantially outperforming our expectations, giving us the confidence to once again raise our financial outlook, including upgraded guidance for floor earnings, which Rob will share momentarily. And further underscoring our confidence in AbbVie's long-term outlook, today, we also announced an increase in our quarterly dividend, which we have grown by more than 285% since our inception. With that, I'll turn the call over to Rob for additional comments on our business performance. Rob?" }, { "speaker": "Rob Michael", "text": "Thank you, Rick. Our results once again demonstrate the strength of our broad portfolio and support AbbVie's long-term growth outlook. We reported adjusted earnings per share of $2.95, which is $0.14 above our guidance midpoint. Total net revenues were $13.9 billion, roughly $225 million ahead of our guidance. The performance of our ex-Humira growth platform continues to be very strong with revenue growth above 12% this quarter, including more than 50% growth from both Skyrizi and Rinvoq, our best in category immunology medicines. We continue to anticipate that these two products will collectively exceed Humira peak revenues by 2027 with robust growth expected into the next decade. Neuroscience also delivered strong performance with operational sales growth of more than 20% this quarter, driven by our leading portfolio for migraine and psychiatric conditions. And lastly, aesthetics performance was highlighted by the return to growth of the U.S. toxin market. This outstanding execution across our well-diversified portfolio gives us the confidence to once again raise our near-term financial outlook. We are increasing our full year revenue guidance by $600 million and have now raised total revenue by $2 billion since our initial guidance in February, including more than $1.4 billion from our ex-Humira growth platform. As a result, we are also raising our full year adjusted earnings per share guidance by $0.25, and now expect adjusted EPS between $11.19 and $11.23. Given the strong momentum of our growth platform, which is significantly outperforming our expectations this year, we are now raising the floor guidance for 2024 adjusted EPS to $11, which is $0.30 better than our previous expectations. This floor guidance continues to exclude any impact from IPR&D expense. As is our typical practice, we'll provide our formal EPS guidance range for 2024 on the fourth quarter call. Finally, today, we are announcing a 4.7% increase in our quarterly cash dividend from $1.48 to $1.55, beginning with a dividend payable in February 2024. Since inception, we have grown our quarterly dividend by more than 285%. In summary, I'm very pleased with the strong execution across our portfolio. We remain confident in our long-term outlook, including a return to robust revenue growth in 2025 with a high single digit CAGR to the end of the decade. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff?" }, { "speaker": "Jeff Stewart", "text": "Thank you, Rob. We once again delivered strong results across our therapeutic portfolio this quarter. I'll start with immunology, which delivered total revenues of nearly $6.8 billion exceeding our expectations. Skyrizi and Rinvoq continue to demonstrate impressive growth and are now on pace to deliver approximately $11.6 billion in combined sales this year. This performance is especially encouraging, recognizing that we are still in the early launch phase for both assets and IBD, an area of high unmet need where we are very competitively positioned with two complementary assets, each having generated strong response rates and durable remission across our development programs. Skyrizi total sales were $2.1 billion, reflecting operational growth of more than 50%. This robust performance includes further share gains in psoriasis, where we remain the clear market leader, capturing roughly one-third of the total prescriptions in the U.S. biologic market, and approximately 50% of in-play patients who are either new to therapy or switching. Increasing momentum in psoriatic arthritis, where Skyrizi is now the leading in-play biologic therapy in the U.S. dermatology segment, as well as continued rapid uptake in Crohn's disease where we are capturing roughly one out of every four in-play patients. Importantly, we recently announced positive results from SEQUENCE the ninth and perhaps the most impactful head-to-head study across our development program for Skyrizi and Rinvoq. SEQUENCE is a Phase 3 head-to-head study in Crohn's, which demonstrated Skyrizi's superiority versus Stelara across key efficacy parameters, including impressive, statistically significant differences in both clinical and endoscopic remission. The detailed data from this trial were presented earlier this month, and we plan to share the findings more broadly now via our medical personnel and representatives in the field. We anticipate these strong head-to-head results will clearly support Skyrizi as the best in category therapy for Crohn's, which is important for continued rapid share capture. So based on this very positive data as well as our continued momentum, we will be once again raising the full year sales outlook for Skyrizi. Moving now to Rinvoq, which delivered global sales of $1.1 billion, reflecting operational growth of nearly 60% with increasing prescriptions across each of the approved indications. In particular, I am very excited about Rinvoq's growth potential in gastroenterology, where uptake is exceeding our expectations. In ulcerative colitis, Rinvoq is now capturing more than 25% total in-play patient share in the U.S. second-line plus setting, nearly at parity to the current market-leading therapy. And in Crohn's disease, Rinvoq is ramping very significantly. The inflection we are seeing is even faster when compared to our time aligned launch in UC just last year. Given this impressive momentum in IBD, we will now be raising our full year sales outlook for Rinvoq. Global Humira sales were more than $3.5 billion, down 36.2% due to biosimilar competition. The erosion impact in the U.S. played out largely in line with our expectations this quarter, while performance across our international markets is trending better-than-expected. Turning now to oncology, where total revenues were $1.5 billion. Imbruvica global revenues were $908 million down 20% and consistent with our expectations. Venclexta global sales were $590 million, up 14% on an operational basis with strong demand for CLL and AML across our key countries. The U.S. launch of at EPKINLY in third line plus DLBCL is also tracking well with commercialization also now underway in Europe and Japan, following the recent respective approvals. In neuroscience, total revenues were more than $2 billion, up 22% on an operational basis. Vraylar continues to demonstrate robust growth. Global sales of $751 million were up 35.4% and we have seen a significant uplift in new prescriptions across all indications, following the approval as an adjunctive treatment for major depressive disorder late last year. Our leading oral CGRP portfolio for migraine contributed $365 million in combined sales this quarter, reflecting growth of nearly 65%, as we continue to see strong demand for both Ubrelvy and Qulipta. Atogepant was also recently approved as a new therapy in Europe branded as Aquipta, where it is the only once-daily oral CGRP for prevention of both episodic and chronic migraine, further strengthening our competitive product profile and long-term growth opportunity. Lastly, total Botox Therapeutic global sales were $748 million, up 7.4% on an operational basis, reflecting momentum in chronic migraine as well as other approved indications. So overall, I am extremely pleased with commercial execution across the therapeutic portfolio, especially with our growth platform, which is demonstrating strong revenue growth. And with that, I'll turn the call over to Carrie for additional comments on aesthetics. Carrie?" }, { "speaker": "Carrie Strom", "text": "Thank you, Jeff. Third quarter global aesthetics sales were approximately $1.2 billion, an operational decline of 4%. In the U.S., aesthetic sales of $759 million were roughly flat to last year as growth for Botox Cosmetic was offset by declines in other brands that continue to be impacted by lower consumer spending related to inflationary pressures. U.S. Botox Cosmetic sales were $388 million, an increase of 5%. We are beginning to see a recovery in the U.S. toxin market, which posted positive year-over-year growth in the third quarter following three consecutive quarters of declines due to economic pressures. Botox continues to perform very well despite increasing competition. It remains the clear market leader with a strong and stable share, and we have seen little to no share impact from new competitive entrants. U.S. Juvederm sales were $116 million in the third quarter, a decline of 6.4% versus prior year as recovery in the facial filler market continues to lag the cosmetic toxin market. The filler market is improving, however, as a higher priced, more deferrable procedure relative to toxins. The segment of the aesthetics market continues to be suppressed by lower consumer spending. In the third quarter, the U.S. facial filler market was down low teens percentage compared to the prior year. Juvederm remains the market-leading facial seller in the U.S. and share was stable in the quarter. While the U.S. facial injectable markets continue to be impacted by lower consumer spending in this inflationary environment, we are seeing signs of stabilization and even a return to growth in the cosmetic toxin segment. This gives us confidence in a stable to improving outlook in the U.S. as we end this year and enter 2024. Internationally, third quarter aesthetic sales were $480 million, representing an operational decline of 9.7%. As anticipated, year-over-year performance in the quarter was impacted by a shipment timing benefit we experienced in the third quarter of last year. Results were also impacted by softening economic conditions across major international aesthetic markets, primarily China. Despite the economic pressures that are currently impacting our aesthetics portfolio, we remain very confident in its long-term growth outlook. In September, we began launching Skin Vive in the U.S. And in the next few years, we plan to launch new indications for Botox in the lower face segment, and our novel fast-onset, short-duration toxin BoNT/E. In addition to our R&D programs, we have a robust Alle technology pipeline, which will bring new tech products into the U.S. market to help our customers acquire, retain and cross-sell more aesthetic patients. Our strong leadership positions in both cosmetic toxins and facial fillers combined with the significant investments we're making to drive market acceleration will position us for strong growth going forward. With that, I'll turn the call over to Tom." }, { "speaker": "Tom Hudson", "text": "Thank you, Carrie. In immunology, we had two important milestones in the third quarter for Skyrizi in inflammatory bowel disease. Following completion of the Phase 3 maintenance trial in ulcerative colitis. We submitted our regulatory applications for Scares in this indication in the U.S. and Europe with approvals anticipated in 2024. We also recently presented results from the SEQUENCE head-to-head trial comparing Skyrizi to Stelara in patients with moderate to severe Crohn's disease. We're extremely pleased with how Skyrizi performed in this study, which enrolled very difficult-to-treat patients who all failed anti-TNF therapy. Skyrizi met the primary and all secondary endpoints in the trial, demonstrating clear superiority to Stelara on all endpoints at week 48 and with a more than doubling of effect in endoscopic remission at 32% of Skyrizi versus 16% for Stelara and endoscopic response at 45% versus 22% for Stelara. Furthermore, steroid-free clinical remission was 61% for Scares versus 40% for Stelara. So these compelling head-to-head Crohn's data combined with the additional indication approval for ulcerative colitis expected next year will further position Skyrizi as a highly effective, durable, safe and well-tolerated treatment option for patients with moderate to severe inflammatory bowel disease. We continue to make very good progress with the second wave of Rinvoq development programs as well in addition to the ongoing Phase 3 programs in GCA, lupus and HS, we recently began the Phase 3 program for Rinvoq in Alopecia Areata. We also recently announced positive top line results from a Phase 2 study for Rinvoq in vitiligo. In this study, Rinvoq met the primary and all secondary endpoints at week 24 and demonstrating a significant improvement in both facial and total body vitiligo scoring measures compared to placebo. Importantly, these results continued to improve through week 52 of the study illustrating Rinvoq's potential to provide significant skin repigmentation to patients suffering from vitiligo. Based on these results, we're advancing Rinvoq to Phase 3 in this indication with studies expected to begin soon. Moving to oncology, where in the quarter, we received approval in Europe and Japan for epcoritamab as a monotherapy treatment for patients with relapsed or refractory DLBCL, were received two or more systemic therapies. These approvals represent important regulatory milestones for EPCO, and we look forward to bringing this new subcutaneous treatment option to patients in these international markets. We also continue to make good progress with the development programs in earlier lines of DLBCL and follicular lymphoma and we look forward to providing updates on these programs as the data mature. In our Venclexta multiple myeloma program, we recently announced top line results of a Phase 3 CANOVA trial evaluating Venclexta plus dexamethasone compared to PomDex in relapsed/refractory patients with a T114 mutation. In this study, the primary endpoint of IR CSS PFS was longer with VenDex versus PomDex but did not meet statistical significance. accommodation also resulted in numerically higher response rates and longer overall survival compared to PomDex. While the differences in efficacy measures were not statistically significant, we believe the totality of the data show a benefit with the Venclexta combination and we plan to discuss the results with regulatory agencies. We'll provide updates on the program as they become available. Behind Venclexta, we have several exciting multiple myeloma programs emerging from our earlier stage pipeline. We continue to make good progress with our BCMA CD3 bispecific ABBV-383 and where we're nearing completion of the dose optimization work and are on track to begin Phase 3 studies in the first half of next year. At an upcoming medical meeting, we plan to present updated Phase 1 efficacy and safety results as well as monthly administration dose data. We're also making good progress with our next-generation BCL2 inhibitor, ABBV-53, which is currently in Phase 1 studies and we'll provide updates as the data become available. Now moving to Neuroscience, where in the quarter, we received approval for Aquipta in Europe, which is now the only oral CGRP antagonist approved in Europe for prevention of both episodic and chronic migraine. And lastly, in our aesthetics pipeline, we recently announced top line results from a second Phase 3 study evaluating Botox in platysma prominence, similar to results from the first Phase 3 study, all primary and secondary endpoints were met with Botox demonstrating a significant reduction in platysma prominence and vertical neckband. We anticipate a regulatory submission in the U.S. here the end of the year. In addition to indication expansion for Botox, we continue to advance our novel toxin pipeline. We recently announced positive top line results from two Phase 3 trials evaluating BoNT/E, our rapid onset, short-acting novel toxin in glabellar lines. BoNT/E performed very well in both studies meeting the primary and all secondary endpoints compared to placebo. BoNT/E was well tolerated and no safety concerns were identified. We're very pleased with these results, which demonstrate this toxin's rapid onset of action and short duration of effect. Patients treated with BoNT/E showed an improvement in glabellar lines as early as 8 hours following injection and a duration of effect of 2 to 3 weeks. This highly differentiated clinical profile could offer patients a novel option compared to currently available neurotoxins. We plan to complete the remaining development work over the course of the next few quarters and anticipate submitting our regulatory applications in the second half of next year. So in summary, we continue to make good progress across all stages and therapeutic areas of our pipeline, and we look forward to several more important milestones in the remainder of this year, including Phase 2 data for Teliso-V and second line plus advanced non-squamous non-small cell lung cancer, which has the potential to support an accelerated approval. Phase 2 proof-of-concept data for our anti-IL-1 alpha beta bispecific antibody, lutikizumab in hidradenitis suprativa, and regulatory approval in Europe for ABBV-951, our novel subcutaneous levodopa, carbidopa delivery system for advanced Parkinson's disease. We also plan to submit updated 951 data in the U.S. near the end of the year. With that, I'll turn the call over to Scott." }, { "speaker": "Scott Reents", "text": "Thank you, Tom. I'm very pleased with the momentum of our business. The strong performance we are demonstrating from our ex Humira growth platform continues to support AbbVie's long-term growth outlook. Starting with our third quarter results. We reported adjusted earnings per share of $2.95, which is $0.14 above our guidance midpoint. These results include a $0.04 unfavorable impact from acquired IP R&D expense. Total net revenues were $13.9 billion, roughly $225 million ahead of our guidance and down 5.8% on an operational basis excluding a 0.2% unfavorable impact from foreign exchange. Importantly, these results reflect double-digit sales growth from our ex-Humira growth platform. The adjusted operating margin ratio was 46.7% of sales. This includes adjusted gross margin of 83.5% of sales, adjusted R&D investment of 12.4% of sales acquired IP R&D expense of 0.5% of sales and adjusted SG&A expense of 23.9% of sales. Net interest expense was $398 million. The adjusted tax rate was 15.7%. Turning to our financial outlook. We are raising the midpoint of our full year adjusted earnings per share guidance by $0.25 and now expect adjusted earnings per share between $11.19 and $11.23. This guidance does not include an estimate for acquired IP R&D expense that may be incurred in the fourth quarter. We now expect total net revenues of approximately $54 billion, an increase of $600 million. At current rates, we expect foreign exchange to have a 0.5% and unfavorable impact on full year sales growth. The updated revenue forecast contemplates a full year sales increase of $300 million roughly split evenly between Skyrizi and Rinvoq, reflecting strong uptake in IBD. The remaining $300 million full year sales increase is primarily attributed to better-than-expected performance of international Humira and Restasis. Moving to the P&L. We continue to forecast an adjusted operating margin ratio of approximately 46.5% of sales. We now expect adjusted net interest expense of roughly $1.7 billion. And we forecast our non-GAAP tax rate to be approximately 15.5%, reflecting IP R&D occurred through the third quarter. Turning to the fourth quarter. We anticipate net revenues of approximately $14 billion. At current rates, we expect foreign exchange to have a modest unfavorable impact on sales growth. We expect adjusted earnings per share between $2.87 and $2.91. This guidance does not include acquired IP R&D expense that may be incurred in the quarter. Finally, AbbVie's strong business performance continues to support our capital allocation priorities. We generated more than $16.5 billion of adjusted free cash flow which is net of approximately $1.1 billion of Skyrizi royalty payments in the first 9 months of the year. And our cash balance at the end of September was approximately $13.3 billion. Underscoring our confidence in AbbVie's long-term outlook, today we announced a 4.7% increase in our quarterly cash dividend, beginning with the dividend payment in February of 2024, and we remain on track to achieve by the end of this year, $34 billion of cumulative debt paydown since the Allergan transaction, maintaining a net leverage ratio around 1.8x. In closing, AbbVie has once again delivered outstanding results and our financial outlook remains very strong. With that, I'll turn the call over to Liz." }, { "speaker": "Liz Shea", "text": "Thanks, Scott. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, we'll take the first question, please." }, { "speaker": "Operator", "text": "First question comes from Chris Shibutani with Goldman Sachs." }, { "speaker": "Chris Shibutani", "text": "The 2024 earnings guidance, it seems as if you were quite confident heading in that $11 floor. As we await further details from top line and other margin structures, can you maybe identify some of the key push pulls that actually gave you that conviction to go to above and where directionally we should be thinking about the source of further growth on the forward?" }, { "speaker": "Rob Michael", "text": "Chris, it's Rob. I'll take that question. So since we provided that guidance in February, recall we gave a $10.70 EPS floor to really help investors model earnings regardless of whether the trough recurred in '23 or '24 we've raised growth platform sales by $1.4 billion covering immunology, neuroscience and aesthetics. We're seeing the IBD indications for Skyrizi and Rinvoq very nicely, and we continue to capture more share in their other indications, both Vraylar and our migraine portfolio have outperformed our share forecast and the strong recovery of Botox has led us to raise guidance for aesthetics twice this year. So given the clear over-performance of the growth platform, we decided to raise the floor to $11 ex IPR&D. We hope this provides investors the view of the low end of the 2024 guidance range and also confirms that '24 will indeed be the trough year. And given that we expect to deliver a high single-digit CAGR from '24 to the end of the decade, it should allow investors to value the company with a better growth multiple." }, { "speaker": "Operator", "text": "Our next question comes from Mohit Banse with Wells Fargo." }, { "speaker": "Mohit Bansal", "text": "And I have a question regarding aesthetic. So it seems like you are keeping the guidance here. So the first part of the question is it seems like across the board, there is a 10% quarter-over-quarter decline on all the products. Can you help us understand what's happening sequentially? And then if you are keeping the guidance, it seems like there would be quite a bump in fourth quarter. So how should we think about that?" }, { "speaker": "Rob Michael", "text": "Maybe I'll start -- this is Rob. I'll start with your question. So one thing to keep in mind is that we mentioned in the last call that we had some dynamics in the international market when you look at the growth rates where we had more difficult comparison because of some of the -- some stocking that occurred in the prior year, that's something to keep in mind. We also do have a certain amount of seasonality that occurs in our business in the U.S. in particular. So those are things to keep in mind. I'd say as we look at it, we're very encouraged by the return to growth of the U.S. toxin market. Botox is performing very well, and we're certainly doing a very nice job maintaining our share position despite competitive pressure. So I'd say we're very pleased there. I'd say on fillers, what we're seeing is probably more of a lag in the recovery. And if we've studied this market historically, we do tend to see a lag and that's really relative to thinking about the price point for fillers versus toxins. It's natural to assume that the recovery will take a little bit longer. So we are seeing that recovery take a little bit longer. We're still very, very encouraged by the trends we're seeing. We're very excited about the new fillers we've launched, both SkinVive and Volux. We're starting to see some nice share momentum come from those new introductions. And so from that standpoint, we feel very good. And then as we've been monitoring the situation in China, as all of you I'm sure have been watching very carefully. We saw, as you recall, a very strong recovery in the first half of the year. We've seen it moderate, and we're keeping a close eye on that. And so that's something we're obviously paying a lot of attention to. Now we look at the rest of the international business, it's growing nicely. And so as I think about the guidance for this year, I'd say we're fairly close. We're not overly concerned. We don't adjust guidance for plus or minus $100 million. If it was greater than that, we would consider it. So that's something to keep in mind. But as we look at this, the long-term outlook for this business, we're very confident. When you think about the U.S. toxin market, it's historically grown in the mid-teens and it's still heavily underpenetrated in the low single digits. And market growth is really the key to deliver on our long-term outlook. We've seen this market rebound very strongly following a period of economic pressure, and we've demonstrated time and again that we can increase new patient starts for our promotional efforts. And something I think probably isn't appreciated is that we do have several innovations that can accelerate that growth. And when you think about the master and platysma indications for Botox, those can each add a few hundred million dollars. Our novel short-acting toxin BoNT/E has the potential to activate new patients that could really drive an inflection in market growth. As you think about one of the biggest barriers for new patients is fear of an unnatural look, and the short-acting toxin opportunity is a great way to unlock that. And then if you look at our regenerative fillers pipeline, those are aimed at providing both short- and long-term treatment benefits for consumers. And as I mentioned, we're also very excited about the new fillers we've launched both SkinVive and Volux. So with this business, you see us go through some cycles with economic pressure. But over the long term, we feel very confident that we can certainly deliver very robust growth and deliver on that real than $9 billion expectation for 2029." }, { "speaker": "Rick Gonzalez", "text": "Lee, this is Rick. The other thing that you're looking at sequentially, you have to keep in mind is we do Botox today in the fourth quarter. So that elevates revenue in the fourth quarter, and that occurs every year. So if you're looking at third quarter to fourth quarter and trying to understand why is there a big step up, part of that step-up is that." }, { "speaker": "Liz Shea", "text": "Operator next question please." }, { "speaker": "Operator", "text": "Our next question comes from Chris Schott with JPMorgan." }, { "speaker": "Christopher Schott", "text": "Just maybe a two-parter really focused on immunology for 2024. So maybe first on Skyrizi and Rinvoq, I guess, with more of the '24 formula discussions complete, we're seeing some great volume trends. But are you still comfortable that we should expect more normalized price erosion for those two products versus the high single digits we're seeing this year? And then the second one was on Humira for 2024. And I think, Rob, you might have commented last quarter of your comfort with where consensus sits. And again, maybe a similar question with maybe more color about formulary for next year. Is that something you're still comfortable? And just how should we think about dynamics there?" }, { "speaker": "Jeff Stewart", "text": "Yes. It's Jeff. I'll take the first question. Yes, we're very comfortable as we see things start to evolve and close here as we move into 2024. I mean if you think about all the indications that we've had 7 over the last 18 months, I highlighted in my remarks, 9 head-to-head trials. We're just a very, very nice position for Skyrizi and Rinvoq as we move into '24 to continue some very strong momentum that we're seeing in the actual. So quite confident in terms of how we're looking at that. And to your key point there on the price, we continue to see that we're not going to have a repeat of what we saw this year. And remember, the background there were those 7 indications that came very fast all on top of each other. And so that was the root cause of that -- of those concessions that won't repeat. Next year, we have really one more big indication, not 7, and that's Skyrizi you see that Tom highlighted. So we'll see the normalized price erosion more in line with industry forms versus what we saw this year." }, { "speaker": "Rob Michael", "text": "And then, Chris, this is Rob. On HUMIRA, I think if you think about the annualization rebates that given the rest increase in the second half of this year, so you have an annualization impact, and the additional rebates to secure parity access next year, really price should be the main driver of the erosion in '24. I mean volume will have an impact, particularly in wax sensitive accounts, but price will make up the vast majority of the erosion next year. And while we're not giving '24 guidance today, as you've mentioned, Chris, I've highlighted the average, it was about $7 billion when I mentioned that was a reasonable expectation for U.S. Humira next year. Now there are a few animals who have forecasted U.S. Humira above $8 billion next year, which is just not a reasonable expectation given the price dynamic." }, { "speaker": "Operator", "text": "Next question comes from Terence Flynn with Morgan Stanley." }, { "speaker": "Terence Flynn", "text": "Obviously, you guys are very well positioned coming out of the Humira LOE in terms of the growth franchise. But I think there's focus from investors on maybe bolstering the pipeline. So as you guys think about M&A and business development, maybe you could just walk us through your latest thoughts and anything in terms of therapeutic areas of interest and stated development." }, { "speaker": "Rick Gonzalez", "text": "Okay. Terence, this is Rick. I'll cover it. That question for you. Yes, I think as we look at the business, as Rob indicated, we're extremely comfortable with how the growth platform is performing. And I'd say how we're managing the biosimilar erosion, which gives us a lot of confidence that we can deliver this high single-digit going forward. From '25 -- going forward through the end of the decade. So I'd say the bulk of what we're looking at, and we're in a fortunate position from that standpoint. There are many companies in our sector we need to go out and do lots of BD to be able to drive the growth that they're trying to achieve. We're not in that position. But I'd say the bulk of what we're looking at is we're looking to add assets that could give us incremental pipeline and revenue growth towards the end of this decade and into the 30s. That's what our -- the bulk of our focus is on. . And I'd say if I look at AbbVie's track record, certainly, BD has been a critical part of how we've grown this company over the last 11 years. And I'd say, for the most part, we have done a pretty good job when we acquire assets and bring them in we can make them perform quite well. Skyrizi is a good example of that. Certainly, Allergan was another good example of that, and there are many others. So I'd say we value BD as a very important tool and how we should grow the business and how we should position our leadership positions in these franchises. Our primary focus is within the franchises that we're operating in. So let's take immunology as an example. I would say our greatest focus in immunology is to continue to add additional mechanisms in particular, that could be used in combination in order to create deeper levels of clinical response in areas like IBD, rheumatology and other areas. So we continue to look for those. We have several already that are in development now, like Luti, like RIPK1 and several others in our pipeline, but we'll continue to look for additional assets that we could add to that. And like I said, especially focused on combination therapy because we think that is the way to get much deeper clinical remission or responses in those patients who aren't responding to things like Skyrizi, Rinvoq, which obviously performed exceptionally well. So that's a big area. Oncology is another big area. We have a high level of interest in next-generation CAR-T technology. We have a high level of interest in T cell engagers beyond our BCMA product. I think as we look at that asset continue to develop, we are very convinced it has a best-in-class profile. And it shows us that for the right indication, T cell engagers can be extremely effective, and they're much easier to use and can be much more broadly brought to patients and CAR-Ts, at least the current version of CAR-Ts. So I'd say that's an area that we have a high level -- in psychiatry, we're interested in additional assets in anxiety and mood, and a variety of other assets, but that gives you some feel for it. And we obviously have the financial wherewithal to go out and do transactions. We need to make sure we find the right transaction. So it's a value-enhancing asset for the company. And when we find them, we will act on and we will act on quickly." }, { "speaker": "Operator", "text": "Next question comes from Tim Anderson with Wolfe Research." }, { "speaker": "Alice Nettleton", "text": "This is Alice Nettleton on for Tim Anderson. A question on obesity and its interface with I&I and a lot of other drug categories, frankly, are views that payers have to cover OBD medicines. And if that's correct, it's a big expense, and payers will be looking for offsets. One-off that would be for payers to squeeze other therapeutic areas as hard as they can. An example could be I&I, where there's now a really good product, your own HUMIRA at a much lower price. So we're wondering how much payers might start to force a step edit for products like Skyrizi? It's a relevant question because yesterday, one of the issues Bristol noted with its TYK2 product is step edits and they cite biosimilar Humira as the reason." }, { "speaker": "Jeff Stewart", "text": "Thank you for the question. It's Jeff. And I think you've got to take a step back regardless of the obesity issues and think about the overall strategy that we pursued, which was 1 of fundamental distinction. And I'll take your point over some of these head-to-head trials, and there's 9 of them, right? So if you take Skyrizi, just in psoriasis, we have gross superiority versus every mechanism in the category. So a head-to-head of gross superiority versus Humira versus the leading IL-17 COSENTYX versus the oral Otezla, and we also have versus Stelara. So fundamentally, when payers think about stepping or not stepping or how they would think about that, there's a medical dynamic there and that distinctiveness that we have across our program is very, very important to help manage maybe the urge of the payers to think of formulary structures like that. If you think about your comments that you have -- that you heard yesterday or the day before, that's a very different dynamic. I mean, if you're not that different or you have the same efficacy as a Humira, it's not going to go that well on some of these formularies. And so I think you got to take a step back and look at the fundamental distinctiveness that we have on both Skyrizi and Rinvoq. And I think my last comment would be, let's take Reno, which is growing very fast, 60%, okay? All of that is in the second-line plus setting. So from a strategic standpoint, it's already stepped. And so when you take a look at those dynamics, we remain quite confident that as we rely on the power of raising the standard of care, that will help us navigate any of these scenarios, whether it's related to obesity or not." }, { "speaker": "Operator", "text": "Next question comes from Vamil Divan with Guggenheim Securities." }, { "speaker": "Vamil Divan", "text": "I mean, transit right now. But the two questions I have actually, one is maybe building on Terence's question around business development base in the pipeline. I think we get a lot of other questions just around sort of the underappreciated assets within your pipeline. I don't know if you can maybe just comment on that. I know there's a couple of assets that you plan out things people are overlooking where they might be some underappreciated upside? And then the second one is just on the charge you took today or this quarter on Imbruvica regarding the Medicare drug pricing program. And obviously, I understand why you did. I'm curious on the amount and the timing of why you're doing now, I suppose I may be willing to see how the losses play out or negotiation process plays out. And then in terms of the amount or how you -- what your assumptions were that you can share on the competitive dynamics for sort of what you're assuming around the impact this program would have on the pricing of Imbruvica…?" }, { "speaker": "Rick Gonzalez", "text": "Divan, this is Rick. I'll take the first question, and then Scott will take the second question. So on the pipeline, I think as I look at the pipeline and how we built the pipeline and how it's playing out, I think -- I don't know that I would call it underappreciated because you don't necessarily have access to all the data that we have on some of these programs. But we obviously invested significantly over the last several years in rapidly developing the indications for Rinvoq and Skyrizi and a lot of our focus had been built around that. But in parallel, we were advancing a number of other programs along the way. And I would say the investment that we made on Skyrizi and Rinvoq are pretty clear the kind of return that we are getting for those assets. I mean, they're growing at a phenomenal rate. In fact, in the not-too-distant future, the combination of those two products on a running rate basis will be larger than Humira, to give you some idea of how rapidly those products are growing and how large they are. But if I look at our pipeline, the real meaningful programs that we have in our pipeline that will be true needle movers for the company, there are several of them that are advancing now I think we have a high level of confidence in 400, our topo warhead platform with our c-Met version of that, we're seeing very encouraging data in CRC. We'll follow that with non-small cell lung cancer. And that platform is demonstrating to us that it is a broad-based platform that we can expand to a number of other areas. And that should be a fairly significant opportunity for us going forward. Later sort of the '27, '28 timeframe, I think it's going well have meaningful benefit play through. And then I'd say the second one is 383, our BCMA bispecific. As we indicated earlier, we're seeing more and more data out of that program that clearly tells us this has a best-in-class profile, high levels of efficacy and very good safety and very convenient dosing. We think it has that ideal profile to be able to enter this market. And as you know, multiple myeloma is a very large market. There are very significant products in this market. So those are two opportunities. I would obviously say, $16 million. And some of our TA programs are also exciting programs that are running in parallel to these. We'll be getting more data on those next year. And I think those have significant opportunities as well. The third program I talked about is in our eye care business. It's our REGENXBIO program for both wet AMD and diabetic retinopathy. We're seeing some very, very encouraging data out of that program, and that could be a nice opportunity for us as well, and it continues to advance. So there are a number of important programs that you'll start to see more and more data as we go through '24 and into '25 that I think will give the market an opportunity to be able to better assess those." }, { "speaker": "Scott Reents", "text": "Vam, this is Scott. With respect to your question on the Imbruvica charge. So I think a couple of things. As we have signaled in some of our regulatory filings, our last 10-Q, for instance, we had indicated that if we were to be selected in the negotiation process under the Inflation Reduction Act, that there would likely trigger an impairment. And so we had anticipated that this would be happy. And so the timing really relates to the fact that under the rules, you have to look at the fair value of that intangible asset with respect to future cash flows. And so the accounting rules would require that we would make that analysis upon selection as we had kind of previewed in our filings. And so we went through the process under that triggering event to determine what the impairment should be. And I would say that when you look at that impairment, the magnitude of the impairment is driven by a number of factors, but really, one of the biggest factors that you're seeing there is it requires you to discount the future cash flow. So as we calculate the future cash flows, looked at what we had assumed was a reasonable assumption on the price, you discount those back. And so that creates part of the magnitude of this adjustment. In terms of the negotiated price that we assumed, I think we're in the middle of these negotiations, and it really wouldn't be appropriate for us to talk about what that is. But we looked at a number of factors, and we think that process is going to play out. Certainly, we will see on February 1 in a private conversation with CMS what they anticipate at least an initial thought on price, but it won't be finalized until September 1 of next year. And so we will see what that price is as the process plays out." }, { "speaker": "Operator", "text": "Next question comes from Steve Scala with TD Cowen." }, { "speaker": "Steve Scala", "text": "I have two questions and one clarification. First, a clarification. Is the base year for the high single-digit revenue growth to the end of the decade? Is the base year 2023 -- or excuse me, 2024 or 2025. I think it's '25, but maybe you can clarify that. Second, given AbbVie's stated interest in building the oncology business, I assume that AbbVie took a hard look at the ADC deal that Merck signed with Daiichi. I'm just curious what about it didn't you like -- was it the profile of the products? Was it the price? Or do you feel you have everything you need already? And then the last question is at least 1 other company has changed its tax rate guidance stemming from a recent IRS document clarifying Section 174 tax legislation. Do you have any perspective on this update and why it doesn't impact AbbVie?" }, { "speaker": "Rob Michael", "text": "Steve, this is Rob. I'll take your first question. So the base year is '24. And if you think about it, we signaled that we expect to return a robust growth in '25. And so that high single-digit CAGR really would pick up that first year of robust growth of 25%. If you start in '25, you miss that your growth. So our intention has always been '24 is a base year and that high single-digit CAGR starts from '24 to the end of the decade." }, { "speaker": "Rick Gonzalez", "text": "Steve, this is Rick. I'll take the second question. Obviously, I'm not going to comment on whether we looked at that same transaction and that probably wouldn't be appropriate. But what I can tell you is we knew it was there. So maybe that gives you some idea of our perspective on it. But the reality is, we believe we have what we need with 400. We believe that platform, and we own that platform, we developed it internally. We give us everything that we need in that area. And so it wasn't something that we were looking at. Scott?" }, { "speaker": "Scott Reents", "text": "Yes. It's Scott. So with respect to the tax legislation, I certainly when can talk about what our facts are. But when we've looked at -- certainly, this results out of tax reform legislation a few years ago. The tax rules, there's always a little bit of uncertainty. And what happened this quarter, there was guidance that came out that, I would say, clarified a certain approach in treatment. Prior to that guidance, though, there was a little bit of a diversity of opinion amongst advisors as to -- and ourselves as to how we might implement. So I would tell you that we were already implementing consistent with how that guidance ultimately came out, and that's why you're not seeing any impact to us on our tax rate." }, { "speaker": "Operator", "text": "The next question comes from Gary Nachman with Raymond James." }, { "speaker": "Gary Nachman", "text": "So first, back to the trough raise in 2024. How are you thinking about spending levels for both SG&A and R&D into the trough year next year to set up for growth in '21 and beyond? Do you have a better sense of where the operating margin might end up next year? And then secondly, Scares and Rinvoq have been doing very well in the IBD indications talk about how much headroom you see for those products in UC and Crohn's with that landscape likely getting more competitive in the coming years? And any updated thoughts on 2025 guidance for those products?" }, { "speaker": "Scott Reents", "text": "Gary, it's Scott. I'll start with your question regarding operating margin. So when we've looked at the operating margins we talked about in the past, for '23 and '24, we talked about those being very, very similar. So when you think about the operating margin that we've talked about for this year and next year, it's really about 46% to 47% range. This year, our guidance is 46.5% and we would expect operating margin in '24 to be very similar to what we're seeing this year. And then I think as a result, roughly the gross margin is going to be in line in '24 with what we're seeing this year as well as the expense profile. So very consistent with this year. And of course, we'll refine that when we come out with guidance." }, { "speaker": "Jeff Stewart", "text": "Yes. This is Jeff. I'll highlight the -- your comment on the head space and IBD. I mean the IBD market is very, very attractive. If we think back historically, we were always, frankly, a little surprised at how fast Humira back in the day grew when we started to achieve the UC and the Chrome's indications. And again, I would say we're very, very pleasantly encouraged about the momentum. The momentum is very, very significant. So there is significant headroom. And what we see in the market dynamic is that unlike what you might think that patients would always want to rotate off of their medications because of the severity of the disease, actually physicians haven't been able to really move the market very much over the years, simply because it's very dangerous to try to go to another drug that hasn't provided any increase in benefit for those patients. It puts those patients at risk. So when you look at what Tom had highlighted, our ability with two complementary assets -- for example, in the U.S., Skyrizi position in the early lines, Rinvoq position in later lines, both of which have exceptional performance criteria versus the market. That gives us a lot of confidence. The other thing that gives us a lot of confidence because there will be more competitive entries in the future is we think our profiles are going to hold up exceptionally well. And then there's the commercial executional component in most of the countries around the world, we have dual sales forces that basically will carry two products with four big indications. So our ability to compete in the market for share even as it gets a little more competitive over time, is still going to be very, very strong. So lots of headroom in the market, lots of unmet need in the market, and we believe we have the best position in the market for the foreseeable future." }, { "speaker": "Rob Michael", "text": "And Gary, this is Rob. On your question regarding 2025 guidance, we do periodically update the long-term guidance for our portfolio. We're obviously very pleased with the momentum we're seeing both from Skyrizi and RNA, particularly in -- if you recall when we provided -- last time we provided guidance for Skyrizi, we had about $2.5 billion of revenue in IBD in 2025 and it was $1.8 billion for Rinvoq. And those are obviously ramping very nicely. We have a lot of confidence. We periodically update that guidance, we'll find the right time to provide a holistic update to our long-term guy. But clearly, the momentum is there. And the Street reflects that, too. I mean if I look at consensus, not for Skyrizi, I think it's around $11 billion. So it's $1 billion higher than our 2025 guide. So I think the market is recognizing the strong momentum, and we'll update that long-term guide holistically at the appropriate time." }, { "speaker": "Operator", "text": "Next question comes from Luisa Hector with Berenberg." }, { "speaker": "Luisa Hector", "text": "To continue with IBD, I just wondered if you could talk a little bit more about the AbbVie pipeline emerging behind Skyrizi and Rinvoq and how we think about that and maybe potential combinations with Skyrizi? And with the recent competitor launch in psoriasis with a label where the FDA has asked to mention anti-TNF safety warnings. I wondered whether the FDA has mentioned anything to you about the review of labor in that regard. ." }, { "speaker": "Roopal Thakkar", "text": "It's Roople. I'll take the IBD question. So you've heard already some mention of Lutikizumab. That's our IL-1 alpha beta bispecific antibody. That's an in-house antibody. And we have observed data where there's resistance to anti-TNF and other biologics with patients with 1 beta signal. So we'll be entering into ulcerative colitis looking at a potential biomarker approach. But in addition to that, we will also be looking at a set of combinations as was already mentioned, for example, with Skyrizi, we have Lutikizumab. We have other agents as well. RIPK1 was also mentioned. There's also some partnerships that we have is another mechanism we're interested in. And another one I'll mention is an IL-2 mutein. All of these are under assessment. And we do believe either you find a biomarker approach where you can see the high efficacy or if you want to see real transformational efficacy, you're going to have to go a combination approach. So those are the assets we'll be looking at. Now moving on to the question, I think it was around depression and suicidal ideation if I heard it correctly. This was in an IL-17 class agent that was recently approved. We've also observed a similar warning and precaution previously also in the IL-17 class. In fact, that previous asset, in fact, had a REMS in place. Remember, Skyrizi is an anti-IL-23 very different class. And to date, with all the data that's been generated across numerous indications, we don't see that type of signal at all nor do we have any of that in our label. And as we look at psoriasis therapy, that particular agent that's been mentioned has been available in Europe and our physicians really don't tell us that there's much of an uptake there. So Skyrizi continues to perform well. Also, our label does not have the high rate of fungal infections that have been observed with the new 1 in the '17 class -- and also, we've talked a lot about IBD. We -- the Skyrizi doesn't also lead to IBD, which is another risk for the IL-17 class. And also with our dosing regimen -- you get it at 0 and week 4, and then it's quarterly after that. With the new one, I think there's 5 doses that are required and potentially every 8 weeks or in heavier patients every 4 weeks. So we're very confident in Skyrizi's position across indications, especially in psoriasis." }, { "speaker": "Operator", "text": "Our next question comes from David Risinger with Leerink Partners." }, { "speaker": "David Risinger", "text": "Upon your vision for oncology, clearly, the company has compelling assets. But in light of an increasingly complex and competitive oncology landscape, could you just paint a picture of how you see your portfolio evolving and opportunities to acquire assets when it may be difficult to see what's around the corner from, let's say, an emerging oncology competitor in 3 to 4 years?" }, { "speaker": "Tom Hudson", "text": "This is Tom Hudson. We've been -- we certainly -- when we talk about 400, we're also talking about going in different space than lung and breast, where there's a lot of competition, like colon cancer, gastric cancer, pancreas. So c-Met is a target that's expressed in many other tumors, and that's why we've developed this with topo warhead, so we can go to a broader set of tumors. And that's where we're seeing a very good data with ABBV-400 even unselected patient population, third line plus, we saw a 22% response versus 2% to 3%. What's also interesting about this is -- it's not just for colon cancer, but most chemos, most treatments and GI tumors have a lot of toxicity, a lot of diarrhea. And one of the things that excite the clinicians about this program is actually a very low rate of diarrhea. So what makes that not only can we see some efficacy in third line, but it sees we can move to earlier lines and combined with other therapies have higher efficacy. So there's a lot of unmet need in GI tumors. And so this data, again, we're going to have more data in our next cohort at the end of this year. In CRC will have different doses, and we'll also have potential cutoffs of biomarkers. So moving very well, but we're actually in a big space, in GI tumors, as I've mentioned, even our GARP program, also where we've shown the best data is in liver cancer, where c-Met is also expressed. We have opportunities to go explore places where there's a big unmet need and the competition is not the same. Now the other targets because we talked about topo platform. We have others, 706, which is already in the clinic with 6. Next year, we'll be going to 2 other indications, which for which there's less competition in terms of ADC space. So our strategy is actually to go and bring this in offering to a lot more cancer patients. I'll stop there, and I'll stop there." }, { "speaker": "Roopal Thakkar", "text": "It's Roopal. Let me add on a little bit. I think you may be also reflecting on some of the ESMO data that came out I will mention long a little bit, we still see an opportunity with Teliso-V. We're going to get data later this year. But what we've already observed is 50% ORRs in a biomarker-selected population in the EGFR wild type. If you look at some of the data that has come out, the ORRs are probably right around 20% to 30%. We don't have all the breakdown of all the different lung subtypes. But 1 approach is to use a biomarker and then select the patient population rather than going so broadly that was observed at ESMO. The other thing I would say reflecting on the data that came out, if you looked at EGFR mutants in lung, you see some higher levels of efficacy, either in the frontline or second line in that space. But that comes at a cost, and that's a chemo-like adverse event profile. And those are things like nausea, vomiting, stomatitis, alopecia, fatigue. These are things that you may see slight increases in efficacy, but clearly, patients don't want that. And like -- as Tom was mentioning with our platform and including Teliso-V, we have an opportunity there in the mutant side to combine with osimertinib, which has a nice profile. And those mutant patients when they progress, half of them have highly expressed c-Met. So that's where a combo looks good. And then we're also seeing 50% ORR in that segment as well. And we have a plan to get into Phase 3 into that next year. And then as we think about heme, we spoke about 383, which we feel has best-in-class potential. And one of the things that we're observing with that one is the high level of efficacy. [PRFs], we're driving down past grade 3 and now driving down to get past grade 2. So that enables the potential where you may not need hospitalization. And what you see now with the BCMA dual engagers is not just hospitalization but a REMS. And what we would add to that is dose spacing potentially every other month. So that one is a very nice profile, and we're moving into Phase 3 with that one, and we continue to conduct a variety of combinations there so we can move into earlier lines of therapy in multiple myeloma. We are still moving into earlier lines in Phase 3s with EPKINLY in heme, which is another dual engager. We have an asset called 453, which is our next-gen BCL2 blocker. And then we have a BTK degrader called 101 that's also in clinic. So quite a comprehensive approach across oncology." }, { "speaker": "Operator", "text": "Our next question comes from Geoff Meacham with Bank of America." }, { "speaker": "Geoff Meacham", "text": "Just have a couple of quick ones, one on immunology. So you guys have evaluated the impact from Humira biosimilars beyond even 25%, is it your view that tail revenues are likely to be better than you initially modeled. And what, if anything, do Stelara, the delay in Stelara biosimilars impact this. And the second question, just on capital deployment. Just given your higher guidance, I know you guys just raised the dividend, but would you also say that the deal capacity is higher. I know you recently raised kind of M&A range and wondering if that's even going higher." }, { "speaker": "Jeff Stewart", "text": "Yes. Geoff, it's Jeff here. And we continue to study the tail. I mean it's something that we're -- we look very closely at -- we continue to think that the Humira tail will emerge sometime in '25 or '26. And that's looking at some of the international analogs, how we think we see pricing may move I mean the one thing that we do believe is that you're not going to have a small molecule like tail, which is virtually nothing. There's going to be a sub-segment of patients that are going to stay on Humira. It's going to be modest, whether it's low price or low volume, but it will be there even in an interchangeable world. We don't necessarily believe that since we've outperformed here in volume in '23 that that's going to fundamentally change our view on the tail at this point. And again, we're still highlighting that. In terms of Stelara, obviously, we think in the U.S. that will not come until -- and I think it was recently confirmed this week until sometime in '25. And so overall, we think that's a modest net positive for AbbVie in terms of how that may play out. But that's not the primary driver of our strategy. Our primary driver of the strategy is how distinctive we are across our indications with Skyrizi versus Stelara, which I've already highlighted. So I hope that helps." }, { "speaker": "Rob Michael", "text": "And Jeff, this is Rob. You're right. We did lift the cap. We had put that $2 billion BD cap in place, although we are rapidly paying down debt. And we lifted that at the beginning of this year because we essentially -- by the end of this year, we're going to have paid off all the incremental financing from the Allergan transaction. As Scott mentioned, our net leverage ratio is around 1.8x. And I have said previously that as long as we're going to pass back to 2x that leverage in 2 to 3 years, that's the way we're thinking about balance sheet capacity. So as we look at it, there's nothing from a balance capacity standpoint that would limit us today for pursuing the opportunities we'd be interested in. So that's not a limiting factor. And to the extent that we continue to raise guidance and perform more strongly. That just means there's even more capacity. But there's -- at this point, that's not a rate limiter for the types of opportunities we'd be interested in." }, { "speaker": "Operator", "text": "Our next question comes from Evan Seigerman with BMO Capital Markets." }, { "speaker": "Evan Seigerman", "text": "Congrats on a progress. I just wanted to touch on the dividend growth. So at first line, it seems that your dividend growth, while impressive, is slowing a bit relative to other recent periods. Maybe you could help us understand kind of what's driving this dynamic at play? Is it concerns around near-term performance of key products you Humira erosion continuing next year? Or are you preserving capital for you to help further? Maybe some color on that would be very helpful." }, { "speaker": "Rob Michael", "text": "So Evan, it's Rob. If you think about it, we're delivering dividend growth both in '23 and '24, while earnings are not growing, right? So then you look at the payout ratio we're at, we're going to be in the mid-50s. And we have said that over the long term, if you look at just across the industry as well, I'd say a good target is in, say, the mid- to high 40% payout ratio, which would mean that during this period where you see our payout ratio go up in the future, we're very committed to growing the dividend. We'll continue to grow the dividend, but we would expect then earnings would grow faster than dividend increases. So I would say we've gone through this period for a couple of years where we are still delivering a very nice dividend growth despite earnings declining. But given our commitment to that dividend, we're going to continue growing it. We'll likely see it step up from here, but not at the same rate as earnings growth because that payout ratio right now will be sitting in. So that's the way we think about it. Over the long term, we want to deliver a healthy, sustainable, growing dividend. And so we have a long view on this, and we are committed to delivering that growth to investors. And so that's the way we're thinking about it. We're going through a period of a couple of years here where earnings aren't growing. And then we see us return a robust growth, we'll step up that dividend again, but it's -- that's a dynamic that we're balancing here." }, { "speaker": "Operator", "text": "Our last question comes from [Jon Hung] with UBS." }, { "speaker": "Unidentified Analyst", "text": "I've got two. Just one confirmation on the trough and then one on aesthetics. So -- on the trough in '24, you mentioned that costs you will have the same margin in '24 is '23. So is it going to be a trough year on sales rather than the trough being driven by costs? And then second, again, just lots of noise on GLP-1s impacting aesthetics. You've commented before on fillers and Ozempic face in the past, but there's potential impact on body scope in -- is this actually anything that you're seeing coming through yet in the sales? And overall, is this trend a net positive or a net negative for you?" }, { "speaker": "Rob Michael", "text": "This is Rob. So clearly, we've communicated a floor for earnings. And Scott previously mentioned that I expect a similar level of operating margin year-over-year. And so you can model the sales accordingly. It should be fairly clear." }, { "speaker": "Rick Gonzalez", "text": "Operating margin profile." }, { "speaker": "Rob Michael", "text": "Operating margin profile, yes. So we said the 46% to 47% is the way to think about operating margin profile in '23 and '24. We've given you the $11 EPS ex IPR&D as a floor for next year. So I was just using those parameters to model revenue. ." }, { "speaker": "Rick Gonzalez", "text": "Carrie?" }, { "speaker": "Carrie Strom", "text": "And this is Carrie. For your question around the weight loss products and the impact on the aesthetics business, I mean as we look at the long-term view of this market, we continue to think that anything that gets a subset of patients engaged in their appearance, which these weight loss products can do, that is a positive tailwind for our business. And we hear that from our customers and many of our customers are bringing these GLP-1s into their practice, and they see it as a natural opportunity to cross-sell. Now that said, in the short term, especially in an environment where discretionary spending is pressured and there could be trade-offs for higher-priced products such as fillers or body contouring. Now we're not necessarily seeing that as a driver. Right now, what we're seeing is the broader macroeconomic dynamics. But in the short term, that could be a trade-off in terms of share of wallet. But absolutely long term, this is something that is going to help patients get engaged in aesthetics and be an opportunity for cross-selling." }, { "speaker": "Liz Shea", "text": "And that concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. ." }, { "speaker": "Operator", "text": "Thank you, and that concludes today's conference. You may all disconnect at this time." } ]	AbbVie Inc.	141,885,706
ABBV	2	2,023	2023-07-27 09:00:00	Operator: Good morning and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Rob Michael, President and Chief Operating Officer; Jeff Stewart, Executive Vice President and Chief Commercial Officer; Scott Reents, Executive Vice President and Chief Financer; Carrie Strom, Senior Vice President, AbbVie and President, Global Allergan aesthetics; and Tom Hudson, Senior Vice President, R&D and Chief Scientific Officer. Joining us for the Q&A portion of the call is Roopal Thakkar, Senior Vice President, Development and Regulatory Affairs and Chief Medical Officer. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll turn the call over to Rick. Rick Gonzalez: Thank you, Liz. Good morning, everyone, and thank you for joining us today. 2023 is an important year for AbbVie as we experience Humira biosimilar competition in the U.S. market, and as we execute our long-term diversification growth strategy. Now roughly seven months into the year, I'm extremely pleased with the progress that we're making against these objectives. The U.S. Humira biosimilar impact is playing out as projected and slightly better than our planning assumptions. We are competing very effectively with the various biosimilar offerings. We have exceeded our guidance in burst in second quarters with the overachievement predominantly driven by our growth platform, the base portfolio, excluding Humira which, as you know, is the critical driver in our rapid return to growth in 2025 and beyond. To that point, this platform demonstrated operational revenue growth of nearly 8% this quarter with growth expected to further accelerate in the second half of this year. We are also once again raising our full year revenue guidance by $1 billion, which is on top of the $400 million sales increase we delivered in the first quarter for a total overachievement of $1.4 billion. And lastly, we are making good progress with our pipeline, across all stages of development, including recent strong data for Skyrizi in ulcerative colitis as well as the recent U.S. approvals for Rinvoq in Crohn's disease and Epkinly in relapsed or refractory DLBCL, both important new therapies for patients. So in summary, I'm extremely pleased with the strong momentum and execution across the business. It reinforces our confidence in our ability to return to robust growth in 2025 with high single-digit compounded growth rate to the end of the decade. With that, I'll turn the call over to Rob for additional comments on our business performance. Rob? Rob Michael: Thank you, Rick. AbbVie delivered excellent results once again this quarter. We are demonstrating strong execution across our business with each of our five key therapeutic areas beating expectations. We reported adjusted earnings per share of $2.91, which is $0.11 above our guidance midpoint. Total net revenues were nearly $13.9 billion, more than $350 million ahead of our guidance with the vast majority of the beat coming from our ex Humira growth platform. In immunology, Skyrizi and Rinvoq are demonstrating impressive growth with sales for both therapies up more than 50% versus the prior year. These two agents have achieved differentiated clinical profiles, including head-to-head data versus Humira and other novel therapies. Skyrizi and Rinvoq are now collectively approved across 10 large indications, and we are forecasting combined revenue growth of more than $3.5 billion this year. With ongoing programs in several additional disease areas, we expect both Skyrizi and Rinvoq to deliver robust growth into the next decade and significantly exceed Humira peak revenue. U.S. Humira is also performing well. The first half erosion coming in better than our expectations due to volume. We have been carefully analyzing the biosimilar marketplace, where the total number of competitors has now expanded to 8. While many of these biosimilars have been added to payer formularies, Humira continues to maintain strong parity access. Based on the volume trends and parity access, we now anticipate U.S. Humira erosion of approximately 35%, an improvement of two points versus our original guidance. Neuroscience is another area that is outperforming expectations. Based on the current run rate, this portfolio is now on pace to add more than $1 billion of incremental revenue this year. with continued strong growth from Vraylar as well as our leading migraine portfolio. In aesthetics, the outlook continues to improve. We delivered positive growth this quarter, driven by strong international performance and stabilizing trends in the U.S. These positive trends give us the confidence to once again raise our full year guidance for aesthetics. And as a clear market leader, we are focused on expanding the aesthetics category with increased commercial investment and continued innovation to support robust long-term growth. Given the strong and balanced performance across our diverse portfolio, we are raising our full year adjusted earnings per share guidance by $0.23 and now expect adjusted earnings per share between $10.90 and $11.10. In closing, our operational execution has been outstanding, and we are very well positioned to deliver on our commitments in 2023 and beyond. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff? Jeff Stewart: Thank you, Rob. I'll start with immunology, which delivered total revenues of $6.8 billion, exceeding our expectations. Skyrizi continues to perform exceptionally well. Global sales were approximately $1.9 billion, reflecting very strong operational growth of 51%. Our performance in psoriasis continues to be impressive. Total prescription share in the U.S. biologic market is now at 32%, double the share of the next closest biologic therapy. When you consider that Skyrizi is capturing roughly one out of two every in-play patient, which are either new to therapy or switching, there remains substantial opportunity for continued robust sales growth. And based on the available clinical data we are seeing from emerging competitive therapies in psoriasis, including orals, we feel very confident in Skyrizi's long-term potential with robust sales growth expected through the early part of the next decade. We are also seeing very nice prescription growth in psoriatic arthritis, especially in the U.S. dermatology segment where Skyrizi is approaching the leading new patient biologic market share. Skyrizi's momentum across psoriatic disease is very solid globally as well with total in-play share leadership in nearly 30 key countries. Turning now to IBD, where Skyrizi has demonstrated a very compelling clinical profile, including strong endoscopic data paired with convenient dosing. Uptake in Crohn's disease has been rapid, with total in-play patient share of approximately 25% in the U.S., roughly at parity leadership with Stelara. This uptake is very encouraging for Skyrizi's potential in ulcerative colitis, where we recently reported positive maintenance data with approval and commercialization anticipated next year. Given the momentum we are seeing across all of the approved indications, we will be raising our full year sales outlook for Skyrizi. Moving now to Rinvoq which delivered global sales of $918 million, reflecting operational growth of nearly 57%. A key element of Rinvoq's success is its strong differentiation. It is now approved across seven distinct indications, including four in rheumatology, two in IBD as well as atopic dermatitis. It's the only potent daily oral medication with compelling head-to-head data against multiple novel therapies, including superiority to Humira in RA and Dupixent in AD. It's the only JAK inhibitor now approved to treat both Crohn's disease and ulcerative colitis. And we have established strong and broad commercial access for each of the core diseases with formulary coverage for Crohn's expected to ramp quickly over the next months. As it pertains to Rinvoq's book performance, we are seeing increasing prescriptions across each of the room indications globally, further market share momentum in atopic dermatitis, including now high-teens in-play patient share in the U.S. and robust uptake in IBD, where Rinvoq has demonstrated strong rates of remission and endoscopic improvement. Rinvoq is now capturing roughly one out of every four in-play ulcerative colitis patients in the second line plus setting. And the early data for Crohn's, which launched just in May, also shows a very strong ramp in new patient starts. We remained well positioned for continued momentum in this new indication as the only jack inhibitor approved to treat Crohn's disease. This level of performance, along with the development of ongoing projects across several other diseases, such as giant cell arteritis and systemic lupus in rheumatology and multiple additional derm indications, reinforces the long-term potential for Rinvoq with strong sales growth expected through the early part of the next decade. Global Humira sales were $4 billion, down 24.8% on an operational basis due to biosimilar competition. Erosion in the U.S. remains slightly better than our expectations due to volume with the vast majority of the impact this quarter driven by price. Turning now to hematologic oncology, where total revenues were approaching $1.5 billion. Imbruvica global revenues were $907 million, down 20.8%, consistent with our expectations. Venclexta global sales were $571 million, up 15% on an operational basis with strong demand for both CLL and AML, and we are particularly pleased with the international performance here, following continued reimbursement progress in the EU and inclusion in China's national reimbursement list. We also recently received the U.S. approval for Epkinly in third line plus DLBCL further expanding our on-market portfolio in hem onc. Early prescription trends have been encouraging, with a more robust opportunity expected as we progress development in earlier lines of therapy. We also anticipate approval and commercialization in Europe and Japan later this year. In neuroscience, revenues were nearly $1.9 billion, up 14.2% on an operational basis. Vraylar continues to exceed our expectations. Sales of $658 million were up 33.9% on an operational basis with increasing momentum across all indications following the MDD approval late last year. Within migraine, we remain the clear market leader with unique treatment options for both acute and chronic conditions. Our oral CGRP portfolio contributed $292 million in combined sales this quarter reflecting growth of more than 30% as we continue to see strong prescription demand for both Ubrelvy and Qulipta. Lastly, total Botox Therapeutic sales were $748 million, up 11.3% on an operational basis, reflecting nice momentum in chronic migraine as well as other approved indications. This franchise continues to outperform our expectations, and we will be raising our full year guidance for the collective neuroscience portfolio. So overall, I'm extremely pleased with the performance and execution across the therapeutic portfolio with growth expected to accelerate through the second half of the year. And with that, I'll turn the call over to Carrie for additional comments on aesthetics. Carrie? Carrie Strom: Thank you, Jeff. Second quarter global aesthetics sales were approximately $1.4 billion up 2.9% on an operational basis with strong performance from our international portfolio offsetting the economic impact in the U.S. U.S. aesthetic sales were $829 million, down 6.2%. Our U.S. portfolio continues to perform well from a competitive perspective. And as expected, the aesthetics markets continued to be impacted by lower consumer spending related to inflationary pressures, which weighed on year-over-year growth rates. U.S. Botox cosmetic sales were $420 million, a decline of 6.5% versus the prior year. While the U.S. cosmetic toxin market declined low single digits in the second quarter on a year-over-year basis, growth rates improved through the quarter, with June showing a return to positive year-over-year market growth. Botox Cosmetic continues to be the clear market leader, maintaining strong and stable share despite new competitive entrants. U.S. Juvederm sales were $125 million, down 14.5% on a year-over-year basis as we continue to see a more pronounced impact from inflationary dynamics on higher-priced, more deferrable procedures such as Filler. The U.S. Filler market declined approximately 20% in the quarter on a year-over-year basis due to the persistent inflationary environment. Our Juvederm collection remains market leader and share was stable in the quarter. The economic metrics that we track for the U.S. have largely stabilized. Our consumer market research shows a meaningful recovery from last summer and those intending to get treated with toxins and fillers. Additionally, we have now lapped the beginning of the market downturn, which occurred in the second quarter of last year. Based on these factors, we expect growth rates for the U.S. facial injectables to improve in the second half of this year. Our international aesthetics portfolio continues to perform exceptionally well with strong results in many key markets. Second quarter sales were $555 million, reflecting operational growth of nearly 20%. The International Botox cosmetic sales of $265 million increased approximately 14% on an operational basis and International Juvederm sales were $243 million, up approximately 28% on an operational basis. Growth in the Asia Pacific region, particularly robust as aesthetic treatment rates in China have fully recovered to pre-COVID levels. We continue to anticipate strong normalized growth through the remainder of the year in China. We are very pleased with the strong performance of our international aesthetics portfolio over the first half of the year and continue to expect similarly strong results in the second half. In the third quarter, we will be facing a challenging year-over-year comparison due to a shipment timing benefit we saw in the third quarter of 2022. This is expected to result in relatively flat growth for our international portfolio in the third quarter. On a full year basis, we expect our international aesthetics sales to grow high single digits. We continue to invest to drive future growth for our aesthetics portfolio with a focus on enhanced promotional activities, improve digital products and services through our Alle platform, sales force expansion, and injector training. We continue to invest in our pipeline as well, and we remain committed to a regular cadence of new product introductions and indication expansions for Botox cosmetic and Juvederm. We recently announced the FDA approval of SkinVive, the first hyaluronic acid filler in the U.S. for improved skin smoothness of the cheeks, which, along with the recently launched Volux filler for jawline contouring, will help sustain our leadership position in the U.S. filler market. Our investments will allow us to maintain a strong leadership position in the highly underpenetrated and rapidly growing global aesthetics markets. We remain very confident in the long-term outlook for our aesthetics portfolio and continue to expect to deliver greater than $9 billion in 2029. In the near term, the improving aesthetics outlook in the U.S. and continued robust international performance gives us confidence to once again raise our full year aesthetics guidance with an expectation for continued operational growth over the back half of the year. With that, I'll turn the call over to Tom. Tom Hudson: Thank you, Carrie. We've continued to make very good progress with our pipeline over the quarter. We had a substantial amount of activity across our R&D pipeline, resulting in new approvals and advancements of several programs. In immunology, we received FDA approval for Rinvoq in Crohn's disease, marking its seventh FDA approval across gastroenterology, rheumatology and dermatology. In our Crohn's development program, Rinvoq demonstrated a very rapid and strong impact on symptoms as well as endoscopic improvement. Given its strong benefit risk profile, we believe Rinvoq will be an important new medicine for patients suffering from moderate to severe Crohn's disease. While Crohn's disease approval marks the completion of the core indications, we believe Rinvoq revokes the potential to become a highly effective therapy in several additional important diseases. We recently began Phase III studies for Rinvoq in systemic lupus, hidradenitis, suprativa, and we remain on track to begin Phase III studies in alopecia areata later this year. We'll also see later this year from a Phase II study in vitiligo, which could support advancement to Phase III in this indication as well. Moving to Skyrizi, where in the quarter, we announced positive top line results from our Phase III maintenance trial in ulcerative colitis. In this study, Skyrizi met the primary and key secondary end points at week 52 compared to the withdrawal arm, demonstrating that patients continuing treatment with Skyrizi maintain high levels of clinical remission as well as more stringent endpoints such as endoscopic improvement, histologic endoscopic mucosal improvement and steroid-free remission. It's important to note that approximately 75% of the patients in this study had failed advanced therapy, including not only anti-TNFs, but also other biologics, JAK inhibitors and S1P modulators. This represents a very difficult-to-treat population in ulcerative colitis. Skyrizi's strong performance in patients with and without failure to advanced therapies including patients who were naive to advanced therapy demonstrate its utility across the spectrum of moderate to severe UC patients. We remain on track to submit our regulatory applications in the third quarter with approvals anticipated in 2024. We also recently published results from a head-to-head trial comparing Skyrizi to Otezla in patients with moderate psoriasis with Skyrizi demonstrating clear superiority to Otezla on all primary and ranked secondary endpoints at week 16 and 52. At week 52 of this study, 64% of patients achieved absolute skin clearance as measured by PASI 100 an SPGA clear compared to just 3% for Otezla, underscoring Skyrizi's ability to drive very high and durable responses in these moderate patients. In addition to higher clinical efficacy outcomes, the patients treat with Skyrizi which is a self-injectable administered quarterly reported improvements in health-related quality of life measures and greater treatment satisfaction compared to those treated with Otezla, which is an oral administered twice daily. Additionally, Skyrizi demonstrated favorable safety and tolerability compared to Otezla. The rates of adverse events, including serious and severe AEs were numerically higher with Otezla than with Skyrizi treatment. Previous to -- similar to previous studies, Otezla treatment was associated with high rates of gastrointestinal distress such as nausea, diarrhea and vomiting, which resulted in a 7% discontinuation rate in the first 16 weeks of treatment compared to no discontinuations for Skyrizi patients. We're incredibly pleased with these results, which further underscores Skyrizi's position as the best in category treatment for moderate-to-severe psoriasis, providing very high efficacy, durable responses a safe and tolerable profile and convenient quarterly administration. In oncology, we received accelerated approval in the U.S. for Epkinly as a monotherapy treatment for patients with relapsed or refractory DLBCL who had received two or more systemic therapies. We also recently received positive CHMP opinion with an approval decision in Europe expected later this year. DLBCL is a very aggressive disease where later-line patients have limited options. We're extremely excited to bring this new subcutaneous treatment option to patients. In the quarter, we also announced positive top line results from the follicular lymphoma cohort of a Phase II trial evaluating Epkinly in patients who have received at least two prior lines of therapy. In this study, Epkinly performed very well as a monotherapy, demonstrating an overall response rate of 82%. We are pleased with these results and plan to discuss these data with regulatory agencies about the potential to support a submission for accelerated approval. Beyond the mid-stage studies supporting accelerated approvals in later lines of therapy. We also have Phase III trials ongoing in earlier lines of DLBCL and for follicular lymphoma, and we look forward to providing updates on these programs as the data mature. In our navitoclax program, we recently saw top line results from the Phase III TRANSFORM one trial, evaluating navitoclax in combination with ruxolitinib in for patients with treatment naive myelofibrosis. This study met the primary endpoint at week 24, demonstrating a statistically significant improvement in the percentage of patients who achieved complete volume reduction of at least 35% compared to rux plus placebo. For the primary endpoint, the navitoclax combination showed a doubling of improvement over rux alone with 63% of patients on the navitoclax combination achieving SVR35 compared to 32% in the rux plus placebo combination. In this study, the navitoclax combination did not achieve the first ranked secondary endpoint, which was improvement in total symptom score at week 24. Additional follow-up data on SVR and TSS as well as other endpoints are expected in the fourth quarter of this year. We plan to wait for these more mature data before engaging with regulatory agencies in order to have a more comprehensive picture of the patient's clinical response and clinical benefit that navitoclax can provide. Looking to the remainder of this year. We remain on track for several additional data readouts from our late-stage oncology programs, including Phase III data from Venclexta's CANOVA trial in relapsed/refractory multiple myeloma patients with t(114) mutation. As a reminder, this is an event-driven study, and we're just waiting -- we're waiting for just a handful of remaining events. So, we'd expect to have these data in-house in the coming months. And we remain on track to see Phase II data for Teliso-V in second-line plus advanced non-squamous, non-small cell lung cancer in the fourth quarter. We're also making very good progress with several earlier line, earlier stage solid tumor programs. We recently initiated a Phase II study for ABBV-151, our anti-GARP antibody in hepatocellular carcinoma and plan to begin Phase II in several additional solid tumors over the course of the next 12 months. At the recent ASCO meeting, we presented promising initial results from a Phase I study evaluating our next-generation c-Met ADC, ABBV-400 in several advanced solid tumor types. We're seeing responses across multiple tumors, indicating broad activity. Results in late-line colorectal patients were particularly encouraging, where monotherapy treatment with 400 resulted in a confirmed overall response rate of 22% well in excess of standard of care, which is typically less than 2% to 3%. We're also encouraged by the durability of response seen in these early results. These patients had an average of five prior lines of therapy, so this level of efficacy is very encouraging. Based on these results, we plan to start our Phase II program later this year, beginning with a second line colorectal cancer study. Now moving to neuroscience, where in the quarter, we received a positive CHMP opinion recommending approval of atogepant for migraine prevention. We anticipate a decision in the coming months. And if approved, atogepant would be the only oral CGRP antagonist approved in Europe for prevention of both episodic and chronic migraine. This is a debilitating condition that impacts tens of millions of people in Europe, and we look forward to making this new oral treatment option available to patients once approved. Also, in the area of neuroscience, ABBV-916, our A-beta antibody for Alzheimer's disease is rapidly advancing to dose escalation studies. This antibody is demonstrating a long half-life and very low antidrug antibodies, both important attributes to achieve a best-in-class profile for our A-beta antibody. Dose selection in Phase II is expected to begin early next year. And lastly, in our aesthetics pipeline, we recently submitted our regulatory application for Botox in masseter muscle prominence in China, which is the initial focus for our program given the prevalence of masseter muscle prominence in Asian populations and a significant unmet need for minimally invasive treatment options. In our platisima prominence program for Botox, we remain on track to see data from two additional Phase III studies later this year with our regulatory submission in the U.S. expected near the end of the year. So, in summary, we had a very productive first half of the year across all stages and therapeutic areas of our pipeline, and we look forward to the second half of 2023 with several important clinical and regulatory milestones. With that, I'll turn the call over to Scott. Scott Reents: Thank you, Tom. I'm very pleased with the performance and outlook of the business, including the strong momentum from our ex-Humira growth plan. Starting with our second quarter results. We reported adjusted earnings per share of $2.91, which is $0.11 above our guidance midpoint. These results include a $0.15 unfavorable impact from acquired IP R&D expense. Total net revenues were nearly $13.9 billion, more than $350 million ahead of our guidance and down 4.2% on an operational basis, excluding a 0.7% unfavorable impact from foreign exchange. Importantly, these results reflect high single-digit sales growth from our growth platform. The adjusted operating margin ratio was 47% of sales. This includes adjusted gross margin of 84.7% of sales, adjusted R&D investment of 12.5% of sales, acquired IP R&D expense of 2% of sales and adjusted SG&A expense of 23.2% of sales. Net interest expense was $454 million, the adjusted tax rate was 15.8%. Turning to our financial outlook. We are raising the midpoint of our full year adjusted earnings per share guidance by $0.23 and now expect adjusted earnings per share between $10.90 and $11.10. This guidance does not include an estimate for acquired IP R&D expense that may be incurred beyond the second quarter. We now expect total net revenues of approximately $53.4 billion, an increase of $1 billion. At current rates, we expect foreign exchange to have a modest unfavorable impact on full year sales growth. This guidance includes the following updated assumptions with more than half of the sales improvement attributed to our ex-Humira growth platform. We now expect Skyrizi global sales of approximately $7.6 billion, an increase of $200 million due to continued strong performance across all approved indications. We now expect neuroscience sales of approximately $7.7 billion, an increase of $300 million, reflecting robust prescription growth for Vraylar following the MDD approval as well as better-than-expected performance of Botox Therapeutics and Qulipta. And for aesthetics, we now expect global revenue of approximately $5.4 billion, an increase of $100 million, primarily reflecting momentum from Botox Cosmetic. Lastly, we now anticipate U.S. Humira erosion of approximately 35%, resulting in a sales guidance increase of $400 million based on volume trends and strong parity access. Moving to the P&L. We continue to anticipate adjusted gross margin of 84% of sales and now expect adjusted R&D expense of $6.9 billion, SG&A expense of $12.7 billion and an adjusted operating margin ratio of approximately 46.5% of sales. Turning to the third quarter. We anticipate net revenues of approximately $13.7 billion, which includes U.S. Humira erosion of approximately 40%. And rates, we expect foreign exchange to have a modest unfavorable impact on sales growth. We expect adjusted earnings per share between $2.80 and $2.90. This guidance does not include acquired IP R&D expense that may be incurred in the quarter. In closing, AbbVie has once again delivered strong top and bottom line performance, and we are very pleased with the momentum of the business heading into the second half of the year. With that, I'll turn the call back over to Liz. Liz Shea: Thanks, Scott. We will now open the call for questions in the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or 2. Operator, we'll take the first question, please. Operator: Vamil Divan, Guggenheim Securities. . Vamil Divan: So one, I'm just curious, given the strong quarter and the guidance raise, in terms of that you talked about your floor EPS, is that -- do you still see a floor of $10.70 or is it different? And can you talk anymore at this point or when you see that floor happening? And then my second question is around IRA, and you obviously a lot of focus there. I'm curious if you have any thoughts around what the first list of products around September 1. Are you expecting AbbVie products to be included in that first group of 10. And then infused just Rinvoq specifically and how you see that might be at risk from IRI, given you bring obviously a lot of life cycle development there. And is there a chance that a life cycle may not be quite as long? Or kind of how are you thinking about prioritizing investing in a small molecule like Rinvoq? Rick Gonzalez : Vamil, this is Rick. I'll take the first question and then maybe Rob and I can also tag team on the first one and the second one as well. So if you look at the floor, if you step back and look at how the business is performing. Obviously, the business is performing extremely well. And a significant part of the over achievement is not the Humira business. In fact, of the $1.4 billion we're raising, as Scott said, only $400 million of it is Humira. So $1 billion of it is the growth platform. So all that speaks. We have very strong momentum going into 2024. And we talked before on these calls about, well, when will the trough year occur. And as you think about the floor, I think you have to sort of think about the trough year at the same time. We said in the past that if we significantly overachieved in 2023, that would increase the probability that the trough year was in 2024. And we said that in the backdrop of primarily thinking about it as Humira overachieving. And obviously, now what we're seeing that it's the majority of the other products that are overachieving the growth platform. So as we look at '24 and as we look at the trough, I think we have to let the year play out a little bit further to see where we're going. But I would say that we're feeling pretty -- we're feeling very good about '24. And the growth of that non-Humira business could more than offset the over performance that we're seeing this year, especially the over performance that we're seeing on Humira. So it's too early to raise the floor. But what I would tell you is the performance that we're seeing now gives us a tremendous amount of confidence of what '24 looks like. Rob, anything you'd add? Rob Michael : I'd just add that we've now collectively raised revenue guidance by $1.4 billion, as Rick mentioned, we raised $400 million in the first quarter, $1 billion this quarter. When you look at it, it's really across the key therapeutic areas that will drive long-term growth. We've raised Skyrizi, aesthetics, neuroscience, and also Humira. So we do feel very good about the performance of the business. We've debated when we update the floor that will come at some point may not come until we actually give the Q4 guidance -- on the Q4 call of 2024 guidance, but as we look at it, the fundamentals of the business are very, very strong, and we're seeing performance across all of the therapeutic areas. Rick Gonzalez : On your second question, IRA. I think it's very difficult to predict. In our planning assumptions, we have assumed for some products to be impacted here early on. Imbruca is obviously one product that we're looking at carefully. I would say it's right from how you would calculate it based on the data that we would have, it would be right on the bubble of where the cutoff would occur in those first 10 products. So it could be 10, it could be 9, it could be 11, depending upon how some other products. And I say it that way because remember, we're using the data that we have, we're not 100% sure that, that is the data that CMS is going to use. So there's not perfect clarity around it. But I would say that's one that we obviously have on the radar screen and we're looking at carefully. Anything you'd add, Rob? Rob Michael : When IRA was passed a year ago, we obviously modeled the impact and we reaffirmed the long-term guidance expectation of high single-digit growth in the second half of this decade. That remains. We looked at what it means in terms of inflation penalties, party benefit redesign, negotiations. So we did make assumptions around that. I think Rick is correct in that there is still enough uncertainty we're going to know soon, right? September one is when they expect to announce the first list. We have modeled it, but we feel good even with IRA although it does have an impact -- has impacted everyone in the industry, we can still deliver on our long-term growth expectations. On your question -- and I think keep in mind, too, when you look at the Medicare percent of business for AbbVie. In the U.S., it's about 20%. Globally, it's a little bit lower, obviously. And so you look at us relative to our peers, we have a lower percent of the business as exposed to Medicare. And then when we look at specific at Rinvoq, you have to keep in mind with Rinvoq with indication expansion, the percent of sales you're talking about by the time it potentially be selected for negotiation, potentially in the later part of the decade, you're talking about something where like 10% to 12% because if you keep in mind, new indications, in many cases, serve younger patient population. And so that's the way we're looking at Rinvoq continuing to develop it. We obviously have a number of indications that could launch later in the decade. We feel very good about that. Those indications can collectively contribute a couple of billion dollars of revenue. We'll continue to drive that robust growth we expect from Rinvoq and Skyrizi as well. And so, we've modeled the impact of IRA, we don't expect it to impact the development plans for Rinvoq. Liz Shea: Thank you, Vamil. Operator, next question, please. Operator: Chris Schott, JPMorgan. Chris Schott: Great. Thanks so much. Just two questions for me. I guess first, can you just elaborate in terms of what you're seeing with biosimilar Humira as we think about kind of the price and volume dynamics. I guess specifically, any surprises from your side in terms of how this is playing out? And then just any qualitative comments you can provide about how you see this kind of translating as we kind of think out to 2024? And then my second question was just on the Skyrizi updated guidance. Just a little bit more color on that $7.6 billion of at this point, how much is coming from psoriasis versus psoriatic arthritis versus this Crohn's launch that seems to be off to such a strong start. So just directional color of like the mix of the indications would be very helpful. Thank you. Jeff Stewart: Yeah. Hi, Chris. It's Jeff. And I'll answer your first question. So in a nutshell, we haven't been surprised at any of the dynamics that we've seen play out, we've called it very, very accurately. So again, nothing that's really other than some small volume holding on a little bit better that's really different. So we're quite pleased with how our contracting and access has played out. And that parity access for Humira has been important. And again, it's what we believe would happen. We think it's good for patients, obviously, who can maintain their therapy with very little volatility, and it certainly provided us with a lot of predictability. And so I think we've managed sort of the first half with the Amgen launch and then the second half dynamics very, very well. And if you look to '24, as I've highlighted before, we do have 2-year agreements with some of our accounts. And we negotiated those in good faith, and we expect them to be honored. And remember, these are parity contracts for both '23 and '24 with Humira access coexisting with these multiple biosimilars. So I would say based on these dynamics, we're confident that Humira access will remain quite meaningful in 2024. And we know that as more biosimilars become established, we're also, as we've highlighted, appropriately planning for some volume loss in those certain so-called wax-sensitive accounts over time. So really no surprises in terms of what we've seen overall. So we're quite pleased. Rob Michael: Chris, this is Rob. Just to give you some color, both in terms of the '23 guidance and the erosion assumptions around that, and then I'll talk about '24 briefly as well. In the first half of the year, obviously, the vast majority of that erosion came from price. We saw very little volume impact. But now with eight biosimilars on the market and some pursuing a low act strategy, we have assumed high single-digit volume erosion in the second half of the year, which would put the full year volume impact at mid-single digits. The rest of the 35% comes from prices we've negotiated those higher rebates and maintain strong parity access. Now while we're not providing '24 guidance today for U.S. Humira, it is reasonable to assume that there will be additional price erosion. Some will come from the annualization of the rebates that increased in the second half of this year and some will come from rebate increases negotiated for 2024 parity access. I'd also expect more volume erosion in '24, given the midyear entry of biosimilars this year, especially those that are pursuing a low act strategy. We've taken a close look at consensus estimates, analyst estimates have a very wide range the difference between the lowest estimate and the highest estimate approach is $4 billion. However, I'd say the average of those estimates appears to be a reasonable expectation for next year. Obviously, we'll give formal guidance likely on the Q4 call, which is our customary practice. But if you look at the average of those estimates, it should give you a good sense. Liz Shea: Thanks, Chris. Operator? Oh, sorry. Rob Michael: Yes. And then I'll take -- this is Rob on to your question on Skyrizi. So of the $200 million, it's split evenly between psoriatic $100 million and IBD a $100 million. So that $7.6 billion psoriatics, about $6.7 million, and IBD is around $900 million. Thanks Chris. Liz Shea: Operator, next question, please. Operator: Mohit Bansal, Wells Fargo. Mohit Bansal: Great. Thank you very much for taking my question. And congrats on the quarter. One clarification question and then one question. So clarification. So Rick, you mentioned that you think, like, again, at this point, you're not talking about increasing the floor, but you feel comfortable about the floor EPS range of $10.70. Is that fair to be in 2023 or '24, that's the first clarification question. And then second one is, when we talk to investors, they do feel comfortable about the ex-Humira portfolio. But one question that cuts up all the time is that, I mean, the lack of shiny object or pipeline beyond Skyrizi and Rinvoq. To the extent you agree with that assessment, how do you plan to mitigate that? Or is there anything in the pipeline that investors are missing at this point? Thank you. Rick Gonzalez: Okay. This is Rick. So as far as the $10.70, I would tell you that we feel highly confident in the $10.70. So there shouldn't be any concern there. And as I said, with how the growth platform is performing, we would expect to update at some point the floor. And obviously, by the way I'm saying it, the update would be in an upward direction. So hopefully, that gives some clarity around the floor. And when you think about the pipeline, what I tell you about the way we operate is we design our investment in R&D to be able to deliver the kind of growth that we expect for the business over the long term, both short term and the long term. Our expectations of the business haven't changed. Our expectations are to build a strategy that allows this business to grow at the top tier and be able to do it over the long term and do it in a consistent way. And I'd say, as I look at our historical performance, we've obviously delivered on that. But as I look at forward-looking performance through the end of this decade and into the early part of the ‘30s, we're highly confident we can deliver high single-digit growth with the pipeline that we have now, and ultimately, with the assets that we have in the marketplace and how they're performing in the marketplace and their ability to be able to drive significant growth. And you see that in the performance that we're delivering now. If you look at the growth platform's growth in first quarter, and then look at it in the second quarter, it's accelerating at a very good pace, and it will continue to accelerate as we go through the rest of this year. And that once we get to a stable tail or relatively stable tail on Humira will be that growth that emerges to be able to drive the company, and that's what gives us such a high level of confidence. But I think when you look at our pipeline, certainly, we invested significantly in Skyrizi and Rinvoq, and that investment is paying off extremely well. We have a number of assets in our pipeline that will continue to help accelerate that growth as we move forward. So venetoclax for t114 and MDS are in samples of that. 951, we should do any submission and get that product on the marketplace. There’s a huge need for that product in the marketplace. And a number of other assets, I won't go through every one of them. The rest of our investment in R&D has really been focusing on assets that are designed to be able to sustain our growth from 2030 - ‘40 forward. And so as I look at our pipeline, and I know you don't have as much visibility as we do, but when I look at our pipeline for things like the 400 platform and the cement platform that we have, the data we're seeing in CRC, non-small cell, that's a significant opportunity for us [indiscernible] is another significant opportunity for us. Our neuroscience portfolio is 916 and other assets is another significant opportunity for us that will emerge in that time frame. We have a next-generation BTK degrader that we're excited about. We have a second-generation BCL-2 that we're very interested in pursuing in multiple myeloma. And so there's a number of assets here that just haven't emerged to the point that you have clear visibility on all that data, but we do have visibility to where they're progressing. And so I think it's just hard for you to assess that earlier pipeline, but it's really designed to deliver on that long-term growth. So we're confident between now and the early ‘30s. And as that pipeline matures and the data comes out, three is another good example of where we have a lot of data now that is demonstrating that is probably best in class for a bispecific in myeloma. And so as that data emerges, you're going to get more visibility to it. And then obviously, we have the ability to go out and acquire things and we find things that we're interested in. Liz Shea: Okay. Thank you, Mohit. Operator, next question, please. Operator: Terence Flynn, Morgan Stanley. Terence Flynn: Maybe a couple for me. Maybe Rick, just to follow-up on that last comment, maybe just an update on your M&A BD appetite here, particularly assets that can contribute more near term to growth? And then again, I want to see what you guys are hearing out there regarding the long-acting Botox competitor. It sounds like you're seeing stable market share, but any feedback on that product? Rick Gonzalez : Okay. So M&A, I mean, obviously, we have a very active group who's constantly working in the area of business development. We're primarily focused in the areas that we operate in franchises. So think of things like immunology, neuroscience, certain areas of neuroscience, oncology, aesthetics, as an example, we constantly look at and then eye care would be, I would say, the key areas of focus. As I said before, we don't need anything to be able to drive that high single digits. Obviously, if we can grow even faster, that's a good thing. I think all of us recognize that. If we find assets that are out there that are later-stage assets, and they fit our strategy and they fit the kind of target product profile that we would expect because we only look for assets that can significantly change standard of care. That's what we're good at. And so we evaluate lots of things, but many of them don't meet that threshold that we're looking for. But if we find something, we would obviously pursue it. If it was in an area that we thought we could maximize the value of it. And so, we'll continue to do that. So like I said, I feel good about where we are and what we can drive, and I feel good about how we're looking at assets that are in the outside. We certainly have the financial wherewithal to be able to acquire assets that are out there. And as we've mentioned before, we obviously acquire larger assets. And so we continue to look at those. But they have to meet our criteria and they have to be able to deliver a good return to the business. On DAXI, I feel very good about how the team -- Harry and the team are performing against that. But I'll let Carrie actually describe to you how it looks. Carrie Strom : Thanks, Rick. So in terms of DAXI, it's been more than six months since their launch and the uptake has been quite limited from our perspective in the low single digits. So for context, as we benchmark our competitive launches. And you would benchmark this launch versus the most recent toxin to enter the U.S. market you would see it's tracking to about 25% of where another product would be at the same point in its launch. And in terms of customer feedback, we continue to hear that expectations are just not being met on duration, that expectations on the customer side and on the consumer side. So we have yet to see impact on Botox share and Botox will continue to be the clear market leader as the other toxins compete for the number 2, 3, 4 position in our customers' offices. We are very pleased with the team's ability to execute on these competitive strategies here. And actually, their clear focus not only on the competitive strategies, but also on the broader focus and vision to grow the entire toxin market in the U.S., which we continue to see as biggest opportunity now and in the future. Liz Shea: Thank you, Carrie. Operator, next question, please. Operator: Evan Seigerman, BMO. Evan Seigerman: I wanted to just talk about kind of how you think about market share across the growth portfolio, specifically Skyrizi and Rinvoq kind of going forward. Is there a potential ceiling for them in one market share you can realize in these markets? Or maybe comment on some of the gating factors for market share growth in each of the patient provider or reimbursement agreements. Jeff Stewart: Yes. Evan, it's Jeff. I'll take that one. One of the aspects that we have that I highlight and we look very carefully at, we look at both sort of in-play capture which I often refer to, for example, right now, the in-play capture for Skyrizi in psoriasis is about 50%. So we're capturing one out of every two patients. And our market share is about 32%, as I highlighted. So theoretically, as we study these markets that if there's not major innovation or major disruption that comes in place. And we really don't see that in psoriasis. You get such a high level of efficacy with Skyrizi, your market share, so the 32% starts to ramp up over time towards your in-play capture because you get the persistency effects and the fall off that take place in the market. So really, when you look at that, I could say the same thing, for example, with Rinvoq. I mentioned that it's capturing 25% of second line plus in-play share. It has like a 3% market share. So in terms of the ability to sort of grow that market share over time, we really monitor that capture rate in the early years, and then you just sort of -- the in place sort of pulls up your market share over time. So that's why we're quite encouraged at the speed of the ramps that we're seeing there and the ability to move that market share. Now when we study the models, you don't fully get there because typically, something else launches, time goes by. But we can feel very, very encouraged as we look at our in-play momentum that the market share starts to approach that over our long-range planning cycle. Rick Gonzalez: The only other thing I would add, this is Rick, is with Otezla head-to-head. I would say currently, Skyrizi is not competing much against Otezla, which is a pretty sizable opportunity. And we're very pleased with this head-to-head data. So that will open up another pool of patients that today Skyrizi doesn't necessarily compete against. So that data will obviously allow us to be able to position it quite effectively against Otezla. Liz Shea: All right. Thank you, Chris. Operator, next question, please. Operator: Chris Raymond, Piper Sandler. Chris Raymond: Just maybe a pipeline line of questioning here. Rick, I heard you mention maybe ABBV-951, but it wasn't in your prepared comments. Maybe -- I know you guys were saying you're working to respond to the CRL later this year with PDUFA in the first half. Is that still the case. And then maybe also on the pipeline. A couple of quarters ago, I think you guys talked about an interesting combo opportunity in IBD with that GLP-2 in-licensed, I think, from Scripps. Any updated thoughts here with this sort of mechanism as a combo agent? Roopal Thakkar: It's Roopal. I can take those. So for 951, the team is still on track for a resubmission this year, consistent with what you just stated. And in fact, we've launched in Japan, and there's already commercial patients receiving it. So the team is very excited about that. And what was described earlier. The unmet need is still quite high, and we still believe in a very strong profile in that asset. Along the lines of combinations, as you mentioned, on GLP-2, we feel with something like Skyrizi, the data that we've seen in Crohn's and ulcerative colitis there's still potentially an opportunity to even increase endoscopic or mucosal healing even higher. We're seeing high ranges already 50%, 60%. And but we can still potentially go higher and something like a GLP-2 can directly address mucosal healing. So that could be a potential combo. There's other assets in our immunology pipeline that we are also considering for a combination. But when you have an asset like Skyrizi and the safety profile that we continue to observe that creates, I would say, multiple opportunities. Tom Hudson: If I can just add, we didn't really opt in yet. Our collaboration with Caliber, which we expanded this week to more programs includes them doing a Phase Ia study which is almost finished. We're going to see the data and make that decision. It does fall into our -- part of our immunology program, which is in epithelial repair, which Roopal just mentioned. And so this is one of the assets which we think if you get a healthy gut to prepare that there will be in combination with immunomodulators will get a better response over time. We have another program called RIPK1, which also is involved in epithelial repair. So as multiple strategies, but this is one where we'll be making a decision and announcing a later time this year. Liz Shea: Thank you, Chris. Operator, next question, please. Operator: Steve Scala, TD Cowen. Steve Scala: A couple of questions. This morning, Takeda noted weakness in the U.S. GI market, and it seemed to be mainly on patient levels as opposed to competition. Wondering if you're seeing this and to what do you attribute it? So that's the first question. On the second question, on the Q1 call, the company said it would narrow the EPS range when it had clarity on biosimilar Humira and the landscape for that. So you narrowed that range today despite most biosimilars having been on the market for only three weeks, what do you know now that you didn't know when you reported in April that gives you the confidence to narrow the range today or is it all about the performance of the rest of the portfolio and really not about Humira? Jeff Stewart: Yeah, hi Steve, it's Jeff. No, we don't see any slowdown in the IBD market. I mean this market has been just one of the highest growth markets we've seen from a CAGR perspective over many, many years. There's such unmet need. And so no, we're not seeing any patient slowdown. I would say, look, if we look at our particular data, I mean, you're seeing very fast ramps on this in-place share from Skyrizi and Crohn's disease. Now you're seeing an equally fast ramp in the early weeks from Rinvoq and Crohn's disease. And again, we're capturing up to 25% of the second line plus patients in ulcerative colitis. So I don't know what data Takeda is looking at, but we're seeing that the competitors in that space. And the leading competitors are Stelara and Entyvio and of course, our own Humira, but it's Stelara and Entyvio, they're under pressure in terms of incremental patient capture since our launch, and we'll continue to monitor. But we don't see any patient flow issues in the marketplace. Rob Michael: And Steve, this is Rob. On your second question. I think it's a combination of both. We're seeing very strong performance from the ex-Humira growth platform, as you can see by the guidance raise, that's really a contributor. But now that we're beyond the middle of the year. We know the biosimilars that have entered the market, we know they're facing prices. We've maintained strong parity access. And so that also increased our confidence which is why we've narrowed the range to $0.20. But it's a combination of both the ex-Humira growth platform performing very strongly as well as where we sit today with biosimilar competition for Humira. Liz Shea: Thanks, Steve. Operator, next question, please. Operator: Carter Gould, Barclays. Carter Gould: Thank you for taking my questions, and congrats on the quarter. I guess, two, acknowledging all your comments on the pipeline and previous comments on BD. Rick, was looking to get your thoughts on how the more assertive FTC here is limiting your target list on BD or your ability to complete deals? And then maybe just on Botox. Just was hoping for a little bit more color on the sustainability of the ex-U.S. trends versus maybe some of that demand getting pushed into the quarter after some of the shutdowns, COVID impacts and whatnot ex-U.S. Thank you. Rick Gonzalez: Okay. So, I'll take the first question. Obviously, the FTC appears to be applying a lot more scrutiny to transactions. Having said that, I would say even before this happened, we would always evaluate an acquisition of a product or a company in the backdrop of what we thought the competitive environment would be our position in that market, meaning we didn't necessarily go out and try to do transactions that we thought would be extremely difficult from an FTC standpoint. So, I think the way we think about the FTC situation now is, look, it may require more time to get acquisitions through it may even require that you're willing to pursue litigation in order to get those through. But in the end, if your position is that what you're trying to do is not anticompetitive. You will be able to ultimately prevail in that process. And I think we're seeing that as some of these transactions go to court. Some not in our own industry, but in other industries, I think that's playing out. And so, I think ultimately, it will end up being more of a delay, but not something that staples your ability to do things that are appropriate to do. That's my perspective on it. Carrie? Carrie Strom: Sure. In terms of the aesthetics market internationally, like we said, we've been very pleased with the performance so far, and we expect to -- we continue to expect to see that type of strong performance through the rest of the year. We're continuing to invest in key growth markets like Japan and in markets like Brazil. And of course, China has become our second biggest market globally. And in China, in the first quarter, we did see significant growth as the market was reopening from COVID and some pent-up demand that came through in Q1 and early Q2. And now China has returned to normalized high growth rates. And so despite some economic pressures there, we really continue to see strong growth as we continue to invest and expand our promotional footprint there through field force, through injector training and our consumer efforts. And China will continue to be a really attractive market for us. Based on that commercial expansion and also, we're going to have a steady flow of new product launches throughout the decade in that market. One thing to note, which we did mention in our prepared remarks is that we do expect Q3 to be relatively flat internationally based on shipment timing from last year with that return to growth in Q4 and high single-digit growth for the full year internationally. Rob Michael: And then, Carter, you were specifically asking about international Botox. I think if you just look at the run rate through the six months of the year, that's probably a good proxy for where we expect international Botox to land. We're holding strong share positions. Force is very, very good. So there's really no dynamic there. As Carrie mentioned, I mean you have to keep in mind that fillers a very large market for us, business for us internationally. We do have the Q3 dynamic. But when you look at the full year for international, that high single-digit growth, is certainly a way to think about the international business for aesthetics. Liz Shea: Thanks, Carter. Operator, next question, please. Operator: David Risinger, Leerink Partners. David Risinger: Yes. Thanks very much. So I have two questions. Rick, you had mentioned that you're expecting stabilization of Humira sales at some point. Could you provide some perspective on when you might expect that? And then second, with respect to the filler franchise, obviously, it's performing strongly, could you discuss the prospects including the driver of weight loss drug patients seeking to compensate for facial hallowing? Thank you very much. Rick Gonzalez: On the Humira tail, as Rob mentioned earlier, obviously, you have the annualization of the impact that we have this year, the second half annualization that's going to roll into '24. We're going to have further price erosion in '24, both based on the contracts that we have and how we're expecting the market to play out. And I'd say the pricing in the marketplace has been consistent with what our original assumptions were. So, I think the expectation you'll start to see stabilization of that tail in '25. And benefit operates similar to what we see in the international markets, which I think would probably be low at that point. it becomes relatively stable, I'd say, in '26 going forward. And it should be still a substantial tail that we maintain. But see less erosion pressure on it at that point. Carrie, do you want to talk a little bit about the Otezla impact? Carrie Strom: Sure. So, in terms of the filler opportunity and outlook, I guess, as that big -- I'll start -- I'll zoom out a little bit and just comment on that the filler market continues to be really attractive, especially internationally, as you've already seen here right now. with China driving some strong growth. And really some of the key Juvederm brand have just become available in China in the past few years, and we'll continue to have, like I said, a cadence of Juvederm launches in China. And then our increased investment all over the world and continues to drive our filler business and gives us a lot of optimism there internationally. Now in the U.S., we have said that the inflationary dynamics have impacted the U.S. market for filler and more than toxin just by the nature of the filler pricing and procedure. And also in terms of the patient journey patients tend to start on toxin before they add filler. And so, for all those reasons, we believe that the top -- the filler market will continue to improve in the second half of the year. although it will lag the toxin market recovery a bit. Now in terms of the question around Ozempic, we have been keeping an eye on that and how these weight loss products could have an impact on the aesthetics market. And what we see is that really anything that gets a consumer engaged in their appearance, including products like Ozempic are a positive tailwind for the aesthetics business. And we are hearing some customers say that these facial hollowing fillers or for -- that's a result of these products is an opportunity for fillers. We see that on social media. We're tracking it in other forms of media. And we think that like many other consumer trends around aesthetics, this will just continue to be a tailwind and the positive dynamic of the business. Liz Shea: Thanks, David Risinger. Operator, next question, please. Operator: Tim Anderson, Wolfe Research Tim Anderson: Thank you. A couple of questions. How much uncertainty is there in terms of contracting in the I&I category in 2024 from a pricing standpoint for Skyrizi and Rinvoq. And when will you be able to provide an update on how those pricing discussions are going for those two brands. So not the formal sales guidance for those products, but how the pricing discussions are going. And what is your expectation today for that level of price erosion in 2024 relative to what it's been in 2023? Rick Gonzalez: Okay. So, I think Jeff and I will tag team this one. It's a great question because, look, I think we all know there has been some question out in the marketplace since the first quarter about I&I pricing. And so let me try to frame our perspective on the pricing because I think there's some misconception that's developed in the marketplace to some extent around I&I pricing. I guess the first thing I'd say to you, this is a market we know well. We've been in this market for a long time. We're obviously a leader in this market. So, it's a market we know extremely well. And obviously, we know any trend that's occurring in this market to a high degree of detail. And what I would tell you is that we see no fundamental change in the way pricing is being dealt with in this marketplace nor do we expect to see any fundamental change that occurs in the foreseeable future. So that brings me to the rebate question in the first quarter. And I would tell you that we're operating exactly the same way we have historically operated in this segment as it relates to rebating or discounting. When we get a new indication or a new product, one of the things that we evaluate is -- okay, what level of rebating should we do in order to maximize two things for the product. The speed at which we can drive the ramp and the ultimate peak sales that we can drive for that asset. We weigh those two things against how we look at contracting and getting on formulary. And so when you get an indication, you make a trade off. Do I want to be on formulator? I don't. If I do, I have to provide some level of incremental rebates. Is that a financially positive decision for the asset in the company. And if it is, we make that decision. And I would say that Skyrizi and Rinvoq are classic examples of that strategy. And I would say, look at how they're performing. We're going to grow those two assets despite the increased rebates, $3.5 billion this year. And that's a pretty good trade-off. I don't know, Jeff, anything you'd add? Jeff Stewart: Yes. Maybe just to build on that point, Rick. I mean this fact base of seven indications in one year in one category with one firm, it's just -- it's really unprecedented. It's not going to happen again. And I think it's important to think about how it works. I mean, when you get a new indication and they're sequencing over time, you've got to clear the payer's P&T clinical committee, and they don't meet every day. They meet every couple of months. So there's a process there. And then you've got to be added to the formulary structure. So you either have to somehow gain a new spot by indication or replace a competitor. And that's not easy as well. And so that's why what we see in the marketplace. Many competitive firms have to offer these free or bridge programs and not just for a quarter or 2, sometimes there are multiple quarters or years until that access ramps. And I would say, in contrast, Rick, as you noted, on average, we achieved fully paid access for those seven indications in about 60 days, really, really unprecedented. So that means we had to give very little free goods we had almost immediate paid access and profit flow and then, of course, that rapid revenue accumulation that you highlighted. So definitely the right trade-off, and we don't see that recurring. Rob Michael: And Tim, on your second question, I mean we've said this before, the high single-digit price impact this year is a function, again, as Jeff mentioned, seven new indications. We do not expect that type of price erosion going forward. It should not be what investors are modeling. So I wouldn't be concerned about high single-digit price erosion in '24. Liz Shea: Thanks, Tim. Operator, we have time for one final question. Operator: And that will be from Geoff Meacham, Bank of America. Geoff Meacham: Great. Good morning, guys. Thanks for the question. On OUS Humira, you're obviously well past the initial biosimilar way, but you're still seeing some sequential decline. So what's the context here? And is there a dynamic that could impact Skyrizi or Rinvoq even indirectly OUS? And then on navitoclax, I know you guys have more details to come, but is there a threshold you're looking for and TRANSFORM one to move forward or even to inform development in other indications, just thinking about maybe the tolerability profile and the comps in that? Rob Michael: So Jeff, this is Rob. I'll answer your question on International Humira. If you look at the '23 erosions, about $600 million it's really split in, I'd say, three buckets. About $300 million of it is new biosimilar markets, markets like Canada, Puerto Rico, Mexico. Those are -- remember, we have additional waves coming in. So that's the next wave coming in so about half of it is that. And then I characterize about $200 million being really the impact of new agents like Skyrizi and Rinvoq, right? So you have agents that deliver higher standard of care, and so you're going to see share erosion just through that dynamic. And fortunately, we've brought forward our own products that do that. And so I'd say of that $600 million, $200 million is roughly that. And then in the international markets, you typically see some, I'd say, low to mid-single-digit price erosion, just typically year-over-year. So that's about another $100 million. So it's important to characterize it the right way. It's not so much markets that were biosimilar several years ago. It's more recent biosimilar markets, our own competition from our own agents as well as the typical price erosion you see in the international market. Roopal Thakkar: It's Roopal. I'll take the navitoclax question. So we'll continue to monitor the spleen volume reduction and see how that looks towards the end of the year. And if it maintains the high level that Tom described, that's something that definitely a positive. The other things that we'll get that will reveal themselves over the longer term as the marrow fibrosis and that, along with the spleen volume reduction and actually some of our earlier data may be correlative for survival events. So we'll get an early look at those. And then in terms of tolerability, what we've seen thus far is consistent with what we've seen initially, and it is a titratable dosing. So the clinicians can tailor in the study to what the patient needs. So more to come by year-end. Liz Shea Okay. Thanks, Jeff. And that concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. Operator: As we are concluded. Again, thank you for your participation. You may please disconnect at this time.	[ { "speaker": "Operator", "text": "Good morning and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Rob Michael, President and Chief Operating Officer; Jeff Stewart, Executive Vice President and Chief Commercial Officer; Scott Reents, Executive Vice President and Chief Financer; Carrie Strom, Senior Vice President, AbbVie and President, Global Allergan aesthetics; and Tom Hudson, Senior Vice President, R&D and Chief Scientific Officer. Joining us for the Q&A portion of the call is Roopal Thakkar, Senior Vice President, Development and Regulatory Affairs and Chief Medical Officer. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll turn the call over to Rick." }, { "speaker": "Rick Gonzalez", "text": "Thank you, Liz. Good morning, everyone, and thank you for joining us today. 2023 is an important year for AbbVie as we experience Humira biosimilar competition in the U.S. market, and as we execute our long-term diversification growth strategy. Now roughly seven months into the year, I'm extremely pleased with the progress that we're making against these objectives. The U.S. Humira biosimilar impact is playing out as projected and slightly better than our planning assumptions. We are competing very effectively with the various biosimilar offerings. We have exceeded our guidance in burst in second quarters with the overachievement predominantly driven by our growth platform, the base portfolio, excluding Humira which, as you know, is the critical driver in our rapid return to growth in 2025 and beyond. To that point, this platform demonstrated operational revenue growth of nearly 8% this quarter with growth expected to further accelerate in the second half of this year. We are also once again raising our full year revenue guidance by $1 billion, which is on top of the $400 million sales increase we delivered in the first quarter for a total overachievement of $1.4 billion. And lastly, we are making good progress with our pipeline, across all stages of development, including recent strong data for Skyrizi in ulcerative colitis as well as the recent U.S. approvals for Rinvoq in Crohn's disease and Epkinly in relapsed or refractory DLBCL, both important new therapies for patients. So in summary, I'm extremely pleased with the strong momentum and execution across the business. It reinforces our confidence in our ability to return to robust growth in 2025 with high single-digit compounded growth rate to the end of the decade. With that, I'll turn the call over to Rob for additional comments on our business performance. Rob?" }, { "speaker": "Rob Michael", "text": "Thank you, Rick. AbbVie delivered excellent results once again this quarter. We are demonstrating strong execution across our business with each of our five key therapeutic areas beating expectations. We reported adjusted earnings per share of $2.91, which is $0.11 above our guidance midpoint. Total net revenues were nearly $13.9 billion, more than $350 million ahead of our guidance with the vast majority of the beat coming from our ex Humira growth platform. In immunology, Skyrizi and Rinvoq are demonstrating impressive growth with sales for both therapies up more than 50% versus the prior year. These two agents have achieved differentiated clinical profiles, including head-to-head data versus Humira and other novel therapies. Skyrizi and Rinvoq are now collectively approved across 10 large indications, and we are forecasting combined revenue growth of more than $3.5 billion this year. With ongoing programs in several additional disease areas, we expect both Skyrizi and Rinvoq to deliver robust growth into the next decade and significantly exceed Humira peak revenue. U.S. Humira is also performing well. The first half erosion coming in better than our expectations due to volume. We have been carefully analyzing the biosimilar marketplace, where the total number of competitors has now expanded to 8. While many of these biosimilars have been added to payer formularies, Humira continues to maintain strong parity access. Based on the volume trends and parity access, we now anticipate U.S. Humira erosion of approximately 35%, an improvement of two points versus our original guidance. Neuroscience is another area that is outperforming expectations. Based on the current run rate, this portfolio is now on pace to add more than $1 billion of incremental revenue this year. with continued strong growth from Vraylar as well as our leading migraine portfolio. In aesthetics, the outlook continues to improve. We delivered positive growth this quarter, driven by strong international performance and stabilizing trends in the U.S. These positive trends give us the confidence to once again raise our full year guidance for aesthetics. And as a clear market leader, we are focused on expanding the aesthetics category with increased commercial investment and continued innovation to support robust long-term growth. Given the strong and balanced performance across our diverse portfolio, we are raising our full year adjusted earnings per share guidance by $0.23 and now expect adjusted earnings per share between $10.90 and $11.10. In closing, our operational execution has been outstanding, and we are very well positioned to deliver on our commitments in 2023 and beyond. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff?" }, { "speaker": "Jeff Stewart", "text": "Thank you, Rob. I'll start with immunology, which delivered total revenues of $6.8 billion, exceeding our expectations. Skyrizi continues to perform exceptionally well. Global sales were approximately $1.9 billion, reflecting very strong operational growth of 51%. Our performance in psoriasis continues to be impressive. Total prescription share in the U.S. biologic market is now at 32%, double the share of the next closest biologic therapy. When you consider that Skyrizi is capturing roughly one out of two every in-play patient, which are either new to therapy or switching, there remains substantial opportunity for continued robust sales growth. And based on the available clinical data we are seeing from emerging competitive therapies in psoriasis, including orals, we feel very confident in Skyrizi's long-term potential with robust sales growth expected through the early part of the next decade. We are also seeing very nice prescription growth in psoriatic arthritis, especially in the U.S. dermatology segment where Skyrizi is approaching the leading new patient biologic market share. Skyrizi's momentum across psoriatic disease is very solid globally as well with total in-play share leadership in nearly 30 key countries. Turning now to IBD, where Skyrizi has demonstrated a very compelling clinical profile, including strong endoscopic data paired with convenient dosing. Uptake in Crohn's disease has been rapid, with total in-play patient share of approximately 25% in the U.S., roughly at parity leadership with Stelara. This uptake is very encouraging for Skyrizi's potential in ulcerative colitis, where we recently reported positive maintenance data with approval and commercialization anticipated next year. Given the momentum we are seeing across all of the approved indications, we will be raising our full year sales outlook for Skyrizi. Moving now to Rinvoq which delivered global sales of $918 million, reflecting operational growth of nearly 57%. A key element of Rinvoq's success is its strong differentiation. It is now approved across seven distinct indications, including four in rheumatology, two in IBD as well as atopic dermatitis. It's the only potent daily oral medication with compelling head-to-head data against multiple novel therapies, including superiority to Humira in RA and Dupixent in AD. It's the only JAK inhibitor now approved to treat both Crohn's disease and ulcerative colitis. And we have established strong and broad commercial access for each of the core diseases with formulary coverage for Crohn's expected to ramp quickly over the next months. As it pertains to Rinvoq's book performance, we are seeing increasing prescriptions across each of the room indications globally, further market share momentum in atopic dermatitis, including now high-teens in-play patient share in the U.S. and robust uptake in IBD, where Rinvoq has demonstrated strong rates of remission and endoscopic improvement. Rinvoq is now capturing roughly one out of every four in-play ulcerative colitis patients in the second line plus setting. And the early data for Crohn's, which launched just in May, also shows a very strong ramp in new patient starts. We remained well positioned for continued momentum in this new indication as the only jack inhibitor approved to treat Crohn's disease. This level of performance, along with the development of ongoing projects across several other diseases, such as giant cell arteritis and systemic lupus in rheumatology and multiple additional derm indications, reinforces the long-term potential for Rinvoq with strong sales growth expected through the early part of the next decade. Global Humira sales were $4 billion, down 24.8% on an operational basis due to biosimilar competition. Erosion in the U.S. remains slightly better than our expectations due to volume with the vast majority of the impact this quarter driven by price. Turning now to hematologic oncology, where total revenues were approaching $1.5 billion. Imbruvica global revenues were $907 million, down 20.8%, consistent with our expectations. Venclexta global sales were $571 million, up 15% on an operational basis with strong demand for both CLL and AML, and we are particularly pleased with the international performance here, following continued reimbursement progress in the EU and inclusion in China's national reimbursement list. We also recently received the U.S. approval for Epkinly in third line plus DLBCL further expanding our on-market portfolio in hem onc. Early prescription trends have been encouraging, with a more robust opportunity expected as we progress development in earlier lines of therapy. We also anticipate approval and commercialization in Europe and Japan later this year. In neuroscience, revenues were nearly $1.9 billion, up 14.2% on an operational basis. Vraylar continues to exceed our expectations. Sales of $658 million were up 33.9% on an operational basis with increasing momentum across all indications following the MDD approval late last year. Within migraine, we remain the clear market leader with unique treatment options for both acute and chronic conditions. Our oral CGRP portfolio contributed $292 million in combined sales this quarter reflecting growth of more than 30% as we continue to see strong prescription demand for both Ubrelvy and Qulipta. Lastly, total Botox Therapeutic sales were $748 million, up 11.3% on an operational basis, reflecting nice momentum in chronic migraine as well as other approved indications. This franchise continues to outperform our expectations, and we will be raising our full year guidance for the collective neuroscience portfolio. So overall, I'm extremely pleased with the performance and execution across the therapeutic portfolio with growth expected to accelerate through the second half of the year. And with that, I'll turn the call over to Carrie for additional comments on aesthetics. Carrie?" }, { "speaker": "Carrie Strom", "text": "Thank you, Jeff. Second quarter global aesthetics sales were approximately $1.4 billion up 2.9% on an operational basis with strong performance from our international portfolio offsetting the economic impact in the U.S. U.S. aesthetic sales were $829 million, down 6.2%. Our U.S. portfolio continues to perform well from a competitive perspective. And as expected, the aesthetics markets continued to be impacted by lower consumer spending related to inflationary pressures, which weighed on year-over-year growth rates. U.S. Botox cosmetic sales were $420 million, a decline of 6.5% versus the prior year. While the U.S. cosmetic toxin market declined low single digits in the second quarter on a year-over-year basis, growth rates improved through the quarter, with June showing a return to positive year-over-year market growth. Botox Cosmetic continues to be the clear market leader, maintaining strong and stable share despite new competitive entrants. U.S. Juvederm sales were $125 million, down 14.5% on a year-over-year basis as we continue to see a more pronounced impact from inflationary dynamics on higher-priced, more deferrable procedures such as Filler. The U.S. Filler market declined approximately 20% in the quarter on a year-over-year basis due to the persistent inflationary environment. Our Juvederm collection remains market leader and share was stable in the quarter. The economic metrics that we track for the U.S. have largely stabilized. Our consumer market research shows a meaningful recovery from last summer and those intending to get treated with toxins and fillers. Additionally, we have now lapped the beginning of the market downturn, which occurred in the second quarter of last year. Based on these factors, we expect growth rates for the U.S. facial injectables to improve in the second half of this year. Our international aesthetics portfolio continues to perform exceptionally well with strong results in many key markets. Second quarter sales were $555 million, reflecting operational growth of nearly 20%. The International Botox cosmetic sales of $265 million increased approximately 14% on an operational basis and International Juvederm sales were $243 million, up approximately 28% on an operational basis. Growth in the Asia Pacific region, particularly robust as aesthetic treatment rates in China have fully recovered to pre-COVID levels. We continue to anticipate strong normalized growth through the remainder of the year in China. We are very pleased with the strong performance of our international aesthetics portfolio over the first half of the year and continue to expect similarly strong results in the second half. In the third quarter, we will be facing a challenging year-over-year comparison due to a shipment timing benefit we saw in the third quarter of 2022. This is expected to result in relatively flat growth for our international portfolio in the third quarter. On a full year basis, we expect our international aesthetics sales to grow high single digits. We continue to invest to drive future growth for our aesthetics portfolio with a focus on enhanced promotional activities, improve digital products and services through our Alle platform, sales force expansion, and injector training. We continue to invest in our pipeline as well, and we remain committed to a regular cadence of new product introductions and indication expansions for Botox cosmetic and Juvederm. We recently announced the FDA approval of SkinVive, the first hyaluronic acid filler in the U.S. for improved skin smoothness of the cheeks, which, along with the recently launched Volux filler for jawline contouring, will help sustain our leadership position in the U.S. filler market. Our investments will allow us to maintain a strong leadership position in the highly underpenetrated and rapidly growing global aesthetics markets. We remain very confident in the long-term outlook for our aesthetics portfolio and continue to expect to deliver greater than $9 billion in 2029. In the near term, the improving aesthetics outlook in the U.S. and continued robust international performance gives us confidence to once again raise our full year aesthetics guidance with an expectation for continued operational growth over the back half of the year. With that, I'll turn the call over to Tom." }, { "speaker": "Tom Hudson", "text": "Thank you, Carrie. We've continued to make very good progress with our pipeline over the quarter. We had a substantial amount of activity across our R&D pipeline, resulting in new approvals and advancements of several programs. In immunology, we received FDA approval for Rinvoq in Crohn's disease, marking its seventh FDA approval across gastroenterology, rheumatology and dermatology. In our Crohn's development program, Rinvoq demonstrated a very rapid and strong impact on symptoms as well as endoscopic improvement. Given its strong benefit risk profile, we believe Rinvoq will be an important new medicine for patients suffering from moderate to severe Crohn's disease. While Crohn's disease approval marks the completion of the core indications, we believe Rinvoq revokes the potential to become a highly effective therapy in several additional important diseases. We recently began Phase III studies for Rinvoq in systemic lupus, hidradenitis, suprativa, and we remain on track to begin Phase III studies in alopecia areata later this year. We'll also see later this year from a Phase II study in vitiligo, which could support advancement to Phase III in this indication as well. Moving to Skyrizi, where in the quarter, we announced positive top line results from our Phase III maintenance trial in ulcerative colitis. In this study, Skyrizi met the primary and key secondary end points at week 52 compared to the withdrawal arm, demonstrating that patients continuing treatment with Skyrizi maintain high levels of clinical remission as well as more stringent endpoints such as endoscopic improvement, histologic endoscopic mucosal improvement and steroid-free remission. It's important to note that approximately 75% of the patients in this study had failed advanced therapy, including not only anti-TNFs, but also other biologics, JAK inhibitors and S1P modulators. This represents a very difficult-to-treat population in ulcerative colitis. Skyrizi's strong performance in patients with and without failure to advanced therapies including patients who were naive to advanced therapy demonstrate its utility across the spectrum of moderate to severe UC patients. We remain on track to submit our regulatory applications in the third quarter with approvals anticipated in 2024. We also recently published results from a head-to-head trial comparing Skyrizi to Otezla in patients with moderate psoriasis with Skyrizi demonstrating clear superiority to Otezla on all primary and ranked secondary endpoints at week 16 and 52. At week 52 of this study, 64% of patients achieved absolute skin clearance as measured by PASI 100 an SPGA clear compared to just 3% for Otezla, underscoring Skyrizi's ability to drive very high and durable responses in these moderate patients. In addition to higher clinical efficacy outcomes, the patients treat with Skyrizi which is a self-injectable administered quarterly reported improvements in health-related quality of life measures and greater treatment satisfaction compared to those treated with Otezla, which is an oral administered twice daily. Additionally, Skyrizi demonstrated favorable safety and tolerability compared to Otezla. The rates of adverse events, including serious and severe AEs were numerically higher with Otezla than with Skyrizi treatment. Previous to -- similar to previous studies, Otezla treatment was associated with high rates of gastrointestinal distress such as nausea, diarrhea and vomiting, which resulted in a 7% discontinuation rate in the first 16 weeks of treatment compared to no discontinuations for Skyrizi patients. We're incredibly pleased with these results, which further underscores Skyrizi's position as the best in category treatment for moderate-to-severe psoriasis, providing very high efficacy, durable responses a safe and tolerable profile and convenient quarterly administration. In oncology, we received accelerated approval in the U.S. for Epkinly as a monotherapy treatment for patients with relapsed or refractory DLBCL who had received two or more systemic therapies. We also recently received positive CHMP opinion with an approval decision in Europe expected later this year. DLBCL is a very aggressive disease where later-line patients have limited options. We're extremely excited to bring this new subcutaneous treatment option to patients. In the quarter, we also announced positive top line results from the follicular lymphoma cohort of a Phase II trial evaluating Epkinly in patients who have received at least two prior lines of therapy. In this study, Epkinly performed very well as a monotherapy, demonstrating an overall response rate of 82%. We are pleased with these results and plan to discuss these data with regulatory agencies about the potential to support a submission for accelerated approval. Beyond the mid-stage studies supporting accelerated approvals in later lines of therapy. We also have Phase III trials ongoing in earlier lines of DLBCL and for follicular lymphoma, and we look forward to providing updates on these programs as the data mature. In our navitoclax program, we recently saw top line results from the Phase III TRANSFORM one trial, evaluating navitoclax in combination with ruxolitinib in for patients with treatment naive myelofibrosis. This study met the primary endpoint at week 24, demonstrating a statistically significant improvement in the percentage of patients who achieved complete volume reduction of at least 35% compared to rux plus placebo. For the primary endpoint, the navitoclax combination showed a doubling of improvement over rux alone with 63% of patients on the navitoclax combination achieving SVR35 compared to 32% in the rux plus placebo combination. In this study, the navitoclax combination did not achieve the first ranked secondary endpoint, which was improvement in total symptom score at week 24. Additional follow-up data on SVR and TSS as well as other endpoints are expected in the fourth quarter of this year. We plan to wait for these more mature data before engaging with regulatory agencies in order to have a more comprehensive picture of the patient's clinical response and clinical benefit that navitoclax can provide. Looking to the remainder of this year. We remain on track for several additional data readouts from our late-stage oncology programs, including Phase III data from Venclexta's CANOVA trial in relapsed/refractory multiple myeloma patients with t(114) mutation. As a reminder, this is an event-driven study, and we're just waiting -- we're waiting for just a handful of remaining events. So, we'd expect to have these data in-house in the coming months. And we remain on track to see Phase II data for Teliso-V in second-line plus advanced non-squamous, non-small cell lung cancer in the fourth quarter. We're also making very good progress with several earlier line, earlier stage solid tumor programs. We recently initiated a Phase II study for ABBV-151, our anti-GARP antibody in hepatocellular carcinoma and plan to begin Phase II in several additional solid tumors over the course of the next 12 months. At the recent ASCO meeting, we presented promising initial results from a Phase I study evaluating our next-generation c-Met ADC, ABBV-400 in several advanced solid tumor types. We're seeing responses across multiple tumors, indicating broad activity. Results in late-line colorectal patients were particularly encouraging, where monotherapy treatment with 400 resulted in a confirmed overall response rate of 22% well in excess of standard of care, which is typically less than 2% to 3%. We're also encouraged by the durability of response seen in these early results. These patients had an average of five prior lines of therapy, so this level of efficacy is very encouraging. Based on these results, we plan to start our Phase II program later this year, beginning with a second line colorectal cancer study. Now moving to neuroscience, where in the quarter, we received a positive CHMP opinion recommending approval of atogepant for migraine prevention. We anticipate a decision in the coming months. And if approved, atogepant would be the only oral CGRP antagonist approved in Europe for prevention of both episodic and chronic migraine. This is a debilitating condition that impacts tens of millions of people in Europe, and we look forward to making this new oral treatment option available to patients once approved. Also, in the area of neuroscience, ABBV-916, our A-beta antibody for Alzheimer's disease is rapidly advancing to dose escalation studies. This antibody is demonstrating a long half-life and very low antidrug antibodies, both important attributes to achieve a best-in-class profile for our A-beta antibody. Dose selection in Phase II is expected to begin early next year. And lastly, in our aesthetics pipeline, we recently submitted our regulatory application for Botox in masseter muscle prominence in China, which is the initial focus for our program given the prevalence of masseter muscle prominence in Asian populations and a significant unmet need for minimally invasive treatment options. In our platisima prominence program for Botox, we remain on track to see data from two additional Phase III studies later this year with our regulatory submission in the U.S. expected near the end of the year. So, in summary, we had a very productive first half of the year across all stages and therapeutic areas of our pipeline, and we look forward to the second half of 2023 with several important clinical and regulatory milestones. With that, I'll turn the call over to Scott." }, { "speaker": "Scott Reents", "text": "Thank you, Tom. I'm very pleased with the performance and outlook of the business, including the strong momentum from our ex-Humira growth plan. Starting with our second quarter results. We reported adjusted earnings per share of $2.91, which is $0.11 above our guidance midpoint. These results include a $0.15 unfavorable impact from acquired IP R&D expense. Total net revenues were nearly $13.9 billion, more than $350 million ahead of our guidance and down 4.2% on an operational basis, excluding a 0.7% unfavorable impact from foreign exchange. Importantly, these results reflect high single-digit sales growth from our growth platform. The adjusted operating margin ratio was 47% of sales. This includes adjusted gross margin of 84.7% of sales, adjusted R&D investment of 12.5% of sales, acquired IP R&D expense of 2% of sales and adjusted SG&A expense of 23.2% of sales. Net interest expense was $454 million, the adjusted tax rate was 15.8%. Turning to our financial outlook. We are raising the midpoint of our full year adjusted earnings per share guidance by $0.23 and now expect adjusted earnings per share between $10.90 and $11.10. This guidance does not include an estimate for acquired IP R&D expense that may be incurred beyond the second quarter. We now expect total net revenues of approximately $53.4 billion, an increase of $1 billion. At current rates, we expect foreign exchange to have a modest unfavorable impact on full year sales growth. This guidance includes the following updated assumptions with more than half of the sales improvement attributed to our ex-Humira growth platform. We now expect Skyrizi global sales of approximately $7.6 billion, an increase of $200 million due to continued strong performance across all approved indications. We now expect neuroscience sales of approximately $7.7 billion, an increase of $300 million, reflecting robust prescription growth for Vraylar following the MDD approval as well as better-than-expected performance of Botox Therapeutics and Qulipta. And for aesthetics, we now expect global revenue of approximately $5.4 billion, an increase of $100 million, primarily reflecting momentum from Botox Cosmetic. Lastly, we now anticipate U.S. Humira erosion of approximately 35%, resulting in a sales guidance increase of $400 million based on volume trends and strong parity access. Moving to the P&L. We continue to anticipate adjusted gross margin of 84% of sales and now expect adjusted R&D expense of $6.9 billion, SG&A expense of $12.7 billion and an adjusted operating margin ratio of approximately 46.5% of sales. Turning to the third quarter. We anticipate net revenues of approximately $13.7 billion, which includes U.S. Humira erosion of approximately 40%. And rates, we expect foreign exchange to have a modest unfavorable impact on sales growth. We expect adjusted earnings per share between $2.80 and $2.90. This guidance does not include acquired IP R&D expense that may be incurred in the quarter. In closing, AbbVie has once again delivered strong top and bottom line performance, and we are very pleased with the momentum of the business heading into the second half of the year. With that, I'll turn the call back over to Liz." }, { "speaker": "Liz Shea", "text": "Thanks, Scott. We will now open the call for questions in the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or 2. Operator, we'll take the first question, please." }, { "speaker": "Operator", "text": "Vamil Divan, Guggenheim Securities. ." }, { "speaker": "Vamil Divan", "text": "So one, I'm just curious, given the strong quarter and the guidance raise, in terms of that you talked about your floor EPS, is that -- do you still see a floor of $10.70 or is it different? And can you talk anymore at this point or when you see that floor happening? And then my second question is around IRA, and you obviously a lot of focus there. I'm curious if you have any thoughts around what the first list of products around September 1. Are you expecting AbbVie products to be included in that first group of 10. And then infused just Rinvoq specifically and how you see that might be at risk from IRI, given you bring obviously a lot of life cycle development there. And is there a chance that a life cycle may not be quite as long? Or kind of how are you thinking about prioritizing investing in a small molecule like Rinvoq?" }, { "speaker": "Rick Gonzalez", "text": "Vamil, this is Rick. I'll take the first question and then maybe Rob and I can also tag team on the first one and the second one as well. So if you look at the floor, if you step back and look at how the business is performing. Obviously, the business is performing extremely well. And a significant part of the over achievement is not the Humira business. In fact, of the $1.4 billion we're raising, as Scott said, only $400 million of it is Humira. So $1 billion of it is the growth platform. So all that speaks. We have very strong momentum going into 2024. And we talked before on these calls about, well, when will the trough year occur. And as you think about the floor, I think you have to sort of think about the trough year at the same time. We said in the past that if we significantly overachieved in 2023, that would increase the probability that the trough year was in 2024. And we said that in the backdrop of primarily thinking about it as Humira overachieving. And obviously, now what we're seeing that it's the majority of the other products that are overachieving the growth platform. So as we look at '24 and as we look at the trough, I think we have to let the year play out a little bit further to see where we're going. But I would say that we're feeling pretty -- we're feeling very good about '24. And the growth of that non-Humira business could more than offset the over performance that we're seeing this year, especially the over performance that we're seeing on Humira. So it's too early to raise the floor. But what I would tell you is the performance that we're seeing now gives us a tremendous amount of confidence of what '24 looks like. Rob, anything you'd add?" }, { "speaker": "Rob Michael", "text": "I'd just add that we've now collectively raised revenue guidance by $1.4 billion, as Rick mentioned, we raised $400 million in the first quarter, $1 billion this quarter. When you look at it, it's really across the key therapeutic areas that will drive long-term growth. We've raised Skyrizi, aesthetics, neuroscience, and also Humira. So we do feel very good about the performance of the business. We've debated when we update the floor that will come at some point may not come until we actually give the Q4 guidance -- on the Q4 call of 2024 guidance, but as we look at it, the fundamentals of the business are very, very strong, and we're seeing performance across all of the therapeutic areas." }, { "speaker": "Rick Gonzalez", "text": "On your second question, IRA. I think it's very difficult to predict. In our planning assumptions, we have assumed for some products to be impacted here early on. Imbruca is obviously one product that we're looking at carefully. I would say it's right from how you would calculate it based on the data that we would have, it would be right on the bubble of where the cutoff would occur in those first 10 products. So it could be 10, it could be 9, it could be 11, depending upon how some other products. And I say it that way because remember, we're using the data that we have, we're not 100% sure that, that is the data that CMS is going to use. So there's not perfect clarity around it. But I would say that's one that we obviously have on the radar screen and we're looking at carefully. Anything you'd add, Rob?" }, { "speaker": "Rob Michael", "text": "When IRA was passed a year ago, we obviously modeled the impact and we reaffirmed the long-term guidance expectation of high single-digit growth in the second half of this decade. That remains. We looked at what it means in terms of inflation penalties, party benefit redesign, negotiations. So we did make assumptions around that. I think Rick is correct in that there is still enough uncertainty we're going to know soon, right? September one is when they expect to announce the first list. We have modeled it, but we feel good even with IRA although it does have an impact -- has impacted everyone in the industry, we can still deliver on our long-term growth expectations. On your question -- and I think keep in mind, too, when you look at the Medicare percent of business for AbbVie. In the U.S., it's about 20%. Globally, it's a little bit lower, obviously. And so you look at us relative to our peers, we have a lower percent of the business as exposed to Medicare. And then when we look at specific at Rinvoq, you have to keep in mind with Rinvoq with indication expansion, the percent of sales you're talking about by the time it potentially be selected for negotiation, potentially in the later part of the decade, you're talking about something where like 10% to 12% because if you keep in mind, new indications, in many cases, serve younger patient population. And so that's the way we're looking at Rinvoq continuing to develop it. We obviously have a number of indications that could launch later in the decade. We feel very good about that. Those indications can collectively contribute a couple of billion dollars of revenue. We'll continue to drive that robust growth we expect from Rinvoq and Skyrizi as well. And so, we've modeled the impact of IRA, we don't expect it to impact the development plans for Rinvoq." }, { "speaker": "Liz Shea", "text": "Thank you, Vamil. Operator, next question, please." }, { "speaker": "Operator", "text": "Chris Schott, JPMorgan." }, { "speaker": "Chris Schott", "text": "Great. Thanks so much. Just two questions for me. I guess first, can you just elaborate in terms of what you're seeing with biosimilar Humira as we think about kind of the price and volume dynamics. I guess specifically, any surprises from your side in terms of how this is playing out? And then just any qualitative comments you can provide about how you see this kind of translating as we kind of think out to 2024? And then my second question was just on the Skyrizi updated guidance. Just a little bit more color on that $7.6 billion of at this point, how much is coming from psoriasis versus psoriatic arthritis versus this Crohn's launch that seems to be off to such a strong start. So just directional color of like the mix of the indications would be very helpful. Thank you." }, { "speaker": "Jeff Stewart", "text": "Yeah. Hi, Chris. It's Jeff. And I'll answer your first question. So in a nutshell, we haven't been surprised at any of the dynamics that we've seen play out, we've called it very, very accurately. So again, nothing that's really other than some small volume holding on a little bit better that's really different. So we're quite pleased with how our contracting and access has played out. And that parity access for Humira has been important. And again, it's what we believe would happen. We think it's good for patients, obviously, who can maintain their therapy with very little volatility, and it certainly provided us with a lot of predictability. And so I think we've managed sort of the first half with the Amgen launch and then the second half dynamics very, very well. And if you look to '24, as I've highlighted before, we do have 2-year agreements with some of our accounts. And we negotiated those in good faith, and we expect them to be honored. And remember, these are parity contracts for both '23 and '24 with Humira access coexisting with these multiple biosimilars. So I would say based on these dynamics, we're confident that Humira access will remain quite meaningful in 2024. And we know that as more biosimilars become established, we're also, as we've highlighted, appropriately planning for some volume loss in those certain so-called wax-sensitive accounts over time. So really no surprises in terms of what we've seen overall. So we're quite pleased." }, { "speaker": "Rob Michael", "text": "Chris, this is Rob. Just to give you some color, both in terms of the '23 guidance and the erosion assumptions around that, and then I'll talk about '24 briefly as well. In the first half of the year, obviously, the vast majority of that erosion came from price. We saw very little volume impact. But now with eight biosimilars on the market and some pursuing a low act strategy, we have assumed high single-digit volume erosion in the second half of the year, which would put the full year volume impact at mid-single digits. The rest of the 35% comes from prices we've negotiated those higher rebates and maintain strong parity access. Now while we're not providing '24 guidance today for U.S. Humira, it is reasonable to assume that there will be additional price erosion. Some will come from the annualization of the rebates that increased in the second half of this year and some will come from rebate increases negotiated for 2024 parity access. I'd also expect more volume erosion in '24, given the midyear entry of biosimilars this year, especially those that are pursuing a low act strategy. We've taken a close look at consensus estimates, analyst estimates have a very wide range the difference between the lowest estimate and the highest estimate approach is $4 billion. However, I'd say the average of those estimates appears to be a reasonable expectation for next year. Obviously, we'll give formal guidance likely on the Q4 call, which is our customary practice. But if you look at the average of those estimates, it should give you a good sense." }, { "speaker": "Liz Shea", "text": "Thanks, Chris. Operator? Oh, sorry." }, { "speaker": "Rob Michael", "text": "Yes. And then I'll take -- this is Rob on to your question on Skyrizi. So of the $200 million, it's split evenly between psoriatic $100 million and IBD a $100 million. So that $7.6 billion psoriatics, about $6.7 million, and IBD is around $900 million. Thanks Chris." }, { "speaker": "Liz Shea", "text": "Operator, next question, please." }, { "speaker": "Operator", "text": "Mohit Bansal, Wells Fargo." }, { "speaker": "Mohit Bansal", "text": "Great. Thank you very much for taking my question. And congrats on the quarter. One clarification question and then one question. So clarification. So Rick, you mentioned that you think, like, again, at this point, you're not talking about increasing the floor, but you feel comfortable about the floor EPS range of $10.70. Is that fair to be in 2023 or '24, that's the first clarification question. And then second one is, when we talk to investors, they do feel comfortable about the ex-Humira portfolio. But one question that cuts up all the time is that, I mean, the lack of shiny object or pipeline beyond Skyrizi and Rinvoq. To the extent you agree with that assessment, how do you plan to mitigate that? Or is there anything in the pipeline that investors are missing at this point? Thank you." }, { "speaker": "Rick Gonzalez", "text": "Okay. This is Rick. So as far as the $10.70, I would tell you that we feel highly confident in the $10.70. So there shouldn't be any concern there. And as I said, with how the growth platform is performing, we would expect to update at some point the floor. And obviously, by the way I'm saying it, the update would be in an upward direction. So hopefully, that gives some clarity around the floor. And when you think about the pipeline, what I tell you about the way we operate is we design our investment in R&D to be able to deliver the kind of growth that we expect for the business over the long term, both short term and the long term. Our expectations of the business haven't changed. Our expectations are to build a strategy that allows this business to grow at the top tier and be able to do it over the long term and do it in a consistent way. And I'd say, as I look at our historical performance, we've obviously delivered on that. But as I look at forward-looking performance through the end of this decade and into the early part of the ‘30s, we're highly confident we can deliver high single-digit growth with the pipeline that we have now, and ultimately, with the assets that we have in the marketplace and how they're performing in the marketplace and their ability to be able to drive significant growth. And you see that in the performance that we're delivering now. If you look at the growth platform's growth in first quarter, and then look at it in the second quarter, it's accelerating at a very good pace, and it will continue to accelerate as we go through the rest of this year. And that once we get to a stable tail or relatively stable tail on Humira will be that growth that emerges to be able to drive the company, and that's what gives us such a high level of confidence. But I think when you look at our pipeline, certainly, we invested significantly in Skyrizi and Rinvoq, and that investment is paying off extremely well. We have a number of assets in our pipeline that will continue to help accelerate that growth as we move forward. So venetoclax for t114 and MDS are in samples of that. 951, we should do any submission and get that product on the marketplace. There’s a huge need for that product in the marketplace. And a number of other assets, I won't go through every one of them. The rest of our investment in R&D has really been focusing on assets that are designed to be able to sustain our growth from 2030 - ‘40 forward. And so as I look at our pipeline, and I know you don't have as much visibility as we do, but when I look at our pipeline for things like the 400 platform and the cement platform that we have, the data we're seeing in CRC, non-small cell, that's a significant opportunity for us [indiscernible] is another significant opportunity for us. Our neuroscience portfolio is 916 and other assets is another significant opportunity for us that will emerge in that time frame. We have a next-generation BTK degrader that we're excited about. We have a second-generation BCL-2 that we're very interested in pursuing in multiple myeloma. And so there's a number of assets here that just haven't emerged to the point that you have clear visibility on all that data, but we do have visibility to where they're progressing. And so I think it's just hard for you to assess that earlier pipeline, but it's really designed to deliver on that long-term growth. So we're confident between now and the early ‘30s. And as that pipeline matures and the data comes out, three is another good example of where we have a lot of data now that is demonstrating that is probably best in class for a bispecific in myeloma. And so as that data emerges, you're going to get more visibility to it. And then obviously, we have the ability to go out and acquire things and we find things that we're interested in." }, { "speaker": "Liz Shea", "text": "Okay. Thank you, Mohit. Operator, next question, please." }, { "speaker": "Operator", "text": "Terence Flynn, Morgan Stanley." }, { "speaker": "Terence Flynn", "text": "Maybe a couple for me. Maybe Rick, just to follow-up on that last comment, maybe just an update on your M&A BD appetite here, particularly assets that can contribute more near term to growth? And then again, I want to see what you guys are hearing out there regarding the long-acting Botox competitor. It sounds like you're seeing stable market share, but any feedback on that product?" }, { "speaker": "Rick Gonzalez", "text": "Okay. So M&A, I mean, obviously, we have a very active group who's constantly working in the area of business development. We're primarily focused in the areas that we operate in franchises. So think of things like immunology, neuroscience, certain areas of neuroscience, oncology, aesthetics, as an example, we constantly look at and then eye care would be, I would say, the key areas of focus. As I said before, we don't need anything to be able to drive that high single digits. Obviously, if we can grow even faster, that's a good thing. I think all of us recognize that. If we find assets that are out there that are later-stage assets, and they fit our strategy and they fit the kind of target product profile that we would expect because we only look for assets that can significantly change standard of care. That's what we're good at. And so we evaluate lots of things, but many of them don't meet that threshold that we're looking for. But if we find something, we would obviously pursue it. If it was in an area that we thought we could maximize the value of it. And so, we'll continue to do that. So like I said, I feel good about where we are and what we can drive, and I feel good about how we're looking at assets that are in the outside. We certainly have the financial wherewithal to be able to acquire assets that are out there. And as we've mentioned before, we obviously acquire larger assets. And so we continue to look at those. But they have to meet our criteria and they have to be able to deliver a good return to the business. On DAXI, I feel very good about how the team -- Harry and the team are performing against that. But I'll let Carrie actually describe to you how it looks." }, { "speaker": "Carrie Strom", "text": "Thanks, Rick. So in terms of DAXI, it's been more than six months since their launch and the uptake has been quite limited from our perspective in the low single digits. So for context, as we benchmark our competitive launches. And you would benchmark this launch versus the most recent toxin to enter the U.S. market you would see it's tracking to about 25% of where another product would be at the same point in its launch. And in terms of customer feedback, we continue to hear that expectations are just not being met on duration, that expectations on the customer side and on the consumer side. So we have yet to see impact on Botox share and Botox will continue to be the clear market leader as the other toxins compete for the number 2, 3, 4 position in our customers' offices. We are very pleased with the team's ability to execute on these competitive strategies here. And actually, their clear focus not only on the competitive strategies, but also on the broader focus and vision to grow the entire toxin market in the U.S., which we continue to see as biggest opportunity now and in the future." }, { "speaker": "Liz Shea", "text": "Thank you, Carrie. Operator, next question, please." }, { "speaker": "Operator", "text": "Evan Seigerman, BMO." }, { "speaker": "Evan Seigerman", "text": "I wanted to just talk about kind of how you think about market share across the growth portfolio, specifically Skyrizi and Rinvoq kind of going forward. Is there a potential ceiling for them in one market share you can realize in these markets? Or maybe comment on some of the gating factors for market share growth in each of the patient provider or reimbursement agreements." }, { "speaker": "Jeff Stewart", "text": "Yes. Evan, it's Jeff. I'll take that one. One of the aspects that we have that I highlight and we look very carefully at, we look at both sort of in-play capture which I often refer to, for example, right now, the in-play capture for Skyrizi in psoriasis is about 50%. So we're capturing one out of every two patients. And our market share is about 32%, as I highlighted. So theoretically, as we study these markets that if there's not major innovation or major disruption that comes in place. And we really don't see that in psoriasis. You get such a high level of efficacy with Skyrizi, your market share, so the 32% starts to ramp up over time towards your in-play capture because you get the persistency effects and the fall off that take place in the market. So really, when you look at that, I could say the same thing, for example, with Rinvoq. I mentioned that it's capturing 25% of second line plus in-play share. It has like a 3% market share. So in terms of the ability to sort of grow that market share over time, we really monitor that capture rate in the early years, and then you just sort of -- the in place sort of pulls up your market share over time. So that's why we're quite encouraged at the speed of the ramps that we're seeing there and the ability to move that market share. Now when we study the models, you don't fully get there because typically, something else launches, time goes by. But we can feel very, very encouraged as we look at our in-play momentum that the market share starts to approach that over our long-range planning cycle." }, { "speaker": "Rick Gonzalez", "text": "The only other thing I would add, this is Rick, is with Otezla head-to-head. I would say currently, Skyrizi is not competing much against Otezla, which is a pretty sizable opportunity. And we're very pleased with this head-to-head data. So that will open up another pool of patients that today Skyrizi doesn't necessarily compete against. So that data will obviously allow us to be able to position it quite effectively against Otezla." }, { "speaker": "Liz Shea", "text": "All right. Thank you, Chris. Operator, next question, please." }, { "speaker": "Operator", "text": "Chris Raymond, Piper Sandler." }, { "speaker": "Chris Raymond", "text": "Just maybe a pipeline line of questioning here. Rick, I heard you mention maybe ABBV-951, but it wasn't in your prepared comments. Maybe -- I know you guys were saying you're working to respond to the CRL later this year with PDUFA in the first half. Is that still the case. And then maybe also on the pipeline. A couple of quarters ago, I think you guys talked about an interesting combo opportunity in IBD with that GLP-2 in-licensed, I think, from Scripps. Any updated thoughts here with this sort of mechanism as a combo agent?" }, { "speaker": "Roopal Thakkar", "text": "It's Roopal. I can take those. So for 951, the team is still on track for a resubmission this year, consistent with what you just stated. And in fact, we've launched in Japan, and there's already commercial patients receiving it. So the team is very excited about that. And what was described earlier. The unmet need is still quite high, and we still believe in a very strong profile in that asset. Along the lines of combinations, as you mentioned, on GLP-2, we feel with something like Skyrizi, the data that we've seen in Crohn's and ulcerative colitis there's still potentially an opportunity to even increase endoscopic or mucosal healing even higher. We're seeing high ranges already 50%, 60%. And but we can still potentially go higher and something like a GLP-2 can directly address mucosal healing. So that could be a potential combo. There's other assets in our immunology pipeline that we are also considering for a combination. But when you have an asset like Skyrizi and the safety profile that we continue to observe that creates, I would say, multiple opportunities." }, { "speaker": "Tom Hudson", "text": "If I can just add, we didn't really opt in yet. Our collaboration with Caliber, which we expanded this week to more programs includes them doing a Phase Ia study which is almost finished. We're going to see the data and make that decision. It does fall into our -- part of our immunology program, which is in epithelial repair, which Roopal just mentioned. And so this is one of the assets which we think if you get a healthy gut to prepare that there will be in combination with immunomodulators will get a better response over time. We have another program called RIPK1, which also is involved in epithelial repair. So as multiple strategies, but this is one where we'll be making a decision and announcing a later time this year." }, { "speaker": "Liz Shea", "text": "Thank you, Chris. Operator, next question, please." }, { "speaker": "Operator", "text": "Steve Scala, TD Cowen." }, { "speaker": "Steve Scala", "text": "A couple of questions. This morning, Takeda noted weakness in the U.S. GI market, and it seemed to be mainly on patient levels as opposed to competition. Wondering if you're seeing this and to what do you attribute it? So that's the first question. On the second question, on the Q1 call, the company said it would narrow the EPS range when it had clarity on biosimilar Humira and the landscape for that. So you narrowed that range today despite most biosimilars having been on the market for only three weeks, what do you know now that you didn't know when you reported in April that gives you the confidence to narrow the range today or is it all about the performance of the rest of the portfolio and really not about Humira?" }, { "speaker": "Jeff Stewart", "text": "Yeah, hi Steve, it's Jeff. No, we don't see any slowdown in the IBD market. I mean this market has been just one of the highest growth markets we've seen from a CAGR perspective over many, many years. There's such unmet need. And so no, we're not seeing any patient slowdown. I would say, look, if we look at our particular data, I mean, you're seeing very fast ramps on this in-place share from Skyrizi and Crohn's disease. Now you're seeing an equally fast ramp in the early weeks from Rinvoq and Crohn's disease. And again, we're capturing up to 25% of the second line plus patients in ulcerative colitis. So I don't know what data Takeda is looking at, but we're seeing that the competitors in that space. And the leading competitors are Stelara and Entyvio and of course, our own Humira, but it's Stelara and Entyvio, they're under pressure in terms of incremental patient capture since our launch, and we'll continue to monitor. But we don't see any patient flow issues in the marketplace." }, { "speaker": "Rob Michael", "text": "And Steve, this is Rob. On your second question. I think it's a combination of both. We're seeing very strong performance from the ex-Humira growth platform, as you can see by the guidance raise, that's really a contributor. But now that we're beyond the middle of the year. We know the biosimilars that have entered the market, we know they're facing prices. We've maintained strong parity access. And so that also increased our confidence which is why we've narrowed the range to $0.20. But it's a combination of both the ex-Humira growth platform performing very strongly as well as where we sit today with biosimilar competition for Humira." }, { "speaker": "Liz Shea", "text": "Thanks, Steve. Operator, next question, please." }, { "speaker": "Operator", "text": "Carter Gould, Barclays." }, { "speaker": "Carter Gould", "text": "Thank you for taking my questions, and congrats on the quarter. I guess, two, acknowledging all your comments on the pipeline and previous comments on BD. Rick, was looking to get your thoughts on how the more assertive FTC here is limiting your target list on BD or your ability to complete deals? And then maybe just on Botox. Just was hoping for a little bit more color on the sustainability of the ex-U.S. trends versus maybe some of that demand getting pushed into the quarter after some of the shutdowns, COVID impacts and whatnot ex-U.S. Thank you." }, { "speaker": "Rick Gonzalez", "text": "Okay. So, I'll take the first question. Obviously, the FTC appears to be applying a lot more scrutiny to transactions. Having said that, I would say even before this happened, we would always evaluate an acquisition of a product or a company in the backdrop of what we thought the competitive environment would be our position in that market, meaning we didn't necessarily go out and try to do transactions that we thought would be extremely difficult from an FTC standpoint. So, I think the way we think about the FTC situation now is, look, it may require more time to get acquisitions through it may even require that you're willing to pursue litigation in order to get those through. But in the end, if your position is that what you're trying to do is not anticompetitive. You will be able to ultimately prevail in that process. And I think we're seeing that as some of these transactions go to court. Some not in our own industry, but in other industries, I think that's playing out. And so, I think ultimately, it will end up being more of a delay, but not something that staples your ability to do things that are appropriate to do. That's my perspective on it. Carrie?" }, { "speaker": "Carrie Strom", "text": "Sure. In terms of the aesthetics market internationally, like we said, we've been very pleased with the performance so far, and we expect to -- we continue to expect to see that type of strong performance through the rest of the year. We're continuing to invest in key growth markets like Japan and in markets like Brazil. And of course, China has become our second biggest market globally. And in China, in the first quarter, we did see significant growth as the market was reopening from COVID and some pent-up demand that came through in Q1 and early Q2. And now China has returned to normalized high growth rates. And so despite some economic pressures there, we really continue to see strong growth as we continue to invest and expand our promotional footprint there through field force, through injector training and our consumer efforts. And China will continue to be a really attractive market for us. Based on that commercial expansion and also, we're going to have a steady flow of new product launches throughout the decade in that market. One thing to note, which we did mention in our prepared remarks is that we do expect Q3 to be relatively flat internationally based on shipment timing from last year with that return to growth in Q4 and high single-digit growth for the full year internationally." }, { "speaker": "Rob Michael", "text": "And then, Carter, you were specifically asking about international Botox. I think if you just look at the run rate through the six months of the year, that's probably a good proxy for where we expect international Botox to land. We're holding strong share positions. Force is very, very good. So there's really no dynamic there. As Carrie mentioned, I mean you have to keep in mind that fillers a very large market for us, business for us internationally. We do have the Q3 dynamic. But when you look at the full year for international, that high single-digit growth, is certainly a way to think about the international business for aesthetics." }, { "speaker": "Liz Shea", "text": "Thanks, Carter. Operator, next question, please." }, { "speaker": "Operator", "text": "David Risinger, Leerink Partners." }, { "speaker": "David Risinger", "text": "Yes. Thanks very much. So I have two questions. Rick, you had mentioned that you're expecting stabilization of Humira sales at some point. Could you provide some perspective on when you might expect that? And then second, with respect to the filler franchise, obviously, it's performing strongly, could you discuss the prospects including the driver of weight loss drug patients seeking to compensate for facial hallowing? Thank you very much." }, { "speaker": "Rick Gonzalez", "text": "On the Humira tail, as Rob mentioned earlier, obviously, you have the annualization of the impact that we have this year, the second half annualization that's going to roll into '24. We're going to have further price erosion in '24, both based on the contracts that we have and how we're expecting the market to play out. And I'd say the pricing in the marketplace has been consistent with what our original assumptions were. So, I think the expectation you'll start to see stabilization of that tail in '25. And benefit operates similar to what we see in the international markets, which I think would probably be low at that point. it becomes relatively stable, I'd say, in '26 going forward. And it should be still a substantial tail that we maintain. But see less erosion pressure on it at that point. Carrie, do you want to talk a little bit about the Otezla impact?" }, { "speaker": "Carrie Strom", "text": "Sure. So, in terms of the filler opportunity and outlook, I guess, as that big -- I'll start -- I'll zoom out a little bit and just comment on that the filler market continues to be really attractive, especially internationally, as you've already seen here right now. with China driving some strong growth. And really some of the key Juvederm brand have just become available in China in the past few years, and we'll continue to have, like I said, a cadence of Juvederm launches in China. And then our increased investment all over the world and continues to drive our filler business and gives us a lot of optimism there internationally. Now in the U.S., we have said that the inflationary dynamics have impacted the U.S. market for filler and more than toxin just by the nature of the filler pricing and procedure. And also in terms of the patient journey patients tend to start on toxin before they add filler. And so, for all those reasons, we believe that the top -- the filler market will continue to improve in the second half of the year. although it will lag the toxin market recovery a bit. Now in terms of the question around Ozempic, we have been keeping an eye on that and how these weight loss products could have an impact on the aesthetics market. And what we see is that really anything that gets a consumer engaged in their appearance, including products like Ozempic are a positive tailwind for the aesthetics business. And we are hearing some customers say that these facial hollowing fillers or for -- that's a result of these products is an opportunity for fillers. We see that on social media. We're tracking it in other forms of media. And we think that like many other consumer trends around aesthetics, this will just continue to be a tailwind and the positive dynamic of the business." }, { "speaker": "Liz Shea", "text": "Thanks, David Risinger. Operator, next question, please." }, { "speaker": "Operator", "text": "Tim Anderson, Wolfe Research" }, { "speaker": "Tim Anderson", "text": "Thank you. A couple of questions. How much uncertainty is there in terms of contracting in the I&I category in 2024 from a pricing standpoint for Skyrizi and Rinvoq. And when will you be able to provide an update on how those pricing discussions are going for those two brands. So not the formal sales guidance for those products, but how the pricing discussions are going. And what is your expectation today for that level of price erosion in 2024 relative to what it's been in 2023?" }, { "speaker": "Rick Gonzalez", "text": "Okay. So, I think Jeff and I will tag team this one. It's a great question because, look, I think we all know there has been some question out in the marketplace since the first quarter about I&I pricing. And so let me try to frame our perspective on the pricing because I think there's some misconception that's developed in the marketplace to some extent around I&I pricing. I guess the first thing I'd say to you, this is a market we know well. We've been in this market for a long time. We're obviously a leader in this market. So, it's a market we know extremely well. And obviously, we know any trend that's occurring in this market to a high degree of detail. And what I would tell you is that we see no fundamental change in the way pricing is being dealt with in this marketplace nor do we expect to see any fundamental change that occurs in the foreseeable future. So that brings me to the rebate question in the first quarter. And I would tell you that we're operating exactly the same way we have historically operated in this segment as it relates to rebating or discounting. When we get a new indication or a new product, one of the things that we evaluate is -- okay, what level of rebating should we do in order to maximize two things for the product. The speed at which we can drive the ramp and the ultimate peak sales that we can drive for that asset. We weigh those two things against how we look at contracting and getting on formulary. And so when you get an indication, you make a trade off. Do I want to be on formulator? I don't. If I do, I have to provide some level of incremental rebates. Is that a financially positive decision for the asset in the company. And if it is, we make that decision. And I would say that Skyrizi and Rinvoq are classic examples of that strategy. And I would say, look at how they're performing. We're going to grow those two assets despite the increased rebates, $3.5 billion this year. And that's a pretty good trade-off. I don't know, Jeff, anything you'd add?" }, { "speaker": "Jeff Stewart", "text": "Yes. Maybe just to build on that point, Rick. I mean this fact base of seven indications in one year in one category with one firm, it's just -- it's really unprecedented. It's not going to happen again. And I think it's important to think about how it works. I mean, when you get a new indication and they're sequencing over time, you've got to clear the payer's P&T clinical committee, and they don't meet every day. They meet every couple of months. So there's a process there. And then you've got to be added to the formulary structure. So you either have to somehow gain a new spot by indication or replace a competitor. And that's not easy as well. And so that's why what we see in the marketplace. Many competitive firms have to offer these free or bridge programs and not just for a quarter or 2, sometimes there are multiple quarters or years until that access ramps. And I would say, in contrast, Rick, as you noted, on average, we achieved fully paid access for those seven indications in about 60 days, really, really unprecedented. So that means we had to give very little free goods we had almost immediate paid access and profit flow and then, of course, that rapid revenue accumulation that you highlighted. So definitely the right trade-off, and we don't see that recurring." }, { "speaker": "Rob Michael", "text": "And Tim, on your second question, I mean we've said this before, the high single-digit price impact this year is a function, again, as Jeff mentioned, seven new indications. We do not expect that type of price erosion going forward. It should not be what investors are modeling. So I wouldn't be concerned about high single-digit price erosion in '24." }, { "speaker": "Liz Shea", "text": "Thanks, Tim. Operator, we have time for one final question." }, { "speaker": "Operator", "text": "And that will be from Geoff Meacham, Bank of America." }, { "speaker": "Geoff Meacham", "text": "Great. Good morning, guys. Thanks for the question. On OUS Humira, you're obviously well past the initial biosimilar way, but you're still seeing some sequential decline. So what's the context here? And is there a dynamic that could impact Skyrizi or Rinvoq even indirectly OUS? And then on navitoclax, I know you guys have more details to come, but is there a threshold you're looking for and TRANSFORM one to move forward or even to inform development in other indications, just thinking about maybe the tolerability profile and the comps in that?" }, { "speaker": "Rob Michael", "text": "So Jeff, this is Rob. I'll answer your question on International Humira. If you look at the '23 erosions, about $600 million it's really split in, I'd say, three buckets. About $300 million of it is new biosimilar markets, markets like Canada, Puerto Rico, Mexico. Those are -- remember, we have additional waves coming in. So that's the next wave coming in so about half of it is that. And then I characterize about $200 million being really the impact of new agents like Skyrizi and Rinvoq, right? So you have agents that deliver higher standard of care, and so you're going to see share erosion just through that dynamic. And fortunately, we've brought forward our own products that do that. And so I'd say of that $600 million, $200 million is roughly that. And then in the international markets, you typically see some, I'd say, low to mid-single-digit price erosion, just typically year-over-year. So that's about another $100 million. So it's important to characterize it the right way. It's not so much markets that were biosimilar several years ago. It's more recent biosimilar markets, our own competition from our own agents as well as the typical price erosion you see in the international market." }, { "speaker": "Roopal Thakkar", "text": "It's Roopal. I'll take the navitoclax question. So we'll continue to monitor the spleen volume reduction and see how that looks towards the end of the year. And if it maintains the high level that Tom described, that's something that definitely a positive. The other things that we'll get that will reveal themselves over the longer term as the marrow fibrosis and that, along with the spleen volume reduction and actually some of our earlier data may be correlative for survival events. So we'll get an early look at those. And then in terms of tolerability, what we've seen thus far is consistent with what we've seen initially, and it is a titratable dosing. So the clinicians can tailor in the study to what the patient needs. So more to come by year-end. Liz Shea Okay. Thanks, Jeff. And that concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us." }, { "speaker": "Operator", "text": "As we are concluded. Again, thank you for your participation. You may please disconnect at this time." } ]	AbbVie Inc.	141,885,706
ABBV	1	2,023	2023-04-27 09:00:00	Operator: Good morning, and thank you for standing by. Welcome to the AbbVie First Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to introduce Ms. Liz Shea, Senior Vice President, Investor Relations. Elizabeth Shea: Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Rob Michael, Vice Chairman and President; Jeff Stewart, Executive Vice President and Chief Commercial Officer; Scott Reents, Executive Vice President and Chief Financial Officer; Carrie Strom, Senior Vice President and President, Allergan aesthetics; and Tom Hudson, Senior Vice President, R&D and Chief Scientific Officer. Joining us for the Q&A portion of the call is Roopal Thakkar, Senior Vice President, Development and Regulatory Affairs and Chief Medical Officer. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll turn the call over to Rick. Richard Gonzalez: Thank you, Liz. Good morning, everyone, and thank you for joining us today. I'm extremely pleased with our start to 2023. With first quarter total revenues and adjusted earnings per share both exceeding our expectations. This performance was driven by double-digit sales growth from several key products, including Skyrizi, Rinvoq, Venclexta and Vraylar. Positive momentum from our aesthetics business with strong results internationally and stabilizing consumer trends in the U.S. and in line performance from U.S. Humira where biosimilar erosion is tracking as expected with much of the impact driven by price. Since our inception, we have successfully created a well-diversified portfolio with multiple growth platforms in highly attractive markets, including immunology, hematological oncology, neuroscience and aesthetics. Our commercial execution, including the launch of new products and expanded indications has been outstanding, especially across Skyrizi and Rinvoq and recently with Vraylar and MDD. Each of these assets are expected to contribute significant revenue growth over the decade. The breadth and the depth of our R&D pipeline also supports our long-term growth outlook and we anticipate numerous important pipeline milestones over the next 2 years. In summary, we are 1 quarter into the U.S. biosimilar event for Humira and are managing the erosion well. Most importantly, our growth platform is demonstrating strong performance, exceeding our expectations. We are executing well across all aspects of our business and see numerous opportunities for our diverse portfolio to drive long-term growth. With that, I'll turn the call over to Rob for additional comments on our business performance. Rob? Robert Michael: Thank you, Rick. We're off to an excellent start in 2023 with each of our 5 key therapeutic areas meeting or exceeding our first quarter expectations, a testament to the strength of our broad portfolio. We delivered adjusted earnings per share of $2.46, which is $0.10 above our guidance midpoint. Total net revenues were $12.2 billion, approximately $400 million ahead of our expectations. First quarter results include continued robust performance from Skyrizi and Rinvoq, which remain on track to contribute more than $11 billion in combined sales this year. Growth rates in the first quarter for both products are consistent with our full year expectations. Skyrizi and Rinvoq are demonstrating momentum across all approved indications and we expect to round out their opportunities in IBD later this year. This includes Rinvoq's anticipated U.S. approval in Crohn's disease as well as Skyrizi's European launch in Crohn's and its global regulatory submission in UC. We are also performing exceptionally well in neuroscience. Total net revenues this quarter were nearly $200 million above our guidance with Vraylar sales accelerating following MDD approval and migraine delivering strong growth. As a result, we will be increasing our full year outlook for neuroscience. Aesthetics is also performing better than expected. We are seeing positive recovery trends in China and some stability in the U.S. market, where we are closely monitoring several economic indicators that correlate with aesthetics procedures, including consumer confidence, personal consumption and Google searches. Although it's still early in the year, these positive trends, especially across our international markets, give us the confidence to increase our full year outlook for aesthetics as well. This continues to be an underpenetrated market with significant growth potential. Based on our robust performance this quarter and the continued strong outlook for our business, we are raising our full year adjusted earnings per share guidance by $0.10 and now expect adjusted earnings per share between $10.72 and $11.12. In closing, I'm extremely pleased with the performance of our diverse portfolio. We're off to a strong start to the year, which further reinforces our confidence in the long-term outlook of the business. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff? Jeffrey Stewart: Thank you, Rob. I'm very pleased with the strong commercial execution across our therapeutic portfolio. Immunology delivered total revenues of approximately $5.6 billion with continued robust double-digit growth from Skyrizi and Rinvoq. Skyrizi global sales were nearly $1.4 billion, reflecting operational growth of more than 46%, despite retail inventory destocking in the quarter. Skyrizi is the clear market leader in the U.S. biologic psoriasis market with a total prescription share now at 30%. In psoriasis, Skyrizi has set a very high bar relative to other therapies on the market or in development with differentiated attributes across the categories that physicians and patients deem most important. This includes the rapid onset of action after the first dose, nearly complete skin clearance with multifold higher rates on PASI 90 and PASI 100. High durability of response, which we have demonstrated can increase over time as well as quarterly dosing for maintenance therapy, a convenient alternative to daily oral or more frequently administered injectables. With a nearly 50% U.S. in-play share of new and switching patients, there is substantial room for Skyrizi's continued growth in psoriasis. This best-in-class profile is supporting strong momentum now in psoriatic arthritis with Skyrizi achieving an in-play biologic share of roughly 20% in the U.S. dermatology segment. Skyrizi is also being co-positioned with Rinvoq in the U.S. room segment in PSA where we are seeing increasing utilization among rheumatologists as well. Globally, Skyrizi has achieved in-play psoriatic disease leadership in more than 25 countries and total market share leadership in nearly 20 of those key markets. In Crohn's disease, we are seeing very fast adoption of Skyrizi in the U.S., with a total in-play patient share at approximately 20%, second only to STELARA. Feedback from gastroenterologists is very positive, especially as it relates to Skyrizi's novel dosing and overall clinical profile. We see strong uptake in Japan and Canada as well with the European launch forthcoming. We also recently reported strong induction data for Skyrizi in ulcerative colitis, which Tom will discuss momentarily. Based on the results of that trial, it is increasingly clear that Skyrizi represents a differentiated asset across inflammatory bowel disease and we look forward to bringing this potential new indication to physicians and patients next year. Turning now to Rinvoq, which delivered global sales of $686 million, reflecting operational growth of more than 50% despite similar retail inventory destocking in the quarter. I'm very pleased with the performance in rheumatology with total prescriptions increasing across each of the 4 approved indications. Atopic dermatitis is also tracking in line with our expectations. We continue to see market share momentum globally, including in-play patient share increasing to approximately 17% in the U.S. We are very excited about the growth potential in gastroenterology. Rinvoq has set a high bar for efficacy in both ulcerative colitis and Crohn's disease, demonstrating strong rates of remission and endoscopic improvement. We're seeing very strong momentum in UC, where adoption has been robust. Rinvoq is now achieving a 23% in-play share in the U.S. second-line plus setting, reflecting an impressive ramp since our launch in UC less than 1 year ago. This accelerated adoption among gastroenterologists is very encouraging for Rinvoq's pending outlook in Crohn's. We are currently launching this indication in the EU, a geography where Rinvoq is the only JAK approved to treat both IBD conditions, and we remain on track for CD approval and commercialization in the U.S. later this quarter with broad formulary access anticipated to ramp quickly over the back half of this year. So we see inflammatory bowel disease continues to be an area of high unmet need. Having 2 novel therapies in IBD with Skyrizi and Rinvoq that each deliver differentiated levels of efficacy is an important step forward for patients. And with these 2 complementary assets, we are very well positioned to compete against other oral or biological agents. Global Humira sales were approximately $3.5 billion, down 24.3% on an operational basis due to biosimilar competition. Erosion in the U.S. remains in line with our expectations with most of the impact driven by price. Turning now to hematologic oncology, where total revenues were $1.4 billion with continued pressure on Imbruvica, partially offset by robust double-digit growth with Venclexta. Imbruvica global revenues were $878 million, down 25.2% due to increasing competition and the cumulative impact of a suppressed market. Venclexta global sales were $538 million, up 17.5% on an operational basis with strong momentum across both AML and CLL. In neuroscience, revenues were approximately $1.7 billion, up 15% on an operational basis. Vraylar is performing exceptionally well. Sales of $561 million were up 31.3% on an operational basis, above our expectations. We are very pleased with the AMDD label and the launch, which has resulted in a significant uplift in total new prescriptions for Vraylar. With a dedicated sales force that calls on both psychiatrists and primary care as well as ramping DTC promotion, we see an opportunity for accelerated growth across all approved indications. And we will be raising our full year guidance for Vraylar accordingly. Within migraine, we remain uniquely positioned with a portfolio to support complete migraine freedom. Our leading oral CGRP therapies contributed $218 million in combined sales this quarter, reflecting growth of more than 45% as we continue to see strong prescription demand for both Ubrelvy and Qulipta. We recently expanded the label for Qulipta, which is now uniquely positioned as the only oral CGRP available as a preventative treatment for patients with both chronic and episodic migraine further strengthening our competitive profile. Lastly, total Botox Therapeutic sales were $719 million, reflecting strong performance in chronic migraine as well as other approved indications. So overall, I'm extremely pleased with the performance across the therapeutic portfolio. And with that, I'll turn the call over to Carrie for additional comments on aesthetics. Carrie? Carrie Strom: Thank you, Jeff. First quarter Global aesthetics sales were approximately $1.3 billion, which came in ahead of our guidance, primarily due to a faster reopening in China as well as a slightly stronger economy in the U.S. versus our planning assumption. In the U.S., aesthetics sales were $777 million, down 8.1% as we continue to see softness in aesthetics procedures related to inflationary dynamics. As a reminder, we saw a very robust performance for our U.S. performance in the first quarter of 2022, which created difficult comparison for growth in the first quarter of this year. U.S. Botox Cosmetic sales were $409 million, down slightly on a year-over-year basis. We continue to see a lesser impact from inflationary dynamics on Botox Cosmetic compared to other areas of our aesthetics portfolio due to its relatively lower price point and large install base of loyal repeat consumers. The U.S. cosmetic toxin market was down low single digits in the first quarter on a year-over-year basis. Botox Cosmetic continues be the clear market leader and its share of the U.S. toxin market remains stable. Sales for our U.S. Juvederm collection were down 18% as our dermal filler portfolio continues to be impacted by inflationary pressure on consumer spending. The U.S. filler market was down nearly 20% in the quarter on a year-over-year basis due to the persistent inflationary environment. Our Juvederm collection remains the clear market leader and share was stable in the quarter. The economic pressure on our U.S. dermal filler business is partially offset in the quarter by strong initial uptake for our recently launched Volux filler, which is approved for the improvement of jawline definition. We expect Volux combined with the upcoming launch of our skin quality injectable [ Skinvive ] to support long-term growth for our filler portfolio in the U.S. While the aesthetics category in the U.S. continues to be challenged due to the fast economy, the key external economic metrics that we track have remained relatively consistent with year-end 2022 levels. Our international aesthetics portfolio continues to demonstrate robust growth with strong performance in Japan, which is rapidly growing and China, which is recovering faster than expected. Sales from our international aesthetics portfolio were $523 million, up 7.8% on an operational basis. International Botox Cosmetics sales grew approximately 17.5% operationally, and international Juvederm sales were down approximately 1.4% on an operational basis. China, which is our second largest market, was negatively impacted by COVID in January and February, but experienced a sharp recovery in March. We expect this level of activity to be sustained throughout the remainder of the year. Recall, our original guidance assumed we would not reach a full recovery until the second half of this year. And in Japan, which is an underdeveloped market and proving to be very responsive to promotion, we continue to make significant investments in injector training, our field force and consumer education. Overall, we are pleased with how our team has been executing through this dynamic environment and remain encouraged by improving trends internationally and stabilization across our U.S. portfolio. These positive trends and continued strong momentum give us the confidence to increase the full year outlook for our aesthetics business. Longer term, we remain extremely confident in our ability to grow the aesthetics business and continue to expect to achieve total sales of more than $9 billion by the end of this decade. Aesthetics continues to be an extremely attractive underpenetrated market and our proven ability to drive consumer demand and develop a strong base of loyal customers as well as bring innovative new products to the market will support robust growth over the long term. With that, I'll turn the call over to Tom. Thomas J. Hudson: Thank you, Carrie. We've continued to make very good progress with our pipeline to start this year. In immunology, we recently received European approval for Rinvoq in Crohn's disease, making it the first JAK inhibitor approved for this indication. We continue to anticipate FDA approval for Rinvoq in Crohn's disease next month. We also recently announced positive top line results from our Phase III induction study for Skyrizi in ulcerative colitis, which is a disease with unpredictable symptoms and frequent players making it challenging to manage. In our study, Skyrizi met the primary and all secondary end points demonstrating a very strong impact on the disease as measured by clinical remission, clinical response and endoscopic improvement. We're particularly pleased with Skyrizi's impressive performance on the more stringent measures in this trial with approximately 37% of Skyrizi-treated patients achieving endoscopic improvement compared to 12% of patients on placebo. This level of efficacy has the potential to position Skyrizi as a highly effective therapy, and we believe it will be a welcome new treatment option for physicians and patients once approved. Detailed data from this induction study will be presented at a forthcoming medical meeting. We expect to see data from the Phase III maintenance study in the second quarter with our regulatory submissions planned for the second half of the year. In oncology, we continue to make good progress across all stages of our hematology and solid tumor pipelines. We remain on track for several important regulatory and clinical milestones this year, including regulatory approval for epcoritamab in relapsed/refractory large B-cell lymphoma. Phase III data from Venclexta's CANOVA trial in relapsed/refractory in multiple myeloma patients with a t(1114) mutation and navitoclax's TRANSFORM-1 trial in frontline myelofibrosis. And Phase II data for Teliso-V in second line plus advanced non-squamous non-small cell lung cancer, which has the potential to support a regulatory submission for accelerated approval. We're also beginning to see very encouraging data for our next-generation c-Met ADC, which uses a more potent Topol payload than our Teliso-V ADC. Based on the data we've seen to date for ABBV-400 in our Phase I solid tumor basket study, we plan to expand the program to earlier lines in colorectal cancer as well as evaluate in other tumors where c-Met is expressed, including pancreatic and liver cancer. Moving to our neuroscience pipeline, where we've recently received FDA approval for Qulipta as a preventive treatment for patients with chronic migraine, making it the only oral CGRP antagonist approved for prevention of both episodic and chronic migraine. In our Phase III study, Qulipta provided a significant reduction in migraine days as well as significant improvements in function and quality of life in patients with chronic migraine, a common and debilitating disease. As a highly effective oral treatment option, we believe Qulipta will be well positioned in a chronic migraine prevention market. In Europe, we continue to anticipate an approval decision in the third quarter for atogepant as a preventive treatment for patients with both chronic and episodic migraine. Turning now to ABBV-951. We announced that we received a complete response letter for our regulatory application in the U.S. The FDA has not asked for additional efficacy or safety studies related to our drug delivery -- drug device delivery system, but rather they have requested additional information regarding the pump as well as updates to instruction for use. We are working to generate the necessary information, and we expect to respond to the CRL later this year with an FDA action anticipated in the first half of '24. In international markets, we've recently received approval for 951 in Japan, and we continue to expect approval in Europe in the fourth quarter of this year. In our early-stage neuroscience pipeline, we recently began Phase I studies of our selective D3 dopamine receptor agonist, ABBV-932. Our experience with Vraylar has highlighted the potential clinical benefit of achieving D3 selectivity, and we believe that a compound that more selectively engages the D3 dopamine receptor has the potential to provide enhanced efficacy. Our program will initially focus on general anxiety disorder with the potential to expand to other neuropsychiatric disorders. The programs under our collaboration with Calico are also progressing well. We now have 4 assets in clinical trials, including 2 PTPN2 inhibitors in Phase I in oncology. Our eIF2B activator for neurodegenerative diseases and an IGF-1 signaling pathway modulator that will be explored in aging-related diseases. Our most advanced program is the eIF2B activator 7262. The first patient was recently enrolled in the HEALEY ALS Platform Trial, a Phase II/III study conducted by the HEALEY Center for ALS at Mass General. This trial is designed to evaluate multiple therapies simultaneously with a goal to accelerate the development of potential breakthrough treatments for ALS. Now I'd like to provide a brief update on 2 earlier stage programs in our therapeutic pipeline. In cystic fibrosis, we recently analyzed data from an ongoing proof-of-concept study, evaluating our triple combination therapy. The results from this interim analysis did not meet our criteria for advancing and we are discontinuing our cystic fibrosis program. We also recently reviewed interim data from our exploratory studies for ABBV-154 in PMR in Crohn's disease. Similar to results from the RA study, while we observed efficacy with 154, we also observed some changes in biomarkers that are consistent with systemic steroid exposure at the higher doses. The benefit risk profile does not sufficiently differentiate 154 from other available treatments. So based on the totality of the data across RA, PMR and Crohn's disease studies, we will not be pursuing further development of this asset. Now moving to our aesthetics pipeline. We recently saw data from our Phase III studies for Botox in platysma prominence and masseter muscle prominence. In our study for prominent neck muscles, Botox met all primary and secondary endpoints demonstrating a significant reduction in the unwanted appearance of platysma prominence on the neck and jaw line. This was the first of 3 Phase III studies in platysma prominence with data from the 2 remaining trials expected in the second half of the year, followed by regulatory submission in the U.S. near the end of 2023. Botox also performed very well in our study for prominent masseter muscles, meeting the primary and all secondary endpoints in the trial. Our program is initially focused on China and other Asian markets as masseter prominence is common in Asian populations and there is significant unmet need for minimally invasive treatment options. Based on the results from this trial, we expect to submit our regulatory application in China in the second half of the year. Once approved, we anticipate high demand for Botox in this novel indication, which will help to further build our portfolio in the lower phase segment. So in summary, we continue to demonstrate significant progress across all stages of our pipeline and anticipate numerous important regulatory and clinical milestones throughout the remainder of 2023. With that, I'll turn the call over to Scott. Scott Reents: Thank you, Tom. I will discuss our most recent financial results and guidance. Starting with our first quarter results, we delivered strong top and bottom line performance. We reported adjusted earnings per share of $2.46, which is $0.10 above our guidance midpoint. These results include an $0.08 unfavorable impact from acquired IPR&D expense. Total net revenues were $12.2 billion, $400 million ahead of our guidance and down 8.3% on an operational basis, excluding a 1.4% unfavorable impact from foreign exchange. The adjusted operating margin ratio was 45% of sales. This includes adjusted gross margin of 84.2% of sales, adjusted R&D investment of 13.6% of sales, acquired IPR&D expense of 1.2% of sales and adjusted SG&A expense of 24.4% of sales. Net interest expense was $454 million. The adjusted tax rate was 13.7%. Turning to our financial outlook. We are raising our full year adjusted earnings per share guidance to between $10.72 and $11.12. This earning per share guidance does not include an estimate for acquired IPR&D expense that may be incurred beyond the first quarter. We now expect net revenues of approximately $52.4 billion, an increase of $400 million. At current rates, we expect foreign exchange to have a modest unfavorable impact on full year sales growth. This guidance includes the following updated assumptions. We now expect Vraylar sales of approximately $2.7 billion, an increase of $200 million, reflecting strong prescription growth following the MDD approval. And for aesthetics, we now expect global revenue of approximately $5.3 billion, reflecting the better-than-expected recovery in China and stable economic trends in the U.S. Turning to the second quarter, we anticipate net revenues of approximately $13.5 billion, which includes U.S. Humira erosion of 27%. At current rates, we expect foreign exchange to have a 0.6% unfavorable impact on sales growth. We are forecasting an adjusted operating margin ratio of 48.5% of sales. We are modeling a non-GAAP tax rate of 15.4%. We expect adjusted earnings per share between $2.90 and $3. This guidance does not include acquired IPR&D expense that may be incurred in the quarter. In closing, we are off to an excellent start to the year with strong performance across the portfolio and financial results ahead of our expectations. With that, I'll turn the call back over to Liz. Elizabeth Shea: Thanks, Scott. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to 1 or 2. Operator, first question, please. Operator: Our first question comes from Terence Flynn with Morgan Stanley. Terence Flynn: Great. Maybe 2 for me. Just on immunology, can you quantify the amount of destocking for both Skyrizi and Rinvoq in the quarter? I think Biogen on their call spoke to some tighter working capital requirements at wholesalers due to rising interest rates. So just wondering if you're seeing something similar here and just to want to be sure that it's not a pricing dynamic. And then can you elaborate at all about your ALS program when we might see some data there? Robert Michael: Terence, it's Rob. So on the retail inventory destocking, we do typically see this in the first quarter, so it wasn't a complete surprise. In fact, it was factored into our guidance. We did beat our guidance in immunology for the quarter. The impact was high single digits, both for Skyrizi and Rinvoq. In terms of absolute value, we're talking about around $70 million for Skyrizi and $30 million for Rinvoq. Jeffrey Stewart: And it's Jeff. Just to clarify on your wholesale comment, I think, as Rob highlighted, it's in the retail. So it's in the specialty pharmacy channel. And you'll recall, as you know, there's about 18 specialty pharmacies that basically distribute the I&I products, and there are some big ones there. So it was not a wholesaler dynamic. It was a retail inventory dynamic, which, again, as these products get bigger, we do see and contemplate in our projections. Robert Michael: And then Terence, this is Rob. Just to more broadly answer the question that I'm sure many investors have. If you look at the growth in the quarter, so overall, U.S. demand was up just north of 60% for Rinvoq and Skyrizi. We saw very strong performance across all approved indications, as Jeff highlighted. We did have the 2 partial offsets, one being the retail inventory destock, which I've already quantified. And then price was down high single digits and that's really driven by rebate increases, which is typical when we see the type of volume increase. And we saw Skyrizi sales up 80% last year, Rinvoq in the U.S. up 40% last year. So when you see that kind of volume growth and couple that with the number of indications we had approved, we had 5 new indications for Rinvoq and 2 for Skyrizi. So it was something we were contemplating. It was factored into our guidance, but I don't know that The Street fully appreciated that in terms of the first quarter estimates that were put out there. Thomas J. Hudson: This is Tom for the ALS question. I'd say about 2 years, we had to recruit the patients and there's about a year of follow-up that is needed. So I would say, late '24, early '25, all depends on the enrollment, which I understand is starting off on a good pace. Elizabeth Shea: Thanks, Terence. Operator, next question, please. Operator: Our next question comes from Steve Scala with Cowen. Steve Scala: A couple of questions. Some of your peers have called out co-pay resets early in the year that have led to more modest performances in products such as Dupixent and Cosentyx. AbbVie has been less vocal on this point. How much was that a factor? Or are Skyrizi and Rinvoq different in some way? And then secondly, despite the solid performance in Q1, the EPS guidance range continues to be very wide. What factors would have to play out for you to hit the high end of that and the low end of that? Jeffrey Stewart: Yes, Steve, it's Jeff, and thanks for the question. I'll take the co-pay one. Look, I mean, some of the peers are seeing the effects of the so-called maximizer programs or even some of the lingering accumulator programs which do sometimes as benefit designs are reset in the first quarter can apply some pressure. We don't see that. We've been managing that very tightly. And we're not seeing any significant sort of surge or creep in terms of that dynamic. The dynamic is exactly what Rob had highlighted, which is the modest price based on the number of indications and how fast the volume is moving and this destocking event that we talked through. So co-pay is very stable for AbbVie. Robert Michael: And Steve, this is Rob, on your EPS range question. We've typically given a $0.20 range; this year, we gave a $0.40 range. And the key driver of that is obviously the U.S. Humira dynamics. As we see that play out, particularly in the second half, we would typically tighten that range. Now keep in mind, that $0.20 wider range represents about 1% of U.S. Humira growth. So it's not as wide as you might think. But we did widen it given the dynamics of U.S. Humira. And I think we'll be able to give you more color as we see those 7, 9 biosimilars coming in the market in the middle of the year. We'll have more clarity for you on the second quarter call. Elizabeth Shea: Thanks, Steve. Operator, next question, please. Operator: Our next question comes from Chris Schott with JPMorgan. Christopher Schott: Just coming back to Skyrizi and Rinvoq, I think you mentioned high single-digit price erosion beyond just those inventory changes. I guess is that a reasonable assumption to think about price as we progress through the rest of this year? And then maybe longer term, should we think about that level of price erosion as more like a onetime kind of issue this year given all the new indications and a more stable trend going forward? I'm just trying to kind of get my hands around the pricing a little bit more. And my second question was on the aesthetics business. You obviously saw a very strong 1Q. Can you just elaborate a little bit more on your confidence in the sustainability of these trends? I know the market has been a little bit bumpy, but it seems like the tone is that you're encouraged with the trends you're seeing. But just how much, I guess, visibility you have in terms of sustainability of those favorable international trends we're seeing right now? Robert Michael: Chris, this is Rob. So on your question on price, yes, the way to think about 2023 price for the year for Skyrizi and Rinvoq would be down high single digits. Now we wouldn't expect high single digits to be the rate going forward given a big driver was the number of new indications that we launched. And so I would expect that to moderate over time. Carrie? Carrie Strom: This is Carrie. In terms of your questions around the aesthetics market, there are 2 key assumptions for the 2023 planning. One was around the U.S. economy and the other was around the recovery in China. When you think about the U.S. economy, we look at Q1 and we see some favorability to our planning assumptions with the metrics that we track, which Rob mentioned, include real personal consumption expenditure and Google. And so in January and February, we saw favorability there. Although in March, there are some potential signs of softening. So we continue to have a cautious outlook for our U.S. business for the rest of the year. The way to think about market growth for the full year would be low -- for toxins, the market would be down low to mid-single digits until we lap the 2022 downturn, which happened around May. And then after that, we would expect flat market growth for the rest of the year. So that's how we think about the U.S. Our other -- our second biggest market is China. And recall, we had assumed that the aesthetics market in China would not recall -- would not fully recover until the second half of the year. Well, in actuality, what we saw was although January was significantly impacted, in February, we started to see improvement. And in March, there was a really steep recovery that we do expect will sustain through the rest of the year. And in other markets around the world, I guess, in Canada and U.K., we are seeing some high inflation impacting consumer demand, but the rest of Europe seems stable right now. Elizabeth Shea: Thank you, Chris. Operator, next question, please. Operator: Our next question comes from Mohit Bansal with Wells Fargo. Mohit Bansal: I have one clarification and one question. So clarification is regarding the price decline for I&I. You said that high single digit, but should we assume like going forward, year-over-year, we should -- versus volumes, should we assume high single-digit decline still going forward for at least for rest of the quarter and then more stable pricing quarter-over-quarter term, just that clarification. And the question is, regarding the I&I pipeline, so you have a leadership position with Skyrizi and Rinvoq, and they are growing. But some of the pipeline products like 154 and 157 did not pan out as you were hoping them to. So what is -- how should we think about the pipeline strategy beyond these 2 products? And can you even do M&A given the increased FTC scrutiny nowadays? Richard Gonzalez: So this is Rick. I'll cover number two and maybe just touch on number one. If you think about our pipeline, obviously, as we look at Skyrizi and Rinvoq, they clearly have restated the immunology market across most of the segments that we operate in. We view those assets as being able to drive strong growth through the early part of the next decade. Having said that, we're continuing to look for assets in areas where we believe there's still a significant opportunity to restate standard of care. And we obviously explore, as everyone in this industry does many different assets and different mechanisms to try to find those kinds of mechanisms that will deliver that kind of performance. It's interesting. When you look at the 154 platform, it did exactly what we thought it would do from the standpoint of efficacy. But it did it in a way only at the highest dose and at that highest dose, we did see it -- some effects of steroids on some of the biomarkers. And based on the way we think regulators would look at a label for those kinds of products, we didn't believe that would be a competitive profile. But the hypothesis certainly worked around the mechanism. So we continue to look for opportunities. We have lots of runway here to be able to get to those, but we do desire to find some additional mechanisms that will be the follow-on products that should be introduced hopefully near the end of this decade or early into the next decade as the next-generation immunology assets for AbbVie. So -- and I feel good about the progress that we're making there. We're continuing to explore a number of other areas. And we're continuing to look both internally and externally at different assets that we can bring into the company to be able to do that. To your question of being able to bring assets into this market, we don't believe that we would be encumbered because immunology is a very crowded space from a competitive standpoint. And that's one of the most important criteria that you look at from an FTC standpoint. So we believe we have freedom to operate across most of those segments from an FTC standpoint as well. And on price, maybe Rob and I will tag team this one to make sure it's clear. It is common that when you go out and you add indications in this industry, that when you negotiate those contracts to be able to get access, it does require some level of price concession. I would say we're on the lower end of what you typically would have seen with the speed at which we got access for Skyrizi and Rinvoq for those indications and the breadth of that access. And so we certainly would expect this year and last year to be the areas where you saw the most significant amount of price because those are the years that we added the majority of the indications, you would expect that to moderate. So then going forward, the way to think about it is, then it's only really driven by volume at that point. And volume typically requires much more modest kinds of price as you go forward. It's not 0 price. You shouldn't have that expectation. But I would not have an expectation of high single digits going forward. Anything you'd add, Rob? Robert Michael: Just to answer the question, Mohit, on the gating. Yes, I think it's safe to assume that you'll see high single-digit price in each of the quarters this year. Elizabeth Shea: Thank you, Mohit. Operator, next question, please. Operator: Our next question comes from Tim Anderson with Wolfe Research. Alice Nettleton: This is Alice Nettleton on for Tim Anderson. So a question on PBMs, which are under renewed scrutiny. If there were material changes to the rebating structure currently in place, would that put big incumbent products at risk because it might remove the so-called rebate wall? And more generally, do you think there is any chance of some of the proposed legislative changes actually becoming law? And then secondly, any collateral impact you're seeing on Skyrizi or Rinvoq since Humira biosimilars have launched? And given the overlapping indications, do you think that you'll start to see some picking off of patients from these 2 brands to biosimilars in the second half of the year? Jeffrey Stewart: Yes, it's Jeff. I'll give some comment on that. I think the way that we think about our brands is the first place that we look at is how distinctive they are. I mean we've got 4 head-to-head trials with Skyrizi and another one on the way where we can clearly differentiate the product. And we have many as well on Rinvoq. So we've really thought about it from a development standpoint. And I would say the perspective is somehow there was a restructuring of the PDMs, which I don't think is imminent. And the rebate sort of approach disappeared. It disappears for everybody. I mean all of these I&I products have a fairly reasonable rebate load and there would be a different basis of competition, which we would do very, very well. So we're not concerned about sort of a fundamental structural change relative to these 2 products, which are very distinctive. If we look at your second part of your question, which is it's really the same answer, which is we don't see that there are going to be significant impacts of Humira biosimilars on the performance of Skyrizi and Rinvoq. And one perspective, let's take Rinvoq is sort of a very simple way of thinking about it. It's already in the United States, a step behind TNF and it's performing at that level because you see such expansion of second and third lines in that space. And Skyrizi is very, very distinctive. So no, in the second half, we do not anticipate sort of a knock-on effect of the emergent biosimilars to our 2 core brands. Elizabeth Shea: Thanks, Alice. Operator, next question, please. Operator: Our next question comes from Carter Gould with Barclays. Carter L. Gould: Maybe a different spin on sort of the BE question there, just given sort of the volatility in the marketplace, as you kind of have those conversations or engage with potential targets. Just if you've seen a shift in sort of that bid-ask spread and the willingness of boards and management to consider deals. Any update on that front would be helpful. Richard Gonzalez: This is Rick. I'd say the environment hasn't changed materially in the last 24 months from my perspective. I still think it's certainly more difficult to raise money for biotech companies. So it probably makes them a bit more willing to engage with players like us or engage in a process, if they're at a point where they've generated data that makes them attractive. But I'd say the interest level in that engagement is similar to what has been for the last 12 to 24 months. And there's a lot of opportunity to be able to find assets that are in the biotech area. The question is you have to find the right kind of asset and you have to find one that's attractive and meet your needs. And I'd say being able to negotiate a transaction, I think, is a reasonable probability. I'd say prices are still relatively high. And so valuations for good assets tend to go at a pretty high level. So again, it's got to be an asset that can demonstrate that it's going to provide significant value to justify that kind of a valuation and a return. But we continue to look for opportunities. And I think as we find those kinds of opportunities, as I've said in the past, we're certainly going to pursue them. Elizabeth Shea: Thanks, Carter. Operator next question, please. Operator: Our next question comes from Vamil Divan with Guggenheim Securities. Vamil Divan: Maybe a couple from me as well. So one, just a couple of data points you have coming up this year that I think may be a little bit less focused on is on Navitoclax and Teliso-V. So maybe you can just sort of frame so what we should be looking for, what your expectations are, what you're hoping to see from those assets, especially Teliso-V given your comments on the sort of next-gen ABBV-400? And then the other question, I guess, would be for Rick and is more on succession planning. I know we've talked -- you've mentioned before that your plans to stick around through the Humira bench. I'm just wondering if you have any sort of updated sort of thoughts around timing on that now that we're in the middle of this process. We've been getting some questions there, too. Is this something we should expect some sort of announcement this year? Or is it more -- are you're looking for 2024 or later? Roopal Thakkar: It's Roopal. I'll take the ones on Navitoclax and Teliso-V. So for Navitoclax, it's the combination with the JAK2 in myelofibrosis. And there, we're looking to be better than monotherapy with JAK2 in that space and improving spleen size and symptoms like abdominal pain, fullness, fever, fatigue. Also, perhaps uniquely, what we've observed is also an improvement in bone marrow fibrosis and a decrease in variant allelic frequency. So that's what we would be looking for, and we should get a readout by midyear or so. For Teliso-V, in lung cancer, EGFR wild type with high c-Met and that's the indication where we have breakthrough therapy designation. Around the end of this year, I would say that's where we would see a readout. What we've seen in earlier data cuts is an ORR above 50%, which is quite a bit higher than what would be expected in standard of care in that second, third line setting. And if the data looks strong, there's a potential that we could submit next year for an accelerated approval. Richard Gonzalez: I'll take the second question. And maybe I'll make a little bit of a comment on Teliso-V because I think you mentioned 400. I think the early data that we're seeing in 400 is impressive to us. There's no question about it. And I think we're going to have some data presented at this ASCO, right, where you'll have an opportunity to see that in CRC. Now having said that, Teliso-V, as Roopal said, does get very good responses in c-Met highs. But to get a broader set of c-MET population, we do believe you need to move to the Topol warhead and seems to get deeper responses and more durable responses. Data has to play out over time, but it appears to be a very good platform for c-MET. And so we need the data to mature, and we need to develop more data in that area. But I'd say the early data is pretty encouraging. You'll have a chance to see a snippet of that at this ASCO. As far as leadership changes, I'd say it's similar to what we've said in the first quarter or fourth quarter, I can't recall, last year around succession. We obviously have a process in place. We have a very experienced board. I've had many, many discussions with the Board about succession. The Board knows I'm committed to be here to ensure a successful and smooth transition. The criteria that we're operating against is we need to completely get through the transition for Humira biosimilars here in the U.S. I'd say, so far, I'm pretty pleased with how the transition is going. And I'm even more pleased with the way the growth platform is operating right now. And in fact, if you look at it this year, the growth platform is going to deliver mid-single digits and it's going to do it despite the headwinds that we see on Imbruvica and the headwinds that we're seeing from the economy on aesthetics. Once the aesthetics business returns to its normal growth rates and much of the pressure on Imbruvica starts to subside, we should see that growth rate increase significantly as we move into '24 for the growth platform. And obviously, returning to robust growth in '25 and deliver high single digit from that point forward. So that's the expectation that we're working against. So we want to make sure that the business is operating the way we want it to. We want to make sure that we're through the biosimilar erosion to the point that we believe it is predictable. And then obviously, the second part of the criteria is ensuring that the candidate that will succeed me is ready to do that. We can make a successful transition. I've also told the Board that I'm willing to stay in any capacity that they would desire for whatever length of time they would. I think the expectation right now is that I would assume the Executive Chairman role for a period of time to finish the transition to the new CEO. You should not be expecting that, that transition is going to occur in '23. Elizabeth Shea: Thanks, Vamil. Operator, next question, please. Operator: Our next question comes from Evan Seigerman with BMO Capital Markets. Evan Seigerman: Just on kind of Skyrizi and some of the dynamics you're seeing there, can you characterize about kind of how you're thinking about further penetration in the psoriasis indication, kind of some puts and takes in the dermatology market? And just a follow-up on the CF program, is it safe to assume that you're totally done investing in this area? Or do you have other assets kind of in earlier development that could emerge? Jeffrey Stewart: Yes. It's Jeff. I'll take your comment on psoriasis. I think that, as I mentioned, it's -- the share is very, very impressive. So we have a 30% total market share now which is really putting significant headroom against any other drug in that category by a lot. And one way to think about it is, I think what you're asking is how much further can it run? And it can run quite a bit further. To some degree, if you think about it, so we're capturing on the dynamic share roughly 50%. So 1 out of every 2 patients. And our market share is about 30. So theoretically, over time, right, unless there's some disruption, which we don't see significant disruption in the market, your total market share is going to move towards that in-play share. Now that takes many, many years. But as we look at the fundamental momentum that we can achieve, it's still very, very significant. Add on to that, that basically, we're still in the rest of the world, starting to really see the PSA ramp. And remember, PSA has a very significant impact because it's treated by derms and it was sort of the last remaining gap that we had, so you're going to see continued momentum in the international markets and the U.S. market and we have a long way to run. And I'd be remiss if I didn't say how fast again that we're growing in both Crohn's right now and very exciting data in UC. And that market is very, very dynamic. So we feel very secure in our ability to continue to create a lot of value with Skyrizi. Thomas J. Hudson: This is Tom. Regarding the question on our triplet program, yes, we are -- our C2 corrector that we just tested did not work. This was not our first attempt that producing one and we do not have another backup. So we don't have other options than to discontinue the CF program. Elizabeth Shea: Thanks, Evan. Operator, next question, please. Operator: Our next question comes from Trung Huynh with Credit Suisse. Carson Wong: This is Carson on for Trung. Just on Imbruvica, how confident are you for the [ 5.7 ] hem-onc guide given the significant competitive pressures there? I mean I understand Brukinsa did particularly have legs in the U.S. until late January. What level of pricing pressures can we expect through the year? And is there a potential for further step downs in your guide for later in the year? And if you do that, could the trough be pushed out given the delay with 951 as well? Jeffrey Stewart: Yes. It's Jeff. And I think we think that's a very good call. And just as a reminder, we're not seeing significant pricing pressure in the market. This is really two effects, which is one, the cumulative effect as we've highlighted over the suppressed market over time, which looks to be normalizing. Actually, for the first time in 3 years, we actually saw a positive growth in the market. So that's encouraging. The big driver is the share -- is the new patient share, which has been under pressure, initially under pressure by Calquence certainly from our own Venclexta and then the recent Brukinsa launch. And so when we put all of that into the calculus, we think we've got it right and it's probably unlikely that we're going to see any significant step down that would put that in jeopardy. Robert Michael: Carson, this is Rob. I'll answer your second question. So I wouldn't consider Imbruvica in 951 to be variables that would push the trough out. It's really more about how the overall year plays out, particularly the second half with U.S. Humira. So if U.S. Humira does better and we outperform in '23, then we could see the trough in '24. I think the important thing to keep in mind is regardless of when the trough occurs, we wouldn't expect earnings to fall below the [ 1074 ex-IPR&D ]. That's really what I would focus on, and we don't consider Imbruvica in 951 delays to be variables that would push that trough. Elizabeth Shea: Thanks, Carson. We are cognizant of a number of peers reporting today. And so in the interest of time, we have one last question. Operator: Our last question comes from Geoff Meacham with Bank of America. Unknown Analyst: This is [ Susan ] on for Geoff Meacham. We had a follow-up on Imbruvica. Do you guys expect any changes to outlook following MCL/MDL withdrawal? And then do you expect any read-through to follicular lymphoma from that withdrawal? Jeffrey Stewart: It's Jeff. Thank you for the question. First, these are very small indications. So to give you some sense of the relative size for Imbruvica, MCL is about 4% of the value. MDL is really less than 1% or about 1%. So we don't anticipate that those withdrawals due to the fact that we didn't get the confirmatory studies to clear, we'll have a material impact. I think it's also important to note that many physicians will continue these patients on the medication. They won't be all switched, for example, or taken off and put on another product. That's the market intelligence. There's no requirement that they need to do that for the physicians. And so net-net, this is not a really material issue given the size of those indications. And I think Roopal will address your point on follicle. Roopal Thakkar: Yes, I can talk about FL here for a minute. So a Phase III readout is expected later this year. It's not clear if the MCL outcomes would be reflected in what we see there. But what I would say about FL is our focus would be with epcoritamab, or dual engager, which we expect DLBCL actions here soon. And then we have programs and we're seeing very high levels of response in FL with epco either as monotherapy or in combination, which we'll see some data in those combos in DLBCL and FL at ASCO as well. Elizabeth Shea: Thanks, [ Susan ]. And that concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. Operator: Thank you for your participation. Participants, you may disconnect at this time.	[ { "speaker": "Operator", "text": "Good morning, and thank you for standing by. Welcome to the AbbVie First Quarter 2023 Earnings Conference Call. [Operator Instructions]" }, { "speaker": "Elizabeth Shea", "text": "Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Rob Michael, Vice Chairman and President; Jeff Stewart, Executive Vice President and Chief Commercial Officer; Scott Reents, Executive Vice President and Chief Financial Officer; Carrie Strom, Senior Vice President and President, Allergan aesthetics; and Tom Hudson, Senior Vice President, R&D and Chief Scientific Officer. Joining us for the Q&A portion of the call is Roopal Thakkar, Senior Vice President, Development and Regulatory Affairs and Chief Medical Officer." }, { "speaker": "Richard Gonzalez", "text": "Thank you, Liz. Good morning, everyone, and thank you for joining us today. I'm extremely pleased with our start to 2023. With first quarter total revenues and adjusted earnings per share both exceeding our expectations. This performance was driven by double-digit sales growth from several key products, including Skyrizi, Rinvoq, Venclexta and Vraylar. Positive momentum from our aesthetics business with strong results internationally and stabilizing consumer trends in the U.S. and in line performance from U.S. Humira where biosimilar erosion is tracking as expected with much of the impact driven by price." }, { "speaker": "Robert Michael", "text": "Thank you, Rick. We're off to an excellent start in 2023 with each of our 5 key therapeutic areas meeting or exceeding our first quarter expectations, a testament to the strength of our broad portfolio. We delivered adjusted earnings per share of $2.46, which is $0.10 above our guidance midpoint. Total net revenues were $12.2 billion, approximately $400 million ahead of our expectations." }, { "speaker": "Jeffrey Stewart", "text": "Thank you, Rob. I'm very pleased with the strong commercial execution across our therapeutic portfolio. Immunology delivered total revenues of approximately $5.6 billion with continued robust double-digit growth from Skyrizi and Rinvoq. Skyrizi global sales were nearly $1.4 billion, reflecting operational growth of more than 46%, despite retail inventory destocking in the quarter. Skyrizi is the clear market leader in the U.S. biologic psoriasis market with a total prescription share now at 30%." }, { "speaker": "Carrie Strom", "text": "Thank you, Jeff. First quarter Global aesthetics sales were approximately $1.3 billion, which came in ahead of our guidance, primarily due to a faster reopening in China as well as a slightly stronger economy in the U.S. versus our planning assumption. In the U.S., aesthetics sales were $777 million, down 8.1% as we continue to see softness in aesthetics procedures related to inflationary dynamics. As a reminder, we saw a very robust performance for our U.S. performance in the first quarter of 2022, which created difficult comparison for growth in the first quarter of this year." }, { "speaker": "Thomas J. Hudson", "text": "Thank you, Carrie. We've continued to make very good progress with our pipeline to start this year. In immunology, we recently received European approval for Rinvoq in Crohn's disease, making it the first JAK inhibitor approved for this indication. We continue to anticipate FDA approval for Rinvoq in Crohn's disease next month. We also recently announced positive top line results from our Phase III induction study for Skyrizi in ulcerative colitis, which is a disease with unpredictable symptoms and frequent players making it challenging to manage." }, { "speaker": "Scott Reents", "text": "Thank you, Tom. I will discuss our most recent financial results and guidance. Starting with our first quarter results, we delivered strong top and bottom line performance. We reported adjusted earnings per share of $2.46, which is $0.10 above our guidance midpoint. These results include an $0.08 unfavorable impact from acquired IPR&D expense. Total net revenues were $12.2 billion, $400 million ahead of our guidance and down 8.3% on an operational basis, excluding a 1.4% unfavorable impact from foreign exchange. The adjusted operating margin ratio was 45% of sales. This includes adjusted gross margin of 84.2% of sales, adjusted R&D investment of 13.6% of sales, acquired IPR&D expense of 1.2% of sales and adjusted SG&A expense of 24.4% of sales. Net interest expense was $454 million. The adjusted tax rate was 13.7%." }, { "speaker": "Elizabeth Shea", "text": "Thanks, Scott. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to 1 or 2. Operator, first question, please." }, { "speaker": "Operator", "text": "Our first question comes from Terence Flynn with Morgan Stanley." }, { "speaker": "Terence Flynn", "text": "Great. Maybe 2 for me. Just on immunology, can you quantify the amount of destocking for both Skyrizi and Rinvoq in the quarter? I think Biogen on their call spoke to some tighter working capital requirements at wholesalers due to rising interest rates. So just wondering if you're seeing something similar here and just to want to be sure that it's not a pricing dynamic. And then can you elaborate at all about your ALS program when we might see some data there?" }, { "speaker": "Robert Michael", "text": "Terence, it's Rob. So on the retail inventory destocking, we do typically see this in the first quarter, so it wasn't a complete surprise. In fact, it was factored into our guidance. We did beat our guidance in immunology for the quarter. The impact was high single digits, both for Skyrizi and Rinvoq. In terms of absolute value, we're talking about around $70 million for Skyrizi and $30 million for Rinvoq." }, { "speaker": "Jeffrey Stewart", "text": "And it's Jeff. Just to clarify on your wholesale comment, I think, as Rob highlighted, it's in the retail. So it's in the specialty pharmacy channel. And you'll recall, as you know, there's about 18 specialty pharmacies that basically distribute the I&I products, and there are some big ones there. So it was not a wholesaler dynamic. It was a retail inventory dynamic, which, again, as these products get bigger, we do see and contemplate in our projections." }, { "speaker": "Robert Michael", "text": "And then Terence, this is Rob. Just to more broadly answer the question that I'm sure many investors have. If you look at the growth in the quarter, so overall, U.S. demand was up just north of 60% for Rinvoq and Skyrizi. We saw very strong performance across all approved indications, as Jeff highlighted. We did have the 2 partial offsets, one being the retail inventory destock, which I've already quantified. And then price was down high single digits and that's really driven by rebate increases, which is typical when we see the type of volume increase." }, { "speaker": "Thomas J. Hudson", "text": "This is Tom for the ALS question. I'd say about 2 years, we had to recruit the patients and there's about a year of follow-up that is needed. So I would say, late '24, early '25, all depends on the enrollment, which I understand is starting off on a good pace." }, { "speaker": "Elizabeth Shea", "text": "Thanks, Terence. Operator, next question, please." }, { "speaker": "Operator", "text": "Our next question comes from Steve Scala with Cowen." }, { "speaker": "Steve Scala", "text": "A couple of questions. Some of your peers have called out co-pay resets early in the year that have led to more modest performances in products such as Dupixent and Cosentyx. AbbVie has been less vocal on this point. How much was that a factor? Or are Skyrizi and Rinvoq different in some way? And then secondly, despite the solid performance in Q1, the EPS guidance range continues to be very wide. What factors would have to play out for you to hit the high end of that and the low end of that?" }, { "speaker": "Jeffrey Stewart", "text": "Yes, Steve, it's Jeff, and thanks for the question. I'll take the co-pay one. Look, I mean, some of the peers are seeing the effects of the so-called maximizer programs or even some of the lingering accumulator programs which do sometimes as benefit designs are reset in the first quarter can apply some pressure. We don't see that. We've been managing that very tightly. And we're not seeing any significant sort of surge or creep in terms of that dynamic. The dynamic is exactly what Rob had highlighted, which is the modest price based on the number of indications and how fast the volume is moving and this destocking event that we talked through. So co-pay is very stable for AbbVie." }, { "speaker": "Robert Michael", "text": "And Steve, this is Rob, on your EPS range question. We've typically given a $0.20 range; this year, we gave a $0.40 range. And the key driver of that is obviously the U.S. Humira dynamics. As we see that play out, particularly in the second half, we would typically tighten that range. Now keep in mind, that $0.20 wider range represents about 1% of U.S. Humira growth. So it's not as wide as you might think. But we did widen it given the dynamics of U.S. Humira. And I think we'll be able to give you more color as we see those 7, 9 biosimilars coming in the market in the middle of the year. We'll have more clarity for you on the second quarter call." }, { "speaker": "Elizabeth Shea", "text": "Thanks, Steve. Operator, next question, please." }, { "speaker": "Operator", "text": "Our next question comes from Chris Schott with JPMorgan." }, { "speaker": "Christopher Schott", "text": "Just coming back to Skyrizi and Rinvoq, I think you mentioned high single-digit price erosion beyond just those inventory changes. I guess is that a reasonable assumption to think about price as we progress through the rest of this year? And then maybe longer term, should we think about that level of price erosion as more like a onetime kind of issue this year given all the new indications and a more stable trend going forward? I'm just trying to kind of get my hands around the pricing a little bit more." }, { "speaker": "Robert Michael", "text": "Chris, this is Rob. So on your question on price, yes, the way to think about 2023 price for the year for Skyrizi and Rinvoq would be down high single digits. Now we wouldn't expect high single digits to be the rate going forward given a big driver was the number of new indications that we launched. And so I would expect that to moderate over time." }, { "speaker": "Carrie Strom", "text": "This is Carrie. In terms of your questions around the aesthetics market, there are 2 key assumptions for the 2023 planning. One was around the U.S. economy and the other was around the recovery in China. When you think about the U.S. economy, we look at Q1 and we see some favorability to our planning assumptions with the metrics that we track, which Rob mentioned, include real personal consumption expenditure and Google." }, { "speaker": "Elizabeth Shea", "text": "Thank you, Chris. Operator, next question, please." }, { "speaker": "Operator", "text": "Our next question comes from Mohit Bansal with Wells Fargo." }, { "speaker": "Mohit Bansal", "text": "I have one clarification and one question. So clarification is regarding the price decline for I&I. You said that high single digit, but should we assume like going forward, year-over-year, we should -- versus volumes, should we assume high single-digit decline still going forward for at least for rest of the quarter and then more stable pricing quarter-over-quarter term, just that clarification." }, { "speaker": "Richard Gonzalez", "text": "So this is Rick. I'll cover number two and maybe just touch on number one. If you think about our pipeline, obviously, as we look at Skyrizi and Rinvoq, they clearly have restated the immunology market across most of the segments that we operate in. We view those assets as being able to drive strong growth through the early part of the next decade." }, { "speaker": "Robert Michael", "text": "Just to answer the question, Mohit, on the gating. Yes, I think it's safe to assume that you'll see high single-digit price in each of the quarters this year." }, { "speaker": "Elizabeth Shea", "text": "Thank you, Mohit. Operator, next question, please." }, { "speaker": "Operator", "text": "Our next question comes from Tim Anderson with Wolfe Research." }, { "speaker": "Alice Nettleton", "text": "This is Alice Nettleton on for Tim Anderson. So a question on PBMs, which are under renewed scrutiny. If there were material changes to the rebating structure currently in place, would that put big incumbent products at risk because it might remove the so-called rebate wall? And more generally, do you think there is any chance of some of the proposed legislative changes actually becoming law? And then secondly, any collateral impact you're seeing on Skyrizi or Rinvoq since Humira biosimilars have launched? And given the overlapping indications, do you think that you'll start to see some picking off of patients from these 2 brands to biosimilars in the second half of the year?" }, { "speaker": "Jeffrey Stewart", "text": "Yes, it's Jeff. I'll give some comment on that. I think the way that we think about our brands is the first place that we look at is how distinctive they are. I mean we've got 4 head-to-head trials with Skyrizi and another one on the way where we can clearly differentiate the product. And we have many as well on Rinvoq. So we've really thought about it from a development standpoint. And I would say the perspective is somehow there was a restructuring of the PDMs, which I don't think is imminent. And the rebate sort of approach disappeared. It disappears for everybody. I mean all of these I&I products have a fairly reasonable rebate load and there would be a different basis of competition, which we would do very, very well. So we're not concerned about sort of a fundamental structural change relative to these 2 products, which are very distinctive." }, { "speaker": "Elizabeth Shea", "text": "Thanks, Alice. Operator, next question, please." }, { "speaker": "Operator", "text": "Our next question comes from Carter Gould with Barclays." }, { "speaker": "Carter L. Gould", "text": "Maybe a different spin on sort of the BE question there, just given sort of the volatility in the marketplace, as you kind of have those conversations or engage with potential targets. Just if you've seen a shift in sort of that bid-ask spread and the willingness of boards and management to consider deals. Any update on that front would be helpful." }, { "speaker": "Richard Gonzalez", "text": "This is Rick. I'd say the environment hasn't changed materially in the last 24 months from my perspective. I still think it's certainly more difficult to raise money for biotech companies. So it probably makes them a bit more willing to engage with players like us or engage in a process, if they're at a point where they've generated data that makes them attractive. But I'd say the interest level in that engagement is similar to what has been for the last 12 to 24 months. And there's a lot of opportunity to be able to find assets that are in the biotech area. The question is you have to find the right kind of asset and you have to find one that's attractive and meet your needs. And I'd say being able to negotiate a transaction, I think, is a reasonable probability." }, { "speaker": "Elizabeth Shea", "text": "Thanks, Carter. Operator next question, please." }, { "speaker": "Operator", "text": "Our next question comes from Vamil Divan with Guggenheim Securities." }, { "speaker": "Vamil Divan", "text": "Maybe a couple from me as well. So one, just a couple of data points you have coming up this year that I think may be a little bit less focused on is on Navitoclax and Teliso-V. So maybe you can just sort of frame so what we should be looking for, what your expectations are, what you're hoping to see from those assets, especially Teliso-V given your comments on the sort of next-gen ABBV-400?" }, { "speaker": "Roopal Thakkar", "text": "It's Roopal. I'll take the ones on Navitoclax and Teliso-V. So for Navitoclax, it's the combination with the JAK2 in myelofibrosis. And there, we're looking to be better than monotherapy with JAK2 in that space and improving spleen size and symptoms like abdominal pain, fullness, fever, fatigue. Also, perhaps uniquely, what we've observed is also an improvement in bone marrow fibrosis and a decrease in variant allelic frequency. So that's what we would be looking for, and we should get a readout by midyear or so." }, { "speaker": "Richard Gonzalez", "text": "I'll take the second question. And maybe I'll make a little bit of a comment on Teliso-V because I think you mentioned 400. I think the early data that we're seeing in 400 is impressive to us. There's no question about it. And I think we're going to have some data presented at this ASCO, right, where you'll have an opportunity to see that in CRC." }, { "speaker": "Elizabeth Shea", "text": "Thanks, Vamil. Operator, next question, please." }, { "speaker": "Operator", "text": "Our next question comes from Evan Seigerman with BMO Capital Markets." }, { "speaker": "Evan Seigerman", "text": "Just on kind of Skyrizi and some of the dynamics you're seeing there, can you characterize about kind of how you're thinking about further penetration in the psoriasis indication, kind of some puts and takes in the dermatology market? And just a follow-up on the CF program, is it safe to assume that you're totally done investing in this area? Or do you have other assets kind of in earlier development that could emerge?" }, { "speaker": "Jeffrey Stewart", "text": "Yes. It's Jeff. I'll take your comment on psoriasis. I think that, as I mentioned, it's -- the share is very, very impressive. So we have a 30% total market share now which is really putting significant headroom against any other drug in that category by a lot. And one way to think about it is, I think what you're asking is how much further can it run? And it can run quite a bit further. To some degree, if you think about it, so we're capturing on the dynamic share roughly 50%. So 1 out of every 2 patients. And our market share is about 30." }, { "speaker": "Thomas J. Hudson", "text": "This is Tom. Regarding the question on our triplet program, yes, we are -- our C2 corrector that we just tested did not work. This was not our first attempt that producing one and we do not have another backup. So we don't have other options than to discontinue the CF program." }, { "speaker": "Elizabeth Shea", "text": "Thanks, Evan. Operator, next question, please." }, { "speaker": "Operator", "text": "Our next question comes from Trung Huynh with Credit Suisse." }, { "speaker": "Carson Wong", "text": "This is Carson on for Trung. Just on Imbruvica, how confident are you for the [ 5.7 ] hem-onc guide given the significant competitive pressures there? I mean I understand Brukinsa did particularly have legs in the U.S. until late January. What level of pricing pressures can we expect through the year? And is there a potential for further step downs in your guide for later in the year? And if you do that, could the trough be pushed out given the delay with 951 as well?" }, { "speaker": "Jeffrey Stewart", "text": "Yes. It's Jeff. And I think we think that's a very good call. And just as a reminder, we're not seeing significant pricing pressure in the market. This is really two effects, which is one, the cumulative effect as we've highlighted over the suppressed market over time, which looks to be normalizing. Actually, for the first time in 3 years, we actually saw a positive growth in the market. So that's encouraging." }, { "speaker": "Robert Michael", "text": "Carson, this is Rob. I'll answer your second question. So I wouldn't consider Imbruvica in 951 to be variables that would push the trough out. It's really more about how the overall year plays out, particularly the second half with U.S. Humira. So if U.S. Humira does better and we outperform in '23, then we could see the trough in '24. I think the important thing to keep in mind is regardless of when the trough occurs, we wouldn't expect earnings to fall below the [ 1074 ex-IPR&D ]. That's really what I would focus on, and we don't consider Imbruvica in 951 delays to be variables that would push that trough." }, { "speaker": "Elizabeth Shea", "text": "Thanks, Carson. We are cognizant of a number of peers reporting today. And so in the interest of time, we have one last question." }, { "speaker": "Operator", "text": "Our last question comes from Geoff Meacham with Bank of America." }, { "speaker": "Unknown Analyst", "text": "This is [ Susan ] on for Geoff Meacham. We had a follow-up on Imbruvica. Do you guys expect any changes to outlook following MCL/MDL withdrawal? And then do you expect any read-through to follicular lymphoma from that withdrawal?" }, { "speaker": "Jeffrey Stewart", "text": "It's Jeff. Thank you for the question. First, these are very small indications. So to give you some sense of the relative size for Imbruvica, MCL is about 4% of the value. MDL is really less than 1% or about 1%. So we don't anticipate that those withdrawals due to the fact that we didn't get the confirmatory studies to clear, we'll have a material impact. I think it's also important to note that many physicians will continue these patients on the medication. They won't be all switched, for example, or taken off and put on another product. That's the market intelligence. There's no requirement that they need to do that for the physicians. And so net-net, this is not a really material issue given the size of those indications. And I think Roopal will address your point on follicle." }, { "speaker": "Roopal Thakkar", "text": "Yes, I can talk about FL here for a minute. So a Phase III readout is expected later this year. It's not clear if the MCL outcomes would be reflected in what we see there. But what I would say about FL is our focus would be with epcoritamab, or dual engager, which we expect DLBCL actions here soon. And then we have programs and we're seeing very high levels of response in FL with epco either as monotherapy or in combination, which we'll see some data in those combos in DLBCL and FL at ASCO as well." }, { "speaker": "Elizabeth Shea", "text": "Thanks, [ Susan ]. And that concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us." }, { "speaker": "Operator", "text": "Thank you for your participation. Participants, you may disconnect at this time." } ]	AbbVie Inc.	141,885,706
ABBV	4	2,024	2025-01-31 03:00:00	Operator: Good morning and thank you for standing by. Welcome to the AbbVie Fourth Quarter 2024 Earnings Conference Call. All participants will be in a listen-only until the question-and-answer portion of this call. [Operator Instructions] Today's call is also being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Ms. Liz Shea, Senior Vice President of Investor Relations. Ma'am, you may begin. Liz Shea: Thank you. Good morning, and thanks for joining us. Also on the call with me today are Rob Michael, Chief Executive Officer; Jeff Stewart, Executive Vice President, Chief Commercial Officer; Roopal Thakkar, Executive Vice President, Research & Development, Chief Scientific Officer; Scott Reents, Executive Vice President, Chief Financial Officer; and Carrie Strom, Senior Vice President, AbbVie, and President, Global Allergan Aesthetics. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So, with that, I'll turn the call over to Rob. Rob Michael: Thank you, Liz. Good morning, everyone, and thank you for joining us. Our fourth quarter performance closes out another excellent year for AbbVie, and I'm very pleased with the significant progress we made in 2024. We executed on our top commercial priorities, advanced our pipeline with key regulatory approvals and promising data, and further strengthened our business through strategic transactions. Turning to our results, we delivered full-year adjusted earnings per share of $10.12, which is $0.49 above our initial guidance midpoint. Excluding the impact of IPR&D expense, total net revenues were $56.3 billion, exceeding our initial guidance by more than $2 billion. Our results demonstrate a rapid return to sales growth, with full-year revenue up 4.6% on an operational basis, despite $5 billion of U.S. Humira erosion in 2024. This outstanding execution is driven by our ex-Humira platform, which continues to outperform expectations, delivering full-year sales growth of more than 18% with revenue growth accelerating to 22% in the fourth quarter. As I look to 2025 and beyond, we are well-positioned with our ex-Humira platform. It will allow AbbVie to deliver robust mid-single-digit revenue growth in 2025 and exceed our previous peak revenue in just the second year following the U.S. Humira LOE. And given that we have no significant LOE events for the rest of this decade, we have a clear runway to growth for at least the next eight years, including a high single-digit revenue CAGR through 2029. We anticipate a substantial portion of this growth will be driven by robust performance from Skyrizi and Rinvoq to assets are expected to collectively generate nearly $24 billion of revenue in 2025, reflecting growth of more than $6 billion. Based on this strong momentum, we now expect Skyrizi and Rinvoq to exceed more than $31 billion of combined sales in 2027, which is $4 billion above the guidance we provided last year. We are seeing strong performance across all of their approved indications, especially in IBD. And we see several tailwinds that will support growth into the next decade, including healthy immunology market growth, strong share capture given best-in-class profiles, continued robust market access, and momentum from new indications, such as the recent launch of Skyrizi in UC, as well as the potential for five new indications for Rinvoq over the next few years. In neuroscience, our second largest therapeutic area, we are seeing very robust performance, with sales of $10 billion expected in 2025, reflecting growth of $1 billion across psychiatry, migraine, and Parkinson's. In oncology, I am very encouraged by our long-term growth prospects. This includes our BCL-2 inhibitor, Venclexta; our FRα ADC for ovarian cancer, Elahere; our two novel c-MET ADCs for solid tumors, Teliso-V and 400, and our BCMA-CD3 bispecific for multiple myeloma 383. Lastly, while the recent performance in aesthetics has been impacted by challenging market conditions in the U.S. and China, the category remains very attractive given low penetration rates for facial injectables. When the market returns to more normalized growth, our leading commercial portfolio and forthcoming pipeline will help drive improved performance. Based on the market trends over the last few years, and our assumption for a gradual recovery in the near term, we now expect aesthetics to deliver a high single-digit revenue CAGR through 2029. Turning now to R&D, we have made excellent progress with our late-stage programs. These advancements include recent approvals for Skyrizi in UC, Epkinly in later lines of follicular lymphoma, Elahere for FRα-positive platinum-resistant ovarian cancer, Vyalev for advanced Parkinson's, and new indications for Botox and Juvéderm. In 2025, we anticipate approvals for Rinvoq in GCA, and Teliso-V for non-squamous, non-small cell lung cancer, as well as regulatory submissions for Tavapadon in Parkinson's, Venclexta in higher-risk MDS, and BoNT/E for aesthetics. We have also added depth to our pipeline by signing more than 20 early-stage deals since the beginning of 2024, including promising technologies and innovative mechanisms that can elevate the standard of care in immunology, oncology, and neuroscience. We have significant capacity to continue pursuing external innovation with a focus on differentiated opportunities that can drive growth in the next decade. In summary, I am very pleased with AbbVie's execution in 2024. And expect our diverse portfolio to drive strong growth in 2025 and beyond. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff? Jeff Stewart: Thank you, Rob. I'll start with the quarterly results for immunology, which delivered total revenues of approximately $7.3 billion, exceeding our expectations. Skyrizi total sales were nearly $3.8 billion, reflecting operational growth of 57.9%. Rinvoq total sales were more than $1.8 billion, reflecting operational growth of 47.1%. On a full-year basis, Skyrizi and Rinvoq delivered approximately $17.7 billion in total combined revenue, an impressive increase of nearly $6 billion year-over-year, exceeding our expectations. These results reflect strong performance across all approved indications. I'll share some highlights in the U.S. Skyrizi total prescription share in the biologic psoriasis market is now approximately 40%, reflecting a very significant lead relative to all major competitors, with in-play capture rates remaining very strong. Over the course of 2025, we anticipate new data for Skyrizi on hard-to-treat areas of the body, including scalp and genital psoriasis. In addition, we expect the readout of our fifth head-to-head study in psoriasis comparing Skyrizi to Sotyktu, which will continue to differentiate the brand versus oral competitors. Rinvoq is now capturing more than 20% in-place share in atopic dermatitis, as our communication around our level-up study versus Dupixen continues to ramp. Recall that in level-up, we showed strong comparative results on stringent endpoints of skin resolution and itch reduction. In RA, Rinvoq is achieving the leading in-place share in the second line plus market, consistent with the brand's label. We see that U.S. physicians are increasingly utilizing only one TNF prior to initiating Rinvoq treatment in RA. In psoriatic arthritis, Skyrizi and Rinvoq together are capturing a leading in-place share in the room category, highlighting the effective co-positioning of both agents in this important segment. Across IBD, Skyrizi and Rinvoq are also capturing substantial portfolio share, given their respective efficacy, safety, and dosing profiles. In Crohn's disease, which is roughly two-thirds of the overall IBD market, these two treatments together are capturing approximately half of the in-place share with total prescription volumes ramping very rapidly. In ulcerative colitis, we are seeing a very strong inflection following the Skyrizi launch in the second-half of last year. Both Skyrizi and Rinvoq together are already capturing roughly a third of the UC in-play market, which supports robust momentum going forward for both AbbVie brands. We see similar performance internationally as well, where Skyrizi and Rinvoq are also achieving leadership positions across our major countries. So, I'm very pleased with this momentum and continue to see a significant opportunity for share gains across our existing indications, in addition to the typical market growth we see across room, derm, and gastro in 2025 and beyond. Turning now to Humira, which delivered global sales of more than $1.6 billion, down 48.7% on an operational basis, primarily due to biosimilar competition, we continue to see molecule compression in the U.S. with volume moving to other novel mechanisms, which has resulted in a benefit to both Skyrizi and Rinvoq. We anticipate Humira access will decrease throughout 2025 as more plans move to exclusive biosimilar contracts. It's reasonable to assume that roughly half of U.S. covered lives will continue to have parity access to Humira on a full-year basis, with select exclusionary contracts for existing patients expected to begin around the middle of the year. Moving now to oncology, where total revenues were approximately $1.7 billion. Imbruvica global revenues were $848 million, down 6.2%, reflecting continued competitive dynamics in CLL. Venclexta global sales were $655 million, up 13% on an operational basis, reflecting strong demand for both CLL and AML across our key countries. Lastly, Elahere continues to demonstrate a strong launch trajectory for FR-alpha positive platinum-resistant ovarian cancer, with global sales of $148 million. Sales in the U.S. are annualizing at more than $600 million and commercialization is now underway in key international markets where we are accelerating regulatory and reimbursement timelines. Moving to neuroscience, where total full-year revenues were $9 billion, reflecting impressive absolute sales growth of nearly $1.3 billion. In the quarter, total revenues were $2.5 billion, up 19.9% on an operational basis. This robust performance is driven by continued double-digit growth of Vraylar with global sales of $924 million, Botox Therapeutic with global revenues of $873 million, Ubrelvy with global sales of $303 million, and Qulipta with global revenues of $201 million. Beyond these leading therapies for psychiatry and migraine, we are very excited for an emerging portfolio in Parkinson's disease. We recently launched Vyalev, the only subcutaneous 24-hour continuous infusion of levodopa-based therapy for the treatment of advanced Parkinson's disease. As a less invasive, non-surgical delivery system that can provide meaningful improvements in on-time and off-time, we are seeing very high interest from both physicians and patient communities. Parkinson's experts report significant benefit from the continuous 24-hour delivery and the control of symptoms morning, day, and through the night. While sales in the U.S. are expected to ramp gradually over the next several quarters as we work to establish the appropriate Medicare coverage and benefit determination, uptake internationally is exceeding our expectations. Finally, I'm very encouraged by the data we are seeing for tavapadon for potential use as a monotherapy for early Parkinson's disease, as well as an adjunct to optimize oral therapy for more advanced patients. Tavapadon represents a very complimentary addition to our Parkinson's disease portfolio with Vyalev and Duopa. So, overall, I'm extremely pleased with the commercial execution across our therapeutic portfolio, which is demonstrating very strong momentum as we head into 2025. With that, I'll turn the call over to Carrie for additional comments on aesthetics. Carrie? Carrie Strom: Thank you, Jeff. Fourth quarter global aesthetic sales were approximately $1.3 billion, reflecting an operational decrease of 4.4%. In the U.S., aesthetic sales of $839 million declined 5% as challenging market conditions and promotional dynamics impacted key assets. Consistent with recent quarters, the U.S. facial injectable market continues to be affected by suppressed consumer spending that is related to the cumulative impact of high inflation over several years. As a higher price procedure relative to toxins, current conditions are most notably impacting the filler market, which declined by approximately 10% in the quarter. The toxin market remains more resilient, demonstrating low single-digit% growth. Although we continue to be the clear market leader in toxins and fillers, in Q4, our facial injectable share declined by a few points. In October, we launched an updated version of our Alle consumer loyalty program, which was designed to benefit providers by increasing treatment frequency, patient retention, and cross-selling. While some providers embraced the new loyalty program, many felt the new contract was too complex to integrate into their practices, therefore negatively impacting market share and inventory levels. Based on this market reaction, we reinstated our original Alle consumer loyalty program earlier this month. This action has been met with a rapid and favorable response from our providers with encouraging early indicators for sales and market share recovery. Internationally, aesthetic sales were $459 million. This represented an operational decline of 3.2% that was primarily due to lower Juvéderm sales as Botox cosmetic sales were roughly flat on an operational basis. Our international results were impacted by our second largest global market, China, where lower consumer spending related to economic headwinds continues to affect performance. Looking to 2025, we've planned prudently with our outlook for modest aesthetic sales growth. In the U.S., this reflects a gradual improvement in market growth rates and share for both toxins and fillers. Additionally, based on our Alle loyalty program changes, we expect a one-time price adjustment to negatively impact our first quarter U.S. results. Internationally, we are focused on retaining a strong competitive position as we launch multiple new products in China while we closely monitor market conditions and consumer sentiment. In summary, while economic headwinds and key geographies have created a near-term impact on market conditions, we continue to see significant long-term growth potential, given high consumer interest and low penetration rate. Allergan Aesthetics is uniquely positioned to benefit based on our customer relationships, commercial investments, and innovative pipeline. With that, I'll turn the call over to Roopal. Roopal Thakkar: Thank you, Carrie. We continue to make significant progress with our R&D efforts to advance novel clinical programs across all stages of our diversified pipeline. In 2025, we expect a strong cadence of important data readouts, regulatory submissions, and new approvals, as well as many clinical trial starts for key programs. Starting with immunology, regulatory applications are under review for Rinvoq and GCA, with approval decisions anticipated in the second quarter. Data for two Phase 3 Rinvoq programs will be available this year, alopecia areata and vitiligo, and for our HS and lupus programs in 2026. Moving to Skyrizi, data from the head-to-head in psoriasis versus Sotyktu will be available this year. Also this year, to further support differentiation in IBD, a study comparing Skyrizi to Entyvio in ulcerative colitis will be initiated. Additional mid-stage monotherapy and combination studies are planned in 2025, including a Phase 2 study evaluating lutikizumab in atopic dermatitis, a Phase 2 study evaluating Skyrizi and lutikizumab in psoriatic arthritis, and advancement of our anti-TREM1 antibody, ABBV-8736 with the eventual goal to add it to the Crohn's Disease Platform Study as a monotherapy and in combination with Skyrizi. Moving to oncology, where multiple regulatory and clinical milestones as well as phase transitions for key programs are planned. One area that we are particularly excited about is our ADC pipeline, where several assets are aimed at multiple tumor types. Our regulatory application is under review for accelerated approval of Teliso-V as a monotherapy in patients with previously treated c-Met overexpressing EGFR wild type non-squamous non-small cell lung cancer. The target for an approval decision is in the first-half of this year. This represents a segment of lung cancer with high unmet need where patients have limited options and tend to have a very poor prognosis. If approved, Teliso-V would be the first c-Met-directed ADC for the treatment of non-small cell lung cancer. We are also rapidly advancing our next-gen c-Met asset. A Phase 3 study evaluating ABBV-400, also known as Temab-A, was recently initiated in patients with c-Met overexpressed refractory metastatic colorectal cancer. Temab-A, as a monotherapy, is being compared against chemotherapy plus bevacizumab. This year, data from a Phase 1 CRC study evaluating Temab-A in combination with bevacizumab could enable a Phase 3 study in an all-comers population. Temab-A is also progressing well across lung programs. A Phase 2 study in EGFR wild-type non-small cell lung cancer is being planned, where Temab-A will be evaluated with a PD-1 inhibitor as a frontline combination therapy. In the EGFR mutant segment, results from the ongoing Phase 1 study could enable Temab-A dose optimization studies as a monotherapy in the second line setting and in combination with osimertinib in the first line setting. In gastroesophageal cancer, a Phase 2 trial was recently started evaluating Temab-A in combination with chemotherapy and a PD-1 inhibitor in frontline patients. We are also excited about ABBV-706, an ADC that utilizes the same Topo warhead and linker technology as Temab-A, but with an antibody that targets SEZ6. Encouraging data in small lung cancer, small cell lung cancer, were presented at ASCO last year. And this year, dose optimization and longer term duration data will be available. This readout could lead to the initiation of a registrational study in second line and dose optimization in combination with standard of care in the frontline. Moving to FRα ADC, Elahere is now approved for platinum resistant ovarian cancer in the U.S. and Europe and is currently in Phase 3 development for the platinum sensitive ovarian cancer segment, also, a next generation ADC targeting FRα, IMGN-151 is currently in Phase 1. This year, Elahere will be tested in combination with bevacizumab and a PARP inhibitor. 151 is being advanced into dose optimization as well as in studies with standard of care agents such as bevacizumab, carboplatin and a PARP inhibitor. These mid-stage studies for Elahere and 151 will be used to inform our Phase 3 approach in various settings for ovarian cancer, including induction and maintenance in platinum sensitive patients and in combination for frontline maintenance. Another ADC from ImmunoGen known as PIVAC targets a rare hematologic malignancy called Blastic Plasmacytoid Dendritic Cell Neoplasm. Based on positive data from the pivotal Phase 2 study, a regulatory application is planned for later this year. If approved, this would be an important new treatment option for patients with this aggressive blood cancer. Also in the area of hematologic oncology, the Phase 3 Venclexta MDS study is nearing completion with an overall survival data readout later this year. Now moving to neuroscience, following the Emraclidine EMPOWER-1 and 2 study readouts, a thorough analysis of the data was conducted to better understand the placebo effect observed in the two trials. Our findings point to a lack of uniformity of placebo effect across sites. When assessing sites beyond those with high placebo response, a clear efficacy signal was observed, albeit more modest than reported in Phase 1b. Therefore, we see a path forward as an adjunct to atypicals and schizophrenia and as a monotherapy in psychosis related to Alzheimer's and Parkinson's. These are diseases where there is a high unmet need for safe and tolerable treatments that can provide even a modest benefit. Additionally, our intention is to explore higher doses of Emraclidine. This is based on the degree of variability observed in the PK data from the EMPOWER studies. If higher doses are found to be safe and well tolerated, there is a potential opportunity to evaluate Emraclidine as a monotherapy in schizophrenia, as higher doses may result in greater efficacy. A multiple ascending dose study will be conducted this year and data will be available in the early part of 2026. Following this dosing work, Phase 2 studies in adjunctive schizophrenia and potentially monotherapy schizophrenia will be initiated. Dose ranging in elderly patients is ongoing with Phase 2 studies planned in 2026 in patients with psychosis related to Alzheimer's and Parkinson's Disease. Staying on the topic of Parkinson's Disease, positive top line results from the third Phase 3 trial for Tavapadon were recently announced. In the TEMPO-2 trial, Tavapadon met the primary endpoint, demonstrating a significant reduction in the severity of Parkinson's Disease symptoms compared with placebo at week 26. Key secondary endpoints were also achieved. We are very pleased with the emerging profile for Tavapadon, which shows strong efficacy as a monotherapy and as an add-on to Levo, Carbidopa. The six-month data from the Phase 3 studies show Tavapadon to be generally safe and well tolerated with low rates of adverse events of special interest, such as sedation and impulse control disorder. Longer term safety data will be available this year and regulatory submissions will then follow. Moving to aesthetics, we met with the FDA late last year regarding our BoNT/E submission for the treatment of glabellar lines. We are in the process of generating additional CMC data requested by the agency, which should be completed in the next few months. The regulatory submission will likely occur around the middle of the year. To summarize, there have been significant advancements across all stages of our pipeline. In 2025, we anticipate numerous important regulatory and clinical milestones, including many trial starts for key programs. With that, I'll turn the call over to Scott. Scott Reents: Thank you, Roopal. Starting with our fourth quarter results, we reported adjusted earnings per share of $2.16 which is $0.08 above our guidance midpoint. These results include an $0.88 unfavorable impact from acquired IPR&D expense. Total net revenues were $15.1 billion reflecting robust growth of 6.1% on an operational basis, excluding a 0.5% unfavorable impact from foreign exchange. Our ex-Humira platform delivered reported growth of 22%, once again exceeding our expectations. Adjusted gross margin was 83.8% of sales, adjusted R&D expense was 15.1% of sales and adjusted SG&A expense was 23.6% of sales. The adjusted operating margin ratio was 34.7% of sales, which includes a 10.4% unfavorable impact from acquired IPR&D expense. Net interest expense was $610 million. The adjusted tax rate was 20.2%. Turning to our financial outlook for 2025, our full-year adjusted earnings per share guidance is between $12.12 and $12.32. Please note that this guidance does not include an estimate for acquired IPR&D expense that may be incurred throughout the year. We expect total net revenues of approximately $59 billion reflecting robust operational growth of 5.7% despite a roughly 4% net unfavorable impact across our portfolio from the Medicare Part D benefit redesign. At current rates, we expect foreign exchange to have a 1% unfavorable impact on full-year sales growth. This revenue forecast contemplates the following approximate assumptions for select key products and therapeutic areas. We expect global immunology sales of $29.4 billion, including Skyrizi revenue of $15.9 billion reflecting growth of more than $4.1 billion driven by continued strong performance in psoriasis as well as robust uptake in IBD; Rinvoq sales of $7.9 billion reflecting growth of nearly $2 billion with continued market growth and share momentum across all approved indications. And Humira total revenue of $5.6 billion, including U.S. sales of $4 billion as more plans exclude branded Humira around the middle of the year. This forecast includes a $600 million net unfavorable impact from the Medicare Part D benefit redesign. In oncology, we expect global sales of $6.3 billion including IMBRUVICA revenue of $2.7 billion which reflects a $400 million net unfavorable impact from the Medicare Part D benefit redesign; Venclexta sales of $2.6 billion, reflecting continued strong demand, partially offset by a $100 million net unfavorable impact from Medicare Part D benefit redesign and Elahere revenue of $750 million. For Aesthetics, we expect global sales of $5.3 billion reflecting gradual improvement in market conditions across global markets as well as market share recovery in the U.S. This includes Botox Cosmetic revenue of $2.8 billion and relatively flat sales for Juvéderm. For neuroscience, we expect global sales of $10 billion reflecting continued double-digit growth. This includes Vraylar revenue of $3.5 billion reflecting continued strong prescription demand, partially offset by a $200 million net unfavorable impact from the Medicare Part D benefit redesign; Botox Therapeutics sales of $3.5 billion, total oral CGRP revenue of $2.1 billion and Vraylar sales of $300 million. For eye care, we expect global sales of $2.2 billion. Moving to the P&L for 2025, we are forecasting full-year adjusted gross margin of approximately 84% of sales, adjusted R&D investment of approximately 14.5%, adjusted SG&A expense of approximately $13.2 billion and an adjusted operating margin ratio of roughly 47% of sales. We expect adjusted net interest expense of approximately $2.6 billion which primarily reflects the annualized financing cost for the ImmunoGen and Cerevel transactions. We forecast our non-GAAP tax rate to be approximately 15.6%. Finally, we expect our share count to be roughly flat to 2024. Turning to the first quarter, we anticipate net revenues of approximately $12.8 billion. At current rates, we expect foreign exchange to have a 1.6% unfavorable impact on sales growth. This revenue forecast comprehends the following approximate assumptions for our key therapeutic areas. Immunology sales of $6.1 billion including Skyrizi sales of $3.2 billion and Rinvoq revenue of $1.6 billion, we expect U.S. Humira sales of $900 million. We also anticipate oncology revenue of $1.5 billion, aesthetic sales of $1.1 billion which includes an unfavorable one-time price adjustment due to the reimplementation of the original program, neuroscience revenue of $2.1 billion and eye care sales of $550 million. We are forecasting an operating margin ratio of roughly 44.5% of sales and model a non-GAAP tax rate of approximately 13.8%. We expect adjusted earnings per share between $2.47 and $2.51. This guidance does not include acquired IPR&D expense that may be incurred in the quarter. Finally, AbbVie's robust business performance continues to support our capital allocation priorities. Our cash balance at the end of December was approximately $5.5 billion and we expect to generate free cash flow approaching $17 billion in 2025, which includes roughly $2.7 billion of Skyrizi royalty payments. This free cash flow will support a strong and growing quarterly dividend, which we have increased by 310% since inception, as well as debt repayment, where we expect to pay down nearly $3 billion of total debt this year and remain on track to achieve a net leverage ratio of 2x by the end of 2026. Our strong cash flow also provides capacity for continued business development to further augment our portfolio. In closing, we are pleased with AbbVie's results in 2024 and our financial outlook remains very strong. We have considerable momentum across our diverse portfolio and we continue to be well positioned to deliver robust growth in 2025 and beyond. With that, I'll turn the call back over to Liz. Liz Shea: Thanks, Scott. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask you please limit your questions to one or two. Operator, first question please. Operator: Our first question comes from Vamil Divan with Guggenheim Securities. Your line is open. Vamil Divan: Great. Thanks for taking the question. So, maybe just to dive a little deeper on the Skyrizi, it is a great performance and guidance. Can you just comment a little more on pricing dynamics that you're seeing there as to how you've factored in pricing both for this year and maybe over the next several years? And then, just a quick follow-up on the comments that were given around aesthetics, especially on the share side, I think you lost a few points when maybe getting it back. Can you just give a sense of where you think the share is now for Botox and Juvéderm sort of this point in time? Thank you. Jeff Stewart: Yes, thanks, Vamil. It's Jeff. And I'll comment on Skyrizi and Rinvoq. And I think, we've been very consistent that over the near-term and over time, this is a volume-based business, so we're going to see price declines year-over-year. But I would say modest, right? We've sort of highlighted that as we negotiate the formularies, we've started to consistently see sort of these low single-digit price concessions. Now, obviously, what Scott highlighted was unique for the 25-year with the Part D redesign that he outlined. So, overall, consistent low single-digit price declines from the rebating side with a one-time Part D. And we would anticipate once we left the Part D, we would see that sort of trend going forward. Rob Michael: And Vamil, this is Rob. I'll just add that if you think about Skyrizi and Rinvoq, our strategy here was to elevate the standard of care for patients and ultimately would drive a rapid return to growth for the company beyond Humira. And that's exactly what we've been able to execute. That strategy has played out. You see the differentiation in the marketplace. We have nine head-to-head studies. We're launching a few more. We've upgraded our guidance now by an additional $4 billion in 2027. We've been very consistent in our language around the pricing dynamics. We said when you think about rebates, think about it as negative low single-digits going forward, but given the robust performance of these assets, it's volume that's dominating the growth, and we would expect that to continue. Carrie Strom: And hi, this is Carrie. I'll answer your question around Botox and Juvéderm share. So, in the U.S., we remain the clear market leader for both toxins and fillers. In Q4, a few points of share erosion, bringing Botox to around the low to mid-60s, Juvéderm to around the low to mid-40s. As I said, the reversion of the loyalty program back to the original one, which we announced in December. And then, put into action January 21st, was greeted with very positive response from our customers. And encouraging signs for us to recapture that share for both Botox and Juvéderm throughout the year. And just to note that the share did not go to one competitor. Rather, it was more distributed amongst the entire competitive set. Liz Shea: Thanks, Vamil. Operator, next question please. Operator: Yes. Our next question comes from Chris Schott with J.P. Morgan. Your line is open. Chris Schott: Great. Thanks so much. Just a two-parter on the Skyrizi Rinvoq dynamics, maybe just first on the 2027 guidance, can you just elaborate on what were the biggest drivers of upside to those targets, as you think about the various indications for the drugs? I guess, is it fair to think most of this coming from IBD, or is it across the board? And then, probably a longer-term question on those brands, can you just elaborate a little bit more on how we should think about the growth rate beyond 2027? So basically, how mature will these franchises be by then? And what type of growth rates can we think about over time? Thank you. Jeff Stewart: Yes. Maybe -- thanks, Chris. This is Jeff. I'll start on that. So, the primary driver of the change is, in fact, share capture. So, the pricing assumptions have been consistent. We can call the markets pretty well. We see the actuals and the long-term trends there. So, it's been really share capture. And I would say that we see it across the board. Certainly, we've been super encouraged with Skyrizi in psoriasis. We continue to see very, very robust TRx share trends. And there's no question that the ramps in IBD have been very, very significant. So, that's a big piece of it. But I would say it's across the board. So, predominantly share capture. I don't know if, Scott, you have anything to add. But that's the big dynamic there on the $4 billion. Scott Reents: Yes, Jeff. Maybe, Chris, if it would help, I can give you the breakdown by indication between the two on the 2027 guide, so, we talk about $31 billion combined in 2027. That's our new long-term guidance. That is $11 billion for Rinvoq and $20 billion for Skyrizi. Rinvoq is broken down. Rheum is about $4.8 billion; dermatology, $2.5 billion; IBD, $3.7. And then, on the Skyrizi side, $12.5 billion of that $20 billion guide is from psoriatic. And the remaining $7.5 billion is coming from IBD. So, that might help you kind of see those where the growth is coming from as well. Rob Michael: And if we speak to it in terms of the $4 billion, just to give you a sense then, to add to what just Scott mentioned. So, Skyrizi is up $3 billion. A billion of that is psoriatic and $2 billion is IBD. We're just seeing tremendous ramps early days with IBD. And then, for Rinvoq, it's up a billion from the previous guidance. And that's a mix of roughly $300 million rheum, $200 million derm, and $500 million IBD. So, again, across the board, we're seeing tremendous performance, particularly in IBD. And then, your question on how to think about the growth, we have obviously given guidance beyond '27. But as I look at the sell side consensus, clearly the growth that's in sell side consensus beyond '27 is below our expectations. We would expect to see these markets continue to grow. We would also expect to see continued share gains, albeit as you start getting close to that in place share level, the share curve bends, but you still expect to see some level of share growth. And then, keep in mind, we will have the five, we expect the five new indications for Rinvoq, collectively adding about $2 billion in peak sales and so that will also contribute. So, as I think about the rate of growth for Skyrizi and Rinvoq beyond '27, Rinvoq will likely grow faster than Skyrizi because of those new indications, but you'll still see a robust performance from both assets, at least through '32. Liz Shea: Thanks, Chris. Operator, next question please. Operator: Our next question comes from Geoff Meacham with Citigroup. Your line is open. Geoff Meacham: Hey, guys. Good morning. Thanks so much for the question. Just had a couple, first one on Cerevel, you guys called out the partial impairment today in the press release. Just want to get your perspective as to what the drivers are for the remaining value, assuming Tavapadon is mostly it, but wasn't sure what you'd assume for Emraclidine or backup compounds? And then, just on aesthetics, with the new guidance to 2029, is it fair to say that you think '25 could be the trough or have already seen a trough in terms of the growth rate? I'm just trying to think of the longer term picture. And then, just on BoNT/E, I wanted to get your perspective about the potential success there adding new patients to the paradigm, just given the potential there. Thank you. Rob Michael: Geoff, on your first question regarding -- this is Rob. On your first question regarding Cerevel, so keep in mind, the accounting rules do not allow you to write up an intangible. So, even though we are more optimistic about Tavapadon now than we were at the time of the deal, we can't write that value up. So, that would be the same as what we originally ascribed. We still obviously, as Roopal walked you through the development programs for Emraclidine, still see opportunity in adjunctive schizophrenia as well as neuro degenerative psychosis. And we haven't completely given up on the monotherapy opportunity either, but that's a more heavily risk adjusted opportunity now. So, when you think about the value you have to take into account, the timing, so there's some level of time delay as well as a different probability of success for monotherapy. That's all baked into because you're essentially valuing risk adjusted revenues. You have to take that into account. That said, we're still optimistic about the asset. We're pursuing it in these indications. And again, as I mentioned, we haven't completely given up on monotherapy that will depend on dose ranging. But that is the way we constructed the revaluation of the intangible. But overall, we still see a very nice opportunity particularly for Tavapadon and we still see potential for Emraclidine as well. Jeff Stewart: Geoff, I'll take your question regarding the aesthetics trough. So, we've not specifically guided that, but the way that we have modeled it and think about it is we do see recovery. And I think the big headwind here has been over the last two years has been the economic condition. So, we do see continued improvement. Carrie spoke about some of the market growth rates that we're seeing coming back in the U.S. for both fillers and toxins. So, we would -- if you model, you would anticipate '25 to be the trough. And then, our long-term guidance is that high-single-digit compound annual growth using '25 as the base year through '29. And if you model that, that's going to put you somewhere north of $7 billion. Certainly, this is a business we continue to be excited about. We think that there are continuing to be low market penetration rates globally, frankly, and we've got some innovation to continue to drive market growth. That market has grown low-double-digits historically, but I think as we model, we're thinking a high-single-digit growth in the markets. But we do see some growth accelerators with BoNT/E, and maybe I'll let the team talk about BoNT/E. Rob Michael: Maybe I'll just mention here just more broadly, this is Rob, on the business. I think as we reflect on the aesthetics performance and we are just going through a period of macroeconomic pressure on that business. But we do continue to see an attractive long-term setup again given low penetration rates, high consumer interest and our leading portfolio, including some exciting pipeline programs in toxins and fillers. When you think about it, as part of AbbVie, the aesthetics business has been able to continue investing despite the macroeconomic challenges and that will allow us to maximize opportunities when the market does recover. We have set up this business to be a global fully integrated unit with dedicated support from R&D and business development, and I'm confident that focused approach will pay off in the long run. It's just been difficult for us to call the market recovery, but we still have a lot of confidence in the long-term outlook. Carrie Strom: And this is Carrie. I'll comment on BoNT/E. So, as you said, BoNT/E will be an important catalyst for new patient activation into the category. Consideration continues to be very high for aesthetics and for toxins. And like we said, it continues to be underpenetrated. And that's because there continue to be barriers for these people who are interested in the category, but not acting around cost and concerns of an unnatural look. And that's really where BoNT/E will play an important role based on its unique profile that is suited to address these concerns. It's fast-acting. It has short duration. So, it's going to be a nice option to position for these considerers to try BoNT/E. And then, our commercial strategy will be to convert them from BoNT/E to Botox. So, this is going to be an important pipeline catalyst to help us to activate that consumer market and drive more consumers into the toxin category for Botox. Roopal Thakkar: And it's Roopal. Maybe one comment to add to Carrie's. On the R&D side, even thinking past that, this year we'll initiate a study with BoNT/E plus Botox to cover people immediately and get that long-term benefit. So, that, those studies will start this year. Liz Shea: Thanks, Geoff. Operator, next question please. Operator: Our next question comes from Terence Flynn with Morgan Stanley. Your line is open. Terence Flynn: Hi. Thanks for taking the questions. You mentioned the net impact of the Part D redesign. Can you tell us what the volume impacts you guys are assuming, if any, in that calculation? And then the second question I had is, on the pipeline slide, you noted you could have some Phase 2 UC data for 113, which I believe is your oral NLRX1 agonist. Just maybe speak to conviction level there and how you think about that on the forward and if that would be something that you could move into Phase 3. Thank you. Scott Reents: Terence and Scott, I'll take your question on the volume. So, we have guided a 4% of a net impact across the business for headwind to growth for Part D redesign. Now, when we think about that volume offset, we've not quantified that in the guidance, but that is part of the 4%. It's a, I would say, in the grand scheme, it's a fairly modest offset overall. And I think part of what you need to do when you think about that volume, recognize that when you look at the patient segments that exist, there's roughly three patient segments and they each take about a third of the business. But this is really something that will impact the standard eligible, and we're working very hard to ensure that people are electing cap and smooth. And so, we really see that volume offset coming from that one-third of the patient segment to drive that. So, that's why I think it's a little bit more of a modest offset, but we've not quantified it. Rob Michael: And it's logical when you think about it, because the other two-thirds, I mean, you have the LIS population, which is one-third, so they don't have an out-of-pocket burden like the standard eligible do, and the other third are covered by employer plans, where, again, they don't have the same out-of-pocket burden. So, when we analyzed it, we looked at the market and saw that about a third, as Scott mentioned, of the population would benefit from the lower out-of-pocket. But keep in mind, the cost share applies to the entire book of Medicare business. That's why the volume doesn't offset the price impact. Roopal Thakkar: And this is Roopal. I'll cover the NLRX question. This is our asset from Landos. We had observed very early data, I would say Phase 1b, in ulcerative colitis, and that looked good, but it was a very small sample size, I would say. So, this will be a robust Phase 2 with a placebo comparator, and we'll get objective data from centralized review of endoscopic data. So, it will be a good data set to look at, and if it looks good, definitely would be a Phase 3 asset for us. And the other consideration we would have, similar to what I highlighted about other biologics that we'd be combining with Skyrizi, if this looks good, this could be a combination agent with Rinvoq as well. Liz Shea: Thanks, Terence. Operator, next question please. Operator: Yes, our next question comes from Mohit Bansal with Wells Fargo. Your line is open. Mohit Bansal: Great. Thank you very much for taking my question, and congrats on all the progress, I have a question regarding IMI. So, I know you talked in the past about Skyrizi and Rinvoq benefiting from some of the Humira prescriptions going to these agents as well. So, taking that aside, it still seems like the volume or IRA space is growing rapidly. Can you talk a little bit about the underlying dynamics as well here, why this market continues to grow, and how should we think about longer term for the overall market growth itself? Thank you. Jeff Stewart: Yes. So, thanks, Mohit. It's Jeff. And like we talked about before, particularly around the acute event, in this case, this was the CDF exclusion in April, we could clearly start to measure the fact that not all of the switching from Humira was going to the biosimilar. We saw about 20% of it was slipping away into new mechanisms or more advanced mechanisms like Skyrizi and Rinvoq. Now, we've continued to see the molecule compress. And it's just physicians are using just less and less sequentially Humira and the biosimilars over time. I would say it's becoming harder to measure because you're also seeing a lot of dynamics around new head-to-head trials, new indications, new other approaches. So, I would say overall, it's there, but it's relatively modest in the scheme of the volume that is basically accruing from basically the promotion and the profile of the medication. So, it should continue. The more that we see sort of disruption in the market, you'll probably continue to see the molecule on trend continue to compress. Now albeit modest, your other point's very important. These markets are still very, very buoyant and significant. And one of the dynamics that we see over time, and I think we'll begin to see it quite dramatically around the world, particularly in IBD, is that the lines of therapy start to expand. So, it used to be like primarily what was fueling the markets was primarily the new patients coming in off of older traditional medications. But now you're seeing the emergence in atopic dermatitis of the second and third line markets, which are growing quite substantially. You're going to see that significantly emerge in IBD, whereas before physicians were really, really afraid to move people along. So, they did dose intensification, they added more steroids. But now that there's drugs like Skyrizi and Rinvoq and other agents, you're seeing those market lines of therapy expand. And so, that should continue. And we've contemplated that in our long-term projections. But that gives you some sense of why you're observing what you're seeing. Rob Michael: Now, as we look across, it's Rob, as we look across the specialty areas, in psoriasis and IBD we're projecting high single-digit market growth. Atopic dermatitis in the mid-teens, it's growing very -- I mean, you're seeing still fairly low penetration rates for atopic dermatitis. So, there's tremendous room for growth. So, we would anticipate mid-teens market growth there. And then, in rheumatoid arthritis, that's probably more like low to mid-single digits. But you can see across the board, very nice market growth, which then will be complemented by the market share gains. Liz Shea: Thanks, Mohit. Operator, next question please. Operator: Yes. The next question comes from Dave Risinger with Leerink Partners. Your line is open. David Risinger: Yes. Thanks very much. So, I have two questions, please. First, regarding ABBV-400 or Temab-A, could you please frame your long-term commercial vision for this candidate, including what some may underappreciate about how broadly it could potentially be adopted in the early 2030s? And then, second, on external transactions, emraclidine was a setback, but AbbVie's overall M&A track record has been very successful. Could you please discuss your agenda for M&A, including the potential to leverage your franchise strength in related product categories? Thanks so much. Jeff Stewart: Yes. Hi. It's Jeff. So, I will give some thoughts on that. It's a very, very attractive asset. I think it's underappreciated. And part of it is the first category it will compete in, which is colorectal cancer. I mean, if you look at the response rate that we've seen, let's say, in a smaller or mid-size cancer type, which is ovarian cancer with Elahere, it's quite striking. I mean, Elahere has been the most rapidly adopted ADC in the entire U.S. oncology market. And it's because it entered this market that was basically almost all chemo-based with unmet need where there had been no innovation. And when we look at the entry with 400 or Temab-A into colorectal cancer, it's a substantially larger tumor type, as it's quite evident. And we've already seen very, very nice monotherapy results in later lines, much, much better than we've seen with the old chemo standard of care. And really, it's whether or not they have c-Met or not. Now, the thing that will really cause a big inflection that Roopal can talk about in a moment is that it's the combinability as you go up into the lines of therapies, okay? And that's really going to make this thing inflect and become a very, very significant product for patients in colorectal cancer over time. Now, the studies will have to bear that out. And as well, we're seeing very, very significant early results in lung cancer as well. So, it is, I think it's an underappreciated asset. We'll have a chance with Teliso-V to sort of set the market around this whole c-Met, the modern c-Met area. But it's quite striking. So, first, we establish in later lines, very big cancer directly against older chemotherapy. And then, we move combination as we move forward. So, thanks for the question. Roopal Thakkar: Hey, it's Roopal, maybe just a comment there on our strategy around ADCs. And I think 400 is a good highlight of that. So, we think about what's a good target, meaning high expression on the tumor, low expression in healthy tissue. And then, we are continuing to focus on patient selection, individualization of care, utilizing robust biomarkers, as Jeff mentioned, c-Met. That is the opportunity to optimize benefit-risk and particularly tolerability. With our Topo Warhead platform, we've seen low rates, for example, of alopecia, stomatitis, diarrhea, which others, I think, continue to struggle with. And safety and tolerability, as Jeff has mentioned, are critical. So, we're also very focused on proper dose optimization to get this right, so we're able to combine in earlier lines. And that's the same approach that we have with the other one I mentioned, 706 in small cell lung cancer and others in the pipeline. Rob Michael: And then, David, this is Rob. I'll take your question on M&A. And thank you for acknowledging the strong track record we've had as a company. I would agree with that when you think about the transaction with BI that brought us Skyrizi, with Pharmacyclics that brought us Imbruvica, really gave us the critical mass to be a leader in blood cancers, and then the transaction with Allergan, which gave us three verticals that can really drive long-term growth for the company in neuroscience, aesthetics, and eye care. And then, more recently, the transaction with Immunogen, which really bolstered our ADC pipeline, as Roopal has highlighted. In terms of our go-forward strategy on BD, we continue to pursue assets that can add depth to our pipeline and really drive growth in the next decade. And we have a clear line of sight to growth for at least the next eight years within the company today. And so, my focus is really about bringing in assets that can help drive that growth in the next decade. And since the beginning of 2024, as I mentioned in my prepared remarks, we've signed more than 20 early-stage deals across immunology, oncology, and neuroscience. In immunology, we've added novel mechanisms that have the potential to raise standard care either as a monotherapy or in combination with Skyrizi and Rinvoq. You should expect that strategy to continue. In oncology, we've added new platforms, including multispecifics, trispecifics, T-cell engagers, and in situ CAR-T approaches. And then within neuroscience, it's not always appreciated the work we've been doing in neuroscience above and beyond cerebral. We expanded our discovery collaboration in psychiatry with Gedeon Richter, who discovered Vraylar. We also invested in a novel mechanism for mood disorders with Gilgamesh. And we recently acquired a next-generation A-beta antibody for Alzheimer's from Aliada. Again that is our area of focus. We have these five areas that can drive long-term growth. I mentioned neuroscientist aesthetics and eye care, and of course, immunology and oncology. I mean, these are all large markets with high unmet need. And so, our BD efforts are focused on building pipeline depth in those areas. Now, I should say if we see an opportunity for differentiation in another large market with high unmet need we would consider pursuing it, especially if it can help drive growth in the next decade. And the company has the financial wherewithal to pursue those opportunities as well. Liz Shea: Thanks, Dave. Operator, next question please. Operator: Yes. Our next question comes from Steve Scala with TD Cowen. And your line is open. Steve Scala: Thank you so much. I have an observation and two questions. The observation is splitting hairs, but on Part D redesign, the guidance had been a three percentage point headwind. It was just set on the call four percentage points. A year ago, it was two percentage points. If there is a change, please, can you identify that? Related to that is my first question. Are you seeing any evidence that IRA Medicare pricing is spilling over to the commercial market? And if yes, to what degree, or is there absolutely none? And then, my second question, the company has provided a lot of helpful perspective on the aesthetics market, but can you distill it to a number? The guidance for aesthetics was previously greater than $9 billion in 2030. What is that number now? Thank you. Scott Reents: Steve, this is Scott. I'll go ahead and start with your Part D observation and question. With Part D, we really -- we saw that as something that the analysts and maybe the marketplace hadn't fully understood the impact. I think we were one of the first companies to come out and talk with any sort of specificity and granularity around what we saw that Part D impact, mechanics of how it would work, and the impact to it. So, we came out with a guidance number, and I think that has probably, as you noted, the numbers, but it's evolved a little bit over time. I would say it's evolved not necessarily from our understanding of Part D, but because really the mix of the business. So, when we talk about it in the second quarter, I believe I came out and said we saw it would see an approximately 3% headwind to growth from the Part D redesign. We've distilled that number and made a precise number of 4%, roughly 4% today. And really, when you think about when I came out with that 3%, we've seen momentum in the business, and we've seen momentum in the business in areas, immunology and oncology in particular, where we reached some guidance, where we saw have high Part D channel mix. And so, that's really been a business mix change that has led to that 4% change, and that's really kind of what it's amounted to. Rob Michael: And Steve, I'll just add, I mean, when you think about the setup for the company, in '25, we said we would return to robust growth, and we're delivering in absolute terms in our guidance a little bit more than $2.5 billion of growth, and that's with headwinds from U.S. Humira erosion around $3 billion, the Part D benefit redesign of approximately $2 billion when you do the math on the roughly 4%, and then a $500 million headwind from the stronger U.S. dollar. So, the underlying growth platform is going to drive $8 billion of growth when you think about Skyrizi and Rinvoq, as well as neuroscience. So, the change you're seeing from, as Scott mentioned, is really more of a function of mix, but we're very pleased with the underlying growth that the business has allowed us to absorb these impacts and still deliver robust growth in 2025. Jeff Stewart: Steve, it's Jeff. I'll take your second question. So, as we've negotiated across the commercial books and the Medicare books, we have not seen any spillover or slippage in our actual negotiations over the last cycles. And one thing I would add is that we have seen in '24 some more consumption on the benefit redesign, particularly in our oncology agents. So, for Imbruvica and Venclexta, we actually see lower discontinuations and some more consumption. And so, that's encouraging, because if you remember that Part D sort of had the lead in where the cap moved down to roughly $33,000, $34,000, it'll sequentially move down more to $2,000 with the smoothing next year, which is a good policy, because it's encouraging to see that the change in benefit design makes people stay on their cancer medication a bit longer. Again, the volume will be more modest than the price hit, as Rob and Scott described it. But that's the dynamics that we're seeing in the channels. Scott Reents: And to answer your question regarding the aesthetics guidance, I'll reinforce maybe what I said earlier and Rob as well. So, when we look at that guidance, that long-term guidance is calling for high single-digit CAGR '25 through '29, so using '25 as the base here. If you do the math on that range, that is something above $7 billion, a little bit north of $7 billion, depending on where it falls within that high single-digit range. So, that's why we've specifically given the range on the high single-digit. The market growth that we've seen historically has been low double-digits, but we're seeing that market we're modeling for now, high single-digit growth during the time period that we've given this long-term guidance. And so, I think that answers your specific questions. Steve Scala: Thank you very much. Liz Shea: Thanks, Steve. Operator, next question please. Operator: The next question comes from Tim Anderson with Bank of America. Your line is open. Tim Anderson: Thank you. A couple of questions, please. On aesthetics, a question I've asked before, what are your expectations for how obesity drugs are going to impact this business? You could argue that the surge in use of products, the GRIP ones, could be either a tailwind or a headwind to the use of products like toxins and fillers. It could be a headwind if patients are having to pick and choose between which products to put their out-of-pocket dollars towards. And then, a second question unrelated to the first. PBM reform still being debated in Washington. If AbbVie had its way, what would change about the current relationship between PBMs and drug companies, and what would you argue should be left alone? Carrie Strom: Hi, this is Carrie. I'll answer your first question around the obesity market and the aesthetics opportunity. And you're exactly right. It continues to be both a headwind and a tailwind, a headwind in terms of share of wallet as these consumers are making decisions on what they're going to spend for. We see that more for the higher-priced products like fillers. And then, also a tailwind as this gets a new group of consumers or patients interested in aesthetics, and many of our aesthetic providers are administering these products. And so, they see this as an opportunity for lead generation and bringing new patients into the category. So, we do see it as both a tailwind, a headwind in the short term, but a tailwind in the long term. And the question is not if injectables work. We know that these products work well in these patients. It's really about how we can partner with our customers to build it and integrate it into their treatment practice. And that's what we're doing with our customers now in helping them position Botox and Juvederm in our product line for these new patients that are entering their practice. Rob Michael: And Tim, this is Rob. I'll take your question on PBM reform. Look, if there are changes to the rebate system, we don't have a strong preference between rebates or discounts. And that's because we've always competed on the attributes of our products, both the clinical benefit they provide and the value they return to health systems. So, we're confident in our ability to compete in either world. I would just point to our share performance in international markets that do not have a rebate-based system. And we see similar market shares in those countries as well. So, we can compete effectively in either system. We don't have a preference. Liz Shea: Thanks, Tim. Operator, next question please. Operator: Our next question comes from Chris Raymond with Piper Sandler. Your line is open. Chris Raymond: Yes, thanks. Just a question on atopic derm as a target indication, just from some of our work, it looks like the upside we're seeing in Rinvoq is largely in room and gastro. And I know you guys have sort of mentioned this, and it's fairly well known. But in atopic derm, at least from our data, it looks like things are starting to flatten out a little bit. And I heard your comments on the derm share of Rinvoq revenue in 2027. But that would seem to infer maybe some kind of inflection. So, maybe a two-part question here; first, talk about the current maybe atopic derm growth dynamic, and is there an inflection sort of anticipated? And then the second part of that is, should we be paying more attention maybe to lutikizumab as a contributor here? I know, Jeff, you've talked about atopic derm as a very important indication that you guys are targeting. Or is there some other sort of area, like external innovation, that you think will augment maybe your position in this indication? Thanks. Jeff Stewart: Yes, it's a very good question. It's an important segment. And to give you some sense of what we see in terms of the inflection. So, we have seen a significant inflection in our new patient capture. And this is despite the launch of other interleukin products over the last year. So, we've ramped to the highest in-place shares that we've had. And it was largely flat in the teens for mid-teens for many, many quarters. And it's ramping up now above 20%. And a lot of that is we've been able to start to distinguish Rinvoq on these stringent endpoints. Basically, like really minimal disease activity where you're taking itch down to a very, very low level. And you're almost completely clearing the skin. And those are the endpoints where we significantly outperform DUPI. Now, having said that, DUPI's still got the vast majority there, but we are seeing, we will see that in-place shares start to build into the TRXs over time, because our TRX share is quite below 20% at that point. I think the other thing that I'd note is that in many, or if not most, of the outside the U.S. markets, our shares are much higher and building even a little bit faster. So, in several large markets, we actually are ahead of Dupixent. And some of that has to do with the way that the label worked during our initial launch, et cetera. But we're quite bullish over time in terms of Rinvoq as this is the best agent in terms of getting to the complete control. Now, having said that, we would and we will continue to look for more assets. Some are in our pipeline as described. But this is a very, very attractive space that we want to continue to invest in. I don't know, Roopal, if you've got any comments on ludi or some of the other concepts. Roopal Thakkar: That's right. I mean, with the 5% penetration rate, there's still many patients that are untreated. So, lutikizumab will be our next one. And Jeff mentioned, there's other pipeline assets that we're working on. And key being skin clearance along with that itch. And if you can get them both and have a safe and tolerable profile, I think that'll continue to be competitive. Liz Shea: Thanks, Chris. Chris Raymond: Thank you. Liz Shea: Operator, next question please. Operator: Thanks. Our next question comes from Trung Huynh with UBS. Your line is open. Trung Huynh: Great. Thanks for taking my questions. Just two for me, so, firstly, your sales in 4Q, did you see any notable difference in trends in stocking or gross-to-net patterns across the portfolio ahead of the changes in Part D versus previous years? Specifically, I'm interested if you had any meaningful one-offs for Skyrizi and Rinvoq for the quarter. And then, circling back on aesthetics, thanks for that updated long-term guide, can you give us a bit more color geographically how we should think about the split between ex-U.S.? China versus the U.S. as you return to growth? Is there an expectation on one coming back quicker than the other? Thanks. Scott Reents: This is Scott. I'll talk about the stocking. So, we did not see -- in the past, we've talked about it a couple years ago in particular. But the stocking was relatively minimal from in terms of the impact. So, we did not see anything with respect to Skyrizi and Rinvoq on the stocking in the fourth quarter that'll be impacted in the first quarter. Trung Huynh: And no real dynamics around gross to net either? Scott Reents: No, that's right. For Skyrizi and Rinvoq, I'm sorry, no dynamics around gross to net for Skyrizi and Rinvoq. And with respect to aesthetics, I don't know Carrie if you want? Carrie Strom: Sure. For aesthetics, if we think about the long-term, we see, like we said, we're planning prudently for the economic recovery around key markets like U.S. and China, where it's been challenging for the past few years. Both those markets will continue to be important moving forward as will the rest of the world. We see Japan as posting nice growth as being an underdeveloped market that we're able to invest in. And then, the pipeline catalysts will be important in both U.S. and the rest of the world. Notably, in China, in the past year, we've had multiple new pipeline catalysts, which are going to -- which continue to help drive share for both toxins and fillers last year and this year. And we expect the international business to continue to increase as a percent of the revenue for overall global Allergan aesthetics. Liz Shea: Thanks, Trung. Operator, we have time for one final question, please. Operator: Sure. And our last question comes from Chris Shibutani with Goldman Sachs. Your line is open. Chris Shibutani: Great. Thank you very much. When you think about going beyond 2030 with your strategy across the portfolio, can you comment about the potential impact of some of these combination approaches in immunology? Do you expect these to be IP extending? Will there be co-formulation based approaches, just trying to understand the potential revenue implications, noting that clearly there could be some clinical benefit that could certainly make sense. And then, just a question about a business segment that has been around that you never talk about, which is eye care, how and why does this fit going forward? I understand there's a legacy with the Allergan deal. But just trying to think about the overall portfolio in areas where you clearly have strengths, but this seems to be one which is less than 5% of revenues. But what is the role for that on the board? How are you thinking about it? Thank you. Roopal Thakkar: Hey, Chris, it's Roopal. Maybe I'll start the ball rolling here on how we think about combos into '23 -- sorry in the 2030. So, the first thing is we have a very strong foundational asset in particularly IBD with Skyrizi. And you've heard me mention other combo studies in the psoriatic arthritis today as well. Now, that we would combine with the multiple assets that we've mentioned over time; TL1A, TREM-1, alpha 4 beta 7, IL-1 alpha beta, lutikizumab that we already have, that we would be able to look at as monotherapies and combo therapies. If they look good as monotherapies, they could also move forward by themselves. For all of these assets, we're also looking at biomarker approaches. Particularly with lutikizumab, but we would apply that same strategy to all of these assets. And as combinations, the goal would be co-formulations. So, as we enter into the clinical study, we're also doing CMC work in parallel to facilitate combination, co-formulation approaches. So, that would also be a convenience factor. And we would want to match with longer acting agents. So, for example, the TL1A we believe to be a longer acting agent. For TREM-1 we're seeing a long pharmacodynamic effect as an example. But then, the next way that we think about this, these combo strategies, is if we start seeing utility there, obviously moving forward with the co-formulation, but we are very competent in making bi-specifics. Lutikizumab is one of those. So, then in parallel we're making bi-specifics that could then also stand alone as single assets. And then, as you've heard recently with our Nimble transaction, we would also be looking at different mechanisms as an oral peptide. The lead one being IL-23, but we're also working on a TL1A. And what's unique and what we like about that platform is the potency, potentially being able to reduce the amount of peptide that's required and these assets having long half-lives. So, if that holds, then you could imagine combinations as a pill with these peptides with that type of profile that we hope to see. So, multiple steps as we think about immunology. Rob Michael: This is Rob. Your question on eye care, I mean our focus on eye care is in glaucoma, retinal disease, and prescription dry eye. We like that business. It precipitates in a large market with high unmet need, meets that criteria. It has very much a scientific focus. It's a data-driven business. It's a very efficient business as well. And obviously, we're excited about the REGENXBIO Gene Therapy Program focused on wet AMD and diabetic retinopathy. Depending on how that plays out, I think you could see that as becoming a stronger growth driver. We obviously have four of the five, as you think about, you get a lot of questions there. But we don't get as many questions on eye care, but we do believe as you start to get more visibility to this REGENXBIO Program, you'll likely spend more time focusing on it. We think of it as a potential to be a long-term growth driver for the company. And we like the fit it has for AbbVie. Liz Shea: Thank you, Chris. And that concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. Operator: Thank you. That concludes today's conference. You may all disconnect at this time.	[ { "speaker": "Operator", "text": "Good morning and thank you for standing by. Welcome to the AbbVie Fourth Quarter 2024 Earnings Conference Call. All participants will be in a listen-only until the question-and-answer portion of this call. [Operator Instructions] Today's call is also being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Ms. Liz Shea, Senior Vice President of Investor Relations. Ma'am, you may begin." }, { "speaker": "Liz Shea", "text": "Thank you. Good morning, and thanks for joining us. Also on the call with me today are Rob Michael, Chief Executive Officer; Jeff Stewart, Executive Vice President, Chief Commercial Officer; Roopal Thakkar, Executive Vice President, Research & Development, Chief Scientific Officer; Scott Reents, Executive Vice President, Chief Financial Officer; and Carrie Strom, Senior Vice President, AbbVie, and President, Global Allergan Aesthetics. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So, with that, I'll turn the call over to Rob." }, { "speaker": "Rob Michael", "text": "Thank you, Liz. Good morning, everyone, and thank you for joining us. Our fourth quarter performance closes out another excellent year for AbbVie, and I'm very pleased with the significant progress we made in 2024. We executed on our top commercial priorities, advanced our pipeline with key regulatory approvals and promising data, and further strengthened our business through strategic transactions. Turning to our results, we delivered full-year adjusted earnings per share of $10.12, which is $0.49 above our initial guidance midpoint. Excluding the impact of IPR&D expense, total net revenues were $56.3 billion, exceeding our initial guidance by more than $2 billion. Our results demonstrate a rapid return to sales growth, with full-year revenue up 4.6% on an operational basis, despite $5 billion of U.S. Humira erosion in 2024. This outstanding execution is driven by our ex-Humira platform, which continues to outperform expectations, delivering full-year sales growth of more than 18% with revenue growth accelerating to 22% in the fourth quarter. As I look to 2025 and beyond, we are well-positioned with our ex-Humira platform. It will allow AbbVie to deliver robust mid-single-digit revenue growth in 2025 and exceed our previous peak revenue in just the second year following the U.S. Humira LOE. And given that we have no significant LOE events for the rest of this decade, we have a clear runway to growth for at least the next eight years, including a high single-digit revenue CAGR through 2029. We anticipate a substantial portion of this growth will be driven by robust performance from Skyrizi and Rinvoq to assets are expected to collectively generate nearly $24 billion of revenue in 2025, reflecting growth of more than $6 billion. Based on this strong momentum, we now expect Skyrizi and Rinvoq to exceed more than $31 billion of combined sales in 2027, which is $4 billion above the guidance we provided last year. We are seeing strong performance across all of their approved indications, especially in IBD. And we see several tailwinds that will support growth into the next decade, including healthy immunology market growth, strong share capture given best-in-class profiles, continued robust market access, and momentum from new indications, such as the recent launch of Skyrizi in UC, as well as the potential for five new indications for Rinvoq over the next few years. In neuroscience, our second largest therapeutic area, we are seeing very robust performance, with sales of $10 billion expected in 2025, reflecting growth of $1 billion across psychiatry, migraine, and Parkinson's. In oncology, I am very encouraged by our long-term growth prospects. This includes our BCL-2 inhibitor, Venclexta; our FRα ADC for ovarian cancer, Elahere; our two novel c-MET ADCs for solid tumors, Teliso-V and 400, and our BCMA-CD3 bispecific for multiple myeloma 383. Lastly, while the recent performance in aesthetics has been impacted by challenging market conditions in the U.S. and China, the category remains very attractive given low penetration rates for facial injectables. When the market returns to more normalized growth, our leading commercial portfolio and forthcoming pipeline will help drive improved performance. Based on the market trends over the last few years, and our assumption for a gradual recovery in the near term, we now expect aesthetics to deliver a high single-digit revenue CAGR through 2029. Turning now to R&D, we have made excellent progress with our late-stage programs. These advancements include recent approvals for Skyrizi in UC, Epkinly in later lines of follicular lymphoma, Elahere for FRα-positive platinum-resistant ovarian cancer, Vyalev for advanced Parkinson's, and new indications for Botox and Juvéderm. In 2025, we anticipate approvals for Rinvoq in GCA, and Teliso-V for non-squamous, non-small cell lung cancer, as well as regulatory submissions for Tavapadon in Parkinson's, Venclexta in higher-risk MDS, and BoNT/E for aesthetics. We have also added depth to our pipeline by signing more than 20 early-stage deals since the beginning of 2024, including promising technologies and innovative mechanisms that can elevate the standard of care in immunology, oncology, and neuroscience. We have significant capacity to continue pursuing external innovation with a focus on differentiated opportunities that can drive growth in the next decade. In summary, I am very pleased with AbbVie's execution in 2024. And expect our diverse portfolio to drive strong growth in 2025 and beyond. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff?" }, { "speaker": "Jeff Stewart", "text": "Thank you, Rob. I'll start with the quarterly results for immunology, which delivered total revenues of approximately $7.3 billion, exceeding our expectations. Skyrizi total sales were nearly $3.8 billion, reflecting operational growth of 57.9%. Rinvoq total sales were more than $1.8 billion, reflecting operational growth of 47.1%. On a full-year basis, Skyrizi and Rinvoq delivered approximately $17.7 billion in total combined revenue, an impressive increase of nearly $6 billion year-over-year, exceeding our expectations. These results reflect strong performance across all approved indications. I'll share some highlights in the U.S. Skyrizi total prescription share in the biologic psoriasis market is now approximately 40%, reflecting a very significant lead relative to all major competitors, with in-play capture rates remaining very strong. Over the course of 2025, we anticipate new data for Skyrizi on hard-to-treat areas of the body, including scalp and genital psoriasis. In addition, we expect the readout of our fifth head-to-head study in psoriasis comparing Skyrizi to Sotyktu, which will continue to differentiate the brand versus oral competitors. Rinvoq is now capturing more than 20% in-place share in atopic dermatitis, as our communication around our level-up study versus Dupixen continues to ramp. Recall that in level-up, we showed strong comparative results on stringent endpoints of skin resolution and itch reduction. In RA, Rinvoq is achieving the leading in-place share in the second line plus market, consistent with the brand's label. We see that U.S. physicians are increasingly utilizing only one TNF prior to initiating Rinvoq treatment in RA. In psoriatic arthritis, Skyrizi and Rinvoq together are capturing a leading in-place share in the room category, highlighting the effective co-positioning of both agents in this important segment. Across IBD, Skyrizi and Rinvoq are also capturing substantial portfolio share, given their respective efficacy, safety, and dosing profiles. In Crohn's disease, which is roughly two-thirds of the overall IBD market, these two treatments together are capturing approximately half of the in-place share with total prescription volumes ramping very rapidly. In ulcerative colitis, we are seeing a very strong inflection following the Skyrizi launch in the second-half of last year. Both Skyrizi and Rinvoq together are already capturing roughly a third of the UC in-play market, which supports robust momentum going forward for both AbbVie brands. We see similar performance internationally as well, where Skyrizi and Rinvoq are also achieving leadership positions across our major countries. So, I'm very pleased with this momentum and continue to see a significant opportunity for share gains across our existing indications, in addition to the typical market growth we see across room, derm, and gastro in 2025 and beyond. Turning now to Humira, which delivered global sales of more than $1.6 billion, down 48.7% on an operational basis, primarily due to biosimilar competition, we continue to see molecule compression in the U.S. with volume moving to other novel mechanisms, which has resulted in a benefit to both Skyrizi and Rinvoq. We anticipate Humira access will decrease throughout 2025 as more plans move to exclusive biosimilar contracts. It's reasonable to assume that roughly half of U.S. covered lives will continue to have parity access to Humira on a full-year basis, with select exclusionary contracts for existing patients expected to begin around the middle of the year. Moving now to oncology, where total revenues were approximately $1.7 billion. Imbruvica global revenues were $848 million, down 6.2%, reflecting continued competitive dynamics in CLL. Venclexta global sales were $655 million, up 13% on an operational basis, reflecting strong demand for both CLL and AML across our key countries. Lastly, Elahere continues to demonstrate a strong launch trajectory for FR-alpha positive platinum-resistant ovarian cancer, with global sales of $148 million. Sales in the U.S. are annualizing at more than $600 million and commercialization is now underway in key international markets where we are accelerating regulatory and reimbursement timelines. Moving to neuroscience, where total full-year revenues were $9 billion, reflecting impressive absolute sales growth of nearly $1.3 billion. In the quarter, total revenues were $2.5 billion, up 19.9% on an operational basis. This robust performance is driven by continued double-digit growth of Vraylar with global sales of $924 million, Botox Therapeutic with global revenues of $873 million, Ubrelvy with global sales of $303 million, and Qulipta with global revenues of $201 million. Beyond these leading therapies for psychiatry and migraine, we are very excited for an emerging portfolio in Parkinson's disease. We recently launched Vyalev, the only subcutaneous 24-hour continuous infusion of levodopa-based therapy for the treatment of advanced Parkinson's disease. As a less invasive, non-surgical delivery system that can provide meaningful improvements in on-time and off-time, we are seeing very high interest from both physicians and patient communities. Parkinson's experts report significant benefit from the continuous 24-hour delivery and the control of symptoms morning, day, and through the night. While sales in the U.S. are expected to ramp gradually over the next several quarters as we work to establish the appropriate Medicare coverage and benefit determination, uptake internationally is exceeding our expectations. Finally, I'm very encouraged by the data we are seeing for tavapadon for potential use as a monotherapy for early Parkinson's disease, as well as an adjunct to optimize oral therapy for more advanced patients. Tavapadon represents a very complimentary addition to our Parkinson's disease portfolio with Vyalev and Duopa. So, overall, I'm extremely pleased with the commercial execution across our therapeutic portfolio, which is demonstrating very strong momentum as we head into 2025. With that, I'll turn the call over to Carrie for additional comments on aesthetics. Carrie?" }, { "speaker": "Carrie Strom", "text": "Thank you, Jeff. Fourth quarter global aesthetic sales were approximately $1.3 billion, reflecting an operational decrease of 4.4%. In the U.S., aesthetic sales of $839 million declined 5% as challenging market conditions and promotional dynamics impacted key assets. Consistent with recent quarters, the U.S. facial injectable market continues to be affected by suppressed consumer spending that is related to the cumulative impact of high inflation over several years. As a higher price procedure relative to toxins, current conditions are most notably impacting the filler market, which declined by approximately 10% in the quarter. The toxin market remains more resilient, demonstrating low single-digit% growth. Although we continue to be the clear market leader in toxins and fillers, in Q4, our facial injectable share declined by a few points. In October, we launched an updated version of our Alle consumer loyalty program, which was designed to benefit providers by increasing treatment frequency, patient retention, and cross-selling. While some providers embraced the new loyalty program, many felt the new contract was too complex to integrate into their practices, therefore negatively impacting market share and inventory levels. Based on this market reaction, we reinstated our original Alle consumer loyalty program earlier this month. This action has been met with a rapid and favorable response from our providers with encouraging early indicators for sales and market share recovery. Internationally, aesthetic sales were $459 million. This represented an operational decline of 3.2% that was primarily due to lower Juvéderm sales as Botox cosmetic sales were roughly flat on an operational basis. Our international results were impacted by our second largest global market, China, where lower consumer spending related to economic headwinds continues to affect performance. Looking to 2025, we've planned prudently with our outlook for modest aesthetic sales growth. In the U.S., this reflects a gradual improvement in market growth rates and share for both toxins and fillers. Additionally, based on our Alle loyalty program changes, we expect a one-time price adjustment to negatively impact our first quarter U.S. results. Internationally, we are focused on retaining a strong competitive position as we launch multiple new products in China while we closely monitor market conditions and consumer sentiment. In summary, while economic headwinds and key geographies have created a near-term impact on market conditions, we continue to see significant long-term growth potential, given high consumer interest and low penetration rate. Allergan Aesthetics is uniquely positioned to benefit based on our customer relationships, commercial investments, and innovative pipeline. With that, I'll turn the call over to Roopal." }, { "speaker": "Roopal Thakkar", "text": "Thank you, Carrie. We continue to make significant progress with our R&D efforts to advance novel clinical programs across all stages of our diversified pipeline. In 2025, we expect a strong cadence of important data readouts, regulatory submissions, and new approvals, as well as many clinical trial starts for key programs. Starting with immunology, regulatory applications are under review for Rinvoq and GCA, with approval decisions anticipated in the second quarter. Data for two Phase 3 Rinvoq programs will be available this year, alopecia areata and vitiligo, and for our HS and lupus programs in 2026. Moving to Skyrizi, data from the head-to-head in psoriasis versus Sotyktu will be available this year. Also this year, to further support differentiation in IBD, a study comparing Skyrizi to Entyvio in ulcerative colitis will be initiated. Additional mid-stage monotherapy and combination studies are planned in 2025, including a Phase 2 study evaluating lutikizumab in atopic dermatitis, a Phase 2 study evaluating Skyrizi and lutikizumab in psoriatic arthritis, and advancement of our anti-TREM1 antibody, ABBV-8736 with the eventual goal to add it to the Crohn's Disease Platform Study as a monotherapy and in combination with Skyrizi. Moving to oncology, where multiple regulatory and clinical milestones as well as phase transitions for key programs are planned. One area that we are particularly excited about is our ADC pipeline, where several assets are aimed at multiple tumor types. Our regulatory application is under review for accelerated approval of Teliso-V as a monotherapy in patients with previously treated c-Met overexpressing EGFR wild type non-squamous non-small cell lung cancer. The target for an approval decision is in the first-half of this year. This represents a segment of lung cancer with high unmet need where patients have limited options and tend to have a very poor prognosis. If approved, Teliso-V would be the first c-Met-directed ADC for the treatment of non-small cell lung cancer. We are also rapidly advancing our next-gen c-Met asset. A Phase 3 study evaluating ABBV-400, also known as Temab-A, was recently initiated in patients with c-Met overexpressed refractory metastatic colorectal cancer. Temab-A, as a monotherapy, is being compared against chemotherapy plus bevacizumab. This year, data from a Phase 1 CRC study evaluating Temab-A in combination with bevacizumab could enable a Phase 3 study in an all-comers population. Temab-A is also progressing well across lung programs. A Phase 2 study in EGFR wild-type non-small cell lung cancer is being planned, where Temab-A will be evaluated with a PD-1 inhibitor as a frontline combination therapy. In the EGFR mutant segment, results from the ongoing Phase 1 study could enable Temab-A dose optimization studies as a monotherapy in the second line setting and in combination with osimertinib in the first line setting. In gastroesophageal cancer, a Phase 2 trial was recently started evaluating Temab-A in combination with chemotherapy and a PD-1 inhibitor in frontline patients. We are also excited about ABBV-706, an ADC that utilizes the same Topo warhead and linker technology as Temab-A, but with an antibody that targets SEZ6. Encouraging data in small lung cancer, small cell lung cancer, were presented at ASCO last year. And this year, dose optimization and longer term duration data will be available. This readout could lead to the initiation of a registrational study in second line and dose optimization in combination with standard of care in the frontline. Moving to FRα ADC, Elahere is now approved for platinum resistant ovarian cancer in the U.S. and Europe and is currently in Phase 3 development for the platinum sensitive ovarian cancer segment, also, a next generation ADC targeting FRα, IMGN-151 is currently in Phase 1. This year, Elahere will be tested in combination with bevacizumab and a PARP inhibitor. 151 is being advanced into dose optimization as well as in studies with standard of care agents such as bevacizumab, carboplatin and a PARP inhibitor. These mid-stage studies for Elahere and 151 will be used to inform our Phase 3 approach in various settings for ovarian cancer, including induction and maintenance in platinum sensitive patients and in combination for frontline maintenance. Another ADC from ImmunoGen known as PIVAC targets a rare hematologic malignancy called Blastic Plasmacytoid Dendritic Cell Neoplasm. Based on positive data from the pivotal Phase 2 study, a regulatory application is planned for later this year. If approved, this would be an important new treatment option for patients with this aggressive blood cancer. Also in the area of hematologic oncology, the Phase 3 Venclexta MDS study is nearing completion with an overall survival data readout later this year. Now moving to neuroscience, following the Emraclidine EMPOWER-1 and 2 study readouts, a thorough analysis of the data was conducted to better understand the placebo effect observed in the two trials. Our findings point to a lack of uniformity of placebo effect across sites. When assessing sites beyond those with high placebo response, a clear efficacy signal was observed, albeit more modest than reported in Phase 1b. Therefore, we see a path forward as an adjunct to atypicals and schizophrenia and as a monotherapy in psychosis related to Alzheimer's and Parkinson's. These are diseases where there is a high unmet need for safe and tolerable treatments that can provide even a modest benefit. Additionally, our intention is to explore higher doses of Emraclidine. This is based on the degree of variability observed in the PK data from the EMPOWER studies. If higher doses are found to be safe and well tolerated, there is a potential opportunity to evaluate Emraclidine as a monotherapy in schizophrenia, as higher doses may result in greater efficacy. A multiple ascending dose study will be conducted this year and data will be available in the early part of 2026. Following this dosing work, Phase 2 studies in adjunctive schizophrenia and potentially monotherapy schizophrenia will be initiated. Dose ranging in elderly patients is ongoing with Phase 2 studies planned in 2026 in patients with psychosis related to Alzheimer's and Parkinson's Disease. Staying on the topic of Parkinson's Disease, positive top line results from the third Phase 3 trial for Tavapadon were recently announced. In the TEMPO-2 trial, Tavapadon met the primary endpoint, demonstrating a significant reduction in the severity of Parkinson's Disease symptoms compared with placebo at week 26. Key secondary endpoints were also achieved. We are very pleased with the emerging profile for Tavapadon, which shows strong efficacy as a monotherapy and as an add-on to Levo, Carbidopa. The six-month data from the Phase 3 studies show Tavapadon to be generally safe and well tolerated with low rates of adverse events of special interest, such as sedation and impulse control disorder. Longer term safety data will be available this year and regulatory submissions will then follow. Moving to aesthetics, we met with the FDA late last year regarding our BoNT/E submission for the treatment of glabellar lines. We are in the process of generating additional CMC data requested by the agency, which should be completed in the next few months. The regulatory submission will likely occur around the middle of the year. To summarize, there have been significant advancements across all stages of our pipeline. In 2025, we anticipate numerous important regulatory and clinical milestones, including many trial starts for key programs. With that, I'll turn the call over to Scott." }, { "speaker": "Scott Reents", "text": "Thank you, Roopal. Starting with our fourth quarter results, we reported adjusted earnings per share of $2.16 which is $0.08 above our guidance midpoint. These results include an $0.88 unfavorable impact from acquired IPR&D expense. Total net revenues were $15.1 billion reflecting robust growth of 6.1% on an operational basis, excluding a 0.5% unfavorable impact from foreign exchange. Our ex-Humira platform delivered reported growth of 22%, once again exceeding our expectations. Adjusted gross margin was 83.8% of sales, adjusted R&D expense was 15.1% of sales and adjusted SG&A expense was 23.6% of sales. The adjusted operating margin ratio was 34.7% of sales, which includes a 10.4% unfavorable impact from acquired IPR&D expense. Net interest expense was $610 million. The adjusted tax rate was 20.2%. Turning to our financial outlook for 2025, our full-year adjusted earnings per share guidance is between $12.12 and $12.32. Please note that this guidance does not include an estimate for acquired IPR&D expense that may be incurred throughout the year. We expect total net revenues of approximately $59 billion reflecting robust operational growth of 5.7% despite a roughly 4% net unfavorable impact across our portfolio from the Medicare Part D benefit redesign. At current rates, we expect foreign exchange to have a 1% unfavorable impact on full-year sales growth. This revenue forecast contemplates the following approximate assumptions for select key products and therapeutic areas. We expect global immunology sales of $29.4 billion, including Skyrizi revenue of $15.9 billion reflecting growth of more than $4.1 billion driven by continued strong performance in psoriasis as well as robust uptake in IBD; Rinvoq sales of $7.9 billion reflecting growth of nearly $2 billion with continued market growth and share momentum across all approved indications. And Humira total revenue of $5.6 billion, including U.S. sales of $4 billion as more plans exclude branded Humira around the middle of the year. This forecast includes a $600 million net unfavorable impact from the Medicare Part D benefit redesign. In oncology, we expect global sales of $6.3 billion including IMBRUVICA revenue of $2.7 billion which reflects a $400 million net unfavorable impact from the Medicare Part D benefit redesign; Venclexta sales of $2.6 billion, reflecting continued strong demand, partially offset by a $100 million net unfavorable impact from Medicare Part D benefit redesign and Elahere revenue of $750 million. For Aesthetics, we expect global sales of $5.3 billion reflecting gradual improvement in market conditions across global markets as well as market share recovery in the U.S. This includes Botox Cosmetic revenue of $2.8 billion and relatively flat sales for Juvéderm. For neuroscience, we expect global sales of $10 billion reflecting continued double-digit growth. This includes Vraylar revenue of $3.5 billion reflecting continued strong prescription demand, partially offset by a $200 million net unfavorable impact from the Medicare Part D benefit redesign; Botox Therapeutics sales of $3.5 billion, total oral CGRP revenue of $2.1 billion and Vraylar sales of $300 million. For eye care, we expect global sales of $2.2 billion. Moving to the P&L for 2025, we are forecasting full-year adjusted gross margin of approximately 84% of sales, adjusted R&D investment of approximately 14.5%, adjusted SG&A expense of approximately $13.2 billion and an adjusted operating margin ratio of roughly 47% of sales. We expect adjusted net interest expense of approximately $2.6 billion which primarily reflects the annualized financing cost for the ImmunoGen and Cerevel transactions. We forecast our non-GAAP tax rate to be approximately 15.6%. Finally, we expect our share count to be roughly flat to 2024. Turning to the first quarter, we anticipate net revenues of approximately $12.8 billion. At current rates, we expect foreign exchange to have a 1.6% unfavorable impact on sales growth. This revenue forecast comprehends the following approximate assumptions for our key therapeutic areas. Immunology sales of $6.1 billion including Skyrizi sales of $3.2 billion and Rinvoq revenue of $1.6 billion, we expect U.S. Humira sales of $900 million. We also anticipate oncology revenue of $1.5 billion, aesthetic sales of $1.1 billion which includes an unfavorable one-time price adjustment due to the reimplementation of the original program, neuroscience revenue of $2.1 billion and eye care sales of $550 million. We are forecasting an operating margin ratio of roughly 44.5% of sales and model a non-GAAP tax rate of approximately 13.8%. We expect adjusted earnings per share between $2.47 and $2.51. This guidance does not include acquired IPR&D expense that may be incurred in the quarter. Finally, AbbVie's robust business performance continues to support our capital allocation priorities. Our cash balance at the end of December was approximately $5.5 billion and we expect to generate free cash flow approaching $17 billion in 2025, which includes roughly $2.7 billion of Skyrizi royalty payments. This free cash flow will support a strong and growing quarterly dividend, which we have increased by 310% since inception, as well as debt repayment, where we expect to pay down nearly $3 billion of total debt this year and remain on track to achieve a net leverage ratio of 2x by the end of 2026. Our strong cash flow also provides capacity for continued business development to further augment our portfolio. In closing, we are pleased with AbbVie's results in 2024 and our financial outlook remains very strong. We have considerable momentum across our diverse portfolio and we continue to be well positioned to deliver robust growth in 2025 and beyond. With that, I'll turn the call back over to Liz." }, { "speaker": "Liz Shea", "text": "Thanks, Scott. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask you please limit your questions to one or two. Operator, first question please." }, { "speaker": "Operator", "text": "Our first question comes from Vamil Divan with Guggenheim Securities. Your line is open." }, { "speaker": "Vamil Divan", "text": "Great. Thanks for taking the question. So, maybe just to dive a little deeper on the Skyrizi, it is a great performance and guidance. Can you just comment a little more on pricing dynamics that you're seeing there as to how you've factored in pricing both for this year and maybe over the next several years? And then, just a quick follow-up on the comments that were given around aesthetics, especially on the share side, I think you lost a few points when maybe getting it back. Can you just give a sense of where you think the share is now for Botox and Juvéderm sort of this point in time? Thank you." }, { "speaker": "Jeff Stewart", "text": "Yes, thanks, Vamil. It's Jeff. And I'll comment on Skyrizi and Rinvoq. And I think, we've been very consistent that over the near-term and over time, this is a volume-based business, so we're going to see price declines year-over-year. But I would say modest, right? We've sort of highlighted that as we negotiate the formularies, we've started to consistently see sort of these low single-digit price concessions. Now, obviously, what Scott highlighted was unique for the 25-year with the Part D redesign that he outlined. So, overall, consistent low single-digit price declines from the rebating side with a one-time Part D. And we would anticipate once we left the Part D, we would see that sort of trend going forward." }, { "speaker": "Rob Michael", "text": "And Vamil, this is Rob. I'll just add that if you think about Skyrizi and Rinvoq, our strategy here was to elevate the standard of care for patients and ultimately would drive a rapid return to growth for the company beyond Humira. And that's exactly what we've been able to execute. That strategy has played out. You see the differentiation in the marketplace. We have nine head-to-head studies. We're launching a few more. We've upgraded our guidance now by an additional $4 billion in 2027. We've been very consistent in our language around the pricing dynamics. We said when you think about rebates, think about it as negative low single-digits going forward, but given the robust performance of these assets, it's volume that's dominating the growth, and we would expect that to continue." }, { "speaker": "Carrie Strom", "text": "And hi, this is Carrie. I'll answer your question around Botox and Juvéderm share. So, in the U.S., we remain the clear market leader for both toxins and fillers. In Q4, a few points of share erosion, bringing Botox to around the low to mid-60s, Juvéderm to around the low to mid-40s. As I said, the reversion of the loyalty program back to the original one, which we announced in December. And then, put into action January 21st, was greeted with very positive response from our customers. And encouraging signs for us to recapture that share for both Botox and Juvéderm throughout the year. And just to note that the share did not go to one competitor. Rather, it was more distributed amongst the entire competitive set." }, { "speaker": "Liz Shea", "text": "Thanks, Vamil. Operator, next question please." }, { "speaker": "Operator", "text": "Yes. Our next question comes from Chris Schott with J.P. Morgan. Your line is open." }, { "speaker": "Chris Schott", "text": "Great. Thanks so much. Just a two-parter on the Skyrizi Rinvoq dynamics, maybe just first on the 2027 guidance, can you just elaborate on what were the biggest drivers of upside to those targets, as you think about the various indications for the drugs? I guess, is it fair to think most of this coming from IBD, or is it across the board? And then, probably a longer-term question on those brands, can you just elaborate a little bit more on how we should think about the growth rate beyond 2027? So basically, how mature will these franchises be by then? And what type of growth rates can we think about over time? Thank you." }, { "speaker": "Jeff Stewart", "text": "Yes. Maybe -- thanks, Chris. This is Jeff. I'll start on that. So, the primary driver of the change is, in fact, share capture. So, the pricing assumptions have been consistent. We can call the markets pretty well. We see the actuals and the long-term trends there. So, it's been really share capture. And I would say that we see it across the board. Certainly, we've been super encouraged with Skyrizi in psoriasis. We continue to see very, very robust TRx share trends. And there's no question that the ramps in IBD have been very, very significant. So, that's a big piece of it. But I would say it's across the board. So, predominantly share capture. I don't know if, Scott, you have anything to add. But that's the big dynamic there on the $4 billion." }, { "speaker": "Scott Reents", "text": "Yes, Jeff. Maybe, Chris, if it would help, I can give you the breakdown by indication between the two on the 2027 guide, so, we talk about $31 billion combined in 2027. That's our new long-term guidance. That is $11 billion for Rinvoq and $20 billion for Skyrizi. Rinvoq is broken down. Rheum is about $4.8 billion; dermatology, $2.5 billion; IBD, $3.7. And then, on the Skyrizi side, $12.5 billion of that $20 billion guide is from psoriatic. And the remaining $7.5 billion is coming from IBD. So, that might help you kind of see those where the growth is coming from as well." }, { "speaker": "Rob Michael", "text": "And if we speak to it in terms of the $4 billion, just to give you a sense then, to add to what just Scott mentioned. So, Skyrizi is up $3 billion. A billion of that is psoriatic and $2 billion is IBD. We're just seeing tremendous ramps early days with IBD. And then, for Rinvoq, it's up a billion from the previous guidance. And that's a mix of roughly $300 million rheum, $200 million derm, and $500 million IBD. So, again, across the board, we're seeing tremendous performance, particularly in IBD. And then, your question on how to think about the growth, we have obviously given guidance beyond '27. But as I look at the sell side consensus, clearly the growth that's in sell side consensus beyond '27 is below our expectations. We would expect to see these markets continue to grow. We would also expect to see continued share gains, albeit as you start getting close to that in place share level, the share curve bends, but you still expect to see some level of share growth. And then, keep in mind, we will have the five, we expect the five new indications for Rinvoq, collectively adding about $2 billion in peak sales and so that will also contribute. So, as I think about the rate of growth for Skyrizi and Rinvoq beyond '27, Rinvoq will likely grow faster than Skyrizi because of those new indications, but you'll still see a robust performance from both assets, at least through '32." }, { "speaker": "Liz Shea", "text": "Thanks, Chris. Operator, next question please." }, { "speaker": "Operator", "text": "Our next question comes from Geoff Meacham with Citigroup. Your line is open." }, { "speaker": "Geoff Meacham", "text": "Hey, guys. Good morning. Thanks so much for the question. Just had a couple, first one on Cerevel, you guys called out the partial impairment today in the press release. Just want to get your perspective as to what the drivers are for the remaining value, assuming Tavapadon is mostly it, but wasn't sure what you'd assume for Emraclidine or backup compounds? And then, just on aesthetics, with the new guidance to 2029, is it fair to say that you think '25 could be the trough or have already seen a trough in terms of the growth rate? I'm just trying to think of the longer term picture. And then, just on BoNT/E, I wanted to get your perspective about the potential success there adding new patients to the paradigm, just given the potential there. Thank you." }, { "speaker": "Rob Michael", "text": "Geoff, on your first question regarding -- this is Rob. On your first question regarding Cerevel, so keep in mind, the accounting rules do not allow you to write up an intangible. So, even though we are more optimistic about Tavapadon now than we were at the time of the deal, we can't write that value up. So, that would be the same as what we originally ascribed. We still obviously, as Roopal walked you through the development programs for Emraclidine, still see opportunity in adjunctive schizophrenia as well as neuro degenerative psychosis. And we haven't completely given up on the monotherapy opportunity either, but that's a more heavily risk adjusted opportunity now. So, when you think about the value you have to take into account, the timing, so there's some level of time delay as well as a different probability of success for monotherapy. That's all baked into because you're essentially valuing risk adjusted revenues. You have to take that into account. That said, we're still optimistic about the asset. We're pursuing it in these indications. And again, as I mentioned, we haven't completely given up on monotherapy that will depend on dose ranging. But that is the way we constructed the revaluation of the intangible. But overall, we still see a very nice opportunity particularly for Tavapadon and we still see potential for Emraclidine as well." }, { "speaker": "Jeff Stewart", "text": "Geoff, I'll take your question regarding the aesthetics trough. So, we've not specifically guided that, but the way that we have modeled it and think about it is we do see recovery. And I think the big headwind here has been over the last two years has been the economic condition. So, we do see continued improvement. Carrie spoke about some of the market growth rates that we're seeing coming back in the U.S. for both fillers and toxins. So, we would -- if you model, you would anticipate '25 to be the trough. And then, our long-term guidance is that high-single-digit compound annual growth using '25 as the base year through '29. And if you model that, that's going to put you somewhere north of $7 billion. Certainly, this is a business we continue to be excited about. We think that there are continuing to be low market penetration rates globally, frankly, and we've got some innovation to continue to drive market growth. That market has grown low-double-digits historically, but I think as we model, we're thinking a high-single-digit growth in the markets. But we do see some growth accelerators with BoNT/E, and maybe I'll let the team talk about BoNT/E." }, { "speaker": "Rob Michael", "text": "Maybe I'll just mention here just more broadly, this is Rob, on the business. I think as we reflect on the aesthetics performance and we are just going through a period of macroeconomic pressure on that business. But we do continue to see an attractive long-term setup again given low penetration rates, high consumer interest and our leading portfolio, including some exciting pipeline programs in toxins and fillers. When you think about it, as part of AbbVie, the aesthetics business has been able to continue investing despite the macroeconomic challenges and that will allow us to maximize opportunities when the market does recover. We have set up this business to be a global fully integrated unit with dedicated support from R&D and business development, and I'm confident that focused approach will pay off in the long run. It's just been difficult for us to call the market recovery, but we still have a lot of confidence in the long-term outlook." }, { "speaker": "Carrie Strom", "text": "And this is Carrie. I'll comment on BoNT/E. So, as you said, BoNT/E will be an important catalyst for new patient activation into the category. Consideration continues to be very high for aesthetics and for toxins. And like we said, it continues to be underpenetrated. And that's because there continue to be barriers for these people who are interested in the category, but not acting around cost and concerns of an unnatural look. And that's really where BoNT/E will play an important role based on its unique profile that is suited to address these concerns. It's fast-acting. It has short duration. So, it's going to be a nice option to position for these considerers to try BoNT/E. And then, our commercial strategy will be to convert them from BoNT/E to Botox. So, this is going to be an important pipeline catalyst to help us to activate that consumer market and drive more consumers into the toxin category for Botox." }, { "speaker": "Roopal Thakkar", "text": "And it's Roopal. Maybe one comment to add to Carrie's. On the R&D side, even thinking past that, this year we'll initiate a study with BoNT/E plus Botox to cover people immediately and get that long-term benefit. So, that, those studies will start this year." }, { "speaker": "Liz Shea", "text": "Thanks, Geoff. Operator, next question please." }, { "speaker": "Operator", "text": "Our next question comes from Terence Flynn with Morgan Stanley. Your line is open." }, { "speaker": "Terence Flynn", "text": "Hi. Thanks for taking the questions. You mentioned the net impact of the Part D redesign. Can you tell us what the volume impacts you guys are assuming, if any, in that calculation? And then the second question I had is, on the pipeline slide, you noted you could have some Phase 2 UC data for 113, which I believe is your oral NLRX1 agonist. Just maybe speak to conviction level there and how you think about that on the forward and if that would be something that you could move into Phase 3. Thank you." }, { "speaker": "Scott Reents", "text": "Terence and Scott, I'll take your question on the volume. So, we have guided a 4% of a net impact across the business for headwind to growth for Part D redesign. Now, when we think about that volume offset, we've not quantified that in the guidance, but that is part of the 4%. It's a, I would say, in the grand scheme, it's a fairly modest offset overall. And I think part of what you need to do when you think about that volume, recognize that when you look at the patient segments that exist, there's roughly three patient segments and they each take about a third of the business. But this is really something that will impact the standard eligible, and we're working very hard to ensure that people are electing cap and smooth. And so, we really see that volume offset coming from that one-third of the patient segment to drive that. So, that's why I think it's a little bit more of a modest offset, but we've not quantified it." }, { "speaker": "Rob Michael", "text": "And it's logical when you think about it, because the other two-thirds, I mean, you have the LIS population, which is one-third, so they don't have an out-of-pocket burden like the standard eligible do, and the other third are covered by employer plans, where, again, they don't have the same out-of-pocket burden. So, when we analyzed it, we looked at the market and saw that about a third, as Scott mentioned, of the population would benefit from the lower out-of-pocket. But keep in mind, the cost share applies to the entire book of Medicare business. That's why the volume doesn't offset the price impact." }, { "speaker": "Roopal Thakkar", "text": "And this is Roopal. I'll cover the NLRX question. This is our asset from Landos. We had observed very early data, I would say Phase 1b, in ulcerative colitis, and that looked good, but it was a very small sample size, I would say. So, this will be a robust Phase 2 with a placebo comparator, and we'll get objective data from centralized review of endoscopic data. So, it will be a good data set to look at, and if it looks good, definitely would be a Phase 3 asset for us. And the other consideration we would have, similar to what I highlighted about other biologics that we'd be combining with Skyrizi, if this looks good, this could be a combination agent with Rinvoq as well." }, { "speaker": "Liz Shea", "text": "Thanks, Terence. Operator, next question please." }, { "speaker": "Operator", "text": "Yes, our next question comes from Mohit Bansal with Wells Fargo. Your line is open." }, { "speaker": "Mohit Bansal", "text": "Great. Thank you very much for taking my question, and congrats on all the progress, I have a question regarding IMI. So, I know you talked in the past about Skyrizi and Rinvoq benefiting from some of the Humira prescriptions going to these agents as well. So, taking that aside, it still seems like the volume or IRA space is growing rapidly. Can you talk a little bit about the underlying dynamics as well here, why this market continues to grow, and how should we think about longer term for the overall market growth itself? Thank you." }, { "speaker": "Jeff Stewart", "text": "Yes. So, thanks, Mohit. It's Jeff. And like we talked about before, particularly around the acute event, in this case, this was the CDF exclusion in April, we could clearly start to measure the fact that not all of the switching from Humira was going to the biosimilar. We saw about 20% of it was slipping away into new mechanisms or more advanced mechanisms like Skyrizi and Rinvoq. Now, we've continued to see the molecule compress. And it's just physicians are using just less and less sequentially Humira and the biosimilars over time. I would say it's becoming harder to measure because you're also seeing a lot of dynamics around new head-to-head trials, new indications, new other approaches. So, I would say overall, it's there, but it's relatively modest in the scheme of the volume that is basically accruing from basically the promotion and the profile of the medication. So, it should continue. The more that we see sort of disruption in the market, you'll probably continue to see the molecule on trend continue to compress. Now albeit modest, your other point's very important. These markets are still very, very buoyant and significant. And one of the dynamics that we see over time, and I think we'll begin to see it quite dramatically around the world, particularly in IBD, is that the lines of therapy start to expand. So, it used to be like primarily what was fueling the markets was primarily the new patients coming in off of older traditional medications. But now you're seeing the emergence in atopic dermatitis of the second and third line markets, which are growing quite substantially. You're going to see that significantly emerge in IBD, whereas before physicians were really, really afraid to move people along. So, they did dose intensification, they added more steroids. But now that there's drugs like Skyrizi and Rinvoq and other agents, you're seeing those market lines of therapy expand. And so, that should continue. And we've contemplated that in our long-term projections. But that gives you some sense of why you're observing what you're seeing." }, { "speaker": "Rob Michael", "text": "Now, as we look across, it's Rob, as we look across the specialty areas, in psoriasis and IBD we're projecting high single-digit market growth. Atopic dermatitis in the mid-teens, it's growing very -- I mean, you're seeing still fairly low penetration rates for atopic dermatitis. So, there's tremendous room for growth. So, we would anticipate mid-teens market growth there. And then, in rheumatoid arthritis, that's probably more like low to mid-single digits. But you can see across the board, very nice market growth, which then will be complemented by the market share gains." }, { "speaker": "Liz Shea", "text": "Thanks, Mohit. Operator, next question please." }, { "speaker": "Operator", "text": "Yes. The next question comes from Dave Risinger with Leerink Partners. Your line is open." }, { "speaker": "David Risinger", "text": "Yes. Thanks very much. So, I have two questions, please. First, regarding ABBV-400 or Temab-A, could you please frame your long-term commercial vision for this candidate, including what some may underappreciate about how broadly it could potentially be adopted in the early 2030s? And then, second, on external transactions, emraclidine was a setback, but AbbVie's overall M&A track record has been very successful. Could you please discuss your agenda for M&A, including the potential to leverage your franchise strength in related product categories? Thanks so much." }, { "speaker": "Jeff Stewart", "text": "Yes. Hi. It's Jeff. So, I will give some thoughts on that. It's a very, very attractive asset. I think it's underappreciated. And part of it is the first category it will compete in, which is colorectal cancer. I mean, if you look at the response rate that we've seen, let's say, in a smaller or mid-size cancer type, which is ovarian cancer with Elahere, it's quite striking. I mean, Elahere has been the most rapidly adopted ADC in the entire U.S. oncology market. And it's because it entered this market that was basically almost all chemo-based with unmet need where there had been no innovation. And when we look at the entry with 400 or Temab-A into colorectal cancer, it's a substantially larger tumor type, as it's quite evident. And we've already seen very, very nice monotherapy results in later lines, much, much better than we've seen with the old chemo standard of care. And really, it's whether or not they have c-Met or not. Now, the thing that will really cause a big inflection that Roopal can talk about in a moment is that it's the combinability as you go up into the lines of therapies, okay? And that's really going to make this thing inflect and become a very, very significant product for patients in colorectal cancer over time. Now, the studies will have to bear that out. And as well, we're seeing very, very significant early results in lung cancer as well. So, it is, I think it's an underappreciated asset. We'll have a chance with Teliso-V to sort of set the market around this whole c-Met, the modern c-Met area. But it's quite striking. So, first, we establish in later lines, very big cancer directly against older chemotherapy. And then, we move combination as we move forward. So, thanks for the question." }, { "speaker": "Roopal Thakkar", "text": "Hey, it's Roopal, maybe just a comment there on our strategy around ADCs. And I think 400 is a good highlight of that. So, we think about what's a good target, meaning high expression on the tumor, low expression in healthy tissue. And then, we are continuing to focus on patient selection, individualization of care, utilizing robust biomarkers, as Jeff mentioned, c-Met. That is the opportunity to optimize benefit-risk and particularly tolerability. With our Topo Warhead platform, we've seen low rates, for example, of alopecia, stomatitis, diarrhea, which others, I think, continue to struggle with. And safety and tolerability, as Jeff has mentioned, are critical. So, we're also very focused on proper dose optimization to get this right, so we're able to combine in earlier lines. And that's the same approach that we have with the other one I mentioned, 706 in small cell lung cancer and others in the pipeline." }, { "speaker": "Rob Michael", "text": "And then, David, this is Rob. I'll take your question on M&A. And thank you for acknowledging the strong track record we've had as a company. I would agree with that when you think about the transaction with BI that brought us Skyrizi, with Pharmacyclics that brought us Imbruvica, really gave us the critical mass to be a leader in blood cancers, and then the transaction with Allergan, which gave us three verticals that can really drive long-term growth for the company in neuroscience, aesthetics, and eye care. And then, more recently, the transaction with Immunogen, which really bolstered our ADC pipeline, as Roopal has highlighted. In terms of our go-forward strategy on BD, we continue to pursue assets that can add depth to our pipeline and really drive growth in the next decade. And we have a clear line of sight to growth for at least the next eight years within the company today. And so, my focus is really about bringing in assets that can help drive that growth in the next decade. And since the beginning of 2024, as I mentioned in my prepared remarks, we've signed more than 20 early-stage deals across immunology, oncology, and neuroscience. In immunology, we've added novel mechanisms that have the potential to raise standard care either as a monotherapy or in combination with Skyrizi and Rinvoq. You should expect that strategy to continue. In oncology, we've added new platforms, including multispecifics, trispecifics, T-cell engagers, and in situ CAR-T approaches. And then within neuroscience, it's not always appreciated the work we've been doing in neuroscience above and beyond cerebral. We expanded our discovery collaboration in psychiatry with Gedeon Richter, who discovered Vraylar. We also invested in a novel mechanism for mood disorders with Gilgamesh. And we recently acquired a next-generation A-beta antibody for Alzheimer's from Aliada. Again that is our area of focus. We have these five areas that can drive long-term growth. I mentioned neuroscientist aesthetics and eye care, and of course, immunology and oncology. I mean, these are all large markets with high unmet need. And so, our BD efforts are focused on building pipeline depth in those areas. Now, I should say if we see an opportunity for differentiation in another large market with high unmet need we would consider pursuing it, especially if it can help drive growth in the next decade. And the company has the financial wherewithal to pursue those opportunities as well." }, { "speaker": "Liz Shea", "text": "Thanks, Dave. Operator, next question please." }, { "speaker": "Operator", "text": "Yes. Our next question comes from Steve Scala with TD Cowen. And your line is open." }, { "speaker": "Steve Scala", "text": "Thank you so much. I have an observation and two questions. The observation is splitting hairs, but on Part D redesign, the guidance had been a three percentage point headwind. It was just set on the call four percentage points. A year ago, it was two percentage points. If there is a change, please, can you identify that? Related to that is my first question. Are you seeing any evidence that IRA Medicare pricing is spilling over to the commercial market? And if yes, to what degree, or is there absolutely none? And then, my second question, the company has provided a lot of helpful perspective on the aesthetics market, but can you distill it to a number? The guidance for aesthetics was previously greater than $9 billion in 2030. What is that number now? Thank you." }, { "speaker": "Scott Reents", "text": "Steve, this is Scott. I'll go ahead and start with your Part D observation and question. With Part D, we really -- we saw that as something that the analysts and maybe the marketplace hadn't fully understood the impact. I think we were one of the first companies to come out and talk with any sort of specificity and granularity around what we saw that Part D impact, mechanics of how it would work, and the impact to it. So, we came out with a guidance number, and I think that has probably, as you noted, the numbers, but it's evolved a little bit over time. I would say it's evolved not necessarily from our understanding of Part D, but because really the mix of the business. So, when we talk about it in the second quarter, I believe I came out and said we saw it would see an approximately 3% headwind to growth from the Part D redesign. We've distilled that number and made a precise number of 4%, roughly 4% today. And really, when you think about when I came out with that 3%, we've seen momentum in the business, and we've seen momentum in the business in areas, immunology and oncology in particular, where we reached some guidance, where we saw have high Part D channel mix. And so, that's really been a business mix change that has led to that 4% change, and that's really kind of what it's amounted to." }, { "speaker": "Rob Michael", "text": "And Steve, I'll just add, I mean, when you think about the setup for the company, in '25, we said we would return to robust growth, and we're delivering in absolute terms in our guidance a little bit more than $2.5 billion of growth, and that's with headwinds from U.S. Humira erosion around $3 billion, the Part D benefit redesign of approximately $2 billion when you do the math on the roughly 4%, and then a $500 million headwind from the stronger U.S. dollar. So, the underlying growth platform is going to drive $8 billion of growth when you think about Skyrizi and Rinvoq, as well as neuroscience. So, the change you're seeing from, as Scott mentioned, is really more of a function of mix, but we're very pleased with the underlying growth that the business has allowed us to absorb these impacts and still deliver robust growth in 2025." }, { "speaker": "Jeff Stewart", "text": "Steve, it's Jeff. I'll take your second question. So, as we've negotiated across the commercial books and the Medicare books, we have not seen any spillover or slippage in our actual negotiations over the last cycles. And one thing I would add is that we have seen in '24 some more consumption on the benefit redesign, particularly in our oncology agents. So, for Imbruvica and Venclexta, we actually see lower discontinuations and some more consumption. And so, that's encouraging, because if you remember that Part D sort of had the lead in where the cap moved down to roughly $33,000, $34,000, it'll sequentially move down more to $2,000 with the smoothing next year, which is a good policy, because it's encouraging to see that the change in benefit design makes people stay on their cancer medication a bit longer. Again, the volume will be more modest than the price hit, as Rob and Scott described it. But that's the dynamics that we're seeing in the channels." }, { "speaker": "Scott Reents", "text": "And to answer your question regarding the aesthetics guidance, I'll reinforce maybe what I said earlier and Rob as well. So, when we look at that guidance, that long-term guidance is calling for high single-digit CAGR '25 through '29, so using '25 as the base here. If you do the math on that range, that is something above $7 billion, a little bit north of $7 billion, depending on where it falls within that high single-digit range. So, that's why we've specifically given the range on the high single-digit. The market growth that we've seen historically has been low double-digits, but we're seeing that market we're modeling for now, high single-digit growth during the time period that we've given this long-term guidance. And so, I think that answers your specific questions." }, { "speaker": "Steve Scala", "text": "Thank you very much." }, { "speaker": "Liz Shea", "text": "Thanks, Steve. Operator, next question please." }, { "speaker": "Operator", "text": "The next question comes from Tim Anderson with Bank of America. Your line is open." }, { "speaker": "Tim Anderson", "text": "Thank you. A couple of questions, please. On aesthetics, a question I've asked before, what are your expectations for how obesity drugs are going to impact this business? You could argue that the surge in use of products, the GRIP ones, could be either a tailwind or a headwind to the use of products like toxins and fillers. It could be a headwind if patients are having to pick and choose between which products to put their out-of-pocket dollars towards. And then, a second question unrelated to the first. PBM reform still being debated in Washington. If AbbVie had its way, what would change about the current relationship between PBMs and drug companies, and what would you argue should be left alone?" }, { "speaker": "Carrie Strom", "text": "Hi, this is Carrie. I'll answer your first question around the obesity market and the aesthetics opportunity. And you're exactly right. It continues to be both a headwind and a tailwind, a headwind in terms of share of wallet as these consumers are making decisions on what they're going to spend for. We see that more for the higher-priced products like fillers. And then, also a tailwind as this gets a new group of consumers or patients interested in aesthetics, and many of our aesthetic providers are administering these products. And so, they see this as an opportunity for lead generation and bringing new patients into the category. So, we do see it as both a tailwind, a headwind in the short term, but a tailwind in the long term. And the question is not if injectables work. We know that these products work well in these patients. It's really about how we can partner with our customers to build it and integrate it into their treatment practice. And that's what we're doing with our customers now in helping them position Botox and Juvederm in our product line for these new patients that are entering their practice." }, { "speaker": "Rob Michael", "text": "And Tim, this is Rob. I'll take your question on PBM reform. Look, if there are changes to the rebate system, we don't have a strong preference between rebates or discounts. And that's because we've always competed on the attributes of our products, both the clinical benefit they provide and the value they return to health systems. So, we're confident in our ability to compete in either world. I would just point to our share performance in international markets that do not have a rebate-based system. And we see similar market shares in those countries as well. So, we can compete effectively in either system. We don't have a preference." }, { "speaker": "Liz Shea", "text": "Thanks, Tim. Operator, next question please." }, { "speaker": "Operator", "text": "Our next question comes from Chris Raymond with Piper Sandler. Your line is open." }, { "speaker": "Chris Raymond", "text": "Yes, thanks. Just a question on atopic derm as a target indication, just from some of our work, it looks like the upside we're seeing in Rinvoq is largely in room and gastro. And I know you guys have sort of mentioned this, and it's fairly well known. But in atopic derm, at least from our data, it looks like things are starting to flatten out a little bit. And I heard your comments on the derm share of Rinvoq revenue in 2027. But that would seem to infer maybe some kind of inflection. So, maybe a two-part question here; first, talk about the current maybe atopic derm growth dynamic, and is there an inflection sort of anticipated? And then the second part of that is, should we be paying more attention maybe to lutikizumab as a contributor here? I know, Jeff, you've talked about atopic derm as a very important indication that you guys are targeting. Or is there some other sort of area, like external innovation, that you think will augment maybe your position in this indication? Thanks." }, { "speaker": "Jeff Stewart", "text": "Yes, it's a very good question. It's an important segment. And to give you some sense of what we see in terms of the inflection. So, we have seen a significant inflection in our new patient capture. And this is despite the launch of other interleukin products over the last year. So, we've ramped to the highest in-place shares that we've had. And it was largely flat in the teens for mid-teens for many, many quarters. And it's ramping up now above 20%. And a lot of that is we've been able to start to distinguish Rinvoq on these stringent endpoints. Basically, like really minimal disease activity where you're taking itch down to a very, very low level. And you're almost completely clearing the skin. And those are the endpoints where we significantly outperform DUPI. Now, having said that, DUPI's still got the vast majority there, but we are seeing, we will see that in-place shares start to build into the TRXs over time, because our TRX share is quite below 20% at that point. I think the other thing that I'd note is that in many, or if not most, of the outside the U.S. markets, our shares are much higher and building even a little bit faster. So, in several large markets, we actually are ahead of Dupixent. And some of that has to do with the way that the label worked during our initial launch, et cetera. But we're quite bullish over time in terms of Rinvoq as this is the best agent in terms of getting to the complete control. Now, having said that, we would and we will continue to look for more assets. Some are in our pipeline as described. But this is a very, very attractive space that we want to continue to invest in. I don't know, Roopal, if you've got any comments on ludi or some of the other concepts." }, { "speaker": "Roopal Thakkar", "text": "That's right. I mean, with the 5% penetration rate, there's still many patients that are untreated. So, lutikizumab will be our next one. And Jeff mentioned, there's other pipeline assets that we're working on. And key being skin clearance along with that itch. And if you can get them both and have a safe and tolerable profile, I think that'll continue to be competitive." }, { "speaker": "Liz Shea", "text": "Thanks, Chris." }, { "speaker": "Chris Raymond", "text": "Thank you." }, { "speaker": "Liz Shea", "text": "Operator, next question please." }, { "speaker": "Operator", "text": "Thanks. Our next question comes from Trung Huynh with UBS. Your line is open." }, { "speaker": "Trung Huynh", "text": "Great. Thanks for taking my questions. Just two for me, so, firstly, your sales in 4Q, did you see any notable difference in trends in stocking or gross-to-net patterns across the portfolio ahead of the changes in Part D versus previous years? Specifically, I'm interested if you had any meaningful one-offs for Skyrizi and Rinvoq for the quarter. And then, circling back on aesthetics, thanks for that updated long-term guide, can you give us a bit more color geographically how we should think about the split between ex-U.S.? China versus the U.S. as you return to growth? Is there an expectation on one coming back quicker than the other? Thanks." }, { "speaker": "Scott Reents", "text": "This is Scott. I'll talk about the stocking. So, we did not see -- in the past, we've talked about it a couple years ago in particular. But the stocking was relatively minimal from in terms of the impact. So, we did not see anything with respect to Skyrizi and Rinvoq on the stocking in the fourth quarter that'll be impacted in the first quarter." }, { "speaker": "Trung Huynh", "text": "And no real dynamics around gross to net either?" }, { "speaker": "Scott Reents", "text": "No, that's right. For Skyrizi and Rinvoq, I'm sorry, no dynamics around gross to net for Skyrizi and Rinvoq. And with respect to aesthetics, I don't know Carrie if you want?" }, { "speaker": "Carrie Strom", "text": "Sure. For aesthetics, if we think about the long-term, we see, like we said, we're planning prudently for the economic recovery around key markets like U.S. and China, where it's been challenging for the past few years. Both those markets will continue to be important moving forward as will the rest of the world. We see Japan as posting nice growth as being an underdeveloped market that we're able to invest in. And then, the pipeline catalysts will be important in both U.S. and the rest of the world. Notably, in China, in the past year, we've had multiple new pipeline catalysts, which are going to -- which continue to help drive share for both toxins and fillers last year and this year. And we expect the international business to continue to increase as a percent of the revenue for overall global Allergan aesthetics." }, { "speaker": "Liz Shea", "text": "Thanks, Trung. Operator, we have time for one final question, please." }, { "speaker": "Operator", "text": "Sure. And our last question comes from Chris Shibutani with Goldman Sachs. Your line is open." }, { "speaker": "Chris Shibutani", "text": "Great. Thank you very much. When you think about going beyond 2030 with your strategy across the portfolio, can you comment about the potential impact of some of these combination approaches in immunology? Do you expect these to be IP extending? Will there be co-formulation based approaches, just trying to understand the potential revenue implications, noting that clearly there could be some clinical benefit that could certainly make sense. And then, just a question about a business segment that has been around that you never talk about, which is eye care, how and why does this fit going forward? I understand there's a legacy with the Allergan deal. But just trying to think about the overall portfolio in areas where you clearly have strengths, but this seems to be one which is less than 5% of revenues. But what is the role for that on the board? How are you thinking about it? Thank you." }, { "speaker": "Roopal Thakkar", "text": "Hey, Chris, it's Roopal. Maybe I'll start the ball rolling here on how we think about combos into '23 -- sorry in the 2030. So, the first thing is we have a very strong foundational asset in particularly IBD with Skyrizi. And you've heard me mention other combo studies in the psoriatic arthritis today as well. Now, that we would combine with the multiple assets that we've mentioned over time; TL1A, TREM-1, alpha 4 beta 7, IL-1 alpha beta, lutikizumab that we already have, that we would be able to look at as monotherapies and combo therapies. If they look good as monotherapies, they could also move forward by themselves. For all of these assets, we're also looking at biomarker approaches. Particularly with lutikizumab, but we would apply that same strategy to all of these assets. And as combinations, the goal would be co-formulations. So, as we enter into the clinical study, we're also doing CMC work in parallel to facilitate combination, co-formulation approaches. So, that would also be a convenience factor. And we would want to match with longer acting agents. So, for example, the TL1A we believe to be a longer acting agent. For TREM-1 we're seeing a long pharmacodynamic effect as an example. But then, the next way that we think about this, these combo strategies, is if we start seeing utility there, obviously moving forward with the co-formulation, but we are very competent in making bi-specifics. Lutikizumab is one of those. So, then in parallel we're making bi-specifics that could then also stand alone as single assets. And then, as you've heard recently with our Nimble transaction, we would also be looking at different mechanisms as an oral peptide. The lead one being IL-23, but we're also working on a TL1A. And what's unique and what we like about that platform is the potency, potentially being able to reduce the amount of peptide that's required and these assets having long half-lives. So, if that holds, then you could imagine combinations as a pill with these peptides with that type of profile that we hope to see. So, multiple steps as we think about immunology." }, { "speaker": "Rob Michael", "text": "This is Rob. Your question on eye care, I mean our focus on eye care is in glaucoma, retinal disease, and prescription dry eye. We like that business. It precipitates in a large market with high unmet need, meets that criteria. It has very much a scientific focus. It's a data-driven business. It's a very efficient business as well. And obviously, we're excited about the REGENXBIO Gene Therapy Program focused on wet AMD and diabetic retinopathy. Depending on how that plays out, I think you could see that as becoming a stronger growth driver. We obviously have four of the five, as you think about, you get a lot of questions there. But we don't get as many questions on eye care, but we do believe as you start to get more visibility to this REGENXBIO Program, you'll likely spend more time focusing on it. We think of it as a potential to be a long-term growth driver for the company. And we like the fit it has for AbbVie." }, { "speaker": "Liz Shea", "text": "Thank you, Chris. And that concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us." }, { "speaker": "Operator", "text": "Thank you. That concludes today's conference. You may all disconnect at this time." } ]	AbbVie Inc.	141,885,706
ABBV	3	2,024	2024-10-30 09:00:00	Operator: Good morning, and thank you for standing by. Welcome to the AbbVie Third Quarter 2024 Earnings Conference Call. All participants will be in a listen-only until the question-and-answer portion of this call. [Operator Instructions] Today’s call is being recorded. I would now like to introduce Ms. Liz Shea, Senior Vice President, Investor Relations. Liz Shea: Good morning and thanks for joining us. Also on the call with me today are Rob Michael, Chief Executive Officer; Jeff Stewart, Executive Vice President, Chief Commercial Officer; Roopal Thakkar, Executive Vice President, Research and Development, Chief Scientific Officer; Scott Reents, Executive Vice President, Chief Financial Officer; and Carrie Strom, Senior Vice President, AbbVie and President, Global Allergan Aesthetics. Before we get started, I’ll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today’s conference call, non-GAAP financial measures will be used to help investors understand AbbVie’s business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we’ll take your questions. So with that, I’ll turn the call over to Rob. Robert A. Michael: Thank you, Liz. Good morning, everyone, and thank you for joining us. AbbVie is performing exceptionally well, and I’m extremely pleased with the execution against our strategic priorities, including continued double-digit sales growth from our ex-Humira platform, the closing and integration of Cerevel Therapeutics and the progress we are making to build and advance a compelling pipeline of innovative medicines. Turning to our results, AbbVie’s diversified portfolio delivered sales that were $260 million above our expectations and reflect robust mid-single-digit operational sales growth. Our ex-Humira platform drove this over achievement, including growth of nearly 18%. The momentum of Skyrizi and Rinvoq is especially impressive with combined sales expected to exceed $17 billion this year, which is $1.3 billion above our initial expectations. And, we see substantial opportunity for continued strong growth well into the next decade. Several other key products also delivered double-digit sales growth, including Venclexta, Vraylar, Ubrelvy and Qulipta. This broad-based performance further demonstrates the strength of our commercial portfolio. For the third time this year, we are raising our full-year revenue and adjusted EPS guidance. We are increasing our full-year revenue guidance by $500 million and have now raised total revenue by $1.8 billion since our initial guidance in February. We are also raising our full-year adjusted earnings per share guidance by $0.15 and now expect adjusted EPS between $10.90 and $10.94. In addition to achieving strong quarterly results, we have been very focused on investing in the business to generate sustainable long-term performance in the 2030s and beyond. During the quarter, we successfully completed the acquisition of Cerevel Therapeutics, strengthening our neuroscience pipeline. Cerevel enhances our ability to help patients suffering from devastating conditions such as Parkinson’s and schizophrenia. The integration has been seamless and we are excited to have the talented Cerevel team join our organization. Within the Cerevel pipeline, we are very pleased with the positive Phase 3 results and emerging profile of tavapadon in Parkinson’s. And, we remain on-track to read out both pivotal studies for emraclidine in schizophrenia in the fourth quarter. More broadly on the pipeline, we have been advancing key R&D programs across all stages of development. Some notable highlights include the U.S. approvals of Vyalev for advanced Parkinson’s and Botox for platysma bands. The U.S. regulatory submission of Teliso-V for non-squamous, non-small cell lung cancer, and the start of our Phase 2 Crohn’s platform study, which is evaluating Skyrizi in combination with several novel biologics. In summary, AbbVie continues to demonstrate strong commercial, operational and R&D execution. The robust performance of our growth platform once again exceeded our expectations and we see numerous opportunities to drive long-term growth. Further underscoring our confidence in that growth, today we announced a 5.8% increase in our quarterly cash dividend, beginning with the dividend payable in February 2025. Since inception, we have increased our quarterly dividend by more than 300%. With that, I’ll turn the call over to Jeff, for additional comments on our commercial highlights. Jeff? Jeffrey R. Stewart: Thank you, Rob. I’m extremely pleased with the continued strong momentum across the therapeutic portfolio. I’ll start with the quarterly results for immunology, which delivered total revenues of more than $7 billion up 4.8% on an operational basis. Skyrizi global sales were $3.2 billion up 51.5% on an operational basis, exceeding our expectations. We are seeing robust prescription growth across psoriatic disease, with Skyrizi achieving in-play biologic share leadership in approximately now 30 key countries. In the U.S, we continue to capture nearly one out of every two in-play psoriatic disease patients on biologic therapy and we see substantial room for further total share growth. We believe that Skyrizi’s best-in-class profile with nearly complete skin clearance, high durability of response, easy onboarding and quarterly dosing for maintenance therapy sets a very high bar relative to other therapies on market or in development. Skyrizi has also demonstrated a compelling clinical profile in IBD, including strong endoscopic data paired with convenient dosing. This differentiated profile as well as our compelling head-to-head sequence data versus Stelara is supporting very rapid uptake in Crohn’s disease, where Skyrizi continues to gain market share globally, achieving in-play patient leadership across all lines of therapy in the U.S, Japan and Canada. Skyrizi’s U.S. in-play patient share is now approximately 32%, more than double the share of the second biologic treatment. And with Skyrizi’s total prescription share of approximately 8%, we see significant opportunity for revenue inflection in Crohn’s going forward. While we are still very early in our launch in the U.S. and Europe, we also anticipate robust uptake for Skyrizi in ulcerative colitis the new indication. Initial prescription trends as well as feedback from gastroenterologists have been overwhelmingly positive. Physicians are particularly impressed with the data that has been demonstrated for naive UC patients, who have not been exposed yet to biologics, where Skyrizi achieved very high results for clinical remission and endoscopic response. We have now secured broad formulary access for Skyrizi in UC, with sales in this indication expected to ramp meaningfully over the next several quarters. So, given the momentum we are seeing across all of these indications, we will be raising our full-year sales guidance once again for Skyrizi. Turning now to Rinvoq, which is also demonstrating robust growth. Global sales were $1.6 billion up 47.4% on an operational basis. We continue to see strong prescription growth across all seven of Rinvoq’s approved indications. I’m especially pleased with our performance in IBD, where Rinvoq’s uptake is exceeding our expectations. Rinvoq is now capturing double-digit in-play patient share in the U.S. for ulcerative colitis as well as Crohn’s disease. Both indications are now available in more than 75 countries with reimbursement and share continuing to increase. I also wanted to highlight our recent performance in atopic dermatitis, where Rinvoq is seeing an acceleration of in-play share following recent positive data from our second head-to-head study versus Dupixent. As an oral option that provides rapid skin clearance and itch relief, we believe Rinvoq’s strong differentiated profile will continue to compete well in this highly underpenetrated AD market. As a result of this continued strong performance, we will also be increasing the full-year sales guidance once again for Rinvoq. Looking forward, we see substantial momentum for both Skyrizi and Rinvoq, including continued share gains across existing indications on top of the typical underlying market growth across room, derm and gastro. Additionally, we are making excellent progress with several new indications for Rinvoq across sizable markets that will have the potential to provide another significant revenue inflection in the second half of this decade and into the 2030s. From a competitive perspective, a key element of Skyrizi and Rinvoq’s success has been their strong differentiation with compelling head-to-head data against several novel therapies. This includes Skyrizi superiority versus Humira, Cosentyx, Otezla and Stelara in psoriasis as well as Stelara in Crohn’s disease and Rinvoq superiority versus Humira and Orencia in rheumatoid arthritis as well as Dupixent in atopic dermatitis. To further support our differentiation, we have another head-to-head study ongoing for Skyrizi versus Sotyktu in psoriasis with plans also underway now for a study comparing Skyrizi versus Entyvio in ulcerative colitis. So given all of these factors, we feel very confident about the long-term growth prospects for both Skyrizi and Rinvoq. Turning now to Humira, which delivered global sales of $2.2 billion down 36.5% on an operational basis due to biosimilar competition. While Humira share erosion to biosimilars in the U.S. is largely in-line with our expectations, we are now seeing more Humira molecule volume moving to other novel mechanisms than previously anticipated. So, while this has an unfavorable impact to Humira sales, we are seeing a benefit to Skyrizi and Rinvoq, which is a very favorable dynamic for immunology portfolio now and certainly over the long-term. Moving now to Oncology, where total revenues were approximately $1.7 billion Imbruvica global revenues were $828 million down 8.8%, reflecting continued competitive dynamics in CLL, partially offset by higher persistency rates for existing patients. Venclexta is performing extremely well. Global sales were $677 million up 18.2% on an operational basis. This reflects strong momentum in CLL, especially in Europe, where recent guideline changes recommend combination use of Venclexta Plus BTK inhibitors as a preferred fixed duration treatment versus continuous BTK treatment alone. Growth is also supported by our very strong share position in frontline AML, where Venclexta is the leading treatment for patients who are ineligible for intensive induction chemotherapy. We are also seeing nice sequential revenue growth from Elahere and Epkinly, which are both demonstrating strong launch trajectories. Turning now to neuroscience, where total revenues were more than $2.3 billion up 16% on an operational basis. Vraylar is demonstrating robust performance. Sales were $875 million up 16.6% on an operational basis, reflecting continued new prescription growth in both bipolar disorder and adjunctive MDD. Within migraine, our leading oral CGRP therapies contributed $445 million in combined revenue this quarter, reflecting growth of approximately 22%, as we continue to see increasing prescription demand for both Ubrelvy and Qulipta. Global Botox Therapeutic sales were $848 million reflecting strong performance in chronic migraine as well as the other approved indications. Finally, we are very excited for the recent U.S. approval of Vyalev, a transformative therapy for patients with advanced Parkinson’s disease, who are uncontrolled on oral therapy alone. As a less invasive, non-surgical delivery system that can provide meaningful improvements in on-time and off-time, we believe Vyalev has the potential to significantly expand use beyond current device aided therapies. Sales in the U.S. for Vyalev are expected to ramp gradually over the next several quarters as we work to establish the appropriate Medicare coverage and benefit determination. At the same time, we are very encouraged by the interest in uptake internationally, where we have approval now in 35 countries with several thousand patients already on treatment. Longer-term, we anticipate peak sales of Vyalev to exceed $1 billion. So overall, I’m very pleased with the continued commercial execution and performance across the therapeutic portfolio. And with that, I’ll turn the call over to Carrie, for additional comments on aesthetics. Carrie? Carrie Strom: Thank you, Jeff. Third quarter global aesthetics sales were more than $1.2 billion representing growth of 1.8% on an operational basis. In the U.S, aesthetic sales of $791 million increased by 3.9%, driven by growth from Botox Cosmetic as well as other brands across our broad portfolio. U.S. Botox Cosmetic sales were $414 million an increase of 6.5% versus the prior year. Favorable pricing dynamics and facial toxin market growth more than offset modest share erosion. Botox Cosmetics remains the clear market leader. U.S. Juvederm sales were $105 million. Juvederm’s market-leading share was consistent with last year and the overall filler market was roughly flat to the prior year. While the U.S. facial injectable market remains largely stable, growth is below historical rates. As a result, there is a reluctance from customers to maintain traditional toxin and filler inventory levels. Based upon the relatively higher price point of filler procedures in a still challenging U.S. economic environment, Juvederm is more impacted by this dynamic, which can be seen in third quarter results. Internationally, aesthetic sales were $448 million reflecting a decline of 1.6% on an operational basis. Within China, the economic dynamics that weighed on our results during the first half of the year have continued to impact consumer spending. This has created challenging aesthetic market conditions that have been particularly impactful to Juvederm’s performance. Primarily due to this circumstance, we are moderating our Juvederm sales outlook for the year. We are encouraged by the recently announced government stimulus in China. We will continue to monitor for any further developments and how it could positively impact consumer discretionary spending and aesthetic market growth. Although the current dynamics in China are challenging, its potential remains attractive and we are committed to bring innovation to this market that will drive long-term growth. Along those lines, in China, we recently received approval for the Botox Cosmetic indication in masseter muscle prominence, marking the first toxin in the world to have this indication. This approval enables us to market and train to this important treatment option that addresses a top aesthetic concern among many Asian patients. In the U.S., we are pleased that we received FDA approval for the use of Botox Cosmetic to treat platysma bands. This approval positions Botox as the only cosmetic toxin with four distinct indications and enables us to market and train beyond the face for the improvement of neck and jawline appearance. We also remain excited about the opportunity for BoNT/E. Based upon its rapid onset and short acting profile, BoNT/E has the potential to activate new patients that are hesitant to try facial toxins, driving long-term market expansion. Looking to the future, we continue to see significant growth potential for our aesthetics portfolio based upon low market penetration rates, our commitment to introduce novel treatments, our strong customer relationships and our position as the global aesthetics leader. With that, I’ll turn the call over to Roopal. Roopal Thakkar: Thank you, Carrie. Starting with immunology, where we recently began our Phase 2 Crohn’s disease platform study, which will evaluate Skyrizi in combination with several other novel biologics. This study will initially look at combinations of Skyrizi with our anti-IL-1α/β bispecific lutikizumab and our novel anti-α4β7 antibody ABBV-382. We are planning to include additional novel biologics in the future. Our approach in immunology has been to pursue therapies that are well differentiated and have the potential to elevate standard of care. We have clearly achieved this with Rinvoq and Skyrizi across multiple indications, including Crohn’s disease and ulcerative colitis. As we think about how the IBD market will evolve, we view dual mechanism approaches as having the greatest potential to achieve levels of efficacy that are above current standard of care. We are very excited about the potential for these combination therapies in IBD and we look forward to sharing updates as the data mature. In Oncology, we continue to make very good progress across all stages of our hem and solid tumor pipeline. In the area of solid tumors, we recently submitted our application to the FDA for accelerated approval of Teliso-V as a monotherapy in patients with previously treated c-Met overexpressing EGFR wild type non-squamous non-small cell lung cancer. Once approved, Teliso-V will become the first c-Met targeted ADC to enter non-small cell lung cancer, a segment with limited options and where patients tend to have a very poor prognosis, especially if their tumors express c-Met. We anticipate an approval decision in the first half of 2025. In the quarter, we also received a positive CHMP opinion recommending Elahere for the treatment of platinum resistant ovarian cancer in patients with high expression of FRα and treated with up to three prior therapies. This decision was based on the positive Phase 3 MIRASOL trial where Elahere demonstrated an overall survival benefit and significantly reduce the risk of cancer progression. We anticipate an approval decision in Europe in the fourth quarter. At the recent ESMO Congress we presented new Phase 1 data for ABBV-400 in advanced non-small cell lung cancer and gastroesophageal cancer. Early efficacy data from the lung cohort are promising with an objective response rate of 48% across all patients in the study and response rates ranging from 60% to 78% in patients with overexpressed c-Met. We are very pleased with the level of activity we’re seeing from our next generation c-Met ADC, which compares favorably to Teliso-V, where we’ve seen objective response rates ranging from 23% in medium c-Met expressors to 35% in patients with high c-Met expression. 400 has the potential to expand our c-Met portfolio into earlier lines of therapy and lower levels of c-Met expression in lung cancer. Similarly, in patients with advanced gastroesophageal cancer, 400 demonstrated promising activity with an objective response rate of 29% across all patients. This compares well against combination and single agent chemotherapy, which are the standards of care for patients in second line and third line of therapy respectively. Based on these encouraging preliminary data, we plan to begin Phase 2 studies for 400 in both non-small cell lung cancer and gastroesophageal cancer. Recall, we’ve also advanced 400 in late line colorectal cancer and we remain on-track to begin a Phase 3 study later this year. In the area of hematologic oncology, we received approval in Europe for Tepkinly as a monotherapy treatment for patients with relapsed refractory follicular lymphoma after two or more lines of therapy. Epcoritamab is now the only T-cell engaging bispecific approved in the U.S. and Europe to treat both follicular lymphoma and diffuse large B-cell lymphoma. Moving to neuroscience, we recently received FDA approval for Vyalev as the first subcutaneous 24 hour infusion of levodopa based therapy for the treatment of motor fluctuations in adults with advanced Parkinson’s disease. Our novel subcutaneous levodopa, carbidopa delivery offers meaningful benefits over current treatment options and others that are in development. Vyalev delivers significant improvements in on-time and off-time with a non-surgical 24 hour delivery system. It can deliver high levodopa doses similar to the amount provided by Duopa and it doesn’t require combination with oral drugs to achieve efficacy. We’re extremely excited to bring this transformative therapeutic option to patients in the U.S. We also recently announced positive topline results from the Phase 3 TEMPO-1 trial, which evaluated fixed doses of monotherapy tavapadon in early Parkinson’s disease. In the study, both doses of tavapadon met the primary endpoint demonstrating a significant reduction in the severity of Parkinson’s disease symptoms compared with placebo at week 26, as measured by decreases in the combined scores for Parts 2 and 3 of the Unified Parkinson’s Disease Rating Scale. Key secondary endpoints were also met in this study. We are very pleased with the emerging profile for tavapadon, which shows it is generally safe and well tolerated and it can drive strong efficacy as a monotherapy in early Parkinson’s and as an adjunctive treatment in patients with more advanced disease. Results from the two Phase 3 studies thus far look favorable compared to other dopamine agonists on the market. And, we believe tavapadon has the potential to become an important new treatment option as a monotherapy for Parkinson’s patients as well as an adjunct to oral levo/carbidopa. We expect to see results from TEMPO-2 later this year, which is our Phase 3 monotherapy study evaluating a flexible dose of tavapadon. Results from our long-term safety study, TEMPO-4 are expected next year. As Rob mentioned, we remain on track to share data from the two emraclidine pivotal studies in the fourth quarter. We also continue to invest in external innovation to strengthen our neuroscience pipeline. We recently announced two deals in this area, including an expanded collaboration with Gedeon Richter to develop novel targets for neuropsychiatric conditions and the acquisition of Aliada brings an anti-pyroglutamate Aβ antibody, which uses a unique blood brain barrier crossing and amyloid aggregate clearing technology. Aliada’s lead antibody has been able to achieve encouraging levels in cerebrospinal fluid with an extended half-life and the potential to be delivered subcutaneously. This molecule could become a best-in-class treatment for Alzheimer’s disease. Aliada’s novel technologies for enabling therapeutics to access the central nervous system also have the potential to be used with other programs across our neuroscience pipeline. In aesthetics, we recently received approval for Botox in the U.S. for moderate to severe platysma bands, marking the first global approval in this indication for any neurotoxin. There is currently a lack of non-surgical treatments available to improve the appearance of prominent platysma bands. And, we believe Botox will represent an important new treatment option for patients who are looking to reduce the appearance of vertical neck bands and improve jawline definition. In our novel toxin portfolio, we remain on-track to submit our regulatory application for BoNT/E around the end of this year. Our rapid onset short acting toxin has a highly differentiated clinical profile and once approved will offer patients a novel option compared to currently available neurotoxins. So in summary, this has been a very productive year thus far for our R&D organization and we are pleased with the progress we’ve made advancing our broad pipeline. With that, I’ll turn the call over to, Scott. Scott T. Reents: Thank you, Roopal. Starting with our third quarter results, we reported adjusted earnings per share of $3 which is $0.10 above our guidance midpoint. These results include a $0.04 unfavorable impact from acquired IPR&D expense. Total net revenues were nearly $14.5 billion reflecting robust growth of 4.9% on an operational basis, excluding a 1.1% unfavorable impact from foreign exchange. Our ex-Humira growth platform, which covers more than 80% of AbbVie’s total sales, delivered reported growth of nearly 18%, once again exceeding our expectations. The adjusted operating margin ratio was 46.7% of sales. This includes adjusted gross margin of 84.4%, adjusted R&D expense of 14.2%, acquired IPR&D expense of 0.6% and adjusted SG&A expense of 23%. Net interest expense was $591 million. The adjusted tax rate was 16.2%. Turning to our financial outlook. We are raising the midpoint of our full-year adjusted earnings per share guidance by $0.15 and now expect adjusted earnings per share between $10.90 and $10.94. Please note that this guidance does not include an estimate for acquired IPR&D expense that may be incurred beyond the third quarter. We now expect total net revenues of approximately $56 billion, an increase of $500 million. At current rates, we expect foreign exchange to have a 0.7% unfavorable impact on full-year sales growth. This revenue forecast includes the following updates to select key products and therapeutic areas. We now approximate Skyrizi global sales of $11.5 billion, an increase of $500 million due to continued strong performance across all approved indications. Rinvoq total revenue of $5.8 billion an increase of $100 million reflecting robust uptake in IBD. U.S. Humira total sales of $7.4 billion a decrease of $400 million reflecting more Humira molecule volume moving to other novel mechanisms, including Skyrizi and Rinvoq. Imbruvica totaled revenue of $3.3 billion an increase of $200 million reflecting higher persistency rates for existing patients. Venclexta total sales of $2.6 billion an increase of $100 million reflecting momentum in both U.S. and international markets. Aesthetics global revenue of $5.3 billion a decrease of $200 million almost entirely due to lower Juvederm volume which continues to be impacted by challenging economic conditions in key markets. Vraylar total sales of $3.3 billion a decrease of $100 million reflecting continued strong prescription demand partially offset by modestly unfavorable channel mix. And for Botox, we now expect global revenue in the therapeutic space of $3.3 billion an increase of $100 million reflecting robust demand across all indications. Moving to the P&L for 2024. We continue to forecast a full-year adjusted gross margin of approximately 84% of sales, adjusted R&D investment of 14%, adjusted SG&A expense of 23.5% as well as an adjusted operating margin ratio of roughly 44.5% of sales, which includes a 2.1% unfavorable impact from acquired IPR&D expense. Turning to the fourth quarter. We anticipate net revenues approaching $14.8 billion. At current rates, we expect foreign exchange to have a neutral impact on sales growth. We expect adjusted earnings per share between $2.94 and $2.98. This guidance does not include acquired IPR&D expense that may be incurred in the quarter and excludes any potential impact from the recently announced acquisition of Aliada Therapeutics. Finally, AbbVie’s robust business performance continues to support our capital allocation priorities. Our cash balance at the end of September was nearly $7.3 billion and we generated more than $11 billion of free cash flow, which includes approximately $1.5 billion of Skyrizi royalty payments in the first nine-months of the year. This free cash flow fully supports a strong and growing quarterly dividend, which we are increasing 5.8% to $1.64 per share, beginning with the dividend payable in 2025, as well as debt repayment, where we remain on-track to pay down the roughly $7 billion of maturities this year and anticipate achieving a net leverage ratio of two times by the end of 2026. Our strong cash flow also provides capacity for additional business development. We have executed more than a dozen early stage deals so far this year, and we continue to assess external innovation across all of our key growth areas. In closing, AbbVie has once again delivered strong top and bottom line results. I’m very pleased with the momentum of our ex-Humira growth platform, including continued robust performance from Skyrizi and Rinvoq, which further supports AbbVie’s long-term outlook. With that, I’ll turn the call back over to Liz. Liz Shea: Thanks, Scott. We will now open the call for questions. We are aware of a peer earnings call that begins at 9:00 A.M. Central, so we will do our best to wrap up our Q&A right around the top of the hour. So, in the interest of hearing from as many analysts as possible, please limit yourself to just one question. Operator, first question please. Operator: Thank you. Our first question comes from Chris Schott with J.P. Morgan. You may ask your question. Chris Schott: Great. Thanks so much for the question, and congrats on the results. My question was really just centered around 2025 and just some preliminary outlook there. I guess a specific question, you mentioned Humira volumes are maybe shifting over to newer drugs. You comment at all about just in terms of where the street sits currently with Humira. I think consensus number is about $6.8 billion. Is that a reasonable forecast, or is that something you could see higher erosion given what’s happening with Humira? And, then bigger picture kind of tied to that, the mid-single-digit topline growth, it sounds like the trends you’re seeing here may be a net positive where maybe Humira volumes are declining, but that’s largely moving over to Skyrizi and Rinvoq. I just want to get some context of is that mid-single-digit target still a reasonable one to think about for AbbVie next year? Thank you. Robert A. Michael: Thanks for the question, Chris. This is Rob. I’ll start and then I’ll have Jeff supplement. So yes, we are very confident in that robust mid-single-digit growth, both topline, bottom line for 2025. I think you’ve interpreted correctly that the trends we’re seeing are net positive and that we’re seeing over performance from Skyrizi and Rinvoq more than offsetting the dynamics with Humira. And so, as we look at consensus, that’s probably not reflected. So, I think it’s fair to say, there’s a shift that’s required there, but we’re very pleased with the strong uptake for Skyrizi and Rinvoq. As I mentioned in my remarks, we have now delivered guidance increases of $1.3 billion for Skyrizi and Rinvoq in total. We’re seeing tremendous momentum, particularly with the IBD indications across really all indications, but particularly in IBD. And, we are starting to see the dynamic with the overall Humira molecule, where there is the switching that we’re seeing now to other mechanisms, including Skyrizi and Rinvoq, which is a long-term very positive benefit. So, as we look at the business, we’re very well-positioned. Essentially two years after the U.S. Humira LOE, we’ll be returning to robust top line and bottom line growth, and really performance across many parts of the business, not just Skyrizi and Rinvoq. You’ve seen us perform very nicely in oncology. We’ve obviously over performed our expectations in oncology, very pleased with the earlier returns on Elahere. Venclexta is performing exceptionally well. The guidelines changes in Europe are positive as we think about combination opportunities with BTK inhibitors. So, Venclexta is going to be strong, Epkinly is performing very nicely as well. And, then when I look across the neuroscience franchise, Vraylar is a strong grower. We’re very pleased with the migraine portfolio. Obviously, very excited about Cerevel and doing a number of deals now on the early pipeline both with Gedeon Richter and Aliada that really fortifies the long-term view for neuroscience as well. And, then with aesthetics, while it’s below our expectations for this year, obviously the economic conditions have dictated that. We still have tremendous confidence in the long-term outlook for that business. But, as we look at 2025, we’re very confident in our ability to return to that robust mid-single-digit growth. Jeffrey R. Stewart: Yes. Thanks, Rob. And, I’ll just add a little bit more flavor. It’s Jeff. So, we saw this trend start to emerge in terms of this compression of the, let’s say, the ADAM molecule or the ADAM market, the Humira plus biosimilars, just prior to the CVS event and then it accelerated over Q2. And again, we saw it throughout Q3. So, that’s why we’ve adapted our approach here. Other than this dynamic, the biosimilar dynamics are playing out really exactly as we anticipated. And you can see this compression in the IQVIA data. So, really the shrinking of the Humira or the ADAM market is something that’s quite clear. It’s a little difficult quantify over time with full precision, but we can see that the molecule continues to decline sequentially and we continue to see strong share gains as I highlighted for Skyrizi and Rinvoq. So, this incremental flow from the molecule compression, it’s clearly a contributing factor to some of the over performance that we saw in Q2 and Q3, but it’s really only one of several. We’ve also had significant incremental investments in the consumer space, the sales force approaches we’ve taken, Chris, the integration of the head-to-head data I talked about. And, certainly now we’re starting to see the impact of the UC launch. So, when we put all that together, we think that the dynamics are net-net quite positive overall. And, as Rob said, we’re still looking good for 25%. Liz Shea: Thank you, Chris. Operator, next question please., Operator: Thank you. Our next question comes from Mohit Bansal. Your line is open. You may ask your question. Mohit Bansal: Awesome. Thank you very much for taking my question. Just wanted to touch upon the trial you are running head-to-head against Entyvio. Could you help us understand based on pre-clinical or early data, what gives you confidence there? And, are you looking at non-inferiority or potential superiority over Entyvio there? Thank you. Roopal Thakkar: Mohit, it’s Roopal. I’ll take that one. So, when we look at the data, in particular, I think Jeff highlighted this, in ulcerative colitis with Skyrizi in this naive patient population, this is a patient population that hasn’t seen biologics or other advanced therapies like JAK inhibitors. The endoscopic improvement and this is in label was 76% in the maintenance portion of this. So, it was quite high, in fact, higher than what we’ve observed even with Rinvoq. So that gave us a good amount of confidence that we have the potential to differentiate with all other assets. You heard about the Skyrizi versus, ustekinumab head to head in Crohn’s disease, but this one gives us a unique opportunity there to go head to head with vedolizumab, especially looking at endoscopic improvement. So, for that particular endpoint, you asked about the type of endpoint. There we would think about superiority, because of it being an objective endpoint. Sometimes with symptoms like clinical remission, these could bounce around. That may be one where we consider as non-inferiority. But I would say endoscopic improvements in the field are now believed to be highly predictive of long-term outcomes. So, that would be how we’re looking at this, Mohit. Mohit Bansal: Thank you very much. Appreciate it. Liz Shea: Thanks, Mohit. Operator, next question please. Operator: Thank you. And this question comes from Vamil Divan with Guggenheim Securities. You may ask your question. Vamil Divan: Great. Thanks for taking the question. So, yes, I’ll give you just one on emraclidine. Just getting a lot of questions from investors kind of leading up to that data release. So, maybe you can just the level set expectations on what you’re hoping to see from the data, especially obviously now we have the approval from Bristol with [Coventry] (ph). Just kind of what are you thinking in terms of efficacy safety profile relative to that competitor? And also on the liver testing requirement that they had at initiation, is that something you’d expect as well based on your data? And then finally just tying to that just in terms of the data release, do you expect to get one press release or do you think you’re combining both studies? Or should we still expect the two separate releases? Thank you. Roopal Thakkar: Yes, Vamil, it’s Roopal. I’ll take that one. So, a couple of things. Maybe starting with what we’ve observed with the approval. So, we were encouraged by the lack of a boxed warning, meaning there’s a recognition that this is a unique mechanism of action looking specifically at the muscarinic class. So, we were pleased to see that. I think what was notable for us was the GI adverse events, including how that would play out in terms of longer-term tolerability. Also anticholinergic effects, bladder retention that was something I guess we did not anticipate. You mentioned hepatic monitoring that was something that we didn’t anticipate. The other thing that was notable is along with the BID dosing, there is a food effect. So, you have to wait a certain period amount of time when you eat and after you eat when you can take the pill. So, when we think about our profile, we continue to be encouraged with emraclidine being a single agent, once a day, no food effect. We don’t see the extent of GI effects. We don’t and we have not observed in the Phase 1b data any bladder issues. And when we had looked at that 1b data, we didn’t see any hepatic issues, so we don’t anticipate any type of laboratory monitoring. We were also thinking about neurodegeneration associated psychosis and these patients are typically older and likely more sensitive to anticholinergic effects. So, we continue to see an opportunity in that patient population as well. So, we’ve stated that the data will read out here in the next couple of months in the quarter. The same team is working on wrapping up these two studies. So, depending on how far apart the data are, we’ll probably determine as you stated, is it 1 or 2 press releases. It’s a little early right now for us to tell you is it going to be 1 or 2. But if they’re going to be close together, it’s potentially going to be 1. Liz Shea: Thank you, Vamil. Operator, next question please. Operator: Thank you. Our next question comes from Terence Flynn with Morgan Stanley. You may ask your question. Terence Flynn : Hi, thanks for taking the question. Maybe a two part for me. Just wondering if you can I’m assuming contracting is now wrapped up, if you can comment at all on how to think about Skyrizi and Rinvoq, formulary positioning and pricing just high level for 2025. Thank you. Jeffrey R. Stewart: Yes. Hi, it’s Jeff. So yes, contracting is very, very close to wrapping up. We have a few more nuances and so typically that may take another month or so. Overall, we’re making very good progress on contracting next year. So, in terms of what we’ve highlighted in the past is we do not anticipate any material change for Skyrizi and Rinvoq in terms of the access for next year across Medicare or the commercial plans. We have quite high, very broad access and we assume that will continue. In terms of what we’ve highlighted to anticipate, we’ve said that we do have over our near-term in LRP sort of a negative pricing environment, but it’s modest. It’s nothing like we saw many quarters ago where we had seven indications. So, we said from a rebate perspective, low single digit changes is a reasonable assumption that we feel confident in despite we’re not fully complete, I think that’s a fair assessment at this point. Liz Shea: Thanks, Terence. Operator, next question please. Operator: Thank you. Our next question comes from Chris Shibutani with Goldman Sachs. You may ask your question. Chris Shibutani, your line is open. You may ask your question. Chris Shibutani: Apologies, I was on mute. Thanks for the question. All the comments you’ve made about Skyrizi or Rinvoq and the molecule switching are very helpful. Just curious as we think on the forward about other potential mechanisms and modalities in particular. I think we have competitor oral data that’s coming up. Interested to hear your thoughts in terms of that modality difference as well as, how you might rank your optimism for some of the new mechanisms of action? I believe you have a TL1A as well in your pipeline though earlier stage. Thank you. Roopal Thakkar: Hi, Chris. It’s Roopal. I’ll take that one. With respect to the oral, I’ll take us back to the Skyrizi head-to-head that occurred with apremilast, which is also an oral. The data were substantially higher from an efficacy standpoint for Skyrizi as was the tolerability along with when we asked patients what did they prefer, they actually preferred quarterly subcutaneous dosing. So, I would think about it that way as well. Now the question would be, it’s a similar mechanism, could the efficacy be better than what has been observed with a apremilast in psoriasis? Well, what we saw in the Phase 2 data, my recollection still is that Skyrizi is a full 50% higher when it comes to full skin clearance at a PASI 100. And that’s where the bar is now at PASI 90 and PASI 100. So, we still see an efficacy advantage. Also the data I’m sharing are Phase 3 Skyrizi data. The data that we saw for the oral 23 was from Phase 2. So, there is a reasonable potential that the efficacy data tend to settle down when you go to a broader patient population, especially those that have had longer standing disease or have seen other therapies like other biologics. So, we continue to feel very good and optimistic about our profile versus any emerging competition. Also, we think about our assets from a global standpoint. And when you think about majority of the countries, they are very driven by efficacy to gain access. And in the oral space, we don’t really see it across the globe. Maybe there’s a couple of countries. I think Jeff has mentioned the U.S., but that space may be referred to as a pre biologic space. So maybe more of an influence on the TIK2 or on a apremilast is how we see it. In terms of other mechanisms that we like, as I mentioned, we like anti L23 the way it’s delivered with Skyrizi, the depth of response, the high durability and the convenience with quarterly dosing. If we can couple that with other assets as part of our combination approach, we think that’s going to be extremely competitive in the future. Mechanisms like TL1a, we think are going to be important, especially from a combination approach, which we have one internally. We think the ulcerative colitis data are encouraging, but from a monotherapy standpoint, not differentiated, especially when you look at the Skyrizi data that I mentioned earlier and Rinvoq. And then in Crohn’s, something like TL1a, we think it really does need a combo. So that’ll be part of our platform along with our novel alpha 4 beta 7, we think that’s also a good combo. And then we’ve also provided very strong data in hidradenitis suppurativa with our IL-1 alpha beta lutikizumab. And we’ve seen some preclinical signals that IL-1 beta could be a driver of disease and resistance to other biologics. So, lutikizumab will also be part of the combo in our IBD platform. So, that’s just some of the mechanisms that we’re excited about. There are several others that are early in the pipeline and we will give you more information about those as the data mature. Chris Shibutani: Thanks very helpful. Liz Shea: Thanks, Craig. Operator, next question please. Operator: Thank you. Our next question comes from Trung Huynh with UBS. You may ask your question. Trung Huynh: Hi, guys. Thanks for taking my question. Just on the aesthetics business, in the Q&A you did mention that you still have a tremendous amount of confidence hitting that longer term guide here. I’m curious on how dependent this is on the economic environment getting better and getting better quickly. So, you’ve moderated your Juvederm outlook this year because it’s not being good. If next year is another challenging economic year, could we see that $9 billion in 2029 being moderated or even pulled? Just what’s giving you confidence? Thank you. Robert A. Michael: Thanks for the question. This is Rob. I’ll take that one. So, as we think about the long-term guide, which is greater than $9 billion by 2029, you need to believe that you can have essentially a compound growth around 11% to get there. If we look at the historical growth of this market, it’s been, let’s say, call it low double digits, low teens. As we look at it going forward, we think probably a more prudent assumption is when we see the recovery, something more in the high single digits, right? So, you need something beyond just the market recovery to get there. And when we look at our the innovation that we’re bringing particularly with the short onset, short acting or fast onset short acting BoNT/E that we expect to launch in ‘26. That could really transform the market, because if you think about the number one barrier for patients is fear of an unnatural look. That could really unlock a part of the market that’s dormant right now, plus it could also lead to share gains. And so I think we need to see, 1, how the market recovers, I would say, 2025 and 26 and then ultimately see how the BoNT/E launch ramps in ‘26. At that point, we’ll have a better sense of the $9 billion as we sit here today. If you believe that the market will recover to high single digits and we have a lot of confidence in BoNT/E, we still believe we can get there, which is why we’re not updating that guidance. But I would expect us to reflect more on that more likely in the ‘26 timeframe than in ‘25. Liz Shea: Thanks, Trung. Operator, next question please. Operator: Thank you. Our next question comes from Geoff Meacham with Citi. You may ask your question. Geoff Meacham: Good morning, everyone. Thanks for the question. I had a bigger picture one for Rob. So, when I look at your therapeutic areas, eye care stands out as one that’s pretty modest contributor today and also down the road. How would you rank that business strategically? And then related when you look at BD going forward, are there other TAs that you’re looking at that could be additive, just thinking specifically maybe metabolic or cardio? Thank you. Robert A. Michael: Thanks for the question, Geoff. So, this is Rob. So yes, I mean, our main focus is our five key growth areas, which includes eye care, includes immunology, oncology, neuroscience, aesthetics and eye care. And we participate in large markets with high unmet need that have great growth potential. And within those five verticals, we’re building depth across 24 core areas that does include eye care as well. When you think about diabetic retinopathy, wet AMD, prescription dry eye medications. And so eye care does play an important role, albeit it’s not as high of a growth driver as the other four verticals, but it is part of our five. And that ultimately guides both our internal R&D investments as well as our BD efforts, which as you know, continue to be very active. So, far this year, we’ve executed 15 deals along those lines, really focused more on early stage opportunities to drive growth in the next decade. So that’s our primary focus. Now if we see an opportunity for differentiation in a large market with high unmet need like metabolics, we would consider pursuing it, especially if we can help drive growth in the next decade. But again, it would be more opportunistic. We have to see differentiation and right now it’s not our primary focus. But again, we’re open to more sources of growth for the next decade if we see differentiation that we can create value. And we certainly have the financial wherewithal to pursue those opportunities. Liz Shea: Thanks, Geoff. Operator, next question please. Operator: Thank you. Our next question comes from James Shin with Deutsche Bank. You may ask your question. James Shin: Good morning, guys. Thanks for taking our question. For emraclidine’s readout, I think there’s a question on how much erosion could be anticipated. I know you mentioned that the team the same team that was originally working on the Phase 1b is wrapping up studies and so forth. But there’s been some other data that has copied some of Cerevel strategies such as high baseline pans and so forth and placebo effect was still kind of surprisingly higher than it should be. Is there any insight on managing this placebo effect? Thank you. Roopal Thakkar: Thanks, James. It’s Roopal. When we did our thorough diligence, that was a major question that we and the broader team had. So, you bring up a good point. Some things that we observed in those two studies that will be the pivotal readouts were what Cerevel was strategically doing. One thing was limiting the number of countries, limiting the number of sites, central review for eligibility criteria, training of raters, certifying those raters, recertifying raters, monitoring blinded data with respect to site activity. So, I think those are important factors that could drive placebo in either direction. So, what we observed was, we would say a good control or at least the best one could do to manage placebo responses. So, it’s hard to know what if there’s any erosion until we see the data. But the effect size that we did see in the Phase 1b was a little over 12 points. So, we think that was a strong separation. And even if that were to go down a little bit, we still feel that based on the safety profile and tolerability profile, this could still be very, very competitive even if we saw a droppage in some point on the efficacy side. Liz Shea: Thanks, James. Operator, next question please. Operator: Thank you. Our next question comes from Carter Gould with Barclays. Your line is open. You may ask your question. Carter Gould: Great. Good morning. Thanks for taking the questions. I was hoping to follow-up a little bit on the Aliada acquisition, sort of what differentiation you saw over some of the other enhanced brain delivery kind of approaches there that gave you confidence. And maybe we’ve seen AbbVie take a number of shots on goal across Alzheimer’s here, just seems pretty central to your longer term neuroscience portfolio. Can you maybe just again put that in some broader context as you think about the TA strategy longer term? Thank you. Roopal Thakkar: Sure. It’s Roopal. I’ll take that. Yes, we’ve been investing for a number of years in the space. And in addition to the recent deal, we’ll have an option readout with Alector and TREM2 coming up. We have SV2A molecule that would look at cognition and other symptoms. Emraclidine could participate in that space from an Alzheimer’s psychosis standpoint. We have other pipeline assets that are looking at tau, intracellular and even an approach looking at extracellular tau. We did have our own A beta monotherapeutic antibody, which we did read out. It did look good, but it wasn’t fully differentiated. And moving on to the Aliada deal, what we see there is the ability to access the CSF at what we would say at this stage at higher concentrations than maybe other competitors. So, we think that’s a good thing. The other aspect that we like is an extended half-life. So that could lead to convenient dosing. And if this approach plays out than one could consider having subcutaneous dosing even getting out to monthly. And if the efficacy is high because of deeper brain penetration that could result in lower levels, faster and a better able to see cognition benefit in a year or 18 months. So, those are some of the benefits that we would see. The other benefit would be getting to the parenchymal tissue more broadly and that could have a reduction in ARIA, which is probably what is disallowing this to really take off. It’s very challenging to take an elderly family member to get multiple scans and worry about them having stroke like symptoms. So, that would be something else we believe we can address with this asset of having a strong safety profile, tolerability, ease of onboarding and high efficacy and ultimately strong benefits on cognition. Robert A. Michael: And this is Rob. I’ll just add on here as we think about strategically about the neuroscience franchise. I mean, I think about it as having really four main segments, psychiatry, migraine, Parkinson’s and then neurodegeneration. And if you look at what we’ve done to build out the long-term growth outlook for this franchise, obviously, in psychiatry between Cereval, Gedeon Richter, we also had the early stage opportunity with Gilgamesh, really investing in longer term growth in psychiatry. We have actually a very strong franchise in migraine with the oral CGRPs as well as Botox Therapeutic. In Parkinson’s, now the launch of Vyalev, which is performing very nicely outside the U.S., and we expect will also perform nicely in the U.S. The early Phase 3 data we’ve seen so far for davapidone, the mitokinin disease modifying approach, it’s early and Parkinson’s is another investment we’ve made. And then in Alzheimer’s now with Aliada is another I’d say, long-term investment we’re making to grow the neuroscience franchise. There’s also adjacencies like ALS, MS that we’re interested in that we have some partnerships that we’ll continue to pursue. So, we see neuroscience as an important long-term growth driver for the company. We’re obviously investing heavily across a number of areas. But we think about really in those four categories, and so it’s one that we’re obviously very excited about the future prospects for. Liz Shea: Thanks, Carter. Operator, next question please. Operator: Thank you. Our next question comes from Steve Scala with Cowen. You may ask your question. Steve Scala: Thank you so much. I’m a bit surprised that how Cerevel was such a focus in the prepared remarks given the pending emraclidine data, which very much will color views of the Cerevel acquisition. Should we conclude you have increased confidence and or insight into the pending data? And related to that, KOLs seem to be looking for an effect size of 0.6. But based on what was just said, that doesn’t even seem to be a possibility. So, any thoughts would be appreciated. Thank you. Robert A. Michael: This is Rob and Roopal can take the second part. I’ll take the first part of the question. So, Steve, in the prepared remarks, we were talking about the quarter. We obviously closed the Cerevel transaction in the quarter. That’s a significant event. We also did see the Phase 3 trial results for tavapadon, so that was important to comment as well. As we’ve mentioned, we expect the two pivotals from emraclidine to read out in the fourth quarter. So, I wouldn’t read too much into it other than it was an important event to highlight in the quarter. Roopal Thakkar: Yes. And it’s Roopal. I agree. We have two positive Phase III studies with tavapadon. And in the oral space, I don’t know if we’ve seen a new mechanism that could have this type of approach in a very long time. So, it is important to discuss that because the unmet need continues to be very high and Parkinson’s is a place where we believe we can meaningfully participate in. On the effect size question, when we look at the 1b data, it was more than a 12 point differential. So we have observed sometimes a decrement and the question was around if placebo responses move up a little bit. So that being said, we still think we can maintain a very strong effect size coupled with the safety profile. Remember that the issue here in therapy isn’t just about efficacy, it’s about maintaining these patients on a drug that they can tolerate. And the majority of these patients don’t last very long and cycle through these assets and even stop these, especially atypicals without even letting their physicians know and then go on to have a flare and end up in the hospital. So, we think about this as a benefit, risk and tolerability profile and from a weight, metabolic, motor symptoms, sedation, these are major problems with atypicals. And with something like emraclidine, we feel that we can still fully differentiate. So, I don’t know if I’d read into any concerns other than maybe seeing an effect that’s slightly different than what we saw in Phase 1b. But beyond that, we think this could still be very competitive. Liz Shea: Thanks, Steve. Operator, we have time for one final question. Operator: Thank you. Our final question comes from Luisa Hector with Berenberg. You may ask your question. Luisa Hector: Hello. Thanks for taking my question. Just on Vraylar, could you expand a little on the comments of the channel mix pressure in Q3 and how that will play out as we move forward? And perhaps just a quick comment on the extension of the collaboration with Gedeon Richter and why you went down that route? Thank you. Scott T. Reents: Luisa, this is Scott. I’ll take the question regarding Vraylar. So, essentially it was a channel mix change. It was slight. I would tell you that really kind of had accumulated over the course of the year. And that’s why we made, we decided it made sense to make the adjustment. So, as that channel mix change, we saw a little bit of negative price as a result of that. So, we took down the regular guidance by $100 million. Now, I would note in neuroscience in totality that was offset by the raise in Botox Therapeutics. So, neuroscience in our therapeutic or growth area guide is stable. So, maybe the second question will go to Roopal. Roopal Thakkar: Yes. It’s Roopal. We expanded further. We’ve had strong partnership. They’re a terrific organization. We have a follow on to Vraylar that’s more D3 meaning that will start entering the clinic quite soon in Phase II looking at bipolar depression and MDD as well as generalized anxiety disorder. As Rob described as part of our neuroscience strategy, psychiatry is a big part of that and having a deeper relationship with Gedeon Richter will allow us to have potentially even more assets in depression, in bipolar disorder, in schizophrenia and anxiety and potentially other adjacent indications that we continue to be interested in because the unmet need continues to be very high. Liz Shea: Well, thank you, and thanks, Shirley. That concludes our conference call today. If you’d like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. Operator: Thank you. And this concludes today’s call. We thank you for your participation. And at this time, you may disconnect your lines.	[ { "speaker": "Operator", "text": "Good morning, and thank you for standing by. Welcome to the AbbVie Third Quarter 2024 Earnings Conference Call. All participants will be in a listen-only until the question-and-answer portion of this call. [Operator Instructions] Today’s call is being recorded. I would now like to introduce Ms. Liz Shea, Senior Vice President, Investor Relations." }, { "speaker": "Liz Shea", "text": "Good morning and thanks for joining us. Also on the call with me today are Rob Michael, Chief Executive Officer; Jeff Stewart, Executive Vice President, Chief Commercial Officer; Roopal Thakkar, Executive Vice President, Research and Development, Chief Scientific Officer; Scott Reents, Executive Vice President, Chief Financial Officer; and Carrie Strom, Senior Vice President, AbbVie and President, Global Allergan Aesthetics. Before we get started, I’ll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today’s conference call, non-GAAP financial measures will be used to help investors understand AbbVie’s business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we’ll take your questions. So with that, I’ll turn the call over to Rob." }, { "speaker": "Robert A. Michael", "text": "Thank you, Liz. Good morning, everyone, and thank you for joining us. AbbVie is performing exceptionally well, and I’m extremely pleased with the execution against our strategic priorities, including continued double-digit sales growth from our ex-Humira platform, the closing and integration of Cerevel Therapeutics and the progress we are making to build and advance a compelling pipeline of innovative medicines. Turning to our results, AbbVie’s diversified portfolio delivered sales that were $260 million above our expectations and reflect robust mid-single-digit operational sales growth. Our ex-Humira platform drove this over achievement, including growth of nearly 18%. The momentum of Skyrizi and Rinvoq is especially impressive with combined sales expected to exceed $17 billion this year, which is $1.3 billion above our initial expectations. And, we see substantial opportunity for continued strong growth well into the next decade. Several other key products also delivered double-digit sales growth, including Venclexta, Vraylar, Ubrelvy and Qulipta. This broad-based performance further demonstrates the strength of our commercial portfolio. For the third time this year, we are raising our full-year revenue and adjusted EPS guidance. We are increasing our full-year revenue guidance by $500 million and have now raised total revenue by $1.8 billion since our initial guidance in February. We are also raising our full-year adjusted earnings per share guidance by $0.15 and now expect adjusted EPS between $10.90 and $10.94. In addition to achieving strong quarterly results, we have been very focused on investing in the business to generate sustainable long-term performance in the 2030s and beyond. During the quarter, we successfully completed the acquisition of Cerevel Therapeutics, strengthening our neuroscience pipeline. Cerevel enhances our ability to help patients suffering from devastating conditions such as Parkinson’s and schizophrenia. The integration has been seamless and we are excited to have the talented Cerevel team join our organization. Within the Cerevel pipeline, we are very pleased with the positive Phase 3 results and emerging profile of tavapadon in Parkinson’s. And, we remain on-track to read out both pivotal studies for emraclidine in schizophrenia in the fourth quarter. More broadly on the pipeline, we have been advancing key R&D programs across all stages of development. Some notable highlights include the U.S. approvals of Vyalev for advanced Parkinson’s and Botox for platysma bands. The U.S. regulatory submission of Teliso-V for non-squamous, non-small cell lung cancer, and the start of our Phase 2 Crohn’s platform study, which is evaluating Skyrizi in combination with several novel biologics. In summary, AbbVie continues to demonstrate strong commercial, operational and R&D execution. The robust performance of our growth platform once again exceeded our expectations and we see numerous opportunities to drive long-term growth. Further underscoring our confidence in that growth, today we announced a 5.8% increase in our quarterly cash dividend, beginning with the dividend payable in February 2025. Since inception, we have increased our quarterly dividend by more than 300%. With that, I’ll turn the call over to Jeff, for additional comments on our commercial highlights. Jeff?" }, { "speaker": "Jeffrey R. Stewart", "text": "Thank you, Rob. I’m extremely pleased with the continued strong momentum across the therapeutic portfolio. I’ll start with the quarterly results for immunology, which delivered total revenues of more than $7 billion up 4.8% on an operational basis. Skyrizi global sales were $3.2 billion up 51.5% on an operational basis, exceeding our expectations. We are seeing robust prescription growth across psoriatic disease, with Skyrizi achieving in-play biologic share leadership in approximately now 30 key countries. In the U.S, we continue to capture nearly one out of every two in-play psoriatic disease patients on biologic therapy and we see substantial room for further total share growth. We believe that Skyrizi’s best-in-class profile with nearly complete skin clearance, high durability of response, easy onboarding and quarterly dosing for maintenance therapy sets a very high bar relative to other therapies on market or in development. Skyrizi has also demonstrated a compelling clinical profile in IBD, including strong endoscopic data paired with convenient dosing. This differentiated profile as well as our compelling head-to-head sequence data versus Stelara is supporting very rapid uptake in Crohn’s disease, where Skyrizi continues to gain market share globally, achieving in-play patient leadership across all lines of therapy in the U.S, Japan and Canada. Skyrizi’s U.S. in-play patient share is now approximately 32%, more than double the share of the second biologic treatment. And with Skyrizi’s total prescription share of approximately 8%, we see significant opportunity for revenue inflection in Crohn’s going forward. While we are still very early in our launch in the U.S. and Europe, we also anticipate robust uptake for Skyrizi in ulcerative colitis the new indication. Initial prescription trends as well as feedback from gastroenterologists have been overwhelmingly positive. Physicians are particularly impressed with the data that has been demonstrated for naive UC patients, who have not been exposed yet to biologics, where Skyrizi achieved very high results for clinical remission and endoscopic response. We have now secured broad formulary access for Skyrizi in UC, with sales in this indication expected to ramp meaningfully over the next several quarters. So, given the momentum we are seeing across all of these indications, we will be raising our full-year sales guidance once again for Skyrizi. Turning now to Rinvoq, which is also demonstrating robust growth. Global sales were $1.6 billion up 47.4% on an operational basis. We continue to see strong prescription growth across all seven of Rinvoq’s approved indications. I’m especially pleased with our performance in IBD, where Rinvoq’s uptake is exceeding our expectations. Rinvoq is now capturing double-digit in-play patient share in the U.S. for ulcerative colitis as well as Crohn’s disease. Both indications are now available in more than 75 countries with reimbursement and share continuing to increase. I also wanted to highlight our recent performance in atopic dermatitis, where Rinvoq is seeing an acceleration of in-play share following recent positive data from our second head-to-head study versus Dupixent. As an oral option that provides rapid skin clearance and itch relief, we believe Rinvoq’s strong differentiated profile will continue to compete well in this highly underpenetrated AD market. As a result of this continued strong performance, we will also be increasing the full-year sales guidance once again for Rinvoq. Looking forward, we see substantial momentum for both Skyrizi and Rinvoq, including continued share gains across existing indications on top of the typical underlying market growth across room, derm and gastro. Additionally, we are making excellent progress with several new indications for Rinvoq across sizable markets that will have the potential to provide another significant revenue inflection in the second half of this decade and into the 2030s. From a competitive perspective, a key element of Skyrizi and Rinvoq’s success has been their strong differentiation with compelling head-to-head data against several novel therapies. This includes Skyrizi superiority versus Humira, Cosentyx, Otezla and Stelara in psoriasis as well as Stelara in Crohn’s disease and Rinvoq superiority versus Humira and Orencia in rheumatoid arthritis as well as Dupixent in atopic dermatitis. To further support our differentiation, we have another head-to-head study ongoing for Skyrizi versus Sotyktu in psoriasis with plans also underway now for a study comparing Skyrizi versus Entyvio in ulcerative colitis. So given all of these factors, we feel very confident about the long-term growth prospects for both Skyrizi and Rinvoq. Turning now to Humira, which delivered global sales of $2.2 billion down 36.5% on an operational basis due to biosimilar competition. While Humira share erosion to biosimilars in the U.S. is largely in-line with our expectations, we are now seeing more Humira molecule volume moving to other novel mechanisms than previously anticipated. So, while this has an unfavorable impact to Humira sales, we are seeing a benefit to Skyrizi and Rinvoq, which is a very favorable dynamic for immunology portfolio now and certainly over the long-term. Moving now to Oncology, where total revenues were approximately $1.7 billion Imbruvica global revenues were $828 million down 8.8%, reflecting continued competitive dynamics in CLL, partially offset by higher persistency rates for existing patients. Venclexta is performing extremely well. Global sales were $677 million up 18.2% on an operational basis. This reflects strong momentum in CLL, especially in Europe, where recent guideline changes recommend combination use of Venclexta Plus BTK inhibitors as a preferred fixed duration treatment versus continuous BTK treatment alone. Growth is also supported by our very strong share position in frontline AML, where Venclexta is the leading treatment for patients who are ineligible for intensive induction chemotherapy. We are also seeing nice sequential revenue growth from Elahere and Epkinly, which are both demonstrating strong launch trajectories. Turning now to neuroscience, where total revenues were more than $2.3 billion up 16% on an operational basis. Vraylar is demonstrating robust performance. Sales were $875 million up 16.6% on an operational basis, reflecting continued new prescription growth in both bipolar disorder and adjunctive MDD. Within migraine, our leading oral CGRP therapies contributed $445 million in combined revenue this quarter, reflecting growth of approximately 22%, as we continue to see increasing prescription demand for both Ubrelvy and Qulipta. Global Botox Therapeutic sales were $848 million reflecting strong performance in chronic migraine as well as the other approved indications. Finally, we are very excited for the recent U.S. approval of Vyalev, a transformative therapy for patients with advanced Parkinson’s disease, who are uncontrolled on oral therapy alone. As a less invasive, non-surgical delivery system that can provide meaningful improvements in on-time and off-time, we believe Vyalev has the potential to significantly expand use beyond current device aided therapies. Sales in the U.S. for Vyalev are expected to ramp gradually over the next several quarters as we work to establish the appropriate Medicare coverage and benefit determination. At the same time, we are very encouraged by the interest in uptake internationally, where we have approval now in 35 countries with several thousand patients already on treatment. Longer-term, we anticipate peak sales of Vyalev to exceed $1 billion. So overall, I’m very pleased with the continued commercial execution and performance across the therapeutic portfolio. And with that, I’ll turn the call over to Carrie, for additional comments on aesthetics. Carrie?" }, { "speaker": "Carrie Strom", "text": "Thank you, Jeff. Third quarter global aesthetics sales were more than $1.2 billion representing growth of 1.8% on an operational basis. In the U.S, aesthetic sales of $791 million increased by 3.9%, driven by growth from Botox Cosmetic as well as other brands across our broad portfolio. U.S. Botox Cosmetic sales were $414 million an increase of 6.5% versus the prior year. Favorable pricing dynamics and facial toxin market growth more than offset modest share erosion. Botox Cosmetics remains the clear market leader. U.S. Juvederm sales were $105 million. Juvederm’s market-leading share was consistent with last year and the overall filler market was roughly flat to the prior year. While the U.S. facial injectable market remains largely stable, growth is below historical rates. As a result, there is a reluctance from customers to maintain traditional toxin and filler inventory levels. Based upon the relatively higher price point of filler procedures in a still challenging U.S. economic environment, Juvederm is more impacted by this dynamic, which can be seen in third quarter results. Internationally, aesthetic sales were $448 million reflecting a decline of 1.6% on an operational basis. Within China, the economic dynamics that weighed on our results during the first half of the year have continued to impact consumer spending. This has created challenging aesthetic market conditions that have been particularly impactful to Juvederm’s performance. Primarily due to this circumstance, we are moderating our Juvederm sales outlook for the year. We are encouraged by the recently announced government stimulus in China. We will continue to monitor for any further developments and how it could positively impact consumer discretionary spending and aesthetic market growth. Although the current dynamics in China are challenging, its potential remains attractive and we are committed to bring innovation to this market that will drive long-term growth. Along those lines, in China, we recently received approval for the Botox Cosmetic indication in masseter muscle prominence, marking the first toxin in the world to have this indication. This approval enables us to market and train to this important treatment option that addresses a top aesthetic concern among many Asian patients. In the U.S., we are pleased that we received FDA approval for the use of Botox Cosmetic to treat platysma bands. This approval positions Botox as the only cosmetic toxin with four distinct indications and enables us to market and train beyond the face for the improvement of neck and jawline appearance. We also remain excited about the opportunity for BoNT/E. Based upon its rapid onset and short acting profile, BoNT/E has the potential to activate new patients that are hesitant to try facial toxins, driving long-term market expansion. Looking to the future, we continue to see significant growth potential for our aesthetics portfolio based upon low market penetration rates, our commitment to introduce novel treatments, our strong customer relationships and our position as the global aesthetics leader. With that, I’ll turn the call over to Roopal." }, { "speaker": "Roopal Thakkar", "text": "Thank you, Carrie. Starting with immunology, where we recently began our Phase 2 Crohn’s disease platform study, which will evaluate Skyrizi in combination with several other novel biologics. This study will initially look at combinations of Skyrizi with our anti-IL-1α/β bispecific lutikizumab and our novel anti-α4β7 antibody ABBV-382. We are planning to include additional novel biologics in the future. Our approach in immunology has been to pursue therapies that are well differentiated and have the potential to elevate standard of care. We have clearly achieved this with Rinvoq and Skyrizi across multiple indications, including Crohn’s disease and ulcerative colitis. As we think about how the IBD market will evolve, we view dual mechanism approaches as having the greatest potential to achieve levels of efficacy that are above current standard of care. We are very excited about the potential for these combination therapies in IBD and we look forward to sharing updates as the data mature. In Oncology, we continue to make very good progress across all stages of our hem and solid tumor pipeline. In the area of solid tumors, we recently submitted our application to the FDA for accelerated approval of Teliso-V as a monotherapy in patients with previously treated c-Met overexpressing EGFR wild type non-squamous non-small cell lung cancer. Once approved, Teliso-V will become the first c-Met targeted ADC to enter non-small cell lung cancer, a segment with limited options and where patients tend to have a very poor prognosis, especially if their tumors express c-Met. We anticipate an approval decision in the first half of 2025. In the quarter, we also received a positive CHMP opinion recommending Elahere for the treatment of platinum resistant ovarian cancer in patients with high expression of FRα and treated with up to three prior therapies. This decision was based on the positive Phase 3 MIRASOL trial where Elahere demonstrated an overall survival benefit and significantly reduce the risk of cancer progression. We anticipate an approval decision in Europe in the fourth quarter. At the recent ESMO Congress we presented new Phase 1 data for ABBV-400 in advanced non-small cell lung cancer and gastroesophageal cancer. Early efficacy data from the lung cohort are promising with an objective response rate of 48% across all patients in the study and response rates ranging from 60% to 78% in patients with overexpressed c-Met. We are very pleased with the level of activity we’re seeing from our next generation c-Met ADC, which compares favorably to Teliso-V, where we’ve seen objective response rates ranging from 23% in medium c-Met expressors to 35% in patients with high c-Met expression. 400 has the potential to expand our c-Met portfolio into earlier lines of therapy and lower levels of c-Met expression in lung cancer. Similarly, in patients with advanced gastroesophageal cancer, 400 demonstrated promising activity with an objective response rate of 29% across all patients. This compares well against combination and single agent chemotherapy, which are the standards of care for patients in second line and third line of therapy respectively. Based on these encouraging preliminary data, we plan to begin Phase 2 studies for 400 in both non-small cell lung cancer and gastroesophageal cancer. Recall, we’ve also advanced 400 in late line colorectal cancer and we remain on-track to begin a Phase 3 study later this year. In the area of hematologic oncology, we received approval in Europe for Tepkinly as a monotherapy treatment for patients with relapsed refractory follicular lymphoma after two or more lines of therapy. Epcoritamab is now the only T-cell engaging bispecific approved in the U.S. and Europe to treat both follicular lymphoma and diffuse large B-cell lymphoma. Moving to neuroscience, we recently received FDA approval for Vyalev as the first subcutaneous 24 hour infusion of levodopa based therapy for the treatment of motor fluctuations in adults with advanced Parkinson’s disease. Our novel subcutaneous levodopa, carbidopa delivery offers meaningful benefits over current treatment options and others that are in development. Vyalev delivers significant improvements in on-time and off-time with a non-surgical 24 hour delivery system. It can deliver high levodopa doses similar to the amount provided by Duopa and it doesn’t require combination with oral drugs to achieve efficacy. We’re extremely excited to bring this transformative therapeutic option to patients in the U.S. We also recently announced positive topline results from the Phase 3 TEMPO-1 trial, which evaluated fixed doses of monotherapy tavapadon in early Parkinson’s disease. In the study, both doses of tavapadon met the primary endpoint demonstrating a significant reduction in the severity of Parkinson’s disease symptoms compared with placebo at week 26, as measured by decreases in the combined scores for Parts 2 and 3 of the Unified Parkinson’s Disease Rating Scale. Key secondary endpoints were also met in this study. We are very pleased with the emerging profile for tavapadon, which shows it is generally safe and well tolerated and it can drive strong efficacy as a monotherapy in early Parkinson’s and as an adjunctive treatment in patients with more advanced disease. Results from the two Phase 3 studies thus far look favorable compared to other dopamine agonists on the market. And, we believe tavapadon has the potential to become an important new treatment option as a monotherapy for Parkinson’s patients as well as an adjunct to oral levo/carbidopa. We expect to see results from TEMPO-2 later this year, which is our Phase 3 monotherapy study evaluating a flexible dose of tavapadon. Results from our long-term safety study, TEMPO-4 are expected next year. As Rob mentioned, we remain on track to share data from the two emraclidine pivotal studies in the fourth quarter. We also continue to invest in external innovation to strengthen our neuroscience pipeline. We recently announced two deals in this area, including an expanded collaboration with Gedeon Richter to develop novel targets for neuropsychiatric conditions and the acquisition of Aliada brings an anti-pyroglutamate Aβ antibody, which uses a unique blood brain barrier crossing and amyloid aggregate clearing technology. Aliada’s lead antibody has been able to achieve encouraging levels in cerebrospinal fluid with an extended half-life and the potential to be delivered subcutaneously. This molecule could become a best-in-class treatment for Alzheimer’s disease. Aliada’s novel technologies for enabling therapeutics to access the central nervous system also have the potential to be used with other programs across our neuroscience pipeline. In aesthetics, we recently received approval for Botox in the U.S. for moderate to severe platysma bands, marking the first global approval in this indication for any neurotoxin. There is currently a lack of non-surgical treatments available to improve the appearance of prominent platysma bands. And, we believe Botox will represent an important new treatment option for patients who are looking to reduce the appearance of vertical neck bands and improve jawline definition. In our novel toxin portfolio, we remain on-track to submit our regulatory application for BoNT/E around the end of this year. Our rapid onset short acting toxin has a highly differentiated clinical profile and once approved will offer patients a novel option compared to currently available neurotoxins. So in summary, this has been a very productive year thus far for our R&D organization and we are pleased with the progress we’ve made advancing our broad pipeline. With that, I’ll turn the call over to, Scott." }, { "speaker": "Scott T. Reents", "text": "Thank you, Roopal. Starting with our third quarter results, we reported adjusted earnings per share of $3 which is $0.10 above our guidance midpoint. These results include a $0.04 unfavorable impact from acquired IPR&D expense. Total net revenues were nearly $14.5 billion reflecting robust growth of 4.9% on an operational basis, excluding a 1.1% unfavorable impact from foreign exchange. Our ex-Humira growth platform, which covers more than 80% of AbbVie’s total sales, delivered reported growth of nearly 18%, once again exceeding our expectations. The adjusted operating margin ratio was 46.7% of sales. This includes adjusted gross margin of 84.4%, adjusted R&D expense of 14.2%, acquired IPR&D expense of 0.6% and adjusted SG&A expense of 23%. Net interest expense was $591 million. The adjusted tax rate was 16.2%. Turning to our financial outlook. We are raising the midpoint of our full-year adjusted earnings per share guidance by $0.15 and now expect adjusted earnings per share between $10.90 and $10.94. Please note that this guidance does not include an estimate for acquired IPR&D expense that may be incurred beyond the third quarter. We now expect total net revenues of approximately $56 billion, an increase of $500 million. At current rates, we expect foreign exchange to have a 0.7% unfavorable impact on full-year sales growth. This revenue forecast includes the following updates to select key products and therapeutic areas. We now approximate Skyrizi global sales of $11.5 billion, an increase of $500 million due to continued strong performance across all approved indications. Rinvoq total revenue of $5.8 billion an increase of $100 million reflecting robust uptake in IBD. U.S. Humira total sales of $7.4 billion a decrease of $400 million reflecting more Humira molecule volume moving to other novel mechanisms, including Skyrizi and Rinvoq. Imbruvica totaled revenue of $3.3 billion an increase of $200 million reflecting higher persistency rates for existing patients. Venclexta total sales of $2.6 billion an increase of $100 million reflecting momentum in both U.S. and international markets. Aesthetics global revenue of $5.3 billion a decrease of $200 million almost entirely due to lower Juvederm volume which continues to be impacted by challenging economic conditions in key markets. Vraylar total sales of $3.3 billion a decrease of $100 million reflecting continued strong prescription demand partially offset by modestly unfavorable channel mix. And for Botox, we now expect global revenue in the therapeutic space of $3.3 billion an increase of $100 million reflecting robust demand across all indications. Moving to the P&L for 2024. We continue to forecast a full-year adjusted gross margin of approximately 84% of sales, adjusted R&D investment of 14%, adjusted SG&A expense of 23.5% as well as an adjusted operating margin ratio of roughly 44.5% of sales, which includes a 2.1% unfavorable impact from acquired IPR&D expense. Turning to the fourth quarter. We anticipate net revenues approaching $14.8 billion. At current rates, we expect foreign exchange to have a neutral impact on sales growth. We expect adjusted earnings per share between $2.94 and $2.98. This guidance does not include acquired IPR&D expense that may be incurred in the quarter and excludes any potential impact from the recently announced acquisition of Aliada Therapeutics. Finally, AbbVie’s robust business performance continues to support our capital allocation priorities. Our cash balance at the end of September was nearly $7.3 billion and we generated more than $11 billion of free cash flow, which includes approximately $1.5 billion of Skyrizi royalty payments in the first nine-months of the year. This free cash flow fully supports a strong and growing quarterly dividend, which we are increasing 5.8% to $1.64 per share, beginning with the dividend payable in 2025, as well as debt repayment, where we remain on-track to pay down the roughly $7 billion of maturities this year and anticipate achieving a net leverage ratio of two times by the end of 2026. Our strong cash flow also provides capacity for additional business development. We have executed more than a dozen early stage deals so far this year, and we continue to assess external innovation across all of our key growth areas. In closing, AbbVie has once again delivered strong top and bottom line results. I’m very pleased with the momentum of our ex-Humira growth platform, including continued robust performance from Skyrizi and Rinvoq, which further supports AbbVie’s long-term outlook. With that, I’ll turn the call back over to Liz." }, { "speaker": "Liz Shea", "text": "Thanks, Scott. We will now open the call for questions. We are aware of a peer earnings call that begins at 9:00 A.M. Central, so we will do our best to wrap up our Q&A right around the top of the hour. So, in the interest of hearing from as many analysts as possible, please limit yourself to just one question. Operator, first question please." }, { "speaker": "Operator", "text": "Thank you. Our first question comes from Chris Schott with J.P. Morgan. You may ask your question." }, { "speaker": "Chris Schott", "text": "Great. Thanks so much for the question, and congrats on the results. My question was really just centered around 2025 and just some preliminary outlook there. I guess a specific question, you mentioned Humira volumes are maybe shifting over to newer drugs. You comment at all about just in terms of where the street sits currently with Humira. I think consensus number is about $6.8 billion. Is that a reasonable forecast, or is that something you could see higher erosion given what’s happening with Humira? And, then bigger picture kind of tied to that, the mid-single-digit topline growth, it sounds like the trends you’re seeing here may be a net positive where maybe Humira volumes are declining, but that’s largely moving over to Skyrizi and Rinvoq. I just want to get some context of is that mid-single-digit target still a reasonable one to think about for AbbVie next year? Thank you." }, { "speaker": "Robert A. Michael", "text": "Thanks for the question, Chris. This is Rob. I’ll start and then I’ll have Jeff supplement. So yes, we are very confident in that robust mid-single-digit growth, both topline, bottom line for 2025. I think you’ve interpreted correctly that the trends we’re seeing are net positive and that we’re seeing over performance from Skyrizi and Rinvoq more than offsetting the dynamics with Humira. And so, as we look at consensus, that’s probably not reflected. So, I think it’s fair to say, there’s a shift that’s required there, but we’re very pleased with the strong uptake for Skyrizi and Rinvoq. As I mentioned in my remarks, we have now delivered guidance increases of $1.3 billion for Skyrizi and Rinvoq in total. We’re seeing tremendous momentum, particularly with the IBD indications across really all indications, but particularly in IBD. And, we are starting to see the dynamic with the overall Humira molecule, where there is the switching that we’re seeing now to other mechanisms, including Skyrizi and Rinvoq, which is a long-term very positive benefit. So, as we look at the business, we’re very well-positioned. Essentially two years after the U.S. Humira LOE, we’ll be returning to robust top line and bottom line growth, and really performance across many parts of the business, not just Skyrizi and Rinvoq. You’ve seen us perform very nicely in oncology. We’ve obviously over performed our expectations in oncology, very pleased with the earlier returns on Elahere. Venclexta is performing exceptionally well. The guidelines changes in Europe are positive as we think about combination opportunities with BTK inhibitors. So, Venclexta is going to be strong, Epkinly is performing very nicely as well. And, then when I look across the neuroscience franchise, Vraylar is a strong grower. We’re very pleased with the migraine portfolio. Obviously, very excited about Cerevel and doing a number of deals now on the early pipeline both with Gedeon Richter and Aliada that really fortifies the long-term view for neuroscience as well. And, then with aesthetics, while it’s below our expectations for this year, obviously the economic conditions have dictated that. We still have tremendous confidence in the long-term outlook for that business. But, as we look at 2025, we’re very confident in our ability to return to that robust mid-single-digit growth." }, { "speaker": "Jeffrey R. Stewart", "text": "Yes. Thanks, Rob. And, I’ll just add a little bit more flavor. It’s Jeff. So, we saw this trend start to emerge in terms of this compression of the, let’s say, the ADAM molecule or the ADAM market, the Humira plus biosimilars, just prior to the CVS event and then it accelerated over Q2. And again, we saw it throughout Q3. So, that’s why we’ve adapted our approach here. Other than this dynamic, the biosimilar dynamics are playing out really exactly as we anticipated. And you can see this compression in the IQVIA data. So, really the shrinking of the Humira or the ADAM market is something that’s quite clear. It’s a little difficult quantify over time with full precision, but we can see that the molecule continues to decline sequentially and we continue to see strong share gains as I highlighted for Skyrizi and Rinvoq. So, this incremental flow from the molecule compression, it’s clearly a contributing factor to some of the over performance that we saw in Q2 and Q3, but it’s really only one of several. We’ve also had significant incremental investments in the consumer space, the sales force approaches we’ve taken, Chris, the integration of the head-to-head data I talked about. And, certainly now we’re starting to see the impact of the UC launch. So, when we put all that together, we think that the dynamics are net-net quite positive overall. And, as Rob said, we’re still looking good for 25%." }, { "speaker": "Liz Shea", "text": "Thank you, Chris. Operator, next question please.," }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Mohit Bansal. Your line is open. You may ask your question." }, { "speaker": "Mohit Bansal", "text": "Awesome. Thank you very much for taking my question. Just wanted to touch upon the trial you are running head-to-head against Entyvio. Could you help us understand based on pre-clinical or early data, what gives you confidence there? And, are you looking at non-inferiority or potential superiority over Entyvio there? Thank you." }, { "speaker": "Roopal Thakkar", "text": "Mohit, it’s Roopal. I’ll take that one. So, when we look at the data, in particular, I think Jeff highlighted this, in ulcerative colitis with Skyrizi in this naive patient population, this is a patient population that hasn’t seen biologics or other advanced therapies like JAK inhibitors. The endoscopic improvement and this is in label was 76% in the maintenance portion of this. So, it was quite high, in fact, higher than what we’ve observed even with Rinvoq. So that gave us a good amount of confidence that we have the potential to differentiate with all other assets. You heard about the Skyrizi versus, ustekinumab head to head in Crohn’s disease, but this one gives us a unique opportunity there to go head to head with vedolizumab, especially looking at endoscopic improvement. So, for that particular endpoint, you asked about the type of endpoint. There we would think about superiority, because of it being an objective endpoint. Sometimes with symptoms like clinical remission, these could bounce around. That may be one where we consider as non-inferiority. But I would say endoscopic improvements in the field are now believed to be highly predictive of long-term outcomes. So, that would be how we’re looking at this, Mohit." }, { "speaker": "Mohit Bansal", "text": "Thank you very much. Appreciate it." }, { "speaker": "Liz Shea", "text": "Thanks, Mohit. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. And this question comes from Vamil Divan with Guggenheim Securities. You may ask your question." }, { "speaker": "Vamil Divan", "text": "Great. Thanks for taking the question. So, yes, I’ll give you just one on emraclidine. Just getting a lot of questions from investors kind of leading up to that data release. So, maybe you can just the level set expectations on what you’re hoping to see from the data, especially obviously now we have the approval from Bristol with [Coventry] (ph). Just kind of what are you thinking in terms of efficacy safety profile relative to that competitor? And also on the liver testing requirement that they had at initiation, is that something you’d expect as well based on your data? And then finally just tying to that just in terms of the data release, do you expect to get one press release or do you think you’re combining both studies? Or should we still expect the two separate releases? Thank you." }, { "speaker": "Roopal Thakkar", "text": "Yes, Vamil, it’s Roopal. I’ll take that one. So, a couple of things. Maybe starting with what we’ve observed with the approval. So, we were encouraged by the lack of a boxed warning, meaning there’s a recognition that this is a unique mechanism of action looking specifically at the muscarinic class. So, we were pleased to see that. I think what was notable for us was the GI adverse events, including how that would play out in terms of longer-term tolerability. Also anticholinergic effects, bladder retention that was something I guess we did not anticipate. You mentioned hepatic monitoring that was something that we didn’t anticipate. The other thing that was notable is along with the BID dosing, there is a food effect. So, you have to wait a certain period amount of time when you eat and after you eat when you can take the pill. So, when we think about our profile, we continue to be encouraged with emraclidine being a single agent, once a day, no food effect. We don’t see the extent of GI effects. We don’t and we have not observed in the Phase 1b data any bladder issues. And when we had looked at that 1b data, we didn’t see any hepatic issues, so we don’t anticipate any type of laboratory monitoring. We were also thinking about neurodegeneration associated psychosis and these patients are typically older and likely more sensitive to anticholinergic effects. So, we continue to see an opportunity in that patient population as well. So, we’ve stated that the data will read out here in the next couple of months in the quarter. The same team is working on wrapping up these two studies. So, depending on how far apart the data are, we’ll probably determine as you stated, is it 1 or 2 press releases. It’s a little early right now for us to tell you is it going to be 1 or 2. But if they’re going to be close together, it’s potentially going to be 1." }, { "speaker": "Liz Shea", "text": "Thank you, Vamil. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Terence Flynn with Morgan Stanley. You may ask your question." }, { "speaker": "Terence Flynn", "text": "Hi, thanks for taking the question. Maybe a two part for me. Just wondering if you can I’m assuming contracting is now wrapped up, if you can comment at all on how to think about Skyrizi and Rinvoq, formulary positioning and pricing just high level for 2025. Thank you." }, { "speaker": "Jeffrey R. Stewart", "text": "Yes. Hi, it’s Jeff. So yes, contracting is very, very close to wrapping up. We have a few more nuances and so typically that may take another month or so. Overall, we’re making very good progress on contracting next year. So, in terms of what we’ve highlighted in the past is we do not anticipate any material change for Skyrizi and Rinvoq in terms of the access for next year across Medicare or the commercial plans. We have quite high, very broad access and we assume that will continue. In terms of what we’ve highlighted to anticipate, we’ve said that we do have over our near-term in LRP sort of a negative pricing environment, but it’s modest. It’s nothing like we saw many quarters ago where we had seven indications. So, we said from a rebate perspective, low single digit changes is a reasonable assumption that we feel confident in despite we’re not fully complete, I think that’s a fair assessment at this point." }, { "speaker": "Liz Shea", "text": "Thanks, Terence. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Chris Shibutani with Goldman Sachs. You may ask your question. Chris Shibutani, your line is open. You may ask your question." }, { "speaker": "Chris Shibutani", "text": "Apologies, I was on mute. Thanks for the question. All the comments you’ve made about Skyrizi or Rinvoq and the molecule switching are very helpful. Just curious as we think on the forward about other potential mechanisms and modalities in particular. I think we have competitor oral data that’s coming up. Interested to hear your thoughts in terms of that modality difference as well as, how you might rank your optimism for some of the new mechanisms of action? I believe you have a TL1A as well in your pipeline though earlier stage. Thank you." }, { "speaker": "Roopal Thakkar", "text": "Hi, Chris. It’s Roopal. I’ll take that one. With respect to the oral, I’ll take us back to the Skyrizi head-to-head that occurred with apremilast, which is also an oral. The data were substantially higher from an efficacy standpoint for Skyrizi as was the tolerability along with when we asked patients what did they prefer, they actually preferred quarterly subcutaneous dosing. So, I would think about it that way as well. Now the question would be, it’s a similar mechanism, could the efficacy be better than what has been observed with a apremilast in psoriasis? Well, what we saw in the Phase 2 data, my recollection still is that Skyrizi is a full 50% higher when it comes to full skin clearance at a PASI 100. And that’s where the bar is now at PASI 90 and PASI 100. So, we still see an efficacy advantage. Also the data I’m sharing are Phase 3 Skyrizi data. The data that we saw for the oral 23 was from Phase 2. So, there is a reasonable potential that the efficacy data tend to settle down when you go to a broader patient population, especially those that have had longer standing disease or have seen other therapies like other biologics. So, we continue to feel very good and optimistic about our profile versus any emerging competition. Also, we think about our assets from a global standpoint. And when you think about majority of the countries, they are very driven by efficacy to gain access. And in the oral space, we don’t really see it across the globe. Maybe there’s a couple of countries. I think Jeff has mentioned the U.S., but that space may be referred to as a pre biologic space. So maybe more of an influence on the TIK2 or on a apremilast is how we see it. In terms of other mechanisms that we like, as I mentioned, we like anti L23 the way it’s delivered with Skyrizi, the depth of response, the high durability and the convenience with quarterly dosing. If we can couple that with other assets as part of our combination approach, we think that’s going to be extremely competitive in the future. Mechanisms like TL1a, we think are going to be important, especially from a combination approach, which we have one internally. We think the ulcerative colitis data are encouraging, but from a monotherapy standpoint, not differentiated, especially when you look at the Skyrizi data that I mentioned earlier and Rinvoq. And then in Crohn’s, something like TL1a, we think it really does need a combo. So that’ll be part of our platform along with our novel alpha 4 beta 7, we think that’s also a good combo. And then we’ve also provided very strong data in hidradenitis suppurativa with our IL-1 alpha beta lutikizumab. And we’ve seen some preclinical signals that IL-1 beta could be a driver of disease and resistance to other biologics. So, lutikizumab will also be part of the combo in our IBD platform. So, that’s just some of the mechanisms that we’re excited about. There are several others that are early in the pipeline and we will give you more information about those as the data mature." }, { "speaker": "Chris Shibutani", "text": "Thanks very helpful." }, { "speaker": "Liz Shea", "text": "Thanks, Craig. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Trung Huynh with UBS. You may ask your question." }, { "speaker": "Trung Huynh", "text": "Hi, guys. Thanks for taking my question. Just on the aesthetics business, in the Q&A you did mention that you still have a tremendous amount of confidence hitting that longer term guide here. I’m curious on how dependent this is on the economic environment getting better and getting better quickly. So, you’ve moderated your Juvederm outlook this year because it’s not being good. If next year is another challenging economic year, could we see that $9 billion in 2029 being moderated or even pulled? Just what’s giving you confidence? Thank you." }, { "speaker": "Robert A. Michael", "text": "Thanks for the question. This is Rob. I’ll take that one. So, as we think about the long-term guide, which is greater than $9 billion by 2029, you need to believe that you can have essentially a compound growth around 11% to get there. If we look at the historical growth of this market, it’s been, let’s say, call it low double digits, low teens. As we look at it going forward, we think probably a more prudent assumption is when we see the recovery, something more in the high single digits, right? So, you need something beyond just the market recovery to get there. And when we look at our the innovation that we’re bringing particularly with the short onset, short acting or fast onset short acting BoNT/E that we expect to launch in ‘26. That could really transform the market, because if you think about the number one barrier for patients is fear of an unnatural look. That could really unlock a part of the market that’s dormant right now, plus it could also lead to share gains. And so I think we need to see, 1, how the market recovers, I would say, 2025 and 26 and then ultimately see how the BoNT/E launch ramps in ‘26. At that point, we’ll have a better sense of the $9 billion as we sit here today. If you believe that the market will recover to high single digits and we have a lot of confidence in BoNT/E, we still believe we can get there, which is why we’re not updating that guidance. But I would expect us to reflect more on that more likely in the ‘26 timeframe than in ‘25." }, { "speaker": "Liz Shea", "text": "Thanks, Trung. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Geoff Meacham with Citi. You may ask your question." }, { "speaker": "Geoff Meacham", "text": "Good morning, everyone. Thanks for the question. I had a bigger picture one for Rob. So, when I look at your therapeutic areas, eye care stands out as one that’s pretty modest contributor today and also down the road. How would you rank that business strategically? And then related when you look at BD going forward, are there other TAs that you’re looking at that could be additive, just thinking specifically maybe metabolic or cardio? Thank you." }, { "speaker": "Robert A. Michael", "text": "Thanks for the question, Geoff. So, this is Rob. So yes, I mean, our main focus is our five key growth areas, which includes eye care, includes immunology, oncology, neuroscience, aesthetics and eye care. And we participate in large markets with high unmet need that have great growth potential. And within those five verticals, we’re building depth across 24 core areas that does include eye care as well. When you think about diabetic retinopathy, wet AMD, prescription dry eye medications. And so eye care does play an important role, albeit it’s not as high of a growth driver as the other four verticals, but it is part of our five. And that ultimately guides both our internal R&D investments as well as our BD efforts, which as you know, continue to be very active. So, far this year, we’ve executed 15 deals along those lines, really focused more on early stage opportunities to drive growth in the next decade. So that’s our primary focus. Now if we see an opportunity for differentiation in a large market with high unmet need like metabolics, we would consider pursuing it, especially if we can help drive growth in the next decade. But again, it would be more opportunistic. We have to see differentiation and right now it’s not our primary focus. But again, we’re open to more sources of growth for the next decade if we see differentiation that we can create value. And we certainly have the financial wherewithal to pursue those opportunities." }, { "speaker": "Liz Shea", "text": "Thanks, Geoff. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from James Shin with Deutsche Bank. You may ask your question." }, { "speaker": "James Shin", "text": "Good morning, guys. Thanks for taking our question. For emraclidine’s readout, I think there’s a question on how much erosion could be anticipated. I know you mentioned that the team the same team that was originally working on the Phase 1b is wrapping up studies and so forth. But there’s been some other data that has copied some of Cerevel strategies such as high baseline pans and so forth and placebo effect was still kind of surprisingly higher than it should be. Is there any insight on managing this placebo effect? Thank you." }, { "speaker": "Roopal Thakkar", "text": "Thanks, James. It’s Roopal. When we did our thorough diligence, that was a major question that we and the broader team had. So, you bring up a good point. Some things that we observed in those two studies that will be the pivotal readouts were what Cerevel was strategically doing. One thing was limiting the number of countries, limiting the number of sites, central review for eligibility criteria, training of raters, certifying those raters, recertifying raters, monitoring blinded data with respect to site activity. So, I think those are important factors that could drive placebo in either direction. So, what we observed was, we would say a good control or at least the best one could do to manage placebo responses. So, it’s hard to know what if there’s any erosion until we see the data. But the effect size that we did see in the Phase 1b was a little over 12 points. So, we think that was a strong separation. And even if that were to go down a little bit, we still feel that based on the safety profile and tolerability profile, this could still be very, very competitive even if we saw a droppage in some point on the efficacy side." }, { "speaker": "Liz Shea", "text": "Thanks, James. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Carter Gould with Barclays. Your line is open. You may ask your question." }, { "speaker": "Carter Gould", "text": "Great. Good morning. Thanks for taking the questions. I was hoping to follow-up a little bit on the Aliada acquisition, sort of what differentiation you saw over some of the other enhanced brain delivery kind of approaches there that gave you confidence. And maybe we’ve seen AbbVie take a number of shots on goal across Alzheimer’s here, just seems pretty central to your longer term neuroscience portfolio. Can you maybe just again put that in some broader context as you think about the TA strategy longer term? Thank you." }, { "speaker": "Roopal Thakkar", "text": "Sure. It’s Roopal. I’ll take that. Yes, we’ve been investing for a number of years in the space. And in addition to the recent deal, we’ll have an option readout with Alector and TREM2 coming up. We have SV2A molecule that would look at cognition and other symptoms. Emraclidine could participate in that space from an Alzheimer’s psychosis standpoint. We have other pipeline assets that are looking at tau, intracellular and even an approach looking at extracellular tau. We did have our own A beta monotherapeutic antibody, which we did read out. It did look good, but it wasn’t fully differentiated. And moving on to the Aliada deal, what we see there is the ability to access the CSF at what we would say at this stage at higher concentrations than maybe other competitors. So, we think that’s a good thing. The other aspect that we like is an extended half-life. So that could lead to convenient dosing. And if this approach plays out than one could consider having subcutaneous dosing even getting out to monthly. And if the efficacy is high because of deeper brain penetration that could result in lower levels, faster and a better able to see cognition benefit in a year or 18 months. So, those are some of the benefits that we would see. The other benefit would be getting to the parenchymal tissue more broadly and that could have a reduction in ARIA, which is probably what is disallowing this to really take off. It’s very challenging to take an elderly family member to get multiple scans and worry about them having stroke like symptoms. So, that would be something else we believe we can address with this asset of having a strong safety profile, tolerability, ease of onboarding and high efficacy and ultimately strong benefits on cognition." }, { "speaker": "Robert A. Michael", "text": "And this is Rob. I’ll just add on here as we think about strategically about the neuroscience franchise. I mean, I think about it as having really four main segments, psychiatry, migraine, Parkinson’s and then neurodegeneration. And if you look at what we’ve done to build out the long-term growth outlook for this franchise, obviously, in psychiatry between Cereval, Gedeon Richter, we also had the early stage opportunity with Gilgamesh, really investing in longer term growth in psychiatry. We have actually a very strong franchise in migraine with the oral CGRPs as well as Botox Therapeutic. In Parkinson’s, now the launch of Vyalev, which is performing very nicely outside the U.S., and we expect will also perform nicely in the U.S. The early Phase 3 data we’ve seen so far for davapidone, the mitokinin disease modifying approach, it’s early and Parkinson’s is another investment we’ve made. And then in Alzheimer’s now with Aliada is another I’d say, long-term investment we’re making to grow the neuroscience franchise. There’s also adjacencies like ALS, MS that we’re interested in that we have some partnerships that we’ll continue to pursue. So, we see neuroscience as an important long-term growth driver for the company. We’re obviously investing heavily across a number of areas. But we think about really in those four categories, and so it’s one that we’re obviously very excited about the future prospects for." }, { "speaker": "Liz Shea", "text": "Thanks, Carter. Operator, next question please." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Steve Scala with Cowen. You may ask your question." }, { "speaker": "Steve Scala", "text": "Thank you so much. I’m a bit surprised that how Cerevel was such a focus in the prepared remarks given the pending emraclidine data, which very much will color views of the Cerevel acquisition. Should we conclude you have increased confidence and or insight into the pending data? And related to that, KOLs seem to be looking for an effect size of 0.6. But based on what was just said, that doesn’t even seem to be a possibility. So, any thoughts would be appreciated. Thank you." }, { "speaker": "Robert A. Michael", "text": "This is Rob and Roopal can take the second part. I’ll take the first part of the question. So, Steve, in the prepared remarks, we were talking about the quarter. We obviously closed the Cerevel transaction in the quarter. That’s a significant event. We also did see the Phase 3 trial results for tavapadon, so that was important to comment as well. As we’ve mentioned, we expect the two pivotals from emraclidine to read out in the fourth quarter. So, I wouldn’t read too much into it other than it was an important event to highlight in the quarter." }, { "speaker": "Roopal Thakkar", "text": "Yes. And it’s Roopal. I agree. We have two positive Phase III studies with tavapadon. And in the oral space, I don’t know if we’ve seen a new mechanism that could have this type of approach in a very long time. So, it is important to discuss that because the unmet need continues to be very high and Parkinson’s is a place where we believe we can meaningfully participate in. On the effect size question, when we look at the 1b data, it was more than a 12 point differential. So we have observed sometimes a decrement and the question was around if placebo responses move up a little bit. So that being said, we still think we can maintain a very strong effect size coupled with the safety profile. Remember that the issue here in therapy isn’t just about efficacy, it’s about maintaining these patients on a drug that they can tolerate. And the majority of these patients don’t last very long and cycle through these assets and even stop these, especially atypicals without even letting their physicians know and then go on to have a flare and end up in the hospital. So, we think about this as a benefit, risk and tolerability profile and from a weight, metabolic, motor symptoms, sedation, these are major problems with atypicals. And with something like emraclidine, we feel that we can still fully differentiate. So, I don’t know if I’d read into any concerns other than maybe seeing an effect that’s slightly different than what we saw in Phase 1b. But beyond that, we think this could still be very competitive." }, { "speaker": "Liz Shea", "text": "Thanks, Steve. Operator, we have time for one final question." }, { "speaker": "Operator", "text": "Thank you. Our final question comes from Luisa Hector with Berenberg. You may ask your question." }, { "speaker": "Luisa Hector", "text": "Hello. Thanks for taking my question. Just on Vraylar, could you expand a little on the comments of the channel mix pressure in Q3 and how that will play out as we move forward? And perhaps just a quick comment on the extension of the collaboration with Gedeon Richter and why you went down that route? Thank you." }, { "speaker": "Scott T. Reents", "text": "Luisa, this is Scott. I’ll take the question regarding Vraylar. So, essentially it was a channel mix change. It was slight. I would tell you that really kind of had accumulated over the course of the year. And that’s why we made, we decided it made sense to make the adjustment. So, as that channel mix change, we saw a little bit of negative price as a result of that. So, we took down the regular guidance by $100 million. Now, I would note in neuroscience in totality that was offset by the raise in Botox Therapeutics. So, neuroscience in our therapeutic or growth area guide is stable. So, maybe the second question will go to Roopal." }, { "speaker": "Roopal Thakkar", "text": "Yes. It’s Roopal. We expanded further. We’ve had strong partnership. They’re a terrific organization. We have a follow on to Vraylar that’s more D3 meaning that will start entering the clinic quite soon in Phase II looking at bipolar depression and MDD as well as generalized anxiety disorder. As Rob described as part of our neuroscience strategy, psychiatry is a big part of that and having a deeper relationship with Gedeon Richter will allow us to have potentially even more assets in depression, in bipolar disorder, in schizophrenia and anxiety and potentially other adjacent indications that we continue to be interested in because the unmet need continues to be very high." }, { "speaker": "Liz Shea", "text": "Well, thank you, and thanks, Shirley. That concludes our conference call today. If you’d like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us." }, { "speaker": "Operator", "text": "Thank you. And this concludes today’s call. We thank you for your participation. And at this time, you may disconnect your lines." } ]	AbbVie Inc.	141,885,706
ABBV	2	2,024	2024-07-25 09:00:00	Operator: Good morning and thank you for standing by. Welcome to the AbbVie Second Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer portion of this call. [Operator Instructions] I would now like to introduce Ms. Liz Shea, Senior Vice President, Investor Relations. Liz Shea: Good morning and thanks for joining us. Also on the call with me today are Rob Michael, Chief Executive Officer; Jeff Stewart, Executive Vice President, Chief Commercial Officer; Roopal Thakkar, Executive Vice President, Research and Development, Chief Scientific Officer; Scott Reents, Executive Vice President, Chief Financial Officer; and Carrie Strom, Senior Vice President, AbbVie and President, Global Allergan Aesthetics. Before we get started, I’ll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today’s conference call, non-GAAP financial measures will be used to help investors understand AbbVie’s business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we’ll take your questions. So, with that, I’ll turn the call over to Rob. Rob Michael: Thank you, Liz. Good morning, everyone, and thank you for joining us. It’s a pleasure to speak with you today as AbbVie’s new CEO. I look forward to building on our track record of success and delivering on AbbVie’s promise to our patients, employees, shareholders and communities. As we begin this new chapter, nearly every aspect of AbbVie’s business is performing at or above our expectations. We are demonstrating a rapid return to revenue growth, with operational sales up nearly 4% through the first half of this year, including robust mid-single-digit growth in the second quarter. Our ex-Humira growth platform, which covers more than 80% of AbbVie’s total sales, will outperform our initial full year sales guidance by more than $1 billion, driven by strong performance in immunology and oncology. In addition, U.S. Humira performance continues to meet our expectations, having achieved or exceeded our guidance in all six quarters with biosimilar competition. The strong performance across our diversified portfolio will drive top-tier high single-digit compound growth through the end of this decade, which will support continued investment to drive growth in the next decade. Turning to our results, I’m especially pleased with immunology, where our leading portfolio is delivering performance well above our expectations. Skyrizi continues to demonstrate strong momentum in psoriasis and Crohn’s disease, where we have substantial headroom for additional share gains and the recent approval in UC will add another source of long-term growth. Rinvoq is also delivering robust growth across all approved indications. We are making excellent progress with late-stage development in five additional indications that we anticipate will launch in the second half of this decade. In oncology, Elahere has accelerated our on-market presence in solid tumors. We also have several exciting pipeline programs, including two novel c-Met ADCs for solid tumors, Teliso-V and 400, as well as 383, our BCMA CD3 bispecific for multiple myeloma. In neuroscience, our leading therapies for migraine and mood disorders continue to gain share and are competitively well-positioned. The pending acquisition of Cerevel will further augment our neuroscience pipeline and we’re excited about what our two companies can achieve together to make a difference for patients with neuropsych disorders. We have certified substantial compliance to the FTC second request and anticipate the Cerevel transaction will close soon. Lastly, we’ve been very active with business development, investing in exciting opportunities that can drive growth in the next decade. Through the first half of this year, we have executed nearly a dozen early-stage deals. These include promising technologies and innovative mechanisms that can elevate the standard-of-care in immunology, oncology and neuroscience. In summary, I’m very pleased with the strong momentum of our business. AbbVie’s results once again exceed our expectations and we are raising guidance for the second time this year, underscoring our confidence in the business. The robust performance of our growth platform and the advancement of our pipeline supports AbbVie’s top-tier long-term outlook. With that, I’ll turn the call over to Jeff for additional comments on our commercial highlights. Jeff? Jeff Stewart: Thank you, Rob. We continue to demonstrate strong commercial execution across our therapeutic portfolio. I’ll start with the quarterly results for immunology, which delivered total revenues of approximately $7 billion. Skyrizi and Rinvoq are performing exceptionally well, contributing more than $4.1 billion in combined sales this quarter, reflecting operational growth of 50% in their fifth full year on the market. These assets are approved across a broad set of indications and are collectively supported by nine compelling head-to-head studies that demonstrate clear differentiation across multiple novel therapies, which has resulted in strong share capture. For Skyrizi, we continue to advance our clear leadership position in psoriasis, where total prescription share of the U.S. biologic market has increased to approximately 38%. Share is also ramping nicely in PSA, especially in the dermatology segment, where Skyrizi has achieved roughly 15% total prescription share in the U.S. biologic market. And for Rinvoq, we are seeing increasing share across each of the rheum indications, as well as additional momentum in atopic dermatitis, including total prescription share of 10% in the U.S. We are very excited about the growth potential in gastroenterology, where Skyrizi and Rinvoq are on pace to double their respective sales in IBD this year. The adoption in Crohn’s disease has been impressive, with Skyrizi and Rinvoq now achieving a combined in-place share in the U.S. of more than 40%. Skyrizi has achieved overall in-place share leadership in Crohn’s, with in-place share approximately now 13 points ahead of Stelara, following our compelling head-to-head sequence data published last year. This positive trial, which demonstrated Skyrizi’s high efficacy versus Stelara, including a more than doubling of effect in endoscopic remission has driven a significant inflection in performance and we anticipate continued share momentum. Commercialization for Skyrizi and ulcerative colitis is now underway in the U.S., with broad formulary access anticipated to ramp quickly over the next several months. Early feedback from gastroenterologists has been very encouraging, with Skyrizi’s UC data viewed as impressive, particularly for naïve patients who have not been exposed to biologics. We also expect the European launch in the coming months. We also see very robust adoption of Rinvoq in UC, where the brand is now achieving a leading in-place share in the U.S. Internationally, Rinvoq UC is now approved in 75 countries, with reimbursement and share gaining momentum. Having two novel therapies that each deliver differentiated levels of efficacy to treat both of these IBD conditions demonstrates our commitment to transforming the treatment landscape for physicians and patients in this area of high unmet need. Turning now to Humira, which delivered global sales of $2.8 billion, down 28.9% on an operational basis due to biosimilar competition. Erosion in the U.S. was in line with our expectations in the quarter and our guidance complicates -- contemplates the impact of additional formulary changes over the course of the year. Importantly, we continue to anticipate that Humira will maintain parity access to biosimilars for a significant majority of patient lives this year. Moving now to oncology, where total revenues were more than $1.6 billion. Imbruvica global revenues were $833 million, down 8.2, reflecting continued competitive dynamics in CLL. Venclexta global sales were $637 million, up 15.8 on an operational basis, with strong momentum across CLL and AML. Elahere is also performing very well, with sales of $128 million and our compelling overall survival data, recent positive updates in the NCCN guidelines and the expansion of commercial resources will continue to drive rapid uptake. Lastly, we continue to be pleased with the prescription trends for Epkinly in DLBCL. Commercialization is now underway for Epkinly’s second indication, follicular lymphoma, in the U.S., with European approval expected later this year. Neuroscience total revenues were nearly $2.2 billion, up 15.2% on an operational basis. This robust performance is driven by continued double-digit growth of Vraylar, with global sales of $774 million, Ubrelvy with total revenue of $231 million and Qulipta with global sales of $150 million. Each of these leading assets continue to gain share and remain competitively well-positioned. Botox Therapeutic is also performing well, especially in chronic migraine. Total global sales were $814 million, up 9.6% on an operational basis. Finally, we are pleased with the early launch trends for 951 in Japan and Europe, and look forward to bringing this innovative therapy for advanced Parkinson’s to the U.S. soon. Overall, I’m extremely pleased with the momentum across the therapeutic portfolio. And with that, I’ll turn the call over to Carrie for additional comments on aesthetics. Carrie? Carrie Strom: Thank you, Jeff. Second quarter global aesthetic sales were approximately $1.4 billion, representing growth of 2.8% on an operational basis. In the U.S., aesthetic sales of $863 million increased by 4.4%, driven by Botox Cosmetic and Juvederm growth of 7.1% and 10.4%, respectively. This toxin and filler performance is supported by a consistent recovery in the facial injectable market, as the number of procedures in both categories increased by a mid-single-digit percentage versus the prior year. However, this level of market growth was lower than previously anticipated. Sales for Botox Cosmetic and Juvederm also benefited from a partial reversal of the prior quarter’s inventory destock, which was related to the timing of certain promotional activities. From a competitive perspective, our U.S. facial injectable portfolio remains the clear market leader, with strong and stable market share. Internationally, second quarter aesthetic sales were $527 million, roughly flat versus the prior year on an operational basis, as declines in China were balanced by growth in other international markets. In China, our largest international market, sales growth continued to be impacted by sustained economic headwinds, as well as a challenging comparison to the second quarter of last year, which benefited from a strong post-COVID recovery. Consistent with what we experienced in the U.S., economic challenges have impacted Juvederm sales growth more than other areas of our portfolio, based upon Juvederm’s relatively higher price point. Looking to the rest of the year, we expect our market-leading aesthetics portfolio to continue to perform well from a competitive perspective across the globe. As we evaluate market dynamics and leading economic indicators, particularly in the U.S. and China, market growth trends are below our prior expectations. Based upon this, we have moderated our outlook for the remainder of the year. Despite this near-term dynamic, we remain confident in the long-term growth outlook of our aesthetics portfolio. Global market penetration rates are extremely low and we expect long-term market growth to accelerate from current levels as economic conditions improve. As the market leader, we are also committed to driving growth by activating new patients and launching innovative treatment options. For example, in China, launch activities are underway for the Botox Cosmetic masseter muscle prominence indication. And in the U.S., we will soon launch Juvederm VOLUMA XC for the treatment of temple hollowing and we expect an approval for Botox Cosmetic in the platysma prominence indication by the end of the year. Pipeline catalysts like these in the key U.S. and China markets, along with our significant investment in consumer activation, injector training and practice support, will enable us to grow the aesthetics market and maintain our clear leadership position over the long-term. With that, I’ll turn the call over to Roopal. Roopal Thakkar: Thank you, Carrie. We continue to make very good progress advancing our pipeline with several regulatory and clinical milestones since our last earnings call. I will start with immunology. We received FDA approval for Skyrizi in ulcerative colitis, which marks its second inflammatory bowel disease indication. Skyrizi is now the only IL-23 specific inhibitor approved for both ulcerative colitis and Crohn’s disease. Skyrizi has proven to be a highly effective, durable, safe and well-tolerated treatment option for patients with moderate to severe inflammatory bowel disease. And this recent approval further strengthens AbbVie’s leadership position in this market. We also received a positive CHMP opinion recommending Skyrizi for the treatment of moderate to severe ulcerative colitis in Europe, with an approval decision anticipated soon. Earlier this month, we submitted our regulatory applications in the U.S. and Europe for Rinvoq and giant cell arteritis. Our submissions are based on the previously announced Phase 3 results from our SELECT-GCA trial, where Rinvoq demonstrated superiority compared to placebo on sustained remission from week 12 through week 52 on disease flare and showed a reduction in total steroid exposure at week 52. We expect approval decisions for this indication next year. We also recently began a Phase 3 study for lutikizumab, our anti-IL-1-alpha-beta-bispecific in hidradenitis suppurativa. HS is a skin disease that can be debilitating and there are limited treatment options. In our Phase 2 study, lutikizumab demonstrated strong clinical response rates and improvement in skin pain in a very refractory patient population. Based on these results, we believe lutikizumab has the potential to become an important new treatment option for patients with moderate to severe HS. We look forward to providing updates on the Phase 3 program as the data become available. In the second quarter, we announced two additional immunology transactions as we continue to invest in external innovation to expand our pipeline. These include the acquisition of Celsius Therapeutics, which brings a Phase 2 ready anti-TREM1 antibody for IBD and a license agreement with FutureGen to develop a next-generation anti-TL1A antibody for IBD that is designed to have less frequent dosing compared to other TL1As in development and will be evaluated in combination with Skyrizi. This follows the four immunology deals we announced earlier this year, which, as a reminder, included the acquisition of Landos and their oral NLRX1 agonist in Phase 2 for UC, a partnership with OSE to develop a novel ChemR23 agonist for IBD and RA, a collaboration with Parvus to utilize their immune tolerization platform for novel IBD therapies and a collaboration with Tentarix to develop conditionally active multi-specific biologics in immunology and oncology. Moving to oncology, where we continue to make very good progress across all stages of our heme and solid tumor pipeline. In the area of solid tumors, we recently announced positive topline results from our Phase 2 PICCOLO study evaluating Elahere as a monotherapy in ER alpha positive third-line plus platinum-sensitive ovarian cancer for those not eligible for retreatment with platinum-based therapies. Elahere met the primary and key secondary endpoints in the study, demonstrating an objective response rate of 52% and median duration of response of 8.25 month. Detailed results will be presented at an upcoming medical congress. Following discussions with the FDA, we will be submitting to Teliso-V for accelerated approval as a monotherapy in patients with previously treated c-Met overexpressing EGFR wild-type non-squamous, non-small-cell lung cancer. This submission will be reviewed under FDA’s real-time oncology review program. Teliso-V has also received breakthrough therapy designation from the FDA. Our submission will be based on the results of our Phase 2 LUMINOSITY study, where Teliso-V demonstrated strong clinical benefits across key endpoints, including overall response rate, duration of response and overall survival, with a tolerable safety profile. Submission is expected in the third quarter, with an approval decision anticipated in 2025. The confirmatory Phase 3 study for this potential accelerated approval is currently ongoing. We continue to see encouraging data for ABBV-400, our next generation c-Met ADC, which uses a topo payload. Recall that we’ve advanced 400 in late-line colorectal cancer based on the deep responses and prolonged durability observed as a monotherapy in our Phase 1 trial. And we remain on track to begin a Phase 3 study later this year in third-line CRC. We’re also seeing encouraging signals of activity for this next-gen ADC in the non-small-cell lung cancer cohort from our Phase 1 study. The preliminary data will be presented at an upcoming medical meeting. And based on the emerging Phase 1 results, we plan to begin a Phase 2 program for 400 in lung cancer. In the area of hematologic oncology, we received accelerated approval in the U.S. for Epkinly as a monotherapy treatment for patients with relapsed refractory follicular lymphoma after two or more lines of prior therapy. Epkinly is now the only T-cell engaging bispecific approved in the U.S. to treat both follicular lymphoma and diffuse large B-cell lymphoma. We’re extremely excited to bring this new subcutaneous treatment option to patients suffering from follicular lymphoma. We also recently received positive CHMP opinion with an approval decision in Europe expected later this year. In the quarter, we initiated a Phase 3 monotherapy study for ABBV-383 in third-line multiple myeloma. 383 is designed for high affinity binding to BCMA on malignant cells and low affinity binding to a unique CD3 epitope on T-cells, which has the potential to mitigate some of the adverse events associated with other T-cell engaging BCMA-based therapies while preserving high levels of efficacy. We remain excited about this asset’s potential to become a best-in-class BCMA CD3 bispecific by providing deep, durable responses and low incidence and severity of CRS, with the potential for outpatient administration, limited or no step-up dosing and monthly administration from the beginning of treatment. In addition to our Phase 3 monotherapy program, we have an ongoing Phase 1 study in later lines of multiple myeloma to evaluate 383 in various combinations, including with Pomalyst, Revlimid and Darzalex. Based on this work, we will begin Phase 2 combination studies in earlier lines of therapy next year. Moving to neuroscience, where in the quarter we announced that we received a complete response letter for our 951 regulatory application in the U.S. The CRL is based on observations identified during an inspection at a third-party manufacturing site that was unrelated to 951. The CRL did not identify any issues related to the safety, efficacy or labeling of 951, nor has the FDA requested any additional clinical data or device-related testing. We’re working closely with the site and the FDA to get clarity on timelines and we’ll provide updates as soon as information becomes available. Moving to an update on one of our Alzheimer’s disease programs. We recently completed an interim analysis of a Phase 2 study evaluating ABBV-916, our A-beta antibody. The emerging efficacy and safety profile in this study is similar to what has been demonstrated by approved agents. However, given the evolving landscape, we do not believe 916 as a monotherapy treatment will be sufficiently differentiated from other emerging therapies. As a result, we are discontinuing further development for 916 as a standalone antibody. As Rob mentioned, we remain on track to close the Cerevel transaction soon and we look forward to welcoming the team into our R&D organization. The emraclidine pivotal studies in schizophrenia remain on track to begin reading out near the end of this year. We’ll also see data from two additional Phase 3 studies for davapidon in Parkinson’s disease later this year. We look forward to providing updates on these programs once the transaction has closed and data are available. In aesthetics, we recently received approval for Botox in China for masseter muscle prominence, marking the first global approval in this indication for any neurotoxin. Masseter prominence is common in Asian populations and there is significant unmet need for minimally invasive treatment options. We anticipate high demand for Botox in this novel indication in China, which will help to further build our portfolio in the face-shaping segment. A regulatory application is under review in the U.S. for Botox and platysma prominence, which is another novel indication that will help build our position in the lower face and neck segment. We continue to expect an FDA approval decision later this year. And we remain on track to submit a regulatory application for BoNT/E near the end of this year. A rapid-onset, short-acting toxin has a highly differentiated clinical profile and once approved would offer patients a novel option compared to currently available toxins. So, in summary, we’ve made great progress across all of our therapeutic areas in the first half of the year and we look forward to additional data readouts, regulatory submissions and approvals throughout the remainder of 2024. With that, I’ll turn the call over to Scott. Scott Reents: Thank you, Roopal. Starting with our second-quarter results, we reported adjusted earnings per share of $2.65, which is $0.10 above our guidance midpoint. These results include a $0.52 unfavorable impact from acquired IPR&D expense. Total net revenues were nearly $14.5 billion, $450 million ahead of our guidance and reflecting robust growth of 5.6% on an operational basis, excluding a 1.3% unfavorable impact from foreign exchange. Importantly, these results reflect more than 18% sales growth from our ex-Humira growth platform. Adjusted gross margin was 85.2% of sales. Adjusted R&D expense was 13.3% of sales and adjusted SG&A expense was 22.9% of sales. The adjusted operating margin ratio was 42.6% of sales, which includes a 6.5% unfavorable impact from acquired IPR&D expense. Net interest expense was $506 million. The adjusted tax rate was 18.8%. Turning to our financial outlook, we are raising our full year adjusted earnings per share guidance by $0.10 to between $10.71 and $10.91. This EPS guidance continues to contemplate approximately $0.19 of dilution for the pending acquisition of Cerevel, which is expected to close soon. Please also note that this guidance does not include an estimate for acquired IPR&D expense that may be incurred beyond the second quarter. We now expect total net revenues of approximately $55.5 billion, an increase of $500 million. At current rates, we expect foreign exchange to have a 1% unfavorable impact on full year sales growth. This revenue forecast includes the following updated assumptions with the entire sales increase, once again, driven by our ex-Humira growth platform, which is now on pace to deliver nearly $6 billion of sales growth in 2024. We now expect Skyrizi global sales of approximately $11 billion, an increase of $300 million due to strong performance across all approved indications. Rinvoq, total revenue of approximately $5.7 billion, an increase of $100 million reflecting continued robust uptake in IBD. Venclexta total sales of approximately $2.5 billion, an increase of $100 million reflecting momentum in both U.S. and international markets. And for aesthetics, we now expect global revenue of approximately $5.5 billion. Given slower-than-expected near-term market growth, particularly in the U.S. and China, as a result, our total sales guidance for Botox and Juvederm will each be lower by roughly $100 million. Moving to the P&L for 2024, we continue to forecast a full year adjusted gross margin of approximately 84% of sales, adjusted R&D investment of 14% and adjusted SG&A expense of 23.5%. We now anticipate an adjusted operating margin ratio of roughly 44.5% of sales, in line with our previous expectations after including the approximately 2% impact of acquired IPR&D expense incurred through the second quarter. And we forecast our non-GAAP tax rate to be approximately 16.3%, also reflecting the impact of IPR&D. Turning to the third quarter, we anticipate net revenues of approximately $14.2 billion. At current rates, we expect foreign exchange to have a 1.3% unfavorable impact on sales growth. We expect adjusted earnings per share between $2.92 and $2.96. This guidance does not include acquired IPR&D expense that may be incurred in the quarter. In closing, AbbVie has once again delivered outstanding performance and I’m very pleased with the strong momentum across the portfolio heading into the second half of the year. With that, I’ll turn the call back over to Liz. Liz Shea: Thanks, Scott. We’ll now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, first question, please. Operator: Our first question comes from the line of Terence Flynn from Morgan Stanley. Please go ahead. Terence Flynn: Great. Thanks for taking the question and congrats, Rob, on the CEO position. Looking forward to the forward here. The question I had is, last quarter you guys gave some early commentary on how to think about 2025, looking at the business, obviously, momentum in immunology, some headwinds in aesthetics. So any update on how you’re thinking about the 2025 outlook, particularly, growth for revenue relative to EPS? Thanks. Scott Reents: Thanks, Terence. This is Scott. I’ll handle the question. So, with respect to 2025, as you know, we haven’t given guidance yet and we’ll provide that at a later time. But we have communicated a few top-level, high-level items to put in context of several dynamics at play next year. We have indicated that we’ll be returning to robust revenue growth, despite the headwinds from Medicare Part D redesign and continued Humira erosion. And when you think about robust growth, we characterize robust growth to be above industry average growth, which we see in the low-single digits. So when you think about the drivers, I mentioned in my remarks that we have $6 billion of growth from the growth platform in 2024 that we’re expecting. $5 billion of that is coming from Skyrizi and Rinvoq alone, our neuros franchise is growing by more than $1 billion and aesthetics has begun to recover from the economic headwinds. In 2025, we see incremental contributions from Skyrizi UC, which was recently approved, as well as 951. All these factors demonstrate strong momentum in the business. And then when you think about the offset of Humira, that erosion that we have expected this year at $4.5 billion. Last year that erosion was $6.5 billion and we do expect another step down in absolute dollar terms in 2025 for that erosion as well. So that will be less of a headwind to growth in 2025 than it was in 2024. So we feel very, very strong about that. And I think from a Part D perspective, we’ve talked about the several points of growth headwinds that we see there. And I think when you model that, you can think about those several points as approximately a 3% headwind to growth. So, overall, very strong momentum from the business with some headwinds, but we feel very confident in our ability to return to robust growth at the topline. Regarding EPS, the bottomline, we see EPS growing in line with that revenue growth that we’ve talked about. So, EPS will benefit from operating margin expansion. We’ve talked about that operating margin expansion will be on the SG&A line as we leverage the revenue growth and drive efficiencies and we have a good history of doing that. So, that operating margin will expand. However, that expansion will be roughly offset by the fact that in 2025, we’ll have a full year of interest expense associated with the financing for Cerevel and ImmunoGen. So robust growth at the topline and in-line growth from an EPS perspective. Liz Shea: Thanks, Terence. Operator, next question, please. Operator: Next, we’ll go to the line of Chris Schott from JPMorgan. Please go ahead. Chris Schott: Great. Thanks so much. Just two questions for me. Maybe first on Rinvoq and Skyrizi, great results in the quarter. Can you elaborate a little bit more on the price versus volume dynamics this quarter? It seemed like results were maybe a little bit stronger than the RX trends would have implied, and I just was wondering if there was anything notable there. My second question was on the immunology portfolio, and as we think about 2025, I know we’re probably in the middle of contracting season right now, but just directionally, what are you anticipating for Humira, and should we be thinking about any incremental pressures on Rinvoq and Skyrizi just given biosimilar Humira dynamics going forward? Thanks. Jeff Stewart: Yeah. Hi, Chris. It’s Jeff. I’ll take that question. So, as noted, we’re very, very pleased with the fundamental momentum on Rinvoq and Skyrizi. So all of the indications are really hitting their stride. So we can see the impact of, obviously, consumer investments we’ve made. We’ve adjusted some of the sales forces. We’ve started to anticipate the ulcerative colitis that’s helped us basically increase our share of voice. And I think the other dynamic in terms of some of the incremental strength has come from this dynamic that we started to see earlier in the quarter where some of the Humira switching that takes place actually starts to accrue towards Skyrizi and Rinvoq because the physicians, when there’s this disruption in the market, will sometimes bring in those patients and start to assess them, and we saw about 20% would move to other mechanisms. So while it’s a component, there are certainly multifactorial approaches why we see this very, very strong volume dynamic and share capture for both of those agents. If I move to the contracting for 2025, obviously, the contract season is in progress and it’s progressing, and the negotiations are well underway. I think it’s important, if you’ll recall, that we already have some multiyear contracts in place that cover 2025, so that’s a positive dynamic. The remaining payer negotiations, as I mentioned, are underway and we anticipate that those will close out during the normal cycle. I would say that, at a macro level, we do expect to maintain parity access next year for Humira for a meaningful portion of lives across all of the channels. Now, that said, our Humira access will certainly be lower than this year as we continue to anticipate and watch certain segments of the market move to adopt biosimilars. And we’ve understood and planned for this, obviously, as we enter that third year of the biosimilars and so we’re well aware of dynamically evaluating how this is going to work out. So, certainly, things are progressing. We already have some in place from those multiyear contracts and we’ll be in a better position to provide some more information, obviously, later in the year as those negotiations or the remaining negotiations fully close out. Rob Michael: And Chris, this is Rob. Just to reiterate an important point that Jeff made, I mean, one trend that we are watching very closely is the switching from the Humira molecule to new mechanisms. I mean, we are starting to see an inflection that is accruing to new mechanisms like Skyrizi and Rinvoq, as Jeff mentioned. And it makes sense, doctors that are reevaluating the patients in their practice are likely looking at more than just the patients that are covered by CVS. What we have factored in is the CVS impact. What we didn’t factor in necessarily is an impact beyond just the CVS-wise. And to the extent that trend continues, it would represent a downside for Humira and an upside for Skyrizi and Rinvoq, which is a very good long-term tradeoff for us. That’s an important point. We want to make sure that was captured. Jeff Stewart: Thank you, Rob. And maybe, Chris, one more point that I didn’t address was the Skyrizi and Rinvoq contracting. So we are anticipating very robust and consistent access for Skyrizi and Rinvoq. And our former comments around sort of low single-digit price erosion should be quite consistent with what we said before. Obviously, the Medicare Part D is a separate dynamic. So things are stable and we’re anticipating ongoing very strong access for both of those brands. Liz Shea: Thanks, Chris. Operator, next question, please. Operator: Next, we’ll go to the line of Carter Gould from Barclays. Please go ahead. Carter Gould: Good morning. Thanks for taking the question and congrats on the results. I guess first, just a housekeeping point. I guess, one -- I guess, on the last call, you had talked about earnings growth not being quite at the rate of revenue growth and it sounds like today you see those more in line. Any, I guess, further color on kind of what’s driving that? I would assume it’s sort of the key I&I drivers, but any other color there would be appreciated. And I guess the more pertinent question, maybe on the commentary on Cerevel, should there be any expectation for divestments or other concessions as we contemplate that deal closing? Thank you. Scott Reents: Yeah. This is Scott. I’ll take the question regarding EPS growth or earnings growth in line with the revenue growth. So when we look at this, as I mentioned, we’re looking at a couple of things. The SG&A that we’re driving some operating margin expansion, we spent a lot of time focusing on that and we do see some efficiencies that we can drive, and we do have the ability to leverage that. So there will be expansion operating margin, which you would expect to then let earnings outpace the revenue growth. However, there is this offset and we had a very successful bond offering when we set the financing in place for Cerevel and ImmunoGen. So, but that will be an offset to the operating margin expansion. So you can think of those two as essentially netting one another and then driving that earnings growth in line with the topline. Rob Michael: Hey, Carter. This is Rob. I’ll take your question on Cerevel. Look, we’ve made very good progress with the FTC and have certified substantial compliance to their second request. No divestments are expected. I would expect the transaction to close soon, potentially as early as next week. We’re obviously very excited about the potential best-in-class therapies in Cerevel’s pipeline, especially emraclidine for schizophrenia, davapidon for early Parkinson’s and their core antagonist for major depression. I mean, these assets clearly will be great additions to our neuroscience franchise. Liz Shea: Thanks, Carter. Operator, next question, please. Operator: Next, we’ll go to the line of Vamil Divan. Please go ahead. Vamil Divan: Yeah. Hi. Thanks for taking my question. So, maybe one if I could just, I guess, for Rob, just around sort of your business development priorities now. You obviously did a sort of larger deal last year with Cerevel, ImmunoGen, you’ve done a number of these smaller acquisitions. And I guess I’m trying to get a sense of the kind of balance between investing for the long-term and then sort of balancing the near-term earnings growth outlook. So there’s a lot of focus on that $11 floor for a long time, obviously, with all the IPR&D. You sort of dipped a little bit below that for this year, which makes sense. But I’m just trying to think now that we’re sort of halfway through the year, how are you thinking about sort of where your priorities are and the need to kind of balance the near-term numbers versus investing for the long-term? Thanks. Rob Michael: Yeah. Vamil, thanks for the question. So, the $11 floor, again, was on an ex-IPR&D basis, where obviously with this guidance, ex-IPR&D, I think, we’re just a little bit over $11.40 and we’re certainly positioned to return to robust growth. I mean, we’re delivering robust revenue growth this quarter. When you look at the outlook for 2025, it’s very strong and so we should be beyond the conversations on the floor at this point. As we think about the tradeoffs for the long-term and the short-term, clearly we have an on-market portfolio today that can drive the growth that we need to deliver on that high single-digit, top-tier outlook in this decade. So our BD efforts continue to be focused on early-stage assets that can drive growth in the next decade, and you’ve seen us execute nearly a dozen deals this year along those lines. These include new mechanisms in immunology that can combine with Skyrizi or Rinvoq or be pursued as model therapies. We’ve also added new platforms, including multi-specifics, that have applicability in immunology and oncology. Our deal targeting in situ CAR-T therapy is another example of a platform investment in oncology. And we added a novel mechanism for psychiatric disorders, given our focus in neuroscience. So we intend to continue adding more depth to our pipeline in our core areas, particularly think about early-stage deals, because what we’re really trying to set up for is that growth in the next decade. We have a clear line of sight to top-tier growth this decade and we want to position the company to deliver strong growth in the next decade as well. Liz Shea: Thanks, Vamil. Operator, next question, please. Operator: Next, we’ll go to the line of Chris Shibutani from Goldman Sachs. Please go ahead. Chris Shibutani: Thank you. Good morning. On the aesthetics business, today has been a day of reporting across the industry. There’s some commentary that aligns with what you said. However, some additional questions I have are on granularity about procedure volumes and pricing. Now, in the first quarter, you talked about promotional activities that you pushed towards a seasonally strong second quarter. One, should we think about the pricing backdrop as being a component of some of the sluggishness as opposed to purely thinking about or primarily thinking about volume of procedures? And if you could sort of respond in the neurotoxin neuromodulator versus the filler segment, that’d be helpful. Thank you. Carrie Strom: Hi. This is Carrie. I’ll address the questions. So, first let’s talk about the market dynamics for market growth in the U.S. for facial injectables. So, late last year, we started to see a recovery and a return to growth of the toxin market and we’ve seen that market growth recovery continue this year in that mid-single-digit range. And that’s volume, that is traffic into our customers’ offices and that’s really been consistent for the past few quarters. So, the market dynamics for our business are really driven by patient demand and volume. Although, when we think about price, price is a factor that we’ll be looking for the second half of the year, which will give us some favorable pricing dynamics. We did take a price action at the beginning of the year for toxins and then we’ll have some more efficiency when it comes to our strategic shifts in our pricing promotions for the second half of the year. So, one example of that would be promotions we did last year, for example, around competitive launches that we won’t need to do this year based on the success of our competitive strategy last year. So really our performance is driven by market growth and we also had some nice stability in our market share. Anything you’d like to add? Jeff Stewart: Maybe because it’s worth mentioning, so some of that shift in promotional activity that you mentioned, we did talk about in the first quarter that that was a destocking that occurred of inventory levels. And when Carrie made her remarks and we spoke about it last quarter, we said that would reverse over time. We did see that reversing in the second quarter on a partial basis. And when you think about the reversal of that Q1 destock, you can think about from the U.S. market that really would reduce by 50% or cut in half the growth rates we published for the actual results for both Botox and Juvederm. So we saw that partial reversal of that destocking event and then we will see that continue to unwind throughout the course of the year, especially as we have some of our larger promotional activities and the back half of the year with Botox Day and Juvederm Day, we do see typically an inventory, a stocking uplift from those activities. Liz Shea: Thanks, Chris. Operator, next question, please. Operator: Next, we’ll go to the line of Mohit Bansal from Wells Fargo. Please go ahead. Mohit Bansal: Great. Thanks for taking my question. I just wanted to talk a little bit about the pipeline in IBD space as well. I mean, you have done a bunch of these and then there has been some movement, especially in the oral IBD drugs as well. I mean, given your expertise, I would love to understand, how do you think about a pipeline moving beyond the likes of Skyrizi, IL-17s and all, because these drugs are pretty good. But when you think about an oral, what is the ideal profile of the drug that could be a first-line drug and then when you think about combinations, I mean, what are you exactly looking for? Thank you. Roopal Thakkar: Hey, Mohit. It’s Roopal. I can talk about that. With respect to orals, we did do this deal with Landos and this is our NX-13asset, which we’ll anticipate a readout end of this year, beginning of next year. Early data point to good outcomes in ulcerative colitis and this asset works through NF-kappa-beta, so you’ll see what we’ve observed in preclinical models is reductions in IL-6, IL-1, TNF, interferon gamma. And it’s potentially a monotherapy and one that wouldn’t have a boxed warning. So far, the safety data has looked good. But there’s also opportunities, we believe, as you mentioned, combinations, that you could still combine with Rinvoq. And as I mentioned the boxed warning and in certain geographies, Rinvoq is utilized post-anti-TNF. Even with a combo there, there’s still opportunity. The second and third line segments in IBD and across immunology continue to grow, and they’re getting larger and larger as patients cycle through biosimilar anti-TNFs. We’ll see them cycle through, for example, in IBD with IL-1223, like Stelara. So in the future, there’s multiple opportunities. And the way we think about these is do we see an asset that is novel and can address mechanisms that haven’t been addressed yet, and can they complement something like Rinvoq? So if you see a little bit less efficacy, that may be okay if it’s complementary. It may not work necessarily as a monotherapy, but we still see opportunities for a combo. And given the other assets that we’ve talked about that could be IV or sub-cue, we still see a lot of opportunity with Skyrizi. In a platform study in IBD we’ll kick off later this year, looking at various combinations, many of the assets that I mentioned in the prepared remarks, including a TL1A, including our own internal alpha-4 beta-7, could be added on to Skyrizi to drive that efficacy even higher because there’s still a bit of a ceiling effect. And I would say the unmet need in IBD in particular continues to be quite high. Mohit Bansal: Okay. Thank you. Liz Shea: Thanks, Mohit. Operator, next question, please. Operator: Next, we’ll go to the line of Chris Raymond from Piper Sandler. Please go ahead. Chris Raymond: Thanks. Hey. Just another follow-up on Humira. So, Jeff and Rob, just hearing your commentary about how when patients discontinue Humira, a number of them are switching to newer biologics. I think you gave the 20% number going to newer biologics like Skyrizi and then also Rinvoq. But we saw some of this happening in the gastro space with one of the checks we did recently, but I wonder if you could provide maybe a little more color on this phenomenon. Is there a particular therapeutic silo where this is maybe happening more extensively? And can you give us a sense as to how this has been influenced or accelerated by biosimilar availability and just any more color there? Thanks. Jeff Stewart: Yeah. Thanks for the question. It’s almost like a bimodal phenomenon. So, the 20% I highlighted, so if you just look from our data, when we just look at the CVS template, so we can see the degradation of Humira that goes down pretty steeply because, remember, it’s an exclusion. So, Humira is no longer widely available at all. So, most of it happens within the first two weeks or three weeks. And in that one segment, we see that the biosimilar doesn’t take up all the Humira loss and we can see it moving to other mechanisms, particularly Skyrizi and Rinvoq. So that’s within, let’s say, the acute biosimilar event. Now, to Rob’s point, what he highlighted is, if you take a step back and you look at the macro market, we’ve started to see in the first quarter and second quarter that the overall molecule, so that’s the adalimumab molecule, inclusive of biosimilars, has started to compress faster than it did before there was the availability of this action that was taken by CVS. So, it’s a doubling of effect, acutely in the segment that takes place with the exclusion and then the wider market. Now, we’re watching this pretty carefully because we haven’t -- obviously haven’t seen something like this before in terms of the compression of a molecule. So, that’s basically the dynamics that we’re seeing. And we do think it’s because some physicians or segments of physicians are, they realize that these biosimilars where there’s an acute interruption, they want to check how the patients are doing. And if they’re not fully in remission when they come in for their appointment, let’s say before the switch, sometimes they’re transitioned at the rates that I described. So that’s sort of the prescriber behavior. Now, where is it coming from? Like, well, we actually see that it is accruing across all of the indications, particularly Humira has quite robust, let’s say, base dynamics in the rheumatology indications. But we can see it in rheum. We can see it in derm. Derm to Skyrizi in particular, which is probably not a surprise given the position. I highlighted a 38% share and a 60% in-place share for Skyrizi and derm. And we also do see it to some degree in gastroenterology. So, to Rob’s point, we’re going to continue to monitor that. If the overall molecule would continue to compress, obviously, there would be some mitigation of some of it accruing over to Skyrizi and Rinvoq, and so we’ll have to continue to see how these weeks and months play out here over the third quarter. Liz Shea: Thanks, Chris. Operator, next question, please. Operator: Next, we’ll go to the line of Gary Nachman from Raymond James. Please go ahead. Gary Nachman: All right. Great. Thanks. Can you talk more about how you’re managing the growth for Skyrizi and Rinvoq in IBD across both UC and Crohn’s, which have both been really strong? And with the Skyrizi UC launch, is there any cannibalization there with Rinvoq? And I guess, generally, how do you see those products working synergistically both in terms of sales force and reimbursement, if you see any sort of issues or conflicts there? Thanks. Jeff Stewart: Yeah. Thank you for the question. A very important question in terms of how we commercialize these. Roopal highlighted it. Obviously, you have the two big indications with two assets within those indications. And so we have constructed, not just in the U.S., but around the world, a very sophisticated approach in terms of multiple sleeves of representatives and medical experts that are representing both drugs across both indications. And it really is, let’s say, for example, in our largest market, the U.S., it’s relatively easy to execute, because what we see is that our representatives can highlight Skyrizi’s data and potential as the obvious frontline agent, which is obviously tremendous data. I mentioned the sequence data. I mentioned our core data. The naive to biologic data in UC is absolutely fantastic for the Skyrizi data. And then, really ironically, because of the label changes that took place a few years ago, Rinvoq is positioned in later lines. So, really, that sort of approach is highly synergistic in terms of we recommend that physicians consider starting with Skyrizi and the efficacy will be fantastic. But to Roopal’s point, there’s still pressure on that disease and then you have a backstop with tremendous, tremendous data on Rinvoq in later lines. And so that’s how we position it. We look and we monitor the cannibalization. It’s quite modest, and overall, when you look at the dynamic of share capture, it’s quite encouraging to see how the infield teams and the commercial teams are managing all of those assets. So, we’re very encouraged about how we’ve approached the market in terms of our execution and I think the results are speaking for themselves. Liz Shea: Thanks, Gary. Operator, next question, please. Operator: Next, we’ll go to the line of Steve Scala from TD Cowen. Please go ahead. Steve Scala: Thank you. Regarding the 2024 sales guidance, which I realize is about $55 billion, but it implies similar growth in the second half as in the first half, if not a slight deceleration. Why won’t total sales do better and what were your reservations about raising sales guidance today? It seems that across the business, strengths are exceeding challenges, so it would seem not unreasonable to have higher sights now. Second question is, I’m wondering if you can elaborate on the comment, a portion of Humira lives is a portion of Humira lives closest to a quarter, a half or three-quarters of lives. Thank you. Scott Reents: Steve, this is Scott. I will talk regarding the revenue. So, just to clarify, we did raise the revenue guidance in total from $55 billion to $55.5 billion, a $500 million raise and that included a $300 million raise for Skyrizi, a $100 million raise for Rinvoq, a $100 million raise for Venclexta, a $200 million spread across other products and then a $200 million reduction in the guidance for aesthetics. So, we do see very strong momentum in the business and we did raise our sales guidance from $55 billion to $55.5 billion. Rob Michael: And Steve, this is Rob. If you just look at, as I mentioned in my remarks, the first half of the year, we talked operational growth around 4%. If you -- the implied operational growth in the second half, based on our guidance, would be slightly above that and really driven by the ex-Humira growth platform, which on a reported basis, grew more than 18% this quarter. And so we’re very pleased with the performance of the business, and I think, when you look at the guidance and you do the math, you’ll see that the actual implied second half operational growth is slightly higher than the first half. Jeff Stewart: And Steve and Jeff, so to give some sense, so we’re looking at coming up on the third year of biosimilar. So, the first way to think about it, in the first year 2023, we had very strong parity access across all the channels and we really exited the year around, I think, 97% or something like that. This year, I think, when we look at all the ins and outs, I think, the three-quarter approach is quite reasonable, and as I mentioned in my remarks to early one of the questions, it will certainly be lower next year and I would think that that range would be around that 0.5 point, but again, we’re not fully complete with all the dynamics. So, that gives you some broad spectrum over three years, maybe around the halfway point, plus or minus, as we go into 2025. Liz Shea: Thanks, Steve. Operator, next question, please. Operator: Next, we’ll go to the line of Trung Huynh from UBS. Please go ahead. Trung Huynh: Hi, guys. Trung Huynh from UBS. Thanks for taking my questions. Just two from me. On the aesthetic, thanks for your comments this year and you’ve also moderated your short-term guide accordingly, but you’ve noted that the long-term 2029 guide remains intact. So, with growth around 4% this year in line with that new guide, I imagine next year will be slightly higher, but then it does imply that growth is well into the double digits for 2027, 2028 and 2029 on our calculations. Just what here makes you confident about that level of growth later in the decade? And then secondly, just following up on some of your thoughts on the immunology pipeline, you noted the potential of the utility of multispecifics in immunology. You’ve got a pretty strong bispecific platform. Just what are your thoughts on the data that you’re seeing here? Is there anything in development that we should be looking at? Thank you. Scott Reents: Trung, this is Scott. I’ll start with your question regarding the long-term guidance on aesthetics. So you’re right. We’ve guided to a long-term $9 billion in 2029 and we’re not changing that guidance. The guidance changed, as you noted, that I mentioned today is just a short-term guidance change for 2024. We remain very confident in our ability to hit that $9 billion in 2029. When you think about these markets, there’s very low penetration in the markets globally. There’s a lot of excitement in the space and we expect the market to recover and grow at historical rates. I would say when we look at the market growth, we do see that rebounding and growing well. And then you also should think about there’s additional innovation coming that will drive that. So, we have some of the additional indications in Botox that Roopal walked through, as well as the quick onset short-acting toxin BoNT/E that will also drive additional market growth. And so we continue to feel very comfortable with our ability to achieve that on a long-term basis in 2029. Roopal Thakkar: Trung, it’s Roopal. I’ll take the next question on the pipeline. So, we continue to be excited about bispecifics, in particular lutikizumab. And it’s an IL-1 alpha, and importantly, also 1-beta. And this, we believe, distinguishes it from earlier generation assets that were singular, and let’s say, only took out IL-1 alpha. We see, I would say, very, very strong benefits in hidradenitis suppurativa and I don’t think that was observed as a pure monoclonal. And the efficacy that we’re seeing is in a 100% anti-TNF failure population and very sick, early Stage 3, 70%. It is one of the most severe, probably the most severe ever studied. So we think there continues to be potential in the bispecific space as you take out multiple cytokines. The way to address it is through engineering of the assets. The other way is combination, so we can get to that bispecific approach through combos. And then, thirdly, I would say earlier in the pipeline is the multispecific approach, which the advantage that could provide is you maintain your bispecific approach, but then a third arm, let’s say, can target specific cells and that could further enhance efficacy, and in particular, safety. And we’re looking at that approach in immunology and as well in oncology, and that was reflected in our partnership with Tentarix. Liz Shea: Thank you, Trung. Operator, next question, please. Operator: Next, we’ll go to the line of Evan Seigerman from BMO Capital Markets. Please go ahead. Evan Seigerman: Hi, guys. Thank you so much for taking my question and it was really, really helpful to update today. So, just looking at kind of the expected growth for… Liz Shea: Can you just -- can you speak up just a little bit? Sorry. Evan Seigerman: All right. Can you guys hear me all right? Does that work? Rob Michael: Yeah. Liz Shea: It’s still faint, but we’ll do our best. Evan Seigerman: All right. Sorry about that. I’ll speak very loudly. So when looking at expected growth for Vraylar over the next few quarters, can you comment on what type of impact you think new competitors to the MBD market might have and what you can do to help maintain a growth position going forward? Jeff Stewart: Yeah. Hi. It’s Jeff. We’re very pleased with how both of the indications are performing and we monitor them very carefully, certainly with bipolar and aMDD. So when we look at our quarterly surveys of our target physicians and really our whole call cycle, we can see now that Vraylar is the most preferred agent overall for bipolar disease based on its indication set, its tolerability, its efficacy, et cetera. And we’ve really gone to the very top of the lead table for aMDD as well. So, if we look overall on our demand, we’re tracking above 20% in terms of the push. We continue to focus our team and where necessary add share a voice in terms of our sales force. So, we’re quite comfortable that we can continue to grow our share, which has been growing very, very nicely, particularly on the MBRX side, and certainly, face the competitive dynamics and navigate those as we go forward. Roopal Thakkar: Jeff, maybe to add. it’s Roopal here. There is going to be competition, but what we see as a benefit clinically for Vraylar is that full spectrum coverage in bipolar and when you’re able to take mania, you don’t need an adjunctive therapy for that. So that’s a big advantage. The other thing that we continue to hear and probably reflected in our data is the really limited impact on fatigue and sedation. And so what we’re hearing is with Vraylar, patients really don’t have to sacrifice their daytime productivity in order to gain that benefit. And then the other benefit, I would say, with Vraylar is flexible, adjustable dosing. So these things together, I think, underlie what Jeff was speaking about. Liz Shea: Thanks, Evan. Operator, next question, please. Operator: Next, we’ll go to the line of James Shin from Deutsche Bank. Please go ahead. James Shin: Hi. Good morning. Thanks for taking our question. You mentioned some of the Humira contracts going to 2025. Does that also apply to Skyrizi and Rinvoq, and that’s what gives you visibility on the low single-digit price erosion? And secondly, has the introduction of co-branded Humira and now that PBMs are more intertwined with biosimilars, changed the negotiation dynamics at all? Thank you. Rob Michael: Yeah. So, typically, again, in some cases we are able to secure multiyear contracts. And as you can imagine that we would do that for the portfolio, basically, the way that our products work. So, that does help with the visibility in terms of what our access would look like for 2025, as well as the pricing dynamics. Again, I want to clarify that the negotiating season is not fully complete, but the dynamics are progressing, as I highlighted there. So, yes, to your first question. The other dynamic in terms of Cordavis, I’m not sure that that’s actually changing the dynamics in terms of the negotiations overall. That was obviously a volume-related deal with CVS that we announced over a year ago or almost a year ago now. So it doesn’t necessarily play into other negotiations. Each of these payers and pharmacy benefit managers, they have their own ideas in terms of how they want to approach the I&I category and certainly the Humira -- the emergence of the Humira biosimilars. So it’s a CVS-unique dynamic. Liz Shea: Thanks, James. We have time for one final question, Operator. Operator: For our last question, we’ll go to the line of Louise Chen from Cantor Fitzgerald. Please go ahead. Louise Chen: Hi. Thanks for taking my questions here. So I wanted to first ask you, do you still feel that your aesthetics business is a good strategic asset for you, and if so, where do you see the synergies within your organization? And second question I wanted to ask you is, how do you think pharma will fare under a Democratic versus a Republican presidency and how are you going to navigate through that uncertainty in the near term? Thank you. Rob Michael: So, Louise, this is Rob. I’ll take your question. Look, we like the aesthetics business. When you think about the growth profile, the profitability, we have set it up as a fully integrated standalone unit, because it behaves differently than the therapeutics business. We think we’ve actually seen, since we announced the transaction, really strong performance. We’ve exceeded our deal model expectations since we announced the deal. So we think it’s operating very well. Obviously, we’re working through some macroeconomic headwinds. But when you look at, for example, share performance, we had the entry of DAXXIFY last year and we did not lose any share. I think a lot of investors were concerned that we’d see considerable share loss. And so I think the team has done a remarkable job of competing in this marketplace, going through a period with economic headwinds. We’re still very confident given low penetration rates, given our relationship in the field, the potential innovations that we plan to bring forward. It has a very nice fit. And you think about just from a profitability and a growth standpoint, it fits the profile we’re looking for. So I certainly feel it’s a nice fit for the company. As it relates to the election, look, it’s hard to handicap it, whether Democrat or Republican. If you think about we’ve obviously contemplated the Inflation Reduction Act. We’ve come out and said that even with modeling that impact in, that we still expect to deliver on our long-term outlook. Now, I will say our view on the IRA from a policy perspective is we’re certainly in favor of the Part D benefit redesign because it helps address patient out-of-pocket burn. But the price-setting provisions in the IRA will certainly harm long-term innovation in our industry. So, we are hopeful that if it’s a new administration or the current administration, that they’ll reassess those provisions that ultimately are harmful for long-term patient care in the U.S. I mean, it clearly takes away the incentive to launch in later lines of smaller patient populations, which is really a very unfortunate negative outcome for the legislation. So, the way I view it is addressing patient out-of-pocket burden is good policy, but taking away the incentive for innovation is not, and my hope is under either administration, that will be reconsidered. Liz Shea: Thanks, Louise. That concludes today’s conference call. If you’d like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. Operator: Thank you all for joining the AbbVie second quarter 2024 earnings conference call. That concludes today’s conference. Please disconnect at this time and have a wonderful rest of your day.	[ { "speaker": "Operator", "text": "Good morning and thank you for standing by. Welcome to the AbbVie Second Quarter 2024 Earnings Conference Call. All participants will be in a listen-only mode until the question-and-answer portion of this call. [Operator Instructions] I would now like to introduce Ms. Liz Shea, Senior Vice President, Investor Relations." }, { "speaker": "Liz Shea", "text": "Good morning and thanks for joining us. Also on the call with me today are Rob Michael, Chief Executive Officer; Jeff Stewart, Executive Vice President, Chief Commercial Officer; Roopal Thakkar, Executive Vice President, Research and Development, Chief Scientific Officer; Scott Reents, Executive Vice President, Chief Financial Officer; and Carrie Strom, Senior Vice President, AbbVie and President, Global Allergan Aesthetics. Before we get started, I’ll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today’s conference call, non-GAAP financial measures will be used to help investors understand AbbVie’s business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we’ll take your questions. So, with that, I’ll turn the call over to Rob." }, { "speaker": "Rob Michael", "text": "Thank you, Liz. Good morning, everyone, and thank you for joining us. It’s a pleasure to speak with you today as AbbVie’s new CEO. I look forward to building on our track record of success and delivering on AbbVie’s promise to our patients, employees, shareholders and communities. As we begin this new chapter, nearly every aspect of AbbVie’s business is performing at or above our expectations. We are demonstrating a rapid return to revenue growth, with operational sales up nearly 4% through the first half of this year, including robust mid-single-digit growth in the second quarter. Our ex-Humira growth platform, which covers more than 80% of AbbVie’s total sales, will outperform our initial full year sales guidance by more than $1 billion, driven by strong performance in immunology and oncology. In addition, U.S. Humira performance continues to meet our expectations, having achieved or exceeded our guidance in all six quarters with biosimilar competition. The strong performance across our diversified portfolio will drive top-tier high single-digit compound growth through the end of this decade, which will support continued investment to drive growth in the next decade. Turning to our results, I’m especially pleased with immunology, where our leading portfolio is delivering performance well above our expectations. Skyrizi continues to demonstrate strong momentum in psoriasis and Crohn’s disease, where we have substantial headroom for additional share gains and the recent approval in UC will add another source of long-term growth. Rinvoq is also delivering robust growth across all approved indications. We are making excellent progress with late-stage development in five additional indications that we anticipate will launch in the second half of this decade. In oncology, Elahere has accelerated our on-market presence in solid tumors. We also have several exciting pipeline programs, including two novel c-Met ADCs for solid tumors, Teliso-V and 400, as well as 383, our BCMA CD3 bispecific for multiple myeloma. In neuroscience, our leading therapies for migraine and mood disorders continue to gain share and are competitively well-positioned. The pending acquisition of Cerevel will further augment our neuroscience pipeline and we’re excited about what our two companies can achieve together to make a difference for patients with neuropsych disorders. We have certified substantial compliance to the FTC second request and anticipate the Cerevel transaction will close soon. Lastly, we’ve been very active with business development, investing in exciting opportunities that can drive growth in the next decade. Through the first half of this year, we have executed nearly a dozen early-stage deals. These include promising technologies and innovative mechanisms that can elevate the standard-of-care in immunology, oncology and neuroscience. In summary, I’m very pleased with the strong momentum of our business. AbbVie’s results once again exceed our expectations and we are raising guidance for the second time this year, underscoring our confidence in the business. The robust performance of our growth platform and the advancement of our pipeline supports AbbVie’s top-tier long-term outlook. With that, I’ll turn the call over to Jeff for additional comments on our commercial highlights. Jeff?" }, { "speaker": "Jeff Stewart", "text": "Thank you, Rob. We continue to demonstrate strong commercial execution across our therapeutic portfolio. I’ll start with the quarterly results for immunology, which delivered total revenues of approximately $7 billion. Skyrizi and Rinvoq are performing exceptionally well, contributing more than $4.1 billion in combined sales this quarter, reflecting operational growth of 50% in their fifth full year on the market. These assets are approved across a broad set of indications and are collectively supported by nine compelling head-to-head studies that demonstrate clear differentiation across multiple novel therapies, which has resulted in strong share capture. For Skyrizi, we continue to advance our clear leadership position in psoriasis, where total prescription share of the U.S. biologic market has increased to approximately 38%. Share is also ramping nicely in PSA, especially in the dermatology segment, where Skyrizi has achieved roughly 15% total prescription share in the U.S. biologic market. And for Rinvoq, we are seeing increasing share across each of the rheum indications, as well as additional momentum in atopic dermatitis, including total prescription share of 10% in the U.S. We are very excited about the growth potential in gastroenterology, where Skyrizi and Rinvoq are on pace to double their respective sales in IBD this year. The adoption in Crohn’s disease has been impressive, with Skyrizi and Rinvoq now achieving a combined in-place share in the U.S. of more than 40%. Skyrizi has achieved overall in-place share leadership in Crohn’s, with in-place share approximately now 13 points ahead of Stelara, following our compelling head-to-head sequence data published last year. This positive trial, which demonstrated Skyrizi’s high efficacy versus Stelara, including a more than doubling of effect in endoscopic remission has driven a significant inflection in performance and we anticipate continued share momentum. Commercialization for Skyrizi and ulcerative colitis is now underway in the U.S., with broad formulary access anticipated to ramp quickly over the next several months. Early feedback from gastroenterologists has been very encouraging, with Skyrizi’s UC data viewed as impressive, particularly for naïve patients who have not been exposed to biologics. We also expect the European launch in the coming months. We also see very robust adoption of Rinvoq in UC, where the brand is now achieving a leading in-place share in the U.S. Internationally, Rinvoq UC is now approved in 75 countries, with reimbursement and share gaining momentum. Having two novel therapies that each deliver differentiated levels of efficacy to treat both of these IBD conditions demonstrates our commitment to transforming the treatment landscape for physicians and patients in this area of high unmet need. Turning now to Humira, which delivered global sales of $2.8 billion, down 28.9% on an operational basis due to biosimilar competition. Erosion in the U.S. was in line with our expectations in the quarter and our guidance complicates -- contemplates the impact of additional formulary changes over the course of the year. Importantly, we continue to anticipate that Humira will maintain parity access to biosimilars for a significant majority of patient lives this year. Moving now to oncology, where total revenues were more than $1.6 billion. Imbruvica global revenues were $833 million, down 8.2, reflecting continued competitive dynamics in CLL. Venclexta global sales were $637 million, up 15.8 on an operational basis, with strong momentum across CLL and AML. Elahere is also performing very well, with sales of $128 million and our compelling overall survival data, recent positive updates in the NCCN guidelines and the expansion of commercial resources will continue to drive rapid uptake. Lastly, we continue to be pleased with the prescription trends for Epkinly in DLBCL. Commercialization is now underway for Epkinly’s second indication, follicular lymphoma, in the U.S., with European approval expected later this year. Neuroscience total revenues were nearly $2.2 billion, up 15.2% on an operational basis. This robust performance is driven by continued double-digit growth of Vraylar, with global sales of $774 million, Ubrelvy with total revenue of $231 million and Qulipta with global sales of $150 million. Each of these leading assets continue to gain share and remain competitively well-positioned. Botox Therapeutic is also performing well, especially in chronic migraine. Total global sales were $814 million, up 9.6% on an operational basis. Finally, we are pleased with the early launch trends for 951 in Japan and Europe, and look forward to bringing this innovative therapy for advanced Parkinson’s to the U.S. soon. Overall, I’m extremely pleased with the momentum across the therapeutic portfolio. And with that, I’ll turn the call over to Carrie for additional comments on aesthetics. Carrie?" }, { "speaker": "Carrie Strom", "text": "Thank you, Jeff. Second quarter global aesthetic sales were approximately $1.4 billion, representing growth of 2.8% on an operational basis. In the U.S., aesthetic sales of $863 million increased by 4.4%, driven by Botox Cosmetic and Juvederm growth of 7.1% and 10.4%, respectively. This toxin and filler performance is supported by a consistent recovery in the facial injectable market, as the number of procedures in both categories increased by a mid-single-digit percentage versus the prior year. However, this level of market growth was lower than previously anticipated. Sales for Botox Cosmetic and Juvederm also benefited from a partial reversal of the prior quarter’s inventory destock, which was related to the timing of certain promotional activities. From a competitive perspective, our U.S. facial injectable portfolio remains the clear market leader, with strong and stable market share. Internationally, second quarter aesthetic sales were $527 million, roughly flat versus the prior year on an operational basis, as declines in China were balanced by growth in other international markets. In China, our largest international market, sales growth continued to be impacted by sustained economic headwinds, as well as a challenging comparison to the second quarter of last year, which benefited from a strong post-COVID recovery. Consistent with what we experienced in the U.S., economic challenges have impacted Juvederm sales growth more than other areas of our portfolio, based upon Juvederm’s relatively higher price point. Looking to the rest of the year, we expect our market-leading aesthetics portfolio to continue to perform well from a competitive perspective across the globe. As we evaluate market dynamics and leading economic indicators, particularly in the U.S. and China, market growth trends are below our prior expectations. Based upon this, we have moderated our outlook for the remainder of the year. Despite this near-term dynamic, we remain confident in the long-term growth outlook of our aesthetics portfolio. Global market penetration rates are extremely low and we expect long-term market growth to accelerate from current levels as economic conditions improve. As the market leader, we are also committed to driving growth by activating new patients and launching innovative treatment options. For example, in China, launch activities are underway for the Botox Cosmetic masseter muscle prominence indication. And in the U.S., we will soon launch Juvederm VOLUMA XC for the treatment of temple hollowing and we expect an approval for Botox Cosmetic in the platysma prominence indication by the end of the year. Pipeline catalysts like these in the key U.S. and China markets, along with our significant investment in consumer activation, injector training and practice support, will enable us to grow the aesthetics market and maintain our clear leadership position over the long-term. With that, I’ll turn the call over to Roopal." }, { "speaker": "Roopal Thakkar", "text": "Thank you, Carrie. We continue to make very good progress advancing our pipeline with several regulatory and clinical milestones since our last earnings call. I will start with immunology. We received FDA approval for Skyrizi in ulcerative colitis, which marks its second inflammatory bowel disease indication. Skyrizi is now the only IL-23 specific inhibitor approved for both ulcerative colitis and Crohn’s disease. Skyrizi has proven to be a highly effective, durable, safe and well-tolerated treatment option for patients with moderate to severe inflammatory bowel disease. And this recent approval further strengthens AbbVie’s leadership position in this market. We also received a positive CHMP opinion recommending Skyrizi for the treatment of moderate to severe ulcerative colitis in Europe, with an approval decision anticipated soon. Earlier this month, we submitted our regulatory applications in the U.S. and Europe for Rinvoq and giant cell arteritis. Our submissions are based on the previously announced Phase 3 results from our SELECT-GCA trial, where Rinvoq demonstrated superiority compared to placebo on sustained remission from week 12 through week 52 on disease flare and showed a reduction in total steroid exposure at week 52. We expect approval decisions for this indication next year. We also recently began a Phase 3 study for lutikizumab, our anti-IL-1-alpha-beta-bispecific in hidradenitis suppurativa. HS is a skin disease that can be debilitating and there are limited treatment options. In our Phase 2 study, lutikizumab demonstrated strong clinical response rates and improvement in skin pain in a very refractory patient population. Based on these results, we believe lutikizumab has the potential to become an important new treatment option for patients with moderate to severe HS. We look forward to providing updates on the Phase 3 program as the data become available. In the second quarter, we announced two additional immunology transactions as we continue to invest in external innovation to expand our pipeline. These include the acquisition of Celsius Therapeutics, which brings a Phase 2 ready anti-TREM1 antibody for IBD and a license agreement with FutureGen to develop a next-generation anti-TL1A antibody for IBD that is designed to have less frequent dosing compared to other TL1As in development and will be evaluated in combination with Skyrizi. This follows the four immunology deals we announced earlier this year, which, as a reminder, included the acquisition of Landos and their oral NLRX1 agonist in Phase 2 for UC, a partnership with OSE to develop a novel ChemR23 agonist for IBD and RA, a collaboration with Parvus to utilize their immune tolerization platform for novel IBD therapies and a collaboration with Tentarix to develop conditionally active multi-specific biologics in immunology and oncology. Moving to oncology, where we continue to make very good progress across all stages of our heme and solid tumor pipeline. In the area of solid tumors, we recently announced positive topline results from our Phase 2 PICCOLO study evaluating Elahere as a monotherapy in ER alpha positive third-line plus platinum-sensitive ovarian cancer for those not eligible for retreatment with platinum-based therapies. Elahere met the primary and key secondary endpoints in the study, demonstrating an objective response rate of 52% and median duration of response of 8.25 month. Detailed results will be presented at an upcoming medical congress. Following discussions with the FDA, we will be submitting to Teliso-V for accelerated approval as a monotherapy in patients with previously treated c-Met overexpressing EGFR wild-type non-squamous, non-small-cell lung cancer. This submission will be reviewed under FDA’s real-time oncology review program. Teliso-V has also received breakthrough therapy designation from the FDA. Our submission will be based on the results of our Phase 2 LUMINOSITY study, where Teliso-V demonstrated strong clinical benefits across key endpoints, including overall response rate, duration of response and overall survival, with a tolerable safety profile. Submission is expected in the third quarter, with an approval decision anticipated in 2025. The confirmatory Phase 3 study for this potential accelerated approval is currently ongoing. We continue to see encouraging data for ABBV-400, our next generation c-Met ADC, which uses a topo payload. Recall that we’ve advanced 400 in late-line colorectal cancer based on the deep responses and prolonged durability observed as a monotherapy in our Phase 1 trial. And we remain on track to begin a Phase 3 study later this year in third-line CRC. We’re also seeing encouraging signals of activity for this next-gen ADC in the non-small-cell lung cancer cohort from our Phase 1 study. The preliminary data will be presented at an upcoming medical meeting. And based on the emerging Phase 1 results, we plan to begin a Phase 2 program for 400 in lung cancer. In the area of hematologic oncology, we received accelerated approval in the U.S. for Epkinly as a monotherapy treatment for patients with relapsed refractory follicular lymphoma after two or more lines of prior therapy. Epkinly is now the only T-cell engaging bispecific approved in the U.S. to treat both follicular lymphoma and diffuse large B-cell lymphoma. We’re extremely excited to bring this new subcutaneous treatment option to patients suffering from follicular lymphoma. We also recently received positive CHMP opinion with an approval decision in Europe expected later this year. In the quarter, we initiated a Phase 3 monotherapy study for ABBV-383 in third-line multiple myeloma. 383 is designed for high affinity binding to BCMA on malignant cells and low affinity binding to a unique CD3 epitope on T-cells, which has the potential to mitigate some of the adverse events associated with other T-cell engaging BCMA-based therapies while preserving high levels of efficacy. We remain excited about this asset’s potential to become a best-in-class BCMA CD3 bispecific by providing deep, durable responses and low incidence and severity of CRS, with the potential for outpatient administration, limited or no step-up dosing and monthly administration from the beginning of treatment. In addition to our Phase 3 monotherapy program, we have an ongoing Phase 1 study in later lines of multiple myeloma to evaluate 383 in various combinations, including with Pomalyst, Revlimid and Darzalex. Based on this work, we will begin Phase 2 combination studies in earlier lines of therapy next year. Moving to neuroscience, where in the quarter we announced that we received a complete response letter for our 951 regulatory application in the U.S. The CRL is based on observations identified during an inspection at a third-party manufacturing site that was unrelated to 951. The CRL did not identify any issues related to the safety, efficacy or labeling of 951, nor has the FDA requested any additional clinical data or device-related testing. We’re working closely with the site and the FDA to get clarity on timelines and we’ll provide updates as soon as information becomes available. Moving to an update on one of our Alzheimer’s disease programs. We recently completed an interim analysis of a Phase 2 study evaluating ABBV-916, our A-beta antibody. The emerging efficacy and safety profile in this study is similar to what has been demonstrated by approved agents. However, given the evolving landscape, we do not believe 916 as a monotherapy treatment will be sufficiently differentiated from other emerging therapies. As a result, we are discontinuing further development for 916 as a standalone antibody. As Rob mentioned, we remain on track to close the Cerevel transaction soon and we look forward to welcoming the team into our R&D organization. The emraclidine pivotal studies in schizophrenia remain on track to begin reading out near the end of this year. We’ll also see data from two additional Phase 3 studies for davapidon in Parkinson’s disease later this year. We look forward to providing updates on these programs once the transaction has closed and data are available. In aesthetics, we recently received approval for Botox in China for masseter muscle prominence, marking the first global approval in this indication for any neurotoxin. Masseter prominence is common in Asian populations and there is significant unmet need for minimally invasive treatment options. We anticipate high demand for Botox in this novel indication in China, which will help to further build our portfolio in the face-shaping segment. A regulatory application is under review in the U.S. for Botox and platysma prominence, which is another novel indication that will help build our position in the lower face and neck segment. We continue to expect an FDA approval decision later this year. And we remain on track to submit a regulatory application for BoNT/E near the end of this year. A rapid-onset, short-acting toxin has a highly differentiated clinical profile and once approved would offer patients a novel option compared to currently available toxins. So, in summary, we’ve made great progress across all of our therapeutic areas in the first half of the year and we look forward to additional data readouts, regulatory submissions and approvals throughout the remainder of 2024. With that, I’ll turn the call over to Scott." }, { "speaker": "Scott Reents", "text": "Thank you, Roopal. Starting with our second-quarter results, we reported adjusted earnings per share of $2.65, which is $0.10 above our guidance midpoint. These results include a $0.52 unfavorable impact from acquired IPR&D expense. Total net revenues were nearly $14.5 billion, $450 million ahead of our guidance and reflecting robust growth of 5.6% on an operational basis, excluding a 1.3% unfavorable impact from foreign exchange. Importantly, these results reflect more than 18% sales growth from our ex-Humira growth platform. Adjusted gross margin was 85.2% of sales. Adjusted R&D expense was 13.3% of sales and adjusted SG&A expense was 22.9% of sales. The adjusted operating margin ratio was 42.6% of sales, which includes a 6.5% unfavorable impact from acquired IPR&D expense. Net interest expense was $506 million. The adjusted tax rate was 18.8%. Turning to our financial outlook, we are raising our full year adjusted earnings per share guidance by $0.10 to between $10.71 and $10.91. This EPS guidance continues to contemplate approximately $0.19 of dilution for the pending acquisition of Cerevel, which is expected to close soon. Please also note that this guidance does not include an estimate for acquired IPR&D expense that may be incurred beyond the second quarter. We now expect total net revenues of approximately $55.5 billion, an increase of $500 million. At current rates, we expect foreign exchange to have a 1% unfavorable impact on full year sales growth. This revenue forecast includes the following updated assumptions with the entire sales increase, once again, driven by our ex-Humira growth platform, which is now on pace to deliver nearly $6 billion of sales growth in 2024. We now expect Skyrizi global sales of approximately $11 billion, an increase of $300 million due to strong performance across all approved indications. Rinvoq, total revenue of approximately $5.7 billion, an increase of $100 million reflecting continued robust uptake in IBD. Venclexta total sales of approximately $2.5 billion, an increase of $100 million reflecting momentum in both U.S. and international markets. And for aesthetics, we now expect global revenue of approximately $5.5 billion. Given slower-than-expected near-term market growth, particularly in the U.S. and China, as a result, our total sales guidance for Botox and Juvederm will each be lower by roughly $100 million. Moving to the P&L for 2024, we continue to forecast a full year adjusted gross margin of approximately 84% of sales, adjusted R&D investment of 14% and adjusted SG&A expense of 23.5%. We now anticipate an adjusted operating margin ratio of roughly 44.5% of sales, in line with our previous expectations after including the approximately 2% impact of acquired IPR&D expense incurred through the second quarter. And we forecast our non-GAAP tax rate to be approximately 16.3%, also reflecting the impact of IPR&D. Turning to the third quarter, we anticipate net revenues of approximately $14.2 billion. At current rates, we expect foreign exchange to have a 1.3% unfavorable impact on sales growth. We expect adjusted earnings per share between $2.92 and $2.96. This guidance does not include acquired IPR&D expense that may be incurred in the quarter. In closing, AbbVie has once again delivered outstanding performance and I’m very pleased with the strong momentum across the portfolio heading into the second half of the year. With that, I’ll turn the call back over to Liz." }, { "speaker": "Liz Shea", "text": "Thanks, Scott. We’ll now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, first question, please." }, { "speaker": "Operator", "text": "Our first question comes from the line of Terence Flynn from Morgan Stanley. Please go ahead." }, { "speaker": "Terence Flynn", "text": "Great. Thanks for taking the question and congrats, Rob, on the CEO position. Looking forward to the forward here. The question I had is, last quarter you guys gave some early commentary on how to think about 2025, looking at the business, obviously, momentum in immunology, some headwinds in aesthetics. So any update on how you’re thinking about the 2025 outlook, particularly, growth for revenue relative to EPS? Thanks." }, { "speaker": "Scott Reents", "text": "Thanks, Terence. This is Scott. I’ll handle the question. So, with respect to 2025, as you know, we haven’t given guidance yet and we’ll provide that at a later time. But we have communicated a few top-level, high-level items to put in context of several dynamics at play next year. We have indicated that we’ll be returning to robust revenue growth, despite the headwinds from Medicare Part D redesign and continued Humira erosion. And when you think about robust growth, we characterize robust growth to be above industry average growth, which we see in the low-single digits. So when you think about the drivers, I mentioned in my remarks that we have $6 billion of growth from the growth platform in 2024 that we’re expecting. $5 billion of that is coming from Skyrizi and Rinvoq alone, our neuros franchise is growing by more than $1 billion and aesthetics has begun to recover from the economic headwinds. In 2025, we see incremental contributions from Skyrizi UC, which was recently approved, as well as 951. All these factors demonstrate strong momentum in the business. And then when you think about the offset of Humira, that erosion that we have expected this year at $4.5 billion. Last year that erosion was $6.5 billion and we do expect another step down in absolute dollar terms in 2025 for that erosion as well. So that will be less of a headwind to growth in 2025 than it was in 2024. So we feel very, very strong about that. And I think from a Part D perspective, we’ve talked about the several points of growth headwinds that we see there. And I think when you model that, you can think about those several points as approximately a 3% headwind to growth. So, overall, very strong momentum from the business with some headwinds, but we feel very confident in our ability to return to robust growth at the topline. Regarding EPS, the bottomline, we see EPS growing in line with that revenue growth that we’ve talked about. So, EPS will benefit from operating margin expansion. We’ve talked about that operating margin expansion will be on the SG&A line as we leverage the revenue growth and drive efficiencies and we have a good history of doing that. So, that operating margin will expand. However, that expansion will be roughly offset by the fact that in 2025, we’ll have a full year of interest expense associated with the financing for Cerevel and ImmunoGen. So robust growth at the topline and in-line growth from an EPS perspective." }, { "speaker": "Liz Shea", "text": "Thanks, Terence. Operator, next question, please." }, { "speaker": "Operator", "text": "Next, we’ll go to the line of Chris Schott from JPMorgan. Please go ahead." }, { "speaker": "Chris Schott", "text": "Great. Thanks so much. Just two questions for me. Maybe first on Rinvoq and Skyrizi, great results in the quarter. Can you elaborate a little bit more on the price versus volume dynamics this quarter? It seemed like results were maybe a little bit stronger than the RX trends would have implied, and I just was wondering if there was anything notable there. My second question was on the immunology portfolio, and as we think about 2025, I know we’re probably in the middle of contracting season right now, but just directionally, what are you anticipating for Humira, and should we be thinking about any incremental pressures on Rinvoq and Skyrizi just given biosimilar Humira dynamics going forward? Thanks." }, { "speaker": "Jeff Stewart", "text": "Yeah. Hi, Chris. It’s Jeff. I’ll take that question. So, as noted, we’re very, very pleased with the fundamental momentum on Rinvoq and Skyrizi. So all of the indications are really hitting their stride. So we can see the impact of, obviously, consumer investments we’ve made. We’ve adjusted some of the sales forces. We’ve started to anticipate the ulcerative colitis that’s helped us basically increase our share of voice. And I think the other dynamic in terms of some of the incremental strength has come from this dynamic that we started to see earlier in the quarter where some of the Humira switching that takes place actually starts to accrue towards Skyrizi and Rinvoq because the physicians, when there’s this disruption in the market, will sometimes bring in those patients and start to assess them, and we saw about 20% would move to other mechanisms. So while it’s a component, there are certainly multifactorial approaches why we see this very, very strong volume dynamic and share capture for both of those agents. If I move to the contracting for 2025, obviously, the contract season is in progress and it’s progressing, and the negotiations are well underway. I think it’s important, if you’ll recall, that we already have some multiyear contracts in place that cover 2025, so that’s a positive dynamic. The remaining payer negotiations, as I mentioned, are underway and we anticipate that those will close out during the normal cycle. I would say that, at a macro level, we do expect to maintain parity access next year for Humira for a meaningful portion of lives across all of the channels. Now, that said, our Humira access will certainly be lower than this year as we continue to anticipate and watch certain segments of the market move to adopt biosimilars. And we’ve understood and planned for this, obviously, as we enter that third year of the biosimilars and so we’re well aware of dynamically evaluating how this is going to work out. So, certainly, things are progressing. We already have some in place from those multiyear contracts and we’ll be in a better position to provide some more information, obviously, later in the year as those negotiations or the remaining negotiations fully close out." }, { "speaker": "Rob Michael", "text": "And Chris, this is Rob. Just to reiterate an important point that Jeff made, I mean, one trend that we are watching very closely is the switching from the Humira molecule to new mechanisms. I mean, we are starting to see an inflection that is accruing to new mechanisms like Skyrizi and Rinvoq, as Jeff mentioned. And it makes sense, doctors that are reevaluating the patients in their practice are likely looking at more than just the patients that are covered by CVS. What we have factored in is the CVS impact. What we didn’t factor in necessarily is an impact beyond just the CVS-wise. And to the extent that trend continues, it would represent a downside for Humira and an upside for Skyrizi and Rinvoq, which is a very good long-term tradeoff for us. That’s an important point. We want to make sure that was captured." }, { "speaker": "Jeff Stewart", "text": "Thank you, Rob. And maybe, Chris, one more point that I didn’t address was the Skyrizi and Rinvoq contracting. So we are anticipating very robust and consistent access for Skyrizi and Rinvoq. And our former comments around sort of low single-digit price erosion should be quite consistent with what we said before. Obviously, the Medicare Part D is a separate dynamic. So things are stable and we’re anticipating ongoing very strong access for both of those brands." }, { "speaker": "Liz Shea", "text": "Thanks, Chris. Operator, next question, please." }, { "speaker": "Operator", "text": "Next, we’ll go to the line of Carter Gould from Barclays. Please go ahead." }, { "speaker": "Carter Gould", "text": "Good morning. Thanks for taking the question and congrats on the results. I guess first, just a housekeeping point. I guess, one -- I guess, on the last call, you had talked about earnings growth not being quite at the rate of revenue growth and it sounds like today you see those more in line. Any, I guess, further color on kind of what’s driving that? I would assume it’s sort of the key I&I drivers, but any other color there would be appreciated. And I guess the more pertinent question, maybe on the commentary on Cerevel, should there be any expectation for divestments or other concessions as we contemplate that deal closing? Thank you." }, { "speaker": "Scott Reents", "text": "Yeah. This is Scott. I’ll take the question regarding EPS growth or earnings growth in line with the revenue growth. So when we look at this, as I mentioned, we’re looking at a couple of things. The SG&A that we’re driving some operating margin expansion, we spent a lot of time focusing on that and we do see some efficiencies that we can drive, and we do have the ability to leverage that. So there will be expansion operating margin, which you would expect to then let earnings outpace the revenue growth. However, there is this offset and we had a very successful bond offering when we set the financing in place for Cerevel and ImmunoGen. So, but that will be an offset to the operating margin expansion. So you can think of those two as essentially netting one another and then driving that earnings growth in line with the topline." }, { "speaker": "Rob Michael", "text": "Hey, Carter. This is Rob. I’ll take your question on Cerevel. Look, we’ve made very good progress with the FTC and have certified substantial compliance to their second request. No divestments are expected. I would expect the transaction to close soon, potentially as early as next week. We’re obviously very excited about the potential best-in-class therapies in Cerevel’s pipeline, especially emraclidine for schizophrenia, davapidon for early Parkinson’s and their core antagonist for major depression. I mean, these assets clearly will be great additions to our neuroscience franchise." }, { "speaker": "Liz Shea", "text": "Thanks, Carter. Operator, next question, please." }, { "speaker": "Operator", "text": "Next, we’ll go to the line of Vamil Divan. Please go ahead." }, { "speaker": "Vamil Divan", "text": "Yeah. Hi. Thanks for taking my question. So, maybe one if I could just, I guess, for Rob, just around sort of your business development priorities now. You obviously did a sort of larger deal last year with Cerevel, ImmunoGen, you’ve done a number of these smaller acquisitions. And I guess I’m trying to get a sense of the kind of balance between investing for the long-term and then sort of balancing the near-term earnings growth outlook. So there’s a lot of focus on that $11 floor for a long time, obviously, with all the IPR&D. You sort of dipped a little bit below that for this year, which makes sense. But I’m just trying to think now that we’re sort of halfway through the year, how are you thinking about sort of where your priorities are and the need to kind of balance the near-term numbers versus investing for the long-term? Thanks." }, { "speaker": "Rob Michael", "text": "Yeah. Vamil, thanks for the question. So, the $11 floor, again, was on an ex-IPR&D basis, where obviously with this guidance, ex-IPR&D, I think, we’re just a little bit over $11.40 and we’re certainly positioned to return to robust growth. I mean, we’re delivering robust revenue growth this quarter. When you look at the outlook for 2025, it’s very strong and so we should be beyond the conversations on the floor at this point. As we think about the tradeoffs for the long-term and the short-term, clearly we have an on-market portfolio today that can drive the growth that we need to deliver on that high single-digit, top-tier outlook in this decade. So our BD efforts continue to be focused on early-stage assets that can drive growth in the next decade, and you’ve seen us execute nearly a dozen deals this year along those lines. These include new mechanisms in immunology that can combine with Skyrizi or Rinvoq or be pursued as model therapies. We’ve also added new platforms, including multi-specifics, that have applicability in immunology and oncology. Our deal targeting in situ CAR-T therapy is another example of a platform investment in oncology. And we added a novel mechanism for psychiatric disorders, given our focus in neuroscience. So we intend to continue adding more depth to our pipeline in our core areas, particularly think about early-stage deals, because what we’re really trying to set up for is that growth in the next decade. We have a clear line of sight to top-tier growth this decade and we want to position the company to deliver strong growth in the next decade as well." }, { "speaker": "Liz Shea", "text": "Thanks, Vamil. Operator, next question, please." }, { "speaker": "Operator", "text": "Next, we’ll go to the line of Chris Shibutani from Goldman Sachs. Please go ahead." }, { "speaker": "Chris Shibutani", "text": "Thank you. Good morning. On the aesthetics business, today has been a day of reporting across the industry. There’s some commentary that aligns with what you said. However, some additional questions I have are on granularity about procedure volumes and pricing. Now, in the first quarter, you talked about promotional activities that you pushed towards a seasonally strong second quarter. One, should we think about the pricing backdrop as being a component of some of the sluggishness as opposed to purely thinking about or primarily thinking about volume of procedures? And if you could sort of respond in the neurotoxin neuromodulator versus the filler segment, that’d be helpful. Thank you." }, { "speaker": "Carrie Strom", "text": "Hi. This is Carrie. I’ll address the questions. So, first let’s talk about the market dynamics for market growth in the U.S. for facial injectables. So, late last year, we started to see a recovery and a return to growth of the toxin market and we’ve seen that market growth recovery continue this year in that mid-single-digit range. And that’s volume, that is traffic into our customers’ offices and that’s really been consistent for the past few quarters. So, the market dynamics for our business are really driven by patient demand and volume. Although, when we think about price, price is a factor that we’ll be looking for the second half of the year, which will give us some favorable pricing dynamics. We did take a price action at the beginning of the year for toxins and then we’ll have some more efficiency when it comes to our strategic shifts in our pricing promotions for the second half of the year. So, one example of that would be promotions we did last year, for example, around competitive launches that we won’t need to do this year based on the success of our competitive strategy last year. So really our performance is driven by market growth and we also had some nice stability in our market share. Anything you’d like to add?" }, { "speaker": "Jeff Stewart", "text": "Maybe because it’s worth mentioning, so some of that shift in promotional activity that you mentioned, we did talk about in the first quarter that that was a destocking that occurred of inventory levels. And when Carrie made her remarks and we spoke about it last quarter, we said that would reverse over time. We did see that reversing in the second quarter on a partial basis. And when you think about the reversal of that Q1 destock, you can think about from the U.S. market that really would reduce by 50% or cut in half the growth rates we published for the actual results for both Botox and Juvederm. So we saw that partial reversal of that destocking event and then we will see that continue to unwind throughout the course of the year, especially as we have some of our larger promotional activities and the back half of the year with Botox Day and Juvederm Day, we do see typically an inventory, a stocking uplift from those activities." }, { "speaker": "Liz Shea", "text": "Thanks, Chris. Operator, next question, please." }, { "speaker": "Operator", "text": "Next, we’ll go to the line of Mohit Bansal from Wells Fargo. Please go ahead." }, { "speaker": "Mohit Bansal", "text": "Great. Thanks for taking my question. I just wanted to talk a little bit about the pipeline in IBD space as well. I mean, you have done a bunch of these and then there has been some movement, especially in the oral IBD drugs as well. I mean, given your expertise, I would love to understand, how do you think about a pipeline moving beyond the likes of Skyrizi, IL-17s and all, because these drugs are pretty good. But when you think about an oral, what is the ideal profile of the drug that could be a first-line drug and then when you think about combinations, I mean, what are you exactly looking for? Thank you." }, { "speaker": "Roopal Thakkar", "text": "Hey, Mohit. It’s Roopal. I can talk about that. With respect to orals, we did do this deal with Landos and this is our NX-13asset, which we’ll anticipate a readout end of this year, beginning of next year. Early data point to good outcomes in ulcerative colitis and this asset works through NF-kappa-beta, so you’ll see what we’ve observed in preclinical models is reductions in IL-6, IL-1, TNF, interferon gamma. And it’s potentially a monotherapy and one that wouldn’t have a boxed warning. So far, the safety data has looked good. But there’s also opportunities, we believe, as you mentioned, combinations, that you could still combine with Rinvoq. And as I mentioned the boxed warning and in certain geographies, Rinvoq is utilized post-anti-TNF. Even with a combo there, there’s still opportunity. The second and third line segments in IBD and across immunology continue to grow, and they’re getting larger and larger as patients cycle through biosimilar anti-TNFs. We’ll see them cycle through, for example, in IBD with IL-1223, like Stelara. So in the future, there’s multiple opportunities. And the way we think about these is do we see an asset that is novel and can address mechanisms that haven’t been addressed yet, and can they complement something like Rinvoq? So if you see a little bit less efficacy, that may be okay if it’s complementary. It may not work necessarily as a monotherapy, but we still see opportunities for a combo. And given the other assets that we’ve talked about that could be IV or sub-cue, we still see a lot of opportunity with Skyrizi. In a platform study in IBD we’ll kick off later this year, looking at various combinations, many of the assets that I mentioned in the prepared remarks, including a TL1A, including our own internal alpha-4 beta-7, could be added on to Skyrizi to drive that efficacy even higher because there’s still a bit of a ceiling effect. And I would say the unmet need in IBD in particular continues to be quite high." }, { "speaker": "Mohit Bansal", "text": "Okay. Thank you." }, { "speaker": "Liz Shea", "text": "Thanks, Mohit. Operator, next question, please." }, { "speaker": "Operator", "text": "Next, we’ll go to the line of Chris Raymond from Piper Sandler. Please go ahead." }, { "speaker": "Chris Raymond", "text": "Thanks. Hey. Just another follow-up on Humira. So, Jeff and Rob, just hearing your commentary about how when patients discontinue Humira, a number of them are switching to newer biologics. I think you gave the 20% number going to newer biologics like Skyrizi and then also Rinvoq. But we saw some of this happening in the gastro space with one of the checks we did recently, but I wonder if you could provide maybe a little more color on this phenomenon. Is there a particular therapeutic silo where this is maybe happening more extensively? And can you give us a sense as to how this has been influenced or accelerated by biosimilar availability and just any more color there? Thanks." }, { "speaker": "Jeff Stewart", "text": "Yeah. Thanks for the question. It’s almost like a bimodal phenomenon. So, the 20% I highlighted, so if you just look from our data, when we just look at the CVS template, so we can see the degradation of Humira that goes down pretty steeply because, remember, it’s an exclusion. So, Humira is no longer widely available at all. So, most of it happens within the first two weeks or three weeks. And in that one segment, we see that the biosimilar doesn’t take up all the Humira loss and we can see it moving to other mechanisms, particularly Skyrizi and Rinvoq. So that’s within, let’s say, the acute biosimilar event. Now, to Rob’s point, what he highlighted is, if you take a step back and you look at the macro market, we’ve started to see in the first quarter and second quarter that the overall molecule, so that’s the adalimumab molecule, inclusive of biosimilars, has started to compress faster than it did before there was the availability of this action that was taken by CVS. So, it’s a doubling of effect, acutely in the segment that takes place with the exclusion and then the wider market. Now, we’re watching this pretty carefully because we haven’t -- obviously haven’t seen something like this before in terms of the compression of a molecule. So, that’s basically the dynamics that we’re seeing. And we do think it’s because some physicians or segments of physicians are, they realize that these biosimilars where there’s an acute interruption, they want to check how the patients are doing. And if they’re not fully in remission when they come in for their appointment, let’s say before the switch, sometimes they’re transitioned at the rates that I described. So that’s sort of the prescriber behavior. Now, where is it coming from? Like, well, we actually see that it is accruing across all of the indications, particularly Humira has quite robust, let’s say, base dynamics in the rheumatology indications. But we can see it in rheum. We can see it in derm. Derm to Skyrizi in particular, which is probably not a surprise given the position. I highlighted a 38% share and a 60% in-place share for Skyrizi and derm. And we also do see it to some degree in gastroenterology. So, to Rob’s point, we’re going to continue to monitor that. If the overall molecule would continue to compress, obviously, there would be some mitigation of some of it accruing over to Skyrizi and Rinvoq, and so we’ll have to continue to see how these weeks and months play out here over the third quarter." }, { "speaker": "Liz Shea", "text": "Thanks, Chris. Operator, next question, please." }, { "speaker": "Operator", "text": "Next, we’ll go to the line of Gary Nachman from Raymond James. Please go ahead." }, { "speaker": "Gary Nachman", "text": "All right. Great. Thanks. Can you talk more about how you’re managing the growth for Skyrizi and Rinvoq in IBD across both UC and Crohn’s, which have both been really strong? And with the Skyrizi UC launch, is there any cannibalization there with Rinvoq? And I guess, generally, how do you see those products working synergistically both in terms of sales force and reimbursement, if you see any sort of issues or conflicts there? Thanks." }, { "speaker": "Jeff Stewart", "text": "Yeah. Thank you for the question. A very important question in terms of how we commercialize these. Roopal highlighted it. Obviously, you have the two big indications with two assets within those indications. And so we have constructed, not just in the U.S., but around the world, a very sophisticated approach in terms of multiple sleeves of representatives and medical experts that are representing both drugs across both indications. And it really is, let’s say, for example, in our largest market, the U.S., it’s relatively easy to execute, because what we see is that our representatives can highlight Skyrizi’s data and potential as the obvious frontline agent, which is obviously tremendous data. I mentioned the sequence data. I mentioned our core data. The naive to biologic data in UC is absolutely fantastic for the Skyrizi data. And then, really ironically, because of the label changes that took place a few years ago, Rinvoq is positioned in later lines. So, really, that sort of approach is highly synergistic in terms of we recommend that physicians consider starting with Skyrizi and the efficacy will be fantastic. But to Roopal’s point, there’s still pressure on that disease and then you have a backstop with tremendous, tremendous data on Rinvoq in later lines. And so that’s how we position it. We look and we monitor the cannibalization. It’s quite modest, and overall, when you look at the dynamic of share capture, it’s quite encouraging to see how the infield teams and the commercial teams are managing all of those assets. So, we’re very encouraged about how we’ve approached the market in terms of our execution and I think the results are speaking for themselves." }, { "speaker": "Liz Shea", "text": "Thanks, Gary. Operator, next question, please." }, { "speaker": "Operator", "text": "Next, we’ll go to the line of Steve Scala from TD Cowen. Please go ahead." }, { "speaker": "Steve Scala", "text": "Thank you. Regarding the 2024 sales guidance, which I realize is about $55 billion, but it implies similar growth in the second half as in the first half, if not a slight deceleration. Why won’t total sales do better and what were your reservations about raising sales guidance today? It seems that across the business, strengths are exceeding challenges, so it would seem not unreasonable to have higher sights now. Second question is, I’m wondering if you can elaborate on the comment, a portion of Humira lives is a portion of Humira lives closest to a quarter, a half or three-quarters of lives. Thank you." }, { "speaker": "Scott Reents", "text": "Steve, this is Scott. I will talk regarding the revenue. So, just to clarify, we did raise the revenue guidance in total from $55 billion to $55.5 billion, a $500 million raise and that included a $300 million raise for Skyrizi, a $100 million raise for Rinvoq, a $100 million raise for Venclexta, a $200 million spread across other products and then a $200 million reduction in the guidance for aesthetics. So, we do see very strong momentum in the business and we did raise our sales guidance from $55 billion to $55.5 billion." }, { "speaker": "Rob Michael", "text": "And Steve, this is Rob. If you just look at, as I mentioned in my remarks, the first half of the year, we talked operational growth around 4%. If you -- the implied operational growth in the second half, based on our guidance, would be slightly above that and really driven by the ex-Humira growth platform, which on a reported basis, grew more than 18% this quarter. And so we’re very pleased with the performance of the business, and I think, when you look at the guidance and you do the math, you’ll see that the actual implied second half operational growth is slightly higher than the first half." }, { "speaker": "Jeff Stewart", "text": "And Steve and Jeff, so to give some sense, so we’re looking at coming up on the third year of biosimilar. So, the first way to think about it, in the first year 2023, we had very strong parity access across all the channels and we really exited the year around, I think, 97% or something like that. This year, I think, when we look at all the ins and outs, I think, the three-quarter approach is quite reasonable, and as I mentioned in my remarks to early one of the questions, it will certainly be lower next year and I would think that that range would be around that 0.5 point, but again, we’re not fully complete with all the dynamics. So, that gives you some broad spectrum over three years, maybe around the halfway point, plus or minus, as we go into 2025." }, { "speaker": "Liz Shea", "text": "Thanks, Steve. Operator, next question, please." }, { "speaker": "Operator", "text": "Next, we’ll go to the line of Trung Huynh from UBS. Please go ahead." }, { "speaker": "Trung Huynh", "text": "Hi, guys. Trung Huynh from UBS. Thanks for taking my questions. Just two from me. On the aesthetic, thanks for your comments this year and you’ve also moderated your short-term guide accordingly, but you’ve noted that the long-term 2029 guide remains intact. So, with growth around 4% this year in line with that new guide, I imagine next year will be slightly higher, but then it does imply that growth is well into the double digits for 2027, 2028 and 2029 on our calculations. Just what here makes you confident about that level of growth later in the decade? And then secondly, just following up on some of your thoughts on the immunology pipeline, you noted the potential of the utility of multispecifics in immunology. You’ve got a pretty strong bispecific platform. Just what are your thoughts on the data that you’re seeing here? Is there anything in development that we should be looking at? Thank you." }, { "speaker": "Scott Reents", "text": "Trung, this is Scott. I’ll start with your question regarding the long-term guidance on aesthetics. So you’re right. We’ve guided to a long-term $9 billion in 2029 and we’re not changing that guidance. The guidance changed, as you noted, that I mentioned today is just a short-term guidance change for 2024. We remain very confident in our ability to hit that $9 billion in 2029. When you think about these markets, there’s very low penetration in the markets globally. There’s a lot of excitement in the space and we expect the market to recover and grow at historical rates. I would say when we look at the market growth, we do see that rebounding and growing well. And then you also should think about there’s additional innovation coming that will drive that. So, we have some of the additional indications in Botox that Roopal walked through, as well as the quick onset short-acting toxin BoNT/E that will also drive additional market growth. And so we continue to feel very comfortable with our ability to achieve that on a long-term basis in 2029." }, { "speaker": "Roopal Thakkar", "text": "Trung, it’s Roopal. I’ll take the next question on the pipeline. So, we continue to be excited about bispecifics, in particular lutikizumab. And it’s an IL-1 alpha, and importantly, also 1-beta. And this, we believe, distinguishes it from earlier generation assets that were singular, and let’s say, only took out IL-1 alpha. We see, I would say, very, very strong benefits in hidradenitis suppurativa and I don’t think that was observed as a pure monoclonal. And the efficacy that we’re seeing is in a 100% anti-TNF failure population and very sick, early Stage 3, 70%. It is one of the most severe, probably the most severe ever studied. So we think there continues to be potential in the bispecific space as you take out multiple cytokines. The way to address it is through engineering of the assets. The other way is combination, so we can get to that bispecific approach through combos. And then, thirdly, I would say earlier in the pipeline is the multispecific approach, which the advantage that could provide is you maintain your bispecific approach, but then a third arm, let’s say, can target specific cells and that could further enhance efficacy, and in particular, safety. And we’re looking at that approach in immunology and as well in oncology, and that was reflected in our partnership with Tentarix." }, { "speaker": "Liz Shea", "text": "Thank you, Trung. Operator, next question, please." }, { "speaker": "Operator", "text": "Next, we’ll go to the line of Evan Seigerman from BMO Capital Markets. Please go ahead." }, { "speaker": "Evan Seigerman", "text": "Hi, guys. Thank you so much for taking my question and it was really, really helpful to update today. So, just looking at kind of the expected growth for…" }, { "speaker": "Liz Shea", "text": "Can you just -- can you speak up just a little bit? Sorry." }, { "speaker": "Evan Seigerman", "text": "All right. Can you guys hear me all right? Does that work?" }, { "speaker": "Rob Michael", "text": "Yeah." }, { "speaker": "Liz Shea", "text": "It’s still faint, but we’ll do our best." }, { "speaker": "Evan Seigerman", "text": "All right. Sorry about that. I’ll speak very loudly. So when looking at expected growth for Vraylar over the next few quarters, can you comment on what type of impact you think new competitors to the MBD market might have and what you can do to help maintain a growth position going forward?" }, { "speaker": "Jeff Stewart", "text": "Yeah. Hi. It’s Jeff. We’re very pleased with how both of the indications are performing and we monitor them very carefully, certainly with bipolar and aMDD. So when we look at our quarterly surveys of our target physicians and really our whole call cycle, we can see now that Vraylar is the most preferred agent overall for bipolar disease based on its indication set, its tolerability, its efficacy, et cetera. And we’ve really gone to the very top of the lead table for aMDD as well. So, if we look overall on our demand, we’re tracking above 20% in terms of the push. We continue to focus our team and where necessary add share a voice in terms of our sales force. So, we’re quite comfortable that we can continue to grow our share, which has been growing very, very nicely, particularly on the MBRX side, and certainly, face the competitive dynamics and navigate those as we go forward." }, { "speaker": "Roopal Thakkar", "text": "Jeff, maybe to add. it’s Roopal here. There is going to be competition, but what we see as a benefit clinically for Vraylar is that full spectrum coverage in bipolar and when you’re able to take mania, you don’t need an adjunctive therapy for that. So that’s a big advantage. The other thing that we continue to hear and probably reflected in our data is the really limited impact on fatigue and sedation. And so what we’re hearing is with Vraylar, patients really don’t have to sacrifice their daytime productivity in order to gain that benefit. And then the other benefit, I would say, with Vraylar is flexible, adjustable dosing. So these things together, I think, underlie what Jeff was speaking about." }, { "speaker": "Liz Shea", "text": "Thanks, Evan. Operator, next question, please." }, { "speaker": "Operator", "text": "Next, we’ll go to the line of James Shin from Deutsche Bank. Please go ahead." }, { "speaker": "James Shin", "text": "Hi. Good morning. Thanks for taking our question. You mentioned some of the Humira contracts going to 2025. Does that also apply to Skyrizi and Rinvoq, and that’s what gives you visibility on the low single-digit price erosion? And secondly, has the introduction of co-branded Humira and now that PBMs are more intertwined with biosimilars, changed the negotiation dynamics at all? Thank you." }, { "speaker": "Rob Michael", "text": "Yeah. So, typically, again, in some cases we are able to secure multiyear contracts. And as you can imagine that we would do that for the portfolio, basically, the way that our products work. So, that does help with the visibility in terms of what our access would look like for 2025, as well as the pricing dynamics. Again, I want to clarify that the negotiating season is not fully complete, but the dynamics are progressing, as I highlighted there. So, yes, to your first question. The other dynamic in terms of Cordavis, I’m not sure that that’s actually changing the dynamics in terms of the negotiations overall. That was obviously a volume-related deal with CVS that we announced over a year ago or almost a year ago now. So it doesn’t necessarily play into other negotiations. Each of these payers and pharmacy benefit managers, they have their own ideas in terms of how they want to approach the I&I category and certainly the Humira -- the emergence of the Humira biosimilars. So it’s a CVS-unique dynamic." }, { "speaker": "Liz Shea", "text": "Thanks, James. We have time for one final question, Operator." }, { "speaker": "Operator", "text": "For our last question, we’ll go to the line of Louise Chen from Cantor Fitzgerald. Please go ahead." }, { "speaker": "Louise Chen", "text": "Hi. Thanks for taking my questions here. So I wanted to first ask you, do you still feel that your aesthetics business is a good strategic asset for you, and if so, where do you see the synergies within your organization? And second question I wanted to ask you is, how do you think pharma will fare under a Democratic versus a Republican presidency and how are you going to navigate through that uncertainty in the near term? Thank you." }, { "speaker": "Rob Michael", "text": "So, Louise, this is Rob. I’ll take your question. Look, we like the aesthetics business. When you think about the growth profile, the profitability, we have set it up as a fully integrated standalone unit, because it behaves differently than the therapeutics business. We think we’ve actually seen, since we announced the transaction, really strong performance. We’ve exceeded our deal model expectations since we announced the deal. So we think it’s operating very well. Obviously, we’re working through some macroeconomic headwinds. But when you look at, for example, share performance, we had the entry of DAXXIFY last year and we did not lose any share. I think a lot of investors were concerned that we’d see considerable share loss. And so I think the team has done a remarkable job of competing in this marketplace, going through a period with economic headwinds. We’re still very confident given low penetration rates, given our relationship in the field, the potential innovations that we plan to bring forward. It has a very nice fit. And you think about just from a profitability and a growth standpoint, it fits the profile we’re looking for. So I certainly feel it’s a nice fit for the company. As it relates to the election, look, it’s hard to handicap it, whether Democrat or Republican. If you think about we’ve obviously contemplated the Inflation Reduction Act. We’ve come out and said that even with modeling that impact in, that we still expect to deliver on our long-term outlook. Now, I will say our view on the IRA from a policy perspective is we’re certainly in favor of the Part D benefit redesign because it helps address patient out-of-pocket burn. But the price-setting provisions in the IRA will certainly harm long-term innovation in our industry. So, we are hopeful that if it’s a new administration or the current administration, that they’ll reassess those provisions that ultimately are harmful for long-term patient care in the U.S. I mean, it clearly takes away the incentive to launch in later lines of smaller patient populations, which is really a very unfortunate negative outcome for the legislation. So, the way I view it is addressing patient out-of-pocket burden is good policy, but taking away the incentive for innovation is not, and my hope is under either administration, that will be reconsidered." }, { "speaker": "Liz Shea", "text": "Thanks, Louise. That concludes today’s conference call. If you’d like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us." }, { "speaker": "Operator", "text": "Thank you all for joining the AbbVie second quarter 2024 earnings conference call. That concludes today’s conference. Please disconnect at this time and have a wonderful rest of your day." } ]	AbbVie Inc.	141,885,706
ABBV	1	2,024	2024-04-26 09:00:00	Operator: Good morning and thank you for standing by. Welcome to the AbbVie First Quarter 2024 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion of this call. [Operator Instructions] Today's call is also being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Ms. Liz Shea, Senior Vice President of Investor Relations. Ma'am, you may begin. Liz Shea: Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Rob Michael, President and Chief Operating Officer; Jeff Stewart, Executive Vice President, Chief Commercial Officer; Scott Reents, Executive Vice President, Chief Financial Officer; Carrie Strom, Senior Vice President, AbbVie and President, Global Allergan Aesthetics; and Roopal Thakkar, Senior Vice President, Chief Medical Officer, Global Therapeutics. Joining us for the Q&A portion of the call is Tom Hudson, Senior Vice President, Chief Scientific Officer, Global Research. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll turn the call over to Rick. Rick Gonzalez: Thank you, Liz. Good morning, everyone, and thank you for joining us today. I'm extremely pleased with our start to 2024 with first quarter results exceeding our expectations. Before we discuss our performance in more detail, I'd like to share my perspective on the planned CEO transition that was announced earlier this year. After serving more than 11 years as AbbVie's first CEO, I have decided to retire from the role effective July 1, of this year and will continue to serve AbbVie as Executive Chairman of the Board. As you heard me say before, it is important that we choose the right time to make this critical leadership transition. The Board and I have been long planning for my eventual succession and now is the opportune time to move forward with the transition. As our business is performing very well and is in a strong position for the long-term. We are successfully navigating the Humira U.S. loss of exclusivity. We have built an outstanding company culture, an important priority and competitive advantage. And our productive R&D engine, which has yielded numerous innovative new medicines for patients will continue to fuel our robust pipeline for years to come. After a multi-year process, our board has unanimously selected Rob Michael, our current President and Chief Operating Officer as AbbVie's next CEO. I have known and worked with Rob for many, many years and he is an excellent choice as my successor. He brings the experience, the leadership and the strategic vision to build on AbbVie's past successes, advance our strategy and enhance shareholder value. Since our inception, Rob has held several important leadership positions that have collectively had a tremendous impact on AbbVie from establishing our financial planning organization to navigating the end of exclusivity for Humira in the U.S., to driving key business development opportunities that have been critical to diversify our business and support long-term growth, including the acquisitions of Allergan and ImmunoGen and the pending Cerevel transaction. Looking back, AbbVie has evolved tremendously as an independent company and our performance has truly been exceptional. Since our inception, we've grown our revenue from $18 billion to $55 billion. Our market capitalization has increased substantially from $54 billion to roughly $300 billion today. We have achieved a total shareholder return of more than 675%, which is top tier relative to our peers. And importantly, we’ve substantially increased our investments in R&D to discover and develop new medicines that have the potential to improve the lives of patients. As I look ahead, our company has never been stronger and our future has never been brighter. We are executing well across all aspects of our business and our long-term growth prospects remain very strong. In summary, it has been a privilege and immensely gratifying to serve with all of my AbbVie colleagues for the past 11 years, growing AbbVie into what it is today. And I look forward to continuing to work with Rob and the leadership team to create meaningful value for our shareholders and all of our stakeholders. And I'd also like to take this opportunity to thank all of our shareholders for the trust and confidence you put in me as AbbVie's CEO. With that, I will turn the call over to Rob for comments on our recent business performance. Rob? Rob Michael: Thank you, Rick. Before I comment on our first quarter performance, I want to congratulate Rick on his exceptional leadership of AbbVie over the past 11 years. During his tenure, Rick made several strategic moves that have positioned AbbVie to have a bright future beyond Humira, consistently drove the organization to deliver very strong performance and demonstrated the genuine care for our employees, patients, shareholders and communities that has defined who we are as a company today. It has been my privilege to work closely with Rick over many years, and I look forward to working with him in his role as Executive Chairman. AbbVie's outlook is very strong and I am excited about the remarkable impact that we the remarkable impact that we will continue to have on patients' lives. Turning to first quarter performance, we're off to an excellent start to the year with strong top and bottom-line results. We reported adjusted earnings per share of $2.31, which is $0.11 above our guidance midpoint. Total net revenues were $12.3 billion approximately $400 million ahead of our expectations. This overachievement was driven by our ex-Humira growth platform, which delivered revenue growth of more than 15% this quarter and includes continued robust sales from Skyrizi and Rinvoq, with combined growth above 50% in their fifth full year on the market, as well as double-digit revenue growth from several other key products including Venclexta, Vraylar, Ubrelvy and Qulipta. This broad based sales momentum clearly demonstrates the strength of our diversified portfolio with multiple growth drivers to support our long-term outlook. We are also making excellent progress with several of our near-term priorities. We recently completed the acquisition of ImmunoGen, which accelerates our entry into the solid tumor market and strengthens our oncology pipeline. The integration has been seamless and we are impressed by the caliber of talent we have welcomed into AbbVie. We also remain on track with the pending acquisition of Cerevel, which we anticipate will close in the middle of the year. Cerevel's pipeline of differentiated assets will further augment our neuroscience portfolio. In addition, we continue to advance our R&D pipeline and invest for long-term growth. This progress includes the FDA's full approval of Elahere for FR alpha positive platinum resistant ovarian cancer, a meaningful first in class treatment for patients and a significant long-term growth opportunity for AbbVie in solid tumors. We also gained U.S. approval of Juvederm Voluma XC for temple hollows, further strengthening our leadership in aesthetic fillers, and we executed several business development opportunities adding novel early stage programs and partnerships in oncology and immunology. Given the strong results this quarter, we are raising our full year adjusted earnings per share guidance by $0.16 and now expect adjusted EPS between $11.13 and $11.33. In summary, this is an exciting time for AbbVie and I am extremely pleased with the momentum of our diverse portfolio. We're off to an excellent start to the year and we are well positioned to deliver a high-single-digit revenue CAGR through the end of the decade. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff? Jeff Stewart: Thank you, Rob. I'll start with the quarterly results for immunology, which delivered total revenues of approximately $5.4 billion exceeding our expectations. Skyrizi global sales were $2 billion reflecting operational growth of 48%. We continue to see exceptional momentum across all of the approved indications. In psoriasis, Skyrizi is the clear market leader in the U.S. biologic psoriasis market with a total prescription share now above 35%. That's more than double the share of the next closest biologic therapy. Share is also ramping nicely in PsA, especially in the dermatology segment, where we are now capturing one out of every four new or switching in play biologic patients. Globally, Skyrizi has achieved psoriatic in play share leadership in nearly 30 key countries. In IBD, Skyrizi is on track to add more than $1 billion of incremental sales growth this year. We are seeing tremendous performance in Crohn's disease, where our compelling head-to-head data versus Stelara is driving a meaningful inflection of patient share. As a result, we have now achieved in play share leadership in Crohn's across all lines of therapy in both the U.S. and Japan as well as other key markets around the world. And finally, we are preparing for the launch of Skyrizi in ulcerative colitis, which represents another substantial long-term growth driver. We expect approval decisions in the middle of this year and anticipate rapid access in the U.S. following our launch. Given the robust frontline capture for Skyrizi in Crohn's and the exceptional bio-naive data we have generated in UC, we anticipate a strong launch. Turning now to Rinvoq with global sales of approximately $1.1 billion, reflecting operational growth of 61.9%. In rheum, we continue to see strong prescription growth across each of the four approved indications, and I'm especially pleased with our performance in rheumatoid arthritis, where Rinvoq has achieved in play share leadership in nearly 20 key international markets. Atopic dermatitis is tracking in line with our expectations with continued market share momentum globally. Importantly, we recently announced positive results from LEVEL UP, our second head-to-head study in AD. LEVEL UP demonstrated Rinvoq superiority for patients starting therapy on the 15 milligram dose versus Dupixent across key efficacy parameters, including the high levels of skin clearance and itch reduction. We anticipate these strong head-to-head results will support additional share capture, especially given Rinvoq label use in the U.S., which requires that initiation with a 15 milligram dose. And in IBD, Rinvoq's uptake continues to be very strong. Rinvoq is capturing high teens in play patient share in ulcerative colitis as well as mid-teens in play patient share in Crohn's disease. This performance is especially encouraging recognizing that we're still relatively early in the launch phase for both the UC and CD indications, and the lines of therapy are also expanding, with second line plus growing even faster as patients cycle to newer, higher efficacy agents like Rinvoq and IBD. Turning now to Humira, which delivered global sales of approximately $2.3 billion, down 35.2% on an operational basis due to biosimilar competition. Erosion in the U.S. played out slightly better than our expectations in the quarter with the vast majority of the impact this quarter driven by price. As previously communicated, the recent changes to the CVS template formularies were anticipated in our full year outlook for U.S. Humira and the volume impact is tracking in line with our expectations. Our guidance has also contemplated the impact of additional formulary changes that are expected to go into effect over the course of the year. We continue to anticipate that Humira will maintain parity access to biosimilars for a significant majority of patient lives this year. Moving now to oncology, where total revenues were more than $1.5 billion exceeding our expectations. Imbruvica global revenues were $838 million, down 4.5%, reflecting continued competitive pressure in CLL. Venclexta global sales were $614 million, up 16.3% on an operational basis and we are seeing robust momentum internationally with strong performance for both CLL and AML. Elahere generated $64 million of sales to AbbVie, reflecting a partial quarter of revenue following the February close of the ImmunoGen acquisition. The Elahere sales and marketing team is executing very well and I'm pleased with the smooth integration into our commercial organization. We anticipate that the recent positive updates in the NCCN guidelines for both platinum sensitive and platinum resistant ovarian cancer patients as well as the full label approval, which of course, includes the compelling overall survival data that has never been achieved before in these platinum resistant patients will continue to drive strong Elahere uptake. Lastly, the global launch of Epkinly in third line plus DLBCL is also performing well and we remain on track for the potential label expansion for follicular lymphoma later this year. Neuroscience total revenues were nearly $2 billion, up 16% on an operational basis, again, ahead of our expectations. This robust performance is driven by continued double-digit growth of Vraylar with global sales of $694 million, Ubrelvy with total revenue of $203 million and Qulipta with global sales of $131 million. Each of these leading assets continue to gain share and remain competitively well positioned. Botox Therapeutic is also performing well, especially in chronic migraine. Total global sales were $748 million, up 4.5% on an operational basis. And finally, we are very excited about 951, which will be commercialized as Vyalev in the U.S. and represents a potentially transformative next generation therapy for advanced Parkinson's disease. Feedback from the launches in Japan and Europe have been very encouraging and we remain on track for commercial approval in the U.S. later this year. So overall, I'm extremely pleased with the strong and balanced growth across our therapeutic portfolio this quarter, a testament to our differentiated product profiles and commercial execution. And with that, I'll turn the call over to Carrie for additional comments on aesthetics. Carrie? Carrie Strom: Thank you, Jeff. First quarter global aesthetic sales were over $1.2 billion, reflecting a modest decline on an operational basis. In the U.S., aesthetic sales of $776 million were roughly flat versus the prior year. We continue to see sustained momentum in the facial injectable market recovery that emerged in the back half of last year. Consistent with the past few quarters, the toxin market grew by a mid-single-digit percentage. We saw similar year-over-year increases in the number of facial filler procedures, representing a return to quarterly market growth for the first time since early 2022. From a competitive perspective, our U.S. aesthetics portfolio continues to perform well. Market share for both Botox Cosmetic and Juvederm was stable in the first quarter as these assets remain the clear market leaders. While we're pleased that the market and share trends across U.S. facial injectables are aligned with our previous expectations, our first quarter results were impacted by customers holding lower than normal inventory levels at quarter end. This dynamic relates to a decision made during the quarter to shift the timing of certain promotional activities into the second quarter. We therefore expect inventory levels to normalize in the second quarter and remain on track to deliver full year aesthetics sales growth in the U.S. Internationally, first quarter aesthetic sales were $473 million reflecting an operational decline of 5.5%. Consistent with our expectations, growth in China was impacted by persistent economic headwinds as well as a challenging comparison versus the first quarter of last year, which benefited from a robust recovery post-COVID. We are monitoring the economic developments across China and continue to anticipate a recovery in the second half of this year. Our pipeline continues to generate important new assets. Uptake of our recently launched Volux and SkinVive products remain strong, underscoring the importance of innovation within aesthetics. Given this context, we are excited for the upcoming launch of Juvederm Voluma XC for the treatment of temple hollows. As the only dermal filler approved for use in the upper face, we anticipate the Voluma XC introduction will activate more consumers and support the long-term growth of our filler portfolio. And within our toxin pipeline, we continue to expect FDA approval of the platysma prominence indication for Botox near the end of this year, enhancing Botox growth potential as a noninvasive treatment to reduce the appearance of vertical neck bands and improve jawline definition. We also remain on track to submit a new drug application for our short acting toxin, BoNT/E, before the end of this year. This novel toxin has demonstrated a rapid onset of action as well as a short duration of effect, meaningfully lowering the barrier for toxin adoption across consumers who have been considering but hesitant to try Botox. Given this profile, BoNT/E has significant market expansion potential as satisfied patients would naturally convert to Botox. Overall, the underlying trends across our aesthetics portfolio align well with our previous expectations and we remain on track to deliver high-single-digit global aesthetics growth this year. With that, I'll turn the call over to Roopal. Roopal Thakkar: Thank you, Carrie. I'll start with immunology. We recently announced positive top-line results from 2 Phase III studies for Rinvoq in dermatology and rheumatology. In the LEVEL UP study, which evaluated Rinvoq against dupilumab in atopic dermatitis, Rinvoq demonstrated superiority on the primary endpoint at week 16, which was a composite endpoint measuring skin clearance and itch reduction. Twice as many Rinvoq patients achieved this very stringent endpoint compared to dupilumab. Rinvoq also demonstrated superiority on all rank secondary endpoints in this trial. LEVEL UP was a study in which patients started on Rinvoq 15 milligrams and could escalate to 30 milligrams if they did not achieve treatment goals, which is how Rinvoq is prescribed for atopic dermatitis in the U.S. We also saw very rapid responses with Rinvoq demonstrating superiority on itch as early as week two and on skin lesions as early as week four. Rinvoq's safety profile in the LEVEL UP trial was consistent with what has been observed in previous studies. There were no serious infections in patients treated with Rinvoq and one in the dupilumab group. The rate of serious adverse events was similar across treatment arms. There were no malignancies, MACE events or VTEs reported in either treatment group. Based on these data as well as results from previous Phase III studies, we remain very confident in Rinvoq's profile in atopic dermatitis, and we believe it offers meaningful advantages over other products on the market today. We also announced positive top-line results from our Phase III select giant cell arthritis trial, which evaluated Rinvoq in combination with a 26-week steroid taper regimen compared to patients receiving placebo in combination with a 52-week steroid taper. In the study, Rinvoq 15 milligrams met the primary and key secondary endpoints, demonstrating superiority on sustained remission from week 12 through week 52, as well as on disease flare and reduction in cumulative steroid exposure at week 52. Importantly, Rinvoq's safety profile was consistent with what has been observed in more than 15,000 patients previously studied across controlled trials. The mean age in this population was 71, which is the oldest population studied to date with Rinvoq. And the average prednisone equivalent dose at baseline was almost 35 milligram. Rates of serious adverse events and VTEs were similar across treatment groups. There were no MACE events in the Rinvoq arm, while there were two in the placebo group. Based on the results from the select GCA trial, we believe Rinvoq has the potential to be a safe and tolerable oral treatment option. We plan to submit our regulatory applications for this indication later this year. We continue to make very good progress with our inflammatory bowel disease programs. We anticipate several advancements this year, including the initiation of a Phase II study for lutikizumab in ulcerative colitis. The start of our Phase II Crohn's disease platform study, which will evaluate combinations of Skyrizi with lutikizumab and other novel biologics. And we remain on track for approval decisions for Skyrizi in ulcerative colitis, with the U.S. expected in the second quarter and Europe in the second half of the year. We also continue to invest in external innovation to expand our immunology pipeline, as evidenced by four deals that we announced in the first quarter. These include the acquisition of Landos Biopharma, which brings an oral NLRX1 agonist currently in Phase II for ulcerative colitis, a partnership with OSE immunotherapeutics to develop a novel ChemR23 agonist antibody for inflammatory conditions, such as IBD and RA. A collaboration with Parvus Therapeutics to utilize their immune tolerization platform to develop novel therapies for IBD, and a collaboration with Tentarix Biotherapeutics to develop conditionally active, multi-specific biologics in immunology and oncology. We are excited to partner with these companies who are all pursuing very innovative approaches to developing transformative therapies. Moving to oncology, where in the quarter, we closed the ImmunoGen transaction, which brings exciting programs in both solid and blood cancers. Last month, Elahere received full approval from the FDA for FR alpha positive platinum resistant ovarian cancer in patients treated with up to three prior therapies. This conversion to full approval was based on data from the confirmatory Phase III MIRASOL trial, where Elahere demonstrated an overall survival benefit and significantly reduced the risk of cancer progression. We expect to see results from additional ImmunoGen programs this year, including data from the Phase II PICCOLO study evaluating Elahere as a monotherapy in FR alpha positive third line plus platinum-sensitive ovarian cancer patients who are not eligible for retreatment with platinum-based therapies. And we expect to see data in the second half of the year from a potentially registration-enabling Phase II trial for our CD123 targeting ADC, Pivek in a rare blood cancer called blastic plasmacytoid dendritic cell neoplasm. Now moving to program updates in hematologic oncology. Based on the totality of the data from our TRANSFORM-1 trial and following recent feedback from regulators, we will not be submitting navitoclax for approval in myelofibrosis, and we will wind down the TRANSFORM-2 study, in the relapsed refractory setting. In other areas of [EMAC], we remain on track for several regulatory and clinical milestones this year, including regulatory approvals in the U.S. and Europe for a Epinkly in relapsed/refractory follicular lymphoma. The Phase III readout from the Venclexta VERONA trial, in treatment-naive, higher-risk MDS and initiation of a Phase III monotherapy study for ABBV-383 in third-line multiple myeloma. We remain very excited about this asset's potential to become a best-in-class BCMA CD3 bispecific by providing deep, durable responses and low incidence and severity of CRS and with the potential for outpatient administration, limited or no step-up dosing and monthly administration from the beginning of treatment. Moving to other areas of our pipeline. In aesthetics, we remain on track to submit our regulatory application for BoNT/E in the second half of the year. Our rapid onset short-acting toxin as a highly differentiated clinical profile compared to currently available neurotoxins. BoNT/E is designed for patients that are considering using facial toxins for the first time or for a special event and will allow them to experience results over a very short period of time. This novel toxin will complement our existing business as patients would naturally transition to BOTOX following experience with this trial toxin. And in neuroscience, we continue to make good progress with 951, where we have received regulatory approvals in 33 countries thus far and anticipate an approval decision in the U.S. in the second quarter. As Rob mentioned, we remain on track to close the Cerevel transaction in the middle of this year. Cerevel recently announced positive top line results from their Phase III TEMPO-3 trial evaluating Tavapadon as adjunctive therapy to levodopa in patients with Parkinson's disease. In study, Tavapadon met the primary endpoint, demonstrating a 1.1 hour increase in total on time without troublesome dyskinesia compared to patients treated with levodopa and placebo. Tavapadon also met the key secondary endpoint in the trial, providing a significant reduction in off time compared to levodopa and placebo. Two additional Phase III studies for Tavapadon in Parkinson's disease are expected to read out later this year. The emracladine pivotal studies in schizophrenia remain on track to begin reading out later this year as well. We look forward to providing updates on these programs once the transaction has closed. With that, I'll turn the call over to Scott. Scott Reents : Thank you, Roopal. Starting with our first quarter results. We reported adjusted earnings per share of $2.31, which is $0.11 above our guidance midpoint. These results include an $0.08 unfavorable impact from acquired IP R&D expense. Total net revenues were $12.3 billion, $400 million ahead of our guidance and reflecting a return to growth of 1.6% on an operational basis, excluding a 0.9% unfavorable impact from foreign exchange. Importantly, these results reflect more than 15% sales growth from our ex-Humira growth platform. The adjusted operating margin ratio was 42.2% of sales. This includes adjusted gross margin of 82.9%, adjusted R&D expense of 14.7%, acquired IP R&D expense of 1.3% and adjusted SG&A expense of 24.6%. Adjusted net interest expense was $429 million. The adjusted tax rate was 14.8%. Turning to our financial outlook. We are raising our full year adjusted earnings per share guidance to between $11.13 and $11.33. This increase of $0.16 at the midpoint includes $0.26 of operating overperformance partially offset by $0.10 of higher dilution due to the earlier close of ImmunoGen. As previously communicated, this earnings per share guidance includes $0.42 of dilution related to the recently closed acquisition of ImmunoGen and the pending acquisition of Cerevel. Please also note that this guidance does not include an estimate for acquired IP R&D expense that may be incurred beyond the first quarter. We now expect total net revenues of approximately $55 billion, an increase of $800 million. At current rates, we expect foreign exchange to have a 0.9% unfavorable impact on full year sales growth. This revenue forecast includes the following updated assumptions with the entire sales increase driven by our ex-Humira growth platform. We now expect Skyrizi global revenue of $10.7 billion, an increase of $200 million due to strong momentum across all approved indications. Rinvoq total sales of $5.6 billion, an increase of $100 million, reflecting robust uptake in IBD. Imbruvica total revenue of $3.1 billion, an increase of $200 million, reflecting lower erosion and Elahere total sales to AbbVie of $450 million, an increase of roughly $200 million, reflecting a partial year of revenue following the February close of the ImmunoGen acquisition. Moving to the P&L for 2024. We continue to forecast adjusted gross margin of approximately 84% of sales, adjusted R&D investment of 14%, adjusted SG&A expense of 23.5% and an adjusted operating margin ratio of roughly 46.5%. We now expect adjusted net interest expense of $2.2 billion, which includes the partial year cost in 2024 to finance the ImmunoGen and Caravel transactions. Turning to the second quarter, we anticipate net revenues of approximately $14 billion, which includes U.S. Humira erosion of approximately 32%, reflecting a step-up in volume erosion and with the recent CVS formulary change, partially offset by a onetime price benefit also associated with that change. At current rates, we expect foreign exchange to have a 1.3% unfavorable impact on sales growth. We are forecasting adjusted operating margin ratio of approximately 49.5% of sales, and we are also modeling a non-GAAP tax rate of 16.4%. We expect adjusted earnings per share between $3.05 and $3.09. This guidance does not include acquired IP R&D expense that may be incurred in the quarter. In closing, I'm very pleased with the excellent start to the year. We are demonstrating strong momentum across the portfolio and our financial outlook remains very strong. With that, I'll turn the call back over to Liz. Liz Shea: Thanks, Scott. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, first question, please. Operator: First question comes from Mohit Bansal with Wells Fargo. Mohit Bansal : Congrats on the progress and congrats Rob as well. So maybe let's just start with 2024. I mean so thanks for this guidance. But when we look from 2024 to '25, there are a couple of headwinds that you have highlighted in the past. So obviously, IRA Part D redesign will be there and Humira may have another leg down. And given the volume erosion here, people are a little bit concerned there. Can you help us understand that what is your current thinking on the trough, '24 versus '25? And could you give us some confidence that you can continue to grow in '25 despite these headwinds from IRA and Humira? Robert Michael : This is Rob. I'll take that question. So if you think about ’24, ‘25. I mean, clearly, the ex-Humira growth platform is demonstrating great momentum. If you just think about Skyrizi and Rinvoq alone are growing by more than $4 billion per year. Aesthetics will recover to high single-digit growth. Our neuroscience franchise will grow by over $1 billion this year on the heels of strong momentum for Vraylar and our migraine portfolio and we will have incremental contributions from Vyalev and Elahere in '25. So we have several drivers that will offset Humira erosion next year as well as the Part D benefit redesign impact and allow us to still deliver robust revenue growth. When you think about that redesign impact, it will really spread across our business, most concentrated in immunology and oncology. And we would estimate that total revenue impact could be worth several points of growth, while we'll still deliver robust revenue growth, we will have that headwind in '25. But keep in mind, for us, the IRA impact really hits us in '25 and isn't a significant headwind in the years that follow as products that are subject to negotiation will not have that Part D cost share impact. So the way to think about it is despite that headwind in '25, we will still deliver robust growth, with that growth rate accelerating in the years that follow. And then if you think about on a margin perspective, we're going to continue to expand operating margins. So that will be a tailwind. You should be, though modeling annualization of interest expense from these transactions. And keep in mind that we essentially would have -- think of it as a roughly half year for Cereval and 10.5 months this year for ImmunoGen. So that should be something that you do model for '25. So we'll have robust revenue growth we'll have earnings growth, not quite at the rate of the revenue growth because of that annualization impact. But then when you get to ‘26 and beyond, you have even faster revenue growth and very robust earnings growth. So that's probably the best way to think about the profile of the company. But when you look at that ex-Humira growth platform, there's a lot of momentum there and we are very well positioned to deliver very robust growth. Liz Shea: Thanks, Mohit. Operator, next question, please. Operator: The next question is from Vamil Divan with Guggenheim. Vamil Divan : So maybe I could just ask a couple on the aesthetics side. It sounds like your commentary is pretty generally in line with Liz said before, but obviously, the number was a little lighter this quarter than even to your guidance that what people are expecting so. Can you maybe just talk a little bit more about that you mentioned some shift in promotional efforts to the second quarter and maybe inventory levels then as a result being lower and maybe I don't know if you can quantify that a little bit? And was this sort of planned when you gave your guidance back in February or is this something that's sort of evolved over the quarter? Maybe just kind of why the decision maybe would be helpful to give us some comfort on the outlook there? Carrie Strom : This is Carrie. So first, I'll give a little bit of context to the fundamentals in terms of market growth and market share, which were in line with our expectations. So our market share continues to be strong and stable. For Botox Cosmetic, despite a new competitor, strong stable share at high levels. And then for our Juvederm line continued share strength, even some share pickup in in the past few quarters, as we launch our new products. So like you said, those fundamentals are in line with our expectations. As we were going through the quarter, we really realized that the aesthetics market is quite sensitive to seasonality with Q2 and Q4 typically having the highest volume. And after a few years of COVID and economic disruption, we're now anticipating a return to that typical seasonality. So we shifted investment in some of our sales and marketing efforts into Q2, which impacted customer and sales promotional timing and activities, which then resulted in lower inventory held by our customers in Q1. And we do expect that to come back in Q2 and the rest year. And I'll let Scott address the rest of that question. Scott Reents : Sure. Thanks, Carrie. So Vamil to quantify the inventory impact in the first quarter, it was a little bit more than $50 million between Juvederm and Botox and you can think of that as being split roughly 2/3 to about and 1/3 to Juvederm. And I think as Carrie mentioned in her remarks that impact of that inventory will -- we expect that to turn in the second quarter. Liz Shea: Thanks, Vamil. Operator, next question, please. Operator: Next question comes from Chris Shibutani with Goldman Sachs. Chris Shibutani : When we think about the 2024 upcoming contracting season, which obviously has been quite dynamic for Humira over the past year plus. Can you provide us with any insights in terms of structural aspects within your contracts that you build in that may help provide offsets. We often have limited visibility. We're looking at the prescription volume trends. And it feels as if our calculus is sometimes incomplete. But what can you reassure us in terms of the dynamics as we're seeing this year two play out and how you're approaching contracting for the forward? Jeff Stewart : Chris, it's Jeff. So the contracting season typically starts April or May. And frankly, as we've highlighted before can run in the immunology category really through the end of the year. So we have a few philosophies that we look towards, which are -- we want to continue to basically make sure that patients if possible, based on our pricing concessions aren't disrupted because when you start to disrupt patients, they do struggle with the change. It's a change in their treatment course. And so as we look to that, we've historically highlighted that we are negotiating for parity contracts with Humira. And we do put some controls in place in some cases, but not all, we seek multi-year contracts with our payers to try to establish the relationship, the pricing, et cetera and we will think of ways to make sure that those contracts can hold. So they have some teeth in them. They can't just be willy-nilly discarded. And so it is a long-term, in some cases, partnership over a couple of years with these payers. I can't go into the details over exactly how those controls work. But suffice it to say that there's terms and timing and limits in terms of when contracts can be changed even maybe some clawbacks in some cases. So because we want these more sustained relationships because of our position in the category with these great brands, we typically use those sort of techniques and that's how we go for it. So again, it's hard to look forward too much because it is dynamic as we look to '25. But we've been quite successful in maintaining good access for our brands and certainly, Humira is tracking in line with our expectations. Liz Shea : Thanks, Chris. Operator, next question, please. Operator: Our next question comes from Chris Schott with JPMorgan. Chris Schott : Just a couple more on the Humira front. I think Humira you had mentioned that in 2024, you expected most of the impact would be price versus volume. I think the street has been concerned that we're seeing more volume erosion, particularly with the CVS book of business. I'm just interested in your latest thinking as we think about price versus volume for the remainder of this year as we consider CVS [Signa], et cetera. How should we think about that balance just so there's kind of surprises, I guess we watch these volume trends playing out? And then maybe just on a related topic, can you talk at all about the tail for Humira sales in the U.S.? I guess the part of the question, do you expect that you'll see most players or payers eventually switch out Humira like we're seeing at CVS? And if so, is it still reasonable to think about there being a kind of a decent tale of revenue, I guess, for this product in the U.S. over time? Jeff Ryan : There's a lot in there. Let me go through it in a systematic fashion. So I think, first, to directly answer your question. We still as we look forward, believe that the significant majority of our lives will be at parity. So that means our guidance around the majority being price is still holding in our go-forward look. Let me give you some perspective. I had some in my opening remarks over what's happening with CVS. So the first is that, as I mentioned, the step down in volume was really anticipated and based on our analysis of the data, which I'll highlight, it's really right in line with our expectations. Now one of the things in my remarks, I often talk about new to brand or our in-play share capture, and that's a really good way to look at performance, particularly early in launch cycles when you're looking at capture rate or competitive dynamics. I think it's important that investors and analysts need to be very mindful when you have a dislocation or disruption or switching, you can get very, very full at looking at NRx or NBRx because it sort of overinflates what you might be looking at. So I think that's important. The other fact base that we look at is in terms of the step down is we look at other analogs and we look at the Cosentyx Taltz analog or Taltz was advantage in ESI for Cosentyx back in 2019. And we see that typically in this category, almost 90% of the erosion tracks within the first two to three weeks. And that's actually what we're starting to see, we believe with the CVS template following that similar pattern. So if you can't really look at NRx or NBRx, you really have to look at TRx in this case, Chris. And this is very interesting. And we would make sure to guide folks to look at what's happening with the TRx data in the market. And what we see is that not all of the Humira prescriptions are moving to a biosimilar. And if you look at the first two weeks, it's pretty meaningful. Over 20% of the Humira prescriptions are moving to other mechanisms of actions, including Skyrizi and Rinvoq. And in fact, while we haven't studied this week as much, it actually seems to have accelerated a bit from there. And that actually makes some sense because if you think it from the physician's perspective, when patients are being switched, they often take a break in a pause to say, are these patients really under control, should I consider an alternative. And that's actually what we see playing out in the market. So the pure degradation or step-down from Humira is in line with what we see, but we are seeing a fairly significant move to other mechanisms, as I mentioned, including our own Skyrizi and Rinvoq. And that could be very, very good for patients who are probably getting better care for control of their disease. Now having said that as well, if we look through the rest of '24, we have very solid contracts with our payers through 2024. And remember that these payers can add biosimilars at parity whenever they choose. We saw that last year in the middle of the year, and that's really not different now. So when we look at the structure and controls of our existing agreements, we do not see widespread exclusions for the rest of the year, as we go forward. And so I think we've been pretty consistent with that that select clients will move towards biosimilars over the course of the year. Last year, we saw that with Kaiser and Medicaid plans. We talked about the CVS exclusion for the template business. And we do see that some select plans may take another approach, which we've contemplated as the year goes on, which is they may move new patients to the biosimilar, but maintain the large existing base. And that's quite manageable because really only about 14% or 15% of the patients are new patients that cycle into Humira. So overall, that's our perspective. We're confident things are tracking in line. We're quite interested in this shift to other mechanisms, which is frankly somewhat anticipated, but maybe operating a little higher than we thought, and we still believe that a significant majority of Humira will see it at parity lives in '24. Okay. So the tail we're going to be negotiating '25. And what we've highlighted is we are going to watch exactly how the interchangeables play out. We think we've got a good understanding of that. And so it will probably become more apparent as we move through '25 where that tail may sit. And we've highlighted that it may start to emerge in '25 and probably be much more visible by '26. And that's going to ultimately depend on how over the course of '25, the price volume fully plays out in the marketplace. Robert Michael : And Chris, this is Rob. On your question regarding the guidance for this year. I think it's important to note yes, we've said that the vast majority of the erosion is price. We've talked about that dynamic. If you think about first half, second half, we have the annualization impact given the mid-year step-up in rebates last year. So the annualization impact comes through in the first half, you'd expect price erosion to be greater in the first half or the second half. But at the same time, we did contemplate volume erosion because we were very well aware of the CVS contract. We gave you that guidance. And so we have contemplated that volume erosion, but that's more of a second half versus first half as well as the potential for we knew with an interchangeable coming in, there could be some marginal amount of volume pickup there. So we did put in volume erosion in our guidance, but the vast majority of it is price, but I don't want investors to think that we didn't put any volume into our guidance. We were very well aware of the CVS contract. And I think we made some prudent assumptions on potentially other impacts. But overall, we're still tracking in line with that guidance. Liz Shea: Thanks, Chris. Operator, next question, please. Operator: Our next question comes from Terence Flynn with Morgan Stanley. Terence Flynn : Congrats to Rick and best of luck to Rob in a new role. Just wondering if you could maybe frame a little bit for us the opportunity for Skyrizi in UC versus Crohn's disease. I think last time we heard from J&J, Crohn's represented about $7 billion of Stelara sales. Obviously, you guys have made decent inroads there based on your comments. But just wondering think about the dollar opportunity in ulcerative colitis. And then when you were talking through some of the latest Rinvoq data, I was just wondering if there's an opportunity down the road as you generate more clinical data, but also commercial data to potentially revisit the restrictions on line of therapy on the label at some point, or if we shouldn't think about that as a possibility. Jeff Stewart : It's Jeff. I'll take the first question. So Crohn's is larger than you see. I mean, if you look at the overall market or revenue, I think it's 65%, 70%. So it's -- Crohn's is very, very significant. Having said that, ulcerative colitis is a multibillion-dollar opportunity for us. It's still a very, very underpenetrated and substantial indication. So it's weighted about 65 -- 35 --70-30, but still, I wouldn't underestimate what ulcerative colitis means. And I think I would add in concert with my prepared remarks, we've seen very, very significant acceleration into frontline Crohn's disease with Skyrizi. And what's remarkable, we studied a very, very difficult population in ulcerative colitis, but we still had substantial amount of naive patients. And the performance in that naive population is exceptional. I mean, it is at the very, very top of the league table terms of overall ability to get to endoscopic clearance and symptom control. And so we like that setup because, obviously, we have exactly the same representatives who are establishing the Crohn's indication in frontline, and we know that we can bring UC very fast afterwards when we get the approval this year. So it's a substantial global opportunity, not the size that we'll see over the LRP with Crohn's, but still one of our largest opportunities that we have in the category. And I'll ask Roopal based on the safety data he highlighted to comment on the second question. Roopal Thakkar : Yes, thank you. So the data we keep generating continues to at least drive confidence for sure that the original Phase III that came out with their safety profile, and what we continue to learn even with longer-term data, even in more high-risk patients confirms what we've always seen. And that will continue to drive confidence, I think with our clinicians. Now from a health authority standpoint, I think the position there is that you have this oral surveillance study with upadacitinib, and they're going to apply those findings to the other assets in a similar class probably until there's another outcome study to sort of argue against that -- that's kind of how we see it, now that's in the U.S. I would say globally, there's still an opportunity for many jurisdictions where JAK inhibitors can be at parity. So you might start seeing some more movement there in earlier lines. But as Jeff stated in his prepared remarks, the second line and even third line of many of these indications continues to grow as people now have options where in the past, if all you had was a TNF, maybe you were cycling. But now that you know that there's other therapies you're starting to see people break sooner. So I think that second and third line is still a huge opportunity, and we'll continue to grow with this emerging data. Jeff Stewart : And Terence, it's Jeff again. One more comment. I mentioned how we're excited about the naive position for both Skyrizi, CD and UC coming. But what's also nice is those same representatives are in the office and are able to highlight basically a one-two punch, where you use Skyrizi first in earlier lines based on this exquisite data. And then obviously, for later lines, you can use Rinvoq. And so we actually see in the marketplace that, that combination and that positioning is allowing us right now in real time, capturing almost towards 40% of all in-play share with Skyrizi first and Rinvoq second. So it's an encouraging position as we fill out that portfolio. Liz Shea : Thanks, Terence. Operator, next question, please. Operator: The next question comes from Carter Gould with Barclays. Carter Gould : I wanted to circle back on the prior commentary around some of the TRx data. And I guess the overarching question is that, I guess, appropriately kind of capturing all the volume you're really seeing? And there's clearly with your part of your agreement with CVS and the Cordavis there, there is the potential for some Humira volume to potentially be shifting there. Is that being captured by TRx. So I guess, any commentary there on sort of the accuracy of that data that we're all seeing. And then maybe if you just go back and I wanted to circle back on the EPS commentary on '25 sort of the way you framed that growth. Is that sort of x-IPR&D? Any color there would be appreciated. Jeff Stewart : Yes, it's a great question. So it's early, but we believe the data is accurate. I mean, if you look at the first two weeks to give you some sense, and this is inclusive of the Cordavis Humira. There was a downdraft of about 13,000 prescriptions for Humira from baseline. And the biosimilars captured about -- which was primarily the Cordavis Humira, captured about 10. So there's 3,000 prescriptions or over 20% that we can see in our data moving to other mechanisms of action, including our Skyrizi and Rinvoq. And again, it's very logical because this is just not a one-to-one type of switch like these physicians are interviewing and discussing with patients, their care path forward. And so we think that clearly, some are moving to other mechanisms, and we've seen that in other analogs as well. So we believe the data is accurate. Again, it's early. We're going to continue to monitor it. Where that ultimately lands, we'll have to see. Again, I want to reiterate the pure Humira downdraft is within line with what we assumed and we are seeing this other market behavior that's taking place. Robert Michael : And Carter, this is Rob. Just to clarify my earlier comments. Yes, it is ex-IP R&D. We always guide to ex-IP R&D. What I was trying to highlight is you should expect robust revenue growth in '25 and that growth accelerating in 2016 and beyond given that Part D benefit redesign impact in '25. And given that operating margin will expand, you typically would expect our earnings to grow faster than our revenue. And that is generally true with 1 exception in '25 being that we will have an annualization impact from net interest expense. We'll still deliver a very solid earnings growth. But as you model it, just keep in mind that while you expect typically earnings to outpace revenue growth given expanding operating margin, you do have that dynamic in '25, that's important for your modeling. Liz Shea: Thanks, Carter. Operator, next question, please. Operator: Our next question comes from Simon Baker with Redburn Atlantic. Simon Baker : Two quick ones, if I may. Just going back to Humira, but in a slightly broader sense. There's been a degree of political noise around the role of PBMs in blocking or rather than assisting biosimilar uptake. I just wondered if you expect that to come to anything in terms of structural changes within the market? And then secondly, on Rinvoq and the Level Up deal -- Level Up data. I wonder how you see the competitive dynamics evolving in that space? Is this about switches? Or is this about market expectation expansion. I asked because this morning Sanofi said that they welcome competition as a way of expanding the number of people treated in an area that's still relatively unpenetrated. So I just wonder how you see the opportunity commercially? Jeff Stewart : It's Jeff again. I would say that we're not anticipating like a wholesale restructure of the PBM industry, for example. I mean, we certainly think that there's very reasonable chance of sort of transparency reform, exactly how some of the economics are working, maybe transparencies to the government or downstream to the clients, that's very possible. But a major wholesale change, we don't see that happening in the near-term. Obviously, we are continuing to monitor that and would make adjustments as we might need to. Regarding your atopic dermatitis question, I think the answer is really a bit of both. I think as we've highlighted before, the market here is exceptional in terms of the low bio penetration or oral and bio penetration. It's really only about 4% or 5%. And so I think Sanofi's comments are very well timed. I mean this marketplace is going to grow significantly as this innovation is able to be delivered to the global population with this very serious disease. But we also think this Level Up study is good for our market share penetration, and I'll give you some perspective. Our U.S. market share is lower. It's around 9%. So typically, where our countries have been able to highlight more direct comparisons. We couldn't do that because of the starting dose, I highlighted. We see that most of our international affiliates have market shares in the mid-teens in some cases in the low 20s. And so the ability to bring a comparative study that's directly linked to the U.S. label and show the physicians how you can get to higher levels of control and really patients want -- they want no disease on their skin and they really don't want itch if they can get there. And that's what we studied in Level Up. So we think it's certainly going to help with both market expansion and in particular, around the world with our ability to capture some more share. So I hope that helps. Liz Shea : Thanks, Simon. Operator, next question, please. Operator: Next question comes from Tim Anderson with Wolfe Research. Tim Anderson : I have questions on contracting for Skyrizi in '25. How many lives do you already have locked up through your general multi-year contracting? And then do you continue to think that the availability of cheap versions of Humira, either brand or biosimilar won't lead to any increase in step edits on Skyrizi under the idea that while Skyrizi is better, something like Humira or biosimilar Stelara might be just fine. That same arrangement can be made in the statin category, for example, Crestor is the best Zocor might do just fine. Jeff Stewart : Yes. I think we'll probably pass on the number of lives locked up. I mean we are confident, given the market position TAM of Skyrizi and Rinvoq, I think, in particular around the momentum that we have across the Skyrizi indication that we're going to have very favorable access in 2025 and beyond. I think the other thing that we've highlighted is I'm very pleased with how the adoption of Skyrizi is going in IBD. I mean it's very, very clear that we're taking significant share from Stelara and the doctors are voting with their pen, or they're basically electronic prescribing because the ability to get these very sensitive patients under significant control, the world's really never seen anything like the sequence trial in terms of the ability to control the most difficult aspect of this challenging disease. So as time goes by, we think that differentiation is going to aid us significantly as we think about the formulary positions relative to not only Humira, but also to Stelara. Liz Shea: Thanks, Tim. Operator, next question, please. Operator: The next question comes from Luisa Hector with Berenberg. Luisa Hector : It's on Elahere. I wonder whether you might be able to tell us the full quarter of sales. And then any commentary around penetration rate of Elahere and how much off-label use you think may be happening with the guideline inclusion? Scott Reents : Sure. It's Scott. With respect to the Elahere full quarter of sales, we closed mid-year in February. Prior to that there were -- according to what we've seen approximately, just let me just double check here, $70 million -- I'm sorry, $110 million in the full quarter, $113 million in the full quarter. Jeff Stewart : And it's Jeff. What we also see in the marketplace, a big catalyst that we saw in the first quarter was the movement from the accelerated approval to the full approval that Roopal highlighted with the MIRASOL data. So we were rapidly able to basically integrate that into all the material of the medical liaisons and certainly account managers and sales folks. And having that definitive table in the label and the ability to go deeper into our call plan is going to be very positive to continue the growth rates through the rest of the year. In terms of off-label, that's difficult to say. We think that the majority of the sales thus far are in that platinum-resistant population. However, the guidelines do allow for reimbursement with different levels of FRA alpha some of the updates that I mentioned in my prepared remarks. So we'll continue to monitor it, but there's certainly a significant headroom in terms of the populations that are coming in terms of the ovarian cancer marketplace. Liz Shea: Thanks, Luisa. Operator, next question, please. Operator: The next question comes from Gary Nachman with Raymond James. Gary Nachman : When looking at the strong performance of the neuro franchise of Vraylar and migraine in particular, talk about the competitive dynamics there in those markets. And how did the gross connects impact you in 1Q versus what you expected? And how should that trend for the rest of the year? And then with respect to Cerevel, just your confidence that it will still close by mid-year, and how FTC is viewing the schizophrenia market and how much overlap there might be between emraclidine and Vraylar? Just the latest thinking on that based on your conversations with FTC. Jeff Stewart : It's Jeff. I'll take the competitiveness comment in terms of what we're looking at. We're very pleased with the competitive -- our ability to gain market share in these segments. I'll start off with migraine. We continue to be the new to brand share leader in Botox for chronic migraine, and we see that Qulipta is accelerating significantly. So Qulipta is now the leading preventative agent. And what's nice is there's very little interaction with Botox because if you're an injector, you use Botox, if you're not an injector, you have access to a fantastic drug with Qulipta. So Qulipta is really clearly taking over the market leadership position among the injectable and the oral CGRPs. Ubrelvy continues to have a very meaningful and substantial lead over the main competitor, Nurtec and we are seeing some increased penetration into the larger triptan segment, which is key to our long-term growth. Vraylar continues to perform very well, ongoing market growth. And it's really because we have -- if we look at our perceptions, Gary, of our key prescribers, you're at the very, very top of the table, the league table in terms of perceptions around the efficacy around adjunctive major depression, which is our most recent indication and we have probably the best scope of indications for bipolar 1. And so both of those are allowing us to continue to gain share. So we're in a pretty good position. We also feel that the gross to net our vouchers, our co-pay, which sometimes can get a little funky in the first quarter. We have strong controls there and we're seeing a lot of stability. So overall, those businesses are performing very well Robert Michael : Gary, I'll take your question. This is Rob. I'll take your question on the FTC. We are working closely with the agency on their additional requests I mean, keep in mind that we do not have any overlapping MOAs with Cereval and Vraylar share in schizophrenia is very low. The vast majority of Vraylar sales comes from the bipolar and AMBD indications. In the case of davapidon, it will serve the early Parkinson's segment, which Duodopa and Vyalev do not participate in. So we don't have any concerns with the merits of the transaction and continue to expect closing it in the middle of the year. Liz Shea: Thanks, Garry. Operator, next question, please. Operator: The next question comes from Steve Scala with TD Cowen. Steve Scala : And I apologize in advance for asking you to clarify on Humira. But you mentioned several times that things are playing out as planned. But in the prepared remarks, you said U.S. erosion played out slightly better than you thought in Q1. So is the conclusion that whatever was better is temporary. You also mentioned volume pressure, but price -- offset by price benefit. Can you quantify that? But when you sum it all up, it sounds like you expect volumes to underperform the expectations you set three months ago? And is that in part maybe due to the Accredo news from yesterday. So that's a big -- that's a long question, but that's only one question. And the second question is curious if the FDA has contacted at the about the potential safety issues with Emlacridine post the competitor issue with convulsions in rabbits. And have you seen this with your agent? Jeff Stewart: Yes. So it's Jeff. So I'll try to take that. So the first part was the first quarter. I mean, it was marginally better in terms of overall performance because we didn't see -- obviously, we didn't see any volume disruption until 401. Now when you look at 401 and we look after three weeks, we look at our model in terms of the expectation around retention of Humira with the CVS template, that's largely tracking in line with what our expectations were with a bit of the surprise that some of that Humira is not going to the biosimilar, as I mentioned, is going to other mechanisms including Skyrizi and Rinvoq. So overall, as we look to the balance of the -- really the first quarter, what we're seeing play out in the second quarter and look to the full year, our commentary, and I'll ask Rob to highlight if he has anything to add is very much in line with what we've guided at the beginning of the year. So no material change in what we're seeing in the marketplace. Robert Michael: Yes, this is Rob. I'll confirm that, what Jeff is saying. I mean it's tracking in line with our expectations. We are not saying that volume is worse than we originally guided. We're saying this is tracking in line with our expectations. We try to characterize for you the price versus volume dynamics? Obviously, saying it's the price erosion is the vast majority of the decline, but there is volume, and it's tracking exactly as we anticipated. So there isn't an additional downside here. As Jeff mentioned, we did have slightly better performance in the first quarter. But again, it was -- I mean, I think, to the tune of $30 million to $40 million on this book of business, not overly material, but ahead of the initial expectation. Roopal Thakkar : Steve, it's Roopal. I can take the next question. We did a thorough diligence. And when we look at data sets that offer clinical data, obviously, we do a deep dive there, also look at blinded data, but we also do a deep dive looking at toxicology, animal tox in particular. And we didn't observe anything that was consistent with what has been described thus far. And as I mentioned, when we look at blinded safety data either from the 1B or the current pivotals that are running, we don't see an adverse event like this that would be related. And as far as we know, no health authority has reached out to ask any further questions about this. Robert Michael : Steve, this is Rob. I'm going to come back to your previous question and maybe I understand where the confusion could be. That one-time price benefit is a year-over-year dynamic. It was contemplated in our guidance. When you have a formulary change you essentially have those rebates go away and you recognize that. That was part of our guidance. That was not a benefit versus our guidance. That's a benefit in the year-over-year. So if you look at Scott guided to I think it was 32%. Scott Reents : That's right. Robert Michael : Erosion in the second quarter, which is lower than -- it was around 40% in the first quarter. So naturally, you'd wonder why would you have less erosion. Well, there's that year-over-year dynamic but that was how we planned the year. We anticipated it because we knew about the change that was coming in April 1. So I don't want to interpret that as a benefit versus our guidance, that's a benefit in the year-over-year calculation. Liz Shea: Thanks, Steve. Operator, next question, please. Operator: The next question comes from Trung Huynh with UBS. Trung Huynh : Congratulations, Rick, on the next chapter of the life and Rob for moving AbbVie forward. Again, on biosimilar Humira. In your remarks, you mentioned post the expected CVS contract, there was a step-up in price for Humira. Is that simply because you're giving away more price to CVS at the contract at the time. And you mentioned additional contracts moving to biosimilar like CVS this year. Are there any meaningful contracts here that you can flag so we're not surprised? And is it possible we could see a actually a pricing increase by year-end because of this? Scott Reents : Trung, this is Scott. I'll start with your question regarding the price benefit. So in my remarks, I indicated that with the formulary change in CVS and the volume step-down we saw there that there's a onetime price benefit associated with that. And you can think of this as we have the volume declines, that volume had been associated with price that we would have been paying in terms of rebate that those rebates will no longer be paid. Therefore, there's a one-time price benefit associated with that initial step down in the quarter. So that's what that relates to. Jeff Stewart : Yes. And in terms of what we see going forward, as I highlighted, we don't see a significant exclusionary action where Humira would be removed from a formulary going forward. We did plan for, obviously, that smaller plans may make some adjustments to their formularies. That's all within the volume degradation and the pricing dynamics that we put into our guidance. And as I mentioned in one of the comments, some of the payers, not super large would maybe consider this idea of starting new patients on the biosimilars versus maintaining all the existing patients on Humira. So if you were to see that, you shouldn't be surprised about that and that would be within the contemplated approaches that we're taking as we look across '24 with our knowledge of what's happening in the marketplace. Liz Shea: Thanks, Trung. Operator, we have time for one final question. Operator: And our final question comes from Evan Seigerman with BMO Capital Markets. Evan Seigerman : On the aesthetics business, maybe talk to me about some of the dynamics you're seeing in China. I know that there's a lot of macro headwinds and this is a pretty big part of your business. And then a bit of housekeeping on Skyrizi, where the last quarter you disclosed the $1.9 billion cash payment for royalties. Can you provide us any color on what this quarter's royalty was? And I believe that was for the full year last year but maybe just for the quarter. Carrie Strom : This is Carrie. I'll address your question on aesthetics in China. And we do expect economic headwinds that we're seeing in China to persist over the near-term with the China aesthetics market flat overall for 2024. So the way to think about it is to expect negative market until the recovery starts to begin in the second half of 2024. China does remain a very important market for our aesthetics business. And as the market there starts to recover, we will continue to invest in consumer activation, injector training and continue to launch new products in the support market. Scott Reents : It's Scott. So you're right. With respect to the schedule relative payments. So you have to remember that these are on a bit of a lag, so they don't track each quarter sales. But the $400 million was the amount in the first quarter that we paid in cash payment. Liz Shea: Well, thanks, Evan. That concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. Operator: Thank you. That concludes today's conference. You may all disconnect at this time.	[ { "speaker": "Operator", "text": "Good morning and thank you for standing by. Welcome to the AbbVie First Quarter 2024 Earnings Conference Call. All participants will be able to listen-only until the question-and-answer portion of this call. [Operator Instructions] Today's call is also being recorded. If you have any objections, you may disconnect at this time. I would now like to introduce Ms. Liz Shea, Senior Vice President of Investor Relations. Ma'am, you may begin." }, { "speaker": "Liz Shea", "text": "Good morning, and thanks for joining us. Also on the call with me today are Rick Gonzalez, Chairman of the Board and Chief Executive Officer; Rob Michael, President and Chief Operating Officer; Jeff Stewart, Executive Vice President, Chief Commercial Officer; Scott Reents, Executive Vice President, Chief Financial Officer; Carrie Strom, Senior Vice President, AbbVie and President, Global Allergan Aesthetics; and Roopal Thakkar, Senior Vice President, Chief Medical Officer, Global Therapeutics. Joining us for the Q&A portion of the call is Tom Hudson, Senior Vice President, Chief Scientific Officer, Global Research. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll turn the call over to Rick." }, { "speaker": "Rick Gonzalez", "text": "Thank you, Liz. Good morning, everyone, and thank you for joining us today. I'm extremely pleased with our start to 2024 with first quarter results exceeding our expectations. Before we discuss our performance in more detail, I'd like to share my perspective on the planned CEO transition that was announced earlier this year. After serving more than 11 years as AbbVie's first CEO, I have decided to retire from the role effective July 1, of this year and will continue to serve AbbVie as Executive Chairman of the Board. As you heard me say before, it is important that we choose the right time to make this critical leadership transition. The Board and I have been long planning for my eventual succession and now is the opportune time to move forward with the transition. As our business is performing very well and is in a strong position for the long-term. We are successfully navigating the Humira U.S. loss of exclusivity. We have built an outstanding company culture, an important priority and competitive advantage. And our productive R&D engine, which has yielded numerous innovative new medicines for patients will continue to fuel our robust pipeline for years to come. After a multi-year process, our board has unanimously selected Rob Michael, our current President and Chief Operating Officer as AbbVie's next CEO. I have known and worked with Rob for many, many years and he is an excellent choice as my successor. He brings the experience, the leadership and the strategic vision to build on AbbVie's past successes, advance our strategy and enhance shareholder value. Since our inception, Rob has held several important leadership positions that have collectively had a tremendous impact on AbbVie from establishing our financial planning organization to navigating the end of exclusivity for Humira in the U.S., to driving key business development opportunities that have been critical to diversify our business and support long-term growth, including the acquisitions of Allergan and ImmunoGen and the pending Cerevel transaction. Looking back, AbbVie has evolved tremendously as an independent company and our performance has truly been exceptional. Since our inception, we've grown our revenue from $18 billion to $55 billion. Our market capitalization has increased substantially from $54 billion to roughly $300 billion today. We have achieved a total shareholder return of more than 675%, which is top tier relative to our peers. And importantly, we’ve substantially increased our investments in R&D to discover and develop new medicines that have the potential to improve the lives of patients. As I look ahead, our company has never been stronger and our future has never been brighter. We are executing well across all aspects of our business and our long-term growth prospects remain very strong. In summary, it has been a privilege and immensely gratifying to serve with all of my AbbVie colleagues for the past 11 years, growing AbbVie into what it is today. And I look forward to continuing to work with Rob and the leadership team to create meaningful value for our shareholders and all of our stakeholders. And I'd also like to take this opportunity to thank all of our shareholders for the trust and confidence you put in me as AbbVie's CEO. With that, I will turn the call over to Rob for comments on our recent business performance. Rob?" }, { "speaker": "Rob Michael", "text": "Thank you, Rick. Before I comment on our first quarter performance, I want to congratulate Rick on his exceptional leadership of AbbVie over the past 11 years. During his tenure, Rick made several strategic moves that have positioned AbbVie to have a bright future beyond Humira, consistently drove the organization to deliver very strong performance and demonstrated the genuine care for our employees, patients, shareholders and communities that has defined who we are as a company today. It has been my privilege to work closely with Rick over many years, and I look forward to working with him in his role as Executive Chairman. AbbVie's outlook is very strong and I am excited about the remarkable impact that we the remarkable impact that we will continue to have on patients' lives. Turning to first quarter performance, we're off to an excellent start to the year with strong top and bottom-line results. We reported adjusted earnings per share of $2.31, which is $0.11 above our guidance midpoint. Total net revenues were $12.3 billion approximately $400 million ahead of our expectations. This overachievement was driven by our ex-Humira growth platform, which delivered revenue growth of more than 15% this quarter and includes continued robust sales from Skyrizi and Rinvoq, with combined growth above 50% in their fifth full year on the market, as well as double-digit revenue growth from several other key products including Venclexta, Vraylar, Ubrelvy and Qulipta. This broad based sales momentum clearly demonstrates the strength of our diversified portfolio with multiple growth drivers to support our long-term outlook. We are also making excellent progress with several of our near-term priorities. We recently completed the acquisition of ImmunoGen, which accelerates our entry into the solid tumor market and strengthens our oncology pipeline. The integration has been seamless and we are impressed by the caliber of talent we have welcomed into AbbVie. We also remain on track with the pending acquisition of Cerevel, which we anticipate will close in the middle of the year. Cerevel's pipeline of differentiated assets will further augment our neuroscience portfolio. In addition, we continue to advance our R&D pipeline and invest for long-term growth. This progress includes the FDA's full approval of Elahere for FR alpha positive platinum resistant ovarian cancer, a meaningful first in class treatment for patients and a significant long-term growth opportunity for AbbVie in solid tumors. We also gained U.S. approval of Juvederm Voluma XC for temple hollows, further strengthening our leadership in aesthetic fillers, and we executed several business development opportunities adding novel early stage programs and partnerships in oncology and immunology. Given the strong results this quarter, we are raising our full year adjusted earnings per share guidance by $0.16 and now expect adjusted EPS between $11.13 and $11.33. In summary, this is an exciting time for AbbVie and I am extremely pleased with the momentum of our diverse portfolio. We're off to an excellent start to the year and we are well positioned to deliver a high-single-digit revenue CAGR through the end of the decade. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff?" }, { "speaker": "Jeff Stewart", "text": "Thank you, Rob. I'll start with the quarterly results for immunology, which delivered total revenues of approximately $5.4 billion exceeding our expectations. Skyrizi global sales were $2 billion reflecting operational growth of 48%. We continue to see exceptional momentum across all of the approved indications. In psoriasis, Skyrizi is the clear market leader in the U.S. biologic psoriasis market with a total prescription share now above 35%. That's more than double the share of the next closest biologic therapy. Share is also ramping nicely in PsA, especially in the dermatology segment, where we are now capturing one out of every four new or switching in play biologic patients. Globally, Skyrizi has achieved psoriatic in play share leadership in nearly 30 key countries. In IBD, Skyrizi is on track to add more than $1 billion of incremental sales growth this year. We are seeing tremendous performance in Crohn's disease, where our compelling head-to-head data versus Stelara is driving a meaningful inflection of patient share. As a result, we have now achieved in play share leadership in Crohn's across all lines of therapy in both the U.S. and Japan as well as other key markets around the world. And finally, we are preparing for the launch of Skyrizi in ulcerative colitis, which represents another substantial long-term growth driver. We expect approval decisions in the middle of this year and anticipate rapid access in the U.S. following our launch. Given the robust frontline capture for Skyrizi in Crohn's and the exceptional bio-naive data we have generated in UC, we anticipate a strong launch. Turning now to Rinvoq with global sales of approximately $1.1 billion, reflecting operational growth of 61.9%. In rheum, we continue to see strong prescription growth across each of the four approved indications, and I'm especially pleased with our performance in rheumatoid arthritis, where Rinvoq has achieved in play share leadership in nearly 20 key international markets. Atopic dermatitis is tracking in line with our expectations with continued market share momentum globally. Importantly, we recently announced positive results from LEVEL UP, our second head-to-head study in AD. LEVEL UP demonstrated Rinvoq superiority for patients starting therapy on the 15 milligram dose versus Dupixent across key efficacy parameters, including the high levels of skin clearance and itch reduction. We anticipate these strong head-to-head results will support additional share capture, especially given Rinvoq label use in the U.S., which requires that initiation with a 15 milligram dose. And in IBD, Rinvoq's uptake continues to be very strong. Rinvoq is capturing high teens in play patient share in ulcerative colitis as well as mid-teens in play patient share in Crohn's disease. This performance is especially encouraging recognizing that we're still relatively early in the launch phase for both the UC and CD indications, and the lines of therapy are also expanding, with second line plus growing even faster as patients cycle to newer, higher efficacy agents like Rinvoq and IBD. Turning now to Humira, which delivered global sales of approximately $2.3 billion, down 35.2% on an operational basis due to biosimilar competition. Erosion in the U.S. played out slightly better than our expectations in the quarter with the vast majority of the impact this quarter driven by price. As previously communicated, the recent changes to the CVS template formularies were anticipated in our full year outlook for U.S. Humira and the volume impact is tracking in line with our expectations. Our guidance has also contemplated the impact of additional formulary changes that are expected to go into effect over the course of the year. We continue to anticipate that Humira will maintain parity access to biosimilars for a significant majority of patient lives this year. Moving now to oncology, where total revenues were more than $1.5 billion exceeding our expectations. Imbruvica global revenues were $838 million, down 4.5%, reflecting continued competitive pressure in CLL. Venclexta global sales were $614 million, up 16.3% on an operational basis and we are seeing robust momentum internationally with strong performance for both CLL and AML. Elahere generated $64 million of sales to AbbVie, reflecting a partial quarter of revenue following the February close of the ImmunoGen acquisition. The Elahere sales and marketing team is executing very well and I'm pleased with the smooth integration into our commercial organization. We anticipate that the recent positive updates in the NCCN guidelines for both platinum sensitive and platinum resistant ovarian cancer patients as well as the full label approval, which of course, includes the compelling overall survival data that has never been achieved before in these platinum resistant patients will continue to drive strong Elahere uptake. Lastly, the global launch of Epkinly in third line plus DLBCL is also performing well and we remain on track for the potential label expansion for follicular lymphoma later this year. Neuroscience total revenues were nearly $2 billion, up 16% on an operational basis, again, ahead of our expectations. This robust performance is driven by continued double-digit growth of Vraylar with global sales of $694 million, Ubrelvy with total revenue of $203 million and Qulipta with global sales of $131 million. Each of these leading assets continue to gain share and remain competitively well positioned. Botox Therapeutic is also performing well, especially in chronic migraine. Total global sales were $748 million, up 4.5% on an operational basis. And finally, we are very excited about 951, which will be commercialized as Vyalev in the U.S. and represents a potentially transformative next generation therapy for advanced Parkinson's disease. Feedback from the launches in Japan and Europe have been very encouraging and we remain on track for commercial approval in the U.S. later this year. So overall, I'm extremely pleased with the strong and balanced growth across our therapeutic portfolio this quarter, a testament to our differentiated product profiles and commercial execution. And with that, I'll turn the call over to Carrie for additional comments on aesthetics. Carrie?" }, { "speaker": "Carrie Strom", "text": "Thank you, Jeff. First quarter global aesthetic sales were over $1.2 billion, reflecting a modest decline on an operational basis. In the U.S., aesthetic sales of $776 million were roughly flat versus the prior year. We continue to see sustained momentum in the facial injectable market recovery that emerged in the back half of last year. Consistent with the past few quarters, the toxin market grew by a mid-single-digit percentage. We saw similar year-over-year increases in the number of facial filler procedures, representing a return to quarterly market growth for the first time since early 2022. From a competitive perspective, our U.S. aesthetics portfolio continues to perform well. Market share for both Botox Cosmetic and Juvederm was stable in the first quarter as these assets remain the clear market leaders. While we're pleased that the market and share trends across U.S. facial injectables are aligned with our previous expectations, our first quarter results were impacted by customers holding lower than normal inventory levels at quarter end. This dynamic relates to a decision made during the quarter to shift the timing of certain promotional activities into the second quarter. We therefore expect inventory levels to normalize in the second quarter and remain on track to deliver full year aesthetics sales growth in the U.S. Internationally, first quarter aesthetic sales were $473 million reflecting an operational decline of 5.5%. Consistent with our expectations, growth in China was impacted by persistent economic headwinds as well as a challenging comparison versus the first quarter of last year, which benefited from a robust recovery post-COVID. We are monitoring the economic developments across China and continue to anticipate a recovery in the second half of this year. Our pipeline continues to generate important new assets. Uptake of our recently launched Volux and SkinVive products remain strong, underscoring the importance of innovation within aesthetics. Given this context, we are excited for the upcoming launch of Juvederm Voluma XC for the treatment of temple hollows. As the only dermal filler approved for use in the upper face, we anticipate the Voluma XC introduction will activate more consumers and support the long-term growth of our filler portfolio. And within our toxin pipeline, we continue to expect FDA approval of the platysma prominence indication for Botox near the end of this year, enhancing Botox growth potential as a noninvasive treatment to reduce the appearance of vertical neck bands and improve jawline definition. We also remain on track to submit a new drug application for our short acting toxin, BoNT/E, before the end of this year. This novel toxin has demonstrated a rapid onset of action as well as a short duration of effect, meaningfully lowering the barrier for toxin adoption across consumers who have been considering but hesitant to try Botox. Given this profile, BoNT/E has significant market expansion potential as satisfied patients would naturally convert to Botox. Overall, the underlying trends across our aesthetics portfolio align well with our previous expectations and we remain on track to deliver high-single-digit global aesthetics growth this year. With that, I'll turn the call over to Roopal." }, { "speaker": "Roopal Thakkar", "text": "Thank you, Carrie. I'll start with immunology. We recently announced positive top-line results from 2 Phase III studies for Rinvoq in dermatology and rheumatology. In the LEVEL UP study, which evaluated Rinvoq against dupilumab in atopic dermatitis, Rinvoq demonstrated superiority on the primary endpoint at week 16, which was a composite endpoint measuring skin clearance and itch reduction. Twice as many Rinvoq patients achieved this very stringent endpoint compared to dupilumab. Rinvoq also demonstrated superiority on all rank secondary endpoints in this trial. LEVEL UP was a study in which patients started on Rinvoq 15 milligrams and could escalate to 30 milligrams if they did not achieve treatment goals, which is how Rinvoq is prescribed for atopic dermatitis in the U.S. We also saw very rapid responses with Rinvoq demonstrating superiority on itch as early as week two and on skin lesions as early as week four. Rinvoq's safety profile in the LEVEL UP trial was consistent with what has been observed in previous studies. There were no serious infections in patients treated with Rinvoq and one in the dupilumab group. The rate of serious adverse events was similar across treatment arms. There were no malignancies, MACE events or VTEs reported in either treatment group. Based on these data as well as results from previous Phase III studies, we remain very confident in Rinvoq's profile in atopic dermatitis, and we believe it offers meaningful advantages over other products on the market today. We also announced positive top-line results from our Phase III select giant cell arthritis trial, which evaluated Rinvoq in combination with a 26-week steroid taper regimen compared to patients receiving placebo in combination with a 52-week steroid taper. In the study, Rinvoq 15 milligrams met the primary and key secondary endpoints, demonstrating superiority on sustained remission from week 12 through week 52, as well as on disease flare and reduction in cumulative steroid exposure at week 52. Importantly, Rinvoq's safety profile was consistent with what has been observed in more than 15,000 patients previously studied across controlled trials. The mean age in this population was 71, which is the oldest population studied to date with Rinvoq. And the average prednisone equivalent dose at baseline was almost 35 milligram. Rates of serious adverse events and VTEs were similar across treatment groups. There were no MACE events in the Rinvoq arm, while there were two in the placebo group. Based on the results from the select GCA trial, we believe Rinvoq has the potential to be a safe and tolerable oral treatment option. We plan to submit our regulatory applications for this indication later this year. We continue to make very good progress with our inflammatory bowel disease programs. We anticipate several advancements this year, including the initiation of a Phase II study for lutikizumab in ulcerative colitis. The start of our Phase II Crohn's disease platform study, which will evaluate combinations of Skyrizi with lutikizumab and other novel biologics. And we remain on track for approval decisions for Skyrizi in ulcerative colitis, with the U.S. expected in the second quarter and Europe in the second half of the year. We also continue to invest in external innovation to expand our immunology pipeline, as evidenced by four deals that we announced in the first quarter. These include the acquisition of Landos Biopharma, which brings an oral NLRX1 agonist currently in Phase II for ulcerative colitis, a partnership with OSE immunotherapeutics to develop a novel ChemR23 agonist antibody for inflammatory conditions, such as IBD and RA. A collaboration with Parvus Therapeutics to utilize their immune tolerization platform to develop novel therapies for IBD, and a collaboration with Tentarix Biotherapeutics to develop conditionally active, multi-specific biologics in immunology and oncology. We are excited to partner with these companies who are all pursuing very innovative approaches to developing transformative therapies. Moving to oncology, where in the quarter, we closed the ImmunoGen transaction, which brings exciting programs in both solid and blood cancers. Last month, Elahere received full approval from the FDA for FR alpha positive platinum resistant ovarian cancer in patients treated with up to three prior therapies. This conversion to full approval was based on data from the confirmatory Phase III MIRASOL trial, where Elahere demonstrated an overall survival benefit and significantly reduced the risk of cancer progression. We expect to see results from additional ImmunoGen programs this year, including data from the Phase II PICCOLO study evaluating Elahere as a monotherapy in FR alpha positive third line plus platinum-sensitive ovarian cancer patients who are not eligible for retreatment with platinum-based therapies. And we expect to see data in the second half of the year from a potentially registration-enabling Phase II trial for our CD123 targeting ADC, Pivek in a rare blood cancer called blastic plasmacytoid dendritic cell neoplasm. Now moving to program updates in hematologic oncology. Based on the totality of the data from our TRANSFORM-1 trial and following recent feedback from regulators, we will not be submitting navitoclax for approval in myelofibrosis, and we will wind down the TRANSFORM-2 study, in the relapsed refractory setting. In other areas of [EMAC], we remain on track for several regulatory and clinical milestones this year, including regulatory approvals in the U.S. and Europe for a Epinkly in relapsed/refractory follicular lymphoma. The Phase III readout from the Venclexta VERONA trial, in treatment-naive, higher-risk MDS and initiation of a Phase III monotherapy study for ABBV-383 in third-line multiple myeloma. We remain very excited about this asset's potential to become a best-in-class BCMA CD3 bispecific by providing deep, durable responses and low incidence and severity of CRS and with the potential for outpatient administration, limited or no step-up dosing and monthly administration from the beginning of treatment. Moving to other areas of our pipeline. In aesthetics, we remain on track to submit our regulatory application for BoNT/E in the second half of the year. Our rapid onset short-acting toxin as a highly differentiated clinical profile compared to currently available neurotoxins. BoNT/E is designed for patients that are considering using facial toxins for the first time or for a special event and will allow them to experience results over a very short period of time. This novel toxin will complement our existing business as patients would naturally transition to BOTOX following experience with this trial toxin. And in neuroscience, we continue to make good progress with 951, where we have received regulatory approvals in 33 countries thus far and anticipate an approval decision in the U.S. in the second quarter. As Rob mentioned, we remain on track to close the Cerevel transaction in the middle of this year. Cerevel recently announced positive top line results from their Phase III TEMPO-3 trial evaluating Tavapadon as adjunctive therapy to levodopa in patients with Parkinson's disease. In study, Tavapadon met the primary endpoint, demonstrating a 1.1 hour increase in total on time without troublesome dyskinesia compared to patients treated with levodopa and placebo. Tavapadon also met the key secondary endpoint in the trial, providing a significant reduction in off time compared to levodopa and placebo. Two additional Phase III studies for Tavapadon in Parkinson's disease are expected to read out later this year. The emracladine pivotal studies in schizophrenia remain on track to begin reading out later this year as well. We look forward to providing updates on these programs once the transaction has closed. With that, I'll turn the call over to Scott." }, { "speaker": "Scott Reents", "text": "Thank you, Roopal. Starting with our first quarter results. We reported adjusted earnings per share of $2.31, which is $0.11 above our guidance midpoint. These results include an $0.08 unfavorable impact from acquired IP R&D expense. Total net revenues were $12.3 billion, $400 million ahead of our guidance and reflecting a return to growth of 1.6% on an operational basis, excluding a 0.9% unfavorable impact from foreign exchange. Importantly, these results reflect more than 15% sales growth from our ex-Humira growth platform. The adjusted operating margin ratio was 42.2% of sales. This includes adjusted gross margin of 82.9%, adjusted R&D expense of 14.7%, acquired IP R&D expense of 1.3% and adjusted SG&A expense of 24.6%. Adjusted net interest expense was $429 million. The adjusted tax rate was 14.8%. Turning to our financial outlook. We are raising our full year adjusted earnings per share guidance to between $11.13 and $11.33. This increase of $0.16 at the midpoint includes $0.26 of operating overperformance partially offset by $0.10 of higher dilution due to the earlier close of ImmunoGen. As previously communicated, this earnings per share guidance includes $0.42 of dilution related to the recently closed acquisition of ImmunoGen and the pending acquisition of Cerevel. Please also note that this guidance does not include an estimate for acquired IP R&D expense that may be incurred beyond the first quarter. We now expect total net revenues of approximately $55 billion, an increase of $800 million. At current rates, we expect foreign exchange to have a 0.9% unfavorable impact on full year sales growth. This revenue forecast includes the following updated assumptions with the entire sales increase driven by our ex-Humira growth platform. We now expect Skyrizi global revenue of $10.7 billion, an increase of $200 million due to strong momentum across all approved indications. Rinvoq total sales of $5.6 billion, an increase of $100 million, reflecting robust uptake in IBD. Imbruvica total revenue of $3.1 billion, an increase of $200 million, reflecting lower erosion and Elahere total sales to AbbVie of $450 million, an increase of roughly $200 million, reflecting a partial year of revenue following the February close of the ImmunoGen acquisition. Moving to the P&L for 2024. We continue to forecast adjusted gross margin of approximately 84% of sales, adjusted R&D investment of 14%, adjusted SG&A expense of 23.5% and an adjusted operating margin ratio of roughly 46.5%. We now expect adjusted net interest expense of $2.2 billion, which includes the partial year cost in 2024 to finance the ImmunoGen and Caravel transactions. Turning to the second quarter, we anticipate net revenues of approximately $14 billion, which includes U.S. Humira erosion of approximately 32%, reflecting a step-up in volume erosion and with the recent CVS formulary change, partially offset by a onetime price benefit also associated with that change. At current rates, we expect foreign exchange to have a 1.3% unfavorable impact on sales growth. We are forecasting adjusted operating margin ratio of approximately 49.5% of sales, and we are also modeling a non-GAAP tax rate of 16.4%. We expect adjusted earnings per share between $3.05 and $3.09. This guidance does not include acquired IP R&D expense that may be incurred in the quarter. In closing, I'm very pleased with the excellent start to the year. We are demonstrating strong momentum across the portfolio and our financial outlook remains very strong. With that, I'll turn the call back over to Liz." }, { "speaker": "Liz Shea", "text": "Thanks, Scott. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator, first question, please." }, { "speaker": "Operator", "text": "First question comes from Mohit Bansal with Wells Fargo." }, { "speaker": "Mohit Bansal", "text": "Congrats on the progress and congrats Rob as well. So maybe let's just start with 2024. I mean so thanks for this guidance. But when we look from 2024 to '25, there are a couple of headwinds that you have highlighted in the past. So obviously, IRA Part D redesign will be there and Humira may have another leg down. And given the volume erosion here, people are a little bit concerned there. Can you help us understand that what is your current thinking on the trough, '24 versus '25? And could you give us some confidence that you can continue to grow in '25 despite these headwinds from IRA and Humira?" }, { "speaker": "Robert Michael", "text": "This is Rob. I'll take that question. So if you think about ’24, ‘25. I mean, clearly, the ex-Humira growth platform is demonstrating great momentum. If you just think about Skyrizi and Rinvoq alone are growing by more than $4 billion per year. Aesthetics will recover to high single-digit growth. Our neuroscience franchise will grow by over $1 billion this year on the heels of strong momentum for Vraylar and our migraine portfolio and we will have incremental contributions from Vyalev and Elahere in '25. So we have several drivers that will offset Humira erosion next year as well as the Part D benefit redesign impact and allow us to still deliver robust revenue growth. When you think about that redesign impact, it will really spread across our business, most concentrated in immunology and oncology. And we would estimate that total revenue impact could be worth several points of growth, while we'll still deliver robust revenue growth, we will have that headwind in '25. But keep in mind, for us, the IRA impact really hits us in '25 and isn't a significant headwind in the years that follow as products that are subject to negotiation will not have that Part D cost share impact. So the way to think about it is despite that headwind in '25, we will still deliver robust growth, with that growth rate accelerating in the years that follow. And then if you think about on a margin perspective, we're going to continue to expand operating margins. So that will be a tailwind. You should be, though modeling annualization of interest expense from these transactions. And keep in mind that we essentially would have -- think of it as a roughly half year for Cereval and 10.5 months this year for ImmunoGen. So that should be something that you do model for '25. So we'll have robust revenue growth we'll have earnings growth, not quite at the rate of the revenue growth because of that annualization impact. But then when you get to ‘26 and beyond, you have even faster revenue growth and very robust earnings growth. So that's probably the best way to think about the profile of the company. But when you look at that ex-Humira growth platform, there's a lot of momentum there and we are very well positioned to deliver very robust growth." }, { "speaker": "Liz Shea", "text": "Thanks, Mohit. Operator, next question, please." }, { "speaker": "Operator", "text": "The next question is from Vamil Divan with Guggenheim." }, { "speaker": "Vamil Divan", "text": "So maybe I could just ask a couple on the aesthetics side. It sounds like your commentary is pretty generally in line with Liz said before, but obviously, the number was a little lighter this quarter than even to your guidance that what people are expecting so. Can you maybe just talk a little bit more about that you mentioned some shift in promotional efforts to the second quarter and maybe inventory levels then as a result being lower and maybe I don't know if you can quantify that a little bit? And was this sort of planned when you gave your guidance back in February or is this something that's sort of evolved over the quarter? Maybe just kind of why the decision maybe would be helpful to give us some comfort on the outlook there?" }, { "speaker": "Carrie Strom", "text": "This is Carrie. So first, I'll give a little bit of context to the fundamentals in terms of market growth and market share, which were in line with our expectations. So our market share continues to be strong and stable. For Botox Cosmetic, despite a new competitor, strong stable share at high levels. And then for our Juvederm line continued share strength, even some share pickup in in the past few quarters, as we launch our new products. So like you said, those fundamentals are in line with our expectations. As we were going through the quarter, we really realized that the aesthetics market is quite sensitive to seasonality with Q2 and Q4 typically having the highest volume. And after a few years of COVID and economic disruption, we're now anticipating a return to that typical seasonality. So we shifted investment in some of our sales and marketing efforts into Q2, which impacted customer and sales promotional timing and activities, which then resulted in lower inventory held by our customers in Q1. And we do expect that to come back in Q2 and the rest year. And I'll let Scott address the rest of that question." }, { "speaker": "Scott Reents", "text": "Sure. Thanks, Carrie. So Vamil to quantify the inventory impact in the first quarter, it was a little bit more than $50 million between Juvederm and Botox and you can think of that as being split roughly 2/3 to about and 1/3 to Juvederm. And I think as Carrie mentioned in her remarks that impact of that inventory will -- we expect that to turn in the second quarter." }, { "speaker": "Liz Shea", "text": "Thanks, Vamil. Operator, next question, please." }, { "speaker": "Operator", "text": "Next question comes from Chris Shibutani with Goldman Sachs." }, { "speaker": "Chris Shibutani", "text": "When we think about the 2024 upcoming contracting season, which obviously has been quite dynamic for Humira over the past year plus. Can you provide us with any insights in terms of structural aspects within your contracts that you build in that may help provide offsets. We often have limited visibility. We're looking at the prescription volume trends. And it feels as if our calculus is sometimes incomplete. But what can you reassure us in terms of the dynamics as we're seeing this year two play out and how you're approaching contracting for the forward?" }, { "speaker": "Jeff Stewart", "text": "Chris, it's Jeff. So the contracting season typically starts April or May. And frankly, as we've highlighted before can run in the immunology category really through the end of the year. So we have a few philosophies that we look towards, which are -- we want to continue to basically make sure that patients if possible, based on our pricing concessions aren't disrupted because when you start to disrupt patients, they do struggle with the change. It's a change in their treatment course. And so as we look to that, we've historically highlighted that we are negotiating for parity contracts with Humira. And we do put some controls in place in some cases, but not all, we seek multi-year contracts with our payers to try to establish the relationship, the pricing, et cetera and we will think of ways to make sure that those contracts can hold. So they have some teeth in them. They can't just be willy-nilly discarded. And so it is a long-term, in some cases, partnership over a couple of years with these payers. I can't go into the details over exactly how those controls work. But suffice it to say that there's terms and timing and limits in terms of when contracts can be changed even maybe some clawbacks in some cases. So because we want these more sustained relationships because of our position in the category with these great brands, we typically use those sort of techniques and that's how we go for it. So again, it's hard to look forward too much because it is dynamic as we look to '25. But we've been quite successful in maintaining good access for our brands and certainly, Humira is tracking in line with our expectations." }, { "speaker": "Liz Shea", "text": "Thanks, Chris. Operator, next question, please." }, { "speaker": "Operator", "text": "Our next question comes from Chris Schott with JPMorgan." }, { "speaker": "Chris Schott", "text": "Just a couple more on the Humira front. I think Humira you had mentioned that in 2024, you expected most of the impact would be price versus volume. I think the street has been concerned that we're seeing more volume erosion, particularly with the CVS book of business. I'm just interested in your latest thinking as we think about price versus volume for the remainder of this year as we consider CVS [Signa], et cetera. How should we think about that balance just so there's kind of surprises, I guess we watch these volume trends playing out? And then maybe just on a related topic, can you talk at all about the tail for Humira sales in the U.S.? I guess the part of the question, do you expect that you'll see most players or payers eventually switch out Humira like we're seeing at CVS? And if so, is it still reasonable to think about there being a kind of a decent tale of revenue, I guess, for this product in the U.S. over time?" }, { "speaker": "Jeff Ryan", "text": "There's a lot in there. Let me go through it in a systematic fashion. So I think, first, to directly answer your question. We still as we look forward, believe that the significant majority of our lives will be at parity. So that means our guidance around the majority being price is still holding in our go-forward look. Let me give you some perspective. I had some in my opening remarks over what's happening with CVS. So the first is that, as I mentioned, the step down in volume was really anticipated and based on our analysis of the data, which I'll highlight, it's really right in line with our expectations. Now one of the things in my remarks, I often talk about new to brand or our in-play share capture, and that's a really good way to look at performance, particularly early in launch cycles when you're looking at capture rate or competitive dynamics. I think it's important that investors and analysts need to be very mindful when you have a dislocation or disruption or switching, you can get very, very full at looking at NRx or NBRx because it sort of overinflates what you might be looking at. So I think that's important. The other fact base that we look at is in terms of the step down is we look at other analogs and we look at the Cosentyx Taltz analog or Taltz was advantage in ESI for Cosentyx back in 2019. And we see that typically in this category, almost 90% of the erosion tracks within the first two to three weeks. And that's actually what we're starting to see, we believe with the CVS template following that similar pattern. So if you can't really look at NRx or NBRx, you really have to look at TRx in this case, Chris. And this is very interesting. And we would make sure to guide folks to look at what's happening with the TRx data in the market. And what we see is that not all of the Humira prescriptions are moving to a biosimilar. And if you look at the first two weeks, it's pretty meaningful. Over 20% of the Humira prescriptions are moving to other mechanisms of actions, including Skyrizi and Rinvoq. And in fact, while we haven't studied this week as much, it actually seems to have accelerated a bit from there. And that actually makes some sense because if you think it from the physician's perspective, when patients are being switched, they often take a break in a pause to say, are these patients really under control, should I consider an alternative. And that's actually what we see playing out in the market. So the pure degradation or step-down from Humira is in line with what we see, but we are seeing a fairly significant move to other mechanisms, as I mentioned, including our own Skyrizi and Rinvoq. And that could be very, very good for patients who are probably getting better care for control of their disease. Now having said that as well, if we look through the rest of '24, we have very solid contracts with our payers through 2024. And remember that these payers can add biosimilars at parity whenever they choose. We saw that last year in the middle of the year, and that's really not different now. So when we look at the structure and controls of our existing agreements, we do not see widespread exclusions for the rest of the year, as we go forward. And so I think we've been pretty consistent with that that select clients will move towards biosimilars over the course of the year. Last year, we saw that with Kaiser and Medicaid plans. We talked about the CVS exclusion for the template business. And we do see that some select plans may take another approach, which we've contemplated as the year goes on, which is they may move new patients to the biosimilar, but maintain the large existing base. And that's quite manageable because really only about 14% or 15% of the patients are new patients that cycle into Humira. So overall, that's our perspective. We're confident things are tracking in line. We're quite interested in this shift to other mechanisms, which is frankly somewhat anticipated, but maybe operating a little higher than we thought, and we still believe that a significant majority of Humira will see it at parity lives in '24. Okay. So the tail we're going to be negotiating '25. And what we've highlighted is we are going to watch exactly how the interchangeables play out. We think we've got a good understanding of that. And so it will probably become more apparent as we move through '25 where that tail may sit. And we've highlighted that it may start to emerge in '25 and probably be much more visible by '26. And that's going to ultimately depend on how over the course of '25, the price volume fully plays out in the marketplace." }, { "speaker": "Robert Michael", "text": "And Chris, this is Rob. On your question regarding the guidance for this year. I think it's important to note yes, we've said that the vast majority of the erosion is price. We've talked about that dynamic. If you think about first half, second half, we have the annualization impact given the mid-year step-up in rebates last year. So the annualization impact comes through in the first half, you'd expect price erosion to be greater in the first half or the second half. But at the same time, we did contemplate volume erosion because we were very well aware of the CVS contract. We gave you that guidance. And so we have contemplated that volume erosion, but that's more of a second half versus first half as well as the potential for we knew with an interchangeable coming in, there could be some marginal amount of volume pickup there. So we did put in volume erosion in our guidance, but the vast majority of it is price, but I don't want investors to think that we didn't put any volume into our guidance. We were very well aware of the CVS contract. And I think we made some prudent assumptions on potentially other impacts. But overall, we're still tracking in line with that guidance." }, { "speaker": "Liz Shea", "text": "Thanks, Chris. Operator, next question, please." }, { "speaker": "Operator", "text": "Our next question comes from Terence Flynn with Morgan Stanley." }, { "speaker": "Terence Flynn", "text": "Congrats to Rick and best of luck to Rob in a new role. Just wondering if you could maybe frame a little bit for us the opportunity for Skyrizi in UC versus Crohn's disease. I think last time we heard from J&J, Crohn's represented about $7 billion of Stelara sales. Obviously, you guys have made decent inroads there based on your comments. But just wondering think about the dollar opportunity in ulcerative colitis. And then when you were talking through some of the latest Rinvoq data, I was just wondering if there's an opportunity down the road as you generate more clinical data, but also commercial data to potentially revisit the restrictions on line of therapy on the label at some point, or if we shouldn't think about that as a possibility." }, { "speaker": "Jeff Stewart", "text": "It's Jeff. I'll take the first question. So Crohn's is larger than you see. I mean, if you look at the overall market or revenue, I think it's 65%, 70%. So it's -- Crohn's is very, very significant. Having said that, ulcerative colitis is a multibillion-dollar opportunity for us. It's still a very, very underpenetrated and substantial indication. So it's weighted about 65 -- 35 --70-30, but still, I wouldn't underestimate what ulcerative colitis means. And I think I would add in concert with my prepared remarks, we've seen very, very significant acceleration into frontline Crohn's disease with Skyrizi. And what's remarkable, we studied a very, very difficult population in ulcerative colitis, but we still had substantial amount of naive patients. And the performance in that naive population is exceptional. I mean, it is at the very, very top of the league table terms of overall ability to get to endoscopic clearance and symptom control. And so we like that setup because, obviously, we have exactly the same representatives who are establishing the Crohn's indication in frontline, and we know that we can bring UC very fast afterwards when we get the approval this year. So it's a substantial global opportunity, not the size that we'll see over the LRP with Crohn's, but still one of our largest opportunities that we have in the category. And I'll ask Roopal based on the safety data he highlighted to comment on the second question." }, { "speaker": "Roopal Thakkar", "text": "Yes, thank you. So the data we keep generating continues to at least drive confidence for sure that the original Phase III that came out with their safety profile, and what we continue to learn even with longer-term data, even in more high-risk patients confirms what we've always seen. And that will continue to drive confidence, I think with our clinicians. Now from a health authority standpoint, I think the position there is that you have this oral surveillance study with upadacitinib, and they're going to apply those findings to the other assets in a similar class probably until there's another outcome study to sort of argue against that -- that's kind of how we see it, now that's in the U.S. I would say globally, there's still an opportunity for many jurisdictions where JAK inhibitors can be at parity. So you might start seeing some more movement there in earlier lines. But as Jeff stated in his prepared remarks, the second line and even third line of many of these indications continues to grow as people now have options where in the past, if all you had was a TNF, maybe you were cycling. But now that you know that there's other therapies you're starting to see people break sooner. So I think that second and third line is still a huge opportunity, and we'll continue to grow with this emerging data." }, { "speaker": "Jeff Stewart", "text": "And Terence, it's Jeff again. One more comment. I mentioned how we're excited about the naive position for both Skyrizi, CD and UC coming. But what's also nice is those same representatives are in the office and are able to highlight basically a one-two punch, where you use Skyrizi first in earlier lines based on this exquisite data. And then obviously, for later lines, you can use Rinvoq. And so we actually see in the marketplace that, that combination and that positioning is allowing us right now in real time, capturing almost towards 40% of all in-play share with Skyrizi first and Rinvoq second. So it's an encouraging position as we fill out that portfolio." }, { "speaker": "Liz Shea", "text": "Thanks, Terence. Operator, next question, please." }, { "speaker": "Operator", "text": "The next question comes from Carter Gould with Barclays." }, { "speaker": "Carter Gould", "text": "I wanted to circle back on the prior commentary around some of the TRx data. And I guess the overarching question is that, I guess, appropriately kind of capturing all the volume you're really seeing? And there's clearly with your part of your agreement with CVS and the Cordavis there, there is the potential for some Humira volume to potentially be shifting there. Is that being captured by TRx. So I guess, any commentary there on sort of the accuracy of that data that we're all seeing. And then maybe if you just go back and I wanted to circle back on the EPS commentary on '25 sort of the way you framed that growth. Is that sort of x-IPR&D? Any color there would be appreciated." }, { "speaker": "Jeff Stewart", "text": "Yes, it's a great question. So it's early, but we believe the data is accurate. I mean, if you look at the first two weeks to give you some sense, and this is inclusive of the Cordavis Humira. There was a downdraft of about 13,000 prescriptions for Humira from baseline. And the biosimilars captured about -- which was primarily the Cordavis Humira, captured about 10. So there's 3,000 prescriptions or over 20% that we can see in our data moving to other mechanisms of action, including our Skyrizi and Rinvoq. And again, it's very logical because this is just not a one-to-one type of switch like these physicians are interviewing and discussing with patients, their care path forward. And so we think that clearly, some are moving to other mechanisms, and we've seen that in other analogs as well. So we believe the data is accurate. Again, it's early. We're going to continue to monitor it. Where that ultimately lands, we'll have to see. Again, I want to reiterate the pure Humira downdraft is within line with what we assumed and we are seeing this other market behavior that's taking place." }, { "speaker": "Robert Michael", "text": "And Carter, this is Rob. Just to clarify my earlier comments. Yes, it is ex-IP R&D. We always guide to ex-IP R&D. What I was trying to highlight is you should expect robust revenue growth in '25 and that growth accelerating in 2016 and beyond given that Part D benefit redesign impact in '25. And given that operating margin will expand, you typically would expect our earnings to grow faster than our revenue. And that is generally true with 1 exception in '25 being that we will have an annualization impact from net interest expense. We'll still deliver a very solid earnings growth. But as you model it, just keep in mind that while you expect typically earnings to outpace revenue growth given expanding operating margin, you do have that dynamic in '25, that's important for your modeling." }, { "speaker": "Liz Shea", "text": "Thanks, Carter. Operator, next question, please." }, { "speaker": "Operator", "text": "Our next question comes from Simon Baker with Redburn Atlantic." }, { "speaker": "Simon Baker", "text": "Two quick ones, if I may. Just going back to Humira, but in a slightly broader sense. There's been a degree of political noise around the role of PBMs in blocking or rather than assisting biosimilar uptake. I just wondered if you expect that to come to anything in terms of structural changes within the market? And then secondly, on Rinvoq and the Level Up deal -- Level Up data. I wonder how you see the competitive dynamics evolving in that space? Is this about switches? Or is this about market expectation expansion. I asked because this morning Sanofi said that they welcome competition as a way of expanding the number of people treated in an area that's still relatively unpenetrated. So I just wonder how you see the opportunity commercially?" }, { "speaker": "Jeff Stewart", "text": "It's Jeff again. I would say that we're not anticipating like a wholesale restructure of the PBM industry, for example. I mean, we certainly think that there's very reasonable chance of sort of transparency reform, exactly how some of the economics are working, maybe transparencies to the government or downstream to the clients, that's very possible. But a major wholesale change, we don't see that happening in the near-term. Obviously, we are continuing to monitor that and would make adjustments as we might need to. Regarding your atopic dermatitis question, I think the answer is really a bit of both. I think as we've highlighted before, the market here is exceptional in terms of the low bio penetration or oral and bio penetration. It's really only about 4% or 5%. And so I think Sanofi's comments are very well timed. I mean this marketplace is going to grow significantly as this innovation is able to be delivered to the global population with this very serious disease. But we also think this Level Up study is good for our market share penetration, and I'll give you some perspective. Our U.S. market share is lower. It's around 9%. So typically, where our countries have been able to highlight more direct comparisons. We couldn't do that because of the starting dose, I highlighted. We see that most of our international affiliates have market shares in the mid-teens in some cases in the low 20s. And so the ability to bring a comparative study that's directly linked to the U.S. label and show the physicians how you can get to higher levels of control and really patients want -- they want no disease on their skin and they really don't want itch if they can get there. And that's what we studied in Level Up. So we think it's certainly going to help with both market expansion and in particular, around the world with our ability to capture some more share. So I hope that helps." }, { "speaker": "Liz Shea", "text": "Thanks, Simon. Operator, next question, please." }, { "speaker": "Operator", "text": "Next question comes from Tim Anderson with Wolfe Research." }, { "speaker": "Tim Anderson", "text": "I have questions on contracting for Skyrizi in '25. How many lives do you already have locked up through your general multi-year contracting? And then do you continue to think that the availability of cheap versions of Humira, either brand or biosimilar won't lead to any increase in step edits on Skyrizi under the idea that while Skyrizi is better, something like Humira or biosimilar Stelara might be just fine. That same arrangement can be made in the statin category, for example, Crestor is the best Zocor might do just fine." }, { "speaker": "Jeff Stewart", "text": "Yes. I think we'll probably pass on the number of lives locked up. I mean we are confident, given the market position TAM of Skyrizi and Rinvoq, I think, in particular around the momentum that we have across the Skyrizi indication that we're going to have very favorable access in 2025 and beyond. I think the other thing that we've highlighted is I'm very pleased with how the adoption of Skyrizi is going in IBD. I mean it's very, very clear that we're taking significant share from Stelara and the doctors are voting with their pen, or they're basically electronic prescribing because the ability to get these very sensitive patients under significant control, the world's really never seen anything like the sequence trial in terms of the ability to control the most difficult aspect of this challenging disease. So as time goes by, we think that differentiation is going to aid us significantly as we think about the formulary positions relative to not only Humira, but also to Stelara." }, { "speaker": "Liz Shea", "text": "Thanks, Tim. Operator, next question, please." }, { "speaker": "Operator", "text": "The next question comes from Luisa Hector with Berenberg." }, { "speaker": "Luisa Hector", "text": "It's on Elahere. I wonder whether you might be able to tell us the full quarter of sales. And then any commentary around penetration rate of Elahere and how much off-label use you think may be happening with the guideline inclusion?" }, { "speaker": "Scott Reents", "text": "Sure. It's Scott. With respect to the Elahere full quarter of sales, we closed mid-year in February. Prior to that there were -- according to what we've seen approximately, just let me just double check here, $70 million -- I'm sorry, $110 million in the full quarter, $113 million in the full quarter." }, { "speaker": "Jeff Stewart", "text": "And it's Jeff. What we also see in the marketplace, a big catalyst that we saw in the first quarter was the movement from the accelerated approval to the full approval that Roopal highlighted with the MIRASOL data. So we were rapidly able to basically integrate that into all the material of the medical liaisons and certainly account managers and sales folks. And having that definitive table in the label and the ability to go deeper into our call plan is going to be very positive to continue the growth rates through the rest of the year. In terms of off-label, that's difficult to say. We think that the majority of the sales thus far are in that platinum-resistant population. However, the guidelines do allow for reimbursement with different levels of FRA alpha some of the updates that I mentioned in my prepared remarks. So we'll continue to monitor it, but there's certainly a significant headroom in terms of the populations that are coming in terms of the ovarian cancer marketplace." }, { "speaker": "Liz Shea", "text": "Thanks, Luisa. Operator, next question, please." }, { "speaker": "Operator", "text": "The next question comes from Gary Nachman with Raymond James." }, { "speaker": "Gary Nachman", "text": "When looking at the strong performance of the neuro franchise of Vraylar and migraine in particular, talk about the competitive dynamics there in those markets. And how did the gross connects impact you in 1Q versus what you expected? And how should that trend for the rest of the year? And then with respect to Cerevel, just your confidence that it will still close by mid-year, and how FTC is viewing the schizophrenia market and how much overlap there might be between emraclidine and Vraylar? Just the latest thinking on that based on your conversations with FTC." }, { "speaker": "Jeff Stewart", "text": "It's Jeff. I'll take the competitiveness comment in terms of what we're looking at. We're very pleased with the competitive -- our ability to gain market share in these segments. I'll start off with migraine. We continue to be the new to brand share leader in Botox for chronic migraine, and we see that Qulipta is accelerating significantly. So Qulipta is now the leading preventative agent. And what's nice is there's very little interaction with Botox because if you're an injector, you use Botox, if you're not an injector, you have access to a fantastic drug with Qulipta. So Qulipta is really clearly taking over the market leadership position among the injectable and the oral CGRPs. Ubrelvy continues to have a very meaningful and substantial lead over the main competitor, Nurtec and we are seeing some increased penetration into the larger triptan segment, which is key to our long-term growth. Vraylar continues to perform very well, ongoing market growth. And it's really because we have -- if we look at our perceptions, Gary, of our key prescribers, you're at the very, very top of the table, the league table in terms of perceptions around the efficacy around adjunctive major depression, which is our most recent indication and we have probably the best scope of indications for bipolar 1. And so both of those are allowing us to continue to gain share. So we're in a pretty good position. We also feel that the gross to net our vouchers, our co-pay, which sometimes can get a little funky in the first quarter. We have strong controls there and we're seeing a lot of stability. So overall, those businesses are performing very well" }, { "speaker": "Robert Michael", "text": "Gary, I'll take your question. This is Rob. I'll take your question on the FTC. We are working closely with the agency on their additional requests I mean, keep in mind that we do not have any overlapping MOAs with Cereval and Vraylar share in schizophrenia is very low. The vast majority of Vraylar sales comes from the bipolar and AMBD indications. In the case of davapidon, it will serve the early Parkinson's segment, which Duodopa and Vyalev do not participate in. So we don't have any concerns with the merits of the transaction and continue to expect closing it in the middle of the year." }, { "speaker": "Liz Shea", "text": "Thanks, Garry. Operator, next question, please." }, { "speaker": "Operator", "text": "The next question comes from Steve Scala with TD Cowen." }, { "speaker": "Steve Scala", "text": "And I apologize in advance for asking you to clarify on Humira. But you mentioned several times that things are playing out as planned. But in the prepared remarks, you said U.S. erosion played out slightly better than you thought in Q1. So is the conclusion that whatever was better is temporary. You also mentioned volume pressure, but price -- offset by price benefit. Can you quantify that? But when you sum it all up, it sounds like you expect volumes to underperform the expectations you set three months ago? And is that in part maybe due to the Accredo news from yesterday. So that's a big -- that's a long question, but that's only one question. And the second question is curious if the FDA has contacted at the about the potential safety issues with Emlacridine post the competitor issue with convulsions in rabbits. And have you seen this with your agent?" }, { "speaker": "Jeff Stewart", "text": "Yes. So it's Jeff. So I'll try to take that. So the first part was the first quarter. I mean, it was marginally better in terms of overall performance because we didn't see -- obviously, we didn't see any volume disruption until 401. Now when you look at 401 and we look after three weeks, we look at our model in terms of the expectation around retention of Humira with the CVS template, that's largely tracking in line with what our expectations were with a bit of the surprise that some of that Humira is not going to the biosimilar, as I mentioned, is going to other mechanisms including Skyrizi and Rinvoq. So overall, as we look to the balance of the -- really the first quarter, what we're seeing play out in the second quarter and look to the full year, our commentary, and I'll ask Rob to highlight if he has anything to add is very much in line with what we've guided at the beginning of the year. So no material change in what we're seeing in the marketplace." }, { "speaker": "Robert Michael", "text": "Yes, this is Rob. I'll confirm that, what Jeff is saying. I mean it's tracking in line with our expectations. We are not saying that volume is worse than we originally guided. We're saying this is tracking in line with our expectations. We try to characterize for you the price versus volume dynamics? Obviously, saying it's the price erosion is the vast majority of the decline, but there is volume, and it's tracking exactly as we anticipated. So there isn't an additional downside here. As Jeff mentioned, we did have slightly better performance in the first quarter. But again, it was -- I mean, I think, to the tune of $30 million to $40 million on this book of business, not overly material, but ahead of the initial expectation." }, { "speaker": "Roopal Thakkar", "text": "Steve, it's Roopal. I can take the next question. We did a thorough diligence. And when we look at data sets that offer clinical data, obviously, we do a deep dive there, also look at blinded data, but we also do a deep dive looking at toxicology, animal tox in particular. And we didn't observe anything that was consistent with what has been described thus far. And as I mentioned, when we look at blinded safety data either from the 1B or the current pivotals that are running, we don't see an adverse event like this that would be related. And as far as we know, no health authority has reached out to ask any further questions about this." }, { "speaker": "Robert Michael", "text": "Steve, this is Rob. I'm going to come back to your previous question and maybe I understand where the confusion could be. That one-time price benefit is a year-over-year dynamic. It was contemplated in our guidance. When you have a formulary change you essentially have those rebates go away and you recognize that. That was part of our guidance. That was not a benefit versus our guidance. That's a benefit in the year-over-year. So if you look at Scott guided to I think it was 32%." }, { "speaker": "Scott Reents", "text": "That's right." }, { "speaker": "Robert Michael", "text": "Erosion in the second quarter, which is lower than -- it was around 40% in the first quarter. So naturally, you'd wonder why would you have less erosion. Well, there's that year-over-year dynamic but that was how we planned the year. We anticipated it because we knew about the change that was coming in April 1. So I don't want to interpret that as a benefit versus our guidance, that's a benefit in the year-over-year calculation." }, { "speaker": "Liz Shea", "text": "Thanks, Steve. Operator, next question, please." }, { "speaker": "Operator", "text": "The next question comes from Trung Huynh with UBS." }, { "speaker": "Trung Huynh", "text": "Congratulations, Rick, on the next chapter of the life and Rob for moving AbbVie forward. Again, on biosimilar Humira. In your remarks, you mentioned post the expected CVS contract, there was a step-up in price for Humira. Is that simply because you're giving away more price to CVS at the contract at the time. And you mentioned additional contracts moving to biosimilar like CVS this year. Are there any meaningful contracts here that you can flag so we're not surprised? And is it possible we could see a actually a pricing increase by year-end because of this?" }, { "speaker": "Scott Reents", "text": "Trung, this is Scott. I'll start with your question regarding the price benefit. So in my remarks, I indicated that with the formulary change in CVS and the volume step-down we saw there that there's a onetime price benefit associated with that. And you can think of this as we have the volume declines, that volume had been associated with price that we would have been paying in terms of rebate that those rebates will no longer be paid. Therefore, there's a one-time price benefit associated with that initial step down in the quarter. So that's what that relates to." }, { "speaker": "Jeff Stewart", "text": "Yes. And in terms of what we see going forward, as I highlighted, we don't see a significant exclusionary action where Humira would be removed from a formulary going forward. We did plan for, obviously, that smaller plans may make some adjustments to their formularies. That's all within the volume degradation and the pricing dynamics that we put into our guidance. And as I mentioned in one of the comments, some of the payers, not super large would maybe consider this idea of starting new patients on the biosimilars versus maintaining all the existing patients on Humira. So if you were to see that, you shouldn't be surprised about that and that would be within the contemplated approaches that we're taking as we look across '24 with our knowledge of what's happening in the marketplace." }, { "speaker": "Liz Shea", "text": "Thanks, Trung. Operator, we have time for one final question." }, { "speaker": "Operator", "text": "And our final question comes from Evan Seigerman with BMO Capital Markets." }, { "speaker": "Evan Seigerman", "text": "On the aesthetics business, maybe talk to me about some of the dynamics you're seeing in China. I know that there's a lot of macro headwinds and this is a pretty big part of your business. And then a bit of housekeeping on Skyrizi, where the last quarter you disclosed the $1.9 billion cash payment for royalties. Can you provide us any color on what this quarter's royalty was? And I believe that was for the full year last year but maybe just for the quarter." }, { "speaker": "Carrie Strom", "text": "This is Carrie. I'll address your question on aesthetics in China. And we do expect economic headwinds that we're seeing in China to persist over the near-term with the China aesthetics market flat overall for 2024. So the way to think about it is to expect negative market until the recovery starts to begin in the second half of 2024. China does remain a very important market for our aesthetics business. And as the market there starts to recover, we will continue to invest in consumer activation, injector training and continue to launch new products in the support market." }, { "speaker": "Scott Reents", "text": "It's Scott. So you're right. With respect to the schedule relative payments. So you have to remember that these are on a bit of a lag, so they don't track each quarter sales. But the $400 million was the amount in the first quarter that we paid in cash payment." }, { "speaker": "Liz Shea", "text": "Well, thanks, Evan. That concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us." }, { "speaker": "Operator", "text": "Thank you. That concludes today's conference. You may all disconnect at this time." } ]	AbbVie Inc.	141,885,706
ABBV	1	2,025	2025-04-25 21:00:00	Operator: Welcome to the AbbVie First Quarter 2025 Earnings Conference Call. All participants will be able to listen only until the question and answer portion of this call. As a reminder, this call is being recorded. I would now like to introduce Ms. Shea, Senior Vice President, Investor Relations. Liz Shea: Good morning, and thanks for joining us. Also on the call with me today are Rob Michael, Chief Executive Officer Jeff Stewart, Executive Vice President, Chief Commercial Officer Roopal Thakkar, Executive Vice President, Research and Development, Chief Scientific Officer and Scott Reents, Executive Vice President, Chief Financial Officer. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll turn the call over to Rob. Rob Michael: Thank you, Liz. Good morning, everyone, and thank you for joining us. AbbVie is off to an excellent start to the year with first quarter results exceeding expectations across several of our therapeutic areas. We also continued to advance our promising internal pipeline and add external opportunities to further strengthen our business and long term outlook. Turning to our first quarter performance, we delivered adjusted earnings per share of $2.46 which is $0.10 above our guidance midpoint. Total net revenues were more than $13.3 billion nearly $550 million ahead of our expectations. I'm especially pleased with the performance of our ex-Humira platform, which delivered robust sales growth of more than 21%. Immunology, neuroscience, oncology, and anesthetics are all performing at or above our expectations. And we are well positioned to exceed our previous peak revenue in just the second full year following the US Humira LOE. Based on this strong performance, we are raising our full year adjusted earnings per share guidance by $0.10 and now expect adjusted EPS between $12.09 and $12.29. As you are aware, there is speculation that sectoral tariffs could be forthcoming. Any related impact from these tariffs as well as other potential new or reciprocal tariffs have not been contemplated in our guidance. To the extent there is an impact, we believe it would be in line with our peers, given that AbbVie has an extensive manufacturing presence in the United States, including API, biologics, toxins and small molecules. And over the next decade, we anticipate investing more than $10 billion of capital in the US to support our volume growth and our expansion into new areas such as obesity. Turning back to our performance, I'm very pleased with the excellent progress we are making with several pipeline programs that have the potential to be meaningful sources of growth. These include Lutikizumab across several immunology indications, 383 in multiple myeloma and our next generation ADCs, including TmAb A for several solid tumor types and 706 for small cell lung cancer. We also continue to add depth to our pipeline with strategic transactions that can help drive growth in the next decade. This includes the recent acquisition of Nimble Therapeutics to expand our immunology portfolio with oral peptides as well as the license agreement with Gubra to develop an amylin analog for the treatment of obesity. Obesity represents a significant global health concern with high unmet need. This market will continue to evolve with improved offerings, and we believe our program with Gubra has the potential to deliver a differentiated asset. Going forward, we plan to invest further in obesity along with other opportunities across our existing five key growth areas. In summary, the fundamentals of our business are strong and we are well positioned for the long term. AbbVie has a clear runway to growth for at least the next eight years, including a high single digit revenue CAGR through 2029. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff? Jeff Stewart: Thank you, Rob. I'll start with the quarterly results for immunology, which delivered total revenues of more than $6.2 billion exceeding our expectations. Skyrizi and Rinvoq are performing exceptionally well, contributing $5.1 billion in combined sales this quarter, reflecting growth of more than 65%. I'm especially encouraged with our portfolio performance across IBD, where Skyrizi and Rinvoq continue to capture significant share given their efficacy, safety and dosing profiles. In Crohn's disease, which is roughly two thirds of the overall IBD market, these two treatments together are capturing roughly one out of every two in play patients in the US and total prescription share is now in the mid-teens. Internationally, our Crohn's portfolio has achieved in-play leadership in nearly a dozen key countries. In ulcerative colitis, Skyrizi has already achieved the leading in-play share in the US following the launch in the second half of last year. Skyrizi and Rinvoq together are now capturing one out of every three in-play UC patients, a very strong leadership position for AbbVie. We are also seeing strong momentum across indications in dermatology and rheumatology as well. For Skyrizi, we continue to gain share in psoriatic disease, where we have achieved the leading in-play share of new and switching patients in nearly 30 countries and see substantial room for total share growth. For Rinvoq, we are seeing increasing prescription demand globally across each of the room indications as well as additional momentum in atopic dermatitis, the fastest growing immunology market, where we have two compelling head to head studies versus Dupixent. We are also preparing for the global launch of giant cell arteritis, another new source of growth for Rinvoq. We received European approval earlier this month and expect FDA approval soon. The addition of this indication further rounds out Rinvoq's rheumatology label and gives patients with GCA access to a new compelling oral therapeutic option. Overall, Skyrizi and Rinvoq are demonstrating impressive results across all of their approved indications, and we will be raising our full year sales guidance for both products. Turning now to Humira, which delivered global sales of $1.1 billion down 49.5% on an operational basis, below our expectations, primarily due to faster share erosion from biosimilar competition as well as further molecule compression in the US. As a result, we will be lowering our full year sales guidance for US Humira. Moving to Oncology, where total revenues were $1.6 billion exceeding our expectations. Imbruvica global sales were $738 million down 11.9%, reflecting competitive dynamics in CLL. Venclexta global revenues were $665 million up 12.3% on an operational basis. This strong performance reflects continued momentum in CLL as well as shared leadership in frontline AML among patients who are ineligible for intensive induction chemotherapy. We also have an emerging commercial portfolio in solid tumors. This includes Elahere, our leading ADC for ovarian cancer with global sales of $179 million as well as Teliso-V, a potential new medicine for late line non-small cell lung cancer patients with US Regulatory approval and commercialization expected in the next couple of months. Teliso-V will be supported by a dedicated sales force and medical affairs team, which will target academic and community cancer treatment centers to reinforce the importance of c-Met as a biomarker and build relationships that support our emerging solid tumor franchise. Turning now to aesthetics, which delivered global sales of $1.1 billion down 10.2% on an operational basis. This was in line with our expectations. BOTOX Cosmetic global revenues were $556 million down 10.7% on an operational basis and Juvederm sales were $231 million down 20% on an operational basis. As we have seen over the last several quarters, economic headwinds have continued to impact market conditions. Based on the trends we are seeing, including a decline in recent consumer sentiment, we are moderating our assumptions for category growth globally and adjusting our full year sales guidance for aesthetics accordingly. While near term aesthetics market conditions remain challenging, the long term prospects for the category remain attractive, given high consumer interest and low penetration rates for facial injectables. I'm particularly excited about BoNT/E, our fast acting, short duration toxin, which we recently submitted for US Regulatory review. This first in class toxin represents a distinctive innovation for the treatment of glabellar lines and has the potential to be an important catalyst for new patient activation into the facial aesthetics category. We anticipate commercialization next year. Moving now to neuroscience, where total revenues were approximately $2.3 billion up 17% on an operational basis, with all key products exceeding our expectations. VRAYLAR global sales were $765 million up 10.3%, reflecting share capture in both Bipolar I disorder and adjunctive major depression. We continue to get very positive feedback on VRAYLAR's profile in terms of dosing flexibility, low sedation and the ability to treat a full spectrum of symptoms. We are very competitively positioned with our migraine portfolio, where all three of our therapies continue to deliver double digit operational growth. BOTOX Therapeutic global revenues were $866 million, up 17%. UBRELVY global sales were $240 million up 18%. And QLIPTA global revenues were $193 million, up 48.3%. And in Parkinson's disease, VYALEV global sales were $63 million reflecting continued strong uptake in Japan and Europe. We are also pleased with the early launch feedback in the US, where revenues are expected to ramp gradually over the next couple of quarters as we work to establish the appropriate Medicare coverage and benefit determination. Lastly, we are making excellent progress with the development of Tavapadon in Parkinson's disease. This first in class D1D5 selective dopamine agonist has a favorable benefit risk profile and the potential to differentiate in several areas, such as sedation and impulse control. Tavapadon could potentially be used as a monotherapy for early Parkinson's disease as well as an adjunctive therapy to levodopa for more advanced patients, which would be a complementary addition to our existing PD portfolio with VYALEV and DUOPA. We expect to submit Tavapadon for regulatory review later this year with commercialization expected in 2026. Overall, I'm extremely pleased with the execution and strong momentum across our commercial portfolio. And with that, I'll turn the call over to Roopal for comments on our R&D highlights. Roopal Thakkar: Thank you, Jeff. I will start with immunology. We received European approval for Rinvoq in GCA and expect FDA approval soon. We remain on track for several important data readouts this year as well including Phase III data for Rinvoq in alopecia areata and vitiligo and data from Skyrizi's head to head study in psoriasis versus SOTIQ2 [ph]. Our early and mid-stage immunology pipeline continues to advance. Recent initiations include a Phase II study evaluating Skyrizi in combination with Lutikizumab in psoriatic arthritis and a Phase I study for our next generation TL1A antibody, which is designed to have less frequent dosing compared to other TL1As in development and will be evaluated in combination with Skyrizi in both Crohn's disease and ulcerative colitis. This summer, we will start a Phase II study evaluating a combination of Lutikizumab and our anti CD40 Ravagalimab in rheumatoid arthritis. Moving to our ADCs and oncology, we anticipate accelerated approval in the second quarter for Teliso-V as a monotherapy in previously treated non-squamous non-small cell lung cancer with high c-Met expression. This is a segment of lung cancer with high unmet need and when approved, Teliso-V will be the first c-Met directed ADC for these patients. We're also making good progress with tmAb A, our next generation c-Met ADC, a Phase 2 dose optimization study evaluating tmAb A with a PD-1 inhibitor as a frontline combination therapy in EGFR wild type non-small cell lung cancer was recently initiated. In the EGFR mutant segment, we plan to initiate studies for tmAb A as a monotherapy in the second line setting and in combination with Osimertinib in the first line setting. Preliminary Phase 1 results will be presented at the upcoming ASCO meeting. This year, Phase 2 data from our CRC study evaluating tmAb A in combination with Bevacizumab will be available, which could enable a Phase 3 study in an all comers population. Progress also continues with ABBV-706 in small cell lung cancer. Recall, this ADC utilizes the same topo warhead and linker technology as tmAb A, but with an antibody that targets SEZ6. In the Phase 1 study, 706 was efficacious across doses with an objective response rate of approximately 60% in patients with relapsed or refractory small cell lung cancer. Based on maturing duration of response and progression free survival data, we plan to advance 706 into a trial in a relapsed refractory population and a dose optimization study in combination with a PD-L1 in the frontline with the goal of establishing a chemo sparing regimen as a new standard of care. In the area of hematologic oncology, the data readout remains on track for the Phase 3 VENCLEXTA MDS trial. And if positive, our regulatory submissions would follow later in the year. A regulatory submission for PIVEC in BPDCN is also planned for this year. We continue to make good progress with our BCMA CD3 bispecific ABBV-383 in multiple myeloma. Recruitment is going well in the Phase 3 monotherapy study in later lines, and we are on track to be fully enrolled by early next year. Additionally, we continue to evaluate 383 in various combinations, including with Pomalyst, Revlimid, DARZALEX and Iverdemine [ph]. We'll begin seeing data from these combinations next year, which could enable Phase 3 lines of therapy. Now moving to neuroscience. Interim data from the long term TEMPO-4 Phase 3 study continued to support Tavapadon’s favorable benefit risk profile. Efficacy in both early and advanced Parkinson's patients was maintained beyond a year and the safety profile was consistent with that observed in the previous Phase III studies with no new safety concerns identified. Rates of adverse events of special interest remained low with impulse control disorder and peripheral edema less than 1%, dyskinesia approximately 2% and sedation less than 5%. These results underscored Tavapadon's potential to become an important new treatment option for patients with Parkinson's disease. Our regulatory application is planned for later in the year. Moving to other areas of our pipeline. In aesthetics, the regulatory application for our rapid onset short acting toxin BoNT/E was recently submitted. We also began the clinical program to evaluate co administration of BoNT/E and BOTOX, which has the potential to be co-formulated as a novel product, offering the combined benefits of rapid onset and Botox like duration. In obesity, our partner, Gubra recently announced positive interim results from the first part of a multiple ascending dose study for our long acting amylin analog ABBV-295. This initial phase of the study tested one and two milligrams dosed once weekly for six weeks in healthy, lean and overweight patients. The study showed 295 performed well, demonstrating a dose dependent mean weight loss compared to placebo and a tolerability profile consistent with the results from the single ascending dose study. Mean weight loss in the two milligram cohort, which had a mean BMI of 24 was 7.8% compared to a weight gain of 2% in the placebo arm on day 43. The second phase of this study is ongoing and is evaluating higher doses in overweight and obese patients with 12 week dosing. Titration and longer dosing intervals will also be assessed. Full data from this part of the study are expected next year. To summarize, significant progress continues with our pipeline and we look forward to important data readouts, regulatory submissions and approvals throughout 2025. With that, I'll turn the call over to Scott. Scott Reents: Starting with our first quarter results, we reported adjusted earnings per share of $2.46 which is $0.10 above our guidance midpoint. These results include a $0.13 unfavorable impact from acquired IPR&D expense. Total net revenues were more than $13.3 billion reflecting robust growth of 9.8% on an operational basis, excluding a 1.4% unfavorable impact from foreign exchange. Adjusted gross margin was 84.1% of sales. Adjusted R&D expense was 15.4% of sales and adjusted SG&A expense was 24.6% of sales. The adjusted operating margin ratio was 42.3% of sales, which includes a 1.9% unfavorable impact from acquired IPR&D expense. Net interest expense was $627 million. The adjusted tax rate was 14.2%. Turning to our financial outlook. We are raising our full year adjusted earnings per share guidance to between $12.09 and $12.29. Please note that this guidance does not include an estimate for acquired IPR&D expense that may be incurred beyond the first quarter. We now expect total net revenues of approximately $59.7 billion an increase of $700 million. This reflects an estimated 0.6% unfavorable impact from foreign exchange on full year sales growth. This updated revenue forecast includes the following approximate assumptions for several of our key products. We now expect Skyrizi global revenues of $16.5 billion an increase of $600 million reflecting share gains in psoriasis and IBD. Rinvoq global sales of $8.2 billion, an increase of $300 million reflecting momentum across all approved indications. US Humira revenues of $3.5 billion a decrease of $500 million reflecting higher erosion from biosimilar competition as well as further molecule compression. BOTOX Therapeutic global sales of $3.6 billion, an increase of $100 million reflecting growth in chronic migraine and other indications. Total oral CGRP revenues of $2.2 billion an increase of $100 million reflecting strong prescription demand. Imbruvica global revenues of $2.8 billion an increase of $100 million reflecting lower erosion. Venclexta global sales of $2.7 billion an increase of $100 million reflecting continued uptake in both CLL and AML across our key countries. And for aesthetics, we now expect global sales of $5.1 billion as we are moderating our assumptions for market growth globally. As a result, total sales guidance for BOTOX and Juvederm will each be lower by roughly $100 million. Moving to the P&L for 2025, we continue to forecast full year adjusted gross margin of approximately 84% of sales and adjusted SG&A expense of approximately $13.2 billion. We now expect adjusted R&D expense of approximately $8.9 billion reflecting additional investment in our robust pipeline for long term growth. We also now anticipate an adjusted operating margin ratio of roughly 46.5% of sales, in line with our previous expectations after including the 0.4% unfavorable impact of acquired IPR&D expense incurred through the first quarter. Turning to the second quarter, we anticipate net revenues of approximately $15 billion. This reflects an estimated 0.3% unfavorable impact from foreign exchange on full year sales growth. We are forecasting an adjusted operating margin ratio of roughly 49.5%. We expect adjusted earnings per share between $3.26 and $3.30 This guidance does not include acquired IPR&D expense that may be incurred in the quarter. Our guidance is based on current trade rules and does not reflect the impact of any additional trade policy shifts, including pharmaceutical sector tariffs. While it's difficult to quantify in the absence of actual policy details, it's worth noting any related unfavorability in 2025 would reflect a partial year given the timeline for 232 investigation. We are actively preparing for a number of potential scenarios and would expect to put into place mitigation strategies as we have more information. Relative to these dynamics, I would also highlight that AbbVie has a significant US manufacturing presence that spans 11 sites with plans to add four new manufacturing plants to our network, expanding our production for API, drug product, peptides and devices in the United States. As we continue to invest and grow our US operational footprint, we believe a more competitive tax policy building on what was accomplished through 2017 tax reform will encourage a sustainable shift towards US Manufacturing over the long term. In closing, I'm very pleased with the excellent start to the year. We are demonstrating strong momentum across the portfolio and continue to be well positioned to deliver robust growth in 2025 and beyond. With that, I'll turn the call back over to Liz. Liz Shea: Thanks, Scott. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two. Operator: For our first question, we'll go to the line of Chris Schott from JPMorgan. Please go ahead. Great. Thanks for the question and congrats on the results. Chris Schott: Just two for me. Maybe first on Skyrizi and Rinvoq, obviously some big step up in the guidance here. Can you just elaborate a little bit more on which of the indications are most attributable to the upside we're seeing right now? And maybe just talk a little bit about the competitive landscape, maybe particularly Tremfya more broadly launching in IBD and how you're thinking about that dynamic? And then just my second question was on second immunology on Humira. Can you talk a bit more about how you're thinking about the tail for Humira in light of some of the erosion that you're seeing this year? Scott Reents: Chris, this is Scott. I'll start with kind of where we saw the increase attribute to for the various indications and I'll turn to Jeff for your other questions. So we raised Skyrizi by $600 million to $16.5 billion and that split between $200 million in psoriatic and $400 million in IBD indications. And then with respect to Rinvoq, we raised that $300 million and that's across all of the approved indications. So you can attribute that to $100 million for rheumatology, $100 million for derm and the remaining $100 million for IBD. Jeff Stewart: Yes. Thanks, Chris. It's Jeff. And maybe I'll give some sense. We're obviously very, very pleased with the performance of Skyrizi and Rinvoq in immunology as you've seen from the report. Maybe to give some perspective, it's not uncommon to start to see in class competition. We've seen that in psoriasis. We've seen that across the board. And maybe I'll just give a little bit of perspective over sort of the historical dynamics that we've seen with the IL-23 category. So for example, if you go back to like 2018, 2019 when the IL-23s were starting to come in psoriasis, the total patient share at that time in the early days was about 7% of the IL-23 class. Now it's over 60%. And if we look at where IBD is, obviously, we launched first with Skyrizi and Crohn's and everything's recently launching here in UC, it's about 7% of the total patient share in IBD. So you can imagine as we start to watch what this category is going to mean to transform IBD, we remain very confident. It's not a zero sum game. We feel very confident in our profile and what we're able to deliver if we look across UC, if we look across our head to head data versus sequence versus the other trials. And so net net, we see very, very strong momentum across the board, regardless of competitors that may come in. And then my thoughts on the Humira tail. Again, as I highlighted and Scott highlighted in his remarks, we are seeing a bit of faster erosions as the biosimilar start to play out. And this is, of course, the third year of the biosimilar event. So it's really not too surprising. We also do continue to see the molecule continue to erode. So as we look and we don't have full visibility and we'll be monitoring the 26 access as we go throughout the year. We do expect it to step down again. Just makes sense. That will be the fourth full year. So we'll have deeper visibility of that tail sometime over the course of the year. But as we said before, the real impact of the tail is when Humira does not have a meaningful headwind to our overall growth as a corporation. So we expect that to start to develop over that ’26 time period. Okay. Operator: Next we'll go to the line of Terence Flynn from Morgan Stanley. Please go ahead. Terence Flynn: Great. Thanks so much. Congrats on the quarter. And maybe two questions for me as well. You alluded to some of the mitigation strategies you're taking with respect to tariffs potentially. Could you just elaborate a little bit more there in terms of what that means for maybe inventory and then any contemplation on any changes to IP domiciling? And the second question I had is on the amylin program there. I know you talked a little bit about next steps, but was just wondering if you can elaborate in terms of how much higher you're going on doses, what you'd expect that to translate to in efficacy and maybe the size of those cohorts, like how many more patients will we get in this next update? Rob Michael: This is Rob. So Scott and I will handle your first question and Roopal will handle your second question. So just to, I think, back up and maybe talk about AbbVie's manufacturing network and then I can mention how we're thinking about potential mitigation. I think it's important to know that we have a broad footprint that allows us to assure supply for our patients around the world. And that's really why you've been able to see us avoid supply disruptions during events like the COVID pandemic. I mean and today, we have a robust US manufacturing network with more than 6,000 American workers across 11 sites. As I mentioned in my remarks, that includes manufacturing of API, biologics, toxins and small molecules. For example, our largest product Skyrizi is made in the US for the domestic market. And given our expected volume growth and our expansion into areas like obesity, as I mentioned, we'll continue increasing our US footprint with over $10 billion in planned capital investment during the next decade. In terms of potential mitigation, in the near term, we could take inventory management actions or secure alternate sources of API. We could also look at cost efficiencies and productivity initiatives as a source of mitigation, which we always do. I think what's more challenging is trying to pass the tariff impacts to our customers, especially with penalties in the government channel and with existing contracts in the commercial setting. So I don't see that as a viable source for mitigation. Longer term, we will add more US manufacturing capacity, which is part of the planned capital investment of over $10 billion. So specific to 2025, we would look to mitigate the impact as much as possible with a combination of supply chain actions, cost efficiencies and any additional overperformance from our growth platform. But in the meantime, we have enough confidence in the momentum of our business to raise our guidance this year, which should be viewed as a positive. Scott Reents: David, with respect to IP, IP has been looked at, I think, when people try to assess the impact of potential tariffs on our sector. IP has been looked at as kind of a proxy as to what that impact might be. And certainly directionally, think that is something that would be somewhat telling. That said, when we look at our profile overall, Rob mentioned the strong US presence that we have, but we don't see our profile suggesting any sort of outsized impact for us as a company. The tax rate is something that you can look at, which is essentially when you think of the bookends of the minimum tax for earnings outside the US for tax earned in or income earned in the US that really kind of aligns with where that IP is structured. And that blending of your income kind of produces generally directionally your tax rate. You see us being relatively in line with our peers. And so that suggests that we have a similar IP profile from an overall perspective. I'd also just quickly point out that sometimes with Allergan, as that was a company that we redomiciled back to the US, it was a foreign headquarter company. Recall that Allergan was a series of several companies that were put together over a few years. And those companies all have a significant US presence as well. So Allergan's profile is not dissimilar from ours as a whole either. So I think when you think about that IP profile, it's important from a tariff perspective. It's also very important from a tax reform perspective. There was a lot of progress made in leveling the playing field for US companies in 2017 tax reform that did a lot of good things and really helped invest in the US as well as can create a competitive environment for our companies. We see it as an important piece of building upon that tax reform to encourage further and long term, as I mentioned in my remarks, sustainable investment. So I see a tax reform initiative building on 2017 coupled with tariffs as something that will encourage US manufacturing over the long term, we feel very good about our profile right now. Roopal Thakkar: Hi, it's Roopal and I'll answer the 295 question regarding the multiple ascending dose study. Currently, what the data you've seen were at 1 mg and 2 mg and we have the opportunity here in this study to go several fold higher than the 2 milligrams. And we also have the opportunity to go beyond six weeks, namely around 12 weeks before we get into formal Phase 2b, which I would say around next year, we would go quite a bit longer. The sample size, what you've seen here maybe a little bit larger because of the multiple ascending dose format here. We'll see larger sample sizes once we get into the formal Phase 2b. The other opportunities here are also to look at titration at the 1 milligram or maybe even lower. We don't see any adverse events beyond suppression of appetite. So there's an opportunity to be able to start low and start titrating up to doses quite a bit higher than 2 milligrams, but we're open to watch this study and be flexible. The other important findings would be around muscle and bone. So those would be other things that will be evaluated as well as looking at dosing. The half-life is around 270 hours. So that could give us an opportunity to go twice a month and even potentially monthly. So all that will be captured in this data set. We expect to see some data next year and then that will allow us to best design a more formal Phase 2b study. Operator: We'll go to the line of Carter Gould from Cantor. Please go ahead. Carter Gould: Good morning. Thanks for taking the question. Obviously, there's been a lot of discussion around drug pricing kind of resurfacing and some rumblings around most favored nation kind of bubbling back to the surface. Wanted to get a sense understanding of your expectations and flexibility, if need be to take actions outside the US? And then maybe more of a commercial question, as we think about the potential co administration of BoNT/E and BOTOX, can you kind of help frame how you think that would impact the market? Is this something that could just grow the overall pie, move share, etc.? Any thoughts on that front would be appreciated. Rob Michael: Thank you. Hey, Carter, it's Rob. I'll take your first question and Jeff will take the second question. I think as we've studied the environment, I mean, we are very supportive of a balanced approach that addresses affordability while also encouraging innovation. And you've seen many of our peers reinforcing the importance for the EU to properly value innovation, which we echo and would support any policies that encourage that outcome. That said, we hope the administration contemplates the harm that international reference pricing could have on US healthcare industry and future innovation. I think anything like price controls, cost increases or higher taxes just leaves less investment available across the industry to advance new innovative medicines. That said, I'm very encouraged by the administration's willingness to address the pill penalty in the IRA and is fixing that would support long term innovation in our industry. And so as we look at the push, I think, for the EU to more properly value the innovation is an absolute appropriate push. We're encouraged by some of the policies that really support innovation. And Scott also talked about tax reform. And I think that's an important lever as well as we think about what are the things that will drive investment in the US and drive more innovation. And I think if you just look at AbbVie as an example, we've invested over $5 billion of capital since tax reform in 2017. I mean that includes a new oncology research center in South San Francisco that includes Skyrizi manufacturing capabilities in the US, eye care capacity expansion in Waco, Texas and technology infrastructure upgrades across our footprint, just to name a few. And importantly, as Scott mentioned, tax reform allowed us to acquire Allergan, an Irish domiciled company that we then redomiciled into the US. I mean that transaction enabled AbbVie to continue increasing our R&D investment through the Humira LOE, which is unprecedented. That will ultimately help us really lead to more innovation in our pipeline and ultimately impact patients of the future. So when we think about policy, we think tax reform has provided the right incentives to invest more in the US and more in innovation. And that's what we would encourage. Jeff Stewart: Let me give a quick update on the BoNT/E and the combination approach in terms of how we're starting to think about it. Obviously, we're super pleased with the recent filing on BoNT/E. And as we've highlighted before, the short acting toxin will operate on two different levels for us. First, it will stimulate the funnel. It will basically be a market stimulator because we know there's lots of considerors in the marketplace that are just worried about going to a full strength toxin because it lasts for three to four months. So the approachability of a short acting toxin that works in about 8.5 hours and is gone in 2.5 weeks makes the market much more approachable for the people in the consideration phase. So we think it's going to work on the market and our share, because obviously we've done studies with BOTOX after BoNT/E. Now in the combination use, Carter, it's very interesting. This is more of a pure sort of share play. When we talk to the consumers, many of the consumers are using a lot of BOTOX and you start saying, can you imagine a BOTOX that works almost immediately, so an immediate acting BOTOX. That gives us the potential and we'll have to see how those trials and those studies play out to actually restate the whole market. Because what's remarkable about BoNT/E is that we can see a two grade change in the glabellar lines in 8.5 hours. So nothing has ever worked even close to that fast. So we could even have a premium toxin that sits alongside BOTOX one day or a replacement product for just simply a better BOTOX, an immediate acting BOTOX. So it gives us a lot of flexibility and it's certainly very exciting as Roopal has highlighted the program that will begin here for the combination. Operator: Next we'll go to the line of Courtney Breen from Bernstein. Please go ahead. Courtney Breen: I wanted to look back to kind of part of the inventory and tariff conversation. We've been able to get some explicit answers from some of the peer companies. So just wanted to see if you were able to give us context as to whether you have enough inventory in the US to support products like Rinvoq, Botox, Vraylar or Humira for the rest of this year? And what about '26 and '27? And then the second question is just on the back of the BoNT/E question. Can you give us a little bit of context as to the pricing strategy for that kind of tester market? Because arguably kind of with a shorter directing time horizon, you have kind of less value. And so I'd love to see understand a little bit more about how you're thinking about placing these products together. Rob Michael: Thank you. This is Rob. I'll take your first question and Jeff will take the second. Look, absent policy details, we're not going to get into speculating on the impact. I think you've known us to be a company that once we have a full understanding, we're very transparent and detailed. If you think about how we approach the Part D benefit redesign, as soon as we understood that impact, we were well in advance of the implementation of that discussing the impact on the company. But with tariffs, we don't have the policy details for the sectoral tariffs. So it's premature to speculate on the impact. And once we have that information, we'll communicate at the appropriate time. Jeff Stewart: And regarding the pricing, obviously, it's since we just had the filing, it's premature. We go through a very rigorous pricing analysis as we would get closer to launch. And some of the considerations that we would look for, which is, obviously, I mentioned, the rotation of even more patients into the aesthetic practices brings a lot of value to those practices. And if you think about it, the lifetime value of those new patients is very meaningful. So that could play into dynamics ultimately how we price the BoNT/E once we ultimately make that decision sometime next year. Obviously, it does work shorter. So that might imply a different or lower price point to start the trial. But those are all considerations commercially that we will go through as we go through our launch readiness process over the course of the year to really optimize the impact of that product as we bring it to the market. Operator: Next, we'll go to the line of Mohit Bansal from Wells Fargo. Please go ahead. Mohit Bansal: Great. Thank you very much for taking my question and congrats on all the progress. I would like to understand a little bit more about your thought process around Gubra? And there have been couple of strategies. So of course, Novo is trying to combine GLP-1, but then there is a strategy or thought process that amylin could be a good agent as a standalone agent. So how are you thinking about this, especially with the longer acting version? Do you think there's a strategy to just use this as a single agent, especially among patients who cannot tolerate GLP-1? We'd love to get your thoughts there. Roopal Thakkar: You. Mohit, it's Roopal. I'll take that. So thanks for highlighting some of the potential here. And I think we're thinking about it quite broadly. So as you stated, there's an opportunity here as a monotherapy. I think the way we think about it is tolerability is key. We see a number of dropouts, upwards of 30% even after a month of starting with the current set of assets. And then when we look over the course of the year, 60% to 70% of the patients will drop. Now there's a variety of factors that drive that discontinuation, but a key component is tolerability. So to have a monotherapy that's tolerable, that provides meaningful weight loss and potentially has other potential benefits. We've seen pre clinically preservation of muscle. We'll have to see if that plays out. But that could be another benefit in the long term. When this launches, we do anticipate many of the patients will have already been on assays that are available today. So it could serve as a nice follow on for folks that couldn't tolerate or came off for other reasons and want to go somewhere else. Now in terms of combinations, recall, when we did this deal, one thing we liked about it, was also the neutral pH of the formulation. So that could enable combinations with a variety of mechanisms. And as Rob stated, we continue to be interested in this space and we'll be, thinking about other potential opportunities, which could include combinations that may drive further weight loss. But key for us would be tolerability and durability of use. Operator: Next we'll go to the line of Steve Scala from TD Cowen. Please go ahead. Steve Scala: First of all, Bristol appears to think there's a path forward with co-benefit in adjuvant schizophrenia based on existing data. Where does AbbVie stand in its analysis of the future of emraclidine? For instance, has a path forward become more clear in the last few months? Secondly, I believe AbbVie has more plants in Ireland than any other company. Curious how you think about that as well as your overall OUS footprint. Do you cut back OUS to invest in the US? Or do you maintain the presence OUS, given the fact that in four years we could have a different administration with very different views? And related to this topic, yesterday, Roche said that their US plants are 50% utilized. I'm wondering if AbbVie would share a similar percentage. Roopal Thakkar: I'll start with schizophrenia question. In terms of the recent data, it's difficult for us to comment. I think that will be a discussion between the company and health authorities regarding the utility of a failed study. That would be their discussion to have. How we look at emraclidine is that we do still see potential and we want to approach this in a stepwise manner. The first step would be to look to see if we can further dose escalate beyond what was previously studied. We saw variable PK levels in those patients from the pivotal studies, some were low and we think there's an opportunity to raise that. So a multiple ascending dose study will be initiated this year and that would apply to potentially monotherapy in schizophrenia as well as the adjunctive setting. So as that data rolls out and if we're able to utilize a higher dose, then we would again stepwise go forward into a Phase 2 setting to further derisk and apply our learnings in terms of trial design. And then if we see strong data there, which could be as a monotherapy, could be as an adjunct and also in neurodegeneration psychosis, then we would move into the Phase 3 setting. But I would say we still believe there's opportunity here. Rob Michael: And then Steve, this is Rob. I'll take your question on the manufacturing footprint. As I mentioned in my remarks earlier, obviously, AbbVie, we have a very broad footprint. An important part of the strategy is to assure supply. And as I mentioned earlier, we went through a global pandemic without any supply disruptions and that strategy certainly paid off. We also have, I'd say, a very robust manufacturing network in the US I think what's been widely misunderstood is Skyrizi as an example, our largest product is made in the US and so when we look at our global footprint, we consider assurance of supply. As Scott mentioned earlier, clearly, obviously, tax has an influence on longer term, how you'd want to structure your supply chain. So certainly, I think with a more competitive tax policy, that sort of provide the appropriate incentives. We try to say we have obviously been ramping our volume considerably. You look at just the performance, just then think about biologics capacity and just the tremendous ramps we've seen for Skyrizi and Rinvoq. And so we stay ahead of the curve. We ensure that we are investing appropriately so we can keep up with that demand. I'd say the commercial team puts a lot of pressure on operations because they're performing so well, but operations stays ahead of the curve and invest appropriately. And so when we look at the investment, when I mentioned the greater than 10 billion investment, that takes into account in the US, that takes into account our volume growth that we expect in addition to new areas that we will invest. For example, peptide manufacturing as an example, as we enter that space, obviously now as we enter into obesity, it makes sense to add that capability. And so that will also be part of our supply chain strategy here. So that's the way we're thinking about it. Operator: Next, we'll go to the line of Dave Risinger from Leerink Partners. Please go ahead. Dave Risinger: Thanks very much, and congrats on the performance. So I have two questions, please. And they're both a bit high level. So the first is the industry is facing three major US Government risks, actions that are harming biopharma innovation, including actions significant FDA disruption and questioning of proven medical science, tariff threats and also the Trump administration's agenda to take prices down more than the Biden administration took down drug prices. So considering what appears to be a lack of appreciation in Washington of the benefits that the biopharmaceutical industry brings to Americans, can you please comment on how your executive team and Board are engaging differently today with Washington leadership to change the political agenda for the better? And then second, the press release mentions that guidance doesn't reflect any trade policy shifts, including pharmaceutical sector tariffs. Can you describe the potential trade policy shifts that you're considering or thinking of beyond tariffs? Rob Michael: So we're obviously not a member of pharma today, AbbVie, but we do continue to communicate with the association really to seek alignment on the most critical issues for the industry. Now AbbVie has a large government affairs organization that engages with lawmakers and the administration on our top policy priorities. And that includes tax reform. We've talked about that quite a bit today IRA, 340B and patient affordability in Medicare. And we have actually seen some positive results from that engagement. I mean, just this week, Congress released a report on 340B, included a recommendation that changed the law to more clearly define a patient, which should help address the abuse that is occurring with this program. I would also view the 340B policies in the latest executive order as a positive. I also previously mentioned that seeking to eliminate the pill penalty is a positive for innovation. So we will continue to work with lawmakers as we always have on policies that support a healthy US biopharma industry, continued innovation and patient affordability. Roopal Thakkar: Regarding FDA interactions, I would say our teams have been in active discussions with the FDA on multiple programs across therapeutic areas, sometimes daily interactions and no signals of a slowdown. We are monitoring the situation closely. However, thus far, we haven't experienced any delays to our timelines. Scott Reents: Just with respect to your question on my initial comments, it's just the trade policy shift we're talking about here is the potential pharmaceutical sector tariffs. It's not any additional things that we were contemplating. Certainly, the environment has some uncertainty out there, but specific to that comment we were speaking of the pharmaceutical sector tariffs. Operator: Next we'll go to the line of Vamil Divan from Guggenheim Securities. Please go ahead. Vamil Divan: Congrats on the quarter. One on the tariff discussion, I was curious about the aesthetic side. I know that pharmaceutical products are excluded from the current tariffs, but I thought products like your breast implants and Juvederm may be included right now. So curious if that's the case or not? And if it is, then why wouldn't there be some accounting for that in your new guidance? Maybe you just absorb it within your guidance? Any impact there? And then secondly, just on the aesthetics side, appreciate macro issues and all the macroeconomic pressures. But I'm just curious if you can comment on the market share dynamics. And is there any sort of share shifts that you're seeing either in toxins or fillers that may be impacting things beyond the macro component? Scott Reents: You are right. It's a great question regarding the current tariff rules that are in place. So in general, pharmaceutical products and our products are exempt from those similar to our peers. However, there is a couple of exceptions to that. And then specific to aesthetics, yes, there are some application of the rules to aesthetics. But we have absorbed the aesthetics impact in the guidance. And I would tell you it's modest. It's something approximately $30 million. So it's something fairly modest in the current rules and that's something that we have absorbed. So all of the guidance that I gave and reaffirmed today from the margin profiles and otherwise includes us absorbing that. Jeff Stewart: So I'll go over your market share, give you some flavor on that. And I'll focus on our two big markets, the US and China. So as I mentioned, we were right on our guidance, right on our forecast for the first quarter. Remember, biggest impact there was the price because we reversed the Alley [ph] redesign from last year. And so when we looked at basically what happened from the fourth quarter to the first quarter, we know we took a market share hit in toxins in that fourth quarter. The good news is we've seen a complete reengagement in the basically the old Alley program with all of our accounts. So things are quite stable. And we actually had a one market share point gain back from where we were. Now we still have to gain some more share over the course of the year to come back to where we were pre the change to Alley. So we have lost year-over-year some share in toxins. In the US in filler, our share is very, very stable. We did not see a significant share impact on the filler side of the business. It's just been sort of a double digit market pressure there. Now in China, I'm quite pleased with the share performance. We've recently had a couple of significant approvals sequentially. We have the masseter approval for BOTOX, which is sort of in the lower face and jawline and also VOLUX, which is in Juvederm. So we've actually seen significant positive momentum in BOTOX share in China as well as positive share in filler. So it's a little variable across the board. Our big push will be to recover that share over the course of the year in the US toxin space. Hope that helps. Operator: Next, we'll go to the line of Alexandria Hammond from Wolfe Research. Alexandria Hammond: So Skyrizi and Rinvoq have consistently surpassed expectations, but we've been getting some questions on what might drive long term growth in I&I as it relates to these assets. Could you comment on when we should start seeing results from your Skyrizi and Rinvoq combination trials? And as a follow-up, what combination are you most excited about from a mechanistic perspective? Roopal Thakkar: I'll start on the Skyrizi question and the combinations. So the studies have initiated and we would anticipate next year starting to see early data readouts. And I would say we're excited about several of these mechanisms. We've utilized quite a bit of data that we've already collected to see what could be the best combination. And ultimately clinical data will guide that path, but we use biopsy data. The team has applied machine learning, to these data sets, spatial omics, a variety of different techniques. And the ones that we like are one, the alpha-4 beta-7. We think that could be a good combination. We like Lutikizumab, which is a bispecific to anti IL-1 alpha and importantly, IL-1 beta. We see that overexpression in patients with IBD that have failed other advanced therapies. We see something similar for TREM1, which would be another potential combination. And then we as I mentioned, we also have a longer acting an agent designed to be longer acting TL1A that could also be a very good fit with IL-23 like Skyrizi. The other thing we'll be doing since I mentioned a variety of different combinations is also capturing a number of biomarkers to see if there's any potential for pretreatment segmentation in the future consistent with what we do in oncology. Thus far no real successes, would say maybe there's hints in TL1A. But we're going to generate that data as well to see if there's opportunities to be able to use biomarkers in the future to segment these patients. Scott Reents: I might add, when we look at Skyrizi and Rinvoq, certainly we're very pleased with the strong demand in the quarter and that led to us taking a combined $900 million of increased guidance for the year. We've also given the long term guidance in 2027, which we continue to feel very confident in. And also I think it's worthwhile to think about Rinvoq will have a second wave of indications towards the end of the decade. It will add a couple of billion dollars of sales. And we really see these two products even before the combination that Roopal spoke about as having a long runway of at least for at least the next eight years and we feel very good about that from that perspective. Rob Michael: And this is Rob. I'll just to add on to that. I think from strategically, when we look at the company and we have this clear runway to growth for at least the next eight years, we can use that time and obviously we're looking to elevate the standard of care for immunology patients. We think these combination studies are a way to accomplish that. But we're going to use that time to and just as we did with Humira, we came up with Skyrizi and Rinvoq as a way to elevate the standard of care And that really launched into a second chapter of the company. Third chapter is going to be as you think about the growth beyond Skyrizi and Rinvoq. And we have the time and we're investing appropriately to identify what those drivers will be and within immunology and outside of it. I mean we have five key growth areas that we're very confident can drive growth. But obviously, you've now seen us enter the obesity space as we think about more sources of growth. We think that's also an opportunity. So we think the company is very well positioned to grow very nicely for at least the next eight years and then use that time and the investment that's available to grow beyond that. Operator: Next, we'll go to the line of James Shin from Deutsche Bank. Please go ahead. James Shin: I had a question on current immunology price volume dynamics. Specifically, is the low single digit headwind being realized? If so, is it somehow being blended where Humira is seeing outsized headwinds, while Skyrizi and Rinvoq are seeing tailwinds? Or is there some sort of co pay shift or is there a shift in co pay utilization year-over-year or sequentially? Scott Reents: James, it's Scott. So I think I'll start with Skyrizi and Rinvoq. If you look at the first quarter, those were both driven by strong demand. Now we've talked about pricing being slightly negative for those two products on a full year basis. We did see a little bit of favorable price in the quarter and that's just a gating issue. So in the quarter, probably two things. One, Jess organization continues to do a very good job of focusing on co pay utilization and effectively managing that. So we saw a little bit of benefit from co pay utilization. And then in addition, we had anticipated some channel mix changes later in the year, but those actually came to fruition a little bit earlier than we thought. And so those factors, I would say, along with some gating issues combined to being price favorability, but we still anticipate negative pricing headwinds on a full year basis. With respect to Humira, we talked about in the quarter and on the full year that there is a decrease in volume associated with share erosion as well as the compression of the overall molecule. So that volume is going to continue. I think you'll see that volume a little bit more pronounced throughout the year, but there certainly continues to be some price. You've got some unwinds of accruals that cause price impacts, but you also have just the changing of the rebating dynamics as we entered into a new contract year. Operator: Next we'll go to the line of Geoff Meacham from Citibank. Please go ahead. Geoff Meacham: Rob, had another one on policy. Wanted to get your perspective on PBM reform, which is often mentioned as highly likely to happen this year. What would you say are the main elements that you'd want to see in reform? And the second one on BD, is there a therapeutic area that you guys feel like you still have to add to? I wasn't sure if neuro remains one of the top priorities just post emeraclidine and it does seem like multiple shots on goal in metabolic disease is kind of the approach a lot of other biopharmers are taking, but I wanted to get your perspective. Jeff Stewart: So on PBM reform, I think we're supportive of anything that helps with patient affordability. And so to the extent that that improves the dynamic on patient affordability that that is truly realized in their pockets, that's favorable. So we are supportive of the efforts there. But it's really all about making sure that we're addressing patient affordability. As it relates to business development, we obviously really like the five key growth areas that we have today. As I mentioned, those will certainly drive very strong growth for at least the next eight years. I think sometimes there's a misconception about neuroscience for AbbVie. It's more than just psychiatry. We have a very strong migraine franchise that's performing exceptionally well. In Parkinson's, we're seeing great results. And we've been in Parkinson's for a long time with Duopa. But as you think about the ramps we're seeing with BioLev, the innovation we've brought for those patients and then Tavapadon, came from Cerevel, we could really start to see our Parkinson's franchise emerge. And so when I think about neuroscience, I would think about it really in four segments. There's psychiatry, it's an important segment. There's migraine, there's Parkinson's and there's all of the neurodegeneration. And we obviously are investing in Alzheimer's. And so you just look at the business development activity since the beginning of last year in neuroscience, extended our discovery collaboration in psychiatry with Gedeon Richter, who discovered Vraylar. We added a novel mechanism for mood disorders with Gilgamesh. We acquired a next generation A beta antibody that's very promising for Alzheimer's from Aliada. And we're also investing in novel approaches for migraine disease. So we are actively investing in neuroscience. We obviously added obesity because we do think of ourselves as being a company that's going be very large in the next decade. So it doesn't hurt to have another source of growth. And we have evaluated various options beyond the five and we chose to move into obesity for a number of reasons. It's obviously an extremely attractive market, has high prevalence and plenty of headroom for growth. It's a market that has ample space for multiple players and new entrants. And I think we're also uniquely positioned with our aesthetics business to access that channel in addition to therapeutics. And importantly, and it's something we always focus on is where are there high areas of unmet need. As we think about our portfolio, that's really our strategy is to drive a remarkable impact for our patients by elevating standard of care. When we look at obesity, there's plenty of opportunity, whether it's reducing GI side effects, improving body composition, more consistent weight loss across patient types, longer lasting weight loss. And so as we evaluate that opportunity, we found the amylin class to be very attractive given it's the most validated non-GLP-1 mechanism for obesity and has very encouraging early data. And we believe the amylin opportunity with Gubra has the potential to deliver a differentiated asset. So we will continue investing in obesity. We'll continue investing in our five key growth areas. And we think that gives us the right mix to drive growth for long term. Operator: Next, we'll go to the line of Tim Anderson from Bank of America. Tim Anderson: I have a question on drug advertising. So AbbVie is the number one spender on this. It's hard to turn on TV without seeing something like a ad. And that says you see a very positive ROI from that level of spending. As you know, there's some occasional talk by the administration about limiting such advertising. So my question is, do you think there's any basis in reality for that? I know you'll say it shouldn't happen, but that doesn't mean that it will potentially happen. But then on obesity, as you noted, your amylin is long acting. Doesn't that imply that a really kind of key next part of the portfolio is a long acting GLP? Or are you not interested in the GLP-1 space at all? Jeff Stewart: And you're right. It's difficult to know if DTC reform would take place or what it might look like. I think you're right. We're very supportive of the First Amendment rights to be able to advertise. And obviously, we work with the FDA on every single claim that we make on television. And if there were to be a change, we would be able to pivot. I mean, we could shift our investment to disease awareness that could help us drive because we have such leading in-play share to continue to basically invest in the right way to consumers. We certainly could move to other channels because it's not really clear if it would just be mass media or etc. So certainly, the whole market would take a step back if that were to happen and our brands would still be very, very competitive in terms of our ability to pivot and toggle were that to happen. So difficult to predict, but we would be, of course, planning for any of those contingencies were they to take place. Roopal Thakkar: Regarding different mechanisms. So as stated previously, we think there's opportunity as a monotherapy and also as a potential combination. Would say we haven't ruled out any particular mechanism that we would combine with. The other thing to mention, I think I already stated this, but we do have a neutral pH in the current formulation for 295. So that potentially makes it more amenable to combinations. But mechanisms that you mentioned and potentially others, would say, are on the table for us. Operator: Next, we'll go to the line of Trung Huynh from UBS. Trung Huynh: I've got two questions if I can. So first, just very quickly, you did touch on the pricing dynamics with Skyrizi and Rinvoq. But did the strong performance include any notable onetime contributions, inventory build or pull forward effects? And then second, similar to Vamil's aesthetics question, but China reciprocal tariffs have been enacted. Is that contemplated in your guide? And is that material to your aesthetics business? And then just I know it's early days, but are you seeing any shifts in demand there? Scott Reents: So with respect to Skyrizi and Rinvoq, I would say the one item that I would point to, again, was strong demand overall. The one thing that also helped the growth in the quarter was with respect to the retailer destocking. So in the past, we've talked about there's some retail inventory buildup as a form of price speculation in the fourth quarter. I talked about in the fourth quarter call that we didn't see a lot of that. And then that was again confirmed, we did not see there was no unwind like there has been in prior year. So there was a year-over-year benefit from the lack of destocking from the retail buildup in the first quarter. But again, that was fairly modest. When we talk about our overall growth globally, 72% operationally, the demand was really in the 60s. And so you just saw a small portion from that retail destocking. With respect to the China tariff, yes, you're right. There is some impact for aesthetics in those products in those numbers. But again, that impact is fairly modest. We've contemplated that in our guidance. And so I would say overall, the existing tariffs, you're talking about $30 million approximately globally and a decent component of that is with respect to the aesthetics business. And then maybe, I don't know if Jeff would like to comment on, I think you'd ask if there's if we've seen demand changes in China? Jeff Stewart: No, we haven't over the last 30 days. I mean, things are things change quickly. But as I mentioned, if we at the quarter, we've been encouraged by the share growth we've seen in China based on the recent approvals for both the toxin and the filler category. Operator: And for our final question, we'll go to the line of Evan Seigerman from BMO Capital Markets. Unidentified Analyst: This is Connor McKay [ph] on for Evan. Thanks for taking our question and congrats on a great quarter. Vyalev and Elahere were two products that outside of your I&I business came in sort of meaningfully ahead of analyst expectations. Can you maybe walk us through what's driving the strength for each of those? Jeff Stewart: Certainly as I mentioned in the prepared remark and Rob as well, Vyalev is emerging as a very, very important product. And we communicated certainly that it could continue to exceed expectations. So it's quite remarkable. We continue to see strong uptake in Japan, across Europe. And while we're only in the commercial market, which is about 30% of the market in the US, because we're still waiting on the full Medicare reimbursement, the market feedback is exceptional. I mean this is a really amazing product to help patients sleep through the night, control the movement disorders. It's unlike Duopa, it lasts for 24 hours. It's a more simple subcu injection versus surgery that you might get. So it's playing out exactly as we had hoped. And so you're just seeing some strength of that in the quarter. And that's also why we remarked that we're excited to bring Tavapadon, which is also showing some very nice data here and we're getting ready for the file to start to really build out a more meaningful Parkinson's category. And then Elahere, we continue to see nice uptake, very unique product. Obviously, it's got a 30% approval in overall survival. It's well tolerated non-chemo. So the US business continues to perform very well. And we are starting to see the international launches. We've pulled forward significant international launches from the time that we had done the deal with ImmunoGen, and we're going to start to see those international launches ramp here over the next several quarters. So that gives some sense over that brand as well. Rob Michael: I'm glad you asked a question about Elahere because oncology doesn't get enough attention for the company. Elahere came to us through the ImmunoGen acquisition. It was a very successful acquisition. It basically combined their ADC capabilities with ours. And now you're starting to see the AbbVie internally discovered ADCs emerge. We've talked about Teliso-V. We're very excited about tmAb A-706. You think about long term growth drivers for AbbVie, oncology with that emerging pipeline and Roopal and I both mentioned 383, the bispecific for multiple myeloma. We have, I think, a very exciting emerging oncology pipeline that could be an important growth driver for the company. So I appreciate the specific question about Elahere. Liz Shea: And that concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us. Operator: Thank you all for joining the AbbVie first quarter 2025 earnings conference call. That concludes today's conference. Please disconnect at this time, and we hope you have a wonderful rest of your day.	[ { "speaker": "Operator", "text": "Welcome to the AbbVie First Quarter 2025 Earnings Conference Call. All participants will be able to listen only until the question and answer portion of this call. As a reminder, this call is being recorded. I would now like to introduce Ms. Shea, Senior Vice President, Investor Relations." }, { "speaker": "Liz Shea", "text": "Good morning, and thanks for joining us. Also on the call with me today are Rob Michael, Chief Executive Officer Jeff Stewart, Executive Vice President, Chief Commercial Officer Roopal Thakkar, Executive Vice President, Research and Development, Chief Scientific Officer and Scott Reents, Executive Vice President, Chief Financial Officer. Before we get started, I'll note that some statements we make today may be considered forward-looking statements based on our current expectations. AbbVie cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in our forward-looking statements. Additional information about these risks and uncertainties is included in our SEC filings. AbbVie undertakes no obligation to update these forward-looking statements, except as required by law. On today's conference call, non-GAAP financial measures will be used to help investors understand AbbVie's business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings release and regulatory filings from today, which can be found on our website. Following our prepared remarks, we'll take your questions. So with that, I'll turn the call over to Rob." }, { "speaker": "Rob Michael", "text": "Thank you, Liz. Good morning, everyone, and thank you for joining us. AbbVie is off to an excellent start to the year with first quarter results exceeding expectations across several of our therapeutic areas. We also continued to advance our promising internal pipeline and add external opportunities to further strengthen our business and long term outlook. Turning to our first quarter performance, we delivered adjusted earnings per share of $2.46 which is $0.10 above our guidance midpoint. Total net revenues were more than $13.3 billion nearly $550 million ahead of our expectations. I'm especially pleased with the performance of our ex-Humira platform, which delivered robust sales growth of more than 21%. Immunology, neuroscience, oncology, and anesthetics are all performing at or above our expectations. And we are well positioned to exceed our previous peak revenue in just the second full year following the US Humira LOE. Based on this strong performance, we are raising our full year adjusted earnings per share guidance by $0.10 and now expect adjusted EPS between $12.09 and $12.29. As you are aware, there is speculation that sectoral tariffs could be forthcoming. Any related impact from these tariffs as well as other potential new or reciprocal tariffs have not been contemplated in our guidance. To the extent there is an impact, we believe it would be in line with our peers, given that AbbVie has an extensive manufacturing presence in the United States, including API, biologics, toxins and small molecules. And over the next decade, we anticipate investing more than $10 billion of capital in the US to support our volume growth and our expansion into new areas such as obesity. Turning back to our performance, I'm very pleased with the excellent progress we are making with several pipeline programs that have the potential to be meaningful sources of growth. These include Lutikizumab across several immunology indications, 383 in multiple myeloma and our next generation ADCs, including TmAb A for several solid tumor types and 706 for small cell lung cancer. We also continue to add depth to our pipeline with strategic transactions that can help drive growth in the next decade. This includes the recent acquisition of Nimble Therapeutics to expand our immunology portfolio with oral peptides as well as the license agreement with Gubra to develop an amylin analog for the treatment of obesity. Obesity represents a significant global health concern with high unmet need. This market will continue to evolve with improved offerings, and we believe our program with Gubra has the potential to deliver a differentiated asset. Going forward, we plan to invest further in obesity along with other opportunities across our existing five key growth areas. In summary, the fundamentals of our business are strong and we are well positioned for the long term. AbbVie has a clear runway to growth for at least the next eight years, including a high single digit revenue CAGR through 2029. With that, I'll turn the call over to Jeff for additional comments on our commercial highlights. Jeff?" }, { "speaker": "Jeff Stewart", "text": "Thank you, Rob. I'll start with the quarterly results for immunology, which delivered total revenues of more than $6.2 billion exceeding our expectations. Skyrizi and Rinvoq are performing exceptionally well, contributing $5.1 billion in combined sales this quarter, reflecting growth of more than 65%. I'm especially encouraged with our portfolio performance across IBD, where Skyrizi and Rinvoq continue to capture significant share given their efficacy, safety and dosing profiles. In Crohn's disease, which is roughly two thirds of the overall IBD market, these two treatments together are capturing roughly one out of every two in play patients in the US and total prescription share is now in the mid-teens. Internationally, our Crohn's portfolio has achieved in-play leadership in nearly a dozen key countries. In ulcerative colitis, Skyrizi has already achieved the leading in-play share in the US following the launch in the second half of last year. Skyrizi and Rinvoq together are now capturing one out of every three in-play UC patients, a very strong leadership position for AbbVie. We are also seeing strong momentum across indications in dermatology and rheumatology as well. For Skyrizi, we continue to gain share in psoriatic disease, where we have achieved the leading in-play share of new and switching patients in nearly 30 countries and see substantial room for total share growth. For Rinvoq, we are seeing increasing prescription demand globally across each of the room indications as well as additional momentum in atopic dermatitis, the fastest growing immunology market, where we have two compelling head to head studies versus Dupixent. We are also preparing for the global launch of giant cell arteritis, another new source of growth for Rinvoq. We received European approval earlier this month and expect FDA approval soon. The addition of this indication further rounds out Rinvoq's rheumatology label and gives patients with GCA access to a new compelling oral therapeutic option. Overall, Skyrizi and Rinvoq are demonstrating impressive results across all of their approved indications, and we will be raising our full year sales guidance for both products. Turning now to Humira, which delivered global sales of $1.1 billion down 49.5% on an operational basis, below our expectations, primarily due to faster share erosion from biosimilar competition as well as further molecule compression in the US. As a result, we will be lowering our full year sales guidance for US Humira. Moving to Oncology, where total revenues were $1.6 billion exceeding our expectations. Imbruvica global sales were $738 million down 11.9%, reflecting competitive dynamics in CLL. Venclexta global revenues were $665 million up 12.3% on an operational basis. This strong performance reflects continued momentum in CLL as well as shared leadership in frontline AML among patients who are ineligible for intensive induction chemotherapy. We also have an emerging commercial portfolio in solid tumors. This includes Elahere, our leading ADC for ovarian cancer with global sales of $179 million as well as Teliso-V, a potential new medicine for late line non-small cell lung cancer patients with US Regulatory approval and commercialization expected in the next couple of months. Teliso-V will be supported by a dedicated sales force and medical affairs team, which will target academic and community cancer treatment centers to reinforce the importance of c-Met as a biomarker and build relationships that support our emerging solid tumor franchise. Turning now to aesthetics, which delivered global sales of $1.1 billion down 10.2% on an operational basis. This was in line with our expectations. BOTOX Cosmetic global revenues were $556 million down 10.7% on an operational basis and Juvederm sales were $231 million down 20% on an operational basis. As we have seen over the last several quarters, economic headwinds have continued to impact market conditions. Based on the trends we are seeing, including a decline in recent consumer sentiment, we are moderating our assumptions for category growth globally and adjusting our full year sales guidance for aesthetics accordingly. While near term aesthetics market conditions remain challenging, the long term prospects for the category remain attractive, given high consumer interest and low penetration rates for facial injectables. I'm particularly excited about BoNT/E, our fast acting, short duration toxin, which we recently submitted for US Regulatory review. This first in class toxin represents a distinctive innovation for the treatment of glabellar lines and has the potential to be an important catalyst for new patient activation into the facial aesthetics category. We anticipate commercialization next year. Moving now to neuroscience, where total revenues were approximately $2.3 billion up 17% on an operational basis, with all key products exceeding our expectations. VRAYLAR global sales were $765 million up 10.3%, reflecting share capture in both Bipolar I disorder and adjunctive major depression. We continue to get very positive feedback on VRAYLAR's profile in terms of dosing flexibility, low sedation and the ability to treat a full spectrum of symptoms. We are very competitively positioned with our migraine portfolio, where all three of our therapies continue to deliver double digit operational growth. BOTOX Therapeutic global revenues were $866 million, up 17%. UBRELVY global sales were $240 million up 18%. And QLIPTA global revenues were $193 million, up 48.3%. And in Parkinson's disease, VYALEV global sales were $63 million reflecting continued strong uptake in Japan and Europe. We are also pleased with the early launch feedback in the US, where revenues are expected to ramp gradually over the next couple of quarters as we work to establish the appropriate Medicare coverage and benefit determination. Lastly, we are making excellent progress with the development of Tavapadon in Parkinson's disease. This first in class D1D5 selective dopamine agonist has a favorable benefit risk profile and the potential to differentiate in several areas, such as sedation and impulse control. Tavapadon could potentially be used as a monotherapy for early Parkinson's disease as well as an adjunctive therapy to levodopa for more advanced patients, which would be a complementary addition to our existing PD portfolio with VYALEV and DUOPA. We expect to submit Tavapadon for regulatory review later this year with commercialization expected in 2026. Overall, I'm extremely pleased with the execution and strong momentum across our commercial portfolio. And with that, I'll turn the call over to Roopal for comments on our R&D highlights." }, { "speaker": "Roopal Thakkar", "text": "Thank you, Jeff. I will start with immunology. We received European approval for Rinvoq in GCA and expect FDA approval soon. We remain on track for several important data readouts this year as well including Phase III data for Rinvoq in alopecia areata and vitiligo and data from Skyrizi's head to head study in psoriasis versus SOTIQ2 [ph]. Our early and mid-stage immunology pipeline continues to advance. Recent initiations include a Phase II study evaluating Skyrizi in combination with Lutikizumab in psoriatic arthritis and a Phase I study for our next generation TL1A antibody, which is designed to have less frequent dosing compared to other TL1As in development and will be evaluated in combination with Skyrizi in both Crohn's disease and ulcerative colitis. This summer, we will start a Phase II study evaluating a combination of Lutikizumab and our anti CD40 Ravagalimab in rheumatoid arthritis. Moving to our ADCs and oncology, we anticipate accelerated approval in the second quarter for Teliso-V as a monotherapy in previously treated non-squamous non-small cell lung cancer with high c-Met expression. This is a segment of lung cancer with high unmet need and when approved, Teliso-V will be the first c-Met directed ADC for these patients. We're also making good progress with tmAb A, our next generation c-Met ADC, a Phase 2 dose optimization study evaluating tmAb A with a PD-1 inhibitor as a frontline combination therapy in EGFR wild type non-small cell lung cancer was recently initiated. In the EGFR mutant segment, we plan to initiate studies for tmAb A as a monotherapy in the second line setting and in combination with Osimertinib in the first line setting. Preliminary Phase 1 results will be presented at the upcoming ASCO meeting. This year, Phase 2 data from our CRC study evaluating tmAb A in combination with Bevacizumab will be available, which could enable a Phase 3 study in an all comers population. Progress also continues with ABBV-706 in small cell lung cancer. Recall, this ADC utilizes the same topo warhead and linker technology as tmAb A, but with an antibody that targets SEZ6. In the Phase 1 study, 706 was efficacious across doses with an objective response rate of approximately 60% in patients with relapsed or refractory small cell lung cancer. Based on maturing duration of response and progression free survival data, we plan to advance 706 into a trial in a relapsed refractory population and a dose optimization study in combination with a PD-L1 in the frontline with the goal of establishing a chemo sparing regimen as a new standard of care. In the area of hematologic oncology, the data readout remains on track for the Phase 3 VENCLEXTA MDS trial. And if positive, our regulatory submissions would follow later in the year. A regulatory submission for PIVEC in BPDCN is also planned for this year. We continue to make good progress with our BCMA CD3 bispecific ABBV-383 in multiple myeloma. Recruitment is going well in the Phase 3 monotherapy study in later lines, and we are on track to be fully enrolled by early next year. Additionally, we continue to evaluate 383 in various combinations, including with Pomalyst, Revlimid, DARZALEX and Iverdemine [ph]. We'll begin seeing data from these combinations next year, which could enable Phase 3 lines of therapy. Now moving to neuroscience. Interim data from the long term TEMPO-4 Phase 3 study continued to support Tavapadon’s favorable benefit risk profile. Efficacy in both early and advanced Parkinson's patients was maintained beyond a year and the safety profile was consistent with that observed in the previous Phase III studies with no new safety concerns identified. Rates of adverse events of special interest remained low with impulse control disorder and peripheral edema less than 1%, dyskinesia approximately 2% and sedation less than 5%. These results underscored Tavapadon's potential to become an important new treatment option for patients with Parkinson's disease. Our regulatory application is planned for later in the year. Moving to other areas of our pipeline. In aesthetics, the regulatory application for our rapid onset short acting toxin BoNT/E was recently submitted. We also began the clinical program to evaluate co administration of BoNT/E and BOTOX, which has the potential to be co-formulated as a novel product, offering the combined benefits of rapid onset and Botox like duration. In obesity, our partner, Gubra recently announced positive interim results from the first part of a multiple ascending dose study for our long acting amylin analog ABBV-295. This initial phase of the study tested one and two milligrams dosed once weekly for six weeks in healthy, lean and overweight patients. The study showed 295 performed well, demonstrating a dose dependent mean weight loss compared to placebo and a tolerability profile consistent with the results from the single ascending dose study. Mean weight loss in the two milligram cohort, which had a mean BMI of 24 was 7.8% compared to a weight gain of 2% in the placebo arm on day 43. The second phase of this study is ongoing and is evaluating higher doses in overweight and obese patients with 12 week dosing. Titration and longer dosing intervals will also be assessed. Full data from this part of the study are expected next year. To summarize, significant progress continues with our pipeline and we look forward to important data readouts, regulatory submissions and approvals throughout 2025. With that, I'll turn the call over to Scott." }, { "speaker": "Scott Reents", "text": "Starting with our first quarter results, we reported adjusted earnings per share of $2.46 which is $0.10 above our guidance midpoint. These results include a $0.13 unfavorable impact from acquired IPR&D expense. Total net revenues were more than $13.3 billion reflecting robust growth of 9.8% on an operational basis, excluding a 1.4% unfavorable impact from foreign exchange. Adjusted gross margin was 84.1% of sales. Adjusted R&D expense was 15.4% of sales and adjusted SG&A expense was 24.6% of sales. The adjusted operating margin ratio was 42.3% of sales, which includes a 1.9% unfavorable impact from acquired IPR&D expense. Net interest expense was $627 million. The adjusted tax rate was 14.2%. Turning to our financial outlook. We are raising our full year adjusted earnings per share guidance to between $12.09 and $12.29. Please note that this guidance does not include an estimate for acquired IPR&D expense that may be incurred beyond the first quarter. We now expect total net revenues of approximately $59.7 billion an increase of $700 million. This reflects an estimated 0.6% unfavorable impact from foreign exchange on full year sales growth. This updated revenue forecast includes the following approximate assumptions for several of our key products. We now expect Skyrizi global revenues of $16.5 billion an increase of $600 million reflecting share gains in psoriasis and IBD. Rinvoq global sales of $8.2 billion, an increase of $300 million reflecting momentum across all approved indications. US Humira revenues of $3.5 billion a decrease of $500 million reflecting higher erosion from biosimilar competition as well as further molecule compression. BOTOX Therapeutic global sales of $3.6 billion, an increase of $100 million reflecting growth in chronic migraine and other indications. Total oral CGRP revenues of $2.2 billion an increase of $100 million reflecting strong prescription demand. Imbruvica global revenues of $2.8 billion an increase of $100 million reflecting lower erosion. Venclexta global sales of $2.7 billion an increase of $100 million reflecting continued uptake in both CLL and AML across our key countries. And for aesthetics, we now expect global sales of $5.1 billion as we are moderating our assumptions for market growth globally. As a result, total sales guidance for BOTOX and Juvederm will each be lower by roughly $100 million. Moving to the P&L for 2025, we continue to forecast full year adjusted gross margin of approximately 84% of sales and adjusted SG&A expense of approximately $13.2 billion. We now expect adjusted R&D expense of approximately $8.9 billion reflecting additional investment in our robust pipeline for long term growth. We also now anticipate an adjusted operating margin ratio of roughly 46.5% of sales, in line with our previous expectations after including the 0.4% unfavorable impact of acquired IPR&D expense incurred through the first quarter. Turning to the second quarter, we anticipate net revenues of approximately $15 billion. This reflects an estimated 0.3% unfavorable impact from foreign exchange on full year sales growth. We are forecasting an adjusted operating margin ratio of roughly 49.5%. We expect adjusted earnings per share between $3.26 and $3.30 This guidance does not include acquired IPR&D expense that may be incurred in the quarter. Our guidance is based on current trade rules and does not reflect the impact of any additional trade policy shifts, including pharmaceutical sector tariffs. While it's difficult to quantify in the absence of actual policy details, it's worth noting any related unfavorability in 2025 would reflect a partial year given the timeline for 232 investigation. We are actively preparing for a number of potential scenarios and would expect to put into place mitigation strategies as we have more information. Relative to these dynamics, I would also highlight that AbbVie has a significant US manufacturing presence that spans 11 sites with plans to add four new manufacturing plants to our network, expanding our production for API, drug product, peptides and devices in the United States. As we continue to invest and grow our US operational footprint, we believe a more competitive tax policy building on what was accomplished through 2017 tax reform will encourage a sustainable shift towards US Manufacturing over the long term. In closing, I'm very pleased with the excellent start to the year. We are demonstrating strong momentum across the portfolio and continue to be well positioned to deliver robust growth in 2025 and beyond. With that, I'll turn the call back over to Liz." }, { "speaker": "Liz Shea", "text": "Thanks, Scott. We will now open the call for questions. In the interest of hearing from as many analysts as possible over the remainder of the call, we ask that you please limit your questions to one or two." }, { "speaker": "Operator", "text": "For our first question, we'll go to the line of Chris Schott from JPMorgan. Please go ahead. Great. Thanks for the question and congrats on the results." }, { "speaker": "Chris Schott", "text": "Just two for me. Maybe first on Skyrizi and Rinvoq, obviously some big step up in the guidance here. Can you just elaborate a little bit more on which of the indications are most attributable to the upside we're seeing right now? And maybe just talk a little bit about the competitive landscape, maybe particularly Tremfya more broadly launching in IBD and how you're thinking about that dynamic? And then just my second question was on second immunology on Humira. Can you talk a bit more about how you're thinking about the tail for Humira in light of some of the erosion that you're seeing this year?" }, { "speaker": "Scott Reents", "text": "Chris, this is Scott. I'll start with kind of where we saw the increase attribute to for the various indications and I'll turn to Jeff for your other questions. So we raised Skyrizi by $600 million to $16.5 billion and that split between $200 million in psoriatic and $400 million in IBD indications. And then with respect to Rinvoq, we raised that $300 million and that's across all of the approved indications. So you can attribute that to $100 million for rheumatology, $100 million for derm and the remaining $100 million for IBD." }, { "speaker": "Jeff Stewart", "text": "Yes. Thanks, Chris. It's Jeff. And maybe I'll give some sense. We're obviously very, very pleased with the performance of Skyrizi and Rinvoq in immunology as you've seen from the report. Maybe to give some perspective, it's not uncommon to start to see in class competition. We've seen that in psoriasis. We've seen that across the board. And maybe I'll just give a little bit of perspective over sort of the historical dynamics that we've seen with the IL-23 category. So for example, if you go back to like 2018, 2019 when the IL-23s were starting to come in psoriasis, the total patient share at that time in the early days was about 7% of the IL-23 class. Now it's over 60%. And if we look at where IBD is, obviously, we launched first with Skyrizi and Crohn's and everything's recently launching here in UC, it's about 7% of the total patient share in IBD. So you can imagine as we start to watch what this category is going to mean to transform IBD, we remain very confident. It's not a zero sum game. We feel very confident in our profile and what we're able to deliver if we look across UC, if we look across our head to head data versus sequence versus the other trials. And so net net, we see very, very strong momentum across the board, regardless of competitors that may come in. And then my thoughts on the Humira tail. Again, as I highlighted and Scott highlighted in his remarks, we are seeing a bit of faster erosions as the biosimilar start to play out. And this is, of course, the third year of the biosimilar event. So it's really not too surprising. We also do continue to see the molecule continue to erode. So as we look and we don't have full visibility and we'll be monitoring the 26 access as we go throughout the year. We do expect it to step down again. Just makes sense. That will be the fourth full year. So we'll have deeper visibility of that tail sometime over the course of the year. But as we said before, the real impact of the tail is when Humira does not have a meaningful headwind to our overall growth as a corporation. So we expect that to start to develop over that ’26 time period. Okay." }, { "speaker": "Operator", "text": "Next we'll go to the line of Terence Flynn from Morgan Stanley. Please go ahead." }, { "speaker": "Terence Flynn", "text": "Great. Thanks so much. Congrats on the quarter. And maybe two questions for me as well. You alluded to some of the mitigation strategies you're taking with respect to tariffs potentially. Could you just elaborate a little bit more there in terms of what that means for maybe inventory and then any contemplation on any changes to IP domiciling? And the second question I had is on the amylin program there. I know you talked a little bit about next steps, but was just wondering if you can elaborate in terms of how much higher you're going on doses, what you'd expect that to translate to in efficacy and maybe the size of those cohorts, like how many more patients will we get in this next update?" }, { "speaker": "Rob Michael", "text": "This is Rob. So Scott and I will handle your first question and Roopal will handle your second question. So just to, I think, back up and maybe talk about AbbVie's manufacturing network and then I can mention how we're thinking about potential mitigation. I think it's important to know that we have a broad footprint that allows us to assure supply for our patients around the world. And that's really why you've been able to see us avoid supply disruptions during events like the COVID pandemic. I mean and today, we have a robust US manufacturing network with more than 6,000 American workers across 11 sites. As I mentioned in my remarks, that includes manufacturing of API, biologics, toxins and small molecules. For example, our largest product Skyrizi is made in the US for the domestic market. And given our expected volume growth and our expansion into areas like obesity, as I mentioned, we'll continue increasing our US footprint with over $10 billion in planned capital investment during the next decade. In terms of potential mitigation, in the near term, we could take inventory management actions or secure alternate sources of API. We could also look at cost efficiencies and productivity initiatives as a source of mitigation, which we always do. I think what's more challenging is trying to pass the tariff impacts to our customers, especially with penalties in the government channel and with existing contracts in the commercial setting. So I don't see that as a viable source for mitigation. Longer term, we will add more US manufacturing capacity, which is part of the planned capital investment of over $10 billion. So specific to 2025, we would look to mitigate the impact as much as possible with a combination of supply chain actions, cost efficiencies and any additional overperformance from our growth platform. But in the meantime, we have enough confidence in the momentum of our business to raise our guidance this year, which should be viewed as a positive." }, { "speaker": "Scott Reents", "text": "David, with respect to IP, IP has been looked at, I think, when people try to assess the impact of potential tariffs on our sector. IP has been looked at as kind of a proxy as to what that impact might be. And certainly directionally, think that is something that would be somewhat telling. That said, when we look at our profile overall, Rob mentioned the strong US presence that we have, but we don't see our profile suggesting any sort of outsized impact for us as a company. The tax rate is something that you can look at, which is essentially when you think of the bookends of the minimum tax for earnings outside the US for tax earned in or income earned in the US that really kind of aligns with where that IP is structured. And that blending of your income kind of produces generally directionally your tax rate. You see us being relatively in line with our peers. And so that suggests that we have a similar IP profile from an overall perspective. I'd also just quickly point out that sometimes with Allergan, as that was a company that we redomiciled back to the US, it was a foreign headquarter company. Recall that Allergan was a series of several companies that were put together over a few years. And those companies all have a significant US presence as well. So Allergan's profile is not dissimilar from ours as a whole either. So I think when you think about that IP profile, it's important from a tariff perspective. It's also very important from a tax reform perspective. There was a lot of progress made in leveling the playing field for US companies in 2017 tax reform that did a lot of good things and really helped invest in the US as well as can create a competitive environment for our companies. We see it as an important piece of building upon that tax reform to encourage further and long term, as I mentioned in my remarks, sustainable investment. So I see a tax reform initiative building on 2017 coupled with tariffs as something that will encourage US manufacturing over the long term, we feel very good about our profile right now." }, { "speaker": "Roopal Thakkar", "text": "Hi, it's Roopal and I'll answer the 295 question regarding the multiple ascending dose study. Currently, what the data you've seen were at 1 mg and 2 mg and we have the opportunity here in this study to go several fold higher than the 2 milligrams. And we also have the opportunity to go beyond six weeks, namely around 12 weeks before we get into formal Phase 2b, which I would say around next year, we would go quite a bit longer. The sample size, what you've seen here maybe a little bit larger because of the multiple ascending dose format here. We'll see larger sample sizes once we get into the formal Phase 2b. The other opportunities here are also to look at titration at the 1 milligram or maybe even lower. We don't see any adverse events beyond suppression of appetite. So there's an opportunity to be able to start low and start titrating up to doses quite a bit higher than 2 milligrams, but we're open to watch this study and be flexible. The other important findings would be around muscle and bone. So those would be other things that will be evaluated as well as looking at dosing. The half-life is around 270 hours. So that could give us an opportunity to go twice a month and even potentially monthly. So all that will be captured in this data set. We expect to see some data next year and then that will allow us to best design a more formal Phase 2b study." }, { "speaker": "Operator", "text": "We'll go to the line of Carter Gould from Cantor. Please go ahead." }, { "speaker": "Carter Gould", "text": "Good morning. Thanks for taking the question. Obviously, there's been a lot of discussion around drug pricing kind of resurfacing and some rumblings around most favored nation kind of bubbling back to the surface. Wanted to get a sense understanding of your expectations and flexibility, if need be to take actions outside the US? And then maybe more of a commercial question, as we think about the potential co administration of BoNT/E and BOTOX, can you kind of help frame how you think that would impact the market? Is this something that could just grow the overall pie, move share, etc.? Any thoughts on that front would be appreciated." }, { "speaker": "Rob Michael", "text": "Thank you. Hey, Carter, it's Rob. I'll take your first question and Jeff will take the second question. I think as we've studied the environment, I mean, we are very supportive of a balanced approach that addresses affordability while also encouraging innovation. And you've seen many of our peers reinforcing the importance for the EU to properly value innovation, which we echo and would support any policies that encourage that outcome. That said, we hope the administration contemplates the harm that international reference pricing could have on US healthcare industry and future innovation. I think anything like price controls, cost increases or higher taxes just leaves less investment available across the industry to advance new innovative medicines. That said, I'm very encouraged by the administration's willingness to address the pill penalty in the IRA and is fixing that would support long term innovation in our industry. And so as we look at the push, I think, for the EU to more properly value the innovation is an absolute appropriate push. We're encouraged by some of the policies that really support innovation. And Scott also talked about tax reform. And I think that's an important lever as well as we think about what are the things that will drive investment in the US and drive more innovation. And I think if you just look at AbbVie as an example, we've invested over $5 billion of capital since tax reform in 2017. I mean that includes a new oncology research center in South San Francisco that includes Skyrizi manufacturing capabilities in the US, eye care capacity expansion in Waco, Texas and technology infrastructure upgrades across our footprint, just to name a few. And importantly, as Scott mentioned, tax reform allowed us to acquire Allergan, an Irish domiciled company that we then redomiciled into the US. I mean that transaction enabled AbbVie to continue increasing our R&D investment through the Humira LOE, which is unprecedented. That will ultimately help us really lead to more innovation in our pipeline and ultimately impact patients of the future. So when we think about policy, we think tax reform has provided the right incentives to invest more in the US and more in innovation. And that's what we would encourage." }, { "speaker": "Jeff Stewart", "text": "Let me give a quick update on the BoNT/E and the combination approach in terms of how we're starting to think about it. Obviously, we're super pleased with the recent filing on BoNT/E. And as we've highlighted before, the short acting toxin will operate on two different levels for us. First, it will stimulate the funnel. It will basically be a market stimulator because we know there's lots of considerors in the marketplace that are just worried about going to a full strength toxin because it lasts for three to four months. So the approachability of a short acting toxin that works in about 8.5 hours and is gone in 2.5 weeks makes the market much more approachable for the people in the consideration phase. So we think it's going to work on the market and our share, because obviously we've done studies with BOTOX after BoNT/E. Now in the combination use, Carter, it's very interesting. This is more of a pure sort of share play. When we talk to the consumers, many of the consumers are using a lot of BOTOX and you start saying, can you imagine a BOTOX that works almost immediately, so an immediate acting BOTOX. That gives us the potential and we'll have to see how those trials and those studies play out to actually restate the whole market. Because what's remarkable about BoNT/E is that we can see a two grade change in the glabellar lines in 8.5 hours. So nothing has ever worked even close to that fast. So we could even have a premium toxin that sits alongside BOTOX one day or a replacement product for just simply a better BOTOX, an immediate acting BOTOX. So it gives us a lot of flexibility and it's certainly very exciting as Roopal has highlighted the program that will begin here for the combination." }, { "speaker": "Operator", "text": "Next we'll go to the line of Courtney Breen from Bernstein. Please go ahead." }, { "speaker": "Courtney Breen", "text": "I wanted to look back to kind of part of the inventory and tariff conversation. We've been able to get some explicit answers from some of the peer companies. So just wanted to see if you were able to give us context as to whether you have enough inventory in the US to support products like Rinvoq, Botox, Vraylar or Humira for the rest of this year? And what about '26 and '27? And then the second question is just on the back of the BoNT/E question. Can you give us a little bit of context as to the pricing strategy for that kind of tester market? Because arguably kind of with a shorter directing time horizon, you have kind of less value. And so I'd love to see understand a little bit more about how you're thinking about placing these products together." }, { "speaker": "Rob Michael", "text": "Thank you. This is Rob. I'll take your first question and Jeff will take the second. Look, absent policy details, we're not going to get into speculating on the impact. I think you've known us to be a company that once we have a full understanding, we're very transparent and detailed. If you think about how we approach the Part D benefit redesign, as soon as we understood that impact, we were well in advance of the implementation of that discussing the impact on the company. But with tariffs, we don't have the policy details for the sectoral tariffs. So it's premature to speculate on the impact. And once we have that information, we'll communicate at the appropriate time." }, { "speaker": "Jeff Stewart", "text": "And regarding the pricing, obviously, it's since we just had the filing, it's premature. We go through a very rigorous pricing analysis as we would get closer to launch. And some of the considerations that we would look for, which is, obviously, I mentioned, the rotation of even more patients into the aesthetic practices brings a lot of value to those practices. And if you think about it, the lifetime value of those new patients is very meaningful. So that could play into dynamics ultimately how we price the BoNT/E once we ultimately make that decision sometime next year. Obviously, it does work shorter. So that might imply a different or lower price point to start the trial. But those are all considerations commercially that we will go through as we go through our launch readiness process over the course of the year to really optimize the impact of that product as we bring it to the market." }, { "speaker": "Operator", "text": "Next, we'll go to the line of Mohit Bansal from Wells Fargo. Please go ahead." }, { "speaker": "Mohit Bansal", "text": "Great. Thank you very much for taking my question and congrats on all the progress. I would like to understand a little bit more about your thought process around Gubra? And there have been couple of strategies. So of course, Novo is trying to combine GLP-1, but then there is a strategy or thought process that amylin could be a good agent as a standalone agent. So how are you thinking about this, especially with the longer acting version? Do you think there's a strategy to just use this as a single agent, especially among patients who cannot tolerate GLP-1? We'd love to get your thoughts there." }, { "speaker": "Roopal Thakkar", "text": "You. Mohit, it's Roopal. I'll take that. So thanks for highlighting some of the potential here. And I think we're thinking about it quite broadly. So as you stated, there's an opportunity here as a monotherapy. I think the way we think about it is tolerability is key. We see a number of dropouts, upwards of 30% even after a month of starting with the current set of assets. And then when we look over the course of the year, 60% to 70% of the patients will drop. Now there's a variety of factors that drive that discontinuation, but a key component is tolerability. So to have a monotherapy that's tolerable, that provides meaningful weight loss and potentially has other potential benefits. We've seen pre clinically preservation of muscle. We'll have to see if that plays out. But that could be another benefit in the long term. When this launches, we do anticipate many of the patients will have already been on assays that are available today. So it could serve as a nice follow on for folks that couldn't tolerate or came off for other reasons and want to go somewhere else. Now in terms of combinations, recall, when we did this deal, one thing we liked about it, was also the neutral pH of the formulation. So that could enable combinations with a variety of mechanisms. And as Rob stated, we continue to be interested in this space and we'll be, thinking about other potential opportunities, which could include combinations that may drive further weight loss. But key for us would be tolerability and durability of use." }, { "speaker": "Operator", "text": "Next we'll go to the line of Steve Scala from TD Cowen. Please go ahead." }, { "speaker": "Steve Scala", "text": "First of all, Bristol appears to think there's a path forward with co-benefit in adjuvant schizophrenia based on existing data. Where does AbbVie stand in its analysis of the future of emraclidine? For instance, has a path forward become more clear in the last few months? Secondly, I believe AbbVie has more plants in Ireland than any other company. Curious how you think about that as well as your overall OUS footprint. Do you cut back OUS to invest in the US? Or do you maintain the presence OUS, given the fact that in four years we could have a different administration with very different views? And related to this topic, yesterday, Roche said that their US plants are 50% utilized. I'm wondering if AbbVie would share a similar percentage." }, { "speaker": "Roopal Thakkar", "text": "I'll start with schizophrenia question. In terms of the recent data, it's difficult for us to comment. I think that will be a discussion between the company and health authorities regarding the utility of a failed study. That would be their discussion to have. How we look at emraclidine is that we do still see potential and we want to approach this in a stepwise manner. The first step would be to look to see if we can further dose escalate beyond what was previously studied. We saw variable PK levels in those patients from the pivotal studies, some were low and we think there's an opportunity to raise that. So a multiple ascending dose study will be initiated this year and that would apply to potentially monotherapy in schizophrenia as well as the adjunctive setting. So as that data rolls out and if we're able to utilize a higher dose, then we would again stepwise go forward into a Phase 2 setting to further derisk and apply our learnings in terms of trial design. And then if we see strong data there, which could be as a monotherapy, could be as an adjunct and also in neurodegeneration psychosis, then we would move into the Phase 3 setting. But I would say we still believe there's opportunity here." }, { "speaker": "Rob Michael", "text": "And then Steve, this is Rob. I'll take your question on the manufacturing footprint. As I mentioned in my remarks earlier, obviously, AbbVie, we have a very broad footprint. An important part of the strategy is to assure supply. And as I mentioned earlier, we went through a global pandemic without any supply disruptions and that strategy certainly paid off. We also have, I'd say, a very robust manufacturing network in the US I think what's been widely misunderstood is Skyrizi as an example, our largest product is made in the US and so when we look at our global footprint, we consider assurance of supply. As Scott mentioned earlier, clearly, obviously, tax has an influence on longer term, how you'd want to structure your supply chain. So certainly, I think with a more competitive tax policy, that sort of provide the appropriate incentives. We try to say we have obviously been ramping our volume considerably. You look at just the performance, just then think about biologics capacity and just the tremendous ramps we've seen for Skyrizi and Rinvoq. And so we stay ahead of the curve. We ensure that we are investing appropriately so we can keep up with that demand. I'd say the commercial team puts a lot of pressure on operations because they're performing so well, but operations stays ahead of the curve and invest appropriately. And so when we look at the investment, when I mentioned the greater than 10 billion investment, that takes into account in the US, that takes into account our volume growth that we expect in addition to new areas that we will invest. For example, peptide manufacturing as an example, as we enter that space, obviously now as we enter into obesity, it makes sense to add that capability. And so that will also be part of our supply chain strategy here. So that's the way we're thinking about it." }, { "speaker": "Operator", "text": "Next, we'll go to the line of Dave Risinger from Leerink Partners. Please go ahead." }, { "speaker": "Dave Risinger", "text": "Thanks very much, and congrats on the performance. So I have two questions, please. And they're both a bit high level. So the first is the industry is facing three major US Government risks, actions that are harming biopharma innovation, including actions significant FDA disruption and questioning of proven medical science, tariff threats and also the Trump administration's agenda to take prices down more than the Biden administration took down drug prices. So considering what appears to be a lack of appreciation in Washington of the benefits that the biopharmaceutical industry brings to Americans, can you please comment on how your executive team and Board are engaging differently today with Washington leadership to change the political agenda for the better? And then second, the press release mentions that guidance doesn't reflect any trade policy shifts, including pharmaceutical sector tariffs. Can you describe the potential trade policy shifts that you're considering or thinking of beyond tariffs?" }, { "speaker": "Rob Michael", "text": "So we're obviously not a member of pharma today, AbbVie, but we do continue to communicate with the association really to seek alignment on the most critical issues for the industry. Now AbbVie has a large government affairs organization that engages with lawmakers and the administration on our top policy priorities. And that includes tax reform. We've talked about that quite a bit today IRA, 340B and patient affordability in Medicare. And we have actually seen some positive results from that engagement. I mean, just this week, Congress released a report on 340B, included a recommendation that changed the law to more clearly define a patient, which should help address the abuse that is occurring with this program. I would also view the 340B policies in the latest executive order as a positive. I also previously mentioned that seeking to eliminate the pill penalty is a positive for innovation. So we will continue to work with lawmakers as we always have on policies that support a healthy US biopharma industry, continued innovation and patient affordability." }, { "speaker": "Roopal Thakkar", "text": "Regarding FDA interactions, I would say our teams have been in active discussions with the FDA on multiple programs across therapeutic areas, sometimes daily interactions and no signals of a slowdown. We are monitoring the situation closely. However, thus far, we haven't experienced any delays to our timelines." }, { "speaker": "Scott Reents", "text": "Just with respect to your question on my initial comments, it's just the trade policy shift we're talking about here is the potential pharmaceutical sector tariffs. It's not any additional things that we were contemplating. Certainly, the environment has some uncertainty out there, but specific to that comment we were speaking of the pharmaceutical sector tariffs." }, { "speaker": "Operator", "text": "Next we'll go to the line of Vamil Divan from Guggenheim Securities. Please go ahead." }, { "speaker": "Vamil Divan", "text": "Congrats on the quarter. One on the tariff discussion, I was curious about the aesthetic side. I know that pharmaceutical products are excluded from the current tariffs, but I thought products like your breast implants and Juvederm may be included right now. So curious if that's the case or not? And if it is, then why wouldn't there be some accounting for that in your new guidance? Maybe you just absorb it within your guidance? Any impact there? And then secondly, just on the aesthetics side, appreciate macro issues and all the macroeconomic pressures. But I'm just curious if you can comment on the market share dynamics. And is there any sort of share shifts that you're seeing either in toxins or fillers that may be impacting things beyond the macro component?" }, { "speaker": "Scott Reents", "text": "You are right. It's a great question regarding the current tariff rules that are in place. So in general, pharmaceutical products and our products are exempt from those similar to our peers. However, there is a couple of exceptions to that. And then specific to aesthetics, yes, there are some application of the rules to aesthetics. But we have absorbed the aesthetics impact in the guidance. And I would tell you it's modest. It's something approximately $30 million. So it's something fairly modest in the current rules and that's something that we have absorbed. So all of the guidance that I gave and reaffirmed today from the margin profiles and otherwise includes us absorbing that." }, { "speaker": "Jeff Stewart", "text": "So I'll go over your market share, give you some flavor on that. And I'll focus on our two big markets, the US and China. So as I mentioned, we were right on our guidance, right on our forecast for the first quarter. Remember, biggest impact there was the price because we reversed the Alley [ph] redesign from last year. And so when we looked at basically what happened from the fourth quarter to the first quarter, we know we took a market share hit in toxins in that fourth quarter. The good news is we've seen a complete reengagement in the basically the old Alley program with all of our accounts. So things are quite stable. And we actually had a one market share point gain back from where we were. Now we still have to gain some more share over the course of the year to come back to where we were pre the change to Alley. So we have lost year-over-year some share in toxins. In the US in filler, our share is very, very stable. We did not see a significant share impact on the filler side of the business. It's just been sort of a double digit market pressure there. Now in China, I'm quite pleased with the share performance. We've recently had a couple of significant approvals sequentially. We have the masseter approval for BOTOX, which is sort of in the lower face and jawline and also VOLUX, which is in Juvederm. So we've actually seen significant positive momentum in BOTOX share in China as well as positive share in filler. So it's a little variable across the board. Our big push will be to recover that share over the course of the year in the US toxin space. Hope that helps." }, { "speaker": "Operator", "text": "Next, we'll go to the line of Alexandria Hammond from Wolfe Research." }, { "speaker": "Alexandria Hammond", "text": "So Skyrizi and Rinvoq have consistently surpassed expectations, but we've been getting some questions on what might drive long term growth in I&I as it relates to these assets. Could you comment on when we should start seeing results from your Skyrizi and Rinvoq combination trials? And as a follow-up, what combination are you most excited about from a mechanistic perspective?" }, { "speaker": "Roopal Thakkar", "text": "I'll start on the Skyrizi question and the combinations. So the studies have initiated and we would anticipate next year starting to see early data readouts. And I would say we're excited about several of these mechanisms. We've utilized quite a bit of data that we've already collected to see what could be the best combination. And ultimately clinical data will guide that path, but we use biopsy data. The team has applied machine learning, to these data sets, spatial omics, a variety of different techniques. And the ones that we like are one, the alpha-4 beta-7. We think that could be a good combination. We like Lutikizumab, which is a bispecific to anti IL-1 alpha and importantly, IL-1 beta. We see that overexpression in patients with IBD that have failed other advanced therapies. We see something similar for TREM1, which would be another potential combination. And then we as I mentioned, we also have a longer acting an agent designed to be longer acting TL1A that could also be a very good fit with IL-23 like Skyrizi. The other thing we'll be doing since I mentioned a variety of different combinations is also capturing a number of biomarkers to see if there's any potential for pretreatment segmentation in the future consistent with what we do in oncology. Thus far no real successes, would say maybe there's hints in TL1A. But we're going to generate that data as well to see if there's opportunities to be able to use biomarkers in the future to segment these patients." }, { "speaker": "Scott Reents", "text": "I might add, when we look at Skyrizi and Rinvoq, certainly we're very pleased with the strong demand in the quarter and that led to us taking a combined $900 million of increased guidance for the year. We've also given the long term guidance in 2027, which we continue to feel very confident in. And also I think it's worthwhile to think about Rinvoq will have a second wave of indications towards the end of the decade. It will add a couple of billion dollars of sales. And we really see these two products even before the combination that Roopal spoke about as having a long runway of at least for at least the next eight years and we feel very good about that from that perspective." }, { "speaker": "Rob Michael", "text": "And this is Rob. I'll just to add on to that. I think from strategically, when we look at the company and we have this clear runway to growth for at least the next eight years, we can use that time and obviously we're looking to elevate the standard of care for immunology patients. We think these combination studies are a way to accomplish that. But we're going to use that time to and just as we did with Humira, we came up with Skyrizi and Rinvoq as a way to elevate the standard of care And that really launched into a second chapter of the company. Third chapter is going to be as you think about the growth beyond Skyrizi and Rinvoq. And we have the time and we're investing appropriately to identify what those drivers will be and within immunology and outside of it. I mean we have five key growth areas that we're very confident can drive growth. But obviously, you've now seen us enter the obesity space as we think about more sources of growth. We think that's also an opportunity. So we think the company is very well positioned to grow very nicely for at least the next eight years and then use that time and the investment that's available to grow beyond that." }, { "speaker": "Operator", "text": "Next, we'll go to the line of James Shin from Deutsche Bank. Please go ahead." }, { "speaker": "James Shin", "text": "I had a question on current immunology price volume dynamics. Specifically, is the low single digit headwind being realized? If so, is it somehow being blended where Humira is seeing outsized headwinds, while Skyrizi and Rinvoq are seeing tailwinds? Or is there some sort of co pay shift or is there a shift in co pay utilization year-over-year or sequentially?" }, { "speaker": "Scott Reents", "text": "James, it's Scott. So I think I'll start with Skyrizi and Rinvoq. If you look at the first quarter, those were both driven by strong demand. Now we've talked about pricing being slightly negative for those two products on a full year basis. We did see a little bit of favorable price in the quarter and that's just a gating issue. So in the quarter, probably two things. One, Jess organization continues to do a very good job of focusing on co pay utilization and effectively managing that. So we saw a little bit of benefit from co pay utilization. And then in addition, we had anticipated some channel mix changes later in the year, but those actually came to fruition a little bit earlier than we thought. And so those factors, I would say, along with some gating issues combined to being price favorability, but we still anticipate negative pricing headwinds on a full year basis. With respect to Humira, we talked about in the quarter and on the full year that there is a decrease in volume associated with share erosion as well as the compression of the overall molecule. So that volume is going to continue. I think you'll see that volume a little bit more pronounced throughout the year, but there certainly continues to be some price. You've got some unwinds of accruals that cause price impacts, but you also have just the changing of the rebating dynamics as we entered into a new contract year." }, { "speaker": "Operator", "text": "Next we'll go to the line of Geoff Meacham from Citibank. Please go ahead." }, { "speaker": "Geoff Meacham", "text": "Rob, had another one on policy. Wanted to get your perspective on PBM reform, which is often mentioned as highly likely to happen this year. What would you say are the main elements that you'd want to see in reform? And the second one on BD, is there a therapeutic area that you guys feel like you still have to add to? I wasn't sure if neuro remains one of the top priorities just post emeraclidine and it does seem like multiple shots on goal in metabolic disease is kind of the approach a lot of other biopharmers are taking, but I wanted to get your perspective." }, { "speaker": "Jeff Stewart", "text": "So on PBM reform, I think we're supportive of anything that helps with patient affordability. And so to the extent that that improves the dynamic on patient affordability that that is truly realized in their pockets, that's favorable. So we are supportive of the efforts there. But it's really all about making sure that we're addressing patient affordability. As it relates to business development, we obviously really like the five key growth areas that we have today. As I mentioned, those will certainly drive very strong growth for at least the next eight years. I think sometimes there's a misconception about neuroscience for AbbVie. It's more than just psychiatry. We have a very strong migraine franchise that's performing exceptionally well. In Parkinson's, we're seeing great results. And we've been in Parkinson's for a long time with Duopa. But as you think about the ramps we're seeing with BioLev, the innovation we've brought for those patients and then Tavapadon, came from Cerevel, we could really start to see our Parkinson's franchise emerge. And so when I think about neuroscience, I would think about it really in four segments. There's psychiatry, it's an important segment. There's migraine, there's Parkinson's and there's all of the neurodegeneration. And we obviously are investing in Alzheimer's. And so you just look at the business development activity since the beginning of last year in neuroscience, extended our discovery collaboration in psychiatry with Gedeon Richter, who discovered Vraylar. We added a novel mechanism for mood disorders with Gilgamesh. We acquired a next generation A beta antibody that's very promising for Alzheimer's from Aliada. And we're also investing in novel approaches for migraine disease. So we are actively investing in neuroscience. We obviously added obesity because we do think of ourselves as being a company that's going be very large in the next decade. So it doesn't hurt to have another source of growth. And we have evaluated various options beyond the five and we chose to move into obesity for a number of reasons. It's obviously an extremely attractive market, has high prevalence and plenty of headroom for growth. It's a market that has ample space for multiple players and new entrants. And I think we're also uniquely positioned with our aesthetics business to access that channel in addition to therapeutics. And importantly, and it's something we always focus on is where are there high areas of unmet need. As we think about our portfolio, that's really our strategy is to drive a remarkable impact for our patients by elevating standard of care. When we look at obesity, there's plenty of opportunity, whether it's reducing GI side effects, improving body composition, more consistent weight loss across patient types, longer lasting weight loss. And so as we evaluate that opportunity, we found the amylin class to be very attractive given it's the most validated non-GLP-1 mechanism for obesity and has very encouraging early data. And we believe the amylin opportunity with Gubra has the potential to deliver a differentiated asset. So we will continue investing in obesity. We'll continue investing in our five key growth areas. And we think that gives us the right mix to drive growth for long term." }, { "speaker": "Operator", "text": "Next, we'll go to the line of Tim Anderson from Bank of America." }, { "speaker": "Tim Anderson", "text": "I have a question on drug advertising. So AbbVie is the number one spender on this. It's hard to turn on TV without seeing something like a ad. And that says you see a very positive ROI from that level of spending. As you know, there's some occasional talk by the administration about limiting such advertising. So my question is, do you think there's any basis in reality for that? I know you'll say it shouldn't happen, but that doesn't mean that it will potentially happen. But then on obesity, as you noted, your amylin is long acting. Doesn't that imply that a really kind of key next part of the portfolio is a long acting GLP? Or are you not interested in the GLP-1 space at all?" }, { "speaker": "Jeff Stewart", "text": "And you're right. It's difficult to know if DTC reform would take place or what it might look like. I think you're right. We're very supportive of the First Amendment rights to be able to advertise. And obviously, we work with the FDA on every single claim that we make on television. And if there were to be a change, we would be able to pivot. I mean, we could shift our investment to disease awareness that could help us drive because we have such leading in-play share to continue to basically invest in the right way to consumers. We certainly could move to other channels because it's not really clear if it would just be mass media or etc. So certainly, the whole market would take a step back if that were to happen and our brands would still be very, very competitive in terms of our ability to pivot and toggle were that to happen. So difficult to predict, but we would be, of course, planning for any of those contingencies were they to take place." }, { "speaker": "Roopal Thakkar", "text": "Regarding different mechanisms. So as stated previously, we think there's opportunity as a monotherapy and also as a potential combination. Would say we haven't ruled out any particular mechanism that we would combine with. The other thing to mention, I think I already stated this, but we do have a neutral pH in the current formulation for 295. So that potentially makes it more amenable to combinations. But mechanisms that you mentioned and potentially others, would say, are on the table for us." }, { "speaker": "Operator", "text": "Next, we'll go to the line of Trung Huynh from UBS." }, { "speaker": "Trung Huynh", "text": "I've got two questions if I can. So first, just very quickly, you did touch on the pricing dynamics with Skyrizi and Rinvoq. But did the strong performance include any notable onetime contributions, inventory build or pull forward effects? And then second, similar to Vamil's aesthetics question, but China reciprocal tariffs have been enacted. Is that contemplated in your guide? And is that material to your aesthetics business? And then just I know it's early days, but are you seeing any shifts in demand there?" }, { "speaker": "Scott Reents", "text": "So with respect to Skyrizi and Rinvoq, I would say the one item that I would point to, again, was strong demand overall. The one thing that also helped the growth in the quarter was with respect to the retailer destocking. So in the past, we've talked about there's some retail inventory buildup as a form of price speculation in the fourth quarter. I talked about in the fourth quarter call that we didn't see a lot of that. And then that was again confirmed, we did not see there was no unwind like there has been in prior year. So there was a year-over-year benefit from the lack of destocking from the retail buildup in the first quarter. But again, that was fairly modest. When we talk about our overall growth globally, 72% operationally, the demand was really in the 60s. And so you just saw a small portion from that retail destocking. With respect to the China tariff, yes, you're right. There is some impact for aesthetics in those products in those numbers. But again, that impact is fairly modest. We've contemplated that in our guidance. And so I would say overall, the existing tariffs, you're talking about $30 million approximately globally and a decent component of that is with respect to the aesthetics business. And then maybe, I don't know if Jeff would like to comment on, I think you'd ask if there's if we've seen demand changes in China?" }, { "speaker": "Jeff Stewart", "text": "No, we haven't over the last 30 days. I mean, things are things change quickly. But as I mentioned, if we at the quarter, we've been encouraged by the share growth we've seen in China based on the recent approvals for both the toxin and the filler category." }, { "speaker": "Operator", "text": "And for our final question, we'll go to the line of Evan Seigerman from BMO Capital Markets." }, { "speaker": "Unidentified Analyst", "text": "This is Connor McKay [ph] on for Evan. Thanks for taking our question and congrats on a great quarter. Vyalev and Elahere were two products that outside of your I&I business came in sort of meaningfully ahead of analyst expectations. Can you maybe walk us through what's driving the strength for each of those?" }, { "speaker": "Jeff Stewart", "text": "Certainly as I mentioned in the prepared remark and Rob as well, Vyalev is emerging as a very, very important product. And we communicated certainly that it could continue to exceed expectations. So it's quite remarkable. We continue to see strong uptake in Japan, across Europe. And while we're only in the commercial market, which is about 30% of the market in the US, because we're still waiting on the full Medicare reimbursement, the market feedback is exceptional. I mean this is a really amazing product to help patients sleep through the night, control the movement disorders. It's unlike Duopa, it lasts for 24 hours. It's a more simple subcu injection versus surgery that you might get. So it's playing out exactly as we had hoped. And so you're just seeing some strength of that in the quarter. And that's also why we remarked that we're excited to bring Tavapadon, which is also showing some very nice data here and we're getting ready for the file to start to really build out a more meaningful Parkinson's category. And then Elahere, we continue to see nice uptake, very unique product. Obviously, it's got a 30% approval in overall survival. It's well tolerated non-chemo. So the US business continues to perform very well. And we are starting to see the international launches. We've pulled forward significant international launches from the time that we had done the deal with ImmunoGen, and we're going to start to see those international launches ramp here over the next several quarters. So that gives some sense over that brand as well." }, { "speaker": "Rob Michael", "text": "I'm glad you asked a question about Elahere because oncology doesn't get enough attention for the company. Elahere came to us through the ImmunoGen acquisition. It was a very successful acquisition. It basically combined their ADC capabilities with ours. And now you're starting to see the AbbVie internally discovered ADCs emerge. We've talked about Teliso-V. We're very excited about tmAb A-706. You think about long term growth drivers for AbbVie, oncology with that emerging pipeline and Roopal and I both mentioned 383, the bispecific for multiple myeloma. We have, I think, a very exciting emerging oncology pipeline that could be an important growth driver for the company. So I appreciate the specific question about Elahere." }, { "speaker": "Liz Shea", "text": "And that concludes today's conference call. If you'd like to listen to a replay of the call, please visit our website at investors.abbvie.com. Thanks again for joining us." }, { "speaker": "Operator", "text": "Thank you all for joining the AbbVie first quarter 2025 earnings conference call. That concludes today's conference. Please disconnect at this time, and we hope you have a wonderful rest of your day." } ]	AbbVie Inc.	141,885,706
ABNB	4	2,020	2021-02-25 17:00:00	Operator: Good afternoon and thank you for joining Airbnb’s Earnings Conference Call for the Fourth Quarter of Fiscal 2020. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb’s website following this call. I will now hand the call over to Ian Lee, Airbnb’s Head of Investor Relations. Please go ahead. Ian Lee: Thank you. Good afternoon, and welcome to Airbnb’s fourth quarter of fiscal 2020 earnings call. On the call today, we have Airbnb’s Co-Founder and CEO, Brian Chesky; and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our fourth quarter of fiscal 2020. These items were also posted on the Investor Relations session of Airbnb’s website. During the call, we’ll make brief opening remarks and then spend the remaining time on Q&A. Before I turn it over to Brian, I’d like to remind everyone that we’ll be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described on the forward-looking statements in our shareholder letter and our perspectives filed with the SEC on December 11, 2020. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We provided reconciliation for the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be substitute for our GAAP results. And with that, I’ll pass the call to Brian. Brian Chesky: Thank you very much, Ian, and thank you all for joining today. I am excited to share our results for the first time as a public company. I want to start by acknowledging that we are still in a pandemic and a lot of people are hurting. So, we know how lucky we are to be in the position we’re in. Now, before I go into a result, I want to share a theme that we’ll run through each of our earnings calls. When we started Airbnb, it was about more than just travel. In 2007, my roommate, Joe and I, played three airbeds one weekend and turned our apartment into an airbed and breakfast. We hosted three guests that weekend, Michael, Kate, and Amol. And in doing so became the first host. Our guests arrived as strangers, but they left as our friends. And the connections we made that weekend made us realize maybe, there’s a bigger idea here. Since then, we’ve grown from two hosts to San Francisco to 4 million hosts all around the world. The idea of Airbnb is only possible, because of host. Without host, you’re an outsider in the place that you visit. without hosts, you have nowhere to stay, but crowded tourist districts or resort. A great host does more than share their space. They provide a deeper connection to the places you visited, the people who live there, and they set the stage for you to be able to spend meaningful time, but the people who travel it. So this is why 14 years later, hosting is still at the center of Airbnb. As the world continues to change, people’s fundamental need for connection and belonging or not. This is what will remain focused on day-in and day-out, quarter-after-quarter. With that, let me talk about our results. 2020 was a year when nearly everything changed, the way we live, the way we work and the way we travel. Airbnb changed as well. We started 2020 by preparing for IPO, only to have to put on hold once the world went into lockdown. But then in the face of the biggest prices in the travel industry has ever seen, our business proved to be resilient and our model was able to adapt. Through the crisis, we also sharpened our focus. We made many difficult decisions while staying true to our core principles that we became a stronger company as a result, and we succeeded in going public after all. Now, despite a difficult year, we are encouraged by our resilient business performance and the depths of the pandemic, we have forecasted that revenue in 2020 could be less than half of 2019 levels. Yes. We delivered $3.4 billion, a full-year revenue in 2020, down only 30% compared to the year earlier. In Q4, our revenue of $859 million was down only 22% year-over-year, despite the second wave of COVID cases and widespread lockdowns. In addition to this top-line resilience, we also demonstrated focus and discipline to protect our profitability. Our adjusted EBITDA in 2020 was slightly better than 2019 and this was despite revenue being down $1.4 billion. Our adjusted EBITDA in Q4 2020 with nearly $250 million better than Q4 2019. This was despite revenue in Q4 2020 being $250 million lower than a year earlier. So, we’re able to achieve these results, because of the adaptability of our business model, and because of our focus and financial discipline. We believe these two factors set us up well for the coming travel rebound and travel is coming back nearly a year after lockdowns began, we believe people are yearning for what’s been taken away from them, travel and human connection. When travel returned, it will be about connection. People will want to spend meaningful time with their family and friends and because of this, as restrictions lift and borders begin to open, we expect there will be a significant travel rebound. So in 2021, our single priority is to prepare for the coming travel rebound. to do this, what we’re going to do is perfect the entire end-to-end experience of our core service. First, we’re going to educate the world about what makes Airbnb different hosting. through our marketing and communications, we will educate guests that being hosted is a better way to travel. In addition, we will inspire more people to become hosts. Next, we will recruit more hosts and set them up for success. Once you’ve educated people about hosting, we’ll simplify the onboarding process. So, it’s easier to for hosts to get started, and we are improving our tools and support to help them succeed. Third, to make it easier for guests to find the perfect stay, we are simplifying every part of the guest experience as well as improving our search functionality to support more flexible travel patterns. And finally, whenever our hosts or guests need us, we need to deliver world-class service. So, we’re actively fixing product issues that drive community contacts, we’re scaling our operations to meet the demand and continually enhancing our service? So that is our plan for 2021, educate the world about hosting, recruit more hosts and set them up for success, simplify the guest experience and deliver world-class service. I want to end by just highlighting two things that we launched this week that I’m really proud of. On Monday, we launched our first large scale marketing campaign in five years, made possible by host. Even though the brand of Airbnb is mainstream, the idea of hosting is not yet. Our goal with this campaign is to make a long-term investment in educating the world about our hosts. This campaign will help our guests to understand the benefits of being hosted and how this is unique to Airbnb. And it will create more awareness around the idea of becoming a host by making it more mainstream and aspirational. by using real photos of real guests on real Airbnb trips, this campaign shows what the real experience of being hosted is like. And I think it speaks directly to the need for connection that people all over the world are feeling after nearly a year of isolation. So that is made possible by hosts. And second finally, flexible dates. on Tuesday, we launched a new feature that we call flexible date. today, more people are working from home and that needs more flexibility about when and where they travel. Because of this, we’re seeing a shift in how people search on Airbnb. in 2021 to-date, almost 40% of people searching on Airbnb have been flexible in terms of their date or their location of their stay. This is a huge change in the search paradigm and travel. flexible date allows guests to search for homes in a whole new way. Instead of having to select the exact dates for a trip, guests are able to do broader searches. Now, you can search for a weekend getaway, a weeklong vacation, or even a month long stay sometimes the next few months. This allows our guests to browse more options while being flexible on the exact dates of their trip and we think this will be a very popular feature coming this travel season. So that’s our plan for this year to prepare for the coming travel rebound. We’re excited about the year ahead. And with that, I look forward to answering your questions today. Operator: [Operator Instructions] And your first question comes from Brian Nowak with Morgan Stanley. Brian Nowak: Thanks for taking my questions. I have two. The first one, Brian, I think you brought on quite a few new users to the platform throughout 2020. Is curious, are you seeing anything different from a retention perspective or any differences in user behavior of those people as 2021 booking season has started? And the second one, I think in the letter, you talk about 1Q 2021 bookings being above 1Q 2020. Are there any more detail on sort of which regions are driving that or is it pretty broad based with people to sort of looking forward to travel in the back half around the globe? Thanks. Brian Chesky: Yes. Thank you for asking the questions and I’ll start and Dave, you can obviously feel free to elaborate. I’ll just – I’ll start with the second question. We are seeing a lot of resiliency in certain geographies, especially in North America and Europe. What we’ve generally found is that domestic travel globally is pretty strong and that the primary challenge is cross border travel in addition to of course, business travel, but we’re not as affected by business travel reductions. And so countries with really strong domestic travel are seeing more resilience than countries that are not as – that are not as affected by the cross border travel. So that’s the first thing that we’re seeing. And I’m very encouraged by it. now, as far as retention of users that we got last year, we are seeing continued strong retention. There’s no major changes. I think the retention of our user base has historically been strong and it was very strong last year. I’ll just highlight a couple of things. One of the reasons I think our retention is strong is, because people are finding many new use cases to use Airbnb in addition to all the old rates that use that. So, even though borders were closed and international travel is reduced, many people found longer-term stays in Airbnb, because they were working from home. They were flexible. Many people want to get in cars and travel nearby, staying in a local community. And so we’re able to seek that demand as well. And so there’s a number of areas that I think that provide a lot of resiliency for our model. I think it’s inherently adaptable and as our model adapts, that means retention increases, because there are more uses for our guests. Brian Nowak: Great. Thanks, Brian. Brian Chesky: Thank you. Operator: And your next question comes from Heath Terry with Goldman Sachs. Heath Terry: Great, thanks. Brian, as we do look out to the recovery later this year and beyond, I’d be interested in what you’re seeing so far in terms of a more flexible workforce using Airbnb for both sides of their travel, meaning they use Airbnb to monetize their home in one location to fund a longer-term stay somewhere else and how you see the size of that opportunity as more mobility becomes possible for a workforce that’s got the taste for it. Brian Chesky: Yes, that’s a really good question. I want to really underscore this point, the way – let me kind of – let me say this, travel will come back, but when travel comes back, we believe it’s going to look different than before. We don’t think we’re ever going back to the world of travel in 2019, it’s going to change and it’s going to be different. And probably, the biggest difference we’ve seen is flexibility. A world of Zoom is a world, where more people can work from home and a world, where more people have the flexibility of work from home. We’re seeing more people say they can work for many home on Airbnb. And so we’ve seen a number of new use cases. People are living more nomadically. Some people are taking longer-term stays, one or two months at a time in our Airbnb. People are taking extended three, four-day weekends. So, like many weekends in a row, because they don’t have to be in the physical office. And many people are snowboarding, they’re like essentially living in somewhere cold and they want to go somewhere warm. They have the flexibility to do that. The other thing you’ve mentioned is new people hosting. One of the things we found is that many people like to start hosting at the beginning of a life change. Maybe, somebody has kids and the kids move out of the house. They got some extra bedrooms. Maybe, they were recently unemployed. They recently lost their job, or they’re now living more remotely and their home is more available. So, one of the things that we’re really excited about is as we see more flexibility and more week or month long stays, there’s more empty homes people are leaving behind. And our largest source of hosts in 2019 were prior guests, 23% of our hosts in 2019 were guests first. As we think, there’s big opportunities for us to continue to convert our guests to become hosts. And this new world of flexibility means more empty homes that can be shared. Heath Terry: Thank you very much, Brian. Brian Chesky: Thank you. Operator: And your next question comes from Lloyd Walmsley with Deutsche Bank. Lloyd Walmsley: Well, thanks for taking the question. two, if I can. first, Brian, you guys talked about made possible by host. Can you just talk a little bit more broadly about the supply acquisition strategy and what you’re doing kind of near-term, the buildup supply in markets close to cities, as well as longer-term to continue to sustain your growth. And is there an opportunity to get more productivity out of existing supplier will most of the long-term growth come from new supply. And then the second question as you guys prepare for the rebound and travel, how are you approaching performance marketing differently in terms of maybe, scale and expected ROIs in 2021 versus say 2019 and 2020 that the shareholder letter talks about materially increasing marketing efficiency. So, if you could explain that a little bit more, that would be great. Thanks. Brian Chesky: Yes. these are two really good questions. Thank you for them. I’ll start with supply, then I’ll go to performance marketing. on supply, let’s just start framing it. We have about four million hosts on Airbnb. 90% of our hosts are individual hosts. These are everyday people, typically school teachers, healthcare workers, students, 55% of them are women. And the vast majority of them come direct to Airbnb. So most of our hosts, we don’t have to acquire per se. They come organically, often because they’ve heard of Airbnb. Their friends have recommended it to them, who are also hosts for – because as I mentioned before, 23% of our hosts in 2019 were prior guests. The second point I’d make is our model is pretty adaptable. So, we have hosts [ph] in 100,000 communities. One of the things we’re seeing is a change of travel patterns right now in the pandemic. people aren’t just looking to go to the same 20 cities or 30 cities. They now want to get in cars and travel the local communities nearby. That means a travel in a sense is being redistributed to thousands of communities. This helps us smooth out any supply demand gaps that we might have, but we do have a number of levers to add supply. Let me start by saying yes, our existing hosts rent their homes only occasionally. So, we see huge opportunities for productivity. The average host on Airbnb makes like under $10,000 a year and they do that by renting out just occasionally. So, we think there’s a huge opportunity to increase productivity of the hosts that we already have. That being said, we also think now is the time that people are interested in hosting more than ever before. Airbnb – we started Airbnb in a recession and during the recession of 2008; people were losing their jobs, losing their homes and many people turned to Airbnb for income. We think now hosting is as appealing as ever before, given the economic circumstances happening in this country and around the world. And so we’re doing a few things, made possible by host is a global campaign it’s as I said, our first global campaign in five years. And we think if this campaign successful, this can absolutely mainstream hosting and bring a lot of people to our platform. In addition, we’re doing a companion campaign called made possible by hosting. And that’s going to talk about all the benefits of hosting, and we’re going to really target people that are going through a life transition. As I said, people that just renovated their home, bought a new house, lost their job. Maybe, they’re retired, maybe, their kids moved out of the house. So, we think this is a really great way to be able to target and recruit more hosts. Once they come to Airbnb, we want to make it more – we want to increase the conversion rate of people come to Airbnb and then listing, an active listing on Airbnb. conversion rates the name of the game, one of the things we’ve learned about conversion rate is easier to make something. And the more support you offer to somebody, the more likely they’re going to get through the conversion funnel. So, we’re reducing the steps. We’re going to allow you to become a host in less than 10 minutes. And if you need help, you can call customer service or we’re going to match you to existing hosts to be able to support you along this journey. If we do these things, I think we’ll be able to add a significant amount of more hosts, because the average person around the world that they knew that they can make some extra money by meeting interesting people. A lot more people would do it. Now, the next question is about marketing performance marketing. And let me just also take a step back and talk a little bit more about our marketing strategy, because I think this is very important to the corporate story. In 2019, we had elevated spending of performance marketing and then 2020 occurred, our business dropped by 80% in eight weeks. And we pulled back all marketing, including performance marketing. But something remarkable happened even before we started resuming our marketing spend, our traffic levels came back to 95% of the traffic levels of 2019 without any marketing spend. And what this revealed is that our brand is inherently strong. It’s a noun and verb in pop culture. And so we don’t intend to ever against, then the amount of money as a percentage of revenue on marketing in the future as we did in 2019. in Q4, 90% of our – more than 90% of our traffic was direct or unpaid. And we think that will continue in the future. our marketing plan; therefore, our strategy is the following, a full funnel marketing approach. The top of the funnel was actually PR. we got more than 0.5 million articles in last year in 2020. And we had as much share of voice as most of the other major travel companies combined. And that’s how we really built the brand of Airbnb more than anything; probably with PR. second is brand marketing, we think of brand marketing as education and investment. And so made possible by hosting is by hosts is an investment in hosting. and then performance marketing, we don’t treat performance marketing like other travel companies. We think of it as like a laser. It’s not a way to arbitrage users. It’s a way to laser in on where we want to acquire guests or hosts and key markets, where we have a supplier demand mismatch, but make no mistake our efficiencies, we’re going to hold to a lot higher level than 2019 or years prior. I don’t know if Dave, you want to share anything else about that? Dave Stephenson: Yes, I think you’ve covered really well. I’ll just round it out by saying that we’ll continue to use performance marketing, where it makes economic sense to do so. It’s absolutely important level and we’ll absolutely continue to do it. We’re just going to have a higher rate of return expectation on the performance marketing spend and we’ll return to the levels that we saw in 2019. Our sales and marketing expenses as a percentage of revenue in 2021 will be below that of 2019. The absolute dollars in 2021 will be below that of 2019. And I guess I’ll run this out by saying that, because of the marketing campaign that made possible by hosts as launching now and in advance of the summer travel season, you’re going to see sales and marketing as a percentage of revenue higher than the first half of this year that you are in the second half. Lloyd Walmsley: All right. Very helpful. Thank you. Operator: And your next question comes from Justin Post with bank of America. Justin Post: Great, thank you. A couple of questions; obviously, a lot of cost discipline this year to get too close to break even by Q4, which is pretty remarkable. How are you thinking about balancing that? And do you have any margin targets in mind as we think about modeling 2021? And then secondly, very interesting and I’m sure you have a lot of incentives to get more hosts. Do you think there’s a lot of latent post offerings that will come online once people get through the health issues? I guess another way of asking, do you think a lot of hosts have pulled their listings and we’ll be back as soon as they feel more comfortable. Thank you. Brian Chesky: Thank you very much, Justin. Why don’t I start? And then I’ll let Dave elaborate. Let me just start at a high level about cost discipline. We would have, of course, like everyone else never asked for last year’s crisis. but I do think that crisis made us a much better company, because the first thing that happened is we got more disciplined. when our business was precipitously falling, we knew we couldn’t focus on everything. So, we focused on what was most special about Airbnb. That was our individual post. It means we scaled back numerous investments, but something else Justin we found was as we focused, what it really meant was, we’re taking our very best people and putting on the most important problem. And as we did that, and not only saved money actually drove more growth. I think that in addition to the inherent adaptability remodel does explain why we’re able to see a fairly strong recovery in the back half of last year. I’ll let Dave talk a little bit more about margin targets, but I’ll just also get to host and I’ll hand over to dave. on latent host offering and/or this question of did hosts pull back and do they intend to host again? What we know is this. In any given day, we have a certain number of hosts active and live in the platform. We know that when hosts deactivate, it’s often not permanent, it’s because they’re taking a break from hosting and we know many hosts are intending to host once again. And so one of the things we’re doing as I did a Q&A town hall with thousands of hosts. And I basically said to them together, we have to be ready and we want to be prepared for this travel season. And our goal to collectively with our hosts is to be ready before the rebound happens. We’d rather be early than late. And so we do expect a lot of hosts to be ready. And one of the dynamics we basically found is one of the nice things about our business is as a host gets more booked up, they often either expand by adding a listing or more likely they’ll tell their friends, who also become hosts. So with occupancy rise, it does have a nice, nice benefit, where word gets out, that people are making money. And if we can fulfill that with a couple of minutes out with our brand campaign, I think it could yield quite a few gains. Dave, do you want to cover either of these? Dave Stephenson: Yes. I’ll just round it out by saying; the overall number of active listening to experiences was relatively stable in Q4 relative to Q3 at about $5.6 million. So we actually haven’t seen a substantial amount of deactivations, it’s been very stable and for all the reasons that Brian said earlier, we’re optimistic that we’ll continue to be adding new hosts in the future, just given all of the tailwinds of the kind of macroeconomic factors that we have going around the world. As far as margin targets, one of the things we’re really proud of is the progress we’ve made on our profitability efficiency over 2020, right. We’ve made substantial reductions in our fixed costs. We will not be having to add back fixed costs to support a business that will again, approach 2019 levels and beyond. And so our fixed cost discipline is great and we’ll continue. And then we saw really great improvement in our variable cost efficiency across the P&L. And when you actually removed in Q4, remove the one-time impacts and stock-based compensation relative to the IPO, or our costs are down in every category across our P&L. And it’s that discipline at very low expenses, things like cost of payments, community support expenses, infrastructure expenses, all the way down that we’re proud of. And what we would like to – expect to achieve over time is 30% EBITDA margins or greater. And this has just accelerated our path towards those long-term margin targets. I’d love to give you on specific targets for 2021, but it’s just too hard to know what our revenue is going to be. And so therefore kind of a flow through to profitability, we’re seeing that our revenue rates in Q1 will be better than the revenue growth rates in Q4. But we just don’t have a lot of visibility in the back half of the year to give you a lot of guidance on profitability right now. Justin Post: Great. Thank you. Operator: And your next question comes from Jed Kelly with Oppenheimer. Jed Kelly: Great. Thanks for taking my question. two if I may. just one, can you provide any color on how your bookings for summer travel are trending relative to this time last year. and then Brian, what do you think the Olympics could do just to get people’s confidence in traveling, especially around international travel? Thank you. Brian Chesky: Thank you for the question. Dave maybe, you can take summer travel and I’ll take Olympics. Dave Stephenson: Sure. Yes. I don’t have a lot of color that I can give you on summer travel bookings. I mean, one thing, which I can say is that people are booking in shorter windows. So, the greatest growth we’re seeing in the business right now are booking windows in less than 30 days and typically, kind of pre-COVID, you’re right. We’d be seeing much more of the bookings now it had for the summer travel season, and that is delayed relative to kind of historic patterns. We’re seeing some bright spots as in a little bit of a bright spot in the UK, dragging some summer travel bookings here in Q1. but I really don’t have a more color that I can give to you on summer expectations. We just know that we want to be ready for the travel rebound when it occurs. We just don’t know exactly when it will occur. Brian Chesky: And then on the question of the Olympics, just we are – we are a sponsor of the Olympics and if the Olympics has fans, I think, it would be a great boon to travel. but I don’t think it’s clear this year in Tokyo that we’ll have fans. So, we’ll have to see how that goes. So, I can just comment more broadly about what we’re seeing with travel demand. We did a survey recently of American travelers and we found a couple of things. The first thing we found is that people missed traveling, that’s not surprising, but we also found that people missed traveling more than any other out-of-home activity. People missed traveling more in America than going to a restaurant, going to sports, live music or other activities, but they don’t miss all kinds of traveling. Generally, people don’t miss traveling for business as much, and they generally don’t miss mass tourism. They’re generally not missing standing in a line with selfie sticks in front of a landmark for example, or going to a crowded lobby. the kind of travel that people missed is spending meaningful time that the people they care about, their friends and their families. And so we found that the majority of people we surveyed said, they do plan to travel this year. They will do it as soon as they feel safe to do so. So obviously, that’s going to be pegged a little bit to the health crisis. but we see a lot of enthusiasm and I think the kind of travel that we offer, allows people to be able to connect with our friends and family, because our home is a great way to be able to gather and spend a meaningful quality time and that is very much what we’re focused on. We think this is a huge window of opportunity, this travel rebound, and I think it’s going to be disproportionately our travel rebound that’s not going to be cross border. It’s not going to be business travel. People want to get in cars, they’re going to travel to smaller communities, and they’re also going to be staying in home. So, we are prepared or we’re going to be prepared for that. Jed Kelly: Thank you. Operator: And your next question comes from Brent Thill with Jefferies. Brent Thill: Thanks, Brian. Just if you could comment on the experience business and what you’re seeing there and how important that is to the overall strategy right now. And also, as we come back through this recovery, can you just talk to the other element of the stay, which could be the hotel, and I know you’ve invested there. How important will that be as we go back to the upswing of this travel cycle? Brian Chesky: Yes. Thanks for questioning, Brent. So yes, I’ll talk about experiences and hotels. So with experiences, this is a very important product for us. Experiences are one of the purest manifestations of hosting and connection that we have. I mean, in a sense that is the entire product. You have an experience with a host when you connect with other guests. So, this is really important to us. And what we found statistically is that guests on Airbnb actually life experiences, statistically, more than home. For example, more guests leave a five star review after their experience than they do after a home, as a percentage of – after the reservations. So, we thought last year was going to be a breakout year for experiences, but the opposite happened. We had to put the product on hold with social distancing. So, very quickly pivoted the product to create online experiences, because people couldn’t gather in person. We created one hour activities that you could do from your computer. These were different than Instagram, like videos or YouTube videos. These are actually interactive. So, you actually can connect with a host and you can meet other guests and people are using these, because they’re feeling more isolated and they want to meet other people. And I think as the world starts opening back up, I think we’re very bullish on experiences over the coming years, because when people travel, they’re going to want to do something interesting. And I don’t think they’re all going to desire to go back to getting on double-decker buses and waiting in line and crowded lobbies, or landmarks. they’re going to want to do really interesting activities and I think that’s what our hosts have to offer. And then for people in their own city, I think, you can only sit at home and watch so many shows on Netflix. People will want to get out of their home. And if they want to alternate to a restaurant, I think experiences are a great thing to do in their own city. So, the short answer is that we’re very focused on it. We had to take a bit of a pause last year, but they’re coming back and we’re going to be focused on it, because it’s just another way of hosting. And this is one of many ways that we’re going to continue to allow hosts, to be able to share the world with others. Now, with regards to hotels, this is a little bit of a different story. We made an acquisition of hotel tonight. I’m very proud of the acquisition. I’m very glad we made it. It’s a great team, a great app. It’s one of the most loved hotel booking apps in the world. And we were investing quite heavily in this product. Now, when the crisis happened, we had to scale back certain investments. And one of the investments we scaled back was our investment in hotels, but we ain’t scale back entirely. We still are investing in hotels, just not as much as before. The way we think of hotels is the way essentially we think about property managers on Airbnb. Airbnb is a community of 4 million hosts; 90% are individuals, and they are who we prioritize, that’s where our guests speak, our guests want something that’s one of a kind, and this is typically offered by our individual hosts. But that being said, we never want Airbnb guests to come to Airbnb and not be able to find something they’re looking for. So, we think that hotels in addition to property, managers are really important for our strategy instilling in our network apps. Again, we don’t want anyone to come to Airbnb and beat, because they couldn’t find a place to stay. So, hotels are important. And as we know, most hotels around the world are below 50% occupancy. So, we know they’re in need of demand and Airbnb certainly, can provide that demand for them. So that’s what we’re doing with experiences and hotels, both part of our strategy in the future. Brent Thill: Thank you. Operator: And your next question comes from Colin Sebastian with Baird. Colin Sebastian: Great, thanks and good afternoon. A couple of questions from me, really follow-ups. But given some of the expense rationalization last year, how confident are you at this point that you have the team and the infrastructure in place to handle more rapid rebound and travel if that’s what does transpire over the course of the year? And then I know this may be a little bit difficult to answer at this point. You addressed it a little bit earlier, but some of the newer use cases such as long-term stays in shorter trips, do you have a view into whether those can be sustainable or incremental over what were normal use cases pre-pandemic? Thank you. Brian Chesky: Yes. Really, good question. So, let me start with being able to handle the rebound in the face of reductions. And then I’ll go to new use cases, and Dave will fill in as needed. With regards to the reductions, a lot of the reductions have just made us significantly more efficient and be able to handle the rebound. One of the big changes we made – or really, there were two big changes we made. The first big change we made is that we got much more focused. So, it means we scaled back a lot of new investment areas and put our very best people on only a few problems, especially our core of hosting. But the other thing we did is because of that we shifted from a divisional business unit structure to a functional organization. And this reduced lots of people case with the function, instead of having multiple marketing departments, most multiple product departments, multiple operations group, we now have one technology group, one marketing group, one operations group, and this made us not only more efficient being able to turn on a dime much more quickly. So, we are preparing for this next rebound. I think that we are much more efficient. Those reductions will be able to sustain, the one group that that’s up the scale a little more linearly, is customer service. We are scaling that ahead of demand, but making a mistake, even that is going to be significantly more efficient. We hired a woman, who running our operations name Tara Bunch. She ran all customer service at Apple for many years, and she has built a great team, including new leaders for trust and community support. And we are focused on improving efficiency by reducing contact rates. We are very, very focused on reducing the need for people to call us or message us, because they have a problem. If they do have to call us or message us, we are going to focus on making our agents significantly more efficient. So that’s a really big focus area on the reductions. Now, on the new use cases, the short answer is yes, we do believe these new use cases are sustainable. Though we can’t predict the future, we do know a few things to be true. Many of the reasons why people are using Airbnb for new use cases is because technology has digitized so much of the world that we can now do things remotely, we couldn’t do before. So what this means is, because more people can work from home on a laptop, that means they can work out of any home. And so we think in the future, fewer people are going to be tethered to a permanent destination. And even people who are going to take more three-day weekends, they might be more likely to go away for the summer. And we think that in addition to the kind of short-term state, these medium length space a couple of weeks, or even a couple of months, we think these are going to be a really big part of the story. I guess the headline is this; people aren’t just traveling on and live on Airbnb. They’re now living on Airbnb. And I think that’s here to stay. Dave, I’ll hand it over to you. Dave Stephenson: Yes. I’ll keep the things at round out is that we’re – I’m very happy with the underlying progress we’ve made in our operations support area, in terms of improving the efficiency there. We are making some investments in it in 2021, that’s going to mask some of the underlying progress that we get to see internally. And the other thing that was happening as Brian said, we’re making sure that we’re ready for the rebound when it occurs, which means that we are going to be investing slightly more earlier in the year to make sure that we have all the support ready for a return to travel and being optimistic that it will return soon. And so with relatively more revenue in the first half than the second half, our operations support expenses, as a percent of revenue will be – sorry, it will be a little bit higher in the first half and the second half. Colin Sebastian: Great, thank you. Operator: And your next question comes from Michael Graham with Canaccord Genuity. Your line is open. please go ahead. Michael Graham: Oh, sorry. I was on mute. Pardon me. Two quick questions; one, on pricing, you mentioned that your average daily rate was up in the shareholder letter, because of mix shift towards North America partially, but as demand is really robust in some of these areas, can you just talk about how hosts are reacting in terms of setting price and are you seeing them get more opportunistic? And then the other one I wanted to ask was, you talked a little bit about the steps you’re taking to simplify host onboarding. Can you just talk about the steps you’re also taking to simplify that guest experience? Brian Chesky: Thank you, Michael. Why don’t I start with simplifying the guest experience and Dave, I can hand it over to you for pricing. So, yes. As we said, to prepare for this travel rebound this summer, we’re doing four things. We’re going to educate the world and Airbnb, what makes them be different, that’s hosting. We’re going to simplify – we’re going to recruit more hosts. We’re going to simplify the guest experience. So, we’re going to deliver world-class service. So, let’s talk about your question simplifying the guest experience. One of the things we know is that as we make something easier, the conversion rate goes up. And so we have a goal that can – to make it even easier to be able to book on Airbnb. So, we’re going to be reducing steps – significantly reducing steps to be able to log in, sign on, get verified, go through the key steps you need to be able to do and be able to find a place on Airbnb. So, we’re looking at the entire end-to-end experience, and we’re going to be doing a bit of a redesign of it over the coming months. I think this is going to be great the next travel season. But the other thing we’re doing, and I want to highlight this, because this is something that I highlight in the very beginning is we’re also changing how Airbnb works, because the whole paradigm that how people search travel is now changed, because today, this year, thus far 40% of people come to Airbnb and they either no longer know, where they’re going or when they’re going, in other words, they’re flexible. And this is a major change, because every travel company has a search box, because people know where they’re going. And so they ask, where are you going? And they have a date and say, check in on this date, check out on that date. This whole new world, that’s much more flexible, means that when people are more open-minded, we can direct demand to where we have supply. And we can actually elevate not just destination, but unique homes that can become the destination. So, we think this is going to change how people search, because it also means that people wouldn’t be more likely to look for something that’s unique and special. And I think that really sets Airbnb up nicely. So that’s what we’re going to do to simplify the guest experience. Dave, I’ll hand over to you. Dave Stephenson: In regards to ADR, we did see elevated rates of – average daily rate in Q4 was up 13% year-over-year. We’re seeing almost all of that is just a form of mix. It’s a mix towards North America, which has higher ADR, entire homes and less urban areas, each of which are – have higher average daily rates. So, we’re actually not seeing new hosts, increased the rate of inflation of the same property year-over-year. I’m sure some are doing it, but we’re not seeing it a material level overall. Michael Graham: Thank you. Operator: And your next question comes from Jason Bazinet with Citi. Jason Bazinet: Maybe, my numbers are wrong, but when I look back over the last five years, it seems as though you’ve actually widened the gap between yourself and your competitors in the alternative segment. And I just wonder, now that it’s sort of dawned on everyone, as you say that the travel is going to change permanently. Have you seen, or do you anticipate sort of heightened, competitive intensity relative to what the historical financials would suggest? Thanks. Brian Chesky: Thank you very much for the question, Jason. I’ll just – yes, I’ll start by saying a couple of things. Number one, travel is one of the largest industries in the world and makes up a significant amount of global GDP as I believe one in 10 new jobs was created in the travel industry before the pandemic. So, the first thing I want you to say is this is such a large market. Its multiples larger than like the advertising industry, just to give you a point of reference. And so we think there’s room for a lot of companies. Now with regards to more competition in our space, I mean, we’ve really been seeing this competition for like the last five years actually. I don’t think it’s really that different. What I have found though is this, I think that fundamentally, Airbnb, we’re in a bit of a different space than our competitors, because Airbnb, we are focused primarily on individual host. They can price 90% of our 4 million hosts. And OTAs are primarily focused on professional hosts. We have professional host as well, and we think professional hosts will probably list on any site that provides a great experience and give them high-quality guests. And we of course, will do that, but we think individual hosts are less likely to want to listen to multiple platforms. We’re the only platform that has a custom built platform designed specifically for individual hosts. We solved a lot of the really hard problems that individual host needs like the system of trust. Individual hosts want to know the quality for example, of their guest, 70% of hosts leave a review of guests after the stay. And that means, for example, a lot of guests actually have reviews. That’s just one of many examples of the kind of custom built platform we’ve made for individual hosts. And so I don’t think competition is anything different, but I also think we’re a bit of a category of one in the sense that we are really focused on the individual host as our primary opportunity area. Jason Bazinet: That’s super-interesting. Thank you. Operator: And your next question comes from Justin Patterson with KeyBanc. Justin Patterson: Great. Thank you very much. We’ve spoken a lot on discovery and just how travel is changing. I’m curious to hear how you’re thinking of helping individual hosts improve their level of service. Just you can make sure that special trips keep happening on Airbnb. And mine is a quick follow-up, it’s got a great asset with your payments platform. I’d love to hear about just how you see that investment evolving and where do you see more opportunity to provide value either to hosts or guests? Thank you. Brian Chesky: Great questions. So, why don’t I start with hosts and then we’re going to payments and I’ll let Dave so – elaborate on payments. So, one of the things we’re gaining is in addition to recruiting more hosts this year, we want to make sure our hosts are set up to succeed. and to be able to set up for success, they have to provide great experiences, because they’re reviewed after the stay obviously. And so we’re working on a number of tools. We’re going to be developing a bit more host education to be able to educate host. We have a Host Advisory Board that has 17 hosts that come from 14 countries and they’re going to be advising us on features that we build to be able to help our hosts be successful. We have a number of tools we’re investing in, pricing tools to help them price their listing and improving our calendar tools, giving them more tips to provide better experiences. We’re going to be updating the way, the information we collect and reviews to be able to give more helpful feedback to hosts. And I’ll just say at a more fundamental level that this person managing our host organization is a woman named Catherine Powell. As I said, she is an executive from Disney. She managed the Disney cast members, and that seems to me, they created a Disney University, where they did a lot of education and we want to bring a lot of those learnings to educating our hosts. We don’t think we’re just a distribution platform for our hosts. We’re really an enablement platform and we want to make sure we build all the tools and services, and educational materials that they need to be able to be successful. The last thing I’ll just say with our hosts is we’re also going to be providing elevated levels of customer service to our hosts. And we think, we can do this well, even becoming more efficient on the cost of customer service. So that is what we’re doing for hosts. Now on payments, I’ll start and I’ll hand over to Dave, just to give a point of reference. In 2019, we processed approximately $70 billion of guest and host transaction and this was an over 40 tenancies across 220 countries and regions. So, we think this is a really unique capability that we have. The reason we even built a payments platform in the first place is, because we started with individual hosts. We didn’t start with hotels and individual people couldn’t actually receive money very easily and we were – because we’re such a global network, we’re in nearly every country in the world. We actually have to have a really custom built payment platform to be able to facilitate money between these countries. So, it’s very strategic to this company. And I think it’s one of the kind of best kept secrets of Airbnb, our payments capability. Dave, you want elaborate on it? Dave Stephenson: Yes. I mean, we process 100% of the guests payments on Airbnb and it’s super-powerful, individual hosts would not be able to host without us processing those payments for us. So, if you look at competitors that have substantially lower penetration of payments, it is a definite pinpoint for individuals, because it’s not like they can do it on their own. And it also does other benefit that as we add more payment methods in, as Brian said, 140 countries across the globe. We keep working on ways to localize these payment methods in all the different countries. The payment methods and customs in Brazil are different than those of Russia; they’re different than those in France, different than those in the United States. And so we really want to localize these payment methods and we get a double benefit of that. One is, we often decrease our costs by being more local and the second is often to increase our conversion. So, those are all great benefits. Justin Patterson: Great. Thank you. Operator: [Operator Instructions] And your next question comes from Stephen Ju with Credit Suisse. Stephen Ju: Okay. Thank you. So Brian, what do you think is a gap in awareness of Airbnb between your more well-established markets like the U.S. and some of your emerging territories and why do you think the corresponding difference in activity that you see between the developed versus emerging territories that you can look to close? And I guess secondarily, this is probably not the best question to ask while your host is still struggling with request demand. but the fees that you are charging seem to be fairly minimal especially through the individual hosts. So, is there a greater desire to start shifting that takeaway burden away from the consumer perhaps gradually overtime, or do you feel like you want to continue on this current path as there’s probably so much more supply out there that you might want to consolidate have the lock onto Airbnb? Thanks. Brian Chesky: Thank you for the question, Steven. I’ll answer the first question. I’ll let Dave answer the second. With regards to the question about the gap of awareness between a mature markets and our new markets. Yes. I mean, our brand is extremely strong in countries all over the world. but in particular, United States, France, UK, Australia, Canada, English speaking countries, and then France, I think in particular non-English speaking country. but it’s got an extremely strong kind of culture of using Airbnb over many years. There is absolutely a gap between those and new emerging market. but this is an exciting opportunity, because the biggest gap is awareness. And what we found pretty universally is in nearly every country in the world, once the awareness normalizes, the growth rates and the volume of business gets to be approximately similar. So, the major thing we need to do is just increase awareness for Airbnb in our emerging markets. We’re starting this year with investing more in brand marketing. We’re going to be doing digital advertising all over the world. And I expect in the coming years, we’re going to be targeting key countries that are emerging opportunities for us. We’ve had a lot of success in Japan over the last few years. We’ve been on a really long journey to build that business. We had great success in Mexico, Brazil, numerous countries and different countries all over the world. And I do think we are this near by farthe most global network and all travel. There’s very few corners in the world, where Airbnb doesn’t have a strong community, but I do think that we have a very big opportunity to grow in other countries. And I think in particular, once cross border travel reemerges it, and it will in the coming year, there’s going to be a huge opportunity for us. Dave, I’ll hand you for the second question. Dave Stephenson: Great. On fees, it’s just important that we charge a really fair price for stays in Airbnb and we continue to have a great value. We believe that we do have a great value there. You can have a whole home for the price of a typical hotel, is the other way when we look at our fees, we want to make sure that those fees are great value to both guests and to hosts and we do have a mix of those fees. In some cases, we have a mix of a low host fee and a higher guest fee. And then for some of our professional hosts, we’ll have a host only fee and all of it is on the host side. And so we’ll see a mix. The mix could change over time. We continue to test and evolve to see what works best for our guests, our hosts, and we’ll just continue to evolve and iterate to make sure that we provide the best value to the overall community. Overall, kind of the philosophy is, as we give more back to the community in terms of services and capability than we would – could see opportunities for further increases uptake rate. But we would always want to give more back to the community before we would increase that take rate. Stephen Ju: Thank you. Operator: And your next question comes from Mario Lu with Barclays. Mario Lu: Great. Thanks for taking the questions. In terms of the guest profile in 2020, just shares that the recent trends in travel such as domestic, non-urban and whole homes thought in a larger mix of new guests in 2020 versus 2019, and could that potentially drive further growth and future years? And then secondly, kind of occupancy you mentioned [Technical Difficulty] had been around 17% pre-COVID. So, what would you say are the largest drivers in order to move that rate higher over time? Thanks. Dave Stephenson: On the mix of new guests, it has been a great opportunity to introduce Airbnb to new driving 50 miles down the road [Technical Difficulty]. So, I would say that the rebound of our business has still been skewed moderately back towards existing guests, guests that know all about Airbnb and all the benefits that we have. So, we think it’s been a great opportunity to expose it. But I wouldn’t say that the – it’s disproportionately been new guests coming into Airbnb now. But at the same time, I think we are just becoming more of a mainstream opportunity for people that it’s no longer the alternative. We really are the default. On occupancy rates, occupancy is kind of Brian mentioned earlier is just an area that can flux over time that, we can also get drive up the occupancy of the existing property. So, we don’t need to necessarily increase the number of listings to drive incremental nights, but it is an opportunity that as we get more nights, we can also bring in people that are more flexible in the times like if they’re traveling for a week, maybe they only use their home for a whole week. So, occupancy is probably not the best measure of performance on Airbnb, because if you’re an individual host, it’s not like you want to constantly drive up the use of your existing home. You just want to make sure that the home is available some part of the time during the year. Mario Lu: Right. That makes sense. Operator: Okay. And your next question comes from Kevin Kopelman with Cowen. Kevin Kopelman: Great. Thanks so much. So, during the pandemic, you’ve seen kind of these sunscreen [ph] suburban properties do really as well. As we’ve started to see some pickup here in booking activity with the COVID cases falling especially for the summer, can you talk about what you’re seeing in some of the urban areas that have been hardest hit by the pandemic and also maybe, the kind of big picture outlook for those urban properties as we emerge? Brian Chesky: Yes. Dave, I think this would be great for you. Dave Stephenson: Sure. Urban is still a really important part of our business. We have over 40% of our nights are still are urban and it’s just the non-urban and low density urban is the place, where we’re seeing the greater growth right now. So, it’s still a really important part. And as probable returns that we’re going to find is there are number of hotels that actually aren’t going to be coming back online anytime soon. Brian also talked about the redistribution of a bit of travel, where people are going to go to some smaller communities that may not even have hotels. And so as this mix that’s going to be kind of changing over time and as travel rebounds, I think we’ll see continue to see nice growth in the non-urban and low density urban, and urban comes back, that would just be another tailwind for us. Kevin Kopelman: Thanks so much. Dave Stephenson: Okay. Operator: And that is all the time we have for questions. I will now turn the call back over to the company for closing remarks. Brian Chesky: Thank you, everyone for joining us today for our first earnings call as a public company. Before I end today, I just want to end by thanking all of you, our shareholders to our early shareholders, thank you for sticking with us and to all of our new shareholders. Thanks for joining us on this journey. It’s just beginning. we look forward to sharing our progress this year with you. Thank you. Operator: This does conclude today’s conference call. You may now disconnect.	[ { "speaker": "Operator", "text": "Good afternoon and thank you for joining Airbnb’s Earnings Conference Call for the Fourth Quarter of Fiscal 2020. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb’s website following this call. I will now hand the call over to Ian Lee, Airbnb’s Head of Investor Relations. Please go ahead." }, { "speaker": "Ian Lee", "text": "Thank you. Good afternoon, and welcome to Airbnb’s fourth quarter of fiscal 2020 earnings call. On the call today, we have Airbnb’s Co-Founder and CEO, Brian Chesky; and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our fourth quarter of fiscal 2020. These items were also posted on the Investor Relations session of Airbnb’s website. During the call, we’ll make brief opening remarks and then spend the remaining time on Q&A. Before I turn it over to Brian, I’d like to remind everyone that we’ll be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described on the forward-looking statements in our shareholder letter and our perspectives filed with the SEC on December 11, 2020. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We provided reconciliation for the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be substitute for our GAAP results. And with that, I’ll pass the call to Brian." }, { "speaker": "Brian Chesky", "text": "Thank you very much, Ian, and thank you all for joining today. I am excited to share our results for the first time as a public company. I want to start by acknowledging that we are still in a pandemic and a lot of people are hurting. So, we know how lucky we are to be in the position we’re in. Now, before I go into a result, I want to share a theme that we’ll run through each of our earnings calls. When we started Airbnb, it was about more than just travel. In 2007, my roommate, Joe and I, played three airbeds one weekend and turned our apartment into an airbed and breakfast. We hosted three guests that weekend, Michael, Kate, and Amol. And in doing so became the first host. Our guests arrived as strangers, but they left as our friends. And the connections we made that weekend made us realize maybe, there’s a bigger idea here. Since then, we’ve grown from two hosts to San Francisco to 4 million hosts all around the world. The idea of Airbnb is only possible, because of host. Without host, you’re an outsider in the place that you visit. without hosts, you have nowhere to stay, but crowded tourist districts or resort. A great host does more than share their space. They provide a deeper connection to the places you visited, the people who live there, and they set the stage for you to be able to spend meaningful time, but the people who travel it. So this is why 14 years later, hosting is still at the center of Airbnb. As the world continues to change, people’s fundamental need for connection and belonging or not. This is what will remain focused on day-in and day-out, quarter-after-quarter. With that, let me talk about our results. 2020 was a year when nearly everything changed, the way we live, the way we work and the way we travel. Airbnb changed as well. We started 2020 by preparing for IPO, only to have to put on hold once the world went into lockdown. But then in the face of the biggest prices in the travel industry has ever seen, our business proved to be resilient and our model was able to adapt. Through the crisis, we also sharpened our focus. We made many difficult decisions while staying true to our core principles that we became a stronger company as a result, and we succeeded in going public after all. Now, despite a difficult year, we are encouraged by our resilient business performance and the depths of the pandemic, we have forecasted that revenue in 2020 could be less than half of 2019 levels. Yes. We delivered $3.4 billion, a full-year revenue in 2020, down only 30% compared to the year earlier. In Q4, our revenue of $859 million was down only 22% year-over-year, despite the second wave of COVID cases and widespread lockdowns. In addition to this top-line resilience, we also demonstrated focus and discipline to protect our profitability. Our adjusted EBITDA in 2020 was slightly better than 2019 and this was despite revenue being down $1.4 billion. Our adjusted EBITDA in Q4 2020 with nearly $250 million better than Q4 2019. This was despite revenue in Q4 2020 being $250 million lower than a year earlier. So, we’re able to achieve these results, because of the adaptability of our business model, and because of our focus and financial discipline. We believe these two factors set us up well for the coming travel rebound and travel is coming back nearly a year after lockdowns began, we believe people are yearning for what’s been taken away from them, travel and human connection. When travel returned, it will be about connection. People will want to spend meaningful time with their family and friends and because of this, as restrictions lift and borders begin to open, we expect there will be a significant travel rebound. So in 2021, our single priority is to prepare for the coming travel rebound. to do this, what we’re going to do is perfect the entire end-to-end experience of our core service. First, we’re going to educate the world about what makes Airbnb different hosting. through our marketing and communications, we will educate guests that being hosted is a better way to travel. In addition, we will inspire more people to become hosts. Next, we will recruit more hosts and set them up for success. Once you’ve educated people about hosting, we’ll simplify the onboarding process. So, it’s easier to for hosts to get started, and we are improving our tools and support to help them succeed. Third, to make it easier for guests to find the perfect stay, we are simplifying every part of the guest experience as well as improving our search functionality to support more flexible travel patterns. And finally, whenever our hosts or guests need us, we need to deliver world-class service. So, we’re actively fixing product issues that drive community contacts, we’re scaling our operations to meet the demand and continually enhancing our service? So that is our plan for 2021, educate the world about hosting, recruit more hosts and set them up for success, simplify the guest experience and deliver world-class service. I want to end by just highlighting two things that we launched this week that I’m really proud of. On Monday, we launched our first large scale marketing campaign in five years, made possible by host. Even though the brand of Airbnb is mainstream, the idea of hosting is not yet. Our goal with this campaign is to make a long-term investment in educating the world about our hosts. This campaign will help our guests to understand the benefits of being hosted and how this is unique to Airbnb. And it will create more awareness around the idea of becoming a host by making it more mainstream and aspirational. by using real photos of real guests on real Airbnb trips, this campaign shows what the real experience of being hosted is like. And I think it speaks directly to the need for connection that people all over the world are feeling after nearly a year of isolation. So that is made possible by hosts. And second finally, flexible dates. on Tuesday, we launched a new feature that we call flexible date. today, more people are working from home and that needs more flexibility about when and where they travel. Because of this, we’re seeing a shift in how people search on Airbnb. in 2021 to-date, almost 40% of people searching on Airbnb have been flexible in terms of their date or their location of their stay. This is a huge change in the search paradigm and travel. flexible date allows guests to search for homes in a whole new way. Instead of having to select the exact dates for a trip, guests are able to do broader searches. Now, you can search for a weekend getaway, a weeklong vacation, or even a month long stay sometimes the next few months. This allows our guests to browse more options while being flexible on the exact dates of their trip and we think this will be a very popular feature coming this travel season. So that’s our plan for this year to prepare for the coming travel rebound. We’re excited about the year ahead. And with that, I look forward to answering your questions today." }, { "speaker": "Operator", "text": "[Operator Instructions] And your first question comes from Brian Nowak with Morgan Stanley." }, { "speaker": "Brian Nowak", "text": "Thanks for taking my questions. I have two. The first one, Brian, I think you brought on quite a few new users to the platform throughout 2020. Is curious, are you seeing anything different from a retention perspective or any differences in user behavior of those people as 2021 booking season has started? And the second one, I think in the letter, you talk about 1Q 2021 bookings being above 1Q 2020. Are there any more detail on sort of which regions are driving that or is it pretty broad based with people to sort of looking forward to travel in the back half around the globe? Thanks." }, { "speaker": "Brian Chesky", "text": "Yes. Thank you for asking the questions and I’ll start and Dave, you can obviously feel free to elaborate. I’ll just – I’ll start with the second question. We are seeing a lot of resiliency in certain geographies, especially in North America and Europe. What we’ve generally found is that domestic travel globally is pretty strong and that the primary challenge is cross border travel in addition to of course, business travel, but we’re not as affected by business travel reductions. And so countries with really strong domestic travel are seeing more resilience than countries that are not as – that are not as affected by the cross border travel. So that’s the first thing that we’re seeing. And I’m very encouraged by it. now, as far as retention of users that we got last year, we are seeing continued strong retention. There’s no major changes. I think the retention of our user base has historically been strong and it was very strong last year. I’ll just highlight a couple of things. One of the reasons I think our retention is strong is, because people are finding many new use cases to use Airbnb in addition to all the old rates that use that. So, even though borders were closed and international travel is reduced, many people found longer-term stays in Airbnb, because they were working from home. They were flexible. Many people want to get in cars and travel nearby, staying in a local community. And so we’re able to seek that demand as well. And so there’s a number of areas that I think that provide a lot of resiliency for our model. I think it’s inherently adaptable and as our model adapts, that means retention increases, because there are more uses for our guests." }, { "speaker": "Brian Nowak", "text": "Great. Thanks, Brian." }, { "speaker": "Brian Chesky", "text": "Thank you." }, { "speaker": "Operator", "text": "And your next question comes from Heath Terry with Goldman Sachs." }, { "speaker": "Heath Terry", "text": "Great, thanks. Brian, as we do look out to the recovery later this year and beyond, I’d be interested in what you’re seeing so far in terms of a more flexible workforce using Airbnb for both sides of their travel, meaning they use Airbnb to monetize their home in one location to fund a longer-term stay somewhere else and how you see the size of that opportunity as more mobility becomes possible for a workforce that’s got the taste for it." }, { "speaker": "Brian Chesky", "text": "Yes, that’s a really good question. I want to really underscore this point, the way – let me kind of – let me say this, travel will come back, but when travel comes back, we believe it’s going to look different than before. We don’t think we’re ever going back to the world of travel in 2019, it’s going to change and it’s going to be different. And probably, the biggest difference we’ve seen is flexibility. A world of Zoom is a world, where more people can work from home and a world, where more people have the flexibility of work from home. We’re seeing more people say they can work for many home on Airbnb. And so we’ve seen a number of new use cases. People are living more nomadically. Some people are taking longer-term stays, one or two months at a time in our Airbnb. People are taking extended three, four-day weekends. So, like many weekends in a row, because they don’t have to be in the physical office. And many people are snowboarding, they’re like essentially living in somewhere cold and they want to go somewhere warm. They have the flexibility to do that. The other thing you’ve mentioned is new people hosting. One of the things we found is that many people like to start hosting at the beginning of a life change. Maybe, somebody has kids and the kids move out of the house. They got some extra bedrooms. Maybe, they were recently unemployed. They recently lost their job, or they’re now living more remotely and their home is more available. So, one of the things that we’re really excited about is as we see more flexibility and more week or month long stays, there’s more empty homes people are leaving behind. And our largest source of hosts in 2019 were prior guests, 23% of our hosts in 2019 were guests first. As we think, there’s big opportunities for us to continue to convert our guests to become hosts. And this new world of flexibility means more empty homes that can be shared." }, { "speaker": "Heath Terry", "text": "Thank you very much, Brian." }, { "speaker": "Brian Chesky", "text": "Thank you." }, { "speaker": "Operator", "text": "And your next question comes from Lloyd Walmsley with Deutsche Bank." }, { "speaker": "Lloyd Walmsley", "text": "Well, thanks for taking the question. two, if I can. first, Brian, you guys talked about made possible by host. Can you just talk a little bit more broadly about the supply acquisition strategy and what you’re doing kind of near-term, the buildup supply in markets close to cities, as well as longer-term to continue to sustain your growth. And is there an opportunity to get more productivity out of existing supplier will most of the long-term growth come from new supply. And then the second question as you guys prepare for the rebound and travel, how are you approaching performance marketing differently in terms of maybe, scale and expected ROIs in 2021 versus say 2019 and 2020 that the shareholder letter talks about materially increasing marketing efficiency. So, if you could explain that a little bit more, that would be great. Thanks." }, { "speaker": "Brian Chesky", "text": "Yes. these are two really good questions. Thank you for them. I’ll start with supply, then I’ll go to performance marketing. on supply, let’s just start framing it. We have about four million hosts on Airbnb. 90% of our hosts are individual hosts. These are everyday people, typically school teachers, healthcare workers, students, 55% of them are women. And the vast majority of them come direct to Airbnb. So most of our hosts, we don’t have to acquire per se. They come organically, often because they’ve heard of Airbnb. Their friends have recommended it to them, who are also hosts for – because as I mentioned before, 23% of our hosts in 2019 were prior guests. The second point I’d make is our model is pretty adaptable. So, we have hosts [ph] in 100,000 communities. One of the things we’re seeing is a change of travel patterns right now in the pandemic. people aren’t just looking to go to the same 20 cities or 30 cities. They now want to get in cars and travel the local communities nearby. That means a travel in a sense is being redistributed to thousands of communities. This helps us smooth out any supply demand gaps that we might have, but we do have a number of levers to add supply. Let me start by saying yes, our existing hosts rent their homes only occasionally. So, we see huge opportunities for productivity. The average host on Airbnb makes like under $10,000 a year and they do that by renting out just occasionally. So, we think there’s a huge opportunity to increase productivity of the hosts that we already have. That being said, we also think now is the time that people are interested in hosting more than ever before. Airbnb – we started Airbnb in a recession and during the recession of 2008; people were losing their jobs, losing their homes and many people turned to Airbnb for income. We think now hosting is as appealing as ever before, given the economic circumstances happening in this country and around the world. And so we’re doing a few things, made possible by host is a global campaign it’s as I said, our first global campaign in five years. And we think if this campaign successful, this can absolutely mainstream hosting and bring a lot of people to our platform. In addition, we’re doing a companion campaign called made possible by hosting. And that’s going to talk about all the benefits of hosting, and we’re going to really target people that are going through a life transition. As I said, people that just renovated their home, bought a new house, lost their job. Maybe, they’re retired, maybe, their kids moved out of the house. So, we think this is a really great way to be able to target and recruit more hosts. Once they come to Airbnb, we want to make it more – we want to increase the conversion rate of people come to Airbnb and then listing, an active listing on Airbnb. conversion rates the name of the game, one of the things we’ve learned about conversion rate is easier to make something. And the more support you offer to somebody, the more likely they’re going to get through the conversion funnel. So, we’re reducing the steps. We’re going to allow you to become a host in less than 10 minutes. And if you need help, you can call customer service or we’re going to match you to existing hosts to be able to support you along this journey. If we do these things, I think we’ll be able to add a significant amount of more hosts, because the average person around the world that they knew that they can make some extra money by meeting interesting people. A lot more people would do it. Now, the next question is about marketing performance marketing. And let me just also take a step back and talk a little bit more about our marketing strategy, because I think this is very important to the corporate story. In 2019, we had elevated spending of performance marketing and then 2020 occurred, our business dropped by 80% in eight weeks. And we pulled back all marketing, including performance marketing. But something remarkable happened even before we started resuming our marketing spend, our traffic levels came back to 95% of the traffic levels of 2019 without any marketing spend. And what this revealed is that our brand is inherently strong. It’s a noun and verb in pop culture. And so we don’t intend to ever against, then the amount of money as a percentage of revenue on marketing in the future as we did in 2019. in Q4, 90% of our – more than 90% of our traffic was direct or unpaid. And we think that will continue in the future. our marketing plan; therefore, our strategy is the following, a full funnel marketing approach. The top of the funnel was actually PR. we got more than 0.5 million articles in last year in 2020. And we had as much share of voice as most of the other major travel companies combined. And that’s how we really built the brand of Airbnb more than anything; probably with PR. second is brand marketing, we think of brand marketing as education and investment. And so made possible by hosting is by hosts is an investment in hosting. and then performance marketing, we don’t treat performance marketing like other travel companies. We think of it as like a laser. It’s not a way to arbitrage users. It’s a way to laser in on where we want to acquire guests or hosts and key markets, where we have a supplier demand mismatch, but make no mistake our efficiencies, we’re going to hold to a lot higher level than 2019 or years prior. I don’t know if Dave, you want to share anything else about that?" }, { "speaker": "Dave Stephenson", "text": "Yes, I think you’ve covered really well. I’ll just round it out by saying that we’ll continue to use performance marketing, where it makes economic sense to do so. It’s absolutely important level and we’ll absolutely continue to do it. We’re just going to have a higher rate of return expectation on the performance marketing spend and we’ll return to the levels that we saw in 2019. Our sales and marketing expenses as a percentage of revenue in 2021 will be below that of 2019. The absolute dollars in 2021 will be below that of 2019. And I guess I’ll run this out by saying that, because of the marketing campaign that made possible by hosts as launching now and in advance of the summer travel season, you’re going to see sales and marketing as a percentage of revenue higher than the first half of this year that you are in the second half." }, { "speaker": "Lloyd Walmsley", "text": "All right. Very helpful. Thank you." }, { "speaker": "Operator", "text": "And your next question comes from Justin Post with bank of America." }, { "speaker": "Justin Post", "text": "Great, thank you. A couple of questions; obviously, a lot of cost discipline this year to get too close to break even by Q4, which is pretty remarkable. How are you thinking about balancing that? And do you have any margin targets in mind as we think about modeling 2021? And then secondly, very interesting and I’m sure you have a lot of incentives to get more hosts. Do you think there’s a lot of latent post offerings that will come online once people get through the health issues? I guess another way of asking, do you think a lot of hosts have pulled their listings and we’ll be back as soon as they feel more comfortable. Thank you." }, { "speaker": "Brian Chesky", "text": "Thank you very much, Justin. Why don’t I start? And then I’ll let Dave elaborate. Let me just start at a high level about cost discipline. We would have, of course, like everyone else never asked for last year’s crisis. but I do think that crisis made us a much better company, because the first thing that happened is we got more disciplined. when our business was precipitously falling, we knew we couldn’t focus on everything. So, we focused on what was most special about Airbnb. That was our individual post. It means we scaled back numerous investments, but something else Justin we found was as we focused, what it really meant was, we’re taking our very best people and putting on the most important problem. And as we did that, and not only saved money actually drove more growth. I think that in addition to the inherent adaptability remodel does explain why we’re able to see a fairly strong recovery in the back half of last year. I’ll let Dave talk a little bit more about margin targets, but I’ll just also get to host and I’ll hand over to dave. on latent host offering and/or this question of did hosts pull back and do they intend to host again? What we know is this. In any given day, we have a certain number of hosts active and live in the platform. We know that when hosts deactivate, it’s often not permanent, it’s because they’re taking a break from hosting and we know many hosts are intending to host once again. And so one of the things we’re doing as I did a Q&A town hall with thousands of hosts. And I basically said to them together, we have to be ready and we want to be prepared for this travel season. And our goal to collectively with our hosts is to be ready before the rebound happens. We’d rather be early than late. And so we do expect a lot of hosts to be ready. And one of the dynamics we basically found is one of the nice things about our business is as a host gets more booked up, they often either expand by adding a listing or more likely they’ll tell their friends, who also become hosts. So with occupancy rise, it does have a nice, nice benefit, where word gets out, that people are making money. And if we can fulfill that with a couple of minutes out with our brand campaign, I think it could yield quite a few gains. Dave, do you want to cover either of these?" }, { "speaker": "Dave Stephenson", "text": "Yes. I’ll just round it out by saying; the overall number of active listening to experiences was relatively stable in Q4 relative to Q3 at about $5.6 million. So we actually haven’t seen a substantial amount of deactivations, it’s been very stable and for all the reasons that Brian said earlier, we’re optimistic that we’ll continue to be adding new hosts in the future, just given all of the tailwinds of the kind of macroeconomic factors that we have going around the world. As far as margin targets, one of the things we’re really proud of is the progress we’ve made on our profitability efficiency over 2020, right. We’ve made substantial reductions in our fixed costs. We will not be having to add back fixed costs to support a business that will again, approach 2019 levels and beyond. And so our fixed cost discipline is great and we’ll continue. And then we saw really great improvement in our variable cost efficiency across the P&L. And when you actually removed in Q4, remove the one-time impacts and stock-based compensation relative to the IPO, or our costs are down in every category across our P&L. And it’s that discipline at very low expenses, things like cost of payments, community support expenses, infrastructure expenses, all the way down that we’re proud of. And what we would like to – expect to achieve over time is 30% EBITDA margins or greater. And this has just accelerated our path towards those long-term margin targets. I’d love to give you on specific targets for 2021, but it’s just too hard to know what our revenue is going to be. And so therefore kind of a flow through to profitability, we’re seeing that our revenue rates in Q1 will be better than the revenue growth rates in Q4. But we just don’t have a lot of visibility in the back half of the year to give you a lot of guidance on profitability right now." }, { "speaker": "Justin Post", "text": "Great. Thank you." }, { "speaker": "Operator", "text": "And your next question comes from Jed Kelly with Oppenheimer." }, { "speaker": "Jed Kelly", "text": "Great. Thanks for taking my question. two if I may. just one, can you provide any color on how your bookings for summer travel are trending relative to this time last year. and then Brian, what do you think the Olympics could do just to get people’s confidence in traveling, especially around international travel? Thank you." }, { "speaker": "Brian Chesky", "text": "Thank you for the question. Dave maybe, you can take summer travel and I’ll take Olympics." }, { "speaker": "Dave Stephenson", "text": "Sure. Yes. I don’t have a lot of color that I can give you on summer travel bookings. I mean, one thing, which I can say is that people are booking in shorter windows. So, the greatest growth we’re seeing in the business right now are booking windows in less than 30 days and typically, kind of pre-COVID, you’re right. We’d be seeing much more of the bookings now it had for the summer travel season, and that is delayed relative to kind of historic patterns. We’re seeing some bright spots as in a little bit of a bright spot in the UK, dragging some summer travel bookings here in Q1. but I really don’t have a more color that I can give to you on summer expectations. We just know that we want to be ready for the travel rebound when it occurs. We just don’t know exactly when it will occur." }, { "speaker": "Brian Chesky", "text": "And then on the question of the Olympics, just we are – we are a sponsor of the Olympics and if the Olympics has fans, I think, it would be a great boon to travel. but I don’t think it’s clear this year in Tokyo that we’ll have fans. So, we’ll have to see how that goes. So, I can just comment more broadly about what we’re seeing with travel demand. We did a survey recently of American travelers and we found a couple of things. The first thing we found is that people missed traveling, that’s not surprising, but we also found that people missed traveling more than any other out-of-home activity. People missed traveling more in America than going to a restaurant, going to sports, live music or other activities, but they don’t miss all kinds of traveling. Generally, people don’t miss traveling for business as much, and they generally don’t miss mass tourism. They’re generally not missing standing in a line with selfie sticks in front of a landmark for example, or going to a crowded lobby. the kind of travel that people missed is spending meaningful time that the people they care about, their friends and their families. And so we found that the majority of people we surveyed said, they do plan to travel this year. They will do it as soon as they feel safe to do so. So obviously, that’s going to be pegged a little bit to the health crisis. but we see a lot of enthusiasm and I think the kind of travel that we offer, allows people to be able to connect with our friends and family, because our home is a great way to be able to gather and spend a meaningful quality time and that is very much what we’re focused on. We think this is a huge window of opportunity, this travel rebound, and I think it’s going to be disproportionately our travel rebound that’s not going to be cross border. It’s not going to be business travel. People want to get in cars, they’re going to travel to smaller communities, and they’re also going to be staying in home. So, we are prepared or we’re going to be prepared for that." }, { "speaker": "Jed Kelly", "text": "Thank you." }, { "speaker": "Operator", "text": "And your next question comes from Brent Thill with Jefferies." }, { "speaker": "Brent Thill", "text": "Thanks, Brian. Just if you could comment on the experience business and what you’re seeing there and how important that is to the overall strategy right now. And also, as we come back through this recovery, can you just talk to the other element of the stay, which could be the hotel, and I know you’ve invested there. How important will that be as we go back to the upswing of this travel cycle?" }, { "speaker": "Brian Chesky", "text": "Yes. Thanks for questioning, Brent. So yes, I’ll talk about experiences and hotels. So with experiences, this is a very important product for us. Experiences are one of the purest manifestations of hosting and connection that we have. I mean, in a sense that is the entire product. You have an experience with a host when you connect with other guests. So, this is really important to us. And what we found statistically is that guests on Airbnb actually life experiences, statistically, more than home. For example, more guests leave a five star review after their experience than they do after a home, as a percentage of – after the reservations. So, we thought last year was going to be a breakout year for experiences, but the opposite happened. We had to put the product on hold with social distancing. So, very quickly pivoted the product to create online experiences, because people couldn’t gather in person. We created one hour activities that you could do from your computer. These were different than Instagram, like videos or YouTube videos. These are actually interactive. So, you actually can connect with a host and you can meet other guests and people are using these, because they’re feeling more isolated and they want to meet other people. And I think as the world starts opening back up, I think we’re very bullish on experiences over the coming years, because when people travel, they’re going to want to do something interesting. And I don’t think they’re all going to desire to go back to getting on double-decker buses and waiting in line and crowded lobbies, or landmarks. they’re going to want to do really interesting activities and I think that’s what our hosts have to offer. And then for people in their own city, I think, you can only sit at home and watch so many shows on Netflix. People will want to get out of their home. And if they want to alternate to a restaurant, I think experiences are a great thing to do in their own city. So, the short answer is that we’re very focused on it. We had to take a bit of a pause last year, but they’re coming back and we’re going to be focused on it, because it’s just another way of hosting. And this is one of many ways that we’re going to continue to allow hosts, to be able to share the world with others. Now, with regards to hotels, this is a little bit of a different story. We made an acquisition of hotel tonight. I’m very proud of the acquisition. I’m very glad we made it. It’s a great team, a great app. It’s one of the most loved hotel booking apps in the world. And we were investing quite heavily in this product. Now, when the crisis happened, we had to scale back certain investments. And one of the investments we scaled back was our investment in hotels, but we ain’t scale back entirely. We still are investing in hotels, just not as much as before. The way we think of hotels is the way essentially we think about property managers on Airbnb. Airbnb is a community of 4 million hosts; 90% are individuals, and they are who we prioritize, that’s where our guests speak, our guests want something that’s one of a kind, and this is typically offered by our individual hosts. But that being said, we never want Airbnb guests to come to Airbnb and not be able to find something they’re looking for. So, we think that hotels in addition to property, managers are really important for our strategy instilling in our network apps. Again, we don’t want anyone to come to Airbnb and beat, because they couldn’t find a place to stay. So, hotels are important. And as we know, most hotels around the world are below 50% occupancy. So, we know they’re in need of demand and Airbnb certainly, can provide that demand for them. So that’s what we’re doing with experiences and hotels, both part of our strategy in the future." }, { "speaker": "Brent Thill", "text": "Thank you." }, { "speaker": "Operator", "text": "And your next question comes from Colin Sebastian with Baird." }, { "speaker": "Colin Sebastian", "text": "Great, thanks and good afternoon. A couple of questions from me, really follow-ups. But given some of the expense rationalization last year, how confident are you at this point that you have the team and the infrastructure in place to handle more rapid rebound and travel if that’s what does transpire over the course of the year? And then I know this may be a little bit difficult to answer at this point. You addressed it a little bit earlier, but some of the newer use cases such as long-term stays in shorter trips, do you have a view into whether those can be sustainable or incremental over what were normal use cases pre-pandemic? Thank you." }, { "speaker": "Brian Chesky", "text": "Yes. Really, good question. So, let me start with being able to handle the rebound in the face of reductions. And then I’ll go to new use cases, and Dave will fill in as needed. With regards to the reductions, a lot of the reductions have just made us significantly more efficient and be able to handle the rebound. One of the big changes we made – or really, there were two big changes we made. The first big change we made is that we got much more focused. So, it means we scaled back a lot of new investment areas and put our very best people on only a few problems, especially our core of hosting. But the other thing we did is because of that we shifted from a divisional business unit structure to a functional organization. And this reduced lots of people case with the function, instead of having multiple marketing departments, most multiple product departments, multiple operations group, we now have one technology group, one marketing group, one operations group, and this made us not only more efficient being able to turn on a dime much more quickly. So, we are preparing for this next rebound. I think that we are much more efficient. Those reductions will be able to sustain, the one group that that’s up the scale a little more linearly, is customer service. We are scaling that ahead of demand, but making a mistake, even that is going to be significantly more efficient. We hired a woman, who running our operations name Tara Bunch. She ran all customer service at Apple for many years, and she has built a great team, including new leaders for trust and community support. And we are focused on improving efficiency by reducing contact rates. We are very, very focused on reducing the need for people to call us or message us, because they have a problem. If they do have to call us or message us, we are going to focus on making our agents significantly more efficient. So that’s a really big focus area on the reductions. Now, on the new use cases, the short answer is yes, we do believe these new use cases are sustainable. Though we can’t predict the future, we do know a few things to be true. Many of the reasons why people are using Airbnb for new use cases is because technology has digitized so much of the world that we can now do things remotely, we couldn’t do before. So what this means is, because more people can work from home on a laptop, that means they can work out of any home. And so we think in the future, fewer people are going to be tethered to a permanent destination. And even people who are going to take more three-day weekends, they might be more likely to go away for the summer. And we think that in addition to the kind of short-term state, these medium length space a couple of weeks, or even a couple of months, we think these are going to be a really big part of the story. I guess the headline is this; people aren’t just traveling on and live on Airbnb. They’re now living on Airbnb. And I think that’s here to stay. Dave, I’ll hand it over to you." }, { "speaker": "Dave Stephenson", "text": "Yes. I’ll keep the things at round out is that we’re – I’m very happy with the underlying progress we’ve made in our operations support area, in terms of improving the efficiency there. We are making some investments in it in 2021, that’s going to mask some of the underlying progress that we get to see internally. And the other thing that was happening as Brian said, we’re making sure that we’re ready for the rebound when it occurs, which means that we are going to be investing slightly more earlier in the year to make sure that we have all the support ready for a return to travel and being optimistic that it will return soon. And so with relatively more revenue in the first half than the second half, our operations support expenses, as a percent of revenue will be – sorry, it will be a little bit higher in the first half and the second half." }, { "speaker": "Colin Sebastian", "text": "Great, thank you." }, { "speaker": "Operator", "text": "And your next question comes from Michael Graham with Canaccord Genuity. Your line is open. please go ahead." }, { "speaker": "Michael Graham", "text": "Oh, sorry. I was on mute. Pardon me. Two quick questions; one, on pricing, you mentioned that your average daily rate was up in the shareholder letter, because of mix shift towards North America partially, but as demand is really robust in some of these areas, can you just talk about how hosts are reacting in terms of setting price and are you seeing them get more opportunistic? And then the other one I wanted to ask was, you talked a little bit about the steps you’re taking to simplify host onboarding. Can you just talk about the steps you’re also taking to simplify that guest experience?" }, { "speaker": "Brian Chesky", "text": "Thank you, Michael. Why don’t I start with simplifying the guest experience and Dave, I can hand it over to you for pricing. So, yes. As we said, to prepare for this travel rebound this summer, we’re doing four things. We’re going to educate the world and Airbnb, what makes them be different, that’s hosting. We’re going to simplify – we’re going to recruit more hosts. We’re going to simplify the guest experience. So, we’re going to deliver world-class service. So, let’s talk about your question simplifying the guest experience. One of the things we know is that as we make something easier, the conversion rate goes up. And so we have a goal that can – to make it even easier to be able to book on Airbnb. So, we’re going to be reducing steps – significantly reducing steps to be able to log in, sign on, get verified, go through the key steps you need to be able to do and be able to find a place on Airbnb. So, we’re looking at the entire end-to-end experience, and we’re going to be doing a bit of a redesign of it over the coming months. I think this is going to be great the next travel season. But the other thing we’re doing, and I want to highlight this, because this is something that I highlight in the very beginning is we’re also changing how Airbnb works, because the whole paradigm that how people search travel is now changed, because today, this year, thus far 40% of people come to Airbnb and they either no longer know, where they’re going or when they’re going, in other words, they’re flexible. And this is a major change, because every travel company has a search box, because people know where they’re going. And so they ask, where are you going? And they have a date and say, check in on this date, check out on that date. This whole new world, that’s much more flexible, means that when people are more open-minded, we can direct demand to where we have supply. And we can actually elevate not just destination, but unique homes that can become the destination. So, we think this is going to change how people search, because it also means that people wouldn’t be more likely to look for something that’s unique and special. And I think that really sets Airbnb up nicely. So that’s what we’re going to do to simplify the guest experience. Dave, I’ll hand over to you." }, { "speaker": "Dave Stephenson", "text": "In regards to ADR, we did see elevated rates of – average daily rate in Q4 was up 13% year-over-year. We’re seeing almost all of that is just a form of mix. It’s a mix towards North America, which has higher ADR, entire homes and less urban areas, each of which are – have higher average daily rates. So, we’re actually not seeing new hosts, increased the rate of inflation of the same property year-over-year. I’m sure some are doing it, but we’re not seeing it a material level overall." }, { "speaker": "Michael Graham", "text": "Thank you." }, { "speaker": "Operator", "text": "And your next question comes from Jason Bazinet with Citi." }, { "speaker": "Jason Bazinet", "text": "Maybe, my numbers are wrong, but when I look back over the last five years, it seems as though you’ve actually widened the gap between yourself and your competitors in the alternative segment. And I just wonder, now that it’s sort of dawned on everyone, as you say that the travel is going to change permanently. Have you seen, or do you anticipate sort of heightened, competitive intensity relative to what the historical financials would suggest? Thanks." }, { "speaker": "Brian Chesky", "text": "Thank you very much for the question, Jason. I’ll just – yes, I’ll start by saying a couple of things. Number one, travel is one of the largest industries in the world and makes up a significant amount of global GDP as I believe one in 10 new jobs was created in the travel industry before the pandemic. So, the first thing I want you to say is this is such a large market. Its multiples larger than like the advertising industry, just to give you a point of reference. And so we think there’s room for a lot of companies. Now with regards to more competition in our space, I mean, we’ve really been seeing this competition for like the last five years actually. I don’t think it’s really that different. What I have found though is this, I think that fundamentally, Airbnb, we’re in a bit of a different space than our competitors, because Airbnb, we are focused primarily on individual host. They can price 90% of our 4 million hosts. And OTAs are primarily focused on professional hosts. We have professional host as well, and we think professional hosts will probably list on any site that provides a great experience and give them high-quality guests. And we of course, will do that, but we think individual hosts are less likely to want to listen to multiple platforms. We’re the only platform that has a custom built platform designed specifically for individual hosts. We solved a lot of the really hard problems that individual host needs like the system of trust. Individual hosts want to know the quality for example, of their guest, 70% of hosts leave a review of guests after the stay. And that means, for example, a lot of guests actually have reviews. That’s just one of many examples of the kind of custom built platform we’ve made for individual hosts. And so I don’t think competition is anything different, but I also think we’re a bit of a category of one in the sense that we are really focused on the individual host as our primary opportunity area." }, { "speaker": "Jason Bazinet", "text": "That’s super-interesting. Thank you." }, { "speaker": "Operator", "text": "And your next question comes from Justin Patterson with KeyBanc." }, { "speaker": "Justin Patterson", "text": "Great. Thank you very much. We’ve spoken a lot on discovery and just how travel is changing. I’m curious to hear how you’re thinking of helping individual hosts improve their level of service. Just you can make sure that special trips keep happening on Airbnb. And mine is a quick follow-up, it’s got a great asset with your payments platform. I’d love to hear about just how you see that investment evolving and where do you see more opportunity to provide value either to hosts or guests? Thank you." }, { "speaker": "Brian Chesky", "text": "Great questions. So, why don’t I start with hosts and then we’re going to payments and I’ll let Dave so – elaborate on payments. So, one of the things we’re gaining is in addition to recruiting more hosts this year, we want to make sure our hosts are set up to succeed. and to be able to set up for success, they have to provide great experiences, because they’re reviewed after the stay obviously. And so we’re working on a number of tools. We’re going to be developing a bit more host education to be able to educate host. We have a Host Advisory Board that has 17 hosts that come from 14 countries and they’re going to be advising us on features that we build to be able to help our hosts be successful. We have a number of tools we’re investing in, pricing tools to help them price their listing and improving our calendar tools, giving them more tips to provide better experiences. We’re going to be updating the way, the information we collect and reviews to be able to give more helpful feedback to hosts. And I’ll just say at a more fundamental level that this person managing our host organization is a woman named Catherine Powell. As I said, she is an executive from Disney. She managed the Disney cast members, and that seems to me, they created a Disney University, where they did a lot of education and we want to bring a lot of those learnings to educating our hosts. We don’t think we’re just a distribution platform for our hosts. We’re really an enablement platform and we want to make sure we build all the tools and services, and educational materials that they need to be able to be successful. The last thing I’ll just say with our hosts is we’re also going to be providing elevated levels of customer service to our hosts. And we think, we can do this well, even becoming more efficient on the cost of customer service. So that is what we’re doing for hosts. Now on payments, I’ll start and I’ll hand over to Dave, just to give a point of reference. In 2019, we processed approximately $70 billion of guest and host transaction and this was an over 40 tenancies across 220 countries and regions. So, we think this is a really unique capability that we have. The reason we even built a payments platform in the first place is, because we started with individual hosts. We didn’t start with hotels and individual people couldn’t actually receive money very easily and we were – because we’re such a global network, we’re in nearly every country in the world. We actually have to have a really custom built payment platform to be able to facilitate money between these countries. So, it’s very strategic to this company. And I think it’s one of the kind of best kept secrets of Airbnb, our payments capability. Dave, you want elaborate on it?" }, { "speaker": "Dave Stephenson", "text": "Yes. I mean, we process 100% of the guests payments on Airbnb and it’s super-powerful, individual hosts would not be able to host without us processing those payments for us. So, if you look at competitors that have substantially lower penetration of payments, it is a definite pinpoint for individuals, because it’s not like they can do it on their own. And it also does other benefit that as we add more payment methods in, as Brian said, 140 countries across the globe. We keep working on ways to localize these payment methods in all the different countries. The payment methods and customs in Brazil are different than those of Russia; they’re different than those in France, different than those in the United States. And so we really want to localize these payment methods and we get a double benefit of that. One is, we often decrease our costs by being more local and the second is often to increase our conversion. So, those are all great benefits." }, { "speaker": "Justin Patterson", "text": "Great. Thank you." }, { "speaker": "Operator", "text": "[Operator Instructions] And your next question comes from Stephen Ju with Credit Suisse." }, { "speaker": "Stephen Ju", "text": "Okay. Thank you. So Brian, what do you think is a gap in awareness of Airbnb between your more well-established markets like the U.S. and some of your emerging territories and why do you think the corresponding difference in activity that you see between the developed versus emerging territories that you can look to close? And I guess secondarily, this is probably not the best question to ask while your host is still struggling with request demand. but the fees that you are charging seem to be fairly minimal especially through the individual hosts. So, is there a greater desire to start shifting that takeaway burden away from the consumer perhaps gradually overtime, or do you feel like you want to continue on this current path as there’s probably so much more supply out there that you might want to consolidate have the lock onto Airbnb? Thanks." }, { "speaker": "Brian Chesky", "text": "Thank you for the question, Steven. I’ll answer the first question. I’ll let Dave answer the second. With regards to the question about the gap of awareness between a mature markets and our new markets. Yes. I mean, our brand is extremely strong in countries all over the world. but in particular, United States, France, UK, Australia, Canada, English speaking countries, and then France, I think in particular non-English speaking country. but it’s got an extremely strong kind of culture of using Airbnb over many years. There is absolutely a gap between those and new emerging market. but this is an exciting opportunity, because the biggest gap is awareness. And what we found pretty universally is in nearly every country in the world, once the awareness normalizes, the growth rates and the volume of business gets to be approximately similar. So, the major thing we need to do is just increase awareness for Airbnb in our emerging markets. We’re starting this year with investing more in brand marketing. We’re going to be doing digital advertising all over the world. And I expect in the coming years, we’re going to be targeting key countries that are emerging opportunities for us. We’ve had a lot of success in Japan over the last few years. We’ve been on a really long journey to build that business. We had great success in Mexico, Brazil, numerous countries and different countries all over the world. And I do think we are this near by farthe most global network and all travel. There’s very few corners in the world, where Airbnb doesn’t have a strong community, but I do think that we have a very big opportunity to grow in other countries. And I think in particular, once cross border travel reemerges it, and it will in the coming year, there’s going to be a huge opportunity for us. Dave, I’ll hand you for the second question." }, { "speaker": "Dave Stephenson", "text": "Great. On fees, it’s just important that we charge a really fair price for stays in Airbnb and we continue to have a great value. We believe that we do have a great value there. You can have a whole home for the price of a typical hotel, is the other way when we look at our fees, we want to make sure that those fees are great value to both guests and to hosts and we do have a mix of those fees. In some cases, we have a mix of a low host fee and a higher guest fee. And then for some of our professional hosts, we’ll have a host only fee and all of it is on the host side. And so we’ll see a mix. The mix could change over time. We continue to test and evolve to see what works best for our guests, our hosts, and we’ll just continue to evolve and iterate to make sure that we provide the best value to the overall community. Overall, kind of the philosophy is, as we give more back to the community in terms of services and capability than we would – could see opportunities for further increases uptake rate. But we would always want to give more back to the community before we would increase that take rate." }, { "speaker": "Stephen Ju", "text": "Thank you." }, { "speaker": "Operator", "text": "And your next question comes from Mario Lu with Barclays." }, { "speaker": "Mario Lu", "text": "Great. Thanks for taking the questions. In terms of the guest profile in 2020, just shares that the recent trends in travel such as domestic, non-urban and whole homes thought in a larger mix of new guests in 2020 versus 2019, and could that potentially drive further growth and future years? And then secondly, kind of occupancy you mentioned [Technical Difficulty] had been around 17% pre-COVID. So, what would you say are the largest drivers in order to move that rate higher over time? Thanks." }, { "speaker": "Dave Stephenson", "text": "On the mix of new guests, it has been a great opportunity to introduce Airbnb to new driving 50 miles down the road [Technical Difficulty]. So, I would say that the rebound of our business has still been skewed moderately back towards existing guests, guests that know all about Airbnb and all the benefits that we have. So, we think it’s been a great opportunity to expose it. But I wouldn’t say that the – it’s disproportionately been new guests coming into Airbnb now. But at the same time, I think we are just becoming more of a mainstream opportunity for people that it’s no longer the alternative. We really are the default. On occupancy rates, occupancy is kind of Brian mentioned earlier is just an area that can flux over time that, we can also get drive up the occupancy of the existing property. So, we don’t need to necessarily increase the number of listings to drive incremental nights, but it is an opportunity that as we get more nights, we can also bring in people that are more flexible in the times like if they’re traveling for a week, maybe they only use their home for a whole week. So, occupancy is probably not the best measure of performance on Airbnb, because if you’re an individual host, it’s not like you want to constantly drive up the use of your existing home. You just want to make sure that the home is available some part of the time during the year." }, { "speaker": "Mario Lu", "text": "Right. That makes sense." }, { "speaker": "Operator", "text": "Okay. And your next question comes from Kevin Kopelman with Cowen." }, { "speaker": "Kevin Kopelman", "text": "Great. Thanks so much. So, during the pandemic, you’ve seen kind of these sunscreen [ph] suburban properties do really as well. As we’ve started to see some pickup here in booking activity with the COVID cases falling especially for the summer, can you talk about what you’re seeing in some of the urban areas that have been hardest hit by the pandemic and also maybe, the kind of big picture outlook for those urban properties as we emerge?" }, { "speaker": "Brian Chesky", "text": "Yes. Dave, I think this would be great for you." }, { "speaker": "Dave Stephenson", "text": "Sure. Urban is still a really important part of our business. We have over 40% of our nights are still are urban and it’s just the non-urban and low density urban is the place, where we’re seeing the greater growth right now. So, it’s still a really important part. And as probable returns that we’re going to find is there are number of hotels that actually aren’t going to be coming back online anytime soon. Brian also talked about the redistribution of a bit of travel, where people are going to go to some smaller communities that may not even have hotels. And so as this mix that’s going to be kind of changing over time and as travel rebounds, I think we’ll see continue to see nice growth in the non-urban and low density urban, and urban comes back, that would just be another tailwind for us." }, { "speaker": "Kevin Kopelman", "text": "Thanks so much." }, { "speaker": "Dave Stephenson", "text": "Okay." }, { "speaker": "Operator", "text": "And that is all the time we have for questions. I will now turn the call back over to the company for closing remarks." }, { "speaker": "Brian Chesky", "text": "Thank you, everyone for joining us today for our first earnings call as a public company. Before I end today, I just want to end by thanking all of you, our shareholders to our early shareholders, thank you for sticking with us and to all of our new shareholders. Thanks for joining us on this journey. It’s just beginning. we look forward to sharing our progress this year with you. Thank you." }, { "speaker": "Operator", "text": "This does conclude today’s conference call. You may now disconnect." } ]	Airbnb, Inc.	115,705,393
ABNB	4	2,021	2022-02-15 17:30:00	Operator: Good afternoon, and thank you for joining Airbnb’s Earnings Conference Call for the Fourth Quarter of 2021. As a reminder, this conference call is being recorded, and will be available for replay from the Investor Relations section of Airbnb’s website following this call. I’ll now hand over to Ellie Mertz, Vice President of Finance. Please go ahead. Ellie Mertz: Good afternoon, and welcome to Airbnb’s fourth quarter of 2021 earnings call. Thank you for joining us today. On the call today, we have Airbnb’s Co-Founder and CEO, Brian Chesky; and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our fourth quarter and full year of 2021. These items were also posted on the Investor Relations section of Airbnb’s website. During the call, we’ll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we’ll be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We’ve provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I’ll pass the call to Brian. Brian Chesky: All right. Thank you very much, Ellie, and good afternoon, everyone. Thanks for joining. I’m excited to share our Q4 results with you. Q4 was another record quarter, and 2021 was the best year in Airbnb’s history. In Q4, revenue was $1.5 billion, our best fourth quarter ever and exceeded 2019 by 38%. Net income was $55 million, our best Q4 ever compared to a loss in 2019. And adjusted EBITDA was $333 million, also our best Q4 ever. Our adjusted EBITDA margin was a positive 22% compared to a negative 25% in Q4 of 2019, this is a huge improvement obviously. Now, in Q4, GBV was $11 billion, which surpassed 2019 levels by 32% and was driven by strong ADR. Now, even with Omicron, Q4 Nights and Experiences Booked were only down 3% compared to 2019. And when you exclude APAC, it was actually up 8%. What our [ph] results show is that we’ve been able to respond to this changing world of travel. Nearly two years into the pandemic, it’s clear that we are undergoing the biggest change to travel since the advent of commercial flying. Remote work has untethered many people from the need to be in an office. And as a result, people are spreading out to thousands of towns and cities, staying for weeks, months, or even entire seasons at a time. For the first time ever, millions of people can now live anywhere. And we’ve been able to respond to these changes because our model is inherently adaptable. Our millions of hosts offer nearly every type of home in nearly every community around the world. But it’s not just a model. It’s also our culture of relentless innovation. In the last year alone, we made more than 150 upgrades and innovations across every aspect of the Airbnb service. This explains why we had our best year in our company’s history, despite still being in the midst of a pandemic. Now, there are a number of business trends that have been driving the strong performance. First, guests are staying in thousands of small towns and rural communities on Airbnb. Throughout the pandemic, we’ve seen growing demand for domestic and nonurban travels. In Q4, gross nights booked in non-urban markets was up nearly 45% from Q4 2019. And in the past year alone, Airbnb guests stayed in nearly 100,000 towns and cities all around the world. Second, guests are also returning to cities. Q4 nights booked at urban destinations have recovered to -- nearly recovered to Q4 2019 levels. And cross border travel also continues to recover and improved each quarter in 2021. Guests are planning to travel despite variants and surges. Despite the impact of Omicron, in December, gross nights booked were up 40% and the cancellation rate was lower than a year ago. In Q1, we’re already seeing strong demand for the summer travel season compared to 2019. And finally, guests are not just traveling Airbnb, they’re now living on Airbnb. Nearly half of our nights booked in Q4 were for stays of a week or longer. One in five nights were for stays of a month or longer. And in the past year alone, nearly 175,000 guests stayed for three months or longer. So, I’m going to follow on the footsteps of our community. Recently, I shared that I too am going to live on Airbnb. Right now, I’m doing this call from Airbnb in Miami. And I’ll be staying in a different town or city every couple of weeks. I’ve always wanted to do this. But before the pandemic, I had to be in office every day. Now, I have the flexibility that millions of other guests do on Airbnb. And I also think it’s important that as CEO, I deeply understand the nuances and unique opportunities that this use case on Airbnb will provide. So now, I want to recap how we did on last year’s priorities. As you recall, for 2021, our single priority last year was to prepare for the incoming travel rebound. And to do this, we focused on perfecting the end-to-end experience all of our core service. This meant educating the world about hosting, recruiting more hosts and setting them up for success, simplifying the guest journey, and delivering world class service. So, let me just give you a really quick update on each. First, we’ve been educating the world of what makes Airbnb different, and that is hosting. In 2021, we launched our first large-scale marketing campaign in five years to educate guests about the benefits of being hosted and inspire more guests to become hosts. It worked. We’ve seen an increase in traffic to our platform in countries we ran the campaign, and this was significantly ahead of non-campaign countries where we didn’t run the campaign. Second, we’ve been recruiting more hosts and setting them up for success. Last year, we redesigned the host onboarding flow, making it easier for new hosts to get started. And we also introduced our d Ask a Superhost program, pairing potential hosts with Superhosts to answer their questions. And finally, we created AirCover top-to-bottom protection, free for every Airbnb Host and only offered on Airbnb. Third, we’ve been simplifying every part of the guest experience. Last year, we introduced I’m Flexible, a whole new way to search on Airbnb when guests are flexible about where and when they’re traveling. And guests, since we’ve launched these features, have used I’m Flexible nearly 800 million times. We’ve also chipped dozens of other product features to improve the guest experience. And finally, fourth, we’ve been focused on delivering world class service to our guests and our hosts. Now, in addition to providing protection for our hosts through AirCover, we launched dedicated Superhost support. Now, dedicated Superhost support provides our most experienced host priority access to our most experienced support agents. And as a result, we’ve seen fewer escalations and faster resolution times, increasing overall Superhost satisfaction. Now, I’m incredibly proud of everything we deliver to our guests and hosts in 2021. But it’s important to note we are not stopping here. Because in 2022 and beyond, what we’re going to do is accelerate our pace of innovation. And we’re going to focus on three key priorities: Live anywhere on Airbnb; unlock the next generation of hosts; and Airbnb becoming the ultimate host to our community. So, let me just give you a quick preview of each. First, live anywhere on Airbnb. As a result of pandemic, millions of people to now live anywhere. They’re now using Airbnb to travel to thousands of towns and cities staying for weeks, months or even entire seasons at a time. Some people without families, like me, I can kind of live a bit nomadically, staying in different Airbnb’s every week or every month. Now, people who have families probably can’t do that. But we’re seeing people who have family going to have a lot more flexibility over the summer, and I think this is why bookings in January for this summer by nights booked are up 25% from this time in 2019. Another people are just going to take some more extended weekends. The key point is that every length of stay on Airbnb is going up, whether it’s two nights, three nights, a week, a month or a season, all lengths of stay except for single nights are up on Airbnb. And we want to design for this new world by making it even easier for guests to live on Airbnb. The second priority is we will unlock the next generation of hosts. With 4 million hosts on Airbnb, we believe we’ve just scratched the surface in growing our host community. So, what we’ve done is we listen to thousands of people who think -- who are thinking about hosting to understand what obstacles there are for them to become a host. And what we’re going to do is systematically address each of these obstacles in order to attract the next generation of host on Airbnb. And finally, Airbnb will become the ultimate host. We believe that Airbnb can be much more than a marketplace that merely connects guests and hosts. Our goal is to provide the ultimate service to our guests, anticipating their needs and going above and beyond just like a good host. Now, by offering a more personalized service, we can dramatically improve the experience for millions of guests around the world. So that’s it. Just to summarize. Q4 was Airbnb’s best quarter ever. Revenues, adjusted EBITDA and net income were all records. We’re in the midst of a revolution in travel because people have newfound flexibility in how they live and work. Our adaptable model and our relentless innovation have allowed us to respond to this moment. And in 2022, we’re going to accelerate our pace of innovation and continue to support this new world of travel. So, with that, Dave and I look forward to answering your questions. Operator: [Operator Instructions] Our first question comes from Colin Sebastian from Baird. Colin Sebastian: Two questions from me. I guess, first off, Brian, you recently posted on Twitter the most popular requests for new functionality or services on the platform for this year. I think crypto payments might have been a tough request. But, when you talk about acceleration in the pace of innovation, what should we think about in terms of the key areas of focus and how that impacts where you’re spending money? And then, secondly, maybe just one clarification on the EBITDA outlook for the full year. I think, there was commentary on flat margins. Is the context for that a seasonal -- or return to seasonal booking trends and ADRs normalizing, or if that’s not right, if you could add some context? Thank you. Brian Chesky: Yes. Thanks very much, Colin. So, why don’t I take the first question and obviously, Dave, I think you could take the second question on EBITDA. So, Colin, with regards to the pace of innovation, just to kind of create a contrast, last year, we created 150 upgrades in innovation. So, it was the most innovation we’ve ever delivered in any year of our history. And I think this explains why it was probably the best year in our company’s history. But this year, we intend to create even bigger leads with our product. And just to give you a sense of how we’re thinking about it. Going back to our priorities. We’re seeing that millions of people are not tethered to have to go back to an office five days a week. And what this means is guests are spreading out to thousands of communities all over the world, and they’re also staying longer. And so, we want to design for this world, both people just living on Airbnb or just traveling and having more extended vacations. We also launched I’m Flexible last year, and that product has been used 800 million times. Now, this is a really key feature, because since the advent of the Internet, almost every travel website asked you two questions: Where are you going? And when are you traveling? And suddenly, I’m Flexible gets us further up the funnel. This allows us to be in the inspiration business. And it’s ultimately strategic for Airbnb because if you’re flexible about where and when you can travel, we can point demand to where we have supply. So, we’re going to continue to upgrade our product. And we’re going to continue to be better host to our guests in those communities by providing even better world-class service for them each step of the way. So, what we’re going to do is continue to invest in the guest experience to adapt to these new behaviors, provide world-class service for them. And then, once again, we want to unlock the next generation of hosts. So, we have a whole road map where we understand each of the obstacles for people to host, and we’re going to launch products and features this year that will unlock those obstacles. And I’m sure that’s going to create a huge plethora of new supply in Airbnb. Dave, do you want to get the second question on EBITDA? Dave Stephenson: Sure. Yes. We’re very proud of the progress we’ve made in our margins in 2021. I mean, we increased them from minus 5% back in 2019 to 27% in 2021. And so, it’s obviously a huge improvement and very proud of the work that we’ve done across the board. But also remember that we’re managing for profitability while investing for growth. We’re still very much in the growth mode investing for the future, and that’s key for us. And what we saw in 2021 was that we had a step change in our marketing expenses and achieved a new level of overall marketing investment as a percentage of revenue. And we’ve already achieved that new baseline and likely not to achieve substantial improvement in the marketing expenses as a percentage of revenue this year. And we also made a step change in our fixed costs and continue to improving our variable costs. We’ll continue to do that. We’ll get more leverage on fixed and keep improving our variable costs. But last year, we also saw the tailwind of average daily rate which definitely helped our margins. And as ADRs may moderate this year and as a mix of our business changes, that will be an offset to some of the further improvements in our fixed cost leverage and variable costs. So if ADRs moderate a little bit less, there’s room for some upside in EBITDA, so. But that’s why we’ve given the guidance we have. Operator: Our next question comes from Naved Khan from Truist Securities. Naved Khan: Yes. Thanks a lot. Two questions. One for Brian, one for Dave. So, Brian, how are you thinking about growth in Experiences for 2022 as travel comes back and people engage in more activities and Experiences? And Dave, on the margin question, again, how should we think about the growth in other expenses outside of marketing and available costs, namely operations support and product development. Is there supposed to be a significant ramp up or is ADR the primary explanation for why margins can be flat year-on-year? Brian Chesky: Yes. Hey Naved. So, I will take the first question and Dave, you can take the second question on expenses. With regards to Experiences, we are very bullish on this product. It should be noted, for example, that the percentage of people that leave 5-star reviews for Experiences is even higher as a percentage of people who leave 5-star reviews for homes. So, what guests have told us is they love Experiences, and I think hosts really depend on the economic income that it offers. Now, in 2020, before the pandemic, we thought that year was going to be a breakout year for Experiences. Instead, we had to pause the product. But now, we are going to be ramping the product back up. It’s going to be a multiyear journey, but I’m really excited about the potential for this product. And I think the reason is really simple. I think you can only like play so many video games and stay home and watch so many shows on Netflix before you want to get out of the house and you want to do an activity with other people, whether it’s traveling or even in your own area. And so, we think this is going to be a great way to meet other people and also connect with people you care about over an activity. Dave, do you want to talk about expenses? Dave Stephenson: Sure. So, we -- like I said just a minute ago, we achieved a new baseline in our marketing expense as a percentage of revenue. We already achieved that in 2021. So, there isn’t as much opportunity for improvement in that particular line item going forward. On the operation support area, we’re continuing to invest in the community and growth for the support of our guest and host community. So, underlying, we’re making improvements in the underlying rate of our operational support, but we still have other investments on top of that in order to drive those underlying improvements. And so, that one will have a few -- would be relatively flat for this year. And on the product development expenses, again, we’re growing our product development expenses more slowly than we’re growing revenue. So, we’re going to continue to get leverage and discipline on our focused kind of product development efforts. It, again, will just be a less of an improvement than what you saw in 2021. And then, ADR is a little bit of the challenge to forecast. If ADRs remain higher and stronger, that’s a tailwind to EBITDA; if they -- as the business rebounds more urban, more lower ADR regions and ADRs moderate some, that will be a continued headwind for our margins. Operator: Our next question comes from Stephen Ju from Credit Suisse. Stephen Ju: Okay. So, Brian, I think you rightly called out the longer-term stays as your fastest-growing category, and you’re going to be in the roster as well. So, thinking about the other side of the equation and I guess, the supply side of the equation. So, how are your hosts responding to the rise in this type of demand? And are there any sort of supply and demand imbalance considerations we should be thinking about or worrying about? Because it seems like the pandemic has definitely taught the consumer that they can work and stay anywhere. Thanks. Brian Chesky: Hey Stephen. This is a really, really great question. And you are correct that there -- that -- just let me preface our supply question by saying that there’s this entire acceleration in this new category of travel, which is that people are less tethered to an office, so they can now live anywhere, not everyone but a lot of people. Additionally, we are really optimistic about cross-border travel rebounding and urban travel rebounding. So, all of the original Airbnb use cases from pre-pandemic are going to come back, I think, in full throttle, probably better than before because of pent-up demand. Now, because of that, we need to make sure we have enough supply. So, let’s talk about how we get that. Well, the first thing I’d say is that one of the great things about our business is we have a global network. And so, what that means is the number one source of host on Airbnb are prior guests. In fact, in Q4, 33% of hosts were prior guests, and that number has been going up over the last couple of years. The other really interesting phenomenon we see is the markets, the fastest supply growth are also the markets have a static demand growth. That’s really interesting. And we think the reason why is most of our community are regular everyday people. They’re teachers, their health care workers, they’re students and really everyday people. And as they make money and they get a lot of bookings, we think what’s happening is they’re telling their friends in their neighborhood and community, and they are also listing, and then some other people are expanding their business. So that’s the first thing is our global network. Next, we have a full funnel approach to recruiting hosts. First, Stephen, we need to make sure that more people know about hosting. We want the brand of hosting to be as mainstream as the brand of Airbnb, which is a noun, a verb used all over the world. So, we did two major host brand campaigns last year: Made Possible by Hosting and a Stranger campaign, and both campaigns have driven a lot more traffic and a lot prospective people to Airbnb. Next, we want to make sure it’s easier to become a host. So, what we did last year is we reduced the number of steps down to 10 easy steps to become a host. One of the things we’ve learned over the course of starting Airbnb and growing Airbnb is the number of -- the less friction, the better the conversion funnel. And so, as we make something easier, more people do it. And we also know that hosting is something that makes people ask questions about. And so, what we wanted to do is match our very best prospective host with their very best Superhost, so they can ask questions and get their questions answered. And this has led to a higher conversion rate of people becoming host. And then finally, we wanted to start addressing the obstacles that people are hosting. Now, one of the most common obstacles we heard are people were nervous about their home being damaged when they rented out to guests. And so, we launched last year with AirCover, top-to-bottom protection, free for every host only in our Airbnb, and this included $1 million damage protection and liability insurance. The last thing I’d say, though, is in addition to our global network, in addition to our supply strategy, is this other real important point. This is kind of the Holy Grail, which is that because more people are flexible about where and when they’re traveling, it means we’re further up funnel. 800 million searches have used I’m Flexible. And this means that we can start to point demand where we have supply because we are not supply constrained globally on any night of the year. The challenge is just that too many people go to too few places at the same time. But as the world gets more flexible, we can balance supply-demand in addition to our other strategies. So that’s the answer, global network, a full host recruitment strategy and pointing demand to where we have supply. Operator: We now turn to Bernie McTernan from Needham & Company. Bernie McTernan: Maybe just a follow-up on that with the supply and demand imbalance in the marketplace. Do you see the price appreciation as a problem for demand or an opportunity for the hosts? Brian Chesky: Dave, do you want to take this one? Dave Stephenson: I think, you would see a bit of both. I mean, if you go back to what we’ve seen for the average daily rate throughout 2021, early in the year, it was almost exclusively driven by mix. So, it’s the rebound of U.S. and European travel. It’s been a rebound in non-urban whole home, larger homes. So, the ADR was almost entirely mix. In the year, especially around the peak travel season around the summer, we started seeing some price appreciation in high-demand locations, think mid-summer. And so, there was more price appreciation in those areas. And it was about equal price appreciation to mix, both in Q3 and that stabilized relatively in Q4. And so, with the amount of demand for travel, the ADRs, we’ve not seen it take a significant tamper down on demand for people who travel. I think there’s a lot of pent-up demand for people to get out of their homes to travel and live. And I think they’re just constantly looking for the opportunity to kind of travel. In terms of the opportunity for host to earn more money, I mean, as there could be challenges in inflation driving up costs for individuals, they can certainly be empowered to become host as a source of earning additional income. And so, we see that Airbnb actually could be a solve for that. Airbnb have had hosts earn $150 billion as hosts on Airbnb, and I think continue to use us as a great way to earn additional income going forward. Operator: Our next question comes from Deepak Mathivanan from Wolfe. Deepak Mathivanan: Two quick ones, one for Brian and one for Dave. Brian, you noted that Airbnb would want to become the ultimate host and offer a more personalized service for guests. Can you elaborate on some of those efforts? And what type of incremental opportunities do you envision kind of unlock from this in the next few years? And then, Dave, I just wanted to ask on the marketing spend. It seems like you noted that you found new baseline. But as some of these volume scales in the next few years, a lot of it is driven by kind of a macro recovery of the travel spend incrementally and then also in some of these use cases like long-term stays remaining strong. Why shouldn’t we kind of expect additional leverage on marketing, or is this an effort by you to sort of step up investments so you can keep marketing spend relatively flat as a percent of revenues and bookings? Thank you. Brian Chesky: All right. Awesome. Well, thanks, Deepak. Obviously, I’ll take the first question, Dave, and then I’ll let you take the second. So, Airbnb becoming the ultimate host. What I would say, let me point you to two things that we’re seeing, just to give you a sense of where we’re going. Let me start by saying Airbnb is really a design-driven company at the very beginning. We have a unique design driven approach, and I think that is a source of much of our innovation. And that’s allowed us to create this new category of travel, and it’s allowed us to make over 150 upgrades innovations in the last year. We have some really huge things that we’re going to be launching in the coming months that I’m really excited about. A couple of schemes that we’re thinking about. Number one, as I said, more and more guests are coming to Airbnb with flexibility, right? So typically, the way it used to work is people would come to Airbnb or an OTA, and you’d ask them where are you traveling and most people knew where they’re traveling. You’d asked them when you’re travelling, they say, I know where I’m traveling. So, maybe I’m going to Miami this week. The more guests are flexible, the more you want to start learning more about why they’re traveling and what they’re interested in, so you can point demand where you have supply. So, the first thing we want to do is provide a more personalized shopping experience. I think that we can go beyond the classic e-commerce paradigm where anonymous customer comes to a website, they type something into search, they get a list of search results and then they book something. We think that we can provide an even more personalized service. And because we have a huge amount of repeat guests and we’re a community and we know quite a lot about our guests, I think we can provide a deeply personal service. And that will increase conversion and really unlock a lot more opportunities for guests. That’s just one example. One other example I’m going to give to you is on customer service. One of the things we noticed is when we offer dedicated Superhost support for a Superhost and then AirCover, which is the industry first protection for host, it has massively increased host sentiment. And, we think this is critical. And we think we can do quite similar things for guests. We think that we can provide just the ultimate customer service to our guests and be there with them and go above and beyond each step of the way, just like a good host. And as far as does this offer an opportunity for incremental new offerings and services, the answer is absolutely yes. The more we know about our guests, the better service we provide, the more opportunities we have to promote new offerings to them as well. Dave, do you want to take marketing? Dave Stephenson: Sure. Just to step back, remember that in 2019, kind of before the pandemic, we shifted our marketing strategy to be more brand-driven and even less dependent on search engine marketing. And so, we made that shift and it kind of was proven to be the right shift to be made not only in 2019, but obviously in 2020 and 2021. And what we’re currently seeing is still 90% of our traffic remaining to be direct and unpaid. And so, we’re continuing to focus more of our spend in brand marketing and less on the search engine marketing. And you are right that the brand marketing then should be more fixed, it’s more of a fixed investment. But what we’re seeing is great success in the brand marketing that we did last year, and we’re going to be expanding it to more countries. And so, to the extent that we expand into additional countries, there will be some incremental more brand marketing spend in this year. But you’re right, once we are penetrated in most of the countries around the world, we can see more leverage because it becomes more of a fixed cost. And as you grow revenue, you can kind of grow revenue out above the marketing. I just -- we don’t expect to see that additional leverage in 2022, but we could see it in 2023 and beyond. Operator: We now turn to Mario Lu from Barclays. Mario Lu: The first one is on one of your top priorities for ‘22 and beyond. You mentioned unlocking the next generation of hosts. So, it’s been pretty clear that your hosts have been growing in regions that are seeing the largest demand. So, just curious if there’s a certain demographic or host that you feel you’re currently under indexing and look to unlock? And then, secondly, on service fees or take rate. I understand this is not reported, but with half of the elevated ADRS is due to pent-up demand, does that give you confidence that you could potentially increase the service fee at some point in the future? Thanks. Brian Chesky: Yes. Hey Mario, I can take both and then Dave, you can feel free to elaborate on anything I didn’t get to. But, I’ll do both of these. All right. So let’s talk about unlocking the next generation of hosts. And the question is, is there any area that we’re under-indexing in? I don’t know if I’d say there’s an area we’re under-indexing in, but I can tell you where I see the biggest opportunity. Airbnb, we started because my roommate and I were living in San Francisco, we couldn’t afford to pay rent. So in other words, we weren’t a small business. We weren’t a vacation rental owner. We were just kind of everyday people. We weren’t a property management company. And we started Airbnb, the real innovation was we created tools to allow everyday people to be able to become host for the very first time. And because of that, nearly 90% of our hosts are individuals. They’re school features, healthcare workers, students. Our hosts have earned over $150 billion since we started and 55% of them are women. So, what we’re going to do is continue to focus on individuals. We’re going to continue to support property managers. We’re continuing to invest in them. We also have hotels, but we think probably the biggest growth area is going to be individuals. And the reason why is because things like inflation are providing more pressure on families all over the world and they’re going to require economic opportunity to be able to make it through this difficult time. And we saw that we started Airbnb during the 2008 recession. And many people were turning to Airbnb because the economic empowerment provided. So, I think that most people don’t realize that they can make an incremental $9,000, $10,000 a year by hosting occasionally. And then there are a number of people that are incredibly successful. We see people renting unique properties that are making tens of thousands of dollars, even hundreds of thousands dollars a year. So, we think just getting the message out to everyday people, they can become a host, making it easier and addressing the obstacle systematically is the key opportunity. And this is true in geographies, all of the world, from North America, Europe, Latin America, Africa and APAC. So, that’s what we’re really seeing. And then on the service fees and take rate, let me just say this. There is no question that we have obviously the opportunity to increase take rate on the guest side and the host side. Now, we don’t want to just increase the tax for the service. We want to make sure that we’re going to increase our prices that -- or if we’re going to increase fees, that’s going to be because we’re offering services that our guests or hosts want to pay for. We want to make sure that every single year, the value listing is increased. Right now, those opportunities to increase monetization efforts are not the most perishable opportunities right now. And the reason why is we think this is a once-in-a-generation opportunity for this huge travel rebound. We have these new use cases. People are living anywhere all over the world. But we also have the return of cross-border travel, the return of urban travel. So, we are totally focused on responding to this travel market share as possible. Now, the bigger we get and the more scale we get, the more services we could potentially offer to guests and hosts. And what we’ve seen is there’s a lot of services that you can offer to host. I think Alibaba, Amazon, Etsy, Shopify and others have proven that there’s a huge opportunity in this area. It’s just not the most perishable opportunity right now, so we’re focused on market share. Operator: We now turn to Jed Kelly from Oppenheimer. Jed Kelly: Two, if I may. You said your listings were up 20% in non-urban North America. Is that coming from primarily individuals or property managers? And then, as we think out to 2022 as more people return to urban destinations, how should we think about competition, specifically from hotels and more commoditized inventory? Thank you. Brian Chesky: Great. Thanks, Jed. Why don’t Dave, you take the first question, growth of individuals versus property managers in nonurban areas? Dave Stephenson: Yes. Broadly, what we’re seeing is that our growth in new supply has been relatively consistent with the distribution of individual versus professional hosts that we’ve seen typically. Like, the majority of our listings are unique to Airbnb and from our individual host community. And so, we’re continuing to see the growth in our overall number of listings to be consistent with the relative distribution that we’ve historically seen. We don’t specifically break out the individual versus professional host by geography. I’ll just tell you that broadly, we are continuing to see that we focus on the unique needs of the individual hosts, individual host community. That’s what we’re focused on, and that’s where we’re continuing to see the growth. So, the mix overall has remained relatively stable between individuals and professional hosts during this most recent period. Brian Chesky: And then, Jed, why don’t I take the question about competition, hotels and more commodity offerings. So, I think the important thing -- I mean this is just one thing to think about. The longer you’re away from a home, the more I think you want to be in a home. And if you actually look at the growth of Airbnb by length of stay, every length of stay segment, except for one grew from this time in 2019, Q4 2019. For example, 1 month stays grew, 1 week stays grew, 3 nights stays, 5 nights stays grew. The only stay category that didn’t grow were 1 night stays. Presumably, these are business travel stays. I don’t think that business travel is going to ever come back the way it was before the pandemic. It doesn’t mean business travel is not going to back. I just think it’s going to be different because the way we work is different. And I think that the bar to get on an airplane to travel for a meeting will just be a little higher than before. Now, I do think that the travel market is so big that I think there’s so much room for both, Airbnb and hotels. And actually, I think many hotels are going to consider it to be a very important distribution platform for them. The bigger we get, the more important we actually are to them. I also think the hotels are going to have a really great opportunity with a lot of group travel conferences, like really large like events and offsites. So, they’re going to have their area where I think they’re going to thrive and I think we are going to have ours as well. But I don’t actually see like a massive overlap. I do think there are some very distinct use cases that are great for Airbnb and some others that are great for hotels and hotels exist on Airbnb. Operator: We now turn to Brian Nowak from Morgan Stanley. Brian Nowak: I have two on the bookers. You guys have had incredible bookings growth the last couple of years. I’d be curious to hear about what you know, what you’ve learned about the demographics of your bookers and how it’s changed, age, income? What does the base of your bookers look like now as opposed to pre-pandemic? How has that sort of changed your view of the world? And then secondly, about all the new bookers that came to the platform in 2020 in 2021, what can you tell us about their user behavior from a frequency or booking perspective at this point versus earlier cohorts, just so we get sort of an idea of how these users may or may not be different from what you’ve added historically? Thanks. Brian Chesky: All right. Thank you very much, Brian. And Dave, why don’t you take these. So, the first question is bookings growth, what are the demographic of bookers, especially new bookers and then new user behavior compared to earlier cohorts? Dave Stephenson: I think broadly, the good news is that we’re really not seeing a major shift in change overall. The demographics have been relatively consistent throughout this rebound and our new cohorts have -- it’s early, but our new cohorts are still aging consistently with what we’ve seen new booking cohorts age in the past, the repeat booking rates and things. So, I think that’s a nice opportunity for us to introduce Airbnb to millions of new guests and it’s great that those guests at least in the early days, are having similar rebooking rates as what we’ve seen historically. Brian Chesky: And maybe I’ll just -- maybe -- and maybe, Brian, I’ll just say one other thing. I think the thing that’s like really quite unique about Airbnb is we’re not just a brand for young travelers or old travelers. We’re not just a budget brand or a luxury brand. We are really -- we range from budget to luxury, young travelers to retirees. We’re in U.S., also in Europe. We’re in every continent in the world, and we’re not just urban, we’re urban and nonurban. And so I think the adaptability of our model and the incredible selection that we have really brings the kind of the whole world to Airbnb. And so, we’re seeing -- and I think I continue to expect that really all demographics are going to continue on Airbnb. It’s a pretty unique brand that can really flex in that way. And so, I think it’s one of the great points of our global network. Operator: We now turn to Brian Fitzgerald from Wells Fargo. Brian Fitzgerald: A couple of questions on the length of stay. As you continue to see the strong growth in longer stay. Just wondering if you could walk us through some of the take rate dynamics of that. And when you talk about addressing the key pain points of hosts, just wondering if you could share what some of the ongoing points of friction are there and preventing people from hosting on the platform? Brian Chesky: Yes. That’s great. So Dave, why don’t you take the length of stay, take rate dynamics and I can talk about the key obstacles people have for hosting. Dave Stephenson: Sure. On the take rates, the long-term stays, they have a moderately lower take rate because the guest needs are a little bit lower. And the ADRs or the average daily rates are just staying for longer because hosts often offer a discount. But those lower take rates and ADRs are offset by the fact that they’re longer than short-term stays and the costs actually support them. So lower customer support costs another -- and actually have a more nights booked. Those are benefit and become a tailwind and we generate similar contribution margins from a long-term stay booking relative to the short-term stay bookings. So, the dynamic is a little bit different on the top, but the bottom line contribution is more similar. Brian Chesky: And as far as addressing the obstacles, Brian, what we’ve seen is we’ve listened to thousands of hosts and we took a very systematic approach to the journey from people learning about Airbnb hosting to listing to going through the entire process. And the first thing we want to make sure is people know the benefits of hosting. Most people don’t realize the economic opportunity the hosting provides. They don’t realize that you can host in 10 easy steps. They don’t realize that the vast majority of people get their first booking within three days. We want to make sure that if they have any problems they can get help they need, so we’re going to continue to expand the Ask a Superhost program. We have some ideas to reduce the effort to hosting even further, and we want to continue to provide more protection like AirCover to get even more people a peace of mind. I think the thing about Airbnb hosting, that’s pretty unique compared to other marketplaces is almost any type of person can be a host. Most of the people listening to this call could be a host. You could be renting your second home. We -- people rent their primary home. People can rent their homes when they’re gone. And so I think there’s something about hosting that can apply to people of all walks of life. And that’s what we’re going to be focused on. Operator: We now turn to Doug Anmuth from JP Morgan. Doug Anmuth: I was just hoping you could talk a little bit more about ADRs and just what you’re seeing so far for bookings in ‘22? And just curious, just your view of the degree of decline for this year has changed at all. And then, Dave, just on capital allocation, just curious if there’s any changes or anything different to call out now just given obviously, a lot more discipline in the business and a very different degree of profitability versus a couple of years ago. Thanks. Brian Chesky: Yes. Obviously, Dave, why don’t you take both of these, ADR in 2022 and capital allocation. Dave Stephenson: Sure. Yes. Like I said earlier in the call, the average daily rate early in 2021 was almost exclusively driven by mix, country mix, urban versus nonurban and whole homes or whole home non-urban, Europe, U.S., just has a higher daily rate. And then towards the back half of the year, both in Q3 and Q4, we saw some price appreciation in high-demand markets and kind of peak periods. And so, then it was more equally weighted between the two. And so, then, what we’ve seen kind of coming in and we expect that as urban comes back, and we are continuing to see urban accelerate every quarter and some of our lower ADR markets start coming back, and we have seen places like Latin America now well above 2019 rates. So, we would see some moderation in the ADRs. What we’re seeing early in 2022 and included in this -- in the letter is we anticipate about a 4% increase still year-over-year, so Q1 ‘22 over Q1 ‘21 in ADR. So, we’re still seeing strong ADR rates and anticipate that will be the case here early in the year. And what’s tougher to forecast is the rate of return of those lower ADR segments and then how much of the price appreciation kind of steps. But we would anticipate some moderation of ADRs through the back half of the year. We just don’t know exactly how much. And then, on the capital allocation, I do tell you that I sleep better at night now that we have $8 billion of cash in the bank relative to the position we were in -- prior to COVID or midst of COVID. And it enables us to have the flexibility to continue to invest in growth because that’s what we’re focused on is to grow this business. And we can continue to use some of that cash in case we wanted to use it for any kind of acquisitions, although acquisition is not our primary kind of growth driver. And one change that we did announce here in the letter of this quarter is that we are planning to pay for our RSU tax obligations for employees with cash rather than selling to cover. So we will be net settling those shares, and that will be a use of about a little more than $1 billion of cash during the year. But, I’m very proud about how -- with our investments. So, thank you. Operator: We now turn to Lloyd Walmsley from UBS. Lloyd Walmsley: Thanks. I had a couple. First, just on the host supply, it sounds like you’re seeing good traffic gains in regions where you’re advertising, but the aggregate listings number is only up something like 7% from the last disclosure, despite a pretty good environment. So, just wondering what gives you the confidence that you can continue to grow supply to meet demand on kind of a multiyear basis? And is there -- do you have visibility into the backlog of hosts just going through that process that gives you that confidence it can accelerate? And then a second one on kind of ADRs, the shareholder letter mentioned having over 25% more nights booked for the summer than this time in 2019. Can you talk about what that looks like kind of on a gross bookings basis? And as we think about ADRs, if you put aside the geographical format mix shift, like where do you think like-for-like pricing is moving up for this year as it seems like some folks are pushing price? Brian Chesky: Yes. Thanks very much, Lloyd. So, Dave, I think you can take both of them, and I’m happy to round up the answers. The first one is obviously on host supply, how we’re feeling about the environment on a multiyear basis and the backlog of hosts. And second, obviously, summer demand, what that means for GBV ADR. Dave Stephenson: Sure. As we kind of mentioned earlier, the key is that -- on the supply side, remember that we have 4 million hosts. The vast majority of those are individual hosts, 90% of those are individual hosts. And the individual hosts hosting their own home or often the second home. And so, what we found kind of during the pandemic is people don’t get rid of their own or their second home just because there’s a global pandemic and they’re not having hosting. When people are ready to travel, they’re there and ready to travel again. So actually, we’ve been quite proud of the fact we’re pleased that our actual supply has remained as stable as it has throughout this pandemic. And I think that’s what you’re seeing in regions outside of where we’re seeing a lot of the rebounds, U.S. and Europe, while there could be softness or not as much growth there. That growth would be there when the demand comes back. And that’s why we’re highlighting the growth that we saw in the high-demand areas. We did grow 20% in the U.S. non-urban because that’s where we’re seeing a greater amount of demand. Airbnb is amazingly self-healing dynamic with the approach to how we add supply to our environment. So, I think as the market comes back, we’ll continue to do it. And then go ahead, Brian. Brian Chesky: And again, maybe I’ll just, Lloyd, round out a little bit of this answer. I just wanted to just really underline this. We designed the Airbnb in the very beginning so that guests attract hosts and hosts attract guests. And this is 14 years later, more than 1 billion guest arrivals later. It’s working obviously pretty well. And again, I think one of the -- a couple of reasons. Number one, guests become hosts. And so, as we get more hosts, a percentage of them -- as we get more guests, a percentage of them become hosts. And we’re going to continue to focus on converting as many guests to hosts as possible. This is a really interesting flywheel. Number two, the way we grow primarily is word of mouth. So, as regular people get more bookings, they tend to tell other regular people about it. If a hotel gets a lot of bookings, they’re not going to tell the next hotel who’s a competitor. Most regular people don’t think of themselves that way. So, word of mouth starts to spread. But the other thing, once again, I also want to underline is the Holy Grail of supply is also being able to point demand where you have supply. And we are not even close to supply constraints any night of the year, if you take a global average of every city, all 100,000 cities around the world. And so, what we want to do is as people are more flexible, and we are moving top of funnel, we want to continue to point demand where you have supply -- and all of that is in addition to our very specific efforts to continue to recruit hosts, which we’re really focused on. So, I think Dave nailed it. It’s all about the global network. And Dave, why don’t you take the second question about summer demand? Dave Stephenson: Yes, summer demand and ADRs. I mean, I think we’re just seeing strong demand for travel. People are ready to travel this summer. We have 25% more nights booked for the summer travel season than we did in 2019. They’re ready to get out and do that travel. And obviously, we are seeing that ADRs are higher. But as I mentioned earlier in the call, both in Q3 and Q4, a portion of that was mix and about an equal portion was due to price appreciation. So, that stayed relatively stable. In other words, we didn’t see price appreciation go up higher as a driver in Q4. It was fairly stable. So, that’s kind of what we have currently forecasted for what we’ve shared in our guide here in Q1. Operator: We now turn to Andrew Boone from JMP Securities. Andrew Boone: Two please. First, can you just talk about your progress with hotels on the platform? Brian, I think you mentioned that briefly earlier. And then, secondly, going back to marketing, do we start to think about brand marketing as being more connected to the supply side of the equation, meaning that there’s going to be continued pressure as you guys grow the network more broadly, but rather than focus on the demand side, focusing more on the listing side and thinking about that as it is connected to marketing? Brian Chesky: Thanks, Andrew. Why don’t we do this? Why don’t I, Dave, take marketing? I’ll start there because I wanted to just recap how we’re thinking about marketing over the coming years. And then you can take our progress with hotels and the platform. Let me just back up and just talk about how we’re thinking about marketing, Andrew. We have a pretty different marketing approach than our competitors because we take a full funnel approach to marketing. And it combines PR with brand marketing and performance marketing, and PR is actually probably the most important channel to build the brand of Airbnb. And that is because Airbnb has got an offering that’s really unique. And so, because of that, people are deeply passionate about, they tell one another and every Airbnb’s become a noun and a verb used all over the world. We got more than 0.5 million articles on Airbnb just last year alone. So, it’s been a very important part of our marketing strategy. And I think this explains why nearly 90% of our traffic remains direct or on pace. Now we take brand marketing, we think of as really investment in educating the world about Airbnb. So, it’s not really about buying customers but educating people what makes Airbnb special. And then we think of performance marketing as really a laser, to laser in on balancing supply and demand. Now with regards to brand marketing going forward, it’s a great question. I think we’re going to focus on a couple of big areas. Number one, yes, we think the area that needs a little more investment is the brand of hosting. The brand of Airbnb is noun and verb used all over the world. And very few people at this point who travel regularly and book travel on Internet don’t know about Airbnb. But we don’t think enough people know about the incredible economic benefits to hosting and just be incredible, like what it brings to people’s lives to be able to bring the world to their home. But the other thing is we have a lot of really big innovations that we’re going to be launching this year. And so, we want to actually put some of our brand marketing dollars behind some of the new product innovations that I’m incredibly excited to deal this year. And so, those are two of the areas that we’re going to continue to invest in. Again, we think of marketing as education, education and what we have that’s unique and different, and we’re going to educate the world about hosting, and we’re going to educate the world about our new products and innovations this year. With that, why don’t I hand it over to Dave. Maybe the only other thing I’d say of hotel, before we talk about how they’re doing on our platform is, again, the core o our community are individual hosts. But the great thing of our platform is property managers and hotels are great ways to fill the network gap. We think most people come to Airbnb to book something unique, one-of-a-kind stay from an everyday host. But we always want to make sure we never have any network gaps. We never want somebody come to Airbnb and leave having not found a place to stay. And so, we think hotels and property managers continue to be a very important part of our strategy. And the more demand we give them, the more they will continue to come on our platform. I don’t know, Dave, you want to talk a little bit about the progress of hotels on our platform. Dave Stephenson: We notice that in 2020 and 2021 we did scale back our investment in those areas. I mean it’s key to have hotels still in the network gaps. But as cities are starting to return and we’re getting urban coming back, that’s when the time we’ll need to fill those network gaps with hotels. And so, what we’ve seen in Q4 is that the nights remain depressed here over two years, and they’re slightly down kind of quarter-over-quarter due to Omicron. But our revenue’s a little bit stronger relative to that due to a little bit higher ADRs, which we’re seeing in hotels, similar to what we’re seeing in other parts of the business. So, we’ll invest in hotels over the long term. It’s just not our immediate focus. Operator: We now turn to Mark Mahaney from Evercore ISI. Mark Mahaney: Okay. Thanks. I just wanted to clarify something on marketing. It does sound like you’ve run a few campaigns towards hosts and towards I think you called them shaggy strangers that you were pretty happy about. So, do you want to lean more into marketing you talked about expenses levering or not -- leveraging or not leveraging in ‘22, should we expect sales and marketing to show some deleverage as you kind of lean more into those marketing plans? And then, could you also talk a little bit more about ADRs? And I forget what the impact of the longer-term stays, what impact that’s had on ADR? So, forget about the urban, forget about the pricing, just that impact itself of longer-term stays. Is that that accretive or dilutive to ADRs, what kind of impact does that have? Thank you. Brian Chesky: All right. Thanks very much, Mark, for both questions. Dave, I’ll hand it over to you. Sorry. Dave Stephenson: On the marketing campaign, as I said earlier, we anticipate our marketing expense as a percentage of revenue in 2022 to be relatively consistent with that in 2021. So I’m not anticipating further deleverage and also not anticipating a lot of incremental leverage. As we’re growing this year, we’ll be expanding the investment to more countries. And as you noted, like our -- some of the brand marketing that we’re doing in support of host. I think one of the powers to remember of our marketing is that we can speak to both sides of the marketplace. So, anytime we market Airbnb, we can actually talk to both, guests and hosts. And as Brian mentioned earlier, one of our single largest sources of new hosts are our formal guests. On the ADR, long-term stays are dilutive on the ADR as a percentage goes up. but it’s kind of offset by some other -- the other factors that we talked about on the call today, both mix shift and price appreciation is what continues to buoy the ADR rates overall. Operator: Our next question comes from Kevin Kopelman from Cowen and Company. Kevin Kopelman: I just had a follow-up on some of the recent booking trends you’re seeing. So, looking at the Q1 revenue guide at the midpoint there, it would be 70% higher than in Q1 ‘19. And that’s higher than any of the GBV stats you’ve given out so far. So, is that revenue growth all GBV driven, or there other -- the take rate or other components in there as well? And if so, what are they? Thanks. Dave Stephenson: Yes. The GBV is primarily driven by the -- relative to nights is driven by the increase in ADRs. So, our absolute kind of take rate on a percentage of GBV is actually remaining fairly stable, so. Operator: We’ve come to the end of our Q&A. I will now hand back to Brian Chesky for his closing remarks. Brian Chesky: All right. Well, thanks for joining us today, everyone. Just to summarize what we shared today. 2021 was a record year for Airbnb. We hit new highs of gross booking value, revenue, net income and adjusted EBITDA. We made more than 150 upgrades and innovations across every aspect of our service. But we’re not stopping there. In 2022 and beyond, the world will continue to change as millions of people choose to live anywhere. And Airbnb will relentlessly innovate to support this new world. We’ve now been a public company for more than a year. And I want to end today by thanking our employees who worked tirelessly to make all of this innovation possible. And to our millions of guests and hosts around the world, I want to thank you for trusting us in helping build Airbnb into what it is today. Thank you all. And I’m going to speak to you again soon from a number Airbnb somewhere around the world. See you. Operator: This concludes today’s call. We thank you for joining. You may now disconnect your lines.	[ { "speaker": "Operator", "text": "Good afternoon, and thank you for joining Airbnb’s Earnings Conference Call for the Fourth Quarter of 2021. As a reminder, this conference call is being recorded, and will be available for replay from the Investor Relations section of Airbnb’s website following this call. I’ll now hand over to Ellie Mertz, Vice President of Finance. Please go ahead." }, { "speaker": "Ellie Mertz", "text": "Good afternoon, and welcome to Airbnb’s fourth quarter of 2021 earnings call. Thank you for joining us today. On the call today, we have Airbnb’s Co-Founder and CEO, Brian Chesky; and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our fourth quarter and full year of 2021. These items were also posted on the Investor Relations section of Airbnb’s website. During the call, we’ll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we’ll be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We’ve provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I’ll pass the call to Brian." }, { "speaker": "Brian Chesky", "text": "All right. Thank you very much, Ellie, and good afternoon, everyone. Thanks for joining. I’m excited to share our Q4 results with you. Q4 was another record quarter, and 2021 was the best year in Airbnb’s history. In Q4, revenue was $1.5 billion, our best fourth quarter ever and exceeded 2019 by 38%. Net income was $55 million, our best Q4 ever compared to a loss in 2019. And adjusted EBITDA was $333 million, also our best Q4 ever. Our adjusted EBITDA margin was a positive 22% compared to a negative 25% in Q4 of 2019, this is a huge improvement obviously. Now, in Q4, GBV was $11 billion, which surpassed 2019 levels by 32% and was driven by strong ADR. Now, even with Omicron, Q4 Nights and Experiences Booked were only down 3% compared to 2019. And when you exclude APAC, it was actually up 8%. What our [ph] results show is that we’ve been able to respond to this changing world of travel. Nearly two years into the pandemic, it’s clear that we are undergoing the biggest change to travel since the advent of commercial flying. Remote work has untethered many people from the need to be in an office. And as a result, people are spreading out to thousands of towns and cities, staying for weeks, months, or even entire seasons at a time. For the first time ever, millions of people can now live anywhere. And we’ve been able to respond to these changes because our model is inherently adaptable. Our millions of hosts offer nearly every type of home in nearly every community around the world. But it’s not just a model. It’s also our culture of relentless innovation. In the last year alone, we made more than 150 upgrades and innovations across every aspect of the Airbnb service. This explains why we had our best year in our company’s history, despite still being in the midst of a pandemic. Now, there are a number of business trends that have been driving the strong performance. First, guests are staying in thousands of small towns and rural communities on Airbnb. Throughout the pandemic, we’ve seen growing demand for domestic and nonurban travels. In Q4, gross nights booked in non-urban markets was up nearly 45% from Q4 2019. And in the past year alone, Airbnb guests stayed in nearly 100,000 towns and cities all around the world. Second, guests are also returning to cities. Q4 nights booked at urban destinations have recovered to -- nearly recovered to Q4 2019 levels. And cross border travel also continues to recover and improved each quarter in 2021. Guests are planning to travel despite variants and surges. Despite the impact of Omicron, in December, gross nights booked were up 40% and the cancellation rate was lower than a year ago. In Q1, we’re already seeing strong demand for the summer travel season compared to 2019. And finally, guests are not just traveling Airbnb, they’re now living on Airbnb. Nearly half of our nights booked in Q4 were for stays of a week or longer. One in five nights were for stays of a month or longer. And in the past year alone, nearly 175,000 guests stayed for three months or longer. So, I’m going to follow on the footsteps of our community. Recently, I shared that I too am going to live on Airbnb. Right now, I’m doing this call from Airbnb in Miami. And I’ll be staying in a different town or city every couple of weeks. I’ve always wanted to do this. But before the pandemic, I had to be in office every day. Now, I have the flexibility that millions of other guests do on Airbnb. And I also think it’s important that as CEO, I deeply understand the nuances and unique opportunities that this use case on Airbnb will provide. So now, I want to recap how we did on last year’s priorities. As you recall, for 2021, our single priority last year was to prepare for the incoming travel rebound. And to do this, we focused on perfecting the end-to-end experience all of our core service. This meant educating the world about hosting, recruiting more hosts and setting them up for success, simplifying the guest journey, and delivering world class service. So, let me just give you a really quick update on each. First, we’ve been educating the world of what makes Airbnb different, and that is hosting. In 2021, we launched our first large-scale marketing campaign in five years to educate guests about the benefits of being hosted and inspire more guests to become hosts. It worked. We’ve seen an increase in traffic to our platform in countries we ran the campaign, and this was significantly ahead of non-campaign countries where we didn’t run the campaign. Second, we’ve been recruiting more hosts and setting them up for success. Last year, we redesigned the host onboarding flow, making it easier for new hosts to get started. And we also introduced our d Ask a Superhost program, pairing potential hosts with Superhosts to answer their questions. And finally, we created AirCover top-to-bottom protection, free for every Airbnb Host and only offered on Airbnb. Third, we’ve been simplifying every part of the guest experience. Last year, we introduced I’m Flexible, a whole new way to search on Airbnb when guests are flexible about where and when they’re traveling. And guests, since we’ve launched these features, have used I’m Flexible nearly 800 million times. We’ve also chipped dozens of other product features to improve the guest experience. And finally, fourth, we’ve been focused on delivering world class service to our guests and our hosts. Now, in addition to providing protection for our hosts through AirCover, we launched dedicated Superhost support. Now, dedicated Superhost support provides our most experienced host priority access to our most experienced support agents. And as a result, we’ve seen fewer escalations and faster resolution times, increasing overall Superhost satisfaction. Now, I’m incredibly proud of everything we deliver to our guests and hosts in 2021. But it’s important to note we are not stopping here. Because in 2022 and beyond, what we’re going to do is accelerate our pace of innovation. And we’re going to focus on three key priorities: Live anywhere on Airbnb; unlock the next generation of hosts; and Airbnb becoming the ultimate host to our community. So, let me just give you a quick preview of each. First, live anywhere on Airbnb. As a result of pandemic, millions of people to now live anywhere. They’re now using Airbnb to travel to thousands of towns and cities staying for weeks, months or even entire seasons at a time. Some people without families, like me, I can kind of live a bit nomadically, staying in different Airbnb’s every week or every month. Now, people who have families probably can’t do that. But we’re seeing people who have family going to have a lot more flexibility over the summer, and I think this is why bookings in January for this summer by nights booked are up 25% from this time in 2019. Another people are just going to take some more extended weekends. The key point is that every length of stay on Airbnb is going up, whether it’s two nights, three nights, a week, a month or a season, all lengths of stay except for single nights are up on Airbnb. And we want to design for this new world by making it even easier for guests to live on Airbnb. The second priority is we will unlock the next generation of hosts. With 4 million hosts on Airbnb, we believe we’ve just scratched the surface in growing our host community. So, what we’ve done is we listen to thousands of people who think -- who are thinking about hosting to understand what obstacles there are for them to become a host. And what we’re going to do is systematically address each of these obstacles in order to attract the next generation of host on Airbnb. And finally, Airbnb will become the ultimate host. We believe that Airbnb can be much more than a marketplace that merely connects guests and hosts. Our goal is to provide the ultimate service to our guests, anticipating their needs and going above and beyond just like a good host. Now, by offering a more personalized service, we can dramatically improve the experience for millions of guests around the world. So that’s it. Just to summarize. Q4 was Airbnb’s best quarter ever. Revenues, adjusted EBITDA and net income were all records. We’re in the midst of a revolution in travel because people have newfound flexibility in how they live and work. Our adaptable model and our relentless innovation have allowed us to respond to this moment. And in 2022, we’re going to accelerate our pace of innovation and continue to support this new world of travel. So, with that, Dave and I look forward to answering your questions." }, { "speaker": "Operator", "text": "[Operator Instructions] Our first question comes from Colin Sebastian from Baird." }, { "speaker": "Colin Sebastian", "text": "Two questions from me. I guess, first off, Brian, you recently posted on Twitter the most popular requests for new functionality or services on the platform for this year. I think crypto payments might have been a tough request. But, when you talk about acceleration in the pace of innovation, what should we think about in terms of the key areas of focus and how that impacts where you’re spending money? And then, secondly, maybe just one clarification on the EBITDA outlook for the full year. I think, there was commentary on flat margins. Is the context for that a seasonal -- or return to seasonal booking trends and ADRs normalizing, or if that’s not right, if you could add some context? Thank you." }, { "speaker": "Brian Chesky", "text": "Yes. Thanks very much, Colin. So, why don’t I take the first question and obviously, Dave, I think you could take the second question on EBITDA. So, Colin, with regards to the pace of innovation, just to kind of create a contrast, last year, we created 150 upgrades in innovation. So, it was the most innovation we’ve ever delivered in any year of our history. And I think this explains why it was probably the best year in our company’s history. But this year, we intend to create even bigger leads with our product. And just to give you a sense of how we’re thinking about it. Going back to our priorities. We’re seeing that millions of people are not tethered to have to go back to an office five days a week. And what this means is guests are spreading out to thousands of communities all over the world, and they’re also staying longer. And so, we want to design for this world, both people just living on Airbnb or just traveling and having more extended vacations. We also launched I’m Flexible last year, and that product has been used 800 million times. Now, this is a really key feature, because since the advent of the Internet, almost every travel website asked you two questions: Where are you going? And when are you traveling? And suddenly, I’m Flexible gets us further up the funnel. This allows us to be in the inspiration business. And it’s ultimately strategic for Airbnb because if you’re flexible about where and when you can travel, we can point demand to where we have supply. So, we’re going to continue to upgrade our product. And we’re going to continue to be better host to our guests in those communities by providing even better world-class service for them each step of the way. So, what we’re going to do is continue to invest in the guest experience to adapt to these new behaviors, provide world-class service for them. And then, once again, we want to unlock the next generation of hosts. So, we have a whole road map where we understand each of the obstacles for people to host, and we’re going to launch products and features this year that will unlock those obstacles. And I’m sure that’s going to create a huge plethora of new supply in Airbnb. Dave, do you want to get the second question on EBITDA?" }, { "speaker": "Dave Stephenson", "text": "Sure. Yes. We’re very proud of the progress we’ve made in our margins in 2021. I mean, we increased them from minus 5% back in 2019 to 27% in 2021. And so, it’s obviously a huge improvement and very proud of the work that we’ve done across the board. But also remember that we’re managing for profitability while investing for growth. We’re still very much in the growth mode investing for the future, and that’s key for us. And what we saw in 2021 was that we had a step change in our marketing expenses and achieved a new level of overall marketing investment as a percentage of revenue. And we’ve already achieved that new baseline and likely not to achieve substantial improvement in the marketing expenses as a percentage of revenue this year. And we also made a step change in our fixed costs and continue to improving our variable costs. We’ll continue to do that. We’ll get more leverage on fixed and keep improving our variable costs. But last year, we also saw the tailwind of average daily rate which definitely helped our margins. And as ADRs may moderate this year and as a mix of our business changes, that will be an offset to some of the further improvements in our fixed cost leverage and variable costs. So if ADRs moderate a little bit less, there’s room for some upside in EBITDA, so. But that’s why we’ve given the guidance we have." }, { "speaker": "Operator", "text": "Our next question comes from Naved Khan from Truist Securities." }, { "speaker": "Naved Khan", "text": "Yes. Thanks a lot. Two questions. One for Brian, one for Dave. So, Brian, how are you thinking about growth in Experiences for 2022 as travel comes back and people engage in more activities and Experiences? And Dave, on the margin question, again, how should we think about the growth in other expenses outside of marketing and available costs, namely operations support and product development. Is there supposed to be a significant ramp up or is ADR the primary explanation for why margins can be flat year-on-year?" }, { "speaker": "Brian Chesky", "text": "Yes. Hey Naved. So, I will take the first question and Dave, you can take the second question on expenses. With regards to Experiences, we are very bullish on this product. It should be noted, for example, that the percentage of people that leave 5-star reviews for Experiences is even higher as a percentage of people who leave 5-star reviews for homes. So, what guests have told us is they love Experiences, and I think hosts really depend on the economic income that it offers. Now, in 2020, before the pandemic, we thought that year was going to be a breakout year for Experiences. Instead, we had to pause the product. But now, we are going to be ramping the product back up. It’s going to be a multiyear journey, but I’m really excited about the potential for this product. And I think the reason is really simple. I think you can only like play so many video games and stay home and watch so many shows on Netflix before you want to get out of the house and you want to do an activity with other people, whether it’s traveling or even in your own area. And so, we think this is going to be a great way to meet other people and also connect with people you care about over an activity. Dave, do you want to talk about expenses?" }, { "speaker": "Dave Stephenson", "text": "Sure. So, we -- like I said just a minute ago, we achieved a new baseline in our marketing expense as a percentage of revenue. We already achieved that in 2021. So, there isn’t as much opportunity for improvement in that particular line item going forward. On the operation support area, we’re continuing to invest in the community and growth for the support of our guest and host community. So, underlying, we’re making improvements in the underlying rate of our operational support, but we still have other investments on top of that in order to drive those underlying improvements. And so, that one will have a few -- would be relatively flat for this year. And on the product development expenses, again, we’re growing our product development expenses more slowly than we’re growing revenue. So, we’re going to continue to get leverage and discipline on our focused kind of product development efforts. It, again, will just be a less of an improvement than what you saw in 2021. And then, ADR is a little bit of the challenge to forecast. If ADRs remain higher and stronger, that’s a tailwind to EBITDA; if they -- as the business rebounds more urban, more lower ADR regions and ADRs moderate some, that will be a continued headwind for our margins." }, { "speaker": "Operator", "text": "Our next question comes from Stephen Ju from Credit Suisse." }, { "speaker": "Stephen Ju", "text": "Okay. So, Brian, I think you rightly called out the longer-term stays as your fastest-growing category, and you’re going to be in the roster as well. So, thinking about the other side of the equation and I guess, the supply side of the equation. So, how are your hosts responding to the rise in this type of demand? And are there any sort of supply and demand imbalance considerations we should be thinking about or worrying about? Because it seems like the pandemic has definitely taught the consumer that they can work and stay anywhere. Thanks." }, { "speaker": "Brian Chesky", "text": "Hey Stephen. This is a really, really great question. And you are correct that there -- that -- just let me preface our supply question by saying that there’s this entire acceleration in this new category of travel, which is that people are less tethered to an office, so they can now live anywhere, not everyone but a lot of people. Additionally, we are really optimistic about cross-border travel rebounding and urban travel rebounding. So, all of the original Airbnb use cases from pre-pandemic are going to come back, I think, in full throttle, probably better than before because of pent-up demand. Now, because of that, we need to make sure we have enough supply. So, let’s talk about how we get that. Well, the first thing I’d say is that one of the great things about our business is we have a global network. And so, what that means is the number one source of host on Airbnb are prior guests. In fact, in Q4, 33% of hosts were prior guests, and that number has been going up over the last couple of years. The other really interesting phenomenon we see is the markets, the fastest supply growth are also the markets have a static demand growth. That’s really interesting. And we think the reason why is most of our community are regular everyday people. They’re teachers, their health care workers, they’re students and really everyday people. And as they make money and they get a lot of bookings, we think what’s happening is they’re telling their friends in their neighborhood and community, and they are also listing, and then some other people are expanding their business. So that’s the first thing is our global network. Next, we have a full funnel approach to recruiting hosts. First, Stephen, we need to make sure that more people know about hosting. We want the brand of hosting to be as mainstream as the brand of Airbnb, which is a noun, a verb used all over the world. So, we did two major host brand campaigns last year: Made Possible by Hosting and a Stranger campaign, and both campaigns have driven a lot more traffic and a lot prospective people to Airbnb. Next, we want to make sure it’s easier to become a host. So, what we did last year is we reduced the number of steps down to 10 easy steps to become a host. One of the things we’ve learned over the course of starting Airbnb and growing Airbnb is the number of -- the less friction, the better the conversion funnel. And so, as we make something easier, more people do it. And we also know that hosting is something that makes people ask questions about. And so, what we wanted to do is match our very best prospective host with their very best Superhost, so they can ask questions and get their questions answered. And this has led to a higher conversion rate of people becoming host. And then finally, we wanted to start addressing the obstacles that people are hosting. Now, one of the most common obstacles we heard are people were nervous about their home being damaged when they rented out to guests. And so, we launched last year with AirCover, top-to-bottom protection, free for every host only in our Airbnb, and this included $1 million damage protection and liability insurance. The last thing I’d say, though, is in addition to our global network, in addition to our supply strategy, is this other real important point. This is kind of the Holy Grail, which is that because more people are flexible about where and when they’re traveling, it means we’re further up funnel. 800 million searches have used I’m Flexible. And this means that we can start to point demand where we have supply because we are not supply constrained globally on any night of the year. The challenge is just that too many people go to too few places at the same time. But as the world gets more flexible, we can balance supply-demand in addition to our other strategies. So that’s the answer, global network, a full host recruitment strategy and pointing demand to where we have supply." }, { "speaker": "Operator", "text": "We now turn to Bernie McTernan from Needham & Company." }, { "speaker": "Bernie McTernan", "text": "Maybe just a follow-up on that with the supply and demand imbalance in the marketplace. Do you see the price appreciation as a problem for demand or an opportunity for the hosts?" }, { "speaker": "Brian Chesky", "text": "Dave, do you want to take this one?" }, { "speaker": "Dave Stephenson", "text": "I think, you would see a bit of both. I mean, if you go back to what we’ve seen for the average daily rate throughout 2021, early in the year, it was almost exclusively driven by mix. So, it’s the rebound of U.S. and European travel. It’s been a rebound in non-urban whole home, larger homes. So, the ADR was almost entirely mix. In the year, especially around the peak travel season around the summer, we started seeing some price appreciation in high-demand locations, think mid-summer. And so, there was more price appreciation in those areas. And it was about equal price appreciation to mix, both in Q3 and that stabilized relatively in Q4. And so, with the amount of demand for travel, the ADRs, we’ve not seen it take a significant tamper down on demand for people who travel. I think there’s a lot of pent-up demand for people to get out of their homes to travel and live. And I think they’re just constantly looking for the opportunity to kind of travel. In terms of the opportunity for host to earn more money, I mean, as there could be challenges in inflation driving up costs for individuals, they can certainly be empowered to become host as a source of earning additional income. And so, we see that Airbnb actually could be a solve for that. Airbnb have had hosts earn $150 billion as hosts on Airbnb, and I think continue to use us as a great way to earn additional income going forward." }, { "speaker": "Operator", "text": "Our next question comes from Deepak Mathivanan from Wolfe." }, { "speaker": "Deepak Mathivanan", "text": "Two quick ones, one for Brian and one for Dave. Brian, you noted that Airbnb would want to become the ultimate host and offer a more personalized service for guests. Can you elaborate on some of those efforts? And what type of incremental opportunities do you envision kind of unlock from this in the next few years? And then, Dave, I just wanted to ask on the marketing spend. It seems like you noted that you found new baseline. But as some of these volume scales in the next few years, a lot of it is driven by kind of a macro recovery of the travel spend incrementally and then also in some of these use cases like long-term stays remaining strong. Why shouldn’t we kind of expect additional leverage on marketing, or is this an effort by you to sort of step up investments so you can keep marketing spend relatively flat as a percent of revenues and bookings? Thank you." }, { "speaker": "Brian Chesky", "text": "All right. Awesome. Well, thanks, Deepak. Obviously, I’ll take the first question, Dave, and then I’ll let you take the second. So, Airbnb becoming the ultimate host. What I would say, let me point you to two things that we’re seeing, just to give you a sense of where we’re going. Let me start by saying Airbnb is really a design-driven company at the very beginning. We have a unique design driven approach, and I think that is a source of much of our innovation. And that’s allowed us to create this new category of travel, and it’s allowed us to make over 150 upgrades innovations in the last year. We have some really huge things that we’re going to be launching in the coming months that I’m really excited about. A couple of schemes that we’re thinking about. Number one, as I said, more and more guests are coming to Airbnb with flexibility, right? So typically, the way it used to work is people would come to Airbnb or an OTA, and you’d ask them where are you traveling and most people knew where they’re traveling. You’d asked them when you’re travelling, they say, I know where I’m traveling. So, maybe I’m going to Miami this week. The more guests are flexible, the more you want to start learning more about why they’re traveling and what they’re interested in, so you can point demand where you have supply. So, the first thing we want to do is provide a more personalized shopping experience. I think that we can go beyond the classic e-commerce paradigm where anonymous customer comes to a website, they type something into search, they get a list of search results and then they book something. We think that we can provide an even more personalized service. And because we have a huge amount of repeat guests and we’re a community and we know quite a lot about our guests, I think we can provide a deeply personal service. And that will increase conversion and really unlock a lot more opportunities for guests. That’s just one example. One other example I’m going to give to you is on customer service. One of the things we noticed is when we offer dedicated Superhost support for a Superhost and then AirCover, which is the industry first protection for host, it has massively increased host sentiment. And, we think this is critical. And we think we can do quite similar things for guests. We think that we can provide just the ultimate customer service to our guests and be there with them and go above and beyond each step of the way, just like a good host. And as far as does this offer an opportunity for incremental new offerings and services, the answer is absolutely yes. The more we know about our guests, the better service we provide, the more opportunities we have to promote new offerings to them as well. Dave, do you want to take marketing?" }, { "speaker": "Dave Stephenson", "text": "Sure. Just to step back, remember that in 2019, kind of before the pandemic, we shifted our marketing strategy to be more brand-driven and even less dependent on search engine marketing. And so, we made that shift and it kind of was proven to be the right shift to be made not only in 2019, but obviously in 2020 and 2021. And what we’re currently seeing is still 90% of our traffic remaining to be direct and unpaid. And so, we’re continuing to focus more of our spend in brand marketing and less on the search engine marketing. And you are right that the brand marketing then should be more fixed, it’s more of a fixed investment. But what we’re seeing is great success in the brand marketing that we did last year, and we’re going to be expanding it to more countries. And so, to the extent that we expand into additional countries, there will be some incremental more brand marketing spend in this year. But you’re right, once we are penetrated in most of the countries around the world, we can see more leverage because it becomes more of a fixed cost. And as you grow revenue, you can kind of grow revenue out above the marketing. I just -- we don’t expect to see that additional leverage in 2022, but we could see it in 2023 and beyond." }, { "speaker": "Operator", "text": "We now turn to Mario Lu from Barclays." }, { "speaker": "Mario Lu", "text": "The first one is on one of your top priorities for ‘22 and beyond. You mentioned unlocking the next generation of hosts. So, it’s been pretty clear that your hosts have been growing in regions that are seeing the largest demand. So, just curious if there’s a certain demographic or host that you feel you’re currently under indexing and look to unlock? And then, secondly, on service fees or take rate. I understand this is not reported, but with half of the elevated ADRS is due to pent-up demand, does that give you confidence that you could potentially increase the service fee at some point in the future? Thanks." }, { "speaker": "Brian Chesky", "text": "Yes. Hey Mario, I can take both and then Dave, you can feel free to elaborate on anything I didn’t get to. But, I’ll do both of these. All right. So let’s talk about unlocking the next generation of hosts. And the question is, is there any area that we’re under-indexing in? I don’t know if I’d say there’s an area we’re under-indexing in, but I can tell you where I see the biggest opportunity. Airbnb, we started because my roommate and I were living in San Francisco, we couldn’t afford to pay rent. So in other words, we weren’t a small business. We weren’t a vacation rental owner. We were just kind of everyday people. We weren’t a property management company. And we started Airbnb, the real innovation was we created tools to allow everyday people to be able to become host for the very first time. And because of that, nearly 90% of our hosts are individuals. They’re school features, healthcare workers, students. Our hosts have earned over $150 billion since we started and 55% of them are women. So, what we’re going to do is continue to focus on individuals. We’re going to continue to support property managers. We’re continuing to invest in them. We also have hotels, but we think probably the biggest growth area is going to be individuals. And the reason why is because things like inflation are providing more pressure on families all over the world and they’re going to require economic opportunity to be able to make it through this difficult time. And we saw that we started Airbnb during the 2008 recession. And many people were turning to Airbnb because the economic empowerment provided. So, I think that most people don’t realize that they can make an incremental $9,000, $10,000 a year by hosting occasionally. And then there are a number of people that are incredibly successful. We see people renting unique properties that are making tens of thousands of dollars, even hundreds of thousands dollars a year. So, we think just getting the message out to everyday people, they can become a host, making it easier and addressing the obstacle systematically is the key opportunity. And this is true in geographies, all of the world, from North America, Europe, Latin America, Africa and APAC. So, that’s what we’re really seeing. And then on the service fees and take rate, let me just say this. There is no question that we have obviously the opportunity to increase take rate on the guest side and the host side. Now, we don’t want to just increase the tax for the service. We want to make sure that we’re going to increase our prices that -- or if we’re going to increase fees, that’s going to be because we’re offering services that our guests or hosts want to pay for. We want to make sure that every single year, the value listing is increased. Right now, those opportunities to increase monetization efforts are not the most perishable opportunities right now. And the reason why is we think this is a once-in-a-generation opportunity for this huge travel rebound. We have these new use cases. People are living anywhere all over the world. But we also have the return of cross-border travel, the return of urban travel. So, we are totally focused on responding to this travel market share as possible. Now, the bigger we get and the more scale we get, the more services we could potentially offer to guests and hosts. And what we’ve seen is there’s a lot of services that you can offer to host. I think Alibaba, Amazon, Etsy, Shopify and others have proven that there’s a huge opportunity in this area. It’s just not the most perishable opportunity right now, so we’re focused on market share." }, { "speaker": "Operator", "text": "We now turn to Jed Kelly from Oppenheimer." }, { "speaker": "Jed Kelly", "text": "Two, if I may. You said your listings were up 20% in non-urban North America. Is that coming from primarily individuals or property managers? And then, as we think out to 2022 as more people return to urban destinations, how should we think about competition, specifically from hotels and more commoditized inventory? Thank you." }, { "speaker": "Brian Chesky", "text": "Great. Thanks, Jed. Why don’t Dave, you take the first question, growth of individuals versus property managers in nonurban areas?" }, { "speaker": "Dave Stephenson", "text": "Yes. Broadly, what we’re seeing is that our growth in new supply has been relatively consistent with the distribution of individual versus professional hosts that we’ve seen typically. Like, the majority of our listings are unique to Airbnb and from our individual host community. And so, we’re continuing to see the growth in our overall number of listings to be consistent with the relative distribution that we’ve historically seen. We don’t specifically break out the individual versus professional host by geography. I’ll just tell you that broadly, we are continuing to see that we focus on the unique needs of the individual hosts, individual host community. That’s what we’re focused on, and that’s where we’re continuing to see the growth. So, the mix overall has remained relatively stable between individuals and professional hosts during this most recent period." }, { "speaker": "Brian Chesky", "text": "And then, Jed, why don’t I take the question about competition, hotels and more commodity offerings. So, I think the important thing -- I mean this is just one thing to think about. The longer you’re away from a home, the more I think you want to be in a home. And if you actually look at the growth of Airbnb by length of stay, every length of stay segment, except for one grew from this time in 2019, Q4 2019. For example, 1 month stays grew, 1 week stays grew, 3 nights stays, 5 nights stays grew. The only stay category that didn’t grow were 1 night stays. Presumably, these are business travel stays. I don’t think that business travel is going to ever come back the way it was before the pandemic. It doesn’t mean business travel is not going to back. I just think it’s going to be different because the way we work is different. And I think that the bar to get on an airplane to travel for a meeting will just be a little higher than before. Now, I do think that the travel market is so big that I think there’s so much room for both, Airbnb and hotels. And actually, I think many hotels are going to consider it to be a very important distribution platform for them. The bigger we get, the more important we actually are to them. I also think the hotels are going to have a really great opportunity with a lot of group travel conferences, like really large like events and offsites. So, they’re going to have their area where I think they’re going to thrive and I think we are going to have ours as well. But I don’t actually see like a massive overlap. I do think there are some very distinct use cases that are great for Airbnb and some others that are great for hotels and hotels exist on Airbnb." }, { "speaker": "Operator", "text": "We now turn to Brian Nowak from Morgan Stanley." }, { "speaker": "Brian Nowak", "text": "I have two on the bookers. You guys have had incredible bookings growth the last couple of years. I’d be curious to hear about what you know, what you’ve learned about the demographics of your bookers and how it’s changed, age, income? What does the base of your bookers look like now as opposed to pre-pandemic? How has that sort of changed your view of the world? And then secondly, about all the new bookers that came to the platform in 2020 in 2021, what can you tell us about their user behavior from a frequency or booking perspective at this point versus earlier cohorts, just so we get sort of an idea of how these users may or may not be different from what you’ve added historically? Thanks." }, { "speaker": "Brian Chesky", "text": "All right. Thank you very much, Brian. And Dave, why don’t you take these. So, the first question is bookings growth, what are the demographic of bookers, especially new bookers and then new user behavior compared to earlier cohorts?" }, { "speaker": "Dave Stephenson", "text": "I think broadly, the good news is that we’re really not seeing a major shift in change overall. The demographics have been relatively consistent throughout this rebound and our new cohorts have -- it’s early, but our new cohorts are still aging consistently with what we’ve seen new booking cohorts age in the past, the repeat booking rates and things. So, I think that’s a nice opportunity for us to introduce Airbnb to millions of new guests and it’s great that those guests at least in the early days, are having similar rebooking rates as what we’ve seen historically." }, { "speaker": "Brian Chesky", "text": "And maybe I’ll just -- maybe -- and maybe, Brian, I’ll just say one other thing. I think the thing that’s like really quite unique about Airbnb is we’re not just a brand for young travelers or old travelers. We’re not just a budget brand or a luxury brand. We are really -- we range from budget to luxury, young travelers to retirees. We’re in U.S., also in Europe. We’re in every continent in the world, and we’re not just urban, we’re urban and nonurban. And so I think the adaptability of our model and the incredible selection that we have really brings the kind of the whole world to Airbnb. And so, we’re seeing -- and I think I continue to expect that really all demographics are going to continue on Airbnb. It’s a pretty unique brand that can really flex in that way. And so, I think it’s one of the great points of our global network." }, { "speaker": "Operator", "text": "We now turn to Brian Fitzgerald from Wells Fargo." }, { "speaker": "Brian Fitzgerald", "text": "A couple of questions on the length of stay. As you continue to see the strong growth in longer stay. Just wondering if you could walk us through some of the take rate dynamics of that. And when you talk about addressing the key pain points of hosts, just wondering if you could share what some of the ongoing points of friction are there and preventing people from hosting on the platform?" }, { "speaker": "Brian Chesky", "text": "Yes. That’s great. So Dave, why don’t you take the length of stay, take rate dynamics and I can talk about the key obstacles people have for hosting." }, { "speaker": "Dave Stephenson", "text": "Sure. On the take rates, the long-term stays, they have a moderately lower take rate because the guest needs are a little bit lower. And the ADRs or the average daily rates are just staying for longer because hosts often offer a discount. But those lower take rates and ADRs are offset by the fact that they’re longer than short-term stays and the costs actually support them. So lower customer support costs another -- and actually have a more nights booked. Those are benefit and become a tailwind and we generate similar contribution margins from a long-term stay booking relative to the short-term stay bookings. So, the dynamic is a little bit different on the top, but the bottom line contribution is more similar." }, { "speaker": "Brian Chesky", "text": "And as far as addressing the obstacles, Brian, what we’ve seen is we’ve listened to thousands of hosts and we took a very systematic approach to the journey from people learning about Airbnb hosting to listing to going through the entire process. And the first thing we want to make sure is people know the benefits of hosting. Most people don’t realize the economic opportunity the hosting provides. They don’t realize that you can host in 10 easy steps. They don’t realize that the vast majority of people get their first booking within three days. We want to make sure that if they have any problems they can get help they need, so we’re going to continue to expand the Ask a Superhost program. We have some ideas to reduce the effort to hosting even further, and we want to continue to provide more protection like AirCover to get even more people a peace of mind. I think the thing about Airbnb hosting, that’s pretty unique compared to other marketplaces is almost any type of person can be a host. Most of the people listening to this call could be a host. You could be renting your second home. We -- people rent their primary home. People can rent their homes when they’re gone. And so I think there’s something about hosting that can apply to people of all walks of life. And that’s what we’re going to be focused on." }, { "speaker": "Operator", "text": "We now turn to Doug Anmuth from JP Morgan." }, { "speaker": "Doug Anmuth", "text": "I was just hoping you could talk a little bit more about ADRs and just what you’re seeing so far for bookings in ‘22? And just curious, just your view of the degree of decline for this year has changed at all. And then, Dave, just on capital allocation, just curious if there’s any changes or anything different to call out now just given obviously, a lot more discipline in the business and a very different degree of profitability versus a couple of years ago. Thanks." }, { "speaker": "Brian Chesky", "text": "Yes. Obviously, Dave, why don’t you take both of these, ADR in 2022 and capital allocation." }, { "speaker": "Dave Stephenson", "text": "Sure. Yes. Like I said earlier in the call, the average daily rate early in 2021 was almost exclusively driven by mix, country mix, urban versus nonurban and whole homes or whole home non-urban, Europe, U.S., just has a higher daily rate. And then towards the back half of the year, both in Q3 and Q4, we saw some price appreciation in high-demand markets and kind of peak periods. And so, then it was more equally weighted between the two. And so, then, what we’ve seen kind of coming in and we expect that as urban comes back, and we are continuing to see urban accelerate every quarter and some of our lower ADR markets start coming back, and we have seen places like Latin America now well above 2019 rates. So, we would see some moderation in the ADRs. What we’re seeing early in 2022 and included in this -- in the letter is we anticipate about a 4% increase still year-over-year, so Q1 ‘22 over Q1 ‘21 in ADR. So, we’re still seeing strong ADR rates and anticipate that will be the case here early in the year. And what’s tougher to forecast is the rate of return of those lower ADR segments and then how much of the price appreciation kind of steps. But we would anticipate some moderation of ADRs through the back half of the year. We just don’t know exactly how much. And then, on the capital allocation, I do tell you that I sleep better at night now that we have $8 billion of cash in the bank relative to the position we were in -- prior to COVID or midst of COVID. And it enables us to have the flexibility to continue to invest in growth because that’s what we’re focused on is to grow this business. And we can continue to use some of that cash in case we wanted to use it for any kind of acquisitions, although acquisition is not our primary kind of growth driver. And one change that we did announce here in the letter of this quarter is that we are planning to pay for our RSU tax obligations for employees with cash rather than selling to cover. So we will be net settling those shares, and that will be a use of about a little more than $1 billion of cash during the year. But, I’m very proud about how -- with our investments. So, thank you." }, { "speaker": "Operator", "text": "We now turn to Lloyd Walmsley from UBS." }, { "speaker": "Lloyd Walmsley", "text": "Thanks. I had a couple. First, just on the host supply, it sounds like you’re seeing good traffic gains in regions where you’re advertising, but the aggregate listings number is only up something like 7% from the last disclosure, despite a pretty good environment. So, just wondering what gives you the confidence that you can continue to grow supply to meet demand on kind of a multiyear basis? And is there -- do you have visibility into the backlog of hosts just going through that process that gives you that confidence it can accelerate? And then a second one on kind of ADRs, the shareholder letter mentioned having over 25% more nights booked for the summer than this time in 2019. Can you talk about what that looks like kind of on a gross bookings basis? And as we think about ADRs, if you put aside the geographical format mix shift, like where do you think like-for-like pricing is moving up for this year as it seems like some folks are pushing price?" }, { "speaker": "Brian Chesky", "text": "Yes. Thanks very much, Lloyd. So, Dave, I think you can take both of them, and I’m happy to round up the answers. The first one is obviously on host supply, how we’re feeling about the environment on a multiyear basis and the backlog of hosts. And second, obviously, summer demand, what that means for GBV ADR." }, { "speaker": "Dave Stephenson", "text": "Sure. As we kind of mentioned earlier, the key is that -- on the supply side, remember that we have 4 million hosts. The vast majority of those are individual hosts, 90% of those are individual hosts. And the individual hosts hosting their own home or often the second home. And so, what we found kind of during the pandemic is people don’t get rid of their own or their second home just because there’s a global pandemic and they’re not having hosting. When people are ready to travel, they’re there and ready to travel again. So actually, we’ve been quite proud of the fact we’re pleased that our actual supply has remained as stable as it has throughout this pandemic. And I think that’s what you’re seeing in regions outside of where we’re seeing a lot of the rebounds, U.S. and Europe, while there could be softness or not as much growth there. That growth would be there when the demand comes back. And that’s why we’re highlighting the growth that we saw in the high-demand areas. We did grow 20% in the U.S. non-urban because that’s where we’re seeing a greater amount of demand. Airbnb is amazingly self-healing dynamic with the approach to how we add supply to our environment. So, I think as the market comes back, we’ll continue to do it. And then go ahead, Brian." }, { "speaker": "Brian Chesky", "text": "And again, maybe I’ll just, Lloyd, round out a little bit of this answer. I just wanted to just really underline this. We designed the Airbnb in the very beginning so that guests attract hosts and hosts attract guests. And this is 14 years later, more than 1 billion guest arrivals later. It’s working obviously pretty well. And again, I think one of the -- a couple of reasons. Number one, guests become hosts. And so, as we get more hosts, a percentage of them -- as we get more guests, a percentage of them become hosts. And we’re going to continue to focus on converting as many guests to hosts as possible. This is a really interesting flywheel. Number two, the way we grow primarily is word of mouth. So, as regular people get more bookings, they tend to tell other regular people about it. If a hotel gets a lot of bookings, they’re not going to tell the next hotel who’s a competitor. Most regular people don’t think of themselves that way. So, word of mouth starts to spread. But the other thing, once again, I also want to underline is the Holy Grail of supply is also being able to point demand where you have supply. And we are not even close to supply constraints any night of the year, if you take a global average of every city, all 100,000 cities around the world. And so, what we want to do is as people are more flexible, and we are moving top of funnel, we want to continue to point demand where you have supply -- and all of that is in addition to our very specific efforts to continue to recruit hosts, which we’re really focused on. So, I think Dave nailed it. It’s all about the global network. And Dave, why don’t you take the second question about summer demand?" }, { "speaker": "Dave Stephenson", "text": "Yes, summer demand and ADRs. I mean, I think we’re just seeing strong demand for travel. People are ready to travel this summer. We have 25% more nights booked for the summer travel season than we did in 2019. They’re ready to get out and do that travel. And obviously, we are seeing that ADRs are higher. But as I mentioned earlier in the call, both in Q3 and Q4, a portion of that was mix and about an equal portion was due to price appreciation. So, that stayed relatively stable. In other words, we didn’t see price appreciation go up higher as a driver in Q4. It was fairly stable. So, that’s kind of what we have currently forecasted for what we’ve shared in our guide here in Q1." }, { "speaker": "Operator", "text": "We now turn to Andrew Boone from JMP Securities." }, { "speaker": "Andrew Boone", "text": "Two please. First, can you just talk about your progress with hotels on the platform? Brian, I think you mentioned that briefly earlier. And then, secondly, going back to marketing, do we start to think about brand marketing as being more connected to the supply side of the equation, meaning that there’s going to be continued pressure as you guys grow the network more broadly, but rather than focus on the demand side, focusing more on the listing side and thinking about that as it is connected to marketing?" }, { "speaker": "Brian Chesky", "text": "Thanks, Andrew. Why don’t we do this? Why don’t I, Dave, take marketing? I’ll start there because I wanted to just recap how we’re thinking about marketing over the coming years. And then you can take our progress with hotels and the platform. Let me just back up and just talk about how we’re thinking about marketing, Andrew. We have a pretty different marketing approach than our competitors because we take a full funnel approach to marketing. And it combines PR with brand marketing and performance marketing, and PR is actually probably the most important channel to build the brand of Airbnb. And that is because Airbnb has got an offering that’s really unique. And so, because of that, people are deeply passionate about, they tell one another and every Airbnb’s become a noun and a verb used all over the world. We got more than 0.5 million articles on Airbnb just last year alone. So, it’s been a very important part of our marketing strategy. And I think this explains why nearly 90% of our traffic remains direct or on pace. Now we take brand marketing, we think of as really investment in educating the world about Airbnb. So, it’s not really about buying customers but educating people what makes Airbnb special. And then we think of performance marketing as really a laser, to laser in on balancing supply and demand. Now with regards to brand marketing going forward, it’s a great question. I think we’re going to focus on a couple of big areas. Number one, yes, we think the area that needs a little more investment is the brand of hosting. The brand of Airbnb is noun and verb used all over the world. And very few people at this point who travel regularly and book travel on Internet don’t know about Airbnb. But we don’t think enough people know about the incredible economic benefits to hosting and just be incredible, like what it brings to people’s lives to be able to bring the world to their home. But the other thing is we have a lot of really big innovations that we’re going to be launching this year. And so, we want to actually put some of our brand marketing dollars behind some of the new product innovations that I’m incredibly excited to deal this year. And so, those are two of the areas that we’re going to continue to invest in. Again, we think of marketing as education, education and what we have that’s unique and different, and we’re going to educate the world about hosting, and we’re going to educate the world about our new products and innovations this year. With that, why don’t I hand it over to Dave. Maybe the only other thing I’d say of hotel, before we talk about how they’re doing on our platform is, again, the core o our community are individual hosts. But the great thing of our platform is property managers and hotels are great ways to fill the network gap. We think most people come to Airbnb to book something unique, one-of-a-kind stay from an everyday host. But we always want to make sure we never have any network gaps. We never want somebody come to Airbnb and leave having not found a place to stay. And so, we think hotels and property managers continue to be a very important part of our strategy. And the more demand we give them, the more they will continue to come on our platform. I don’t know, Dave, you want to talk a little bit about the progress of hotels on our platform." }, { "speaker": "Dave Stephenson", "text": "We notice that in 2020 and 2021 we did scale back our investment in those areas. I mean it’s key to have hotels still in the network gaps. But as cities are starting to return and we’re getting urban coming back, that’s when the time we’ll need to fill those network gaps with hotels. And so, what we’ve seen in Q4 is that the nights remain depressed here over two years, and they’re slightly down kind of quarter-over-quarter due to Omicron. But our revenue’s a little bit stronger relative to that due to a little bit higher ADRs, which we’re seeing in hotels, similar to what we’re seeing in other parts of the business. So, we’ll invest in hotels over the long term. It’s just not our immediate focus." }, { "speaker": "Operator", "text": "We now turn to Mark Mahaney from Evercore ISI." }, { "speaker": "Mark Mahaney", "text": "Okay. Thanks. I just wanted to clarify something on marketing. It does sound like you’ve run a few campaigns towards hosts and towards I think you called them shaggy strangers that you were pretty happy about. So, do you want to lean more into marketing you talked about expenses levering or not -- leveraging or not leveraging in ‘22, should we expect sales and marketing to show some deleverage as you kind of lean more into those marketing plans? And then, could you also talk a little bit more about ADRs? And I forget what the impact of the longer-term stays, what impact that’s had on ADR? So, forget about the urban, forget about the pricing, just that impact itself of longer-term stays. Is that that accretive or dilutive to ADRs, what kind of impact does that have? Thank you." }, { "speaker": "Brian Chesky", "text": "All right. Thanks very much, Mark, for both questions. Dave, I’ll hand it over to you. Sorry." }, { "speaker": "Dave Stephenson", "text": "On the marketing campaign, as I said earlier, we anticipate our marketing expense as a percentage of revenue in 2022 to be relatively consistent with that in 2021. So I’m not anticipating further deleverage and also not anticipating a lot of incremental leverage. As we’re growing this year, we’ll be expanding the investment to more countries. And as you noted, like our -- some of the brand marketing that we’re doing in support of host. I think one of the powers to remember of our marketing is that we can speak to both sides of the marketplace. So, anytime we market Airbnb, we can actually talk to both, guests and hosts. And as Brian mentioned earlier, one of our single largest sources of new hosts are our formal guests. On the ADR, long-term stays are dilutive on the ADR as a percentage goes up. but it’s kind of offset by some other -- the other factors that we talked about on the call today, both mix shift and price appreciation is what continues to buoy the ADR rates overall." }, { "speaker": "Operator", "text": "Our next question comes from Kevin Kopelman from Cowen and Company." }, { "speaker": "Kevin Kopelman", "text": "I just had a follow-up on some of the recent booking trends you’re seeing. So, looking at the Q1 revenue guide at the midpoint there, it would be 70% higher than in Q1 ‘19. And that’s higher than any of the GBV stats you’ve given out so far. So, is that revenue growth all GBV driven, or there other -- the take rate or other components in there as well? And if so, what are they? Thanks." }, { "speaker": "Dave Stephenson", "text": "Yes. The GBV is primarily driven by the -- relative to nights is driven by the increase in ADRs. So, our absolute kind of take rate on a percentage of GBV is actually remaining fairly stable, so." }, { "speaker": "Operator", "text": "We’ve come to the end of our Q&A. I will now hand back to Brian Chesky for his closing remarks." }, { "speaker": "Brian Chesky", "text": "All right. Well, thanks for joining us today, everyone. Just to summarize what we shared today. 2021 was a record year for Airbnb. We hit new highs of gross booking value, revenue, net income and adjusted EBITDA. We made more than 150 upgrades and innovations across every aspect of our service. But we’re not stopping there. In 2022 and beyond, the world will continue to change as millions of people choose to live anywhere. And Airbnb will relentlessly innovate to support this new world. We’ve now been a public company for more than a year. And I want to end today by thanking our employees who worked tirelessly to make all of this innovation possible. And to our millions of guests and hosts around the world, I want to thank you for trusting us in helping build Airbnb into what it is today. Thank you all. And I’m going to speak to you again soon from a number Airbnb somewhere around the world. See you." }, { "speaker": "Operator", "text": "This concludes today’s call. We thank you for joining. You may now disconnect your lines." } ]	Airbnb, Inc.	115,705,393
ABNB	3	2,021	2021-11-04 17:30:00	Operator: Good afternoon, and thank you for joining Airbnb’s Earnings Conference Call for the Third Quarter of 2021. As a reminder, this conference call is being recorded, and will be available for replay from the Investor Relations section of Airbnb’s website following this call. I will now hand the call over to Ellie Mertz, Vice President of Finance. Please go ahead. Ellie Mertz: Good afternoon, and welcome to Airbnb’s Third Quarter of 2021 Earnings Call. Thank you for joining us today. On the call today, we have Airbnb’s Co-Founder and CEO, Brian Chesky; and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our third quarter of 2021. These items were also posted on the Investor Relations section of Airbnb’s website. During the call, we’ll make brief opening remarks and spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we’ll be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We’ve provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. And with that, I’ll pass the call to Brian. Brian Chesky: All right. Thank you, Ellie, and good afternoon, everyone. Thanks for joining us today. I’m really excited to share our results with you. The travel rebound that began earlier this year accelerated in the third quarter. Q3 was Airbnb’s best quarter yet. Revenue of $2.2 billion with our highest ever, surpassing 2019 by 36%. Net income of $834 million was our highest ever, nearly 4x larger than a year ago. Adjusted EBITDA exceeded $1 billion, also our best ever. Our EBITDA margin was 49%, an increase of 30%, or 3,000 basis points compared to Q3 2019. Over the summer, we also reached a major milestone with one billion cumulative guest arrivals. This means that Airbnb has been used more than one billion times since we started. Now finally, I’m delighted to report that our hosts earned a record $12.8 billion in the quarter. Our results show that the growing strength of the travel rebound is here despite the continued pandemic. We saw continued strength in North America and EMEA and an acceleration in Latin America despite sequential increase of cancellations. Now excluding APAC, our total global Nights and Experiences Booked exceeded 2019 levels. Gross booking value of $11.9 billion shot above 2019’s levels by 23%, driven by the strength of ADR. But something bigger than a travel rebound that’s happening. The world is undergoing a revolution in how we live and work. The pandemic has suddenly untethered tens of millions of people from the need to go into an office. Technologies like Zoom make it possible to work from home. Airbnb makes it possible to work from any home. And this new found flexibility is bringing about a revolution in how we travel, because for the first time ever, millions of people can now travel anytime, anywhere for any length and even live anywhere on Airbnb. And we believe that this trend towards more flexibility will only accelerate. In recent months, some of the world’s largest companies Procter & Gamble, Amazon, Ford, PricewaterhouseCoopers have announced increased flexibility for employees to work remotely and we expect many more companies follow this. And so what we’re seeing our several trends as a result of this travel revolution. First, people can travel anytime, because many people don’t have to be in the office at specific times, they have more flexibility and when they can travel. So families are increasingly travelling traveling outside the traditional week, weekend trip. And in fact, Mondays and Tuesdays are currently our highest growing days of the week to travel. This is really interesting. The second trend we’re seeing is that people are traveling everywhere, literally everywhere. During the pandemic, over 100,000 cities have had at least one booking on Airbnb. And that includes 6,000 towns and cities that received their first booking ever on Airbnb. The third trend we’re seeing is people aren’t just traveling in Airbnb, they’re now living on Airbnb. Long-term stays, up 28 days or more, remained our fastest-growing category by trip length. People are traveling Airbnb for extended vacations, relocation, temporary housing, student housing and many other reasons. Now finally, more people were also interested in hosting than ever before. We ended Q3 with the most active listings ever, and there are two reasons for this. First, our demand is driving more supply. In fact, our highest supply growth is in our highest demand destinations, particularly in North America and EMEA. And second our marketing and product initiatives to attract new hosts are working. Now we’re constantly improving our service to meet this new way of traveling and the wave of guests it will bring. On May 24, we introduced the Airbnb 2021 release, which included more than 100 upgrades across every aspect of Airbnb service. On November 9, which is next Tuesday we’ll be announcing the Airbnb 2021 Winter Release and this release will include another 50 upgrades and innovations that make it easier to host and support the changing needs of guests, and you can watch it right at our home page next Tuesday at 8:00 AM Pacific Standard Time. So, I hope you can tune in and to see I’m really excited about what we have to share. So, now let’s turn to our progress on our 2021 plan. Now as a reminder, our single priority in 2021 has been to prepare for the travel rebound. To do this, we’ve been perfecting the end-to-end experience of our core service. And this includes educating the world about hosting, recruiting more hosts, simplifying the guest experience and delivering world-class service. So, let me give you an update on each of these. First, we are educating the world about what makes Airbnb different, and that is hosting. Earlier this year, we launched our first large-scale marketing campaign in five years, made possible by hosts. We’re educating guests about the benefits of being hosted, and we’re also inspiring more people to become hosts, and we continue to be encouraged by the results of this campaign. Second, we’re recruiting more hosts and setting them up for success. On May 24, we launched a completely redesigned host onboarding flow that makes it simpler for anyone to start hosting. Throughout the process, potential hosts can now be paired with Superhosts to answer their questions or concerns. We began Ask a Superhost in nine countries, and we’ve since expanded the program to over 30 languages in 196 countries. Third, we’re simplifying every part of the guest experience. Earlier this year, we introduced I’m Flexible, a whole new way to search on Airbnb when guests are flexible about where or when they’re traveling. Now since launch, guests have used I’m Flexible more than 500 million times. Now due to the popularity of this feature, we’re soon making it even more flexible by expanding the date range of this feature as well as adding more categories of unique space. We’re really excited about the progress of this feature. And finally, fourth, whenever a host or guest need us, we must deliver world-class service. In September, we launched dedicated Superhost support in North America, giving our most experienced hosts priority access to our most experienced support agents. We’re expanding the support to all Superhosts globally by the end of the year. So that is our plan for 2021. Now, before I go to questions, I have one update that bittersweet. Three years ago, Ann Mather became the second independent director to join our Board after Ken Chenault. Since then, our team has benefited from her guidance. Now Ann recently made the decision to reduce the number of Board she sits on, and sadly for us that means she’ll be departing our Board of Directors on December 15. Now Ann has been a critical member of our team as we transition from a private to a public company, and we appreciate everything she’s done. We look forward to adding another independent director as soon as possible. I know that being on the Airbnb born in the midst of a global pandemic is no easy task. And I want to once again thank you, Ann, for everything you’ve done. So to recap, Q3 was Airbnb’s best quarter ever. Revenue, adjusted EBITDA and net income were our highest ever. Travel is undergoing a revolution. People are now taking longer trips traveling to more locations and even living on Airbnb. As the world changes, we continue to innovate. We’ve made more than 150 upgrades innovations this year alone. So with that, Dave and I look forward to answering your questions. Operator: Thank you. [Operator Instructions] Our first question comes from Eric Sheridan from Goldman Sachs. Eric, please go ahead. Eric Sheridan: Thanks so much for taking the questions. It’s been a big year in terms of innovation and investing behind supply. Brian, would love to get a little bit more color on what you see as the key learnings from rolling some of those investments out into the marketplace. And how they can inform the way investors should be thinking about supply growth and innovation in the years ahead. Thanks. Brian Chesky: Yes. Thank you very much, Eric. So yes, this has been a really great year for supply growth. We have more active listings on Airbnb today than we ever have. And it’s important to just share a few thoughts on supply. Number one, we are quite different than our competitors. Airbnb, we have four million hosts, and 90% of our hosts are individual. That means they could never have posted, if not for the tools that we provide. And the vast majority are only listed on Airbnb. And we found that if we make hosting easier and as more people know about hosting and we give host more support, more people will become hosts. And so our strategy is a full life cycle. It starts with making sure more people know about hosting. You see the Airbnb brand is very mainstream. Our brand is now – use all over the world, but hosting is not as mainstream. And so the first thing we’re doing is we’re raising awareness about hosting. This year, we did our first brand campaign in five years, made possible by hosts. It uses real photos from real trips to highlight what makes Airbnb different in that host. The great thing about that ad is that also is able to track more host to Airbnb as well. So once we’re able to increase awareness of hosting, then the name of the game is making it easier to host. And on May 24, we showed a simple 10-step process to become a host where we’ve radically reduced the number of steps and made it easier to host and conversion rate for people starting to leisure their space low is up. Third, if a host needs help we’re going to give them support. So, we launched Ask a Superhost. Ask a Superhost pairs prospective host with our very best Superhost on Airbnb. And since we launched this feature in May, more than 50,000 prospective hosts have used this, and we’re now expanding this to 196 countries globally. And finally, we’re continually investing more tools to allow hosts to expand their business. And what all this means is that you’re going to see continued innovation from us. What we’ve seen is an increase in the trajectory of a number of people becoming a host. The other point, though, Eric, I just want to make is the following. On [indiscernible], we ever supply constraint globally on Airbnb, the vast majority hosts only rent occasionally. And so the holy grail of travel is pointing demand to where we have supply. Before the pandemic, most people were very fixed in their search parameters. They had a destination of mine and they had dates in mind. But now because many people don’t have to go back to an office, they’re more flexible. And this means that we can point them to where we have supply. And this is the power of being flexible. Over 500 million searches have used flexibility. More than 40% of our searches, guests are flexible on where or when they’re traveling. So this is what we’re doing. We’re focused on a full funnel approach to supply acquisition, and we’re pointing demand to where we have supply. And I expect that we’ll have plenty of supply years to come. Operator: Our next question comes from Mario Lu from Barclays. Mario, please proceed. Mario Lu: Great. Thanks for taking the question. I have a couple on the long-term stays of 28 days and more. You guys mentioned that it was roughly 20% within 3Q. But I think in the first quarter, it was around 24%. Was this mostly due to seasonality that declined slightly since then. And then at a higher level, any updated views on how large the channel these larger stays could attract over time? Thanks. Brian Chesky: Yes, Mario, why don’t I give the mix shift to Dave and I spent to talk a little bit more broadly about the strategy. Dave? Dave Stephenson: Yes. The majority of the decrease is simply the increase of short-term stays kind of coming back. It still remains to be – long-term stay has been one of the fastest-growing parts of our business, pre-COVID. That is a trend that we are seeing in the pre-COVID era it just continued to be strong during COVID, and it remains strong today. And so yes, the decrease is just the fact that short-term stays continue to come back. And in terms of the market opportunity of long-term state – market opportunity in long-term stays, we think this adds hundreds of billions of dollars to our overall long-term TAM opportunity with long-term space. Brian Chesky: And I’ll just share a few more thoughts, Mario. We’ve just seen a major paradigm shift in travel. Before the pandemic, short-term stays is really the primary business that we were in. What we actually saw was that long-term stays was our fastest-growing segment of business even before the pandemic. So, I think what the pandemic did is an accelerated inevitable trend. There was already this emerging category between classic traveling and really kind of permanent housing which was people seeking stays of weeks at a time or even months at a time. And I think what the pandemic has done has just accelerated this. We’re going to see a lot more people going away as they have newfound flexibility. Even people with families who can’t go away during the year, they may be able to travel a little bit longer during summer as well. So this is really exciting. And the only other thing I’d just add is nearly half of our business is for more than a week as well. So these are really exciting categories. I think there’s a huge amount of growth going forward for these different segments. Mario Lu: Okay. Thanks. Operator: Our next question comes from the line of Jen Shi from Bank of America. Jen, please go ahead. Jen Shi: Thanks for taking the question. This is Jen on for Justin. Just wondering, so you guys mentioned that with the host initiatives, you’re gaining supply in very popular areas like North America and Europe. Just wondering, are you seeing supply opening up in urban areas? And as the mix shift kind of comes back to urban and cross-border travel, how should we think about the impact on ADRs, take rate and maybe margins in future years? And then just one follow-up on marketing spend. Looking at marketing spend trends, obviously, this year has been super positive compared to pre-pandemic spending, you have a lot of leverage there. Just wondering, do you see a scenario where maybe you would have to be more aggressive on marketing if hotel travel was coming back? Thanks. Brian Chesky: All right. So thank you, Jen. I heard three questions. One is about supply growth in urban. The next is mix shift, it’s impacting at ADR and then marketing spend. Dave, do you want to take these? I think these would be great for you to take. Dave Stephenson: Sure. In terms – again, one of the things to remember is – and the reason why we kind of highlighted on the call that the growth in our supply in the nonurban areas of on North America and Europe is that we get the supply when we have the demand, and that’s why it’s gone up 15% since the beginning of the year because that’s also where there’s biggest demand. Now, we’re obviously seeing greater demand pickup in our more urban areas. So the percentage of nights in the urban area has started to increase or now made 46% of our nights. We’re still down to maybe 60% of our nights kind of pre-COVID. And so we’ll continue to see listings growth in those more urban areas as the demand kind of keeps coming back. So until I think we’re back to full demand, we actually don’t need incremental growth because we’re still below our nights that we had back in 2019. But again, the important part is that we get the supply when we need it because the supply will follow that demand and we’ll continue to make it easier for new supply to come on board. In terms of forward-looking ADRs, the high average daily rate we’ve seen throughout this last year has been primarily driven by the mix of types of space and the location. So it’s a mix of Europe and North America have higher average daily rates. Non-urban whole home, larger homes, all those reasons have been driving up the rates overall. And the other thing we start seeing a little bit more in Q3 with some price appreciation in high demand areas. And so it was a combination in Q3 of both the mix of types of stays and some of the price appreciation. And what we do anticipate is as urban comes back, and more markets like Asia and Latin America, which have lower average daily rates. We anticipate the overall ADR to moderate some, but we also believe that some of the higher ADR will sustain for the future. So in terms of – and then what we did say also in our shareholder letter is that we anticipate that the ADRs in Q4 should be relatively consistent with the ADRs we had here in Q3. In terms of marketing, we’re really happy with the adjusted marketing approach that we’ve taken. Now again, this was a pre-COVID change that we made, where we were – began to invest in our strength. And our strength is the brand of Airbnb. And we modified that marketing approach pre-COVID. We reduced our reliance on search-engine marketing. And then in COVID, we have shifted even just more significantly more quickly, and we’re really pleased with those results. As Brian mentioned, this broader brand campaign, talking about made possible by hosts, it gets to talk to both sides of our marketplace. It both recruits new host to Airbnb, and talks to guests about why you’d want to stand Airbnb, and we’re really happy with those results and plan to continue the strength of that. We’ve increased our relative marketing rate this year, just given the fact that our – the business has been going quite well. And so – but on a relative basis, our marketing expenses as a percentage of revenue are down from levels we had in 2019. And we should anticipate that this – it will be in this kind of range for the foreseeable future. Brian Chesky: And I can just share just to really recap briefly our marketing strategy. We take a really different approach than our competitors at the full funnel integrated marketing strategy. And it really starts with PR and word of mouth. And really word of mouth and PR’s how we build the brand for the vast majority of the years before you even have enough money to have a marketing budget. And because of that, Airbnb is a really well-known brand that’s a noun and a verb used all over the world. And because of this, more than 90% of our traffic was free or unpaid in Q3. And so we think of marketing is really education. Brand marketing is really about educating people that are highly differentiated product. And then performance marketing for us isn’t really a way to buy customers. It’s the way the laser in on balancing supply and demand. So we think this is a really unique approach. And I think that it’s just really all about continually investing in our brand. And over time, we think the amount of the loyalty to the brand will only increase. Jen Shi: Great. Super helpful. Thank you both. Operator: Our next question comes from Kevin Kopelman from Canaccord. Kevin, your line is now open. Kevin Kopelman: Thanks a lot. It’s Kevin from Cowen. Can you give us a sense of the booking trends in the fourth quarter, quarter-to-date. You mentioned acceleration in the shareholder letter, are you seeing that back to Q2 levels yet in terms of growth as compared to the same quarter in 2019, just given kind of the Delta slowdown, that would be helpful. Brian Chesky: Hey, Kevin, thanks for the question. Dave, do you want to take this? Dave Stephenson: Sure. what we’re seeing is continued strength in growing strength in the business as borders are starting to open up, people are more vaccinate more willing to kind of travel. We’re continuing to see bookings strength, and that’s why we’re going to be seeing gross booking rate of gross booking value growth increasing from Q3 to Q4. I don’t have a specific percentage that we’re sharing on the call today. There can be some variability on the overall growth, but it is accelerating. And that’s what’s included in our guidance estimate that we’ve shared. Kevin Kopelman: Thank you. Operator: Our next question comes from Stephen Ju from Credit Suisse. Stephen, your line is now open. Stephen Ju: Okay. Brian, I don’t know if you have data – this data, but I’ll go ahead and ask anyway. But are you able to say perhaps what percentage of your registered users perhaps have younger children who until now were not able to get vaccinated. I’m just trying to get a sense for how much incremental pent-up demand you may have waiting for U.S. parents start to feel better about traveling more with the younger kids? Thank you. Brian Chesky: Thanks for the question, Stephen. I don’t think we have that data specifically, but I can just share a couple of high-level thoughts with you. I think that we’re going to be entering a new golden age of travel. I tend to think that the last 18 months have been – the world has been turned on its head. And I think that many people yearned for what was taken away from them. Now not everything that was taken away from us. Do I think we all want that. But I think one of the things that’s taken away from a lot of people, they want back is the ability to travel and the ability to travel freely and the ability to travel freely or cross borders. And just to give you one anecdote or one data point on October 15, I believe it was that date that President Biden announced the reopening of the borders for international travelers come to the United States. Within one week of that announcement, we saw a 44% spike in nights booked for stays, crossing borders coming into United States on Airbnb for stays November 9 and later, which is when the borders would open. So, what we are seeing kind of across the board is evidence of pent-up demand. I think all the new emerging use cases that exist in Airbnb are here to stay, because I think flexibility is here to stay. So, I think a lot of the nearby destinations of people getting cars here to stay, I think the longer stays, people living in Airbnb Tuesday. But I think what I’m really excited about is the emergence of cross-border travel. Cross-border travel is now 80% of what it was at its peak in Airbnb. It used to be half of our business. It went down quite a bit. Now it’s about one-third of our business and growing again. So yes, we are seeing a lot of pent-up demand. And Dave, I don’t know if you want to add anything to this. Dave Stephenson: No, I think that’s the key. Our cross-border travel, it’s 33% here in Q3, but we’re continuing to see strengthening here in October. More continued countries are reducing their travel restrictions and the travel trends continue to improve. Stephen Ju: Thank you. Operator: Our next question comes from the line of Brent Thill from Jefferies. Brent, please go ahead. Brent Thill: Thanks. Just on the cross-border, and when you think of Europe and what you’re seeing there, can you drill in and give us a sense of what’s starting to happen inside the country there. Brian Chesky: Dave, do you want to take that? Dave Stephenson: Sure. We’re continuing to see sequential improvement in the net nights booked in October relative to September. So travel restrictions as they come off. We’re continuing to see that sequential increase – We have more global net nights booked in October 21 that we did in 2019. So, I think that’s a really positive sign for Europe. And there are some week-to-week variations, but the trends continue to be up and to the right. Brent Thill: And as just a follow on, has there been anything surprising to you due to this recovery in Europe that just anything that you’ve seen in underlying trends? Or is it just continued strengthening as you’ve been mentioning? Dave Stephenson: Well, the reality it tends to vary by country, right? Different countries will have different levels of restrictions in opening. There’s obviously a lot of pent-up demand for kind of peak kind of travel. We saw that in Q3 is a big part of the strength of our results in Q3 or Europeans wanting to get into their traditional kind of summer holidays in Spain and Italy and other places. And so there can be some variation by country throughout, but the strengthening of the business in Europe just kind of continues. We’re seeing a nice uptick in bookings, especially even leading into 2022. So some of the bookings growth that we’re seeing now is going to obviously be for travel in early next year and throughout in 2022. Brent Thill: Great. Thank you. Operator: We now have a question from Doug Anmuth from JPMorgan. Doug, your line is now open. Dae Lee: This is Dae Lee on for Doug. Thanks for taking the question. The first one, so based on your conversation with your host, what do you think is the biggest friction point that prevented them from becoming a host for the first time? And along that line, among the initiatives that you’ve rollout for them this year was resonated in those? And as a follow-up, how are these newer host cohorts performing versus your historical cohorts but didn’t have the upgrade that now hosts have today. Brian Chesky: All right. Thank you for the question, Dave – Doug. Why don’t I take the first part of the question about what the biggest friction points for hosts are and then Dave can have the follow-on. Now a really, really great question. there’s really three parts of the funnel. Number one, do people know about hosting. Number two, is it easy? And number three, can they get help. To me, those are the three parts of the funnel. So number one, do people even know about hosting Well, Airbnb’s brand is very much mainstream. So we’ve seen a huge opportunity in people being able to host. I don’t think most people realize that the average host can make $9,600, which is more than the stimulus check they’ve been getting the United States and the amount of effort is surprisingly easy. And so the first thing we have to do is continue to tell story of hosting, and we’ve been doing that, and that is working. The next thing we have to do is make it easier to host. The easier we make something, the more people do it. Airbnb really innovated and built a lot of custom tools to make it easier to host than ever before. This was really the core innovation we have. We built a system of trust where we’re continually making it easier to host. We obviously simplified the number of steps to become a host to 10 really simple basic steps. You can do it now quite quickly from your phone or a desktop device. And we have more innovations that are going to make it even easier that we’re showing next Tuesday, November 9. So that’s the second part, making it easier as we do that conversion rate goes up. And then finally, sometimes people like say, this is – some people want to talk to other hosts. They want to know what it’s like, what’s it like to let a stranger in your home. How much should I change? What are the local rules and regulations. And so having another host to talk to is really important. Now this is the power the Airbnb model. One of the things that makes me so special is we’re a community. And we’re a community where host tell other hosts about Airbnb and they bring them on to the platform. And so what I’m really excited about is the Ask a Superhost program. We’ve had more than 50,000 prospective host sign up to use that. And we’re going to continue to scale that, and we’re announcing on November 9 that we’re going to be scaling the Ask a Superhost program. So these are three parts of the journey. We continue to focus on these. We’re going to get a lot more host. Dave, you want to take the next part on the host retention. Dave Stephenson: Sure. What we’re seeing – I can step back some of the new host acquisition that it makes it a little too early to tell exactly how the retention and things are going to work for all the new hosts. But let me step back and broadly share that overall, we’re seeing churn rate of our hosts or has improved. It’s lower than it had been historically that the actual success rate of new hosts is increasing. Like 50% of new listings receiving a booking in three days. 75% of new listings are receiving a booking within eight days. So they’re actually more successful, more quickly. We’re seeing of the new hosts that are coming on, that they are – the traditional host that have been successful in Airbnb, individual host that are largely – have exclusive to Airbnb that may only have a property or two, it’s that core individual host. That’s still the majority of the host that we’re kind of bringing on. And the cross listing of our host is actually down from where it was in kind of pre-COVID times. So I think the overall health of our hosting community is quite strong, and the growth that we’re seeing in new host is very consistent with the historic types of host we’ve had in the past. Dae Lee: Got it. Thank you. Dave Stephenson: Thank you. Operator: Our next question comes from the line of Justin Patterson from KeyBanc Capital Markets. Justin, please go ahead. Justin Patterson: Great. Thank you. Brian, you’ve clearly had a lot of success with flexible stays. What have your learnings been around that, the marketing of that feature to consumers? And what do you think the next steps are to make this a broader consumer behavior? Is that more brand marketing? Or is that something within the app? That’s question one. And then for Dave’s question, two, how should I think about the pace of the urban recovery going forward? Thank you. Brian Chesky: All right. Yes. Thank you very much for the question, Justin. I’m really excited with I’m Flexible. So just to recap what this feature is – On May 24, we announced I’m Flexible, a new search tool that allows people to search on Airbnb, if they’re flexible about where or when they’re traveling. And so to go to Airbnb’s home page right now, actually, if you do it, you’ll see a really big button, it says I’m Flexible. If you click on that button, it now takes you to a whole new view of Airbnb, where you can completely browse. Now this is a really special new product we built. We actually went through millions of listings, and we had to do this really extensive process of organizing our structured data, essentially getting an organized catalog of all of our inventory. If something says it’s a tree house, is it a tree house? We made sure every photo is the properly labeled. And this feature has been really, really successful. We also have flexible dates allows people, if they’re flexible when they’re traveling to say, I’m looking for a place for a weekend for a week or a month any time over the next six months. Well, that – those features have been used more than 0.5 billion times. So what are our lessons? Well, the first lesson, if conversion rates up, the more people use I’m Flexible, the more likely they’re going to book on Airbnb because they’re more likely to find a property. Number two, what it’s showing is we’re able to point demand to where we have supply. There’s a lot of really unique listings that are in locations that people wouldn’t have thought to type in, right? It might be in a small town you never heard of. With I’m Flexible, it really levels the playing field and allows many more properties to be discovered. Maybe another way of thinking about it is on flexible turns the home into the destination, so you don’t have to type in the destination. And I’m really excited about this. So this tells us that we’re on to something. It also tells us that there’s a new paradigm in travel. And so I think that this flexibility is here to stay. I think one of the holy grails in travel is to answer a question for a guest of where should I go and when should I go. And by having this new flexible features, we’re able to really be able to do that. So what’s next for us is that we’re going to continue to invest in this feature. On November 9, we’re announcing four new categories of I’m Flexible. There’s going to be some really cool features that we can show. So I hope you tune in. We’re also expanding the flexible date feature from six months to 12 months. So now you can see when these really incredible properties available anytime in the next 12 months. And we’re going to continue to invest in this feature. And I think down the road, this will be a major way that people are searching on Airbnb, and it’s so important because, again, it allows us to balance supply and demand. Dave, do you want to take the second question? Dave Stephenson: Yes. I think one thing to kind of step back and remember is that Airbnb strength has traditionally been cross-border and more urban. I mean, that’s traditionally where our business strength has been, right? Cross-border has been 50% of our business. The urban has been about 60% and yet our really strong Q3 results happened while even those two parts of the business are not yet returned to kind of pre-pandemic levels, right? Cross-border still at 33%, the urban – high-density urbans at 46%. So it’s not quite back, but it’s growing nicely. So I think what you say about the pace of urban recovery is that, that will continue to be additive to our business and the strength that we’re seeing overall. I think what’s also interesting about the pace of the urban recovery is that the nature of it is even a little bit different. Historically, our top 10 cities in the world contributed approximately 11% of revenue and now the top 10 cities are comprising about 6%. So it’s just getting more diverse, more spread in terms of where our distribution of travel is. So as urban comes back, I think it’s still going to be even a more broad spread version of the revenue across the world. Operator: Our next question comes from the line of Jed Kelly from Oppenheimer. Jed, please go ahead. Jed Kelly: Great. Thanks for taking my question. We’ve seen a couple of larger call them, property managers and urban accommodation providers start to scale up inventory that will probably use your platform for bookings. So Brian, can you just provide us an update on how you’re working with some of the larger property managers. And then in your opening remarks, you did call out some major companies on the work from anywhere trends. Is there any way for you to work closer to them and provide benefits to the workers? Brian Chesky: Yes. Thank you for the question, Jed. Yes, let me take both of these large property managers and work from anywhere trends and how opportunities to work with companies. So on the first one, though our platform is 90% of individuals, the 10% of our hosts or professionals are very important to Airbnb, and we continue to build new tools for them. And so this just past year alone, we’ve had 150 upgrades and innovations and around half of those happened for a host. And many of the upgrades we have also applied to the more professional host as well. And so we’re going to be showing off a number of features on November 9, and many of these are going to be innovations for professional hosts in addition to individual hosts. So we’re still very focused in this area, and I continue to believe that we’re going to be growing really quickly. And just to give you an example, as Dave said, we’ve seen our fastest-growing areas of inventory in North America and Europe in nonurban areas. And certainly, professional hosts are a part of this. And I think they really love the amount of demand that we provide for them. Now as far as the work from anywhere approach. Yes, I think this is a really exciting area. I mean, as we said, Amazon, Ford, PwC, Procter & Gamble are just the beginning of the number of companies that have offered a more remote policy. I think it’s safe to say that very few companies that have office workers are going to be asking those workers to come back to an office five days a week. And all you have to believe as that people don’t come back five days a week, maybe they come back four days a week, maybe they come back three days a week, maybe they had even more flexible policies. And all we have to do is believe that, to believe that Zoom is here to stay, to believe that work from anywhere is here to stay. And so we’re starting to see a lot of companies certainly reach out to us. We don’t have anything to announce right now, but we are going to continually make it easier for people to be able to live anywhere and work anywhere on Airbnb and integrating with companies if that’s what it takes of course, would be something that we continue to do more of. Jed Kelly: Thank you. Operator: Our next question comes from the line of Colin Sebastian from Baird. Colin, your line is now open. Unidentified Analyst: This is Reese on for Colin. I was just wondering if you could talk about kind of the trends you’re seeing between the growth in nights booked versus adoption of experiences? And is there any difference in the trajectory of recovery there? And then maybe just how your relationships with communities are doing? Thanks. Brian Chesky: Yes. I can take these. So obviously, the growth of our core business of homes has been very, very strong. With experiences, I really expected last year to be a breakout year for Airbnb experiences. And of course, the opposite happened. The pandemic put that product on pause. That being said, it’s now been more than 1.5 years, and I feel like people can only stay home so many nights watching Netflix. And eventually, they want to get out of house. And I do think people want alternative things like restaurants, especially when they’re traveling. And Airbnb experiences are very popular amongst our guests. They actually love even more than homes statistically from a five star standpoint. In other words, more guests leave a five star review for experiences in the homes after they stay. So I’m very bullish on this product. It’s been gradually ramping back up and reopening. We’ve seen strong growth over the last couple of quarters, and I’m expecting this to be a big area of growth over the coming five years or so. So that’s what we’re seeing with experiences. Now with regards to our relationship with communities, let me just start by saying this. Even before the pandemic, we worked with thousands of cities all over the world. You see we created this new category of travel, and we had to work with cities to educate them and work collaboratively with them to be able to really make sure everybody works best for these communities. To give you a stat, we have today, collected $4 billion in hotel occupancy tax or transient occupancy tax. You can’t collect hotel tax without working with those cities and jurisdictions. So we’ve had really close relationships with them. And what I’ve seen in the last year is that the pandemic has actually been a bit of a reset for our relationship with cities. And reset probably in a good way because what we’re seeing is a lot of cities that we’re concerned with tourism in their markets are in a different concern now. Now over tourism the number of cities have to under tourism. The reduction of business travel, fewer international travelers crossing borders going into big cities means that many of these cities and destinations have revenue shortfalls and just general travel shortfalls. And so what’s happened is we’ve had a lot of cities reaching out to us to collaborate. And in fact, we’ve done 100 partnerships with destination marketing organizations, around the world. And I think our new and flexible features where we can point demand to where we have supply also means we can point demand to cities that want it. And so I think this is a really exciting period for us to, really renew a great relationship with cities all over the world. Unidentified Analyst: Great, thank you. Operator: Our next question is from Brian Fitzgerald from Wells Fargo. Brian, please go ahead. Brian Fitzgerald: Thanks guys. On the cross-border travel, I open up, we’re just wondering if you could comment on lengths of stay trends there. Our intuition is that people are going to get on a plane in the current environment, they probably want to amortize that across a longer stay. But just wondering what you’re seeing there. And then second thing on about the length of stay more generally. You spoke to 28-days plus, and just wondering if you could talk to what you’re seeing in terms of maybe a seven day stay becoming a 14-day and any trends there? And any thoughts on how the competitiveness of Airbnb increases versus hotels as one week stays, become two week stays. Brian Chesky: Yes. Why don’t I start with that very last question, Brian. And then, Dave, I can hand over to you. You can talk a little bit more about cross-border, its impact on length of stay and just the growth of maybe weekly stays is what I think Brian’s asking. But let me start with this question of the competitiveness of long-term stays. It’s really quite interesting to think about how we started Airbnb. I started the company when I was 26 years old with two of my friends, and the category we entered was hotels. That was the incumbent industry. An industry that most people liked, and travelers have a lot of other options. If you were to try to stay somewhere for two weeks, three weeks a month or multiple months, and let’s say you’re staying somewhere other than the city you live, what are your current options? There’s not a lot of players doing this. There’s a lot of friction. So we think essentially, the longer the length of stay, the more compelling it is to stay in a home. It gets very expensive to stay in a hotel for weeks at a time. And the longer you’re away from home, the more I think you want to be in a home. You want a kitchen, you might want a backyard, you want to be able to cook. You just want to feel like your home and you’re not like an outsider. And so I think that this is going to be a really big opportunity for us. And this is partly why I’m really excited about long-term stays or even stays that are for a week or longer. Dave, do you want to talk about some of the stats we’re seeing? Dave Stephenson: Yes. We highlighted on the shareholder letter that 45% of our nights were from stays at least seven nights. And this is the trend that we’re seeing is that the length of stay continues to increase. The number of use cases that people find working with Airbnb in the same way that Brian just mentioned, it’s just a better way to travel for longer. You’re not going to want to stay in a hotel room for 28 nights, but those trends are continuing. And I don’t have anything specific to say about cross-border and the length of stay directly related to that. But just more broadly that the length of stay continues to increase. And to the extent that it does, it accretes to Airbnb. Brian Fitzgerald: Great. Appreciated guys. Dave Stephenson: Thank you. Operator: Our next question comes from Naved Khan from Truist Securities. Your line is now open. Naved Khan: Great. Thank you. Two questions. Did you see any impact on the Apple iOS changes on your social ad campaigns? And then the second question I had is just around some news articles we saw that showed that you continue to work on technology to basically help onboard hotels. Maybe just talk about where it sits in your list of priorities. Brian Chesky: Yes. I can take both of those, Naved. Number one, just in Apple, their iOS changes. No, we’ve not seen any impact on Airbnb, and that’s not really the business we’re in. With regards to our efforts to invest in technology to onboard hotels. Let’s just talk a little bit about our strategy with hotels. Last year, we had to make some difficult decisions to put a number of initiatives on pause, like transportation and scale back some others. And one of the initiatives that we had to scale back a bit was our investment in hotels. That being said, hotels are still a very important part of Airbnb’s strategy. We believe that people come to Airbnb because we have something unique. We have unique host to offer something you can’t get anywhere else. And so we think that the majority of people come to Airbnb direct to book individual host. That being said, we want to make sure that people come to Airbnb, they always find a place to stay. And sometimes we have network gaps. And we think that hotels are really great ways to fill a network gap. So when somebody comes to Airbnb, they can always find a place to stay. HotelTonight has been growing really steadily in the last couple of years. I’m very excited about the progress, and we’re continually investing in this area. Now it’s not as big a priority as our core business of supporting individual hosts, but we’re continually supporting them. We’re continually investing in this area. Naved Khan: Maybe just to follow up on that, Brian, would we be seeing hotels on the core Airbnb time in the future or anytime soon? Brian Chesky: Will we be seeing what? Naved Khan: Would we see hotels on core Airbnb at all? Brian Chesky: Yes. I mean, yes. And we have tens of thousands of other terms now on Airbnb, and I expect you to see more in the future for sure. And it’s just – it’s really just a matter of prioritization. Right now, we are focused on the most perishable opportunities the most perishable opportunities right now are scaling as quickly as possible to get as many hosts ready to host as many guests as possible. And so our big priorities are recruiting hosts, simplifying the guest experience, educating the world that would make certain be different, that’s hosting, and getting world-class service to getting our service to be at a world-class level. Those are our major priorities, but we are continually investing in hotels. Naved Khan: Thank you. Operator: Our next question comes from the line of Deepak Mathivanan from Wolfe Research. Deepak, please go ahead. Zach Morrissey: Thanks. This is Zach on from Deepak. Just first on ADRs, I know you kind of called out that the primary driver so far has been this kind of mix shift. But you also noted that you’re starting to see some price appreciation in certain high-demand areas. Just curious if you can kind of parse this out a little further. And is that trend kind of concerning to you in the context of Airbnb’s long-term growth? And then second, just related to COVID, I know it’s very dynamic and hard to predict. But the restrictions seem to be generally easing, but we are seeing pockets of rising cases and some kind of impediments to travel demand. Do you see any kind of differences in the restrictions today and the impediment to demand behavior today versus six or 12 months ago? Thanks. Brian Chesky: Dave, do you want to take these? Dave Stephenson: Sure. Let me start with the ADR. The trend that we saw in ADR late last year, the increase in ADR was almost exclusively driven by mix. And so that was the regional mix urban, nonurban mix, size of home. And then what we saw earlier in the year is some price appreciation as a larger portion of the ADR increase. And that increased a little bit further here in Q3, kind of the peak kind of summer travel season. And then what we’re seeing, as I said in Q4, is our ADRs are relatively stable with what they were in Q3. Even with these elevated ADRs, again, the majority of the increase has been just on a relative basis due to mix. So there’s really no change in the price where there is some price appreciation. I think we still have a great value. We’re still able to give people, homes and stays that they find very valuable in terms of all the amenities they get. Maybe a larger place, more amenities, kitchen, more bedrooms, there’s more space to be. And so we think we continue to give a great value. And so we’ll continue to monitor it and be mindful of it. But I don’t think it’s an existential threat to us. And then the second question is just rising cases, any differences versus the pandemic. I guess I think what we’ve seen is just a bit more resilience in guests being willing to travel around the world, right? There’s a little bit of – there could be pockets of variation depending on what governments frankly do in terms of opening up borders. And – but the general trend has continued to be more positive, more up into the right and more consistent. And I think people, even in the face of various strains of COVID continue to be wanting to travel, and they find that doing that on Airbnb is the best way to do it. Unidentified Analyst: Great, thanks for the color. Brian Chesky: I’ll just add one last comment. We’re living in a really fast-changing world. And I don’t think we’ve seen the end of big existential changes in the world. And if you can’t predict the future, the best thing to do is adapt to it. And I think our business model is incredibly adaptable to whatever changes are to come. Operator: Our next question comes from the line of Mark Mahaney from Evercore ISI. Mark, please go ahead. Mark Mahaney: Thanks a lot. This is Ben on for Mark. So in the last 18 months, COVID has allowed Airbnb to really pivot their product priorities to refocus on the core business. As you look to next year, do you anticipate your investment priorities to change somewhat? Are you going to start focusing on stuff a little bit outside of your core business? And then the second question, if I could. Just in the letter you talked about in relation to APAC, just the short-term rental restrictions as being somewhat of a drag on the recovery in that region. Are those new restrictions versus 2019? And how significant are they? Do you expect them to be a permanent drag? Thanks. Brian Chesky: Thanks for the question. Dave, do you want to take APAC and start with that and then I can be to talk about new investments. Dave Stephenson: Yes. On APAC, we’re not anticipating that any short-term rental regulation changes as being a major negative drag on our business over time. We’re just mindful that there can be some variation in what governments are wanting to do, especially during this kind of COVID crisis time, and it varies by area. And we saw a little more restrictions in APAC than we did elsewhere. Brian Chesky: And then on your question of new investments. Here’s what I would say. I mean, we learned some very valuable lessons last year about focus. I remember once I was in college and my teachers told me, Brian, you can do everything you want in your life just not all at the same time. Yes, we certainly learned that less than last year. We had to scale back initiatives. But one of the benefits of all that, we took our very best people and we focused them only on a few problems, including recruiting more hosts, simplifying the guest journey, improving a world-class service and educating the world about Airbnb. And as we’ve done that, we’ve not only reduced costs in the business, but we’ve actually been growing even faster. And so this year has been a year of a relentless innovation to perfect our core service nearly one innovation every 48 hours on our core service. That being said, we are going to do new things Airbnb. We created this category of travel. And I think there’s a lot more categories that we can create in Airbnb. And so we’ve done two releases this year. We did one in May and one in November, and we’re going to do a couple more again next year. And so November will not be the last time you hear from us. You’ll hear from us again in the spring, where we’ll introduce a summer release for the summer, and we’re going to have some really big new offerings as well. And again, the really big areas I’m excited about that we’re currently doing, short-term stays. I think we’re realizing that we are just scratching the surface of this incredibly huge opportunity as home sharing continues to grow. Long-term stays is an entirely new category for Airbnb. And I think now that people are getting comfortable crossing borders, can get outside and getting gathering with other people, experience will be a big opportunity. But this is just the beginning. We have many more innovations in front of us, and we will continue to use our creativity to design new possibilities for people. Mark Mahaney: Thanks, Brian. Thanks, Dave. Operator: We currently have no further questions. So I will now hand back over to Brian Chesky for any closing remarks. Brian Chesky : All right. Well, thank you all for joining us today. Just to recap everything 2021 for Airbnb has been a year of relentless innovation. We launched more than 100 upgrades already this year. And next week, we’re going to announce 50 more. That’s 150 upgrade innovations this year. Our design-driven approach means that we’re constantly improving our service to adapt to this changing world. And the world will continue to change because for the first time ever, millions of people can now travel anytime, anywhere for any length and even live anywhere on Airbnb. And this is a travel revolution. So we’re just getting started. We have many more innovations to share with you, starting with some exciting announcements next Tuesday. So thank you all for joining today and we’ll see you next week. Operator: This concludes today’s call. Thank you for joining, and I hope you have a lovely rest of your day. You may now disconnect your lines.	[ { "speaker": "Operator", "text": "Good afternoon, and thank you for joining Airbnb’s Earnings Conference Call for the Third Quarter of 2021. As a reminder, this conference call is being recorded, and will be available for replay from the Investor Relations section of Airbnb’s website following this call. I will now hand the call over to Ellie Mertz, Vice President of Finance. Please go ahead." }, { "speaker": "Ellie Mertz", "text": "Good afternoon, and welcome to Airbnb’s Third Quarter of 2021 Earnings Call. Thank you for joining us today. On the call today, we have Airbnb’s Co-Founder and CEO, Brian Chesky; and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our third quarter of 2021. These items were also posted on the Investor Relations section of Airbnb’s website. During the call, we’ll make brief opening remarks and spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we’ll be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We’ve provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. And with that, I’ll pass the call to Brian." }, { "speaker": "Brian Chesky", "text": "All right. Thank you, Ellie, and good afternoon, everyone. Thanks for joining us today. I’m really excited to share our results with you. The travel rebound that began earlier this year accelerated in the third quarter. Q3 was Airbnb’s best quarter yet. Revenue of $2.2 billion with our highest ever, surpassing 2019 by 36%. Net income of $834 million was our highest ever, nearly 4x larger than a year ago. Adjusted EBITDA exceeded $1 billion, also our best ever. Our EBITDA margin was 49%, an increase of 30%, or 3,000 basis points compared to Q3 2019. Over the summer, we also reached a major milestone with one billion cumulative guest arrivals. This means that Airbnb has been used more than one billion times since we started. Now finally, I’m delighted to report that our hosts earned a record $12.8 billion in the quarter. Our results show that the growing strength of the travel rebound is here despite the continued pandemic. We saw continued strength in North America and EMEA and an acceleration in Latin America despite sequential increase of cancellations. Now excluding APAC, our total global Nights and Experiences Booked exceeded 2019 levels. Gross booking value of $11.9 billion shot above 2019’s levels by 23%, driven by the strength of ADR. But something bigger than a travel rebound that’s happening. The world is undergoing a revolution in how we live and work. The pandemic has suddenly untethered tens of millions of people from the need to go into an office. Technologies like Zoom make it possible to work from home. Airbnb makes it possible to work from any home. And this new found flexibility is bringing about a revolution in how we travel, because for the first time ever, millions of people can now travel anytime, anywhere for any length and even live anywhere on Airbnb. And we believe that this trend towards more flexibility will only accelerate. In recent months, some of the world’s largest companies Procter & Gamble, Amazon, Ford, PricewaterhouseCoopers have announced increased flexibility for employees to work remotely and we expect many more companies follow this. And so what we’re seeing our several trends as a result of this travel revolution. First, people can travel anytime, because many people don’t have to be in the office at specific times, they have more flexibility and when they can travel. So families are increasingly travelling traveling outside the traditional week, weekend trip. And in fact, Mondays and Tuesdays are currently our highest growing days of the week to travel. This is really interesting. The second trend we’re seeing is that people are traveling everywhere, literally everywhere. During the pandemic, over 100,000 cities have had at least one booking on Airbnb. And that includes 6,000 towns and cities that received their first booking ever on Airbnb. The third trend we’re seeing is people aren’t just traveling in Airbnb, they’re now living on Airbnb. Long-term stays, up 28 days or more, remained our fastest-growing category by trip length. People are traveling Airbnb for extended vacations, relocation, temporary housing, student housing and many other reasons. Now finally, more people were also interested in hosting than ever before. We ended Q3 with the most active listings ever, and there are two reasons for this. First, our demand is driving more supply. In fact, our highest supply growth is in our highest demand destinations, particularly in North America and EMEA. And second our marketing and product initiatives to attract new hosts are working. Now we’re constantly improving our service to meet this new way of traveling and the wave of guests it will bring. On May 24, we introduced the Airbnb 2021 release, which included more than 100 upgrades across every aspect of Airbnb service. On November 9, which is next Tuesday we’ll be announcing the Airbnb 2021 Winter Release and this release will include another 50 upgrades and innovations that make it easier to host and support the changing needs of guests, and you can watch it right at our home page next Tuesday at 8:00 AM Pacific Standard Time. So, I hope you can tune in and to see I’m really excited about what we have to share. So, now let’s turn to our progress on our 2021 plan. Now as a reminder, our single priority in 2021 has been to prepare for the travel rebound. To do this, we’ve been perfecting the end-to-end experience of our core service. And this includes educating the world about hosting, recruiting more hosts, simplifying the guest experience and delivering world-class service. So, let me give you an update on each of these. First, we are educating the world about what makes Airbnb different, and that is hosting. Earlier this year, we launched our first large-scale marketing campaign in five years, made possible by hosts. We’re educating guests about the benefits of being hosted, and we’re also inspiring more people to become hosts, and we continue to be encouraged by the results of this campaign. Second, we’re recruiting more hosts and setting them up for success. On May 24, we launched a completely redesigned host onboarding flow that makes it simpler for anyone to start hosting. Throughout the process, potential hosts can now be paired with Superhosts to answer their questions or concerns. We began Ask a Superhost in nine countries, and we’ve since expanded the program to over 30 languages in 196 countries. Third, we’re simplifying every part of the guest experience. Earlier this year, we introduced I’m Flexible, a whole new way to search on Airbnb when guests are flexible about where or when they’re traveling. Now since launch, guests have used I’m Flexible more than 500 million times. Now due to the popularity of this feature, we’re soon making it even more flexible by expanding the date range of this feature as well as adding more categories of unique space. We’re really excited about the progress of this feature. And finally, fourth, whenever a host or guest need us, we must deliver world-class service. In September, we launched dedicated Superhost support in North America, giving our most experienced hosts priority access to our most experienced support agents. We’re expanding the support to all Superhosts globally by the end of the year. So that is our plan for 2021. Now, before I go to questions, I have one update that bittersweet. Three years ago, Ann Mather became the second independent director to join our Board after Ken Chenault. Since then, our team has benefited from her guidance. Now Ann recently made the decision to reduce the number of Board she sits on, and sadly for us that means she’ll be departing our Board of Directors on December 15. Now Ann has been a critical member of our team as we transition from a private to a public company, and we appreciate everything she’s done. We look forward to adding another independent director as soon as possible. I know that being on the Airbnb born in the midst of a global pandemic is no easy task. And I want to once again thank you, Ann, for everything you’ve done. So to recap, Q3 was Airbnb’s best quarter ever. Revenue, adjusted EBITDA and net income were our highest ever. Travel is undergoing a revolution. People are now taking longer trips traveling to more locations and even living on Airbnb. As the world changes, we continue to innovate. We’ve made more than 150 upgrades innovations this year alone. So with that, Dave and I look forward to answering your questions." }, { "speaker": "Operator", "text": "Thank you. [Operator Instructions] Our first question comes from Eric Sheridan from Goldman Sachs. Eric, please go ahead." }, { "speaker": "Eric Sheridan", "text": "Thanks so much for taking the questions. It’s been a big year in terms of innovation and investing behind supply. Brian, would love to get a little bit more color on what you see as the key learnings from rolling some of those investments out into the marketplace. And how they can inform the way investors should be thinking about supply growth and innovation in the years ahead. Thanks." }, { "speaker": "Brian Chesky", "text": "Yes. Thank you very much, Eric. So yes, this has been a really great year for supply growth. We have more active listings on Airbnb today than we ever have. And it’s important to just share a few thoughts on supply. Number one, we are quite different than our competitors. Airbnb, we have four million hosts, and 90% of our hosts are individual. That means they could never have posted, if not for the tools that we provide. And the vast majority are only listed on Airbnb. And we found that if we make hosting easier and as more people know about hosting and we give host more support, more people will become hosts. And so our strategy is a full life cycle. It starts with making sure more people know about hosting. You see the Airbnb brand is very mainstream. Our brand is now – use all over the world, but hosting is not as mainstream. And so the first thing we’re doing is we’re raising awareness about hosting. This year, we did our first brand campaign in five years, made possible by hosts. It uses real photos from real trips to highlight what makes Airbnb different in that host. The great thing about that ad is that also is able to track more host to Airbnb as well. So once we’re able to increase awareness of hosting, then the name of the game is making it easier to host. And on May 24, we showed a simple 10-step process to become a host where we’ve radically reduced the number of steps and made it easier to host and conversion rate for people starting to leisure their space low is up. Third, if a host needs help we’re going to give them support. So, we launched Ask a Superhost. Ask a Superhost pairs prospective host with our very best Superhost on Airbnb. And since we launched this feature in May, more than 50,000 prospective hosts have used this, and we’re now expanding this to 196 countries globally. And finally, we’re continually investing more tools to allow hosts to expand their business. And what all this means is that you’re going to see continued innovation from us. What we’ve seen is an increase in the trajectory of a number of people becoming a host. The other point, though, Eric, I just want to make is the following. On [indiscernible], we ever supply constraint globally on Airbnb, the vast majority hosts only rent occasionally. And so the holy grail of travel is pointing demand to where we have supply. Before the pandemic, most people were very fixed in their search parameters. They had a destination of mine and they had dates in mind. But now because many people don’t have to go back to an office, they’re more flexible. And this means that we can point them to where we have supply. And this is the power of being flexible. Over 500 million searches have used flexibility. More than 40% of our searches, guests are flexible on where or when they’re traveling. So this is what we’re doing. We’re focused on a full funnel approach to supply acquisition, and we’re pointing demand to where we have supply. And I expect that we’ll have plenty of supply years to come." }, { "speaker": "Operator", "text": "Our next question comes from Mario Lu from Barclays. Mario, please proceed." }, { "speaker": "Mario Lu", "text": "Great. Thanks for taking the question. I have a couple on the long-term stays of 28 days and more. You guys mentioned that it was roughly 20% within 3Q. But I think in the first quarter, it was around 24%. Was this mostly due to seasonality that declined slightly since then. And then at a higher level, any updated views on how large the channel these larger stays could attract over time? Thanks." }, { "speaker": "Brian Chesky", "text": "Yes, Mario, why don’t I give the mix shift to Dave and I spent to talk a little bit more broadly about the strategy. Dave?" }, { "speaker": "Dave Stephenson", "text": "Yes. The majority of the decrease is simply the increase of short-term stays kind of coming back. It still remains to be – long-term stay has been one of the fastest-growing parts of our business, pre-COVID. That is a trend that we are seeing in the pre-COVID era it just continued to be strong during COVID, and it remains strong today. And so yes, the decrease is just the fact that short-term stays continue to come back. And in terms of the market opportunity of long-term state – market opportunity in long-term stays, we think this adds hundreds of billions of dollars to our overall long-term TAM opportunity with long-term space." }, { "speaker": "Brian Chesky", "text": "And I’ll just share a few more thoughts, Mario. We’ve just seen a major paradigm shift in travel. Before the pandemic, short-term stays is really the primary business that we were in. What we actually saw was that long-term stays was our fastest-growing segment of business even before the pandemic. So, I think what the pandemic did is an accelerated inevitable trend. There was already this emerging category between classic traveling and really kind of permanent housing which was people seeking stays of weeks at a time or even months at a time. And I think what the pandemic has done has just accelerated this. We’re going to see a lot more people going away as they have newfound flexibility. Even people with families who can’t go away during the year, they may be able to travel a little bit longer during summer as well. So this is really exciting. And the only other thing I’d just add is nearly half of our business is for more than a week as well. So these are really exciting categories. I think there’s a huge amount of growth going forward for these different segments." }, { "speaker": "Mario Lu", "text": "Okay. Thanks." }, { "speaker": "Operator", "text": "Our next question comes from the line of Jen Shi from Bank of America. Jen, please go ahead." }, { "speaker": "Jen Shi", "text": "Thanks for taking the question. This is Jen on for Justin. Just wondering, so you guys mentioned that with the host initiatives, you’re gaining supply in very popular areas like North America and Europe. Just wondering, are you seeing supply opening up in urban areas? And as the mix shift kind of comes back to urban and cross-border travel, how should we think about the impact on ADRs, take rate and maybe margins in future years? And then just one follow-up on marketing spend. Looking at marketing spend trends, obviously, this year has been super positive compared to pre-pandemic spending, you have a lot of leverage there. Just wondering, do you see a scenario where maybe you would have to be more aggressive on marketing if hotel travel was coming back? Thanks." }, { "speaker": "Brian Chesky", "text": "All right. So thank you, Jen. I heard three questions. One is about supply growth in urban. The next is mix shift, it’s impacting at ADR and then marketing spend. Dave, do you want to take these? I think these would be great for you to take." }, { "speaker": "Dave Stephenson", "text": "Sure. In terms – again, one of the things to remember is – and the reason why we kind of highlighted on the call that the growth in our supply in the nonurban areas of on North America and Europe is that we get the supply when we have the demand, and that’s why it’s gone up 15% since the beginning of the year because that’s also where there’s biggest demand. Now, we’re obviously seeing greater demand pickup in our more urban areas. So the percentage of nights in the urban area has started to increase or now made 46% of our nights. We’re still down to maybe 60% of our nights kind of pre-COVID. And so we’ll continue to see listings growth in those more urban areas as the demand kind of keeps coming back. So until I think we’re back to full demand, we actually don’t need incremental growth because we’re still below our nights that we had back in 2019. But again, the important part is that we get the supply when we need it because the supply will follow that demand and we’ll continue to make it easier for new supply to come on board. In terms of forward-looking ADRs, the high average daily rate we’ve seen throughout this last year has been primarily driven by the mix of types of space and the location. So it’s a mix of Europe and North America have higher average daily rates. Non-urban whole home, larger homes, all those reasons have been driving up the rates overall. And the other thing we start seeing a little bit more in Q3 with some price appreciation in high demand areas. And so it was a combination in Q3 of both the mix of types of stays and some of the price appreciation. And what we do anticipate is as urban comes back, and more markets like Asia and Latin America, which have lower average daily rates. We anticipate the overall ADR to moderate some, but we also believe that some of the higher ADR will sustain for the future. So in terms of – and then what we did say also in our shareholder letter is that we anticipate that the ADRs in Q4 should be relatively consistent with the ADRs we had here in Q3. In terms of marketing, we’re really happy with the adjusted marketing approach that we’ve taken. Now again, this was a pre-COVID change that we made, where we were – began to invest in our strength. And our strength is the brand of Airbnb. And we modified that marketing approach pre-COVID. We reduced our reliance on search-engine marketing. And then in COVID, we have shifted even just more significantly more quickly, and we’re really pleased with those results. As Brian mentioned, this broader brand campaign, talking about made possible by hosts, it gets to talk to both sides of our marketplace. It both recruits new host to Airbnb, and talks to guests about why you’d want to stand Airbnb, and we’re really happy with those results and plan to continue the strength of that. We’ve increased our relative marketing rate this year, just given the fact that our – the business has been going quite well. And so – but on a relative basis, our marketing expenses as a percentage of revenue are down from levels we had in 2019. And we should anticipate that this – it will be in this kind of range for the foreseeable future." }, { "speaker": "Brian Chesky", "text": "And I can just share just to really recap briefly our marketing strategy. We take a really different approach than our competitors at the full funnel integrated marketing strategy. And it really starts with PR and word of mouth. And really word of mouth and PR’s how we build the brand for the vast majority of the years before you even have enough money to have a marketing budget. And because of that, Airbnb is a really well-known brand that’s a noun and a verb used all over the world. And because of this, more than 90% of our traffic was free or unpaid in Q3. And so we think of marketing is really education. Brand marketing is really about educating people that are highly differentiated product. And then performance marketing for us isn’t really a way to buy customers. It’s the way the laser in on balancing supply and demand. So we think this is a really unique approach. And I think that it’s just really all about continually investing in our brand. And over time, we think the amount of the loyalty to the brand will only increase." }, { "speaker": "Jen Shi", "text": "Great. Super helpful. Thank you both." }, { "speaker": "Operator", "text": "Our next question comes from Kevin Kopelman from Canaccord. Kevin, your line is now open." }, { "speaker": "Kevin Kopelman", "text": "Thanks a lot. It’s Kevin from Cowen. Can you give us a sense of the booking trends in the fourth quarter, quarter-to-date. You mentioned acceleration in the shareholder letter, are you seeing that back to Q2 levels yet in terms of growth as compared to the same quarter in 2019, just given kind of the Delta slowdown, that would be helpful." }, { "speaker": "Brian Chesky", "text": "Hey, Kevin, thanks for the question. Dave, do you want to take this?" }, { "speaker": "Dave Stephenson", "text": "Sure. what we’re seeing is continued strength in growing strength in the business as borders are starting to open up, people are more vaccinate more willing to kind of travel. We’re continuing to see bookings strength, and that’s why we’re going to be seeing gross booking rate of gross booking value growth increasing from Q3 to Q4. I don’t have a specific percentage that we’re sharing on the call today. There can be some variability on the overall growth, but it is accelerating. And that’s what’s included in our guidance estimate that we’ve shared." }, { "speaker": "Kevin Kopelman", "text": "Thank you." }, { "speaker": "Operator", "text": "Our next question comes from Stephen Ju from Credit Suisse. Stephen, your line is now open." }, { "speaker": "Stephen Ju", "text": "Okay. Brian, I don’t know if you have data – this data, but I’ll go ahead and ask anyway. But are you able to say perhaps what percentage of your registered users perhaps have younger children who until now were not able to get vaccinated. I’m just trying to get a sense for how much incremental pent-up demand you may have waiting for U.S. parents start to feel better about traveling more with the younger kids? Thank you." }, { "speaker": "Brian Chesky", "text": "Thanks for the question, Stephen. I don’t think we have that data specifically, but I can just share a couple of high-level thoughts with you. I think that we’re going to be entering a new golden age of travel. I tend to think that the last 18 months have been – the world has been turned on its head. And I think that many people yearned for what was taken away from them. Now not everything that was taken away from us. Do I think we all want that. But I think one of the things that’s taken away from a lot of people, they want back is the ability to travel and the ability to travel freely and the ability to travel freely or cross borders. And just to give you one anecdote or one data point on October 15, I believe it was that date that President Biden announced the reopening of the borders for international travelers come to the United States. Within one week of that announcement, we saw a 44% spike in nights booked for stays, crossing borders coming into United States on Airbnb for stays November 9 and later, which is when the borders would open. So, what we are seeing kind of across the board is evidence of pent-up demand. I think all the new emerging use cases that exist in Airbnb are here to stay, because I think flexibility is here to stay. So, I think a lot of the nearby destinations of people getting cars here to stay, I think the longer stays, people living in Airbnb Tuesday. But I think what I’m really excited about is the emergence of cross-border travel. Cross-border travel is now 80% of what it was at its peak in Airbnb. It used to be half of our business. It went down quite a bit. Now it’s about one-third of our business and growing again. So yes, we are seeing a lot of pent-up demand. And Dave, I don’t know if you want to add anything to this." }, { "speaker": "Dave Stephenson", "text": "No, I think that’s the key. Our cross-border travel, it’s 33% here in Q3, but we’re continuing to see strengthening here in October. More continued countries are reducing their travel restrictions and the travel trends continue to improve." }, { "speaker": "Stephen Ju", "text": "Thank you." }, { "speaker": "Operator", "text": "Our next question comes from the line of Brent Thill from Jefferies. Brent, please go ahead." }, { "speaker": "Brent Thill", "text": "Thanks. Just on the cross-border, and when you think of Europe and what you’re seeing there, can you drill in and give us a sense of what’s starting to happen inside the country there." }, { "speaker": "Brian Chesky", "text": "Dave, do you want to take that?" }, { "speaker": "Dave Stephenson", "text": "Sure. We’re continuing to see sequential improvement in the net nights booked in October relative to September. So travel restrictions as they come off. We’re continuing to see that sequential increase – We have more global net nights booked in October 21 that we did in 2019. So, I think that’s a really positive sign for Europe. And there are some week-to-week variations, but the trends continue to be up and to the right." }, { "speaker": "Brent Thill", "text": "And as just a follow on, has there been anything surprising to you due to this recovery in Europe that just anything that you’ve seen in underlying trends? Or is it just continued strengthening as you’ve been mentioning?" }, { "speaker": "Dave Stephenson", "text": "Well, the reality it tends to vary by country, right? Different countries will have different levels of restrictions in opening. There’s obviously a lot of pent-up demand for kind of peak kind of travel. We saw that in Q3 is a big part of the strength of our results in Q3 or Europeans wanting to get into their traditional kind of summer holidays in Spain and Italy and other places. And so there can be some variation by country throughout, but the strengthening of the business in Europe just kind of continues. We’re seeing a nice uptick in bookings, especially even leading into 2022. So some of the bookings growth that we’re seeing now is going to obviously be for travel in early next year and throughout in 2022." }, { "speaker": "Brent Thill", "text": "Great. Thank you." }, { "speaker": "Operator", "text": "We now have a question from Doug Anmuth from JPMorgan. Doug, your line is now open." }, { "speaker": "Dae Lee", "text": "This is Dae Lee on for Doug. Thanks for taking the question. The first one, so based on your conversation with your host, what do you think is the biggest friction point that prevented them from becoming a host for the first time? And along that line, among the initiatives that you’ve rollout for them this year was resonated in those? And as a follow-up, how are these newer host cohorts performing versus your historical cohorts but didn’t have the upgrade that now hosts have today." }, { "speaker": "Brian Chesky", "text": "All right. Thank you for the question, Dave – Doug. Why don’t I take the first part of the question about what the biggest friction points for hosts are and then Dave can have the follow-on. Now a really, really great question. there’s really three parts of the funnel. Number one, do people know about hosting. Number two, is it easy? And number three, can they get help. To me, those are the three parts of the funnel. So number one, do people even know about hosting Well, Airbnb’s brand is very much mainstream. So we’ve seen a huge opportunity in people being able to host. I don’t think most people realize that the average host can make $9,600, which is more than the stimulus check they’ve been getting the United States and the amount of effort is surprisingly easy. And so the first thing we have to do is continue to tell story of hosting, and we’ve been doing that, and that is working. The next thing we have to do is make it easier to host. The easier we make something, the more people do it. Airbnb really innovated and built a lot of custom tools to make it easier to host than ever before. This was really the core innovation we have. We built a system of trust where we’re continually making it easier to host. We obviously simplified the number of steps to become a host to 10 really simple basic steps. You can do it now quite quickly from your phone or a desktop device. And we have more innovations that are going to make it even easier that we’re showing next Tuesday, November 9. So that’s the second part, making it easier as we do that conversion rate goes up. And then finally, sometimes people like say, this is – some people want to talk to other hosts. They want to know what it’s like, what’s it like to let a stranger in your home. How much should I change? What are the local rules and regulations. And so having another host to talk to is really important. Now this is the power the Airbnb model. One of the things that makes me so special is we’re a community. And we’re a community where host tell other hosts about Airbnb and they bring them on to the platform. And so what I’m really excited about is the Ask a Superhost program. We’ve had more than 50,000 prospective host sign up to use that. And we’re going to continue to scale that, and we’re announcing on November 9 that we’re going to be scaling the Ask a Superhost program. So these are three parts of the journey. We continue to focus on these. We’re going to get a lot more host. Dave, you want to take the next part on the host retention." }, { "speaker": "Dave Stephenson", "text": "Sure. What we’re seeing – I can step back some of the new host acquisition that it makes it a little too early to tell exactly how the retention and things are going to work for all the new hosts. But let me step back and broadly share that overall, we’re seeing churn rate of our hosts or has improved. It’s lower than it had been historically that the actual success rate of new hosts is increasing. Like 50% of new listings receiving a booking in three days. 75% of new listings are receiving a booking within eight days. So they’re actually more successful, more quickly. We’re seeing of the new hosts that are coming on, that they are – the traditional host that have been successful in Airbnb, individual host that are largely – have exclusive to Airbnb that may only have a property or two, it’s that core individual host. That’s still the majority of the host that we’re kind of bringing on. And the cross listing of our host is actually down from where it was in kind of pre-COVID times. So I think the overall health of our hosting community is quite strong, and the growth that we’re seeing in new host is very consistent with the historic types of host we’ve had in the past." }, { "speaker": "Dae Lee", "text": "Got it. Thank you." }, { "speaker": "Dave Stephenson", "text": "Thank you." }, { "speaker": "Operator", "text": "Our next question comes from the line of Justin Patterson from KeyBanc Capital Markets. Justin, please go ahead." }, { "speaker": "Justin Patterson", "text": "Great. Thank you. Brian, you’ve clearly had a lot of success with flexible stays. What have your learnings been around that, the marketing of that feature to consumers? And what do you think the next steps are to make this a broader consumer behavior? Is that more brand marketing? Or is that something within the app? That’s question one. And then for Dave’s question, two, how should I think about the pace of the urban recovery going forward? Thank you." }, { "speaker": "Brian Chesky", "text": "All right. Yes. Thank you very much for the question, Justin. I’m really excited with I’m Flexible. So just to recap what this feature is – On May 24, we announced I’m Flexible, a new search tool that allows people to search on Airbnb, if they’re flexible about where or when they’re traveling. And so to go to Airbnb’s home page right now, actually, if you do it, you’ll see a really big button, it says I’m Flexible. If you click on that button, it now takes you to a whole new view of Airbnb, where you can completely browse. Now this is a really special new product we built. We actually went through millions of listings, and we had to do this really extensive process of organizing our structured data, essentially getting an organized catalog of all of our inventory. If something says it’s a tree house, is it a tree house? We made sure every photo is the properly labeled. And this feature has been really, really successful. We also have flexible dates allows people, if they’re flexible when they’re traveling to say, I’m looking for a place for a weekend for a week or a month any time over the next six months. Well, that – those features have been used more than 0.5 billion times. So what are our lessons? Well, the first lesson, if conversion rates up, the more people use I’m Flexible, the more likely they’re going to book on Airbnb because they’re more likely to find a property. Number two, what it’s showing is we’re able to point demand to where we have supply. There’s a lot of really unique listings that are in locations that people wouldn’t have thought to type in, right? It might be in a small town you never heard of. With I’m Flexible, it really levels the playing field and allows many more properties to be discovered. Maybe another way of thinking about it is on flexible turns the home into the destination, so you don’t have to type in the destination. And I’m really excited about this. So this tells us that we’re on to something. It also tells us that there’s a new paradigm in travel. And so I think that this flexibility is here to stay. I think one of the holy grails in travel is to answer a question for a guest of where should I go and when should I go. And by having this new flexible features, we’re able to really be able to do that. So what’s next for us is that we’re going to continue to invest in this feature. On November 9, we’re announcing four new categories of I’m Flexible. There’s going to be some really cool features that we can show. So I hope you tune in. We’re also expanding the flexible date feature from six months to 12 months. So now you can see when these really incredible properties available anytime in the next 12 months. And we’re going to continue to invest in this feature. And I think down the road, this will be a major way that people are searching on Airbnb, and it’s so important because, again, it allows us to balance supply and demand. Dave, do you want to take the second question?" }, { "speaker": "Dave Stephenson", "text": "Yes. I think one thing to kind of step back and remember is that Airbnb strength has traditionally been cross-border and more urban. I mean, that’s traditionally where our business strength has been, right? Cross-border has been 50% of our business. The urban has been about 60% and yet our really strong Q3 results happened while even those two parts of the business are not yet returned to kind of pre-pandemic levels, right? Cross-border still at 33%, the urban – high-density urbans at 46%. So it’s not quite back, but it’s growing nicely. So I think what you say about the pace of urban recovery is that, that will continue to be additive to our business and the strength that we’re seeing overall. I think what’s also interesting about the pace of the urban recovery is that the nature of it is even a little bit different. Historically, our top 10 cities in the world contributed approximately 11% of revenue and now the top 10 cities are comprising about 6%. So it’s just getting more diverse, more spread in terms of where our distribution of travel is. So as urban comes back, I think it’s still going to be even a more broad spread version of the revenue across the world." }, { "speaker": "Operator", "text": "Our next question comes from the line of Jed Kelly from Oppenheimer. Jed, please go ahead." }, { "speaker": "Jed Kelly", "text": "Great. Thanks for taking my question. We’ve seen a couple of larger call them, property managers and urban accommodation providers start to scale up inventory that will probably use your platform for bookings. So Brian, can you just provide us an update on how you’re working with some of the larger property managers. And then in your opening remarks, you did call out some major companies on the work from anywhere trends. Is there any way for you to work closer to them and provide benefits to the workers?" }, { "speaker": "Brian Chesky", "text": "Yes. Thank you for the question, Jed. Yes, let me take both of these large property managers and work from anywhere trends and how opportunities to work with companies. So on the first one, though our platform is 90% of individuals, the 10% of our hosts or professionals are very important to Airbnb, and we continue to build new tools for them. And so this just past year alone, we’ve had 150 upgrades and innovations and around half of those happened for a host. And many of the upgrades we have also applied to the more professional host as well. And so we’re going to be showing off a number of features on November 9, and many of these are going to be innovations for professional hosts in addition to individual hosts. So we’re still very focused in this area, and I continue to believe that we’re going to be growing really quickly. And just to give you an example, as Dave said, we’ve seen our fastest-growing areas of inventory in North America and Europe in nonurban areas. And certainly, professional hosts are a part of this. And I think they really love the amount of demand that we provide for them. Now as far as the work from anywhere approach. Yes, I think this is a really exciting area. I mean, as we said, Amazon, Ford, PwC, Procter & Gamble are just the beginning of the number of companies that have offered a more remote policy. I think it’s safe to say that very few companies that have office workers are going to be asking those workers to come back to an office five days a week. And all you have to believe as that people don’t come back five days a week, maybe they come back four days a week, maybe they come back three days a week, maybe they had even more flexible policies. And all we have to do is believe that, to believe that Zoom is here to stay, to believe that work from anywhere is here to stay. And so we’re starting to see a lot of companies certainly reach out to us. We don’t have anything to announce right now, but we are going to continually make it easier for people to be able to live anywhere and work anywhere on Airbnb and integrating with companies if that’s what it takes of course, would be something that we continue to do more of." }, { "speaker": "Jed Kelly", "text": "Thank you." }, { "speaker": "Operator", "text": "Our next question comes from the line of Colin Sebastian from Baird. Colin, your line is now open." }, { "speaker": "Unidentified Analyst", "text": "This is Reese on for Colin. I was just wondering if you could talk about kind of the trends you’re seeing between the growth in nights booked versus adoption of experiences? And is there any difference in the trajectory of recovery there? And then maybe just how your relationships with communities are doing? Thanks." }, { "speaker": "Brian Chesky", "text": "Yes. I can take these. So obviously, the growth of our core business of homes has been very, very strong. With experiences, I really expected last year to be a breakout year for Airbnb experiences. And of course, the opposite happened. The pandemic put that product on pause. That being said, it’s now been more than 1.5 years, and I feel like people can only stay home so many nights watching Netflix. And eventually, they want to get out of house. And I do think people want alternative things like restaurants, especially when they’re traveling. And Airbnb experiences are very popular amongst our guests. They actually love even more than homes statistically from a five star standpoint. In other words, more guests leave a five star review for experiences in the homes after they stay. So I’m very bullish on this product. It’s been gradually ramping back up and reopening. We’ve seen strong growth over the last couple of quarters, and I’m expecting this to be a big area of growth over the coming five years or so. So that’s what we’re seeing with experiences. Now with regards to our relationship with communities, let me just start by saying this. Even before the pandemic, we worked with thousands of cities all over the world. You see we created this new category of travel, and we had to work with cities to educate them and work collaboratively with them to be able to really make sure everybody works best for these communities. To give you a stat, we have today, collected $4 billion in hotel occupancy tax or transient occupancy tax. You can’t collect hotel tax without working with those cities and jurisdictions. So we’ve had really close relationships with them. And what I’ve seen in the last year is that the pandemic has actually been a bit of a reset for our relationship with cities. And reset probably in a good way because what we’re seeing is a lot of cities that we’re concerned with tourism in their markets are in a different concern now. Now over tourism the number of cities have to under tourism. The reduction of business travel, fewer international travelers crossing borders going into big cities means that many of these cities and destinations have revenue shortfalls and just general travel shortfalls. And so what’s happened is we’ve had a lot of cities reaching out to us to collaborate. And in fact, we’ve done 100 partnerships with destination marketing organizations, around the world. And I think our new and flexible features where we can point demand to where we have supply also means we can point demand to cities that want it. And so I think this is a really exciting period for us to, really renew a great relationship with cities all over the world." }, { "speaker": "Unidentified Analyst", "text": "Great, thank you." }, { "speaker": "Operator", "text": "Our next question is from Brian Fitzgerald from Wells Fargo. Brian, please go ahead." }, { "speaker": "Brian Fitzgerald", "text": "Thanks guys. On the cross-border travel, I open up, we’re just wondering if you could comment on lengths of stay trends there. Our intuition is that people are going to get on a plane in the current environment, they probably want to amortize that across a longer stay. But just wondering what you’re seeing there. And then second thing on about the length of stay more generally. You spoke to 28-days plus, and just wondering if you could talk to what you’re seeing in terms of maybe a seven day stay becoming a 14-day and any trends there? And any thoughts on how the competitiveness of Airbnb increases versus hotels as one week stays, become two week stays." }, { "speaker": "Brian Chesky", "text": "Yes. Why don’t I start with that very last question, Brian. And then, Dave, I can hand over to you. You can talk a little bit more about cross-border, its impact on length of stay and just the growth of maybe weekly stays is what I think Brian’s asking. But let me start with this question of the competitiveness of long-term stays. It’s really quite interesting to think about how we started Airbnb. I started the company when I was 26 years old with two of my friends, and the category we entered was hotels. That was the incumbent industry. An industry that most people liked, and travelers have a lot of other options. If you were to try to stay somewhere for two weeks, three weeks a month or multiple months, and let’s say you’re staying somewhere other than the city you live, what are your current options? There’s not a lot of players doing this. There’s a lot of friction. So we think essentially, the longer the length of stay, the more compelling it is to stay in a home. It gets very expensive to stay in a hotel for weeks at a time. And the longer you’re away from home, the more I think you want to be in a home. You want a kitchen, you might want a backyard, you want to be able to cook. You just want to feel like your home and you’re not like an outsider. And so I think that this is going to be a really big opportunity for us. And this is partly why I’m really excited about long-term stays or even stays that are for a week or longer. Dave, do you want to talk about some of the stats we’re seeing?" }, { "speaker": "Dave Stephenson", "text": "Yes. We highlighted on the shareholder letter that 45% of our nights were from stays at least seven nights. And this is the trend that we’re seeing is that the length of stay continues to increase. The number of use cases that people find working with Airbnb in the same way that Brian just mentioned, it’s just a better way to travel for longer. You’re not going to want to stay in a hotel room for 28 nights, but those trends are continuing. And I don’t have anything specific to say about cross-border and the length of stay directly related to that. But just more broadly that the length of stay continues to increase. And to the extent that it does, it accretes to Airbnb." }, { "speaker": "Brian Fitzgerald", "text": "Great. Appreciated guys." }, { "speaker": "Dave Stephenson", "text": "Thank you." }, { "speaker": "Operator", "text": "Our next question comes from Naved Khan from Truist Securities. Your line is now open." }, { "speaker": "Naved Khan", "text": "Great. Thank you. Two questions. Did you see any impact on the Apple iOS changes on your social ad campaigns? And then the second question I had is just around some news articles we saw that showed that you continue to work on technology to basically help onboard hotels. Maybe just talk about where it sits in your list of priorities." }, { "speaker": "Brian Chesky", "text": "Yes. I can take both of those, Naved. Number one, just in Apple, their iOS changes. No, we’ve not seen any impact on Airbnb, and that’s not really the business we’re in. With regards to our efforts to invest in technology to onboard hotels. Let’s just talk a little bit about our strategy with hotels. Last year, we had to make some difficult decisions to put a number of initiatives on pause, like transportation and scale back some others. And one of the initiatives that we had to scale back a bit was our investment in hotels. That being said, hotels are still a very important part of Airbnb’s strategy. We believe that people come to Airbnb because we have something unique. We have unique host to offer something you can’t get anywhere else. And so we think that the majority of people come to Airbnb direct to book individual host. That being said, we want to make sure that people come to Airbnb, they always find a place to stay. And sometimes we have network gaps. And we think that hotels are really great ways to fill a network gap. So when somebody comes to Airbnb, they can always find a place to stay. HotelTonight has been growing really steadily in the last couple of years. I’m very excited about the progress, and we’re continually investing in this area. Now it’s not as big a priority as our core business of supporting individual hosts, but we’re continually supporting them. We’re continually investing in this area." }, { "speaker": "Naved Khan", "text": "Maybe just to follow up on that, Brian, would we be seeing hotels on the core Airbnb time in the future or anytime soon?" }, { "speaker": "Brian Chesky", "text": "Will we be seeing what?" }, { "speaker": "Naved Khan", "text": "Would we see hotels on core Airbnb at all?" }, { "speaker": "Brian Chesky", "text": "Yes. I mean, yes. And we have tens of thousands of other terms now on Airbnb, and I expect you to see more in the future for sure. And it’s just – it’s really just a matter of prioritization. Right now, we are focused on the most perishable opportunities the most perishable opportunities right now are scaling as quickly as possible to get as many hosts ready to host as many guests as possible. And so our big priorities are recruiting hosts, simplifying the guest experience, educating the world that would make certain be different, that’s hosting, and getting world-class service to getting our service to be at a world-class level. Those are our major priorities, but we are continually investing in hotels." }, { "speaker": "Naved Khan", "text": "Thank you." }, { "speaker": "Operator", "text": "Our next question comes from the line of Deepak Mathivanan from Wolfe Research. Deepak, please go ahead." }, { "speaker": "Zach Morrissey", "text": "Thanks. This is Zach on from Deepak. Just first on ADRs, I know you kind of called out that the primary driver so far has been this kind of mix shift. But you also noted that you’re starting to see some price appreciation in certain high-demand areas. Just curious if you can kind of parse this out a little further. And is that trend kind of concerning to you in the context of Airbnb’s long-term growth? And then second, just related to COVID, I know it’s very dynamic and hard to predict. But the restrictions seem to be generally easing, but we are seeing pockets of rising cases and some kind of impediments to travel demand. Do you see any kind of differences in the restrictions today and the impediment to demand behavior today versus six or 12 months ago? Thanks." }, { "speaker": "Brian Chesky", "text": "Dave, do you want to take these?" }, { "speaker": "Dave Stephenson", "text": "Sure. Let me start with the ADR. The trend that we saw in ADR late last year, the increase in ADR was almost exclusively driven by mix. And so that was the regional mix urban, nonurban mix, size of home. And then what we saw earlier in the year is some price appreciation as a larger portion of the ADR increase. And that increased a little bit further here in Q3, kind of the peak kind of summer travel season. And then what we’re seeing, as I said in Q4, is our ADRs are relatively stable with what they were in Q3. Even with these elevated ADRs, again, the majority of the increase has been just on a relative basis due to mix. So there’s really no change in the price where there is some price appreciation. I think we still have a great value. We’re still able to give people, homes and stays that they find very valuable in terms of all the amenities they get. Maybe a larger place, more amenities, kitchen, more bedrooms, there’s more space to be. And so we think we continue to give a great value. And so we’ll continue to monitor it and be mindful of it. But I don’t think it’s an existential threat to us. And then the second question is just rising cases, any differences versus the pandemic. I guess I think what we’ve seen is just a bit more resilience in guests being willing to travel around the world, right? There’s a little bit of – there could be pockets of variation depending on what governments frankly do in terms of opening up borders. And – but the general trend has continued to be more positive, more up into the right and more consistent. And I think people, even in the face of various strains of COVID continue to be wanting to travel, and they find that doing that on Airbnb is the best way to do it." }, { "speaker": "Unidentified Analyst", "text": "Great, thanks for the color." }, { "speaker": "Brian Chesky", "text": "I’ll just add one last comment. We’re living in a really fast-changing world. And I don’t think we’ve seen the end of big existential changes in the world. And if you can’t predict the future, the best thing to do is adapt to it. And I think our business model is incredibly adaptable to whatever changes are to come." }, { "speaker": "Operator", "text": "Our next question comes from the line of Mark Mahaney from Evercore ISI. Mark, please go ahead." }, { "speaker": "Mark Mahaney", "text": "Thanks a lot. This is Ben on for Mark. So in the last 18 months, COVID has allowed Airbnb to really pivot their product priorities to refocus on the core business. As you look to next year, do you anticipate your investment priorities to change somewhat? Are you going to start focusing on stuff a little bit outside of your core business? And then the second question, if I could. Just in the letter you talked about in relation to APAC, just the short-term rental restrictions as being somewhat of a drag on the recovery in that region. Are those new restrictions versus 2019? And how significant are they? Do you expect them to be a permanent drag? Thanks." }, { "speaker": "Brian Chesky", "text": "Thanks for the question. Dave, do you want to take APAC and start with that and then I can be to talk about new investments." }, { "speaker": "Dave Stephenson", "text": "Yes. On APAC, we’re not anticipating that any short-term rental regulation changes as being a major negative drag on our business over time. We’re just mindful that there can be some variation in what governments are wanting to do, especially during this kind of COVID crisis time, and it varies by area. And we saw a little more restrictions in APAC than we did elsewhere." }, { "speaker": "Brian Chesky", "text": "And then on your question of new investments. Here’s what I would say. I mean, we learned some very valuable lessons last year about focus. I remember once I was in college and my teachers told me, Brian, you can do everything you want in your life just not all at the same time. Yes, we certainly learned that less than last year. We had to scale back initiatives. But one of the benefits of all that, we took our very best people and we focused them only on a few problems, including recruiting more hosts, simplifying the guest journey, improving a world-class service and educating the world about Airbnb. And as we’ve done that, we’ve not only reduced costs in the business, but we’ve actually been growing even faster. And so this year has been a year of a relentless innovation to perfect our core service nearly one innovation every 48 hours on our core service. That being said, we are going to do new things Airbnb. We created this category of travel. And I think there’s a lot more categories that we can create in Airbnb. And so we’ve done two releases this year. We did one in May and one in November, and we’re going to do a couple more again next year. And so November will not be the last time you hear from us. You’ll hear from us again in the spring, where we’ll introduce a summer release for the summer, and we’re going to have some really big new offerings as well. And again, the really big areas I’m excited about that we’re currently doing, short-term stays. I think we’re realizing that we are just scratching the surface of this incredibly huge opportunity as home sharing continues to grow. Long-term stays is an entirely new category for Airbnb. And I think now that people are getting comfortable crossing borders, can get outside and getting gathering with other people, experience will be a big opportunity. But this is just the beginning. We have many more innovations in front of us, and we will continue to use our creativity to design new possibilities for people." }, { "speaker": "Mark Mahaney", "text": "Thanks, Brian. Thanks, Dave." }, { "speaker": "Operator", "text": "We currently have no further questions. So I will now hand back over to Brian Chesky for any closing remarks." }, { "speaker": "Brian Chesky", "text": "All right. Well, thank you all for joining us today. Just to recap everything 2021 for Airbnb has been a year of relentless innovation. We launched more than 100 upgrades already this year. And next week, we’re going to announce 50 more. That’s 150 upgrade innovations this year. Our design-driven approach means that we’re constantly improving our service to adapt to this changing world. And the world will continue to change because for the first time ever, millions of people can now travel anytime, anywhere for any length and even live anywhere on Airbnb. And this is a travel revolution. So we’re just getting started. We have many more innovations to share with you, starting with some exciting announcements next Tuesday. So thank you all for joining today and we’ll see you next week." }, { "speaker": "Operator", "text": "This concludes today’s call. Thank you for joining, and I hope you have a lovely rest of your day. You may now disconnect your lines." } ]	Airbnb, Inc.	115,705,393
ABNB	2	2,021	2021-08-12 17:00:00	Operator: Good afternoon, and thank you for joining Airbnb's earnings conference call for the second quarter of 2021. As a reminder, this conference call is being recorded, and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Ellie Mertz, VP of Finance. Please go ahead. Ellie Mertz: Good afternoon, and welcome to Airbnb's Second Quarter of 2021 Earnings Call. Thank you for joining us today. On the call today, we have Airbnb's Co-Founder and CEO, Brian Chesky, and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our second quarter of 2021. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I'd like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also during this call, we will discuss some non-GAAP financial measures. We provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. And with that, I will pass the call to Brian. Brian Chesky: All right. Thank you, Ellie, and hey, everyone, thanks for joining us today. I'm dialing in from an Airbnb listing in Italy, and I'm very excited to share our Q2 results with you. Since the beginning of the year, we've been preparing for the travel rebound. After months of being stuck at home, millions of people have been yearning to travel, explore the world and connect with others. And we anticipated a travel rebound unlike any other in history. And in Q1, we saw the start of this rebound. And now that Q2 is behind us, we can definitively say that the travel rebound is upon us, and Airbnb is leading the way. But as we predicted, travel is different than before. Airbnb has benefited from our adaptable business model, which is able to meet the changing needs of our guests. We haven't just been sitting passively around waiting for travel to return. For the past year, we've been relentlessly driving product innovations to meet this historic moment. And as a result, Airbnb has emerged from this crisis faster than others, and we're better positioned for the future of travel. Now while we recognize the persistence of COVID and the Delta variant, we expect Q3 to be our strongest revenue quarter ever. The fact that we expect Q3 revenue to be our highest revenue quarter ever speaks to the inherent resiliency of our business. So now turning to our Q2 results. As vaccination rates increased and travel restrictions lifted in Q2, we saw consistent strength in North America, followed by significant recovery in Europe. One year ago in Q2, our business was significantly impacted with the onset of COVID. Now like many others, our year-over-year comparison to 2020 does show a dramatic improvement. But what is most notable are our results relative to pre-COVID levels. Across all key metrics, we nearly met or exceeded our Q2 2019 performance. Q2 nights and experiences booked nearly tripled from a year ago. More importantly, Q2 nights and experiences booked nearly matched pre-COVID levels in 2019. Gross booking value of $13.4 billion, more than quadrupled from a year ago and also shot up above 2019 levels by 37% based on the recovery of nights, combined with the strength of our ADR. Meanwhile, Q2 revenue of $1.335 billion, also nearly quadrupled from a year ago, and it exceeded 2019 levels by 10%. What this demonstrates is an acceleration in our recovery from Q1. Our Q2 results not only demonstrate our leadership in the travel rebound, but also our continued operating discipline. Our adjusted EBITDA profit was $217 million. Now this represents a 16% EBITDA margin. This was more than $600 million of improvement in EBITDA from a year ago, and it represents 20% or 2,000 basis points margin expansion from 2019. And this is on a similar level of revenue. Now over the past year, as our top line recovered, we consistently focused on improving our profitability. For example, over the last 4 quarters, we've improved EBITDA margins on average more than 20% every quarter as compared to periods in 2019. Now that is a 2,000 basis point improvement on average, every single quarter. And we've done this by improving our variable cost by driving up marketing efficiency and by very tightly managing our fixed cost. Now I'm really proud of these results. And what they demonstrate is that we are emerging from this crisis as a stronger and more efficient company. Now turning to business highlights and travel trends. Despite the continued impact of COVID around the world, we have seen clear evidence that travel is recovering. We're incredibly encouraged by what we've seen in Q2. And what we've seen is an accelerating pace of global travel, particularly in Europe, as well as continued popularity of nonurban and domestic destinations. In Q2, we had the highest number of gross nights booked of any quarter in our history. And we just had the biggest night on Airbnb since the pandemic began. Last Saturday night, more than 4 million guests from around the world, were staying in an Airbnb. That is more people than the entire population of Los Angeles. And we're also seeing travelers once again cross borders and business cities. These 2 categories of travel have been historic strengths of Airbnb, and we're really excited to see them begin to recover. But at the same time, the way that people travel and live continues to change. We believe that many of the new booking trends that emerge over the past year are here to stay. People are traveling to many more destinations than before. And when they travel, they're staying longer. We believe these 2 categories of travel are in fact here to stay. And as a result, what we focused on are product innovations that support these new ways that people travel. You see many people have a greater freedom about where and when they travel, and we've improved our product to better meet their needs. Our new search products offer guests the flexibility that they want when planning and booking trips. And finally, we're seeing more people around the world consider hosting. We ended Q2 with the largest number of active listings in Airbnb's history. Now there are a couple of reasons for this. First, our demand is driving supply. This is what's so powerful about our model. For example, in Q2, our highest supply growth was actually in high-demand destination. And second, our marketing and product initiatives have been really accelerating to support host recruitment, and they're working. So now let me go into a little more detail on what we've been doing to prepare for and support this travel recovery. Now as a reminder, our single priority in 2021 has been to prepare for the travel rebound. To do this, we've been perfecting the end-to-end experience of our core service. And this includes 4 themes: first, educating the world about hosting; second, recruiting more hosts; third, simplifying the guest journey; and finally, delivering world-class service. So let me just briefly give you an update on how we're executing on each of these 4 areas. So first, we’re educating the world about what makes Airbnb different, and that is hosting. In Q1, we launched our first large-scale marketing campaign in 5 years, Made Possible by Hosts, and we expanded this campaign in Q2. We're educating guests about the benefits of being hosted, and we're also inspiring more people to become hosts. Now we continue to be really encouraged by the result of this campaign in terms of traffic, first-time bookers, interest in hosting and brand favorability. Second, we are recruiting more hosts, and we are setting them up for success. On May 24, just a few months ago, we launched a completely redesigned host onboarding flow that makes it simpler for anyone to start hosting. This new flow has made it faster to become a host, which has helped drive our listings growth in Q2. Third, we are simplifying every part of the guest experience. On May 24, we expanded the tools for guests to offer more flexibility when they're searching for a place to stay. We announced flexible dates, flexible destinations and flexible matching. And all 3 of these features are to support the new ways that guests are looking to plan and book trips. And finally, whenever our host or guests need us, we must deliver world-class service. So we recently launched a redesigned Help Center. We've more than tripled our supported languages, and we've updated our safety resources. And all of it is to ensure that we are supporting our guests and hosts whenever they need us. So to summarize, travel is recovering and our Q2 results show that Airbnb's leading the way. For the past year, we've been preparing for this rebound. We've driven product innovation to support changes to the way people are traveling and living all over the world. And as a result, we've emerged from this crisis faster than others and as a stronger, more efficient company. So with that, we look forward to answering your questions. Operator: [Operator Instructions]. Your first question comes from the line of Mark Mahaney with Evercore ISI. Mark Mahaney: Okay. You just talked about having this record day. I think you said last Saturday, and I think you're also maybe appropriately cautioning about third quarter trends and variants and Delta. So just kind of put those things together. Record day still sounds like things are good, but I'm sure there are some warnings out there. Can you be more specific about you're seeing that's causing you to be just a little more cautious about Q3 and the back half of the year? Brian Chesky: Yes, Mark, thank you for the question. Before I hand it over to Dave, let me just say that, yes, we had a record night. There was more than 4 million guests staying with hosts all over the world. And we're really encouraged that this is the biggest night we've had since the pandemic began. And the one other thing I'll just say is that we have an incredibly adaptable model. So however, travel changes, we'll be able to meet that demand. But Dave, why don't we talk about what we're seeing right now? David Stephenson: A lot of the trends we're seeing in Q2 are consistent with some of the trends we saw in Q1 and Q4. People continue to be flexible. That's why we built all these flexible tools where because 40% of searchers are showing flexibility in either the date or location and people are traveling to more destinations and people are staying longer. And one of the elements is that we're seeing the trends of long-term stays, which we highlighted as a key strength in Q1, stays of 28 days or longer, remain being one of the largest and strongest growing parts of our business. So that was 19% of our nights booked in Q2, following being 24% in Q1, just as the mix of short-term stays kind of rebounded strongly in Q2. We've seen a strong increase in month-over-month performance across Q2. So April to May to June nights booked, all were strong leading in anticipation of the summer peak travel. Now in July, we've seen some of the pullback in demand, but it's likely due to summer peak and possibly [Indiscernible] to the Delta variant. But all of those lead to still being the Q3 revenue, the nights that people stay and the revenue that we recognize will be the strongest ever. And concurrently, our profit in Q3 will be the strongest ever. Operator: Your next question comes from the line of Stephen Ju with Credit Suisse. Stephen Ju: So Brian, as a follow-up to the product announcement that you had, I think this was late May when you hosted that session, and it seems like to me you're giving consumers broader recommendations. And if this is really successful, hopefully, it's something that they really didn't know that they even really wanted. So I know it's probably really early, but anything you can share in terms of what their response has been? Are they delighted with what you're showing them? Or do you still think you have some tinkering that you need to do? Brian Chesky: Yes, Stephen -- yes, Stephen, thanks. It's a great question. Let me like preface this by saying the following. There's been a major paradigm shift in how people search for travel on the Internet. Before the pandemic, the way search was on the Internet for travel was the vast, vast majority of people came to a website, a travel website, typically an OTA, and they would type in a location. They have a location in mind, and they go to date, and they check -- type a date to check-in, and a date to check-out. So this is really fixed search. People know where they're going to go. With the pandemic, I think it's safe to say the world is never going back to the way it was, and that means travel isn't going back to the way it was. And the way travel is evolving is that people because they're able to work more remotely, they're more flexible. And what we are seeing, Stephen, is that 40% of our guests have flexibility about where or when they travel. And to give you one example of one of the things we've done, flexible dates. We have a couple of flexible date features. We have a feature that you can tap, I'm flexible, and you can say I'm looking for a place for a weekend, a week or a month, sometime in the next few months. And what we have seen is with our flexible date feature, it's being used more than 500 million times. This is a feature that's been used 0.5 billion times since we launched this feature in the beginning of the year. We've also seen a very big uptick in the use of flexible destinations as well, where people -- if they're flexible about where they travel, we can recommend them to where to go. Now these features are really important. The reason they're really important isn't just because this is the paradigm shift and how people are searching for travel, but it's also important because this means that we can point demand to where we have supply. And this is a major, major shift for our business. And so we are going to continue to tweak the products. When you have hundreds of millions of data points on a feature, you learn, and we're continually innovating. But I will also just say that this is just the very beginning because our team is not going to rest on their laurels. We are working really, really hard to continue to offer more flexibility to guests and continue to be able to inspire them and point them to where we have available supply. Operator: Next question comes from the line of Jed Kelly with Oppenheimer. Jed Kelly: Great. Just on the work-from-anywhere trends you were just mentioning, Brian, can you provide anything you're seeing in sort of the shoulder season that kind of gives you confidence? Are you seeing any improvement there? And then on the yield management capabilities, you're providing the host of the new tools, any of that providing the ADR uplift? Brian Chesky: Yes, Dave, actually, you want to take these questions? David Stephenson: Sure. Maybe I'll start with the yield management. The majority of the ADR uplift that we're seeing is being driven by mix. It continues to be mix. The strength of our rebound has been in North America and Europe. Those have higher ADRs. It's been in nonurban, which is higher ADR than urban and in larger kind of whole home, larger homes. So the majority of the ADR has been driven by that. To a lesser extent, a newer trend that we saw in Q2 was the impact of some pricing pressure in peak markets that are highly constrained for the summer, but that was still [Indiscernible] minority relative to the overall mix. So ADR is not really being driven by features. Over time, our ADR on a revenue to gross booking value adjusted basis where you line them up at the same time of booking has been very consistent. Over time, I think there are opportunities for us to increase our monetization through new opportunities, whether that be test travel insurance, maybe promoted listings or other things that we could do, but we don't see those as perishable opportunities as they are kind of evergreen opportunities. And instead, what we're focusing on right now, as Brian has talked about, is the travel rebound and making sure that we are addressing the needs of travelers today. And their needs today are the additional flexibility that they have in where and when they travel. So 40% of our searches in Q2 actually had flexible dates or flexible destinations, which is why we built those tools and capabilities and seeing that strength. And so in terms of the work-from-anywhere trends, I think that we're seeing people are continuing to find Airbnb is the best place for them to be able to both live and work. And one of the things that we launched in Q2 is directly in response to people's demand there. It sounds small, but I think it's a really unique item, which is it allows hosts to measure the speed of their WiFi and then actually post it on their listing. And that's because guests were wanting to know how easy will it be for me to -- how good is the WiFi here? Can I work from this location? So I think that's kind of a unique small element that can just show us how we're innovating in order to kind of support these broader travel trends. So what we do know is just that people are incrementally more flexible. If we can a take 1-hour Zoom call on a Thursday, you're likely to be able to do a longer weekend with the family than maybe historically you've been kind of struck in the office to kind of go do. And so we believe that all of these kind of trends will just continue to accrete to Airbnb and be tailwinds to our business going forward. Brian Chesky: And I'll just add one more really interesting fact. Not long ago, we did a contest online, on social, a contest that allowed people to apply to be able to live on Airbnb. And to be able to be part of this contest, you have to fill out an application and it takes a while to fill out. We got 315,000 applications for people wanting to live on Airbnb, 315,000. And I think what this says is that travel is never going to be the same again because it's completely opened up now. When we started Airbnb, like stays of longer than a month really wasn't a major part of our business. It really wasn't a major use case for us to be able to serve. But flexibility is now a permanent part of travel. It's just a permanent part now because it's all we have to believe is that Zoom is here to stay. And if we believe that Zoom is here to stay, we believe that flexibility in remote living is here to stay. And therefore, it's pretty obvious that what would happen is that we are going to continue to see more and more longer-term stays. And I think this is going to help us smooth out our seasonality over the coming years to come. Operator: Next question comes from the line of Naved Khan with Truist Securities. Naved Khan: So you guys mentioned some slowdown in the nights booked in the third quarter. Just wanted to get some color on how that looks like. Maybe can you talk about July and how it compared to the second quarter? And how does this look across different regions? Is it more pronounced in the U.S. versus Europe? Or are they about the same? Brian Chesky: Dave, do you want to take this one? David Stephenson: Sure. I mean, again, what we saw in Q2 is very strong bookings growth in advance of the third quarter kind of pre-travel season. We saw this kind of in the depths of COVID in 2020 as well. People are wanting to travel. They want to get out of their homes, and they especially want to do that in the summer. And so we saw a lot of peak travel demand coming in Q2. So as we exit Q2 and come into Q3, we have a combination of fewer bookings for the fall, just given the nature of some of the seasonality and any kind of impact potentially on COVID concerns going into early Q3. So we're not seeing a substantial deceleration. Always identified in the outlook is that our nights and experiences booked in Q3 will be lower than in Q2, given just the extreme strength that we saw in the business in Q2, but we continue to be very bullish on the business. As I said, the revenue that we're going to have in Q3 will be the highest ever, while the profits are going to be the highest ever. And so the business remains very strong. And what we've seen is that people want to travel, and they are really resilient in finding ways to travel. One of the benefits that we see with Airbnb is that you don't actually have to hop on a plane always or cross a border in order to travel with Airbnb. The big part of our strength has been in nights with less than 300 miles, that continues to be one of the strongest parts of our business. And then in Q2, we saw strengthening where the faster parts are growing was growing of 300 miles longer, and we saw an increase of urban nights booked. And so some of those trends have continue -- started to pick up to more kind of historic levels. So I'm very bullish on the long-term view of our business overall. Naved Khan: Got it. And maybe just a clarification on this, maybe slowdown with the Delta variant COVID spreading, is this possible that with people getting more cautious and maybe having or wanting to optionality to maybe cancel even last minute. Could that be delivering some demand away to maybe more like traditional hotel types where you could cancel like literally the day before or something like that? David Stephenson: Again, we feel like the ability for Airbnb to provide the kinds of stays and experiences that people desire all around the world, it remains incredibly strong. We've been the best way for people to kind of travel and live through Airbnb throughout the pandemic. And I think that the tailwinds that we've talked about, the tailwinds of flexibility, the tailwinds of people staying longer, the tailwinds of even how people are traveling for business in the future are always that they will travel more likely with Airbnb for the longer term. These travel trends are directly supporting the strength of Airbnb's business. Operator: Your next question comes from the line of Brian Fitzgerald with Wells Fargo. Brian Fitzgerald: We want to ask about the growth you're seeing in Hosts, maybe particularly -- in particular high-demand locations. Any way to characterize the new Hosts who are coming online, maybe the level of professionalism -- professionalization, maybe is a better word -- versus the rest of your base? And how much of their calendar they're making available to you? Are these pros or are these people who are looking at doing this seasonally or opportunistically? Just trying to get a feel for that. Brian Chesky: Thank you, Brian, for the question. Dave, before I hand over to you, let me just kind of recap a couple of high-level things about our host community. Number one, we have more than 4 million Hosts. 90% of them are individuals, and most of them couldn't have hosted, if not for the tools we provide. And what we saw in Q2 was that we had the fastest listing growth where we had demand. And the reason why is because we have individual hosts, as they get booked, word of mouth typically increases and they often tell their friends. But the other thing that we've often seen is that as more guests become flexible, we're able to point demand where you have supply. Now specific to your question about the nature of the host that we did add in Q2 and whether they were individuals or professionals, Dave, do you want to take that? David Stephenson: Yes, we continue to see 90% of our Hosts are individual Hosts, and that remains to be the case. So as we continue to add new individuals, and this is where we focus on, we focus our tools and capabilities to uniquely enable individual Hosts to be successful in hosting Airbnb. And when they come on Airbnb, the vast majority of their listings are unique to Airbnb, and that has remained the case in Q2 where the vast majority of our new Hosts coming on are also individuals. That's our focus, but -- so we're going to build the tools and capabilities, and those are the results that we're continuing to see. Operator: Your next question comes from the line of Colin Sebastian with Baird. Colin Sebastian: Great. And nice to see the progress on listings growth. But first off, just in terms of the trend in ADRs and the commentary in the letter, is that something -- is the moderation there? Is that something you're already seeing in terms of bookings? Or is this more of a seasonal trend you expect to happen as summer holidays give way to a different profile of travel? And then, secondly, on the EBITDA margins, should we think about the sustainability of those in context of a step function higher from this point? Or are there other investments in the quarters a year ahead that will moderate some of that near-term leverage we're seeing? Brian Chesky: Dave, do you want to take one of these? David Stephenson: Sure. On the trend in ADR, again, the vast majority of the ADR has been driven by mix. And so as other parts of the mix towards urban and maybe towards Latin America and Asia changes and reverts to more historic levels, we will see ADRs moderate, but that will be purely as part of mix and as the other parts of the business come back and they have that lower overall kind of ADR rates. So the strength of North America and Europe, we believe to continue to remain strong. And then as other parts of the business come back then the mix comes out and the ADRs moderate. So that's all we're kind of indicating. And in terms of the EBITDA margins, I think we're all -- we're proud of the progress we're making in EBITDA and that accelerating towards our long term. We've stated that we could achieve 30% or more EBITDA margins over time. Clearly, we've accelerated our way there. I think that a piece of that is clearly the improvements we've done on fixed costs, marketing costs, improvements in our variable costs. We also see some benefits on the higher ADR rates as well. And so over time, we will see some variation in our EBITDA margins kind of over time, but I think what we've demonstrated is the capability to dramatically expand those margins. And I think it just proves the point that we've kind of talked about more verbally, which is we can achieve this 30% margin or more. And now we're actually showing how we can do that. Brian Chesky: And I think the one thing I'll just add on -- the one thing I'd just add on, the efficiency of our business. And we've said this in the letter. I also mentioned this in the opening comments. But COVID was a crucible moment for the company. And in that moment, this company, we've gotten significantly more disciplined and much more efficient. And I think that we've all seen the incredible benefits and focus because we've put our very best people on the most important problems in the company. And because what we've seen does not only have margins improved but actually, we're able to move much more quickly. We can pivot, and I think this explains why we were able to announce and launch more than 100 upgrades on the heels of our IPO in time for the travel season. And so I think that you're going to see a continued acceleration of product innovation because of our discipline and because of our focus. These are lessons that we will never ever forget. These are lessons that will leave indelible marks for this company. Operator: And your next question comes from the line of Justin Patterson with KeyBanc Capital Markets. Justin Patterson: Great. With flexible dates rolling out, how has the booking window changed? Are there more instances of last minute stays coming into play? And then the second question, you provided a lot more value to Hosts this year. Conceptually, how are you thinking about factors behind when the right time it is to increase take rate? Brian Chesky: Thank you for the question. So why don't -- Justin, why don't, Dave, I take the second question around take rate for Hosts, and then you can take the first question about flexible dates and how that has affected the booking window. So with regards to factors to be able to increase take rate, as -- and I'll kind of say what Dave said before, we think there's -- one -- our guiding principle is that we want to make sure that every single year, we are providing incrementally more value to hosts than we're charging them because the name of the game is to make sure that our really strong business model continues to grow, and that means that hosts feel like they have the very best opportunity to host on Airbnb. We want them to always feel like we're giving them more value than we're taking away -- so taking. So that's number one. Number two, I do think there's a lot of opportunities for us to be able to increase take rate. And if we do that, I think the way we would think about that is by charging for some incremental services that we can provide for hosts. And the more that hosts really rely on Airbnb to be able to continue to grow their business, the more we think they're going to be willing to be able to buy or participate in new services and offerings. But the way we think about this is a nonperishable opportunity. So as Dave said, we have a number of years in front of us where we can continue to look at offering new services. But what we have focused on this year is this unprecedented travel rebound that's upon us. And so we've worked really, really hard to simplify the guest experience to introduce more flexibility for guests to make it much easier for hosts to come on the platform so that we get thousands and thousands more hosts in time for the travel season. So with that, I don't know if, Dave, you want to talk about the booking window for flexible dates. David Stephenson: Yes. What we saw in Q2 is actually a fairly stable booking new window in line with our Q2 of 2019. It was actually a little bit shorter booking window than Q1 of this year, but that's largely been due to seasonality. So yes, you're right, that during COVID, we've seen variations in booking windows where last year in COVID, the booking windows would shorten when people felt more only would book when they felt more confident in staying. But it's interesting, in Q2, the booking window has been consistent with more historic levels. Operator: And your next question comes from the line of Justin Post with Bank of America Merrill Lynch. Justin Post: A couple of questions. You mentioned a lot of positive trends for the company. I wonder if you have any thoughts on the market opportunity or the TAM for alternative accommodations versus hotel nights, is that changing? And do you think alternative accommodations is growing? Maybe any thoughts also on your opportunity within hotel bookings. And then second, I'll take a swing at this. Any updates on actual supply metrics like Hosts or active listings? Or is that something we'll get once a year? Brian Chesky: Dave? David Stephenson: Sure. On the latter, on supply metrics, I think we've highlighted what's really important. Remember that we do not need to grow supply one-to-one for revenue growth. And why is that? It's because we have millions of listings all around the world. And what we need to do is have the right listing for the right guest at the right time. And as people continue to get more flexible on when and where they travel as we get better focusing those hosts on the flexible locations and dates that they have in mind, we're going to get better at utilizing the supply we have all around the world. But what we have highlighted is that when there is great demand in specific areas, and that was in North America and Europe nonurban, we are very effective at growing at supply, and that's what we saw in Q2. We had some of the strongest growth of our supply specifically in the areas of our strongest areas of demand. And we do that both organically and then inorganically through all the actions that Brian talked about, about making inspiring hosts and what the benefits are being of hosted or being a host, talking to them about how they can make it easier for them to host and then having existing Hosts help new Hosts be successful. So those are all the ways that we'll be driving it. So I think we will be talking about listing infrequently as it is helpful to guide the overall direction of the business, but not as a routine measure because it's not the primary driver of revenue growth. In terms of TAM for alternatives versus hotels, if you really think about Airbnb, it's -- we're not just a travel company. We're -- if it's all about travel and living. And really, any kind of stay, any kind of accommodation, really short of kind of a full year lease can be accommodated in Airbnb. And that's what we're seeing with the fact that we're seeing such strong growth in stays of 28 days or longer. And that, that was 19% of nights in Q2. And we highlighted in the letter the fact that even the nights of 7 days or longer were 50% of our nights. And so that is not hotels. Hotels average much lower, maybe 1 to 2 nights on average. We're going to be 4-plus, and 50% of our nights were of 7 days or longer. So clearly, during this time period, we have taken share from traditional accommodations. And I think that a lot of these changes that we've talked about on the call today, the increased flexibility of how people are traveling and living, I think that just actually increases the overall TAM of what Airbnb is able to address because if you're going to be staying longer, if you're going to have more flexibility, you're much more likely to want to stay in a hosted Airbnb with the amenities that you have in Airbnb versus being in a hotel room. Brian Chesky: Yes, and I'll just kind of just add to that just a little bit. In addition to long-term stays, which is essentially an entirely new category that is not even really traveling, it's living, which has, I think, been significantly expanded by COVID, you have a number of other dynamics happening. People are traveling to many more locations. And oftentimes, people are now traveling to places that don't even have hotels. So that would explain some expansion of TAM there. There's also a general shift from business travel to leisure travel because we think that as fewer people travel for business in their home, they're going to have a greater desire to travel for leisure. And Airbnb obviously is a disproportionately offering new to travel. And again, over the course of the pandemic, many people, millions of people, in fact, have tried Airbnb for the first time. And the most important thing about growth for Airbnb is you just got to try it because our retention is really strong. And I think what this says is that Airbnb is no longer an alternative way to travel. I think the term alternative accommodations might be a dated term because maybe it was appropriate 10 years ago. 10 years ago, the TAM was significantly smaller. If you see what it is today, just imagine what it could be 10 years from now. And that's what we're focused on is continually increasing the market by continually adding more categories of travel we can offer and making sure that more people know about this, the new way of traveling. Operator: Your next question comes from the line of James Lee with Mizuho. James Lee: On the Hosts acquisition side, obviously, you guys did a lot of upgrades there and did a great job ramping up listings in the quarter. And just curious, what other areas of Hosts acquisition are you looking to improve kind of going forward? And also secondly, in APAC, where you are more dependent on cross-border travel, how are you making any adjustments there to shift your demand to these domestic states? Brian Chesky: James, I'll answer the first question, and Dave can answer the second question about APAC. So with regards to host acquisition, there's a number of things we've done. One of the things you mentioned is making it easier to host. And so what we've done, as I said, is we've reduced the number of steps to 10 really simple steps to become a host. And this means that now the amount of time it takes to be able to list on Airbnb is reduced in half. Now this is a really, really big deal because the thing we know is that the easier you make a conversion funnel, the more people get through the funnel. And we're talking about very small optimizations could yield thousands and thousands of new hosts. But in addition to that, we've also been increasing the top of funnel. We've been doing a brand marketing campaign. The company -- our Made Possible by Hosts campaign, to target and recruit more Hosts and what we've seen in the 5 countries where we've run this campaign, traffic to the Hosts -- to become a host page has more than doubled. And so this has worked really, really well. And finally, one of the things that Dave mentioned is, number one, we got to make sure we get a host in the funnel. Number two, we have to reduce the number of steps. But three, we want to make sure that we provide help if anyone has any questions about hosting. And so we've created is a host ambassador program. We have many of our Superhosts who now are able to provide assistance to a new host. So when they go through the funnel, they go through the conversion flow to become a host. If they have a question, we say, "Hey, would you like to talk to a Superhost?" And so we find that one of the strongest factors we've seen, our Hosts recruiting other Hosts. And this is in addition to the fact that the bigger we grow and the bigger our guest base, the more that we get host because many of our guests also become host. In fact, the #1 source of new host are prior guests. Over 30% of our Hosts were guests, and that number is continually increasing. So these are some of the things we're doing to continue to increase the number of Hosts around the world. And obviously, we're going to continue to do a lot more in the coming years ahead. Dave? David Stephenson: Yes. In regards to APAC, I mean it's amazing how resilient the domestic business has been all around the world. So we're actually seeing have seen strength in domestic business in all regions. I think the issue has been in Asia and Latin America have typically been more reliant on outbound and international travel to come back. And so -- but the domestic business is within those countries has actually been quite strong. So we're very happy with the performance of domestic. We just need more borders to open for those businesses to return to kind of pre-pandemic levels. Operator: And your next question will come from the line of Brent Thill with Jefferies. Brent Thill: I was curious if you could just talk a little bit about Europe in more detail and kind of what you're seeing in that region and any other observations you have as it relates to cross-border? Brian Chesky: Dave? David Stephenson: Yes. Europe, what we've seen over the last several months is that the pent-up demand that people have had to travel, it kind of varies a bit by the travel restrictions within those countries. We saw increase in the people's willingness to book in Q2, they were ready for their summer travel. And we saw a particular kind of strength in areas of Spain and France throughout the year, throughout the quarter as people want to kind of travel for the summer season. So I don't have much more to say about Europe than kind of what we've included in the letter here. Brent Thill: Dave, did you see -- when you're talking about all the decel, did you see EMEA drop off more or less? Was this consistent across regions when you saw a little bit of a pullback that you've been talking about? David Stephenson: Well, again, the pullback we're seeing has been -- is incredibly modest. I really don't want to overstate it. I mean what we're seeing is that Q2 was incredibly strong as people want to travel for Q3 and that our stays in Q3 are incredibly strong, which is driving our strength in revenue and why we articulated that Q3 revenue and profit will be the highest ever. So all that is incredibly strong. And then it is -- we're kind of waiting and seeing to see what the rest of the impact of travel expectations are in Q3 for the back half of the year. So I don't really have much more that I can share. Operator: And your next question comes from the line of Mario Lu with Barclays. Mario Lu: The first one, on listings. You guys grew that sequentially this quarter. So just trying to think through where the scores of new license growth will come over the next few quarters. Is there a component of, say, like urban and cross-border listings that were deactivated during the pandemic that will be reactivated as mobile travel resumes? Any color there? Brian Chesky: Dave? David Stephenson: Yes. I mean if you think about it, we have 4 million Hosts around the world. 90% of those are individual Hosts. Then the vast majority of those individual Hosts lists only on Airbnb. And most of their listings are their own personal property or maybe a second home that they have. And so I think one of the benefits we have is that people don't get rid of their primary home and not always their secondary home just because of the near-term impacts of what we're seeing with COVID. And so I think that fact, that resilience of our individual hosts is what's leading to the fact that we have had stable overall listings growth. I think that's why we're quite proud about it in Q1 and then while we're seeing increases from Q1 to Q2 in the areas where we have the most demand. And so as people are ready to travel back to urban locations and as people are going back to the kind of the historic strengths of Airbnb, our Hosts are ready to and bring them back. And I think that's been the power. The inverse could have easily been true, where if you're more reliant on professional Hosts, they may be delisting, not ready for the travel rebound and not ready to accept our guests. That's not the case of Airbnb. Our Airbnb Hosts are ready to accept travelers whenever they're ready to travel. Brian Chesky: And I think the key point, again, is that we've seen, as demand in markets increase, supply in those markets correspondingly increase. Mario Lu: Got it. And just a quick follow-up. In terms of the Hosts campaign, you guys mentioned there's early signs of success there. Anything to talk about in terms of existing Hosts and whether there's any actions on your end to kind of retain them to prevent competitors from onboarding them to their platforms as well? Brian Chesky: Yes, I can just share and, Dave, if you're going to add as well. Number one, what we've seen is that the vast majority of Hosts on Airbnb, because they're individuals, what they really just want to do is make sure they get enough bookings to fill their calendar, and we found that we can get them enough bookings to fill their calendar. That's not been a problem this year. And the other thing about our Hosts is they care about the quality of guest on Airbnb. Because these are mostly people's real homes, their primary home or their secondary home, they care a lot about who's in their home. And we provide a huge amount of trust and safety features and protocols to be able to give them peace of mind. And this is what they tell us. And we've really also worked on providing best-in-class customer service. For example, on May 24, one of the things we announced is the dedicated Superhosts line. This is something that our very best host, our Superhosts, have been asking for. And I think the reception was very, very positive. And so in addition to investing in our hosts, one of the most important thing we can do is to continue and invest in our Superhosts. And if we continue to invest in our Superhosts, there will be no reason for them to list anywhere else. David Stephenson: Yes. The Superhosts program is really -- that is a loyalty program for Hosts, right? And that's why we continue to invest. Those are our best Hosts. We have over 800,000 around the world. I think that's really key. And then, actually, what we've seen with our Hosts churn has actually decreased from what we saw pre-COVID. So it was lower in 2020 than it was in 2019, and it's lower in 2021 than it was in 2020. So we'd be overall can certainly continue to actually decline right now. Operator: And your next question line of Kevin Kopelman with Cowen and Company. Kevin Kopelman: Great. A quick one. Can you just give us an update on where your revenue take rate is today as a percentage of GPV just given all the timing differences? It's hard to tell from the outside where that is. Brian Chesky: Kevin, Dave can take this. David Stephenson: Sure. Our take rate has actually been very consistent. So if you time adjust our revenue to gross booking value, the take rate is approximately 15%, and it's been very stable during -- so when you time adjust it. Operator: [Operator Instructions]. Your next question is from the line of Deepak Mathivanan with Wolfe. Deepak Mathivanan: I wanted to ask about how you think about the travel demand trends. I know there's COVID uncertainty near term. But as you think about the sustained benefit of pent-up travel demand, there's still a lot of unspent travel dollars out there even in markets where we've seen good recovery like U.S. and parts of Europe. So as you think about second half and then even into 2022, do you think this incremental benefit that we're seeing near term from pent-up travel demand likely to sustain? Or you think we'll go through a period where the activity rebound to normal travel levels and the recovery moderates to some extent? Not looking for any specific guidance, but curious to hear your thoughts on how you think about this. Brian Chesky: Yes. Thank you very much, Deepak. I think I can maybe take this at a high level. And Dave, feel free to chime in as well. I think there's been a number of lessons from this pandemic. And I think one of the general lessons is we tend to appreciate things more when they're taken away from us. And I think that not everything that was taken away from us during the pandemic did people appreciate. But I think that travel was one of the things that people miss the most from the pandemic. In fact, we did surveys of travelers around the world, and travel was the out-of-home activity that people miss the most. They missed it more than going to sport events, more than going to restaurants, out-of-home dining and other opportunities. And we think that we've not even obviously tapped into the pent-up demand because, obviously, not everyone has been able to travel. And also remember that before the pandemic, about 50 -- just almost 50% of our business, was cross-border travel and urban travel. There hasn't been nearly the cross-border travel recovery yet that is possible in the coming year. So I think what we're going to see is you can only imagine that as things get more under control in the coming travel seasons, people will once again be more comfortable crossing borders, but will be different this time is that people will have flexibility they didn't have before. And so I think that we're very, very bullish about the future for cross-border travel. A lot of people haven't left their country in quite a long time, and we think they're going to desire to do so. And this is in addition to many new opportunities to be able to travel the city. So I think there's a lot of reason to be extremely optimistic in the coming years about what's going to happen to travel. There's many things that may not come back to levels before the pandemic. But one thing I think we know for certain is that travel will, and it will probably be bigger than ever. Dave, do you want to add anything else? David Stephenson: Yes. I guess I just will add that, remember, that we're not really just a travel company. We are about stays of any kind. And I think we talked about a lot on the call today, the fact of the trends of 28-day stays and longer, even 7 days and longer, the flexibility that people have when they travel, the fact that travel and living is blurring, I think all of these are kind of incremental ways in which people will travel and can travel on Airbnb. And so clearly, there's this pent-up demand, and people are yearning to travel again. But I just think all of these other tailwinds of travel trends are really benefiting our business over the long term. Operator: And your final question comes from the line of Rob Sanderson with Loop Capital. Robert Sanderson: Great. Question for Brian. So this year, you've been very clear in your focus and that's, of course, to position for recovery. So you'll basically be 2 years now when we finally get through this where your priorities have been shifted and dislocated. So how would you expect to focus to shift as we get back to this new normal? I know development of experiences was really hamstrung and put on hold. But what are some of the more important focus areas that you would like to be spending time on? Or what's -- and maybe how the pandemic may have shifted those goals from what they may have been otherwise? Brian Chesky: It's a great question, Rob. I think there's 4 things. Number one, I think what the pandemic has shown in this travel recovery that is upon us is that I think the opportunity, number one, for our core business is probably greater than anyone ever really imagined before the pandemic. And part of this is just because, again, more people are traveling to more locations, many of which don't even have hotels, millions of people have been introduced to Airbnb. And I think as cross-border and urban travel recover, you're going to see the huge amount of strength in our core. So number one, we have a lot of opportunity in our core, and I want to make sure our team is really focused. Number two, as we said, long-term stays is a huge boon to our business. This is an entire category of travel that really wasn't -- didn't really exist when Joe, Nate and I started this company more than 13 years ago. But I think there's this entire new category of travel where travel and living is blurring, so that will be number two. Three, you mentioned experiences. We thought last year could be a breakout year for experiences. Obviously, the opposite happened. We had to put the product on pause. But I think that people are going to be yearning for experiences. And the reason why is a very simple one. I think people are yearning to have a meaningful experience. I think you can only sit at home and watch Netflix or streaming services for so many nights in a row before you actually want to get out of house and do something and be with other people. And I think there's going to be a huge amount of pent-up demand for people having authentic experiences all over the world. And then finally, number four, I think there's a huge number of opportunities to unlock more hosting. We are now living in a world where there's still great economic distress all over the world. And take one example, women have been disproportionately impacted by the pandemic. And 55% of our Hosts are women all over the world. And so we think there's a huge opportunity to continue to unlock more hosting. And we're going to take guidance from the creativity of our community. When we started the Airbnb, it was really just a way to rent your living room or your bedroom, but our Hosts and their creativity started listing entire homes. And not only did they list entire homes, they started listing castles and boats and tree houses. And so we're going to continue to take guidance from our host community as well, and they will continue to point the way towards where we go, and we're going to continue to innovate to unlock more hosting. So those are some of our priorities. The good news is they're not really different. It's what we've always been focused on. I think it's just a renewed focus on our core, this amazing new opportunity around long-term stays. We're continuing to double down on experiences, and we'll continue to unlock hosting. We do all those things. And I think we're going to look back on this is still the very early innings of a much, much bigger business. We're 13 years old, but I think -- as a Founder, I say you don't raise a 13-year old to be a great 14-year-old. You raise them to be a great adult many years from now. And I think that there's a lot of opportunities in this coming decade for us. Operator: And I will now turn the call back over to Brian Chesky for final remarks. Brian Chesky: Well, thank you, everyone, for joining us today. I just wanted to say, once again, it was -- we're very, very proud of the results for this quarter. I think what this proves is that number one, our model is inherently adaptable. We can adapt to the changing use cases of guests, and that's because we have hosted nearly every community offering nearly any type of space at every price point. And number two, we're continuing to focus on product innovation. We're going to continue to build new products. And these 2 things, I think, have demonstrated that this pandemic, as hard as it's been for us and hard as it's been for everyone all around the world, it's made us a stronger, more efficient and a better company. And we are prepared for what's to come and for the future of travel and the future of living. So with that, thank you all very much for joining us today. We'll talk to you next quarter. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect.	[ { "speaker": "Operator", "text": "Good afternoon, and thank you for joining Airbnb's earnings conference call for the second quarter of 2021. As a reminder, this conference call is being recorded, and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Ellie Mertz, VP of Finance. Please go ahead." }, { "speaker": "Ellie Mertz", "text": "Good afternoon, and welcome to Airbnb's Second Quarter of 2021 Earnings Call. Thank you for joining us today. On the call today, we have Airbnb's Co-Founder and CEO, Brian Chesky, and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our second quarter of 2021. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I'd like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also during this call, we will discuss some non-GAAP financial measures. We provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. And with that, I will pass the call to Brian." }, { "speaker": "Brian Chesky", "text": "All right. Thank you, Ellie, and hey, everyone, thanks for joining us today. I'm dialing in from an Airbnb listing in Italy, and I'm very excited to share our Q2 results with you. Since the beginning of the year, we've been preparing for the travel rebound. After months of being stuck at home, millions of people have been yearning to travel, explore the world and connect with others. And we anticipated a travel rebound unlike any other in history. And in Q1, we saw the start of this rebound. And now that Q2 is behind us, we can definitively say that the travel rebound is upon us, and Airbnb is leading the way. But as we predicted, travel is different than before. Airbnb has benefited from our adaptable business model, which is able to meet the changing needs of our guests. We haven't just been sitting passively around waiting for travel to return. For the past year, we've been relentlessly driving product innovations to meet this historic moment. And as a result, Airbnb has emerged from this crisis faster than others, and we're better positioned for the future of travel. Now while we recognize the persistence of COVID and the Delta variant, we expect Q3 to be our strongest revenue quarter ever. The fact that we expect Q3 revenue to be our highest revenue quarter ever speaks to the inherent resiliency of our business. So now turning to our Q2 results. As vaccination rates increased and travel restrictions lifted in Q2, we saw consistent strength in North America, followed by significant recovery in Europe. One year ago in Q2, our business was significantly impacted with the onset of COVID. Now like many others, our year-over-year comparison to 2020 does show a dramatic improvement. But what is most notable are our results relative to pre-COVID levels. Across all key metrics, we nearly met or exceeded our Q2 2019 performance. Q2 nights and experiences booked nearly tripled from a year ago. More importantly, Q2 nights and experiences booked nearly matched pre-COVID levels in 2019. Gross booking value of $13.4 billion, more than quadrupled from a year ago and also shot up above 2019 levels by 37% based on the recovery of nights, combined with the strength of our ADR. Meanwhile, Q2 revenue of $1.335 billion, also nearly quadrupled from a year ago, and it exceeded 2019 levels by 10%. What this demonstrates is an acceleration in our recovery from Q1. Our Q2 results not only demonstrate our leadership in the travel rebound, but also our continued operating discipline. Our adjusted EBITDA profit was $217 million. Now this represents a 16% EBITDA margin. This was more than $600 million of improvement in EBITDA from a year ago, and it represents 20% or 2,000 basis points margin expansion from 2019. And this is on a similar level of revenue. Now over the past year, as our top line recovered, we consistently focused on improving our profitability. For example, over the last 4 quarters, we've improved EBITDA margins on average more than 20% every quarter as compared to periods in 2019. Now that is a 2,000 basis point improvement on average, every single quarter. And we've done this by improving our variable cost by driving up marketing efficiency and by very tightly managing our fixed cost. Now I'm really proud of these results. And what they demonstrate is that we are emerging from this crisis as a stronger and more efficient company. Now turning to business highlights and travel trends. Despite the continued impact of COVID around the world, we have seen clear evidence that travel is recovering. We're incredibly encouraged by what we've seen in Q2. And what we've seen is an accelerating pace of global travel, particularly in Europe, as well as continued popularity of nonurban and domestic destinations. In Q2, we had the highest number of gross nights booked of any quarter in our history. And we just had the biggest night on Airbnb since the pandemic began. Last Saturday night, more than 4 million guests from around the world, were staying in an Airbnb. That is more people than the entire population of Los Angeles. And we're also seeing travelers once again cross borders and business cities. These 2 categories of travel have been historic strengths of Airbnb, and we're really excited to see them begin to recover. But at the same time, the way that people travel and live continues to change. We believe that many of the new booking trends that emerge over the past year are here to stay. People are traveling to many more destinations than before. And when they travel, they're staying longer. We believe these 2 categories of travel are in fact here to stay. And as a result, what we focused on are product innovations that support these new ways that people travel. You see many people have a greater freedom about where and when they travel, and we've improved our product to better meet their needs. Our new search products offer guests the flexibility that they want when planning and booking trips. And finally, we're seeing more people around the world consider hosting. We ended Q2 with the largest number of active listings in Airbnb's history. Now there are a couple of reasons for this. First, our demand is driving supply. This is what's so powerful about our model. For example, in Q2, our highest supply growth was actually in high-demand destination. And second, our marketing and product initiatives have been really accelerating to support host recruitment, and they're working. So now let me go into a little more detail on what we've been doing to prepare for and support this travel recovery. Now as a reminder, our single priority in 2021 has been to prepare for the travel rebound. To do this, we've been perfecting the end-to-end experience of our core service. And this includes 4 themes: first, educating the world about hosting; second, recruiting more hosts; third, simplifying the guest journey; and finally, delivering world-class service. So let me just briefly give you an update on how we're executing on each of these 4 areas. So first, we’re educating the world about what makes Airbnb different, and that is hosting. In Q1, we launched our first large-scale marketing campaign in 5 years, Made Possible by Hosts, and we expanded this campaign in Q2. We're educating guests about the benefits of being hosted, and we're also inspiring more people to become hosts. Now we continue to be really encouraged by the result of this campaign in terms of traffic, first-time bookers, interest in hosting and brand favorability. Second, we are recruiting more hosts, and we are setting them up for success. On May 24, just a few months ago, we launched a completely redesigned host onboarding flow that makes it simpler for anyone to start hosting. This new flow has made it faster to become a host, which has helped drive our listings growth in Q2. Third, we are simplifying every part of the guest experience. On May 24, we expanded the tools for guests to offer more flexibility when they're searching for a place to stay. We announced flexible dates, flexible destinations and flexible matching. And all 3 of these features are to support the new ways that guests are looking to plan and book trips. And finally, whenever our host or guests need us, we must deliver world-class service. So we recently launched a redesigned Help Center. We've more than tripled our supported languages, and we've updated our safety resources. And all of it is to ensure that we are supporting our guests and hosts whenever they need us. So to summarize, travel is recovering and our Q2 results show that Airbnb's leading the way. For the past year, we've been preparing for this rebound. We've driven product innovation to support changes to the way people are traveling and living all over the world. And as a result, we've emerged from this crisis faster than others and as a stronger, more efficient company. So with that, we look forward to answering your questions." }, { "speaker": "Operator", "text": "[Operator Instructions]. Your first question comes from the line of Mark Mahaney with Evercore ISI." }, { "speaker": "Mark Mahaney", "text": "Okay. You just talked about having this record day. I think you said last Saturday, and I think you're also maybe appropriately cautioning about third quarter trends and variants and Delta. So just kind of put those things together. Record day still sounds like things are good, but I'm sure there are some warnings out there. Can you be more specific about you're seeing that's causing you to be just a little more cautious about Q3 and the back half of the year?" }, { "speaker": "Brian Chesky", "text": "Yes, Mark, thank you for the question. Before I hand it over to Dave, let me just say that, yes, we had a record night. There was more than 4 million guests staying with hosts all over the world. And we're really encouraged that this is the biggest night we've had since the pandemic began. And the one other thing I'll just say is that we have an incredibly adaptable model. So however, travel changes, we'll be able to meet that demand. But Dave, why don't we talk about what we're seeing right now?" }, { "speaker": "David Stephenson", "text": "A lot of the trends we're seeing in Q2 are consistent with some of the trends we saw in Q1 and Q4. People continue to be flexible. That's why we built all these flexible tools where because 40% of searchers are showing flexibility in either the date or location and people are traveling to more destinations and people are staying longer. And one of the elements is that we're seeing the trends of long-term stays, which we highlighted as a key strength in Q1, stays of 28 days or longer, remain being one of the largest and strongest growing parts of our business. So that was 19% of our nights booked in Q2, following being 24% in Q1, just as the mix of short-term stays kind of rebounded strongly in Q2. We've seen a strong increase in month-over-month performance across Q2. So April to May to June nights booked, all were strong leading in anticipation of the summer peak travel. Now in July, we've seen some of the pullback in demand, but it's likely due to summer peak and possibly [Indiscernible] to the Delta variant. But all of those lead to still being the Q3 revenue, the nights that people stay and the revenue that we recognize will be the strongest ever. And concurrently, our profit in Q3 will be the strongest ever." }, { "speaker": "Operator", "text": "Your next question comes from the line of Stephen Ju with Credit Suisse." }, { "speaker": "Stephen Ju", "text": "So Brian, as a follow-up to the product announcement that you had, I think this was late May when you hosted that session, and it seems like to me you're giving consumers broader recommendations. And if this is really successful, hopefully, it's something that they really didn't know that they even really wanted. So I know it's probably really early, but anything you can share in terms of what their response has been? Are they delighted with what you're showing them? Or do you still think you have some tinkering that you need to do?" }, { "speaker": "Brian Chesky", "text": "Yes, Stephen -- yes, Stephen, thanks. It's a great question. Let me like preface this by saying the following. There's been a major paradigm shift in how people search for travel on the Internet. Before the pandemic, the way search was on the Internet for travel was the vast, vast majority of people came to a website, a travel website, typically an OTA, and they would type in a location. They have a location in mind, and they go to date, and they check -- type a date to check-in, and a date to check-out. So this is really fixed search. People know where they're going to go. With the pandemic, I think it's safe to say the world is never going back to the way it was, and that means travel isn't going back to the way it was. And the way travel is evolving is that people because they're able to work more remotely, they're more flexible. And what we are seeing, Stephen, is that 40% of our guests have flexibility about where or when they travel. And to give you one example of one of the things we've done, flexible dates. We have a couple of flexible date features. We have a feature that you can tap, I'm flexible, and you can say I'm looking for a place for a weekend, a week or a month, sometime in the next few months. And what we have seen is with our flexible date feature, it's being used more than 500 million times. This is a feature that's been used 0.5 billion times since we launched this feature in the beginning of the year. We've also seen a very big uptick in the use of flexible destinations as well, where people -- if they're flexible about where they travel, we can recommend them to where to go. Now these features are really important. The reason they're really important isn't just because this is the paradigm shift and how people are searching for travel, but it's also important because this means that we can point demand to where we have supply. And this is a major, major shift for our business. And so we are going to continue to tweak the products. When you have hundreds of millions of data points on a feature, you learn, and we're continually innovating. But I will also just say that this is just the very beginning because our team is not going to rest on their laurels. We are working really, really hard to continue to offer more flexibility to guests and continue to be able to inspire them and point them to where we have available supply." }, { "speaker": "Operator", "text": "Next question comes from the line of Jed Kelly with Oppenheimer." }, { "speaker": "Jed Kelly", "text": "Great. Just on the work-from-anywhere trends you were just mentioning, Brian, can you provide anything you're seeing in sort of the shoulder season that kind of gives you confidence? Are you seeing any improvement there? And then on the yield management capabilities, you're providing the host of the new tools, any of that providing the ADR uplift?" }, { "speaker": "Brian Chesky", "text": "Yes, Dave, actually, you want to take these questions?" }, { "speaker": "David Stephenson", "text": "Sure. Maybe I'll start with the yield management. The majority of the ADR uplift that we're seeing is being driven by mix. It continues to be mix. The strength of our rebound has been in North America and Europe. Those have higher ADRs. It's been in nonurban, which is higher ADR than urban and in larger kind of whole home, larger homes. So the majority of the ADR has been driven by that. To a lesser extent, a newer trend that we saw in Q2 was the impact of some pricing pressure in peak markets that are highly constrained for the summer, but that was still [Indiscernible] minority relative to the overall mix. So ADR is not really being driven by features. Over time, our ADR on a revenue to gross booking value adjusted basis where you line them up at the same time of booking has been very consistent. Over time, I think there are opportunities for us to increase our monetization through new opportunities, whether that be test travel insurance, maybe promoted listings or other things that we could do, but we don't see those as perishable opportunities as they are kind of evergreen opportunities. And instead, what we're focusing on right now, as Brian has talked about, is the travel rebound and making sure that we are addressing the needs of travelers today. And their needs today are the additional flexibility that they have in where and when they travel. So 40% of our searches in Q2 actually had flexible dates or flexible destinations, which is why we built those tools and capabilities and seeing that strength. And so in terms of the work-from-anywhere trends, I think that we're seeing people are continuing to find Airbnb is the best place for them to be able to both live and work. And one of the things that we launched in Q2 is directly in response to people's demand there. It sounds small, but I think it's a really unique item, which is it allows hosts to measure the speed of their WiFi and then actually post it on their listing. And that's because guests were wanting to know how easy will it be for me to -- how good is the WiFi here? Can I work from this location? So I think that's kind of a unique small element that can just show us how we're innovating in order to kind of support these broader travel trends. So what we do know is just that people are incrementally more flexible. If we can a take 1-hour Zoom call on a Thursday, you're likely to be able to do a longer weekend with the family than maybe historically you've been kind of struck in the office to kind of go do. And so we believe that all of these kind of trends will just continue to accrete to Airbnb and be tailwinds to our business going forward." }, { "speaker": "Brian Chesky", "text": "And I'll just add one more really interesting fact. Not long ago, we did a contest online, on social, a contest that allowed people to apply to be able to live on Airbnb. And to be able to be part of this contest, you have to fill out an application and it takes a while to fill out. We got 315,000 applications for people wanting to live on Airbnb, 315,000. And I think what this says is that travel is never going to be the same again because it's completely opened up now. When we started Airbnb, like stays of longer than a month really wasn't a major part of our business. It really wasn't a major use case for us to be able to serve. But flexibility is now a permanent part of travel. It's just a permanent part now because it's all we have to believe is that Zoom is here to stay. And if we believe that Zoom is here to stay, we believe that flexibility in remote living is here to stay. And therefore, it's pretty obvious that what would happen is that we are going to continue to see more and more longer-term stays. And I think this is going to help us smooth out our seasonality over the coming years to come." }, { "speaker": "Operator", "text": "Next question comes from the line of Naved Khan with Truist Securities." }, { "speaker": "Naved Khan", "text": "So you guys mentioned some slowdown in the nights booked in the third quarter. Just wanted to get some color on how that looks like. Maybe can you talk about July and how it compared to the second quarter? And how does this look across different regions? Is it more pronounced in the U.S. versus Europe? Or are they about the same?" }, { "speaker": "Brian Chesky", "text": "Dave, do you want to take this one?" }, { "speaker": "David Stephenson", "text": "Sure. I mean, again, what we saw in Q2 is very strong bookings growth in advance of the third quarter kind of pre-travel season. We saw this kind of in the depths of COVID in 2020 as well. People are wanting to travel. They want to get out of their homes, and they especially want to do that in the summer. And so we saw a lot of peak travel demand coming in Q2. So as we exit Q2 and come into Q3, we have a combination of fewer bookings for the fall, just given the nature of some of the seasonality and any kind of impact potentially on COVID concerns going into early Q3. So we're not seeing a substantial deceleration. Always identified in the outlook is that our nights and experiences booked in Q3 will be lower than in Q2, given just the extreme strength that we saw in the business in Q2, but we continue to be very bullish on the business. As I said, the revenue that we're going to have in Q3 will be the highest ever, while the profits are going to be the highest ever. And so the business remains very strong. And what we've seen is that people want to travel, and they are really resilient in finding ways to travel. One of the benefits that we see with Airbnb is that you don't actually have to hop on a plane always or cross a border in order to travel with Airbnb. The big part of our strength has been in nights with less than 300 miles, that continues to be one of the strongest parts of our business. And then in Q2, we saw strengthening where the faster parts are growing was growing of 300 miles longer, and we saw an increase of urban nights booked. And so some of those trends have continue -- started to pick up to more kind of historic levels. So I'm very bullish on the long-term view of our business overall." }, { "speaker": "Naved Khan", "text": "Got it. And maybe just a clarification on this, maybe slowdown with the Delta variant COVID spreading, is this possible that with people getting more cautious and maybe having or wanting to optionality to maybe cancel even last minute. Could that be delivering some demand away to maybe more like traditional hotel types where you could cancel like literally the day before or something like that?" }, { "speaker": "David Stephenson", "text": "Again, we feel like the ability for Airbnb to provide the kinds of stays and experiences that people desire all around the world, it remains incredibly strong. We've been the best way for people to kind of travel and live through Airbnb throughout the pandemic. And I think that the tailwinds that we've talked about, the tailwinds of flexibility, the tailwinds of people staying longer, the tailwinds of even how people are traveling for business in the future are always that they will travel more likely with Airbnb for the longer term. These travel trends are directly supporting the strength of Airbnb's business." }, { "speaker": "Operator", "text": "Your next question comes from the line of Brian Fitzgerald with Wells Fargo." }, { "speaker": "Brian Fitzgerald", "text": "We want to ask about the growth you're seeing in Hosts, maybe particularly -- in particular high-demand locations. Any way to characterize the new Hosts who are coming online, maybe the level of professionalism -- professionalization, maybe is a better word -- versus the rest of your base? And how much of their calendar they're making available to you? Are these pros or are these people who are looking at doing this seasonally or opportunistically? Just trying to get a feel for that." }, { "speaker": "Brian Chesky", "text": "Thank you, Brian, for the question. Dave, before I hand over to you, let me just kind of recap a couple of high-level things about our host community. Number one, we have more than 4 million Hosts. 90% of them are individuals, and most of them couldn't have hosted, if not for the tools we provide. And what we saw in Q2 was that we had the fastest listing growth where we had demand. And the reason why is because we have individual hosts, as they get booked, word of mouth typically increases and they often tell their friends. But the other thing that we've often seen is that as more guests become flexible, we're able to point demand where you have supply. Now specific to your question about the nature of the host that we did add in Q2 and whether they were individuals or professionals, Dave, do you want to take that?" }, { "speaker": "David Stephenson", "text": "Yes, we continue to see 90% of our Hosts are individual Hosts, and that remains to be the case. So as we continue to add new individuals, and this is where we focus on, we focus our tools and capabilities to uniquely enable individual Hosts to be successful in hosting Airbnb. And when they come on Airbnb, the vast majority of their listings are unique to Airbnb, and that has remained the case in Q2 where the vast majority of our new Hosts coming on are also individuals. That's our focus, but -- so we're going to build the tools and capabilities, and those are the results that we're continuing to see." }, { "speaker": "Operator", "text": "Your next question comes from the line of Colin Sebastian with Baird." }, { "speaker": "Colin Sebastian", "text": "Great. And nice to see the progress on listings growth. But first off, just in terms of the trend in ADRs and the commentary in the letter, is that something -- is the moderation there? Is that something you're already seeing in terms of bookings? Or is this more of a seasonal trend you expect to happen as summer holidays give way to a different profile of travel? And then, secondly, on the EBITDA margins, should we think about the sustainability of those in context of a step function higher from this point? Or are there other investments in the quarters a year ahead that will moderate some of that near-term leverage we're seeing?" }, { "speaker": "Brian Chesky", "text": "Dave, do you want to take one of these?" }, { "speaker": "David Stephenson", "text": "Sure. On the trend in ADR, again, the vast majority of the ADR has been driven by mix. And so as other parts of the mix towards urban and maybe towards Latin America and Asia changes and reverts to more historic levels, we will see ADRs moderate, but that will be purely as part of mix and as the other parts of the business come back and they have that lower overall kind of ADR rates. So the strength of North America and Europe, we believe to continue to remain strong. And then as other parts of the business come back then the mix comes out and the ADRs moderate. So that's all we're kind of indicating. And in terms of the EBITDA margins, I think we're all -- we're proud of the progress we're making in EBITDA and that accelerating towards our long term. We've stated that we could achieve 30% or more EBITDA margins over time. Clearly, we've accelerated our way there. I think that a piece of that is clearly the improvements we've done on fixed costs, marketing costs, improvements in our variable costs. We also see some benefits on the higher ADR rates as well. And so over time, we will see some variation in our EBITDA margins kind of over time, but I think what we've demonstrated is the capability to dramatically expand those margins. And I think it just proves the point that we've kind of talked about more verbally, which is we can achieve this 30% margin or more. And now we're actually showing how we can do that." }, { "speaker": "Brian Chesky", "text": "And I think the one thing I'll just add on -- the one thing I'd just add on, the efficiency of our business. And we've said this in the letter. I also mentioned this in the opening comments. But COVID was a crucible moment for the company. And in that moment, this company, we've gotten significantly more disciplined and much more efficient. And I think that we've all seen the incredible benefits and focus because we've put our very best people on the most important problems in the company. And because what we've seen does not only have margins improved but actually, we're able to move much more quickly. We can pivot, and I think this explains why we were able to announce and launch more than 100 upgrades on the heels of our IPO in time for the travel season. And so I think that you're going to see a continued acceleration of product innovation because of our discipline and because of our focus. These are lessons that we will never ever forget. These are lessons that will leave indelible marks for this company." }, { "speaker": "Operator", "text": "And your next question comes from the line of Justin Patterson with KeyBanc Capital Markets." }, { "speaker": "Justin Patterson", "text": "Great. With flexible dates rolling out, how has the booking window changed? Are there more instances of last minute stays coming into play? And then the second question, you provided a lot more value to Hosts this year. Conceptually, how are you thinking about factors behind when the right time it is to increase take rate?" }, { "speaker": "Brian Chesky", "text": "Thank you for the question. So why don't -- Justin, why don't, Dave, I take the second question around take rate for Hosts, and then you can take the first question about flexible dates and how that has affected the booking window. So with regards to factors to be able to increase take rate, as -- and I'll kind of say what Dave said before, we think there's -- one -- our guiding principle is that we want to make sure that every single year, we are providing incrementally more value to hosts than we're charging them because the name of the game is to make sure that our really strong business model continues to grow, and that means that hosts feel like they have the very best opportunity to host on Airbnb. We want them to always feel like we're giving them more value than we're taking away -- so taking. So that's number one. Number two, I do think there's a lot of opportunities for us to be able to increase take rate. And if we do that, I think the way we would think about that is by charging for some incremental services that we can provide for hosts. And the more that hosts really rely on Airbnb to be able to continue to grow their business, the more we think they're going to be willing to be able to buy or participate in new services and offerings. But the way we think about this is a nonperishable opportunity. So as Dave said, we have a number of years in front of us where we can continue to look at offering new services. But what we have focused on this year is this unprecedented travel rebound that's upon us. And so we've worked really, really hard to simplify the guest experience to introduce more flexibility for guests to make it much easier for hosts to come on the platform so that we get thousands and thousands more hosts in time for the travel season. So with that, I don't know if, Dave, you want to talk about the booking window for flexible dates." }, { "speaker": "David Stephenson", "text": "Yes. What we saw in Q2 is actually a fairly stable booking new window in line with our Q2 of 2019. It was actually a little bit shorter booking window than Q1 of this year, but that's largely been due to seasonality. So yes, you're right, that during COVID, we've seen variations in booking windows where last year in COVID, the booking windows would shorten when people felt more only would book when they felt more confident in staying. But it's interesting, in Q2, the booking window has been consistent with more historic levels." }, { "speaker": "Operator", "text": "And your next question comes from the line of Justin Post with Bank of America Merrill Lynch." }, { "speaker": "Justin Post", "text": "A couple of questions. You mentioned a lot of positive trends for the company. I wonder if you have any thoughts on the market opportunity or the TAM for alternative accommodations versus hotel nights, is that changing? And do you think alternative accommodations is growing? Maybe any thoughts also on your opportunity within hotel bookings. And then second, I'll take a swing at this. Any updates on actual supply metrics like Hosts or active listings? Or is that something we'll get once a year?" }, { "speaker": "Brian Chesky", "text": "Dave?" }, { "speaker": "David Stephenson", "text": "Sure. On the latter, on supply metrics, I think we've highlighted what's really important. Remember that we do not need to grow supply one-to-one for revenue growth. And why is that? It's because we have millions of listings all around the world. And what we need to do is have the right listing for the right guest at the right time. And as people continue to get more flexible on when and where they travel as we get better focusing those hosts on the flexible locations and dates that they have in mind, we're going to get better at utilizing the supply we have all around the world. But what we have highlighted is that when there is great demand in specific areas, and that was in North America and Europe nonurban, we are very effective at growing at supply, and that's what we saw in Q2. We had some of the strongest growth of our supply specifically in the areas of our strongest areas of demand. And we do that both organically and then inorganically through all the actions that Brian talked about, about making inspiring hosts and what the benefits are being of hosted or being a host, talking to them about how they can make it easier for them to host and then having existing Hosts help new Hosts be successful. So those are all the ways that we'll be driving it. So I think we will be talking about listing infrequently as it is helpful to guide the overall direction of the business, but not as a routine measure because it's not the primary driver of revenue growth. In terms of TAM for alternatives versus hotels, if you really think about Airbnb, it's -- we're not just a travel company. We're -- if it's all about travel and living. And really, any kind of stay, any kind of accommodation, really short of kind of a full year lease can be accommodated in Airbnb. And that's what we're seeing with the fact that we're seeing such strong growth in stays of 28 days or longer. And that, that was 19% of nights in Q2. And we highlighted in the letter the fact that even the nights of 7 days or longer were 50% of our nights. And so that is not hotels. Hotels average much lower, maybe 1 to 2 nights on average. We're going to be 4-plus, and 50% of our nights were of 7 days or longer. So clearly, during this time period, we have taken share from traditional accommodations. And I think that a lot of these changes that we've talked about on the call today, the increased flexibility of how people are traveling and living, I think that just actually increases the overall TAM of what Airbnb is able to address because if you're going to be staying longer, if you're going to have more flexibility, you're much more likely to want to stay in a hosted Airbnb with the amenities that you have in Airbnb versus being in a hotel room." }, { "speaker": "Brian Chesky", "text": "Yes, and I'll just kind of just add to that just a little bit. In addition to long-term stays, which is essentially an entirely new category that is not even really traveling, it's living, which has, I think, been significantly expanded by COVID, you have a number of other dynamics happening. People are traveling to many more locations. And oftentimes, people are now traveling to places that don't even have hotels. So that would explain some expansion of TAM there. There's also a general shift from business travel to leisure travel because we think that as fewer people travel for business in their home, they're going to have a greater desire to travel for leisure. And Airbnb obviously is a disproportionately offering new to travel. And again, over the course of the pandemic, many people, millions of people, in fact, have tried Airbnb for the first time. And the most important thing about growth for Airbnb is you just got to try it because our retention is really strong. And I think what this says is that Airbnb is no longer an alternative way to travel. I think the term alternative accommodations might be a dated term because maybe it was appropriate 10 years ago. 10 years ago, the TAM was significantly smaller. If you see what it is today, just imagine what it could be 10 years from now. And that's what we're focused on is continually increasing the market by continually adding more categories of travel we can offer and making sure that more people know about this, the new way of traveling." }, { "speaker": "Operator", "text": "Your next question comes from the line of James Lee with Mizuho." }, { "speaker": "James Lee", "text": "On the Hosts acquisition side, obviously, you guys did a lot of upgrades there and did a great job ramping up listings in the quarter. And just curious, what other areas of Hosts acquisition are you looking to improve kind of going forward? And also secondly, in APAC, where you are more dependent on cross-border travel, how are you making any adjustments there to shift your demand to these domestic states?" }, { "speaker": "Brian Chesky", "text": "James, I'll answer the first question, and Dave can answer the second question about APAC. So with regards to host acquisition, there's a number of things we've done. One of the things you mentioned is making it easier to host. And so what we've done, as I said, is we've reduced the number of steps to 10 really simple steps to become a host. And this means that now the amount of time it takes to be able to list on Airbnb is reduced in half. Now this is a really, really big deal because the thing we know is that the easier you make a conversion funnel, the more people get through the funnel. And we're talking about very small optimizations could yield thousands and thousands of new hosts. But in addition to that, we've also been increasing the top of funnel. We've been doing a brand marketing campaign. The company -- our Made Possible by Hosts campaign, to target and recruit more Hosts and what we've seen in the 5 countries where we've run this campaign, traffic to the Hosts -- to become a host page has more than doubled. And so this has worked really, really well. And finally, one of the things that Dave mentioned is, number one, we got to make sure we get a host in the funnel. Number two, we have to reduce the number of steps. But three, we want to make sure that we provide help if anyone has any questions about hosting. And so we've created is a host ambassador program. We have many of our Superhosts who now are able to provide assistance to a new host. So when they go through the funnel, they go through the conversion flow to become a host. If they have a question, we say, \"Hey, would you like to talk to a Superhost?\" And so we find that one of the strongest factors we've seen, our Hosts recruiting other Hosts. And this is in addition to the fact that the bigger we grow and the bigger our guest base, the more that we get host because many of our guests also become host. In fact, the #1 source of new host are prior guests. Over 30% of our Hosts were guests, and that number is continually increasing. So these are some of the things we're doing to continue to increase the number of Hosts around the world. And obviously, we're going to continue to do a lot more in the coming years ahead. Dave?" }, { "speaker": "David Stephenson", "text": "Yes. In regards to APAC, I mean it's amazing how resilient the domestic business has been all around the world. So we're actually seeing have seen strength in domestic business in all regions. I think the issue has been in Asia and Latin America have typically been more reliant on outbound and international travel to come back. And so -- but the domestic business is within those countries has actually been quite strong. So we're very happy with the performance of domestic. We just need more borders to open for those businesses to return to kind of pre-pandemic levels." }, { "speaker": "Operator", "text": "And your next question will come from the line of Brent Thill with Jefferies." }, { "speaker": "Brent Thill", "text": "I was curious if you could just talk a little bit about Europe in more detail and kind of what you're seeing in that region and any other observations you have as it relates to cross-border?" }, { "speaker": "Brian Chesky", "text": "Dave?" }, { "speaker": "David Stephenson", "text": "Yes. Europe, what we've seen over the last several months is that the pent-up demand that people have had to travel, it kind of varies a bit by the travel restrictions within those countries. We saw increase in the people's willingness to book in Q2, they were ready for their summer travel. And we saw a particular kind of strength in areas of Spain and France throughout the year, throughout the quarter as people want to kind of travel for the summer season. So I don't have much more to say about Europe than kind of what we've included in the letter here." }, { "speaker": "Brent Thill", "text": "Dave, did you see -- when you're talking about all the decel, did you see EMEA drop off more or less? Was this consistent across regions when you saw a little bit of a pullback that you've been talking about?" }, { "speaker": "David Stephenson", "text": "Well, again, the pullback we're seeing has been -- is incredibly modest. I really don't want to overstate it. I mean what we're seeing is that Q2 was incredibly strong as people want to travel for Q3 and that our stays in Q3 are incredibly strong, which is driving our strength in revenue and why we articulated that Q3 revenue and profit will be the highest ever. So all that is incredibly strong. And then it is -- we're kind of waiting and seeing to see what the rest of the impact of travel expectations are in Q3 for the back half of the year. So I don't really have much more that I can share." }, { "speaker": "Operator", "text": "And your next question comes from the line of Mario Lu with Barclays." }, { "speaker": "Mario Lu", "text": "The first one, on listings. You guys grew that sequentially this quarter. So just trying to think through where the scores of new license growth will come over the next few quarters. Is there a component of, say, like urban and cross-border listings that were deactivated during the pandemic that will be reactivated as mobile travel resumes? Any color there?" }, { "speaker": "Brian Chesky", "text": "Dave?" }, { "speaker": "David Stephenson", "text": "Yes. I mean if you think about it, we have 4 million Hosts around the world. 90% of those are individual Hosts. Then the vast majority of those individual Hosts lists only on Airbnb. And most of their listings are their own personal property or maybe a second home that they have. And so I think one of the benefits we have is that people don't get rid of their primary home and not always their secondary home just because of the near-term impacts of what we're seeing with COVID. And so I think that fact, that resilience of our individual hosts is what's leading to the fact that we have had stable overall listings growth. I think that's why we're quite proud about it in Q1 and then while we're seeing increases from Q1 to Q2 in the areas where we have the most demand. And so as people are ready to travel back to urban locations and as people are going back to the kind of the historic strengths of Airbnb, our Hosts are ready to and bring them back. And I think that's been the power. The inverse could have easily been true, where if you're more reliant on professional Hosts, they may be delisting, not ready for the travel rebound and not ready to accept our guests. That's not the case of Airbnb. Our Airbnb Hosts are ready to accept travelers whenever they're ready to travel." }, { "speaker": "Brian Chesky", "text": "And I think the key point, again, is that we've seen, as demand in markets increase, supply in those markets correspondingly increase." }, { "speaker": "Mario Lu", "text": "Got it. And just a quick follow-up. In terms of the Hosts campaign, you guys mentioned there's early signs of success there. Anything to talk about in terms of existing Hosts and whether there's any actions on your end to kind of retain them to prevent competitors from onboarding them to their platforms as well?" }, { "speaker": "Brian Chesky", "text": "Yes, I can just share and, Dave, if you're going to add as well. Number one, what we've seen is that the vast majority of Hosts on Airbnb, because they're individuals, what they really just want to do is make sure they get enough bookings to fill their calendar, and we found that we can get them enough bookings to fill their calendar. That's not been a problem this year. And the other thing about our Hosts is they care about the quality of guest on Airbnb. Because these are mostly people's real homes, their primary home or their secondary home, they care a lot about who's in their home. And we provide a huge amount of trust and safety features and protocols to be able to give them peace of mind. And this is what they tell us. And we've really also worked on providing best-in-class customer service. For example, on May 24, one of the things we announced is the dedicated Superhosts line. This is something that our very best host, our Superhosts, have been asking for. And I think the reception was very, very positive. And so in addition to investing in our hosts, one of the most important thing we can do is to continue and invest in our Superhosts. And if we continue to invest in our Superhosts, there will be no reason for them to list anywhere else." }, { "speaker": "David Stephenson", "text": "Yes. The Superhosts program is really -- that is a loyalty program for Hosts, right? And that's why we continue to invest. Those are our best Hosts. We have over 800,000 around the world. I think that's really key. And then, actually, what we've seen with our Hosts churn has actually decreased from what we saw pre-COVID. So it was lower in 2020 than it was in 2019, and it's lower in 2021 than it was in 2020. So we'd be overall can certainly continue to actually decline right now." }, { "speaker": "Operator", "text": "And your next question line of Kevin Kopelman with Cowen and Company." }, { "speaker": "Kevin Kopelman", "text": "Great. A quick one. Can you just give us an update on where your revenue take rate is today as a percentage of GPV just given all the timing differences? It's hard to tell from the outside where that is." }, { "speaker": "Brian Chesky", "text": "Kevin, Dave can take this." }, { "speaker": "David Stephenson", "text": "Sure. Our take rate has actually been very consistent. So if you time adjust our revenue to gross booking value, the take rate is approximately 15%, and it's been very stable during -- so when you time adjust it." }, { "speaker": "Operator", "text": "[Operator Instructions]. Your next question is from the line of Deepak Mathivanan with Wolfe." }, { "speaker": "Deepak Mathivanan", "text": "I wanted to ask about how you think about the travel demand trends. I know there's COVID uncertainty near term. But as you think about the sustained benefit of pent-up travel demand, there's still a lot of unspent travel dollars out there even in markets where we've seen good recovery like U.S. and parts of Europe. So as you think about second half and then even into 2022, do you think this incremental benefit that we're seeing near term from pent-up travel demand likely to sustain? Or you think we'll go through a period where the activity rebound to normal travel levels and the recovery moderates to some extent? Not looking for any specific guidance, but curious to hear your thoughts on how you think about this." }, { "speaker": "Brian Chesky", "text": "Yes. Thank you very much, Deepak. I think I can maybe take this at a high level. And Dave, feel free to chime in as well. I think there's been a number of lessons from this pandemic. And I think one of the general lessons is we tend to appreciate things more when they're taken away from us. And I think that not everything that was taken away from us during the pandemic did people appreciate. But I think that travel was one of the things that people miss the most from the pandemic. In fact, we did surveys of travelers around the world, and travel was the out-of-home activity that people miss the most. They missed it more than going to sport events, more than going to restaurants, out-of-home dining and other opportunities. And we think that we've not even obviously tapped into the pent-up demand because, obviously, not everyone has been able to travel. And also remember that before the pandemic, about 50 -- just almost 50% of our business, was cross-border travel and urban travel. There hasn't been nearly the cross-border travel recovery yet that is possible in the coming year. So I think what we're going to see is you can only imagine that as things get more under control in the coming travel seasons, people will once again be more comfortable crossing borders, but will be different this time is that people will have flexibility they didn't have before. And so I think that we're very, very bullish about the future for cross-border travel. A lot of people haven't left their country in quite a long time, and we think they're going to desire to do so. And this is in addition to many new opportunities to be able to travel the city. So I think there's a lot of reason to be extremely optimistic in the coming years about what's going to happen to travel. There's many things that may not come back to levels before the pandemic. But one thing I think we know for certain is that travel will, and it will probably be bigger than ever. Dave, do you want to add anything else?" }, { "speaker": "David Stephenson", "text": "Yes. I guess I just will add that, remember, that we're not really just a travel company. We are about stays of any kind. And I think we talked about a lot on the call today, the fact of the trends of 28-day stays and longer, even 7 days and longer, the flexibility that people have when they travel, the fact that travel and living is blurring, I think all of these are kind of incremental ways in which people will travel and can travel on Airbnb. And so clearly, there's this pent-up demand, and people are yearning to travel again. But I just think all of these other tailwinds of travel trends are really benefiting our business over the long term." }, { "speaker": "Operator", "text": "And your final question comes from the line of Rob Sanderson with Loop Capital." }, { "speaker": "Robert Sanderson", "text": "Great. Question for Brian. So this year, you've been very clear in your focus and that's, of course, to position for recovery. So you'll basically be 2 years now when we finally get through this where your priorities have been shifted and dislocated. So how would you expect to focus to shift as we get back to this new normal? I know development of experiences was really hamstrung and put on hold. But what are some of the more important focus areas that you would like to be spending time on? Or what's -- and maybe how the pandemic may have shifted those goals from what they may have been otherwise?" }, { "speaker": "Brian Chesky", "text": "It's a great question, Rob. I think there's 4 things. Number one, I think what the pandemic has shown in this travel recovery that is upon us is that I think the opportunity, number one, for our core business is probably greater than anyone ever really imagined before the pandemic. And part of this is just because, again, more people are traveling to more locations, many of which don't even have hotels, millions of people have been introduced to Airbnb. And I think as cross-border and urban travel recover, you're going to see the huge amount of strength in our core. So number one, we have a lot of opportunity in our core, and I want to make sure our team is really focused. Number two, as we said, long-term stays is a huge boon to our business. This is an entire category of travel that really wasn't -- didn't really exist when Joe, Nate and I started this company more than 13 years ago. But I think there's this entire new category of travel where travel and living is blurring, so that will be number two. Three, you mentioned experiences. We thought last year could be a breakout year for experiences. Obviously, the opposite happened. We had to put the product on pause. But I think that people are going to be yearning for experiences. And the reason why is a very simple one. I think people are yearning to have a meaningful experience. I think you can only sit at home and watch Netflix or streaming services for so many nights in a row before you actually want to get out of house and do something and be with other people. And I think there's going to be a huge amount of pent-up demand for people having authentic experiences all over the world. And then finally, number four, I think there's a huge number of opportunities to unlock more hosting. We are now living in a world where there's still great economic distress all over the world. And take one example, women have been disproportionately impacted by the pandemic. And 55% of our Hosts are women all over the world. And so we think there's a huge opportunity to continue to unlock more hosting. And we're going to take guidance from the creativity of our community. When we started the Airbnb, it was really just a way to rent your living room or your bedroom, but our Hosts and their creativity started listing entire homes. And not only did they list entire homes, they started listing castles and boats and tree houses. And so we're going to continue to take guidance from our host community as well, and they will continue to point the way towards where we go, and we're going to continue to innovate to unlock more hosting. So those are some of our priorities. The good news is they're not really different. It's what we've always been focused on. I think it's just a renewed focus on our core, this amazing new opportunity around long-term stays. We're continuing to double down on experiences, and we'll continue to unlock hosting. We do all those things. And I think we're going to look back on this is still the very early innings of a much, much bigger business. We're 13 years old, but I think -- as a Founder, I say you don't raise a 13-year old to be a great 14-year-old. You raise them to be a great adult many years from now. And I think that there's a lot of opportunities in this coming decade for us." }, { "speaker": "Operator", "text": "And I will now turn the call back over to Brian Chesky for final remarks." }, { "speaker": "Brian Chesky", "text": "Well, thank you, everyone, for joining us today. I just wanted to say, once again, it was -- we're very, very proud of the results for this quarter. I think what this proves is that number one, our model is inherently adaptable. We can adapt to the changing use cases of guests, and that's because we have hosted nearly every community offering nearly any type of space at every price point. And number two, we're continuing to focus on product innovation. We're going to continue to build new products. And these 2 things, I think, have demonstrated that this pandemic, as hard as it's been for us and hard as it's been for everyone all around the world, it's made us a stronger, more efficient and a better company. And we are prepared for what's to come and for the future of travel and the future of living. So with that, thank you all very much for joining us today. We'll talk to you next quarter." }, { "speaker": "Operator", "text": "This concludes today's conference call. Thank you for participating. You may now disconnect." } ]	Airbnb, Inc.	115,705,393
ABNB	1	2,021	2021-05-13 17:00:00	Operator: Good afternoon and thank you for joining Airbnb's Earnings Conference Call for the First Quarter of 2021. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Ian Lee, Airbnb's Head of Investor Relations. Please go ahead. Ian Lee: Good afternoon and welcome to Airbnb's First Quarter of 2021 Earnings Call. Thank you for joining us today. On the call today, we have Airbnb's Co-founder and CEO, Brian Chesky; and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our first quarter of 2021. These items are also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of the time on Q&A. Before I turn it over to Brian, I'd like to remind everyone that we'll be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under Forward-looking Statements in our shareholder letter and in our Form 10-K filed with the SEC on February 26, 2021. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. And with that, I'll pass the call to Brian. Brian Chesky: All right. Thank you very much, Ian. And thank you, everyone, for joining us today. I want to start by acknowledging the state of the pandemic. COVID-19 cases continue to surge in parts of the world such as India. And our thoughts go out to our hosts, guests and employees in India during this difficult time. There is much more work to do to limit the spread of the pandemic, and many people are still hurting. And we know how lucky we are to be in the position we're in today. 2020 was a year that none of us will ever forget. It was also a year when travel fundamentally changed forever. Airbnb changed as well. We sharpened our focus on our core business of hosting. And we got back to our roots, back to what is truly special by Airbnb: the everyday people who host their homes and offer experiences. And we emerged as a stronger and more efficient company. Our business rebounded faster than anyone expected, and it showed that as the world changes, we are able to adapt. Now turning to our Q1 results. Our business dramatically improved with the rollout of vaccines and the easing of some travel restrictions. While conditions aren't yet normal, they are improving. People's desire to travel, combined with our tightly managed expenses, drove a return to our positive top line growth and materially improved adjusted EBITDA. In Q1, our revenue was $887 million. This was an increase of 5% year-over-year, and it exceeded Q1 2019 levels as well. But here is the most important fact: Our business improved without the recovery of two of our strongest historical segments: urban travel and cross-border travel. We expect the return of urban and cross-border travel to be significant tailwinds over the coming quarters. Now as our top line recovers, we are maintaining our focus and our financial discipline to improve our profitability. Our adjusted EBITDA loss was $59 million. This was approximately $190 million better than the same period in 2019, and it was $275 million better than a year ago on essentially the same revenue. Now these results show that we are improving our variable costs, we're being disciplined with our marketing and our fixed costs. Our strong performance also indicates the beginning of the travel rebound. Just a few hours ago, the Director of the Centers for Disease Control said, "If you are fully vaccinated, you can start doing the things that you had stopped doing because of the pandemic." What we think this means is that more people will be comfortable traveling. And it further strengthens our view that we are going to see a significant travel rebound. In fact, we expect this rebound to be unlike anything that we have ever seen before, and we expect travel to be very different than before. People are discovering that they don't have to be tethered to one location to live and work. And what this means is that people are more flexible about where and when they travel. People can now travel any time. People are also traveling everywhere. They're not just going to the same 20 or 30 cities. They're visiting smaller cities, towns and rural communities. And when people do travel, they're staying longer. 24% of our nights booked in Q1 were for stays of 28 nights or longer. People are not just traveling in Airbnb, they're now living on Airbnb. And these trends are not going away. The world is never going back to the way it was, and that means that travel is never going back to the way it was either. So let me tell you about what we're doing to prepare for what's ahead. Our single priority in 2021 is to prepare for the coming travel rebound. To do this, we're professing the end-to-end experience of our core service. This includes educating the world about hosting, recruiting more hosts, simplifying the guest experience, and delivering a world-class service. Now I'm going to briefly share how we're executing against each of these areas. First, we are educating the world about what makes Airbnb different: hosting. In late February, we launched our first large-scale marketing campaign in five years, Made possible by Hosts. We're educating guests about the benefits of being hosted, and we're aspiring more people to become hosts. Now while it's still early, the campaign is being well received. In markets where we're running the campaign, overall traffic is up, first-time bookers are up, traffic from prospective hosts is up, and our brand favorability is up. Second, we are recruiting more hosts, and we are setting them up for success. To build on the momentum of our marketing campaign, we launched an accompanying digital campaign that's focused on recruiting new hosts. And we've completely redesigned the end-to-end experience of being a host on Airbnb. We're making it easier for anyone to start hosting. Third, we are simplifying every part in the guest experience. In February, we launched a Flexible Dates feature. It allows guests to browse options while being flexible on the exact dates of their trip. Now since the feature launched, there have been more than 90 million Flexible Dates searches on Airbnb, 90 million searches since just February with Flexible Dates, this new feature we created. And guests who used this feature have converted at a higher rate than guests who do not. Now this is just one of many improvements that we are making to the guest experience. And finally, whenever our guests or hosts need us, we must deliver world-class service. So to prepare for the travel rebound, we're improving our community support products, enhancing our safety protocols, and we're scaling our operation by ramping our third-party support. Now I want to wrap by highlighting a major announcement that we have coming up in less than two weeks. On May 24, we will announce the most comprehensive update to the Airbnb service in 12 years. As part of this special announcement, we're going to share insights on how travel is fundamentally changing, along with updates we've made to prepare for what's ahead. We're going to unveil a simpler and more inspiring guest experience. And we are going to show you upgrades that make it even easier to be a host on Airbnb. So watch the announcement with the airbnb.com on Monday, May 24. So to summarize, we're pleased with the strong Q1 results. We are encouraged by the trends that we're seeing driving these results, and we are executing against our 2021 plan to prepare for the travel rebound. And we think this travel rebound will be unlike anything we've seen before. We think this is the travel rebound of the century. So travel is coming back, and Airbnb is ready. And with that, Dave and I look forward to answer your questions. Operator: [Operator Instructions] Your first question comes from Justin Post with Bank of America. Justin Post: I guess I really want to focus on behavior change, which could benefit the Company, first hosts and also guests. I think in the letter, it said post listings were stable with Q4, but it seems like you're really encouraged by what you're seeing. So maybe you could dive in there and tell us what is encouraging about what you're seeing with hosts and whether you see -- expect a lot of new listings to hit the market over the next year? And then similarly on the guests side, how do you think this pandemic is going to increase willingness to use alternative accommodations? Are you seeing some positive signs there? Brian Chesky: Thank you very much, Justin. So why don't I start? And Dave, feel free to add in after I go. So let's start with hosts, and then we'll go to guests. So Justin, let's just start with we have 4 million hosts on Airbnb. And I think if you asked people a year ago, would we have had such a stable host community? They probably wouldn't have expected that. But what we have today are hosts that offer 5.6 million listing. And these 5.6 million listings more about 1 million more than we had this time in 2019 and what we've actually seen is a large growth in non-urban listing. So we actually have a 30% growth in non-urban and vacation rental listings as well. Now it's important to note that 90% of our hosts, our everyday people, they're individuals. And the reason why is as we've made hosting on Airbnb easier, more and more hosts are coming to Airbnb as well. Now specific to what we're doing, we launched our first global campaign in five years, Made possible by Hosts. As I said, we also have an accompanying host campaign. Both of these campaigns, we are seeing significantly larger traffic of prospective hosts to the platform. The next thing we're doing is we're making it even easier to become a host by reducing number of steps to become a host. And as we reduce the number of steps, conversion rate for hosts gets even easier. We now are allowing hosts to be paired with other super hosts to help them get started, and we have webinars as well. And then finally, we have new tools and services that's going to make it even easier for hosts to list and be successful. I'll just end this in by saying on May 24 we will unveil a number of new tools and service that I think are going to make it much easier for hosts to get started. And I want to point out that new hosts that join Airbnb, 50% of them get a booking within four days of activation. And I think hosting is something at the perfect time for many people in the world. Because Airbnb, we started actually after the Great Recession in 2008. And at that time, there were many hosts, many people that were looking at Airbnb as a financial lifeline. I think if you think about the number of hosts on Airbnb, the top occupations of our hosts are health care workers, educators and people in food and hospitality. These are industries that have been hit really, really hard. So our job is to tell the story of hosting, the fact that on Airbnb you can make $8,000 on average if you have one listing, which is 5x you can make what an average American got in the stimulus check. So these are some of the things we're getting going, and we are just getting started ramping. And I expect us to get millions of more hosts in the coming years on Airbnb. Now as far as trends for guests, Justin, I'll also cover this as well. As I said before, I think two things are true. Number one, this travel rebound that is starting that is unlike anything we've ever seen before. And I think the Q1 results kind of demonstrate this. But the other thing that we're seeing is that travel is going to be very different than before. Probably the biggest changes are the following: number one, I don't think business travel is ever coming back the way it was before the pandemic. It's at least not going to look like it did. I do think a new kind of business travel may emerge. Many employees are working remotely. They're going to need to go back to headquarters occasionally. You're going to see longer stays going in cities. And so we're seeing elevated bookings in urban markets for stays of longer than 28 days. But the bigger trend is going to be flexibility. I think that all of us working around the world, most of us, if we're privileged enough to say this, are more flexible than we were before the pandemic. Because of the world of Zoom means a world where we can work anywhere, it's a world where many people are also choosing to live anywhere. And this has created three travel trends. Number one, people can travel anytime. This is why we have a Flexible Dates feature where instead of saying, "I want to travel from July 5 to July 10," you can say, "I want to go somewhere for a weekend, a week or a month anytime this summer." We've had over 90 million people use this feature. And as more people use this feature, conversion rate goes up. The second thing we're seeing is length of stay is increasing. In 2019 at this period of time, 14% of our nights were longer than 28 days. Now 24% of our nights are longer than 28 days. What that basically means is 1/4 of our business isn't travel, it's living. After 28 days, you're probably not traveling. And I think what this is a trend of is that traveling and living are going to begin to blur together. So this is the second trend we're seeing. And the third is people are now traveling everywhere. If you look at the concentration of our revenue, it is much more distributed than it was a couple of years ago. And this is because people aren't just going to the same 20 or 30 cities, they are getting in cars and they're traveling to small towns and rural communities, many of which don't even have a hotel. So again, the big trend is flexibility. People are traveling anytime, anywhere, and they're staying longer. We think all these trends are here to stay. And I'll just end by giving one more thought. I think there is a mass shift from mass travel to meaningful travel because people missed traveling. In fact in my surveys, people say the thing they miss the most that was taken away from the pandemic, at least from out of door activities, was travel. But they don't miss business travel. They don't miss standing in line in front of a museum or a selfie -- a landmark getting a selfie stick -- getting a photo with a selfie stick. What they really miss is spending time with the people they care about. And we call this meaningful travel. We have friends and families. We think Airbnb is really a great way to do that. So those are the trends that we're seeing. The two trends I do think are going to inverse are we are going to see a recovery of urban travel and the recovery of cross-border. This has been our bread and butter before the pandemic, and I think those are significant tailwinds for us. Operator: And your next question comes from Mario Lu with Barclays. Mario Lu: The first one's on listings count. So you said you have similar levels to last quarter around 5.6 million. But with this hosting campaign that you guys are running, is there like a time line that we should expect to drive that number up? Or you mentioned in the past that 1/4 of guests eventually become hosts. When should we expect that number to increase? Brian Chesky: Yes. Dave, why don't I give you this question? And it's a great question, Mario. And I'll also say that in Q1, 28% of our hosts were now prior guests as well. So that number is increasing. But Dave, I'll hand it over to you. David Stephenson: Yes, to be clear on the stat, it's that of guests, 25%, about 24% were former -- new hosts were former guests, so just to be clear with the percentage. It's early. We're seeing strong listing count, 5.6 million. It's been very stable. I think, actually, one of the things that's been very impressive during this time is that our host churn in Q1 '21 is actually lower than our host churn in the same period in 2019. And actually, our churn in 2020 was even lower than what it was in 2019. So I just think it all just shows kind of that resiliency and the stability of our supply. And we're just optimistic that as things continue to rebound, as we continue to educate people about the benefits of hosting and all of the tailwinds that Brian just outlined, we'll continue to see a strong host growth going forward. Mario Lu: Great, and then just one follow-up on domestic versus international. So I'm not sure if you can see this in your data yet, but just curious to hear if you're seeing some substitution in terms of domestic bookings versus international as the vaccine rates increase? And do you think the domestic rates will remain above 2019 levels even after borders open up? Brian Chesky: Yes. Dave, do you want to take this one as well? David Stephenson: Yes. I mean just unsure exactly where everything will settle out for domestic versus international. Clearly, right now 80% of our nights in Q1 were domestic. So we've seen domestic travel being consistent, the strength all around the world. Historically, our strength has obviously been in urban areas cross-border. So prior to kind of pandemic, think about 50% of our nights were actually cross-border nights. And obviously with that not occurring, clearly there's going to be some substitution where people are going to stay domestically where they might have taken a cross-border trip. But again, our urban cross-border has been our strength. We know that many of these trips will be -- are incremental and such that when travel rebounds to a more typical state, we'll have growth in overall travel. Just hesitancy, right? People are hesitant to travel right now if they aren't vaccinated, or maybe they can't travel due to do some of the lockdowns in borders. So we know that many of the trips will be coming back and will be incremental to what we're seeing today. Operator: And your next question comes from Colin Sebastian with Baird. Colin Sebastian: I have a couple of questions on investments and spending. I guess first off, what gives you the confidence that you can moderate sales and marketing spend in the second half without impacting bookings or listing levels? Is that still the plan? And then in terms of product development, obviously, Brian, you'll be making some announcements soon. But how are you thinking about the pace of R&D or product development spend, now that business appears to be returning to normal, or whatever normal means now? Is it perhaps time to look at reaccelerating hiring? Or what are your thoughts on that? Brian Chesky: Yes. Thank you very much, Colin. Dave, why don't I take this at a high level, and you can obviously go into more detailed analysis? So Colin, a couple of things. Let me just first start and talk about our marketing strategy, and then I'll answer your very specific question about H2 marketing. First of all, we take a very different approach to sales and marketing, I think, than our competition. What we have is a full funnel integrated approach to marketing. And what we iterate is PR, brand marketing and performance marketing. And really PR, in addition to word of mouth, is the thing that really built our brand over the last 10 years. And because of that, Airbnb is a noun and a verb used all over the world. And this has led to 90% of our traffic being unpaid or direct even as recently as Q1. And even in this past quarter, with elevated marketing, we have similar traffic levels in 2019 but we spent 50% less on marketing. So we think that if you have a product that is unique and different, that the role of marketing isn't to buy customers, and the role of marketing is not sizzle. The role of marketing is education. And so what we have done is we're doing our first brand -- we did our first brand marketing campaign at a global level in five years. It was a campaign called Made possible by Hosts. And it's really just taking real photos from real guests on real trips to highlight what makes Airbnb different, which is hosts. We want our hosts to be as mainstream as the homes and spaces on Airbnb. Now while the results are still early, as I said, we have seen elevated traffic levels. And to answer your question on H1 versus H2, we decided to front load spending. We were prepared for a travel rebound unlike any other so we didn't want to spread the money over the course of the year. So we disproportionately put the spending in H1 to really capture as much of this demand as possible. And I think what we're seeing is that timing is going to bear out to be the right timing. And then as far as -- why don't I also answer product development at a high level? And then Dave, you can also go in. So at a high level for product development, here's what we've learned. Before the pandemic, we were a divisional structure. We had our core business of homes. We also had a business travel. We had -- we were working on a number of other divisions. We had many divisions. And because we have many divisions, we had multiple product development groups. And what we did is when we became a functional organization, and we got much more focused on hosting, we realized that we could be much, much more efficient. It's one of the reasons our product development group is much smaller than it was two years ago. And that's allowed us to move really, really fast. And I hope that you see on May 24 that even despite the team being smaller and more nimble, we've been able to increase the pace of development. I think people are going to be really impressed by what we're able to deliver. So that's at a high level. But Dave, I don't know if you want to jump in and talk specifically about the numbers. David Stephenson: Yes. I mean our product development spend will increase at a lower rate than revenue. We're not going to have to add back significant number of fixed resources in order to accommodate the business that's back to the size of 2019 and beyond. So we're just going to be very disciplined in any additions to our expenses. And then as Brian said, we're just seeing great success with our marketing strategy, which we actually started modifying prior to COVID, solidified during COVID and are continuing to see strength here in Q1. So marketing as a percentage of revenue will be higher early this first half of the year than it will be in the second half of the year, but we're very encouraged by the results. Operator: And your next question comes from Naved Khan with Truist Securities. Naved Khan: Brian, maybe give us your thoughts about the reopening of urban travel in terms of timing. How are you thinking about it? Is that something that you think might happen in the back half of this year? Or do you think that's further out? Brian Chesky: Yes. Thank you very much, Naved, for the question. Well, let me preface my answer with two comments. Number one, I'll be -- I'll try to be careful with predictions, because anyone that was compelled to making predictions last year was humbled. But something I'll say is no matter what happens with travel, I think one of the things we showed last year is that our model is inherently adaptable. And so we are adaptable to any travel changes. With that being said, I do think we have quite a bit of data. And so with the data we have and we're seeing, I think I can give you some indications, although it's going to be a little hard to pinpoint. We are seeing that as restrictions lift and cross-border begins, more people travel the cities. We're also seeing that the nature of travel to cities is changing. For example, more and more people are booking longer-term stays in cities. So the length of stay is going up. And one of the things we know is that the longer you stay somewhere, the more you're inclined to stay in a home. So I think that as restrictions lift in countries, as vaccinations rise, we think this is a significant tailwind to both urban travel and cross-border travel. So we're very, very bullish. It's a little hard to pinpoint, but I think the comments from the head of CDC today, the lifting of restrictions across Europe, these are all really, really good signs. There's no reason this wouldn't be a huge tailwind to urban travel and cross-border. David Stephenson: Yes, our urban travel growth rate has increased every month this year and continues to do so through April and early May. So we're just seeing continued positive momentum. Naved Khan: That's very helpful. And maybe a quick follow-up, if I may. So Brian, you talked about business travel maybe becoming a little different where people might just travel to headquarters and maybe rent maybe an Airbnb. Brian Chesky: Yes. Naved Khan: Is there a -- do you see a good opportunity to maybe take share in that segment versus previously just targeting business travelers going into cities? Brian Chesky: Yes. I mean in New York City, in Los Angeles, a number of these cities, we almost have as many nights booked for stays longer than 28 days as we do stays under 28 days. In New York City, actually, the majority is over 28 days now. So I think that there's a huge opportunity. If you think about where business travel is going in the future, it seems completely intuitive to me that as companies offer more flexibility, more people are going to live around the world, but they're not all going to want to live remote. They're going to have to come back to visit. And so I think you're going to start to see longer stays. I think in addition to longer stays, you may also see business travelers traveling together. So let's say three different employees work in three different cities, and they have to come back to headquarters. They may not all get three different hotel rooms at Airbnb. They might get one house. They can split the cost. They can eat around the dinner -- the breakfast table in the morning. So I think the things that benefit Airbnb at business travel is group travel and longer-stay travel. Those two things, I think, are disproportionately beneficial to doing home, and these are general tailwind for business travel. Now I want to be clear. I mean people will, of course, travel for business again. I just think the bar to get on a plane to go to a meeting will be higher than before. Operator: And your next question comes from James Lee with Mizuho. James Lee: A couple of questions regarding the supply side. And can you guys talk about maybe supply and demand balance by region a little bit here? Where do you see surpluses? Where do you see deficits? And are you also looking to increase your supply by tapping into professional hosts. I know 90% are individual, or even hotel supply? And also secondly, what are the key frictions that you're seeing right now for your hosts signing up and that you're looking to address with these new tools you're about to introduce? Brian Chesky: Yes. Dave, do you want to take supply and demand? I can probably take the increase in pro hosts and key friction? David Stephenson: Sounds good, yes. I mean on supply and demand, really, what we're seeing, because cross-border and urban travel has not yet fully rebounded, the places that we're seeing surpluses or deficits in demand or a surplus of supply would be more urban markets. And where we can see some tightening of it, especially U.S. non-urban for the peak in the summer is clearly going to be the most constrained of our markets. So we're actively working against each of those areas. But on each side, on the supply side, making sure that we are doing our best to recruit hosts and bring on as more supply as possible for peak periods in constrained markets. And then we're also using -- go back to our marketing expenses before, where we use search engine marketing is in targeted approach, especially in markets where we have maybe surplus supply and not maybe enough demand, and so being kind of pointed at that. So we look at every individual market as different, and we will use different levers to try to manage that balance over time. Brian Chesky: Yes. And James, why don't I jump in and say this. One of the things that Dave just said, I want to put out underline under, highlights. Before the pandemic, most people came to Airbnb and they knew exactly where they were going and they knew when they were going. So we asked the question in the search bar, "Where are you going?" And we asked, "When are you going?" You put in date. The holy grail for matching supply and demand is to be able to also control where you can point demand. But we can't point demand to where we have supply if guests aren't flexible, if they're predisposed to where they want to travel. Now that guests are telling us that they're much more flexible about where they travel, we can point demand to where we have supply. This is probably one of the most important things we have. And it explains why when 90 million searches were used with the Flexible Dates feature, conversion rates went up. So that is just another thing I want to underline. Now regarding your next two questions, let's talk about pro hosts and hotels. Obviously, Airbnb created a new category in travel because we created tools that allowed everyday people and individuals become hosts. And yes, out of 4 million hosts, 3.5 million are individuals. That being said, we welcome all hospitality providers on Airbnb. And we have hundreds of thousands of professional hosts and professional hospitality providers. The way we think about it is when a guest comes to Airbnb, they're looking for a place to stay. And so we don't want them to leave without having found something they want. Typically, they come to look for individual hosts, that's what we're known for. But we want to make sure that we have professional hosts and hotels to serve those customers and to fill in our network gaps. So we're continuing to develop new tools and services over the coming years to continue to welcome these providers onto our platform. And I think they're going to obviously benefit from all the demand that we have. Now as far as key friction to becoming a host, one of the things we've seen, probably the main learning we've had is as we make it easier, more people do it. That's the name of the game, make it easier and more people do it. Before Airbnb, it was really hard to rent your home on the Internet. People did it, which is hard, and we made it easier. And on May 24, we're going to show a number of tools, a number of offerings and innovations that we have that are going to make hosting even easier. We're reducing the number of steps to become hosts. We're making it even easier by providing more tools and support. And we're going to offer some better tools and services for hosts once they become host. And so I think all these things will reduce the number of frictions as well. James Lee: If I can ask a follow-up question also on the hosts side, too, are you seeing increased competition for acquiring hosts and maybe potentially pressure on your take rate? Brian Chesky: Dave, do you want to take this one? David Stephenson: Sure. Right now what we're seeing is -- remember, it comes back to what our hosts are. We have 4 million hosts around the world. The vast majority of those are individual -- so 3.5 million of those are individual hosts. And I think that's very different than what we see kind of competitive platforms are doing. And so what we end up seeing with the 4 million hosts that we have is -- give me the last part of the question, sorry, I lost my train of thought. James Lee: Yes, increased competition for hosts and maybe potentially pressure on take rates? David Stephenson: Yes, no, pressure on the take rates. Right now, we're not seeing the pressure in take rates. We think that we have a really great value to the take rates that we give. We charge rates that give good value to both our guests and our hosts. And what we see on the take rate side is making sure that when we give value back to our hosts, that then we were able to take kind of appropriate revenue from that. So we're not really seeing any pressure at that driving for increasing or decreasing the number of hosts that we have on Airbnb. Operator: [Operator Instructions] And your next question comes from Brian Nowak with Morgan Stanley. Brian Nowak: I have two. The first one on the -- is on the 2020 new users that you added. It was a great year to sort of add a lot of new users to the platform. I'd be curious to hear about what you're seeing from those new users from a retention or booking perspective now as you're into 2021, and how that compares to what you've seen in the user cohorts in the past? Then the second one, to go a little bit more into the monetization of the take rate, can you just talk to us about any of the tests or experiments you've been doing around insurance or ancillary service sales or tiered take rates or sponsored listings, and ways we can think about that take rate potentially adjusting over time for more services to your hosts or guests? Brian Chesky: Yes. thank you very much, Brian. Dave, why don't I take the second question on monetization and take rates? Why don't you take the question on new users, what are we seeing for new users from retention and booking? David Stephenson: Yes. So what we're seeing for new users, it's early, but all of the early data for the new users that we've acquired here during 2020 is that the retention is very consistent with what we had for users in 2019 and before. So I think one of the benefits that we've seen in 2020 is just we've actually did lower to barrier for entry for new guests to kind of come to Airbnb and try us out for the first time. You don't have to hop on a plane. You don't have to go across the border. As we said, over 50% of our nights historically have been cross-border. You don't have to do that to try Airbnb. Now you can kind of drive just a couple of hours down the road and go check us out. And what we're seeing from the early results is that the retention rates are very consistent with what we've seen in the past. Brian Chesky: And then Brian, to your question about monetization and take rate, we absolutely see lots of opportunities to increase our monetization and take rate for both guests and hosts. For example, one of the things we've said is that many of these tools and services we've offered in the last five years, they're incremental, we haven't charged for. For example, unlike our competitors, we offer free protection of $1 million against theft, property damage and personal liability in countries all over the world. And as we added these services, we do not charge incrementally for these. Our general principle is we always want to give away more value than we're taking, but we do think there's opportunities for us to do -- to offer some more tools and services to increase take rate. Now that being said, focus is critical. And we are focused on the most perishable opportunity. The most perishable opportunity right now is to capture as much travel demand as possible and be ready before anyone else is for this travel rebound. So we are making sure that we have enough hosts for this travel season. We simplified the guests experience, and we're providing world-class support. So that's where we're focused on this year. But make no mistake, we have many opportunities in the years ahead. Operator: Our next question comes from Mark Mahaney with ISI. Mark Mahaney: Okay, I'll stick with one question. Just on the supply side, will you address the issue of whether increasing local restrictions is a factor that's limiting your supply in -- especially in some of the larger cities? And I realize that travel hasn't really recovered there fully. But just address the issue of whether how much of a constraint new local regulations on rentals, et cetera, is on your ability to expand supply? Brian Chesky: Yes, I can take this at a high level. Dave, again, feel free to jump in as well. Mark, thanks for the question. What we saw with COVID was actually a positive reset in our relationship with cities all over the world. Now first, let me just start by saying we now collect/remit taxes in 30,000 jurisdictions. We collected and remitted to date $2.6 billion of transient occupancy taxes. What happened with COVID is two things: Number one, travel went from being concentrated in very few top cities to distributing everywhere, thousand cities around the world. Though we do see an urban recovery, we don't see that trend completely reversing. Because I think in a sense, you could say the genie's out of the bottle, a number of people have realized that there's all these really cool small towns, rural communities and small cities, many of which don't even have hotels. And so they're really important destinations. The other thing that we've noticed, though, is that a lot of cities have been hit really hard by the devastating economic effects of the pandemic. So you'll see major cities have had major tourism shortfalls, major tax shortfalls. And because of this, what we're actually seen is a lot of cities reaching out to us. In fact, we struck over 100 partnerships over the course of just the pandemic with destination marketing organizations, which as you know are basically tourism bureaus and tourism arms. From Scotland to Portland, we've been doing partnerships with cities all over the world. And to scale our partnerships to thousands of cities, we launched last year the City Portal as well. So this is what we're seeing. I don't know, Dave, if you want to add anything to that. David Stephenson: I think that's key. We also added this new capability last year of the City Portal, which is another tool to enable cities to understand what goes on with our business in each of their communities. And we think that's been another positive tool for cities to feel like they can work with Airbnb to help their economies rebound. Operator: And your next question comes from Jed Kelly with Oppenheimer. Jed Kelly: I guess, Brian, going back to business travel, I guess it's kind of like a two-part question. I guess number one would be, where are you in terms of talking to companies, talking to businesses sort of making the ability to work from anywhere through Airbnb and benefit? And then as, like, a follow-up, you mentioned work from anywhere. Your company is, of course, based in San Francisco. So how do you see basically potentially using the work-from-anywhere trend to sort of save costs to make your business more efficient if you can have more employees working outside the Bay Area? Brian Chesky: Yes, these are two really good questions. Let me start with the first one. So as you point out and as I said, one of the kind of -- one of the trends that has been pretty remarkable over the last year is as more people have more flexibility, they can work from home. And that means they can work from any home, often on Airbnb. And so one of the things we're doing is we're continually trying to make it even easier for guests to be able to search anywhere around the world. And on May 24, we're going to show you some new tools and new ways to make the experience of searching on Airbnb, especially allowing you to search with more flexibility, even easier. Again, the type of flexibility we're looking at is people staying longer, booking any time and be able to go anywhere, not just to the same top destination. So we are going to continue to look at innovation in this area. And I think the other thing I'll just point out is, again, in 2019, only 14% of our nights booked were longer than 28 days. That's now 24%. And so we think this is a huge growth area for us. We think basically, 1/4 of our business is not even travel anymore. There's a lot of innovation opportunities for us. We're a design-led company at our heart. And I think they're going to offer a lot of really interesting opportunities. Now specific to our San Francisco employee base, let me talk a little bit about what I told our employees a couple of weeks ago. I told them there's two guiding principles. Number one, we want to model the live anywhere lifestyle. So by modeling the live-anywhere lifestyle, we're going to allow more flexibility for our employees. So I told our employees, they don't have to come back to the office until next September. We're going to allow a lot of flexibility. And even when we do ask people to come back, they're going to have a lot more flexibly before. People aren't going to be expected to come back to the office five days week every week. We think that is really not how most workplaces in the 21st century are going to operate. That being said, as an incredibly light company, we also do think that in-person collaboration is important. So we want to find some balance between modeling the live-anywhere lifestyle and allowing for in-person creative collaboration. And that's what we're designing. We want to get it right. We don't want to rush into this. So that's what we're going to be working on over the course of next year. Operator: And your next question comes from Justin Patterson with KeyBanc. Justin Patterson: Brian, just expanding on the prior question, it does sound like this platform experience update is really designed around inspiration and discovery. Without spoiling your announcement on the 24th, I'm curious about how you think about the opportunity to broaden the funnel on Airbnb, provide inspiration for travelers as they think about places they can stay and things to do such that Airbnb really starts to drive natural inspiration for the much broader spectrum of the customer base than before. Brian Chesky: Thank you, Justin. It was a little bit hard for me to hear you, but I think the question was what are we doing to drive more inspiration and discovery on Airbnb, inspiring where you can go and what you can do, correct? I just want to make sure I -- I couldn't the end of that last question. Okay. I'll answer that. So yes, so inspiration is something that we're really focused on. Actually if you go to airbnb.com right now, if you type Airbnb.com, you're going to notice on our top of our homepage, there's a big piece of art and it says, "the greatest outdoors." So we just launched wish lists that are curated by Airbnb. And if you click on Get Inspired, you're going to see a number of wish lists. So this is just the beginning of a number of things we're doing to try to inspire more travel. On the home page below that, you're going to see that we're now merchandising places you can go nearby. So between wish lists, nearby travel and then some of the updates we have on May 24, I think that's going to continue to drive more and more inspiration. On May 24, though, we are going to showcase some new exciting features that I think are going to inspire people around flexibility. Because one of the things we've seen is if you are more flexible about where you travel and when you travel, then what that kind of means for some people is the home becomes the destination, suddenly where you go is less important than the type of home you say in. And so this is how we're thinking about it, and hopefully, if you can tune in, we can show you some of the things we're working on. Operator: And your next question comes from Lloyd Walmsley with Deutsche Bank. Lloyd Walmsley: Two questions, if I can. First, can you talk about how you think about occupancy rates or kind of room nights per active listing over the medium term? It seems like it's been pretty stable over the past few years. But wondering if this notion of, like, blending of travel and living is kind of increasing shoulder season demand in a way where you can grow room nights in excess of listings, or getting more out of your existing listings? And then the second one, the average booking value per night looked really high in 1Q. If you peel back the onion and look within the same region, the same-property type, are you seeing pricing up? Or is most of this just mix shift? And how do you think about this as maybe as travel normalizes a bit? How would that impact ADRs going forward? Brian Chesky: Great, Lloyd. So I'll take the first question on occupancy rate. Dave, you can take the second one. The answer to your question is yes. Occupancy rates, we think, average on global level will go up as we get better at matching supply and demand. The basic name of the game is in classic travel a lot of people try to go to the same place on the same date. That's why kind of when you show up to Paris in the summer, and there's a whole bunch of people in line at a landmark is because they're going to the same place at the same time. So to increase occupancy rates, there's one or two things we can do. We can add more hosts to the same places that everyone is going to, or we can point demand to other places. And as length of stay increases, as people shift from going to 20 or 30 cities to thousands of communities, and as people become more flexible when they travel, we can then show them deals. We can show them, for example, I know you want to go to -- we'll make up the place, France, in July. But if you went in September, you could get -- you could save a lot of money because there's fewer people there. Or we can point you instead of in Paris, we can point you to Brittany or some other community. So there's a lot of opportunities for us, I think, to point demand to where we have available supply, which will allow us to steadily increase occupancy. What it means is we don't need to increase supply linearly with increasing revenue. We can get more productivity out of the supply that we have. And Dave, I don't know if you want to take ADR. David Stephenson: Yes. And our ADRs in Q1 were up 35% year-over-year. That was after being up 13% year-over-year in Q4. The significant majority driver of the ADR increase is driven by mix. The rebound has been earlier in the U.S., which has a higher average daily rate. It's been in non-urban whole home and even larger homes, and each one of those is just, on average, a higher ADR. So the majority of the ADR that we're seeing is from mix. When you actually look at some highly constrained markets in a highly constrained time period, we're seeing some pricing pressure within there that will drive ADR rates up. So the vast majority of it is just driven by mix. Brian Chesky: And the other thing I want to say, again, is -- yes, another thing I'll just say is as demand increases on Airbnb, that can also correspondingly increase supply. So again, one of the things we published in our S-1 was 23% of our new available hosts in 2019 were guests. That increased to 28% in our new available hosts that started out as guests in Airbnb in 2020. So we also think there's a really interesting flywheel where we can point demand where we have supply. We have a muscle to continue to add hosts, and but we can also convert guests to hosts. And as that number keeps increasing, that's another big lever for us. Operator: And your next question comes from Brent Thill with Jefferies. Brent Thill: Dave, I don't know any color you can add around the final unlock that comes over the next week of close to 500 million shares. I know not all of those are eligible. But is there any way you could just frame that? There's been some fear of this unlock, and what it means. Can you just -- any color around that you could give would be helpful. Brian Chesky: Yes. Dave, you want to take that? David Stephenson: Sure. So clearly, our unlock comes on Monday. And the key thing that we're doing to try to make sure that we're ready for that unlock, is to do what we've been doing, which is deliver outstanding results, deliver outsized kind of gross booking value revenue and driving for profitability. So there's not a lot more color I can give you on the unlock on Monday beyond that. Operator: And your next question comes from Brian Fitzgerald with Wells Fargo. Brian Fitzgerald: We wanted to ask if you could tell us what you're seeing with respect to experiences, supply dynamics there, online versus offline, linkages to travel conversion rates there, anything with experiences? Brian Chesky: Yes. Thank you very much for the question. So here's what I'd say about experiences. When we came back in the beginning of 2020, I really thought experiences would be a breakout year last year. It turns out a pandemic was a very difficult year for experiences. We had to put products on hold. We remain very, very bullish about experiences over the long term. One of the reasons we remain bullish is because the percent of guests leaving a five-start review with experiences is higher and remains higher than percent of guests who leave a five-star review for homes. But the pandemic was a difficult time for experiences. So we launched online experiences, which is the way to have an experience without leaving your living room. And I am thinking that in the coming years, experiences will be successful because there's fewer alternatives. There's fewer mass tour operators, bars, lounges and restaurants that are going to be operating at full capacity. So we do think there's a window, and we're playing the long game on this one. Operator: [Operator Instructions] And your next question comes from Stephen Ju with Credit Suisse. Stephen Ju: Okay. So Brian, I asked the same question to one of your competitors last week. So I'd be interested in your opinion what is probably more of a macro consideration. So the consumer savings rate, at least in the United States, is probably at the highest level it's been since World War II. It will take some time for all of this to widen down to, I guess, normalized levels, which brings up the scenario of consumer spend probably accelerating for the next several years. And hopefully, one of the likely destinations for all of these dollars is going to be in travel. So I know it's early days of the recovery, but what are you seeing in terms of, I guess, greater willingness to maybe, say, upgrade to the more expensive Airbnb, or just in general stepping up in the frequency as we recover here? Brian Chesky: Very good question, Stephen. Let me tell you what we're seeing so far. One of the things is we did travel surveys in the beginning of the year. And we surveyed people in the United States. We also surveyed people around the world. And in our surveys, what we found is that the out-of-home activity people missed the most, more than restaurants, more than bars, more than sporting events, more than concerts, was travel. The kind of travel people missed was not business travel. It was not mass travel, going to crowded destinations. It was really just spending time with people that they've not been able to see during the pandemic. I think that we generally just yearn for what was taken away from us. And travel and spending time with people was something that was taken away from us. Now with regard to your question about are we seeing people upgrading? We have seen, as we mentioned, a material increase in the average daily rate in the United States. And this does give us a sense of consumer willingness to spend. Maybe another way of saying it is maybe before the pandemic, people were booking studio apartments in cities. Now what we're seeing is a pretty big expansion of people booking entire homes, typically even more bedrooms, the number of guests per reservation has increased considerably. And so correspondingly, people are spending more money. I think that trend, of course, will get normalized over some period of time when other geographies recover and urban recovers. But I do think that we are going to see sustained confidence, there's no question. Operator: And your next question comes from Deepak Mathivanan with Wolfe Research. Deepak Mathivanan: Just a couple of quick ones. So first, can you talk about the implications of booking window trends on second quarter and second half? There's a lot of summer bookings happening right now already in markets like Europe and even in North America. Is that earlier than usual? Or does that mean that the recovery is being pulled forward by some capacity? Just wondering if you can now provide some insights on that, and then second question, not sure if this was asked already. How are you thinking about the ROI on the targeted digital marketing programs in the hosts? Are these on performance channels? Any color that you can add there would be great. Brian Chesky: Yes. Dave, why don't you take these two questions. David Stephenson: Sure. So regarding the booking window, we're seeing the booking window, obviously, in 2020 shrank dramatically, right? People were hesitant to travel. They only started booking when they had high confidence that they were going to travel. What we've seen here early in Q1 of '21 is the booking windows have expanded. And in March, we actually saw booking windows consistent with those from March of 2019. And so the windows are expanding. I think that what you're seeing is still even more confidence in the U.S. So that the willingness of travel and the booking window in the U.S. has expanded further than it has in Europe. But we're starting to see some greater acceleration of our European business. We're seeing the European nights increasing the rate of year-over-year growth every month of the year since the beginning of the year, including through April and May. And we're seeing that as things like the lockdowns in France are removed. And after the U.K. Prime Minister announced plans to exit lockdown in February, we started seeing more acceleration in Europe. So the booking window trends are positive and give us encouragement for what we're going to see in the back half of the year. But we'll just have to see what the lockdowns and other kind of travel restrictions look like for Europe for the back half. And then regarding the ROI and targeted digital marketing for hosts, this is one of the levers that we have. When we do target digital marketing for hosts, it would be in specific areas that we know are more supply-constrained and where we want to focus on it. We established a return on that investment for value of the hosts that we acquire through that channel. And it is one channel, but it's not the only one, and it's not the primary one. Again, the most important thing is to kind of step back and educate people about the benefits of hosting, and then make it easier for them to host once they start considering it. Operator: And your next question comes from Kevin Kopelman with Cowen. Kevin Kopelman: A quick one, could you give us an update on cancellation rate trends this year compared to 2019 with I think the average listing being a little bit more flexible than it was in the past? Brian Chesky: You're welcome. Dave, do you want to take this one for Kevin? David Stephenson: Sure. So the cancellation rates obviously were substantially elevated in 2020 versus 2019. They've begun to moderate so that they are sequentially below where they were at in 2020, but they're still moderately elevated versus the 2019 rate. So we're seeing a bit more returns than normal but it's not quite to historical level rates. Operator: And your next question comes from Tom White with D.A. Davidson. Tom White: Just one from me to follow up on ADRs and specifically your expectations for the second half. I know there's some color in the letter, but can you maybe unpack your thoughts on kind of all the different moving pieces there between the recovery and some of the kind of structurally lower ADR markets, recovery in urban and cross-border. Just curious to hear your thoughts on how it all kind of nets out, you think, in the back half? Brian Chesky: Thanks, Tom. Dave, I'll give you this one. David Stephenson: Sure. Yes, I think that the best thing to do is actually kind of look at some of the guidance figures that we gave in the earnings call itself where we're basically expecting -- because it's harder to have visibility in the back half of the year. We're highly confident in the rebound that it's going to be coming. All the early indications are that it's there. But it's hard to kind of precisely pin down what Q3 and Q4 are going to do. So what we did do is give some perspective on what we expect out of Q2. And that is that our gross booking value in Q2 of this year will be higher than in Q2 of 2019, and that our revenue rate in Q2 will be similar to that of 2019, and that our EBITDA will be -- our adjusted EBITDA will be breakeven to slightly positive in Q2 of this year. So I think those are kind of the key things. Because as you said, as rebound comes back, the pace at which it comes back in the geographies that come back will affect the mix on those ADRs. And we do expect the ADRs to moderate, but it's hard to perfectly pinpoint down the specific of that mix. Operator: I will now turn the call back over to the management team for closing remarks. Brian Chesky: All right. Well, thank you, everyone, for joining us today. I just want to recap. We are really proud of our strong Q1 results. We believe they're a testament to our focus and the adaptability of our model. And we've shown over the past year that as the world changes, Airbnb can adapt. I think we're now well positioned for the travel rebound ahead. As travel returns, Airbnb will be ready, and our hosts will be ready as well. So I hope you'll join us on May 24, where we'll share insights on how travel is fundamentally changing and announce the most comprehensive update to Airbnb service in 12 years. Thank you, and we'll see you then. Operator: This concludes today's conference call. You may now disconnect.	[ { "speaker": "Operator", "text": "Good afternoon and thank you for joining Airbnb's Earnings Conference Call for the First Quarter of 2021. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Ian Lee, Airbnb's Head of Investor Relations. Please go ahead." }, { "speaker": "Ian Lee", "text": "Good afternoon and welcome to Airbnb's First Quarter of 2021 Earnings Call. Thank you for joining us today. On the call today, we have Airbnb's Co-founder and CEO, Brian Chesky; and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our first quarter of 2021. These items are also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of the time on Q&A. Before I turn it over to Brian, I'd like to remind everyone that we'll be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under Forward-looking Statements in our shareholder letter and in our Form 10-K filed with the SEC on February 26, 2021. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. And with that, I'll pass the call to Brian." }, { "speaker": "Brian Chesky", "text": "All right. Thank you very much, Ian. And thank you, everyone, for joining us today. I want to start by acknowledging the state of the pandemic. COVID-19 cases continue to surge in parts of the world such as India. And our thoughts go out to our hosts, guests and employees in India during this difficult time. There is much more work to do to limit the spread of the pandemic, and many people are still hurting. And we know how lucky we are to be in the position we're in today. 2020 was a year that none of us will ever forget. It was also a year when travel fundamentally changed forever. Airbnb changed as well. We sharpened our focus on our core business of hosting. And we got back to our roots, back to what is truly special by Airbnb: the everyday people who host their homes and offer experiences. And we emerged as a stronger and more efficient company. Our business rebounded faster than anyone expected, and it showed that as the world changes, we are able to adapt. Now turning to our Q1 results. Our business dramatically improved with the rollout of vaccines and the easing of some travel restrictions. While conditions aren't yet normal, they are improving. People's desire to travel, combined with our tightly managed expenses, drove a return to our positive top line growth and materially improved adjusted EBITDA. In Q1, our revenue was $887 million. This was an increase of 5% year-over-year, and it exceeded Q1 2019 levels as well. But here is the most important fact: Our business improved without the recovery of two of our strongest historical segments: urban travel and cross-border travel. We expect the return of urban and cross-border travel to be significant tailwinds over the coming quarters. Now as our top line recovers, we are maintaining our focus and our financial discipline to improve our profitability. Our adjusted EBITDA loss was $59 million. This was approximately $190 million better than the same period in 2019, and it was $275 million better than a year ago on essentially the same revenue. Now these results show that we are improving our variable costs, we're being disciplined with our marketing and our fixed costs. Our strong performance also indicates the beginning of the travel rebound. Just a few hours ago, the Director of the Centers for Disease Control said, \"If you are fully vaccinated, you can start doing the things that you had stopped doing because of the pandemic.\" What we think this means is that more people will be comfortable traveling. And it further strengthens our view that we are going to see a significant travel rebound. In fact, we expect this rebound to be unlike anything that we have ever seen before, and we expect travel to be very different than before. People are discovering that they don't have to be tethered to one location to live and work. And what this means is that people are more flexible about where and when they travel. People can now travel any time. People are also traveling everywhere. They're not just going to the same 20 or 30 cities. They're visiting smaller cities, towns and rural communities. And when people do travel, they're staying longer. 24% of our nights booked in Q1 were for stays of 28 nights or longer. People are not just traveling in Airbnb, they're now living on Airbnb. And these trends are not going away. The world is never going back to the way it was, and that means that travel is never going back to the way it was either. So let me tell you about what we're doing to prepare for what's ahead. Our single priority in 2021 is to prepare for the coming travel rebound. To do this, we're professing the end-to-end experience of our core service. This includes educating the world about hosting, recruiting more hosts, simplifying the guest experience, and delivering a world-class service. Now I'm going to briefly share how we're executing against each of these areas. First, we are educating the world about what makes Airbnb different: hosting. In late February, we launched our first large-scale marketing campaign in five years, Made possible by Hosts. We're educating guests about the benefits of being hosted, and we're aspiring more people to become hosts. Now while it's still early, the campaign is being well received. In markets where we're running the campaign, overall traffic is up, first-time bookers are up, traffic from prospective hosts is up, and our brand favorability is up. Second, we are recruiting more hosts, and we are setting them up for success. To build on the momentum of our marketing campaign, we launched an accompanying digital campaign that's focused on recruiting new hosts. And we've completely redesigned the end-to-end experience of being a host on Airbnb. We're making it easier for anyone to start hosting. Third, we are simplifying every part in the guest experience. In February, we launched a Flexible Dates feature. It allows guests to browse options while being flexible on the exact dates of their trip. Now since the feature launched, there have been more than 90 million Flexible Dates searches on Airbnb, 90 million searches since just February with Flexible Dates, this new feature we created. And guests who used this feature have converted at a higher rate than guests who do not. Now this is just one of many improvements that we are making to the guest experience. And finally, whenever our guests or hosts need us, we must deliver world-class service. So to prepare for the travel rebound, we're improving our community support products, enhancing our safety protocols, and we're scaling our operation by ramping our third-party support. Now I want to wrap by highlighting a major announcement that we have coming up in less than two weeks. On May 24, we will announce the most comprehensive update to the Airbnb service in 12 years. As part of this special announcement, we're going to share insights on how travel is fundamentally changing, along with updates we've made to prepare for what's ahead. We're going to unveil a simpler and more inspiring guest experience. And we are going to show you upgrades that make it even easier to be a host on Airbnb. So watch the announcement with the airbnb.com on Monday, May 24. So to summarize, we're pleased with the strong Q1 results. We are encouraged by the trends that we're seeing driving these results, and we are executing against our 2021 plan to prepare for the travel rebound. And we think this travel rebound will be unlike anything we've seen before. We think this is the travel rebound of the century. So travel is coming back, and Airbnb is ready. And with that, Dave and I look forward to answer your questions." }, { "speaker": "Operator", "text": "[Operator Instructions] Your first question comes from Justin Post with Bank of America." }, { "speaker": "Justin Post", "text": "I guess I really want to focus on behavior change, which could benefit the Company, first hosts and also guests. I think in the letter, it said post listings were stable with Q4, but it seems like you're really encouraged by what you're seeing. So maybe you could dive in there and tell us what is encouraging about what you're seeing with hosts and whether you see -- expect a lot of new listings to hit the market over the next year? And then similarly on the guests side, how do you think this pandemic is going to increase willingness to use alternative accommodations? Are you seeing some positive signs there?" }, { "speaker": "Brian Chesky", "text": "Thank you very much, Justin. So why don't I start? And Dave, feel free to add in after I go. So let's start with hosts, and then we'll go to guests. So Justin, let's just start with we have 4 million hosts on Airbnb. And I think if you asked people a year ago, would we have had such a stable host community? They probably wouldn't have expected that. But what we have today are hosts that offer 5.6 million listing. And these 5.6 million listings more about 1 million more than we had this time in 2019 and what we've actually seen is a large growth in non-urban listing. So we actually have a 30% growth in non-urban and vacation rental listings as well. Now it's important to note that 90% of our hosts, our everyday people, they're individuals. And the reason why is as we've made hosting on Airbnb easier, more and more hosts are coming to Airbnb as well. Now specific to what we're doing, we launched our first global campaign in five years, Made possible by Hosts. As I said, we also have an accompanying host campaign. Both of these campaigns, we are seeing significantly larger traffic of prospective hosts to the platform. The next thing we're doing is we're making it even easier to become a host by reducing number of steps to become a host. And as we reduce the number of steps, conversion rate for hosts gets even easier. We now are allowing hosts to be paired with other super hosts to help them get started, and we have webinars as well. And then finally, we have new tools and services that's going to make it even easier for hosts to list and be successful. I'll just end this in by saying on May 24 we will unveil a number of new tools and service that I think are going to make it much easier for hosts to get started. And I want to point out that new hosts that join Airbnb, 50% of them get a booking within four days of activation. And I think hosting is something at the perfect time for many people in the world. Because Airbnb, we started actually after the Great Recession in 2008. And at that time, there were many hosts, many people that were looking at Airbnb as a financial lifeline. I think if you think about the number of hosts on Airbnb, the top occupations of our hosts are health care workers, educators and people in food and hospitality. These are industries that have been hit really, really hard. So our job is to tell the story of hosting, the fact that on Airbnb you can make $8,000 on average if you have one listing, which is 5x you can make what an average American got in the stimulus check. So these are some of the things we're getting going, and we are just getting started ramping. And I expect us to get millions of more hosts in the coming years on Airbnb. Now as far as trends for guests, Justin, I'll also cover this as well. As I said before, I think two things are true. Number one, this travel rebound that is starting that is unlike anything we've ever seen before. And I think the Q1 results kind of demonstrate this. But the other thing that we're seeing is that travel is going to be very different than before. Probably the biggest changes are the following: number one, I don't think business travel is ever coming back the way it was before the pandemic. It's at least not going to look like it did. I do think a new kind of business travel may emerge. Many employees are working remotely. They're going to need to go back to headquarters occasionally. You're going to see longer stays going in cities. And so we're seeing elevated bookings in urban markets for stays of longer than 28 days. But the bigger trend is going to be flexibility. I think that all of us working around the world, most of us, if we're privileged enough to say this, are more flexible than we were before the pandemic. Because of the world of Zoom means a world where we can work anywhere, it's a world where many people are also choosing to live anywhere. And this has created three travel trends. Number one, people can travel anytime. This is why we have a Flexible Dates feature where instead of saying, \"I want to travel from July 5 to July 10,\" you can say, \"I want to go somewhere for a weekend, a week or a month anytime this summer.\" We've had over 90 million people use this feature. And as more people use this feature, conversion rate goes up. The second thing we're seeing is length of stay is increasing. In 2019 at this period of time, 14% of our nights were longer than 28 days. Now 24% of our nights are longer than 28 days. What that basically means is 1/4 of our business isn't travel, it's living. After 28 days, you're probably not traveling. And I think what this is a trend of is that traveling and living are going to begin to blur together. So this is the second trend we're seeing. And the third is people are now traveling everywhere. If you look at the concentration of our revenue, it is much more distributed than it was a couple of years ago. And this is because people aren't just going to the same 20 or 30 cities, they are getting in cars and they're traveling to small towns and rural communities, many of which don't even have a hotel. So again, the big trend is flexibility. People are traveling anytime, anywhere, and they're staying longer. We think all these trends are here to stay. And I'll just end by giving one more thought. I think there is a mass shift from mass travel to meaningful travel because people missed traveling. In fact in my surveys, people say the thing they miss the most that was taken away from the pandemic, at least from out of door activities, was travel. But they don't miss business travel. They don't miss standing in line in front of a museum or a selfie -- a landmark getting a selfie stick -- getting a photo with a selfie stick. What they really miss is spending time with the people they care about. And we call this meaningful travel. We have friends and families. We think Airbnb is really a great way to do that. So those are the trends that we're seeing. The two trends I do think are going to inverse are we are going to see a recovery of urban travel and the recovery of cross-border. This has been our bread and butter before the pandemic, and I think those are significant tailwinds for us." }, { "speaker": "Operator", "text": "And your next question comes from Mario Lu with Barclays." }, { "speaker": "Mario Lu", "text": "The first one's on listings count. So you said you have similar levels to last quarter around 5.6 million. But with this hosting campaign that you guys are running, is there like a time line that we should expect to drive that number up? Or you mentioned in the past that 1/4 of guests eventually become hosts. When should we expect that number to increase?" }, { "speaker": "Brian Chesky", "text": "Yes. Dave, why don't I give you this question? And it's a great question, Mario. And I'll also say that in Q1, 28% of our hosts were now prior guests as well. So that number is increasing. But Dave, I'll hand it over to you." }, { "speaker": "David Stephenson", "text": "Yes, to be clear on the stat, it's that of guests, 25%, about 24% were former -- new hosts were former guests, so just to be clear with the percentage. It's early. We're seeing strong listing count, 5.6 million. It's been very stable. I think, actually, one of the things that's been very impressive during this time is that our host churn in Q1 '21 is actually lower than our host churn in the same period in 2019. And actually, our churn in 2020 was even lower than what it was in 2019. So I just think it all just shows kind of that resiliency and the stability of our supply. And we're just optimistic that as things continue to rebound, as we continue to educate people about the benefits of hosting and all of the tailwinds that Brian just outlined, we'll continue to see a strong host growth going forward." }, { "speaker": "Mario Lu", "text": "Great, and then just one follow-up on domestic versus international. So I'm not sure if you can see this in your data yet, but just curious to hear if you're seeing some substitution in terms of domestic bookings versus international as the vaccine rates increase? And do you think the domestic rates will remain above 2019 levels even after borders open up?" }, { "speaker": "Brian Chesky", "text": "Yes. Dave, do you want to take this one as well?" }, { "speaker": "David Stephenson", "text": "Yes. I mean just unsure exactly where everything will settle out for domestic versus international. Clearly, right now 80% of our nights in Q1 were domestic. So we've seen domestic travel being consistent, the strength all around the world. Historically, our strength has obviously been in urban areas cross-border. So prior to kind of pandemic, think about 50% of our nights were actually cross-border nights. And obviously with that not occurring, clearly there's going to be some substitution where people are going to stay domestically where they might have taken a cross-border trip. But again, our urban cross-border has been our strength. We know that many of these trips will be -- are incremental and such that when travel rebounds to a more typical state, we'll have growth in overall travel. Just hesitancy, right? People are hesitant to travel right now if they aren't vaccinated, or maybe they can't travel due to do some of the lockdowns in borders. So we know that many of the trips will be coming back and will be incremental to what we're seeing today." }, { "speaker": "Operator", "text": "And your next question comes from Colin Sebastian with Baird." }, { "speaker": "Colin Sebastian", "text": "I have a couple of questions on investments and spending. I guess first off, what gives you the confidence that you can moderate sales and marketing spend in the second half without impacting bookings or listing levels? Is that still the plan? And then in terms of product development, obviously, Brian, you'll be making some announcements soon. But how are you thinking about the pace of R&D or product development spend, now that business appears to be returning to normal, or whatever normal means now? Is it perhaps time to look at reaccelerating hiring? Or what are your thoughts on that?" }, { "speaker": "Brian Chesky", "text": "Yes. Thank you very much, Colin. Dave, why don't I take this at a high level, and you can obviously go into more detailed analysis? So Colin, a couple of things. Let me just first start and talk about our marketing strategy, and then I'll answer your very specific question about H2 marketing. First of all, we take a very different approach to sales and marketing, I think, than our competition. What we have is a full funnel integrated approach to marketing. And what we iterate is PR, brand marketing and performance marketing. And really PR, in addition to word of mouth, is the thing that really built our brand over the last 10 years. And because of that, Airbnb is a noun and a verb used all over the world. And this has led to 90% of our traffic being unpaid or direct even as recently as Q1. And even in this past quarter, with elevated marketing, we have similar traffic levels in 2019 but we spent 50% less on marketing. So we think that if you have a product that is unique and different, that the role of marketing isn't to buy customers, and the role of marketing is not sizzle. The role of marketing is education. And so what we have done is we're doing our first brand -- we did our first brand marketing campaign at a global level in five years. It was a campaign called Made possible by Hosts. And it's really just taking real photos from real guests on real trips to highlight what makes Airbnb different, which is hosts. We want our hosts to be as mainstream as the homes and spaces on Airbnb. Now while the results are still early, as I said, we have seen elevated traffic levels. And to answer your question on H1 versus H2, we decided to front load spending. We were prepared for a travel rebound unlike any other so we didn't want to spread the money over the course of the year. So we disproportionately put the spending in H1 to really capture as much of this demand as possible. And I think what we're seeing is that timing is going to bear out to be the right timing. And then as far as -- why don't I also answer product development at a high level? And then Dave, you can also go in. So at a high level for product development, here's what we've learned. Before the pandemic, we were a divisional structure. We had our core business of homes. We also had a business travel. We had -- we were working on a number of other divisions. We had many divisions. And because we have many divisions, we had multiple product development groups. And what we did is when we became a functional organization, and we got much more focused on hosting, we realized that we could be much, much more efficient. It's one of the reasons our product development group is much smaller than it was two years ago. And that's allowed us to move really, really fast. And I hope that you see on May 24 that even despite the team being smaller and more nimble, we've been able to increase the pace of development. I think people are going to be really impressed by what we're able to deliver. So that's at a high level. But Dave, I don't know if you want to jump in and talk specifically about the numbers." }, { "speaker": "David Stephenson", "text": "Yes. I mean our product development spend will increase at a lower rate than revenue. We're not going to have to add back significant number of fixed resources in order to accommodate the business that's back to the size of 2019 and beyond. So we're just going to be very disciplined in any additions to our expenses. And then as Brian said, we're just seeing great success with our marketing strategy, which we actually started modifying prior to COVID, solidified during COVID and are continuing to see strength here in Q1. So marketing as a percentage of revenue will be higher early this first half of the year than it will be in the second half of the year, but we're very encouraged by the results." }, { "speaker": "Operator", "text": "And your next question comes from Naved Khan with Truist Securities." }, { "speaker": "Naved Khan", "text": "Brian, maybe give us your thoughts about the reopening of urban travel in terms of timing. How are you thinking about it? Is that something that you think might happen in the back half of this year? Or do you think that's further out?" }, { "speaker": "Brian Chesky", "text": "Yes. Thank you very much, Naved, for the question. Well, let me preface my answer with two comments. Number one, I'll be -- I'll try to be careful with predictions, because anyone that was compelled to making predictions last year was humbled. But something I'll say is no matter what happens with travel, I think one of the things we showed last year is that our model is inherently adaptable. And so we are adaptable to any travel changes. With that being said, I do think we have quite a bit of data. And so with the data we have and we're seeing, I think I can give you some indications, although it's going to be a little hard to pinpoint. We are seeing that as restrictions lift and cross-border begins, more people travel the cities. We're also seeing that the nature of travel to cities is changing. For example, more and more people are booking longer-term stays in cities. So the length of stay is going up. And one of the things we know is that the longer you stay somewhere, the more you're inclined to stay in a home. So I think that as restrictions lift in countries, as vaccinations rise, we think this is a significant tailwind to both urban travel and cross-border travel. So we're very, very bullish. It's a little hard to pinpoint, but I think the comments from the head of CDC today, the lifting of restrictions across Europe, these are all really, really good signs. There's no reason this wouldn't be a huge tailwind to urban travel and cross-border." }, { "speaker": "David Stephenson", "text": "Yes, our urban travel growth rate has increased every month this year and continues to do so through April and early May. So we're just seeing continued positive momentum." }, { "speaker": "Naved Khan", "text": "That's very helpful. And maybe a quick follow-up, if I may. So Brian, you talked about business travel maybe becoming a little different where people might just travel to headquarters and maybe rent maybe an Airbnb." }, { "speaker": "Brian Chesky", "text": "Yes." }, { "speaker": "Naved Khan", "text": "Is there a -- do you see a good opportunity to maybe take share in that segment versus previously just targeting business travelers going into cities?" }, { "speaker": "Brian Chesky", "text": "Yes. I mean in New York City, in Los Angeles, a number of these cities, we almost have as many nights booked for stays longer than 28 days as we do stays under 28 days. In New York City, actually, the majority is over 28 days now. So I think that there's a huge opportunity. If you think about where business travel is going in the future, it seems completely intuitive to me that as companies offer more flexibility, more people are going to live around the world, but they're not all going to want to live remote. They're going to have to come back to visit. And so I think you're going to start to see longer stays. I think in addition to longer stays, you may also see business travelers traveling together. So let's say three different employees work in three different cities, and they have to come back to headquarters. They may not all get three different hotel rooms at Airbnb. They might get one house. They can split the cost. They can eat around the dinner -- the breakfast table in the morning. So I think the things that benefit Airbnb at business travel is group travel and longer-stay travel. Those two things, I think, are disproportionately beneficial to doing home, and these are general tailwind for business travel. Now I want to be clear. I mean people will, of course, travel for business again. I just think the bar to get on a plane to go to a meeting will be higher than before." }, { "speaker": "Operator", "text": "And your next question comes from James Lee with Mizuho." }, { "speaker": "James Lee", "text": "A couple of questions regarding the supply side. And can you guys talk about maybe supply and demand balance by region a little bit here? Where do you see surpluses? Where do you see deficits? And are you also looking to increase your supply by tapping into professional hosts. I know 90% are individual, or even hotel supply? And also secondly, what are the key frictions that you're seeing right now for your hosts signing up and that you're looking to address with these new tools you're about to introduce?" }, { "speaker": "Brian Chesky", "text": "Yes. Dave, do you want to take supply and demand? I can probably take the increase in pro hosts and key friction?" }, { "speaker": "David Stephenson", "text": "Sounds good, yes. I mean on supply and demand, really, what we're seeing, because cross-border and urban travel has not yet fully rebounded, the places that we're seeing surpluses or deficits in demand or a surplus of supply would be more urban markets. And where we can see some tightening of it, especially U.S. non-urban for the peak in the summer is clearly going to be the most constrained of our markets. So we're actively working against each of those areas. But on each side, on the supply side, making sure that we are doing our best to recruit hosts and bring on as more supply as possible for peak periods in constrained markets. And then we're also using -- go back to our marketing expenses before, where we use search engine marketing is in targeted approach, especially in markets where we have maybe surplus supply and not maybe enough demand, and so being kind of pointed at that. So we look at every individual market as different, and we will use different levers to try to manage that balance over time." }, { "speaker": "Brian Chesky", "text": "Yes. And James, why don't I jump in and say this. One of the things that Dave just said, I want to put out underline under, highlights. Before the pandemic, most people came to Airbnb and they knew exactly where they were going and they knew when they were going. So we asked the question in the search bar, \"Where are you going?\" And we asked, \"When are you going?\" You put in date. The holy grail for matching supply and demand is to be able to also control where you can point demand. But we can't point demand to where we have supply if guests aren't flexible, if they're predisposed to where they want to travel. Now that guests are telling us that they're much more flexible about where they travel, we can point demand to where we have supply. This is probably one of the most important things we have. And it explains why when 90 million searches were used with the Flexible Dates feature, conversion rates went up. So that is just another thing I want to underline. Now regarding your next two questions, let's talk about pro hosts and hotels. Obviously, Airbnb created a new category in travel because we created tools that allowed everyday people and individuals become hosts. And yes, out of 4 million hosts, 3.5 million are individuals. That being said, we welcome all hospitality providers on Airbnb. And we have hundreds of thousands of professional hosts and professional hospitality providers. The way we think about it is when a guest comes to Airbnb, they're looking for a place to stay. And so we don't want them to leave without having found something they want. Typically, they come to look for individual hosts, that's what we're known for. But we want to make sure that we have professional hosts and hotels to serve those customers and to fill in our network gaps. So we're continuing to develop new tools and services over the coming years to continue to welcome these providers onto our platform. And I think they're going to obviously benefit from all the demand that we have. Now as far as key friction to becoming a host, one of the things we've seen, probably the main learning we've had is as we make it easier, more people do it. That's the name of the game, make it easier and more people do it. Before Airbnb, it was really hard to rent your home on the Internet. People did it, which is hard, and we made it easier. And on May 24, we're going to show a number of tools, a number of offerings and innovations that we have that are going to make hosting even easier. We're reducing the number of steps to become hosts. We're making it even easier by providing more tools and support. And we're going to offer some better tools and services for hosts once they become host. And so I think all these things will reduce the number of frictions as well." }, { "speaker": "James Lee", "text": "If I can ask a follow-up question also on the hosts side, too, are you seeing increased competition for acquiring hosts and maybe potentially pressure on your take rate?" }, { "speaker": "Brian Chesky", "text": "Dave, do you want to take this one?" }, { "speaker": "David Stephenson", "text": "Sure. Right now what we're seeing is -- remember, it comes back to what our hosts are. We have 4 million hosts around the world. The vast majority of those are individual -- so 3.5 million of those are individual hosts. And I think that's very different than what we see kind of competitive platforms are doing. And so what we end up seeing with the 4 million hosts that we have is -- give me the last part of the question, sorry, I lost my train of thought." }, { "speaker": "James Lee", "text": "Yes, increased competition for hosts and maybe potentially pressure on take rates?" }, { "speaker": "David Stephenson", "text": "Yes, no, pressure on the take rates. Right now, we're not seeing the pressure in take rates. We think that we have a really great value to the take rates that we give. We charge rates that give good value to both our guests and our hosts. And what we see on the take rate side is making sure that when we give value back to our hosts, that then we were able to take kind of appropriate revenue from that. So we're not really seeing any pressure at that driving for increasing or decreasing the number of hosts that we have on Airbnb." }, { "speaker": "Operator", "text": "[Operator Instructions] And your next question comes from Brian Nowak with Morgan Stanley." }, { "speaker": "Brian Nowak", "text": "I have two. The first one on the -- is on the 2020 new users that you added. It was a great year to sort of add a lot of new users to the platform. I'd be curious to hear about what you're seeing from those new users from a retention or booking perspective now as you're into 2021, and how that compares to what you've seen in the user cohorts in the past? Then the second one, to go a little bit more into the monetization of the take rate, can you just talk to us about any of the tests or experiments you've been doing around insurance or ancillary service sales or tiered take rates or sponsored listings, and ways we can think about that take rate potentially adjusting over time for more services to your hosts or guests?" }, { "speaker": "Brian Chesky", "text": "Yes. thank you very much, Brian. Dave, why don't I take the second question on monetization and take rates? Why don't you take the question on new users, what are we seeing for new users from retention and booking?" }, { "speaker": "David Stephenson", "text": "Yes. So what we're seeing for new users, it's early, but all of the early data for the new users that we've acquired here during 2020 is that the retention is very consistent with what we had for users in 2019 and before. So I think one of the benefits that we've seen in 2020 is just we've actually did lower to barrier for entry for new guests to kind of come to Airbnb and try us out for the first time. You don't have to hop on a plane. You don't have to go across the border. As we said, over 50% of our nights historically have been cross-border. You don't have to do that to try Airbnb. Now you can kind of drive just a couple of hours down the road and go check us out. And what we're seeing from the early results is that the retention rates are very consistent with what we've seen in the past." }, { "speaker": "Brian Chesky", "text": "And then Brian, to your question about monetization and take rate, we absolutely see lots of opportunities to increase our monetization and take rate for both guests and hosts. For example, one of the things we've said is that many of these tools and services we've offered in the last five years, they're incremental, we haven't charged for. For example, unlike our competitors, we offer free protection of $1 million against theft, property damage and personal liability in countries all over the world. And as we added these services, we do not charge incrementally for these. Our general principle is we always want to give away more value than we're taking, but we do think there's opportunities for us to do -- to offer some more tools and services to increase take rate. Now that being said, focus is critical. And we are focused on the most perishable opportunity. The most perishable opportunity right now is to capture as much travel demand as possible and be ready before anyone else is for this travel rebound. So we are making sure that we have enough hosts for this travel season. We simplified the guests experience, and we're providing world-class support. So that's where we're focused on this year. But make no mistake, we have many opportunities in the years ahead." }, { "speaker": "Operator", "text": "Our next question comes from Mark Mahaney with ISI." }, { "speaker": "Mark Mahaney", "text": "Okay, I'll stick with one question. Just on the supply side, will you address the issue of whether increasing local restrictions is a factor that's limiting your supply in -- especially in some of the larger cities? And I realize that travel hasn't really recovered there fully. But just address the issue of whether how much of a constraint new local regulations on rentals, et cetera, is on your ability to expand supply?" }, { "speaker": "Brian Chesky", "text": "Yes, I can take this at a high level. Dave, again, feel free to jump in as well. Mark, thanks for the question. What we saw with COVID was actually a positive reset in our relationship with cities all over the world. Now first, let me just start by saying we now collect/remit taxes in 30,000 jurisdictions. We collected and remitted to date $2.6 billion of transient occupancy taxes. What happened with COVID is two things: Number one, travel went from being concentrated in very few top cities to distributing everywhere, thousand cities around the world. Though we do see an urban recovery, we don't see that trend completely reversing. Because I think in a sense, you could say the genie's out of the bottle, a number of people have realized that there's all these really cool small towns, rural communities and small cities, many of which don't even have hotels. And so they're really important destinations. The other thing that we've noticed, though, is that a lot of cities have been hit really hard by the devastating economic effects of the pandemic. So you'll see major cities have had major tourism shortfalls, major tax shortfalls. And because of this, what we're actually seen is a lot of cities reaching out to us. In fact, we struck over 100 partnerships over the course of just the pandemic with destination marketing organizations, which as you know are basically tourism bureaus and tourism arms. From Scotland to Portland, we've been doing partnerships with cities all over the world. And to scale our partnerships to thousands of cities, we launched last year the City Portal as well. So this is what we're seeing. I don't know, Dave, if you want to add anything to that." }, { "speaker": "David Stephenson", "text": "I think that's key. We also added this new capability last year of the City Portal, which is another tool to enable cities to understand what goes on with our business in each of their communities. And we think that's been another positive tool for cities to feel like they can work with Airbnb to help their economies rebound." }, { "speaker": "Operator", "text": "And your next question comes from Jed Kelly with Oppenheimer." }, { "speaker": "Jed Kelly", "text": "I guess, Brian, going back to business travel, I guess it's kind of like a two-part question. I guess number one would be, where are you in terms of talking to companies, talking to businesses sort of making the ability to work from anywhere through Airbnb and benefit? And then as, like, a follow-up, you mentioned work from anywhere. Your company is, of course, based in San Francisco. So how do you see basically potentially using the work-from-anywhere trend to sort of save costs to make your business more efficient if you can have more employees working outside the Bay Area?" }, { "speaker": "Brian Chesky", "text": "Yes, these are two really good questions. Let me start with the first one. So as you point out and as I said, one of the kind of -- one of the trends that has been pretty remarkable over the last year is as more people have more flexibility, they can work from home. And that means they can work from any home, often on Airbnb. And so one of the things we're doing is we're continually trying to make it even easier for guests to be able to search anywhere around the world. And on May 24, we're going to show you some new tools and new ways to make the experience of searching on Airbnb, especially allowing you to search with more flexibility, even easier. Again, the type of flexibility we're looking at is people staying longer, booking any time and be able to go anywhere, not just to the same top destination. So we are going to continue to look at innovation in this area. And I think the other thing I'll just point out is, again, in 2019, only 14% of our nights booked were longer than 28 days. That's now 24%. And so we think this is a huge growth area for us. We think basically, 1/4 of our business is not even travel anymore. There's a lot of innovation opportunities for us. We're a design-led company at our heart. And I think they're going to offer a lot of really interesting opportunities. Now specific to our San Francisco employee base, let me talk a little bit about what I told our employees a couple of weeks ago. I told them there's two guiding principles. Number one, we want to model the live anywhere lifestyle. So by modeling the live-anywhere lifestyle, we're going to allow more flexibility for our employees. So I told our employees, they don't have to come back to the office until next September. We're going to allow a lot of flexibility. And even when we do ask people to come back, they're going to have a lot more flexibly before. People aren't going to be expected to come back to the office five days week every week. We think that is really not how most workplaces in the 21st century are going to operate. That being said, as an incredibly light company, we also do think that in-person collaboration is important. So we want to find some balance between modeling the live-anywhere lifestyle and allowing for in-person creative collaboration. And that's what we're designing. We want to get it right. We don't want to rush into this. So that's what we're going to be working on over the course of next year." }, { "speaker": "Operator", "text": "And your next question comes from Justin Patterson with KeyBanc." }, { "speaker": "Justin Patterson", "text": "Brian, just expanding on the prior question, it does sound like this platform experience update is really designed around inspiration and discovery. Without spoiling your announcement on the 24th, I'm curious about how you think about the opportunity to broaden the funnel on Airbnb, provide inspiration for travelers as they think about places they can stay and things to do such that Airbnb really starts to drive natural inspiration for the much broader spectrum of the customer base than before." }, { "speaker": "Brian Chesky", "text": "Thank you, Justin. It was a little bit hard for me to hear you, but I think the question was what are we doing to drive more inspiration and discovery on Airbnb, inspiring where you can go and what you can do, correct? I just want to make sure I -- I couldn't the end of that last question. Okay. I'll answer that. So yes, so inspiration is something that we're really focused on. Actually if you go to airbnb.com right now, if you type Airbnb.com, you're going to notice on our top of our homepage, there's a big piece of art and it says, \"the greatest outdoors.\" So we just launched wish lists that are curated by Airbnb. And if you click on Get Inspired, you're going to see a number of wish lists. So this is just the beginning of a number of things we're doing to try to inspire more travel. On the home page below that, you're going to see that we're now merchandising places you can go nearby. So between wish lists, nearby travel and then some of the updates we have on May 24, I think that's going to continue to drive more and more inspiration. On May 24, though, we are going to showcase some new exciting features that I think are going to inspire people around flexibility. Because one of the things we've seen is if you are more flexible about where you travel and when you travel, then what that kind of means for some people is the home becomes the destination, suddenly where you go is less important than the type of home you say in. And so this is how we're thinking about it, and hopefully, if you can tune in, we can show you some of the things we're working on." }, { "speaker": "Operator", "text": "And your next question comes from Lloyd Walmsley with Deutsche Bank." }, { "speaker": "Lloyd Walmsley", "text": "Two questions, if I can. First, can you talk about how you think about occupancy rates or kind of room nights per active listing over the medium term? It seems like it's been pretty stable over the past few years. But wondering if this notion of, like, blending of travel and living is kind of increasing shoulder season demand in a way where you can grow room nights in excess of listings, or getting more out of your existing listings? And then the second one, the average booking value per night looked really high in 1Q. If you peel back the onion and look within the same region, the same-property type, are you seeing pricing up? Or is most of this just mix shift? And how do you think about this as maybe as travel normalizes a bit? How would that impact ADRs going forward?" }, { "speaker": "Brian Chesky", "text": "Great, Lloyd. So I'll take the first question on occupancy rate. Dave, you can take the second one. The answer to your question is yes. Occupancy rates, we think, average on global level will go up as we get better at matching supply and demand. The basic name of the game is in classic travel a lot of people try to go to the same place on the same date. That's why kind of when you show up to Paris in the summer, and there's a whole bunch of people in line at a landmark is because they're going to the same place at the same time. So to increase occupancy rates, there's one or two things we can do. We can add more hosts to the same places that everyone is going to, or we can point demand to other places. And as length of stay increases, as people shift from going to 20 or 30 cities to thousands of communities, and as people become more flexible when they travel, we can then show them deals. We can show them, for example, I know you want to go to -- we'll make up the place, France, in July. But if you went in September, you could get -- you could save a lot of money because there's fewer people there. Or we can point you instead of in Paris, we can point you to Brittany or some other community. So there's a lot of opportunities for us, I think, to point demand to where we have available supply, which will allow us to steadily increase occupancy. What it means is we don't need to increase supply linearly with increasing revenue. We can get more productivity out of the supply that we have. And Dave, I don't know if you want to take ADR." }, { "speaker": "David Stephenson", "text": "Yes. And our ADRs in Q1 were up 35% year-over-year. That was after being up 13% year-over-year in Q4. The significant majority driver of the ADR increase is driven by mix. The rebound has been earlier in the U.S., which has a higher average daily rate. It's been in non-urban whole home and even larger homes, and each one of those is just, on average, a higher ADR. So the majority of the ADR that we're seeing is from mix. When you actually look at some highly constrained markets in a highly constrained time period, we're seeing some pricing pressure within there that will drive ADR rates up. So the vast majority of it is just driven by mix." }, { "speaker": "Brian Chesky", "text": "And the other thing I want to say, again, is -- yes, another thing I'll just say is as demand increases on Airbnb, that can also correspondingly increase supply. So again, one of the things we published in our S-1 was 23% of our new available hosts in 2019 were guests. That increased to 28% in our new available hosts that started out as guests in Airbnb in 2020. So we also think there's a really interesting flywheel where we can point demand where we have supply. We have a muscle to continue to add hosts, and but we can also convert guests to hosts. And as that number keeps increasing, that's another big lever for us." }, { "speaker": "Operator", "text": "And your next question comes from Brent Thill with Jefferies." }, { "speaker": "Brent Thill", "text": "Dave, I don't know any color you can add around the final unlock that comes over the next week of close to 500 million shares. I know not all of those are eligible. But is there any way you could just frame that? There's been some fear of this unlock, and what it means. Can you just -- any color around that you could give would be helpful." }, { "speaker": "Brian Chesky", "text": "Yes. Dave, you want to take that?" }, { "speaker": "David Stephenson", "text": "Sure. So clearly, our unlock comes on Monday. And the key thing that we're doing to try to make sure that we're ready for that unlock, is to do what we've been doing, which is deliver outstanding results, deliver outsized kind of gross booking value revenue and driving for profitability. So there's not a lot more color I can give you on the unlock on Monday beyond that." }, { "speaker": "Operator", "text": "And your next question comes from Brian Fitzgerald with Wells Fargo." }, { "speaker": "Brian Fitzgerald", "text": "We wanted to ask if you could tell us what you're seeing with respect to experiences, supply dynamics there, online versus offline, linkages to travel conversion rates there, anything with experiences?" }, { "speaker": "Brian Chesky", "text": "Yes. Thank you very much for the question. So here's what I'd say about experiences. When we came back in the beginning of 2020, I really thought experiences would be a breakout year last year. It turns out a pandemic was a very difficult year for experiences. We had to put products on hold. We remain very, very bullish about experiences over the long term. One of the reasons we remain bullish is because the percent of guests leaving a five-start review with experiences is higher and remains higher than percent of guests who leave a five-star review for homes. But the pandemic was a difficult time for experiences. So we launched online experiences, which is the way to have an experience without leaving your living room. And I am thinking that in the coming years, experiences will be successful because there's fewer alternatives. There's fewer mass tour operators, bars, lounges and restaurants that are going to be operating at full capacity. So we do think there's a window, and we're playing the long game on this one." }, { "speaker": "Operator", "text": "[Operator Instructions] And your next question comes from Stephen Ju with Credit Suisse." }, { "speaker": "Stephen Ju", "text": "Okay. So Brian, I asked the same question to one of your competitors last week. So I'd be interested in your opinion what is probably more of a macro consideration. So the consumer savings rate, at least in the United States, is probably at the highest level it's been since World War II. It will take some time for all of this to widen down to, I guess, normalized levels, which brings up the scenario of consumer spend probably accelerating for the next several years. And hopefully, one of the likely destinations for all of these dollars is going to be in travel. So I know it's early days of the recovery, but what are you seeing in terms of, I guess, greater willingness to maybe, say, upgrade to the more expensive Airbnb, or just in general stepping up in the frequency as we recover here?" }, { "speaker": "Brian Chesky", "text": "Very good question, Stephen. Let me tell you what we're seeing so far. One of the things is we did travel surveys in the beginning of the year. And we surveyed people in the United States. We also surveyed people around the world. And in our surveys, what we found is that the out-of-home activity people missed the most, more than restaurants, more than bars, more than sporting events, more than concerts, was travel. The kind of travel people missed was not business travel. It was not mass travel, going to crowded destinations. It was really just spending time with people that they've not been able to see during the pandemic. I think that we generally just yearn for what was taken away from us. And travel and spending time with people was something that was taken away from us. Now with regard to your question about are we seeing people upgrading? We have seen, as we mentioned, a material increase in the average daily rate in the United States. And this does give us a sense of consumer willingness to spend. Maybe another way of saying it is maybe before the pandemic, people were booking studio apartments in cities. Now what we're seeing is a pretty big expansion of people booking entire homes, typically even more bedrooms, the number of guests per reservation has increased considerably. And so correspondingly, people are spending more money. I think that trend, of course, will get normalized over some period of time when other geographies recover and urban recovers. But I do think that we are going to see sustained confidence, there's no question." }, { "speaker": "Operator", "text": "And your next question comes from Deepak Mathivanan with Wolfe Research." }, { "speaker": "Deepak Mathivanan", "text": "Just a couple of quick ones. So first, can you talk about the implications of booking window trends on second quarter and second half? There's a lot of summer bookings happening right now already in markets like Europe and even in North America. Is that earlier than usual? Or does that mean that the recovery is being pulled forward by some capacity? Just wondering if you can now provide some insights on that, and then second question, not sure if this was asked already. How are you thinking about the ROI on the targeted digital marketing programs in the hosts? Are these on performance channels? Any color that you can add there would be great." }, { "speaker": "Brian Chesky", "text": "Yes. Dave, why don't you take these two questions." }, { "speaker": "David Stephenson", "text": "Sure. So regarding the booking window, we're seeing the booking window, obviously, in 2020 shrank dramatically, right? People were hesitant to travel. They only started booking when they had high confidence that they were going to travel. What we've seen here early in Q1 of '21 is the booking windows have expanded. And in March, we actually saw booking windows consistent with those from March of 2019. And so the windows are expanding. I think that what you're seeing is still even more confidence in the U.S. So that the willingness of travel and the booking window in the U.S. has expanded further than it has in Europe. But we're starting to see some greater acceleration of our European business. We're seeing the European nights increasing the rate of year-over-year growth every month of the year since the beginning of the year, including through April and May. And we're seeing that as things like the lockdowns in France are removed. And after the U.K. Prime Minister announced plans to exit lockdown in February, we started seeing more acceleration in Europe. So the booking window trends are positive and give us encouragement for what we're going to see in the back half of the year. But we'll just have to see what the lockdowns and other kind of travel restrictions look like for Europe for the back half. And then regarding the ROI and targeted digital marketing for hosts, this is one of the levers that we have. When we do target digital marketing for hosts, it would be in specific areas that we know are more supply-constrained and where we want to focus on it. We established a return on that investment for value of the hosts that we acquire through that channel. And it is one channel, but it's not the only one, and it's not the primary one. Again, the most important thing is to kind of step back and educate people about the benefits of hosting, and then make it easier for them to host once they start considering it." }, { "speaker": "Operator", "text": "And your next question comes from Kevin Kopelman with Cowen." }, { "speaker": "Kevin Kopelman", "text": "A quick one, could you give us an update on cancellation rate trends this year compared to 2019 with I think the average listing being a little bit more flexible than it was in the past?" }, { "speaker": "Brian Chesky", "text": "You're welcome. Dave, do you want to take this one for Kevin?" }, { "speaker": "David Stephenson", "text": "Sure. So the cancellation rates obviously were substantially elevated in 2020 versus 2019. They've begun to moderate so that they are sequentially below where they were at in 2020, but they're still moderately elevated versus the 2019 rate. So we're seeing a bit more returns than normal but it's not quite to historical level rates." }, { "speaker": "Operator", "text": "And your next question comes from Tom White with D.A. Davidson." }, { "speaker": "Tom White", "text": "Just one from me to follow up on ADRs and specifically your expectations for the second half. I know there's some color in the letter, but can you maybe unpack your thoughts on kind of all the different moving pieces there between the recovery and some of the kind of structurally lower ADR markets, recovery in urban and cross-border. Just curious to hear your thoughts on how it all kind of nets out, you think, in the back half?" }, { "speaker": "Brian Chesky", "text": "Thanks, Tom. Dave, I'll give you this one." }, { "speaker": "David Stephenson", "text": "Sure. Yes, I think that the best thing to do is actually kind of look at some of the guidance figures that we gave in the earnings call itself where we're basically expecting -- because it's harder to have visibility in the back half of the year. We're highly confident in the rebound that it's going to be coming. All the early indications are that it's there. But it's hard to kind of precisely pin down what Q3 and Q4 are going to do. So what we did do is give some perspective on what we expect out of Q2. And that is that our gross booking value in Q2 of this year will be higher than in Q2 of 2019, and that our revenue rate in Q2 will be similar to that of 2019, and that our EBITDA will be -- our adjusted EBITDA will be breakeven to slightly positive in Q2 of this year. So I think those are kind of the key things. Because as you said, as rebound comes back, the pace at which it comes back in the geographies that come back will affect the mix on those ADRs. And we do expect the ADRs to moderate, but it's hard to perfectly pinpoint down the specific of that mix." }, { "speaker": "Operator", "text": "I will now turn the call back over to the management team for closing remarks." }, { "speaker": "Brian Chesky", "text": "All right. Well, thank you, everyone, for joining us today. I just want to recap. We are really proud of our strong Q1 results. We believe they're a testament to our focus and the adaptability of our model. And we've shown over the past year that as the world changes, Airbnb can adapt. I think we're now well positioned for the travel rebound ahead. As travel returns, Airbnb will be ready, and our hosts will be ready as well. So I hope you'll join us on May 24, where we'll share insights on how travel is fundamentally changing and announce the most comprehensive update to Airbnb service in 12 years. Thank you, and we'll see you then." }, { "speaker": "Operator", "text": "This concludes today's conference call. You may now disconnect." } ]	Airbnb, Inc.	115,705,393
ABNB	4	2,022	2023-02-14 16:30:00	Operator: Good afternoon, and thank you for joining Airbnb's earnings conference call. for the fourth quarter of 2022. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Ellie Mertz, VP of Finance. Please go ahead. Ellie Mertz: Thank you. Good afternoon, and welcome to Airbnb's Fourth Quarter of 2022 Earnings Call. Thank you for joining us today. On the call today, we have Arrium's Co-Founder and CEO, Brian Chesky, and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our fourth quarter of 2022. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also during this call, we will discuss some non-GAAP financial measures. We provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results. And with that, I will pass the call to Brian. Brian Chesky: All right. Well, thank you very much, Elie, and good afternoon, everyone. Thanks for joining. Before I share our results, I want to tell a quick personal story. As you may have seen, I've started hosting again. Last November, I listed my guest room on Airbnb. My listing is called Beyond the Airbed. And the run guests is a histologically themed around the early years of Airbnb. There's memorabilia in the walls. From the receipt for the original airbed to old photos and me hacking boxes of Obama Os and Cat McCain breakfast cereal. When guests arrive, I have welcome basket waiting for them. And the first night we make dinner together, followed by desert. We bake [indiscernible] Chip, chocolate chip cookies from my cherished family recipe that I got off Google. The next day, we tour the airbnb office with my golden retriever, Seltenova, and I tell the story of building Airbnb. Now why am I doing this? Well, because I love hosting. Joe and I were the first host on Airbnb 15 years ago. And having guests staying at your home with you is the original idea behind Airbnb. It's been an amazing way to connect with people. But I also believe that companies that makes the best products make products for themselves. And Airbnb will only be as successful as our host. And the best way to understand our host is to be one. Since I've resumed hosting, I've got new first-hand insights that have informed some of the new products we'll be releasing, including some exciting updates this May as part of our 2023 summer release. Now before we get into our quarterly results, I want to recap the full year of 2022. While we're 3 years out from the start of pandemic, we are still living with this impact. We've also seen high inflation, recessionary fears and the war in Ukraine, all of which we're still dealing with in 2023. And yet, through all this, people continue to travel, and 2022 was a record year for Airbnb. Revenue of $8.4 billion grew 40% year-over-year. And when you exclude foreign exchange, our revenue increased by 46% year-over-year. Net income was $1.9 billion, which marks 2022 as our first profitable year -- full year on a GAAP basis. And finally, free cash flow was $3.4 billion. And this $3.4 billion of free cash flow represented a free cash flow margin of over 40%. And because of our strong balance sheet, we are able to begin buying back stock last year, and we repurchased $1.5 billion in shares in just the past 5 months. Now during the height of the pandemic, we made some very difficult choices to reduce our spending making us a leaner and more focused company, and we've kept this discipline ever since. In over each of the past 2 years, we've only modestly increased our headcount. In fact, compared to 2019, our headcount is actually down 5%, while our revenue is up 75%. In every single quarter in 2022 outperformed past comparable periods. In Q4, net income was $319 million. Now this is $264 million higher than a year ago. Adjusted EBITDA was $506 million, which is 52% higher than Q4 of 2021. And we generated $455 million of free cash flow, and this is 20% higher than Q4 2021. During the quarter, we saw a number of positive business trends. First, guest demand at Airbnb remains strong. Nights and experiences booked increased 20% in Q4. We had our highest number of active bookers ever in Q4, demonstrating guest excitement of travel on Airbnb despite evolving economic uncertainties. During the quarter, we also continued to see guest booking trips further advance supporting a strong backlog for Q1. Second, guests are increasingly returning to cities and crossing border. And this is the bread-and-butter before the pandemic. Now both segments continue to accelerate while non-urban and domestic travel remains strong. Cross-border growth nights booked increased 49% compared to last year. High density urban nights grew 22%. And globally, we saw cross-border travel to all regions increased despite continued foreign currency volatility. Third, the guests continue to book longer stays on Airbnb. During Q4, long-term stays remained stable from a year ago at 21% of total gross nights booked in Airbnb. And finally, we saw tremendous growth in our supply on Airbnb. We ended 2022 with 6.6 million active listings. Now excluding all the Mainland China listings we removed in July, we grew supply by 900,000 listings, or 16% compared to a year ago, representing an acceleration in growth in listings relative to Q3. Now why are listings accelerating in growth? We believe there's probably 2 factors that drove this growth. First, demand to drive supply. Post or attracted the supplemental income that they can earn an Airbnb, which is often critical during tough times. Second, our product improvements are working. Over the past 2 years, we've made it more attractive and easier to become a host. Just this past November, we introduced Airbnb set up where prospective host can connect with Super Host for free one-to-one guidance all the way through their first reservation. The number of new active hosts recruited with the help of our super House increased by more than 20% compared to prelaunch. But we are not stopping there. In 2023, we're focused on 3 strategic priorities. First, we want to make posting mainstream. If you're listening to this call, you've likely travel on Airbnb or you know someone who have. We want hosting on Airbnb to be just as popular and to achieve this, we'll continue to raise awareness around hosting, make it easier to get started and provide even better tools for hosts. Second, we are perfecting our core service. We want people who love our service. And that means obsessing over every single detail, and we've listened to our hosting guests and based on their feedback, we're making a large number of upgrades to our service this year, including improving customer service, making it easier to find the right home and delivering greater value and much, much more. And you'll see more of this in the forthcoming in the coming months, especially our release. And finally, third, we're expanding beyond the core. We have some pretty big ideas for where to take Airbnb next. And this year, we're going to build the foundation for future products and services that will provide incremental growth for many years to come. So with that, Dave and I look forward to answering your questions. Operator: [Operator Instructions]. Your first question today comes from the line of Jed Kelly with Oppenheimer. Jed Kelly: Great. Great quarter and great execution. Just 2, if I may. Just one, can you talk about how your urban supply is trending and sort of some of the initiatives you're doing around apartments? And then, Brian, you did mention headcount. In Silicon Valley, there's obviously a lot of layoffs. You're one of the companies that are growing, having expanding margins. So can you talk about like your ability to attract top tech talent to execute on some of the initiatives you just talked about? Brian Chesky: Yes, absolutely. Yes. So let's start with the first one, urban supply growth. Let me kind of first start, Jed, by just talking a little bit more about how we think about supply. The great thing about our supply is that the vast majority of hosts that come to Airbnb come organically, and that's because of our global network. In fact, the #1 source of host are prior guests. And in Q4, 36% of our hosts were prior guests. And one of the other things we see is the fastest-growing market where we have supply is also the fastest-growing market we have demand. And I think what's happening is a lot of our hosts are regular people. And as they get more bookings, they tend to tell their friends. And so this network is something that has a kind of self-growing effect to it. Now in addition to that, we've been doing a number of initiatives. Number one, we've been focused to make hosting easier with Airbnb set up. And between that and a new campaign we've been running Jed called Airbnb, which is basically this idea that if you have a space, you have an Airbnb. Between these 2 initiatives, we've seen twice the amount of traffic to our host landing page, the landing page to learn about hosting. And then we also have made big improvements to making hosting easier. Now in addition, you might have seen that last November, we announced a new initiative called Airbnb from the apartment. Airbnb from the apartments, I think can unlock a large amount of inventory in multifamily homes in urban areas, and we worked with Greystar and a number of the other largest real estate developers in the United States. We have 175 buildings in Phoenix, in Jacksonville, in Houston and other cities. And the response from landlords have been very, very positive. So we are seeing a lot of traction on urban supply. I don't know, Dave, if you want to add anything before I talk of headcount. David Stephenson: You covered really well because this has been a historic strength of ours has been kind of the urban part of the business, it's taken longer for that to kind of recover. It's now well above 2019 rates, and it's actually part of the areas that accelerated our growth in Q4. So we're very happy with where we're at with Urban. And as Brian said, the early days of Airbnb friendly apartments has been very well adopted, and we're excited about the potential in that part of the business. Brian Chesky: And just on your question, Jed, on headcount, something was really interesting happened. So obviously, in 2020, we had to make some really difficult decisions -- and we became a much smaller and more focused company. And the obvious result of that is that we got more efficient and more profitable. But there was a less obvious result. What ended up happening is we have fewer people in meetings and people can move a lot faster. And we concentrate all of our very best people and put them on only a few problems. And I think that's been an explanation for why the company has grown really quickly. But also, I think it's made us a much more attractive place to work because it's much easier to get work done. And we have a general philosophy that we want the very best people in every field to come to Airbnb in every function. We're functionally organized. And I think that we're one of the few tech companies that isn't doing layoffs. We're not cutting. We're not freezing. We're actually stepping on the gas. But in our mind, stepping on the gas doesn't mean adding a huge amount of people, we're going to continue to stay really lean, but we're really focused on just really hiring in key positions. And we -- and again, I kind of use this analogy that we're not building like a giant Navy, it's more like the special forces that's what we're focused on. So we've had a lot of success with talent. And of course, we're getting a lot of inbound. David Stephenson: Add to a couple of things. One is our headcount is actually still 5% below where it was in 2019. We have a revenue is 75% higher. So we're nearly twice as big as we were previously with fewer people. And I'd say the other is our Live and Work Anywhere approach, our approach to being very intentional about how we gather in person. We believe that actually working together in person is very important, just need to do it in a very coordinated way. So actually having people being back in the office on random days of the week is not very effective, but being -- doing it in a very controlled and planful way is respectful of employees' time and is more efficient for the company, and our employees love it. And I think that's also enabling us to attract great talent. Operator: Your next question comes from the line of Richard Clarke with Sanford C. Bernstein. Richard Clarke: Two, if I may. The first one, just around, I guess, some of the changes that might come over the coming years with regard to the distribution landscape. One of your rivals is going to wrap their vacation rental business into a loyalty program, lots of talk around conversational AI and what that can do to the distribution landscape. So just any comments to whether Airbnb needs to do anything further on the distribution platform? And then second one, a little bit more preset, but obviously, it looks like Q4 was a very good quarter for take rate. Have you done anything in particular there on take rate to achieve that result? Brian Chesky: Dave, do you want to start with take rate and I'll end with distribution after. David Stephenson: Yes. With take rate, there's nothing in particular that we've done with take rate there. Absolutely, on a time-adjusted basis, the amount that we take from each night's day has been very stable. And so any variation in take rate of revenue over gross booking value is just variation quarter-to-quarter. So nothing on take rate. Brian Chesky: And maybe, Richard, just if -- can you just clarify what you mean by distribution landscape? Do you mean like the competitive environment or how? Richard Clarke: The competitive landscape, competitive environment with regard to distribution, whether you see any threat or increased threats from loyalty program wrapping around your competitors and maybe the conversational AI that's coming into various other search platforms at the moment. Brian Chesky: No. I mean, like, I think there's just 2 things. On the competitive front, I mean, we have a lot of competitors and a lot of different categories. But I think Airbnb kind of stands in a class of its own. I mean we're now in over used all over the world. We're not just the U.S. business. We're not just the European business. We're a global business. We're not just vacation rentals. We're also urban and [indiscernible] and off the grid. We're known as an affordable way to travel, but we also have a lots of offering and everything in between. So I think we have a pretty unique offering. And I think ultimately, 90% of our traffic comes direct. And that's because we have something that's unique. The vast majority of our homes don't exist anywhere else. And what we're really just focused on doing is we're obsessing over providing the very best experience for guests. And if we do that and we perfect that experience and then we do really great marketing, I think we'll do quite well. The only thing I'll say, Richard, on the distribution front is we have some unique assets that most other travel brands don't have. Let's take PR. There were 600,000 articles written about Airbnb last year. Airbnb is on social media a lot and a lot of people are talking about Airbnb on social media. So we generally have a slightly different approach to distribution, where we think just continually innovating on our product is great. The best loyalty program is building a product people love so much they want to come back and you have to pay them to come back. And we just take a full funnel approach to marketing around PR, and we think of our general advertising as really educating people on new products. Now as far as the changing landscape for technology, I'm actually very excited about the possibilities of AI. I think Airbnb will uniquely benefit from this. And the reason why it's because Airbnb is a fairly difficult product challenge, which is unlike hotels, we don't have SKUs. There's no representative inventory. Every single 1 of our 6.6 million listings are unique guests left more than 100 million reviews last year. And to parse through all these reviews is very glorious. And I think that AI is going to really benefit our long tail of data. And the fact that our search problem isn't really a search problem, so much as a matching problem. -- right? If there's like 50,000 homes in a city, what's the right 1 for you, that's less of a search problem than a matching problem. And I think that AI is going to be a really good opportunity for us. And just stay tuned for some developments there. Operator: Your next question comes from the line of Ron Josey with Citi. Ronald Josey: Brian, you mentioned investments for 2023 and extending beyond the core, that's been a key question that we consistently get in terms of what's next. Any insights you can provide there would be helpful, maybe just is it building out the tech infrastructure? Or is it more sort of newer products that are coming down the pike? And then I believe in the letter, we talked about 1.4 billion cumulative guest arrivals. And so I was wondering if you can talk more about the brand, the awareness overall and just that user mix in terms of returning users versus newer users. Brian Chesky: Yes. Awesome. Well, let me start with investments for 2023. So the good news is that -- though we're investing this year and some new products and services to expand beyond the core, I don't think you're going to see any material changes in the P&L. We kind of think like I started my in my 2 friends. We didn't have very many resources back then. And the great thing about Airbus business is we're essentially a global network. So I think that we can incubate new opportunities, products and services for a relatively low amount of investment. And as far as what you're going to see, I'd say there's going to be innovations on the guest and host side. On the host side, our general principle is that we want to always deliver more value for host number charging. And we have a 3% take rate on the host side, and we've been giving away a lot of products for free, like AirCover. And we launched aircover for host 2 Novembers ago. NPS for claims, reimbursement claims has gone up 70 points, so it's been pretty amazing. And our general view on host are we're going to primarily give away most of our product service and innovation to them. But we do think there's some opportunities for eco services that Host might pay for. On the guest side, we started very modestly. You might have seen that we launched travel insurance, which is now in 8 countries, and that's been really, really successful. But I think there's many more opportunities around the like services. Obviously, Airbnb experiences is something that we're beginning to really ramp up. And I think you're going to see a lot more traction in that product in the coming years. And I think there's going to be just a lot more around creating a step change in new service level and matching people to the right homes and experiences for them. So that's what I would say. Services on the host side, services on the guest side, there's going to be a lot of opportunities to revisit some of the end-to-end travel opportunities that we have, and you'll stay tuned for some cool innovation. Oh, I'm sorry, brand awareness, sorry. Yes, brand awareness. On the brand awareness, again, we generally try to -- as I said the last part, we generally focus on a full funnel approach. 90% of our traffic is now direct. It's sustained that since we went public, it's always been about 90%. We have extremely high efficiency on things like performance marketing. And generally, the way we approach our brand is that Airbnb is a pretty ubiquitous brand. So what we really want to do now is continue to invest in awareness around our different innovations. And there are going to be 2 things. Number one, we're going to be focused on educating people on our new services and offerings. So for example, there will be categories we've been running campaigns around that. And people have viewed 500 million -- people viewed listings, 500 million times for every categories. We're also continuing to raise awareness around hosting. We're going to grow as fast as we have host. Now as far as how much traffic is coming from new returning, I don't know, Dave, do you want to share anything about that on where branded? David Stephenson: Yes. I mean the majority of our bookings come from past guests, and it's actually been the strong guest retention that we've had over years since the beginning of Airbnb, that's been a powerful driver of our growth. But I think what's also interesting is that we've introduced Airbnb to millions of new users since COVID. And the performance of those new users, the booking frequency of those new users from '21 that we saw into '22 has been very strong. And so really pleased with the new users that we've been able to track that look very, very similar to the historic type of users that we've had on Airbnb. Operator: Your next question comes from the line of Mark Mahaney with Evercore. Mark Mahaney: Okay. Two questions, please. I know you mentioned that guess to host ratio, I think you said something like 36% or something. I imagine you've got cohort data that shows that the percentage of guests that have converted into being host or and additionally, our host is actually higher, maybe much higher. Could you just qualify that or quantify that at all? I'm sure that's a pipeline, but just how robust is that pipeline when you look at the cohort data? And then just very briefly on China. Just on the China outbound, can you just remind us how material that was to your business back when back in 2019, so we can get a sense of -- I know you've said that the China outbound market will gradually reopen -- but as it fully reopens, how much of an opportunity that is for you? Brian Chesky: Yes. I mean I'll start, Mark. Yes. We've seen that third in Q4 2022, 36% of new available hosts who started out as guest in Airbnb. This is more than prior year. So this has been going up actually like year-over-year. So that number is going up. And it makes sense as Airbnb becomes more ubiquitous, but also it makes sense because a lot of people, they'll connect with a host, and they realize, wow, I can do this too. And the vast majority of our new listings are by individuals, not property managers. So there's this kind of interesting network effect where guest becomes host and then host becomes guest. As far as China, we expect the recovery to be pretty gradual in China. We think the big prize in China is the outbound business. We think that there are going to be hundreds of millions of people that want to leave China to travel the world, and we think is going to be the best way for essentially Gen Z people to travel. I think they really want an authentic experience when they're traveling around the world. That being said, we are expecting a pretty gradual recovery in China. David Stephenson: And China kind of pre-COVID was in the kind of low single-digit percentage of our gross booking value. So it gives you some perspective of our opportunity. I think we think very -- could be large over an extended period of time, but it will take a while for it to be larger. Brian Chesky: And Mark, And just 1 other thing, yes, you are right that the cohorts are trending up. So for example, I think in Q4 2021, 33% of guests became host. In 2020, 28%. In 2019, 23%. So it is picking up. Operator: Your next question comes from the line of Brian Nowak with Morgan Stanley. Brian Nowak: I have two. Just the first one, and I'll talk about guests and hosts. Could you just sort of help us understand a little bit how fast did your new guests grow in 2022? And how are you thinking about sort of new guest growth in '23 sort of talk about EBITDA margins? Or what's your first cut and how fast guests could grow this year? And then the second one, just any update on metrics or quantifying adoption around unflexible or any of the other tools that you've rolled out to sort of better improve the load balancing between supply and demand. Brian Chesky: Great. Yes, Dave, if you want to. David Stephenson: Yes. No, sure. On the new guests, we don't disclose the exact number of the new guest growth. Like I said, I think the thing that I'm really pleased is that we've introduced Airbnb to millions of new guests since COVID and that they're performing similarly, not even stronger than kind of historic guests in terms of their rebooking rates. So I feel really good about the position we have for new guests. A big piece of it is some of the brand marketing that Brian kind of mentioned earlier, is just making sure we have a lot of awareness of Airbnb, but just to also make sure that we're getting strong consideration of Airbnb as a true option for them. And again, in this last several years, we've been able to introduce Airbnb to millions of new people that might not have thought about trying us before. So I think that's been really helpful. And I don't have a lot to say on flexible except that we have a very strong adoption of the feature that -- and we think that it's a great way for us to distribute demand to where we have supplied. And the flexibility features are a key benefit for Airbnb because we have this more difficult problem, as Brian mentioned earlier, of matching and trying to match the right guest to the right host and the flexible gives us the ability to do a better match. Brian Chesky: Yes. And one of the things I'd just say, Brian, is that we've seen a permanent like shift in some of the travel booking behaviors on Airbnb since before the pandemic. And a lot of those changes have endured. And probably one of the most pronounced ones is just is incremental flexibility for people. We noticed more people are searching with more locations and using more flexibility features. And even before we built these features, we were seeing people entering a lot of different gate variations when they were searching. And so we were just really responding to where things are going. And I think where this goes down the road is there's always going to be business travelers and families that know exactly where they want to go and when they want to go. But I think the long-term game here is increasingly, we're in 100,000 markets, people have not heard of 100,000 places. So the name of the game is pointing demand to where we have available supply, and that's kind of a big part of our product strategy. Operator: Your next question comes from the line of Lee Horowitz with Deutsche Bank. Lee Horowitz: So maybe on ADRs, you guys continue to surpass expectations with FX-neutral growth that probably came in the quarter at mid-single digits up year-on-year. Would appreciate that looking at the '23 pricing initiatives and mix will impact your ability to grow. but we've seen underlying pricing continue to offset these mix impacts. So when you think about 2023, why can't ADRs grow again, given the strength of the overall industry is supportive of pricing for you guys. David Stephenson: Yes. Thanks on the ADRs. Yes, we were pleasantly -- there's 2 edges of the ADR. ADRs were up 5% year-over-year in Q4, excluding the impact of foreign exchange. Obviously, foreign exchange brings you down to kind of minus 1% when you bring back nights that come, say, from euro or our GBP-denominated nights. And what we forecasted for going forward is modest decline year-over-year in ADRs largely driven by changes in mix, right? People going back to cities, cities are accelerating more cross-border travel mix towards lower ADR regions. It's a double-edged sword, clearly for the financials. It's helpful to have the higher ADR rates because they drive greater revenue, greater flow-through and greater profitability. But obviously, also ADRs are 36% higher than they were in 2019. So it's more expensive for guests to stay on Airbnb and frankly, other places. I think the benefit that we've had is that even while ADRs are higher, we're providing great value. right? The ADRs on Airbnb still can provide a great location, maybe a fully stocked kitchen, a washer and dryer, all the reasons why you might want to stand at Airbnb versus other alternatives. And so as we look forward in the year, we just want to make sure that we continue to provide great value to our guests. And that's why we're building some of the tools that Brian's talked about, which are things like giving tools to host to make sure that they understand the prices that guests are paying and making sure that they are providing -- continue to provide great value to guests. So then the other thing we're doing is, even as ADRs might come down modestly through the year through -- largely through mix, and maybe some through pricing. It's just making sure that we're being really rigorous in our cost structure to kind of support declining ADRs, which is why we anticipate our EBITDA margins for the full year to be roughly the same as 2022 in that the headwinds from lower ADR rates will be offset by our efficiencies that we kind of drive internally. Lee Horowitz: Great. Helpful. And then one follow-up on supply, if I could. Clearly, the product initiatives are driving impressive supply growth as everyone by seller rates and you guys are showing at this point. When I think about how that plays through into 2023, is there anything that we should be thinking about that can keep you from maintaining at these elevated rates, particularly given the fact that you will continue to iterate on the supply funnel to make it easier for hosts to come to the platform? David Stephenson: Yes. Very proud of the continued growth in our supply. And we highlighted in the letter because it's super important that we do our best to get a -- have a balanced marketplace, right? If we get too much supply too quickly, then hosts aren't happy because they're not getting enough bookings. We don't get enough supply early enough, then guests are not happy because they don't get the kind of selection they want. And actually, what we highlighted in the letter is that we have grown our supply by 26% since 2019, and yet our nights and experiences booked have grown by 24%. So we've actually had a nice balance in that, and then I'm very proud of the fact that we've had 6.6 million active listings here in the last year and $900,000 more from the beginning of the year, which just shows the strength of Airbnb and why host want to come to where there is demand. And then we'll just make it easier for hosts to become host on Airbnb. So this will be a forever journey for us to keep providing supply where there is demand. And I think we've been doing it incredibly well for the last 10, 12 years, and we'll continue to do that. Brian Nowak: Yes. I think we just say, look, I think we're I think we're building a bit more of a muscle to around this. And I think it's been a really big focus of ours. So whether it's the product innovations, the awareness, focusing on even building, supply in key markets. I think it's been a really great muscle the team has built. Operator: Your next question comes from the line of John Colantuoni with Jefferies. John Colantuoni: I wanted to start with the new pricing and discounting tools that you're rolling out. It sounds like the expectation is that they're going to be sort of a net headwind to ADR. So can you just walk through the strategic rationale for the new products. I assume it's about sort of improved customer experience, but it would be great to get your perspective on that. And second, nights and experiences on a quarter-on-quarter basis in 4Q and 1Q seem to be back on trend with the historical seasonality we saw pre-pandemic. Is this sort of the right way to think about the trend in nights and experiences throughout the cadence of the year? Brian Chesky: John, I'll start. On pricing and discounts, let's just take a step back. Airbnb, we started 15 years ago. And when we started, we started as an affordable alternative to hotels. And I think that affordability and great value is 1 of the key reasons that people use Airbnb, and we have to continue to make sure that we have that value. And as long as people feel like they have the best product at the best value for Airbnb, I think we're going to deliver a huge amount of growth in years to come. And so there's really 3 things that we're doing. The first thing is transparent pricing with all-in pricing display. In Europe, in many countries around the world, we actually do show total price. But in the United States, the convention for travel companies show a low base rate. And then when you get to check out, there's additional fees. But we spent a lot of time listening to our guests and hosts. And we've heard from our guests, it's not -- a lot of them want to be able to see the total price upfront. And we spent a bunch of time in December, we rolled out total pricing includes all fees before taxes -- Since we've rolled it out, the impact on our bookings has been neutral. Now I know there was a lot of -- we did -- there was a lot of speculation around what happened to show up on pricing. But I think that the response has been very positive. And we chose a very specific implementation and implementation we chose as a price toggle where you can turn it on or off. The basic idea is if people to control of how they want to see prices but also the active can the toggle on helps people understand why our prices are changing and why they might be displayed different than competitors. So again, the impact has been neutral on bookings in the short run, but I actually think the impact on booking in the long run is going to be very positive because it's just a better experience, and it gives people more control. The second thing is we are now prioritizing better value listing in search results. So in other words, we're going to take the total price in the total price into account when we're prioritizing bookings. And then the third thing we're going to be doing is we're building new tools, pricing tools for hosts so that they understand the final price that they're showing to guests. One of the things we learned when we talk to hosts, they don't know the final price guests are paying. And if they did, they modulate some of the fees. I think in the short run, it may have some modest impacts on ADR, but in the long run, I think what it's going to do is drive a lot more demand here at Airbnb, I don't know, Dave, do you want to add anything or take the second question. David Stephenson: No, I think you hit on all the key points on ADR. We're not anticipating a significant decrease in ADR as a result of the pricing tools. We just want to make sure that we're being transparent and helping host make sure that they're setting prices that are appropriate for their listings. So I think that on the nights and experiences trends, we're finally beginning to reach a point where the year-over-year comparisons are much more consistent. And so I think 2023 won't look exactly like 2022, but it's a much better guide than kind of historic years. So we are getting back to -- you'd be able to use year-over-year as a trend line for your forecasting. Operator: Your next question comes from the line of Mario Lu with Barclays. Mario Lu: First one is on the listings growth number, the $900,000 year-over-year. I was wondering if you could help break down that number further. For example, were most of these listings completely new listings or were a good portion of it reactivated say in urban areas? Just trying to see how this growth organic versus travel normalizing? David Stephenson: Yes. I mean the real thing about listings is think about how all listings work. In any given year, we have brand new listings, we have reactivated listings and then we have deactivated listings and some combination of each of those 3. I'd say that the trends of each of those have been kind of up and to the right. In other words, I think we're showing improvement in fewer deactivations and strengthening of our new activations. And so the sum total of each of those is all contributing towards our growth, but I don't have any other more specific breakout to give to you. I mean I think the other -- maybe the only other highlight I would give is it wasn't in just kind of 1 region, like we were seeing broad-based growth of listings around the world and then even by listing type. It was like 1 of the earlier questions about how is the listing growth around urban again, in Urban was 1 of the accelerating areas. So we've seen really nice growth in the urban where that comes back. It just leads back to this marketplace dynamic that we have for Airbnb, which is we both work hard to get listings, proactively on our own and get them more organically where there's demand. and where there's not demand, that's also where you'll see deactivations or fewer listing growth. It tends to be self-healing over time. Mario Lu: And the second one is on the lead time for bookings. In your outlook, you mentioned Europeans were booking summer travel earlier this year. So any commentary you could provide on just globally how lead times look thus far versus pre-pandemic? And any puts and takes to consider when thinking about the 20% room night growth is sustainable for the rest of the year? David Stephenson: Yes. We're really pleased with the European lead times coming up. Europeans will tend to book their summer travel here in the beginning of the year. and to see them booking even earlier on Airbnb relative to our historic rates has been really great to see. Just, I think, shows the optimism that they have to kind of travel this summer. And then broad-based, we are just seeing a slightly longer lead time more generally across Airbnb overall. So again, I just think that shows a nice optimism for people feeling confident that they can book for their summer travel season. So I think not much more to say than that. Operator: [Operator Instructions]. Your next question comes from the line of Justin Post with Bank of America. Justin Post: Great. I think you give it in the K, but can you give us the mix of Asia in '22? I don't know if you can now -- And then secondly, how do you think about the Asia recovery in China cross-border impacting results over the next 12 months? David Stephenson: Yes. The -- in the next 12 months, Asia is still recovering, right? Asia has still been down versus 2022 -- I mean 2019 and -- but they were the fastest kind of growing region in the fourth quarter. So we think it's pretty optimistic about the opportunity. And as Brian even mentioned about China, like the long-term outlook for, for example, Chinese outbound travelers is something that we feel very bullish on for over the long term. And in terms of the fourth quarter, APAC was 12% of the business in the fourth quarter. Brian Chesky: And maybe I'll just say that I think the Asia Pacific is a huge growth area for us going forward. And it's been a little bit of a slower recovery. And I think the reason why is Asia is historically more of a cross-border market. a lot of people in Asia is basically travel across countries. They don't have as big of a domestic market in any of these countries for the most part. And that's just been a slower recovery. But I think the one thing we've seen is that just means probably more pent-up demand, and Asia index is even higher on Gen Z travelers, which is a strong suit of Airbnb. So we're really bullish over the next few years on Asia. Operator: Your next question comes from the line of Lloyd Walmsley with UBS. Unidentified Analyst: This is Chris on for Lloyd. Just can you start by helping us think about the range of outcomes for ADRs in the 1Q '23 guide? I guess as we kind of lay out your guidance saying that take rates would be very similar to 1Q '22 levels and gets you to, say, $20.7 billion potentially of gross bookings in 1Q, '23, and you assume maybe a slight detail on room nights. I could get to a situation where ADRs are potentially flat to better. I guess, is you're talking to ADRs being down slightly on a year-over-year basis. I guess, is -- what would need to happen here for ADRs to be flat to better on a year-over-year basis in 1Q? David Stephenson: Well, to be flat to better would be if there's stronger overall just pricing? And if the mix came in differently, for example, maybe urban didn't come in quite as strong as or cross-border Latin America, Asia didn't come in quite as strong. So a lot of our ADR forecast for Q1 comes from the anticipated continued growth of urban, cross-border and regional mix. And that's why we're forecasting it down for just down slightly year-over-year. the implied take rate, it should be directionally the same as last year and maybe not precisely the same, I think you look back in 2022 and it will be a good guide for your take rate. Unidentified Analyst: Okay. Got it. And just maybe 1 quick follow-up question on the product side as you guys were talking about really kind of expansion opportunities. How should we be thinking about hotel within that? Or should we be thinking about more of the expansion opportunities being related to the core business and experiences in '23. Brian Chesky: Chris, I would just say, I mean all of the above, I think hotels are important ways to fill a network gaps. I think people come to be here because we have something unique they can't get anywhere else. But we also have a huge amount of traffic, and so we want to make sure people come here to me they don't leave without finding something. So I think you can think about our product a few ways. Number one, our core business has a huge amount of growth ahead of us. And so we just want to first perfect the core experience by making it easier to find the right Airbnb, providing better service each step of the way and providing better value. Next, we have a lot of emerging use cases. those emerging use cases are longer stays, obviously, which is more than 1/5 of our nice book. We also have experiences that we're really focused on and continuing to fill out our network gaps. And then finally, beyond just all those are obviously new products and services over the horizon. So we kind of have a very balanced portfolio of all of the above. Operator: Your next question comes from the line of Kevin Kopelman with Cowen. Kevin Kopelman: So a quick one. Given you have $10 billion in cash on the balance sheet and generated $3 billion in cash flow last year, not including the funds held on behalf of guests. Can you just give us an update on how you're thinking about capital allocation and share repurchases? And do you see a potential for repurchases to go beyond offsetting stock comp? David Stephenson: Yes. really pleased with our cash position, right? We ended with $9.6 billion of cash on the balance sheet at the end of the year. That is after buying back $1.5 billion of stock. We have $500 million left on the existing repurchase approval, and we anticipate that will be executing early in the year. But clearly, we're also in -- still in growth mode like we are using this balance sheet to make sure that we can invest in growth for the business in the future. Clearly keep enough cash for potential M&A opportunities, which could exist. And then to the extent that we can return stock and cash to shareholders through share repurchases that will be our primary vehicle that you would anticipate this year. We're going to have about $1 billion of stock-based compensation. We'll at least be offsetting that through share repurchases and -- but I don't have anything more to say beyond that at this time, but we'll continue to evaluate what the appropriate amount of cash is to keep and how much we should continue to return to shareholders. But remember, we are still heavily in growth. We want to be able to invest in the long-term growth of this business. Operator: Your next question comes from the line of Stephen Ju with Credit Suisse. Stephen Ju: So can you talk about the typical behavior from the new host when they're onboarded? Do they start making only a small number of days available. And as time goes on and they get more comfortable with hosting they maybe make more time slots available throughout the course of the year because it seems like we're really preoccupied with the total host number because honestly, as disclosed, but I'm wondering if the aggregate availability growth has historically been a number that's been much higher than the property host growth? Brian Chesky: Yes, Stephen, I can start. The general trend we see is that most people come to Airbnb with kind of more casual intent to host occasionally. Sometimes people come dara host on a one-off basis, for example, on this past weekend in Phoenix, we saw a really big surge of new listings for Super Bowl. What we noticed is that over time, hosts generally increase the number of days available and they tend to get more productive every year. And so more and more nights get booked on a single listing. And then we also see a number of hosts add a second, third or fourth listing depending upon what markets they're in. So the general idea is that host get more productive, they eventually book more nights. Their ADR typically goes up as they accumulate more reviews. One of the things we recommend new hosts do is when they don't have reviews to start a little bit more affordably. And then as they accumulate rate reviews, they can command a little bit higher kind of market pricing. And so those are the general trends we see a general uptick in ADR is to get more reviews and to build a reputation. They add more nights. And then occasionally, you'll see some people add additional listings depending upon the kind of segment they're in. Operator: Your next question comes from the line of Doug Anmuth with JPMorgan. Douglas Anmuth: I just wanted to circle back on your comments on EBITDA margins for '23. You talked about maintaining margins with the variable cost efficiencies kind of being the offset to lower ADRs? Can you just walk us through a little bit more on those cost efficiencies that you're thinking about? And then kind of related, how should we think about marketing spending? It sounds like you're going to shift more of the brand into 1Q. Is that just driven by a pull forward in bookings or more of just a shift in your strategy? David Stephenson: Yes. The way we anticipate our EBITDA margins for this year is that one of the headwinds is this anticipated ADR decline that we talked about earlier on the call, and that the ways in which we are going to be able to offset the margin impact of those declines will be through fixed cost discipline. We're going to continue to grow, but we're going to grow modestly. So think of our headcount growth being in the 2%, 3%, 4% range. So we'll keep having very good fixed cost discipline. We've already addressed marketing in a minute because we've already addressed a lot of the marketing reductions, but we're just seeing strong improvements in our variable cost reductions as well, everything from community support costs, cost of payments costs, infrastructure costs. All those areas are just important and ongoing efforts for us to drive profitability. As I mentioned earlier, we're still in heavy growth mode. I am not in profit maximization mode. I have a long list of things that we can invest in to drive further profitability. But I know that I can also afford with our headcount growth profitability improvements that can offset the ADR declines, and that's what we'll be investing in this year. And then we can keep working on the other variable cost improvements over time. And then in terms of marketing, we've had the major step change reduction in our marketing expense. That was actually a strategic change all the way back in 2019. That's proven to be incredibly effective from 2020 all the way through 2022. And what we've seen in 2023 is that marketing costs as a percentage of revenue for the full year will be about the same as what it was in 2022. But what we are doing is shifting some of the timing. We're just getting even earlier in the year to make sure that we're getting our message out to guests around the world. So they're ready to kind of make their bookings for kind of peak summer travel season, which is in the summer. And so I think it's just we're getting more efficient and effective at the timing. And we think bringing forward a little bit more marketing into Q1 as a more effective use of our dollars. Operator: Your next question comes from the line of Nick Jones with JMP Securities. Nicholas Jones: Can I go back to kind of the Airbnb friendly apartments. What does it look like to get property managers on board with this? And I guess, how much of the apartments that they're managing start to get unlocked? And I guess, what kind of runway do you see in these key markets to add on kind of meaningfully more property managers? Brian Chesky: Yes, I can start, Nick. So yes, I mean this new program is something that we developed because actually, we started getting a lot of inbound from real estate developers. And they started -- we started saying if we made our buildings Airbnb friendly, would it make the building more appealing, especially to young people that are moving to markets in certain cities. And so we did a partnership. We started with working with Greystar, Equity Residential, over 10 other companies, and we've launched. We have 175 buildings in like Houston, Phoenix, Jacksonville -- and the vast majority of these units are kind of -- we expect if they were put on Airbnb, that would be a typical kind of ADR. They're usually 1 bedroom studios. The tenants sign a sublease to a fixed number of days a year, they can rent typically less than 180 days. So the whole idea is these are people's primary homes, and they rent them when they're gone. And I think we're going to get a lot of demand because there's a lot of benefits to landlords. Number one, a landlord get visibility control around who's doing what in their building. Number two, they get a lot of free demand of people that want to lease their apartments. And three, they get a cut on the commission. So based on what we're seeing, there's been a lot of positive word of mouth, many REITs and developers are engaging with Airbnb. We think we're going to be able to send a lot of traffic to them. And so I think this is a program that's going to grow quite a lot. And I also think what is strategic to us beyond all the incremental apartments that unlocks is we're now developing relationships with many of the biggest landlords in United States. And if that happens, I think you're going to see leases generally being more friendly to Airbnb. Operator: Your next question comes from the line of Bernie McTernan with Needham. Bernard McTernan: On margins. So 2 impacts on ADRs, the mix shift in the pricing. It sounds like mix shift is contemplated in that flat EBITDA margin guide for '23, but can you still achieve flat EBITDA margins if that pricing benefit does come out modestly of ADRs. And as a follow-up, just if there's an estimate for how much FX weighed on EBITDA margins in '22, that would be helpful. David Stephenson: Yes. On the 2 impacts, I mean, as you said, large forecast that we have for ADR moderation is due to the mix shift. Clearly, we want to make sure that we are giving tools to host to price effectively so that we have great value. We're not -- it will be -- time will tell how much change we're seeing ADR from those overall changes. I do have a fair amount of levers, as I said, over time, that I can pull in order to continue to improve the cost efficiency. And if ADRs come down more, then I may need to pull a few more levers, but I feel confident we can deliver our EBITDA margin neutral in the face of whatever ADR headwinds that we see this year. So I think that's the main end piece. And then your second question again? Bernard McTernan: Just if there is an estimate for how much FX weighed on EBITDA margins this year given the differential between where revenues are generated and where the costs are in the U.S. David Stephenson: Maybe we can follow up off-line on that. I mean it was a material probably several hundred million dollars, but we would have to give you the -- maybe we work off-line on a specific calculation. Operator: Your next question comes from the line of Tom White with D.A. Davidson. Thomas White: Any color or metrics you guys can provide on how cohorts of guests that you acquired during the height of the pandemic have been performing over the last several months kind of relative to customers acquired pre-pandemic. I'm just curious whether it looks like there might be any meaningful differences when it comes to, I don't know, frequency, spend levels, repeat rates, anything like that? David Stephenson: No, the actual frequencies take rate spend rates have obviously been very consistent with kind of pre-COVID acquired guests. So we feel really good about the new guests coming on and having them look very similar to historic guests, and so very consistent. Operator: Your next question comes from the line of Deepak Mathivanan with Wolfe Research. Deepak Mathivanan: Just a couple of ones. First, it's nice to see the supply growth, but can you talk about trends on the utilization side? I know you don't look at occupancy in a traditional sense. But any color on how the product initiatives like changing the search experience or I'm flexible from 2022 is kind of helping with utilization or occupancy on the platform? And then second question, mix of long-term stays remains stable near 20%. How should we think about that for 2023? Is that a potential opportunity and an area of focus for 2023? What sort of product initiatives can you do to kind of take that mix higher given that it obviously helps with the marketplace balance. David Stephenson: Yes. Deepak, on the supply growth, I think the best measure to look at is you just look at the growth in supply that we had versus 2019 that we grew at 26% and our nights and Experiences book grew 24%, kind of largely in line -- we're not seeing any major shifts in overall kind of utilization rate that give us any concern. We feel like we continue to keep, in aggregate this nice balance of growing supply and growing demand, and we want to keep that relative balance, as I mentioned earlier in the call. If one gets out of whack too much than either the host aren't happy or the guests aren't happy. But I'm very pleased with the way in which we've been able to keep that balanced. And then in terms of long-term stays, I mean, if you actually rewind the tape all the way back to pre-COVID time. Q1 of 2019, our long-term stays were about 13% of nights. By the end of the year, it was maybe 16% at nights. So I think 13% to 16%. Last year, it was kind of 19% to 21% or so, 21%, obviously, in the fourth quarter. So it's been elevated and fairly stable. I think we see in Q1 this year is that we continue to see really strong growth in short-term stays and short-term stays kind of outpacing our growth a little bit in -- versus long-term stays here in the first quarter. So I anticipate it coming down just a little bit here in the first quarter on a mix basis, but it's largely just driven by the short-term acceleration that we're seeing and it's still remaining significantly elevated over 2019 rates. Operator: This concludes our Q&A session for today. I turn the call back over to Brian for closing remarks. Brian Chesky: All right, everyone. Thank you for joining us today. To recap, we had another record year in 2022. Revenue and adjusted EBITDA were both record high and free cash flow was $3.4 billion. I'm really proud of these results. And before I go, I just want to say how proud I am of our team. If you think about what we -- what this team has been through the last 3 years, initially losing 80% of our business, kind of rebuilding the company from the ground up and now just becoming a much more focused, disciplined company. This is a lot of momentum inside the company. And looking forward, we're already seeing some really strong demand in Q1. Consumer confidence to travel remains really high. I think part of that is like no matter what happens in the world, people want to travel. And for many people, the office is now Zoom, the Mall of now Amazon, the theater is now Netflix. Travel is going to become a very important way that people experience the world this year. And so therefore, this is going to be an exciting year for Airbnb and for traveling all around the world. So with that, thank you all, and we'll talk to you next quarter. Operator: This concludes today's conference call. Thank you for attending. You may now disconnect.	[ { "speaker": "Operator", "text": "Good afternoon, and thank you for joining Airbnb's earnings conference call. for the fourth quarter of 2022. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Ellie Mertz, VP of Finance. Please go ahead." }, { "speaker": "Ellie Mertz", "text": "Thank you. Good afternoon, and welcome to Airbnb's Fourth Quarter of 2022 Earnings Call. Thank you for joining us today. On the call today, we have Arrium's Co-Founder and CEO, Brian Chesky, and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our fourth quarter of 2022. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also during this call, we will discuss some non-GAAP financial measures. We provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results. And with that, I will pass the call to Brian." }, { "speaker": "Brian Chesky", "text": "All right. Well, thank you very much, Elie, and good afternoon, everyone. Thanks for joining. Before I share our results, I want to tell a quick personal story. As you may have seen, I've started hosting again. Last November, I listed my guest room on Airbnb. My listing is called Beyond the Airbed. And the run guests is a histologically themed around the early years of Airbnb. There's memorabilia in the walls. From the receipt for the original airbed to old photos and me hacking boxes of Obama Os and Cat McCain breakfast cereal. When guests arrive, I have welcome basket waiting for them. And the first night we make dinner together, followed by desert. We bake [indiscernible] Chip, chocolate chip cookies from my cherished family recipe that I got off Google. The next day, we tour the airbnb office with my golden retriever, Seltenova, and I tell the story of building Airbnb. Now why am I doing this? Well, because I love hosting. Joe and I were the first host on Airbnb 15 years ago. And having guests staying at your home with you is the original idea behind Airbnb. It's been an amazing way to connect with people. But I also believe that companies that makes the best products make products for themselves. And Airbnb will only be as successful as our host. And the best way to understand our host is to be one. Since I've resumed hosting, I've got new first-hand insights that have informed some of the new products we'll be releasing, including some exciting updates this May as part of our 2023 summer release. Now before we get into our quarterly results, I want to recap the full year of 2022. While we're 3 years out from the start of pandemic, we are still living with this impact. We've also seen high inflation, recessionary fears and the war in Ukraine, all of which we're still dealing with in 2023. And yet, through all this, people continue to travel, and 2022 was a record year for Airbnb. Revenue of $8.4 billion grew 40% year-over-year. And when you exclude foreign exchange, our revenue increased by 46% year-over-year. Net income was $1.9 billion, which marks 2022 as our first profitable year -- full year on a GAAP basis. And finally, free cash flow was $3.4 billion. And this $3.4 billion of free cash flow represented a free cash flow margin of over 40%. And because of our strong balance sheet, we are able to begin buying back stock last year, and we repurchased $1.5 billion in shares in just the past 5 months. Now during the height of the pandemic, we made some very difficult choices to reduce our spending making us a leaner and more focused company, and we've kept this discipline ever since. In over each of the past 2 years, we've only modestly increased our headcount. In fact, compared to 2019, our headcount is actually down 5%, while our revenue is up 75%. In every single quarter in 2022 outperformed past comparable periods. In Q4, net income was $319 million. Now this is $264 million higher than a year ago. Adjusted EBITDA was $506 million, which is 52% higher than Q4 of 2021. And we generated $455 million of free cash flow, and this is 20% higher than Q4 2021. During the quarter, we saw a number of positive business trends. First, guest demand at Airbnb remains strong. Nights and experiences booked increased 20% in Q4. We had our highest number of active bookers ever in Q4, demonstrating guest excitement of travel on Airbnb despite evolving economic uncertainties. During the quarter, we also continued to see guest booking trips further advance supporting a strong backlog for Q1. Second, guests are increasingly returning to cities and crossing border. And this is the bread-and-butter before the pandemic. Now both segments continue to accelerate while non-urban and domestic travel remains strong. Cross-border growth nights booked increased 49% compared to last year. High density urban nights grew 22%. And globally, we saw cross-border travel to all regions increased despite continued foreign currency volatility. Third, the guests continue to book longer stays on Airbnb. During Q4, long-term stays remained stable from a year ago at 21% of total gross nights booked in Airbnb. And finally, we saw tremendous growth in our supply on Airbnb. We ended 2022 with 6.6 million active listings. Now excluding all the Mainland China listings we removed in July, we grew supply by 900,000 listings, or 16% compared to a year ago, representing an acceleration in growth in listings relative to Q3. Now why are listings accelerating in growth? We believe there's probably 2 factors that drove this growth. First, demand to drive supply. Post or attracted the supplemental income that they can earn an Airbnb, which is often critical during tough times. Second, our product improvements are working. Over the past 2 years, we've made it more attractive and easier to become a host. Just this past November, we introduced Airbnb set up where prospective host can connect with Super Host for free one-to-one guidance all the way through their first reservation. The number of new active hosts recruited with the help of our super House increased by more than 20% compared to prelaunch. But we are not stopping there. In 2023, we're focused on 3 strategic priorities. First, we want to make posting mainstream. If you're listening to this call, you've likely travel on Airbnb or you know someone who have. We want hosting on Airbnb to be just as popular and to achieve this, we'll continue to raise awareness around hosting, make it easier to get started and provide even better tools for hosts. Second, we are perfecting our core service. We want people who love our service. And that means obsessing over every single detail, and we've listened to our hosting guests and based on their feedback, we're making a large number of upgrades to our service this year, including improving customer service, making it easier to find the right home and delivering greater value and much, much more. And you'll see more of this in the forthcoming in the coming months, especially our release. And finally, third, we're expanding beyond the core. We have some pretty big ideas for where to take Airbnb next. And this year, we're going to build the foundation for future products and services that will provide incremental growth for many years to come. So with that, Dave and I look forward to answering your questions." }, { "speaker": "Operator", "text": "[Operator Instructions]. Your first question today comes from the line of Jed Kelly with Oppenheimer." }, { "speaker": "Jed Kelly", "text": "Great. Great quarter and great execution. Just 2, if I may. Just one, can you talk about how your urban supply is trending and sort of some of the initiatives you're doing around apartments? And then, Brian, you did mention headcount. In Silicon Valley, there's obviously a lot of layoffs. You're one of the companies that are growing, having expanding margins. So can you talk about like your ability to attract top tech talent to execute on some of the initiatives you just talked about?" }, { "speaker": "Brian Chesky", "text": "Yes, absolutely. Yes. So let's start with the first one, urban supply growth. Let me kind of first start, Jed, by just talking a little bit more about how we think about supply. The great thing about our supply is that the vast majority of hosts that come to Airbnb come organically, and that's because of our global network. In fact, the #1 source of host are prior guests. And in Q4, 36% of our hosts were prior guests. And one of the other things we see is the fastest-growing market where we have supply is also the fastest-growing market we have demand. And I think what's happening is a lot of our hosts are regular people. And as they get more bookings, they tend to tell their friends. And so this network is something that has a kind of self-growing effect to it. Now in addition to that, we've been doing a number of initiatives. Number one, we've been focused to make hosting easier with Airbnb set up. And between that and a new campaign we've been running Jed called Airbnb, which is basically this idea that if you have a space, you have an Airbnb. Between these 2 initiatives, we've seen twice the amount of traffic to our host landing page, the landing page to learn about hosting. And then we also have made big improvements to making hosting easier. Now in addition, you might have seen that last November, we announced a new initiative called Airbnb from the apartment. Airbnb from the apartments, I think can unlock a large amount of inventory in multifamily homes in urban areas, and we worked with Greystar and a number of the other largest real estate developers in the United States. We have 175 buildings in Phoenix, in Jacksonville, in Houston and other cities. And the response from landlords have been very, very positive. So we are seeing a lot of traction on urban supply. I don't know, Dave, if you want to add anything before I talk of headcount." }, { "speaker": "David Stephenson", "text": "You covered really well because this has been a historic strength of ours has been kind of the urban part of the business, it's taken longer for that to kind of recover. It's now well above 2019 rates, and it's actually part of the areas that accelerated our growth in Q4. So we're very happy with where we're at with Urban. And as Brian said, the early days of Airbnb friendly apartments has been very well adopted, and we're excited about the potential in that part of the business." }, { "speaker": "Brian Chesky", "text": "And just on your question, Jed, on headcount, something was really interesting happened. So obviously, in 2020, we had to make some really difficult decisions -- and we became a much smaller and more focused company. And the obvious result of that is that we got more efficient and more profitable. But there was a less obvious result. What ended up happening is we have fewer people in meetings and people can move a lot faster. And we concentrate all of our very best people and put them on only a few problems. And I think that's been an explanation for why the company has grown really quickly. But also, I think it's made us a much more attractive place to work because it's much easier to get work done. And we have a general philosophy that we want the very best people in every field to come to Airbnb in every function. We're functionally organized. And I think that we're one of the few tech companies that isn't doing layoffs. We're not cutting. We're not freezing. We're actually stepping on the gas. But in our mind, stepping on the gas doesn't mean adding a huge amount of people, we're going to continue to stay really lean, but we're really focused on just really hiring in key positions. And we -- and again, I kind of use this analogy that we're not building like a giant Navy, it's more like the special forces that's what we're focused on. So we've had a lot of success with talent. And of course, we're getting a lot of inbound." }, { "speaker": "David Stephenson", "text": "Add to a couple of things. One is our headcount is actually still 5% below where it was in 2019. We have a revenue is 75% higher. So we're nearly twice as big as we were previously with fewer people. And I'd say the other is our Live and Work Anywhere approach, our approach to being very intentional about how we gather in person. We believe that actually working together in person is very important, just need to do it in a very coordinated way. So actually having people being back in the office on random days of the week is not very effective, but being -- doing it in a very controlled and planful way is respectful of employees' time and is more efficient for the company, and our employees love it. And I think that's also enabling us to attract great talent." }, { "speaker": "Operator", "text": "Your next question comes from the line of Richard Clarke with Sanford C. Bernstein." }, { "speaker": "Richard Clarke", "text": "Two, if I may. The first one, just around, I guess, some of the changes that might come over the coming years with regard to the distribution landscape. One of your rivals is going to wrap their vacation rental business into a loyalty program, lots of talk around conversational AI and what that can do to the distribution landscape. So just any comments to whether Airbnb needs to do anything further on the distribution platform? And then second one, a little bit more preset, but obviously, it looks like Q4 was a very good quarter for take rate. Have you done anything in particular there on take rate to achieve that result?" }, { "speaker": "Brian Chesky", "text": "Dave, do you want to start with take rate and I'll end with distribution after." }, { "speaker": "David Stephenson", "text": "Yes. With take rate, there's nothing in particular that we've done with take rate there. Absolutely, on a time-adjusted basis, the amount that we take from each night's day has been very stable. And so any variation in take rate of revenue over gross booking value is just variation quarter-to-quarter. So nothing on take rate." }, { "speaker": "Brian Chesky", "text": "And maybe, Richard, just if -- can you just clarify what you mean by distribution landscape? Do you mean like the competitive environment or how?" }, { "speaker": "Richard Clarke", "text": "The competitive landscape, competitive environment with regard to distribution, whether you see any threat or increased threats from loyalty program wrapping around your competitors and maybe the conversational AI that's coming into various other search platforms at the moment." }, { "speaker": "Brian Chesky", "text": "No. I mean, like, I think there's just 2 things. On the competitive front, I mean, we have a lot of competitors and a lot of different categories. But I think Airbnb kind of stands in a class of its own. I mean we're now in over used all over the world. We're not just the U.S. business. We're not just the European business. We're a global business. We're not just vacation rentals. We're also urban and [indiscernible] and off the grid. We're known as an affordable way to travel, but we also have a lots of offering and everything in between. So I think we have a pretty unique offering. And I think ultimately, 90% of our traffic comes direct. And that's because we have something that's unique. The vast majority of our homes don't exist anywhere else. And what we're really just focused on doing is we're obsessing over providing the very best experience for guests. And if we do that and we perfect that experience and then we do really great marketing, I think we'll do quite well. The only thing I'll say, Richard, on the distribution front is we have some unique assets that most other travel brands don't have. Let's take PR. There were 600,000 articles written about Airbnb last year. Airbnb is on social media a lot and a lot of people are talking about Airbnb on social media. So we generally have a slightly different approach to distribution, where we think just continually innovating on our product is great. The best loyalty program is building a product people love so much they want to come back and you have to pay them to come back. And we just take a full funnel approach to marketing around PR, and we think of our general advertising as really educating people on new products. Now as far as the changing landscape for technology, I'm actually very excited about the possibilities of AI. I think Airbnb will uniquely benefit from this. And the reason why it's because Airbnb is a fairly difficult product challenge, which is unlike hotels, we don't have SKUs. There's no representative inventory. Every single 1 of our 6.6 million listings are unique guests left more than 100 million reviews last year. And to parse through all these reviews is very glorious. And I think that AI is going to really benefit our long tail of data. And the fact that our search problem isn't really a search problem, so much as a matching problem. -- right? If there's like 50,000 homes in a city, what's the right 1 for you, that's less of a search problem than a matching problem. And I think that AI is going to be a really good opportunity for us. And just stay tuned for some developments there." }, { "speaker": "Operator", "text": "Your next question comes from the line of Ron Josey with Citi." }, { "speaker": "Ronald Josey", "text": "Brian, you mentioned investments for 2023 and extending beyond the core, that's been a key question that we consistently get in terms of what's next. Any insights you can provide there would be helpful, maybe just is it building out the tech infrastructure? Or is it more sort of newer products that are coming down the pike? And then I believe in the letter, we talked about 1.4 billion cumulative guest arrivals. And so I was wondering if you can talk more about the brand, the awareness overall and just that user mix in terms of returning users versus newer users." }, { "speaker": "Brian Chesky", "text": "Yes. Awesome. Well, let me start with investments for 2023. So the good news is that -- though we're investing this year and some new products and services to expand beyond the core, I don't think you're going to see any material changes in the P&L. We kind of think like I started my in my 2 friends. We didn't have very many resources back then. And the great thing about Airbus business is we're essentially a global network. So I think that we can incubate new opportunities, products and services for a relatively low amount of investment. And as far as what you're going to see, I'd say there's going to be innovations on the guest and host side. On the host side, our general principle is that we want to always deliver more value for host number charging. And we have a 3% take rate on the host side, and we've been giving away a lot of products for free, like AirCover. And we launched aircover for host 2 Novembers ago. NPS for claims, reimbursement claims has gone up 70 points, so it's been pretty amazing. And our general view on host are we're going to primarily give away most of our product service and innovation to them. But we do think there's some opportunities for eco services that Host might pay for. On the guest side, we started very modestly. You might have seen that we launched travel insurance, which is now in 8 countries, and that's been really, really successful. But I think there's many more opportunities around the like services. Obviously, Airbnb experiences is something that we're beginning to really ramp up. And I think you're going to see a lot more traction in that product in the coming years. And I think there's going to be just a lot more around creating a step change in new service level and matching people to the right homes and experiences for them. So that's what I would say. Services on the host side, services on the guest side, there's going to be a lot of opportunities to revisit some of the end-to-end travel opportunities that we have, and you'll stay tuned for some cool innovation. Oh, I'm sorry, brand awareness, sorry. Yes, brand awareness. On the brand awareness, again, we generally try to -- as I said the last part, we generally focus on a full funnel approach. 90% of our traffic is now direct. It's sustained that since we went public, it's always been about 90%. We have extremely high efficiency on things like performance marketing. And generally, the way we approach our brand is that Airbnb is a pretty ubiquitous brand. So what we really want to do now is continue to invest in awareness around our different innovations. And there are going to be 2 things. Number one, we're going to be focused on educating people on our new services and offerings. So for example, there will be categories we've been running campaigns around that. And people have viewed 500 million -- people viewed listings, 500 million times for every categories. We're also continuing to raise awareness around hosting. We're going to grow as fast as we have host. Now as far as how much traffic is coming from new returning, I don't know, Dave, do you want to share anything about that on where branded?" }, { "speaker": "David Stephenson", "text": "Yes. I mean the majority of our bookings come from past guests, and it's actually been the strong guest retention that we've had over years since the beginning of Airbnb, that's been a powerful driver of our growth. But I think what's also interesting is that we've introduced Airbnb to millions of new users since COVID. And the performance of those new users, the booking frequency of those new users from '21 that we saw into '22 has been very strong. And so really pleased with the new users that we've been able to track that look very, very similar to the historic type of users that we've had on Airbnb." }, { "speaker": "Operator", "text": "Your next question comes from the line of Mark Mahaney with Evercore." }, { "speaker": "Mark Mahaney", "text": "Okay. Two questions, please. I know you mentioned that guess to host ratio, I think you said something like 36% or something. I imagine you've got cohort data that shows that the percentage of guests that have converted into being host or and additionally, our host is actually higher, maybe much higher. Could you just qualify that or quantify that at all? I'm sure that's a pipeline, but just how robust is that pipeline when you look at the cohort data? And then just very briefly on China. Just on the China outbound, can you just remind us how material that was to your business back when back in 2019, so we can get a sense of -- I know you've said that the China outbound market will gradually reopen -- but as it fully reopens, how much of an opportunity that is for you?" }, { "speaker": "Brian Chesky", "text": "Yes. I mean I'll start, Mark. Yes. We've seen that third in Q4 2022, 36% of new available hosts who started out as guest in Airbnb. This is more than prior year. So this has been going up actually like year-over-year. So that number is going up. And it makes sense as Airbnb becomes more ubiquitous, but also it makes sense because a lot of people, they'll connect with a host, and they realize, wow, I can do this too. And the vast majority of our new listings are by individuals, not property managers. So there's this kind of interesting network effect where guest becomes host and then host becomes guest. As far as China, we expect the recovery to be pretty gradual in China. We think the big prize in China is the outbound business. We think that there are going to be hundreds of millions of people that want to leave China to travel the world, and we think is going to be the best way for essentially Gen Z people to travel. I think they really want an authentic experience when they're traveling around the world. That being said, we are expecting a pretty gradual recovery in China." }, { "speaker": "David Stephenson", "text": "And China kind of pre-COVID was in the kind of low single-digit percentage of our gross booking value. So it gives you some perspective of our opportunity. I think we think very -- could be large over an extended period of time, but it will take a while for it to be larger." }, { "speaker": "Brian Chesky", "text": "And Mark, And just 1 other thing, yes, you are right that the cohorts are trending up. So for example, I think in Q4 2021, 33% of guests became host. In 2020, 28%. In 2019, 23%. So it is picking up." }, { "speaker": "Operator", "text": "Your next question comes from the line of Brian Nowak with Morgan Stanley." }, { "speaker": "Brian Nowak", "text": "I have two. Just the first one, and I'll talk about guests and hosts. Could you just sort of help us understand a little bit how fast did your new guests grow in 2022? And how are you thinking about sort of new guest growth in '23 sort of talk about EBITDA margins? Or what's your first cut and how fast guests could grow this year? And then the second one, just any update on metrics or quantifying adoption around unflexible or any of the other tools that you've rolled out to sort of better improve the load balancing between supply and demand." }, { "speaker": "Brian Chesky", "text": "Great. Yes, Dave, if you want to." }, { "speaker": "David Stephenson", "text": "Yes. No, sure. On the new guests, we don't disclose the exact number of the new guest growth. Like I said, I think the thing that I'm really pleased is that we've introduced Airbnb to millions of new guests since COVID and that they're performing similarly, not even stronger than kind of historic guests in terms of their rebooking rates. So I feel really good about the position we have for new guests. A big piece of it is some of the brand marketing that Brian kind of mentioned earlier, is just making sure we have a lot of awareness of Airbnb, but just to also make sure that we're getting strong consideration of Airbnb as a true option for them. And again, in this last several years, we've been able to introduce Airbnb to millions of new people that might not have thought about trying us before. So I think that's been really helpful. And I don't have a lot to say on flexible except that we have a very strong adoption of the feature that -- and we think that it's a great way for us to distribute demand to where we have supplied. And the flexibility features are a key benefit for Airbnb because we have this more difficult problem, as Brian mentioned earlier, of matching and trying to match the right guest to the right host and the flexible gives us the ability to do a better match." }, { "speaker": "Brian Chesky", "text": "Yes. And one of the things I'd just say, Brian, is that we've seen a permanent like shift in some of the travel booking behaviors on Airbnb since before the pandemic. And a lot of those changes have endured. And probably one of the most pronounced ones is just is incremental flexibility for people. We noticed more people are searching with more locations and using more flexibility features. And even before we built these features, we were seeing people entering a lot of different gate variations when they were searching. And so we were just really responding to where things are going. And I think where this goes down the road is there's always going to be business travelers and families that know exactly where they want to go and when they want to go. But I think the long-term game here is increasingly, we're in 100,000 markets, people have not heard of 100,000 places. So the name of the game is pointing demand to where we have available supply, and that's kind of a big part of our product strategy." }, { "speaker": "Operator", "text": "Your next question comes from the line of Lee Horowitz with Deutsche Bank." }, { "speaker": "Lee Horowitz", "text": "So maybe on ADRs, you guys continue to surpass expectations with FX-neutral growth that probably came in the quarter at mid-single digits up year-on-year. Would appreciate that looking at the '23 pricing initiatives and mix will impact your ability to grow. but we've seen underlying pricing continue to offset these mix impacts. So when you think about 2023, why can't ADRs grow again, given the strength of the overall industry is supportive of pricing for you guys." }, { "speaker": "David Stephenson", "text": "Yes. Thanks on the ADRs. Yes, we were pleasantly -- there's 2 edges of the ADR. ADRs were up 5% year-over-year in Q4, excluding the impact of foreign exchange. Obviously, foreign exchange brings you down to kind of minus 1% when you bring back nights that come, say, from euro or our GBP-denominated nights. And what we forecasted for going forward is modest decline year-over-year in ADRs largely driven by changes in mix, right? People going back to cities, cities are accelerating more cross-border travel mix towards lower ADR regions. It's a double-edged sword, clearly for the financials. It's helpful to have the higher ADR rates because they drive greater revenue, greater flow-through and greater profitability. But obviously, also ADRs are 36% higher than they were in 2019. So it's more expensive for guests to stay on Airbnb and frankly, other places. I think the benefit that we've had is that even while ADRs are higher, we're providing great value. right? The ADRs on Airbnb still can provide a great location, maybe a fully stocked kitchen, a washer and dryer, all the reasons why you might want to stand at Airbnb versus other alternatives. And so as we look forward in the year, we just want to make sure that we continue to provide great value to our guests. And that's why we're building some of the tools that Brian's talked about, which are things like giving tools to host to make sure that they understand the prices that guests are paying and making sure that they are providing -- continue to provide great value to guests. So then the other thing we're doing is, even as ADRs might come down modestly through the year through -- largely through mix, and maybe some through pricing. It's just making sure that we're being really rigorous in our cost structure to kind of support declining ADRs, which is why we anticipate our EBITDA margins for the full year to be roughly the same as 2022 in that the headwinds from lower ADR rates will be offset by our efficiencies that we kind of drive internally." }, { "speaker": "Lee Horowitz", "text": "Great. Helpful. And then one follow-up on supply, if I could. Clearly, the product initiatives are driving impressive supply growth as everyone by seller rates and you guys are showing at this point. When I think about how that plays through into 2023, is there anything that we should be thinking about that can keep you from maintaining at these elevated rates, particularly given the fact that you will continue to iterate on the supply funnel to make it easier for hosts to come to the platform?" }, { "speaker": "David Stephenson", "text": "Yes. Very proud of the continued growth in our supply. And we highlighted in the letter because it's super important that we do our best to get a -- have a balanced marketplace, right? If we get too much supply too quickly, then hosts aren't happy because they're not getting enough bookings. We don't get enough supply early enough, then guests are not happy because they don't get the kind of selection they want. And actually, what we highlighted in the letter is that we have grown our supply by 26% since 2019, and yet our nights and experiences booked have grown by 24%. So we've actually had a nice balance in that, and then I'm very proud of the fact that we've had 6.6 million active listings here in the last year and $900,000 more from the beginning of the year, which just shows the strength of Airbnb and why host want to come to where there is demand. And then we'll just make it easier for hosts to become host on Airbnb. So this will be a forever journey for us to keep providing supply where there is demand. And I think we've been doing it incredibly well for the last 10, 12 years, and we'll continue to do that." }, { "speaker": "Brian Nowak", "text": "Yes. I think we just say, look, I think we're I think we're building a bit more of a muscle to around this. And I think it's been a really big focus of ours. So whether it's the product innovations, the awareness, focusing on even building, supply in key markets. I think it's been a really great muscle the team has built." }, { "speaker": "Operator", "text": "Your next question comes from the line of John Colantuoni with Jefferies." }, { "speaker": "John Colantuoni", "text": "I wanted to start with the new pricing and discounting tools that you're rolling out. It sounds like the expectation is that they're going to be sort of a net headwind to ADR. So can you just walk through the strategic rationale for the new products. I assume it's about sort of improved customer experience, but it would be great to get your perspective on that. And second, nights and experiences on a quarter-on-quarter basis in 4Q and 1Q seem to be back on trend with the historical seasonality we saw pre-pandemic. Is this sort of the right way to think about the trend in nights and experiences throughout the cadence of the year?" }, { "speaker": "Brian Chesky", "text": "John, I'll start. On pricing and discounts, let's just take a step back. Airbnb, we started 15 years ago. And when we started, we started as an affordable alternative to hotels. And I think that affordability and great value is 1 of the key reasons that people use Airbnb, and we have to continue to make sure that we have that value. And as long as people feel like they have the best product at the best value for Airbnb, I think we're going to deliver a huge amount of growth in years to come. And so there's really 3 things that we're doing. The first thing is transparent pricing with all-in pricing display. In Europe, in many countries around the world, we actually do show total price. But in the United States, the convention for travel companies show a low base rate. And then when you get to check out, there's additional fees. But we spent a lot of time listening to our guests and hosts. And we've heard from our guests, it's not -- a lot of them want to be able to see the total price upfront. And we spent a bunch of time in December, we rolled out total pricing includes all fees before taxes -- Since we've rolled it out, the impact on our bookings has been neutral. Now I know there was a lot of -- we did -- there was a lot of speculation around what happened to show up on pricing. But I think that the response has been very positive. And we chose a very specific implementation and implementation we chose as a price toggle where you can turn it on or off. The basic idea is if people to control of how they want to see prices but also the active can the toggle on helps people understand why our prices are changing and why they might be displayed different than competitors. So again, the impact has been neutral on bookings in the short run, but I actually think the impact on booking in the long run is going to be very positive because it's just a better experience, and it gives people more control. The second thing is we are now prioritizing better value listing in search results. So in other words, we're going to take the total price in the total price into account when we're prioritizing bookings. And then the third thing we're going to be doing is we're building new tools, pricing tools for hosts so that they understand the final price that they're showing to guests. One of the things we learned when we talk to hosts, they don't know the final price guests are paying. And if they did, they modulate some of the fees. I think in the short run, it may have some modest impacts on ADR, but in the long run, I think what it's going to do is drive a lot more demand here at Airbnb, I don't know, Dave, do you want to add anything or take the second question." }, { "speaker": "David Stephenson", "text": "No, I think you hit on all the key points on ADR. We're not anticipating a significant decrease in ADR as a result of the pricing tools. We just want to make sure that we're being transparent and helping host make sure that they're setting prices that are appropriate for their listings. So I think that on the nights and experiences trends, we're finally beginning to reach a point where the year-over-year comparisons are much more consistent. And so I think 2023 won't look exactly like 2022, but it's a much better guide than kind of historic years. So we are getting back to -- you'd be able to use year-over-year as a trend line for your forecasting." }, { "speaker": "Operator", "text": "Your next question comes from the line of Mario Lu with Barclays." }, { "speaker": "Mario Lu", "text": "First one is on the listings growth number, the $900,000 year-over-year. I was wondering if you could help break down that number further. For example, were most of these listings completely new listings or were a good portion of it reactivated say in urban areas? Just trying to see how this growth organic versus travel normalizing?" }, { "speaker": "David Stephenson", "text": "Yes. I mean the real thing about listings is think about how all listings work. In any given year, we have brand new listings, we have reactivated listings and then we have deactivated listings and some combination of each of those 3. I'd say that the trends of each of those have been kind of up and to the right. In other words, I think we're showing improvement in fewer deactivations and strengthening of our new activations. And so the sum total of each of those is all contributing towards our growth, but I don't have any other more specific breakout to give to you. I mean I think the other -- maybe the only other highlight I would give is it wasn't in just kind of 1 region, like we were seeing broad-based growth of listings around the world and then even by listing type. It was like 1 of the earlier questions about how is the listing growth around urban again, in Urban was 1 of the accelerating areas. So we've seen really nice growth in the urban where that comes back. It just leads back to this marketplace dynamic that we have for Airbnb, which is we both work hard to get listings, proactively on our own and get them more organically where there's demand. and where there's not demand, that's also where you'll see deactivations or fewer listing growth. It tends to be self-healing over time." }, { "speaker": "Mario Lu", "text": "And the second one is on the lead time for bookings. In your outlook, you mentioned Europeans were booking summer travel earlier this year. So any commentary you could provide on just globally how lead times look thus far versus pre-pandemic? And any puts and takes to consider when thinking about the 20% room night growth is sustainable for the rest of the year?" }, { "speaker": "David Stephenson", "text": "Yes. We're really pleased with the European lead times coming up. Europeans will tend to book their summer travel here in the beginning of the year. and to see them booking even earlier on Airbnb relative to our historic rates has been really great to see. Just, I think, shows the optimism that they have to kind of travel this summer. And then broad-based, we are just seeing a slightly longer lead time more generally across Airbnb overall. So again, I just think that shows a nice optimism for people feeling confident that they can book for their summer travel season. So I think not much more to say than that." }, { "speaker": "Operator", "text": "[Operator Instructions]. Your next question comes from the line of Justin Post with Bank of America." }, { "speaker": "Justin Post", "text": "Great. I think you give it in the K, but can you give us the mix of Asia in '22? I don't know if you can now -- And then secondly, how do you think about the Asia recovery in China cross-border impacting results over the next 12 months?" }, { "speaker": "David Stephenson", "text": "Yes. The -- in the next 12 months, Asia is still recovering, right? Asia has still been down versus 2022 -- I mean 2019 and -- but they were the fastest kind of growing region in the fourth quarter. So we think it's pretty optimistic about the opportunity. And as Brian even mentioned about China, like the long-term outlook for, for example, Chinese outbound travelers is something that we feel very bullish on for over the long term. And in terms of the fourth quarter, APAC was 12% of the business in the fourth quarter." }, { "speaker": "Brian Chesky", "text": "And maybe I'll just say that I think the Asia Pacific is a huge growth area for us going forward. And it's been a little bit of a slower recovery. And I think the reason why is Asia is historically more of a cross-border market. a lot of people in Asia is basically travel across countries. They don't have as big of a domestic market in any of these countries for the most part. And that's just been a slower recovery. But I think the one thing we've seen is that just means probably more pent-up demand, and Asia index is even higher on Gen Z travelers, which is a strong suit of Airbnb. So we're really bullish over the next few years on Asia." }, { "speaker": "Operator", "text": "Your next question comes from the line of Lloyd Walmsley with UBS." }, { "speaker": "Unidentified Analyst", "text": "This is Chris on for Lloyd. Just can you start by helping us think about the range of outcomes for ADRs in the 1Q '23 guide? I guess as we kind of lay out your guidance saying that take rates would be very similar to 1Q '22 levels and gets you to, say, $20.7 billion potentially of gross bookings in 1Q, '23, and you assume maybe a slight detail on room nights. I could get to a situation where ADRs are potentially flat to better. I guess, is you're talking to ADRs being down slightly on a year-over-year basis. I guess, is -- what would need to happen here for ADRs to be flat to better on a year-over-year basis in 1Q?" }, { "speaker": "David Stephenson", "text": "Well, to be flat to better would be if there's stronger overall just pricing? And if the mix came in differently, for example, maybe urban didn't come in quite as strong as or cross-border Latin America, Asia didn't come in quite as strong. So a lot of our ADR forecast for Q1 comes from the anticipated continued growth of urban, cross-border and regional mix. And that's why we're forecasting it down for just down slightly year-over-year. the implied take rate, it should be directionally the same as last year and maybe not precisely the same, I think you look back in 2022 and it will be a good guide for your take rate." }, { "speaker": "Unidentified Analyst", "text": "Okay. Got it. And just maybe 1 quick follow-up question on the product side as you guys were talking about really kind of expansion opportunities. How should we be thinking about hotel within that? Or should we be thinking about more of the expansion opportunities being related to the core business and experiences in '23." }, { "speaker": "Brian Chesky", "text": "Chris, I would just say, I mean all of the above, I think hotels are important ways to fill a network gaps. I think people come to be here because we have something unique they can't get anywhere else. But we also have a huge amount of traffic, and so we want to make sure people come here to me they don't leave without finding something. So I think you can think about our product a few ways. Number one, our core business has a huge amount of growth ahead of us. And so we just want to first perfect the core experience by making it easier to find the right Airbnb, providing better service each step of the way and providing better value. Next, we have a lot of emerging use cases. those emerging use cases are longer stays, obviously, which is more than 1/5 of our nice book. We also have experiences that we're really focused on and continuing to fill out our network gaps. And then finally, beyond just all those are obviously new products and services over the horizon. So we kind of have a very balanced portfolio of all of the above." }, { "speaker": "Operator", "text": "Your next question comes from the line of Kevin Kopelman with Cowen." }, { "speaker": "Kevin Kopelman", "text": "So a quick one. Given you have $10 billion in cash on the balance sheet and generated $3 billion in cash flow last year, not including the funds held on behalf of guests. Can you just give us an update on how you're thinking about capital allocation and share repurchases? And do you see a potential for repurchases to go beyond offsetting stock comp?" }, { "speaker": "David Stephenson", "text": "Yes. really pleased with our cash position, right? We ended with $9.6 billion of cash on the balance sheet at the end of the year. That is after buying back $1.5 billion of stock. We have $500 million left on the existing repurchase approval, and we anticipate that will be executing early in the year. But clearly, we're also in -- still in growth mode like we are using this balance sheet to make sure that we can invest in growth for the business in the future. Clearly keep enough cash for potential M&A opportunities, which could exist. And then to the extent that we can return stock and cash to shareholders through share repurchases that will be our primary vehicle that you would anticipate this year. We're going to have about $1 billion of stock-based compensation. We'll at least be offsetting that through share repurchases and -- but I don't have anything more to say beyond that at this time, but we'll continue to evaluate what the appropriate amount of cash is to keep and how much we should continue to return to shareholders. But remember, we are still heavily in growth. We want to be able to invest in the long-term growth of this business." }, { "speaker": "Operator", "text": "Your next question comes from the line of Stephen Ju with Credit Suisse." }, { "speaker": "Stephen Ju", "text": "So can you talk about the typical behavior from the new host when they're onboarded? Do they start making only a small number of days available. And as time goes on and they get more comfortable with hosting they maybe make more time slots available throughout the course of the year because it seems like we're really preoccupied with the total host number because honestly, as disclosed, but I'm wondering if the aggregate availability growth has historically been a number that's been much higher than the property host growth?" }, { "speaker": "Brian Chesky", "text": "Yes, Stephen, I can start. The general trend we see is that most people come to Airbnb with kind of more casual intent to host occasionally. Sometimes people come dara host on a one-off basis, for example, on this past weekend in Phoenix, we saw a really big surge of new listings for Super Bowl. What we noticed is that over time, hosts generally increase the number of days available and they tend to get more productive every year. And so more and more nights get booked on a single listing. And then we also see a number of hosts add a second, third or fourth listing depending upon what markets they're in. So the general idea is that host get more productive, they eventually book more nights. Their ADR typically goes up as they accumulate more reviews. One of the things we recommend new hosts do is when they don't have reviews to start a little bit more affordably. And then as they accumulate rate reviews, they can command a little bit higher kind of market pricing. And so those are the general trends we see a general uptick in ADR is to get more reviews and to build a reputation. They add more nights. And then occasionally, you'll see some people add additional listings depending upon the kind of segment they're in." }, { "speaker": "Operator", "text": "Your next question comes from the line of Doug Anmuth with JPMorgan." }, { "speaker": "Douglas Anmuth", "text": "I just wanted to circle back on your comments on EBITDA margins for '23. You talked about maintaining margins with the variable cost efficiencies kind of being the offset to lower ADRs? Can you just walk us through a little bit more on those cost efficiencies that you're thinking about? And then kind of related, how should we think about marketing spending? It sounds like you're going to shift more of the brand into 1Q. Is that just driven by a pull forward in bookings or more of just a shift in your strategy?" }, { "speaker": "David Stephenson", "text": "Yes. The way we anticipate our EBITDA margins for this year is that one of the headwinds is this anticipated ADR decline that we talked about earlier on the call, and that the ways in which we are going to be able to offset the margin impact of those declines will be through fixed cost discipline. We're going to continue to grow, but we're going to grow modestly. So think of our headcount growth being in the 2%, 3%, 4% range. So we'll keep having very good fixed cost discipline. We've already addressed marketing in a minute because we've already addressed a lot of the marketing reductions, but we're just seeing strong improvements in our variable cost reductions as well, everything from community support costs, cost of payments costs, infrastructure costs. All those areas are just important and ongoing efforts for us to drive profitability. As I mentioned earlier, we're still in heavy growth mode. I am not in profit maximization mode. I have a long list of things that we can invest in to drive further profitability. But I know that I can also afford with our headcount growth profitability improvements that can offset the ADR declines, and that's what we'll be investing in this year. And then we can keep working on the other variable cost improvements over time. And then in terms of marketing, we've had the major step change reduction in our marketing expense. That was actually a strategic change all the way back in 2019. That's proven to be incredibly effective from 2020 all the way through 2022. And what we've seen in 2023 is that marketing costs as a percentage of revenue for the full year will be about the same as what it was in 2022. But what we are doing is shifting some of the timing. We're just getting even earlier in the year to make sure that we're getting our message out to guests around the world. So they're ready to kind of make their bookings for kind of peak summer travel season, which is in the summer. And so I think it's just we're getting more efficient and effective at the timing. And we think bringing forward a little bit more marketing into Q1 as a more effective use of our dollars." }, { "speaker": "Operator", "text": "Your next question comes from the line of Nick Jones with JMP Securities." }, { "speaker": "Nicholas Jones", "text": "Can I go back to kind of the Airbnb friendly apartments. What does it look like to get property managers on board with this? And I guess, how much of the apartments that they're managing start to get unlocked? And I guess, what kind of runway do you see in these key markets to add on kind of meaningfully more property managers?" }, { "speaker": "Brian Chesky", "text": "Yes, I can start, Nick. So yes, I mean this new program is something that we developed because actually, we started getting a lot of inbound from real estate developers. And they started -- we started saying if we made our buildings Airbnb friendly, would it make the building more appealing, especially to young people that are moving to markets in certain cities. And so we did a partnership. We started with working with Greystar, Equity Residential, over 10 other companies, and we've launched. We have 175 buildings in like Houston, Phoenix, Jacksonville -- and the vast majority of these units are kind of -- we expect if they were put on Airbnb, that would be a typical kind of ADR. They're usually 1 bedroom studios. The tenants sign a sublease to a fixed number of days a year, they can rent typically less than 180 days. So the whole idea is these are people's primary homes, and they rent them when they're gone. And I think we're going to get a lot of demand because there's a lot of benefits to landlords. Number one, a landlord get visibility control around who's doing what in their building. Number two, they get a lot of free demand of people that want to lease their apartments. And three, they get a cut on the commission. So based on what we're seeing, there's been a lot of positive word of mouth, many REITs and developers are engaging with Airbnb. We think we're going to be able to send a lot of traffic to them. And so I think this is a program that's going to grow quite a lot. And I also think what is strategic to us beyond all the incremental apartments that unlocks is we're now developing relationships with many of the biggest landlords in United States. And if that happens, I think you're going to see leases generally being more friendly to Airbnb." }, { "speaker": "Operator", "text": "Your next question comes from the line of Bernie McTernan with Needham." }, { "speaker": "Bernard McTernan", "text": "On margins. So 2 impacts on ADRs, the mix shift in the pricing. It sounds like mix shift is contemplated in that flat EBITDA margin guide for '23, but can you still achieve flat EBITDA margins if that pricing benefit does come out modestly of ADRs. And as a follow-up, just if there's an estimate for how much FX weighed on EBITDA margins in '22, that would be helpful." }, { "speaker": "David Stephenson", "text": "Yes. On the 2 impacts, I mean, as you said, large forecast that we have for ADR moderation is due to the mix shift. Clearly, we want to make sure that we are giving tools to host to price effectively so that we have great value. We're not -- it will be -- time will tell how much change we're seeing ADR from those overall changes. I do have a fair amount of levers, as I said, over time, that I can pull in order to continue to improve the cost efficiency. And if ADRs come down more, then I may need to pull a few more levers, but I feel confident we can deliver our EBITDA margin neutral in the face of whatever ADR headwinds that we see this year. So I think that's the main end piece. And then your second question again?" }, { "speaker": "Bernard McTernan", "text": "Just if there is an estimate for how much FX weighed on EBITDA margins this year given the differential between where revenues are generated and where the costs are in the U.S." }, { "speaker": "David Stephenson", "text": "Maybe we can follow up off-line on that. I mean it was a material probably several hundred million dollars, but we would have to give you the -- maybe we work off-line on a specific calculation." }, { "speaker": "Operator", "text": "Your next question comes from the line of Tom White with D.A. Davidson." }, { "speaker": "Thomas White", "text": "Any color or metrics you guys can provide on how cohorts of guests that you acquired during the height of the pandemic have been performing over the last several months kind of relative to customers acquired pre-pandemic. I'm just curious whether it looks like there might be any meaningful differences when it comes to, I don't know, frequency, spend levels, repeat rates, anything like that?" }, { "speaker": "David Stephenson", "text": "No, the actual frequencies take rate spend rates have obviously been very consistent with kind of pre-COVID acquired guests. So we feel really good about the new guests coming on and having them look very similar to historic guests, and so very consistent." }, { "speaker": "Operator", "text": "Your next question comes from the line of Deepak Mathivanan with Wolfe Research." }, { "speaker": "Deepak Mathivanan", "text": "Just a couple of ones. First, it's nice to see the supply growth, but can you talk about trends on the utilization side? I know you don't look at occupancy in a traditional sense. But any color on how the product initiatives like changing the search experience or I'm flexible from 2022 is kind of helping with utilization or occupancy on the platform? And then second question, mix of long-term stays remains stable near 20%. How should we think about that for 2023? Is that a potential opportunity and an area of focus for 2023? What sort of product initiatives can you do to kind of take that mix higher given that it obviously helps with the marketplace balance." }, { "speaker": "David Stephenson", "text": "Yes. Deepak, on the supply growth, I think the best measure to look at is you just look at the growth in supply that we had versus 2019 that we grew at 26% and our nights and Experiences book grew 24%, kind of largely in line -- we're not seeing any major shifts in overall kind of utilization rate that give us any concern. We feel like we continue to keep, in aggregate this nice balance of growing supply and growing demand, and we want to keep that relative balance, as I mentioned earlier in the call. If one gets out of whack too much than either the host aren't happy or the guests aren't happy. But I'm very pleased with the way in which we've been able to keep that balanced. And then in terms of long-term stays, I mean, if you actually rewind the tape all the way back to pre-COVID time. Q1 of 2019, our long-term stays were about 13% of nights. By the end of the year, it was maybe 16% at nights. So I think 13% to 16%. Last year, it was kind of 19% to 21% or so, 21%, obviously, in the fourth quarter. So it's been elevated and fairly stable. I think we see in Q1 this year is that we continue to see really strong growth in short-term stays and short-term stays kind of outpacing our growth a little bit in -- versus long-term stays here in the first quarter. So I anticipate it coming down just a little bit here in the first quarter on a mix basis, but it's largely just driven by the short-term acceleration that we're seeing and it's still remaining significantly elevated over 2019 rates." }, { "speaker": "Operator", "text": "This concludes our Q&A session for today. I turn the call back over to Brian for closing remarks." }, { "speaker": "Brian Chesky", "text": "All right, everyone. Thank you for joining us today. To recap, we had another record year in 2022. Revenue and adjusted EBITDA were both record high and free cash flow was $3.4 billion. I'm really proud of these results. And before I go, I just want to say how proud I am of our team. If you think about what we -- what this team has been through the last 3 years, initially losing 80% of our business, kind of rebuilding the company from the ground up and now just becoming a much more focused, disciplined company. This is a lot of momentum inside the company. And looking forward, we're already seeing some really strong demand in Q1. Consumer confidence to travel remains really high. I think part of that is like no matter what happens in the world, people want to travel. And for many people, the office is now Zoom, the Mall of now Amazon, the theater is now Netflix. Travel is going to become a very important way that people experience the world this year. And so therefore, this is going to be an exciting year for Airbnb and for traveling all around the world. So with that, thank you all, and we'll talk to you next quarter." }, { "speaker": "Operator", "text": "This concludes today's conference call. Thank you for attending. You may now disconnect." } ]	Airbnb, Inc.	115,705,393
ABNB	3	2,022	2022-11-01 16:30:00	Operator: Good afternoon and thank you for joining Airbnb’s Earnings Conference Call for the Third Quarter of 2022. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb’s website following this call. I will now hand the call over to Ellie Mertz, VP of Finance. Please go ahead. Ellie Mertz: Good afternoon and welcome to Airbnb’s third quarter of 2022 earnings call. Thank you for joining us today. On the call today, we have Airbnb’s Co-Founder and CEO, Brian Chesky and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our third quarter of 2022. These items were also posted on the Investor Relations section of Airbnb’s website. During the call, we will make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially, expressed or implied, in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also during this call, we will discuss some non-GAAP financial measures. We provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I will pass the call to Brian. Brian Chesky: Alright. Well, thank you, Ellie and good afternoon, everyone. Thanks for joining. Q3 was another record quarter despite macroeconomic headwinds. We had nearly 100 million Nights and Experiences Booked, which is up 25% year-over-year. Gross booking value was $15.6 billion. This is up 31% year-over-year. Revenue grew 29% year-over-year to $2.9 billion, our highest ever. And when you exclude foreign exchange, our revenue increased 36% year-over-year. Now, we also had our most profitable quarter ever. Net income was $1.2 billion. And this is up $400 million from a year ago. Now, this represents a 42% net income margin. Adjusted EBITDA was $1.5 billion, also our highest ever and we generated $960 million of free cash flow. In fact, over the last 12 months, we have generated $3.3 billion in free cash flow. What our Q3 results demonstrate is that Airbnb continues to drive growth and profitability at scale. And even with the macroeconomic uncertainties, we believe that we are well positioned for the road ahead. Now why is this? Well, new use cases such as long-term stays and non-urban travel are here to stay. And this is because millions of people now have the flexibility that they didn’t have before the pandemic. At the same time, we have seen recovery in urban and cross-border travel, two of our strongest segments before the pandemic. And just like during the Great Recession in 2008, when everything started, people today are especially interested in earning extra income through hosting. Now during the quarter, we saw a number of positive business trends. First, guest demand on Airbnb remains strong. Globally, we exceeded 90 million guest arrivals during the quarter and this is another record. Now even with macroeconomic headwinds, Nights and Experiences Booked increased 25%. And during the quarter, we also continued to see longer lead times, supporting a stronger backlog for Q4. Second, guests are increasingly returning to cities and crossing borders. Both segments continue to accelerate. Cross-border gross nights booked increased 58% compared to a year ago. High density urban nights booked grew 27%. And now even as these two segments return, demand for domestic and non-urban travel remains strong. Third, guests continue to stay longer on Airbnb. Over the last year, we have seen many companies require their employees to return to the office. And at the same time, long-term stay remains 20% of our total gross nights booked on Airbnb. And finally, four, our host community continues to grow. We believe there are several factors that are driving this growth. The first reason is the demand drives supply. For instance, in Q3, as guests were returning to cities, we saw urban supply accelerate. Second, since Airbnb began in 2008, posts have consistently churned Airbnb to earn extra income. In fact, since 2008, hosts on Airbnb have earned $180 billion in our platform. Third, over last year, we made several product improvements to help onboard and support our hosts, but we are not stopping there. On November 16, we are going to introduce an all-new super easy way for millions of people to turn to Airbnb their homes as part of our winter release. We are also delivering a major upgrade to AirCover that provides even more top or bottom protection for every host. Now with these upgrades and more, we aim to unlock the next generation of hosts and improve the experience for more than 4 million people that are already hosting. So just to recap, we had a record Q3, Nights and Experiences Booked were our highest Q3 ever, revenue and adjusted EBITDA were record high, free cash flow was $950 million. And in the last 12 months, we have generated $3.3 billion in free cash flow. So with that, Dave and I look forward to answer your questions. Operator: Thank you. [Operator Instructions] And we will take our first question from Lloyd Walmsley at UBS. Lloyd Walmsley: Thanks. Two, if I can. First, just the classic kind of macro question, anything you guys are seeing globally, any pockets where you are seeing weaker trends in bookings or ADRs that would be kind of early warning sign that you would flag heading into next year? And then second one you guys have talked a little bit about starting to invest again in Experiences. I guess if we step back, how should we think about the cost growth outlook heading into 2023? And are you – is there anything you are doing in light of just questions around macro to kind of keep a lid on costs heading into next year? Thanks. Brian Chesky: Alright. Thanks, Lloyd. Dave, why don’t I answer these and then you can go at a high level and you can go specifically into the booking side question. But Lloyd, what I am going to do is I’ll answer it at a little more of a high level. So one of the things that we have seen is, despite a lot of consumers pulling back on spending, the one area that I haven’t seen them pullback on as much is travel. And in particular, like travel, where you can go and see your friends, see your family, more inspirational type of travel, in other words, meaningful travel and not just mass travel. And I think the reason why is just because many people are now working from home, the mall is now Amazon. The movie theater is now Netflix, people still want to get out of their house. They still want to have memories. They still want to have meaningful experiences. And I think that’s why they continue to turn to Airbnb. And so just like people continue to travel this quarter, we expect really strong demand for Airbnb next year. And again, the new use cases are sticking. In other words, a fifth of our nights booked are for longer than a month and half of our nights booked are longer than a week. And this has basically been a boon because of the flexibility that people have and being able to essentially work from home or have a hybrid work lifestyle. At the same time, our urban and cross-border businesses are incredibly strong because of the value that we provide. And we think that value and having great deals is going to be a key driver as the economy slows down. On the supply side, I just would remind everyone that we started Airbnb in 2008 during the Great Recession. And at that time, many people were turning to Airbnb to earn extra income. And so we think this will be also a great time for millions of people to consider hosting, which is why we are focused on this on November 16. So we are feeling really positive about the path forward. With regards to Experiences, to answer your question very simply, the great thing about Experiences is we don’t have to have very much incremental investment to make this work. It’s really just a matter of incorporating Experiences more into our existing marketing and incorporating Experiences more into our existing products. So I don’t think you will see that in the P&L from a cost perspective next year at all. Dave, feel free to take – anything else you want to add. Dave Stephenson: No, I will just double click in a few areas. We are just doing incredibly well despite the macroeconomic environment. We saw continued strength in Q3. The Q3 nights experiences grew 25% year-over-year and our revenue grew 29% year-over-year. And as we stated, it’s actually 36% growth year-over-year, excluding the impact of foreign exchange. And what we are seeing in Q4 is not seeing any overall changes in booking behaviors from our guests. 4 weeks in this quarter, we are seeing really strong promising trends in cross-border, renewed interest in urban stays, stabilizing cancellations and just strong future bookings. And that we included in our guidance here. On our guidance for Q4, we are anticipating revenue growth between 17% and 23%. And that’s 23% to 29%, excluding the impact of foreign exchange. And maybe I will just take a minute to double click here, because one of the things we are seeing is the difference in the behavior that we had last year. If you actually go back to 2019 at historic rates, we are actually seeing stable to increasing demand for bookings here from Q3 into Q4. The decel that we see from Q3 into Q4 is really a hard comp on Q4 last year, where we had really strong demand after Delta and before Omicron. And so this is really kind of a hard year-over-year comp. And if you go back and compare back to 2019, we are seeing stable to increasing demand across the globe. And have actually aimed areas to highlight and you see it in our letter, is that APAC had some of the stronger growth, 65% growth in APAC. And excluding China, APAC is now kind of above 2019 level. So, that’s been kind of the last major region to kind of return to 2019. Lloyd Walmsley: Okay, thank you. Operator: We will move next to Naved Khan at Truist Securities. Naved Khan: Yes, thanks a lot. Is there anything worth calling out in terms of incremental demand for European sales from travelers outside of Europe, given the decline in the currencies in that area? And then the other question I had is just on advertising, can you share anything in terms of ROI on the advertising dollars? And are you seeing more opportunities to deploy these more broadly? Brian Chesky: Yes, Naved. Why don’t Dave – you take these, I can round out the answers. Dave Stephenson: Sure. In terms of European demand, we are seeing strong European demand from places like the U.S., where the dollar is stronger than the euro. It’s not a material part of the business. It’s hard to see it impact the overall materiality given just the size of our business being in 220 countries and regions around the world. And conversely, the European travel is going to be maybe less likely to come say to the U.S. where the U.S. dollar is so strong. So there is some offset in there. Overall, the impact of foreign exchange isn’t as large on the business because of the regional impacts. More people kind of travel either domestically or within their own regions. And then in terms of advertising ROI, we are really pleased with our approach to the marketing strategy that we have had. Our brand marketing results are delivering excellent results overall with a strong rate of return. And it’s been so successful that we are actually expanding to more countries. And so that’s what you will be still be seeing over the course of this next year is to expand more countries to support our brand advertising. Naved Khan: Great. Thank you. Operator: We’ll go next to Nick Jones at JMP Securities. Nick Jones: Great. Thanks for taking the questions. I guess first, I guess when we look at kind of U.S. to international travel, is the strength in U.S. dollar maybe helping drive more interest in going overseas? And then the second question on durability of kind of ADRs, as elevated home prices may be making host less likely to lower the rate at which they are willing to take kind of from here. I mean, are these going to be maybe more durable than we think? Thanks. Brian Chesky: Dave, why don’t you take the first question, I can take the second. Dave Stephenson: Yes. Again, as I just said, on the U.S. international, we clearly do have a strong U.S. dollar, which enables Americans to travel abroad quite well and we are seeing nice strength there. And again, that part of the business is not so large as to have a material impact on the overall business, because you also have some of the offsets of weaker currencies, not necessarily travel in the U.S. Again, more of the travel is domestic and intra-regional, that’s what’s really going to kind of drive things and more of the foreign exchange issues are not as pronounced within the given region. Brian Chesky: And I think just regarding elevated home prices and what that does to average daily rate on Airbnb, I mean just to zoom out, people come to Airbnb because they can find a great value. And you can often get significantly more for your money than a hotel room. You can often get an entire home with a lot of amenities. And continuing to deliver value is going to be really important for the next travel season. And that means that we need to make sure we have really competitive prices. And that means that we need to give tools for host, more tools for them to be able to better price their listings. So, one of the things we are doing is we are going to continue to move towards a more all-in pricing, where when you see pricing, instead of seeing more of a nightly rate, you are going to see a little bit more of a fully loaded rate. And then our search ranking is going to prioritize great value, great deal for the fully loaded price. I think this will really help host understand what they are charging and then we are going to give them more tools so they can see and understand what their all-in pricing is for guests and we are going to provide more discount tools and other features to allow hosts to remain competitive. And if we do all these things, I believe we will be even more competitive from a pricing standpoint than we are today. Nick Jones: Great. Thanks, Brian. Operator: We will take our next question from Brian Fitzgerald at Wells Fargo. Brian Fitzgerald: Thanks, guys. I think you will have more to say about supply with the upcoming winter release, but just wondering if you could talk about what you see as continuing pain points for host, Brian, maybe you just talk to that a little bit and maybe also structural drivers around supply like local regulations and zoning? Thanks. Brian Chesky: Yes, yes. So let me dive into this, because this is a pretty important topic. Just to zoom out, we have a global network where demand drives supply. And that means that where we see our highest growth of bookings is also typically where we see our highest growth of supply. And just to give you an example, this past quarter, approximately 35% of our new available hosts had started as guests. So this is a really strong network where guests become host and the host as they get more bookings, they tend to tell their friends about it, and then we get more supply that way. And so this is, I think, one of the things that’s really, really important. But beyond that, obviously, we want to be very aggressive about recruiting more hosts to Airbnb, because this is a great time. And because of the softening economy, we think increasingly now more than ever before, people are interested in putting their homes on Airbnb to make supplemental income. So to answer your question, what are the pain points? I would highlight too, as we’ve talked to people that are considering hosting, they have told us two things. The first thing they said is that they want it to be easier to get started. They need help getting started becoming a host. The second thing is they are a little nervous about having strangers in their house. And so we have tackled both of these. On November 16, as part of our winter release, number one, we are going to unveil an all new super easy way for millions of people to put their home on Airbnb. I am pretty excited about this. We have been working on this for quite a while. Second, to make people feel comfortable about having other people in their home, which will unlock a lot more everyday people putting their real homes on Airbnb, we are going to be providing some huge upgrades and improvements to AirCover for host. If we do these two things, I think we are going to help unlock significantly greater amounts of supply, which is already on top of the momentum that we have and we have seen in Q3. Maybe the final thing I’ll just say is in addition to adding more supply in Airbnb, the Holy Grail is pointing demand to where we have supply, because I know night globally on Airbnb, are we ever close to 100% occupied. It’s just a matter of pointing demand to where we have supply. And this is the whole theory around Airbnb categories that instead of hoping people type in the place you have available supply in the search box, you can then come and have more of a browse experience where we highlight homes that are available. So this is our holistic strategy. As far as pain points, as far as like from a regulatory standpoint, I mean, one of the things we’ve seen is a redistribution away from very large city kind of to everywhere. And a lot of cities and a lot of local communities have been actually reaching out to us, because they can see the economic opportunity we provide. So we are working really, really closely with these markets, but we are feeling very optimistic about our supply for 2023. Dave Stephenson: Let me just double click it too on a couple of Brian’s points, because I think they are really important because of these partnerships that we’ve had with local governments, especially on tax collection, we have delivered more than $6 billion in tourism-related taxes to local governments. I mean, this is a material amount of money. And collecting – remitting taxes, we do it in over 30,000 jurisdictions around the globe. And I think in terms of like zoning regulations, we believe that the reasonable regulation actually normalizes hosting. And when you normalize hosting, it can really be a foundation for future growth. So we actually think that you do this in a reasonable way, and it will actually be a tailwind to growth in the future. Brian Fitzgerald: Got it. Thanks, guys. Operator: Next, we will move to Brian Nowak at Morgan Stanley. Brian Nowak: Thanks for taking my question. I have two. The first one, just to maybe try to cut the business a little bit different way. What can you tell us about sort of your growth in active bookers or stairs versus spend per booker that’s sort of driving the business right now? And how have those cohorts that came in during COVID, how have they aged versus COVID which is cohorts you had prior to COVID. And then the second one, Brian, you made so many improvements to the platform over the years from unflexible and trying to load balance supply and demand, etcetera. What can you tell us about the conversion of traffic now versus where it was, say, in 2019? Brian Chesky: Alright. Yes, Dave, do you want to take the first question? Dave Stephenson: Yes, in terms of the active bookers, I think you kind of step back and look at the marketing approach that we’ve had since pre COVID and that we really has accelerated in COVID in sense has been to continue to focus on the overall brand of Airbnb and to be less reliant on search engine marketing. We’ve been incredibly effective at that 90% of our traffic remains direct or unpaid which is driving a great return on investment for kind of new active bookers. And so I think the return that we’re getting on new has been quite good. And in terms of the cohorts of new, we’re actually seeing that the cohorts that are coming in since COVID are actually as strong, if not even stronger than they were in prior to COVID. The people that are willing to kind of travel right now and experience Airbnb have are really sticky, and the cohorts are as strong and not stronger than we saw previously. Operator: We will go next to the... Brian Chesky: Alright. Sorry, sorry, I just want to answer about conversion of traffic for unflexible. So yes, at a high level, conversion on a year-over-year basis is up. But I would actually generally say, Brian, that we actually think about it even more broadly. When we launch Airbnb Categories, for example, one of the goals was not just increased conversion, but was actually to increase traffic. And there is a scenario where you can increase traffic, initially conversion can go down because you are a little bit more in the inspiration business. And there were people who are coming and they are dreaming and planning travel. So you really want to look at conversion over a longer period of time. But we have actually seen metronomic improvement in our conversion rate. But stays listings in Airbnb Categories since we launched on May 11 have been viewed more than 300 million times and with homes they would have never otherwise have known existed. So we are really excited about the progress we’re making between Airbnb Categories, which is really bringing a lot more traffic to Airbnb, plenty demand were half supply, bringing us top of funnel. There would be AirCover for guests, which is making people feel more assured about their experience and allowing a more consistent form of reliability. I think that we’re going to continue to see a step change in improvement in the product from a guest experience. And this, of course, will continue to lead to greater conversion. Brian Nowak: Great. Thank you, both. Operator: We will go next to Doug Anmuth from JPMorgan. Doug Anmuth: Thanks for taking the questions. I have two. First, Brian, I know you talked about strong growth in new hosts and a lot of them seeing new income opportunities. But within that, is the macro environment and interest rates, is that putting any pressure on second homes in your view? And then secondly, if you could talk a little bit about the early returns on the spring update categories. Is there anything you can add just around conversion rates or what you might be seeing in incremental bookings? Thanks. Brian Chesky: Yes, Doug, I mean, I’ll let Dave fill in, in more detail. But at the highest level, I think it’s actually pretty simple. In – as the economy slows down, I think people are looking for more ways to make either supplemental income or like greater yield on the assets they have. And so we generally see a selling economy as a moment when more and more people are going to be presumably turning to Airbnb for hosting. And so whether it’s second homes or primary homes, I think there is going to be a pretty big opportunity for us. And we just want to make sure that we provide great tools for people so they continue to lift on Airbnb. As far as some of the metrics we’ve seen, again, as I said, conversion has steadily picked up. Homes and Airbnb experiences have been viewed more than 300 million times. We’re seeing us continue to spread out bookings to more and more markets, which is a bit of the Holy Grail to be on the point demand we have supply. With AirCover for guests, which is another very important upgrade that we made because this is AirCover for guests really addresses a bit of the chilly fuel of Airbnb, which is on the one hand, we have this incredible one-of-a-kind homes. Other hand, one of a kind can be variable in consistency. And so what we’ve seen with AirCover is we provide protection in the unlikely event that a host cancels or you get to a home and it’s not as described. And we’ve seen since we’ve launched AirCover for guests, NPS is up and probably even more importantly, rebooking rates when I guess it dissatisfied is also up. And so if we can do these two things: on the front end, continue to be more in the inspiration business, point demand already have supply. On the back end, make sure that Airbnb’s are meeting your expectations. And in the rare event that they don’t, we make it right, then these are going to continue to unlock significantly greater growth for us in the year ahead. Dave Stephenson: Just to double quick on the strong – the second home impact question. If you go back and think about the 4 million hosts that we have a very different business than many others. So 90% of those hosts are individual hosts. They are the people that own a first – a primary home or maybe a secondary home and a big strength of our business, we saw this in COVID is that people even during an economic kind of shock period, they don’t get rid of their primary home. They don’t get necessarily getting rid of their secondary home, which is very different than professional hosts that maybe are doing an arbitrage of exact cost of ownership and return on the investment they can get on that specific property versus other alternatives. And so I think that this helps buffer any of those kind of impacts on our businesses, that individual host community. Doug Anmuth: Thank you. Operator: We will go next to Justin Post at Bank of America. Justin Post: Great, thanks. One quick one. When you say ADRs could face some pressure. Is that quarter-over-quarter or year-over-year in Q4? And then much bigger picture, solid bookings for 31% growth. Guidance probably implies well over 20 in Q4. How do we think about the backlog for ‘23 on revenues or associate that with potential revenue growth next year? Thank you. Brian Chesky: Alright, Dave, I think you can take this one. Dave Stephenson: Sure. On the year-over-year for Q4 – the Q4 pressure ADR is year-over-year. In terms of the backlog for ‘23, it’s a little early to tell, but really, what we’re seeing is continued strong demand for travel overall. And like I said, when you look back to historic levels of growth back to 2019, we’re seeing stable to increasing demand. We have strong bookings on the books for Q4, but then there will be fewer on the books yet for it kind of tails off into 2023. So it’s a little early to say. But we’re seeing no hints of a decline in people’s demand and willingness to travel. It’s just a little early to extrapolate much further. Justin Post: Great, thank you. Operator: We will move next to Mario Lu at Barclays. Mario Lu: Thanks for taking the questions. First one is for Brian. You mentioned earlier this one that redesigning pricing and better transparency is a top priority for you. How much of an uplift could this be to conversion potentially? And what changes should we expect to see? Brian Chesky: Yes. Mario, yes. Just to give a little more context to those listening about pricing. Right now, we have pricing that is primarily displayed on a nightly rate. Post, you can then choose to add a cleaning fee and then Airbnb ad service fees. And one of the things that we’ve been hearing from guests, and we heard it loud and clear, is that people would like a little more transparency about what they are actually paying when they first get to Airbnb. And so we are working on redesigning how pricing works on Airbnb, so people better understand the total price they are going to pay the moment they arrive at Airbnb, and it’s not a surprise for them. So I think the north star for us on this matter is transparency. I think the benefit of this is going to be – we also want to make it easier for a host to understand what they are charging. And sometimes to tell us that they are not aware of what guests are paying because as you know, we add a guest service fee on top of the price that the host charge and occasionally hosts that they are charging more than they intended to. And so we are updating some of the tools to make it easier for hosts to understand what they are charging, and this will allow them to be more competitive. In addition to that, we’re going to be updating our search ranking algorithm. We’ve been making some refinements to prioritize home that offer a better value. And of course, when a guest checks out, they leave a 5-star rating. One of the questions we ask is on a scale of 1 to 5, how good of a value was this, and home to offer a great value are going to be prioritized higher in search results. And in addition to that, we’re going to continue to develop new discounting tools, discounting tools like seasonal discounts, weekly discounts, peak season discounts and really tools to make host more competitive. If we do all this, I do believe the prices will get even more competitive. And one of the things we know is obviously as the prices get more competitive, conversion rate goes up and as conversion rate goes up, bookings go up. And just the final thing to say is we will have some updates on this soon. I’ll be in making some announcements soon. Mario Lu: Great, thanks, Brian. And just one on the operational take rate. I believe it’s still above 14% and has not changed much over the past few years. So firstly, one, is that correct? And if so, what are your thoughts on adjusting up or down in the future to drive demand? Brian Chesky: Yes, it’s a great question, Mario. I’ll start and Dave, you can feel free to jump in. We do not have an intention to increase take rate. I mean this is a company that, obviously, in the last quarter did more than $1 billion in net income, nearly $1 billion of free cash flow. So I think there is a lot of levers to increase monetization on Airbnb, but I don’t think we have to increase take rate to do that. In other words, there is opportunities like to allow additional services to host that we could charge for, and we think they pay for that we can do. So there is a lot of ways to increase the take rate on Airbnb. There are going to be some areas where we can probably optimize and improve take rates and potentially lower a little bit like on long-term space. If you’re booking a place for 2, 3, 4 months, we think conversion rate might go up if we were to lower the take rate a little bit. But I don’t think this would cut into our current business. I think that might actually keep more bookings on the platform. So we are going to continue to look at some optimization, but we think that we provide a great value. And I think if we make some of these pricing and discount changes in the coming future, I think the value on Airbnb will get even better. We’re going to remain disciplined on our expenses. And there is a lot of monetization opportunities going forward. But our general view is if we’re going to charge more, we should provide more. That’s our North Star. Operator: [Operator Instructions] We will go next to Bernie McTernan at Needham & Company. Bernie McTernan: Great. Thank you for taking question. I realize that you guys are saying you’re not seeing any negative impact yet from the macro on the consumer. But as you think about different scenarios playing out and the potential impact of a recessionary environment, is there any cohort or demographic data that you see from your consumers that makes you think Airbnb could be more resilient than broader travel? Brian Chesky: I mean I could answer the high level and Dave, you can go in. I mean, Bernie, it’s a very great question. One of the things we noticed during the pandemic – one of the lessons of the pandemic is I think Airbnb is the most adaptable business model in all of travel. And the reason why is we’re not just the European business, we’re not just a North American business. We are a truly global business. We’re in 100,000 cities all over the world. We’re not just a vacation rental business. We’re also an urban business, also a cross-border business. We’re not just a family business. We’re also popular with millennials, Gen Z and retiree at nearly every type of price point. So I think that however travel demand changes, we will be able to adapt. And that’s one of the great things about our model. It’s a global network, guests become hosts. Most hosts are regular people that tell their friends about Airbnb, which is why when a market occupancy increases, it tends in itself create more supply. So these are some of the reasons why we feel very, very excited about our ability to continue to adapt given this challenging macroeconomic environment. Dave, I don’t know if you want to add anything to it? Dave Stephenson: Yes, I’ll just double click. I mean, it’s just a great value that we provide, right, that can people can pick anything from budget to luxe. And if a person has a certain kind of budget constraint, they can choose to maybe get a slightly smaller place or place with fewer amenities maybe they are well further out, like they can adjust the type of home they want based on their budget. And I think Airbnb has such a diversity of offerings that, that enables them to do it uniquely with us, which is very different than the flexibility they might have in hotels. Operator: We will move next to James Lee at Mizuho. James Lee: Great. Thanks for taking my questions. And when we spoke with hoteliers in general, I think they are planning to keep the ADRs high and with reduced staffing levels. So just curious what you’re thinking, does that present an opportunity for you to price your product more dynamically to demand and gain share? And also considering – are you also considering a price structure change charging guest fees given the tighter consumer budget? Thanks. Brian Chesky: Yes, James, yes, I think that as we give more tools to host to be able to dynamically price, they can be more competitive. And as they are more competitive, then we will continue to gain more share. So anything that allows greater value allows for more share. We don’t – we’re not – other than changing how pricing will be displayed to make it more transparent, intuitive and to continue to offer better value, we’re not actually looking at a fundamental change to our pricing structure. Operator: We will move next to Richard Clarke at Bernstein. Richard Clarke: Alright. Thanks for taking my question. Just wondering, based on commentary, you’re seeing urban coming back. How normal are we in that mix at the moment? And can you possibly quantify what the ADR headwind might be as urban continues to come back? And then maybe just the same question regionally, you’re more skewed to the North American market than you were pre-COVID. Is that because those use cases are a bigger factor in North America or do you expect further changes in the geographical mix over time as well? Brian Chesky: Yes, Dave, you want to take this one? Dave Stephenson: Sure. In terms of like urban coming back, it just continues to be a higher and higher percentage of our overall mix. It’s not quite back to where it was in 2019, and it may never quite be because we see such great strength in our non-urban but urban is strengthening each quarter. And so that’s the trend that we’re seeing on the urban side. And I think it’s actually similar on the cross-border international side. We’re not back to where we were in kind of 2019 level. Gross nights were like 48% were cross-border back in 2019. And what we’ve just seen is a cross-border continues to be a greater, greater percentage every quarter, but we’re not quite back to where we were in 2019. Operator: We will move next to Mark Mahaney at Evercore ISI. Mark Mahaney: Okay, thanks. Let’s see. David, could I ask you just adjust the over-earning question that the free cash flow margins are truly very impressive. Just you really see them you’ve been at 40% plus or roughly for the last three quarters on a trailing 12-month basis. What would cause those margins to go materially higher or lower from here? Or is there a reason to think that they are roughly sustainable? And then can I just ask about Categories? I know somebody asked about this earlier. But Brian, these features can sometimes take quite a long time to kind of get broadly used and the doubt that they can have a major impact. And I think this is one of those that could, how long do you think it’s going to take for Categories to be kind of widely adopted used and really start impacting and helping people better match up that supply – all the supply you have with the demand that’s out there? Thanks. Brian Chesky: Alright. So we have two questions. I think, Dave, you can take the first one, and then I’ll take Categories. Dave Stephenson: Excellent. So yes, the free cash flow, I’m really proud of our delivery of the free cash flow and the free cash flow margin. So thanks for calling it out. I mean we’ve just made substantial improvement in the overall profitability of our business, right? We’ve radically adjusted our marketing expenditures to be substantially lower. We’ve made metronomic improvement in our variable costs. We’re seeing great leverage in our fixed costs. We’re being incredibly disciplined in our fixed cost growth, and that will continue going forward. And so all of those will be tailwinds to being able to maintain or even increase our free cash flow margins over time. As average daily rates could moderate next year, that does put a little bit of a headwind towards our margins. But I think the improvements in our variable costs and the fixed cost leverage should enable us to maintain or even increase free cash flow margins over the longer-term. What we will continue to have greater expansion in free cash flow margin to be some of the things that Brian talked about a little bit ago, it would be kind of incremental services or activities that we add for guests or host over time. And there is no immediate announcements of major changes that you should anticipate in ‘23, but know that, that is a focus for us and over a more extended period will drive incremental revenue for us and incremental margin. Brian Chesky: Yes. And to answer your other question about the kind of timing for wide adoption of Airbnb Categories, it’s a great question. I think just to kind of zoom out, customers of travel have been, as you know, trained over the last 25 years to search a certain way. And that way is to go to a website, there is a search box, you type in where you want to go and you search. And then what you get is a list of results. You refine the results, you compare sometimes the different websites, different apps and then you make a booking. And I think this is going to be a year transition to retrain kind of customers about how they can search for travel on Airbnb. But I think we’re going to start to see some really great momentum next year. Again, we are already seeing people discover home they never knew existed. We are seeing a lot more people engage with categories. The homes and categories have been viewed more than 300 million times, we are going to continue to be making improvements to this every single year. We have some upgrades coming out in two weeks in November. And of course, you are going to see some upgrades beyond that as well. So, I think this is a really great opportunity for us. And again, because we are a little more concentrated in vacation travel, the business travel, and because people are increasingly more flexible when they travel, we think they are going to be much more open to ideas from Airbnb. And part of this is idea of Airbnb becoming more at the top of the funnel. The way the travel funnel used to be, if you go to one website to figure out where to travel, these are typically travel content sites. Then you go to the next site, typically to book your flight, and then the third thing you do is get your hotel or get your housing. So, with Airbnb was kind of step three. And we like Airbnb to go from kind of step three to step one. This is going to take some retraining for everything to go from step three to step one, but I think there is definitely a line of sight to getting there. Operator: We will go next to Stephen Ju at Credit Suisse. Stephen Ju: Okay. Thank you. Hi Brian. Brian Chesky: Hey. Stephen Ju: So, you guys took off you – you guys took out the China supply, but maintained your outbound business. It’s probably a little bit too early to tell and there probably isn’t a lot of outbound happening as of yet. But is there anything we should worry about from a customer acquisition funnel or retention standpoint because the Airbnb use case for, I guess the Chinese traveler is going to get reduced to, I guess international only versus what was previously domestic plus international? Thanks. Brian Chesky: Yes. Stephen, I mean the crown jewel of our China business was always and we thought always was going to be the China outbound business. And the reason why is the take rate was higher for the outbound business than it was for the domestic business. The inventory is more unique. There is less competition and the average daily rate is a lot higher. So, the outbound business was always the price part of our business. And that’s what we are focused on. Now, as you know, not a lot of people are leaving the country right now, but we want to be prepared for when they do. And they eventually will, of course. And so the two things we are doing to prepare is, number one, we are going to be continuing to invest in our brand in China. And number two, if people are traveling and they are leaving China, they are going to other countries, and we would call these the core to countries. And the primary place, they are first probably going to go with intra-region. So, they are presumably going to be going to Southeast Asia, Korea, Japan. Eventually, they will go a little further to Europe and then they will presumably come back to the United States, especially maybe the kind of some of the coastal cities. And this is kind of how I think travel may recover. And so what we need to do is make sure we have enough supply in these corridors and continue to invest in our brand in China. And I think by only having an outbound business, we can actually focus all of our investments just on that, and it actually makes a lot more cost effective, a lot more efficient. And one thing I have learned is more focused we are, the more likely we are to achieve our results. So, that’s what we are feeling. We are actually feeling really confident about the prospects for China. It’s just going to be a longer like payoff than because of the fact that not a lot of people are leaving the country and traveling right now. Operator: We will go next to Eric Sheridan at Goldman Sachs. Eric Sheridan: Thanks for taking the question. Maybe a two-parter, if I can on investment strategy. Obviously, we have a lot of technology companies that are talking about slowing hiring, possibly pruning talent out of their organizations. How do you think that positions you to possibly upgrade talent within the organization, Brian? And how are you thinking about hiring goals over the next sort 12 months to 18 months? And then the second part of the question is, obviously, a slow in the economy would not be like the existential crisis that travel belt in spring of 2020. But what’s your broader philosophy of investing through a soft patch in the economy or more closely aligning revenue growth with expense growth if you did see a soft patch over a couple of quarters? Thanks so much. Brian Chesky: Yes. Hey Eric, good to talk to you. Yes, let me just recap how we think about expense management and investments. Before the pandemic, we were essentially a nearly breakeven business doing like a little under $250 million in loss from an EBITDA perspective. And of course, in the pandemic hit, we lost 80% of our business, and we completely changed our cost structure. And out of that crisis, we made a decision. And the decision we made is we weren’t going to wait for another crisis, another weakened economy or a recession to change how we invest or we run the company that we were going to be lean regardless of the economy. In other words, we were going to go from the Navy to the Navy seal, a small, lean, elite group. And so we are a small team, we are functionally organized. We are only slightly more than 6,000 people in the beginning of this year. Before obviously, the economy took a turn for the worst, we still only had a plan to hire 7% to 8% more employees. In other words, we had a plan to be really profitable and we were planning for a storm. And so we have not had a change anything about our hiring plans. We don’t intend to change anything about our hiring plans in the next 12 months to 18 months regardless of the economy because one of the lessons we have learned is a smaller we are, the more nimble we are, the faster we can move. And not only can we be more profitable, we can actually grow faster. And we have been actually more productive than we ever were in our history. We have made more than 150 upgrades in innovation across the core service. So, we are still really aggressive about trying to attract the best of our generation to this company, but that doesn’t mean hiring a lot of people. We are really embracing being a lean organization, which is partly our functional structure. We are not a business organization where you would have four marketing departments. We have one functional organization, and so that allows us to be quite a bit leaner. And I guess that goes to your other question, which is slowness in the economy. Well, regardless of what happens to the economy, our model is highly adaptable. We have a very low expense base. And we are pretty efficient with marketing. We spend a lot less on marketing than our competitors and the vast majority of our traffic is direct. So, whatever happens to the economy, I think we are in a pretty good position where we won’t have to change the way we run the company. But I think we have proven if we ever have to, of course, we will. But I don’t expect for us to have to make a lot of changes because of how much cash we are generating, because of how lean we already are. Dave Stephenson: And if I double-click on one area is that we announced our Live and Work Anywhere policy this year, and I think that has enabled us to hire the best people in the world regardless of where they live. And so to Brian’s point about hiring fewer, more senior, and more experts in areas, this has clearly been able to make sure that we are getting the best talent in the world. Brian Chesky: Yes. And maybe the last thing I will just say is I think that we learned a lot of lessons probably a year or 2 years earlier than a lot of other tech companies because we were hit so hard so early. But I think the adversity, the challenge we had just made us a much more focused, a much better company. And one of the commitments we made is we are never going to forget the lessons from the pandemic. We are never going to lose our discipline. Because the more disciplined we are, the more focused we are, not only to become more profitable, but we actually innovate faster. And so those principles are here to stay. Operator: We will move next to Ron Josey at Citi. Ron Josey: Great. Thanks for taking the question. Maybe a bigger picture question first, Brian, and then Dave, one for you on just guidance. Just I think, Brian, you were talking maybe intra-quarter about AirCover being a major franchise going forward. Clearly, we will hear more about this in the winter release. But just talk to us about how AirCover might expand longer term. We clearly see it for guests, for host. We know we will have more updates here in the next week or two weeks. But just bigger picture, how you see it as a franchise. And then, Dave, just on guidance, I think in the letter, we mentioned longer lead time for bookings, stronger backlog for 4Q. Just trying to understand how that might compare to where we were maybe in prior periods at the same time. Thank you. Brian Chesky: Alright. I will take obviously the first one, Ron. Thanks. So yes, questions around kind of the longer-term strategy around AirCover. And maybe the way to explain AirCover, let’s just take as an analogy, let’s take Amazon. So, my recollection of Amazon, this will go back maybe 20 years, because 20 years ago, Amazon even back then, their core retail business was an amazing product. They had the most amount of selection on the Internet, and they have the lowest prices. But the problem with Amazon is they had an Achilles’ heel. And the Achilles’ heel was they were competing with walking in a store and taking something out at that moment. And so one of the things they created was Amazon Prime, which was obviously addressing the core Achilles’ heel, which was shipping. I think every business has to understand what its potential weakness is. I think the great thing about Airbnb’s model is we similarly have probably the widest selection of accommodations and everything we have is truly one of a kind at a great value. But our challenge is unlike a hotel, we don’t control the inventory and it cannot structurally always be as consistent. We can’t expect every property. So, AirCover similar for consistency addresses something similar to what Prime did for Amazon with shipping, which is to say, what if we could take this off the table, this question of consistency. And on the host side, the protections have led to a huge increase in NPS. Our NPS for AirCover for a host is over 60. And this is after something happened to your home. So clearly, this was a huge hit. And it was so popular that we decided to bring it to guests. And I think where this can go is over the coming years, we can offer increasingly more protection, more coverage for more different use cases. And I think the North Star for AirCover is if a listing was across – most of our inventory is only in Airbnb. But let’s say a home was on two different websites, Airbnb and another website, we want AirCover to be so compelling that just by having AirCover alone, it would be reason to go direct and book on Airbnb and not book anywhere else. And we are going to continue to make improvements every single year, and I want AirCover to be the gold standard for customer service for our category. And that’s what we are really focused on. And then down the road, there may be opportunities to offer like a paid version of this or some other type of membership program, but that would be down the road, but it’s a very popular customer request. Operator: We will go next to Deepak – I apologize. Dave Stephenson: And then in terms of – to answer the question on guidance, too. On the guidance, articulation of the longer lead times for bookings and just the Q4 bookings that we have already on the books for the rest of this quarter is just to indicate that we have stable to accelerating demand for growth, right. And demand from our guests around the world. It’s that we are not seeing a softening in that demand especially when you look back to historic levels of 2019, that any of the deceleration in revenue growth between Q3 and Q4 is largely due to the uniqueness of the 2021 timing of growth between Delta and Omicron. So, I just think it just shows the stability of people wanting to get out their homes, wanting to travel, regardless of the macroeconomic uncertainties. Operator: We will move now to Deepak Mathivanan at Wolfe Research. Deepak Mathivanan: Great. Thanks for taking the questions. Just a couple of quick ones. So first, there has been a lot of press recently about how occupancies on the platform are down for certain house hosts. Is it just anecdotal or seasonal or whether there is anything more to it? I mean your 4Q guidance is pretty strong, but just trying to understand how much of this is just kind of noise out there. And then second question, maybe for Brian. Long-term stays is stabilizing near 20% of the mix on the platform, even as sort of your room nights is growing pretty nicely, you have talked about sort of like the flexibility and lifestyle for many people keeping this – or helping this growth. But curious whether there is also like a bigger macro drivers like maybe rental markets being very difficult right now that’s helping this trend. Just kind of trying to understand how much you are reaching already into the addressable markets beyond travel currently. Brian Chesky: Yes. I can – I will take both, and then Dave can feel free to dive in, especially on the bookings. I mean I think our – just to answer your question on whether bookings were down for hosts. I mean at the macro level, at the high level, they are not down. And I mean I think the Q3 results speak for themselves. There are anecdotal descriptions of some host bookings are down, some host bookings are up. And this – there is many possible explanations for this. It’s just that travel is continuing to change. One of the other things though is that our search rank algorithm is prioritizing all-in pricing and host with the best value. So, it’s possible that might be one possible explanation. But again, it’s primarily what we have seen is anecdotal. And it really depends – you really have to take it on a case-by-case basis. But overall, obviously, bookings are up. In fact, it’s a record quarter. Now, with regard to long-term stays beyond travel, I mean feedback, I would just say that we have only scratched the surface. A fifth of our nights book are for stays longer than a month. And this is before making some really big fundamental improvement to this product in this category. And I think in the coming years, flexibility is here to stay. I think more people are going to work remotely in a hybrid way 5 years from now than they do today. I think increasingly, fewer people are going to have 1-year leases, not to say no one will, but more and more people are going to value the flexibility and want to live in different places. And we think there is a real opportunity. And one of the things we are going to also see over the coming years isn’t just that people are going to live in different parts of the United States, but people are going to choose to live for short periods of time abroad in different countries. So, we think we are going to start to see more long-term cross-border business, too. So, there is a lot of opportunities here. And we are going to be making some upgrades to our long-term stay business to tap into this large market. I mean the largest expense that most people have in their life is their housing, it’s their housing costs. And we have built many of the tools and features that you would need to provide for a longer term stay offering already. But we are going to continue to make improvements. And as we do, I think we will continue to take more and more of that market. Operator: Next, we will move to Lee Horowitz at Deutsche Bank. Lee Horowitz: Great. Thanks. So, building on the comments earlier about expense growth. Given that your advertising strategy has moved away from, say, purely demand linked performance advertising and more towards longer-dated ROI investments and brand advertising. How do you think about actively flexing down your advertising spend in a perhaps a tougher macro environment versus investing into that environment to continue to teach the customers – retrain the customers about your ever-expanding product set? Brian Chesky: Dave, do you want to start with this? Dave Stephenson: Sure. I mean if you look at our actual advertising strategy and the amount of money we are spending on it, it’s going to be relatively flat from ‘22 over ‘21, and you should anticipate similar marketing as a percentage of revenue in ‘23. And so we can certainly flex it in line with revenue. We will be kind of mindful of that. But what we have already kind of hit this new kind of lower overall rate. And what we have actually seen is, to the extent that we are keeping it flat even as we grow, it’s because we are actually seeing such success that we are wanting to be able to invest in other countries. Certainly, we can moderate that over time, but we are already so low that I wouldn’t anticipate us dropping it dramatically in face of substantial headwinds over growth. But we can flex it with the revenue within a reasonably a few hundred basis points here and there. Brian Chesky: And I will just say – just to jump in. I mean we don’t really think of marketing as a way to buy customers because, obviously, as we have mentioned, more than 90% of our traffic is direct or organic. And so the main thing is we take a full funnel approach to marketing. And actually the top of the funnel is PR and communication. And we think that’s one of the biggest drivers of our traffic is PR. And then brand marketing is actually important. And actually, we think a bit more like product marketing. We want to educate people about our new features. So, right now, we are advertising and educating people about Airbnb Categories and AirCover. And then we think that performance marketing is more of a way the laser in to balance supply and demand rather than a way purchased a large amount of customers. And that’s essentially the way we think about marketing. And this allows for a very efficient, very dynamic approach to marketing that should get more efficient every single year. Operator: And we will take our final question from Brad Erickson at RBC Capital Markets. Brad Erickson: Hey. Thanks. Few follow-ups. First, nights came up just a bit light of where we all had it forecasted. So, obviously, that’s on us. But I guess in cases where you are maybe seeing a little bit of nights booked softness, are you seeing those hosts making moves on price, or are your pricing tools sending any message to those hosts about making moves? Just curious if you look to affect some elasticity in the event of any pockets of softness. And then second, Dave, I know you spoke to this just a minute ago on the backlog, but asked in a different way. Are you basically saying that you are seeing booking windows expand more than prior years here as we start out Q4? Thanks. Brian Chesky: Yes. Brad, I will take the first question. I think Dave can take the second. Yes, I mean what we do see is that many hosts do bring their prices up or down as demand goes up or down. That being said, I think there is opportunities for us to have more dynamic tools and give more visibility that would make prices even more competitive. To answer your question, they do, many hosts do adjust their prices, but I think hosts probably adjust their prices less frequently than hotels. And so in periods of time where prices are generally coming down in the industry, we might be a little bit slower. But as we build more tools to provide more dynamic changes, we will be – continue to be more competitive. And I will let Dave take next question. Dave Stephenson: Yes. Well, a couple of things. One thing is we are not focused on optimizing just night side. I think nights is an important measure, and it’s an important driver of kind of overall demand. But we could also drive a lot of nights and looking and try to just drive them towards lower rate nights. Like we are trying to drive a balance of making sure that we have nights growth and revenue growth. And revenue growth obviously pays the bills. And so we are seeing strong growth in the business. I am very happy with our Q3 results. And on our full guide like you said, I think we are seeing stable to increasing demand, and we are just really impressed with the resiliency of guests and their willingness to travel and interest in traveling Airbnb. And I guess it goes back to the backlog, too, is that the reason why we kind of highlight is just that people are having confidence in travel. So, what we are seeing is that, yes, the booking windows are up year-over-year. There are a little bit – there is some seasonality in that. So, they are actually booking windows a little bit down from Q3. And so as – the lead times are just up from historical levels because the people are confident in being able to travel, I think that’s the important thing you should take away. Operator: And that concludes the question-and-answer session. At this time, I will turn the conference back over to Brian for any concluding remarks. End of Q&A: Brian Chesky: Alright. Well, first of all, thank you all for joining today. I just want to recap and just say we are incredibly proud of our results. And I believe we are incredibly well positioned for the future ahead. I hope you all join us in two weeks for 2022 winter release. You will be able to watch it right from our homepage on Wednesday, this is November 16th, 8 a.m. Eastern. Thank you all and I will see you then. Operator: And that concludes today’s conference call. Thank you for your participation. You may now disconnect.	[ { "speaker": "Operator", "text": "Good afternoon and thank you for joining Airbnb’s Earnings Conference Call for the Third Quarter of 2022. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb’s website following this call. I will now hand the call over to Ellie Mertz, VP of Finance. Please go ahead." }, { "speaker": "Ellie Mertz", "text": "Good afternoon and welcome to Airbnb’s third quarter of 2022 earnings call. Thank you for joining us today. On the call today, we have Airbnb’s Co-Founder and CEO, Brian Chesky and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our third quarter of 2022. These items were also posted on the Investor Relations section of Airbnb’s website. During the call, we will make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially, expressed or implied, in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also during this call, we will discuss some non-GAAP financial measures. We provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I will pass the call to Brian." }, { "speaker": "Brian Chesky", "text": "Alright. Well, thank you, Ellie and good afternoon, everyone. Thanks for joining. Q3 was another record quarter despite macroeconomic headwinds. We had nearly 100 million Nights and Experiences Booked, which is up 25% year-over-year. Gross booking value was $15.6 billion. This is up 31% year-over-year. Revenue grew 29% year-over-year to $2.9 billion, our highest ever. And when you exclude foreign exchange, our revenue increased 36% year-over-year. Now, we also had our most profitable quarter ever. Net income was $1.2 billion. And this is up $400 million from a year ago. Now, this represents a 42% net income margin. Adjusted EBITDA was $1.5 billion, also our highest ever and we generated $960 million of free cash flow. In fact, over the last 12 months, we have generated $3.3 billion in free cash flow. What our Q3 results demonstrate is that Airbnb continues to drive growth and profitability at scale. And even with the macroeconomic uncertainties, we believe that we are well positioned for the road ahead. Now why is this? Well, new use cases such as long-term stays and non-urban travel are here to stay. And this is because millions of people now have the flexibility that they didn’t have before the pandemic. At the same time, we have seen recovery in urban and cross-border travel, two of our strongest segments before the pandemic. And just like during the Great Recession in 2008, when everything started, people today are especially interested in earning extra income through hosting. Now during the quarter, we saw a number of positive business trends. First, guest demand on Airbnb remains strong. Globally, we exceeded 90 million guest arrivals during the quarter and this is another record. Now even with macroeconomic headwinds, Nights and Experiences Booked increased 25%. And during the quarter, we also continued to see longer lead times, supporting a stronger backlog for Q4. Second, guests are increasingly returning to cities and crossing borders. Both segments continue to accelerate. Cross-border gross nights booked increased 58% compared to a year ago. High density urban nights booked grew 27%. And now even as these two segments return, demand for domestic and non-urban travel remains strong. Third, guests continue to stay longer on Airbnb. Over the last year, we have seen many companies require their employees to return to the office. And at the same time, long-term stay remains 20% of our total gross nights booked on Airbnb. And finally, four, our host community continues to grow. We believe there are several factors that are driving this growth. The first reason is the demand drives supply. For instance, in Q3, as guests were returning to cities, we saw urban supply accelerate. Second, since Airbnb began in 2008, posts have consistently churned Airbnb to earn extra income. In fact, since 2008, hosts on Airbnb have earned $180 billion in our platform. Third, over last year, we made several product improvements to help onboard and support our hosts, but we are not stopping there. On November 16, we are going to introduce an all-new super easy way for millions of people to turn to Airbnb their homes as part of our winter release. We are also delivering a major upgrade to AirCover that provides even more top or bottom protection for every host. Now with these upgrades and more, we aim to unlock the next generation of hosts and improve the experience for more than 4 million people that are already hosting. So just to recap, we had a record Q3, Nights and Experiences Booked were our highest Q3 ever, revenue and adjusted EBITDA were record high, free cash flow was $950 million. And in the last 12 months, we have generated $3.3 billion in free cash flow. So with that, Dave and I look forward to answer your questions." }, { "speaker": "Operator", "text": "Thank you. [Operator Instructions] And we will take our first question from Lloyd Walmsley at UBS." }, { "speaker": "Lloyd Walmsley", "text": "Thanks. Two, if I can. First, just the classic kind of macro question, anything you guys are seeing globally, any pockets where you are seeing weaker trends in bookings or ADRs that would be kind of early warning sign that you would flag heading into next year? And then second one you guys have talked a little bit about starting to invest again in Experiences. I guess if we step back, how should we think about the cost growth outlook heading into 2023? And are you – is there anything you are doing in light of just questions around macro to kind of keep a lid on costs heading into next year? Thanks." }, { "speaker": "Brian Chesky", "text": "Alright. Thanks, Lloyd. Dave, why don’t I answer these and then you can go at a high level and you can go specifically into the booking side question. But Lloyd, what I am going to do is I’ll answer it at a little more of a high level. So one of the things that we have seen is, despite a lot of consumers pulling back on spending, the one area that I haven’t seen them pullback on as much is travel. And in particular, like travel, where you can go and see your friends, see your family, more inspirational type of travel, in other words, meaningful travel and not just mass travel. And I think the reason why is just because many people are now working from home, the mall is now Amazon. The movie theater is now Netflix, people still want to get out of their house. They still want to have memories. They still want to have meaningful experiences. And I think that’s why they continue to turn to Airbnb. And so just like people continue to travel this quarter, we expect really strong demand for Airbnb next year. And again, the new use cases are sticking. In other words, a fifth of our nights booked are for longer than a month and half of our nights booked are longer than a week. And this has basically been a boon because of the flexibility that people have and being able to essentially work from home or have a hybrid work lifestyle. At the same time, our urban and cross-border businesses are incredibly strong because of the value that we provide. And we think that value and having great deals is going to be a key driver as the economy slows down. On the supply side, I just would remind everyone that we started Airbnb in 2008 during the Great Recession. And at that time, many people were turning to Airbnb to earn extra income. And so we think this will be also a great time for millions of people to consider hosting, which is why we are focused on this on November 16. So we are feeling really positive about the path forward. With regards to Experiences, to answer your question very simply, the great thing about Experiences is we don’t have to have very much incremental investment to make this work. It’s really just a matter of incorporating Experiences more into our existing marketing and incorporating Experiences more into our existing products. So I don’t think you will see that in the P&L from a cost perspective next year at all. Dave, feel free to take – anything else you want to add." }, { "speaker": "Dave Stephenson", "text": "No, I will just double click in a few areas. We are just doing incredibly well despite the macroeconomic environment. We saw continued strength in Q3. The Q3 nights experiences grew 25% year-over-year and our revenue grew 29% year-over-year. And as we stated, it’s actually 36% growth year-over-year, excluding the impact of foreign exchange. And what we are seeing in Q4 is not seeing any overall changes in booking behaviors from our guests. 4 weeks in this quarter, we are seeing really strong promising trends in cross-border, renewed interest in urban stays, stabilizing cancellations and just strong future bookings. And that we included in our guidance here. On our guidance for Q4, we are anticipating revenue growth between 17% and 23%. And that’s 23% to 29%, excluding the impact of foreign exchange. And maybe I will just take a minute to double click here, because one of the things we are seeing is the difference in the behavior that we had last year. If you actually go back to 2019 at historic rates, we are actually seeing stable to increasing demand for bookings here from Q3 into Q4. The decel that we see from Q3 into Q4 is really a hard comp on Q4 last year, where we had really strong demand after Delta and before Omicron. And so this is really kind of a hard year-over-year comp. And if you go back and compare back to 2019, we are seeing stable to increasing demand across the globe. And have actually aimed areas to highlight and you see it in our letter, is that APAC had some of the stronger growth, 65% growth in APAC. And excluding China, APAC is now kind of above 2019 level. So, that’s been kind of the last major region to kind of return to 2019." }, { "speaker": "Lloyd Walmsley", "text": "Okay, thank you." }, { "speaker": "Operator", "text": "We will move next to Naved Khan at Truist Securities." }, { "speaker": "Naved Khan", "text": "Yes, thanks a lot. Is there anything worth calling out in terms of incremental demand for European sales from travelers outside of Europe, given the decline in the currencies in that area? And then the other question I had is just on advertising, can you share anything in terms of ROI on the advertising dollars? And are you seeing more opportunities to deploy these more broadly?" }, { "speaker": "Brian Chesky", "text": "Yes, Naved. Why don’t Dave – you take these, I can round out the answers." }, { "speaker": "Dave Stephenson", "text": "Sure. In terms of European demand, we are seeing strong European demand from places like the U.S., where the dollar is stronger than the euro. It’s not a material part of the business. It’s hard to see it impact the overall materiality given just the size of our business being in 220 countries and regions around the world. And conversely, the European travel is going to be maybe less likely to come say to the U.S. where the U.S. dollar is so strong. So there is some offset in there. Overall, the impact of foreign exchange isn’t as large on the business because of the regional impacts. More people kind of travel either domestically or within their own regions. And then in terms of advertising ROI, we are really pleased with our approach to the marketing strategy that we have had. Our brand marketing results are delivering excellent results overall with a strong rate of return. And it’s been so successful that we are actually expanding to more countries. And so that’s what you will be still be seeing over the course of this next year is to expand more countries to support our brand advertising." }, { "speaker": "Naved Khan", "text": "Great. Thank you." }, { "speaker": "Operator", "text": "We’ll go next to Nick Jones at JMP Securities." }, { "speaker": "Nick Jones", "text": "Great. Thanks for taking the questions. I guess first, I guess when we look at kind of U.S. to international travel, is the strength in U.S. dollar maybe helping drive more interest in going overseas? And then the second question on durability of kind of ADRs, as elevated home prices may be making host less likely to lower the rate at which they are willing to take kind of from here. I mean, are these going to be maybe more durable than we think? Thanks." }, { "speaker": "Brian Chesky", "text": "Dave, why don’t you take the first question, I can take the second." }, { "speaker": "Dave Stephenson", "text": "Yes. Again, as I just said, on the U.S. international, we clearly do have a strong U.S. dollar, which enables Americans to travel abroad quite well and we are seeing nice strength there. And again, that part of the business is not so large as to have a material impact on the overall business, because you also have some of the offsets of weaker currencies, not necessarily travel in the U.S. Again, more of the travel is domestic and intra-regional, that’s what’s really going to kind of drive things and more of the foreign exchange issues are not as pronounced within the given region." }, { "speaker": "Brian Chesky", "text": "And I think just regarding elevated home prices and what that does to average daily rate on Airbnb, I mean just to zoom out, people come to Airbnb because they can find a great value. And you can often get significantly more for your money than a hotel room. You can often get an entire home with a lot of amenities. And continuing to deliver value is going to be really important for the next travel season. And that means that we need to make sure we have really competitive prices. And that means that we need to give tools for host, more tools for them to be able to better price their listings. So, one of the things we are doing is we are going to continue to move towards a more all-in pricing, where when you see pricing, instead of seeing more of a nightly rate, you are going to see a little bit more of a fully loaded rate. And then our search ranking is going to prioritize great value, great deal for the fully loaded price. I think this will really help host understand what they are charging and then we are going to give them more tools so they can see and understand what their all-in pricing is for guests and we are going to provide more discount tools and other features to allow hosts to remain competitive. And if we do all these things, I believe we will be even more competitive from a pricing standpoint than we are today." }, { "speaker": "Nick Jones", "text": "Great. Thanks, Brian." }, { "speaker": "Operator", "text": "We will take our next question from Brian Fitzgerald at Wells Fargo." }, { "speaker": "Brian Fitzgerald", "text": "Thanks, guys. I think you will have more to say about supply with the upcoming winter release, but just wondering if you could talk about what you see as continuing pain points for host, Brian, maybe you just talk to that a little bit and maybe also structural drivers around supply like local regulations and zoning? Thanks." }, { "speaker": "Brian Chesky", "text": "Yes, yes. So let me dive into this, because this is a pretty important topic. Just to zoom out, we have a global network where demand drives supply. And that means that where we see our highest growth of bookings is also typically where we see our highest growth of supply. And just to give you an example, this past quarter, approximately 35% of our new available hosts had started as guests. So this is a really strong network where guests become host and the host as they get more bookings, they tend to tell their friends about it, and then we get more supply that way. And so this is, I think, one of the things that’s really, really important. But beyond that, obviously, we want to be very aggressive about recruiting more hosts to Airbnb, because this is a great time. And because of the softening economy, we think increasingly now more than ever before, people are interested in putting their homes on Airbnb to make supplemental income. So to answer your question, what are the pain points? I would highlight too, as we’ve talked to people that are considering hosting, they have told us two things. The first thing they said is that they want it to be easier to get started. They need help getting started becoming a host. The second thing is they are a little nervous about having strangers in their house. And so we have tackled both of these. On November 16, as part of our winter release, number one, we are going to unveil an all new super easy way for millions of people to put their home on Airbnb. I am pretty excited about this. We have been working on this for quite a while. Second, to make people feel comfortable about having other people in their home, which will unlock a lot more everyday people putting their real homes on Airbnb, we are going to be providing some huge upgrades and improvements to AirCover for host. If we do these two things, I think we are going to help unlock significantly greater amounts of supply, which is already on top of the momentum that we have and we have seen in Q3. Maybe the final thing I’ll just say is in addition to adding more supply in Airbnb, the Holy Grail is pointing demand to where we have supply, because I know night globally on Airbnb, are we ever close to 100% occupied. It’s just a matter of pointing demand to where we have supply. And this is the whole theory around Airbnb categories that instead of hoping people type in the place you have available supply in the search box, you can then come and have more of a browse experience where we highlight homes that are available. So this is our holistic strategy. As far as pain points, as far as like from a regulatory standpoint, I mean, one of the things we’ve seen is a redistribution away from very large city kind of to everywhere. And a lot of cities and a lot of local communities have been actually reaching out to us, because they can see the economic opportunity we provide. So we are working really, really closely with these markets, but we are feeling very optimistic about our supply for 2023." }, { "speaker": "Dave Stephenson", "text": "Let me just double click it too on a couple of Brian’s points, because I think they are really important because of these partnerships that we’ve had with local governments, especially on tax collection, we have delivered more than $6 billion in tourism-related taxes to local governments. I mean, this is a material amount of money. And collecting – remitting taxes, we do it in over 30,000 jurisdictions around the globe. And I think in terms of like zoning regulations, we believe that the reasonable regulation actually normalizes hosting. And when you normalize hosting, it can really be a foundation for future growth. So we actually think that you do this in a reasonable way, and it will actually be a tailwind to growth in the future." }, { "speaker": "Brian Fitzgerald", "text": "Got it. Thanks, guys." }, { "speaker": "Operator", "text": "Next, we will move to Brian Nowak at Morgan Stanley." }, { "speaker": "Brian Nowak", "text": "Thanks for taking my question. I have two. The first one, just to maybe try to cut the business a little bit different way. What can you tell us about sort of your growth in active bookers or stairs versus spend per booker that’s sort of driving the business right now? And how have those cohorts that came in during COVID, how have they aged versus COVID which is cohorts you had prior to COVID. And then the second one, Brian, you made so many improvements to the platform over the years from unflexible and trying to load balance supply and demand, etcetera. What can you tell us about the conversion of traffic now versus where it was, say, in 2019?" }, { "speaker": "Brian Chesky", "text": "Alright. Yes, Dave, do you want to take the first question?" }, { "speaker": "Dave Stephenson", "text": "Yes, in terms of the active bookers, I think you kind of step back and look at the marketing approach that we’ve had since pre COVID and that we really has accelerated in COVID in sense has been to continue to focus on the overall brand of Airbnb and to be less reliant on search engine marketing. We’ve been incredibly effective at that 90% of our traffic remains direct or unpaid which is driving a great return on investment for kind of new active bookers. And so I think the return that we’re getting on new has been quite good. And in terms of the cohorts of new, we’re actually seeing that the cohorts that are coming in since COVID are actually as strong, if not even stronger than they were in prior to COVID. The people that are willing to kind of travel right now and experience Airbnb have are really sticky, and the cohorts are as strong and not stronger than we saw previously." }, { "speaker": "Operator", "text": "We will go next to the..." }, { "speaker": "Brian Chesky", "text": "Alright. Sorry, sorry, I just want to answer about conversion of traffic for unflexible. So yes, at a high level, conversion on a year-over-year basis is up. But I would actually generally say, Brian, that we actually think about it even more broadly. When we launch Airbnb Categories, for example, one of the goals was not just increased conversion, but was actually to increase traffic. And there is a scenario where you can increase traffic, initially conversion can go down because you are a little bit more in the inspiration business. And there were people who are coming and they are dreaming and planning travel. So you really want to look at conversion over a longer period of time. But we have actually seen metronomic improvement in our conversion rate. But stays listings in Airbnb Categories since we launched on May 11 have been viewed more than 300 million times and with homes they would have never otherwise have known existed. So we are really excited about the progress we’re making between Airbnb Categories, which is really bringing a lot more traffic to Airbnb, plenty demand were half supply, bringing us top of funnel. There would be AirCover for guests, which is making people feel more assured about their experience and allowing a more consistent form of reliability. I think that we’re going to continue to see a step change in improvement in the product from a guest experience. And this, of course, will continue to lead to greater conversion." }, { "speaker": "Brian Nowak", "text": "Great. Thank you, both." }, { "speaker": "Operator", "text": "We will go next to Doug Anmuth from JPMorgan." }, { "speaker": "Doug Anmuth", "text": "Thanks for taking the questions. I have two. First, Brian, I know you talked about strong growth in new hosts and a lot of them seeing new income opportunities. But within that, is the macro environment and interest rates, is that putting any pressure on second homes in your view? And then secondly, if you could talk a little bit about the early returns on the spring update categories. Is there anything you can add just around conversion rates or what you might be seeing in incremental bookings? Thanks." }, { "speaker": "Brian Chesky", "text": "Yes, Doug, I mean, I’ll let Dave fill in, in more detail. But at the highest level, I think it’s actually pretty simple. In – as the economy slows down, I think people are looking for more ways to make either supplemental income or like greater yield on the assets they have. And so we generally see a selling economy as a moment when more and more people are going to be presumably turning to Airbnb for hosting. And so whether it’s second homes or primary homes, I think there is going to be a pretty big opportunity for us. And we just want to make sure that we provide great tools for people so they continue to lift on Airbnb. As far as some of the metrics we’ve seen, again, as I said, conversion has steadily picked up. Homes and Airbnb experiences have been viewed more than 300 million times. We’re seeing us continue to spread out bookings to more and more markets, which is a bit of the Holy Grail to be on the point demand we have supply. With AirCover for guests, which is another very important upgrade that we made because this is AirCover for guests really addresses a bit of the chilly fuel of Airbnb, which is on the one hand, we have this incredible one-of-a-kind homes. Other hand, one of a kind can be variable in consistency. And so what we’ve seen with AirCover is we provide protection in the unlikely event that a host cancels or you get to a home and it’s not as described. And we’ve seen since we’ve launched AirCover for guests, NPS is up and probably even more importantly, rebooking rates when I guess it dissatisfied is also up. And so if we can do these two things: on the front end, continue to be more in the inspiration business, point demand already have supply. On the back end, make sure that Airbnb’s are meeting your expectations. And in the rare event that they don’t, we make it right, then these are going to continue to unlock significantly greater growth for us in the year ahead." }, { "speaker": "Dave Stephenson", "text": "Just to double quick on the strong – the second home impact question. If you go back and think about the 4 million hosts that we have a very different business than many others. So 90% of those hosts are individual hosts. They are the people that own a first – a primary home or maybe a secondary home and a big strength of our business, we saw this in COVID is that people even during an economic kind of shock period, they don’t get rid of their primary home. They don’t get necessarily getting rid of their secondary home, which is very different than professional hosts that maybe are doing an arbitrage of exact cost of ownership and return on the investment they can get on that specific property versus other alternatives. And so I think that this helps buffer any of those kind of impacts on our businesses, that individual host community." }, { "speaker": "Doug Anmuth", "text": "Thank you." }, { "speaker": "Operator", "text": "We will go next to Justin Post at Bank of America." }, { "speaker": "Justin Post", "text": "Great, thanks. One quick one. When you say ADRs could face some pressure. Is that quarter-over-quarter or year-over-year in Q4? And then much bigger picture, solid bookings for 31% growth. Guidance probably implies well over 20 in Q4. How do we think about the backlog for ‘23 on revenues or associate that with potential revenue growth next year? Thank you." }, { "speaker": "Brian Chesky", "text": "Alright, Dave, I think you can take this one." }, { "speaker": "Dave Stephenson", "text": "Sure. On the year-over-year for Q4 – the Q4 pressure ADR is year-over-year. In terms of the backlog for ‘23, it’s a little early to tell, but really, what we’re seeing is continued strong demand for travel overall. And like I said, when you look back to historic levels of growth back to 2019, we’re seeing stable to increasing demand. We have strong bookings on the books for Q4, but then there will be fewer on the books yet for it kind of tails off into 2023. So it’s a little early to say. But we’re seeing no hints of a decline in people’s demand and willingness to travel. It’s just a little early to extrapolate much further." }, { "speaker": "Justin Post", "text": "Great, thank you." }, { "speaker": "Operator", "text": "We will move next to Mario Lu at Barclays." }, { "speaker": "Mario Lu", "text": "Thanks for taking the questions. First one is for Brian. You mentioned earlier this one that redesigning pricing and better transparency is a top priority for you. How much of an uplift could this be to conversion potentially? And what changes should we expect to see?" }, { "speaker": "Brian Chesky", "text": "Yes. Mario, yes. Just to give a little more context to those listening about pricing. Right now, we have pricing that is primarily displayed on a nightly rate. Post, you can then choose to add a cleaning fee and then Airbnb ad service fees. And one of the things that we’ve been hearing from guests, and we heard it loud and clear, is that people would like a little more transparency about what they are actually paying when they first get to Airbnb. And so we are working on redesigning how pricing works on Airbnb, so people better understand the total price they are going to pay the moment they arrive at Airbnb, and it’s not a surprise for them. So I think the north star for us on this matter is transparency. I think the benefit of this is going to be – we also want to make it easier for a host to understand what they are charging. And sometimes to tell us that they are not aware of what guests are paying because as you know, we add a guest service fee on top of the price that the host charge and occasionally hosts that they are charging more than they intended to. And so we are updating some of the tools to make it easier for hosts to understand what they are charging, and this will allow them to be more competitive. In addition to that, we’re going to be updating our search ranking algorithm. We’ve been making some refinements to prioritize home that offer a better value. And of course, when a guest checks out, they leave a 5-star rating. One of the questions we ask is on a scale of 1 to 5, how good of a value was this, and home to offer a great value are going to be prioritized higher in search results. And in addition to that, we’re going to continue to develop new discounting tools, discounting tools like seasonal discounts, weekly discounts, peak season discounts and really tools to make host more competitive. If we do all this, I do believe the prices will get even more competitive. And one of the things we know is obviously as the prices get more competitive, conversion rate goes up and as conversion rate goes up, bookings go up. And just the final thing to say is we will have some updates on this soon. I’ll be in making some announcements soon." }, { "speaker": "Mario Lu", "text": "Great, thanks, Brian. And just one on the operational take rate. I believe it’s still above 14% and has not changed much over the past few years. So firstly, one, is that correct? And if so, what are your thoughts on adjusting up or down in the future to drive demand?" }, { "speaker": "Brian Chesky", "text": "Yes, it’s a great question, Mario. I’ll start and Dave, you can feel free to jump in. We do not have an intention to increase take rate. I mean this is a company that, obviously, in the last quarter did more than $1 billion in net income, nearly $1 billion of free cash flow. So I think there is a lot of levers to increase monetization on Airbnb, but I don’t think we have to increase take rate to do that. In other words, there is opportunities like to allow additional services to host that we could charge for, and we think they pay for that we can do. So there is a lot of ways to increase the take rate on Airbnb. There are going to be some areas where we can probably optimize and improve take rates and potentially lower a little bit like on long-term space. If you’re booking a place for 2, 3, 4 months, we think conversion rate might go up if we were to lower the take rate a little bit. But I don’t think this would cut into our current business. I think that might actually keep more bookings on the platform. So we are going to continue to look at some optimization, but we think that we provide a great value. And I think if we make some of these pricing and discount changes in the coming future, I think the value on Airbnb will get even better. We’re going to remain disciplined on our expenses. And there is a lot of monetization opportunities going forward. But our general view is if we’re going to charge more, we should provide more. That’s our North Star." }, { "speaker": "Operator", "text": "[Operator Instructions] We will go next to Bernie McTernan at Needham & Company." }, { "speaker": "Bernie McTernan", "text": "Great. Thank you for taking question. I realize that you guys are saying you’re not seeing any negative impact yet from the macro on the consumer. But as you think about different scenarios playing out and the potential impact of a recessionary environment, is there any cohort or demographic data that you see from your consumers that makes you think Airbnb could be more resilient than broader travel?" }, { "speaker": "Brian Chesky", "text": "I mean I could answer the high level and Dave, you can go in. I mean, Bernie, it’s a very great question. One of the things we noticed during the pandemic – one of the lessons of the pandemic is I think Airbnb is the most adaptable business model in all of travel. And the reason why is we’re not just the European business, we’re not just a North American business. We are a truly global business. We’re in 100,000 cities all over the world. We’re not just a vacation rental business. We’re also an urban business, also a cross-border business. We’re not just a family business. We’re also popular with millennials, Gen Z and retiree at nearly every type of price point. So I think that however travel demand changes, we will be able to adapt. And that’s one of the great things about our model. It’s a global network, guests become hosts. Most hosts are regular people that tell their friends about Airbnb, which is why when a market occupancy increases, it tends in itself create more supply. So these are some of the reasons why we feel very, very excited about our ability to continue to adapt given this challenging macroeconomic environment. Dave, I don’t know if you want to add anything to it?" }, { "speaker": "Dave Stephenson", "text": "Yes, I’ll just double click. I mean, it’s just a great value that we provide, right, that can people can pick anything from budget to luxe. And if a person has a certain kind of budget constraint, they can choose to maybe get a slightly smaller place or place with fewer amenities maybe they are well further out, like they can adjust the type of home they want based on their budget. And I think Airbnb has such a diversity of offerings that, that enables them to do it uniquely with us, which is very different than the flexibility they might have in hotels." }, { "speaker": "Operator", "text": "We will move next to James Lee at Mizuho." }, { "speaker": "James Lee", "text": "Great. Thanks for taking my questions. And when we spoke with hoteliers in general, I think they are planning to keep the ADRs high and with reduced staffing levels. So just curious what you’re thinking, does that present an opportunity for you to price your product more dynamically to demand and gain share? And also considering – are you also considering a price structure change charging guest fees given the tighter consumer budget? Thanks." }, { "speaker": "Brian Chesky", "text": "Yes, James, yes, I think that as we give more tools to host to be able to dynamically price, they can be more competitive. And as they are more competitive, then we will continue to gain more share. So anything that allows greater value allows for more share. We don’t – we’re not – other than changing how pricing will be displayed to make it more transparent, intuitive and to continue to offer better value, we’re not actually looking at a fundamental change to our pricing structure." }, { "speaker": "Operator", "text": "We will move next to Richard Clarke at Bernstein." }, { "speaker": "Richard Clarke", "text": "Alright. Thanks for taking my question. Just wondering, based on commentary, you’re seeing urban coming back. How normal are we in that mix at the moment? And can you possibly quantify what the ADR headwind might be as urban continues to come back? And then maybe just the same question regionally, you’re more skewed to the North American market than you were pre-COVID. Is that because those use cases are a bigger factor in North America or do you expect further changes in the geographical mix over time as well?" }, { "speaker": "Brian Chesky", "text": "Yes, Dave, you want to take this one?" }, { "speaker": "Dave Stephenson", "text": "Sure. In terms of like urban coming back, it just continues to be a higher and higher percentage of our overall mix. It’s not quite back to where it was in 2019, and it may never quite be because we see such great strength in our non-urban but urban is strengthening each quarter. And so that’s the trend that we’re seeing on the urban side. And I think it’s actually similar on the cross-border international side. We’re not back to where we were in kind of 2019 level. Gross nights were like 48% were cross-border back in 2019. And what we’ve just seen is a cross-border continues to be a greater, greater percentage every quarter, but we’re not quite back to where we were in 2019." }, { "speaker": "Operator", "text": "We will move next to Mark Mahaney at Evercore ISI." }, { "speaker": "Mark Mahaney", "text": "Okay, thanks. Let’s see. David, could I ask you just adjust the over-earning question that the free cash flow margins are truly very impressive. Just you really see them you’ve been at 40% plus or roughly for the last three quarters on a trailing 12-month basis. What would cause those margins to go materially higher or lower from here? Or is there a reason to think that they are roughly sustainable? And then can I just ask about Categories? I know somebody asked about this earlier. But Brian, these features can sometimes take quite a long time to kind of get broadly used and the doubt that they can have a major impact. And I think this is one of those that could, how long do you think it’s going to take for Categories to be kind of widely adopted used and really start impacting and helping people better match up that supply – all the supply you have with the demand that’s out there? Thanks." }, { "speaker": "Brian Chesky", "text": "Alright. So we have two questions. I think, Dave, you can take the first one, and then I’ll take Categories." }, { "speaker": "Dave Stephenson", "text": "Excellent. So yes, the free cash flow, I’m really proud of our delivery of the free cash flow and the free cash flow margin. So thanks for calling it out. I mean we’ve just made substantial improvement in the overall profitability of our business, right? We’ve radically adjusted our marketing expenditures to be substantially lower. We’ve made metronomic improvement in our variable costs. We’re seeing great leverage in our fixed costs. We’re being incredibly disciplined in our fixed cost growth, and that will continue going forward. And so all of those will be tailwinds to being able to maintain or even increase our free cash flow margins over time. As average daily rates could moderate next year, that does put a little bit of a headwind towards our margins. But I think the improvements in our variable costs and the fixed cost leverage should enable us to maintain or even increase free cash flow margins over the longer-term. What we will continue to have greater expansion in free cash flow margin to be some of the things that Brian talked about a little bit ago, it would be kind of incremental services or activities that we add for guests or host over time. And there is no immediate announcements of major changes that you should anticipate in ‘23, but know that, that is a focus for us and over a more extended period will drive incremental revenue for us and incremental margin." }, { "speaker": "Brian Chesky", "text": "Yes. And to answer your other question about the kind of timing for wide adoption of Airbnb Categories, it’s a great question. I think just to kind of zoom out, customers of travel have been, as you know, trained over the last 25 years to search a certain way. And that way is to go to a website, there is a search box, you type in where you want to go and you search. And then what you get is a list of results. You refine the results, you compare sometimes the different websites, different apps and then you make a booking. And I think this is going to be a year transition to retrain kind of customers about how they can search for travel on Airbnb. But I think we’re going to start to see some really great momentum next year. Again, we are already seeing people discover home they never knew existed. We are seeing a lot more people engage with categories. The homes and categories have been viewed more than 300 million times, we are going to continue to be making improvements to this every single year. We have some upgrades coming out in two weeks in November. And of course, you are going to see some upgrades beyond that as well. So, I think this is a really great opportunity for us. And again, because we are a little more concentrated in vacation travel, the business travel, and because people are increasingly more flexible when they travel, we think they are going to be much more open to ideas from Airbnb. And part of this is idea of Airbnb becoming more at the top of the funnel. The way the travel funnel used to be, if you go to one website to figure out where to travel, these are typically travel content sites. Then you go to the next site, typically to book your flight, and then the third thing you do is get your hotel or get your housing. So, with Airbnb was kind of step three. And we like Airbnb to go from kind of step three to step one. This is going to take some retraining for everything to go from step three to step one, but I think there is definitely a line of sight to getting there." }, { "speaker": "Operator", "text": "We will go next to Stephen Ju at Credit Suisse." }, { "speaker": "Stephen Ju", "text": "Okay. Thank you. Hi Brian." }, { "speaker": "Brian Chesky", "text": "Hey." }, { "speaker": "Stephen Ju", "text": "So, you guys took off you – you guys took out the China supply, but maintained your outbound business. It’s probably a little bit too early to tell and there probably isn’t a lot of outbound happening as of yet. But is there anything we should worry about from a customer acquisition funnel or retention standpoint because the Airbnb use case for, I guess the Chinese traveler is going to get reduced to, I guess international only versus what was previously domestic plus international? Thanks." }, { "speaker": "Brian Chesky", "text": "Yes. Stephen, I mean the crown jewel of our China business was always and we thought always was going to be the China outbound business. And the reason why is the take rate was higher for the outbound business than it was for the domestic business. The inventory is more unique. There is less competition and the average daily rate is a lot higher. So, the outbound business was always the price part of our business. And that’s what we are focused on. Now, as you know, not a lot of people are leaving the country right now, but we want to be prepared for when they do. And they eventually will, of course. And so the two things we are doing to prepare is, number one, we are going to be continuing to invest in our brand in China. And number two, if people are traveling and they are leaving China, they are going to other countries, and we would call these the core to countries. And the primary place, they are first probably going to go with intra-region. So, they are presumably going to be going to Southeast Asia, Korea, Japan. Eventually, they will go a little further to Europe and then they will presumably come back to the United States, especially maybe the kind of some of the coastal cities. And this is kind of how I think travel may recover. And so what we need to do is make sure we have enough supply in these corridors and continue to invest in our brand in China. And I think by only having an outbound business, we can actually focus all of our investments just on that, and it actually makes a lot more cost effective, a lot more efficient. And one thing I have learned is more focused we are, the more likely we are to achieve our results. So, that’s what we are feeling. We are actually feeling really confident about the prospects for China. It’s just going to be a longer like payoff than because of the fact that not a lot of people are leaving the country and traveling right now." }, { "speaker": "Operator", "text": "We will go next to Eric Sheridan at Goldman Sachs." }, { "speaker": "Eric Sheridan", "text": "Thanks for taking the question. Maybe a two-parter, if I can on investment strategy. Obviously, we have a lot of technology companies that are talking about slowing hiring, possibly pruning talent out of their organizations. How do you think that positions you to possibly upgrade talent within the organization, Brian? And how are you thinking about hiring goals over the next sort 12 months to 18 months? And then the second part of the question is, obviously, a slow in the economy would not be like the existential crisis that travel belt in spring of 2020. But what’s your broader philosophy of investing through a soft patch in the economy or more closely aligning revenue growth with expense growth if you did see a soft patch over a couple of quarters? Thanks so much." }, { "speaker": "Brian Chesky", "text": "Yes. Hey Eric, good to talk to you. Yes, let me just recap how we think about expense management and investments. Before the pandemic, we were essentially a nearly breakeven business doing like a little under $250 million in loss from an EBITDA perspective. And of course, in the pandemic hit, we lost 80% of our business, and we completely changed our cost structure. And out of that crisis, we made a decision. And the decision we made is we weren’t going to wait for another crisis, another weakened economy or a recession to change how we invest or we run the company that we were going to be lean regardless of the economy. In other words, we were going to go from the Navy to the Navy seal, a small, lean, elite group. And so we are a small team, we are functionally organized. We are only slightly more than 6,000 people in the beginning of this year. Before obviously, the economy took a turn for the worst, we still only had a plan to hire 7% to 8% more employees. In other words, we had a plan to be really profitable and we were planning for a storm. And so we have not had a change anything about our hiring plans. We don’t intend to change anything about our hiring plans in the next 12 months to 18 months regardless of the economy because one of the lessons we have learned is a smaller we are, the more nimble we are, the faster we can move. And not only can we be more profitable, we can actually grow faster. And we have been actually more productive than we ever were in our history. We have made more than 150 upgrades in innovation across the core service. So, we are still really aggressive about trying to attract the best of our generation to this company, but that doesn’t mean hiring a lot of people. We are really embracing being a lean organization, which is partly our functional structure. We are not a business organization where you would have four marketing departments. We have one functional organization, and so that allows us to be quite a bit leaner. And I guess that goes to your other question, which is slowness in the economy. Well, regardless of what happens to the economy, our model is highly adaptable. We have a very low expense base. And we are pretty efficient with marketing. We spend a lot less on marketing than our competitors and the vast majority of our traffic is direct. So, whatever happens to the economy, I think we are in a pretty good position where we won’t have to change the way we run the company. But I think we have proven if we ever have to, of course, we will. But I don’t expect for us to have to make a lot of changes because of how much cash we are generating, because of how lean we already are." }, { "speaker": "Dave Stephenson", "text": "And if I double-click on one area is that we announced our Live and Work Anywhere policy this year, and I think that has enabled us to hire the best people in the world regardless of where they live. And so to Brian’s point about hiring fewer, more senior, and more experts in areas, this has clearly been able to make sure that we are getting the best talent in the world." }, { "speaker": "Brian Chesky", "text": "Yes. And maybe the last thing I will just say is I think that we learned a lot of lessons probably a year or 2 years earlier than a lot of other tech companies because we were hit so hard so early. But I think the adversity, the challenge we had just made us a much more focused, a much better company. And one of the commitments we made is we are never going to forget the lessons from the pandemic. We are never going to lose our discipline. Because the more disciplined we are, the more focused we are, not only to become more profitable, but we actually innovate faster. And so those principles are here to stay." }, { "speaker": "Operator", "text": "We will move next to Ron Josey at Citi." }, { "speaker": "Ron Josey", "text": "Great. Thanks for taking the question. Maybe a bigger picture question first, Brian, and then Dave, one for you on just guidance. Just I think, Brian, you were talking maybe intra-quarter about AirCover being a major franchise going forward. Clearly, we will hear more about this in the winter release. But just talk to us about how AirCover might expand longer term. We clearly see it for guests, for host. We know we will have more updates here in the next week or two weeks. But just bigger picture, how you see it as a franchise. And then, Dave, just on guidance, I think in the letter, we mentioned longer lead time for bookings, stronger backlog for 4Q. Just trying to understand how that might compare to where we were maybe in prior periods at the same time. Thank you." }, { "speaker": "Brian Chesky", "text": "Alright. I will take obviously the first one, Ron. Thanks. So yes, questions around kind of the longer-term strategy around AirCover. And maybe the way to explain AirCover, let’s just take as an analogy, let’s take Amazon. So, my recollection of Amazon, this will go back maybe 20 years, because 20 years ago, Amazon even back then, their core retail business was an amazing product. They had the most amount of selection on the Internet, and they have the lowest prices. But the problem with Amazon is they had an Achilles’ heel. And the Achilles’ heel was they were competing with walking in a store and taking something out at that moment. And so one of the things they created was Amazon Prime, which was obviously addressing the core Achilles’ heel, which was shipping. I think every business has to understand what its potential weakness is. I think the great thing about Airbnb’s model is we similarly have probably the widest selection of accommodations and everything we have is truly one of a kind at a great value. But our challenge is unlike a hotel, we don’t control the inventory and it cannot structurally always be as consistent. We can’t expect every property. So, AirCover similar for consistency addresses something similar to what Prime did for Amazon with shipping, which is to say, what if we could take this off the table, this question of consistency. And on the host side, the protections have led to a huge increase in NPS. Our NPS for AirCover for a host is over 60. And this is after something happened to your home. So clearly, this was a huge hit. And it was so popular that we decided to bring it to guests. And I think where this can go is over the coming years, we can offer increasingly more protection, more coverage for more different use cases. And I think the North Star for AirCover is if a listing was across – most of our inventory is only in Airbnb. But let’s say a home was on two different websites, Airbnb and another website, we want AirCover to be so compelling that just by having AirCover alone, it would be reason to go direct and book on Airbnb and not book anywhere else. And we are going to continue to make improvements every single year, and I want AirCover to be the gold standard for customer service for our category. And that’s what we are really focused on. And then down the road, there may be opportunities to offer like a paid version of this or some other type of membership program, but that would be down the road, but it’s a very popular customer request." }, { "speaker": "Operator", "text": "We will go next to Deepak – I apologize." }, { "speaker": "Dave Stephenson", "text": "And then in terms of – to answer the question on guidance, too. On the guidance, articulation of the longer lead times for bookings and just the Q4 bookings that we have already on the books for the rest of this quarter is just to indicate that we have stable to accelerating demand for growth, right. And demand from our guests around the world. It’s that we are not seeing a softening in that demand especially when you look back to historic levels of 2019, that any of the deceleration in revenue growth between Q3 and Q4 is largely due to the uniqueness of the 2021 timing of growth between Delta and Omicron. So, I just think it just shows the stability of people wanting to get out their homes, wanting to travel, regardless of the macroeconomic uncertainties." }, { "speaker": "Operator", "text": "We will move now to Deepak Mathivanan at Wolfe Research." }, { "speaker": "Deepak Mathivanan", "text": "Great. Thanks for taking the questions. Just a couple of quick ones. So first, there has been a lot of press recently about how occupancies on the platform are down for certain house hosts. Is it just anecdotal or seasonal or whether there is anything more to it? I mean your 4Q guidance is pretty strong, but just trying to understand how much of this is just kind of noise out there. And then second question, maybe for Brian. Long-term stays is stabilizing near 20% of the mix on the platform, even as sort of your room nights is growing pretty nicely, you have talked about sort of like the flexibility and lifestyle for many people keeping this – or helping this growth. But curious whether there is also like a bigger macro drivers like maybe rental markets being very difficult right now that’s helping this trend. Just kind of trying to understand how much you are reaching already into the addressable markets beyond travel currently." }, { "speaker": "Brian Chesky", "text": "Yes. I can – I will take both, and then Dave can feel free to dive in, especially on the bookings. I mean I think our – just to answer your question on whether bookings were down for hosts. I mean at the macro level, at the high level, they are not down. And I mean I think the Q3 results speak for themselves. There are anecdotal descriptions of some host bookings are down, some host bookings are up. And this – there is many possible explanations for this. It’s just that travel is continuing to change. One of the other things though is that our search rank algorithm is prioritizing all-in pricing and host with the best value. So, it’s possible that might be one possible explanation. But again, it’s primarily what we have seen is anecdotal. And it really depends – you really have to take it on a case-by-case basis. But overall, obviously, bookings are up. In fact, it’s a record quarter. Now, with regard to long-term stays beyond travel, I mean feedback, I would just say that we have only scratched the surface. A fifth of our nights book are for stays longer than a month. And this is before making some really big fundamental improvement to this product in this category. And I think in the coming years, flexibility is here to stay. I think more people are going to work remotely in a hybrid way 5 years from now than they do today. I think increasingly, fewer people are going to have 1-year leases, not to say no one will, but more and more people are going to value the flexibility and want to live in different places. And we think there is a real opportunity. And one of the things we are going to also see over the coming years isn’t just that people are going to live in different parts of the United States, but people are going to choose to live for short periods of time abroad in different countries. So, we think we are going to start to see more long-term cross-border business, too. So, there is a lot of opportunities here. And we are going to be making some upgrades to our long-term stay business to tap into this large market. I mean the largest expense that most people have in their life is their housing, it’s their housing costs. And we have built many of the tools and features that you would need to provide for a longer term stay offering already. But we are going to continue to make improvements. And as we do, I think we will continue to take more and more of that market." }, { "speaker": "Operator", "text": "Next, we will move to Lee Horowitz at Deutsche Bank." }, { "speaker": "Lee Horowitz", "text": "Great. Thanks. So, building on the comments earlier about expense growth. Given that your advertising strategy has moved away from, say, purely demand linked performance advertising and more towards longer-dated ROI investments and brand advertising. How do you think about actively flexing down your advertising spend in a perhaps a tougher macro environment versus investing into that environment to continue to teach the customers – retrain the customers about your ever-expanding product set?" }, { "speaker": "Brian Chesky", "text": "Dave, do you want to start with this?" }, { "speaker": "Dave Stephenson", "text": "Sure. I mean if you look at our actual advertising strategy and the amount of money we are spending on it, it’s going to be relatively flat from ‘22 over ‘21, and you should anticipate similar marketing as a percentage of revenue in ‘23. And so we can certainly flex it in line with revenue. We will be kind of mindful of that. But what we have already kind of hit this new kind of lower overall rate. And what we have actually seen is, to the extent that we are keeping it flat even as we grow, it’s because we are actually seeing such success that we are wanting to be able to invest in other countries. Certainly, we can moderate that over time, but we are already so low that I wouldn’t anticipate us dropping it dramatically in face of substantial headwinds over growth. But we can flex it with the revenue within a reasonably a few hundred basis points here and there." }, { "speaker": "Brian Chesky", "text": "And I will just say – just to jump in. I mean we don’t really think of marketing as a way to buy customers because, obviously, as we have mentioned, more than 90% of our traffic is direct or organic. And so the main thing is we take a full funnel approach to marketing. And actually the top of the funnel is PR and communication. And we think that’s one of the biggest drivers of our traffic is PR. And then brand marketing is actually important. And actually, we think a bit more like product marketing. We want to educate people about our new features. So, right now, we are advertising and educating people about Airbnb Categories and AirCover. And then we think that performance marketing is more of a way the laser in to balance supply and demand rather than a way purchased a large amount of customers. And that’s essentially the way we think about marketing. And this allows for a very efficient, very dynamic approach to marketing that should get more efficient every single year." }, { "speaker": "Operator", "text": "And we will take our final question from Brad Erickson at RBC Capital Markets." }, { "speaker": "Brad Erickson", "text": "Hey. Thanks. Few follow-ups. First, nights came up just a bit light of where we all had it forecasted. So, obviously, that’s on us. But I guess in cases where you are maybe seeing a little bit of nights booked softness, are you seeing those hosts making moves on price, or are your pricing tools sending any message to those hosts about making moves? Just curious if you look to affect some elasticity in the event of any pockets of softness. And then second, Dave, I know you spoke to this just a minute ago on the backlog, but asked in a different way. Are you basically saying that you are seeing booking windows expand more than prior years here as we start out Q4? Thanks." }, { "speaker": "Brian Chesky", "text": "Yes. Brad, I will take the first question. I think Dave can take the second. Yes, I mean what we do see is that many hosts do bring their prices up or down as demand goes up or down. That being said, I think there is opportunities for us to have more dynamic tools and give more visibility that would make prices even more competitive. To answer your question, they do, many hosts do adjust their prices, but I think hosts probably adjust their prices less frequently than hotels. And so in periods of time where prices are generally coming down in the industry, we might be a little bit slower. But as we build more tools to provide more dynamic changes, we will be – continue to be more competitive. And I will let Dave take next question." }, { "speaker": "Dave Stephenson", "text": "Yes. Well, a couple of things. One thing is we are not focused on optimizing just night side. I think nights is an important measure, and it’s an important driver of kind of overall demand. But we could also drive a lot of nights and looking and try to just drive them towards lower rate nights. Like we are trying to drive a balance of making sure that we have nights growth and revenue growth. And revenue growth obviously pays the bills. And so we are seeing strong growth in the business. I am very happy with our Q3 results. And on our full guide like you said, I think we are seeing stable to increasing demand, and we are just really impressed with the resiliency of guests and their willingness to travel and interest in traveling Airbnb. And I guess it goes back to the backlog, too, is that the reason why we kind of highlight is just that people are having confidence in travel. So, what we are seeing is that, yes, the booking windows are up year-over-year. There are a little bit – there is some seasonality in that. So, they are actually booking windows a little bit down from Q3. And so as – the lead times are just up from historical levels because the people are confident in being able to travel, I think that’s the important thing you should take away." }, { "speaker": "Operator", "text": "And that concludes the question-and-answer session. At this time, I will turn the conference back over to Brian for any concluding remarks." }, { "speaker": "End of Q&A", "text": "" }, { "speaker": "Brian Chesky", "text": "Alright. Well, first of all, thank you all for joining today. I just want to recap and just say we are incredibly proud of our results. And I believe we are incredibly well positioned for the future ahead. I hope you all join us in two weeks for 2022 winter release. You will be able to watch it right from our homepage on Wednesday, this is November 16th, 8 a.m. Eastern. Thank you all and I will see you then." }, { "speaker": "Operator", "text": "And that concludes today’s conference call. Thank you for your participation. You may now disconnect." } ]	Airbnb, Inc.	115,705,393
ABNB	2	2,022	2022-08-02 16:30:00	Operator: Good afternoon, and thank you for joining Airbnb's earnings conference call for the second quarter of 2022. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I'll now hand the call over to Ellie Mertz, VP of Finance. Please go ahead. Ellie Mertz: Good afternoon, and welcome to Airbnb's Second Quarter of 2022 Earnings Call. Thank you for joining us today. On the call today, we have Airbnb's Co-Founder and CEO, Brian Chesky; and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our second quarter of 2022. These items were posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be substitute for our GAAP results. And with that, I will pass the call to Brian. Brian Chesky: All right. Thank you, Ellie, and good afternoon, everyone. Thanks for joining. Our Q2 results demonstrate that Airbnb has achieved growth and profitability at scale. From a growth perspective, we exceeded 103 million Nights and Experiences Booked. Now this was our largest quarterly number ever. Revenue was $2.1 billion, up 58% from last year or 64%, excluding foreign exchange. Gross booking value was $17 billion, up 27% from last year or 34% if you exclude foreign exchange. Now both revenue and GBV were 73% higher than Q2 2019, significantly outperforming the travel industry. Now from a profitability perspective, we had our most profitable Q2 ever. Net income of $379 million was a nearly $700 million improvement from Q2 2019. Adjusted EBITDA was $711 million. Now this represents a 34% adjusted EBITDA margin, which is significantly up from the 16% margin in Q2 2021, a negative 4% in Q2 2019. Finally, we generated $795 million of free cash flow. Now this is a $1.1 billion improvement from the nearly $300 million cash burn 2 years ago at the depth of the pandemic. Over the last 12 months, Airbnb generated $3 billion in free cash flow, nearly $3 billion, and ended the quarter with nearly $10 billion in cash. So what explains this transformation in our business? Well, first, our business model is adaptable. We have nearly every type of space in nearly every location so however travel changes, we can adapt. And regardless of the economic environment, our guests come to Airbnb because they can find great value and our host can earn extra income. Second, we've relentlessly innovated while also staying focused and disciplined. When the pandemic began in 2020, we made some incredibly difficult decisions. We significantly reduced spending, making us a leaner and more focused company. And we've kept this discipline ever since, allowing us to keep the hiring and investment plans made in the beginning of the year. And Airbnb is well positioned for whatever lies ahead. In fact, we're so confident in our long-term growth and profitability that today, we're announcing a $2 billion share repurchase program. And this is coming only 1.5 years after our IPO. Now returning to our Q2 results. Our strong financial performance was driven by a number of positive business trends. First, guest demand in Airbnb is as high as ever. In Q2, we surpassed 103 million Nights and Experiences Booked, marking our highest quarterly number ever. Now despite broader macroeconomic concerns, we still saw a 25% increase in Nights and Experiences Booked compared to the quarter of 2021. Now early in Q2, strong guest demand exceeded our expectations. This is because guests in Europe and North America booked earlier than they have historically. Now given this earlier booking, growth rates compared to last year decelerated in May and June. And since the end of Q2, what we've seen is growth in nights booked reaccelerate from June to July as we enter peak travel season. Second, guests continue to return to cities and cross borders. In previous quarters, we've talked about how we saw significant growth driven by surges in domestic travel as well as travel to rural destinations. Now these trends continue. But we're also seeing guests returning to cities and crossing borders above pre-pandemic levels. Third, guests continue to stay longer in Airbnb. They're not just traveling Airbnb, they're now living on Airbnb. We saw long-term stays of 28 days or more remain our fastest-growing category by trip nights compared to 2019. The long-term stays has increased nearly 25% from a year ago. And actually, long-term stays have increased almost 90% since Q2 2019. Fourth, guest demand is driving growth on our host community. We continue to see the strongest supply increases in areas of greatest demand, with nonurban active listings up 50% compared to Q2 2019. But as demand is returning to cities, we're also seeing an increase in total urban supply. And we believe the upgrades we introduced last year, including our new host onboarding flow and AirCover are supporting this growth, but we're not stopping there. So you're going to see some exciting new product features to recruit the next generation of host later this year. Finally, I'd like to share a few highlights from the 2022 summer release. In May, we introduced Airbnb Categories. Since launch, listings in the Airbnb Categories have been viewed more than 180 million times. Through Categories, we are distributing guest discovery across more destinations and dates. Now we also introduced AirCover for guests. Since launch, the Net Promoter Score for guests that had an issue with their stay has already improved. And the real insulin -- instance where our host cancels, AirCover has led to 10% more rebookings. So to recap. We achieved significant milestones this quarter with our results. Nights and Experiences Booked were our highest ever. Revenue and adjusted EBITDA were records for Q2, and free cash flow was $795 million. In the last 12 months, we generated nearly $3 billion in free cash flow. Now before I go to questions, I want to talk about an update on my co-founder, Joe Gebbia. Last month, Joe announced that he'll be stepping back from this full-time operating role. Joe will continue to serve on the Board of Directors of both Airbnb and Airbnb.org. Airbnb is a founder-led company. So he's going to continue to take a role at Airbnb, and this will be as an adviser to me on future concepts and creative culture. Since the beginning, Joe has always been focused on big ideas to help others. These are uncompromising True North. So it will be fun to be able to spend more time with them on dreaming up new ideas, just like the early days. And as I reflect back on the last 14 years together, I just can't believe how lucky Joe, Nate and I have been. If anything, I've just gone a few degrees in a different direction, I wouldn't be doing this call with you right now. That's how fragile ideas are. And it's what gives me gratitude to know Joe and Nate. And what I'm most thankful for is that we're still together, still meeting every Sunday 14 years after we started. We built a dream together, and now, after all these years, we still continue to dream. So thank you, Joe. And with that, Dave and I look forward to answer your questions. Operator: [Operator Instructions]. Our first question is from Lloyd Walmsley with UBS. Lloyd Walmsley: Two questions, if I can. First, just it looks like room Nights and Experiences Booked grew a little bit sequentially less in 2Q this year than it did in '19. And similarly, the guidance looks like it's calling for a little bit slower sequential growth. Just wondering if there's anything you'd call out that's behind that? And then secondly, can you give us an update on what you're seeing around just how people are using the platform post some of the new search and discovery innovations this summer? Are you seeing demand move into a wider dispersion of areas or any changes in conversion rates? What are early learnings from some of those innovations this past summer? Brian Chesky: Thank you very much. Dave, why don't you take the first question about Q2, Q3 growth, and I can talk a little bit about how the launch from Airbnb Categories have affected how people use Airbnb? David Stephenson: Yes. So our Q2 gross nights before the cancellations, they came in actually above our internal expectations. We did see some elevated cancellations in the back of the quarter relative to our forecast. We believe that some of the elevated cancellation's related to flight cancellations around the world, but it was mostly in North America towards the end of Q2 '22. And we're just seeing strong overall nights kind of growth, the 25% year-over-year growth in nights and experiences, we feel very confident in. And the same -- having the same results for Q3, we also feel quite good about. We're just seeing strong demand for guest travel all around the world. Brian Chesky: And just to answer the second question, just to give a little bit of background, for decades, travel search has worked the same way. There's a box, a search box, and you are asked to enter a location. And the problem with that is that Airbnb is in 100,000 locations all over the world. And so people can't think to type in 100,000 destinations into a search box. And so people miss millions of unique Airbnbs they would have never known to search for. And the reason this is important, as you asked is because we think that category categories can allow us to point demand to where we have supply. This, I think, is one of the really big opportunities. So as I said, since release, listings in every categories have been viewed over 180 million times. We've also seen that guests are now showing more flexibility with their dates and their destinations than before. So for example, a typical search, properties are 30 miles further apart than they would have been before. So we are seeing search radiuses increase. And additionally, we are seeing more people continue to use the flexible date feature. So we believe our theory is working. Airbnb categories allows us to highlight what makes us unique. It allows us to point demand where we have supply. And I also think it helps us be in the inspiration business where people to start to travel on Airbnb. Operator: Our next question is from Mario Lu with Barclays. Mario Lu: So the first one is on new initiatives. So we look at the third quarter guidance, it seems like bookings is expected to contract by more than 10 points in 3Q versus 2019 versus the second quarter. So does that change the timing or focus on these other new initiatives such as experiences? Or are more resources now being focused back on the core business? Brian Chesky: No. I mean we have a very consistent strategy. And our strategy is, number one, we want to unlock the next generation of hosts. We have 4 million hosts on Airbnb, and I think that millions more can turn to hosting, especially during these economic times. So that, I think, is really priority #1. As we add more hosts, we continue to grow. We want Airbnb to be the ultimate host to our guests and host. That's why we offered AirCover where we continue to provide better service all over the world and continue to up level. And guests aren't just traveling Airbnb, they're now living on Airbnb. And so we want to continue to offer more opportunities for them to travel and live on Airbnb. So we are still focused on our core business. That is the priority for us. We are also continuing to invest in long-term stays and other initiatives and most importantly, providing an incredible service that people love. And I would also just say, again, we're feeling really, really solid and good about Q3. Dave, anything you want to add. David Stephenson: Yes. I'll just double click on Brian's comment. Yes, I mean, we do really feel good about stable bookings in Q3. I mean, in particular, given we have long lead times that we're seeing. We're seeing some pull forward for summer travel here in Q2 and just the broader economic conditions overall. We are -- if you look at our gross booking value growth versus 2019, Q1 was 73%; Q2, 73%. We're just seeing strong gross booking value growth relative to 2019. And to see further kind of quarter-over-quarter acceleration, we just need to see continued recovery in Europe and APAC, which remains significantly depressed. Mario Lu: Great. And just a follow-up, speaking of APAC. You guys mentioned that the domestic business is trending down in China, which I believe you guys said was around 1% of your business. Is there any other color you can provide in terms of the P&L impact from shutting that down? And any color on how large the outbound bookings for China is? Brian Chesky: Dave? David Stephenson: Yes. I mean the China business has been a small part of business overall. I mean, it's had less than a 1% impact on our revenue. One of the things that has been important in us getting out of the domestic business in China is maintaining a focus on what we think is the most valuable and important part of China, which is the outbound business. So really, what we've done is we've shifted all of the resources that we're applying and splitting between both domestic and outbound travel. We focused all that on outbound, which we think is the greater prize and the most important part for the long term. So until China has their COVID policy kind of in place and allowing people to kind of travel outbound from China, it will kind of remain to be depressed. But as that evolves and Chinese travelers travel again, we think that will be a nice unlock for our Asia Pacific business. It's not going to have a material impact on our P&L. Operator: Our next question is from Bernie McTernan with Needham & Company. Bernard McTernan: Great. ADRs are hanging in there better than feared, I believe, still expecting them to be up year-over-year. Can you just talk to some of the puts and takes, demand-driven pricing versus mix shift? Brian Chesky: Dave? David Stephenson: Yes. If you kind of rewind to what we've seen with ADRs back at the beginning of the pandemic, all of the increase was driven by mix, right? This initial resurgence of the travel for North America, whole home, nonurban. And then over time, we've seen mix become less and less a part of the increase in the ADR. Here in both Q1 and Q2, what we've seen is that ADRs were up 40% year over -- 3 years back to 2019. And about 2/3 of that increase has been price appreciation, and about 1/3 due to mix. And so we do anticipate that over time, as more people return to travel to urban, more cross border, ADRs may moderate. But yes, as you see, 2/3 of that has actually been price appreciation. So it's been stickier than we anticipated, maybe 6 months ago. Bernard McTernan: Got it. And then the dip in May and June from the earlier booking windows and then reacceleration in July, is that reacceleration for near-term bookings in terms of late summer? Or is that kind of early bookings for the fall and winter period? David Stephenson: Well, it's a bit of both. I mean, really, we have on the books for Q4 of this year, we have more nights on the books in Q4 than relative to the same kind of period a year ago. It's very strong. We're seeing really strong demand in the back half of the year. So we're seeing a bit of both. Operator: Our next question is from Justin Patterson with KeyBanc Capital Markets. Justin Patterson: Great. Two, if I can. Brian, when you look at host right now and just the friction to onboarding, what are you looking to really solve with this upcoming release? And then secondly, perhaps for both you and Dave, you've clearly shown a lot of margin progress, free cash flow progress over the next few years. How should we think about just the puts and takes between overall growth and showing more margin, more free cash flow generation ahead? Brian Chesky: And just to confirm, you're talking about with this upcoming release, right, this winter? Justin Patterson: Yes. Well, I mean it can be a little broader in there. Just where the friction point on onboarding is. Brian Chesky: Yes. So that's a great question. Let me -- why don't I answer the first question, and then, Dave, you can talk about margin improvement, and then I can potentially elaborate on that answer as well. We have -- as we said, we have 4 million hosts on Airbnb, but we think there are millions more people that could turn to hosting. I mean, honestly, hosting is one of the easiest ways to be able to make money with an asset that you already have. For most people, they don't need to have a start-up cost and the majority of people get a booking within the first week. And so there are a number of things that we're going to be doing this fall -- this winter and beyond, but one of the most important things we want to do is continue to make it easier to host. And one of the high -- things I want to highlight that we launched last year was Ask a Super Host. Ask A Super Host pairs our very best super hosts with prospective hosts. And this is really cool because, basically, what it does is it allows our community to help train new community members, new hosts to come on the platform. That's made a big difference. And we're going to continue to double down on that product. We're going to -- but we're looking at some other opportunities to continue to reduce friction. So you're going to see some really cool products to just continue to make it even easier to host. And so that's probably the primary thing that we're going to be focused on this fall. We're also looking at some additional protections for hosts, and just ways to really try to get everyday people with their primary homes that want to host occasionally to host on Airbnb. A lot of people don't realize that the number -- the top professions for a host in the United States, for example, are school teachers, they're health care workers, they're students, these are top 3 kind of professions and locations in Airbnb. And so what we really think the big opportunity is to continue to attract regular people to become host. And we think one of the biggest sources of new hosts are prior guests on Airbnb, 36% of new hosts last quarter were prior guests. So this is where we're going to be focused on. It's a really big opportunity for us. And I think, again, Airbnb was founded during a recession in 2008, financial crisis. People were worried about being able to pay their bills, pay for their homes and their income. And so they turned to hosting. And we think a lot of people may turn to hosting once again. So this is a big opportunity for us. Dave, if you want to talk about the margin improvement? David Stephenson: Yes. Thanks. We're really proud of the progress we made to reduce our fixed costs and make improvements in our variable costs. We've really exercised discipline on our spending here in 2022, and we're going to continue to do so. But while we're thrilled with this margin expansion, we're heavily in growth mode. We are not in profit maximization mode. We really want to balance profitability with growth. We -- one of the things we're very proud in Q2 is that we are showing both growth and profitability at scale. But we'll continue to invest in growth. We're going to prioritize things. We'll grow the business over the long haul. Operator: Our next question is from Doug Anmuth with JPMorgan. Douglas Anmuth: Just hoping you can talk a little bit about just kind of macro environment, just what you're seeing in terms of consumer activity or types of trips being booked. And also just to get your view on long-term stays. I think you talked about 25% growth year-over-year, but just the trends there going forward. Brian Chesky: Dave? David Stephenson: Sure. Well, if you start the macro environment, again, we are very pleased with our results despite any kind of macroeconomic. We're seeing strong demand here in Q3. And as I said, the Q2 nights and experiences grew 25% year-over-year, we're seeing a similar growth for Q3, and our demand in Q4 reservations is really strong, as I mentioned kind of earlier. What we've seen so far is North America and Europe have been our strengths. We're seeing -- but we are seeing an uptick in more cross-border and more urban. So those are historic strength areas for us, and we're starting to see those parts of the businesses come back. But ultimately, if you just kind of step back, you just see the resilience of our business overall, right, that because we have so much different kinds of supply in so many places around the world, we have any kind of place for anyone that wants to travel. And there's just so much pent-up demand for travel and just so much demand for travel in general, that people would like to spend money on the experience of travel and getting out of their home more than on things that we're just continuing to see that great strength in our business. And then in terms of long-term stays, it continues to be the fastest-growing business by tripling. So if you look at nights of 28 days or longer, that part of the business is growing faster since 2019 than any other segment stays. And actually, if you kind of subsegment it, nearly 50% of our nights are 7 days or longer. And which I think, again, you start to stay any place 7 days or more, an Airbnb is the best way to kind of experience that stay. So long-term stay trend continues to be very solid, growing faster than any other part of the business. Operator: The next question is from Nick Jones with JMP Securities. Nicholas Jones: Two. I guess, first, can you just kind of give us an update on the I'm Flexible option and how that's kind of playing out and what kind of experiences you're able to provide in those markets that maybe are less dense? And then a follow-up. Brian Chesky: Yes, yes. So Nick, I'm Flexible, essentially with the product that we launched last year, it really has 2 components. There's flexible dates that allows people to say, I'm flexible when to travel, and we can say, I'm really interested in traveling anywhere for a week and a week or a month anytime in the next year. And we also had I'm Flexible destinations. We rebuilt I'm Flexible destination from the ground up, and that became Airbnb Categories. So that's the product that has been used or people have seen listings that have been featured in the Airbnb categories over 180 million times since May 11. This has definitely been like a huge boon for us. And what we're seeing is that people are, in fact, discovering homes they would have never otherwise seen in their books. We're seeing the search radius widen by, I think, it was 30 miles, what I said before. The other thing we're seeing is that people are continuing to be more flexible about their dates. So more and more people are using the I'm Flexible dates feature as well. And so we're really excited about this. I think this is a really big thing that we're going to be focusing on, and we're going to continue to be investing in this product because I think this is a bit of a paradigm shift for how people will travel. Not everyone is going to be flexible about how they travel. But for anyone that's not traveling for business or not visiting family, if you were doing leisure travel, almost by definition, you probably have some flexibility. And as fewer and fewer people are going to be required to go into office 5 days a week, I think this option is going to be more and more important. And our business model works uniquely for this because we have a lot of unique inventory. So it has been used quite a lot, and hopefully, that answers your question. Nicholas Jones: Yes. And then, I guess a follow-up is in some of the areas that are outside of urban areas, less dense, less, I guess, arguably activities, how are you thinking about adding more optionality to make these types of experience more engaging for the guests? Brian Chesky: Sorry, can you elaborate outside of urban areas. Or I'm trying... Nicholas Jones: Like if you're in a rural area and there's less activities, arguably, because there's less population, how are you adding -- looking to add more experiences for those guests in those regions? Brian Chesky: Oh, I see. Yes. Well, it's a great question. So number one, Airbnb Categories and the new products we're doing are great ways to highlight really interesting home and communities you never know existed, right? We have like these incredible barns and farm stays and capsules and treehouses. And many of these are in towns you've probably never even heard of, most of them. But there's another good question, if you go to Paris, you have the Eiffel Tower. But if you go to a rural area in upstate New York or in California or some other place, what do you do when you're there? And we do think Airbnb Experiences are great. Obviously, for like places that are not iconic tourism destination. So that's why we're continuing to invest in that product and people really love Airbnb Experiences. They actually have a higher 5-star rating even than home. So I think this is a great opportunity for rural destinations, and we have a lot of really popular experiences. So like if you go on a farm, you can do a farm stay and then you can have interesting experiences on that farm. So that's just one example. We have really popular experiences, for example, in Tuscany. You can make pasta with a nearly 90-year-old grandmother who's been making pasta the same way for more than half a century. So these are experiences you would have never been able to find, and we're really excited about that. Operator: The next question is from James Lee with Mizuho. James Lee: And maybe as we look into FY '23, obviously, we have a lot of economic uncertainties here. If the economy indeed slows down and consumers start to trade down, how do you think that impacts Airbnb's business? And also on the other hand, if you look at expenses, the demand slowdown, is there anything in your cost structure you could optimize to offset any potential headwinds? Brian Chesky: Dave, do you want to take that? David Stephenson: Sure. I think we've highlighted this a bit on the call that you don't know what the economy is going to bring, but we do know that Airbnb is resilient to almost any kind of economic shock. As Brian mentioned, we're founded in a recession, and we've obviously thrived in the era of COVID despite COVID. And what we're just finding is that people can come to Airbnb because we have any kind of property, whether it's a small shared room or a private room to luxury stays, we have something for anyone depending on their travel needs. And we likely saw on COVID, if they can't cross borders, they're going to stay domestically. They get in the car and they go down the road. If domestic -- if air travel gets too expensive, they -- again, they can stay domestically, and they can basically, within their budget, find the perfect place for them because we have such a diversity of types of offerings for them. So I think that is one of the things that just gives us this great resilience. And then in terms of expenses, if the business slows down, I mean, again, we've already made the hard choices. In 2020, we substantially reduced our fixed costs. We eliminated a number of positions. We moved from being divisional to functional. So we are a leaner, tighter machine, and we will remain that way. We're going to continue to grow. We're growing headcount maybe high single-digit percentage rates, but that is going to be able to support us for the very long term, and we're going to remain very focused and disciplined in our investments. So I feel really good about the position that we're in with our investment model. Operator: The next question is from Brian Fitzgerald with Wells Fargo. Brian Fitzgerald: We wanted to ask about the recovery of supply that you continue to see, maybe particularly in urban areas. Are you seeing hosts who had come off the platform now coming back, wondering how you're making these hosts aware of the increased urban demand and helping to reactivate them? And any color there on that, maybe latent supply capacity, if you could, that'd be awesome. Brian Chesky: Dave, do you want to take this? David Stephenson: Yes. A couple of notes on the supply growth. We just continue to see strong supply growth. I think since 2019, our Nights and Experiences Booked, they grew 24%, and our active listings have grown 23%. And we have over 6 million active listings now even taking down the domestic listings in China. So as you mentioned on the urban side, the active listings -- well, I'll start with the nonurban. Nonurban increased 7% quarter-over-quarter and 16% from Q2 '21. And then in North America, they've increased 23%. But then to your specific question, yes, as demand returns to cities, we're seeing a return to growth in the total urban supply. And exactly right, the people that have properties, they come back on to Airbnb and are ready to host again. I mean, if you kind of step back and think about it, because the vast majority of our hosts are individual hosts, and then therefore, the vast majority of their listings are either their primary home or maybe a secondary home, they don't get rid of those in a recessionary environment and other things. I mean it's not like a professional host, which may be looking at the pure return on investment opportunity of the property at a particular point in time. And so with those individual houses, when the demand comes back, they come back on to Airbnb and the listings are there. So it's precisely what we're seeing. When the demand comes back, the supply is right there ready for them to stay. Operator: The next question is from Mark Mahaney with Evercore ISI. Mark Mahaney: Okay. I think I'll ask two questions. Just talk about the China outbound market and how you tap into that, how material that's been for you to date? And then on experiences, I know that's in that list of -- a long list of things that you've been working on in terms of product innovations. It seems like it was less -- it's been less of a priority, but is there anything that suggested it's rising a little bit in your list of priorities and that you want to lean into it more aggressively in '23? Brian Chesky: Yes. Dave, why don't you take China, I can expand on the answer and I'll take Experiences. David Stephenson: Yes. I mean we're very bullish on China over the longer term. I mean it's obviously been significantly impacted due to COVID. People are not traveling outbound. I mean that's actually right how we started the business, is seeing great outbound travel from China all around the world. And then -- and that is still the prize for us to kind of continue to focus on. So right now, APAC is still significantly depressed. I mean if you look at our overall nights growth, as we said, it's 25% up from Q2 of 2019. But if you exclude APAC, it's actually up 35%. So you can see what kind of a drag that has. And I think the reacceleration -- further acceleration of the business from where we're at today will be benefited by having -- trying to outbound come back and resurrecting our APAC business. Brian Chesky: Yes. I would just add to that, that we have absolutely seen in every other geography in the world that there is pent-up demand. In North America, there was pent-up demand. In Europe, there was pent-up demand. We expect there will probably be a lot of pent-up demand for travel from China outbound and more broadly in APAC. And so how we've been preparing? Well, number one way to prepare for the China outbound business is to make sure we have really great supply in the corridors where people in China are traveling to. This includes like Japan and Korea, Southeast Asia and beyond. The next thing is just making sure that once people are ready to travel, our product is continuing to be updated, and we have the marketing campaign ready to go. So it's a pretty simple strategy. The great thing is we don't have to make a lot of changes. We think our product as it is, is going to be great once the China outbound rebounds, and we think it will. We expect -- everything suggests it will, just like every other market. So we're pretty excited about that. And I think that in the coming years, this will actually be a pretty important part of our APAC business. Now with regards to experiences, yes, I mean, Mark, let me just give a little bit of context. 2018, 2019 experiences is going along pretty well, and we expected that 2020 was going to be a breakout year for experiences. And I was going to -- we were going to focus quite a lot of energy on it. And then, of course, the opposite happened. There was a pandemic. We had to pause the business, people were not comfortable gathering in person, let alone meeting strangers. And so during the depths of the pandemic, we got focused back on our core business. We got back to basics. And I think that explains a lot of the business transformation we experienced, especially now we've generated nearly [indiscernible] of free cash flow. That being said, we remain incredibly bullish about the long-term potential of experiences. The average 5-star rating for Experiences, as I mentioned, is higher than the average 5-star ratings even for homes. And we just think people need to know more about this product. It needs to be continually integrated into the search flow, and we need to continue to market it. So the answer to your question, yes, Experiences will become once again a rising priority, and we are making quite a few investments in the product to continue to highlight experiences. And I think it's going to be a big part of our story in 2023 and beyond over really the next 5 years. So I'm really excited about them. Operator: Our next question is from John Colantuoni with Jefferies. John Colantuoni: So last quarter, you mentioned an expectation for marketing as a percentage of revenue to remain relatively flat compared to 2021. Maybe -- is it possible for you to update us on whether or not that's still your expectation following marketing in the first half coming in a few hundred basis points below last year? And I have a follow-up. Brian Chesky: Dave? David Stephenson: Yes. The short answer is we anticipate marketing as a percentage of revenue in 2022 will be consistent with 2021. So a very modest increase in the back half of the year. John Colantuoni: Okay. Great. And second question on take rate. It looks like outlook for the third quarter implies a take rate that's better than what we were expecting and up a decent chunk versus the same quarter in 2019. Any chance you can give us some detail about the puts and takes driving that take rate? David Stephenson: Yes. The underlying kind of -- if you shifted take rate is unchanged. So any of the variation in take rate is just a timing difference between revenue stays versus timing of bookings. Operator: Our next question is from Stephen Ju with Credit Suisse. Stephen Ju: So Brian, I think you yourself signed up to be a digital nomad and joined your employees who could now, I guess, work from anywhere. So is there anything you can share in terms of what you're seeing from the organization overall regarding pickups or declines in productivity or your ability to innovate? And Dave, at the time of the IPO, I think you guys had disclosed that the different cohorts of guests were displaying pretty similar revenue retention as they age. But as we enter the pandemic, you probably had a pretty good influx of new users who signed up to experience Airbnb for the first time ever. So is there anything you can share in terms of the behavior of the 2020 and the '21 cohorts relative to what you have seen for the folks who are arguably the earlier adopters. Brian Chesky: Yes. So why don't I take the first question on really remote work. So in April, we announced that Airbnb employees can live and work anywhere. And why do we do this? Well, there are a couple of reasons. Number one, we had the most productive 2 years in our company history. And those 2 years were 2 years when we rebuilt the company from the ground up, fixed our cost base, accelerated growth. And all of this was done on Zoom. And so it's very clear to me that like the most productive we have ever been is on Zoom. And so I thought -- there was no question that we can maintain that productivity. Additionally, I think a really good way to predict the future is to look at what young companies do, right? 20 years ago, young companies had open floor plans and they had a lot of perks on site, and that became the dominant way that people worked in offices around the world. If you look at a lot of young companies today, they have a lot of flexibility. They're embracing remote work. And so I think this is a really good leading indicator of what the office space -- office place -- office environment of the future will look like in the next 10 years. Now that being said, we do think in-person interaction is really important, but I don't think that requires you to have to come to an office 3 days a week. So the guideline that we've given is we'd like to gather employees at least 1 week a quarter. So rather than kind of coming in every week, we want more meaningful, less frequent interactions and gatherings. And otherwise, we think Zoom is really, really efficient for productivity. And the other thing I'll just say is I know a lot of CEOs are kind of nervous about productivity if their employees aren't in an office. But we have a pretty unique way we run the company. We do these 2 releases every year, and it's a really great mechanism for accountability. So you can see the productivity of everyone in the organization because all the work is kind of coming together twice a year to make these really big leaps in the organization. So it's actually, in a sense, kind of easier to track productivity when everything is really online. And so that's something that we're really embracing. David Stephenson: Great. And then relative to cohorts, what we're starting to see is we believe, to start with, that we have some of the highest guest retention rates in travel. We still -- we said it in our IPO, and we still believe that to be true. And our booking frequency remains quite strong. It's getting closer to 2019 levels. And as we manage -- look at the cohorts, really, what we're seeing in 2020 and 2021, the new guest cohorts, they've been actually very retentive, even maybe more so than kind of historical levels likely due to some self-selection. New guests who joined in the years of pandemic are willing to kind of travel now are probably more inclined to kind of travel than others. And then in terms of rebooking rates of past guests, we've seen nice improving rates in those trends here in 2022, above kind of 2021 levels, but maybe still a bit below 2019, again, just given the nature of self-selection of who's willing to kind of travel at this time. Operator: The next question is from Kevin Kopelman with Cowen. Kevin Kopelman: Can you give us a sense of what listings growth looks like ex the China shutdown? And then qualitatively, if you could talk about the key drivers and trends you're seeing there and listings. Brian Chesky: Dave, do you want to take that? David Stephenson: Yes. Yes. I mean in terms of the growth, what we've stated is that we're still well above 6 million active listings, even excluding the takedown of the China domestic. So -- and as we kind of mentioned in our results, we're seeing strong listings growth, specifically in the areas where we have the strongest kind of bookings. So... Kevin Kopelman: Did you give the number of China listings? David Stephenson: We have not specifically mentioned the China listings, no. Kevin Kopelman: Okay. And then just a quick follow-up on -- so on the Q2 guide, you talked about slowing later in the quarter, but you were still pretty much on your -- where you had guided for nights. Is it safe to assume for the third quarter, you're also assuming some slowdown in the remainder of that quarter? David Stephenson: Well, if anything, what we're seeing is an acceleration of the business here in July and actually kind of a very stable overall nights booked growth for the quarter on Nights and Experiences Booked. I mean, obviously, then for our revenue, it has a modest -- has a decel on a year-over-year basis, but actually will be up from kind of a year over 3 years. Operator: The next question is from Brian Nowak with Morgan Stanley. Brian Nowak: I have two. The first one, just any update on the number of I'm Flexible queries or sort of how big that's gotten? I know it's a number that you all were disclosing for a couple of quarters. And then secondly, there remains to be an ongoing debate about how much of the shift toward Airbnb long-term accommodations was sort of COVID, and now you're going to have a mean reversion back to our hotels. What are 2 or 3 of the KPIs that you look at that sort of give you confidence that your addressable market of users, of the hosts, everything has really expanded. Like what are you seeing in the internal KPIs that you watch now in July and August that give you confidence that you're still going to have outsized market share growth into '23. Brian Chesky: Dave, you want take this? David Stephenson: Yes. I mean we're continuing to see just really strong growth in our new guests. Obviously, looking at our new guests, our new guest retention, which is one of the questions we just had, which remains quite strong with people coming back on. We're continuing to see just overall utilization of Airbnb versus hotels. We didn't ever dip as much as hotels did, and we introduced Airbnb to millions of new customers. And we see the new use cases. I mean, we've highlighted things like our long-term stays and the use cases where people aren't going to want to be at a hotel for more than 7 days. And so the portion of our business, nearly 50% that are over 7 days is really helpful in that regard and over 28 days, it's nearly 1/5 of our business. So we look at just the destinations that people are able to kind of travel. So the robustness of historically have been cross-border in urban. And now what we've seen is great growth in suburban and nonurban and some of the distribution of the nights around the world. I think that is also giving us great confidence in the growth of our business overall. Because we don't just tap out. If we were only, say, a vacation rental destination-type company, you can tap out in either supply and even demand in those kind of areas. But that's really -- we have such a diversity of supply around the world that we're able to continue to grow quite well. Brian Chesky: Yes. Maybe I'll just -- Brian, maybe I'll add a little bit of context. It's good to remember that before the pandemic, our bread and butter was cross-border and urban, right? That was our bread and butter, it was cross-border travel and urban travel. And of course, when the pandemic occurred, that got primarily shut off, and yet our business recovered because people were using Airbnb differently. I think that really the key important thing here is that our model is obviously incredibly adaptable. We are in nearly every community in the world. We have nearly every type of space at nearly every type price point. And I think that the reason that people would use Airbnb will continue to endure. People are looking for value. They want to feel like they live at the local. As more and more people have flexibility and trip trick length and continues to increase, nearly half of our business is a week or longer, it's prohibitive probably to stay in hotels. So there's a lot of new use cases that we think are here to stay. So the thing I'm pretty excited about is that a lot of the older use cases, cross-border and urban, are coming back. Operator: The next question is from Naved Khan with Truist Securities. Naved Khan: I'm really surprised by the continued strength in North America and in the U.S. I think you talked about a 37% growth in Nights and Experiences versus EMEA, maybe up 25%. Is it just that EMEA continues to lag? Or just from everything that we've been hearing, it seems like EMEA saw like a burst of demand in the second quarter. So just trying to reconcile that. Brian Chesky: Dave? David Stephenson: Yes. I mean EMEA is still lagging behind the acceleration that we've seen in North America, and we think that, that is actually one of the opportunities for future acceleration of the business. I mean, clearly, things like the impact of the war in Ukraine certainly has had an impact. And there's obviously the economic impact of even just foreign exchange rates, lower euro and British pound relative to the U.S. dollar. So there are some reasons why Europe has been lagging. It's still a strong business for us. It's still doing well, but it could even do better. Naved Khan: And then maybe just as a follow-up. So if I have to think about the back half and the advertising channels, do you see opportunity to increase the branded ad spend? Or do you think you're pretty much maxed out and might just stay on these levels? David Stephenson: Well, again, I think we have a very -- a modest increase in our overall marketing spend in the back half of the year. We're very happy with the approach to our brand spend. I mean, again, if you step back, one of the big strengths of Airbnb is our ability to market to both guests and hosts at the same time, to be able to bring guests with 90% of our traffic remaining direct or unpaid. And I think this brand strategy, frankly, it's more of a product marketing strategy that we have to market the features and capabilities that we have in Airbnb, what makes us different, has been a huge strength for us. So we're really happy with that investment. We think we're investing fully at the moment there. We will look over time to maybe expand the countries that we're doing more of that investment. So later this year and into early next, you could see us expanding into more countries because we're seeing such good success with our investment right now. Operator: The next question is from Jed Kelly with Oppenheimer. Jed Kelly: Great. Two, if I may. Just one on the nonurban listings, it continues to grow well, and you're adding a lot of supply. Can you sort of touch on where the share gains are coming from, like where those listings are coming from? Is it coming from people not using their second home as much and going back to more urban destination? Or are you taking more share with property managers? Or are you opening up with new destinations? Then my second question just relates to over and all seasonality this year. It seems like the room nights is following a consistent seasonal trend as 2019. So should we expect a similar 4Q seasonality as 2019? Brian Chesky: Yes. So maybe -- why don't I -- I can at least answer the first not the urban listings at a high level. And Dave, you can answer maybe more specifically and also talk about seasonality. So Jed, at the highest level, I would say that one of the things that we've seen is that we have a global network where the fastest-growing market from a supply basis are typically the fastest-growing markets from a demand basis. And this is not surprising because the #1 source of host are prior guests. So specifically in non-urban listings, it's -- it's not a uniquely different composition. It's not like it's a lot more property managers or anything like that. It's pretty consistent composition from years prior. So the vast majority of listings are individuals, but there are also property managers that are continuing to come out on the platform. We're also seeing people continue to open up more nights on their calendar. As demand goes up, people are often motivated to add more availability on their calendar. And also as people get more business, they tend to tell their friends about it. And this is one of the great things about having a business where the vast majority of your supply are individuals. So we continue to see really strong growth in nonurban listings. But as urban recovers, we are anticipating that we're going to see some solid supply growth in urban areas as well. Dave, feel free to elaborate on that and take the second question as well. David Stephenson: Yes, I think you covered the first really well. I mean, I'll just say on the Nights and Experiences Booked kind of seasonality. Now that we kind of enter Q3 and Q4, it's probably just better to look at the year-over-year growth rates as kind of being more normalized. And I think that's the better way to kind of look at the overall seasonal growth. Operator: The next question is from Tom White with D.A. Davidson. Thomas White: Brian, during the early days of the pandemic, you talked about narrowing your focus on Airbnb's most perishable opportunities. You guys have now achieved profitability at scale. Your cash balance has grown significantly. Can you update us on maybe your latest thinking about those nonperishable opportunities? Are any of them particularly attractive to you? Or should we maybe infer from the buyback announcement that maybe you're not super close to really exploring those opportunities again? Brian Chesky: Tom, yes. So again, during the 2020 pandemic curve, just to recap, we got really focused. We got back to basics. And over the last 2 years, I think we've really, really benefited by perfecting our core product. That being said, we are now looking and we are thinking very expansively. So you should look at our stock buyback as our confidence in our long-term growth and profitability. That's all you should believe that stock buyback's about. That being said, we are going to continue to be investing aggressively over the coming years. So we are not pulling on the brake; we are now stepping on the gas. Remember, like the biggest innovations I had aren't going to be in my 20s and 30s, right? So we have some pretty big opportunities coming up. I'm excited about some of the things we're going to be releasing later this year, but we have another release coming next spring in time for the summer release and the following winter. And again, we're going to continue to focus on unlocking the next generation of host. So we have some really exciting new products built to attract the next generation of host, especially individuals that want to host occasionally. We are going to continue to think of radical innovations around Airbnb becoming the ultimate host to our guests and host. We're going to continue to innovate on our search technology. And we have a lot of opportunities around helping people travel and live on Airbnb. So there's going to be some pretty exciting opportunities coming forward, and I'm pretty bullish about it. I don't know if, Dave, if there's anything you want to add to that? David Stephenson: Yes. I'll just reemphasize, our priority is investing in growth. And $10 billion cash is more than we need, $8 billion is more than sufficient to aggressively invest in growth in the business. And that is our #1 priority. At the same time, we're able to both invest and grow just given the profitability profile of our business overall. So I'm proud that we can do both, but the priority for us is investment growth. Thomas White: Great. Maybe just one quick follow-up on FX. Over the years, I remember some of the kind of traditional OTAs talking about how maybe it's less about kind of the absolute level of one currency relative to another, but it's maybe more like the volatility of foreign exchange rates that kind of dictate customer booking behavior. Curious whether you'd say that was a similar dynamic in your business? Or just generally how to changes in FX rate, what changes impacts are you seeing kind of in terms of customer behavior? David Stephenson: I think the biggest impact you see with FX is in the cross-border travel, obviously, right? A strengthening dollar gives you the ability for Americans to travel abroad, specifically right now, probably Europe and to the U.K., and a weakening euro and pound makes it more difficult for them to kind of travel back. But again, if you look at Airbnb, the fact is that people adjust their travel to meet their overall kind of budgets. And as we saw in COVID, people are more willing to -- maybe they stay domestically if their budget doesn't allow the cross-border traveler. Maybe they stay domestically if they don't feel like they can afford the cost of airline travel. So the FX impact from a consumer standpoint is usually this kind of cross-border impact. And then to our overall business, we're just seeing that as we generate nights stayed in euro and pounds and then we bring them back to the U.S. and into the U.S. dollar, we're just seeing the headwind of foreign exchange, which was -- which is material in Q1, it was 600 basis points of revenue growth driven by the FX move. So I'd anticipate Q3 probably be something less than that to our overall P&L. Operator: That will conclude our question-and-answer session for today. I'll hand it over to Brian Chesky for any closing remarks. Brian Chesky: All right. Well, thank you, everyone, for joining us today. So I just want to say I'm incredibly proud of what we've delivered this quarter. Record Nights and Experiences Booked, we had our most profitable Q2, and we generated $795 million of free cash flow, bringing our total free cash flow over the last 12 months to nearly $3 billion. This transformation of our business was only possible because of our adaptable model and a relentless innovation. And regardless of economic environment, we believe guests will continue to come to Airbnb because they can find great value and hosts can earn extra income. Airbnb is ready for whatever lies ahead, and we're so confident in our long-term growth and profitability that today, we're announcing a $2 billion share repurchase program. So thank you all for joining us today, and I'll see you next quarter. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.	[ { "speaker": "Operator", "text": "Good afternoon, and thank you for joining Airbnb's earnings conference call for the second quarter of 2022. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I'll now hand the call over to Ellie Mertz, VP of Finance. Please go ahead." }, { "speaker": "Ellie Mertz", "text": "Good afternoon, and welcome to Airbnb's Second Quarter of 2022 Earnings Call. Thank you for joining us today. On the call today, we have Airbnb's Co-Founder and CEO, Brian Chesky; and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our second quarter of 2022. These items were posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be substitute for our GAAP results. And with that, I will pass the call to Brian." }, { "speaker": "Brian Chesky", "text": "All right. Thank you, Ellie, and good afternoon, everyone. Thanks for joining. Our Q2 results demonstrate that Airbnb has achieved growth and profitability at scale. From a growth perspective, we exceeded 103 million Nights and Experiences Booked. Now this was our largest quarterly number ever. Revenue was $2.1 billion, up 58% from last year or 64%, excluding foreign exchange. Gross booking value was $17 billion, up 27% from last year or 34% if you exclude foreign exchange. Now both revenue and GBV were 73% higher than Q2 2019, significantly outperforming the travel industry. Now from a profitability perspective, we had our most profitable Q2 ever. Net income of $379 million was a nearly $700 million improvement from Q2 2019. Adjusted EBITDA was $711 million. Now this represents a 34% adjusted EBITDA margin, which is significantly up from the 16% margin in Q2 2021, a negative 4% in Q2 2019. Finally, we generated $795 million of free cash flow. Now this is a $1.1 billion improvement from the nearly $300 million cash burn 2 years ago at the depth of the pandemic. Over the last 12 months, Airbnb generated $3 billion in free cash flow, nearly $3 billion, and ended the quarter with nearly $10 billion in cash. So what explains this transformation in our business? Well, first, our business model is adaptable. We have nearly every type of space in nearly every location so however travel changes, we can adapt. And regardless of the economic environment, our guests come to Airbnb because they can find great value and our host can earn extra income. Second, we've relentlessly innovated while also staying focused and disciplined. When the pandemic began in 2020, we made some incredibly difficult decisions. We significantly reduced spending, making us a leaner and more focused company. And we've kept this discipline ever since, allowing us to keep the hiring and investment plans made in the beginning of the year. And Airbnb is well positioned for whatever lies ahead. In fact, we're so confident in our long-term growth and profitability that today, we're announcing a $2 billion share repurchase program. And this is coming only 1.5 years after our IPO. Now returning to our Q2 results. Our strong financial performance was driven by a number of positive business trends. First, guest demand in Airbnb is as high as ever. In Q2, we surpassed 103 million Nights and Experiences Booked, marking our highest quarterly number ever. Now despite broader macroeconomic concerns, we still saw a 25% increase in Nights and Experiences Booked compared to the quarter of 2021. Now early in Q2, strong guest demand exceeded our expectations. This is because guests in Europe and North America booked earlier than they have historically. Now given this earlier booking, growth rates compared to last year decelerated in May and June. And since the end of Q2, what we've seen is growth in nights booked reaccelerate from June to July as we enter peak travel season. Second, guests continue to return to cities and cross borders. In previous quarters, we've talked about how we saw significant growth driven by surges in domestic travel as well as travel to rural destinations. Now these trends continue. But we're also seeing guests returning to cities and crossing borders above pre-pandemic levels. Third, guests continue to stay longer in Airbnb. They're not just traveling Airbnb, they're now living on Airbnb. We saw long-term stays of 28 days or more remain our fastest-growing category by trip nights compared to 2019. The long-term stays has increased nearly 25% from a year ago. And actually, long-term stays have increased almost 90% since Q2 2019. Fourth, guest demand is driving growth on our host community. We continue to see the strongest supply increases in areas of greatest demand, with nonurban active listings up 50% compared to Q2 2019. But as demand is returning to cities, we're also seeing an increase in total urban supply. And we believe the upgrades we introduced last year, including our new host onboarding flow and AirCover are supporting this growth, but we're not stopping there. So you're going to see some exciting new product features to recruit the next generation of host later this year. Finally, I'd like to share a few highlights from the 2022 summer release. In May, we introduced Airbnb Categories. Since launch, listings in the Airbnb Categories have been viewed more than 180 million times. Through Categories, we are distributing guest discovery across more destinations and dates. Now we also introduced AirCover for guests. Since launch, the Net Promoter Score for guests that had an issue with their stay has already improved. And the real insulin -- instance where our host cancels, AirCover has led to 10% more rebookings. So to recap. We achieved significant milestones this quarter with our results. Nights and Experiences Booked were our highest ever. Revenue and adjusted EBITDA were records for Q2, and free cash flow was $795 million. In the last 12 months, we generated nearly $3 billion in free cash flow. Now before I go to questions, I want to talk about an update on my co-founder, Joe Gebbia. Last month, Joe announced that he'll be stepping back from this full-time operating role. Joe will continue to serve on the Board of Directors of both Airbnb and Airbnb.org. Airbnb is a founder-led company. So he's going to continue to take a role at Airbnb, and this will be as an adviser to me on future concepts and creative culture. Since the beginning, Joe has always been focused on big ideas to help others. These are uncompromising True North. So it will be fun to be able to spend more time with them on dreaming up new ideas, just like the early days. And as I reflect back on the last 14 years together, I just can't believe how lucky Joe, Nate and I have been. If anything, I've just gone a few degrees in a different direction, I wouldn't be doing this call with you right now. That's how fragile ideas are. And it's what gives me gratitude to know Joe and Nate. And what I'm most thankful for is that we're still together, still meeting every Sunday 14 years after we started. We built a dream together, and now, after all these years, we still continue to dream. So thank you, Joe. And with that, Dave and I look forward to answer your questions." }, { "speaker": "Operator", "text": "[Operator Instructions]. Our first question is from Lloyd Walmsley with UBS." }, { "speaker": "Lloyd Walmsley", "text": "Two questions, if I can. First, just it looks like room Nights and Experiences Booked grew a little bit sequentially less in 2Q this year than it did in '19. And similarly, the guidance looks like it's calling for a little bit slower sequential growth. Just wondering if there's anything you'd call out that's behind that? And then secondly, can you give us an update on what you're seeing around just how people are using the platform post some of the new search and discovery innovations this summer? Are you seeing demand move into a wider dispersion of areas or any changes in conversion rates? What are early learnings from some of those innovations this past summer?" }, { "speaker": "Brian Chesky", "text": "Thank you very much. Dave, why don't you take the first question about Q2, Q3 growth, and I can talk a little bit about how the launch from Airbnb Categories have affected how people use Airbnb?" }, { "speaker": "David Stephenson", "text": "Yes. So our Q2 gross nights before the cancellations, they came in actually above our internal expectations. We did see some elevated cancellations in the back of the quarter relative to our forecast. We believe that some of the elevated cancellation's related to flight cancellations around the world, but it was mostly in North America towards the end of Q2 '22. And we're just seeing strong overall nights kind of growth, the 25% year-over-year growth in nights and experiences, we feel very confident in. And the same -- having the same results for Q3, we also feel quite good about. We're just seeing strong demand for guest travel all around the world." }, { "speaker": "Brian Chesky", "text": "And just to answer the second question, just to give a little bit of background, for decades, travel search has worked the same way. There's a box, a search box, and you are asked to enter a location. And the problem with that is that Airbnb is in 100,000 locations all over the world. And so people can't think to type in 100,000 destinations into a search box. And so people miss millions of unique Airbnbs they would have never known to search for. And the reason this is important, as you asked is because we think that category categories can allow us to point demand to where we have supply. This, I think, is one of the really big opportunities. So as I said, since release, listings in every categories have been viewed over 180 million times. We've also seen that guests are now showing more flexibility with their dates and their destinations than before. So for example, a typical search, properties are 30 miles further apart than they would have been before. So we are seeing search radiuses increase. And additionally, we are seeing more people continue to use the flexible date feature. So we believe our theory is working. Airbnb categories allows us to highlight what makes us unique. It allows us to point demand where we have supply. And I also think it helps us be in the inspiration business where people to start to travel on Airbnb." }, { "speaker": "Operator", "text": "Our next question is from Mario Lu with Barclays." }, { "speaker": "Mario Lu", "text": "So the first one is on new initiatives. So we look at the third quarter guidance, it seems like bookings is expected to contract by more than 10 points in 3Q versus 2019 versus the second quarter. So does that change the timing or focus on these other new initiatives such as experiences? Or are more resources now being focused back on the core business?" }, { "speaker": "Brian Chesky", "text": "No. I mean we have a very consistent strategy. And our strategy is, number one, we want to unlock the next generation of hosts. We have 4 million hosts on Airbnb, and I think that millions more can turn to hosting, especially during these economic times. So that, I think, is really priority #1. As we add more hosts, we continue to grow. We want Airbnb to be the ultimate host to our guests and host. That's why we offered AirCover where we continue to provide better service all over the world and continue to up level. And guests aren't just traveling Airbnb, they're now living on Airbnb. And so we want to continue to offer more opportunities for them to travel and live on Airbnb. So we are still focused on our core business. That is the priority for us. We are also continuing to invest in long-term stays and other initiatives and most importantly, providing an incredible service that people love. And I would also just say, again, we're feeling really, really solid and good about Q3. Dave, anything you want to add." }, { "speaker": "David Stephenson", "text": "Yes. I'll just double click on Brian's comment. Yes, I mean, we do really feel good about stable bookings in Q3. I mean, in particular, given we have long lead times that we're seeing. We're seeing some pull forward for summer travel here in Q2 and just the broader economic conditions overall. We are -- if you look at our gross booking value growth versus 2019, Q1 was 73%; Q2, 73%. We're just seeing strong gross booking value growth relative to 2019. And to see further kind of quarter-over-quarter acceleration, we just need to see continued recovery in Europe and APAC, which remains significantly depressed." }, { "speaker": "Mario Lu", "text": "Great. And just a follow-up, speaking of APAC. You guys mentioned that the domestic business is trending down in China, which I believe you guys said was around 1% of your business. Is there any other color you can provide in terms of the P&L impact from shutting that down? And any color on how large the outbound bookings for China is?" }, { "speaker": "Brian Chesky", "text": "Dave?" }, { "speaker": "David Stephenson", "text": "Yes. I mean the China business has been a small part of business overall. I mean, it's had less than a 1% impact on our revenue. One of the things that has been important in us getting out of the domestic business in China is maintaining a focus on what we think is the most valuable and important part of China, which is the outbound business. So really, what we've done is we've shifted all of the resources that we're applying and splitting between both domestic and outbound travel. We focused all that on outbound, which we think is the greater prize and the most important part for the long term. So until China has their COVID policy kind of in place and allowing people to kind of travel outbound from China, it will kind of remain to be depressed. But as that evolves and Chinese travelers travel again, we think that will be a nice unlock for our Asia Pacific business. It's not going to have a material impact on our P&L." }, { "speaker": "Operator", "text": "Our next question is from Bernie McTernan with Needham & Company." }, { "speaker": "Bernard McTernan", "text": "Great. ADRs are hanging in there better than feared, I believe, still expecting them to be up year-over-year. Can you just talk to some of the puts and takes, demand-driven pricing versus mix shift?" }, { "speaker": "Brian Chesky", "text": "Dave?" }, { "speaker": "David Stephenson", "text": "Yes. If you kind of rewind to what we've seen with ADRs back at the beginning of the pandemic, all of the increase was driven by mix, right? This initial resurgence of the travel for North America, whole home, nonurban. And then over time, we've seen mix become less and less a part of the increase in the ADR. Here in both Q1 and Q2, what we've seen is that ADRs were up 40% year over -- 3 years back to 2019. And about 2/3 of that increase has been price appreciation, and about 1/3 due to mix. And so we do anticipate that over time, as more people return to travel to urban, more cross border, ADRs may moderate. But yes, as you see, 2/3 of that has actually been price appreciation. So it's been stickier than we anticipated, maybe 6 months ago." }, { "speaker": "Bernard McTernan", "text": "Got it. And then the dip in May and June from the earlier booking windows and then reacceleration in July, is that reacceleration for near-term bookings in terms of late summer? Or is that kind of early bookings for the fall and winter period?" }, { "speaker": "David Stephenson", "text": "Well, it's a bit of both. I mean, really, we have on the books for Q4 of this year, we have more nights on the books in Q4 than relative to the same kind of period a year ago. It's very strong. We're seeing really strong demand in the back half of the year. So we're seeing a bit of both." }, { "speaker": "Operator", "text": "Our next question is from Justin Patterson with KeyBanc Capital Markets." }, { "speaker": "Justin Patterson", "text": "Great. Two, if I can. Brian, when you look at host right now and just the friction to onboarding, what are you looking to really solve with this upcoming release? And then secondly, perhaps for both you and Dave, you've clearly shown a lot of margin progress, free cash flow progress over the next few years. How should we think about just the puts and takes between overall growth and showing more margin, more free cash flow generation ahead?" }, { "speaker": "Brian Chesky", "text": "And just to confirm, you're talking about with this upcoming release, right, this winter?" }, { "speaker": "Justin Patterson", "text": "Yes. Well, I mean it can be a little broader in there. Just where the friction point on onboarding is." }, { "speaker": "Brian Chesky", "text": "Yes. So that's a great question. Let me -- why don't I answer the first question, and then, Dave, you can talk about margin improvement, and then I can potentially elaborate on that answer as well. We have -- as we said, we have 4 million hosts on Airbnb, but we think there are millions more people that could turn to hosting. I mean, honestly, hosting is one of the easiest ways to be able to make money with an asset that you already have. For most people, they don't need to have a start-up cost and the majority of people get a booking within the first week. And so there are a number of things that we're going to be doing this fall -- this winter and beyond, but one of the most important things we want to do is continue to make it easier to host. And one of the high -- things I want to highlight that we launched last year was Ask a Super Host. Ask A Super Host pairs our very best super hosts with prospective hosts. And this is really cool because, basically, what it does is it allows our community to help train new community members, new hosts to come on the platform. That's made a big difference. And we're going to continue to double down on that product. We're going to -- but we're looking at some other opportunities to continue to reduce friction. So you're going to see some really cool products to just continue to make it even easier to host. And so that's probably the primary thing that we're going to be focused on this fall. We're also looking at some additional protections for hosts, and just ways to really try to get everyday people with their primary homes that want to host occasionally to host on Airbnb. A lot of people don't realize that the number -- the top professions for a host in the United States, for example, are school teachers, they're health care workers, they're students, these are top 3 kind of professions and locations in Airbnb. And so what we really think the big opportunity is to continue to attract regular people to become host. And we think one of the biggest sources of new hosts are prior guests on Airbnb, 36% of new hosts last quarter were prior guests. So this is where we're going to be focused on. It's a really big opportunity for us. And I think, again, Airbnb was founded during a recession in 2008, financial crisis. People were worried about being able to pay their bills, pay for their homes and their income. And so they turned to hosting. And we think a lot of people may turn to hosting once again. So this is a big opportunity for us. Dave, if you want to talk about the margin improvement?" }, { "speaker": "David Stephenson", "text": "Yes. Thanks. We're really proud of the progress we made to reduce our fixed costs and make improvements in our variable costs. We've really exercised discipline on our spending here in 2022, and we're going to continue to do so. But while we're thrilled with this margin expansion, we're heavily in growth mode. We are not in profit maximization mode. We really want to balance profitability with growth. We -- one of the things we're very proud in Q2 is that we are showing both growth and profitability at scale. But we'll continue to invest in growth. We're going to prioritize things. We'll grow the business over the long haul." }, { "speaker": "Operator", "text": "Our next question is from Doug Anmuth with JPMorgan." }, { "speaker": "Douglas Anmuth", "text": "Just hoping you can talk a little bit about just kind of macro environment, just what you're seeing in terms of consumer activity or types of trips being booked. And also just to get your view on long-term stays. I think you talked about 25% growth year-over-year, but just the trends there going forward." }, { "speaker": "Brian Chesky", "text": "Dave?" }, { "speaker": "David Stephenson", "text": "Sure. Well, if you start the macro environment, again, we are very pleased with our results despite any kind of macroeconomic. We're seeing strong demand here in Q3. And as I said, the Q2 nights and experiences grew 25% year-over-year, we're seeing a similar growth for Q3, and our demand in Q4 reservations is really strong, as I mentioned kind of earlier. What we've seen so far is North America and Europe have been our strengths. We're seeing -- but we are seeing an uptick in more cross-border and more urban. So those are historic strength areas for us, and we're starting to see those parts of the businesses come back. But ultimately, if you just kind of step back, you just see the resilience of our business overall, right, that because we have so much different kinds of supply in so many places around the world, we have any kind of place for anyone that wants to travel. And there's just so much pent-up demand for travel and just so much demand for travel in general, that people would like to spend money on the experience of travel and getting out of their home more than on things that we're just continuing to see that great strength in our business. And then in terms of long-term stays, it continues to be the fastest-growing business by tripling. So if you look at nights of 28 days or longer, that part of the business is growing faster since 2019 than any other segment stays. And actually, if you kind of subsegment it, nearly 50% of our nights are 7 days or longer. And which I think, again, you start to stay any place 7 days or more, an Airbnb is the best way to kind of experience that stay. So long-term stay trend continues to be very solid, growing faster than any other part of the business." }, { "speaker": "Operator", "text": "The next question is from Nick Jones with JMP Securities." }, { "speaker": "Nicholas Jones", "text": "Two. I guess, first, can you just kind of give us an update on the I'm Flexible option and how that's kind of playing out and what kind of experiences you're able to provide in those markets that maybe are less dense? And then a follow-up." }, { "speaker": "Brian Chesky", "text": "Yes, yes. So Nick, I'm Flexible, essentially with the product that we launched last year, it really has 2 components. There's flexible dates that allows people to say, I'm flexible when to travel, and we can say, I'm really interested in traveling anywhere for a week and a week or a month anytime in the next year. And we also had I'm Flexible destinations. We rebuilt I'm Flexible destination from the ground up, and that became Airbnb Categories. So that's the product that has been used or people have seen listings that have been featured in the Airbnb categories over 180 million times since May 11. This has definitely been like a huge boon for us. And what we're seeing is that people are, in fact, discovering homes they would have never otherwise seen in their books. We're seeing the search radius widen by, I think, it was 30 miles, what I said before. The other thing we're seeing is that people are continuing to be more flexible about their dates. So more and more people are using the I'm Flexible dates feature as well. And so we're really excited about this. I think this is a really big thing that we're going to be focusing on, and we're going to continue to be investing in this product because I think this is a bit of a paradigm shift for how people will travel. Not everyone is going to be flexible about how they travel. But for anyone that's not traveling for business or not visiting family, if you were doing leisure travel, almost by definition, you probably have some flexibility. And as fewer and fewer people are going to be required to go into office 5 days a week, I think this option is going to be more and more important. And our business model works uniquely for this because we have a lot of unique inventory. So it has been used quite a lot, and hopefully, that answers your question." }, { "speaker": "Nicholas Jones", "text": "Yes. And then, I guess a follow-up is in some of the areas that are outside of urban areas, less dense, less, I guess, arguably activities, how are you thinking about adding more optionality to make these types of experience more engaging for the guests?" }, { "speaker": "Brian Chesky", "text": "Sorry, can you elaborate outside of urban areas. Or I'm trying..." }, { "speaker": "Nicholas Jones", "text": "Like if you're in a rural area and there's less activities, arguably, because there's less population, how are you adding -- looking to add more experiences for those guests in those regions?" }, { "speaker": "Brian Chesky", "text": "Oh, I see. Yes. Well, it's a great question. So number one, Airbnb Categories and the new products we're doing are great ways to highlight really interesting home and communities you never know existed, right? We have like these incredible barns and farm stays and capsules and treehouses. And many of these are in towns you've probably never even heard of, most of them. But there's another good question, if you go to Paris, you have the Eiffel Tower. But if you go to a rural area in upstate New York or in California or some other place, what do you do when you're there? And we do think Airbnb Experiences are great. Obviously, for like places that are not iconic tourism destination. So that's why we're continuing to invest in that product and people really love Airbnb Experiences. They actually have a higher 5-star rating even than home. So I think this is a great opportunity for rural destinations, and we have a lot of really popular experiences. So like if you go on a farm, you can do a farm stay and then you can have interesting experiences on that farm. So that's just one example. We have really popular experiences, for example, in Tuscany. You can make pasta with a nearly 90-year-old grandmother who's been making pasta the same way for more than half a century. So these are experiences you would have never been able to find, and we're really excited about that." }, { "speaker": "Operator", "text": "The next question is from James Lee with Mizuho." }, { "speaker": "James Lee", "text": "And maybe as we look into FY '23, obviously, we have a lot of economic uncertainties here. If the economy indeed slows down and consumers start to trade down, how do you think that impacts Airbnb's business? And also on the other hand, if you look at expenses, the demand slowdown, is there anything in your cost structure you could optimize to offset any potential headwinds?" }, { "speaker": "Brian Chesky", "text": "Dave, do you want to take that?" }, { "speaker": "David Stephenson", "text": "Sure. I think we've highlighted this a bit on the call that you don't know what the economy is going to bring, but we do know that Airbnb is resilient to almost any kind of economic shock. As Brian mentioned, we're founded in a recession, and we've obviously thrived in the era of COVID despite COVID. And what we're just finding is that people can come to Airbnb because we have any kind of property, whether it's a small shared room or a private room to luxury stays, we have something for anyone depending on their travel needs. And we likely saw on COVID, if they can't cross borders, they're going to stay domestically. They get in the car and they go down the road. If domestic -- if air travel gets too expensive, they -- again, they can stay domestically, and they can basically, within their budget, find the perfect place for them because we have such a diversity of types of offerings for them. So I think that is one of the things that just gives us this great resilience. And then in terms of expenses, if the business slows down, I mean, again, we've already made the hard choices. In 2020, we substantially reduced our fixed costs. We eliminated a number of positions. We moved from being divisional to functional. So we are a leaner, tighter machine, and we will remain that way. We're going to continue to grow. We're growing headcount maybe high single-digit percentage rates, but that is going to be able to support us for the very long term, and we're going to remain very focused and disciplined in our investments. So I feel really good about the position that we're in with our investment model." }, { "speaker": "Operator", "text": "The next question is from Brian Fitzgerald with Wells Fargo." }, { "speaker": "Brian Fitzgerald", "text": "We wanted to ask about the recovery of supply that you continue to see, maybe particularly in urban areas. Are you seeing hosts who had come off the platform now coming back, wondering how you're making these hosts aware of the increased urban demand and helping to reactivate them? And any color there on that, maybe latent supply capacity, if you could, that'd be awesome." }, { "speaker": "Brian Chesky", "text": "Dave, do you want to take this?" }, { "speaker": "David Stephenson", "text": "Yes. A couple of notes on the supply growth. We just continue to see strong supply growth. I think since 2019, our Nights and Experiences Booked, they grew 24%, and our active listings have grown 23%. And we have over 6 million active listings now even taking down the domestic listings in China. So as you mentioned on the urban side, the active listings -- well, I'll start with the nonurban. Nonurban increased 7% quarter-over-quarter and 16% from Q2 '21. And then in North America, they've increased 23%. But then to your specific question, yes, as demand returns to cities, we're seeing a return to growth in the total urban supply. And exactly right, the people that have properties, they come back on to Airbnb and are ready to host again. I mean, if you kind of step back and think about it, because the vast majority of our hosts are individual hosts, and then therefore, the vast majority of their listings are either their primary home or maybe a secondary home, they don't get rid of those in a recessionary environment and other things. I mean it's not like a professional host, which may be looking at the pure return on investment opportunity of the property at a particular point in time. And so with those individual houses, when the demand comes back, they come back on to Airbnb and the listings are there. So it's precisely what we're seeing. When the demand comes back, the supply is right there ready for them to stay." }, { "speaker": "Operator", "text": "The next question is from Mark Mahaney with Evercore ISI." }, { "speaker": "Mark Mahaney", "text": "Okay. I think I'll ask two questions. Just talk about the China outbound market and how you tap into that, how material that's been for you to date? And then on experiences, I know that's in that list of -- a long list of things that you've been working on in terms of product innovations. It seems like it was less -- it's been less of a priority, but is there anything that suggested it's rising a little bit in your list of priorities and that you want to lean into it more aggressively in '23?" }, { "speaker": "Brian Chesky", "text": "Yes. Dave, why don't you take China, I can expand on the answer and I'll take Experiences." }, { "speaker": "David Stephenson", "text": "Yes. I mean we're very bullish on China over the longer term. I mean it's obviously been significantly impacted due to COVID. People are not traveling outbound. I mean that's actually right how we started the business, is seeing great outbound travel from China all around the world. And then -- and that is still the prize for us to kind of continue to focus on. So right now, APAC is still significantly depressed. I mean if you look at our overall nights growth, as we said, it's 25% up from Q2 of 2019. But if you exclude APAC, it's actually up 35%. So you can see what kind of a drag that has. And I think the reacceleration -- further acceleration of the business from where we're at today will be benefited by having -- trying to outbound come back and resurrecting our APAC business." }, { "speaker": "Brian Chesky", "text": "Yes. I would just add to that, that we have absolutely seen in every other geography in the world that there is pent-up demand. In North America, there was pent-up demand. In Europe, there was pent-up demand. We expect there will probably be a lot of pent-up demand for travel from China outbound and more broadly in APAC. And so how we've been preparing? Well, number one way to prepare for the China outbound business is to make sure we have really great supply in the corridors where people in China are traveling to. This includes like Japan and Korea, Southeast Asia and beyond. The next thing is just making sure that once people are ready to travel, our product is continuing to be updated, and we have the marketing campaign ready to go. So it's a pretty simple strategy. The great thing is we don't have to make a lot of changes. We think our product as it is, is going to be great once the China outbound rebounds, and we think it will. We expect -- everything suggests it will, just like every other market. So we're pretty excited about that. And I think that in the coming years, this will actually be a pretty important part of our APAC business. Now with regards to experiences, yes, I mean, Mark, let me just give a little bit of context. 2018, 2019 experiences is going along pretty well, and we expected that 2020 was going to be a breakout year for experiences. And I was going to -- we were going to focus quite a lot of energy on it. And then, of course, the opposite happened. There was a pandemic. We had to pause the business, people were not comfortable gathering in person, let alone meeting strangers. And so during the depths of the pandemic, we got focused back on our core business. We got back to basics. And I think that explains a lot of the business transformation we experienced, especially now we've generated nearly [indiscernible] of free cash flow. That being said, we remain incredibly bullish about the long-term potential of experiences. The average 5-star rating for Experiences, as I mentioned, is higher than the average 5-star ratings even for homes. And we just think people need to know more about this product. It needs to be continually integrated into the search flow, and we need to continue to market it. So the answer to your question, yes, Experiences will become once again a rising priority, and we are making quite a few investments in the product to continue to highlight experiences. And I think it's going to be a big part of our story in 2023 and beyond over really the next 5 years. So I'm really excited about them." }, { "speaker": "Operator", "text": "Our next question is from John Colantuoni with Jefferies." }, { "speaker": "John Colantuoni", "text": "So last quarter, you mentioned an expectation for marketing as a percentage of revenue to remain relatively flat compared to 2021. Maybe -- is it possible for you to update us on whether or not that's still your expectation following marketing in the first half coming in a few hundred basis points below last year? And I have a follow-up." }, { "speaker": "Brian Chesky", "text": "Dave?" }, { "speaker": "David Stephenson", "text": "Yes. The short answer is we anticipate marketing as a percentage of revenue in 2022 will be consistent with 2021. So a very modest increase in the back half of the year." }, { "speaker": "John Colantuoni", "text": "Okay. Great. And second question on take rate. It looks like outlook for the third quarter implies a take rate that's better than what we were expecting and up a decent chunk versus the same quarter in 2019. Any chance you can give us some detail about the puts and takes driving that take rate?" }, { "speaker": "David Stephenson", "text": "Yes. The underlying kind of -- if you shifted take rate is unchanged. So any of the variation in take rate is just a timing difference between revenue stays versus timing of bookings." }, { "speaker": "Operator", "text": "Our next question is from Stephen Ju with Credit Suisse." }, { "speaker": "Stephen Ju", "text": "So Brian, I think you yourself signed up to be a digital nomad and joined your employees who could now, I guess, work from anywhere. So is there anything you can share in terms of what you're seeing from the organization overall regarding pickups or declines in productivity or your ability to innovate? And Dave, at the time of the IPO, I think you guys had disclosed that the different cohorts of guests were displaying pretty similar revenue retention as they age. But as we enter the pandemic, you probably had a pretty good influx of new users who signed up to experience Airbnb for the first time ever. So is there anything you can share in terms of the behavior of the 2020 and the '21 cohorts relative to what you have seen for the folks who are arguably the earlier adopters." }, { "speaker": "Brian Chesky", "text": "Yes. So why don't I take the first question on really remote work. So in April, we announced that Airbnb employees can live and work anywhere. And why do we do this? Well, there are a couple of reasons. Number one, we had the most productive 2 years in our company history. And those 2 years were 2 years when we rebuilt the company from the ground up, fixed our cost base, accelerated growth. And all of this was done on Zoom. And so it's very clear to me that like the most productive we have ever been is on Zoom. And so I thought -- there was no question that we can maintain that productivity. Additionally, I think a really good way to predict the future is to look at what young companies do, right? 20 years ago, young companies had open floor plans and they had a lot of perks on site, and that became the dominant way that people worked in offices around the world. If you look at a lot of young companies today, they have a lot of flexibility. They're embracing remote work. And so I think this is a really good leading indicator of what the office space -- office place -- office environment of the future will look like in the next 10 years. Now that being said, we do think in-person interaction is really important, but I don't think that requires you to have to come to an office 3 days a week. So the guideline that we've given is we'd like to gather employees at least 1 week a quarter. So rather than kind of coming in every week, we want more meaningful, less frequent interactions and gatherings. And otherwise, we think Zoom is really, really efficient for productivity. And the other thing I'll just say is I know a lot of CEOs are kind of nervous about productivity if their employees aren't in an office. But we have a pretty unique way we run the company. We do these 2 releases every year, and it's a really great mechanism for accountability. So you can see the productivity of everyone in the organization because all the work is kind of coming together twice a year to make these really big leaps in the organization. So it's actually, in a sense, kind of easier to track productivity when everything is really online. And so that's something that we're really embracing." }, { "speaker": "David Stephenson", "text": "Great. And then relative to cohorts, what we're starting to see is we believe, to start with, that we have some of the highest guest retention rates in travel. We still -- we said it in our IPO, and we still believe that to be true. And our booking frequency remains quite strong. It's getting closer to 2019 levels. And as we manage -- look at the cohorts, really, what we're seeing in 2020 and 2021, the new guest cohorts, they've been actually very retentive, even maybe more so than kind of historical levels likely due to some self-selection. New guests who joined in the years of pandemic are willing to kind of travel now are probably more inclined to kind of travel than others. And then in terms of rebooking rates of past guests, we've seen nice improving rates in those trends here in 2022, above kind of 2021 levels, but maybe still a bit below 2019, again, just given the nature of self-selection of who's willing to kind of travel at this time." }, { "speaker": "Operator", "text": "The next question is from Kevin Kopelman with Cowen." }, { "speaker": "Kevin Kopelman", "text": "Can you give us a sense of what listings growth looks like ex the China shutdown? And then qualitatively, if you could talk about the key drivers and trends you're seeing there and listings." }, { "speaker": "Brian Chesky", "text": "Dave, do you want to take that?" }, { "speaker": "David Stephenson", "text": "Yes. Yes. I mean in terms of the growth, what we've stated is that we're still well above 6 million active listings, even excluding the takedown of the China domestic. So -- and as we kind of mentioned in our results, we're seeing strong listings growth, specifically in the areas where we have the strongest kind of bookings. So..." }, { "speaker": "Kevin Kopelman", "text": "Did you give the number of China listings?" }, { "speaker": "David Stephenson", "text": "We have not specifically mentioned the China listings, no." }, { "speaker": "Kevin Kopelman", "text": "Okay. And then just a quick follow-up on -- so on the Q2 guide, you talked about slowing later in the quarter, but you were still pretty much on your -- where you had guided for nights. Is it safe to assume for the third quarter, you're also assuming some slowdown in the remainder of that quarter?" }, { "speaker": "David Stephenson", "text": "Well, if anything, what we're seeing is an acceleration of the business here in July and actually kind of a very stable overall nights booked growth for the quarter on Nights and Experiences Booked. I mean, obviously, then for our revenue, it has a modest -- has a decel on a year-over-year basis, but actually will be up from kind of a year over 3 years." }, { "speaker": "Operator", "text": "The next question is from Brian Nowak with Morgan Stanley." }, { "speaker": "Brian Nowak", "text": "I have two. The first one, just any update on the number of I'm Flexible queries or sort of how big that's gotten? I know it's a number that you all were disclosing for a couple of quarters. And then secondly, there remains to be an ongoing debate about how much of the shift toward Airbnb long-term accommodations was sort of COVID, and now you're going to have a mean reversion back to our hotels. What are 2 or 3 of the KPIs that you look at that sort of give you confidence that your addressable market of users, of the hosts, everything has really expanded. Like what are you seeing in the internal KPIs that you watch now in July and August that give you confidence that you're still going to have outsized market share growth into '23." }, { "speaker": "Brian Chesky", "text": "Dave, you want take this?" }, { "speaker": "David Stephenson", "text": "Yes. I mean we're continuing to see just really strong growth in our new guests. Obviously, looking at our new guests, our new guest retention, which is one of the questions we just had, which remains quite strong with people coming back on. We're continuing to see just overall utilization of Airbnb versus hotels. We didn't ever dip as much as hotels did, and we introduced Airbnb to millions of new customers. And we see the new use cases. I mean, we've highlighted things like our long-term stays and the use cases where people aren't going to want to be at a hotel for more than 7 days. And so the portion of our business, nearly 50% that are over 7 days is really helpful in that regard and over 28 days, it's nearly 1/5 of our business. So we look at just the destinations that people are able to kind of travel. So the robustness of historically have been cross-border in urban. And now what we've seen is great growth in suburban and nonurban and some of the distribution of the nights around the world. I think that is also giving us great confidence in the growth of our business overall. Because we don't just tap out. If we were only, say, a vacation rental destination-type company, you can tap out in either supply and even demand in those kind of areas. But that's really -- we have such a diversity of supply around the world that we're able to continue to grow quite well." }, { "speaker": "Brian Chesky", "text": "Yes. Maybe I'll just -- Brian, maybe I'll add a little bit of context. It's good to remember that before the pandemic, our bread and butter was cross-border and urban, right? That was our bread and butter, it was cross-border travel and urban travel. And of course, when the pandemic occurred, that got primarily shut off, and yet our business recovered because people were using Airbnb differently. I think that really the key important thing here is that our model is obviously incredibly adaptable. We are in nearly every community in the world. We have nearly every type of space at nearly every type price point. And I think that the reason that people would use Airbnb will continue to endure. People are looking for value. They want to feel like they live at the local. As more and more people have flexibility and trip trick length and continues to increase, nearly half of our business is a week or longer, it's prohibitive probably to stay in hotels. So there's a lot of new use cases that we think are here to stay. So the thing I'm pretty excited about is that a lot of the older use cases, cross-border and urban, are coming back." }, { "speaker": "Operator", "text": "The next question is from Naved Khan with Truist Securities." }, { "speaker": "Naved Khan", "text": "I'm really surprised by the continued strength in North America and in the U.S. I think you talked about a 37% growth in Nights and Experiences versus EMEA, maybe up 25%. Is it just that EMEA continues to lag? Or just from everything that we've been hearing, it seems like EMEA saw like a burst of demand in the second quarter. So just trying to reconcile that." }, { "speaker": "Brian Chesky", "text": "Dave?" }, { "speaker": "David Stephenson", "text": "Yes. I mean EMEA is still lagging behind the acceleration that we've seen in North America, and we think that, that is actually one of the opportunities for future acceleration of the business. I mean, clearly, things like the impact of the war in Ukraine certainly has had an impact. And there's obviously the economic impact of even just foreign exchange rates, lower euro and British pound relative to the U.S. dollar. So there are some reasons why Europe has been lagging. It's still a strong business for us. It's still doing well, but it could even do better." }, { "speaker": "Naved Khan", "text": "And then maybe just as a follow-up. So if I have to think about the back half and the advertising channels, do you see opportunity to increase the branded ad spend? Or do you think you're pretty much maxed out and might just stay on these levels?" }, { "speaker": "David Stephenson", "text": "Well, again, I think we have a very -- a modest increase in our overall marketing spend in the back half of the year. We're very happy with the approach to our brand spend. I mean, again, if you step back, one of the big strengths of Airbnb is our ability to market to both guests and hosts at the same time, to be able to bring guests with 90% of our traffic remaining direct or unpaid. And I think this brand strategy, frankly, it's more of a product marketing strategy that we have to market the features and capabilities that we have in Airbnb, what makes us different, has been a huge strength for us. So we're really happy with that investment. We think we're investing fully at the moment there. We will look over time to maybe expand the countries that we're doing more of that investment. So later this year and into early next, you could see us expanding into more countries because we're seeing such good success with our investment right now." }, { "speaker": "Operator", "text": "The next question is from Jed Kelly with Oppenheimer." }, { "speaker": "Jed Kelly", "text": "Great. Two, if I may. Just one on the nonurban listings, it continues to grow well, and you're adding a lot of supply. Can you sort of touch on where the share gains are coming from, like where those listings are coming from? Is it coming from people not using their second home as much and going back to more urban destination? Or are you taking more share with property managers? Or are you opening up with new destinations? Then my second question just relates to over and all seasonality this year. It seems like the room nights is following a consistent seasonal trend as 2019. So should we expect a similar 4Q seasonality as 2019?" }, { "speaker": "Brian Chesky", "text": "Yes. So maybe -- why don't I -- I can at least answer the first not the urban listings at a high level. And Dave, you can answer maybe more specifically and also talk about seasonality. So Jed, at the highest level, I would say that one of the things that we've seen is that we have a global network where the fastest-growing market from a supply basis are typically the fastest-growing markets from a demand basis. And this is not surprising because the #1 source of host are prior guests. So specifically in non-urban listings, it's -- it's not a uniquely different composition. It's not like it's a lot more property managers or anything like that. It's pretty consistent composition from years prior. So the vast majority of listings are individuals, but there are also property managers that are continuing to come out on the platform. We're also seeing people continue to open up more nights on their calendar. As demand goes up, people are often motivated to add more availability on their calendar. And also as people get more business, they tend to tell their friends about it. And this is one of the great things about having a business where the vast majority of your supply are individuals. So we continue to see really strong growth in nonurban listings. But as urban recovers, we are anticipating that we're going to see some solid supply growth in urban areas as well. Dave, feel free to elaborate on that and take the second question as well." }, { "speaker": "David Stephenson", "text": "Yes, I think you covered the first really well. I mean, I'll just say on the Nights and Experiences Booked kind of seasonality. Now that we kind of enter Q3 and Q4, it's probably just better to look at the year-over-year growth rates as kind of being more normalized. And I think that's the better way to kind of look at the overall seasonal growth." }, { "speaker": "Operator", "text": "The next question is from Tom White with D.A. Davidson." }, { "speaker": "Thomas White", "text": "Brian, during the early days of the pandemic, you talked about narrowing your focus on Airbnb's most perishable opportunities. You guys have now achieved profitability at scale. Your cash balance has grown significantly. Can you update us on maybe your latest thinking about those nonperishable opportunities? Are any of them particularly attractive to you? Or should we maybe infer from the buyback announcement that maybe you're not super close to really exploring those opportunities again?" }, { "speaker": "Brian Chesky", "text": "Tom, yes. So again, during the 2020 pandemic curve, just to recap, we got really focused. We got back to basics. And over the last 2 years, I think we've really, really benefited by perfecting our core product. That being said, we are now looking and we are thinking very expansively. So you should look at our stock buyback as our confidence in our long-term growth and profitability. That's all you should believe that stock buyback's about. That being said, we are going to continue to be investing aggressively over the coming years. So we are not pulling on the brake; we are now stepping on the gas. Remember, like the biggest innovations I had aren't going to be in my 20s and 30s, right? So we have some pretty big opportunities coming up. I'm excited about some of the things we're going to be releasing later this year, but we have another release coming next spring in time for the summer release and the following winter. And again, we're going to continue to focus on unlocking the next generation of host. So we have some really exciting new products built to attract the next generation of host, especially individuals that want to host occasionally. We are going to continue to think of radical innovations around Airbnb becoming the ultimate host to our guests and host. We're going to continue to innovate on our search technology. And we have a lot of opportunities around helping people travel and live on Airbnb. So there's going to be some pretty exciting opportunities coming forward, and I'm pretty bullish about it. I don't know if, Dave, if there's anything you want to add to that?" }, { "speaker": "David Stephenson", "text": "Yes. I'll just reemphasize, our priority is investing in growth. And $10 billion cash is more than we need, $8 billion is more than sufficient to aggressively invest in growth in the business. And that is our #1 priority. At the same time, we're able to both invest and grow just given the profitability profile of our business overall. So I'm proud that we can do both, but the priority for us is investment growth." }, { "speaker": "Thomas White", "text": "Great. Maybe just one quick follow-up on FX. Over the years, I remember some of the kind of traditional OTAs talking about how maybe it's less about kind of the absolute level of one currency relative to another, but it's maybe more like the volatility of foreign exchange rates that kind of dictate customer booking behavior. Curious whether you'd say that was a similar dynamic in your business? Or just generally how to changes in FX rate, what changes impacts are you seeing kind of in terms of customer behavior?" }, { "speaker": "David Stephenson", "text": "I think the biggest impact you see with FX is in the cross-border travel, obviously, right? A strengthening dollar gives you the ability for Americans to travel abroad, specifically right now, probably Europe and to the U.K., and a weakening euro and pound makes it more difficult for them to kind of travel back. But again, if you look at Airbnb, the fact is that people adjust their travel to meet their overall kind of budgets. And as we saw in COVID, people are more willing to -- maybe they stay domestically if their budget doesn't allow the cross-border traveler. Maybe they stay domestically if they don't feel like they can afford the cost of airline travel. So the FX impact from a consumer standpoint is usually this kind of cross-border impact. And then to our overall business, we're just seeing that as we generate nights stayed in euro and pounds and then we bring them back to the U.S. and into the U.S. dollar, we're just seeing the headwind of foreign exchange, which was -- which is material in Q1, it was 600 basis points of revenue growth driven by the FX move. So I'd anticipate Q3 probably be something less than that to our overall P&L." }, { "speaker": "Operator", "text": "That will conclude our question-and-answer session for today. I'll hand it over to Brian Chesky for any closing remarks." }, { "speaker": "Brian Chesky", "text": "All right. Well, thank you, everyone, for joining us today. So I just want to say I'm incredibly proud of what we've delivered this quarter. Record Nights and Experiences Booked, we had our most profitable Q2, and we generated $795 million of free cash flow, bringing our total free cash flow over the last 12 months to nearly $3 billion. This transformation of our business was only possible because of our adaptable model and a relentless innovation. And regardless of economic environment, we believe guests will continue to come to Airbnb because they can find great value and hosts can earn extra income. Airbnb is ready for whatever lies ahead, and we're so confident in our long-term growth and profitability that today, we're announcing a $2 billion share repurchase program. So thank you all for joining us today, and I'll see you next quarter." }, { "speaker": "Operator", "text": "Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect." } ]	Airbnb, Inc.	115,705,393
ABNB	1	2,022	2022-05-03 14:20:00	Operator: Good afternoon, and thank you for joining Airbnb's Earnings Conference Call for the First Quarter of 2022. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I'll now hand over to Ellie Mertz, VP of finance. Please go ahead. Ellie Mertz: Good afternoon, and welcome to Airbnb's first quarter of 2022 earnings call. Thank you for joining us today. On the call today, we have Airbnb's Co-Founder and CEO, Brian Chesky; and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our first quarter of 2022. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we'll be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We've provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. And with that, I'll pass the call to Brian. Brian Chesky: All right, thank you very much, Ellie, and good afternoon, everyone. Thanks for joining. I'm excited to share our Q1 results with you. Now, despite the pandemic, the war in Ukraine and macroeconomic headwinds, Q1 was another incredible quarter. We exceeded 100 million Nights and Experiences Booked for the first time ever. GBV was $17 billion, which was 73% above Q1 2019. Revenue was $1.5 billion, exceeding Q1, 2019 by 80%. Net loss was $19 million. Now this is a significant improvement in the same periods from 2018 and 2021. Adjusted EBITDA was $229 million. Now, this is our first positive adjusted EBITDA Q1, and this represented adjusted EBITDA margin of a positive 15%. Now this is compared to a negative 7% a year ago, and a negative 30% in Q1 2019. And finally, we generated $1.2 billion of free cash flow in the quarter. This was also an all-time high. And what these results show is that two years into the pandemic, Airbnb is stronger than ever before. Now, why is this? Well, millions of people are now more flexible about where they live and they work. And as a result, they're spreading out to thousands of towns and cities. And they're staying for weeks, months, or even entire seasons at a time. That's through our adaptability innovation, we've been able to quickly respond to this changing world of travel. And these incredible results were driven by a number of positive business trends. First, guests are booking more than ever before. In Q1 gross nights booked grew 32% compared to Q1 2019. And this is despite the pandemic, the war in Ukraine, and macroeconomic headwinds. People are also more confident booking travel further in advance. And we're seeing strong demand for summer bookings and beyond. Second, guests are returning to cities and they’re crossing borders. So our guests continue to travel domestically and continue to go to rural destinations at Airbnb. We are also seeing guests return to cities and cross borders at or even above pre-pandemic rates. Third, guest are also staying longer, even living on Airbnb. Now, while short-term stays rebounded strongly in Q1 2022, stays of a month or longer continue to be our fastest-growing category by tripling compared to 2019. In nearly half of our nights booked in Q1 were for stays of week or longer in one in five nights booked were for stays of a month or longer. So the world is clearly becoming more flexible about where people can work. And getting ahead of this trend, last week, we announced that Airbnb employees can live and work anywhere. And we've designed a way for them to live and work around the world, while collaborating in a highly collaborative way and experiencing the in-person connection that makes Airbnb special. Now fourth, our innovations are inspiring guests to discover thousands of new places. In 2021, we delivered more than 150 upgrades across every aspect of our service. And among these upgrades was the innovative I’m Flexible feature. Now I’m Flexible feature has now been used more than 2 billion times, 2 billion. And guests who use I’m flexible are more likely to book home in less popular locations. This is really important, because this allows us to point demand to where we have supply, and it helps distribute guests more widely in communities all around the world. But we're not stopping there. On May 11, next Wednesday, we will be announcing the Airbnb 2022 summer release. This is a new Airbnb for a new world of travel. With a completely new way to search, guests will be able to discover millions of unique homes in Airbnb they never thought to search for. And when they book, guests will have the confidence knowing that Airbnb has their back each step of the way. And so you can watch this announcement right on our homepage next Wednesday at 9 AM Eastern Standard Time, next Wednesday, right on our homepage. I hope you can tune in because I'm really excited about what we have to share. And then finally, our community - our host community continues to expand. We see destinations the strongest demand showing this most supply growth with non-urban active listings actually growing 15% globally. And we're also showing an increase in total urban supply as demand returns to cities. And we believe that the upgrades we announced last year, including our new host onboarding flow and AirCover, are supporting this growth and enabling success for a new host. So to recap, we had our best Q1 ever. Nights and Experiences Booked and GBV were a highest ever. Revenue and adjusted EBITDA were records for Q1 and we generated more than $1 billion in free cash flow in the quarter. With these results, Airbnb is stronger than ever before. Now, before I go to question, I just want to talk for a minute about our efforts in Ukraine. Because over the past few months, millions of lives have been devastated by the war. And when the crisis broke out, we knew that our platform can help refugees fleeing the crisis. And within four days of the invasion, Ukraine, we announced that airbnb.org would provide free housing for up to 100,000 refugees fleeing from Ukraine, and over 30,000 hosts have already signed up to open their homes to refugees for free or for a discount. But then, something even more remarkable happened. People started booking homes for hosts in Ukraine. Hosts, they never intend to stay with just to provide relief aid. And soon, more than 170,000 people joined in, and they booked approximately 600,000 nights booked in Ukraine. And because we waived our fees, $20 million went directly to host in Ukraine. And I think this speaks to the power of our community. And they are a reminder that in the world of darkness and a world of destruction, kindness still exist. And so I'm really proud of our business results this quarter. I'm also proud of how helpful we've been able to be to thousands of people in need. And with all that, Dave and I look forward to answering your questions. Operator: [Operator Instructions] The first question comes from Colin Sebastian with Baird. Please proceed. Colin Sebastian: Thanks. Good afternoon, and congrats on the strong quarter. A couple of questions for me. I guess first off, Brian, drilling down a bit on some of the broader use cases that emerged through the pandemic. At a high level, the trends clearly sound very good. I'm hoping you could unpack that a little bit more in terms of the sustainability of longer stays and other use cases in markets that are furthest along in the recovery, where offices are reopening and lives are sort of getting back to normal, if you could able to break that down a bit more. And then secondly, on the plans for advertising and marketing, you're keeping that looks like fixed as a percentage of revenues, so a little bit higher spend on marketing and advertising. Can you talk about that? Is that with all the product updates, the rebound in travel, maybe the competitive landscape? If you could talk about the strategy with respect to the advertising and marketing? Thank you. Brian Chesky: Yes, excellent. Thanks, Colin. So why don't I answer these at a high level? And Dave, feel free to jump in with some more specifics. So let's start with the question of Colin, some of the broader use cases you talked about. And let's back up. So when we started Airbnb, it was really just a way for people to book a home for just a few days at a time. But even before the pandemic, actually long-term stays, stays of a month or longer were our fastest-growing category or segment of trip by trip length, some of those are already growing very quickly before the pandemic. And I think what the pandemic did, is I think it accelerated the adoption of longer-term stays in Airbnb by hard to say how many, but certainly by years, and I think it's important to understand why this is happening. Right now, what's happened is that for millions of people, they don't need to go back to an office five days a week. And the vast majority of companies are not requiring employees to come back to an office, many have moved to a hybrid or entirely remote model. And I think that what we're going to see going forward, is you're going to see more and more flexibility. Because I think companies ultimately want to attract the very best people, and the best people are going to be everywhere. And so long as we believe that people don't need to go back to an office five days a week, millions of people, then we believe in a world of more flexibility. So long as we believe in a world where people will continue to dial in and zoom, we will again believe in a world of more flexibility. And so what we are going to continue to see we think, over the coming years is continued and sustained growth for stays of longer than a month and stays of longer than a week. I don't think this is a temporary phenomenon. I think that the genie is out of the bottle and flexibility is here to stay. And I think flexibility after compensation will probably be the most important benefit that an employer can offer. And just to give you a small anecdote. Last week, last Thursday, we announced that Airbnb employees can live and work anywhere in the world. The response internally was great, but even more impressive was the response externally. Because a, our career page was visited 800,000 times after that announcement. And so I think that just speaks to the durability of this use case. And I think that it's going to continue. Now with regards to advertising, I think it's just important that I share a little bit of a recap of how we think about marketing and Dave, feel free to talk a little more detail. So we have, Colin, a little bit obviously different approach to marketing and advertising than our peers. We take a full funnel approach to marketing that combines PR, brand marketing and performance marketing. We're not really focused on buying customers. We're focused primarily in investing in our brand and educating the world about what makes Airbnb unique. So we think of marketing primarily as education. And I think this explains why 90% of our traffic or more is direct or unpaid. Airbnb is a noun and verb used all over the world, and it was really not advertising, but PR and word-of-mouth that built our brand. And just to give you an example, and - since the pandemic started, there have been more than 1 million articles written about Airbnb, 55% of articles that used to have the word travel in it, also have the word Airbnb in it. So it's pretty, so advertising is really a form of supplemental education for us. It's not the core driver of growth. We think the core driver of growth, Airbnb, is innovation. It's about building a product that people love. And the role of marketing isn't to buy customers. The role of marketing for us is to educate people about our new features and our new offerings. Dave, do you want to - I don’t know if you want to go into a little more detail about advertising? Dave Stephenson: Brian, I think you've covered it incredibly well. I mean, we're very proud of the approach to marketing this, the full funnel approach is working probably well for us. And as you said, we are actually increasing our marketing dollars. We're just keeping the marketing expenses as a percent of revenue relatively consistent to the level we had in 2021, and we think it's being really effective for us. Operator: Thank you. The next question comes from Bernie McTernan with Needham & Company. Bernie McTernan: Great. Thank you so much for taking the questions. I guess first just want to get any insights on how supply and demand are growing relative to each other versus what was happening before the pandemic. So maybe even just utilization, how it's trending, how it was trending before the pandemic and how it's trending now. And then secondly, on capital allocation with over a $1 billion of free cash flow in the quarter, $9 billion of cash on the balance sheet. Can you remind us and just your thoughts on if there's any sort of capital allocation, whether it's returning to shareholders, M&A, and continuing to invest in the product? We'd love to hear your thoughts there. Brian Chesky: Great, Bernie. So why don't I do this? Let me just talk at a high level about the first question. And then Dave, why don't you take both questions at a more specific level. So let me just say at a high level around supply and demand, number one, I think we're going to have plenty of supply this summer for the demand. We're expecting a lot of demand for the summer. But we are not supply constrained any night of the year, not even close to the global level. The challenge of most travel companies is that a lot of people try to go to the same place, the same city on the same day. And cities, essentially, like travel OTAs typically get sold out. So like a lot of people try to go to New York City on New Year's Eve, and there's only so many places to stay in New York, and so you're going to get sold out. Now, here is Airbnb. We're in 100,000, towns and cities all over the world. And we see a couple phenomenon, I think it's important to point out. The first thing we see is the fastest-growing supply markets are actually our fastest-growing demand markets. So as a market experiences more demand, more supply gets unlocked. And I think the reason why is primarily because the vast majority of host of Airbnb are individuals. The vast majority of new host get a booking within three days. And when a regular person gets a booking, and the booking might be $300, $400 or $500, they tend to tell their friends about it. And so as more people get booked, they create more word-of-mouth, and this unlocks more supply. So we have a global network, where demand in a sense, stimulates more supply. Additionally, the I'm Flexible feature is critical, because it allows us to point demand to where we have supply. So if somebody types in Paris on June 4 to 5, we are limited to the properties in Paris on those dates. But if somebody says, we’re flexible, we can point them to other dates in Paris that are a little lower season, or other towns around Paris to have available supply. So I think these are really important. But Dave, I don't know if you want to go into a little more specifics about either utilization and also kind of the capital allocation theory. Dave Stephenson: Yes, just double click on a couple areas. I mean, one is we just have more supply than we've ever had in our history. And as Brian kind of mentioned on the call, the fact that we grow more supply in the areas that we have the greatest demand, like non-urban active listings grew 21% in North America, and 15% globally, it's the area where it's kind of self-healing, where we have the demand is where we end up having this supply. And this redistribution is also incredibly important. Because we have listings in all types of markets. We're not globally constrained at any given night, which is different than if you only had supply in one type of market. And then when demand spikes in that particular more narrow market type, like vacation rentals, you don't have anywhere else to distribute demand. But because we're all around the world, in every kind of community, we end up with the benefit of being able to redistribute demand to other places. So I think that's been incredibly strong for us. Regarding the capital allocation, yes, we have $9.3 billion that take as a CFO and the continued pandemic, having a strong balance sheet continues to allow us to sleep well at night. We have noted previously that we're going to use about $1 billion of our cash to pay for employee tax obligations as they exercise their shares. And so that will be a use of cash this year. And beyond that we're continue to be in growth mode, we will continue to have a balance sheet that enables us to be ready to invest when and where we find that it's appropriate. It does enable us to do M&A in the future, if desired. Although M&A is not our primary driver of growth, we still plan to grow organically as our primary means. But we'll continue to evaluate our balance sheet use and make sure that we are deploying capital appropriately. Operator: The next question comes from Mario Lu with Barclays. Mario Lu: Great. Thanks for taking the questions. The first one for Brian, high level strategy question. So now that the total room nights has fully recovered versus 2019. How do you decide when is the right time to deaden the company's focus to other potential growth areas such as experiences, hotels and flights versus continuing to hone in on the core product? Brian Chesky: Great. Yes, so let me take that. So thanks, Mario. So basically, we learned some really important lessons during the pandemic. I started this company with my two friends when I was 26. I just turned 26 to start this company, and we had this enormous amount of success. And one of the things that happens when you're a first time entrepreneur, an enormous amount of success as you do something well, and you think you can kind of do everything well. And we pursue it a lot of things before the pandemic. And I remember growing up, my teacher said, you can do everything you want your life not at the same time, though. And I think that when the pandemic happened, there was a silver lining to our, to the crisis for us, which is we got really focused, we took all of our best people, we pause a lot of new initiatives. And we put our very best people on the most important problems, the company, which was stimulating core business. But I think what we saw is not only did that happen, but the total addressable market for short term stays is bigger than we ever imagined. And we are also able to extend it to long term stays. Our general approach now, going forward, is to be incredibly focused, we're going to absolutely be pursuing new opportunities. But we want to focus on the most perishable opportunities right now. And right now, the most perishable opportunity is this. Last year, we had what was probably the travel rebound in century, certainly I'd never seen the travel rebound, like last year since I started Airbnb. And I think this year is going to be even bigger than last year, because last year, it was a little bit tempered by the Delta and other strains. And I think what you're going to see this year is a true pickup of demand and cross border travel. So we're focused on this year is the perishable opportunity of trying to capture as much market share as possible, and get as many people who haven't traveled a couple years to try Airbnb, because for many people, Airbnb is no longer an alternative way to travel. It's the default. But that being said, we are absolutely looking at new opportunities and new services, nothing we pause from the pandemic that is out of -- is off the table to resume. And Airbnb experiences, for example, is a big area of investment in the coming years. And so we're starting to ramp up that product this year, I think more even more next year, you're going to see some major new offerings around Airbnb experiences and set a few demand. And I think that some of our best ideas are ahead of us, I'm 40. And I don't want to feel like the best ideas we had were in my 20s, or 30s. So I think that there's some really big opportunities going forward. But the name of the game is focused, just a few things at a time, the most perishable opportunities, get as much scale as possible, get that scale into an ecosystem, and then you can do a variety of line extensions for guest and for hosts. Mario Lu: Great, thanks. Awesome. Thanks Brian. And then just one on the travel demand post the summer month. I know you guys talked about the fourth quarter seeing a little bit higher than historical. But how do we compare that versus the 30% figure that is provided in terms of this summer's travel, travel season? Is it higher or lower? Anything you can say in terms of the demand for summer? Brian Chesky: Yes, David, I’ll let you take that. Dave Stephenson: I'd say that with the 30% in the summer periods, we're seeing consistently that strong or stronger on a relative basis in Q4. I think that's the fact that people are willing to plan out into the fourth quarter that far, and higher rates than they've done in the past, it just shows the resilience that people have for traveling. So now the Q4 demand is as strong relative to the Q3 demand. We're stronger. Operator: The next question comes from Brian Nowak with Morgan Stanley. Brian Nowak: Great. Thanks for taking my questions. Brian, I have a couple for you, the $2 billion, did the $2 billion I’m Flexible searches, yes, that's up quite a bit from $800 million last time around. I guess I'd be curious to hear about what are you seeing when people use that I’m Flexile. Is that leading to higher conversion? Is that leading to higher utilization of some radius of the search sort of? What are you seeing that sort of driving that quick inflection of that product? And then to go back to your earlier answers about your innovation in your 40s now. What are still the areas on the host front where you see sort of low hanging fruit opportunities to improve it to drive more host growth? Brian Chesky: Yes. These are great questions, Brian, good to talk to you again. So yes, let me go. Let me start with guests. And let me then go to host. So you're right. I think that I don't mean just preface by saying that last year, we launched I’m Flexible. The reason we launched it, as we saw more people were flexible. And the challenge is this, for 25 years, travel search has basically been the same. There's a search box, in the search box to ask you, where are you going, and it presumed that where you're going, in fact, you have to come to these websites for intent, and then ask you, when are you going, and so most OTAs aren't really in the business inspiration, they're in business of converting traffic into bookings. And this is good. But we always thought this, the holy grail of online travel was to inspire people about where to go. Now the results have been flexible has exceeded our expectations, it's been used 2 billion times. And for a travel product to be used 2 billion times and people on use travel product typically a couple times a year is pretty unusual. So what are we seeing the results, I think the primary thing we're seeing with I'm Flexible, is we're seeing a very strong amount of engagement. With I’m flexible, people see a lot more properties and a lot more markets. We're seeing people booked properties outside of a lot of the popular tourist destinations. And we're seeing an ability to redistribute travel demand beyond the top popular hotspots like Rome, Paris, Las Vegas, New York, and Los Angeles. So that's really the most important thing that I'm Flexible can do. I'm Flexible, can be in the inspiration game and point the mandatory half supply. And so our measures of success are how often do people come back to the website? How many properties do they wish list? How frequently they came to the product on the inspiration side and on the demand side? How well re-pointing demand to where we have available supply, rather than just kind of being at the mercy of where they think they want to go, when they want to when they come to Airbnb. And so think that what are seeing in the Q1 results is that clearly the product is working because I think that I’m Flexible as a feature has helped drive fair amount of that growth. Now with regard to the host price, you aright, it’s very important that we continue innovate on the host side. Last year, we made a number of improvements to the host side of our product. Number one, our general principle is the easier your make something the more people do it. That’s a really basic principle of the internet. If you make something easy, you reduce friction, more people do it. In hosting, the easier we make it the more people become host. So what we did last year as we reduced the number of steps to being a host to ten easy steps. We added a new product call ask a super host I think 170,000 prospective host have used the product. So where they have a question they can ask on our very best host. And then probably most importantly, Brian, importantly Brian, last year we launched air cover for host. Air cover provides a $1 million protection against property damage, a $1 million personal liability coverage and it’s free, we did not charge anything incremental to our transaction free. And we're the only company and travel to offers this for free all these feature sets to our host. Now going forward this year, we have a number of new innovations that I'm really excited about. I'm not going to go into all the details, I'd like to kind of save it until we announce it. But I'll say at a high level, we are looking at features that bring more people into hosting ecosystem. So we want to provide even more ways to make it easier for hosts to list, we want to provide more support for them to make it easier to host. And we want to provide even more kind of control so people can decide, like who sees their property, when it's available, things like that. So we have some really exciting announcements. On May 11, you'll hear some interesting features that are going to be launching. And then we're also going to have a product released later in the year in November, as well. So we'll have a couple of big updates on those two fronts. But again, it's all about making hosting easier, and making it even more appealing for people who aren't host to become hosts. And if we can do that and make hosting mainstream that will fulfill our growth for years to come. Operator: The next question comes from Naved Khan with Truist Securities. Naved Khan: Yes, thanks a lot. Question for Dave. So, Dave, last time around you kind of set expectations for ADR to be down for the year in aggregate. Is that still where you expect to be and then what are you making in terms of this new product release that's coming up next week. Dave Stephenson: Right on ADR, yes, what was shown in the past is that ADRs are up substantially from where they were back in 2019. So they were up 37% year over three years. And what we saw throughout the time in 2021, was that by Q4, about half of that ADR increase was driven by just mix. So regional mix like North America and Europe and the type of home so nonurban whole home and so mix was driving about half of the price appreciation. And then the other half was driven by price appreciation itself. So about half and half on the drivers are ADR. Here in Q1, price appreciation has become a larger percentage overall of the driver of ADR and mix has been a little bit less than half so it shifted even a little bit more. So what we're going to see and we've shown this in the outlook is that Q2 of this year ADRs will be relatively flat with Q2 of the prior year. And so they'll give you a sense that ADR will remain elevated, both due to mix and due to price appreciation. We think that they will likely moderate throughout the back half of the year as mix continues to adjust more towards cities more cross border which have lower average daily rates. But price appreciation has remained to be high and stickier. And so I think the level of decrease in ADR I think will be maybe lower than what we anticipated at the beginning of the year. And then, I think, give me more on your question around new product introductions that we'll be talking about next week. I’ll give those details -- Naved Khan: Yes, just details of contract -- just the contract, does your outlook contemplate any contribution from those products? Dave Stephenson: Yes, I mean, our outlook for Q2 clearly includes a lot of the results from the investments we've made to date, and we're very bullish on these continued improvements to continue to drive the strong results that you've seen. So we're not giving kind of guidance out beyond Q2 at this time. Operator: The next question comes from Stephen Ju with Credit Suisse Stephen Ju: Okay, thank you. So Brian, the rising consumer demand for longer term stays has been something you've been highlighting in terms of a fundamental change of behavior for some time now. So can you share with us how the reception from the host has been in terms of their willingness to accept longer term stays versus the more traditional shorter bursts? Because I guess what I'm trying to get at is whether there's any sort of extra push you guys may need to do in order to enable that longer duration supply with the 6 million hosts you have now? Or is this just a matter of demand, as you say, lighting up the supply? And I guess, second, I get that things are pretty depressed right now. But going back to the world pre-pandemic, like what were some of the bigger corridors of travel in Asia, so we can start thinking about what the shape of the recovery there can be? Thanks. Brian Chesky: Yes, thank you very much, Stephen. Now, yes. So let's start with rising demand for long term stays, what has been the reception of hosts? This is actually one of the most interesting points, I would say, which is, I think, when we really started looking at this category, my assumption was, it would be a different type of host, right? Some hosts wanted to list their place for short term basis. And other different hosts wanted to list their properties for a long term basis. And this is what you say, see on Craigslist, right? There's a short term stay category, and there's apartment categories, and they're not the same people. On Airbnb is totally different. The vast majority of hosts on Airbnb, who initially list their homes for a short term basis, have now included a monthly stay discount. And that's critical. So we have a large percent of people that have a monthly stay discount, or are available to host on a long term basis. So I think that's the most important thing I would say, which is that they absolutely are interested in it. Now, why are hosts interested in this? Well, there's a number of reasons. One is seasonality. Some people live in highly seasonal areas, where on high season, they want to rent by the night because they have a really great yield. But during low season, they have low occupancy. So they'll move to over a month. In some markets in urban markets. There are some restrictions on the number of nights, you can rent on a short term basis below 30 days. But they don't have restrictions on 30 plus days. So for the most part, what hosts see long term stays as is a way to increase their annual occupancy? And they generally want to go nightly, to get as many bookings as possible but during low season where there's limits to go to monthly, and they're really the same host. Now there are some hosts that only do short term, there are some hosts that only do long term, but what we see as generally open mindedness for most hosts to offer both. And the great thing about our product is you hardly had to do anything different to offer long term stays, having long term discounts is key. There's some new amenities, having verified Wi-Fi is important. And if you're going to live someplace, there's a number of like tactical things. But I think generally speaking, the product as it exists work for short term or long term stays, the vast majority hosts are open to it. So the answer is they're very receptive. Now, I think your second question was, what were the biggest corridors in Asia? Well, yes, so let's start. Asia is a highly cross border market. Let's kind of break it out Asia Pacific, I’ll start actually with Australia, which is, of course, part of Asia Pacific. Australia is a primarily outbound market, and it's very much a cross border international market because obviously Australia is very much in a center quarter of globe. And so we're seeing a real rapid recovery in our Australian demand business. Japan has historically been an inbound business, and a lot of our demand in Japan has come from other countries. That is starting to see some uptick. But that's going to take a little bit of time. China is primarily an outbound business, people go to China, but primarily, they travel in deep China, and they go to other communities, especially around Asia. And what we see in Southeast Asia primarily is these are absolutely inbound and outbound markets, they're very much cross border. So I guess the high level is the vast majority markets in Asia Pacific are cross border, a lot of that travel is intra-Asia travel. There's a fair amount of travel though, where it's inside and outside of Asia. And I'm very, very optimistic about the ability of our Asia business to more than fully recover. Because what we've seen is the longer people can travel, the more pent-up demand there is. I don't think travel ever is going to go out of style, people are going to continue to travel. And so I think that we're very, very optimistic that Asia is going to follow the recovery curves of Europe, North America and Latin America, just on a little different timescale. And sorry, just to give you one step, just to give you a couple of stats, on the first question, 87% of all available listings on Airbnb accept long term stays. 52% of hosts offer a monthly discount. And these discounts are 85% of our long term stays. Operator: The next question comes from James Lee with Mizuho. James Lee: Great, thanks for taking my questions. Two here. I'm just curious, is inflation having an impact on consumer behavior? Maybe, for example, consumer trading down on hotels to home accommodation, and also in terms of market share within home accommodation, as you see mix shift to urban markets, we have strengthened supply, how's that compare versus your peers who may be more non-urban focus? Thanks. Brian Chesky: Yes, maybe why don't we do this day? Why don't I answer a high level of the second question, because I just wanted to share a point about our urban business? And then maybe you can go into the details about both inflation impact on consumer behavior and kind of how we're comparing to our peers in urban markets. James, the thing I would just say about our business is, I think that our business is uniquely resilient in a uniquely adaptable model. And the reason our model is adaptable is because we are not just the US business. We are not just the European business. We are a global business and we are strong in Europe, North America, Asia, Latin America, Africa, we're global. We're in 220 countries regions, one of those global companies in the world. We're not just a vacation rental business. We're vacation rental markets. But our bread and butter is urban, cross border was really how we got our start. So we're very much an urban, a rural vacation and an off the grid, we even have homes totally off the grid. We have homes that are 20, 30 bucks a night and 10s of 1000s of dollars a night. So we're really at all price points. We have catered to families and individuals. So we have nearly every type of home at every price point, and every type of space and nearly every type of community around the world. And so I think that we've been able to be uniquely resilient. And the other thing I want to say about our urban market business, is we're seeing record long term stays. I'm doing this call, for example, from New York City, Airbnb, where I have for a month. And we're seeing in New York City, for example, a huge uptick in long term stays, because a lot of people have to come here, working remotely for months at a time. So that's just a little bit of how we think about it. Dave, I'll hand it over to you and go to a little bit more detail. Dave Stephenson: Yes, I mean we're just not seeing price appreciation impact our business negatively. We had our strongest quarter ever, we have even stronger demand for Q3 and Q4 than we've ever had. And I think Brian hits right in the head because we have every type of home and every type of community, everything from budget, shared homes to luxury homes, people can make a choice about what kind of property fits their particular budget and their needs. And so I think it's that strength of diversity of product that will continue to support our business going forward. And then I think you also hit on it, which is this mix shift to urban markets, which has traditionally been our strength at Airbnb, when you compare it to others who don't have the same amount of supply and capabilities build in those cities. It's going to give us kind of a further tailwind. And really what we're seeing right now is continued strength of the domestic business that was up 65% versus 2019. Strength in our non-urban business is up 80% versus Q1 2019. And that remains incredibly strong. And now we're seeing the mix shift towards urban markets back towards 2019. And across border back to 2019. And so I think that tailwind is going to continue to help our business going forward. Operator: The next question comes from Jed Kelly with Oppenheimer. Jed Kelly: Hey, great, thanks for taking my question, just thinking about on how higher interest rates in like a potential recession, how do you think that would impact your supply? And then just thinking about the top line from the back half of the year with AIPAC opening up, and more and more cross border more urban, do you think revenue or I guess bookings will be driven more by volume? Or by ADRs? Thank you. Brian Chesky: Yes, so why don't I take the first question about higher interest rates or recessions impact on supply and Dave to take the second question. Jed, no way to know for sure, on your question, but I'm pretty sure I've a sense of it. Airbnb, we launched on August 11, 2008. So you'll remember what the world was like in August 2008. And we really got going January, February, March of 2009, in the depths of the Great Recession. And the reason that Airbnb initially grew was that people were having trouble paying their rent, having trouble keeping their homes, and people turn to Airbnb to list their homes. And what we generally see is in recessions, people change their behavior. And they change their behavior based on kind of price considerations. And so will generally expect in a recession, if that were to happen, is that probably more people would turn to hosting. That would be number one. So that we would expect, and number two, travelers would probably become more budget conscious. And that would probably have a benefit to Airbnb as well. Now, the downside, of course, the recession is often times fewer people travel. But again, I think we're a pretty resistant business, whether it's economy's good or bad, we're pretty adaptable model. So that's what I would expect in the supply side, that's the more difficult to the economy is, the more people are going to need supplemental income. And a lot, a handful of them will turn to hosting. Dave, I'll hand it over to you. Dave Stephenson: Yes, and just to double click on that, I think in a recessionary environment, if people are more constrained on the dollars they have to spend to travel, they often will come back to Airbnb because we're a better value in that travel. And going back to the earlier point, we have all types of price points, budget to deluxe, and consumers can figure out what meets their best budget needs. And so I think it actually, we are a better option than many other alternatives in a recessionary environment. And then, in terms of the back half of the year expectations, revenue will be driven more by volume than ADRs. We give our outlook on ADRs for Q2 of being flat year-over-year, they may moderate a little bit in the back half depending on mix. But I think that the biggest driver of revenue, maybe outperforming current expectations would be a further strengthening of the European business or acceleration of that maybe normalization of cancellation rates across the globe could also be a tailwind. APAC coming back more strongly more quickly will certainly help the results. But I don't think it'd be the major driver this year. North American and European travel is still just such a large percentage of our business at the moment. APAC will be super important over the long term, but less of an immediate driver here in 2022. Operator: The next question comes from Mark Mahaney with Evercore. Mark Mahaney: Okay, Brian want to applaud you, by the way for your efforts with the Ukraine, you came up with a creative and direct way for people to help out. So I applaud you for that. And then I also want to give you some comfort in terms of your thoughts on innovation and age. I think most studies show that peak innovation occurs when people reach 50. So if you can just make it through the next 10 years, you'll be good. And then finally, just because you touched most of the questions I've thought about were already been asked, but let's get back to experiences. So it sounded like maybe you're, I know you got the core business and that's what you're really focused on. But it sounds like you may start leaning in a little bit more to experiences so just flesh that out a little bit and I know it's relatively small versus the core opportunity now but, at some point I assume you're going to lean more aggressively into experiences. And I assume that there'll be host demand to do that. So because there's probably a lot of win-win all around that. So just talk about the timing of when you think you may want to lean more aggressively into experiences. Thank you. Brian Chesky: All right. Well, thanks, Mark. It's great to hear from you again. First of all, yes, I'm 40. I hope I got a good 10 years in me and I think I'm a pretty late bloomer, so maybe give even more than 10 years. And so what I want to do at that time, well, one of the things I want to do is experiences. I think that experiences is a massive, massive opportunity. When we started Airbnb, air homes took off. And I remember saying at the time, Mark, well, we've monetized people's biggest asset already, which is their home, what do we do next, we go to the next largest asset. And it actually turns out your home is not your largest asset from a latency standpoint, I think it's your time for most people, your time ultimately can generate more revenue for the average person than their property can. And so that's a bit of an insight of where experiences came. It also came from the fact that a lot of people book Airbnb not just to save money, but to have a local travel experience. And I think experiences are a great way to do that. And so I was expecting 2020 to be the breakout year for experiences, we prepared for that. And of course, the opposite happened, the pandemic occurred, and we put the product on hold. In the last two years, when people aren't really comfortable leaving their house they have to mask on, it's not really been the right conditions to double down on experiences. But now that the light is at the end of the tunnel of the pandemic, we think people's first trips won't be to meet strangers and go on experiences, we think the first trips we want to have are to reunite with family, unite with friends get a big home together. And so we think that this summer, though people will book experiences, I think the summer still a little more about homes, just because people are getting comfortable getting out of their house. That being said, I think this summer, you're going to start to see a ramp up of experiences, I think next year and beyond it’s going to be a massive opportunity and I’m incredibly excited about it and one of the reasons I am so excited about it is that our guest actually, from a customer satisfaction standpoint, like experience more than homes, they actually leave a significantly higher five star rating as a percentage of their ratings for experiences at home. The people like home, the retention is really good. So we think this is just scratching the surface. And so to answer your question definitively, we are going to be ramping up, we're going to be getting more aggressive experiences, we will be a slower on ramp in this year, but by next year, we're going to be going full throttle. And I'm really excited about this opportunity. And it's a little hard, I don't want to make too many predictions about how big it will become. But my general sense is it's kind of probably bigger than most of us imagined, just because I think people are looking for interesting things to do with people. People are lonely, they want to meet one another, they want to do activities, they can only go to so many restaurants, they can only watch so many shows on Netflix, and many physical communities are being digitized. And so people ultimately want to have real experience in the real world. I think travel is a great way to do that. And the final thing I'd say Mark, is the increasingly people aren't just booking homes in Paris, you go to Paris, you can see the Eiffel Tower, you can go to Loire. But if you go to a small town in France, what do you do other than go to a restaurant, experience is a great way to do something interesting in nearly every community in the world, especially ones that don't have the Eiffel Tower. So that's -- those are just some of the reasons why I am incredibly bullish about this product. But it's going to take some time to really wrap up. Operator: The next question comes from Justin Post with Bank of America, Justin Post: Great, thank you. Well, lot of my question has been answered. But on the urban supply side, I imagine you had some churn on health issues and other factors. What are you seeing in urban markets? And could you see a big uptick there as demand comes back? How are you thinking about that? And then maybe one follow up. Brian Chesky: Yes, Dave, do you want to take this one? Dave Stephenson: Sure. I think one of the key things remember about our supply is that the vast majority of our hosts are individual hosts. And they don't get rid of their home. And they're using their own home or maybe a second home to host. And so even in the midst of a pandemic, or other kind of recessionary environment they are not getting rid of their own home or their second home, which means that they're ready for hosts, and there'll be there when the demand is coming back. And that's what we're seeing now with our urban demand. So the urban demand is starting to come back. It's now back towards night 2019 levels, and our hosts are ready for them and our growth in hosts in the urban markets has also increased. So we're seeing an increase in our listings for both our high density and urban markets overall. And that's what we kind of continue to see as the demand comes back, the supply is there to meet it. Justin Post: Right and then follow up on ADRs, I think you're saying around flat year-over-year, can you just talk about the normal seasonality for ADRs? Why -- is it mix that they caused them to down? And how does it -- how do you think about the back half seasonality on ADRs? Dave Stephenson: Yes, I think if you could, again, we have been up 5%, year-over-year in Q1, it is going to be flat relative on year-over-year basis in Q2, you can kind of see a little bit of a decrease of seasonality for Q3, Q, you can maybe look at some of the seasonality back to ‘19, which will show you that Q3 and Q4 have moderately lower ADR is not substantially, I think you could use that as a little bit of a guide. And then just know that the mix change is being offset a lot by strong price appreciation that is continuing to prop up the ADR overall. So I think that is a bit of the unknown for exactly where ADR is going to land in the back half of the year, what I can see is very clearly what's going to happen in Q2, which will be flat year-over-year. Operator: The next question comes from Rohan Joshi with Citi. Rohan Joshi: Great, thanks for taking the question. I want to ask a little bit more about cross border, just given the rebound that we saw this quarter and rebounds and seeing just can you talk about the dynamics maybe Brian on whether there's cross borders, mostly call it North America users going overseas? Are we seeing more EMEA users coming to US or any sort of insights around there? And then Dave, on just overall EBITDA, understood, more leverage and margin expansion in the first half. But it's really impressive to see the continued call it leverage across most of your line items. Can you just remind us ops and support and gross margin, what's driving that? Thank you. Brian Chesky: Yes, hey, Rohan, I can just start the cross border is I would say North America, Europe, Australia, Latin America, pretty much everywhere, but Asia, and it's really going in all directions. So people are coming into North America, people in North America are leaving. They're absolutely going to Europe, there's a lot of travel within Europe. And we're now also seeing Europeans come to the United States and go kind of in other locations as well. So the great thing is the network effect is kind of moving in multiple directions. Whereas, say, last year, it was much more domestic and kind of really limited, the corridors are really starting to open. So Dave, I'll let you take the rest of the answer. Dave Stephenson: Yes, on the EBITDA, I'm really pleased and proud of the work that we've done to improve our overall profitability, we made some really difficult choices in the midst of the pandemic, to reduce our overall workforce and focus on the core of our business. We think that actually, that focus is enabling us to deliver even more like, I think we've actually delivered more innovation and productivity as a company by being very deliberate focusing in a more narrow area versus trying to do everything all at once. And that's been really effective with this. We actually have 16% fewer people at the end of Q1 ‘22, than we did at the end of Q1 2020, before we had our layoffs, and yet, we think we're being more productive than ever before. And then we're getting nice. So on top of that fixed cost leverage, yes, we're getting nice improvement in our variable costs, and our options support, it was 15% of revenue here in the first quarter, and seeing nice improvement versus our ops and support in a prior quarters, right. Option support will include, largely our community support operations, and our trust and safety activities. Those are the elements that are within ops and support, we're going to continue to invest in those areas, because we think those are differentiators for us and they doing those really well supports our individual host community. But we're making nice strides and improvement in leverage, so that we gain continued profitability. And one of the things we noted in the letter is that we're expecting for the full year, a modest expansion in our overall EBITDA margin rate. So that's nice to see versus 2021. And I'm really excited that in 2022, we'll have our first full year of net income profitability. So just not a full net income basis to be profitable this year feels excellent. Operator: The next question comes from Lee Horowitz with Deutsche Bank. Lee Horowitz: Great. Thanks for taking the questions, two, if I could. High level demand across the -- accommodation industry has proved incredibly sticky to the front half of this recovery and your comments suggest even into the back end. To what do you kind of owe this stickiness and consumer patterns in terms of the way that they travel even as things open up and hotels, perhaps gain a bit of share? And then maybe a bit on cost as well, wage inflation and its inability to kind of find talent has been cropping up across a lot of the names that we cover. You guys haven't necessarily commented too much here. But how if at all are you seeing wage inflation potentially play from the model as we move through 2022? Thanks so much. Brian Chesky: All right. Dave, do you want to take it? Dave Stephenson: Sure. Brian Chesky: Sorry. Can I actually can I ask a clarifying, I don't quite understand the first question. Can you ask it again? Lee Horowitz: Yes, in terms of you -- Brian Chesky: The way that question -- yes, can you clarify the first question? About first question consumer demand -- Brian Chesky: The industry. Yes, for alternative accommodations and proven incredibly sticky. Despite reopening more host are coming online, those sorts of things, I guess, to what do you owe this kind of stickiness in consumer travel patterns? Brian Chesky: Oh, why is it sticky? Are you -- so sorry, I want to make sure I understand. Are you saying why? It like it was obvious why people were booking homes last year because people weren't traveling for business. They weren't going to urban markets. They weren't crossing borders. They were staying nearby. So you're asking why – Lee Horowitz: They were – Brian Chesky: Trying to reopen -- why they're still sticky. Okay, got it. Yes. Okay, I got it. Thank you. And then let me do that. And then Dave, you can take the second question. So I mean I think it's important to just note Lee that, like we were growing really fast before the pandemic. And the reason we are growing fast is number one, I think a lot of people want to have a local experience they travel number two, they want to save money when they travel. Number three, Airbnb allows them to travel with groups, and increasingly people are traveling in groups. Number four, Airbnb allows them to travel and stay in nearly every community in the world, hotels on unlimited markets around the world. And number five, the longer you're away from home, the more you want to be in a home and length of stay is going up. So I think all those reasons explain the stickiness. Maybe said another way, there's another way of saying rural demand increased during the pandemic, and people are still traveling to rural areas. People are still traveling domestically, which was a very popular demand use case during the pandemic, people don't have to go back to the office five days a week. So people are still booking weekly stays and monthly stays. So again, domestic, non-urban, in longer stays, were three use cases that weren't really our original bread and butter, our original bread and butter was urban cross border short term. But these three trends are sustaining, they're still sustaining. And the reason why is I think the genie is out of the bottle, people have permanent flexibility. And people now realize there's a lot of great places to go beyond the top 100 tourist destinations. That being said, what we're seeing is a recovery of cross border in urban, it's actually both above 2019 levels. So in short, the old ways, the bread and butter of Airbnb, cross border, urban are back in the new use cases or the use cases that were accelerated at pandemic are here to stay. And the combination of those two things is why I think this business is so sticky, maybe a more fundamental way of saying it is people love the experience they have. And so when people love them, they tend to do more of it. Dave, I'll hand over to you. Dave Stephenson: Yes, in terms of wage inflation, this we did $1.5 billion of revenue in Q1 with just 6,200 people. And we don't need as I said, we actually have 16% fewer people than we did in Q1 of 2020. We don't need to add incremental people to have this business grow dramatically, we are significantly larger today as a business with significantly fewer people. So really, wage inflation is not a really major driver of costs. We are investing in our employees in order to enable them to live anywhere, move anywhere within the country. If they move someplace else, we're not going to alter their pay for being in a different part of the country. And we're going to support them work 90 days in other countries around the world. So we think that kind of investment will benefit us by having lower attrition, and being able to attract the best talent in the world. So we think that's going to be a great investment for the future, to have the best talent to unlock all the innovation that Brian has talked about on the call today. That concludes the Q&A session. I would like to pass the conference back to Brian Chesky for additional remarks. Brian Chesky: All right. Well, thank you all for joining us today. I'm incredibly proud of what we accomplished this quarter. We hit new records with nights and experiences booked and GBV. We had our first positive Q1 adjusted EBITDA and our highest free cash flow ever $1.2 billion of cash flow. But we're just getting started because we are going to be accelerating our pace of innovation. And I'm really excited to announce the biggest change to Airbnb in a decade. It's going to be next Wednesday, May 11 at 9 AM Eastern Standard Time, you can watch a special event right from our homepage. Until then, thank you. I'll see you soon. Operator: That concludes the Airbnb Q1 2022 earnings call. Thank you for your participation. You may now disconnect your line.	[ { "speaker": "Operator", "text": "Good afternoon, and thank you for joining Airbnb's Earnings Conference Call for the First Quarter of 2022. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I'll now hand over to Ellie Mertz, VP of finance. Please go ahead." }, { "speaker": "Ellie Mertz", "text": "Good afternoon, and welcome to Airbnb's first quarter of 2022 earnings call. Thank you for joining us today. On the call today, we have Airbnb's Co-Founder and CEO, Brian Chesky; and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our first quarter of 2022. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we'll be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We've provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. And with that, I'll pass the call to Brian." }, { "speaker": "Brian Chesky", "text": "All right, thank you very much, Ellie, and good afternoon, everyone. Thanks for joining. I'm excited to share our Q1 results with you. Now, despite the pandemic, the war in Ukraine and macroeconomic headwinds, Q1 was another incredible quarter. We exceeded 100 million Nights and Experiences Booked for the first time ever. GBV was $17 billion, which was 73% above Q1 2019. Revenue was $1.5 billion, exceeding Q1, 2019 by 80%. Net loss was $19 million. Now this is a significant improvement in the same periods from 2018 and 2021. Adjusted EBITDA was $229 million. Now, this is our first positive adjusted EBITDA Q1, and this represented adjusted EBITDA margin of a positive 15%. Now this is compared to a negative 7% a year ago, and a negative 30% in Q1 2019. And finally, we generated $1.2 billion of free cash flow in the quarter. This was also an all-time high. And what these results show is that two years into the pandemic, Airbnb is stronger than ever before. Now, why is this? Well, millions of people are now more flexible about where they live and they work. And as a result, they're spreading out to thousands of towns and cities. And they're staying for weeks, months, or even entire seasons at a time. That's through our adaptability innovation, we've been able to quickly respond to this changing world of travel. And these incredible results were driven by a number of positive business trends. First, guests are booking more than ever before. In Q1 gross nights booked grew 32% compared to Q1 2019. And this is despite the pandemic, the war in Ukraine, and macroeconomic headwinds. People are also more confident booking travel further in advance. And we're seeing strong demand for summer bookings and beyond. Second, guests are returning to cities and they’re crossing borders. So our guests continue to travel domestically and continue to go to rural destinations at Airbnb. We are also seeing guests return to cities and cross borders at or even above pre-pandemic rates. Third, guest are also staying longer, even living on Airbnb. Now, while short-term stays rebounded strongly in Q1 2022, stays of a month or longer continue to be our fastest-growing category by tripling compared to 2019. In nearly half of our nights booked in Q1 were for stays of week or longer in one in five nights booked were for stays of a month or longer. So the world is clearly becoming more flexible about where people can work. And getting ahead of this trend, last week, we announced that Airbnb employees can live and work anywhere. And we've designed a way for them to live and work around the world, while collaborating in a highly collaborative way and experiencing the in-person connection that makes Airbnb special. Now fourth, our innovations are inspiring guests to discover thousands of new places. In 2021, we delivered more than 150 upgrades across every aspect of our service. And among these upgrades was the innovative I’m Flexible feature. Now I’m Flexible feature has now been used more than 2 billion times, 2 billion. And guests who use I’m flexible are more likely to book home in less popular locations. This is really important, because this allows us to point demand to where we have supply, and it helps distribute guests more widely in communities all around the world. But we're not stopping there. On May 11, next Wednesday, we will be announcing the Airbnb 2022 summer release. This is a new Airbnb for a new world of travel. With a completely new way to search, guests will be able to discover millions of unique homes in Airbnb they never thought to search for. And when they book, guests will have the confidence knowing that Airbnb has their back each step of the way. And so you can watch this announcement right on our homepage next Wednesday at 9 AM Eastern Standard Time, next Wednesday, right on our homepage. I hope you can tune in because I'm really excited about what we have to share. And then finally, our community - our host community continues to expand. We see destinations the strongest demand showing this most supply growth with non-urban active listings actually growing 15% globally. And we're also showing an increase in total urban supply as demand returns to cities. And we believe that the upgrades we announced last year, including our new host onboarding flow and AirCover, are supporting this growth and enabling success for a new host. So to recap, we had our best Q1 ever. Nights and Experiences Booked and GBV were a highest ever. Revenue and adjusted EBITDA were records for Q1 and we generated more than $1 billion in free cash flow in the quarter. With these results, Airbnb is stronger than ever before. Now, before I go to question, I just want to talk for a minute about our efforts in Ukraine. Because over the past few months, millions of lives have been devastated by the war. And when the crisis broke out, we knew that our platform can help refugees fleeing the crisis. And within four days of the invasion, Ukraine, we announced that airbnb.org would provide free housing for up to 100,000 refugees fleeing from Ukraine, and over 30,000 hosts have already signed up to open their homes to refugees for free or for a discount. But then, something even more remarkable happened. People started booking homes for hosts in Ukraine. Hosts, they never intend to stay with just to provide relief aid. And soon, more than 170,000 people joined in, and they booked approximately 600,000 nights booked in Ukraine. And because we waived our fees, $20 million went directly to host in Ukraine. And I think this speaks to the power of our community. And they are a reminder that in the world of darkness and a world of destruction, kindness still exist. And so I'm really proud of our business results this quarter. I'm also proud of how helpful we've been able to be to thousands of people in need. And with all that, Dave and I look forward to answering your questions." }, { "speaker": "Operator", "text": "[Operator Instructions] The first question comes from Colin Sebastian with Baird. Please proceed." }, { "speaker": "Colin Sebastian", "text": "Thanks. Good afternoon, and congrats on the strong quarter. A couple of questions for me. I guess first off, Brian, drilling down a bit on some of the broader use cases that emerged through the pandemic. At a high level, the trends clearly sound very good. I'm hoping you could unpack that a little bit more in terms of the sustainability of longer stays and other use cases in markets that are furthest along in the recovery, where offices are reopening and lives are sort of getting back to normal, if you could able to break that down a bit more. And then secondly, on the plans for advertising and marketing, you're keeping that looks like fixed as a percentage of revenues, so a little bit higher spend on marketing and advertising. Can you talk about that? Is that with all the product updates, the rebound in travel, maybe the competitive landscape? If you could talk about the strategy with respect to the advertising and marketing? Thank you." }, { "speaker": "Brian Chesky", "text": "Yes, excellent. Thanks, Colin. So why don't I answer these at a high level? And Dave, feel free to jump in with some more specifics. So let's start with the question of Colin, some of the broader use cases you talked about. And let's back up. So when we started Airbnb, it was really just a way for people to book a home for just a few days at a time. But even before the pandemic, actually long-term stays, stays of a month or longer were our fastest-growing category or segment of trip by trip length, some of those are already growing very quickly before the pandemic. And I think what the pandemic did, is I think it accelerated the adoption of longer-term stays in Airbnb by hard to say how many, but certainly by years, and I think it's important to understand why this is happening. Right now, what's happened is that for millions of people, they don't need to go back to an office five days a week. And the vast majority of companies are not requiring employees to come back to an office, many have moved to a hybrid or entirely remote model. And I think that what we're going to see going forward, is you're going to see more and more flexibility. Because I think companies ultimately want to attract the very best people, and the best people are going to be everywhere. And so long as we believe that people don't need to go back to an office five days a week, millions of people, then we believe in a world of more flexibility. So long as we believe in a world where people will continue to dial in and zoom, we will again believe in a world of more flexibility. And so what we are going to continue to see we think, over the coming years is continued and sustained growth for stays of longer than a month and stays of longer than a week. I don't think this is a temporary phenomenon. I think that the genie is out of the bottle and flexibility is here to stay. And I think flexibility after compensation will probably be the most important benefit that an employer can offer. And just to give you a small anecdote. Last week, last Thursday, we announced that Airbnb employees can live and work anywhere in the world. The response internally was great, but even more impressive was the response externally. Because a, our career page was visited 800,000 times after that announcement. And so I think that just speaks to the durability of this use case. And I think that it's going to continue. Now with regards to advertising, I think it's just important that I share a little bit of a recap of how we think about marketing and Dave, feel free to talk a little more detail. So we have, Colin, a little bit obviously different approach to marketing and advertising than our peers. We take a full funnel approach to marketing that combines PR, brand marketing and performance marketing. We're not really focused on buying customers. We're focused primarily in investing in our brand and educating the world about what makes Airbnb unique. So we think of marketing primarily as education. And I think this explains why 90% of our traffic or more is direct or unpaid. Airbnb is a noun and verb used all over the world, and it was really not advertising, but PR and word-of-mouth that built our brand. And just to give you an example, and - since the pandemic started, there have been more than 1 million articles written about Airbnb, 55% of articles that used to have the word travel in it, also have the word Airbnb in it. So it's pretty, so advertising is really a form of supplemental education for us. It's not the core driver of growth. We think the core driver of growth, Airbnb, is innovation. It's about building a product that people love. And the role of marketing isn't to buy customers. The role of marketing for us is to educate people about our new features and our new offerings. Dave, do you want to - I don’t know if you want to go into a little more detail about advertising?" }, { "speaker": "Dave Stephenson", "text": "Brian, I think you've covered it incredibly well. I mean, we're very proud of the approach to marketing this, the full funnel approach is working probably well for us. And as you said, we are actually increasing our marketing dollars. We're just keeping the marketing expenses as a percent of revenue relatively consistent to the level we had in 2021, and we think it's being really effective for us." }, { "speaker": "Operator", "text": "Thank you. The next question comes from Bernie McTernan with Needham & Company." }, { "speaker": "Bernie McTernan", "text": "Great. Thank you so much for taking the questions. I guess first just want to get any insights on how supply and demand are growing relative to each other versus what was happening before the pandemic. So maybe even just utilization, how it's trending, how it was trending before the pandemic and how it's trending now. And then secondly, on capital allocation with over a $1 billion of free cash flow in the quarter, $9 billion of cash on the balance sheet. Can you remind us and just your thoughts on if there's any sort of capital allocation, whether it's returning to shareholders, M&A, and continuing to invest in the product? We'd love to hear your thoughts there." }, { "speaker": "Brian Chesky", "text": "Great, Bernie. So why don't I do this? Let me just talk at a high level about the first question. And then Dave, why don't you take both questions at a more specific level. So let me just say at a high level around supply and demand, number one, I think we're going to have plenty of supply this summer for the demand. We're expecting a lot of demand for the summer. But we are not supply constrained any night of the year, not even close to the global level. The challenge of most travel companies is that a lot of people try to go to the same place, the same city on the same day. And cities, essentially, like travel OTAs typically get sold out. So like a lot of people try to go to New York City on New Year's Eve, and there's only so many places to stay in New York, and so you're going to get sold out. Now, here is Airbnb. We're in 100,000, towns and cities all over the world. And we see a couple phenomenon, I think it's important to point out. The first thing we see is the fastest-growing supply markets are actually our fastest-growing demand markets. So as a market experiences more demand, more supply gets unlocked. And I think the reason why is primarily because the vast majority of host of Airbnb are individuals. The vast majority of new host get a booking within three days. And when a regular person gets a booking, and the booking might be $300, $400 or $500, they tend to tell their friends about it. And so as more people get booked, they create more word-of-mouth, and this unlocks more supply. So we have a global network, where demand in a sense, stimulates more supply. Additionally, the I'm Flexible feature is critical, because it allows us to point demand to where we have supply. So if somebody types in Paris on June 4 to 5, we are limited to the properties in Paris on those dates. But if somebody says, we’re flexible, we can point them to other dates in Paris that are a little lower season, or other towns around Paris to have available supply. So I think these are really important. But Dave, I don't know if you want to go into a little more specifics about either utilization and also kind of the capital allocation theory." }, { "speaker": "Dave Stephenson", "text": "Yes, just double click on a couple areas. I mean, one is we just have more supply than we've ever had in our history. And as Brian kind of mentioned on the call, the fact that we grow more supply in the areas that we have the greatest demand, like non-urban active listings grew 21% in North America, and 15% globally, it's the area where it's kind of self-healing, where we have the demand is where we end up having this supply. And this redistribution is also incredibly important. Because we have listings in all types of markets. We're not globally constrained at any given night, which is different than if you only had supply in one type of market. And then when demand spikes in that particular more narrow market type, like vacation rentals, you don't have anywhere else to distribute demand. But because we're all around the world, in every kind of community, we end up with the benefit of being able to redistribute demand to other places. So I think that's been incredibly strong for us. Regarding the capital allocation, yes, we have $9.3 billion that take as a CFO and the continued pandemic, having a strong balance sheet continues to allow us to sleep well at night. We have noted previously that we're going to use about $1 billion of our cash to pay for employee tax obligations as they exercise their shares. And so that will be a use of cash this year. And beyond that we're continue to be in growth mode, we will continue to have a balance sheet that enables us to be ready to invest when and where we find that it's appropriate. It does enable us to do M&A in the future, if desired. Although M&A is not our primary driver of growth, we still plan to grow organically as our primary means. But we'll continue to evaluate our balance sheet use and make sure that we are deploying capital appropriately." }, { "speaker": "Operator", "text": "The next question comes from Mario Lu with Barclays." }, { "speaker": "Mario Lu", "text": "Great. Thanks for taking the questions. The first one for Brian, high level strategy question. So now that the total room nights has fully recovered versus 2019. How do you decide when is the right time to deaden the company's focus to other potential growth areas such as experiences, hotels and flights versus continuing to hone in on the core product?" }, { "speaker": "Brian Chesky", "text": "Great. Yes, so let me take that. So thanks, Mario. So basically, we learned some really important lessons during the pandemic. I started this company with my two friends when I was 26. I just turned 26 to start this company, and we had this enormous amount of success. And one of the things that happens when you're a first time entrepreneur, an enormous amount of success as you do something well, and you think you can kind of do everything well. And we pursue it a lot of things before the pandemic. And I remember growing up, my teacher said, you can do everything you want your life not at the same time, though. And I think that when the pandemic happened, there was a silver lining to our, to the crisis for us, which is we got really focused, we took all of our best people, we pause a lot of new initiatives. And we put our very best people on the most important problems, the company, which was stimulating core business. But I think what we saw is not only did that happen, but the total addressable market for short term stays is bigger than we ever imagined. And we are also able to extend it to long term stays. Our general approach now, going forward, is to be incredibly focused, we're going to absolutely be pursuing new opportunities. But we want to focus on the most perishable opportunities right now. And right now, the most perishable opportunity is this. Last year, we had what was probably the travel rebound in century, certainly I'd never seen the travel rebound, like last year since I started Airbnb. And I think this year is going to be even bigger than last year, because last year, it was a little bit tempered by the Delta and other strains. And I think what you're going to see this year is a true pickup of demand and cross border travel. So we're focused on this year is the perishable opportunity of trying to capture as much market share as possible, and get as many people who haven't traveled a couple years to try Airbnb, because for many people, Airbnb is no longer an alternative way to travel. It's the default. But that being said, we are absolutely looking at new opportunities and new services, nothing we pause from the pandemic that is out of -- is off the table to resume. And Airbnb experiences, for example, is a big area of investment in the coming years. And so we're starting to ramp up that product this year, I think more even more next year, you're going to see some major new offerings around Airbnb experiences and set a few demand. And I think that some of our best ideas are ahead of us, I'm 40. And I don't want to feel like the best ideas we had were in my 20s, or 30s. So I think that there's some really big opportunities going forward. But the name of the game is focused, just a few things at a time, the most perishable opportunities, get as much scale as possible, get that scale into an ecosystem, and then you can do a variety of line extensions for guest and for hosts." }, { "speaker": "Mario Lu", "text": "Great, thanks. Awesome. Thanks Brian. And then just one on the travel demand post the summer month. I know you guys talked about the fourth quarter seeing a little bit higher than historical. But how do we compare that versus the 30% figure that is provided in terms of this summer's travel, travel season? Is it higher or lower? Anything you can say in terms of the demand for summer?" }, { "speaker": "Brian Chesky", "text": "Yes, David, I’ll let you take that." }, { "speaker": "Dave Stephenson", "text": "I'd say that with the 30% in the summer periods, we're seeing consistently that strong or stronger on a relative basis in Q4. I think that's the fact that people are willing to plan out into the fourth quarter that far, and higher rates than they've done in the past, it just shows the resilience that people have for traveling. So now the Q4 demand is as strong relative to the Q3 demand. We're stronger." }, { "speaker": "Operator", "text": "The next question comes from Brian Nowak with Morgan Stanley." }, { "speaker": "Brian Nowak", "text": "Great. Thanks for taking my questions. Brian, I have a couple for you, the $2 billion, did the $2 billion I’m Flexible searches, yes, that's up quite a bit from $800 million last time around. I guess I'd be curious to hear about what are you seeing when people use that I’m Flexile. Is that leading to higher conversion? Is that leading to higher utilization of some radius of the search sort of? What are you seeing that sort of driving that quick inflection of that product? And then to go back to your earlier answers about your innovation in your 40s now. What are still the areas on the host front where you see sort of low hanging fruit opportunities to improve it to drive more host growth?" }, { "speaker": "Brian Chesky", "text": "Yes. These are great questions, Brian, good to talk to you again. So yes, let me go. Let me start with guests. And let me then go to host. So you're right. I think that I don't mean just preface by saying that last year, we launched I’m Flexible. The reason we launched it, as we saw more people were flexible. And the challenge is this, for 25 years, travel search has basically been the same. There's a search box, in the search box to ask you, where are you going, and it presumed that where you're going, in fact, you have to come to these websites for intent, and then ask you, when are you going, and so most OTAs aren't really in the business inspiration, they're in business of converting traffic into bookings. And this is good. But we always thought this, the holy grail of online travel was to inspire people about where to go. Now the results have been flexible has exceeded our expectations, it's been used 2 billion times. And for a travel product to be used 2 billion times and people on use travel product typically a couple times a year is pretty unusual. So what are we seeing the results, I think the primary thing we're seeing with I'm Flexible, is we're seeing a very strong amount of engagement. With I’m flexible, people see a lot more properties and a lot more markets. We're seeing people booked properties outside of a lot of the popular tourist destinations. And we're seeing an ability to redistribute travel demand beyond the top popular hotspots like Rome, Paris, Las Vegas, New York, and Los Angeles. So that's really the most important thing that I'm Flexible can do. I'm Flexible, can be in the inspiration game and point the mandatory half supply. And so our measures of success are how often do people come back to the website? How many properties do they wish list? How frequently they came to the product on the inspiration side and on the demand side? How well re-pointing demand to where we have available supply, rather than just kind of being at the mercy of where they think they want to go, when they want to when they come to Airbnb. And so think that what are seeing in the Q1 results is that clearly the product is working because I think that I’m Flexible as a feature has helped drive fair amount of that growth. Now with regard to the host price, you aright, it’s very important that we continue innovate on the host side. Last year, we made a number of improvements to the host side of our product. Number one, our general principle is the easier your make something the more people do it. That’s a really basic principle of the internet. If you make something easy, you reduce friction, more people do it. In hosting, the easier we make it the more people become host. So what we did last year as we reduced the number of steps to being a host to ten easy steps. We added a new product call ask a super host I think 170,000 prospective host have used the product. So where they have a question they can ask on our very best host. And then probably most importantly, Brian, importantly Brian, last year we launched air cover for host. Air cover provides a $1 million protection against property damage, a $1 million personal liability coverage and it’s free, we did not charge anything incremental to our transaction free. And we're the only company and travel to offers this for free all these feature sets to our host. Now going forward this year, we have a number of new innovations that I'm really excited about. I'm not going to go into all the details, I'd like to kind of save it until we announce it. But I'll say at a high level, we are looking at features that bring more people into hosting ecosystem. So we want to provide even more ways to make it easier for hosts to list, we want to provide more support for them to make it easier to host. And we want to provide even more kind of control so people can decide, like who sees their property, when it's available, things like that. So we have some really exciting announcements. On May 11, you'll hear some interesting features that are going to be launching. And then we're also going to have a product released later in the year in November, as well. So we'll have a couple of big updates on those two fronts. But again, it's all about making hosting easier, and making it even more appealing for people who aren't host to become hosts. And if we can do that and make hosting mainstream that will fulfill our growth for years to come." }, { "speaker": "Operator", "text": "The next question comes from Naved Khan with Truist Securities." }, { "speaker": "Naved Khan", "text": "Yes, thanks a lot. Question for Dave. So, Dave, last time around you kind of set expectations for ADR to be down for the year in aggregate. Is that still where you expect to be and then what are you making in terms of this new product release that's coming up next week." }, { "speaker": "Dave Stephenson", "text": "Right on ADR, yes, what was shown in the past is that ADRs are up substantially from where they were back in 2019. So they were up 37% year over three years. And what we saw throughout the time in 2021, was that by Q4, about half of that ADR increase was driven by just mix. So regional mix like North America and Europe and the type of home so nonurban whole home and so mix was driving about half of the price appreciation. And then the other half was driven by price appreciation itself. So about half and half on the drivers are ADR. Here in Q1, price appreciation has become a larger percentage overall of the driver of ADR and mix has been a little bit less than half so it shifted even a little bit more. So what we're going to see and we've shown this in the outlook is that Q2 of this year ADRs will be relatively flat with Q2 of the prior year. And so they'll give you a sense that ADR will remain elevated, both due to mix and due to price appreciation. We think that they will likely moderate throughout the back half of the year as mix continues to adjust more towards cities more cross border which have lower average daily rates. But price appreciation has remained to be high and stickier. And so I think the level of decrease in ADR I think will be maybe lower than what we anticipated at the beginning of the year. And then, I think, give me more on your question around new product introductions that we'll be talking about next week. I’ll give those details --" }, { "speaker": "Naved Khan", "text": "Yes, just details of contract -- just the contract, does your outlook contemplate any contribution from those products?" }, { "speaker": "Dave Stephenson", "text": "Yes, I mean, our outlook for Q2 clearly includes a lot of the results from the investments we've made to date, and we're very bullish on these continued improvements to continue to drive the strong results that you've seen. So we're not giving kind of guidance out beyond Q2 at this time." }, { "speaker": "Operator", "text": "The next question comes from Stephen Ju with Credit Suisse" }, { "speaker": "Stephen Ju", "text": "Okay, thank you. So Brian, the rising consumer demand for longer term stays has been something you've been highlighting in terms of a fundamental change of behavior for some time now. So can you share with us how the reception from the host has been in terms of their willingness to accept longer term stays versus the more traditional shorter bursts? Because I guess what I'm trying to get at is whether there's any sort of extra push you guys may need to do in order to enable that longer duration supply with the 6 million hosts you have now? Or is this just a matter of demand, as you say, lighting up the supply? And I guess, second, I get that things are pretty depressed right now. But going back to the world pre-pandemic, like what were some of the bigger corridors of travel in Asia, so we can start thinking about what the shape of the recovery there can be? Thanks." }, { "speaker": "Brian Chesky", "text": "Yes, thank you very much, Stephen. Now, yes. So let's start with rising demand for long term stays, what has been the reception of hosts? This is actually one of the most interesting points, I would say, which is, I think, when we really started looking at this category, my assumption was, it would be a different type of host, right? Some hosts wanted to list their place for short term basis. And other different hosts wanted to list their properties for a long term basis. And this is what you say, see on Craigslist, right? There's a short term stay category, and there's apartment categories, and they're not the same people. On Airbnb is totally different. The vast majority of hosts on Airbnb, who initially list their homes for a short term basis, have now included a monthly stay discount. And that's critical. So we have a large percent of people that have a monthly stay discount, or are available to host on a long term basis. So I think that's the most important thing I would say, which is that they absolutely are interested in it. Now, why are hosts interested in this? Well, there's a number of reasons. One is seasonality. Some people live in highly seasonal areas, where on high season, they want to rent by the night because they have a really great yield. But during low season, they have low occupancy. So they'll move to over a month. In some markets in urban markets. There are some restrictions on the number of nights, you can rent on a short term basis below 30 days. But they don't have restrictions on 30 plus days. So for the most part, what hosts see long term stays as is a way to increase their annual occupancy? And they generally want to go nightly, to get as many bookings as possible but during low season where there's limits to go to monthly, and they're really the same host. Now there are some hosts that only do short term, there are some hosts that only do long term, but what we see as generally open mindedness for most hosts to offer both. And the great thing about our product is you hardly had to do anything different to offer long term stays, having long term discounts is key. There's some new amenities, having verified Wi-Fi is important. And if you're going to live someplace, there's a number of like tactical things. But I think generally speaking, the product as it exists work for short term or long term stays, the vast majority hosts are open to it. So the answer is they're very receptive. Now, I think your second question was, what were the biggest corridors in Asia? Well, yes, so let's start. Asia is a highly cross border market. Let's kind of break it out Asia Pacific, I’ll start actually with Australia, which is, of course, part of Asia Pacific. Australia is a primarily outbound market, and it's very much a cross border international market because obviously Australia is very much in a center quarter of globe. And so we're seeing a real rapid recovery in our Australian demand business. Japan has historically been an inbound business, and a lot of our demand in Japan has come from other countries. That is starting to see some uptick. But that's going to take a little bit of time. China is primarily an outbound business, people go to China, but primarily, they travel in deep China, and they go to other communities, especially around Asia. And what we see in Southeast Asia primarily is these are absolutely inbound and outbound markets, they're very much cross border. So I guess the high level is the vast majority markets in Asia Pacific are cross border, a lot of that travel is intra-Asia travel. There's a fair amount of travel though, where it's inside and outside of Asia. And I'm very, very optimistic about the ability of our Asia business to more than fully recover. Because what we've seen is the longer people can travel, the more pent-up demand there is. I don't think travel ever is going to go out of style, people are going to continue to travel. And so I think that we're very, very optimistic that Asia is going to follow the recovery curves of Europe, North America and Latin America, just on a little different timescale. And sorry, just to give you one step, just to give you a couple of stats, on the first question, 87% of all available listings on Airbnb accept long term stays. 52% of hosts offer a monthly discount. And these discounts are 85% of our long term stays." }, { "speaker": "Operator", "text": "The next question comes from James Lee with Mizuho." }, { "speaker": "James Lee", "text": "Great, thanks for taking my questions. Two here. I'm just curious, is inflation having an impact on consumer behavior? Maybe, for example, consumer trading down on hotels to home accommodation, and also in terms of market share within home accommodation, as you see mix shift to urban markets, we have strengthened supply, how's that compare versus your peers who may be more non-urban focus? Thanks." }, { "speaker": "Brian Chesky", "text": "Yes, maybe why don't we do this day? Why don't I answer a high level of the second question, because I just wanted to share a point about our urban business? And then maybe you can go into the details about both inflation impact on consumer behavior and kind of how we're comparing to our peers in urban markets. James, the thing I would just say about our business is, I think that our business is uniquely resilient in a uniquely adaptable model. And the reason our model is adaptable is because we are not just the US business. We are not just the European business. We are a global business and we are strong in Europe, North America, Asia, Latin America, Africa, we're global. We're in 220 countries regions, one of those global companies in the world. We're not just a vacation rental business. We're vacation rental markets. But our bread and butter is urban, cross border was really how we got our start. So we're very much an urban, a rural vacation and an off the grid, we even have homes totally off the grid. We have homes that are 20, 30 bucks a night and 10s of 1000s of dollars a night. So we're really at all price points. We have catered to families and individuals. So we have nearly every type of home at every price point, and every type of space and nearly every type of community around the world. And so I think that we've been able to be uniquely resilient. And the other thing I want to say about our urban market business, is we're seeing record long term stays. I'm doing this call, for example, from New York City, Airbnb, where I have for a month. And we're seeing in New York City, for example, a huge uptick in long term stays, because a lot of people have to come here, working remotely for months at a time. So that's just a little bit of how we think about it. Dave, I'll hand it over to you and go to a little bit more detail." }, { "speaker": "Dave Stephenson", "text": "Yes, I mean we're just not seeing price appreciation impact our business negatively. We had our strongest quarter ever, we have even stronger demand for Q3 and Q4 than we've ever had. And I think Brian hits right in the head because we have every type of home and every type of community, everything from budget, shared homes to luxury homes, people can make a choice about what kind of property fits their particular budget and their needs. And so I think it's that strength of diversity of product that will continue to support our business going forward. And then I think you also hit on it, which is this mix shift to urban markets, which has traditionally been our strength at Airbnb, when you compare it to others who don't have the same amount of supply and capabilities build in those cities. It's going to give us kind of a further tailwind. And really what we're seeing right now is continued strength of the domestic business that was up 65% versus 2019. Strength in our non-urban business is up 80% versus Q1 2019. And that remains incredibly strong. And now we're seeing the mix shift towards urban markets back towards 2019. And across border back to 2019. And so I think that tailwind is going to continue to help our business going forward." }, { "speaker": "Operator", "text": "The next question comes from Jed Kelly with Oppenheimer." }, { "speaker": "Jed Kelly", "text": "Hey, great, thanks for taking my question, just thinking about on how higher interest rates in like a potential recession, how do you think that would impact your supply? And then just thinking about the top line from the back half of the year with AIPAC opening up, and more and more cross border more urban, do you think revenue or I guess bookings will be driven more by volume? Or by ADRs? Thank you." }, { "speaker": "Brian Chesky", "text": "Yes, so why don't I take the first question about higher interest rates or recessions impact on supply and Dave to take the second question. Jed, no way to know for sure, on your question, but I'm pretty sure I've a sense of it. Airbnb, we launched on August 11, 2008. So you'll remember what the world was like in August 2008. And we really got going January, February, March of 2009, in the depths of the Great Recession. And the reason that Airbnb initially grew was that people were having trouble paying their rent, having trouble keeping their homes, and people turn to Airbnb to list their homes. And what we generally see is in recessions, people change their behavior. And they change their behavior based on kind of price considerations. And so will generally expect in a recession, if that were to happen, is that probably more people would turn to hosting. That would be number one. So that we would expect, and number two, travelers would probably become more budget conscious. And that would probably have a benefit to Airbnb as well. Now, the downside, of course, the recession is often times fewer people travel. But again, I think we're a pretty resistant business, whether it's economy's good or bad, we're pretty adaptable model. So that's what I would expect in the supply side, that's the more difficult to the economy is, the more people are going to need supplemental income. And a lot, a handful of them will turn to hosting. Dave, I'll hand it over to you." }, { "speaker": "Dave Stephenson", "text": "Yes, and just to double click on that, I think in a recessionary environment, if people are more constrained on the dollars they have to spend to travel, they often will come back to Airbnb because we're a better value in that travel. And going back to the earlier point, we have all types of price points, budget to deluxe, and consumers can figure out what meets their best budget needs. And so I think it actually, we are a better option than many other alternatives in a recessionary environment. And then, in terms of the back half of the year expectations, revenue will be driven more by volume than ADRs. We give our outlook on ADRs for Q2 of being flat year-over-year, they may moderate a little bit in the back half depending on mix. But I think that the biggest driver of revenue, maybe outperforming current expectations would be a further strengthening of the European business or acceleration of that maybe normalization of cancellation rates across the globe could also be a tailwind. APAC coming back more strongly more quickly will certainly help the results. But I don't think it'd be the major driver this year. North American and European travel is still just such a large percentage of our business at the moment. APAC will be super important over the long term, but less of an immediate driver here in 2022." }, { "speaker": "Operator", "text": "The next question comes from Mark Mahaney with Evercore." }, { "speaker": "Mark Mahaney", "text": "Okay, Brian want to applaud you, by the way for your efforts with the Ukraine, you came up with a creative and direct way for people to help out. So I applaud you for that. And then I also want to give you some comfort in terms of your thoughts on innovation and age. I think most studies show that peak innovation occurs when people reach 50. So if you can just make it through the next 10 years, you'll be good. And then finally, just because you touched most of the questions I've thought about were already been asked, but let's get back to experiences. So it sounded like maybe you're, I know you got the core business and that's what you're really focused on. But it sounds like you may start leaning in a little bit more to experiences so just flesh that out a little bit and I know it's relatively small versus the core opportunity now but, at some point I assume you're going to lean more aggressively into experiences. And I assume that there'll be host demand to do that. So because there's probably a lot of win-win all around that. So just talk about the timing of when you think you may want to lean more aggressively into experiences. Thank you." }, { "speaker": "Brian Chesky", "text": "All right. Well, thanks, Mark. It's great to hear from you again. First of all, yes, I'm 40. I hope I got a good 10 years in me and I think I'm a pretty late bloomer, so maybe give even more than 10 years. And so what I want to do at that time, well, one of the things I want to do is experiences. I think that experiences is a massive, massive opportunity. When we started Airbnb, air homes took off. And I remember saying at the time, Mark, well, we've monetized people's biggest asset already, which is their home, what do we do next, we go to the next largest asset. And it actually turns out your home is not your largest asset from a latency standpoint, I think it's your time for most people, your time ultimately can generate more revenue for the average person than their property can. And so that's a bit of an insight of where experiences came. It also came from the fact that a lot of people book Airbnb not just to save money, but to have a local travel experience. And I think experiences are a great way to do that. And so I was expecting 2020 to be the breakout year for experiences, we prepared for that. And of course, the opposite happened, the pandemic occurred, and we put the product on hold. In the last two years, when people aren't really comfortable leaving their house they have to mask on, it's not really been the right conditions to double down on experiences. But now that the light is at the end of the tunnel of the pandemic, we think people's first trips won't be to meet strangers and go on experiences, we think the first trips we want to have are to reunite with family, unite with friends get a big home together. And so we think that this summer, though people will book experiences, I think the summer still a little more about homes, just because people are getting comfortable getting out of their house. That being said, I think this summer, you're going to start to see a ramp up of experiences, I think next year and beyond it’s going to be a massive opportunity and I’m incredibly excited about it and one of the reasons I am so excited about it is that our guest actually, from a customer satisfaction standpoint, like experience more than homes, they actually leave a significantly higher five star rating as a percentage of their ratings for experiences at home. The people like home, the retention is really good. So we think this is just scratching the surface. And so to answer your question definitively, we are going to be ramping up, we're going to be getting more aggressive experiences, we will be a slower on ramp in this year, but by next year, we're going to be going full throttle. And I'm really excited about this opportunity. And it's a little hard, I don't want to make too many predictions about how big it will become. But my general sense is it's kind of probably bigger than most of us imagined, just because I think people are looking for interesting things to do with people. People are lonely, they want to meet one another, they want to do activities, they can only go to so many restaurants, they can only watch so many shows on Netflix, and many physical communities are being digitized. And so people ultimately want to have real experience in the real world. I think travel is a great way to do that. And the final thing I'd say Mark, is the increasingly people aren't just booking homes in Paris, you go to Paris, you can see the Eiffel Tower, you can go to Loire. But if you go to a small town in France, what do you do other than go to a restaurant, experience is a great way to do something interesting in nearly every community in the world, especially ones that don't have the Eiffel Tower. So that's -- those are just some of the reasons why I am incredibly bullish about this product. But it's going to take some time to really wrap up." }, { "speaker": "Operator", "text": "The next question comes from Justin Post with Bank of America," }, { "speaker": "Justin Post", "text": "Great, thank you. Well, lot of my question has been answered. But on the urban supply side, I imagine you had some churn on health issues and other factors. What are you seeing in urban markets? And could you see a big uptick there as demand comes back? How are you thinking about that? And then maybe one follow up." }, { "speaker": "Brian Chesky", "text": "Yes, Dave, do you want to take this one?" }, { "speaker": "Dave Stephenson", "text": "Sure. I think one of the key things remember about our supply is that the vast majority of our hosts are individual hosts. And they don't get rid of their home. And they're using their own home or maybe a second home to host. And so even in the midst of a pandemic, or other kind of recessionary environment they are not getting rid of their own home or their second home, which means that they're ready for hosts, and there'll be there when the demand is coming back. And that's what we're seeing now with our urban demand. So the urban demand is starting to come back. It's now back towards night 2019 levels, and our hosts are ready for them and our growth in hosts in the urban markets has also increased. So we're seeing an increase in our listings for both our high density and urban markets overall. And that's what we kind of continue to see as the demand comes back, the supply is there to meet it." }, { "speaker": "Justin Post", "text": "Right and then follow up on ADRs, I think you're saying around flat year-over-year, can you just talk about the normal seasonality for ADRs? Why -- is it mix that they caused them to down? And how does it -- how do you think about the back half seasonality on ADRs?" }, { "speaker": "Dave Stephenson", "text": "Yes, I think if you could, again, we have been up 5%, year-over-year in Q1, it is going to be flat relative on year-over-year basis in Q2, you can kind of see a little bit of a decrease of seasonality for Q3, Q, you can maybe look at some of the seasonality back to ‘19, which will show you that Q3 and Q4 have moderately lower ADR is not substantially, I think you could use that as a little bit of a guide. And then just know that the mix change is being offset a lot by strong price appreciation that is continuing to prop up the ADR overall. So I think that is a bit of the unknown for exactly where ADR is going to land in the back half of the year, what I can see is very clearly what's going to happen in Q2, which will be flat year-over-year." }, { "speaker": "Operator", "text": "The next question comes from Rohan Joshi with Citi." }, { "speaker": "Rohan Joshi", "text": "Great, thanks for taking the question. I want to ask a little bit more about cross border, just given the rebound that we saw this quarter and rebounds and seeing just can you talk about the dynamics maybe Brian on whether there's cross borders, mostly call it North America users going overseas? Are we seeing more EMEA users coming to US or any sort of insights around there? And then Dave, on just overall EBITDA, understood, more leverage and margin expansion in the first half. But it's really impressive to see the continued call it leverage across most of your line items. Can you just remind us ops and support and gross margin, what's driving that? Thank you." }, { "speaker": "Brian Chesky", "text": "Yes, hey, Rohan, I can just start the cross border is I would say North America, Europe, Australia, Latin America, pretty much everywhere, but Asia, and it's really going in all directions. So people are coming into North America, people in North America are leaving. They're absolutely going to Europe, there's a lot of travel within Europe. And we're now also seeing Europeans come to the United States and go kind of in other locations as well. So the great thing is the network effect is kind of moving in multiple directions. Whereas, say, last year, it was much more domestic and kind of really limited, the corridors are really starting to open. So Dave, I'll let you take the rest of the answer." }, { "speaker": "Dave Stephenson", "text": "Yes, on the EBITDA, I'm really pleased and proud of the work that we've done to improve our overall profitability, we made some really difficult choices in the midst of the pandemic, to reduce our overall workforce and focus on the core of our business. We think that actually, that focus is enabling us to deliver even more like, I think we've actually delivered more innovation and productivity as a company by being very deliberate focusing in a more narrow area versus trying to do everything all at once. And that's been really effective with this. We actually have 16% fewer people at the end of Q1 ‘22, than we did at the end of Q1 2020, before we had our layoffs, and yet, we think we're being more productive than ever before. And then we're getting nice. So on top of that fixed cost leverage, yes, we're getting nice improvement in our variable costs, and our options support, it was 15% of revenue here in the first quarter, and seeing nice improvement versus our ops and support in a prior quarters, right. Option support will include, largely our community support operations, and our trust and safety activities. Those are the elements that are within ops and support, we're going to continue to invest in those areas, because we think those are differentiators for us and they doing those really well supports our individual host community. But we're making nice strides and improvement in leverage, so that we gain continued profitability. And one of the things we noted in the letter is that we're expecting for the full year, a modest expansion in our overall EBITDA margin rate. So that's nice to see versus 2021. And I'm really excited that in 2022, we'll have our first full year of net income profitability. So just not a full net income basis to be profitable this year feels excellent." }, { "speaker": "Operator", "text": "The next question comes from Lee Horowitz with Deutsche Bank." }, { "speaker": "Lee Horowitz", "text": "Great. Thanks for taking the questions, two, if I could. High level demand across the -- accommodation industry has proved incredibly sticky to the front half of this recovery and your comments suggest even into the back end. To what do you kind of owe this stickiness and consumer patterns in terms of the way that they travel even as things open up and hotels, perhaps gain a bit of share? And then maybe a bit on cost as well, wage inflation and its inability to kind of find talent has been cropping up across a lot of the names that we cover. You guys haven't necessarily commented too much here. But how if at all are you seeing wage inflation potentially play from the model as we move through 2022? Thanks so much." }, { "speaker": "Brian Chesky", "text": "All right. Dave, do you want to take it?" }, { "speaker": "Dave Stephenson", "text": "Sure." }, { "speaker": "Brian Chesky", "text": "Sorry. Can I actually can I ask a clarifying, I don't quite understand the first question. Can you ask it again?" }, { "speaker": "Lee Horowitz", "text": "Yes, in terms of you --" }, { "speaker": "Brian Chesky", "text": "The way that question -- yes, can you clarify the first question? About first question consumer demand --" }, { "speaker": "Brian Chesky", "text": "The industry. Yes, for alternative accommodations and proven incredibly sticky. Despite reopening more host are coming online, those sorts of things, I guess, to what do you owe this kind of stickiness in consumer travel patterns?" }, { "speaker": "Brian Chesky", "text": "Oh, why is it sticky? Are you -- so sorry, I want to make sure I understand. Are you saying why? It like it was obvious why people were booking homes last year because people weren't traveling for business. They weren't going to urban markets. They weren't crossing borders. They were staying nearby. So you're asking why –" }, { "speaker": "Lee Horowitz", "text": "They were –" }, { "speaker": "Brian Chesky", "text": "Trying to reopen -- why they're still sticky. Okay, got it. Yes. Okay, I got it. Thank you. And then let me do that. And then Dave, you can take the second question. So I mean I think it's important to just note Lee that, like we were growing really fast before the pandemic. And the reason we are growing fast is number one, I think a lot of people want to have a local experience they travel number two, they want to save money when they travel. Number three, Airbnb allows them to travel with groups, and increasingly people are traveling in groups. Number four, Airbnb allows them to travel and stay in nearly every community in the world, hotels on unlimited markets around the world. And number five, the longer you're away from home, the more you want to be in a home and length of stay is going up. So I think all those reasons explain the stickiness. Maybe said another way, there's another way of saying rural demand increased during the pandemic, and people are still traveling to rural areas. People are still traveling domestically, which was a very popular demand use case during the pandemic, people don't have to go back to the office five days a week. So people are still booking weekly stays and monthly stays. So again, domestic, non-urban, in longer stays, were three use cases that weren't really our original bread and butter, our original bread and butter was urban cross border short term. But these three trends are sustaining, they're still sustaining. And the reason why is I think the genie is out of the bottle, people have permanent flexibility. And people now realize there's a lot of great places to go beyond the top 100 tourist destinations. That being said, what we're seeing is a recovery of cross border in urban, it's actually both above 2019 levels. So in short, the old ways, the bread and butter of Airbnb, cross border, urban are back in the new use cases or the use cases that were accelerated at pandemic are here to stay. And the combination of those two things is why I think this business is so sticky, maybe a more fundamental way of saying it is people love the experience they have. And so when people love them, they tend to do more of it. Dave, I'll hand over to you." }, { "speaker": "Dave Stephenson", "text": "Yes, in terms of wage inflation, this we did $1.5 billion of revenue in Q1 with just 6,200 people. And we don't need as I said, we actually have 16% fewer people than we did in Q1 of 2020. We don't need to add incremental people to have this business grow dramatically, we are significantly larger today as a business with significantly fewer people. So really, wage inflation is not a really major driver of costs. We are investing in our employees in order to enable them to live anywhere, move anywhere within the country. If they move someplace else, we're not going to alter their pay for being in a different part of the country. And we're going to support them work 90 days in other countries around the world. So we think that kind of investment will benefit us by having lower attrition, and being able to attract the best talent in the world. So we think that's going to be a great investment for the future, to have the best talent to unlock all the innovation that Brian has talked about on the call today. That concludes the Q&A session. I would like to pass the conference back to Brian Chesky for additional remarks." }, { "speaker": "Brian Chesky", "text": "All right. Well, thank you all for joining us today. I'm incredibly proud of what we accomplished this quarter. We hit new records with nights and experiences booked and GBV. We had our first positive Q1 adjusted EBITDA and our highest free cash flow ever $1.2 billion of cash flow. But we're just getting started because we are going to be accelerating our pace of innovation. And I'm really excited to announce the biggest change to Airbnb in a decade. It's going to be next Wednesday, May 11 at 9 AM Eastern Standard Time, you can watch a special event right from our homepage. Until then, thank you. I'll see you soon." }, { "speaker": "Operator", "text": "That concludes the Airbnb Q1 2022 earnings call. Thank you for your participation. You may now disconnect your line." } ]	Airbnb, Inc.	115,705,393
ABNB	4	2,023	2024-02-13 16:30:00	Operator: Good afternoon, and thank you for joining Airbnb's Earnings Conference Call for the Fourth Quarter of 2023. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Angela Yang, Director of Investor Relations. Please go ahead. Angela Yang: Good afternoon, and welcome to Airbnb's fourth quarter of 2023 earnings call. Thank you for joining us today. On the call today, we have Airbnb Co-Founder and CEO, Brian Chesky and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our fourth quarter of 2023. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We provide a reconciliation to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I will pass the call to Brian. Brian Chesky: All right. Thank you, and good afternoon, everyone. Thanks for joining. I am excited to share our results with you. We wrapped 2023 with another strong quarter. We had 99 million Nights and Experiences Booked in Q4, marking our highest fourth quarter ever. Revenue of $2.2 billion grew 70% year-over-year. Net loss was $249 million. But when excluding nonrecurring tax items, adjusted net income was $489 million, representing an adjusted net income margin of 22%. For the full year, our free cash flow was $3.8 billion, our highest ever. Because of our strong cash flow and balance sheet, we repurchased $2.25 billion of our shares during 2023. And I'm excited to announce that today, our Board of Directors approved a new share repurchase authorization of up to $6 billion of our Class A common stock. Our strong results in 2023 were driven by our focus on 3 strategic priorities, making hosting mainstream, perfecting our first service and expanding beyond the core. First, we're making hosting mainstream. We've been focused on making hosting just as popular as traveling in Airbnb. Our results show that our approach is working. In Q4, our host community grew to 5 million hosts around the globe. Active listings exceeded $7.7 million by the end of 2023, increasing 18% year-over-year. And we also saw sustained double-digit supply growth across all regions. All in all, in 2023, host earned more than $57 billion. This year, we are going to continue to raise awareness from hosting and improve the overall host experience. Second, we're perfecting our core service. Over the past 3 years, we've launched more than 430 new features and upgrades to our core service. We've made significant improvements to make Airbnb a more affordable and reliable option, and we are already seeing a positive impact. For example, post cancellations have decreased by 36% in Q4 of 2023, and this is compared to the same period a year ago. And now two thirds of our host offer a weekly or monthly discount. We will never stop perfecting our core service. In the year ahead, we'll remain focused on improving the quality and reliability of stays. Finally, we are expanding beyond the core. Airbnb is at an inflection point. We spent the last 3 years perfecting our core service, and we are now ready to embark on our next chapter. We're focused on unlocking more growth opportunities by investing in underpenetrated international markets, and we're seeing some great results. Following the success that we've seen in recent quarters in Germany, Brazil and Korea, we're now rolling out our playbook in other countries, including Switzerland, Belgium and Netherlands. But this is only one piece of a much bigger strategy because we've always believed that Airbnb was destined to offer more than just a place to stay. And now is the time for us to expand beyond our core business and reinvent Airbnb. And there are a few reasons why. I mean, first, we want people to love our core service before offering them something new. And with hundreds of improvements we made over the past 3 years, the Airbnb service is now better than it's ever been. Second, we've been able to attract some of the best talent in the world, and we now have the capabilities to do so much more. And third, there is a new platform shift with AI, and it will allow us to do things we never could have imagined. While we've been using AI across our service for years, we believe we can become a leader in developing some of the most innovative and personalized AI interfaces in the world. In November, we accelerated our efforts with the acquisition of GamePlanner.AI, a stealth AI company led by the Co-Founder and original developer of Siri. With these critical pieces in place, we're now ready to expand beyond our core business. Now this will be a multiyear journey, and we will share more with you towards the end of this year. Now looking back on Q4, we also saw a number of very positive business highlights. First, we surpassed 5 million hosts in the platform and saw meaningful supply growth across all regions. We added nearly 1.2 million listings in 2023, ending the year with over 7.7 million active listings. Q4 supply growth grew 18% year-over-year. Now this is a real highlight. And we saw the highest growth in regions with the highest demand. So obviously, there's a real strong network effect happening here. We also continue to see relatively similar supply growth among individual and professional hosts with the majority of these listings exclusive to Airbnb. Now second, we continue to see strong demand on Airbnb. Now this is especially true amongst first-time bookers, which is particularly encouraging. Nights and Experiences Booked grew 12% compared to a year ago and following some volatile in October, Nights Booked actually accelerated throughout the remainder of the quarter, and Q4 also marked the highest quarterly growth rate of the year for first-time bookers. And additionally, we also gained momentum in app downloads and app bookings. 55% of gross Nights Booked were on our app. This is up from 50% a year ago. And finally, we're driving affordability for guests. Throughout 2023, we introduced several features to make Airbnb every more affordable from new pricing tools for hosts to increased pricing transparency for guests. Since launching these features, we've seen 1.4 million hosts use similar listings, which lets host compare to price or listing to others in the area. Nearly 300,000 listings have removed or lowered their cleaning fee. And by year-end, nearly 40% of our active listings didn't charge a cleaning fee at all. So our work around affordability is paying off. In December, the average nightly price of a 1-bedroom listing on Airbnb was $114 [ph] a night. This is down 2% from the same period last year, while hotel prices rose 7% to $149 over the same period. Now before I turn to Q&A, I want to share the latest on two executive updates we announced at the end of last year. To start, Dave Stephenson is now Airbnb's first Chief Business Officer. Over the past 5 years, Dave has done an incredible job as CFO, and our business is stronger than ever. One of the qualities that is so remarkable about Dave is that he's not just a world-class finance leader. He's also a world class operator. And whenever I need someone to quickly drive a complicated series of operations together to clear outcome that doesn't compromise our values, I turn to Dave. As we expand beyond our core, it will be paramount to have an executive dedicated to our long-term growth plans, and there is nobody better than Dave to do this. Dave will continue to drive growth across existing and new businesses, and this includes driving international expansion, growing global host supply and leading all business and corporate development activities at Airbnb. Now as Dave takes on this position, I am thrilled that Ellie Mertz will be our CFO. You see Ellie has been my right hand for 11 years, and many of you already know here and are well aware of impressive track record at Airbnb. She led our IPO during one of the most pivotal moments in our company's history. And for the past several years, Ellie has overseen Strategic Finance and Analysis, Corporate Development and Investor Relations. And under her leadership, our company grew from adolescent to adulthood with revenue growing over 100x. I am thrilled that she's stepping into this role. Dave has already started as Chief Business Officer; and Ellie will officially transition to CFO on March 1. So next call, you will hear from Ellie. Before we go to questions, I'd just love to hand over to David to share a few thoughts. Dave? David Stephenson: Thanks, Brian. I'm really excited about my new role as Chief Business Officer. In this role, I'm focused on driving Airbnb's growth by concentrating in three specific areas. First, continuing to grow our high-quality supply of stays and experiences around the world; second, leading our global expansion efforts in underpenetrated countries; and third, developing and launching new businesses as we expand beyond the core. As Brian has said, this is a transformational year for Airbnb. I look forward to Ellie becoming our CFO next month. I couldn't think of a better person to lead us into the next phase of growth. And so with that, let's open up the call for Q&A. Operator: [Operator Instructions] Your first question comes from the line of Ron Josey from Citi. Your line is open. Ron Josey: Great. Thanks for taking the question, Dave. Congrats on the role and Ellie to you as well. Brian, I wanted to ask a little bit more on just expanding beyond the core. I think you said now is the time to do it and stay tuned towards the end of the year. But then you also talked about being a leader in personalized AI. Can you just give us a little more insight on how you're thinking about AI given the acquisition of GamePlanner? And then as we think about these newer underpenetrated markets, Switzerland, Belgium, Netherlands, talk to us about just lessons learned from, call it, Germany, Korea, Brazil that you can apply to these newer markets? Thank you. David Stephenson: Yes, absolutely, Ron. Thanks for asking the question. So let me start with AI. So I think to talk about AI, it would be good to zoom out, just lay out the landscape. One way to think about AI is let's use a real-world metaphor. I mentioned we're building a city. And in that city, we have infrastructure like roads and bridges. And then on top of those roads to bridges, we have applications like cars. So Airbnb is not an infrastructure company. Infrastructure would be a large language model or obviously, GPUs. So we're not going to be investing in infrastructure. So we're not going to be building a large language model. We'll be relying on, obviously, open AI. Google makes a great model, meta great models. So those are really infrastructure. They're really developing infrastructure. But where we can excel is on the application layer. And I believe that we can build one of the leading and most innovative AI interfaces ever created. And maybe one way to make this real is if you were to open, say, ChatGPT or Google, though the models are very powerful, the interface is really not an AI interface. It's the same interface as the 2000s in the sense or 2010s. It's a typical classical web interface. So we feel like the models in a sense, are probably underutilized. Here's another way of saying it. Take your phone and look all the icons on your phone. Most of those apps have not fundamentally changed since the advent of generative AI. So what I think AI represents is the ultimate platform shift. We had the Internet. We had mobile, Airbnb really rose during the rise of mobile. And the thing about a platform shift, as you know, there is also a shift in power. It's a shift to behavior. And so I think this is a zero, zero ballgame, where Airbnb, we have a platform that was built for one vertical, short-term space. And I think with AI, generative AI and developing a leading AI interface to provide experience that's so much more personalized than anything you've ever seen before. Imagine an app that you feel like knows you. It's like the ultimate concierge, an interface that is adaptive and evolving and changing in real time, unlike no interface you've ever seen before. That would allow us to go from a single vertical company to a cross-vertical company because one of the things that we've noticed is the largest tech companies aren't a single vertical. And we studied Amazon in the late '90s, early 2000s when they went from books to everything, or Apple when they launched the App Store. And these really large technology companies are horizontal platforms. And I think with AI and the work we're doing around AI interfaces, I think that's what you should expect us. We're not going to talk specifically on this call about the specific products and services we're going to be offering, but you will see some very big announcements later this year. And as you know, we did an acquisition of GamePlanner.AI. It was from the creator Siri. And that was just accelerating the efforts we are already endeavoring on. Operator: Your next question... Ron Josey: And then... David Stephenson: Sorry... Ron Josey: My question was... Brian Chesky: Yeah, more on the underpenetrated markets. So is one of the few things. First, we just need to make sure that we have great supply and great supply in specific nights. So even the subtleties of local holidays and ensuring that we're there, that we have it at all price points. Different countries have different expectations on what the supply growth looks like. And then just make sure we have the right product. Things like we've done include installment payments in Brazil and Latin America, Naver Login in Korea. Just making sure that we're showing up locally in the ways that they're expecting. And then the third is just to make sure we have a full funnel marketing approach. In some of these countries, we're now big enough where we can have a small team do a very targeted social marketing, PR, communications, use influencers, search engine marketing, but build that on top of brand marketing to have that all work together in one full funnel approach. Approximately 90% of our traffic remains direct or unpaid because the majority of Airbnb stays are unique to us. And that continues to drive the flywheel. But having this full funnel approach is very effective when we implement it on the ground in these countries. Operator: Your next question comes from the line of Eric Sheridan from Goldman Sachs. Your line is open. Eric Sheridan: Thanks so much for taking the question. I was curious how the building blocks of sort of the way you're thinking about the macro environment and the idiosyncratic growth the company sort of is looking at for Q1, driven by elements of both supply and demand? And what do you see as sort of the exit dynamics from 2023? Thanks so much. Brian Chesky: So again, what we saw exiting 2023 was interesting, right? When we were on this call a quarter ago, we've seen some softness in demand in October. And then what we - and so we guided to that kind of expectation. And then what we saw is accelerating demand in November and December. And then as we come into - from that strength, 17% kind of revenue growth and 12% nights growth in the fourth quarter, we're seeing really stable demand coming at the start of the year. You have to actually rewind the tapes and remind yourself that we were just exiting kind of Omicron and there's a lot of pent up demand in January of last year, which makes for some harder comps in Q1, but against those harder comps, we continue to see strong demand for travel. I think that we continue to see a very robust demand for people staying on Airbnbs versus just necessarily kind of buying other things. So the experiences over things continues to be a big trend. And we're excited to see the growth that we're continuing to see in our established businesses in North America and Europe and even greater growth in Latin America and Asia Pacific. So as we do things, as I said on the last question about doubling down and making sure that we invest in these expansion countries where we're underpenetrated, I think that's going to continue to drive growth for us for the rest of the year. Operator: Your next question comes from the line of Justin Patterson from KeyBanc. Your line is open. Justin Patterson: Hi. Thank you very much. There's been a lot of investor interest around the cross-currency fee. How should we think about that phasing in over the course of the year and the potential financial impact from that? And then further, could you talk about just why you viewed now is the right time to pull that lever? So maybe this is a sign that you'll take pricing actions where there's a value disconnect more regularly than in the past? Thanks. Brian Chesky: Yes. To be clear, when we announced this recently, we updated our terms of service. And what it did is it gives us the ability to implement across currency fee. So we needed to update the terms of service just to allow us to do it. Now the fee only applies when the currency of the guest uses to pay differs from the currency that the host set for their listening. So we don't anticipate this fee to affect the majority of our guests because the cross currency transactions are only approximately 20% of our gross booking value. It's different than our cross-border, which is closer to 40%. And we anticipate the majority of the fee changes to be closer to 1%. So we're going to test and evaluate and just see what the results are, and that testing will begin in April. Why now? There's just a point where we understand that the size and complexity of our business ensures that we should be making sure we're providing great value to our guests and our host. We do things like last year, we had a change to our long-term stay fees for beyond 3 months. That was an opportunity where we saw that maybe the fees were too high relative to the benefit we're giving. I think there's just a fundamental principle where we want to make sure that we're giving more value to our guests and our hosts than we take in our take rate over time, and we're going to continue to be more nuanced in how we make those choices going forward. Operator: Our next question comes from the line of Brian Nowak from Morgan Stanley. Your line is open. Brian Nowak: Great. Thanks for taking my questions. I have two. One big picture and one sort of accounting. So big picture one, you guys have made a lot of interesting changes to the U.S. around I'm flexible [ph] and new tools for host, et cetera. Brian, can you just sort of talk to us about areas of progress you've made on improving conversion or getting host to lower prices in the U.S.? And sort of what are the existing hurdles you have to overcome to kind of get power host and host to kind of lower prices more in the U.S.? And the second one, on Dave or Ellie. There's a lot of moving pieces around this 1Q guide. If we're sort of thinking through gross bookings versus revenue, and we're getting to room night growth in sort of the mid to high to single digits, is that right? Or are there sort of other moving pieces that we're missing around the room night growth calculation? Thanks. Brian Chesky: Yes. Why don't I start, Brian? So you could think of probably like 3 really big buckets of work that are going to drive conversion of Airbnb. One is our work on affordability. The next is really product optimization. And the third is really quality and reliability. So let me talk about all 3, and I'll start with affordability. A couple of years ago, we noticed that there was quite a lot of, call it, a feedback we're getting from our guests that Airbnb was getting more expensive. And so last year, we really hunkered down and rolled out a suite of tools for guests and host to make Airbnb more affordable. Starting with total price display, where you now can turn on a toggle and see the total price upfront, including taxes and cleaning fees and services. Now this tool is really important because now we are pushing more demand to listings at better prices. We've also seen some really positive knock-on effects. For example, 300,000 listings have now reduced or eliminated their cleaning fee and 40% of listing go [ph] we don't even have a cleaning fee. The next thing we did is we encourage more hosting to provide discounts for weekly or monthly stays. As you know, 19% of our month - of our nights are monthly stays and more than 40% are weekly. Well, now two out of three hosts have a monthly or a weekly discount. So this has been a huge, huge improvement. And we also launched a product called Compare listings. One of the things we noticed is that hosts are more likely to have a competitive price if they see what other similar listings are charging in their neighborhood and then they can see whether they're getting booked or not. Well, since we rolled out that tool, 1.4 million hosts have turned the tool on, and this means they'll provide more competitive listing. The result of which, Brian, is that our prices year-over-year for one bedroom apartment globally are down 2% where hotels are up 7%. That's a 9% swing. The next is product optimization. Here's a simple way to think about it. We did $9.9 billion of revenue last year. So let's round that to $10 billion for really simple numbers. All we have to do is increase our nights booked by 100 basis points, and that's $100 million of revenue. And if we can increase $100 million of revenue, it'd be $100 million of very like high-margin revenue because we're converting presumably traffic we already have on the website. And so there's a number of things we're doing on product compensation to increase conversion rate. One of the big things, as you noticed, is I'm flexible, here's a simple way to think about it. We are never close to sold out in Airbnb. If we can just point demand where we have supply by getting people to be more flexible off their dates or a little more flexible off their radius or the location, that'd be massive. We also made some optimization to get more people to download our app. And now we are very typically a top 50 application in the United States and now 55% of our bookings are now on a native application. So those are some of things that non-profit [ph] product limitation. The last thing I'll talk about is reliability. We launched Guest Favorites. Guest Favorites, the reason we launched this is for every person who stays in a hotel, 9 people stay in an Airbnb - sorry, for every person who stays in Airbnb, 9 people stay in a hotel. What if we could get just one of those people who stays in a hotel to stay in an Airbnb? We would quite literally double the size of our business. So when you ask people book hotels, why they don't book Airbnbs, there's two reasons. One, well, it's habitual. They've always booked hotels. And the other is they are comforted by the reliability, the consistency of the hotel experience. And we asked, what if we had a product that was as consistent as a hotel from a quality standpoint, but had all the unique advantage of the Airbnb? It was more affordable, it was more unique with more character, and it was better equipped. And that's exactly what Guest Favorites are. They're 2 million of the best listings on Airbnb based on rating, review and reliability data on 500 million trips in Airbnb. Since we launched that product in November, we are seeing a shift in bookings towards Guest Favorites. That's of course good because number one, they get fewer customer service contacts, so customer service costs go down, they have this higher five star rating trips, so we have better repeat bookings. And we think this will attract people to Airbnb that never considered us before. So those are just some of the things we're doing. The last thing I'll say before I hand it over to Dave, is that, that's just what we did last year. We had 200 - about 200 upgrades last year, 430 in the last 3 years, but we are just getting started, and we're going to have significantly larger upgrades this year. Dave? David Stephenson: In terms of the Q1 guide on room nights growth, again, I think you have to remember that we have a hard comp versus Q1 of '23, where there was a lot of pent-up demand coming out of the holidays and we saw much stronger growth in early in the year, especially in January. I think the other thing that's unusual about Q1 this year is Easter moved from Q2 to Q1. So this actually helps our revenue by 100 to 200 basis points in Q1, but actually is a drag on nights because we actually get fewer nights booked in the period as people are actually doing the traveling on holiday. So it will shift some nights from Q1 to Q2. So revenue is a little bit helped Q2 to Q1 and bookings nights booked are slightly hurt Q1 to Q2 and then don't forget the hard comp. So this is why we have the language of moderating from 12% growth in Q4. Operator: Your next question comes from the line of Doug Anmuth from JPMorgan. Your line is open. Doug Anmuth: Thanks so much for taking the question, Ellie, can you just help us understand the commentary on EBITDA a little bit better for '24 or the incremental investments that could drag on the margins. Is that primarily about expanding beyond the core and tied to some of the new initiatives that Brian talked about that we'll learn about later this year? Or is that more around marketing or just something around kind of the existing business? Thanks. Ellie Mertz: Thanks, Doug. I was actually going to start next quarter, but thanks for pointing it to me. So what you saw in the guidance language that we provided is that we are basically giving ourselves a floor in terms of the 4 year [ph] EBITDA margin guidance. As we said, we will hold or provide a minimum of 35%, which is slightly down from what we delivered in 2023. The intent here is really to ensure that we have flexibility over the course of the year to continue to invest in a variety of growth opportunities as they appear. So what might those be? So first, we have a pretty robust budget in terms of our international expansion, but there's certainly opportunities at the margin to continue to invest in newer markets. Second, there's always opportunities in terms of looking at our high ROI marketing channels and adding marginally at the top. Third, what we note, given the ambitions around our product development road map is that obviously often constrained by our resources there. And so we may look to add incremental product resources to increase the throughput of our overall product team. And then finally, obviously, we haven't said much with regard to what the platform extensions will look like in the back of the year, but we also want to give ourselves flexibility there to ensure that we're able to share something broadly and meaningful by the end of the year. Operator: Your next question comes from the line of Justin Post from Bank of America. Your line is open. Justin Post: Great, thank you. Just want to ask about room nights. We all know there's a tough comp in Q1, but - and that was partially due to the reopening. But we're kind of over COVID now. And just kind of thinking about where you are in the room night cycle going forward? And what are the key drivers for nights? Is it growing supply and just getting that conversion level better. The big picture just saying, it looks like a tough comp in Q1, but how do you think about the rest of the year and where nights can grow over the medium term? Thank you. David Stephenson: Yes. Again, we are starting to see overall kind of demand normalize. I think you also look at our nights growth and the nights on Airbnb and to continue to see that we take share of overall accommodations globally versus kind of traditional accommodations and are either equaling or exceeding versus our key competition. So I think if you just look at room nights growth, we continue to see strength relative to traditional hospitality and our competition. And you're exactly right. The key focus is on supply. There's been a lot of critique around whether or not we have sufficient supply growth. I hope that we continue to show that strength with the 7.7 million active listings, they're growing 18% year-over-year. We saw incredible strength throughout the year, 5 million hosts. The vast majority of this listings being unique to Airbnb. And I think that, that uniqueness also gives us a lot of strength on, as you say, conversion and a lot of things that Brian talked about, in terms of perfecting price, making it easier to shop and find the right home for each guest is incredibly important. So perfecting the core service is there. And then the last piece, which we've also talked about is just finding the areas where we are underpenetrated relative to where the opportunity is. And I think that's the vast majority of countries around the world. And when we make sure to apply a product view, a marketing view, as supply view in a targeted way in each country, we're unlocking incremental growth. And that's what we've seen why Brazil has nearly doubled since 2019. So yes, it's supply, it's product, it's full funnel marketing, and it's doubling down in underpenetrated countries. Operator: Your next question comes from the line of Kevin Kopelman from TD Cowen. Your line is open. Kevin Kopelman: Thanks so much. I had a follow up on the margin question. Could you give any more color on your kind of initial thinking for the year on growing headcount and also how you're thinking about the marketing plan to support the growth initiatives that you talked about? Brian Chesky: Yes. In terms of headcount, we grew headcount last year about 1%. We're planning to grow at maybe slightly more than that. It could be kind of mid single digits, low to mid single-digit percent. As kind of Ellie mentioned, I think we will see depending on what our product development needs are, but it's not going to be above overall kind of revenue growth. And then in terms of marketing, margin, we're going to keep marketing costs as a percentage of revenue largely the same as what it was in 2023. In some ways, we probably could see additional leverage on marketing, but what we've seen is such great success with our brand marketing efforts in our core markets. We're actually expanding to 20 countries around the world. So that's already included in this. And then we'll see as there are other investments to support the newer business areas. But to the extent that there may be any incremental marketing, it's not going to be a materially larger percentage of revenue than it was last year. Operator: Your next question comes from the line of Lee Horowitz from Deutsche Bank. Your line is open. Lee Horowitz: Hi. Can you maybe spend some time talking through sort of the competitive dynamics and your expectations for the competitive set in the U.S. in 2024, particularly as some of your larger competitors look to lean into share gains. Are any of these investments aimed at holding share or any of this type of investments sort of aimed at defending share against a more competitive environment? Thanks so much. David Stephenson: Yes, we're going to continue to do what we're doing well, which is have unique supply that is outgrowing any of our competitors. And I think that by having that, we were able to drive kind of incremental nights and take share from both traditional hospitality and our competitors. I know competitors are trying to come in to North America and take - try to take additional share. It's not what we're seeing. We're not seeing success there. We're seeing that a lot of the competition is focused on professional host supply, which is undifferentiated and often cross listed. And I think the differentiated supply that we were able to bring on has been a material kind of net benefit to us. So that's where the strength we're seeing. Brian Chesky: And I'll just add that, we have a lot of competition for people choosing places to stay. Our main competition are hotels, first of all. And we're so much smaller than hotels. For everyone who stays at Airbnb, nine people stay in a hotel. So I think the bigger opportunities for us to take market share, because again, all you need is one of them to come to Airbnb and we've now doubled the size of our business. I think we are only scratching the surface. We grew in every region. We maintained or grew share in every region. As Dave said, we have - we are the brand in this category, a noun and a verb used all over the world. We are the only ones with a custom built platform. And we're going to continue to strengthen our advantages, including like Guest Favorites, the only one to offer that. The only one to offer custom built tools on the host side. So the best game we can play is to continue to focus on executing ruthlessly. And if we continue to do that, we're going to continue to take share. Operator: Your next question comes from the line of Jed Kelly from Oppenheimer. Your line is open. Jed Kelly: Hey, great. Thanks for taking my question. Just a couple - just one. Can you talk about how we think - we should think about demand and supply starting to converge? I know you've had great supply growth up 18%. Should we start to see room nights catch up to that demand? And then can you just give us an update on the how for the U.S. short-term rental market, how you're thinking about that going into this year after what was the softness in a lot of those core vacation rental destinations last year? Thanks. Brian Chesky: Yes. So why don't I just start, Jed, I'm talking about supply growth, and I'll let Dave answer the rest. I believe in the long run that supply growth is a long-term indication of growth in Airbnb. And it's been healthy since we started the company, but you'll know that during the pandemic, one of the biggest questions I got asked when supply growth stops is how we're going to restart supply growth. The great thing about our supply growth is that most of it comes organic to us. In fact, 36% of our new hosts are prior guests. That's the highest that number it's ever been. And the reason people host is because their friends typically tell them about it. The last year - actually, the year before, we actually began and we really put the throttle on it last year, a new strategic priority to mainstream hosting. And we did a few things. We really focused on making hosting easy to get started and increasing awareness. Now one of the reasons that we're so excited about the growth being 18%, and we hope it grows even faster is, as you know, the more supply you have, the more pricing pressure you relieve on the inventory. So when you're supply constrained, what you typically see is prices go up and prices go up, nice growth is typically diminished. So we believe that, again, the total addressable market for Airbnb space is every single person with very few exceptions who stay in a hotel. If we can get the right supply at the right price, then we believe we can capture that demand and build a company significantly larger. Additionally, by having a surplus of supply, we think that that will allow us to have even tighter quality control. So to answer your question, we do think that the healthy supply growth of 18% could be a great leading indicator down the road of where demand could be, and we'd love your supply to grow even faster. David Stephenson: Yes. I think what's also interesting is, if you actually back up and look out over multiple years, you go back 4 years or so and look at the total amount of supply growth versus the total amount of nights growth, it's actually fairly consistent. So there are times that supply leads demand and times that demand leads supply. But I think as Brian mentioned, over time, those things equalize out and the greater supply definitely helps our overall performance. I'd say in terms of U.S. very specifically, a couple of things. We're just - we're seeing overall very stable growth in the U.S. We're seeing strong inbound cross-border growth in nights. And I think unlike others that we're seeing in the U.S., we've seen very healthy growth in the non-urban markets, right? Urban markets have been traditionally our areas of strength, not only grew substantially kind of during COVID and coming out of COVID, we've continued to hold really great share and growth in the non-urban areas, and now urban is coming back stronger, and that has been our additional area of strength. Maybe a last area is our long-term stays. So 19% of our stays were 28 days or longer in the last quarter. So it was even up a little bit from 18% prior to that. I think there's been a lot of critique of, well, long-term stays, that's a post-COVID benefit that's going to go away. Well, it's still materially bigger than it was back in 2019 when it was closer to 13%, 14% of our nights growth. So we're seeing really great strength there. So that's what we're seeing in North America. Operator: Your next question comes from the line of Timothy Shubsda from JMP Securities. Your line is open. Nick Jones: Hi. This is Nick Jones on. You talk a lot about focus on international expansion and then kind of underpenetrated in many of these markets, you're rolling this playbook out, I think it was Switzerland, Belgium, Netherlands. Is this kind of the cadence we should expect the playbook to kind of continue to expand into additional countries, it's kind of 3 or 4 at a time? And I guess how are you balancing rolling this playbook out to more countries - to more countries with kind of these new initiatives that we're looking forward to hearing from later in 2024? Brian Chesky: Yes. I think that's what you'll continue to see is that we're being very judicious about putting small teams on the ground in each of these locales, making sure that we have the full funnel marketing approach working well, establishing what product adjustments might be unique to a specific location that's helpful. And then we're going to - we're working down our list. What's the largest opportunity, what do we have the capabilities for and how do we kind of do it. None of these are perishable things. We're just kind of working our way down kind of a prioritized list of our capabilities. And then this sets us up well as we expand beyond on the core to make sure that we have strong, established base of business to kind of build from. David Stephenson: And I'll just add that, I think that there's some massive opportunities in front of us, especially with Asia. We really did focus on Korea, but I think the point that should be made is if you look at our penetration, and say, U.S., Australia, Canada, France and to maybe a lesser extent, United Kingdom, they're significantly higher than other parts of the world. In fact, in the United States is more than an order magnitude higher penetration than Asia. There is no reason why we cannot get to today's U.S. penetration and the equivalent penetration in most of the major tourism markets around the world. And we think we're only scratching the service in our more mature market - more mature markets. So again, we are going to continue to add these countries one by one. But the other thing is we're just getting started in Korea. We're just getting started in Germany. We're just getting started in Brazil. Brazil is now double the size it was pre-pandemic, but it's going to double again. And so we're going to continue. We have multiple phases of this playbook and the first phase is playing out in Korea, Japan and Brazil. But we're going to go on to the next phase as we continue to add more countries. Operator: Your next question comes from the line of James Lee from Mizuho. Your line is open. James Lee: Great. Thanks for taking my questions. My question is about booking window. I think in 1Q last year, booking window was extended as consumer tried to lock in high prices for accommodation. And just curious what you are seeing this quarter so far. Are you seeing any differences booking window by region also? That would be helpful. Thank you. Brian Chesky: Yeah, booking window has been relatively stable. We've kind of come back to a little bit more normal booking windows over time. So there's actually not a lot to say on it. It's pretty consistent now globally as things are returning to a more normal state. Operator: Your next question comes from the line of Bernie McTernan from Needham & Company. Your line is open. Bernie McTernan: Great. Thanks for taking questions. Brian, just on cross vertical when you're talking about the new product initiatives, were you meaning more of like a full OTA and thinking about cross vertical within travel? Or was this more thinking about Amazon AWS, you know, moving beyond retail to all industries? And then bringing in more first time bookers to the platform, any specific drivers there? Is that just international or anything else we should be aware of? Thank you. Brian Chesky: Yeah. Hey, Bernie, I think that Airbnb can go far beyond travel in the coming years, but I think we're going to start with our core. So I think what we're going to do is start with travel and then down the road we can move beyond travel. So you should start by seeing us do the things that are the most logical extensions of what we already provide, and then we will move further and further out from our core as the things we launch are successful. And then what was the second part of the question? David Stephenson: So it's about first time bookers and what we're seeing the growth of first time bookers. I'll start, Brian. You can round it out if I miss anything. But a key part is the reliability. Making sure that they feel like we have - that the services can be reliable. So things like air cover has been an area that we've been promoting to get people comfortable on booking Airbnb. Doing things like reducing cancellations has been great. The work that we've done to make sure that prices are moderating and then just general awareness, making sure that they're aware of it, which is the full funnel marketing approach we do to a lot of these international countries. We're seeing strong strength in mobile downloads, as we highlight at the top of the call, and just overall strong organic trends across the business. Brian Chesky: Yeah, I mean, I'll just highlight a few things in addition to what Dave said. First of all, our traffic and our top of funnel results are really good. And one of the reasons why is, we've, number one, we're having a really successful advertising campaign. As you know, we have a very different approach to marketing than our competitors. We're not really typically trying to buy customers through foreign [ph] marketing. We generally, as Dave mentioned, have a full funnel approach and we think of advertising more as education than sales. And one of the things we noticed was that we want to educate people about how there are some trips that are really just always better in Airbnb. If you're staying with - if you're traveling your family, if you're traveling your groups, be able to share a house and have your own bedroom and save money, rather than getting separate hotel rooms or crammed in one hotel room, makes complete logical sense. And so we have this campaign running, it's called Get an Airbnb, it's the most successful digital advertising campaign we've ever done, and it's now running on television. We also are tapping into the biggest moments of pop culture. Last year, for example, the Barbie movie came out, and we partnered with Mattel to turn a mansion and Malibu into Malibu Barbie DreamHouse. That became a phenomenon on social media, and it got more press, more articles than our IPO. In fact, three times as many articles were written about the Barbie Malibu DreamHouse as Airbnb's IPO, just to give you a sense. So we have a lot of traffic coming to Airbnb. We're going to continue to hopefully stay relevant within culture. And if we can then convert that traffic, as Dave said, through product optimization, reliability efforts, improve customer service, then I think there's a lot of opportunities. And again, we have an entire road map where you can imagine hundreds of basis points of conversion of a nice growth increase through some of these efforts. So we've got a pretty big arsenal of levers. Operator: Your next question comes from the line of John Cantone from Jefferies. Your line is open. John Cantone: Great. Thanks for taking my question. Just looking across your regions, EMEA is where you've sort of seen the biggest moderation, incremental Nights and Experiences this year. I know there's some big travel markets where you're still underpenetrated like Germany and now Switzerland, Belgium and the Netherlands. Maybe you could talk to why consumer adoption has lagged in some European markets versus others? And any key areas of investments you still need to make to help drive adoption rates higher in that market? Thanks. Brian Chesky: Yes. We continue to see strength in our growth in our more established markets, North America and Europe. But we're actually seeing still stronger growth relatively in Latin America and Asia. And so any kind of moderation is still just coming off of high overall growth. I mean I'd say APAC we're really encouraged to see China outbound, gathering kind of additional momentum that we expect by the end of the year, China outbound travel should be above 2019 levels. So I'd say that we continue to see great strength and this international expansion playbook that we have, I think it's going to continue to be a tailwind for growth, especially in Latin America and Asia for the rest of this year. Operator: Your next question comes from the line of Ken Gawrelski from Wells Fargo. Your line is open. Ken Gawrelski: Thank you very much. And I'm sure you'll tell us more later this year, but could you talk about how you think about either the build by our partner strategy with respect to expanding beyond the core? Brian Chesky: Yes, absolutely. So I think one of the great things about Airbnb is that most of our innovation in most of our business is developed organically. And that just becomes from our DNA. Like Airbnb was started by three product and then just product, people and engineers, two designers an engineer. And we created Joni [ph] and I created this company from nothing with really no capital whatsoever to speak of. So I think build and the organic growth is in our DNA, and it's always going to be our predisposition. That being said, with the scale that we have, the scale we have, having nearly 2 billion guest arrivals and more than $70 billion GBV, that is a huge asset to be able to partner. And a number of brands have reached out to us telling us they want to partner Airbnb not just because of the traffic we have, but also because of the strength of our brand. So we think that there's a myriad of opportunities of partnerships. Now on in the buy [ph] we're going to be -- we're going to have a very high bar for ROI for acquisitions. We've done a number of acquisitions in the past. Some have been very successful. And with our free cash flow, we have generated $3.8 billion of free cash flow. We absolutely have the cash and obviously, the currency of our stock to make acquisitions, but we're going to be very, very thoughtful and there's always going to be build, then partner then buy probably in that order of prioritization. Operator: Your next question comes from the line of Mark Mahaney from Evercore ISI. Your line is open. Mark Mahaney: Let me try two questions. There's some discussion in your shareholder letter about take rates. Just take rates have been relatively consistent in the last couple of years. Is there any reason to think that, that pattern won't change going forward or will change going forward? Is there a reason why take rates would actually go up? And then secondly, Brian, you talked about the ability to really expand in Asia. And I don't know - and I understand the momentum that you've got in Korea. Asia, it seems like it's generally been a tough market for a lot of Internet companies that tried to expand there, and there's - China seems to be relatively off-limit. So just talk through a little bit more about why you see grounds for optimism in that region. And I know there's a lot more to Asia than just China, but I wanted to ask that question. Thank you. Brian Chesky: Mark, yes, why don't I - when we do, I'll do Asia and then Dave will take, take rate. So I mean no doubt that Internet companies have struggled in Asia. I think in particular, they struggled in China, and we do not have an inbound business, the domestic business in China any longer. Although obviously, there's a lot of stories of companies doing well in other countries in Asia. So let me just talk about why I think Airbnb is unique. The reason why, as you know, is that we're a global travel network. And so 44% of our nights booked were cross-border. And if you're in Japan and you want to stay in Germany and you don't want to stay in a hotel, then where are you going to go? You're going to want to go to a global platform, probably not a Japanese platform. And the reason is you're going to Germany from Japan, and you're not going to use a Japanese platform because the Japanese platform would have to get German homes on that platform, and that is probably not going to happen. And so we think this is a global market. There's a global network, not a regional network. And one of the things we've noticed is that Airbnb seems to work about as well in every single country that we've entered. Now there's a big question about Latin America, for example. We were massively underpenetrated. And there was a question, well, this is an emerging market, will Latin America work well? And then, of course, Brazil, Ecuador, Peru have grown very, very quickly. And we - and also I just say the success of Korea has been phenomenal. And the other thing is that the population in Asia is generally younger than the population in Europe and North America. And the other thing we know is that young people tend to gravitate more to Airbnb than older cohorts. So I just think the amount of people that are mobile applications that are young, where Airbnb [ph] they're not predisposed to book a hotel, the strength of network effects and the fact that there's going to be really strong cross-border travel in Airbnb is a cross-border network are all the reasons why I think Asia will be no different than any other region in Airbnb. It might just take a little bit more time. Dave? David Stephenson: And then, Mark, in terms of take rates, no, there should be consistent. There's no real reason why they should be going up on kind of a time-adjusted basis. We have not materially changed our pricing as a percentage of GBV when you adjust for the timing. So we are testing a cross-currency themes, as we mentioned earlier in the call, but you shouldn't count that as a major expansion of fees this year. In Q1, the implied take rate revenue over gross booking value is going to be higher, but that again, that's largely due to timing, right, a little more revenue coming in Q1 largely due to the Easter timing. So now longer term, I am excited about the opportunity for revenue driving with our experiences and services and that ability to drive incremental revenue and incremental margin. So over a longer period of time, I think our margin expansion will absolutely come from hosting guest services and experiences. But here in the short term, there's no real change on time-adjusted basis towards these. Operator: [Operator Instructions] Your next question comes from the line of Alex Brignall from Redburn Atlantic. Your line is open. Alex Brignall: Good evening. Thank you very much for taking the question. First one would just be on the Q1 guide. Just trying to understand what you're implying on the take rate expansion because there's obviously one comment which is Easter timing, which is 1% to 2% of revenue, but it seems like the comment of notably higher take rates would be more than just 1% to 2% extra on the revenue. So if you could just piece that out and then obviously, it feeds back into the room nights. And the second one, just in terms of a little bit more detail on the cross currency. It sounds like what you're saying is that it now is another lever that you have, which is fantastic, but it's something that you're going to test with. Is there an amount of friction that you expect when you add it, do people have the chance to not pay the fee, where will it be displayed to consumers? And your last comment, Dave, on the take rate not expanding, but presumably, that means that in terms of its contribution to take rate, it's going to be relatively immaterial? Thank you so much. David Stephenson: Yes. So the two areas. The reason why we say the particular expansion in Q1 is because there's a double hit. You have the increased revenue in Q1 due to the timing and you have decreased gross booking value that shifts from Q1 to Q2. So both increased revenue and decreased gross booking values in the period by some amount, say, 100 to 200 basis points, and then you get that greater expansion of fees, revenue over gross booking values. So that's why we give the guidance that way. Yes, in terms of cross country - cross currency, we're going to be tough here. We'll be launching in April. We need to understand what the impact is to demand overall. I mean, if you step back to it, it's actually a unique capability that the vast majority of other platforms either don't have or they charge a substantial premium for. So we've been largely giving away this benefit for no incremental costs, and we were just monitoring and have the capability of adjusting that fee if we so choose, and we will - but we'll be mindful about it to make sure that we're thoughtful in terms of the impact on overall demand. Operator: We have reached the end of our question-and-answer session. I will now turn the call back over to Mr. Brian Chesky for some closing remarks. Brian Chesky: All right. Well, thanks, everyone, for joining us today. Just to recap, revenue was another incredibly strong quarter. Revenue was $2.2 billion, 70% higher. Adjusted net income and adjusted EBITDA were both to Q4 records and our trailing 12-month free cash flow of $2.8 billion. And this, of course, represents a free cash flow margin at 39%. I'm really proud of what we've been able to accomplish this past year, and there's more to come. 2024 marks the beginning of a new chapter for Airbnb, and I look forward to sharing more throughout the year. Thank you all very much. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.+	[ { "speaker": "Operator", "text": "Good afternoon, and thank you for joining Airbnb's Earnings Conference Call for the Fourth Quarter of 2023. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Angela Yang, Director of Investor Relations. Please go ahead." }, { "speaker": "Angela Yang", "text": "Good afternoon, and welcome to Airbnb's fourth quarter of 2023 earnings call. Thank you for joining us today. On the call today, we have Airbnb Co-Founder and CEO, Brian Chesky and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our fourth quarter of 2023. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We provide a reconciliation to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I will pass the call to Brian." }, { "speaker": "Brian Chesky", "text": "All right. Thank you, and good afternoon, everyone. Thanks for joining. I am excited to share our results with you. We wrapped 2023 with another strong quarter. We had 99 million Nights and Experiences Booked in Q4, marking our highest fourth quarter ever. Revenue of $2.2 billion grew 70% year-over-year. Net loss was $249 million. But when excluding nonrecurring tax items, adjusted net income was $489 million, representing an adjusted net income margin of 22%. For the full year, our free cash flow was $3.8 billion, our highest ever. Because of our strong cash flow and balance sheet, we repurchased $2.25 billion of our shares during 2023. And I'm excited to announce that today, our Board of Directors approved a new share repurchase authorization of up to $6 billion of our Class A common stock. Our strong results in 2023 were driven by our focus on 3 strategic priorities, making hosting mainstream, perfecting our first service and expanding beyond the core. First, we're making hosting mainstream. We've been focused on making hosting just as popular as traveling in Airbnb. Our results show that our approach is working. In Q4, our host community grew to 5 million hosts around the globe. Active listings exceeded $7.7 million by the end of 2023, increasing 18% year-over-year. And we also saw sustained double-digit supply growth across all regions. All in all, in 2023, host earned more than $57 billion. This year, we are going to continue to raise awareness from hosting and improve the overall host experience. Second, we're perfecting our core service. Over the past 3 years, we've launched more than 430 new features and upgrades to our core service. We've made significant improvements to make Airbnb a more affordable and reliable option, and we are already seeing a positive impact. For example, post cancellations have decreased by 36% in Q4 of 2023, and this is compared to the same period a year ago. And now two thirds of our host offer a weekly or monthly discount. We will never stop perfecting our core service. In the year ahead, we'll remain focused on improving the quality and reliability of stays. Finally, we are expanding beyond the core. Airbnb is at an inflection point. We spent the last 3 years perfecting our core service, and we are now ready to embark on our next chapter. We're focused on unlocking more growth opportunities by investing in underpenetrated international markets, and we're seeing some great results. Following the success that we've seen in recent quarters in Germany, Brazil and Korea, we're now rolling out our playbook in other countries, including Switzerland, Belgium and Netherlands. But this is only one piece of a much bigger strategy because we've always believed that Airbnb was destined to offer more than just a place to stay. And now is the time for us to expand beyond our core business and reinvent Airbnb. And there are a few reasons why. I mean, first, we want people to love our core service before offering them something new. And with hundreds of improvements we made over the past 3 years, the Airbnb service is now better than it's ever been. Second, we've been able to attract some of the best talent in the world, and we now have the capabilities to do so much more. And third, there is a new platform shift with AI, and it will allow us to do things we never could have imagined. While we've been using AI across our service for years, we believe we can become a leader in developing some of the most innovative and personalized AI interfaces in the world. In November, we accelerated our efforts with the acquisition of GamePlanner.AI, a stealth AI company led by the Co-Founder and original developer of Siri. With these critical pieces in place, we're now ready to expand beyond our core business. Now this will be a multiyear journey, and we will share more with you towards the end of this year. Now looking back on Q4, we also saw a number of very positive business highlights. First, we surpassed 5 million hosts in the platform and saw meaningful supply growth across all regions. We added nearly 1.2 million listings in 2023, ending the year with over 7.7 million active listings. Q4 supply growth grew 18% year-over-year. Now this is a real highlight. And we saw the highest growth in regions with the highest demand. So obviously, there's a real strong network effect happening here. We also continue to see relatively similar supply growth among individual and professional hosts with the majority of these listings exclusive to Airbnb. Now second, we continue to see strong demand on Airbnb. Now this is especially true amongst first-time bookers, which is particularly encouraging. Nights and Experiences Booked grew 12% compared to a year ago and following some volatile in October, Nights Booked actually accelerated throughout the remainder of the quarter, and Q4 also marked the highest quarterly growth rate of the year for first-time bookers. And additionally, we also gained momentum in app downloads and app bookings. 55% of gross Nights Booked were on our app. This is up from 50% a year ago. And finally, we're driving affordability for guests. Throughout 2023, we introduced several features to make Airbnb every more affordable from new pricing tools for hosts to increased pricing transparency for guests. Since launching these features, we've seen 1.4 million hosts use similar listings, which lets host compare to price or listing to others in the area. Nearly 300,000 listings have removed or lowered their cleaning fee. And by year-end, nearly 40% of our active listings didn't charge a cleaning fee at all. So our work around affordability is paying off. In December, the average nightly price of a 1-bedroom listing on Airbnb was $114 [ph] a night. This is down 2% from the same period last year, while hotel prices rose 7% to $149 over the same period. Now before I turn to Q&A, I want to share the latest on two executive updates we announced at the end of last year. To start, Dave Stephenson is now Airbnb's first Chief Business Officer. Over the past 5 years, Dave has done an incredible job as CFO, and our business is stronger than ever. One of the qualities that is so remarkable about Dave is that he's not just a world-class finance leader. He's also a world class operator. And whenever I need someone to quickly drive a complicated series of operations together to clear outcome that doesn't compromise our values, I turn to Dave. As we expand beyond our core, it will be paramount to have an executive dedicated to our long-term growth plans, and there is nobody better than Dave to do this. Dave will continue to drive growth across existing and new businesses, and this includes driving international expansion, growing global host supply and leading all business and corporate development activities at Airbnb. Now as Dave takes on this position, I am thrilled that Ellie Mertz will be our CFO. You see Ellie has been my right hand for 11 years, and many of you already know here and are well aware of impressive track record at Airbnb. She led our IPO during one of the most pivotal moments in our company's history. And for the past several years, Ellie has overseen Strategic Finance and Analysis, Corporate Development and Investor Relations. And under her leadership, our company grew from adolescent to adulthood with revenue growing over 100x. I am thrilled that she's stepping into this role. Dave has already started as Chief Business Officer; and Ellie will officially transition to CFO on March 1. So next call, you will hear from Ellie. Before we go to questions, I'd just love to hand over to David to share a few thoughts. Dave?" }, { "speaker": "David Stephenson", "text": "Thanks, Brian. I'm really excited about my new role as Chief Business Officer. In this role, I'm focused on driving Airbnb's growth by concentrating in three specific areas. First, continuing to grow our high-quality supply of stays and experiences around the world; second, leading our global expansion efforts in underpenetrated countries; and third, developing and launching new businesses as we expand beyond the core. As Brian has said, this is a transformational year for Airbnb. I look forward to Ellie becoming our CFO next month. I couldn't think of a better person to lead us into the next phase of growth. And so with that, let's open up the call for Q&A." }, { "speaker": "Operator", "text": "[Operator Instructions] Your first question comes from the line of Ron Josey from Citi. Your line is open." }, { "speaker": "Ron Josey", "text": "Great. Thanks for taking the question, Dave. Congrats on the role and Ellie to you as well. Brian, I wanted to ask a little bit more on just expanding beyond the core. I think you said now is the time to do it and stay tuned towards the end of the year. But then you also talked about being a leader in personalized AI. Can you just give us a little more insight on how you're thinking about AI given the acquisition of GamePlanner? And then as we think about these newer underpenetrated markets, Switzerland, Belgium, Netherlands, talk to us about just lessons learned from, call it, Germany, Korea, Brazil that you can apply to these newer markets? Thank you." }, { "speaker": "David Stephenson", "text": "Yes, absolutely, Ron. Thanks for asking the question. So let me start with AI. So I think to talk about AI, it would be good to zoom out, just lay out the landscape. One way to think about AI is let's use a real-world metaphor. I mentioned we're building a city. And in that city, we have infrastructure like roads and bridges. And then on top of those roads to bridges, we have applications like cars. So Airbnb is not an infrastructure company. Infrastructure would be a large language model or obviously, GPUs. So we're not going to be investing in infrastructure. So we're not going to be building a large language model. We'll be relying on, obviously, open AI. Google makes a great model, meta great models. So those are really infrastructure. They're really developing infrastructure. But where we can excel is on the application layer. And I believe that we can build one of the leading and most innovative AI interfaces ever created. And maybe one way to make this real is if you were to open, say, ChatGPT or Google, though the models are very powerful, the interface is really not an AI interface. It's the same interface as the 2000s in the sense or 2010s. It's a typical classical web interface. So we feel like the models in a sense, are probably underutilized. Here's another way of saying it. Take your phone and look all the icons on your phone. Most of those apps have not fundamentally changed since the advent of generative AI. So what I think AI represents is the ultimate platform shift. We had the Internet. We had mobile, Airbnb really rose during the rise of mobile. And the thing about a platform shift, as you know, there is also a shift in power. It's a shift to behavior. And so I think this is a zero, zero ballgame, where Airbnb, we have a platform that was built for one vertical, short-term space. And I think with AI, generative AI and developing a leading AI interface to provide experience that's so much more personalized than anything you've ever seen before. Imagine an app that you feel like knows you. It's like the ultimate concierge, an interface that is adaptive and evolving and changing in real time, unlike no interface you've ever seen before. That would allow us to go from a single vertical company to a cross-vertical company because one of the things that we've noticed is the largest tech companies aren't a single vertical. And we studied Amazon in the late '90s, early 2000s when they went from books to everything, or Apple when they launched the App Store. And these really large technology companies are horizontal platforms. And I think with AI and the work we're doing around AI interfaces, I think that's what you should expect us. We're not going to talk specifically on this call about the specific products and services we're going to be offering, but you will see some very big announcements later this year. And as you know, we did an acquisition of GamePlanner.AI. It was from the creator Siri. And that was just accelerating the efforts we are already endeavoring on." }, { "speaker": "Operator", "text": "Your next question..." }, { "speaker": "Ron Josey", "text": "And then..." }, { "speaker": "David Stephenson", "text": "Sorry..." }, { "speaker": "Ron Josey", "text": "My question was..." }, { "speaker": "Brian Chesky", "text": "Yeah, more on the underpenetrated markets. So is one of the few things. First, we just need to make sure that we have great supply and great supply in specific nights. So even the subtleties of local holidays and ensuring that we're there, that we have it at all price points. Different countries have different expectations on what the supply growth looks like. And then just make sure we have the right product. Things like we've done include installment payments in Brazil and Latin America, Naver Login in Korea. Just making sure that we're showing up locally in the ways that they're expecting. And then the third is just to make sure we have a full funnel marketing approach. In some of these countries, we're now big enough where we can have a small team do a very targeted social marketing, PR, communications, use influencers, search engine marketing, but build that on top of brand marketing to have that all work together in one full funnel approach. Approximately 90% of our traffic remains direct or unpaid because the majority of Airbnb stays are unique to us. And that continues to drive the flywheel. But having this full funnel approach is very effective when we implement it on the ground in these countries." }, { "speaker": "Operator", "text": "Your next question comes from the line of Eric Sheridan from Goldman Sachs. Your line is open." }, { "speaker": "Eric Sheridan", "text": "Thanks so much for taking the question. I was curious how the building blocks of sort of the way you're thinking about the macro environment and the idiosyncratic growth the company sort of is looking at for Q1, driven by elements of both supply and demand? And what do you see as sort of the exit dynamics from 2023? Thanks so much." }, { "speaker": "Brian Chesky", "text": "So again, what we saw exiting 2023 was interesting, right? When we were on this call a quarter ago, we've seen some softness in demand in October. And then what we - and so we guided to that kind of expectation. And then what we saw is accelerating demand in November and December. And then as we come into - from that strength, 17% kind of revenue growth and 12% nights growth in the fourth quarter, we're seeing really stable demand coming at the start of the year. You have to actually rewind the tapes and remind yourself that we were just exiting kind of Omicron and there's a lot of pent up demand in January of last year, which makes for some harder comps in Q1, but against those harder comps, we continue to see strong demand for travel. I think that we continue to see a very robust demand for people staying on Airbnbs versus just necessarily kind of buying other things. So the experiences over things continues to be a big trend. And we're excited to see the growth that we're continuing to see in our established businesses in North America and Europe and even greater growth in Latin America and Asia Pacific. So as we do things, as I said on the last question about doubling down and making sure that we invest in these expansion countries where we're underpenetrated, I think that's going to continue to drive growth for us for the rest of the year." }, { "speaker": "Operator", "text": "Your next question comes from the line of Justin Patterson from KeyBanc. Your line is open." }, { "speaker": "Justin Patterson", "text": "Hi. Thank you very much. There's been a lot of investor interest around the cross-currency fee. How should we think about that phasing in over the course of the year and the potential financial impact from that? And then further, could you talk about just why you viewed now is the right time to pull that lever? So maybe this is a sign that you'll take pricing actions where there's a value disconnect more regularly than in the past? Thanks." }, { "speaker": "Brian Chesky", "text": "Yes. To be clear, when we announced this recently, we updated our terms of service. And what it did is it gives us the ability to implement across currency fee. So we needed to update the terms of service just to allow us to do it. Now the fee only applies when the currency of the guest uses to pay differs from the currency that the host set for their listening. So we don't anticipate this fee to affect the majority of our guests because the cross currency transactions are only approximately 20% of our gross booking value. It's different than our cross-border, which is closer to 40%. And we anticipate the majority of the fee changes to be closer to 1%. So we're going to test and evaluate and just see what the results are, and that testing will begin in April. Why now? There's just a point where we understand that the size and complexity of our business ensures that we should be making sure we're providing great value to our guests and our host. We do things like last year, we had a change to our long-term stay fees for beyond 3 months. That was an opportunity where we saw that maybe the fees were too high relative to the benefit we're giving. I think there's just a fundamental principle where we want to make sure that we're giving more value to our guests and our hosts than we take in our take rate over time, and we're going to continue to be more nuanced in how we make those choices going forward." }, { "speaker": "Operator", "text": "Our next question comes from the line of Brian Nowak from Morgan Stanley. Your line is open." }, { "speaker": "Brian Nowak", "text": "Great. Thanks for taking my questions. I have two. One big picture and one sort of accounting. So big picture one, you guys have made a lot of interesting changes to the U.S. around I'm flexible [ph] and new tools for host, et cetera. Brian, can you just sort of talk to us about areas of progress you've made on improving conversion or getting host to lower prices in the U.S.? And sort of what are the existing hurdles you have to overcome to kind of get power host and host to kind of lower prices more in the U.S.? And the second one, on Dave or Ellie. There's a lot of moving pieces around this 1Q guide. If we're sort of thinking through gross bookings versus revenue, and we're getting to room night growth in sort of the mid to high to single digits, is that right? Or are there sort of other moving pieces that we're missing around the room night growth calculation? Thanks." }, { "speaker": "Brian Chesky", "text": "Yes. Why don't I start, Brian? So you could think of probably like 3 really big buckets of work that are going to drive conversion of Airbnb. One is our work on affordability. The next is really product optimization. And the third is really quality and reliability. So let me talk about all 3, and I'll start with affordability. A couple of years ago, we noticed that there was quite a lot of, call it, a feedback we're getting from our guests that Airbnb was getting more expensive. And so last year, we really hunkered down and rolled out a suite of tools for guests and host to make Airbnb more affordable. Starting with total price display, where you now can turn on a toggle and see the total price upfront, including taxes and cleaning fees and services. Now this tool is really important because now we are pushing more demand to listings at better prices. We've also seen some really positive knock-on effects. For example, 300,000 listings have now reduced or eliminated their cleaning fee and 40% of listing go [ph] we don't even have a cleaning fee. The next thing we did is we encourage more hosting to provide discounts for weekly or monthly stays. As you know, 19% of our month - of our nights are monthly stays and more than 40% are weekly. Well, now two out of three hosts have a monthly or a weekly discount. So this has been a huge, huge improvement. And we also launched a product called Compare listings. One of the things we noticed is that hosts are more likely to have a competitive price if they see what other similar listings are charging in their neighborhood and then they can see whether they're getting booked or not. Well, since we rolled out that tool, 1.4 million hosts have turned the tool on, and this means they'll provide more competitive listing. The result of which, Brian, is that our prices year-over-year for one bedroom apartment globally are down 2% where hotels are up 7%. That's a 9% swing. The next is product optimization. Here's a simple way to think about it. We did $9.9 billion of revenue last year. So let's round that to $10 billion for really simple numbers. All we have to do is increase our nights booked by 100 basis points, and that's $100 million of revenue. And if we can increase $100 million of revenue, it'd be $100 million of very like high-margin revenue because we're converting presumably traffic we already have on the website. And so there's a number of things we're doing on product compensation to increase conversion rate. One of the big things, as you noticed, is I'm flexible, here's a simple way to think about it. We are never close to sold out in Airbnb. If we can just point demand where we have supply by getting people to be more flexible off their dates or a little more flexible off their radius or the location, that'd be massive. We also made some optimization to get more people to download our app. And now we are very typically a top 50 application in the United States and now 55% of our bookings are now on a native application. So those are some of things that non-profit [ph] product limitation. The last thing I'll talk about is reliability. We launched Guest Favorites. Guest Favorites, the reason we launched this is for every person who stays in a hotel, 9 people stay in an Airbnb - sorry, for every person who stays in Airbnb, 9 people stay in a hotel. What if we could get just one of those people who stays in a hotel to stay in an Airbnb? We would quite literally double the size of our business. So when you ask people book hotels, why they don't book Airbnbs, there's two reasons. One, well, it's habitual. They've always booked hotels. And the other is they are comforted by the reliability, the consistency of the hotel experience. And we asked, what if we had a product that was as consistent as a hotel from a quality standpoint, but had all the unique advantage of the Airbnb? It was more affordable, it was more unique with more character, and it was better equipped. And that's exactly what Guest Favorites are. They're 2 million of the best listings on Airbnb based on rating, review and reliability data on 500 million trips in Airbnb. Since we launched that product in November, we are seeing a shift in bookings towards Guest Favorites. That's of course good because number one, they get fewer customer service contacts, so customer service costs go down, they have this higher five star rating trips, so we have better repeat bookings. And we think this will attract people to Airbnb that never considered us before. So those are just some of the things we're doing. The last thing I'll say before I hand it over to Dave, is that, that's just what we did last year. We had 200 - about 200 upgrades last year, 430 in the last 3 years, but we are just getting started, and we're going to have significantly larger upgrades this year. Dave?" }, { "speaker": "David Stephenson", "text": "In terms of the Q1 guide on room nights growth, again, I think you have to remember that we have a hard comp versus Q1 of '23, where there was a lot of pent-up demand coming out of the holidays and we saw much stronger growth in early in the year, especially in January. I think the other thing that's unusual about Q1 this year is Easter moved from Q2 to Q1. So this actually helps our revenue by 100 to 200 basis points in Q1, but actually is a drag on nights because we actually get fewer nights booked in the period as people are actually doing the traveling on holiday. So it will shift some nights from Q1 to Q2. So revenue is a little bit helped Q2 to Q1 and bookings nights booked are slightly hurt Q1 to Q2 and then don't forget the hard comp. So this is why we have the language of moderating from 12% growth in Q4." }, { "speaker": "Operator", "text": "Your next question comes from the line of Doug Anmuth from JPMorgan. Your line is open." }, { "speaker": "Doug Anmuth", "text": "Thanks so much for taking the question, Ellie, can you just help us understand the commentary on EBITDA a little bit better for '24 or the incremental investments that could drag on the margins. Is that primarily about expanding beyond the core and tied to some of the new initiatives that Brian talked about that we'll learn about later this year? Or is that more around marketing or just something around kind of the existing business? Thanks." }, { "speaker": "Ellie Mertz", "text": "Thanks, Doug. I was actually going to start next quarter, but thanks for pointing it to me. So what you saw in the guidance language that we provided is that we are basically giving ourselves a floor in terms of the 4 year [ph] EBITDA margin guidance. As we said, we will hold or provide a minimum of 35%, which is slightly down from what we delivered in 2023. The intent here is really to ensure that we have flexibility over the course of the year to continue to invest in a variety of growth opportunities as they appear. So what might those be? So first, we have a pretty robust budget in terms of our international expansion, but there's certainly opportunities at the margin to continue to invest in newer markets. Second, there's always opportunities in terms of looking at our high ROI marketing channels and adding marginally at the top. Third, what we note, given the ambitions around our product development road map is that obviously often constrained by our resources there. And so we may look to add incremental product resources to increase the throughput of our overall product team. And then finally, obviously, we haven't said much with regard to what the platform extensions will look like in the back of the year, but we also want to give ourselves flexibility there to ensure that we're able to share something broadly and meaningful by the end of the year." }, { "speaker": "Operator", "text": "Your next question comes from the line of Justin Post from Bank of America. Your line is open." }, { "speaker": "Justin Post", "text": "Great, thank you. Just want to ask about room nights. We all know there's a tough comp in Q1, but - and that was partially due to the reopening. But we're kind of over COVID now. And just kind of thinking about where you are in the room night cycle going forward? And what are the key drivers for nights? Is it growing supply and just getting that conversion level better. The big picture just saying, it looks like a tough comp in Q1, but how do you think about the rest of the year and where nights can grow over the medium term? Thank you." }, { "speaker": "David Stephenson", "text": "Yes. Again, we are starting to see overall kind of demand normalize. I think you also look at our nights growth and the nights on Airbnb and to continue to see that we take share of overall accommodations globally versus kind of traditional accommodations and are either equaling or exceeding versus our key competition. So I think if you just look at room nights growth, we continue to see strength relative to traditional hospitality and our competition. And you're exactly right. The key focus is on supply. There's been a lot of critique around whether or not we have sufficient supply growth. I hope that we continue to show that strength with the 7.7 million active listings, they're growing 18% year-over-year. We saw incredible strength throughout the year, 5 million hosts. The vast majority of this listings being unique to Airbnb. And I think that, that uniqueness also gives us a lot of strength on, as you say, conversion and a lot of things that Brian talked about, in terms of perfecting price, making it easier to shop and find the right home for each guest is incredibly important. So perfecting the core service is there. And then the last piece, which we've also talked about is just finding the areas where we are underpenetrated relative to where the opportunity is. And I think that's the vast majority of countries around the world. And when we make sure to apply a product view, a marketing view, as supply view in a targeted way in each country, we're unlocking incremental growth. And that's what we've seen why Brazil has nearly doubled since 2019. So yes, it's supply, it's product, it's full funnel marketing, and it's doubling down in underpenetrated countries." }, { "speaker": "Operator", "text": "Your next question comes from the line of Kevin Kopelman from TD Cowen. Your line is open." }, { "speaker": "Kevin Kopelman", "text": "Thanks so much. I had a follow up on the margin question. Could you give any more color on your kind of initial thinking for the year on growing headcount and also how you're thinking about the marketing plan to support the growth initiatives that you talked about?" }, { "speaker": "Brian Chesky", "text": "Yes. In terms of headcount, we grew headcount last year about 1%. We're planning to grow at maybe slightly more than that. It could be kind of mid single digits, low to mid single-digit percent. As kind of Ellie mentioned, I think we will see depending on what our product development needs are, but it's not going to be above overall kind of revenue growth. And then in terms of marketing, margin, we're going to keep marketing costs as a percentage of revenue largely the same as what it was in 2023. In some ways, we probably could see additional leverage on marketing, but what we've seen is such great success with our brand marketing efforts in our core markets. We're actually expanding to 20 countries around the world. So that's already included in this. And then we'll see as there are other investments to support the newer business areas. But to the extent that there may be any incremental marketing, it's not going to be a materially larger percentage of revenue than it was last year." }, { "speaker": "Operator", "text": "Your next question comes from the line of Lee Horowitz from Deutsche Bank. Your line is open." }, { "speaker": "Lee Horowitz", "text": "Hi. Can you maybe spend some time talking through sort of the competitive dynamics and your expectations for the competitive set in the U.S. in 2024, particularly as some of your larger competitors look to lean into share gains. Are any of these investments aimed at holding share or any of this type of investments sort of aimed at defending share against a more competitive environment? Thanks so much." }, { "speaker": "David Stephenson", "text": "Yes, we're going to continue to do what we're doing well, which is have unique supply that is outgrowing any of our competitors. And I think that by having that, we were able to drive kind of incremental nights and take share from both traditional hospitality and our competitors. I know competitors are trying to come in to North America and take - try to take additional share. It's not what we're seeing. We're not seeing success there. We're seeing that a lot of the competition is focused on professional host supply, which is undifferentiated and often cross listed. And I think the differentiated supply that we were able to bring on has been a material kind of net benefit to us. So that's where the strength we're seeing." }, { "speaker": "Brian Chesky", "text": "And I'll just add that, we have a lot of competition for people choosing places to stay. Our main competition are hotels, first of all. And we're so much smaller than hotels. For everyone who stays at Airbnb, nine people stay in a hotel. So I think the bigger opportunities for us to take market share, because again, all you need is one of them to come to Airbnb and we've now doubled the size of our business. I think we are only scratching the surface. We grew in every region. We maintained or grew share in every region. As Dave said, we have - we are the brand in this category, a noun and a verb used all over the world. We are the only ones with a custom built platform. And we're going to continue to strengthen our advantages, including like Guest Favorites, the only one to offer that. The only one to offer custom built tools on the host side. So the best game we can play is to continue to focus on executing ruthlessly. And if we continue to do that, we're going to continue to take share." }, { "speaker": "Operator", "text": "Your next question comes from the line of Jed Kelly from Oppenheimer. Your line is open." }, { "speaker": "Jed Kelly", "text": "Hey, great. Thanks for taking my question. Just a couple - just one. Can you talk about how we think - we should think about demand and supply starting to converge? I know you've had great supply growth up 18%. Should we start to see room nights catch up to that demand? And then can you just give us an update on the how for the U.S. short-term rental market, how you're thinking about that going into this year after what was the softness in a lot of those core vacation rental destinations last year? Thanks." }, { "speaker": "Brian Chesky", "text": "Yes. So why don't I just start, Jed, I'm talking about supply growth, and I'll let Dave answer the rest. I believe in the long run that supply growth is a long-term indication of growth in Airbnb. And it's been healthy since we started the company, but you'll know that during the pandemic, one of the biggest questions I got asked when supply growth stops is how we're going to restart supply growth. The great thing about our supply growth is that most of it comes organic to us. In fact, 36% of our new hosts are prior guests. That's the highest that number it's ever been. And the reason people host is because their friends typically tell them about it. The last year - actually, the year before, we actually began and we really put the throttle on it last year, a new strategic priority to mainstream hosting. And we did a few things. We really focused on making hosting easy to get started and increasing awareness. Now one of the reasons that we're so excited about the growth being 18%, and we hope it grows even faster is, as you know, the more supply you have, the more pricing pressure you relieve on the inventory. So when you're supply constrained, what you typically see is prices go up and prices go up, nice growth is typically diminished. So we believe that, again, the total addressable market for Airbnb space is every single person with very few exceptions who stay in a hotel. If we can get the right supply at the right price, then we believe we can capture that demand and build a company significantly larger. Additionally, by having a surplus of supply, we think that that will allow us to have even tighter quality control. So to answer your question, we do think that the healthy supply growth of 18% could be a great leading indicator down the road of where demand could be, and we'd love your supply to grow even faster." }, { "speaker": "David Stephenson", "text": "Yes. I think what's also interesting is, if you actually back up and look out over multiple years, you go back 4 years or so and look at the total amount of supply growth versus the total amount of nights growth, it's actually fairly consistent. So there are times that supply leads demand and times that demand leads supply. But I think as Brian mentioned, over time, those things equalize out and the greater supply definitely helps our overall performance. I'd say in terms of U.S. very specifically, a couple of things. We're just - we're seeing overall very stable growth in the U.S. We're seeing strong inbound cross-border growth in nights. And I think unlike others that we're seeing in the U.S., we've seen very healthy growth in the non-urban markets, right? Urban markets have been traditionally our areas of strength, not only grew substantially kind of during COVID and coming out of COVID, we've continued to hold really great share and growth in the non-urban areas, and now urban is coming back stronger, and that has been our additional area of strength. Maybe a last area is our long-term stays. So 19% of our stays were 28 days or longer in the last quarter. So it was even up a little bit from 18% prior to that. I think there's been a lot of critique of, well, long-term stays, that's a post-COVID benefit that's going to go away. Well, it's still materially bigger than it was back in 2019 when it was closer to 13%, 14% of our nights growth. So we're seeing really great strength there. So that's what we're seeing in North America." }, { "speaker": "Operator", "text": "Your next question comes from the line of Timothy Shubsda from JMP Securities. Your line is open." }, { "speaker": "Nick Jones", "text": "Hi. This is Nick Jones on. You talk a lot about focus on international expansion and then kind of underpenetrated in many of these markets, you're rolling this playbook out, I think it was Switzerland, Belgium, Netherlands. Is this kind of the cadence we should expect the playbook to kind of continue to expand into additional countries, it's kind of 3 or 4 at a time? And I guess how are you balancing rolling this playbook out to more countries - to more countries with kind of these new initiatives that we're looking forward to hearing from later in 2024?" }, { "speaker": "Brian Chesky", "text": "Yes. I think that's what you'll continue to see is that we're being very judicious about putting small teams on the ground in each of these locales, making sure that we have the full funnel marketing approach working well, establishing what product adjustments might be unique to a specific location that's helpful. And then we're going to - we're working down our list. What's the largest opportunity, what do we have the capabilities for and how do we kind of do it. None of these are perishable things. We're just kind of working our way down kind of a prioritized list of our capabilities. And then this sets us up well as we expand beyond on the core to make sure that we have strong, established base of business to kind of build from." }, { "speaker": "David Stephenson", "text": "And I'll just add that, I think that there's some massive opportunities in front of us, especially with Asia. We really did focus on Korea, but I think the point that should be made is if you look at our penetration, and say, U.S., Australia, Canada, France and to maybe a lesser extent, United Kingdom, they're significantly higher than other parts of the world. In fact, in the United States is more than an order magnitude higher penetration than Asia. There is no reason why we cannot get to today's U.S. penetration and the equivalent penetration in most of the major tourism markets around the world. And we think we're only scratching the service in our more mature market - more mature markets. So again, we are going to continue to add these countries one by one. But the other thing is we're just getting started in Korea. We're just getting started in Germany. We're just getting started in Brazil. Brazil is now double the size it was pre-pandemic, but it's going to double again. And so we're going to continue. We have multiple phases of this playbook and the first phase is playing out in Korea, Japan and Brazil. But we're going to go on to the next phase as we continue to add more countries." }, { "speaker": "Operator", "text": "Your next question comes from the line of James Lee from Mizuho. Your line is open." }, { "speaker": "James Lee", "text": "Great. Thanks for taking my questions. My question is about booking window. I think in 1Q last year, booking window was extended as consumer tried to lock in high prices for accommodation. And just curious what you are seeing this quarter so far. Are you seeing any differences booking window by region also? That would be helpful. Thank you." }, { "speaker": "Brian Chesky", "text": "Yeah, booking window has been relatively stable. We've kind of come back to a little bit more normal booking windows over time. So there's actually not a lot to say on it. It's pretty consistent now globally as things are returning to a more normal state." }, { "speaker": "Operator", "text": "Your next question comes from the line of Bernie McTernan from Needham & Company. Your line is open." }, { "speaker": "Bernie McTernan", "text": "Great. Thanks for taking questions. Brian, just on cross vertical when you're talking about the new product initiatives, were you meaning more of like a full OTA and thinking about cross vertical within travel? Or was this more thinking about Amazon AWS, you know, moving beyond retail to all industries? And then bringing in more first time bookers to the platform, any specific drivers there? Is that just international or anything else we should be aware of? Thank you." }, { "speaker": "Brian Chesky", "text": "Yeah. Hey, Bernie, I think that Airbnb can go far beyond travel in the coming years, but I think we're going to start with our core. So I think what we're going to do is start with travel and then down the road we can move beyond travel. So you should start by seeing us do the things that are the most logical extensions of what we already provide, and then we will move further and further out from our core as the things we launch are successful. And then what was the second part of the question?" }, { "speaker": "David Stephenson", "text": "So it's about first time bookers and what we're seeing the growth of first time bookers. I'll start, Brian. You can round it out if I miss anything. But a key part is the reliability. Making sure that they feel like we have - that the services can be reliable. So things like air cover has been an area that we've been promoting to get people comfortable on booking Airbnb. Doing things like reducing cancellations has been great. The work that we've done to make sure that prices are moderating and then just general awareness, making sure that they're aware of it, which is the full funnel marketing approach we do to a lot of these international countries. We're seeing strong strength in mobile downloads, as we highlight at the top of the call, and just overall strong organic trends across the business." }, { "speaker": "Brian Chesky", "text": "Yeah, I mean, I'll just highlight a few things in addition to what Dave said. First of all, our traffic and our top of funnel results are really good. And one of the reasons why is, we've, number one, we're having a really successful advertising campaign. As you know, we have a very different approach to marketing than our competitors. We're not really typically trying to buy customers through foreign [ph] marketing. We generally, as Dave mentioned, have a full funnel approach and we think of advertising more as education than sales. And one of the things we noticed was that we want to educate people about how there are some trips that are really just always better in Airbnb. If you're staying with - if you're traveling your family, if you're traveling your groups, be able to share a house and have your own bedroom and save money, rather than getting separate hotel rooms or crammed in one hotel room, makes complete logical sense. And so we have this campaign running, it's called Get an Airbnb, it's the most successful digital advertising campaign we've ever done, and it's now running on television. We also are tapping into the biggest moments of pop culture. Last year, for example, the Barbie movie came out, and we partnered with Mattel to turn a mansion and Malibu into Malibu Barbie DreamHouse. That became a phenomenon on social media, and it got more press, more articles than our IPO. In fact, three times as many articles were written about the Barbie Malibu DreamHouse as Airbnb's IPO, just to give you a sense. So we have a lot of traffic coming to Airbnb. We're going to continue to hopefully stay relevant within culture. And if we can then convert that traffic, as Dave said, through product optimization, reliability efforts, improve customer service, then I think there's a lot of opportunities. And again, we have an entire road map where you can imagine hundreds of basis points of conversion of a nice growth increase through some of these efforts. So we've got a pretty big arsenal of levers." }, { "speaker": "Operator", "text": "Your next question comes from the line of John Cantone from Jefferies. Your line is open." }, { "speaker": "John Cantone", "text": "Great. Thanks for taking my question. Just looking across your regions, EMEA is where you've sort of seen the biggest moderation, incremental Nights and Experiences this year. I know there's some big travel markets where you're still underpenetrated like Germany and now Switzerland, Belgium and the Netherlands. Maybe you could talk to why consumer adoption has lagged in some European markets versus others? And any key areas of investments you still need to make to help drive adoption rates higher in that market? Thanks." }, { "speaker": "Brian Chesky", "text": "Yes. We continue to see strength in our growth in our more established markets, North America and Europe. But we're actually seeing still stronger growth relatively in Latin America and Asia. And so any kind of moderation is still just coming off of high overall growth. I mean I'd say APAC we're really encouraged to see China outbound, gathering kind of additional momentum that we expect by the end of the year, China outbound travel should be above 2019 levels. So I'd say that we continue to see great strength and this international expansion playbook that we have, I think it's going to continue to be a tailwind for growth, especially in Latin America and Asia for the rest of this year." }, { "speaker": "Operator", "text": "Your next question comes from the line of Ken Gawrelski from Wells Fargo. Your line is open." }, { "speaker": "Ken Gawrelski", "text": "Thank you very much. And I'm sure you'll tell us more later this year, but could you talk about how you think about either the build by our partner strategy with respect to expanding beyond the core?" }, { "speaker": "Brian Chesky", "text": "Yes, absolutely. So I think one of the great things about Airbnb is that most of our innovation in most of our business is developed organically. And that just becomes from our DNA. Like Airbnb was started by three product and then just product, people and engineers, two designers an engineer. And we created Joni [ph] and I created this company from nothing with really no capital whatsoever to speak of. So I think build and the organic growth is in our DNA, and it's always going to be our predisposition. That being said, with the scale that we have, the scale we have, having nearly 2 billion guest arrivals and more than $70 billion GBV, that is a huge asset to be able to partner. And a number of brands have reached out to us telling us they want to partner Airbnb not just because of the traffic we have, but also because of the strength of our brand. So we think that there's a myriad of opportunities of partnerships. Now on in the buy [ph] we're going to be -- we're going to have a very high bar for ROI for acquisitions. We've done a number of acquisitions in the past. Some have been very successful. And with our free cash flow, we have generated $3.8 billion of free cash flow. We absolutely have the cash and obviously, the currency of our stock to make acquisitions, but we're going to be very, very thoughtful and there's always going to be build, then partner then buy probably in that order of prioritization." }, { "speaker": "Operator", "text": "Your next question comes from the line of Mark Mahaney from Evercore ISI. Your line is open." }, { "speaker": "Mark Mahaney", "text": "Let me try two questions. There's some discussion in your shareholder letter about take rates. Just take rates have been relatively consistent in the last couple of years. Is there any reason to think that, that pattern won't change going forward or will change going forward? Is there a reason why take rates would actually go up? And then secondly, Brian, you talked about the ability to really expand in Asia. And I don't know - and I understand the momentum that you've got in Korea. Asia, it seems like it's generally been a tough market for a lot of Internet companies that tried to expand there, and there's - China seems to be relatively off-limit. So just talk through a little bit more about why you see grounds for optimism in that region. And I know there's a lot more to Asia than just China, but I wanted to ask that question. Thank you." }, { "speaker": "Brian Chesky", "text": "Mark, yes, why don't I - when we do, I'll do Asia and then Dave will take, take rate. So I mean no doubt that Internet companies have struggled in Asia. I think in particular, they struggled in China, and we do not have an inbound business, the domestic business in China any longer. Although obviously, there's a lot of stories of companies doing well in other countries in Asia. So let me just talk about why I think Airbnb is unique. The reason why, as you know, is that we're a global travel network. And so 44% of our nights booked were cross-border. And if you're in Japan and you want to stay in Germany and you don't want to stay in a hotel, then where are you going to go? You're going to want to go to a global platform, probably not a Japanese platform. And the reason is you're going to Germany from Japan, and you're not going to use a Japanese platform because the Japanese platform would have to get German homes on that platform, and that is probably not going to happen. And so we think this is a global market. There's a global network, not a regional network. And one of the things we've noticed is that Airbnb seems to work about as well in every single country that we've entered. Now there's a big question about Latin America, for example. We were massively underpenetrated. And there was a question, well, this is an emerging market, will Latin America work well? And then, of course, Brazil, Ecuador, Peru have grown very, very quickly. And we - and also I just say the success of Korea has been phenomenal. And the other thing is that the population in Asia is generally younger than the population in Europe and North America. And the other thing we know is that young people tend to gravitate more to Airbnb than older cohorts. So I just think the amount of people that are mobile applications that are young, where Airbnb [ph] they're not predisposed to book a hotel, the strength of network effects and the fact that there's going to be really strong cross-border travel in Airbnb is a cross-border network are all the reasons why I think Asia will be no different than any other region in Airbnb. It might just take a little bit more time. Dave?" }, { "speaker": "David Stephenson", "text": "And then, Mark, in terms of take rates, no, there should be consistent. There's no real reason why they should be going up on kind of a time-adjusted basis. We have not materially changed our pricing as a percentage of GBV when you adjust for the timing. So we are testing a cross-currency themes, as we mentioned earlier in the call, but you shouldn't count that as a major expansion of fees this year. In Q1, the implied take rate revenue over gross booking value is going to be higher, but that again, that's largely due to timing, right, a little more revenue coming in Q1 largely due to the Easter timing. So now longer term, I am excited about the opportunity for revenue driving with our experiences and services and that ability to drive incremental revenue and incremental margin. So over a longer period of time, I think our margin expansion will absolutely come from hosting guest services and experiences. But here in the short term, there's no real change on time-adjusted basis towards these." }, { "speaker": "Operator", "text": "[Operator Instructions] Your next question comes from the line of Alex Brignall from Redburn Atlantic. Your line is open." }, { "speaker": "Alex Brignall", "text": "Good evening. Thank you very much for taking the question. First one would just be on the Q1 guide. Just trying to understand what you're implying on the take rate expansion because there's obviously one comment which is Easter timing, which is 1% to 2% of revenue, but it seems like the comment of notably higher take rates would be more than just 1% to 2% extra on the revenue. So if you could just piece that out and then obviously, it feeds back into the room nights. And the second one, just in terms of a little bit more detail on the cross currency. It sounds like what you're saying is that it now is another lever that you have, which is fantastic, but it's something that you're going to test with. Is there an amount of friction that you expect when you add it, do people have the chance to not pay the fee, where will it be displayed to consumers? And your last comment, Dave, on the take rate not expanding, but presumably, that means that in terms of its contribution to take rate, it's going to be relatively immaterial? Thank you so much." }, { "speaker": "David Stephenson", "text": "Yes. So the two areas. The reason why we say the particular expansion in Q1 is because there's a double hit. You have the increased revenue in Q1 due to the timing and you have decreased gross booking value that shifts from Q1 to Q2. So both increased revenue and decreased gross booking values in the period by some amount, say, 100 to 200 basis points, and then you get that greater expansion of fees, revenue over gross booking values. So that's why we give the guidance that way. Yes, in terms of cross country - cross currency, we're going to be tough here. We'll be launching in April. We need to understand what the impact is to demand overall. I mean, if you step back to it, it's actually a unique capability that the vast majority of other platforms either don't have or they charge a substantial premium for. So we've been largely giving away this benefit for no incremental costs, and we were just monitoring and have the capability of adjusting that fee if we so choose, and we will - but we'll be mindful about it to make sure that we're thoughtful in terms of the impact on overall demand." }, { "speaker": "Operator", "text": "We have reached the end of our question-and-answer session. I will now turn the call back over to Mr. Brian Chesky for some closing remarks." }, { "speaker": "Brian Chesky", "text": "All right. Well, thanks, everyone, for joining us today. Just to recap, revenue was another incredibly strong quarter. Revenue was $2.2 billion, 70% higher. Adjusted net income and adjusted EBITDA were both to Q4 records and our trailing 12-month free cash flow of $2.8 billion. And this, of course, represents a free cash flow margin at 39%. I'm really proud of what we've been able to accomplish this past year, and there's more to come. 2024 marks the beginning of a new chapter for Airbnb, and I look forward to sharing more throughout the year. Thank you all very much." }, { "speaker": "Operator", "text": "This concludes today's conference call. Thank you for your participation. You may now disconnect.+" } ]	Airbnb, Inc.	115,705,393
ABNB	3	2,023	2023-11-01 16:30:00	Operator: Good afternoon and thank you for joining Airbnb's Earnings Conference Call for the Third Quarter of 2023. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Elli Mertz, VP of Finance. Please go ahead. Ellie Mertz: Thank you. Good afternoon and welcome to Airbnb's third quarter of 2023 earnings call. Thank you for joining us today. On the call today, we have Airbnb's Co-Founder and CEO, Brian Chesky and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our third quarter of 2023. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we'll be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also during this call, we will discuss some non-GAAP financial measures. We provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I'd like to pass the call to Brian. Brian Chesky: All right. Well, thank you, Eli and good afternoon, everyone. Thanks for joining. I'm excited to share results with you. Q3 was another strong quarter for Airbnb. We had over 113 million Nights and Experiences Booked. Revenue of $3.4 billion grew 18% year-over-year. Net income was $4.4 billion. Now this includes a onetime income tax benefit from the release of a valuation allowance of $2.8 billion. But even excluding this tax benefit, adjusted net income was $1.6 billion, our highest ever and represented an adjusted net income margin of 47%. And free cash flow for the quarter was $1.3 billion. In fact, on a trailing 12-month basis, our free cash flow was $4.2 billion which is also our highest ever. And because of our strong cash flow and balance sheet, we repurchased over $500 million of our stock. Now during the quarter, we saw a number of positive business highlights. First, we have added nearly 1 million active listings this year. Our supply grew 19% in Q3 compared to a year ago. We once again saw double-digit supply growth across all regions with the highest growth in regions with the highest demand. Urban and nonurban supply increased at nearly the same rate and we saw relatively similar supply growth among individual professional hosts with the majority of new listings exclusive to Airbnb. Second, Q3 was a record travel season on Airbnb. Nights and Experiences Booked grew 14% in Q3 compared to a year ago. We saw an acceleration of nights growth across all geographies and we are particularly encouraged by the growth of first-time bookers during Q3 and we saw more nights than ever booked in the Airbnb app with 53% of gross nights booked in the app compared to 48% in the same period last year. And finally, international expansion markets are gaining momentum. Cross-border nights book increased 17% in Q3 compared to a year ago. In Asia Pacific, our business has fully recovered to pre-pandemic level. And we're seeing significant growth in Asia Pacific markets such as Taiwan, Thailand and Indonesia, all experiencing year-over-year nights growth above 30% on an origin basis. Now we've been able to achieve these results by continually making progress on our 3 strategic priorities. First, we're making hosting mainstream. We've been focused on making hosting as popular as traveling and our Q3 results show that our approach is working. We ended the quarter with the highest number of active listing and we saw strong active listings growth across all regions of the market types. And hosts are benefiting. During Q3 alone, Airbnb host earned more than $19 billion. We'll continue growing supply by raising awareness around hosting, making it easier to get started and improving the overall experience for a host. Second, we're reflecting our core service. We've collected millions of pieces of feedback on how to improve Airbnb. And 2 years ago, we started doing twice a year of product releases to address this feedback. And since then, we've launched more than 350 new features and upgrades across our entire service. And in the past year alone, this has included things such as improved customer service, total price display and new tools to help host set more competitive prices. These upgrades are paying off for both guests and host. For example, we redesigned our tool and we made it easier for hosts to add discounts and promotions. And now almost 2/3 the host offer weekly or monthly discount. We also added a new feature called similar listings that let hosts see listing prices in the area, so they know what to charge. And since we launched the similar-listings tool, nearly 1 million hosts have used this feature. In mid-September, we shared progress we've made to help lower cleaning fees, reduce prices and improved search and reliability. We have even more improvements coming as part of our November 8 winter release next Wednesday where we'll introduce dozens of new features aimed at making Airbnb more reliable. And finally, our third strategic priority is expand Airbnb beyond their core. Now we made significant progress in the past few years in building a strong and profitable business. And in addition to laying the foundation for new services and offerings, we've been focused on international expansion. We are investing in underpenetrated international markets and we're seeing great results. Following the success, we've seen in recent quarters in Germany and Brazil, Korea has now become one of our fastest growing countries compared to 2019 with gross nights booked 54% higher than they were in Q3 2019 on origin basis. As international travel continues to recover, we're building greater momentum for Airbnb in underpenetrated markets. So those are results for Q3. With that, Dave and I look forward to answering your questions. Operator: [Operator Instructions] We'll take our first question from Mark Mahaney at Evercore ISI. Mark Mahaney: And I have 2 questions. You talked about some of these improvements you've seen in markets like Germany, Brazil and Korea. Could you just spend a little bit more time on that opportunity going forward? And is it the expectation now that Germany and Brazil are already optimized, you just keep optimizing other ones? Or is this take a while to add to monetize those? And then secondly, in terms of future services that you could offer to sellers, any update on when we could see those particularly things like sponsored listings for sellers for host, I mean. Brian Chesky: Yes. Mark, this is Brian. I'll take it. Let's first talk about international expansion. So it's a great question. And as everyone on this recall is probably aware, Airbnb is in 220 countries in the region. So on the one hand, we're one of the most global like companies in all of travel. We're a truly global travel network. At the same time, Mark, what we've seen is that our penetration in the United States is significantly higher than our penetration in many other countries. And we think there's a huge amount of growth if we could just get Airbnb to even a fraction of the percentage of penetration that we have in the United States. So last year, we decided to roll out this updated playbook. We rolled it out in Germany and Brazil. It's kind of a four-pronged approach and involve some product optimization, PR, local marketing and just general optimizations on the ground in these regions. And what we've seen is Brazil is now double the size as it was pre-pandemic. We rolled that same playbook out to Korea. It's now 54% higher than it was before. But what I would say is we've just scratched the surface of what we can do in Germany, Brazil and Korea. I think those markets are on a good trajectory. They could be significantly larger and we're now looking at Japan and India, China, around Asia Pacific. We have some optimizations in Southeast Asia, continual growth in Mexico. There's a number of other countries in addition to a number of areas in Europe where we think we can see a lot more growth. So I think the next 24 months, we're going to see a major acceleration in our penetration in a lot of these markets. There's about a dozen, dozen half markets around the world, as you know, have large tourism opportunities and we're really focused on that. And that's going to be one of our biggest near-term expansion opportunities. With regards to future services to sellers, we don't have anything to announce right now. But what we've been doing is we've been building the foundation of our systems so that we can have these new tools and services, including sponsor listings. And we also -- recently, we've been rolling out a pilot for co-hosting. Co-hosting is a service where we match host that don't have homes but they have extra time with homeowners to have space but they don't have time to host. And we've been doing these pilots in France. We've rolled that out in parts of the United States and this is turning into a popular service that we think can unlock a lot more supply. So we're going to -- over the next couple of years, I think you're going to see a number of new services roll out for host. Operator: We'll go next to Eric Sheridan at Goldman Sachs. Eric Sheridan: I just have one. Brian, in a number of interviews in the quarter, you talked about potential for product road map over the longer term, different products that could probably expand elements of the platform, car rentals, maybe even long-term apartment rentals. How do you think about product evolution that's being offered to the consumers on the platform and thinking about investing behind those initiatives? Brian Chesky: Eric, I mean, just to step back, the last few years, I think we've really, really benefited by being focused. When the pandemic occurred, we felt like we had to hunker down, get really lean, get really focused and we went from basically a breakeven company to now a company doing obviously cash flow margins of around 44% of revenue. So we've really benefited from this focus and really benefited from focusing on our core business. To your point, Eric, I think we are now getting ready to re-expand Airbnb beyond its core. It was always our attention to do much more than just short-term housing for travelers. We're always intended to do more of that. So we're working on making Airbnb more of an extensible platform. And I think, ultimately, there are actually quite literally dozens of services, guests and hosts that we could build on top of the Airbnb system. I think a lot of it comes down to making the platform extensible so we can offer these services. I think at the end of the day, we're really thinking about are a couple of big ideas. First, I think that we are thinking about generative AI as an opportunity to reimagine much of our product category and product catalog. So if you think about how you can sell a lot of different types of products and new offerings, generative AI could be really, really powerful. It can match you in a way you've never seen before. So imagine Airbnb being almost like the ultimate travel agent as an app. We think this can unlock opportunities that we've never seen. Additionally to that, there's a lot of opportunities on both the guests side and the host side. And so we're going to be thinking through a lot of this. So you'll see hopefully some updates in the coming years. Operator: We'll move to our next question from Brian Nowak at Morgan Stanley. Brian Nowak: I have two. First one, maybe on the guide a little bit. I know there's a lot of moving pieces between the revenue comments and the ADR comments and the take rate. Just sort of wanted to confirm, are you guys sort of looking to guide room night growth in sort of the high single, low double-digit range in 4Q? Is that the right way we should be thinking about with take rate and things? And then the second one, Brian, I know you, you have a lot of innovation, you have 350 features and upgrades, etcetera. Can you just sort of give us 1 or 2 of them that you think could be most impactful to accelerate that room night growth as we go into '24 and '25? Brian Chesky: And Brian, sorry, are you referring to things we've already shipped or things that we're working on that we haven't shipped? Brian Nowak: Well, either way you want to go. Yes, if you have one that already shipped that would be great. If you have other ones you want to tell us about next week, that would be good too. Brian Chesky: Yes. So yes, so let me -- why don't I answer the innovation and Dave, you can talk about the guide for going forward? So maybe let me talk about some things that we've already done. I can give you a little bit of sense of how we're thinking about next week and beyond. So we did over 50 upgrades last May. It was based on the idea that millions of customers have given us feedback, actually both guests and hosts on how to improve Airbnb and we've listened. And if I were to just call out 3 things, Brian, I would just call out 3 things would be total price display, pricing tools for host and monthly stays. So let me just go through 3 and what happened. On total price display, we rolled out total price display before taxes. This is based on popular demand. We are now the only travel app of our kind that actually does this. Since we rolled this out, 260,000 listings have removed or reduced their cleaning fees. We now have 3 million listings that do not have a cleaning fee. So we think this is working. We also think people are now being steered towards better total value on a total price, inclusive of overall cost basis. The second are pricing tools. Since we rolled out new pricing tools, about half of new listings are now offering a monthly discount. And we also have this new tool called similar listings, where you can see where other people are charging around you. And this we find has been the best way to make sure our host have competitive prices. Because host are usually surprised to discover the listings that get most bookings around them offer a better value. And it's always really hard to know what your home is worth and what you charge. And so the best thing you can do is give people transparent data. Well, 1 million people have used these tools and probably the thing I'd point to is, while this time year-over-year in September data, hotel prices are up 10%. Airbnb prices globally are only up 1%. So we are definitely moving in the right direction. Now in North America, on a mix shift in FX neutral basis, our price is actually down 3% in North America, while hotels are up towards double digits, I think. So the last thing I'd say is monthly stays. We obviously announced a bunch of updates on monthly stays, including you can pay by bank, we lowered fees after 3 months, we have the whole new really cool interface and stays for 3 months or longer are now growing nearly 20% year-over-year. So those are just 3 things we've seen. I think what we've learned is like as we listen to customers, we adapt quickly, we can drive incremental growth. As far as what's next, obviously, we don't talk about too much before it will release. I will say though, next Wednesday, we are focused on some pretty big opportunities around reliability. So this is the last thing I'll say about this. If you think about how big Airbnb is, for every person who stays in Airbnb, approximately 9 people every night stay in a hotel or about 9 bookings. The hotels are about to order magnitude bigger. And when you ask people, why do you book a hotel and not Airbnb, the number one reason they come up with is usually reliability that they know what they're going to get before they book. It kind of speaks to the strength and weakness of Airbnb that on the one hand, it's one of a kind, other hand, that one-of-a-kindness offers valuability that not every person wants. And so next week, we're going to have some new offerings that I think will make a pretty big in this. So that's what I can say. I think I'm pretty optimistic about what you'll see next week. And of course, we're already working on stuff for next May and next October releases as well. So hopefully, stay tuned. David Stephenson: And then in terms of the guidance, Brian, for the fourth quarter, we have our revenue guidance between $2.13 billion and $2.17 billion. So that's revenue growth between 12% and 14%. And remember that in Q3, our revenue growth, excluding the impact of foreign exchange is about 14%. So -- and we're not anticipating the same level of FX impact on the fourth quarter. So broadly, our revenue growth is relatively comparable between Q4 and Q3. In terms of the nights guide, we're just seeing some variability in our nights demand here early in the quarter and so we're just being cautious with that guide. And so we're not being specific on it but anticipate nights to be a few points below -- nights growth to be a few points below Q3. Operator: We'll move to our next question from Lee Horowitz at Deutsche Bank. Lee Horowitz: Can you maybe help us think about how you guys are tracking towards expectations on occupancy or utilization moving forward? As you guys extend beyond the core into newer markets, do those markets come with occupancy or utilization headwinds that we should be thinking about? And holistically, how you guys think about how occupancy or utilization may track next year? And then, maybe just one high level one. Sticking beyond the current cycle, we've seen a lot of other remote travel models, sort of hit this low teens to high single-digit growth rate and decelerate from there or not be able to reaccelerate their business as a meaningful like. Can you maybe take a step back and help us better understand how you think that maybe Airbnb may be a little bit different than prior ratios that we've seen and could perhaps sustain sort of that double-digit revenue cadence over a longer period of time than what we're used to in the market. Brian Chesky: Yes. Yes, you start with occupancy and I'll take the second question. David Stephenson: In terms of occupancy, we've actually seen it be pretty stable in terms of kind of on a global basis. I mean, if you actually step back, you got to remember that the vast majority of our hosts on Airbnb are individual houses. They're not looking to drive 100% occupancy of all their listings. And what they want to do is earn enough money to usually hit some certain amount of financial goals. So as we continue to grow our inventory, we're continuing to see strong occupancy levels overall. Clearly, we grew our inventory at 19% which is ahead of kind of revenue growth in the current period. But if you actually step back and look over like a 4-year period, go back all the way to 2019, the growth in our overall listings have actually been relatively similar to our overall growth in night. So that occupancy over an extended time period tends to be fairly stable while in any short-term time period, it can have a little bit more volatility. But overall, again, we don't focus on occupancy as a primary driver, we monitor it on local by local because what really matters is that we have great available listings in a specific market on a specific date. Brian Chesky: Lee, I'll take your second question. Yes, I think that -- as I said before, I think we're only scratching the surface to how this company becomes. And I absolutely think that we can get to really solid double-digit revenue growth for many, many years to come. And there's 3 things that I'd point out. The first is our core business. I think our core business could be significantly larger than it is today, even if we didn't do anything new. And the reason I believe this is the following: I believe that almost every single person who stays in a hotel could stay in Airbnb is, number one, they knew about all the benefits of Airbnb and number two, we made sure that our service was sufficiently reliable to be an alternative. So let me start with those 2. We've done recently a new marketing campaign that's called "Airbnb it". And it basically contrast the benefits of the Airbnb versus the hotel. And based on our research, one of the things we've noticed is that a lot of people stay in hotels don't understand some of the unique benefits of staying in Airbnb and why it is better for certain types of trips. And one type of trip that Airbnb is almost always better is when you're traveling with 3 or more people. If you're traveling with a family or traveling with a group, why do you want to stay in different rooms versus -- different room separated. We're having to stay at the same time. And then the only place you can meet in these crowded lobbies when you can get a whole home all to yourself. So this is -- we've been running these digital campaigns. It's the highest performing digital campaign we've ever done. And this is going to be the basis for a new -- major new marketing campaign next year. Additional to that, as I mentioned before, if we just keep focusing on reliability, making sure that when you book, you know what you're going to get and this is ever a problem, you have an excellent customer service that is nearly as good as a front desk or as good as a front desk then I think there could be in the years to come a tipping point where many people could choose Airbnb. So that's just our core business. Next is international. Even though we're in 220 countries in the region, there's only a couple of countries where we even have penetration at rivals of United States. And those countries are Canada, Australia and France. After that, U.K. a little bit, it really starts to tip down. And so we have like massive, massive opportunity and just by bringing Airbnb's playbook to these other countries. Obviously, Germany but not just Germany, like actually the entirety of Northern Europe, Eastern Europe and even Italy and Spain, basically every country but France and U.K., there are at a step change lower penetration. Latin America is a completely new market for us, emerging. Asia Pacific, I would argue it's a completely new market. We can be adding huge amounts of growth just by our expansion playbook. And then finally, yes, I mean I would say just on new products and services, though we're not disclosing anything that we're doing new right now, here's what I'd say. I think the biggest strength I have as a CEO is not driving profitability even though we've done a really good job. I think it is literally inventing new products and services. That's why we've hired so many great technologists, designers and I think this is going to be a sweet spot for us. We're obviously not going to talk about new things before we ship them but twice a year, every May and every November -- October, November, we're going to be hopefully, putting out going forward new ideas that I hope really increase the addressable market for Airbnb. And I think that we can do much more than just short-term housing. But again, I think short-term housing is still a huge opportunity for us. Operator: We'll go to our next question from Doug Anmuth at JPMorgan. Douglas Anmuth: First, you caught up the greater volatility in early 4Q. Just curious if you have any view of whether that's more macro driven or geopolitical and then curious if you have a sense of kind of visibility and any kind of bookings into 2024 and perhaps maybe how that visibility compares now versus a year ago? David Stephenson: Yes. It's hard to completely pin down the root cause of any kind of softness or volatility. I think it is just broadly, what we're seeing is a little bit of softness in our overall kind of demand relative to Q3, we call out kind of the macroeconomic and geopolitical just because that is what's, I think, driving any volatility that's out there. It's early. I think I am clearly confident about our revenue growth for Q4 being 12% to 14% growth. And the fact that, that remains stable with Q3, I think is really promising. Our early visibility into 2024 is -- again, it's too early to tell. I think I'm feeling great about our overall playbook and plans, as kind of Brian has mentioned. I think I am most excited about the additional efforts we're making to get greater penetration in our international markets. And overall, I'm seeing solid demand for Airbnbs, like people are still prioritizing travel over buying things so I'm very bullish in the long term. Operator: Next, we'll go to Jed Kelly at Oppenheimer & Company. Jed Kelly: Okay, great. Can you just give us further update on the regulations you talked about in the shareholder letter. And then Google announced a new update to their vacation rentals where they're essentially letting property managers show their price. So can you talk about how you're seeing some of the changes Google is making. Brian Chesky: Jed, I'll take regulation. So yes, I would generally say, over the last decade, we've been really, really encouraged by the general trajectory of regulation. Here are a couple of stats. Currently today, 80% of our top 200 markets already have regulations on the books and these regulations, though they vary, generally have found workable solutions for home sharing for us to continue to grow and thrive. And I'd point out like the country of France has passed national legislation that is very, very favorable and workable. We've had cities near us like Seattle or San Diego that have passed really favorable legislation. I will probably contrast that to New York City which has completely gone a different direction. And unfortunately, I thought when we started Airbnb, we can develop model legislation in New York that we can make in New York, we can make it anywhere and that other cities have adopted legislation that New York has adopted. It turns out that's actually not the case. In fact, New York has gone a different direction and I think it's going to turn into a cautionary tale because what we're already seeing hotel price in New York are now up 8% year-over-year. A one-bedroom or a studio in New York seems to be about $500. A lot of people can't even afford to go there anymore. We are seeing work bookings in Jersey City and the perimeters around New York City. And I do anticipate more and more activity will probably go underground which is probably not the intention of the people to even pass a lot. So generally speaking, we're seeing the trend line to be generally really, really constructive. We built the city portal with the one-stop shop for cities to be able to self-serve, to be ale get data and monitor the type of activity happening in their city. We have 400 cities on the city portal. And generally, what we're seeing is that a lot of cities in pandemic or post-pandemic era have reached out to us wanting to make sure that they are able to benefit from economic dollars going to the city and we paid $9 billion in hotel tax. So generally, it's gone fairly well. It is going to be notable that if you just read the news, you're always going to seem to be reading about these cities, something happen in New York because we're in a 100,000 cities and nearly all regulations happen at the municipal level. So it's kind of a long slide to be able to work with these cities because there's so many of them and there's not a lot of standardization but generally speaking, now listed in New York, we are seeing a lot of positive developments. And then, on the Google question. David Stephenson: Yes, I can take this. I mean we're not going to respond directly to any kind of specific thing that Google is doing. I think if you do step back though and remember that the vast majority of host on Airbnb or individual host, approximately 90% of them, that the majority of those listings are unique to Airbnb and you can only get them here. I think that, that is one of the larger kind of defensible moats that we have which is if you want to have an amazing stay, if you want to have the unique listings, you come directly to us and we're really not seeing the impact of the competition taking additional share from us. In fact, we continue to take or increase our relative share of listings in the market, continually. And this is why we're continuing to grow at faster than the overall kind of travel market. So I don't have much more to say beyond that. Brian Chesky: Yes. Maybe the only other thing I'd say -- maybe the only other thing Jed, I'd say is we're just seeing a lot of strength in mobile bookings. You can think of mobile bookings essentially like direct. It's not people not going to Google. 53% of our gross nights booked in the last quarter were on native mobile apps, essentially iOS and Android. And that is up from a year earlier which was less than 50%. And again, I'll just say 90% of our traffic is direct or unpaid. So we think that the strength of our brand, the strength of our app, the strength of people coming direct to Airbnb is key. And the reason it's direct is because they're inventory is unique. It's not commodities. The majority of hosts don't list anywhere else and we build customer tools for them. So that's our general theory, to build unique inventories that allow people to come direct to Airbnb. And I don't see that changing. Operator: We'll move next to Nick Jones at JMP Securities. Nick Jones: Great. Brian, you talked about Airbnb's pricing, maybe not increasing or it's down while hotels are up. I mean, how do you feel about the average prices on Airbnb today? Is there still room to kind of -- if you get those lower? And I guess as you talk about some of the marketing and advertising campaigns, do you think kind of travelers or consumers view Airbnb as a premium offering, a discount offering, is the reliability kind of the trade-off. I guess can you kind of maybe paint the picture a little bit more as to kind of what you feel consumers' hesitation is to maybe book an Airbnb and how much pricing plays a role in that? Brian Chesky: Nick, let me start with pricing and then I'll talk about the general offering. When we started Airbnb, our original tagline was a cheap affordable alternative to a hotel. And the primary reason people chose Airbnb the early days was price. Now once they used it, we used to say money as the hook but the experience is the reason you keep coming back. Because it also turns out when you stay in Airbnbs, you're often typically in a real neighborhood, not a hotel district. You have this really cool space. You can make a meal, you have a lot more of a much more quick home. Sometimes there's a local connection to the community, that's what you're looking for. But affordability has always been one of the most important benefits that we have in Airbnb. And I do feel like we still have opportunity for our prices to be even more competitive. There's a really interesting thing we discovered. Within reason, generally, when host lower the prices, they tend to make more money. And this is typically not true of hotels, right? Because if you're running at 80% occupancy and you lower your prices per night, you typically don't have a lot more room to make up the lower prices with higher occupancy and you'll typically lose money. But many of our hosts run at low enough occupancy and they always have that if they lower the price just a bit, they can sell more nights. And so we think there's a win-win where if we continue to encourage host to offer more competitive pricing, it's a win for guests but it's also a win for many of the host. And I would also just point out that in addition to pricing tools, you need to have ample supply. Supply, I just want to highlight again, is growing 19% year-over-year. This was a huge question by the way 18 months ago. Could Airbnb re-accelerate to nearly 20% supply growth and we are approaching 20% supply growth. I think that is really, really key. So to answer your question, we've made huge progress in last year but prices are up quite significantly from pre-pandemic for Airbnb and hotels. We're both up a lot. And my hope is whether or not prices come down on Airbnb further in the next year or 2, my hope is while hotels will almost undoubtedly keep increasing year-over-year, our prices will continue to be a little bit more -- they'll be more moderated. And that goes to the next question. We actually think there's a very high correlation of relationship between ADR and night growth and the higher the ADR, typically the lower the nights growth and the lower the ADR, typically the higher the nights growth. So there's a trade-off there. And so we think that as we continue to be more affordable, we'll continue to stimulate more demand. Now the interesting thing about Airbnb is that we're not really one type of offering, right? Southwest is a budget brand. Louis Vuitton is a luxury brand. Apple is kind of like a luxury brand for like a lot of different people but they do have like premium prices. Airbnb's offering really is one of the most unique and resilient models. I mean we are one of the most popular brands for people under 30 in travel, probably the most popular band for people under 30. We're also very much a family travel brand because homes accommodate families much better than typically hotels. We're not just an urban brand. We're a rural brand and vocational brand. We're not just a North American brand. We're a global brand. So one of the things we highlighted in the public is that we literally have something for everyone. But as we continue to get more affordable, I think that's going to continue to drive a lot more growth for us. Operator: And next, we'll go to Ron Josey at Citi. Ron Josey: Great. Brian, I wanted to ask a little bit about your comments on first-time bookers. I'm just trying to understand a little bit more on the drivers that are attracting these new bookers. Are they doing this directly through the brand, Airbnb, through the app and just trying to understand a little bit more as you're expanding the pie and getting more supply and how users are coming to the site, point number one. And second question, just on probably with Experiences, there's any update there? Brian Chesky: Yes. I mean, David can feel free to jump in on this. But at the highest level, we generally are seeing that the vast majority of first-time bookers still come direct to Airbnb. So I'll just kind of step back. The number one way reason people come to Airbnb is because a friend or a family member told them about Airbnb. And so we primarily grow through word of mouth. After that, then we have a lot of earned media. We have some 500,000 to 600,000 press articles a year. I mean the share of voice of Airbnb compared to most travel companies is overwhelming. We have a greater share of voice than almost all the other major travel brands combined. We also have a huge amount of presence in social media. You might have heard a few months ago about the Barbie house rented in Airbnb or the Shrek House, so we get a lot of earned media. And then beyond that, we do these pretty big brand campaign. And the vast majority of our marketing spend that we do spend on advertising is not performance marketing, it's brand marketing. It's really marketing education around our unique product offering. So we do performance marketing but we think unlike other travel companies, it's not necessarily a way to buy customers. It's literally more like a laser that we use to hone in on balancing supply/demand and we really can use it to optimize certain markets. So a lot of it remains direct. And again, 90% of our traffic is direct or unpaid. I think that's been pretty consistent. On Experiences, again, I don't have anything new to share now. I'll just say the following. We are actively working on updates to this product. As much as people love homes, I think 84% of people who book Airbnb leave a review, give a 5 star. We even have a higher customer satisfaction experience with 94% of people leave 5-star reviews. So we haven't updated this product yet because we just had our hands full really trying to focusing the most perishable opportunities which was recovering from the pandemic, improving our core service and addressing the needs of customers. But we should have some updates coming in the coming -- obviously, coming next year and beyond on this product. And you'll see we're continually investing in this product. Operator: We'll go next to Kevin Kopelman at TD Cowen. Kevin Kopelman: Could you touch on your vision for building more of a travel community on Airbnb and maybe the time line you expect for rolling out some of the new community features that you've talked about a little bit. Brian Chesky: Kevin, yes, I think -- let me just explain what I even mean by a travel community. I think one of the biggest visions that we have as a company isn't just to be a marketplace to become but to build literally quite literally a global travel community where you can get homes and experiences and a variety of other services, all in one place. So we can provide a lot of offerings for guests and hosts. And that we can use an emerging technologies like generative AI, like take the Where the Airbnb app can be like the ultimate travel agent. So to do this, there's a number of things that we've been investing in. The first thing is identity and account structure. So on most travel companies, you can book as a guest and they don't even have account information. And you can sign up with an account but you can also check out as a guest and they don't have the same robust account information that we do. On Airbnb 100% of the bookers and 100% of the host have to have a verified ID on -- associated to their account. They have robust profiles. About 70% of people on the guest and host side leave reviews to the other people. So this really does demonstrate how Airbnb is a little bit of a different community. We think that if we continue to invest in the profile and we can continue to invest in our system of trust, then as we learn more about guest and host, we can then match them for more types of offerings on Airbnb. And so this is, I think, really what we're starting to see. And the reason that AI is so powerful is I'll just cover 2 opportunities. Number one, I think that AI is going to affect -- this is an obvious statement, I think, digital business is more than brick-and-mortar businesses. So Airbnb and OTAs are probably going to benefit more quickly from AI than, say, a hotel will just because Airbnb and OTAs are more digital. And so the transformation will happen at the digital surface sooner. One of the areas that we're specifically going to benefit is customer service. Right now, customer service in Airbnb is really, really hard, especially compared to hotels. The problem is, imagine you have a Japanese host booking with -- hosting a German guest and there's a problem and you have these 2 people speaking different languages calling customer service, there's a myriad of issues, there's no front desk, we can't go on-premise. We don't understand the inventory and we need to try to adjudicate an issue based on 70 different policies that can be up to 100 pages long. AI can literally start to solve these problems where agents can supervise a model that can -- in second, come up with a better resolution and provide front desk level support in nearly every community in the world. But probably more importantly, Kevin, is what we can do by reimagining the search experience. Travel search has not really changed much in 25 years since really Expedia, Hotels.com, it's pretty much the same as it's been. And Airbnb, we fit that paradigm. There's a search box, you enter a date location, you refine your results and you book something. And it really hasn't changed much for a couple of decades. I think now with AI, there can be entirely different booking models. And I think this is like a Cambrian moment for like the Internet or mobile for travel where suddenly an app could actually learn more about you. They could ask you questions and they could offer you a significantly greater personalized service. Before the Internet, there were travel agents and they actually used to learn about you. And then travel got unbundled, it became self-service and it became all about price. But we do think that there's a way that travel could change and AI could lead the way with that. So these are some of the things we're thinking about and I think it's really, really exciting. And we're just at the beginning of this. Operator: We'll move next to Justin Post at Bank of America. Justin Post: Supply is up 19%. How do you think about that as a leading indicator for room night growth? And how do you maybe accelerate night growth to capture that? And then the second question is on ADRs. Is that supply coming in higher or lower, similar ADRs? And I don't know, Dave, if you can give us any thoughts on positive and negative drivers for ADRs next year. David Stephenson: Sure. Yes, I'll start with ADR and I'll go back to growth. I mean on the ADR side, it varies a little bit by market. We have seen, depending on the market, the ADRs of new listings coming in a little bit higher than they were in the average current ones. But what actually ends up happening is people are booking lower ADR places. And so that's kind of the offset. It depends on what's available and versus what's booked. And it does vary a little bit by region between North America and Europe on what the prices are. In North America, we're seeing more of the prices come down. And I think that's been a good indicator of strength for us going forward. And in Europe, the ADRs have been a little bit more elevated and we're hoping that with some more of the work that we've done to improve post tools and give greater visibility to host on how they're pricing, we'll continue to be able to kind of moderate ADRs in Europe going forward, too. So that's on the leading indicator. I do think that the strength of 19% listings growth is a great leading indicator of what we're capable of growing over time. As I said earlier, the overall growth of Airbnb since 2019, nights growth has been actually relatively in line with the total growth of supply. And I'm really bullish that we can get more supply coming on which will have more quality supply coming in which will also can drive down actually the prices because the more supply that comes on board, maybe back to your first question, the more likelihood that we can actually bring prices down in the market or at least moderate them so they don't grow as fast as competing supply. So, I'm really bullish on our overall growth. It's been great to see the strength of our listings growth this year. Brian Chesky: And maybe, Justin, I'll just say that like this is my intuition having done this for almost 16 years of my life. I think that supply is even more important than it seems on the surface. Ultimately, when you're tiny and no one ever hears about you, one of the big levers is awareness. But once you're a brand like Airbnb that's known as really [indiscernible] used all over the world, so supply growth becomes a very important like long-term leading indicator. And so long as we make sure we have healthy supply growth and then we continue to improve reliability and promote Airbnb globally around the world, then that is a very, very healthy long-term indicator. And we love for that number to be a bit higher. Operator: We'll go next to James Lee at Mizuho. James Lee: Great. Two questions here, Dave. I remember at the beginning of the year when you were guiding ADR down about mid-single digits. You were talking about leverage and like variable expenses like payment and cloud. I was just wondering where you are in that process, how much up to unlock going forward? And secondarily, on sales and marketing, it looks like supply is creating demand right now. Is it fair to assume we're shifting more demand-side advertising going forward? And can you talk about the implications there? David Stephenson: I'll start with sales and marketing. We're not actually shifting more to demand-side marketing. I think what we're seeing is exactly the success that Brian talked about earlier on the call. We -- the vast majority of our traffic is direct or unpaid. The first reason why people come to Airbnb is they're referred to us by family and friends. They come directly to us. The brand marketing certainly kind of helps talk about all the features and benefits of Airbnb and we use our search engine marketing as kind of a laser to focus on areas where maybe we have less demand than we have supply or in specific countries where we want to focus and kind of grow the overall kind of pie for us. So it is not the primary driver of it but this overall strategy of leading with brands and then following with surgical on our search engine marketing continues to work really well for us. And then in terms of the ADR, I think that the unlock of the variable expense improvements we've been making has just continued to enable us to drive profitable growth, right? We have -- our fixed cost growth discipline has been excellent, probably grow our fixed -- headcount this year, approximately 4%. So we're growing our head count and fixed expenses less than revenue. We continue to make great strides of improvement in our operations and support and Brian talked about a lot of the opportunities we have going forward in customer service. And then we're continuing to make good strides in cost of payments, our infrastructure costs, etcetera. That's not our primary driver. Like our primary focus is still on growth. Growth of the business, making hosting mainstream, perfecting the core service and expanding down the core and the fact that I can do all those things and do it while still doing it profitably and actually expanding our overall margins this year, it is something that I'm just very proud of. Operator: And we'll move to our next question from Lloyd Walmsley at UBS. Lloyd Walmsley: My question, you guys have been talking a lot about innovating on the search experience, like working on GenAI, the community side, things like co-hosting. Do you see a path where some of these features over the longer term like community in search drive enough differentiation that you could bring on more traditional supply, things like boutique hotels in such a way that you kind of expand your addressable market and revenue per user while still sort of preserving enough that's unique about Airbnb? Is that sort of makes sense? Or is that just too far out there? Brian Chesky: No, Lloyd, that absolutely makes sense. And I think that's inevitability. Just to back up for a second, we are very much supportive having hotel inventory on Airbnb. And we acquired HotelTonight before the pandemic because we believe so much in it. Over the last few years, we had to make some decisions, especially when our business initially contracted and we made some decisions. We said, well, we have to really just get focused on our core. And our core were individual people renting homes, sharing homes. That is the most differentiated thing. It's inventory you can't find anywhere else. It's a thing that is most defensible, is the thing that attracts all the direct traffic. That being said, I mean, let's just take New York, for example. We still have a lot of traffic of people searching for New York and we now have a lot less inventory we used to have so there's a real opportunity for us to supplement what used to be homes with boutique hotels. They're already on hotel tonight and others and we can certainly put those in New York. And I generally think for sure, as Airbnb becomes a little more of a so-called like AI travel agent which is what I think all travel apps will trend towards to some extent. I think there's opportunity for us to do things in a differentiated way even with slightly less differentiated inventory. I think our bread and butter for combinations are always going to be home. I think that's where our heart and soul is. I also think that's where the biggest growth opportunity is but you should not think of our total supply -- addressable market of supply as only homes. We've had hotels. We've just been prioritizing homes because we wanted to be really focused. Operator: Next, we'll move to Kenneth Gawrelski at Wells Fargo. Kenneth Gawrelski: Appreciate it. Two questions, if I may. First, I want to go back to supply. I know you've talked a lot about it. The room nights up 19% with double-digit growth in all territories. Yet every week, we read about new STR regulations. At least in North America, could you help us reconcile this kind of this contrast for the financial market? Like what are we missing as investors here -- where is that supply growth really happening, especially in the kind of Western markets? And then my second question to be a bit more specific, I know you called out the volatility in room nights and on the demand side in 4Q. Are there any specific regions that you would call out? Or is it more broad-based? And just on the timing standpoint, did this start in October? Or did you see some of the volatility start in 3Q? Brian Chesky: Maybe I'll -- go for it, Dave. David Stephenson: Well, I'll just start with the volatility in room nights. There's not a specific region where we're seeing it. I think maybe the biggest thing we've seen is that it's more broad-based on a global basis right now which is why we've kind of called out the macroeconomic and potential geopolitical issues as a potential driver to it. We saw maybe some of it just late September and it's kind of been early October. And again, it's just a little too early to tell how much volatility we see going into the rest of the quarter. That's why we continue to highlight the revenue growth that we're still expecting this year between 12% and 14% and our growth overall. And then on the regulation side, I mean, I think it's a lot of what Brian said earlier that 80% of our top 200 markets already have regulation. I think the headlines, they tend to make good headlines when people are highlighting kind of issues with short-term regulation. But in many ways, outside of New York City, I've never been -- felt better about our overall regulatory landscape on a global basis. We have really good partnerships with many cities around the world and things like our City Portal and other things has made us continue to collaborate extremely well with the vast majority of cities. So, I think those are outliers. But Brian? Brian Chesky: Yes. Yes. And I'd just say, like, again, we're in like 100,000 cities around the world and for every headline you read, there's cities that actually have very workable solutions. There's not a lot of activity. We're actually seeing growth in supply across all types of markets, not just big cities where you see in headlines. And I think vacation rental destinations -- in fact, there's a U.S. Census report that we looked at. I think said that 2/3 of markets where Airbnb exist, there aren't even hotel. So if you just think about that way, there's a lot of markets where there aren't even hotels, especially in the vacation rental in the nonurban areas. So the way I'd reconcile it is just to say that like while you read headlines about a few cities, they actually represent a very small percentage of the overall market concentration that we have. Operator: And we'll take our next question from Conor Cunningham at Melius Research. Conor Cunningham: Just on the 2/3 of the hosts that are using the pricing tool today, as you add new supply, you mentioned that ADRs of new supply is at a higher rate but are those people more likely to use the discounting tools that you've kind of mentioned after they've listed before? And then maybe on the implications for take rate when you move into international markets, you're tracking towards -- over 50% of your rooms are going to be there. Is take rate can eventually just kind of bleed lower as that expands? Just curious on your thinking about that overall. Brian Chesky: Yes, I can take the first one, Conor. On tools, generally, new host adopt new tools at a higher rate than existing host. And the reason why is like when you sign up, like we have this really great onboarding and you're immediately presented with all the tools. Now we do have a percentage of our host, maybe like, call it, 1 million hosts that are highly, highly engaged and they're going to be really engaged on a lot of these tools. But every new host, as far as they're concerned, every tool is like -- is exactly how you're supposed to use Airbnb, whereas an older host, there's an adoption where you have to get them on to the new tools and they're used to hosting a certain way. So we're generally seeing that new host would probably adopt new tools at a faster rate than existing host. That being said, the ADR-related new host might also be related to the mix shift. We're getting a lot of inventory in nonurban areas. They're larger homes. So there's a lot of different reasons I can explain that. Dave, I can hand over to you. David Stephenson: Yes. And can you read the second question again, it was take-rate on international host? Conor Cunningham: Yes. Just as you expand internationally, is there going to be a natural reduction in take rate overall as that kind of tracks over 50% of your overall rooms at some point? David Stephenson: No. I mean, actually, I think over time, the way we think about our take rate is that it's been very stable. We've actually made no underlying kind of recent changes to our absolute take rate. And what we want to be able to do is as we add more services and capabilities, that would be the way to further kind of monetize Airbnb. So what have we done things like adding guest travel insurance has been a nice add for kind of incremental monetization. It's small but it's growing nicely. And then as Brian said, there as we kind of expand beyond core and add more services for host and guests, that will be the way to kind of increase it. Brian Chesky: And you could -- theoretically, you could argue the inverse which is to say that as the expanded new markets, they might be more interested in new services that we can offer because hosting is newer to them. So as we expand in new markets and as we expand to new host services, we want to make sure that new host and new markets are percent of those opportunities. Operator: And there are no further questions at this time. I would like to turn the conference back to Brian Chesky for closing remarks. Brian Chesky: All right. Well, thanks, everyone, for joining today. Just to recap, revenue was $3.4 billion, 18% higher than a year ago. Net income and adjusted EBITDA were both Q3 records. And as well -- I just want to -- the last thing I want to highlight is our trailing 12-month free cash flow was $4.2 billion. And this represents a free cash flow margin of 44%. And so I just want to call out the real incredible hard work that the team has done over the last 3 years. We've been really, really disciplined to try to make this business a cash-generating machine and to be really focused. And I think the team has made some great progress. Next week, we're going to take a leap forward in making Airbnb more reliable with some big updates as part of our 2023 winter release. So I hope you can tune in. It's next Wednesday, November 8, to learn more and I'll see you there. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.	[ { "speaker": "Operator", "text": "Good afternoon and thank you for joining Airbnb's Earnings Conference Call for the Third Quarter of 2023. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Elli Mertz, VP of Finance. Please go ahead." }, { "speaker": "Ellie Mertz", "text": "Thank you. Good afternoon and welcome to Airbnb's third quarter of 2023 earnings call. Thank you for joining us today. On the call today, we have Airbnb's Co-Founder and CEO, Brian Chesky and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a shareholder letter with our financial results and commentary for our third quarter of 2023. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we'll be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also during this call, we will discuss some non-GAAP financial measures. We provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I'd like to pass the call to Brian." }, { "speaker": "Brian Chesky", "text": "All right. Well, thank you, Eli and good afternoon, everyone. Thanks for joining. I'm excited to share results with you. Q3 was another strong quarter for Airbnb. We had over 113 million Nights and Experiences Booked. Revenue of $3.4 billion grew 18% year-over-year. Net income was $4.4 billion. Now this includes a onetime income tax benefit from the release of a valuation allowance of $2.8 billion. But even excluding this tax benefit, adjusted net income was $1.6 billion, our highest ever and represented an adjusted net income margin of 47%. And free cash flow for the quarter was $1.3 billion. In fact, on a trailing 12-month basis, our free cash flow was $4.2 billion which is also our highest ever. And because of our strong cash flow and balance sheet, we repurchased over $500 million of our stock. Now during the quarter, we saw a number of positive business highlights. First, we have added nearly 1 million active listings this year. Our supply grew 19% in Q3 compared to a year ago. We once again saw double-digit supply growth across all regions with the highest growth in regions with the highest demand. Urban and nonurban supply increased at nearly the same rate and we saw relatively similar supply growth among individual professional hosts with the majority of new listings exclusive to Airbnb. Second, Q3 was a record travel season on Airbnb. Nights and Experiences Booked grew 14% in Q3 compared to a year ago. We saw an acceleration of nights growth across all geographies and we are particularly encouraged by the growth of first-time bookers during Q3 and we saw more nights than ever booked in the Airbnb app with 53% of gross nights booked in the app compared to 48% in the same period last year. And finally, international expansion markets are gaining momentum. Cross-border nights book increased 17% in Q3 compared to a year ago. In Asia Pacific, our business has fully recovered to pre-pandemic level. And we're seeing significant growth in Asia Pacific markets such as Taiwan, Thailand and Indonesia, all experiencing year-over-year nights growth above 30% on an origin basis. Now we've been able to achieve these results by continually making progress on our 3 strategic priorities. First, we're making hosting mainstream. We've been focused on making hosting as popular as traveling and our Q3 results show that our approach is working. We ended the quarter with the highest number of active listing and we saw strong active listings growth across all regions of the market types. And hosts are benefiting. During Q3 alone, Airbnb host earned more than $19 billion. We'll continue growing supply by raising awareness around hosting, making it easier to get started and improving the overall experience for a host. Second, we're reflecting our core service. We've collected millions of pieces of feedback on how to improve Airbnb. And 2 years ago, we started doing twice a year of product releases to address this feedback. And since then, we've launched more than 350 new features and upgrades across our entire service. And in the past year alone, this has included things such as improved customer service, total price display and new tools to help host set more competitive prices. These upgrades are paying off for both guests and host. For example, we redesigned our tool and we made it easier for hosts to add discounts and promotions. And now almost 2/3 the host offer weekly or monthly discount. We also added a new feature called similar listings that let hosts see listing prices in the area, so they know what to charge. And since we launched the similar-listings tool, nearly 1 million hosts have used this feature. In mid-September, we shared progress we've made to help lower cleaning fees, reduce prices and improved search and reliability. We have even more improvements coming as part of our November 8 winter release next Wednesday where we'll introduce dozens of new features aimed at making Airbnb more reliable. And finally, our third strategic priority is expand Airbnb beyond their core. Now we made significant progress in the past few years in building a strong and profitable business. And in addition to laying the foundation for new services and offerings, we've been focused on international expansion. We are investing in underpenetrated international markets and we're seeing great results. Following the success, we've seen in recent quarters in Germany and Brazil, Korea has now become one of our fastest growing countries compared to 2019 with gross nights booked 54% higher than they were in Q3 2019 on origin basis. As international travel continues to recover, we're building greater momentum for Airbnb in underpenetrated markets. So those are results for Q3. With that, Dave and I look forward to answering your questions." }, { "speaker": "Operator", "text": "[Operator Instructions] We'll take our first question from Mark Mahaney at Evercore ISI." }, { "speaker": "Mark Mahaney", "text": "And I have 2 questions. You talked about some of these improvements you've seen in markets like Germany, Brazil and Korea. Could you just spend a little bit more time on that opportunity going forward? And is it the expectation now that Germany and Brazil are already optimized, you just keep optimizing other ones? Or is this take a while to add to monetize those? And then secondly, in terms of future services that you could offer to sellers, any update on when we could see those particularly things like sponsored listings for sellers for host, I mean." }, { "speaker": "Brian Chesky", "text": "Yes. Mark, this is Brian. I'll take it. Let's first talk about international expansion. So it's a great question. And as everyone on this recall is probably aware, Airbnb is in 220 countries in the region. So on the one hand, we're one of the most global like companies in all of travel. We're a truly global travel network. At the same time, Mark, what we've seen is that our penetration in the United States is significantly higher than our penetration in many other countries. And we think there's a huge amount of growth if we could just get Airbnb to even a fraction of the percentage of penetration that we have in the United States. So last year, we decided to roll out this updated playbook. We rolled it out in Germany and Brazil. It's kind of a four-pronged approach and involve some product optimization, PR, local marketing and just general optimizations on the ground in these regions. And what we've seen is Brazil is now double the size as it was pre-pandemic. We rolled that same playbook out to Korea. It's now 54% higher than it was before. But what I would say is we've just scratched the surface of what we can do in Germany, Brazil and Korea. I think those markets are on a good trajectory. They could be significantly larger and we're now looking at Japan and India, China, around Asia Pacific. We have some optimizations in Southeast Asia, continual growth in Mexico. There's a number of other countries in addition to a number of areas in Europe where we think we can see a lot more growth. So I think the next 24 months, we're going to see a major acceleration in our penetration in a lot of these markets. There's about a dozen, dozen half markets around the world, as you know, have large tourism opportunities and we're really focused on that. And that's going to be one of our biggest near-term expansion opportunities. With regards to future services to sellers, we don't have anything to announce right now. But what we've been doing is we've been building the foundation of our systems so that we can have these new tools and services, including sponsor listings. And we also -- recently, we've been rolling out a pilot for co-hosting. Co-hosting is a service where we match host that don't have homes but they have extra time with homeowners to have space but they don't have time to host. And we've been doing these pilots in France. We've rolled that out in parts of the United States and this is turning into a popular service that we think can unlock a lot more supply. So we're going to -- over the next couple of years, I think you're going to see a number of new services roll out for host." }, { "speaker": "Operator", "text": "We'll go next to Eric Sheridan at Goldman Sachs." }, { "speaker": "Eric Sheridan", "text": "I just have one. Brian, in a number of interviews in the quarter, you talked about potential for product road map over the longer term, different products that could probably expand elements of the platform, car rentals, maybe even long-term apartment rentals. How do you think about product evolution that's being offered to the consumers on the platform and thinking about investing behind those initiatives?" }, { "speaker": "Brian Chesky", "text": "Eric, I mean, just to step back, the last few years, I think we've really, really benefited by being focused. When the pandemic occurred, we felt like we had to hunker down, get really lean, get really focused and we went from basically a breakeven company to now a company doing obviously cash flow margins of around 44% of revenue. So we've really benefited from this focus and really benefited from focusing on our core business. To your point, Eric, I think we are now getting ready to re-expand Airbnb beyond its core. It was always our attention to do much more than just short-term housing for travelers. We're always intended to do more of that. So we're working on making Airbnb more of an extensible platform. And I think, ultimately, there are actually quite literally dozens of services, guests and hosts that we could build on top of the Airbnb system. I think a lot of it comes down to making the platform extensible so we can offer these services. I think at the end of the day, we're really thinking about are a couple of big ideas. First, I think that we are thinking about generative AI as an opportunity to reimagine much of our product category and product catalog. So if you think about how you can sell a lot of different types of products and new offerings, generative AI could be really, really powerful. It can match you in a way you've never seen before. So imagine Airbnb being almost like the ultimate travel agent as an app. We think this can unlock opportunities that we've never seen. Additionally to that, there's a lot of opportunities on both the guests side and the host side. And so we're going to be thinking through a lot of this. So you'll see hopefully some updates in the coming years." }, { "speaker": "Operator", "text": "We'll move to our next question from Brian Nowak at Morgan Stanley." }, { "speaker": "Brian Nowak", "text": "I have two. First one, maybe on the guide a little bit. I know there's a lot of moving pieces between the revenue comments and the ADR comments and the take rate. Just sort of wanted to confirm, are you guys sort of looking to guide room night growth in sort of the high single, low double-digit range in 4Q? Is that the right way we should be thinking about with take rate and things? And then the second one, Brian, I know you, you have a lot of innovation, you have 350 features and upgrades, etcetera. Can you just sort of give us 1 or 2 of them that you think could be most impactful to accelerate that room night growth as we go into '24 and '25?" }, { "speaker": "Brian Chesky", "text": "And Brian, sorry, are you referring to things we've already shipped or things that we're working on that we haven't shipped?" }, { "speaker": "Brian Nowak", "text": "Well, either way you want to go. Yes, if you have one that already shipped that would be great. If you have other ones you want to tell us about next week, that would be good too." }, { "speaker": "Brian Chesky", "text": "Yes. So yes, so let me -- why don't I answer the innovation and Dave, you can talk about the guide for going forward? So maybe let me talk about some things that we've already done. I can give you a little bit of sense of how we're thinking about next week and beyond. So we did over 50 upgrades last May. It was based on the idea that millions of customers have given us feedback, actually both guests and hosts on how to improve Airbnb and we've listened. And if I were to just call out 3 things, Brian, I would just call out 3 things would be total price display, pricing tools for host and monthly stays. So let me just go through 3 and what happened. On total price display, we rolled out total price display before taxes. This is based on popular demand. We are now the only travel app of our kind that actually does this. Since we rolled this out, 260,000 listings have removed or reduced their cleaning fees. We now have 3 million listings that do not have a cleaning fee. So we think this is working. We also think people are now being steered towards better total value on a total price, inclusive of overall cost basis. The second are pricing tools. Since we rolled out new pricing tools, about half of new listings are now offering a monthly discount. And we also have this new tool called similar listings, where you can see where other people are charging around you. And this we find has been the best way to make sure our host have competitive prices. Because host are usually surprised to discover the listings that get most bookings around them offer a better value. And it's always really hard to know what your home is worth and what you charge. And so the best thing you can do is give people transparent data. Well, 1 million people have used these tools and probably the thing I'd point to is, while this time year-over-year in September data, hotel prices are up 10%. Airbnb prices globally are only up 1%. So we are definitely moving in the right direction. Now in North America, on a mix shift in FX neutral basis, our price is actually down 3% in North America, while hotels are up towards double digits, I think. So the last thing I'd say is monthly stays. We obviously announced a bunch of updates on monthly stays, including you can pay by bank, we lowered fees after 3 months, we have the whole new really cool interface and stays for 3 months or longer are now growing nearly 20% year-over-year. So those are just 3 things we've seen. I think what we've learned is like as we listen to customers, we adapt quickly, we can drive incremental growth. As far as what's next, obviously, we don't talk about too much before it will release. I will say though, next Wednesday, we are focused on some pretty big opportunities around reliability. So this is the last thing I'll say about this. If you think about how big Airbnb is, for every person who stays in Airbnb, approximately 9 people every night stay in a hotel or about 9 bookings. The hotels are about to order magnitude bigger. And when you ask people, why do you book a hotel and not Airbnb, the number one reason they come up with is usually reliability that they know what they're going to get before they book. It kind of speaks to the strength and weakness of Airbnb that on the one hand, it's one of a kind, other hand, that one-of-a-kindness offers valuability that not every person wants. And so next week, we're going to have some new offerings that I think will make a pretty big in this. So that's what I can say. I think I'm pretty optimistic about what you'll see next week. And of course, we're already working on stuff for next May and next October releases as well. So hopefully, stay tuned." }, { "speaker": "David Stephenson", "text": "And then in terms of the guidance, Brian, for the fourth quarter, we have our revenue guidance between $2.13 billion and $2.17 billion. So that's revenue growth between 12% and 14%. And remember that in Q3, our revenue growth, excluding the impact of foreign exchange is about 14%. So -- and we're not anticipating the same level of FX impact on the fourth quarter. So broadly, our revenue growth is relatively comparable between Q4 and Q3. In terms of the nights guide, we're just seeing some variability in our nights demand here early in the quarter and so we're just being cautious with that guide. And so we're not being specific on it but anticipate nights to be a few points below -- nights growth to be a few points below Q3." }, { "speaker": "Operator", "text": "We'll move to our next question from Lee Horowitz at Deutsche Bank." }, { "speaker": "Lee Horowitz", "text": "Can you maybe help us think about how you guys are tracking towards expectations on occupancy or utilization moving forward? As you guys extend beyond the core into newer markets, do those markets come with occupancy or utilization headwinds that we should be thinking about? And holistically, how you guys think about how occupancy or utilization may track next year? And then, maybe just one high level one. Sticking beyond the current cycle, we've seen a lot of other remote travel models, sort of hit this low teens to high single-digit growth rate and decelerate from there or not be able to reaccelerate their business as a meaningful like. Can you maybe take a step back and help us better understand how you think that maybe Airbnb may be a little bit different than prior ratios that we've seen and could perhaps sustain sort of that double-digit revenue cadence over a longer period of time than what we're used to in the market." }, { "speaker": "Brian Chesky", "text": "Yes. Yes, you start with occupancy and I'll take the second question." }, { "speaker": "David Stephenson", "text": "In terms of occupancy, we've actually seen it be pretty stable in terms of kind of on a global basis. I mean, if you actually step back, you got to remember that the vast majority of our hosts on Airbnb are individual houses. They're not looking to drive 100% occupancy of all their listings. And what they want to do is earn enough money to usually hit some certain amount of financial goals. So as we continue to grow our inventory, we're continuing to see strong occupancy levels overall. Clearly, we grew our inventory at 19% which is ahead of kind of revenue growth in the current period. But if you actually step back and look over like a 4-year period, go back all the way to 2019, the growth in our overall listings have actually been relatively similar to our overall growth in night. So that occupancy over an extended time period tends to be fairly stable while in any short-term time period, it can have a little bit more volatility. But overall, again, we don't focus on occupancy as a primary driver, we monitor it on local by local because what really matters is that we have great available listings in a specific market on a specific date." }, { "speaker": "Brian Chesky", "text": "Lee, I'll take your second question. Yes, I think that -- as I said before, I think we're only scratching the surface to how this company becomes. And I absolutely think that we can get to really solid double-digit revenue growth for many, many years to come. And there's 3 things that I'd point out. The first is our core business. I think our core business could be significantly larger than it is today, even if we didn't do anything new. And the reason I believe this is the following: I believe that almost every single person who stays in a hotel could stay in Airbnb is, number one, they knew about all the benefits of Airbnb and number two, we made sure that our service was sufficiently reliable to be an alternative. So let me start with those 2. We've done recently a new marketing campaign that's called \"Airbnb it\". And it basically contrast the benefits of the Airbnb versus the hotel. And based on our research, one of the things we've noticed is that a lot of people stay in hotels don't understand some of the unique benefits of staying in Airbnb and why it is better for certain types of trips. And one type of trip that Airbnb is almost always better is when you're traveling with 3 or more people. If you're traveling with a family or traveling with a group, why do you want to stay in different rooms versus -- different room separated. We're having to stay at the same time. And then the only place you can meet in these crowded lobbies when you can get a whole home all to yourself. So this is -- we've been running these digital campaigns. It's the highest performing digital campaign we've ever done. And this is going to be the basis for a new -- major new marketing campaign next year. Additional to that, as I mentioned before, if we just keep focusing on reliability, making sure that when you book, you know what you're going to get and this is ever a problem, you have an excellent customer service that is nearly as good as a front desk or as good as a front desk then I think there could be in the years to come a tipping point where many people could choose Airbnb. So that's just our core business. Next is international. Even though we're in 220 countries in the region, there's only a couple of countries where we even have penetration at rivals of United States. And those countries are Canada, Australia and France. After that, U.K. a little bit, it really starts to tip down. And so we have like massive, massive opportunity and just by bringing Airbnb's playbook to these other countries. Obviously, Germany but not just Germany, like actually the entirety of Northern Europe, Eastern Europe and even Italy and Spain, basically every country but France and U.K., there are at a step change lower penetration. Latin America is a completely new market for us, emerging. Asia Pacific, I would argue it's a completely new market. We can be adding huge amounts of growth just by our expansion playbook. And then finally, yes, I mean I would say just on new products and services, though we're not disclosing anything that we're doing new right now, here's what I'd say. I think the biggest strength I have as a CEO is not driving profitability even though we've done a really good job. I think it is literally inventing new products and services. That's why we've hired so many great technologists, designers and I think this is going to be a sweet spot for us. We're obviously not going to talk about new things before we ship them but twice a year, every May and every November -- October, November, we're going to be hopefully, putting out going forward new ideas that I hope really increase the addressable market for Airbnb. And I think that we can do much more than just short-term housing. But again, I think short-term housing is still a huge opportunity for us." }, { "speaker": "Operator", "text": "We'll go to our next question from Doug Anmuth at JPMorgan." }, { "speaker": "Douglas Anmuth", "text": "First, you caught up the greater volatility in early 4Q. Just curious if you have any view of whether that's more macro driven or geopolitical and then curious if you have a sense of kind of visibility and any kind of bookings into 2024 and perhaps maybe how that visibility compares now versus a year ago?" }, { "speaker": "David Stephenson", "text": "Yes. It's hard to completely pin down the root cause of any kind of softness or volatility. I think it is just broadly, what we're seeing is a little bit of softness in our overall kind of demand relative to Q3, we call out kind of the macroeconomic and geopolitical just because that is what's, I think, driving any volatility that's out there. It's early. I think I am clearly confident about our revenue growth for Q4 being 12% to 14% growth. And the fact that, that remains stable with Q3, I think is really promising. Our early visibility into 2024 is -- again, it's too early to tell. I think I'm feeling great about our overall playbook and plans, as kind of Brian has mentioned. I think I am most excited about the additional efforts we're making to get greater penetration in our international markets. And overall, I'm seeing solid demand for Airbnbs, like people are still prioritizing travel over buying things so I'm very bullish in the long term." }, { "speaker": "Operator", "text": "Next, we'll go to Jed Kelly at Oppenheimer & Company." }, { "speaker": "Jed Kelly", "text": "Okay, great. Can you just give us further update on the regulations you talked about in the shareholder letter. And then Google announced a new update to their vacation rentals where they're essentially letting property managers show their price. So can you talk about how you're seeing some of the changes Google is making." }, { "speaker": "Brian Chesky", "text": "Jed, I'll take regulation. So yes, I would generally say, over the last decade, we've been really, really encouraged by the general trajectory of regulation. Here are a couple of stats. Currently today, 80% of our top 200 markets already have regulations on the books and these regulations, though they vary, generally have found workable solutions for home sharing for us to continue to grow and thrive. And I'd point out like the country of France has passed national legislation that is very, very favorable and workable. We've had cities near us like Seattle or San Diego that have passed really favorable legislation. I will probably contrast that to New York City which has completely gone a different direction. And unfortunately, I thought when we started Airbnb, we can develop model legislation in New York that we can make in New York, we can make it anywhere and that other cities have adopted legislation that New York has adopted. It turns out that's actually not the case. In fact, New York has gone a different direction and I think it's going to turn into a cautionary tale because what we're already seeing hotel price in New York are now up 8% year-over-year. A one-bedroom or a studio in New York seems to be about $500. A lot of people can't even afford to go there anymore. We are seeing work bookings in Jersey City and the perimeters around New York City. And I do anticipate more and more activity will probably go underground which is probably not the intention of the people to even pass a lot. So generally speaking, we're seeing the trend line to be generally really, really constructive. We built the city portal with the one-stop shop for cities to be able to self-serve, to be ale get data and monitor the type of activity happening in their city. We have 400 cities on the city portal. And generally, what we're seeing is that a lot of cities in pandemic or post-pandemic era have reached out to us wanting to make sure that they are able to benefit from economic dollars going to the city and we paid $9 billion in hotel tax. So generally, it's gone fairly well. It is going to be notable that if you just read the news, you're always going to seem to be reading about these cities, something happen in New York because we're in a 100,000 cities and nearly all regulations happen at the municipal level. So it's kind of a long slide to be able to work with these cities because there's so many of them and there's not a lot of standardization but generally speaking, now listed in New York, we are seeing a lot of positive developments. And then, on the Google question." }, { "speaker": "David Stephenson", "text": "Yes, I can take this. I mean we're not going to respond directly to any kind of specific thing that Google is doing. I think if you do step back though and remember that the vast majority of host on Airbnb or individual host, approximately 90% of them, that the majority of those listings are unique to Airbnb and you can only get them here. I think that, that is one of the larger kind of defensible moats that we have which is if you want to have an amazing stay, if you want to have the unique listings, you come directly to us and we're really not seeing the impact of the competition taking additional share from us. In fact, we continue to take or increase our relative share of listings in the market, continually. And this is why we're continuing to grow at faster than the overall kind of travel market. So I don't have much more to say beyond that." }, { "speaker": "Brian Chesky", "text": "Yes. Maybe the only other thing I'd say -- maybe the only other thing Jed, I'd say is we're just seeing a lot of strength in mobile bookings. You can think of mobile bookings essentially like direct. It's not people not going to Google. 53% of our gross nights booked in the last quarter were on native mobile apps, essentially iOS and Android. And that is up from a year earlier which was less than 50%. And again, I'll just say 90% of our traffic is direct or unpaid. So we think that the strength of our brand, the strength of our app, the strength of people coming direct to Airbnb is key. And the reason it's direct is because they're inventory is unique. It's not commodities. The majority of hosts don't list anywhere else and we build customer tools for them. So that's our general theory, to build unique inventories that allow people to come direct to Airbnb. And I don't see that changing." }, { "speaker": "Operator", "text": "We'll move next to Nick Jones at JMP Securities." }, { "speaker": "Nick Jones", "text": "Great. Brian, you talked about Airbnb's pricing, maybe not increasing or it's down while hotels are up. I mean, how do you feel about the average prices on Airbnb today? Is there still room to kind of -- if you get those lower? And I guess as you talk about some of the marketing and advertising campaigns, do you think kind of travelers or consumers view Airbnb as a premium offering, a discount offering, is the reliability kind of the trade-off. I guess can you kind of maybe paint the picture a little bit more as to kind of what you feel consumers' hesitation is to maybe book an Airbnb and how much pricing plays a role in that?" }, { "speaker": "Brian Chesky", "text": "Nick, let me start with pricing and then I'll talk about the general offering. When we started Airbnb, our original tagline was a cheap affordable alternative to a hotel. And the primary reason people chose Airbnb the early days was price. Now once they used it, we used to say money as the hook but the experience is the reason you keep coming back. Because it also turns out when you stay in Airbnbs, you're often typically in a real neighborhood, not a hotel district. You have this really cool space. You can make a meal, you have a lot more of a much more quick home. Sometimes there's a local connection to the community, that's what you're looking for. But affordability has always been one of the most important benefits that we have in Airbnb. And I do feel like we still have opportunity for our prices to be even more competitive. There's a really interesting thing we discovered. Within reason, generally, when host lower the prices, they tend to make more money. And this is typically not true of hotels, right? Because if you're running at 80% occupancy and you lower your prices per night, you typically don't have a lot more room to make up the lower prices with higher occupancy and you'll typically lose money. But many of our hosts run at low enough occupancy and they always have that if they lower the price just a bit, they can sell more nights. And so we think there's a win-win where if we continue to encourage host to offer more competitive pricing, it's a win for guests but it's also a win for many of the host. And I would also just point out that in addition to pricing tools, you need to have ample supply. Supply, I just want to highlight again, is growing 19% year-over-year. This was a huge question by the way 18 months ago. Could Airbnb re-accelerate to nearly 20% supply growth and we are approaching 20% supply growth. I think that is really, really key. So to answer your question, we've made huge progress in last year but prices are up quite significantly from pre-pandemic for Airbnb and hotels. We're both up a lot. And my hope is whether or not prices come down on Airbnb further in the next year or 2, my hope is while hotels will almost undoubtedly keep increasing year-over-year, our prices will continue to be a little bit more -- they'll be more moderated. And that goes to the next question. We actually think there's a very high correlation of relationship between ADR and night growth and the higher the ADR, typically the lower the nights growth and the lower the ADR, typically the higher the nights growth. So there's a trade-off there. And so we think that as we continue to be more affordable, we'll continue to stimulate more demand. Now the interesting thing about Airbnb is that we're not really one type of offering, right? Southwest is a budget brand. Louis Vuitton is a luxury brand. Apple is kind of like a luxury brand for like a lot of different people but they do have like premium prices. Airbnb's offering really is one of the most unique and resilient models. I mean we are one of the most popular brands for people under 30 in travel, probably the most popular band for people under 30. We're also very much a family travel brand because homes accommodate families much better than typically hotels. We're not just an urban brand. We're a rural brand and vocational brand. We're not just a North American brand. We're a global brand. So one of the things we highlighted in the public is that we literally have something for everyone. But as we continue to get more affordable, I think that's going to continue to drive a lot more growth for us." }, { "speaker": "Operator", "text": "And next, we'll go to Ron Josey at Citi." }, { "speaker": "Ron Josey", "text": "Great. Brian, I wanted to ask a little bit about your comments on first-time bookers. I'm just trying to understand a little bit more on the drivers that are attracting these new bookers. Are they doing this directly through the brand, Airbnb, through the app and just trying to understand a little bit more as you're expanding the pie and getting more supply and how users are coming to the site, point number one. And second question, just on probably with Experiences, there's any update there?" }, { "speaker": "Brian Chesky", "text": "Yes. I mean, David can feel free to jump in on this. But at the highest level, we generally are seeing that the vast majority of first-time bookers still come direct to Airbnb. So I'll just kind of step back. The number one way reason people come to Airbnb is because a friend or a family member told them about Airbnb. And so we primarily grow through word of mouth. After that, then we have a lot of earned media. We have some 500,000 to 600,000 press articles a year. I mean the share of voice of Airbnb compared to most travel companies is overwhelming. We have a greater share of voice than almost all the other major travel brands combined. We also have a huge amount of presence in social media. You might have heard a few months ago about the Barbie house rented in Airbnb or the Shrek House, so we get a lot of earned media. And then beyond that, we do these pretty big brand campaign. And the vast majority of our marketing spend that we do spend on advertising is not performance marketing, it's brand marketing. It's really marketing education around our unique product offering. So we do performance marketing but we think unlike other travel companies, it's not necessarily a way to buy customers. It's literally more like a laser that we use to hone in on balancing supply/demand and we really can use it to optimize certain markets. So a lot of it remains direct. And again, 90% of our traffic is direct or unpaid. I think that's been pretty consistent. On Experiences, again, I don't have anything new to share now. I'll just say the following. We are actively working on updates to this product. As much as people love homes, I think 84% of people who book Airbnb leave a review, give a 5 star. We even have a higher customer satisfaction experience with 94% of people leave 5-star reviews. So we haven't updated this product yet because we just had our hands full really trying to focusing the most perishable opportunities which was recovering from the pandemic, improving our core service and addressing the needs of customers. But we should have some updates coming in the coming -- obviously, coming next year and beyond on this product. And you'll see we're continually investing in this product." }, { "speaker": "Operator", "text": "We'll go next to Kevin Kopelman at TD Cowen." }, { "speaker": "Kevin Kopelman", "text": "Could you touch on your vision for building more of a travel community on Airbnb and maybe the time line you expect for rolling out some of the new community features that you've talked about a little bit." }, { "speaker": "Brian Chesky", "text": "Kevin, yes, I think -- let me just explain what I even mean by a travel community. I think one of the biggest visions that we have as a company isn't just to be a marketplace to become but to build literally quite literally a global travel community where you can get homes and experiences and a variety of other services, all in one place. So we can provide a lot of offerings for guests and hosts. And that we can use an emerging technologies like generative AI, like take the Where the Airbnb app can be like the ultimate travel agent. So to do this, there's a number of things that we've been investing in. The first thing is identity and account structure. So on most travel companies, you can book as a guest and they don't even have account information. And you can sign up with an account but you can also check out as a guest and they don't have the same robust account information that we do. On Airbnb 100% of the bookers and 100% of the host have to have a verified ID on -- associated to their account. They have robust profiles. About 70% of people on the guest and host side leave reviews to the other people. So this really does demonstrate how Airbnb is a little bit of a different community. We think that if we continue to invest in the profile and we can continue to invest in our system of trust, then as we learn more about guest and host, we can then match them for more types of offerings on Airbnb. And so this is, I think, really what we're starting to see. And the reason that AI is so powerful is I'll just cover 2 opportunities. Number one, I think that AI is going to affect -- this is an obvious statement, I think, digital business is more than brick-and-mortar businesses. So Airbnb and OTAs are probably going to benefit more quickly from AI than, say, a hotel will just because Airbnb and OTAs are more digital. And so the transformation will happen at the digital surface sooner. One of the areas that we're specifically going to benefit is customer service. Right now, customer service in Airbnb is really, really hard, especially compared to hotels. The problem is, imagine you have a Japanese host booking with -- hosting a German guest and there's a problem and you have these 2 people speaking different languages calling customer service, there's a myriad of issues, there's no front desk, we can't go on-premise. We don't understand the inventory and we need to try to adjudicate an issue based on 70 different policies that can be up to 100 pages long. AI can literally start to solve these problems where agents can supervise a model that can -- in second, come up with a better resolution and provide front desk level support in nearly every community in the world. But probably more importantly, Kevin, is what we can do by reimagining the search experience. Travel search has not really changed much in 25 years since really Expedia, Hotels.com, it's pretty much the same as it's been. And Airbnb, we fit that paradigm. There's a search box, you enter a date location, you refine your results and you book something. And it really hasn't changed much for a couple of decades. I think now with AI, there can be entirely different booking models. And I think this is like a Cambrian moment for like the Internet or mobile for travel where suddenly an app could actually learn more about you. They could ask you questions and they could offer you a significantly greater personalized service. Before the Internet, there were travel agents and they actually used to learn about you. And then travel got unbundled, it became self-service and it became all about price. But we do think that there's a way that travel could change and AI could lead the way with that. So these are some of the things we're thinking about and I think it's really, really exciting. And we're just at the beginning of this." }, { "speaker": "Operator", "text": "We'll move next to Justin Post at Bank of America." }, { "speaker": "Justin Post", "text": "Supply is up 19%. How do you think about that as a leading indicator for room night growth? And how do you maybe accelerate night growth to capture that? And then the second question is on ADRs. Is that supply coming in higher or lower, similar ADRs? And I don't know, Dave, if you can give us any thoughts on positive and negative drivers for ADRs next year." }, { "speaker": "David Stephenson", "text": "Sure. Yes, I'll start with ADR and I'll go back to growth. I mean on the ADR side, it varies a little bit by market. We have seen, depending on the market, the ADRs of new listings coming in a little bit higher than they were in the average current ones. But what actually ends up happening is people are booking lower ADR places. And so that's kind of the offset. It depends on what's available and versus what's booked. And it does vary a little bit by region between North America and Europe on what the prices are. In North America, we're seeing more of the prices come down. And I think that's been a good indicator of strength for us going forward. And in Europe, the ADRs have been a little bit more elevated and we're hoping that with some more of the work that we've done to improve post tools and give greater visibility to host on how they're pricing, we'll continue to be able to kind of moderate ADRs in Europe going forward, too. So that's on the leading indicator. I do think that the strength of 19% listings growth is a great leading indicator of what we're capable of growing over time. As I said earlier, the overall growth of Airbnb since 2019, nights growth has been actually relatively in line with the total growth of supply. And I'm really bullish that we can get more supply coming on which will have more quality supply coming in which will also can drive down actually the prices because the more supply that comes on board, maybe back to your first question, the more likelihood that we can actually bring prices down in the market or at least moderate them so they don't grow as fast as competing supply. So, I'm really bullish on our overall growth. It's been great to see the strength of our listings growth this year." }, { "speaker": "Brian Chesky", "text": "And maybe, Justin, I'll just say that like this is my intuition having done this for almost 16 years of my life. I think that supply is even more important than it seems on the surface. Ultimately, when you're tiny and no one ever hears about you, one of the big levers is awareness. But once you're a brand like Airbnb that's known as really [indiscernible] used all over the world, so supply growth becomes a very important like long-term leading indicator. And so long as we make sure we have healthy supply growth and then we continue to improve reliability and promote Airbnb globally around the world, then that is a very, very healthy long-term indicator. And we love for that number to be a bit higher." }, { "speaker": "Operator", "text": "We'll go next to James Lee at Mizuho." }, { "speaker": "James Lee", "text": "Great. Two questions here, Dave. I remember at the beginning of the year when you were guiding ADR down about mid-single digits. You were talking about leverage and like variable expenses like payment and cloud. I was just wondering where you are in that process, how much up to unlock going forward? And secondarily, on sales and marketing, it looks like supply is creating demand right now. Is it fair to assume we're shifting more demand-side advertising going forward? And can you talk about the implications there?" }, { "speaker": "David Stephenson", "text": "I'll start with sales and marketing. We're not actually shifting more to demand-side marketing. I think what we're seeing is exactly the success that Brian talked about earlier on the call. We -- the vast majority of our traffic is direct or unpaid. The first reason why people come to Airbnb is they're referred to us by family and friends. They come directly to us. The brand marketing certainly kind of helps talk about all the features and benefits of Airbnb and we use our search engine marketing as kind of a laser to focus on areas where maybe we have less demand than we have supply or in specific countries where we want to focus and kind of grow the overall kind of pie for us. So it is not the primary driver of it but this overall strategy of leading with brands and then following with surgical on our search engine marketing continues to work really well for us. And then in terms of the ADR, I think that the unlock of the variable expense improvements we've been making has just continued to enable us to drive profitable growth, right? We have -- our fixed cost growth discipline has been excellent, probably grow our fixed -- headcount this year, approximately 4%. So we're growing our head count and fixed expenses less than revenue. We continue to make great strides of improvement in our operations and support and Brian talked about a lot of the opportunities we have going forward in customer service. And then we're continuing to make good strides in cost of payments, our infrastructure costs, etcetera. That's not our primary driver. Like our primary focus is still on growth. Growth of the business, making hosting mainstream, perfecting the core service and expanding down the core and the fact that I can do all those things and do it while still doing it profitably and actually expanding our overall margins this year, it is something that I'm just very proud of." }, { "speaker": "Operator", "text": "And we'll move to our next question from Lloyd Walmsley at UBS." }, { "speaker": "Lloyd Walmsley", "text": "My question, you guys have been talking a lot about innovating on the search experience, like working on GenAI, the community side, things like co-hosting. Do you see a path where some of these features over the longer term like community in search drive enough differentiation that you could bring on more traditional supply, things like boutique hotels in such a way that you kind of expand your addressable market and revenue per user while still sort of preserving enough that's unique about Airbnb? Is that sort of makes sense? Or is that just too far out there?" }, { "speaker": "Brian Chesky", "text": "No, Lloyd, that absolutely makes sense. And I think that's inevitability. Just to back up for a second, we are very much supportive having hotel inventory on Airbnb. And we acquired HotelTonight before the pandemic because we believe so much in it. Over the last few years, we had to make some decisions, especially when our business initially contracted and we made some decisions. We said, well, we have to really just get focused on our core. And our core were individual people renting homes, sharing homes. That is the most differentiated thing. It's inventory you can't find anywhere else. It's a thing that is most defensible, is the thing that attracts all the direct traffic. That being said, I mean, let's just take New York, for example. We still have a lot of traffic of people searching for New York and we now have a lot less inventory we used to have so there's a real opportunity for us to supplement what used to be homes with boutique hotels. They're already on hotel tonight and others and we can certainly put those in New York. And I generally think for sure, as Airbnb becomes a little more of a so-called like AI travel agent which is what I think all travel apps will trend towards to some extent. I think there's opportunity for us to do things in a differentiated way even with slightly less differentiated inventory. I think our bread and butter for combinations are always going to be home. I think that's where our heart and soul is. I also think that's where the biggest growth opportunity is but you should not think of our total supply -- addressable market of supply as only homes. We've had hotels. We've just been prioritizing homes because we wanted to be really focused." }, { "speaker": "Operator", "text": "Next, we'll move to Kenneth Gawrelski at Wells Fargo." }, { "speaker": "Kenneth Gawrelski", "text": "Appreciate it. Two questions, if I may. First, I want to go back to supply. I know you've talked a lot about it. The room nights up 19% with double-digit growth in all territories. Yet every week, we read about new STR regulations. At least in North America, could you help us reconcile this kind of this contrast for the financial market? Like what are we missing as investors here -- where is that supply growth really happening, especially in the kind of Western markets? And then my second question to be a bit more specific, I know you called out the volatility in room nights and on the demand side in 4Q. Are there any specific regions that you would call out? Or is it more broad-based? And just on the timing standpoint, did this start in October? Or did you see some of the volatility start in 3Q?" }, { "speaker": "Brian Chesky", "text": "Maybe I'll -- go for it, Dave." }, { "speaker": "David Stephenson", "text": "Well, I'll just start with the volatility in room nights. There's not a specific region where we're seeing it. I think maybe the biggest thing we've seen is that it's more broad-based on a global basis right now which is why we've kind of called out the macroeconomic and potential geopolitical issues as a potential driver to it. We saw maybe some of it just late September and it's kind of been early October. And again, it's just a little too early to tell how much volatility we see going into the rest of the quarter. That's why we continue to highlight the revenue growth that we're still expecting this year between 12% and 14% and our growth overall. And then on the regulation side, I mean, I think it's a lot of what Brian said earlier that 80% of our top 200 markets already have regulation. I think the headlines, they tend to make good headlines when people are highlighting kind of issues with short-term regulation. But in many ways, outside of New York City, I've never been -- felt better about our overall regulatory landscape on a global basis. We have really good partnerships with many cities around the world and things like our City Portal and other things has made us continue to collaborate extremely well with the vast majority of cities. So, I think those are outliers. But Brian?" }, { "speaker": "Brian Chesky", "text": "Yes. Yes. And I'd just say, like, again, we're in like 100,000 cities around the world and for every headline you read, there's cities that actually have very workable solutions. There's not a lot of activity. We're actually seeing growth in supply across all types of markets, not just big cities where you see in headlines. And I think vacation rental destinations -- in fact, there's a U.S. Census report that we looked at. I think said that 2/3 of markets where Airbnb exist, there aren't even hotel. So if you just think about that way, there's a lot of markets where there aren't even hotels, especially in the vacation rental in the nonurban areas. So the way I'd reconcile it is just to say that like while you read headlines about a few cities, they actually represent a very small percentage of the overall market concentration that we have." }, { "speaker": "Operator", "text": "And we'll take our next question from Conor Cunningham at Melius Research." }, { "speaker": "Conor Cunningham", "text": "Just on the 2/3 of the hosts that are using the pricing tool today, as you add new supply, you mentioned that ADRs of new supply is at a higher rate but are those people more likely to use the discounting tools that you've kind of mentioned after they've listed before? And then maybe on the implications for take rate when you move into international markets, you're tracking towards -- over 50% of your rooms are going to be there. Is take rate can eventually just kind of bleed lower as that expands? Just curious on your thinking about that overall." }, { "speaker": "Brian Chesky", "text": "Yes, I can take the first one, Conor. On tools, generally, new host adopt new tools at a higher rate than existing host. And the reason why is like when you sign up, like we have this really great onboarding and you're immediately presented with all the tools. Now we do have a percentage of our host, maybe like, call it, 1 million hosts that are highly, highly engaged and they're going to be really engaged on a lot of these tools. But every new host, as far as they're concerned, every tool is like -- is exactly how you're supposed to use Airbnb, whereas an older host, there's an adoption where you have to get them on to the new tools and they're used to hosting a certain way. So we're generally seeing that new host would probably adopt new tools at a faster rate than existing host. That being said, the ADR-related new host might also be related to the mix shift. We're getting a lot of inventory in nonurban areas. They're larger homes. So there's a lot of different reasons I can explain that. Dave, I can hand over to you." }, { "speaker": "David Stephenson", "text": "Yes. And can you read the second question again, it was take-rate on international host?" }, { "speaker": "Conor Cunningham", "text": "Yes. Just as you expand internationally, is there going to be a natural reduction in take rate overall as that kind of tracks over 50% of your overall rooms at some point?" }, { "speaker": "David Stephenson", "text": "No. I mean, actually, I think over time, the way we think about our take rate is that it's been very stable. We've actually made no underlying kind of recent changes to our absolute take rate. And what we want to be able to do is as we add more services and capabilities, that would be the way to further kind of monetize Airbnb. So what have we done things like adding guest travel insurance has been a nice add for kind of incremental monetization. It's small but it's growing nicely. And then as Brian said, there as we kind of expand beyond core and add more services for host and guests, that will be the way to kind of increase it." }, { "speaker": "Brian Chesky", "text": "And you could -- theoretically, you could argue the inverse which is to say that as the expanded new markets, they might be more interested in new services that we can offer because hosting is newer to them. So as we expand in new markets and as we expand to new host services, we want to make sure that new host and new markets are percent of those opportunities." }, { "speaker": "Operator", "text": "And there are no further questions at this time. I would like to turn the conference back to Brian Chesky for closing remarks." }, { "speaker": "Brian Chesky", "text": "All right. Well, thanks, everyone, for joining today. Just to recap, revenue was $3.4 billion, 18% higher than a year ago. Net income and adjusted EBITDA were both Q3 records. And as well -- I just want to -- the last thing I want to highlight is our trailing 12-month free cash flow was $4.2 billion. And this represents a free cash flow margin of 44%. And so I just want to call out the real incredible hard work that the team has done over the last 3 years. We've been really, really disciplined to try to make this business a cash-generating machine and to be really focused. And I think the team has made some great progress. Next week, we're going to take a leap forward in making Airbnb more reliable with some big updates as part of our 2023 winter release. So I hope you can tune in. It's next Wednesday, November 8, to learn more and I'll see you there." }, { "speaker": "Operator", "text": "And this concludes today's conference call. Thank you for your participation. You may now disconnect." } ]	Airbnb, Inc.	115,705,393
ABNB	2	2,023	2023-08-03 16:30:00	Operator: Good afternoon, and thank you for joining Airbnb's earnings conference call for the Second Quarter of 2023. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Ellie Mertz, VP of Finance. Please go ahead. Ellie Mertz: Good afternoon, and welcome to Airbnb's Second Quarter of 2023 Earnings Call. Thank you for joining us today. On the call today, we have Airbnb's Co-Founder and CEO, Brian Chesky; and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a Shareholder Letter with our financial results and commentary for our second quarter of 2023. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks, and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we'll be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under Forward-looking Statements in our Shareholder Letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also during this call, we will discuss some non-GAAP financial measures. We provided reconciliations to the most directly comparable GAAP financial measures in the Shareholder Letter posted to our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I will pass the call to Brian. Brian Chesky: All right. Thank you Ellie. And Good afternoon, everyone. Thanks for joining today. I'm excited to share our results with you. Q2 was another strong quarter for Airbnb. We had over 115 million nights and experiences booked. Revenue of $2.5 billion grew 18% year-over-year. And when you exclude foreign exchange, our revenue increased 19% year-over-year. Net income was $650 million, representing a net income margin of 26%, our highest second quarter ever. And free cash flow for the quarter was $900 million, up 13% year-over-year. In fact, on a trailing 12-month basis, our free cash flow was $3.9 billion. And this represented a trailing 12-month free cash flow margin of 43%. And because of our strong cash flow and balance sheet, we were able to repurchase $2.5 billion of our stock in the last 12 months, which is more than offset the impact of shared dilution. Now, during the quarter, we saw a number of positive business trends. First, guest demand in Airbnb remained strong. Nights and experiences booked increased 11% in Q2 compared to a year ago. Active bookers grew in every region, and we had more first-time bookers compared to a year ago. In fact, we've now had more than 1.5 billion guest arrivals since starting Airbnb. Second, guests are traveling farther. Cross-border nights booked increased 16% in Q2 compared to a year ago. And we are especially encouraged by the continued recovery of Asia Pacific, where inbound international travel increased 80% compared to this time last year. And we also saw cross-border nights booked to North America increase 20% year-over-year. And finally, the third trend we're seeing is that guests are staying longer on Airbnb. Millions of people remain flexible about where they live and work, and we see this reflected in our bookings. In Q2, long-term stays remain 18% of total nights booked. And throughout the quarter, we saw an acceleration in year-over-year growth in bookings for month these days. Now, while the ability to travel and work remotely has been an important part of long-term stay growth, people are also extending their typical weekend stays by an extra night or two. In fact, in the past six quarters, long stays, long weekend stays have been the fastest growing trip type on Airbnb. I think this is just evidence of the incremental flexibility people have post-pandemic. Now, given that we're halfway through 2023, I just want to provide a very quick update on the progress we made across our three strategic priorities. First, we are focused on making hosting mainstream. With supply growth stagnated at the beginning of COVID, we developed a new strategy to recruit more hosts. Since then, we've been focused on raising awareness around hosting, making it easier to get started, and improving our tools for hosts. And our strategy is working. In Q2, supply growth is 19% year-over-year, and this is actually up from 18% in Q1. In fact, in every quarter since we've gone public, we've seen an acceleration in total active listings growth. And we're continuing to see strong supply growth across all regions, all market types, and all price points. In fact, we added a record number of new listings in Q2, and we ended the quarter with more than 7 million total active listings. Second, we're perfecting our core service. We want people to love our service, and that means obsessing over every detail. Millions of people have given us feedback on how to improve Airbnb. We've listened. On May 3rd, we introduced over 50 new features and upgrades as part of our 2023 summer release. Now many of these new features and upgrades were aimed at addressing affordability, starting with new pricing tools for hosts. Hosts told us that our pricing tools are difficult to use. So we redesigned our tools, and we made it easier for hosts to add discounts and promotions. They also told us that they had trouble setting competitive prices. So we added a new feature called similar listings to help them see listings in their area so they know what to charge. Now we received very positive feedback from our hosts, and the changes are already having an impact. Hosts have started lowering their prices, and and with more of them offering weekly and monthly discounts. And as more hosts adopt these tools, we believe we'll be able to drive greater affordability and value for guests. We also rolled out more affordable monthly stays. Guests are staying longer in Airbnb. So we took steps to make longer stays more affordable. We significantly reduced fees for stays longer than three months. We started offering U.S. guests the option to save money by paying with their bank account, and we made it easier for hosts to offer monthly discounts. And as a result, the percentage of our new active listings to offer monthly discount jumped from 22% to 50%. Now we took another step to address affordability with the launch of Airbnb rooms. Airbnb rooms takes us back to our founding ethos of sharing, and it's one of the most affordable ways to travel. Airbnb rooms have an average price of only $67 per night, significantly lower than the average hotel room. Given the increased price sensitivity for many guests, especially the next generation of travelers, this is going to remain an important category for Airbnb. And finally, our third strategic priority is to expand beyond the core. We spent the past few years perfecting our core service. We've rolled out hundreds of new features and upgrades. And today, our core is stronger and more profitable than ever, but we're not stopping there because we have some big ideas for where to take Airbnb next. And we're building the foundational capability for these new product and services that we plan to launch in the years to come. Now, before I turn to Q&A, I want to tell you about a recent campaign that highlights what makes Airbnb unique. Airbnb is known for one of a kind listings. As I'm sure you know, the Barbie movie just came out in theaters. And in celebration of the premiere, we partnered with Warner Brothers and Mattel to transform a home into the Barbie Malibu Dreamhouse. And we launched it as part of our Only on Airbnb campaign. Only on Airbnb caps in the global pop culture moments, inspiring guests with some of the most iconic homes in the world. The Barbie Malibu Dreamhouse has been a sensation, and it is now Airbnb's most popular listing ever. We saw 13,000 press hits and more than 250 million social media impressions since it was announced. And to give you a sense of how much that is, that is twice, more than twice as many press hits as were generated from our IPO. Only on Airbnb campaigns are an effective way to introduce Airbnb and our unique inventory to new guests, and they'll be an important part of our playbook going forward. So those are the results that we have to share for Q2. And with that, Dave and I look forward to answering your question. Operator: Thank you. [Operator Instructions] We'll go to our first question from Mario Lu at Barclays. Mario Lu: Great. Thanks for taking question. So the first one is on the third quarter ADR guide. You said it's upward pressure in the quarter. Can you help explain what you mean by the listing type mix shift that's kind of listing up ADRs? Brian Chesky: Yes, the listing type mix shift is just simply the mix of types of listings, either geographic type of size of home location, that's right in the mix. And so ADRs coming up due to that. And it's also being coming up in the third quarter driven by foreign exchange. Mario Lu: Okay, got it. And then in terms of your section on the operational take rate, you guys mentioned that you're offering a lower take rate, especially for stays after the third month. Does that mean, over time, should we expect this number to come down? Or are there kind of offsets that you're going to provide to keep the operational take rate flat? Thanks. Brian Chesky: Yes, that's Mario. I can answer that. We always want to make sure that we're providing the very best value for our guests. We identified this is a huge opportunity where we could drive incremental conversion by taking take rates down after the third month. And we saw some really great results. That being said, I do not expect our take rates to change materially. There may be some segments or trip types or geographies where we would want to take it down, but that could be offset by other areas that could come up. And so generally, I would expect it to be pretty stable. And the way that we're going to see margin expansion is by launching incremental services for guests and hosts over the coming years. Mario Lu: Great. Thank you. Operator: We'll move next to Jed Kelly at Oppenheimer. Jed Kelly: Hey, great, great. Thanks for taking my question. Just following up on the listing pipe, are you still adding more of that like vacation rental single unit inventory versus some of like call it the smaller units and urban vacation and urban areas? And then can you just give us an update on how we should think about your marketing into the back half? Thank you. Brian Chesky: Yes. Hey, Jed, I can start and I'll hand over to Dave. So our supply, I mean, let me just back up, our supply has actually been really, really strong. You might remember that being a COVID, we were, we flagged this as something we need to work on. That's why we created an initiative called mainstreaming hosting. And the results have been very successful. In fact, supply growth is growing 19% year-over-year. And in fact, urban is actually growing faster in vacation. Urban is growing 20% whereas vacation is growing 19%. So that is pretty stable. And as far as the number of individual hosts versus what we describe as professional hosts, around 90% of our hosts remain individuals. I'll hand over to Dave. David Stephenson: Yes, on the marketing back half, I mean, our marketing expenses as a percentage of revenue we expect to remain relatively flat year-over-year on a total year basis from 2023 over 2022. We did pull forward more marketing to the first half of the year relative to the second half this year. We've been really pleased with the results. So I mean, remember that 90% of our traffic remains direct or unpaid. I think that's an important differentiator versus others. And then when we do things like the Barbie dream house and other big, events like that, we're able to kind of drive more awareness about Airbnb about the uniqueness of our offerings. And this is a powerful strategy for our marketing. Brian Chesky: Yes, maybe I'll just add one thing about marketing is just, it's a full funnel approach. And last year we got 600,000 articles written about us. So people talk a lot about Airbnb. And now I think what you're also seeing is social media, whether it's the only on program Barbie or just generally every means social media is just a topic of conversation. I think that is just a testament to when you invest in a brand, when your brand's a noun and a verb, and you have something unique, you get a lot of those benefits. And I think it's going to be consistent and we'll have pretty consistent marketing expenses to send a revenue over time because of the strength of the brand. Jed Kelly: Thank you. Operator: We'll go next to Douglas Anmuth at JP Morgan. Douglas Anmuth: Hey, this is [indiscernible].. Thanks for taking the question, but I have two. So first one through this affordability. Are you actually seeing that consumers are coming to your platform seeing that the prices are high and walking away and do you feel like that's an opportunity that you guys aren't capturing? Or is it just the case that people are okay with higher prices on the platform right now? And the second thing on the other side for the full year, where does it see the outside to raise your point? Brian Chesky: I don't, we're not able to hear the second question. I don't think. Can you say one more time? Douglas Anmuth: Yes, sorry, on your full year guidance for adjusted EBITDA where did you see upside to give you the confidence to raise it? Brian Chesky: Yes, so I'll take the first question and I'll hand over to Dave. On affordability, our prices have, have obviously risen since pre-pandemic and the growth has been incredible in the business is nearly about twice the size that was pre-pandemic. That being said, in the long run, Airbnb started as an affordable alternative to hotels. And I think that we always have to remember that for every dollar people spend on Airbnb, they spend as much as many as $10 in the world on hotels. So we're still a very small player in a very large market. And I think that one of our big opportunities is to make sure we continue to be affordable. Last year, we got a lot of feedback from the community that Airbnb wasn't as affordable as it used to be. So we made a bunch of changes. We highlighted some of these in my opening remarks. What we've seen though, since then, I'll answer your question. People, the book prices on Airbnb, on average, are lower than the listed prices. So we do see people gravitating towards more affordable stays listed in Airbnb. It's partly why we launched a feature called similar listings, which help us see the listings that we're getting booked. And what hosts I think discovered was the most popular listings that made the most money offered many times the very best value. And so this was, in a sense, a win-win for guests in the house by really trying to build better tools. I also just want to point out one thing, which is our prices are essentially flat year by year. I think they're about 1% up year-over-year, but in North America, our prices are now down 1%. Now, when you take out mixed shifts, because people are booking larger homes, our prices in North America are actually down 4%. And if you compare it to hotels, depending upon which data you take, hotels are up some between 4% or as much as 10%. And it seems like hotels are suggesting, based on some of the public remarks, that they aren't going to come down. In fact, those prices might come up. So to answer your question, I think people come to Airbnb for one of the kindspaces at great value. And if we can keep prices very affordable, and then also focus on reliability, I think there's going to be a lot of demand to come. David Stephenson: And then in terms of profitability, I'm just really proud of our continued progress of increasing our overall margins over time. We made some hard choices in the midst of COVID to reduce our fixed costs, get back to the core, and focus on our overall profitability. The major shifts of things like our marketing expenses that we just talked about, where 90% of our traffic remains direct or unpaid, it gives us a lot of leverage for improving our overall profitability. And we're going to continue to do that this year. We continue to make great improvements in our overall variable costs, things like operations and support costs, or community support, infrastructure costs, etc. And then we've just been doing an excellent job of being very judicious with our fixed cost growth. So we've moderated our headcount growth overall. We're growing modestly, and we're investing behind the things that matter most for our guest center hosts. And I think that focus is actually enabling us to deliver even more innovations, as Brian talked about on the call, like, and we've had over 500 improvements to Airbnb in the last several years. And so we're going to continue to manage our fixed costs closely, focusing on the things that matter. So for the back half of the year, we feel confident we're going to be able to exceed our EBITDA margins over the prior year. Brian Chesky: And I think I'll just add that, I think that we found that as we get more efficient, we actually grow faster. So I think being incredibly disciplined, incredibly focused, incredibly lean has actually been great for growth. Douglas Anmuth: Okay, thank you. Operator: And our next question comes from Stephen Ju at Crédit Suisse. Stephen Ju: Okay, thank you. So Brian, the shareholder letter is teasing us a little bit with the commentary about Expand Beyond the Core, but there really isn't much there beyond the statement itself. So in addition to experiences, and please share any updates in terms of what you may be doing there, but what could be some of these new directions you might be thinking about that might be products and services for either the host or the consumer. Thanks. Brian Chesky: Hey, Steven, thanks for the question. It's one of my favorite questions. What are we going to do next? Let me just start and back up. I just want to recap today how I think about this whole space. Before we talk about Expand Beyond the Core, I just want to say one thing about the Core, which is that the hotel industry is more than about 10 times the size of Airbnb. And I think that almost anyone that stays in a hotel could consider staying in an Airbnb. I mean, the spaces are one of a kind. They're often better value, but we need to make sure that we continue to drive value. And I think the next big focus for Airbnb is reliability. We can make Airbnb even nearly as reliable in many markets and hotels. I think you're going to open up a whole new generation of travelers to Airbnb. So I think there's a lot more runway just in the core business. I think we're only scratching the surface, and that's partly why we are so focused on perfecting our core. Now, beyond that, let's talk about what's next, starting from the most nearest adjacencies out international. One of the things we've seen is that Airbnb has a lot of, we've got a lot of scale in the United States, and we've got a lot of scale in top markets in Europe, but actually, Airbnb is under-penetrated in most countries around the world. Just to give you an example, a couple years ago, a few years ago, we were concerned about the lack of penetration we had in Germany. We were also pretty nascent in Brazil. Since the beginning of the pandemic, Brazil is more than double the size, and Germany is more than 60% larger. And Germany is on track now to be one of the largest countries in the world on Airbnb. So we're going to take that playbook, and we're going to bring it to Asia, and we're starting with Japan and Korea. But Asia Pacific is a frontier. It's a huge opportunity for growth. I think that is just one of many markets, including Latin America. And the other thing I should point out within Europe is, beyond UK, beyond France, beyond some of the really top markets, there's a lot of countries in Europe where we're not actually that penetrated. So there's a lot of international expansion. Next would be longer stays. Before the pandemic, only 13% of our business was for monthly stays. Now it's 18%, and it's stable, and we don't think it's going down. In fact, I think this is a huge opportunity. I think all you have to believe is Zoom is here to stay to believe flexibility is here to stay. If you believe that, you're going to see a lot more people either living nominally or some people traveling for the summer, going away for the winter, or extend to weekends, which is a whole new category between travel and housing. So I think that is probably one of the most underrated markets in Airbnb. You have experiences. I thought experiences were going to have a breakout before the pandemic, and instead we had to put them on hold. But the thing we've learned is that people love experiences. 95% of reviews that are left for experiences end in a five-star review. And for our core business homes, it's 84%. So that means that people on a statistical basis like experience even more than homes. And so we think that product is being – is ready to scale. And so I've been spending a lot of time. I think you're going to see some growth in the years to come. And I'll just add a couple more things. And let me preface this by saying I don't usually like to foreshadow new things before we launch them. I got to get you to tune into our releases, which we do every May and November. But there's a lot of service opportunities on guests and hosts. I think that, whether it's Eats, Amazon, or Etsy, or Alibaba, they've shown there's an entire suite of services that you can offer for hosts. I know I get a lot of questions about paid placement, which is absolutely on the table. But there's many other services as well for hosts. And then in guest services, think about all the services you could get in a hotel or at a resort. And then think of all the services that a hotel couldn't maybe afford to offer because they're at sub-scale. But Airbnb, in many markets, we've got a lot of critical scale. So these are just some of the – I would just even call it near-term opportunities. But we do have some pretty big ideas. I think AI is basically like a once-in-a-generation platform shift, probably bigger than the shift to mobile, probably more akin to something like the Internet as far as what it can do for new businesses and new business opportunities. And I think that it is a huge opportunity for us to really be in the leading edge of innovation. So that's what we're doing. I'm very, very excited about it. And I will just say that we made a lot of progress the last three years, building a strong business, being profitable. But my strength as CEO is really about expanding beyond the core. So this is where I think we're going to be entering our sweet spot in the coming years to come. Stephen Ju: Thank you. Operator: We'll move next to Bernard McTernan at Needham & Company. Bernard McTernan: Great. Thank you for taking questions. Maybe just start just – if you could just discuss the booking trends throughout the quarter where April is up 10%, going to June plus 15%, anything that you saw that was driving that better performance throughout the quarter. And then on pricing, you mentioned the new pricing tools focused on affordability. Are we seeing the full impact of that in 3Q, or how should we expect that to trend throughout the coming quarters? Brian Chesky: Let me start with the booking trends. What we saw was – what we shared in the letter, which is that the global booking trends increased from 10% growth year-over-year in April to 15% in June. And if you remember what we saw on Q2 was a hard comparison year-over-year, specifically driven by Europe, where there were delayed bookings in 2022 that compressed more bookings into Q2. That pressure moderated through the quarter, which is the primary reason why we're seeing that acceleration. And interestingly, we actually saw acceleration in total [growth on both book] from Q1 to Q2 in North America. And so I think that was telling about just the strength and resiliency of the North American consumer. And we're continuing to see that strength lead into Q3, which is why we're forecasting further acceleration of Knight's growth from Q2 into Q3. We're seeing great growth in Asia Pacific, as we called out in the letter, over 80 percent growth in APAC. And I'm really pleased with our growth in Latin America. It's twice the size that it was pre-COVID, and it's growing really nicely. And then in terms of the pricing tools, I think that we have seen a number of positive impacts from our pricing tools. As we talked about earlier, in North America, ADR actually being down 1 percent year-over-year when excluding the impact of mixed, it's actually down 4%. I don't think we've seen the full impact of all of those. I think we're going to continue to improve and make the pricing tools better for our hosts. And then to make it more transparent for what the prices are that they should charge so that they know what a competitive rate is. And I think we'll continue to make sure that we're providing great value, because while our prices are either moderating or even coming down, that's in the face of other competing platforms actually increasing rates. And so I think the value gap continues to grow, which just shows the benefit of booking on Airbnb expanding. Bernard McTernan: Great. Thanks, Dave. Operator: We'll go next to Jacob [indiscernible] at TD Cowen. Unidentified Analyst: Hi, this is Jacob in for Kevin. Thanks for taking my question. We've been getting a lot of questions from investors on potential initiatives that Airbnb could do moving forward to increase take grade, which could maybe include letting advertisers bid on a platform. I was wondering if you could write any details there. Also, you discussed a bit in this call that you had already rolled out expansion tools in Germany and Brazil. I was wondering if you could comment on any of the results that you're seeing so far. Thanks. David Stephenson: Yes, I'll start. So with regards to increasing take rate, one of the things I've learned, actually Dave was somebody who told me this, it's something from Jeff Bezos at Amazon. He said that one of the things you have to do as a business leader is you have to be focused, and you have to focus on the most perishable opportunities first. And so I think that the most perishable initial opportunity Airbnb was to get focused and disciplined and really rationalize our cost base. And then when we saw a travel recovery, it was about getting market share. And I think that's still where we're focused on. So, advertising on the platform is a common request. Certainly, it's a common thing I get asked on earnings calls. It is absolutely on the table. I think we could do a very good job at it. It is not one of the most perishable opportunities. It's just why we haven't prioritized it. We're really prioritizing getting Airbnb to as much scale as possible and continue to grow. So, but it is absolutely on the table. And just to dive in this a little bit deeper, there is such an opportunity for us to build differentiated tools, services, and offerings for hosts. You think about it, over the last few years, we made, as Dave referenced, almost over 500 upgrades in innovation. Probably around half of those happened for hosts, literally hundreds of improvements. And most of these we don't charge for. They have nothing to do with our take rate. Our take rate was what it was even before all these, like air cover, which is top to bottom protection with $3 million of damage protection. That is free to our hosts and our competitors don't offer it. I do think though, while we always want to make sure we're providing more value for hosts for whatever we're charging, there's a lot of opportunities. Obviously an advertising platform is one, matching people with homes that need, that don't have time to host with hosts who can host but don't have a home, really matching that marketplace. But I think a lot more, a lot more business that we call them co-hosts, so creating a co-host marketplace is really interesting. And there's a plethora of other services on the host side. And again, there's also a plethora of services on the guest side as well. So those, for things that make the experience better, I would say would be more perishable. With regards to Germany and Brazil, I can have Dave just talk about it in a second. But before I do, I'll just say that, we are, I think the most international travel company in the world, we are not concentrating Europe. We're not concentrating North America. We're truly everywhere. We're in almost every country and region in the world. It's truly a global travel network. And I think we have a really good playbook for how to expand into these markets. And I think Germany and Brazil was a really interesting playbook where we didn't just focus on brand, but we also focus on PR, social media. We leverage like local celebrities that often will do promotions with Airbnb. And so there's a, and this is, in addition to localizing our product and really making sure we have a key product and we have good supply in the corridors that these people will travel to. I think Germany and Brazil are good stories. Germany is more than 60% larger than it was before the pandemic. I believe Brazil is like 110% larger. I don't know if Dave, you want to go into anything else? Brian Chesky: I think you hit it. Well, I'll just reinforce a couple of things. I mean, step one in 80s markets is make sure that we well localized the product. Usually the product can be very consistent globally, but often payment methods are areas where we need to make sure that we're being very localized. And then this full funnel approach is key. Making sure that we have all of the elements, social, NPR, celebrity and brand and search engine marketing. We often start in some of these markets with just the search engine marketing, but that's too narrow and we need the full funnel to see the effect. And I think when we have that full funnel approach, you get the results that we're seeing in Brazil and Germany. That's why we're expanding that on to Asia for both like Japan and South Korea. And then I'll even go back to the potential initiatives for loan because I think it's important to double click on the fact that you have to remember that the majority of our hosts are individual hosts and the things that we need to build are for those individuals So for example, adding advertising, we have to be mindful that we don't just add something like that that can disproportionately benefit professional hosts over individuals and take the balance of the marketplace out of balance. And I think it's really important to do that because that's what's unique and different about Airbnb. We're not built on the backs of professional hosts. We're glad they're there. We're glad they're part of the ecosystem, but it's even more important that we support our individual host community. Unidentified Analyst: Great, thank you. Operator: We'll go next to Brian Nowak at Morgan Stanley. Brian Nowak: Thanks for taking my question out. Dave, just to go back to earlier question on ADRs being up in 3Q, I get geographic size location, it's better, but could you just give us a little more detail about that so we can understand sort of is that geographic comp structure? What are the sizes you're talking about? We're just trying to understand how to think about the drivers of the ADR growth in the third quarter and the durability of that growth into next year. David Stephenson: Yes, I think what we're seeing in the near term for Q3 is what we've included here. We're anticipating it to be up year-over-year driven by foreign exchange and the mix shift of larger homes and geographic mix. I think over time, because we're seeing things like Latin America growing nicely, Asia growing nicely and more of cross-border travel, you could see some moderation of our ADRs over time, but again, we're talking moderation, we're talking a percentage point in our here or there. We have better visibility into Q3 right now, which thinks it's going to be up year over year, longer term, it could be flat-ish to maybe moderately down over time, but at the same time, we keep predicting that ADRs are going to decrease and each quarter, it's been amazingly resilient throughout the last few number of quarters, so I don't have much more to say beyond that. Operator: We'll go to our next question from James Lee at Mizuho. James Lee: Great, thanks for taking my questions. Two here, one on ADR, you guys talk about, obviously, North America decreased by one percent. I was wondering if you can maybe unpack between life alike and maybe next shift, so we can better understand the dynamic. And also secondly, maybe can you talk about the price elasticity as you're allowing hosts to use the tools to adjust the pricing? What do you see from consumer out there, travelers out there, in terms of reacting to those price changes? Thanks. Brian Chesky: Sure, we absolutely measure the price elasticity of our pricing and we see a good benefit from lower pricing driving increased nights overall. I think, obviously, affordability is super important in people's minds all around the world. We definitely see it specifically in North America where while calendar prices have increased, that is the average price available on Airbnb have gone up, the booking prices of what people are actually booking are declining. So that just shows you the desire for people to have great value. In North America specifically, what we saw was it was down 1% year-of-year, but like for like, so that means the same property on average, excluding mix of size, location, and type was actually down 4%. So on a like for like basis our ADRs in North America is actually down 4%. And that's very different than what we're seeing the hotel industry kind of touting increases of six to 10% or more. So that's where the gap in value continues to widen. James Lee: Okay, I have one more question here, Dave. A lot of investors are asking about maybe student loan forgiveness, expiration. I was wondering how you think about this issue, anything that's contemplating into your guidance for FY23. Thanks. David Stephenson: Yes. I don't have a specific point of view on the student loan forgiveness and impact on guidance. I think what we're seeing is that in the face -- people keep waiting for the economic shoe to drop and get concerned about whether or not people are willing to travel and whether the economy is going to have a drag on our overall results. And it's just not what we're seeing. We're seeing a strong resilience in travel that people are prioritizing, travel over other things. And all the work that we're doing to make sure that we're providing great value and even either moderating or having prices come down just gives us greater value relative to alternatives, which I think is the tailwind on why we're continuing to, by all of our estimates, gain share of total accommodation nights, both quarter-over-quarter and year-over-year. James Lee: Okay, great, thank you. Operator: We'll go next to Ken Gawrelski at Wells Fargo Securities. Ken Gawrelski: Hi, thank you. I want to come back to the ADR issue. And Brian, if you could talk about-it was very helpful detail on the 4% kind of like for like in North America, but how do I square Dave's comments that you see overall ADRs kind of flattish over the medium term with your comments that you want to continue to drive affordability? I know you've introduced some tools and you're seeing some impact there. And maybe the follow-up to that is, how will you know when the marketplace is in balance and where you've kind of reached equilibrium and the ADRs in the right place? Thank you. Brian Chesky: Again, yes, I'll start. So I think affordability and our prices have to be taken into account relative to the rest of the market. Obviously inflation is up, most everything in the world is more expensive today than it was a year ago. And I presume that will be the case next year this time. We know, for example, that while our price in North America like for like or down 4% hotels are at least 4% higher in some estimates are they might even be approaching double digits higher. And based on recent comments I've been hearing, I think they expect for prices to continue to go up. So if we live in a world where Airbnb prices do not go up and the even remain flat or stable and hotels continue to rise, then Airbnb continues to become more affordable relative to hotels, which are still much larger audience than Airbnb. But that brings up a different question, which is, how do you balance the right prices for guest and host? It's good to the marketplace. And so we have hosts, these aren't just suppliers we have no relationship with. So our goal is not to drive down prices as low as possible. The prices have to find a balance between the very best affordability for guests while still making sure a host can make any meaningful income and it's still really valuable income for them to earn. Now, one of the things we've seen is there's a lot of sensitivities you can look at that we can show hosts that when you lower your prices to a point, you actually will get more business because most hosts have very low occupancy. They're not like hotels. A hotel is usually booked like 20, 25 nights a month. Maybe some hotels are booked 30 days a month. Most hosts are not booked most nights. And so the big deal is that they lower the price just a little bit. They will add more bookings, more nights and they'll end up making more money. There's a point where they lower it so much though that it's no longer worth their while. And that is the secret sauce for us to be able to perfectly balance supply and demand to make sure that both sides it's working for them. And I think that equilibrium, that balance between guests and hosts, that kind of is one of our secret sauces. James Lee: Thank you. Operator: And next we'll move to Tom Champion at Piper Sandler. Tom Champion: Hi, good afternoon. Looks like you've built some tools to stimulate or offer long-term stays. And I'm just curious what you think that will ultimately do to the rate, which is kind of hovered around the 18% rate for room nights to the last couple quarters now. Where do you see that going over time? And then Dave, I guess a question for you. Another very strong quarter for EBITDA margins. What do you see the long-term margin potential of the business over time? Just curious if you've updated that. Thank you. Brian Chesky: Hey Tom, I'll take the first one. So long-term stays are 18% of our nights book. Long-term stays obviously defined by a month or longer. And as I mentioned before, they were around 13% before the pandemic. Now, it's very hard to predict exactly how it will change in the next one, two, three, four quarters from now. So I'm not going to make a prediction about where 18% might be in Q4 or next Q1. But what I can say with a fair amount of confidence is I think in the next decade, it's going to be a lot higher than 18%. I think the overall wins are towards longer and longer stays. And the reason why is because more than ever in any time in human history, you've got hundreds of millions of people and one day, perhaps more than a billion people that have a job via laptop that has some incremental flexibility that did not exist 10 or 20 years ago. Think about the number of people that are young that don't have a family and can actually work from a laptop and move around. Then you have people of families that have kids in school that can't do that, but their kids aren't in school in the summer. So you're going to see more and more people still go away from the summer. Many people are thinking about going away for the winter. People are moving away from headquarters, but they might come back, give a work for extended periods. So I think this basic thing we think is going to happen is there's going to be a lot more flexibility in the future. And I think there's going to be a category that is not travel and it's not classic housing, housing as in one year leases or real estate. There's going to be a category in between. And it doesn't even really have a name, but our stays of 30 days are longer. I mean, that is around 100 million nights booked a year. So that is actually a major new category of business that didn't really exist in a meaningful way when we started Airbnb. And if anyone in the world wants to book a stay of a month or longer, and they're going to book site on scene, so they're going to book a place they can't visit and do a tour ahead of time, I think Airbnb is going to be the leading place to do. And there really isn't another global player that you can do with this. So ultimately, I can't predict the short term, but the long term, we're very bullish. And we actually have a lot more features and upgrades in this area of monthly stays that I think will increase adoption. And also to be able to get people that only want to host on a monthly basis to come on Airbnb, that would actually unlock lots of new listings. Dave, I'll hand over to you. David Stephenson: Yes, thanks for the question, EBITDA margins I am really proud of our progress towards it. We've made some substantial progress based on things like the change in our marketing approach, improvements in variable costs or fixed cost leverage. Also remember that the higher average daily rates have helped our overall margins and kind of accelerated overall profitability. That said, we are in growth mode. I'm really not focused on optimizing margins. I'm proud of the fact that we can grow well and drive great profitable growth, but we are focused on growth. I think the extent that we'll expand our margins over time, I think the biggest opportunity to be with some of the services that Brian mentioned earlier in the call, as we add guests to our host services, I think that will increase the lovers of revenue that we can gain and much of that revenue will flow through to kind of higher overall profitability. But all that said, I don't have a new long-term target. I'm just proud of the fact that we've been able to deliver the profitability we have as quickly as we have. Tom Champion : Thank you both. Brian Chesky: Thank you. Operator: Next, we'll move to Mark Mahaney at Evercore ISI. Mark Mahaney: Okay, I wanted to ask Dave, I wanted to ask a financial question on the impact of AI and Gen AI. And I want to ask it this way, which is, as you think about the P&L impact of these investments over time and applications, do you think it's more likely to lead to improved monetization or improved cost efficiencies? And I'm sure you're going to answer it's both, but if you would lean more on one way or the other, which one would it be? Thanks a lot. David Stephenson: Thanks Mark. Yes, absolutely, it is both. I think it's timing. I think in the near term, I mean, remember that we actually use a fair amount of AI right now on the product. Like we do it for our party prevention technology, a lot of our matching technologies, while the underlying technologies we have, actually AI driven, it's not so much Gen AI, which is such a huge kind of future opportunity. I think we'll see more leverage in our fixed cost space. So needing fewer people to do more work overall. And so I think that that's going to help both on our fixed costs and some more variable costs. So you'll see us be able to automate more customer service contacts over time. So in the near term, I think you'll see, this is one of the things that we're going to be able to benefit from on our fixed and variable cost leverage. And then over more time, and I think it would be great to have Brian chime in on our future approach with Gen AI, would be how do we even make the service better for our guests and our hosts? I think there's a huge unlock there, but it may take a little more time. Brian Chesky: Yes, I'll just share a few things. I mean, I think, obviously as Dave said, probably efficiency in the short term, growth in the long term. Before I talk about the long term, let me just double click on one part of the near term that Dave referred to, which is customer service. So customer service, the strength of Airbnb is that we're one of a kind. We have seven million active listings, more than seven million listings, and everyone is unique, and that is really special. But the problem with Airbnb is it's one of a kind, and sometimes you don't know what you're going to get. And so I think that if we can continue to increase reliability, and then if there's something that goes unexpected, if customer service can quickly fix or mediate the issue, then I think there will be a tipping point where many people that don't consider Airbnb and they only stand hotels would consider Airbnb. And to give you a little more color about this customer service before I go to the future, there are so many more types of issues that could arise staying in Airbnb than a hotel. First of all, when you call a hotel, they're usually one property and they're aware of every room. We're nearly every country in the world. Often guest host will call us, and they will even potentially speak a different language than the person on the other side, the host, the guest and host. There are nearly 70 different policies that you could be adjudicating. Many of these are 100 pages long. So imagine a customer service agent trying to quickly deal with an issue with somebody from two people from two different countries in a neighborhood that the agent may never even have heard of. What AI can do, and we're using a pilot to GPT-4, is AI can read all their policies. No human can ever quickly read all those policies. It can read the case history of both guests and hosts. It could summarize the case issue, and it can even recommend what the ruling should be based on our policies, and it can then write a macro that the customer service agent can basically adopt and amend. If we get all this right, it's going to do things. And in your term, it's going to actually make customer service a lot more effective, because agents will actually be able to handle a lot more tickets than many tickets. You'll never even have to talk to an agent, but also the service to be more reliable, which will unlock more growth. Now, this of course leads to the bigger question. What can we do with AI? And I just wanted to offer a minute or two of thoughts, and I've shared this last earnings, but it's worth repeating. If you were to go to ChatGPT right now, and you ask it a question, and I were to go to chat GPT and ask it a question, we're going to get mostly the same answer. And the reason why is it doesn't know who you are, and it doesn't know who I am, so it does really go with like a mutable truth, like how far's the Earth, the Moon, or something like that. There's no conditional answers to that. But it turns out in life, there's a whole bunch of questions. And travel is one of these areas where the answer isn't right for everyone. Where should I travel? Where should I stay? Who should I go with? What should I bring? Everyone of these questions depends on who you are. And so we're not going to be building like large research labs to develop these large language models. Those are like infrastructure projects, building bridges, but we're going to build the applications on top of the bridges, like the car. And I think Airbnb is best in class at designing interfaces. I think you've seen that over the last few years. And we can design, I think, a breakthrough interface for AI. I do not think that the AI interface is Chat. Chat, I do not think is the right interface, because you want to interface that's multimodal. It's text, it's image, and it's video. And you can, it's much faster than typing to be able to see what you want. So we think there's a whole new interface. And also, I think it's really important that we provide a lot of personalization, that we learn more about you, that you're not just a unanimous customer. And that's partly why we're investing more and more on account profiles, personalization, really understanding the guests. We want to know more about every guest in Airbnb than any travel company knows about their customer in the world. And if we do that, we can provide much more personalized service and that our app can almost be like an AI concierge that can match you to local experiences, local homes, local places all over the world. And I think the last thing I'll just say about AI is I think the companies that will best succeed in AI, well, think of it this way. Which company's best adopted a mobile? Which company's best adopted the internet? It was the companies that were most innovative, the most product-led. And I think we are very much a product-led, design-led, technology-led company. And we always want to be on the frontier of new tech. So we're working on that. And I think you'll see some exciting things in the years to come. Mark Mahaney: Thank you, Brian. Thank you, David. Operator: And that does conclude the question and answer session. At this time, I'd like to turn the call back over to Brian Chesky for closing remarks. Brian Chesky: All right, everyone. Well, thank you for joining us today. I just want to recap. Revenue was $2.5 billion, that's 18% higher than a year ago. Net income and adjusted EBITDA were both Q2 records. And our trailing 12-month pre-cash flow was $3.9 billion. Now, this represents a free cash flow margin of 43%. We've made a tremendous amount of progress in the first half of the year, but in many ways we're just getting started. In November, we will share a new set of features and upgrades as part of our 2023 winter release. I'm proud to be accomplishing you too. And I look forward to sharing more with you next quarter. Operator: And this concludes today's conference call. Thank you for your participation. You may now disconnect.	[ { "speaker": "Operator", "text": "Good afternoon, and thank you for joining Airbnb's earnings conference call for the Second Quarter of 2023. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Ellie Mertz, VP of Finance. Please go ahead." }, { "speaker": "Ellie Mertz", "text": "Good afternoon, and welcome to Airbnb's Second Quarter of 2023 Earnings Call. Thank you for joining us today. On the call today, we have Airbnb's Co-Founder and CEO, Brian Chesky; and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a Shareholder Letter with our financial results and commentary for our second quarter of 2023. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks, and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we'll be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under Forward-looking Statements in our Shareholder Letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also during this call, we will discuss some non-GAAP financial measures. We provided reconciliations to the most directly comparable GAAP financial measures in the Shareholder Letter posted to our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I will pass the call to Brian." }, { "speaker": "Brian Chesky", "text": "All right. Thank you Ellie. And Good afternoon, everyone. Thanks for joining today. I'm excited to share our results with you. Q2 was another strong quarter for Airbnb. We had over 115 million nights and experiences booked. Revenue of $2.5 billion grew 18% year-over-year. And when you exclude foreign exchange, our revenue increased 19% year-over-year. Net income was $650 million, representing a net income margin of 26%, our highest second quarter ever. And free cash flow for the quarter was $900 million, up 13% year-over-year. In fact, on a trailing 12-month basis, our free cash flow was $3.9 billion. And this represented a trailing 12-month free cash flow margin of 43%. And because of our strong cash flow and balance sheet, we were able to repurchase $2.5 billion of our stock in the last 12 months, which is more than offset the impact of shared dilution. Now, during the quarter, we saw a number of positive business trends. First, guest demand in Airbnb remained strong. Nights and experiences booked increased 11% in Q2 compared to a year ago. Active bookers grew in every region, and we had more first-time bookers compared to a year ago. In fact, we've now had more than 1.5 billion guest arrivals since starting Airbnb. Second, guests are traveling farther. Cross-border nights booked increased 16% in Q2 compared to a year ago. And we are especially encouraged by the continued recovery of Asia Pacific, where inbound international travel increased 80% compared to this time last year. And we also saw cross-border nights booked to North America increase 20% year-over-year. And finally, the third trend we're seeing is that guests are staying longer on Airbnb. Millions of people remain flexible about where they live and work, and we see this reflected in our bookings. In Q2, long-term stays remain 18% of total nights booked. And throughout the quarter, we saw an acceleration in year-over-year growth in bookings for month these days. Now, while the ability to travel and work remotely has been an important part of long-term stay growth, people are also extending their typical weekend stays by an extra night or two. In fact, in the past six quarters, long stays, long weekend stays have been the fastest growing trip type on Airbnb. I think this is just evidence of the incremental flexibility people have post-pandemic. Now, given that we're halfway through 2023, I just want to provide a very quick update on the progress we made across our three strategic priorities. First, we are focused on making hosting mainstream. With supply growth stagnated at the beginning of COVID, we developed a new strategy to recruit more hosts. Since then, we've been focused on raising awareness around hosting, making it easier to get started, and improving our tools for hosts. And our strategy is working. In Q2, supply growth is 19% year-over-year, and this is actually up from 18% in Q1. In fact, in every quarter since we've gone public, we've seen an acceleration in total active listings growth. And we're continuing to see strong supply growth across all regions, all market types, and all price points. In fact, we added a record number of new listings in Q2, and we ended the quarter with more than 7 million total active listings. Second, we're perfecting our core service. We want people to love our service, and that means obsessing over every detail. Millions of people have given us feedback on how to improve Airbnb. We've listened. On May 3rd, we introduced over 50 new features and upgrades as part of our 2023 summer release. Now many of these new features and upgrades were aimed at addressing affordability, starting with new pricing tools for hosts. Hosts told us that our pricing tools are difficult to use. So we redesigned our tools, and we made it easier for hosts to add discounts and promotions. They also told us that they had trouble setting competitive prices. So we added a new feature called similar listings to help them see listings in their area so they know what to charge. Now we received very positive feedback from our hosts, and the changes are already having an impact. Hosts have started lowering their prices, and and with more of them offering weekly and monthly discounts. And as more hosts adopt these tools, we believe we'll be able to drive greater affordability and value for guests. We also rolled out more affordable monthly stays. Guests are staying longer in Airbnb. So we took steps to make longer stays more affordable. We significantly reduced fees for stays longer than three months. We started offering U.S. guests the option to save money by paying with their bank account, and we made it easier for hosts to offer monthly discounts. And as a result, the percentage of our new active listings to offer monthly discount jumped from 22% to 50%. Now we took another step to address affordability with the launch of Airbnb rooms. Airbnb rooms takes us back to our founding ethos of sharing, and it's one of the most affordable ways to travel. Airbnb rooms have an average price of only $67 per night, significantly lower than the average hotel room. Given the increased price sensitivity for many guests, especially the next generation of travelers, this is going to remain an important category for Airbnb. And finally, our third strategic priority is to expand beyond the core. We spent the past few years perfecting our core service. We've rolled out hundreds of new features and upgrades. And today, our core is stronger and more profitable than ever, but we're not stopping there because we have some big ideas for where to take Airbnb next. And we're building the foundational capability for these new product and services that we plan to launch in the years to come. Now, before I turn to Q&A, I want to tell you about a recent campaign that highlights what makes Airbnb unique. Airbnb is known for one of a kind listings. As I'm sure you know, the Barbie movie just came out in theaters. And in celebration of the premiere, we partnered with Warner Brothers and Mattel to transform a home into the Barbie Malibu Dreamhouse. And we launched it as part of our Only on Airbnb campaign. Only on Airbnb caps in the global pop culture moments, inspiring guests with some of the most iconic homes in the world. The Barbie Malibu Dreamhouse has been a sensation, and it is now Airbnb's most popular listing ever. We saw 13,000 press hits and more than 250 million social media impressions since it was announced. And to give you a sense of how much that is, that is twice, more than twice as many press hits as were generated from our IPO. Only on Airbnb campaigns are an effective way to introduce Airbnb and our unique inventory to new guests, and they'll be an important part of our playbook going forward. So those are the results that we have to share for Q2. And with that, Dave and I look forward to answering your question." }, { "speaker": "Operator", "text": "Thank you. [Operator Instructions] We'll go to our first question from Mario Lu at Barclays." }, { "speaker": "Mario Lu", "text": "Great. Thanks for taking question. So the first one is on the third quarter ADR guide. You said it's upward pressure in the quarter. Can you help explain what you mean by the listing type mix shift that's kind of listing up ADRs?" }, { "speaker": "Brian Chesky", "text": "Yes, the listing type mix shift is just simply the mix of types of listings, either geographic type of size of home location, that's right in the mix. And so ADRs coming up due to that. And it's also being coming up in the third quarter driven by foreign exchange." }, { "speaker": "Mario Lu", "text": "Okay, got it. And then in terms of your section on the operational take rate, you guys mentioned that you're offering a lower take rate, especially for stays after the third month. Does that mean, over time, should we expect this number to come down? Or are there kind of offsets that you're going to provide to keep the operational take rate flat? Thanks." }, { "speaker": "Brian Chesky", "text": "Yes, that's Mario. I can answer that. We always want to make sure that we're providing the very best value for our guests. We identified this is a huge opportunity where we could drive incremental conversion by taking take rates down after the third month. And we saw some really great results. That being said, I do not expect our take rates to change materially. There may be some segments or trip types or geographies where we would want to take it down, but that could be offset by other areas that could come up. And so generally, I would expect it to be pretty stable. And the way that we're going to see margin expansion is by launching incremental services for guests and hosts over the coming years." }, { "speaker": "Mario Lu", "text": "Great. Thank you." }, { "speaker": "Operator", "text": "We'll move next to Jed Kelly at Oppenheimer." }, { "speaker": "Jed Kelly", "text": "Hey, great, great. Thanks for taking my question. Just following up on the listing pipe, are you still adding more of that like vacation rental single unit inventory versus some of like call it the smaller units and urban vacation and urban areas? And then can you just give us an update on how we should think about your marketing into the back half? Thank you." }, { "speaker": "Brian Chesky", "text": "Yes. Hey, Jed, I can start and I'll hand over to Dave. So our supply, I mean, let me just back up, our supply has actually been really, really strong. You might remember that being a COVID, we were, we flagged this as something we need to work on. That's why we created an initiative called mainstreaming hosting. And the results have been very successful. In fact, supply growth is growing 19% year-over-year. And in fact, urban is actually growing faster in vacation. Urban is growing 20% whereas vacation is growing 19%. So that is pretty stable. And as far as the number of individual hosts versus what we describe as professional hosts, around 90% of our hosts remain individuals. I'll hand over to Dave." }, { "speaker": "David Stephenson", "text": "Yes, on the marketing back half, I mean, our marketing expenses as a percentage of revenue we expect to remain relatively flat year-over-year on a total year basis from 2023 over 2022. We did pull forward more marketing to the first half of the year relative to the second half this year. We've been really pleased with the results. So I mean, remember that 90% of our traffic remains direct or unpaid. I think that's an important differentiator versus others. And then when we do things like the Barbie dream house and other big, events like that, we're able to kind of drive more awareness about Airbnb about the uniqueness of our offerings. And this is a powerful strategy for our marketing." }, { "speaker": "Brian Chesky", "text": "Yes, maybe I'll just add one thing about marketing is just, it's a full funnel approach. And last year we got 600,000 articles written about us. So people talk a lot about Airbnb. And now I think what you're also seeing is social media, whether it's the only on program Barbie or just generally every means social media is just a topic of conversation. I think that is just a testament to when you invest in a brand, when your brand's a noun and a verb, and you have something unique, you get a lot of those benefits. And I think it's going to be consistent and we'll have pretty consistent marketing expenses to send a revenue over time because of the strength of the brand." }, { "speaker": "Jed Kelly", "text": "Thank you." }, { "speaker": "Operator", "text": "We'll go next to Douglas Anmuth at JP Morgan." }, { "speaker": "Douglas Anmuth", "text": "Hey, this is [indiscernible].. Thanks for taking the question, but I have two. So first one through this affordability. Are you actually seeing that consumers are coming to your platform seeing that the prices are high and walking away and do you feel like that's an opportunity that you guys aren't capturing? Or is it just the case that people are okay with higher prices on the platform right now? And the second thing on the other side for the full year, where does it see the outside to raise your point?" }, { "speaker": "Brian Chesky", "text": "I don't, we're not able to hear the second question. I don't think. Can you say one more time?" }, { "speaker": "Douglas Anmuth", "text": "Yes, sorry, on your full year guidance for adjusted EBITDA where did you see upside to give you the confidence to raise it?" }, { "speaker": "Brian Chesky", "text": "Yes, so I'll take the first question and I'll hand over to Dave. On affordability, our prices have, have obviously risen since pre-pandemic and the growth has been incredible in the business is nearly about twice the size that was pre-pandemic. That being said, in the long run, Airbnb started as an affordable alternative to hotels. And I think that we always have to remember that for every dollar people spend on Airbnb, they spend as much as many as $10 in the world on hotels. So we're still a very small player in a very large market. And I think that one of our big opportunities is to make sure we continue to be affordable. Last year, we got a lot of feedback from the community that Airbnb wasn't as affordable as it used to be. So we made a bunch of changes. We highlighted some of these in my opening remarks. What we've seen though, since then, I'll answer your question. People, the book prices on Airbnb, on average, are lower than the listed prices. So we do see people gravitating towards more affordable stays listed in Airbnb. It's partly why we launched a feature called similar listings, which help us see the listings that we're getting booked. And what hosts I think discovered was the most popular listings that made the most money offered many times the very best value. And so this was, in a sense, a win-win for guests in the house by really trying to build better tools. I also just want to point out one thing, which is our prices are essentially flat year by year. I think they're about 1% up year-over-year, but in North America, our prices are now down 1%. Now, when you take out mixed shifts, because people are booking larger homes, our prices in North America are actually down 4%. And if you compare it to hotels, depending upon which data you take, hotels are up some between 4% or as much as 10%. And it seems like hotels are suggesting, based on some of the public remarks, that they aren't going to come down. In fact, those prices might come up. So to answer your question, I think people come to Airbnb for one of the kindspaces at great value. And if we can keep prices very affordable, and then also focus on reliability, I think there's going to be a lot of demand to come." }, { "speaker": "David Stephenson", "text": "And then in terms of profitability, I'm just really proud of our continued progress of increasing our overall margins over time. We made some hard choices in the midst of COVID to reduce our fixed costs, get back to the core, and focus on our overall profitability. The major shifts of things like our marketing expenses that we just talked about, where 90% of our traffic remains direct or unpaid, it gives us a lot of leverage for improving our overall profitability. And we're going to continue to do that this year. We continue to make great improvements in our overall variable costs, things like operations and support costs, or community support, infrastructure costs, etc. And then we've just been doing an excellent job of being very judicious with our fixed cost growth. So we've moderated our headcount growth overall. We're growing modestly, and we're investing behind the things that matter most for our guest center hosts. And I think that focus is actually enabling us to deliver even more innovations, as Brian talked about on the call, like, and we've had over 500 improvements to Airbnb in the last several years. And so we're going to continue to manage our fixed costs closely, focusing on the things that matter. So for the back half of the year, we feel confident we're going to be able to exceed our EBITDA margins over the prior year." }, { "speaker": "Brian Chesky", "text": "And I think I'll just add that, I think that we found that as we get more efficient, we actually grow faster. So I think being incredibly disciplined, incredibly focused, incredibly lean has actually been great for growth." }, { "speaker": "Douglas Anmuth", "text": "Okay, thank you." }, { "speaker": "Operator", "text": "And our next question comes from Stephen Ju at Crédit Suisse." }, { "speaker": "Stephen Ju", "text": "Okay, thank you. So Brian, the shareholder letter is teasing us a little bit with the commentary about Expand Beyond the Core, but there really isn't much there beyond the statement itself. So in addition to experiences, and please share any updates in terms of what you may be doing there, but what could be some of these new directions you might be thinking about that might be products and services for either the host or the consumer. Thanks." }, { "speaker": "Brian Chesky", "text": "Hey, Steven, thanks for the question. It's one of my favorite questions. What are we going to do next? Let me just start and back up. I just want to recap today how I think about this whole space. Before we talk about Expand Beyond the Core, I just want to say one thing about the Core, which is that the hotel industry is more than about 10 times the size of Airbnb. And I think that almost anyone that stays in a hotel could consider staying in an Airbnb. I mean, the spaces are one of a kind. They're often better value, but we need to make sure that we continue to drive value. And I think the next big focus for Airbnb is reliability. We can make Airbnb even nearly as reliable in many markets and hotels. I think you're going to open up a whole new generation of travelers to Airbnb. So I think there's a lot more runway just in the core business. I think we're only scratching the surface, and that's partly why we are so focused on perfecting our core. Now, beyond that, let's talk about what's next, starting from the most nearest adjacencies out international. One of the things we've seen is that Airbnb has a lot of, we've got a lot of scale in the United States, and we've got a lot of scale in top markets in Europe, but actually, Airbnb is under-penetrated in most countries around the world. Just to give you an example, a couple years ago, a few years ago, we were concerned about the lack of penetration we had in Germany. We were also pretty nascent in Brazil. Since the beginning of the pandemic, Brazil is more than double the size, and Germany is more than 60% larger. And Germany is on track now to be one of the largest countries in the world on Airbnb. So we're going to take that playbook, and we're going to bring it to Asia, and we're starting with Japan and Korea. But Asia Pacific is a frontier. It's a huge opportunity for growth. I think that is just one of many markets, including Latin America. And the other thing I should point out within Europe is, beyond UK, beyond France, beyond some of the really top markets, there's a lot of countries in Europe where we're not actually that penetrated. So there's a lot of international expansion. Next would be longer stays. Before the pandemic, only 13% of our business was for monthly stays. Now it's 18%, and it's stable, and we don't think it's going down. In fact, I think this is a huge opportunity. I think all you have to believe is Zoom is here to stay to believe flexibility is here to stay. If you believe that, you're going to see a lot more people either living nominally or some people traveling for the summer, going away for the winter, or extend to weekends, which is a whole new category between travel and housing. So I think that is probably one of the most underrated markets in Airbnb. You have experiences. I thought experiences were going to have a breakout before the pandemic, and instead we had to put them on hold. But the thing we've learned is that people love experiences. 95% of reviews that are left for experiences end in a five-star review. And for our core business homes, it's 84%. So that means that people on a statistical basis like experience even more than homes. And so we think that product is being – is ready to scale. And so I've been spending a lot of time. I think you're going to see some growth in the years to come. And I'll just add a couple more things. And let me preface this by saying I don't usually like to foreshadow new things before we launch them. I got to get you to tune into our releases, which we do every May and November. But there's a lot of service opportunities on guests and hosts. I think that, whether it's Eats, Amazon, or Etsy, or Alibaba, they've shown there's an entire suite of services that you can offer for hosts. I know I get a lot of questions about paid placement, which is absolutely on the table. But there's many other services as well for hosts. And then in guest services, think about all the services you could get in a hotel or at a resort. And then think of all the services that a hotel couldn't maybe afford to offer because they're at sub-scale. But Airbnb, in many markets, we've got a lot of critical scale. So these are just some of the – I would just even call it near-term opportunities. But we do have some pretty big ideas. I think AI is basically like a once-in-a-generation platform shift, probably bigger than the shift to mobile, probably more akin to something like the Internet as far as what it can do for new businesses and new business opportunities. And I think that it is a huge opportunity for us to really be in the leading edge of innovation. So that's what we're doing. I'm very, very excited about it. And I will just say that we made a lot of progress the last three years, building a strong business, being profitable. But my strength as CEO is really about expanding beyond the core. So this is where I think we're going to be entering our sweet spot in the coming years to come." }, { "speaker": "Stephen Ju", "text": "Thank you." }, { "speaker": "Operator", "text": "We'll move next to Bernard McTernan at Needham & Company." }, { "speaker": "Bernard McTernan", "text": "Great. Thank you for taking questions. Maybe just start just – if you could just discuss the booking trends throughout the quarter where April is up 10%, going to June plus 15%, anything that you saw that was driving that better performance throughout the quarter. And then on pricing, you mentioned the new pricing tools focused on affordability. Are we seeing the full impact of that in 3Q, or how should we expect that to trend throughout the coming quarters?" }, { "speaker": "Brian Chesky", "text": "Let me start with the booking trends. What we saw was – what we shared in the letter, which is that the global booking trends increased from 10% growth year-over-year in April to 15% in June. And if you remember what we saw on Q2 was a hard comparison year-over-year, specifically driven by Europe, where there were delayed bookings in 2022 that compressed more bookings into Q2. That pressure moderated through the quarter, which is the primary reason why we're seeing that acceleration. And interestingly, we actually saw acceleration in total [growth on both book] from Q1 to Q2 in North America. And so I think that was telling about just the strength and resiliency of the North American consumer. And we're continuing to see that strength lead into Q3, which is why we're forecasting further acceleration of Knight's growth from Q2 into Q3. We're seeing great growth in Asia Pacific, as we called out in the letter, over 80 percent growth in APAC. And I'm really pleased with our growth in Latin America. It's twice the size that it was pre-COVID, and it's growing really nicely. And then in terms of the pricing tools, I think that we have seen a number of positive impacts from our pricing tools. As we talked about earlier, in North America, ADR actually being down 1 percent year-over-year when excluding the impact of mixed, it's actually down 4%. I don't think we've seen the full impact of all of those. I think we're going to continue to improve and make the pricing tools better for our hosts. And then to make it more transparent for what the prices are that they should charge so that they know what a competitive rate is. And I think we'll continue to make sure that we're providing great value, because while our prices are either moderating or even coming down, that's in the face of other competing platforms actually increasing rates. And so I think the value gap continues to grow, which just shows the benefit of booking on Airbnb expanding." }, { "speaker": "Bernard McTernan", "text": "Great. Thanks, Dave." }, { "speaker": "Operator", "text": "We'll go next to Jacob [indiscernible] at TD Cowen." }, { "speaker": "Unidentified Analyst", "text": "Hi, this is Jacob in for Kevin. Thanks for taking my question. We've been getting a lot of questions from investors on potential initiatives that Airbnb could do moving forward to increase take grade, which could maybe include letting advertisers bid on a platform. I was wondering if you could write any details there. Also, you discussed a bit in this call that you had already rolled out expansion tools in Germany and Brazil. I was wondering if you could comment on any of the results that you're seeing so far. Thanks." }, { "speaker": "David Stephenson", "text": "Yes, I'll start. So with regards to increasing take rate, one of the things I've learned, actually Dave was somebody who told me this, it's something from Jeff Bezos at Amazon. He said that one of the things you have to do as a business leader is you have to be focused, and you have to focus on the most perishable opportunities first. And so I think that the most perishable initial opportunity Airbnb was to get focused and disciplined and really rationalize our cost base. And then when we saw a travel recovery, it was about getting market share. And I think that's still where we're focused on. So, advertising on the platform is a common request. Certainly, it's a common thing I get asked on earnings calls. It is absolutely on the table. I think we could do a very good job at it. It is not one of the most perishable opportunities. It's just why we haven't prioritized it. We're really prioritizing getting Airbnb to as much scale as possible and continue to grow. So, but it is absolutely on the table. And just to dive in this a little bit deeper, there is such an opportunity for us to build differentiated tools, services, and offerings for hosts. You think about it, over the last few years, we made, as Dave referenced, almost over 500 upgrades in innovation. Probably around half of those happened for hosts, literally hundreds of improvements. And most of these we don't charge for. They have nothing to do with our take rate. Our take rate was what it was even before all these, like air cover, which is top to bottom protection with $3 million of damage protection. That is free to our hosts and our competitors don't offer it. I do think though, while we always want to make sure we're providing more value for hosts for whatever we're charging, there's a lot of opportunities. Obviously an advertising platform is one, matching people with homes that need, that don't have time to host with hosts who can host but don't have a home, really matching that marketplace. But I think a lot more, a lot more business that we call them co-hosts, so creating a co-host marketplace is really interesting. And there's a plethora of other services on the host side. And again, there's also a plethora of services on the guest side as well. So those, for things that make the experience better, I would say would be more perishable. With regards to Germany and Brazil, I can have Dave just talk about it in a second. But before I do, I'll just say that, we are, I think the most international travel company in the world, we are not concentrating Europe. We're not concentrating North America. We're truly everywhere. We're in almost every country and region in the world. It's truly a global travel network. And I think we have a really good playbook for how to expand into these markets. And I think Germany and Brazil was a really interesting playbook where we didn't just focus on brand, but we also focus on PR, social media. We leverage like local celebrities that often will do promotions with Airbnb. And so there's a, and this is, in addition to localizing our product and really making sure we have a key product and we have good supply in the corridors that these people will travel to. I think Germany and Brazil are good stories. Germany is more than 60% larger than it was before the pandemic. I believe Brazil is like 110% larger. I don't know if Dave, you want to go into anything else?" }, { "speaker": "Brian Chesky", "text": "I think you hit it. Well, I'll just reinforce a couple of things. I mean, step one in 80s markets is make sure that we well localized the product. Usually the product can be very consistent globally, but often payment methods are areas where we need to make sure that we're being very localized. And then this full funnel approach is key. Making sure that we have all of the elements, social, NPR, celebrity and brand and search engine marketing. We often start in some of these markets with just the search engine marketing, but that's too narrow and we need the full funnel to see the effect. And I think when we have that full funnel approach, you get the results that we're seeing in Brazil and Germany. That's why we're expanding that on to Asia for both like Japan and South Korea. And then I'll even go back to the potential initiatives for loan because I think it's important to double click on the fact that you have to remember that the majority of our hosts are individual hosts and the things that we need to build are for those individuals So for example, adding advertising, we have to be mindful that we don't just add something like that that can disproportionately benefit professional hosts over individuals and take the balance of the marketplace out of balance. And I think it's really important to do that because that's what's unique and different about Airbnb. We're not built on the backs of professional hosts. We're glad they're there. We're glad they're part of the ecosystem, but it's even more important that we support our individual host community." }, { "speaker": "Unidentified Analyst", "text": "Great, thank you." }, { "speaker": "Operator", "text": "We'll go next to Brian Nowak at Morgan Stanley." }, { "speaker": "Brian Nowak", "text": "Thanks for taking my question out. Dave, just to go back to earlier question on ADRs being up in 3Q, I get geographic size location, it's better, but could you just give us a little more detail about that so we can understand sort of is that geographic comp structure? What are the sizes you're talking about? We're just trying to understand how to think about the drivers of the ADR growth in the third quarter and the durability of that growth into next year." }, { "speaker": "David Stephenson", "text": "Yes, I think what we're seeing in the near term for Q3 is what we've included here. We're anticipating it to be up year-over-year driven by foreign exchange and the mix shift of larger homes and geographic mix. I think over time, because we're seeing things like Latin America growing nicely, Asia growing nicely and more of cross-border travel, you could see some moderation of our ADRs over time, but again, we're talking moderation, we're talking a percentage point in our here or there. We have better visibility into Q3 right now, which thinks it's going to be up year over year, longer term, it could be flat-ish to maybe moderately down over time, but at the same time, we keep predicting that ADRs are going to decrease and each quarter, it's been amazingly resilient throughout the last few number of quarters, so I don't have much more to say beyond that." }, { "speaker": "Operator", "text": "We'll go to our next question from James Lee at Mizuho." }, { "speaker": "James Lee", "text": "Great, thanks for taking my questions. Two here, one on ADR, you guys talk about, obviously, North America decreased by one percent. I was wondering if you can maybe unpack between life alike and maybe next shift, so we can better understand the dynamic. And also secondly, maybe can you talk about the price elasticity as you're allowing hosts to use the tools to adjust the pricing? What do you see from consumer out there, travelers out there, in terms of reacting to those price changes? Thanks." }, { "speaker": "Brian Chesky", "text": "Sure, we absolutely measure the price elasticity of our pricing and we see a good benefit from lower pricing driving increased nights overall. I think, obviously, affordability is super important in people's minds all around the world. We definitely see it specifically in North America where while calendar prices have increased, that is the average price available on Airbnb have gone up, the booking prices of what people are actually booking are declining. So that just shows you the desire for people to have great value. In North America specifically, what we saw was it was down 1% year-of-year, but like for like, so that means the same property on average, excluding mix of size, location, and type was actually down 4%. So on a like for like basis our ADRs in North America is actually down 4%. And that's very different than what we're seeing the hotel industry kind of touting increases of six to 10% or more. So that's where the gap in value continues to widen." }, { "speaker": "James Lee", "text": "Okay, I have one more question here, Dave. A lot of investors are asking about maybe student loan forgiveness, expiration. I was wondering how you think about this issue, anything that's contemplating into your guidance for FY23. Thanks." }, { "speaker": "David Stephenson", "text": "Yes. I don't have a specific point of view on the student loan forgiveness and impact on guidance. I think what we're seeing is that in the face -- people keep waiting for the economic shoe to drop and get concerned about whether or not people are willing to travel and whether the economy is going to have a drag on our overall results. And it's just not what we're seeing. We're seeing a strong resilience in travel that people are prioritizing, travel over other things. And all the work that we're doing to make sure that we're providing great value and even either moderating or having prices come down just gives us greater value relative to alternatives, which I think is the tailwind on why we're continuing to, by all of our estimates, gain share of total accommodation nights, both quarter-over-quarter and year-over-year." }, { "speaker": "James Lee", "text": "Okay, great, thank you." }, { "speaker": "Operator", "text": "We'll go next to Ken Gawrelski at Wells Fargo Securities." }, { "speaker": "Ken Gawrelski", "text": "Hi, thank you. I want to come back to the ADR issue. And Brian, if you could talk about-it was very helpful detail on the 4% kind of like for like in North America, but how do I square Dave's comments that you see overall ADRs kind of flattish over the medium term with your comments that you want to continue to drive affordability? I know you've introduced some tools and you're seeing some impact there. And maybe the follow-up to that is, how will you know when the marketplace is in balance and where you've kind of reached equilibrium and the ADRs in the right place? Thank you." }, { "speaker": "Brian Chesky", "text": "Again, yes, I'll start. So I think affordability and our prices have to be taken into account relative to the rest of the market. Obviously inflation is up, most everything in the world is more expensive today than it was a year ago. And I presume that will be the case next year this time. We know, for example, that while our price in North America like for like or down 4% hotels are at least 4% higher in some estimates are they might even be approaching double digits higher. And based on recent comments I've been hearing, I think they expect for prices to continue to go up. So if we live in a world where Airbnb prices do not go up and the even remain flat or stable and hotels continue to rise, then Airbnb continues to become more affordable relative to hotels, which are still much larger audience than Airbnb. But that brings up a different question, which is, how do you balance the right prices for guest and host? It's good to the marketplace. And so we have hosts, these aren't just suppliers we have no relationship with. So our goal is not to drive down prices as low as possible. The prices have to find a balance between the very best affordability for guests while still making sure a host can make any meaningful income and it's still really valuable income for them to earn. Now, one of the things we've seen is there's a lot of sensitivities you can look at that we can show hosts that when you lower your prices to a point, you actually will get more business because most hosts have very low occupancy. They're not like hotels. A hotel is usually booked like 20, 25 nights a month. Maybe some hotels are booked 30 days a month. Most hosts are not booked most nights. And so the big deal is that they lower the price just a little bit. They will add more bookings, more nights and they'll end up making more money. There's a point where they lower it so much though that it's no longer worth their while. And that is the secret sauce for us to be able to perfectly balance supply and demand to make sure that both sides it's working for them. And I think that equilibrium, that balance between guests and hosts, that kind of is one of our secret sauces." }, { "speaker": "James Lee", "text": "Thank you." }, { "speaker": "Operator", "text": "And next we'll move to Tom Champion at Piper Sandler." }, { "speaker": "Tom Champion", "text": "Hi, good afternoon. Looks like you've built some tools to stimulate or offer long-term stays. And I'm just curious what you think that will ultimately do to the rate, which is kind of hovered around the 18% rate for room nights to the last couple quarters now. Where do you see that going over time? And then Dave, I guess a question for you. Another very strong quarter for EBITDA margins. What do you see the long-term margin potential of the business over time? Just curious if you've updated that. Thank you." }, { "speaker": "Brian Chesky", "text": "Hey Tom, I'll take the first one. So long-term stays are 18% of our nights book. Long-term stays obviously defined by a month or longer. And as I mentioned before, they were around 13% before the pandemic. Now, it's very hard to predict exactly how it will change in the next one, two, three, four quarters from now. So I'm not going to make a prediction about where 18% might be in Q4 or next Q1. But what I can say with a fair amount of confidence is I think in the next decade, it's going to be a lot higher than 18%. I think the overall wins are towards longer and longer stays. And the reason why is because more than ever in any time in human history, you've got hundreds of millions of people and one day, perhaps more than a billion people that have a job via laptop that has some incremental flexibility that did not exist 10 or 20 years ago. Think about the number of people that are young that don't have a family and can actually work from a laptop and move around. Then you have people of families that have kids in school that can't do that, but their kids aren't in school in the summer. So you're going to see more and more people still go away from the summer. Many people are thinking about going away for the winter. People are moving away from headquarters, but they might come back, give a work for extended periods. So I think this basic thing we think is going to happen is there's going to be a lot more flexibility in the future. And I think there's going to be a category that is not travel and it's not classic housing, housing as in one year leases or real estate. There's going to be a category in between. And it doesn't even really have a name, but our stays of 30 days are longer. I mean, that is around 100 million nights booked a year. So that is actually a major new category of business that didn't really exist in a meaningful way when we started Airbnb. And if anyone in the world wants to book a stay of a month or longer, and they're going to book site on scene, so they're going to book a place they can't visit and do a tour ahead of time, I think Airbnb is going to be the leading place to do. And there really isn't another global player that you can do with this. So ultimately, I can't predict the short term, but the long term, we're very bullish. And we actually have a lot more features and upgrades in this area of monthly stays that I think will increase adoption. And also to be able to get people that only want to host on a monthly basis to come on Airbnb, that would actually unlock lots of new listings. Dave, I'll hand over to you." }, { "speaker": "David Stephenson", "text": "Yes, thanks for the question, EBITDA margins I am really proud of our progress towards it. We've made some substantial progress based on things like the change in our marketing approach, improvements in variable costs or fixed cost leverage. Also remember that the higher average daily rates have helped our overall margins and kind of accelerated overall profitability. That said, we are in growth mode. I'm really not focused on optimizing margins. I'm proud of the fact that we can grow well and drive great profitable growth, but we are focused on growth. I think the extent that we'll expand our margins over time, I think the biggest opportunity to be with some of the services that Brian mentioned earlier in the call, as we add guests to our host services, I think that will increase the lovers of revenue that we can gain and much of that revenue will flow through to kind of higher overall profitability. But all that said, I don't have a new long-term target. I'm just proud of the fact that we've been able to deliver the profitability we have as quickly as we have." }, { "speaker": "Tom Champion", "text": "Thank you both." }, { "speaker": "Brian Chesky", "text": "Thank you." }, { "speaker": "Operator", "text": "Next, we'll move to Mark Mahaney at Evercore ISI." }, { "speaker": "Mark Mahaney", "text": "Okay, I wanted to ask Dave, I wanted to ask a financial question on the impact of AI and Gen AI. And I want to ask it this way, which is, as you think about the P&L impact of these investments over time and applications, do you think it's more likely to lead to improved monetization or improved cost efficiencies? And I'm sure you're going to answer it's both, but if you would lean more on one way or the other, which one would it be? Thanks a lot." }, { "speaker": "David Stephenson", "text": "Thanks Mark. Yes, absolutely, it is both. I think it's timing. I think in the near term, I mean, remember that we actually use a fair amount of AI right now on the product. Like we do it for our party prevention technology, a lot of our matching technologies, while the underlying technologies we have, actually AI driven, it's not so much Gen AI, which is such a huge kind of future opportunity. I think we'll see more leverage in our fixed cost space. So needing fewer people to do more work overall. And so I think that that's going to help both on our fixed costs and some more variable costs. So you'll see us be able to automate more customer service contacts over time. So in the near term, I think you'll see, this is one of the things that we're going to be able to benefit from on our fixed and variable cost leverage. And then over more time, and I think it would be great to have Brian chime in on our future approach with Gen AI, would be how do we even make the service better for our guests and our hosts? I think there's a huge unlock there, but it may take a little more time." }, { "speaker": "Brian Chesky", "text": "Yes, I'll just share a few things. I mean, I think, obviously as Dave said, probably efficiency in the short term, growth in the long term. Before I talk about the long term, let me just double click on one part of the near term that Dave referred to, which is customer service. So customer service, the strength of Airbnb is that we're one of a kind. We have seven million active listings, more than seven million listings, and everyone is unique, and that is really special. But the problem with Airbnb is it's one of a kind, and sometimes you don't know what you're going to get. And so I think that if we can continue to increase reliability, and then if there's something that goes unexpected, if customer service can quickly fix or mediate the issue, then I think there will be a tipping point where many people that don't consider Airbnb and they only stand hotels would consider Airbnb. And to give you a little more color about this customer service before I go to the future, there are so many more types of issues that could arise staying in Airbnb than a hotel. First of all, when you call a hotel, they're usually one property and they're aware of every room. We're nearly every country in the world. Often guest host will call us, and they will even potentially speak a different language than the person on the other side, the host, the guest and host. There are nearly 70 different policies that you could be adjudicating. Many of these are 100 pages long. So imagine a customer service agent trying to quickly deal with an issue with somebody from two people from two different countries in a neighborhood that the agent may never even have heard of. What AI can do, and we're using a pilot to GPT-4, is AI can read all their policies. No human can ever quickly read all those policies. It can read the case history of both guests and hosts. It could summarize the case issue, and it can even recommend what the ruling should be based on our policies, and it can then write a macro that the customer service agent can basically adopt and amend. If we get all this right, it's going to do things. And in your term, it's going to actually make customer service a lot more effective, because agents will actually be able to handle a lot more tickets than many tickets. You'll never even have to talk to an agent, but also the service to be more reliable, which will unlock more growth. Now, this of course leads to the bigger question. What can we do with AI? And I just wanted to offer a minute or two of thoughts, and I've shared this last earnings, but it's worth repeating. If you were to go to ChatGPT right now, and you ask it a question, and I were to go to chat GPT and ask it a question, we're going to get mostly the same answer. And the reason why is it doesn't know who you are, and it doesn't know who I am, so it does really go with like a mutable truth, like how far's the Earth, the Moon, or something like that. There's no conditional answers to that. But it turns out in life, there's a whole bunch of questions. And travel is one of these areas where the answer isn't right for everyone. Where should I travel? Where should I stay? Who should I go with? What should I bring? Everyone of these questions depends on who you are. And so we're not going to be building like large research labs to develop these large language models. Those are like infrastructure projects, building bridges, but we're going to build the applications on top of the bridges, like the car. And I think Airbnb is best in class at designing interfaces. I think you've seen that over the last few years. And we can design, I think, a breakthrough interface for AI. I do not think that the AI interface is Chat. Chat, I do not think is the right interface, because you want to interface that's multimodal. It's text, it's image, and it's video. And you can, it's much faster than typing to be able to see what you want. So we think there's a whole new interface. And also, I think it's really important that we provide a lot of personalization, that we learn more about you, that you're not just a unanimous customer. And that's partly why we're investing more and more on account profiles, personalization, really understanding the guests. We want to know more about every guest in Airbnb than any travel company knows about their customer in the world. And if we do that, we can provide much more personalized service and that our app can almost be like an AI concierge that can match you to local experiences, local homes, local places all over the world. And I think the last thing I'll just say about AI is I think the companies that will best succeed in AI, well, think of it this way. Which company's best adopted a mobile? Which company's best adopted the internet? It was the companies that were most innovative, the most product-led. And I think we are very much a product-led, design-led, technology-led company. And we always want to be on the frontier of new tech. So we're working on that. And I think you'll see some exciting things in the years to come." }, { "speaker": "Mark Mahaney", "text": "Thank you, Brian. Thank you, David." }, { "speaker": "Operator", "text": "And that does conclude the question and answer session. At this time, I'd like to turn the call back over to Brian Chesky for closing remarks." }, { "speaker": "Brian Chesky", "text": "All right, everyone. Well, thank you for joining us today. I just want to recap. Revenue was $2.5 billion, that's 18% higher than a year ago. Net income and adjusted EBITDA were both Q2 records. And our trailing 12-month pre-cash flow was $3.9 billion. Now, this represents a free cash flow margin of 43%. We've made a tremendous amount of progress in the first half of the year, but in many ways we're just getting started. In November, we will share a new set of features and upgrades as part of our 2023 winter release. I'm proud to be accomplishing you too. And I look forward to sharing more with you next quarter." }, { "speaker": "Operator", "text": "And this concludes today's conference call. Thank you for your participation. You may now disconnect." } ]	Airbnb, Inc.	115,705,393
ABNB	1	2,023	2023-05-09 12:30:00	Operator: Good afternoon, and thank you for joining Airbnb's earnings conference call for the First Quarter of 2023. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Ellie Mertz, VP of Finance. Please go ahead. Ellie Mertz: Good afternoon, and welcome to Airbnb's First Quarter of 2023 Earnings Call. Thank you for joining us today. On the call today, we have Airbnb's Co-Founder and CEO, Brian Chesky; and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a Shareholder Letter with our financial results and commentary for our first quarter of 2023. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks, and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we'll be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under Forward-looking Statements in our Shareholder Letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also during this call, we will discuss some non-GAAP financial measures. We provided reconciliations to the most directly comparable GAAP financial measures in the Shareholder Letter posted to our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I will pass the call to Brian. Brian Chesky: All right. All right. Good afternoon, everyone. Thanks for joining. I'm excited to share our Q1 results with you now. We had a strong start to 2023. We had over 120 million Nights and Experiences Booked in Q1. This was a record high [Technical Difficulty] change. Our revenue increased 24% year-over-year. Net income was $117 million, making this our most profitable Q1 on a GAAP basis. And free cash flow for the quarter was $1.6 billion. In fact, on a trailing 12-month basis, our free cash flow was $3.8 billion. This represented a trailing 12-month free cash flow margin of 44%. Because of our strong balance sheet, we were able to repurchase $2 billion of our stock in the last 9 months. And today, we're pleased to announce that our Board just approved a new repurchase authorization for up to $2.5 billion of our Class A common stock. Now during the quarter, we saw a number of really positive business trends. First, more guests are traveling on Airbnb than ever before. Knights and Experiences Booked increased 19% in Q1 compared to a year ago, and we've seen our highest number of active bookers ever despite continued macroeconomic uncertainties. During the quarter, we also saw guests booking trips further in advance, supporting a strong backlog for Q2. Second, more guests are traveling overseas and returning to cities. Cross-border gross nights booked increased 36% in Q1 compared to last year. Now we were especially encouraged by the continued recovery of Asia Pacific as nights booked in Q1 increased more than 40% year-over-year. And we saw international travel from other regions to Asia Pacific increased 160% during the quarter compared to this time last year. Additionally, cross-border nights booked to North America increased once again, with 34% of year-over-year growth in Q1 relative to 31% last quarter. And we've also seen high-density urban nights booked increased 20% year-over-year. Third, guests are continuing to use Airbnb for longer stays. In Q1, long-term stays were 18% of total gross nights booked. And over the past 3 years, we've seen new use cases emerge as guests across all regions and age groups use Airbnb for long-term stays. And finally, supply growth continued to accelerate. In Q1, we grew supply 18% year-over-year, and this is up from 16% in Q4. We saw double-digit supply growth around the world with the fastest growth in North America and Latin America. Urban and nonurban supply growth, in fact, both grew 18%. Now looking ahead, we remain focused on our 3 strategic priorities. First, we're making hosting mainstream. We want hosting to be as popular as traveling on Airbnb. And to do this, we're raising awareness around hosting, making it easier to get started and providing even better tools for our hosts. And our approach is working. In fact, in every quarter since we went public, we have seen acceleration in the year-over-year growth of our total active listings. Second, we're perfecting our core service. We want people to love our service, and that means obsessing over every single detail. Last week, we introduced over 50 new features and upgrades as part of our 2023 Summer Release. Everything we launched was based on direct feedback from our guests and hosts. This included pricing tools, transparent checkout instructions, faster customer service and more. And we also responded to input on rising prices, with the rollout of Airbnb Rooms, an all-new take on the original Airbnb. Now I'm going to share a little bit more about what will be launched in a moment. And finally, we're expanding beyond our core. We have some big ideas for where to take Airbnb next. We're building the foundation for new products and services that we plan to launch in 2024 and beyond. At the same time, Airbnb is still underpenetrated in many markets around the world. So we're increasing our focus on these less mature markets, and we are already seeing positive results. So let me just give you 2 examples. In Germany and Brazil, we rolled out our expansion playbook for accelerated growth. And as a result, we are now 2 -- they are now 2 of our fastest-growing markets. And this playbook has, in fact, worked so well. So we are now expanding it to other markets around the world. Now before we go to questions, I want to talk a little bit about our 2023 Summer Release. Last week, we introduced the most extensive set of improvements ever to Airbnb, and it was all based on feedback from our community. We took a design-driven approach to perfecting our core service. We created a blueprint of the entire experience: every screen, every policy and every interaction with customer service. We then analyzed millions of calls and thousands of social media posts. And we hosted listening sessions with guests and hosts all over the world. And we mapped all this feedback against our blueprint and we prioritized the most common issues. And on May 3, we introduced Airbnb Rooms and unveiled over 50 new features and upgrades for guests and hosts. So let me share a few highlights with you. First is total price display. Guests told us, our prices aren't transparent enough. With total price display, guests can now view the total price with fees before taxes across the entire app. Second, new pricing tools for hosts. We heard from hosts that it's hard to use our pricing tools, and it's difficult to know what the charge. So to help our hosts set more competitive prices, they can now see other Airbnbs are priced in their area. And this includes listings that are both in high demand and getting booked as well as listings that are not. And finally, we also made it simpler to add discounts and promotions for hosts. And third is more affordable stays. Longer stays on Airbnb can be expensive, so we're doing a few things about it. We're reducing our fees after 3 months. U.S. guests can now save money by paying with their bank account, and hosts can easily set monthly discounts and offer more flexible cancellations. Finally, we also introduced Airbnb Rooms, an all-new take on the original Airbnb Private Room. Airbnb Rooms gets us back to the idea that started it all, back to our founding ethos of sharing. And they're also one of the most affordable ways of travel, with an average price of only $67 a night. In fact, over 80% of Airbnb Rooms are under $100 a night. And in the current macroeconomic environment, people want to travel affordably. But guests have told us that they want to know more about who they're staying with before they book. So that's why every Airbnb Room comes with a host passport, which helps guests get to know their host before they book. In response to last week and our 2023 Summer Release has exceeded our expectations. Press coverage was overwhelmingly positive, and we got over 3,000 articles. This is the most press we've ever had from the launch. On social media, our Tweets got 19 million impressions. It really went far and wide on social. But the most important thing we heard is that our guests and our hosts feel like we're listening to their top concerns. If we're not done listening, it will never stop improving Airbnb. So with that, I look forward, Dave and I, to answering your questions. Operator: [Operator Instructions]. We'll go first to Eric Sheridan at Goldman Sachs. Eric Sheridan: I want to come back to the Summer Release from a couple of days ago and come back to the concept of room. Can you help us better understand what you think that will do in terms of generating supply growth and coupled with it generating demand and new traveler growth to the platform as you look out over the next 12, 18 months? Brian Chesky: Yes, I'm here. How are you doing? Yes. So I'm very excited about Airbnb Rooms, because Airbnb Rooms is one of the most affordable ways to travel on Airbnb. We've been doing a lot of listening to guests on Airbnb. And one of the things they told us is, especially in this economic environment, they are looking for affordable ways to travel on Airbnb. And the average price of Airbnb Rooms is $67 a night. So it's an incredible value. And what we wanted to do is offer a product that we thought could capture this affordability segment that we think more and more people are going to be interested in, in this economy and also launch a product that will be very relevant to the next generation of travelers. Essentially, I wanted to launch a product that the 26-year-old me would have wanted. And we looked at our private rooms product, and we already had 1 million listings all over the world, but there was a bit of an obstacle. During the pandemic, people weren't comfortable staying with one another. And to get people more comfortable, we realized that we needed to help people understand the host they're staying with before they book. And so that's why we launched the Airbnb Host Passport. I think this is going to help a lot of people that are looking to save money and are interested in the local travel experience, be encouraged to stay in Airbnb Rooms. We also added new privacy features to understand if there's a lock in the bedroom door, if the bathroom is private. And we think all these different features are going to definitely help Airbnb Rooms. The final thing I'm going to say, Eric, is that we have a major brand campaign coming this summer, where we are going to be promoting Airbnb Rooms. If we are successful, I think this is going to bring in a whole new cohort of younger travelers, people that maybe weren't inclined to travel may now be able to travel and hopefully should list the overall marketplace for Airbnb. Operator: Next, we'll move to Justin Patterson at KeyBanc. Justin Patterson: So if I can, first, to follow up on Eric's question around the Summer Release. Brian, you recently made some comments about AI being a meaningful opportunity for Airbnb going forward. Could you talk about how that just reshapes or helps you reimagine the travel experience going forward and some of the initiatives you might lean into around AI? And then Dave, I appreciate you only give guidepost on the full year versus explicit guidance. Given the room night comp and expense shift in Q2 as well as the dynamic around new pricing tools in the Summer Release, could you help us understand a little bit more some of the assumptions that go into the second half and about flattish year-over-year margin? Brian Chesky: Great. Well, why don't I start, Justin, with AI. This is certainly the biggest revolution and test since I came to Silicon Valley. It's certainly as big of a platform shift as the Internet, and many people think it might be even bigger. And I'll give you kind of a bit of an overview of how we think about AI. So all of this is going to be built on the base model. The base models, the large language models, think of those as GPT-4. Google has a couple of base models, Microsoft reaches Entropic. These are like major infrastructure investments. Some of these models might cost tens of billions of dollars towards the compute power. And so think of that as essentially like building a highway. It's a major infrastructure project. And we're not going to do that. We're not an infrastructure company. But we're going to build the cars on the highway. In other words, we're going to design the interface and the tuning of the model on top of AI, on top of the base model. So on top of the base model is the tuning of the model. And the tuning of the model is going to be based on the customer data you have. And I'll just paint a picture for you. If you were to ask a question to ChatGPT, and if I were to ask a question to ChatGPT, we're both going to get pretty much the same answer. And the reason both of us are going to get pretty close the same answer is because ChatGPT doesn't know that it's between you and I, doesn't know anything about us. Now this is totally fine for many questions, like how far is it from this destination to that destination. But it turns out that a lot of questions in travel aren't really search questions. They're matching questions. Another is, they're questions that the answer depends on who you are and what your preferences are. So for example, I think that going forward, Airbnb is going to be pretty different. Instead of asking you questions like where are you going and when are you going, I want us to build a robust profile about you, learn more about you and ask you 2 bigger and more fundamental questions: who are you? And what do you want? And ultimately, what I think Airbnb is building is not just a service or a product. But what we are in the largest sense is a global travel community. And the role of Airbnb and that travel community is to be the ultimate host. Think of us with AI as building the ultimate AI concierge that could understand you. And we could build these world-class interfaces, tune our model. Unlike most other travel companies, we know a lot more about our guests and hosts. This is partly why we're investing in the Host Passport. We want to continue to learn more about people. And then our job is to match you to accommodations, other travel services and eventually things beyond travel. So that's the big vision of where we're going to go. I think it's an incredibly expanding opportunity. I'll just end by giving you some tactical things we're going to be doing in the next 12 months. Number one is customer service. This is going to be one of the biggest benefits to Airbnb. One of the strengths of Airbnb is that Airbnb's offering is one of a kind. The problem with Airbnb is our service is also one of a kind. And so therefore, historically less consistent than a hotel. I think AI can level the playing field from a service perspective relative to hotels because hotels have front desk, Airbnb doesn't. But we have literally millions of people staying on Airbnb every night. And imagine they call customer service. We have agents that have to adjudicate between 70 different user policies. Some of these are as many as 100 pages long. What AI is going to do is be able to give us better service, cheaper and faster by augmenting the agents. And I think this is going to be something that is a huge transformation. It's a bit all hands on deck, and used to be improvement later this year into next year. That's number one. Number two, we are now building AI into our product. And let me just give you an example. A few months ago, OpenAI launched plug-ins. And in fact, we were actually supposed to be one of the launch partners for the plug-ins on OpenAI ChatGPT. But I told Sam, we were literally one of the first to work with him that before right before our launch, I decided to pull the plug on it. And the reason why is I decided that the interface of pure tech space with widgets at the bottom was probably not the right interface for travel. Ultimately, I think the right interface for travel is multimodal. It's rich media. It's photo. It's video. It's much more immersive. And GPT-4 is available in our app. So we're going to be building GPT-4 into our interface. And I think that's the real opportunity for us. So you should see some big changes next year with AI built into our app. The final thing I'll say is developer productivity and productivity of our workforce generally. I think our employees could easily be, especially our developers, 30% more productive in the short to medium term, and this will allow significantly greater throughput through tools like GitHub's Copilot. So all of this is to say, I'm really excited on the short term and the long term. And the last thing I'll just say is I think the companies that will most benefit from the shift of AI are going to be the companies that have the most innovative cultures. That's kind of what happened in the '90s with the Internet. And if the last couple of years is any indication, having launched over 340 features of innovations, I think we're definitely going to be right at the forefront of this revolution. David Stephenson: And in terms of profitability, we're just really proud of the progress that we've made in our operating efficiency, right? We made some very difficult choices in the midst of COVID to rationalize and streamline the company, get focused, get back to our roots. And we made substantial progress in our profitability ever since, where we've done it. We obviously reduced our headcount by 25%. We've only grown it moderately since. We've made substantial changes in our marketing efficiency, continue to make good improvements in our operating costs, anything from community support to cost of payments to infrastructure costs. Basically, we become a better, more rigorous operating company overall. And that kind of progress has been great for us going forward because even as our businesses rebounded, we have stuck to our core strong kind of operating mode. And so even this year, as we anticipate moderation in ADRs, the improvements that we're going to continue to make in community support, infrastructure, cost of payments and our fixed cost leverage will be enough to offset any of the pressures that we're seeing in average daily rates. Operator: We'll go next to Mark Mahaney of Evercore ISI. Mark Mahaney: Two questions. Across the online travel space, there's this dynamic of marketing costs being much more front-end loaded this year. Dave, any commentary on -- from your perspective, why that is? And then secondly, could you just double-click a little bit, Brian, on the Brazil and Germany examples that you talked about? If there's anything specific that you could say that you did that caused those to kind of accelerate up to become 2 of your fastest-growing markets so that we can think about how replicable those efforts would be in other markets, that would be really helpful. Brian Chesky: Yes, sure. Dave, why don't you take the first one? David Stephenson: Yes. Great. Thanks, Mark. In terms of the front-loading of marketing costs this year, it's just we're learning to operate better. I mean we had seen such great success in our brand marketing campaigns, strong return on investments in that last year. And what we learned is that we just felt like we needed to do that earlier in the year, get out even more ahead of our peak travel summer season with our brand marketing. The earlier we get that message out in the year, the better we can kind of reap that investment for the full year. So this is purely about moving up the spend on kind of brand marketing earlier. And to a lesser extent, but it is an element of it as well, is investing in some of these new geographies where we haven't historically had brand marketing, and so actually expanding that market into more countries. So our marketing expenses as a percentage of revenue will remain largely the same in 2023 as it was in 2022. It's just that we're front-loading more the marketing to get the message out earlier. Brian Chesky: Yes. And Mark, I'll just share a little bit about Brazil and Germany. So Airbnb is one of the most international companies in the world. We're in 220 countries and regions. And many years ago, we developed a playbook to expand internationally outside the United States. And that playbook included PR, included having some people on the ground, although generally, in many these markets only need that. It included a brand marketing campaign and made sure that our product was adequately localized. And it's just a really full funnel approach. And now we've added social media and influencers as well. So recently, over the course of the pandemic, we were not as focused on international expansion. And that's because we're mainly focused on recovery and some of the new travel segments like longer-term stay. Over the last 3 years, obviously, as you know, we've gotten really, really focused, back to basics and our company is significantly more profitable. Now we've done over $3.8 billion in trailing 12-month free cash flow. So we feel like now is a really good time to focus on international expansion. So we started with Germany and Brazil. And again, it was full funnel. It involved a lot of PRs. It involve brand marketing, bringing our marketing ad campaigns to pricing in the United States to these markets, localizing our product and working with local influencers. So it's a pretty full funnel approach. The results have been incredibly positive. These are now 2 of our fastest-growing markets. So we're now looking at bringing this playbook to other markets around the world. And I'll give you a couple of examples. Number one is Asia Pacific. We think there's a huge opportunity in Asia. We're massively underpenetrated. This is going to be probably the fastest-growing market internationally over the next 5 years. And the problem with Asia historically over the last few years is Asia market, as you know, is a very much cross-border market. And with the borders being historically kind of locked down and there hasn't been as much travel, the recovery in Asia has been delayed. Now people are starting to travel, and Asia disproportionately has a lot of young travelers. And Airbnb, as you know, is very popular among the young travelers. So we think Japan, Korea, China, India and Southeast Asia are going to be huge opportunities for growth. Next is Europe. We're very big in France. We're very big in the U.K. We're now seeing great growth in Germany. But there's a lot of markets in Europe. We haven't ever really run robust brand marketing campaigns. Now we're getting more aggressive in Italy. We're getting more aggressive in Spain, and we're now looking at other markets in Northern Europe. And I think there's actually a lot of greenfield in Europe because we've really only focused on a few of the really big markets. And when we see we focus the big markets like France and U.K., we are now really strong. And I think we can have similar penetration in other countries in Europe. And then finally is Latin America. We're seeing a lot of growth in Brazil, and we're now going to bring it to some other really large markets, like Colombia and some other markets within Latin America. So I think international is going to be a pretty big boom to growth over the next 2, 3 years. The one thing I've learned about Airbnb is no matter how different every country is, the playbook doesn't have to vary that much. It works quite well in every market. And especially, it works with Airbnb because it's very much a cross-border network effect business. David Stephenson: Yes, the playbook -- so I just don't want to leave the question without just reinforcing how well the playbook is working for us and that 90% of our traffic remains direct or unpaid, and that's been the case since COVID and continues to be the case. So this investment is working very well for us. Operator: We'll move next to Richard Clarke at Sanford Bernstein. Richard Clarke: Two, if I may. I guess the full year results, you mentioned how you control supply against the demand. I guess at this point, you're talking about supply growing at about 18%, but you're pointing to Q2 demand growing maybe more like 10% to 12%. Which one of those numbers is the right way to think about growth going forward? Should we be extrapolating the 18% or the 10% to 12%? And then just very quickly, you obviously shifted to showing the hold prices. Any impact you've seen from that? Is that impacting conversions? Is that impacting supply? What's been the impact of that change? Brian Chesky: Yes. Richard, why don't I start at a high level? I think our long-term growth is going to only be as strong as our supply. If we were to back out, what happened in 2020, 2021, as that demand grew faster than supply. And initially, this was a great thing. But the problem is when demand grows faster than supply and there's supply constraints, prices generally go up. And as prices have risen, while that's been good for the bottom line, affordability in this economy is a major issue. And so one of the most important things we can do to make Airbnb affordable is to make sure we have enough supply in the platform. And so a year ago, we identified supply growth as a major strategic initiative that we really needed to accelerate, and we created an initiative called Mainstreaming Hosting. The idea is we wanted hosting to be as mainstream as traveling. And we did a number of things. We said, in order to mainstream hosting, we need to make it safe, easy and cool. So we launched AirCover, which is top to bottom protection. No one else offers it. They're going to be set up, and we did some marketing campaigns for the first time in many years. We've since seen, as you know, 900,000 incremental listings. It's now accelerating every single quarter since the IPO. And I think what's going to happen is all the supply coming out of the market will keep prices from going up. My hope is that while the hotel CEOs have said, they expect demand to drive prices up this summer, we want to actually have prices moderate. We think that's going to bring in a whole new generation of travelers to Airbnb. So ultimately, I think that like -- that's a very, very important consideration of the marketplace. The more affordable we are -- just like Amazon, the more affordable we are with a wider selection, the more people will come to Airbnb. So that's the high level. Now with regard to total price, this is primarily a U.S. issue. But in the U.S., as you know, there was a bit of an issue where some hosts had higher cleaning fees. And we heard a lot from guests. And I think what the total price display is going to do, it's going to push demand to listings that are -- have an overall better value of a total price. And when people turn on the price toggle, we see that people are booking listings with lower cleaning fees or no cleaning fees. And I think this is going to have a really good practice in the marketplace of driving the demand to the best value listings, rewarding those hosts and making sure every single host remains competitive. So it's just beginning. We set a pilot in December. It's now available to everyone, so we'll have to see how this plays out in the coming months. But what my expectation is based on our release last week, we launched a lot of features around affordability. We have many more -- much more affordable monthly stay products. Hosts now have monthly stay discounts, weekly stay discounts. We allow hosts to set more competitive prices. We're going to continue to add supply. And hopefully, this is going to continue to address the number one request of travelers, which is affordable offer since. David Stephenson: Let me add two more points. The implementation of the oil price has gone really well. And what we're seeing is actually a neutral impact on our overall business. So the , which we've implemented, has worked quite well. The people that care the most about seeing it all in pricing, they can make the selection. And those who want to see it like other marketplaces don't even make that selection. And then the other -- back to the growth rates, 10% to 12% nights growth is not our long-term ambition. You do have to remember that in Q2, we have a significant hard comparison versus the Omicron, COVID variant that came out last year. Remember that people delayed their travel in Q1 and compressed a large amount of travel into the second quarter, which makes for a hard comparison of nice growth here in the second quarter. Operator: We'll take our next question from Brian Nowak at Morgan Stanley. Brian Nowak: I have two. The first one, Brian, just to go back to your last answer about how affordability is an issue in the economy. On the Airbnb platform, have you seen any signs of trade down or shorter stays or price changes or lower traffic conversion sort of impacts of that more price-sensitive user on the platform yet? That's the first one. Then the second one, Dave, actually, to go back to your last answer as well. I think in the past, you've spoken about how there's a lot of moving pieces around the shape of the year, but 2022 was a reasonable way to think about the shape of the room nights or bookings for the year. How should we think about that now that sort of thinking through the comp structure and how the 2Q, 3Q comps are quite similar? Brian Chesky: David, do you want to take the second, and I'll get on with the first? David Stephenson: Yes. I mean, it has been hard to kind of perfectly predict the exact shape of demand. And obviously, Omicron has impacted the shape on nights demand probably more than the impact of revenue. We continue to see as the revenue guide that we have here is revenue growth between kind of 12% and 16% in the second quarter. And I think that some of the pressures that we're seeing there on overall revenue growth has, frankly, just been some of the elevated ADR rates that we're seeing, just higher overall kind of pricing, especially in North America. But some of the tailwinds that we're seeing for future growth in the back half of the year or a lot of the areas that Brian spoke about, things like continued acceleration in Latin America, acceleration in Asia Pacific and more cross-border travel. So I think some of those things are the benefits we're seeing in the back half of the year. Q2 is turning out to be a little bit tougher comp given Omicron last year, but we're seeing overall stable demand for the back half. We highlighted in the letter that we have 25% more bookings on the books at this time this year for the back half of the year than we did this time last year. So it just gives us confidence in people's willingness and interest in travel for the back half. Brian Chesky: And I can just take the first question, which is what we're seeing, Brian, is that people are most price sensitive, at least currently in North America, especially United States. And in the United States, the lowest price listings have the highest occupancy. So yes, people do want low price listings. And we expect that as Airbnb rates continue to normalize, and hopefully, our rates do not increase as fast to hotels over the next couple of years that we're going to see continued increase in occupancy for more listings in Airbnb and also is partly why we're so bullish about the prospect for Airbnb Rooms, not just to bring people to Airbnb that want affordable options, but really new travelers that have never really traveled very much before, especially Gen Z. Operator: Next, we'll go to Ron Josey at Citi. Ronald Josey: Brian, you talked about expanding the core. And I wanted to ask a little bit more about new ideas for products or the vision for the Airbnb economy overall. I think we've mentioned in the past the marketplace for local host services and other sponsored listings and other ideas. So any insights on sort of how you think about expanding the core and the vision for the Airbnb economy? And then just a quick follow-up, too, on just the experiences rebuild, that recent calls on experience, just talk to us a little bit more about how you feel that product is progressing? Brian Chesky: Yes, Ron, I mean, great, great questions. Just to kind of step back, before the pandemic, we were really already focused on expanding beyond the core. In fact, we had 10 different divisions at Airbnb. We added a Home division. We had an Experience division. We had a Transportation division. We had a Magazine division. So we had a lot of efforts. And then obviously, the pandemic occurred, and we had to get focused back to basics. And what we wanted to do over the last few years is before we work on new things, we wanted to perfect our core service. One of the great source of inspiration I had was Apple. And I remember in the mid-2000s, it was 2006, and Apple had not yet launched the iPhone, but how many of us wanted Apple to come out with a phone? And the answer is a lot of people. And the reason people wanted Apple to expand their phone is because they love their iPod. But how many of us wanted gateway to come out with a phone? And the answer is probably not many, because we didn't love our gateway computer. And so I think that one of the things I've told our team is we have numerous expansion opportunities, but we need permission to expand beyond our core. We need people to first love our core service. So that's why over the last 3 years, we've been focused on really perfecting our core service. That being said, our core service is stronger than ever. It's more profitable than ever. And I think we're now ready to expand beyond the core. So as we speak, we are working actively on new products and services. These new products and services are going to be shipping. Beginning next year, you're going to see a number of things ship next May as part of the 2024 Summer Release. And we're going to see even more things shift later in the year and the years to come. Now obviously, there's a lot of opportunities. There's guest services, there's host services. I'm not going to go into a lot of detail. You obviously will have to tune in to talk. But I think it is important to note that I think that the biggest idea Airbnb has are in front of us. I don't want to think that the biggest idea I ever had when I was 26 working [indiscernible] my 2 cofounders. I think that there's so much more Airbnb can offer. And part of it is just making sure we continue to learn more, build robust profile, build an extensible platform model, continue to increase trust in the platform. And then what we can do is go into adjacencies within our core, but then including that, expand beyond the core. So I think you're going to see a lot of new opportunities. With regards to Experiences, I remain bullish about the product. I think there is a massive opportunity for someone to build a huge product around Experiences. Whether it's us and whether we're able to execute that product, we still have to prove that. One of my great investors -- one of our early investors is Marc Andreessen. He said there's no bad ideas, just ideas that are too early. And a lot of life is timing and experiences. I think when we launched in 2016, it launched right like leading into the pandemic. It was probably early. I think the timing is probably now better. But we did as we decided, let's take a pause on new submissions. Let's retool the product and hopefully put out something that is even more relevant to this next generation that are looking for things to do. So I remain really bullish on all of this. Operator: We'll go next to Mario Lu at Barclays. Mario Lu: Great. The first one is on ADRs. It came better than expected in the first quarter. You guys mentioned, India saw 8% growth. Anything to point out to within that region for its strength? And then is the full year growth still expected to be down mid-single digits? Brian Chesky: Dave? David Stephenson: Yes. On ADRs, it's been interesting how persistently higher average daily rates have remained, and that has been consistent kind of across the globe. I think even more particularly, the ADR rates that we saw in North America have been persistently high. So these are a lot of the reasons why we've been launching so many of the tools and capabilities that Brian has talked about on the call that -- and making sure that we're finding good affordability for our guests for things like Airbnb Rooms and getting tools for a host of even kind of price better. So I don't have anything more to say on that, except that we think that the ADRs, as we continue to see growth in Europe, Latin America and Asia, should moderate a bit here in the second quarter. And we want to continue to make sure we're giving great value to our guests. In terms of full year expectations, the year-over-year growth in ADR should be, I think, still probably down in that kind of mid-single-digit range. There's really no change in our expectations on ADR growth. Mario Lu: Got it. And then the second question is on competition. One of your competitors is launching a loyalty program in July in the U.S. Just curious if you think that is a potential threat to the business since you don't have one? And any data points you can share with regards to what percentage of things are exclusive to your platform? Brian Chesky: I always believe that the best loyalty program is people loving your products. And if they love your products, they come back. And I think that's the reason why nearly 90% of our traffic is direct to organic, and we have really strong rebooker rate. So I mean we haven't needed to have a loyalty program to have really good loyalty on Airbnb because people really love the experience. And ultimately, I think it's just a matter of continuing to innovate. Ultimately, we're in the inspiration business. People want to have good trips, and the best trip wins. And whatever company is most focused on listing the customer feedback, innovating as quickly as possible and taking giant leaps and experiences, I think it's going to be the most successful. So we're really bullish about this. Now that being said, for years, we've looked at a loyalty program. And I don't think a classic point program, which is essentially a subsidy to buy loyalty is the right approach for us. But we do think there's really compelling, interesting ways to reward our very best guests and something we've been actively thinking about. Operator: We'll take our next question from Nick Jones of JMP Securities. Nicholas Jones: So you're adding a lot of great solutions for hosts and guests and the outlook comments in the release, sounds like this is contributing a little bit to some of the ADR pressure. So how do you balance the efforts to continue to increase supply, making it easier for supply to join while redistributing demand to available supply? Is there a risk of incremental ADR compression as a result of some of these efforts? Brian Chesky: Nick, I can start. So I mean, I think part of our secret sauce is our ability to really try to elegantly balance supply and demand. One of the great things we've seen is the marketplace has a natural equilibrium that it finds in itself. For example, the fastest-growing markets of supply are also turned out to be the fastest-growing market for demand. So if demand creates supply, what ends up happening is a lot of these individual hosts get booked. They start making a bunch of money, obviously. The vast majority of them get booked within days of listing. And what ends up happening is they tend to open up more nights. They tell their friends about it and then supply increases. But we've also found a number of tactics. In fact, performance marketing is a very important way that we balance supply and demand. Other companies tend to use it as an arbitrage business to buy a lot of customers. We have never thought of it that way. We think of supply performance marketing really as a laser, to laser in on balancing supply and demand in markets all over the world. And frankly, the more supply we add, the more we think we're going to have really great value listings that will ultimately attract more demand. So I think we're able to balance this out throughout the coming year. Operator: Mr. Kelly with Oppenheimer. Jed Kelly: Just going back to the comment in the Shareholder Letter of your current backlog of nights being approximately 25% stronger than it was a year ago, can you just reconcile that with the 2Q guide? And how should we expect normal seasonality trends going forward? And then my second question, Brian, is you've done a great job with apartments and rooms growing supply in the U.S. Can you take that apartments' initiative and implement it in Europe and other regions of the world? David Stephenson: Yes, on the 25%, I mean, I think what it's doing is just demonstrating the strength in demand. I think what -- if you go back to the beginning of Q1, people booked much earlier here in 2023 than they have historically. So we had longer overall booking rates for the back half of the year. So we're seeing that strength. And so to the extent that, that demand just shifts earlier in the year, that's why the growth rate in backlog. And so it will be higher than what we are projecting for nights in any kind of given period. In terms of normalcy, I think as -- it's the specific percentage of backlog isn't a direct translation to kind of nights booked, but what we are seeing is strong demand across the globe and very stable demand in North America. Brian Chesky: And Jed, just to clarify question. When you say apartments, are you referring to the Airbnb-friendly apartment? Jed Kelly: Yes. Brian Chesky: With landlords and they'll take offers? Jed Kelly: Yes. Yes, can you do that? Brian Chesky: Yes, Yes. 100%, yes. We believe that this can be expanded all over the world. We wanted to use United States as a proof of concept. Obviously, that was we thought the first place to start. We started with about 175 buildings. We now have, I think, over 250 buildings. We have Greystar and some of the biggest real estate developers in America on the platform. And that's been our proof of concept. But assuming this works, and all indications are it is going to work. If response has actually exceeded our expectation, at least from landlords, then yes, we'd love to bring this to Europe, Latin America and Asia. Operator: We'll move next to Justin Post at Bank of America. Justin Post: Great. A couple of questions. I guess the first thing about competition. As you move into Europe, you might see a big competitor in booking. Can you talk about your model where you charge both the host and the guest versus there's more heavily weighted to the host? Do you think that works well in Europe? And how do you think about the differences there? And then maybe for Dave, on the marketing spend, it definitely seems like the timing is different. How do you think about marketing ROIs this year versus prior years? How should we think about that? Brian Chesky: Dave, do you want to take the second question first? David Stephenson: Sure. No, the marketing ROIs, I mean, again, I'm very pleased with our overall marketing strategy. I'm happy that our 90% of our traffic remains direct-run paid and that does great returns. And the brand marketing returns on -- that we've seen have been quite strong, which is why we're expanding into some of the markets. Also, the return on our search engine marketing has been quite good, and we're maintaining high ROIs there and making sure that where we have opportunities to drive incremental profit, we do so. So I feel really good about the investment we're making. I like the improved timing that we have here in 2023. And I like the overall approach to this full funnel marketing that Brian is talking about. We add amplify our brand and search engine marketing with things like social and PR, and we have that full funnel approach that works really well and that's kind of success we're seeing in Brazil and in Germany. Brian Chesky: Yes. And maybe, Justin, before I answer about our model in Europe, I just want to also add something. So with most travel companies, their strategy is like basically paid marketing, right, performance marketing and brand marketing. I think a callout I just want to make is PR social media is a huge benefit to Airbnb. Historically, we have the largest share of voice in travel. Last week, we got 3,000 articles. I mean that was like more than 1/3 of the amount of press we got for IPO. So we think that there's a lot of opportunity for Airbnb to continue to be front and center in people's minds, in PR and social media and even in pop culture on TV shows, movies, songs, et cetera, et cetera. So I think the name of the game is both paid media and then earned media. And earned media is a really important part of the international story and international expansion because earned media really creates trust more than paid media. Now with regards to Europe, the one thing I just want to point out is we actually have both models. We have a model where we have a guest fee and host fee. We also have a model where we have a host-only fee. And host can choose, and we have this kind of choice for hosts, especially for larger property managers. Ultimately, especially with our total price display, I don't think it's a major issue for guests. I think ultimately, they're going to be looking at the total price. And we've not seen a major behavior change. I think, yes, they're most sensitive to total price. They're becoming more savvy. They're getting trained on total price. And that is partly why we moved our product towards an option of showing people total price. As long as we remain competitive, as long as we offer the best product and we offer the overall best value for the total price, I think that's ultimately what guests are going to care about. Operator: [Operator Instructions]. We'll go next to Stephen Ju at Credit Suisse. Stephen Ju: So Brian, can you talk about eventual rollout plans for pay over time to other parts of the world like Brazil, given the propensity among users there as to use this type of product? And I guess I'll ask the Airbnb Rooms question another way. Between this and pay over time, it seems like you are in a position to expand your audience. So can you talk about how much latent demand you may potentially unlock with what looks like higher service levels to that bargain shopper? Brian Chesky: Yes. So I'll talk. One of the things -- I mean, what you'll notice is a lot of our updates last week were based on affordability. So we announced a partnership with Klarna, which is pay over time. we can pay in as many as 4 installments. I also want to add, we also announced a partnership with Stripe, where you can pay by bank account for monthly stay. This is really important because it means you don't have to pay for credit card to pay basically what is essentially rent and then also would increase conversion by lowering costs. So we're really focused. And a lot of what we're focused on is starting these payment services in the United States, kind of similar to Airbnb-friendly apartment. And assuming these partnerships work, no doubt we're going to be spanning these to markets all over the world. And you're correct, a lot of countries, people pay in installments more than even in the United States. So yes, Brazil end markets, emerging markets over the world, I think this will absolutely be a very compelling offering. We just like to get the product right in our more like established markets, like the United States before expanding it globally. But all indications are this is going to be very successful. Now as far as expanding our audience, yes. I mean, ultimately, the biggest market opportunity for any company is always the next generation. I mean the great thing about young people is more of them every year. And if you can continue to be the most relevant brand for a young audience, then you're going to continue to be able to ride that growth. And that's going to definitely be a boom for first-time bookers. And the great thing about young people is 15 years ago, I was 26, and my friends and I didn't have a lot of money. Now many of us have families and we're much older, we have more money. And so what we want to do is capture the next generation of travelers, and then they'll grow with us. And I think that Airbnb Rooms is a Gary entry-level product. It's a great way to introduce people to Airbnb. I noticed, for example, when I used to talk [indiscernible], he said that like diapers was a very important entry product to Amazon for families, right? You buy diapers and then I will see you need other things. This is maybe an extreme example, but I think Airbnb Rooms is a great way for new travelers to come to Airbnb. And if you think about it, between Airbnb Rooms allowing the pricing tool for hosts that price more affordably, total price, which should see the cleaning fees down and other discount products, I think we're going to have really one of the most affordable products in travel, bar none. Operator: We'll go next to John Colantuoni at Jefferies. John Colantuoni: Active listings has expanded more this quarter than the recent quarters. When you look at the profile of these new active listings, overall, how do these listings compare to your existing portfolio? What portion of the hosts are individuals, urban versus suburban versus vacation destinations, et cetera? Then on sales and marketing with front-end loaded spending on brand investments, can you just sort of walk through the shape of marketing throughout the year? Brian Chesky: Yes, Dave, why don't you take both, please? David Stephenson: Sure. I think we talked about the shape of marketing during the year that we are bringing in more front-end loading on our brand marketing spend, especially here into Q1 and Q2. So it's several hundred basis points higher in Q2 than it was in Q2 last year. And then for the full year, total marketing costs will be roughly the same as they were in the prior year. So I don't have much more to say on kind of the shape or marketing beyond that. In terms of active listings, I think this is what's been really continued strength in our business, which is that we are focused on individual hosts. And individual host were 90% of our hosts, that continues to be the case. The new host that we're bringing on because we cater our tools to the needs of those individual hosts, so that's making sure that it's easy to list. And we give them AirCover for hosts. They know that their home is well protected. We give them the great payment capabilities, the customer support that they require. All those things make it easier for individuals. And what's been great to see is that our mix of individual for -- and professional host has remained very stable through that. The other thing that's been interesting about just our listings growth overall is it tends to grow where we have the biggest demand. And so the areas -- as urban come back, our urban growth has been kept in line with that kind of growth. And so as we keep expanding and increasing our business around the world, the listings come right along with it. Operator: We'll go next to Doug Anmuth at JPMorgan. Douglas Anmuth: I just want to ask about long-term base if it kind of moves down versus recent periods. I know you talked about some of the changes in payments and fees coming up. Are long-term stays slowing more with normalization in the economy or really just more of a mix shift issue towards shorter stays? Brian Chesky: Doug, I think it's important to just step back and say that what we saw, even before the pandemic, was that long-term stays were growing, and they have been our fastest-growing segment by trip length. I think what the pandemic did is it probably accelerated some inevitable growth and there's huge opportunity for us. And I also think we're never going back to the way the world was before the pandemic. I do think there is some little bit of a post-pandemic equilibrium that you're starting to see. And we're also seeing a mix shift because cross-border urban nights are now up. That being said, I remain extremely bullish on long-term stays. I think this is going to be one of the big growth opportunities for Airbnb over the next 5 years. And the reason why is because people are permanently more flexible. Even bosses that want people back to the office, I think they're going to see incremental flexibility. More people going away for the summer, more people may be going away for the holidays. And ultimately, with AI, you're going to see an acceleration of people having more distributed and more global workforces. So all you have to do is believe Zoom is here to stay, to believe long-term stays are here to stay and that's what we're betting on. But the biggest feedback we've gotten on our long-term stay product was it was just sometimes a little more expensive to book long-term stay on Airbnb, because the platform was built for short-term stays. So we made over a dozen upgrades to long-term stays and a lot of more based on affordability. So starting with -- we now have a monthly dial for you to really discover monthly stays, which was really cool dial like an quick wheel that allows you to search from 1 month to a year on Airbnb. You can pay by bank account. This saves on credit card processing fees. You can pay over time. We have more flexible cancellation policies. So you now can cancel a long-term stay up to 1 month before check-in. We have new discounting tools for hosts on weekly stays and monthly stays, and we have many other upgrades as well for monthly stays. So I think we're going to see a lot more growth. And one of the big opportunities, I think, that we're going to see is more people starting to come to Airbnb to list exclusively long-term stay. People that have no intention of hosting on a nightly basis will host long term. Another thing we believe is going to happen is we think long-term stays could be a gateway to short-term stays. There might be a host that are uncomfortable hosting on a nightly basis, but they're used to having a tenant and they might go to Airbnb to rent monthly. And over time, we might be able to get them more comfortable on a short-term basis. So we think this is a really big opportunity for us. But I do think there is some normalization in the post-pandemic equilibrium, but I believe this is still a major growth opportunity for years to come. Operator: We'll move next to Lee Horowitz at Deutsche Bank. Lee Horowitz: Brian, maybe circling back to the competitive environment. It strikes us given some of the numbers coming out of your large OTA competitors, and the industry has grown incrementally more than it has in the last year or so. Can you help us understand from your seat, if you've seen a change in the competitive environment over the last 12 months? And what your expectations are for how competition may evolve over the next couple of years? And then, Dave, can you talk about how you think about balancing margins and investments beyond this year, assuming rates aren't a headwind moving forward, it stresses that international investments are said to grow nicely over the next couple of years? I guess with this in mind, how do you think about how margins can progress in the coming years given your investment priorities? Brian Chesky: All right. Yes. Lee, I'll start with the first one, competitive environment. I think it's important to note that Airbnb is more than double the size. And most of the travel industry is only a little bit larger than they were before the pandemic. So there's been a major mix shift share towards Airbnb. I think we're starting to see some of the old ways of traveling recover, specifically urban and cross-border. But ultimately, we're really focused on innovating. We're focused on playing our own game, and I think that we're going to continue to focus on a few areas. We're going to continue the Mainstream Hosting. And we think we're going to be adding more supply of homes than any other company. Next, we're going to be focused on perfecting our core service. I think there's potentially down the road to tipping point, where a whole new cohort of people could be comfortable using Airbnb. The biggest obstacle to Airbnb historically has been reliability and consistency. As I said, the biggest strength we have is we're one of a kind. The biggest weakness we have is it's just hard to be as consistent as a hotel. But again, with AI, being able to supplement and augment customer service and with many of our other initiatives to perfect the core service, I think we can introduce a whole new category of travelers to Airbnb. And this doesn't even include many of the opportunities we have with younger travelers, with new markets and new products and services that are only on Airbnb. I also just generally would just say, one of the big guiding principles I have is to focus on the things only Airbnb can do. And if we focus on the things that only Airbnb can do, then in a sense, you're going to come to Airbnb and we're going to have a lot of demand, a lot of exclusive traffic. And Airbnb Rooms is just one of many examples of something that only Airbnb offers. And so we're going to continue to be competitive, but we're also going to focus on things that only we offer. Dave? David Stephenson: Yes. I think one of the things I'm really proud of is the ability for us to both grow and grow profitably and have very strong margins. I mean having a 44% kind of free cash flow margin is something I'm definitely very proud of. I think going forward, just remember that we are still heavily in growth mode, and we're going to continue to invest behind growth for the future. The good news is that as I'm doing this year, we're able to continue to be very rigorous in our investments across our P&L, make improvements in our cost structure, buying fixed cost leverage and do all that while investing for kind of growth for the future. So what I think you should anticipate going forward is that we'll continue to have a profitable business focused on growth. And that over time, we'll continue to have opportunities to expand margins, but that's not my primary focus right now. Our primary focus is in investing for growth. And as you mentioned, one of those areas for opportunities will be to increase our investment in areas where we're significantly underpenetrated and seeing great success. And we highlighted a couple of those areas on the call today. Operator: And that does conclude today's question-and-answer session. At this time, I would like to turn the conference back over to Brian Chesky for closing remarks. Brian Chesky: All right. Well, thank you, everyone, for joining us today. Just to recap, we had a strong start to 2023. Revenue was $1.8 billion, which is 20% higher than a year ago. Net income and adjusted EBITDA were both records for Q1, and our trailing 12-month free cash flow was $3.8 billion and that represents a free cash flow margin of 44%. I'm really proud of the progress we made. If you look at over the last 3 years, how much more profitable the company's become, I think a lot of that has been based on our discipline and our execution. And speaking of execution, our product just keeps getting better, and we continue to innovate with more than 50 upgrades and features last week and many more ahead later this year. I'm proud of what we're doing, and I'm really excited for the road ahead. So thank you all, and we'll talk next quarter. Operator: And that does conclude today's conference. Again, thank you for your participation. You may now disconnect.	[ { "speaker": "Operator", "text": "Good afternoon, and thank you for joining Airbnb's earnings conference call for the First Quarter of 2023. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Ellie Mertz, VP of Finance. Please go ahead." }, { "speaker": "Ellie Mertz", "text": "Good afternoon, and welcome to Airbnb's First Quarter of 2023 Earnings Call. Thank you for joining us today. On the call today, we have Airbnb's Co-Founder and CEO, Brian Chesky; and our Chief Financial Officer, Dave Stephenson. Earlier today, we issued a Shareholder Letter with our financial results and commentary for our first quarter of 2023. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks, and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we'll be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under Forward-looking Statements in our Shareholder Letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also during this call, we will discuss some non-GAAP financial measures. We provided reconciliations to the most directly comparable GAAP financial measures in the Shareholder Letter posted to our IR website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I will pass the call to Brian." }, { "speaker": "Brian Chesky", "text": "All right. All right. Good afternoon, everyone. Thanks for joining. I'm excited to share our Q1 results with you now. We had a strong start to 2023. We had over 120 million Nights and Experiences Booked in Q1. This was a record high [Technical Difficulty] change. Our revenue increased 24% year-over-year. Net income was $117 million, making this our most profitable Q1 on a GAAP basis. And free cash flow for the quarter was $1.6 billion. In fact, on a trailing 12-month basis, our free cash flow was $3.8 billion. This represented a trailing 12-month free cash flow margin of 44%. Because of our strong balance sheet, we were able to repurchase $2 billion of our stock in the last 9 months. And today, we're pleased to announce that our Board just approved a new repurchase authorization for up to $2.5 billion of our Class A common stock. Now during the quarter, we saw a number of really positive business trends. First, more guests are traveling on Airbnb than ever before. Knights and Experiences Booked increased 19% in Q1 compared to a year ago, and we've seen our highest number of active bookers ever despite continued macroeconomic uncertainties. During the quarter, we also saw guests booking trips further in advance, supporting a strong backlog for Q2. Second, more guests are traveling overseas and returning to cities. Cross-border gross nights booked increased 36% in Q1 compared to last year. Now we were especially encouraged by the continued recovery of Asia Pacific as nights booked in Q1 increased more than 40% year-over-year. And we saw international travel from other regions to Asia Pacific increased 160% during the quarter compared to this time last year. Additionally, cross-border nights booked to North America increased once again, with 34% of year-over-year growth in Q1 relative to 31% last quarter. And we've also seen high-density urban nights booked increased 20% year-over-year. Third, guests are continuing to use Airbnb for longer stays. In Q1, long-term stays were 18% of total gross nights booked. And over the past 3 years, we've seen new use cases emerge as guests across all regions and age groups use Airbnb for long-term stays. And finally, supply growth continued to accelerate. In Q1, we grew supply 18% year-over-year, and this is up from 16% in Q4. We saw double-digit supply growth around the world with the fastest growth in North America and Latin America. Urban and nonurban supply growth, in fact, both grew 18%. Now looking ahead, we remain focused on our 3 strategic priorities. First, we're making hosting mainstream. We want hosting to be as popular as traveling on Airbnb. And to do this, we're raising awareness around hosting, making it easier to get started and providing even better tools for our hosts. And our approach is working. In fact, in every quarter since we went public, we have seen acceleration in the year-over-year growth of our total active listings. Second, we're perfecting our core service. We want people to love our service, and that means obsessing over every single detail. Last week, we introduced over 50 new features and upgrades as part of our 2023 Summer Release. Everything we launched was based on direct feedback from our guests and hosts. This included pricing tools, transparent checkout instructions, faster customer service and more. And we also responded to input on rising prices, with the rollout of Airbnb Rooms, an all-new take on the original Airbnb. Now I'm going to share a little bit more about what will be launched in a moment. And finally, we're expanding beyond our core. We have some big ideas for where to take Airbnb next. We're building the foundation for new products and services that we plan to launch in 2024 and beyond. At the same time, Airbnb is still underpenetrated in many markets around the world. So we're increasing our focus on these less mature markets, and we are already seeing positive results. So let me just give you 2 examples. In Germany and Brazil, we rolled out our expansion playbook for accelerated growth. And as a result, we are now 2 -- they are now 2 of our fastest-growing markets. And this playbook has, in fact, worked so well. So we are now expanding it to other markets around the world. Now before we go to questions, I want to talk a little bit about our 2023 Summer Release. Last week, we introduced the most extensive set of improvements ever to Airbnb, and it was all based on feedback from our community. We took a design-driven approach to perfecting our core service. We created a blueprint of the entire experience: every screen, every policy and every interaction with customer service. We then analyzed millions of calls and thousands of social media posts. And we hosted listening sessions with guests and hosts all over the world. And we mapped all this feedback against our blueprint and we prioritized the most common issues. And on May 3, we introduced Airbnb Rooms and unveiled over 50 new features and upgrades for guests and hosts. So let me share a few highlights with you. First is total price display. Guests told us, our prices aren't transparent enough. With total price display, guests can now view the total price with fees before taxes across the entire app. Second, new pricing tools for hosts. We heard from hosts that it's hard to use our pricing tools, and it's difficult to know what the charge. So to help our hosts set more competitive prices, they can now see other Airbnbs are priced in their area. And this includes listings that are both in high demand and getting booked as well as listings that are not. And finally, we also made it simpler to add discounts and promotions for hosts. And third is more affordable stays. Longer stays on Airbnb can be expensive, so we're doing a few things about it. We're reducing our fees after 3 months. U.S. guests can now save money by paying with their bank account, and hosts can easily set monthly discounts and offer more flexible cancellations. Finally, we also introduced Airbnb Rooms, an all-new take on the original Airbnb Private Room. Airbnb Rooms gets us back to the idea that started it all, back to our founding ethos of sharing. And they're also one of the most affordable ways of travel, with an average price of only $67 a night. In fact, over 80% of Airbnb Rooms are under $100 a night. And in the current macroeconomic environment, people want to travel affordably. But guests have told us that they want to know more about who they're staying with before they book. So that's why every Airbnb Room comes with a host passport, which helps guests get to know their host before they book. In response to last week and our 2023 Summer Release has exceeded our expectations. Press coverage was overwhelmingly positive, and we got over 3,000 articles. This is the most press we've ever had from the launch. On social media, our Tweets got 19 million impressions. It really went far and wide on social. But the most important thing we heard is that our guests and our hosts feel like we're listening to their top concerns. If we're not done listening, it will never stop improving Airbnb. So with that, I look forward, Dave and I, to answering your questions." }, { "speaker": "Operator", "text": "[Operator Instructions]. We'll go first to Eric Sheridan at Goldman Sachs." }, { "speaker": "Eric Sheridan", "text": "I want to come back to the Summer Release from a couple of days ago and come back to the concept of room. Can you help us better understand what you think that will do in terms of generating supply growth and coupled with it generating demand and new traveler growth to the platform as you look out over the next 12, 18 months?" }, { "speaker": "Brian Chesky", "text": "Yes, I'm here. How are you doing? Yes. So I'm very excited about Airbnb Rooms, because Airbnb Rooms is one of the most affordable ways to travel on Airbnb. We've been doing a lot of listening to guests on Airbnb. And one of the things they told us is, especially in this economic environment, they are looking for affordable ways to travel on Airbnb. And the average price of Airbnb Rooms is $67 a night. So it's an incredible value. And what we wanted to do is offer a product that we thought could capture this affordability segment that we think more and more people are going to be interested in, in this economy and also launch a product that will be very relevant to the next generation of travelers. Essentially, I wanted to launch a product that the 26-year-old me would have wanted. And we looked at our private rooms product, and we already had 1 million listings all over the world, but there was a bit of an obstacle. During the pandemic, people weren't comfortable staying with one another. And to get people more comfortable, we realized that we needed to help people understand the host they're staying with before they book. And so that's why we launched the Airbnb Host Passport. I think this is going to help a lot of people that are looking to save money and are interested in the local travel experience, be encouraged to stay in Airbnb Rooms. We also added new privacy features to understand if there's a lock in the bedroom door, if the bathroom is private. And we think all these different features are going to definitely help Airbnb Rooms. The final thing I'm going to say, Eric, is that we have a major brand campaign coming this summer, where we are going to be promoting Airbnb Rooms. If we are successful, I think this is going to bring in a whole new cohort of younger travelers, people that maybe weren't inclined to travel may now be able to travel and hopefully should list the overall marketplace for Airbnb." }, { "speaker": "Operator", "text": "Next, we'll move to Justin Patterson at KeyBanc." }, { "speaker": "Justin Patterson", "text": "So if I can, first, to follow up on Eric's question around the Summer Release. Brian, you recently made some comments about AI being a meaningful opportunity for Airbnb going forward. Could you talk about how that just reshapes or helps you reimagine the travel experience going forward and some of the initiatives you might lean into around AI? And then Dave, I appreciate you only give guidepost on the full year versus explicit guidance. Given the room night comp and expense shift in Q2 as well as the dynamic around new pricing tools in the Summer Release, could you help us understand a little bit more some of the assumptions that go into the second half and about flattish year-over-year margin?" }, { "speaker": "Brian Chesky", "text": "Great. Well, why don't I start, Justin, with AI. This is certainly the biggest revolution and test since I came to Silicon Valley. It's certainly as big of a platform shift as the Internet, and many people think it might be even bigger. And I'll give you kind of a bit of an overview of how we think about AI. So all of this is going to be built on the base model. The base models, the large language models, think of those as GPT-4. Google has a couple of base models, Microsoft reaches Entropic. These are like major infrastructure investments. Some of these models might cost tens of billions of dollars towards the compute power. And so think of that as essentially like building a highway. It's a major infrastructure project. And we're not going to do that. We're not an infrastructure company. But we're going to build the cars on the highway. In other words, we're going to design the interface and the tuning of the model on top of AI, on top of the base model. So on top of the base model is the tuning of the model. And the tuning of the model is going to be based on the customer data you have. And I'll just paint a picture for you. If you were to ask a question to ChatGPT, and if I were to ask a question to ChatGPT, we're both going to get pretty much the same answer. And the reason both of us are going to get pretty close the same answer is because ChatGPT doesn't know that it's between you and I, doesn't know anything about us. Now this is totally fine for many questions, like how far is it from this destination to that destination. But it turns out that a lot of questions in travel aren't really search questions. They're matching questions. Another is, they're questions that the answer depends on who you are and what your preferences are. So for example, I think that going forward, Airbnb is going to be pretty different. Instead of asking you questions like where are you going and when are you going, I want us to build a robust profile about you, learn more about you and ask you 2 bigger and more fundamental questions: who are you? And what do you want? And ultimately, what I think Airbnb is building is not just a service or a product. But what we are in the largest sense is a global travel community. And the role of Airbnb and that travel community is to be the ultimate host. Think of us with AI as building the ultimate AI concierge that could understand you. And we could build these world-class interfaces, tune our model. Unlike most other travel companies, we know a lot more about our guests and hosts. This is partly why we're investing in the Host Passport. We want to continue to learn more about people. And then our job is to match you to accommodations, other travel services and eventually things beyond travel. So that's the big vision of where we're going to go. I think it's an incredibly expanding opportunity. I'll just end by giving you some tactical things we're going to be doing in the next 12 months. Number one is customer service. This is going to be one of the biggest benefits to Airbnb. One of the strengths of Airbnb is that Airbnb's offering is one of a kind. The problem with Airbnb is our service is also one of a kind. And so therefore, historically less consistent than a hotel. I think AI can level the playing field from a service perspective relative to hotels because hotels have front desk, Airbnb doesn't. But we have literally millions of people staying on Airbnb every night. And imagine they call customer service. We have agents that have to adjudicate between 70 different user policies. Some of these are as many as 100 pages long. What AI is going to do is be able to give us better service, cheaper and faster by augmenting the agents. And I think this is going to be something that is a huge transformation. It's a bit all hands on deck, and used to be improvement later this year into next year. That's number one. Number two, we are now building AI into our product. And let me just give you an example. A few months ago, OpenAI launched plug-ins. And in fact, we were actually supposed to be one of the launch partners for the plug-ins on OpenAI ChatGPT. But I told Sam, we were literally one of the first to work with him that before right before our launch, I decided to pull the plug on it. And the reason why is I decided that the interface of pure tech space with widgets at the bottom was probably not the right interface for travel. Ultimately, I think the right interface for travel is multimodal. It's rich media. It's photo. It's video. It's much more immersive. And GPT-4 is available in our app. So we're going to be building GPT-4 into our interface. And I think that's the real opportunity for us. So you should see some big changes next year with AI built into our app. The final thing I'll say is developer productivity and productivity of our workforce generally. I think our employees could easily be, especially our developers, 30% more productive in the short to medium term, and this will allow significantly greater throughput through tools like GitHub's Copilot. So all of this is to say, I'm really excited on the short term and the long term. And the last thing I'll just say is I think the companies that will most benefit from the shift of AI are going to be the companies that have the most innovative cultures. That's kind of what happened in the '90s with the Internet. And if the last couple of years is any indication, having launched over 340 features of innovations, I think we're definitely going to be right at the forefront of this revolution." }, { "speaker": "David Stephenson", "text": "And in terms of profitability, we're just really proud of the progress that we've made in our operating efficiency, right? We made some very difficult choices in the midst of COVID to rationalize and streamline the company, get focused, get back to our roots. And we made substantial progress in our profitability ever since, where we've done it. We obviously reduced our headcount by 25%. We've only grown it moderately since. We've made substantial changes in our marketing efficiency, continue to make good improvements in our operating costs, anything from community support to cost of payments to infrastructure costs. Basically, we become a better, more rigorous operating company overall. And that kind of progress has been great for us going forward because even as our businesses rebounded, we have stuck to our core strong kind of operating mode. And so even this year, as we anticipate moderation in ADRs, the improvements that we're going to continue to make in community support, infrastructure, cost of payments and our fixed cost leverage will be enough to offset any of the pressures that we're seeing in average daily rates." }, { "speaker": "Operator", "text": "We'll go next to Mark Mahaney of Evercore ISI." }, { "speaker": "Mark Mahaney", "text": "Two questions. Across the online travel space, there's this dynamic of marketing costs being much more front-end loaded this year. Dave, any commentary on -- from your perspective, why that is? And then secondly, could you just double-click a little bit, Brian, on the Brazil and Germany examples that you talked about? If there's anything specific that you could say that you did that caused those to kind of accelerate up to become 2 of your fastest-growing markets so that we can think about how replicable those efforts would be in other markets, that would be really helpful." }, { "speaker": "Brian Chesky", "text": "Yes, sure. Dave, why don't you take the first one?" }, { "speaker": "David Stephenson", "text": "Yes. Great. Thanks, Mark. In terms of the front-loading of marketing costs this year, it's just we're learning to operate better. I mean we had seen such great success in our brand marketing campaigns, strong return on investments in that last year. And what we learned is that we just felt like we needed to do that earlier in the year, get out even more ahead of our peak travel summer season with our brand marketing. The earlier we get that message out in the year, the better we can kind of reap that investment for the full year. So this is purely about moving up the spend on kind of brand marketing earlier. And to a lesser extent, but it is an element of it as well, is investing in some of these new geographies where we haven't historically had brand marketing, and so actually expanding that market into more countries. So our marketing expenses as a percentage of revenue will remain largely the same in 2023 as it was in 2022. It's just that we're front-loading more the marketing to get the message out earlier." }, { "speaker": "Brian Chesky", "text": "Yes. And Mark, I'll just share a little bit about Brazil and Germany. So Airbnb is one of the most international companies in the world. We're in 220 countries and regions. And many years ago, we developed a playbook to expand internationally outside the United States. And that playbook included PR, included having some people on the ground, although generally, in many these markets only need that. It included a brand marketing campaign and made sure that our product was adequately localized. And it's just a really full funnel approach. And now we've added social media and influencers as well. So recently, over the course of the pandemic, we were not as focused on international expansion. And that's because we're mainly focused on recovery and some of the new travel segments like longer-term stay. Over the last 3 years, obviously, as you know, we've gotten really, really focused, back to basics and our company is significantly more profitable. Now we've done over $3.8 billion in trailing 12-month free cash flow. So we feel like now is a really good time to focus on international expansion. So we started with Germany and Brazil. And again, it was full funnel. It involved a lot of PRs. It involve brand marketing, bringing our marketing ad campaigns to pricing in the United States to these markets, localizing our product and working with local influencers. So it's a pretty full funnel approach. The results have been incredibly positive. These are now 2 of our fastest-growing markets. So we're now looking at bringing this playbook to other markets around the world. And I'll give you a couple of examples. Number one is Asia Pacific. We think there's a huge opportunity in Asia. We're massively underpenetrated. This is going to be probably the fastest-growing market internationally over the next 5 years. And the problem with Asia historically over the last few years is Asia market, as you know, is a very much cross-border market. And with the borders being historically kind of locked down and there hasn't been as much travel, the recovery in Asia has been delayed. Now people are starting to travel, and Asia disproportionately has a lot of young travelers. And Airbnb, as you know, is very popular among the young travelers. So we think Japan, Korea, China, India and Southeast Asia are going to be huge opportunities for growth. Next is Europe. We're very big in France. We're very big in the U.K. We're now seeing great growth in Germany. But there's a lot of markets in Europe. We haven't ever really run robust brand marketing campaigns. Now we're getting more aggressive in Italy. We're getting more aggressive in Spain, and we're now looking at other markets in Northern Europe. And I think there's actually a lot of greenfield in Europe because we've really only focused on a few of the really big markets. And when we see we focus the big markets like France and U.K., we are now really strong. And I think we can have similar penetration in other countries in Europe. And then finally is Latin America. We're seeing a lot of growth in Brazil, and we're now going to bring it to some other really large markets, like Colombia and some other markets within Latin America. So I think international is going to be a pretty big boom to growth over the next 2, 3 years. The one thing I've learned about Airbnb is no matter how different every country is, the playbook doesn't have to vary that much. It works quite well in every market. And especially, it works with Airbnb because it's very much a cross-border network effect business." }, { "speaker": "David Stephenson", "text": "Yes, the playbook -- so I just don't want to leave the question without just reinforcing how well the playbook is working for us and that 90% of our traffic remains direct or unpaid, and that's been the case since COVID and continues to be the case. So this investment is working very well for us." }, { "speaker": "Operator", "text": "We'll move next to Richard Clarke at Sanford Bernstein." }, { "speaker": "Richard Clarke", "text": "Two, if I may. I guess the full year results, you mentioned how you control supply against the demand. I guess at this point, you're talking about supply growing at about 18%, but you're pointing to Q2 demand growing maybe more like 10% to 12%. Which one of those numbers is the right way to think about growth going forward? Should we be extrapolating the 18% or the 10% to 12%? And then just very quickly, you obviously shifted to showing the hold prices. Any impact you've seen from that? Is that impacting conversions? Is that impacting supply? What's been the impact of that change?" }, { "speaker": "Brian Chesky", "text": "Yes. Richard, why don't I start at a high level? I think our long-term growth is going to only be as strong as our supply. If we were to back out, what happened in 2020, 2021, as that demand grew faster than supply. And initially, this was a great thing. But the problem is when demand grows faster than supply and there's supply constraints, prices generally go up. And as prices have risen, while that's been good for the bottom line, affordability in this economy is a major issue. And so one of the most important things we can do to make Airbnb affordable is to make sure we have enough supply in the platform. And so a year ago, we identified supply growth as a major strategic initiative that we really needed to accelerate, and we created an initiative called Mainstreaming Hosting. The idea is we wanted hosting to be as mainstream as traveling. And we did a number of things. We said, in order to mainstream hosting, we need to make it safe, easy and cool. So we launched AirCover, which is top to bottom protection. No one else offers it. They're going to be set up, and we did some marketing campaigns for the first time in many years. We've since seen, as you know, 900,000 incremental listings. It's now accelerating every single quarter since the IPO. And I think what's going to happen is all the supply coming out of the market will keep prices from going up. My hope is that while the hotel CEOs have said, they expect demand to drive prices up this summer, we want to actually have prices moderate. We think that's going to bring in a whole new generation of travelers to Airbnb. So ultimately, I think that like -- that's a very, very important consideration of the marketplace. The more affordable we are -- just like Amazon, the more affordable we are with a wider selection, the more people will come to Airbnb. So that's the high level. Now with regard to total price, this is primarily a U.S. issue. But in the U.S., as you know, there was a bit of an issue where some hosts had higher cleaning fees. And we heard a lot from guests. And I think what the total price display is going to do, it's going to push demand to listings that are -- have an overall better value of a total price. And when people turn on the price toggle, we see that people are booking listings with lower cleaning fees or no cleaning fees. And I think this is going to have a really good practice in the marketplace of driving the demand to the best value listings, rewarding those hosts and making sure every single host remains competitive. So it's just beginning. We set a pilot in December. It's now available to everyone, so we'll have to see how this plays out in the coming months. But what my expectation is based on our release last week, we launched a lot of features around affordability. We have many more -- much more affordable monthly stay products. Hosts now have monthly stay discounts, weekly stay discounts. We allow hosts to set more competitive prices. We're going to continue to add supply. And hopefully, this is going to continue to address the number one request of travelers, which is affordable offer since." }, { "speaker": "David Stephenson", "text": "Let me add two more points. The implementation of the oil price has gone really well. And what we're seeing is actually a neutral impact on our overall business. So the , which we've implemented, has worked quite well. The people that care the most about seeing it all in pricing, they can make the selection. And those who want to see it like other marketplaces don't even make that selection. And then the other -- back to the growth rates, 10% to 12% nights growth is not our long-term ambition. You do have to remember that in Q2, we have a significant hard comparison versus the Omicron, COVID variant that came out last year. Remember that people delayed their travel in Q1 and compressed a large amount of travel into the second quarter, which makes for a hard comparison of nice growth here in the second quarter." }, { "speaker": "Operator", "text": "We'll take our next question from Brian Nowak at Morgan Stanley." }, { "speaker": "Brian Nowak", "text": "I have two. The first one, Brian, just to go back to your last answer about how affordability is an issue in the economy. On the Airbnb platform, have you seen any signs of trade down or shorter stays or price changes or lower traffic conversion sort of impacts of that more price-sensitive user on the platform yet? That's the first one. Then the second one, Dave, actually, to go back to your last answer as well. I think in the past, you've spoken about how there's a lot of moving pieces around the shape of the year, but 2022 was a reasonable way to think about the shape of the room nights or bookings for the year. How should we think about that now that sort of thinking through the comp structure and how the 2Q, 3Q comps are quite similar?" }, { "speaker": "Brian Chesky", "text": "David, do you want to take the second, and I'll get on with the first?" }, { "speaker": "David Stephenson", "text": "Yes. I mean, it has been hard to kind of perfectly predict the exact shape of demand. And obviously, Omicron has impacted the shape on nights demand probably more than the impact of revenue. We continue to see as the revenue guide that we have here is revenue growth between kind of 12% and 16% in the second quarter. And I think that some of the pressures that we're seeing there on overall revenue growth has, frankly, just been some of the elevated ADR rates that we're seeing, just higher overall kind of pricing, especially in North America. But some of the tailwinds that we're seeing for future growth in the back half of the year or a lot of the areas that Brian spoke about, things like continued acceleration in Latin America, acceleration in Asia Pacific and more cross-border travel. So I think some of those things are the benefits we're seeing in the back half of the year. Q2 is turning out to be a little bit tougher comp given Omicron last year, but we're seeing overall stable demand for the back half. We highlighted in the letter that we have 25% more bookings on the books at this time this year for the back half of the year than we did this time last year. So it just gives us confidence in people's willingness and interest in travel for the back half." }, { "speaker": "Brian Chesky", "text": "And I can just take the first question, which is what we're seeing, Brian, is that people are most price sensitive, at least currently in North America, especially United States. And in the United States, the lowest price listings have the highest occupancy. So yes, people do want low price listings. And we expect that as Airbnb rates continue to normalize, and hopefully, our rates do not increase as fast to hotels over the next couple of years that we're going to see continued increase in occupancy for more listings in Airbnb and also is partly why we're so bullish about the prospect for Airbnb Rooms, not just to bring people to Airbnb that want affordable options, but really new travelers that have never really traveled very much before, especially Gen Z." }, { "speaker": "Operator", "text": "Next, we'll go to Ron Josey at Citi." }, { "speaker": "Ronald Josey", "text": "Brian, you talked about expanding the core. And I wanted to ask a little bit more about new ideas for products or the vision for the Airbnb economy overall. I think we've mentioned in the past the marketplace for local host services and other sponsored listings and other ideas. So any insights on sort of how you think about expanding the core and the vision for the Airbnb economy? And then just a quick follow-up, too, on just the experiences rebuild, that recent calls on experience, just talk to us a little bit more about how you feel that product is progressing?" }, { "speaker": "Brian Chesky", "text": "Yes, Ron, I mean, great, great questions. Just to kind of step back, before the pandemic, we were really already focused on expanding beyond the core. In fact, we had 10 different divisions at Airbnb. We added a Home division. We had an Experience division. We had a Transportation division. We had a Magazine division. So we had a lot of efforts. And then obviously, the pandemic occurred, and we had to get focused back to basics. And what we wanted to do over the last few years is before we work on new things, we wanted to perfect our core service. One of the great source of inspiration I had was Apple. And I remember in the mid-2000s, it was 2006, and Apple had not yet launched the iPhone, but how many of us wanted Apple to come out with a phone? And the answer is a lot of people. And the reason people wanted Apple to expand their phone is because they love their iPod. But how many of us wanted gateway to come out with a phone? And the answer is probably not many, because we didn't love our gateway computer. And so I think that one of the things I've told our team is we have numerous expansion opportunities, but we need permission to expand beyond our core. We need people to first love our core service. So that's why over the last 3 years, we've been focused on really perfecting our core service. That being said, our core service is stronger than ever. It's more profitable than ever. And I think we're now ready to expand beyond the core. So as we speak, we are working actively on new products and services. These new products and services are going to be shipping. Beginning next year, you're going to see a number of things ship next May as part of the 2024 Summer Release. And we're going to see even more things shift later in the year and the years to come. Now obviously, there's a lot of opportunities. There's guest services, there's host services. I'm not going to go into a lot of detail. You obviously will have to tune in to talk. But I think it is important to note that I think that the biggest idea Airbnb has are in front of us. I don't want to think that the biggest idea I ever had when I was 26 working [indiscernible] my 2 cofounders. I think that there's so much more Airbnb can offer. And part of it is just making sure we continue to learn more, build robust profile, build an extensible platform model, continue to increase trust in the platform. And then what we can do is go into adjacencies within our core, but then including that, expand beyond the core. So I think you're going to see a lot of new opportunities. With regards to Experiences, I remain bullish about the product. I think there is a massive opportunity for someone to build a huge product around Experiences. Whether it's us and whether we're able to execute that product, we still have to prove that. One of my great investors -- one of our early investors is Marc Andreessen. He said there's no bad ideas, just ideas that are too early. And a lot of life is timing and experiences. I think when we launched in 2016, it launched right like leading into the pandemic. It was probably early. I think the timing is probably now better. But we did as we decided, let's take a pause on new submissions. Let's retool the product and hopefully put out something that is even more relevant to this next generation that are looking for things to do. So I remain really bullish on all of this." }, { "speaker": "Operator", "text": "We'll go next to Mario Lu at Barclays." }, { "speaker": "Mario Lu", "text": "Great. The first one is on ADRs. It came better than expected in the first quarter. You guys mentioned, India saw 8% growth. Anything to point out to within that region for its strength? And then is the full year growth still expected to be down mid-single digits?" }, { "speaker": "Brian Chesky", "text": "Dave?" }, { "speaker": "David Stephenson", "text": "Yes. On ADRs, it's been interesting how persistently higher average daily rates have remained, and that has been consistent kind of across the globe. I think even more particularly, the ADR rates that we saw in North America have been persistently high. So these are a lot of the reasons why we've been launching so many of the tools and capabilities that Brian has talked about on the call that -- and making sure that we're finding good affordability for our guests for things like Airbnb Rooms and getting tools for a host of even kind of price better. So I don't have anything more to say on that, except that we think that the ADRs, as we continue to see growth in Europe, Latin America and Asia, should moderate a bit here in the second quarter. And we want to continue to make sure we're giving great value to our guests. In terms of full year expectations, the year-over-year growth in ADR should be, I think, still probably down in that kind of mid-single-digit range. There's really no change in our expectations on ADR growth." }, { "speaker": "Mario Lu", "text": "Got it. And then the second question is on competition. One of your competitors is launching a loyalty program in July in the U.S. Just curious if you think that is a potential threat to the business since you don't have one? And any data points you can share with regards to what percentage of things are exclusive to your platform?" }, { "speaker": "Brian Chesky", "text": "I always believe that the best loyalty program is people loving your products. And if they love your products, they come back. And I think that's the reason why nearly 90% of our traffic is direct to organic, and we have really strong rebooker rate. So I mean we haven't needed to have a loyalty program to have really good loyalty on Airbnb because people really love the experience. And ultimately, I think it's just a matter of continuing to innovate. Ultimately, we're in the inspiration business. People want to have good trips, and the best trip wins. And whatever company is most focused on listing the customer feedback, innovating as quickly as possible and taking giant leaps and experiences, I think it's going to be the most successful. So we're really bullish about this. Now that being said, for years, we've looked at a loyalty program. And I don't think a classic point program, which is essentially a subsidy to buy loyalty is the right approach for us. But we do think there's really compelling, interesting ways to reward our very best guests and something we've been actively thinking about." }, { "speaker": "Operator", "text": "We'll take our next question from Nick Jones of JMP Securities." }, { "speaker": "Nicholas Jones", "text": "So you're adding a lot of great solutions for hosts and guests and the outlook comments in the release, sounds like this is contributing a little bit to some of the ADR pressure. So how do you balance the efforts to continue to increase supply, making it easier for supply to join while redistributing demand to available supply? Is there a risk of incremental ADR compression as a result of some of these efforts?" }, { "speaker": "Brian Chesky", "text": "Nick, I can start. So I mean, I think part of our secret sauce is our ability to really try to elegantly balance supply and demand. One of the great things we've seen is the marketplace has a natural equilibrium that it finds in itself. For example, the fastest-growing markets of supply are also turned out to be the fastest-growing market for demand. So if demand creates supply, what ends up happening is a lot of these individual hosts get booked. They start making a bunch of money, obviously. The vast majority of them get booked within days of listing. And what ends up happening is they tend to open up more nights. They tell their friends about it and then supply increases. But we've also found a number of tactics. In fact, performance marketing is a very important way that we balance supply and demand. Other companies tend to use it as an arbitrage business to buy a lot of customers. We have never thought of it that way. We think of supply performance marketing really as a laser, to laser in on balancing supply and demand in markets all over the world. And frankly, the more supply we add, the more we think we're going to have really great value listings that will ultimately attract more demand. So I think we're able to balance this out throughout the coming year." }, { "speaker": "Operator", "text": "Mr. Kelly with Oppenheimer." }, { "speaker": "Jed Kelly", "text": "Just going back to the comment in the Shareholder Letter of your current backlog of nights being approximately 25% stronger than it was a year ago, can you just reconcile that with the 2Q guide? And how should we expect normal seasonality trends going forward? And then my second question, Brian, is you've done a great job with apartments and rooms growing supply in the U.S. Can you take that apartments' initiative and implement it in Europe and other regions of the world?" }, { "speaker": "David Stephenson", "text": "Yes, on the 25%, I mean, I think what it's doing is just demonstrating the strength in demand. I think what -- if you go back to the beginning of Q1, people booked much earlier here in 2023 than they have historically. So we had longer overall booking rates for the back half of the year. So we're seeing that strength. And so to the extent that, that demand just shifts earlier in the year, that's why the growth rate in backlog. And so it will be higher than what we are projecting for nights in any kind of given period. In terms of normalcy, I think as -- it's the specific percentage of backlog isn't a direct translation to kind of nights booked, but what we are seeing is strong demand across the globe and very stable demand in North America." }, { "speaker": "Brian Chesky", "text": "And Jed, just to clarify question. When you say apartments, are you referring to the Airbnb-friendly apartment?" }, { "speaker": "Jed Kelly", "text": "Yes." }, { "speaker": "Brian Chesky", "text": "With landlords and they'll take offers?" }, { "speaker": "Jed Kelly", "text": "Yes. Yes, can you do that?" }, { "speaker": "Brian Chesky", "text": "Yes, Yes. 100%, yes. We believe that this can be expanded all over the world. We wanted to use United States as a proof of concept. Obviously, that was we thought the first place to start. We started with about 175 buildings. We now have, I think, over 250 buildings. We have Greystar and some of the biggest real estate developers in America on the platform. And that's been our proof of concept. But assuming this works, and all indications are it is going to work. If response has actually exceeded our expectation, at least from landlords, then yes, we'd love to bring this to Europe, Latin America and Asia." }, { "speaker": "Operator", "text": "We'll move next to Justin Post at Bank of America." }, { "speaker": "Justin Post", "text": "Great. A couple of questions. I guess the first thing about competition. As you move into Europe, you might see a big competitor in booking. Can you talk about your model where you charge both the host and the guest versus there's more heavily weighted to the host? Do you think that works well in Europe? And how do you think about the differences there? And then maybe for Dave, on the marketing spend, it definitely seems like the timing is different. How do you think about marketing ROIs this year versus prior years? How should we think about that?" }, { "speaker": "Brian Chesky", "text": "Dave, do you want to take the second question first?" }, { "speaker": "David Stephenson", "text": "Sure. No, the marketing ROIs, I mean, again, I'm very pleased with our overall marketing strategy. I'm happy that our 90% of our traffic remains direct-run paid and that does great returns. And the brand marketing returns on -- that we've seen have been quite strong, which is why we're expanding into some of the markets. Also, the return on our search engine marketing has been quite good, and we're maintaining high ROIs there and making sure that where we have opportunities to drive incremental profit, we do so. So I feel really good about the investment we're making. I like the improved timing that we have here in 2023. And I like the overall approach to this full funnel marketing that Brian is talking about. We add amplify our brand and search engine marketing with things like social and PR, and we have that full funnel approach that works really well and that's kind of success we're seeing in Brazil and in Germany." }, { "speaker": "Brian Chesky", "text": "Yes. And maybe, Justin, before I answer about our model in Europe, I just want to also add something. So with most travel companies, their strategy is like basically paid marketing, right, performance marketing and brand marketing. I think a callout I just want to make is PR social media is a huge benefit to Airbnb. Historically, we have the largest share of voice in travel. Last week, we got 3,000 articles. I mean that was like more than 1/3 of the amount of press we got for IPO. So we think that there's a lot of opportunity for Airbnb to continue to be front and center in people's minds, in PR and social media and even in pop culture on TV shows, movies, songs, et cetera, et cetera. So I think the name of the game is both paid media and then earned media. And earned media is a really important part of the international story and international expansion because earned media really creates trust more than paid media. Now with regards to Europe, the one thing I just want to point out is we actually have both models. We have a model where we have a guest fee and host fee. We also have a model where we have a host-only fee. And host can choose, and we have this kind of choice for hosts, especially for larger property managers. Ultimately, especially with our total price display, I don't think it's a major issue for guests. I think ultimately, they're going to be looking at the total price. And we've not seen a major behavior change. I think, yes, they're most sensitive to total price. They're becoming more savvy. They're getting trained on total price. And that is partly why we moved our product towards an option of showing people total price. As long as we remain competitive, as long as we offer the best product and we offer the overall best value for the total price, I think that's ultimately what guests are going to care about." }, { "speaker": "Operator", "text": "[Operator Instructions]. We'll go next to Stephen Ju at Credit Suisse." }, { "speaker": "Stephen Ju", "text": "So Brian, can you talk about eventual rollout plans for pay over time to other parts of the world like Brazil, given the propensity among users there as to use this type of product? And I guess I'll ask the Airbnb Rooms question another way. Between this and pay over time, it seems like you are in a position to expand your audience. So can you talk about how much latent demand you may potentially unlock with what looks like higher service levels to that bargain shopper?" }, { "speaker": "Brian Chesky", "text": "Yes. So I'll talk. One of the things -- I mean, what you'll notice is a lot of our updates last week were based on affordability. So we announced a partnership with Klarna, which is pay over time. we can pay in as many as 4 installments. I also want to add, we also announced a partnership with Stripe, where you can pay by bank account for monthly stay. This is really important because it means you don't have to pay for credit card to pay basically what is essentially rent and then also would increase conversion by lowering costs. So we're really focused. And a lot of what we're focused on is starting these payment services in the United States, kind of similar to Airbnb-friendly apartment. And assuming these partnerships work, no doubt we're going to be spanning these to markets all over the world. And you're correct, a lot of countries, people pay in installments more than even in the United States. So yes, Brazil end markets, emerging markets over the world, I think this will absolutely be a very compelling offering. We just like to get the product right in our more like established markets, like the United States before expanding it globally. But all indications are this is going to be very successful. Now as far as expanding our audience, yes. I mean, ultimately, the biggest market opportunity for any company is always the next generation. I mean the great thing about young people is more of them every year. And if you can continue to be the most relevant brand for a young audience, then you're going to continue to be able to ride that growth. And that's going to definitely be a boom for first-time bookers. And the great thing about young people is 15 years ago, I was 26, and my friends and I didn't have a lot of money. Now many of us have families and we're much older, we have more money. And so what we want to do is capture the next generation of travelers, and then they'll grow with us. And I think that Airbnb Rooms is a Gary entry-level product. It's a great way to introduce people to Airbnb. I noticed, for example, when I used to talk [indiscernible], he said that like diapers was a very important entry product to Amazon for families, right? You buy diapers and then I will see you need other things. This is maybe an extreme example, but I think Airbnb Rooms is a great way for new travelers to come to Airbnb. And if you think about it, between Airbnb Rooms allowing the pricing tool for hosts that price more affordably, total price, which should see the cleaning fees down and other discount products, I think we're going to have really one of the most affordable products in travel, bar none." }, { "speaker": "Operator", "text": "We'll go next to John Colantuoni at Jefferies." }, { "speaker": "John Colantuoni", "text": "Active listings has expanded more this quarter than the recent quarters. When you look at the profile of these new active listings, overall, how do these listings compare to your existing portfolio? What portion of the hosts are individuals, urban versus suburban versus vacation destinations, et cetera? Then on sales and marketing with front-end loaded spending on brand investments, can you just sort of walk through the shape of marketing throughout the year?" }, { "speaker": "Brian Chesky", "text": "Yes, Dave, why don't you take both, please?" }, { "speaker": "David Stephenson", "text": "Sure. I think we talked about the shape of marketing during the year that we are bringing in more front-end loading on our brand marketing spend, especially here into Q1 and Q2. So it's several hundred basis points higher in Q2 than it was in Q2 last year. And then for the full year, total marketing costs will be roughly the same as they were in the prior year. So I don't have much more to say on kind of the shape or marketing beyond that. In terms of active listings, I think this is what's been really continued strength in our business, which is that we are focused on individual hosts. And individual host were 90% of our hosts, that continues to be the case. The new host that we're bringing on because we cater our tools to the needs of those individual hosts, so that's making sure that it's easy to list. And we give them AirCover for hosts. They know that their home is well protected. We give them the great payment capabilities, the customer support that they require. All those things make it easier for individuals. And what's been great to see is that our mix of individual for -- and professional host has remained very stable through that. The other thing that's been interesting about just our listings growth overall is it tends to grow where we have the biggest demand. And so the areas -- as urban come back, our urban growth has been kept in line with that kind of growth. And so as we keep expanding and increasing our business around the world, the listings come right along with it." }, { "speaker": "Operator", "text": "We'll go next to Doug Anmuth at JPMorgan." }, { "speaker": "Douglas Anmuth", "text": "I just want to ask about long-term base if it kind of moves down versus recent periods. I know you talked about some of the changes in payments and fees coming up. Are long-term stays slowing more with normalization in the economy or really just more of a mix shift issue towards shorter stays?" }, { "speaker": "Brian Chesky", "text": "Doug, I think it's important to just step back and say that what we saw, even before the pandemic, was that long-term stays were growing, and they have been our fastest-growing segment by trip length. I think what the pandemic did is it probably accelerated some inevitable growth and there's huge opportunity for us. And I also think we're never going back to the way the world was before the pandemic. I do think there is some little bit of a post-pandemic equilibrium that you're starting to see. And we're also seeing a mix shift because cross-border urban nights are now up. That being said, I remain extremely bullish on long-term stays. I think this is going to be one of the big growth opportunities for Airbnb over the next 5 years. And the reason why is because people are permanently more flexible. Even bosses that want people back to the office, I think they're going to see incremental flexibility. More people going away for the summer, more people may be going away for the holidays. And ultimately, with AI, you're going to see an acceleration of people having more distributed and more global workforces. So all you have to do is believe Zoom is here to stay, to believe long-term stays are here to stay and that's what we're betting on. But the biggest feedback we've gotten on our long-term stay product was it was just sometimes a little more expensive to book long-term stay on Airbnb, because the platform was built for short-term stays. So we made over a dozen upgrades to long-term stays and a lot of more based on affordability. So starting with -- we now have a monthly dial for you to really discover monthly stays, which was really cool dial like an quick wheel that allows you to search from 1 month to a year on Airbnb. You can pay by bank account. This saves on credit card processing fees. You can pay over time. We have more flexible cancellation policies. So you now can cancel a long-term stay up to 1 month before check-in. We have new discounting tools for hosts on weekly stays and monthly stays, and we have many other upgrades as well for monthly stays. So I think we're going to see a lot more growth. And one of the big opportunities, I think, that we're going to see is more people starting to come to Airbnb to list exclusively long-term stay. People that have no intention of hosting on a nightly basis will host long term. Another thing we believe is going to happen is we think long-term stays could be a gateway to short-term stays. There might be a host that are uncomfortable hosting on a nightly basis, but they're used to having a tenant and they might go to Airbnb to rent monthly. And over time, we might be able to get them more comfortable on a short-term basis. So we think this is a really big opportunity for us. But I do think there is some normalization in the post-pandemic equilibrium, but I believe this is still a major growth opportunity for years to come." }, { "speaker": "Operator", "text": "We'll move next to Lee Horowitz at Deutsche Bank." }, { "speaker": "Lee Horowitz", "text": "Brian, maybe circling back to the competitive environment. It strikes us given some of the numbers coming out of your large OTA competitors, and the industry has grown incrementally more than it has in the last year or so. Can you help us understand from your seat, if you've seen a change in the competitive environment over the last 12 months? And what your expectations are for how competition may evolve over the next couple of years? And then, Dave, can you talk about how you think about balancing margins and investments beyond this year, assuming rates aren't a headwind moving forward, it stresses that international investments are said to grow nicely over the next couple of years? I guess with this in mind, how do you think about how margins can progress in the coming years given your investment priorities?" }, { "speaker": "Brian Chesky", "text": "All right. Yes. Lee, I'll start with the first one, competitive environment. I think it's important to note that Airbnb is more than double the size. And most of the travel industry is only a little bit larger than they were before the pandemic. So there's been a major mix shift share towards Airbnb. I think we're starting to see some of the old ways of traveling recover, specifically urban and cross-border. But ultimately, we're really focused on innovating. We're focused on playing our own game, and I think that we're going to continue to focus on a few areas. We're going to continue the Mainstream Hosting. And we think we're going to be adding more supply of homes than any other company. Next, we're going to be focused on perfecting our core service. I think there's potentially down the road to tipping point, where a whole new cohort of people could be comfortable using Airbnb. The biggest obstacle to Airbnb historically has been reliability and consistency. As I said, the biggest strength we have is we're one of a kind. The biggest weakness we have is it's just hard to be as consistent as a hotel. But again, with AI, being able to supplement and augment customer service and with many of our other initiatives to perfect the core service, I think we can introduce a whole new category of travelers to Airbnb. And this doesn't even include many of the opportunities we have with younger travelers, with new markets and new products and services that are only on Airbnb. I also just generally would just say, one of the big guiding principles I have is to focus on the things only Airbnb can do. And if we focus on the things that only Airbnb can do, then in a sense, you're going to come to Airbnb and we're going to have a lot of demand, a lot of exclusive traffic. And Airbnb Rooms is just one of many examples of something that only Airbnb offers. And so we're going to continue to be competitive, but we're also going to focus on things that only we offer. Dave?" }, { "speaker": "David Stephenson", "text": "Yes. I think one of the things I'm really proud of is the ability for us to both grow and grow profitably and have very strong margins. I mean having a 44% kind of free cash flow margin is something I'm definitely very proud of. I think going forward, just remember that we are still heavily in growth mode, and we're going to continue to invest behind growth for the future. The good news is that as I'm doing this year, we're able to continue to be very rigorous in our investments across our P&L, make improvements in our cost structure, buying fixed cost leverage and do all that while investing for kind of growth for the future. So what I think you should anticipate going forward is that we'll continue to have a profitable business focused on growth. And that over time, we'll continue to have opportunities to expand margins, but that's not my primary focus right now. Our primary focus is in investing for growth. And as you mentioned, one of those areas for opportunities will be to increase our investment in areas where we're significantly underpenetrated and seeing great success. And we highlighted a couple of those areas on the call today." }, { "speaker": "Operator", "text": "And that does conclude today's question-and-answer session. At this time, I would like to turn the conference back over to Brian Chesky for closing remarks." }, { "speaker": "Brian Chesky", "text": "All right. Well, thank you, everyone, for joining us today. Just to recap, we had a strong start to 2023. Revenue was $1.8 billion, which is 20% higher than a year ago. Net income and adjusted EBITDA were both records for Q1, and our trailing 12-month free cash flow was $3.8 billion and that represents a free cash flow margin of 44%. I'm really proud of the progress we made. If you look at over the last 3 years, how much more profitable the company's become, I think a lot of that has been based on our discipline and our execution. And speaking of execution, our product just keeps getting better, and we continue to innovate with more than 50 upgrades and features last week and many more ahead later this year. I'm proud of what we're doing, and I'm really excited for the road ahead. So thank you all, and we'll talk next quarter." }, { "speaker": "Operator", "text": "And that does conclude today's conference. Again, thank you for your participation. You may now disconnect." } ]	Airbnb, Inc.	115,705,393
ABNB	4	2,024	2025-02-13 16:30:00	Operator: Good afternoon, and thank you for joining Airbnb, Inc.'s earnings conference call for the fourth quarter of 2024. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb, Inc.'s website following this call. I will now hand the call over to Angela Yang, Director of Investor Relations. Please go ahead. Angela Yang: Good afternoon, and welcome to Airbnb, Inc.'s fourth quarter of 2024 earnings call. Thank you for joining us today. On the call today, we have Airbnb, Inc.'s co-founder and CEO, Brian Chesky, and our Chief Financial Officer, Ellie Mertz. Earlier today, we issued a shareholder letter with our financial results and commentary for our fourth quarter of 2024. These items were also posted on the Investor Relations section of Airbnb, Inc.'s website. During the call, we will make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of performance. Also during the call, we will discuss some non-GAAP financial measures. We provide a reconciliation to the most directly comparable GAAP financial measures in the shareholder letter posted to our investor relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I'll pass the call to Brian. Brian Chesky: Alright. Well, thank you very much. And hey, everyone. Thanks for joining me today. 2024 Airbnb, Inc. outpaced the travel industry's growth. We ended the year with Q4 revenue. Now before we get into the results, nights booked, and GBV all accelerating from Q3. I want to just quickly touch on some of the work that got us here. You know, over the past several years, we've been preparing for Airbnb, Inc.'s next chapter and we wanted to make sure that guests and hosts love our core service before we introduce something new. So we listened to their feedback and we rolled out more than 535 features and upgrades to improve the experience. These upgrades include major reliability efforts, like guest favorites. Guest favorites make it easier for guests to find the best listings in Airbnb, Inc. We've also made it easier to host by launching the Toast network. It's a really simple way to find the best local host to manage your Airbnb. Now in just four months, the cohost network has grown to almost 100,000 listings. At the same time, we've been driving growth in a number of product optimizations. We made it easier for guests to find the perfect stay with enhanced search functionality and better merchandising. And this includes things like suggested destinations, more detailed maps, and a new welcome guide for guests. We also introduced flexible payment options in local payment methods in nearly two dozen countries, making it easier for people around the world to use Airbnb, Inc. And we're in the process of rolling out a completely redesigned checkout experience that makes it even simpler to book at Airbnb, Inc. As a result, we've seen a higher conversion rate, and we expect these improvements to continue delivering growth in 2025. By optimizing key parts of our product, like search, merchandising, and payments, we're seeing strong near-term results, and we're building a foundation to support the introduction of new offerings. Finally, we've rebuilt our platform from the ground up with a new technology stack. This includes new listing management tools for hosts, and these tools make it easier for hosts to list and manage their homes while giving them the ability to eventually offer more services. We've also upgraded our messaging system into a single unified platform, making communication between guests and hosts smoother and more reliable. Now with this new tech platform, we are able to innovate faster and expand beyond short-term rentals into becoming an extensible platform with a range of new offerings, and 2025 marks the start of Airbnb, Inc.'s next chapter. No. Today, our service is better than ever, and our platform is ready for the support with next. In 2025, we will continue building on this momentum. We're executing on a multiyear growth strategy to perfect our core service, accelerate growth in global markets, and launch and scale new offerings. Now we've talked a lot on previous calls about how we're preparing to expand beyond our core business. In this year, you'll see the beginning of a new Airbnb, Inc. So now I'm gonna turn it over to Ellie to give you a financial update. Ellie? Ellie Mertz: Thank you, Brian, and good afternoon. I'll start with a review of our financial results and then provide our current outlook for Q1 2025. As Brian mentioned, we ended last year on a strong note. Nights and experiences booked accelerated in Q4 to 12%, making it the highest year-over-year growth quarter of 2024. Revenue also grew 12% year-over-year to $2.5 billion in Q4. Net income was $461 million and adjusted EBITDA was $765 million. For the full year, adjusted EBITDA totaled $4 billion, representing an adjusted EBITDA margin of 36%. Since 2020, we've delivered over 4,000 basis points of EBITDA margin expansion. Next, I'll turn to the balance sheet and cash flow. During Q4, we generated $458 million of free cash flow. And for the full year, we generated $4.5 billion, representing a free cash flow margin of 40%. At the end of the year, we had $10.6 billion of corporate cash and investments, as well as $5.9 billion of funds held on behalf of our guests. Our strong balance sheet allowed us to repurchase $838 million of our Class A common stock during Q4 and $3.4 billion for the full year. At the end of Q4, we had $3.3 billion remaining on our repurchase authorization. Now let's shift to our Q1 2025 outlook. After closing out 2024 with our highest quarter of nights and bookings growth, we're excited about the strong demand we continue to see early in 2025. For Q1, we expect to deliver revenue between $2.23 billion and $2.27 billion, representing 4% to 6% year-over-year growth, or 7% to 9% when excluding FX headwinds. As we mentioned last quarter, revenue in Q1 2024 benefited from both the timing of Easter and the extra day from leap year, creating a hard year-over-year comparison. Without these calendar impacts and FX headwinds, our revenue growth would be about 6 percentage points higher, or 10% to 12%, which is relatively stable compared to Q4. For nights and experiences booked, we expect year-over-year growth in Q1 2025 to be relatively in line with Q1 2024 once you exclude leap day, which contributed about one percentage point of growth last year. On profitability, we expect adjusted EBITDA and adjusted EBITDA margin to decline compared to Q1 2024, driven by the same factors impacting revenue. That said, if you exclude the calendar and FX headwinds, adjusted EBITDA margin in Q1 would remain relatively flat year-over-year. As we look ahead to 2025, we're focused on executing our multiyear growth strategy. Our strategy is designed to drive long-term growth and deliver market share gains through three levers: one, perfecting our core service; two, accelerating growth in global markets; and three, launching and scaling new offerings. We're focused on strengthening the economics of our core business and generating strong free cash flow while also investing in growth opportunities. This year, we plan to invest $200 million to $250 million towards launching and scaling new businesses, which we'll introduce in May. Even with these investments, we expect to maintain strong profitability, delivering a full-year adjusted EBITDA margin of at least 34.5%. Because these investments will roll out throughout the year, their impact on our quarterly adjusted EBITDA margin will be the most pronounced in the first nine months of 2025. As these new businesses scale over the coming years, we expect them to make a significant contribution to revenue growth. And so each year, we'll layer in new offerings where we see long-term revenue growth opportunities. And at the same time, we'll focus on delivering strong profitability and world-class free cash flow for our core business. And now with that, I'll open it up to Q&A. Operator: We will now begin the question and answer session. Stephen Ju: Thank you. So I think in the past, in terms of the global sort of localization effort, you've talked about Brazil and I think in the shareholder letter, you were showing your localization effort for Japan. So just wondering how long it typically takes for one of these efforts to localize in any given country you know, it takes to come together. If you have you guys have mentioned Argentina, Germany, South Korea, and other places. Ellie, I guess, the $200 to $250 million of investment that you're planning to incur I guess, in the, you know, the front half of this year for the most part. What is that primarily gonna be geared to? Is it gonna be marketing? Is gonna be engineering, staff up, or any color there would be helpful. Thank you. Ellie Mertz: Great. Thank you, Stephen. Let me start just giving a little bit of color in terms of our global market strategy. As backdrop in terms of context on this strategy, we've shared over the last year that Airbnb, Inc. is a very global brand. However, our business is concentrated in our top five core markets. So that's the US, UK, Canada, France, and Australia. Those five markets comprise about 70% of our gross booking value. And so as a growth lever that we've been investing in, we've been targeting markets outside of that top five. Where we think that there's a sizable opportunity for us to invest and both gain penetration in the markets and also provide a tailwind to our global growth rates. I think what you've seen over the last not just the Q4 results, but over 2024 as well is that those investments and that targeting of new geos has had a meaningful impact on our growth. In particular, what we shared in Q4 was that those markets that we've targeted are growing about double the rate of our core markets. And to your question in terms of, you know, how long does it take, I would say it depends on the specific market. I think Brazil is a huge success case, and that's a market that we've been focused on in particular with adding brand marketing over the last two years, and we've been able to materially increase the scale of our business in that country in particular. I think there's other markets that maybe the duration for building scale will take longer. A country that I would put in that category would be Japan, which is a market that we just commenced our brand marketing in Q4. And we're starting at a lower base of domestic awareness. So each of our targeted markets, you know, we have to factor in where the market is, the level of awareness and consideration we have among local travelers and the level of product optimizations we need to make to make sure that we are appropriately addressing the local audience. So your second question is around our investments in scaling launching and scaling the new businesses. As the letter details, we're planning to spend approximately $200 to $250 million this year. And you should see the bulk of that investment hit both our marketing line and our product development line items. Just to give a little bit more color here. In terms of marketing, we will obviously be spending to build out the teams to drive the supply operations around those new offerings. We will also be investing behind awareness of the new products and demand generation. And then on the product side, we will be slightly increasing our pace of count growth across our development organization. So that we can move more quickly across our road map and support these new businesses. Operator: Our next question comes from the line of Richard Clarke with Bernstein. Please go ahead. Richard Clarke: Hi. Thanks for taking my questions. I just want to ask about the launch we've seen of AI. I think Airbnb, Inc. avoided some of the volatility that some of your peers had. But are you leaning into those operators? Are you or are you confident you can kind of control the AI flow through the Airbnb, Inc. platform? Brian Chesky: Hey, Richard. Yeah. Here's what I think about AI. I think it's still really early. It's probably similar to, like, the mid to late nineties for the Internet. So I think it's gonna have a profound impact on travel. But I don't think, you know, it's yet fundamentally changed for any of the large travel platforms. And so you know, we want to be the leading company for, you know, AI-enabled traveling and eventually living. I'll just talk about a little bit about how we're gonna do that. So most companies, what they're actually doing is they're doing integrations with these other platforms on trip planning. But the trip planning, it's still early. I don't think it's quite ready for prime time. We're actually choosing a totally different approach which is we're actually starting with customer service. So later this year, we're gonna be rolling out, as part of our summer release, AI-powered customer support. You know, as you imagine, we get millions of contacts every year, AI can do an incredible job of customer service. It's gonna speak every language 24/7. They can read a corpus of thousands of pages of documents. And so we're starting with customer support. Over the coming years, what we're gonna do is we're gonna take the AI-powered customer service agent and we're gonna bring it into essentially, Airbnb, Inc. search to eventually graduate to be a travel living concierge. I think it's a really exciting time in the space because you've seen, like, with Deepseek and more competition with models, these models are getting cheaper or nearly free. They're getting faster, and they're getting more intelligent. And for all of this, it's starting to get commoditized. What I think that means is a lot of value is gonna accrue to the platform. And, ultimately, I think the best platforms, the best applications are gonna be the ones that, like, most accrue the value from AI, and I think we're gonna be the one to do that with traveling and living. Operator: Our next question comes from the line of Eric Sheridan with Goldman Sachs. Please go ahead. Eric Sheridan: Thanks so much for taking the question. Maybe just one quick follow-up, Brian, and then I could ask a follow-up. With respect to the AI, I appreciate your answer with respect to outward-looking and how it might change the landscape. Where do you think the potential is internally to apply AI for efficiencies inside the company and create an additional layer of potential margin efficiency and or free cash flow conversion in the years ahead? And then in terms of the way you guys framed the year with exiting it up higher margin trajectory post some of the investments you called out, will there be any change or thought about how your capital allocation process might evolve as you move through 2025? Thanks so much. Brian Chesky: Alright. Hey, Eric. I'll answer the efficiency deal. I'll wait for the second part. So yeah. There's, like, a couple of efficiencies that you could imagine. Airbnb, Inc., one is obviously customer service. I think that's, like, one of the biggest ones. I've kinda already covered that, but I think that's, like, a massive change for Airbnb, Inc. Other I assume you refer to is essentially engineering productivity. We are seeing some productivity gains. I've talked to a lot of other tech CEOs who and here's what I've heard talking to other, like, tech CEOs. Most of them haven't seen a material, like, change in engineering productivity. Most of the engineers are using AI tools. They're seeing some productivity, I don't think it's flowing to, like, a fundamental step change in productivity yet. I think a lot of us believe in some kind of medium term of a few years, you could easily see, like, a 30% increase in technology and engineering productivity. And then, of course, you know, beyond that, I mean, I think it could be, like, an order of magnitude more productivity because it but but that's that's gonna be, like, down the road. And I think that's gonna be something that almost all companies benefit from. I think the kinda younger, more innovative startup-like companies might benefit a little bit more because they'll have engineers who are more likely to adopt the tool. That's probably pretty important. But I think I think this is what I'm hearing from other people and we're pretty much having the same experience. Ellie Mertz: Eric, to answer your question with regards to the capital allocation strategy, I would say, no, no meaningful change in terms of strategy. What we've stated consistently over the last two years is that our capital allocation strategy includes, one, obviously, investing in our core operation, valuing M&A where there's relevant opportunities, and three, returning capital to shareholders. Obviously, given the strength of our balance sheet as well as our world-class free cash flow margins, we have the capital to do all three. You can see from our 2025 guidance that we are leaning in through the P&L in terms of investing slightly more in terms of the core operations and in particular new businesses. And then from a returning capital to shareholders, you know, you should look at the volume of repurchase activity in 2024 as a guide with regard to the magnitude in 2025. I would expect us to, you know, be slightly price sensitive and to dial up the quarterly repurchasing based on the underlying stock price. Operator: Our next question comes from the line of Justin Patterson at KeyBanc. Please go ahead. Justin Patterson: Great. Thank you very much. Brian, could you see how how you're thinking about the pace of product innovation versus the past? It sounds like this new tech stack should be beneficial to product velocity. So I'm curious where you saw friction points on the prior tech stack and how you think this new new tech stack really positions you to to execute on those growth initiatives you outlined at at the start? Thank you. Brian Chesky: Yeah. Hey, Justin. I mean, this tech stack probably like, this project probably started, frankly, six years ago, if I'm not mistaken. So this has been a very, very long thing. We've been doing it for quite a long time. I think the big milestone is that, like, you know, most of the work is now complete. And you're gonna see this year, like, almost every part of the application is gonna be essentially rebuilt from the ground up. What you've seen is, like, we've done 535 upgrades. The vast majority of those upgrades have actually been in the last two years. So every year, we are increasing the throughput of features and upgrades. This summer release is gonna be significantly larger than past ones, and I expect the ones after that will be larger. So it's gonna just basically, what it's gonna lead to is the, fewer engineers being able to basically, ship features faster. And so, you know, there's a pretty, pretty huge gain here. So I think I think what you should expect is this year, we're gonna launch significantly more upgrades than last year, and every year, it should increase. Operator: Next question comes from the line of Brian Nowak with Morgan Stanley. Go ahead. Brian Nowak: Great. Thanks for taking my questions. Good good guide, guys. Just two questions. One, so, Brian, as you're as you're thinking about sort of the the new products and new use cases to come from the some of the growth opportunities, launching in May. Can you just talk us through some of the the larger points of friction or opportunities high level that you see from a a guest and a host perspective you're looking to address with some of these products? And then the second one, Ellie, on the on the full year margin guide, the at least 34%, can you just sort of walk us through how you're thinking thinking about the the contribution from the invest sort of growth throughout the throughout the year and as you kind of tumble through the comps for the margin guide? Brian Chesky: Yeah. Hey, Brian. I will and are you asking just to clarify the first this is specifically, friction point for new products and services, not product optimizations. Correct? That's right. Yeah. So the, you know, the $200 to $250 million. Yeah. The new new business is running. Yep. Yep. So let me just kinda back up and just give you a little bit of our philosophy. So you know, we spent the last, like, four to you know, four or five years really trying to get to this moment where we could prepare for the next chapter of Airbnb, Inc. What we did, as I said, is we built a tech stack from the ground up. We listened to guest and host feedback made over 500 upgrades, we built this new business organization that Dave is now leading. Become obviously, went from breakeven to quite profitable. So I think we're now ready for this next platform, next next chapter expand beyond our core where Airbnb, Inc. is you know, just a place to stay. And to do that, here's a couple of philosophies a couple principles we have in our philosophy I'll share and I'll just tell you a little bit about the friction. Number one, I think we can do this quite efficiently because we are not gonna launch separate apps or separate brands. We're gonna have one app, one brand, the Airbnb, Inc. app. We want the Airbnb, Inc. app kinda similar to Amazon to be one place to go for all of your traveling and living needs. A place to stay is just really, frankly, a very small part of the overall equation. Every new business we launch, we'd like to be strong enough. It could stand alone, but it makes the core business stronger. You know, I think that each business could take three to five years to to scale. A great business could get to a billion dollars of revenue. It doesn't mean all of them will. And you should be able to expect, like, you know, one or a couple businesses to launch every single year for the next five years. We're gonna start initially with things very closely adjacent to travel. So, you know, when people book an Airbnb, Inc., there's a lot of, like, you know, experiences and services and other things that would make their stay more special. And it would even include things they wouldn't think to search for. And from there, we're just gonna keep expanding, and we're gonna expand out to more host services to enable them to become better hosts. And then eventually, we'll move it, you know, further and further away from our core. I think, like, maybe the analogy of Amazon is a really good one, which is to say, they started with books, the nearest adjacency to books was DVDs and CDs back when people bought physical media, and then they went to, like, I don't know, maybe toys and other things. And eventually, they ended up with fashion, and pretty soon, they were doing things pretty far adjacent from, you know, media and books. So we're gonna probably follow that path. So we're gonna really, really start adjacent to travel, and part of the reason why is a traveler booking a home, what else would they wanna book? And the other great thing is like, we offer these other experiences and services that could potentially bring a new guest that then book more homes in Airbnb, Inc. And I think one of the ultimate goals is you know, Airbnb, Inc. is used by, like, I think, 1.6 billion devices a year. So it's got a pretty big volume of users. But we're not very we're not a very frequently used app. People typically use us once it's right a year. And I would love for it to be one day for people to use this once or twice a week. And so that's kind of one of the goals over the long term. Ellie Mertz: Great, Brian. Let me talk a little bit about margins over the course of the year. So to restate, or just reiterate the guidance that we provide for the full year, we're going to invest $200 and $250 million in terms of launching and scaling the new businesses. We anticipate that the negative impact to margin from those investments will be heavily weighted in Q1 through Q3. Whereas the revenue obviously won't pick up until we've launched those new products. At the end of Q2. And so we would assume that the benefit from that lift would really be concentrated in terms of our x rate of Q4. But more broadly, I think the, you know, the takeaway from our guide is that even with that investment level, we're obviously maintaining extremely strong healthy margins for our core business. And obviously, the global floor on EBITDA gets you to that number. I think in terms of the general question of comps, I think the most notable comp, I would say, noise is what we described in the letter with regard to Q1. It's obviously in the letter, but just to restate it here. Q1 revenue will be heavily impacted by both the FX headwinds as well as the calendar changes vis a vis or relative to 2024. That will impact not just revenue, but also Q1 EBITDA. We've called that out in the letter just to highlight that. Absent those pieces, the Q1 EBITDA margins would actually be relatively flat. Operator: Our next question will come from the line of Ron Josie at Citi. Ron Josie: Thanks for taking the question. Brian, I wanted to ask a little bit more on the here now. You in the letter, you talked about recent product enhancements around search and better merchandising. Love to hear your thoughts on what what you're finding, what you're seeing with search and merchandising and learnings there to help inform these newer experiences and products that are come down the pike. And then next question is just on nights and experiences both to the acceleration this quarter. Talk to us about the contribution between just the broader travel market being relatively healthy and and these newer products that are launching, the ex like, co-hosting or experiences or the next nine. Thank you. Brian Chesky: Yeah. Hey, Ron. I'll take the first. Yeah, when you think about the here and now, you know, when we call this out in our letter really around product optimizations. And, Ron, I'll kinda just let's just start, like, three parts. Step one, people come to Airbnb, Inc. It's really we have a huge amount of traffic. We have nearly 5 billion visitor unique 5 billion visitors a year. It's really important that, like, when people come to Airbnb, Inc., they are able to find the right Airbnb, Inc. for them. We've done a lot around, you know, like, we've introduced a personalized welcome tour. Again, people use Airbnb, Inc. only a couple times a year, so it's really important to orient them. So we've got this welcome tour that's personalized to every person. Based on your past searches, we suggest destinations that you we think you're gonna be interested in. Based on past filters, we offer up those filters as essentially, like, quick filters to apply. We've also found that, you know, this is probably obvious, but, our mobile app converts significantly higher than our mobile website. So we've been pushing to get more people to download our mobile app, and now in Q4, mobile bookings represented 60% of our overall bookings up from, I think, 55% the year before. You know, our checkout page, it this sounds like a simple thing, but the checkout page like, the page to to pay, not the checkout Airbnb, Inc., the page to pay, was really, really long, and we found that if you make it shorter, simpler, that leads to a massive increase in conversion. I'm just giving you a couple examples. There's really a long list of dozens and dozens of things again, you know, a hundred basis point increase on a GBV of $80 billion, you know, you're gonna be soon approaching like, $100 million optimizations just one at a time for some of these really, really big efforts. So once you find an Airbnb, Inc., it's important that that Airbnb, Inc. is affordable. And affordability is in our DNA. So we've made a lot of improvements around affordability that have also increased optimization. Like showing the total price display. When guests toggle on total price display, that includes all fees including cleaning fees, we see that people are booking higher value Airbnb, Inc.s. We've also created a lot of tools for hosts. Whether it's monthly and weekly monthly discounts, price tips, search tips, all these things are essentially efforts to make everything more affordable, and it's working. Because during 2024, hotel prices were up year to year while comparable Airbnb, Inc. listings were down year over year in price. So we're making progress. And the last thing is if you find the Airbnb, Inc. is a good price, it's still really important that it's of high quality. For every person who books in Airbnb, Inc., about 90 people book a hotel. And so if we do, you know, around a 500 million IT year and we got the extra hotel grass to use Airbnb, Inc., go from 500 million nights to a billion room nights. So that's a really, really big opportunity. And we think the number one way to do that is to improve the reliability and quality of our service especially your host. So the way to do that is elevate the best and cut the bottom. We introduced guest favorites in October 2023, it's now gotten 250 million nights booked. If you book a guest favorite, customer service rates are down. Trip issues are down, guest net promoter is up, cancellations are down, so it's really great. We also since April 2023, we introduced a new host quality system and removed 400,000 listings that don't meet our or don't meet our guest expectation. Ron, those are essentially the three levers. We have usability, making it easier for people to find the listing by increasing conversion. Affordability, getting prices to be better and more competitive, and then reliability and quality of the service. So again, we've made know, hundreds of updates over the past few years on these, but these are just a couple callouts. Ellie Mertz: And and Ron, to answer your question in terms of quantifying the Q4 demand. I would say, you know, obviously, we benefited from organic tailwinds across the industry. But in addition to that, all of the product optimizations that Brian shared from our testing of those improvements, we estimate the exit rate growth rate for our business was lifted by a couple hundred basis points due to those improvements. And we see it through improvements in our booking conversion. Operator: Our next question will come from the line of James Lee at Mizuho. Please go ahead. James Lee: Great. Thanks for taking my questions. I'm sorry I joined the call a little bit late, so I apologize if my question has been repeated. Two questions here. One on experiences. Can you guys talk about maybe some of the friction you're able to resolve in the upcoming launch? Any indication that you can give us on the confidence of a successful launch this time? And secondly, I just want to double click on you know, Brian's commentary on Beyond the Core. Are you thinking about maybe some sort of concierge service, meaning, like grocery shopping, access to spa, to gym, maybe some kind of access to recreation. Is that what we should think about when we think about adjacency to travel? Thanks. Brian Chesky: Yeah. I can I can handle this? Hey, James. So frictions do you wanna resolve with experiences? Let's ask, though, what were the were some of the challenges the first time around? Well, the first time around, I don't think we integrated the experiences really well. The products. If you go to airbnb.com or app right now, it's pretty hard to find them. The second thing is that when you find the experiences, I don't think they were merchandised as compellingly as they could. Third, there weren't really a lot of integrations with social media. I think social media is a great distribution. And fourth, I think we are completely rethinking the kind of supply we're gonna have. I think it's gonna be really, really compelling. And then fifth, we didn't really market it that much, and I think this we're gonna be a bit more aggressive in marketing then because we're really proud of the quality of product we have. Confidence of how successful the launch is gonna be. You know, I wanna be measured in my response because know, you know, this is a this is a second shot at it. I am extremely confident that this product can be incredibly, incredibly compelling, though. So I think if people give it a shot, I think they're gonna be really in love with the product because people really do actually like the current Airbnb, Inc. experiences, and I think this one's gonna be significantly better. I probably won't say much more, tune in in May, and we're gonna, like, you know, I'll walk you through the entire product and product launch. As far as adjacencies, yeah. I mean, there are you know, dozens and dozens I mean, if you got really granular, hundreds of opportunities. Endless. We could spend many, many years picking all the adjacencies to be able to travel somewhere and list somewhere. Number like, you know, 17, 18% of our nights booked are longer-term stays of more than 30 days. And that's gonna become an even greater share of our business. I think down the road, and so if you think about what all the service need to travel or live somewhere, there's a lot of opportunities. Now the key is not to do them obviously all at once, to be to prioritize, to pick the most differentiated services guests want the most that are, you know, the most compelling, opportunities from a business standpoint and just start from there. We're not we're not gonna go into too many more details, but stay tuned. Operator: Our next question will come from the line of Jed Kelly at Oppenheimer. Please go ahead. Jed Kelly: Hey. Great. Thanks for taking my questions. Just first, can you talk about as you kind of increase your reliability, where are where are you in potentially partnering with some you know, larger companies that might be able to provide these enhanced services. And then just just circling back to North America. I mean, how do you view that market opportunity? I know room nights accelerated mid-single digits, but I'm sure you want it to grow faster. So so just how should we view the North American market? Thank you. Brian Chesky: Yeah. Why don't I start in with partners? I imagine eventual like, Airbnb, Inc., first of all, we haven't done a lot of partnership. We historically have not had a robust business development or partnerships function. So most of our platform, we feel as kind of a little bit more of a closed ecosystem. I imagine this next chapter of Airbnb, Inc. is much more of an open ecosystem. If you think about the really large tech platforms, they're kinda ecosystem ecosystems, essentially, and they're ecosystems that partner with other companies and developers to build on their platform. And Airbnb, Inc. is the kind of company where there are quite literally thousands of companies like cleaning companies, key exchange, like grocery companies, there's all sorts of companies built on top of Airbnb, Inc., especially local businesses. So I think that Airbnb, Inc., there is a play to the ecosystem where we could partner with local companies and global brands. So we are absolutely thinking about that. It's not the first thing we would do. We'd probably start with kinda first party before we go to third party, but third party integrations is incredibly compelling because why not, like, allow the world to build an Airbnb, Inc.? We don't need to build future by ourselves. Ellie Mertz: K. Just to talk a little bit about North America. So one to just call it the trends that we saw in the back half of the year. North America, like all other regions, accelerated from Q3 to Q4. What I would say about you know, the the state of play in North America is we believe we can grow faster than we are growing today. And and why is that? I would say one is that North America, despite the scale that we've been able to achieve in North America, is still a market dominated by hotels. Our business continues to be a a fraction of the overall lodging industry, and, you know, there's there's plenty of room to grow. Short-term rental in particular, our business relative to hotels as compared to what it looks like in other regions. I would say second, we've we've mentioned this in prior calls. We look across the states and identify that there's there's several demos that we we just frankly don't do as well as we do in other demos. The ones that we've called out in particular would be the Latino population, the kind of crossover heartland states outside of the coast, and those are areas that we continue to, you know, work to drive penetration and, increase consideration. Operator: Our next question will come from the line of Doug Anmuth with JPMorgan. Please go ahead. Doug Anmuth: Thanks for taking the questions. Brian, can you just talk about in what markets or for what kind of listings you're seeing the cohost network work best and what's really driving them to earn twice as much as other listings. And then, Ellie, I'm just curious where you might be finding the most traction in managing the cost structure to make room for some of these new investments coming up. Thanks. Brian Chesky: Yeah. Hey, Doug. Co Host Network, just to give people a little bit of background on the Co Host Network, you know, we did a bunch of surveys, and we talked to a lot of prospective hosts. And here's the status surprised us. More than 40% of people we surveyed say they would be interested in sharing their home on Airbnb, Inc., but the biggest obstacle to them doing that was that felt like it was a lot of work. We also noticed there were a lot of people that were hosting Airbnb, Inc. that would like to expand, but they don't have another home to put in Airbnb, Inc. And so we thought, what if we created a marketplace to match people with extra time with people to have home? And that is the Co Host network. The reason why the Co Host listings are so much productive they make about twice as much revenues listings matched by Co Host than other listings. It's because we only invited top hosts on Airbnb, Inc. to become a cohost. So the average rating for a host in Airbnb, Inc. is significantly higher. The majority of listings managed by Co Host, I believe, are guest 85% help manage a guest favorite, 75% of Co Hosts are actually Superhosts. We launched in ten countries with 10,000 cohosts. Those countries where I think it was Australia, Brazil, Canada, France, Germany, Italy, Mexico, Spain, UK, and US. So it was those ten countries, and that's it. You know? And since we've and the average cohost has an exceptional rating of 4.87. That's a really, really good rating. But I was, like, four months ago, five months ago. Today, went from 10,000 cohosts to 15,000 cohosts. We now have 100,000 listings under management. The next plan is to expand to Asia. So the two countries we're focused on are Japan and Korea. And, we'll give you updates as that progresses. Ellie Mertz: Great. And, Doug, to talk about margins in terms of where there's opportunity for incremental efficiencies? Just to restate our our margin guide every year, we will be looking to invest in new growth opportunities while also finding incremental efficiencies in our core business. In terms of 2025 and and the outlook there, I would say incremental opportunities across our variable costs. So areas like payment processing and customer service opportunities to just be frankly a little bit more efficient and to deliver some margin expansion there. Similarly, we continue to be extremely disciplined with our G&A expenses and headcount growth, allowing for some margin expansion there as well. And then on the marketing line item, in 2024, we did increase our overall marketing intensity over the course of the year because we saw opportunities to lean into. Our current plan for 2025 plans for a flat percent of revenue for the core business on marketing. Operator: Our next question will come from the line of Lee Horowitz at Deutsche Bank. Please go ahead. Lee Horowitz: Great. Thanks for thanks for taking the question. Maybe just on some of the growth markets. You guys highlighted some really healthy growth rates in these expansion regions. And obviously put up nice numbers in the 4Q. But as we look after to the first quarter, nice growth is sort of reverting back to what you did for March of 2024. So can you maybe help us unpack why the success you are seeing in some of these regions is not necessarily pulling up the overall growth rate in the first quarter? And then maybe relatedly to the marketing comments, you just made in terms of it being sort of flat year on year. I guess, how how do we maybe, you know, put together the pieces of, you know, marketing intensity perhaps flat year on year, with a number of different growth regions still out there, that are are probably not quite as large as you want at this point. Like, do you no longer really have to invest in them, or have you reached investment sort of threshold on those? Are you gonna start to get leverage on the investments that you've made in those regions? How come they they don't necessarily need more marketing dollars to deleverage next year? Thanks so much. Ellie Mertz: Sure. Let me let me start with the latter question. So if you think about how we've been managing our overall marketing dollars, the majority of the spend is on brand marketing. And the way to think about brand marketing is that it is effectively a fixed amount of spend for each market in terms of the minimum amount that you need to spend for that market to be efficient. And so it is not necessarily a one for one, like, performance marketing in terms of how you need to scale it up. And so what we've done over the last couple of years is keep the the growth of spending against our core markets relatively modest while adding on these incremental new markets and the incremental brand marketing dollars that requires. And so as we look forward to 2025, the way that we're able to maintain strong growth in the core markets, but also incrementally invest in a higher level of marketing intensity for the expansion market is not to grow the core market marketing spend faster than revenue. And and that the the way we're able to do that is our lack of of strong reliance on performance marketing which would be entirely variable. Instead, in a market like the US, we have a base fixed amount that is dedicated to brand. On top of which we we surgically add performance marketing. And so the the broad takeaway should be that in particular, in our core markets because they are so heavily reliant on brand, we are not adding dollar for dollar as revenue increases, and therefore, the marketing budget's allowed to expand and be more heavily dedicated to expansion markets. Operator: Our next question will come from the line of Justin Post at B of A. Please go ahead. Justin Post: Great. Thanks. A couple questions. Looks like you know, we've already covered it. US accelerated. Looking back, what what might have pressured the the growth rates and and on a macro level? And do you see those those pressures changing this year? And then, maybe Ellie, you could talk a little about the take rates contemplated in your outlook. What are some of the the positives and and negatives for for take rates? Thank you. Ellie Mertz: Yeah. Certainly. So let's talk a little bit about North America in terms of what, you know, what 2024 looks like. You'll recall this past summer, North America in particular, we saw at the beginning of the summer peak that there was a pretty material contract in terms of lead times, which made bookings growth in Q3 relatively muted. I think the question at the time was, is this a signal of weakening demand or is this a signal of simply a little bit of a volatility in terms of consumer behavior? When people book their next trip. What we found at the end of Q3 and consistent with our Q3 results that that played through with Q4 is that that volatility and kind of usage bookings growth we saw over the summer was somewhat temporal. And those folks who were, you know, somewhat on the sidelines in terms of making their future bookings in the summer came back to us in the fall and did indeed make bookings. I think subsequent to that, we've certainly seen that past the initial uncertainty leading into the election. The consumer and in particular the North American consumer has been strong and in particular has been been strong in terms of of contemplating future travel. In terms of take rates, if we play back the if we play back last year, let's talk about the puts and takes for last year and how they impact the take rate for 2025. So as you'll recall, we introduced an FX service fee mid-2024. That service fee is approximately 100 basis points applied to 20% of our GBV. So on an annualized basis, you would assume that it would list the implied take rate by about 20 basis points. It did that. However, in Q3, we had some offsets and in Q4, we also had some offsets. So specifically, in Q3, we had elevated made goods, which come in as a contra revenue and offset the the lift we received from the FX service fees. And then fast forward to the last quarter, the offset was a hard comp from some benefits we got to revenue in Q4 of 2023. Associated with breakage of gift cards. So fast forward to 2025, we don't anticipate any of those similar one-offs that will offset the the benefit we get from the FX service fee. And so instead for full year 2025, you should assume that, the implied take rate gets the full benefit of 20 basis points increase on a year-over-year basis. As compared to 2024. Operator: Our next question will come from the line of Ken Gawrelski with Wells Fargo. Please go ahead. Ken Gawrelski: Thank you. Two, if I may. First, just on the expense side, maybe, Ellie, you talk a little bit going looking beyond 2025. How do you think about the fixed investments you've made to prepare for the product launches in 2025? How should we think about that fixed versus variable component in 2026 and beyond? And then and then second maybe for Brian, you you talked about how you there's still opportunity in North America and the the the bookings of alternative accommodations relative to hotels and still it's very heavily weighted to to hotels. Could you talk about some of the elements you think that that could change that kind of price to value equation for consumers, especially in maybe in urban markets. Where where alternative accommodations had tougher time gaining share versus vacation markets where where you picked up a ton of share? Thank you. Ellie Mertz: So let me, let me talk about the product investments. Brian has shared that in in the letter we shared that we've sent the the last couple of years effectively rebuilding the tech stack. And so I would say, you know, while that work is not fully complete, a lot of it is behind us. So think from investor standpoint, you should be excited that most of the hard work has been done in terms of rebuilding the tech stack and and frankly modernizing our app that sets us up well to now turn our product road map towards supporting these these new services as well as continuing to perfecting the the core service. So what that means from an expense perspective is that on the go forward, we can increasingly dedicate our product resources to those consumer-facing growth additive features that, you know, obviously, the the consumer benefits. Brian Chesky: Hey, Ken. Just on your question, couple of things. So with regards let's focus on North American urban markets. That are very heavily dominated by hotels. The vast majority of people going to city in North America are staying in a hotel. Which is good for us and so far that there's so much room to grow. So what are the what are the what's the value equation? It's really four things. Why do people book hotels? Well, the first reason they book hotel is because it's pretty frictionless to book. Why we've been working on all those product optimizations, especially usability, to make it easier to book an Airbnb, Inc. The second is they know what they're gonna get. Whether hotels whether you like the hotel or not, you kinda know what to expect. And so that's why we've been focused a lot on reliability. We're gonna do a lot more on reliability and quality. And third, hotels offer a suite of services on premise. But we think there's obviously endless service that could be offered on Airbnb, Inc. And then finally, think affordability is a reason you'd book Airbnb, Inc. In fact, we have a we have a campaign we've been running. Some trips are better than Airbnb, Inc. And it's been incredibly successful. It highlights different between Airbnb, Inc. and hotels, and it basically says, we're not saying we're better in Airbnb, Inc. hotels for every trip. But if you're traveling with other people, it's almost always better and almost always significantly more affordable on Airbnb, Inc. So just tend to, like, back to zoom out. I believe I don't know when this will happen. But I do believe there's probably a tipping point where a whole bunch of guests that don't consider Airbnb, Inc. or use it only for maybe non-urban markets or for really large group family travel, but don't use it for business travel or urban markets. There's a tipping point where if we keep making the service more reliable, we add more service we make it more affordable, even more frictionless, eventually, there's a tipping point I think a lot of hotel travelers will come to Airbnb, Inc. Or use us for more of their share of wallet. So I think I can't possibly predict when this will happen, you know, but I what I can't predict is how much faster our service improve, and that's gonna happen over the coming years pretty quickly. Operator: Our next question comes from the line of Kevin Kopelman with TD Cowen. Please go ahead. Kevin Kopelman: Thanks. Could you give us an update on how you're thinking about advertising services in your priority list as you're rolling on new businesses? Thanks. Brian Chesky: Hey, Kevin. I think it it's, like, almost every marketplace that's successful has done this. We've looked at this. We definitely think this is easily a billion-dollar revenue opportunity. It's not a matter of if, it's a matter of when. It's not the most perishable opportunity, so it's not something we'll be doing this year. It's definitely something, you know, on the horizon. Operator: Our next question comes from the line of Naved Khan at B. Riley Securities. Please go ahead. Naved Khan: Okay. Thanks. Maybe just on the know, the urban demand, Brian, and you talked about how a lot of people just book hotel? Can you maybe touch on regulation and do you think do you see movement there in terms of how that might become more favorable, especially the other cities like New York might start to open up? Give us some thoughts there. And then if I have to think about regulation, maybe at a at a bigger scale, so I think Europe has been pretty pretty heavy on regulation. Especially on the on the larger platforms. Any anything in terms of either becoming a deemed gatekeeper or I'm not just any faster would be helpful. Thank you. Brian Chesky: Yeah. Sure. I'll take the first part, and I'll let you know it take a second. You know, with regards to regulation, let's just let's just frame it. So our top 200 market take comprise the vast majority of revenue. 80% of those jurisdictions have regulations on the books for Airbnb, Inc., regulations as in they recognize us. And we've now collected and remitted around $13 billion in hotel occupancy tax, and we have a, you know, really a great history of partnering with cities. I think the trajectory for cities is increasingly, I think, they're go when we first started, cities didn't really know what to make of us. This is, like, ten, fifteen years ago. I think some people thought Airbnb, Inc. was a problem. And I think increasingly cities are thinking of us as partners, and they're thinking of us as a solution to their problems. Just give a couple examples. Last summer, you know, parents had a really big problem. I hope many like, millions of people were coming to Paris, and they didn't have hotels to put them in. So Airbnb, Inc., we went from 100,000 to about 150,000 homes. Partnering with the IOC loan debt committee and the city of Paris. The French government, we have great support. And we were able to house 700,000 guests. In Paris during the Olympics. Imagine that. That's, like, more than ten Olympic stadiums where the guests were staying in Airbnb, Inc. I think that Paris Olympics was so successful that the city of Milan and the city of LA now looking at how we can be a solution for their challenges with you know, compression nights during the Olympics. And I think cities all over the world are looking at Airbnb, Inc. as a solution to be able to accommodate guests for large events. Where the money goes into local communities, and it, like, you know, limits hotels' ability to essentially create surge pricing. Another solution we've been is during times of disaster. You know, there was a devastating LA fire that I'm sure you're all aware of, about a month ago. And, you know, a large number of people were displaced. Well, Airbnb, Inc. and working with Airbnb.org has housed more than 19,000 residents. Los Angeles that were displaced because of the fire. And so I think generally, the conclusion here is that I think we're developing some really great momentum. I think cities are seeing us as a partner. I think that New York City remains an outlier. They banned the majority of our business. One year later, sorry. One year know, as of, I think, like, last September, the last data I saw, rents, they they they basically banned Airbnb, Inc. with the idea that rents would go down. What we've seen is rents aren't down year over year. In fact, rents are up, I think, 3% year over year. There hasn't been meaningful supply housing stock going back in the market, and guess what happened to hotel prices? They're actually up 7% year over year. So I think New York's a cautionary tale, and I do not think cities are gonna follow it. I think they're gonna, like, see us much more as a solution to a problem. Ellie Mertz: And then just on your second question, related to DMA, no no real change here. From from last quarter. It it doesn't really apply to us. Operator: Our next question comes from the line of Colin at Baird. Colin: Thanks, and and good afternoon. I guess two quick ones for me. First off, I guess from a competitive standpoint, Brian and Ellie, the tone of the letter comes across, I think, is quite a bit stronger in terms of leading the industry. So I'm curious if that's more of the result of your performance to date or is that more about what's to come in in terms of putting more distance between Airbnb, Inc. and and competitors? And then secondly, on experience, I know we don't have the formal relaunch yet, although I enjoyed a nice food tour recently, purchased the platform. But just curious on the progress you're seeing in repopulating the marketplace or ingesting more and higher quality experiences before the relaunch. Thank you. Ellie Mertz: Great. Thanks, Colin. Just just giving a little bit of update in terms of the competitive competitive environment. What I would say is that, you know, our results in Q4 and 2024 support that. We continue to gain market share on a year-over-year basis, both globally as well as at a regional level. This is true both from a traffic share as well as a night stay perspective. And what we've seen of late is predominantly market share gains coming from hotels. I think all the product improvements that Brian has shared throughout this call as well as the increases we've seen in terms of brand consideration have really been attracting more frankly classic hotel users to try our product. And has allowed us to continue to to gain market share. I think one of the underlying questions I'm sure people have is vis a vis Vrbo and their strong performance in Q4. What I would say there is that, you know, Vrbo obviously had a very soft comp in terms of their business contracting in the US. Or globally in Q4 of 2023. And in the last quarter, what we see is that the markets that we tend to compete against them in, in particular, non-urban US markets. Was actually one of our fastest growing segments in the US. So even in that comparison point, we feel like we're doing quite well. The other point I would make on the competitive is that we continue to see that on the supply side, we're number one, leading in terms of total supply growth. And number two, in terms of the new listings coming online, the majority come to Airbnb, Inc. and the majority are exclusive. So further extending our differentiation with regard to both the breadth but also the differentiation of the supply that is key to to the brand and key to the the guest value proposition for Airbnb, Inc. Operator: Our next question will come from the line of John Colantuoni with Jefferies. Go ahead. John Colantuoni: Thanks so much for my questions. First one on conversion. When when you look at how travelers interact with your booking experience and begin to think about how best to layer in new services over time. Talk about how you're planning to evolve search and discovery to help balance gearing users to your new services while simultaneously maintaining conversion on accommodations. And second, I'd be curious to get your perspective on the opportunity to use new services to create some flywheel effects by which maybe you're acquiring new customers through new products or driving more multiproduct bookings to help increase customer lifetime value. Thanks. Ellie Mertz: Yeah. So let's talk a little bit. You asked about the conversion funnel and how we think about adding in new products. And and I think the question is really, how do you how do you launch and merchandise new products while not creating some risk to your your core offering? And I think this goes to one of our key learnings in terms of the experiences product that we've had historically versus what we want to put into market in coming months. And one of the insights there is that the the kind of classic generalized traveler does not come to our site or any other site to book their entire trip. Instead, they, you know, tend to book their airline. They tend to book their accommodations. Once they get through that, they're very relieved that that is behind them. And they kind of sit on the sidelines for weeks or months in advance of the trip until they start thinking about what do I need to book to fill out my itinerary. And so when we think about how to launch these new offerings, we want to be very mindful of the guest journey and to be very thoughtful with regard to both personalization and timing around what type of products are we merchandising to the customer at what point? So that we can obviously have the the best conversion impact by merchandising the the right thing. In terms of the flywheel, I think as we have been considering what, you know, both near-term and long-term future offerings will be, we're very focused on adding things to the platform that not only will be solid businesses in and of themselves, but also make the core offering better. So so that is part of our our criteria in terms of selecting new offerings is what if added to the platform would actually know, likely cause people to, one, book more frequently in terms of accommodations. But also come back to the app or or or the service on a more frequent basis than they do today because we have a a variety of offerings that may work not just on their trip, but also when they are in their home markets. Operator: And that will conclude our Q&A session. I'll turn the call back over to Brian for any closing remarks. Brian Chesky: Alright. Well, thanks everyone for joining us today. Just to recap, we ended 2024 with nice growth accelerating in incredible momentum heading out of 2025. Free cash flow was $4.5 billion for the year. Representing a free cash flow margin of 40% and our strong balance sheet enabled us to repurchase $3.4 billion of common stock. I'm really proud of what we accomplished, but this is just the beginning. 2025 marks the start of Airbnb, Inc.'s next chapter. Alright. Thank you all. Operator: That concludes our call for today. Thank you all for joining. You may now disconnect.	[ { "speaker": "Operator", "text": "Good afternoon, and thank you for joining Airbnb, Inc.'s earnings conference call for the fourth quarter of 2024. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb, Inc.'s website following this call. I will now hand the call over to Angela Yang, Director of Investor Relations. Please go ahead." }, { "speaker": "Angela Yang", "text": "Good afternoon, and welcome to Airbnb, Inc.'s fourth quarter of 2024 earnings call. Thank you for joining us today. On the call today, we have Airbnb, Inc.'s co-founder and CEO, Brian Chesky, and our Chief Financial Officer, Ellie Mertz. Earlier today, we issued a shareholder letter with our financial results and commentary for our fourth quarter of 2024. These items were also posted on the Investor Relations section of Airbnb, Inc.'s website. During the call, we will make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of performance. Also during the call, we will discuss some non-GAAP financial measures. We provide a reconciliation to the most directly comparable GAAP financial measures in the shareholder letter posted to our investor relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I'll pass the call to Brian." }, { "speaker": "Brian Chesky", "text": "Alright. Well, thank you very much. And hey, everyone. Thanks for joining me today. 2024 Airbnb, Inc. outpaced the travel industry's growth. We ended the year with Q4 revenue. Now before we get into the results, nights booked, and GBV all accelerating from Q3. I want to just quickly touch on some of the work that got us here. You know, over the past several years, we've been preparing for Airbnb, Inc.'s next chapter and we wanted to make sure that guests and hosts love our core service before we introduce something new. So we listened to their feedback and we rolled out more than 535 features and upgrades to improve the experience. These upgrades include major reliability efforts, like guest favorites. Guest favorites make it easier for guests to find the best listings in Airbnb, Inc. We've also made it easier to host by launching the Toast network. It's a really simple way to find the best local host to manage your Airbnb. Now in just four months, the cohost network has grown to almost 100,000 listings. At the same time, we've been driving growth in a number of product optimizations. We made it easier for guests to find the perfect stay with enhanced search functionality and better merchandising. And this includes things like suggested destinations, more detailed maps, and a new welcome guide for guests. We also introduced flexible payment options in local payment methods in nearly two dozen countries, making it easier for people around the world to use Airbnb, Inc. And we're in the process of rolling out a completely redesigned checkout experience that makes it even simpler to book at Airbnb, Inc. As a result, we've seen a higher conversion rate, and we expect these improvements to continue delivering growth in 2025. By optimizing key parts of our product, like search, merchandising, and payments, we're seeing strong near-term results, and we're building a foundation to support the introduction of new offerings. Finally, we've rebuilt our platform from the ground up with a new technology stack. This includes new listing management tools for hosts, and these tools make it easier for hosts to list and manage their homes while giving them the ability to eventually offer more services. We've also upgraded our messaging system into a single unified platform, making communication between guests and hosts smoother and more reliable. Now with this new tech platform, we are able to innovate faster and expand beyond short-term rentals into becoming an extensible platform with a range of new offerings, and 2025 marks the start of Airbnb, Inc.'s next chapter. No. Today, our service is better than ever, and our platform is ready for the support with next. In 2025, we will continue building on this momentum. We're executing on a multiyear growth strategy to perfect our core service, accelerate growth in global markets, and launch and scale new offerings. Now we've talked a lot on previous calls about how we're preparing to expand beyond our core business. In this year, you'll see the beginning of a new Airbnb, Inc. So now I'm gonna turn it over to Ellie to give you a financial update. Ellie?" }, { "speaker": "Ellie Mertz", "text": "Thank you, Brian, and good afternoon. I'll start with a review of our financial results and then provide our current outlook for Q1 2025. As Brian mentioned, we ended last year on a strong note. Nights and experiences booked accelerated in Q4 to 12%, making it the highest year-over-year growth quarter of 2024. Revenue also grew 12% year-over-year to $2.5 billion in Q4. Net income was $461 million and adjusted EBITDA was $765 million. For the full year, adjusted EBITDA totaled $4 billion, representing an adjusted EBITDA margin of 36%. Since 2020, we've delivered over 4,000 basis points of EBITDA margin expansion. Next, I'll turn to the balance sheet and cash flow. During Q4, we generated $458 million of free cash flow. And for the full year, we generated $4.5 billion, representing a free cash flow margin of 40%. At the end of the year, we had $10.6 billion of corporate cash and investments, as well as $5.9 billion of funds held on behalf of our guests. Our strong balance sheet allowed us to repurchase $838 million of our Class A common stock during Q4 and $3.4 billion for the full year. At the end of Q4, we had $3.3 billion remaining on our repurchase authorization. Now let's shift to our Q1 2025 outlook. After closing out 2024 with our highest quarter of nights and bookings growth, we're excited about the strong demand we continue to see early in 2025. For Q1, we expect to deliver revenue between $2.23 billion and $2.27 billion, representing 4% to 6% year-over-year growth, or 7% to 9% when excluding FX headwinds. As we mentioned last quarter, revenue in Q1 2024 benefited from both the timing of Easter and the extra day from leap year, creating a hard year-over-year comparison. Without these calendar impacts and FX headwinds, our revenue growth would be about 6 percentage points higher, or 10% to 12%, which is relatively stable compared to Q4. For nights and experiences booked, we expect year-over-year growth in Q1 2025 to be relatively in line with Q1 2024 once you exclude leap day, which contributed about one percentage point of growth last year. On profitability, we expect adjusted EBITDA and adjusted EBITDA margin to decline compared to Q1 2024, driven by the same factors impacting revenue. That said, if you exclude the calendar and FX headwinds, adjusted EBITDA margin in Q1 would remain relatively flat year-over-year. As we look ahead to 2025, we're focused on executing our multiyear growth strategy. Our strategy is designed to drive long-term growth and deliver market share gains through three levers: one, perfecting our core service; two, accelerating growth in global markets; and three, launching and scaling new offerings. We're focused on strengthening the economics of our core business and generating strong free cash flow while also investing in growth opportunities. This year, we plan to invest $200 million to $250 million towards launching and scaling new businesses, which we'll introduce in May. Even with these investments, we expect to maintain strong profitability, delivering a full-year adjusted EBITDA margin of at least 34.5%. Because these investments will roll out throughout the year, their impact on our quarterly adjusted EBITDA margin will be the most pronounced in the first nine months of 2025. As these new businesses scale over the coming years, we expect them to make a significant contribution to revenue growth. And so each year, we'll layer in new offerings where we see long-term revenue growth opportunities. And at the same time, we'll focus on delivering strong profitability and world-class free cash flow for our core business. And now with that, I'll open it up to Q&A." }, { "speaker": "Operator", "text": "We will now begin the question and answer session." }, { "speaker": "Stephen Ju", "text": "Thank you. So I think in the past, in terms of the global sort of localization effort, you've talked about Brazil and I think in the shareholder letter, you were showing your localization effort for Japan. So just wondering how long it typically takes for one of these efforts to localize in any given country you know, it takes to come together. If you have you guys have mentioned Argentina, Germany, South Korea, and other places. Ellie, I guess, the $200 to $250 million of investment that you're planning to incur I guess, in the, you know, the front half of this year for the most part. What is that primarily gonna be geared to? Is it gonna be marketing? Is gonna be engineering, staff up, or any color there would be helpful. Thank you." }, { "speaker": "Ellie Mertz", "text": "Great. Thank you, Stephen. Let me start just giving a little bit of color in terms of our global market strategy. As backdrop in terms of context on this strategy, we've shared over the last year that Airbnb, Inc. is a very global brand. However, our business is concentrated in our top five core markets. So that's the US, UK, Canada, France, and Australia. Those five markets comprise about 70% of our gross booking value. And so as a growth lever that we've been investing in, we've been targeting markets outside of that top five. Where we think that there's a sizable opportunity for us to invest and both gain penetration in the markets and also provide a tailwind to our global growth rates. I think what you've seen over the last not just the Q4 results, but over 2024 as well is that those investments and that targeting of new geos has had a meaningful impact on our growth. In particular, what we shared in Q4 was that those markets that we've targeted are growing about double the rate of our core markets. And to your question in terms of, you know, how long does it take, I would say it depends on the specific market. I think Brazil is a huge success case, and that's a market that we've been focused on in particular with adding brand marketing over the last two years, and we've been able to materially increase the scale of our business in that country in particular. I think there's other markets that maybe the duration for building scale will take longer. A country that I would put in that category would be Japan, which is a market that we just commenced our brand marketing in Q4. And we're starting at a lower base of domestic awareness. So each of our targeted markets, you know, we have to factor in where the market is, the level of awareness and consideration we have among local travelers and the level of product optimizations we need to make to make sure that we are appropriately addressing the local audience. So your second question is around our investments in scaling launching and scaling the new businesses. As the letter details, we're planning to spend approximately $200 to $250 million this year. And you should see the bulk of that investment hit both our marketing line and our product development line items. Just to give a little bit more color here. In terms of marketing, we will obviously be spending to build out the teams to drive the supply operations around those new offerings. We will also be investing behind awareness of the new products and demand generation. And then on the product side, we will be slightly increasing our pace of count growth across our development organization. So that we can move more quickly across our road map and support these new businesses." }, { "speaker": "Operator", "text": "Our next question comes from the line of Richard Clarke with Bernstein. Please go ahead." }, { "speaker": "Richard Clarke", "text": "Hi. Thanks for taking my questions. I just want to ask about the launch we've seen of AI. I think Airbnb, Inc. avoided some of the volatility that some of your peers had. But are you leaning into those operators? Are you or are you confident you can kind of control the AI flow through the Airbnb, Inc. platform?" }, { "speaker": "Brian Chesky", "text": "Hey, Richard. Yeah. Here's what I think about AI. I think it's still really early. It's probably similar to, like, the mid to late nineties for the Internet. So I think it's gonna have a profound impact on travel. But I don't think, you know, it's yet fundamentally changed for any of the large travel platforms. And so you know, we want to be the leading company for, you know, AI-enabled traveling and eventually living. I'll just talk about a little bit about how we're gonna do that. So most companies, what they're actually doing is they're doing integrations with these other platforms on trip planning. But the trip planning, it's still early. I don't think it's quite ready for prime time. We're actually choosing a totally different approach which is we're actually starting with customer service. So later this year, we're gonna be rolling out, as part of our summer release, AI-powered customer support. You know, as you imagine, we get millions of contacts every year, AI can do an incredible job of customer service. It's gonna speak every language 24/7. They can read a corpus of thousands of pages of documents. And so we're starting with customer support. Over the coming years, what we're gonna do is we're gonna take the AI-powered customer service agent and we're gonna bring it into essentially, Airbnb, Inc. search to eventually graduate to be a travel living concierge. I think it's a really exciting time in the space because you've seen, like, with Deepseek and more competition with models, these models are getting cheaper or nearly free. They're getting faster, and they're getting more intelligent. And for all of this, it's starting to get commoditized. What I think that means is a lot of value is gonna accrue to the platform. And, ultimately, I think the best platforms, the best applications are gonna be the ones that, like, most accrue the value from AI, and I think we're gonna be the one to do that with traveling and living." }, { "speaker": "Operator", "text": "Our next question comes from the line of Eric Sheridan with Goldman Sachs. Please go ahead." }, { "speaker": "Eric Sheridan", "text": "Thanks so much for taking the question. Maybe just one quick follow-up, Brian, and then I could ask a follow-up. With respect to the AI, I appreciate your answer with respect to outward-looking and how it might change the landscape. Where do you think the potential is internally to apply AI for efficiencies inside the company and create an additional layer of potential margin efficiency and or free cash flow conversion in the years ahead? And then in terms of the way you guys framed the year with exiting it up higher margin trajectory post some of the investments you called out, will there be any change or thought about how your capital allocation process might evolve as you move through 2025? Thanks so much." }, { "speaker": "Brian Chesky", "text": "Alright. Hey, Eric. I'll answer the efficiency deal. I'll wait for the second part. So yeah. There's, like, a couple of efficiencies that you could imagine. Airbnb, Inc., one is obviously customer service. I think that's, like, one of the biggest ones. I've kinda already covered that, but I think that's, like, a massive change for Airbnb, Inc. Other I assume you refer to is essentially engineering productivity. We are seeing some productivity gains. I've talked to a lot of other tech CEOs who and here's what I've heard talking to other, like, tech CEOs. Most of them haven't seen a material, like, change in engineering productivity. Most of the engineers are using AI tools. They're seeing some productivity, I don't think it's flowing to, like, a fundamental step change in productivity yet. I think a lot of us believe in some kind of medium term of a few years, you could easily see, like, a 30% increase in technology and engineering productivity. And then, of course, you know, beyond that, I mean, I think it could be, like, an order of magnitude more productivity because it but but that's that's gonna be, like, down the road. And I think that's gonna be something that almost all companies benefit from. I think the kinda younger, more innovative startup-like companies might benefit a little bit more because they'll have engineers who are more likely to adopt the tool. That's probably pretty important. But I think I think this is what I'm hearing from other people and we're pretty much having the same experience." }, { "speaker": "Ellie Mertz", "text": "Eric, to answer your question with regards to the capital allocation strategy, I would say, no, no meaningful change in terms of strategy. What we've stated consistently over the last two years is that our capital allocation strategy includes, one, obviously, investing in our core operation, valuing M&A where there's relevant opportunities, and three, returning capital to shareholders. Obviously, given the strength of our balance sheet as well as our world-class free cash flow margins, we have the capital to do all three. You can see from our 2025 guidance that we are leaning in through the P&L in terms of investing slightly more in terms of the core operations and in particular new businesses. And then from a returning capital to shareholders, you know, you should look at the volume of repurchase activity in 2024 as a guide with regard to the magnitude in 2025. I would expect us to, you know, be slightly price sensitive and to dial up the quarterly repurchasing based on the underlying stock price." }, { "speaker": "Operator", "text": "Our next question comes from the line of Justin Patterson at KeyBanc. Please go ahead." }, { "speaker": "Justin Patterson", "text": "Great. Thank you very much. Brian, could you see how how you're thinking about the pace of product innovation versus the past? It sounds like this new tech stack should be beneficial to product velocity. So I'm curious where you saw friction points on the prior tech stack and how you think this new new tech stack really positions you to to execute on those growth initiatives you outlined at at the start? Thank you." }, { "speaker": "Brian Chesky", "text": "Yeah. Hey, Justin. I mean, this tech stack probably like, this project probably started, frankly, six years ago, if I'm not mistaken. So this has been a very, very long thing. We've been doing it for quite a long time. I think the big milestone is that, like, you know, most of the work is now complete. And you're gonna see this year, like, almost every part of the application is gonna be essentially rebuilt from the ground up. What you've seen is, like, we've done 535 upgrades. The vast majority of those upgrades have actually been in the last two years. So every year, we are increasing the throughput of features and upgrades. This summer release is gonna be significantly larger than past ones, and I expect the ones after that will be larger. So it's gonna just basically, what it's gonna lead to is the, fewer engineers being able to basically, ship features faster. And so, you know, there's a pretty, pretty huge gain here. So I think I think what you should expect is this year, we're gonna launch significantly more upgrades than last year, and every year, it should increase." }, { "speaker": "Operator", "text": "Next question comes from the line of Brian Nowak with Morgan Stanley. Go ahead." }, { "speaker": "Brian Nowak", "text": "Great. Thanks for taking my questions. Good good guide, guys. Just two questions. One, so, Brian, as you're as you're thinking about sort of the the new products and new use cases to come from the some of the growth opportunities, launching in May. Can you just talk us through some of the the larger points of friction or opportunities high level that you see from a a guest and a host perspective you're looking to address with some of these products? And then the second one, Ellie, on the on the full year margin guide, the at least 34%, can you just sort of walk us through how you're thinking thinking about the the contribution from the invest sort of growth throughout the throughout the year and as you kind of tumble through the comps for the margin guide?" }, { "speaker": "Brian Chesky", "text": "Yeah. Hey, Brian. I will and are you asking just to clarify the first this is specifically, friction point for new products and services, not product optimizations. Correct? That's right. Yeah. So the, you know, the $200 to $250 million. Yeah. The new new business is running. Yep. Yep. So let me just kinda back up and just give you a little bit of our philosophy. So you know, we spent the last, like, four to you know, four or five years really trying to get to this moment where we could prepare for the next chapter of Airbnb, Inc. What we did, as I said, is we built a tech stack from the ground up. We listened to guest and host feedback made over 500 upgrades, we built this new business organization that Dave is now leading. Become obviously, went from breakeven to quite profitable. So I think we're now ready for this next platform, next next chapter expand beyond our core where Airbnb, Inc. is you know, just a place to stay. And to do that, here's a couple of philosophies a couple principles we have in our philosophy I'll share and I'll just tell you a little bit about the friction. Number one, I think we can do this quite efficiently because we are not gonna launch separate apps or separate brands. We're gonna have one app, one brand, the Airbnb, Inc. app. We want the Airbnb, Inc. app kinda similar to Amazon to be one place to go for all of your traveling and living needs. A place to stay is just really, frankly, a very small part of the overall equation. Every new business we launch, we'd like to be strong enough. It could stand alone, but it makes the core business stronger. You know, I think that each business could take three to five years to to scale. A great business could get to a billion dollars of revenue. It doesn't mean all of them will. And you should be able to expect, like, you know, one or a couple businesses to launch every single year for the next five years. We're gonna start initially with things very closely adjacent to travel. So, you know, when people book an Airbnb, Inc., there's a lot of, like, you know, experiences and services and other things that would make their stay more special. And it would even include things they wouldn't think to search for. And from there, we're just gonna keep expanding, and we're gonna expand out to more host services to enable them to become better hosts. And then eventually, we'll move it, you know, further and further away from our core. I think, like, maybe the analogy of Amazon is a really good one, which is to say, they started with books, the nearest adjacency to books was DVDs and CDs back when people bought physical media, and then they went to, like, I don't know, maybe toys and other things. And eventually, they ended up with fashion, and pretty soon, they were doing things pretty far adjacent from, you know, media and books. So we're gonna probably follow that path. So we're gonna really, really start adjacent to travel, and part of the reason why is a traveler booking a home, what else would they wanna book? And the other great thing is like, we offer these other experiences and services that could potentially bring a new guest that then book more homes in Airbnb, Inc. And I think one of the ultimate goals is you know, Airbnb, Inc. is used by, like, I think, 1.6 billion devices a year. So it's got a pretty big volume of users. But we're not very we're not a very frequently used app. People typically use us once it's right a year. And I would love for it to be one day for people to use this once or twice a week. And so that's kind of one of the goals over the long term." }, { "speaker": "Ellie Mertz", "text": "Great, Brian. Let me talk a little bit about margins over the course of the year. So to restate, or just reiterate the guidance that we provide for the full year, we're going to invest $200 and $250 million in terms of launching and scaling the new businesses. We anticipate that the negative impact to margin from those investments will be heavily weighted in Q1 through Q3. Whereas the revenue obviously won't pick up until we've launched those new products. At the end of Q2. And so we would assume that the benefit from that lift would really be concentrated in terms of our x rate of Q4. But more broadly, I think the, you know, the takeaway from our guide is that even with that investment level, we're obviously maintaining extremely strong healthy margins for our core business. And obviously, the global floor on EBITDA gets you to that number. I think in terms of the general question of comps, I think the most notable comp, I would say, noise is what we described in the letter with regard to Q1. It's obviously in the letter, but just to restate it here. Q1 revenue will be heavily impacted by both the FX headwinds as well as the calendar changes vis a vis or relative to 2024. That will impact not just revenue, but also Q1 EBITDA. We've called that out in the letter just to highlight that. Absent those pieces, the Q1 EBITDA margins would actually be relatively flat." }, { "speaker": "Operator", "text": "Our next question will come from the line of Ron Josie at Citi." }, { "speaker": "Ron Josie", "text": "Thanks for taking the question. Brian, I wanted to ask a little bit more on the here now. You in the letter, you talked about recent product enhancements around search and better merchandising. Love to hear your thoughts on what what you're finding, what you're seeing with search and merchandising and learnings there to help inform these newer experiences and products that are come down the pike. And then next question is just on nights and experiences both to the acceleration this quarter. Talk to us about the contribution between just the broader travel market being relatively healthy and and these newer products that are launching, the ex like, co-hosting or experiences or the next nine. Thank you." }, { "speaker": "Brian Chesky", "text": "Yeah. Hey, Ron. I'll take the first. Yeah, when you think about the here and now, you know, when we call this out in our letter really around product optimizations. And, Ron, I'll kinda just let's just start, like, three parts. Step one, people come to Airbnb, Inc. It's really we have a huge amount of traffic. We have nearly 5 billion visitor unique 5 billion visitors a year. It's really important that, like, when people come to Airbnb, Inc., they are able to find the right Airbnb, Inc. for them. We've done a lot around, you know, like, we've introduced a personalized welcome tour. Again, people use Airbnb, Inc. only a couple times a year, so it's really important to orient them. So we've got this welcome tour that's personalized to every person. Based on your past searches, we suggest destinations that you we think you're gonna be interested in. Based on past filters, we offer up those filters as essentially, like, quick filters to apply. We've also found that, you know, this is probably obvious, but, our mobile app converts significantly higher than our mobile website. So we've been pushing to get more people to download our mobile app, and now in Q4, mobile bookings represented 60% of our overall bookings up from, I think, 55% the year before. You know, our checkout page, it this sounds like a simple thing, but the checkout page like, the page to to pay, not the checkout Airbnb, Inc., the page to pay, was really, really long, and we found that if you make it shorter, simpler, that leads to a massive increase in conversion. I'm just giving you a couple examples. There's really a long list of dozens and dozens of things again, you know, a hundred basis point increase on a GBV of $80 billion, you know, you're gonna be soon approaching like, $100 million optimizations just one at a time for some of these really, really big efforts. So once you find an Airbnb, Inc., it's important that that Airbnb, Inc. is affordable. And affordability is in our DNA. So we've made a lot of improvements around affordability that have also increased optimization. Like showing the total price display. When guests toggle on total price display, that includes all fees including cleaning fees, we see that people are booking higher value Airbnb, Inc.s. We've also created a lot of tools for hosts. Whether it's monthly and weekly monthly discounts, price tips, search tips, all these things are essentially efforts to make everything more affordable, and it's working. Because during 2024, hotel prices were up year to year while comparable Airbnb, Inc. listings were down year over year in price. So we're making progress. And the last thing is if you find the Airbnb, Inc. is a good price, it's still really important that it's of high quality. For every person who books in Airbnb, Inc., about 90 people book a hotel. And so if we do, you know, around a 500 million IT year and we got the extra hotel grass to use Airbnb, Inc., go from 500 million nights to a billion room nights. So that's a really, really big opportunity. And we think the number one way to do that is to improve the reliability and quality of our service especially your host. So the way to do that is elevate the best and cut the bottom. We introduced guest favorites in October 2023, it's now gotten 250 million nights booked. If you book a guest favorite, customer service rates are down. Trip issues are down, guest net promoter is up, cancellations are down, so it's really great. We also since April 2023, we introduced a new host quality system and removed 400,000 listings that don't meet our or don't meet our guest expectation. Ron, those are essentially the three levers. We have usability, making it easier for people to find the listing by increasing conversion. Affordability, getting prices to be better and more competitive, and then reliability and quality of the service. So again, we've made know, hundreds of updates over the past few years on these, but these are just a couple callouts." }, { "speaker": "Ellie Mertz", "text": "And and Ron, to answer your question in terms of quantifying the Q4 demand. I would say, you know, obviously, we benefited from organic tailwinds across the industry. But in addition to that, all of the product optimizations that Brian shared from our testing of those improvements, we estimate the exit rate growth rate for our business was lifted by a couple hundred basis points due to those improvements. And we see it through improvements in our booking conversion." }, { "speaker": "Operator", "text": "Our next question will come from the line of James Lee at Mizuho. Please go ahead." }, { "speaker": "James Lee", "text": "Great. Thanks for taking my questions. I'm sorry I joined the call a little bit late, so I apologize if my question has been repeated. Two questions here. One on experiences. Can you guys talk about maybe some of the friction you're able to resolve in the upcoming launch? Any indication that you can give us on the confidence of a successful launch this time? And secondly, I just want to double click on you know, Brian's commentary on Beyond the Core. Are you thinking about maybe some sort of concierge service, meaning, like grocery shopping, access to spa, to gym, maybe some kind of access to recreation. Is that what we should think about when we think about adjacency to travel? Thanks." }, { "speaker": "Brian Chesky", "text": "Yeah. I can I can handle this? Hey, James. So frictions do you wanna resolve with experiences? Let's ask, though, what were the were some of the challenges the first time around? Well, the first time around, I don't think we integrated the experiences really well. The products. If you go to airbnb.com or app right now, it's pretty hard to find them. The second thing is that when you find the experiences, I don't think they were merchandised as compellingly as they could. Third, there weren't really a lot of integrations with social media. I think social media is a great distribution. And fourth, I think we are completely rethinking the kind of supply we're gonna have. I think it's gonna be really, really compelling. And then fifth, we didn't really market it that much, and I think this we're gonna be a bit more aggressive in marketing then because we're really proud of the quality of product we have. Confidence of how successful the launch is gonna be. You know, I wanna be measured in my response because know, you know, this is a this is a second shot at it. I am extremely confident that this product can be incredibly, incredibly compelling, though. So I think if people give it a shot, I think they're gonna be really in love with the product because people really do actually like the current Airbnb, Inc. experiences, and I think this one's gonna be significantly better. I probably won't say much more, tune in in May, and we're gonna, like, you know, I'll walk you through the entire product and product launch. As far as adjacencies, yeah. I mean, there are you know, dozens and dozens I mean, if you got really granular, hundreds of opportunities. Endless. We could spend many, many years picking all the adjacencies to be able to travel somewhere and list somewhere. Number like, you know, 17, 18% of our nights booked are longer-term stays of more than 30 days. And that's gonna become an even greater share of our business. I think down the road, and so if you think about what all the service need to travel or live somewhere, there's a lot of opportunities. Now the key is not to do them obviously all at once, to be to prioritize, to pick the most differentiated services guests want the most that are, you know, the most compelling, opportunities from a business standpoint and just start from there. We're not we're not gonna go into too many more details, but stay tuned." }, { "speaker": "Operator", "text": "Our next question will come from the line of Jed Kelly at Oppenheimer. Please go ahead." }, { "speaker": "Jed Kelly", "text": "Hey. Great. Thanks for taking my questions. Just first, can you talk about as you kind of increase your reliability, where are where are you in potentially partnering with some you know, larger companies that might be able to provide these enhanced services. And then just just circling back to North America. I mean, how do you view that market opportunity? I know room nights accelerated mid-single digits, but I'm sure you want it to grow faster. So so just how should we view the North American market? Thank you." }, { "speaker": "Brian Chesky", "text": "Yeah. Why don't I start in with partners? I imagine eventual like, Airbnb, Inc., first of all, we haven't done a lot of partnership. We historically have not had a robust business development or partnerships function. So most of our platform, we feel as kind of a little bit more of a closed ecosystem. I imagine this next chapter of Airbnb, Inc. is much more of an open ecosystem. If you think about the really large tech platforms, they're kinda ecosystem ecosystems, essentially, and they're ecosystems that partner with other companies and developers to build on their platform. And Airbnb, Inc. is the kind of company where there are quite literally thousands of companies like cleaning companies, key exchange, like grocery companies, there's all sorts of companies built on top of Airbnb, Inc., especially local businesses. So I think that Airbnb, Inc., there is a play to the ecosystem where we could partner with local companies and global brands. So we are absolutely thinking about that. It's not the first thing we would do. We'd probably start with kinda first party before we go to third party, but third party integrations is incredibly compelling because why not, like, allow the world to build an Airbnb, Inc.? We don't need to build future by ourselves." }, { "speaker": "Ellie Mertz", "text": "K. Just to talk a little bit about North America. So one to just call it the trends that we saw in the back half of the year. North America, like all other regions, accelerated from Q3 to Q4. What I would say about you know, the the state of play in North America is we believe we can grow faster than we are growing today. And and why is that? I would say one is that North America, despite the scale that we've been able to achieve in North America, is still a market dominated by hotels. Our business continues to be a a fraction of the overall lodging industry, and, you know, there's there's plenty of room to grow. Short-term rental in particular, our business relative to hotels as compared to what it looks like in other regions. I would say second, we've we've mentioned this in prior calls. We look across the states and identify that there's there's several demos that we we just frankly don't do as well as we do in other demos. The ones that we've called out in particular would be the Latino population, the kind of crossover heartland states outside of the coast, and those are areas that we continue to, you know, work to drive penetration and, increase consideration." }, { "speaker": "Operator", "text": "Our next question will come from the line of Doug Anmuth with JPMorgan. Please go ahead." }, { "speaker": "Doug Anmuth", "text": "Thanks for taking the questions. Brian, can you just talk about in what markets or for what kind of listings you're seeing the cohost network work best and what's really driving them to earn twice as much as other listings. And then, Ellie, I'm just curious where you might be finding the most traction in managing the cost structure to make room for some of these new investments coming up. Thanks." }, { "speaker": "Brian Chesky", "text": "Yeah. Hey, Doug. Co Host Network, just to give people a little bit of background on the Co Host Network, you know, we did a bunch of surveys, and we talked to a lot of prospective hosts. And here's the status surprised us. More than 40% of people we surveyed say they would be interested in sharing their home on Airbnb, Inc., but the biggest obstacle to them doing that was that felt like it was a lot of work. We also noticed there were a lot of people that were hosting Airbnb, Inc. that would like to expand, but they don't have another home to put in Airbnb, Inc. And so we thought, what if we created a marketplace to match people with extra time with people to have home? And that is the Co Host network. The reason why the Co Host listings are so much productive they make about twice as much revenues listings matched by Co Host than other listings. It's because we only invited top hosts on Airbnb, Inc. to become a cohost. So the average rating for a host in Airbnb, Inc. is significantly higher. The majority of listings managed by Co Host, I believe, are guest 85% help manage a guest favorite, 75% of Co Hosts are actually Superhosts. We launched in ten countries with 10,000 cohosts. Those countries where I think it was Australia, Brazil, Canada, France, Germany, Italy, Mexico, Spain, UK, and US. So it was those ten countries, and that's it. You know? And since we've and the average cohost has an exceptional rating of 4.87. That's a really, really good rating. But I was, like, four months ago, five months ago. Today, went from 10,000 cohosts to 15,000 cohosts. We now have 100,000 listings under management. The next plan is to expand to Asia. So the two countries we're focused on are Japan and Korea. And, we'll give you updates as that progresses." }, { "speaker": "Ellie Mertz", "text": "Great. And, Doug, to talk about margins in terms of where there's opportunity for incremental efficiencies? Just to restate our our margin guide every year, we will be looking to invest in new growth opportunities while also finding incremental efficiencies in our core business. In terms of 2025 and and the outlook there, I would say incremental opportunities across our variable costs. So areas like payment processing and customer service opportunities to just be frankly a little bit more efficient and to deliver some margin expansion there. Similarly, we continue to be extremely disciplined with our G&A expenses and headcount growth, allowing for some margin expansion there as well. And then on the marketing line item, in 2024, we did increase our overall marketing intensity over the course of the year because we saw opportunities to lean into. Our current plan for 2025 plans for a flat percent of revenue for the core business on marketing." }, { "speaker": "Operator", "text": "Our next question will come from the line of Lee Horowitz at Deutsche Bank. Please go ahead." }, { "speaker": "Lee Horowitz", "text": "Great. Thanks for thanks for taking the question. Maybe just on some of the growth markets. You guys highlighted some really healthy growth rates in these expansion regions. And obviously put up nice numbers in the 4Q. But as we look after to the first quarter, nice growth is sort of reverting back to what you did for March of 2024. So can you maybe help us unpack why the success you are seeing in some of these regions is not necessarily pulling up the overall growth rate in the first quarter? And then maybe relatedly to the marketing comments, you just made in terms of it being sort of flat year on year. I guess, how how do we maybe, you know, put together the pieces of, you know, marketing intensity perhaps flat year on year, with a number of different growth regions still out there, that are are probably not quite as large as you want at this point. Like, do you no longer really have to invest in them, or have you reached investment sort of threshold on those? Are you gonna start to get leverage on the investments that you've made in those regions? How come they they don't necessarily need more marketing dollars to deleverage next year? Thanks so much." }, { "speaker": "Ellie Mertz", "text": "Sure. Let me let me start with the latter question. So if you think about how we've been managing our overall marketing dollars, the majority of the spend is on brand marketing. And the way to think about brand marketing is that it is effectively a fixed amount of spend for each market in terms of the minimum amount that you need to spend for that market to be efficient. And so it is not necessarily a one for one, like, performance marketing in terms of how you need to scale it up. And so what we've done over the last couple of years is keep the the growth of spending against our core markets relatively modest while adding on these incremental new markets and the incremental brand marketing dollars that requires. And so as we look forward to 2025, the way that we're able to maintain strong growth in the core markets, but also incrementally invest in a higher level of marketing intensity for the expansion market is not to grow the core market marketing spend faster than revenue. And and that the the way we're able to do that is our lack of of strong reliance on performance marketing which would be entirely variable. Instead, in a market like the US, we have a base fixed amount that is dedicated to brand. On top of which we we surgically add performance marketing. And so the the broad takeaway should be that in particular, in our core markets because they are so heavily reliant on brand, we are not adding dollar for dollar as revenue increases, and therefore, the marketing budget's allowed to expand and be more heavily dedicated to expansion markets." }, { "speaker": "Operator", "text": "Our next question will come from the line of Justin Post at B of A. Please go ahead." }, { "speaker": "Justin Post", "text": "Great. Thanks. A couple questions. Looks like you know, we've already covered it. US accelerated. Looking back, what what might have pressured the the growth rates and and on a macro level? And do you see those those pressures changing this year? And then, maybe Ellie, you could talk a little about the take rates contemplated in your outlook. What are some of the the positives and and negatives for for take rates? Thank you." }, { "speaker": "Ellie Mertz", "text": "Yeah. Certainly. So let's talk a little bit about North America in terms of what, you know, what 2024 looks like. You'll recall this past summer, North America in particular, we saw at the beginning of the summer peak that there was a pretty material contract in terms of lead times, which made bookings growth in Q3 relatively muted. I think the question at the time was, is this a signal of weakening demand or is this a signal of simply a little bit of a volatility in terms of consumer behavior? When people book their next trip. What we found at the end of Q3 and consistent with our Q3 results that that played through with Q4 is that that volatility and kind of usage bookings growth we saw over the summer was somewhat temporal. And those folks who were, you know, somewhat on the sidelines in terms of making their future bookings in the summer came back to us in the fall and did indeed make bookings. I think subsequent to that, we've certainly seen that past the initial uncertainty leading into the election. The consumer and in particular the North American consumer has been strong and in particular has been been strong in terms of of contemplating future travel. In terms of take rates, if we play back the if we play back last year, let's talk about the puts and takes for last year and how they impact the take rate for 2025. So as you'll recall, we introduced an FX service fee mid-2024. That service fee is approximately 100 basis points applied to 20% of our GBV. So on an annualized basis, you would assume that it would list the implied take rate by about 20 basis points. It did that. However, in Q3, we had some offsets and in Q4, we also had some offsets. So specifically, in Q3, we had elevated made goods, which come in as a contra revenue and offset the the lift we received from the FX service fees. And then fast forward to the last quarter, the offset was a hard comp from some benefits we got to revenue in Q4 of 2023. Associated with breakage of gift cards. So fast forward to 2025, we don't anticipate any of those similar one-offs that will offset the the benefit we get from the FX service fee. And so instead for full year 2025, you should assume that, the implied take rate gets the full benefit of 20 basis points increase on a year-over-year basis. As compared to 2024." }, { "speaker": "Operator", "text": "Our next question will come from the line of Ken Gawrelski with Wells Fargo. Please go ahead." }, { "speaker": "Ken Gawrelski", "text": "Thank you. Two, if I may. First, just on the expense side, maybe, Ellie, you talk a little bit going looking beyond 2025. How do you think about the fixed investments you've made to prepare for the product launches in 2025? How should we think about that fixed versus variable component in 2026 and beyond? And then and then second maybe for Brian, you you talked about how you there's still opportunity in North America and the the the bookings of alternative accommodations relative to hotels and still it's very heavily weighted to to hotels. Could you talk about some of the elements you think that that could change that kind of price to value equation for consumers, especially in maybe in urban markets. Where where alternative accommodations had tougher time gaining share versus vacation markets where where you picked up a ton of share? Thank you." }, { "speaker": "Ellie Mertz", "text": "So let me, let me talk about the product investments. Brian has shared that in in the letter we shared that we've sent the the last couple of years effectively rebuilding the tech stack. And so I would say, you know, while that work is not fully complete, a lot of it is behind us. So think from investor standpoint, you should be excited that most of the hard work has been done in terms of rebuilding the tech stack and and frankly modernizing our app that sets us up well to now turn our product road map towards supporting these these new services as well as continuing to perfecting the the core service. So what that means from an expense perspective is that on the go forward, we can increasingly dedicate our product resources to those consumer-facing growth additive features that, you know, obviously, the the consumer benefits." }, { "speaker": "Brian Chesky", "text": "Hey, Ken. Just on your question, couple of things. So with regards let's focus on North American urban markets. That are very heavily dominated by hotels. The vast majority of people going to city in North America are staying in a hotel. Which is good for us and so far that there's so much room to grow. So what are the what are the what's the value equation? It's really four things. Why do people book hotels? Well, the first reason they book hotel is because it's pretty frictionless to book. Why we've been working on all those product optimizations, especially usability, to make it easier to book an Airbnb, Inc. The second is they know what they're gonna get. Whether hotels whether you like the hotel or not, you kinda know what to expect. And so that's why we've been focused a lot on reliability. We're gonna do a lot more on reliability and quality. And third, hotels offer a suite of services on premise. But we think there's obviously endless service that could be offered on Airbnb, Inc. And then finally, think affordability is a reason you'd book Airbnb, Inc. In fact, we have a we have a campaign we've been running. Some trips are better than Airbnb, Inc. And it's been incredibly successful. It highlights different between Airbnb, Inc. and hotels, and it basically says, we're not saying we're better in Airbnb, Inc. hotels for every trip. But if you're traveling with other people, it's almost always better and almost always significantly more affordable on Airbnb, Inc. So just tend to, like, back to zoom out. I believe I don't know when this will happen. But I do believe there's probably a tipping point where a whole bunch of guests that don't consider Airbnb, Inc. or use it only for maybe non-urban markets or for really large group family travel, but don't use it for business travel or urban markets. There's a tipping point where if we keep making the service more reliable, we add more service we make it more affordable, even more frictionless, eventually, there's a tipping point I think a lot of hotel travelers will come to Airbnb, Inc. Or use us for more of their share of wallet. So I think I can't possibly predict when this will happen, you know, but I what I can't predict is how much faster our service improve, and that's gonna happen over the coming years pretty quickly." }, { "speaker": "Operator", "text": "Our next question comes from the line of Kevin Kopelman with TD Cowen. Please go ahead." }, { "speaker": "Kevin Kopelman", "text": "Thanks. Could you give us an update on how you're thinking about advertising services in your priority list as you're rolling on new businesses? Thanks." }, { "speaker": "Brian Chesky", "text": "Hey, Kevin. I think it it's, like, almost every marketplace that's successful has done this. We've looked at this. We definitely think this is easily a billion-dollar revenue opportunity. It's not a matter of if, it's a matter of when. It's not the most perishable opportunity, so it's not something we'll be doing this year. It's definitely something, you know, on the horizon." }, { "speaker": "Operator", "text": "Our next question comes from the line of Naved Khan at B. Riley Securities. Please go ahead." }, { "speaker": "Naved Khan", "text": "Okay. Thanks. Maybe just on the know, the urban demand, Brian, and you talked about how a lot of people just book hotel? Can you maybe touch on regulation and do you think do you see movement there in terms of how that might become more favorable, especially the other cities like New York might start to open up? Give us some thoughts there. And then if I have to think about regulation, maybe at a at a bigger scale, so I think Europe has been pretty pretty heavy on regulation. Especially on the on the larger platforms. Any anything in terms of either becoming a deemed gatekeeper or I'm not just any faster would be helpful. Thank you." }, { "speaker": "Brian Chesky", "text": "Yeah. Sure. I'll take the first part, and I'll let you know it take a second. You know, with regards to regulation, let's just let's just frame it. So our top 200 market take comprise the vast majority of revenue. 80% of those jurisdictions have regulations on the books for Airbnb, Inc., regulations as in they recognize us. And we've now collected and remitted around $13 billion in hotel occupancy tax, and we have a, you know, really a great history of partnering with cities. I think the trajectory for cities is increasingly, I think, they're go when we first started, cities didn't really know what to make of us. This is, like, ten, fifteen years ago. I think some people thought Airbnb, Inc. was a problem. And I think increasingly cities are thinking of us as partners, and they're thinking of us as a solution to their problems. Just give a couple examples. Last summer, you know, parents had a really big problem. I hope many like, millions of people were coming to Paris, and they didn't have hotels to put them in. So Airbnb, Inc., we went from 100,000 to about 150,000 homes. Partnering with the IOC loan debt committee and the city of Paris. The French government, we have great support. And we were able to house 700,000 guests. In Paris during the Olympics. Imagine that. That's, like, more than ten Olympic stadiums where the guests were staying in Airbnb, Inc. I think that Paris Olympics was so successful that the city of Milan and the city of LA now looking at how we can be a solution for their challenges with you know, compression nights during the Olympics. And I think cities all over the world are looking at Airbnb, Inc. as a solution to be able to accommodate guests for large events. Where the money goes into local communities, and it, like, you know, limits hotels' ability to essentially create surge pricing. Another solution we've been is during times of disaster. You know, there was a devastating LA fire that I'm sure you're all aware of, about a month ago. And, you know, a large number of people were displaced. Well, Airbnb, Inc. and working with Airbnb.org has housed more than 19,000 residents. Los Angeles that were displaced because of the fire. And so I think generally, the conclusion here is that I think we're developing some really great momentum. I think cities are seeing us as a partner. I think that New York City remains an outlier. They banned the majority of our business. One year later, sorry. One year know, as of, I think, like, last September, the last data I saw, rents, they they they basically banned Airbnb, Inc. with the idea that rents would go down. What we've seen is rents aren't down year over year. In fact, rents are up, I think, 3% year over year. There hasn't been meaningful supply housing stock going back in the market, and guess what happened to hotel prices? They're actually up 7% year over year. So I think New York's a cautionary tale, and I do not think cities are gonna follow it. I think they're gonna, like, see us much more as a solution to a problem." }, { "speaker": "Ellie Mertz", "text": "And then just on your second question, related to DMA, no no real change here. From from last quarter. It it doesn't really apply to us." }, { "speaker": "Operator", "text": "Our next question comes from the line of Colin at Baird." }, { "speaker": "Colin", "text": "Thanks, and and good afternoon. I guess two quick ones for me. First off, I guess from a competitive standpoint, Brian and Ellie, the tone of the letter comes across, I think, is quite a bit stronger in terms of leading the industry. So I'm curious if that's more of the result of your performance to date or is that more about what's to come in in terms of putting more distance between Airbnb, Inc. and and competitors? And then secondly, on experience, I know we don't have the formal relaunch yet, although I enjoyed a nice food tour recently, purchased the platform. But just curious on the progress you're seeing in repopulating the marketplace or ingesting more and higher quality experiences before the relaunch. Thank you." }, { "speaker": "Ellie Mertz", "text": "Great. Thanks, Colin. Just just giving a little bit of update in terms of the competitive competitive environment. What I would say is that, you know, our results in Q4 and 2024 support that. We continue to gain market share on a year-over-year basis, both globally as well as at a regional level. This is true both from a traffic share as well as a night stay perspective. And what we've seen of late is predominantly market share gains coming from hotels. I think all the product improvements that Brian has shared throughout this call as well as the increases we've seen in terms of brand consideration have really been attracting more frankly classic hotel users to try our product. And has allowed us to continue to to gain market share. I think one of the underlying questions I'm sure people have is vis a vis Vrbo and their strong performance in Q4. What I would say there is that, you know, Vrbo obviously had a very soft comp in terms of their business contracting in the US. Or globally in Q4 of 2023. And in the last quarter, what we see is that the markets that we tend to compete against them in, in particular, non-urban US markets. Was actually one of our fastest growing segments in the US. So even in that comparison point, we feel like we're doing quite well. The other point I would make on the competitive is that we continue to see that on the supply side, we're number one, leading in terms of total supply growth. And number two, in terms of the new listings coming online, the majority come to Airbnb, Inc. and the majority are exclusive. So further extending our differentiation with regard to both the breadth but also the differentiation of the supply that is key to to the brand and key to the the guest value proposition for Airbnb, Inc." }, { "speaker": "Operator", "text": "Our next question will come from the line of John Colantuoni with Jefferies. Go ahead." }, { "speaker": "John Colantuoni", "text": "Thanks so much for my questions. First one on conversion. When when you look at how travelers interact with your booking experience and begin to think about how best to layer in new services over time. Talk about how you're planning to evolve search and discovery to help balance gearing users to your new services while simultaneously maintaining conversion on accommodations. And second, I'd be curious to get your perspective on the opportunity to use new services to create some flywheel effects by which maybe you're acquiring new customers through new products or driving more multiproduct bookings to help increase customer lifetime value. Thanks." }, { "speaker": "Ellie Mertz", "text": "Yeah. So let's talk a little bit. You asked about the conversion funnel and how we think about adding in new products. And and I think the question is really, how do you how do you launch and merchandise new products while not creating some risk to your your core offering? And I think this goes to one of our key learnings in terms of the experiences product that we've had historically versus what we want to put into market in coming months. And one of the insights there is that the the kind of classic generalized traveler does not come to our site or any other site to book their entire trip. Instead, they, you know, tend to book their airline. They tend to book their accommodations. Once they get through that, they're very relieved that that is behind them. And they kind of sit on the sidelines for weeks or months in advance of the trip until they start thinking about what do I need to book to fill out my itinerary. And so when we think about how to launch these new offerings, we want to be very mindful of the guest journey and to be very thoughtful with regard to both personalization and timing around what type of products are we merchandising to the customer at what point? So that we can obviously have the the best conversion impact by merchandising the the right thing. In terms of the flywheel, I think as we have been considering what, you know, both near-term and long-term future offerings will be, we're very focused on adding things to the platform that not only will be solid businesses in and of themselves, but also make the core offering better. So so that is part of our our criteria in terms of selecting new offerings is what if added to the platform would actually know, likely cause people to, one, book more frequently in terms of accommodations. But also come back to the app or or or the service on a more frequent basis than they do today because we have a a variety of offerings that may work not just on their trip, but also when they are in their home markets." }, { "speaker": "Operator", "text": "And that will conclude our Q&A session. I'll turn the call back over to Brian for any closing remarks." }, { "speaker": "Brian Chesky", "text": "Alright. Well, thanks everyone for joining us today. Just to recap, we ended 2024 with nice growth accelerating in incredible momentum heading out of 2025. Free cash flow was $4.5 billion for the year. Representing a free cash flow margin of 40% and our strong balance sheet enabled us to repurchase $3.4 billion of common stock. I'm really proud of what we accomplished, but this is just the beginning. 2025 marks the start of Airbnb, Inc.'s next chapter. Alright. Thank you all." }, { "speaker": "Operator", "text": "That concludes our call for today. Thank you all for joining. You may now disconnect." } ]	Airbnb, Inc.	115,705,393
ABNB	3	2,024	2024-11-07 16:30:00	Operator: Good afternoon, and thank you for joining Airbnb's Earnings Conference Call for the Third Quarter of 2024. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand it over to Angela Yang, Director of Investor Relations. Please go ahead. Angela Yang: Good afternoon, and welcome to Airbnb's third quarter of 2024 earnings call. Thank you for joining us today. On the call today, we have Airbnb’s Co-Founder and CEO, Brian Chesky and our Chief Financial Officer, Ellie Mertz. Earlier today, we issued a shareholder letter with our financial results and commentary for our third quarter of 2024. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We provide a reconciliation to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I will pass the call to Brian. Brian Chesky: All right. Good afternoon, everyone, and thanks for joining. Airbnb had a strong third quarter. Nice and experiences booked accelerated throughout Q3 and into Q4. Despite a slower start to the quarter due to shorter booking lead times compared to last year bookings grew steadily each month returned to double-digit growth by the end of Q3. We had a $123 million nights and experience booked. Revenue grew 10% year-over-year to $3.7 billion. Net income was $1.4 billion, representing net income margin of about 37%. And we generated $1.1 billion of free cash flow. In fact, our total trailing 12 month free cash flow was $4.1 billion, which allowed us to repurchase $1.1 billion of our shares in the quarter. And as of the end of Q3, we have $4.2 billion remaining on our repurchase authorization. Now, during Q3, we continue to make progress across our three strategic initiatives, which are making hosting mainstream, prospecting our core service and expanding beyond the core. Now I am going to share a few highlights about each. First, we're making hosting mainstream. We are focused on making hosting just as popular as traveling on Airbnb. Today, we have over 8 million active listings with growth across all regions and market types. To retain and track new hosts, we prioritize making hosting easier. Last month, as part of our 2024 winter release, we introduced co-host networks, an easy way to find the best local host to manage your Airbnb. Co-hosts are some of our most experienced hosts. They provide personalized support ranges from listing setups, can managing bookings and communicating with guests. Second, we're prospecting our core service. Over the past three years, we've launched more than 535 new features and upgrades to make Airbnb a better service. Our 2024 winner release included over 50 upgrades for guests that make Airbnb a more intuitive and personalized App. This includes features like recommended destinations, suggested search filters and personalized listing highlights. We're also focused on one of the top issues for guests, listing quality. Since last year, we removed over 300,000 listings that failed to meet guest expectations. And we will continue to invest in improving the quality of guest stays. Finally, we're expanding beyond our core. Outside of our core markets, there are many countries and regions that remain underpenetrated and we're focused on these expansion markets as part of a global market strategy and we're seeing great results.. In Q3, the growth rate of nights booked in our expansion markets more than doubled that of our core markets. Now, in addition to driving growth in our expansion markets, we're also preparing for an Airbnb’s next chapter, which will take us beyond accommodations. And you'll see more about this next year. We also saw a number of positive business highlights in Q3. First, guest demand accelerated throughout the quarter. As I mentioned earlier, after a slower start in July, bookings accelerated each month in Q3. Global lead times also normalized throughout the quarter. Now part of this growth has been driven by our App strategy. Nights booked on our App increased 18% year-over-year in Q3. App bookings now account for 58% of nights booked. Now this is up from 53% in the same period last year. And we also saw continued growth of first-time bookers, with the highest growth among young travelers. This is quite exciting. And I'm really excited to share that we recently surpassed 2 billion guest arrivals on Airbnb. Second, our global market strategy is working. We continue to drive growth by investing in underpenetrated markets. While our timing and investment level will vary by market, our strategy is consistent, to make Airbnb local and relevant in more places around the world. Now in each market, we focus on finding product market fit, increasing brand awareness, and driving traffic. And I want to just use one country as an example, which is Japan. Airbnb is still pretty new in Japan and it's pretty unfamiliar to most Japanese travelers. So to raise awareness, we launched a brand campaign last month is centered on domestic travel. Beyond Japan though, we are all so introducing more local payment options and countries around the world like Vietnam, Denmark and Poland and in fact, by spring of next year, we expect to offer nearly 40 local payment methods around the world. Now finally, supply quality is improving on Airbnb. We are focused on removing low-quality supply, as well as make it easier for guests to find the best places to stay. I shared that we removed over 300,000 listings last year. And we are seeing the - we're already seeing this payoff. Customer service contact rates have decreased, guest MPS has improved, and we're also reducing host cancellations, which are now almost 30% lower than a year ago. And we've made it so much easier for guests to find the best place to stay with Guests Favorites. In fact, since launching Guest Favorites a year ago, last November, over 200 million nights have been booked at Guest Favorite listings. All right, next I want to share briefly some highlights from our 2024, which was last month on October 16th. Starting with the Co-Host network. We know that hosting Airbnb is one of the best ways to make money from our home. But not everyone has the time to host. So that’s why we introduced Co-Host Network, an easy way for people to find the best - to find and hire the best local co-host to manage the Airbnb. Co-host offer personalized support for host needs, everything from setting up your listing, demands your bookings and communicating with guests. These are super experienced hosts with an exceptional track record, 73% are super hosts and 84% manage Guest Favorite. Now, when we announced this on October 16th, we launched the Co-Host Network with 10,000 Co-Hosts across 10 countries. In this three weeks since we launched, we've already received interest from over 20,000 potential new co-hosts. This is huge, this is way bigger than we were expecting. And we are making co-hosting easier, we really believe that co-host network will allow us to lock even more high quality supply. And we also introduced safety updates for guests and make Airbnb a more intuitive and personalized App. And some of the features include a personalized welcome tour of the App for first-time guests, suggested destinations, winning guests pass the search bar will recommend locations on their search and booking history. And for our hosting highlights. So when a guest views, a listing, we will highlight the details that are relevant to their search and there are dozens of these features just like these. This is quite literally the beginning of a more personalized Airbnb. Now turning to Q4, last quarter, we talked about shorter booking lead times, but as I shared nights and experiences booked accelerated throughout the quarter, returning to double-digit growth by the end of Q3. While we know the comps from last year will get harder in the back of the quarter, we are anticipating that nights booked will accelerate in Q4 relative to Q3. So with that Ellie and I look forward to answering your questions. Operator: [Operator Instructions] Our first question comes from the line of Richard Clarke with Bernstein. Your line is open. Richard Clarke: Hi, good afternoon. Thanks for taking my questions. Just a question on supply. It looks like you stopped sort of giving us the year-on-year supply growth I guess because of the removals. I guess,, any color on what’s happening to maybe gross supply growth. And whether the removals you are doing and additions you are doing and seeing any meaningful shift towards professional hosts as you guys do that process or co-listed supply. And then maybe any color on whether this co-hosting is unlocking supply here. You talked about adding co-hosts, but are you getting additional supply due to the co-hosting initiatives? Ellie Mertz: Yes, thanks, Richard. Let me talk a little bit about what we've seen on supply. As you probably noted, our initiatives around supply have really morphed over the last 12 months. We can continue to focus on growing our overall supply base. But we incrementally are focused on making sure that we are delivering very high quality levels of supply across the world to our guests. And the two important features that we've done to drive quality are obviously introduction of Guest Favorites a year ago, and then ,second the removals that you called out over the last 12 months. And the interesting thing is, we’ve seen what we hope to have seen from these quality initiatives, in particular, what we see is that, based on encouraging our guests to use Guest Favorites and taking down those listings that we believe do not meet our quality expectations or those of our guests. What we see is that the average rating of our stays goes up. The incident rates go down and customer service contacts go down as well. So, we're seeing the intended impact of those quality efforts, which we believe, one, it improves the guest experience, second, allows for improvements of rebooking rates over time; and third, more broadly increases booking confidence around Airbnb. To the specific questions in terms of what has happened to the supply growth? It continues to be strong and in Q3, we continue to see Supply growth exceed demand by a couple of points. So it continues to be the very healthy, but again the focus more recently has been on incrementally raising the quality bar on Airbnb, not just adding more supply to the platform. Brian, do you want to talk about co-hosting or actually take that as well? Brian Chesky : Yeah, I can take. Yeah, I can take that. Richard, it’s a great question. Airbnb, I think we are just scratching the surface of how big this company can become. And the growth rate of demand is going to fall probably in line with the growth rate of supply. And so, one of the questions we had was, well, how do we get millions more listings in Airbnb? And how do we not just get millions of property managed listing? How do we get millions of regular everyday people to put their homes in Airbnb? Well, we are doing obviously a lot of research and we've asked people and we learned two things. The first thing we learned is that, people are very interested in making extra money in the home Ttey already have and make sense, they pay for this asset. That they can make tens of thousand dollars a year. Why wouldn't you want to put on Airbnb? But the second thing we learned was that the number and reason people don't host is because a lot of people say they don't have the time. And so that’s why we ask ourselves, what if we get match people with homes, that don't have time with people have extra time that don't have homes. The Venn diagram would potentially unlock millions more listings and the best part of all was this would be alternative so some of the third-party property management companies if you want to have one of the best host to Airbnb and the average 5 star rating. for co-host in Airbnb is significantly higher than the average rating of a third-party property manager. So that's what we did with the Co-Host Networks. Now we start with 10,000, co-host. We have 20,000 people that apply in the three week expense. And this is going to be something that we're going to be focusing on in the coming years to come. But, to answer your questions very directly, Richard, not only would this unlock more supply, I think in the coming years, this is going to lock millions of listings. I think that they - the vast majority of them are going to be everyday people that are going to list exclusively on Airbnb. Richard Clarke: Thanks. Thanks very much. Operator: And your next question comes from the line of Mark Mahaney with Evercore ISI. Your line is open. Mark Mahaney: Hey, thanks. Two questions please. You talked about this acceleration or improvement in. room nights as you kind of went through the quarter. Did that come from any particular geographic areas? We'd heard that Europe was one a market that was recovering maybe faster than others. Was that your experience, as well? And then, just back on the co-hosting experience, you had this out in a series of markets for a while. Is it how long do we see materiality come through it? Like have you seen these in relatively small markets where you’ve rolled it out this will become material to the growth rate in those markets already in the 6 to 12 month, period or is this take a just more of like a 12 to 24 month process? Thank you.. Ellie Mertz: Thanks, Mark. Let me first answer your first question with regard to the acceleration of the business. What we shared in the letter was that for your line to where we were back at the time of the last earnings call, we called out that there was a bit of softness globally related to lead times is specifically what we shared with that. We were seeing continued strength of last minute bookings, but relative softness in terms of the longer lead times. And what we saw over the course of the quarter, specific to both the regions that you called out, but globally was that lead times over the course of July, August and September normalized and came back almost in line to where we were in ‘23. I think you saw that most notably in EMEA and I think probably some of the, long lead time softness that we were seeing in EMEA was certainly related to some distraction around the Olympics because we certainly saw the bookibgs pick up after the Olympics pass, but more broadly that acceleration was seen across all four major regions. And then, on the co-hosting, Brian gave you, I think a broad answer in terms of the expectations there. One of the reasons that we had confidence in terms of launching the Co-host Network more broadly is, the pilots that we've had over the last several years, in particular, in France, what we've seen is that, the co-host themselves are very incremental in terms of going out and attracting high quality listings themselves. Obviously, it will take time for us to scale co-hosting to a level that is, meaningful relative to the scale of our current business. But what we've seen from those pilots is extremely encouraging and we'll continue to build out the network from here on. Operator: And your next question is going to come from the line of Brian Nowak with Morgan Stanley. Your line is open Brian Nowak: Thanks for taking my questions. I have two. Excuse me. The first one, I think that the 4Q EBITDA guide sort of implies a margin somewhere in the 20s around 27%, 28%. Is there any sort of timing factors you call out that are sort of driving the margin down at that level? And then, how do we sort of think about philosophically the levels of investment and sort of the philosophy around investment and margins into next year to sort of go off this 27 number in the fourth quarter? Thanks. Ellie Mertz: Yes. So Brian, talking a little bit about Q4 obviously, the guide does imply a, several points margin compression relative to last Q4. And you should see that most specifically in terms of both the product development line item as well as marketing. In marketing, we continue to invest in our global expansion markets in our comm strategy around icons and then also Performance Marketing where we're seeing really great efficiencies. There's also a little bit of timing difference in terms of spend from Q3 getting into Q4. But in aggregate, the level of incremental marketing spend on a year-over-year basis is relatively modest. So your second question is, how do we think about the level of investment and philosophy around margins in 25? Let me let me give you a little bit of color in terms of our overall approach as we head into to 2025 Obviously, we will give more color in the following earnings call. But let me just talk a little bit about the approach today. So, if you think about how we've been managing our P&L, I think it's important you're certainly well aware of our history. But I think it's important to reflect on how well we've managed the, the overall P&L since we went public. We've been extremely disciplined in terms of delivering over a quarter basis points of EBITDA margin expansion since 2020 going from negative margins in in 2019 and 2020 to over 35% consistent with our outlook this year. And we’ve demonstrated consistently over these last several years that our business model is, extremely strong. It's extremely profitable and obviously has world-class levels of cash flow generation. And over the long term, I think you can expect that there is opportunity for further margin expansion. But when you remind through where we are right now? We've talked a lot about this. We see a huge incredible opportunity to invest in growth, both investing in growth in our core accommodations business, as well as our new offerings. And so, as we head into 2025, we will continue to lean into our growth initiatives around core optimizations, global markets expansions and new products and services, which is then the question is, how exactly will we be managing the P&L? Let's say for the core business, our goal is every year to make the core business better and more efficient, and deliver greater value for our guests and hosts. And the way we do that is to find incremental efficiencies every year across in particular variable costs. And invest some of that into greater service levels on both sides of the marketplace. In addition to that in terms of the growth investments, in ‘25, we will be investing in our existing expansion markets, as well as a handful of incremental expansion markets and we will be launching new products with our upcoming 2025 spring release. The good news about these investments is that, we intend for them to be relatively capitalized, consistent with our core business. but we will be adding members to our teams and spending to our marketing to support these growth levers. We will provide greater detail on the exact level of investment and growth expectations on our next call early next year. Operator: And your next question comes from the line of Justin Patterson with KeyBanc. Your line is open. Justin Patterson: Great. Thanks for taking the question. Brian, recently you’ve passed the two billion guest milestone and you did that next one billion much faster than your first one billion. As you look at the business today, what do you - what investments you need to make to attract that next billion plus guests to Airbnb when you look at just the types of people taking trips today? What demographics do you under-index on? And how do you think some of these service releases can really bring that next wave of customers? And thank you. Brian Chesky : Justin, it’s a great question. Maybe I'll just start by stepping back, it's pretty crazy that Airbnb has been used by two billion guests. Because I remember when we started Airbnb, I remember telling investors one day this company be huge, thousands of people will use it. And I think there's been a common like pattern where we keep saying it's going to be big and it’s even bigger than we imagined. And I think the reason why is, the travel industry, as you know, you guys cover it is it's approximate the size of the oil industry. And people love traveling. And one thing I know about the future is more people travel in the past. And, I think that we'll be creative with the new category. And this is the business that is approaching half a billion nights booked a year. And so the question is, well, how do we get to a billion nights a year? Or how do we get a company to even be an order of magnitude bigger one day? Because I'm 43 years old. I started to from my 26. And I feel like I got a couple decades ahead of me. And so, where do we go from here? I think that if you think about the history of this company I think you could maybe break it up into a few chapters. The first chapter was when we had this idea, Tony and I in 2008 - and we went on it really crazy [Indiscernible] And now it’s Phase one. And then I would say the second chapter which are probably in now exiting was the beginning of the pandemic, we lost 80% of our business and then we had the right size the company, become really profitable, go public, listing the customer feedback and really strengthen the foundation for the next chapter of the company. And that’s kind of the stage we are in. And I think the next chapter of Airbnb is starting next May. Because I think the next chapter is really about taking Airbnb and expanding this beyond our core business. And so, I will outline three areas that are going to allow us to grow and let's start with the shortest horizon to a longest horizon. The shortest horizon is actually just our core business. Again, we do, - we're approaching 500 million room nights booked a year, I think our core business could certainly get to a billion nights a year. I am not going to put a time horizon on it, but the way we are going to do that, is we are going to continue to increase quality. For everyone who stays in Airbnb, nine people staying on a town. So the question is, what if we could just 1 of those other people to stay in Airbnb? That's how you get to a billion. And so, we think quality, mansion quality is a part of it. I think our work on affordability and usability are also going to be really, really critical. So we're going to continue to focus on the core business. The next horizon, our Global Market. A huge percent of our business is still concentrated in five countries,The US, Canada, Australia, France, UK. So those are all our core markets. But there are massive opportunities in emerging markets. There's nine of them that I'm focused on in the Americas, it’s Mexico and Brzil. In Europe, it’s Germany, Italy and Spain. And in Asia, it’s the big four countries, which are Korea. Japan, India and China. I think this is what I've described as a medium-term horizon. And, by the way, just as for a second, if there was one company in the world, that you can bet on to expand internationally, I think it will be a global travel network. So, I think there's a huge amount of opportunity here. And the biggest opportunity by far is expanding beyond our core business. I'm reminded of Amazon, one of the biggest companies in the world. And they started as an online book seller and can you imagine if Amazon was only selling books to the half way they would become? And yet we for the last 17 years for the most part have only sold one thing, which is basically vacation rentals Airbnb homes by the night. And so, I think that we have a huge opportunity to expand beyond our core business of accommodations. Amazon went from books to what they do first after books, they did CDs and DVDs and people used to buy both. And that was a very close adjacency. And eventually, they sold everything and then they even sold things beyond consumers to enterprise. I think Airbnb is going to go on it’s own journey and what I expect is every year now, for the coming years, we will launch 1 to 2 new businesses that will generate $1 billion or more of revenue incrementally a year. I'm not going to be able to share everything we're doing or even most of the things we are doing. We like to reveal them during our release, but one thing that we've previewed to you was we are going to be reimagining Airbnb experiences and those are going to be coming next May, but we have some really core other things that we are working on. And it’s going to basically be starting with the nearest adjacencies around travel and over the next decade, we're going to go far beyond travel. Operator: And your next question comes from the line of Justin Post with Bank of America. Your line is open, Justin Post: Great, thanks for taking my question. I just wanted to ask about the new markets. If you could give us the expansion markets, maybe some of the biggest ones there? I know Japan is one of them and then, how big they are. So we can think about the growth contribution next year. Thank you.. Ellie Mertz: Yeah, Justin, let me just give you some context in terms of our overall kind of concentration of the business. So, if we think about the core markets and again remember those are US, Canada, Australia, France, and the UK. They currently represent about three quarters of our gross booking value. And then the rest of the world is obviously a quarter. The expansion markets that we're focused on are kind of 15% approximately of the remainder. But in a normalized world should be significantly larger. So if you give, - just to give you a sense in terms of kind of the success that we've had, that encourages us to keep going down this path and adding more expansion markets. I just call out actually Brazil because it was one of our first expansion markets that we began to focus on about two years ago. We introduced localized brand campaigns. We localized the products. We provided incremental payment methods to make it more locally relevant. And if we look at the success of that specific market, would you see - what you would see is that, for Brazil, from a destination nights perspective is actually about three times as large as it was pre-pandemic. And you can see just like paying attention to a particular market deploying, our full funnel marketing strategy, being very thoughtful about product market fit allows us to scale these currently smaller portions of our business to over time a significantly larger proportion. On the other end of the spectrum, I would highlight Japan, which we obviously called out in our shareholder letter, given the recency of our um, of our - the launch of our brand campaign there. That’s obviously a significantly large market. But we are relatively new in the eyes of Japanese travelers. And so if they've opportunity to really introduce ourselves to the local traveler have them under understand the opportunity locally to use Airbnb domestically and begin to scale that business commensurately. And so, when you think about the scale of these markets where we are today, Brian and I characterized this as a medium-term opportunity, because the immediate opportunity is large, but it will take time for us to scale these individual markets such that they have an increasing impact in terms of our consolidated global results given the relative concentration to that. Operator: And your next question comes form the line of Lee Horowitz with Deutsche Bank. Your line is open. Lee Horowitz : Great. Thanks so much. A couple of I could? Maybe you, your online travel peers have given color that's what they think their long-term bookings growth how that looks like. I mean, I guess, given your leverage to alternative accommodations, because the assumption is that you guys should be able to go faster. Can you give any color maybe on sort of what you see is the long-term growth algorithm for your core business? And then, what new verticals may add to that on top of that? And then one follow-up if I could. Brian Chesky : Yeah, Lee, maybe Ellie before you answer the question, can I just say one quick thing? Lee, o don’t think we do alternative accommodations. I think alternative accommodations is what our competitors OTAs do? I think alternative accommodations is a bit of a catch all that includes property managed homes, service apartments, boutique hotels. But I've never heard a customer say alternative accommodations. I hear them say Airbnb. I am going to book in Airbnb. I am going to get Airbnb. And I think we are really in a category of our own. So, just you know, I just think we don't refer to it and we don't think of it as alternative accommodations. So Ellie, over to you. Ellie Mertz: Yes, thanks Lee. So we think about overall growth algorithm and our growth drivers it's exactly as Brian has described earlier in terms of talking about the opportunity. It really starts with focusing on our core offering and optimizing it such that we are effectively limiting the barriers, to trying Airbnb relative to alternatives in particularly hotels. And so that's why we focus so much on things like affordability and reliability, because we know, for many consumers, even though they're aware of Airbnb, there is a gap in terms of their booking confidence around what they are going to get from us. And so, every quarter, we work at reducing that gap of consideration. And when we look at the business from that perspective, there's a huge amount of growth room ahead even in our core markets, because we know so many consumers consider - continue to consider themselves as hotel guests. not necessarily Airbnb guests. And so, a lot of the optimizations and marketing are both raising considerations, as well as helping people frankly get through our platform more easily by making it easier to book, making it more personalized and getting them the right listing. So, we continue to focus on these core optimizations, because we believe it's a considerable future, current I should say and future growth lever that will continue to pay dividends in particular in our core markets but more globally, more generally globally across our platform. The second component is what I just spoke about in terms of responding to Justin. Our business today is over-concentrated in our core markets and is not necessarily reflective of the commensurate business opportunity across the globe. And so, over the couple of years, you should see, assuming that our global market strategy is successful. You should see the contributions to growth of those expansion markets grow every single quarter and I think the results that we've delivered so far this year suggest that that is, that is working. We just need to continue to scale those businesses such as they contribute to global growth more significantly. Lee Horowitz : Great. And then, to the extent that sort of your improving 4Q outlook the acceleration is really nice, it is an output of some of the investments that you guys are putting into place driving the kind of gains that you want. Does this give you confidence to throw fuel on the fire and invest more aggressively behind those initiatives? And maybe how we should think about the way that that interplay should play through in terms of margin over the longer term? Ellie Mertz: Well, I think where we've seen success. One of the areas is core optimization and so we have built out the product roadmap around that because where we see success in terms of improvements we're making to the booking flow. We continue to keep a stable set of resources against those challenges. So that every single quarter, the price is getting better and we're delivering more gains from those product improvements. Operator: And your next question comes from the line of James Lee with Mizuho. Your line is open. James Lee: Great. Thanks for taking my questions. The question of core initiatives here, can you guys talk about the progress you have made and affordability, and quality that’s driving, maybe some of the increased bookings that we’ve seen in the quarter ? And also, can you give us an update on the outcome from a service transformation, maybe what's working, what's not and what's yet to be improved? And when do you expect to complete the process? Thanks. Brian Chesky : Yeah, I got this. Hey James, these are great questions. I'm really excited about it. So, I'll take each, affordability and reliability and customer service. Affordability, it's funny, the first tagline Airbnb ever had was an affordable alternative a hotel. And it was the number one reason that people first tried to use Airbnb. Now I think today that's not the main reason people use Airbnb. I think they use it because they want to travel like a local. They want more space. They want homes in real neighborhood, better equipped, but it's really, really important that we don't ever leave our roots of affordability. And I think in the pandemic, I think there was so much demand, there was constrained supply, prices went up, and I think we addressed it from our affordability risk. So, a couple of years ago, we actually got very, very serious about driving more affordable in Airbnb. And we did a few things. The first thing we did is, we heard a lot of complaints about rising cleaning fees and I set the fees in Airbnb. So we introduced total price display, total price slates exactly what it sounds like you can click it on and see the total price upfront. And, since we’ve done that, more than 300,000 listings have removed or lowered their cleaning fees. But this has been huge. Next, we introduced weekly and monthly discounts. And now more than, - we're introducing more entry points in weekly, monthly discounts.Two-thirds of hosts now offer discounts. In fact, more than half of our hosts offer a monthly discount and now 70% of our nights booked are for monthly stays. We introduced a similar listings tool. So what we noticed was a lot of hosts were overestimating what they could make on a nightly basis, especially new hosts. So we built the tool for you to see other listings in your neighbourhood and 2 million hosts have used this tool. And basically, when most of who use this tool they realize that they need to make sure they are competitive and so it brings the prices in line. Now over the this past release on October 16th, we also added a couple more different features like price tips, hosts can now view suggested prices based on similar listings in that area and search tips. So throughout the guest search, we're going to offer relevant tips to help them find last minute stays. And probably the most important thing you can do to drive affordability is just continue to increase supply. But we know about almost every marketplace is that as supply goes up relative to demand prices come down and so that's a really big effort for us. The results have been the following: In the last two years, while Airbnb prices on a like-for-like basis, if you net out mix shift, has it remains fairly constant hotel prices have gone up considerably. So we believe that we've actually become more competitive from – cancelling relative hotels last year. That’s affordability. Now reliability. Reliability, as I said is probably the most important thing that we can do to drive more growth in our core business. If we do nearly 100 million nights a year in bookings, the question is, how do we get the next 100 million nights booked. And there is no silver bullet, but the closest thing to a silver bullet is quality and reliability. And there is a lot of things we are doing, quite literally dozens. But I can just pick two. The two things I’d pick are at the top, Guest Favorites, piloting the two million best listings in Airbnb. We also highlight the best 1%, 5% and 10% listings. As Ellie mentioned, we’ve got 200 million nights booked just in Guest Favorites. Now, this is amazing. Why it is great? Because number one, customer service contact, these listings are down , our profitability on a per booking basis goes up, NPS is up, because NPS is up that means that rebooking rates are up. That also means the word of mouth is up, but most importantly, a lot of people that wouldn't have considered staying in Airbnb, now would. I mean, I'm going to go on a NIM and say that while the average Airbnb is not as reliable as a hotel, I believe the average Guest Favorite is. And we have two million to choose from. Two million listings is more inventory than Hilton or Marriott, nearly combined, by the way. So there's a lot of selection here. At the bottom-end, just like any company you need to make sure you reward the top performers and you also deal with the people that aren't performing. We've removed more than 300,000 listings over the last year, the last two years of hosts that weren't meeting our quality standards. So, these are just some of the things we're doing on reliability. The last is customer service. And we are going through a really exciting transformation on customer service. I don’t want to be one of the CEOs just brings up AI every earnings call, because I think you got a happy measure, but we are seeing some really great progress on AI-powered customer service. The way we think about customer service Powered by AI is in three phases. Phase 1 is the phase we're in right now. If you were to most of - first of all most of our customer contacts, we get over 10 million contacts here, most of the contacts that we anticipate getting in the coming years aren't going to be phone calls. They're going to be chatting through the App. I think really personally don't like calling customer service and having to dial, and I want to be able to chat. And chat AI can intercept. And so, we think in the future the vast majority of our chats are going to be intercepted in the end directly by the AI agent. And so there's really three phasing for this. Phase 1 is just answer basic general questions. We're rolling out a pilot that could answer basic general questions. Phase two, is personalization, personalize the questions. Phase three is to take actions. So I’ll give you an example, let me just give you one example. Let's say, I were to contact customer service and I’d say, how do I cancel a reservation. In Phase one, what we are doing now AI agent will answer – copy even better the average customer service agent how do cancel a reservation. So Phase 2 is how you cancel reservation step-by-step. Phase 2 personalization, they’ll say, hey Brian, I see you have a reservation coming up in Los Angeles next week. Here is how you cancel that reservation. And Phase three is taking actions. It would say hey Brian. I see you have a reservation come to Los Angeles. Would you like me to cancel it for you? Just tell me yes and I’ll do it for you. I can even handle the rebooking. So this is where we think customer service can go enabled by AI, and we've hired some of the best people in the world to work on this and I really excited to tell you more progress about it. Operator: And your next question comes from the line of Doug Anmuth with JPMorgan. Your line is open. Doug, if you could check to see if your line is on mute. And moving forward to our next question from Kevin Kopelman with TD Securities. Your line is open. Kevin Kopelman: Thanks a lot. A question on the new services that are expected to come out next year. Do we think of those new services as driving some revenue growth right off of that for the second half next year? Or areyou anticipating more gradual rollouts in more of 2026 revenue drivers? Thanks. Brian Chesky : Yeah, I can take that and Ellie feel free to add. Kevin, the answer is a little bit of both, I mean, we are, the way like – let’s just back up? So Uber, let's just take Uber. I admire that company. They've done really well. When they launched Uber Eats, they launched in one market. And they had it city-by-city market and was very, very gradual. We are not going to do that. We're going to be much more aggressive. When we launch the new offerings next year, they are going to be available immediately in more than a 100 cities around the world. So we believe in trying to reach scale a little more quickly just given how big and how mature we are. So, because of that, we do think there will be some incremental revenue next year, that will hit the financials. But I also just want to like step back and just say that what we've learned from Uber Eats, from Amazon category expansion, from Door Dash, from we can go down the list of marketplaces is, when something's built off of small base, you've got to be patient. I think that there's a, multi-billion dollar revenue opportunities, multiple of them that will be introduced next year. But I also would point people to a 5-year Horizon. For a number of these things to really reach scale, not, they won't reach scale in just a year or two. And part of that is it's a network effect business. We want to roll it out carefully. We want to make sure it’s really well done. Ellie, do you want to add anything? Ellie Mertz : The one thing I would add is, Kevin, we will obviously give you much more detailed color next year on the next earnings call. But what you should anticipate is that, some of the investment behind those new services will front run the revenue. So you'll begin to see those expenses or those investments I should say, at the beginning of the year, whereas the revenue will start to scale once we've released the new offering. Operator: And your next question comes from the line of Patrick Scholes with /Truist. Your line is open. Patrick Scholes: Great. Thank you. Good evening. I want to go back to the first question I was asking and ask it maybe a little more direct. Can you provide us in percentage terms what your year-over-year net unit growth was in the quarter? Thank you. Ellie Mertz : On Supply? Patrick Scholes: Yeah. Supply, correct. Ellie Mertz : Yeah so we had over 10% growth of supply as of the end of Q3, which is down several points based on the removals. Operator: Your next question comes from the line of John Colantuoni with Jefferies. Your line is open. John Colantuoni: Great. Thanks for taking my questions. Wanted to ask about the Experiences offering. As you get closer to the relaunch next year, how are you thinking about sort of the pace of expansion and scalability? I know, you'd like to keep experiences unique like your accommodations offering. But I'm curious if that means it will take longer to build supply behind it. And maybe, you could also sort of give us a sense for any investments in Tech or marketing that you plan to make around the relaunch of Experiences? Thanks. Brian Chesky: Yeah, John, really good question. I think we are able to reach a sweet spot where I think we can - we're going to offer something that's really, really unique and we will scale. Now, I want to just moderate expectations that again, these Journeys are going to be multi-year journeys that I do not think that there's a choice. I don't think we need to make a choice between you mean unique or being at scale. I think - by the way, I think our core business proof that a business that’s approaching a hundred billion dollars in gross sales a year. And it's pretty unique, it's pretty different than a hotel. So, I'm not going to certainly promise that experience we'll get to that size, but we do think we have something that's very unique, very scalable available around the world. As far as the Tech and marketing, the great thing about our business is, are you not anticipate very many businesses in the next five years are going to need significant investments. We are certainly nothing like many other companies where they have a lot of either capital allocation or major technical investments or even major marketing investments. Here's another way of saying it. We've already made most of the technology investments. When you see the last four years, a huge amount of what we've done is rebuilt the company from the ground up, not just to make it stronger to offer homes, to make it an extensive platform. One of those companies that we learnt from again was Amazon. I know, I talk a lot about Apple. A lot of people reference Apple when they talk about them because of their big launches. But Apple, Amazon is a very good reference point. Initially, as you know, they built a bookstore. They were based on like, IBM. They had to rebuild the platform and I’d extract the platform and you might call compromising to build offer many room verticals. And so, we want to take every new platform that works certification and build it for the next decade for like 50 or 100 different categories, just like Amazon. So now, I think with the timeline when we offer them, but we've rebuilt the technology already most of it to be able to do that. Now with marketing, I don’t think we are going to market everything as standalone businesses. We really like the idea of marketing, all of Airbnb. In marketing there's these two choices. Are you a house the brand or a branded house? We're a branded house. We're one App. We are one brand and we want to market everything in one Ad. So that's a little bit more how we're going to approach it. And so I think for those reasons we will, of course, be investing. I want to be clear, we of course be investing, but it's not going to be like many other companies where they have to go deep and sort of right and get the new business off the ground. Operator: And your next question comes from the line of Jed Kelly with Oppenheimer. Your line is open. Jed Kelly: Great, great. Thanks for taking my questions. Just two if I may? Can you talk about in areas such as New York City, where the regulations are becoming increasingly difficult? Can you talk about how we should view those and then potentially leaning more into hotels? And then, as you grow outside some of these non-core markets, is it going to be more brand-driven or will you lean more into Performance Marketing? Thanks. Brian Chesky: Hey Jud. I'll take that. Yes, so let’s talk about New York. Actually, I would like to talk about two cities. I want to talk about a tale of two cities. New York City and Paris. Because both cities need some major decisions on Airbnb recently and I want to distinguish differencing the two. New York City has, might be this before the housing crisis and that’s a very real thing. And so the decided one of the ways they try to feel with that was banning Airbnb. And a year ago, Airbnb was banned and the theory was that if you ban Airbnb, a bunch of homes will come back on the rental market and prices will come down. Well, for the first time we've gotten a year-long longitudinal study of what happened in Airbnb into the city. Rent prices in New York City are not down. In fact, they're up 3.5%. And by the way, hotel prices are now up to 7%. So, a year after banning Airbnb, it's more expensive to live there. And it’s even more expensive to travel there. And I think that New York City is now a cautionary tale of how to deal with Airbnb. Now, the other side is Paris. Paris, France. A couple years ago, we knew the Olympics were coming to Paris, we started working with the City of Paris. And I think that Paris tood a different approach and set us thinking that Airbnb as a problem they started that Airbnb is a solution to their problems which were they weren’t going to have enough housing for the Olympics. And so in the last year, we went from a 100,000 homes in Paris to 150,000 homes in Paris And I'm pleased to announce that 700,000 guests stayed in Paris over the course of the Olympics. 700,000 and that's like 8 or 9 Olympics stadiums worth of guests. Our favourability in Paris has not been higher in years. And cities all over the world are now coming to Airbnb and saying we want to be Paris not New York, can you help us, because there are thousands events going around the world. So I think that’s the most important point I would make that New York and Paris are a tale of two cities and we can be a solution to the problem. We are not the problem. But specific to New York, I’d just say two things. Number 1, I remain optimistic that there will be a task to us to re-enter New York and people be able to stay in homes in Airbnb because there is a constrained number of hotels in New York. And by the way most hotels are only in Manhattan. And they're in Midtown, Manhattan. Do you want to stay in any part of the part of the Manhattan, the Brooklyn, The Bronx and Island Queens you are going to be pretty limited. And to answer the other part of your question, yes We absolutely welcome hotels on Airbnb and we are going to be adding more hotels to Airbnb. Because for Airbnb the win hotels don’t have to lose we own hotels a night and we believe that you should be able to find homes and hotels on Airbnb. So yes, we are focused on hotels in New York City on Airbnb. We are focused on Airbnb’s and stay New Jersey, stay Jersey City, which is actually closer Manhattan, other parts of Manhattan. And I am optimistic that New York there will be a workable solution at some opoint in the future, I don’t know when that will be and they can follow the lead of Paris. Operator: [Operator Instructions] Our, next question comes from the line of Stephen Ju with UBS. Your line is open. Stephen Ju : Great. Thanks. So thanks for taking the question. Som Brian, I guess, on the Experiences, again I'm wondering if there's going to be an angle where this could be something that increases the overall engagement or even raises the overall frequency of usage for you, because, maybe I don’t stay in an Airbnb every weekend. But maybe I tried Airbnb Experience every weekend. So I'm just wondering like how the product development path and how utilization will shift as your selection goes? Thanks Brian Chesky: 100%, I mean, this is a great point Stephen. Experiences, I absolutely like within, like Airbnb is typically something you book once or twice a year, very, very few people will book Airbnb every month. Unless you are like incredibly prolific traveller and so we struggle from the point, where on the 1 hand, like our average purchase price is over $500, so, like, like the economics are great, on the other hand we have the challenge of low frequency, most people don't travel that frequently. Expansions are going to be, I think, one of many new offerings that you can increase the frequency that can make Airbnb go from an annual App to a monthly usage App or even for some people weekly usage App. And the reason is because Experiences will not be limited just when you travel. Just like they are today. We are designing products, Experiences and new services that will be great when you travel, but you could book them in your own home town like and I think there's a real problem which is what do you what do you want to do on a Saturday? And if you're with your family. Other than the things you already do. If you got a Friday night, what do you do other than going to a restaurant, staying home and watching Netflix I think there is a market for a locals who want to do unique things and I think traveling is how they are going to be expose Experiences, but I do think that some of the people will try them back home. I think the really big opportunity here kind of similar to iPod, when iPod launched you can only use it with a Macintosh. And the really big game for the iPod was once it became Windows compatible. When iTunes be able to Windows all the people that end on the Mac, but iPod end of sales surged. But I do think there is potential place for that down the road experiences. We're gonna position it for most of travelers. But it’’s not going to be exclusive travlers and I do think people are going to come to work frequently. Operator: And there are no further questions at this time, I would now like to turn the call back over to Brian Chesky. Brian Chesky: All right. Well, I just want to thank everyone for joining today. And just to recap, revenue was $3.7 billion, which is 10% higher than a year ago. Adjusted EBITDA was $2 billion and our trailing 12 months cash flow is $1.1 billion. Now this is representing a free cash flow margin of 38%. Our strong enables to repurchase $1.1 billion of our common stock this quarter and we're continuing to innovate and our product just keeps getting better. I am so proud that we accomplish and I am satisfied with that. Thank you all for joining. Operator: This concludes today's conference call, you may now disconnect	[ { "speaker": "Operator", "text": "Good afternoon, and thank you for joining Airbnb's Earnings Conference Call for the Third Quarter of 2024. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand it over to Angela Yang, Director of Investor Relations. Please go ahead." }, { "speaker": "Angela Yang", "text": "Good afternoon, and welcome to Airbnb's third quarter of 2024 earnings call. Thank you for joining us today. On the call today, we have Airbnb’s Co-Founder and CEO, Brian Chesky and our Chief Financial Officer, Ellie Mertz. Earlier today, we issued a shareholder letter with our financial results and commentary for our third quarter of 2024. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We provide a reconciliation to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I will pass the call to Brian." }, { "speaker": "Brian Chesky", "text": "All right. Good afternoon, everyone, and thanks for joining. Airbnb had a strong third quarter. Nice and experiences booked accelerated throughout Q3 and into Q4. Despite a slower start to the quarter due to shorter booking lead times compared to last year bookings grew steadily each month returned to double-digit growth by the end of Q3. We had a $123 million nights and experience booked. Revenue grew 10% year-over-year to $3.7 billion. Net income was $1.4 billion, representing net income margin of about 37%. And we generated $1.1 billion of free cash flow. In fact, our total trailing 12 month free cash flow was $4.1 billion, which allowed us to repurchase $1.1 billion of our shares in the quarter. And as of the end of Q3, we have $4.2 billion remaining on our repurchase authorization. Now, during Q3, we continue to make progress across our three strategic initiatives, which are making hosting mainstream, prospecting our core service and expanding beyond the core. Now I am going to share a few highlights about each. First, we're making hosting mainstream. We are focused on making hosting just as popular as traveling on Airbnb. Today, we have over 8 million active listings with growth across all regions and market types. To retain and track new hosts, we prioritize making hosting easier. Last month, as part of our 2024 winter release, we introduced co-host networks, an easy way to find the best local host to manage your Airbnb. Co-hosts are some of our most experienced hosts. They provide personalized support ranges from listing setups, can managing bookings and communicating with guests. Second, we're prospecting our core service. Over the past three years, we've launched more than 535 new features and upgrades to make Airbnb a better service. Our 2024 winner release included over 50 upgrades for guests that make Airbnb a more intuitive and personalized App. This includes features like recommended destinations, suggested search filters and personalized listing highlights. We're also focused on one of the top issues for guests, listing quality. Since last year, we removed over 300,000 listings that failed to meet guest expectations. And we will continue to invest in improving the quality of guest stays. Finally, we're expanding beyond our core. Outside of our core markets, there are many countries and regions that remain underpenetrated and we're focused on these expansion markets as part of a global market strategy and we're seeing great results.. In Q3, the growth rate of nights booked in our expansion markets more than doubled that of our core markets. Now, in addition to driving growth in our expansion markets, we're also preparing for an Airbnb’s next chapter, which will take us beyond accommodations. And you'll see more about this next year. We also saw a number of positive business highlights in Q3. First, guest demand accelerated throughout the quarter. As I mentioned earlier, after a slower start in July, bookings accelerated each month in Q3. Global lead times also normalized throughout the quarter. Now part of this growth has been driven by our App strategy. Nights booked on our App increased 18% year-over-year in Q3. App bookings now account for 58% of nights booked. Now this is up from 53% in the same period last year. And we also saw continued growth of first-time bookers, with the highest growth among young travelers. This is quite exciting. And I'm really excited to share that we recently surpassed 2 billion guest arrivals on Airbnb. Second, our global market strategy is working. We continue to drive growth by investing in underpenetrated markets. While our timing and investment level will vary by market, our strategy is consistent, to make Airbnb local and relevant in more places around the world. Now in each market, we focus on finding product market fit, increasing brand awareness, and driving traffic. And I want to just use one country as an example, which is Japan. Airbnb is still pretty new in Japan and it's pretty unfamiliar to most Japanese travelers. So to raise awareness, we launched a brand campaign last month is centered on domestic travel. Beyond Japan though, we are all so introducing more local payment options and countries around the world like Vietnam, Denmark and Poland and in fact, by spring of next year, we expect to offer nearly 40 local payment methods around the world. Now finally, supply quality is improving on Airbnb. We are focused on removing low-quality supply, as well as make it easier for guests to find the best places to stay. I shared that we removed over 300,000 listings last year. And we are seeing the - we're already seeing this payoff. Customer service contact rates have decreased, guest MPS has improved, and we're also reducing host cancellations, which are now almost 30% lower than a year ago. And we've made it so much easier for guests to find the best place to stay with Guests Favorites. In fact, since launching Guest Favorites a year ago, last November, over 200 million nights have been booked at Guest Favorite listings. All right, next I want to share briefly some highlights from our 2024, which was last month on October 16th. Starting with the Co-Host network. We know that hosting Airbnb is one of the best ways to make money from our home. But not everyone has the time to host. So that’s why we introduced Co-Host Network, an easy way for people to find the best - to find and hire the best local co-host to manage the Airbnb. Co-host offer personalized support for host needs, everything from setting up your listing, demands your bookings and communicating with guests. These are super experienced hosts with an exceptional track record, 73% are super hosts and 84% manage Guest Favorite. Now, when we announced this on October 16th, we launched the Co-Host Network with 10,000 Co-Hosts across 10 countries. In this three weeks since we launched, we've already received interest from over 20,000 potential new co-hosts. This is huge, this is way bigger than we were expecting. And we are making co-hosting easier, we really believe that co-host network will allow us to lock even more high quality supply. And we also introduced safety updates for guests and make Airbnb a more intuitive and personalized App. And some of the features include a personalized welcome tour of the App for first-time guests, suggested destinations, winning guests pass the search bar will recommend locations on their search and booking history. And for our hosting highlights. So when a guest views, a listing, we will highlight the details that are relevant to their search and there are dozens of these features just like these. This is quite literally the beginning of a more personalized Airbnb. Now turning to Q4, last quarter, we talked about shorter booking lead times, but as I shared nights and experiences booked accelerated throughout the quarter, returning to double-digit growth by the end of Q3. While we know the comps from last year will get harder in the back of the quarter, we are anticipating that nights booked will accelerate in Q4 relative to Q3. So with that Ellie and I look forward to answering your questions." }, { "speaker": "Operator", "text": "[Operator Instructions] Our first question comes from the line of Richard Clarke with Bernstein. Your line is open." }, { "speaker": "Richard Clarke", "text": "Hi, good afternoon. Thanks for taking my questions. Just a question on supply. It looks like you stopped sort of giving us the year-on-year supply growth I guess because of the removals. I guess,, any color on what’s happening to maybe gross supply growth. And whether the removals you are doing and additions you are doing and seeing any meaningful shift towards professional hosts as you guys do that process or co-listed supply. And then maybe any color on whether this co-hosting is unlocking supply here. You talked about adding co-hosts, but are you getting additional supply due to the co-hosting initiatives?" }, { "speaker": "Ellie Mertz", "text": "Yes, thanks, Richard. Let me talk a little bit about what we've seen on supply. As you probably noted, our initiatives around supply have really morphed over the last 12 months. We can continue to focus on growing our overall supply base. But we incrementally are focused on making sure that we are delivering very high quality levels of supply across the world to our guests. And the two important features that we've done to drive quality are obviously introduction of Guest Favorites a year ago, and then ,second the removals that you called out over the last 12 months. And the interesting thing is, we’ve seen what we hope to have seen from these quality initiatives, in particular, what we see is that, based on encouraging our guests to use Guest Favorites and taking down those listings that we believe do not meet our quality expectations or those of our guests. What we see is that the average rating of our stays goes up. The incident rates go down and customer service contacts go down as well. So, we're seeing the intended impact of those quality efforts, which we believe, one, it improves the guest experience, second, allows for improvements of rebooking rates over time; and third, more broadly increases booking confidence around Airbnb. To the specific questions in terms of what has happened to the supply growth? It continues to be strong and in Q3, we continue to see Supply growth exceed demand by a couple of points. So it continues to be the very healthy, but again the focus more recently has been on incrementally raising the quality bar on Airbnb, not just adding more supply to the platform. Brian, do you want to talk about co-hosting or actually take that as well?" }, { "speaker": "Brian Chesky", "text": "Yeah, I can take. Yeah, I can take that. Richard, it’s a great question. Airbnb, I think we are just scratching the surface of how big this company can become. And the growth rate of demand is going to fall probably in line with the growth rate of supply. And so, one of the questions we had was, well, how do we get millions more listings in Airbnb? And how do we not just get millions of property managed listing? How do we get millions of regular everyday people to put their homes in Airbnb? Well, we are doing obviously a lot of research and we've asked people and we learned two things. The first thing we learned is that, people are very interested in making extra money in the home Ttey already have and make sense, they pay for this asset. That they can make tens of thousand dollars a year. Why wouldn't you want to put on Airbnb? But the second thing we learned was that the number and reason people don't host is because a lot of people say they don't have the time. And so that’s why we ask ourselves, what if we get match people with homes, that don't have time with people have extra time that don't have homes. The Venn diagram would potentially unlock millions more listings and the best part of all was this would be alternative so some of the third-party property management companies if you want to have one of the best host to Airbnb and the average 5 star rating. for co-host in Airbnb is significantly higher than the average rating of a third-party property manager. So that's what we did with the Co-Host Networks. Now we start with 10,000, co-host. We have 20,000 people that apply in the three week expense. And this is going to be something that we're going to be focusing on in the coming years to come. But, to answer your questions very directly, Richard, not only would this unlock more supply, I think in the coming years, this is going to lock millions of listings. I think that they - the vast majority of them are going to be everyday people that are going to list exclusively on Airbnb." }, { "speaker": "Richard Clarke", "text": "Thanks. Thanks very much." }, { "speaker": "Operator", "text": "And your next question comes from the line of Mark Mahaney with Evercore ISI. Your line is open." }, { "speaker": "Mark Mahaney", "text": "Hey, thanks. Two questions please. You talked about this acceleration or improvement in. room nights as you kind of went through the quarter. Did that come from any particular geographic areas? We'd heard that Europe was one a market that was recovering maybe faster than others. Was that your experience, as well? And then, just back on the co-hosting experience, you had this out in a series of markets for a while. Is it how long do we see materiality come through it? Like have you seen these in relatively small markets where you’ve rolled it out this will become material to the growth rate in those markets already in the 6 to 12 month, period or is this take a just more of like a 12 to 24 month process? Thank you.." }, { "speaker": "Ellie Mertz", "text": "Thanks, Mark. Let me first answer your first question with regard to the acceleration of the business. What we shared in the letter was that for your line to where we were back at the time of the last earnings call, we called out that there was a bit of softness globally related to lead times is specifically what we shared with that. We were seeing continued strength of last minute bookings, but relative softness in terms of the longer lead times. And what we saw over the course of the quarter, specific to both the regions that you called out, but globally was that lead times over the course of July, August and September normalized and came back almost in line to where we were in ‘23. I think you saw that most notably in EMEA and I think probably some of the, long lead time softness that we were seeing in EMEA was certainly related to some distraction around the Olympics because we certainly saw the bookibgs pick up after the Olympics pass, but more broadly that acceleration was seen across all four major regions. And then, on the co-hosting, Brian gave you, I think a broad answer in terms of the expectations there. One of the reasons that we had confidence in terms of launching the Co-host Network more broadly is, the pilots that we've had over the last several years, in particular, in France, what we've seen is that, the co-host themselves are very incremental in terms of going out and attracting high quality listings themselves. Obviously, it will take time for us to scale co-hosting to a level that is, meaningful relative to the scale of our current business. But what we've seen from those pilots is extremely encouraging and we'll continue to build out the network from here on." }, { "speaker": "Operator", "text": "And your next question is going to come from the line of Brian Nowak with Morgan Stanley. Your line is open" }, { "speaker": "Brian Nowak", "text": "Thanks for taking my questions. I have two. Excuse me. The first one, I think that the 4Q EBITDA guide sort of implies a margin somewhere in the 20s around 27%, 28%. Is there any sort of timing factors you call out that are sort of driving the margin down at that level? And then, how do we sort of think about philosophically the levels of investment and sort of the philosophy around investment and margins into next year to sort of go off this 27 number in the fourth quarter? Thanks." }, { "speaker": "Ellie Mertz", "text": "Yes. So Brian, talking a little bit about Q4 obviously, the guide does imply a, several points margin compression relative to last Q4. And you should see that most specifically in terms of both the product development line item as well as marketing. In marketing, we continue to invest in our global expansion markets in our comm strategy around icons and then also Performance Marketing where we're seeing really great efficiencies. There's also a little bit of timing difference in terms of spend from Q3 getting into Q4. But in aggregate, the level of incremental marketing spend on a year-over-year basis is relatively modest. So your second question is, how do we think about the level of investment and philosophy around margins in 25? Let me let me give you a little bit of color in terms of our overall approach as we head into to 2025 Obviously, we will give more color in the following earnings call. But let me just talk a little bit about the approach today. So, if you think about how we've been managing our P&L, I think it's important you're certainly well aware of our history. But I think it's important to reflect on how well we've managed the, the overall P&L since we went public. We've been extremely disciplined in terms of delivering over a quarter basis points of EBITDA margin expansion since 2020 going from negative margins in in 2019 and 2020 to over 35% consistent with our outlook this year. And we’ve demonstrated consistently over these last several years that our business model is, extremely strong. It's extremely profitable and obviously has world-class levels of cash flow generation. And over the long term, I think you can expect that there is opportunity for further margin expansion. But when you remind through where we are right now? We've talked a lot about this. We see a huge incredible opportunity to invest in growth, both investing in growth in our core accommodations business, as well as our new offerings. And so, as we head into 2025, we will continue to lean into our growth initiatives around core optimizations, global markets expansions and new products and services, which is then the question is, how exactly will we be managing the P&L? Let's say for the core business, our goal is every year to make the core business better and more efficient, and deliver greater value for our guests and hosts. And the way we do that is to find incremental efficiencies every year across in particular variable costs. And invest some of that into greater service levels on both sides of the marketplace. In addition to that in terms of the growth investments, in ‘25, we will be investing in our existing expansion markets, as well as a handful of incremental expansion markets and we will be launching new products with our upcoming 2025 spring release. The good news about these investments is that, we intend for them to be relatively capitalized, consistent with our core business. but we will be adding members to our teams and spending to our marketing to support these growth levers. We will provide greater detail on the exact level of investment and growth expectations on our next call early next year." }, { "speaker": "Operator", "text": "And your next question comes from the line of Justin Patterson with KeyBanc. Your line is open." }, { "speaker": "Justin Patterson", "text": "Great. Thanks for taking the question. Brian, recently you’ve passed the two billion guest milestone and you did that next one billion much faster than your first one billion. As you look at the business today, what do you - what investments you need to make to attract that next billion plus guests to Airbnb when you look at just the types of people taking trips today? What demographics do you under-index on? And how do you think some of these service releases can really bring that next wave of customers? And thank you." }, { "speaker": "Brian Chesky", "text": "Justin, it’s a great question. Maybe I'll just start by stepping back, it's pretty crazy that Airbnb has been used by two billion guests. Because I remember when we started Airbnb, I remember telling investors one day this company be huge, thousands of people will use it. And I think there's been a common like pattern where we keep saying it's going to be big and it’s even bigger than we imagined. And I think the reason why is, the travel industry, as you know, you guys cover it is it's approximate the size of the oil industry. And people love traveling. And one thing I know about the future is more people travel in the past. And, I think that we'll be creative with the new category. And this is the business that is approaching half a billion nights booked a year. And so the question is, well, how do we get to a billion nights a year? Or how do we get a company to even be an order of magnitude bigger one day? Because I'm 43 years old. I started to from my 26. And I feel like I got a couple decades ahead of me. And so, where do we go from here? I think that if you think about the history of this company I think you could maybe break it up into a few chapters. The first chapter was when we had this idea, Tony and I in 2008 - and we went on it really crazy [Indiscernible] And now it’s Phase one. And then I would say the second chapter which are probably in now exiting was the beginning of the pandemic, we lost 80% of our business and then we had the right size the company, become really profitable, go public, listing the customer feedback and really strengthen the foundation for the next chapter of the company. And that’s kind of the stage we are in. And I think the next chapter of Airbnb is starting next May. Because I think the next chapter is really about taking Airbnb and expanding this beyond our core business. And so, I will outline three areas that are going to allow us to grow and let's start with the shortest horizon to a longest horizon. The shortest horizon is actually just our core business. Again, we do, - we're approaching 500 million room nights booked a year, I think our core business could certainly get to a billion nights a year. I am not going to put a time horizon on it, but the way we are going to do that, is we are going to continue to increase quality. For everyone who stays in Airbnb, nine people staying on a town. So the question is, what if we could just 1 of those other people to stay in Airbnb? That's how you get to a billion. And so, we think quality, mansion quality is a part of it. I think our work on affordability and usability are also going to be really, really critical. So we're going to continue to focus on the core business. The next horizon, our Global Market. A huge percent of our business is still concentrated in five countries,The US, Canada, Australia, France, UK. So those are all our core markets. But there are massive opportunities in emerging markets. There's nine of them that I'm focused on in the Americas, it’s Mexico and Brzil. In Europe, it’s Germany, Italy and Spain. And in Asia, it’s the big four countries, which are Korea. Japan, India and China. I think this is what I've described as a medium-term horizon. And, by the way, just as for a second, if there was one company in the world, that you can bet on to expand internationally, I think it will be a global travel network. So, I think there's a huge amount of opportunity here. And the biggest opportunity by far is expanding beyond our core business. I'm reminded of Amazon, one of the biggest companies in the world. And they started as an online book seller and can you imagine if Amazon was only selling books to the half way they would become? And yet we for the last 17 years for the most part have only sold one thing, which is basically vacation rentals Airbnb homes by the night. And so, I think that we have a huge opportunity to expand beyond our core business of accommodations. Amazon went from books to what they do first after books, they did CDs and DVDs and people used to buy both. And that was a very close adjacency. And eventually, they sold everything and then they even sold things beyond consumers to enterprise. I think Airbnb is going to go on it’s own journey and what I expect is every year now, for the coming years, we will launch 1 to 2 new businesses that will generate $1 billion or more of revenue incrementally a year. I'm not going to be able to share everything we're doing or even most of the things we are doing. We like to reveal them during our release, but one thing that we've previewed to you was we are going to be reimagining Airbnb experiences and those are going to be coming next May, but we have some really core other things that we are working on. And it’s going to basically be starting with the nearest adjacencies around travel and over the next decade, we're going to go far beyond travel." }, { "speaker": "Operator", "text": "And your next question comes from the line of Justin Post with Bank of America. Your line is open," }, { "speaker": "Justin Post", "text": "Great, thanks for taking my question. I just wanted to ask about the new markets. If you could give us the expansion markets, maybe some of the biggest ones there? I know Japan is one of them and then, how big they are. So we can think about the growth contribution next year. Thank you.." }, { "speaker": "Ellie Mertz", "text": "Yeah, Justin, let me just give you some context in terms of our overall kind of concentration of the business. So, if we think about the core markets and again remember those are US, Canada, Australia, France, and the UK. They currently represent about three quarters of our gross booking value. And then the rest of the world is obviously a quarter. The expansion markets that we're focused on are kind of 15% approximately of the remainder. But in a normalized world should be significantly larger. So if you give, - just to give you a sense in terms of kind of the success that we've had, that encourages us to keep going down this path and adding more expansion markets. I just call out actually Brazil because it was one of our first expansion markets that we began to focus on about two years ago. We introduced localized brand campaigns. We localized the products. We provided incremental payment methods to make it more locally relevant. And if we look at the success of that specific market, would you see - what you would see is that, for Brazil, from a destination nights perspective is actually about three times as large as it was pre-pandemic. And you can see just like paying attention to a particular market deploying, our full funnel marketing strategy, being very thoughtful about product market fit allows us to scale these currently smaller portions of our business to over time a significantly larger proportion. On the other end of the spectrum, I would highlight Japan, which we obviously called out in our shareholder letter, given the recency of our um, of our - the launch of our brand campaign there. That’s obviously a significantly large market. But we are relatively new in the eyes of Japanese travelers. And so if they've opportunity to really introduce ourselves to the local traveler have them under understand the opportunity locally to use Airbnb domestically and begin to scale that business commensurately. And so, when you think about the scale of these markets where we are today, Brian and I characterized this as a medium-term opportunity, because the immediate opportunity is large, but it will take time for us to scale these individual markets such that they have an increasing impact in terms of our consolidated global results given the relative concentration to that." }, { "speaker": "Operator", "text": "And your next question comes form the line of Lee Horowitz with Deutsche Bank. Your line is open." }, { "speaker": "Lee Horowitz", "text": "Great. Thanks so much. A couple of I could? Maybe you, your online travel peers have given color that's what they think their long-term bookings growth how that looks like. I mean, I guess, given your leverage to alternative accommodations, because the assumption is that you guys should be able to go faster. Can you give any color maybe on sort of what you see is the long-term growth algorithm for your core business? And then, what new verticals may add to that on top of that? And then one follow-up if I could." }, { "speaker": "Brian Chesky", "text": "Yeah, Lee, maybe Ellie before you answer the question, can I just say one quick thing? Lee, o don’t think we do alternative accommodations. I think alternative accommodations is what our competitors OTAs do? I think alternative accommodations is a bit of a catch all that includes property managed homes, service apartments, boutique hotels. But I've never heard a customer say alternative accommodations. I hear them say Airbnb. I am going to book in Airbnb. I am going to get Airbnb. And I think we are really in a category of our own. So, just you know, I just think we don't refer to it and we don't think of it as alternative accommodations. So Ellie, over to you." }, { "speaker": "Ellie Mertz", "text": "Yes, thanks Lee. So we think about overall growth algorithm and our growth drivers it's exactly as Brian has described earlier in terms of talking about the opportunity. It really starts with focusing on our core offering and optimizing it such that we are effectively limiting the barriers, to trying Airbnb relative to alternatives in particularly hotels. And so that's why we focus so much on things like affordability and reliability, because we know, for many consumers, even though they're aware of Airbnb, there is a gap in terms of their booking confidence around what they are going to get from us. And so, every quarter, we work at reducing that gap of consideration. And when we look at the business from that perspective, there's a huge amount of growth room ahead even in our core markets, because we know so many consumers consider - continue to consider themselves as hotel guests. not necessarily Airbnb guests. And so, a lot of the optimizations and marketing are both raising considerations, as well as helping people frankly get through our platform more easily by making it easier to book, making it more personalized and getting them the right listing. So, we continue to focus on these core optimizations, because we believe it's a considerable future, current I should say and future growth lever that will continue to pay dividends in particular in our core markets but more globally, more generally globally across our platform. The second component is what I just spoke about in terms of responding to Justin. Our business today is over-concentrated in our core markets and is not necessarily reflective of the commensurate business opportunity across the globe. And so, over the couple of years, you should see, assuming that our global market strategy is successful. You should see the contributions to growth of those expansion markets grow every single quarter and I think the results that we've delivered so far this year suggest that that is, that is working. We just need to continue to scale those businesses such as they contribute to global growth more significantly." }, { "speaker": "Lee Horowitz", "text": "Great. And then, to the extent that sort of your improving 4Q outlook the acceleration is really nice, it is an output of some of the investments that you guys are putting into place driving the kind of gains that you want. Does this give you confidence to throw fuel on the fire and invest more aggressively behind those initiatives? And maybe how we should think about the way that that interplay should play through in terms of margin over the longer term?" }, { "speaker": "Ellie Mertz", "text": "Well, I think where we've seen success. One of the areas is core optimization and so we have built out the product roadmap around that because where we see success in terms of improvements we're making to the booking flow. We continue to keep a stable set of resources against those challenges. So that every single quarter, the price is getting better and we're delivering more gains from those product improvements." }, { "speaker": "Operator", "text": "And your next question comes from the line of James Lee with Mizuho. Your line is open." }, { "speaker": "James Lee", "text": "Great. Thanks for taking my questions. The question of core initiatives here, can you guys talk about the progress you have made and affordability, and quality that’s driving, maybe some of the increased bookings that we’ve seen in the quarter ? And also, can you give us an update on the outcome from a service transformation, maybe what's working, what's not and what's yet to be improved? And when do you expect to complete the process? Thanks." }, { "speaker": "Brian Chesky", "text": "Yeah, I got this. Hey James, these are great questions. I'm really excited about it. So, I'll take each, affordability and reliability and customer service. Affordability, it's funny, the first tagline Airbnb ever had was an affordable alternative a hotel. And it was the number one reason that people first tried to use Airbnb. Now I think today that's not the main reason people use Airbnb. I think they use it because they want to travel like a local. They want more space. They want homes in real neighborhood, better equipped, but it's really, really important that we don't ever leave our roots of affordability. And I think in the pandemic, I think there was so much demand, there was constrained supply, prices went up, and I think we addressed it from our affordability risk. So, a couple of years ago, we actually got very, very serious about driving more affordable in Airbnb. And we did a few things. The first thing we did is, we heard a lot of complaints about rising cleaning fees and I set the fees in Airbnb. So we introduced total price display, total price slates exactly what it sounds like you can click it on and see the total price upfront. And, since we’ve done that, more than 300,000 listings have removed or lowered their cleaning fees. But this has been huge. Next, we introduced weekly and monthly discounts. And now more than, - we're introducing more entry points in weekly, monthly discounts.Two-thirds of hosts now offer discounts. In fact, more than half of our hosts offer a monthly discount and now 70% of our nights booked are for monthly stays. We introduced a similar listings tool. So what we noticed was a lot of hosts were overestimating what they could make on a nightly basis, especially new hosts. So we built the tool for you to see other listings in your neighbourhood and 2 million hosts have used this tool. And basically, when most of who use this tool they realize that they need to make sure they are competitive and so it brings the prices in line. Now over the this past release on October 16th, we also added a couple more different features like price tips, hosts can now view suggested prices based on similar listings in that area and search tips. So throughout the guest search, we're going to offer relevant tips to help them find last minute stays. And probably the most important thing you can do to drive affordability is just continue to increase supply. But we know about almost every marketplace is that as supply goes up relative to demand prices come down and so that's a really big effort for us. The results have been the following: In the last two years, while Airbnb prices on a like-for-like basis, if you net out mix shift, has it remains fairly constant hotel prices have gone up considerably. So we believe that we've actually become more competitive from – cancelling relative hotels last year. That’s affordability. Now reliability. Reliability, as I said is probably the most important thing that we can do to drive more growth in our core business. If we do nearly 100 million nights a year in bookings, the question is, how do we get the next 100 million nights booked. And there is no silver bullet, but the closest thing to a silver bullet is quality and reliability. And there is a lot of things we are doing, quite literally dozens. But I can just pick two. The two things I’d pick are at the top, Guest Favorites, piloting the two million best listings in Airbnb. We also highlight the best 1%, 5% and 10% listings. As Ellie mentioned, we’ve got 200 million nights booked just in Guest Favorites. Now, this is amazing. Why it is great? Because number one, customer service contact, these listings are down , our profitability on a per booking basis goes up, NPS is up, because NPS is up that means that rebooking rates are up. That also means the word of mouth is up, but most importantly, a lot of people that wouldn't have considered staying in Airbnb, now would. I mean, I'm going to go on a NIM and say that while the average Airbnb is not as reliable as a hotel, I believe the average Guest Favorite is. And we have two million to choose from. Two million listings is more inventory than Hilton or Marriott, nearly combined, by the way. So there's a lot of selection here. At the bottom-end, just like any company you need to make sure you reward the top performers and you also deal with the people that aren't performing. We've removed more than 300,000 listings over the last year, the last two years of hosts that weren't meeting our quality standards. So, these are just some of the things we're doing on reliability. The last is customer service. And we are going through a really exciting transformation on customer service. I don’t want to be one of the CEOs just brings up AI every earnings call, because I think you got a happy measure, but we are seeing some really great progress on AI-powered customer service. The way we think about customer service Powered by AI is in three phases. Phase 1 is the phase we're in right now. If you were to most of - first of all most of our customer contacts, we get over 10 million contacts here, most of the contacts that we anticipate getting in the coming years aren't going to be phone calls. They're going to be chatting through the App. I think really personally don't like calling customer service and having to dial, and I want to be able to chat. And chat AI can intercept. And so, we think in the future the vast majority of our chats are going to be intercepted in the end directly by the AI agent. And so there's really three phasing for this. Phase 1 is just answer basic general questions. We're rolling out a pilot that could answer basic general questions. Phase two, is personalization, personalize the questions. Phase three is to take actions. So I’ll give you an example, let me just give you one example. Let's say, I were to contact customer service and I’d say, how do I cancel a reservation. In Phase one, what we are doing now AI agent will answer – copy even better the average customer service agent how do cancel a reservation. So Phase 2 is how you cancel reservation step-by-step. Phase 2 personalization, they’ll say, hey Brian, I see you have a reservation coming up in Los Angeles next week. Here is how you cancel that reservation. And Phase three is taking actions. It would say hey Brian. I see you have a reservation come to Los Angeles. Would you like me to cancel it for you? Just tell me yes and I’ll do it for you. I can even handle the rebooking. So this is where we think customer service can go enabled by AI, and we've hired some of the best people in the world to work on this and I really excited to tell you more progress about it." }, { "speaker": "Operator", "text": "And your next question comes from the line of Doug Anmuth with JPMorgan. Your line is open. Doug, if you could check to see if your line is on mute. And moving forward to our next question from Kevin Kopelman with TD Securities. Your line is open." }, { "speaker": "Kevin Kopelman", "text": "Thanks a lot. A question on the new services that are expected to come out next year. Do we think of those new services as driving some revenue growth right off of that for the second half next year? Or areyou anticipating more gradual rollouts in more of 2026 revenue drivers? Thanks." }, { "speaker": "Brian Chesky", "text": "Yeah, I can take that and Ellie feel free to add. Kevin, the answer is a little bit of both, I mean, we are, the way like – let’s just back up? So Uber, let's just take Uber. I admire that company. They've done really well. When they launched Uber Eats, they launched in one market. And they had it city-by-city market and was very, very gradual. We are not going to do that. We're going to be much more aggressive. When we launch the new offerings next year, they are going to be available immediately in more than a 100 cities around the world. So we believe in trying to reach scale a little more quickly just given how big and how mature we are. So, because of that, we do think there will be some incremental revenue next year, that will hit the financials. But I also just want to like step back and just say that what we've learned from Uber Eats, from Amazon category expansion, from Door Dash, from we can go down the list of marketplaces is, when something's built off of small base, you've got to be patient. I think that there's a, multi-billion dollar revenue opportunities, multiple of them that will be introduced next year. But I also would point people to a 5-year Horizon. For a number of these things to really reach scale, not, they won't reach scale in just a year or two. And part of that is it's a network effect business. We want to roll it out carefully. We want to make sure it’s really well done. Ellie, do you want to add anything?" }, { "speaker": "Ellie Mertz", "text": "The one thing I would add is, Kevin, we will obviously give you much more detailed color next year on the next earnings call. But what you should anticipate is that, some of the investment behind those new services will front run the revenue. So you'll begin to see those expenses or those investments I should say, at the beginning of the year, whereas the revenue will start to scale once we've released the new offering." }, { "speaker": "Operator", "text": "And your next question comes from the line of Patrick Scholes with /Truist. Your line is open." }, { "speaker": "Patrick Scholes", "text": "Great. Thank you. Good evening. I want to go back to the first question I was asking and ask it maybe a little more direct. Can you provide us in percentage terms what your year-over-year net unit growth was in the quarter? Thank you." }, { "speaker": "Ellie Mertz", "text": "On Supply?" }, { "speaker": "Patrick Scholes", "text": "Yeah. Supply, correct." }, { "speaker": "Ellie Mertz", "text": "Yeah so we had over 10% growth of supply as of the end of Q3, which is down several points based on the removals." }, { "speaker": "Operator", "text": "Your next question comes from the line of John Colantuoni with Jefferies. Your line is open." }, { "speaker": "John Colantuoni", "text": "Great. Thanks for taking my questions. Wanted to ask about the Experiences offering. As you get closer to the relaunch next year, how are you thinking about sort of the pace of expansion and scalability? I know, you'd like to keep experiences unique like your accommodations offering. But I'm curious if that means it will take longer to build supply behind it. And maybe, you could also sort of give us a sense for any investments in Tech or marketing that you plan to make around the relaunch of Experiences? Thanks." }, { "speaker": "Brian Chesky", "text": "Yeah, John, really good question. I think we are able to reach a sweet spot where I think we can - we're going to offer something that's really, really unique and we will scale. Now, I want to just moderate expectations that again, these Journeys are going to be multi-year journeys that I do not think that there's a choice. I don't think we need to make a choice between you mean unique or being at scale. I think - by the way, I think our core business proof that a business that’s approaching a hundred billion dollars in gross sales a year. And it's pretty unique, it's pretty different than a hotel. So, I'm not going to certainly promise that experience we'll get to that size, but we do think we have something that's very unique, very scalable available around the world. As far as the Tech and marketing, the great thing about our business is, are you not anticipate very many businesses in the next five years are going to need significant investments. We are certainly nothing like many other companies where they have a lot of either capital allocation or major technical investments or even major marketing investments. Here's another way of saying it. We've already made most of the technology investments. When you see the last four years, a huge amount of what we've done is rebuilt the company from the ground up, not just to make it stronger to offer homes, to make it an extensive platform. One of those companies that we learnt from again was Amazon. I know, I talk a lot about Apple. A lot of people reference Apple when they talk about them because of their big launches. But Apple, Amazon is a very good reference point. Initially, as you know, they built a bookstore. They were based on like, IBM. They had to rebuild the platform and I’d extract the platform and you might call compromising to build offer many room verticals. And so, we want to take every new platform that works certification and build it for the next decade for like 50 or 100 different categories, just like Amazon. So now, I think with the timeline when we offer them, but we've rebuilt the technology already most of it to be able to do that. Now with marketing, I don’t think we are going to market everything as standalone businesses. We really like the idea of marketing, all of Airbnb. In marketing there's these two choices. Are you a house the brand or a branded house? We're a branded house. We're one App. We are one brand and we want to market everything in one Ad. So that's a little bit more how we're going to approach it. And so I think for those reasons we will, of course, be investing. I want to be clear, we of course be investing, but it's not going to be like many other companies where they have to go deep and sort of right and get the new business off the ground." }, { "speaker": "Operator", "text": "And your next question comes from the line of Jed Kelly with Oppenheimer. Your line is open." }, { "speaker": "Jed Kelly", "text": "Great, great. Thanks for taking my questions. Just two if I may? Can you talk about in areas such as New York City, where the regulations are becoming increasingly difficult? Can you talk about how we should view those and then potentially leaning more into hotels? And then, as you grow outside some of these non-core markets, is it going to be more brand-driven or will you lean more into Performance Marketing? Thanks." }, { "speaker": "Brian Chesky", "text": "Hey Jud. I'll take that. Yes, so let’s talk about New York. Actually, I would like to talk about two cities. I want to talk about a tale of two cities. New York City and Paris. Because both cities need some major decisions on Airbnb recently and I want to distinguish differencing the two. New York City has, might be this before the housing crisis and that’s a very real thing. And so the decided one of the ways they try to feel with that was banning Airbnb. And a year ago, Airbnb was banned and the theory was that if you ban Airbnb, a bunch of homes will come back on the rental market and prices will come down. Well, for the first time we've gotten a year-long longitudinal study of what happened in Airbnb into the city. Rent prices in New York City are not down. In fact, they're up 3.5%. And by the way, hotel prices are now up to 7%. So, a year after banning Airbnb, it's more expensive to live there. And it’s even more expensive to travel there. And I think that New York City is now a cautionary tale of how to deal with Airbnb. Now, the other side is Paris. Paris, France. A couple years ago, we knew the Olympics were coming to Paris, we started working with the City of Paris. And I think that Paris tood a different approach and set us thinking that Airbnb as a problem they started that Airbnb is a solution to their problems which were they weren’t going to have enough housing for the Olympics. And so in the last year, we went from a 100,000 homes in Paris to 150,000 homes in Paris And I'm pleased to announce that 700,000 guests stayed in Paris over the course of the Olympics. 700,000 and that's like 8 or 9 Olympics stadiums worth of guests. Our favourability in Paris has not been higher in years. And cities all over the world are now coming to Airbnb and saying we want to be Paris not New York, can you help us, because there are thousands events going around the world. So I think that’s the most important point I would make that New York and Paris are a tale of two cities and we can be a solution to the problem. We are not the problem. But specific to New York, I’d just say two things. Number 1, I remain optimistic that there will be a task to us to re-enter New York and people be able to stay in homes in Airbnb because there is a constrained number of hotels in New York. And by the way most hotels are only in Manhattan. And they're in Midtown, Manhattan. Do you want to stay in any part of the part of the Manhattan, the Brooklyn, The Bronx and Island Queens you are going to be pretty limited. And to answer the other part of your question, yes We absolutely welcome hotels on Airbnb and we are going to be adding more hotels to Airbnb. Because for Airbnb the win hotels don’t have to lose we own hotels a night and we believe that you should be able to find homes and hotels on Airbnb. So yes, we are focused on hotels in New York City on Airbnb. We are focused on Airbnb’s and stay New Jersey, stay Jersey City, which is actually closer Manhattan, other parts of Manhattan. And I am optimistic that New York there will be a workable solution at some opoint in the future, I don’t know when that will be and they can follow the lead of Paris." }, { "speaker": "Operator", "text": "[Operator Instructions] Our, next question comes from the line of Stephen Ju with UBS. Your line is open." }, { "speaker": "Stephen Ju", "text": "Great. Thanks. So thanks for taking the question. Som Brian, I guess, on the Experiences, again I'm wondering if there's going to be an angle where this could be something that increases the overall engagement or even raises the overall frequency of usage for you, because, maybe I don’t stay in an Airbnb every weekend. But maybe I tried Airbnb Experience every weekend. So I'm just wondering like how the product development path and how utilization will shift as your selection goes? Thanks" }, { "speaker": "Brian Chesky", "text": "100%, I mean, this is a great point Stephen. Experiences, I absolutely like within, like Airbnb is typically something you book once or twice a year, very, very few people will book Airbnb every month. Unless you are like incredibly prolific traveller and so we struggle from the point, where on the 1 hand, like our average purchase price is over $500, so, like, like the economics are great, on the other hand we have the challenge of low frequency, most people don't travel that frequently. Expansions are going to be, I think, one of many new offerings that you can increase the frequency that can make Airbnb go from an annual App to a monthly usage App or even for some people weekly usage App. And the reason is because Experiences will not be limited just when you travel. Just like they are today. We are designing products, Experiences and new services that will be great when you travel, but you could book them in your own home town like and I think there's a real problem which is what do you what do you want to do on a Saturday? And if you're with your family. Other than the things you already do. If you got a Friday night, what do you do other than going to a restaurant, staying home and watching Netflix I think there is a market for a locals who want to do unique things and I think traveling is how they are going to be expose Experiences, but I do think that some of the people will try them back home. I think the really big opportunity here kind of similar to iPod, when iPod launched you can only use it with a Macintosh. And the really big game for the iPod was once it became Windows compatible. When iTunes be able to Windows all the people that end on the Mac, but iPod end of sales surged. But I do think there is potential place for that down the road experiences. We're gonna position it for most of travelers. But it’’s not going to be exclusive travlers and I do think people are going to come to work frequently." }, { "speaker": "Operator", "text": "And there are no further questions at this time, I would now like to turn the call back over to Brian Chesky." }, { "speaker": "Brian Chesky", "text": "All right. Well, I just want to thank everyone for joining today. And just to recap, revenue was $3.7 billion, which is 10% higher than a year ago. Adjusted EBITDA was $2 billion and our trailing 12 months cash flow is $1.1 billion. Now this is representing a free cash flow margin of 38%. Our strong enables to repurchase $1.1 billion of our common stock this quarter and we're continuing to innovate and our product just keeps getting better. I am so proud that we accomplish and I am satisfied with that. Thank you all for joining." }, { "speaker": "Operator", "text": "This concludes today's conference call, you may now disconnect" } ]	Airbnb, Inc.	115,705,393
ABNB	2	2,024	2024-08-06 16:30:00	Operator: Ladies and gentlemen, good afternoon, and thank you for joining Airbnb's Earnings Conference Call for the Second Quarter of 2024. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Angela Yang, Director of Investor Relations. Please go ahead. Angela Yang: Good afternoon, and welcome to Airbnb's first quarter of 2024 earnings call. Thank you for joining us today. On the call today, we have Airbnb’s Co-Founder and CEO, Brian Chesky and our Chief Financial Officer, Ellie Mertz. Earlier today, we issued a shareholder letter with our financial results and commentary for our second quarter of 2024. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We provide a reconciliation to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I will pass the call to Brian. Brian Chesky: All right. Good afternoon, everyone, and thanks for joining. Q2 marked another strong quarter for Airbnb. We had 125 million nights and experiences booked. Revenue increased 11% year-over-year to $2.75 billion. Net income was $555 million representing a net income margin of 20% and we generated $1 billion of free cash flow. Our total trailing 12 month free cash flow was $4.3 billion, our highest ever, and our strong cash flow allowed us to repurchase $749 million of our shares in the quarter. And as of the end of Q2, we had $5.25 billion remaining on our share repurchase authorization program. Now during Q2, we continue to make progress on our three strategic priorities, which again are making hosting mainstream, perfecting our core service and expanding beyond the core. So I’ll share a few highlights on each. First, we are making hosting mainstream. Last year, we shared a commitment to make hosting just as popular as travelling in Airbnb. We've been focused on raising awareness around the benefits of hosting and providing better tools for hosts. In Q2, we surpassed 8 million active listings driven by continued growth across all regions and market types. We're not just growing supply and we're also committed to ensuring that it's high quality supply. Since launching our updated host quality system last April, we’ve removed over 200,000 listings that failed to meet our guests expectations. And we'll continue to raise the overall quality of listings on Airbnb so we can consistently deliver high quality stays. Second, we're perfecting our core service. We remain focused on making Airbnb more reliable, affordable and a overall better service for hosting guests. We’ve rolled out hundreds of new features and upgrades over the past two years to do this. This includes launching major reliability initiatives like guest favorites which make it easy for guests to find the best listings in Airbnb. Now since launch, last November, we've seen over a 150 million nights booked at guest favorite listings. We've also made dozens of smaller changes that have led to improved usability and booking conversion. These include things like simplified set up and login, improved map, clear cancellation policies and so much more. Now we've made tremendous progress and we'll never stop improving Airbnb. We're going to continue this commitment. And finally, perhaps most excitingly, we are expanding beyond our core. We continue to drive growth by investing in underpenetrated markets. In Q2, growth of gross nights booked on an origin basis in our expansion markets significantly outperformed our core markets on average. Our core markets again are US, UK, France, Australia and Canada. This is largely due to the success of our global expansion playbook which includes a more localized product and marketing approach. We're also expanding Airbnb’s brand positioning beyond travel accommodations with the launch and roll out of Airbnb Icons which is a new category of extraordinary experiences that we launched in May. Now since launch, we see nearly 40 million views of Icons on our site. Helping people understand that Airbnb offers more than accommodations will be critical as we expand our offerings in the coming years. Now, looking back to Q2, we saw a number of positive business highlights. First, guests are increasingly booking on the Airbnb app. We've continued to optimized our mobile website’s app downloads and we believe our approach is working. Nights booked in our app during Q2 increased 19% year-over-year. Now these bookings now comprise 55% of total nights booked and this is up from 50% in the prior year period. Now in addition to our success of mobile downloads and bookings, we're continuing to see growth of first-time bookers on our platform with the highest levels of growth seen in the youngest age demographic. Second, Airbnb is uniquely positioned for special events where continuously more guests choose Airbnb for major holidays and events. The week of July 4th for example represented our single highest week of revenue ever in North America and we saw similar trends in Europe. Now in anticipation of the Olympics which is in Paris, nights booked in Paris through Q2 were more than double what they were this time last year. Additionally, cities hosting matches during the recent Euro Cup in Germany saw an average of more than 20% year-over-year increase in nights booked. And supply has increased to meet the higher demand. So we have 37% increase in active listings in Paris in Q2 compared to the year ago. And these events, what they really do is they highlight Airbnb’s unique ability to disperse travel and spread economic benefits by allowing people stay in local neighborhoods where there are no hotels. Finally, supply growth is improving on Airbnb. We made huge strides for supply growth, we remain just as focus on supply quality. As we improve quality, we believe more people will try Airbnb unlocking even more growth. We have two major initiatives underway to help us do this. First, we're removing low quality supply. As I shared earlier, we've removed over 200,000 listings since April of last year. Second, we're making it easier for guests to find the best stays on Airbnb. We launched guest favorites as well as top listing highlights, which show the top 1%, 5% and 10% of eligible homes on Airbnb. These new features make it easy for guests to find the highest quality homes on Airbnb. In Q2, we also saw active listing managed by Superhosts, some of our highest quality hosts, increase 26% year-over-year. We're proud of our Q2 results. Now, turning to Q3, we're looking forward to another record summer travel season. We're encouraged by the excitement around the Olympics and the Euro Cup and we're also encouraged by the relative strength of Latin America and Asia Pacific which continue to be our fastest growing regions. However, we are seeing shorter looking lead times globally and some signs of slowing demand from US guests and our Q3 outlook incorporate these recent trends. We are watching these trends closely along with the impact any macroeconomic pressures might be causing. And we're continuing to execute against our growth strategy by improving our service, expanding in less penetrated markets and introducing new offerings. We believe this growth strategy will over the long term offset any transitory macro trends. So with that, Ellie and I look forward to answering your questions. Operator: [Operator Instructions] And your first question comes from the line of Ron Josey with Citi. You're line is open. Ron Josey: Great. Thanks for taking the question. I have two please. Brian, just with your last comments on slowing lead times and what not in North America. Can you tell us a little bit more about that when you saw those trends sort of first hit. And then, how it offsets the strength from the Olympics and UEFA and everything else? And that's question one. And maybe a bigger question when we think about expanding beyond the core and perfecting the core service. Post summer release, posts winter release we've seen a lot of key improvements across Airbnb with Guest Favorites, with Icons and the list goes on and on, , how does - when we think about the coming winter release and throughout ‘25 and everything else, how are these newer services helping to influence call it the Airbnb of tomorrow? Thank you. Brian Chesky : Yes, why don’t Ellie you take the first one about slowing lead times and when we started seeing these trends and I'll take the second one. Ellie Mertz : Yeah. Yeah, absolutely. So let me double click a little bit in terms of the trends for lead times since the beginning of the year. In both Q1 and Q2, what we saw with that lead times were basically equivalent with what we had seen in 2023. So there wasn't really any timing shift behavior in terms of when guests were booking. What we’ve seen more recently and in particular in July is a shrinking of the lead times and in particular what we've seen is that there continues to be very strong growth of the shorter lead times. So anything from same day to next week to a couple of weeks from now. But what we're not seeing the same level of strength is in those longer lead times. So two months from now, what you’re booking for Thanksgiving what you’re booking for Christmas, and so it's that I would say softness in terms of longer lead times as a big factor in terms of the outlook that we've provided. What I would say additionally is that, over the last couple of years as we emerge from covid, there were several periods where we saw some volatility in terms of overall lead times and in particular some hesitancy for consumers to book those longer lead time trips. I suspect that's what we're seeing right now and the - I would say the silver lining with regard to the trends that we see right now, it's not that consumers are not necessarily going to book that trip for Thanksgiving or Christmas. It just appears that they have not booked it yet. So we're closely following all of the trends on lead times, but it is a factor that informs the outlook that we provided for Q3. Operator: And your next question comes from the line of Doug Anmuth with JPMorgan. Your line is open. Brian Chesky : Sorry, sorry. Operator: My apology. Brian Chesky : Sorry, there was a second part of the question. So, Ron, to answer your question about expanding beyond the core business. Where we are is we spent 16 years building a business that's approaching $80 billion in gross booking value that's basically one category, which we call Airbnb which is short term accommodation. It's been pretty amazing how far this single product has gone. And we haven't really charged other than like essentially travel insurance, we haven't really ever really expanded beyond our core business and we do have long-term stays which are [17%] (ph) of nights. We haven't done very much. We began before the pandemic preparing to expand Airbnb. And then when the pandemic hit, we cut back a lot of our resources. We got focused, went back to our roots and really focused on rebuilding our platform, becoming lean, becoming a functional organization and we now have essentially the same amount of employees as before the pandemic and double the revenue and that explains why we have 41% free cash flow margin, one of the most profitable companies in tech. We're now beginning to prepare the next chapter of Airbnb. And I want Airbnb to be one of the most important companies of our generation and to do that, we're going to do more than one thing. We're going to do multiple new things. We're going to have to have multiple new products and multiple new services. This fall, this October, we're going to be launching a new host service which is really important. It's essentially a co-hosting marketplace. So, there are people that have homes but they don't have time. There are other people in the world that have time but they don’t have a home. And so, there's a Venn diagram of people today who have both that get host. But what if we can match those two people together? That would unlock a lot more inventory. That's what we're going to be launching later in October. Then next year we're going to begin to expand Airbnb truly beyond our core business. And we're going to be launching - we're going to relaunch Experiences. I've been asked about Experiences probably every earnings call since we’ve been public, rightly so, because it's very exciting. We've learned a lot of lessons from Experiences. They need to be more affordable. They need to be more unique to Airbnb when you think so you can only find on Airbnb. They should be merchandised, videos not photos. They should be discoverable in the app and we should market them. If we think we do these five things, we think we'll have a hit on our hands and we're working on that. We also have new guests services and new host services that we're launching next year that we're working on. And then every year starting next year, we're going to launch new products and services. I look at Apple, I look at Amazon. Apple at one point was selling iMacs, Amazon was only selling books. We've gotten bigger than either of those companies just selling short-term rentals. But we're ready to go beyond short term rentals. So, the new Airbnb, to answer your question Ron, will be about a lot more than short-term rentals. It's going to be about long-term stays. It's going to be our guest services, host services and many new offerings and you'll begin to see that next year. Operator: And your next question comes from the line of Doug Anmuth with JPMorgan. Your line is open. Doug Anmuth : Thanks for taking the questions. Ellie, just to follow up on I know you talked about the shorter booking window. Are you seeing any change in activity around pricing or class of property? And is there anything to call out across cohorts or income levels? And then, Brian just circling back on expanding beyond the core, are there any expansion markets in particular that you would call out where you're seeing particularly strong traction? Thanks. Brian Chesky : Yes. So, why don't Ellie, you take the first. I’ll take the second. Ellie Mertz : Yeah. so Let's talk a little bit generally about ADR, so question was like what are people are actually purchasing on the platform. I would say, generally, so far this year what you've seen is a little bit of ADR appreciation globally. In particular, obviously, but more recently in North America. And what we see there is a big driver of the ADR appreciation is big shifts, which you can assume is what it sounds like people choosing more expensive or larger properties. And I think part of the read through from that can be oh, people are choosing more expensive listings. Therefore, you are seeing stronger demand from higher economic demographics. I think that is one read through. I think another read through is that, if you think about the value proposition of Airbnb, it's that we offer these larger properties and on a per guest basis, they can be quite affordable and frankly more affordable than a hotel. So I think part of that ADR mix shift appreciation that you see is frankly people gravitating to where we actually have some great value, which is the larger Airbnb that that do provide value on a guest level. Brian Chesky : And to answer your question about expansion markets, maybe a framework I can give to think about how we want accelerate growth, listen, we want to be growing a lot fast than we are. We want to be growing in healthy double-digit growth - double-digit growth and I think we can. And the way we're thinking about accelerating growth is through short-term, medium- term and long-term. Short-term is really optimizing our core business. It's really around affordability, about having high quality stays and just conversion rate increases. Long term is really about new products and services. So, the question you asked about international is interesting because it's kind of like a medium term horizon, like one to three years. And to frame this, Airbnb is in 220 countries and regions. We're one of the most global companies in the world on the Internet, 220 countries and regions. We operate nearly in every country in the world. But there's only really five markets where we're penetrating. And those markers are the US, UK, France, Canada and Australia. And you'd think like, well, if there was one company in the world that would truly be like have a lot of international penetration it’d be a global travel network, right? A website where you want to travel, use one platform to travel around the world. So there's a number of countries. Just to give you a couple of examples of our some big expansion markets, Germany and Brazil we've seen a lot of progress. Those are huge travel markets and the biggest travel markets in the world. And we're continuing to go bigger. In Europe, Italy and Spain, we have low penetration compared to France and UK and these are major destinations. Then in Latin America, we've had a lot of progress in Brazil but there's really Peru, Chile, Colombia, Argentina, these are a huge opportunity markets, and that's Latin America is the fastest growing region alongside Asia. And Asia, you really have like the big four, big five countries. So you have China, Japan, Korea, India and then maybe we could kind of call out Southeast Asia as a holistic region. So what we're going to do is we have an international playbook, which is really product and marketing. First, need to localize the product, you need to make sure you have the right regulation in place. You need to make sure you have the right foundation. We've highlighted in our Investor Letter that we’ve retooled our product for Asia. Asia are different character counts. And so it's more laborious in certain languages to type in so like in Korea and Japan they prefer to do browsing than search. So we've had to retool our product and that's yielded some huge conversion rate increases. So some of these are going to pay back sooner, like some of North - like Switzerland, Belgium, Netherlands, they're going to pay back sooner. Japan is going to be a longer game, but that's one of the biggest travel markets in the world. And I literally think there are tens of billions of dollars of gross booking value increase just by getting all the aforementioned countries to the current market penetration of Canada or Australia. If we can get those countries to Canada, Australia there's tens of billions of dollars and it's just something we've had to focus - we're going to focus on. It's something we hadn't focused on in the last four years as much. We really want to solidify our core business, but now we're focused on it. Operator: And your next question comes from the line of Richard Clarke with Bernstein. Your line is open. Richard Clarke: I just want to unpick the Q3 revenue guidance a little bit more. I guess the - if I look from the balance sheet your funds held on behalf of customers, to me it looks like it's up about 13% year-on-year. So it looks like you're carrying more bookings into the quarter and then you're talking about shorter lead times. So does that mean more bookings in the quarter for the quarter. So just trying to square that with why revenue is slowing down in your guidance? Ellie Mertz: Yeah, thanks Richard. So, obviously, that that energy is balanced on - on the balance sheet gives you some indication of the backlog. I would not take those balance sheet items as a one for one read through in terms of the revenue that will be recognized over the course of the quarter. A couple of deviations in terms of why they might not match. One is obviously a good portion of the bookings that we will recognize in a particular quarter are still to be booked within the quarter? That's one aspect. The second is the balance sheet items will reflect the timing of the payments, the - whether it’s pay less upfront or the entirety of the payment and so they're just not a one for one guide. All they do, they do obviously give a time stamped point in time view of the backlog that we have. Operator: And your next question comes from the line of Eric Sheridan with Goldman. Your line is open. Eric Sheridan: Thanks so much for taking the question. Maybe I can ask a two-parter coming back to the booking window. When you've – what you’ve seen over the last couple of years in terms of the booking window evolving from where it was pre-pandemic to where it is post-pandemic how much differ just that booking window look today versus maybe 2019 as opposed to today versus one in two years ago. And when you think about what that shift looks like, how much of that do you think in terms of a shortening booking window are elements of demand-driven Dynamics where the consumer might want to spend less money and be more discerning. Or just elements of normalization that are working in the way back into global travel? Thank you. Ellie Mertz: Thanks, Eric. So, let's talk about lead times over time. If we look at where we were say in Q2 of 2019, the average lead time across the platform was within one or two days of what it was in Q2 in ‘24? So from the kind of pre-covid to last quarter, there hasn't been some material shifts. What you did see through the path of covid was initially, we saw a massive reduction in lead time because people had no confidence in terms of their ability to book far out. That, that reversed in say the 20 to 2022 to ‘23 time period where people are so eager to travel that they were booking way in advance of their kind of normalized patterns to make sure that they had the trip on the book. They got the most attractive listing at the best price by booking early. And I think fast forward to ‘24 you're seeing up and up through Q2 a very much return to normal. So hopefully that's helpful in terms of the overall four-year arc. In terms of having some color commentary in terms of what we're seeing today, just to reiterate some of the color I provided at the beginning of the call. The last minute bookings are incredibly strong. So they are, I would say much higher in growth rates than what we are guiding to in terms of the average. There seems to be a lot of desire in terms of making sure you get your summer travel in at very elevated rates. But it's being offset by that portion of bookings which is for us about half of the overall bookings, which are a month or longer. And I think it's a minor - it's a minor softness, but it does have impact in terms of our backlog just given the concentration of bookings that happen more than a month in advance. There's just a modest amount of softness that is bringing the average lead times down. And I think what we’ve seen in the past is from time-to-time whether it be a new COVID variant, whether it be a macro headline, whether it be like last year the outbreak of war in Israel. People from time to time have moments where they are not booking in the same timeframe that they did in prior periods, and that's what we're tracking closely right now. Operator: [Operator Instructions] Your next question comes from the line of Brian Nowak with Morgan Stanley. Your line is open. Brian Nowak: Thanks for taking my questions. Maybe I'll squeeze in two. Let me ask one on the marketing expense comments for you Ellie. You mentioned in the guide marking expense has been real faster than revenue in the third quarter. I guess, the question is how do we think about performance versus brand expend and I think you sort of learned about your marketing spend over the years sort of gives you confidence this could resonate even faster room than growth this time around. And then one for Brian and sort of Gen AI and philosophical strategy. There's a lot of talks that are about top of funnel Gen AI travel assistance. How do you think about taking your leading supply that you have maybe partnering with hotel partners to create a really differentiated top of funnel alternative and hotel booking assistant using all these large language model capabilities? Ellie Mertz : Yeah, so, Brian, let me let me talk a little bit about our marketing spend. Let me just back up before I talk about Q3 and remind you of the full year guide that we provided back in February. What we shared in February is that, for the full year we were looking to deliver an EBITDA margin of a minimum of 35%, which was obviously down slightly from the nearly 37% we delivered in ‘23. And the intent on guiding to margin compression on a year-over-year basis was to allow us the flexibility to invest in growth. And what you've seen so far this year is that for H1, marketing as a percent of revenue was effectively flat with where it was in ‘23. But we do intend to lean into those growth investments in the back half of the year starting in Q3, and that's obviously what informs the EBITDA guide that that you saw in the letter. In terms of where we are leaning in on marketing in particular and the confidence around the various channels, let me just talk about a couple of the components of the increase in marketing. So first, consistent with the conversation Brian Chesky just had on international markets. What you'll see in Q3 is that we will be layering on a handful of incremental markets that we will be targeting and effectively turning on our global playbook. In particular, you'll see us try or intend to extend our success that we've seen in Latin American countries like Brazil and Mexico to other markets in that region. Places like Peru, Colombia, Chile, Argentina so there will be some layering on of those incremental markets. We feel like we have had pretty good success there. Obviously it takes time in terms of investments in a market both from a product perspective as well as a marketing perspective to reaccelerate growth. But as the results have shown in terms of the differential between growth rates in our expansion markets and our core markets we feel like our expansion efforts have been successful and so, rolling them out to incremental markets will be helpful over the medium term. In terms of incremental performance marketing, what we've shared with you today that has continued into Q3 is that based on a lot of optimizations that we've made to our performance marketing efforts. We've been able to maintain extremely high efficiencies and so where we see those we do lean in and have quite high confidence in terms of returns. Brian Chesky : And why don’t take your second question. So Brian Gen AI ChatGPT launched late November 2022. When it launched, I think we all got like incredibly excited. It was kind of like the moment probably some of us first discovered the Internet or you know maybe when I come with launch. And when it was launched you had a feeling that everything was going to change. But I think that's still true. But I think one of the things we’ve learned over the last say 18 months or nearly two years 22 months since ChatGPT launched is that that’s going to take a lot longer than people think for applications to change. If I were to think of AI, I'd probably think about it in three layers. You have the chips. You have the models. And you have the applications. There has been a lot of innovation on the chips. There has been a lot of innovation on the models. We have a lot of new models and there's a prolific rate of improvement in these models. But if you look at your home screen which of your apps are fundamentally different because of the AI? Like fundamentally different kinds of generative AI, very little especially even less in e-commerce or travel. And the reason why is I think it's just going to take time to develop new AI paradigm. ChatGPT is an AI model – interface if that could have existed before AI. And so, all of our paradigms are pre-AI paradigms. And so what we need to do is we need to actually develop AI applications that are needed to the models, no one's done this yet. There's not been one app that I'm aware of at the top 50 app in the app store in the United States that is a fundamentally new paradigm as fundamentally different FC multi-touch was to the iPhone in 2008 and we need that interface change. So that's one of the things that we're working on. And I do think Airbnb will eventually be much more than a search box where you type a destination, add dates and find a listing. It's going to be much more of a travel concierge is having a conversation, learning adapting to you. It's going to take a number of years to develop this. And so, it won't be in the next year that this will happen and I think this is probably what most of my tech friends are also saying, it's going to just take a bit more time. But the answer to your question on what’s possible, a new interface paradigm would allow us to attach new businesses. So the question is, what permission do we have to go into a business like hotel? Well today, we have permission because we have a lot of traffic. But if we had a breakthrough interface we have even more permission. Because suddenly we could move top of funnel and not just ask where you're going but we could point to we could inspire where you travel. Imagine if we add an index of the world's communities we told you we had information about every community and we can provide the end-to-end trip for you. So, there's a lot of opportunities as we develop new interfaces to cross-sell new more inventory. And just to remind everyone we own hotels nights. We bought that before the pandemic. It’s one of the most popular hotel booking apps in the world and we are still investing in hotels. So absolutely there are opportunities down the road with this new interface to sell new things including hotels and everything. Operator: And your next question comes from the line of Justin Post with Bank of America. Your line is open. Justin Post: Great thanks for taking my question. Just on the North America and Europe markets presumably growing a little slower than the average for the company. Any signs of kind of cyclical or macro pressure like shorter trips or people trading down that that could end in and any that could maybe drive some acceleration when the period ends. And second, how do you feel about your market share in those two key regions? Thank you. Ellie Mertz : Yes, so let me talk. Let me talk a little bit about what we're seeing in both, North America and EMEA. I would say I would go back to my prior comments in terms of just the lead times. That that commentary is true globally so it applies to both northern - North America and EMEA. I would say EMEA has been relatively stable quarter to-date. And so it is not necessarily part of the broader moderation story that we have shared. In terms of North America, there's a handful of components. One is the shorter lead times I would say. A second is North America has a concentration of our long-term stays, nights and what we've seen over the last year is that short term days have grown more quickly than long term stays. And so, the LTS to growth rate is a drag on the average that has an outsized impact on North America and we've just comped with the changes that we made a year ago in terms of our LTS fees which is a bit of a headwind for LTS generally on the platform, but in particular in North America The one other thing I would add in terms of just providing some color on what's happening in the US is couple of regulatory comments. One in particular that we're watching is that in California, the total price display and cancellation grace period, regulations went in went into place on July 1st and we think that's been a little bit of a headwind to our California business. Our California business if you include both guests who reside in California as well as guests who are travelling to California, which is what the new rule is applied to is about 10% of our GVV. So it’s an area that we're watching quite closely just see how quickly consumer behavior normalizes after these regulations have been put into place. And into the comments I made earlier on ADR, I would say we haven't really seen a material move towards trade downs much of the contrary people continue to book our larger more expensive listings. And then in terms of shorter trips, the average from playing has gone down, but that is really a function of the mix shift between short-term rentals growing more quickly than long-term rentals. Less so people choosing a three day trip versus a four-day trip. So I don't think we've seen that the type of tree down behavior that that you're likely asking about. In terms of the second component of your question, market share. When we look at market share, we look at the market of night stays across accommodations. And so that obviously includes all the hotel nights that are either booked directly through hotel or booked through an intermediary. And when we look at market share on that basis is what we see is that, in Q2, consistent with prior quarters, we continued on a year of your basis to gain market share in terms of total nights stayed over the universe of hotel and other travel accommodations. That is also true on a regional basis. We feel like we're doing quite well. As we across the world continue to gain market share. Operator: And your next question comes from the line of James Lee with Mizuho. Your line is open. James Lee: Great. Thanks for my questions. Two here please. First on experiences. What are some of the frictions and difficult problems you're trying to resolve here. It seems like you have plenty of supply, plenty of listings. So that doesn't seem to be that issue. Can you help us understand something key paint points for both suppliers and customers? And second, I once again noticed in North America and EMEA, you have call out that to see a mix shift to non-urban markets and just want to get some more color on that. Urban markets in general, are you seeing weaker demand or seeing increased competition in the hotels? Thanks. Brian Chesky : Hey, James, I'll take the first question. So there's five things that we're looking for to do with experiences. The first thing is we want them to be a better price selection. Right now, we think we can have - we can offer more affordable experiences that younger people especially Gen Z could afford. So that's the first thing. We don't really have enough affordable listings. The second thing is, we need more unique inventory. It's really good. The inventory we have is good. In fact the five star rating average for experiences is higher than the five star rating for homes. But we still think we can have even more unique inventory that you could only find at Airbnb. That's not another platform and we want to recruit some of the most interesting people in the world to be on our platform. And we're getting a lot of excitement. The third is we think we can even merchandise them better. I think experience to see more and more insights like with film, with movie, with video. Imagine deciding on a movie but instead of a film trailer, you had some movie stills. Would you go see the movie, you probably wouldn't. You need a trailer. You need a video experience. You saw video first. The fourth it needs to be discoverable in the apps. Right now experiences are really hard to find because those the last four years we've really focused on prioritizing our core business. I mean a lot of people they come to our homepage they don't ever see experiences. You wouldn't know these sell experiences. So we're going to completely reimagine our search and discovery engines to cross-sell experiences after you book a home and to really target the right homes. We were going to show you other guests on the experience, just provide social proof. We're going to bring some of the magic like the countdown in the icons and some of the magic there. And the final thing is awareness for experiences really low. Most people don't know we offer experiences even though we launched them eight years ago. So we're going to actually market them and tell the world about them and we can do this without a lot of incremental investment because we can market homes and experiences in the same ad. So if we do those five things, I think we can dramatically change the trajectory of experiences business. Ellie Mertz: And James, to your second question, in terms of the mix shift to non-urban market. We call it on the letter because it is a differential in terms of the respective market segments, but there isn't – it’s not a major shift what we are seeing is that growth in non-urban markets continues to be slightly higher than that of urban. I think what that tells you is we have a - I would think differentiated offering in non-urban. And I think the interesting thing about that portion of our business is, it has maintained a - I would say meaningful larger share of our business demand four years post covid than it was previously. And I think over the last four years has been a broadening awareness of the variety of markets that Airbnb is available that hotels simply don't exist and we continue to see great demand for those markets. Operator: And your next question comes from the line of Justin Patterson with KeyBanc. Your line is open. Justin Patterson: Great. Thank you very much. Ellie, I appreciate your comments on margins and real flexibility to invest this year. Could you talk about how long we should see this investment cycle persist and when we could start seeing more meaningful returns? Thank you. Ellie Mertz: Yes, thank you. So we always have not given a guide for ’25. We will provide you a view on ‘25 as it approaches. What I would say is, if you look at where we have come over the last couple of years, we obviously delivered a substantial amount of margin expansion from where we started. You followed us for some time, but pre - going public we had negative EBITDA margins and four years later, we were able to deliver almost 37% margins last year. So I think we've more than demonstrated the strength of this model both from a profitability basis as well as a free cash flow basis. What we'd like to deliver more of is growth and that's why we have as I said a lower margin target for the current year. And as I said previously, you'll see us start to make those investments in the back half of the year. I anticipate that when you think about both our medium term growth lever of international markets and then what long-term growth lever of expanding the core offerings. Those will require some ongoing investments in order to scale and then deliver the growth. What I think you should also think about though is that all of our expansions to-date have not been very capital intensive. So we will use some of the probability to invest but we don't anticipate any kind of sea change in the foreseeable future around overall profitability levels. Operator: And you're next question comes from the line of Kevin Kopelman with TD Cowen. Your line is open. Kevin Kopelman : Great. Thanks a lot. So, if we adjust our Easter impact it looks like you have a little bit of revenue growth slowing kind of each quarter this year expect to see the third quarter. Based on the dynamics you're seeing today do you anticipate some further slowing towards the end of the year, if you look at how space are shaping up for Q4 or do you see anything in your numbers as of now that could lead to stabilization? Thanks. Ellie Mertz: Yes. thanks, Kevin. So I would say, first, we're not going to provide outlook right now for Q4, but when I when I give you that color on the lead times, I think it's pretty informative from the perspective of, it's not that people are not definitively booking over the long term, if they may not have booked yet. And so, as I shared previously, we have seen some. some movement in lead times over the last couple of years and in many cases people have come booked. They just come and booked at a later time period and so that's certainly something that we will be on the eyes out for in terms of Q4 and beyond. I think also just thinking about how the comps play out for the balance of the year. As you'll recall where we were last year September and October were quite soft and then November and December had a bit of a rebound. So those are the comps that we'll be lapping as we approach the end of the summer heading into Q4. Operator: And your next question comes from the line of Nick Jones with Citizens JMP. Your line is open. Nick Jones : Hey, thanks for taking my question. Maybe just another one on an expenses and philosophically how you're thinking about it. There's plan to relaunch experiences, Brian it sounds like there's not a lot of incremental investment required there, but earlier you kind of talked about launching new products and services every year. So I guess can you speak to how nimble you plan to be with the investment cycle to if demand may be continues to get weaker or versus kind of bouncing back, how should we be thinking about kind of the level of commitment to invest in and what sounds like a lot of new and exciting products and services? Brian Chesky : Yeah, I mean we essentially built our forecast to have already have a spread of that between short term, medium term and long term. So in the short term, I mean, the biggest driver of growth in the short term again is conversion increases. Every 1% increase in our business is about $100 million. And we have hundreds of basis points of growth opportunities just in conversion and usability improvements. And then affordability we have quite a few opportunities and then a quality and reliability. Probably one of the biggest variables might be like how we think about expanding internationally like some of the big Asian countries like Japan, we can be very, very nimble. based on the results of Japan. Most of these new services and offering though are going to not cost very much. They're mostly headcount we're talking some teams hundreds of people not thousands of people so you won't really see that. Because this is a network effect business and most of our traffic is going to be taking traffic we already have for accommodations business and cross-selling new offerings. And so, it's really just the cost of acquisition of supply and that's not very expensive because we've found that we can do it fairly efficiently. So most of this it's very nimble. There's not going to be a lot of incremental investment that would materially change. The variability is sometimes it’s probably like marketing especially internationally that's a question. Operator: And your next question comes from the line of Jed Kelly with Oppenheimer. Your line is open. Jed Kelly : Hey great. Thanks for taking my question. Just going back to the urban opportunity and potentially putting more hotels on your platform, can you just talk about philosophically how the company balances putting more supply that you might consider more could commoditize and that can be cross-listed. What that might convert at a higher rate? Thank you. Brian Chesky : Hi, Jed, so, essentially, I think people come to Airbnb because they want to get something unique. That's what customers think of when they think of Airbnb. That's why we're a noun and a verb. We're one of the only brands in the world like Kleenex or Xerox, that's a noun and verb and it means you can - it's something that didn't really exist before we created this category at a wide scale. That being said, for everyone who books in Airbnb, about 9 people book a hotel. And so, if we can get just one of those guests to book on Airbnb, that's currently booking on a hotel platform we would go from nearly half a billion nights a year to a billion nights a year. And there's two ways to do that. One is the increased reliability of homes in Airbnb, because the number one reason people tell us they book hotels is they are typically more reliable. They know what they're going to get they have a front desk. The other is adding hotels in Airbnb and we're not philosophically misaligned with adding hotels, if we were we would never bought hotels a night before the pandemic. We just haven't prioritized hotels. We think of hotels as a filling in network gap during high occupancy nights. We generally think our if there's an incredible home at a low price, they're always going to choose that but when occupancy goes up they are going to go towards hotels. There are also some use cases where hotels are better and Airbnbs are better. If you need to stay for one night, you're travelling alone, you are business travel and you plug in you plug out a hotel is better. If you're traveling with a group you are travelling for more than three nights and you're travelling in the non-urban area, Airbnb is better. And then, if you're doing something between then you're going to have choices. So, we do think between filling in a network gap and getting more of those one night business travel stays, there is an opportunity to offer hotels in Airbnb and we have a lot of hotels. We have hundreds of thousands of boutique hotels and non-home inventory on Airbnb and we're going to continue to expand that over its years to come. And so there's no philosophical misalignment to add commodity inventory. The philosophical misalign would be if that becomes the majority of our marketplace and people - consumers stop thinking of Airbnb as unique and local. If they start thinking about us that changes the brand then that would be a philosophical misalignment but I don't see that happening anytime soon. Operator: And your next question comes from Mark Mahaney with Evercore ISI, Your line is open. Mark Mahaney: I just wanted to ask a question about Paris and the learnings you've had from this. I assume this is the biggest event for Airbnb and a massive popular event in your largest city. So just if that’s true and I think that is, just step back and talk about the learnings of being able to make sure you had enough supply working with local regulators and agencies and in terms of getting messages out to opportunities out to guests as well like this big event that you've pulled off. Just talk about the lessons you've been able to draw from that that'll you know help you set you a better for the next FIFA World Cup and the next World Cup, next Olympics et cetera? Brian Chesky : It’s a great question, Mark I'm really glad you asked this. I just want to like take us back down memory lane because in 2007, Airbnb provided housing for a design conference. Then in 2008, we provided housing for the Democratic National Convention. Then in 2009 we provided housing for the inauguration. Our first three moments when we started Airbnb was provided housing for events. In fact, our original premise of our business was at housing for events. It wasn't meant to be ever offered for anything other than events in conferences. And the reason why is because conferences and events especially things like the Olympics and World Cup are unbelievable use cases for Airbnb. And the reason why is I think obvious to everyone. Events typically like to host more guests than they have hotel rooms available for. And people, most people they have, most regular people aren't looking to become Airbnb host and make a long-term commitment to host every week. So a lot of people events coming to town is wanting to host one week and make $1,000 or $2,000. And so what we did is we focused a year ago on Paris. And in the last year we increased our supply in Paris by 37%. We now have nearly 150,000 homes in Paris. We had 430,000 guests stay in Paris so far and counting and that number to continue to climb. So that's equivalent of five Olympic stadiums, I want you to imagine five Olympic stadiums where the guest staying in at Airbnb. The fact is that the Olympics as we know it could not ever happen again, without Airbnb because this 400,000 could not have stayed in a hotel room. And so to do that, what we did is we worked at the City of Paris. I was in Paris 10 days ago. I met with President Macron. I met with his economic team. And we talked about how important Airbnb was to the Olympics happening. And we had a lot of cooperation. We were a title sponsor Olympics. And we targeted this event of at Paris, we Did a lot of local campaign. And so it was so successful that we now looking at the top thousand events in the world, really large ones like the World Cup and Olympics, but also like you know looking at where Taylor Swift is going on concert or looking at different conferences, different like we provide housing for the Berkshire Hathaway conference in Omaha and we worked with Warren Buffett you got the word out. This is over a decade ago. So conferences, festivals, events, Coachella, you go down the list. I think this is the best strategy we have to recruit supply and the supply recruit for an event is not property managers. They are individuals who host occasionally that come only to Airbnb. And cities actually like when Airbnb provides housing for events because we solve a problem for them. So, I'm glad you ask the question. The answer is it worked widely successful. Better than we ever imagined. We're working on the lawn for 2026. We're looking at La Olympics for 2028. But we're also building a strategy for the top thousand events in the world. But I think this is the strategy the only Airbnb can do. Because we basically increase excess capacity in cities all over the world to allow them to temporary as well. And it's really alignment and incentives. So it's been very successful at least that we continue - we'll be playing to expand the playbook. Operator: And your next question comes from the line of Stephen Ju with UBS. Your line is open. Stephen Ju: Okay. great. Thank you. Brian, I want to ask on Airbnb rooms. I would have thought that given its more nascent statement in the economic backdrop that this is should probably be the product that should be growing the fastest. So is there anything that you can call out in terms of product fit or awareness? I think I heard you call out maybe supply shortages earlier. But any factors that might be weighing on the growth rate here a little bit? Thanks. Brian Chesky : Thanks. Yeah, the reality is the biggest issue with Airbnb rooms it’s just a small percent of our business. It's a very small percentage. So even if it - even no matter how fast it grows it's often very small base. It's how Airbnb started by providing a room and a house. It's very affordable. It's very popular for Gen Z, but it is off a very small base and so you're not going to see a major change to the growth rate of the company based on that. I think the thing but maybe just broad zooming out though, two points I’ll make. The first point is Airbnb is one of the most diverse businesses in the world. We have bedrooms and homes up to tens of thousands of dollars a night luxury villas in Airbnb. We allow you to travel by yourself or with the large groups of up to 16 people. We're in every country nearly in the world, every continent in the world including at one point in article and so we're a very - we're in urban areas. Where in the decades arounds this nations we're off to be impact. So our general philosophy is that something for everyone to have the most diverse array of inventory in the world. The other point I'll just make is an area down the road that would really help Airbnb rooms is continuing to invest in our system of trust. The biggest obstacle to people staying in a room is just the discomfort with staying at a house with a stranger they don't know. One of our core inventions with a system of trust and as more we invest in system of trust, I just gave a lot more of these businesses where strangers to live in the others. So I do think it's still a big long term opportunity for us. But it's often but smaller base and it's never going to be as big as entire home and everything. Operator: And your next question comes from the line of Lee Horowitz with Deutsche Bank. Your line is open. Lee Horowitz: Great, thanks. New on one our nights and on pricing. So Ellie you're talking about putting more investments into place in the second half of this year as a means of accelerating growth. Can you help us better understand sort of the payback periods that you tend to expect on these dollars and over what timeframe you may assess the ROI on these investments in terms of accelerating total company growth rates? And then maybe one on ADRs. You guys are highlighting sort of some building demand pressures in North America, all sign the pointing towards people trading up the whole homes and persisting ADR growth for your entire business again despite weaker growth in your highest ADR region, North America. I guess when we think about. the sustainability of ADR growth beyond the 3Q as you mix away from North America and perhaps see the overall travel demand environment continue to soften, how do you think about your ability to continue growing through that kind of a scenario? Thanks so much. Ellie Mertz: Yeah, so first let me talk about marketing payback. I would say the way we are looking marketing paybacks is very different based on the channels and investment from a performance marketing standpoint obviously the ROI is very specific and relatively short-term. We think about that in terms of weeks and months not quarters. In terms of Brands we think about that over a longer time horizon. If you think about any particular brand campaign, it needs to be in market for quite some time and it needs to be sustained for you not only to see the benefit, but also sustain the benefit and convert it into actual transaction. So I think about that more from the six months to a year payback period and requires - I would say a consistent level of investment. And then, as a third factor something that I mentioned in terms of an area of investment that is not programmatic. We do need to at the margin build some of our teams that are driving this growth and so that will be in a gradual investment modestly above the headcount growth that we've been targeting over the last couple of years but we think it will help long Payback should I should say high payback in terms of driving acceleration across a variety of initiatives. In terms of pricing, I think there's one question about what is happening at a geo level. I think there's a broader question in terms of the aggregate or global ADRs. To your question in terms of if neighbor is softer than other regions what happens to global ADR obviously mix shift is a huge component in terms of the global ADRs that we report. One Factor in terms of the Q3 guide is the shift a little bit away from North America which as you highlight does have the highest ADRs Over time we would anticipate that as regions like Latin America and APAC become larger portions of our overall business, the global ADR would come down. But those incremental nights are all accretive and the economics behind them still are very strong. So it's a at a global basis, we are we're somewhat agnostic because we can deliver strong economics across a wide range in ADRs. Operator: And ladies and gentlemen, that will conclude our question and answer session. I will now turn the conference back over to Brian Chesky for closing remarks. Brian Chesky: Alright, well, thanks for joining us today. Just to recap, revenue was 2.7 billion 11% higher than a year ago, adjusted EBITDA was a Q2 record And our a trailing 12 months free cash flow was $4.3 billion is our highest yet representing a free cash flow margin of 41%. And we've made significant progress over the past few weeks, but there's more to come. In October we're going to share with set of features and upgrades as part of our 2024 winter release. This includes expanding host of co-hosting, setting the stage for host provided services and much more. I'm proud what we accomplished in Q2 and I look forward to sharing more with you next quarter. Thanks for joining. Operator: And ladies and gentlemen, that concludes today's call and we thank you for your participation. You may now disconnect.	[ { "speaker": "Operator", "text": "Ladies and gentlemen, good afternoon, and thank you for joining Airbnb's Earnings Conference Call for the Second Quarter of 2024. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Angela Yang, Director of Investor Relations. Please go ahead." }, { "speaker": "Angela Yang", "text": "Good afternoon, and welcome to Airbnb's first quarter of 2024 earnings call. Thank you for joining us today. On the call today, we have Airbnb’s Co-Founder and CEO, Brian Chesky and our Chief Financial Officer, Ellie Mertz. Earlier today, we issued a shareholder letter with our financial results and commentary for our second quarter of 2024. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We provide a reconciliation to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I will pass the call to Brian." }, { "speaker": "Brian Chesky", "text": "All right. Good afternoon, everyone, and thanks for joining. Q2 marked another strong quarter for Airbnb. We had 125 million nights and experiences booked. Revenue increased 11% year-over-year to $2.75 billion. Net income was $555 million representing a net income margin of 20% and we generated $1 billion of free cash flow. Our total trailing 12 month free cash flow was $4.3 billion, our highest ever, and our strong cash flow allowed us to repurchase $749 million of our shares in the quarter. And as of the end of Q2, we had $5.25 billion remaining on our share repurchase authorization program. Now during Q2, we continue to make progress on our three strategic priorities, which again are making hosting mainstream, perfecting our core service and expanding beyond the core. So I’ll share a few highlights on each. First, we are making hosting mainstream. Last year, we shared a commitment to make hosting just as popular as travelling in Airbnb. We've been focused on raising awareness around the benefits of hosting and providing better tools for hosts. In Q2, we surpassed 8 million active listings driven by continued growth across all regions and market types. We're not just growing supply and we're also committed to ensuring that it's high quality supply. Since launching our updated host quality system last April, we’ve removed over 200,000 listings that failed to meet our guests expectations. And we'll continue to raise the overall quality of listings on Airbnb so we can consistently deliver high quality stays. Second, we're perfecting our core service. We remain focused on making Airbnb more reliable, affordable and a overall better service for hosting guests. We’ve rolled out hundreds of new features and upgrades over the past two years to do this. This includes launching major reliability initiatives like guest favorites which make it easy for guests to find the best listings in Airbnb. Now since launch, last November, we've seen over a 150 million nights booked at guest favorite listings. We've also made dozens of smaller changes that have led to improved usability and booking conversion. These include things like simplified set up and login, improved map, clear cancellation policies and so much more. Now we've made tremendous progress and we'll never stop improving Airbnb. We're going to continue this commitment. And finally, perhaps most excitingly, we are expanding beyond our core. We continue to drive growth by investing in underpenetrated markets. In Q2, growth of gross nights booked on an origin basis in our expansion markets significantly outperformed our core markets on average. Our core markets again are US, UK, France, Australia and Canada. This is largely due to the success of our global expansion playbook which includes a more localized product and marketing approach. We're also expanding Airbnb’s brand positioning beyond travel accommodations with the launch and roll out of Airbnb Icons which is a new category of extraordinary experiences that we launched in May. Now since launch, we see nearly 40 million views of Icons on our site. Helping people understand that Airbnb offers more than accommodations will be critical as we expand our offerings in the coming years. Now, looking back to Q2, we saw a number of positive business highlights. First, guests are increasingly booking on the Airbnb app. We've continued to optimized our mobile website’s app downloads and we believe our approach is working. Nights booked in our app during Q2 increased 19% year-over-year. Now these bookings now comprise 55% of total nights booked and this is up from 50% in the prior year period. Now in addition to our success of mobile downloads and bookings, we're continuing to see growth of first-time bookers on our platform with the highest levels of growth seen in the youngest age demographic. Second, Airbnb is uniquely positioned for special events where continuously more guests choose Airbnb for major holidays and events. The week of July 4th for example represented our single highest week of revenue ever in North America and we saw similar trends in Europe. Now in anticipation of the Olympics which is in Paris, nights booked in Paris through Q2 were more than double what they were this time last year. Additionally, cities hosting matches during the recent Euro Cup in Germany saw an average of more than 20% year-over-year increase in nights booked. And supply has increased to meet the higher demand. So we have 37% increase in active listings in Paris in Q2 compared to the year ago. And these events, what they really do is they highlight Airbnb’s unique ability to disperse travel and spread economic benefits by allowing people stay in local neighborhoods where there are no hotels. Finally, supply growth is improving on Airbnb. We made huge strides for supply growth, we remain just as focus on supply quality. As we improve quality, we believe more people will try Airbnb unlocking even more growth. We have two major initiatives underway to help us do this. First, we're removing low quality supply. As I shared earlier, we've removed over 200,000 listings since April of last year. Second, we're making it easier for guests to find the best stays on Airbnb. We launched guest favorites as well as top listing highlights, which show the top 1%, 5% and 10% of eligible homes on Airbnb. These new features make it easy for guests to find the highest quality homes on Airbnb. In Q2, we also saw active listing managed by Superhosts, some of our highest quality hosts, increase 26% year-over-year. We're proud of our Q2 results. Now, turning to Q3, we're looking forward to another record summer travel season. We're encouraged by the excitement around the Olympics and the Euro Cup and we're also encouraged by the relative strength of Latin America and Asia Pacific which continue to be our fastest growing regions. However, we are seeing shorter looking lead times globally and some signs of slowing demand from US guests and our Q3 outlook incorporate these recent trends. We are watching these trends closely along with the impact any macroeconomic pressures might be causing. And we're continuing to execute against our growth strategy by improving our service, expanding in less penetrated markets and introducing new offerings. We believe this growth strategy will over the long term offset any transitory macro trends. So with that, Ellie and I look forward to answering your questions." }, { "speaker": "Operator", "text": "[Operator Instructions] And your first question comes from the line of Ron Josey with Citi. You're line is open." }, { "speaker": "Ron Josey", "text": "Great. Thanks for taking the question. I have two please. Brian, just with your last comments on slowing lead times and what not in North America. Can you tell us a little bit more about that when you saw those trends sort of first hit. And then, how it offsets the strength from the Olympics and UEFA and everything else? And that's question one. And maybe a bigger question when we think about expanding beyond the core and perfecting the core service. Post summer release, posts winter release we've seen a lot of key improvements across Airbnb with Guest Favorites, with Icons and the list goes on and on, , how does - when we think about the coming winter release and throughout ‘25 and everything else, how are these newer services helping to influence call it the Airbnb of tomorrow? Thank you." }, { "speaker": "Brian Chesky", "text": "Yes, why don’t Ellie you take the first one about slowing lead times and when we started seeing these trends and I'll take the second one." }, { "speaker": "Ellie Mertz", "text": "Yeah. Yeah, absolutely. So let me double click a little bit in terms of the trends for lead times since the beginning of the year. In both Q1 and Q2, what we saw with that lead times were basically equivalent with what we had seen in 2023. So there wasn't really any timing shift behavior in terms of when guests were booking. What we’ve seen more recently and in particular in July is a shrinking of the lead times and in particular what we've seen is that there continues to be very strong growth of the shorter lead times. So anything from same day to next week to a couple of weeks from now. But what we're not seeing the same level of strength is in those longer lead times. So two months from now, what you’re booking for Thanksgiving what you’re booking for Christmas, and so it's that I would say softness in terms of longer lead times as a big factor in terms of the outlook that we've provided. What I would say additionally is that, over the last couple of years as we emerge from covid, there were several periods where we saw some volatility in terms of overall lead times and in particular some hesitancy for consumers to book those longer lead time trips. I suspect that's what we're seeing right now and the - I would say the silver lining with regard to the trends that we see right now, it's not that consumers are not necessarily going to book that trip for Thanksgiving or Christmas. It just appears that they have not booked it yet. So we're closely following all of the trends on lead times, but it is a factor that informs the outlook that we provided for Q3." }, { "speaker": "Operator", "text": "And your next question comes from the line of Doug Anmuth with JPMorgan. Your line is open." }, { "speaker": "Brian Chesky", "text": "Sorry, sorry." }, { "speaker": "Operator", "text": "My apology." }, { "speaker": "Brian Chesky", "text": "Sorry, there was a second part of the question. So, Ron, to answer your question about expanding beyond the core business. Where we are is we spent 16 years building a business that's approaching $80 billion in gross booking value that's basically one category, which we call Airbnb which is short term accommodation. It's been pretty amazing how far this single product has gone. And we haven't really charged other than like essentially travel insurance, we haven't really ever really expanded beyond our core business and we do have long-term stays which are [17%] (ph) of nights. We haven't done very much. We began before the pandemic preparing to expand Airbnb. And then when the pandemic hit, we cut back a lot of our resources. We got focused, went back to our roots and really focused on rebuilding our platform, becoming lean, becoming a functional organization and we now have essentially the same amount of employees as before the pandemic and double the revenue and that explains why we have 41% free cash flow margin, one of the most profitable companies in tech. We're now beginning to prepare the next chapter of Airbnb. And I want Airbnb to be one of the most important companies of our generation and to do that, we're going to do more than one thing. We're going to do multiple new things. We're going to have to have multiple new products and multiple new services. This fall, this October, we're going to be launching a new host service which is really important. It's essentially a co-hosting marketplace. So, there are people that have homes but they don't have time. There are other people in the world that have time but they don’t have a home. And so, there's a Venn diagram of people today who have both that get host. But what if we can match those two people together? That would unlock a lot more inventory. That's what we're going to be launching later in October. Then next year we're going to begin to expand Airbnb truly beyond our core business. And we're going to be launching - we're going to relaunch Experiences. I've been asked about Experiences probably every earnings call since we’ve been public, rightly so, because it's very exciting. We've learned a lot of lessons from Experiences. They need to be more affordable. They need to be more unique to Airbnb when you think so you can only find on Airbnb. They should be merchandised, videos not photos. They should be discoverable in the app and we should market them. If we think we do these five things, we think we'll have a hit on our hands and we're working on that. We also have new guests services and new host services that we're launching next year that we're working on. And then every year starting next year, we're going to launch new products and services. I look at Apple, I look at Amazon. Apple at one point was selling iMacs, Amazon was only selling books. We've gotten bigger than either of those companies just selling short-term rentals. But we're ready to go beyond short term rentals. So, the new Airbnb, to answer your question Ron, will be about a lot more than short-term rentals. It's going to be about long-term stays. It's going to be our guest services, host services and many new offerings and you'll begin to see that next year." }, { "speaker": "Operator", "text": "And your next question comes from the line of Doug Anmuth with JPMorgan. Your line is open." }, { "speaker": "Doug Anmuth", "text": "Thanks for taking the questions. Ellie, just to follow up on I know you talked about the shorter booking window. Are you seeing any change in activity around pricing or class of property? And is there anything to call out across cohorts or income levels? And then, Brian just circling back on expanding beyond the core, are there any expansion markets in particular that you would call out where you're seeing particularly strong traction? Thanks." }, { "speaker": "Brian Chesky", "text": "Yes. So, why don't Ellie, you take the first. I’ll take the second." }, { "speaker": "Ellie Mertz", "text": "Yeah. so Let's talk a little bit generally about ADR, so question was like what are people are actually purchasing on the platform. I would say, generally, so far this year what you've seen is a little bit of ADR appreciation globally. In particular, obviously, but more recently in North America. And what we see there is a big driver of the ADR appreciation is big shifts, which you can assume is what it sounds like people choosing more expensive or larger properties. And I think part of the read through from that can be oh, people are choosing more expensive listings. Therefore, you are seeing stronger demand from higher economic demographics. I think that is one read through. I think another read through is that, if you think about the value proposition of Airbnb, it's that we offer these larger properties and on a per guest basis, they can be quite affordable and frankly more affordable than a hotel. So I think part of that ADR mix shift appreciation that you see is frankly people gravitating to where we actually have some great value, which is the larger Airbnb that that do provide value on a guest level." }, { "speaker": "Brian Chesky", "text": "And to answer your question about expansion markets, maybe a framework I can give to think about how we want accelerate growth, listen, we want to be growing a lot fast than we are. We want to be growing in healthy double-digit growth - double-digit growth and I think we can. And the way we're thinking about accelerating growth is through short-term, medium- term and long-term. Short-term is really optimizing our core business. It's really around affordability, about having high quality stays and just conversion rate increases. Long term is really about new products and services. So, the question you asked about international is interesting because it's kind of like a medium term horizon, like one to three years. And to frame this, Airbnb is in 220 countries and regions. We're one of the most global companies in the world on the Internet, 220 countries and regions. We operate nearly in every country in the world. But there's only really five markets where we're penetrating. And those markers are the US, UK, France, Canada and Australia. And you'd think like, well, if there was one company in the world that would truly be like have a lot of international penetration it’d be a global travel network, right? A website where you want to travel, use one platform to travel around the world. So there's a number of countries. Just to give you a couple of examples of our some big expansion markets, Germany and Brazil we've seen a lot of progress. Those are huge travel markets and the biggest travel markets in the world. And we're continuing to go bigger. In Europe, Italy and Spain, we have low penetration compared to France and UK and these are major destinations. Then in Latin America, we've had a lot of progress in Brazil but there's really Peru, Chile, Colombia, Argentina, these are a huge opportunity markets, and that's Latin America is the fastest growing region alongside Asia. And Asia, you really have like the big four, big five countries. So you have China, Japan, Korea, India and then maybe we could kind of call out Southeast Asia as a holistic region. So what we're going to do is we have an international playbook, which is really product and marketing. First, need to localize the product, you need to make sure you have the right regulation in place. You need to make sure you have the right foundation. We've highlighted in our Investor Letter that we’ve retooled our product for Asia. Asia are different character counts. And so it's more laborious in certain languages to type in so like in Korea and Japan they prefer to do browsing than search. So we've had to retool our product and that's yielded some huge conversion rate increases. So some of these are going to pay back sooner, like some of North - like Switzerland, Belgium, Netherlands, they're going to pay back sooner. Japan is going to be a longer game, but that's one of the biggest travel markets in the world. And I literally think there are tens of billions of dollars of gross booking value increase just by getting all the aforementioned countries to the current market penetration of Canada or Australia. If we can get those countries to Canada, Australia there's tens of billions of dollars and it's just something we've had to focus - we're going to focus on. It's something we hadn't focused on in the last four years as much. We really want to solidify our core business, but now we're focused on it." }, { "speaker": "Operator", "text": "And your next question comes from the line of Richard Clarke with Bernstein. Your line is open." }, { "speaker": "Richard Clarke", "text": "I just want to unpick the Q3 revenue guidance a little bit more. I guess the - if I look from the balance sheet your funds held on behalf of customers, to me it looks like it's up about 13% year-on-year. So it looks like you're carrying more bookings into the quarter and then you're talking about shorter lead times. So does that mean more bookings in the quarter for the quarter. So just trying to square that with why revenue is slowing down in your guidance?" }, { "speaker": "Ellie Mertz", "text": "Yeah, thanks Richard. So, obviously, that that energy is balanced on - on the balance sheet gives you some indication of the backlog. I would not take those balance sheet items as a one for one read through in terms of the revenue that will be recognized over the course of the quarter. A couple of deviations in terms of why they might not match. One is obviously a good portion of the bookings that we will recognize in a particular quarter are still to be booked within the quarter? That's one aspect. The second is the balance sheet items will reflect the timing of the payments, the - whether it’s pay less upfront or the entirety of the payment and so they're just not a one for one guide. All they do, they do obviously give a time stamped point in time view of the backlog that we have." }, { "speaker": "Operator", "text": "And your next question comes from the line of Eric Sheridan with Goldman. Your line is open." }, { "speaker": "Eric Sheridan", "text": "Thanks so much for taking the question. Maybe I can ask a two-parter coming back to the booking window. When you've – what you’ve seen over the last couple of years in terms of the booking window evolving from where it was pre-pandemic to where it is post-pandemic how much differ just that booking window look today versus maybe 2019 as opposed to today versus one in two years ago. And when you think about what that shift looks like, how much of that do you think in terms of a shortening booking window are elements of demand-driven Dynamics where the consumer might want to spend less money and be more discerning. Or just elements of normalization that are working in the way back into global travel? Thank you." }, { "speaker": "Ellie Mertz", "text": "Thanks, Eric. So, let's talk about lead times over time. If we look at where we were say in Q2 of 2019, the average lead time across the platform was within one or two days of what it was in Q2 in ‘24? So from the kind of pre-covid to last quarter, there hasn't been some material shifts. What you did see through the path of covid was initially, we saw a massive reduction in lead time because people had no confidence in terms of their ability to book far out. That, that reversed in say the 20 to 2022 to ‘23 time period where people are so eager to travel that they were booking way in advance of their kind of normalized patterns to make sure that they had the trip on the book. They got the most attractive listing at the best price by booking early. And I think fast forward to ‘24 you're seeing up and up through Q2 a very much return to normal. So hopefully that's helpful in terms of the overall four-year arc. In terms of having some color commentary in terms of what we're seeing today, just to reiterate some of the color I provided at the beginning of the call. The last minute bookings are incredibly strong. So they are, I would say much higher in growth rates than what we are guiding to in terms of the average. There seems to be a lot of desire in terms of making sure you get your summer travel in at very elevated rates. But it's being offset by that portion of bookings which is for us about half of the overall bookings, which are a month or longer. And I think it's a minor - it's a minor softness, but it does have impact in terms of our backlog just given the concentration of bookings that happen more than a month in advance. There's just a modest amount of softness that is bringing the average lead times down. And I think what we’ve seen in the past is from time-to-time whether it be a new COVID variant, whether it be a macro headline, whether it be like last year the outbreak of war in Israel. People from time to time have moments where they are not booking in the same timeframe that they did in prior periods, and that's what we're tracking closely right now." }, { "speaker": "Operator", "text": "[Operator Instructions] Your next question comes from the line of Brian Nowak with Morgan Stanley. Your line is open." }, { "speaker": "Brian Nowak", "text": "Thanks for taking my questions. Maybe I'll squeeze in two. Let me ask one on the marketing expense comments for you Ellie. You mentioned in the guide marking expense has been real faster than revenue in the third quarter. I guess, the question is how do we think about performance versus brand expend and I think you sort of learned about your marketing spend over the years sort of gives you confidence this could resonate even faster room than growth this time around. And then one for Brian and sort of Gen AI and philosophical strategy. There's a lot of talks that are about top of funnel Gen AI travel assistance. How do you think about taking your leading supply that you have maybe partnering with hotel partners to create a really differentiated top of funnel alternative and hotel booking assistant using all these large language model capabilities?" }, { "speaker": "Ellie Mertz", "text": "Yeah, so, Brian, let me let me talk a little bit about our marketing spend. Let me just back up before I talk about Q3 and remind you of the full year guide that we provided back in February. What we shared in February is that, for the full year we were looking to deliver an EBITDA margin of a minimum of 35%, which was obviously down slightly from the nearly 37% we delivered in ‘23. And the intent on guiding to margin compression on a year-over-year basis was to allow us the flexibility to invest in growth. And what you've seen so far this year is that for H1, marketing as a percent of revenue was effectively flat with where it was in ‘23. But we do intend to lean into those growth investments in the back half of the year starting in Q3, and that's obviously what informs the EBITDA guide that that you saw in the letter. In terms of where we are leaning in on marketing in particular and the confidence around the various channels, let me just talk about a couple of the components of the increase in marketing. So first, consistent with the conversation Brian Chesky just had on international markets. What you'll see in Q3 is that we will be layering on a handful of incremental markets that we will be targeting and effectively turning on our global playbook. In particular, you'll see us try or intend to extend our success that we've seen in Latin American countries like Brazil and Mexico to other markets in that region. Places like Peru, Colombia, Chile, Argentina so there will be some layering on of those incremental markets. We feel like we have had pretty good success there. Obviously it takes time in terms of investments in a market both from a product perspective as well as a marketing perspective to reaccelerate growth. But as the results have shown in terms of the differential between growth rates in our expansion markets and our core markets we feel like our expansion efforts have been successful and so, rolling them out to incremental markets will be helpful over the medium term. In terms of incremental performance marketing, what we've shared with you today that has continued into Q3 is that based on a lot of optimizations that we've made to our performance marketing efforts. We've been able to maintain extremely high efficiencies and so where we see those we do lean in and have quite high confidence in terms of returns." }, { "speaker": "Brian Chesky", "text": "And why don’t take your second question. So Brian Gen AI ChatGPT launched late November 2022. When it launched, I think we all got like incredibly excited. It was kind of like the moment probably some of us first discovered the Internet or you know maybe when I come with launch. And when it was launched you had a feeling that everything was going to change. But I think that's still true. But I think one of the things we’ve learned over the last say 18 months or nearly two years 22 months since ChatGPT launched is that that’s going to take a lot longer than people think for applications to change. If I were to think of AI, I'd probably think about it in three layers. You have the chips. You have the models. And you have the applications. There has been a lot of innovation on the chips. There has been a lot of innovation on the models. We have a lot of new models and there's a prolific rate of improvement in these models. But if you look at your home screen which of your apps are fundamentally different because of the AI? Like fundamentally different kinds of generative AI, very little especially even less in e-commerce or travel. And the reason why is I think it's just going to take time to develop new AI paradigm. ChatGPT is an AI model – interface if that could have existed before AI. And so, all of our paradigms are pre-AI paradigms. And so what we need to do is we need to actually develop AI applications that are needed to the models, no one's done this yet. There's not been one app that I'm aware of at the top 50 app in the app store in the United States that is a fundamentally new paradigm as fundamentally different FC multi-touch was to the iPhone in 2008 and we need that interface change. So that's one of the things that we're working on. And I do think Airbnb will eventually be much more than a search box where you type a destination, add dates and find a listing. It's going to be much more of a travel concierge is having a conversation, learning adapting to you. It's going to take a number of years to develop this. And so, it won't be in the next year that this will happen and I think this is probably what most of my tech friends are also saying, it's going to just take a bit more time. But the answer to your question on what’s possible, a new interface paradigm would allow us to attach new businesses. So the question is, what permission do we have to go into a business like hotel? Well today, we have permission because we have a lot of traffic. But if we had a breakthrough interface we have even more permission. Because suddenly we could move top of funnel and not just ask where you're going but we could point to we could inspire where you travel. Imagine if we add an index of the world's communities we told you we had information about every community and we can provide the end-to-end trip for you. So, there's a lot of opportunities as we develop new interfaces to cross-sell new more inventory. And just to remind everyone we own hotels nights. We bought that before the pandemic. It’s one of the most popular hotel booking apps in the world and we are still investing in hotels. So absolutely there are opportunities down the road with this new interface to sell new things including hotels and everything." }, { "speaker": "Operator", "text": "And your next question comes from the line of Justin Post with Bank of America. Your line is open." }, { "speaker": "Justin Post", "text": "Great thanks for taking my question. Just on the North America and Europe markets presumably growing a little slower than the average for the company. Any signs of kind of cyclical or macro pressure like shorter trips or people trading down that that could end in and any that could maybe drive some acceleration when the period ends. And second, how do you feel about your market share in those two key regions? Thank you." }, { "speaker": "Ellie Mertz", "text": "Yes, so let me talk. Let me talk a little bit about what we're seeing in both, North America and EMEA. I would say I would go back to my prior comments in terms of just the lead times. That that commentary is true globally so it applies to both northern - North America and EMEA. I would say EMEA has been relatively stable quarter to-date. And so it is not necessarily part of the broader moderation story that we have shared. In terms of North America, there's a handful of components. One is the shorter lead times I would say. A second is North America has a concentration of our long-term stays, nights and what we've seen over the last year is that short term days have grown more quickly than long term stays. And so, the LTS to growth rate is a drag on the average that has an outsized impact on North America and we've just comped with the changes that we made a year ago in terms of our LTS fees which is a bit of a headwind for LTS generally on the platform, but in particular in North America The one other thing I would add in terms of just providing some color on what's happening in the US is couple of regulatory comments. One in particular that we're watching is that in California, the total price display and cancellation grace period, regulations went in went into place on July 1st and we think that's been a little bit of a headwind to our California business. Our California business if you include both guests who reside in California as well as guests who are travelling to California, which is what the new rule is applied to is about 10% of our GVV. So it’s an area that we're watching quite closely just see how quickly consumer behavior normalizes after these regulations have been put into place. And into the comments I made earlier on ADR, I would say we haven't really seen a material move towards trade downs much of the contrary people continue to book our larger more expensive listings. And then in terms of shorter trips, the average from playing has gone down, but that is really a function of the mix shift between short-term rentals growing more quickly than long-term rentals. Less so people choosing a three day trip versus a four-day trip. So I don't think we've seen that the type of tree down behavior that that you're likely asking about. In terms of the second component of your question, market share. When we look at market share, we look at the market of night stays across accommodations. And so that obviously includes all the hotel nights that are either booked directly through hotel or booked through an intermediary. And when we look at market share on that basis is what we see is that, in Q2, consistent with prior quarters, we continued on a year of your basis to gain market share in terms of total nights stayed over the universe of hotel and other travel accommodations. That is also true on a regional basis. We feel like we're doing quite well. As we across the world continue to gain market share." }, { "speaker": "Operator", "text": "And your next question comes from the line of James Lee with Mizuho. Your line is open." }, { "speaker": "James Lee", "text": "Great. Thanks for my questions. Two here please. First on experiences. What are some of the frictions and difficult problems you're trying to resolve here. It seems like you have plenty of supply, plenty of listings. So that doesn't seem to be that issue. Can you help us understand something key paint points for both suppliers and customers? And second, I once again noticed in North America and EMEA, you have call out that to see a mix shift to non-urban markets and just want to get some more color on that. Urban markets in general, are you seeing weaker demand or seeing increased competition in the hotels? Thanks." }, { "speaker": "Brian Chesky", "text": "Hey, James, I'll take the first question. So there's five things that we're looking for to do with experiences. The first thing is we want them to be a better price selection. Right now, we think we can have - we can offer more affordable experiences that younger people especially Gen Z could afford. So that's the first thing. We don't really have enough affordable listings. The second thing is, we need more unique inventory. It's really good. The inventory we have is good. In fact the five star rating average for experiences is higher than the five star rating for homes. But we still think we can have even more unique inventory that you could only find at Airbnb. That's not another platform and we want to recruit some of the most interesting people in the world to be on our platform. And we're getting a lot of excitement. The third is we think we can even merchandise them better. I think experience to see more and more insights like with film, with movie, with video. Imagine deciding on a movie but instead of a film trailer, you had some movie stills. Would you go see the movie, you probably wouldn't. You need a trailer. You need a video experience. You saw video first. The fourth it needs to be discoverable in the apps. Right now experiences are really hard to find because those the last four years we've really focused on prioritizing our core business. I mean a lot of people they come to our homepage they don't ever see experiences. You wouldn't know these sell experiences. So we're going to completely reimagine our search and discovery engines to cross-sell experiences after you book a home and to really target the right homes. We were going to show you other guests on the experience, just provide social proof. We're going to bring some of the magic like the countdown in the icons and some of the magic there. And the final thing is awareness for experiences really low. Most people don't know we offer experiences even though we launched them eight years ago. So we're going to actually market them and tell the world about them and we can do this without a lot of incremental investment because we can market homes and experiences in the same ad. So if we do those five things, I think we can dramatically change the trajectory of experiences business." }, { "speaker": "Ellie Mertz", "text": "And James, to your second question, in terms of the mix shift to non-urban market. We call it on the letter because it is a differential in terms of the respective market segments, but there isn't – it’s not a major shift what we are seeing is that growth in non-urban markets continues to be slightly higher than that of urban. I think what that tells you is we have a - I would think differentiated offering in non-urban. And I think the interesting thing about that portion of our business is, it has maintained a - I would say meaningful larger share of our business demand four years post covid than it was previously. And I think over the last four years has been a broadening awareness of the variety of markets that Airbnb is available that hotels simply don't exist and we continue to see great demand for those markets." }, { "speaker": "Operator", "text": "And your next question comes from the line of Justin Patterson with KeyBanc. Your line is open." }, { "speaker": "Justin Patterson", "text": "Great. Thank you very much. Ellie, I appreciate your comments on margins and real flexibility to invest this year. Could you talk about how long we should see this investment cycle persist and when we could start seeing more meaningful returns? Thank you." }, { "speaker": "Ellie Mertz", "text": "Yes, thank you. So we always have not given a guide for ’25. We will provide you a view on ‘25 as it approaches. What I would say is, if you look at where we have come over the last couple of years, we obviously delivered a substantial amount of margin expansion from where we started. You followed us for some time, but pre - going public we had negative EBITDA margins and four years later, we were able to deliver almost 37% margins last year. So I think we've more than demonstrated the strength of this model both from a profitability basis as well as a free cash flow basis. What we'd like to deliver more of is growth and that's why we have as I said a lower margin target for the current year. And as I said previously, you'll see us start to make those investments in the back half of the year. I anticipate that when you think about both our medium term growth lever of international markets and then what long-term growth lever of expanding the core offerings. Those will require some ongoing investments in order to scale and then deliver the growth. What I think you should also think about though is that all of our expansions to-date have not been very capital intensive. So we will use some of the probability to invest but we don't anticipate any kind of sea change in the foreseeable future around overall profitability levels." }, { "speaker": "Operator", "text": "And you're next question comes from the line of Kevin Kopelman with TD Cowen. Your line is open." }, { "speaker": "Kevin Kopelman", "text": "Great. Thanks a lot. So, if we adjust our Easter impact it looks like you have a little bit of revenue growth slowing kind of each quarter this year expect to see the third quarter. Based on the dynamics you're seeing today do you anticipate some further slowing towards the end of the year, if you look at how space are shaping up for Q4 or do you see anything in your numbers as of now that could lead to stabilization? Thanks." }, { "speaker": "Ellie Mertz", "text": "Yes. thanks, Kevin. So I would say, first, we're not going to provide outlook right now for Q4, but when I when I give you that color on the lead times, I think it's pretty informative from the perspective of, it's not that people are not definitively booking over the long term, if they may not have booked yet. And so, as I shared previously, we have seen some. some movement in lead times over the last couple of years and in many cases people have come booked. They just come and booked at a later time period and so that's certainly something that we will be on the eyes out for in terms of Q4 and beyond. I think also just thinking about how the comps play out for the balance of the year. As you'll recall where we were last year September and October were quite soft and then November and December had a bit of a rebound. So those are the comps that we'll be lapping as we approach the end of the summer heading into Q4." }, { "speaker": "Operator", "text": "And your next question comes from the line of Nick Jones with Citizens JMP. Your line is open." }, { "speaker": "Nick Jones", "text": "Hey, thanks for taking my question. Maybe just another one on an expenses and philosophically how you're thinking about it. There's plan to relaunch experiences, Brian it sounds like there's not a lot of incremental investment required there, but earlier you kind of talked about launching new products and services every year. So I guess can you speak to how nimble you plan to be with the investment cycle to if demand may be continues to get weaker or versus kind of bouncing back, how should we be thinking about kind of the level of commitment to invest in and what sounds like a lot of new and exciting products and services?" }, { "speaker": "Brian Chesky", "text": "Yeah, I mean we essentially built our forecast to have already have a spread of that between short term, medium term and long term. So in the short term, I mean, the biggest driver of growth in the short term again is conversion increases. Every 1% increase in our business is about $100 million. And we have hundreds of basis points of growth opportunities just in conversion and usability improvements. And then affordability we have quite a few opportunities and then a quality and reliability. Probably one of the biggest variables might be like how we think about expanding internationally like some of the big Asian countries like Japan, we can be very, very nimble. based on the results of Japan. Most of these new services and offering though are going to not cost very much. They're mostly headcount we're talking some teams hundreds of people not thousands of people so you won't really see that. Because this is a network effect business and most of our traffic is going to be taking traffic we already have for accommodations business and cross-selling new offerings. And so, it's really just the cost of acquisition of supply and that's not very expensive because we've found that we can do it fairly efficiently. So most of this it's very nimble. There's not going to be a lot of incremental investment that would materially change. The variability is sometimes it’s probably like marketing especially internationally that's a question." }, { "speaker": "Operator", "text": "And your next question comes from the line of Jed Kelly with Oppenheimer. Your line is open." }, { "speaker": "Jed Kelly", "text": "Hey great. Thanks for taking my question. Just going back to the urban opportunity and potentially putting more hotels on your platform, can you just talk about philosophically how the company balances putting more supply that you might consider more could commoditize and that can be cross-listed. What that might convert at a higher rate? Thank you." }, { "speaker": "Brian Chesky", "text": "Hi, Jed, so, essentially, I think people come to Airbnb because they want to get something unique. That's what customers think of when they think of Airbnb. That's why we're a noun and a verb. We're one of the only brands in the world like Kleenex or Xerox, that's a noun and verb and it means you can - it's something that didn't really exist before we created this category at a wide scale. That being said, for everyone who books in Airbnb, about 9 people book a hotel. And so, if we can get just one of those guests to book on Airbnb, that's currently booking on a hotel platform we would go from nearly half a billion nights a year to a billion nights a year. And there's two ways to do that. One is the increased reliability of homes in Airbnb, because the number one reason people tell us they book hotels is they are typically more reliable. They know what they're going to get they have a front desk. The other is adding hotels in Airbnb and we're not philosophically misaligned with adding hotels, if we were we would never bought hotels a night before the pandemic. We just haven't prioritized hotels. We think of hotels as a filling in network gap during high occupancy nights. We generally think our if there's an incredible home at a low price, they're always going to choose that but when occupancy goes up they are going to go towards hotels. There are also some use cases where hotels are better and Airbnbs are better. If you need to stay for one night, you're travelling alone, you are business travel and you plug in you plug out a hotel is better. If you're traveling with a group you are travelling for more than three nights and you're travelling in the non-urban area, Airbnb is better. And then, if you're doing something between then you're going to have choices. So, we do think between filling in a network gap and getting more of those one night business travel stays, there is an opportunity to offer hotels in Airbnb and we have a lot of hotels. We have hundreds of thousands of boutique hotels and non-home inventory on Airbnb and we're going to continue to expand that over its years to come. And so there's no philosophical misalignment to add commodity inventory. The philosophical misalign would be if that becomes the majority of our marketplace and people - consumers stop thinking of Airbnb as unique and local. If they start thinking about us that changes the brand then that would be a philosophical misalignment but I don't see that happening anytime soon." }, { "speaker": "Operator", "text": "And your next question comes from Mark Mahaney with Evercore ISI, Your line is open." }, { "speaker": "Mark Mahaney", "text": "I just wanted to ask a question about Paris and the learnings you've had from this. I assume this is the biggest event for Airbnb and a massive popular event in your largest city. So just if that’s true and I think that is, just step back and talk about the learnings of being able to make sure you had enough supply working with local regulators and agencies and in terms of getting messages out to opportunities out to guests as well like this big event that you've pulled off. Just talk about the lessons you've been able to draw from that that'll you know help you set you a better for the next FIFA World Cup and the next World Cup, next Olympics et cetera?" }, { "speaker": "Brian Chesky", "text": "It’s a great question, Mark I'm really glad you asked this. I just want to like take us back down memory lane because in 2007, Airbnb provided housing for a design conference. Then in 2008, we provided housing for the Democratic National Convention. Then in 2009 we provided housing for the inauguration. Our first three moments when we started Airbnb was provided housing for events. In fact, our original premise of our business was at housing for events. It wasn't meant to be ever offered for anything other than events in conferences. And the reason why is because conferences and events especially things like the Olympics and World Cup are unbelievable use cases for Airbnb. And the reason why is I think obvious to everyone. Events typically like to host more guests than they have hotel rooms available for. And people, most people they have, most regular people aren't looking to become Airbnb host and make a long-term commitment to host every week. So a lot of people events coming to town is wanting to host one week and make $1,000 or $2,000. And so what we did is we focused a year ago on Paris. And in the last year we increased our supply in Paris by 37%. We now have nearly 150,000 homes in Paris. We had 430,000 guests stay in Paris so far and counting and that number to continue to climb. So that's equivalent of five Olympic stadiums, I want you to imagine five Olympic stadiums where the guest staying in at Airbnb. The fact is that the Olympics as we know it could not ever happen again, without Airbnb because this 400,000 could not have stayed in a hotel room. And so to do that, what we did is we worked at the City of Paris. I was in Paris 10 days ago. I met with President Macron. I met with his economic team. And we talked about how important Airbnb was to the Olympics happening. And we had a lot of cooperation. We were a title sponsor Olympics. And we targeted this event of at Paris, we Did a lot of local campaign. And so it was so successful that we now looking at the top thousand events in the world, really large ones like the World Cup and Olympics, but also like you know looking at where Taylor Swift is going on concert or looking at different conferences, different like we provide housing for the Berkshire Hathaway conference in Omaha and we worked with Warren Buffett you got the word out. This is over a decade ago. So conferences, festivals, events, Coachella, you go down the list. I think this is the best strategy we have to recruit supply and the supply recruit for an event is not property managers. They are individuals who host occasionally that come only to Airbnb. And cities actually like when Airbnb provides housing for events because we solve a problem for them. So, I'm glad you ask the question. The answer is it worked widely successful. Better than we ever imagined. We're working on the lawn for 2026. We're looking at La Olympics for 2028. But we're also building a strategy for the top thousand events in the world. But I think this is the strategy the only Airbnb can do. Because we basically increase excess capacity in cities all over the world to allow them to temporary as well. And it's really alignment and incentives. So it's been very successful at least that we continue - we'll be playing to expand the playbook." }, { "speaker": "Operator", "text": "And your next question comes from the line of Stephen Ju with UBS. Your line is open." }, { "speaker": "Stephen Ju", "text": "Okay. great. Thank you. Brian, I want to ask on Airbnb rooms. I would have thought that given its more nascent statement in the economic backdrop that this is should probably be the product that should be growing the fastest. So is there anything that you can call out in terms of product fit or awareness? I think I heard you call out maybe supply shortages earlier. But any factors that might be weighing on the growth rate here a little bit? Thanks." }, { "speaker": "Brian Chesky", "text": "Thanks. Yeah, the reality is the biggest issue with Airbnb rooms it’s just a small percent of our business. It's a very small percentage. So even if it - even no matter how fast it grows it's often very small base. It's how Airbnb started by providing a room and a house. It's very affordable. It's very popular for Gen Z, but it is off a very small base and so you're not going to see a major change to the growth rate of the company based on that. I think the thing but maybe just broad zooming out though, two points I’ll make. The first point is Airbnb is one of the most diverse businesses in the world. We have bedrooms and homes up to tens of thousands of dollars a night luxury villas in Airbnb. We allow you to travel by yourself or with the large groups of up to 16 people. We're in every country nearly in the world, every continent in the world including at one point in article and so we're a very - we're in urban areas. Where in the decades arounds this nations we're off to be impact. So our general philosophy is that something for everyone to have the most diverse array of inventory in the world. The other point I'll just make is an area down the road that would really help Airbnb rooms is continuing to invest in our system of trust. The biggest obstacle to people staying in a room is just the discomfort with staying at a house with a stranger they don't know. One of our core inventions with a system of trust and as more we invest in system of trust, I just gave a lot more of these businesses where strangers to live in the others. So I do think it's still a big long term opportunity for us. But it's often but smaller base and it's never going to be as big as entire home and everything." }, { "speaker": "Operator", "text": "And your next question comes from the line of Lee Horowitz with Deutsche Bank. Your line is open." }, { "speaker": "Lee Horowitz", "text": "Great, thanks. New on one our nights and on pricing. So Ellie you're talking about putting more investments into place in the second half of this year as a means of accelerating growth. Can you help us better understand sort of the payback periods that you tend to expect on these dollars and over what timeframe you may assess the ROI on these investments in terms of accelerating total company growth rates? And then maybe one on ADRs. You guys are highlighting sort of some building demand pressures in North America, all sign the pointing towards people trading up the whole homes and persisting ADR growth for your entire business again despite weaker growth in your highest ADR region, North America. I guess when we think about. the sustainability of ADR growth beyond the 3Q as you mix away from North America and perhaps see the overall travel demand environment continue to soften, how do you think about your ability to continue growing through that kind of a scenario? Thanks so much." }, { "speaker": "Ellie Mertz", "text": "Yeah, so first let me talk about marketing payback. I would say the way we are looking marketing paybacks is very different based on the channels and investment from a performance marketing standpoint obviously the ROI is very specific and relatively short-term. We think about that in terms of weeks and months not quarters. In terms of Brands we think about that over a longer time horizon. If you think about any particular brand campaign, it needs to be in market for quite some time and it needs to be sustained for you not only to see the benefit, but also sustain the benefit and convert it into actual transaction. So I think about that more from the six months to a year payback period and requires - I would say a consistent level of investment. And then, as a third factor something that I mentioned in terms of an area of investment that is not programmatic. We do need to at the margin build some of our teams that are driving this growth and so that will be in a gradual investment modestly above the headcount growth that we've been targeting over the last couple of years but we think it will help long Payback should I should say high payback in terms of driving acceleration across a variety of initiatives. In terms of pricing, I think there's one question about what is happening at a geo level. I think there's a broader question in terms of the aggregate or global ADRs. To your question in terms of if neighbor is softer than other regions what happens to global ADR obviously mix shift is a huge component in terms of the global ADRs that we report. One Factor in terms of the Q3 guide is the shift a little bit away from North America which as you highlight does have the highest ADRs Over time we would anticipate that as regions like Latin America and APAC become larger portions of our overall business, the global ADR would come down. But those incremental nights are all accretive and the economics behind them still are very strong. So it's a at a global basis, we are we're somewhat agnostic because we can deliver strong economics across a wide range in ADRs." }, { "speaker": "Operator", "text": "And ladies and gentlemen, that will conclude our question and answer session. I will now turn the conference back over to Brian Chesky for closing remarks." }, { "speaker": "Brian Chesky", "text": "Alright, well, thanks for joining us today. Just to recap, revenue was 2.7 billion 11% higher than a year ago, adjusted EBITDA was a Q2 record And our a trailing 12 months free cash flow was $4.3 billion is our highest yet representing a free cash flow margin of 41%. And we've made significant progress over the past few weeks, but there's more to come. In October we're going to share with set of features and upgrades as part of our 2024 winter release. This includes expanding host of co-hosting, setting the stage for host provided services and much more. I'm proud what we accomplished in Q2 and I look forward to sharing more with you next quarter. Thanks for joining." }, { "speaker": "Operator", "text": "And ladies and gentlemen, that concludes today's call and we thank you for your participation. You may now disconnect." } ]	Airbnb, Inc.	115,705,393
ABNB	1	2,024	2024-05-08 16:30:00	Operator: Good afternoon, and thank you for joining Airbnb's Earnings Conference Call for the First Quarter of 2024. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Angela Yang, Director of Investor Relations. Please go ahead. Angela Yang: Good afternoon, and welcome to Airbnb's first quarter of 2024 earnings call. Thank you for joining us today. On the call today, we have Airbnb Co-Founder and CEO, Brian Chesky and our Chief Financial Officer, Ellie Mertz. Earlier today, we issued a shareholder letter with our financial results and commentary for our first quarter of 2024. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We provide a reconciliation to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I will pass the call to Brian. Brian Chesky: All right. Good afternoon, everyone, and thanks for joining. Airbnb had a strong start to 2024. We had 133 million nights and experiences booked in Q1, marking our highest first quarter ever. Revenue of $2.1 billion grew 18% year-over-year, primarily driven by continued strength in travel demand and the timing of Easter. Net income was $264 million, representing a net income margin of 12%. For Q1, our free cash flow was $1.9 billion, our highest ever. And for the trailing 12 months, our free cash flow was $4.2 billion, representing a free cash flow margin of 41%. Our strong cash flow allowed us to repurchase $750 million of our shares in the quarter. And at the end of Q1, we had $6 billion remaining on our repurchase authorization. Now, during Q1, we made significant progress across our three strategic initiatives, which are making hosting mainstream, perfecting our core service, and expanding beyond the core. First, we're making hosting mainstream. We remain focused on making hosting just as popular as traveling in Airbnb. And to do this, we're raising awareness around the benefits of hosting, providing better tools, and helping hosts deliver high-quality stays. As we grow, we're also taking action to rapidly improve the quality of stays on Airbnb. In Q1, we removed thousands of listings that failed to meet our guest expectations. And excluding these removals, active listings for accommodations grew 17% year-over-year. And we also saw sustained double-digit supply growth across all regions. This year, we'll continue to raise awareness around hosting and improve the overall host experience. Second, we are perfecting our core service. Over the past few years, we've rolled out more than 430 new features and upgrades to improve our service. In November, we took another huge step forward on reliability with the launch of Guest Favorites, a collection of the top homes on Airbnb based on ratings, reviews, and reliability. Now, since launching Guest Favorites, there have been more than 100 million nights booked at these listings. And we will continue to make it easier for guests to find high-quality and affordable stays. Finally, we're expanding beyond our core. During the quarter, we continued investing in less mature markets to unlock more growth. And in Q1, growth nights booked in our expansion markets grew twice as fast as our core markets. And we're also focused on expanding beyond our core business. Now, this will be a multi-year journey, and we've already begun laying the foundation. Last week, we introduced Icons, a new category of extraordinary experiences by the greatest names in music, film, sports, and more. Icons mark an important next step in helping people understand that Airbnb offers more than just travel accommodations. Now, before I share a few business highlights, I just want to provide some context on why we actually introduced Icons, because they deliver on three key objectives. First, Icons keeps Airbnb's brand relevant and top of mind. With new Icons launching throughout the year, we can introduce more people to Airbnb and highlight what makes us unique. Second, while Airbnb's brand is already recognized around the world, there are specific segments where we want to accelerate growth. And with a broad range of Icons spanning various geographies, demographics, and fan bases, we'll be able to reach key segments in a more targeted way. And third, Icons helped change the way people think about Airbnb and what we offer. And this is going to be critical as we expand beyond accommodations in the coming years. Now, it's still early, but we're really excited about the response we've seen to Icons so far. In just one week, the Icons launch has generated over 8,100 pieces of global media coverage and 371 million social media impressions. And the coverage has been overwhelmingly positive. Now, just to put this into perspective, Icons has already generated more for us than our IPO. It's clear Icons are resonating with people. Now, looking back to Q1, we saw a number of positive business highlights. First, mobile downloads are accelerating. So, to quickly zoom out, nights and experiences booked in Q1 increased 9.5% year-over-year, despite a hard conference this time last year. And we were particularly encouraged by the growth of app downloads. In the U.S., app downloads increased 60% in Q1 compared to a year ago. And global nights booked in our app increased 21% year-over-year. And they now represent 54% of nights booked during the quarter. And this time last year, mobile bookings represented only 49%. So, it went from 49% to 54%. So, we're seeing some really, really good traction. Second, Airbnb is uniquely positioned for special events. Special events is really how we started Airbnb. We really started it to provide housing for conferences and events. And in April, we had over 500,000 guests stay on Airbnb during the solar eclipse in North America. And interestingly, we saw more than twice as many nights stayed on Airbnb along the direct path of the eclipse compared to the year prior, with many of these locations in areas that don't even have hotels. Nights booked in Paris during the summer's Olympics are five times higher than this time a year ago. And Germany is also seeing a similar trend for the Euro Cup this summer, with nights booked nearly double compared to a year ago. Now, supplies also increased to meet the higher demand, including nearly 40% more active listings in Paris in Q1 compared to a year ago. These events highlight that Airbnb's unique ability to disperse travel and spread economic benefits by allowing people to stay in local neighborhoods where there are no hotels. And finally, supply growth remains strong. Now, as mentioned earlier, in Q1, we removed thousands of listings that failed to meet our guest expectations. And excluding these removals, active listings for accommodations grew 17% year-over-year. We continue to see double-digit supply growth across all regions, with the highest growth in regions with the highest demand. Urban and non-urban supply increased at about the same rate, and we saw relatively similar supply growth among individual and professional hosts, with the majority of new listings exclusive to Airbnb. We're really proud of our strong Q1 results, and we're looking forward to another record summer travel season. So with that, Ellie and I look forward to answering your questions. Operator: [Operator Instructions] Our first question will come from the line of Mark Mahaney with Evercore ISI. Please go ahead. Mark Mahaney: Thanks. You talk about these kind of leaning into these kind of less mature markets and this doubling of growth rate in some of those expansion markets versus your core markets. Could you give a little more color on which countries and which markets that is? Which countries, I think in the past, you may have mentioned Brazil, but which ones you're leaning into this year? And then secondly, that U.S. app downloads increase of 60% year-over-year. That's an extremely high number for what you would think would be a reasonably well-known app and brand. So what drove that? Do you have any whys behind that? Thank you very much. Brian Chesky: Yes. Hey, Mark. Why don't I start? So leaning into less mature markets. So if you think about Airbnb, we're obviously in 220 countries and regions. We're one of the most global brands in the world. But our markets with the highest penetration would be U.S., Canada, Australia, France, and U.K. So those five. So the next markets that are the biggest potential TAM would be like Mexico, and Brazil, and Latin America. In Europe, it would be Germany. It would be Italy. It would be Spain. We're also starting to see some traction like Switzerland and Netherlands. And in Asia, it would be Japan. It would be Korea. It would be China. And eventually, a little bit longer game would be India. So these are, and there's a few others in Latin America. So I could kind of keep going. But those are kind of some of the really, really big travel TAMs. And Mark, maybe just one other thing I'll just say. I think a really good thing to look at is our penetration for each country. And while U.S., Canada, Australia are really, really similar, there's a really, really big drop off in a lot of these other markets that are huge travel TAMs, I mean, especially in Asia. And one of the things that we've learned is that Airbnb pretty much resonates pretty equally everywhere once there's the awareness. In fact, I could argue that Airbnb might resonate better in Asia because there's a younger travel population that's not predisposed to hotels and they're on social media. And we are disproportionately on social media versus our competitors. So I'm very, very bullish about that. Now, on U.S. staff downloads, you're right. I mean, it's grown 60% last year. It went from 49% of bookings to 54% of bookings. So at the highest level mark, what drove that was just focused on a roadmap. We have a brand that most everybody, at least in the United States has heard of. And a lot of people download our app, but we've never really focused on optimizing our app from a download perspective. And just to be clear, these numbers were driven organically, not by paid advertising. So it was really just a lot of optimization, different touch points, encouraging people at the right moment to download our app, not being intrusive. We had pushed a lot of people to just, we just pushed them to our mobile website. Our mobile website does not convert nearly at the rate of our app download. And so maybe the highest level point I'll just make is, I think what we've been able to prove in the last three years is when we focus on something, we can drive the numbers. Two years ago, supply wasn't growing, we focused on it. It's now growing 70% net quality. A year ago, we felt like app downloads weren't where they needed to be. We put a team on it, they focused. So I think we're developing a good track record to really be able to move metrics when we focus on them. Mark Mahaney: Thank you, Brian. Ellie Mertz: Brian, if I could just add, I think the app download effort is really just part of our broader priority around perfecting the core and optimizing the core business. We identified that not as many of our guests were using the app as they should. And we know that the app is a much better user experience than MoWeb. So it's again, part of a broader suite of roadmap items that are intended to improve and perfect the core experience. Mark Mahaney: Thank you, Ellie. Brian Chesky: Thanks, Mark. Operator: Your next question will come from the line of Richard Clark with Bernstein. Please go ahead. Richard Clarke: Hi, good afternoon. Thanks for my questions. Just on, you mentioned on the prepared remarks and you mentioned that Q4, that Q1 would have quite a tough comp. And there's calendar effects in there as well. But you're guiding the Q2, it's going to be flat on room night growth. So is there anything you call out in Q2 that's maybe holding that back and how we should think about the rest of the year? And maybe just a similar question on margin, the Q2 guide, I guess a little bit softer than consensus had some calendar in there. Is that including any of the growth investments you talk about or are those things that may come in more the second half of the year? Ellie Mertz: Yes, thanks, Richard. Let me just talk a little bit about the trends that we've seen here today to help answer your question. So first, as you point out, as we were heading into 2024, we were widely aware that last January was particularly strong. And so the guide that we've provided back in February included a step down in growth from Q4 to Q1 that was reflective of that hard comp from a year ago. We did experience it. And then since then, we've seen relatively stable growth, which I see as frankly, a really strong statement in terms of both the stability and resilience of leisure travel demand so far this year. I think, something that we've seen this year that is contrasting to last year there was a lot of volatility in terms of the timing of when people booked relative to their check-ins. And so far this year, it's been, frankly, much more stable. Lead times on our platform have been, frankly, generally in line with a year ago, and it just hasn't been at the same level of volatility, again, that we saw a year ago. And so heading into Q2, our guidance reflects this continued stability of booking. Obviously, we'd like to deliver higher growth and stable growth, but our outlook obviously reflects the trends that we have seen quarter to date. To your question on Q2 margins, obviously, we guided, the Q1 results reflect a pretty meaningful year-over-year margin expansion. A big portion of that is due to the timing of Easter. So Easter is not only a benefit to revenue growth in Q1, but it's obviously also a benefit to margin expansion. Those two factors reverse in Q2. It is a headwind to revenue growth, and it is a headwind to overall margins. Two other components in terms of what's putting pressure on margins in Q2. One is just some one-time credits that we had in payment processing a year ago that will not recur this year. And then third, we shifted slightly the timing of our marketing spend, a little bit heavier in Q2 than in Q1, and that will be reflected in terms of marketing as a percent of revenue growing in the quarter on a year-over-year basis. Richard Clarke: Very helpful. Thank you. Operator: Your next question will come from the line of Jed Kelly with Oppenheimer. Please go ahead. Jed Kelly: Hey, great. Thanks for taking my question. Just one on ADRs. They seem to be relatively sticky, and I think a couple quarters ago, you talked about driving value to the consumer. So can you just give us an update on where you are in sort of some of your value initiatives? And then on supply, great supply growth again. Can you talk about how we should think about supply and nights eventually converging to similar growth rates? Thank you. Brian Chesky: Yes. Hey, Jed. Why don't I take the first one on value initiatives, and I'll let Ellie take the second one. So on providing value, when we started Airbnb, our original tagline was a cheap, affordable alternative to a hotel. And the majority of the primary reason people came to us is because it was a better value than a hotel. And we still think that's a core value proposition that we have to offer. Now, a year and a half ago, we noticed that, there was a lot of concern about Airbnb prices increasing. And so we created a whole team to identify a series of initiatives to modulate our prices, and they're working. And I'll go down the list. One is total price display. So as you know, in travel, especially online travel, there's a lot of progressive fee disclosures. And we decided to have a toggle right on the homepage that you can turn on to show the total price display. Since we've done that, not only do consumers -- not only are consumers going toward the best total value, but it's begun to change behavior in our host community because 300,000 or 300,000 listeners, say, have removed or lowered their cleaning fee as a result. So that was the first thing we did. The next thing we did is we started offering monthly and weekly discounts and much more robust tools for that. Now, this is important because, nearly half of our nights booked are for stays of a week or longer. And now more than two-thirds of our hosts offer a monthly or weekly discount. We also noticed that a lot of hosts that weren't getting booked weren't getting booked because their prices were too high. And they just didn't have really good concepts. So we created a tool called the Compare Listing Tool where people can see how much other people are charging the neighborhood. And they can actually see people who are getting booked, not getting booked. And no surprise, the people getting booked generally have lower prices. We have nearly 2 million hosts that now use the Compare Listing Tool. So those are just a few of the initiatives we've done. We actually have many others as well. The net of all of it is that hotel prices are up year-over-year and Airbnb listings on a like-for-like basis are down. So today the value of Airbnb versus a hotel is better than it was a year ago. And I think that trend line is going to continue given all of our efforts. And maybe the only other thing I'll just say on this is, as we know, loss of supply and demand, as supply grows faster and demand prices go down a little bit. And supply is growing faster in demand. I think that's also relieving some pressure. Ellie, over to you. Ellie Mertz: Yes, so Jed, to your question with regard to the relative growth rates of supply and demand, just a few comments. I would say first, something that we've shared previously is that in any given quarter, we would not expect supply and demand to grow exactly in line. But when we look over a longer time period, either the last decade or more specifically from pre-pandemic to today, what we do see is that over a period of years, they do grow generally in line. And I would say that continues to be the case. Where we are right now, I would say we're very encouraged to be able to deliver this continued level of very strong supply growth for a couple of reasons. I would say one, we know that more unique, differentiated supply wins and differentiated supply is why people come to Airbnb. I would say second, and Brian made this point, but growing supply allows us to, it really benefits our affordability measures in that more supply obviously but gets more competitive pricing. And then I would say third, relevant to our recent quality initiatives, we see it as an opportunity for, as supply growth is stronger than demand growth, for us to continue to be driving quality. What you saw in the quarters, we obviously did some one-time takedowns of supply that frankly just did not meet our community's expectations. And the fact that supply is growing so rapidly, it allows us to make those cuts, if you will, to the supply base and to be continually upgrading the level of quality that we deliver to our guests. Jed Kelly: Thank you. Operator: Your next question comes from the line of Ron Josey with Citi. Please go ahead. Ron Josey: Great, thanks for taking the question. Brian, I wanted to ask you about search on Airbnb, just following the strength and the benefits of guest favorites. I wanted to better understand sort of, talk to us about post-guest favorites, how search and really conversion rates have improved and really how you feel search can just evolve over time. And then as a follow-up to what we were just talking about around inventory quality, we'd love to hear just the process to ensure that quality listings continue to come on the platform. I think we've talked about verified listings and trophies, but any other thoughts there would be helpful. Thank you. Brian Chesky: Oh yes, Ron. These are really, really good questions, Ron. So yes, let's start with search. So, we did approximately $10 billion last year in revenue. So the way to think about this is if we can just drive an incremental 100 basis points in growth, that's $100 million. So like the way we look at our conversion rate is like we have teams dedicated to the search experience. And we, over the last year, we, the last 12 months, we've likely driven at least a few 100 basis points of incremental growth just through optimizations of the search flow, because we just get so much traffic. And so just to call out a couple of things that we did, I mean, there's been dozens of dozens, I'll just name a couple. One I already mentioned, mobile app downloads. Now, why do mobile app downloads lead to also more bookings? Because the conversion rate on a native application is typically a lot higher than a mobile website. Number two, just to give you a couple of examples, one of the challenges of Airbnb compared to a hotel is you may type in a location and certain dates and maybe you're on vacation and you don't see exactly the home you need and you might not book a home. You might now open a different app. And we have this carousel that basically offers, hey, if you change your dates by one or two days, here are other listings you can find. And that led to a huge increase in booking. We made improvements to filters. We've made improvements to search input, the search box, making the search box more prominent. So there are quite literally dozens and dozens of improvements that we've made. And I see hundreds of basis points of incremental growth just through essentially optimizing the end-to-end guest flow for our core business. So it's really, really exciting. And a couple of big areas would be maps and location. There's a huge opportunity around that area. So that's on search. On inventory and quality, this is a great question. I mean, we have a really extensive roadmap. Last year we launched guest favorites, as you know. In November, 100 million nights booked have been booked through them. I would say the response to guest favorites has even been greater than I anticipated. We're seeing more people not only book guest favorites, but we're seeing that guest favorites have a fraction of the trip issue and contact rate as non-guest favorites. So guest favorites have between a fifth and a 10th the contact rate as our bottom quartile of listings. And the rebooking rates are much higher. And I also think what Guest Favorites is doing is it's changing behavior to encourage more hosts to become better. And so after that we launched quality highlights in March. Quality highlights, basically what happened was Guest Favorites was the top 2 million listings in Airbnb. But a bunch of people were saying, well how do we know which are the best within those 2 million? So what we did is we have a top 1%, top 5%, and top 10% trophy classification. And this is also really I think popular with guests. We've now removed hundreds of thousands of listings. And we are going to be doing a number of new things. One of the things we are experimenting with is showing to percentile where something falls in a quality distribution as a percentile basis. And then continually adding a lot more supply, and then tightening up our quality control, and really giving a lot more feedback to hosts to become better. I think that a really good opportunity here is to get a lot more listings in Guest Favorites, and to provide host education, host tools for the hosts that are struggling to be much more successful. So there's a pretty big and extensive roadmap to go. And just the last thing I'll say about this is, as big as Airbnb is, and we are approaching half a billion room nights a year, for everyone who stays in Airbnb, somewhere around 8 or 9 people stay in hotels. And when you ask people, why are you staying in a hotel? Airbnb is typically more affordable. It's a more local experience. It's much better for groups and families. People say yes, but hotels are historically a more consistent experience. And so if we can just get one of those travelers from hotels to stay in Airbnb, that would double the size of our business to a billion nights a year. And so we think quality and reliability is a multi-year roadmap. So you're going to be hearing every year major updates from us on quality and reliability. Ron Josey: Thank you, Brian. Super helpful. Operator: Your next question comes from the line of Eric Sheridan with Goldman Sachs. Please go ahead. Eric Sheridan: Thanks so much for taking the question. Maybe coming back and putting a finer point on some of the topics we've talked about already, Brian. When you think about your top investment priorities for 2024 and beyond, how would you categorize those investments if we put them in buckets such as demand generation, supply growth, and platform and product innovation over the long-term? And in that last bucket, how should we increasingly think about what you're learning about testing and deploying AI across the platform and how it might reduce friction over the longer term? Thanks so much. Brian Chesky: Hey, Eric. Good to hear from you. So maybe I can just – you had three buckets. Maybe I can give you three slightly different buckets to give you our framework. The way I think about deploying our resources – and when I say resources, probably the most precious resources we have is product and engineering resources. And the way I think about that is we have our core business, we have international expansion, and we have expanding our core business of accommodation. So that's kind of the way we think about our portfolio. And you can imagine they're all totally different horizons. So the majority of our people are still focused on the core business. And I believe that we are just scratching the surface of the size of our core business. Within our core business, we typically have about three different areas of focus. One I just talked about, which is quality and reliability. The next one is affordability, making sure Airbnbs are more affordable hotels. And the third is usability, what I also talked about with search and reducing friction. So that's the first bucket of our investment. And that really will pay off within this year. And so there's – you can get a return on those efforts within a matter of months, because a lot of that – a lot of those changes are software changes. They're immediate. They touch 100% of our user base. And they touch a very large base, our entire GBV. Next is international expansion. International expansion is really supply, demand, and platform. It's all three within international. And you can really bucket into two things. We have to localize the product, and then we have to have a global marketing strategy to go one market at a time. And we've done a lot of really good work over the last few years on international expansion. But I think at this moment, we are ready to step on the gas. And by stepping on the gas, I don't mean it's going to be a significantly greater investment, but a much greater velocity, because we spend a lot of energy updating our products. So most recently, we just – we just updated our application in Asia, specifically in China. And we're bringing a lot of those improvements to Japan and Korea, because the applications work fairly similarly. And so getting these products onto a better standard is a really good first thing that you want to do before you actually step on the gas for marketing. So that's international. And of course, the final thing is expanding the inter-corporate business accommodation. So from dollars and number of people, this is by far the smallest area that we're putting people on now, because it's a small base. But it's actually where I'm spending the majority of my time. And I think the majority of the leadership's time is now being spent focused on transforming the company from an accommodations business to a multi-vertical or multi-category company. And over the next three years, you're going to see this play out quite substantially. So that's the way we think about it, core, international, and then expanding beyond our core. Eric Sheridan: Great. Thank you. Brian Chesky: And then I think the other question, sorry, I have to answer the question about how are you, what are we learning about AI and reducing friction? So just a couple of things in AI. First of all, like, we've been using AI for a long time. In the last 12 months, we've made a lot of progress. I'll just give you three examples of things we've done with AI. We've made it easier to host. We have a computer vision model that we trained in 100 million photos, and that allows hosts to, like the AI model, to organize all their photos by room. Why would you want to do this? Because this increases conversion rate when you do this. Number two, we launched last week AI-powered quick replies for hosts. So it basically predicts the right kind of question or answer for a host to pre-generate to provide to guests. And this has been really helpful. And then we've made a really big impact on reducing partisan Airbnb with our reservation screening technology. So now we're going much bigger on generative AI. I think we're going to see, I think we're going to see the biggest impact is going to be on, customer service in the near term. I think more than hotels, probably even more than OTA, Airbnb will benefit from generative AI. And the reason why is just a simple structural reason. We have the most, like, varied inventory. We don't have any SKUs. And we're an incredibly global platform. So it's a very difficult customer service challenge. But imagine an AI agent that can actually, like, read a corpus of a thousand pages of policies and be able to help adjudicate and help a customer service agent help a guest from Germany staying with a host in Japan. It's a very difficult problem and AI can really supplement. Over time, we're going to bring the AI capabilities from customer service to search and to the broader experience. And the end game is to provide basically an AI-powered concierge. So that's where it's going. But it's really focused on customer service at this very moment. Operator: Your next question will come from the line of Brian Nowak with Morgan Stanley. Please go ahead. Brian Nowak: Thanks for taking my questions. I have two just to sort of come back to a couple of the topics we talked about. The comp did get easier. So with the comps getting modestly harder in the back half, can you just sort of walk us through maybe micro levels of innovation that can sort of drive stability? Or how do we think about reasonable ranges of outcomes for room-night growth in the second half? And then the second one, you know, Brian, you talked about how like-for-like pricing is more attractive versus hotels. I don't have the transcript exactly yet. But if I look at Marriott and Hilton and their ADRs are up 2% to 3% and your ADRs are also up 2% to 3%, is there something else that you're seeing where the relative pricing is actually becoming more attractive that you can help us understand a little bit more? Thanks. Brian Chesky: Yes. Why don't I take the second question? And I think, Brian, either you or I cut out. We didn't hear the first part of your question. Brian Nowak: So do you want to just repeat the first question? Yes. Yes, absolutely. The first question was more for Ellie, where she has – you talked about how you have stable room-night growth now, but I think the comp is a little bit easier from 1Q to 2Q. And with the comps getting a little more difficult in the back half, can you just sort of walk us through some reasonable ranges of outcomes of growth in the back half and maybe micro-level drivers to kind of keep the stability versus drive deceleration? Brian Chesky: Ellie, you want to take the first one, and I'll take the second one? Ellie Mertz: Yes. So I think you were right in terms of the thinking was that the comparison in Q2 would be a little bit softer. I think what we've seen so far, just to repeat what I said previously, is that, yes, it was clear that there was a hard comp in January. Since then, we've seen, I would just say, a general stability. We are not so far this year seeing the same level of volatility that we saw in 2023 in terms of either movement of lead times or consumer, I would say, hesitancy to book during kind of macro dislocation. So general statement is that, year-to-date, just the trends have been stable, and that's what our Q2 reflects. In terms of the back half of the year, I would say – I don't know if I would characterize the back half of the year as harder comps. I think if you recall, actually, some of the volatility that we and others saw in the back half of the year, there was a bit of a moment of dislocation end of summer heading into October, and in particular, in the month of October related to the conflict breaking out in Israel. So I wouldn't necessarily characterize the back half of the year as being a harder comp. Instead, I think if you think through the growth initiatives that Brian talked about in terms of thinking about where our portfolio of investments lie, I would say we are optimistic that a lot of the core optimizations could have near-term impact as well as the international investments. So those are the places where we're really looking to drive in-year growth above where we are today. Brian Chesky: And Brian, I'll take the like-for-like question. So specifically, the data we're citing is global like-for-like basis. So what we're comparing is the average price of a global hotel room to a one-bedroom listing on Airbnb in March. And in March, our prices were down 2% and hotel prices were up 3%. So our prices were, again, one-bedroom globally on Airbnb in March was $114, down 2%. Hotels were $148, up 3%. So that's what we're talking about, one-bedroom global. When our ADRs move, obviously the other thing to take into consideration is mix shift. Oftentimes our ADRs do go up because people increasingly, more and more of our travel is group travel. 81% of our trips now have two or more guests and increasingly we're seeing people booking more space, larger homes, just as travel's mixing towards larger groups. Brian Nowak: That's helpful. Thank you both. Ellie Mertz: And Brian, that was particularly the case in North America this quarter. On an absolute basis, ADRs were up, but if you exclude the impact of mix, they were flat. Brian Nowak: Oh, okay. Great. Thank you both. Operator: Your next question will come from the line of James Lee with Mizuho. Please go ahead. James Lee: Great. Thanks for taking my question. And just want to follow up the prior question on supply and demand growth. And in other segments of the gig economy services, they seem to benefit when supply exceeding demand. So if you think about, ride sharing and food delivery, because they drive prices down and therefore increasing consumer demand. Should we, think about it in the same path for home accommodation? Are you thinking, expecting maybe a similar trend for your business as well? Thanks. Ellie Mertz: I would say generally speaking, when we see growth in supply, it is additive to demand. It means that, when people are searching for a particular night in a particular city, if we have more that we can provide them, it is obviously net beneficial. I think I would just, repeat the prior comments that we don't always see kind of in period equivalence by market in terms of the respective growth rates. And that I would say that, there's a primary difference in terms of our business model relative to some of the others that you mentioned in that the frequency of the activity is simply lower and the lead time is also much longer. James Lee: Great, thank you. Operator: Your next question comes from the line of Stephen Ju with UBS. Please go ahead. Stephen Ju: Okay, thank you so much. So Brian, would we be overreaching if we were to think that Icons is a leading indicator of what should be, I guess, a revitalization or re-imagining of experiences? So, maybe the overnight stay in the [Indiscernible] generates all the media and consumer attention, but maybe this affords you the opportunity to expose the users you're getting to the more everyday experiences. And also secondarily, you've talked about this and the letter talks about this also, the Olympics and the Euro's bump, and there's going to be travelers who are probably not sports fans and who might want to be avoiding Paris and the host cities in Germany altogether. So, is there anything you can share in terms of how additive these two events may be? Thanks. Brian Chesky: All right, Stephen. Well, that was, you are absolutely not overreaching on Icons. So let me give you a sense. You can think of a company as going through a few phases, especially to start a company. You have an idea, you get product market fit, that's phase one. Phase two is you try to go into hyper growth. We've done that. Phase three, you become a real company, you go public, you generate a return for shareholders. And then the fourth frontier, and very few companies have ever done this, is you reinvent yourself and you go from offering one thing to many things. And a lot of the big tech companies have done this. But one of the companies that I think is a really interesting one to look at is Nike. In the late 70s and early 80s, my recollection, I was born in 81, but my recollection is, I remember, Nike was mostly a running shoe company. And then the 80s, they became more popular with basketball and other things. But at the time, people didn't really think of Nike as a serious basketball shoe. And so they had to not only create a great product for basketball, but they had to actually stretch the brand and open up in people's minds what Nike stands for. And a lot of brands have had to do this. I mean Apple had to do this with the iPod. And I think Airbnb, one of the strengths of our brand also is something that we have to manage which is Airbnb is a noun and a verb. It's synonymous with a category, kind of like Kleenex or Xerox. People say, I'm going to get an Airbnb. I'm going to Airbnb my place. Literally, the name Airbnb has the name B&B in it. So one of the challenges is that people open our app to expect to see stays. And so what we want to do in addition to bringing back experiences, you are totally right, is we wanted to expand Airbnb's brand positioning to include more than just a place to stay. And one of the things you'll notice is when we launched Icons, we said these are extraordinary experiences. We didn't say these are extraordinary stays. We positioned them as experiences. And so you can almost imagine Icons is like we are a car company, but we are starting with a Formula 1 car. And very few people can experience a Formula 1 car, but it captures the magic. It captures the demand. It really expands the brand and increases our permission to be able to go into experiences. And then you kind of move down market. And one of our goals is going to be to bring the magic of Icons to everyone. So I can't probably say too much more about experiences, but absolutely it's not a leap or a stretch whatsoever. Icons is primarily a brand positioning and a brand investment. It obviously wasn't a business. There's only about 4,000 tickets. But we are seeing some really encouraging signs in the last week, a big bump in traffic. It's a lot more top of mind. A lot more people are opening our app. And I just think we are being positioned as more aspirational. And I think people are now starting to think of us for experiences. So I think we've really paved the way for next year. Ellie, do you want to take the Olympics in your own? Ellie Mertz: Yes, certainly. So if you look at our history, I would say that special events have always been kind of a good moment for Airbnb to shine and have been overall additive in terms of both our brand perception as well as supply growth. I think what we've seen from prior events, and I'm talking about pre-COVID Olympics, World Cup, Super Bowl, those type of events, what we see is that it should bring a ton of supply onto the platform. And while not all of that supply will persist, a good portion of it does. And so it's a nice supply acquisition moment for us. I would also say it's really additive in terms of signaling to cities how helpful and additive Airbnb can be to those cities to ramp up supply in a very organic and easy way without adding incremental hotel infrastructure that will not be necessarily needed long-term. And I think you see that in particular in Paris right now. We're going to be hugely additive in terms of hosting travelers for the games, whereas the existing infrastructure would not be able to manage such a large inflow. Stephen Ju: Thank you. Operator: Your next question will come from the line of Doug Anmuth with JPMorgan. Please go ahead. Unidentified Analyst: Hey, this is Dave [ph] on for Doug. Thanks for taking the questions. One for you, Ellie. Can you talk about how you're thinking about the investment levers that provide flexibility and shape your 35% plus EBITDA margin guide for the full year? And can we expect to see these levers get pulled more through the year? Ellie Mertz: Yes, so I couldn't hear entirely, but a question about our guide for full year EBITDA margins, a floor of 35%. Let me just talk a little bit. Yes, the investment level. Unidentified Analyst: Yes, and how you're thinking about investment levers. Ellie Mertz: Yes, of course. So let me just step back and provide a little bit more color in terms of why the 35%. If you look at our performance since the IPO, pre-IPO, we had a negative 5% EBITDA margin. And behold, three years after the IPO, we delivered nearly 37% EBITDA margins last year. I think we have repeatedly demonstrated the increased strength of this business model in terms of very strong profitability, inclusive of GAAP, net income profitability, as well as free cash flow. And at the same time, where we sit today, we see a huge opportunity in driving incremental growth. And so as we kicked off the year last quarter and looked at our opportunity set, we've identified a handful of areas where we'd like the flexibility to lean in and drive incremental growth beyond what we're seeing today. So where would you see those investment levers on the P&L? It's really two areas. So first, not surprisingly, is marketing. In marketing, we've been very disciplined over the last couple of years. We continue to have a much lower level of marketing intensity than really anyone else in travel. And at the same time, at the margin, we have seen some incremental opportunities to lean in on channels where we're seeing higher ROIs. In Q1, we saw nice, very high ROIs in performance marketing. To the extent that that continues, we would lean in modestly over the course of the year. Additionally, and probably more importantly, Brian talked a little bit about our opportunity set in international markets. And that's also an area where, to the extent that our full funnel marketing investments are working, we would look to top off those investments and to therefore accelerate growth. So marketing is one line item. You will potentially see some margin compression in order to drive growth. The second area, Brian talked about prioritizing our resources and identified that, in many cases, our product development team is our kind of scarcest resource. And I think when you hear us talk about our roadmap, you can obviously infer that we have a very robust list of initiatives that we would like to tackle. And so there's an opportunity to, at the margin, add more personnel over the course of the year to allow us to accelerate that roadmap. And you would see that in particular on the product development line item. So grand scheme of things, no material pivot in terms of our overall financial discipline, but instead a bit of lean into those areas where we believe we can accelerate growth. Unidentified Analyst: Thank you for the detailed response. Operator: Your next question will come from the line of Kevin Kopelman with TD Cowen. Please go ahead. Kevin Kopelman: Great, thanks a lot. I had a question on the May release. You added a couple of small new features to the user profiles, I think on the photos and the travel stamps. Can we see that as a first step towards some of the profile enhancements and community features that you've talked about being interested in in the past and where does kind of building out potentially new community features stand in your priority list? Thanks. Brian Chesky: Yes, hey Kevin. We spoke in this call mostly about Icons, but I mean, I am equally excited for the results that we've seen for group travel. I'm not going to go through all the metrics, but the metrics have been all really, really positive for group travel features. And in particular, one of the things we've seen is, when people book an Airbnb, the average number of guests is two. So that means that typically for every booking, there's another guest. But typically the other guest hasn't connected their account to Airbnb. So if you travel with a partner or a friend, maybe if you book, the other person doesn't actually have an account or they haven't connected their account. So as we've, and it's strategic for us to get more accounts, that would make sense, right? Especially as you want to sell more things beyond home. We want to have a point of sale for every single person on a trip, not just a point of sale for the booker. So this is really, really critical for us. And what we've seen is a major jump in the number of co-travelers that are now creating accounts in Airbnb and not only creating accounts, but filling out their profile. And so to answer your question, yes, this is the beginning of something much bigger. To probably zoom out, when we started Airbnb, there already were vacation rentals, but they were mostly on classified sites like Craigslist [ph] or there were like paid subscription services like Vrbo. And one of the innovations we brought is we added profiles, payments, two-sided reviews and messaging and those capabilities unlocked really this whole new category. This was what we may call the system of trust. So what we're now doing is we're going to be investing a lot more in increasing our profiles and our profile capabilities, both our account structure, cleaning it up, our identity verification, making, getting more people to complete more robust profiles, increasing their preferences so we have more information about people. And this is so strategic because as trust goes up, more, you can unlock more things for people. And as we know more about you, we can match you better. So, I think in the future, right now, if you think of like the Airbnb solar system, the home is like the sun at the center of the solar system. I think in the future, the profile will be at the center of the solar system of Airbnb and the home will be one of many categories orbiting the profile. Kevin Kopelman: Great, thanks so much. Operator: Your next question comes from the line of Nick Jones with Citizens JMP. Please go ahead. Nick Jones: Great, thanks for taking the questions. I guess maybe going back to supply and your effort to remove low quality supply. I guess, can you speak to the percentage of the supply that you've removed over time? I think you said 100 to 1,000 that I guess maybe take the removal and I guess the learnings and come back and try to list and provide a kind of a higher quality or better experience. I guess as you continue to remove lower quality supplies, it's becoming a tool to kind of nudge hosts into the behavior you're looking for without actually having to remove them. Brian Chesky: Yes, I mean, hey Nick, why don't I take the first one? So, the first thing I'll say is the global occupancy on Airbnb is so much lower than hotels. So, even though you type in a certain date and a location, when it's a popular day and location, occupancy can rise at a global level. We are still like, not even close to high occupancy. And so, one of the games we need to do is we want to point them in to the best supply on Airbnb. So, we don't, and so having removed all this supply, we haven't seen a fundamental shift or impact on global bookings because a lot of them either weren't getting as many bookings in the first place, or they were eating up page views, they were lower converting listings, or people were booking them, they were really expensive because they were leading to customer service contacts, which were expensive. And if you went through all that, the revoking rate for them was much lower. Now, as far as the answer to your question about like how many of them come back, I don't have the stats on top of my head. But, I think that like this quality control program, one of the things we've noticed is that a lot of hosts are very coachable and learnable. They're very coachable and they can learn. So I think one of the problems in this category is historically there's these marketplaces have been so hands off that people don't know what it takes to be successful. And as you give them more like metrics, as you give them more incentive to be good, and as you create more boundaries about what's not acceptable in Airbnb, it actually does change behavior and people do come back. So, we're seeing that for sure. And we're seeing that the good people reward and they tend to expand their business. So, I don't have the exact numbers of people that come back, but absolutely, we do think people will come back, if they've remediated some of their issues. And some of what we do too is we'll give warnings to people. So, we don't always have to remove people. We can give warnings first. And warnings are like very, very effective. We're just giving them a heads up. And that actually has a way of increasing the quality of our platform. The last thing I'll just say on this is, we've, what I think makes Airbnb different than our competitors, we have a much more hands-on approach to quality than our competitors. But we are getting more and more hands-on every single year. As we want to get bigger, and we want to capture more of the hotel traveling market, our quality has to go up. And that means that we need to just continue to raise the bar of quality. So, we have a multi-year roadmap where we're going to continue to do so and continue to invest in host education. Nick Jones: Thanks for the color, Brian. Operator: Your next question will come from the line of Naved Khan with B. Riley Securities. Please go ahead. Naved Khan: Yes. Hi. Thanks a lot. Maybe a clarification from Ellie. I think, I heard you say you saw really good ROIs on the performance marketing channels. I wanted to understand better where that came from. And maybe on a related topic, was there any effect from either the rollout of the DMA in Europe in March, or maybe changes to Google search in late March and early April? And then I have a follow-up. Ellie Mertz: Yes. So, in terms of first, the higher ROIs that we're seeing on marketing, I would say we over the last year have just been frankly very encouraged with the ROIs that we've been able to deliver from that channel. In particular, like what has been driving that? Well, we've been continually testing, improving our performance marketing execution. We have expanded the target audiences. We've expanded our keyword coverage. We've made general improvements to the landing pages. And all of that has been, I would say, quite successful in terms of allowing us to spend marginally more and maintain really great efficiencies. So, really good channel for us, even though it is obviously a minority of our overall marketing spend or strategy. In terms of your second question, impact from the D&A rollout, I would say we haven't seen any meaningful impact. I think primarily that is because the majority, 90% of our traffic is coming to us through direct or unpaid traffic. And so, we have not seen any noticeable impact there yet or at all, I should say. Naved Khan: Okay. And then, yes, I know it does help. So, maybe just on the changes to the extenuating circumstances policy, I wanted to kind of understand better what kind of led to that change and what kind of impact we can expect from the outside looking in? Ellie Mertz: I didn't hear that question. Sorry. Naved Khan: Sorry, the changes to the extenuating circumstances policy, I think it was tweaked recently to kind of maybe raise the bar on the cancellation. Ellie Mertz: Extenuating circumstance policy. Brian, do you have any comments on that? I would say we just tried to clarify over time and make that more equitable for our guests and hosts, but no meaningful impact to the business. Naved Khan: Yes, I agree. Operator: Your next question will come from the line of Conor Cunningham with Melius Research. Please go ahead. Conor Cunningham: Hi everyone. Thank you. Just on the under-penetrated international markets, as you develop those, I'm just curious if they're producing the, what you'd expect in terms of key KPIs from, take rate ADR profits, just trying to understand how the mixed changes are going to impact the overall company. And then just one on the 2Q to 3Q re-acceleration. I would assume that the booking window is a little bit more extended this year, given some of the events. Just curious on where you're booked into 3Q right now, just trying to understand the confidence interval there. Thank you. Ellie Mertz: Yes, sure. So first the question is around economics of our international expansion markets. So if you think about the various factors on our economics, so first there's virtually no change in terms of our underlying take rates by market. So that's not a factor. I would say second, depending on the market that we're targeting, many of these markets will have lower ADRs than our averages. So over time, to the extent that we were incrementally more successful in higher, seeing higher penetration in places like Latin America or Asia Pacific, we would anticipate that the global ADR would come down. And yet all of those nights would be accretive. So it would be market expanding, even if the nights were coming in at a lower ADR. And what we've been able to achieve over time is very strong economics at the booking level for a wide range of ADRs. So it is not a concern for us to be expanding in markets where the average ADRs are lower. It is again, just accretive in terms of the top line and the volume of the business. Your second question is around lead time. I would say generally speaking, as I said previously, our lead times year-to-date have been pretty flat on a year-over-year basis. We did not see a pull forward that maybe some others in the industry mentioned. And yet when we look forward in terms of the backlog for Q3, it's quite strong. And it's that backlog that gives us quite a bit of confidence around the comments we made in the outlook that Q3 revenue should accelerate above the Q2 outlook. Conor Cunningham: Appreciate it, thank you. Operator: I will now turn the call back over to Brian Chesky for closing remarks. Brian Chesky: All right, well, thank you all for joining us today. And I just wanted to say before I wrap up, this was Ellie's first earning call as CFO and the transition has gone incredibly well. Her, Dave and I are really, really focused on this next chapter of growth. So to recap, revenue was $2.1 billion, this is 18% higher than a year ago. Net income and adjusted EBITDA were both Q1 records and our trailing 12 month free cash flow was $4.2 billion, representing a free cash flow margin of 41%. Now we've made a tremendous amount of progress over the past few years. And with the launch of Icons, we're now laying the foundation for our plan to expand beyond our core business. This is just the beginning. Thank you all and we'll see you next quarter. Operator: That concludes our call for today. We thank you all for joining and you may now disconnect. Brian Chesky: For business. This is just the beginning. Thank you all and we'll see you next quarter.	[ { "speaker": "Operator", "text": "Good afternoon, and thank you for joining Airbnb's Earnings Conference Call for the First Quarter of 2024. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Angela Yang, Director of Investor Relations. Please go ahead." }, { "speaker": "Angela Yang", "text": "Good afternoon, and welcome to Airbnb's first quarter of 2024 earnings call. Thank you for joining us today. On the call today, we have Airbnb Co-Founder and CEO, Brian Chesky and our Chief Financial Officer, Ellie Mertz. Earlier today, we issued a shareholder letter with our financial results and commentary for our first quarter of 2024. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We provide a reconciliation to the most directly comparable GAAP financial measures in the shareholder letter posted to our Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I will pass the call to Brian." }, { "speaker": "Brian Chesky", "text": "All right. Good afternoon, everyone, and thanks for joining. Airbnb had a strong start to 2024. We had 133 million nights and experiences booked in Q1, marking our highest first quarter ever. Revenue of $2.1 billion grew 18% year-over-year, primarily driven by continued strength in travel demand and the timing of Easter. Net income was $264 million, representing a net income margin of 12%. For Q1, our free cash flow was $1.9 billion, our highest ever. And for the trailing 12 months, our free cash flow was $4.2 billion, representing a free cash flow margin of 41%. Our strong cash flow allowed us to repurchase $750 million of our shares in the quarter. And at the end of Q1, we had $6 billion remaining on our repurchase authorization. Now, during Q1, we made significant progress across our three strategic initiatives, which are making hosting mainstream, perfecting our core service, and expanding beyond the core. First, we're making hosting mainstream. We remain focused on making hosting just as popular as traveling in Airbnb. And to do this, we're raising awareness around the benefits of hosting, providing better tools, and helping hosts deliver high-quality stays. As we grow, we're also taking action to rapidly improve the quality of stays on Airbnb. In Q1, we removed thousands of listings that failed to meet our guest expectations. And excluding these removals, active listings for accommodations grew 17% year-over-year. And we also saw sustained double-digit supply growth across all regions. This year, we'll continue to raise awareness around hosting and improve the overall host experience. Second, we are perfecting our core service. Over the past few years, we've rolled out more than 430 new features and upgrades to improve our service. In November, we took another huge step forward on reliability with the launch of Guest Favorites, a collection of the top homes on Airbnb based on ratings, reviews, and reliability. Now, since launching Guest Favorites, there have been more than 100 million nights booked at these listings. And we will continue to make it easier for guests to find high-quality and affordable stays. Finally, we're expanding beyond our core. During the quarter, we continued investing in less mature markets to unlock more growth. And in Q1, growth nights booked in our expansion markets grew twice as fast as our core markets. And we're also focused on expanding beyond our core business. Now, this will be a multi-year journey, and we've already begun laying the foundation. Last week, we introduced Icons, a new category of extraordinary experiences by the greatest names in music, film, sports, and more. Icons mark an important next step in helping people understand that Airbnb offers more than just travel accommodations. Now, before I share a few business highlights, I just want to provide some context on why we actually introduced Icons, because they deliver on three key objectives. First, Icons keeps Airbnb's brand relevant and top of mind. With new Icons launching throughout the year, we can introduce more people to Airbnb and highlight what makes us unique. Second, while Airbnb's brand is already recognized around the world, there are specific segments where we want to accelerate growth. And with a broad range of Icons spanning various geographies, demographics, and fan bases, we'll be able to reach key segments in a more targeted way. And third, Icons helped change the way people think about Airbnb and what we offer. And this is going to be critical as we expand beyond accommodations in the coming years. Now, it's still early, but we're really excited about the response we've seen to Icons so far. In just one week, the Icons launch has generated over 8,100 pieces of global media coverage and 371 million social media impressions. And the coverage has been overwhelmingly positive. Now, just to put this into perspective, Icons has already generated more for us than our IPO. It's clear Icons are resonating with people. Now, looking back to Q1, we saw a number of positive business highlights. First, mobile downloads are accelerating. So, to quickly zoom out, nights and experiences booked in Q1 increased 9.5% year-over-year, despite a hard conference this time last year. And we were particularly encouraged by the growth of app downloads. In the U.S., app downloads increased 60% in Q1 compared to a year ago. And global nights booked in our app increased 21% year-over-year. And they now represent 54% of nights booked during the quarter. And this time last year, mobile bookings represented only 49%. So, it went from 49% to 54%. So, we're seeing some really, really good traction. Second, Airbnb is uniquely positioned for special events. Special events is really how we started Airbnb. We really started it to provide housing for conferences and events. And in April, we had over 500,000 guests stay on Airbnb during the solar eclipse in North America. And interestingly, we saw more than twice as many nights stayed on Airbnb along the direct path of the eclipse compared to the year prior, with many of these locations in areas that don't even have hotels. Nights booked in Paris during the summer's Olympics are five times higher than this time a year ago. And Germany is also seeing a similar trend for the Euro Cup this summer, with nights booked nearly double compared to a year ago. Now, supplies also increased to meet the higher demand, including nearly 40% more active listings in Paris in Q1 compared to a year ago. These events highlight that Airbnb's unique ability to disperse travel and spread economic benefits by allowing people to stay in local neighborhoods where there are no hotels. And finally, supply growth remains strong. Now, as mentioned earlier, in Q1, we removed thousands of listings that failed to meet our guest expectations. And excluding these removals, active listings for accommodations grew 17% year-over-year. We continue to see double-digit supply growth across all regions, with the highest growth in regions with the highest demand. Urban and non-urban supply increased at about the same rate, and we saw relatively similar supply growth among individual and professional hosts, with the majority of new listings exclusive to Airbnb. We're really proud of our strong Q1 results, and we're looking forward to another record summer travel season. So with that, Ellie and I look forward to answering your questions." }, { "speaker": "Operator", "text": "[Operator Instructions] Our first question will come from the line of Mark Mahaney with Evercore ISI. Please go ahead." }, { "speaker": "Mark Mahaney", "text": "Thanks. You talk about these kind of leaning into these kind of less mature markets and this doubling of growth rate in some of those expansion markets versus your core markets. Could you give a little more color on which countries and which markets that is? Which countries, I think in the past, you may have mentioned Brazil, but which ones you're leaning into this year? And then secondly, that U.S. app downloads increase of 60% year-over-year. That's an extremely high number for what you would think would be a reasonably well-known app and brand. So what drove that? Do you have any whys behind that? Thank you very much." }, { "speaker": "Brian Chesky", "text": "Yes. Hey, Mark. Why don't I start? So leaning into less mature markets. So if you think about Airbnb, we're obviously in 220 countries and regions. We're one of the most global brands in the world. But our markets with the highest penetration would be U.S., Canada, Australia, France, and U.K. So those five. So the next markets that are the biggest potential TAM would be like Mexico, and Brazil, and Latin America. In Europe, it would be Germany. It would be Italy. It would be Spain. We're also starting to see some traction like Switzerland and Netherlands. And in Asia, it would be Japan. It would be Korea. It would be China. And eventually, a little bit longer game would be India. So these are, and there's a few others in Latin America. So I could kind of keep going. But those are kind of some of the really, really big travel TAMs. And Mark, maybe just one other thing I'll just say. I think a really good thing to look at is our penetration for each country. And while U.S., Canada, Australia are really, really similar, there's a really, really big drop off in a lot of these other markets that are huge travel TAMs, I mean, especially in Asia. And one of the things that we've learned is that Airbnb pretty much resonates pretty equally everywhere once there's the awareness. In fact, I could argue that Airbnb might resonate better in Asia because there's a younger travel population that's not predisposed to hotels and they're on social media. And we are disproportionately on social media versus our competitors. So I'm very, very bullish about that. Now, on U.S. staff downloads, you're right. I mean, it's grown 60% last year. It went from 49% of bookings to 54% of bookings. So at the highest level mark, what drove that was just focused on a roadmap. We have a brand that most everybody, at least in the United States has heard of. And a lot of people download our app, but we've never really focused on optimizing our app from a download perspective. And just to be clear, these numbers were driven organically, not by paid advertising. So it was really just a lot of optimization, different touch points, encouraging people at the right moment to download our app, not being intrusive. We had pushed a lot of people to just, we just pushed them to our mobile website. Our mobile website does not convert nearly at the rate of our app download. And so maybe the highest level point I'll just make is, I think what we've been able to prove in the last three years is when we focus on something, we can drive the numbers. Two years ago, supply wasn't growing, we focused on it. It's now growing 70% net quality. A year ago, we felt like app downloads weren't where they needed to be. We put a team on it, they focused. So I think we're developing a good track record to really be able to move metrics when we focus on them." }, { "speaker": "Mark Mahaney", "text": "Thank you, Brian." }, { "speaker": "Ellie Mertz", "text": "Brian, if I could just add, I think the app download effort is really just part of our broader priority around perfecting the core and optimizing the core business. We identified that not as many of our guests were using the app as they should. And we know that the app is a much better user experience than MoWeb. So it's again, part of a broader suite of roadmap items that are intended to improve and perfect the core experience." }, { "speaker": "Mark Mahaney", "text": "Thank you, Ellie." }, { "speaker": "Brian Chesky", "text": "Thanks, Mark." }, { "speaker": "Operator", "text": "Your next question will come from the line of Richard Clark with Bernstein. Please go ahead." }, { "speaker": "Richard Clarke", "text": "Hi, good afternoon. Thanks for my questions. Just on, you mentioned on the prepared remarks and you mentioned that Q4, that Q1 would have quite a tough comp. And there's calendar effects in there as well. But you're guiding the Q2, it's going to be flat on room night growth. So is there anything you call out in Q2 that's maybe holding that back and how we should think about the rest of the year? And maybe just a similar question on margin, the Q2 guide, I guess a little bit softer than consensus had some calendar in there. Is that including any of the growth investments you talk about or are those things that may come in more the second half of the year?" }, { "speaker": "Ellie Mertz", "text": "Yes, thanks, Richard. Let me just talk a little bit about the trends that we've seen here today to help answer your question. So first, as you point out, as we were heading into 2024, we were widely aware that last January was particularly strong. And so the guide that we've provided back in February included a step down in growth from Q4 to Q1 that was reflective of that hard comp from a year ago. We did experience it. And then since then, we've seen relatively stable growth, which I see as frankly, a really strong statement in terms of both the stability and resilience of leisure travel demand so far this year. I think, something that we've seen this year that is contrasting to last year there was a lot of volatility in terms of the timing of when people booked relative to their check-ins. And so far this year, it's been, frankly, much more stable. Lead times on our platform have been, frankly, generally in line with a year ago, and it just hasn't been at the same level of volatility, again, that we saw a year ago. And so heading into Q2, our guidance reflects this continued stability of booking. Obviously, we'd like to deliver higher growth and stable growth, but our outlook obviously reflects the trends that we have seen quarter to date. To your question on Q2 margins, obviously, we guided, the Q1 results reflect a pretty meaningful year-over-year margin expansion. A big portion of that is due to the timing of Easter. So Easter is not only a benefit to revenue growth in Q1, but it's obviously also a benefit to margin expansion. Those two factors reverse in Q2. It is a headwind to revenue growth, and it is a headwind to overall margins. Two other components in terms of what's putting pressure on margins in Q2. One is just some one-time credits that we had in payment processing a year ago that will not recur this year. And then third, we shifted slightly the timing of our marketing spend, a little bit heavier in Q2 than in Q1, and that will be reflected in terms of marketing as a percent of revenue growing in the quarter on a year-over-year basis." }, { "speaker": "Richard Clarke", "text": "Very helpful. Thank you." }, { "speaker": "Operator", "text": "Your next question will come from the line of Jed Kelly with Oppenheimer. Please go ahead." }, { "speaker": "Jed Kelly", "text": "Hey, great. Thanks for taking my question. Just one on ADRs. They seem to be relatively sticky, and I think a couple quarters ago, you talked about driving value to the consumer. So can you just give us an update on where you are in sort of some of your value initiatives? And then on supply, great supply growth again. Can you talk about how we should think about supply and nights eventually converging to similar growth rates? Thank you." }, { "speaker": "Brian Chesky", "text": "Yes. Hey, Jed. Why don't I take the first one on value initiatives, and I'll let Ellie take the second one. So on providing value, when we started Airbnb, our original tagline was a cheap, affordable alternative to a hotel. And the majority of the primary reason people came to us is because it was a better value than a hotel. And we still think that's a core value proposition that we have to offer. Now, a year and a half ago, we noticed that, there was a lot of concern about Airbnb prices increasing. And so we created a whole team to identify a series of initiatives to modulate our prices, and they're working. And I'll go down the list. One is total price display. So as you know, in travel, especially online travel, there's a lot of progressive fee disclosures. And we decided to have a toggle right on the homepage that you can turn on to show the total price display. Since we've done that, not only do consumers -- not only are consumers going toward the best total value, but it's begun to change behavior in our host community because 300,000 or 300,000 listeners, say, have removed or lowered their cleaning fee as a result. So that was the first thing we did. The next thing we did is we started offering monthly and weekly discounts and much more robust tools for that. Now, this is important because, nearly half of our nights booked are for stays of a week or longer. And now more than two-thirds of our hosts offer a monthly or weekly discount. We also noticed that a lot of hosts that weren't getting booked weren't getting booked because their prices were too high. And they just didn't have really good concepts. So we created a tool called the Compare Listing Tool where people can see how much other people are charging the neighborhood. And they can actually see people who are getting booked, not getting booked. And no surprise, the people getting booked generally have lower prices. We have nearly 2 million hosts that now use the Compare Listing Tool. So those are just a few of the initiatives we've done. We actually have many others as well. The net of all of it is that hotel prices are up year-over-year and Airbnb listings on a like-for-like basis are down. So today the value of Airbnb versus a hotel is better than it was a year ago. And I think that trend line is going to continue given all of our efforts. And maybe the only other thing I'll just say on this is, as we know, loss of supply and demand, as supply grows faster and demand prices go down a little bit. And supply is growing faster in demand. I think that's also relieving some pressure. Ellie, over to you." }, { "speaker": "Ellie Mertz", "text": "Yes, so Jed, to your question with regard to the relative growth rates of supply and demand, just a few comments. I would say first, something that we've shared previously is that in any given quarter, we would not expect supply and demand to grow exactly in line. But when we look over a longer time period, either the last decade or more specifically from pre-pandemic to today, what we do see is that over a period of years, they do grow generally in line. And I would say that continues to be the case. Where we are right now, I would say we're very encouraged to be able to deliver this continued level of very strong supply growth for a couple of reasons. I would say one, we know that more unique, differentiated supply wins and differentiated supply is why people come to Airbnb. I would say second, and Brian made this point, but growing supply allows us to, it really benefits our affordability measures in that more supply obviously but gets more competitive pricing. And then I would say third, relevant to our recent quality initiatives, we see it as an opportunity for, as supply growth is stronger than demand growth, for us to continue to be driving quality. What you saw in the quarters, we obviously did some one-time takedowns of supply that frankly just did not meet our community's expectations. And the fact that supply is growing so rapidly, it allows us to make those cuts, if you will, to the supply base and to be continually upgrading the level of quality that we deliver to our guests." }, { "speaker": "Jed Kelly", "text": "Thank you." }, { "speaker": "Operator", "text": "Your next question comes from the line of Ron Josey with Citi. Please go ahead." }, { "speaker": "Ron Josey", "text": "Great, thanks for taking the question. Brian, I wanted to ask you about search on Airbnb, just following the strength and the benefits of guest favorites. I wanted to better understand sort of, talk to us about post-guest favorites, how search and really conversion rates have improved and really how you feel search can just evolve over time. And then as a follow-up to what we were just talking about around inventory quality, we'd love to hear just the process to ensure that quality listings continue to come on the platform. I think we've talked about verified listings and trophies, but any other thoughts there would be helpful. Thank you." }, { "speaker": "Brian Chesky", "text": "Oh yes, Ron. These are really, really good questions, Ron. So yes, let's start with search. So, we did approximately $10 billion last year in revenue. So the way to think about this is if we can just drive an incremental 100 basis points in growth, that's $100 million. So like the way we look at our conversion rate is like we have teams dedicated to the search experience. And we, over the last year, we, the last 12 months, we've likely driven at least a few 100 basis points of incremental growth just through optimizations of the search flow, because we just get so much traffic. And so just to call out a couple of things that we did, I mean, there's been dozens of dozens, I'll just name a couple. One I already mentioned, mobile app downloads. Now, why do mobile app downloads lead to also more bookings? Because the conversion rate on a native application is typically a lot higher than a mobile website. Number two, just to give you a couple of examples, one of the challenges of Airbnb compared to a hotel is you may type in a location and certain dates and maybe you're on vacation and you don't see exactly the home you need and you might not book a home. You might now open a different app. And we have this carousel that basically offers, hey, if you change your dates by one or two days, here are other listings you can find. And that led to a huge increase in booking. We made improvements to filters. We've made improvements to search input, the search box, making the search box more prominent. So there are quite literally dozens and dozens of improvements that we've made. And I see hundreds of basis points of incremental growth just through essentially optimizing the end-to-end guest flow for our core business. So it's really, really exciting. And a couple of big areas would be maps and location. There's a huge opportunity around that area. So that's on search. On inventory and quality, this is a great question. I mean, we have a really extensive roadmap. Last year we launched guest favorites, as you know. In November, 100 million nights booked have been booked through them. I would say the response to guest favorites has even been greater than I anticipated. We're seeing more people not only book guest favorites, but we're seeing that guest favorites have a fraction of the trip issue and contact rate as non-guest favorites. So guest favorites have between a fifth and a 10th the contact rate as our bottom quartile of listings. And the rebooking rates are much higher. And I also think what Guest Favorites is doing is it's changing behavior to encourage more hosts to become better. And so after that we launched quality highlights in March. Quality highlights, basically what happened was Guest Favorites was the top 2 million listings in Airbnb. But a bunch of people were saying, well how do we know which are the best within those 2 million? So what we did is we have a top 1%, top 5%, and top 10% trophy classification. And this is also really I think popular with guests. We've now removed hundreds of thousands of listings. And we are going to be doing a number of new things. One of the things we are experimenting with is showing to percentile where something falls in a quality distribution as a percentile basis. And then continually adding a lot more supply, and then tightening up our quality control, and really giving a lot more feedback to hosts to become better. I think that a really good opportunity here is to get a lot more listings in Guest Favorites, and to provide host education, host tools for the hosts that are struggling to be much more successful. So there's a pretty big and extensive roadmap to go. And just the last thing I'll say about this is, as big as Airbnb is, and we are approaching half a billion room nights a year, for everyone who stays in Airbnb, somewhere around 8 or 9 people stay in hotels. And when you ask people, why are you staying in a hotel? Airbnb is typically more affordable. It's a more local experience. It's much better for groups and families. People say yes, but hotels are historically a more consistent experience. And so if we can just get one of those travelers from hotels to stay in Airbnb, that would double the size of our business to a billion nights a year. And so we think quality and reliability is a multi-year roadmap. So you're going to be hearing every year major updates from us on quality and reliability." }, { "speaker": "Ron Josey", "text": "Thank you, Brian. Super helpful." }, { "speaker": "Operator", "text": "Your next question comes from the line of Eric Sheridan with Goldman Sachs. Please go ahead." }, { "speaker": "Eric Sheridan", "text": "Thanks so much for taking the question. Maybe coming back and putting a finer point on some of the topics we've talked about already, Brian. When you think about your top investment priorities for 2024 and beyond, how would you categorize those investments if we put them in buckets such as demand generation, supply growth, and platform and product innovation over the long-term? And in that last bucket, how should we increasingly think about what you're learning about testing and deploying AI across the platform and how it might reduce friction over the longer term? Thanks so much." }, { "speaker": "Brian Chesky", "text": "Hey, Eric. Good to hear from you. So maybe I can just – you had three buckets. Maybe I can give you three slightly different buckets to give you our framework. The way I think about deploying our resources – and when I say resources, probably the most precious resources we have is product and engineering resources. And the way I think about that is we have our core business, we have international expansion, and we have expanding our core business of accommodation. So that's kind of the way we think about our portfolio. And you can imagine they're all totally different horizons. So the majority of our people are still focused on the core business. And I believe that we are just scratching the surface of the size of our core business. Within our core business, we typically have about three different areas of focus. One I just talked about, which is quality and reliability. The next one is affordability, making sure Airbnbs are more affordable hotels. And the third is usability, what I also talked about with search and reducing friction. So that's the first bucket of our investment. And that really will pay off within this year. And so there's – you can get a return on those efforts within a matter of months, because a lot of that – a lot of those changes are software changes. They're immediate. They touch 100% of our user base. And they touch a very large base, our entire GBV. Next is international expansion. International expansion is really supply, demand, and platform. It's all three within international. And you can really bucket into two things. We have to localize the product, and then we have to have a global marketing strategy to go one market at a time. And we've done a lot of really good work over the last few years on international expansion. But I think at this moment, we are ready to step on the gas. And by stepping on the gas, I don't mean it's going to be a significantly greater investment, but a much greater velocity, because we spend a lot of energy updating our products. So most recently, we just – we just updated our application in Asia, specifically in China. And we're bringing a lot of those improvements to Japan and Korea, because the applications work fairly similarly. And so getting these products onto a better standard is a really good first thing that you want to do before you actually step on the gas for marketing. So that's international. And of course, the final thing is expanding the inter-corporate business accommodation. So from dollars and number of people, this is by far the smallest area that we're putting people on now, because it's a small base. But it's actually where I'm spending the majority of my time. And I think the majority of the leadership's time is now being spent focused on transforming the company from an accommodations business to a multi-vertical or multi-category company. And over the next three years, you're going to see this play out quite substantially. So that's the way we think about it, core, international, and then expanding beyond our core." }, { "speaker": "Eric Sheridan", "text": "Great. Thank you." }, { "speaker": "Brian Chesky", "text": "And then I think the other question, sorry, I have to answer the question about how are you, what are we learning about AI and reducing friction? So just a couple of things in AI. First of all, like, we've been using AI for a long time. In the last 12 months, we've made a lot of progress. I'll just give you three examples of things we've done with AI. We've made it easier to host. We have a computer vision model that we trained in 100 million photos, and that allows hosts to, like the AI model, to organize all their photos by room. Why would you want to do this? Because this increases conversion rate when you do this. Number two, we launched last week AI-powered quick replies for hosts. So it basically predicts the right kind of question or answer for a host to pre-generate to provide to guests. And this has been really helpful. And then we've made a really big impact on reducing partisan Airbnb with our reservation screening technology. So now we're going much bigger on generative AI. I think we're going to see, I think we're going to see the biggest impact is going to be on, customer service in the near term. I think more than hotels, probably even more than OTA, Airbnb will benefit from generative AI. And the reason why is just a simple structural reason. We have the most, like, varied inventory. We don't have any SKUs. And we're an incredibly global platform. So it's a very difficult customer service challenge. But imagine an AI agent that can actually, like, read a corpus of a thousand pages of policies and be able to help adjudicate and help a customer service agent help a guest from Germany staying with a host in Japan. It's a very difficult problem and AI can really supplement. Over time, we're going to bring the AI capabilities from customer service to search and to the broader experience. And the end game is to provide basically an AI-powered concierge. So that's where it's going. But it's really focused on customer service at this very moment." }, { "speaker": "Operator", "text": "Your next question will come from the line of Brian Nowak with Morgan Stanley. Please go ahead." }, { "speaker": "Brian Nowak", "text": "Thanks for taking my questions. I have two just to sort of come back to a couple of the topics we talked about. The comp did get easier. So with the comps getting modestly harder in the back half, can you just sort of walk us through maybe micro levels of innovation that can sort of drive stability? Or how do we think about reasonable ranges of outcomes for room-night growth in the second half? And then the second one, you know, Brian, you talked about how like-for-like pricing is more attractive versus hotels. I don't have the transcript exactly yet. But if I look at Marriott and Hilton and their ADRs are up 2% to 3% and your ADRs are also up 2% to 3%, is there something else that you're seeing where the relative pricing is actually becoming more attractive that you can help us understand a little bit more? Thanks." }, { "speaker": "Brian Chesky", "text": "Yes. Why don't I take the second question? And I think, Brian, either you or I cut out. We didn't hear the first part of your question." }, { "speaker": "Brian Nowak", "text": "So do you want to just repeat the first question? Yes. Yes, absolutely. The first question was more for Ellie, where she has – you talked about how you have stable room-night growth now, but I think the comp is a little bit easier from 1Q to 2Q. And with the comps getting a little more difficult in the back half, can you just sort of walk us through some reasonable ranges of outcomes of growth in the back half and maybe micro-level drivers to kind of keep the stability versus drive deceleration?" }, { "speaker": "Brian Chesky", "text": "Ellie, you want to take the first one, and I'll take the second one?" }, { "speaker": "Ellie Mertz", "text": "Yes. So I think you were right in terms of the thinking was that the comparison in Q2 would be a little bit softer. I think what we've seen so far, just to repeat what I said previously, is that, yes, it was clear that there was a hard comp in January. Since then, we've seen, I would just say, a general stability. We are not so far this year seeing the same level of volatility that we saw in 2023 in terms of either movement of lead times or consumer, I would say, hesitancy to book during kind of macro dislocation. So general statement is that, year-to-date, just the trends have been stable, and that's what our Q2 reflects. In terms of the back half of the year, I would say – I don't know if I would characterize the back half of the year as harder comps. I think if you recall, actually, some of the volatility that we and others saw in the back half of the year, there was a bit of a moment of dislocation end of summer heading into October, and in particular, in the month of October related to the conflict breaking out in Israel. So I wouldn't necessarily characterize the back half of the year as being a harder comp. Instead, I think if you think through the growth initiatives that Brian talked about in terms of thinking about where our portfolio of investments lie, I would say we are optimistic that a lot of the core optimizations could have near-term impact as well as the international investments. So those are the places where we're really looking to drive in-year growth above where we are today." }, { "speaker": "Brian Chesky", "text": "And Brian, I'll take the like-for-like question. So specifically, the data we're citing is global like-for-like basis. So what we're comparing is the average price of a global hotel room to a one-bedroom listing on Airbnb in March. And in March, our prices were down 2% and hotel prices were up 3%. So our prices were, again, one-bedroom globally on Airbnb in March was $114, down 2%. Hotels were $148, up 3%. So that's what we're talking about, one-bedroom global. When our ADRs move, obviously the other thing to take into consideration is mix shift. Oftentimes our ADRs do go up because people increasingly, more and more of our travel is group travel. 81% of our trips now have two or more guests and increasingly we're seeing people booking more space, larger homes, just as travel's mixing towards larger groups." }, { "speaker": "Brian Nowak", "text": "That's helpful. Thank you both." }, { "speaker": "Ellie Mertz", "text": "And Brian, that was particularly the case in North America this quarter. On an absolute basis, ADRs were up, but if you exclude the impact of mix, they were flat." }, { "speaker": "Brian Nowak", "text": "Oh, okay. Great. Thank you both." }, { "speaker": "Operator", "text": "Your next question will come from the line of James Lee with Mizuho. Please go ahead." }, { "speaker": "James Lee", "text": "Great. Thanks for taking my question. And just want to follow up the prior question on supply and demand growth. And in other segments of the gig economy services, they seem to benefit when supply exceeding demand. So if you think about, ride sharing and food delivery, because they drive prices down and therefore increasing consumer demand. Should we, think about it in the same path for home accommodation? Are you thinking, expecting maybe a similar trend for your business as well? Thanks." }, { "speaker": "Ellie Mertz", "text": "I would say generally speaking, when we see growth in supply, it is additive to demand. It means that, when people are searching for a particular night in a particular city, if we have more that we can provide them, it is obviously net beneficial. I think I would just, repeat the prior comments that we don't always see kind of in period equivalence by market in terms of the respective growth rates. And that I would say that, there's a primary difference in terms of our business model relative to some of the others that you mentioned in that the frequency of the activity is simply lower and the lead time is also much longer." }, { "speaker": "James Lee", "text": "Great, thank you." }, { "speaker": "Operator", "text": "Your next question comes from the line of Stephen Ju with UBS. Please go ahead." }, { "speaker": "Stephen Ju", "text": "Okay, thank you so much. So Brian, would we be overreaching if we were to think that Icons is a leading indicator of what should be, I guess, a revitalization or re-imagining of experiences? So, maybe the overnight stay in the [Indiscernible] generates all the media and consumer attention, but maybe this affords you the opportunity to expose the users you're getting to the more everyday experiences. And also secondarily, you've talked about this and the letter talks about this also, the Olympics and the Euro's bump, and there's going to be travelers who are probably not sports fans and who might want to be avoiding Paris and the host cities in Germany altogether. So, is there anything you can share in terms of how additive these two events may be? Thanks." }, { "speaker": "Brian Chesky", "text": "All right, Stephen. Well, that was, you are absolutely not overreaching on Icons. So let me give you a sense. You can think of a company as going through a few phases, especially to start a company. You have an idea, you get product market fit, that's phase one. Phase two is you try to go into hyper growth. We've done that. Phase three, you become a real company, you go public, you generate a return for shareholders. And then the fourth frontier, and very few companies have ever done this, is you reinvent yourself and you go from offering one thing to many things. And a lot of the big tech companies have done this. But one of the companies that I think is a really interesting one to look at is Nike. In the late 70s and early 80s, my recollection, I was born in 81, but my recollection is, I remember, Nike was mostly a running shoe company. And then the 80s, they became more popular with basketball and other things. But at the time, people didn't really think of Nike as a serious basketball shoe. And so they had to not only create a great product for basketball, but they had to actually stretch the brand and open up in people's minds what Nike stands for. And a lot of brands have had to do this. I mean Apple had to do this with the iPod. And I think Airbnb, one of the strengths of our brand also is something that we have to manage which is Airbnb is a noun and a verb. It's synonymous with a category, kind of like Kleenex or Xerox. People say, I'm going to get an Airbnb. I'm going to Airbnb my place. Literally, the name Airbnb has the name B&B in it. So one of the challenges is that people open our app to expect to see stays. And so what we want to do in addition to bringing back experiences, you are totally right, is we wanted to expand Airbnb's brand positioning to include more than just a place to stay. And one of the things you'll notice is when we launched Icons, we said these are extraordinary experiences. We didn't say these are extraordinary stays. We positioned them as experiences. And so you can almost imagine Icons is like we are a car company, but we are starting with a Formula 1 car. And very few people can experience a Formula 1 car, but it captures the magic. It captures the demand. It really expands the brand and increases our permission to be able to go into experiences. And then you kind of move down market. And one of our goals is going to be to bring the magic of Icons to everyone. So I can't probably say too much more about experiences, but absolutely it's not a leap or a stretch whatsoever. Icons is primarily a brand positioning and a brand investment. It obviously wasn't a business. There's only about 4,000 tickets. But we are seeing some really encouraging signs in the last week, a big bump in traffic. It's a lot more top of mind. A lot more people are opening our app. And I just think we are being positioned as more aspirational. And I think people are now starting to think of us for experiences. So I think we've really paved the way for next year. Ellie, do you want to take the Olympics in your own?" }, { "speaker": "Ellie Mertz", "text": "Yes, certainly. So if you look at our history, I would say that special events have always been kind of a good moment for Airbnb to shine and have been overall additive in terms of both our brand perception as well as supply growth. I think what we've seen from prior events, and I'm talking about pre-COVID Olympics, World Cup, Super Bowl, those type of events, what we see is that it should bring a ton of supply onto the platform. And while not all of that supply will persist, a good portion of it does. And so it's a nice supply acquisition moment for us. I would also say it's really additive in terms of signaling to cities how helpful and additive Airbnb can be to those cities to ramp up supply in a very organic and easy way without adding incremental hotel infrastructure that will not be necessarily needed long-term. And I think you see that in particular in Paris right now. We're going to be hugely additive in terms of hosting travelers for the games, whereas the existing infrastructure would not be able to manage such a large inflow." }, { "speaker": "Stephen Ju", "text": "Thank you." }, { "speaker": "Operator", "text": "Your next question will come from the line of Doug Anmuth with JPMorgan. Please go ahead." }, { "speaker": "Unidentified Analyst", "text": "Hey, this is Dave [ph] on for Doug. Thanks for taking the questions. One for you, Ellie. Can you talk about how you're thinking about the investment levers that provide flexibility and shape your 35% plus EBITDA margin guide for the full year? And can we expect to see these levers get pulled more through the year?" }, { "speaker": "Ellie Mertz", "text": "Yes, so I couldn't hear entirely, but a question about our guide for full year EBITDA margins, a floor of 35%. Let me just talk a little bit. Yes, the investment level." }, { "speaker": "Unidentified Analyst", "text": "Yes, and how you're thinking about investment levers." }, { "speaker": "Ellie Mertz", "text": "Yes, of course. So let me just step back and provide a little bit more color in terms of why the 35%. If you look at our performance since the IPO, pre-IPO, we had a negative 5% EBITDA margin. And behold, three years after the IPO, we delivered nearly 37% EBITDA margins last year. I think we have repeatedly demonstrated the increased strength of this business model in terms of very strong profitability, inclusive of GAAP, net income profitability, as well as free cash flow. And at the same time, where we sit today, we see a huge opportunity in driving incremental growth. And so as we kicked off the year last quarter and looked at our opportunity set, we've identified a handful of areas where we'd like the flexibility to lean in and drive incremental growth beyond what we're seeing today. So where would you see those investment levers on the P&L? It's really two areas. So first, not surprisingly, is marketing. In marketing, we've been very disciplined over the last couple of years. We continue to have a much lower level of marketing intensity than really anyone else in travel. And at the same time, at the margin, we have seen some incremental opportunities to lean in on channels where we're seeing higher ROIs. In Q1, we saw nice, very high ROIs in performance marketing. To the extent that that continues, we would lean in modestly over the course of the year. Additionally, and probably more importantly, Brian talked a little bit about our opportunity set in international markets. And that's also an area where, to the extent that our full funnel marketing investments are working, we would look to top off those investments and to therefore accelerate growth. So marketing is one line item. You will potentially see some margin compression in order to drive growth. The second area, Brian talked about prioritizing our resources and identified that, in many cases, our product development team is our kind of scarcest resource. And I think when you hear us talk about our roadmap, you can obviously infer that we have a very robust list of initiatives that we would like to tackle. And so there's an opportunity to, at the margin, add more personnel over the course of the year to allow us to accelerate that roadmap. And you would see that in particular on the product development line item. So grand scheme of things, no material pivot in terms of our overall financial discipline, but instead a bit of lean into those areas where we believe we can accelerate growth." }, { "speaker": "Unidentified Analyst", "text": "Thank you for the detailed response." }, { "speaker": "Operator", "text": "Your next question will come from the line of Kevin Kopelman with TD Cowen. Please go ahead." }, { "speaker": "Kevin Kopelman", "text": "Great, thanks a lot. I had a question on the May release. You added a couple of small new features to the user profiles, I think on the photos and the travel stamps. Can we see that as a first step towards some of the profile enhancements and community features that you've talked about being interested in in the past and where does kind of building out potentially new community features stand in your priority list? Thanks." }, { "speaker": "Brian Chesky", "text": "Yes, hey Kevin. We spoke in this call mostly about Icons, but I mean, I am equally excited for the results that we've seen for group travel. I'm not going to go through all the metrics, but the metrics have been all really, really positive for group travel features. And in particular, one of the things we've seen is, when people book an Airbnb, the average number of guests is two. So that means that typically for every booking, there's another guest. But typically the other guest hasn't connected their account to Airbnb. So if you travel with a partner or a friend, maybe if you book, the other person doesn't actually have an account or they haven't connected their account. So as we've, and it's strategic for us to get more accounts, that would make sense, right? Especially as you want to sell more things beyond home. We want to have a point of sale for every single person on a trip, not just a point of sale for the booker. So this is really, really critical for us. And what we've seen is a major jump in the number of co-travelers that are now creating accounts in Airbnb and not only creating accounts, but filling out their profile. And so to answer your question, yes, this is the beginning of something much bigger. To probably zoom out, when we started Airbnb, there already were vacation rentals, but they were mostly on classified sites like Craigslist [ph] or there were like paid subscription services like Vrbo. And one of the innovations we brought is we added profiles, payments, two-sided reviews and messaging and those capabilities unlocked really this whole new category. This was what we may call the system of trust. So what we're now doing is we're going to be investing a lot more in increasing our profiles and our profile capabilities, both our account structure, cleaning it up, our identity verification, making, getting more people to complete more robust profiles, increasing their preferences so we have more information about people. And this is so strategic because as trust goes up, more, you can unlock more things for people. And as we know more about you, we can match you better. So, I think in the future, right now, if you think of like the Airbnb solar system, the home is like the sun at the center of the solar system. I think in the future, the profile will be at the center of the solar system of Airbnb and the home will be one of many categories orbiting the profile." }, { "speaker": "Kevin Kopelman", "text": "Great, thanks so much." }, { "speaker": "Operator", "text": "Your next question comes from the line of Nick Jones with Citizens JMP. Please go ahead." }, { "speaker": "Nick Jones", "text": "Great, thanks for taking the questions. I guess maybe going back to supply and your effort to remove low quality supply. I guess, can you speak to the percentage of the supply that you've removed over time? I think you said 100 to 1,000 that I guess maybe take the removal and I guess the learnings and come back and try to list and provide a kind of a higher quality or better experience. I guess as you continue to remove lower quality supplies, it's becoming a tool to kind of nudge hosts into the behavior you're looking for without actually having to remove them." }, { "speaker": "Brian Chesky", "text": "Yes, I mean, hey Nick, why don't I take the first one? So, the first thing I'll say is the global occupancy on Airbnb is so much lower than hotels. So, even though you type in a certain date and a location, when it's a popular day and location, occupancy can rise at a global level. We are still like, not even close to high occupancy. And so, one of the games we need to do is we want to point them in to the best supply on Airbnb. So, we don't, and so having removed all this supply, we haven't seen a fundamental shift or impact on global bookings because a lot of them either weren't getting as many bookings in the first place, or they were eating up page views, they were lower converting listings, or people were booking them, they were really expensive because they were leading to customer service contacts, which were expensive. And if you went through all that, the revoking rate for them was much lower. Now, as far as the answer to your question about like how many of them come back, I don't have the stats on top of my head. But, I think that like this quality control program, one of the things we've noticed is that a lot of hosts are very coachable and learnable. They're very coachable and they can learn. So I think one of the problems in this category is historically there's these marketplaces have been so hands off that people don't know what it takes to be successful. And as you give them more like metrics, as you give them more incentive to be good, and as you create more boundaries about what's not acceptable in Airbnb, it actually does change behavior and people do come back. So, we're seeing that for sure. And we're seeing that the good people reward and they tend to expand their business. So, I don't have the exact numbers of people that come back, but absolutely, we do think people will come back, if they've remediated some of their issues. And some of what we do too is we'll give warnings to people. So, we don't always have to remove people. We can give warnings first. And warnings are like very, very effective. We're just giving them a heads up. And that actually has a way of increasing the quality of our platform. The last thing I'll just say on this is, we've, what I think makes Airbnb different than our competitors, we have a much more hands-on approach to quality than our competitors. But we are getting more and more hands-on every single year. As we want to get bigger, and we want to capture more of the hotel traveling market, our quality has to go up. And that means that we need to just continue to raise the bar of quality. So, we have a multi-year roadmap where we're going to continue to do so and continue to invest in host education." }, { "speaker": "Nick Jones", "text": "Thanks for the color, Brian." }, { "speaker": "Operator", "text": "Your next question will come from the line of Naved Khan with B. Riley Securities. Please go ahead." }, { "speaker": "Naved Khan", "text": "Yes. Hi. Thanks a lot. Maybe a clarification from Ellie. I think, I heard you say you saw really good ROIs on the performance marketing channels. I wanted to understand better where that came from. And maybe on a related topic, was there any effect from either the rollout of the DMA in Europe in March, or maybe changes to Google search in late March and early April? And then I have a follow-up." }, { "speaker": "Ellie Mertz", "text": "Yes. So, in terms of first, the higher ROIs that we're seeing on marketing, I would say we over the last year have just been frankly very encouraged with the ROIs that we've been able to deliver from that channel. In particular, like what has been driving that? Well, we've been continually testing, improving our performance marketing execution. We have expanded the target audiences. We've expanded our keyword coverage. We've made general improvements to the landing pages. And all of that has been, I would say, quite successful in terms of allowing us to spend marginally more and maintain really great efficiencies. So, really good channel for us, even though it is obviously a minority of our overall marketing spend or strategy. In terms of your second question, impact from the D&A rollout, I would say we haven't seen any meaningful impact. I think primarily that is because the majority, 90% of our traffic is coming to us through direct or unpaid traffic. And so, we have not seen any noticeable impact there yet or at all, I should say." }, { "speaker": "Naved Khan", "text": "Okay. And then, yes, I know it does help. So, maybe just on the changes to the extenuating circumstances policy, I wanted to kind of understand better what kind of led to that change and what kind of impact we can expect from the outside looking in?" }, { "speaker": "Ellie Mertz", "text": "I didn't hear that question. Sorry." }, { "speaker": "Naved Khan", "text": "Sorry, the changes to the extenuating circumstances policy, I think it was tweaked recently to kind of maybe raise the bar on the cancellation." }, { "speaker": "Ellie Mertz", "text": "Extenuating circumstance policy. Brian, do you have any comments on that? I would say we just tried to clarify over time and make that more equitable for our guests and hosts, but no meaningful impact to the business." }, { "speaker": "Naved Khan", "text": "Yes, I agree." }, { "speaker": "Operator", "text": "Your next question will come from the line of Conor Cunningham with Melius Research. Please go ahead." }, { "speaker": "Conor Cunningham", "text": "Hi everyone. Thank you. Just on the under-penetrated international markets, as you develop those, I'm just curious if they're producing the, what you'd expect in terms of key KPIs from, take rate ADR profits, just trying to understand how the mixed changes are going to impact the overall company. And then just one on the 2Q to 3Q re-acceleration. I would assume that the booking window is a little bit more extended this year, given some of the events. Just curious on where you're booked into 3Q right now, just trying to understand the confidence interval there. Thank you." }, { "speaker": "Ellie Mertz", "text": "Yes, sure. So first the question is around economics of our international expansion markets. So if you think about the various factors on our economics, so first there's virtually no change in terms of our underlying take rates by market. So that's not a factor. I would say second, depending on the market that we're targeting, many of these markets will have lower ADRs than our averages. So over time, to the extent that we were incrementally more successful in higher, seeing higher penetration in places like Latin America or Asia Pacific, we would anticipate that the global ADR would come down. And yet all of those nights would be accretive. So it would be market expanding, even if the nights were coming in at a lower ADR. And what we've been able to achieve over time is very strong economics at the booking level for a wide range of ADRs. So it is not a concern for us to be expanding in markets where the average ADRs are lower. It is again, just accretive in terms of the top line and the volume of the business. Your second question is around lead time. I would say generally speaking, as I said previously, our lead times year-to-date have been pretty flat on a year-over-year basis. We did not see a pull forward that maybe some others in the industry mentioned. And yet when we look forward in terms of the backlog for Q3, it's quite strong. And it's that backlog that gives us quite a bit of confidence around the comments we made in the outlook that Q3 revenue should accelerate above the Q2 outlook." }, { "speaker": "Conor Cunningham", "text": "Appreciate it, thank you." }, { "speaker": "Operator", "text": "I will now turn the call back over to Brian Chesky for closing remarks." }, { "speaker": "Brian Chesky", "text": "All right, well, thank you all for joining us today. And I just wanted to say before I wrap up, this was Ellie's first earning call as CFO and the transition has gone incredibly well. Her, Dave and I are really, really focused on this next chapter of growth. So to recap, revenue was $2.1 billion, this is 18% higher than a year ago. Net income and adjusted EBITDA were both Q1 records and our trailing 12 month free cash flow was $4.2 billion, representing a free cash flow margin of 41%. Now we've made a tremendous amount of progress over the past few years. And with the launch of Icons, we're now laying the foundation for our plan to expand beyond our core business. This is just the beginning. Thank you all and we'll see you next quarter." }, { "speaker": "Operator", "text": "That concludes our call for today. We thank you all for joining and you may now disconnect." }, { "speaker": "Brian Chesky", "text": "For business. This is just the beginning. Thank you all and we'll see you next quarter." } ]	Airbnb, Inc.	115,705,393
ABNB	1	2,025	2025-05-01 17:00:00	Operator: Good afternoon, and thank you for joining Airbnb's Earnings Conference Call for the First Quarter of 2025. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Angela Yang, Director of Investor Relations. Please go ahead. Angela Yang: Good afternoon, and welcome to Airbnb's first quarter of 2025 earnings call. Thank you for joining us today. On the call today, we have Airbnb's Co-Founder and CEO, Brian Chesky; and our Chief Financial Officer, Ellie Mertz. Earlier today, we issued a shareholder letter with our financial results and commentary for our first quarter of 2025. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We've provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to the Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I'll pass the call to Brian. Brian Chesky: Well, good afternoon, everyone, and thanks for joining. We had a strong start to 2025. In Q1, guests on Airbnb spent nearly $25 billion. These results show that no matter what's happening in the world, people continue to choose Airbnb, and that's because our model is inherently adaptable. It's something we've proven time and time again. We started Airbnb during the Great Recession of 2008. People turned to us for a more affordable way to travel, and they started hosting Airbnb to earn extra income. Then, in 2020, when the pandemic hit, we provided a way for people to travel close to home. And as a result, our business quickly rebounded. And by the end of that year, we went public. Today, things feel uncertain once again. But just as we've shown in the past, as the world changes, Airbnb will continue to adapt. And that's because we have millions of hosts offering nearly every type of home at nearly every price point from budget to luxury in neighborhoods and cities all over the world. And for hosts, Airbnb remains a great way to earn meaningful income. Now, before we get into Q1 results, I want to just talk for a moment about where we are as a company. We've been focused on driving long-term growth, as well as preparing for Airbnb's next chapter when we'll offer more than a place to stay. And we've been laying the groundwork to make this transformation for years. And there are two key things we've done to get ready. First, we want to make sure that people loved our core service before we launched anything new. So, we spent the last few years rolling out hundreds of upgrades to make Airbnb better for guests and hosts. It's now easier to use, more affordable and more reliable. And just one example of this is the launch of Guest Favorites, which is a way for people to easily find the best places to stay on Airbnb. Since launch, over 350 million nights booked, have been booked at Guest Favorites listings. We've also worked hard to improve affordability and price transparency, which are especially top of mind for people today. When guests told us prices weren't transparent enough, we introduced a toggle that let them see the total price upfront. Over 17 million guests have used it over the past two years. And last month, we rolled-out total price display globally. So, now the price you see upfront includes all fees. But perfecting our core service wasn't enough. To expand beyond homes, we needed an app that could support new offerings. Until now, our app has really done one thing, which is, it lets you book a home. So, we rebuilt the app from the ground-up on a new technology stack. And now, we can innovate faster and offer much more than homes. So, we're ready for Airbnb's next chapter. On Tuesday, May 13th, we'll unveil the 2025 Summer Release, and you can visit our website that day to watch the announcement and see all the details. So with that, I'm going to turn the call over to Ellie for a financial update. Ellie Mertz: Thanks, Brian, and good afternoon, everyone. I'll start with a review of our Q1 financial results, and then I'll walk through our outlook for Q2. As Brian mentioned, we had a strong first quarter. We had 143 million nights and experiences booked, up 8% year-over-year. Looking at this year-over-year growth by region, Latin America grew in the low-20%s, Asia Pacific grew in the mid-teens, Europe in the mid-single-digits, and North America in the low-single-digits. Revenue for the quarter was $2.3 billion, up 6% year-over-year. If you exclude the impact of FX and calendar factors, revenue would have grown 11%. As a reminder, those calendar factors include Easter falling in Q1 2024 and the extra day from Leap Day last year. We generated $417 million of adjusted EBITDA, which represents an 18% margin. Next, I'll turn to our balance sheet and cash flow. We continue to generate significant cash in Q1, delivering $1.8 billion of free cash flow. Over the past 12 months, we've generated $4.4 billion, representing a free cash flow margin of 39%. At the end of Q1, we had $11.5 billion of corporate cash and investments as well as $9.2 billion of funds held on behalf of guests. Our strong balance sheet allowed us to repurchase $807 million of our common stock during the quarter. And at the end of Q1, we had $2.5 billion remaining on our repurchase authorization. Now, let's shift to our Q2 and full year 2025 outlook. Despite the recent volatility in the global economy, we believe we're positioned to deliver strong results in Q2. We expect to deliver revenue between $2.99 billion to $3.05 billion, representing 9% to 11% year-over-year growth. This includes a benefit of approximately 2 percentage points due to the timing of Easter. For nights and experiences booked, we expect year-over-year growth in Q2 to moderate relative to Q1. So far in Q2, we saw strong guest demand for Easter travel in Europe and continued momentum in Latin America, which remains our fastest growing region. In the US, we've seen relatively softer trends, which we believe is largely driven by broader economic uncertainty. On profitability, we expect adjusted EBITDA to increase year-over-year with adjusted EBITDA margin expected to be flat to slightly down compared to Q2 2024. Marketing expense will grow faster than revenue in Q2, mostly due to our upcoming summer release and investments in growth initiatives. For the full year, we continue to expect an adjusted EBITDA margin of at least 34.5%, in line with what we shared in February. Now that includes $200 million to $250 million of investment to launch and scale new businesses in 2025. These investments will have the biggest impact on our margins in the second half of the year, since our new offerings go live on May 13. Now, as these new businesses scale over the coming years, we expect them to be significant drivers of future revenue growth. Now looking ahead, our priorities remain consistent with last quarter. As a reminder, we're continuing to drive long-term growth and deliver market share gains through three key growth levers. First, we are perfecting our core service. As Brian mentioned, we've made significant -- we've made Airbnb significantly better for both guests and hosts. We've been driving growth from product improvements like enhanced search and better merchandising. One example is the newly redesigned Rare Find feature that better highlights popular high-quality listing. We also simplified our checkout page to make booking easier. These are just a few examples of the product optimizations that are contributing to our top line, but we know there's still more work to do. Second, we are accelerating growth in global market. We're taking a much more localized approach to product and marketing in underpenetrated markets around the world. This is a multi-year strategy, but we've already seen encouraging results. For the fifth quarter in a row, growth in these expansion markets significantly outperformed our core markets. In fact, the average growth rate in Q1 in expansion markets was more than double that of our core markets. Brazil continues to lead the way. In Q1, origin nights in Brazil grew 27% and first-time bookers grew over 30%, both accelerating from Q4. Third, we are launching and scaling new offerings. This begins on May 13th, so expect more on that soon. Now, to wrap-up before we go to questions, we're staying close to geopolitical and macroeconomic uncertainty and monitoring any short-term impact they could have. As Brian mentioned in his remarks, we have an adaptable and diversified business that has been resilient during periods of uncertainty, most recently is COVID. Despite signs of near-term volatility, we remain focused on the long-term opportunity to both grow our core business and expand into new ones. We believe that our efficient operating model, financial strength and significant liquidity give us the ability to pursue these multi-year initiatives in the current environment. And with that, I will open it up to Q&A. Operator: Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Justin Post from Bank of America. Your line is open. Justin Post: Great. Thank you. I wonder if you could expand a little bit on the letter on travel corridor changes. Are you seeing any differences in like total volumes of bookings from quarter changes like in Europe? And I know you already mentioned Canada. Is that driving any change for you? And then, do you think there's any market share impact in the US? Or do you think you're holding in your share, it's just the whole kind of country is a little depressed? Thank you. Ellie Mertz: Great. Brian, why don't I take this? Let me first talk a little bit about travel corridors, and in particular you mentioned Canada, we called it out in the letter. Let me tell you a little bit about what we are seeing, in particular with regard to the inbound corridor to the US. We absolutely have seen a decline in popularity of foreign travelers coming to the US. What we have seen is that, number one, it's less popular to come to the US from a year ago also relative to the beginning of the year. And what we're seeing in that segment is two things. One is that, that segment is a very small portion of our overall business. As a reminder, US travel is predominantly domestic. And as a result, that corridor of foreign travelers coming to the US is approximately 2% to 3% of our overall business. So, it's frankly not quite material. At the same time, what we're seeing is, within that corridor, guest who would have in a prior year come to the US are simply choosing a different location? So, I think, Canada is the most obvious example where we see Canadians are traveling at a much lower rate to the US, but they're traveling more domestically, they are traveling to Mexico, they are going to Brazil, they're going to France, they're going to Japan. And I think what that tells you about the distribution is that, in this moment, it's not necessarily that people don't want to travel, they are just using different destinations. And Airbnb is a platform, given our distributed supply, it provides an adaptable way for them to find a new location. So that's the comment I would say on the corridors. In terms of market share in the US, I would say that, we continue to have very strong market share in the US. We are not seeing any losses in market share. Much to the contrary, we continue to gain market share in the US, but we do see generally that as a market, North America for the last several quarters has been the slowest grower across the industry. Operator: Your next question comes from the line of Richard Clarke from Bernstein. Your line is open. Richard Clarke: Hi, thanks for taking my question. Just wanted to delve a little bit into what is the behavior you're actually seeing from the US guests to slow down? Is it delayed booking windows? Is it higher cancellation rates, shorter trips, trading down, some nature of what you're actually seeing? And I guess, we've heard from maybe a few travel companies that things got a little bit better towards the end of April. Are you seeing that? Is there any sort of light at the end of the tunnel there with regard to bookings picking up in the last few days or weeks? Ellie Mertz: Yeah. Thanks for the question, Richard. So, let me double-click. I just talked about the quarter that is inbound to the US. Let me talk now about what we're seeing with regard to US domestic travel, which again is the lion's share of overall US destination. A couple of things to comment on. One is, we are seeing the higher-income traveler somewhat unimpacted by the current macro conditions. We see in particular, the higher ADRs of our bookings, the growth is very stable and very healthy for the US traveler. In terms of lead times, we're seeing something else. We're seeing that the short lead times, so that would be bookings that are just around the quarter, they could be in two days or a week or two weeks, we're seeing relatively strong growth there, whereas in the longer lead times, and in particular, those bookings that are for more than say a month out, that is where we're seeing the relative softness. And so, I think what you take from that double-click in terms of the lead times is that, we do have some US consumers that are waiting and seen before they book their summer travel. And I think the one thing that gives us some amount of comfort in terms of seeing the weakness at the longer lead times is that, we have seen movements in terms of lead time shift, many times in the past. I think the most recent to call-out was last summer, where we saw in June and July, a truncation of lead times, somewhat similar to what we're seeing today. And what we saw then is that, people waited for a while, but they did end up booking that trip. It was just closer to the check-in day. And so that's something that we're obviously monitoring quite closely, both globally, but also in particular to the US, as we believe the US is obviously the most impacted by a lot of the headline noise currently. The one thing I would also add is, we haven't particularly seen consumers trade down in terms of choose a lower ADR booking or a shorter trip that has not been any behavior that we've seen. Operator: Your next question comes from the line of Mark Mahaney from Evercore ISI. Your line is open. Mark Mahaney: I wanted to ask about what you think are the best chances for reaccelerating your units, your nights and experiences. If we just leave aside experiences for now, like what -- in terms of the core accommodations unit growth, I think you're investing to get back to double-digit unit growth. And of the different things you're rolling out, co-hosting, is it really leaning into the expansion markets? Is there something else, maybe marketing? What are those do you -- are you counting on to be most impactful in order to get that recovery back to double-digit nights growth? Thank you very much. Brian Chesky: Yeah. Hey, Mark. I will take this. So, yeah, I guess I would just say, we think we're just scratching the surface of how much bigger our core business could be. And there's no reason to think it could not be double the size that it is today. And then, the question is, well, what would you have to believe? I think the first thing we want to do is to continue to perfect the core service. To do that, we really have to do three things. We got to make Airbnb easy to use, we got to make it more affordable, and we got to make it more reliable. So just for example, starting with reliability. For every person who books an Airbnb, we estimate about nine people are booking hotels. So, if we could just get one of those nine people to book an Airbnb, that essentially would double the size of our business. And the number one reason people say they don't use an Airbnb is, they don't find it historically as reliable as a hotel. That's why we're really trying to elevate the best homes in Airbnb and remove the worst. So, we now Guest Favorites, 350 million nights have been booked in Guest Favorites. We've also removed 450,000 listings. This has created a lot higher customer satisfaction, reduced customer service tickets. And we think over time, more and more people are going to come to Airbnb. So we're going to do a lot more, Mark, on making Airbnb more reliable. On affordability, we know that that's a big driver of growth. Airbnb started as affordable alternative to hotels. We lost, I think, a little ground versus hotels during the pandemic, but I think in the last couple of years, hotel prices have gone up more than Airbnb. I want to call out that as of last month, we have rolled out total price displays globally. So, now, the price you see before taxes in the United States and really inclusive taxes, say, in Europe, include all fees. So -- and I think this is really important, because it drives customers to the best value Airbnb's, which we rank higher and incentivize the best behavior for host. On the usability standpoint, the vast majority of our people come to Airbnb, don't find a booking. Airbnb last year was accessed by over 1.5 billion devices. So, think about like how many people come to Airbnb, they don't find a place to stay. Part of this is having the right homes for them, but also having the right tools. So, we think perfecting the core is a huge driver to growth, but that is really going to be a big driver in our core markets. Our core markets are US, Australia, Canada, UK and France, the four English-speaking countries, plus France, which make about 70% of our growth -- our business. But the more growth markets, emerging markets would be Spain, Italy, Germany, Mexico, Brazil, and then the big four countries in Asia are China, India, Korea and Japan. And these markets are actually growing twice as fast as the aforementioned five core markets. And we're going to step on the gas. And I think that international will be one of the biggest growth drivers that will get us back to double-digit growth on Airbnb. So that's just a little bit. It's really three horizons. Horizon one, the biggest near-term opportunity is continue to increase conversion rate by making Airbnb easier to use, more affordable, more reliable. Horizon two, really is international growth. And then, of course, the longest horizon will be expanding our core business to offering [beyond a place to stay] (ph). Operator: Your next question comes from the line of Jed Kelly from Oppenheimer. Your line is open. Jed Kelly: Hey, great. Thanks for taking my questions. Just two, just circling back on the US, I think I've asked this before, but just in some of these urban markets, do you think about leaning more into hotels? And then just on the full year guidance, you reiterated your margin guidance. But any reason given the macro uncertainty for not widening the margin range? Thanks. Brian Chesky: Yeah, I can take hotels, and I'll let Ellie take the second part, Jed. So, yeah, we think hotels is a massive opportunity for Airbnb. In 2019, we acquired HotelTonight, and that was basically under the philosophy that while people came to Airbnb looking for a unique place to stay, typically a home, the vast majority of people come to Airbnb don't end-up booking and one of the reasons is they're window shopping and they're not ready to book. But sometimes, especially in popular markets, urban areas, when a lot of people are traveling, Airbnb homes are booked. And we have a fairly high occupancy and we need other place to stay and hotels are a great way to fill-in network gaps. During the pandemic, we had to pause some of our efforts and some of our progress, because we really want to focus on getting back to the basics. But now that we've made a huge amount of progress on our core business, making over 500 improvements in upgrades over the last three years. We are prepared to expand beyond our core. And actually one of those expansions is hotels. One of the things you saw was we just did a promotional HotelTonight. So, now if you book a hotel in HotelTonight, we're offering 10% credit towards an Airbnb booking. This of course, increases conversion rate on HotelTonight, but also introduces the number of hotel travelers to Airbnb. Over the coming years, we're going to be doing a lot more though on Airbnb's application to bring more great hotels onto Airbnb. We think almost all the hoteliers in the world would love to have Airbnb as a distribution channel. And so, we think there's a lot of opportunity over the coming year. So, absolutely going to be part of our strategy. Ellie Mertz: And then, on the second question with regard to the margin guidance, we reiterated the plan that we had shared in February. We believe that gives us considerable room to continue to focus on strengthening the core business, while investing in growth initiatives, and no material change in terms of that investment profile for the year. Operator: Your next question comes from the line of John Colantuoni from Jefferies. Your line is open. John Colantuoni: Hey. Thanks for the question. I wanted to start with sort of momentum in the business with growth in 2024 peaking in December and strength continuing in early 2025, I'm curious how growth has trended throughout the quarter and into April. Is growth sort of at a low-point right now for the year, or did it sort of dip a little bit earlier in the quarter and it's since improved from there? And second question, just sort of looking specifically at the expansion markets. I'm curious if you could just sort of characterize how growth has progressed there specifically this quarter compared to last quarter when you called it out as a key contributor to the strength that you saw? Thanks. Ellie Mertz: Thanks, John. Let me start with the first question, in terms of how growth has trended effectively year-to-date. So, I think it's actually interesting to understand the path that both we and I think the industry went through in Q1. If you recall, January was a very strong month, followed by softness in February. You'll recall, there was a bunch of revisions to guidance in terms of the airlines. And I think what they saw, but we saw a slightly less degree of it was, there was a step-down from January to February that coincided with a pretty meaningful decline in consumer sentiment over that sequential month-to-month period. And yet, when we look at our full-quarter results for Q1, that softness that we saw in February, effectively rebounded and recovered in March such that the full-quarter was generally in line with our expectations. So, I think when we fast-forward today and the headlines are quite volatile. I think we do have to recall that, since the beginning of the year. There has been some temporal shift in terms of when people are booking. But from that Q1 period, what you gauge is that people may pause on the booking, but what we've seen today is that they come back into it. So, I wouldn't say that April is necessarily below. There has been some week-to-week and month-to-month volatility, since the beginning of the year. On the expansion markets, what would I say? I would say, generally speaking, we see nice momentum in those markets. I think in particular, what I would say is that, Latin America accelerated over the course of full year 2024. And if you look at Latin America's growth in Q1 is actually above where we were in Q1 of last year, which I think gives you a sense of, if we're able to achieve momentum in a particular market based on our product and marketing localization, we can maintain it and accelerate it over time. Obviously, the nuance of every country is slightly different, but I think anchoring on the performance that we've had across Latin America, but in Brazil, in particular gives you a sense of the ability to build momentum in these relatively underpenetrated markets. Operator: Your next question comes from the line of Lee Horowitz from Deutsche Bank. Your line is open. Lee Horowitz: Thanks for taking the question. Two, if I could. Last quarter, you guys talked about the ability to leverage marketing expense in some of your core markets, which gives you the ability to invest in the growth markets. I guess as things perhaps slow a little bit, how do you think about perhaps leaning into that slowness to take some more share to take advantage of a weaker market to pick-up share, particularly relative to, say, some of your competitors that have talked to trying to be more aggressive as things slow? Do you still think you can leverage marketing in your core markets under those assumptions? Ellie Mertz: Yeah, I would say, absolutely. Obviously, we start the year with a full-year marketing plan and yet every month, we're looking at the relative efficiencies by channel, by market and adjusting accordingly. So, I would say, broadly speaking for the year, we retain quite a bit of flexibility to put more money into channels that are working and markets that are working and to cut where we see less desirable results. And so, far this year, we've been doing that on a regular basis as we would in prior years. Operator: Your next question comes from the line of Ron Josey from Citi. Your line is open. Ron Josey: Hi, thanks for taking the question. Two please. I want to ask just on the new product launch on May 13th in experiences or something else. Talk to us a little bit more about the plans, integration plans across the site and how you think or whether any contribution from these new products are included in guidance? And then, on the affordability or just the volatile headlines that we've been talking about, would love your thoughts on just how Airbnb's affordability initiatives could drive greater bookings. We saw the summer travel data, where I think US guests are prioritizing staycations and more prone to drive. Maybe that's an opportunity for the team. Talk to us about that, please. Thank you. Ellie Mertz: Okay. So, on the first question, I believe it was, what's the impact of the new business launches with regard to our guidance. So, I would say, the launch date is M 13, and we're extremely excited in terms of what is to come and what is to start on that day, but it is just the beginning. And so, the impact from a top line in the current quarter will be relatively modest, whereas as we scale those offerings, they will obviously increasingly contribute to the top line. In terms of the expense and the investments associated with that launch, they are building over the course of the beginning of the year. And as we said in the guidance language, you will see them more meaningfully hit EBITDA in terms of compression in the back half of the year as we scale the investments behind the launch. In terms of affordability, I think your thesis here is exactly right. What we saw, and it's not a perfect comp, but I do think it is instructive here. What we saw five years ago in terms of the pandemic was when certain portions of travel were inaccessible, people found other things to do on our platform. As Brian and I shared in terms of the opening, just to remind everyone, this business model has a huge amount of diversity in its offering, which allows us to be extremely resilient and adaptable as consumer behavior changes. And so, as I think about the current environment that we are in, you can think about, for example, the US guest, there's an opportunity for us to merchandise the lower-cost listing or the more proximate listing where the guest doesn't need to travel for -- doesn't need to take a flight for the summer, but they can drive. There's a huge amount of optionality with regard to the diversity of our offering that can allow us to better merchandise what is applicable to the guests in the current moment. Operator: Your next question comes from the line of Justin Patterson from KeyBanc. Your line is open. Justin Patterson: Great. Thank you. Could you talk more about the behavior of the guests who are booking primarily in app versus those who are arriving through the web? Are you just seeing greater frequency rates, repeat rates and so on and so forth? Thank you. Ellie Mertz: So, probably I would say, the demo is slightly different in terms of the app relative to the web. I would say, the broader thing to takeaway in terms of the movements we've made in terms of booking share moving to the app is that we know the app is a much better experience for the consumer. We see this most notably just in terms of conversion rates and getting people to use our apps as compared to in particular [mo web] (ph). It's a much better experience that we have designed. And so, we want to migrate people to that experience. You can see that the booking share has gone up quite dramatically over the last couple of years as we've encouraged people to use our app. And as a result, it's additive in terms of the consolidated conversion levels. Operator: Your next question comes from the line of Doug Anmuth from JPMorgan. Your line is open. Unidentified Analyst: Great. Thanks for taking my questions. And this is [Dave] (ph) on for Doug. I have two. So, first one, Brian, you've been pretty vocal about user experience in travel. So, curious to hear how you experience on the Airbnb to change as you move beyond places to stay and new choices introduce new frictions? And then, secondly, how do you guys think about the long-term sustainability of your margins as your efforts to move beyond the core scales over time? Thank you. Brian Chesky: Hey, Doug. I -- let me just start by saying, I think one of the super powers of Airbnb is our design team and our ability to make something incredibly easy to use. When we started Airbnb, we didn't really invent the idea of vacation rentals. They existed before us, but what was true is that they were very hard to book. Before Airbnb, you couldn't actually book a vacation rental online. The messaging platforms really were non-existent or very rudimentary. Very few people actually left reviews, people didn't really have an account. And so kind of one of the things we really tried to do when we created Airbnb was designed the system of trust. And as something is easier, more people do it. So, what we're noticing, for example is many of the new business we're going into, they also have similar frictions as our core business did or vacation [house] (ph) did before we basically created a category, which is, what we now call Airbnb. And so that's one of the things is we're going to try to -- the things we're going to offer want to be Instant book, we want to be like really easy. We want to have that great Airbnb design. But the other thing is a couple of other things with user experience. I think a lot of companies have tried to like design an end-to-end travel. I think designing end-to-end travel is very, very hard. It's funny. There's a funny thing. One of the most common startup ideas for entrepreneurs is to do a travel planning app. And yet travel planning apps almost always fail. So, it's almost like a riddle. Why do travel planning apps fail and everyone really tries to do it. And the reason why is, because to plan travel is very complicated. In fact, it's so complicated, many people have assistance and a big part of the job is to plan travel for them. And yet you use it infrequently. So, it's a very difficult thing to do and you do it infrequently. And so therefore, a lot of companies have failed to design like a so-called connected trip. So, I think, to do this, a lot of it is to design a really good user experience. And I think that's one of the things that we're going to try to do to really design a great end-to-end experience to be able to book your entire trip and much more. I think the user interface will be important. I think AI will be an important way to do this as well. AI is -- I think as I said before, we're really focused on customer service and solving the most difficult problems for customers and working backwards towards travel inspiration. Just one thing I'll say about AI, which is definitely making the customer experience easier is, we just rolled-out our AI customer service agent this past month. 50% of US users are now using the agent and will roll it out to 100% of US users this month. We believe this is the best AI supported customers travel agent in travel. It's already led to a 15% reduction in people needing to contact live human agents, and it's going to get significantly more personalized and agentic over the years to come. So essentially, that's what we're focused on. We're focused on making everything instant book and easy-to-use. We're trying to make sure that the end-to-end travel experience is really, really wonderful with great Airbnb design, and we're going to bring more AI into the application, so that Airbnb, you can really solve your own problems with great self-solve through AI customer service agents. Ellie Mertz: Great. Let me talk a little bit about long-term margins. I think just starting with our core business, obviously, our core business has extremely strong EBITDA margins and cash flow generation abilities. I think you've seen us bring that up over time, in particular subsequent to the pandemic. And where we sit today, we see incremental efficiencies that we can continue to drive across that core business. And every year what we're seeking to do is strengthen and make more efficient that core business, so that we have incremental room to invest in growth. From year-to-year, we may choose to invest more in growth relative to the efficiencies that we generate. I think you're seeing that in the current year. But the intent both with the core and the new businesses is to invest in growth upfront and to optimize the margins over time. I think that the portfolio over time, we expect to have quite compelling margins. Operator: Your next question comes from the line of Nick Jones from Citizens. Your line is open. Your next question comes from the line of Ken Gawrelski from Wells Fargo. Your line is open. Ken Gawrelski: Thank you very much. Appreciate the question. Brian, a question for you on, as you think about the ADRs and the opportunity, the balance, if you go back over the last couple of years, you've talked about making Airbnb's more affordable. And there's been various initiatives, including the Rooms initiative to make Airbnb's more affordable. Do you expect maybe more flexibility in ADRs and room night prices on Airbnb's relative to hotels in a period of weaker consumer spending, especially in the US, maybe in urban areas? I'm just curious as how you think about the balance between potential ADRs versus room nights in North America? Thank you. Brian Chesky: Sorry, I'm not clear what the question is. Ken Gawrelski: I'm sorry, let me rephrase. Do you -- as you think about the opportunity -- if you just think about the balance between pricing ADRs, average daily room nights, relative to total room nights volume, do you think that there is an opportunity to have more for your hosts to have more flexibility on ADRs and to see more affordability, drive better room nights and ultimately greater share over the long-term in a period where there's maybe more consumer weakness or some pressure on the consumer wallet? Brian Chesky: Yeah. Okay. Yeah, absolutely. The answer is yes, and I'll try to explain why this is the case. Hotels, let's just contrast two hotels. I assume you're referring to Airbnbs versus hotels. So, hotels have -- most hotels -- hotel rooms -- all hotel rooms have a cost base, right? And so, they need to build in a profit margin on their room, they call this RevPAR, revenue per -- and it's really important that for them that they stay within some margin. The vast majority of people on Airbnb list only their home only on Airbnb. We believe most listings are exclusive to Airbnb and most of these homes are either primary homes or the second homes, but the homes don't exist to list on Airbnb, they exist for somebody to live in summer all the time. And so, most of the income that people make on Airbnb, the average host in Airbnb in the United States, for example makes about $15,000 a year. This is supplemental income. And so, it's all-up, it's typically all upside to them. So, what this means is there's typically a little bit more flexibility on the Airbnb host, let's say, hotel to be able to move their prices up or down, because like if they didn't rent on Airbnb -- before Airbnb, they didn't rent that night was completely lost. So really any price is upside for them as compared to hotel. One of the things we do is, we try to build really great host tools for them. And four out of five hosts on Airbnb are now using our host tools. To give you a couple of examples, Compare Listings. More than 2 million listings in Airbnb have used the Compare Listings tool. What the Compare Listings tool does is shows you how your price compares to prices of similar Airbnbs in your area. We found that when hosts have more visibility, they tend to provide more competitive prices. Another is weekly and monthly discounts. Now, the vast majority of hosts on Airbnb offer a discount, if you rent by the week, or if you rent by the month. So these are just some of the tools that we offer and we're going to continue to offer more and more tools. So our hosts are increasingly responsive. But yes, to answer your question, we do believe that there's more flexibility. And ultimately, while a higher ADR can benefit Airbnb's financial outlook on the short-term, in the long-run, affordability aligns our interest with customers, which is the best long-term incentive to alignment to align with shareholders. So we always want to drive as much value as possible to our guests. Ellie Mertz: Ken, I would just also add that when we test elasticity, we often see that driving down prices is more than compensated by increased volume. And that's why when we think about our pricing tools, we are not trying to necessarily drive host who offer higher prices. We're trying to get them to the best price for their listing that will drive more bookings. And in many cases, that will be to reduce your price. Operator: Your next question comes from the line of Kevin Kopelman from TD Cowen. Your line is open. Kevin Kopelman: Thanks. Another one on ADRs. Given FX, the guide seems to point to softer ADRs for Q2, how much of that is geo mix versus softening within the key regions or other factors, and what are you assuming for FX benefit in Q2? Thanks. Ellie Mertz: Yeah. So, if we look at the guide for Q2, what is happening? We're seeing a couple of different factors. One is, there is underlying real price appreciation, which is a tailwind in terms of bringing prices up. There is a movement in terms of the FX headwinds. So, the FX headwind relative to Q1 is dissipating in Q2. And then, the third component is, as our business mix shifts away from North America in particular, that is a headwind, right? It moderates prices because the US prices are significantly above, frankly, ADRs around the world. I would note, we do not get the same FX benefit as maybe other platforms in that our exposure to, for example, the euro is much more limited than some other platforms. Operator: Your next question comes from the line of Tom White from D.A. Davidson. Your line is open. Tom White: Great. Thanks for taking my questions. Just one on the international expansion markets. I was hoping you guys could just update us on kind of how those markets are tracking in terms of profitability relative to your kind of core markets, both in terms of like absolute level and also just curious about the kind of the pace at which they're tracking that way. I mean, if you could just share a little color on exactly what kind of investments you guys are finding are helping -- in those markets are helping drive the acceleration in growth you talked about? Thanks. Ellie Mertz: Sure. So, when we think about our expansion markets, what I would say generally about this business is, we're able to generate very attractive contribution profit at a variety of ADRs and that typically is the biggest determinant on the overall level of profitability at a market level, like the relative ADR. I would say, broadly speaking, when we think about investing in a new market, there is some fixed cost upfront in terms of say, launching brand campaigns and that does drag margins down. But over time, we are able to scale into the marketing load as well as make some efficiencies in terms of the underlying variable costs if they have not already been localized. And so, I would go back to my first comment that, independent of a pretty wide range of ADRs, we're able to deliver very attractive unit economics across the globe. In terms of like what the types of investments we're making in those markets are, it really falls into two very simple buckets. One is product, and the other is marketing. On the product side, we have been taking a localized approach to look at specific markets to say, what do we need to do to either the global product or, for example, the payment stack to enable more local customers to use Airbnb. And we've been very choiceful with those localizations to make sure they're worth the effort and they aren't too localized, but when they're important, they can be quite meaningful in terms of driving growth in a particular market. I think some of the obvious cases are around adjusting the booking flow to be locally nuanced, and in particular to offer the right payment methods for a specific type of customer. So that's one area of investment on product. The next is obviously marketing. When we talk about going into a particular expansion market, what that means is that, we are applying effectively the full funnel of our marketing approach to that market. So, it's inclusive of some amount of brand marketing, performance marketing, comms, policy, et cetera, such that we are hands on to deliver a differential outcome for that market versus the light touch approach of some of our long-tail markets. Operator: Your next question comes from the line of Stephen Ju from UBS. Your line is open. Stephen Ju: Great. Thank you. So, Brian and Ellie, I think we and the analyst community sort of outside looking in, are always probably overly focused on the advertising and the monetization angle of product development. And -- but can we talk about like in re-center where your priorities are, because based on everything that you're talking about, whether it's experiences or the international expansion, the co-hosting and Brian, your prior analogy with lateral things to sell like Amazon, it does sound like we should be thinking more about transaction growth versus things that you are doing to capture a greater portion of the unit economics. So, can you kind of recenter us in terms of like what do you think the primary drivers of gross bookings will be and revenue will be? Thanks. Brian Chesky: I mean, maybe I can talk at a high-level, Ellie, feel free to elaborate. But yeah, you have the right mental model. I've always believed that what we should do is, focus on the things that are either most perishable opportunities or things that our guests and hosts are asking for. And so, most of what we've done is to try to do one of those two things. So, whether we're increasing reliability, affordability, making it be more easier to use, those are really in response to what our guests and hosts are telling us. That's, I'd say, the first priority is being responsive to their feedback and listening to them. And the vast majority of the 500 improvements we made over the last three years was based on feedback from our guests and hosts. So then, everything else is really a matter of just a sequencing. And the sequencing that we've chosen is just based on some of the opportunities that are most perishable. And so frankly, number one would actually be beyond improving our core business, it would be international expansion. And so, the international markets are critical. We think like what Latin America and what Asia have in common, for example, is that the average population is younger in these markets, they're more likely to be on social media, and therefore, also less predisposed to staying in hotels. And there's huge populations, huge economies growing very, very quickly. So, we think these are huge opportunities for investment. And one of the most important things that we can do at Airbnb is to continue to grow our network effect. And this network effect is really a global network. And so we really wanted to match the travel corridors. And then obviously, expanding beyond a place to stay, we are prioritizing things that increase, yeah, volume growth versus unit economics. That being said, there are a number of things that we are looking at that would increase monetization of Airbnb, especially on the host side. And the reason why is, because almost everything we've done for host, we've given away without charging anything incremental from a take rate standpoint in the last five years. We've increased air cover coverage to $3 million. We don't charge more. We can go down the list of other things that we offer. We don't take any additional take rate on co-host listings. They just host an Airbnb, we want to grow unit volume. So, we think that growing network effect, increasing market share is the most important priority for us in the near term. Operator: Your next question comes from the line of Deepak Mathivanan from Cantor Fitzgerald. Your line is open. Unidentified Analyst: Thanks, guys. This is Jack on for Deepak. Just one for you real quick. Are you guys seeing hosts adjust pricing for some of the early demand softness in the US? And kind of moreover, do you expect the marketplace to be relatively price sticky? Or is it going to be more dynamic should the macro get any worse from here? Thank you. Ellie Mertz: I would say, we haven't seen any meaningful shift to the downside in terms of hosts resetting their pricing. But two parts of the call earlier, I do think there is considerable opportunity for us to encourage hosts to bring down their prices generally, but certainly in this macro to capture more demand. So, I would call it an opportunity as opposed to something that we're seeing hosts actively do today. Operator: Your next question comes from the line of Conor Cunningham from Melius Research. Your line is open. Conor Cunningham: Hi, everyone. Thank you. So airlines and hotels spend a ton of time talking about the resiliency of loyalty programs during downturns. And I know you guys don't want to copy them, but can you just give us some updated thoughts on a subscription model or a loyalty program? It just seems much more likely that thing is -- that type of opportunity is on the table after you move into experiences or something else along that line. So, if you could just talk about that, that would be helpful. Thank you. Brian Chesky: Yeah. I mean, totally agree with you. I think it is absolutely something that we're looking at. I've been actively thinking about this as well. What I've always was very intentional about was that we never wanted to necessarily have essentially like a point subsidy program, which to me, is in a way the price for not having a lot of loyalty on your platform. And we have a lot of loyalty. A lot of these other programs, they try to get people to join loyalty programs, they even have an account information, they even have a relationship with the guest. Everyone at Airbnb, we verify their identity. The vast majority of people have profiles. We have 200 million verified identities on the platform on Airbnb today. I think there's more than any or almost any other platform in the United States for any -- not just travel, but beyond travel, around two out of three people who book intermediary leave a review. So we have really good retention. We have really good participation. But I've always thought that there could be a membership program, potentially even a paid subscription or membership program, Airbnb, where you pay more to get differentiated offerings and better service. And I think we're looking at a variety of models there, where it's not necessarily subsidizing the business we already have, but really increasing usage and increasing share of wallet. And I think that Amazon Prime, one of the things that's compelling about it is, they actually were able to get people not just to come back to Amazon, but to use it more frequently. And so, I think any program that increase the share of wallet or gets people not necessarily to come back to Airbnb, but to use it more frequently for a greater part of their lives, not necessarily just every year, but imagine every month or every week, including in your own city would be really, really compelling to us. Operator: Your next question comes from the line of Alex Brignall from Redburn Atlantic. Your line is open. Alex Brignall: Good evening. Thank you very much for taking the question. At the Q4 results, when you talked about the margin target, you said that FX was a headwind because of the transaction exposure that you have, more of your costs are in dollars. That's obviously, and I think, I'm not 100%. I think you said that margins certainly wouldn't have gone down as much, maybe not even down, if FX wasn't going against. Tell me I'm wrong, if I am on that. Obviously, FX has gone entirely the other way now and it would be a tailwind to your numbers. So, I would have imagined that all else equal, which of course is not, that the margin target for the full-year would have seen a tailwind from the fact that FX will benefit your US dollar cost base relative to your revenues. Could you just talk about why that's not happening? Thank you. Ellie Mertz: Yeah. Thanks for the question, Alex. So certainly, yes, between now and February, ever since -- sorry, since February, we have seen a change in the FX rates. As of February, we were assuming that, FX would be a pretty meaningful headwind for the remainder of the year. Fast forward to where we are today, it's obviously less of a headwind. A couple of things that I would note. One is that, we, the positivity we've seen out of Europe in terms of the weakening of the dollar is not necessarily relevant for our entire portfolio. We do have some -- we do continue to have some FX headwinds out of Latin America that do impact a certain portion of our business. Second is, we do some revenue hedging such that the tailwind that some are seeing does not entirely materialize in terms of our hedged portfolio for revenue. And then I would say, third, in terms of managing to the guidance that we provided you, there are some puts and takes with regard to overall volume underlying ADR as well as FX-adjusted ADR. Operator: And that concludes our question-and-answer session. I will now turn the call back over to Brian for closing remarks. Brian Chesky: All right, everyone. Well, thanks for joining us today. We're incredibly proud of our results, and I'm really excited to share what we've been working on at Airbnb. So, make sure to watch our 2025 Summer Release to see what's next. Until then, thank you. Operator: This concludes today's conference call. Thank you for your participation. You may now disconnect.	[ { "speaker": "Operator", "text": "Good afternoon, and thank you for joining Airbnb's Earnings Conference Call for the First Quarter of 2025. As a reminder, this conference call is being recorded and will be available for replay from the Investor Relations section of Airbnb's website following this call. I will now hand the call over to Angela Yang, Director of Investor Relations. Please go ahead." }, { "speaker": "Angela Yang", "text": "Good afternoon, and welcome to Airbnb's first quarter of 2025 earnings call. Thank you for joining us today. On the call today, we have Airbnb's Co-Founder and CEO, Brian Chesky; and our Chief Financial Officer, Ellie Mertz. Earlier today, we issued a shareholder letter with our financial results and commentary for our first quarter of 2025. These items were also posted on the Investor Relations section of Airbnb's website. During the call, we'll make brief opening remarks and then spend the remainder of time on Q&A. Before I turn it over to Brian, I would like to remind everyone that we will be making forward-looking statements on this call that involve a number of risks and uncertainties. Actual results may differ materially from those expressed or implied in the forward-looking statements due to a variety of factors. These factors are described under forward-looking statements in our shareholder letter and in our most recent filings with the Securities and Exchange Commission. We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances. You should be aware that these statements should be considered estimates only and are not a guarantee of future performance. Also, during this call, we will discuss some non-GAAP financial measures. We've provided reconciliations to the most directly comparable GAAP financial measures in the shareholder letter posted to the Investor Relations website. These non-GAAP measures are not intended to be a substitute for our GAAP results. With that, I'll pass the call to Brian." }, { "speaker": "Brian Chesky", "text": "Well, good afternoon, everyone, and thanks for joining. We had a strong start to 2025. In Q1, guests on Airbnb spent nearly $25 billion. These results show that no matter what's happening in the world, people continue to choose Airbnb, and that's because our model is inherently adaptable. It's something we've proven time and time again. We started Airbnb during the Great Recession of 2008. People turned to us for a more affordable way to travel, and they started hosting Airbnb to earn extra income. Then, in 2020, when the pandemic hit, we provided a way for people to travel close to home. And as a result, our business quickly rebounded. And by the end of that year, we went public. Today, things feel uncertain once again. But just as we've shown in the past, as the world changes, Airbnb will continue to adapt. And that's because we have millions of hosts offering nearly every type of home at nearly every price point from budget to luxury in neighborhoods and cities all over the world. And for hosts, Airbnb remains a great way to earn meaningful income. Now, before we get into Q1 results, I want to just talk for a moment about where we are as a company. We've been focused on driving long-term growth, as well as preparing for Airbnb's next chapter when we'll offer more than a place to stay. And we've been laying the groundwork to make this transformation for years. And there are two key things we've done to get ready. First, we want to make sure that people loved our core service before we launched anything new. So, we spent the last few years rolling out hundreds of upgrades to make Airbnb better for guests and hosts. It's now easier to use, more affordable and more reliable. And just one example of this is the launch of Guest Favorites, which is a way for people to easily find the best places to stay on Airbnb. Since launch, over 350 million nights booked, have been booked at Guest Favorites listings. We've also worked hard to improve affordability and price transparency, which are especially top of mind for people today. When guests told us prices weren't transparent enough, we introduced a toggle that let them see the total price upfront. Over 17 million guests have used it over the past two years. And last month, we rolled-out total price display globally. So, now the price you see upfront includes all fees. But perfecting our core service wasn't enough. To expand beyond homes, we needed an app that could support new offerings. Until now, our app has really done one thing, which is, it lets you book a home. So, we rebuilt the app from the ground-up on a new technology stack. And now, we can innovate faster and offer much more than homes. So, we're ready for Airbnb's next chapter. On Tuesday, May 13th, we'll unveil the 2025 Summer Release, and you can visit our website that day to watch the announcement and see all the details. So with that, I'm going to turn the call over to Ellie for a financial update." }, { "speaker": "Ellie Mertz", "text": "Thanks, Brian, and good afternoon, everyone. I'll start with a review of our Q1 financial results, and then I'll walk through our outlook for Q2. As Brian mentioned, we had a strong first quarter. We had 143 million nights and experiences booked, up 8% year-over-year. Looking at this year-over-year growth by region, Latin America grew in the low-20%s, Asia Pacific grew in the mid-teens, Europe in the mid-single-digits, and North America in the low-single-digits. Revenue for the quarter was $2.3 billion, up 6% year-over-year. If you exclude the impact of FX and calendar factors, revenue would have grown 11%. As a reminder, those calendar factors include Easter falling in Q1 2024 and the extra day from Leap Day last year. We generated $417 million of adjusted EBITDA, which represents an 18% margin. Next, I'll turn to our balance sheet and cash flow. We continue to generate significant cash in Q1, delivering $1.8 billion of free cash flow. Over the past 12 months, we've generated $4.4 billion, representing a free cash flow margin of 39%. At the end of Q1, we had $11.5 billion of corporate cash and investments as well as $9.2 billion of funds held on behalf of guests. Our strong balance sheet allowed us to repurchase $807 million of our common stock during the quarter. And at the end of Q1, we had $2.5 billion remaining on our repurchase authorization. Now, let's shift to our Q2 and full year 2025 outlook. Despite the recent volatility in the global economy, we believe we're positioned to deliver strong results in Q2. We expect to deliver revenue between $2.99 billion to $3.05 billion, representing 9% to 11% year-over-year growth. This includes a benefit of approximately 2 percentage points due to the timing of Easter. For nights and experiences booked, we expect year-over-year growth in Q2 to moderate relative to Q1. So far in Q2, we saw strong guest demand for Easter travel in Europe and continued momentum in Latin America, which remains our fastest growing region. In the US, we've seen relatively softer trends, which we believe is largely driven by broader economic uncertainty. On profitability, we expect adjusted EBITDA to increase year-over-year with adjusted EBITDA margin expected to be flat to slightly down compared to Q2 2024. Marketing expense will grow faster than revenue in Q2, mostly due to our upcoming summer release and investments in growth initiatives. For the full year, we continue to expect an adjusted EBITDA margin of at least 34.5%, in line with what we shared in February. Now that includes $200 million to $250 million of investment to launch and scale new businesses in 2025. These investments will have the biggest impact on our margins in the second half of the year, since our new offerings go live on May 13. Now, as these new businesses scale over the coming years, we expect them to be significant drivers of future revenue growth. Now looking ahead, our priorities remain consistent with last quarter. As a reminder, we're continuing to drive long-term growth and deliver market share gains through three key growth levers. First, we are perfecting our core service. As Brian mentioned, we've made significant -- we've made Airbnb significantly better for both guests and hosts. We've been driving growth from product improvements like enhanced search and better merchandising. One example is the newly redesigned Rare Find feature that better highlights popular high-quality listing. We also simplified our checkout page to make booking easier. These are just a few examples of the product optimizations that are contributing to our top line, but we know there's still more work to do. Second, we are accelerating growth in global market. We're taking a much more localized approach to product and marketing in underpenetrated markets around the world. This is a multi-year strategy, but we've already seen encouraging results. For the fifth quarter in a row, growth in these expansion markets significantly outperformed our core markets. In fact, the average growth rate in Q1 in expansion markets was more than double that of our core markets. Brazil continues to lead the way. In Q1, origin nights in Brazil grew 27% and first-time bookers grew over 30%, both accelerating from Q4. Third, we are launching and scaling new offerings. This begins on May 13th, so expect more on that soon. Now, to wrap-up before we go to questions, we're staying close to geopolitical and macroeconomic uncertainty and monitoring any short-term impact they could have. As Brian mentioned in his remarks, we have an adaptable and diversified business that has been resilient during periods of uncertainty, most recently is COVID. Despite signs of near-term volatility, we remain focused on the long-term opportunity to both grow our core business and expand into new ones. We believe that our efficient operating model, financial strength and significant liquidity give us the ability to pursue these multi-year initiatives in the current environment. And with that, I will open it up to Q&A." }, { "speaker": "Operator", "text": "Thank you. We will now begin the question-and-answer session. [Operator Instructions] Your first question comes from the line of Justin Post from Bank of America. Your line is open." }, { "speaker": "Justin Post", "text": "Great. Thank you. I wonder if you could expand a little bit on the letter on travel corridor changes. Are you seeing any differences in like total volumes of bookings from quarter changes like in Europe? And I know you already mentioned Canada. Is that driving any change for you? And then, do you think there's any market share impact in the US? Or do you think you're holding in your share, it's just the whole kind of country is a little depressed? Thank you." }, { "speaker": "Ellie Mertz", "text": "Great. Brian, why don't I take this? Let me first talk a little bit about travel corridors, and in particular you mentioned Canada, we called it out in the letter. Let me tell you a little bit about what we are seeing, in particular with regard to the inbound corridor to the US. We absolutely have seen a decline in popularity of foreign travelers coming to the US. What we have seen is that, number one, it's less popular to come to the US from a year ago also relative to the beginning of the year. And what we're seeing in that segment is two things. One is that, that segment is a very small portion of our overall business. As a reminder, US travel is predominantly domestic. And as a result, that corridor of foreign travelers coming to the US is approximately 2% to 3% of our overall business. So, it's frankly not quite material. At the same time, what we're seeing is, within that corridor, guest who would have in a prior year come to the US are simply choosing a different location? So, I think, Canada is the most obvious example where we see Canadians are traveling at a much lower rate to the US, but they're traveling more domestically, they are traveling to Mexico, they are going to Brazil, they're going to France, they're going to Japan. And I think what that tells you about the distribution is that, in this moment, it's not necessarily that people don't want to travel, they are just using different destinations. And Airbnb is a platform, given our distributed supply, it provides an adaptable way for them to find a new location. So that's the comment I would say on the corridors. In terms of market share in the US, I would say that, we continue to have very strong market share in the US. We are not seeing any losses in market share. Much to the contrary, we continue to gain market share in the US, but we do see generally that as a market, North America for the last several quarters has been the slowest grower across the industry." }, { "speaker": "Operator", "text": "Your next question comes from the line of Richard Clarke from Bernstein. Your line is open." }, { "speaker": "Richard Clarke", "text": "Hi, thanks for taking my question. Just wanted to delve a little bit into what is the behavior you're actually seeing from the US guests to slow down? Is it delayed booking windows? Is it higher cancellation rates, shorter trips, trading down, some nature of what you're actually seeing? And I guess, we've heard from maybe a few travel companies that things got a little bit better towards the end of April. Are you seeing that? Is there any sort of light at the end of the tunnel there with regard to bookings picking up in the last few days or weeks?" }, { "speaker": "Ellie Mertz", "text": "Yeah. Thanks for the question, Richard. So, let me double-click. I just talked about the quarter that is inbound to the US. Let me talk now about what we're seeing with regard to US domestic travel, which again is the lion's share of overall US destination. A couple of things to comment on. One is, we are seeing the higher-income traveler somewhat unimpacted by the current macro conditions. We see in particular, the higher ADRs of our bookings, the growth is very stable and very healthy for the US traveler. In terms of lead times, we're seeing something else. We're seeing that the short lead times, so that would be bookings that are just around the quarter, they could be in two days or a week or two weeks, we're seeing relatively strong growth there, whereas in the longer lead times, and in particular, those bookings that are for more than say a month out, that is where we're seeing the relative softness. And so, I think what you take from that double-click in terms of the lead times is that, we do have some US consumers that are waiting and seen before they book their summer travel. And I think the one thing that gives us some amount of comfort in terms of seeing the weakness at the longer lead times is that, we have seen movements in terms of lead time shift, many times in the past. I think the most recent to call-out was last summer, where we saw in June and July, a truncation of lead times, somewhat similar to what we're seeing today. And what we saw then is that, people waited for a while, but they did end up booking that trip. It was just closer to the check-in day. And so that's something that we're obviously monitoring quite closely, both globally, but also in particular to the US, as we believe the US is obviously the most impacted by a lot of the headline noise currently. The one thing I would also add is, we haven't particularly seen consumers trade down in terms of choose a lower ADR booking or a shorter trip that has not been any behavior that we've seen." }, { "speaker": "Operator", "text": "Your next question comes from the line of Mark Mahaney from Evercore ISI. Your line is open." }, { "speaker": "Mark Mahaney", "text": "I wanted to ask about what you think are the best chances for reaccelerating your units, your nights and experiences. If we just leave aside experiences for now, like what -- in terms of the core accommodations unit growth, I think you're investing to get back to double-digit unit growth. And of the different things you're rolling out, co-hosting, is it really leaning into the expansion markets? Is there something else, maybe marketing? What are those do you -- are you counting on to be most impactful in order to get that recovery back to double-digit nights growth? Thank you very much." }, { "speaker": "Brian Chesky", "text": "Yeah. Hey, Mark. I will take this. So, yeah, I guess I would just say, we think we're just scratching the surface of how much bigger our core business could be. And there's no reason to think it could not be double the size that it is today. And then, the question is, well, what would you have to believe? I think the first thing we want to do is to continue to perfect the core service. To do that, we really have to do three things. We got to make Airbnb easy to use, we got to make it more affordable, and we got to make it more reliable. So just for example, starting with reliability. For every person who books an Airbnb, we estimate about nine people are booking hotels. So, if we could just get one of those nine people to book an Airbnb, that essentially would double the size of our business. And the number one reason people say they don't use an Airbnb is, they don't find it historically as reliable as a hotel. That's why we're really trying to elevate the best homes in Airbnb and remove the worst. So, we now Guest Favorites, 350 million nights have been booked in Guest Favorites. We've also removed 450,000 listings. This has created a lot higher customer satisfaction, reduced customer service tickets. And we think over time, more and more people are going to come to Airbnb. So we're going to do a lot more, Mark, on making Airbnb more reliable. On affordability, we know that that's a big driver of growth. Airbnb started as affordable alternative to hotels. We lost, I think, a little ground versus hotels during the pandemic, but I think in the last couple of years, hotel prices have gone up more than Airbnb. I want to call out that as of last month, we have rolled out total price displays globally. So, now, the price you see before taxes in the United States and really inclusive taxes, say, in Europe, include all fees. So -- and I think this is really important, because it drives customers to the best value Airbnb's, which we rank higher and incentivize the best behavior for host. On the usability standpoint, the vast majority of our people come to Airbnb, don't find a booking. Airbnb last year was accessed by over 1.5 billion devices. So, think about like how many people come to Airbnb, they don't find a place to stay. Part of this is having the right homes for them, but also having the right tools. So, we think perfecting the core is a huge driver to growth, but that is really going to be a big driver in our core markets. Our core markets are US, Australia, Canada, UK and France, the four English-speaking countries, plus France, which make about 70% of our growth -- our business. But the more growth markets, emerging markets would be Spain, Italy, Germany, Mexico, Brazil, and then the big four countries in Asia are China, India, Korea and Japan. And these markets are actually growing twice as fast as the aforementioned five core markets. And we're going to step on the gas. And I think that international will be one of the biggest growth drivers that will get us back to double-digit growth on Airbnb. So that's just a little bit. It's really three horizons. Horizon one, the biggest near-term opportunity is continue to increase conversion rate by making Airbnb easier to use, more affordable, more reliable. Horizon two, really is international growth. And then, of course, the longest horizon will be expanding our core business to offering [beyond a place to stay] (ph)." }, { "speaker": "Operator", "text": "Your next question comes from the line of Jed Kelly from Oppenheimer. Your line is open." }, { "speaker": "Jed Kelly", "text": "Hey, great. Thanks for taking my questions. Just two, just circling back on the US, I think I've asked this before, but just in some of these urban markets, do you think about leaning more into hotels? And then just on the full year guidance, you reiterated your margin guidance. But any reason given the macro uncertainty for not widening the margin range? Thanks." }, { "speaker": "Brian Chesky", "text": "Yeah, I can take hotels, and I'll let Ellie take the second part, Jed. So, yeah, we think hotels is a massive opportunity for Airbnb. In 2019, we acquired HotelTonight, and that was basically under the philosophy that while people came to Airbnb looking for a unique place to stay, typically a home, the vast majority of people come to Airbnb don't end-up booking and one of the reasons is they're window shopping and they're not ready to book. But sometimes, especially in popular markets, urban areas, when a lot of people are traveling, Airbnb homes are booked. And we have a fairly high occupancy and we need other place to stay and hotels are a great way to fill-in network gaps. During the pandemic, we had to pause some of our efforts and some of our progress, because we really want to focus on getting back to the basics. But now that we've made a huge amount of progress on our core business, making over 500 improvements in upgrades over the last three years. We are prepared to expand beyond our core. And actually one of those expansions is hotels. One of the things you saw was we just did a promotional HotelTonight. So, now if you book a hotel in HotelTonight, we're offering 10% credit towards an Airbnb booking. This of course, increases conversion rate on HotelTonight, but also introduces the number of hotel travelers to Airbnb. Over the coming years, we're going to be doing a lot more though on Airbnb's application to bring more great hotels onto Airbnb. We think almost all the hoteliers in the world would love to have Airbnb as a distribution channel. And so, we think there's a lot of opportunity over the coming year. So, absolutely going to be part of our strategy." }, { "speaker": "Ellie Mertz", "text": "And then, on the second question with regard to the margin guidance, we reiterated the plan that we had shared in February. We believe that gives us considerable room to continue to focus on strengthening the core business, while investing in growth initiatives, and no material change in terms of that investment profile for the year." }, { "speaker": "Operator", "text": "Your next question comes from the line of John Colantuoni from Jefferies. Your line is open." }, { "speaker": "John Colantuoni", "text": "Hey. Thanks for the question. I wanted to start with sort of momentum in the business with growth in 2024 peaking in December and strength continuing in early 2025, I'm curious how growth has trended throughout the quarter and into April. Is growth sort of at a low-point right now for the year, or did it sort of dip a little bit earlier in the quarter and it's since improved from there? And second question, just sort of looking specifically at the expansion markets. I'm curious if you could just sort of characterize how growth has progressed there specifically this quarter compared to last quarter when you called it out as a key contributor to the strength that you saw? Thanks." }, { "speaker": "Ellie Mertz", "text": "Thanks, John. Let me start with the first question, in terms of how growth has trended effectively year-to-date. So, I think it's actually interesting to understand the path that both we and I think the industry went through in Q1. If you recall, January was a very strong month, followed by softness in February. You'll recall, there was a bunch of revisions to guidance in terms of the airlines. And I think what they saw, but we saw a slightly less degree of it was, there was a step-down from January to February that coincided with a pretty meaningful decline in consumer sentiment over that sequential month-to-month period. And yet, when we look at our full-quarter results for Q1, that softness that we saw in February, effectively rebounded and recovered in March such that the full-quarter was generally in line with our expectations. So, I think when we fast-forward today and the headlines are quite volatile. I think we do have to recall that, since the beginning of the year. There has been some temporal shift in terms of when people are booking. But from that Q1 period, what you gauge is that people may pause on the booking, but what we've seen today is that they come back into it. So, I wouldn't say that April is necessarily below. There has been some week-to-week and month-to-month volatility, since the beginning of the year. On the expansion markets, what would I say? I would say, generally speaking, we see nice momentum in those markets. I think in particular, what I would say is that, Latin America accelerated over the course of full year 2024. And if you look at Latin America's growth in Q1 is actually above where we were in Q1 of last year, which I think gives you a sense of, if we're able to achieve momentum in a particular market based on our product and marketing localization, we can maintain it and accelerate it over time. Obviously, the nuance of every country is slightly different, but I think anchoring on the performance that we've had across Latin America, but in Brazil, in particular gives you a sense of the ability to build momentum in these relatively underpenetrated markets." }, { "speaker": "Operator", "text": "Your next question comes from the line of Lee Horowitz from Deutsche Bank. Your line is open." }, { "speaker": "Lee Horowitz", "text": "Thanks for taking the question. Two, if I could. Last quarter, you guys talked about the ability to leverage marketing expense in some of your core markets, which gives you the ability to invest in the growth markets. I guess as things perhaps slow a little bit, how do you think about perhaps leaning into that slowness to take some more share to take advantage of a weaker market to pick-up share, particularly relative to, say, some of your competitors that have talked to trying to be more aggressive as things slow? Do you still think you can leverage marketing in your core markets under those assumptions?" }, { "speaker": "Ellie Mertz", "text": "Yeah, I would say, absolutely. Obviously, we start the year with a full-year marketing plan and yet every month, we're looking at the relative efficiencies by channel, by market and adjusting accordingly. So, I would say, broadly speaking for the year, we retain quite a bit of flexibility to put more money into channels that are working and markets that are working and to cut where we see less desirable results. And so, far this year, we've been doing that on a regular basis as we would in prior years." }, { "speaker": "Operator", "text": "Your next question comes from the line of Ron Josey from Citi. Your line is open." }, { "speaker": "Ron Josey", "text": "Hi, thanks for taking the question. Two please. I want to ask just on the new product launch on May 13th in experiences or something else. Talk to us a little bit more about the plans, integration plans across the site and how you think or whether any contribution from these new products are included in guidance? And then, on the affordability or just the volatile headlines that we've been talking about, would love your thoughts on just how Airbnb's affordability initiatives could drive greater bookings. We saw the summer travel data, where I think US guests are prioritizing staycations and more prone to drive. Maybe that's an opportunity for the team. Talk to us about that, please. Thank you." }, { "speaker": "Ellie Mertz", "text": "Okay. So, on the first question, I believe it was, what's the impact of the new business launches with regard to our guidance. So, I would say, the launch date is M 13, and we're extremely excited in terms of what is to come and what is to start on that day, but it is just the beginning. And so, the impact from a top line in the current quarter will be relatively modest, whereas as we scale those offerings, they will obviously increasingly contribute to the top line. In terms of the expense and the investments associated with that launch, they are building over the course of the beginning of the year. And as we said in the guidance language, you will see them more meaningfully hit EBITDA in terms of compression in the back half of the year as we scale the investments behind the launch. In terms of affordability, I think your thesis here is exactly right. What we saw, and it's not a perfect comp, but I do think it is instructive here. What we saw five years ago in terms of the pandemic was when certain portions of travel were inaccessible, people found other things to do on our platform. As Brian and I shared in terms of the opening, just to remind everyone, this business model has a huge amount of diversity in its offering, which allows us to be extremely resilient and adaptable as consumer behavior changes. And so, as I think about the current environment that we are in, you can think about, for example, the US guest, there's an opportunity for us to merchandise the lower-cost listing or the more proximate listing where the guest doesn't need to travel for -- doesn't need to take a flight for the summer, but they can drive. There's a huge amount of optionality with regard to the diversity of our offering that can allow us to better merchandise what is applicable to the guests in the current moment." }, { "speaker": "Operator", "text": "Your next question comes from the line of Justin Patterson from KeyBanc. Your line is open." }, { "speaker": "Justin Patterson", "text": "Great. Thank you. Could you talk more about the behavior of the guests who are booking primarily in app versus those who are arriving through the web? Are you just seeing greater frequency rates, repeat rates and so on and so forth? Thank you." }, { "speaker": "Ellie Mertz", "text": "So, probably I would say, the demo is slightly different in terms of the app relative to the web. I would say, the broader thing to takeaway in terms of the movements we've made in terms of booking share moving to the app is that we know the app is a much better experience for the consumer. We see this most notably just in terms of conversion rates and getting people to use our apps as compared to in particular [mo web] (ph). It's a much better experience that we have designed. And so, we want to migrate people to that experience. You can see that the booking share has gone up quite dramatically over the last couple of years as we've encouraged people to use our app. And as a result, it's additive in terms of the consolidated conversion levels." }, { "speaker": "Operator", "text": "Your next question comes from the line of Doug Anmuth from JPMorgan. Your line is open." }, { "speaker": "Unidentified Analyst", "text": "Great. Thanks for taking my questions. And this is [Dave] (ph) on for Doug. I have two. So, first one, Brian, you've been pretty vocal about user experience in travel. So, curious to hear how you experience on the Airbnb to change as you move beyond places to stay and new choices introduce new frictions? And then, secondly, how do you guys think about the long-term sustainability of your margins as your efforts to move beyond the core scales over time? Thank you." }, { "speaker": "Brian Chesky", "text": "Hey, Doug. I -- let me just start by saying, I think one of the super powers of Airbnb is our design team and our ability to make something incredibly easy to use. When we started Airbnb, we didn't really invent the idea of vacation rentals. They existed before us, but what was true is that they were very hard to book. Before Airbnb, you couldn't actually book a vacation rental online. The messaging platforms really were non-existent or very rudimentary. Very few people actually left reviews, people didn't really have an account. And so kind of one of the things we really tried to do when we created Airbnb was designed the system of trust. And as something is easier, more people do it. So, what we're noticing, for example is many of the new business we're going into, they also have similar frictions as our core business did or vacation [house] (ph) did before we basically created a category, which is, what we now call Airbnb. And so that's one of the things is we're going to try to -- the things we're going to offer want to be Instant book, we want to be like really easy. We want to have that great Airbnb design. But the other thing is a couple of other things with user experience. I think a lot of companies have tried to like design an end-to-end travel. I think designing end-to-end travel is very, very hard. It's funny. There's a funny thing. One of the most common startup ideas for entrepreneurs is to do a travel planning app. And yet travel planning apps almost always fail. So, it's almost like a riddle. Why do travel planning apps fail and everyone really tries to do it. And the reason why is, because to plan travel is very complicated. In fact, it's so complicated, many people have assistance and a big part of the job is to plan travel for them. And yet you use it infrequently. So, it's a very difficult thing to do and you do it infrequently. And so therefore, a lot of companies have failed to design like a so-called connected trip. So, I think, to do this, a lot of it is to design a really good user experience. And I think that's one of the things that we're going to try to do to really design a great end-to-end experience to be able to book your entire trip and much more. I think the user interface will be important. I think AI will be an important way to do this as well. AI is -- I think as I said before, we're really focused on customer service and solving the most difficult problems for customers and working backwards towards travel inspiration. Just one thing I'll say about AI, which is definitely making the customer experience easier is, we just rolled-out our AI customer service agent this past month. 50% of US users are now using the agent and will roll it out to 100% of US users this month. We believe this is the best AI supported customers travel agent in travel. It's already led to a 15% reduction in people needing to contact live human agents, and it's going to get significantly more personalized and agentic over the years to come. So essentially, that's what we're focused on. We're focused on making everything instant book and easy-to-use. We're trying to make sure that the end-to-end travel experience is really, really wonderful with great Airbnb design, and we're going to bring more AI into the application, so that Airbnb, you can really solve your own problems with great self-solve through AI customer service agents." }, { "speaker": "Ellie Mertz", "text": "Great. Let me talk a little bit about long-term margins. I think just starting with our core business, obviously, our core business has extremely strong EBITDA margins and cash flow generation abilities. I think you've seen us bring that up over time, in particular subsequent to the pandemic. And where we sit today, we see incremental efficiencies that we can continue to drive across that core business. And every year what we're seeking to do is strengthen and make more efficient that core business, so that we have incremental room to invest in growth. From year-to-year, we may choose to invest more in growth relative to the efficiencies that we generate. I think you're seeing that in the current year. But the intent both with the core and the new businesses is to invest in growth upfront and to optimize the margins over time. I think that the portfolio over time, we expect to have quite compelling margins." }, { "speaker": "Operator", "text": "Your next question comes from the line of Nick Jones from Citizens. Your line is open. Your next question comes from the line of Ken Gawrelski from Wells Fargo. Your line is open." }, { "speaker": "Ken Gawrelski", "text": "Thank you very much. Appreciate the question. Brian, a question for you on, as you think about the ADRs and the opportunity, the balance, if you go back over the last couple of years, you've talked about making Airbnb's more affordable. And there's been various initiatives, including the Rooms initiative to make Airbnb's more affordable. Do you expect maybe more flexibility in ADRs and room night prices on Airbnb's relative to hotels in a period of weaker consumer spending, especially in the US, maybe in urban areas? I'm just curious as how you think about the balance between potential ADRs versus room nights in North America? Thank you." }, { "speaker": "Brian Chesky", "text": "Sorry, I'm not clear what the question is." }, { "speaker": "Ken Gawrelski", "text": "I'm sorry, let me rephrase. Do you -- as you think about the opportunity -- if you just think about the balance between pricing ADRs, average daily room nights, relative to total room nights volume, do you think that there is an opportunity to have more for your hosts to have more flexibility on ADRs and to see more affordability, drive better room nights and ultimately greater share over the long-term in a period where there's maybe more consumer weakness or some pressure on the consumer wallet?" }, { "speaker": "Brian Chesky", "text": "Yeah. Okay. Yeah, absolutely. The answer is yes, and I'll try to explain why this is the case. Hotels, let's just contrast two hotels. I assume you're referring to Airbnbs versus hotels. So, hotels have -- most hotels -- hotel rooms -- all hotel rooms have a cost base, right? And so, they need to build in a profit margin on their room, they call this RevPAR, revenue per -- and it's really important that for them that they stay within some margin. The vast majority of people on Airbnb list only their home only on Airbnb. We believe most listings are exclusive to Airbnb and most of these homes are either primary homes or the second homes, but the homes don't exist to list on Airbnb, they exist for somebody to live in summer all the time. And so, most of the income that people make on Airbnb, the average host in Airbnb in the United States, for example makes about $15,000 a year. This is supplemental income. And so, it's all-up, it's typically all upside to them. So, what this means is there's typically a little bit more flexibility on the Airbnb host, let's say, hotel to be able to move their prices up or down, because like if they didn't rent on Airbnb -- before Airbnb, they didn't rent that night was completely lost. So really any price is upside for them as compared to hotel. One of the things we do is, we try to build really great host tools for them. And four out of five hosts on Airbnb are now using our host tools. To give you a couple of examples, Compare Listings. More than 2 million listings in Airbnb have used the Compare Listings tool. What the Compare Listings tool does is shows you how your price compares to prices of similar Airbnbs in your area. We found that when hosts have more visibility, they tend to provide more competitive prices. Another is weekly and monthly discounts. Now, the vast majority of hosts on Airbnb offer a discount, if you rent by the week, or if you rent by the month. So these are just some of the tools that we offer and we're going to continue to offer more and more tools. So our hosts are increasingly responsive. But yes, to answer your question, we do believe that there's more flexibility. And ultimately, while a higher ADR can benefit Airbnb's financial outlook on the short-term, in the long-run, affordability aligns our interest with customers, which is the best long-term incentive to alignment to align with shareholders. So we always want to drive as much value as possible to our guests." }, { "speaker": "Ellie Mertz", "text": "Ken, I would just also add that when we test elasticity, we often see that driving down prices is more than compensated by increased volume. And that's why when we think about our pricing tools, we are not trying to necessarily drive host who offer higher prices. We're trying to get them to the best price for their listing that will drive more bookings. And in many cases, that will be to reduce your price." }, { "speaker": "Operator", "text": "Your next question comes from the line of Kevin Kopelman from TD Cowen. Your line is open." }, { "speaker": "Kevin Kopelman", "text": "Thanks. Another one on ADRs. Given FX, the guide seems to point to softer ADRs for Q2, how much of that is geo mix versus softening within the key regions or other factors, and what are you assuming for FX benefit in Q2? Thanks." }, { "speaker": "Ellie Mertz", "text": "Yeah. So, if we look at the guide for Q2, what is happening? We're seeing a couple of different factors. One is, there is underlying real price appreciation, which is a tailwind in terms of bringing prices up. There is a movement in terms of the FX headwinds. So, the FX headwind relative to Q1 is dissipating in Q2. And then, the third component is, as our business mix shifts away from North America in particular, that is a headwind, right? It moderates prices because the US prices are significantly above, frankly, ADRs around the world. I would note, we do not get the same FX benefit as maybe other platforms in that our exposure to, for example, the euro is much more limited than some other platforms." }, { "speaker": "Operator", "text": "Your next question comes from the line of Tom White from D.A. Davidson. Your line is open." }, { "speaker": "Tom White", "text": "Great. Thanks for taking my questions. Just one on the international expansion markets. I was hoping you guys could just update us on kind of how those markets are tracking in terms of profitability relative to your kind of core markets, both in terms of like absolute level and also just curious about the kind of the pace at which they're tracking that way. I mean, if you could just share a little color on exactly what kind of investments you guys are finding are helping -- in those markets are helping drive the acceleration in growth you talked about? Thanks." }, { "speaker": "Ellie Mertz", "text": "Sure. So, when we think about our expansion markets, what I would say generally about this business is, we're able to generate very attractive contribution profit at a variety of ADRs and that typically is the biggest determinant on the overall level of profitability at a market level, like the relative ADR. I would say, broadly speaking, when we think about investing in a new market, there is some fixed cost upfront in terms of say, launching brand campaigns and that does drag margins down. But over time, we are able to scale into the marketing load as well as make some efficiencies in terms of the underlying variable costs if they have not already been localized. And so, I would go back to my first comment that, independent of a pretty wide range of ADRs, we're able to deliver very attractive unit economics across the globe. In terms of like what the types of investments we're making in those markets are, it really falls into two very simple buckets. One is product, and the other is marketing. On the product side, we have been taking a localized approach to look at specific markets to say, what do we need to do to either the global product or, for example, the payment stack to enable more local customers to use Airbnb. And we've been very choiceful with those localizations to make sure they're worth the effort and they aren't too localized, but when they're important, they can be quite meaningful in terms of driving growth in a particular market. I think some of the obvious cases are around adjusting the booking flow to be locally nuanced, and in particular to offer the right payment methods for a specific type of customer. So that's one area of investment on product. The next is obviously marketing. When we talk about going into a particular expansion market, what that means is that, we are applying effectively the full funnel of our marketing approach to that market. So, it's inclusive of some amount of brand marketing, performance marketing, comms, policy, et cetera, such that we are hands on to deliver a differential outcome for that market versus the light touch approach of some of our long-tail markets." }, { "speaker": "Operator", "text": "Your next question comes from the line of Stephen Ju from UBS. Your line is open." }, { "speaker": "Stephen Ju", "text": "Great. Thank you. So, Brian and Ellie, I think we and the analyst community sort of outside looking in, are always probably overly focused on the advertising and the monetization angle of product development. And -- but can we talk about like in re-center where your priorities are, because based on everything that you're talking about, whether it's experiences or the international expansion, the co-hosting and Brian, your prior analogy with lateral things to sell like Amazon, it does sound like we should be thinking more about transaction growth versus things that you are doing to capture a greater portion of the unit economics. So, can you kind of recenter us in terms of like what do you think the primary drivers of gross bookings will be and revenue will be? Thanks." }, { "speaker": "Brian Chesky", "text": "I mean, maybe I can talk at a high-level, Ellie, feel free to elaborate. But yeah, you have the right mental model. I've always believed that what we should do is, focus on the things that are either most perishable opportunities or things that our guests and hosts are asking for. And so, most of what we've done is to try to do one of those two things. So, whether we're increasing reliability, affordability, making it be more easier to use, those are really in response to what our guests and hosts are telling us. That's, I'd say, the first priority is being responsive to their feedback and listening to them. And the vast majority of the 500 improvements we made over the last three years was based on feedback from our guests and hosts. So then, everything else is really a matter of just a sequencing. And the sequencing that we've chosen is just based on some of the opportunities that are most perishable. And so frankly, number one would actually be beyond improving our core business, it would be international expansion. And so, the international markets are critical. We think like what Latin America and what Asia have in common, for example, is that the average population is younger in these markets, they're more likely to be on social media, and therefore, also less predisposed to staying in hotels. And there's huge populations, huge economies growing very, very quickly. So, we think these are huge opportunities for investment. And one of the most important things that we can do at Airbnb is to continue to grow our network effect. And this network effect is really a global network. And so we really wanted to match the travel corridors. And then obviously, expanding beyond a place to stay, we are prioritizing things that increase, yeah, volume growth versus unit economics. That being said, there are a number of things that we are looking at that would increase monetization of Airbnb, especially on the host side. And the reason why is, because almost everything we've done for host, we've given away without charging anything incremental from a take rate standpoint in the last five years. We've increased air cover coverage to $3 million. We don't charge more. We can go down the list of other things that we offer. We don't take any additional take rate on co-host listings. They just host an Airbnb, we want to grow unit volume. So, we think that growing network effect, increasing market share is the most important priority for us in the near term." }, { "speaker": "Operator", "text": "Your next question comes from the line of Deepak Mathivanan from Cantor Fitzgerald. Your line is open." }, { "speaker": "Unidentified Analyst", "text": "Thanks, guys. This is Jack on for Deepak. Just one for you real quick. Are you guys seeing hosts adjust pricing for some of the early demand softness in the US? And kind of moreover, do you expect the marketplace to be relatively price sticky? Or is it going to be more dynamic should the macro get any worse from here? Thank you." }, { "speaker": "Ellie Mertz", "text": "I would say, we haven't seen any meaningful shift to the downside in terms of hosts resetting their pricing. But two parts of the call earlier, I do think there is considerable opportunity for us to encourage hosts to bring down their prices generally, but certainly in this macro to capture more demand. So, I would call it an opportunity as opposed to something that we're seeing hosts actively do today." }, { "speaker": "Operator", "text": "Your next question comes from the line of Conor Cunningham from Melius Research. Your line is open." }, { "speaker": "Conor Cunningham", "text": "Hi, everyone. Thank you. So airlines and hotels spend a ton of time talking about the resiliency of loyalty programs during downturns. And I know you guys don't want to copy them, but can you just give us some updated thoughts on a subscription model or a loyalty program? It just seems much more likely that thing is -- that type of opportunity is on the table after you move into experiences or something else along that line. So, if you could just talk about that, that would be helpful. Thank you." }, { "speaker": "Brian Chesky", "text": "Yeah. I mean, totally agree with you. I think it is absolutely something that we're looking at. I've been actively thinking about this as well. What I've always was very intentional about was that we never wanted to necessarily have essentially like a point subsidy program, which to me, is in a way the price for not having a lot of loyalty on your platform. And we have a lot of loyalty. A lot of these other programs, they try to get people to join loyalty programs, they even have an account information, they even have a relationship with the guest. Everyone at Airbnb, we verify their identity. The vast majority of people have profiles. We have 200 million verified identities on the platform on Airbnb today. I think there's more than any or almost any other platform in the United States for any -- not just travel, but beyond travel, around two out of three people who book intermediary leave a review. So we have really good retention. We have really good participation. But I've always thought that there could be a membership program, potentially even a paid subscription or membership program, Airbnb, where you pay more to get differentiated offerings and better service. And I think we're looking at a variety of models there, where it's not necessarily subsidizing the business we already have, but really increasing usage and increasing share of wallet. And I think that Amazon Prime, one of the things that's compelling about it is, they actually were able to get people not just to come back to Amazon, but to use it more frequently. And so, I think any program that increase the share of wallet or gets people not necessarily to come back to Airbnb, but to use it more frequently for a greater part of their lives, not necessarily just every year, but imagine every month or every week, including in your own city would be really, really compelling to us." }, { "speaker": "Operator", "text": "Your next question comes from the line of Alex Brignall from Redburn Atlantic. Your line is open." }, { "speaker": "Alex Brignall", "text": "Good evening. Thank you very much for taking the question. At the Q4 results, when you talked about the margin target, you said that FX was a headwind because of the transaction exposure that you have, more of your costs are in dollars. That's obviously, and I think, I'm not 100%. I think you said that margins certainly wouldn't have gone down as much, maybe not even down, if FX wasn't going against. Tell me I'm wrong, if I am on that. Obviously, FX has gone entirely the other way now and it would be a tailwind to your numbers. So, I would have imagined that all else equal, which of course is not, that the margin target for the full-year would have seen a tailwind from the fact that FX will benefit your US dollar cost base relative to your revenues. Could you just talk about why that's not happening? Thank you." }, { "speaker": "Ellie Mertz", "text": "Yeah. Thanks for the question, Alex. So certainly, yes, between now and February, ever since -- sorry, since February, we have seen a change in the FX rates. As of February, we were assuming that, FX would be a pretty meaningful headwind for the remainder of the year. Fast forward to where we are today, it's obviously less of a headwind. A couple of things that I would note. One is that, we, the positivity we've seen out of Europe in terms of the weakening of the dollar is not necessarily relevant for our entire portfolio. We do have some -- we do continue to have some FX headwinds out of Latin America that do impact a certain portion of our business. Second is, we do some revenue hedging such that the tailwind that some are seeing does not entirely materialize in terms of our hedged portfolio for revenue. And then I would say, third, in terms of managing to the guidance that we provided you, there are some puts and takes with regard to overall volume underlying ADR as well as FX-adjusted ADR." }, { "speaker": "Operator", "text": "And that concludes our question-and-answer session. I will now turn the call back over to Brian for closing remarks." }, { "speaker": "Brian Chesky", "text": "All right, everyone. Well, thanks for joining us today. We're incredibly proud of our results, and I'm really excited to share what we've been working on at Airbnb. So, make sure to watch our 2025 Summer Release to see what's next. Until then, thank you." }, { "speaker": "Operator", "text": "This concludes today's conference call. Thank you for your participation. You may now disconnect." } ]	Airbnb, Inc.	115,705,393
ABT	4	2,020	2021-01-26 22:45:00	Operator: Good morning, and thank you for standing by. Welcome to Abbott's Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant's questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission. I would now like to introduce Mr. Scott Leinenweber, Vice President, Investor Relations, Licensing and Acquisitions. Scott Leinenweber: Good morning, and thank you for joining us. With me today are Robert Ford, President and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Finance Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2021. Abbott cautions that these forward-looking statements are subject to risks and uncertainties, including the impact of COVID-19 pandemic on Abbott's operations and financial results, that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A Risk Factors to our annual report on Form 10-K for the year ended December 31, 2019, and in Item 1A Risk Factors in our quarterly report on Form 10-Q for the quarter ended March 31, 2020. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. Please note that financial information provided on the call today for sales, EPS and line items of the P&L will be for continuing operations only. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which excludes the impact of foreign exchange. With that, I will now turn the call over to Robert. Robert Ford: Thanks, Scott. Good morning, everyone, and thank you for joining us. Today, we reported another highly successful year for Abbott during what's been the single most disruptive health care event in our lifetimes. For the full year, we reported organic sales growth of nearly 10% and ongoing earnings per share of $3.65, which reflects double-digit growth and is at the upper end of our guidance range we set last January when we were expecting a normal economy. Performance like this after the pandemic struck is a real achievement and demonstrates the strength of our diversified business model. The normal times, it maximizes our growth opportunities, and during the pandemic, it's been tested by a global crisis and proven to be highly resilient. It should come as no surprise that our performance was led by our Diagnostics business. COVID-19 dominated the year for us and the world, and our primary response came in the form of diagnostic tests to identify the virus. In total, we delivered more than 400 million COVID tests since the start of the pandemic, including more than 300 million tests in the fourth quarter alone. But as we've discussed before, the year was not all Diagnostics and COVID. Our more consumer-facing businesses, Nutrition, Diabetes Care and Established Pharmaceuticals all contribute growth for the year, and we continue to launch an impressive stream of innovations across our businesses. And I'll touch on some of these new products in more detail in just a moment. We exited 2020 with tremendous momentum, including total sales growth of more than 28% and ongoing earnings per share growth of more than 50% in the fourth quarter. Turning to 2021. We're forecasting another year of top-tier performance. As we announced this morning, we forecast ongoing earnings per share of at least $5 in 2021, reflecting growth of more than 35% compared to last year. And because we're building on top of our strong 2020 performance, our forecasted 2021 earnings per share is more than 50% higher than our pre-pandemic EPS in 2019, which is highly unique and differentiated in this environment. I'll now provide more details on our 2020 results before turning over the call to Bob. And I'll start with Nutrition, where sales increased around 4.5% for both the fourth quarter and full year. Strong growth of Ensure, our market-leading complete and balanced nutrition brand, and Glucerna, our leading diabetes nutrition brand, led to double-digit growth in Adult Nutrition for both the quarter and full year. In Pediatric Nutrition, U.S. sales growth of more than 5% last year was led by increased market share of Similac, our market-leading infant formula brand. International Pediatric Nutrition sales continued to be impacted by challenging market conditions in Greater China. During the past year, we continue to expand our Nutrition portfolio with several new product and line extensions, including the continued rollout of infant formula products across our Similac brand family that contain human oligosaccharide or HMO, which supports a healthy immune system. Global expansion of our PediaSure, Glucerna and Ensure brands, including the continued rollout of Ensure high-protein products; and the launch of 4 new Pedialyte rehydration products: Pedialyte Zero Sugar, Sport, Organic and Immune Support. For 2021, we're forecasting similar sales growth for our global Nutrition business and a continued strong cadence of new product introductions. Turning to Medical Devices, where sales were relatively flat in the fourth quarter. Strong double-digit growth in Diabetes Care was offset by lower sales in our Cardiovascular and Neuromodulation businesses due to challenging conditions as COVID case rates surged in certain geographies towards the end of the quarter. As we saw throughout last summer and fall, we expect procedure volumes to improve in these businesses as COVID case rates subside. In Diabetes Care, sales grew nearly 30% for the fourth quarter and full year, led by FreeStyle Libre, our market-leading continuous glucose monitoring system. In the U.S., Libre sales grew 50% last year. And outside the U.S., Libre sales grew 40%, surpassing $2 billion of international sales for the full year 2020. This past year was possibly our most productive ever in terms of new product approvals and launches across our Medical Device portfolio. Let me touch on a handful. First, the approval of MitraClip Gen 4, the latest generation of our market-leading system to repair a leaky mitral heart valve. Just last week in the U.S., Medicare expanded reimbursement coverage for MitraClip, which significantly expands the eligible patient population that can benefit from this life-changing technology. CE Mark of Tendyne, a first-of-its-kind minimally invasive device to replace a faulty mitral valve; and the CE Mark of TriClip, our minimally invasive clip technology to repair a leaky tricuspid heart valve. Long considered the forgotten valve, TriClip brings an important new solution to patients that have previously had very few treatment options. Abbott now offers minimally invasive device therapies for 3 valves in the heart: the aortic, the mitral and the tricuspid valves. We also launched 2 cardiac rhythm defibrillation products under our Gallant brand that include Bluetooth capabilities to align with our strategy in remote monitoring and digitally connected care. Also saw the approval of EnSite X, our next-generation 3D cardiac mapping technology; and U.S. approval of FreeStyle Libre 2 and CE Mark for Libre 3, the latest generations of our market-leading continuous glucose monitoring systems; and CE Mark of Libre Sense Glucose Sport, the first product in our strategy to expand use of our wearable biosensor technology into mass-market opportunities beyond diabetes. As you can see, it was a highly productive year for our pipeline, and quite frankly, there's even more I could highlight. In 2021, we're forecasting continued strong double-digit growth in our Diabetes Care business, led by FreeStyle Libre, and steady improvements in our Cardiovascular and Neuromodulation businesses, fueled by the continued business recovery, the society works its way through COVID-19 and on the strength of our recent and upcoming new product launches. Moving to Established Pharmaceuticals or EPD, where sales increased 3.5% in the fourth quarter, reflecting sequential improvement versus the prior quarter. Despite COVID, EPD sales increased 2% overall in 2020, demonstrating the resilience of our business model even in this challenging environment. Growth this past year was led by sales in India, Russia, China and Brazil. During the year, EPD continued to strengthen its portfolio with more than 50 new product launches across our key emerging markets. As we've discussed before, new product introductions in EPD are more incremental in nature, and the steady cadence of portfolio expansion and refreshment we're achieving is an important element of our sustainable growth strategy. We forecast demand and growth rate improvements in EPD during 2021 as well as a continued steady cadence of new product introductions that will contribute to growth. And I'll wrap up with our Diagnostic business, where sales grew nearly 110% in the quarter, driven by $2.4 billion of COVID testing-related sales. We realized very early that a variety of different testing solutions would be required to tackle the pandemic. With that understanding, starting last March, we developed and launched an entire portfolio of tests to target the virus. The biggest contribution in the fourth quarter came from our rapid lateral flow test to detect the virus, which includes BinaxNOW in the U.S. and Panbio internationally. These are highly portable, reliable and affordable tests and in just 50 minutes can detect if someone is infectious without the use of an instrument, which means the test can be performed in virtually any setting, such as physician office, pharmacies, urgent care centers, workplace settings and even at home. As part of our pandemic response efforts, we also developed and launched a digital solution that pairs with these tests called NAVICA, which allows people to receive and display test results on their mobile devices. But our efforts didn't stop at developing these tests. We also ramped up manufacturing capacity on a massive scale and now producing more than 100 million of these 2 tests combined per month. While our COVID testing efforts have clearly received a lot of attention, we've also remained focused on the launch and rollout of Alinity, our suite of innovative diagnostic instruments. We continue to retain existing businesses and capture share at strong rates. And we continue to build on our test menus for these instruments. Last year, we initiated the U.S. launch of Alinity m for molecular testing. This launch included a COVID test, which helped jump-start demand for this innovative, highly automated and differentiated molecular testing platform. And earlier this month, we announced U.S. FDA clearance for the first rapid handheld blood test for concussions. This test measures certain biomarkers found in blood after a head trauma event and produce the result within 15 minutes after a plasma sample is inserted in our i-STAT Alinity handheld device. Building on this initial clearance, we're also working on a whole blood point-of-care test under FDA breakthrough designation. And our vision is to develop a 15-minute portable test that can be used in any settings where people might experience head injuries that require quick evaluation. So in summary, despite the challenging environment, we achieved the upper end of the EPS range we set last January before anyone knew the extent of the COVID pandemic, demonstrating the strength, resilience of our diversified business model and our superior execution. Our new product pipeline continues to be incredibly productive, delivering groundbreaking innovations and a steady cadence of important new products, with more on the horizon. We continue to lead in the area of diagnostic testing for COVID, which is helping to fight the virus, and accelerating our long-term decentralized testing strategy. And we're forecasting more than 35% adjusted EPS growth in 2021, which is truly unique in this environment. I'll now turn over the call to Bob. Bob? Robert Funck: Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis. Turning to our results. Sales for the fourth quarter increased 28.4%, which was led by strong performance in Nutrition and Diabetes Care, along with global COVID testing-related sales of $2.4 billion in the quarter. Foreign exchange had a favorable impact of 0.3% on sales, which was somewhat favorable compared to expectations had exchange rates held steady since the time of our earnings call in October. Reported sales increased 28.7% in the quarter. Regarding other aspects of the P&L. The adjusted gross margin ratio was 58.5% of sales. R&D investment was 6% of sales. And SG&A expense was 23.5% of sales. Our fourth quarter adjusted tax rate of 14.1% reflects the adjustment required to align our tax expense with our revised full year effective tax rate of 15%. This is somewhat lower than the estimate we provided in October due to a shift in the mix of our geographic and business income. Turning to our outlook for the full year 2021. Today, we issued guidance for full year adjusted earnings per share of at least $5. Based on current rates, we would expect exchange to have a favorable impact of approximately 3.5% on our reported sales, which includes an expected favorable impact of approximately 3% on our first quarter reported sales. We forecast full year net interest expense of around $515 million, nonoperating income of around $230 million and a full year adjusted tax rate of 15%. With that, we'll now open the call for questions. Operator: [Operator Instructions] Our first question comes from Bob Hopkins from Bank of America. Robert Hopkins: Congrats on all the success and progress you guys are having. So Robert, so much that I could ask about here, but I'll go high level with my question and ask, if you wouldn't mind, putting that $5 earnings -- or at least $5 in earnings for 2021, a guidance number in perspective for us given that, that $5 is above even what The Street was modeling for 2022. And specifically, I guess the way I'd ask the question is, I'm sure investors would love some perspective on how COVID testing impacts that guidance, how you're thinking about the base business. And maybe most importantly, given how much higher $5 is compared to expectations, I'm sure investors would love to hear your early thoughts on whether or not Abbott can grow at its sort of traditional rates off of that $5 number next year. So sorry for the long-winded question, but would love any perspective. Robert Ford: Sure, Bob. You hit on all the points there. I guess we've been looking at 2021 for several months right now. I think one of the things as we're going into it is that we knew, I mean, a lot of companies were going to be forecasting double-digit growth going into 2021, a lot of that probably based on comps, where we saw a decrease in EPS. And that was -- that's not the case for Abbott. We're not coming out of a hole. And as I said in my remarks, the $5 -- the at least $5 target for 2021 is about 50% higher than where we were in 2019. And what I can say is that we are, Bob and myself, as we manage the business, especially over these last couple of months and going into this year, we've been looking at 2-year CAGRs across our businesses. And then -- I think that's the right way to look at it, is to kind of look at what happened in 2020. And it's easy for some of the businesses to come up and post double-digit kind of growth for us. So we're really looking on a 2-year CAGR basis. The points that you touched on are all the points that we've looked at, and we've been modeling several different scenarios. So I'll touch on those because they're all elements of how we built to our at least $5. First of all, obviously, COVID testing, it's been a big driver for us, and it will continue to be a big driver. I expect testing demand is still going to remain high even as the vaccines roll out. I don't think we've even seen testing demand peak yet. So we built a lot of capacity, and we've talked about that over the last year, the capacity that we built. But we didn't put it all in. We didn't put it all in into that $5. So -- but we don't all see it going away either. But there's enough capacity there, testing capacity, sufficient testing capacity for us to be able to meet this kind of growing demand right now. The other part of our forecast here, without a doubt, is looking at our base business and the recovery of our base business, specifically the ones that were hit probably more heavily by the COVID, which was some of our device businesses and our routine testing and routine lab testing. These are important procedures and life-saving procedures. They're important routine tests to do. So you can't just keep pushing them out indefinitely. And what we saw in Q3 of last year as those rates -- hospitalization rates start to come down, we started to see the pickup of our procedures and of our core testing. And we actually saw growth in several months in Q3 and going into Q4. And obviously, that got impacted probably around Thanksgiving. So we've seen that these can recover, and we do have that modeled in into that $5, which is a recovery of these businesses at a similar rate of what we saw in Q3 in summer and the fall. I'd say the third kind of key element in there is our consumer businesses that probably weren't as impacted and did pretty well during the pandemic. We expect those businesses to either continue their trajectory or get better. I mean I think Nutrition had a really great year last year. I expect them to have a very similar year this year with a lot of new product launches. EPD should get sequentially better. We saw that in Q4. Early indications in January show that recovery continuing. And quite frankly, Libre, I expect to do better with all the innovation and investment we're making there. So those businesses will do well. And then the fourth element that we've modeled a lot is spending and ability to reinvest in the businesses and areas that we thought that we could do with more investment, whether it's SG&A, and more specifically in R&D, and accelerate some of our programs. I think you saw some of that in our Q4 results, where we beat consensus while at the same time, investing more in R&D and SG&A. So we looked at these 4 elements here, Bob, and we modeled it variety of different ways and just feel really good that this was a good floor, a good starting point at $5. Quite frankly, if anything, we could have significant upside over here. And it's just really going to depend a little bit on how we think about COVID testing going forward. So I kind of saw the $5 here as, okay, it's a 37% increase versus 2020, which grew 13%. And we've got probable upside to that, while at the same time, an opportunity to invest in the business, invest in SG&A, more specifically in R&D. We've got a leading COVID test portfolio here with a variety of different tests and capacity that we haven't dialed all in. Quite frankly, if I had put all that capacity in, I think maybe you would have a little bit of time believing that, but it's there. And I think we've got an exciting base business like you'd mentioned here that is poised for recovery. I mean we've got great portfolios, real strong brands, rich pipelines, strong leadership position. So I think the $5 here was definitely a good starting point, factoring all those elements in here, and we'll be able to kind of build from there as the year progresses. Robert Hopkins: That's thorough overview. And then just the one follow-up would be, obviously, it's the beginning of 2021. But does that high level of earnings for this year, does that mean you might not be able to grow off of that in 2022 because there's so much testing in 2021? Or just give us some thoughts on Abbott's ability to continue on a double-digit growth trajectory off of that $5 number, if okay. Robert Ford: Sure. It's a little premature to just skip across all the way to 2022. But we have -- but listen, when -- we didn't do 2021 in isolation. So yes, we looked at 2022 and looked at all those different scenarios that I talked about. So I can probably give you some general comments over here. I mean I think we're forecasting a lot of growth this year, and we're going to be looking to build on it. Prior to the pandemic, The Street consensus for 2023 EPS was just under $5. So we're targeting that EPS, this level this year. So in essence, we've pulled forward at least 2 full years of EPS growth. And our mindset here, Bob, is going to be that we're going to maintain that pull-forward indefinitely. We always start our process with a double-digit target every year. That's been our identity. And I have no intention of changing that identity. Of course, there's a couple of factors here that we need to contemplate. But even looking at those factors, we feel good that we've got the different elements here to be able to deliver on that double digit. One of those is obviously COVID and COVID testing. And even if COVID testing starts to mature a little bit in 2022, we believe there's a significant portion that's still very sustainable. Can we predict it perfectly today? No, I can't, not to the level that you're accustomed to get from us. But I also think that the ability to do testing in a decentralized manner, people talk a lot about how the pandemic has accelerated digital transformation in businesses, accelerated transformation in the business models. The pandemic has accelerated our decentralized testing strategy. And I think the -- I think I talked about this in the last call. I think a lot of the testing channels that we're building here that have emerged, I don't see them going away. On top of that, we -- as I said, we've got investment and investment spending into SG&A, but more specifically into R&D. We believe R&D is the more sustainable spend. It's the spend that allows us to sustain our top line growth rate. So I would expect that these investments that we've made in Q4 and definitely into 2021 that, that will have an impact on our base business growth rate. We've always talked about our base business being sustainable at [ 7 to 8 ], and I would expect these investments to be able to accelerate on that. And I guess the third part to that question of yours about confidence on delivering double digits in 2022 is we've got a great balance sheet, and we've got strong financial health and a lot of strategic flexibility there. So I lay all of these elements out here: sustained COVID testing, the investment in the business and the strong balance sheet, just gives me confidence that even with all these different models here that we'll be able to kind of continue to deliver that identity of double-digit growth. Operator: Our next question comes from Matt Taylor from UBS. Matthew Taylor: So maybe I'll just ask you to drill down a little bit on testing and the assumptions that you have for testing in the year. You came in really strong here in Q4 with a big step-up sequentially. What are you assuming in the $5 for testing throughout the year, if you could discuss some of the different product lines? And then maybe if you could provide some high-level thoughts on how much of a tail of testing we might see into '22 and beyond? Robert Ford: Sure. So let me talk about kind of numbers and ranges here then, and then I'll spend time talking a little bit about sustainability of the testing. As I said, I don't see the demand just kind of dropping off even with the vaccine rollout. We achieved $2.4 billion in Q4. So if you annualize that, it'll go -- it will annualize for around $10 billion. So I can expect probably Q1 is going to be at that range of about $2.5 billion or so. And if you'd say, "Okay. What does the full year range look like?" I probably can't go beyond Q1 in terms of exactly how it's going to look like, but you can be in that $6.5 billion to $7 billion range, I would think. But we've got, as I said, plenty of capacity to go above that. So that's probably what's incorporated here, Matt, in the $5. But I think the big point here is the sustainability of this. And to your question there, I think a good portion is sustainable. I think a substantial portion is sustainable, which is why we were a first mover and a leader here. We started with our lab-based systems. Those were the probably the obvious part in the strategy. Since we knew we had a lot of capital equipment out in the labs, we started with that strategy to take advantage of the systems out there. And you saw that rollout happen. But we also knew that in a pandemic, you were going to need to add on top of that testing infrastructure. You're going to have to add faster testing, and testing that could be done at a much significant scale and that was more affordable, which is why we developed those 2 lateral flow tests. There's been a lot of visibility to BinaxNOW here in the U.S. We haven't talked a lot about Panbio. But Panbio uses the same technology, the same kind of antibodies. And we've got a whole supply chain that's been built outside of the United States that supplies all of the markets that we're supporting with Panbio. So both those products, they've been the bulk of our sales. We saw that in Q4. There's a lot of capacity that we've built around them, and that would continue to build around them. And the clinical utility of them is really strong. I mean they've been -- a lot of studies are showing their reliability here at finding people that are infectious. And I think that's a key distinction here, is your ability to use these tests in a way for being able to find those people that are infectious and not necessarily those that were infectious and that might have some remnants of DNA of the virus in their system. So I think it's sustainable. And I think you need to take 2 kind of views here on that, at least this is how we're looking at it. First of all, we need to think globally about this. Sometimes, we get very focused on the U.S. and what's going on in here in the U.S., but you've got 8 billion-plus people around the world. And you've got a variety of different countries that are experiencing different cycles in the disease, different cycles in their vaccination strategies. So once you really take a bigger view here, this is not going to be something that will just be done in the next couple of quarters here, if you take a real global perspective. And the second thing that I think is just reframing the testing. I think we think about the sustainability of testing when we think about Q2 and Q3 of last year. Long lines, not enough volume, long turnaround times, $150, $200 tests. That might be not sustainable -- not as sustainable. But if you position yourself into a 2021, 2022 world where you now have fast, easier, much more scalable test, digital tests that are priced for more accessibility and affordability, I think that's the sustained kind of business here that we see. So when you think about that maturing of the COVID testing market, we kind of see PCR kind of maturing first, and then we see the rapid part of the business being sustained. And listen, we've built a lot of capacity, as I said. It's probably $12 million, $13 million, $14 billion of capacity that we built in there. We haven't put it all in, but it's there. And then the other part that I talked about was just the sustainability of it past '22 and into 2023 as we've accelerated our point-of-care testing strategy. And everything we're doing in fighting the virus has not only a direct impact of helping reopen the economy, et cetera, but it's also seeding the market. And it's building these new testing channels. We've got testing going on at airports, hotels, urgent care, retail, universities, et cetera. So we believe that's pretty sustainable, too. Matthew Taylor: Great. Maybe I'll just ask a quick follow-up on Panbio. That's a big new piece of the story here. I think you rightly pointed out, may take longer in some countries for things to improve. So maybe testing lasts longer there. Could you talk specifically about Panbio and what you're able to do capacity-wise? Or any way to frame that opportunity? Robert Ford: Sure. So from a technology perspective, it's the -- it's using the same kind of lateral flow technology that Binax has. It's just in a different format, in a cassette format. We've got capacity to do over 50 million tests per month. And we've used our infectious disease emerging market organization. So the manufacturing, the regulatory, the R&D, and more importantly, the commercial infrastructure to be able to look across the world and support governments, workplaces, et cetera, on rolling out antigen testing internationally. So I think it's done very well. We've been able to kind of leverage some of the kind of joint development of Binax and Panbio. But the demand that we're seeing internationally, I would characterize also as probably just starting. It hasn't even peaked either. So I think we've got a lot of opportunity with Panbio internationally, too. And I think the teams have done a really good job there. Operator: Our next question comes from Robbie Marcus from JPMorgan. Robert Marcus: I'll add my congratulations on the quarter. Maybe I'll ask both my questions as one upfront. This is a significant windfall of cash you're getting from the COVID testing in 2020 and 2021 and hopefully beyond. So maybe you could just talk about where you're going to put all that cash to use. I know you've mentioned in the past, some of it's going to fund new product launches. If you could just also, as part of the answer, highlight the key product launches in 2021 and beyond to look for. Robert Ford: Sure. I'll probably say the following. A lot of it's going towards R&D, Robbie. And as I said, I think that's the more sustainable spend. It's the one that allows us to build more sustainability in our top line and building R&D programs. Yes, there's opportunity to accelerate SG&A and put some of that cash to use in SG&A. And there are some businesses that could definitely benefit with more SG&A. And there's a pretty strong return as we put those in there, whether it's Libre or Nutrition. But a lot of the focus of this reinvestment here is going into R&D. And quite frankly, I think our pipeline has been highly productive and maybe a little bit underappreciated, I think. There's a lot of focus that goes into kind of key 3 products that you guys like to write about them as the big 3, and they get a lot of attention. And quite frankly, they should, whether it's Libre, MitraClip and Alinity. They're large multibillion-dollar segments that are underpenetrated. And we've been making clear and intentional investments in those businesses. I'm not going to spend a lot of time going through those, but you kind of know them, right? So Libre with Libre 3. We've got Libre 4 in development. We've been making investments in new applications for the Libre platform outside of diabetes. And MitraClip, obviously, we've got this opportunity with the CMS reimbursement. We have a fifth generation MitraClip that's also in development. And we're investing in a significant amount of clinical trials here to expand the market for us, and we'll continue to do that. Probably the one I'm more excited about here is the moderate risk for DMR that we've announced also. And then Alinity, you also know the story. I mean we've got 6 new systems where we're increasing the menu and expanding that geographically. So that has a lot of attention, continues to have a lot of attention, and we do resource those opportunities because they're that big. But I think it's misleading here to think that that's the sum of our innovation strategy. We're so much more than that. On the EPD and the Nutrition side, we're going to continue to invest in line extensions and portfolio refreshment. This is the model that we know drive the returns we need for these businesses. And I think the team has now hit their stride in terms of how to do this and how to effectively roll this out with local portfolios. EPDs rolled out over 50 products. I expect that to continue. Nutrition has done over 20, and I expect that to continue also. In Diagnostics, outside of Alinity, outside of COVID, we've been investing a lot in expanding our rapid testing portfolio. I've been talking about this, about the opportunity we have to take advantage of these new channels that we built and increase the penetration with different assays. So whether it's going beyond COVID or flu with RSV, strep, we've got a sexually transmitted disease platform for ID NOW, which we're excited about also, which I think has got a great opportunity. And then this rapid concussion test, Robbie, I think, is a great opportunity for us. Probably the biggest opportunity we have is if -- once we work through to have a whole blood test, I can envision here an opportunity across the 25,000 high schools in the U.S., the 5,000 colleges, all the sporting leagues, and that's going to take us another 1.5 years or a bit or so to get there, but I think it's a great opportunity. And then the device portfolio is going to continue to get a lot of investment the way we have. Obviously, Tendyne and Cephea, we want to be a leader in mitral. We've launched Tendyne in Europe. We're funding our Cephea program so that we can have a transfemoral/transseptal program for the replacement of the mitral valve. I'm very pleased with the progress we've seen on Tendyne. TriClip, I've talked about the opportunity with TriClip. It's not going to be as large as mitral, but it will be 30%, 35% the size of the mitral market. And we're still in the early innings here of development -- of clinical evidence development, and we're going to be leading there. We've made investments in increasing the competitiveness of our CRM portfolio. We've just started to roll out now more global basis, our new 2 -- our 2 new defibrillator products under the Gallant. And we've been working hard at our leadless program and making the investments in the leadless program so that not only can we come out with a single-chamber product and then be able to upgrade it to a dual-chamber product. I like the program. I like what we've done with it. I think we have a value proposition -- a differentiated value proposition versus the competition. CardioMEMS is another study that we've been funding, and there's probably going to be required some build-out of the commercial infrastructure to be able to support the rollout of that product. If you think about the opportunity we have with CardioMEMS, even at a 10% to 15% penetration on that population, you're looking at a $1 billion opportunity for us. So that is obviously getting a lot of attention. And then I'm very excited to come into the U.S. with the LAA and the TAVR product sometime this year. I think these are great opportunities. I like the product that we have, especially on the LAA side with Amulet. It does very well in Europe. And we'll be funding those programs, too. So it's more than the big 3. There's a lot here. And quite frankly, Bob and I are already going to the businesses and say, "Okay. What was below the line that you didn't show us in the planning process?" and "Can we get going on those, too?" So that's where a lot of the investment goes into R&D. Operator: Our next question comes from David Lewis from Morgan Stanley. David Lewis: Robert, just want to follow back up on investment. And I just -- I'm just sort of thinking about your balance sheet here relative to peers. You're already more than a turn better than all your large-cap peers. And frankly, I can see a scenario by 2024, this is a net cash business and a $200 billion market cap company. So you have kind of unprecedented levels of financial leverage on the balance sheet. In recent weeks, we've actually seen some of your competitors get more aggressive on growth-oriented M&A, and we haven't heard much of that conversation this morning. So what are your thoughts on kind of growth-oriented M&A this year to supplement that pipeline? And should investors be thinking about tuck-in, growth-oriented M&A? Because you certainly have the capacity to do something more transformative. Then I had a quick follow-up. Robert Ford: Sure. On the M&A side, listen, we're always looking. As I've always said, we're always looking. We're always studying. So while we'll not be announcing or doing something, we're still studying, we're still looking. As I said in the previous question, though, David, I mean we've got a lot of organic opportunities to invest in. And I like those organic opportunities. So they obviously do get a lot of our attention right now. But if you think about M&A, yes, it's got to be a good fit strategically, and it's got to align with our growth orientation here. I mean I'm not going to look at something that's going to dilute our top line growth rate, and obviously, is able to generate a return for our shareholders. So there's a lot of activity. There's a lot of, I'd say, high valuations right now so. But to the extent that we do something this year, it would be more like tuck-in in nature to be able to kind of augment some of these portfolios. So that's probably the better way to put it to you. David Lewis: Okay. Very helpful. And then what a difference a year makes. We're deep in the call. We haven't talked about Libre yet, but I'm kind of curious on 2 fronts on Libre one. What -- the full commercial rollout of Libre 3 in Europe, when can we think about -- the right quarter to think about sort of stepping on the gas with Libre 3? Is it this quarter? Is it next quarter? And then just more broadly, Robert, I mean, given the investment spending this year on direct-to-consumer and where that platform would go over time, just maybe help us understand what investors may not be appreciating about where that platform can go over a multiyear basis. So when is the push in Europe? And where can that platform go with investment? Robert Ford: Sure. Sure. So Libre gets pushed down to like fourth or fifth question. But it's still top of our priorities here because it's such a huge opportunity for us. We had a real strong quarter in Q4. We exited with a lot of momentum going into this year, especially in the U.S. I think global sales were $0.75 billion, up 35%. And I expect the absolute dollar amount to get bigger. And usually when that happens, we think, well, gee, law of big numbers, right, the percentages are going to go down. And I don't think so. I think that we're going to see continuing growth rate expansion on our Libre business here. So I kind of look at Libre as a 2021 growth that should start at 40% and go from there. A lot of focus on the U.S. on the rollout -- on Libre 2 rollout. We're seeing a lot of the trend shifts, whether it's revenue, whether it's new users. I think the superior accuracy messaging here is definitely coming through, and it's got all the other advantages of our value proposition. I think one of the good things about the pharmacy channel is that there's a lot of available data. There's a lot of available third-party audited data. And when I do the reviews with the team, we spend a lot of time looking at them. And it tells me you can't hide behind these -- you can't hide when we're in the pharmacy, like all this data is available. And I think it's done really well in the U.S. Obviously, I want it to do better, but I can't look at it and not be objective that there's obviously been a trend shift here, whether it's NBRxs, TRxs, refill rates, et cetera. One of them that I'm extremely happy to see is the Rx fulfillment rate. So when a consumer goes to the pharmacy with a prescription, swipes the card, do they get that prescription filled, right? And there's factors that drive somebody to not get it filled. It's usually a copay. And what we've seen with the Libre Rx fulfillment rate is that about 9 out of 10 get filled. And you compare that to our competitor at about 6 out of 10, I think the value proposition here is really strong, meaning that we can invest in DTC advertising. We can invest more in this platform. And we're seeing the value proposition come through as it relates to Rx fulfillment rates. So I'd say the focus on U.S. is., now to your question on L3, we're already here. We've been working through, say, the reimbursement contracting process. It probably got delayed a little bit in Q4 in terms of our expectations, given some of the focus of a lot of the international countries focusing on COVID. But we're all ready. Manufacturing is ready. In fact, between Libre 2 and Libre 3, we've got hundreds of millions of sensors here of capacity. And I think that ties a little bit to the expectation that we have for this segment, which is you've got close to 80 million people that could benefit from this target, which is why we took a very different approach in our strategy, a much mass-market approach that develop a product that's consumer-friendly, intuitive, make sure that it can provide measurable benefits and price it for mass adoption. And that's working out very well. So we should see a Libre 3 launch international in Q1. And then in the U.S., we'll issue a release when we get approval. Operator: Our next question comes from Larry Biegelsen from Wells Fargo. Larry Biegelsen: Congrats on a really nice year. So 2 for me. One, just on kind of how you see the recovery playing out in 2021 and one on the P&L. So Robert, how do you see the year playing out for devices, ex Libre and Diagnostics ex COVID testing in terms of the recovery? Q1 starts to be an easier comp because we started to see the COVID impact last year in the first quarter. And do you see the second half of this year as more normalized? Then I have one follow-up. Robert Ford: Yes, sure. So on the device side, as I said in the earlier comments here, Larry, I think we're going to -- we're looking at what we saw in Q3 and correlating those -- that drop in rates. Not an absolute drop, so not trying to mirror the absolute number of hospitalizations, but at least the rate of decline of hospitalizations and tying it into the increase in the procedures. A lot of these procedures are lifesaving. Some of them are electives, some of them are lifesaving. And we're hearing a lot of our accounts in the U.S. and international are really wanting to kind of push stronger and a sense here that with a vaccine, they feel more confident to be able to build it. So I think you'll see probably the biggest comp issue, I'd say, is probably Q2. I mean I think that's when we saw the big drop. Q1 was probably more towards the end of the quarter, the last 2 weeks of March. So I kind of see the more normalization growth rates. So that -- those kind of growth rates that you saw from our device business, excluding diabetes, to look more like that in -- starting in Q3. But we'll have a nice build, I think, to there as the year progresses. Larry Biegelsen: And then on the P&L, Bob, you gave some helpful color on some of the below-the-line items. But the testing revenue is it comes at a pretty high margin, I believe. How should we be thinking about gross margin and operating margin in '21 relative to 2020? Robert Funck: Yes. Certainly. So our gross margin on our testing business is pretty similar to kind of the base business, maybe a touch higher than that. We saw steady improvement in the fourth quarter on gross margin from the prior quarter. It was up about 100 basis points. And we saw that kind of steady improvement coming out of the second quarter, where we saw the impact of the decline in kind of the Medical Device area. And so third quarter, fourth quarter is getting improvement. And we would expect that to continue, to go steadily up as we see recovery in those base businesses. We see more normalization kind of coming through our manufacturing plants as well as that volume kind of normalizes. In the fourth quarter, you did also see the impact of some of the investments that we're making in that capacity that Robert talked about. And so that was a bit of an offset that you saw kind of come through in the fourth quarter. Operator: Our next question comes from Joanne Wuensch from Citi. Joanne Wuensch: I want to focus on 2 things. EPD saw a really nice recovery in the fourth quarter, but not as strong as it's been the last couple of years. How do you think about that recovering over time? And then the second question is a bit of a big picture question. We're talking a lot with investors about sort of a whole new world in how health care is being delivered, and I would think you would be one of the closest to seeing how the pandemic has changed delivery. Robert Ford: Sure. So on EPD, yes, we did see a nice recovery. I mean when we looked at how the impact of COVID progressed geographically, we saw it, for some reason, kind of trail a little bit kind of the developed markets, whether it was Europe and the U.S. We really started to feel the impact on our EPD business, which is, as you know, mostly emerging markets, started to see it coming out of Q2 and then big in Q3 as a lot of those countries kind of shut down. And the way the model works is you still need a prescription and you need your physician or you need to go to your hospital to get that prescription. So when we looked at Q4, we're actually not surprised, but it was good to see that it came in a little bit higher than what we had expected because we were trying to model it very similar to what we saw in some of the other businesses. And it came back faster. At the same time, there's -- it's not a nice kind of linear forecast in these markets. And there's -- it does tend to bounce up around. I mean, we had a 9%, 10% growth in Q1. There was some stocking effect there in kind of February and March in some of the markets, so we'll have a comp over there. But what I -- what we look at is we're looking at the IMS demand market progression in all these markets that we're competing in. And we're seeing a nice recovery. So I expect that just to sequentially kind of get better, and I guess similar to the comment on devices, get back to that high single-digit growth rate towards second half. Oh, and then you also had a question on change of care. I mean I think a lot has happened, right? And we've tried to focus on the areas that we feel that we can contribute and benefit. One of them I've talked about is this decentralization of testing and how the pandemic has accelerated that decentralization for us. We believed in it. We believe that we could drive it and create a whole new testing channel when we did the Alere acquisition. And this has kind of brought it forward about -- probably about 2 years in terms of where we are today versus where we thought we're going to be. So that's an important part for us. Being able to have access to fast, affordable and digitally connected testing is something that I think is going to be here and here to stay. Whether it's a COVID test or other tests, I think that is a change a little bit in the delivery, at least on the diagnostic side. And then the other side that I'd say is one that we've been working on for quite some bit is the connectivity of our devices and the intersection of digital and health care and how those devices are being connected. You've seen what we've done across all of our portfolio on devices, and we'll continue to position our products in such a way where we can develop them and take advantage of that. For Neuromodulation, we've just announced here a very interesting platform, which I think is going to have a significant impact on how that business and business model works with a much more connected care platform, where patients get to report their outcomes and eventually get to remote programming, which is a huge change in that business model. So I'd say the COVID testing, accelerating decentralization of testing and connected care are probably the 2 pandemic-driven changes that we're focusing on taking advantage of. Operator: And our last question comes from Vijay Kumar from Evercore. Vijay Kumar: I'll try to ask both of mine in one question. I guess, Robert, your PCR plus antigen test, can they detect these new variants, especially the South African variant? Is there a difference one versus the other, PCR versus an antigen? And when you look at the total revenue contribution, my follow-up was the $6.5 billion to $7 billion-ish of COVID revenues in fiscal '21. What would be a reasonable baseline modeling assumptions when I look at fiscal '22? Is that a 50% drop-off, 75% drop-off? I'm curious how you guys are thinking about it. Robert Ford: Yes. I guess on the modeling thing, listen, you could say there could be a drop-off, but you could say there could be an increase or it could stay. So I think the modeling piece here is a little bit difficult. I think we're going to have a lot more understanding as we get towards the summer. But I think, at least for the first half, you've got -- we've got sufficient capacity here to kind of explore the demand that exists both in the U.S. and globally. So yes, I'm not sure right now that you can kind of easily kind of just put that model down like that, but it's just too soon. Regarding your question on mutations and the impact there, a lot of the mutations here -- I don't want to get too wonky here. But we've been looking at this, Vijay, since the beginning. We have a group of, we call them the virus hunters. They're constantly looking and studying and getting their hands on samples to be able to kind of, not only test our existing products but even to develop new ones. And I'd say, right now, the mutations are happening. The ones that you've referenced, the South African one and the U.K. one, those are happening on what we would call the spike protein or what we call the S protein. The rapid antigen test that we have are actually targeting the nucleocapsid protein, what we call the N protein. So in silico analysis says no impact. The U.K. NIH kind of did a study on Panbio and found the U.K. variant to not influence the sensitivity of the Panbio, but we're also collecting as many samples as we can from U.K., South Africa, Brazil, et cetera, and making sure that we're constantly studying that to ensure that there's no change to the sensitivity of the test that we've developed. On the molecular side, whether it's ID NOW -- ID NOW looks at a different gene, the RPDP genes. It's completely different thing, and similar thing also with the PCR. So I think those are, right now, from everything we know, wouldn't be impacted by the mutations. We're more focused on the antigen with the mutations on those protein sequences. So I feel good about that right now. But obviously, we're constantly vigilant here. So let me just close here. I'd say we had a real strong 2020, very strong performance, almost 10% top line growth, 13% EPS. We're forecasting 2021 here at least $5. And like I said, I think we've got opportunity to have upside to that. But still already at $5, it's already at a 37% increase. And in that $5, we're also making a lot of investments in R&D to be able to sustain our growth going forward. So we feel confident about maintaining our double digit in 2022. Significant portion of our COVID testing, we believe, is sustainable. We've made investments or have a plan here to lay out investments in our base business that I think will accelerate our growth rate. And in some of the questions here, we've got a strong balance sheet here. So you combine those 3 elements here, I think we've got not only a strong '21 forecast but a pretty good line of sight here in terms of delivering double digits for 2022. So thanks. Scott Leinenweber: Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day.	[ { "speaker": "Operator", "text": "Good morning, and thank you for standing by. Welcome to Abbott's Fourth Quarter 2020 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant's questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission." }, { "speaker": "Scott Leinenweber", "text": "Good morning, and thank you for joining us. With me today are Robert Ford, President and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Finance Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions." }, { "speaker": "Robert Ford", "text": "Thanks, Scott. Good morning, everyone, and thank you for joining us. Today, we reported another highly successful year for Abbott during what's been the single most disruptive health care event in our lifetimes. For the full year, we reported organic sales growth of nearly 10% and ongoing earnings per share of $3.65, which reflects double-digit growth and is at the upper end of our guidance range we set last January when we were expecting a normal economy. Performance like this after the pandemic struck is a real achievement and demonstrates the strength of our diversified business model." }, { "speaker": "During the past year, we continue to expand our Nutrition portfolio with several new product and line extensions, including the continued rollout of infant formula products across our Similac brand family that contain human oligosaccharide or HMO, which supports a healthy immune system. Global expansion of our PediaSure, Glucerna and Ensure brands, including the continued rollout of Ensure high-protein products; and the launch of 4 new Pedialyte rehydration products", "text": "Pedialyte Zero Sugar, Sport, Organic and Immune Support." }, { "speaker": "Abbott now offers minimally invasive device therapies for 3 valves in the heart", "text": "the aortic, the mitral and the tricuspid valves. We also launched 2 cardiac rhythm defibrillation products under our Gallant brand that include Bluetooth capabilities to align with our strategy in remote monitoring and digitally connected care." }, { "speaker": "Robert Funck", "text": "Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis." }, { "speaker": "Operator", "text": "[Operator Instructions] Our first question comes from Bob Hopkins from Bank of America." }, { "speaker": "Robert Hopkins", "text": "Congrats on all the success and progress you guys are having. So Robert, so much that I could ask about here, but I'll go high level with my question and ask, if you wouldn't mind, putting that $5 earnings -- or at least $5 in earnings for 2021, a guidance number in perspective for us given that, that $5 is above even what The Street was modeling for 2022. And specifically, I guess the way I'd ask the question is, I'm sure investors would love some perspective on how COVID testing impacts that guidance, how you're thinking about the base business. And maybe most importantly, given how much higher $5 is compared to expectations, I'm sure investors would love to hear your early thoughts on whether or not Abbott can grow at its sort of traditional rates off of that $5 number next year. So sorry for the long-winded question, but would love any perspective." }, { "speaker": "Robert Ford", "text": "Sure, Bob. You hit on all the points there. I guess we've been looking at 2021 for several months right now. I think one of the things as we're going into it is that we knew, I mean, a lot of companies were going to be forecasting double-digit growth going into 2021, a lot of that probably based on comps, where we saw a decrease in EPS. And that was -- that's not the case for Abbott. We're not coming out of a hole. And as I said in my remarks, the $5 -- the at least $5 target for 2021 is about 50% higher than where we were in 2019." }, { "speaker": "Robert Hopkins", "text": "That's thorough overview. And then just the one follow-up would be, obviously, it's the beginning of 2021. But does that high level of earnings for this year, does that mean you might not be able to grow off of that in 2022 because there's so much testing in 2021? Or just give us some thoughts on Abbott's ability to continue on a double-digit growth trajectory off of that $5 number, if okay." }, { "speaker": "Robert Ford", "text": "Sure. It's a little premature to just skip across all the way to 2022. But we have -- but listen, when -- we didn't do 2021 in isolation. So yes, we looked at 2022 and looked at all those different scenarios that I talked about. So I can probably give you some general comments over here. I mean I think we're forecasting a lot of growth this year, and we're going to be looking to build on it." }, { "speaker": "And I guess the third part to that question of yours about confidence on delivering double digits in 2022 is we've got a great balance sheet, and we've got strong financial health and a lot of strategic flexibility there. So I lay all of these elements out here", "text": "sustained COVID testing, the investment in the business and the strong balance sheet, just gives me confidence that even with all these different models here that we'll be able to kind of continue to deliver that identity of double-digit growth." }, { "speaker": "Operator", "text": "Our next question comes from Matt Taylor from UBS." }, { "speaker": "Matthew Taylor", "text": "So maybe I'll just ask you to drill down a little bit on testing and the assumptions that you have for testing in the year. You came in really strong here in Q4 with a big step-up sequentially. What are you assuming in the $5 for testing throughout the year, if you could discuss some of the different product lines? And then maybe if you could provide some high-level thoughts on how much of a tail of testing we might see into '22 and beyond?" }, { "speaker": "Robert Ford", "text": "Sure. So let me talk about kind of numbers and ranges here then, and then I'll spend time talking a little bit about sustainability of the testing. As I said, I don't see the demand just kind of dropping off even with the vaccine rollout. We achieved $2.4 billion in Q4. So if you annualize that, it'll go -- it will annualize for around $10 billion. So I can expect probably Q1 is going to be at that range of about $2.5 billion or so." }, { "speaker": "Matthew Taylor", "text": "Great. Maybe I'll just ask a quick follow-up on Panbio. That's a big new piece of the story here. I think you rightly pointed out, may take longer in some countries for things to improve. So maybe testing lasts longer there. Could you talk specifically about Panbio and what you're able to do capacity-wise? Or any way to frame that opportunity?" }, { "speaker": "Robert Ford", "text": "Sure. So from a technology perspective, it's the -- it's using the same kind of lateral flow technology that Binax has. It's just in a different format, in a cassette format. We've got capacity to do over 50 million tests per month. And we've used our infectious disease emerging market organization. So the manufacturing, the regulatory, the R&D, and more importantly, the commercial infrastructure to be able to look across the world and support governments, workplaces, et cetera, on rolling out antigen testing internationally. So I think it's done very well." }, { "speaker": "Operator", "text": "Our next question comes from Robbie Marcus from JPMorgan." }, { "speaker": "Robert Marcus", "text": "I'll add my congratulations on the quarter. Maybe I'll ask both my questions as one upfront. This is a significant windfall of cash you're getting from the COVID testing in 2020 and 2021 and hopefully beyond. So maybe you could just talk about where you're going to put all that cash to use. I know you've mentioned in the past, some of it's going to fund new product launches. If you could just also, as part of the answer, highlight the key product launches in 2021 and beyond to look for." }, { "speaker": "Robert Ford", "text": "Sure. I'll probably say the following. A lot of it's going towards R&D, Robbie. And as I said, I think that's the more sustainable spend. It's the one that allows us to build more sustainability in our top line and building R&D programs. Yes, there's opportunity to accelerate SG&A and put some of that cash to use in SG&A. And there are some businesses that could definitely benefit with more SG&A. And there's a pretty strong return as we put those in there, whether it's Libre or Nutrition. But a lot of the focus of this reinvestment here is going into R&D." }, { "speaker": "Operator", "text": "Our next question comes from David Lewis from Morgan Stanley." }, { "speaker": "David Lewis", "text": "Robert, just want to follow back up on investment. And I just -- I'm just sort of thinking about your balance sheet here relative to peers. You're already more than a turn better than all your large-cap peers. And frankly, I can see a scenario by 2024, this is a net cash business and a $200 billion market cap company. So you have kind of unprecedented levels of financial leverage on the balance sheet." }, { "speaker": "Robert Ford", "text": "Sure. On the M&A side, listen, we're always looking. As I've always said, we're always looking. We're always studying. So while we'll not be announcing or doing something, we're still studying, we're still looking." }, { "speaker": "David Lewis", "text": "Okay. Very helpful. And then what a difference a year makes. We're deep in the call. We haven't talked about Libre yet, but I'm kind of curious on 2 fronts on Libre one. What -- the full commercial rollout of Libre 3 in Europe, when can we think about -- the right quarter to think about sort of stepping on the gas with Libre 3? Is it this quarter? Is it next quarter?" }, { "speaker": "Robert Ford", "text": "Sure. Sure. So Libre gets pushed down to like fourth or fifth question. But it's still top of our priorities here because it's such a huge opportunity for us. We had a real strong quarter in Q4. We exited with a lot of momentum going into this year, especially in the U.S. I think global sales were $0.75 billion, up 35%." }, { "speaker": "Operator", "text": "Our next question comes from Larry Biegelsen from Wells Fargo." }, { "speaker": "Larry Biegelsen", "text": "Congrats on a really nice year. So 2 for me. One, just on kind of how you see the recovery playing out in 2021 and one on the P&L. So Robert, how do you see the year playing out for devices, ex Libre and Diagnostics ex COVID testing in terms of the recovery? Q1 starts to be an easier comp because we started to see the COVID impact last year in the first quarter. And do you see the second half of this year as more normalized? Then I have one follow-up." }, { "speaker": "Robert Ford", "text": "Yes, sure. So on the device side, as I said in the earlier comments here, Larry, I think we're going to -- we're looking at what we saw in Q3 and correlating those -- that drop in rates. Not an absolute drop, so not trying to mirror the absolute number of hospitalizations, but at least the rate of decline of hospitalizations and tying it into the increase in the procedures. A lot of these procedures are lifesaving. Some of them are electives, some of them are lifesaving. And we're hearing a lot of our accounts in the U.S. and international are really wanting to kind of push stronger and a sense here that with a vaccine, they feel more confident to be able to build it." }, { "speaker": "Larry Biegelsen", "text": "And then on the P&L, Bob, you gave some helpful color on some of the below-the-line items. But the testing revenue is it comes at a pretty high margin, I believe. How should we be thinking about gross margin and operating margin in '21 relative to 2020?" }, { "speaker": "Robert Funck", "text": "Yes. Certainly. So our gross margin on our testing business is pretty similar to kind of the base business, maybe a touch higher than that. We saw steady improvement in the fourth quarter on gross margin from the prior quarter. It was up about 100 basis points. And we saw that kind of steady improvement coming out of the second quarter, where we saw the impact of the decline in kind of the Medical Device area. And so third quarter, fourth quarter is getting improvement. And we would expect that to continue, to go steadily up as we see recovery in those base businesses. We see more normalization kind of coming through our manufacturing plants as well as that volume kind of normalizes." }, { "speaker": "Operator", "text": "Our next question comes from Joanne Wuensch from Citi." }, { "speaker": "Joanne Wuensch", "text": "I want to focus on 2 things. EPD saw a really nice recovery in the fourth quarter, but not as strong as it's been the last couple of years. How do you think about that recovering over time? And then the second question is a bit of a big picture question. We're talking a lot with investors about sort of a whole new world in how health care is being delivered, and I would think you would be one of the closest to seeing how the pandemic has changed delivery." }, { "speaker": "Robert Ford", "text": "Sure. So on EPD, yes, we did see a nice recovery. I mean when we looked at how the impact of COVID progressed geographically, we saw it, for some reason, kind of trail a little bit kind of the developed markets, whether it was Europe and the U.S. We really started to feel the impact on our EPD business, which is, as you know, mostly emerging markets, started to see it coming out of Q2 and then big in Q3 as a lot of those countries kind of shut down. And the way the model works is you still need a prescription and you need your physician or you need to go to your hospital to get that prescription." }, { "speaker": "Operator", "text": "And our last question comes from Vijay Kumar from Evercore." }, { "speaker": "Vijay Kumar", "text": "I'll try to ask both of mine in one question. I guess, Robert, your PCR plus antigen test, can they detect these new variants, especially the South African variant? Is there a difference one versus the other, PCR versus an antigen? And when you look at the total revenue contribution, my follow-up was the $6.5 billion to $7 billion-ish of COVID revenues in fiscal '21. What would be a reasonable baseline modeling assumptions when I look at fiscal '22? Is that a 50% drop-off, 75% drop-off? I'm curious how you guys are thinking about it." }, { "speaker": "Robert Ford", "text": "Yes. I guess on the modeling thing, listen, you could say there could be a drop-off, but you could say there could be an increase or it could stay. So I think the modeling piece here is a little bit difficult. I think we're going to have a lot more understanding as we get towards the summer. But I think, at least for the first half, you've got -- we've got sufficient capacity here to kind of explore the demand that exists both in the U.S. and globally." }, { "speaker": "Scott Leinenweber", "text": "Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today." }, { "speaker": "Operator", "text": "Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day." } ]	Abbott Laboratories	247,483
ABT	3	2,020	2020-10-20 23:00:00	Operator: Good morning, and thank you for standing by. Welcome to Abbott's Third Quarter 2020 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant's questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission. I would now like to introduce Mr. Scott Leinenweber, Vice President, Investor Relations, Licensing and Acquisitions. Scott Leinenweber: Good morning, and thank you for joining us. With me today are Robert Ford, President and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we will take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2020. Abbott cautions that these forward-looking statements are subject to risks and uncertainties, including the impact of the COVID-19 pandemic on Abbott's operations and financial results that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A Risk Factors to our annual report on Form 10-K for the year ended December 31, 2019, and in Item 1A Risk Factors in our quarterly report on Form 10-Q for the quarter ended March 31, 2020. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. Please note that financial information provided on the call today for sales, EPS and line items of the P&L will be for continuing operations only. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Unless otherwise noted, our commentary on sales refers to organic sales growth, which excludes the impact of foreign exchange. With that, I will now turn the call over to Robert. Robert Ford: Thanks, Scott. Good morning, everyone, and thank you for joining us. Today, we reported organic sales growth of 10.5% and ongoing earnings per share of $0.98, which reflects high-teens growth versus the prior year. Based on our performance and momentum through the first 9 months, along with our expectations for the remainder of the year, we increased our earnings per share guidance to at least $3.55 for the full year. This speaks to the strength and resilience of our diversified business model as well as our ability to innovate and deliver in this challenging environment. While the pandemic has created many new business dynamics, we've continued to invest in our growth platforms. And our pipeline continues to be highly productive, resulting in several new product launches and approvals this past quarter, including U.S. FDA Emergency Use Authorization for our BinaxNOW rapid antigen test, which can detect COVID-19 infection in just 15 minutes with no instrument required; U.S. launch of FreeStyle Libre 2, which sets a new standard of accuracy and performance in the market; CE Mark of Libre 3, which automatically delivers real-time glucose readings every minute in the world's smallest and thinnest wearable sensor; CE Mark of Libre Sense Glucose Sport Biosensor, our initial step to expand use of the Libre platform beyond diabetes; and finally, CE Mark of MitraClip G4, the latest generation of our market-leading, minimally invasive mitral heart valve repair device. I'll now summarize our third quarter results in more detail before turning the call over to Bob. And I'll start with Nutrition, where sales increased 4% in the quarter. Growth was led by Ensure, our market-leading Adult Nutrition brand, which contains several ingredients to support a healthy immune system. We're seeing strong demand in both U.S. and internationally, which led to global Adult Nutrition growth of 12.5% in the third quarter. In Pediatric Nutrition, sales growth in the U.S. was led by our market-leading Pedialyte rehydration brand, which was driven by market conditions and portfolio expansion. Internationally, growth in Southeast Asia was offset by continued challenging conditions in Greater China. Moving to Established Pharmaceuticals or EPD, where sales declined 3%. During the quarter, we saw challenging market conditions in several countries due to the COVID pandemic. Whereas the virus had its biggest impact in developed countries during the second quarter, we saw it hit emerging markets more significantly this past quarter, which lowered market demand. Encouragingly, as we exited the quarter, we started to see signs of market recovery in several of those countries, and we expect we'll see a continued recovery curve going forward. I'll turn now to Medical Devices, which grew 2.5% in the quarter. We continue to see steady improvements in demand and procedure trends across our portfolio, which resulted in 5 of our 7 businesses within Medical Devices achieving positive sales growth in the quarter, including Electrophysiology, Heart Failure, Structural Heart, Neuromodulation and Diabetes Care. Growth in the quarter was led by Diabetes Care, where sales grew 25%, including more than 35% growth of FreeStyle Libre, our market-leading continuous glucose monitoring system. As I mentioned earlier, during the third quarter, we launched Libre 2 in the U.S., which sets a new standard in the market with best-in-class accuracy and alarm performance as well as 40% longer wear time compared to competitors. Although still early in the launch, customer feedback has been overwhelmingly positive. We also obtained CE Mark to Libre 3, which integrates Libre's leading accuracy and performance into the world's smallest, thinnest disposable sensor, the size of just 2 stacked pennies at the same affordable price as currently available versions of Libre. And in Europe, we also launched Libre Sense Glucose Sport, which is our initial step in a very intentional approach to pursue mass-market biosensor opportunities beyond diabetes. Libre Sense allows athletes to monitor their glucose levels in order to learn how and when to best fuel with food and supplements to avoid fatigue and achieve peak performance. I'll wrap up with our Diagnostics business, where sales grew nearly 40% in the quarter. As I mentioned during our last earnings call, our teams have worked tirelessly since the beginning of the pandemic to bring to market multiple COVID-19 tests across our diagnostic testing platforms. During the third quarter, we launched a new rapid antigen test called BinaxNOW, which is a disposable test about the size of the credit card that can determine if someone is infected with the virus within 15 minutes without the use of an instrument. Given the mass-market need for testing, we knew that developing and launching this test was only half the equation, which is why we simultaneously built 2 new manufacturing facilities in the U.S. to help meet the public health need of testing as many people as possible, as often as possible, to help reduce the risk in the environment and slow the spread of the virus. To date, we've sold more than 100 million COVID tests across our diagnostic platforms. And we continue to pursue opportunities to further increase our manufacturing capacity to help meet the significant demand for testing around the world. So in summary, despite the challenging environment, we achieved double-digit organic sales growth and high teens EPS growth in the quarter. Our pipeline continues to be highly productive, resulting in several important new product launches and approvals during the quarter. We continue to lead in the area of diagnostic testing for COVID-19, which has added a significant new layer of growth for our business and accelerated our distributed testing strategy. And we've increased our full year EPS guidance, which highlights the strength and resilience of our diversified business model. I'll now turn over the call to Bob. Bob? Robert Funck: Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis. Turning to our results. Sales for the third quarter increased 10.6%, which was led by strong performance in Nutrition and Diabetes Care, sequential growth improvements in Cardiovascular and Neuromodulation devices, along with global COVID-testing-related sales of approximately $880 million in the quarter. Foreign exchange had an unfavorable impact of 1% on sales, which was somewhat favorable compared to expectations had exchange rates held steady since the time of our earnings call in July. Reported sales increased 9.6% in the quarter. Regarding other aspects of the P&L, the adjusted gross margin ratio was 57.4% of sales, R&D investment was 6.3% of sales and SG&A expense was 26.7% of sales. Now turning to our outlook for the full year. As Robert mentioned, we're increasing our guidance for full year adjusted earnings per share to at least $3.55, which includes our expectation for strong double-digit sales and earnings growth in the fourth quarter. Based on current rates, we would expect exchange to have a negative impact of approximately 1.5% on our reported sales. We forecast full year net interest expense of around $500 million and continue to forecast a full year adjusted tax rate of 15.6%. With that, we'll now open the call for questions. Operator: [Operator Instructions] Our first question comes from David Lewis from Morgan Stanley. David Lewis: Just a couple of related questions. Robert, I wanted to maybe think about next year a little bit given we're closing out this year. And obviously, investors are in the process of trying to figure out '21 estimates for a whole bunch of companies and whether they're achievable. In your case, at least for us, they clearly look beatable. But I wonder if on a high level you could share with us how you're thinking about growth, earnings and, frankly, the opportunities for reinvestment for Abbott in '21? And then I have a quick follow-up. Robert Ford: Sure. Well, I think it's -- we had a very strong quarter, which gave us confidence here to be able to raise the bottom end of our forecast this year. And obviously, that momentum -- that strong momentum is going to -- will carry into 2021. It's a little premature here, David, to kind of start talking specific about guidance. But I'd give some general comments here. I mean I expect a lot of companies will forecast double-digit growth rates going into next year. So as you think about -- a lot of you looking at 2021. But I think most of that is because they're -- a lot of them are going to be coming out of a hole, right? They're going to have a certain amount of easy comps, especially if you look at like Q2 and Q3 this year. So they're essentially kind of making up for a lost year and getting back to 2019. We're in a very, very different position than that. We're forecasting double-digit earnings growth this year. So when we look at the trajectory that we have going into 2021, which is a trajectory of strong double-digit top and bottom line growth rates, I think that's pretty differentiated and pretty unique here because we're not coming out of that hole. Clearly, COVID testing is going to be a driver. It's going to be a big boost for us, and I don't expect that testing to go away. But another key component of it is our core businesses continue to improve. They're trending in the right direction. And I think a key aspect of that trending in the right direction is our pipeline. Our pipeline has been highly productive. We've got over 100 new products in pipeline across all of our 4 businesses that we have planned to launch over the next couple of years. So are there opportunities to accelerate what is already going to be double-digit top and bottom line growth rates? Yes, there'll be opportunities to be able to invest in this pipeline and accelerate the growth there. So I think we're very well positioned to go from what is a very strong year for us in 2020 to an even stronger year in 2021. David Lewis: Okay. And just maybe following up on COVID testing here. I mean, obviously, your testing revenues are going to be up very sharply in the fourth quarter on the strength of Binax. It sounds like, just thinking about the earnings, could we be thinking about a COVID testing number this year that's certainly in excess of kind of $2.7 billion? Just want to get your commentary on that. And as you think about next year and you think about new test capacity, Panbio, how should be thinking or how are you thinking about sort of duration of testing relative to kind of a $2.7 billion base year in 2020? Robert Ford: Sure. So we had just under $900 million of COVID testing this quarter. I think it was just under $100 million favorable to some of the forecast there. A lot of that was driven by our manufacturing ramp-up, our scale-up and the new products we launched. So we actually exited the quarter at a higher run rate than that. That run rate into Q4 would be around $1.3 billion, $1.4 billion of sales at that run rate. But if I talk about COVID sustainability, I know this is a key topic here. I'd say when we talked about testing back in July earnings, I talked about the testing demand over 4 different phases: the pandemic phase, a recovery phase, a vaccine phase and a post-vaccine phase. And I shared that my view here was that a lot of the volume was still going to be in this kind of pandemic recovery phase. That even with the vaccine, you'd still get kind of more of a steady state. But a lot of the volume was going to be coming during this pandemic and recovery phase. I still think we're in this phase right now, David, depending on what country you are or state, you're in a pandemic, you're in a recovery. And I expect that to last definitely all next year. With the vaccine, you might see a trend of a little bit of a decrease on the PCR testing, I think, just -- and then maybe an increase in antibody testing. But I think the rapid testing is not going to go away like that. I think it's going to be around for a while just because it's easier to do, it's an easier sample, it's a faster result. So I think there's a lot of complexity here in trying to forecast whether COVID will ramp down and -- COVID testing will ramp down and when will it reach a steady state. So I've read some reports, it's 2 years, it's 3 years. I actually think if you're thinking long term -- strategically long term, that might not be the right question because I think it misses the point on what Abbott is actually doing right now. Yes, we've developed a lot of COVID tests. We've invested in manufacturing and selling them at affordable prices. That obviously helps the economy. It helps contain the virus. But what we're actually doing here, if you take a step back on a bigger picture, is we're actually executing on the vision that we had when we bought Alere, where we wanted to build a premier point-of-care business so that we could decentralize test, so that we could democratize test and so that we could digitize test. And if you look at what we've done with BinaxNOW, ID NOW, Panbio, I think those are perfect embodiments of that execution. So the COVID assay itself, when will it ramp down, 2 years, 3 years, okay, it will eventually ramp down to more of like a flu state kind of business. But the installed base that we built during this period, the consumer behavior that's been created, the new channels that we've opened up with rapid testing, whether it's airports, retail stores, more physicians' offices, the app ecosystem that we're building, all that is going to remain. And it will remain for all the other assays that we currently have and that we'll be rolling out. So I think that as we look at 2021 into 2022, it's going to be COVID testing, but it's more importantly to look, at least the way we're looking at it, is the execution of that Alere strategy, which is to build a whole new testing platform outside of the walls of a lab and a hospital. And the COVID has actually given us an opportunity to accelerate that strategy. Operator: Our next question comes from Vijay Kumar from Evercore. Vijay Kumar: Congrats on a solid [ performance ] here. So Robert, maybe back on the fiscal '21 question. I guess maybe if I approach it slightly differently. Street numbers are EPS at $4.25. Based on the updated guidance for '20 of $3.55, that's still close to a 20% earnings growth. And I think implicit in those assumptions would be med tech procedures normalize. And obviously, that has a drop-down on margins. So I'm just curious, how should we be thinking about device procedures into Q4. Because like you said, the comp is an easy for you guys, right? I mean you guys -- you will be doing high singles organic in fiscal '20 versus declines or flattish for other -- some of your peers. So maybe if you could just unpack that a little bit and put that in context will be helpful. Robert Ford: Sure. So yes. I mean, as I said, looking into 2021, the trajectory -- the growth trajectory is those high strong double-digit top and bottom line, Vijay. And again, I think that's going to be predicated on 2 factors, just like we spoke about it in July in the earnings call, it's going to be the continued recovery of our base business and then, obviously, our ability to ramp up COVID and COVID testing. If you look at the businesses that were most hit by COVID, devices and core lab, so laboratory testing outside -- out of COVID, those have shown a really, really nice recovery starting in June, into July and then into the third quarter. September was actually our highest month of absolute sales in the quarter for both Medical Devices, especially in the cardiovascular area, across all areas. We saw a little bit of a July kind of pent-up growth as the lockdown started to get reduced a little bit. We saw that growth rate in July. A lot of that was some pent-up demand. So if you look at the third quarter, I'd like to look at it -- the trajectory from August to September. And when you look at that in our cardiovascular devices, those growth rates in September were much better than the growth rates in August. And the growth rates in September were better than the third quarter overall. And then that's true for both U.S. and internationally for both devices -- for devices. In Core Lab, we actually saw a nice growth in the month of September in the U.S., in Europe and in China also. So I like the rate of recovery that we're seeing in our base business. If you look at Electrophysiology, that was an interesting one, where when you look at the sales, we were hurt a little bit by the capital cycle, which is why we're only at about 2% or 3%. But if you look at the consumable part of our business, so -- which probably reflect better the return of procedures. So looking at mapping catheters and therapeutic catheters, we saw a high single-digit growth rate there. So our plan here is to continue to see that recovery. And it's not just about recovery of COVID and easing, it's also the pipeline. And we've got a very rich pipeline in our Cardiovascular area, too. And in our Core Lab business, the continued rollout of Alinity, improving our menu, expanding our menu, that's all helping us become more competitive in this recovery process. Vijay Kumar: That's a helpful commentary, Robert. And maybe one big-picture question on balance sheet. You guys are really in an enviable position here. Considering that we're in a 0 interest rate environment, maybe thoughts on optimal balance sheet structure here. And what opportunities do you see, if perhaps, on the inorganic side? Robert Ford: Yes. Listen, our financial strong here is very healthy. We're generating nice cash and we're allocating to our needs. We don't see any changes, Vijay, to our allocation strategy. We focus on paying a strong and growing dividend. It's part of our identity. It's different from a lot of med tech peers that don't have that dividend. So we're going to continue to support that growth of the dividend. We haven't done a lot of share repurchasing, mostly to offset our dilution. A lot of our investment here has been to drive organic growth. So taking our balance sheet and applying that cash to invest in areas where we see opportunities for growth, that's where we've been focused on. And I think that's the best return we've got right now for our shareholders. If you look at what we've done with COVID and the investments we've made there, the speed at which we've been able to make those investments and execute it is because of that strategic flexibility that we have in the balance sheet. Talked about manufacturing expansions with Libre, which we're definitely going to need as we expand the portfolio and build the portfolio and other parts of our Medical Devices, too. Operator: Our next question comes from Robbie Marcus from JPMorgan. Robert Marcus: Congrats on a good quarter. Robert, maybe we -- if we could spend a minute on diabetes here. You've had a lot of approvals over the past few months with Libre 3 in Europe, Libre 2 for a while now in the U.S. and then also the Libre Sense starting to move into the consumer area outside of diabetes. I was hoping you could talk about your expectations just for Libre growth, both U.S. and outside the U.S. Maybe when we could see a Libre 3 in the U.S., which would really help close the gap versus DexCom, and your thoughts on the non-diabetes component. Robert Ford: Sure, Robbie. Listen, I think Libre continues to perform really well. And as you saw, our pipeline continues to be highly productive. We had a good growth rate this quarter, over 35%. I thought it was a real nice sequential improvement versus Q2. And I think in Q2 our sales were just under $600 million, and Q3 sales were just under $700 million. So I think we had a nice sequential Q2 to Q3 kind of growth rate. We continue to focus on our strategy of kind of mass-market opportunity, mass-market potential and not see this as a niche play. We now have over -- more than 2.5 million users. That's significantly more than our next competitor. Regarding Libre 2 in the U.S. We were able to get the product on shelf -- in the retail shelf in mid-August. So we had about a partial quarter over here. But the customer response has been really positive. We've heard -- just you talking about closing the gap here with Libre 3. Listen, Libre 2, in my view, has already done that, and that's what we're hearing from our customers here. It's by far the smallest, easiest sensor to use, got the best accuracy, low range, high range, mid-range, adults, children. The readings every minute, which is unique to Libre, allows us to get a better alarm performance. And we can continue to mass produce it and sell it at a fraction of the price so that you're not really overburdening the health care system. So I think that's worked very well. Libre sales in the U.S., they actually grew 20% sequentially Q3 versus Q2 and about 45% year-over-year, and that's with just about 40 days' worth of sales of Libre 2 in the quarter. So I've seen positive momentum in some of the prescriptions. We -- because our strategy is focused more in the retail environment, we get to see that prescription data every week. So we're seeing nice trend from high prescribers. We're also seeing a nice pickup here for the pediatric endocrinologists segment. So we see a nice pickup in prescriptions over there, too. So I think it's obviously fairly early in the launch, but I think we're off to a great start. And I like what I've seen in the first 45 days. Regarding Libre 3. Listen, we always said that Libre was going to be a platform, and we're going to be building on this platform. And are we funding R&D programs to continue to innovate? Yes, we are. We'll have a Libre 4. We'll have a Libre 5. But we get so -- I think we get so caught up on every version over here, we might miss the bigger picture. And the bigger picture here is that to be able to sustain an ability to penetrate the mass market, you do need to have a variety of different platforms and continuously innovate. About bringing -- about timing of Libre 3 in the U.S. here, Robbie, I'm not going to provide details to you on that timing here. Obviously, the U.S. team is having a good time launching Libre 2 right now. What I would say is it's a very different segment than the cardiovascular device segment as it relates to clinical trials in the sense that we haven't seen the impact of kind of coronavirus slow down our trials here for -- within this space. So listen, you'll hear about Libre 3 approval when we get it and we issue a press release, just like we did with Libre 3 in Europe. On Libre Sense, listen, we've always talked about we could expand beyond diabetes, and this is our first step over here. The goal with this product specifically is to help kind of athletes achieve kind of better performance by using data, so they can kind of better fuel themselves to avoid fatigue. It's a different business model, Robbie. It will be a different business model, different channels. There'll probably be a different usage pattern and frequency in this segment. But obviously, if you look at the athletic training and sports population, it's a significantly large population here. So we've actually built a team that's separated from the diabetes group that's just focused on developing this opportunity. We've done an initial collaboration here, which I think is going to provide us a great visibility on how this kind of very large mass segment needs to be addressed and the different strategies we'll be able to kind of deploy. Robert Marcus: Great. That was really helpful. And maybe just a quick follow-up. Robert, you talked about how the testing business in Diagnostics is more than just COVID. It's the whole platform. Alinity is just getting going now in the U.S. How should we think about Abbott share gains over the past few months? You've obviously made huge strides in COVID testing. It's a leading platform. Has that driven share shifts over to Alinity and some of your other platforms during this time that sets you up better going forward? Robert Ford: Yes. I mean I think we already had a real strong momentum before COVID with the rollout of the Alinity system. We're having great share gains, both in immunoassay and then the clinic chem business also. So that -- obviously, with COVID in Q2, a lot of the hospitals and the labs weren't focused so much on migrating of systems. But before that, we were renewing our existing contracts in the 90% range. And new tenders that were coming up for bid, we were in that kind of 45% to 50% kind of win rate. So you put that together and you look at our sales growth, we were definitely taking share. That -- the placements of instruments took a little bit of a pause in Q2. And as I said in the opening comments, we started to see a little bit of a pickup in September in terms of positive growth for all these geographies. And that's coupled with, again, a new cycle here of reopening of the tenders. I think that it's also allowed us, Robbie, with our position in COVID testing to be viewed as a more holistic partner to a large -- to large systems, whether they're in the U.S. or internationally, and that's ultimately helped us. I think one of the things that's definitely helped us in our Diagnostic business has been our molecular platform with the Alinity m launch. That's obviously had kind of a little bit of catapult effect with that launch. And -- but in that platform, we have more than just COVID testing. So yes, I think it's a good opportunity for us overall for Diagnostics. Operator: Our next question comes from Larry Biegelsen from Wells Fargo. Larry Biegelsen: A couple of product questions and then one big-picture question, Robert. Just on EPD, just the outlook there. It sounds like you started to see some recovery. And in Adult Nutrition, the strength there, can you talk about why you're seeing that strength and how sustainable that is? And I have one follow-up. Robert Ford: Sure, Larry. Yes, EPD, we definitely saw some more challenging market conditions in this quarter than what we had in Q1 and in Q2. If you look at how COVID kind of progressed a little bit, it hit the developed markets, I think, harder in Q2. And then the emerging markets, it hit us more in Q3, especially markets like India, Russia, some markets in Latin America also. But it -- when -- we look at a lot of the data, and we started to see a similar trend in September than what we saw in June in the developed markets, right? So you had that kind of drop, and then it starts to kind of recover. So I kind of look at the EPD as following the same trend that we saw in devices and core lab in Q2 but just a quarter later. So I think we'll see some of the recovery there. It's a good business. A lot of the portfolio is still very resilient. 50% of our portfolio is tied to chronic diseases. So that's the piece that, I think, kind of got impacted. The acute part of the portfolio has actually done pretty well. So we expect to see that recovery curve continue into Q4. On the Nutrition side, and your question was on adult, right? It was very strong growth in adult. And one of the things that the team did really well starting in Q2 is they started to look at our messaging regarding the immunity benefits of our Adult Nutrition. And they came out with a strong campaign, a strong messaging on the benefits on the immunity side, and that helped fuel the demand there. I think we saw probably at the end of Q1, there was a little bit of pantry loading, Larry. We saw that in the U.S., saw a little bit of that internationally, too. But what we did -- what we were able to do with that is we actually picked up new users and we picked up market share. So the combination of new users and market share and then the immunity messaging resonating with consumers and physicians has really kind of strengthened that portfolio. And I think it definitely sticks out a little bit in terms of our growth rate. But a lot of that, what we're seeing, is share gain and market expansion based on the data that we're seeing. Larry Biegelsen: That's helpful. And then just one big-picture question. It sounds like COVID testing should continue to be strong next year. But if you have a -- get at some point where COVID testing declines because we have a safe and effective vaccine, how are you thinking about reinvestment and managing, potentially smoothing out earnings? Is there any thoughts kind of if we did see a decline in COVID testing, at some point, how you would manage that? Robert Ford: Yes. I don't think we're going to see that kind of decline in COVID testing. I think even with a vaccine, you're going to see kind of more of a steady state. And we've talked about that, and we planned for that. The other part of your question regarding kind of reinvesting in the business. Well, we're going to be able to do that next year and still deliver a pretty differentiated, unique kind of earnings growth and earnings power. As I said, we've got over 100 new products in our pipeline that we're going to invest in. We can either accelerate their development and their coming to market. We've got opportunities to expand market development. The opportunities that we have in MitraClip to be able to invest in that, strengthening of that market, strengthening our competitiveness. So I think we've got a great opportunity here with COVID testing to deliver differentiated earnings power and growth, while at the same time investing in this pipeline that Abbott has built over these years to sustain that growth rate. I'll just go back to the notion here that the COVID assay might go down to steady state. But if you think about the installed base that we're building because of COVID, especially on the rapid side, I think that's going to be a strong growth driver for us going forward. I mean I'll give an example of that. When we started the year in the U.S., we had over 20,000 ID NOWs placed in the in the U.S., in the U.S. alone. In 4 months, we've already doubled that placement rate by more physician offices, retail channels and a variety of universities and different channels. So what we're building here with the COVID test is an installed base that will then be able to run different kind of assays and different tests. And if it's -- if they're digital, if they're affordable, then the consumer behavior that's now today in COVID test and we believe is going to be there for all the other assays that we're building on. Operator: Our next question comes from Bob Hopkins from Bank of America. Robert Hopkins: Congrats on all the good results this quarter. I just had 2 quick follow-ups. First, just on COVID testing. Does that $1.3 billion, $1.4 billion run rate that you highlighted include contribution from the OUS antigen test? Or is that more upside to come as that fully launches in the fourth quarter? Robert Ford: It's got some of it in there, Bob. Obviously, when you're doing this kind of ramp up the way we're doing it across continents, very different platforms there, we want to make sure that we can deliver. So in that number, you've got some of that international antigen there. But obviously, we're working that -- we could probably do a little bit better than that in that international antigen also. So... Robert Hopkins: Okay. And then just one follow-up on the device side ex diabetes. I was wondering if you could talk a little bit about vascular in Q3 as that was down, I think, 10%, which is a little worse than some of the other businesses. And then more importantly, Robert, I'd love to get your view, just like based on everything you're seeing right now, what are your directional thoughts on the outlook for 2021 for Medical Devices ex diabetes? Is there -- should we be thinking about that as potentially close to normal in terms of the business? Or just how much uncertainty do you think there is as we think about devices for next year based on what you're seeing now? Robert Ford: Sure. On the outlook there of devices, I would say -- listen, I think that we had a really big impact in Q2 across the world, U.S. and internationally. Because I think a lot of -- this was a new thing -- this was a new virus and the shutdown was pretty dramatic, was pretty significant. As I think about our device portfolio, there are still cardiovascular needs. People still need to get a pacemaker. There's still a need for mitral repair. There's still a need for ablation for AFib. I mean those are all conditions that the reason we're in them is because there were medically scientific needs for us to be in them. So I see the market is still an opportunity for growth. And I think that the hospitals and hospital systems have learned now how to deal with that and how to deal with that pandemic. You've seen certain systems kind of focus on treating COVID and keeping other hospitals more focused for electives. So I think that's -- I believe the device portfolio that we've built is relevant, is important. And even in a COVID kind of world, those are medically necessary procedures. And we're working with hospitals to assist them in opening. And we'll see it continue to grow. We've seen a nice progression from Q2 to Q3. I expect that progression to continue into Q4. Yes, there could be some lumpiness here and there. But I think the progression is going to be positive. And my expectation is that we'll see kind of devices get back to that growth rate that we previously had in those high single digits next year. Robert Hopkins: And then on vascular? Sorry. Robert Ford: Oh, on the vascular question. Yes, we had -- it's interesting. If you look at the device portfolios that were a little bit -- didn't recover as fast, it really was vascular and CRM. I think some of those are affected by some of the pricing dynamics that still exist in that channel. Vascular, you've got an average price erosion there of 5% to 6%. So once you exclude that, it would probably be a little bit better. But there's a little bit of a slower kind of recovery. We did see vascular is right now at about 95% of their kind of pre-COVID levels. So there's been a rebound, but I think there's been a little bit of a price impact there also. Operator: Our next question comes from Joanne Wuensch from Citibank. Joanne Wuensch: Actually, there are 2 of them, and I'll put them up front. Can you give us an update on your Structural Heart platform and what we might be looking forward to in the next 12 to 18 months? And then my second question is, it sounds as if you are more leaning towards reinvesting some of the COVID-19 revenue versus sort of tuck-in M&A. Can you just give us an idea of how we should think about how much of the upside actually flows through to EPS versus how much of it gets invested? Robert Ford: Sure. I think on your Structural Heart question here, I think we've got a leading kind of portfolio of products here. We've launched a couple of novel products this year. TriClip for the tricuspid valve repair. And then Tendyne, which is the first product for mitral valve replacement. Those have actually gone very well. Especially when you're going to launch novel products like this, you want to kind of build evidence. You want to kind of build your way into it. So everything that we had planned for those 2 product launches really didn't get much impacted by COVID because we didn't have kind of significant sales attached to them, more about kind of developing the clinical evidence. So that's gone very well. If you -- your question in the next kind of 12 to 18 months, I think we've got a really rich pipeline here. Obviously, the biggest opportunity we have is to expand the mitral valve repair with the NCD for the secondary MR indication. That will be a big driver for us. We've seen already patient referral networks starting to be built around waiting for that indication -- that reimbursement approval. But we've got several of the products in the pipeline. I think Amulet, our left atrial appendage device, is going to be a great opportunity. It does very well from a share perspective internationally. The larger part of the market is here in the U.S. So we're looking forward to enter that market here in the U.S. We've got a next-gen TAVR device called Navitor that we've been working on. This will be our third iteration. We've launched our FlexNav product in Europe this year with an improved delivery catheter and gotten good feedback from implanters over there. And then I think that TriClip and Tendyne are multibillion-dollar opportunities here for us that are, as I described, very, very early in the innings. So I'm very excited about that Structural Heart portfolio in the next 12, 18 months. It's probably one of our richest portfolios in our device portfolio. Scott Leinenweber: There was a second question, Joanne. I -- we didn't grab it here. Can you repeat the question? Joanne Wuensch: Of course. The second question was there's -- you're one of the few companies in med tech land that's going to have the benefit from COVID-19 diagnostic testing and the revenue associated with it. I'm trying to think about how, as we look forward, that revenue either is reinvested or flows through, or maybe you'll redirect it towards targeted M&A? Robert Ford: Yes. So again, we're trying to triangulate here as much as we can, but we're not going to put out a specific number. What I can reemphasize here is that COVID is definitely going to be a big boost for us, continue to be a big driver for us into 2021. We're in a unique position. We're not coming out of a hole. We're going to be delivering what I would say very high strong double-digit top and bottom line. And in doing that and in delivering those very high double-digit top and bottom line after double-digit earnings this year, we're still going to have plenty of opportunity to put investment into R&D and into sales and marketing to continue to drive not only the pipeline but all the opportunities that we've had that we've talked a little bit about here. Whether it's Libre, whether it's Structural Heart, whether it's in Nutrition, we've got plenty of opportunities. So I guess the -- I'll leave you there, Joanne, with we've got tremendous momentum, strong 2020. We're going to have a stronger 2021. And we realize that we've got a unique opportunity here with over 100 products in our pipeline to be able to kind of fund and drive on top of our double-digit earnings and top line growth next year. Operator: Our last question comes from Josh Jennings from Cowen. Joshua Jennings: Robert, I was hoping you could talk a little bit about the Medical Device franchise. And following up on Bob's question just on the outlook, but just thinking about how you're setting internal targets for your med device sales team or just internally how you're going to judge success. I think there's -- I'm confused about how we should be thinking about it, our team independently for the whole sector. But I mean are you thinking about sequential improvement as we get into Q4, Q1, Q2 next year as kind of a solid target to think about kind of a performance level? Are those the type of targets you're setting for your sales force? Or are you looking back at 2019 over the next 3 quarters and think about that being the base in terms of how you're incentivizing your sales force? Robert Ford: Yes. We're looking for steady improvement quarter-over-quarter, and that's how we've kind of set our targets. I mean I think the ultimate measure here of success and of winning is market share and market share gains for those products where we're competing more head-to-head. And then for other products where we're unique in the space, whether it's mitral or tricuspid, et cetera, then we're looking at market development and market expansion. But to your question here, it's all about kind of steady sequential quarter-over-quarter improvement. Do I think we're going to be at 10% Med Device growth by the end of this quarter? No, I don't. But do I think Q4 is going to be better than Q3? Yes, I do. Joshua Jennings: That's helpful. And then just wanted to ask on COVID testing, just focusing on the serology segment. Can you give us the state of the affairs for the demand level for COVID-19 antibody testing in the U.S., internationally currently and then how you see that demand evolving? I think you've said maybe in the last earnings call that vaccine -- success with the vaccine programs could drive some incremental demand on the serology side. Robert Ford: Sure. Yes. I mean when it first happened, we were fast to take advantage of the installed base that we had with our Alinity and our architect systems here to develop a blood antibody test. And we also developed lateral flow rapid antibody test. And I would say we haven't seen the kind of demand that we thought we would see when we were putting those programs together. So in our numbers here, I think we've kind of excluded them. But do I think that there's an opportunity for antibody testing as the vaccine gets rolled out? Yes, I do. And I see the opportunity for lab-based and for rapid lateral flow testing also. We've seen some governments already mandate on every blood draw for other tests to check for antibodies. I think that's just going to get more intense when the vaccines get rolled out. So I think there's -- there'll be an opportunity there. And Abbott will be in a unique position there to be able to capitalize on that. So I'll just kind of wrap up here. We've had a nice growth step-up during the third quarter. We achieved double-digit top and bottom line growth. The businesses, we spent some time talking about the businesses that were hardest hit by COVID. We can see that they're all trending in the right direction and showing sequential steady improvement. Our pipeline continues to be highly productive. We've got a lot of ongoing launch activity across all the businesses in the markets here. And we've expanded our COVID testing platforms, adding more testing platforms, adding more capacity. I don't think that COVID testing is going to go away anytime soon. And I think it's big, and I think that Abbott's in a unique position with not only the platforms that we've developed but the manufacturing and supply chain that we've assembled. We've increased our full year guidance, which now reflects double-digit EPS growth. And I think that's pretty unique and differentiated in this environment, and I think it's a testament to our ability to execute and deliver across our diversified portfolio. And I think we're well positioned to go from what is a very good, strong year for us to an even better one in 2021. And again, I think we're pretty uniquely insulated here against kind of any kind of COVID reemergence scenarios. So with that, I thank you. Scott Leinenweber: Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day.	[ { "speaker": "Operator", "text": "Good morning, and thank you for standing by. Welcome to Abbott's Third Quarter 2020 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant's questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission." }, { "speaker": "Scott Leinenweber", "text": "Good morning, and thank you for joining us. With me today are Robert Ford, President and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we will take your questions." }, { "speaker": "Robert Ford", "text": "Thanks, Scott. Good morning, everyone, and thank you for joining us. Today, we reported organic sales growth of 10.5% and ongoing earnings per share of $0.98, which reflects high-teens growth versus the prior year. Based on our performance and momentum through the first 9 months, along with our expectations for the remainder of the year, we increased our earnings per share guidance to at least $3.55 for the full year. This speaks to the strength and resilience of our diversified business model as well as our ability to innovate and deliver in this challenging environment." }, { "speaker": "Robert Funck", "text": "Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis." }, { "speaker": "Operator", "text": "[Operator Instructions] Our first question comes from David Lewis from Morgan Stanley." }, { "speaker": "David Lewis", "text": "Just a couple of related questions. Robert, I wanted to maybe think about next year a little bit given we're closing out this year. And obviously, investors are in the process of trying to figure out '21 estimates for a whole bunch of companies and whether they're achievable. In your case, at least for us, they clearly look beatable. But I wonder if on a high level you could share with us how you're thinking about growth, earnings and, frankly, the opportunities for reinvestment for Abbott in '21? And then I have a quick follow-up." }, { "speaker": "Robert Ford", "text": "Sure. Well, I think it's -- we had a very strong quarter, which gave us confidence here to be able to raise the bottom end of our forecast this year. And obviously, that momentum -- that strong momentum is going to -- will carry into 2021." }, { "speaker": "David Lewis", "text": "Okay. And just maybe following up on COVID testing here. I mean, obviously, your testing revenues are going to be up very sharply in the fourth quarter on the strength of Binax. It sounds like, just thinking about the earnings, could we be thinking about a COVID testing number this year that's certainly in excess of kind of $2.7 billion? Just want to get your commentary on that." }, { "speaker": "Robert Ford", "text": "Sure. So we had just under $900 million of COVID testing this quarter. I think it was just under $100 million favorable to some of the forecast there. A lot of that was driven by our manufacturing ramp-up, our scale-up and the new products we launched. So we actually exited the quarter at a higher run rate than that. That run rate into Q4 would be around $1.3 billion, $1.4 billion of sales at that run rate." }, { "speaker": "But if I talk about COVID sustainability, I know this is a key topic here. I'd say when we talked about testing back in July earnings, I talked about the testing demand over 4 different phases", "text": "the pandemic phase, a recovery phase, a vaccine phase and a post-vaccine phase. And I shared that my view here was that a lot of the volume was still going to be in this kind of pandemic recovery phase. That even with the vaccine, you'd still get kind of more of a steady state." }, { "speaker": "Operator", "text": "Our next question comes from Vijay Kumar from Evercore." }, { "speaker": "Vijay Kumar", "text": "Congrats on a solid [ performance ] here. So Robert, maybe back on the fiscal '21 question. I guess maybe if I approach it slightly differently. Street numbers are EPS at $4.25. Based on the updated guidance for '20 of $3.55, that's still close to a 20% earnings growth. And I think implicit in those assumptions would be med tech procedures normalize. And obviously, that has a drop-down on margins." }, { "speaker": "Robert Ford", "text": "Sure. So yes. I mean, as I said, looking into 2021, the trajectory -- the growth trajectory is those high strong double-digit top and bottom line, Vijay. And again, I think that's going to be predicated on 2 factors, just like we spoke about it in July in the earnings call, it's going to be the continued recovery of our base business and then, obviously, our ability to ramp up COVID and COVID testing." }, { "speaker": "Vijay Kumar", "text": "That's a helpful commentary, Robert. And maybe one big-picture question on balance sheet. You guys are really in an enviable position here. Considering that we're in a 0 interest rate environment, maybe thoughts on optimal balance sheet structure here. And what opportunities do you see, if perhaps, on the inorganic side?" }, { "speaker": "Robert Ford", "text": "Yes. Listen, our financial strong here is very healthy. We're generating nice cash and we're allocating to our needs. We don't see any changes, Vijay, to our allocation strategy. We focus on paying a strong and growing dividend. It's part of our identity. It's different from a lot of med tech peers that don't have that dividend. So we're going to continue to support that growth of the dividend." }, { "speaker": "Operator", "text": "Our next question comes from Robbie Marcus from JPMorgan." }, { "speaker": "Robert Marcus", "text": "Congrats on a good quarter. Robert, maybe we -- if we could spend a minute on diabetes here. You've had a lot of approvals over the past few months with Libre 3 in Europe, Libre 2 for a while now in the U.S. and then also the Libre Sense starting to move into the consumer area outside of diabetes. I was hoping you could talk about your expectations just for Libre growth, both U.S. and outside the U.S. Maybe when we could see a Libre 3 in the U.S., which would really help close the gap versus DexCom, and your thoughts on the non-diabetes component." }, { "speaker": "Robert Ford", "text": "Sure, Robbie. Listen, I think Libre continues to perform really well. And as you saw, our pipeline continues to be highly productive. We had a good growth rate this quarter, over 35%. I thought it was a real nice sequential improvement versus Q2. And I think in Q2 our sales were just under $600 million, and Q3 sales were just under $700 million. So I think we had a nice sequential Q2 to Q3 kind of growth rate." }, { "speaker": "Robert Marcus", "text": "Great. That was really helpful. And maybe just a quick follow-up. Robert, you talked about how the testing business in Diagnostics is more than just COVID. It's the whole platform. Alinity is just getting going now in the U.S. How should we think about Abbott share gains over the past few months? You've obviously made huge strides in COVID testing. It's a leading platform. Has that driven share shifts over to Alinity and some of your other platforms during this time that sets you up better going forward?" }, { "speaker": "Robert Ford", "text": "Yes. I mean I think we already had a real strong momentum before COVID with the rollout of the Alinity system. We're having great share gains, both in immunoassay and then the clinic chem business also." }, { "speaker": "Operator", "text": "Our next question comes from Larry Biegelsen from Wells Fargo." }, { "speaker": "Larry Biegelsen", "text": "A couple of product questions and then one big-picture question, Robert. Just on EPD, just the outlook there. It sounds like you started to see some recovery. And in Adult Nutrition, the strength there, can you talk about why you're seeing that strength and how sustainable that is? And I have one follow-up." }, { "speaker": "Robert Ford", "text": "Sure, Larry. Yes, EPD, we definitely saw some more challenging market conditions in this quarter than what we had in Q1 and in Q2. If you look at how COVID kind of progressed a little bit, it hit the developed markets, I think, harder in Q2. And then the emerging markets, it hit us more in Q3, especially markets like India, Russia, some markets in Latin America also." }, { "speaker": "Larry Biegelsen", "text": "That's helpful. And then just one big-picture question. It sounds like COVID testing should continue to be strong next year. But if you have a -- get at some point where COVID testing declines because we have a safe and effective vaccine, how are you thinking about reinvestment and managing, potentially smoothing out earnings? Is there any thoughts kind of if we did see a decline in COVID testing, at some point, how you would manage that?" }, { "speaker": "Robert Ford", "text": "Yes. I don't think we're going to see that kind of decline in COVID testing. I think even with a vaccine, you're going to see kind of more of a steady state. And we've talked about that, and we planned for that." }, { "speaker": "Operator", "text": "Our next question comes from Bob Hopkins from Bank of America." }, { "speaker": "Robert Hopkins", "text": "Congrats on all the good results this quarter. I just had 2 quick follow-ups. First, just on COVID testing. Does that $1.3 billion, $1.4 billion run rate that you highlighted include contribution from the OUS antigen test? Or is that more upside to come as that fully launches in the fourth quarter?" }, { "speaker": "Robert Ford", "text": "It's got some of it in there, Bob. Obviously, when you're doing this kind of ramp up the way we're doing it across continents, very different platforms there, we want to make sure that we can deliver. So in that number, you've got some of that international antigen there. But obviously, we're working that -- we could probably do a little bit better than that in that international antigen also. So..." }, { "speaker": "Robert Hopkins", "text": "Okay. And then just one follow-up on the device side ex diabetes. I was wondering if you could talk a little bit about vascular in Q3 as that was down, I think, 10%, which is a little worse than some of the other businesses. And then more importantly, Robert, I'd love to get your view, just like based on everything you're seeing right now, what are your directional thoughts on the outlook for 2021 for Medical Devices ex diabetes? Is there -- should we be thinking about that as potentially close to normal in terms of the business? Or just how much uncertainty do you think there is as we think about devices for next year based on what you're seeing now?" }, { "speaker": "Robert Ford", "text": "Sure. On the outlook there of devices, I would say -- listen, I think that we had a really big impact in Q2 across the world, U.S. and internationally. Because I think a lot of -- this was a new thing -- this was a new virus and the shutdown was pretty dramatic, was pretty significant." }, { "speaker": "Robert Hopkins", "text": "And then on vascular? Sorry." }, { "speaker": "Robert Ford", "text": "Oh, on the vascular question. Yes, we had -- it's interesting. If you look at the device portfolios that were a little bit -- didn't recover as fast, it really was vascular and CRM. I think some of those are affected by some of the pricing dynamics that still exist in that channel. Vascular, you've got an average price erosion there of 5% to 6%. So once you exclude that, it would probably be a little bit better." }, { "speaker": "Operator", "text": "Our next question comes from Joanne Wuensch from Citibank." }, { "speaker": "Joanne Wuensch", "text": "Actually, there are 2 of them, and I'll put them up front. Can you give us an update on your Structural Heart platform and what we might be looking forward to in the next 12 to 18 months? And then my second question is, it sounds as if you are more leaning towards reinvesting some of the COVID-19 revenue versus sort of tuck-in M&A. Can you just give us an idea of how we should think about how much of the upside actually flows through to EPS versus how much of it gets invested?" }, { "speaker": "Robert Ford", "text": "Sure. I think on your Structural Heart question here, I think we've got a leading kind of portfolio of products here. We've launched a couple of novel products this year. TriClip for the tricuspid valve repair. And then Tendyne, which is the first product for mitral valve replacement. Those have actually gone very well. Especially when you're going to launch novel products like this, you want to kind of build evidence. You want to kind of build your way into it." }, { "speaker": "Scott Leinenweber", "text": "There was a second question, Joanne. I -- we didn't grab it here. Can you repeat the question?" }, { "speaker": "Joanne Wuensch", "text": "Of course. The second question was there's -- you're one of the few companies in med tech land that's going to have the benefit from COVID-19 diagnostic testing and the revenue associated with it. I'm trying to think about how, as we look forward, that revenue either is reinvested or flows through, or maybe you'll redirect it towards targeted M&A?" }, { "speaker": "Robert Ford", "text": "Yes. So again, we're trying to triangulate here as much as we can, but we're not going to put out a specific number. What I can reemphasize here is that COVID is definitely going to be a big boost for us, continue to be a big driver for us into 2021." }, { "speaker": "Operator", "text": "Our last question comes from Josh Jennings from Cowen." }, { "speaker": "Joshua Jennings", "text": "Robert, I was hoping you could talk a little bit about the Medical Device franchise. And following up on Bob's question just on the outlook, but just thinking about how you're setting internal targets for your med device sales team or just internally how you're going to judge success. I think there's -- I'm confused about how we should be thinking about it, our team independently for the whole sector." }, { "speaker": "Robert Ford", "text": "Yes. We're looking for steady improvement quarter-over-quarter, and that's how we've kind of set our targets. I mean I think the ultimate measure here of success and of winning is market share and market share gains for those products where we're competing more head-to-head. And then for other products where we're unique in the space, whether it's mitral or tricuspid, et cetera, then we're looking at market development and market expansion." }, { "speaker": "Joshua Jennings", "text": "That's helpful. And then just wanted to ask on COVID testing, just focusing on the serology segment. Can you give us the state of the affairs for the demand level for COVID-19 antibody testing in the U.S., internationally currently and then how you see that demand evolving? I think you've said maybe in the last earnings call that vaccine -- success with the vaccine programs could drive some incremental demand on the serology side." }, { "speaker": "Robert Ford", "text": "Sure. Yes. I mean when it first happened, we were fast to take advantage of the installed base that we had with our Alinity and our architect systems here to develop a blood antibody test. And we also developed lateral flow rapid antibody test." }, { "speaker": "Scott Leinenweber", "text": "Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today." }, { "speaker": "Operator", "text": "Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day." } ]	Abbott Laboratories	247,483
ABT	2	2,020	2020-07-15 22:45:00	Operator: Good morning and thank you for standing by. Welcome to Abbott's Second Quarter 2020 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participants' questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's express written permission. I would now like to introduce Mr. Scott Leinenweber, Vice President, Investor Relations, Licensing and Acquisitions. Scott Leinenweber: Good morning and thank you for joining us. With me today are Robert Ford, President and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2020. Abbott cautions that these forward-looking statements are subject to risks and uncertainties, including the impact of the COVID-19 pandemic on Abbott's operations and financial results that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A Risk Factors to our annual report on Form 10-K for the year ended December 31, 2019, and in 1A Risk Factors in our quarterly report on Form 10-Q for the quarter ended March 31, 2020. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. Please note that financial information provided on the call today for sales, EPS and line items of the P&L will be for continuing operations only. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which excludes the impact of foreign exchange. With that, I will now turn the call over to Robert. Robert Ford: Thanks, Scott. Good morning, everyone, and thank you for joining us. I hope you and your families are staying healthy and safe during these challenging times. Today, we reported ongoing earnings per share of $0.57, which is significantly above analysts' expectations. Based on our performance and momentum for the first 6 months, along with our expectations for the remainder of the year, we now forecast adjusted earnings per share of at least $3.25 for the full year 2020. As I stated on our last earnings call, we anticipated this past quarter would be our most challenging of the year. At the start of the quarter, many areas of the world were under shelter-in-place restrictions, which led to the postponement of elective medical procedures and sharp declines in routine diagnostic testing. Encouragingly, as we progressed through the quarter, we saw steady improvements in both testing and procedure volumes across our hospital-based businesses. At the same time, our more consumer-facing businesses, which include diabetes care, nutrition and established pharmaceuticals, continued to be resilient in this environment, collectively growing more than 9% in the first half of the year. Throughout this time, our supply chain has remained resilient. Our financial health has remained strong, and we've continued to advance our pipeline and strengthen our long-term growth platforms with several recent regulatory approvals, including U.S. approval of Libre 2 as an ICGM, which sets a new standard for accuracy and performance and includes a new pediatric use indication; CE Mark approval of TriClip, the world's first minimally invasive device for repairing a leaky tricuspid heart valve. This is a new market opportunity for our structural heart business that has the potential to be a significant area of growth over the next several years. And U.S. approval of Gallant, our next-generation heart rhythm devices that feature Bluetooth connectivity for continuous remote monitoring, which is a capability we've been integrating across our device portfolio over the past several years, including FreeStyle Libre, our continuous glucose monitor; Confirm, our implantable cardiac monitoring device; CardioMEMS, our leading heart failure monitoring system; and several other cardiovascular and neuromodulation devices across our portfolio. These connected care capabilities allow for better ongoing engagement between patients and their health care providers. And this benefit has never been more evident than in today's pandemic, where virtual care has become necessary to safeguard against exposure between physicians and patients, while continuing to manage and implement medical interventions when they're needed. I'll now summarize our second quarter results in more detail before turning over the call to Bob. And I'll start with Nutrition where sales increased 3% in the quarter. Strong U.S. and international growth of Ensure, our market-leading complete and balanced nutrition brand, led to global adult nutrition growth of around 7.5%. In pediatric nutrition, sales were led by global growth of PediaSure and Pedialyte, our market-leading oral rehydration brand, which was offset by challenging conditions in Greater China. Moving to Established Pharmaceuticals or EPD, sales were relatively flat, following strong growth in the first quarter when we saw increased demand in late March during the early phase of the pandemic. Over the last couple of months, we've seen the virus spread and impact market demand in certain emerging countries such as Russia, Brazil and Colombia. Through the first half of the year, EPD achieved mid-single-digit sales growth, and we anticipate a similar growth profile for the second half of the year. Turning now to Medical Devices. As I mentioned earlier, over the course of the second quarter, we saw steady improvements in procedure volumes across our cardiovascular and neuromodulation portfolio. For example, at the end of June, our procedure volumes had rebounded to approximately 90% of pre-COVID levels on average in the U.S., which represents a significant recovery compared to procedure activity at the beginning of the second quarter. In Diabetes Care, sales grew nearly 30% in the quarter led by FreeStyle Libre growth of 40%. As I mentioned earlier, we obtained U.S. FDA approval for Libre 2 during the quarter. Now approved for both kids and adults, Libre 2 sets a new standard for accuracy, including when glucose levels are in the lowest range, which is critically important in order to avoid going into hypoglycemia. This leading accuracy profile results in superior alarm performance with fewer false alarms than other systems, which can be frustrating, but more importantly, significantly fewer missed alarms, which can be critical to avoiding dangerous glucose levels. Libre 2 maintains all the market-leading features that Libre brand is known for. It's smaller, easier to use and longer-lasting than other glucose monitors, and its value proposition is unparalleled with a cost profile that is not a burden to health care systems. We'll launch FreeStyle Libre 2 in the next few weeks at the same price as the current available FreeStyle Libre 14-day system, continuing our commitment to make Libre affordable and accessible to as many people as possible. I'll wrap up with our Diagnostic business, where sales grew 7% in the quarter. Similar to what we saw in medical device procedures, testing volumes in our underlying diagnostic business, which excludes COVID-19 tests, rebounded to approximately 90% of pre-COVID levels by the end of the second quarter. Over the first half of the year, we've developed and launched several COVID-19 tests across our testing platform for both laboratory and rapid point-of-care settings. To date, we've sold about 40 million tests across all our platforms in countries around the globe. As we think about the continuum of diagnostic testing for COVID-19 going forward, we see the environment unfolding across a few phases. To date, we've largely experienced the pandemic phase where testing has been prioritized for essential professionals such as health care workers as well as symptomatic patients. Molecular testing, which detects if someone currently has the virus, has been in high demand during this period. With the phased easing of shelter-in-place restrictions, we're entering a new phase where continued testing of symptomatic patients will start to overlap with broader surveillance testing of asymptomatic patients in order to better track, understand and contain the spread of the virus until we have broad vaccine availability. So in addition to molecular testing during this period, we would anticipate increased demand for other types of tests, including both antigen and antibody. As vaccines become available, we would anticipate continued surveillance testing to monitor and assess for both natural and vaccine-related immune response, which would be followed by a steady state of ongoing monitoring and tracking of vaccine protection. So looking across the spectrum, it's clear that the need for testing is large and it isn't going away. I'm incredibly proud of the work of our scientists as well of our manufacturing, supply chain and business teams are doing to lead in this area as we fight this pandemic. So in summary, while as we had expected this quarter was a challenging one from a growth perspective, we significantly exceeded expectations and more importantly, exited the quarter in a much stronger position than we entered it. We continued to advance our pipeline and achieved several important new product approvals during the quarter. And we've continued to lead in the area of diagnostic testing for COVID-19, which is significant and expected to carry forward beyond this year. I'll now turn the call over to Bob. Bob? Robert Funck: Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis. Turning to our results. Sales for the second quarter declined 5.4%. Our adjusted gross margin ratio was 56% of sales. R&D investment was 7.3% of sales. And adjusted SG&A expense was 30.7% of sales. Exchange had an unfavorable year-over-year impact of 2.8% on second quarter sales. During the quarter, we saw the U.S. dollar weaken versus several major currencies, which resulted in a favorable impact on sales compared to expectations had exchange rates held steady since the time of our earnings call in April. Based on current rates, we would now expect exchange to have a negative impact of approximately 2% on our full year sales. Our second quarter adjusted tax rate of 17.7% reflects the aggregate adjustment to align our tax rate for the first half of 2020 with our revised full year effective tax rate forecast of 15.6%. This is higher than the estimated range we provided in January due to a shift in our geographic and business income mix caused by COVID-19. Before we open the call for questions, I'd like to briefly discuss a couple of items related to our capital allocation strategy. We ended the second quarter with approximately $5 billion of cash and short-term investments, which represents an increase of more than $1 billion compared to the end of the first quarter. The increase includes the impact of a bond offering we executed in June. We intend to use the proceeds from that offering to pay off debt that matures in September. Following that, we have no other debt payments due until mid-2022, which only further enhances our financial flexibility. In June, we also announced our 386th consecutive quarterly dividend payment, an impressive track record that dates back to 1924. This year also marks the 48th straight year that Abbott has increased its dividend payment, making Abbott a long-tenured member of the S&P 500 Dividend Aristocrats Index, which tracks companies that have increased dividends annually for at least 25 consecutive years. Our consistency and commitment to paying a dividend is a hallmark of Abbott's identity, and our strong financial position allows us to continue that track record even during challenging economic times. With that, we'll now open the call for questions. Operator: [Operator Instructions] And our first question comes from Robbie Marcus from JPMorgan. Robert Marcus: Congrats on a much better-than-expected quarter. Maybe we could start at the top. With 2Q coming in better but still a decent amount of uncertainty about the balance of the year and the recovery trajectory, what gives you the confidence in providing an EPS floor here of at least $3.25? Robert Ford: Sure, Robbie. Thanks. Well, I'd say it's not one single factor. It's really more of a collection of factors here. And I think it -- that speaks to really the power of our diversified model, the diverse strength of all of our different businesses. So without a doubt, the Q2 EPS beat, which was pretty significant, factors into that. I think some of that really was driven by -- there's some impact there of the challenges of forecasting that I think we all had in April. But a good portion of that beat really comes from strong performance across the businesses. I mean if you look at our 4 businesses, 3 out of -- 3 of them, 3 out of 4 of them are actually posting mid-single-digit growth for the first 6 months of the year. But as you look at the base business and think about base business as ultimately Abbott without COVID testing, I think we saw a nice recovery in the second quarter. Yes, there's probably still some uncertainty, but I think we saw a real nice recovery across our base business. If you look at the diagnostic and the device businesses that were probably more impacted, we -- as I described, we exited June with about 90% pre-COVID -- at pre-COVID levels. So -- and that was on average. I can tell you, there were some markets or some segments of our portfolio that we actually saw growth in the month of June. So -- and that happened I'd say, both in the U.S. and internationally. And that's important because obviously, there's maybe some concerns of resurgence here in the U.S., but a large portion of our sales of these businesses are concentrated internationally, too. And we're not seeing those same concerns in those markets. And nutrition was interesting too, I would say, as I look at that base kind of recovery or that base trend in Q2. I mean we thought that there could be some impact of pantry stocking in Q1 that drove nutrition performance. We actually did better than that, and I think part of that was some stocking. But what we've now seen through some of the share charts, Rob, is that we picked up share in both pediatric and adult nutrition. So again, nice recovery, nice performance of the base business in Q2, and I see that momentum carrying forward to the second half. I mean we've got a lot of product launches, label and reimbursement expansions. I can go through some of them. We'll probably talk about them. But if you think about Libre 2, I've got high expectations about that launch in the U.S. TriClip and Tendyne, and these are product launches that we've started to roll out in Europe. We've gotten great feedback in the first months of launch, and we expect kind of good momentum for those products in that geography. The NCD certainty, I think, now in terms of lease time lines for MitraClip is a real big plus for us. And the Alinity expansion that we continue to roll out, I'd say, a nice launch now of Alinity m in the U.S. and we're using COVID here to jump-start that launch. So I'd say the combination of nice recovery in Q2 and that momentum being powered through all these launches and all these products that we've historically been talking about is a big factor there. And then I'd say finally, COVID testing, in my prepared remarks, I talked a little bit about kind of the phases we're going to be going. But ultimately, the demand here and the need will be with us for the foreseeable future. So we've got a comprehensive portfolio, whether it's point of care, whether it's core lab, whether it's lateral flow, different types of tests, whether it's molecular PCR, antibody. So I think we really have a competitive portfolio. And as we look at going into the second half of the year, the competitive position combined with the demand that's going to be there, we're going to be adding in the second half. We'll be adding in terms of new tests, new formats. And also important, we'll be adding in terms of manufacturing capacity, whether it's our molecular platforms, whether it's our lateral flow platform. So we've been working at manufacturer expansion during this quarter. So the notion here that we're -- somehow our competitive position is threatened. I think that we -- we'll be adding competitive position. We'll be adding to it. And I see the demand being there. So you factor all this in, Robbie, you look at our beat, our base business recovery in Q2 fueled by a lot of these kind of product launches carrying that momentum forward, look at the acceleration of our COVID testing across all of our platforms. You can then do some risk adjustments to some of the points that you've made there about maybe some resurgence in some states. But I felt that once you factored all that in, I felt confident about reinstating our guidance, and I thought that a number of $3.25 was a good starting point as we go into the second half. Robert Marcus: Great. That's a lot of wonderful color. Maybe if we could turn the second question to testing. And the 2 things I wanted to focus on was the durability of the testing, not just for the second half of this year, but as you think out beyond into 2021-plus, how durable is the serology testing? And then second, if you could just give us an update on where you stand in some of these other tests like the lateral flow test and then anything else time line or product-wise you could comment on. Robert Ford: Sure. We spent some time looking at kind of what that demand curve will look like. And obviously, our understanding now is much better informed than what it was in March. I'd kind of highlight a little bit the different phases that we'll see. And I think we're now moving into, I guess, what I would call this more recovery phase here as some of these shelter-in-place restrictions are being eased not just in the U.S. but globally also. And that's ultimately the part of the demand curve that I actually see where most of the testing is going to occur, where you're really here trying to do broad surveillance beyond just symptomatic or essential workers. And I can see that phase lasting quite a bit actually, at least until there is a proven kind of vaccine and vaccine availability. And I think once that happens, we'll probably be getting into what I would call like a vaccine phase here, where I still think you're going to be needing to do surveillance testing of the virus. And that's probably where I'll also think that we'll see an increase in serology and antibody testing. And I see that, that's going to be an opportunity for us and for other companies here that have the antibody test. I see that as being kind of a real kind of demand driver on the serology side. But I'd say as we look at this recovery phase that we're in probably over the next kind of 12 months here, we're going to see broad testing. And I think that, as I said, the platforms that we've built is important because you're going to need to have different solutions for different environments, different countries, different trajectories that countries are on. So I like our position. The other thing I would say is there's -- it's good to see a lot of science and a lot of approvals of new tests and that's really important. But as we all know, one thing is to ultimately solve the scientific question of detecting the virus and finding the antibody, but you got to be able to have the scale and the manufacturing footprint to be able to kind of scale up and build. And I think that's what we focused a lot on over -- definitely over the last 90 days is looking at the portfolio of tests that we have and adding our manufacturing capacity to them. And it's not just one single site or one single technology. We're really looking at bolstering manufacturing capacity across all of our testing platforms. Operator: Our next question comes from Vijay Kumar from Evercore. Vijay Kumar: Congrats on a solid execution here. So Robert, I had a 2-part question or 2 questions, if you will, one on the product side, one on the guidance. Maybe I'll start on with the product side. I think you made some bullish comments on Libre. There has been some confusion on the street on the labeling side, on the ICGM label, but lack of an AID compatibility, if you will. Maybe parse this out and explain how you see this Libre franchise in the back half heading into next year. And in your perspective, do you think this labeling is an issue or is this more of a sell-side issue? Robert Ford: Sure. Well, I mean, I think you saw -- let me just start off then with kind of the trajectory here. I mean you looked at our first quarter trajectory in terms of sales growth, new user additions as measured by prescription data here in the U.S. and other data sources outside internationally. And we were on a real strong kind of trend as we were going into Q1. And then obviously, COVID had a little bit of an impact on our new user acquisition growth rate. I mean we were definitely growing new users through Q2, but I think you could see in the data that we all kind of felt a little bit of an impact in May. And that's probably just the impact of shelter in place where patients weren't going to their physicians either to get their prescription or just weren't going to the physician's office. But you see now, I mean, if you look at the data, you see the pickup in the month of June. And you look at the exit of June, we're probably very close to the rate that we were before we came into COVID. And as I said, that was a rate that was growing really nicely in terms of new users. So I'm encouraged by that recovery there. I would say the biggest encouragement I have here for the second part of the year is not only that recovery, but obviously the approval of Libre 2 here in the U.S. I think it's a product that's been long-awaited from physicians, payers, consumers, the diabetes community. We had launched it in Europe about a year or so ago. So I think I look at this, and it's not really a catch-up for me. It's really setting a new standard, as I said in my comments, regarding accuracy and performance. It's got the best accuracy across the board, whether -- and again, this is a 14-day sensor versus our closest competitor being a 10-day sensor. But even with that longer range of use, better accuracy overall, better accuracy in the low range and high range, better accuracy with kids and adults, so I think that's very important. And one thing that we wanted to make sure we got right here, Vijay, was kind of regarding alarms. We had heard a lot about from consumers, when we were developing Libre, the frustration with alarms. And so we really put that feedback, really put the consumer really at the core, at the heart of what we're doing to try and build the alarm. So not only does the accuracy have better alarm performance, whether it's fewer missed or fewer false, but we added a feature there, which is optional alarms. And it's the only CGM that will have that where you can actually toggle between deciding when you want alarms and don't want alarms. And I think that's an important mindset of how we brought that consumer into it. So I look at the combination of all this, Vijay, and I look at the base core of the Libre brand, which I described. And I think the overall value proposition is really second to none here. It's simple, easy to use. It's connected, consumer-friendly device. It's been like that from day 1 once we started the design process back in 2011. And I think one of the things that gets lost a little bit in the feature battle sometimes that happens is the outcomes. Outcomes are really important for the payers and for the physician community. And we showed some really powerful outcomes data at the ADA this year regarding A1c improvements for Type 2 patients that aren't on insulin, so Type 2 patients on oral meds, and I think that's very important. And we priced this for mass adoption. Our -- we don't measure success here, at least not for this product, which we've always talked about of being a mass market opportunity. We don't measure success of how high of a reimbursement we got. We measure success about broad access. So that as a framework, to answer your question on the AID, it was interesting to see the reaction regarding that aspect of our approval. I think it provided a lot of insight to some of the mindset here, some of the people that follow this space. But listen, pumps are going to be important. They're going to be an important segment of the market. The fully automated pumps are pretty amazing technologies. They're great technologies. But for context, these types of pumps, they really just compromise about 1% of the insulin users here in the U.S. So listen, we're very confident that we'll be connected to the full assortment of all the pumps and pens, and we've got everything we need here. But our vision and our strategy was much bigger and has always been much bigger than that. We see this as a mass market opportunity that includes both Type 1s, Type 2s, whether you're an insulin, non-insulin. And when you look at the world like that, you're talking tens and tens of millions of people. So we're excited about Libre 2 approval in the U.S. I think it sets a new standard, and I got high expectations for it here in the U.S. Vijay Kumar: No, that's extremely helpful, Robert. And one quick one on the guidance. I think you mentioned the exit rate on procedures was at 90% of pre-COVID levels. If procedures remain at 90% in the back half, one, are you still expecting to hit the $3.25 EPS number? That's -- I'm assuming -- and if that scenario plays out, it's going to be a mix impact on margins just given devices have higher margins. So where is the upside coming from? I think you mentioned something about antigen testing. I'm just curious how you guys are thinking about that opportunity? And are you baking in some upside from Libre as well? Robert Ford: Listen, you've just basically rattled off all the different factors that we've been looking at as we've looked at the $3.25 kind of floor scenario for us over here. So all those things were factored in. We've actually had some countries where we're actually seeing procedure growth. I mean in China, for example, which was probably the tip of the spear, we actually saw procedure growth in the month of June and healthy growth. So we factored all of that in there. We factored in the launch of Libre 2 and the expectations that we think that we can drive in terms of new user acquisitions and recovery there and we factor all this in. And if you ask, where is the upside, well, listen, there could be upside on all these factors here. I would say if you look at how we built the forecast, a big portion of that is our manufacturing, our manufacturing expansion. All of those are on time, they're on sequence. We've allowed for a little bit of wiggle room there, I would say. But if they continue to be on target and on time -- again, it's not one single expansion. But if they continue to be on time, we could potentially see a potential for upside to that number. But all these factors that you've laid out here, we've sort of contemplated that in that $3.25 scenario. Vijay Kumar: Congrats again. Operator: Our next question comes from David Lewis from Morgan Stanley. David Lewis: Robert, just another follow-up here on guidance. I guess I appreciate the $3.25 and obviously, you have some incremental profitability coming from the mix of diagnostic testing. So is a good way of thinking about this year something around mid-single-digit revenue growth in that range? And I wonder, if you think about '21, and I know it's obviously pretty early, our math has you sort of comfortably above pre-COVID levels. But any kind of qualitative commentary you can give us on '21 would be, I think, helpful. I have a quick follow-up. Robert Ford: Yes, sure. On your question regarding this year, yes, I mean, I think the math would, at this level, would suggest that, but -- that kind of mid-single-digit growth range. But as I said in the previous question, depending on how some of this manufacturing ramp-up occurs and the scaling of it occurs on the COVID side, the rolling out of our new tests, we could be ahead of that. And that would then imply a different kind of -- a different type of growth rate for the full year. But even at the $3.25, we're definitely accelerating our growth rate versus where we were at pre-COVID levels. So I think that the combination of these factors here, I could -- we can see us potentially entering next year with a high top line growth rate because of the combination of a strong base business, a strong base Abbott with an additional layer here of COVID testing. David Lewis: Okay. And then just related to that, Robert, just in terms of the diagnostic outlook here, we assume you're expanding capacity. We have both the lateral flow tests coming. How should we think about the capacity expansion on sort of m2000 versus ID NOW? I think your business was sort of $600 million here this quarter. How can that scale up here after the coming quarters? We certainly see an outlook here that's probably $2 billion to $2.5 billion for this year. But just give us a sense of where you think the bigger opportunity lies between m2000 and ID NOW and what steps you're taking there to expand capacity. Robert Ford: Yes, I think that's a good range if you want to dollarize it. And -- but I'd say, listen, we're looking at capacity expansions across all the platforms. So you mentioned m2000. We actually did a really good job at doing -- at expanding capacity through the quarter. We're also looking at expanding capacity for our Alinity m system, which I think is going to get a really nice kind of jump-start here in terms of its launch with the COVID test. It's a very attractive system in terms of kind of its features and -- its competitive features, whether it's a throughput or ease of use, not only versus m2000, but also versus other systems there. We're also investing in ID NOW capacity expansion. We talked a little bit about that when we came out with approval. We knew that 50,000 tests a day wouldn't necessarily be enough. It was a good start, but it wouldn't be enough, and we've been working very diligently to be able to do that. And on the lateral flow side, we began rolling the tests outside and in some international markets. We'll start to bring that here in the U.S. And we think there's a use case for both an antibody and an antigen test also. And we're investing capacity there also. So it's really not just, I'd say, one kind of area, but really looking across the entire suite of solutions here. Operator: Our next question comes from Kristen Stewart from Barclays. Kristen Stewart: Thanks, Robert and the entire organization, for all that you're doing on the COVID side. Just wanted to get a little bit more specific on just timing for the U.S. for an antigen test, and if there's anything that you can provide, just kind of more specifics on just the manufacturing capacity or just kind of how big you think kind of the COVID testing opportunity could be? And just kind of correct me if I'm wrong, it just sounds like -- and kind of my thought is that this COVID testing opportunity could definitely be something that not only kind of sticks around into 2021, but obviously, it could just be something more durable provided that not everybody may be willing to sign up for a COVID vaccine if one is developed and hopefully, obviously, one is developed. And then if I could just have a follow-up too, if you could explain a little bit more of the dynamics of what's going on in China with Nutrition. Robert Ford: Sure. Let me just talk about kind of overall demand there. I mean I agree with you, and that's how we see it. We see the -- that COVID testing will stick around. Even when you have a vaccine, I think that I can see patients going to a physician's office with a fever, and they want to know is it influenza, is it the flu, is it COVID? So yes, so we think that the capacity that we're building is not only for, I'd say, a high demand during the next 12, 18, 24 months here, but we do the -- a steady state, as I said, that it will continue to be there. Regarding your question on antigen, I won't give kind of specifics in terms of timing. What I can say, and I talked about it in Q1, is that we've really looked across our entire agnostic platform and not only the instrumented side, but the non-instrumented side as it relates to lateral flow testing. As you know, a lot of this lateral flow test came with the acquisition we did of Alere, and we're intending to maximize that scale that came with the acquisition. So we feel good about the test that we developed for the antibody. We're rolling it out. The antigen side, again, it's going to be -- we've been working very hard on this. And I think it will just fall into the same kind of bucket and value proposition here where we'll have a lot of scale to be able to use this, produce a reliable test that's easy to use, that's affordable. I think that's the critical aspect here. If you want to get some more mass screening, more mass volume, the tests need to be more affordable. And one of the ways you do that is you remove the restriction on the instrument, so -- or requiring an instrument. So we're working on that test, and we've been building capacity for it. So -- and that's factored it a little bit into our guidance. I think you had a question on Nutrition, right? Yes. So specifically, in China, yes, it's been a tough market, I'd say, for a lot of companies, I'd say, especially some of the multinational foreign companies. We've also seen a little bit of a decline there in birth rates, so that's kind of slowed the market growth down a little bit. So -- but it's -- we're not overly dependent on China Nutrition within Nutrition. And obviously, within Abbott, our Nutrition business has been pretty resilient in the quarter. We actually saw some pretty strong growth in pediatrics in some of other Asian markets, too. So listen, it's an important market for us. It's about 7% of our Nutrition sales. The market conditions are shifting there a little bit. And we'll continue to be competitive as we can there with our new product launches and innovations that we're launching. And we'll see that dynamic, I think, still kind of play out a little bit here in the next quarter or so until we can get some of our new launches kind of rolled out. Operator: Our next question comes from Matt Miksic from Crédit Suisse. Matthew Miksic: Just maybe changing gears a little bit, if you could talk a little about some of the pipeline products that -- recently approved and in the pipeline and time line, like the CE Mark for TriClip and Tendyne for tricuspid and mitral. Maybe how to think about those products adding to the growth in the back half and into early '21. And then for the pivotal for Amulet, the NCD for CardioMEMS, what's different this time on that product, which was kind of ahead of its time last time? Maybe just help us understand how to think about or model those. And then I have one follow-up. Robert Ford: Sure. Well, we've been investing strong and heavily in the structural heart business. And I think your -- you've just kind of mentioned a lot of a lot of the output of those investments as we're building the portfolio and the pipeline of our structural heart business. I would say, MitraClip is still in the early innings. And I think that we've been working hard to kind of expand that market. And think about the NCD coverage here in the U.S., I mean in the U.S., we did close to 12,000 procedures last year, and the NCD is going to give us opportunity to target 250,000 procedures. So I think -- I still think there's a lot of opportunity in the mitral space, in the repair side. Specifically, on TriClip, listen, I think this is a great opportunity for us. We got a lot of feedback from the physician community about wanting to see a repair system for the tricuspid area. They were trying to get there using the MitraClip, but it's a difficult area to get to. So we took a lot of the feedback here and redesigned the delivery catheter for the clip to be able to get to the tricuspid area. And we've got CE Mark. We've launched it. We've gotten great feedback in terms of its -- the biggest challenge was getting there in an easier way. And I think that the TriClip with the redesign has kind of helped that. I think it's about a -- think about the market size here. It's probably about 1/3 of the size that I think of the mitral repair market. That's how we've looked at it. And it's going to take a little bit of time to develop. If you think about how we developed the mitral repair market, you need to build a steady base of experienced users here to build good data on its efficacy and then you start to kind of roll it out. So I think this is really in the early stages here. We've got some growth baked in, in the second half of this year. But this is probably a multiyear kind of growth here for us, but it's an exciting one given our position that we have in mitral. On Tendyne, this was an important play that we made. We knew that we wanted to be a company that had a broad suite of solutions in the mitral area. And having a repair would be one part of it, but then having a replacement device would be another part of the value proposition. And right now, we're the only company now that -- be able to offer that solution to our customers to be able to repair, and if repair is not needed, to be able to have a transcatheter solution for replacement. So we got CE Mark in January. We started to roll it out, again, gotten very good feedback. And we'll -- we don't have, I'd say, a lot of sales baked into the second half year. We really want to kind of develop the use, develop the data. Both these products, the TriClip and the Tendyne, they're currently under trial here in the U.S.. Our projected launch here for a Tendyne product in the U.S. is late in 2022, and the TriClip here in the U.S. sometime in 2023. So we've got a nice kind of cadence here of product launches. You mentioned Amulet. This is another exciting area for us. It sometimes gets lost in the shuffle and the richness of the pipeline of this division here, but it's one that is not lost with me or with the management team here. We've completed our enrollment, and now we've got an 18-month kind of end point. So we'll expect to file by the end of this year and have a launch sometime in 2021. And that will be a nice kind of growth opportunity as we go into next year also. Matthew Miksic: Terrific. And then just one follow-up, if I could, on EPD and emerging markets. I know it's a little bit more of a narrow geography to think about, but maybe similar to the way that everyone was trying to sort of gauge the recovery or the way that COVID sort of paces through the developed markets in Q2. Any sense of how to think about the cadence of -- are we at a trough point? Or should we trough the impact in August here or in this quarter in EPD and in emerging markets? Robert Ford: Yes. So we saw a little bit of softness in Q2, as we discussed. I think it's partially due to some of the purchases that I think were pulled forward a little bit in late March as it relates to kind of the quarantine mandates in certain countries. If you look at our Q1 performance, it was over 9%. So I think what we've seen here is once we saw the data, the data comes here a little bit of a lag to us. We were able to kind of see what happened. And you kind of see this contraction, sharp contraction in the market kind of in the March, probably more April, May kind of time frame here. And early indication starts to show a little bit of a bounce back in June, but it's not going to be -- you can't make a definitive conclusion across all markets because they're all at different phases. So I think right now, probably the ones that are being hit the most are probably kind of Russia and Brazil. But we actually saw, similar to devices, we saw a nice recovery in China in our EPD business also and saw the kind of growth rate that we had been seeing. So double-digit growth rate in the quarter in China. So I guess what I'd say is the impact of quarantine and the virus, it kind of moved from China, started moving east. And I would say kind of the emerging markets were probably the most laggard part of that movement. And I'd expect to see them come back in a similar fashion in terms of some of the developed markets that we saw in devices and diagnostics also. So... Operator: Our next question comes Joanne Wuensch from Citibank. Joanne Wuensch: A very solid quarter. A couple of very quick questions. Can you give us an update on Libre 3 and when you're thinking of the timing of that? Can you also comment on how you're thinking about the run rate for MitraClip, particularly with COAPT data behind it and now CMS coverage in front of it? And then lastly, expense management. I got the impression from some of your comments that you're leaning in on some investments. And if there's anything that you can give us regarding big picture and/or the cadence on that, that would be great. Robert Ford: Sure. I guess I would take your first question on Libre 3. We've gone through a long journey here, so I think I want to prioritize a little bit on Libre 2. But what I will say is the following. We've always said that Libre was a platform product. We've always said that we would have different iterations. Libre 3 has been in development for some time. But I'm not going to provide any details on product capabilities or time lines as it relates to this point. My focus here is going to be really to maximize kind of Libre 2 launch. But we do have a team that's been working on it, and we're excited about it. And when we have more details to kind of share, we will share. Regarding MitraClip, yes, it was an interesting quarter for sure. We saw a pretty sharp decline in clip procedures in the month of April and probably about half of May. Then we started to see a nice kind of ramp up. And so we exited Q2 in June with about 85% of where we were in pre-COVID levels, and that continues to kind of trend up. So I think you've -- you talked about kind of a key growth driver for us. The NCD is an important part. I'm glad to see the process moving forward. I think it represents a significant growth opportunity for us. I think it more than doubles the U.S. market opportunity, as I said. And it's nice to see that we could have an expected time line here that could potentially result in an NCD approval at the end of the quarter. So I'm -- as I said in the previous question about the structural portfolio, we've got a lot there, but MitraClip is still in its early innings, and this is a great opportunity here for us. Regarding your question on spending, we've been careful obviously about spending. And obviously I think you see a natural cadence of less spending, whether it's travel and stuff like that, that we saw. But -- and so that just naturally happens. But we've paid a lot of attention to R&D and R&D spend and ensuring that not only do we not slow down our programs, but are there other opportunities that we have to be able to accelerate them, and we have been looking at that. I think some of the challenges and some of the R&D spend is that some of that spend is these clinical trials. So obviously, that -- with some of the follow-ups, enrollments slowing down, you'll see that. But we've tried to take some of that favorability and look at product development side to be able to continue to build our pipeline, build our sustainable kind of growth story. So yes, that's got a lot of attention and focus from me and the management team and ensuring we don't lose the opportunity on the R&D side. And then the other investment we've been making, as has probably been pretty clear, is we're putting in a lot of manufacturing capacity. That includes not only capital, but also project expense. And we're managing those opportunities very, very closely also. Operator: And our last question comes from Matt Taylor from UBS. Matthew Taylor: So I really had just 2 follow-ups on 2 of the bigger themes here. So one is on the floor of $3.25. It seems like you've been very thoughtful about how you've layered together all these different moving parts for the second half of the year to get to that floor assumption. I guess my question is kind of taking the inverse of that. So what would have to happen, what would have to go wrong for you to not achieve that floor? Would things have to get significantly worse? Maybe you could just speak to that. Robert Ford: Yes. I mean, listen, we've looked at every -- a lot of different scenarios here, Matt. We've got a lot of great data that we -- that's pretty proprietary to us. I mean I think I mentioned this in the last quarter where a lot of the laboratory testing that happens on our systems in the hospitals, we get to see that data every day, every night and we've been aggregating it. And we look at not only the volume of tests that are being done, but we also look at the type of different tests that are being done. And so I think we've got a pretty good insight in terms of what's actually happening in the hospitals beyond just the headlines. Those are important, but we haven't relied on headlines or models to do this. We've really looked at it at a very granular level using the assets that we have to be able to kind of put our own forecast together. On the device side, the way our compensation is struck with our sales reps, they've got to log their procedures. So we have a fairly accurate representation of the kind of procedures that are occurring at the hospital. So we've factored all this in and factored in the different components of our manufacturing of COVID. And that's why I feel confident, again, in reinstating and reinstating at $3.25. So what you're trying to figure out is what needs to go wrong here. I think even if there is a shutdown, another shutdown, which I personally don't believe will be there, I think we know a lot more now. The hospitals know a lot more versus what happened in the first shutdown. And I think we're going to have a lot of manufacturing capacity to be able to deal with that from a testing perspective. And then you also have to have that same granularity not just in the U.S., so looking at different states. But you also have to look at it around the globe. And around the globe, there are different countries on different situations, too. So... Matthew Taylor: And then maybe one other follow-up. So you talked about Libre 2 and all the exciting aspects of it. I was wondering if you could at least qualitatively talk about the kind of acceleration or pickup or additional opportunity that you see for that in the second half of the year. And are you going to immediately be able to blast that out? Or is there some kind of conversion time for you to get up to full speed on the manufacturing of the new product? Robert Ford: Well, on the manufacturing side, I'll just answer that quickly. I mean you know that we've been investing in manufacturing, manufacturing capacity and scale. We knew that was going to be an important aspect for our strategy when we look at it as a mass market. So from a manufacturing standpoint, we don't have that issue. We've got teams that are already kind of building product, putting them in boxes, ready to start shipping them to wholesalers and retailers here in the U.S. Regarding kind of qualitative assessment of the opportunity, I mean, I guess, I'll just go back to there's -- you can look at the penetration of CGM in the U.S. here. And again, it depends on the kind of lens you want to look at. If you want to look at it through the lens of AID systems and connected pumps, you're going to have a market. If you're going to look at it through the lens of at least how we're looking at it, which is mass market, Type 1s, Type 2s, whether you're on insulin or whether you're not on insulin, you're looking at a large -- you're looking at 15 million, 20 million people here in the U.S. And you can look at the amount of users we have. You can look at the amount of users that the other systems in the market have. And you can add that up and you can say, "Okay, there's a lot of opportunity here for that kind of growth." The question is what is the product that best suits that kind of penetration, that more mass market penetration. And I'll make the case not because I've been with this product for a while. But I'll make the case based on what I've heard from payers, what I've heard from the system that ultimately have to pay for it, that Libre has got everything -- Libre 2 has got everything it needs to be able to kind of accelerate that penetration. And I'll point to the study that we published at the ADA with a Type 2 non-insulin user. I mean that is a significant A1c reduction for people on oral medication that you probably don't see in terms of other studies with other drugs. So I think Libre has shown that it is just as effective at providing outcomes for type 2 patients that are on oral medication versus those that are on pumps. So I'm very bullish about the opportunity that we have for Libre 2 in the U.S. as I am for Libre as a whole in -- around the globe. So let me just wrap up here then by just -- we knew that Q2 here was going to be our toughest quarter of the year, and we beat those expectations. I think part of it was probably some difficulty in forecasting. But a good portion of that was our performance, our strong performance across our businesses. We can see a base business that's -- if you exclude the COVID test, we've got product launches, we've got channel expansions, new reimbursement claims. So we continue to forecast a steady acceleration, a quarter of work-over improvement of our base business. You then have the COVID testing, which, as I said, I think will be here with us for the foreseeable future. Not only do we have a very complete portfolio, we're going to be adding to it, but we're also investing in manufacturing capacity and scale. And I think that's an important role here to play, an important role to play in meeting that demand. So a floor of $3.25 I thought was a good place to start as we reinstate our guidance. But if you look at our product launches, both U.S. and internationally, our manufacturing expansions and depending how that goes, we could see a situation where we're heading in next year with a very high top line growth rate and really compromised here of a strong base Abbott business with now an added layer of growth from COVID testing. Scott Leinenweber: Okay. Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a wonderful day.	[ { "speaker": "Operator", "text": "Good morning and thank you for standing by. Welcome to Abbott's Second Quarter 2020 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participants' questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's express written permission." }, { "speaker": "Scott Leinenweber", "text": "Good morning and thank you for joining us. With me today are Robert Ford, President and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions." }, { "speaker": "Robert Ford", "text": "Thanks, Scott. Good morning, everyone, and thank you for joining us. I hope you and your families are staying healthy and safe during these challenging times." }, { "speaker": "Robert Funck", "text": "Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis." }, { "speaker": "Operator", "text": "[Operator Instructions] And our first question comes from Robbie Marcus from JPMorgan." }, { "speaker": "Robert Marcus", "text": "Congrats on a much better-than-expected quarter. Maybe we could start at the top. With 2Q coming in better but still a decent amount of uncertainty about the balance of the year and the recovery trajectory, what gives you the confidence in providing an EPS floor here of at least $3.25?" }, { "speaker": "Robert Ford", "text": "Sure, Robbie. Thanks. Well, I'd say it's not one single factor. It's really more of a collection of factors here. And I think it -- that speaks to really the power of our diversified model, the diverse strength of all of our different businesses." }, { "speaker": "Robert Marcus", "text": "Great. That's a lot of wonderful color. Maybe if we could turn the second question to testing. And the 2 things I wanted to focus on was the durability of the testing, not just for the second half of this year, but as you think out beyond into 2021-plus, how durable is the serology testing? And then second, if you could just give us an update on where you stand in some of these other tests like the lateral flow test and then anything else time line or product-wise you could comment on." }, { "speaker": "Robert Ford", "text": "Sure. We spent some time looking at kind of what that demand curve will look like. And obviously, our understanding now is much better informed than what it was in March. I'd kind of highlight a little bit the different phases that we'll see. And I think we're now moving into, I guess, what I would call this more recovery phase here as some of these shelter-in-place restrictions are being eased not just in the U.S. but globally also." }, { "speaker": "Operator", "text": "Our next question comes from Vijay Kumar from Evercore." }, { "speaker": "Vijay Kumar", "text": "Congrats on a solid execution here. So Robert, I had a 2-part question or 2 questions, if you will, one on the product side, one on the guidance." }, { "speaker": "Robert Ford", "text": "Sure. Well, I mean, I think you saw -- let me just start off then with kind of the trajectory here. I mean you looked at our first quarter trajectory in terms of sales growth, new user additions as measured by prescription data here in the U.S. and other data sources outside internationally. And we were on a real strong kind of trend as we were going into Q1. And then obviously, COVID had a little bit of an impact on our new user acquisition growth rate." }, { "speaker": "Vijay Kumar", "text": "No, that's extremely helpful, Robert. And one quick one on the guidance. I think you mentioned the exit rate on procedures was at 90% of pre-COVID levels. If procedures remain at 90% in the back half, one, are you still expecting to hit the $3.25 EPS number? That's -- I'm assuming -- and if that scenario plays out, it's going to be a mix impact on margins just given devices have higher margins. So where is the upside coming from? I think you mentioned something about antigen testing. I'm just curious how you guys are thinking about that opportunity? And are you baking in some upside from Libre as well?" }, { "speaker": "Robert Ford", "text": "Listen, you've just basically rattled off all the different factors that we've been looking at as we've looked at the $3.25 kind of floor scenario for us over here. So all those things were factored in." }, { "speaker": "Vijay Kumar", "text": "Congrats again." }, { "speaker": "Operator", "text": "Our next question comes from David Lewis from Morgan Stanley." }, { "speaker": "David Lewis", "text": "Robert, just another follow-up here on guidance. I guess I appreciate the $3.25 and obviously, you have some incremental profitability coming from the mix of diagnostic testing. So is a good way of thinking about this year something around mid-single-digit revenue growth in that range? And I wonder, if you think about '21, and I know it's obviously pretty early, our math has you sort of comfortably above pre-COVID levels. But any kind of qualitative commentary you can give us on '21 would be, I think, helpful. I have a quick follow-up." }, { "speaker": "Robert Ford", "text": "Yes, sure. On your question regarding this year, yes, I mean, I think the math would, at this level, would suggest that, but -- that kind of mid-single-digit growth range. But as I said in the previous question, depending on how some of this manufacturing ramp-up occurs and the scaling of it occurs on the COVID side, the rolling out of our new tests, we could be ahead of that. And that would then imply a different kind of -- a different type of growth rate for the full year." }, { "speaker": "David Lewis", "text": "Okay. And then just related to that, Robert, just in terms of the diagnostic outlook here, we assume you're expanding capacity. We have both the lateral flow tests coming. How should we think about the capacity expansion on sort of m2000 versus ID NOW? I think your business was sort of $600 million here this quarter. How can that scale up here after the coming quarters? We certainly see an outlook here that's probably $2 billion to $2.5 billion for this year. But just give us a sense of where you think the bigger opportunity lies between m2000 and ID NOW and what steps you're taking there to expand capacity." }, { "speaker": "Robert Ford", "text": "Yes, I think that's a good range if you want to dollarize it. And -- but I'd say, listen, we're looking at capacity expansions across all the platforms." }, { "speaker": "Operator", "text": "Our next question comes from Kristen Stewart from Barclays." }, { "speaker": "Kristen Stewart", "text": "Thanks, Robert and the entire organization, for all that you're doing on the COVID side. Just wanted to get a little bit more specific on just timing for the U.S. for an antigen test, and if there's anything that you can provide, just kind of more specifics on just the manufacturing capacity or just kind of how big you think kind of the COVID testing opportunity could be?" }, { "speaker": "Robert Ford", "text": "Sure. Let me just talk about kind of overall demand there. I mean I agree with you, and that's how we see it. We see the -- that COVID testing will stick around. Even when you have a vaccine, I think that I can see patients going to a physician's office with a fever, and they want to know is it influenza, is it the flu, is it COVID? So yes, so we think that the capacity that we're building is not only for, I'd say, a high demand during the next 12, 18, 24 months here, but we do the -- a steady state, as I said, that it will continue to be there." }, { "speaker": "Operator", "text": "Our next question comes from Matt Miksic from Crédit Suisse." }, { "speaker": "Matthew Miksic", "text": "Just maybe changing gears a little bit, if you could talk a little about some of the pipeline products that -- recently approved and in the pipeline and time line, like the CE Mark for TriClip and Tendyne for tricuspid and mitral. Maybe how to think about those products adding to the growth in the back half and into early '21. And then for the pivotal for Amulet, the NCD for CardioMEMS, what's different this time on that product, which was kind of ahead of its time last time? Maybe just help us understand how to think about or model those. And then I have one follow-up." }, { "speaker": "Robert Ford", "text": "Sure. Well, we've been investing strong and heavily in the structural heart business. And I think your -- you've just kind of mentioned a lot of a lot of the output of those investments as we're building the portfolio and the pipeline of our structural heart business. I would say, MitraClip is still in the early innings. And I think that we've been working hard to kind of expand that market." }, { "speaker": "Matthew Miksic", "text": "Terrific. And then just one follow-up, if I could, on EPD and emerging markets. I know it's a little bit more of a narrow geography to think about, but maybe similar to the way that everyone was trying to sort of gauge the recovery or the way that COVID sort of paces through the developed markets in Q2. Any sense of how to think about the cadence of -- are we at a trough point? Or should we trough the impact in August here or in this quarter in EPD and in emerging markets?" }, { "speaker": "Robert Ford", "text": "Yes. So we saw a little bit of softness in Q2, as we discussed. I think it's partially due to some of the purchases that I think were pulled forward a little bit in late March as it relates to kind of the quarantine mandates in certain countries. If you look at our Q1 performance, it was over 9%." }, { "speaker": "Operator", "text": "Our next question comes Joanne Wuensch from Citibank." }, { "speaker": "Joanne Wuensch", "text": "A very solid quarter. A couple of very quick questions. Can you give us an update on Libre 3 and when you're thinking of the timing of that? Can you also comment on how you're thinking about the run rate for MitraClip, particularly with COAPT data behind it and now CMS coverage in front of it?" }, { "speaker": "Robert Ford", "text": "Sure. I guess I would take your first question on Libre 3. We've gone through a long journey here, so I think I want to prioritize a little bit on Libre 2. But what I will say is the following. We've always said that Libre was a platform product. We've always said that we would have different iterations." }, { "speaker": "Operator", "text": "And our last question comes from Matt Taylor from UBS." }, { "speaker": "Matthew Taylor", "text": "So I really had just 2 follow-ups on 2 of the bigger themes here. So one is on the floor of $3.25. It seems like you've been very thoughtful about how you've layered together all these different moving parts for the second half of the year to get to that floor assumption." }, { "speaker": "Robert Ford", "text": "Yes. I mean, listen, we've looked at every -- a lot of different scenarios here, Matt. We've got a lot of great data that we -- that's pretty proprietary to us. I mean I think I mentioned this in the last quarter where a lot of the laboratory testing that happens on our systems in the hospitals, we get to see that data every day, every night and we've been aggregating it. And we look at not only the volume of tests that are being done, but we also look at the type of different tests that are being done." }, { "speaker": "Matthew Taylor", "text": "And then maybe one other follow-up. So you talked about Libre 2 and all the exciting aspects of it. I was wondering if you could at least qualitatively talk about the kind of acceleration or pickup or additional opportunity that you see for that in the second half of the year. And are you going to immediately be able to blast that out? Or is there some kind of conversion time for you to get up to full speed on the manufacturing of the new product?" }, { "speaker": "Robert Ford", "text": "Well, on the manufacturing side, I'll just answer that quickly. I mean you know that we've been investing in manufacturing, manufacturing capacity and scale. We knew that was going to be an important aspect for our strategy when we look at it as a mass market. So from a manufacturing standpoint, we don't have that issue. We've got teams that are already kind of building product, putting them in boxes, ready to start shipping them to wholesalers and retailers here in the U.S." }, { "speaker": "Scott Leinenweber", "text": "Okay. Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today." }, { "speaker": "Operator", "text": "Ladies and gentlemen, this concludes today's conference call. Thank you for participating, and you may now disconnect. Everyone, have a wonderful day." } ]	Abbott Laboratories	247,483
ABT	1	2,020	2020-04-15 22:45:00	Operator: Good morning and thank you for standing by. Welcome to Abbott's First Quarter 2020 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participants' questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's express written permission. I would now like to introduce Mr. Scott Leinenweber, Vice President, Investor Relations, Licensing and Acquisitions. Scott Leinenweber: Good morning, and thank you for joining us. With me today are Robert Ford, President and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2020. Abbott cautions that these forward-looking statements are subject to risks and uncertainties, including the impact of the COVID-19 pandemic on Abbott's operations, results and financial results. This may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A, Risk Factors, to our annual report on Securities and Exchange Commission Form 10-K for the year ended December 31, 2019. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. Please note that financial information provided on the call today for sales, EPS and line items of the P&L will be for continuing operations only. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which is defined in our earnings news release issued earlier today. With that, I will now turn the call over to Robert. Robert Ford: Thanks, Scott. Good morning, everyone, and thank you for joining us. As everyone here knows, we haven't seen a quarter or any time quite like this before. This global environment is unprecedented in our lifetimes. Before we get into the details of the quarter, I want to take a moment to thank our employees, our customers and our suppliers, all of whom are making extraordinary efforts to keep systems working and to maintain supply of our critically important products for the people who need them. This moment has strongly underscored 2 fundamental things to me. The first is the biggest and most important, and that's the essential nature of health and health care. Times like these make very clear what truly matters the most. The second, to bring it closer to home, has to do with the nature of Abbott. We've been in the business of improving people's health through medical innovation for more than 130 years, and it's in moments like these that the importance of our mission becomes even more critical: delivering for the people that depend on us. I've been extremely impressed, though, not at all surprised, by the way my colleagues around the world have stepped up to this moment. As you know, we've quickly developed and launched 3 diagnostic tests for COVID-19: 2 for the laboratory setting and 1 for rapid point-of-care testing. At the same time, our teams in every business and around the world have been making extraordinary efforts to keep our operations running and our supply chains moving and to undertake the thousands of processes to make our vital products and get them to the people who need them. And we're also donating both funding and products to support frontline health care workers, families and communities to meet the challenges of this pandemic. I think this speaks to a well-known attribute of Abbott's culture: We're execution-oriented, and we could be relied on to deliver when it matters the most because we know how important our work is, that lives depend on us, and we take that very seriously. Our diversified business model is a true strength in times like these. It's a model that has served our shareholders and the company very well. Under normal circumstances, it provides more opportunities for growth. And in situations like this, it helps to dampen the impact by ensuring we're not overly reliant on a given business, product or geography. Overall, our sales grew nearly 4.5% on an organic basis in the first quarter. Looking across our portfolio. Some parts of the business faced challenges, others have been relatively stable, and still others are performing at high levels to meet new demands. Beginning in February, as China implemented quarantine restrictions and nonemergency health care activities were postponed, we saw sharp declines in both cardiovascular device procedures and routine core laboratory diagnostic testing volumes in that country. Encouragingly, over the course of March and the first 2 weeks of April, we've seen a steady improvement in procedures and testing volumes in China from the lows we saw in February. As the virus spread geographically, the impact initially expanded to pockets of Asia and Europe beginning in late February, and more broadly across Europe and the U.S. during the last few weeks of March. As the health care industry shifted its focus to fighting the virus, we saw similar impacts to our business as those we had seen in China. Based on our most recent data points, while we haven't seen a rebound, we're starting to see some signs of stabilization. Importantly, while we're navigating the demands of the current environment, we've continued to advance our pipeline and strengthen our long-term growth platforms. Over the last few months, we've announced CE Mark approvals of new products in important cardiovascular device areas, including TriClip, the world's first minimally invasive device for repairing a leaky tricuspid heart valve; Tendyne, a first-of-its-kind device for mitral heart valve replacement; and Gallant, our next-generation implantable cardiac defibrillator. In EPD and Nutrition, underlying market growth and share dynamics remain in line with historical trends during the quarter, with the exception of increased demand during late March in advance of shelter-in-place restrictions in certain markets, most notably in U.S. Pediatric Nutrition. In Diabetes Care, Freestyle Libre continued to add new users at a strong and steady rate throughout the quarter as reflected by sales growth of more than 60%. We also continue to expand reimbursement coverage for Libre around the world, including recently becoming the only continuous glucose monitoring system to obtain reimbursement in Japan for people with Type 2 diabetes. And just last week, we announced the availability of Freestyle Libre for hospitalized patients with COVID-19. The Libre system allows frontline health care workers and hospitals to remotely monitor glucose levels in patients with diabetes in order to minimize exposure to COVID-19 and preserve the use of personal protective equipment. In partnership with the American Diabetes Association, Abbott has donated 25,000 Freestyle Libre sensors to U.S. hospitals and medical centers in outbreak hotspots to help accelerate access to the technology. Before I wrap up, I'd like to take a moment to discuss our ongoing efforts in the area of diagnostic testing for COVID-19. Abbott has long been a global leader in infectious disease testing, so leading in this area is a role we can and should play. In late March, we launched 2 molecular diagnostic tests to detect COVID-19: one for our ID NOW rapid point-of-care platform; and one for our m2000 laboratory platform. Over the past few weeks, we've been actively working with government authorities and health systems to deploy these tests to places of greatest need. And just yesterday, we announced the launch of a lab-based serology test for the detection of the antibody IgG. While molecular testing detects whether someone currently has the virus, antibody tests determine if someone was previously infected. We already began shipping these antibody tests and intend to ship 4 million tests in April and ramping up capacity to 20 million tests per month in June and beyond. But our efforts don't stop there. We're moving as fast as we can to develop additional tests, including a lab-based serology test to detect another important antibody, IgM, which we expect to launch in the near future. I'd like to thank our outstanding scientists as well as our manufacturing, supply chain and business teams. They've really stepped up to the challenge and are doing extraordinary work to increase availability of diagnostic testing as we fight this pandemic. So in summary, this unprecedented situation underscores our purpose and the strength of our diversified business model. The underlying fundamentals of our business remains strong, and our manufacturing and supply chain have been highly resilient. We've long planned for how to maintain business continuity in the face of a global crisis, and our employees and suppliers have risen to the challenge. And lastly, Abbott is contributing in a significant and meaningful way by providing new test solutions across our diagnostic platforms to help screen as many people as possible. I'll now turn over the call to Bob. Bob? Robert Funck: Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which is consistent with our previous guidance. Turning to our results. Sales for the first quarter increased 4.3%. Our adjusted gross margin ratio was 58% of sales. R&D investment was 7.3% of sales, and adjusted SG&A expense was 32.2% of sales. Exchange had an unfavorable year-over-year impact of 1.8% on first quarter sales. During the quarter, we saw the U.S. dollar strengthen versus most currencies, which resulted in a larger unfavorable impact on sales compared to expectations had exchange rates held steady since the time of our earnings call in January. Based on current rates, we would now expect exchange to have a negative impact of a little more than 3% on our full year sales. As we announced this morning in our earnings news release, given the uncertainties regarding the duration and impact of the COVID-19 pandemic, we're suspending our previously issued annual guidance for sales and earnings per share. We're actively monitoring the situation closely, and we'll provide updates as appropriate. Before we open the call for questions, I'd like to briefly discuss Abbott's overall financial condition. As this situation has reminded all of us, unforeseen events can rapidly change the environment we operate in. And our philosophy of maintaining strong financial flexibility is in place for just these types of moments. Overall, I'd say our financial health is strong. We ended the first quarter with approximately $3.7 billion of cash and short-term investments, and we have existing agreements in place that will provide additional access to $5 billion, if needed. As you know, over the last couple of years, we have put a heavy emphasis on strong cash flow generation and rapid debt paydown following a period of strategic shaping. This focused effort has positioned us with healthy leverage ratios and only a modest amount of debt coming due over the next few years. It has also resulted in strong investment-grade credit ratings. That said, we are prudently planning to ensure we can withstand a variety of potential scenarios that may emerge over the coming months. As Robert mentioned earlier, our diversified business model is a true strength in times like these. I would also add that our disciplined and thoughtful approach to financial decisions and capital allocation priorities are also strengths and that Abbott is well positioned to navigate this challenge. With that, we'll now open the call for questions. Operator: [Operator Instructions] And our first question comes from Robbie Marcus with JPMorgan. Robert Marcus: And congrats on a good quarter, all things considered. Maybe I can start with the 2 positives in the portfolio here. I'll ask them separately. First, on diagnostics. Abbott's leading the way. You have 3 different tests: the ID NOW molecular tests, the m2000 SARS-COVID-19 test and then the antibody test, which was just announced. I know a lot of people are interested in the potential of all 3 of these tests here. So I was wondering if you could give us an overview of where you are with the testing, the potential revenue implications and volumes that you'll have. And any other tests that we should be on the lookout for on the horizon here? Robert Ford: Sure, Robbie. So yes, it was definitely an intense first quarter here for our Diagnostic business, even though it doesn't look like that in the sales number, right? We've got a core lab business that had some declines and it -- given the similar dynamics that we saw in our cardiovascular procedures as the hospitalization and procedures kind of came down. And then on the other side of the business, we have our rapid and molecular business where we did see positive growth in the quarter. And we actually didn't have a lot of COVID test sales for those businesses in the quarter. As you know, we got our approvals towards the end of the quarter, last week or so in March. So the potential here for the COVID tests are more significant for us in the second quarter here. But our biggest motivation on the testing aspect here, the key driver here is we want to help people. We want to help people get tested. We want to help society move forward. We want to help workers get back to work, people get back to schools, et cetera. So when you look at the diagnostic platform, the suite of platforms and products that we have built over the last 20 years here, they've really been aimed at being able to do just that. So in mid-February, when we saw that the virus was not going to mimic what we had seen in maybe previous viruses, like a SARS or a MERS, for example, and we saw that this was going to be something much more significant, much more widespread, we assembled 4 different and independent R&D teams to go about it in individual groups. I mean there was obviously some collaboration between them, but we wanted them stand-alone going after 4 different types of tests: a molecular lab test, a molecular point-of-care test, a lab-based serology test, and a lateral flow serology test. And we did that not because we thought that we needed 4 shots on goal here to try and get 1 or 2 of them to get it. We understood, given our experience here, that all 4 of these tests, all 4 of these different types of testing would be needed. All 4 of them had a different value proposition. So if you look at the lab-based systems, they're more high throughput, get a lot of tests done. There's a little bit of a turnaround time there, 1, 2, 3 days, et cetera, but we knew we needed that kind of testing volume. We also knew that we needed fast, immediate -- more faster, immediate results, maybe with the notion of having some portability where you'd be able to take the test straight to testing people, not having to restrict them to having to go to a lab or a hospital. And we also knew that there was going to be a need for mass volume screening. So when we look at the assembly of these 4 different tests that we've been working on, that's the -- that was the goal: to understand that there's a viral progression that occurs where in the beginning, in the early stages, you need molecular testing to be able to diagnose if somebody has the virus. And as the degrees (sic) [ disease ] progresses and people start to build antibodies for that, you're going to need a different type of test and in different formats of the test. So I would say every single one of our programs here either met or beat their target dates. And there's probably 2 reasons for that: One of them is, I'd say, just a very passionate and committed scientific and manufacturing team here that really went 24/7. I mean 1 of our teams split in 2 so they could go 24 hours a day, 10 days a week to be able to continue the work and doing the work. So that's one key driver. And I'd say the other one here, and we've talked a bit about this, is a very collaborative, science-based approach of our work with the FDA. Throughout every step of our development process, we worked real time with the FDA, sharing with them our technology, sharing how are we going to do the clinical, sharing with them the results, taking input and feedback from them on a real-time basis. And I think the combination of those 2 factors really allowed us to do this, at least these 3 tests here in record time. And I think what you're seeing, at least what we see a lot is the reward of that. It's very rewarding to see the vision that we had about these different types of tests and different types of platforms being deployed to the way that we had thought and envision them to be and then to get feedback back. I mean the amount of stories that I've received from CEOs, from mayors, from governors about our rapid test and how we envisioned that test rollout to start off with frontline workers, whether it's an ICU nurse, an ER doctor so that they could be tested if they had -- thought that they had symptoms, they're going to have to be self-quarantined for 4 or 5 days until their lab test would come back. And now with a rapid test in 15 minutes, they would know whether they would need to get appropriate care or whether they could return to the front line. And that's been exactly how we envisioned that product to work, at least in our initial rollout. We also -- we're shipping a lot of m2000. I mean we have a lot of m2000s in the country, but we also began shipping them to some pretty difficult areas where the turnaround time that we had heard from mayors and governors was over 2 weeks. So now we can ship these boxes -- these lab boxes, and they can do close to 500 tests, 470 tests a day and get results in 24 hours. So the way we've developed these tests, the way we've put them out to the market, the way we've launched them, the way we've worked with the labs and the hospitals is exactly how we had envisioned this. Obviously, there's a lot of stories that I've, at least, been seeing recently about the difficulty to find the tests, et cetera. And what I would say there is we've done everything that we said we were going to do. We've delivered everything that we said we were going to deliver. Obviously, that is not enough. We still need to do more, and there's a need here to manufacture more tests. Scaling is important and we have -- to get these tests out, we use high-precision, high-automated manufacturing process. And some of those, we've been able to kind of utilize existing assets that we have to manufacture it. In other cases, it's not enough, and we need to buy more. We need to set up more. And that obviously takes some time here, but you have a committed, dedicated team here that's really doing 24/7 type of work. But on the ID NOW side, I mean, we made comment -- we made commitments to manufacture -- start manufacturing 50,000 tests per day starting April 1, and we're halfway through the month here already, and we've delivered exactly that. And every day, I get to see the manufacturing and the shipment output, and we haven't fallen behind that. And several days, we've beaten that number and able to get more tests out. And we've worked collaboratively with federal government, with state government, with governors, with mayors. We provide everybody daily reports on what we've made and where we've shipped the product. It's a collaborative process to be able to allocate the tests to the areas that -- or need it the most. As I said on ID NOW, our first phase was to roll this out to ensure that the frontline health care workers were tested and were protected. And as we start to ramp up manufacturing for ID NOW, as we'll start to implement those actions in the month of May, into June, we'll start to roll this out into a second phase where we'll start to be able to test more of the general population. And we started to work on some pilots here with CVS and other retailers here to say, okay, how can we get this system out of the hospital into more decentralized testing so we can test the general population, whether it's in urgent care clinics, nursing homes, retail settings, et cetera. So that's on target, on plan also. On the m2000, we made a commitment when we got approval to ship out 1 million tests during the month of March, and we did exactly that. On the IgG, we just announced yesterday. We talked about shipping 4 million tests, put a stake in the ground there. I got an update from my team. Yesterday, they already have orders for about 1/4 of that as of yesterday. So we're moving fast here. And we know that we need to play our role here in manufacturing and getting as most tests out as possible to this platform that we've developed. We've also been very clear about how we're selling the product. We sell the product from our warehouse right into our customers. We try to limit as much as we can the use of wholesalers and distributors. So that's worked very well. We're making weekly shipments so there's no hoarding, and we can get to as many people, as many customers as we can. And we're selling all of these tests at the same selling price that we were previously selling all of our other assays for these instruments. So the ID NOW COVID tests, we're selling at the same price that we sell our ID NOW flu test and the same for all of our other -- for our other assays and the other boxes. So we're working on our last platform here, which is our lateral flow serology test. This will allow us to scale up to numbers much more significant than some of these that I've talked about. This falls into our ability to kind of look at mass testing for the general population. They're on time right now, and we're almost there. So I would say we've got a promising Q2 ahead of us as it relates to testing. I'm not going to try here and forecast exactly how this is going to look like in Q2 right now. But it's clear that the demand for testing is big. It's not going to go away. And I think that the team here has aligned a portfolio of testing solutions that have a wide variety of different uses and will play a key role in ramping up testing. Robert Marcus: Appreciate the response. Very helpful. And maybe just one other bright spot in the portfolio is Libre. This is a nonprocedure-based recurring revenue product. You had great international numbers. The U.S. number looked a little lighter this quarter, kind of flat quarter-over-quarter. Maybe just help us understand the trends in that business and how sustainable that is as people are away from their endocrinologists? Robert Ford: Sure. As I said, if you look at our script data, if you want to look at the U.S. data, we had a very good quarter as it relates to kind of script. And beginning of the year, I talked about how we were deploying a lot of demand-generation strategies here, whether it was sales force expansions, direct-to-consumer advertising, et cetera. And you can see that those that follow the weekly Rx data, you can see that inflection point starting in the first couple of weeks of January here versus where we exited. So our scripts between Q1 of 2020 and Q4 of '19, the scripts actually grew 35% sequentially, obviously, over 100% if you look at it over year-over-year. So the sequential growth rate there that maybe you're referring to is really focused here on just kind of timing of sales and sales shipments in the quarter. I expect to see that shipment, selling mimic what we've been seeing in our Rx generation in the U.S. that you saw in the first quarter. And I think that speaks a lot to the value proposition of FreeStyle Libre. It is not only is it accessible, affordable, but it's easy to use, it's easy to start patients on the product. So I think that we've seen that play out here even within the situation that we saw with COVID in the U.S. And you're right in international business has done very, very well, growing at very high rates, and that's off a very, very large base. So I'm very pleased with the international business. I think there's more work to be done there for sure. We're starting to roll out the Libre 2 product in Europe and in the international markets a little bit more intentionally with that expansion. I think we showed some of our accuracy data on Libre 2 in the European conference beginning of this month, and I think that's going to help fuel a lot of our growth also in the international markets, too. Operator: Our next question comes from David Lewis from Morgan Stanley. David Lewis: Robert, just a couple of quick questions for me. I guess the first thing, just sort of thinking about recovery. You gave some comments on China. But I wonder where is China right now as a kind of a percent of prior normal. In the U.S., have you seen week over week, the business get softer. Has the U.S. sort of reached some stabilization at a trough? And then just more broadly, how are you thinking about sort of recovery kind of across the quarters this year? Any qualitative commentary would be helpful. And then I have a quick follow-up. Robert Ford: Sure. So just on your question on China, I mean, it's an important market for us, but we're not overly reliant on China. But let me put the -- let me put your general demand question here, I think, a little bit into context, and I'll kind of walk through what we saw in the quarter geographically and across the businesses and then talk a little bit about how we see the rest of the year going. But if you look at our business and break them out into 2 groups, I would say, more hospital-based demand generation businesses and then the second part, more consumer-based demand businesses, they're about 50-50 -- roughly 50-50 in size. And we don't tend to look at our businesses that way, David. But I think as we looked at coronavirus and started to look at our models, we started to look at this approach here by looking at hospital and consumer base. On the consumer-based side businesses, so you look at our EPD business, our Nutrition business, our Diabetes Care business, all of them performed in the quarter very, very well. They all performed in line with our trends, with our targets, with our aspirations, with the execution of our growth strategies. Obviously, the exception to that was some parts of our Nutrition business, where we did see pantry loading as a result of some of -- towards the end of March there, where we saw a lot of consumers try to stock up and get ready. But excluding that, all of them kind of performed well and on target. And obviously, there was increased demand for some of these products, and our supply chain was resilient, was able to fulfill them. So I see those businesses kind of going forward, performing at the same kind of trend, at the same rate that we have been seeing. Obviously, we might see a little bit of Nutrition in the second quarter, adjust a little bit. But overall, I see these businesses performing at the same kind of trend. If we look at the hospital-based businesses, so think about that as kind of the more core lab testing, our Cardiovascular portfolio, even to some extent, our Neuromodulation business, even though it's not hospitals, it's more ASC, we definitely saw a decrease in those procedures, in those elective procedures and in that routine testing. And even within those, you see some differentiation. So we didn't see our Heart Failure business get impacted that much because those are life-saving devices versus an EP ablation procedure that was more elective and could be pushed out. So -- but in general, I would say, testing and procedures, we saw that drop. We collect daily device implant data and we collect daily hospital diagnostic testing data. And we collect it on a global basis. So I think we've got a pretty robust set of information that we can look at here as we start to observe kind of the trends that we saw in the quarter. And as we shared, we're starting to see an improving trend here in China. It's not to the level that we saw in our normal levels, pre-COVID, say, December, January kind of rates. But they're definitely not as low as where they were in February. And we're starting to kind of see them every week, get better and better and getting closer to those levels that we saw pre-COVID. We've seen other markets around the world, whether that's Asia or some of the other European smaller markets there, where we've seen the beginning of the same kind of recovery trend that we saw in China. So starting to see some of the beginning of that recovery. And then in other markets, we're seeing kind of just this flattening and a stabilization here that's suggesting here that the speed of the virus is a little bit more controlled. So if I look at this data, and we've looked at it various different ways. We've run a lot of different forecast models and sensitivities here. There's a couple of things that I can see ahead of us here, right? The first one is Q2 will likely be our toughest quarter in the year, especially, I would say, for our core lab business and our cardio and neuro businesses. This will probably be our toughest quarter for those. And I think our consumer businesses will continue to perform at the trends and dynamics that I just explained. The second thing that we can see here based on our modeling, based on the data that we're seeing from -- that we're collecting on a daily basis is that we can see a recovery into Q3 and into Q4 especially for these more elective procedures. There are some that, yes, you can push out, but they are important. They are life-saving. They are solving some significant problems, whether it's a stent, a pacemaker, repairing a mitral valve. We will see those start to come back the same way that we started to see in some of the earlier markets that have kind of -- that they are further along in the recovery. I don't believe that they're going to come back at the same speed that they came down. But like I said, these are important procedures, and I do see them coming back. I've -- talking to a lot of health systems, a lot of CEOs from health systems, and they are -- they're already talking about how they are planning to start to work with some of those elective procedures. It will be a V-shape. I don't think it will be -- I think the right-hand side of that V-shape will be definitely a little less steeper than the left-hand side of that V-shape. But I think we're going to see that recovery in Q3 and Q4, at least that's what our data is suggesting. Clearly, it's quite possible that other industries might take longer to recover. But I think for health care, the data our modeling here suggests the kind of recovery that I've just described. And the third thing we can see here clearly is that testing is going to play a major role here at getting back to work, getting back to school, getting people back to factories, back to distribution centers, et cetera. And we know that this is a 24/7 type of work that our teams need to do to be able to kind of scale up. And I think that the sales ramp and potential, et cetera, is really going to be guided by our manufacturing ramp up and our ability to kind of deliver on that manufacturing ramp up. And I think that we've been batting at a very high average here based on the commitments that we've made. So when you look at all of that and you put all of this into context here, we have decided here to suspend our guidance. We're usually right here to the penny every quarter, and it's going to be -- right now, it's going to be very difficult to be able to get that right to the penny going forward. But I believe that we'll be in a position to give, I'd say, some more qualitative update sometime in the quarter. And depending on how that goes, we might be able to -- be able to give guidance in the second half here. So I've looked at the consensus that's been put out there. I mean we beat the revised consensus across our business. I'll leave the consensus where it is right now, given that it is a pretty fluid situation. But I think we could do better. But there's just too much it depends on right now for us. So we're going to keep on focusing on what we're doing, and sometime throughout the quarter here, if we feel that we're in a better position to be able to give some more qualitative assessment and guidance, we'll do that. David Lewis: Okay. That's actually very specific, probably more than I hoped for. And then in terms of the second question, just you've probably been less active on growth-oriented M&A these last couple of years than some of your peers, but you're going to emerge from this pandemic crisis with probably the strongest balance sheet in large-cap device. So how are we thinking about your interest in -- buybacks, I imagine, are less of your focus, but your interest in opportunistic M&A here coming out of this crisis? Robert Ford: Sure. Listen, I'd say right now, we've done a lot of work on our balance sheet over the last couple of years. We've talked a lot about the work we've done to improve our leverage ratios, the work that the organization has done to improve our cash conversion cycle. So yes, our financial strength here is very strong. As Bob talked about, we've got a strong cash position here towards the end of the quarter, close to $4 billion. We have access to credit facilities. And we've got businesses that are strong cash flow generators, and that's going to be important as we go forward. We don't have a lot of debt maturing or coming due here in the next couple of years. So I don't foresee our capital allocation strategy here to kind of really change at this point. Where -- we have a strong dividend, we pay a strong dividend, and we're going to continue to do that. That's an important part of our identity. We haven't done a lot of share repurchases historically. Most of the time when we do that, it's really just to try and offset some of the dilution. I think Bob and the finance team, I would say, is definitely looking at our CapEx and our CapEx spending. I don't -- we'll probably see some slowdown a little bit in that. And the team -- I know Bob is kind of working on that. We'll see how that's going to look like but that will just be a factor of getting the work done. And right now, there are some of our projects that require people to be building sites, et cetera. So we'll continue to focus on that. We'll continue to build our capacity expansions that we've talked about in the past. But we'll probably see some phasing a little bit over there. And on your question on M&A, I mean, I'm not really looking at anything. As we talked about it, there's an opportunistic side to it and then there's a strategic side to it. And on the strategic side, I just don't see anything right now that fits what we want to do and where we want to go. And quite frankly, our execution here -- again, going back and maybe this sounds a little bit broken record here, but we've just got so many opportunities in our existing portfolio to keep on focusing on, and now you layer on top of that the opportunity we have on our testing platforms. So our big focus here is on internal execution. Operator: Our next question comes from Bob Hopkins from Bank of America. Robert Hopkins: Just a couple of quick questions. First, I wanted to kind of circle back to testing, specifically regarding the 2 COVID-19 tests that are being run, on ID NOW and m2000. I just wanted to be super clear on where you are today in terms of shipping capacity. Is it that 5 million per month that you talked about? And also, can you give us a sense as we look forward, given the critical importance of these tests, kind of where you'll be, say, maybe midyear in terms of testing and shipping capacity? Robert Ford: Sure. On the testing side, I mean, we talked about achieving a manufacturing ramp up here as we come out of the gates with the ID NOW platform at about 1.5 million tests, and we're on target to do that definitely throughout the middle of this month here. And we're making improvements in the manufacturing process and adding more shifts, et cetera, to be able to expand that to get to 2 million tests by June. And that's what we've talked about. And right now, we're on plan, on target to be able to kind of deliver on that expansion. Obviously, we need more than 2 million of the ID NOW tests, so we're looking at how we can ramp up. As I explained in the beginning, on the first question, these manufacturing processes are highly precise, highly automated, so that we can get the performance and reliability of the product. So these involve making -- setting up manufacturing lines and you don't do those in a week or 2 weeks. So there's a lot of work going on there, but we know we need to -- we know that there's a need for more ID NOW tests. And on the m2000, we made the commitment here to ship 1 million tests in the month of March, which we did. We talked about shipping 4 million tests in the month of April, and we're on target to do that, to manufacture 4 million tests, and we're on target to do that. We've moved the team along to find ways that we can expand that, and the teams are working on that also. So I'd say right now, that 5 million tests mark on those 2 tests is where we're at. And as we make progress with our manufacturing ramp-ups, we will be clear about what the market can expect from. Robert Hopkins: Great. And then one follow-up on the same sort of topic. Congratulations on the new serology test that you just announced. I was wondering if you could talk a little bit about sensitivity and specificity data relating to that test. And whether you think the high levels that have been quoted are kind of sustainable when you think about general population testing? Robert Ford: Yes, to answer your question on the accuracy. Right now, the label we have is, if you do the test 14 days post symptoms, the sensitivity of the test is 100% and the specificity of that test is 99.5%, and that's over 1,000 samples. So I think we've got a very, very accurate, reliable test here to be able to work on. Obviously, if you try and do this test 5 days after you've been exposed to the virus, your body hasn't produced enough antibodies to be able to be detected at a reliable, accurate level. So that's why when I talked about how we've set up our tests, the forms, the different form factors, that the use of the antibody test is more to look towards a couple of weeks after somebody has been exposed. Have they built enough antibodies that they've defeated the virus? So that's the data. Operator: And our next question comes from Vijay Kumar from Evercore. Vijay Kumar: Congratulations, guys. Two questions for me. So one, maybe on the near term. I guess when you think about the serology test and applicability to opening up the economy, there are some issues around prevalence rates and false positives and is this now paving the way for a second wave of infection. So maybe address that? I mean how these tests could be deployed perhaps in helping us open up the economy? And one other -- when you think about your employees getting back to work, what signs are you looking for to completely open up workforce and let employees back? Robert Ford: Sure. I mean as I said, we have to look at the suite of tests as not -- one test is not the panacea. You need to look at the comprehensive suite of testing and deploy them in the right ways over here. As I said, I think the serology test here is very reliable as we roll this out for the antibodies. We're working on an IgG -- on an IgM antibody test also. Obviously, as companies are thinking about coming back to work, the way we're looking at this a little bit is, okay, we know that there's going to be a little bit different -- work a little bit differently the way we've historically been working. So maybe not a lot of big kind of meetings. 20 people, 30 people in the meeting rooms will probably be a little bit different than that. I think we'll see people wearing masks. I think we'll see more cleaning of door knobs and elevator buttons and all of that. And I think that's ongoing right now. I think there are a lot of companies that are doing this right now, and that seems to be working. So if you now add on to all of those protocols kind of the lateral flow test here that's got a very strong sensitivity, reliability, et cetera, and you add that on and you can test at companies using an occupational health team, et cetera, that will be an additional layer of security, of testing that will be on top of like thermometers and everything I just described also. So I think it's going to be an important tool. And I think that we've talked about this a lot in terms of microclimates. We try to think about everybody coming back at once, and then you use all this data that you just referenced, prevalence and sensitivity and specificity, and you try and look at that at very large populations. We need to think about it more in terms of like a factory, an office building, a school. And then running these tests will allow you to -- on top of what you are doing, provide another tool to be able to assist companies and schools, et cetera, get people back to work. So I think that's how, at least, we're looking at it, and I think how I've heard other companies looking at how to reopen, how to get back. Vijay Kumar: Yes, that's helpful. And then maybe one -- so a bigger picture question or maybe this is more -- help us understand on how we should be thinking about the future. Because when I look at 2021, and obviously, I'm not asking for guidance. We know '20 was impacted. But what is the right base to be looking at procedure volumes, right? When you look at the underlying rate of incidence and prevalence pool for disease states, those really haven't changed. So if we don't have a, knock wood, a second wave of infection coming in or next year being impacted, should we be looking at procedure volumes in '19 as the base, the right base to build off? Or should we be -- there are some issues on hospital capacity constraints. And should we be looking at the depressed 2020 procedure numbers as the right base to looking at how those numbers could track -- trend next year? Robert Ford: Well, I can appreciate you trying to figure out 2021 already, Vijay, but listen, I think it's pretty tough right now for us to figure out how exactly Q2 is going to look like, let alone next year. But I think you raised some of the unknowns here that really make it difficult to predict how fast the economy recovers, how fast hospitals return to normalcy, how does our testing platform and how's the testing environment evolved. Listen, we're all hoping for a fast recovery here, but if it takes longer, we'll have strong demand for testing. And that will continue to help buffer the impact. I do think there's a lot of pent-up demand here on cardiovascular devices and diagnostics. And I think hospitals are figuring out how they're going to get back to work. I think there's a lot of patients that are in need of care. And I think that -- I can't -- I don't know if we can predict exactly when it's going to come back. But I do think that when it does come back, I think you'll see these device procedures, which are extremely important -- as truly important in the care continuum, et cetera, that we will see them come back. So that's probably my best answer for you is I believe that we'll see a recovery towards the second half of this year in these elective procedures. And you can kind of try and model out what kind of V-shape is it. Is it -- does it look more like an L? Does it look more like a V? Is it something in between, et cetera? But I think that's how, at least, we're looking at the rest of this year. Operator: Our next question comes from Matt Taylor with UBS. Matthew Taylor: So first question, I just wanted to follow-up on the testing since it's so important and certainly commend the team for their efforts in getting those out so quickly. So it's 2 part. One is, you mentioned in the earlier remarks that there's been a lot of commentary about difficulty in the testing market. It's not only due to kits, but folks have mentioned swabs and reagents and other things like that. I was just wondering from your perspective -- I'm sure you're getting a lot of feedback on this. What do you think is the biggest challenge out there in terms of getting access to testing now? And how do you see that improving over the next weeks and months? And then on -- yes, go ahead, sorry. Robert Ford: No. So on the question there of testing and testing supplies and shortages there, I mean I think when you look at kind of what we've done, I mean, we've made sure, obviously, that when we ship out our test, they have everything they need to test, whether it's controls, calibrators, whether it's swabs and ID NOW, those come together here. So from Abbott's perspective, we're trying to make sure that they have everything that they need. I do think that some of the challenges you have is potentially workflow. At least for us, we've got our m2000s. They're in regional hospitals, regional labs, which is a good thing because you can now have not only your big central labs doing a lot of centralization, but then you can use the regional network to be able to get to test. And I just think it's a workflow process here, how to get the samples. I think a lot of hospitals might not want to be doing a lot of mass testing into the hospital. So how do you collect the samples? And then how you bring them into the hospital? And then how do you get them out? So I think that's probably one of the bigger challenges. And I think that the team, whether it's on the federal government side and also with a lot of governors, are figuring this out. And they're sharing how they're doing it and sharing best practices. And at least on our side, we're starting to see a ramp-up here on the m2000. But there's obviously more that they can do. Matthew Taylor: Okay. And then one follow-up on that. I think on Bob's question, you commented on the accuracy of the serology test, which is high. Could you comment on the accuracy of the other tests, your confidence in them with smaller samples that you had to get out quickly and the relative importance of the 2 serology tests in determining who's had the virus and who has immunity? Robert Ford: Yes, sure. So on the molecular test, listen, molecular test is the gold standard for accuracy. RNA testing, testing viral load, et cetera, is the gold standard. And if you look at how we did the test, obviously, it's -- it was worked in conjunction with the FDA, using a testing model that was provided by the FDA. The tests are performed at 100% of the expected outcomes in the samples for both negative and positive results. So I think the ID NOW system is very reliable. The other, m2000, we use levels of detection. And I mean, you can go through levels of detection labels, and you could see the accuracy and reliability of the m2000 versus the other systems that have been approved also. So -- and as I said, the use of the antibody test is just going to be an important tool in conjunction with kind of molecular testing to be able to screen, test and manage the population. So we'll see how that's going to kind of roll out, and it will follow kind of the vision that we've kind of thought of, having both a lab-based system and a lateral flow-based system. Operator: And our final question comes from Larry Biegelsen from Wells Fargo. Larry Biegelsen: Robert, let me just ask one multipart device question. On 2 milestones we're waiting for, the MitraClip FMR, NCD, any update there? And of course, Libre 2, any update on the status there? Just lastly, any other time lines in devices that could be impacted by coronavirus would be helpful. Robert Ford: Sure, Larry. I was waiting for the Libre question. Let me answer your CMS question over here on secondary MR. As you as you'd expect under these circumstances here, CMS has delayed the issuance of the proposed NCD. We were previously expecting that to be mid-February. But given the current circumstances, the delay here isn't really having an impact on our business. I'm confident in the process. I'm confident that we've been working with them and the different societies over here. And this will move forward on the appropriate time. On Libre 2, I guess I sound like a broken record here, Larry, but what I'll say is, I'm very confident in the product the same way that I've been saying. I'm confident. I mean I think some of you might have seen the accuracy data that we published at the European conference beginning of February. So I'm very encouraged about resolving these -- some of these kind of open items here in the near future with the FDA. We're just working through some finishing items. So -- but like I said, that's not holding back Libre or Libre's growth here. So more to come. Larry Biegelsen: Yes. Anything else though that we should be aware of that could be impacted on the device side from a time line standpoint? Robert Ford: Yes, there's been some discussion on clinical trial and clinical trial regulatory time lines here. Our near-term forecast here wasn't really overly reliant on kind of any patient enrollment end points. There's obviously been some delays in some of the enrollment, and as we've seen a kind of mandate here to pause some of these procedures here. So -- but I think once this is over, for the ongoing trials that have kind of longer time lines here, we'll look at opportunities that we'll have to accelerate enrollment and make up for some time here. So let me just say here then, closing here. I think we had a pretty unusual quarter here for us. I think you saw the strength of our diversified business model come through here in true strength. Some parts of the business, we did have some challenges, as I've described. Other parts of the business have been pretty stable, and I think they'll continue to be pretty stable. And then there are others that are performing at very high levels. And I think we'll start to see on the testing side, how fast we can ramp up. The team here has done an amazing job around the world, not only to develop the test, but also the manufacturing, the supply chain teams across the world, across our network have done an incredible job. I think our -- I said our financial strength here is pretty strong. I think we had that question here, and we'll continue to look at ways to improve on that. And as I said, we believe that there is a recovery, and we'll start to see that, I believe, in the Q3, Q4 time frame. I think health care is a little bit different than you might expect from maybe other industries. So once we get better -- a better sense of how that's going to look like towards the second half of the year, we'll definitely be updating and providing some more qualitative updates on that. So okay. Scott Leinenweber: Good. All right. Well, thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11 a.m. Central time today, on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today. Operator: Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day.	[ { "speaker": "Operator", "text": "Good morning and thank you for standing by. Welcome to Abbott's First Quarter 2020 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participants' questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's express written permission." }, { "speaker": "Scott Leinenweber", "text": "Good morning, and thank you for joining us. With me today are Robert Ford, President and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions." }, { "speaker": "Robert Ford", "text": "Thanks, Scott. Good morning, everyone, and thank you for joining us. As everyone here knows, we haven't seen a quarter or any time quite like this before. This global environment is unprecedented in our lifetimes. Before we get into the details of the quarter, I want to take a moment to thank our employees, our customers and our suppliers, all of whom are making extraordinary efforts to keep systems working and to maintain supply of our critically important products for the people who need them." }, { "speaker": "This moment has strongly underscored 2 fundamental things to me. The first is the biggest and most important, and that's the essential nature of health and health care. Times like these make very clear what truly matters the most. The second, to bring it closer to home, has to do with the nature of Abbott. We've been in the business of improving people's health through medical innovation for more than 130 years, and it's in moments like these that the importance of our mission becomes even more critical", "text": "delivering for the people that depend on us." }, { "speaker": "I've been extremely impressed, though, not at all surprised, by the way my colleagues around the world have stepped up to this moment. As you know, we've quickly developed and launched 3 diagnostic tests for COVID-19", "text": "2 for the laboratory setting and 1 for rapid point-of-care testing. At the same time, our teams in every business and around the world have been making extraordinary efforts to keep our operations running and our supply chains moving and to undertake the thousands of processes to make our vital products and get them to the people who need them. And we're also donating both funding and products to support frontline health care workers, families and communities to meet the challenges of this pandemic. I think this speaks to a well-known attribute of Abbott's culture: We're execution-oriented, and we could be relied on to deliver when it matters the most because we know how important our work is, that lives depend on us, and we take that very seriously." }, { "speaker": "Before I wrap up, I'd like to take a moment to discuss our ongoing efforts in the area of diagnostic testing for COVID-19. Abbott has long been a global leader in infectious disease testing, so leading in this area is a role we can and should play. In late March, we launched 2 molecular diagnostic tests to detect COVID-19", "text": "one for our ID NOW rapid point-of-care platform; and one for our m2000 laboratory platform. Over the past few weeks, we've been actively working with government authorities and health systems to deploy these tests to places of greatest need. And just yesterday, we announced the launch of a lab-based serology test for the detection of the antibody IgG. While molecular testing detects whether someone currently has the virus, antibody tests determine if someone was previously infected. We already began shipping these antibody tests and intend to ship 4 million tests in April and ramping up capacity to 20 million tests per month in June and beyond." }, { "speaker": "Robert Funck", "text": "Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which is consistent with our previous guidance." }, { "speaker": "Operator", "text": "[Operator Instructions] And our first question comes from Robbie Marcus with JPMorgan." }, { "speaker": "Robert Marcus", "text": "And congrats on a good quarter, all things considered. Maybe I can start with the 2 positives in the portfolio here. I'll ask them separately. First, on diagnostics. Abbott's leading the way. You have 3 different tests: the ID NOW molecular tests, the m2000 SARS-COVID-19 test and then the antibody test, which was just announced. I know a lot of people are interested in the potential of all 3 of these tests here. So I was wondering if you could give us an overview of where you are with the testing, the potential revenue implications and volumes that you'll have. And any other tests that we should be on the lookout for on the horizon here?" }, { "speaker": "Robert Ford", "text": "Sure, Robbie. So yes, it was definitely an intense first quarter here for our Diagnostic business, even though it doesn't look like that in the sales number, right? We've got a core lab business that had some declines and it -- given the similar dynamics that we saw in our cardiovascular procedures as the hospitalization and procedures kind of came down. And then on the other side of the business, we have our rapid and molecular business where we did see positive growth in the quarter. And we actually didn't have a lot of COVID test sales for those businesses in the quarter. As you know, we got our approvals towards the end of the quarter, last week or so in March. So the potential here for the COVID tests are more significant for us in the second quarter here." }, { "speaker": "So in mid-February, when we saw that the virus was not going to mimic what we had seen in maybe previous viruses, like a SARS or a MERS, for example, and we saw that this was going to be something much more significant, much more widespread, we assembled 4 different and independent R&D teams to go about it in individual groups. I mean there was obviously some collaboration between them, but we wanted them stand-alone going after 4 different types of tests", "text": "a molecular lab test, a molecular point-of-care test, a lab-based serology test, and a lateral flow serology test. And we did that not because we thought that we needed 4 shots on goal here to try and get 1 or 2 of them to get it. We understood, given our experience here, that all 4 of these tests, all 4 of these different types of testing would be needed. All 4 of them had a different value proposition. So if you look at the lab-based systems, they're more high throughput, get a lot of tests done. There's a little bit of a turnaround time there, 1, 2, 3 days, et cetera, but we knew we needed that kind of testing volume. We also knew that we needed fast, immediate -- more faster, immediate results, maybe with the notion of having some portability where you'd be able to take the test straight to testing people, not having to restrict them to having to go to a lab or a hospital. And we also knew that there was going to be a need for mass volume screening. So when we look at the assembly of these 4 different tests that we've been working on, that's the -- that was the goal: to understand that there's a viral progression that occurs where in the beginning, in the early stages, you need molecular testing to be able to diagnose if somebody has the virus. And as the degrees (sic) [ disease ] progresses and people start to build antibodies for that, you're going to need a different type of test and in different formats of the test." }, { "speaker": "So I would say every single one of our programs here either met or beat their target dates. And there's probably 2 reasons for that", "text": "One of them is, I'd say, just a very passionate and committed scientific and manufacturing team here that really went 24/7. I mean 1 of our teams split in 2 so they could go 24 hours a day, 10 days a week to be able to continue the work and doing the work. So that's one key driver." }, { "speaker": "Robert Marcus", "text": "Appreciate the response. Very helpful. And maybe just one other bright spot in the portfolio is Libre. This is a nonprocedure-based recurring revenue product. You had great international numbers. The U.S. number looked a little lighter this quarter, kind of flat quarter-over-quarter. Maybe just help us understand the trends in that business and how sustainable that is as people are away from their endocrinologists?" }, { "speaker": "Robert Ford", "text": "Sure. As I said, if you look at our script data, if you want to look at the U.S. data, we had a very good quarter as it relates to kind of script. And beginning of the year, I talked about how we were deploying a lot of demand-generation strategies here, whether it was sales force expansions, direct-to-consumer advertising, et cetera. And you can see that those that follow the weekly Rx data, you can see that inflection point starting in the first couple of weeks of January here versus where we exited." }, { "speaker": "Operator", "text": "Our next question comes from David Lewis from Morgan Stanley." }, { "speaker": "David Lewis", "text": "Robert, just a couple of quick questions for me. I guess the first thing, just sort of thinking about recovery. You gave some comments on China. But I wonder where is China right now as a kind of a percent of prior normal. In the U.S., have you seen week over week, the business get softer. Has the U.S. sort of reached some stabilization at a trough? And then just more broadly, how are you thinking about sort of recovery kind of across the quarters this year? Any qualitative commentary would be helpful. And then I have a quick follow-up." }, { "speaker": "Robert Ford", "text": "Sure. So just on your question on China, I mean, it's an important market for us, but we're not overly reliant on China. But let me put the -- let me put your general demand question here, I think, a little bit into context, and I'll kind of walk through what we saw in the quarter geographically and across the businesses and then talk a little bit about how we see the rest of the year going." }, { "speaker": "David Lewis", "text": "Okay. That's actually very specific, probably more than I hoped for. And then in terms of the second question, just you've probably been less active on growth-oriented M&A these last couple of years than some of your peers, but you're going to emerge from this pandemic crisis with probably the strongest balance sheet in large-cap device. So how are we thinking about your interest in -- buybacks, I imagine, are less of your focus, but your interest in opportunistic M&A here coming out of this crisis?" }, { "speaker": "Robert Ford", "text": "Sure. Listen, I'd say right now, we've done a lot of work on our balance sheet over the last couple of years. We've talked a lot about the work we've done to improve our leverage ratios, the work that the organization has done to improve our cash conversion cycle. So yes, our financial strength here is very strong." }, { "speaker": "Operator", "text": "Our next question comes from Bob Hopkins from Bank of America." }, { "speaker": "Robert Hopkins", "text": "Just a couple of quick questions. First, I wanted to kind of circle back to testing, specifically regarding the 2 COVID-19 tests that are being run, on ID NOW and m2000. I just wanted to be super clear on where you are today in terms of shipping capacity. Is it that 5 million per month that you talked about? And also, can you give us a sense as we look forward, given the critical importance of these tests, kind of where you'll be, say, maybe midyear in terms of testing and shipping capacity?" }, { "speaker": "Robert Ford", "text": "Sure. On the testing side, I mean, we talked about achieving a manufacturing ramp up here as we come out of the gates with the ID NOW platform at about 1.5 million tests, and we're on target to do that definitely throughout the middle of this month here. And we're making improvements in the manufacturing process and adding more shifts, et cetera, to be able to expand that to get to 2 million tests by June. And that's what we've talked about. And right now, we're on plan, on target to be able to kind of deliver on that expansion." }, { "speaker": "Robert Hopkins", "text": "Great. And then one follow-up on the same sort of topic. Congratulations on the new serology test that you just announced. I was wondering if you could talk a little bit about sensitivity and specificity data relating to that test. And whether you think the high levels that have been quoted are kind of sustainable when you think about general population testing?" }, { "speaker": "Robert Ford", "text": "Yes, to answer your question on the accuracy. Right now, the label we have is, if you do the test 14 days post symptoms, the sensitivity of the test is 100% and the specificity of that test is 99.5%, and that's over 1,000 samples. So I think we've got a very, very accurate, reliable test here to be able to work on. Obviously, if you try and do this test 5 days after you've been exposed to the virus, your body hasn't produced enough antibodies to be able to be detected at a reliable, accurate level. So that's why when I talked about how we've set up our tests, the forms, the different form factors, that the use of the antibody test is more to look towards a couple of weeks after somebody has been exposed. Have they built enough antibodies that they've defeated the virus? So that's the data." }, { "speaker": "Operator", "text": "And our next question comes from Vijay Kumar from Evercore." }, { "speaker": "Vijay Kumar", "text": "Congratulations, guys. Two questions for me. So one, maybe on the near term. I guess when you think about the serology test and applicability to opening up the economy, there are some issues around prevalence rates and false positives and is this now paving the way for a second wave of infection. So maybe address that? I mean how these tests could be deployed perhaps in helping us open up the economy? And one other -- when you think about your employees getting back to work, what signs are you looking for to completely open up workforce and let employees back?" }, { "speaker": "Robert Ford", "text": "Sure. I mean as I said, we have to look at the suite of tests as not -- one test is not the panacea. You need to look at the comprehensive suite of testing and deploy them in the right ways over here. As I said, I think the serology test here is very reliable as we roll this out for the antibodies. We're working on an IgG -- on an IgM antibody test also." }, { "speaker": "Vijay Kumar", "text": "Yes, that's helpful. And then maybe one -- so a bigger picture question or maybe this is more -- help us understand on how we should be thinking about the future. Because when I look at 2021, and obviously, I'm not asking for guidance. We know '20 was impacted. But what is the right base to be looking at procedure volumes, right? When you look at the underlying rate of incidence and prevalence pool for disease states, those really haven't changed. So if we don't have a, knock wood, a second wave of infection coming in or next year being impacted, should we be looking at procedure volumes in '19 as the base, the right base to build off? Or should we be -- there are some issues on hospital capacity constraints. And should we be looking at the depressed 2020 procedure numbers as the right base to looking at how those numbers could track -- trend next year?" }, { "speaker": "Robert Ford", "text": "Well, I can appreciate you trying to figure out 2021 already, Vijay, but listen, I think it's pretty tough right now for us to figure out how exactly Q2 is going to look like, let alone next year. But I think you raised some of the unknowns here that really make it difficult to predict how fast the economy recovers, how fast hospitals return to normalcy, how does our testing platform and how's the testing environment evolved." }, { "speaker": "Operator", "text": "Our next question comes from Matt Taylor with UBS." }, { "speaker": "Matthew Taylor", "text": "So first question, I just wanted to follow-up on the testing since it's so important and certainly commend the team for their efforts in getting those out so quickly. So it's 2 part. One is, you mentioned in the earlier remarks that there's been a lot of commentary about difficulty in the testing market. It's not only due to kits, but folks have mentioned swabs and reagents and other things like that. I was just wondering from your perspective -- I'm sure you're getting a lot of feedback on this. What do you think is the biggest challenge out there in terms of getting access to testing now? And how do you see that improving over the next weeks and months? And then on -- yes, go ahead, sorry." }, { "speaker": "Robert Ford", "text": "No. So on the question there of testing and testing supplies and shortages there, I mean I think when you look at kind of what we've done, I mean, we've made sure, obviously, that when we ship out our test, they have everything they need to test, whether it's controls, calibrators, whether it's swabs and ID NOW, those come together here. So from Abbott's perspective, we're trying to make sure that they have everything that they need." }, { "speaker": "Matthew Taylor", "text": "Okay. And then one follow-up on that. I think on Bob's question, you commented on the accuracy of the serology test, which is high. Could you comment on the accuracy of the other tests, your confidence in them with smaller samples that you had to get out quickly and the relative importance of the 2 serology tests in determining who's had the virus and who has immunity?" }, { "speaker": "Robert Ford", "text": "Yes, sure. So on the molecular test, listen, molecular test is the gold standard for accuracy. RNA testing, testing viral load, et cetera, is the gold standard. And if you look at how we did the test, obviously, it's -- it was worked in conjunction with the FDA, using a testing model that was provided by the FDA. The tests are performed at 100% of the expected outcomes in the samples for both negative and positive results. So I think the ID NOW system is very reliable." }, { "speaker": "Operator", "text": "And our final question comes from Larry Biegelsen from Wells Fargo." }, { "speaker": "Larry Biegelsen", "text": "Robert, let me just ask one multipart device question. On 2 milestones we're waiting for, the MitraClip FMR, NCD, any update there? And of course, Libre 2, any update on the status there? Just lastly, any other time lines in devices that could be impacted by coronavirus would be helpful." }, { "speaker": "Robert Ford", "text": "Sure, Larry. I was waiting for the Libre question. Let me answer your CMS question over here on secondary MR. As you as you'd expect under these circumstances here, CMS has delayed the issuance of the proposed NCD. We were previously expecting that to be mid-February. But given the current circumstances, the delay here isn't really having an impact on our business. I'm confident in the process. I'm confident that we've been working with them and the different societies over here. And this will move forward on the appropriate time." }, { "speaker": "Larry Biegelsen", "text": "Yes. Anything else though that we should be aware of that could be impacted on the device side from a time line standpoint?" }, { "speaker": "Robert Ford", "text": "Yes, there's been some discussion on clinical trial and clinical trial regulatory time lines here. Our near-term forecast here wasn't really overly reliant on kind of any patient enrollment end points. There's obviously been some delays in some of the enrollment, and as we've seen a kind of mandate here to pause some of these procedures here. So -- but I think once this is over, for the ongoing trials that have kind of longer time lines here, we'll look at opportunities that we'll have to accelerate enrollment and make up for some time here." }, { "speaker": "Scott Leinenweber", "text": "Good. All right. Well, thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11 a.m. Central time today, on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today." }, { "speaker": "Operator", "text": "Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. You may all disconnect. Everyone, have a wonderful day." } ]	Abbott Laboratories	247,483
ABT	4	2,021	2022-01-25 23:00:00	Operator: Good morning and thank you for standing by. Welcome to Abbott's Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant's questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's express written permission. I would now like to introduce Mr. Scott Leinenweber, Vice President, Investor Relations, Licensing and Acquisitions. Scott Leinenweber: Good morning and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we will take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2022. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A Risk Factors to our annual report on Form 10-K for the year ended December 31, 2020. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which excludes the impact of foreign exchange. With that, I will now turn the call over to Robert. Robert Ford: Thanks, Scott, and good morning, everyone, and thank you for joining us. Today, we reported another strong quarter and highly successful year for Abbott. For the year, we reported organic sales growth of 23% and ongoing earnings per share of $5.21, which reflects more than 40% growth compared to the prior year and exceeded the original EPS guidance we set last January. These last couple of years have truly been unique on many levels. The challenge throughout the pandemic has been the sheer breadth of its impacts. And for Abbott, it's reinforced the value of our diversified business model, which is uniquely balanced across multiple dimensions, including our business mix, customer and payer types, innovation cycles across our businesses and geographic footprint. We've always said that our business model allows us more opportunities to win during the good times and makes us more resilient during the tough times, and never has this been put to the test more so than over the past couple of years. It's been tested by a major global pandemic and has proven to be highly resilient, delivering strong growth and returns for our shareholders. COVID testing has been a big part of this, of course. We delivered 1 billion tests last year and approximately $300 million in the fourth quarter alone and continue to play a significant role in the world's response to the pandemic. But just as importantly, we demonstrated Abbott's strength across our company, delivering strong growth across our businesses while continuing to expand our portfolio with innovations that will fuel our success for years to come regardless of the pandemic situation. Turning to our outlook for 2022. As we announced this morning, we forecast ongoing earnings per share of at least $4.70, which reflects nearly 50% growth compared to our prepandemic baseline in 2019. We forecast organic sales growth for our base business, excluding COVID tests, in the high single digits, and our guidance includes an initial COVID testing sales forecast of $2.5 billion. We're seeing very strong demand for testing to start the year with the recent emergence of the Omicron variant. And as you know, forecasting COVID testing demand for more than a few months at a time has been challenging. Therefore, our initial forecast compromises sales that we expect to occur in the early part of the year. And we'll update this forecast 1 quarter at a time over the remainder of the year. I'll now provide more details on our 2021 results before turning the call over to Bob. And I'll start with Nutrition, where sales grew nearly 6% in the fourth quarter and over 7.5% for the year. Adult Nutrition delivered 9% growth for the quarter and double-digit growth for the year, led once again by Ensure, our market-leading complete and balanced nutrition brand; and Glucerna, our leading diabetes nutrition brand. In Pediatric Nutrition, U.S. sales growth of more than 10% for the year was led by strong growth of Pedialyte, our oral rehydration brand; and market share gains for Similac, our market-leading infant formula brand. During the past year, we continued to expand our Nutrition portfolio with several new product and line extensions, including the launch of Similac 360 Total Care in the U.S. and continued global expansion of our PediaSure, Glucerna and Ensure brands with line extensions such as plant-based, lower-sugar and high-protein products. Turning to Medical Devices, where continued recovery from the impacts of the pandemic and strong growth in Diabetes Care drove sales growth of 16% in the quarter and nearly 20% for the year. In Diabetes Care, sales growth of nearly 30% for both the fourth quarter and full year was led by FreeStyle Libre, our market-leading continuous glucose monitoring system. Rebased Libre sales grew over 35%, which translates to year-over-year growth of $1 billion to a total of $3.7 billion in 2021. This past year, we continued to strengthen our Medical Device portfolio with several pipeline advancements and launches. In the U.S., expanded Medicare reimbursement coverage for MitraClip will make it possible for more people to benefit from this life-changing technology. We launched NeuroSphere Virtual Clinic, a first-of-its-kind technology that lets patients communicate with physicians and receive new treatment settings remotely. We received U.S. FDA approval for our Amplatzer Amulet heart device, which treats people with atrial fibrillation who are at risk of ischemic stroke. And we received U.S. FDA approval of our Portico heart valve replacement system for people with severe aortic stenosis; and CE Mark for Navitor, our latest-generation transcatheter aortic valve replacement system. Moving to Established Pharmaceuticals, or EPD, where sales increased nearly 6% in the fourth quarter and over 10% for the full year. Strong performance was broad based across several countries, led by India, Russia and China. EPD has performed well throughout the pandemic, fueled by strong execution and a steady flow of new product introductions in our core therapeutic areas. And I'll wrap up with Diagnostics, where COVID testing was a big part of the story but far from all of it. COVID testing sales were $2.3 billion in the fourth quarter with rapid testing platforms, including BinaxNOW in the U.S., Panbio internationally and ID NOW globally, compromising approximately 90% of those sales. Demand for testing continues to remain strong, and we remain committed to help ensure broad access. Since the start of the pandemic, we've invested significantly to build both U.S. and international manufacturing supply chains, and we're working to expand our capacity further to meet global demand. Excluding COVID testing sales, worldwide Diagnostics sales grew over 8% in the fourth quarter and 13% for the year. We continue to roll out Alinity, our innovative suite of diagnostic instruments, and expand test menus across our platforms. During the year, we placed more than 3,000 Alinity instruments for immunoassay and clinical chemistry testing, with approximately 2/3 of those placements coming from share capture. And in Molecular Diagnostics, excluding COVID testing, sales grew double digits in both U.S. and internationally as we continue the rollout of our Alinity m instrument for molecular testing. So in summary, 2021 was another highly successful year for Abbott. We continue to play a vital role in combating COVID-19 as a result of our massive scale we've built in rapid testing capacity. All 4 of our major businesses delivered strong performance this past year and are well positioned for continued success going forward. And we continue to strengthen our overall strategic position with a steady cadence of important new products from our pipeline in several attractive growth areas. I'll now turn over the call to Bob. Bob? Robert Funck: Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which excludes the impact of foreign exchange. Turning to our results. Sales for the fourth quarter increased 7.7% on an organic basis, which was led by strong performance across all of our businesses, along with global COVID testing-related sales of $2.3 billion in the quarter. Excluding COVID testing sales, organic sales growth was 10.3% versus the fourth quarter of 2020 and 10.8% compared to our prepandemic baseline in the fourth quarter of 2019. Foreign exchange had an unfavorable year-over-year impact of 0.5% on fourth quarter sales, resulting in total reported sales growth of 7.2% in the quarter. Regarding other aspects of the P&L for the quarter, the adjusted gross margin ratio was 57.7% of sales, adjusted R&D investment was 6.3% of sales, and adjusted SG&A expense was 26.2% of sales. Our fourth quarter adjusted tax rate was 16.9%, which reflects an adjustment to align our tax rate for the first 3 quarters of last year with our revised full year effective tax rate of 15.5%, which is modestly higher than the estimate we provided in October due to a shift in the mix of our business and geographic income. Turning to our outlook for the full year 2022. Today, we issued guidance for the full year adjusted earnings per share of at least $4.70. For the year, we forecast organic sales growth, excluding the impact of COVID testing-related sales, to be in the high single digits. We forecast COVID testing-related sales of approximately $2.5 billion, with a significant portion of these sales expected to occur in the early part of the year. We'll update our COVID testing sales forecast 1 quarter at a time throughout the year. Based on current rates, we would expect exchange to have an unfavorable impact of approximately 2% on our reported sales. We forecast an adjusted gross margin ratio of approximately 58.5% of sales for the year, which reflects our forecasted business mix, underlying gross margin improvement initiatives across our businesses, along with the impact of inflation on certain manufacturing and distribution cost. For the year, we forecast R&D investment of around $2.7 billion and SG&A expense of around $10.8 billion, which reflects investments to support several ongoing and upcoming new product launches and strategic growth initiatives. We forecast net interest expense of around $500 million, nonoperating income of around $375 million and a full year adjusted tax rate of approximately 14.5% for the year. Turning to our outlook for the first quarter. We forecast adjusted earnings per share of at least $1.50 and organic sales growth, excluding the impact of COVID testing-related sales, to be in the high single digits. Lastly, at current rates, we would expect exchange to have an unfavorable impact of approximately 3% on our first quarter reported sales. With that, we'll now open the call for questions. Operator: [Operator Instructions] And our first question comes from Larry Biegelsen from Wells Fargo. Larry Biegelsen: Congratulations on a really strong finish to a strong year. Robert, can you talk about how you thought about the 2022 guidance? Why is $2.5 billion for COVID testing the right starting point? And how are you thinking about reinvesting the upside from COVID testing implied in the $4.70 EPS guidance? And I have one follow-up. Robert Ford: Sure, Larry. I'd say at the beginning of the year, you're coming into the year and you're trying to find the right balance, right? You're trying to find the right balance on your long-term growth opportunities that Abbott has, which I think are pretty unique, and balancing that with, I'd say, probably some uncertainty. And I'd say every year, there's a little bit of uncertainty at the beginning of the year, but I'd say this year is probably a little bit more than usual. So you're trying to find that balance, and I'm pretty sure we'll talk about some of the long-term growth opportunities. But if you think about some of the challenges in forecasting right now, there's a lot of dynamics that are existing from a macroeconomic standpoint that are out there that, quite frankly, aren't necessarily unique to Abbott. But they're out there, whether it's the pandemic and the duration of the current surge, potential new waves and how long they will last, staffing shortages that we've seen for the hospital base kind of part of our business; quite frankly, patients' willingness to go in, to do a procedure during the surges. So that's probably one kind of big bucket to look at. Another area, obviously, on the macro side is supply chains and inflation challenges that every company is facing, and obviously, kind of currency headwinds. So I'd say those are all challenges that are facing a lot of medtech companies, companies in health care, and quite frankly, a lot of companies outside of our sector. Probably what's a little bit different for us, another fact to consider in our forecast is just COVID testing and how is that going to play out throughout the rest of the year given the magnitude of what the testing could look like between it completely going away or it staying or increasing at this level. So factoring all those kind of elements over here, I think this was the right starting point for us, to start off like that. And I think this initial full year guidance is contemplating not only some of those challenges, but also contemplating on the flip side, a very strong underlying kind of Abbott base business, as I said in my comments, high single-digit growth. So there are definitely acceleration in a lot of our portfolio versus where we were prepandemic. We've got investment in this guidance to be able to support not only all of our launches that we engaged in towards the end of last year. Beginning of this year, we've got launches and opportunities. And that's all been contemplated and fully funded. And the initial COVID testing forecast of $2.5 billion, I don't expect COVID to simply go to 0 starting in the second quarter. But the challenge of forecasting, the magnitude, I felt, is the right way to -- and quite frankly, I talked about this in October, we will be updating it as we go along. We've got a -- we've built a lot of capacity. You've seen that over this last 1.5 years, especially in rapid testing. So we have that capacity, and we'll be updating it. So if we had typically done our $0.10 range guide here, Larry, our consensus, we would have been right in the middle of where you guys are at. But I didn't want to cap the upside, which is why we're at the least $4.70. So if I kind of sum it up, I look at our guidance now and I say, "Okay. We've contemplated as much as we can of some of the challenges that a lot of companies are facing, whether it's supply chain, duration of pandemic, medical device procedures, et cetera." I've fully funded our growth platforms that we're very excited about. And there's potential for the upside of more COVID testing because I don't think it goes away, which would then fall through at a good click and provide that upside. So I think that's probably the best way to summarize. It's derisked, fully funded for long-term growth opportunities, and we've got potential upside as we go into the remainder of the year. Larry Biegelsen: That's super helpful. Robert, just for my follow-up, Libre had another remarkable year. How are you thinking about Libre growth in 2022? And what are the drivers of that growth this year? Robert Ford: Sure. Well, yes, I mean, you saw it. It continues to grow at a very strong rate and a very large base. 35 -- over 35% this year, 4 million users now. We've initiated geographic expansion of Libre 3, and that will start in the next couple of weeks. Moving out of Germany into U.K. and France, those are probably kind of key markets that we're expanding over the next couple of weeks. And if I think about 2022, Larry, I mean, I'm looking at here strong double-digit growth. We've been growing about $1 billion of incremental sales per year, and I expect that growth to be at least in that range. So that probably translates into a 25% growth. I think the biggest driver for us is, quite frankly, not just this year but as we look forward, it's still very underpenetrated, right? I'm talking about being a leader in terms of patients with 4 million users where we've talked about numbers between 60 million, 70 million, 80 million people around the world that could be benefiting from continuous glucose monitoring and sensor-based monitoring. So I'd say biggest opportunities we've got continue to be international. The CGM penetration internationally is still much lower than in the U.S. And then moving into -- more aggressively into patient segments that historically have been underpenetrated, you kind of look at the type 2s on single injection therapy. So we've got great opportunity there. U.S., I would say, is another good opportunity for us. We had very good year this year, close to like 16% growth. I think that's the number. Now over 1 million users. We've made the investments that we need to make last year in terms of sales force and advertising, and that's paying dividends. In terms of new users, we continue to have a high share of new user growth. So as you combine what we're doing internationally, expansion of Libre 3, continued growth in the U.S., expanding into a pretty underpenetrated population of type 2s, and I think we've still got -- like I've kind of said, still in the early innings of the Libre story here. Operator: Our next question comes from Robbie Marcus from JPMorgan. Robert Marcus: I'll also add my congratulations on a nice quarter. Two for me. I'll ask them both upfront. First question, maybe you could spend a minute on cadence throughout the year. First quarter has a lot more COVID testing sales than we had thought but also implies somewhat of a different cadence than we have been thinking. So just top and bottom line, what are the impacts there? How is inflation, FX hitting throughout? And then second question is probably tied into it. If you could just touch on what you're seeing in current device and procedure trends as we sit here today and how you're thinking about the evolution of that over the course of '22. Robert Ford: Well, your first question has got multiple subquestions there, Robbie. So let me take the first one, and then I'll go back -- so I can take the second one, and then I'll go back to your first one because it does contemplate some of the challenges on inflation that might be worthwhile spending some time just talking a little bit about also. But in terms of demand dynamics, especially in the more hospital-based business here, Robbie, we saw a real nice trajectory recovery in the beginning of Q4. We were -- and I always like to compare versus 2019, at least for 2021, to avoid some of the comp pieces. So we were improving our growth rates in our probably more cardio-like businesses, let's use that as a proxy. It would be in that kind of 3% to 4% range and improving as the quarters progressed. And Q4 was looking like, again, a continuation of that progression until probably December, where we saw a pretty big drop because of Omicron in most of the device -- of our device businesses. Probably the only 2 that we didn't see that drop was Heart Failure, that was probably up in the mid-20s in December versus 2019; and obviously, Libre, which was up probably like in the 70s percent versus 2019. So we did have an impact in these parts of the business, again as -- predominantly driven by Omicron impact of not only staffing, I'd say, but also even just patients basically postponing a little bit and not wanting to go into a hospital. And I think that's continued a little bit here into January. I'd say geographically, seeing a little bit more of that impact in the U.S. compared to other geographies, at least for us. Europe and Asia have held up a little bit better than the U.S. And then we've contemplated as best as we can what that recovery curve is going to look like. We'll see some pressure on that, I'd say, probably January, February going into March. We expect it to get better, and then Q2 will be better. And if you look at the second half of this year, we expect for these businesses to be more at their normal run rate. So I think -- I'd say that's what we're seeing, and that's kind of how we're forecasting the rest of the year. Actually, I was pretty pleased that some of the new product launches that we had during the quarter -- we're always cautious about, okay, do we launch the product during -- in this environment? And they did pretty well, both in Europe and in the U.S., too. So I think that speaks well about still the need for the products and the technologies and the innovation. So the consumer side -- the consumer-facing part of our business, I mentioned Libre, but you saw it in Nutrition and EPD. They've done pretty well, the pandemic. They did pretty well in Q4. So didn't necessarily see the impact of Omicron to those businesses like we didn't see it in Delta either. So we would expect those businesses to be pretty resilient. And the key driver there, as I talked a little bit about Libre, is just kind of innovation. On your first question regarding cadence, I mean, part of it is this combination that I said, recovering device and core testing procedures that we see going into Q2 and into Q3 and Q4. And then as we have more, let's say, call it, confidence in precision regarding our COVID testing, we'll see that kind of flow through, and then we'll be able to update you. I think when we're here in April, we'll have a better sense of what Q2 is going to look like, not only for the U.S. but also internationally. And as I said, having that ability to then kind of update the forecast with that COVID number, we'll let it flow through. So I think you also had a question about inflation. I mean that is another area that we're working on and focused on and probably ask Bob to give you some color on that. Robert Funck: Okay. Yes. And Robbie, you actually kind of asked about currency and inflation. I'll cover currency first. I mean we saw the U.S. dollar kind of strengthen since the middle of last year, in particular over the last few months. And so as I said in my opening remarks, at current rates, that's about a 2% headwind on the top line for the year. We're going to see that -- a greater impact in the first quarter, around 3% and kind of -- and in the second quarter. And it'll get -- the impact will be a little bit less severe as we go -- kind of go through the course of the year into the back half of the year. In terms of inflation, inflation and supply chain challenges are really kind of linked together as supply chains have not been able to catch up to the strong demand that's out there. And so we're seeing some impacts here, certainly not unique to us or our industry. And we're seeing those impacts across transportation cost, manufacturing inputs, commodities, et cetera. From a pricing standpoint, we have the flexibility to adjust price a bit in some areas of the business, and we're doing so. That's really more in the consumer-facing businesses like Nutrition. In other areas of the business, that flexibility doesn't exist. So I'd say in aggregate, kind of across those headwinds, we're seeing impacts on gross margin of roughly $0.5 billion, and that's contemplated in our guidance. And I think as supply chains start to normalize over time, we would expect to see improving cost in some areas. For example, in commodities for Nutrition, those costs have kind of moved up and down historically over time. But currently, our kind of outlook doesn't assume any significant changes kind of versus the current dynamics that we're seeing in the market. Operator: Our next question comes from Vijay Kumar from Evercore ISI. Vijay Kumar: I have 2 questions. Maybe my first one was on the new product side. Robert, you made some comments on perhaps a consumer kind of product at CES at Lingo. I'm just curious, how do you see the opportunity here, right? It's slightly different perhaps from our perspective. But for Abbott, I mean, you guys have played in consumer markets. How big is this opportunity? Perhaps some sense for when U.S. launch timing could be. And should we expect more analytes, right? I think you guys had 4 analytes at CES, but I'm curious, is there -- are there other products expected to come down the pipeline? Robert Ford: Sure, Vijay. So we made a decision to put a stake in the ground here and start talking about what we've always believed to be another opportunity, a sizable opportunity for Abbott, and that was really using the Libre platform that we had developed to look into other analytes, other areas. I talked about this recently, and quite frankly, we've talked about it several years ago also. And you referenced some of the analytes that we have been working on: ketones, lactate, alcohol, glucose for people with known diabetes. And those are big opportunities. As I've said, the model is a little bit different. It is probably a much larger TAM in terms of people, but the usage of the sensors is probably more intermittent than you would kind of get on a person, for example, with diabetes today, where we're very clear whether you're a type 1 on a pump or a type 1 injector or a type 2, like we know through the data we've covered here in terms of the usage patterns. So the usage pattern is a little bit different, but the sample size is significant. If you think about like a keto sensor and the opportunity to be able to provide real-time feedback for somebody who's trying to manage their keto diet, I think there's a large amount of people, large consumer pool that whether it's more disciplined keto diets or kind of more on an on-off basis, there's a very large amount of people. And we'll have to just think about how to market it a little bit differently, and our go-to-market strategy will be a little bit differently. But I'd say -- we've always seen this as a big opportunity. And we funded it, and we have a separate team that is obviously leveraging the platform, but they're managed differently. They have a completely different organizational structure, and they're just focused on developing not only the technical side of the analytes but obviously doing all the market development work. So we're really, really in the early inning stages here, but I think the numbers could be pretty significant and pretty large. And why not? Over a good period of time, maybe it's even bigger than diabetes once you line these up. The first phase of analytes, we announced at CES that this is our intention, that we were designing these. Timing, we expect to launch our first products outside of the United States towards the second half of this year. In the United States, we'll obviously be having the conversations with the agency in terms of how that regulatory path is going to shape up, probably a little bit too early right now to talk about that. But we're very excited about this opportunity because we've seen this opportunity many, many years back and made the moves. On your question about other analytes, yes, I would say Part 1 -- or Phase 1, I would say, is what I would call these more consumer-facing, more consumer-driven opportunities. But we are looking at other analytes that we probably have, I would say, more of a medical clinical application, whether it's in the hospital or for discharges, et cetera. So there is opportunity there that we're also working on. So I think it's very large, and we're just in the beginning right now in terms of market creation. Vijay Kumar: That's helpful, Robert. And maybe my second question, in the balance sheet, I think you guys probably have over $40 billion of capacity right now conservatively. With valuations coming down, what kind of opportunities do you see? And one of the things that always frights me is Abbott is very large in diagnostics, #1, #2 in most of your end markets. If you look at diagnostics, liquid biopsy, cancer screening diagnostics is -- that's a massive opportunity, but I don't see Abbott having a stake in the ground in that area. Is that an area that would interest Abbott? Robert Ford: Well, answer that specifically, I'm not going to necessarily show all of my cards here. But I guess what I will say regarding the M&A question here is yes, there's -- there seems to be some dislocation now. And I think this could make sense. If there's anything out there that looks strategic for us and that makes financial sense, then yes, we'll be -- we've got plenty of capacity, as you said. We've generated a lot of strong cash flow, and quite frankly, it's been a meaningful step-up in that cash flow over the last kind of 1.5 years or so. So yes, strategically financial fits, as I've always said, we're in a great position now to be able to look at that. Devices and diagnostics, I will say, are the areas that we're looking at more carefully. Scott's team is always looking at everything, but he's got more special lens here in devices and diagnostics. The areas that you referenced are areas that are in the list of things that we would be interested in looking at. Tuck-in and medium-sized deals probably are more likely, if -- again, if those situations present themselves. But again, we're always looking at everything. So I would say yes, nothing has changed regarding what I've said about M&A, if it's strategic and it makes financial sense and we can deliver value for our shareholders. We are now in a great position as a result of all the efforts that we've had, quite frankly, on cash flow conversion. And now with kind of COVID cash, that also helps. Operator: Our next question comes from Josh Jennings from Cowen. Joshua Jennings: Rob, just first, wanted to ask a question on 2022 guidance. And understand you don't want to put the top end of the range there and cap the upside. Clearly, there's a potential upside with the increased COVID testing outside of that $2.5 billion revenue stream that you're expecting in the early part of the year. But just in a scenario where COVID testing does fall off in that guidance for the revenue from that franchise turns into reality, can you just refresh us on some of the other levers you have that you can pull to drive EPS growth? I think last year, in June when COVID testing fell off, your team talked about share repurchase, accretive M&A, some cost-cutting reductions. But just wanted to get a refresh there and see if you could help us think through those levers. And then second question is just on the diabetes franchise. And clearly, Libre has a long runway. You're looking -- I believe you just talked about in one of your answers about the consumer opportunity. But how should we be thinking about the diabetes franchise and Abbott's desire to kind of leverage the positioning there with other products, either insulin delivery devices or other portfolio adds as we move into 2022 and beyond? Robert Ford: Sure. On your first one, I mean, like I said, we derisked, we fully funded, and we've got the potential upside for the COVID testing. If COVID testing in that scenario, which I think is highly unlikely, kind of falls off, then we'll have to obviously look at kind of the investments we're making and kind of make the adjustments that we have to make, especially as we start to move into 2023. I don't think that is the case. I think that COVID testing is going to be still around. I think Omicron has catalyzed a pretty significant shift in global rapid testing and screening. And the question here is just going to be how does it evolve over the next kind of 9 months, 12 months here. So -- but that being said, to your question on that scenario, you'd have to make adjustments. As I've said, we would. But right now, I'm managing -- we're managing the enterprise as a whole, and we obviously got profits that are coming from COVID that we're reinvesting into the business. If that turns out to not be the case this year then, like I said, we're fully funded on our growth platforms. And then we'd have to kind of make adjustments or look at that investment level as we go into 2023. Buybacks is another opportunity that we've got. We've got a lot of flexibility here also. Last year, we bought -- I think it was about $2 billion in 2021. And I'd anticipate being active in the market again this year since we do have that capacity. So -- and your second question, I think, was on diabetes, right, and growth opportunities. Is that -- could you just... Joshua Jennings: Sorry. Absolutely. Just thinking about anything you can share just in terms of internal development programs outside of advancing Libre in diabetes and on the consumer channel on the sensing side. Any other products within the diabetes device realm that you could add to the portfolio? Or should we be thinking about the diabetes franchise just sticking with the playbook that you have that's been so successful over the last number of years and has a long runway? Robert Ford: Got it. Got it. So listen, yes, we're in the beginning here. There's still a lot of opportunities, still a lot of underpenetration, whether it's internationally or type 2s. As I've said, key aspect here is to ensure your pipeline is relevant and is advancing. We've launched Libre 3 in Europe, and we'll be expanding that launch now globally. I expect to be able to bring Libre 3 here into the U.S. I won't necessarily get into the specifics, but I figured you guys would eventually ask this. We have filed Libre 3 here in the U.S. as an iCGM to the FDA last year. I won't get into specifics about timing there, but it's the -- review process happens in the same agency that reviews diagnostic tests. So as you would imagine, there's a lot of busy work going on with that area of the agency. So we've obviously seen our data that we've submitted to the agency. We've obviously seen now data from a competitive system. And I'd say we're feeling pretty good about where we stand. So I think that's -- a key component there is to expand the portfolio. I've talked about Libre 4, not necessarily what exactly is that, but we do have that as an active program. Connecting to insulin delivery systems is also part of that strategy. And we've got active programs with all pump suppliers and pen delivery systems also to be able to connect Libre onto that. So I think we'll stay focused on making the best sensor, sticking to our strategy of consumer-friendly, showing outcomes, price for access and affordability and continue to innovate with our sensor platform and then look at opportunities to use those sensors to not only expand into other platforms, but also to connect to other devices. Operator: Our next question comes from Joanne Wuensch from Citibank. Joanne Wuensch: I have a big picture one and a specific one. Big picture, one of the themes of your keynote address at CES was the marriage of tech and medtech. And I'm curious if you could highlight how you sort of take that lens in terms of your product pipeline. And then my specific question has to do with your Structural Heart franchise. Portico is out in the market, Amulet is out in the market, and I would love just a little bit of an update on how those products are doing. Robert Ford: Sure. So yes, I've talked about this convergence. And quite frankly, we've seen this convergence occurring probably when we are doing the St. Jude acquisition and integration. And we started to set a lot of our portfolios to be able to connect to whether it's consumer electronics or cloud or other elements like that to ultimately be able to empower the consumer and just provide better solutions to ultimately improve outcomes. So I think you saw the device portfolio has been going down that path for quite some time now as very pleasantly -- very pleasant to see that start to look not only in the Cardiovascular side, also in the Neuromodulation side. As I said in my opening comments on our virtual clinic, I think that's got an opportunity to change the business model of that business, and at the same time, provide better outcomes for not only DBS but also spinal cord stimulation, too. So you've seen that in devices. We then started to see Diagnostics, and you saw over that thinking. As we developed Binax, we wanted to make sure that we were kind of integrating not just our expertise in developing an accurate test to be able to detect COVID, but also integrate it into an app where you can kind of have your pass and your phone, et cetera, and working with partners to be able to kind of do that. So I think you're seeing it across all of the portfolio. In our pharma business, we're using digital tools to be able to ensure that patients are taking their medications. So that's pretty -- I'd say, a strategic element going across all of our businesses and how we're thinking about it. So it's not -- I wouldn't say it's just one part of the portfolio, but I think it's a convergence that is happening, and we want to be leaders in that convergence across all of our portfolio. Regarding your question on Structural Heart. So I think you mentioned Portico and Amulet. Listen, Amulet, we received approval in Q3 last year, moved quickly to launch. I'd say initial feedback has been very strong, especially in the areas of superior closure rates, the need to be able to leave the hospital without blood thinners. And also, we've heard a lot of broader sizes to better fit more anatomies and give them more of that flexibility. So that's done very well. As part of the launch, we wanted to make sure that we had good proctoring -- good peer-to-peer proctoring. So obviously, that became a little bit of a challenge in November and December after Thanksgiving and into December. But I think despite all of that, I think we've done pretty well. I think we did about 500 procedures last year, mostly happening -- mostly in Q4. And if you look at what we did in December, that would put us at about a 10% market share, which is -- which I think is pretty good. Obviously, we're not satisfied with that, given what we know we can do and what we've done in Europe. But I think it's very much aligned to where we wanted to be regarding the end of the year and as we enter into 2022. So I think that's going very well. Portico, we're -- as I've said, this is an important area for Structural Heart. We know that there are 2 entrenched competitors in there. We think we've got a great technology also, and we're going about it very systematically, very methodically to build our position. We launched our generation 2 product in Europe, our Navitor product. And again, that's received great feedback also, and there's a pretty competitive clinical profile here for high-risk surgery patients. So we're making the investments that we know we need to make to be able to expand our position here. So I feel good about our Structural Heart portfolio. I've talked about how this is a big opportunity for us. We've made the investments, and I think we're in a great position as we go into 2022. Operator: Our next question comes from Matt Taylor from UBS. Matthew Taylor: So I just had 2 margin questions I wanted to ask. The first one, I guess I'll frame it as, if we take the 1 50 from Q1, that implies about $1.06 to $1.07 for the remaining 3 quarters of the year. So is that how we should view your base business earnings power? Or are you still spending more through the year from some of the COVID testing profits or being conservative? Would love just any additional color on the base business earnings power ex testing. Robert Funck: Yes. Matt, I'll take that. This is Bob. So we don't really think about earnings or at the bottom line base versus COVID. We manage the whole company. Obviously, the first quarter is benefiting from the majority of the COVID sales that we've got forecasted at this point in time, kind of our starting point. But we funded our growth throughout the rest of the quarter. So what you have is COVID testing, initial COVID testing sales in that first quarter, but our investments throughout the entire year. And so as we update our COVID testing each quarter, kind of as Robert talked about, that will fall through, certainly at a higher level than our overall margin profile. Robert Ford: I'd just add on to that, Matt, we absolutely expect there to be COVID testing after the first quarter. The question is at what level. And as I said in the beginning, to be able to kind of forecast a full year out like that, given the magnitude of how this can shift, it's just prudent to do it a quarter at a time. So when we're here in April, we'll have a better sense of what Q2 is going to look like in terms of COVID testing, and we'll be able to kind of update you there, okay? Matthew Taylor: Got you. Can I just have one follow-up on -- so on gross margin, you mentioned that there was about $500 million headwind from inflation and supply chain. And so I guess if we add that back in, you're getting to gross margins closer to 60%. Ex that, I was just wondering if you could talk about expectations for gross margins going forward longer term if things normalize. And if you could kind of see those levels in 2023, if things improve or just pluses and minuses on gross margins longer term? Robert Funck: Well, I think the add back gets you a little bit below that. But the way we think about gross margin every year is looking for ways to expand that. Every one of our businesses has dedicated teams focused on gross margin initiatives. And you're seeing some of that benefit actually in our 2022 forecast helping to offset the impact of the inflation that we're seeing. We continue those programs. They are not a 1-year program. We do them every year, and we'll continue to do those into next year. The other thing we're seeing is a benefit of kind of the business mix. So as medical devices and routine diagnostic testing recovers, that benefits our overall gross margin for the business. Obviously, Robert talked about a lot of the opportunity. Some of the opportunities is even more that we have to drive growth in our Medical Device business as well as in Diagnostics. And as we grow those businesses, that will have a positive impact overall on our gross margin profile. Robert Ford: Okay. Let me wrap up here then. Thanks, Bob. Listen, I'll finish by saying a little bit how I started. I acknowledge that there's a lot of uncertainties in the macro environment right now and the challenges that, that creates in terms of forecasting for investors, at least in the short term: pandemic, how long will it last, phases, transition to endemic, recovery curves of procedures. I get some of the challenges of that forecast. But if I look at the market here at the start of the year and look at health care sector, specifically medtech and diagnostics, definitely been disproportionately hit by some of those uncertainties. And I think if you take a step back, I think it's important to remind ourselves the -- that health care still remains a very, very important need and a great long-term growth area because I think none of the long-term market fundamentals have changed in the pandemic. If anything, some of them have gotten even better and accelerated. So I think the demographic trends are still very favorable. And procedures and routine testing, they're going to come back, whether it's a month, 2 months, et cetera. It's just difficult to predict with that perfect degree of precision, but they'll come back. And if you look at the innovation pipelines across the entire industry, they have never been stronger. And within that context, I think Abbott's pretty uniquely positioned here. We're in great markets, leading positions in several large, fast-growing segments: diabetes; devices; diagnostics, including COVID testing; nutrition; emerging market, pharma. We have strong positions, brands, franchises across all of these. So -- and to one of the questions, I think we're leading in the digital transformation that's going to be more patient-centric care, whether it's with biowearables, whether it's connected devices, remote monitoring, et cetera. And then you layer that diversification that I talked about in my opening comments, which I think is very unique, it maximizes our growth opportunities, and it does provide a natural hedge to some of these macro environment impacts that we're going to see from time to time. And that diversity is not just on the business mix, but customers, payer types, obviously, geographic footprint and a very strong and resilient supply chain. So you translate all that into real strong, sustainable, strategic financial health, whether it's growing revenues, cash flows, dividends. We've got a rock-solid balance sheet. I talked about the opportunities that we have with it. So I think we're in a really good position strategically, financially, and I'm excited about all the growth opportunities that lie ahead of us. So with that, I'll wrap it up and I'll thank everybody for joining us today. Scott Leinenweber: Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us. Operator: Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a wonderful day.	[ { "speaker": "Operator", "text": "Good morning and thank you for standing by. Welcome to Abbott's Fourth Quarter 2021 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant's questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's express written permission." }, { "speaker": "Scott Leinenweber", "text": "Good morning and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we will take your questions." }, { "speaker": "Robert Ford", "text": "Thanks, Scott, and good morning, everyone, and thank you for joining us. Today, we reported another strong quarter and highly successful year for Abbott. For the year, we reported organic sales growth of 23% and ongoing earnings per share of $5.21, which reflects more than 40% growth compared to the prior year and exceeded the original EPS guidance we set last January." }, { "speaker": "Robert Funck", "text": "Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which excludes the impact of foreign exchange." }, { "speaker": "Operator", "text": "[Operator Instructions] And our first question comes from Larry Biegelsen from Wells Fargo." }, { "speaker": "Larry Biegelsen", "text": "Congratulations on a really strong finish to a strong year. Robert, can you talk about how you thought about the 2022 guidance? Why is $2.5 billion for COVID testing the right starting point? And how are you thinking about reinvesting the upside from COVID testing implied in the $4.70 EPS guidance? And I have one follow-up." }, { "speaker": "Robert Ford", "text": "Sure, Larry. I'd say at the beginning of the year, you're coming into the year and you're trying to find the right balance, right? You're trying to find the right balance on your long-term growth opportunities that Abbott has, which I think are pretty unique, and balancing that with, I'd say, probably some uncertainty. And I'd say every year, there's a little bit of uncertainty at the beginning of the year, but I'd say this year is probably a little bit more than usual. So you're trying to find that balance, and I'm pretty sure we'll talk about some of the long-term growth opportunities." }, { "speaker": "Larry Biegelsen", "text": "That's super helpful. Robert, just for my follow-up, Libre had another remarkable year. How are you thinking about Libre growth in 2022? And what are the drivers of that growth this year?" }, { "speaker": "Robert Ford", "text": "Sure. Well, yes, I mean, you saw it. It continues to grow at a very strong rate and a very large base. 35 -- over 35% this year, 4 million users now. We've initiated geographic expansion of Libre 3, and that will start in the next couple of weeks. Moving out of Germany into U.K. and France, those are probably kind of key markets that we're expanding over the next couple of weeks." }, { "speaker": "Operator", "text": "Our next question comes from Robbie Marcus from JPMorgan." }, { "speaker": "Robert Marcus", "text": "I'll also add my congratulations on a nice quarter. Two for me. I'll ask them both upfront. First question, maybe you could spend a minute on cadence throughout the year. First quarter has a lot more COVID testing sales than we had thought but also implies somewhat of a different cadence than we have been thinking. So just top and bottom line, what are the impacts there? How is inflation, FX hitting throughout?" }, { "speaker": "Robert Ford", "text": "Well, your first question has got multiple subquestions there, Robbie. So let me take the first one, and then I'll go back -- so I can take the second one, and then I'll go back to your first one because it does contemplate some of the challenges on inflation that might be worthwhile spending some time just talking a little bit about also." }, { "speaker": "Robert Funck", "text": "Okay. Yes. And Robbie, you actually kind of asked about currency and inflation. I'll cover currency first. I mean we saw the U.S. dollar kind of strengthen since the middle of last year, in particular over the last few months. And so as I said in my opening remarks, at current rates, that's about a 2% headwind on the top line for the year. We're going to see that -- a greater impact in the first quarter, around 3% and kind of -- and in the second quarter. And it'll get -- the impact will be a little bit less severe as we go -- kind of go through the course of the year into the back half of the year." }, { "speaker": "Operator", "text": "Our next question comes from Vijay Kumar from Evercore ISI." }, { "speaker": "Vijay Kumar", "text": "I have 2 questions. Maybe my first one was on the new product side. Robert, you made some comments on perhaps a consumer kind of product at CES at Lingo. I'm just curious, how do you see the opportunity here, right? It's slightly different perhaps from our perspective. But for Abbott, I mean, you guys have played in consumer markets. How big is this opportunity? Perhaps some sense for when U.S. launch timing could be. And should we expect more analytes, right? I think you guys had 4 analytes at CES, but I'm curious, is there -- are there other products expected to come down the pipeline?" }, { "speaker": "Robert Ford", "text": "Sure, Vijay. So we made a decision to put a stake in the ground here and start talking about what we've always believed to be another opportunity, a sizable opportunity for Abbott, and that was really using the Libre platform that we had developed to look into other analytes, other areas. I talked about this recently, and quite frankly, we've talked about it several years ago also. And you referenced some of the analytes that we have been working on: ketones, lactate, alcohol, glucose for people with known diabetes. And those are big opportunities." }, { "speaker": "Vijay Kumar", "text": "That's helpful, Robert. And maybe my second question, in the balance sheet, I think you guys probably have over $40 billion of capacity right now conservatively. With valuations coming down, what kind of opportunities do you see? And one of the things that always frights me is Abbott is very large in diagnostics, #1, #2 in most of your end markets. If you look at diagnostics, liquid biopsy, cancer screening diagnostics is -- that's a massive opportunity, but I don't see Abbott having a stake in the ground in that area. Is that an area that would interest Abbott?" }, { "speaker": "Robert Ford", "text": "Well, answer that specifically, I'm not going to necessarily show all of my cards here. But I guess what I will say regarding the M&A question here is yes, there's -- there seems to be some dislocation now. And I think this could make sense. If there's anything out there that looks strategic for us and that makes financial sense, then yes, we'll be -- we've got plenty of capacity, as you said. We've generated a lot of strong cash flow, and quite frankly, it's been a meaningful step-up in that cash flow over the last kind of 1.5 years or so. So yes, strategically financial fits, as I've always said, we're in a great position now to be able to look at that." }, { "speaker": "Operator", "text": "Our next question comes from Josh Jennings from Cowen." }, { "speaker": "Joshua Jennings", "text": "Rob, just first, wanted to ask a question on 2022 guidance. And understand you don't want to put the top end of the range there and cap the upside. Clearly, there's a potential upside with the increased COVID testing outside of that $2.5 billion revenue stream that you're expecting in the early part of the year. But just in a scenario where COVID testing does fall off in that guidance for the revenue from that franchise turns into reality, can you just refresh us on some of the other levers you have that you can pull to drive EPS growth?" }, { "speaker": "Robert Ford", "text": "Sure. On your first one, I mean, like I said, we derisked, we fully funded, and we've got the potential upside for the COVID testing. If COVID testing in that scenario, which I think is highly unlikely, kind of falls off, then we'll have to obviously look at kind of the investments we're making and kind of make the adjustments that we have to make, especially as we start to move into 2023." }, { "speaker": "Joshua Jennings", "text": "Sorry. Absolutely. Just thinking about anything you can share just in terms of internal development programs outside of advancing Libre in diabetes and on the consumer channel on the sensing side. Any other products within the diabetes device realm that you could add to the portfolio? Or should we be thinking about the diabetes franchise just sticking with the playbook that you have that's been so successful over the last number of years and has a long runway?" }, { "speaker": "Robert Ford", "text": "Got it. Got it. So listen, yes, we're in the beginning here. There's still a lot of opportunities, still a lot of underpenetration, whether it's internationally or type 2s. As I've said, key aspect here is to ensure your pipeline is relevant and is advancing. We've launched Libre 3 in Europe, and we'll be expanding that launch now globally." }, { "speaker": "Operator", "text": "Our next question comes from Joanne Wuensch from Citibank." }, { "speaker": "Joanne Wuensch", "text": "I have a big picture one and a specific one. Big picture, one of the themes of your keynote address at CES was the marriage of tech and medtech. And I'm curious if you could highlight how you sort of take that lens in terms of your product pipeline." }, { "speaker": "Robert Ford", "text": "Sure. So yes, I've talked about this convergence. And quite frankly, we've seen this convergence occurring probably when we are doing the St. Jude acquisition and integration. And we started to set a lot of our portfolios to be able to connect to whether it's consumer electronics or cloud or other elements like that to ultimately be able to empower the consumer and just provide better solutions to ultimately improve outcomes." }, { "speaker": "Operator", "text": "Our next question comes from Matt Taylor from UBS." }, { "speaker": "Matthew Taylor", "text": "So I just had 2 margin questions I wanted to ask. The first one, I guess I'll frame it as, if we take the 1 50 from Q1, that implies about $1.06 to $1.07 for the remaining 3 quarters of the year. So is that how we should view your base business earnings power? Or are you still spending more through the year from some of the COVID testing profits or being conservative? Would love just any additional color on the base business earnings power ex testing." }, { "speaker": "Robert Funck", "text": "Yes. Matt, I'll take that. This is Bob. So we don't really think about earnings or at the bottom line base versus COVID. We manage the whole company. Obviously, the first quarter is benefiting from the majority of the COVID sales that we've got forecasted at this point in time, kind of our starting point. But we funded our growth throughout the rest of the quarter. So what you have is COVID testing, initial COVID testing sales in that first quarter, but our investments throughout the entire year. And so as we update our COVID testing each quarter, kind of as Robert talked about, that will fall through, certainly at a higher level than our overall margin profile." }, { "speaker": "Robert Ford", "text": "I'd just add on to that, Matt, we absolutely expect there to be COVID testing after the first quarter. The question is at what level. And as I said in the beginning, to be able to kind of forecast a full year out like that, given the magnitude of how this can shift, it's just prudent to do it a quarter at a time. So when we're here in April, we'll have a better sense of what Q2 is going to look like in terms of COVID testing, and we'll be able to kind of update you there, okay?" }, { "speaker": "Matthew Taylor", "text": "Got you. Can I just have one follow-up on -- so on gross margin, you mentioned that there was about $500 million headwind from inflation and supply chain. And so I guess if we add that back in, you're getting to gross margins closer to 60%. Ex that, I was just wondering if you could talk about expectations for gross margins going forward longer term if things normalize. And if you could kind of see those levels in 2023, if things improve or just pluses and minuses on gross margins longer term?" }, { "speaker": "Robert Funck", "text": "Well, I think the add back gets you a little bit below that. But the way we think about gross margin every year is looking for ways to expand that. Every one of our businesses has dedicated teams focused on gross margin initiatives. And you're seeing some of that benefit actually in our 2022 forecast helping to offset the impact of the inflation that we're seeing. We continue those programs. They are not a 1-year program. We do them every year, and we'll continue to do those into next year." }, { "speaker": "Robert Ford", "text": "Okay. Let me wrap up here then. Thanks, Bob. Listen, I'll finish by saying a little bit how I started. I acknowledge that there's a lot of uncertainties in the macro environment right now and the challenges that, that creates in terms of forecasting for investors, at least in the short term: pandemic, how long will it last, phases, transition to endemic, recovery curves of procedures. I get some of the challenges of that forecast. But if I look at the market here at the start of the year and look at health care sector, specifically medtech and diagnostics, definitely been disproportionately hit by some of those uncertainties." }, { "speaker": "And procedures and routine testing, they're going to come back, whether it's a month, 2 months, et cetera. It's just difficult to predict with that perfect degree of precision, but they'll come back. And if you look at the innovation pipelines across the entire industry, they have never been stronger. And within that context, I think Abbott's pretty uniquely positioned here. We're in great markets, leading positions in several large, fast-growing segments", "text": "diabetes; devices; diagnostics, including COVID testing; nutrition; emerging market, pharma. We have strong positions, brands, franchises across all of these." }, { "speaker": "Scott Leinenweber", "text": "Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us." }, { "speaker": "Operator", "text": "Thank you. This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a wonderful day." } ]	Abbott Laboratories	247,483
ABT	3	2,021	2021-10-19 23:00:00	Operator: Good morning, and thank you for standing by. Welcome to Abbott's Third Quarter 2021 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant's questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission. I would now like to introduce Mr. Scott Leinenweber, Vice President, Investor Relations, Licensing and Acquisitions. Scott Leinenweber: Good morning, and thank you for joining us. With me today are Robert Ford, President and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including expected financial results for 2021. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A Risk Factors to our annual report on Form 10-K for the year ended December 31, 2020. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which excludes the impact of foreign exchange. With that, I will now turn the call over to Robert. Robert Ford: Thanks, Scott. Good morning, everyone, and thanks for joining us. Today, we reported results of another very strong quarter. Ongoing earnings per share were $1.40, reflecting nearly 45% growth compared to last year, and sales increased more than 22% on an organic basis. Excluded COVID testing-related sales, which totaled $1.9 billion in the quarter, organic sales increased 12% versus last year. As we've seen since the start of the pandemic, our diversified mix of health care businesses continues to prove highly resilient. Even as COVID case rates surged in the U.S. and other geographies during the third quarter, strong growth in our more consumer-facing businesses, Nutritionals, Established Pharmaceuticals and Diabetes Care, mitigated the modest impacts we saw from the surges in certain areas of our hospital-based businesses. This has been a consistent theme throughout the pandemic, as evidenced by an increase in total company sales, excluding COVID test of 11% on an organic basis through the first 9 months of this year compared to our 2019 pre-pandemic baseline, which highlights that our growth is real and not simply a function of easy comps versus last year. As a result of our strong performance and outlook, today, we increased our full year adjusted earnings per share guidance range now at $5 to $5.10, which reflects nearly 40% growth compared to last year. I'll now summarize our third quarter results before turning the call over to Bob. And I'll start with Nutrition, where sales increased 9% compared to last year. Strong growth in the quarter was led by U.S. Pediatric and international Adult Nutrition. In Pediatric Nutrition, sales grew over 8.5% in the quarter, led by strong growth in the U.S. from continued share gains in our infant formula and toddler portfolio. Sales of Pedialyte, our market-leading rehydration brand, once again grew strong double digits, driven by market uptake of several recently launched new products as well as investments we're making in direct consumer promotion. In Adult Nutrition, sales grew over 9% in the quarter, including mid-teens growth internationally as we continue to see strong demand for our Ensure and Glucerna brands, including new users entering these categories and existing customers increasing their usage. Turning to Diagnostics. Sales increased more than 45% overall and 12.5%, excluding COVID testing-related sales. During the quarter, as the Delta variant spread and COVID cases surge particularly in the U.S., demand for testing increased significantly, most notably for rapid tests. In total, during the quarter, we sold more than 225 million COVID tests globally and have now shipped over 1 billion tests since the start of the pandemic. Over the last several months, we've learned that COVID vaccines, while a powerful tool, are not the lone solution needed in our global fight against this virus. Testing, particularly rapid testing, which is fast, affordable and easy to use is an important companion to vaccines and therapeutics. Abbott has established a global leadership position in rapid testing, including a supply capacity of more than 100 million tests per month. Moving to established pharmaceuticals, where sales grew more than 15%, driven by strong execution and a steady cadence of new product introductions. Strong sales performance in the quarter was broad based across several countries, including double-digit growth in China, Russia and India, which led to overall sales growth of 18% in our key emerging markets. And lastly, I'll cover Medical Devices, where sales grew 13% in the quarter compared to last year and more than 16% compared to pre-pandemic sales in the third quarter of 2019. Strong performance in the quarter was led by double-digit growth in Rhythm Management, Structural Heart, Heart Failure and Diabetes Care. In Structural Heart, we continue to enhance our portfolio in large, fast-growing markets with the recent U.S. FDA approvals of Amulet, which closes the left atrial appendage in the heart to help reduce the risk of stroke and people with atrial fibrillation; and Portico for transcatheter aortic valve replacement. In Heart Failure, we announced results from the GUIDE-HF trial of our CardioMEMS system. As with many other recent and ongoing clinical trials across the health care industry, a portion of the CardioMEMS trial overlapped with the COVID-19 pandemic. After adjusting for this impact, CardioMEMS demonstrated a 28% reduction in heart failure hospitalizations. And we filed with the U.S. FDA for label expansion based on the trial data in the middle of this year. During the quarter, we also added an attractive growth platform to our vascular device portfolio with the acquisition of Walk Vascular, a commercial stage company with a minimally invasive thrombectomy system called JETi that removes peripheral blood clots. Peripheral thrombectomy is a large, high-growth area where we can leverage our existing commercial presence. And I'll wrap up with Diabetes Care, where strong growth was led by FreeStyle Libre sales of nearly $1 billion. During the quarter, we added over 200,000 new users, bringing the total global user base for Libre to well over 3.5 million users. So in summary, we continue to achieve strong, well-balanced growth across all of our major businesses, which is being fueled by strong execution and a steady cadence of new products. COVID testing -- particularly COVID testing remains an important companion to vaccines and therapeutics, and Abbott has established a strong leadership position in this area. And based on the strength of our performance and outlook, we're raising our EPS guidance for the year, which now reflects growth of nearly 40% compared to last year. I'll now turn over the call to Bob to discuss our results and outlook for the year in more detail. Bob? Robert Funck: Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which is consistent with our previous guidance. Turning to our results. Sales for the third quarter increased 22.4% on an organic basis, which was led by strong performance across all of our businesses, along with global COVID testing-related sales of $1.9 billion in the quarter. Excluding COVID testing-related sales, organic sales growth was 12.1% versus last year and 11.7% compared to the third quarter of 2019. Foreign exchange had a favorable year-over-year impact of 1% on third quarter sales, resulting in total reported sales growth of 23.4% in the quarter. Regarding other aspects of the P&L for the quarter, the adjusted gross margin ratio was 58.8% of sales, adjusted R&D investment was 6% of sales, and adjusted SG&A expense was 25% of sales. Our third quarter adjusted tax rate was 15.5%, which reflects an adjustment to align our year-to-date tax rate with our revised full year effective tax rate forecast of 15%. The revised full year forecast is modestly higher than the estimate we provided in July due to a shift in the mix of our business and geographic income. Turning to the outlook for the fourth quarter. We forecast $1 billion to $1.4 billion of COVID testing-related sales and forecast organic sales growth, excluding COVID testing-related sales, in the low double digits versus last year. And based on current rates, we would expect exchange to have an unfavorable impact of around 0.5% of 1% on our fourth quarter reported sales. With that, we'll now open the call for questions. Operator: [Operator Instructions] Our first question comes from Robbie Marcus from JPMorgan. Robert Marcus: Great. And congrats on a really nice quarter. So maybe after such a good quarter led by COVID testing, I feel like you have a unique perspective looking at both sides of the coin from COVID testing, volumes and also device procedure volumes. So Robert, I'd love to get your sense of where you think we are here in fourth quarter and heading into 2022. And any early thoughts you could give us on sort of how to think about the progression of COVID testing sales and the recovery and durability of medtech volumes? Robert Ford: Sure. I think regarding COVID testing, we obviously -- since the start here of the pandemic, we've been learning a lot. And I think one of the things that as we developed our strategy for that, we always believe that the rapid test was going to be a kind of more sustainable part of the business. And I think we were pretty right there. I'd say the key thing that I -- and I made this in the comments, in the opening comments, the key thing that we learned over the last, let's say, couple of months here is that the vaccine is just an incredible tool for the value. It's had a huge impact on public health around the world. But alone, it's not enough. We know that dramatically reduces hospitalizations, dramatically reduces mortality. But I think we're all seeing here that even if you're vaccinated, you could still get and you could still transmit the virus. Obviously, you're not heading to a hospital, but I think we've all heard and seen stories of that. So I think that's the biggest kind of learning here for us as we go into Q4 and as we go into next year is that testing is going to remain an important companion here. And even with therapeutics, it's still going to remain an important part of fighting the virus. And I think we've also learned a lot about understanding kind of the difference between symptomatic testing and screening testing. And we started to pay much closer attention to understanding the channels and the platforms that are more aligned to symptomatic testing versus screening testing. And we can definitely see a correlation on the symptomatic testing with cases going up, cases going down. What we don't see that correlation is, is on screening. So even as cases have started to come down a little bit in the U.S., actually screening demand has increased quite a bit. So I think that is another kind of key learning as we think about going into Q4 and thinking about going into next year also. The other, I'd say, key distinction we've started to make is understanding kind of government purchasing a test versus kind of private. And I'd say in the beginning of the pandemic, most of our sales were focused to governments, whether international governments, federal government here in the U.S., state governments also. And that continues to be pretty strong. But what we've seen now grew pretty significantly. And I think it's aligned to the screening pieces, the private side of the market, whether it's OTC, cash pay, whether it's a lot of companies. We've seen a lot of companies in the last couple of months here, signed contracts with us to ensure that they've got rapid testing to be able to give to their employees. So while we're not seeing -- we only see some shelf and stocking issues at the retail and those will work their way through that in the next couple of weeks, we are seeing still a lot of companies buy test to give to their employees. So I think all of this is basically saying, listen, I don't know how much is going to be there next year, but it's clearly here that, that screening segment of the market is going to be an important part, even with therapeutics and vaccines. So I think that's going to be an important part. Our base business has done very well, continues to be on a recovery trajectory here, Robbie. Started in Q2, we saw that in devices. We saw that in Diagnostics. Yes, there was some there was some softness during Q3 as Delta and cases increased here in the U.S. That's probably more in August and throughout half of September, we started to see it kind of re-picked back up again towards the end of the quarter, first couple of weeks. We like what we're seeing here in terms of some pickup. But these were pockets. I wouldn't call it like a general softness and slowdown or pockets here in the U.S., some pockets in some countries. But generally speaking, that base business is doing very well. So when you think about 2022, I expect our base business -- our underlying base business to continue that momentum, very strong momentum across the board, especially with all of our new product launches. And the question here is going to be COVID. And I think it's going to be very difficult, as we go into next year, to be able to forecast a full number, a full year number of COVID next year. I think we're probably thinking about, okay, well, there's probably a COVID number that we're comfortable going into 2022. And then we'll have to update on a rolling quarterly basis here how COVID's going to play out throughout next year. So that's kind of how I see it. COVID is going to -- COVID testing will be there. We'll have to kind of do it more on a rolling basis as we go to next year. And our base business continues to accelerate. There was a little bit of softness in Q3, but I like what we're seeing in terms of recovery. And I like the portfolio that we built around our cardio business, our EPD business, our Nutrition business, our Diagnostic business. So that's all good. Robert Marcus: Great. Great. That was really helpful. And then maybe, Robert, to build on that, I know it's still very early in your planning process. But as you just said, there's a lot of variables, a lot of moving pieces. You've had a great year in devices so far, a bumper year in testing. Any early thoughts on how investors should be thinking about 2022 versus 2021 from a top and bottom line perspective? Robert Ford: Yes. I mean I think like I said, we're still in our process. We'll give our guidance in 2022 in January, like we always do, Robbie. And I want to see a little bit more in terms of how this pandemic is unfolding here, especially on the COVID side, but on the base business side. I think our base business, I would say is, we've been pretty good at forecasting our business both from a top line, from a margin on our base business. So I think what you can expect in 2022 is that base business getting even stronger with the rollout of all these product launches that we've announced over this year. And then the question here really is going to be kind of COVID testing. And like I said, we'll have a portion of it that, I think, we'll feel good about putting it in. And then we'll have to be updating on a rolling basis. And I think that's kind of how to think about it. The base business, which is probably the more sustainable piece, is building momentum. And it will go into 2022 with a lot of growth opportunity. And then we'll have to kind of look at COVID on a more rolling basis. Operator: Our next question comes from Bob Hopkins from Bank of America. Robert Hopkins: Congrats on some solid execution. I just have 2 questions. And in the interest of time, I'll just mention them both upfront because the first one is pretty straightforward. The first question is just on Amulet, and I realize it's very early in the launch. But just would love your sort of top-down comments on how things are going. And maybe any metrics you can share in terms of perhaps like the percentage of your U.S. coronary accounts that are now active with Amulet. So we'd love some just color there. And then the second question is more of a broad-based question. I was just wondering if you could provide just a little bit more detail on what you're seeing on inflation and supply chain because the headlines are obviously -- they're just constant. But the message from Abbott and other companies we follow just seems to be that it's sort of generally manageable. So just wondering if you can kind of talk to that a little bit, if you can quantify the headwinds or just give us a better understanding of why it's manageable and just put some perspective around it for us. Robert Ford: Okay. Well, I'll take the Amulet and then I'll let Bob kind of talk to kind of the inflation supply chain. I mean I would just say it is manageable, but -- that we have a great team. So -- and I'll let Bob cover that. On Amulet, listen, we received approval in August. We already initiated the launch. I know there's a lot of anticipation, at least on the last 2 calls, about the data and when we're going to publish the data and why we're going to do it, the time that we were going to do it. And so we released that data really close to our approval. And I think that was a good strategy because it allowed our team to kind of prepare for that. I will say, regarding the data, I mean, you saw when we released the data, it's -- the product has got a lot of advantages versus the product that's on the market right now. We've got a pretty broad portfolio of sizes, and that helps as you're looking at different anatomies and having a better fit there. The steerable sheath that we've got has resulted in great precision in the placement, and that's super important, especially when you're looking at transcatheter therapies. And then you saw the data of superior kind of closure rates without the need for blood thinners, right -- falling right at the procedure. And ultimately, that's why the patient went to the hospital or part of the reason why they went there. So I think we've got a great product here. I think the team has done a good job getting the contracts ready. Right now I would say we have a goal of certain amount of contracts by the end of this year. And in the first month, we've already gotten 40% of them of that target. So I think that we're going to definitely hit what we need to hit in terms of getting our contracts, our accounts, the ones that we want to get on contract up and running so we could start to build the usage and familiarity with the system. We've got a really strong commercial presence here. And I think that's a key aspect in the rollout. The implants of these devices, the electrophysiologist or the interventional cardiologist, I mean we've got a lot of great products and a lot of great call point. So that's worked out very well, too. There's always a certain amount of coordination that's required there, and that coordination has been fantastic. I'm really pleased to see that. Initial feedback has been super positive. So very happy with the initial signs. Like you said, it's about a month, 1.5 months into it. All the signs that I'm seeing show that we'll have a great opportunity here to establish Amulet as another product in the category. And then on top of that, we're making the investments, like I said, to grow the category with all of our clinical trials. Catalyst is one of them that I think is important also. So I'd say 1.5 months, very, very pleased with what I'm seeing. Robert Funck: Okay. Thanks. I'll take the inflation comments. So I think inflation and supply chain are really linked together. The global supply chains have not been able to keep up with the strong demand out there. And so like others, we're seeing some increased input costs across areas of our business. We're experiencing some higher shipping costs, and in some cases, higher commodity costs. I'd say the commodity costs are really more kind of in the Nutrition area of the business. In some areas, we have flexibility to adjust pricing a bit, and we plan to do that. In other areas, that flexibility doesn't exist, and so we're working to mitigate the impacts we're seeing such as looking at other manufacturing costs. As Robert mentioned, we've got a very strong procurement organization and supply chain organizations, and they're doing a great job working with our suppliers. And our suppliers understand the critical nature of our products. And so it's been -- we've been successful in terms of ensuring that we're able to get what we need to support the business. Operator: Our next question comes from Josh Jennings from Cowen. Joshua Jennings: Congratulations on the strong 3Q results. Hopefully, Rob, hoping to just hear maybe some puts and takes or help us understand some of the puts and takes of the 2022 operating margin. Clearly, COVID testing is going to be a factor, but any other drivers of operating margin expansion that you would highlight as we move into 2022 and then any other levers that Abbott is able to pull to drive earnings next year, depending on how the COVID testing environment plays out. Robert Ford: Sure. I'd say -- like I said in the beginning, I mean, I think 2022, our base business, our underlying base business is going to grow very strong, both on the top and the bottom. So we'll see margin expansion in that business. And that's a combination. Like Bob said, we've got gross margin improvement teams across all of our business that are working at ways to mitigate other manufacturing costs. So that will be important to be able to drive margin expansion. And then just the nature of the mix as we continue to roll out our pipeline, which is predominantly focused, I'd say, on the med device side, we've got gross margin profiles there that are accretive to the company's gross margin. So I think a lot of it is really driven on the top line and driving our top line. And the execution of these new product launches allows us to get that kind of margin expansion into 2022. And like I said, we -- the COVID piece is really just one where we're going to have to go quarter-by-quarter and update and roll our forecast every quarter. We'll have a number that we'll feel comfortable with. But those -- I'd say those are the kind of key drivers here, our product launches, our ongoing base business, margin expansions by mix and gross margin improvement. I want to keep the same profiles that we've got right now in our base business in terms of spend, R&D and SG&A. So those profiles, we wouldn't want to maintain. Obviously, if you look at our profiles right now, it's a little bit distorted because of the COVID piece. But if you look historically where we've been in the low 7s in R&D and SG&A between 20% and 30%, that's where we're going to want to kind of land. Joshua Jennings: And then just a quick follow-up on Libre. We've had some consultants talk about the potential for Abbott to add other analytes onto the platform and particularly the addition of ketone monitoring as a potential competitive advantage. Any updates just in terms of how the 3.0 on tap here, but any updates in terms of the future development plans for Libre and how you continue to maintain your competitive edge here? Robert Ford: Sure. I mean I've always -- we've always said that Libre was a platform. We always -- I know every time you put out a number, it becomes like the next what is that and what's after that. And so we've launched Libre 2. It's doing very well in the U.S. We've launched Libre 3 in Europe, and we'll obviously be rolling Libre 3 out. Regarding your question on analytes, yes, I mean that is an area that we are intentionally looking at, which is using the platform of Libre, the manufacturing platform to be able to develop new analytes. You mentioned one that we've got particular experience in our blood glucose monitoring. We have a blood ketone system. So that, we believe, is an important aspect, especially for type 1 and pumpers. We think that, that's a real important kind of feature. If you look at going into the type 2 population, there's a lot of new drugs for type 2 where there are certain warnings regarding DKA. And we think that, that might also be an opportunity, too. But that's only one analyte, and we've got a pipeline here of analytes, a dedicated team that's only focused on looking at what are the business opportunities the market needs for that. And as we get closer to those launches, which will be coming up fairly soon, we'll be updating the market. But I'm really excited about using the Libre platform here to be able to kind of expand even beyond diabetes. Operator: Our next question comes from Larry Biegelsen from Wells Fargo. Larry Biegelsen: Robert, I wanted to focus on the device side and the pipeline. Just starting with Amulet, to ask Bob's earlier question in another way, the surveys seem to be coming back, suggesting Amulet can take about 1/3 of the U.S. market and maybe even 20% next year. It's not easy for a second to market to become a market leader, but Amulet has a nice profile. What's your reaction to some of these consensus estimates for share? Do you think you can do better? And I had a follow-up. Robert Ford: Sure. Well, I mean, Amulet is new to the U.S., but it's not new to the international markets. When you look at the international market, Amulet's got a 50% market share. I've seen some of the reports, not all of them, but I'm aware of some of these surveys that are done with different physicians. And what I read and what I see them is similar what I see here in the U.S. versus what we actually see in Europe, which is it's a great product. It's sized portfolio is an advantage. Its closure rate is also an advantage. And yes, we -- as I said, this is a multibillion-dollar market where we think that we can be a true competitor in also but, at the same time, invest to develop it. I think that's an important part here also, Larry. So as I mentioned, we're making investments in next-generation product. We're going to be making investments in the commercial infrastructure, which is not only to be there during the implant but also to develop the patient referral network. And we're going to be investing in clinical trials. I think the CATALYST trial is going to be comparing it to NOACs. I think that will be a great opportunity to expand the market also. So I think it's a combination of kind of market expansion. And yes, we're competitive with our offering. We're competitive with our team. And I think 50% international is a good aspiration to have here in the U.S. Larry Biegelsen: That's helpful. And then I wanted to ask about Portico and CardioMEMS. So with Portico, you have Navitor outside the U.S. Do you think you need that in the U.S. to really drive share? And do you think you can compete in the -- without an intermediate low-risk indication, which I don't think you'll have until about 2024. And just lastly on CardioMEMS, how are you feeling about the label expansion and the commercial opportunity, given the COVID impact you mentioned on the GUIDE-HF trial? Robert Ford: Sure, Larry. Let me talk about Portico and TAVI here more broadly. This is a hugely important segment in Structural Heart. We want to be a structural heart leader. We had that vision when we put the businesses together with St. Jude. And we know that we need to be a true player here in the TAVI space. So I'm really looking at this for us as a long game. And what I mean by that is we're launching Portico in the U.S. Navitor, to your question, is a great second-generation device. We got it CE Marked and feedback is that it's a very, very competitive device. Its clinical profile in high risk is really strong. And yes, I want to bring it to the U.S. also, but not because I feel we need to because Portico is not competitive. Portico is very competitive. But in this context of building a strategy here to be a real player in the TAVI space, we know that we're going to have to bring a second generation here in the U.S. We'll have to also look about how do we develop further on Navitor. So I think that we've got about a 5% share in Europe. That's not my aspiration for the TAVI space. To your point, there's 2 pretty well entrenched competitors in the market. And -- but we have a higher aspiration than just kind of a 5% share, which is what we have in Europe. So I think the combination here of investment in the team, investment in the pipeline, in the clinical data, you're right, our kind of low-risk -- intermediate low-risk trial kind of reads out a little bit later on. But it's there. We're investing in it because we see this as a big opportunity for us to be a real player in this market. So I'm excited about it, and I know the team is to be able to kind of be a real -- a go-to full-service player in the field of structural heart. Regarding CardioMems, listen, I think we -- the data, I think, was pretty compelling. I mean this is the second -- and you know this, Larry, this is the second RCT trial that we've done. And I'm a big believer in RCT trials and the need for them to be able to generate the clinical evidence. We filed for the label expansion end of June. I think the data was very compelling. And part of it is expansion to Class II and Class IV and then also to be able to expand indication to patients with elevated BNP, which is, today, just for patients that have been previously hospitalized. So I think the combination here of the data, the fact that it is already the second RCT that we've done, a very large one also on top of CHAMPIONs -- the CHAMPIONs trial. I think there's a great opportunity here for us to develop this market. One of the things that we did in the quarter here also is we now have a more dedicated business unit for Heart Failure, where both the LVAD and CardioMEMS team are going to be combined under 1 GM, very similar to what we've done with our other businesses because we believe in the benefit of that focus and that attention to the business. So I think the combination of what we've submitted, our focus, this is a great opportunity for us in 2022 and beyond. I'm not going to comment on when -- all I can tell you is we filed it at the end of Q2. And I think the data is very strong, and we'll just leave it like that. And I'm highly hopeful that we'll be seeing that next year for sure. Operator: Our next question comes from Cecilia Furlong from Morgan Stanley. Cecilia Furlong: Great. I wanted to ask about just your neuromod business, SCS as well as other deferrable procedures. And can you walk through just sequential trends in the quarter if you started to see recovery in some of the -- in some of your more deferrable procedures trending ahead of others and also how you're thinking about the ability to recapture deferred procedures that the majority of procedure recapture can occur in 4Q or staffing shortages. Do some of this recovery in procedure recapture flow into 2022? Robert Ford: Sure. Well, I would say, this is probably out of our device businesses, the business that's had a little bit of a harder time in terms of recovering post COVID. It's probably more elective like you said, Cecilia. So it has been lagging a bit. It's been pretty flat, I would say, in terms of kind of its trajectory if we look at our trials and our implants. So -- but that's really something that we can't control in terms of kind of how that is going to bounce back. We have visibility to the pipeline of patients. We work closely with the surgery centers, and we've got visibility to that. We're not expecting a big bolus to come into Q4 and then we'll have to kind of see how Q1 and Q2 of next year looks like to be able to kind of give a better sense there. But what we can control, and that's what I focus -- we focus the team on is on our pipeline. And I think the team here has done a really good job. I'd highlight a couple of things here that we've done. NeuroSphere, which is this novel remote care platform, we've launched it. It's the first kind of system that was approved by the FDA. We did a full market release at the end of June. And I really like the numbers we're seeing. We've done over 5,000 remote programming sessions. And not only is it a remote program, but it also allows us to get visibility of the patients in the funnel. So using the adoption of that tool is great because I think it will have a real big change on the sales and service kind of business model that exists in this business. So that's going very well, and I think that will help get better visibility. Another key thing here is entrance into the rechargeable segment, which is about half of the market. We really don't have a competitive system in there, and the team has developed a rechargeable system that is best-in-class, significant advantages versus the market leaders in this segment. So we're looking forward to bringing that product to market next year. And then we've also made investments in trials. I think probably the most notable one is DISTINCT, which is an indication for nonsurgical lower back. We've completed enrollment in that study. So I think the combination of these factors here are important for us to be able to kind of take share. And then if we see the bolus of patients come back in Q1 and Q2, that will be an additional tailwind for us. Cecilia Furlong: Great. And I wanted to ask you as well about your recent acquisition of Walk Vascular and really at a high level, can you talk about your outlook just for the underlying market growth in the peripheral space over the next several years versus some of the other high-growth target end markets, including diabetes and EP? And are there other areas you look to build out around your vascular business? And beyond that, too, just what's your current outlook for pursuing a PE indication for the thrombectomy system? Robert Ford: Sure. So we've been looking at this area for quite a bit. As I always said, we're always looking. We're always studying. And this was an opportunity that we saw. We think it's an attractive segment. We see it about $700 million, growing double digits. And this kind of fell right into that sweet spot of kind of strategic -- make sense strategically for us. We've got a commercial footprint out there with an endovascular sales and service team. We know the customers. We have the call point. And we've got the capacity here to be able to leverage our manufacturing expertise here to be able to kind of scale up manufacturing. So this made perfect sense for us to be able to add it to the portfolio. And that integration is going pretty well. I don't expect any significant contributions in Q4. But as we go into next year, I think it will have an impact on our vascular business. And yes, I mean we're -- like I said, there are plenty of segments in the endo space, I would say, that we continue to study, we continue to look at, areas that we're interested in. And if we find the right moment for us to be able to add those opportunities, we will. Regarding your question on the PE indication, yes. Absolutely. We know that is very important in the peripheral space. So we're investing. That's one of the key aspects in the integration is to invest to be able to get that indication established. So yes, we are working on that. Operator: Our next question comes from Vijay Kumar from Evercore ISI. Vijay Kumar: Robert, my first one was -- going back to testing, I think your Q4 assumptions of $1 billion to $1.4 billion, that's a sequential step down versus 3Q. I'm curious, where are we on capacity right now? And what is the demand for these testing products right now? Are we seeing any sequential step down in demand right now? And I think you guys did win about $600 million-ish of DoD contracts. Is that baked into that Q4 number? Or is that a fiscal '22 contributor? Robert Ford: Okay. So regarding the Q4 forecast of $1 billion to $1.4 billion here, our capacity is we can do significantly more than that, Vijay, especially as we've -- Q3, we didn't have the full ramp-up, but now we're finishing this month. We'll be in full ramp-up mode. So we can do more than the $1.4 billion. I think the factor here that we're looking at is, as I said in the opening comments here in the first question, I continue to see the surveillance in the screening market to continue to increase. And that's with kind of Binax and ID NOW also. So we've got those businesses, everything we can make, we're rolling in here. I'd say the only question we've got here a little bit is on the symptomatic. And that's what you see maybe in this step-down here is assuming as cases decline in the U.S. that we're going to see a little bit of a decline in symptomatic testing. So that's a little -- that's one part of the factor. The other factor in the $1 billion to $1.4 billion is just pricing. We've got a market leadership position in rapid testing, especially in OTC. If you look at Nielsen data, you'll be able to see that we were at about 90% share. Before the month of September, we dropped to about 60 just because of supply. And now we're back up to 75% share, and we're seeing a little bit of price pressure. So in that number, I've baked in some price pressure to ensure that we maintain that market leadership position as we see more market entrants come in. But if we don't need that price, then that will obviously drive another beat to that number, too. But -- so that's -- those are the drivers and the thinking there, Vijay, a little bit of pricing pressure and what are we going to see on the symptomatic testing. Vijay Kumar: Sorry, the DoD contract, $600 million, is that assumed in Q4? Or is that a fiscal '22 contributor? Robert Ford: Well, we're going to have to -- yes, so the DoD contract is actually a -- I think you're quoting the maximum amount of the contract, which I know is kind of what got a lot of the news headlines. But the contract actually has a minimum amount, which is significantly lower than that, less than $100 million. So it's really going to depend here on the DoD and the federal government in terms of their purchasing. We factored in a little bit of that minimum piece in Q4. And as I talk about going into next year, that will be a portion of the part that we will feel comfortable with adding on. So -- but it's a pretty big range, Vijay, in terms of what the maximum is and what the minimum is. Vijay Kumar: Understood. And just one on your earlier comments, Robert, on the SG&A, looking back at historical trends of 29% to 30%, R&D at 7% of revenues. Was that comment referring to fiscal '22, what the OpEx as a percentage of revenue should look like for your base business? And then the variable over and beyond that should be COVID, is that the right way to think about the [indiscernible]. Robert Ford: The comment was more about ensuring that we don't -- you don't see that there is a drop in investment. When you look at our profile in Q3 in terms of R&D, it's down to 6%. Our SG&A is down to 25%. So that comment was more about there's a little bit of a distortion factor here because of COVID, and we're going to make sure that we continue to invest in the business. If you look at the investment we've made, Vijay, this year, we've added about $1 billion between R&D and SG&A to the business so that we can continue to drive the top line and, at the same time, drive the long-term sustainability of the business with the R&D investments. I talked about how we could pulsate that spend, not only this year, but as we go into next year, a portion of that spend is a little bit more discretionary on the SG&A side, and we'll be looking at that. But -- so the comment there was more about ensuring that there wasn't a distortion. We at least understood the distortion of COVID in terms of our profiles. Operator: Our next question comes from Matt Miksic from Credit Suisse. Matthew Miksic: Congrats on the strong results. So maybe just a follow-up on some of the things you were just talking about sort of this concept of reinvesting the proceeds of this very strong COVID business. So there's a perception out there, I think, because COVID testing is maybe not permanent and hard to predict that it's somehow less important or harder to value than the rest of your businesses. But the last few months, obviously, in this quarter, $1.5 billion of upside in Q3 is, by our estimates, more than $0.5 billion in operating cash. And that goes up against your $2 billion or $2.5 billion operating cash run rate. So the question is, in addition to kind of being part of the solution as you've talked about to the pandemic, maybe drill down a little bit into some of the things you were just describing, opportunities to invest behind, which ones of your growth programs do you see an opportunity to sort of dial things up? And how, if at all, does this change maybe the way you think about M&A and your activity on that front? Robert Ford: Sure. I think you've captured pretty well all the elements there of how we look at COVID. As I said in the beginning, when we started this, there's definitely an opportunity to accelerate the strategy of decentralized testing because of COVID, and that strategy has been in place, and that's an area that we are investing to ensure that we do have an ability to -- so we see more testing in pharmacy, more testing in urgent care centers and testing that goes beyond COVID that even goes beyond flu and RSV and respiratory viruses by developing assays that will be used on that rapid testing platform. So that's one investment, for sure. You can see the impact on the investment on some of the business. You see it in Nutrition. So we have been putting more disciplinary advertising and direct-to-consumer promotion in that business, and you could see the step-up in the growth rate there. We've obviously put investment into Libre, both on the SG&A side. You see -- we've rolled out a new TV commercial and funded that to a level that we feel is competitive, is leading in terms of messaging. Increased our sales force in the U.S. and other key markets for Libre so that we can call on more physicians, and you see the impact there on Libre. I mean we did almost $1 billion of sales of Libre this quarter. And in the U.S., it's about 65%. We're making great progress in penetrating the type 2 population, whether it's non-insulin users or non-intensive insulin users. We've got about a 90% market share of that segment at least. So that growth is also being supported. And we've got all these new product launches that I've been talking about on the cardiovascular side that require feet on the street, whether it's sales force, clinical specialists. And we're funding that also. So I think that, that's very clearly where we're putting our investments. We've talked about R&D investments and making sure that we've got pipeline beyond '22 and '23, and that's predominantly been in the Diagnostics and Device areas also. So it's been pretty broad based. That $1 billion increase has kind of gone well across all the businesses. And if I ask my general managers and my presidents of my businesses, do they have a next tranche of where they would go, they would have that list ready to go, too. So there's no shortage of opportunity. And then the other topic you talked about or touched on was the cash flow generation and -- as a result of the COVID business. And yes, it has generated a lot of cash. We have invested some of that cash in the organic opportunities we have, whether it's manufacturing sites here in the U.S. for COVID, for MitraClip, for Libre. So we've made those internal investments, but we've also looked at where we could provide the best return to our shareholders. And you saw that in the form of our dividend increase at the beginning of this year. We increased our dividend by 25%. You saw that we also -- probably saw that we bought back shares in Q2. And we've stepped that up even further in Q3, and we've got capacity to do more of that in Q4, if that makes sense for our shareholders. So we find a way to kind of deploy that capital. And on the M&A side, I mean, I've talked about this. If we think there's a strategic fit for us, one that is financially justified for us, that we can do better with it, that we can make it better and that there's value for our shareholders, we'll do that also. Right now, I'd say, I think the med tech and diagnostic valuations out there, especially the ones that we would be interested in, in high-quality, high-growth assets is a little bit frothy. So we're in the mode of studying and paying attention. I think the good news here is that we don't really need M&A to be able to support what I think is pretty top-tier performance here. So that's pretty comprehensive in terms of how we're looking at COVID. And it both funds our internal organic growth and allows us to either provide some more value to shareholders through buybacks, dividends. And if there's a growth vehicle out there that I think will make sense, we'll -- we won't be shy for that also. So I'll just close here a little bit and just say our results, we're achieving very strong growth across all of our businesses. I'm very excited and proud about the pipeline that all the businesses have been focused on. We've historically really focused on our organic pipelines, and that continues to be highly productive. We are entering to very new and attractive growth segments across our portfolio, and there's more products along the way there. So we're investing in our key platforms, as I've said. COVID testing is going to be an important companion to vaccines and therapeutics. At what level, I can't say right now for next year. I've given a range on what I think it's going to look like in Q4, and there could be opportunities there for us to do better than that. But I think the rapid test here is really the value proposition that's going to make sense going into next year, and we're a leader in that segment. We've built scale. We've built manufacturing, and we know how to operate in this environment, whether it's retail pharmacies or direct consumers. So our focus right now is we're going to finish strong 2021, enter into 2022 with a lot of momentum. And I think we're well-placed strategically here as we go into next year. So with that, I'll thank you all for joining us today. Scott Leinenweber: Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today. Operator: This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day.	[ { "speaker": "Operator", "text": "Good morning, and thank you for standing by. Welcome to Abbott's Third Quarter 2021 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott." }, { "speaker": "Scott Leinenweber", "text": "Good morning, and thank you for joining us. With me today are Robert Ford, President and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions." }, { "speaker": "Robert Ford", "text": "Thanks, Scott. Good morning, everyone, and thanks for joining us." }, { "speaker": "Robert Funck", "text": "Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which is consistent with our previous guidance." }, { "speaker": "Operator", "text": "[Operator Instructions] Our first question comes from Robbie Marcus from JPMorgan." }, { "speaker": "Robert Marcus", "text": "Great. And congrats on a really nice quarter. So maybe after such a good quarter led by COVID testing, I feel like you have a unique perspective looking at both sides of the coin from COVID testing, volumes and also device procedure volumes. So Robert, I'd love to get your sense of where you think we are here in fourth quarter and heading into 2022. And any early thoughts you could give us on sort of how to think about the progression of COVID testing sales and the recovery and durability of medtech volumes?" }, { "speaker": "Robert Ford", "text": "Sure. I think regarding COVID testing, we obviously -- since the start here of the pandemic, we've been learning a lot. And I think one of the things that as we developed our strategy for that, we always believe that the rapid test was going to be a kind of more sustainable part of the business. And I think we were pretty right there. I'd say the key thing that I -- and I made this in the comments, in the opening comments, the key thing that we learned over the last, let's say, couple of months here is that the vaccine is just an incredible tool for the value. It's had a huge impact on public health around the world." }, { "speaker": "Robert Marcus", "text": "Great. Great. That was really helpful. And then maybe, Robert, to build on that, I know it's still very early in your planning process. But as you just said, there's a lot of variables, a lot of moving pieces. You've had a great year in devices so far, a bumper year in testing. Any early thoughts on how investors should be thinking about 2022 versus 2021 from a top and bottom line perspective?" }, { "speaker": "Robert Ford", "text": "Yes. I mean I think like I said, we're still in our process. We'll give our guidance in 2022 in January, like we always do, Robbie. And I want to see a little bit more in terms of how this pandemic is unfolding here, especially on the COVID side, but on the base business side. I think our base business, I would say is, we've been pretty good at forecasting our business both from a top line, from a margin on our base business." }, { "speaker": "Operator", "text": "Our next question comes from Bob Hopkins from Bank of America." }, { "speaker": "Robert Hopkins", "text": "Congrats on some solid execution. I just have 2 questions. And in the interest of time, I'll just mention them both upfront because the first one is pretty straightforward. The first question is just on Amulet, and I realize it's very early in the launch. But just would love your sort of top-down comments on how things are going. And maybe any metrics you can share in terms of perhaps like the percentage of your U.S. coronary accounts that are now active with Amulet. So we'd love some just color there." }, { "speaker": "Robert Ford", "text": "Okay. Well, I'll take the Amulet and then I'll let Bob kind of talk to kind of the inflation supply chain. I mean I would just say it is manageable, but -- that we have a great team. So -- and I'll let Bob cover that." }, { "speaker": "Robert Funck", "text": "Okay. Thanks. I'll take the inflation comments. So I think inflation and supply chain are really linked together. The global supply chains have not been able to keep up with the strong demand out there. And so like others, we're seeing some increased input costs across areas of our business. We're experiencing some higher shipping costs, and in some cases, higher commodity costs. I'd say the commodity costs are really more kind of in the Nutrition area of the business." }, { "speaker": "Operator", "text": "Our next question comes from Josh Jennings from Cowen." }, { "speaker": "Joshua Jennings", "text": "Congratulations on the strong 3Q results. Hopefully, Rob, hoping to just hear maybe some puts and takes or help us understand some of the puts and takes of the 2022 operating margin. Clearly, COVID testing is going to be a factor, but any other drivers of operating margin expansion that you would highlight as we move into 2022 and then any other levers that Abbott is able to pull to drive earnings next year, depending on how the COVID testing environment plays out." }, { "speaker": "Robert Ford", "text": "Sure. I'd say -- like I said in the beginning, I mean, I think 2022, our base business, our underlying base business is going to grow very strong, both on the top and the bottom. So we'll see margin expansion in that business. And that's a combination. Like Bob said, we've got gross margin improvement teams across all of our business that are working at ways to mitigate other manufacturing costs. So that will be important to be able to drive margin expansion." }, { "speaker": "Joshua Jennings", "text": "And then just a quick follow-up on Libre. We've had some consultants talk about the potential for Abbott to add other analytes onto the platform and particularly the addition of ketone monitoring as a potential competitive advantage. Any updates just in terms of how the 3.0 on tap here, but any updates in terms of the future development plans for Libre and how you continue to maintain your competitive edge here?" }, { "speaker": "Robert Ford", "text": "Sure. I mean I've always -- we've always said that Libre was a platform. We always -- I know every time you put out a number, it becomes like the next what is that and what's after that. And so we've launched Libre 2. It's doing very well in the U.S. We've launched Libre 3 in Europe, and we'll obviously be rolling Libre 3 out. Regarding your question on analytes, yes, I mean that is an area that we are intentionally looking at, which is using the platform of Libre, the manufacturing platform to be able to develop new analytes." }, { "speaker": "Operator", "text": "Our next question comes from Larry Biegelsen from Wells Fargo." }, { "speaker": "Larry Biegelsen", "text": "Robert, I wanted to focus on the device side and the pipeline. Just starting with Amulet, to ask Bob's earlier question in another way, the surveys seem to be coming back, suggesting Amulet can take about 1/3 of the U.S. market and maybe even 20% next year. It's not easy for a second to market to become a market leader, but Amulet has a nice profile. What's your reaction to some of these consensus estimates for share? Do you think you can do better? And I had a follow-up." }, { "speaker": "Robert Ford", "text": "Sure. Well, I mean, Amulet is new to the U.S., but it's not new to the international markets. When you look at the international market, Amulet's got a 50% market share. I've seen some of the reports, not all of them, but I'm aware of some of these surveys that are done with different physicians. And what I read and what I see them is similar what I see here in the U.S. versus what we actually see in Europe, which is it's a great product. It's sized portfolio is an advantage. Its closure rate is also an advantage." }, { "speaker": "Larry Biegelsen", "text": "That's helpful. And then I wanted to ask about Portico and CardioMEMS. So with Portico, you have Navitor outside the U.S. Do you think you need that in the U.S. to really drive share? And do you think you can compete in the -- without an intermediate low-risk indication, which I don't think you'll have until about 2024. And just lastly on CardioMEMS, how are you feeling about the label expansion and the commercial opportunity, given the COVID impact you mentioned on the GUIDE-HF trial?" }, { "speaker": "Robert Ford", "text": "Sure, Larry. Let me talk about Portico and TAVI here more broadly. This is a hugely important segment in Structural Heart. We want to be a structural heart leader. We had that vision when we put the businesses together with St. Jude. And we know that we need to be a true player here in the TAVI space. So I'm really looking at this for us as a long game. And what I mean by that is we're launching Portico in the U.S." }, { "speaker": "Operator", "text": "Our next question comes from Cecilia Furlong from Morgan Stanley." }, { "speaker": "Cecilia Furlong", "text": "Great. I wanted to ask about just your neuromod business, SCS as well as other deferrable procedures. And can you walk through just sequential trends in the quarter if you started to see recovery in some of the -- in some of your more deferrable procedures trending ahead of others and also how you're thinking about the ability to recapture deferred procedures that the majority of procedure recapture can occur in 4Q or staffing shortages. Do some of this recovery in procedure recapture flow into 2022?" }, { "speaker": "Robert Ford", "text": "Sure. Well, I would say, this is probably out of our device businesses, the business that's had a little bit of a harder time in terms of recovering post COVID. It's probably more elective like you said, Cecilia. So it has been lagging a bit. It's been pretty flat, I would say, in terms of kind of its trajectory if we look at our trials and our implants. So -- but that's really something that we can't control in terms of kind of how that is going to bounce back." }, { "speaker": "Cecilia Furlong", "text": "Great. And I wanted to ask you as well about your recent acquisition of Walk Vascular and really at a high level, can you talk about your outlook just for the underlying market growth in the peripheral space over the next several years versus some of the other high-growth target end markets, including diabetes and EP? And are there other areas you look to build out around your vascular business? And beyond that, too, just what's your current outlook for pursuing a PE indication for the thrombectomy system?" }, { "speaker": "Robert Ford", "text": "Sure. So we've been looking at this area for quite a bit. As I always said, we're always looking. We're always studying. And this was an opportunity that we saw. We think it's an attractive segment. We see it about $700 million, growing double digits. And this kind of fell right into that sweet spot of kind of strategic -- make sense strategically for us. We've got a commercial footprint out there with an endovascular sales and service team. We know the customers. We have the call point. And we've got the capacity here to be able to leverage our manufacturing expertise here to be able to kind of scale up manufacturing." }, { "speaker": "Operator", "text": "Our next question comes from Vijay Kumar from Evercore ISI." }, { "speaker": "Vijay Kumar", "text": "Robert, my first one was -- going back to testing, I think your Q4 assumptions of $1 billion to $1.4 billion, that's a sequential step down versus 3Q. I'm curious, where are we on capacity right now? And what is the demand for these testing products right now? Are we seeing any sequential step down in demand right now? And I think you guys did win about $600 million-ish of DoD contracts. Is that baked into that Q4 number? Or is that a fiscal '22 contributor?" }, { "speaker": "Robert Ford", "text": "Okay. So regarding the Q4 forecast of $1 billion to $1.4 billion here, our capacity is we can do significantly more than that, Vijay, especially as we've -- Q3, we didn't have the full ramp-up, but now we're finishing this month. We'll be in full ramp-up mode. So we can do more than the $1.4 billion. I think the factor here that we're looking at is, as I said in the opening comments here in the first question, I continue to see the surveillance in the screening market to continue to increase. And that's with kind of Binax and ID NOW also." }, { "speaker": "Vijay Kumar", "text": "Sorry, the DoD contract, $600 million, is that assumed in Q4? Or is that a fiscal '22 contributor?" }, { "speaker": "Robert Ford", "text": "Well, we're going to have to -- yes, so the DoD contract is actually a -- I think you're quoting the maximum amount of the contract, which I know is kind of what got a lot of the news headlines. But the contract actually has a minimum amount, which is significantly lower than that, less than $100 million. So it's really going to depend here on the DoD and the federal government in terms of their purchasing. We factored in a little bit of that minimum piece in Q4. And as I talk about going into next year, that will be a portion of the part that we will feel comfortable with adding on. So -- but it's a pretty big range, Vijay, in terms of what the maximum is and what the minimum is." }, { "speaker": "Vijay Kumar", "text": "Understood. And just one on your earlier comments, Robert, on the SG&A, looking back at historical trends of 29% to 30%, R&D at 7% of revenues. Was that comment referring to fiscal '22, what the OpEx as a percentage of revenue should look like for your base business? And then the variable over and beyond that should be COVID, is that the right way to think about the [indiscernible]." }, { "speaker": "Robert Ford", "text": "The comment was more about ensuring that we don't -- you don't see that there is a drop in investment. When you look at our profile in Q3 in terms of R&D, it's down to 6%. Our SG&A is down to 25%. So that comment was more about there's a little bit of a distortion factor here because of COVID, and we're going to make sure that we continue to invest in the business. If you look at the investment we've made, Vijay, this year, we've added about $1 billion between R&D and SG&A to the business so that we can continue to drive the top line and, at the same time, drive the long-term sustainability of the business with the R&D investments." }, { "speaker": "Operator", "text": "Our next question comes from Matt Miksic from Credit Suisse." }, { "speaker": "Matthew Miksic", "text": "Congrats on the strong results. So maybe just a follow-up on some of the things you were just talking about sort of this concept of reinvesting the proceeds of this very strong COVID business. So there's a perception out there, I think, because COVID testing is maybe not permanent and hard to predict that it's somehow less important or harder to value than the rest of your businesses. But the last few months, obviously, in this quarter, $1.5 billion of upside in Q3 is, by our estimates, more than $0.5 billion in operating cash. And that goes up against your $2 billion or $2.5 billion operating cash run rate." }, { "speaker": "Robert Ford", "text": "Sure. I think you've captured pretty well all the elements there of how we look at COVID. As I said in the beginning, when we started this, there's definitely an opportunity to accelerate the strategy of decentralized testing because of COVID, and that strategy has been in place, and that's an area that we are investing to ensure that we do have an ability to -- so we see more testing in pharmacy, more testing in urgent care centers and testing that goes beyond COVID that even goes beyond flu and RSV and respiratory viruses by developing assays that will be used on that rapid testing platform." }, { "speaker": "Scott Leinenweber", "text": "Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today." }, { "speaker": "Operator", "text": "This concludes today's conference call. Thank you for participating. You may now disconnect. Everyone, have a great day." } ]	Abbott Laboratories	247,483
ABT	2	2,021	2021-07-21 23:15:00	Operator: Good morning, and thank you for standing by. Welcome to Abbott's Second Quarter 2021 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant's questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission. I would now like to introduce Mr. Scott Leinenweber, Vice President, Investor Relations, Licensing and Acquisitions. Scott Leinenweber: Good morning, and thank you for joining us. With me today are Robert Ford, President and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance, and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2021. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A, Risk Factors, to our annual report on Form 10-K for the year ended December 31, 2020. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available at our website at abbott.com. Unless otherwise noted, our commentary for sales growth refers to organic sales growth, which excludes the impact of foreign exchange. With that, I will now turn the call over to Robert. Robert Ford: Thanks, Scott. Good morning, everyone, and thank you for joining us. Today, we reported results of a very strong quarter. Ongoing earnings per share were $1.17, reflecting more than 100% growth compared to the prior year. Sales increased 35% on an organic basis in the quarter compared to last year. Given the significant negative impact COVID had on demand for elective medical procedures and routine diagnostic testing last year, comparing sales versus pre-pandemic levels of 2019 provides one of the more relevant measures of performance. On this comparison, excluding sales from our COVID testing business, organic sales grew nearly 11.5% in the second quarter, driven by strong sales growth across all 4 of our major businesses, including double-digit growth in Established Pharmaceuticals, Nutrition and Medical Devices. I'll now summarize our second quarter results before turning over the call to Bob. And I'll start with Nutrition, where sales increased 9.5% compared to last year. Strong growth in the quarter was led by mid-teens growth in Adult Nutrition, including more than 20% growth internationally. Since the beginning of the pandemic, we've seen 2 factors positively impact Adult Nutrition demand: new users are entering the category and existing customers have increased their usage. And as the global market leader, these dynamics are driving strong growth for our Ensure and Glucerna brands. In Pediatric Nutrition, sales grew nearly 4.5% in the quarter, led by growth of nearly 9% in the U.S., where we continue to capture share with our leading portfolio of infant formula and toddler brands. Sales of Pedialyte, our global rehydration brand, grew strong double digits, driven by recently launched new products and increased investments we're making in direct-to-consumer promotion. Turning to Diagnostics. Sales increased more than 55%, which includes $1.3 billion of COVID testing-related sales. Excluding COVID testing-related sales, underlying Diagnostics sales increased 37% compared to last year. Strong sales growth in our underlying Diagnostic business is being driven by improving routine diagnostic testing as health care systems continue to recover from the pandemic as well as the continued rollout of our Alinity platforms. Excluding COVID testing-related sales, second quarter sales in Core Laboratory and Molecular Diagnostics grew mid-single digits compared to pre-pandemic levels in the second quarter of 2019. Moving to Established Pharmaceuticals, where sales grew nearly 15% in the quarter. Strong sales performance in the quarter was broad-based across several countries, including double-digit growth in India, China, Russia and Brazil, which led to overall sales growth of nearly 18.5% in our key emerging markets. While we continue to see COVID cases surge in several emerging markets, including the recent surge in India, our team is executing at a high level to meet market demand for our medicines. And lastly, I'll cover Medical Devices, where sales grew 45% in the quarter compared to last year and more than 15.5% compared to the second quarter of 2019. Strong growth in the quarter was led by Structural Heart, Electrophysiology, Heart Failure and Diabetes Care, all of which grew double digits compared to the second quarter of 2019. In Structural Heart, we achieved the highest number of MitraClip procedures ever in the second quarter, including a record number of procedures in the month of June. Now I'll wrap up with Diabetes Care, where strong growth was led by FreeStyle Libre sales of more than $900 million. The global user base for Libre grew to approximately 3.5 million users, including approximately 1 million users in the U.S., driven by market expansion and awareness efforts as well as ongoing new product launch activity in every major market around the world. So in summary, we're achieving strong growth across all 4 of our major businesses, particularly pleased with the strong momentum and growth contributions we're seeing from several recently launched products and investments we're making in our key growth platforms. And our new product pipeline continues to be incredibly productive, delivering a steady cadence of new products with more to come over the next several months. I'll now turn over the call to Bob to discuss our results and outlook for the full year in more detail. Bob? Robert Funck: Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which is consistent with our previous guidance. Turning to our results. Sales for the second quarter increased 35% on an organic basis, which was led by strong performance across all of our businesses. Excluding COVID testing-related sales, organic sales growth was 29% versus last year and nearly 11.5% compared to the second quarter of 2019. Foreign exchange had a favorable year-over-year impact of 4.5% on second quarter sales, resulting in total reported sales growth of 39.5% in the quarter. Regarding other aspects of the P&L for the quarter, the adjusted gross margin ratio was 56.9% of sales, adjusted R&D investment was 6.2% of sales and adjusted SG&A expense was 25.8% of sales. Our second quarter adjusted tax rate was 14.4%, which reflects an adjustment to align our year-to-date tax rate with our revised full year effective tax rate forecast of 14.7%. The revised full year forecast is modestly lower than the estimate we provided in January due to a shift in the mix of our business and geographic income. Turning to our outlook for the full year 2021. Our full year adjusted earnings per share guidance of $4.30 to $4.50 remains unchanged and reflects strong double-digit growth compared to last year and approximately 35% growth at the midpoint compared to our pre-pandemic adjusted earnings per share in 2019. We continue to forecast $4 billion to $4.5 billion in COVID testing-related sales for the full year 2021. And based on current rates, we would expect exchange to have a favorable impact of around 2% on our full year 2021 sales. Turning to the outlook for the third quarter. We forecast adjusted earnings per share of at least $0.90, which reflects continued strong growth and momentum in our core underlying business and a sequential step-down in COVID testing-related sales compared to the second quarter. And based on current rates, we would expect exchange to have a favorable impact of around 1% on our third quarter reported sales. With that, we'll now open the call for questions. Operator: [Operator Instructions] Our first question comes from Bob Hopkins from Bank of America. Robert Hopkins: I'll keep my questions quick and high level. First, for Robert, I'm just curious on your view on the pace of the recovery in surgical procedures generally. Is it kind of continued throughout the quarter and into July? Or are you starting to see signs of the spread of variants could cause a little lumpiness in the pace of the recovery? Just wanted to get your views on how things are going. Robert Ford: Sure. Listen, we obviously had a very strong quarter in terms of recovery. I mean we had planned to see that recovery in the U.S. and in Europe and in certain Asian markets, and that recovery has largely played out the way we had anticipated. I'd say probably a little bit better even than what we thought. I don't think what we're seeing here with relating to like increase in COVID cases, I don't think that you'll see the same -- or at least we're not seeing the same kind of impact in terms of hospitals shutting procedures down, stopping testing, et cetera. I think it's a very different situation where we are this year versus where we are last year, even though if you look at the case, global case counts, they're pretty much in line to where we were in October last year. We've got therapeutics. We've got vaccines. We've got testing. So we're not seeing that. On the device side, listen, our business has done very well. Overall, as I said in my comments, we're up double digits, mid-teens versus the second quarter largely driven by EP, Heart Failure, Structural Heart, Diabetes, as I said. And actually, if you look at the cardiovascular-specific recovery, we exited the first quarter at about a 2% growth versus March of 2019. And then if you look at the second quarter, our June growth rate was around about 7% versus June of 2019. So we're seeing this kind of sequential recovery in the procedures as evidenced by our growth rates in our procedures. And we were looking at data yesterday, the first couple of weeks of July are showing that same trajectory, whether it's in the U.S. or whether it's outside the U.S., generally. Obviously, there are some markets that have different kind of trends and paces. But I'd say, overall, we're seeing that recovery. And that's how we're looking at the rest of the year, Bob, is that continued trajectory in terms of recovery in procedures and diagnostic testing. Robert Hopkins: Okay. That's really helpful. And then my second question for Bob. I'd love you to comment on 2 things, if okay. One, just you had a nice EPS beat relative to consensus and really relative to the way you guys just guiding the quarter. But you're leaving guidance the same. Just wanted to understand that dynamic. Why not boost the EPS a little bit? And then secondly, if you -- just curious if you think consensus estimates, as we look forward a little bit, are kind of reflecting the way you guys are viewing the world right now. And obviously, I'm specifically talking about next year. So any preliminary thoughts on whether consensus is sort of capturing the world as you see it? And wondering just about the EPS guidance for this year. Robert Funck: Yes. Bob, I'll take the first question on the guidance for this year. Clearly, about 1/3 of that beat was due to the little higher COVID sales than we have projected. Obviously, forecasting COVID is quite challenging. And so that was about 1/3 of beat. About 2/3 really was better performance in the base business versus how The Street had modeled that. And so the way we look at it, we gave a pretty wide range on earnings guidance back at the beginning of June. And that really kind of accounts for any kind of fluctuations or changes in the COVID testing in the back half of this year as well as kind of underlying base business performance. So we feel really comfortable about the range we have and feel that kind of captures different scenarios around COVID testing. Robert Ford: Bob, on the question of consensus for the rest of the year, I mean, I think this is how we're thinking about the second half of the year. Obviously, from a top line perspective, we're going to have to lap some of our COVID sales that we had in Q3 and Q4. Obviously, if you looked at last year, that was really the height of our ramp-up in COVID sales. But the underlying business, excluding COVID sales, will be getting sequentially better every quarter. So we're looking at our base underlying business growing low double digits for the rest of the year. From a gross margin perspective, we'll see expansion in gross margin versus where we were in Q2. There's obviously maybe some friction on some input costs, commodities, freight, et cetera, the team works hard to kind of offset those. So we'll see improvement also as the base business recovers and the margin profiles from that recovery expand. And we'll continue to make the ramp-up of investments that we talked about from an R&D and SG&A perspective. Some of those investments have a faster and more, I'd say, kind of more immediate return. So for example, direct-to-consumer advertising in Nutrition or Libre, for example, and some of those investments are a little bit more medium term, whether it's R&D programs or whether it's kind of getting ready for upcoming launches. So the real, I'd say, kind of factor here becomes COVID testing. And we gave guidance about a month ago about $4 billion to $4.5 billion. After the 2 quarters, we're about $3 billion, $3.5 billion. So we've got between $0.5 billion and $1 billion to go in the next 6 months. And I think that's really the question here is how will testing play itself out in the next kind of second half year, whether it's variants, whether it's vaccination rates, et cetera. So that's just something that we're paying attention. And as Bob said, that's why our guidance range was pretty wide, which is really to account for that. Operator: Our next question comes from Robbie Marcus from JPMorgan. Robert Marcus: Great. Congrats on a good quarter. Bob, maybe to follow up on the last question. There's a lot of moving pieces down the P&L right now. You had a really good operating margin in the quarter. I was just wondering if you could update us on the latest on how you're thinking of reinvestment of COVID testing revenues, how that's flowing through the P&L. And if you have any preliminary thoughts on the impact or benefit it might add to next year as people think about their models now. Robert Funck: In terms of investment, Robbie, if you look at our SG&A and R&D combined, we're up around $700 million versus the prior year. And we expect to kind of sustain pretty strong investment in the base business. So we have, as you know, reinvested some of those COVID testing sale profits back into the base business to drive growth going forward. As you say, we had a really healthy operating margin profile in the second quarter. We're going to see some impact on that operating margin profile the rest of the year with the step-down in those COVID testing sales in the back half of this year. That's going to obviously have some impact on our operating margin profile while we sustain a lot of that investment, in particular, in the R&D and SG&A spaces to drive growth the rest of the year and into next year. Robert Marcus: Great. And maybe just a quick follow-up. We have some -- coming back to new product launches and clinical data sets. We have 2 interesting ones coming at ESC later in August with CardioMEMS and with Amulet. I was just hoping we could get the latest thoughts on approval timing, product launch potential and how we should think about near-term expectations for product launches, given the COVID environment is still impacting hospitals to a degree. Robert Ford: Sure. On Amulet, we talked about this, right, Robbie. We filed with the FDA late last year. We -- right now, we plan to present the data at ESC. So that's kind of in the late August time frame. We think it's, again, an attractive market, great opportunity for growth for us. The product is available in Europe and in those markets, albeit a smaller market than the U.S. We have a 50% market share. So we feel very good about our ability here to compete with the product we have. Regarding timing, it's one of those I can't give you an exact timing. It's definitely, we think, kind of in the second half. And then it's just going to depend in terms of impact this year versus next year. Obviously, the impact next year is larger. And that's just going to depend on when the approval hits this year. Obviously, if it's more towards the back end of the year, then we'll see less of an impact. If it's sooner, that will be an opportunity for us here to execute on that. On CardioMEMS, I guess, similar. We think this is another great opportunity. I mean, both these products were products when we began the St. Jude integration, both of these products were trials that we really wanted to invest in and drive on the clinical evidence and driving the clinical evidence of these 2 products. So it's great to see we're in a position now to be able to kind of disclose and share the data from these trials that we put together. We filed our label expansion with the FDA on CardioMEMS this second quarter, more towards the end of the second quarter. And again, we think it's a great opportunity also. And probably in terms of an approval there, not really banking on that approval from a sales perspective this year. Operator: Our next question comes from Vijay Kumar from Evercore ISI. Vijay Kumar: Congrats on the strong print this morning. Robert, maybe one high-level question on the base business here. I think there are some confusion this morning. On the base ex COVID rate versus pre-pandemic 2019 levels, I think you did 11% in 2Q and that was maybe perhaps low double digits in Q1. So the question I think people are asking is, if we had sequential improvements, is 11% versus 10%, that seems a little light. But I think that kind of ignores the business mix. Maybe perhaps can you talk about what's happening to device business? What was the sequential acceleration? And what is baked in for the back half? Should we continue to see some benefit from backlog and further acceleration? Robert Ford: Sure. I mean I think the Med Device kind of grew again, Q2 versus 2021. That growth rate has been increasing and has been sequentially improving, as I said, in the first question. Obviously, the recovery is not uniform across all businesses. So if you look at our device portfolio, one of the parts of the portfolio that we've seen a little bit of a lagging recovery here has been in Neuromodulation, where I'd characterize that as a little bit even more elective than some of the other procedures. And we've seen, say, like a little bit of a slower recovery trend in that business versus, say, for example, a Structural Heart, an EP or a Diabetes business. Similar to Diagnostics, our immunoassay and clinical chemistry business, that's growing high single digits in the second quarter versus the second quarter of 2019, and that's an improvement versus where we were in Q1. One of the issues that we see in our Diagnostic businesses, we're seeing a slower recovery in kind of blood donations and that obviously impacts our transfusion business. So kind of similar to neuro on the diagnostic side, seen a little of a slower recovery. But I'd say those businesses that were more impacted by COVID in Q2 of last year, I'd say they've largely kind of recovered very well, very nicely, and we expect that trend to continue in the second half. Vijay Kumar: That's helpful. And then maybe one on the product side on CardioMEMS. We did some work. It looks like it's an interesting trial. It's a pretty large trial, I think, 3,600 patients enrolled, that's fairly large. I guess assuming some of these results, if they were to mimic CHAMPION or the original trial in terms of reduction in heart failure hospitalizations. I think mortality is an endpoint here. Should CardioMEMS be a multibillion-dollar product for Abbott? The reason I'm asking is historical adoption trends have been quite slow, but your investments in such a large trial suggests some optimism. So I'm curious how you guys are thinking about the longer-term opportunity. Robert Ford: Sure. I mean I think a lot of these device segments that we see kind of large opportunities. I think the key thing here is to make sure that you put the clinical evidence to be able to kind of create a strong kind of market development approach here. And when we looked at CardioMEMS at the time back in 2017, where there were some issues with reimbursement in CMS, ascertaining the max kind of worth reimbursing, et cetera. And you had positive CHAMPION's data. I'm aware of some of the perceived shortcomings of that trial, but there is also plenty of real-world evidence showing similar benefits and similar results that you had observed in CHAMPION. So we looked at this and we believe that this was a significant opportunity in the cardiovascular space. We believe that monitoring pulmonary arterial pressure is a great indicator for prevention of acute heart failure and decided to make the investment in a larger trial to either address the perceived shortcomings of CHAMPION or -- and/or augment the data set. So I'm hesitant to put a number around here, Vijay. But I think the viewpoint here is that this is an opportunity as we're building our Heart Failure portfolio together with our LVAD portfolio and even with MitraClip, quite frankly, to really have a comprehensive suite of solutions for it. And I think this is going to be an opportunity that we will be intentional about investing, whether it's trial, whether it's clinical and field-based teams to drive it. We think the opportunity to expand the label to a Class II and Class IV presents a significant opportunity for us to expand the market and also the indication here to include CardioMEMS with elevated levels of BNP. So I think that this is a great opportunity. I guess your comment on mortality, I think that's important, but I also know, in talking to health systems, that hospitalization and reduction in hospitalization is still very important. Some can argue that maybe you're just kicking the can down the road. But I think that if you look at and have conversations with the health care systems, they'll see this as an important reduction. Any reduction of hospitalization for this patient population will be significantly important for them. So bottom line, yes, I think this is a great opportunity for us and we're being intentional about our investment and making the right clinical evidence to support the adoption so that we can get to numbers that you're referencing or even bigger. Operator: Our next question comes from Larry Biegelsen from Wells Fargo. Larry Biegelsen: Just 2 for me. I'll start with Libre, Robert. Just maybe at a high level, your thoughts on kind of the road map for Libre from here, given that you're closing in on $1 billion a quarter in sales. And more specifically, any update on the launch of Libre 3 in Europe and how delays at FDA might impact the timing of Libre 3 in the U.S. And I had one follow-up. Robert Ford: Sure. Listen, we had a real strong quarter, as you saw, and as you mentioned, approaching that $1 billion mark on a quarterly perspective, sales above 40%. I think really important here, Larry, is the user base. And this is a different kind of device business. It's a -- we talked about it from a mass market opportunity versus other parts of our device portfolio that might be a little bit more, let's say, call it, nichey versus the size of Libre. But the user base is super important because when you've got this kind of retention level that we're seeing on the product, so between 80% and 90-plus percent globally, it really looks more like a subscription-like model. And when you're in that subscription-like model and you've got this recurring revenue, the user base is hugely important. And I think that's a lot of our focus right here, as we talked about this mass market, is building the user base. And I think we've done a really good job internationally and in the U.S. But as we've talked about, okay, we've got 3.5 million users. I've talked about numbers all the way up to 80 million users potential for this product once you aggregate insulin users and type 2s, et cetera. So I think this is a real strong growth opportunity for us, and we're still in the early innings, as I've said. From a road map perspective, we're not deviating from kind of how we thought about this, right, which is we will continue to provide superior technology, superior experience to the user, whether it's with the product, whether it's how they get the product and still a value proposition that makes sense for a mass adoption. So that's all gone very well, and that will continue to go very well. Libre 3, we launched it in, I'd say, in Germany at the beginning of the year here. A lot of our focus in that launch, Larry, was just more to understand kind of our marketing messaging, our positioning with our existing portfolio, reactions from physicians and even look at how other users from other CGMs kind of reacted to it. And it's basically surpassed my expectations as we went into that pilot launch. And so we'll be now transitioning to full launch mode of Libre 3, where we've got approval. Specifically in the U.S., obviously, it's understood that the backlog that exists in -- at the FDA regarding diabetes products. And I'm not going to comment on kind of timing here or expectations, but just that we're very excited kind of to be able to bring Libre 3 to the U.S. also and augment our portfolio with the product. Larry Biegelsen: That's helpful, Robert. And just lastly for me. I know I've asked about this on a few earnings calls, but I'm just curious how your thoughts on capital allocation are evolving, given your strong balance sheet. We know valuations are relatively high. Are there areas where you think valuations look more attractive? And historically, the sweet spot for Abbott's been acquisitions in the $5 billion to $10 billion range. Is that still the case? I mean, obviously, St. Jude was an exception to that, but just curious to see how your thoughts are evolving on M&A. Robert Ford: Well, specifically on M&A, there's no change in thoughts there. I mean I think rather than have a number tied to it, it's more about does it strategically fit? Do we think that we can execute and drive more value out of it? And that mindset hasn't changed independently of kind of dollar amount there. We're obviously actively looking. We constantly surveil and survey and pay attention and track. What I can say is that we've been probably actively moderating much more than where we were back in 2017. But there are some pretty elevated valuations right now, and I'm not going to do anything here that's going to either dilute our profiles, our growth rates, et cetera. And key driver here is, is it being strategic? I actually think a lot of opportunity we have from a capital allocation back to kind of how you started the question was we've got a lot of opportunity internally. A lot of great returns that we can have with our capital as we deploy them to support these opportunities that we have in our pipeline, specifically regarding kind of manufacturing, kind of ramp-up in capacity, whether it's Libre, whether it's MitraClip, seeing an opportunity here with Adult Nutrition as we've seen kind of several years here of strong kind of double-digit growth in Nutrition. So I think we've got a great opportunity to be able to provide a great return to our shareholders by looking at our internal opportunities also. Operator: Our next question comes from Matt Taylor from UBS. Matthew Taylor: So I did want to ask one about COVID testing. And we know your guidance for the year here implies lower sales in the last 2 quarters. I was wondering if you could just give us any insight into the trends that you're seeing in testing, especially outside of the U.S. where we have less visibility, so we can think about some of these different scenarios that you're baking into the guidance for the rest of the year. Robert Ford: Sure. Well, about a month ago, we talked a lot about COVID testing here. And I don't think, over the last 30 days, we've seen anything materially different. I would say we continue to see some of that kind of lowered kind of testing volumes in the U.S., whether it's PCR but probably a little bit more on the rapid side. We did a little bit better than what we had forecasted for the second quarter, and that was largely driven by international markets. Still about 80% of our sales are on the rapid side. But we did see higher international sales. And I'd say, yes, it's probably driven by delta variant. A lot of those international sales are more, let's say, kind of tender-driven. And we've got great visibility to where cases are rising and our positions in those markets. As a company, our relationships, our understanding of how health authorities in those countries are thinking about their testing. And what I can say is we become -- we've definitely become a preferred supplier here because of our scale, our capacity, the quality of our products and our pricing. So the question here is going to be, even with surges, are you going to see testing increase? I think we will. I think we will see some of that. The question will be, geographically, where are we going to see it more? And I think geographically, we'll see more internationally than, at least what I think right now, than what we'll see in the United States from a back half perspective. Matthew Taylor: Got it. And maybe I could just ask one follow-up on recovery in Diagnostics versus med tech. So I know you called out this issue with blood donations. And I guess, excluding that, would you think about the recovery in your core diagnostics business, ex COVID, similar to med tech, should it go in lockstep? Or is there going to be a difference there for some reason? Could you flesh out the blood donation headwind? How much is that? Robert Ford: Yes. Like at a high level, I would say, yes, we're seeing kind of that same kind of recovery trend, again, within its own kind of segment. Our immunoassay and clinical chemistry business, which represents about 80% of our core lab business, that actually was up high single digits in Q2 versus Q2 of 2019. So we are seeing that recovery on the core lab. There are some assays that haven't recovered as much. What we've seen here in the U.S. is that we're seeing post-surgery policies here from certain hospitals do less overnight stays. So when you're doing that, you're getting a little bit less of that. But I'd say that's offset with higher share gain and growth in new accounts with the rollout of Alinity. So we're seeing that kind of high single digit. And as you mentioned, the issue is really kind of low donation, blood donations that are impacting our transfusion business, which we've got 65%, 60-plus percent market share. So we're hoping to see -- we've been working with different agencies here to kind of bring awareness to this fact here because, obviously, there's inventory of blood. But if this rate of donations continues, then it will be a challenge for the U.S. So hopefully, we'll start to see that recover here as we get towards the end of the year. Operator: Our next question comes from Joanne Wuensch from Citibank. Joanne Wuensch: It's really 2 questions. The first one is a follow-up on what Bob was asking earlier on, is there anything that you can give us on 2022? I'm getting a lot of questions as it relates to margins, COVID, double-digit EPS. So anything on a framework basis that would be helpful. I'd appreciate it. Robert Ford: Sure. Listen, we've talked about this a couple of times on a couple of calls already, and I just think it's a little bit too early to kind of provide that forecast given there's so many different kind of moving parts. We're starting our process right now. But I don't think the framework changes versus what we've talked about, which is our underlying business, so excluding COVID testing, it will clearly be very well positioned for very strong growth, top line and bottom line just based on the trends that we're seeing, based on the pipeline, the new products that we have in the pipeline that we have in place. So our underlying base business will clearly be set up for very strong top and bottom line growth. We've obviously got to look at COVID testing, and that's a factor here. We talked about it last call. It'll be probably not very prudent here to assume a significant amount of COVID testing. Now if there's going to be demand of COVID testing, we've got plenty of capacity to meet it, and that's ultimately going to be kind of the factor here. As I said, we're going to start to kind of lap a little bit of this testing in Q3 and Q4 of this year. We've obviously had a real strong Q1 also. So that obviously has an impact. And then having to look at our spend and modulate our spend here, but in a way that doesn't detract from our kind of long-term sustainable kind of growth even past 2022, 2023. So we've got a lot of good momentum, a lot of ongoing and upcoming launch activity and I want to make sure that I capitalize on the positions and the opportunities that we've built upon. Joanne Wuensch: And then I've heard the word pipeline investment a couple of times there. Other than some of the names that we've -- or products that we've already focused on, such as Amulet, CardioMEMS and Libre 3, are there other products in the pipeline that you'd like to draw our attention to? Robert Ford: Yes, sure. Listen, if you look at Structural Heart, I think there's 2 kind of really good opportunities for us over here. TAVR with bringing the product to the U.S. and the launch of our second-generation product in Navitor in Europe. I mean these are 2 opportunities that we have. We know our position and we know the choices and the strategy that we'll take as we enter this market here in the U.S., and I think it's great. It will be a great opportunity for us. And then the second product on Structural Heart is our tricuspid repair system. It's a great opportunity. It's got a potential kind of billion-dollar market opportunity for it. We've done very well with it, actually. Right now, our sales have kind of annualized right now on a $100 million basis, and we launched this in the middle of pandemic last year. So I think that's a great near-term opportunity. And then on CRM, we've made the investment here to get our leadless program back on track here regarding a single chamber and then making the investment on a dual chamber. And I think that's another kind of big opportunity that we'll have to continue our kind of growth recovery in our CRM. So we're targeting to enter this market next year, again, with a single chamber and then build off there. So I think we've got great opportunity in the device space. And then in the Diagnostics is the continuing of building the menu, the assays, the menu of assays. We're obviously making investments in our rapid business to capitalize on the placements that we've made for ID NOW with COVID to be able to kind of not only drive flu, but other respiratory viruses that we think will be opportunity for us also. But I think those are probably more the near term, i.e., next kind of 12, 18 months and then a larger pipeline after that. Operator: And our last question comes from Josh Jennings from Cowen. Joshua Jennings: Robert, just wanted to ask a multipart question on just duopolies in the U.S. market. You're about to create one with the entrance at Amulet. And then down the line, you'll be in a different position as the first mover in the duopoly being created by a competitor coming into the edge-to-edge mitral repair market. And I was hoping if you could just give us your views on U.S. duopolies in terms of second player coming into the market, catalyzing market growth, how you think about that, the risk for competitive pricing to ensue and then the potential for that second mover to capture share and where those can lay out. Robert Ford: Sure. I mean generally speaking, competition will always kind of drive further innovation, further investment. So one can kind of make the analysis here that when you're -- when you have a competitor coming into your segment, you'll do more to invest in the business and that investment will then drive the category. So I think on one side, I do believe in that, and I think you can see how that's kind of had an impact. Definitely, when we came into the U.S. with Libre and kind of what happened to that market and what happened to the technology in terms of kind of making all the technologies better and et cetera. So the flip side of that is competition is -- you could potentially see, I guess, price as a lever to drive demand or to drive share capture. We've tried to focus every time we're entering markets with a value proposition that sustains our price and our pricing strategy and focus on the benefits that our solution will bring. And so I think you've got these 2 parts of kind of competition in markets. I'd say that's probably true for a 2-player market or a 3-player market. So -- but listen, we're excited to come into the LAA market here in the U.S. We're obviously a player internationally and we're making the investments. So for example, we've already begun our investment in market expansion in LAA with our CATALYST trial, which is comparing our product to NOAC, which is the standard of care. And I know that competitors are making kind of similar clinical investment. I think that's good. I think that's positive. Okay. So that being said, I'd say here, if I just kind of sum up, our results clearly demonstrated here that we're showing real strong growth across all of our businesses, devices, Diagnostics, our Established Pharmaceutical business and our Nutrition. And as I said in the beginning of the call, as we look to the second half of the year, we expect that growth to continue in our underlying business. I think to Joanne's question, maybe to Bob's question also, optically, you're going to see a little bit of this, I'd say, artificial fog or lapping here or a comp versus for a few quarters as we kind of go through these sales that we've had from this big role that we played in COVID testing during the pandemic. But I don't let that cloud kind of how we think about the business and how we think about the business long term. And I think our forecast here shows that we'll have a pretty differentiated underlying base business performance here. Our pipeline is highly productive, we've got a lot of ongoing launch activity and there's even more on the way here. So we're very excited about that, and we're investing across our key growth platforms. So we're feeling really good about our underlying base business and the momentum that we've got. So thanks for joining us today. Scott Leinenweber: Thank you, operator, and thank you for all of your questions. That now concludes Abbott's conference call. A webcast replay of this call will be available after 11 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today. Operator: Thank you. This concludes today's conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day.	[ { "speaker": "Operator", "text": "Good morning, and thank you for standing by. Welcome to Abbott's Second Quarter 2021 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott." }, { "speaker": "Scott Leinenweber", "text": "Good morning, and thank you for joining us. With me today are Robert Ford, President and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance, and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions." }, { "speaker": "Robert Ford", "text": "Thanks, Scott. Good morning, everyone, and thank you for joining us. Today, we reported results of a very strong quarter. Ongoing earnings per share were $1.17, reflecting more than 100% growth compared to the prior year. Sales increased 35% on an organic basis in the quarter compared to last year." }, { "speaker": "Since the beginning of the pandemic, we've seen 2 factors positively impact Adult Nutrition demand", "text": "new users are entering the category and existing customers have increased their usage. And as the global market leader, these dynamics are driving strong growth for our Ensure and Glucerna brands." }, { "speaker": "Robert Funck", "text": "Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which is consistent with our previous guidance." }, { "speaker": "Operator", "text": "[Operator Instructions] Our first question comes from Bob Hopkins from Bank of America." }, { "speaker": "Robert Hopkins", "text": "I'll keep my questions quick and high level. First, for Robert, I'm just curious on your view on the pace of the recovery in surgical procedures generally. Is it kind of continued throughout the quarter and into July? Or are you starting to see signs of the spread of variants could cause a little lumpiness in the pace of the recovery? Just wanted to get your views on how things are going." }, { "speaker": "Robert Ford", "text": "Sure. Listen, we obviously had a very strong quarter in terms of recovery. I mean we had planned to see that recovery in the U.S. and in Europe and in certain Asian markets, and that recovery has largely played out the way we had anticipated. I'd say probably a little bit better even than what we thought. I don't think what we're seeing here with relating to like increase in COVID cases, I don't think that you'll see the same -- or at least we're not seeing the same kind of impact in terms of hospitals shutting procedures down, stopping testing, et cetera. I think it's a very different situation where we are this year versus where we are last year, even though if you look at the case, global case counts, they're pretty much in line to where we were in October last year. We've got therapeutics. We've got vaccines. We've got testing. So we're not seeing that." }, { "speaker": "Robert Hopkins", "text": "Okay. That's really helpful. And then my second question for Bob. I'd love you to comment on 2 things, if okay. One, just you had a nice EPS beat relative to consensus and really relative to the way you guys just guiding the quarter. But you're leaving guidance the same. Just wanted to understand that dynamic. Why not boost the EPS a little bit?" }, { "speaker": "Robert Funck", "text": "Yes. Bob, I'll take the first question on the guidance for this year. Clearly, about 1/3 of that beat was due to the little higher COVID sales than we have projected. Obviously, forecasting COVID is quite challenging. And so that was about 1/3 of beat. About 2/3 really was better performance in the base business versus how The Street had modeled that. And so the way we look at it, we gave a pretty wide range on earnings guidance back at the beginning of June. And that really kind of accounts for any kind of fluctuations or changes in the COVID testing in the back half of this year as well as kind of underlying base business performance. So we feel really comfortable about the range we have and feel that kind of captures different scenarios around COVID testing." }, { "speaker": "Robert Ford", "text": "Bob, on the question of consensus for the rest of the year, I mean, I think this is how we're thinking about the second half of the year. Obviously, from a top line perspective, we're going to have to lap some of our COVID sales that we had in Q3 and Q4. Obviously, if you looked at last year, that was really the height of our ramp-up in COVID sales. But the underlying business, excluding COVID sales, will be getting sequentially better every quarter. So we're looking at our base underlying business growing low double digits for the rest of the year." }, { "speaker": "Operator", "text": "Our next question comes from Robbie Marcus from JPMorgan." }, { "speaker": "Robert Marcus", "text": "Great. Congrats on a good quarter. Bob, maybe to follow up on the last question. There's a lot of moving pieces down the P&L right now. You had a really good operating margin in the quarter. I was just wondering if you could update us on the latest on how you're thinking of reinvestment of COVID testing revenues, how that's flowing through the P&L. And if you have any preliminary thoughts on the impact or benefit it might add to next year as people think about their models now." }, { "speaker": "Robert Funck", "text": "In terms of investment, Robbie, if you look at our SG&A and R&D combined, we're up around $700 million versus the prior year. And we expect to kind of sustain pretty strong investment in the base business. So we have, as you know, reinvested some of those COVID testing sale profits back into the base business to drive growth going forward. As you say, we had a really healthy operating margin profile in the second quarter. We're going to see some impact on that operating margin profile the rest of the year with the step-down in those COVID testing sales in the back half of this year. That's going to obviously have some impact on our operating margin profile while we sustain a lot of that investment, in particular, in the R&D and SG&A spaces to drive growth the rest of the year and into next year." }, { "speaker": "Robert Marcus", "text": "Great. And maybe just a quick follow-up. We have some -- coming back to new product launches and clinical data sets. We have 2 interesting ones coming at ESC later in August with CardioMEMS and with Amulet. I was just hoping we could get the latest thoughts on approval timing, product launch potential and how we should think about near-term expectations for product launches, given the COVID environment is still impacting hospitals to a degree." }, { "speaker": "Robert Ford", "text": "Sure. On Amulet, we talked about this, right, Robbie. We filed with the FDA late last year. We -- right now, we plan to present the data at ESC. So that's kind of in the late August time frame. We think it's, again, an attractive market, great opportunity for growth for us. The product is available in Europe and in those markets, albeit a smaller market than the U.S. We have a 50% market share. So we feel very good about our ability here to compete with the product we have." }, { "speaker": "Operator", "text": "Our next question comes from Vijay Kumar from Evercore ISI." }, { "speaker": "Vijay Kumar", "text": "Congrats on the strong print this morning. Robert, maybe one high-level question on the base business here. I think there are some confusion this morning. On the base ex COVID rate versus pre-pandemic 2019 levels, I think you did 11% in 2Q and that was maybe perhaps low double digits in Q1. So the question I think people are asking is, if we had sequential improvements, is 11% versus 10%, that seems a little light. But I think that kind of ignores the business mix. Maybe perhaps can you talk about what's happening to device business? What was the sequential acceleration? And what is baked in for the back half? Should we continue to see some benefit from backlog and further acceleration?" }, { "speaker": "Robert Ford", "text": "Sure. I mean I think the Med Device kind of grew again, Q2 versus 2021. That growth rate has been increasing and has been sequentially improving, as I said, in the first question. Obviously, the recovery is not uniform across all businesses. So if you look at our device portfolio, one of the parts of the portfolio that we've seen a little bit of a lagging recovery here has been in Neuromodulation, where I'd characterize that as a little bit even more elective than some of the other procedures. And we've seen, say, like a little bit of a slower recovery trend in that business versus, say, for example, a Structural Heart, an EP or a Diabetes business." }, { "speaker": "Vijay Kumar", "text": "That's helpful. And then maybe one on the product side on CardioMEMS. We did some work. It looks like it's an interesting trial. It's a pretty large trial, I think, 3,600 patients enrolled, that's fairly large. I guess assuming some of these results, if they were to mimic CHAMPION or the original trial in terms of reduction in heart failure hospitalizations. I think mortality is an endpoint here. Should CardioMEMS be a multibillion-dollar product for Abbott? The reason I'm asking is historical adoption trends have been quite slow, but your investments in such a large trial suggests some optimism. So I'm curious how you guys are thinking about the longer-term opportunity." }, { "speaker": "Robert Ford", "text": "Sure. I mean I think a lot of these device segments that we see kind of large opportunities. I think the key thing here is to make sure that you put the clinical evidence to be able to kind of create a strong kind of market development approach here. And when we looked at CardioMEMS at the time back in 2017, where there were some issues with reimbursement in CMS, ascertaining the max kind of worth reimbursing, et cetera. And you had positive CHAMPION's data." }, { "speaker": "Operator", "text": "Our next question comes from Larry Biegelsen from Wells Fargo." }, { "speaker": "Larry Biegelsen", "text": "Just 2 for me. I'll start with Libre, Robert. Just maybe at a high level, your thoughts on kind of the road map for Libre from here, given that you're closing in on $1 billion a quarter in sales. And more specifically, any update on the launch of Libre 3 in Europe and how delays at FDA might impact the timing of Libre 3 in the U.S. And I had one follow-up." }, { "speaker": "Robert Ford", "text": "Sure. Listen, we had a real strong quarter, as you saw, and as you mentioned, approaching that $1 billion mark on a quarterly perspective, sales above 40%. I think really important here, Larry, is the user base. And this is a different kind of device business. It's a -- we talked about it from a mass market opportunity versus other parts of our device portfolio that might be a little bit more, let's say, call it, nichey versus the size of Libre. But the user base is super important because when you've got this kind of retention level that we're seeing on the product, so between 80% and 90-plus percent globally, it really looks more like a subscription-like model. And when you're in that subscription-like model and you've got this recurring revenue, the user base is hugely important. And I think that's a lot of our focus right here, as we talked about this mass market, is building the user base." }, { "speaker": "Larry Biegelsen", "text": "That's helpful, Robert. And just lastly for me. I know I've asked about this on a few earnings calls, but I'm just curious how your thoughts on capital allocation are evolving, given your strong balance sheet. We know valuations are relatively high. Are there areas where you think valuations look more attractive? And historically, the sweet spot for Abbott's been acquisitions in the $5 billion to $10 billion range. Is that still the case? I mean, obviously, St. Jude was an exception to that, but just curious to see how your thoughts are evolving on M&A." }, { "speaker": "Robert Ford", "text": "Well, specifically on M&A, there's no change in thoughts there. I mean I think rather than have a number tied to it, it's more about does it strategically fit? Do we think that we can execute and drive more value out of it? And that mindset hasn't changed independently of kind of dollar amount there. We're obviously actively looking. We constantly surveil and survey and pay attention and track. What I can say is that we've been probably actively moderating much more than where we were back in 2017. But there are some pretty elevated valuations right now, and I'm not going to do anything here that's going to either dilute our profiles, our growth rates, et cetera. And key driver here is, is it being strategic?" }, { "speaker": "Operator", "text": "Our next question comes from Matt Taylor from UBS." }, { "speaker": "Matthew Taylor", "text": "So I did want to ask one about COVID testing. And we know your guidance for the year here implies lower sales in the last 2 quarters. I was wondering if you could just give us any insight into the trends that you're seeing in testing, especially outside of the U.S. where we have less visibility, so we can think about some of these different scenarios that you're baking into the guidance for the rest of the year." }, { "speaker": "Robert Ford", "text": "Sure. Well, about a month ago, we talked a lot about COVID testing here. And I don't think, over the last 30 days, we've seen anything materially different. I would say we continue to see some of that kind of lowered kind of testing volumes in the U.S., whether it's PCR but probably a little bit more on the rapid side. We did a little bit better than what we had forecasted for the second quarter, and that was largely driven by international markets. Still about 80% of our sales are on the rapid side. But we did see higher international sales. And I'd say, yes, it's probably driven by delta variant. A lot of those international sales are more, let's say, kind of tender-driven. And we've got great visibility to where cases are rising and our positions in those markets." }, { "speaker": "Matthew Taylor", "text": "Got it. And maybe I could just ask one follow-up on recovery in Diagnostics versus med tech. So I know you called out this issue with blood donations. And I guess, excluding that, would you think about the recovery in your core diagnostics business, ex COVID, similar to med tech, should it go in lockstep? Or is there going to be a difference there for some reason? Could you flesh out the blood donation headwind? How much is that?" }, { "speaker": "Robert Ford", "text": "Yes. Like at a high level, I would say, yes, we're seeing kind of that same kind of recovery trend, again, within its own kind of segment. Our immunoassay and clinical chemistry business, which represents about 80% of our core lab business, that actually was up high single digits in Q2 versus Q2 of 2019. So we are seeing that recovery on the core lab. There are some assays that haven't recovered as much. What we've seen here in the U.S. is that we're seeing post-surgery policies here from certain hospitals do less overnight stays. So when you're doing that, you're getting a little bit less of that. But I'd say that's offset with higher share gain and growth in new accounts with the rollout of Alinity. So we're seeing that kind of high single digit." }, { "speaker": "Operator", "text": "Our next question comes from Joanne Wuensch from Citibank." }, { "speaker": "Joanne Wuensch", "text": "It's really 2 questions. The first one is a follow-up on what Bob was asking earlier on, is there anything that you can give us on 2022? I'm getting a lot of questions as it relates to margins, COVID, double-digit EPS. So anything on a framework basis that would be helpful. I'd appreciate it." }, { "speaker": "Robert Ford", "text": "Sure. Listen, we've talked about this a couple of times on a couple of calls already, and I just think it's a little bit too early to kind of provide that forecast given there's so many different kind of moving parts. We're starting our process right now. But I don't think the framework changes versus what we've talked about, which is our underlying business, so excluding COVID testing, it will clearly be very well positioned for very strong growth, top line and bottom line just based on the trends that we're seeing, based on the pipeline, the new products that we have in the pipeline that we have in place. So our underlying base business will clearly be set up for very strong top and bottom line growth." }, { "speaker": "Joanne Wuensch", "text": "And then I've heard the word pipeline investment a couple of times there. Other than some of the names that we've -- or products that we've already focused on, such as Amulet, CardioMEMS and Libre 3, are there other products in the pipeline that you'd like to draw our attention to?" }, { "speaker": "Robert Ford", "text": "Yes, sure. Listen, if you look at Structural Heart, I think there's 2 kind of really good opportunities for us over here. TAVR with bringing the product to the U.S. and the launch of our second-generation product in Navitor in Europe. I mean these are 2 opportunities that we have. We know our position and we know the choices and the strategy that we'll take as we enter this market here in the U.S., and I think it's great. It will be a great opportunity for us." }, { "speaker": "Operator", "text": "And our last question comes from Josh Jennings from Cowen." }, { "speaker": "Joshua Jennings", "text": "Robert, just wanted to ask a multipart question on just duopolies in the U.S. market. You're about to create one with the entrance at Amulet. And then down the line, you'll be in a different position as the first mover in the duopoly being created by a competitor coming into the edge-to-edge mitral repair market. And I was hoping if you could just give us your views on U.S. duopolies in terms of second player coming into the market, catalyzing market growth, how you think about that, the risk for competitive pricing to ensue and then the potential for that second mover to capture share and where those can lay out." }, { "speaker": "Robert Ford", "text": "Sure. I mean generally speaking, competition will always kind of drive further innovation, further investment. So one can kind of make the analysis here that when you're -- when you have a competitor coming into your segment, you'll do more to invest in the business and that investment will then drive the category. So I think on one side, I do believe in that, and I think you can see how that's kind of had an impact. Definitely, when we came into the U.S. with Libre and kind of what happened to that market and what happened to the technology in terms of kind of making all the technologies better and et cetera. So the flip side of that is competition is -- you could potentially see, I guess, price as a lever to drive demand or to drive share capture. We've tried to focus every time we're entering markets with a value proposition that sustains our price and our pricing strategy and focus on the benefits that our solution will bring." }, { "speaker": "Scott Leinenweber", "text": "Thank you, operator, and thank you for all of your questions. That now concludes Abbott's conference call. A webcast replay of this call will be available after 11 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today." }, { "speaker": "Operator", "text": "Thank you. This concludes today's conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day." } ]	Abbott Laboratories	247,483
ABT	1	2,021	2021-04-19 23:00:00	Operator: Good morning, and thank you for standing by. Welcome to Abbott's First Quarter 2021 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participants' questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's express written permission. I would now like to introduce Mr. Scott Leinenweber, Vice President, Investor Relations, Licensing and Acquisitions. Scott Leinenweber: Good morning, and thank you for joining us. With me today are Robert Ford, President and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance, and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2021. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A Risk Factors to our annual report on Form 10-K for the year ended December 31, 2020. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or development except as required by law. Please note that financial information provided on the call today for sales, EPS and line items of the P&L will be for continuing operations only. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which excludes the impact of foreign exchange. With that, I will now turn the call over to Robert. Robert Ford: Thanks, Scott. Good morning, everyone, and thank you for joining us. Today, we reported the results of a very strong quarter. Ongoing earnings per share were $1.32, reflecting more than 100% growth compared to the prior year. Sales increased 33% on an organic basis in the quarter. At the start of the year, we issued full year guidance that reflected another year of strong performance, and through the first quarter, we're right on track with those expectations. Our full year 2021 adjusted earnings per share guidance of at least $5 remains unchanged and reflects over 35% growth compared to last year. Our strong first quarter were comprised of several factors, including global COVID testing-related sales of $2.2 billion, with rapid tests compromising roughly 85% of those sales; strong sales growth across all 4 of our major business areas, which resulted in base business organic sales growth, excluding COVID testing-related sales, of nearly 6%; growth contributions and momentum from several recently launched products across all of our businesses; and the impact of significant investments we're making across our portfolio in R&D and commercial initiatives that will further strengthen our sustainable growth profile. I'll now summarize our first quarter results before turning the call over to Bob. And I'll start with Nutrition, where sales increased nearly 6.5% in the quarter. Performance was led by our Adult Nutrition business, with sales growth of more than 18% in the quarter. The pandemic has brought a lot of awareness to the value of good nutrition, including immune support, which is helping to bring new users into the category and more specifically to our market-leading Ensure and Glucerna brands. Pediatric Nutrition sales declined 2.5% in the quarter. Recall, during the first quarter of last year, this business experienced significant pantry stocking ahead of the shelter-in-place restrictions in several countries at the start of the global pandemic. Our sales growth this quarter in Pediatric Nutrition reflects that difficult year-over-year comparison. In the U.S. and several international markets, we continue to capture share with our leading portfolio of infant formula and toddler brands. In Diagnostics, sales increased 115%, which was led by significant demand for our portfolio of COVID-19 tests as well as improvement in the base business. As I mentioned earlier, strong COVID testing-related sales were led by our rapid point-of-care platforms, ID NOW, BinaxNOW and Panbio, as we continue to see demand shift towards rapid testing worldwide. During the quarter, BinaxNOW received U.S. Emergency Use Authorization for over-the-counter, nonprescription, self-use for people with or without symptoms. We began shipping test kits to major retailers yesterday. Just as importantly, our underlying base business continues to improve, driven by improving routine diagnostic testing levels and the continued rollout of our Alinity platforms. Excluding COVID testing-related sales, our Core Lab and Molecular Diagnostic businesses both achieved double-digit sales growth in the quarter. Turning to Established Pharmaceuticals, where sales grew over 6% in the quarter, which is particularly strong given the comparison versus a strong first quarter last year. Performance in the quarter was led by double-digit sales growth in India, China and Brazil. And while we continue to see elevated COVID case levels across several emerging markets, the business is executing at a high level to ensure patients have access to our branded generic medicines. And lastly, I'll cover Medical Devices, where sales grew nearly 9% in the quarter, led by strong growth in Structural Heart, Rhythm Management, Electrophysiology and Diabetes Care. Although procedure volumes across our cardiovascular and neuromodulation businesses were impacted early in the year by elevated [ coast ] case rates in certain countries including the U.S., we saw growth improve throughout the quarter and exited with good momentum. On average in March, U.S. procedure levels were up mid-single digits compared to pre-COVID baselines across our cardiovascular business with some areas even higher. In Structural Heart, sales were up mid-teens overall with growth contributions coming from several products within our innovative portfolio, including MitraClip, TriClip, Portico and others. MitraClip sales grew more than 15% in the U.S., where we achieved our highest number of monthly procedures ever in the month of March. In January, CMS expanded reimbursement covered for MitraClip, which significantly increases the number of people who can benefit from this market-leading device. And I'll wrap up with Diabetes Care, where growth was led by Freestyle Libre sales of nearly $830 million. The global user base for Libre has now surpassed 3 million users, driven by market expansion and awareness efforts as well as ongoing new product launch activity in every major market around the world. So in summary, we're off to a very strong start and right on track with our expectations for the year. All 4 of our major businesses are achieving strong growth. We're particularly pleased with the growth contributions and momentum of several recently launched products. And we're well positioned to achieve more than 35% EPS growth, as we have forecasted at the beginning of the year. I'll now turn over the call to Bob to discuss our results and outlook for the year in more detail. Bob? Robert Funck: Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which is consistent with our previous guidance. Turning to our results. Sales for the first quarter increased 32.9%, which was led by strong performance across all of our businesses, along with strong global COVID testing-related sales. Organic sales growth was balanced, with 34% growth in the U.S. and 32% growth internationally. COVID testing-related sales were also balanced geographically, with a little more than half of those sales coming from international markets. Foreign exchange had a favorable year-over-year impact of 2.5% on first quarter sales. During the quarter, we saw the U.S. dollar strengthen somewhat versus several currencies, which resulted in a slightly less favorable impact on sales compared to exchange rates at the time of our earnings call in January. Based on current rates, we would expect exchange to have a favorable impact of approximately 4% on our second quarter reported sales and would now expect exchange to have a favorable impact of nearly 2% on our full year 2021 sales. Regarding other aspects of the P&L for the first quarter, the adjusted gross margin ratio was 58.3% of sales, adjusted R&D investment was 6% of sales, and adjusted SG&A expense was 25.1% of sales. As Robert mentioned, the strength of our business performance has created an opportunity to significantly increase our investments in R&D and SG&A to further strengthen our pipeline and growth initiatives. During the first quarter, our combined investments in these areas increased approximately $200 million compared to the same quarter last year and was at the highest level since our separation with AbbVie. For the first quarter, net interest expense was $124 million. Nonoperating income was $73 million. And our adjusted tax rate was 15%, which is consistent with our full year effective tax rate from last year. With that, we'll now open the call for questions. Operator: [Operator Instructions] Our first question comes from Bob Hopkins from Bank of America. Robert Hopkins: Congratulations on the strong Q1 revenue and profit growth. I don't think I can recall the last time the company put up 100% earnings growth, so impressive there. I guess I'd love to hear your thoughts on 2 important topics, Robert, if you don't mind, and that the first topic is BinaxNOW OTC. I was wondering if you could just talk a little bit about capacity and your early thoughts on how you think demand will play out for that product. So that's the first topic. And then I'll just go ahead and list the second one in the interest of time. The second topic is a little bit longer-term oriented, because last quarter you expressed some confidence in Abbott's ability to drive double-digit earnings growth in 2022 off of that $5 number for this year. And the question I would have is, based on what you're seeing today, has anything changed with your views? And then I think investors would also love to hear, if you assume a more conservative testing scenario, how does that impact that goal of double-digit earnings growth next year? So I just wanted to list this all upfront there. Robert Ford: Okay, thanks. On your first question regarding kind of the U.S. Binax OTC launch, so yes, we're very excited about that. We see this is a as a significant opportunity, and quite frankly, a trend that's been happening overseas and is kind of now happening here in the U.S., which is this move, this accelerated move here from, say, more hospital lab-based testing to more rapid testing outside of that environment, where consumers and people can get the results at a much faster rate, and quite frankly, with a little bit less hassle, less process. So we see this as a significant opportunity. It's easy and it's affordable. And I think that's a key part here, Bob, as we think about surveillance testing and serial testing. It needs to contemplate those 2 areas, right? It needs to be affordable. It's difficult to do serial testing on PCR when you've got a cost of $100-plus and takes between 2 to 3 days to get that. So I think we're in a great opportunity here to be able to capitalize on that. I think this is something that people are going to want to buy and have in their homes and stock up in their homes. Think of it as maybe your new element in your medicine cabinet. But we've been seeing this shift happen towards the end of last year and definitely into this quarter here, this move towards rapid. Specifically in the U.S., we've got a great position as a lot of this OTC is going to require understanding of the retail and the retail environment, the retail channel. And those are capabilities that, as you know through our Nutrition business, through our Diabetes business, we know how to operate and operate pretty well in there. So we're excited, and I think this is going to eliminate a lot of the barriers that exist for frequent testing. A key aspect of that is obviously scale. We have to have scale to be able to meet the demand. And quite frankly, we're probably the leaders here in terms of production. We've got an established capacity this quarter now, that we can do about 150 million rapid tests per month across all of our different platforms. So we feel very good about that position. We feel good about this opportunity. To your second question on 2022, yes, we did -- you did mention our confidence back in January, and we commented it on our call. And to be honest, nothing's changed on that front. Nothing's changed over the last 90 days. We start our planning process every year. We target double-digit growth. And we talked about some of the key elements and laid out some of the key elements that allowed us to have that confidence to be able to drive that double digit in 2022, whether it's the pace of recovery of our base business, COVID testing, new product launches, investment spend, et cetera. None of that has changed. I mean if you look at the pace of our recovery on our base business, that's done very well. Cardio and neuro finished the quarter very strong. We grew double digits, as I said in my prepared remarks, in Core Lab and Molecular Diagnostics excluding COVID. Libre is growing rapidly. Nutrition and EPD are accelerating their growth rates with pipeline and a market that supports that sustained growth. We've got momentum with a lot of our product launches: MitraClip G4, TriClip, I'd say our mapping systems, our new CRM devices. And then we've got coming out of this year going into next year, 4 key product launches that we feel very good about. We're very excited about them, given our position, given the product offering and the value proposition of them. And you know those are LAA -- entering the LAA market here in the U.S., potential expansion of indication for CardioMEMS, entering the leadless pacemaker with single chamber and then follow that with a dual chamber, entering the U.S. TAVR market. I mean all 4 of those opportunities are multibillion-dollar segments. And we've been working hard on the last, call it, 18 months to get us ready and to be in a position in 2022 to be able to capitalize on that. So the underlying base business, the pipeline, all of that is kind of heading in the right direction and don't see any changes. If anything, there's acceleration to kind of what we talked about 90 days ago. And we continue to believe a good portion of the COVID testing is sustainable. There's, as I said, there's a clear trend here to move towards rapid formats. We're the dominant producer here of these rapid tests, making about 150 million a month. So wherever that market goes, we know that we'll be the share leader here for sure. So you look at all these different components here, Bob, we still feel very confident about our double digit. The one thing I'll say is that as you look at all these different businesses, probably one thing that we can try and model now but it will probably be different, January is just how the mix of those businesses are going to contribute to that double-digit growth. It always ends up differently in terms of how we plan. We did double digit in '20, and it was very different versus how we set it up in January of 2020. So if you look at our history, we're pretty consistent about delivering on that. If there's any caution here, I guess, for next year, it'd already be -- seem to be priced here into our P/E. So -- but that being said, I don't think anything has changed here from the last 90 days from our perspective. We still feel very good about our double digit. Robert Hopkins: That's great. And then just if it was a more conservative testing environment, how does that impact the way you think about things? Robert Ford: I mean that's -- I guess that's the model here where we start to model different ways, different parts of all these elements that I explained to you, and it's going to be difficult. I'm not going to put out an assumption there of what COVID testing level is required, but I do feel that a good portion of it is going to be sustainable. And we'll get a lot of the share of the COVID testing that's remained. So... Operator: Our next question comes from Robbie Marcus from JPMorgan. Robert Marcus: Great. And I'll echo Bob's congratulations on a very nice quarter. Maybe just to follow up, Robert, I'd love to get a sense. One of the key investor topics, as you just touched on, is the double-digit target for EPS growth next year. And part of that, it looks like you're front-loading a lot of expenses into 2021 here. You grew OpEx about $300 million versus last year. So I'd love to see if I could just get a little more meat on the bones in terms of the road map to that double-digit EPS, more down the P&L versus the top line, which you just talked about? And does it imply sort of high 20s operating margins to get there? Robert Ford: On the high 20s operating margin, yes, that does appear to be the case. Regarding the areas of investment. I mean I talked a lot about these in terms of the investments we're making. I'd say from a bigger picture perspective, we want to make sure that we're spending and investing a good portion of these COVID testing profits into the R&D portion of the P&L. We believe that is a very sustainable investment. And if I look across all of the businesses, in devices, in diagnostics, in rapid diagnostics, in nutrition, all of these businesses have opportunities to invest in R&D. And we've got clear programs across all of them to build the R&D programs that will sustain our growth beyond '22, '23, '24. A lot of the products that I just mentioned, whether it's the ones we've just launched over the last kind of quarter, 2 or 3 quarters, plus the 4 key areas that we're looking at entering in 2022, those are going to drive a lot of our revenue growth. And those have already been funded, but I would say the investments here are really looking into next-generation products in Diagnostics, expansion in our portfolio and devices that will lead to new product launches in '23 and '24. On the SG&A side, we're making sure that we're supporting our big growth products. I'd say probably a lot of the SG&A is going towards Libre and driving Libre awareness and growth, both in the U.S. and international markets. And you'll start to see that ramp up even more as we go throughout the year, both in terms of spend and the return on the top line. We're making investments also in Nutrition to strengthen our brand and capitalize on the expansion, especially in the adult nutrition side of the market. And expanding footprint in several of our device businesses where we know that clinical specialists and sales force, et cetera, is important to be able to support not only the expansion of our current products, but the launch of new products. Robert Marcus: Great, really helpful. And maybe just a quick follow-up. We're all really interested to hear not just about how the devices business did in first quarter, but really the forward commentary on what you're seeing exiting March into April here. So if you have any early feedback on the exit rates and what you're expecting in terms of catch-up, that would be really helpful. Robert Ford: Yes. I mean I think as I said in my prepared comments and on the first question, too, I mean we saw a nice recovery. Obviously, there was obviously some -- a little bit of a slowdown in January. So we had a nice pickup, I'd say, in October, November where -- sorry, yes October, November, where we saw procedure growth rates return to growth. And I'd say December, January saw that decline as the cases increased, but saw real nice progression in the month of February and then very strong growth in March. And Rob, what we try to do also is we try to look at there's -- March is a tricky month because you've got those 2 weeks of last year where things kind of really kind of shut down. So we look at March not only versus last year, but also looking at it versus March of 2019, and quite frankly, the whole quarter versus 2019. And we actually see growth rates in this quarter that are higher than our pre-pandemic rates in 2019, in Q1 of 2019. So I think we saw a real nice growth. In Core Lab, that was very positive to see. We saw double-digit growth there, and that's a good indicator of routine testing coming back to hospitals, saw double digit there. Our Molecular Diagnostic business, excluding COVID and PCR COVID testing, was up 30%. So that's a real positive sign that our strategy of utilizing the Alinity M to launch into the market with COVID and then kind of build off the menu is also having a positive impact over there, too. So I'd say very good exit rate. And as we look at the first 2 weeks of April, and we look at it every week here, real nice progression. So I didn't see the bolus coming in and then the drop. I actually saw continued nice improvement in Structural Heart, in EP and even in CRM. So those are -- that's a nice trend as we're going into the second quarter, too. And we'll start to see a little bit of opening up here in Europe. I'd say the one area that was a little bit softer for us was Europe, given all the shutdowns there. But again, I'd say the first couple of weeks in Europe are looking pretty good. Operator: Our next question comes from Larry Biegelsen from Wells Fargo. Larry Biegelsen: Robert, one for me on capital allocation; and one on your favorite topic, I think, Libre. So a lot of questions around 2022. And my question is, how important is it to hit that double-digit EPS growth target in 2022? And your thoughts around capital allocation helping you achieve the $5.50 in EPS, is it a buyback or an accretive deal, something you would consider to get there? And I have one follow-up on Libre. Robert Ford: Sure. Well, we start every year, as I said, targeting double digit. If you look at where we are in 2021 versus 2019, we're up 53%. But we'll be targeting, as I said, double-digit in 2022. And again, there's multiple ways of how we can get there in terms of business mix, et cetera. We do have a strong balance sheet, and that provides us a lot of strategic flexibility. We try to have a balanced approach there, Larry, in terms of balancing between the short and long-term investing in the business and providing some of that return back to our shareholders. So whether it's in the form of dividend, we're committed to a strong growing dividend. It's an important part of our identity. On the share repurchasing, we've historically just really looked at share repurchasing to offset some of the dilution. We could be looking to do a little bit more than that going -- in this year, going into next year. And then from an M&A perspective, I'd say we're always actively monitoring. We're always actively looking. And you'll always hear me say that I'm not going to tip my hand and give up any kind of competitive advantage there. But if there's something that is attractive, something that has got growth, that won't dilute our top line growth profile, which I think is best in class, or that we can do better with, we're always going to be interested. But we're always going to be prudent about deploying our cash, Larry, always keeping our shareholders happy, balancing the long term, the short term, the internal and the external. And this is not a kind of a new CEO versus prior CEO philosophy. This has always been an Abbott philosophy. We're good stewards of that capital and good stewards of finding that right balance that I just described. Larry Biegelsen: That's very helpful. And then Libre, how should we think about the growth for the remainder of the year? The comps get a little easier. You talked about 40% as an aspirational goal on the last call. And just what's the latest on the Libre 3 launch in Europe? And if you'll give us any color on the U.S., it would be certainly appreciated, but I'm not sure we'll get it today. Robert Ford: Sure. Well, I did put out a goal of growing 40% in 2021. You mentioned comparison. Yes, there was a little bit of a -- you've got a little bit of a balance here between Q1 and Q2. So Q1 last year, we saw some stocking up in international and in the U.S. So I look at our 30% here and -- on top of a pretty strong quarter last year as really positive momentum. We'll have some effect on the reverse side of that in Q2. So then it becomes really a second half, can we kind of sustain this kind of mid-30s and accelerate it into the 40s in the second half? And the answer is we believe so. We've got a great portfolio. We've got great momentum and making the investments, whether it's field force, whether it's direct-to-consumer advertising, not just in the U.S., but around the world, significant investments to building awareness for the category. I mean we've achieved 3 million -- surpassed 3 million users around the world. That's 3 -- we could say, hey, that's 3x our next competitor, but the reality is the penetration for us and for the categories is still pretty significant. So there's plenty of room here for us to invest and grow, and we'll be doing that on the back of our -- not only our commercial investments, but also R&D. Your question on Libre 3, that's -- we launched that into Europe at the end of this quarter. We're right where we want to be. We start off usually small and focused here, Larry. We learn. We learn with the consumer. We learn with the HCP in terms of what resonates. We learn with our manufacturing. We've got a lot of capabilities in terms of how to manufacture at scale. But there's always a little bit of a learning curve here. It is a new platform. And we learn with insurance, and insurance switches over and all those things. And once we get all of that kind of lined up, then we accelerate and we go break it. But I've got -- we've got a lot of strategic flexibility here with Libre 2 and Libre 3. I think we're in a great position. Feedback has been really good. I mean we've launched this with about over 1,000 HCPs. We've got close to a couple of hundred patients that we've now kind of just tried to see what their reactions are with the products, and it's been extremely positive. There's a lot of social media there. I'm not very fluent in German, but I can tell a facial expression of awesomeness and coolness and amazement factor, and you can see those in the videos of these patients that are using it. So I think this is going to set a whole new standard for us on every dimension: size, ease of use, accuracy, alarm performance, wear experience, all that. It's all great. It's all good. So regarding your question on Libre time frame, I think you answered it. So that's good. I'm not going to provide any details here. But I'm just really excited about Libre 3 and the combination of the portfolio, having both 2 and 3. I just think it provides us a lot of strategic flexibility. Operator: Our next question comes from Vijay Kumar from Evercore ISI. Vijay Kumar: Congrats on the [ printing ]. Robert, I did want to ask you on fiscal '21. If I look at Q1, excluding contribution from COVID, right, the base business looks like it was up 10% organic versus pre-pandemic in the '19 levels. One, is that math correct? And if we're starting off at 10%, I guess, are we looking at perhaps teens kind of growth for fiscal '21 on the top line on the base business? Robert Funck: Vijay, this is Bob. Yes, your math is spot-on. Our first quarter was up over 2019 and by around 10%. So we had really good performance in the quarter in the base business, and you really saw that across kind of the portfolio of businesses. And then we would expect to continue to see strong growth during the course of the rest of the year, in particular as medical device procedures continue to improve. And we would expect to see kind of that base business growth in the mid-teens. Vijay Kumar: That's helpful, guys. And then one on the antigen testing side, I saw the press release yesterday launching the asymptomatic consumer version of the product. What -- I guess how are revenues recognized? Is this recognized on shipment? And what are early -- what is early demand looking like from retailers, the CVS and Walgreens, Walmart? And is there expectation of $6.5 billion to $7 billion for fiscal '21? Is that unchanged? Robert Ford: Yes. So on the $6.5 billion to $7 billion, yes, that remains unchanged. It's difficult to forecast here in that tight range that you'd expect from Abbott. But yes, we continue to forecast sales at around that level. Regarding your question, I think it was regarding the Binax OTC in the U.S., correct? Is that what you're referring to? Vijay Kumar: Correct. Robert Ford: Yes. So yes, I mean we received approval for the product several weeks ago, and we immediately started our manufacturing process. It is a different presentation from the previous Binax test in which we provide 2 tests and the necessary consumables to run those tests. So we started manufacturing that and began shipping literally yesterday to retailers. And we'll start with CVS, Walgreens, Walmart. And you can expect all the other retailers, food merchants, et cetera, to roll into that as we expand and start manufacturing and accelerating our manufacturing. So yes, we ship the product and the revenue is booked when the asset is transferred over to the retailer. But I think this is going to be, as I said, a great opportunity. It's a channel we know very well. I think few diagnostic companies that have this product have the capacity, the manufacturing scale and the channel experience and domain here to kind of really compete. So we feel very good about our position. And we'll start -- we start off with initial stocking orders. And then from them, we'll roll out more distribution. And we expect, given the price point here, Vijay, that there's going to be a great opportunity for a lot of households in the U.S. to be able to have testing on hand, ready to go at their house. So we expect that there'll be a nice repeat purchase also. Vijay Kumar: Yes, I'm planning on stocking up, Robert. Operator: And our next question comes from Matt Miksic from Crédit Suisse. Matthew Miksic: Just a quick question for me, if I could, is just on some of the pipeline opportunities around Amulet and CardioMEMS in Portugal, if you could provide us with maybe an update on those programs. And secondly, on just the progression of MitraClip, this has been a device and procedure that was a little bit more impacted by the slowdown over the winter. And just love to get a sense of what the trajectory looks like now heading into Q2. Robert Ford: So a couple there. So on the Amulet side, yes, listen, we've got experience in this category outside of the United States and the international markets, and the product does very well. We filed with the FDA late last year. We think this is a very attractive market. It's approaching about $1 billion today, and it's growing double digits. And as I said, I think Amulet is a very competitive product in its current form. We're obviously -- we'll obviously be investing as part of some of those R&D investments I mentioned in next generations there also. But even in its current format, performs very well, and we've got a great experience in Europe. We believe a lot in this market in this segment. And so we've also initiated our CATALYST trial. So we started a new trial late last year, and this is a trial comparing Amulet to NOAC drugs, which is currently the standard treatment option for people with AF that -- or at risk of a stroke. So we think that this will be a significant kind of growth driver after we launch also. Results there will take a little bit longer to divulge those, probably in the 2023 time frame. But it just shows our commitment to this segment because we believe we've got a great product, great product portfolio, a pipeline, and it's a great segment here. So I think you had another question on MitraClip. MitraClip did very well in the quarter. Obviously, it got impacted by COVID last year. It was on a great trajectory. It kind of got slowed down as obviously the ICU beds and hospitals moved towards treating COVID. But we had great growth in Q1. We're up in the mid-teens in the U.S. So that was good. As I said in my prepared comments, we had our highest number of procedures ever in the month of March. And that wasn't just catch-up because I've looked at the procedures in the first 2 weeks of April and they continue to move up. So that's very positive for us. And we're making our investments, not only on the pipeline side, new versions of MitraClip, but also more importantly in the market development, so really to expand the funnel of patients being treated, creating those patient referral networks with the cardiologists and our implanting centers. So that's done very well. And I think the NCD that got approved in January, opens up a significant opportunity for us with MitraClip. Remember, we're only about 5% to 6%, maybe 7% penetrated right now in the total available market here. And I think that we've got a lot of runway for growth in the mitral space. And I think you also had a question on CardioMEMS. We expect to file for a label expansion relatively soon. This would also significantly broaden the U.S. market opportunity. And we plan to pursue CMS reimbursement after we obtain that label expansion. This segment continues to grow. Our Q1 growth in CardioMEMS was north of 20%. And that market has started to recover also from the pandemic, and I like the position we have in them. Operator: Our next question comes from Matt Taylor from UBS. Matthew Taylor: So I wanted to go back to the idea of the double-digit growth and the investments that you're making this year. You called out R&D, and we've seen DTC has been stepping up. I think there's a lot of Libre commercials there now. I guess my question is, when you think about these investments and the sustainability, historically, we've thought about Abbott is driving 7% growth. That was your algorithm pre-COVID. Do you think that the investments could lead to more sustainable, higher post-COVID organic growth? And then how quickly can you toggle them up and down if the environment changes quickly to manage earnings? Robert Ford: Sure. So I'd say on the base business side, our identity, our target was really sustaining a 7% to 8% growth rate pre-COVID. And I'd say with these investments that we're making, excluding any kind of year-over-year comp, we'd probably be at the higher end of that 7% to 8% range, I mean, once you factor in maybe a Q1 comparison on the base business. Next year, you're probably growing a little bit higher than that, Matt. But at the high end of that 7% to 8% is what we're looking at, with all these investments and product development and portfolio development. As I said, a big portion of our COVID cash flows and profits, part of it goes to our shareholders, but part of it goes back into the business. And we've got a lot of flexibility here to toggle that investment up or down if we need to. I mean I'd probably say that each business has their list of go-to areas that we've all agreed to are kind of next steps. If we have more opportunity to invest in the business, we know exactly where to go. As it relates to toggling down, yes, I mean, I wouldn't be toggling down R&D. I think that's more of a sustainable kind of investment that sustains our growth rate. It's easier to toggle on SG&A, and we've got that capabilities also if we need to. Matthew Taylor: Great. And I just had a follow-up on Diagnostics. The underlying growth, as you called out in Core Lab and Molecular, was impressive. And I'm wondering if we're going to see you get increased momentum in the underlying business because of your success with COVID diagnostics. Do you think you can leverage that larger installed base and drive to higher growth in the core diagnostic business over time now? Robert Ford: Yes, I think the answer to that is yes. We've definitely been elevated to a kind of higher level of partnership here with a lot of hospitals and IDNs and institutions as it relates to their kind of COVID testing. There's been large set of accounts that we've historically been out of and now had the opportunity to place our instruments and show what we can do. So the answer to that is yes on the core lab for sure. You saw -- you're seeing a little bit of that strategy play out in the molecular side of the business, where we haven't seen these kind of growth rates in our molecular business, excluding COVID, in a very long time. And we were up close to 30%, excluding COVID testing. A lot of that has to do with the instruments that we're placing and getting the test pull-through on the other assays on the other tests. So on the rapid side, too, I wouldn't just look at it from a Core Lab perspective. The sustainability of COVID is one portion of it is the actual COVID test. The other portion of it is the installed base that we're placing as a result of that. I've talked a little bit about this building sustainability of a rapid testing channel beyond just COVID, and COVID is allowing us to do that. But if you think about, for example, our ID NOW instrument, where we basically ceded the market here for an opportunity to do much more in the world outside of COVID by placing these instruments, we had roughly about 19,000 boxes in the U.S. in 2019, and we're currently at 75,000 boxes. So we almost quadrupled our installed base there. And will they all be as productive from a COVID testing perspective at the highest level of the pandemic 1, 2 years out? No, probably not, but they'll be very productive with all of our other assays. And that installed base will continue to grow and will continue to produce for us. So to answer your question, yes, I do think this is a great opportunity here for us to continue to roll out our Alinity platform on the Core Lab, on the molecular side and continue to build our rapid testing channel in the rapids business. Operator: Our next question comes from Joanne Wuensch from Citibank. Joanne Wuensch: I'll just put them both upfront. Can you give us an idea of how you're thinking about revenue for the remainder of the year? Particularly I'm going to ask questions about COVID-19 diagnostic revenue in 2021. And then my second question has to do with the other areas of med tech that are starting to support or continue to support that high single-digit growth rate. Anything you can add color on a neuromod, vascular or CRM would be helpful. Robert Ford: Sure. So kind of growth rate in our diagnostic business, the way to think about it is, at least how we've modeled it, is we'll see our, let's call it, non-COVID diagnostic business continue to accelerate, continue to grow. Obviously, you'll have comps over there, Joanne, in Q2 and Q3. That will be producing some mid-teens kind of growth numbers in this business. But I think we always look at it, at least the way we're managing it here, is we're always looking at it on a 2-year CAGR. So if we can get back up to that kind of 10%, 11%, 12% growth rate that we were seeing in our Core Lab business that -- on a 2-year CAGR, that's basically our target to be able to get to those numbers. COVID testing, it's difficult to forecast right now. I can't give you an exact quarterly progression of that. I think the range that we've given last call, I'd continue to reiterate it. But it's going to be a little bit difficult here to get the exact calendarization, the exact mix, the exact geography right in terms of the COVID testing. What I will say though is that I do continue to believe that the shift from lab-based PCR will still play a role in COVID, but I think that the bigger role will be played by the rapid testing as it relates to surveillance. And as I said, I think we're well positioned there. I think you had -- your second question was regarding some of the other devices. I'd say, listen, I'm very pleased with CRM. I'm not saying that we've completely turned it around, but it's a great progression that we're seeing here. The launch of our ICDs and CRT-Ds with the Gallant brand with Bluetooth capability in Europe and U.S., all of the numbers show that we're picking up share, and that's the ultimate measure here. And I'm excited about the ability for us to enter the leadless segment in next year with our product and the capabilities that -- and the value proposition that, that product will bring versus competitive systems. So I think that's done very well. I'd say heart failure, one of the challenges there is probably -- that's probably the slowest part of the device portfolio to recover. A lot of those procedures require some ICU stays. So I think that one was one where we saw a little bit of impact to market. I'd say our share has started pretty high around the mid-80s, 85%. So that's mostly a market condition that we'll see come back. But I think that the CardioMEMS is another great opportunity for us where we saw growth in the quarter for 26%. So I don't know if I covered all the device areas that you wanted me to hit on. Joanne Wuensch: If you can hit on neuromod, that would be great. Robert Ford: Yes. So we did see a little bit of a slowdown in trials towards the end of the year and the beginning of the year, and we saw that start to pick up a little bit now. We think that we like our position. We recently launched our remote programming and monitoring system, the NeuroSphere. I think that's going to create a whole new opportunity for us in terms of business model, in terms of our ability to service the patients and the physicians better with that. So we started to roll it out in the U.S. I think it applies to both SCS and DBS, too. We've gotten great feedback on that. So I think that we'll see sequential improvement on our performance in neuro not only as we lap the comps, but also as the NeuroSphere gets widely used. And then we've got a nice pipeline of products to be launching towards the end of the year here. Operator: And our last question comes from Josh Jennings from Cowen. Joshua Jennings: Congratulations on the quarter. I wanted to, Rob, just to ask about your commentary about the potential to pursue M&A to support, if need be, to support the double-digit earnings growth in 2022. And anything you can provide investors or analysts with in terms of the areas of focus? I mean should we be thinking that each business unit could receive some support with the acquisition? And then specifically on Medical Devices, just a follow-up to Joanne's question, should we be thinking about potential the bolstering heart failure, vascular, neuromod to some of the softer businesses here? I mean you have such a pipeline and had such success with internal development initiatives, is Medical Device an area where you can add? And then lastly, just on this Structural Heart business. I mean in the U.S., you're going to be adding Amulet and Portico in the near term. And just how are you thinking about that -- you mentioned a specialized sales force. Should we be thinking about individual sales teams for MitraClip, TAVR and left atrial appendage occlusion? And how could that all shape out? Robert Ford: Yes. So I think on the M&A side, you'll hear me say the same thing, which is I think it always starts off strategically. Does the business that we're looking at have a strategic fit to Abbott, both from a market position, from a financial standpoint? So we wouldn't be looking at anything that doesn't fit us strategically just to fill an EPS. We want businesses that we can grow, that we can obviously operate and can fit well into the company. So I think it always starts like that. It always starts with the strategic fit. And then if it's attractive, if the timing is right, then we'll look at it. I think all the areas that you mentioned are all areas that we look at. So we look at all those areas that you mentioned. We look at diagnostics. We look at all the areas we're always studying. And we're always paying attention to the new technologies, the new companies, et cetera. So I just won't tip my hand here and give anything away in terms of our competitive position here. So regarding your second question on sales forces, it always depends. But we tend to have a viewpoint here, Josh, where we believe that kind of focused and dedicated teams has always been best. That's kind of how we've run our businesses. It's how we've run our businesses for many, many decades. We don't try and bring things together that don't make sense just for the sake of synergies. If we believe we're in growth areas and growth businesses, then we'll fund them as growth business and growth areas. And quite frankly, all the businesses that you talked about in Structural Heart are areas of high potential growth. So we will treat them and resource them as such. So I'll just close here by saying we set guidance of at least $5, which is about 35% growth year-over-year. That's after a 13% growth in 2020. And we feel very good about our first quarter. We feel that our first quarter puts us on track to achieve those -- at least those $5. We have multiple ways to get there. The COVID market is going to move more and more towards rapid, and our position in this segment of COVID testing is unmatched with our capabilities, our scale, et cetera. And we believe a good portion of those tests, of that COVID testing market will remain at least into 2022. And I'm very pleased with the pace of recovery of our base business Abbott, or let's call it the non-COVID side of our business. And we're making investments in 2021, so we can accelerate our growth in 2022 and beyond, and we've talked about this also. So we feel very good about the position we're in today and the position we have this year and going into next year. Scott Leinenweber: Very good. Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today. Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day.	[ { "speaker": "Operator", "text": "Good morning, and thank you for standing by. Welcome to Abbott's First Quarter 2021 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participants' questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's express written permission." }, { "speaker": "Scott Leinenweber", "text": "Good morning, and thank you for joining us. With me today are Robert Ford, President and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance, and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions." }, { "speaker": "Robert Ford", "text": "Thanks, Scott. Good morning, everyone, and thank you for joining us. Today, we reported the results of a very strong quarter. Ongoing earnings per share were $1.32, reflecting more than 100% growth compared to the prior year. Sales increased 33% on an organic basis in the quarter." }, { "speaker": "Robert Funck", "text": "Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which is consistent with our previous guidance." }, { "speaker": "Operator", "text": "[Operator Instructions] Our first question comes from Bob Hopkins from Bank of America." }, { "speaker": "Robert Hopkins", "text": "Congratulations on the strong Q1 revenue and profit growth. I don't think I can recall the last time the company put up 100% earnings growth, so impressive there." }, { "speaker": "Robert Ford", "text": "Okay, thanks. On your first question regarding kind of the U.S. Binax OTC launch, so yes, we're very excited about that. We see this is a as a significant opportunity, and quite frankly, a trend that's been happening overseas and is kind of now happening here in the U.S., which is this move, this accelerated move here from, say, more hospital lab-based testing to more rapid testing outside of that environment, where consumers and people can get the results at a much faster rate, and quite frankly, with a little bit less hassle, less process. So we see this as a significant opportunity. It's easy and it's affordable. And I think that's a key part here, Bob, as we think about surveillance testing and serial testing. It needs to contemplate those 2 areas, right? It needs to be affordable." }, { "speaker": "We start our planning process every year. We target double-digit growth. And we talked about some of the key elements and laid out some of the key elements that allowed us to have that confidence to be able to drive that double digit in 2022, whether it's the pace of recovery of our base business, COVID testing, new product launches, investment spend, et cetera. None of that has changed. I mean if you look at the pace of our recovery on our base business, that's done very well. Cardio and neuro finished the quarter very strong. We grew double digits, as I said in my prepared remarks, in Core Lab and Molecular Diagnostics excluding COVID. Libre is growing rapidly. Nutrition and EPD are accelerating their growth rates with pipeline and a market that supports that sustained growth. We've got momentum with a lot of our product launches", "text": "MitraClip G4, TriClip, I'd say our mapping systems, our new CRM devices." }, { "speaker": "Robert Hopkins", "text": "That's great. And then just if it was a more conservative testing environment, how does that impact the way you think about things?" }, { "speaker": "Robert Ford", "text": "I mean that's -- I guess that's the model here where we start to model different ways, different parts of all these elements that I explained to you, and it's going to be difficult. I'm not going to put out an assumption there of what COVID testing level is required, but I do feel that a good portion of it is going to be sustainable. And we'll get a lot of the share of the COVID testing that's remained. So..." }, { "speaker": "Operator", "text": "Our next question comes from Robbie Marcus from JPMorgan." }, { "speaker": "Robert Marcus", "text": "Great. And I'll echo Bob's congratulations on a very nice quarter. Maybe just to follow up, Robert, I'd love to get a sense. One of the key investor topics, as you just touched on, is the double-digit target for EPS growth next year. And part of that, it looks like you're front-loading a lot of expenses into 2021 here. You grew OpEx about $300 million versus last year." }, { "speaker": "Robert Ford", "text": "On the high 20s operating margin, yes, that does appear to be the case. Regarding the areas of investment. I mean I talked a lot about these in terms of the investments we're making. I'd say from a bigger picture perspective, we want to make sure that we're spending and investing a good portion of these COVID testing profits into the R&D portion of the P&L. We believe that is a very sustainable investment." }, { "speaker": "Robert Marcus", "text": "Great, really helpful. And maybe just a quick follow-up. We're all really interested to hear not just about how the devices business did in first quarter, but really the forward commentary on what you're seeing exiting March into April here. So if you have any early feedback on the exit rates and what you're expecting in terms of catch-up, that would be really helpful." }, { "speaker": "Robert Ford", "text": "Yes. I mean I think as I said in my prepared comments and on the first question, too, I mean we saw a nice recovery. Obviously, there was obviously some -- a little bit of a slowdown in January. So we had a nice pickup, I'd say, in October, November where -- sorry, yes October, November, where we saw procedure growth rates return to growth. And I'd say December, January saw that decline as the cases increased, but saw real nice progression in the month of February and then very strong growth in March." }, { "speaker": "Operator", "text": "Our next question comes from Larry Biegelsen from Wells Fargo." }, { "speaker": "Larry Biegelsen", "text": "Robert, one for me on capital allocation; and one on your favorite topic, I think, Libre. So a lot of questions around 2022. And my question is, how important is it to hit that double-digit EPS growth target in 2022? And your thoughts around capital allocation helping you achieve the $5.50 in EPS, is it a buyback or an accretive deal, something you would consider to get there? And I have one follow-up on Libre." }, { "speaker": "Robert Ford", "text": "Sure. Well, we start every year, as I said, targeting double digit. If you look at where we are in 2021 versus 2019, we're up 53%. But we'll be targeting, as I said, double-digit in 2022. And again, there's multiple ways of how we can get there in terms of business mix, et cetera." }, { "speaker": "Larry Biegelsen", "text": "That's very helpful. And then Libre, how should we think about the growth for the remainder of the year? The comps get a little easier. You talked about 40% as an aspirational goal on the last call." }, { "speaker": "Robert Ford", "text": "Sure. Well, I did put out a goal of growing 40% in 2021. You mentioned comparison. Yes, there was a little bit of a -- you've got a little bit of a balance here between Q1 and Q2. So Q1 last year, we saw some stocking up in international and in the U.S. So I look at our 30% here and -- on top of a pretty strong quarter last year as really positive momentum." }, { "speaker": "So I think this is going to set a whole new standard for us on every dimension", "text": "size, ease of use, accuracy, alarm performance, wear experience, all that. It's all great. It's all good." }, { "speaker": "Operator", "text": "Our next question comes from Vijay Kumar from Evercore ISI." }, { "speaker": "Vijay Kumar", "text": "Congrats on the [ printing ]. Robert, I did want to ask you on fiscal '21. If I look at Q1, excluding contribution from COVID, right, the base business looks like it was up 10% organic versus pre-pandemic in the '19 levels. One, is that math correct? And if we're starting off at 10%, I guess, are we looking at perhaps teens kind of growth for fiscal '21 on the top line on the base business?" }, { "speaker": "Robert Funck", "text": "Vijay, this is Bob. Yes, your math is spot-on. Our first quarter was up over 2019 and by around 10%." }, { "speaker": "Vijay Kumar", "text": "That's helpful, guys. And then one on the antigen testing side, I saw the press release yesterday launching the asymptomatic consumer version of the product." }, { "speaker": "Robert Ford", "text": "Yes. So on the $6.5 billion to $7 billion, yes, that remains unchanged. It's difficult to forecast here in that tight range that you'd expect from Abbott. But yes, we continue to forecast sales at around that level." }, { "speaker": "Vijay Kumar", "text": "Correct." }, { "speaker": "Robert Ford", "text": "Yes. So yes, I mean we received approval for the product several weeks ago, and we immediately started our manufacturing process. It is a different presentation from the previous Binax test in which we provide 2 tests and the necessary consumables to run those tests. So we started manufacturing that and began shipping literally yesterday to retailers. And we'll start with CVS, Walgreens, Walmart. And you can expect all the other retailers, food merchants, et cetera, to roll into that as we expand and start manufacturing and accelerating our manufacturing." }, { "speaker": "Vijay Kumar", "text": "Yes, I'm planning on stocking up, Robert." }, { "speaker": "Operator", "text": "And our next question comes from Matt Miksic from Crédit Suisse." }, { "speaker": "Matthew Miksic", "text": "Just a quick question for me, if I could, is just on some of the pipeline opportunities around Amulet and CardioMEMS in Portugal, if you could provide us with maybe an update on those programs. And secondly, on just the progression of MitraClip, this has been a device and procedure that was a little bit more impacted by the slowdown over the winter. And just love to get a sense of what the trajectory looks like now heading into Q2." }, { "speaker": "Robert Ford", "text": "So a couple there. So on the Amulet side, yes, listen, we've got experience in this category outside of the United States and the international markets, and the product does very well. We filed with the FDA late last year. We think this is a very attractive market. It's approaching about $1 billion today, and it's growing double digits. And as I said, I think Amulet is a very competitive product in its current form." }, { "speaker": "Operator", "text": "Our next question comes from Matt Taylor from UBS." }, { "speaker": "Matthew Taylor", "text": "So I wanted to go back to the idea of the double-digit growth and the investments that you're making this year. You called out R&D, and we've seen DTC has been stepping up. I think there's a lot of Libre commercials there now." }, { "speaker": "Robert Ford", "text": "Sure. So I'd say on the base business side, our identity, our target was really sustaining a 7% to 8% growth rate pre-COVID. And I'd say with these investments that we're making, excluding any kind of year-over-year comp, we'd probably be at the higher end of that 7% to 8% range, I mean, once you factor in maybe a Q1 comparison on the base business. Next year, you're probably growing a little bit higher than that, Matt. But at the high end of that 7% to 8% is what we're looking at, with all these investments and product development and portfolio development." }, { "speaker": "Matthew Taylor", "text": "Great. And I just had a follow-up on Diagnostics. The underlying growth, as you called out in Core Lab and Molecular, was impressive. And I'm wondering if we're going to see you get increased momentum in the underlying business because of your success with COVID diagnostics. Do you think you can leverage that larger installed base and drive to higher growth in the core diagnostic business over time now?" }, { "speaker": "Robert Ford", "text": "Yes, I think the answer to that is yes. We've definitely been elevated to a kind of higher level of partnership here with a lot of hospitals and IDNs and institutions as it relates to their kind of COVID testing. There's been large set of accounts that we've historically been out of and now had the opportunity to place our instruments and show what we can do." }, { "speaker": "Operator", "text": "Our next question comes from Joanne Wuensch from Citibank." }, { "speaker": "Joanne Wuensch", "text": "I'll just put them both upfront. Can you give us an idea of how you're thinking about revenue for the remainder of the year? Particularly I'm going to ask questions about COVID-19 diagnostic revenue in 2021." }, { "speaker": "Robert Ford", "text": "Sure. So kind of growth rate in our diagnostic business, the way to think about it is, at least how we've modeled it, is we'll see our, let's call it, non-COVID diagnostic business continue to accelerate, continue to grow. Obviously, you'll have comps over there, Joanne, in Q2 and Q3. That will be producing some mid-teens kind of growth numbers in this business." }, { "speaker": "Joanne Wuensch", "text": "If you can hit on neuromod, that would be great." }, { "speaker": "Robert Ford", "text": "Yes. So we did see a little bit of a slowdown in trials towards the end of the year and the beginning of the year, and we saw that start to pick up a little bit now. We think that we like our position." }, { "speaker": "Operator", "text": "And our last question comes from Josh Jennings from Cowen." }, { "speaker": "Joshua Jennings", "text": "Congratulations on the quarter. I wanted to, Rob, just to ask about your commentary about the potential to pursue M&A to support, if need be, to support the double-digit earnings growth in 2022. And anything you can provide investors or analysts with in terms of the areas of focus? I mean should we be thinking that each business unit could receive some support with the acquisition?" }, { "speaker": "Robert Ford", "text": "Yes. So I think on the M&A side, you'll hear me say the same thing, which is I think it always starts off strategically. Does the business that we're looking at have a strategic fit to Abbott, both from a market position, from a financial standpoint? So we wouldn't be looking at anything that doesn't fit us strategically just to fill an EPS. We want businesses that we can grow, that we can obviously operate and can fit well into the company." }, { "speaker": "Scott Leinenweber", "text": "Very good. Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today." }, { "speaker": "Operator", "text": "Ladies and gentlemen, this concludes today's conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day." } ]	Abbott Laboratories	247,483
ABT	4	2,022	2023-01-24 22:45:00	Operator: Good morning, and thank you for standing by. Welcome to Abbott's Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participants' questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission. I would now like to introduce Mr. Scott Leinenweber, Vice President, Investor Relations, Licensing and Acquisitions. Scott Leinenweber: Good morning, and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2023. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A, Risk Factors, to our annual report on Form 10-K for the year ended December 31, 2021. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Note that Abbott has not provided the GAAP financial measure for organic sales growth excluding COVID testing sales on a forward-looking basis because the company is unable to predict future changes in foreign exchange rates, which could impact reported sales growth. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which excludes the impact of foreign exchange. With that, I will now turn the call over to Robert. Robert Ford: Thanks, Scott. Good morning, everyone, and thank you for joining us. Today, I'll discuss our 2022 results as well as our outlook for this year. For the full year 2022, we achieved ongoing earnings per share of $5.34, which is well above the original EPS guidance we set at the beginning of the year. As you know, macro business conditions have been highly dynamic and challenging over the last few years, particularly for U.S.-based multinational companies. COVID-19 pandemic played a big role in this, of course. We saw the U.S. dollar strengthened significantly and inflation reached new heights last year. Supply chains continue to face challenges, and our health care customers have been navigating staffing challenges that are negatively impacting certain medical device procedure trends and routine diagnostic testing volumes. As we start the new year, however, while all these factors remain headwinds, I'm cautiously optimistic that we're starting to see them peak and, in some cases, ease a bit. Over the past few months, the impact of COVID-19 on society is lessened and economies around the world are increasingly reopening. In the U.S., the U.S. dollar weakened a bit and inflation has eased somewhat and hospital-based procedures and routine testing trends continue to steadily improve in many areas. As you know, COVID testing has been a big part of our story these past couple of years, and I'm proud of what our team has built a full suite of tests across several platforms and the intentionality and how we established a leading role in the world's response to the pandemic. In total, we've delivered nearly 3 billion COVID test globally since the start of the pandemic. Going forward, we expect COVID-19 to transition to more of an endemic seasonal type of respiratory virus. And with that, COVID testing, while still important, is expected to decline significantly. We expect variance will continue to emerge, and therefore, our tests will remain an important part of our leading respiratory testing portfolio, along with flu, RSV and Strep, which we offer across multiple testing platforms, including lab-based systems and hospitals, small desktop devices in urgent care centers and physician offices as well as at-home tests. As we reflect back on the impact of COVID testing efforts over the last few years, it's clear that our success in this area will have a positive, long-lasting impact for the company. It strengthened our strategic position in diagnostics through the expansion of our installed base of instruments, including ID NOW, our wrap point-of-care molecular testing platform and through the opening of new testing channels, such as physician offices and at-home testing. It enabled us to increase investments in priority growth areas across the company, including R&D and commercial initiatives in support of several recent and upcoming new product launches, while at the same time, increasing returns to our shareholders in the forms of dividend growth and share repurchase. And lastly, it further strengthened our overall financial health and balance sheet, which will provide significant strategic flexibility as we look to build and grow the company even further. I'm proud of the role we played in fighting COVID in the last few years. It reinforced our purpose, had a meaningful impact on society and enhanced our long-term strategic position going forward. Turning now to our outlook for 2023. As we announced this morning, we forecast ongoing earnings per share of $4.30 to $4.50. We forecast organic sales growth, excluding COVID testing sales in the high single digits, and we forecast around $2 billion of COVID testing sales for the full year 2023. I'll now provide more details on our results by business area before turning the call over to Bob. And I'll start with Nutrition, where sales declined around 6% in both the fourth quarter and full year as a result of manufacturing disruptions at one of our U.S. infant formula facilities last year. Production at the facility is up and running. And as we've mentioned previously, our initial supply priority was to the WIC, women, infant and children federal food assistance program to ensure underserved participants have access to infant formula. As our manufacturing capacity has continued to recover, we've been able to increase production of our non-WIC brands with a focus on serving the broader infant formula market and building back inventory levels on retail shelves. Turning to Diagnostics, where as expected, sales growth in the fourth quarter was negatively impacted by a year-over-year decline in COVID-19 test sales. COVID testing sales were $1.1 billion in the fourth quarter with rapid testing platforms, including BinaxNOW in the U.S., Panbio internationally, and ID NOW globally compromising approximately 95% of these sales. Excluding COVID testing sales, worldwide diagnostics grew over 11% in the fourth quarter. Growth in the quarter was led by rapid diagnostics where excluding COVID-19 tests, sales increased 30% compared to the prior year. As I mentioned earlier, during the pandemic, we significantly expanded the installed base of ID NOW and open new testing channels. This expanded footprint drove strong growth and supported testing needs when flu and other respiratory infection surged late last year. During this past year, we continued the rollout of Alinity, our innovative suite of diagnostic instruments and expand test menus across our platforms for immunoassay, clinical chemistry and molecular testing. Moving to Established Pharmaceuticals or EPD, where sales increased 8% in the fourth quarter and over 10% for the full year. EPD continues to perform at a high level, having carved out an attractive growth space in the global pharmaceutical market, specifically our geographic focus on fast-growing emerging markets with a broad portfolio targeting attractive therapeutic areas. Strong performance in the quarter was led by double-digit growth across several geographies, including India, China, Brazil and Mexico. And I'll wrap up with medical devices where sales grew 7.5% in the fourth quarter and 8% for the full year. Growth in both the quarter and full year was led by double-digit growth in Electrophysiology, Structural Heart and Diabetes Care in the U.S. Internationally, sales growth was negatively impacted by COVID surges in China during the fourth quarter as well as lingering supply challenges in a couple of areas. In Diabetes Care, fourth quarter sales of FreeStyle Libre, our market-leading continuous glucose monitoring system grew over 40% in the U.S. and global Libre sales reached $4.3 billion for the full year 2022. We continue to strengthen our medical device portfolio with numerous pipeline advancements and launches, including recent U.S. regulatory approvals of Aveir, our highly innovative leadless pacemaker used to treating people with slow heart rhythms, Eterna the smallest implantable, rechargeable spinal cord stimulation system currently available in the market for the treatment of chronic pain. FreeStyle Libre 3, which provides continuous glucose readings in the world's smallest and most accurate wearable sensor. Libre was recently named the best medical technology of the last 50 years by Galien Foundation. And finally, Navitor our latest generation transcatheter aortic heart valve replacement system. So in summary, 2022 was another highly successful year for Abbott. We're optimistic about the early signs we're seeing of an improving operating environment and excited about the growth opportunities that lie ahead for all of our businesses, and we continue to strengthen our overall strategic position with a steady cadence of innovative technologies that are either in the early stages of launching or expected to launch over the course of this year. I'll now turn over the call to Bob. Bob? Robert Funck: Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which excludes the impact of foreign exchange. Turning to our results. Sales decreased 6.1% on an organic basis in the quarter. COVID testing-related sales were $1.1 billion in the quarter, which, while stronger than the forecast provided back in October, reflect a year-over-year decline versus sales in the fourth quarter of the prior year. Excluding both COVID testing-related sales and U.S. infant formula sales that were impacted by manufacturing disruptions last year in our Nutrition business. Total Abbott sales increased 7.1% on an organic basis in the fourth quarter and 7.4% for the full year 2022. Foreign exchange had an unfavorable year-over-year impact of 5.9% on fourth quarter sales, which resulted in a somewhat favorable impact on sales compared to exchange rates at the time of our earnings call in October as we saw the dollar weaken a bit late last year. Regarding other aspects of the P&L for the quarter, the adjusted gross margin ratio was 55.6% of sales, which reflects the impact of the nutrition manufacturing disruptions and inflation we've experienced on certain manufacturing and distribution costs across our businesses. Adjusted R&D investment was 6.5% of sales and adjusted SG&A expense was 28% of sales in the fourth quarter. Turning to our outlook for the full year 2023. Today, we issued guidance for full year ongoing earnings per share of $4.30 to $4.50. For the year, we forecast organic sales growth excluding the impact of COVID testing-related sales to be in the high single digits. We forecast COVID testing-related sales of around $2 billion with around $750 million forecasted in the first quarter. Based on current rates, we would expect exchange to have an unfavorable impact of approximately 1% on our reported full year sales, which includes an expected unfavorable impact of approximately 3% on our first quarter reported sales. We forecast an adjusted gross margin ratio for the full year of approximately 56% of sales. Also for the year, we forecast R&D investment of around $2.5 billion and SG&A investment of around $11 billion, which reflects investments to support several ongoing and upcoming new product launches and strategic growth initiatives. We forecast net interest expense of around $300 million, nonoperating income of around $450 million and a full year adjusted tax rate of approximately 14% for the year. As Robert mentioned, the strength and resiliency of our business, particularly since the start of the pandemic has allowed us to concurrently invest in our strategic priorities, provide strong return to our shareholders and further strengthen our financial health, which provides a strong base on which to grow the company going forward. With that, we'll now open the call for questions. Operator: [Operator Instructions] And our first question will come from Robbie Marcus from JPMorgan. Robert Marcus: Robert, maybe to kick it off, I appreciate the guidance, but there's a lot of moving parts through the different business lines with macro involved with a lot of new product launches involved. Maybe you could just build up how we should be thinking about how you came up with the guidance range on both the top and bottom lines given all the moving parts? Robert Ford: Sure. I mean there's obviously a macro environment here that's been complex, and you've mentioned it. And as I said -- as I said in my remarks, and I think they've gotten significantly better versus where we were in October when -- on our last earnings call. So I think that we've factored some of that improvement and some of that stabilization in there. I mean, I don't necessarily think that we've got too many moving parts here. I mean obviously, we run a -- the company has got a lot of business and business segments. But I mean, if you look at really the 2 areas I would say, Robbie, that kind of have had this effect of maybe sometimes distorting the results a little bit is our COVID testing business and the impact of the recall products last year, right? So from a COVID perspective in 2022, we actually sold more tests than we sold in 2021, and then obviously, the impact of Recall products, that was a negative. Both of those flip next year. So if you take those out of the equation, you kind of go back to what we were growing pre-pandemic, right, which was top tier, high single digits, 7% to 8% growth. That's what we grew in 2022, again excluding COVID and the impact of the recall products. And then if you take that comp out on the recall product side this year as we return to market, and look at the base business, obviously, without the COVID testings, we're going to be growing high single digits, probably at a higher end of that pre-pandemic rate, probably 8-plus percent. So I think it starts with the top line. And that's probably the #1 part of our guidance is obviously making sure that we feel that our top line is taking advantage of all the good parts, all the good product launches, et cetera, that we have. And from that perspective, I think a lot of what we're doing kind of supports that ongoing -- that ongoing high single-digit growth rate. If you look at our device portfolio, we'll be looking at high single-digit growth rate, low double-digit growth rate, a combination of both kind of recovery, the steady recovery procedures that we're seeing combined with all these product launches that we've got lined up that will ultimately have a full year impact, whether it's Libre 3, Amulet, Aveir, Navitor, CardioMEMS, Eterna on the neuromodulation side, our mapping system in EP, we're going to launch a new ablation catheter. So the device portfolio is well set up to be able to drive those high single -- sorry, high single-digit, low double-digit growth rate. And I think we're going to continue to see strong performance in EPD. I think as the world continues to reopen, those emerging markets continue to be a great opportunity for us. We've strengthened our position in diagnostics throughout these years, and we'll see continued successful rollout of Alinity in our core molecular diagnostics and recovery and infant formula 2. So I think you put all that in place, our core business, Abbott that we knew pre-pandemic is actually stronger than we were pre-pandemic with the investments that we made. And I think that's the other part of, I guess, in the P&L, if you look at what we've been able to do this year is because of COVID and the investments that we made during COVID in these growth areas, we're able to drive this high single-digit growth across the company with a fairly flat investment line, whether it's R&D and SG&A. So really getting the leverage across the businesses. So I mean, I think it really starts with our top line and the confidence we have and the products we're launching, the pipeline, the position we have. And then COVID, we forecast about $2 billion next year, and I think that's the right number right now. Obviously, we see kind of society transitioning here. We've got a strong installed base. We've got manufacturing capacity. We haven't factored in any kind of real surge but if that happens, we do have the capacity to be able to do that. So I'd say those are some of the moving pieces there. But fundamentally, we're in a real strong position in terms of our long-term growth opportunities, leading positions in these attractive growth areas, strong pipeline, which I'm sure we'll get into some of them and a strong balance sheet. So that's how this has been constructed, and I think that we're in a good position here. Robert Marcus: Great. Really helpful. Maybe one for Bob. You gave us the full year guide and you gave some commentary down the P&L, which is really helpful. But how should we be thinking about some of the quarterly cadence here? How FX flows, what is FX on the bottom line? And how did that compare to '22? And any just things we should be thinking about first half versus second half on the P&L? Robert Funck: Yes. So if you think about the kind of the cadence of our business for 2023, it really starts with the top line and some of the things that Robert kind of talked about. First, we have a lot of the new product launch activity, especially in our medical device businesses. You got products that either launched last year, we'll be launching this year. I'm sure we'll talk about some of those on the call today. So you'll see the impact of those launches kind of grow over the course of the year, kind of feather into that top line. Secondly, we are seeing a steady improvement in procedure trends in the U.S. and Europe. We've been seeing that and we expect to continue to see kind of a steady improvement there on procedure trends over the course of the year. In our Nutrition business, we will see improvement as we continue to supply the market, in particular, the non-WIC segment of the infant formula market in the U.S. And so will recover share there. And so we'll have the impact of that over the course of the year. For China, Robbie, I'd say we've assumed a softer start in Q1 given some of the dynamics there at the start of this year, but we anticipate that will improve over the course of the year. And so all those changes -- all those impacts on the top line as that builds over the course of the year will flow through to earnings as Robert talked about we're going to get leverage in the middle here. And so for the first quarter, we're -- we think earnings will be approximately $1, and then we'll build from there. On your question on foreign exchange, rates have improved a bit recently, but exchange is still a headwind, particularly on earnings. At current rates, as I said in my opening remarks, exchange is approximately a 1% headwind on sales. EPS, it's a little bit more than $0.30 headwind for us in 2023. The fall-through impact move like we have seen over the last year is always complex. Translation is just a piece of the impact. And while that has improved from where we were a few months ago, it still remains a headwind. One of the biggest drivers that we're seeing is the impact from our hedging program. We realized pretty significant hedging gains last year that won't repeat this year. And you can really see the impact of those hedging gains on our 2022 results. Last year, there was a pretty significant exchange headwind on sales, a little over 5% or $2.1 billion, but a fairly modest impact on earnings, it was less than $0.10. And that was really the benefit we realized last year on those hedging gains that won't repeat in 2023. That's not a unique dynamic that we're seeing. We're seeing that from some other multinationals as well. Operator: And our next question will come from Larry Biegelsen from Wells Fargo. Larry Biegelsen: Robert, I feel compelled to ask about Libre again, just given how important it is. So maybe I'd like to hear from you the outlook for 2023. How should we think about worldwide growth? Can it exceed 20% this year? And can you talk about international, where you've been negatively impacted by the supply issues and the transition to Libre 3 in Germany, when do you expect those issues to be resolved? And just the growth drivers like basal and the vitamin C, resolution, what are some of the growth drivers to look forward to this year for Libre? And I had one follow-up. Robert Ford: Sure, Larry. Well, I think Libre had another great year, full year growth of over 21% strong growth in the U.S. over 42% and international kind of grew in those mid-teens number. We were impacted a little bit by back orders, as you said, on the international side. And I'd say probably a little bit more on our early generation products so kind of Libre 1 was that. We had a significant improvement in that situation in Q4. I expect 1 or 2 more months of until we can completely resolve that, but a significant improvement over there on our international performance. I think one of the key things on the international side is it was a little bit of this supply chain on chips that we had, like that I said, is mostly behind us. The other part of it is the upgrade cycle, right? And when you go with an accelerated upgrade cycle versus with Libre 3 that we did from Libre 2 in some of our key markets, when we went from Libre 1 to Libre 2, we let that upgrade kind of somewhat happen naturally. And that takes about 1.5 years, 2 years to a complete. For Libre 3, we wanted to go more aggressively in some of these markets. So that takes our sales force away from new demand generation to making sure that we can get the scripts and do all the behind-the-scenes work for those upgrades. So that's -- I would say that's still ongoing, but I'd call it about 80% to 85% complete. So then that allows us starting now in 2023 on the international side to start kind of driving new additions here. So I'd say, I expect continued growth in the U.S. in terms of market expansion, basal opportunity, I think, is a great opportunity, and I think it will start in the U.S. But I think we're seeing that also internationally. And now that we've got the supply chain issue largely behind us, and the upgrade cycle, again, largely behind us, we can forecast our demand generation activities on new users. So I think that, that's one key driver of growth for us. Can we see a path for another 20% growth in 2023? Yes, I can. And I think there's a lot of opportunities of growth. I think one of them that you mentioned being the basal expansion is a significant opportunity. I think we've been leading the charge over here, Larry, in terms of generating the clinical data that's required to be able to support reimbursement. It will start, I think, in the U.S., but I don't think it will be a U.S.-only phenomenon. But in the U.S., we'll probably start first. You've got about 4 million type 2 basal patients, in the U.S., about 1/3 of them are Medicare. And even if you assume a reasonable market penetration, you also have to assume difference in annual utilization rates versus type 1 an MDI or a pumper. But even if you take all that into consideration, the opportunity starts with a $1 billion and it can range depending on the speed and the uptake of that. So I think this is a great growth opportunity. And like I said, I don't think it's a U.S.-only situation. I think this is going to start to expand across the world, given the clinical data that you see with Libre and the impact that it has. So I think this is another great opportunity for us. The vitamin C issue that you asked, we've submitted our response. We're working with the FDA on this, and I'm not going to try and forecast that approval. But what I would say is that as soon as that gets approved, then we'll start to see the product with a couple of quarters connect to ID pump systems. We have already launched a connected ID system, AID system in Europe, initial results of the receptivity of that product -- of that combined product in Europe has been very favorable. So I think that's another key growth driver for us in 2023. And then finally, I would say on the pipeline perspective, I don't think it's a 2023 milestone for sales, but I think it's an important development activity for us is going to be the running our trial for the combined glucose-ketone sensor with the FDA and generating the data to support a dual sensor because I think, again, as I've mentioned, it seems to be the go-to sensor for pumpers will be this ability to measure glucose and ketones and factoring that into the algorithms. So that's going to be -- that's obviously having a lot of focus of us in terms of running that trial. And then finally, I would say, outside of Libre, the lingo platform is another kind of key growth driver for us. I've talked about expanding Libre, the Libre platform outside of diabetes and using this more broadly for a much more broader target. We have a separate team that's been working on that development, Larry. We will be launching 2 Lingo products this year. In Europe, I'd say the first one will probably be in the first half of this year and the second one in the second half. So I've talked about Libre being a $10 billion product by 2028 that implies a 15% annual growth rate. We'll do better than that this year. And I think the opportunities we have to be able to drive to that kind of revenue for this product are very real. And I think we've been executing very strongly on all these areas. Larry Biegelsen: That's super helpful. Just one brief follow-up. You talked about being excited about the TriClip opportunity at JPMorgan. I think it was just a month. I know it's limited in what you can say because you're presenting the TRILUMINATE data at ACC. But how are you thinking about that opportunity relative to mitral? Do you still -- and do you still expect approval in the U.S. by year-end '23? Robert Ford: I think it's a great opportunity for us. And I think that we've shown that we're definitely here one of the leaders when it comes to clip-based heart valve repair market. And do I think it's -- do I think it's -- it could be bigger than mitral? I'm not sure I would go that far yet. But I would say that the uptake of the tricuspid repair market, I think, will be faster than the uptake for the mitral just because I think when Mitra was launched, it was the first repair system and now you have a large group of implanting physicians that are familiar with the clip technology are familiar with mapping that clip technology and the procedure. We did make some changes to the delivery device for the clip, it's a little different anatomy, a little bit more challenging to get there with the clip in the tricuspid area. But I think that it's a great opportunity. I mean, I think there's 3 million people today that suffer from tricuspid regurgitation. There's not a lot of really good options available for treatment which is why we invested in the trial here in the U.S. to bring products to the trial. Like you said, we're going to be presenting that in a couple of months. And I think it's a great opportunity for us. We've already seen real nice traction of that in Europe. We launched that in 2021. The team wanted to launch it right in COVID. And I must say at the beginning, I was somewhat against that but they proved me wrong and the product's done really well in Europe. So I think this is another great opportunity for us here in the U.S., too. So we're not ignoring MitraClip, it's part of our entire portfolio. And I think the combination of those 2 products in the implanting physician will be very powerful for Abbott. Operator: And our next question will come from Josh Jennings from Cowen. Joshua Jennings: Robert, I was hoping just to follow up on Larry's question just on Libre, but just thinking more kind of in the out years and this $10 billion target that you've set. I think maybe just -- I think you outlined everything for 2023, probably holds true for over the next 5 years. But just if you could reiterate your confidence we're not in that $10 billion out-year target? And just you expect consolidation between pump and CGM companies. And maybe it would be just great to hear strategic rationale of whether a combined pump CGM offering under one roof would be advantageous for either Abbott or another company? And then the second question is just on Navitor and the launch here in the United States. What would represent a win for Abbott from a U.S. share gain perspective? And what segment is the low-hanging fruit considering the current label? Is it the elderly patients that don't have a long life expectancy that are high risk or even intermediate risk and how do you expect the Navitor launch to play out and add to the macro device growth in 2023? Robert Ford: Sure. Well, I mean, I guess on Libre, to your question on how to get to $10 billion by 2028, I mean, the math will say 15%, right. How do you get 15%. I mean there are real 3 key areas, and I talked a little bit about them. But I'd say, first of all, it's to continue to have a dominant share in the heavy insulin user segment. We have that today with the non-pumpers with the MDI both in the U.S. and globally, internationally. So the real focus there becomes, okay, how do we focus now on the pumper segment and the connectivity over there. And like I said, I think we'll do that with a little bit of catch-up with Libre 2 in terms of what is currently offered in the market. But then to leapfrog that, I think the combined sensor, glucose-ketone sensor is ultimately the way we'll play. And we'll see what pump company is going to want to line up to be first on that connectivity if and once we get that approval because again, I continue to hear from KOLs the importance of that product for the pumper segment. So the second part is the basal expansion. And like I said, you can look at the basal population globally, assume a certain rate globally, a certain utilization rate, and that adds a significant amount of growth to that number. And then the third piece of that is really expanding Libre beyond just diabetes and looking at the Lingo platform. So the adding up and the execution of those strategies are what ultimately gives us confidence that we can get there and we can sustain that 15% growth rate over the next kind of 5 years. Regarding your questions on pumps, listen, I think that it's an important segment. It's one that benefits quite significantly from a combined system. We're now -- we're focusing more aggressively on that. As it relates to an all in one, I think the market has spoken in terms of -- the pumpers want choice. They want to be able to choose what is the best sensor pump combination. And so I think right now, my view on that is the consumers have spoken, the market has spoken, the regulators spoken, they want that interchangeability. And I think that our focus will be on providing the best sensor for the pump systems that are out there. So that's -- I think I covered your Libre questions. I think you had a question on Navitor. Listen, we're excited about this. It's a large market. It's a large segment here in the U.S., it's about $3 billion. Our label is about 50% -- sorry, it's about 50% of the market because we're only approved right now for the high-risk patients. But it's got a strong clinical profile. I mean we'll be sharing data at CRP specifically to this, but I mean we've already released some data on it last year comparing it to other valve systems. So I think that we've been very intentional about wanting to enter this market and to do it in a way that is sustainable. Expectations, I mean, I've talked a little bit about this. There's obviously 2 pretty well entrenched players in the U.S. market. do I think that we can be a leader in 3, 4, 5 years, I think that might be difficult. But I think that we can come into this market and offer another choice, another opportunity that provides additional benefits or differentiated benefits versus other systems that allow us to pick up share. If I look at where we are in Europe, we launched this in Europe, and we have high single-digit share in Europe. And we're not in all centers, we're in about half of the market. In the centers that we are implanted and available, our shares in the mid-teens. So you put that together, we're high single, but where we're competing, we're in the mid-teens. So I think this will be a ramp. I think we've got the sales force in place. We want to roll this out in a way that allows us to be sustainable in that strategy of being able to be a double-digit share gain over the next couple of years. Operator: And our next question will come from Joanne Wuensch from Citibank. Joanne Wuensch: I have 2. The first one has to do with Nutrition. And if you could outline where the company is in terms of the recovery and when do you think it will return to growth? And then the second question has to do with the use of cash, what are your thoughts on it and where you are on share repurchases? Robert Ford: Sure. Well, on Nutrition, as I said in the opening statements, production at Sturgis is up and running. The team is working around-the-clock, nonstop, very hard. Number 1 focus here, as I said, was to serve the customers, get product back on shelves. We started with WIC. The inventory levels on our WIC contracts are very good as we entered into Q4, and we then started to focus on our non-WIC brands, and that's progressed very well in the fourth quarter. And as we go into this year, looking very good. So I would say, if you look at our growth rate, obviously, you've got this year-over-year comp. You're going to see the growth already in Q1, Joanne, right, because we were impacted last year in February. But I guess the right way to look at this is, okay, strip away the comp, strip away where this year-over-year effect of coming back on the market, et cetera, I expect our business -- our overall nutrition business to be growing at that pre-pandemic level between 4% and 6%. Our market shares in WIC have largely recovered, and we're seeing a nice cadence of recovery in the non-WIC share here in the U.S. So I think you'll start to see that growth rate already on the print in Q1, obviously, in Q2 and Q3. But the important thing here is we're looking at our share and the share recovery is very much in line with our forecast that we've set for the full year. I'd like to see our market share get back to pre-pandemic levels by the end of the year. I'm sorry, what was your other question? Joanne Wuensch: Use of cash and whether -- where would you stand on share repurchases? Robert Ford: Sure. While use of cash talked about this. We've taken this balanced approach. I'd say if I were to kind of rank it in terms of use of cash, we're committed to growing a dividend, a strong and growing dividend. So that's probably #1 use of cash. We announced that increase of about 9% in our dividend last year. So that's I'll say is priority number one. Number 2 is obviously ensuring that all of these new products that we've got launching are appropriately resourced in terms of manufacturing and a lot of our CapEx investments. On the buybacks, we did throughout the first 9 months of last year, we had about $3 billion of buybacks. And I'd say, we probably did a little bit of catch-up there, Joanne, in terms of catching up to some of the dilution as we were focusing on getting our leverage down post acquisition. So we do a little bit of catch-up there. And I'd say in terms of buybacks going forward, we'll be contemplating them and they'll be largely focused on offsetting any kind of dilution that we have this year. I'd say the other kind of key use here for us this year is going to be debt. We have some debt towers coming up, and we're not going to be renegotiating those just given interest rates. We want to move those off. So that's probably where you see the use of cash. On the M&A side, which I know is always a question, so I'll preempt anybody over there who's got that on their list. I talked about it where -- on several calls, we're interested. We're actively assessing the opportunities, whether it's tuck-in on up. Clearly, the valuations here have come down somewhat and I think they need to stabilize a little bit. But we have casted -- we casted a pretty wide net. Diagnostics devices are the areas where we have most interest. And again, if it financially makes sense for our shareholders, and it fits strategically, then we will -- we've got that strategic flexibility in our balance sheet to do that. And we're going to be looking at businesses where we can bring value, whether it's -- whether we can accelerate sales, whether we can enhance an R&D program or enhance its probably success, a growth area that we can build and have a path to building a position or even if it's just to augment our own existing pipeline. I think when we've taken that approach -- our track record shows that when we've taken that approach, it's largely been very successful for our shareholders. Operator: And our next question will come from Vijay Kumar from Evercore ISI. Vijay Kumar: Robert. Maybe my first question on your organic growth assumptions here. I think I heard 8-plus is a reasonable number for '23. What is that assuming for any impact from China supply chain, any VBP impact? If you could just give us some assumptions around those macro factors that would be helpful. Robert Ford: Well, I'll let Bob talk a little bit about some of the potentially other macro factors. But the ones you've just mentioned here. I mean China, it's an important market for us, Vijay. It's an important growth market, and it's good that it's moved to a more kind of reopening play. I think that has not only a big impact for us in China, where we've got a strong position. I mean, we're not overly reliant, I'd say it's about less than 5% of our total sales. But nonetheless, it's an important kind of growth market for us. And I think that reopening in China is going to have a real positive spillover effect in other areas of the world. And I would say, predominantly in Asia, Southeast Asia, where we've got strong position in our EPD and in our Nutrition business and some device areas, too. So I think the overall opening of China is good. Like Bob said, there's going to be some choppiness in the first quarter because we're seeing a lot of cases, hospitalizations, et cetera. But I think as that moves -- starts to move down, I think we'll see a pretty strong rebound in our growth prospects over there. So the VBP that you mentioned, yes, I mean, that does have an impact. It's more restricted for 2023 in our electrophysiology business. So we'll feel a little bit of an impact there, but I think that the market opens up for us because of the strategy we took on VBP side. So I think it's net-net, it's going to be positive for us in the long term here, medium, long term in terms of that being an opportunity for us. We've seen this, Vijay. I mean, this happened to us -- this happened in the market with stents in 2019, in our vascular business. That business is back to what I would call pre VBP levels this year. So there's an impact. In that case, we didn't necessarily win some of the contracts. In the case of VBP, we did win the contracts, so -- or a portion of the contract. So I'd say macro, yes, we've got some of these headwinds that we've talked about FX. I think Bob has already talked about it, inflation. But all those seem to be easing off a little bit and the recovery of the procedures and the pipeline and the product launch is a key growth driver for us. Vijay Kumar: Understood. And then Bob, one for you on the gross margins you're at 56%. That's a step down year-on-year. When I look at pre-pandemic, you guys were at 59%. Is there a simple bridge Bob on how much of this has been inflation, you did spoke for hedging impact. Is that all hitting your gross margin line? And why shouldn't inflationary pressures improve? And when can we start seeing gross margins creep back up to pre-pandemic levels? Robert Funck: Yes. So the -- as I said in my opening remarks around 56% for the year. That's a modest step-up kind of from where we exited last year. As you would expect, Vijay, in this environment, there's a lot of different dynamics that multinationals are facing. We've got some headwinds. We've talked about those inflationary impact, how that flows through, including the inventory we built last year that will be sold this year. We talked about currency where we're going to -- we're not going to see a repeat of those hedging gains that we had in '22. So that's a -- that's a bit of a headwind there. On the positive side, I'd say the recovery we're forecasting in the U.S. infant nutrition business will contribute positively. And as that recovery occurs over the course of the year that will have a more positive impact. We also have gross margin improvement programs across all of our businesses that will help to offset some of those headwinds. And we're taking price where we can, I'd say, in our more consumer-facing businesses. And then finally, I'd say just the kind of from a mix standpoint, as we continue to see an acceleration in our medical device business with some of these new product launches. Those are higher gross margins than the overall company, and that will positively contribute to our gross margin. If you -- to your question about kind of where we pre pandemic in what we're guiding to this year kind of I'd say the biggest impact on a cumulative basis has really been inflation. And that's really the -- I'd say the big difference here in terms of where we're guiding right now, and where we were pre-pandemic. But as we continue to see an acceleration from a mix standpoint and continue to work at some of our costs, we'd expect over time to see that gross margin to continue to improve. Operator: And our next question will come from Travis Steed from Bank of America. Travis Steed: Just a follow-up to Vijay's question. On the inflation piece, is that still $1 billion baked into the $4.40 guidance? I just want to make sure I understand what's baked in on the gross margin line. And then anything to call out on the 2023 operating margin expansion some of the moving parts to get the op margin expansion there. It looks like 22% is kind of what's implied by the guide? Robert Funck: Yes. So yes, on the gross -- on the operating margin, yes, we're around 22% kind of where we were pre-pandemic. We're getting the high single-digit growth on the top line kind of in the -- excluding the COVID testing. We're getting leverage down the P&L, which Robert talked about, where we were able forward invest over the last couple of years. So we're going to get leverage in the expense area, and that gets you to around 22% op margin. In terms of inflation, we are going to see a carryover impact from last year, still pretty meaningful. But we've been able to mitigate a good portion of that through both our gross margin improvement programs that we have across our businesses as well as taking some price where we can. Travis Steed: Okay. That's helpful. And a couple of product questions on EP. I think you mentioned the new EP catheter mapping system. I know that was new, maybe I missed that in the past. I'm curious how you're thinking about pulsed-filed ablation and the impact on your EP business. And then the other product question was on Libre. The Vitamin C, is that on Libre 2 or Libre 3 just want to understand the pathway to get vitamin C on Libre 3 and the timing there? Robert Ford: Sure. On the Libre 3, Vit C, I mean it's going to start off with Libre 2. So we want to get that done first, and then we'll progress on to Libre 3. So focus right now is on Libre 2 and then we'll move to Libre 3. On your question on EP, yes, I mean, I think the new catheter that we've launched Japan and start to launch in Europe towards the end of last year as our TactiFlex, which is really using contact sports together with the flexible tip that we had in our flex catheter. So the feedback we've got in that is really, really positive. So I think the combination here of our enhanced new mapping system together with our market-leading mapping catheter in HD grid and now bringing TactiFlex. That combination is very powerful. Regarding PSA, it's definitely an area of interest. We've been investing in it. We actually had 2 internal programs, had a bake off and saw the one that we felt stronger about, taking some of the learnings that we're seeing from the current on-market products. And there's obviously some trialing that's ongoing right now, but I would say it's a growth opportunity. It's an interesting area. I think it's still too early to say in terms of will the market move completely over to this technology or not. I think it's important to have it and hence, why we're investing in our program and incorporating into our R&D program, all of a sudden of the deficiencies that we've heard from some of the market products are the ones that are being put in development right now. So important area -- important investment area for us in EP definitely benefited from kind of the investments that we made during COVID. And I think it's an important product to have. It's ability to convert, I think it will convert a portion of the market. My sense is cryo was probably the first one. But how much of cryo still up to see, but definitely an interesting area for investment. Robert Funck: We'll take one more question. Operator: And our last question will come from Matt Miksic from Barclays. Matthew Miksic: I figure maybe just if we can wrap it up with an update on a couple of the pipeline products, the 5 products, Robert, that you've highlighted in the past, Amulet and CardioMEMS, maybe if you could just talk a little bit about where you are with these launches in terms of size, scale, momentum and maybe what kinds of catalysts we can look for or metrics we can see for these 2 products this year? Robert Ford: Sure. I mean I think those 5 products that I discussed on the last call, and we talked about them exiting at an annual run rate of [ 500 ]. They actually exited at a run rate of [ 550 ] and they grew around -- they grew around 100%. So I expect those 5 products to kind of have maybe not 100%, but pretty high growth rate in next -- in this year. Regarding Amulet, listen, I think it's -- like I said, it's a great space. We've been rolling out the product last year, building the sales force. Key focus here is obviously ensuring good implanting technique with the physicians. We're in about 225 accounts right now. I expect that in terms of growth catalysts, getting more share of those existing accounts as the physicians become more and more accustomed to using our product and see the benefits of using our product versus other systems I think that will be a growth catalyst and then expanding. We do want to start to expand more. As our sales force has increased, the competency of our sales team has increased and our clinical team has increased, we feel more confident now to be able to kind of expand more accounts. And that's what we'll be focused on. Another key catalyst of growth here is obviously the trial that we've been investing on in catalysts, which is to compare Amulet to novel oral anticoagulant. So that's another opportunity. It's not one in 2023, but continuing that enrollment in that trial is an important driver for kind of the long-term growth strategy here of Amulet. CardioMEMS has done very good. We saw an indication expansion last year in the U.S., seen a nice step-up in sales. I think it's a great long-term opportunity. I think it's part of those 5 products that are driving a lot of growth. And I'd say probably the next kind of big area, I mean, we've been investing in Salesforce and rolling this out. Next big area here is working on that NCD. I think that will remove some of maybe some regional hang-ups in terms of reimbursement. So the NCD is something that we're going to be working on this year with the data that we've collected as part of all of our trials. So I think they look very strong as part of that group of 5 products. I'd like to close up the call here. Just a few remarks. The operating environment still remains challenging, right? But it's not as challenging as we saw back in Q3 of 2022 in October. There are definitely signs here of stability. There are signs of improvement, whether it's in the macroeconomic side or whether it's specifically in the segments that we are competing in. And Abbott is well positioned. We're well positioned to both capitalize on this improving environment or to navigate if there's any unforeseen volatility over here. That's what our portfolio has been built for. That's what our balance sheet is set up for. It's set up for these kind of situations and these kind of scenarios. We always knew that pandemic level testing was not a base case. We knew that eventually this would move down to an endemic-like testing. And we're -- our view here is that in 2023, we'll start this process of moving to that and -- so as a result of that, we did do this forward investing into our growth areas, whether it's devices, diagnostics, certain areas in EPD or nutrition. And that's allowed us to grow at the pre-pandemic level, this high single-digit top-tier growth without having to make the OpEx investment that you would expect to be able to sustain that growth. So we're getting that flow through on the P&L and net leverage on our investments. I do recognize the cost pressures. The company recognized those cost pressures. We talked about this now. To Vijay's question, we're going to be working relentlessly on getting our gross margin back to that pre-pandemic level, and it's a combination of working in our cost profiles and our GMI programs, but also as we accelerate the growth in our device business, that mix shift contributes to that. And finally, our balance sheet is strong and provides us the strategic flexibility we need to navigate. And we take this balanced approach where we can provide returns to our shareholders, while at the same time, investing for the long term. So thank you for being on the call. Overall, I think Abbott is very well positioned as we kind of exit this kind of pandemic state and move into more of an endemic state. I think we're well positioned and now it's all about execution. Scott Leinenweber: Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today. Operator: Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.	[ { "speaker": "Operator", "text": "Good morning, and thank you for standing by. Welcome to Abbott's Fourth Quarter 2022 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participants' questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission." }, { "speaker": "Scott Leinenweber", "text": "Good morning, and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions." }, { "speaker": "Robert Ford", "text": "Thanks, Scott. Good morning, everyone, and thank you for joining us. Today, I'll discuss our 2022 results as well as our outlook for this year. For the full year 2022, we achieved ongoing earnings per share of $5.34, which is well above the original EPS guidance we set at the beginning of the year. As you know, macro business conditions have been highly dynamic and challenging over the last few years, particularly for U.S.-based multinational companies." }, { "speaker": "Robert Funck", "text": "Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which excludes the impact of foreign exchange. Turning to our results. Sales decreased 6.1% on an organic basis in the quarter. COVID testing-related sales were $1.1 billion in the quarter, which, while stronger than the forecast provided back in October, reflect a year-over-year decline versus sales in the fourth quarter of the prior year. Excluding both COVID testing-related sales and U.S. infant formula sales that were impacted by manufacturing disruptions last year in our Nutrition business. Total Abbott sales increased 7.1% on an organic basis in the fourth quarter and 7.4% for the full year 2022." }, { "speaker": "Operator", "text": "[Operator Instructions] And our first question will come from Robbie Marcus from JPMorgan." }, { "speaker": "Robert Marcus", "text": "Robert, maybe to kick it off, I appreciate the guidance, but there's a lot of moving parts through the different business lines with macro involved with a lot of new product launches involved. Maybe you could just build up how we should be thinking about how you came up with the guidance range on both the top and bottom lines given all the moving parts?" }, { "speaker": "Robert Ford", "text": "Sure. I mean there's obviously a macro environment here that's been complex, and you've mentioned it. And as I said -- as I said in my remarks, and I think they've gotten significantly better versus where we were in October when -- on our last earnings call. So I think that we've factored some of that improvement and some of that stabilization in there. I mean, I don't necessarily think that we've got too many moving parts here. I mean obviously, we run a -- the company has got a lot of business and business segments. But I mean, if you look at really the 2 areas I would say, Robbie, that kind of have had this effect of maybe sometimes distorting the results a little bit is our COVID testing business and the impact of the recall products last year, right?" }, { "speaker": "Robert Marcus", "text": "Great. Really helpful. Maybe one for Bob. You gave us the full year guide and you gave some commentary down the P&L, which is really helpful. But how should we be thinking about some of the quarterly cadence here? How FX flows, what is FX on the bottom line? And how did that compare to '22? And any just things we should be thinking about first half versus second half on the P&L?" }, { "speaker": "Robert Funck", "text": "Yes. So if you think about the kind of the cadence of our business for 2023, it really starts with the top line and some of the things that Robert kind of talked about. First, we have a lot of the new product launch activity, especially in our medical device businesses. You got products that either launched last year, we'll be launching this year. I'm sure we'll talk about some of those on the call today. So you'll see the impact of those launches kind of grow over the course of the year, kind of feather into that top line." }, { "speaker": "Operator", "text": "And our next question will come from Larry Biegelsen from Wells Fargo." }, { "speaker": "Larry Biegelsen", "text": "Robert, I feel compelled to ask about Libre again, just given how important it is. So maybe I'd like to hear from you the outlook for 2023. How should we think about worldwide growth? Can it exceed 20% this year? And can you talk about international, where you've been negatively impacted by the supply issues and the transition to Libre 3 in Germany, when do you expect those issues to be resolved? And just the growth drivers like basal and the vitamin C, resolution, what are some of the growth drivers to look forward to this year for Libre? And I had one follow-up." }, { "speaker": "Robert Ford", "text": "Sure, Larry. Well, I think Libre had another great year, full year growth of over 21% strong growth in the U.S. over 42% and international kind of grew in those mid-teens number. We were impacted a little bit by back orders, as you said, on the international side. And I'd say probably a little bit more on our early generation products so kind of Libre 1 was that. We had a significant improvement in that situation in Q4. I expect 1 or 2 more months of until we can completely resolve that, but a significant improvement over there on our international performance." }, { "speaker": "Larry Biegelsen", "text": "That's super helpful. Just one brief follow-up. You talked about being excited about the TriClip opportunity at JPMorgan. I think it was just a month. I know it's limited in what you can say because you're presenting the TRILUMINATE data at ACC. But how are you thinking about that opportunity relative to mitral? Do you still -- and do you still expect approval in the U.S. by year-end '23?" }, { "speaker": "Robert Ford", "text": "I think it's a great opportunity for us. And I think that we've shown that we're definitely here one of the leaders when it comes to clip-based heart valve repair market. And do I think it's -- do I think it's -- it could be bigger than mitral? I'm not sure I would go that far yet." }, { "speaker": "Operator", "text": "And our next question will come from Josh Jennings from Cowen." }, { "speaker": "Joshua Jennings", "text": "Robert, I was hoping just to follow up on Larry's question just on Libre, but just thinking more kind of in the out years and this $10 billion target that you've set. I think maybe just -- I think you outlined everything for 2023, probably holds true for over the next 5 years. But just if you could reiterate your confidence we're not in that $10 billion out-year target? And just you expect consolidation between pump and CGM companies. And maybe it would be just great to hear strategic rationale of whether a combined pump CGM offering under one roof would be advantageous for either Abbott or another company?" }, { "speaker": "Robert Ford", "text": "Sure. Well, I mean, I guess on Libre, to your question on how to get to $10 billion by 2028, I mean, the math will say 15%, right. How do you get 15%. I mean there are real 3 key areas, and I talked a little bit about them. But I'd say, first of all, it's to continue to have a dominant share in the heavy insulin user segment. We have that today with the non-pumpers with the MDI both in the U.S. and globally, internationally. So the real focus there becomes, okay, how do we focus now on the pumper segment and the connectivity over there. And like I said, I think we'll do that with a little bit of catch-up with Libre 2 in terms of what is currently offered in the market." }, { "speaker": "Operator", "text": "And our next question will come from Joanne Wuensch from Citibank." }, { "speaker": "Joanne Wuensch", "text": "I have 2. The first one has to do with Nutrition. And if you could outline where the company is in terms of the recovery and when do you think it will return to growth? And then the second question has to do with the use of cash, what are your thoughts on it and where you are on share repurchases?" }, { "speaker": "Robert Ford", "text": "Sure. Well, on Nutrition, as I said in the opening statements, production at Sturgis is up and running. The team is working around-the-clock, nonstop, very hard. Number 1 focus here, as I said, was to serve the customers, get product back on shelves. We started with WIC. The inventory levels on our WIC contracts are very good as we entered into Q4, and we then started to focus on our non-WIC brands, and that's progressed very well in the fourth quarter." }, { "speaker": "Joanne Wuensch", "text": "Use of cash and whether -- where would you stand on share repurchases?" }, { "speaker": "Robert Ford", "text": "Sure. While use of cash talked about this. We've taken this balanced approach. I'd say if I were to kind of rank it in terms of use of cash, we're committed to growing a dividend, a strong and growing dividend. So that's probably #1 use of cash. We announced that increase of about 9% in our dividend last year. So that's I'll say is priority number one." }, { "speaker": "Operator", "text": "And our next question will come from Vijay Kumar from Evercore ISI." }, { "speaker": "Vijay Kumar", "text": "Robert. Maybe my first question on your organic growth assumptions here. I think I heard 8-plus is a reasonable number for '23. What is that assuming for any impact from China supply chain, any VBP impact? If you could just give us some assumptions around those macro factors that would be helpful." }, { "speaker": "Robert Ford", "text": "Well, I'll let Bob talk a little bit about some of the potentially other macro factors. But the ones you've just mentioned here. I mean China, it's an important market for us, Vijay. It's an important growth market, and it's good that it's moved to a more kind of reopening play. I think that has not only a big impact for us in China, where we've got a strong position. I mean, we're not overly reliant, I'd say it's about less than 5% of our total sales. But nonetheless, it's an important kind of growth market for us." }, { "speaker": "Vijay Kumar", "text": "Understood. And then Bob, one for you on the gross margins you're at 56%. That's a step down year-on-year. When I look at pre-pandemic, you guys were at 59%. Is there a simple bridge Bob on how much of this has been inflation, you did spoke for hedging impact. Is that all hitting your gross margin line? And why shouldn't inflationary pressures improve? And when can we start seeing gross margins creep back up to pre-pandemic levels?" }, { "speaker": "Robert Funck", "text": "Yes. So the -- as I said in my opening remarks around 56% for the year. That's a modest step-up kind of from where we exited last year. As you would expect, Vijay, in this environment, there's a lot of different dynamics that multinationals are facing. We've got some headwinds. We've talked about those inflationary impact, how that flows through, including the inventory we built last year that will be sold this year. We talked about currency where we're going to -- we're not going to see a repeat of those hedging gains that we had in '22. So that's a -- that's a bit of a headwind there." }, { "speaker": "Operator", "text": "And our next question will come from Travis Steed from Bank of America." }, { "speaker": "Travis Steed", "text": "Just a follow-up to Vijay's question. On the inflation piece, is that still $1 billion baked into the $4.40 guidance? I just want to make sure I understand what's baked in on the gross margin line. And then anything to call out on the 2023 operating margin expansion some of the moving parts to get the op margin expansion there. It looks like 22% is kind of what's implied by the guide?" }, { "speaker": "Robert Funck", "text": "Yes. So yes, on the gross -- on the operating margin, yes, we're around 22% kind of where we were pre-pandemic. We're getting the high single-digit growth on the top line kind of in the -- excluding the COVID testing. We're getting leverage down the P&L, which Robert talked about, where we were able forward invest over the last couple of years. So we're going to get leverage in the expense area, and that gets you to around 22% op margin." }, { "speaker": "Travis Steed", "text": "Okay. That's helpful. And a couple of product questions on EP. I think you mentioned the new EP catheter mapping system. I know that was new, maybe I missed that in the past. I'm curious how you're thinking about pulsed-filed ablation and the impact on your EP business. And then the other product question was on Libre. The Vitamin C, is that on Libre 2 or Libre 3 just want to understand the pathway to get vitamin C on Libre 3 and the timing there?" }, { "speaker": "Robert Ford", "text": "Sure. On the Libre 3, Vit C, I mean it's going to start off with Libre 2. So we want to get that done first, and then we'll progress on to Libre 3. So focus right now is on Libre 2 and then we'll move to Libre 3." }, { "speaker": "Robert Funck", "text": "We'll take one more question." }, { "speaker": "Operator", "text": "And our last question will come from Matt Miksic from Barclays." }, { "speaker": "Matthew Miksic", "text": "I figure maybe just if we can wrap it up with an update on a couple of the pipeline products, the 5 products, Robert, that you've highlighted in the past, Amulet and CardioMEMS, maybe if you could just talk a little bit about where you are with these launches in terms of size, scale, momentum and maybe what kinds of catalysts we can look for or metrics we can see for these 2 products this year?" }, { "speaker": "Robert Ford", "text": "Sure. I mean I think those 5 products that I discussed on the last call, and we talked about them exiting at an annual run rate of [ 500 ]. They actually exited at a run rate of [ 550 ] and they grew around -- they grew around 100%. So I expect those 5 products to kind of have maybe not 100%, but pretty high growth rate in next -- in this year." }, { "speaker": "Scott Leinenweber", "text": "Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today." }, { "speaker": "Operator", "text": "Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day." } ]	Abbott Laboratories	247,483
ABT	3	2,022	2022-10-18 23:00:00	Operator: Good morning, and thank you for standing by. Welcome to Abbott's Third Quarter 2022 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant's questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission. I would now like to introduce Mr. Scott Leinenweber, Vice President, Investor Relations, Licensing and Acquisitions. Scott Leinenweber: Good morning, and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2022. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A, Risk Factors, to our annual report on Form 10-K the year ended December 31, 2021. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Note that Abbott has not provided the GAAP financial measure for organic sales growth on a forward-looking basis because the company is unable to predict future changes in foreign exchange rates which could impact reported sales growth. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which excludes the impact of foreign exchange. With that, I will now turn the call over to Robert. Robert Ford: Thanks, Scott. Good morning, everyone, and thank you for joining us. Today, we reported results of another strong quarter, including ongoing earnings per share of $1.15. Based on our performance through the first 9 months of the year, we increased our full year adjusted earnings per share guidance to $5.17 to $5.23, which is more than 10% higher than the initial guidance flow we provided back in January. As you know, the macroeconomic conditions remain challenging. Inflation continues to be a stubborn force globally, but we've started to see some moderating impacts in certain areas of our businesses compared to earlier in the year. At the same time, the U.S. dollar has continued to strengthen, including throughout the most recent quarter. COVID remains as unpredictable as ever with intermittent surges continuing throughout the world. And lastly, global supply chain dynamics, staffing shortages continued to impact our health care markets, though we're seeing steady signs of improvements. Over the last few months, we've made progress in several important areas following the temporary shutdown of our infant formula manufacturing plant in Sturgis, Michigan earlier this year. We restarted production at Sturgis in July with a focus on our EleCare and other specialty infant formulas. And in September, we began production of several Similac products, which we expect will begin to reach retail store shelves over the coming weeks. We also boosted production in our global network to increase infant formula supply to the U.S. In fact, we delivered roughly the same volume of formula to our U.S. customers this past quarter as we did during the 3 months prior to the recall. Our #1 supply priority was to the WIC, Women, Infant and Children, federal food assistance program to ensure that underserved participants would have access to infant formula. During the quarter, we also made leadership changes, both at our Sturgis site and in our prior organization, and we concluded a month-long investigation into the accusations that were made by a former employee. The investigation, which included extensive document reviews and interviews, concluded that the allegations about quality were unfounded. And during the quarter, the same former employee dropped the federal OSHA complaint. And lastly, we conducted an analysis of the U.S. infant formula market and concluded that this country would benefit from more manufacturing capacity and redundancy. As such, we're moving forward with plans for a $0.5 billion investment in a new U.S. nutrition facility for specialty and metabolic infant formulas. We're currently in the final stages of determining the site location and will work with regulators and other experts to ensure this facility is state-of-the-art and sets a new standard for infant formula production. We recognize there's more to do, but feel confident in the progress we're making, and I want to thank all the Abbott employees that have been working around the clock on this matter. I'll now summarize our third quarter results for our remaining businesses in more detail before turning the call over to Bob. And I'll start with Established Pharmaceuticals, or EPD, where sales increased more than 12% in the quarter. Strong performance was led by double-digit growth across several countries, including India, China, Brazil and Vietnam, along with broad-based strength across several therapeutic areas. EPD has now achieved double-digit organic sales growth since the beginning of last year, fueled by a steady cadence of new product launches and strong commercial execution. And EPD has also expanded its profitability profile over the same time period, which is quite unique given the current macroeconomic headwinds. Moving to Diagnostics, where COVID test sales of $1.7 billion were significantly higher than expectations but lower compared to last year, which resulted in a modest decline in sales growth overall. The decline in COVID test sales compared to last year was driven by lower demand for laboratory-based tests. Whereas demand for our rapid tests, which include BinaxNOW, Panbio and ID NOW continues to be strong, with sales this past quarter at a similar amount to the third quarter of last year. Rapid tests have proven to be very important and highly practical tools. They provide a quick and affordable way to test COVID almost anywhere and at any time, whether you're experiencing symptoms or just want to know your status before attending events or gatherings. Excluding COVID testing revenues, sales of routine diagnostic tests grew 6% in the quarter overall and even faster internationally, fueled by the continued global rollout of our Alinity instrument for immunoassay, clinical chemistry and molecular testing. Lastly, I'll wrap up with Medical Devices, where sales grew 6.5% in the quarter globally. In the U.S., sales growth of approximately 11.5% was led by strong double-digit growth in Electrophysiology, Structural Heart and Diabetes Care. During the quarter in the U.S., cardiovascular procedure volumes were somewhat soft in July before strengthening in August and September. Internationally, in addition to similar procedure volume trends, sales were negatively impacted by intermittent COVID lockdowns in China as well as supply constraints in certain areas, most notably in Electrophysiology. In Diabetes Care, sales of FreeStyle Libre exceeded $1 billion in the quarter, and our user base expanded to approximately 4.5 million users globally. In the U.S., where sales grew more than 40%, we initiated the full launch of Libre 3, which automatically delivers up to the minute glucose readings with unsurpassed accuracy in the world's smallest and thinnest wearable sensor. Internationally, organic sales growth was impacted by a couple of transitory items, including supply constraints on Libre 1 in certain emerging markets, which we expect to improve over the next couple of months. And secondly, a strategic choice we made in Germany to rapidly transition our large existing user base to our latest generation Libre 3 system, which temporarily reduced our focus on new user additions during the quarter in that country. We already transitioned well over half of our users with the vast majority of the remaining users expected to move to Libre 3 by year-end. This move strategically fortifies our leadership position in the second largest continuous glucose monitoring market in the world and further enhances our already strong strategic position as we work to bring the benefits of Libre to more and more people, including those with type 2 diabetes that are not reliant on insulin to manage their disease. So in summary, despite the challenging environment, we achieved another strong quarter that significantly surpassed expectations which reflects the strength of our diversified business model and execution. And based on our strong performance for the first 9 months of the year, we're once again raising our EPS guidance for the year. I'll now turn the call to Bob. Bob? Robert Funck: Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which excludes the impact of foreign exchange. Turning to our results. Sales increased 1.3% on an organic basis in the quarter. COVID testing-related sales were $1.7 billion, which while stronger than anticipated, reflect a year-over-year decline versus sales in the third quarter of last year. Additionally, organic sales growth was negatively impacted by a temporary shutdown of manufacturing at our nutrition plant in Sturgis, Michigan earlier this year. Excluding COVID testing-related sales and the U.S. sales impacted by the temporary manufacturing shutdown, total Abbott sales increased 6% on an organic basis in the third quarter. Foreign exchange had an unfavorable year-over-year impact of 6% on third quarter sales. During the quarter, we saw the U.S. dollar continue to strengthen versus several currencies, which resulted in a slightly more unfavorable impact on sales compared to exchange rates at the time of our earnings call in July. Regarding other aspects of the P&L, the adjusted gross margin ratio was 55.9% of sales, which reflects the impacts of the nutrition manufacturing disruption and inflation we've experienced on certain manufacturing and distribution costs across our businesses. Adjusted R&D investment was 6.1% of sales, and adjusted SG&A investment was 25.9% of sales in the third quarter. Lastly, our third quarter adjusted tax rate was 18.1%, which reflects an adjustment to align our year-to-date tax rate with our revised full year effective tax rate forecast of 15.5%. The revised full year forecast is modestly higher than the estimate we provided in July due to a shift in the mix of our business and geographic income. Turning to our 2022 outlook. For the full year, we now forecast ongoing earnings per share of $5.17 to $5.23, which is comprised of our year-to-date results through September, plus ongoing earnings per share guidance of $0.86 to $0.92 for the fourth quarter. We forecast total company organic sales growth, excluding the impact of COVID testing-related sales, to be in the mid-single digits for the fourth quarter. Excluding U.S. sales impacted by the temporary manufacturing disruption, we forecast fourth quarter organic sales growth to be in the mid-to-high single digits for the remainder of our combined businesses, which includes Medical Devices, Established Pharmaceuticals, Diagnostics, excluding COVID testing-related sales, and areas of nutrition, not impacted by the disruption. We forecast COVID testing-related sales of approximately $500 million, which does not assume a COVID testing surge in the fourth quarter. And lastly, based on current rates, we expect exchange to have an unfavorable impact of approximately 7% on our fourth quarter reported sales. With that, we'll now open the call for questions. Operator: [Operator Instructions] And our first question comes from Robbie Marcus from JPMorgan. Robert Marcus: Great. Congrats on the quarter. Robert, maybe we could start, we're already towards the end of 2022. And I think people's attention are really shifting to next year. Just with so many moving pieces, both in revenues and down the P&L with currency and inflation and COVID testing assumptions and so on. So I was hoping sometimes at this point in the year, you might give us some early thoughts on next year. Anything you can provide to help us narrow the range of outcomes would be great. Robert Ford: Sure. I mean, with all those topics, we could spend the whole call on it, right? So I'll provide as broad framework that I can give you here. Obviously, the macro conditions are going to remain challenging, right, Robbie. I don't think that anybody right now as we're planning going into next year, is forecasting that this is just going to ease up, right? So specifically, I would say probably inflation, I don't expect to get better. And I'd say the currency headwinds are very much kind of in play here for next year, right? Those are probably 2 of the big kind of macro kind of impacts for us. But I still see a lot of opportunity for growth as I have been talking about our business and our portfolio. There's a clear path in my mind here for top line growth of high single digits. And you can get there with a variety of looking at across our businesses. So in Medical Devices, we've got a lot of upcoming launches and products that we have launched. So Libre 3, Amulet, Aveir, CardioMEMS, Navitor, we expect to be launching next year here in the U.S. EnSite X, our mapping system, launching a new ablation catheter into the market globally next year also. I'm probably sure there's more that I could kind of rattle off here in terms of devices. So I think the device portfolio looks very strong as we go into next year. I expect the same kind of growth rate that we're seeing in EPD. I expect to see continued share capture that we're seeing in core diagnostics and then obviously, a strong recovery in U.S. infant nutrition. So like I said, you see that high single-digit growth in the clear path just based looking at how those businesses will perform and how they're performing and the launches that we got upcoming. Then you mentioned COVID, right? And that's the other piece of the business. So high single-digit growth, excluding COVID. COVID is an interesting one, Robbie, where I think over the last couple of years, we've been talking about the sustainability of COVID. Many of you writing that COVID testing will probably go away. And here we are in the third quarter, in the summer months, with a $1.5 billion, $1.6 billion number here in the third quarter. So I think that as we look -- I want to see how the next few months look like. I think Bob made a comment in terms of our forecast for Q4. We haven't really planned for a big win to surge. It's more of an endemic-like forecast for Q4. And I think that's the kind of endemic forecast that we'll see going into 2023. But I think it's -- right now, it's looking like COVID test sales are stickier than most have assumed. So those are the components on the top line. Down the P&L, as I've said, we're going to be taking a close look at our cost structure. We have been. We've increased that over the last couple of years, made the investments. We talked about those investments. And I'm looking to be able to get a lot of leverage out of those investments that we've made historically. And at the top line, the way it's kind of laid out comes through and the leverage falls through, you're going to see that sales growth falling through at, I'd say, pretty healthy margins. Rob is going to invest in the areas that we know we've got good growth and high growth. Those get the investment dollars. I think in the past, a lot of you have written about the big 3 of Abbott, where there was Libre, Alinity and MitraClip and those are still a big contributor to drive a growth. But we've got a new class of products, I guess, I would call them the Fab 5, looking at TriClip, Aveir, Navitor, CardioMEMS and LAA. These products combined are an annual run rate of about $0.5 billion, growing 50% and those will also receive the kind of investments to be able to kind of drive their growth since I think they're, again, in the early innings of growth for us. So we'll look at managing the P&L and our investments in our structures and choosing the areas where we're going to continue to invest. And then other areas, we'll see some of the leverage from the investments that we've made in the past. So as we go into 2023, to say that everything is -- fundamentally nothing has changed. I'd say, true, our markets are still very attractive. We've got leading positions in these very large, high-growth markets. I like the pipeline, and we've got a lot of ongoing and upcoming launch activity. So that, I'd say, hasn't really changed. We're going to have to be mindful, obviously, of the cost structure of some of the inflation pressures and FX challenges we have. And then on top of that, we have a strong balance sheet. And we've talked about that and that provides us a lot of strategic and financial flexibility as we go into next year. So that's probably my best characterization here in the condensed version of 2023. Robert Marcus: That's really helpful. And maybe one for Bob. The fourth quarter implied EPS guide came in a little bit lower than the Street. We also saw a much bigger FX headwind. So how should we be thinking about the impact to the bottom line in third quarter? What's implied in fourth quarter? And if we start thinking about our models for next year, Robert gave us the top line considerations. How do we think about FX at current rates heading into next year? Robert Funck: Yes, certainly. So we've seen the dollar significantly strengthened this year, including throughout the third quarter. And the biggest moves have been really in developed market currencies, the euro, the pound, the yen. So this is something that most, if not all, multinationals are dealing with and certainly not unique to us. And I think, Robbie, maybe these headwinds are a little bit underappreciated in terms of the impact here. We always are looking to mitigate as best we can, but there's certainly going to be a limit here in terms of what can be done. We try to match our cost, hedging program and take price where appropriate. This year at current rates, our full year headwind is a little bit more than $0.15 in terms of earnings. But about $0.10 of that is happening just in the fourth quarter alone. And so while there are certainly other moving parts, that fourth quarter impact should give you a pretty good feel for the magnitude of headwind that's flowing into next year, particularly in the first 2 to 3 quarters of the year. We'll provide our earnings guidance in January as we always do, and we'll contemplate currency rates at that time. Operator: Our next question comes from Larry Biegelsen from Wells Fargo. Larry Biegelsen: Two product-related questions for me. First, I wanted to start with Libre. A lot going on there, Robert. Obviously, the exciting news this quarter was the type 2 basal LCD from CMS. So I'd love to hear your thoughts on that opportunity. Our back of the envelope math suggests that could be a $1 billion opportunity for Abbott in 5 years. I'd love to hear if you agree. And just lastly, on the vitamin C timing of that resolution and any color -- any additional color you want to provide on Libre. And I did catch in your prepared remarks, you talked about non-insulin patients that was interesting. And I did have one follow-up. Robert Ford: Sure. That's the catch-all Libre question. Let me take the CMS one. So it is very exciting. And if I think about your model, you're probably more aligned maybe to my team, but I think my team is cutting it short in terms of what we could actually do with this indication, and I'll tell you why in a second. But it is pretty significant. I mean, you got 4 million basal patients in the U.S., about 1/3 of them are covered by CMS. So this is probably going to be in terms of the timing of public comments and amount of time it's going to take for CMS to make the decision and then the implementation date, et cetera. So this is probably more of a second half 2023 item, I would say, but it's pretty significant. It's going to expand CGM coverage by about 1.5 million patients on CMS. And as you probably know, Larry, one CMS makes that determination then there's a natural flow that will then move into the private commercial market. So I'm looking at the opportunity of ultimately 4 million patients that will have potential to get some sort of coverage and benefit from the technology. Listen, I think that we've -- it's not surprising from the perspective of this coming up because we've been leading in the generation of data and evidence to support this proposal. I think if you do a lit search on all the studies that have been done on CGM and then segment them between pump studies and basal studies and type 2 studies and type 2 with non-insulin studies, you're going to see that Libre's at the head of all of those type 2 study. So I think this is part of the investments that we've been making clinically to be able to show the evidence and how this benefits a broader population. And then with the value proposition that Libre has, it provides us I think I know what your model is saying. I just think that we'll have a disproportionate share of that. This is a market where, whether it's in the U.S. or in Europe, it predominantly drives around primary care, primary care call point, primary care scale, specifically in the U.S., DMEs. And this is a segment where we do very well. If you do an audit of prescriptions by physician class, Libre has taken about 80% market share of the primary care Rx. So the team has been working on that. So I think it's a great opportunity. And I think this kind of fuels into this notion of this is a much larger market than has historically been contemplated as part of CGM, and that's what our strategy from the moment we enter the market has been thinking about it, right? We're not looking at sprinting quarter-to-quarter, we're looking at this over the long term and making the investments to be able to sustain this kind of growth rate. We announced manufacturing capacity expansions also in the quarter for Diabetes Care because we believe this is a $10 billion franchise by 2028. We believe that we've got pathway between 15 million and 20 million users on this product. So we're resourcing our manufacturing, our scale, our commercial infrastructure, our service, our clinical investments to be able to support what I believe is a significant growth opportunity, and we intend to lead that. I think your other question was on vitamin C. Yes, we have completed the clinical work on the vitamin C. I'll provide updates at the appropriate time. I do recognize that this is an important, I would call short-term, medium-term kind of growth driver for us. If you think about our franchise, it's going to be about basal, type 2 and pump integration. So think of that in the next kind of 2, 3 years of key core growth drivers. And then I'd say, more longer term to get to those numbers, I made an announcement beginning of this year regarding looking at this outside of diabetes on our Lingo franchise, and that will then sustain our growth going forward. So we've made the study. We feel good about the results, and I'll be updating once we have something to update there. We are working on pump integrations outside the United States and we'll have a pump integration launch by end of this year, beginning of next year into Europe with 1 of our pump partners. And I think they're going to benefit a lot from our user base that we have in those countries. Larry Biegelsen: Robert, that was super helpful. Just for my follow-up, I'd love to get your reaction to the PASCAL data at TCT and the launch in the U.S. specifically, your thoughts on the greater durability effect they showed with PASCAL. I know we haven't seen that in the MitraClip registries. And just any update on the locking issue we heard about this quarter. Robert Ford: Yes. So it wasn't unexpected. Every time at TCT, there's always an expectation of a landmark study or an approval. So that wasn't unexpected. They got approval for DMR. That's one of the smaller indications, about 1/3 of the market. We've competed with PASCAL internationally already for a couple of years. I expect to see some trialing in the U.S. And the question is going to be how much it is going to stick. Internationally, MitraClip has done very well, and we've held on to a good portion of our share. I think in Europe, we're kind of at that 80-20 split. So I think -- I expect some of those dynamics to play out here in the U.S. And I think MitraClip is going to do very well. Regarding the data set, yes, I mean it was -- I think it was 117 or 120 patients. I think it was maybe versus 63 of MitraClip. I mean we've done over 150,000 implants, Larry. And we've got great data on our products. We do have over 1,000 patients in the registry. I think the data set is pretty small right now. So we're working on our side. We're doing our investments in our clinical trials, investments in product advancements, in MitraClip. I think right now, I think the biggest opportunity is market expansion, and we're going to be driving a lot of that with the FMR indication. I think I said this in the last call, I think that one of the biggest impacts we have, for me, as I looked at our portfolio was regarding COVID was not being able to benefit the FMR indication and the NCD. So I think that's the biggest opportunity we have is market expansion and working to get those referrals network set up and driving that demand for further expansion. So I think it' a locking mechanism -- yes, I think we had -- we took a field action and I think that's so far going okay. I haven't had any kind of issues, supplies back to normal. Operator: And our next question will come from Joanne Wuensch from Citibank. Joanne Wuensch: I'd like to jump off a little bit from the MitraClip conversation and try and peel apart the double-digit growth in Structural Heart this quarter a little bit stronger than we were looking for. How much of that is MitraClip versus demand for Portico versus maybe something else? And how do you think about developing that segment a little bit further? Robert Ford: Sure. Well, I mean, I think we've talked about how important the Structural Heart portfolio was for us even when we go all the way back to the acquisition of St. Jude and really building this franchise. So we've been intentional about doing that. MitraClip had a good quarter. We had a growth of about 6%. That was impacted a little bit in the U.S. but we had double digit -- almost double-digit growth internationally. So if you kind of then back into that, you could see that some of the other parts of the portfolio are now starting to kind of -- as they're gaining in scale, Joanne, they're starting to have a stronger impact on the portfolio. So Amulet and Navitor internationally, I know you mentioned Portico, but I'd say it's probably more Navitor in Europe that did very well for us, and it continues to do pretty well. We've -- as I say, we acknowledge that we're behind 2 market leaders here, but we're making the investments and it's done pretty well. In Europe, I'd say we've got about an 8%, 9% market share in Europe and the accounts that we actually have Navitor in we're close to kind of mid-teens. So that product is very competitive, and we're looking forward to bringing that here to the U.S. We filed it with the FDA and we expect to bring this to the market here in the first half of next year. Scott, maybe you can talk about kind of Amulet and what we're seeing there also. Scott Leinenweber: Yes. I'd say, Joanne, as Robert mentioned, it is kind of the remaining basket of that Structural Heart business that's driving a lot of the growth there, Amulet, being a component of that. Launched in the U.S. continues to go very well, nice traction. In particular, I would say, in the early adopter accounts as it started late last year. Our share in those accounts is around 40% now at this point. It just shows you kind of once you get in there and get experience and have an opportunity to drive some deeper penetration that you can really achieve a strong share position, and we're doing that in those early adopter accounts. So as we've added accounts over the first portion of this year, we'll look to do the same thing with them as we go forward. So a great opportunity to build, seeing nice growth there. And like I said, like Robert said, kind of a handful of the other items along with TriClip, Navitor and Amulet here that are driving growth in addition to what you're seeing and now is the long-term opportunity for MitraClip. Joanne Wuensch: As my follow-up question, in Nutrition, one of the things we talk with investors about is, how do you think about the recovery in that segment once your supply is back up? Do you see yourself just returning to growth of the market rate or taking a good percentage of the share back? Or any guidance you could give us remodel forward would be helpful. Robert Ford: Sure. I would say we've gone -- we've had a situation like this back in 2010, and we've seen other competitors have situations like this, Joanne, in terms of the share recovery process. I'd say there's a couple of key things in terms of consideration. And when you think about doing those modeling, it's looking at your share of the WIC program, your ability to continue to call on pediatricians and your share in the hospitals. And I would say we've disproportionately focused in this quarter with our global supply network to focus on those channels. And one of the challenges with that the WIC channel is a lower priced channel than I would've call the non-WIC channel. So that's probably where we made a decision to take our -- take the volume that we had. And like I said in my opening comments, we actually supplied to the market this quarter, what we supplied in the 3 months prior to the recall. It's just the mix of that supply was overly gated towards the WIC states and the WIC contracts that we had. We made a commitment to those states that they would not have backward supply shortages. So we focused on that. And I think by focusing on that, we not only live to our commitments and the contracts that we put in place but that's going to obviously be a base for us as we go into this quarter and into next quarter. So if you look at the Nielsen data, you do see share recovery, I'd say, we probably lost about 20 share points from the recall. And I think the last read that I saw in September was we got half of it back. And that is a mix -- this will go to the mix piece where on the WIC side, we've recovered all of our share. And now we're going to take our capacity and start moving it into the non-WIC channel with the non-WIC configuration. So like I said, we've intentionally made these decisions in terms of how we're supplying the market. And I think by doing that, just naturally with the work that our teams are doing, we'll start to see the share recovery build month-over-month. So that's probably how to think about it. Operator: And our next question comes from Josh Jennings from Cowen. Joshua Jennings: Robert, I wanted to ask about the COVID testing franchise and just the strength in 2022 and thinking about the comp for 2023. Is there anything you can share in terms of contracts that are in place for 2023 and what that base could look like where weather contracts in 2022 could roll over into 2023? I know it's impossible to forecast utilization or uptake of COVID testing next year, but if there's any base commentary you can provide, that would be helpful. And I just have 1 follow-up. Robert Ford: Yes, I think that's -- looking at the market between government contracts and nongovernment contracts is something that we spent a lot of time this year doing because obviously, those government contracts, they're high-volume and they ultimately skew a little bit of kind of the run rate as we're trying to kind of run rate this. So if you look at our Q4 number, our Q4 number that we're forecasting is really what I would call an endemic state, right? So about $0.5 billion across the world, across all of our platforms, in a winter season without necessarily forecasting the kind of surge that we saw last year. In that number, we do not have any significant government contracts. Now what governments have realized is that they do need to make some investments and they do need to hold some level of testing inventory in their countries. So we have active conversations with a lot of governments and they recognize and realize an Abbott's ability to scale up and scale up pretty fast. So we've got plenty of capacity, and they know that, they know the value of our product. They work very well with the -- in terms of determining COVID and the new variants, et cetera. So we don't have any significant number in 2020 -- in Q4 of this year, we think that that's the kind of right -- kind of run rate from an endemic standpoint. And if there is a surge and if governments realize that they do need to procure more testing, we've got the product, we've got the reliability of the product and we've got the reliability of supply, and they know that. So we're in a good position there. Joshua Jennings: Excellent. Just one follow-up on Libre. You mentioned just the path to achieving full iCGM status and understand there's a segment of the CGM that will open up for Libre, but I was wondering if you could just share your thoughts on the potential impact to clinician sentiment towards accuracy of the platform, payer sentiment in terms of whether there could be any formulary prioritization decisions considering the pricing? And then on the other side of that, how are you -- any new thoughts on pricing for Libre 3 particularly in this inflationary environment. Robert Ford: Sure. Well, listen, this is an important segment, right? Obviously, the vast majority of CGM users and the vast majority of future potential users are people that are either injecting insulin with pens or syringes or not even using insulin, right? But we recognize that this is an important segment. So we're doing -- like I said, we completed the work on Libre 2 regarding the vitamin C. We'll be updating --we will be updating the market and our partners as we go through that process with the agency. But we also believe that -- we also believe that there is potential to innovate even further in that pump integration, right? And we talked about this in last call. We announced this at the ADA in June which is the creation of a dual analyze sensor, a glucose ketone sensor. Everybody -- all the [ capabilities ] that I've spoken to that you're -- I guess you're referring to believe that this would be the go-to sensor for pump integration because the ketone functionality provides the added safety feature that would be required, right? So if there's some sort of interruption in insulin delivery from the pump, what is understood clinically is that the ketone levels will rise earlier than the glucose levels and to be able to have that ketone level, that continuous ketone level measurement is an added safety feature for that pump environment. And I think it does provide, I guess, a step ahead in terms of innovation, in terms of pump integration. Regarding the accuracy, I mean, I think it's commonly understood and the data is very clear in terms of Freestyle Libre 3 -- I mean even FreeStyle Libre 2, but FreeStyle Libre 3 being a definitive best-in-class accurate sensor. It's the only CGM sub-8 MARD. So I don't think we have that issue. So it's an important segment, and we're going to be investing in it, and we're going to -- our goal is to actually provide something that's even more advanced and more beneficial. Sorry, did you have another question on --oh, it' pricing. Yes, Libre 3 pricing, Libre 2 pricing, Libre 1 pricing, it's practically all the same, Josh. And the more volume we can get on to Libre 3, the more we can kind of lower those COGS. But we have a parity pricing right now. And we think that, that pricing strategy as I said last year, as the international markets or even in the U.S., people have challenges either with co-pays in the U.S. or with formularies and reimbursement decisions internationally. I think that our value proposition is very strong, and it's going to prove itself out very clearly as single-payer systems start to look at how to fine-tune their budgets and get more done either with less or with the same amount. So I think that our value proposition, consumer-friendly product with best-in-class accuracy, feature set that no real gaps and our pricing strategy, I think it's a complete value prop. Operator: And our next question comes from Vijay Kumar from Evercore ISI. Vijay Kumar: Robert, maybe my first one for you. The headline organic ExCo within 3Q was 3%-ish low singles. When you back out some of these the supply chain impact, I think you mentioned Germany and Nutrition, what was the underlying organic growth? And when can we get back to an environment where there is no mismatch in the headline organic and underlying rate? It's a clean number. So maybe just talk about that cadence to normality. Robert Ford: It was high single -- it's mid- to high single once you do all those exclusions. I don't like doing that. I mean I get that it's important to be able to isolate what the challenges are and what the issues are and are they more transitory or are they more kind of sustained issues in the business. I would say the issues that we've had, the challenges we've had in this quarter regarding supply chain, they're fairly, I'd say, from a Med Device perspective, they're pretty significant, and they kind of had the impact that we saw in our Med Device business. I think if you had look at the kind of back orders that we had, whether it was Libre 1 and some of the back orders that we had in EP, we would be high single digits. But if you back out these issues mid to high overall for the company. Yes, your question of when do we get into kind of normal organic? I think part of the challenge here is COVID -- COVID to play. And as that base becomes smaller than what it is this year, I mean, this year, we'll probably do very much close to the same amount of COVID test sales that we did kind of last year. But as we move into next year, and that becomes smaller than this year, we'll see a little bit of an impact on that overall growth rate. But as I said, I think in Robbie's question, I see high single-digit growth once you back out of COVID. And so COVID will be just the determining factor there, but base non-COVID, high single digits next year. Vijay Kumar: That's helpful. And then maybe one on the financial side. I think when gross margins were down Q-on-Q. I'm wondering what was the FX incremental inflationary impact. I think Robert Funck mentioned $0.10 of FX impact in Q4. Should we annualize that to $0.40 of FX impact for next year? I'm not sure how to think about FX and inflationary impact for next year. And we didn't talk about Lingo. Shouldn't that be an incremental driver here and not '23? Robert Funck: Let me -- Vijay, I'll take the exchange first. I mean, I wouldn't necessarily take that $0.10 impact in the fourth quarter and extrapolate that for the full year of next year. But certainly, through the first 3 quarters, you would expect to see that. But then in the fourth quarter, you're going to kind of be at those rates that we currently are at. So but again, it is going to be a significant headwind for us next year. On inflation, definitely, we're seeing the impacts there. Like others, the biggest impacts we've seen is really around commodities, other manufacturing input cost and logistics. We've incorporated about another $100 million impact to gross margin in our current guidance. So that's about $1 billion for the year, so call it, maybe 240 -- probably a little more than 240 basis points on the gross margin. As we -- as Robert said, we've seen a little bit of moderation in the rate of increase in the third quarter compared to where we were earlier in the year, and we're trying to take some price to offset that really more in our consumer-facing businesses. Kind of given the way that inflation has hit us over the course of this year, the inventory that we purchased and manufacture this year at these higher costs will definitely negatively impact us next year when that inventory is sold even if inflationary pressures start to come down kind of as we get into next year. Robert Ford: On your question on Lingo, Vijay, we have factored in a launch into next year. We have not factored that launch here in the U.S. So it is an international launch. It's a different business model, as I talked about it, more of a direct-to-consumer wellness subscription model. And we're on target here to come out of the gates to that in Q1. We are going to be launching into what I would call a little bit of a challenging environment. So we've taken that into consideration here. But I think that the long-term growth opportunity of building this kind of business, a wellness subscription-like model with the platform that we've built and the scale that we have, I think, is a great growth opportunity for us. We do have it factored in into next year probably launching in the beginning of the year and then building from there. But we'll be launching, like I said, in a challenging environment, but I still think it's the right thing to do from a long-term perspective. Scott Leinenweber: Operator, we'll take one more question. Operator: And we'll take our last question from Travis Steed from Bank of America. Travis Steed: I did want to ask on China, how do you see the recovery shaping up there. There's going to be another headwind next year and any new VBPs that you see coming up in China? Robert Ford: Yes. It is going to be a little bit of a headwind. You can think about it as either currency and VBP. We've gone through this in some other parts of our business. So we do expect this value-based procurement or pricing here to play out. I think the next area that we're looking at. We've gone through it with stents last year or 1.5 years ago, and the next area that we're looking at is probably on the electrophysiology side. That's probably the next category that's up. It's interesting, as we've been looking at this, there's definitely interesting impacts in terms of ranges of these pricing. We've actually gone through some of it in pharmaceuticals also. It will range from 30% to 80% in terms of pricing. And really, the magnitude here depends on whether it's a national or regional process. Some of the categories have been more regional. And they tend to be a little bit lower. And it also depends on the number of participants that exist in that category. So as I look at -- on the EP side, we've also seen that when there are more -- like a system-based approach, Travis. So think capital, think about the technical support and the infrastructure associated support that, those tend to be a little bit on the lower end of that range versus to be on the higher end of that range. So that's probably what we've got contemplated for VBP next year is more on the EP side. Travis Steed: No. That's helpful. And I did want to ask about the M&A environment, too, since it hasn't come up yet on this call. And also kind of how it relates to your thinking of the device growth longer term, if you're still able to grow at the high end of med tech. And if the Fab 5, as you called, is enough to do that? Or if you need to augment device growth with M&A over time? Robert Ford: No, I don't feel that I need to do M&A to be able to sustain that high single-digit growth that we've been posting pretty consistently on devices. I did say in the last call that we're interested and we're being prudent about that interest. The interest has increased and we actively assess all the opportunities here. But as I've said, just because we have a strong balance sheet, and we've got a lot of flexibility, we're still going to make sure that we're going about this from a strategic perspective and we're going about it from a financial perspective. So obviously, valuations come down somewhat. And that helps on the financial modeling and attractiveness side from it. But I would say they probably need to stabilize a little bit of these valuations so that you can engage what I would call just meaningful discussions here. And I think as those stabilize, I think you'll see the environment pick up here in terms of M&A. So we're in a good position. Don't need to do M&A, but there's a lot of opportunities out there for us, and we're going to apply that consistent framework of strategic and financially disciplined in terms of how we look at that. So I'll just sum up here. Q3 was probably a very challenging quarter for us, probably our most challenging. Obviously, the impact of inflation and supply chain and some of the back orders that we encountered was a headwind. Some of the FX as we go forward also will be a headwind. But you saw the portfolio strength and the execution here coming through that, all those challenges and delivery, not only in the quarter but also for the full year, as evidence of our full year raise here also. So it's also provided us an opportunity to make some strategic choices, to strengthen our business and to strengthen our position and build our momentum, I guess, to Robbie's comment in the beginning about how everybody shifting to 2023 and so are we. And we made some choices and decisions here to be able to prepare us and build our momentum and strengthen our position as we go into 2023. I saw a nice recovery in the institutional businesses. And our pipeline here that we talked a little bit about is going to sustain that growth acceleration. There's a lot of organic growth opportunities that we've got in 2023. And I highlighted here how I see a clear path for high single-digit revenue growth. And then on top of that, we've got a strong balance sheet, and that's going to allow for a very balanced capital deployment to our shareholders and also allow us to fuel future growth. So with that, I'm going to wrap that up. Thanks. Scott Leinenweber: Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today. Operator: Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.	[ { "speaker": "Operator", "text": "Good morning, and thank you for standing by. Welcome to Abbott's Third Quarter 2022 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant's questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission. I would now like to introduce Mr. Scott Leinenweber, Vice President, Investor Relations, Licensing and Acquisitions." }, { "speaker": "Scott Leinenweber", "text": "Good morning, and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions." }, { "speaker": "Robert Ford", "text": "Thanks, Scott. Good morning, everyone, and thank you for joining us." }, { "speaker": "Robert Funck", "text": "Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which excludes the impact of foreign exchange." }, { "speaker": "Operator", "text": "[Operator Instructions] And our first question comes from Robbie Marcus from JPMorgan." }, { "speaker": "Robert Marcus", "text": "Great. Congrats on the quarter. Robert, maybe we could start, we're already towards the end of 2022. And I think people's attention are really shifting to next year. Just with so many moving pieces, both in revenues and down the P&L with currency and inflation and COVID testing assumptions and so on. So I was hoping sometimes at this point in the year, you might give us some early thoughts on next year. Anything you can provide to help us narrow the range of outcomes would be great." }, { "speaker": "Robert Ford", "text": "Sure. I mean, with all those topics, we could spend the whole call on it, right? So I'll provide as broad framework that I can give you here. Obviously, the macro conditions are going to remain challenging, right, Robbie. I don't think that anybody right now as we're planning going into next year, is forecasting that this is just going to ease up, right? So specifically, I would say probably inflation, I don't expect to get better." }, { "speaker": "Robert Marcus", "text": "That's really helpful. And maybe one for Bob. The fourth quarter implied EPS guide came in a little bit lower than the Street. We also saw a much bigger FX headwind. So how should we be thinking about the impact to the bottom line in third quarter? What's implied in fourth quarter? And if we start thinking about our models for next year, Robert gave us the top line considerations. How do we think about FX at current rates heading into next year?" }, { "speaker": "Robert Funck", "text": "Yes, certainly. So we've seen the dollar significantly strengthened this year, including throughout the third quarter. And the biggest moves have been really in developed market currencies, the euro, the pound, the yen. So this is something that most, if not all, multinationals are dealing with and certainly not unique to us. And I think, Robbie, maybe these headwinds are a little bit underappreciated in terms of the impact here." }, { "speaker": "Operator", "text": "Our next question comes from Larry Biegelsen from Wells Fargo." }, { "speaker": "Larry Biegelsen", "text": "Two product-related questions for me. First, I wanted to start with Libre. A lot going on there, Robert. Obviously, the exciting news this quarter was the type 2 basal LCD from CMS. So I'd love to hear your thoughts on that opportunity. Our back of the envelope math suggests that could be a $1 billion opportunity for Abbott in 5 years. I'd love to hear if you agree. And just lastly, on the vitamin C timing of that resolution and any color -- any additional color you want to provide on Libre. And I did catch in your prepared remarks, you talked about non-insulin patients that was interesting. And I did have one follow-up." }, { "speaker": "Robert Ford", "text": "Sure. That's the catch-all Libre question. Let me take the CMS one. So it is very exciting. And if I think about your model, you're probably more aligned maybe to my team, but I think my team is cutting it short in terms of what we could actually do with this indication, and I'll tell you why in a second. But it is pretty significant. I mean, you got 4 million basal patients in the U.S., about 1/3 of them are covered by CMS." }, { "speaker": "Larry Biegelsen", "text": "Robert, that was super helpful. Just for my follow-up, I'd love to get your reaction to the PASCAL data at TCT and the launch in the U.S. specifically, your thoughts on the greater durability effect they showed with PASCAL. I know we haven't seen that in the MitraClip registries. And just any update on the locking issue we heard about this quarter." }, { "speaker": "Robert Ford", "text": "Yes. So it wasn't unexpected. Every time at TCT, there's always an expectation of a landmark study or an approval. So that wasn't unexpected. They got approval for DMR. That's one of the smaller indications, about 1/3 of the market. We've competed with PASCAL internationally already for a couple of years. I expect to see some trialing in the U.S. And the question is going to be how much it is going to stick." }, { "speaker": "Operator", "text": "And our next question will come from Joanne Wuensch from Citibank." }, { "speaker": "Joanne Wuensch", "text": "I'd like to jump off a little bit from the MitraClip conversation and try and peel apart the double-digit growth in Structural Heart this quarter a little bit stronger than we were looking for. How much of that is MitraClip versus demand for Portico versus maybe something else? And how do you think about developing that segment a little bit further?" }, { "speaker": "Robert Ford", "text": "Sure. Well, I mean, I think we've talked about how important the Structural Heart portfolio was for us even when we go all the way back to the acquisition of St. Jude and really building this franchise. So we've been intentional about doing that. MitraClip had a good quarter. We had a growth of about 6%. That was impacted a little bit in the U.S. but we had double digit -- almost double-digit growth internationally." }, { "speaker": "Scott Leinenweber", "text": "Yes. I'd say, Joanne, as Robert mentioned, it is kind of the remaining basket of that Structural Heart business that's driving a lot of the growth there, Amulet, being a component of that. Launched in the U.S. continues to go very well, nice traction. In particular, I would say, in the early adopter accounts as it started late last year. Our share in those accounts is around 40% now at this point." }, { "speaker": "Joanne Wuensch", "text": "As my follow-up question, in Nutrition, one of the things we talk with investors about is, how do you think about the recovery in that segment once your supply is back up? Do you see yourself just returning to growth of the market rate or taking a good percentage of the share back? Or any guidance you could give us remodel forward would be helpful." }, { "speaker": "Robert Ford", "text": "Sure. I would say we've gone -- we've had a situation like this back in 2010, and we've seen other competitors have situations like this, Joanne, in terms of the share recovery process. I'd say there's a couple of key things in terms of consideration. And when you think about doing those modeling, it's looking at your share of the WIC program, your ability to continue to call on pediatricians and your share in the hospitals." }, { "speaker": "Operator", "text": "And our next question comes from Josh Jennings from Cowen." }, { "speaker": "Joshua Jennings", "text": "Robert, I wanted to ask about the COVID testing franchise and just the strength in 2022 and thinking about the comp for 2023. Is there anything you can share in terms of contracts that are in place for 2023 and what that base could look like where weather contracts in 2022 could roll over into 2023? I know it's impossible to forecast utilization or uptake of COVID testing next year, but if there's any base commentary you can provide, that would be helpful. And I just have 1 follow-up." }, { "speaker": "Robert Ford", "text": "Yes, I think that's -- looking at the market between government contracts and nongovernment contracts is something that we spent a lot of time this year doing because obviously, those government contracts, they're high-volume and they ultimately skew a little bit of kind of the run rate as we're trying to kind of run rate this. So if you look at our Q4 number, our Q4 number that we're forecasting is really what I would call an endemic state, right?" }, { "speaker": "Joshua Jennings", "text": "Excellent. Just one follow-up on Libre. You mentioned just the path to achieving full iCGM status and understand there's a segment of the CGM that will open up for Libre, but I was wondering if you could just share your thoughts on the potential impact to clinician sentiment towards accuracy of the platform, payer sentiment in terms of whether there could be any formulary prioritization decisions considering the pricing? And then on the other side of that, how are you -- any new thoughts on pricing for Libre 3 particularly in this inflationary environment." }, { "speaker": "Robert Ford", "text": "Sure. Well, listen, this is an important segment, right? Obviously, the vast majority of CGM users and the vast majority of future potential users are people that are either injecting insulin with pens or syringes or not even using insulin, right? But we recognize that this is an important segment. So we're doing -- like I said, we completed the work on Libre 2 regarding the vitamin C. We'll be updating --we will be updating the market and our partners as we go through that process with the agency." }, { "speaker": "Operator", "text": "And our next question comes from Vijay Kumar from Evercore ISI." }, { "speaker": "Vijay Kumar", "text": "Robert, maybe my first one for you. The headline organic ExCo within 3Q was 3%-ish low singles. When you back out some of these the supply chain impact, I think you mentioned Germany and Nutrition, what was the underlying organic growth? And when can we get back to an environment where there is no mismatch in the headline organic and underlying rate? It's a clean number. So maybe just talk about that cadence to normality." }, { "speaker": "Robert Ford", "text": "It was high single -- it's mid- to high single once you do all those exclusions. I don't like doing that. I mean I get that it's important to be able to isolate what the challenges are and what the issues are and are they more transitory or are they more kind of sustained issues in the business. I would say the issues that we've had, the challenges we've had in this quarter regarding supply chain, they're fairly, I'd say, from a Med Device perspective, they're pretty significant, and they kind of had the impact that we saw in our Med Device business." }, { "speaker": "Vijay Kumar", "text": "That's helpful. And then maybe one on the financial side. I think when gross margins were down Q-on-Q. I'm wondering what was the FX incremental inflationary impact. I think Robert Funck mentioned $0.10 of FX impact in Q4. Should we annualize that to $0.40 of FX impact for next year? I'm not sure how to think about FX and inflationary impact for next year. And we didn't talk about Lingo. Shouldn't that be an incremental driver here and not '23?" }, { "speaker": "Robert Funck", "text": "Let me -- Vijay, I'll take the exchange first. I mean, I wouldn't necessarily take that $0.10 impact in the fourth quarter and extrapolate that for the full year of next year. But certainly, through the first 3 quarters, you would expect to see that. But then in the fourth quarter, you're going to kind of be at those rates that we currently are at. So but again, it is going to be a significant headwind for us next year." }, { "speaker": "Robert Ford", "text": "On your question on Lingo, Vijay, we have factored in a launch into next year. We have not factored that launch here in the U.S. So it is an international launch. It's a different business model, as I talked about it, more of a direct-to-consumer wellness subscription model. And we're on target here to come out of the gates to that in Q1. We are going to be launching into what I would call a little bit of a challenging environment." }, { "speaker": "Scott Leinenweber", "text": "Operator, we'll take one more question." }, { "speaker": "Operator", "text": "And we'll take our last question from Travis Steed from Bank of America." }, { "speaker": "Travis Steed", "text": "I did want to ask on China, how do you see the recovery shaping up there. There's going to be another headwind next year and any new VBPs that you see coming up in China?" }, { "speaker": "Robert Ford", "text": "Yes. It is going to be a little bit of a headwind. You can think about it as either currency and VBP. We've gone through this in some other parts of our business. So we do expect this value-based procurement or pricing here to play out. I think the next area that we're looking at. We've gone through it with stents last year or 1.5 years ago, and the next area that we're looking at is probably on the electrophysiology side. That's probably the next category that's up." }, { "speaker": "Travis Steed", "text": "No. That's helpful. And I did want to ask about the M&A environment, too, since it hasn't come up yet on this call. And also kind of how it relates to your thinking of the device growth longer term, if you're still able to grow at the high end of med tech. And if the Fab 5, as you called, is enough to do that? Or if you need to augment device growth with M&A over time?" }, { "speaker": "Robert Ford", "text": "No, I don't feel that I need to do M&A to be able to sustain that high single-digit growth that we've been posting pretty consistently on devices. I did say in the last call that we're interested and we're being prudent about that interest. The interest has increased and we actively assess all the opportunities here. But as I've said, just because we have a strong balance sheet, and we've got a lot of flexibility, we're still going to make sure that we're going about this from a strategic perspective and we're going about it from a financial perspective." }, { "speaker": "Scott Leinenweber", "text": "Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today." }, { "speaker": "Operator", "text": "Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day." } ]	Abbott Laboratories	247,483
ABT	2	2,022	2022-07-19 23:00:00	Operator: Good morning, and thank you for standing by. Welcome to Abbott Second Quarter 2022 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant's questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission. I would now like to introduce Mr. Scott Leinenweber, Vice President, Investor Relations, Licensing and Acquisitions. Scott Leinenweber: Good morning, and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2022. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A, Risk Factors, to our annual report on Form 10-K for the year ended December 31, 2021. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Note that Abbott has not provided the GAAP financial measure for organic sales growth on a forward-looking basis because the company is unable to predict future changes in foreign exchange rates, which could impact reported sales growth. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which excludes the impact of foreign exchange. With that, I will now turn the call over to Robert. Robert Ford: Thanks, Scott. Good morning, everyone, and thank you for joining us. Today, we reported results of another strong quarter. Earnings per share were $1.43, reflecting more than 20% growth compared to last year. Sales increased nearly 14.5% on an organic basis in the quarter led by growth in Established Pharmaceuticals, Diagnostics and Medical Devices. Based on our performance for the first 6 months, we increased our earnings per share guidance to at least $4.90 for the full year. This speaks to the strength and resilience of our diversified health care model as well as strong execution in this challenging macro environment. We continue to advance our R&D pipeline and strengthen our long-term growth platforms with several new product approvals. Our supply chain has remained resilient, and our financial health remains strong. I'll now summarize our second quarter results in more detail before turning the call over to Bob, and I'll start with Established Pharmaceuticals, or EPD, where sales increased more than 9% in the quarter. Strong performance this quarter was led by double-digit growth across several countries, including China, Brazil, Colombia, Mexico and Vietnam. EPD continues to execute and perform at a very high level in a dynamic environment, achieving double-digit organic sales growth over the past 1.5 years, including more than 11% organic growth for the first half of this year. Moving to Diagnostics, where sales grew over 35% in the quarter. COVID test sales were $2.3 billion in the quarter, more than 95% of which came from rapid tests, including BinaxNOW in the U.S., Panbio internationally and ID NOW globally. As we had predicted some time ago, rapid testing has become widely accepted and has proven to be a very important tool in combating the virus due to its affordability and accessibility, including at-home testing. And while vaccines have been shown to play an important role in reducing severity of outcomes, with the emergence of new variants that escape immunity, rapid tests have become the best tool we have to help people quickly and easily identify new cases and quarantine to help slow and prevent transmission. As you know, forecasting COVID testing demand beyond the near term has been challenging. As such, our forecast for the next few months contemplates a modest approaching endemic-like amount of testing sales. We are in regular discussions with governments around the world, including the U.S., for surveillance testing needs and to ensure capacity is available and ready, if we see another surge this winter. If that were to happen, we have a lot of manufacturing capacity in the U.S. and internationally to help meet testing needs. I'll now turn to Nutrition, where, as you know, we initiated a voluntary recall in February of certain infant formula products manufactured at one of our U.S. facilities. Earlier this month, we resumed partial production at that facility, starting with our specialty formula EleCare and metabolic formulas. We are in the final phases of testing to restart Similac production. As a reminder, once we begin production, it takes several weeks for product to reach store shelves. That said, we will do everything possible to accelerate delivery of product to retailers, so families can have access to the formula they need as soon as possible. We've already started to see some share recovery at retail over the past couple of months, as we leveraged our global manufacturing network to increase supply to the U.S., including importing product from our FDA registered plant in Ireland. We also began importing product from Spain after receiving informed discretion from the FDA that expanded the allowance for imports. As I said in April, it's important to note that the results of the investigation from the FDA, CDC and Abbott concluded no evidence linked our formulas to any infant illnesses or deaths, and there is no new information to suggest otherwise. We take this matter very seriously, and we're making a number of enhancements to our operations at the impacted manufacturing plant. We're also taking steps across our manufacturing network to expand capacity and redundancy. We're committed to set the standard in industry on quality and safety and to reearn the trust of the families that depend on us. Across our broader Nutrition business, global sales in Adult Nutrition increased 5% in the quarter, including more than 7.5% growth internationally led by our market-leading Ensure and Glucerna brands. And lastly, I'll wrap up with Medical Devices, where sales grew 7.5% in the quarter. In cardiovascular devices, sales growth was led by Structural Heart and Heart Failure. While cardiovascular procedure trends continued to improve, growth in the quarter was somewhat more modest than what we had anticipated back in April due to several factors, most notably health care staffing challenges, COVID surges and lockdowns in China that were implemented as part of their efforts to control the spread of the virus. We expect these dynamics to improve in the second half of the year. In Diabetes Care, sales of FreeStyle Libre grew more than 25% on an organic basis in the quarter, and our user base now exceeds 4 million users globally. During the quarter, we continued to strengthen our Medical Device portfolio with innovative new products, most notably U.S. FDA clearance of our FreeStyle Libre 3 continuous glucose monitoring system, which is the world's smallest and thinnest wearable glucose sensor that provides results with the highest level of accuracy in the industry. And U.S. approval of Aveir, our leadless pacemaker for the management of slow heart rhythms, Aveir was specifically designed to be retrievable if the device ever needs to be removed and expandable to a dual-chamber device, which is currently under development if the therapy needs to evolve over time. So in summary, our diversified health care model continues to prove highly resilient in a dynamic macro environment. We're achieving strong growth across several areas of the portfolio and making good progress restarting our nutrition manufacturing facility. And as a result of our strong performance through the first 6 months, we're raising our EPS guidance for the year. I'll now turn over the call to Bob. Bob? Robert Funck: Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which excludes the impact of foreign exchange. Turning to our results. Sales for the second quarter increased 14.3% on an organic basis, which was led by strong growth in Diagnostics, Established Pharmaceuticals and Medical Devices, along with global COVID testing-related sales of $2.3 billion in the quarter. During the second quarter, sales were negatively impacted by a voluntary recall and manufacturing shutdown in February of certain infant formula products manufactured at one of our U.S. plants. Excluding COVID testing-related sales and the U.S. sales associated with the recalled products, Abbott sales increased 6.2% on an organic basis in the second quarter. Foreign exchange had an unfavorable year-over-year impact of 4.2% on second quarter sales. During the quarter, we saw the U.S. dollar continue to strengthen versus several currencies, which resulted in a more unfavorable impact on sales compared to exchange rates at the time of our earnings call in April. Regarding other aspects of the P&L, the adjusted gross margin ratio was 56.7% of sales, which reflects the impacts of the recent nutrition recall and incremental inflation we saw in certain manufacturing and distribution costs in the quarter. Adjusted R&D investment was 5.8% of sales, and adjusted SG&A investment was 24.4% of sales in the second quarter. Lastly, our second quarter adjusted tax rate was 14.5%. Turning to our outlook for the full year 2022. We forecast total company organic sales growth, excluding the impact of COVID testing-related sales, to be in the mid- to high single digits. It is important to note, excluding products impacted by the nutrition recall, we forecast total organic sales growth in the high single digits for the remainder of our combined businesses, which includes Medical Devices, Established Pharmaceuticals, Diagnostics, excluding COVID testing-related sales and areas of nutrition not impacted by the recall. We forecast COVID testing-related sales of $6.1 billion, which includes year-to-date sales through June of $5.6 billion and projected sales of approximately $500 million over the next few months. We will continue to update our COVID testing-related sales forecast 1 quarter at a time as appropriate. Lastly, based on current rates, we would now expect exchange to have an unfavorable impact of approximately 5% on our full year reported sales. With that, we'll now open the call for questions. Operator: [Operator Instructions] And our first question will come from Robbie Marcus from JPMorgan. Robert Marcus: Congrats on a good quarter. Robert, maybe to start -- maybe I'll get a little greedy here since we're only sitting in July, and half of '22 is done. But I think the focus for investors is quickly shifting to next year, and there's a lot of moving pieces going on in 2022, a lot of assumptions we have to make in the go forward of 2023. Where is COVID testing? How fast does Nutrition come back? And how steady can the Device business be going forward? So there's a lot of uncertainty out there of where numbers should sit and how to start thinking about the business for next year. Any thoughts you have at this point would be really helpful. Robert Ford: Sure. Well, I think there's a lot of uncertainty for everybody regarding 2023. I think you've kind of highlighted some of the aspects as it relates to our business here. But the macro environment still is pretty challenging, and I don't think it's unique to us. Obviously, there's significant inflation, and seems like there's a pretty significant, call it, a commodity super cycle for us. There's health care staffing challenges, you hear about that. And then, obviously, a strong U.S. dollar. So all those kind of combinations are the challenges that a lot of companies are going to face. And if you look at a lot of the financial and consumer indicators, retail, housing, auto, et cetera, those tend to point towards an increased risk here of recession. So what I would say is, historically, in that macro environment, health care has proven to be pretty resilient. And whether it's the durability of these essential procedures and products, I mean, you can only defer them somewhat. A large portion of the health care spend is government-funded, and we've got a diversified model that's proved itself to be very resilient in this kind of environment. So at a macro level, I think those are the headwinds that we're all facing and we'll all be facing. You mentioned COVID as a factor here. It's interesting. Last year at this time, we were talking about how COVID would -- COVID testing would move away, but we've actually shipped just as an amount of tests in the first 6 months of this year compared to all of last year. So I think that we're going to need to see how the cases evolve, Robbie, especially during the winter and fall months over here. And obviously, I don't think it's prudent to forecast a winter surge. But like I said, we've got capacity to be able to deal with that. So those are some of the key factors here that we're looking at. Nutrition that you mentioned, we're recovering pretty nicely, I would say, versus where we originally thought we were going to be back in April. A lot of focus on restarting the manufacturing site. We've recovered already a good portion of the share that we lost. And obviously, we continue to see that moving forward positively. So on the flip side, though, what I would say is that we're not going to just sit still over the next couple of months and wait for these macro kind of factors here to play out, right? We're taking a very proactive approach on the elements that we can control and that we can impact. We're taking price where we can, and we've seen that in our consumer base businesses. These are businesses, because of the strength of our brands, that we've been able to do that and pass it on. We're also looking at other areas that we can -- or that historically, we haven't necessarily looked at in terms of price. We're looking at our cost structure. I talked about this in previous calls, too, and we've got a program in place now where we're looking at our cost structure. The hurdles in terms of investment have obviously increased given this macro environment. We're not going to put any risk to our long-term growth platforms, but we're definitely looking at our cost structure and see where we can improve. And the inventory is important, as we move into this inflationary period here. So we're ensuring that we've got the right amount of inventory. So I put all that together, Robbie. We've got macro headwinds that everybody else has. Regarding Nutrition, I think our performance is well aligned to where we planned and where I see us ending up end of the year is ultimately where our forecast -- the forecast that we laid out. COVID testing is one that, to simply assume, that there won't be any COVID testing next year. We've never believed that. The question is just your ability to forecast beyond 3 to 6 months, that's the challenge. So fundamentally, I think our business remains very strong. We've got leading positions in attractive long-term growth markets, strong pipeline, and I'm sure we'll talk about some of that today also. We've got a lot of ongoing, upcoming launch activity and a strong balance sheet that provides us a lot of strategic and financial flexibility. So it's difficult to pin a number on it right now, Robbie. But at a high level, those are the elements that we're working with and, ultimately, like to see some of these elements play out over the next couple of months here. Robert Marcus: Great. Maybe just as a follow-up to that, Robert. You were talking about the cost structure at Abbott, and this is something we're hearing from basically everyone, that inflation, supply chain, et cetera. You're in this enviable position where you've probably grown operating margins more than anyone else in medtech since the start of COVID. A lot of that has been from the benefit of COVID testing sales, which are at healthy margins and still healthy reinvestment against that. So as we think about your operating margins going forward and you reevaluating your cost base here, I just -- it's a difficult question and it's been a while for medtech investors to see anything but just margins going straight up. So how do you want investors to start thinking about where your base operating margin is maybe potentially of COVID testing sales slowdown in the future? Robert Ford: Yes. I always appreciate you like to get at the next year's number in a couple of different ways, Robbie. I guess, I would say on the cost structure piece, I don't necessarily fully agree with you, the way you characterized it in terms of COVID being the ultimate driver here. I think we made a lot of progress on our gross margins historically, whether it was in Devices and in Nutrition. So as the Device business continues to grow, that profile of that business is accretive, and you've seen our growth rates in that business over these last couple of years. So that helps the margin. Our biggest challenge, I would say, from a gross margin perspective is really on the inflation side. Yes, we're seeing input cost go up probably more on the commodity side, so impacting EPD, impacting Nutrition, less so, I would say, in Devices and Diagnostics. Yes, there's some noise that happens here with one supplier -- another supplier, and we deal with it. But the real challenge we've had, I would say, over the last kind of 6 months here has been on the Nutrition side. And part of that is -- some of it is commodities. So we're going to have to see how those look like over the next kind of couple of months, seeing some slowing down of some commodities, but that's the biggest kind of driver there. But the other part of the Nutrition is, I would say, cost that I don't anticipate to be there next year. So for example, we're paying WIC rebates for competitive products since April -- actually, since March when we initiated the recall. And as we restart production in the facility, I don't assume that, that will continue. I made statements in my opening comments about bringing product in from overseas. We brought a lot of formula from overseas, and that's all airfreight. And you know the story on freight and distribution. So once that facility starts up and running, I don't anticipate to see those same kind of freight expenses from overseas shipments. And we put some money towards brand recovery. And I think that, that was an investment that's necessary to get our share back in position that we need as we go into next year. So that being said, as I said, we're going to look at our cost structure. We're going to look at areas that have a higher hurdle now for passing an investment hypothesis or thesis, and we're going to -- we'll take action where we need to take action. So that's how I'd characterize our margin. Operator: And our next question comes from Joshua Jennings from Cowen. Joshua Jennings: I was hoping to start with a follow-up on the raise of the 2022 EPS guidance floor and just better understand the puts and takes. I think there are some questions around the $0.30 beat in 2Q and the $0.20 increase, again, realizing that it is a floor. But it seems like a lot of that kind of guess $0.10 delta is driven by the move in the U.S. dollar in July. But just wanted to better understand the puts and takes and how you guys arrived at the increase that you did. I have one follow-up. Robert Ford: Sure. Yes. I think you'll see -- I mean, we've seen a lot of companies kind of beat their Q2 and either maintain their guidance for the full year or actually reduce it. And we looked at our numbers very carefully, and we basically looked at the strength of our base business. So if you exclude AN, our nutrition -- the parts of the Nutrition business that was recalled, we're growing high single digits, and we continue to see that kind of growth rate going forward. So between the strength of the base business and the COVID sales, we then felt that we had enough power here to navigate and push through some of these macro headwinds that are pretty significant, right? Inflation is a big element there. We had some costs. When we gave initial guidance in January, we increased that in our April call. And we've assumed another couple of hundred million dollars of inflation since that number that we provided in April. So that's one element that we're absorbing, I guess. The, what I would call, health care staffing challenges, COVID cancellations, the lockdown issues that we saw in Q2, especially, I'd say, on our Core Lab business and EP in China, for example, those are being absorbed also. And then currency, as you referenced, pretty dramatic strengthening here of the U.S. dollar. So we've assumed all of that. And as I said also to Robbie, we've had to factor in some additional costs on the nutrition side, whether it's the WIC rebate, the freight and distribution, some of the investments we're making to support share recovery. So you put those 2 together -- those 2 elements together on the macro on nutrition side and then you offset that with our base business and COVID sales, and those -- that's really the element there, Josh. And as you said, since the beginning of the pandemic, we've gotten to at least floor-like guidance here, and that's what $4.90 is. It's a floor right now. Could that be better? Yes, it could. There could be elements that could make that number be better. But on top of absorbing all these incremental headwinds here, inflation, currency, making some of the investments we need on nutrition, we're still able to raise our full year guidance. Joshua Jennings: And just one follow-up on the Medical Devices business, and it's encouraging to hear you talk about kind of quick improvement in the back half, and you did have that tough comp in 2Q. But are you able to share any high-level color just on elective procedure trends throughout the quarter in 2Q, just a month-over-month improvement did you see? And then anything you can share on color in July? And just wondering, you caught a couple of the headwinds that you saw in 2Q for hospitals and the challenges that they're facing to accelerate elective procedure volumes in the second half. But what do you think the biggest challenge is? And do you think the hospitals are well equipped to overcome those? Robert Ford: Yes, sure. I think you mentioned there, I mean, Q2 last year was a pretty significant revenue for a lot in medtech, so there is that comp aspect there. But second quarter procedures and volumes, if I look at Abbott's procedure volumes and sales, they're actually higher than pre-pandemic levels. And there was sequential growth from Q2 to Q1, over 7% in the U.S. and a little bit lower internationally. So the aspect here is that we are seeing growth and -- but it was a little bit more modest than what we had anticipated back in April, right? And then I think there's really 3 factors there. One of them, as I said, in the U.S., specifically, I think the staffing challenges were a factor there. And as people tested positive, while they didn't have to go to the hospital and they could just stay at home, that had an impact in some of the procedures that there's a little bit more planning towards. So the good news is we know what those procedures are, we know where they are, and we've got an opportunity to follow up on them like we did last year and following up on all the procedures that got pushed out. So internationally, I think you saw some similar headwinds there, but I think the biggest headwind for us was China and the lockdowns that occurred there. And then the third factor for us was we had some back order and that was really due to the timing of input material availability. So in terms of when you receive the materials to build the product, now we are building inventory, and I don't anticipate that to be the case going forward in the second half. So those are really our fact -- those are really the facts that had our Device business a little bit more modest than what we predicted in April. I think those get better. One, we've got launch activity. So -- and I'm sure we'll talk about some of those also, products that we've launched that will gain in momentum in the second half. In talking to a lot of the U.S. systems, they've just got to figure out better how to staff and to do more planning, and that might involve maybe looking at having more procedures booked because you know that there's a certain amount of cancellations that will happen. So I think that will get better also as the hospitals understand these dynamics. So I'm excited about the device portfolio in terms of the second half, not only because of some of these issues, which I think will get better, but also because of our pipeline and the products we're launching and the execution. Operator: And our next question will come from Larry Biegelsen from Wells Fargo. Larry Biegelsen: Robert, can you hear me okay? Robert Ford: Yes, I can, Larry. Larry Biegelsen: You'd cut out a little bit. So 2 for me, I wanted to start with Libre. Robert, just a multipart question here on Libre. Another nice quarter. Any -- how should we think about the Libre 3 launch in the U.S.? Should we expect it to be kind of a gradual rollout like we saw with Libre 2? And how are you feeling about resolving the vitamin C interaction issue? It sounds like you guys have made some good progress there. And just lastly, international was a little softer than we expected. Is this just kind of a law of large numbers? Or is this just a timing issue in terms of the full rollout of Libre 3? And I did have one follow-up. Robert Ford: Sure. I think Libre 3, we're very excited. We've had very good success in Germany in terms of upgrading the base and then with the benefits of Libre 3 actually seeing some conversions from competitive systems. So the U.S. launch is going to be exciting for the U.S. team. It will be the only CGM with a sub-8% MARD. And that launch process is underway, but it is a little bit more gradual. So we're going to work to get on to pharmacy contracts, PBM contracts, managed care contracts, et cetera. So we're building inventory. We're familiarizing the physicians with the product. But given what I've seen in Europe, I think this is a great opportunity for our U.S. business, which, by the way, did really well this quarter, right, even without Libre 3. We grew 53% in the second quarter, and I actually think that we can maintain that 30% to 40% growth rate in the U.S. even without Libre 3. So I think that's going to be an important growth driver for us towards the end of the year and as we go into 2023. I do think, Larry, that CGM is a little different. I mean, we have it in devices, but the model, at least in the U.S., is very pharma-like and -- where patient out-of-pocket, coinsurance, co-pays, contracts, et cetera, they play a big role in understanding those, and the interdependencies of those are very important. I think in an environment where employers and consumers are going to be looking more closely at managing their expenses, I think the value proposition of Libre is going to be even stronger. Regarding your question on vitamin C, fixed, yes. We have done the work to be able to address that. We've made very good progress. I'm going to provide further updates over time. But obviously, this relates only to the U.S. We're actually going to be launching an AID system in Europe with our partners in Europe in Q4 with Libre 2. So -- but you'll get more updates on that. I think that the exciting piece on the pump connectivity, though, is what we announced in June at the ADA with a dual sensor, a glucose-ketone sensor that's under development, that's received breakthrough designation from the FDA. The scientific advisers that I've spoken to, both in the U.S. and international, believe that this is going to become the go-to sensor for pump connectivity and -- just because of the ability to bring in the ketone measurement and perfect even more of those algorithms. So I think this is going to be an ideal sensor for existing pump companies and even for new pump manufacturers. Regarding your question on international, there's a little bit of timing there, I would say. Well, it's 2 parts, a little bit of timing from -- in Germany as we convert to Libre 3 and the mechanism is in place there. And then there was some FX headwind that impacted a lot of our international businesses. So did that cover all for you, Larry? Larry Biegelsen: That was very comprehensive. Really appreciate it. Just for my follow-up, Robert, I know I've asked this a lot on recent calls, but you're sitting on a lot of cash. And we have seen a recent re-rating of valuations. So are you starting to see more opportunities? Any color on deal size that you're looking at? And I think some investors are saying, when COVID testing comes down, you might have a gap in terms of earnings that you need to fill. So how important is it to find an accretive deal to offset potential decline in COVID testing? Robert Ford: Well, on the COVID testing side, I mean, I guess, we'll have to kind of see how things play out right now. I mean, I guess, that was the same comment last year. And as I said, we're selling more. We're probably selling more what we sold more in the first 6 months here versus last year. So regarding your comment, though, on the M&A side, yes, I don't think anything has really changed there. I mean, obviously, valuations have obviously come down somewhat. And we've got the capacity, as you said, in our balance sheet and that flexibility. But the macro environment is -- just because the valuation has come down, I mean, it's challenging and dynamic for all the companies, even the ones that have seen these valuations come significantly down. So I think we -- while we do have cash, I still think we need to be strategically and financially disciplined here to be mindful of when we're assessing these potential targets and have they gotten to the right point given some of these macro environments that are going to be playing out. So I think the market needs to stabilize for a period of time here, Larry, before I think a lot of management teams and their Board to become a little more comfortable with the reset of their valuations and their financial outlook. That being said, yes, I'd say the level of study, the level of review, the level of analysis on potential targets has definitely increased over the past 4, 5 months here. And I've been clear about the areas that we're looking at and the kind of types of transactions we would be interested of, but it always goes back to does it make sense strategically and does it make sense financially. So nothing has changed yet. Operator: And our next question will come from Joanne Wuensch from Citi. Joanne Wuensch: I'm going to put them all upfront. Some questions regarding your Structural Heart franchise. Could you give us sort of a state of the union or update on where you are on some key products, MitraClip, Portico and Amulet? And then just as a follow-up to the previous question, could you remind us where you are on share repurchases and your view towards if you're not using the cash for M&A, what you will be using the cash for? Robert Ford: Sure. On the Structural Heart side, I talked about how this is such an important division for us and the focus that we've had there. So I'd say on Amulet, we've had a very good quarter in Amulet aligned to the trends that we were hoping for. We've got an expansion of the amount of accounts that are using the product and also an expansion on the amount of implanters that are completing and performing this procedure. One of the challenges we had in the beginning was just really to get the implanters trained. We needed proctors. And as you remember, in November, December, January and February, there was a lot of challenge with travel. So that's actually looking really nice in terms of the ramp there. What I'm very encouraged about is the traction we're seeing from the early adopters. So some of those that began the training and implanting in Q4 of last year, their utilization is more than double that of the average user. So we're seeing both things in terms of driving the sales there, the increase of new accounts and then the increase in productivity and utilization of the existing implanters. On the Portico side or on the TAVR side, sales have been strong, especially in Europe where we've introduced Navitor, which is our next-generation TAVR system. It's a competitive device from a clinical profile in high-risk patients. I estimate right now -- we estimate right now that we're about a high single digit. But when we look at the centers that are using Navitor, and Navitor is probably in about 40%, 45% of the centers in Europe, shares in the mid-teens. And that's very encouraging also because Navitor being our second product has really been an improvement for Portico. And as you know, we filed that in the U.S. in October of last year at the PMA. I expect that to be the case. I expect to see an approval and an opportunity for us to launch into the TAVR market here in the U.S. And on MitraClip, this was a tough comp for us this quarter. Last quarter -- last year, it was the highest quarter we've ever had in terms of procedures, in terms of sales. So there's no doubt that this one here is probably a little bit more impacted by COVID and some of the health care staffing challenges and the rescheduling of the procedures. So I expect these dynamics to steadily improve over time. And as I said previously, I don't think we fully benefited yet from the indication expansion that we received for the functional MR. So the market still remains pretty underpenetrated, and there's a lot of opportunity for growth there. So a lot of activity in our Structural Heart business, a lot of good performance. And I just expect that to get better over the next couple of quarters. And then what was your other question? Joanne Wuensch: It had to do on share repurchases, use of cash if you're not using it for M&A. Robert Ford: Sure. Well, listen, we've always kind of had a balanced approach for deploying our cash. We're mindful of our cash on hand. We're investing in the dividend, and we've been growing that dividend, and that's an important part of it. We're investing in the capacity expansions in several of our areas, Libre, Electrophysiology, MitraClip, Nutrition. And we bought back shares in the first half of the year and something that we'll continue to assess as we go through the second half year. So the approach towards our capital allocation is pretty balanced, and we're committed to the dividend. Done some share buybacks in the first half. We'll continue to assess in the second half. And there's great opportunities for us to continue to invest organically to be able to drive the organic part of the business. Operator: Our next question will come from Vijay Kumar from Evercore ISI. Vijay Kumar: Congrats on a strong 2Q here. One on this guidance here, when you look at the base floor for fiscal '22, $4.90, you guys did close to $3.15 of earnings in first half, so the implied earnings for back half was -- the floor is $1.74. That's annualizing to about $3.50-ish. Is there -- I guess, that $1.74-ish for back half, that's below the back half of 2019. So I'm wondering, between FX, inflation, is there something else that's going on here where -- we still have COVID revenues flowing through in the back half? It seems a little light on the EPS guidance. Robert Funck: Vijay, this is Bob, I'll take that call -- question. I think it's -- I think using an implied kind of fourth quarter exit rate as an indicator kind of how we're thinking about '23 probably wouldn't be prudent at this point. There's obviously a lot going on in the macro environment that warrants further monitoring and assessment. And on top of that, there are a couple of swing factors that are specific to us. Strength of our COVID testing business, that's provided us an awful lot of flexibility to reinvest back into our P&L over the last couple of years. And so as part of our -- and as Robert kind of talked about, we'll see kind of how COVID testing plays out. We continue to see very strong demand. And so there's some element of that, that we fully expect to stick around. And it's just difficult to pinpoint what that level is at this point in the year. But as part of our budgeting process for next year, we'll take a close look at the overall cost structure, which Robert touched on, and our investment priorities. And as you know, we're also working through the nutrition recall and making good progress, incrementally investing, and Robert talked about the fact that some of those investments will modulate over time or even go away. And so that, combined with recapturing share, we'll see the earnings power of that business ramp up over time. So -- and then finally, our pipeline has been highly productive and especially in devices. And as we drive that growth, that's accretive growth overall to the corporation. So those are big moving parts. And as we start to think about 2023, we'll incorporate all those elements and especially in devices. And as we drive that growth, that's accretive growth overall to the corporation. So those are big moving parts. And as we start to think about 2023, we'll incorporate all those elements in our forecast next year. Robert Ford: I guess, I'll just add to that, Vijay, also, I mean, we talk about the strength of the U.S. dollar and the impact that we're having on a full year basis. It's pretty significant, and a big portion of that impact is actually forecasted to happen in the second half of this year. So that also plays a role together with the inflation aspects that we're facing. So that's really the challenge. Vijay Kumar: That's helpful. And maybe one last one. With the second half base business guidance mid-single digit to high single digits, if I look at 2Q ex China and ex Nutrition, the base business did north of 7%, which is in line with the high single sort of trajectory that investors have baked in. The back half of mid-single to high single... Robert Ford: So like I said, I think we've got an opportunity here on the back half also. We've set a floor. And again, I'll just reiterate that this is where contemplating all these puts and takes that we've been discussing, we feel confident in that floor number. And we believe that there's opportunities here for upside to that. Scott Leinenweber: Vijay, I would just say, as Bob said in his prepared remarks, excluding Nutrition, we expect high single digits for the kind of remainder of the businesses to your point. So the math you're doing there is right. Vijay Kumar: That's helpful, Scott. So the guide is assuming some impact here in the back half. That's helpful. Operator: And our next question will come from Travis Steed from Bank of America. Travis Steed: Can you hear me okay? Robert Ford: Yes. Travis Steed: Great. Just wanted to ask a couple more on the margin puts and takes, and I know these are related to Robbie's question. You mentioned a lot of like onetime costs in Nutrition with contracts on top of inflation and FX. So just wanted to think about the commitment and ability to grow operating margin off this year's base margins. If the macro environment just remains stable, I assume most of those Nutrition and onetime investments go away later this year as Nutrition ramps back up. But I don't know if there's any other levers that you can pull on the margin line. And also not sure about this year's FX headwinds, how much of those naturally carry over into next year? That's something that J&J kind of flagged for people. Robert Ford: Yes. Listen, the commitment to grow the operating margin is always there. We've -- we always shoot for that growth. You had a big if there, and that's the big if, right, if the conditions remain the same. So I don't know what currency is going to look like next year. Bob can talk about that a little bit. But there are some of these costs that I mentioned that I don't anticipate having to fly in the amount formula that we flew in from overseas. I don't anticipate having to kind of pay those WIC rebates on competitive product. We have, what I would call, a steady investment profile on our Nutrition business that, I would say, we're a little bit out of profile in the next quarter or so because we want to make sure that as products coming back that we can work to regain our share. And we've seen some of that share regain the last couple of months. I mean, from the start of the recall, we lost about half of our IMF share. And of that half that we lost in the last couple of months, we've regained half of that back. So some of these costs, like I said, are more onetime in nature. On the FX side, I don't know, Bob, do you have a comment on there? Robert Funck: Well, I guess, I'd say history has taught us that rates rarely if ever hold for a long period of time. So trying to pinpoint kind of an accurate projection for next year at this point is pretty challenging. There's an awful lot of moving parts. As you know, different central banks taking different rate actions, different strengths of economies, et cetera. That said, at a high level, based upon kind of where we're at today, a decent portion of the impact we're seeing this year will carry into next year. Obviously, there's a long way to go, so we need to see how things play out. And as part of our planning process, we always look for opportunities to mitigate currency impacts as best we can. Travis Steed: That's helpful. I do want to make sure I heard you right. It sounds like you're going to launch an AID insulin system in Europe with Libre 2 by Q4. And I don't know if you'd be willing to say like who that partner is or what that product might look like in any form or fashion. Robert Ford: Yes. I think we made an announcement about the partnership several -- about 1 month, 1.5 months ago. So yes, that's with Ypsomed, a local European manufacturer, and another partner. So yes, our target is to be able to launch that by the end of the year in Europe. . Scott Leinenweber: Operator, we'll take one more question. Operator: And our last question will come from Jayson Bedford from Raymond James. Jayson Bedford: Just a couple. First, on the infant nutrition and the manufacturing ramp here, is there any way to frame where you are today and when you feel like you'll be back to full production levels? And obviously, I'm just thinking in the context of where you were last year and potential profit recapture in this segment. Robert Ford: Sure. Well, as I said, we restarted in July 1, and we began production of the specialty formulas. The production of the Similac, which we call our more base formula, I mean, we're very close to that, Jayson, is what I would say. I don't want to necessarily kind of put an exact date here, but we're not talking months, we're not talking weeks. So we're very close there, and we obviously have a team that's ready to go and to ramp up. We know that we're going to have to work hard to shorten the time between manufacturer and on-shelf availability. So there's a team that's specifically dedicated to working on accelerated that time frame also. So I like where we're at. And we'll continue to use our global network to be able to augment those efforts of share recapture. Jayson Bedford: So Robert, when we look at '23 for USP, is it -- the debate just around market share, and I'm assuming from a manufacturing standpoint, you should be clean in '23. Robert Ford: Yes. That's our expectation. I think the debate on '23 is predominantly market share and then there might be a little bit of market also in terms of understanding how much of the growth in today's market is inventory build. We have seen an increase in birth rates, so that's another opportunity also for -- to maybe to offset that. So -- but yes, I think it's mostly about market share, market share recovery. And like I said, I think in the previous question, I think we've done pretty well about using our network to be able to regain the market share that we had lost in those first couple of months. So yes, it's really about looking at our share and share recovery, which is why, as I said, we've made some investments during -- over the next 3, 4, 5 months here to be able to put us in, in that right position in 2023. So I'll just close the call here. Obviously, a lot of your questions, so that there is, I guess, some uncertainty in the environment. It's pretty dynamic, and I think that's going to be the same for a lot of companies. For Abbott specifically, our new product launches are performing very well. Our R&D pipeline is strong. And as I said, our financial health is also strong. We're making progress in Nutrition to drive share recovery, and our Adult business and international growth opportunities still remain very strong. The Cardiovascular portfolio, Device portfolio, there is growth. It continues to recover, albeit not at the same level that we had forecasted back in April, but I do expect that same recovery trend. It's not as leaner as we would like or as what we've historically had. But ultimately, I do believe that the segment will continue to grow and recover. EPD and Libre continue to perform very well. And in Diagnostics, I get that COVID testing is a big portion of the equation here. But I just remind ourselves to where we were last year and what we thought was going to happen last year. And right now, all the data shows that testing is still here. Cases are up. Our test sales are actually up, and our tests have done very well from a brand and become somewhat of a preferred format over here. So as I look to the second half of the year, I anticipate some of the macro challenges to continue, in some cases, to be tough. And in other cases, hopefully, we'll see some easing on there. But our diversification is very unique, and that's what's held up very well. We're navigating the macro headwinds. We're investing in our growth platforms. And we've raised our guidance for the full year. And I think that's a rarity in this environment, and I think it speaks to the strength of the portfolio and the execution and our ability to manage and leverage the portfolio. So with that, we'll wrap up, and thank you for joining us today. Scott Leinenweber: Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today. Operator: This concludes today's conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day.	[ { "speaker": "Operator", "text": "Good morning, and thank you for standing by. Welcome to Abbott Second Quarter 2022 Earnings Conference Call. [Operator Instructions]" }, { "speaker": "Scott Leinenweber", "text": "Good morning, and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions." }, { "speaker": "Robert Ford", "text": "Thanks, Scott. Good morning, everyone, and thank you for joining us." }, { "speaker": "Robert Funck", "text": "Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which excludes the impact of foreign exchange." }, { "speaker": "Operator", "text": "[Operator Instructions] And our first question will come from Robbie Marcus from JPMorgan." }, { "speaker": "Robert Marcus", "text": "Congrats on a good quarter. Robert, maybe to start -- maybe I'll get a little greedy here since we're only sitting in July, and half of '22 is done. But I think the focus for investors is quickly shifting to next year, and there's a lot of moving pieces going on in 2022, a lot of assumptions we have to make in the go forward of 2023." }, { "speaker": "Robert Ford", "text": "Sure. Well, I think there's a lot of uncertainty for everybody regarding 2023. I think you've kind of highlighted some of the aspects as it relates to our business here. But the macro environment still is pretty challenging, and I don't think it's unique to us." }, { "speaker": "Robert Marcus", "text": "Great. Maybe just as a follow-up to that, Robert. You were talking about the cost structure at Abbott, and this is something we're hearing from basically everyone, that inflation, supply chain, et cetera. You're in this enviable position where you've probably grown operating margins more than anyone else in medtech since the start of COVID. A lot of that has been from the benefit of COVID testing sales, which are at healthy margins and still healthy reinvestment against that." }, { "speaker": "Robert Ford", "text": "Yes. I always appreciate you like to get at the next year's number in a couple of different ways, Robbie. I guess, I would say on the cost structure piece, I don't necessarily fully agree with you, the way you characterized it in terms of COVID being the ultimate driver here." }, { "speaker": "Operator", "text": "And our next question comes from Joshua Jennings from Cowen." }, { "speaker": "Joshua Jennings", "text": "I was hoping to start with a follow-up on the raise of the 2022 EPS guidance floor and just better understand the puts and takes. I think there are some questions around the $0.30 beat in 2Q and the $0.20 increase, again, realizing that it is a floor." }, { "speaker": "Robert Ford", "text": "Sure. Yes. I think you'll see -- I mean, we've seen a lot of companies kind of beat their Q2 and either maintain their guidance for the full year or actually reduce it. And we looked at our numbers very carefully, and we basically looked at the strength of our base business." }, { "speaker": "Joshua Jennings", "text": "And just one follow-up on the Medical Devices business, and it's encouraging to hear you talk about kind of quick improvement in the back half, and you did have that tough comp in 2Q." }, { "speaker": "Robert Ford", "text": "Yes, sure. I think you mentioned there, I mean, Q2 last year was a pretty significant revenue for a lot in medtech, so there is that comp aspect there. But second quarter procedures and volumes, if I look at Abbott's procedure volumes and sales, they're actually higher than pre-pandemic levels." }, { "speaker": "Operator", "text": "And our next question will come from Larry Biegelsen from Wells Fargo." }, { "speaker": "Larry Biegelsen", "text": "Robert, can you hear me okay?" }, { "speaker": "Robert Ford", "text": "Yes, I can, Larry." }, { "speaker": "Larry Biegelsen", "text": "You'd cut out a little bit. So 2 for me, I wanted to start with Libre. Robert, just a multipart question here on Libre. Another nice quarter. Any -- how should we think about the Libre 3 launch in the U.S.? Should we expect it to be kind of a gradual rollout like we saw with Libre 2? And how are you feeling about resolving the vitamin C interaction issue? It sounds like you guys have made some good progress there." }, { "speaker": "Robert Ford", "text": "Sure. I think Libre 3, we're very excited. We've had very good success in Germany in terms of upgrading the base and then with the benefits of Libre 3 actually seeing some conversions from competitive systems. So the U.S. launch is going to be exciting for the U.S. team. It will be the only CGM with a sub-8% MARD. And that launch process is underway, but it is a little bit more gradual. So we're going to work to get on to pharmacy contracts, PBM contracts, managed care contracts, et cetera." }, { "speaker": "Larry Biegelsen", "text": "That was very comprehensive. Really appreciate it. Just for my follow-up, Robert, I know I've asked this a lot on recent calls, but you're sitting on a lot of cash. And we have seen a recent re-rating of valuations." }, { "speaker": "Robert Ford", "text": "Well, on the COVID testing side, I mean, I guess, we'll have to kind of see how things play out right now. I mean, I guess, that was the same comment last year. And as I said, we're selling more. We're probably selling more what we sold more in the first 6 months here versus last year." }, { "speaker": "Operator", "text": "And our next question will come from Joanne Wuensch from Citi." }, { "speaker": "Joanne Wuensch", "text": "I'm going to put them all upfront. Some questions regarding your Structural Heart franchise. Could you give us sort of a state of the union or update on where you are on some key products, MitraClip, Portico and Amulet?" }, { "speaker": "Robert Ford", "text": "Sure. On the Structural Heart side, I talked about how this is such an important division for us and the focus that we've had there. So I'd say on Amulet, we've had a very good quarter in Amulet aligned to the trends that we were hoping for. We've got an expansion of the amount of accounts that are using the product and also an expansion on the amount of implanters that are completing and performing this procedure." }, { "speaker": "Joanne Wuensch", "text": "It had to do on share repurchases, use of cash if you're not using it for M&A." }, { "speaker": "Robert Ford", "text": "Sure. Well, listen, we've always kind of had a balanced approach for deploying our cash. We're mindful of our cash on hand. We're investing in the dividend, and we've been growing that dividend, and that's an important part of it." }, { "speaker": "Operator", "text": "Our next question will come from Vijay Kumar from Evercore ISI." }, { "speaker": "Vijay Kumar", "text": "Congrats on a strong 2Q here. One on this guidance here, when you look at the base floor for fiscal '22, $4.90, you guys did close to $3.15 of earnings in first half, so the implied earnings for back half was -- the floor is $1.74. That's annualizing to about $3.50-ish." }, { "speaker": "Robert Funck", "text": "Vijay, this is Bob, I'll take that call -- question. I think it's -- I think using an implied kind of fourth quarter exit rate as an indicator kind of how we're thinking about '23 probably wouldn't be prudent at this point. There's obviously a lot going on in the macro environment that warrants further monitoring and assessment." }, { "speaker": "Robert Ford", "text": "I guess, I'll just add to that, Vijay, also, I mean, we talk about the strength of the U.S. dollar and the impact that we're having on a full year basis. It's pretty significant, and a big portion of that impact is actually forecasted to happen in the second half of this year. So that also plays a role together with the inflation aspects that we're facing. So that's really the challenge." }, { "speaker": "Vijay Kumar", "text": "That's helpful. And maybe one last one. With the second half base business guidance mid-single digit to high single digits, if I look at 2Q ex China and ex Nutrition, the base business did north of 7%, which is in line with the high single sort of trajectory that investors have baked in. The back half of mid-single to high single..." }, { "speaker": "Robert Ford", "text": "So like I said, I think we've got an opportunity here on the back half also. We've set a floor. And again, I'll just reiterate that this is where contemplating all these puts and takes that we've been discussing, we feel confident in that floor number. And we believe that there's opportunities here for upside to that." }, { "speaker": "Scott Leinenweber", "text": "Vijay, I would just say, as Bob said in his prepared remarks, excluding Nutrition, we expect high single digits for the kind of remainder of the businesses to your point. So the math you're doing there is right." }, { "speaker": "Vijay Kumar", "text": "That's helpful, Scott. So the guide is assuming some impact here in the back half. That's helpful." }, { "speaker": "Operator", "text": "And our next question will come from Travis Steed from Bank of America." }, { "speaker": "Travis Steed", "text": "Can you hear me okay?" }, { "speaker": "Robert Ford", "text": "Yes." }, { "speaker": "Travis Steed", "text": "Great. Just wanted to ask a couple more on the margin puts and takes, and I know these are related to Robbie's question. You mentioned a lot of like onetime costs in Nutrition with contracts on top of inflation and FX." }, { "speaker": "Robert Ford", "text": "Yes. Listen, the commitment to grow the operating margin is always there. We've -- we always shoot for that growth. You had a big if there, and that's the big if, right, if the conditions remain the same." }, { "speaker": "Robert Funck", "text": "Well, I guess, I'd say history has taught us that rates rarely if ever hold for a long period of time. So trying to pinpoint kind of an accurate projection for next year at this point is pretty challenging. There's an awful lot of moving parts. As you know, different central banks taking different rate actions, different strengths of economies, et cetera." }, { "speaker": "Travis Steed", "text": "That's helpful. I do want to make sure I heard you right. It sounds like you're going to launch an AID insulin system in Europe with Libre 2 by Q4. And I don't know if you'd be willing to say like who that partner is or what that product might look like in any form or fashion." }, { "speaker": "Robert Ford", "text": "Yes. I think we made an announcement about the partnership several -- about 1 month, 1.5 months ago. So yes, that's with Ypsomed, a local European manufacturer, and another partner. So yes, our target is to be able to launch that by the end of the year in Europe. ." }, { "speaker": "Scott Leinenweber", "text": "Operator, we'll take one more question." }, { "speaker": "Operator", "text": "And our last question will come from Jayson Bedford from Raymond James." }, { "speaker": "Jayson Bedford", "text": "Just a couple. First, on the infant nutrition and the manufacturing ramp here, is there any way to frame where you are today and when you feel like you'll be back to full production levels? And obviously, I'm just thinking in the context of where you were last year and potential profit recapture in this segment." }, { "speaker": "Robert Ford", "text": "Sure. Well, as I said, we restarted in July 1, and we began production of the specialty formulas. The production of the Similac, which we call our more base formula, I mean, we're very close to that, Jayson, is what I would say. I don't want to necessarily kind of put an exact date here, but we're not talking months, we're not talking weeks. So we're very close there, and we obviously have a team that's ready to go and to ramp up." }, { "speaker": "Jayson Bedford", "text": "So Robert, when we look at '23 for USP, is it -- the debate just around market share, and I'm assuming from a manufacturing standpoint, you should be clean in '23." }, { "speaker": "Robert Ford", "text": "Yes. That's our expectation. I think the debate on '23 is predominantly market share and then there might be a little bit of market also in terms of understanding how much of the growth in today's market is inventory build." }, { "speaker": "Scott Leinenweber", "text": "Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today." }, { "speaker": "Operator", "text": "This concludes today's conference call. Thank you for your participation, and you may now disconnect. Everyone, have a wonderful day." } ]	Abbott Laboratories	247,483
ABT	1	2,022	2022-04-19 23:00:00	Operator: Good morning, and thank you for standing by. Welcome to Abbott's First Quarter 2022 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant's questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbot's expressed written permission. I would now like to introduce Mr. Scott Leinenweber, Vice President, Investor Relations, Licensing and Acquisitions. Scott Leinenweber: Good morning, and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we will take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2022. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A Risk Factors to our annual report on Form 10-K for the year ended December 31, 2021. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Note that Abbott has not provided the GAAP financial measure for organic sales growth on a forward-looking basis, because the company is unable to predict future changes in foreign exchange rates, which could impact reported sales growth. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which excludes the impact of foreign exchange. With that, I will now turn the call over to Robert. Robert Ford: Thanks, Scott. Good morning, everyone, and thank you for joining us. Today, we reported results of another strong quarter. Earnings per share were $1.73, reflecting more than 30% growth compared to the prior year. Sales increased 17.5% on an organic basis in the quarter, led by double-digit growth in Medical Devices, Established Pharmaceuticals as well as Diagnostics, both with and without COVID testing-related sales. In addition to these strong results during the quarter, we continue to strengthen our strategic position and long-term growth opportunities with regulatory approvals of new products and expanded indications of use along with continued market uptake of several recently launched products in attractive growth areas. I'll now summarize our first quarter results in more detail before turning the call over to Bob. And I'll start with Established Pharmaceuticals, or EPD, where sales increased 13.5% in the quarter. EPD has now achieved double-digit organic sales growth in 3 of the last 4 quarters. Strong performance this quarter was led by double-digit growth across several countries and core therapeutic areas, including gastroenterology, respiratory and CNS pain management. Turning to Nutrition, where our performance was mixed. Our Adult Nutrition business continues to perform at a high level with global organic sales growth of 11.5%, led by our Ensure and Glucerna brands. And we also achieved double-digit growth globally in our combined toddler nutrition products, which includes our market-leading PediaSure and Pedialyte brands. As you know, however, we initiated a voluntary recall in February of certain infant formula products manufactured at one of our U.S. facilities. It's important to highlight as part of our quality system, we retain in-house samples of products that we ship to customers. Testing of retained samples related to this recall action by both Abbott and the FDA have all come back negative for the presence of the bacteria that cause the reported illnesses. Importantly, the FDA and CDC found that there is no genetic match between the strains of the bacteria identified in nonproduct contact areas of our facility and available samples obtained from customer complaints, suggesting a different source of contamination. And lastly, no salmonella was found in our factory or product and, therefore, the FDA ruled out any link to our facility. We hope these findings get parents, caregivers and other stakeholders renewed confidence in our products. We know the situation has further exacerbated industry-wide infant formula supply shortages. That's why we're doing everything possible to mitigate supply constraints by bringing in product from our FDA registered facility in Europe and ramping up production at our other U.S. plants. And of course, we're working very closely with the FDA on proactive actions and enhancements so that we can restart operations at the facility. Moving to Diagnostics, where sales grew 35%. COVID test sales were $3.3 billion in the quarter, more than 90% of which came from our rapid test, including BinaxNOW in the U.S., Panbio internationally and ID NOW globally. Excluding COVID-related -- COVID testing-related sales, our Global Diagnostics sales grew 12% in the quarter, driven by the continued rollout of Alinity, our innovative suite of diagnostic instruments and expanding menus across our testing platforms. And I'll wrap up with Medical Devices, where sales grew 11.5% in the quarter. This strong performance was led by double-digit growth in Diabetes Care, Structural Heart, Heart Failure and Electrophysiology. In Diabetes Care, sales of FreeStyle Libre grew more than 25% on an organic basis in the quarter and the user base has now reached approximately 4 million users globally. In Cardiovascular Devices, while procedure volumes were negatively impacted by elevated COVID case rates early in the year, we saw a steady improvement in procedure trends as the case rates came down in the second half of the quarter, which has continued into April. In addition to improving market trends and our strong results, this was also another highly productive quarter for our pipeline. In the U.S., we received FDA approval for Aveir, our leadless pacemaker to treat patients with slow heart rhythms. In Japan, expanded reimbursement for Libre will now cover all people with diabetes who use insulin at least once a day. CardioMEMS received an expanded indication in the U.S. to treat more patients suffering from earlier stages of heart failure. And we received U.S. FDA clearance for the latest generation of our EnSite X system, which provides a 360-degree view of the heart for improved cardiac mapping. So in summary, we're achieving strong growth overall and across several areas of our business. As the first quarter progressed and COVID levels decreased, we saw a steady improvement in the hospital-based procedure trends, which has continued into April. And we continue to advance our pipeline with new products, indications and reimbursement coverage in several attractive growth areas. I'll now turn over the call to Bob. Bob? Robert Funck: Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which excludes the impact of foreign exchange. Turning to our results. Sales for the first quarter increased 17.5% on an organic basis, which was led by double-digit growth in Diagnostics, Medical Devices and Established Pharmaceuticals along with global COVID testing-related sales of $3.3 billion in the quarter. Excluding COVID testing-related sales, organic sales growth was 7.7% versus the prior year. Foreign exchange had an unfavorable year-over-year impact of 3.7% on first quarter sales. During the quarter, we saw the U.S. dollar continue to strengthen versus several currencies, which resulted in a more unfavorable impact on sales compared to exchange rates at the time of our earnings call in January. Regarding other aspects of the P&L, the adjusted gross margin ratio was 59.1% of sales, which reflects higher than normal fall-through on COVID testing sales as a result of significant production volumes during the first quarter, partially offset by the impacts of the nutrition recall and somewhat higher-than-expected inflation on certain manufacturing and distribution costs in the quarter. Adjusted research and development investment was 5.6% of sales and adjusted SG&A investment was 23.1% of sales in the first quarter. Lastly, our first quarter adjusted tax rate was 14.5%. Before discussing our outlook for the full year, I want to provide an update on our strategic capital deployment initiatives completed in the first quarter, which included approximately $2.3 billion of share repurchases, $800 million of dividends, scheduled debt repayment of $750 million and $300 million of capital expenditures, which support future organic growth opportunities. We continue to generate strong cash flow, which provides the flexibility required to execute a well-balanced capital allocation strategy. Turning to our outlook for the full year 2022. Our adjusted earnings per share guidance of at least $4.70 remains unchanged. We now forecast total company organic sales growth, excluding the impact of COVID testing-related sales, to be in the mid- to high single digits, which is somewhat lower than our prior forecast of high single digits due to the recent recall event in Nutrition. It is important to note, excluding sales impacted by the recall, we continue to forecast total organic sales growth in the high single digits for the remainder of our combined businesses, which includes Medical Devices, Established Pharmaceuticals, Diagnostics, excluding the impact of testing-related sales and areas of nutrition, not impacted by the recall. We forecast COVID testing-related sales of approximately $4.5 billion with a significant portion of these sales expected to occur in the first half of the year. We continue to -- we'll continue to update our COVID testing-related sales forecast 1 quarter at a time throughout the year as appropriate. Lastly, based on current rates, we would now expect exchange to have an unfavorable impact of a little more than 3% on our full year reported sales. With that, we'll now open the call for questions. Operator: [Operator Instructions] And our first question comes from Robbie Marcus from JPMorgan. Robert Marcus: Congrats on a good quarter. Maybe to start for Robert or Bob, you guys put up a good first quarter being on COVID testing sales had double-digit growth in most of the businesses. I was hoping maybe you can reconcile the strong 1Q and the reiterated guidance and walk us through some of the puts and takes and how to think about bridging the difference? Robert Ford: Sure, Robbie. I think you've been on these calls for a while. We rarely raised in Q1, I would say. And despite that, I mean, we've had a great start to the year as pointed out. And there's a lot of good things going on at the company. We talked a little bit about procedure recovery in the comments. We've seen good recovery in our device portfolio, especially in cardiovascular, seen routine diagnostic testing improving albeit a little bit slower than what we've seen in devices, but definitely the trend of recovery is there. . EPD execution is going very well, like I said in the comments, 3 out of 4 quarters, double digit, strong COVID sales, both in the U.S. and internationally. I think that's an important aspect here is our international presence, too. Talked a little bit about the pipeline and the approvals, not just the recent approvals, but the performance of some of the recently launched products. Bob talked about our cash flow generation and the deployment of that cash flow. We're able to kind of share part of that cash flow with our shareholders, but also to continue to invest in the business. So there's a lot of good things going on here in the business, and -- but there are a couple of challenges that we're managing, and that's probably the piece there where the reconciliation that you're looking for is actually happening. First of all, obviously managing through the recall on the nutrition side, we're working with the FDA. And we've contemplated in that reiterated guidance, various scenarios here in terms of kind of restart dates and share recovery curves, et cetera. So it's simple to give an exact date right now as to when that restart starts. We're working closely with the FDA, but I see this more as a shorter-term challenge in the sense that once we align with restarting with the FDA then we'll begin to execute our strategy here in terms of coming back to market, resupplying the market and regaining the share. Probably the second other part here, which is I think is a little bit not unique to Abbott. And I think you'll probably see this across a lot of companies is just the macro environment right now is -- has definitely changed versus where we were in January. And it's gotten a little bit more challenging. So -- and we expect some of that macro environment, whether it's supply chain, et cetera, to kind of be a little bit more persistent throughout this year. So that being said, I wanted to see how these -- probably these 2 points here play out over the next couple of months, and we'll be in a better position to be able to assess that and on our guidance going forward after Q2. But like I said, there's a lot of great momentum in the business. Devices performing very well. Diagnostics performing very well. The parts of nutrition that weren't impacted by the recall continue to do very well. I'm not a big fan of the -- exclude this, but for that statement, but I think in the context of how the business is performing, I mean if you exclude the COVID piece, which was pretty significant for us and then just look at the business without the base business, without the impacted nutrition products, our growth rate was about 11%. And I think that reflects the strength of the portfolio, the investments that we've made and the execution. So in that guidance, that reiteration of $470 million, we've absorbed, as Bob said, more FX headwinds, absorbed some challenges in supply chain, absorbed portions of the nutrition recall. So I think it's the right EPS guide right now in terms of where we are after Q1. Robert Marcus: Great. And maybe as a follow-up, I think a lot of investors are focused on the go forward, realizing that January and February weren't the strongest months due to some of the elevated Omicron levels. So we heard Johnson & Johnson yesterday talk about reaching pre-COVID volume levels in April. It sounds like you exited and continue to see strong growth coming out of the quarter and into second quarter. I was hoping maybe you could give us a little more color on just the volume trends you're seeing, particularly in devices and diabetes, which was one that missed the street a little bit in the quarter? And how you're seeing the geographic spread and any differences there? Robert Ford: Sure. I mean I think the storyline here was very similar, as I said in my comments. I mean it started off a little bit slower than we had anticipated in January, obviously, given Omicron and the surges there and the pressure that, that put on staff at hospitals. But definitely sequential improvement from a dollar perspective every month as we moved along the quarter, March was very strong. I've always talked about how we compare our businesses versus pre-pandemic levels to kind of avoid some of the comp issues that ultimately do exist. If you look at our Q1 '22 growth rate versus 2019, we were up about 7.3%. So well ahead of where we were in 2019. And that was pretty broad-based. Geographically, the U.S. was up 6%, again versus 2019. And international was up over 8% versus 2019, too. So I think our device business has performed very well, and we've seen that improvement as we went through the quarter. The cardiovascular side has done very well as I've kind of given those numbers, and March was really strong, too. I think it's -- part of it is recovery, Robbie, that we're seeing. But also -- I would also put in those numbers, I made these comments about recently launched products that we started launching last year. It's always a challenge to launch these new technologies in that COVID environment, but it was the right decision to make, and we're seeing good momentum on whether it's Amulet, Navitor in Europe, CardioMEMS, the rollout of EnSite X that began in Q4 of last year, our TriClip product. So I think all of that, it's the combination, I would say, of both recovery as the COVID cases subside, but also the new product launches and the pipeline that we put, which is driving this performance where, I'd say, we're ahead of where we were in 2019, having good growth rate in our cardio portfolio. Operator: Our next question comes from Vijay Kumar from Evercore ISI. Vijay Kumar: Robert, maybe back on the guidance question, right. The testing guidance was raised by $2 billion, right? That's perhaps $0.40 of upside and reiteration of the EPS, like what is offsetting the incremental tailwind from COVID rate? Like how much of this is FX, was this macro Russia versus the recall or inflationary pressures, I think, a little bit more granularity will be helpful. Robert Ford: Sure. Well, I mean I think you hit on the key points there. I mean inflation -- additional inflation pressures is impacting some of that. We've got a couple of hundred million dollars that we've contemplated throughout the rest of the year in terms of friction on supply chain costs, input costs, freight and distribution. The recall -- well, let me take a step back, the FX is probably about another about $0.05 of friction that we're having as we've seen the dollar strengthen and the rest of it is really coming from nutrition, but it's very difficult right now to be able to kind of pinpoint exactly. We've got a couple of different scenarios, as I said in the first question in terms of the restart and the curve. So we are seeing more COVID tests and more COVID sales. And that, like I said, is absorbing some of these challenges. Vijay Kumar: And then one on Libre. Sequentially, your revenue has declined. And I guess my question is you've been adding, I think, a couple of hundred thousand new patients starts. Is that new patient starts changing at all? How should we think about the incremental reimbursement in Japan? And was the seasonality or what drove the sequential Libre revenue trends? Robert Ford: Yes. I mean I think we see some of that from time to time here, especially as you go from Q4 to Q1, Vijay. We've seen that a couple of times. I'd say internationally, the biggest driver of that is actually FX that created that. We've seen good growth internationally from Libre getting close to 20% on a very large base. And in the U.S., you're going to see some timing patterns there in terms of wholesaler ordering. I like to look at scripts, both new-to-brand scripts and total Rx scripts here in the U.S. and the sequential Q1 to Q4, there's definitely growth there. So I think we've done a really good job in the U.S. We've grown our business in this quarter by 50%. Users now well over 1 million users. We've made the investments in the U.S., whether it's Salesforce, DTC advertising. I think the team is beginning to hit its stride over there. They know that I'm not satisfied. We always want to see more and believe that we can do more. But I think the U.S. is starting to kind of really hit its stride with those investments as the sales force gets deployed and establishes the relationships with what is new physicians that are getting introduced to CGM. So I think that's worked out very well. If I take a step back, though, and move away a little bit from the RXs and the sequential, I think one of the key things here to really take a look at is the evolution of the CGM market. And I'm starting to really see now what we had always envisioned this market to start to be, which is a market that is shifting from what traditionally was more of a type 1, more of a pumper -- insulin pump kind of connectivity play, which is an important segment, but really start to move and expand beyond that. And we're starting to see signs of that. And I think Libre is a big driver. The value proposition of Libre is a big driver, whether it's physicians and payers, quite frankly, starting to see the value of the sensing technology across a much broader set of patients. If you look at a U.S. base of patients, and we get to see this because we get to see the Rx data in terms of what medications the patients are using. And over 40% of our user base, which is pretty large in the U.S., is already type 2 non-intensive. And that, as I said, is really kind of an opportunity to expand this market and become a really strong growth driver. The Japan reimbursement that you just referenced, again, this goes back to a comment I made about. We see this as a mass market opportunity. So counter to maybe how we think about reimbursement in different segments of devices where you're thinking about price of reimbursement versus patient TAM, we're looking at patient TAM much more than we are on the pricing side. We've got great reimbursement in Japan, but to be able to have access to all insulin users in Japan with our product is a great opportunity for us. And then you're seeing the value proposition, again, really strong. There was a study that was published by U.K. NICE. And I think that, for me, is the ultimate validation of our strategy and the value proposition we offer where it was clearly shown to be extremely cost effective, whether you look at ICERs or Qualys in the U.K. by NICE and their view here of how this can benefit a lot of patients. So that for me is the real exciting part of Libre is we're really starting to see that evolution from the CGM market to become much more than kind of a niche play and much more mass market play. And I think we're starting to see evidence of that, whether it's new studies or reimbursement access or even seeing physicians primary care docs start to really embrace the prescription of CGM for type 2s. So... Operator: Our next question comes from Josh Jennings from Cowen. Joshua Jennings: Congratulations on a strong start to the year. Rob and Bob, I just wanted to start with just a question on gross margins. The 1Q performance was the highest since 20 -- quarters in 2019. Just wanted to better understand the sustainability of this profile? 59.1% despite all the challenges in place in 1Q, and then -- and should investors be thinking that return to 2019 gross margin levels in that 59% range plus is achievable in the out years? And follow-up is on MitraClip. I just wanted to hear -- and Amulet, what have you learned in the early days, the Amulet launched as the #2 player in the U.S. left atrial appendage closure market that you can apply to your defense strategy starting this year, maybe carrying into next year when you're defending your MitraClip turf as the #1 player, assuming the U.S. [ PASCAL ] launch occurs in 2023? Robert Funck: Okay. Josh, I'll take the kind of the gross margin question. In the first quarter, our gross margin certainly benefited from the very high COVID testing sales. As I mentioned in my remarks, that actually, the fall-through on that was higher than we've seen in the past because of the production volumes that we had going through our plant, we're basically running full out on that. So our first quarter definitely benefited from that. As we look at the rest of the year, obviously, we're going to have the impact of the nutrition recall and the inflation, the increased inflation that Robert mentioned. Obviously, inflation is not unique to us. As we said back in January, we incorporated a sizable amount in our guidance at that point in time. And what we've seen, and I think a lot of other companies have seen as kind of an increase in some of those headwinds. And so we've captured that in our guidance for the rest of the year. When I think out beyond this year and where gross margin goes, I mean, gross margin is something we focus on in the company constantly. We've got dedicated teams within each business that are focused on driving gross margin improvements. I mean, a lot's going to depend, I think, as we think out in the future, the evolution of inflation and supply chain dynamics and how those evolve over time, that will be a key component. And then obviously, as we grow the top line in our medical device business, that's accretive to the overall profile of the company. And so that's kind of where we see gross margin right now and potentially in the future. Robert Ford: Yes. On your question on MitraClip and Amulet, so I'll talk a little bit about MitraClip. I'd say the progression of MitraClip in the quarter was very similar to my commentary on our cardiovascular procedure, right? So we obviously had high COVID case kind of impacted but started to really accelerate growth towards the end of February and into March. So as those cases came down, we saw the improving growth rate. But I'll tell you, I mean, while the growth rate has been strong and it's been strong for a while, Josh, I don't think we've really been able to benefit yet from the FMR indication, which we got kind of right in the middle of COVID. And as part of that, and I talked a little bit about this, to be able to benefit from this pretty significant kind of market expansion opportunity that we had with incredible robust data from COAPT, you have to really start to work those patient referrals and the referral networks. And we began doing that when COVID took its first break, and then that got put on hold again when Delta and Omicron served. So I'm really looking forward and the team is kind of already putting in place that strategy, again, to reengage the patient referral network so that we can really take advantage of this indication, which is unique to us and will be unique to us for a while. Relating to competitive movements into the market, we just got to stay ahead. We've got to keep on investing in the product. So we've done that with MitraClip, staying ahead and iterating and improving on the performance of the product. We're investing in new trials. I talked about our investment that we're making in moderate risk surgery patients. That will be a great opportunity for us. And we have a great team, and we have great relationships and a strong mitral position. So not discounting the fact that we'll have competition. We've had competition in Europe for a couple of years already. Germany is probably the second largest global market, and our position there remains at an 80% market share. So I acknowledge that we will have competition, but we do -- we have established this mitral leadership position, and we intend to defend it because of all the investments that we've made to create this market. So that's what I would talk about MitraClip. I still think the best is still to come because I don't think we've been able to tap into the opportunity of the FMR indication. Regarding Amulet, listen, I think the team has done a really good job, again, reiterating the same kind of comments, a little bit challenged in the beginning of the quarter. And that was predominantly driven by the fact that we wanted to start the initial cases with every case being proctored. So difficult to move proctors throughout the U.S. and travel international, et cetera. So that slowed us down a little bit in the beginning of the year. But I'll tell you, the team has done -- we spent a lot of time and attention and focus with them in February and March. And the team has definitely had a really strong exit to Q1, caught up in terms of all the contract closes that we had established as part of our plan in Q1. So I think the commercial execution is doing really well, and that's supported really by the performance of the product. And once physicians have had an opportunity to get a couple of these implants done, it's a little bit of a different technique, but they feel comfortable with it and then they get the benefits of what the data shows is superior closure. And that's really because of our unique dual ceiling mechanism. So there was some data that came out -- late-breaking data that came out of the AACC, which talked about the importance of leaks and leaks matter, whether they're big leaks or whether they're small leaks, they do matter. And even the small leaks were associated with an increase in thromboembolic events. So I think we're in a good position now with Amulet. I'm pleased with the commercial team and what they're doing in the clinical team, and we've got opportunities here to grow. I think momentum is building with Amulet. Operator: Our next question comes from Larry Biegelsen from Wells Fargo. Larry Biegelsen: So Robert, 2 high-level questions for me. One, I'll push my luck a little bit and see if we can get any preliminary thoughts on 2023. You're getting a meaningful testing benefit this year, which may not materialize next year. So how do you feel about your ability to grow margins and earnings next year as testing demand drops? And I have one follow-up. Robert Ford: Sure. Well, we had a really strong quarter regarding testing, Larry. And I think to answer your question, I think you have to kind of look at what's going on a little bit right now in the U.S. and internationally. In the U.S., we saw cases decline pretty significantly in February. But I think we all agree that some of those cases that are being reported aren't covering all cases because of the use of the at-home testing systems, right, that are currently available. So I think that's part of the process that we're seeing as testing -- as we're moving more into this kind of endemic state. And as we move to this endemic state, listen, vaccines have been incredibly powerful to be able to prevent serious illness to be able to protect the hospitals and the hospital system, but it's really testing that really allows us to kind of move to this endemic state and kind of live our day-to-day and it's more about surveillance and screening and checking. So -- and I think our product has done really well here. It's maintained a kind of preferred status here in the U.S., even with a pretty significant increase in product coming into the country, whether it's ease of use, its shelf life, the reliability it has, its studies, et cetera. So I think that, that's an important aspect as we go into 2023 is do we have confidence that even in an endemic state does testing continue? And I would say, yes, it does continue. One portion that doesn't get a lot of attention is our international testing business. 50% of our sales in March of COVID tests came from the international markets. And I'd say, similar sense there of governments investing in testing and coming to Abbott as one of the preferred suppliers. So I think that to answer your question, obviously, there's a certain amount that you can't overcome, right? But I do think that as we go into next year, we'll have a portion of our testing business that will look more like a flu kind of respiratory kind of endemic state. And I think that's going to be important as we continue to grow earnings. And then on top of that, like I said, the focus of our medical device business, the investments we've made in our diagnostic systems and increasing the test menus over there. So I expect our base business to continue to grow very strongly. Yes, it's a little bit early regarding 2023, but we are planning. We are looking. We are looking at where we're going to be able to kind of grow and I'd say there will be some COVID business next year. I think we're in probably the strongest position to be able to kind of capitalize and lead in that market. And then our base business is going to do very strongly next year with all the investments we've made and new product pipeline that we've got. Larry Biegelsen: And Robert, you're in a unique position with your strong balance sheet. I saw you mentioned on the call, you bought back, I think, $2.5 billion in stock this quarter. What are your updated thoughts on M&A? And if you can't find attractive assets, are you going to continue to return cash to shareholders like we saw this past quarter? Robert Ford: Sure. On the M&A side, yes, I mean, I'll sound like a broken record here, Larry. I mean we're always looking. We're always studying. We're always looking at ways to be able to add to the company and add to our business, but it needs to be strategic. And from that perspective, I don't want to dilute our growth rate. I don't want to dilute our profiles. We need to make sure that we're looking at assets that will be additive to our growth into our profile. So at least the top line. So that's always there, and we're always looking. Regarding the approach, listen, it's always a balanced approach, Larry. We're generating strong cash flow. We got a lot of financial flexibility here. We'll return $3 billion when you -- in terms of dividend this year, Bob talked about what we've done regarding buybacks. And we're always going to look at this kind of balanced approach. We've made investments in our organic opportunities for growth because I believe that those are great returns for our shareholders, whether it's Libre, MitraClip, expansion of our medical devices, diagnostics, those are all opportunities that deliver great returns for our shareholders, and we'll take that balanced approach. And if there is an opportunity for more, we'll do more. Operator: Our next question comes from Joanne Wuensch from Citibank. Joanne Wuensch: I'd like to circle back a little bit to the nutritional business. A lot of the feedback that I get from investors is some level of concern regarding brand name, brand damage, if you will. And I'm curious your thoughts on what it would take to sort of revamp this business up? Robert Ford: Sorry, you're referring to Nutrition business? Joanne Wuensch: Yes. Robert Ford: Okay. Listen, we've got a very robust manufacturing network and a robust quality system. Obviously, there's a shortage of product in the market. I highlighted some of the things that we're doing to be able to kind of resupply the market. A key aspect of that is going to be the restart, and we're in that process. We've got a strong brand with Similac. We've maintained a lot of contracts. We've been able to supply those contracts even with a little bit of this shortage. So I feel confident in our team's ability here to look at once we get restarted to be able to resupply the market and build back our share. We had just launched a new product last year -- end of last year with a blend of 5 HMOs and that's a significant advancement. And we were expecting that based on everything that we had studied and seen was going to be a big growth driver for us and kind of brand enhancers. So I think that's going to be important. And yes, we'll have to make some investments as we go back to the market. But I'd say historically, when some of these issues have happened in the past, whether it's Abbott or other manufacturers, share does recover. The question is just kind of the timing and the curve of that recovery, but share do come to recover and you can look at past situations with other competitors and even with us. Joanne Wuensch: And as a follow-up, forgive me for asking it this way. What's next? I mean, I don't think we're going to be talking about COVID testing in a year. I hope we're not going to be talking about it. But how do you see the sort of forward momentum of the company? Big picture? Robert Ford: Yes. Well, yes, I don't think we're going to be talking about COVID testing the way we're talking about it today or how we talked about it in the past year. But like I told Larry, I mean, I do think that there's going to be an opportunity for COVID testing to play a role in this kind of endemic state. And as I've said in the past also, what COVID has allowed us to do is to further accelerate what we believe was a key trend in diagnostics and point-of-care diagnostics, which is the expansion and the decentralization of that testing outside of the lab into pharmacies, into people's homes and it being connected. So I think that -- COVID has accelerated that, I guess, I would say. And we're obviously building menus where we'll be able to add to the ID NOW instrument, more panels, more different tests. Remember, when we started the pandemic, we had about 20,000 kind of instruments that's now fivefold in terms of the opportunity that we have to be able to expand menu into basically an asset that's been capitalized and deployed into the market. So that's what we've been working on from that perspective on the, I guess, I would say, on the rapid testing side on the decentralized testing side. I'd say going back to the device portfolio, I mean there's still a lot of what next in our pipeline of products that we've just launched that are still in the early innings here. One of them that we got approved this quarter, which I'm really excited about, is Aveir and our leadless pacemaker. I think this is going to be a great opportunity to kind of reignite growth back in our CRM business. I mean we've seen an improvement already with the existing portfolio and had a 4% growth this quarter. But I think Aveir is a real kind of game changer for our CRM portfolio. Obviously, the single chamber is a smaller part of the market. We know that it's about 15%. But I think when you're coming second to the market, you get to observe what needs to -- what could be addressed that maybe the first generation didn't do. And I think that our product whether it's retrievability, its ability to be retrieved, it's longer-lasting battery. Right now, it's about 2x product that's on the market. But I think what's really exciting about this is its ability to upgrade to a dual chamber device. So it's upgradability is what we're hearing extremely big interest from the physician community. So I think that's a great opportunity for us that I think is really going to start to show as we evolve our trial for dual chamber and begin to collect data there. I think that's going to be a great opportunity for our CRM portfolio. I look at CardioMEMS as another great opportunity that we have just really just started. The expanded indication is going to really open up the market. I've seen some of the implant trends that we've seen post-expansion indication, and that gives me a lot of excitement about what this product can be. We talked about Amulet. I think that the TAVR piece is one that, as I've said in the past, we're investing. I think Navitor is an extremely competitive product, and we're seeing that in Europe as we've launched it and been 6 months in the market now. So there's great opportunities over there. Libre 3 is an opportunity for us, not only in the U.S., but in Europe to continue to expand the market. I think Lingo, as I said in the last call, is another great opportunity that is really in the early stages. But look at using our biowearable sensors outside of diabetes and looking at opportunities there. So I think we have a lot of what next that are truly early in their early stages. And then on top of all the products that we've been talking about right now also. So I'm excited about the what next. Operator: Our next question comes from Travis Steed from Bank of America. Travis Steed: Curious on the inflation supply chain, sounds like it's gotten about $200 million worse than the $500 million you had built into the P&L, just to confirm that. I'm curious what you're seeing the biggest pain points? Is it wages, raw materials, shipping costs and expectations on when that could start to ease to some degree? Or how you're thinking for a potential offset with price? Robert Funck: Yes. Travis, I'll take the question. This is Bob. So as we said back in January, we did incorporate a sizable impact into our 2022 guidance, which was about $500 million on the gross margin line. And as Robert mentioned, we've now incorporated an additional $200 million in gross margin impact in our current guidance. The biggest impact we're seeing is really on logistics and commodities and some other manufacturing inputs. It's not so much on the labor front. Labor is a smaller portion of our total product cost. So it's really on the commodities. In terms of when this will ease and change, I mean, that's a very -- I think there's a lot of things that affect that and where the -- where inflation may go. We do know that historically, on commodities, we do see cycles. We do see commodity costs go up, but they also come down. And we would expect at some point, and it's very difficult to kind of call exactly when that will be, we will see some of the inflationary pressures subside. Travis Steed: And then given your presence in China, I would just kind of love to hear your thoughts on both China from a procedure standpoint and also a supply chain standpoint, just given how much of the business you have there? And any thoughts on the progress you're making with Libre 3 and the FDA would be great, too. Robert Ford: Sure. I think regarding China, I saw a little bit of an inverse in terms of what we saw in all the other geographies where started off pretty well in the quarter. And then as the lockdown started to occur, specifically in Shanghai towards the end of February and into March, started to kind of see the impact of that in our procedures. We look at our testing platforms as kind of an early indicator and a proxy. So we saw those go down also during the month of April -- during the month of March. And I'd say, over the last 2 weeks in April, started to see a recovery of those diagnostic testing. So I think what we saw was a lot of the testing that was being done in the major kind of cities was shifted over to kind of PCR testing, together with rapid testing and that obviously impacted some of the routine hospital testing. But we're starting to see that now probably 2 solid weeks of kind of positive trend back in the right direction. Still not at the level we were before the lockdowns, but definitely starting to move in the right direction there. So I would expect just based on patterns that we've seen in the past that we're starting to kind of move to sequential week-over-week improvements in the procedures. And not all procedures are the same. Some of them return faster. Some of them have a different kind of recovery curve. But I do expect kind of the impact that we saw in March and a little bit in the beginning of April and devices start to kind of improve. Sorry, you had a question on Libre 3? Travis Steed: Yes, Libre 3. Any update on how the progress is working with the FDA or what the label might look like? Just any additional color would be great. Robert Ford: Sure. Like I mentioned in the call, we filed as an ICGM. I don't have much to kind of update you there regarding that. I will say that we have moved Libre 3 in Europe into -- from kind of more of a limited rollout in Germany a while back to kind of more of an accelerated conversion from Libre 2 to Libre 3. And I think the process started really well in Germany. We got initial feedback from physicians, very positive feedback from the reimbursement system also. And that gave us the confidence here to kind of really begin to accelerate this market transition in Libre 3. We did that in Libre 2 also when we moved from Libre 1 to Libre 2 in Germany. That took us about a year. I think it's going to be faster than that with Libre 3. And we've got over 90% reimbursement coverage for Libre 3 in Germany. So that's now moved into high gear, not only in Germany, but for the rest of the year. So I'm focused a lot on what we can do with Libre in the countries that we do have it approved. And right now, everything that we're seeing is that it is a very, very compelling product. Scott Leinenweber: Okay. Operator, we'll take one more question. Operator: Our last question will come from Matt Miksic from Credit Suisse. Matthew Miksic: Just in the context of some of these new products, I did want to maybe follow up with just a level set expectations, for example, the Avidity rollout and menu expansion, very strong growth in the quarter. Robert, if you could maybe talk about what's the duration of this rollout? I know it started into the pandemic. And what does that look like through this year and potentially through next year? And then I know you touched this a few times here about Amulet. Just love to get your updated thoughts on where you think share could go in the next year, 18 months? You've made some comments in Q4. I know the pace is picking up here in the U.S.? Any numbers you could put around your thoughts there would be super helpful. Robert Ford: Sure. I mean Alinity is a multiyear strategy and rollout here, Matt. We're doing it not only with immunoassay, we're doing with clinical chemistry, we're doing with hematology. We're doing it with transfusion. This has never been done at this kind of scale to be able to really recycle all of our systems. So I think that if you look at the way the market is set up, the contracts are lasting between 7 to 10 years. So on any given year, you've got 15% of the market that's coming up for an RFP. So regarding its legs like you're asking, I mean, I still think that we've got multiple, multiple years here. The COVID pandemic definitely slowed that down in terms of the renewal cycles, a lot of hospitals focusing on just dealing with the COVID. But I guess what I would say is there's plenty more to come. The key here is the balance between -- in that 15% that comes up for RFP, what's renewable to an existing customer and what's kind of share gain. And I think the team has done a really good job at being able to look at having a real strong balance about not just defending the base, and we've done that pretty well. So I'd say, 9 out of 10 accounts, we've been able to maintain. And then if you look at the business that's coming up for grabs, I'd say our win rate here is over 50%. So when you think about that math, retaining 90% and winning 50% of the new businesses, that's what ultimately drives our top line growth. And then once you put those instruments in, then the key aspect here is to be able to expand the menu use of those instruments while they're in an account, right? You've got the capital deployed, you've got the service cost that's kind of been deployed there. So everything we can do to be able to add new menus, new tests, et cetera, is accretive from both the top and the bottom line. So that's a big focus of the team on the R&D side is to be able to expand the menus concurrent to what I would say is kind of placement strategy that we have with the new systems. So Amulet -- on your question on Amulet, listen, I think we continue to capture share. We estimate that we're in double-digit share position here in the U.S. Longer term, I would say, our aspiration is to build a significant share position. The European market is much smaller than the U.S. market. In that market, we have a 50 share. So I think the key thing here is for us is to -- every time you're a new player coming into the market, you have different technology. We believe ours is superior, but it's different in terms of how it gets used, how it gets implanted. So you need to make sure that the physicians as you roll it out learn how to use our product, our implant, our system. And from there, you build off there. So I think we'll be looking at not only expansion into new accounts, but also utilization in existing accounts. And that's the piece that I'm actually getting very excited about it. As we've looked at the accounts that we started back in September and October, we're starting to see nice share movement over there. So that's very exciting for us. So let me just close here. I think we've had a very strong start to the year, like I said in my prepared comments. We've reaffirmed our guidance that we set back in January, absorbing, I would say, impact of the nutrition recall, which we're working hard on to restart. Other parts and attrition are doing very well, and I expect them to continue to do very well. We're absorbing, as Bob said, challenges with inflation in the supply chain that many companies I know are facing, and we're absorbing some headwinds on FX side. That being said, there's a lot of great things that are going on at Abbott in the company, a lot of positives. I talked about them in the beginning of the call. And I expect all of that positive to continue and to that momentum to continue to build on that business. Like I said, excluding COVID, excluding some of the recall products, our base business grew 11% in the quarter and the team is focused on building off that and building off that momentum. So thanks. Scott Leinenweber: Very good. Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today. Operator: Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.	[ { "speaker": "Operator", "text": "Good morning, and thank you for standing by. Welcome to Abbott's First Quarter 2022 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant's questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbot's expressed written permission." }, { "speaker": "Scott Leinenweber", "text": "Good morning, and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we will take your questions." }, { "speaker": "Robert Ford", "text": "Thanks, Scott. Good morning, everyone, and thank you for joining us. Today, we reported results of another strong quarter. Earnings per share were $1.73, reflecting more than 30% growth compared to the prior year. Sales increased 17.5% on an organic basis in the quarter, led by double-digit growth in Medical Devices, Established Pharmaceuticals as well as Diagnostics, both with and without COVID testing-related sales." }, { "speaker": "Robert Funck", "text": "Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis, which excludes the impact of foreign exchange." }, { "speaker": "Operator", "text": "[Operator Instructions] And our first question comes from Robbie Marcus from JPMorgan." }, { "speaker": "Robert Marcus", "text": "Congrats on a good quarter. Maybe to start for Robert or Bob, you guys put up a good first quarter being on COVID testing sales had double-digit growth in most of the businesses. I was hoping maybe you can reconcile the strong 1Q and the reiterated guidance and walk us through some of the puts and takes and how to think about bridging the difference?" }, { "speaker": "Robert Ford", "text": "Sure, Robbie. I think you've been on these calls for a while. We rarely raised in Q1, I would say. And despite that, I mean, we've had a great start to the year as pointed out. And there's a lot of good things going on at the company. We talked a little bit about procedure recovery in the comments. We've seen good recovery in our device portfolio, especially in cardiovascular, seen routine diagnostic testing improving albeit a little bit slower than what we've seen in devices, but definitely the trend of recovery is there. ." }, { "speaker": "Robert Marcus", "text": "Great. And maybe as a follow-up, I think a lot of investors are focused on the go forward, realizing that January and February weren't the strongest months due to some of the elevated Omicron levels. So we heard Johnson & Johnson yesterday talk about reaching pre-COVID volume levels in April. It sounds like you exited and continue to see strong growth coming out of the quarter and into second quarter. I was hoping maybe you could give us a little more color on just the volume trends you're seeing, particularly in devices and diabetes, which was one that missed the street a little bit in the quarter? And how you're seeing the geographic spread and any differences there?" }, { "speaker": "Robert Ford", "text": "Sure. I mean I think the storyline here was very similar, as I said in my comments. I mean it started off a little bit slower than we had anticipated in January, obviously, given Omicron and the surges there and the pressure that, that put on staff at hospitals. But definitely sequential improvement from a dollar perspective every month as we moved along the quarter, March was very strong. I've always talked about how we compare our businesses versus pre-pandemic levels to kind of avoid some of the comp issues that ultimately do exist." }, { "speaker": "Operator", "text": "Our next question comes from Vijay Kumar from Evercore ISI." }, { "speaker": "Vijay Kumar", "text": "Robert, maybe back on the guidance question, right. The testing guidance was raised by $2 billion, right? That's perhaps $0.40 of upside and reiteration of the EPS, like what is offsetting the incremental tailwind from COVID rate? Like how much of this is FX, was this macro Russia versus the recall or inflationary pressures, I think, a little bit more granularity will be helpful." }, { "speaker": "Robert Ford", "text": "Sure. Well, I mean I think you hit on the key points there. I mean inflation -- additional inflation pressures is impacting some of that. We've got a couple of hundred million dollars that we've contemplated throughout the rest of the year in terms of friction on supply chain costs, input costs, freight and distribution." }, { "speaker": "Vijay Kumar", "text": "And then one on Libre. Sequentially, your revenue has declined. And I guess my question is you've been adding, I think, a couple of hundred thousand new patients starts. Is that new patient starts changing at all? How should we think about the incremental reimbursement in Japan? And was the seasonality or what drove the sequential Libre revenue trends?" }, { "speaker": "Robert Ford", "text": "Yes. I mean I think we see some of that from time to time here, especially as you go from Q4 to Q1, Vijay. We've seen that a couple of times. I'd say internationally, the biggest driver of that is actually FX that created that. We've seen good growth internationally from Libre getting close to 20% on a very large base. And in the U.S., you're going to see some timing patterns there in terms of wholesaler ordering. I like to look at scripts, both new-to-brand scripts and total Rx scripts here in the U.S. and the sequential Q1 to Q4, there's definitely growth there." }, { "speaker": "Operator", "text": "Our next question comes from Josh Jennings from Cowen." }, { "speaker": "Joshua Jennings", "text": "Congratulations on a strong start to the year. Rob and Bob, I just wanted to start with just a question on gross margins. The 1Q performance was the highest since 20 -- quarters in 2019. Just wanted to better understand the sustainability of this profile? 59.1% despite all the challenges in place in 1Q, and then -- and should investors be thinking that return to 2019 gross margin levels in that 59% range plus is achievable in the out years?" }, { "speaker": "Robert Funck", "text": "Okay. Josh, I'll take the kind of the gross margin question. In the first quarter, our gross margin certainly benefited from the very high COVID testing sales. As I mentioned in my remarks, that actually, the fall-through on that was higher than we've seen in the past because of the production volumes that we had going through our plant, we're basically running full out on that. So our first quarter definitely benefited from that." }, { "speaker": "Robert Ford", "text": "Yes. On your question on MitraClip and Amulet, so I'll talk a little bit about MitraClip. I'd say the progression of MitraClip in the quarter was very similar to my commentary on our cardiovascular procedure, right? So we obviously had high COVID case kind of impacted but started to really accelerate growth towards the end of February and into March. So as those cases came down, we saw the improving growth rate." }, { "speaker": "Operator", "text": "Our next question comes from Larry Biegelsen from Wells Fargo." }, { "speaker": "Larry Biegelsen", "text": "So Robert, 2 high-level questions for me. One, I'll push my luck a little bit and see if we can get any preliminary thoughts on 2023. You're getting a meaningful testing benefit this year, which may not materialize next year. So how do you feel about your ability to grow margins and earnings next year as testing demand drops? And I have one follow-up." }, { "speaker": "Robert Ford", "text": "Sure. Well, we had a really strong quarter regarding testing, Larry. And I think to answer your question, I think you have to kind of look at what's going on a little bit right now in the U.S. and internationally. In the U.S., we saw cases decline pretty significantly in February. But I think we all agree that some of those cases that are being reported aren't covering all cases because of the use of the at-home testing systems, right, that are currently available. So I think that's part of the process that we're seeing as testing -- as we're moving more into this kind of endemic state." }, { "speaker": "Larry Biegelsen", "text": "And Robert, you're in a unique position with your strong balance sheet. I saw you mentioned on the call, you bought back, I think, $2.5 billion in stock this quarter. What are your updated thoughts on M&A? And if you can't find attractive assets, are you going to continue to return cash to shareholders like we saw this past quarter?" }, { "speaker": "Robert Ford", "text": "Sure. On the M&A side, yes, I mean, I'll sound like a broken record here, Larry. I mean we're always looking. We're always studying. We're always looking at ways to be able to add to the company and add to our business, but it needs to be strategic. And from that perspective, I don't want to dilute our growth rate. I don't want to dilute our profiles. We need to make sure that we're looking at assets that will be additive to our growth into our profile. So at least the top line. So that's always there, and we're always looking." }, { "speaker": "Operator", "text": "Our next question comes from Joanne Wuensch from Citibank." }, { "speaker": "Joanne Wuensch", "text": "I'd like to circle back a little bit to the nutritional business. A lot of the feedback that I get from investors is some level of concern regarding brand name, brand damage, if you will. And I'm curious your thoughts on what it would take to sort of revamp this business up?" }, { "speaker": "Robert Ford", "text": "Sorry, you're referring to Nutrition business?" }, { "speaker": "Joanne Wuensch", "text": "Yes." }, { "speaker": "Robert Ford", "text": "Okay. Listen, we've got a very robust manufacturing network and a robust quality system. Obviously, there's a shortage of product in the market. I highlighted some of the things that we're doing to be able to kind of resupply the market. A key aspect of that is going to be the restart, and we're in that process." }, { "speaker": "Joanne Wuensch", "text": "And as a follow-up, forgive me for asking it this way. What's next? I mean, I don't think we're going to be talking about COVID testing in a year. I hope we're not going to be talking about it. But how do you see the sort of forward momentum of the company? Big picture?" }, { "speaker": "Robert Ford", "text": "Yes. Well, yes, I don't think we're going to be talking about COVID testing the way we're talking about it today or how we talked about it in the past year. But like I told Larry, I mean, I do think that there's going to be an opportunity for COVID testing to play a role in this kind of endemic state." }, { "speaker": "Operator", "text": "Our next question comes from Travis Steed from Bank of America." }, { "speaker": "Travis Steed", "text": "Curious on the inflation supply chain, sounds like it's gotten about $200 million worse than the $500 million you had built into the P&L, just to confirm that. I'm curious what you're seeing the biggest pain points? Is it wages, raw materials, shipping costs and expectations on when that could start to ease to some degree? Or how you're thinking for a potential offset with price?" }, { "speaker": "Robert Funck", "text": "Yes. Travis, I'll take the question. This is Bob. So as we said back in January, we did incorporate a sizable impact into our 2022 guidance, which was about $500 million on the gross margin line. And as Robert mentioned, we've now incorporated an additional $200 million in gross margin impact in our current guidance. The biggest impact we're seeing is really on logistics and commodities and some other manufacturing inputs. It's not so much on the labor front. Labor is a smaller portion of our total product cost. So it's really on the commodities." }, { "speaker": "Travis Steed", "text": "And then given your presence in China, I would just kind of love to hear your thoughts on both China from a procedure standpoint and also a supply chain standpoint, just given how much of the business you have there? And any thoughts on the progress you're making with Libre 3 and the FDA would be great, too." }, { "speaker": "Robert Ford", "text": "Sure. I think regarding China, I saw a little bit of an inverse in terms of what we saw in all the other geographies where started off pretty well in the quarter. And then as the lockdown started to occur, specifically in Shanghai towards the end of February and into March, started to kind of see the impact of that in our procedures." }, { "speaker": "Travis Steed", "text": "Yes, Libre 3. Any update on how the progress is working with the FDA or what the label might look like? Just any additional color would be great." }, { "speaker": "Robert Ford", "text": "Sure. Like I mentioned in the call, we filed as an ICGM. I don't have much to kind of update you there regarding that. I will say that we have moved Libre 3 in Europe into -- from kind of more of a limited rollout in Germany a while back to kind of more of an accelerated conversion from Libre 2 to Libre 3." }, { "speaker": "Scott Leinenweber", "text": "Okay. Operator, we'll take one more question." }, { "speaker": "Operator", "text": "Our last question will come from Matt Miksic from Credit Suisse." }, { "speaker": "Matthew Miksic", "text": "Just in the context of some of these new products, I did want to maybe follow up with just a level set expectations, for example, the Avidity rollout and menu expansion, very strong growth in the quarter. Robert, if you could maybe talk about what's the duration of this rollout? I know it started into the pandemic. And what does that look like through this year and potentially through next year?" }, { "speaker": "Robert Ford", "text": "Sure. I mean Alinity is a multiyear strategy and rollout here, Matt. We're doing it not only with immunoassay, we're doing with clinical chemistry, we're doing with hematology. We're doing it with transfusion. This has never been done at this kind of scale to be able to really recycle all of our systems. So I think that if you look at the way the market is set up, the contracts are lasting between 7 to 10 years. So on any given year, you've got 15% of the market that's coming up for an RFP." }, { "speaker": "Scott Leinenweber", "text": "Very good. Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today." }, { "speaker": "Operator", "text": "Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day." } ]	Abbott Laboratories	247,483
ABT	4	2,023	2024-01-23 23:15:00	Operator: Good morning, and thank you for standing by. Welcome to Abbott's Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant's questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission. I would now like to introduce Mr. Mike Comilla, Vice President, Investor Relations. Michael Comilla: Good morning, and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; Bob Funck, Executive Vice President, Finance; and Phil Boudreau, Senior Vice President, Finance and Chief Financial Officer. Robert and Phil will provide opening remarks. Following their comments, we'll take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2024. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A, Risk Factors, to our annual report on Form 10-K for the year ended December 31, 2022. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Note that Abbott has not provided the GAAP financial measure for organic sales growth on a forward-looking basis because the company is unable to predict future changes in foreign exchange rates, which could impact reported sales growth. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which is defined in the press release issued earlier today. With that, I will now turn the call over to Robert. Robert Ford: Thanks, Mike. Good morning, everyone, and thank you for joining us. Today, I'll discuss our 2023 results as well as our outlook for this year. But before I do that, I think it's important that we take a moment to look back at the challenging environment that we all faced over the last few years and how our actions during that time have positioned the company to be in an even stronger position today than before the start of the pandemic. In the 2 years preceding the start of the pandemic, Abbott delivered organic sales growth of more than 7%, which was considered top tier given the large size of our company. We expected growth in 2020 to be in the similar range, but then COVID-19 arrived and disrupted that trajectory. And while our procedures-driven businesses such as Medical Devices and Routine Diagnostic Testing experienced a slowdown due to the healthcare systems around the world shifting their focus, our Branded Generics Pharmaceutical business was able to stay the course and our Nutrition business accelerated as people around the world place a greater emphasis on protecting their health. While some companies saw their entire portfolio suffer during the pandemic, Abbott's diversified business once again proved to be resilient. It was also during this time that we created a multibillion-dollar COVID testing business in just a matter of months that helped play a role in reducing the spread of the virus around the world. COVID testing grew to become a significant part of our portfolio, representing nearly 20% of our sales in 2021 and 2022. And given the important role that these tests had on society and on our financial performance, COVID testing temporarily altered our identity and became a main point of focus to the general public, our investors and other stakeholders. But we knew that the pandemic would not last for ever, so we planned ahead. We pulled forward or accelerated investments in several areas across the company when the demand for COVID testing was at peak levels, knowing that we would scale these investments back down when the eventual decline in demand for COVID testing occurred. And the experiences we gained in creating the COVID testing business and then managing the rapid scale-up and subsequent scale down of that business will have a lasting positive impact on our company. Our R&D pipeline was one of the areas we targeted for the accelerated investments, and we're seeing those investments pay off. In the last 2 years, we have announced more than 25 new growth opportunities, which include a mix of new products, new indications and geographic and reimbursement expansions. And this level of pipeline activity is occurring across the entire company. In EPD, for example, we announced an agreement to commercialize several biosimilars in emerging markets. In Nutrition, we continue to invest in science-based solutions to address emerging medical needs with particular emphasis on the fast-growing Adult Nutrition segment. In Diagnostics, we announced approvals for new tests, new instruments and a new laboratory automation solution. And in Medical Devices, we announced 10 new product approvals along with several new opportunities to further improve the growth outlook of the existing portfolio. These new opportunities are well balanced with each of our 7 Medical Device businesses accomplishing at least one significant pipeline-related achievement. Looking back at our performance in 2023, it is clear that these new opportunities contributed to an acceleration in our growth, both our sales and earnings growth exceeded the expectations we communicated at the beginning of last year. Sales, excluded COVID testing grew double digits every quarter last year and finished the year up more than 11% higher than our original guidance of high-single-digit growth. Adjusted earnings per share finished the year at $4.44, which was above the midpoint of our original guidance range despite COVID testing sales coming in much lower than originally forecasted. And this is a testament to the strength of the Abbott portfolio and a strong indication of the top-tier sustainable performance we are positioned to continue to deliver as we move past the pandemic. Turning to our outlook for 2024. As we announced this morning, we forecast sales growth excluded COVID testing to be in the range of 8% to 10%, which equates to generating organic sales growth of more than $3 billion. We forecasted adjusted earnings per share of $4.50 to $4.70, which contemplates double-digit earnings growth on the base business. I'll now provide additional details on our 2023 results by business area before turning the call over to Phil. And I'll start with Nutrition, where sales increased 14% in the quarter. In Pediatric Nutrition, double-digit growth in the U.S. was driven by continued market share capture in the U.S. and from formula business, where we are once again the market leader. International growth of 18% was driven by growth coming from both infant formula products and our PediaSure toddler brand. In Adult Nutrition, sales for the full year surpassed $4 billion and grew 13.5% in the quarter, driven by strong demand for Abbott's market-leading Ensure and Glucerna brands. Turning to Established Pharmaceuticals, or EPD, where sales increased nearly 9% in the quarter and 11% for the full year. This is the third consecutive year that EPD sales have grown double digits. Our unique business model of offering broad product portfolios across a targeted set of therapeutic areas that are tailored to the local needs of each emerging market we operate in continues to deliver outstanding results. Moving to Diagnostics. Growth in Rapid Diagnostics was impacted by seasonality related to the respiratory virus testing. The flu season arrived later this year than last year, which caused sales of flu and other respiratory tests to be lower in the fourth quarter compared to that of the prior year. But in Core Lab Diagnostics growth of nearly 10% continues to be driven by the success of our Alinity suite of systems paired with our broad test menu offering. Alinity continues to drive high contract renewal rates and competitive win rates. We recently announced that we received FDA approval for our new lab automation system that offers cutting-edge technology to help laboratories increase performance and improve the overall quality of their operations. The system has been available in international markets, and we look forward to offering this to customers in the U.S. I'll wrap up with Medical Devices where sales grew more than 15% in the quarter, led by double-digit growth in 6 of our 7 Medical Device businesses. In Diabetes Care, fourth quarter sales of FreeStyle Libre, our market-leading continuous glucose monitoring system grew 24% and ended the year with global sales surpassing $5.3 billion. In terms of sales dollars, Libre has become the most successful medical device in history, and it has outpaced market growth in 13 out of the last 16 quarters. In Electrophysiology, sales growth of 21% was driven by double-digit growth across all major geographic regions, including more than 20% growth in Europe. In Rhythm Management, growth was led by double-digit growth in pacemaker sales led by Aveir, our recently launched leadless pacemaker that can be used for both single-chamber and dual-chamber. In Structural Heart, double-digit growth in the quarter and full year was led by MitraClip, as well as several recently launched new products, including Amulet, TriClip and Navitor. For the full year, MitraClip sales grew high teens internationally and 10% on a global basis. In Heart Failure, sales grew more than 15% in the quarter and 12% for the full year driven by continued adoption of both chronic and acute circulatory support devices. And lastly, in Neuromodulation, sales grew nearly 19% driven by the recent launch of Eterna, our first rechargeable neurostimulation device for pain management. So in summary, we exited the pandemic in an even stronger position. 2023 was a very successful year. We outperformed our initial expectations on both the top and bottom lines. The pipeline is generating a lot of new opportunities for growth and we're forecasting this positive momentum to continue and contribute to the strong growth we're forecasting for 2024. I'll now turn over the call to Phil. Phil? Philip Boudreau: Thanks, Robert. As Mike mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis. Turning to our fourth quarter results, sales increased 2.1% on an organic basis, which, as expected, reflects the impact of the year-over-year decline in COVID testing-related sales. Excluding COVID testing sales, underlying base business organic sales growth was 11% in the quarter. Foreign exchange had an unfavorable year-over-year impact of 0.8% on fourth quarter sales. Regarding other aspects of the P&L, the adjusted gross margin ratio was 55.9% of sales. Adjusted R&D was 6.1% of sales, and adjusted SG&A was 26.3% of sales in the quarter. Lastly, our fourth quarter adjusted tax rate was 14%. Turning to our outlook for 2024. Today, we issued guidance for full year adjusted earnings per share of $4.50 to $4.70, which includes an adjusted earnings per share forecast of $0.93 to $0.97 for the first quarter of 2024. For the year, we forecast total underlying base business organic sales growth, which excludes COVID testing sales to be in the range of 8% to 10%. Based on current rates, we would expect exchange to have an unfavorable impact of a little more than 1% on our reported full year sales, which includes an unfavorable impact of approximately 2% on our first quarter reported sales. We forecast nonoperating income of approximately $130 million and an adjusted tax rate of 15%. With that, we'll now open the call for questions. Operator: [Operator Instructions] And our first question will come from Larry Biegelsen from Wells Fargo. Larry Biegelsen: Congrats on a nice end to the year here. So Robert, pre-COVID, Abbott was growing 7% to 8% organically as you mentioned, you're guiding to 8% to 10% today for 2024 off of a higher revenue base. What has changed? And what is giving you the confidence to guide that high to start the year? Maybe talk about the key assumptions, and I'll leave it there for my one question. Robert Ford: Thanks, Larry. I mean, as I said in my prepared remarks and quite frankly, as we talked about throughout most of 2023, the impact of the strategy we took to take some of the COVID revenue and reinvest in the base business. I think ultimately, that's really the factor here. I mean, we operate in these 4 business segments and their underlying attractiveness still is very sustainable. So strengthening our positions that were already pretty strong in each of these 4 segments was absolutely the right strategy here because we believe that these are important areas of healthcare to be in. So I'd make the case here that all 4 of our major businesses are actually in a better and stronger shape than when we were pre-pandemic, which was about $10 billion less and growing at that 7% to 8% range. If you look at EPD, as I said in my comments, I mean, these are 3 consecutive years of double-digit organic sales growth. This is probably one of our best commercial teams. They operate in a very challenging geographies in different markets and they've done an exceptional job at growing the top line and expanding the bottom line. I think even with all the FX and all the challenges that we've seen in those markets, they have expanded their op margin profile by 300 basis points. So a pretty strong position, strong team. And then we layered in that now a new growth vertical by adding biosimilars, which historically hasn't been a platform that's been readily available in emerging markets. It's probably been more of a developed markets play. So I think that's going to provide a new growth vertical for us there. Nutrition I think did an incredible job here. As we said at the beginning of last year at regaining our leadership position here in the U.S. I think it speaks a lot about the trust that our users and customers have for our product. But even Adult -- our Adult Business, our Adult Business has increased $1 billion since pre-pandemic, and it's just strengthening and getting stronger. I mean it's $4 billion, growing high-single digits. There's a lot of med tech businesses, Larry, that command very strong premiums in terms of the valuation just by having those kind of growth rates and sizes. So -- and we're making investments in that channel also. So diagnostics has got a great track record here. Our Core Lab business has done very well. I've talked about our algorithm and formula here and framework for growth. We've gotten some recent very large account wins globally here. I think that's the result of our portfolio. And quite frankly, the trust that these customers have in Abbott and our ability to execute. And our Rapids portfolio has done very well in terms of placing a lot of new instruments out there, for decentralized testing, and we've been making investments on new assays to be able to go through those instruments. And then Medical Devices historically was in that high single-digit growth. I think what's changed there to become now a double-digit grower for us on a very large-size business is that you have historically double-digit growth businesses like Heart Failure, EP, Structural Heart, EDC, I mean, those are continuing. I think what's changed here is that we've taken a strategic look at about 40% of the revenue in Medical Devices, our CRM and Vascular businesses, that we're showing very little growth historically and made investments in them to accelerate their growth rates. I think you saw that in Q4 with CRM. I'd say it's predominantly been an organic play with our leadless platform and technology. On Vascular, it's been a combination of adding inorganically to the business and organic plays to reposition some of the portfolio to higher growth segments. So I think that's really in a nutshell across all these very 4 attractive segments. We've spent the last couple of years strengthening it. And I think you're starting -- you saw that last year, every year, double-digit growth and they've gotten stronger and they've gotten better and they've gotten more growth opportunities with them. So I think that's really the driver there. I mean if you -- I've gotten some of the headlines here about accelerating sales, but not seeing maybe that come through in the -- on the earnings. Again, this is another one where you look at the impact that COVID had on us and the clouding of it. Our Core business grew EPS last year, 40-plus percent. We're forecasting double-digit earnings per share growth this -- at the midpoint, double digit this year. We've got a range around it. I mean there's a lot of volatility in the world, Larry. So I'd say, yes, I don't have to list all those out in terms of macro and geopolitics. But we've proven to be pretty resilient there. And I think the range captures the opportunity that we have on the earnings side. I'd say there's probably more upside than downside in that range, but it's only January. So I think this is a good starting point. Operator: Our next question will come from Joshua Jennings from Cowen. Joshua Jennings: Congratulations on the strong finish to the year. I was hoping to just follow up on your comments there, Robert, on just the earnings power and just the margin expansion trajectory. I know Abbott is a unique story relative to peers because you didn't have the margin headwinds during the pandemic due to the COVID Testing business that you developed internally. But was hoping to just -- thinking about the pre-pandemic margin expansion trajectory of the business in that 30 to 50 basis point range. And I just hope if you could just give us a little bit more color on some of the drivers of market expansion and how your team sees that trajectory going forward in '24 and into the outyears? Robert Ford: Sure. I mean, listen, we hear a lot of companies talk about working here to recover to their operating margin and try to get back to their op margin pre-pandemic. We're in a pretty unique position, I'd say, versus our peers here. Our op margin profile is already at -- is already at the pretty pandemic level. And I think what you saw us do there, Josh, and I talked a little bit about it in my comments, is I think we managed very well strategically the spending piece of it. We accelerated the spending investments when we were at our -- COVID sales were at their peak levels a few years ago. And then we held that spending flat these last couple of years, even though our top line was growing pretty significantly here. So I'd say our biggest opportunity for margin expansion really is on the gross margin line. And that is, if you think about our big 5 activities this year at the company, and we could do all 5 in the same time. But I'd say gross margin is pretty high up there in our priority. We're forecasting a pretty nice step-up in our gross margin profile this year, roughly around 75 basis points. And there's a combination of factors that are helping to drive that margin expansion, that profile expansion. We've got a pretty strong track record here of executing on internal margin improvement program. So every business has got their programs. We manage those on a monthly basis. They all get reported out. So there's a high degree of visibility and inspection to those programs. Some of the headwinds that we faced, I'd say, over the last couple of years are starting to turn a little bit into tailwinds. So whether it's commodity costs, freight and distribution, all those elements seem to be, let's say, right now and given our visibility for the year as we stand here today, turning into tailwinds, so that helps. And then the other part here is just, I'd say, portfolio mix. So as some of the Device businesses continue to outpace and continue to grow those are higher-margin businesses and they provide that mix element in that gross margin expansion. So I think this provides a nice opportunity for us this year. But I expect over time, we'll get back to our pre-pandemic gross margin profile. It's -- for me, it's not a question of if -- it's just a question of when we could target 50, 75, I mean it's never going to be as linear as we always would want, but that kind of expansion for us, I think, really provides a good opportunity to drive earnings growth over the next couple of years. So I'd say that's our biggest opportunity. I think we did a really good job at leveraging spending. And I think you see that in our profiles. So our big opportunity here is gross margin, and we're all over it. Operator: Next question will come from Marie Thibault from BTIG. Marie Thibault: I wanted to ask a little bit more about your Electrophysiology business. That segment has been very strong, and I've been impressed that you've been able to put up that European growth rate in the face of some competitive PSA launches. So I would love to hear what's going on behind the scenes there, how you're getting those growth rates and how you're thinking about the U.S. EP business as we see some PSA launches this year? Robert Ford: Sure. Well, I think we've showed pretty strong robust growth in our EP business throughout all the year, even in the face of actual end market competition, it's been strong across the board. I don't think it's just been a Europe story. U.S. has been strong. China has been very strong for us this year, especially in VBP. I mean there were some price challenges throughout the year with VBP, but the volume we picked up, the market share we picked up more than offset that. So it's really been across the board here. And I think it really is about the strength of the portfolio. So not only having a strong mapping system with our EnSite X, I think is at the core, good mapping disposables and diagnostic disposals also. And I think launching TactiFlex, which is the flexible tip combined with the contact force. We've seen great results, great outcomes, whether it's outcomes to the patient or time of procedure. We've seen that consistently around the world. And then on top of that, I think we've got a great team, really a great team that is very close to our customers. And yes, we were able to see the adoption of new technologies. We've talked about some of the shortcomings that exist in those. So I think it's really the combination of our portfolio and our team that really has kind of sustained the growth as we look to more PFA systems that will be in the market this year in the U.S. Listen, as I've said, I think it's a great technology. I think there are some challenges with some of these first-generation products. I do expect there to be uptake and usage of it. I think what's been interesting in observing the uptake in Europe is that it is first, at least from what we've seen, it is first seen to have broader adoption in the Cryo segment. And then from there, then kind of moving past that, so right now, I think -- I guess, that's my assumption in the U.S. until I see something differently that it will follow a similar pattern. And then the question will just be kind of the speed. But I think the team has done a really good job here on the ground with the technology. Operator: And our next question will come from Robbie Marcus from JPMorgan. Robert Marcus: Robert, maybe I could ask on Libre. This is the most successful medical device. At the conference just a few weeks ago in San Fran, you were talking about really robust growth rates moving forward and targets. Maybe you could help us understand where the growth is going to come from in '24 and beyond and one question I get a lot from investors is we see the IQVIA script data. It's the best we have. It seems like Libre sales or at least prescriptions are flattening out, yet the sales keep growing. How do we think about the discrepancy there? And how big is the Medicare DME business? And the growth we're getting there from basal. Robert Ford: Sure. Strong growth in Q4 under $1.5 billion. U.S. was up 32%. And I'd say still haven't -- team hasn't even had to unleash L3 in the U.S. market in 2023, I think you'll see that now really hit in 2024. But being able to put those kind of growth rates in the U.S. without even having to launch L3 with a competitive new system. I think that speaks a lot about our position, our scale and our brand. The growth is going to come from -- I've been pretty consistent about this, Robbie, and then we've a lot of opportunities here for growth. I'm not going to list them all out here. But I'd say, okay, the basal is a big opportunity. It's a large opportunity for us. And I also think it's multiyear. So I don't think it's just a '24, '25. I think the penetration into the basal segment is definitely 2-plus years easily. And Libre dominates in the pharmacy channel here. I mean you referenced IQVIA, Robbie. 7 out of 10 new scripts for this patient segment is Libre. And I think that's a testament to the strength and the value proposition that the product has, so it's becoming an increasingly strong growth contributor in the U.S. In Japan and in France, where that reimbursement is exclusive to Libre, that's also having a nice contribution on growth. I think right now in the U.S., most of the population is now covered, whether it's in Medicare or whether it's in private -- private commercial Medicare represents about 1/3 of the market. So I think there's great opportunity here. We just got to build the awareness, build the traveling experience with primary care. And that's what we're doing. That's what we have been doing, quite frankly, for some time. So it's a nice opportunity, and it's a great growth opportunity for us, and like I said, easily 2-plus years. I think the other part of the opportunity we have, Robbie, is looking at a segment that really hasn't been -- we haven't been able to access which is that of pump connectivity. I think this represents a great opportunity for us. If you look at basal as being a market expansion opportunity, I think the pump connectivity becomes a market conversion opportunity for us. You got 150,000 to 200,000 I guess, new pumpers every year, and that patient segment has -- we haven't been able to target it, but now that we've got the regulatory clearings and list and connecting to all the different pump manufacturers. I think this is a great opportunity for us. And I think it's good for patients. I think it's going to be good to have a different option especially for this patient population, where insulin delivery and the whole connected system is important, right? Recently, there was an independent third party study. I think this is the first time we've seen an independent head to head study that was published a few weeks ago, showing that Libre 3 is superior to the recently launched product from our competitor across a variety of different metrics, whether it's bias, whether it's MARD. So I look at that and I say, okay, through a pump company, and you're wanting to provide the best solution to users, that's an important aspect, especially for this segment. So I look at the basal, I look at the pump, it's probably good drivers for us in '24, '25, but we've got multiple growth verticals here on this platform like I've said. To your question on IQVIA, I think anybody who kind of follows Pharma and is more attuned to pharma knows that IQVIA doesn't pick up the entire market. So the pharmacy channel in the U.S. gets picked up by IQVIA, but there are other segments in the market that drive adoption that don't get picked up by IQVIA. So maybe that's what you're seeing. Operator: Our next question will come from Danielle Antalffy from UBS. Danielle Antalffy: Congrats on strong end to the year and strong guidance. Just, Robert, since the story seems to be very much about top line growth. I haven't heard you reference the Fab 5, one of my favorite analogies in a long time. So just wanted to -- and maybe I just missed it, but I just wanted to get an update on those 5 products or where you think you guys are in launch trajectories, revenue contribution for each of those products. Do you still think there is a Fab 5? And where -- how they sort of factor into the growth, the 8% to 10% organic growth for 2024? Robert Ford: Yes. Thanks. I don't know if I regret using that terminology or not now, Danielle, but I guess I would say, yes, they are great products, and we didn't think about calling them that because they were going to be a flash in the pan for 1 or 2 years. We look at these as really long-term great growth opportunities that we have that will significantly add to the company over the next few years. And quite frankly, they have added a good amount of growth for us this year, and they'll accelerate. So I think this year -- sorry, in 2023, those 5 products represented about 0.5 point of growth. I expect that to increase in 2024 to about 1 point of growth, total Abbott contribution. So they're definitely stepping up and I'd say some of them, I would call market creating opportunities, tricuspid I would put over there, CardioMEMS over there, generating the clinical data, generating the data for reimbursement, generating referral pathways. We know how to do this, and we all want things to go pretty fast, especially with med tech products, right? But with products like this that have such significant growth opportunities, there's a certain amount of work that you need to do regarding clinical work as it relates to market expansion, development -- and market development. I'd say some of the other products on that list, I'd say, are probably more market conversion, and these are already attractive -- large attractive growth segments that we're targeting with our technologies, Navitor in the TAVR space, Aveir in the CRM side. I mean these are large segments that were coming in, and will have different value propositions. I think Aveir has got a tremendous opportunity. It's a $3 billion global pacing market and the value proposition for Aveir I think is second to none in terms of its proposition to the implanter, to the patient. So -- we -- I expect a lot from Aveir in terms of growth. I expect a lot from Navitor. And we're going to be expanding. So we'll have 2 new line extensions to Navitor this year, Navitor Vision and Navitor Titan. And so we're investing in those areas. And yes, they're still great products. They'll still have the Fab 5 on it. And they continue to increase. They'll grow 50%, at least we're forecasting a 50% growth next year and they will contribute about 1 point of growth to the overall company. So that being said, I will say those are great products. They take a lot of focus, but we still have a lot in the chamber here, too, whether it's Lingo, whether it's our TBI test. We're going to be launching a nutritional drink for GLP-1 users this year. Also, we're doing a lot of work on [indiscernible], which is our PFA solution. We put out some announcements already at the beginning of the year regarding our clinical trials. I talked about biosimilars in EPD, our dual analyzer sensor for Libre, we're developing a new Alinity system to target a segment of the Diagnostic market that we're currently not competing. So yes, Fab 5, a lot of great contributions, but there's a lot in the chamber here, and I think that's really what's going to sustain our growth beyond 2024 and 2025 is just having a robust pipeline. Operator: Our next question will come from Joanne Wuensch from Citibank. Joanne Wuensch: Nice start to the year or nice end to last year, too. So here is a question I have in Nutrition, you've done a great job of sounds like returning to normalcy. I'm wondering if there are pockets that still need to sort of get back on track or whether we should think of this returning to sort of a mid-single-digit segment growth category. Robert Ford: Yes. I think kudos to the team here, we set out a target at the beginning of last year -- this time last year to get to market leadership in our October call, we had already confirmed that and let's say, over the last couple of months, that continues to expand in terms of our position versus the #2. Yes, I mean I think you'll now have the full year effect, Joanne, of having all of that share. And I'd say, given the strength of the portfolio of team and what we went through and the actions that we've taken, I'd actually expect us to actually surpass our pre-recall share. I don't know exactly when, but that will be my expectation on that. You'll have a little bit of a partial year impact there of some pricing that we took across the entire Nutrition portfolio. So I'd say we're probably above that 4% to 6% range that we used to have prepandemic, at least into 2024. As I've said, I think that we can be at the higher end of that range once everything kind of settles down. And I think a big growth driver for us going forward is really going to be the Adult segment, which is growing high-single digits and of which we've got very high market share positions across the globe. And this position with the brand we have, the science that we have, really aligns to, I'd say, a pretty sustainable demographic trend that we're seeing, which is just an aging population that is focusing on Healthcare and on Nutrition. So I'd say that's probably an opportunity for us to maybe break out of that higher end 6% range going forward. But I think right now, you'll see the impact of the share in the U.S., some partial year impact of the price allow us to be above that 6% range. And then as we move into next year, what's going to be the impact of some of the launches that we have planned for the Adult segment and what is that going to do for us? Operator: And our next question will come from Vijay Kumar with Evercore ISI. Vijay Kumar: Robert, congratulations on a nice Q4 and a solid guide. I guess my one question is on M&A. Looking at the balance sheet phenomenal position, you at least have a minimum of $20 billion of firepower, Abbott hasn't done any large deals in the last few years. So my question is, how do you see the opportunity for larger-sized deals, what is Abbott's appetite for a larger-sized, more meaningful transaction? Robert Ford: Well, yes, we've got a strong balance sheet and provides us a lot of flexibility on our capital allocation plan. On the M&A side, Vijay, listen, I think it starts off with -- we've got great pipeline. We have great organic opportunities here to be able to kind of drive top-tier sustainable growth. So that ends up putting -- allowing us to be in a selective position here where we're not trying to use M&A as a way to kind of bulk up our top line or to cover any kind of top line gaps that might be there. So that allows us to be sustainable -- allows us to be more selective. And if there are opportunities that fit strategically and can generate an attractive return, then like you said, you've done the math, we've got the flexibility and the firepower to do that. But I'm not looking to acquire businesses simply to make the top line look good. Profitability matters. Earnings matter. And when you get into these larger size deals, you have to have very strong conviction and understanding of that to be able to generate those returns and not just look at it as a top line play. I think they're harder nowadays. You look at what we did with St. Jude, and we have looked back at the deal model that we put together spot on in terms of all aspects there of how we thought this business would impact the company. So I'm not discarding anything like that. I'm just providing you the framework that says they're harder to make work if you want to look beyond just top line and you want to look at ROICs and all the right financial metrics here in terms of how you deploy capital. And -- but I don't feel that we need to do anything like that to cover a top line kind of gap. If we ever did something like that, it was because it would be strategic and looking at the company kind of long term and not trying to feel a top line gap. Michael Comilla: Operator, we'll take 1 more question, please. Operator: And our last question will come from Travis Steed from BofA Securities. Travis Steed: So some of the insurance companies are getting surprised by higher procedure utilization. Some of the tech companies are kind of calling out above-normal growth. So curious, Robert, if you look at your net device markets, are there areas where you think you're seeing some kind of above elevated catch-up still coming through? Or do you think this is kind of more normalized growth rates that you're seeing in 2024? Just kind of curious on some of your thoughts on the overall market. Robert Ford: Yes. I don't think that we're seeing kind of any kind of catch-up or pent-up or anything like that. I think what you're seeing here is more -- at least I can speak for our portfolio. I just think you're seeing more adoption of the technologies, right? So I think there was some disruption. We've talked about it in some parts of some procedures that require a little bit more preop planning or imaging before and imaging after. I mean I think those -- that combined with the labor shortages that occurred 2022. I think that, that probably slowed a few of them down, but I don't think that there was a bolus returning as a result of that. I just think we got back into a normal cadence here of being able to see procedures increasing. We saw that in structural heart procedures, saw that in CRM and EP procedures, not just here in the U.S. but around the world too. So seeing that also in routine diagnostic testing, Travis, a lot of our -- a good portion of the diagnostic business, our Core Lab business is actually in the hospital. So we also get to see that, too. And I didn't see a bolus of testing coming back. So we try and triangulate this. I just see this as procedures are returning back to normal. And because the -- because these technologies that are being developed and launched into the market are so -- it got such great opportunity to improve care, improve life of patients. I just think you're seeing the return to the adoption and the adoption curve. Some are faster than others, just given, I think, the market and market positions, et cetera. But I wouldn't account for it to be some sort of pent-up piece over here. Okay. Well, I'll wrap up here. And like I said in the beginning, very successful year 2023, in many ways, it sort of represented this transition year regarding the coming down of COVID. I think we did a really good job at managing the scale up and the scale down, a lot of healthcare companies actually participated and -- in trying to solve the COVID problem and I think we did a good job here at being able to scale up and scale down. Our performance here is now transitioned from being driven by COVID testing to once again being driven by a broad-based strength across the entire company. We delivered double-digit organic sales growth on every base business every quarter. And we're clearly entering 2024 with a lot of momentum. The pipeline we talked a little bit about it, continues to be highly productive. And I'm forecasting here top-tier growth in 2024. And as you look at our range on the EPS guide, like I said, there's probably more upside to that than downside. But we're in January. So we're off to a good start and looking forward to executing this year. Michael Comilla: Okay. Thank you, operator, and thank you all for your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott Investor Relations website at abbottinvestor.com. Thank you for joining us today. Operator: Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.	[ { "speaker": "Operator", "text": "Good morning, and thank you for standing by. Welcome to Abbott's Fourth Quarter 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant's questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission." }, { "speaker": "Michael Comilla", "text": "Good morning, and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; Bob Funck, Executive Vice President, Finance; and Phil Boudreau, Senior Vice President, Finance and Chief Financial Officer." }, { "speaker": "Robert Ford", "text": "Thanks, Mike. Good morning, everyone, and thank you for joining us. Today, I'll discuss our 2023 results as well as our outlook for this year. But before I do that, I think it's important that we take a moment to look back at the challenging environment that we all faced over the last few years and how our actions during that time have positioned the company to be in an even stronger position today than before the start of the pandemic." }, { "speaker": "Philip Boudreau", "text": "Thanks, Robert. As Mike mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis. Turning to our fourth quarter results, sales increased 2.1% on an organic basis, which, as expected, reflects the impact of the year-over-year decline in COVID testing-related sales. Excluding COVID testing sales, underlying base business organic sales growth was 11% in the quarter." }, { "speaker": "Operator", "text": "[Operator Instructions] And our first question will come from Larry Biegelsen from Wells Fargo." }, { "speaker": "Larry Biegelsen", "text": "Congrats on a nice end to the year here. So Robert, pre-COVID, Abbott was growing 7% to 8% organically as you mentioned, you're guiding to 8% to 10% today for 2024 off of a higher revenue base. What has changed? And what is giving you the confidence to guide that high to start the year? Maybe talk about the key assumptions, and I'll leave it there for my one question." }, { "speaker": "Robert Ford", "text": "Thanks, Larry. I mean, as I said in my prepared remarks and quite frankly, as we talked about throughout most of 2023, the impact of the strategy we took to take some of the COVID revenue and reinvest in the base business. I think ultimately, that's really the factor here. I mean, we operate in these 4 business segments and their underlying attractiveness still is very sustainable." }, { "speaker": "Operator", "text": "Our next question will come from Joshua Jennings from Cowen." }, { "speaker": "Joshua Jennings", "text": "Congratulations on the strong finish to the year. I was hoping to just follow up on your comments there, Robert, on just the earnings power and just the margin expansion trajectory. I know Abbott is a unique story relative to peers because you didn't have the margin headwinds during the pandemic due to the COVID Testing business that you developed internally. But was hoping to just -- thinking about the pre-pandemic margin expansion trajectory of the business in that 30 to 50 basis point range. And I just hope if you could just give us a little bit more color on some of the drivers of market expansion and how your team sees that trajectory going forward in '24 and into the outyears?" }, { "speaker": "Robert Ford", "text": "Sure. I mean, listen, we hear a lot of companies talk about working here to recover to their operating margin and try to get back to their op margin pre-pandemic. We're in a pretty unique position, I'd say, versus our peers here. Our op margin profile is already at -- is already at the pretty pandemic level. And I think what you saw us do there, Josh, and I talked a little bit about it in my comments, is I think we managed very well strategically the spending piece of it. We accelerated the spending investments when we were at our -- COVID sales were at their peak levels a few years ago. And then we held that spending flat these last couple of years, even though our top line was growing pretty significantly here." }, { "speaker": "Operator", "text": "Next question will come from Marie Thibault from BTIG." }, { "speaker": "Marie Thibault", "text": "I wanted to ask a little bit more about your Electrophysiology business. That segment has been very strong, and I've been impressed that you've been able to put up that European growth rate in the face of some competitive PSA launches. So I would love to hear what's going on behind the scenes there, how you're getting those growth rates and how you're thinking about the U.S. EP business as we see some PSA launches this year?" }, { "speaker": "Robert Ford", "text": "Sure. Well, I think we've showed pretty strong robust growth in our EP business throughout all the year, even in the face of actual end market competition, it's been strong across the board. I don't think it's just been a Europe story. U.S. has been strong. China has been very strong for us this year, especially in VBP. I mean there were some price challenges throughout the year with VBP, but the volume we picked up, the market share we picked up more than offset that. So it's really been across the board here. And I think it really is about the strength of the portfolio. So not only having a strong mapping system with our EnSite X, I think is at the core, good mapping disposables and diagnostic disposals also. And I think launching TactiFlex, which is the flexible tip combined with the contact force. We've seen great results, great outcomes, whether it's outcomes to the patient or time of procedure. We've seen that consistently around the world." }, { "speaker": "Operator", "text": "And our next question will come from Robbie Marcus from JPMorgan." }, { "speaker": "Robert Marcus", "text": "Robert, maybe I could ask on Libre. This is the most successful medical device. At the conference just a few weeks ago in San Fran, you were talking about really robust growth rates moving forward and targets. Maybe you could help us understand where the growth is going to come from in '24 and beyond and one question I get a lot from investors is we see the IQVIA script data. It's the best we have. It seems like Libre sales or at least prescriptions are flattening out, yet the sales keep growing. How do we think about the discrepancy there? And how big is the Medicare DME business? And the growth we're getting there from basal." }, { "speaker": "Robert Ford", "text": "Sure. Strong growth in Q4 under $1.5 billion. U.S. was up 32%. And I'd say still haven't -- team hasn't even had to unleash L3 in the U.S. market in 2023, I think you'll see that now really hit in 2024. But being able to put those kind of growth rates in the U.S. without even having to launch L3 with a competitive new system. I think that speaks a lot about our position, our scale and our brand." }, { "speaker": "Operator", "text": "Our next question will come from Danielle Antalffy from UBS." }, { "speaker": "Danielle Antalffy", "text": "Congrats on strong end to the year and strong guidance. Just, Robert, since the story seems to be very much about top line growth. I haven't heard you reference the Fab 5, one of my favorite analogies in a long time. So just wanted to -- and maybe I just missed it, but I just wanted to get an update on those 5 products or where you think you guys are in launch trajectories, revenue contribution for each of those products. Do you still think there is a Fab 5? And where -- how they sort of factor into the growth, the 8% to 10% organic growth for 2024?" }, { "speaker": "Robert Ford", "text": "Yes. Thanks. I don't know if I regret using that terminology or not now, Danielle, but I guess I would say, yes, they are great products, and we didn't think about calling them that because they were going to be a flash in the pan for 1 or 2 years. We look at these as really long-term great growth opportunities that we have that will significantly add to the company over the next few years. And quite frankly, they have added a good amount of growth for us this year, and they'll accelerate." }, { "speaker": "Operator", "text": "Our next question will come from Joanne Wuensch from Citibank." }, { "speaker": "Joanne Wuensch", "text": "Nice start to the year or nice end to last year, too. So here is a question I have in Nutrition, you've done a great job of sounds like returning to normalcy. I'm wondering if there are pockets that still need to sort of get back on track or whether we should think of this returning to sort of a mid-single-digit segment growth category." }, { "speaker": "Robert Ford", "text": "Yes. I think kudos to the team here, we set out a target at the beginning of last year -- this time last year to get to market leadership in our October call, we had already confirmed that and let's say, over the last couple of months, that continues to expand in terms of our position versus the #2. Yes, I mean I think you'll now have the full year effect, Joanne, of having all of that share. And I'd say, given the strength of the portfolio of team and what we went through and the actions that we've taken, I'd actually expect us to actually surpass our pre-recall share. I don't know exactly when, but that will be my expectation on that." }, { "speaker": "Operator", "text": "And our next question will come from Vijay Kumar with Evercore ISI." }, { "speaker": "Vijay Kumar", "text": "Robert, congratulations on a nice Q4 and a solid guide. I guess my one question is on M&A. Looking at the balance sheet phenomenal position, you at least have a minimum of $20 billion of firepower, Abbott hasn't done any large deals in the last few years. So my question is, how do you see the opportunity for larger-sized deals, what is Abbott's appetite for a larger-sized, more meaningful transaction?" }, { "speaker": "Robert Ford", "text": "Well, yes, we've got a strong balance sheet and provides us a lot of flexibility on our capital allocation plan. On the M&A side, Vijay, listen, I think it starts off with -- we've got great pipeline. We have great organic opportunities here to be able to kind of drive top-tier sustainable growth. So that ends up putting -- allowing us to be in a selective position here where we're not trying to use M&A as a way to kind of bulk up our top line or to cover any kind of top line gaps that might be there. So that allows us to be sustainable -- allows us to be more selective. And if there are opportunities that fit strategically and can generate an attractive return, then like you said, you've done the math, we've got the flexibility and the firepower to do that. But I'm not looking to acquire businesses simply to make the top line look good." }, { "speaker": "Michael Comilla", "text": "Operator, we'll take 1 more question, please." }, { "speaker": "Operator", "text": "And our last question will come from Travis Steed from BofA Securities." }, { "speaker": "Travis Steed", "text": "So some of the insurance companies are getting surprised by higher procedure utilization. Some of the tech companies are kind of calling out above-normal growth. So curious, Robert, if you look at your net device markets, are there areas where you think you're seeing some kind of above elevated catch-up still coming through? Or do you think this is kind of more normalized growth rates that you're seeing in 2024? Just kind of curious on some of your thoughts on the overall market." }, { "speaker": "Robert Ford", "text": "Yes. I don't think that we're seeing kind of any kind of catch-up or pent-up or anything like that. I think what you're seeing here is more -- at least I can speak for our portfolio. I just think you're seeing more adoption of the technologies, right? So I think there was some disruption. We've talked about it in some parts of some procedures that require a little bit more preop planning or imaging before and imaging after. I mean I think those -- that combined with the labor shortages that occurred 2022. I think that, that probably slowed a few of them down, but I don't think that there was a bolus returning as a result of that." }, { "speaker": "Michael Comilla", "text": "Okay. Thank you, operator, and thank you all for your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott Investor Relations website at abbottinvestor.com. Thank you for joining us today." }, { "speaker": "Operator", "text": "Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day." } ]	Abbott Laboratories	247,483
ABT	3	2,023	2023-10-17 23:00:00	Operator: Good morning, and thank you for standing by. Welcome to Abbott's Third Quarter 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant's questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission. I would now like to introduce Mr. Mike Comilla, Vice President, Investor Relations. Michael Comilla: Good morning, and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; Bob Funck, Executive Vice President Finance, and Phil Boudreau, Chief Financial Officer. Robert and Phil will provide opening remarks. Following their comments we'll take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2023. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A, Risk Factors, to our annual report on Form 10-K for the year ended December 31, 2022. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Note that Abbott has not provided the GAAP financial measure for organic sales growth on a forward-looking basis because the company is unable to predict future changes in foreign exchange rates, which could impact reported sales growth. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which is defined in the quarterly results press release issued earlier today. With that, I will now turn the call over to Robert. Robert Ford: Thanks, Mike. Good morning, everyone, and thank you for joining us. Today, we reported third quarter adjusted earnings per share of $1.14. Based on our performance through the first 9 months of the year, we raised the midpoint of our full year adjusted earnings per share guidance and narrowed the range to $4.42 to $4.46. Organic sales growth on the base business, which excludes COVID testing, increased double digits for the third consecutive quarter and was led by double-digit growth in all 4 of our major businesses. This acceleration in sales growth is a result of our strong position in attractive growth markets. In conjunction with the additional investments we made across the company during the pandemic. In addition to the strong top line performance, we continue to deliver accelerating earnings power on our base business, and remain on track to deliver on the financial commitments we set at the beginning of the year. With a positive growth outlook for the businesses and the momentum we're building across the portfolio, we are well positioned for a strong finish to the year and heading into 2024. I will now review our performance in more detail before turning the call over to Phil. I'll start with Nutrition, where sales increased 18% in the quarter. In Pediatric Nutrition, growth of 25% was led by continued market share capture in the U.S. infant formula business, where we have now reclaimed the leadership position. Internationally, we continue to deliver well-balanced growth coming from both infant formula products and our PediaSure taller brand. In Adult Nutrition, growth of 12% was driven by strong demand for Abbott's market-leading Ensure and Glucerna brands across the U.S. and international markets. Turning to Established Pharmaceuticals. Sales increased 11% in the quarter. This strong performance was broad-based and led by double-digit growth in several markets and therapeutic areas, including cardiometabolic, women's health and CNS pain management. In September, we announced an agreement with global biotech leader, mAb science to commercialize several biosimilars in emerging markets. This collaboration will help introduce cutting-edge medicines in the areas of oncology, women's health and respiratory diseases, the people in countries that have historically lacked access to these treatment options. Moving to Diagnostics. Excluding COVID testing, organic sales grew 10%, led by Core Lab Diagnostics, where sales grew double digits, driven by above-market performance in the U.S. and internationally. Growth was driven by a continued increase in global demand for routine diagnostic testing and a strong recovery of our blood transfusion testing business following a period of lower plasma donations that occurred during the COVID-19 pandemic. In Rapid Diagnostics, double-digit organic sales growth on the base business benefited from increased demand for respiratory tests in anticipation of an earlier-than-normal start to the flu season in the Northern Hemisphere. And I'll wrap up with Medical Devices, where sales grew nearly 15%, including double-digit growth in both the U.S. and internationally. In Diabetes Care, FreeStyle Libre sales were $1.4 billion in the quarter, and grew 28%. The global Libre user base now exceeds 5 million people with nearly 2 million of those in the U.S. where the Libre user base has nearly doubled in the last 2 years. A recent analysis of our U.S. user base showed that a growing number of Libre users are using Libre in combination with GLP-1 medications as part of a companion therapy approach for managing their diabetes. On average, those using both Libre and GLP-1 exhibited a higher rate of use for both products, wearing Libre sensors more often and taking GLP-1 medication more frequently compared to other users. This increase in use or better compliance is a positive sign that these users are taking an even more active role in managing their diabetes. And while we traditionally think of therapy choices as having to compete against one another, this is a good example of a complementary relationship between 2 products that both help optimize the treatment of diabetes. In cardiovascular devices, sales grew 10% overall in the quarter, led by double-digit growth in Electrophysiology and Structural Heart. In Electrophysiology, sales growth of 17% was driven by double-digit growth across all major international geographic regions and high teens growth of ablation catheters in the U.S. In Structural Heart, performance was driven by double-digit growth of MitraClip and strong growth from several recently launched new products, most notably Navitor, our latest generation TAVR valve. In Rhythm Management, growth was led by double-digit growth in pacemaker sales led by Aveir, our recently launched leadless pacemaker that can be used for both single chamber and dual-chamber pacing. And lastly, in Neuromodulation, sales grew 19%, driven by the recent launch of Eterna, our first rechargeable neurostimulation device for pain management which targets a large segment of the market where we previously did not compete. So in summary, this was a very strong quarter. With all 4 major businesses delivering double-digit organic sales growth, excluding COVID testing-related sales. Growth rates in the base business have improved every quarter this year on both the top and bottom lines. And the momentum we are building positions us well for a strong finish to the year and heading into 2024. I'll now turn over the call to Phil. Phil? Philip Boudreau: Thanks, Robert. As Mike mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis. Turning to our third quarter results. Sales decreased 1.5% on an organic basis due to as expected a year-over-year decline in COVID testing-related sales. Excluded COVID-tested sales, underlying base business organic sales growth was 13.8% in the quarter. Foreign exchange had an unfavorable year-over-year impact of 1.4% on third quarter sales. During the quarter, we saw the U.S. dollar strengthen somewhat versus several currencies, which resulted in a slightly more unfavorable impact on sales compared to exchange rates at the time of our earnings call in July. Regarding other aspects of the P&L, the adjusted gross margin ratio was 55% of sales. On a year-to-date basis, our adjusted gross margin ratio was 55.4% of sales which is below our original full year guidance of approximately 56% that we provided back in January. The difference is primarily due to lower gross margins on COVID tests due to lower volumes and price compared to our original forecast assumptions and the impact of higher inventory obsolescence as a result of maintaining higher inventory levels throughout the pandemic to help ensure product supply during a time when global supply chains were less predictable. As the global supply chain environment continues to improve, we're adjusting our inventory levels to align with that trend. Adjusted R&D was 6.2% of sales and adjusted SG&A was 26.4% of sales in the third quarter. Lastly, our third quarter adjusted tax rate was 14%. Turning to our 2023 outlook. For the full year, we now forecast ongoing earnings per share of $4.42 to $4.46, which is comprised of our year-to-date results plus ongoing earnings per share guidance of $1.17 to $1.21 for the fourth quarter. For the fourth quarter, we forecast total underlying base business organic sales growth, excluding COVID testing sales to be in the low double digits and exchange to have an unfavorable impact of a little more than 1% on fourth quarter reported sales. With that, we'll now open the call for questions. Operator: [Operator Instructions] And our first question will come from Josh Jennings from TD Cowen. Joshua Jennings: Congratulations on another strong quarter. Robert, organic revenue growth nearly touched the mid-teens range for the core business in 3Q, and realize we've recently talked about the sustainability of the momentum generated this year. But I think investors would like to hear about your confidence level in the core business, delivering high single-digit organic revenue growth and solid margin expansion in 2024 off the 2023 comp that's only retire over the course of this year. Robert Ford: Sure, Josh. I mean the confidence level is very high, especially with this kind of momentum that we're seeing. Clearly, there's going to be some macro environment challenges as companies head into 2024. But I'd say our portfolio has really been built to withstand this type of environment, and we tend to do pretty well in this type of environment. And as I said in my comments also, we've further strengthened the portfolio and the position that we had with the investments that we made during the pandemic, and that's helped lead to a step up here in our growth rate this year. The base business has grown double digits, 3 quarters in a row, and I expect to be doing that again in Q4. And if you look at the EPS contribution, as I said in the comments, it's really having a positive impact and a lot of power coming through on the base business as we continue to grow that, and it's sequentially gotten better every quarter. So we're forecasting other step up in the fourth quarter. So if you look at that EPS for the fourth quarter and put it all together, the base business here is going to contribute to about $4.10 of EPS and we've raised that twice this year. So there's clearly momentum that's building here both on the top and the bottom lines. And I believe that momentum is going to sustain and continue as we go into 2024. I think it starts, Josh, always with the top line. And if you can drive a higher top line growth, I think that's really the building block. And if you look at our -- let's say, our pre-pandemic kind of growth formula here, we were growing around 7%. So I expect that to accelerate in next year without a doubt. And that's off a much larger sales base than when we were pre-pandemic. And like I said, that's based off the momentum that we're seeing, and increased contributions that we'll be seeing from a lot of our growth drivers that I'm sure we'll be talking about throughout the call. The Street models double-digit EPS on the base business right now, and I feel real good about our ability to deliver that. Obviously, a lot of focus is going to come from gross margin and gross margin expansion. And I think we've got momentum and tailwind here as we're going to go into 2024. So when we go to our call in January, I'll be able to kind of quantify that and give you better ranges on all of that. But I'd say it's really about reiterating and reinforcing our growth model, our growth framework, which is high single-digit revenue growth, double-digit bottom line growth, margin expansion, strong free cash flow generation and a balanced capital allocation strategy. So again, I feel very good about sustaining this momentum going into next year. Operator: And our next question will come from Larry Biegelsen from JPMorgan (sic) [ Well Fargo ]. Larry Biegelsen: Just to be clear, it's Wells Fargo. So Robert, China has been in the news a lot. Love to hear your thoughts on how you're thinking about China, big picture. How is Q3? And what are you expecting from the VBP impact in the EP business and from the anticorruption initiatives we've been hearing about there. Robert Ford: Sure. Well, China has been and will continue to be an important market for us. As it relates to, I think, this theme on this anticorruption discussion points there. Listen, we've been operating in China for 35 years. We follow our compliance standards follow all applicable laws. I didn't see any kind of meaningful impact in Q3. Larry, I was actually there last week and had a chance to meet with the teams and go through the businesses and I didn't really see any meaningful impact. Devices grew 20% in the quarter. So I think that's -- we'll just have to keep on monitoring that situation, but I didn't see any real impact in the quarter. As it relates to VBP, listen, this is a term that's used for China, but I think it's just a common theme that we see across the world with governments trying to provide the care to their populations and manage their budgets. So I don't think this is anything completely extraordinary than what we've seen. There was a VBP on the EP business. That process started earlier this year in April, I'd say about 80% of the market has now been implemented and expect the remainder of that to be implemented by year-end. Yes, there's a little bit of a price impact that we felt. But net-net, it was a positive for our EP business in China because we're able to pick up share and pick up volume. So I think that's the status there. I think as announced a VBP on diagnostics. That's not unexpected either. I think the process will start sometime in the first half of next year. Right now, from the list of products that we've seen, it involves about 20% of our Core Lab business. And then as we've seen with businesses that have capital and service tied to it, the rollout is a little bit different from the rollout that you see on what I would call more pure consumables. So it's more of a kind of phased approach like we saw in EP. Each province will go and do their implementation. So it will take a few quarters to implement here. But like I said, I don't think these are different than what we see in other markets in terms of how we manage the balance of our technology and our access. But I'd say China is still a big opportunity of growth, not just in Devices and Diagnostics, but in Adult Nutrition in our Pharma business. So it's an important market for us, and the team is doing a really good job at operating there. Operator: Our next question will come from Robbie Marcus from JPMorgan. Robert Marcus: Congrats on a really nice quarter. Robert, I want to ask you the overwhelming topic of discussion in the past few months has been GLP-1s and the possible impact on the future med tech market growth. You talked about it with respect to diabetes, but I'd love to just get your thoughts on a broader basis on GLP-1s? And do you see it as a negative, neutral or positive to your different end markets you participate in over the next 5, 10 years? Robert Ford: Sure, Robbie. Obviously, this has been a hot topic over the last couple of months. And let me just start off by saying with 20-plus years of experience in diabetes. I think every time new therapies, new technologies come to address this disease in this population, I think it's all great. And these are great new medications that are going to have very positive effect on the treatment of diabetes. There's obviously a lot of investor -- thanks to Robbie, about the potential impact of these drugs and what's going to happen to different industries and different companies. I feel that the investor angst is it's probably driven more by those that have a little bit less domain knowledge in Medtech, I would say, seem to be moving a lot with like headlines or any new study or publishment there or publishing of any kind of study headlines, et cetera. So we've seen valuations in Medtech significantly be impacted by the fear, like you said, about the reduction in these market sizes, whether it's going to happen in the next few years or it's going to happen in decades from now. And I guess my view there is that I understand that new technologies will naturally cause us to think differently about the future. And I think early on, those initial thoughts about the future are generally impacted more by motion than facts and data. And I think that's what you're seeing right now today as it relates to GLP-1 and Medtech markets. I think there's a -- if you think about it long term here on the bigger picture, I think there's a fundamental mismatch here on revenue and revenue forecast that we're seeing versus potential impact to patient and patient TAMs. I've looked at the consensus forecast for this class of drugs looking out 4 to 5 years here, they seem to be in that $60 billion to $70 billion range, which is pretty significant as a category. It's probably one of the largest categories, I think we've ever seen. But then if you take the pricing, at least the public pricing that we've seen, whether it's the U.S. pricing or the lower international pricing, and you convert that into user bases and back into the numbers, I mean, we're looking at 10 million to 15 million people in the next 4 to 5 years that will be on this drug. That's a real small fraction of the size of these medical device markets that we're talking about, right? There's about 0.5 billion people with diabetes, maybe another 0.5 billion people that got cardiovascular disease and maybe there's an overlap of people with diabetes and cardiovascular, but still, you're talking tens of millions of people with maybe 1 billion or under 1 billion people. So I think there's a little bit of a mismatch there in terms of how we're seeing this impact equating to revenue and the potential growth of the revenue with the patient pool TAM. So that's one big area, I would say. I think there's another question here of just about the question of coverage. And obviously, these drugs have great outcomes and great outcomes impact. And then the question is, what's the appropriate cost to achieve that outcome. I've seen a lot of discussions and new stories about payers and what the payers are going to do and insurance companies and PBMs and pharmacy chains. Those aren't payers. The real payers are the employers and the companies that pay for these. And I think as you look at companies and higher medical expense costs, inflation. I think that's going to be a factor as we go into next year also. So I think that's -- those are, I'd say, the bigger aspect here on the long term. On the short term, though, as you mentioned, on the diabetes side, actually seen as a positive impact on the diabetes business. As I mentioned in the opening remarks, we completed an analysis recently that showed a significant number of Libre users were on these drugs. And the data showed that those that are using both products are actually using more of those both products when you compare them to other users. They tend to wear Libre sensors more often, and they tend to take their GLP-1 medication more frequently. And I think that's a great thing, because higher therapy compliance ultimately is going to improve health outcomes. And that's not different, Robbie, this complementary relationship, Medtech very well. It's not uncommon to see that. Medical Device procedures you have patients that are taking medications either before and after their procedure. And you see it in diabetes, like I said, I've seen this in my 20 years, where it's very common to use multiple tools in combination, whether it's insulin and oral meds, whether it was fast-acting insulin and long-acting insulin. And so I think more treatment options here is a good thing for patients. And I think these drugs are a real nice addition to the mix. I think as you go forward, though, I think there are some -- but definitely some other areas of interest related to this topic that we're exploring. I think one thing that is clear to us as we've gone through this process is to really use the data a little bit more to our advantage. Since the launch of Libre, we've collected the de-identified data from the user base. I'd probably go as far as to say that we probably have the most robust glucose data set in the world. I think the last time I looked at it, we've got close to 50 billion hours of glucose monitoring data. So I think Libre is a perfect platform here to actually evaluate the effectiveness outside of a more controlled trial look at it more in a real-world setting. And there's just so many different ways we can look at the data, look at how the drugs work over time, does 1 drug work better than the other. What kind of job they do in terms of a profile in terms time and range. So again, I think we can do this on a population level. We can do this on an individual level. So I think that's going to be, I'd say, an important thing going forward for us here is to use that data set to be able to kind of explore that. And I'd just finally say with the portfolio -- with a diverse portfolio that Abbott has, where we look at health care, across the full spectrum from nutrition to diagnostics to then treatment. I think that this then provides the company with an opportunity to further explore where we can bring value to patients that are using these drugs. And I think it's common knowledge here that there are side effects, as there are side effects with most drugs. And one of those being increased loss of muscle mass. I'd say, we have experience here in the area of nutrition, and losing that amount of muscle mass as a ratio is -- it can be problematic. So we've got an opportunity here to be able to develop, whether it's a nutritional product or other products that can help address one of these side effects, which is muscle mass loss. So there's good opportunities for there -- for us also in the portfolio. So bottom line, I think it's fantastic science. It's fantastic biology. This is great for public health in the short term. I think the concerns are overblown. And I think in the long term, if we want to look out 15, 20 years, I mean, I think it's -- I think there's still a lot of question marks there, given some of the facts that I've raised, so. Robert Marcus: Really appreciate that, Robert. Maybe if I could sneak 1 more in on CGM, something that I think has really flown under the radar with the GLP-1, noise is you've recently gotten type 2 basal coverage in France. You have it in the U.S. and Japan as well. Just thinking about future opportunities in countries to approve type 2 basal, which could materially expand your reimbursed coverage opportunity around the world. How should we think about that? And how do you size that opportunity over the next few years for Abbott. Robert Ford: Sure. Well, we had a really good quarter, up 28%. International was up 26%. U.S., we continue to do pretty well in the plus 30% range there. And to your point, we saw a nice impact from that basal coverage, especially in the international markets, right? And it's nice to see the international growth accelerate again. I remember last year, the question mark about our international growth and a lot of our focus was on our upgrade strategy for Libre 3. So getting the sales team now reworking the demand generation. And a lot of that growth is, as you pointed out, we're seeing nice growth from that basal segment, especially in France and Japan, where we got reimbursement -- differentiated reimbursement, right? We've added about 150,000. I think that was the day that we reviewed over the last 12 months, of basal users onto the user base. And if you look at that last 12 months, a larger portion of that $150,000 was happening towards the second half of that. So there's definitely acceleration ongoing there. I was actually surprised to see the speed at the U.S. coverage. So right now, about, I'd say, of commercial payers have now adopted some level of basal coverage. So that's very positive. So both those 3 markets, U.S., Japan and France are doing very well, in terms of basal and basal coverage and providing that kind of tailwind of growth. And again, there's a lot of good data to be able to support while that it benefits these types of patients also and saw that in the data that we presented with the French claims data. So I'd say, yes, it's a great opportunity. It's not something that's happened. We've been focusing on this, generating the clinical evidence, building the sales forces to be able to reach a primary care team, investing in direct-to-consumer advertising where we're allowed to do that. And that's a key growth driver here of this target, we have to reach $10 billion by 2028. I'd say that's an important growth driver. It's not the only growth driver, but it's an important growth driver, and we've got a lot of good momentum there, Robbie. Operator: Our next question will come from Danielle Antalffy from UBS. Danielle Antalffy: Robert and Phil just wanted to follow up on Josh's question earlier, and I appreciate you're not going to give 2024 guidance. But just at a high level, there's a few puts and takes I can think of, Robert, I appreciate the momentum in the underlying business, but you will have competition coming on the EP side, which has been a strong double-digit grower looking at MitraClip and a quarter of double-digit growth, that was great to see, like how sustainable is that? And comps are just inherently potentially a little bit tougher. So if you could maybe walk through in a little bit more detail. Some of the puts and takes at a high level that we should consider nutrition, tough comps there, should consider as we think about 2024, that would be awesome. Robert Ford: Yes. I mean you're -- not sure we'll do a planned review here. But I mean there's a lot there. I'll try and touch on some of the topics there. I mean I'd just go back to -- we have a growth model and a growth forecast that I'd say, during the last 2 years has been masked a little bit by COVID and the ups and downs of COVID testing, but being able to sustain high single-digit growth, double-digit growth in the bottom line that's what we've been doing this year, a pretty significant double-digit bottom line because we forward invested back in 2022. So if you look at our top line growth, right now, we haven't had to put as much SG&A to build but to kind of support that growth this year. So -- but the growth model of that high single-digit growth and double-digit bottom line growth is happening throughout this pandemic with COVID testing. And as the COVID testing numbers come down, you get to see that a little bit more now. So I feel good about delivering that in 2024. Yes, there's a macro environment that's out there. But as it relates to all the elements that are directly in our control, I feel very good about it. Your comment on Electrophysiology, yes, we'll have competition. We have competition today. We grew -- in Europe, we grew mid-teens and we've been growing mid-teens for the first 9 months with the competition that you referred to. So we feel good about our position. there. On MitraClip, we've seen double-digit growth in MitraClip for the last 3 quarters, big driver of that has been international and growth international, and we're starting to see a little bit now of a rebound in U.S. U.S. was up 5% in MitraClip this quarter. And again, that's sequentially better from the previous quarter and sequentially better from the one before that. So -- and we've had competition in that space also we've had competition internationally and we've had competition in the U.S., too. So again, you referred to comps, see yes, there's -- listen, I'm not going to deny there's some comps. Obviously, probably the biggest one there is nutrition this year. But every year, there's comps. Every year, a company has got comps. And I'd say if you remove some of those comps from our Q3 would still be growing double digits also. So again, I feel good about our high single-digit growth forecast. I feel good about our double-digit EPS growth. We've got a lot to work with. Yes, there's challenges, but we have a lot to work with. We've got a great pipeline of products that we're going to be -- that we've not only just launched, but that we're going to be launching also. So yes, there's always puts and takes, Danielle. But I think in the aggregate, if you look at the aggregate of our positions in these markets, I think we're in a real strong position. Operator: Our next question will come from Joanne Wuensch from Citibank. Joanne Wuensch: Nutrition, your comments, if I remember them correctly, are that you are back in a leadership position in the Nutrition business. Are you back at 100%? Are you humming along? Do you feel like there's anything that's lagging or maybe ahead of the game? And I'm going to squeeze in your current thoughts on M&A, particularly given a lot of pullbacks in valuations. Robert Ford: Sure. We never believe that we were going to recover all the share in a quarter, right? So the way this market works and the way we've kind of modeled it out is that we'll showing month-by-month kind of sequential increases in our market share. So if you look at the volume right now is measured by a third party, we've now crossed over that leadership position in the month of September. We're not 100% back to where we were before the recall, but I always said that we would be there towards the end of the year. So we're probably at about 90% back to that initial -- to that pre-recall market share. But it's nice to see across all the segments here, real nice sustained growth in our market share. And even if when you look at different segments of the IMS. So if you look at the channels, WIC and non-WIC, WIC we've been a market leader since the beginning of the year, and that was a result of our strategy in the second half of last year to stay focused on that underserved population. And the non-WIC channel, we're seeing nice continuous month-by-month gains of market share. And I think the team is doing a real good job. I think we can all see that the shelves are pretty well replenished right now. And now it's just about continuing to execute on our demand generation. And I feel good about what the team is doing and recovering that market share. So that's gone pretty much to plan there. And then what was your other question? Joanne Wuensch: M&A, particularly given pullbacks on valuations? Robert Ford: Yes. Well, listen, we've completed 3 transactions over the last 6 months. We acquired CSI and in the process of integrating that business. I think it's going to be a nice addition to our vascular business and start to reposition that business to kind of more higher growth markets. This quarter, we announced the acquisition of Bigfoot and this is just going to be able to allow us to broaden our offerings with Libre and provide a nice opportunity from a global perspective, and then also an announcement on the EPD side to expand access to biosimilars. So we've been active, and we continue to be active. Yes, I think valuations have come down. The same way they came down, let's say, post pandemic in that 2022 time frame. It's a good opportunity. Like I've said, I think sometimes companies need to understand if it's a short term or if there's something more fundamental in that valuation, but we're in a great strategic position to be able to execute on our M&A strategy, which is really focused on can we add value to the asset. And does it fall into our strategic framework of areas that we want to invest in and growth in the ones that I highlighted here are strategic, and we believe that we can add a lot of value to them. So we've got plenty of capacity to engage. And if there's the right opportunity that comes along in this period, we'll be ready. Operator: Our next question will come from Vijay Kumar from Evercore ISI. Vijay Kumar: Robert, congrats on the good print here. I had 2 questions. My first one is, could you just elaborate on this China VBP for Diagnostics. How big is Core Lab in China for you guys at this point in time? And I think I heard 20% would be impacted next year? Is the assumption or rest of Core Lab would be impacted in fiscal '25, like how do these contracts flow up? Because my understanding is you will see volume gains or those volumes and the asset price headwinds? Robert Ford: Yes. So the way this is kind of working out, right, this was announced recently, I think proposals are due within the provinces that are going to be bidding, Vijay, I'd say, in the next 30 days, right? And then there's like another 30 days, 30 to 60 days to evaluate all the proposals. So I think that this is going to probably start, I'd say, late Q1 and into Q2. Right now, the list of assays that are on VBP equate to about 20% of the market. So our annual sales are in China are about $1 billion. So -- and then if you look at the specific assays, it's infectious disease, there's some fertility assays there, et cetera. So that's where the -- that's where the VBP is kind of focused on. I haven't heard and team hasn't heard about expanding that to other areas of other areas of testing, such as oncology or hormones or other areas like that. So right now, I'd say, this is going to be our focus in 2024. If there's volume upside to begin, yes, there could be volume upside to be gained. I mean we do have good market share in some of these segments and others, we have lower market share, so it presents us an opportunity. So I think in areas where you've got higher market share, you'll feel more price. And then if you can offset that price by gaining volume in segments that you've got lower share. So I don't think that's rocket science there, and we'll just have to see how that all plays out. But we've had experience gone VBP in China. We've gone through it with stents. We've gone through it with EP certain parts of our pharma business, certain parts in CRM also. So team knows how to do this. They know to kind of think about it and manage it pretty well. We adjust some of our -- our cost structure is also as a result of that. So I think the team has got a good formula here how to manage it. And we'll just have to see how this kind of plays out. Vijay Kumar: That's helpful, Robert. And my second one, I know you touched upon PFA. I think Abbott's launching their own PFA at some point in fiscal '25, '26. How should we think in the interim, right? I think your peer had pretty robust assumptions for what percentage of procedures would be PFA. Is Abbott concerned about share loss when you think about that medium-term time frame? And are there offsets to it, right? When you haven't touched upon Lingo. I think previously you had said Lingo could be as big as Libre, where will be on Lingo launch? Robert Ford: Yes. So we'll have to see how -- what other companies report to go to see if we're gaining or losing share right now. But I'd say we still have got good, robust growth. I'd say as we look into 2024, I'd expect us to grow generally in line with market, which has historically been double digits. We've got some good innovation that's rolling out on the RF side. And as we've spoken about our EP business, we talk about PFA. That's going to be a product that's going to be really geared towards AF ablations, you still have VT and SVT ablations, where we do have good positions over there. A good portion of our sales are also on the mapping side and the mapping and the diagnostics and those consumables. So I see those being less impacted also. So I'd say for 2024, we've got a good opportunity with our EP portfolio to be growing there in line with the market. And I think to the previous question, yes, we've got plenty of different shots on goal here to be able to deliver our high single-digit growth rates. And we've got a very rich portfolio, and we're in exciting markets. Yes, Lingo didn't touch on it because it wasn't asked, but now that you have asked, yes, it is a great growth opportunity for us. We're launching it in the U.K., I'd say, I'd call it more of a controlled launch, Vijay, to understand kind of the marketing mix, the marketing messaging, the positioning, the inner positioning with Libre and the learnings we've got are fantastic, and I'm excited about a full-on launch in the U.K. starting next year. And then the opportunity to be able to bring that here to the U.S. I've been public about our intention to file Lingo here in the U.S. by the end of the year. And I think that's going to provide another great opportunity for growth for us also. Operator: Our next question will come from Matt Miksic from Barclays. Matthew Miksic: So maybe follow up on a couple of pipeline opportunities and growth drivers, one being TRILUMINATE and TriClip, sort of if you could maybe walk us through the expected pathway for commercialization in the U.S. on that front? And then back to diabetes, I know the GLP-1s dominated to the discussion there, but with Tandem rolling out integration with their pump and kind of making wider availability here of closed-loop integration in Q4. Just it would be great to hear your thoughts on what that ramp looks like, what additional support or efforts you expect will be required on your end? And just what we can expect over the next 12, 18 months, that's out there and available to patients. Robert Ford: Sure. On your question on TriClip, yes, so we submitted to the FDA for review earlier this year. It's my understanding that CMS is going to review this in parallel also. I think I made a comment to this last time, we'll likely see a panel review here, and I don't think it's unexpected to be quite honest with you. A lot of the novel therapies go through an advisory panel process with TAVR, saw with MitraClip. So I expect that to be the case here for TriClip. Right now, the expectation of that panel is I said the date that we think we have right now is January but we'll have to see how that occurs. But again, I don't -- the fact that we'll probably go through a panel, I still feel very enthusiastic and confident about the opportunity that we have with TriClip. Not only this is -- these are patients that are in real rough shape and it's not a lot of treatment options. And we've shown in the TRILUMINATE study that we can reduce TR and our understanding and our belief is that reduction of TR is important, and we'll be going through that. And then I'd say the safety profile of the TriClip product is very important as you think about building a new category and a new area, but you've got 5 million people here, Matt, that suffered from TR globally. I believe this is a 1 billion-plus opportunity for sure, and we're committed to building a real strong position on here with innovation on the product and strong clinical evidence to support it. What was your other question, sorry? Matthew Miksic: Sure. Closed-loop integration with Tandem and maybe the ramp or expectations for that process? Robert Ford: Yes, it's my understanding here that we'll see a launch sometime by the end of this year with Tandem. And we're excited about that. There's about 150,000 to 200,000 new pump users globally. So I think this is an area that we've historically haven't been a player in, and now we will be a player in. We've launched an AID system in Europe, let's say, more towards the end of last year into this year, and I was reviewing the results of the team. I mean that pump company has had tremendous kind of growth partnering with us. And so that's a proof point there that when you bring in the choice and the option and you put it together with Libre that there's a real strong value proposition to connecting the pump with Libre. And then as I've said, we want to be a leader in this space, not just be a competitor. So there's a lot of work ongoing right now with our dual analyte glucose ketone sensor, which we believe there's a lot of applications there, Matt, but I think one of the clear applications and value propositions is to be able to kind of pair that with an insulin pump and have a much more richer algorithm and safety algorithm in the insulin delivery system. So we feel good about that. Michael Comilla: Operator, we will take one more question, please. Operator: And our last question will come from Jayson Bedford from Raymond James. Jayson Bedford: Just a couple of quick ones. First, what is the updated expectation for COVID testing revenue here in '23? And then second one, Robert, you alluded to gross margin expansion in '24. Can you just frame the sources of gross margin? I assume nutrition is a key driver there. And then maybe just bigger picture, and I appreciate that everyone in the industry is facing these challenges. But is there visibility into clawing back to pre-COVID gross margin levels. Robert Ford: Sure. Yes, there's visibility. I mean, the visibility is in the first half of 2024, then I'd say no, but we do have a plan to be able to kind of drive gross margin and gross margin expansion. I'd say as you look at it into next year, Jayson, there's really a couple of elements here that will be tailwinds for us. I'd say lower commodity costs, that for sure. And those were pretty big headwinds for us in, I'd say, in 2022 and 2023. On one hand, you've got commodity costs in nutrition, but you also got other commodity costs that are impacting the entire company. And what we have seen, and I think a lot of companies have seen this is those commodity costs start to bend and move down the other way. So -- and that will be particularly important for us as we think about nutrition, which is highly dependent on a large number of commodity and commodity inputs. Seeing a lower freight and distribution. And again, I think a lot of companies are seeing that, but we're seeing that not only just in terms of rates but also with more normalized supply chains, we can use different modalities of freight that can also lower cost and not using air all the time. So that's going to help. We've got a, I think, a pretty robust process and teams in place that work on gross margin and gross margin improvement plans have been very busy, I'd say, over the last 12, 18 months, I expect those teams to continue to deliver on their strategies to deliver cost reductions, and then favorable product and portfolio mix, right? So as our faster-growing, higher-margin businesses and new products become a large portion of our overall sales and sales mix. I think that also contributes to that. So yes, we understand that gross margin is key to be able to deliver on that double-digit bottom line EPS growth. And we're -- this is something that we work on every year. And I think we've got a little bit more of a better environment for our teams to work on. So on your COVID question, I'll ask Phil to give you the details there. Philip Boudreau: Jayson, relative to 2023 COVID testing sales forecast full year is about $1.5 billion here. Robert Ford: Okay. So I'll just wrap up here with a few comments. It's clear that we're seeing broad-based growth across the entire company. As I said in my comments, we've now delivered double-digit organic sales growth here for the past 3 quarters and forecasting that type of growth again this next quarter EPS contributions and the growth in the base business has increased every quarter, and we've exceeded the expectations we set for the initial guidance of the year. The pipeline to some of the points that were made there, a big kind of opportunity for us going into 2024 is our pipeline, and it continues to be productive with several new product approvals, indications reimbursement and geographic expansions there. So momentum is clearly building and well positioned for a strong end of the year and going into 2024. So with that, I'll wrap up and thank you for joining us. Michael Comilla: Thank you, operator, and thank you all for your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today. Operator: Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.	[ { "speaker": "Operator", "text": "Good morning, and thank you for standing by. Welcome to Abbott's Third Quarter 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott." }, { "speaker": "Michael Comilla", "text": "Good morning, and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; Bob Funck, Executive Vice President Finance, and Phil Boudreau, Chief Financial Officer. Robert and Phil will provide opening remarks. Following their comments we'll take your questions." }, { "speaker": "Robert Ford", "text": "Thanks, Mike. Good morning, everyone, and thank you for joining us. Today, we reported third quarter adjusted earnings per share of $1.14. Based on our performance through the first 9 months of the year, we raised the midpoint of our full year adjusted earnings per share guidance and narrowed the range to $4.42 to $4.46. Organic sales growth on the base business, which excludes COVID testing, increased double digits for the third consecutive quarter and was led by double-digit growth in all 4 of our major businesses." }, { "speaker": "Philip Boudreau", "text": "Thanks, Robert. As Mike mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis. Turning to our third quarter results. Sales decreased 1.5% on an organic basis due to as expected a year-over-year decline in COVID testing-related sales." }, { "speaker": "Operator", "text": "[Operator Instructions] And our first question will come from Josh Jennings from TD Cowen." }, { "speaker": "Joshua Jennings", "text": "Congratulations on another strong quarter. Robert, organic revenue growth nearly touched the mid-teens range for the core business in 3Q, and realize we've recently talked about the sustainability of the momentum generated this year. But I think investors would like to hear about your confidence level in the core business, delivering high single-digit organic revenue growth and solid margin expansion in 2024 off the 2023 comp that's only retire over the course of this year." }, { "speaker": "Robert Ford", "text": "Sure, Josh. I mean the confidence level is very high, especially with this kind of momentum that we're seeing. Clearly, there's going to be some macro environment challenges as companies head into 2024. But I'd say our portfolio has really been built to withstand this type of environment, and we tend to do pretty well in this type of environment." }, { "speaker": "Operator", "text": "And our next question will come from Larry Biegelsen from JPMorgan (sic) [ Well Fargo ]." }, { "speaker": "Larry Biegelsen", "text": "Just to be clear, it's Wells Fargo. So Robert, China has been in the news a lot. Love to hear your thoughts on how you're thinking about China, big picture. How is Q3? And what are you expecting from the VBP impact in the EP business and from the anticorruption initiatives we've been hearing about there." }, { "speaker": "Robert Ford", "text": "Sure. Well, China has been and will continue to be an important market for us. As it relates to, I think, this theme on this anticorruption discussion points there. Listen, we've been operating in China for 35 years. We follow our compliance standards follow all applicable laws. I didn't see any kind of meaningful impact in Q3. Larry, I was actually there last week and had a chance to meet with the teams and go through the businesses and I didn't really see any meaningful impact. Devices grew 20% in the quarter. So I think that's -- we'll just have to keep on monitoring that situation, but I didn't see any real impact in the quarter." }, { "speaker": "Operator", "text": "Our next question will come from Robbie Marcus from JPMorgan." }, { "speaker": "Robert Marcus", "text": "Congrats on a really nice quarter. Robert, I want to ask you the overwhelming topic of discussion in the past few months has been GLP-1s and the possible impact on the future med tech market growth. You talked about it with respect to diabetes, but I'd love to just get your thoughts on a broader basis on GLP-1s? And do you see it as a negative, neutral or positive to your different end markets you participate in over the next 5, 10 years?" }, { "speaker": "Robert Ford", "text": "Sure, Robbie. Obviously, this has been a hot topic over the last couple of months. And let me just start off by saying with 20-plus years of experience in diabetes. I think every time new therapies, new technologies come to address this disease in this population, I think it's all great. And these are great new medications that are going to have very positive effect on the treatment of diabetes. There's obviously a lot of investor -- thanks to Robbie, about the potential impact of these drugs and what's going to happen to different industries and different companies." }, { "speaker": "Robert Marcus", "text": "Really appreciate that, Robert. Maybe if I could sneak 1 more in on CGM, something that I think has really flown under the radar with the GLP-1, noise is you've recently gotten type 2 basal coverage in France. You have it in the U.S. and Japan as well. Just thinking about future opportunities in countries to approve type 2 basal, which could materially expand your reimbursed coverage opportunity around the world. How should we think about that? And how do you size that opportunity over the next few years for Abbott." }, { "speaker": "Robert Ford", "text": "Sure. Well, we had a really good quarter, up 28%. International was up 26%. U.S., we continue to do pretty well in the plus 30% range there. And to your point, we saw a nice impact from that basal coverage, especially in the international markets, right? And it's nice to see the international growth accelerate again." }, { "speaker": "Operator", "text": "Our next question will come from Danielle Antalffy from UBS." }, { "speaker": "Danielle Antalffy", "text": "Robert and Phil just wanted to follow up on Josh's question earlier, and I appreciate you're not going to give 2024 guidance. But just at a high level, there's a few puts and takes I can think of, Robert, I appreciate the momentum in the underlying business, but you will have competition coming on the EP side, which has been a strong double-digit grower looking at MitraClip and a quarter of double-digit growth, that was great to see, like how sustainable is that?" }, { "speaker": "Robert Ford", "text": "Yes. I mean you're -- not sure we'll do a planned review here. But I mean there's a lot there. I'll try and touch on some of the topics there. I mean I'd just go back to -- we have a growth model and a growth forecast that I'd say, during the last 2 years has been masked a little bit by COVID and the ups and downs of COVID testing, but being able to sustain high single-digit growth, double-digit growth in the bottom line that's what we've been doing this year, a pretty significant double-digit bottom line because we forward invested back in 2022." }, { "speaker": "Operator", "text": "Our next question will come from Joanne Wuensch from Citibank." }, { "speaker": "Joanne Wuensch", "text": "Nutrition, your comments, if I remember them correctly, are that you are back in a leadership position in the Nutrition business. Are you back at 100%? Are you humming along? Do you feel like there's anything that's lagging or maybe ahead of the game? And I'm going to squeeze in your current thoughts on M&A, particularly given a lot of pullbacks in valuations." }, { "speaker": "Robert Ford", "text": "Sure. We never believe that we were going to recover all the share in a quarter, right? So the way this market works and the way we've kind of modeled it out is that we'll showing month-by-month kind of sequential increases in our market share." }, { "speaker": "Joanne Wuensch", "text": "M&A, particularly given pullbacks on valuations?" }, { "speaker": "Robert Ford", "text": "Yes. Well, listen, we've completed 3 transactions over the last 6 months. We acquired CSI and in the process of integrating that business. I think it's going to be a nice addition to our vascular business and start to reposition that business to kind of more higher growth markets. This quarter, we announced the acquisition of Bigfoot and this is just going to be able to allow us to broaden our offerings with Libre and provide a nice opportunity from a global perspective, and then also an announcement on the EPD side to expand access to biosimilars." }, { "speaker": "Operator", "text": "Our next question will come from Vijay Kumar from Evercore ISI." }, { "speaker": "Vijay Kumar", "text": "Robert, congrats on the good print here. I had 2 questions. My first one is, could you just elaborate on this China VBP for Diagnostics. How big is Core Lab in China for you guys at this point in time? And I think I heard 20% would be impacted next year? Is the assumption or rest of Core Lab would be impacted in fiscal '25, like how do these contracts flow up? Because my understanding is you will see volume gains or those volumes and the asset price headwinds?" }, { "speaker": "Robert Ford", "text": "Yes. So the way this is kind of working out, right, this was announced recently, I think proposals are due within the provinces that are going to be bidding, Vijay, I'd say, in the next 30 days, right? And then there's like another 30 days, 30 to 60 days to evaluate all the proposals." }, { "speaker": "Vijay Kumar", "text": "That's helpful, Robert. And my second one, I know you touched upon PFA. I think Abbott's launching their own PFA at some point in fiscal '25, '26. How should we think in the interim, right? I think your peer had pretty robust assumptions for what percentage of procedures would be PFA. Is Abbott concerned about share loss when you think about that medium-term time frame? And are there offsets to it, right? When you haven't touched upon Lingo. I think previously you had said Lingo could be as big as Libre, where will be on Lingo launch?" }, { "speaker": "Robert Ford", "text": "Yes. So we'll have to see how -- what other companies report to go to see if we're gaining or losing share right now. But I'd say we still have got good, robust growth. I'd say as we look into 2024, I'd expect us to grow generally in line with market, which has historically been double digits. We've got some good innovation that's rolling out on the RF side. And as we've spoken about our EP business, we talk about PFA. That's going to be a product that's going to be really geared towards AF ablations, you still have VT and SVT ablations, where we do have good positions over there. A good portion of our sales are also on the mapping side and the mapping and the diagnostics and those consumables. So I see those being less impacted also." }, { "speaker": "Operator", "text": "Our next question will come from Matt Miksic from Barclays." }, { "speaker": "Matthew Miksic", "text": "So maybe follow up on a couple of pipeline opportunities and growth drivers, one being TRILUMINATE and TriClip, sort of if you could maybe walk us through the expected pathway for commercialization in the U.S. on that front? And then back to diabetes, I know the GLP-1s dominated to the discussion there, but with Tandem rolling out integration with their pump and kind of making wider availability here of closed-loop integration in Q4. Just it would be great to hear your thoughts on what that ramp looks like, what additional support or efforts you expect will be required on your end? And just what we can expect over the next 12, 18 months, that's out there and available to patients." }, { "speaker": "Robert Ford", "text": "Sure. On your question on TriClip, yes, so we submitted to the FDA for review earlier this year. It's my understanding that CMS is going to review this in parallel also. I think I made a comment to this last time, we'll likely see a panel review here, and I don't think it's unexpected to be quite honest with you. A lot of the novel therapies go through an advisory panel process with TAVR, saw with MitraClip. So I expect that to be the case here for TriClip. Right now, the expectation of that panel is I said the date that we think we have right now is January but we'll have to see how that occurs." }, { "speaker": "Matthew Miksic", "text": "Sure. Closed-loop integration with Tandem and maybe the ramp or expectations for that process?" }, { "speaker": "Robert Ford", "text": "Yes, it's my understanding here that we'll see a launch sometime by the end of this year with Tandem. And we're excited about that. There's about 150,000 to 200,000 new pump users globally. So I think this is an area that we've historically haven't been a player in, and now we will be a player in. We've launched an AID system in Europe, let's say, more towards the end of last year into this year, and I was reviewing the results of the team." }, { "speaker": "Michael Comilla", "text": "Operator, we will take one more question, please." }, { "speaker": "Operator", "text": "And our last question will come from Jayson Bedford from Raymond James." }, { "speaker": "Jayson Bedford", "text": "Just a couple of quick ones. First, what is the updated expectation for COVID testing revenue here in '23? And then second one, Robert, you alluded to gross margin expansion in '24. Can you just frame the sources of gross margin? I assume nutrition is a key driver there. And then maybe just bigger picture, and I appreciate that everyone in the industry is facing these challenges. But is there visibility into clawing back to pre-COVID gross margin levels." }, { "speaker": "Robert Ford", "text": "Sure. Yes, there's visibility. I mean, the visibility is in the first half of 2024, then I'd say no, but we do have a plan to be able to kind of drive gross margin and gross margin expansion. I'd say as you look at it into next year, Jayson, there's really a couple of elements here that will be tailwinds for us. I'd say lower commodity costs, that for sure. And those were pretty big headwinds for us in, I'd say, in 2022 and 2023." }, { "speaker": "Philip Boudreau", "text": "Jayson, relative to 2023 COVID testing sales forecast full year is about $1.5 billion here." }, { "speaker": "Robert Ford", "text": "Okay. So I'll just wrap up here with a few comments. It's clear that we're seeing broad-based growth across the entire company. As I said in my comments, we've now delivered double-digit organic sales growth here for the past 3 quarters and forecasting that type of growth again this next quarter EPS contributions and the growth in the base business has increased every quarter, and we've exceeded the expectations we set for the initial guidance of the year." }, { "speaker": "Michael Comilla", "text": "Thank you, operator, and thank you all for your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today." }, { "speaker": "Operator", "text": "Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day." } ]	Abbott Laboratories	247,483
ABT	2	2,023	2023-07-19 23:00:00	Operator: Good morning, and thank you for standing by. Welcome to Abbott's Second Quarter 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant's questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's express written permission. I would now like to introduce Mr. Mike Comilla, Vice President of Relations. Michael Comilla: Good morning, and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2023. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A, Risk Factors, to our annual report on Form 10-K for the year ended December 31, 2022. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Note that Abbott has not provided the GAAP financial measure for organic sales growth on a forward-looking basis because the company is unable to predict future changes in foreign exchange rates, which could impact reported sales growth. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which is defined in the quarterly results press release issued earlier today. With that, I will now turn the call over to Robert. Robert Ford: Thanks, Mike. Good morning, everyone, and thank you for joining us. Today, we reported second quarter adjusted earnings per share of $1.08, which reflects an acceleration in the contribution from the underlying base business. Organic sales, excluding COVID testing, increased low double digits for the second quarter in a row and was led by mid-teens growth in Medical Devices, along with double-digit growth in Established Pharmaceuticals and Nutrition. On our last couple of earnings calls, I've highlighted improving underlying demand trends across our businesses. These strengthening trends continued in both our institutional and consumer-facing businesses this past quarter. Within the institutional businesses, health care systems around the world have continued to improve their ability to expand the supply of health care services through ongoing efforts to adjust protocols, manage the labor challenges and increase the overall available capacity to treat patients. In our more consumer-facing businesses, we're seeing consumers prioritize spending for health care products, which is driving increased demand for our products in the U.S. and internationally. I'll now summarize our second quarter results in more detail before turning the call over to Bob, and I'll start with Nutrition, where sales increased 10% in the quarter. In the U.S., growth was led by Pediatric Nutrition growth of more than 20%. We continue to make good progress in increasing manufacturing production and have now recovered approximately 75% of the market share in the infant formula business that was lost last year as a result of the voluntary recall. Internationally, total Nutrition sales grew 6%, led by growth in both Pediatric and Adult Nutrition businesses. Turning to Established Pharmaceuticals, sales increased 12.5% in the quarter. This strong performance was led by growth across several markets, including India and China; and therapeutic areas, including gastroenterology, women's health and CNS pain management. This business continues to execute at a high level and capitalize on the favorable demographic and socioeconomic trends in emerging markets. Moving to Diagnostics. Excluding COVID testing, organic sales grew 7%, led by Core Lab Diagnostics, where sales grew 10%, driven by performance in the U.S., Europe and China. This broad-based strong performance reflects the increased demand for routine diagnostic testing globally. And in the U.S., our blood transfusion testing business continues to make good progress, recovering from the impact of lower plasma donations that occurred during the COVID-19 pandemic. And I'll wrap up with Medical Devices, where sales grew more than 14% on an organic basis, including double-digit growth in both the U.S. and internationally. In Diabetes Care, FreeStyle Libre sales exceeded $1.3 billion in the quarter and grew 25% on an organic basis. During the quarter, Libre became the first and only continuous glucose monitoring system to be nationally reimbursed in France for all people with diabetes who use insulin. This achievement was a direct result of the unique value proposition that Libre offers, a fully featured continuous glucose monitor made available at an accessible price. Abbott has led the way in expanding reimbursement coverage for continuous glucose monitors in order to bring the benefits of this life-changing technology to more people around the world. In cardiovascular devices, sales grew more than 10% overall in the quarter, led by double-digit growth in Electrophysiology and Structural Heart. In Electrophysiology, performance was led by international growth of more than 20%, which included high teens growth in Europe and strong growth in China. During the quarter, we received U.S. FDA approval for our TactiFlex ablation catheter, the world's first ablation catheter with a flexible tip and contact force sensing technology, which helps to deliver improved procedure outcomes and faster procedure times. In Structural Heart, performance was driven by MitraClip growth of approximately 10%, along with growth from several recently launched new products. Earlier this year, we submitted for FDA approval for TriClip, our minimally invasive tricuspid valve repair device that helps treat a condition on as tricuspid regurgitation, a leaky heart valve disease. The clinical trial data supporting our submission showed that TriClip is a highly effective and safe treatment that provide a significant improvement in the quality of life for patients. TriClip is currently being reviewed by the FDA, and we look forward to bringing this first-of-its-kind technology to patients here in the U.S. In Rhythm Management, growth of 8% was led by Aveir, our recently launched leadless pacemaker. And during the quarter, we received FDA approval for our dual-chamber leadless pacemaker, a first-of-its-kind technology that allows for 2 pacemaker devices to communicate with one other inside the body to provide minimally invasive treatment for those with abnormal heart rhythms. Aveir was specifically designed to be upgradable and retrievable in order to evolve with patient changes and therapy needs over time. This unique technology offers the potential to revolutionize care for millions of people who require a pacemaker. And lastly, in Neuromodulation, sales grew 16%, driven by the recent launch of Eterna, our first rechargeable neurostimulation device for pain management, which targets a large segment of the market where we previously did not compete. During the first half of this year, we introduced several new innovations, including the launch of Eterna, and label indication expansions for treating painful diabetic neuropathy and chronic back pain for those who have not had or are not eligible for back surgery. So in summary, we exceeded expectations on both top and the bottom lines. Growth in the underlying base business accelerated, driven by improving market conditions and contributions from both new products and legacy growth platforms. And our pipeline continues to be highly productive, which will sustain our strong growth profile in the future. I'll now turn over the call to Bob. Bob? Robert Funck: Thanks, Robert. As Mike mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis. Turning to our second quarter results. Sales decreased 9.2% on an organic basis due to, as expected, a year-over-year decline in COVID testing-related sales. Excluding COVID testing-related sales, underlying base business organic sales growth was 11.5% in the quarter. Foreign exchange had an unfavorable year-over-year impact of 2.5% on second quarter sales. During the quarter, we saw the U.S. dollar strengthen somewhat versus several currencies, which resulted in a slightly more unfavorable impact on sales, compared to exchange rates at the time of our earnings call in April. Regarding other aspects of the P&L. The adjusted gross margin ratio was 55.4% of sales, which reflects continued flow-through impacts from the elevated inflation we experienced last year on certain manufacturing and distribution costs as well as an unfavorable impact from foreign exchange. Adjusted R&D was 6.4% of sales, and adjusted SG&A was 27.2% of sales in the second quarter. Lastly, our second quarter adjusted tax rate was 14%. Turning to our outlook for the full year. We now forecast total underlying base business organic sales growth, excluding COVID testing sales, to be in the low double digits. We're now forecasting COVID testing-related sales of around $1.3 billion, which is below our full year forecast of around $1.5 billion that we provided in April due to current testing dynamics, including lower demand for testing, following the end of the public health emergency in May. For the third quarter, we forecast COVID testing sales of around $100 million. Based on current rates, we expect exchange to have an unfavorable impact of a little more than 1.5% on full year reported sales. Lastly, our full year adjusted earnings per share guidance of $4.30 to $4.50 remains unchanged, but reflects a lower earnings contribution from COVID testing sales compared to expectations in April, offset by raising our underlying base business earnings forecast by approximately $0.05 based on our strong performance and outlook. Compared to the initial guidance we provided back in January, we have now raised our underlying base business earnings forecast by more than $0.15, offsetting the lower contribution from COVID testing versus our initial forecast. Turning to our outlook for the third quarter. We forecast adjusted earnings per share to be approximately $1.10, which reflects strong growth on the underlying base business. We forecast total underlying base business organic sales growth, excluding COVID testing sales, to be in the low double digits, and exchange to have an unfavorable impact of a little more than 1% on our third quarter reported sales. With that, we'll now open the call for questions. Operator: [Operator Instructions] And our first question will come from Joshua Jennings from TD Cowen. Joshua Jennings: Congratulations on another strong quarter. The core business is generating nice momentum. Organic sales growth accelerating, earnings power increasing. Robert, it would be great to hear your views, first, on the drivers of the back-half momentum, assuming an updated low double-digit organic revenue growth forecast for '23. And then second, it'd be great also to get your thoughts on the sustainability of this building momentum in '24 as the business is creating some more challenging comps for next year. Robert Ford: Sure, Josh. Yes, it was a very strong quarter, broad-based growth. And -- but listen, I still think that we could do better, and I know my team feels that also. If you go back a little bit in terms of a couple of years when COVID was happening, we always said that there was a great hedge share for us, right? And when COVID would subside, we would have a strong base business and making investments. And I think that's what you're seeing right now play out in these last couple of quarters and what we think is going to continue to play out throughout the rest of the year and going into 2024. We saw a very strong growth across all 4 sectors, excluding the COVID testing piece of it. And as I said in my opening remarks, the institutional business, the consumer business, there was an acceleration from Q1 to Q2, growth versus Q2 of last year. So all the right indicators here trending positive and with great momentum. Devices and Diagnostics, there was a nice step up. I attribute that really good improving market conditions, whether it's the hospital systems addressing some of the bottlenecks that they had in care, but also markets that are reopening and that trend continuing, but also new products. So market conditions was part of it, but new product launches also contributed quite a bit there. EPD has sustained, I'd say, high single-digit, low double-digit growth the last 2 years, and I think that continues. I think we're probably one of the best-positioned large health care companies in emerging markets. We've got a unique strategy there, a lot of regionalization and a lot of local for local, and the team does a really good job at executing that. The double-digit growth in Nutrition was as expected. We're seeing the recovery in the Pediatric business, recovering our market share. My comment there of the 3 quarters of recovery is more general and broad-based. But once you start looking at different segments of the -- and from the market, different SKU sets and different types of form, there are certain segments where we're already back to leadership position. So that's moving it all in the right trajectory. And Adult is doing very well in several countries. So COVID declined as we had forecasted. We decided to bring our COVID number down a couple of hundred million dollars because we're seeing -- as the public health emergency ended, we saw a little bit of a decline in testing there. So we'll see how that's going to play out in Q4. It's probably at the first quarter, we'll see, Josh, of an endemic respiratory season. So we'll see how that's going to play out. But the base business is doing really well. And I'd say, from a geographic perspective, it was pretty broad-based also across all geographies: U.S. Europe, Asia. Obviously, China reopening was really positive, too. But it wasn't like this over-indexing in our growth rate with China opening. I mean if you look at our growth rate, excluding China, it was -- it only added about 1 point of growth to that 11.5%. So it's pretty broad-based across the market. So pleased with the top line. We believe it's very sustainable, which is why we increased from at least high single to low double-digit growth rate. And I think the pipeline and the productivity is another kind of key aspect in our quarter, a lot of product approvals, and that's going to drive it. It's probably a little bit early to kind of go through a specific guidance for 2024. But I think if you look at this COVID decline, this anticipated COVID decline that we had this year, I think it's kind of overshadowed a little bit about the strong and the strength in the performance in the base business. And you're starting to see -- as that number comes down in COVID, you'll start to see really the strength of the base business. So if you look at the base business, it's contributing about $4.10 of earnings for the full year this year. That's about $0.15 higher to what we originally guided back in January. And I think that's pretty significant growth, even at $4.10 on the base business, and that's really been driven by top line. So you look at the leverage in the P&L, the investments we made during COVID were able to drive a lot of growth there. So pipeline is delivering pretty significantly. And I believe that, that is the sustainability going into 2024, that top line. Of course, gross margin is a constant area of focus for us, whether it was the impact of FX or the impact of inflation. But I'm already seeing 3 out of our 4 major businesses here showing improved gross margin profiles versus the end of last year. So we're seeing good momentum over there. So if I put this all into account, I think we're achieving a lot of growth, top and bottom line, the new product contributions, strong pipeline and then the opportunity that we'll have for gross margin expansion. So I think we're well set up as we go into the second half of this year and as we go into 2024. Operator: And our next question will come from Larry Biegelsen from Wells Fargo. Larry Biegelsen: Congrats on the nice quarter here. Just one for me. Robert, I'd like to hear your thoughts on the med tech top five and the pipeline, specifically how you're thinking about Aveir and the dual chamber approval and TriClip you mentioned earlier, and just the sustainability of that 11% cardio neuromod growth we saw this quarter. Robert Ford: Sure. Well, that group of products, they did pretty well in the quarter. Combined, those products, they grew about 40%, Larry. If you take the Q2 run rate and annualize it, it's annualizing to about a little over $650 million. I expect to do better than that in the year as the next quarters progress. Regarding your question on these products, I can go through some of them here. I mean, on the Aveir side, we saw a lot of positive developments this quarter for leadless. If you remember, we received FDA approval for the single chamber last year. And if you look at some of the claims data, at least the claims data that we're looking at, showing that we'd be able to capture about 1/3 of that market. So that's doing really well. But what's really exciting for us, and quite frankly, it's a lot of KOLs that I've spoken to, especially at HRS this year, was the approval for the dual chamber, which is a much larger segment of that makes up at least 80% of that $3 billion worldwide pace market. And it's the first-ever technology, right, where you've got 2 implanted devices communicating with each other. So it's a huge opportunity for us, I think, to really change paradigm here. It's a little bit of a different implant than what EPs have been accustomed to doing, with pacemakers that have leads. So our focus here at the beginning, I think, is really to look at the bigger part of the market and make sure that we do a really good job at creating a real-world kind of strong clinical results, making sure that the implant technique gets well understood. And so we'll focus a lot on training and training physicians. We'll be opening new centers, of course, but we're going to -- this falls in the bucket, Larry, of just making sure that we go at the right tempo out of the gate so that we've got a bigger eye on the larger market and the larger conversion because I think that that's a huge opportunity for conversion over there. So there, I'm very excited about, and the team is already starting their launch plan here. Amulet grew 25% this quarter, which is a great growth rate. And again, we're also focusing on generating great real-world clinical results there, being thoughtful about how we open the accounts, build a strong, sustainable position. This is a fast-growing market. It's a great opportunity for us. And so that's done well. And TAVR with Navitor, again, our quarterly sales, we're looking at this the other day. Our quarterly sales have roughly doubled in the last 18 months. Now, yes, granted it's a smaller base, but I'm just hearing really good feedback from the implanters now, once Navitor is out, regarding the implant technique, regarding the outcomes. So I think we're building a really good position here, obviously, in the U.S. following the launch, but internationally seen real strong performance, whether it's market share gains or our ability now to open new accounts with this new product. And then TriClip is, we're seeing similar international performance. Physician enthusiasm here continues to build as now they've got this much better, I'd say, a real effective option here to treat patients that are suffering from TR. So -- and I think the publishing of the TRILUMINATE data earlier this year really gave a boost to those international markets. I mean, we had clinical data out there, but the TRILUMINATE data, I think, really, you can see this correlation in terms of what we're seeing in terms of implants there post publishing that data. So I'm excited to bring it here to the U.S. I mean, we submitted it to the FDA earlier this year. The clinical data that supported the submission, as I said in my opening comments, is really strong, great quality-of-life improvement. I'm enthusiastic about the opportunity in the U.S. I mean, it's a PMA submission. We submitted in January. So we didn't necessarily bake in any kind of significant sales this year, but I think it's a great contributor for us next year. So -- and then on neuro, I mean, this market moves a lot with innovation. And we introduced quite a bit of innovation, I would say, over the last 6 months in this market. There's great opportunity to execute on that, and there's more to come also in that business, too. So I look at the cardio and neuro business, just with these products that we've mentioned here, this group of products that we recently launched, billion-dollar segments, and that we're in the early innings. So I'm excited about it, and I think these got a lot of momentum and sustainability on our cardio and neuro business, Larry. Operator: Our next question comes from Danielle Antalffy from UBS. Danielle Antalffy: Robert, I do have 2 product-specific questions, but you totally stole my thunder with that very thorough answer there. But if I could follow up on specifically Libre and MitraClip. So did see U.S. deceleration in the quarter for Libre. Just wondering what you're seeing out there. You have a competitor launching a new product, but you guys are launching Libre 3. And you do have the basal coverage for Medicare now, but how you see basal ramping? That's the first product question. And then the second question is on MitraClip. And another -- a quarter was fine, but this is a market that had been growing double digits pre-COVID. Just curious about where you think this market falls out on a normalized basis once we're through staffing constraints, once we get through what feels like a little bit of an air pocket in the patient population given the high mortality rates through COVID. So those are my 2 product questions. Robert Ford: Okay. Thanks. So on your Libre question, we had a really strong quarter there, Danielle. We grew 25%, yes, 30% in the U.S. I think it's pretty strong growth still. And internationally, we're up 22%. So that's very positive now that we've kind of put behind us some of the upgrading activities that we are doing towards the second half of last year, so you're seeing the impact there. The basal is a great opportunity. In my comments, I referenced France. Yes, this wasn't just like a tender award. The French authorities looked at claims data. They looked at data from basal users using the product. We've got over about a 70% share of that market. So they looked at it and say, "Wow, this is really having an impact". So that's good. It provides us great momentum. You look at -- now you've got U.S., Japan and France reimbursing for basal. I mean those are 3 of the top 5 markets in the world, and we're well positioned there. U.S. coverage began in April. So that's playing out nicely also. So I think we got great momentum here. I'd say what's really exciting is a lot of the upcoming launch activity and pipeline activity that we'll have in the second half of this year. If you look at our integration with pumps, it's my understanding here that sometime in this second half, we'll see Tandem integration with our CGM system here in the U.S., and that will be exciting. One of the things that we've also got rolled out and planning is, as you might remember, we got L3 approved full iCGM. But together with that approval, we also got a 15-day claim. So we'll be launching our 15-day sensor here in the U.S. second half -- in the second half of this year. So that's exciting, too. And the team is on target here to start and initiate our glucose-ketone dual-sensor trial sometime in Q4 here. So a lot of pipeline activity in the second half. Probably the one that I'm most excited about, Danielle, is actually Libre 2 streaming. I think this is an incredible opportunity and what the team has been able to do. I think it's the most exciting launch that we have in the second half here, which is really our ability to convert our entire Libre 2 base from scanning to be able to have real-time streaming through an app update. We ran our first conversion in the U.K. over the weekend. There were some challenges there as we rolled it out. Team worked over the weekend. But as of -- I think as of end of day, Monday, 90% of the user base was converted. And the social media posts that I've been seeing are just incredibly positive. So just think about our ability here to convert our entire L2 base into a slightly smaller version of L3 across the world with all the manufacturing capacity we have. So I'm really excited about that. So I think Libre is on a great trajectory, great momentum. And I think that's going to continue. Regarding your question on MitraClip, yes, I think the performance was -- I think it was pretty strong, 10% growth. International was up 20%. So U.S. was more modest. And I think you pointed to some of the challenges that we are seeing. I'm not sure it's so much the staffing portion now, Danielle. I mean, I think it was probably in the second half of last year. We're not seeing that in the other parts of the business. So I think the U.S. piece here is really our ability here to reignite and restart that referral funnel here in the U.S., which was impacted by the pandemic. And I think this is going to take a little bit of time, but it's a key -- it's a key area of focus of the U.S. commercial team here is to really look the commercial and the clinical team to really restart those that referral process from the cardiologists into the hospitals. This is a -- continues to be an attractive growth area, and you can see that. Where we don't have some of these issues here in the U.S., we're looking internationally to accelerate as a way to kind of balance it out. And we're seeing great growth internationally here. So the market is still very attractive. We're having a lot of success internationally. And in the U.S., we're going to focus on this patient referral funnel here, and I think we'll start to see kind of improvements in the numbers. Operator: Our next question will come from Vijay Kumar from Evercore ISI. Vijay Kumar: Congrats on a solid print here. Robert, I had a 2-part question. One, you did mention double-digit organic sort of base. Is that -- like should we worry about the comp issue for fiscal '24? Because I'm thinking about Lingo, which I think is just launching, is that enough to sort of maintain some of the strength we're seeing? So any comment on Lingo launch, update on Lingo would be helpful. And my second part is on gross margins, down sequentially. If I'm looking at that 56% overall for the year, it looks like we're probably looking at bottom half of the EPS guidance. I know you had mentioned $1 billion of inflation impact. How should we think of that benefit in margin expansion in back half of year '24? Robert Ford: So yes, I'll take the Lingo question, and then I'll ask Bob to fill in on the gross margin. On the Lingo piece, listen, this has been part of our strategy, Vijay. It wasn't -- it was an afterthought as we were building Lingo platform. We knew it would be in this situation where can we expand beyond diabetes. We've been very thoughtful about it and very intentional about it. The opportunity during COVID to invest heavily in this was our opportunity. And as I've said in the past, to be thoughtful about this, we had to create a separate group, a fully dedicated group. I was with them a few months ago. And if you look at the team, the scientists, the engineers, the data experts, the marketing team, et cetera, they're just focused on this. But it's interesting, their backgrounds here aren't necessarily with diabetes, right? They're more digital health, they're more consumer health. And they've got this target, which is to do something that not a lot of well-established companies, health care companies do, which is to create a product that's really targeting a healthy population and a healthy population that wants to stay healthy. So the product was launched yesterday in the U.K., kudos to Lisa and the team for getting that through. And the value proposition is pretty simple. And I think that's how we needed to think about it for this patient segment here -- for this consumer segment, sorry. And it's really to deliver personalized like metabolic improvement and metabolic health. And the way it does that, Vijay, is that it's teaching you about glucose spikes. It's teaching the consumer about how your body reacts to food, how it reacts to sleep, how it reacts to exercise. And the goal is to minimize those spikes throughout the day. So the Lingo coach, it learns -- it first learns about your metabolism, right? And then after it learns about your metabolism, by wearing the sensor, it then assigns you a daily target, and we're going to call this the Lingo count. And this is basically a number that is the amount of spikes that you're allotted to or assigned to during the day. And we're going to track that daily progress and track to that target. And we believe that, that's a great kind of behavior modification tool for those that don't have diabetes. Their charts, there's data. There's all that, that you have in the app. But we believe that the simplicity of this Lingo count is really key to modifying behavior. It's a subscription-based model. It's direct to consumer. We are looking at opportunities for partnership, but it's direct to consumer. The website -- the web shop is open. And the pricing is pretty much in line with our cash pay price for Libre. And I think the key aspect here is -- for this app, is that we have to constantly provide content to the app, constantly new information, new data. And if I think about everything that's going on in the world of AI, and I think about -- how I think about AI for Abbott, we have a lot of opportunities. I would put this one here together with Libre as our biggest opportunity to capitalize on AI and what it can do for personalization. So it's out in the U.K. It's launched yesterday. We'll study. We'll learn from the U.K., and then we'll roll it out to other markets. I'll preempt your question, which is always like, is it going to come to the U.S.? Yes, it will. We intend to file in the U.S. at the end of the year. I don't expect big contribution right now from a financial perspective early on. Maybe my team will surprise me, but I absolutely expect this to be a significant contributor over time for us. And so that third part of the growth stool here for that platform is out of the gates, and we're excited to see what we can do. Robert Funck: Okay. So Vijay, on the gross margin question. So back in January, we guided a gross margin profile of 56% of sales for the full year. And through the first half of the year, the base business, so excluding COVID testing, is right in line with that. We are, however, seeing lower gross margins on our COVID test do -- really due to the significant decline in volumes that we've seen compared to our assumptions at the beginning of the year. And so that's really what's being reflected in a little bit lower gross margin that you've seen. And I think for the balance of the year, we would expect to see gross margins roughly in the range of 56%, and then we would look for steady improvement after that. As Robert talked about, it's a key focus area for us. Each of our businesses have gross margin improvement programs in place, with teams that are dedicated to that effort. And as -- so as we work into 2024, we would expect to see some improvement overall in our gross margins. Operator: Our next question will come from Joanne Wuensch from Citi. Joanne Wuensch: Briefly, can you sort of tear apart the Electrophysiology growth rate of 17%? How much of that is in the U.S.? How much of that is oUS? And what do you think is driving that? And then I'll just jump in with my second question, which is, if you have reclaimed about 75% of the Pediatric Nutritional business, can you get to 100%? Or do you think you're more or less where you can get to? Robert Ford: Sure. So really good growth on EP. We're up about 17% total. U.S. was high single digits, around 9%. International was about 24%. In that 24%, Joanne, there's probably about 8 or 9 points of kind of China recovery. So if you look at the growth rate internationally outside of China, that was about 15%. So real strong growth. Again, if you look at Europe specifically, it was up just under 20%. So it's pretty broad based. And even if you look at the big 5 countries in Europe, did really well there. TactiFlex in those countries, that's been out there for a couple of quarters right now. We only got approval in the U.S. towards the end of the quarter. So that's doing really well, and it's really helping. We got really good feedback on the catheter. So growth is doing very well. The U.S. is probably a little bit impacted by kind of the capital cycle. If you remember, last year, we launched EnSite X, and it was like a very large bolus of kind of upgrading and capital placements that we're making. We get a lot of good feedback on the system, both from the users and from the administration, especially the fact that it's an open system. So that's done very well. If you look at the consumable part of the U.S. growth, it was up in the mid-teens. So that, I guess, the term used was tear apart the EP growth rate. But again, it's a great market. We've got a great position and good recovery, and I expect to see this continuing throughout this year. And sorry, what was your other question? Joanne Wuensch: The other question had to do with the 75% recovery in Nutrition. Is that sort of your best case or is there more to go? Robert Ford: No, I kind of made my team, and I also kind of said publicly that our target here is to get back to 100% of our market share by the end of the year. A big driver of that is the manufacturing and the manufacturing kind of ramp up. And we started the manufacturing -- reopened the manufacturing process in July for specialty of last year and August and September for non-specialty. So that manufacturing has provided us the supply we need to fulfill the demand. We've got a very strong brand in Similac, and you're seeing that. So -- and as I said, I think maybe to Josh's question at the beginning, if you look at the different segments, first of all, if you start with WIC and non-WIC. In the WIC segment, we're back to leadership position or back to our position we had before the recall. And that was because we focused a lot on that Q3, Q4 time in that segment. So I guess, long-winded to say yes. I mean, we're still on target for that to be able to get to the end of the year with our pre-recall market share. So -- and like I said, if you pull -- if you break out some of the different formulas because there's a lot of different SKU sets and different types of formulas. In some of them, we've already -- we're already back to where we were before recall. So team's working really hard at this, and I'm not changing that target. Operator: Our next question comes from Marie Thibault from BTIG. Marie Thibault: I wanted to ask a fairly high-level one here on the Diagnostics business. Now that COVID testing is sort of behind us, Core Lab was really strong this quarter. I just want to kind of get an update on the areas of investment and growth in Diagnostics testing today. The Alinity rollout, how that's progressing? And whatever else, in terms of tests or trends, we should be paying attention to now in Diagnostics? Robert Ford: Sure. I think we had a really, really good recovery here. As the health systems are opening up, you're seeing that routine testing come back. And like I said, it was pretty broad-based, U.S., Europe, Asia, Asia without China. I mean, it was pretty broad-based, Latin America. So that's working well. I've said Alinity is -- it's a multiyear kind of cycle. If you look at these contracts there, 7 to 10 years. So every year, you got 15% that's coming up for renewal. I've also said we're trying to strike the balance between top line growth and gross margin and gross margin expansion. And I think this is the range that we feel is the right range. We can probably accelerate that more with more placements of instruments and more capital, but you have some friction on your gross margin as you do that. So we're being thought about how we make these placements and how we expand. The -- one of the areas that recovered really nicely, and I talked about in the opening comments, was on blood banks. As you know, we're a market leader over here. So as the blood bank business and as people come back to doing blood donations and plasma donations, we disproportionately benefit from that, not only here in the U.S. and around the world. So our big focus here is really to look at the assays and the tests that are missing on the menus and focus the R&D spend to be able to close those gaps. And that was one of the areas that we did during COVID was while one portion of the diagnostic business is working on the COVID testing, the other group was receiving investment to be able to develop new assays to be able to layer on. And that, Marie, is extremely -- it's a very important strategic driver for us because you've got the capital that's been placed out in the instrument, so we could add more assays to that. That comes with a much higher margin profile. So that's our key area of focus. Molecular is an area of focus. We've been working on expanding the menu in Molecular also. And then Point of Care. One of the most exciting assays that the team has developed for Point of Care is a rapid test for traumatic brain injury, sulfur concussion testing. We've got it approved on a plasma sample. We're doing all the work to be able to get it on a whole blood sample, which can then go through a clear waiver test. And then ultimately, you've got now a handheld 15-minute test, blood test, to be able to rule out a concussion that could be -- you can imagine the applications of that kind of test around the world, but specifically a lot in terms of this country. So that's a lot of our focus in Diagnostics. Operator: Our next question comes from Matt Miksic from Barclays. Matthew Miksic: I have one clarification on some of the topics that came up earlier, and then just hopefully one of the kind of pipeline questions. So one of the things going on in CGM and wearables, as you talked about, Robert, and just to kind of separate these out so we can understand exactly how this will play together maybe over the next 18, 24 months: Libre 3, Lingo and sort of -- and ketone. So Lingo, you mentioned filing at the end of the year. Wondering if that's still ketones and lactates for that product? And then if there's a path forward that includes ketones for kind of the core CGM Libre 3? And then I have 1 just quick pipeline question, if I could. Robert Ford: Sure. Yes, the Lingo product that was launched yesterday, it was really starting off with a glucose-only component to it. We had a lot of debate about this, and we wanted to start off simple. The opportunity to add ketones to that is definitely in the mix, Matt. There's going to be a lot of learning here for us as we, like I say, market a product to a healthy population. And there's going to be a lot of learnings about that. But the idea, as I've laid out at CES a couple of years ago, is that we'll have a pipeline of different analytes that will come into this. Lactate is on the menu also. The team has figured that out. There is an interesting application for lactate, both in the consumer market, but also in the institutional market for continuous lactate monitoring. So bottom line, Lingo is -- it starts with glucose. And then we'll be adding on different analytes as we go learning through that. But all of those opportunities are all there. And I actually think that there's going to be an opportunity, as I've said, with ketones in the diabetes space, for sure. And that dual sensor with ketones-glucose is very strong for a specific diabetes population, but I also think it could be strong for a nondiabetes population also. Matthew Miksic: Great. And then the -- just on the pipeline. We hadn't heard much about what was happening with CSI post the acquisition, and, obviously, important strategic fit and add around peripheral and their platforms there. But they did have this IVL program that was kind of in process. I'm just wondering if you're ready to comment on where that is or when we might start to hear more about the progress there or your expectations for that? Robert Ford: Yes. Listen, the CSI, it closed this quarter. Thank you for asking that. I think it's going to really have a strong impact as we look at our vascular business and really focus on the growth in the peripheral. You can see that we've strategically been adding, either organically with our below-the-knee stent that we're working on that's currently in trial, and then all the inorganic moves that we've been making. So that's very clear, and we're super excited about having the CSI portfolio at Abbott. Yes, and you highlighted one of the ones that, as we're looking at it, that we were super excited about, and the IVL product. I'll put it this way, as we look and do a lot of the integration efforts, and we did a lot of that in St. Jude, and we learned a lot, I would say, from an R&D and portfolio perspective, as part of that integration exercise, that's one that gets probably a disproportionate amount of attention and share of mind from us as we're doing the integration and as we're looking at the program and thinking about would the program benefit with additional resources, et cetera. So I'm not prepared to comment on that right now, Matt. But rest assured that this one is high on my priority list as we're going through these next kind of quarters here of integration. Michael Comilla: Operator, we'll take one more question, please. Operator: Our final question will come from Jayson Bedford from Raymond James. Jayson Bedford: Maybe just on margins. It looked like there was a nice lift to base business' up margin. And I'm just wondering, is this all related to the improvement in Infant Nutrition? Or are there other factors at work? And then maybe just as a bit of a related question. You talked about the inflationary impacts on gross margin. I think we all understand that. But I'm wondering if you're seeing input costs actually start to come down now? And if so, when will we start to see that impact the P&L? Robert Ford: Sure. Regarding the op margin profile, we're actually back to our pre-pandemic op margin profile. So that's -- I think that's really positive. Obviously, the mix of how we get there is a little different. We got a little bit less gross margin from some of the points that Bob has raised here. But that op margin profile is really a combination of 2 things. I'd say, we made a lot of investments during COVID. I talked about them. We outlined them over the last couple of years. And as we go into this year, you're seeing this accelerated top line. We're seeing a lot of leverage in the P&L because of those investments, haven't had to make the kind of SG&A or R&D investments to be able to drive this 11.5% or low double-digit top line growth rate. So that's one of the big drivers there. Yes, your question on infant formula, that obviously contributes as the product -- as we're recovering the share and the manufacturing is ramping up again. But it's really a combination of all the areas, right? As the device business grows and grows disproportionately, that has a higher gross margin profile, too. So I'd say it's really across the board on all the businesses. And this is an area of focus that we have. To your question on gross margin, this is our biggest opportunity, I would say, maintaining this kind of growth rate and then looking at areas where we can improve our gross margins. Your point on endpoint costs are true. We are seeing certain input costs come down, certain commodities come down. And if we see that continue throughout -- going into next year, I think we'll have a great opportunity there. One of the things that I wanted to make sure we focused on going into this year was that we had the inventory we needed to be able to capitalize on the opportunities we have from a top line perspective. And if you remember, Jayson, second half of last year, supply chain is really challenged, and we had some challenges, right? And that -- those supply chain challenges had an impact on our top line. So going into this year, we told the team, let's make sure we've got all the inventory we need to capitalize on these opportunities. And one of the ways you do that is you've got to lock in your supply, you've got to lock in your volume, you've got to lock in your price. So as commodities come down and we start to look at our contracts for next year, I think that will be a great opportunity for us as we go through it. So that being said, I'll just wrap up here with a few closing comments. We had a very strong start to the first half of the year. We achieved double-digit organic sales growth on the underlying business. We've done it for 2 quarters in a row now. The growth was broad-based. It's not focused on one specific area or one geographic area, it's across the entire portfolio. And all of the areas have delivered great performance. The pipeline has been highly productive. And I think that's the key for us and for our strategy is to make sure that we're bringing new innovations to the market that can kind of sustain our top line and meet unmet needs for patients. We've raised the organic sales growth and the EPS guidance on the base business. And the EPS guidance on the base business is now forecast, as I said in the beginning, to be about $0.15 higher than our original guidance back in January. So momentum is building. We're well positioned for the second half of the year and heading into next year. So with that, thank you for joining us. Michael Comilla: Thank you, operator, and thank you all for your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today. Operator: Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.	[ { "speaker": "Operator", "text": "Good morning, and thank you for standing by. Welcome to Abbott's Second Quarter 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott." }, { "speaker": "Michael Comilla", "text": "Good morning, and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions." }, { "speaker": "Robert Ford", "text": "Thanks, Mike. Good morning, everyone, and thank you for joining us. Today, we reported second quarter adjusted earnings per share of $1.08, which reflects an acceleration in the contribution from the underlying base business. Organic sales, excluding COVID testing, increased low double digits for the second quarter in a row and was led by mid-teens growth in Medical Devices, along with double-digit growth in Established Pharmaceuticals and Nutrition." }, { "speaker": "Robert Funck", "text": "Thanks, Robert. As Mike mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis." }, { "speaker": "Operator", "text": "[Operator Instructions] And our first question will come from Joshua Jennings from TD Cowen." }, { "speaker": "Joshua Jennings", "text": "Congratulations on another strong quarter. The core business is generating nice momentum. Organic sales growth accelerating, earnings power increasing." }, { "speaker": "Robert Ford", "text": "Sure, Josh. Yes, it was a very strong quarter, broad-based growth. And -- but listen, I still think that we could do better, and I know my team feels that also. If you go back a little bit in terms of a couple of years when COVID was happening, we always said that there was a great hedge share for us, right? And when COVID would subside, we would have a strong base business and making investments." }, { "speaker": "But the base business is doing really well. And I'd say, from a geographic perspective, it was pretty broad-based also across all geographies", "text": "U.S. Europe, Asia. Obviously, China reopening was really positive, too. But it wasn't like this over-indexing in our growth rate with China opening. I mean if you look at our growth rate, excluding China, it was -- it only added about 1 point of growth to that 11.5%. So it's pretty broad-based across the market." }, { "speaker": "Operator", "text": "And our next question will come from Larry Biegelsen from Wells Fargo." }, { "speaker": "Larry Biegelsen", "text": "Congrats on the nice quarter here. Just one for me. Robert, I'd like to hear your thoughts on the med tech top five and the pipeline, specifically how you're thinking about Aveir and the dual chamber approval and TriClip you mentioned earlier, and just the sustainability of that 11% cardio neuromod growth we saw this quarter." }, { "speaker": "Robert Ford", "text": "Sure. Well, that group of products, they did pretty well in the quarter. Combined, those products, they grew about 40%, Larry. If you take the Q2 run rate and annualize it, it's annualizing to about a little over $650 million. I expect to do better than that in the year as the next quarters progress." }, { "speaker": "Operator", "text": "Our next question comes from Danielle Antalffy from UBS." }, { "speaker": "Danielle Antalffy", "text": "Robert, I do have 2 product-specific questions, but you totally stole my thunder with that very thorough answer there. But if I could follow up on specifically Libre and MitraClip. So did see U.S. deceleration in the quarter for Libre. Just wondering what you're seeing out there. You have a competitor launching a new product, but you guys are launching Libre 3. And you do have the basal coverage for Medicare now, but how you see basal ramping? That's the first product question." }, { "speaker": "Robert Ford", "text": "Okay. Thanks. So on your Libre question, we had a really strong quarter there, Danielle. We grew 25%, yes, 30% in the U.S. I think it's pretty strong growth still. And internationally, we're up 22%. So that's very positive now that we've kind of put behind us some of the upgrading activities that we are doing towards the second half of last year, so you're seeing the impact there." }, { "speaker": "Operator", "text": "Our next question will come from Vijay Kumar from Evercore ISI." }, { "speaker": "Vijay Kumar", "text": "Congrats on a solid print here. Robert, I had a 2-part question. One, you did mention double-digit organic sort of base. Is that -- like should we worry about the comp issue for fiscal '24? Because I'm thinking about Lingo, which I think is just launching, is that enough to sort of maintain some of the strength we're seeing? So any comment on Lingo launch, update on Lingo would be helpful." }, { "speaker": "Robert Ford", "text": "So yes, I'll take the Lingo question, and then I'll ask Bob to fill in on the gross margin. On the Lingo piece, listen, this has been part of our strategy, Vijay. It wasn't -- it was an afterthought as we were building Lingo platform. We knew it would be in this situation where can we expand beyond diabetes. We've been very thoughtful about it and very intentional about it." }, { "speaker": "Robert Funck", "text": "Okay. So Vijay, on the gross margin question. So back in January, we guided a gross margin profile of 56% of sales for the full year. And through the first half of the year, the base business, so excluding COVID testing, is right in line with that. We are, however, seeing lower gross margins on our COVID test do -- really due to the significant decline in volumes that we've seen compared to our assumptions at the beginning of the year. And so that's really what's being reflected in a little bit lower gross margin that you've seen." }, { "speaker": "Operator", "text": "Our next question will come from Joanne Wuensch from Citi." }, { "speaker": "Joanne Wuensch", "text": "Briefly, can you sort of tear apart the Electrophysiology growth rate of 17%? How much of that is in the U.S.? How much of that is oUS? And what do you think is driving that? And then I'll just jump in with my second question, which is, if you have reclaimed about 75% of the Pediatric Nutritional business, can you get to 100%? Or do you think you're more or less where you can get to?" }, { "speaker": "Robert Ford", "text": "Sure. So really good growth on EP. We're up about 17% total. U.S. was high single digits, around 9%. International was about 24%. In that 24%, Joanne, there's probably about 8 or 9 points of kind of China recovery. So if you look at the growth rate internationally outside of China, that was about 15%. So real strong growth." }, { "speaker": "Joanne Wuensch", "text": "The other question had to do with the 75% recovery in Nutrition. Is that sort of your best case or is there more to go?" }, { "speaker": "Robert Ford", "text": "No, I kind of made my team, and I also kind of said publicly that our target here is to get back to 100% of our market share by the end of the year. A big driver of that is the manufacturing and the manufacturing kind of ramp up. And we started the manufacturing -- reopened the manufacturing process in July for specialty of last year and August and September for non-specialty. So that manufacturing has provided us the supply we need to fulfill the demand. We've got a very strong brand in Similac, and you're seeing that." }, { "speaker": "Operator", "text": "Our next question comes from Marie Thibault from BTIG." }, { "speaker": "Marie Thibault", "text": "I wanted to ask a fairly high-level one here on the Diagnostics business. Now that COVID testing is sort of behind us, Core Lab was really strong this quarter. I just want to kind of get an update on the areas of investment and growth in Diagnostics testing today. The Alinity rollout, how that's progressing? And whatever else, in terms of tests or trends, we should be paying attention to now in Diagnostics?" }, { "speaker": "Robert Ford", "text": "Sure. I think we had a really, really good recovery here. As the health systems are opening up, you're seeing that routine testing come back. And like I said, it was pretty broad-based, U.S., Europe, Asia, Asia without China. I mean, it was pretty broad-based, Latin America. So that's working well. I've said Alinity is -- it's a multiyear kind of cycle. If you look at these contracts there, 7 to 10 years. So every year, you got 15% that's coming up for renewal." }, { "speaker": "Operator", "text": "Our next question comes from Matt Miksic from Barclays." }, { "speaker": "Matthew Miksic", "text": "I have one clarification on some of the topics that came up earlier, and then just hopefully one of the kind of pipeline questions. So one of the things going on in CGM and wearables, as you talked about, Robert, and just to kind of separate these out so we can understand exactly how this will play together maybe over the next 18, 24 months: Libre 3, Lingo and sort of -- and ketone." }, { "speaker": "Robert Ford", "text": "Sure. Yes, the Lingo product that was launched yesterday, it was really starting off with a glucose-only component to it. We had a lot of debate about this, and we wanted to start off simple. The opportunity to add ketones to that is definitely in the mix, Matt. There's going to be a lot of learning here for us as we, like I say, market a product to a healthy population. And there's going to be a lot of learnings about that." }, { "speaker": "Matthew Miksic", "text": "Great. And then the -- just on the pipeline. We hadn't heard much about what was happening with CSI post the acquisition, and, obviously, important strategic fit and add around peripheral and their platforms there. But they did have this IVL program that was kind of in process. I'm just wondering if you're ready to comment on where that is or when we might start to hear more about the progress there or your expectations for that?" }, { "speaker": "Robert Ford", "text": "Yes. Listen, the CSI, it closed this quarter. Thank you for asking that. I think it's going to really have a strong impact as we look at our vascular business and really focus on the growth in the peripheral. You can see that we've strategically been adding, either organically with our below-the-knee stent that we're working on that's currently in trial, and then all the inorganic moves that we've been making. So that's very clear, and we're super excited about having the CSI portfolio at Abbott." }, { "speaker": "Michael Comilla", "text": "Operator, we'll take one more question, please." }, { "speaker": "Operator", "text": "Our final question will come from Jayson Bedford from Raymond James." }, { "speaker": "Jayson Bedford", "text": "Maybe just on margins. It looked like there was a nice lift to base business' up margin. And I'm just wondering, is this all related to the improvement in Infant Nutrition? Or are there other factors at work? And then maybe just as a bit of a related question. You talked about the inflationary impacts on gross margin. I think we all understand that. But I'm wondering if you're seeing input costs actually start to come down now? And if so, when will we start to see that impact the P&L?" }, { "speaker": "Robert Ford", "text": "Sure. Regarding the op margin profile, we're actually back to our pre-pandemic op margin profile. So that's -- I think that's really positive. Obviously, the mix of how we get there is a little different. We got a little bit less gross margin from some of the points that Bob has raised here. But that op margin profile is really a combination of 2 things. I'd say, we made a lot of investments during COVID. I talked about them. We outlined them over the last couple of years." }, { "speaker": "Michael Comilla", "text": "Thank you, operator, and thank you all for your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today." }, { "speaker": "Operator", "text": "Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day." } ]	Abbott Laboratories	247,483
ABT	1	2,023	2023-04-18 23:00:00	Operator: Good morning, and thank you for standing by. Welcome to Abbott's First Quarter 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participants' questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission. I would now like to introduce Mr. Scott Leinenweber, Vice President, Investor Relations, Licensing and Acquisitions. Scott Leinenweber: Good morning, and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions. . Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2023. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A, Risk Factors, to our annual report on Form 10-K for the year ended December 31, 2022. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Note that Abbott has not provided the GAAP financial measure for organic sales growth on a forward-looking basis because the company is unable to predict future changes in foreign exchange rates, which could impact reported sales growth. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which is defined in the quarterly results press release issued earlier today. With that, I will now turn the call over to Robert. Robert Ford: Thanks, Scott. Good morning, everyone, and thank you for joining us. Today, we reported strong results to start the year. First quarter adjusted earnings per share were $1.03, which is above consensus estimates, driven entirely by strong underlying base business performance, excluding COVID testing. Organic sales growth excluded COVID testing increased 10% led by double-digit growth in Medical Devices, Established Pharmaceuticals and Nutrition. As you'll recall, back in January, I expressed some optimism that the headwinds Abbott and other companies faced over the last few years were starting to peak and in some cases ease a bit. As we move through the first part of the year, that's exactly what we continue to see. Most notably, the impact of COVID has rapidly and significantly lessened. As part of this transition, certain behavioral shifts have been evident across society. One simple illustrative example has been the significant increase in travel and tourism, we've all seen, heard about or experience firsthand. A much more relevant and important behavioral shift that we're seeing in health care globally has been the increased priority people are putting on getting healthy and staying healthy. And for our businesses, the impacts have been increased routine diagnostic testing volumes, improved medical device procedure trends and strong demand for consumer-based health products. The net results this past quarter was strong, broad-based growth across our portfolio. Importantly, this growing focus on health adds to and enhances other favorable demographic trends such as a global population that's growing older and living longer and increasing access to health care around the world. Combination of these favorable market dynamics, along with the strength of our growth platforms and new product pipeline provides a strong foundation for sustainable, top-tier growth going forward. I'll now summarize our first quarter results in more detail before turning the call over to Bob. I'll start with Established Pharmaceuticals, or EPD, where sales increased 11% in the quarter. This continues EPD's impressive stretch of consistent strong performance, including double-digit growth each of the last 2 years. Growth this past quarter was led by strong performance in Brazil, China and Southeast Asia and across several therapeutic areas, including cardiometabolic, gastroenterology, CNS and pain management. Turning to Nutrition, where sales increased more than 10% in the quarter. In the U.S., Pediatric Nutrition growth of more than 35% included the impact of lower sales in the first quarter of last year due to a voluntary recall of certain infant formula products. We continue to make good progress, increasing manufacturing production and recovering market share in this business. Internationally, total Nutrition sales grew mid-single digits overall, and sales in global Adult Nutrition also grew mid-single digits, driven by strong performance of our market-leading Ensure brand. Moving to Diagnostics, where as forecasted, sales growth was negatively impacted by a significant decrease in COVID testing sales compared to the first quarter of last year. Excluding COVID testing, organic sales growth was led by mid- to -high single-digit growth in Core Lab, Rapid and Point of Care Diagnostics. In Core Lab Diagnostics, growth was led by strong performance in the U.S. and Europe, which was partially offset by soft market conditions in China early in the year, though we're seeing improving market demand over the last several weeks. Excluding China, Core Laboratory Diagnostics sales grew nearly 8% globally. And I'll wrap up with Medical Devices, where sales grew 12.5% globally on an organic basis, including mid-teens growth in the U.S. and double-digit growth internationally. In Diabetes Care, sales of FreeStyle Libre grew more than 25% on an organic basis in the quarter, including approximately 50% growth in the U.S. and mid-teens internationally. During the quarter, Libre received U.S. FDA clearance for connectivity with automated insulin delivery systems. We're working with leading insulin pump manufacturers to integrate their systems with both Libre 2 and Libre 3 as soon as possible. In cardiovascular devices, sales grew more than 8% overall in the quarter. And impressively, organic sales growth rate improved sequentially compared to the prior quarter in every one of our cardiovascular device businesses. This broad-based strength was led by strong double-digit growth in Heart Failure and Structural Heart. In Heart Failure, sales of CardioMEMS grew more than 30%, which represents the third quarter in a row that CardioMEMS sales have grown more than 25%. In Electrophysiology, performance was led by high teens growth in Europe, including strong, broad-based performance across big 5 European countries, which was driven by cardiac ablation catheters and mapping systems. In Structural Heart, growth was led by double-digit growth of MitraClip, along with strong contributions from 3 recently launched products, Amulet, Navitor and TriClip, which combined to grow nearly 50% in the quarter. And lastly, in Neuromodulation sales grew 11%, driven by a recent launch of Eterna, our first rechargeable neurostimulation device for pain management, which targets a large segment of the market where we didn't previously compete. So in summary, we're off to a very good start to the year, exceeding financial expectations on both top and bottom lines. The strong performance we're achieving is broad-based and fueled by strong execution, new products and improving market conditions. And our core foundational growth platforms have strong momentum and are achieving exceptional results, positioning us well for top-tier growth going forward. And now I'll turn over the call to Bob. Bob? Robert Funck: Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis. Turning to our first quarter results. Sales decreased 14.5% on an organic basis due to, as expected, a year-over-year decline in COVID testing-related sales. Excluding COVID testing-related sales, underlying base business organic sales growth was 10% in the quarter. Foreign exchange had an unfavorable year-over-year impact of 3.3% on first quarter sales. During the quarter, we saw the U.S. dollar strengthen somewhat versus several currencies, which resulted in a slightly more unfavorable impact on sales compared to exchange rates at the time of our earnings call in January. Regarding other aspects of the P&L, the adjusted gross margin ratio was 55.9% of sales, which reflects flow-through impacts from the elevated inflation we experienced last year on certain manufacturing and distribution costs as well as an unfavorable impact from foreign exchange. Adjusted R&D was 6.4% of sales and adjusted SG&A was 28.3% of sales in the first quarter. Lastly, our first quarter adjusted tax rate was 14%. Turning to our outlook for the full year. We now forecast total underlying base business organic sales growth, excluding COVID testing sales, to be at least high single digits. We're now forecasting COVID testing-related sales of around $1.5 billion, which is below the full year forecast of approximately $2 billion we provided in January due to current testing dynamics we're seeing in the market. For the second quarter, we forecast COVID testing sales of around $200 million. Based on current rates, we expect exchange to have an unfavorable impact of a little more than 1% on full year reported sales, which includes an expected unfavorable impact of a little more than 2% on second quarter reported sales. Lastly, our full year adjusted earnings per share guidance of $4.30 to $4.50 remains unchanged, but now reflects a lower earnings contribution from COVID testing sales compared to expectations in January, offset by raising our underlying base business earnings forecast by a little more than $0.10 based on our strong performance and outlook. With that, we'll now open the call for questions. Operator: [Operator Instructions] And our first question will come from Larry Biegelsen from Wells Fargo. Larry Biegelsen: Congratulations on a nice start to the year. So Robert, you raised the base business organic growth and held EPS flat despite lower expected COVID testing sales. Can you please provide more color on the trends you're seeing across your businesses and geographies that allowed you to maintain EPS? And how does that feed into 2024? It sounds like you're thinking more about the base business, ex testing going forward? And I have 1 follow-up. Robert Ford: Sure, Larry. I think that you summarized it pretty well there. We reduced our COVID forecast right now from $2 billion to about $1.5 billion, but maintained the previous guidance, and that was the result of a better performance that we're seeing in our base -- in our underlying base business. I think that's actually a pretty great trade-off to have our base business have a raise of just over $0.10 here, offsetting this decline in COVID testing. As I said in my comments in the beginning, Larry, back in January, we were seeing already some signs of a better environment, right, specifically in devices we're starting to see already the hospitals and the systems starting to get their handle on staffing shortages. From an inflation perspective, we talked about some of the commodities starting to turn a little bit, not all of them, but some of them starting to turn. So that's really translated, I'd say, in improving top line on the base business, better diagnostic testing, more procedures. I'd say if you look at the procedure trends throughout the quarter, if you look at cardio specifically of around 8%, you look at the way we exited February and specifically March, they were double digits in March. So the real impact there was, I'd say, the reopening of China in January and the beginning of the quarter. That created a little bit of friction, but it was pretty broad-based across the systems in Diagnostics and Devices, U.S., Europe, Asia. We saw good performance in Japan also. So that gave us a lot of confidence that we're on the right trajectory here. And I'd say we're forecasting at least these high single-digit growth for the base business. And that's because of what we've been talking about over these last couple of years, which is reinvesting some of those COVID revenues and profits into the base business. So we're able to drive accelerated growth through without having to provide extra funding, let's call it that way, to that growth. So I think there's a real strong start to the year to see double digits in Devices, EPD, Nutrition, we continue our recovery there. So it's a really good strong start to the year. I think it's very sustainable. Of course, we're going to keep pushing and wanting more. But I think it's a good starting point. Regarding your 2024 question. I get it -- these last couple of years, Larry, usually in our first call, it's always about what's going to happen in the next year because of COVID. So I get that question. I'd say right now, I'm not going to give any specific guidance, but if you look at our underlying base business, we're a little over -- right now, we're forecasting for this year a little over $4 of EPS. And we always start our planning process here as double digits. This year, we're forecasting really strong double-digit growth because like we've talked about, making those investments, getting the leverage through the P&L and not having to invest to get that additional earnings growth. And that's our starting point as we go into next year, targeting that double-digit EPS growth. And I think it starts with driving a strong top line. And if we maintain a strong top line, which I'm sure we'll get into all the growth drivers here, I feel very good about them and the sustainability of them and the investment and the execution. So we keep that strong top line. There's obviously work that we got to continue to do on margin and margin expansion, and that's a big area of focus for us. Those are really the elements here. Strong top line on the base business going into 2024 and targeting that double-digit growth with that top line and margin expansion. Larry Biegelsen: That's super helpful. Just for my follow-up, Robert, Cardio and Neuro was strong this quarter at about 8.5% organic. Can you talk about the trends there and the sustainability of that? There's still concerns in the investment community about your EP business with PFA competition coming. Robert Ford: Sure. Well, like I said, I think the trends in the quarter were very positive. I think, like I said, I think it's a combination of improving conditions. I think the hospital systems have done a really good job right now at managing through the staffing shortages, and we're starting to see the impact there. And then the combination of our product launches and execution of those product launches. Like I said, I think it was pretty broad-based across the geographies. And really, the only challenge we had was in January in China, but I think we're starting to see, again, a lot of growth in that market, too. So I think it's very sustainable. Regarding your question on PFA. Yes, I mean, I think it's an interesting technology. We've been working on it for several years now, Larry. And haven't been as public about what we're doing. That's probably driven by my direction to the team, but I think we'll share more about it at [ HRS ] this year in terms of everything we've done. As a backdrop to that, I guess I would say one of the benefits of having a very large installed open mapping system based on the markets, we actually get to see these systems being used in real world. And it's a great product development tool to be quite honest with you. So a lot of our focus and the development of our program, Larry, is really looking at some of the gaps and some of the challenges we're seeing in these first-generation catheter systems and really looking at addressing those. So I think what the team has been working on is really unique and differentiated. So I don't think that PFA will be the one tool to rule all tools. I think that it will be a tool that will be important. We're obviously working on our system. I think that the companies that are going to be winning in this space are going to be those that can effectively work with PFA and at the same time, work with RF. So I think there are a couple of questions that are going to still need to be answered over the next 12 to 18 months, Larry. I think safety and efficacy is one that still needs to be -- we see certain signals in certain markets. So those, I think, need to kind of work their way through the type of cases, type of patients that are going to be used with this product. I think one big question on the PFA is kind of can it actually improve real-world procedure times. I think that's the big question I have in terms of what I've been seeing, what our teams have been seeing. And then given all the pressures that the health systems have is a 3x to 4x premium on RF, is that actually sustainable. So bottom line, I think our device, cardio device portfolio is well developed across all the different areas of growth opportunities that we have. And I think that PFA is going to be an important technology that we've been working and investing on to bring to market and looking more as a second-generation product. Operator: Our next question comes from Josh Jennings from Cowen. Joshua Jennings: Congrats on the strong start to the year. I was hoping to ask 1 question and related follow-up. But what is -- Rob, just to help think through some of the core gross margin and operating margin trajectories from the core business with the COVID testing, volumes coming down and the historic margin contribution in the last couple of years, but I'd love to just hear about drivers of gross and operating margin expansion. Like pre-COVID, we were thinking 50 basis points or up to 50 basis points of operating margin expansion was plausible for your business. And maybe just help us think through the trajectories, but also any leverage you can pull to support double-digit EPS growth trajectory in 2024, if there's some unpredictable headwinds that pop up. I just have 1 related follow-up. Robert Ford: Sure. I mean I think as I said to Larry, I mean, I think it starts with the top line, right, and being able to drive that top line and especially the top line coming from our med device portfolio, which obviously has margins that are accretive to the overall company. So looking at the growth drivers there, whether it's the Structural Heart portfolio, the EP portfolio, Libre and Diabetes or recovery in Nutrition. I mean, I think these are all important areas of top line growth that will drive accretion to our margins. One of the challenges that we all faced has been the impact of inflation on our input costs. And as I said, I think some of those are normalizing a little bit. I think last year, a lot of the focus was just to ensure that we had access to all the raw materials, right? And I think in those situations, we ultimately had to deal with elevated prices. And I think that some of these will unwind over time. This is not a -- I don't think this is a quick fix, but it's definitely an area that we're going to see steady improvement over the next couple of years here in terms of improvement. We've been able to take price where we can to offset some of those inputs, those cost input increases, but I think it's really the focus on the top line with our device portfolio that drives the accretion and then combined with focusing on our gross margin improvement programs, which we have across all of the businesses and that get the attention and the focus every month in our operating meeting. So the combination of those 2 factors are what gives us confidence for that margin expansion. Operator: Mr. Jennings, please make sure your line is not on mute. Joshua Jennings: I was on mute. I apologize. I wanted to just, related follow-up, you already touched on taking price, Rob. And would love to hear mostly on the device business, how pricing is shaping up in 2023. But also if you could touch on any other businesses where price is turning into a tailwind for your business that would be great to hear. Robert Ford: Yes. I think on price, we've historically, as a company, our high single-digit growth really driven by volume, whether it's expanding markets or taking market share. I'd say on the device side, pricing historically has been a headwind for us. I'd say, over the last 12 to 18 months, it hasn't been one. So we've been able to, at least, kind of hold pricing, I wouldn't say gone out and did big pricing increases, but at least being able to hold pricing. I'd say more on the consumer side of the business, Josh, is where we've been able to kind of take price. If you look at our Nutrition business, we haven't been able to offset 100% of the commodity increase, but we've been able to apply some price increases globally across the portfolio. In our Established Pharmaceutical business, there are segments of the market where it is more kind of cash pay. And we've been able to implement pricing increasing there. I think the team in EPD has done a pretty good job at how to implement those and still have good share positions across our therapeutic areas. So those are probably the areas that we've been able to implement pricing increases. And to your point on tailwind, if we start to see the commodities and some of the input costs come down, especially these more consumer-based businesses, I think the strength of our brands, whether it's in Nutrition or an EPD, there's an opportunity there to have that kind of tailwind. Operator: Our next question comes from Robbie Marcus from JPMorgan. Robert Marcus: Great. Congrats on a nice quarter here. Maybe to start, Robert, we just saw you get approval earlier this week for Medicare reimbursement for type 2 patients that use basal insulin for Libre 3. Clearly, a really big opportunity. But would love to get your thoughts on, first, how this impacts Abbott. And then broader how you see improving reimbursement, both in the U.S., around the world evolving over the next few years and the benefit it could add to the Libre business? Robert Ford: Sure, Robbie. I've talked about how this is an important part of the growth strategy and an important part of the market opportunity for [ CGMs ] as a whole. We've been investing and generating the clinical data to be able to kind of support this. So this is a great opportunity for us. I'd say I talked about, there's about 4 million type 2 basal insulin users here in the U.S., about 1/3 of them are on Medicare. So it will start there. I think we built a robust kind of position in this patient segment, and that includes not only the clinical data that we produced, but building a sales force that's focused more on the primary care side. I think the product lends itself very well to this patient population also. So I think we're excited about the opportunity. I think I've sized it at about $1 billion plus in terms of opportunity in the short term here. And as the CMS reimbursement starts to play out, we know that there will be eventually a spill onto private payers here in the U.S. It's difficult to forecast that because each plan will look at its own population and make its own determinations. But I think that provides a nice tailwind of growth over the next couple of years for this franchise. And I don't think it's just a U.S. situation. We're seeing other countries around the world also start to expand the reimbursement. And it's a combination of both the clinical data that supports the use of CGMs on this patient group and also specifically, I'd say, for FreeStyle Libre the value proposition in terms of being able to support a larger group of patients have the benefits without necessarily having to have a significant premium, I guess, call it over that. So we've seen markets outside the U.S. already kind of do that, and we're seeing good results in terms of its implementation. So I think it's a great opportunity for the category and more specifically for Libre. Robert Marcus: Great. And maybe a quick follow-up here. Structural Heart had been challenged throughout the pandemic, and here we are with a nice double-digit growth quarter from you. Can you speak to -- is this the start of a strong recovery here? Anything in the quarter that feels durable to you? And then also, you had some, in my opinion, good TriClip data at [ ACC ] earlier this year. Your thoughts on how that might evolve over the year as well. Robert Ford: Yes. I mean I think we've always looked at our Structural Heart portfolio over the -- at least the last 3, 4 years and made all the investments in terms of building a product pipeline, building commercial infrastructure globally in the market. So this is definitely an area of growth. I think the entire portfolio looks really strong and really durable and really sustainable, Robbie, whether it's our position in mitral, our building of our position in the tricuspid area. We're entering the aortic area with Navitor seeing good momentum over there also. Amulet, the launch of Amulet also. So I think we've really built a strong pipeline of products and commercial footprint here. So I think it's doing what -- this quarter, what we've always envisioned it to do, which is to be a top-tier growth contributor to Abbott. Regarding your question on TriClip, I agree with you, too. I was pleased with the results. I was pleased with the outcome. As I said in the past, I don't think it's a one study, and that's it. I think you have to continue to invest in generating clinical data. It's what we did with MitraClip. But the trial enrolled really fast. And I think that's always a good sign in terms of the speed of enrollment, in terms of its acceptance and excitement from the physicians. And that's because there's not a lot of good treatment options for these patients. As you know, traditional surgery over here has got a high mortality rate, and diuretics don't really work well. So I think the measures we saw in terms of the TR reduction, the quality of life improvement scores, I think they are probably some of the best that we've ever seen in a heart failure trial. So the bottom line, I think these patients are in rough shape, and I think the physicians know this. So we feel good about the data. We've already submitted it to the FDA. So that's been submitted. I know the CMS will probably review this in parallel. And I believe that click-based devices here are going to be the first option. They've got strong efficacy data and a very good safety data also. So I think -- you think it's good data, I think it's good data, too, and I'm cautiously optimistic here of bringing this product. We're seeing great momentum in Europe. So that's a proof point here that I can tell you is a lot of great growth that we're seeing in Europe. Operator: Our next question will come from Rick Wise from Stifel. Frederick Wise: Sorry for my scratchy voice, a little bit. I was hoping we could talk about Diagnostic broadly ex COVID, you're thinking about what's next, broadly for the franchise as COVID wanes. But more specifically, we haven't had an [ Alinity ] update in a while. I know this is a multi-platform, multiyear rollout process. Where are we in that process? How much more do we have to go? And any other diagnostic perspectives you'd want to share? Robert Ford: Thanks, Rick. Yes, I mean, I think -- so the way we were thinking about Alinity and Alinity rollout, it was a multi-platform, multiyear rollout, right? If you look at these contracts, that you enter in there between 7 to 10 years. So you're really looking at 12%, 15% of the market that's up for renewal every year. So we always looked at this as multiyear. It did take a back seat a little bit, I would say, during COVID as a lot of hospital systems weren't necessarily focused on RFPing their diagnostic, really just focusing on treating patients and doing the tests related to COVID. So what we began to see, I'd say, probably middle of last year, definitely into the end of the last -- definitely into Q4 of last year and going into this quarter is those RFPs in that process are restarting back up again. So -- and I think we saw this a little bit on our growth rate here, again, excluding COVID. And you look at our Core Lab business, which is the predominant base of our Diagnostic business, growing 7% if you take out China, which started off a little bit roughly in the 8%, which is the range that we tend to target here, Rick. So I think we're restarting the process and reaccelerating it. I think it's going well. I think we saw good growth in the U.S. and good growth in Europe and that's good. One of the areas that got impacted during COVID also was transfusion. So we saw a drop in donations during COVID. So I'm glad there was inventory in the blood banks to be able to deal with that. But now we're starting to see donation start to ramp up again and the rebuilding of inventories and the picking up of donations. So I think that, that's also another positive sign. And specifically on the blood bank side, our system Alinity s system, it really requires a lot less manual labor. There's a lot of automation in there. And I think that's something that we're seeing a lot from the blood banks as donations are ramping up again, the ability to take advantage of that increased demand with our system. So I would say that we could probably grow faster than that, but I think it would come at some margin erosion because you're going to have to place a lot of boxes to be able to get to the double-digit growth. So I think that this growth rate that we've established here 7%, 8%, 8.5% is the right growth rate where we can actually drive top line growth and at the same time, drive bottom line profitability. I think our margin profile in this business is probably one of the highest amongst the industry. So I think the team has done a really good job at finding that right balance. So all in all, I think -- it took a little bit of break during COVID, but it's restarted right now, and I like the systems we have, the position we have and the commercial execution that's in place. Frederick Wise: Okay. That's very thorough. As a follow-up, I wanted to focus on Nutritional, but I'm going to also sneak in a quick CardioMEMS as well. Nutritional, it's great to see the 10% performance, the strong U.S. recovery. It sounds like you're making solid progress. What's next -- when do we get back to normal in your view? And what is the new normal growth? And just to sneak in the CardioMEMS, jeez, I've been watching the CardioMEMS story, Robert, for over a decade back to St. Jude days. And I always thought it was great technology. What's Abbott's special sauce that you're driving such a superb performance? And where do we go from here with CardioMEMS. So why -- what's happening? Robert Ford: I guess on the Nutrition side, I think the team has made a lot of progress. They work incredibly hard at this. Our manufacturing and our market recovery are in line with our expectations. I've talked about -- we've talked about this business being between 4% to 6% in terms of the target growth range, maybe towards the upper end of that range. And ultimately, that's when everything kind of normalizes and you don't have some of these comps, that's what I expect this business to be in. Regarding CardioMEMS, this has been a little bit of a journey for us. I think we found the right combination here of what I would call, making the investments that we needed to make on the clinical -- generating the clinical data and the clinical trial. We've obviously had an expansion in our label that happened last year. But I think the biggest and most important part here is commercial execution on the ground and thinking about workflow in the hospital systems, right, managing that and addressing that and working with the hospitals to address this workflow has been probably the biggest impact that the team has had. And then we're going to continue to invest in more clinical data and product upgrade. So I feel great about this product. Operator: Our next question comes from Vijay Kumar from Evercore ISI. Vijay Kumar: Congrats on the [indiscernible] this morning, and I had 1 back, Robert, on this base EPS question. I think based on some of the numbers you disclosed, it looks like the base earnings EPS is about $4.10 in fiscal [ '23 ], excluding COVID testing. Assuming base EPS grows double digits, historical average algorithm, we're looking at something like 450-ish for fiscal '24. The variables here are of endemic COVID testing run rate, [ what if ] inflation coming down and capital deployment assumptions, right? So if you could just parse out, is $250 million, $300 million like a right number for endemic COVID testing. And what is your current inflation -- total gross inflation that Abbott has taken a hit on versus prepandemic? And what part of that inflation is coming down? Or could there be some pricing offsets in that cap deployment? Robert Ford: Sure. So I think you've got the numbers kind of in the right direction there, Vijay, if I followed all of that. And I would say, as I said, that primary driver of that is going to be the base business performance driving that growth. Regarding COVID for 2024, listen, I'm going to need to see a little bit how the testing environment evolves. We brought down the forecast for this year based on what we're seeing. I'd say there's very little public investment, I would say, in testing. So it's mostly now a private market. I think we do very well in that segment with the brand that we've built, not just here in the U.S., but overseas also. But it might be a little bit early to try and forecast what COVID is going to be next year. But I think the number you threw out there of a few hundred million dollars is maybe a good starting point. But again, we're going to have to see how that evolves during the year. Regarding your inflation question, I'm going to ask Bob to address it. Robert Funck: Yes. Vijay, so we saw a lot of inflation, which we talked about on the last few calls, really hitting us last year, it was probably tuned around $1 billion. We saw some carryover inflation there into this year, but we've essentially been able to offset that through some of the gross margin programs we have across our businesses, which Robert talked on as well as taking some price in some of the areas of the business, again, with more consumer-facing businesses. So we've really been able to kind of mute that carryover inflation this year, but we still have probably about $1 billion, call it, 240, 250 basis points worth of -- where the headwind currently sitting in our gross margin. Vijay Kumar: Understood. And then sorry, Robert, capital deployment, I think CSI acquisition, people thought was on the smaller side. How are you thinking about capital deployment? And then one on product side. The Libre U.S. number, 50% was a big number. Is there anything from a competitive perspective that's going on? Is Abbott gaining share? Or is this the underlying market growth? Robert Ford: I'll talk about us. I mean I think the 50% growth there is pretty strong. We've been at this rate for couple of quarters now. I think it's a combination of our product launch and our execution and expansion of the market. So I think the 50% here is -- like I said, I don't know what the other manufacturers are going to -- are seeing, but that 50%, I'd say that's our growth rate. And so I think it's doing very well. Sorry, what was your first question? It got... Vijay Kumar: On cap deployment, cap deployment. Robert Ford: Yes. I mean I think you guys almost feel like you want to have like some sort of model from us in terms of how we do this. I guess the best model -- the only model that we're looking at is what's the best return for our shareholders here. And what we found is having this kind of balanced approach where we're committed to a strong and growing dividend. We make the investments in our organic opportunities to drive organic growth. And we've been doing those in Med Device, in Diagnostics, in Nutrition. And if there's an opportunity for M&A, to able to add to the portfolio, then we'll do that. And we announced the -- our intention to acquire CSI. And I think it was fit exactly our criteria here, Vijay, which is -- it's a great strategic fit, wanted to build more of a position in the peripheral side. You've been seeing what we've been doing. We acquired a thrombectomy company about 1.5 years ago, now looking at atherectomy with CSI. So it's a good strategic fit. They have a strong position in a growth area that we like, and we believe that we can add value and the deal made sense financially for the company. So that kind of fits into our framework of how we look at M&A and how I've talked about it. So the allocation is balanced, and we'll look at what's the best return for our shareholders as we allocate the capital. Operator: Our next question comes from Joanne Wuensch from Citi. Joanne Wuensch: Nice quarter. A couple of catch-up questions. Can you update your guidance and thoughts on interest expense, and where you are on share purchases in the quarter and plans for the year? And I'll toss my real question in. EPD, another quarter of double-digit growth, what is driving that? And in your view, how sustainable is that in a potentially recessionary environment? Robert Ford: Okay. I'll take the EPD question here. Listen, I think that this is a -- we've been doing this for many years here, I would say. I think we've carved out this, I talked about this, nice little space for us in the global pharma market, which is, I call, fast-growing emerging markets with a branded generic focus. There's a way of how to operate in this. It's not operating the way you would operate with proprietary pharma. And it's different from operating in pure generics. And I think that what you're seeing now is really an organization that has kind of figured out the right sweet spot on how to execute on this strategy. And you're seeing the results over the last couple of years. We tend to really focus on local for local. We pick the right markets, and we develop portfolios that are relevant for those specific markets by having local R&D, local manufacturing. So that's done very well for us. And I think the team has done a really good job at driving profitability. So not just the top line, but also the bottom line. One of the challenges here, Joanne, is obviously FX, but they've actually -- this group has actually driven absolute dollar profit growth in the business. So I think they've figured out how to do this really well, not just with portfolios, but also channels and integrating that. It is a very unique model. And I think the team have done a really good job at understanding it. From a geography perspective, I mean, in my opening comments, a lot of growth in Southeast Asia, a lot of growth in Latin America for us and great growth in India, too. As you know, we've got a large business in India there, too. So I think it's working very well. And I think it's very sustainable, too, given the dynamics of these markets. Regarding your question on interest... Robert Funck: Yes. So Joanne, in terms of kind of net interest expense for the year, we're forecasting a few hundred million dollars there. And then you had a question on share buybacks. As you know, historically, we do buybacks to offset dilution. And so we did some buybacks in the first quarter, again, a few hundred million dollars' worth of buybacks. Scott Leinenweber: Operator, we'll take 1 -- go ahead. Operator: Our next question will come from Danielle Antalffy from UBS. Danielle Antalffy: Just a question on specifically 2 components of the Structural Heart business. The first being MitraClip. Robert, just curious about what you're seeing in that market. That was a market that was severely impacted by both COVID mortality and hospital staffing constraints. Just curious about where you think we are in the recovery specifically in that market? You did seem to put up another decent growth quarter this quarter. And then I have 1 follow-up on Amulet. Robert Ford: Sure. I think it was double-digit growth in the quarter. I think what we saw there was continued international momentum, and I think that's a great opportunity for us is to be able to expand the technology internationally. We have a new manufacturing site that we invested in, that's up and running, and I think that will give us the opportunity to be able to expand this more internationally. So I think that's a great growth driver for us. And then recovery in the U.S. As I said, I think some of the systems have figured out how to manage the staffing shortage, our teams play an important role in that also. So I think that -- listen, I'm cautiously optimistic here that this part of the ramping up of MitraClip has been addressed. From our side, we continue to focus on driving the patient referral funnel. I mean that was probably one of the areas that got shut down that we were starting to build. So I'm starting to see good momentum there on building those patient referral funnels. Danielle Antalffy: Okay, that's great. And then on Amulet, the question I have there is really about where you think you are in the launch. I mean that's a product that very high growth market. But let's be honest, you launched, I think, that product during Omicron right? So just curious about how you would characterize where you are in the launch of Amulet. Robert Ford: Yes. And listen, it's going well. We've got a nice kind of ramp. I guess I wanted that ramp to be a little bit more vertical. I would say one of the challenges we face there is exactly like you said, it's difficult to launch a product right into the pandemic. We saw that with a couple of products also. But I think that the team has done a really good job here of being thoughtful about how to build a strong and sustainable position in the market. We're not in the entire market. We haven't gone out and launched into all the accounts. But the accounts that we have launched into, Danielle, we're actually seeing roughly about a 25% market share into those accounts. So I think that's the right kind of base to work off from ensuring that the accounts that we're in, we're starting to see repeat usage, continued usage, expanded usage. And as we start to see more of that, then we'll start to ramp up and start to go to new accounts. So I think this is an exciting area for us. Yes, I would want it to be a little bit more vertical in terms of its launch, but I'm very optimistic about the product, about the team, about the position that we built in. So -- and we're investing in it, right? We've got our CATALYST trial here that's enrolling pretty well, too, comparing Amulet to NOACs. So I think this is a great opportunity, a great area of investment and growth for us. Scott Leinenweber: Operator, we'll take 1 more question. Operator: And our last question will come from Matt Miksic from Barclays. Matthew Miksic: Thanks so much for squeezing me in. So you covered a lot of ground, obviously, out of here. So maybe, Robert, if I could just ask -- just 1 follow-up on your comments this morning, which came across, I think, to most folks as noticeably more bullish and encouraged by what you saw in Q1? And maybe just recognizing that investor expectations have also risen a bit throughout Q1 as checks and everything came in during the quarter. But would you describe what you're seeing in the environment as something like a volume recovery or some other companies have used this backlog concept or something that might is strong now and may ease whenever, later in the year? Or is what you're seeing maybe something more general in terms of lifting productivity and volumes that could be more sustainable? Robert Ford: Yes. I guess the way I'm seeing this, and I've traveled quite a bit during this first quarter, and I made the statement in my opening remarks. I sense in talking to systems and talking to consumers, again, not just in the U.S., but around the world that there is this focus now of, okay, COVID is behind us, but I want to stay healthy, I want to get healthy, and I want to stay there. So as it relates to procedures, what I'm seeing is people say, listen, I've been putting this off not because of COVID, not because there's some sort of backlog. But I've been putting this off for a couple of years, I want to go and address this. Or on the consumer side of our products, whether it's EPD or Nutrition, we're seeing, again, a lot more focus on, okay, I'm going to spend some of my disposable income on these products, on these health products. So I don't see this as like a backlog aspect here that we're going to work our way through. Maybe there's some areas or geographies that you might have a little bit of that. But we tend to -- on the procedure side, we tend to work with the systems and we play a role and preplanning this procedure. So we have a sense of what the funnel is. And I don't see like this oversized funnel over here because of a backlog. What I do see is more funnel just because people are wanting to invest in their health. And on the flip side of that is I think the systems have figured out whether it's in diagnostics or whether it's in cardio procedures, they figured out how to deal with some of these staffing issues that I don't think are -- will ever be back to normal. So I think that what you're seeing are systems, obviously, addressing some of the shortfalls, but not just by hiring, but also using technology, working with companies to figure out how to offset some of that delta and labor shortage. So I think this is very sustainable. And I think you're seeing some of the companies that are reporting -- yesterday, I think we saw some companies report talk about growth and procedure [ change ]. So I think it is sustainable. I don't think it's a bolus of backlog, so at least that's how we're seeing it, at least on our products. I'll just wrap up here then. I think like I said in my comments, I think we're off to -- we're definitely off to a very strong start to the year here. Growth in our underlying base business has accelerated, and it's strong, and it's across the board, whether it's the different product groups, platforms or geographies. We're now forecasting at least high single-digit growth in our underlying base business year. And I think this is a pretty unique and differentiated growth profile. Part of it is market conditions improving, but I also think part of it is our new product pipeline that continues to be highly productive. So we're really pleased with how we started off the year. And with that, we'll wrap up, and thank you for joining us. Scott Leinenweber: Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us. Operator: Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.	[ { "speaker": "Operator", "text": "Good morning, and thank you for standing by. Welcome to Abbott's First Quarter 2023 Earnings Conference Call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participants' questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission." }, { "speaker": "Scott Leinenweber", "text": "Good morning, and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Bob Funck, Executive Vice President, Finance and Chief Financial Officer. Robert and Bob will provide opening remarks. Following their comments, we'll take your questions. ." }, { "speaker": "Robert Ford", "text": "Thanks, Scott. Good morning, everyone, and thank you for joining us. Today, we reported strong results to start the year. First quarter adjusted earnings per share were $1.03, which is above consensus estimates, driven entirely by strong underlying base business performance, excluding COVID testing. Organic sales growth excluded COVID testing increased 10% led by double-digit growth in Medical Devices, Established Pharmaceuticals and Nutrition." }, { "speaker": "Robert Funck", "text": "Thanks, Robert. As Scott mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis." }, { "speaker": "Operator", "text": "[Operator Instructions] And our first question will come from Larry Biegelsen from Wells Fargo." }, { "speaker": "Larry Biegelsen", "text": "Congratulations on a nice start to the year. So Robert, you raised the base business organic growth and held EPS flat despite lower expected COVID testing sales. Can you please provide more color on the trends you're seeing across your businesses and geographies that allowed you to maintain EPS? And how does that feed into 2024? It sounds like you're thinking more about the base business, ex testing going forward? And I have 1 follow-up." }, { "speaker": "Robert Ford", "text": "Sure, Larry. I think that you summarized it pretty well there. We reduced our COVID forecast right now from $2 billion to about $1.5 billion, but maintained the previous guidance, and that was the result of a better performance that we're seeing in our base -- in our underlying base business. I think that's actually a pretty great trade-off to have our base business have a raise of just over $0.10 here, offsetting this decline in COVID testing." }, { "speaker": "Larry Biegelsen", "text": "That's super helpful. Just for my follow-up, Robert, Cardio and Neuro was strong this quarter at about 8.5% organic. Can you talk about the trends there and the sustainability of that? There's still concerns in the investment community about your EP business with PFA competition coming." }, { "speaker": "Robert Ford", "text": "Sure. Well, like I said, I think the trends in the quarter were very positive. I think, like I said, I think it's a combination of improving conditions. I think the hospital systems have done a really good job right now at managing through the staffing shortages, and we're starting to see the impact there. And then the combination of our product launches and execution of those product launches. Like I said, I think it was pretty broad-based across the geographies. And really, the only challenge we had was in January in China, but I think we're starting to see, again, a lot of growth in that market, too. So I think it's very sustainable." }, { "speaker": "Operator", "text": "Our next question comes from Josh Jennings from Cowen." }, { "speaker": "Joshua Jennings", "text": "Congrats on the strong start to the year. I was hoping to ask 1 question and related follow-up. But what is -- Rob, just to help think through some of the core gross margin and operating margin trajectories from the core business with the COVID testing, volumes coming down and the historic margin contribution in the last couple of years, but I'd love to just hear about drivers of gross and operating margin expansion. Like pre-COVID, we were thinking 50 basis points or up to 50 basis points of operating margin expansion was plausible for your business. And maybe just help us think through the trajectories, but also any leverage you can pull to support double-digit EPS growth trajectory in 2024, if there's some unpredictable headwinds that pop up. I just have 1 related follow-up." }, { "speaker": "Robert Ford", "text": "Sure. I mean I think as I said to Larry, I mean, I think it starts with the top line, right, and being able to drive that top line and especially the top line coming from our med device portfolio, which obviously has margins that are accretive to the overall company. So looking at the growth drivers there, whether it's the Structural Heart portfolio, the EP portfolio, Libre and Diabetes or recovery in Nutrition. I mean, I think these are all important areas of top line growth that will drive accretion to our margins." }, { "speaker": "Operator", "text": "Mr. Jennings, please make sure your line is not on mute." }, { "speaker": "Joshua Jennings", "text": "I was on mute. I apologize. I wanted to just, related follow-up, you already touched on taking price, Rob. And would love to hear mostly on the device business, how pricing is shaping up in 2023. But also if you could touch on any other businesses where price is turning into a tailwind for your business that would be great to hear." }, { "speaker": "Robert Ford", "text": "Yes. I think on price, we've historically, as a company, our high single-digit growth really driven by volume, whether it's expanding markets or taking market share. I'd say on the device side, pricing historically has been a headwind for us. I'd say, over the last 12 to 18 months, it hasn't been one. So we've been able to, at least, kind of hold pricing, I wouldn't say gone out and did big pricing increases, but at least being able to hold pricing. I'd say more on the consumer side of the business, Josh, is where we've been able to kind of take price. If you look at our Nutrition business, we haven't been able to offset 100% of the commodity increase, but we've been able to apply some price increases globally across the portfolio." }, { "speaker": "Operator", "text": "Our next question comes from Robbie Marcus from JPMorgan." }, { "speaker": "Robert Marcus", "text": "Great. Congrats on a nice quarter here. Maybe to start, Robert, we just saw you get approval earlier this week for Medicare reimbursement for type 2 patients that use basal insulin for Libre 3. Clearly, a really big opportunity. But would love to get your thoughts on, first, how this impacts Abbott. And then broader how you see improving reimbursement, both in the U.S., around the world evolving over the next few years and the benefit it could add to the Libre business?" }, { "speaker": "Robert Ford", "text": "Sure, Robbie. I've talked about how this is an important part of the growth strategy and an important part of the market opportunity for [ CGMs ] as a whole. We've been investing and generating the clinical data to be able to kind of support this. So this is a great opportunity for us. I'd say I talked about, there's about 4 million type 2 basal insulin users here in the U.S., about 1/3 of them are on Medicare. So it will start there. I think we built a robust kind of position in this patient segment, and that includes not only the clinical data that we produced, but building a sales force that's focused more on the primary care side. I think the product lends itself very well to this patient population also." }, { "speaker": "Robert Marcus", "text": "Great. And maybe a quick follow-up here. Structural Heart had been challenged throughout the pandemic, and here we are with a nice double-digit growth quarter from you. Can you speak to -- is this the start of a strong recovery here? Anything in the quarter that feels durable to you? And then also, you had some, in my opinion, good TriClip data at [ ACC ] earlier this year. Your thoughts on how that might evolve over the year as well." }, { "speaker": "Robert Ford", "text": "Yes. I mean I think we've always looked at our Structural Heart portfolio over the -- at least the last 3, 4 years and made all the investments in terms of building a product pipeline, building commercial infrastructure globally in the market. So this is definitely an area of growth. I think the entire portfolio looks really strong and really durable and really sustainable, Robbie, whether it's our position in mitral, our building of our position in the tricuspid area. We're entering the aortic area with Navitor seeing good momentum over there also. Amulet, the launch of Amulet also. So I think we've really built a strong pipeline of products and commercial footprint here. So I think it's doing what -- this quarter, what we've always envisioned it to do, which is to be a top-tier growth contributor to Abbott." }, { "speaker": "Operator", "text": "Our next question will come from Rick Wise from Stifel." }, { "speaker": "Frederick Wise", "text": "Sorry for my scratchy voice, a little bit. I was hoping we could talk about Diagnostic broadly ex COVID, you're thinking about what's next, broadly for the franchise as COVID wanes. But more specifically, we haven't had an [ Alinity ] update in a while. I know this is a multi-platform, multiyear rollout process. Where are we in that process? How much more do we have to go? And any other diagnostic perspectives you'd want to share?" }, { "speaker": "Robert Ford", "text": "Thanks, Rick. Yes, I mean, I think -- so the way we were thinking about Alinity and Alinity rollout, it was a multi-platform, multiyear rollout, right? If you look at these contracts, that you enter in there between 7 to 10 years. So you're really looking at 12%, 15% of the market that's up for renewal every year. So we always looked at this as multiyear. It did take a back seat a little bit, I would say, during COVID as a lot of hospital systems weren't necessarily focused on RFPing their diagnostic, really just focusing on treating patients and doing the tests related to COVID. So what we began to see, I'd say, probably middle of last year, definitely into the end of the last -- definitely into Q4 of last year and going into this quarter is those RFPs in that process are restarting back up again." }, { "speaker": "Frederick Wise", "text": "Okay. That's very thorough. As a follow-up, I wanted to focus on Nutritional, but I'm going to also sneak in a quick CardioMEMS as well. Nutritional, it's great to see the 10% performance, the strong U.S. recovery. It sounds like you're making solid progress. What's next -- when do we get back to normal in your view? And what is the new normal growth? And just to sneak in the CardioMEMS, jeez, I've been watching the CardioMEMS story, Robert, for over a decade back to St. Jude days. And I always thought it was great technology. What's Abbott's special sauce that you're driving such a superb performance? And where do we go from here with CardioMEMS. So why -- what's happening?" }, { "speaker": "Robert Ford", "text": "I guess on the Nutrition side, I think the team has made a lot of progress. They work incredibly hard at this. Our manufacturing and our market recovery are in line with our expectations. I've talked about -- we've talked about this business being between 4% to 6% in terms of the target growth range, maybe towards the upper end of that range. And ultimately, that's when everything kind of normalizes and you don't have some of these comps, that's what I expect this business to be in." }, { "speaker": "Operator", "text": "Our next question comes from Vijay Kumar from Evercore ISI." }, { "speaker": "Vijay Kumar", "text": "Congrats on the [indiscernible] this morning, and I had 1 back, Robert, on this base EPS question. I think based on some of the numbers you disclosed, it looks like the base earnings EPS is about $4.10 in fiscal [ '23 ], excluding COVID testing. Assuming base EPS grows double digits, historical average algorithm, we're looking at something like 450-ish for fiscal '24. The variables here are of endemic COVID testing run rate, [ what if ] inflation coming down and capital deployment assumptions, right? So if you could just parse out, is $250 million, $300 million like a right number for endemic COVID testing. And what is your current inflation -- total gross inflation that Abbott has taken a hit on versus prepandemic? And what part of that inflation is coming down? Or could there be some pricing offsets in that cap deployment?" }, { "speaker": "Robert Ford", "text": "Sure. So I think you've got the numbers kind of in the right direction there, Vijay, if I followed all of that. And I would say, as I said, that primary driver of that is going to be the base business performance driving that growth. Regarding COVID for 2024, listen, I'm going to need to see a little bit how the testing environment evolves. We brought down the forecast for this year based on what we're seeing. I'd say there's very little public investment, I would say, in testing." }, { "speaker": "Robert Funck", "text": "Yes. Vijay, so we saw a lot of inflation, which we talked about on the last few calls, really hitting us last year, it was probably tuned around $1 billion. We saw some carryover inflation there into this year, but we've essentially been able to offset that through some of the gross margin programs we have across our businesses, which Robert talked on as well as taking some price in some of the areas of the business, again, with more consumer-facing businesses. So we've really been able to kind of mute that carryover inflation this year, but we still have probably about $1 billion, call it, 240, 250 basis points worth of -- where the headwind currently sitting in our gross margin." }, { "speaker": "Vijay Kumar", "text": "Understood. And then sorry, Robert, capital deployment, I think CSI acquisition, people thought was on the smaller side. How are you thinking about capital deployment? And then one on product side. The Libre U.S. number, 50% was a big number. Is there anything from a competitive perspective that's going on? Is Abbott gaining share? Or is this the underlying market growth?" }, { "speaker": "Robert Ford", "text": "I'll talk about us. I mean I think the 50% growth there is pretty strong. We've been at this rate for couple of quarters now. I think it's a combination of our product launch and our execution and expansion of the market. So I think the 50% here is -- like I said, I don't know what the other manufacturers are going to -- are seeing, but that 50%, I'd say that's our growth rate. And so I think it's doing very well. Sorry, what was your first question? It got..." }, { "speaker": "Vijay Kumar", "text": "On cap deployment, cap deployment." }, { "speaker": "Robert Ford", "text": "Yes. I mean I think you guys almost feel like you want to have like some sort of model from us in terms of how we do this. I guess the best model -- the only model that we're looking at is what's the best return for our shareholders here. And what we found is having this kind of balanced approach where we're committed to a strong and growing dividend. We make the investments in our organic opportunities to drive organic growth. And we've been doing those in Med Device, in Diagnostics, in Nutrition." }, { "speaker": "Operator", "text": "Our next question comes from Joanne Wuensch from Citi." }, { "speaker": "Joanne Wuensch", "text": "Nice quarter. A couple of catch-up questions. Can you update your guidance and thoughts on interest expense, and where you are on share purchases in the quarter and plans for the year? And I'll toss my real question in. EPD, another quarter of double-digit growth, what is driving that? And in your view, how sustainable is that in a potentially recessionary environment?" }, { "speaker": "Robert Ford", "text": "Okay. I'll take the EPD question here. Listen, I think that this is a -- we've been doing this for many years here, I would say. I think we've carved out this, I talked about this, nice little space for us in the global pharma market, which is, I call, fast-growing emerging markets with a branded generic focus. There's a way of how to operate in this. It's not operating the way you would operate with proprietary pharma. And it's different from operating in pure generics." }, { "speaker": "Robert Funck", "text": "Yes. So Joanne, in terms of kind of net interest expense for the year, we're forecasting a few hundred million dollars there. And then you had a question on share buybacks. As you know, historically, we do buybacks to offset dilution. And so we did some buybacks in the first quarter, again, a few hundred million dollars' worth of buybacks." }, { "speaker": "Scott Leinenweber", "text": "Operator, we'll take 1 -- go ahead." }, { "speaker": "Operator", "text": "Our next question will come from Danielle Antalffy from UBS." }, { "speaker": "Danielle Antalffy", "text": "Just a question on specifically 2 components of the Structural Heart business. The first being MitraClip. Robert, just curious about what you're seeing in that market. That was a market that was severely impacted by both COVID mortality and hospital staffing constraints. Just curious about where you think we are in the recovery specifically in that market? You did seem to put up another decent growth quarter this quarter. And then I have 1 follow-up on Amulet." }, { "speaker": "Robert Ford", "text": "Sure. I think it was double-digit growth in the quarter. I think what we saw there was continued international momentum, and I think that's a great opportunity for us is to be able to expand the technology internationally. We have a new manufacturing site that we invested in, that's up and running, and I think that will give us the opportunity to be able to expand this more internationally. So I think that's a great growth driver for us." }, { "speaker": "Danielle Antalffy", "text": "Okay, that's great. And then on Amulet, the question I have there is really about where you think you are in the launch. I mean that's a product that very high growth market. But let's be honest, you launched, I think, that product during Omicron right? So just curious about how you would characterize where you are in the launch of Amulet." }, { "speaker": "Robert Ford", "text": "Yes. And listen, it's going well. We've got a nice kind of ramp. I guess I wanted that ramp to be a little bit more vertical. I would say one of the challenges we face there is exactly like you said, it's difficult to launch a product right into the pandemic. We saw that with a couple of products also. But I think that the team has done a really good job here of being thoughtful about how to build a strong and sustainable position in the market. We're not in the entire market. We haven't gone out and launched into all the accounts. But the accounts that we have launched into, Danielle, we're actually seeing roughly about a 25% market share into those accounts." }, { "speaker": "Scott Leinenweber", "text": "Operator, we'll take 1 more question." }, { "speaker": "Operator", "text": "And our last question will come from Matt Miksic from Barclays." }, { "speaker": "Matthew Miksic", "text": "Thanks so much for squeezing me in. So you covered a lot of ground, obviously, out of here. So maybe, Robert, if I could just ask -- just 1 follow-up on your comments this morning, which came across, I think, to most folks as noticeably more bullish and encouraged by what you saw in Q1? And maybe just recognizing that investor expectations have also risen a bit throughout Q1 as checks and everything came in during the quarter. But would you describe what you're seeing in the environment as something like a volume recovery or some other companies have used this backlog concept or something that might is strong now and may ease whenever, later in the year? Or is what you're seeing maybe something more general in terms of lifting productivity and volumes that could be more sustainable?" }, { "speaker": "Robert Ford", "text": "Yes. I guess the way I'm seeing this, and I've traveled quite a bit during this first quarter, and I made the statement in my opening remarks. I sense in talking to systems and talking to consumers, again, not just in the U.S., but around the world that there is this focus now of, okay, COVID is behind us, but I want to stay healthy, I want to get healthy, and I want to stay there. So as it relates to procedures, what I'm seeing is people say, listen, I've been putting this off not because of COVID, not because there's some sort of backlog. But I've been putting this off for a couple of years, I want to go and address this. Or on the consumer side of our products, whether it's EPD or Nutrition, we're seeing, again, a lot more focus on, okay, I'm going to spend some of my disposable income on these products, on these health products." }, { "speaker": "Scott Leinenweber", "text": "Thank you, operator, and thank you for all of your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11:00 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us." }, { "speaker": "Operator", "text": "Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day." } ]	Abbott Laboratories	247,483
ABT	4	2,024	2025-01-22 09:30:00	Operator: Good morning and thank you for standing by. Welcome to Abbott’s Fourth Quarter 2024 Earnings Conference Call. All participants will be able to listen only until the question-and-answer portion of this call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant’s questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott’s express written permission. I would now like to introduce Mr. Mike Comilla, Vice President, Investor Relations. Mike Comilla: Good morning and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Phil Boudreau, Executive Vice President, Finance and Chief Financial Officer. Robert and Phil will provide opening remarks. Following their comments, we’ll take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2025. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological, and other factors that may affect Abbott’s operations are discussed in Item 1A, Risk Factors, to our annual report on Form 10-K for the year-ended December 31, 2023. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. On today’s conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott’s ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Note that Abbott has not provided the related GAAP financial measures on a forward-looking basis, for the non-GAAP financial measures for which the company is providing guidance because the company is unable to predict with reasonable certainty and without unreasonable effort, the timing and impact of certain items, which could significantly impact Abbott's results in accordance with GAAP. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which is defined in the press release issued earlier today. With that, I will now turn the call over to Robert. Robert Ford: Thanks, Mike. Good morning, everyone. And thank you for joining us. First, I want to express gratitude to my Abbott colleagues around the world whose hard work and passion with the driving forces of Abbott's continued success. Abbott's commitment to innovation, operational excellence and serving the needs of our customers resulted in another year of exceptional performance, which included achieving sales growth of 9.5% excluded COVID testing, delivering 70 basis points of gross margin profile improvement, driving acceleration in the growth of our earnings per share throughout the year and developing and advancing new products through our rich pipeline. The strong performance resulted in generating $8.5 billion of operating cash flow, which was used to reinvest in the business, fund capacity expansions, repay debt and returned $5 billion to shareholders in the form of dividends and share repurchases. These accomplishments played a key role in continuing our well-established track record for delivering on our financial commitments, which included achieving results that finished at the high end of our initial guidance ranges we provided for 2024. These results included exiting the year with a very strong momentum as fourth quarter sales grew 10%, excluding COVID testing sales, and adjusted earnings per share increased 13% versus the prior year. For 2025, we're well positioned to deliver another year of strong growth. As we announced this morning, we forecast organic sales growth to be in the range of 7.5% to 8.5% and adjusted earnings per share to be in the range of $5.05 to $5.25, which reflects double-digit growth at the midpoint. I'll now summarize our fourth quarter results in more detail before turning the call over to Phil. I'll start with Nutrition. Our sales increased 7% in the quarter. Growth in the quarter was driven by double-digit growth in adult nutrition, led by our market-leading Ensure and Glucerna brands. We achieved a significant milestone last year with annual sales of Ensure surpassing $3 billion. This achievement helped deliver another year of strong performance in adult nutrition, with annual sales of adult nutrition products growing 9% last year. This strong performance is a continuation of a well-established trend, the five year compound annual growth rate in adult nutrition is 9%, which reflects the impact of our well-known and respected brands, favorable demographic trends, the significant investments we've made to expand manufacturing capacity to serve the growing global demand for our products. Moving to Diagnostics, where sales increased 6%, excluded COVID testing sales. Growth in the quarter was led by rapid diagnostics where excluded COVID testing sales increased 16% in the quarter. This was driven by strong demand for our portfolio of respiratory disease tests used to help diagnose influenza, strep throat and RSV. In Core Laboratory Diagnostics, growth of 4% was driven by continued strong demand for our market-leading immunoassay, clinical chemistry, hematology and blood screening testing panels. Excluding the impact of challenging market dynamics in China, the combined growth in all other markets was double digits in the quarter. Turning to EPD, where sales increased 8.5% in the quarter. Growth was well balanced across markets and therapeutic areas that we participate in, including gastroenterology, women's health, CNS and pain management. EPD also delivered broad-based growth across the markets we serve, including double-digit growth in several countries across Latin America, Southeast Asia and the Middle East. By focusing on the therapies most needed in these faster-growing markets, we continue to sustain our long track record of delivering strong growth, which includes a five-year compound annual growth rate for EPD of 8%. And I'll wrap up with Medical Devices, where sales grew 14%. In Diabetes Care, sales of continuous glucose monitors were $1.8 billion in the quarter and grew 23%. For the full year 2024, sales of continuous glucose monitors were approximately $6.5 billion and grew 22%. This included growth of 27% in the U.S. where our market share on a revenue basis has increased by more than 10 share points over the last three years. In electrophysiology, growth of 9% was well balanced across the U.S. and international markets. As expected, growth in the quarter was impacted by a challenging comparison versus the prior year where we saw a sharp increase in demand for our EnSite cardiac mapping systems as customers prepared for the launch of PFA catheters. Excluding the impact of this prior year comparison dynamic, growth would have been double digits globally in the U.S. and internationally. In Structural Heart, growth of 23% was driven by strong performance across our market-leading portfolio of surgical valves, structural interventions and transcatheter repair and replacement products. Structural Heart represents one of the most attractive areas in the field of medical technologies. It is an area that we have invested in heavily, and we're seeing those investments yield outstanding results. Our comprehensive portfolio of products drove an acceleration in sales growth in Structural Heart throughout the year. In Rhythm Management, growth of 7% was led by AVEIR, our innovative leadless pacemaker and Assert, our newest implantable cardiac monitor, which we launched in the U.S. last year. With growth of 7% for the full year, our Rhythm Management business delivered another year of performance that far exceeded the market, and we expect that to continue this year. Last month, we announced that we completed the first-in-human implant of a new version of AVEIR specifically designed to deliver pacing to the left bundle branch area of the heart, activating the heart's natural conduction system. This highly innovative device currently in development was granted breakthrough designation by the FDA. In Heart Failure, growth of 9.5% was driven by our market-leading portfolio of heart-assist devices, which offer treatment for chronic and temporary conditions. In Vascular, growth of 7% was led by double-digit growth in vessel closure products and growth from Esprit are below-the-knee resorbable stent. And lastly, in Neuromodulation, sales grew 8%, driven by strong demand in international markets for our Eterna rechargeable spinal cord stimulation device. So in summary, we delivered another quarter of strong growth, with sales growing 10% and earnings per share growing 13%. For the year, we achieved the upper end of the initial guidance ranges we provided for 2024. We made great progress expanding our gross margin profile, and we expect that progress to continue into 2025. The pipeline continues to provide a steady cadence of new growth opportunities, and we're well positioned to deliver another year of strong growth in 2025. I'll now turn over the call to Phil. Phil Boudreau: Thanks, Robert. As Mike mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis. Turning to our fourth quarter results. Sales increased 8.8% on an organic basis and increased 10.1% when excluding COVID testing sales. Foreign exchange had an unfavorable year-over-year impact of 1.4% on fourth quarter sales. During the quarter, we saw the U.S. dollar strengthen against most currencies, which resulted in unfavorable impact on sales compared to exchange rates at the time of our earnings call in October. Regarding other aspects of the P&L, the adjusted gross margin ratio was 56.9% of sales, adjusted R&D was 6.3% of sales, and adjusted SG&A was 26.3% of sales in the fourth quarter. Lastly, our fourth quarter adjusted tax rate was 15%. Turning to our outlook for 2025. Today, we issued guidance for full year adjusted earnings per share of $5.05 to $5.25, which reflects double-digit growth at the midpoint of the range and contemplates an adjusted earnings per share forecast of $1.05 to $1.09 for the first quarter. For the year, we forecast organic sales growth to be in the range of 7.5% to 8.5%. Please note that we are no longer providing separate guidance for the sales growth, excluding COVID testing sales as COVID testing sales represents less than 2% of total company sales in 2024. Based on current rates, we would expect exchange to have an unfavorable impact of around 2.5% on full year reported sales, which includes an expected unfavorable impact of approximately 3.5% on our first quarter reported sales. We expect our full year 2025 adjusted gross margin profile to be around 57% of sales, which reflects an improvement of around 80 basis points versus the prior year. We forecast our full year 2025 adjusted operating margin profile to be in the range of 23.5% to 24% of sales, which reflects an improvement of 150 basis points versus the prior year at the midpoint of range. This improvement is driven by a combination of strong gross margin expansion and operating margin leverage. We forecast our adjusted tax rate to be in the range of 16% to 17%, which reflects an increase compared to last year related to the adoption of the Pillar 2 tax framework. With that, we'll now open the call for questions. Operator: Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] And our first question will come from Robbie Marcus from JPMorgan. Your line is open. Robbie Marcus: Great. Thanks for taking the question and congrats on a nice quarter and guide. And maybe, Robert, I could start with the 2025 guide, once again guiding to high single-digit organic sales growth, healthy operating margin expansion, and nice to see 10% EPS growth back in the algorithm again. Maybe you could just speak to some of the key growth drivers and how we should think about the different business segments on the top line and some of the components of the operating margin expansion down the P&L? Thanks a lot. Robert Ford: Sure, Robbie. Yes, it's nice to see kind of the headline print now back to double-digit EPS growth. I think that's probably one of the things that -- it's one of the things you'll see now, Robbie, as we go into 2025. I mean, you've got a lot of growth drivers there. But I think one of the big things is that you don't have the COVID sales decline cloud that's kind of overshadowing all these real strong growth drivers that we got in the business. And you saw that in Q3 as we showed 13% EPS -- sorry, in Q4 as we showed 13% EPS growth. So I think that's one big aspect. It's just not having those sales decline. I mean we've got COVID sales in 2025, but it's, as Phil said in his comments, significantly less from our total revenue perspective. I think it starts with the top line always, Robbie, and the markets that we compete in, they remain attractive. We're seeing acceleration in several of them. I mean we're a very diversified healthcare companies so we get to benefit from all the different dynamics that are going on in healthcare, whether it's increased health and wellness focus from consumers, we get to benefit from that on our Nutrition business. Every treatment requires a diagnostic test, about 70% of them require diagnostic test, so we're seeing continued growth over there. And then we've got two areas where we focus on treatments, whether it's pharmaceuticals or med tech. And so all of those markets, they're accelerating. And then within them, we've got strong product portfolios that are either keeping up with these very high-growth markets, or we're outperforming the market and taking shares. And if you look at the contributions, we've got your current drivers, whether it's Libre, TriClip, Aveir, Navitor, Amulet, all of those products in the cardiovascular space. So the bases are loaded, I would call that. And then you've got a nice on-deck circle and the lineup of Abbott that are coming up right after that, whether it's biosimilars, volt, innovations in the Libre portfolio, some clinical trial readouts. So I think we feel very good about all of the businesses, and you saw all of the businesses improved their growth from Q3 to Q4. So I think it starts with the top line, and I think we're well positioned in them. To your question on the margin drivers, I'd say we've got -- we've done a lot of work on gross margin expansion. We've talked about that committing to a 70-basis-point improvement in 2024. We achieved that. We believe that we can achieve another 80 basis points of improvement in 2025, and that's what's embedded in that guide is continuous improvement on the gross margin in the tune of 80 basis points, will be driven by continued focus on gross margin improvement programs and then mix as some of the higher gross margin products continue to grow ahead of the company average, you get that mix effect. And then down the P&L, I think you've got an opportunity, as we've talked about in the past, to be able to leverage the business and obtain spending leverage across the business. And again, I think that was another challenge we had during COVID or as the COVID was coming down, we really only relied on one lever of margin expansion, which was gross margin equipment. I'd say now you've got two. We actually have two, which is our original formula, gross margin expansion and then spending leverage. So you put all that together, you've got about 16% actually underlying growth in the EPS coming from the top line, the gross margin improvement and the spending leverage. And then we've got, obviously, some friction on FX. I think every company is going to face that as we've seen the strengthening dollar, and increased tax rates, which also aren't a surprise. We've known about that. And so that brings us down to that 10%. So I kind of look at this and say, okay, what you've seen now for 2025 is the Abbott that we know, the Abbott identity that we built, which is high single-digit top line, double-digit bottom line, gross margin improvement, spending, leverage and productivity, strong operating cash flow. We know how to deal with FX. So we deal with it every year, and we're dealing with it again this year and still being able to deliver double-digit EPS. Dealing with a higher tax rate, so I think I saw some notes about calendarization about maybe Q1 not coming in. I could tell you, we looked at our Q1 and all of our gating or EPS is very much aligned to what it was in 2024. It's very much aligned to what it was pre-COVID. So again, all the elements of Abbott and the Abbott identity that we know are there, and we're looking forward to 2025. Robbie Marcus: Great. Thank you very much. Operator: Thank you. Our next question will come from Larry Biegelsen from Wells Fargo. Your line is open. Larry Biegelsen: Good morning. Thanks for taking the question. So Robert, I guess you talked about, it starts with the top line. You had another really strong year for CGM with over 20% constant currency growth of $6.5 billion in sales. So I'd love to hear you talk about your expectations for growth in 2025. The status of the Libre 3 supply issues and any color you have on the Lingo launch? Thank you. Robert Ford: Sure. So let me talk about Libre 3 supply. As we spoke about during the last call, Larry, there was a little bit of a mismatch, but our manufacturing coming up online and the demand that we were seeing, especially here in the US. That caused a little bit of friction there, but as I said, we were in process of getting our new manufacturing site up and running. I was there in November and seen the team and that's going now at full force. So Libre 3 supply with two manufacturing sites up and running and I think you'll start to see throughout the next one or two quarters a change here and a little bit on the NBRxs on the TRxs. I know you guys like to look at those quite often, I guess, those are an important metric to look at it, Larry, but they're not the only metric to see how the businesses are doing. I mean, I think you saw that in our Q4. We're able to grow the US 24%. So there are other elements that aren't measured. I think you also -- you guys also saw the impact of relying exclusively on those data's in Q3 as competitors had challenges also. So it's an important metric to look at, but I would say, it's not the only ones, and I think we've kind of shown that here. So Libre 3 is doing pretty well and it's just going to get better. As I look at 2025, I'd say there are some pretty interesting kind of growth drivers here for us. I'd say, first, as a base case, I still think there's under-penetration in the intensive insulin using segment. I mean, if you look at the US, there's still 25% of that segment that are not on CGMs, and if you think about that international, it's more like 50%. So I still think as a base case to driving all this growth, there's all this opportunity in this segment, but I think there are three areas in 2025 that I believe accelerates that opportunity for us. One of them is obviously basal coverage. And we continue to see with the publication of more clinical evidence, you see more and more markets move towards expanding basal coverage, reimbursement coverage. Now we have a couple of markets where we're the only ones that do have that coverage, whether it's Japan or Canada. These are large markets. So these are great opportunities for us where we've got this head start and we'll keep on driving that. So I think Basel is a big bucket of growth. I think the other area that I talked about as being an area of growth for us is more a kind of share -- ability to take share, and that's through connectivity strategies with insulin delivery systems. We've been talking about all the things that we've been doing with regards to partnership with insulin pump companies. And I think you'll see throughout this year several announcements on connectivity in different geographies, and that's gives us the opportunity to penetrate, albeit a smaller segment, but be able to penetrate that segment and take share. And I think the third area of growth for us of acceleration is just the whole OTC non-diabetes application with the launch of Lingo continue to see very nice trends. We've launched it in a restricted number of U.S. cities, but I think now that we understand what it takes to be able drive adoption with this completely different consumer segment that we'll probably be expanding this and expanding this more nationally here in the U.S. and potentially looking at other areas internationally due to bring this. So I think the Lingo launch is going very well. In several areas, I think, it surpassed some of my expectations, especially regarding reorder rates. And I think those continue, and I think that's going to be another kind of leg of the stool so as to say on growth. So I think those are really the kind of growth drivers that we've got planned for Libre. I think the insulin -- intensive insulin segment is still an opportunity, a pretty significant opportunity. And then you've got these three accelerators on top of that. Larry Biegelsen: Thank you very much. Operator: Thank you. Our next question comes from Travis Steed from BofA Securities. Your line is open. Travis Steed: Hey, thanks for taking the question. I wanted to ask about EP growth, so still strong high single digits in the quarter, and I think it was even faster than that, excluding the tough mapping comp. There's a lot of things moving around in that market right now. One competitor had a big setback in DSA and your progress is moving forward with both. So just thinking about how you're thinking about EP growth in 2025 as you bridge the PFA in 2026 and your ability to kind of regain market share once both launches? Robert Ford: Sure. Yes, I mean, I think this was not a surprise for us, and it wasn't really driven by any kind of adoption of PFA regarding our Q4 growth rate. In fact, as I've said in previous calls, I think the net effect for us -- net-net effect for us has actually been very positive. What we did have was an execution of that strategy, Travis, where we said, okay, we're going to bridge ourselves, and one of the ways to do that is through our mapping. And that's what really drove our success in 2024 is we did in Q4 of 2023, really taking advantage of our ability to offer the only real open -- truly open mapping system. So that created that comp issue. It was double digits in Q4, 12% in the U.S., 12% internationally. So still seem very good. And I think, again, I would say, these results, I think we outperformed a lot of the expectations that many of you guys had about our EP business. And I think the driver of that has been the team. The team in the field has just been spectacular, I think. And I've been close to them last year and I think what they did was really strong. So, I guess I answered your question in 2025, really looking at what we did in 2024. And I expect to continue to benefit in 2025 from the -- just the general increasing procedure trends. We've got opportunities to grow with some recently launched products, whether it's our GridX, our next-generation mapping catheter, our new Agilis Introducer Sheath, I mean that's a great opportunity for us also. So, yes, it's going to be a little bit more competitive. It's been pretty competitive in 2024. I expect that intensity to increase when it comes to the ablation catheters. But I'm confident that we can maintain a strong position in the mapping segment and everything that comes with all the consumables that come with that. On top of that, our pipeline is very strong. We'll continue to engage KOLs and our customers. We've got an ongoing trial right now with a dual energy source catheter internationally and in the U.S. We've got integration with ICE. We've got kind of new sheets to launch. So, I think the pipeline allows us to continue that interaction with the KOLs and with the users. So, we should expect -- I think you mentioned bridging to PFA in 2026. It's more like 2025 on PFA, at least internationally. So, I feel good about it. And maybe you've got a tail of two halves, where the second half is going to grow faster than the first half as Volt comes on board. But I'd say, for the full year, high single-digits seems like a good place to start, call that our base case. And then to the point that you made about competition and some of the dynamics that have occurred in the last couple of weeks, it's still a little bit too early to tell, but that could be an opportunity for us also. So, I feel good about the business, not only the pipeline, but more importantly, the team that we've got. They're doing an incredible real strong job. Travis Steed: Great. Thanks a lot. Operator: Thank you. Our next question will come from Vijay Kumar from Evercore ISI. Your line is open. Vijay Kumar: Hi Robert. Thanks for taking my question and congrats on a strong finish to the year. I guess I had a two-part question, if you don't mind. Really strong operating margins, driven both by gross margins and operating leverage, but your gross margins are still below pre-pandemic levels. So, I'm curious, when you look at the margins, how sustainable are these trends, perhaps not at triple-digits, but should we be thinking about trend margin framework as gross margins normalize? And my second part is on balance sheet. I'm curious there's been some M&A activity picking up in MedTech. How you're thinking about devices versus diagnostics? I'm curious any thoughts on that cancer screening, MRD, et cetera? Robert Ford: I'll let Phil talk to the gross margin and the sustainability of that margin improvement, and then I'll take your balance sheet question. Phil Boudreau: Yes. Thanks, Robert and Vijay here. On the gross margin front, I think we spoke to this in the last few calls and nothing here has really changed relative to an underlying focus of the business and of the organization, as Robert touched on here. I think the difference in recent years causing that erosion was the significant inflation in commodity prices, which has really resorted back to, I'd call it, normalized inflationary pressures that we're very much accustomed to managing through with our organizations and focus on gross margin expansion. And so what you saw in 2024 was exactly that, the recipe we're accustomed to and the commitment in 2025 to do much of the same. So from expense standpoint, we expect this to continue, and it's not a matter of if, but when we get back to the legacy and historical gross margin profiles. Robert Ford: Yeah. I guess on your question on balance sheet. I've always talked about this, Vijay. I mean, we do take this kind of balanced approach. I'm not going to give you a formula of how much goes to here, how much goes to their. We do take a balanced approach. And on your M&A question, yeah, there's been an uptake of activity, no doubt. There are some good opportunities out there and whether -- and I don't think you're going to see a change in rate environment, but maybe on the regulatory environment, I think that creates opportunity. I've said that we've got a strong organic pipeline. It allows us to be selective. It allows us to look at opportunities that make sense strategically, but also generate an attractive return. I talked about how ROIC is important for us also. So not just top line, but return on that capital. So we do take a position here of being stewards of that capital. So I'd say, yes, we're in great position. We do have some debt to pay down this year, which we will. I don't anticipate rates coming down to the point that we might want to look at refinancing that. So we'll pay off that debt. It's about $1.5 billion this year. But even with that, we're in a great position with our balance sheet to be able to leverage opportunities that we'll see, talked about them. There's opportunities in med-tech, there's opportunities in diagnostics, and we're in a great position, and it allows us to be selective. Vijay Kumar: Understood. Thanks guys. Operator: Thank you. And our next question will come from Josh Jennings from TD Cowen. Your line is open. Josh Jennings: Hi, good morning. Thanks for taking the questions. I echo Vijay's congrats on a strong finish to the year. Another margin question just because the operating margin guidance for 2025 was some stronger than expected, I think you talked about a lot of the drivers, Robert and Phil, but just a continued positive mix shift from stronger macro device contributions and the strong top line growth. But I was hoping you may just help us think through just the margin expansion opportunities in EPD, Nutrition and Diagnostics. And just with the outsized expansion in 2025, how should we be thinking about sustained open expansion in 2026 and beyond? And then should we be thinking about 50 to 100 basis points a year? I appreciate you taking the question. Robert Ford: Yeah. I'd like to get to that pre-pandemic gross margin. I mean, I know we talk a lot about this being behind where we were from a pre-pandemic. But our op margin profile, especially after our guidance for 2025 is actually ahead of that. So we've been able to achieve that through our spending and spending efficiencies. But I think that's the right range to have. I mean I think we've always had this notion. I mean, I talked about being able to offset FX and things like that and not provide any surprises. That's part of the algorithm there, which is we're just constantly having to address gross margin. It's not like this initiative either because of inflation or bits of tariffs or anything like that, it's just we're constantly working to improve gross margins. I'd say, on the nutrition side, those gross margins, given what we encountered over the last two years, those came down. But if you look at them, they have been improving sequentially almost like every quarter. We've got a ways to go to get back to where we were in 2022, Josh. That's a little bit more dependent on commodities and freight and distribution, things like that. But I think the teams have got a really good strategy here of kind of working on cost to serve and even, quite frankly, using some pricing where we felt we had to because of some of the increase in those commodities. So I think the Nutrition gross margin is definitely an opportunity that we've got over the next couple of years. The pharmaceutical teams have done an incredible job at maintaining a gross margin under pretty significant FX. I mean they do a fantastic job at offsetting FX. If you look at the margin profile in that business, it's actually increased several -- couple of hundred basis points over the last couple of years. So they've been able to do that also through gross margin. And I think the other element is just ensuring that we keep on driving the med tech business that have accretive gross margins quite frankly, across all of those different business units. And if we can continue to do that, then that's how you get to that model of maybe 50 to 100 basis points every single year. That's our target. We committed to 70, and we deliver to 70, we're now committing to 80 for 2025. And getting us closer to where we were pre pandemic. So I feel good about what we're doing, the strategy we got in place, the discipline that we have as a management team to review these programs and dedicate time. They don't just happen. We got to make decisions. There's oversight. So I feel good about it. Josh Jennings: Excellent. Thanks, again. Operator: Thank you. Our next question will come from David Roman from Goldman Sachs. Your line is open. David Roman: Thank you. Good morning, everybody. I was hoping, Robert, you could go into a little bit more detail on the Structural Heart business. As you kind of break down the pieces that portfolio, you have a balance of drivers, some more legacy like MitraClip and some that are more emerging categories, like TriClip and the tricuspid repair segment. But maybe you could help us think about the evolution of that business, which did very nicely through 2024, and how we should think about that into 2025? And maybe I could just contextualize the broader outlook here, and I appreciate your comments about getting back to the Aveir of high single-digit top line and double-digit bottom line. But it looks like 2025 does carry some headwinds that may prove to be one-time in nature like VBP dynamics in China on the diagnostics side, the transient competition in EP. So maybe you could kind of give us some color on Structural Heart, but also help contextualize the growth rate in 2025, as we think about the long-term as well? Robert Ford: Sure. I think it's interesting, like the sixth question comes on Structural Heart after we posted a 23% growth. So thank you, David. As I said in my opening comments, I think this is one of the most attractive areas in med tech. And it's one that we looked at several years ago and said, we're going to build truly a market-leading portfolio of products. And we're not going to just kind of rely on one platform to kind of drive growth, we're really to assemble a full area here and look across the entire area. And even in surgical, I mean I think, I look at our Epic valve, the feedback I keep getting on the surgical side of it is just doing incredibly well and it's really a preferred go-to on the mitral side for surgical repair, but -- replacement. But yeah. I think in the past, David, I think our Structural Heart portfolio was just viewed as MitraClip. And quite frankly, the sales would say, yeah, that's probably the case. But as we've been building out the portfolio, building on our stroke prevention with PFO approval, with Amulet approval and driving growth there, Amulet did very well in Q4 also grew 25%. Getting into the aortic segment, right, and really being a player there that has established now clinical credibility, whether it's through clinical trials, but also actual real-world usage of the product. They've been seeing some of Navitor cases here in the US and just the feedback has been very, very positive. So, building our aortic portfolio there. We're making big investments, whether it's in our clinical trials to build out our indications. We recently talked about -- shared that we are developing a balloon expandable TAVR valve, and we want to have a full aortic portfolio. On the tricuspid side, we were one of the leaders there to say, hey, there's no real good transcatheter opportunity here to treat TR. And TriClip has done very well. It's done extremely well, quite frankly, throughout this year. I think the team has done an incredible job getting approved behind the competitor. I would say right now, our data says that the ratio of repair and replace is about 2:1, and we're leveraging all of that built in kind of infrastructure and scale that we already built with MitraClip. So what you see is a Structural Heart portfolio, $2.5 billion growing, let's call it, mid-teens because it much more diversified and, quite frankly, very competitive products in these high-growth areas. So I think that's going to continue, and we're committed to making these investments. We've got new versions of Amulet launch. We just got an approval for an updated version of TriClip to ease even more of the implant. You're going to see clinical trials read out in this area for label expansion indications in TAVR and in LAA. So this is an area that I think what you're seeing now, that kind of growth rate coming from the investments and just great execution from the team so. What was your -- your question was about growth rate and... David Roman: Yes, I was trying to speak a second there was just to contextualize the 25% growth rate given some onetime-ish headwinds like VBP in China Diagnostics and the dynamics in EP being potentially kind of transient as well? Robert Ford: Yeah. I mean, listen, every quarter, every year, there's always going to be some headwind. I want to do is here is assemble David, more tailwinds than headwinds, right? But yeah, I mean, you mentioned one, which is a little bit of a headwind for us in our diagnostic business regarding VBP. That's going to be with us in 2025 as they're rolling out new panels of testing that's going to go through that. But outside of that, I'd say, the diagnostics business is doing very well. Q4 growth rates in most areas were actually higher than the full year growth rate in those same areas, US, Latin America, Europe, even Japan was faster in Q4. So yes, we do have a challenge, but most companies are going to do it. And you know what, we've gone through these, David. Every company goes through a VBP, and what we're trying to do is, okay, we're not going to define the company by having this one kind of headwind. We've got a lot more tailwinds to leverage. We still have deal with it. We're still managing it. It's still an important part of the business. But the company is more than just VBP in diagnostics and one important market, but just one market. So I think the growth rate is very robust. I mean, 8% at the midpoint on a base of $40-plus billion, I think is pretty strong and pretty good. David Roman: Perfect. Thanks for taking the questions. Operator: Thank you. And our next question will come from Joanne Wuensch from Citi. Your line is open. Joanne Wuensch: Good morning and thank you for taking the question and nice quarter. I'm curious if you could just sort of step back and talk about the overall health of the MedTech market. I feel like I'm constantly answering questions on things such as volume and price. And looking at you delivering mid-teens revenue growth, and I think you're seeing something that maybe not everybody is seeing, so I'd love to get your view on that? Thank you. Robert Ford: Sure. I mean, I think it does put us -- I mean, the way our portfolio is structured, Joanne, is that it does give us a little bit of bird's eye view into the entire health care system and the spectrum, right? And I think if you're getting questions on MedTech and MedTech growth, I think all you've got to do is continue to look at what companies are reporting. And what they're reporting is ultimately what we're seeing in the market, which is, it's not a pre-COVID pent-up demand. You are seeing a greater focus from whether consumers or the technologies that are being developed that are attracting more people into these procedures. So I think what we're seeing here is continued utilization growth really driven by whether it's demographics, combined with the innovation. I mean, what the industry is doing in terms of the innovation that we're bringing to the market, it's pretty spectacular and the procedures are getting faster, they're getting less invasive, and that's attracting more people to look at, select these procedures as a real viable first-line option versus guided medical therapy. So I think that's going to continue as long as we continue to see this innovation where we are obviously positioning ourselves pretty strongly in this, and you've seen sequential improvement in the growth rate across quite frankly, a lot of our businesses in MedTech. So I think the utilization is definitely increasing. I think there's maybe some questions, okay, what's going to happen with pricing? We've historically seen some price erosion in the past. I'd say, over the last couple of years, it's actually been pretty stable. So I don't know how that's going to play out. We've got a scenario here where we believe that with our portfolio, we'll see some pretty stable pricing. But I think utilization, combined with stable pricing is what's driving this MedTech growth. And we're seeing it in diagnostics, too. A lot of our diagnostic business is actual hospital-based diagnostics. So, we're seeing those diagnostic tests and those routine diagnostics tests continue to increase, high single, double-digit, low double-digit growth rates in terms of utilization. So, I think that MedTech is benefiting from just this increased utilization and consumers wanting to take care of themselves and looking at these technologies as a viable option for treatment. Joanne Wuensch: Thank you so much. Operator: Thank you. Our next question will come from Danielle Antalffy from UBS. Your line is open. Danielle Antalffy: Hey good morning guys. Thanks so much for taking the question and congrats on a really good quarter, strong end to the year. Robert, we've talked in the past, I mean, obviously, we talked a lot about MedTech in the high-growth areas, but some areas where you've excelled or the legacy sort of slower growth businesses, I'm obviously thinking CRM being one of those mid- to high single-digits growth. Can you talk about -- that you find in CRM other legacy businesses. I'm thinking like heart failure, peripheral, and maybe how you're thinking about elevating those growth profiles in 2025, but then also longer term? Thanks so much for taking the question. Robert Ford: Yes. So, one of our strategies that we looked at a couple of years ago, Danielle, was if you looked at our MedTech business, it was growing like 8%, 9%. And that was a combination of probably like high-growth areas like EP, Structural Heart, Diabetes, even Heart Failure. And 40% of the portfolio was relatively flat and that was mostly our Vascular business and our CRM business. And the way we looked at it is to get our MedTech to be best-in-class, to be able to grow 12%, 13%, 14%, we need to continue the strong growth rate of Structural Heart, EP, Diabetes, et cetera. But we had to find a way to accelerate the growth rate of our Vascular and CRM businesses. And we said, if we can get them, these are historically been flat growth markets. If we can get them to grow 5% the way that would then work out is that we'd be able to elevate our MedTech portfolio to the mid-teens. So, that's what we've been doing over the last couple of years, and the team have been executing on that. I think on the Vascular space, what you've seen us do is kind of used a little bit a combination of organic and inorganic to accelerate and increase our participation in higher growth areas, specifically in the peripheral side. So, -- and I think you started to see that. We've been growing -- this quarter was a good quarter. Our target was around 5% for our Vascular business by having those -- by having stronger pipelines and portfolios in that more Peripheral space. And you're seeing that now start to happen. On the CRM side, our big strategy here was organic and getting to launch a very comprehensive and be the leaders -- sorry, leaders in leadless. So, we launched a single chamber a couple of years ago, launched a dual chamber last year, going to get into conduct and pacing leadless also. And I think that you've seen that over the last two years, our CRM business has grown 7%. And I think we can continue to extend that with the strategy that we're doing, which is to really lead in this area. I actually think that Aveir is probably the most underappreciated opportunities that we have in our portfolio. Look at it right now, you're asking the question towards the end of call, but I think really what you're seeing is these businesses, the focus, the innovation, the execution and now you're seeing those start to deliver on that strategy to bring these flat businesses up to mid -- at least mid-single-digit growth. I think there's the team doesn't like that I characterize them like that. So that's good. I'm glad that they think that they can do better than that. But we've got a lot of opportunity in those big areas, and we think there's innovation to be had in those. So we feel good about it. Danielle Antalffy: Thank you. Mike Comilla: Operator, we'll take one more question, please. Operator: Thank you. And our last question will come from Matt Miksic from Barclays. Your line is open. Matt Miksic: Hey. Thanks for squeezing me in. Just maybe a follow-up here, given the tech guidance you gave for this year and some of the dynamics in US and overseas or tax policy, It'd be great to get your perspective on maybe the direction of where those things are going. And how we should think about them for having? Thanks so much. Phil Boudreau: Yeah. Thanks, Matt. There's a lot of narrative at the moment going on. But to your point and to the guide that we referenced in our opening comments here, what we've reflected is all current tax laws and guidance and geographic mix of where our business growth is coming from, which is about a 150-basis-point increase in the midpoint of this guide. That increase in the guide is driven by the increased adoption of the rollout here of Pillar 2 as is currently enacted in countries. And so that's what we reflect. We continue to be a good taxpayer, compliant taxpayer, and we'll see how more of this narrative unfolds here. But currently, we're running the operations and reflecting what's known and as Robert highlighted, absorbing still within the way we run the business. Robert Ford: Let me -- I want to add in on that one, Matt. I think you'll hear this topic come up quite a bit. And if I just take a bigger picture here. I mean, corporate tax rates tend to get higher politicized and especially during election years, and it's really not a political debate. In the business world, it's just an expense. It's just another form of expense. And in our world, when one expense goes up, you've got to manage and other expenses have got to come down or maybe not increase at the same rate that they were increasing. And I think what you'll find sometimes, you get a small handful of companies that maybe had a really low tax rate and then that viewpoint then gets unfairly applied to every large company, and then you get these predictable narratives of companies have got to pay their fair share, et cetera. The reality is, most companies pay their fair share and then some. I mean, I could talk about Abbott. Our cash taxes are over 20%, and that's one thing that people never talk about is we use these GAAP rates. But what really matters is cash taxes. That's the money that's going to be paid. But more importantly, US companies, companies like Abbott, we play a key role in making the US economy so successful. We're conducting a significant portion of the R&D in the US. We invest billions of dollars in capital projects, which then drive this drop growth. Our CapEx spend has increased over 60% over the last couple of years. We increased our workforce by 20%. And when you increase that workforce, you're investing hundreds of millions of dollars in employee health care and employee benefits. So this Pillar 2 legislation -- this Pillar 2 rule here that got adopted, that's added. And we -- I think this rate that Phil is kind of quote, that's an additional $200 million of expense. That's all it is. It's $200 million of expense that is not going to investing in other areas. And what's even more challenging is of those $200 million, two-thirds of it is actually going to be paid taxes to overseas countries. So that's not really a good policy for the US. And so we're absorbing this. We're managing it. And I think as still said, there are a couple still some new policies or new issues that we have to kind of work on. But I think the overall goal here has got to be to ensure the competitiveness of US companies and US multinationals. And I'm hoping we can get to that during the next 12 months or so. Let me just kind of close then on the call. I think we had a really strong finish to 2024. We exited our Q4 organic sales growth was over 10% and top line, 13% EPS, as I said, finished at the higher end of our range, expanded our gross margin, delivered what we said we were going to do. The pipeline continues to be highly, highly attractive, steady cadence of great new growth opportunities. And I think, to Vijay's question, we've got a balance sheet that's going to provide us a lot of strategic flexibility. So I think we're really well positioned to 2025. So with that, I want to thank you for joining us today. Mike Comilla: Thank you, operator, and thank you all for your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you all for joining us today. Operator: Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.	[ { "speaker": "Operator", "text": "Good morning and thank you for standing by. Welcome to Abbott’s Fourth Quarter 2024 Earnings Conference Call. All participants will be able to listen only until the question-and-answer portion of this call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant’s questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott’s express written permission. I would now like to introduce Mr. Mike Comilla, Vice President, Investor Relations." }, { "speaker": "Mike Comilla", "text": "Good morning and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Phil Boudreau, Executive Vice President, Finance and Chief Financial Officer. Robert and Phil will provide opening remarks. Following their comments, we’ll take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2025. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological, and other factors that may affect Abbott’s operations are discussed in Item 1A, Risk Factors, to our annual report on Form 10-K for the year-ended December 31, 2023. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. On today’s conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott’s ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Note that Abbott has not provided the related GAAP financial measures on a forward-looking basis, for the non-GAAP financial measures for which the company is providing guidance because the company is unable to predict with reasonable certainty and without unreasonable effort, the timing and impact of certain items, which could significantly impact Abbott's results in accordance with GAAP. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which is defined in the press release issued earlier today. With that, I will now turn the call over to Robert." }, { "speaker": "Robert Ford", "text": "Thanks, Mike. Good morning, everyone. And thank you for joining us. First, I want to express gratitude to my Abbott colleagues around the world whose hard work and passion with the driving forces of Abbott's continued success. Abbott's commitment to innovation, operational excellence and serving the needs of our customers resulted in another year of exceptional performance, which included achieving sales growth of 9.5% excluded COVID testing, delivering 70 basis points of gross margin profile improvement, driving acceleration in the growth of our earnings per share throughout the year and developing and advancing new products through our rich pipeline. The strong performance resulted in generating $8.5 billion of operating cash flow, which was used to reinvest in the business, fund capacity expansions, repay debt and returned $5 billion to shareholders in the form of dividends and share repurchases. These accomplishments played a key role in continuing our well-established track record for delivering on our financial commitments, which included achieving results that finished at the high end of our initial guidance ranges we provided for 2024. These results included exiting the year with a very strong momentum as fourth quarter sales grew 10%, excluding COVID testing sales, and adjusted earnings per share increased 13% versus the prior year. For 2025, we're well positioned to deliver another year of strong growth. As we announced this morning, we forecast organic sales growth to be in the range of 7.5% to 8.5% and adjusted earnings per share to be in the range of $5.05 to $5.25, which reflects double-digit growth at the midpoint. I'll now summarize our fourth quarter results in more detail before turning the call over to Phil. I'll start with Nutrition. Our sales increased 7% in the quarter. Growth in the quarter was driven by double-digit growth in adult nutrition, led by our market-leading Ensure and Glucerna brands. We achieved a significant milestone last year with annual sales of Ensure surpassing $3 billion. This achievement helped deliver another year of strong performance in adult nutrition, with annual sales of adult nutrition products growing 9% last year. This strong performance is a continuation of a well-established trend, the five year compound annual growth rate in adult nutrition is 9%, which reflects the impact of our well-known and respected brands, favorable demographic trends, the significant investments we've made to expand manufacturing capacity to serve the growing global demand for our products. Moving to Diagnostics, where sales increased 6%, excluded COVID testing sales. Growth in the quarter was led by rapid diagnostics where excluded COVID testing sales increased 16% in the quarter. This was driven by strong demand for our portfolio of respiratory disease tests used to help diagnose influenza, strep throat and RSV. In Core Laboratory Diagnostics, growth of 4% was driven by continued strong demand for our market-leading immunoassay, clinical chemistry, hematology and blood screening testing panels. Excluding the impact of challenging market dynamics in China, the combined growth in all other markets was double digits in the quarter. Turning to EPD, where sales increased 8.5% in the quarter. Growth was well balanced across markets and therapeutic areas that we participate in, including gastroenterology, women's health, CNS and pain management. EPD also delivered broad-based growth across the markets we serve, including double-digit growth in several countries across Latin America, Southeast Asia and the Middle East. By focusing on the therapies most needed in these faster-growing markets, we continue to sustain our long track record of delivering strong growth, which includes a five-year compound annual growth rate for EPD of 8%. And I'll wrap up with Medical Devices, where sales grew 14%. In Diabetes Care, sales of continuous glucose monitors were $1.8 billion in the quarter and grew 23%. For the full year 2024, sales of continuous glucose monitors were approximately $6.5 billion and grew 22%. This included growth of 27% in the U.S. where our market share on a revenue basis has increased by more than 10 share points over the last three years. In electrophysiology, growth of 9% was well balanced across the U.S. and international markets. As expected, growth in the quarter was impacted by a challenging comparison versus the prior year where we saw a sharp increase in demand for our EnSite cardiac mapping systems as customers prepared for the launch of PFA catheters. Excluding the impact of this prior year comparison dynamic, growth would have been double digits globally in the U.S. and internationally. In Structural Heart, growth of 23% was driven by strong performance across our market-leading portfolio of surgical valves, structural interventions and transcatheter repair and replacement products. Structural Heart represents one of the most attractive areas in the field of medical technologies. It is an area that we have invested in heavily, and we're seeing those investments yield outstanding results. Our comprehensive portfolio of products drove an acceleration in sales growth in Structural Heart throughout the year. In Rhythm Management, growth of 7% was led by AVEIR, our innovative leadless pacemaker and Assert, our newest implantable cardiac monitor, which we launched in the U.S. last year. With growth of 7% for the full year, our Rhythm Management business delivered another year of performance that far exceeded the market, and we expect that to continue this year. Last month, we announced that we completed the first-in-human implant of a new version of AVEIR specifically designed to deliver pacing to the left bundle branch area of the heart, activating the heart's natural conduction system. This highly innovative device currently in development was granted breakthrough designation by the FDA. In Heart Failure, growth of 9.5% was driven by our market-leading portfolio of heart-assist devices, which offer treatment for chronic and temporary conditions. In Vascular, growth of 7% was led by double-digit growth in vessel closure products and growth from Esprit are below-the-knee resorbable stent. And lastly, in Neuromodulation, sales grew 8%, driven by strong demand in international markets for our Eterna rechargeable spinal cord stimulation device. So in summary, we delivered another quarter of strong growth, with sales growing 10% and earnings per share growing 13%. For the year, we achieved the upper end of the initial guidance ranges we provided for 2024. We made great progress expanding our gross margin profile, and we expect that progress to continue into 2025. The pipeline continues to provide a steady cadence of new growth opportunities, and we're well positioned to deliver another year of strong growth in 2025. I'll now turn over the call to Phil." }, { "speaker": "Phil Boudreau", "text": "Thanks, Robert. As Mike mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis. Turning to our fourth quarter results. Sales increased 8.8% on an organic basis and increased 10.1% when excluding COVID testing sales. Foreign exchange had an unfavorable year-over-year impact of 1.4% on fourth quarter sales. During the quarter, we saw the U.S. dollar strengthen against most currencies, which resulted in unfavorable impact on sales compared to exchange rates at the time of our earnings call in October. Regarding other aspects of the P&L, the adjusted gross margin ratio was 56.9% of sales, adjusted R&D was 6.3% of sales, and adjusted SG&A was 26.3% of sales in the fourth quarter. Lastly, our fourth quarter adjusted tax rate was 15%. Turning to our outlook for 2025. Today, we issued guidance for full year adjusted earnings per share of $5.05 to $5.25, which reflects double-digit growth at the midpoint of the range and contemplates an adjusted earnings per share forecast of $1.05 to $1.09 for the first quarter. For the year, we forecast organic sales growth to be in the range of 7.5% to 8.5%. Please note that we are no longer providing separate guidance for the sales growth, excluding COVID testing sales as COVID testing sales represents less than 2% of total company sales in 2024. Based on current rates, we would expect exchange to have an unfavorable impact of around 2.5% on full year reported sales, which includes an expected unfavorable impact of approximately 3.5% on our first quarter reported sales. We expect our full year 2025 adjusted gross margin profile to be around 57% of sales, which reflects an improvement of around 80 basis points versus the prior year. We forecast our full year 2025 adjusted operating margin profile to be in the range of 23.5% to 24% of sales, which reflects an improvement of 150 basis points versus the prior year at the midpoint of range. This improvement is driven by a combination of strong gross margin expansion and operating margin leverage. We forecast our adjusted tax rate to be in the range of 16% to 17%, which reflects an increase compared to last year related to the adoption of the Pillar 2 tax framework. With that, we'll now open the call for questions." }, { "speaker": "Operator", "text": "Thank you. At this time, we will conduct a question-and-answer session. [Operator Instructions] And our first question will come from Robbie Marcus from JPMorgan. Your line is open." }, { "speaker": "Robbie Marcus", "text": "Great. Thanks for taking the question and congrats on a nice quarter and guide. And maybe, Robert, I could start with the 2025 guide, once again guiding to high single-digit organic sales growth, healthy operating margin expansion, and nice to see 10% EPS growth back in the algorithm again. Maybe you could just speak to some of the key growth drivers and how we should think about the different business segments on the top line and some of the components of the operating margin expansion down the P&L? Thanks a lot." }, { "speaker": "Robert Ford", "text": "Sure, Robbie. Yes, it's nice to see kind of the headline print now back to double-digit EPS growth. I think that's probably one of the things that -- it's one of the things you'll see now, Robbie, as we go into 2025. I mean, you've got a lot of growth drivers there. But I think one of the big things is that you don't have the COVID sales decline cloud that's kind of overshadowing all these real strong growth drivers that we got in the business. And you saw that in Q3 as we showed 13% EPS -- sorry, in Q4 as we showed 13% EPS growth. So I think that's one big aspect. It's just not having those sales decline. I mean we've got COVID sales in 2025, but it's, as Phil said in his comments, significantly less from our total revenue perspective. I think it starts with the top line always, Robbie, and the markets that we compete in, they remain attractive. We're seeing acceleration in several of them. I mean we're a very diversified healthcare companies so we get to benefit from all the different dynamics that are going on in healthcare, whether it's increased health and wellness focus from consumers, we get to benefit from that on our Nutrition business. Every treatment requires a diagnostic test, about 70% of them require diagnostic test, so we're seeing continued growth over there. And then we've got two areas where we focus on treatments, whether it's pharmaceuticals or med tech. And so all of those markets, they're accelerating. And then within them, we've got strong product portfolios that are either keeping up with these very high-growth markets, or we're outperforming the market and taking shares. And if you look at the contributions, we've got your current drivers, whether it's Libre, TriClip, Aveir, Navitor, Amulet, all of those products in the cardiovascular space. So the bases are loaded, I would call that. And then you've got a nice on-deck circle and the lineup of Abbott that are coming up right after that, whether it's biosimilars, volt, innovations in the Libre portfolio, some clinical trial readouts. So I think we feel very good about all of the businesses, and you saw all of the businesses improved their growth from Q3 to Q4. So I think it starts with the top line, and I think we're well positioned in them. To your question on the margin drivers, I'd say we've got -- we've done a lot of work on gross margin expansion. We've talked about that committing to a 70-basis-point improvement in 2024. We achieved that. We believe that we can achieve another 80 basis points of improvement in 2025, and that's what's embedded in that guide is continuous improvement on the gross margin in the tune of 80 basis points, will be driven by continued focus on gross margin improvement programs and then mix as some of the higher gross margin products continue to grow ahead of the company average, you get that mix effect. And then down the P&L, I think you've got an opportunity, as we've talked about in the past, to be able to leverage the business and obtain spending leverage across the business. And again, I think that was another challenge we had during COVID or as the COVID was coming down, we really only relied on one lever of margin expansion, which was gross margin equipment. I'd say now you've got two. We actually have two, which is our original formula, gross margin expansion and then spending leverage. So you put all that together, you've got about 16% actually underlying growth in the EPS coming from the top line, the gross margin improvement and the spending leverage. And then we've got, obviously, some friction on FX. I think every company is going to face that as we've seen the strengthening dollar, and increased tax rates, which also aren't a surprise. We've known about that. And so that brings us down to that 10%. So I kind of look at this and say, okay, what you've seen now for 2025 is the Abbott that we know, the Abbott identity that we built, which is high single-digit top line, double-digit bottom line, gross margin improvement, spending, leverage and productivity, strong operating cash flow. We know how to deal with FX. So we deal with it every year, and we're dealing with it again this year and still being able to deliver double-digit EPS. Dealing with a higher tax rate, so I think I saw some notes about calendarization about maybe Q1 not coming in. I could tell you, we looked at our Q1 and all of our gating or EPS is very much aligned to what it was in 2024. It's very much aligned to what it was pre-COVID. So again, all the elements of Abbott and the Abbott identity that we know are there, and we're looking forward to 2025." }, { "speaker": "Robbie Marcus", "text": "Great. Thank you very much." }, { "speaker": "Operator", "text": "Thank you. Our next question will come from Larry Biegelsen from Wells Fargo. Your line is open." }, { "speaker": "Larry Biegelsen", "text": "Good morning. Thanks for taking the question. So Robert, I guess you talked about, it starts with the top line. You had another really strong year for CGM with over 20% constant currency growth of $6.5 billion in sales. So I'd love to hear you talk about your expectations for growth in 2025. The status of the Libre 3 supply issues and any color you have on the Lingo launch? Thank you." }, { "speaker": "Robert Ford", "text": "Sure. So let me talk about Libre 3 supply. As we spoke about during the last call, Larry, there was a little bit of a mismatch, but our manufacturing coming up online and the demand that we were seeing, especially here in the US. That caused a little bit of friction there, but as I said, we were in process of getting our new manufacturing site up and running. I was there in November and seen the team and that's going now at full force. So Libre 3 supply with two manufacturing sites up and running and I think you'll start to see throughout the next one or two quarters a change here and a little bit on the NBRxs on the TRxs. I know you guys like to look at those quite often, I guess, those are an important metric to look at it, Larry, but they're not the only metric to see how the businesses are doing. I mean, I think you saw that in our Q4. We're able to grow the US 24%. So there are other elements that aren't measured. I think you also -- you guys also saw the impact of relying exclusively on those data's in Q3 as competitors had challenges also. So it's an important metric to look at, but I would say, it's not the only ones, and I think we've kind of shown that here. So Libre 3 is doing pretty well and it's just going to get better. As I look at 2025, I'd say there are some pretty interesting kind of growth drivers here for us. I'd say, first, as a base case, I still think there's under-penetration in the intensive insulin using segment. I mean, if you look at the US, there's still 25% of that segment that are not on CGMs, and if you think about that international, it's more like 50%. So I still think as a base case to driving all this growth, there's all this opportunity in this segment, but I think there are three areas in 2025 that I believe accelerates that opportunity for us. One of them is obviously basal coverage. And we continue to see with the publication of more clinical evidence, you see more and more markets move towards expanding basal coverage, reimbursement coverage. Now we have a couple of markets where we're the only ones that do have that coverage, whether it's Japan or Canada. These are large markets. So these are great opportunities for us where we've got this head start and we'll keep on driving that. So I think Basel is a big bucket of growth. I think the other area that I talked about as being an area of growth for us is more a kind of share -- ability to take share, and that's through connectivity strategies with insulin delivery systems. We've been talking about all the things that we've been doing with regards to partnership with insulin pump companies. And I think you'll see throughout this year several announcements on connectivity in different geographies, and that's gives us the opportunity to penetrate, albeit a smaller segment, but be able to penetrate that segment and take share. And I think the third area of growth for us of acceleration is just the whole OTC non-diabetes application with the launch of Lingo continue to see very nice trends. We've launched it in a restricted number of U.S. cities, but I think now that we understand what it takes to be able drive adoption with this completely different consumer segment that we'll probably be expanding this and expanding this more nationally here in the U.S. and potentially looking at other areas internationally due to bring this. So I think the Lingo launch is going very well. In several areas, I think, it surpassed some of my expectations, especially regarding reorder rates. And I think those continue, and I think that's going to be another kind of leg of the stool so as to say on growth. So I think those are really the kind of growth drivers that we've got planned for Libre. I think the insulin -- intensive insulin segment is still an opportunity, a pretty significant opportunity. And then you've got these three accelerators on top of that." }, { "speaker": "Larry Biegelsen", "text": "Thank you very much." }, { "speaker": "Operator", "text": "Thank you. Our next question comes from Travis Steed from BofA Securities. Your line is open." }, { "speaker": "Travis Steed", "text": "Hey, thanks for taking the question. I wanted to ask about EP growth, so still strong high single digits in the quarter, and I think it was even faster than that, excluding the tough mapping comp. There's a lot of things moving around in that market right now. One competitor had a big setback in DSA and your progress is moving forward with both. So just thinking about how you're thinking about EP growth in 2025 as you bridge the PFA in 2026 and your ability to kind of regain market share once both launches?" }, { "speaker": "Robert Ford", "text": "Sure. Yes, I mean, I think this was not a surprise for us, and it wasn't really driven by any kind of adoption of PFA regarding our Q4 growth rate. In fact, as I've said in previous calls, I think the net effect for us -- net-net effect for us has actually been very positive. What we did have was an execution of that strategy, Travis, where we said, okay, we're going to bridge ourselves, and one of the ways to do that is through our mapping. And that's what really drove our success in 2024 is we did in Q4 of 2023, really taking advantage of our ability to offer the only real open -- truly open mapping system. So that created that comp issue. It was double digits in Q4, 12% in the U.S., 12% internationally. So still seem very good. And I think, again, I would say, these results, I think we outperformed a lot of the expectations that many of you guys had about our EP business. And I think the driver of that has been the team. The team in the field has just been spectacular, I think. And I've been close to them last year and I think what they did was really strong. So, I guess I answered your question in 2025, really looking at what we did in 2024. And I expect to continue to benefit in 2025 from the -- just the general increasing procedure trends. We've got opportunities to grow with some recently launched products, whether it's our GridX, our next-generation mapping catheter, our new Agilis Introducer Sheath, I mean that's a great opportunity for us also. So, yes, it's going to be a little bit more competitive. It's been pretty competitive in 2024. I expect that intensity to increase when it comes to the ablation catheters. But I'm confident that we can maintain a strong position in the mapping segment and everything that comes with all the consumables that come with that. On top of that, our pipeline is very strong. We'll continue to engage KOLs and our customers. We've got an ongoing trial right now with a dual energy source catheter internationally and in the U.S. We've got integration with ICE. We've got kind of new sheets to launch. So, I think the pipeline allows us to continue that interaction with the KOLs and with the users. So, we should expect -- I think you mentioned bridging to PFA in 2026. It's more like 2025 on PFA, at least internationally. So, I feel good about it. And maybe you've got a tail of two halves, where the second half is going to grow faster than the first half as Volt comes on board. But I'd say, for the full year, high single-digits seems like a good place to start, call that our base case. And then to the point that you made about competition and some of the dynamics that have occurred in the last couple of weeks, it's still a little bit too early to tell, but that could be an opportunity for us also. So, I feel good about the business, not only the pipeline, but more importantly, the team that we've got. They're doing an incredible real strong job." }, { "speaker": "Travis Steed", "text": "Great. Thanks a lot." }, { "speaker": "Operator", "text": "Thank you. Our next question will come from Vijay Kumar from Evercore ISI. Your line is open." }, { "speaker": "Vijay Kumar", "text": "Hi Robert. Thanks for taking my question and congrats on a strong finish to the year. I guess I had a two-part question, if you don't mind. Really strong operating margins, driven both by gross margins and operating leverage, but your gross margins are still below pre-pandemic levels. So, I'm curious, when you look at the margins, how sustainable are these trends, perhaps not at triple-digits, but should we be thinking about trend margin framework as gross margins normalize? And my second part is on balance sheet. I'm curious there's been some M&A activity picking up in MedTech. How you're thinking about devices versus diagnostics? I'm curious any thoughts on that cancer screening, MRD, et cetera?" }, { "speaker": "Robert Ford", "text": "I'll let Phil talk to the gross margin and the sustainability of that margin improvement, and then I'll take your balance sheet question." }, { "speaker": "Phil Boudreau", "text": "Yes. Thanks, Robert and Vijay here. On the gross margin front, I think we spoke to this in the last few calls and nothing here has really changed relative to an underlying focus of the business and of the organization, as Robert touched on here. I think the difference in recent years causing that erosion was the significant inflation in commodity prices, which has really resorted back to, I'd call it, normalized inflationary pressures that we're very much accustomed to managing through with our organizations and focus on gross margin expansion. And so what you saw in 2024 was exactly that, the recipe we're accustomed to and the commitment in 2025 to do much of the same. So from expense standpoint, we expect this to continue, and it's not a matter of if, but when we get back to the legacy and historical gross margin profiles." }, { "speaker": "Robert Ford", "text": "Yeah. I guess on your question on balance sheet. I've always talked about this, Vijay. I mean, we do take this kind of balanced approach. I'm not going to give you a formula of how much goes to here, how much goes to their. We do take a balanced approach. And on your M&A question, yeah, there's been an uptake of activity, no doubt. There are some good opportunities out there and whether -- and I don't think you're going to see a change in rate environment, but maybe on the regulatory environment, I think that creates opportunity. I've said that we've got a strong organic pipeline. It allows us to be selective. It allows us to look at opportunities that make sense strategically, but also generate an attractive return. I talked about how ROIC is important for us also. So not just top line, but return on that capital. So we do take a position here of being stewards of that capital. So I'd say, yes, we're in great position. We do have some debt to pay down this year, which we will. I don't anticipate rates coming down to the point that we might want to look at refinancing that. So we'll pay off that debt. It's about $1.5 billion this year. But even with that, we're in a great position with our balance sheet to be able to leverage opportunities that we'll see, talked about them. There's opportunities in med-tech, there's opportunities in diagnostics, and we're in a great position, and it allows us to be selective." }, { "speaker": "Vijay Kumar", "text": "Understood. Thanks guys." }, { "speaker": "Operator", "text": "Thank you. And our next question will come from Josh Jennings from TD Cowen. Your line is open." }, { "speaker": "Josh Jennings", "text": "Hi, good morning. Thanks for taking the questions. I echo Vijay's congrats on a strong finish to the year. Another margin question just because the operating margin guidance for 2025 was some stronger than expected, I think you talked about a lot of the drivers, Robert and Phil, but just a continued positive mix shift from stronger macro device contributions and the strong top line growth. But I was hoping you may just help us think through just the margin expansion opportunities in EPD, Nutrition and Diagnostics. And just with the outsized expansion in 2025, how should we be thinking about sustained open expansion in 2026 and beyond? And then should we be thinking about 50 to 100 basis points a year? I appreciate you taking the question." }, { "speaker": "Robert Ford", "text": "Yeah. I'd like to get to that pre-pandemic gross margin. I mean, I know we talk a lot about this being behind where we were from a pre-pandemic. But our op margin profile, especially after our guidance for 2025 is actually ahead of that. So we've been able to achieve that through our spending and spending efficiencies. But I think that's the right range to have. I mean I think we've always had this notion. I mean, I talked about being able to offset FX and things like that and not provide any surprises. That's part of the algorithm there, which is we're just constantly having to address gross margin. It's not like this initiative either because of inflation or bits of tariffs or anything like that, it's just we're constantly working to improve gross margins. I'd say, on the nutrition side, those gross margins, given what we encountered over the last two years, those came down. But if you look at them, they have been improving sequentially almost like every quarter. We've got a ways to go to get back to where we were in 2022, Josh. That's a little bit more dependent on commodities and freight and distribution, things like that. But I think the teams have got a really good strategy here of kind of working on cost to serve and even, quite frankly, using some pricing where we felt we had to because of some of the increase in those commodities. So I think the Nutrition gross margin is definitely an opportunity that we've got over the next couple of years. The pharmaceutical teams have done an incredible job at maintaining a gross margin under pretty significant FX. I mean they do a fantastic job at offsetting FX. If you look at the margin profile in that business, it's actually increased several -- couple of hundred basis points over the last couple of years. So they've been able to do that also through gross margin. And I think the other element is just ensuring that we keep on driving the med tech business that have accretive gross margins quite frankly, across all of those different business units. And if we can continue to do that, then that's how you get to that model of maybe 50 to 100 basis points every single year. That's our target. We committed to 70, and we deliver to 70, we're now committing to 80 for 2025. And getting us closer to where we were pre pandemic. So I feel good about what we're doing, the strategy we got in place, the discipline that we have as a management team to review these programs and dedicate time. They don't just happen. We got to make decisions. There's oversight. So I feel good about it." }, { "speaker": "Josh Jennings", "text": "Excellent. Thanks, again." }, { "speaker": "Operator", "text": "Thank you. Our next question will come from David Roman from Goldman Sachs. Your line is open." }, { "speaker": "David Roman", "text": "Thank you. Good morning, everybody. I was hoping, Robert, you could go into a little bit more detail on the Structural Heart business. As you kind of break down the pieces that portfolio, you have a balance of drivers, some more legacy like MitraClip and some that are more emerging categories, like TriClip and the tricuspid repair segment. But maybe you could help us think about the evolution of that business, which did very nicely through 2024, and how we should think about that into 2025? And maybe I could just contextualize the broader outlook here, and I appreciate your comments about getting back to the Aveir of high single-digit top line and double-digit bottom line. But it looks like 2025 does carry some headwinds that may prove to be one-time in nature like VBP dynamics in China on the diagnostics side, the transient competition in EP. So maybe you could kind of give us some color on Structural Heart, but also help contextualize the growth rate in 2025, as we think about the long-term as well?" }, { "speaker": "Robert Ford", "text": "Sure. I think it's interesting, like the sixth question comes on Structural Heart after we posted a 23% growth. So thank you, David. As I said in my opening comments, I think this is one of the most attractive areas in med tech. And it's one that we looked at several years ago and said, we're going to build truly a market-leading portfolio of products. And we're not going to just kind of rely on one platform to kind of drive growth, we're really to assemble a full area here and look across the entire area. And even in surgical, I mean I think, I look at our Epic valve, the feedback I keep getting on the surgical side of it is just doing incredibly well and it's really a preferred go-to on the mitral side for surgical repair, but -- replacement. But yeah. I think in the past, David, I think our Structural Heart portfolio was just viewed as MitraClip. And quite frankly, the sales would say, yeah, that's probably the case. But as we've been building out the portfolio, building on our stroke prevention with PFO approval, with Amulet approval and driving growth there, Amulet did very well in Q4 also grew 25%. Getting into the aortic segment, right, and really being a player there that has established now clinical credibility, whether it's through clinical trials, but also actual real-world usage of the product. They've been seeing some of Navitor cases here in the US and just the feedback has been very, very positive. So, building our aortic portfolio there. We're making big investments, whether it's in our clinical trials to build out our indications. We recently talked about -- shared that we are developing a balloon expandable TAVR valve, and we want to have a full aortic portfolio. On the tricuspid side, we were one of the leaders there to say, hey, there's no real good transcatheter opportunity here to treat TR. And TriClip has done very well. It's done extremely well, quite frankly, throughout this year. I think the team has done an incredible job getting approved behind the competitor. I would say right now, our data says that the ratio of repair and replace is about 2:1, and we're leveraging all of that built in kind of infrastructure and scale that we already built with MitraClip. So what you see is a Structural Heart portfolio, $2.5 billion growing, let's call it, mid-teens because it much more diversified and, quite frankly, very competitive products in these high-growth areas. So I think that's going to continue, and we're committed to making these investments. We've got new versions of Amulet launch. We just got an approval for an updated version of TriClip to ease even more of the implant. You're going to see clinical trials read out in this area for label expansion indications in TAVR and in LAA. So this is an area that I think what you're seeing now, that kind of growth rate coming from the investments and just great execution from the team so. What was your -- your question was about growth rate and..." }, { "speaker": "David Roman", "text": "Yes, I was trying to speak a second there was just to contextualize the 25% growth rate given some onetime-ish headwinds like VBP in China Diagnostics and the dynamics in EP being potentially kind of transient as well?" }, { "speaker": "Robert Ford", "text": "Yeah. I mean, listen, every quarter, every year, there's always going to be some headwind. I want to do is here is assemble David, more tailwinds than headwinds, right? But yeah, I mean, you mentioned one, which is a little bit of a headwind for us in our diagnostic business regarding VBP. That's going to be with us in 2025 as they're rolling out new panels of testing that's going to go through that. But outside of that, I'd say, the diagnostics business is doing very well. Q4 growth rates in most areas were actually higher than the full year growth rate in those same areas, US, Latin America, Europe, even Japan was faster in Q4. So yes, we do have a challenge, but most companies are going to do it. And you know what, we've gone through these, David. Every company goes through a VBP, and what we're trying to do is, okay, we're not going to define the company by having this one kind of headwind. We've got a lot more tailwinds to leverage. We still have deal with it. We're still managing it. It's still an important part of the business. But the company is more than just VBP in diagnostics and one important market, but just one market. So I think the growth rate is very robust. I mean, 8% at the midpoint on a base of $40-plus billion, I think is pretty strong and pretty good." }, { "speaker": "David Roman", "text": "Perfect. Thanks for taking the questions." }, { "speaker": "Operator", "text": "Thank you. And our next question will come from Joanne Wuensch from Citi. Your line is open." }, { "speaker": "Joanne Wuensch", "text": "Good morning and thank you for taking the question and nice quarter. I'm curious if you could just sort of step back and talk about the overall health of the MedTech market. I feel like I'm constantly answering questions on things such as volume and price. And looking at you delivering mid-teens revenue growth, and I think you're seeing something that maybe not everybody is seeing, so I'd love to get your view on that? Thank you." }, { "speaker": "Robert Ford", "text": "Sure. I mean, I think it does put us -- I mean, the way our portfolio is structured, Joanne, is that it does give us a little bit of bird's eye view into the entire health care system and the spectrum, right? And I think if you're getting questions on MedTech and MedTech growth, I think all you've got to do is continue to look at what companies are reporting. And what they're reporting is ultimately what we're seeing in the market, which is, it's not a pre-COVID pent-up demand. You are seeing a greater focus from whether consumers or the technologies that are being developed that are attracting more people into these procedures. So I think what we're seeing here is continued utilization growth really driven by whether it's demographics, combined with the innovation. I mean, what the industry is doing in terms of the innovation that we're bringing to the market, it's pretty spectacular and the procedures are getting faster, they're getting less invasive, and that's attracting more people to look at, select these procedures as a real viable first-line option versus guided medical therapy. So I think that's going to continue as long as we continue to see this innovation where we are obviously positioning ourselves pretty strongly in this, and you've seen sequential improvement in the growth rate across quite frankly, a lot of our businesses in MedTech. So I think the utilization is definitely increasing. I think there's maybe some questions, okay, what's going to happen with pricing? We've historically seen some price erosion in the past. I'd say, over the last couple of years, it's actually been pretty stable. So I don't know how that's going to play out. We've got a scenario here where we believe that with our portfolio, we'll see some pretty stable pricing. But I think utilization, combined with stable pricing is what's driving this MedTech growth. And we're seeing it in diagnostics, too. A lot of our diagnostic business is actual hospital-based diagnostics. So, we're seeing those diagnostic tests and those routine diagnostics tests continue to increase, high single, double-digit, low double-digit growth rates in terms of utilization. So, I think that MedTech is benefiting from just this increased utilization and consumers wanting to take care of themselves and looking at these technologies as a viable option for treatment." }, { "speaker": "Joanne Wuensch", "text": "Thank you so much." }, { "speaker": "Operator", "text": "Thank you. Our next question will come from Danielle Antalffy from UBS. Your line is open." }, { "speaker": "Danielle Antalffy", "text": "Hey good morning guys. Thanks so much for taking the question and congrats on a really good quarter, strong end to the year. Robert, we've talked in the past, I mean, obviously, we talked a lot about MedTech in the high-growth areas, but some areas where you've excelled or the legacy sort of slower growth businesses, I'm obviously thinking CRM being one of those mid- to high single-digits growth. Can you talk about -- that you find in CRM other legacy businesses. I'm thinking like heart failure, peripheral, and maybe how you're thinking about elevating those growth profiles in 2025, but then also longer term? Thanks so much for taking the question." }, { "speaker": "Robert Ford", "text": "Yes. So, one of our strategies that we looked at a couple of years ago, Danielle, was if you looked at our MedTech business, it was growing like 8%, 9%. And that was a combination of probably like high-growth areas like EP, Structural Heart, Diabetes, even Heart Failure. And 40% of the portfolio was relatively flat and that was mostly our Vascular business and our CRM business. And the way we looked at it is to get our MedTech to be best-in-class, to be able to grow 12%, 13%, 14%, we need to continue the strong growth rate of Structural Heart, EP, Diabetes, et cetera. But we had to find a way to accelerate the growth rate of our Vascular and CRM businesses. And we said, if we can get them, these are historically been flat growth markets. If we can get them to grow 5% the way that would then work out is that we'd be able to elevate our MedTech portfolio to the mid-teens. So, that's what we've been doing over the last couple of years, and the team have been executing on that. I think on the Vascular space, what you've seen us do is kind of used a little bit a combination of organic and inorganic to accelerate and increase our participation in higher growth areas, specifically in the peripheral side. So, -- and I think you started to see that. We've been growing -- this quarter was a good quarter. Our target was around 5% for our Vascular business by having those -- by having stronger pipelines and portfolios in that more Peripheral space. And you're seeing that now start to happen. On the CRM side, our big strategy here was organic and getting to launch a very comprehensive and be the leaders -- sorry, leaders in leadless. So, we launched a single chamber a couple of years ago, launched a dual chamber last year, going to get into conduct and pacing leadless also. And I think that you've seen that over the last two years, our CRM business has grown 7%. And I think we can continue to extend that with the strategy that we're doing, which is to really lead in this area. I actually think that Aveir is probably the most underappreciated opportunities that we have in our portfolio. Look at it right now, you're asking the question towards the end of call, but I think really what you're seeing is these businesses, the focus, the innovation, the execution and now you're seeing those start to deliver on that strategy to bring these flat businesses up to mid -- at least mid-single-digit growth. I think there's the team doesn't like that I characterize them like that. So that's good. I'm glad that they think that they can do better than that. But we've got a lot of opportunity in those big areas, and we think there's innovation to be had in those. So we feel good about it." }, { "speaker": "Danielle Antalffy", "text": "Thank you." }, { "speaker": "Mike Comilla", "text": "Operator, we'll take one more question, please." }, { "speaker": "Operator", "text": "Thank you. And our last question will come from Matt Miksic from Barclays. Your line is open." }, { "speaker": "Matt Miksic", "text": "Hey. Thanks for squeezing me in. Just maybe a follow-up here, given the tech guidance you gave for this year and some of the dynamics in US and overseas or tax policy, It'd be great to get your perspective on maybe the direction of where those things are going. And how we should think about them for having? Thanks so much." }, { "speaker": "Phil Boudreau", "text": "Yeah. Thanks, Matt. There's a lot of narrative at the moment going on. But to your point and to the guide that we referenced in our opening comments here, what we've reflected is all current tax laws and guidance and geographic mix of where our business growth is coming from, which is about a 150-basis-point increase in the midpoint of this guide. That increase in the guide is driven by the increased adoption of the rollout here of Pillar 2 as is currently enacted in countries. And so that's what we reflect. We continue to be a good taxpayer, compliant taxpayer, and we'll see how more of this narrative unfolds here. But currently, we're running the operations and reflecting what's known and as Robert highlighted, absorbing still within the way we run the business." }, { "speaker": "Robert Ford", "text": "Let me -- I want to add in on that one, Matt. I think you'll hear this topic come up quite a bit. And if I just take a bigger picture here. I mean, corporate tax rates tend to get higher politicized and especially during election years, and it's really not a political debate. In the business world, it's just an expense. It's just another form of expense. And in our world, when one expense goes up, you've got to manage and other expenses have got to come down or maybe not increase at the same rate that they were increasing. And I think what you'll find sometimes, you get a small handful of companies that maybe had a really low tax rate and then that viewpoint then gets unfairly applied to every large company, and then you get these predictable narratives of companies have got to pay their fair share, et cetera. The reality is, most companies pay their fair share and then some. I mean, I could talk about Abbott. Our cash taxes are over 20%, and that's one thing that people never talk about is we use these GAAP rates. But what really matters is cash taxes. That's the money that's going to be paid. But more importantly, US companies, companies like Abbott, we play a key role in making the US economy so successful. We're conducting a significant portion of the R&D in the US. We invest billions of dollars in capital projects, which then drive this drop growth. Our CapEx spend has increased over 60% over the last couple of years. We increased our workforce by 20%. And when you increase that workforce, you're investing hundreds of millions of dollars in employee health care and employee benefits. So this Pillar 2 legislation -- this Pillar 2 rule here that got adopted, that's added. And we -- I think this rate that Phil is kind of quote, that's an additional $200 million of expense. That's all it is. It's $200 million of expense that is not going to investing in other areas. And what's even more challenging is of those $200 million, two-thirds of it is actually going to be paid taxes to overseas countries. So that's not really a good policy for the US. And so we're absorbing this. We're managing it. And I think as still said, there are a couple still some new policies or new issues that we have to kind of work on. But I think the overall goal here has got to be to ensure the competitiveness of US companies and US multinationals. And I'm hoping we can get to that during the next 12 months or so. Let me just kind of close then on the call. I think we had a really strong finish to 2024. We exited our Q4 organic sales growth was over 10% and top line, 13% EPS, as I said, finished at the higher end of our range, expanded our gross margin, delivered what we said we were going to do. The pipeline continues to be highly, highly attractive, steady cadence of great new growth opportunities. And I think, to Vijay's question, we've got a balance sheet that's going to provide us a lot of strategic flexibility. So I think we're really well positioned to 2025. So with that, I want to thank you for joining us today." }, { "speaker": "Mike Comilla", "text": "Thank you, operator, and thank you all for your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you all for joining us today." }, { "speaker": "Operator", "text": "Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day." } ]	Abbott Laboratories	247,483
ABT	3	2,024	2024-10-16 09:00:00	Operator: Good day, and thank you for standing by. Welcome to Abbott's Third Quarter 2024 Earnings Conference Call. All participants will be able to listen only until the question-and-answer portion of this call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant's questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission. I would now like to introduce Mr. Mike Comilla, Vice President, Investor Relations. Mike Comilla: Good morning, and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Phil Boudreau, Executive Vice President, Finance and Chief Financial Officer. Robert and Phil will provide opening remarks. Following their comments, we'll take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2024. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A, Risk Factors, to our annual report on Form 10-K for the year ended December 31, 2023. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Note that Abbott has not provided the GAAP financial measure for organic sales growth on a forward-looking basis because the Company is unable to predict future changes in foreign exchange rates, which could impact reported sales growth. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which is defined in the press release issued earlier today. With that, I will now turn the call over to Robert. Robert Ford: Thanks, Mike. Good morning, everyone. Thank you for joining us. Today, we reported organic sales growth of more than 8%, excluding COVID testing sales and adjusted earnings per share of $1.21. In addition to delivering another quarter of strong financial performance, we accomplished several key objectives this quarter, which included entering new strategic partnerships, launching new products and making several key advancements in our R&D pipeline. And I'll elaborate further on these accomplishments when discussing the performance of our businesses and summarize our third quarter results in more detail before turning the call over to Phil. And I'll start with Nutrition, where sales increased 3.5% in the quarter. Growth in the quarter was led by double-digit growth in the U.S., and this included growth of 12% in U.S. Pediatric Nutrition driven by market share gains in the infant formula business and growth of 11.5% in U.S. Adult Nutrition led by our market-leading Ensure and Glucerna brands. As the market leader in adult nutrition, we continue to expand our portfolio to meet the growing global demand for products that offer a combination of high protein, low sugar to help people optimize their health and wellness. Moving to Diagnostics. Our sales in Core Laboratory Diagnostics increased 4.5% excluding COVID testing sales. Growth in Core Lab was driven by global demand for routine diagnostic testing and continued adoption of our market-leading diagnostic systems and testing platforms, including recent large account wins that will help continue to sustain our growth into 2025. In our rapid and point-of-care diagnostics businesses, we continue to expand our test menus and capitalize on the growing demand for respiratory tests that can be performed at home or in more traditional health care settings. In September, we announced an exciting new partnership with the Big Ten conference to help boost the U.S. blood supply through a blood donation competition. Students, alumni and fans can donate blood for any of the 18 member universities at blood centers located across the country. And our goal with this competition is to help rebuild the nation's blood supply which is currently at an extremely low level, while also helping to create a new generation of blood donors. Turning to EPE, where sales increased 7% in the quarter. Growth was well balanced across the markets and therapeutic areas in which we participate. Our performance this quarter was driven by double-digit growth in several countries across Latin America, Southeast Asia and the Middle East, where our broad product portfolios focused on addressing local market needs continues to enhance our unique position in these markets. From a portfolio perspective, we continue to deliver broad-based growth across our key therapeutic areas of focus, including strong growth in the quarter. in the areas of gastroenterology, cardiometabolic, central nervous system and pain management. We also achieved several milestones this quarter as it relates to advancing our portfolio of biosimilars, which we built and continue to expand through collaboration agreements. The first of these biosimilars is on track to launch in emerging markets in late 2025. And I'll wrap up with our med tech portfolio, where sales grew more than 13%. In Diabetes Care, sales of continuous glucose monitors exceeded $1.6 billion in the quarter and grew 21%. In August, we announced that we had entered into a unique global partnership with Medtronic to connect Abbott's world-leading FreeStyle Libre CGM sensor with their automated insulin delivery systems. Abbott now has partnerships with five of the largest companies that offer automated insulin dosing pumps, allowing more people around the world to benefit from the connectivity with the Libre technology. In September, we announced the U.S. launch of Lingo, our new glucose monitoring sensor available for purchase without a prescription, the Lingo wearable sensor and app track real-time glucose data and provide personal insights in coaching based on your body's reaction to nutrition exercise and other lifestyle choices to help create healthier habits and improve overall well-being. In Electrophysiology, growth of 14% was driven by double-digit growth in both the U.S. and international markets and similar to previous quarters, the growth was broad-based across the portfolio, including double-digit growth in catheters and cardiac mapping related products. We also achieved several important milestones as it relates to our electrophysiology new product pipeline, and this includes completing enrollment ahead of schedule in our VOLT-AF U.S. IDE trial and after we complete the required patient follow-up phase, we expect to file for FDA approval next year. Earlier this month, we announced that we began enrolling patients in our focal FLEX clinical trial designed to assess our new TactiFlex DUO catheter, which offers physicians the option of using PFA and radio frequency energy to treat atrial fibrillation. And finally, we received FDA approval and launched our new adviser HD Grid X mapping catheter, which further enhances the cardiac mapping process when using PFA or RF ablation catheters to treat AFib. In Structural Heart, growth of more than 16% was driven by growth across our market-leading comprehensive portfolio of surgical valves, structural interventions and transcatheter repair and replacement products. This quarter, we continue to capture market share in TAVR and saw accelerating adoption of Amulet and TriClip, which we launched in the U.S. earlier this year. And earlier this month, CMS began the process of evaluating TriClip for a national coverage determination, which, if approved, would help expand the addressable market through broader access in the U.S. for this first of its kind technology. In Ribbon Management, growth of 7% was led by Aveir, our highly innovative leadless pacemaker, and Assert our newest implantable cardiac monitor, which launched in the U.S. last year. In Heart Failure, growth of 14% was driven by our market-leading portfolio of heart assist devices, which offer treatment for chronic and temporary conditions. In Vascular, growth of 5% was led by double-digit growth in vessel closure and coronary imaging, along with Esprit our below-the-knee resorbable stent that launched in the U.S. in the second quarter. And lastly, in Neuromodulation, sales grew 5%, driven by strong demand in international markets for our rechargeable spinal cord stimulation device. So, in summary, we delivered another quarter of strong top line growth with sales growth with sales growing more than 8%. We continue to make good progress expanding our gross margin profile and remain on track to improve our profile by 75 basis points on a full year basis compared to last year. And as you saw, we achieved several important new product pipe loan milestones this quarter, and we're well positioned for a strong finish to the year and have great momentum heading into 2025. And I'll now turn over the call to Phil. Phil Boudreau: Thanks, Robert. As Mike mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis. Turning to our third quarter results. Sales increased 7.6% on an organic basis and increased 8.2% when excluding COVID testing sales. Foreign exchange had an unfavorable year-over-year impact of 2.5% on third quarter sales. During the quarter, we saw the U.S. dollar weaken versus several currencies, which resulted in a favorable impact on sales compared to exchange rates at the time of our call in July. Regarding other aspects of the P&L. The adjusted gross margin ratio was 56.3% of sales. Adjusted R&D was 6.5% of sales and adjusted SG&A was 27.2% of sales in the third quarter. Lastly, our third quarter adjusted tax rate was 15%. Turning to our outlook for the fourth quarter. We forecast adjusted earnings per share guidance of $1.31 to $1.37, and based on current rates, we expect exchange to have an unfavorable impact of less than 1% on fourth quarter reported sales. With that, we'll open the call for questions. Operator: Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] And our first question will come from Travis Steed from BofA Securities. Travis Steed: In Q3 devices were really strong, but Nutrition and Diagnostics came in below expectations, but you still maintain the full year guidance, which is implying a step up of 9.5 or more growth in Q4. So, I just want to understand what happened in those divisions in Q3? And what's giving you the confidence to still reiterate the full year revenue guidance? Robert Ford: Sure, Travis. Listen, we got multiple business units here. I think, by my count, it's close to like 17. We always want all 17 to beat and top your estimates here. The reality is sometimes some of them fall short. And then the question is, is there something more long term? Is it more of kind of a onetime kind of challenge? I'd put that more in the second bucket over here. I think one of the benefits that we do have in having a broad diversified portfolio is that when you do have situations like that, Travis, other businesses can overperform and kind of make up for that. And I think that's what you saw in this quarter. I mean, you opened your question with devices did really good, and that's what helped us deliver on our quarter. And as you look forward to Q4, yes, we do have still very high confidence in the businesses, if I was at all concerned about it, I wouldn't have raised our guidance now for the third time this year. So yes, we're still very confident in both the EPS forecast that we've got. I think this is a great quarter now as we're into Q4 and there's less COVID comps, we'll see our EPS grow double digits back to the growth model that we had during pre-COVID. And yes, revenue at that 9.5% to 10% still feel very good about that. The issues that you raised there are kind of onetime in nature. On nutrition, the entire business did really well with the exception of our international pediatric business. U.S. was up 12%; pediatric, U.S. adult was up almost 12%; international adult was up high single digits. So, what ended up happening there is we saw some softness in the beginning of the quarter in some of our international markets for pediatric team quickly determined that it wasn't market. It was actually us and it was our commercial execution or lack thereof that was leading to some share loss. So, team took action pretty quickly in the quarter. We made some personnel changes, we calibrated our demand generation and what ends up happening in the quarter there as a result of that share loss is we didn't want to build excess inventory, so we shorted our sales to the distributors just to align that. But I feel good about what the team has put together. Early indications show that, that was the right move to do, and we've seen good progress there. So yes, disappointed, but the team knows that, and they acted quickly. So, I expect to see international pediatric and overall nutrition growth step up in the quarter. It doesn't change my thinking about nutrition for the quarter or for next year, for the long-term aspect of it, just something that we had to address. And then I think you mentioned Core Lab also came a little bit shorter than expectations. I'd say there, really, the driver of that was just the VBP implementation in China. If you look at our Core Lab business, our International Core Lab business, excluding China, the international business was up double digits. So, the teams in those markets are doing really well. And I'd mentioned this in January, we were going to see the VBP impact the Core Lab business. We had originally forecasted in April, it got delayed and pushed out to Q3. If you look at our growth rate in the first half of this year, it was over 7%. And some of that favorability that we saw in the business and that we rolled into higher guidance as a result of a little bit of that delay here. So, we'll go through the VBP transition. We've done it in a lot of our businesses. There's the pricing impact going forward, there's some transition-related items that happen, whether you're making pricing accommodations for the inventory that's already in the channel, et cetera. So I still feel very good about the business we've got there. I feel good about China continues to be a very attractive market for us. So we'll just work our way through this. But to your question on the quarter, yes, we feel good about the quarter. I wouldn't have kept the guidance if we didn't. We've got great momentum in the business. We're meeting with the management team yesterday. They're very committed and feel good about the momentum. So, I think we'll have a very good year with a good strong close in Q4. Operator: And our next question will come from Larry Biegelsen from Wells Fargo. Your line is open. Larry Biegelsen: Robert, I wanted to ask about Libre and just big picture. You had 21% growth in Libre in Q3, which was good, but your competitors obviously having some issues. So, it would be helpful to hear your view of the state of the CGM market, talk about your confidence in the overall CGM market outlook and your goal of $10 billion in sales by 2028. And maybe just give us some color on what you're seeing so far with Lingo? Robert Ford: Yes, sure. Larry, I've always been very bullish about this market and talk about this market a little bit differently than when we talk about general med tech markets, right? This is a mass market opportunity that we have. And yes, we grew 21%. U.S. was actually up 26%, and we feel good about the market. The fundamentals are still very much there and they're still very much intact. This is -- you've got about 10 million CGM users globally, I think, right now. And you got over 100 million diabetics in the developed world, over 0.5 billion globally. So yes, I think this is a market that's got mass market potential to it. As long as you stay ahead from a technology perspective, as long as you stay ahead from a scale perspective, as long as you stay ahead from a cost perspective, for me, those are the three elements here that allow us and have guided our strategy from day one. And I don't think that you're going to have some changes in the market when you've got a market that's, whatever, $12 billion, $13 billion, growing 15%. There'll be more players for sure, there'll be more competition for sure. But we feel good about our position and the strategy that we've built. We've thought about this not just for the next year, we've been thinking about this, what is it going to look like a decade from now and how we built our portfolio and our position. So, I feel very good about this market. And I don't think there's anything fundamentally here that's significantly changed, at least from our internal way of thinking about it. So yes, I think this is a great opportunity for us. Libre is -- it will be a $6 billion-plus product. It will grow 20% this year. When we put out the $10 billion target, Larry, we talked about a compound annual growth rate of 15%. So, we're ahead of that, and we're going to work hard to make sure that we stay ahead of that, and we continue to gain share. We'll add $1 billion of revenue this year, add 1 million users. You got opportunities in type 1s on the pump side, on the connectivity side with pens. You've got opportunities with type 2s and basal. I mean I think that's just really still so much opportunity in those markets. So I feel very good about it. And as we've talked about Libre, we always viewed it as a platform. So you mentioned Lingo, glad to see that launch. Just as a reminder, we're really focusing on a very different population with this technology, right? We're targeting people that don't have diabetes. So it's a little bit of a different kind of business model, sale model. But so far, we've seen really, really good early interest. Great, great feedback from the users so far. The app, the data, the website, the Hello Lingo website, the delivery, the whole nonprescription stuff. That's working out very well. The 2 sensor pack is the most popular version right now. And I think that's a good -- it's a great way to start. I was looking at some of the initial reorder rates that came in last night. And wow, was I surprised at really, really much higher reorder rates than what we saw in the U.K., and I thought that I think the team did a really good job at adapting some of the learnings from the U.K. into that. So, I think overall, over time, this is going to be a great opportunity to be able to add to that $10 billion target as we build this user base out. So overall, back to your question on Libre, I feel very good about our position, what we're doing, and Lingo is off to a very good start. Operator: And our next question will come from Robbie Marcus from JPMorgan. Your line is open. Robbie Marcus: Congrats on a nice quarter. Robert, I wanted to ask this time of the year, we all -- we're looking for fourth quarter, but we're also turning our focus to 2025. I see The Street sitting at about 7% on the top line, 10% on the bottom line. I wanted to see if you had any comments about how you feel about that or your view into next year, realizing it's still on the early side? Robert Ford: Yes. It's a little early to give real specific guidance there, Robbie. But similar to you, we're also looking at '25, we've been looking at '25 also as part of our strategic planning process here, too. So yes, this is the time of the season, right? I'd say, yes, similar to last year, I look at the analyst estimates going into 2025, high single-digit growth, 10% EPS. And like I said last year, that feels like a very reasonable starting point. I think the difference going into 2025 versus when we were coming into 2024 is, as we go into 2025, one of the things that we don't have is what I would call kind of like the COVID cloud at least for a couple of the quarters ahead of us. And that kind of masked a little bit of our underlying kind of base EPS kind of business growth. So, I am looking forward to, in a way, not having that be kind of this kind of comp issue. But I think the high single-digit, 10% EPS, yes, that sounds like a very kind of, I'd say, a reasonable starting point. But if I take a step back also, I look at that and say, okay, here we have a company that's $40 billion in revenue, and we've been driving high single to high single-digit top line growth. I think that's pretty unique for us. And I think one of the reasons that is a combination of two factors. First of all, the markets that we're participating, they're very attractive, Robbie, whether it's their size, their growth outlook, whether their alignment to favorable demographic trends, the positions we have in them, and there's a couple of different types of markets that we're in, right? Markets that are probably a little bit lower from a growth rate perspective, but we've got tremendous scale, tremendous positions in them and that scale and that position disproportionate us and they provide great financial stability to our business. We've got other markets that are very exciting, high-growth markets that our goal there is to enter and capture share, whether it's TAVR or LAA, new diagnostic systems that we'll be launching and then other markets we're building right? And we're building them and creating them with first-of-their-kind types of products, whether it's Lingo that we talked about, TBI testing, leadless, biosimilars in emerging markets, so it's a nice collection of markets that really allow us to set these high single-digit target growth rates for us. And then the other part is pipeline, which is fundamental, right? And I think it's been highly productive. Recently launched products this year are going to contribute about $1 billion of revenue this year, and that's double to what it was in 2023. And I expect that to be the case again next year, right? So, I think it starts at the top line. We've made a lot of effort right now in expanding gross margin and delivering. That was a topic that we talked about last year, expanding margins and gross margin is a key focus of ours. But I also think we've been a pretty proficient allocator of investment. We've invested -- we've done increasing investments in areas that are -- we know are high-growth areas, and we've still been able to generate over $1 billion of spending leverage over the last five years. So, I'd say as we go down the P&L, I think that's another opportunity for us as we go down into 2025 is our discipline in terms of how we make the investments and our focus on gross margin. So, I think the combination of that will allow us to have that op margin expansion. And the balance sheet is in a great year -- sorry, balance sheet is in a great shape here. So, I think we've got all the elements that we need to go into 2025 with great momentum, markets, positions and financial flexibility there. Operator: Our next question will come from David Roman from Goldman Sachs. Your line is open. David Roman: Robert, maybe if I could push a little bit more on the investment spending and help us think a little bit about the shape of the P&L on a go-forward basis. During the quarter, you did accelerate R&D and SG&A spending on a year-over-year growth basis. And maybe you could help us think through where are some of those incremental dollars going? How should we think about the trajectory of operating expenses in the context of gross margin expansion? And then with the announced share repurchase program, should we think about that as an effort to keep the share count flat or a view that this is an opportunity to return incremental capital to shareholders and reduce the share count? Robert Ford: Sure. Yes, I guess, on the investment side, if you look at what we've done with our expenses here, they've gone from 37% in 2019, down to about 34% this year. So that's where that $1 billion of spending leverage comes, right? If you look at our five-year CAGR, it's high single digits and our operating expense CAGR is about 4%. But it's not a cookie-cutter approach, David. We look at the businesses and look at their opportunities and make those decisions. R&D investments, they're a little bit more-longer term, right? So, once you commit to R&D programs, they tend to be a little bit more-longer term than making some SG&A decisions, where you could toggle up and down a little bit easier. But I mean, I think you could see where some of the growth is coming from, and that's being supported by those investments. Obviously, our med tech portfolio has been getting investments, I'd say, in EP, in structural heart, in diabetes care, in neuromodulation. I mean, all of the businesses, they come with a strategic plan and we look at where it makes more sense, whether it's to put more, more investment in the field with sales force and clinical people, whether it's to make the investment in a clinical trial, so we tend to have a pretty good process about how to do that. We've been making investments in diagnostics, soon we'll probably be talking about a new system that we're going to be launching for a whole new segment of the diagnostic industry. That's a longer-term program that's been a couple of years. So I think we've got a good process about how to make the investments knowing that R&D investments are a little bit more longer than SG&A. So -- and I think that's what we've been able to show. And I think that's one of the reasons we've been able to get to our op margin profile to pre-pandemic levels, which I'm not sure a lot of companies would be able to kind of say that. So -- but we haven't driven our op margin by expenses. I mean we've been driving our top line pretty effectively, too. So I think that's probably the best proof point that we know how to do this allocation and the cycles of the allocation, et cetera. And then I think you had a question regarding share count and buybacks. Listen, we -- as I've said, we've got a pretty balanced approach about how we allocate our capital. I've talked about the importance of the dividend and supporting that growing dividend and we'll continue to do that. The buybacks is just another element in that capital allocation strategy. We just announced that the Board recently approved a new $7 billion buyback program. The previous one that we had approved in 2021 was running down, and we thought it was a good time to put that in place. We've deployed around $8 billion towards buyback over the last five years. We took a little bit of a step up during a couple of years after the acquisitions that we did, we'd stepped that down a little bit. So we've stepped that up. Q3, we did about $750 million. I thought given our strong performance outlook here that we saw a disconnect between what we were doing in our PE ratio, and in fact, I still do. So it made sense to buy shares, and the buyback announcement is just part of our balanced approach to allocating capital, and we've got that authorization set. So if we feel that there is a disconnect going forward, we've got that opportunity to try and correct that. So -- and if that reduces the share count, yes, then it will reduce the share count. But we're not trying to drive our EPS through a lower share count. We're trying to drive our EPS through top line growth, David. Operator: Our next question will come from Joshua Jennings from TD Cowen. Your line is open. Joshua Jennings: Robert, I wanted to ask about just structural heart markets. The TAVR market slowing down or decelerating, there's been some investor concerns about U.S. provider capacity and whether there's a bottleneck. I think Abbott is uniquely positioned because you do have offerings in transcatheter aortic, mitral and tricuspid solutions and left atrial appendage occlusion. We've got interventional heart failure interventions coming down the pike. Are you seeing any capacity constraints limiting growth? You had a strong structural heart quarter this in 3Q? Or are you concerned about that? Is that on the horizon or should we just think that hospitals are seeing this growth opportunity as well and building out capacity, adding cath labs, hybrid ORs, et cetera? I'd love to get your view on the current situation and whether you're worried in the next 12, 24, 36 months that we could run into a bottleneck in the U.S.? Robert Ford: Not seeing the bottleneck, not forecasting bottleneck, not concerned about the capacity here. Obviously, this is a this is a very growing area not only for those that are developing the technologies, but also for the health care systems that are delivering them and deploying them. I've been to some large centers over the quarter. I've been through some smaller centers over the quarter. There's always challenges, but I put it as a challenge, not specific to a given technology or challenges just whether it's ramping up a new technology, getting more people to train. So -- but I'm not hearing that the centers that we've been working with that capacity is a big rate-limiting factor today. I think if it started to become one and the demand is there, I think history has shown that make the right investments, the investments will be made to accommodate that demand. So -- I mean, this is obviously what's happened in structural heart over the last decade, investments will be made to accommodate that demand. So I'm not hearing that, and we continue to be very excited about the prospects that we had in our structural heart portfolio. I think the team has kind of hit its stride right now. We've got new management, new products launching and I'm very optimistic right now with what the teams are putting together across the entire portfolio. I think like you said, we're one of the few companies here that we can see the full spectrum, right, from -- all the way from surgical, structural interventions, all the occlusion and appendages and then looking at being able to see mitral, tricuspid, aortic, whether it's repair, whether it's replacement, I think the team is hitting its stride right now. And our focus here is going to be on both sides, making the investments on the R&D side. I think we've got a lot of new product investment in structural heart, new clinical trials, new indications, investments over there. And I think the different part of our investment profile, and we've been doing that for many years in mitral -- in structural heart, and I think that's why we have the portfolio we have. I think the piece that we're adding on now is like, okay, we've got the products, now we've got to increase our field presence to support either the market share gain that we aspire to or to support these growing new fields, whether it's tricuspid. So, our focus now is really to start to add more on the field side in these businesses to be able to kind of support that growth. But no, I think this is a tremendous area of growth of opportunity of underpenetration, of R&D, of clinical work. So, we're really excited about it. Operator: Our next question will come from Vijay Kumar from Evercore ISI. Your line is open. Vijay Kumar: I had one on, I guess, NEC infant formula. The FDA, CDC and NIH have put out a joint statement. It's a pretty strong statement saying noting that there's perhaps no causative relationship between infant formula and NEC. So, I guess my question is, how does this change Abbott's position in these lawsuits? Does it matter? What else can we expect from the government? Could we expect more announcements similar to this? What shape or form could it be? What can Abbott to do to perhaps ring-fence liabilities related to these cases? Robert Ford: Yes, sure. Well, listen, as it relates to our position, it's great to see the statement, and I agree with you, I think it was a very strong statement. It doesn't change what I have been saying, which is and the statement seems to be aligned and support what I hear from the market and what I hear from neonatologists, which is these products are they're medically necessary, they are considered the standard of care, and they're valuable tools. They're valuable tools for the neonatologists in their decisions, in their decisions and their discussions with parents and how to feed premature. And the labels, which is a component in all of this, they've been reviewed by the regulators and never call for net warning. So -- this is a consensus statement made by these three agencies, three regulators here in the U.S. and they're basically -- Vijay, they're actually endorsing an expert panel with dozens of researchers that were conveyed by the secretary of HHS, and I think the researchers issued a 100-page document-or-so. I think they looked at thousands of publications. I think it was 600-specific to the relationship between NEC and feeding. And in that joint statement, the agencies, they reiterated the importance of preterm formula as the standard of care. And they also clearly state there's no conclusive evidence that the formula causes NEC. So, I think this is only one of a handful of times where the three agencies, the most prominent and significant health agencies and regulators in the U.S. have come together and put out a joint statement. Obviously, we saw that during the COVID pandemic. But I think before that, I think it was during the HIV pandemic. So I think the statement says a lot, Vijay. At this point, though, at this point, the judge in our trial right now has not allowed the joint statement or the underlying report to be entered into evidence. I don't know the reasons there, but I think it would be -- we believe that it's the joint statement, the report, the expert testimony, I think those are important pieces of information for a jury to consider as they're making their decisions. So, I don't know how to cap that, but I would say beyond this case and as the cases move to more of the federal side, my expectation here is that the juries in these cases would be allowed to consider the criticality of that important evidence. So, to your question on the liability portion and kind of what to do? If I take a step back on this one, I've been thinking about this quite a bit. But as health care innovators, we develop health care products based on problems that we see. We run the clinical trials. We gather the data. We review the data with the regulators. You guys know this process pretty well. And ultimately, the regulator decides if the products are safe and they're fit for purpose and they decide how they got to be labeled. And that's the country, that's the market that I want to be in, where the products, the labels, they're evaluated through a well-established regulatory process by expert regulators that have unfettered access to the best scientific evidence rather than trying to do this, regulate products through uncertainty and unpredictive jury trials. So ultimately, to your question, if the regulatory process is disregarded, if the science is disregarded, it's going to be very difficult for any company to remain on the market with these products. Taking on that indefinite liability here, at least in the United States, that would be an issue that the United States would confront. It wouldn't be an issue for premature babies in international countries because this issue -- this is not an issue and the products are still available there. So yes, I do think there needs to be some fortitude here by those that can make decisions, prioritize the babies, prioritize preterm babies all 370,000 every single year that rely on these products. Over those that seem to kind of distort and abuse this tort system that we have in our country here for financial gains. I'm hoping it doesn't come to that. But I've been pretty clear that this is -- we stand behind the products, but if the process won't be -- is going to be disregarded then this is something that we will not continue adding to the liability here. So, there's a playbook it seems for these things to happen. You take a decade, 10-plus years to litigate this and come to some resolution. I don't intend to follow that playbook. And I intend to resolve this faster. And yes, there are different ways to resolve this and different ways to look at this. And we are having conversations at all levels to be able to express the concern that this could cause to families here in the United States. Operator: Our next question will come from Joanne Wuensch from Citi. Your line is open. Joanne Wuensch: Congratulations on earlier-than-expected completion of enrollment in your PFA catheter clinical trial. But I would really love to get your view on the state of the electrophysiology market. What you're seeing in terms of PFA uptake and how that is impacting your mapping and navigation systems? Robert Ford: Sure, Joanne. I mean I think this quarter was a continuation of the trend that we've been seeing since the arrival of PFA. We're growing a little bit lower than the market. The market has kind of grown pretty significantly here. But if you look at our growth rate, prior to PFA, we're actually growing faster now with PFA. And I think there's a couple of factors there. I think you mentioned one of those, which is cardiac mapping. Right now, we're seeing about 90-plus percent of the cases, at least here in the U.S., being masked. If you look at where we were before, Joanne, we were mapping about maybe between 25% and 30% of RF cases, we're now mapping 50-plus. So that is a little bit of a tailwind for us. We're seeing a pretty strong growth in procedures. So -- and I think that's probably what's helped drive some of the market growth that we're seeing. But I also think that the volume increase is actually due to improved treatment guidelines that we're seeing and quite frankly, new technologies that are helping to identify AFib patients, too. So, I think it's a combination of factors there that are helping to drive more producers. And then for us, the RF portion of it is still a growth piece for us. As I said in my comments, we grew ablation catheters double digits, too. So, we're seeing about 20% of the PFA cases, at least the ones that we're mapping, use RF catheters and we're in those cases. So, I think the key thing here is just to at least right now, PFA is really being used for de novo procedures, right? So, if you kind of break that out, it's about of all ablation procedures are de novo. The other two-thiirds are VT ablation, SVT ablation, redos. And in those cases, they're using -- we're still using RF and RF plays an important role there, which is why we've initiated our focal FLEX trial to be able to have the optionality, to be able to toggle between PFA and RF. So, we still think that's an important part there. So -- but I think the team has done a really good job here at leveraging our open mapping system I made comments, we used the open mapping system as a design input for R&D programs to start off with. And now that open system is allowing us to be in more cases and partner more with the electrophysiologists. So I think that is -- that's what we're seeing, and we're very committed to be able to bring PFA to the market. We've completed the enrollment, like you said. And we completed the CE Mark enrollment beginning of this year. So we're committed to the space, but we do feel that it's a full portfolio approach. You need good mapping which is why we invested in our next-generation HD grid. You need to have a PFA portfolio that's pretty complete. You need to have RF, and I think that's what the team has been building, I'd say, very, very successfully. Operator: Our next question will come from Matt Miksic from Barclays. Your line is open. Matt Miksic: I'd a follow-up on Libre in the diabetes business. And just a couple of topics that come up quite a bit, the last few months around the market and competition. The first being kind of anything you can comment on regarding your share trends, in particular, in the DME channel, anything you're doing there differently, did differently, what you're seeing as a user of Lingo for the last couple of months, I complemented the team on putting together a great product. Question, just curious about the timing and the plan for Rio and thoughts on potential reimbursement for that certain non-insulin intensive type 2 community. And then lastly, just zooming out for a sec and getting back to your comments and plans for gross margin, how -- if you could to scale the expansion into OTC of Libre in this platform kind of plays a role in hitting your '24 gross margin plans and your plans for expansion going forward as you scale this business? Robert Ford: You lined up a lot there, Matt. I'm going to make sure that Mike here helps me stay with all the questions that you laid out there. I mean I think regarding your Libre question on competitiveness, yes, I think the team has done a really good job here in the U.S., not just in the DME channel but at the endo's offices, at the primary care channel, with the basal population. I think it's kind of an all-out all-channel, real strong execution there. U.S., we grew 26% in the U.S. this quarter. And that was having some of the challenges we had there regarding some kind of temporary supply challenges with Libre 3. So, we haven't really unleashed Libre 3 fully yet, and a lot of the share gains that we're getting are with Libre 2. But that piece is behind us. We invested in a new manufacturing line. We have a new manufacturing, a whole brand-new manufacturing facility come up and towards the end of the year. So that will -- as we go into next year, that will all be kind of behind us. So, I think our position here in the U.S. and globally, quite frankly, is strengthened by the product portfolio, the cost position that we had. You're mentioning gross margins in Libre. That's a key aspect here. We've always talked about. You got to have cost leadership here because as the market expands to basal and oral meds, GLP-1 users. And as that population grows, you're going to have a much larger TAM to operate in. But yes, you are going to see -- you're going to have to make some pricing adjustments to be able to get that reimbursement, so you got to have your cost structure in place to be able to benefit, have the top line growth and not have that come at the expense of gross margin. And our gross margins, as we've grown Libre, have actually expanded. As our manufacturing scale continues to ramp up, some of the costs associated with these products, because there's a lot of automation, we've been doing this from day one, some of the costs are depreciation in the equipment. So as a lot of our facilities are running through their depreciation schedules, those will help our gross margins, too. So I feel good about our opportunity to drive the market, to be competitive, to lead in technology, to lead in scale and cost and take advantage of what we believe is a mass market opportunity for us. I think you had a question on Rio. Listen, the initial focus is on Lingo right now. We've got that -- think of Rio as another arrow here in the quiver that we can pull out if we need to ahead of schedule. We do have a schedule. I'm not going to lay out what that schedule is, but for some reason we need to do that, we'll be able to do that. But the focus is on Lingo right now, and we've got a nice opportunity here to build a completely new segment of biowearables with consumers. So... Operator: And our last question will come from Danielle Antalffy from UBS. Your line is open. Danielle Antalffy: Congrats on a really good quarter here. I just wanted to follow up on the structural heart component of the business. Robert, you talked about this earlier in response to Josh's question. But just digging a little bit deeper, as we look into 2025, I mean, you've got potential indication expansion for LAA closure, but you do have some competitive data coming on the tricuspid side of things at TCP and whether or not that chose a mortality benefit. So just curious about how you think about those two markets specifically and sustainable growth in those franchises, there are some puts and takes there. So, I just wanted to get your sense of how to think about that as we head into next year? Robert Ford: Sure. Just to remind me again there, Danielle, tricuspid and what was the other one? Danielle Antalffy: Sorry, left aerial appendage closure... Robert Ford: Yes. Okay. Good. Yes, these are great areas of investment for us. And the investment of money, time, effort, thinking, power, all of that. So, I think, as I said on business hitting its stride, I definitely would say that about the Amulet team. They're definitely hitting their stride. We saw nice growth this quarter, 25% globally, 40% growth in the U.S. here. So -- and we're making the investments. I mean, I think you saw our registry data shows a really good positive results from Amulet, 95% of the closure rates achieved and sustained after 45 days, I think that's pretty good. 90% closure rate when using Amulet for those that have failed proper closure with the competitor product. So -- but we're investing in there. We've got our CATALYST trial that's looking at comparing Amulet to anticoagulants for people that have a risk of AFib, expect to complete that trial next year. And then the team has been working on Amulet 2.0. And I expect that we will be beginning or entering the trial in that business with that product towards the end of this year. So really nice progress on the appendage side, whether -- and quite frankly, PFO, too, is doing really well, and that's a great growth driver for us, too. On the tricuspid side, yes, there's going to be a lot of data coming out over the next 12, 24 months. I expect that. I think with any new category here, Danielle, you're going to have to make the investments. I mean nobody was doing anything from an interventional perspective on the tricuspid, right? So as companies are developing technologies, I think you are going to see a lot of clinical readouts and clinical data more to be able to kind of support the use of these technologies. I think we saw one recently at ESC specifically to TriClip, a European study, and this is the second RCT that's basically confirming what the TRILUMINATE RCTs showed, which is much superior to medical therapy and extremely effective at reducing TR. So, I think that's an area of investment for us. Without a doubt, I think that there's an opportunity here that the team's been working on regarding our full portfolio approach with our structural products, and I think TriClip plays an important role there. We're excited about the NCD that was opened and looking forward to that, so that's another opportunity for us in 2025. But quite frankly, I just think there's a great opportunity here with our team. We've got, I would say, some built-in advantages as it comes to the TriClip product. We've got manufacturing scale, the sales force and all of that. And there's definitely demand and we're seeing that and the launch is going very well. So, I think that, yes, you're going to see more data, and that's good, and it's a growth opportunity for us. I think this is a $1 billion business for us here over time. But you're going to have to make the investments on the clinical side to be able to kind of support the adoption of it. So very excited about structural heart overall. And ultimately excited about the entire company and business. We've had -- yes, I'm really pleased with the performance of the first three quarters. We're on track to finish the year at the high end of the initial guidance that we provided back in January. Sales growth has been strong. Gross margin profile continues to expand. EPS growth is now accelerating throughout the year as we were lapping some of those COVID comps. The pipeline is richer than ever. So, I think we've got great momentum heading into next year. And with that, I'm going to wrap up and thank all of you for joining us. Mike Comilla: Thank you, operator, and thank you all for your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today. Operator: Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day.	[ { "speaker": "Operator", "text": "Good day, and thank you for standing by. Welcome to Abbott's Third Quarter 2024 Earnings Conference Call. All participants will be able to listen only until the question-and-answer portion of this call. [Operator Instructions] This call is being recorded by Abbott. With the exception of any participant's questions asked during the question-and-answer session, the entire call, including the question-and-answer session, is material copyrighted by Abbott. It cannot be recorded or rebroadcast without Abbott's expressed written permission. I would now like to introduce Mr. Mike Comilla, Vice President, Investor Relations." }, { "speaker": "Mike Comilla", "text": "Good morning, and thank you for joining us. With me today are Robert Ford, Chairman and Chief Executive Officer; and Phil Boudreau, Executive Vice President, Finance and Chief Financial Officer. Robert and Phil will provide opening remarks. Following their comments, we'll take your questions. Before we get started, some statements made today may be forward-looking for purposes of the Private Securities Litigation Reform Act of 1995, including the expected financial results for 2024. Abbott cautions that these forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those indicated in the forward-looking statements. Economic, competitive, governmental, technological and other factors that may affect Abbott's operations are discussed in Item 1A, Risk Factors, to our annual report on Form 10-K for the year ended December 31, 2023. Abbott undertakes no obligation to release publicly any revisions to forward-looking statements as a result of subsequent events or developments, except as required by law. On today's conference call, as in the past, non-GAAP financial measures will be used to help investors understand Abbott's ongoing business performance. These non-GAAP financial measures are reconciled with the comparable GAAP financial measures in our earnings news release and regulatory filings from today, which are available on our website at abbott.com. Note that Abbott has not provided the GAAP financial measure for organic sales growth on a forward-looking basis because the Company is unable to predict future changes in foreign exchange rates, which could impact reported sales growth. Unless otherwise noted, our commentary on sales growth refers to organic sales growth, which is defined in the press release issued earlier today. With that, I will now turn the call over to Robert." }, { "speaker": "Robert Ford", "text": "Thanks, Mike. Good morning, everyone. Thank you for joining us. Today, we reported organic sales growth of more than 8%, excluding COVID testing sales and adjusted earnings per share of $1.21. In addition to delivering another quarter of strong financial performance, we accomplished several key objectives this quarter, which included entering new strategic partnerships, launching new products and making several key advancements in our R&D pipeline. And I'll elaborate further on these accomplishments when discussing the performance of our businesses and summarize our third quarter results in more detail before turning the call over to Phil. And I'll start with Nutrition, where sales increased 3.5% in the quarter. Growth in the quarter was led by double-digit growth in the U.S., and this included growth of 12% in U.S. Pediatric Nutrition driven by market share gains in the infant formula business and growth of 11.5% in U.S. Adult Nutrition led by our market-leading Ensure and Glucerna brands. As the market leader in adult nutrition, we continue to expand our portfolio to meet the growing global demand for products that offer a combination of high protein, low sugar to help people optimize their health and wellness. Moving to Diagnostics. Our sales in Core Laboratory Diagnostics increased 4.5% excluding COVID testing sales. Growth in Core Lab was driven by global demand for routine diagnostic testing and continued adoption of our market-leading diagnostic systems and testing platforms, including recent large account wins that will help continue to sustain our growth into 2025. In our rapid and point-of-care diagnostics businesses, we continue to expand our test menus and capitalize on the growing demand for respiratory tests that can be performed at home or in more traditional health care settings. In September, we announced an exciting new partnership with the Big Ten conference to help boost the U.S. blood supply through a blood donation competition. Students, alumni and fans can donate blood for any of the 18 member universities at blood centers located across the country. And our goal with this competition is to help rebuild the nation's blood supply which is currently at an extremely low level, while also helping to create a new generation of blood donors. Turning to EPE, where sales increased 7% in the quarter. Growth was well balanced across the markets and therapeutic areas in which we participate. Our performance this quarter was driven by double-digit growth in several countries across Latin America, Southeast Asia and the Middle East, where our broad product portfolios focused on addressing local market needs continues to enhance our unique position in these markets. From a portfolio perspective, we continue to deliver broad-based growth across our key therapeutic areas of focus, including strong growth in the quarter. in the areas of gastroenterology, cardiometabolic, central nervous system and pain management. We also achieved several milestones this quarter as it relates to advancing our portfolio of biosimilars, which we built and continue to expand through collaboration agreements. The first of these biosimilars is on track to launch in emerging markets in late 2025. And I'll wrap up with our med tech portfolio, where sales grew more than 13%. In Diabetes Care, sales of continuous glucose monitors exceeded $1.6 billion in the quarter and grew 21%. In August, we announced that we had entered into a unique global partnership with Medtronic to connect Abbott's world-leading FreeStyle Libre CGM sensor with their automated insulin delivery systems. Abbott now has partnerships with five of the largest companies that offer automated insulin dosing pumps, allowing more people around the world to benefit from the connectivity with the Libre technology. In September, we announced the U.S. launch of Lingo, our new glucose monitoring sensor available for purchase without a prescription, the Lingo wearable sensor and app track real-time glucose data and provide personal insights in coaching based on your body's reaction to nutrition exercise and other lifestyle choices to help create healthier habits and improve overall well-being. In Electrophysiology, growth of 14% was driven by double-digit growth in both the U.S. and international markets and similar to previous quarters, the growth was broad-based across the portfolio, including double-digit growth in catheters and cardiac mapping related products. We also achieved several important milestones as it relates to our electrophysiology new product pipeline, and this includes completing enrollment ahead of schedule in our VOLT-AF U.S. IDE trial and after we complete the required patient follow-up phase, we expect to file for FDA approval next year. Earlier this month, we announced that we began enrolling patients in our focal FLEX clinical trial designed to assess our new TactiFlex DUO catheter, which offers physicians the option of using PFA and radio frequency energy to treat atrial fibrillation. And finally, we received FDA approval and launched our new adviser HD Grid X mapping catheter, which further enhances the cardiac mapping process when using PFA or RF ablation catheters to treat AFib. In Structural Heart, growth of more than 16% was driven by growth across our market-leading comprehensive portfolio of surgical valves, structural interventions and transcatheter repair and replacement products. This quarter, we continue to capture market share in TAVR and saw accelerating adoption of Amulet and TriClip, which we launched in the U.S. earlier this year. And earlier this month, CMS began the process of evaluating TriClip for a national coverage determination, which, if approved, would help expand the addressable market through broader access in the U.S. for this first of its kind technology. In Ribbon Management, growth of 7% was led by Aveir, our highly innovative leadless pacemaker, and Assert our newest implantable cardiac monitor, which launched in the U.S. last year. In Heart Failure, growth of 14% was driven by our market-leading portfolio of heart assist devices, which offer treatment for chronic and temporary conditions. In Vascular, growth of 5% was led by double-digit growth in vessel closure and coronary imaging, along with Esprit our below-the-knee resorbable stent that launched in the U.S. in the second quarter. And lastly, in Neuromodulation, sales grew 5%, driven by strong demand in international markets for our rechargeable spinal cord stimulation device. So, in summary, we delivered another quarter of strong top line growth with sales growth with sales growing more than 8%. We continue to make good progress expanding our gross margin profile and remain on track to improve our profile by 75 basis points on a full year basis compared to last year. And as you saw, we achieved several important new product pipe loan milestones this quarter, and we're well positioned for a strong finish to the year and have great momentum heading into 2025. And I'll now turn over the call to Phil." }, { "speaker": "Phil Boudreau", "text": "Thanks, Robert. As Mike mentioned earlier, please note that all references to sales growth rates, unless otherwise noted, are on an organic basis. Turning to our third quarter results. Sales increased 7.6% on an organic basis and increased 8.2% when excluding COVID testing sales. Foreign exchange had an unfavorable year-over-year impact of 2.5% on third quarter sales. During the quarter, we saw the U.S. dollar weaken versus several currencies, which resulted in a favorable impact on sales compared to exchange rates at the time of our call in July. Regarding other aspects of the P&L. The adjusted gross margin ratio was 56.3% of sales. Adjusted R&D was 6.5% of sales and adjusted SG&A was 27.2% of sales in the third quarter. Lastly, our third quarter adjusted tax rate was 15%. Turning to our outlook for the fourth quarter. We forecast adjusted earnings per share guidance of $1.31 to $1.37, and based on current rates, we expect exchange to have an unfavorable impact of less than 1% on fourth quarter reported sales. With that, we'll open the call for questions." }, { "speaker": "Operator", "text": "Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] And our first question will come from Travis Steed from BofA Securities." }, { "speaker": "Travis Steed", "text": "In Q3 devices were really strong, but Nutrition and Diagnostics came in below expectations, but you still maintain the full year guidance, which is implying a step up of 9.5 or more growth in Q4. So, I just want to understand what happened in those divisions in Q3? And what's giving you the confidence to still reiterate the full year revenue guidance?" }, { "speaker": "Robert Ford", "text": "Sure, Travis. Listen, we got multiple business units here. I think, by my count, it's close to like 17. We always want all 17 to beat and top your estimates here. The reality is sometimes some of them fall short. And then the question is, is there something more long term? Is it more of kind of a onetime kind of challenge? I'd put that more in the second bucket over here. I think one of the benefits that we do have in having a broad diversified portfolio is that when you do have situations like that, Travis, other businesses can overperform and kind of make up for that. And I think that's what you saw in this quarter. I mean, you opened your question with devices did really good, and that's what helped us deliver on our quarter. And as you look forward to Q4, yes, we do have still very high confidence in the businesses, if I was at all concerned about it, I wouldn't have raised our guidance now for the third time this year. So yes, we're still very confident in both the EPS forecast that we've got. I think this is a great quarter now as we're into Q4 and there's less COVID comps, we'll see our EPS grow double digits back to the growth model that we had during pre-COVID. And yes, revenue at that 9.5% to 10% still feel very good about that. The issues that you raised there are kind of onetime in nature. On nutrition, the entire business did really well with the exception of our international pediatric business. U.S. was up 12%; pediatric, U.S. adult was up almost 12%; international adult was up high single digits. So, what ended up happening there is we saw some softness in the beginning of the quarter in some of our international markets for pediatric team quickly determined that it wasn't market. It was actually us and it was our commercial execution or lack thereof that was leading to some share loss. So, team took action pretty quickly in the quarter. We made some personnel changes, we calibrated our demand generation and what ends up happening in the quarter there as a result of that share loss is we didn't want to build excess inventory, so we shorted our sales to the distributors just to align that. But I feel good about what the team has put together. Early indications show that, that was the right move to do, and we've seen good progress there. So yes, disappointed, but the team knows that, and they acted quickly. So, I expect to see international pediatric and overall nutrition growth step up in the quarter. It doesn't change my thinking about nutrition for the quarter or for next year, for the long-term aspect of it, just something that we had to address. And then I think you mentioned Core Lab also came a little bit shorter than expectations. I'd say there, really, the driver of that was just the VBP implementation in China. If you look at our Core Lab business, our International Core Lab business, excluding China, the international business was up double digits. So, the teams in those markets are doing really well. And I'd mentioned this in January, we were going to see the VBP impact the Core Lab business. We had originally forecasted in April, it got delayed and pushed out to Q3. If you look at our growth rate in the first half of this year, it was over 7%. And some of that favorability that we saw in the business and that we rolled into higher guidance as a result of a little bit of that delay here. So, we'll go through the VBP transition. We've done it in a lot of our businesses. There's the pricing impact going forward, there's some transition-related items that happen, whether you're making pricing accommodations for the inventory that's already in the channel, et cetera. So I still feel very good about the business we've got there. I feel good about China continues to be a very attractive market for us. So we'll just work our way through this. But to your question on the quarter, yes, we feel good about the quarter. I wouldn't have kept the guidance if we didn't. We've got great momentum in the business. We're meeting with the management team yesterday. They're very committed and feel good about the momentum. So, I think we'll have a very good year with a good strong close in Q4." }, { "speaker": "Operator", "text": "And our next question will come from Larry Biegelsen from Wells Fargo. Your line is open." }, { "speaker": "Larry Biegelsen", "text": "Robert, I wanted to ask about Libre and just big picture. You had 21% growth in Libre in Q3, which was good, but your competitors obviously having some issues. So, it would be helpful to hear your view of the state of the CGM market, talk about your confidence in the overall CGM market outlook and your goal of $10 billion in sales by 2028. And maybe just give us some color on what you're seeing so far with Lingo?" }, { "speaker": "Robert Ford", "text": "Yes, sure. Larry, I've always been very bullish about this market and talk about this market a little bit differently than when we talk about general med tech markets, right? This is a mass market opportunity that we have. And yes, we grew 21%. U.S. was actually up 26%, and we feel good about the market. The fundamentals are still very much there and they're still very much intact. This is -- you've got about 10 million CGM users globally, I think, right now. And you got over 100 million diabetics in the developed world, over 0.5 billion globally. So yes, I think this is a market that's got mass market potential to it. As long as you stay ahead from a technology perspective, as long as you stay ahead from a scale perspective, as long as you stay ahead from a cost perspective, for me, those are the three elements here that allow us and have guided our strategy from day one. And I don't think that you're going to have some changes in the market when you've got a market that's, whatever, $12 billion, $13 billion, growing 15%. There'll be more players for sure, there'll be more competition for sure. But we feel good about our position and the strategy that we've built. We've thought about this not just for the next year, we've been thinking about this, what is it going to look like a decade from now and how we built our portfolio and our position. So, I feel very good about this market. And I don't think there's anything fundamentally here that's significantly changed, at least from our internal way of thinking about it. So yes, I think this is a great opportunity for us. Libre is -- it will be a $6 billion-plus product. It will grow 20% this year. When we put out the $10 billion target, Larry, we talked about a compound annual growth rate of 15%. So, we're ahead of that, and we're going to work hard to make sure that we stay ahead of that, and we continue to gain share. We'll add $1 billion of revenue this year, add 1 million users. You got opportunities in type 1s on the pump side, on the connectivity side with pens. You've got opportunities with type 2s and basal. I mean I think that's just really still so much opportunity in those markets. So I feel very good about it. And as we've talked about Libre, we always viewed it as a platform. So you mentioned Lingo, glad to see that launch. Just as a reminder, we're really focusing on a very different population with this technology, right? We're targeting people that don't have diabetes. So it's a little bit of a different kind of business model, sale model. But so far, we've seen really, really good early interest. Great, great feedback from the users so far. The app, the data, the website, the Hello Lingo website, the delivery, the whole nonprescription stuff. That's working out very well. The 2 sensor pack is the most popular version right now. And I think that's a good -- it's a great way to start. I was looking at some of the initial reorder rates that came in last night. And wow, was I surprised at really, really much higher reorder rates than what we saw in the U.K., and I thought that I think the team did a really good job at adapting some of the learnings from the U.K. into that. So, I think overall, over time, this is going to be a great opportunity to be able to add to that $10 billion target as we build this user base out. So overall, back to your question on Libre, I feel very good about our position, what we're doing, and Lingo is off to a very good start." }, { "speaker": "Operator", "text": "And our next question will come from Robbie Marcus from JPMorgan. Your line is open." }, { "speaker": "Robbie Marcus", "text": "Congrats on a nice quarter. Robert, I wanted to ask this time of the year, we all -- we're looking for fourth quarter, but we're also turning our focus to 2025. I see The Street sitting at about 7% on the top line, 10% on the bottom line. I wanted to see if you had any comments about how you feel about that or your view into next year, realizing it's still on the early side?" }, { "speaker": "Robert Ford", "text": "Yes. It's a little early to give real specific guidance there, Robbie. But similar to you, we're also looking at '25, we've been looking at '25 also as part of our strategic planning process here, too. So yes, this is the time of the season, right? I'd say, yes, similar to last year, I look at the analyst estimates going into 2025, high single-digit growth, 10% EPS. And like I said last year, that feels like a very reasonable starting point. I think the difference going into 2025 versus when we were coming into 2024 is, as we go into 2025, one of the things that we don't have is what I would call kind of like the COVID cloud at least for a couple of the quarters ahead of us. And that kind of masked a little bit of our underlying kind of base EPS kind of business growth. So, I am looking forward to, in a way, not having that be kind of this kind of comp issue. But I think the high single-digit, 10% EPS, yes, that sounds like a very kind of, I'd say, a reasonable starting point. But if I take a step back also, I look at that and say, okay, here we have a company that's $40 billion in revenue, and we've been driving high single to high single-digit top line growth. I think that's pretty unique for us. And I think one of the reasons that is a combination of two factors. First of all, the markets that we're participating, they're very attractive, Robbie, whether it's their size, their growth outlook, whether their alignment to favorable demographic trends, the positions we have in them, and there's a couple of different types of markets that we're in, right? Markets that are probably a little bit lower from a growth rate perspective, but we've got tremendous scale, tremendous positions in them and that scale and that position disproportionate us and they provide great financial stability to our business. We've got other markets that are very exciting, high-growth markets that our goal there is to enter and capture share, whether it's TAVR or LAA, new diagnostic systems that we'll be launching and then other markets we're building right? And we're building them and creating them with first-of-their-kind types of products, whether it's Lingo that we talked about, TBI testing, leadless, biosimilars in emerging markets, so it's a nice collection of markets that really allow us to set these high single-digit target growth rates for us. And then the other part is pipeline, which is fundamental, right? And I think it's been highly productive. Recently launched products this year are going to contribute about $1 billion of revenue this year, and that's double to what it was in 2023. And I expect that to be the case again next year, right? So, I think it starts at the top line. We've made a lot of effort right now in expanding gross margin and delivering. That was a topic that we talked about last year, expanding margins and gross margin is a key focus of ours. But I also think we've been a pretty proficient allocator of investment. We've invested -- we've done increasing investments in areas that are -- we know are high-growth areas, and we've still been able to generate over $1 billion of spending leverage over the last five years. So, I'd say as we go down the P&L, I think that's another opportunity for us as we go down into 2025 is our discipline in terms of how we make the investments and our focus on gross margin. So, I think the combination of that will allow us to have that op margin expansion. And the balance sheet is in a great year -- sorry, balance sheet is in a great shape here. So, I think we've got all the elements that we need to go into 2025 with great momentum, markets, positions and financial flexibility there." }, { "speaker": "Operator", "text": "Our next question will come from David Roman from Goldman Sachs. Your line is open." }, { "speaker": "David Roman", "text": "Robert, maybe if I could push a little bit more on the investment spending and help us think a little bit about the shape of the P&L on a go-forward basis. During the quarter, you did accelerate R&D and SG&A spending on a year-over-year growth basis. And maybe you could help us think through where are some of those incremental dollars going? How should we think about the trajectory of operating expenses in the context of gross margin expansion? And then with the announced share repurchase program, should we think about that as an effort to keep the share count flat or a view that this is an opportunity to return incremental capital to shareholders and reduce the share count?" }, { "speaker": "Robert Ford", "text": "Sure. Yes, I guess, on the investment side, if you look at what we've done with our expenses here, they've gone from 37% in 2019, down to about 34% this year. So that's where that $1 billion of spending leverage comes, right? If you look at our five-year CAGR, it's high single digits and our operating expense CAGR is about 4%. But it's not a cookie-cutter approach, David. We look at the businesses and look at their opportunities and make those decisions. R&D investments, they're a little bit more-longer term, right? So, once you commit to R&D programs, they tend to be a little bit more-longer term than making some SG&A decisions, where you could toggle up and down a little bit easier. But I mean, I think you could see where some of the growth is coming from, and that's being supported by those investments. Obviously, our med tech portfolio has been getting investments, I'd say, in EP, in structural heart, in diabetes care, in neuromodulation. I mean, all of the businesses, they come with a strategic plan and we look at where it makes more sense, whether it's to put more, more investment in the field with sales force and clinical people, whether it's to make the investment in a clinical trial, so we tend to have a pretty good process about how to do that. We've been making investments in diagnostics, soon we'll probably be talking about a new system that we're going to be launching for a whole new segment of the diagnostic industry. That's a longer-term program that's been a couple of years. So I think we've got a good process about how to make the investments knowing that R&D investments are a little bit more longer than SG&A. So -- and I think that's what we've been able to show. And I think that's one of the reasons we've been able to get to our op margin profile to pre-pandemic levels, which I'm not sure a lot of companies would be able to kind of say that. So -- but we haven't driven our op margin by expenses. I mean we've been driving our top line pretty effectively, too. So I think that's probably the best proof point that we know how to do this allocation and the cycles of the allocation, et cetera. And then I think you had a question regarding share count and buybacks. Listen, we -- as I've said, we've got a pretty balanced approach about how we allocate our capital. I've talked about the importance of the dividend and supporting that growing dividend and we'll continue to do that. The buybacks is just another element in that capital allocation strategy. We just announced that the Board recently approved a new $7 billion buyback program. The previous one that we had approved in 2021 was running down, and we thought it was a good time to put that in place. We've deployed around $8 billion towards buyback over the last five years. We took a little bit of a step up during a couple of years after the acquisitions that we did, we'd stepped that down a little bit. So we've stepped that up. Q3, we did about $750 million. I thought given our strong performance outlook here that we saw a disconnect between what we were doing in our PE ratio, and in fact, I still do. So it made sense to buy shares, and the buyback announcement is just part of our balanced approach to allocating capital, and we've got that authorization set. So if we feel that there is a disconnect going forward, we've got that opportunity to try and correct that. So -- and if that reduces the share count, yes, then it will reduce the share count. But we're not trying to drive our EPS through a lower share count. We're trying to drive our EPS through top line growth, David." }, { "speaker": "Operator", "text": "Our next question will come from Joshua Jennings from TD Cowen. Your line is open." }, { "speaker": "Joshua Jennings", "text": "Robert, I wanted to ask about just structural heart markets. The TAVR market slowing down or decelerating, there's been some investor concerns about U.S. provider capacity and whether there's a bottleneck. I think Abbott is uniquely positioned because you do have offerings in transcatheter aortic, mitral and tricuspid solutions and left atrial appendage occlusion. We've got interventional heart failure interventions coming down the pike. Are you seeing any capacity constraints limiting growth? You had a strong structural heart quarter this in 3Q? Or are you concerned about that? Is that on the horizon or should we just think that hospitals are seeing this growth opportunity as well and building out capacity, adding cath labs, hybrid ORs, et cetera? I'd love to get your view on the current situation and whether you're worried in the next 12, 24, 36 months that we could run into a bottleneck in the U.S.?" }, { "speaker": "Robert Ford", "text": "Not seeing the bottleneck, not forecasting bottleneck, not concerned about the capacity here. Obviously, this is a this is a very growing area not only for those that are developing the technologies, but also for the health care systems that are delivering them and deploying them. I've been to some large centers over the quarter. I've been through some smaller centers over the quarter. There's always challenges, but I put it as a challenge, not specific to a given technology or challenges just whether it's ramping up a new technology, getting more people to train. So -- but I'm not hearing that the centers that we've been working with that capacity is a big rate-limiting factor today. I think if it started to become one and the demand is there, I think history has shown that make the right investments, the investments will be made to accommodate that demand. So -- I mean, this is obviously what's happened in structural heart over the last decade, investments will be made to accommodate that demand. So I'm not hearing that, and we continue to be very excited about the prospects that we had in our structural heart portfolio. I think the team has kind of hit its stride right now. We've got new management, new products launching and I'm very optimistic right now with what the teams are putting together across the entire portfolio. I think like you said, we're one of the few companies here that we can see the full spectrum, right, from -- all the way from surgical, structural interventions, all the occlusion and appendages and then looking at being able to see mitral, tricuspid, aortic, whether it's repair, whether it's replacement, I think the team is hitting its stride right now. And our focus here is going to be on both sides, making the investments on the R&D side. I think we've got a lot of new product investment in structural heart, new clinical trials, new indications, investments over there. And I think the different part of our investment profile, and we've been doing that for many years in mitral -- in structural heart, and I think that's why we have the portfolio we have. I think the piece that we're adding on now is like, okay, we've got the products, now we've got to increase our field presence to support either the market share gain that we aspire to or to support these growing new fields, whether it's tricuspid. So, our focus now is really to start to add more on the field side in these businesses to be able to kind of support that growth. But no, I think this is a tremendous area of growth of opportunity of underpenetration, of R&D, of clinical work. So, we're really excited about it." }, { "speaker": "Operator", "text": "Our next question will come from Vijay Kumar from Evercore ISI. Your line is open." }, { "speaker": "Vijay Kumar", "text": "I had one on, I guess, NEC infant formula. The FDA, CDC and NIH have put out a joint statement. It's a pretty strong statement saying noting that there's perhaps no causative relationship between infant formula and NEC. So, I guess my question is, how does this change Abbott's position in these lawsuits? Does it matter? What else can we expect from the government? Could we expect more announcements similar to this? What shape or form could it be? What can Abbott to do to perhaps ring-fence liabilities related to these cases?" }, { "speaker": "Robert Ford", "text": "Yes, sure. Well, listen, as it relates to our position, it's great to see the statement, and I agree with you, I think it was a very strong statement. It doesn't change what I have been saying, which is and the statement seems to be aligned and support what I hear from the market and what I hear from neonatologists, which is these products are they're medically necessary, they are considered the standard of care, and they're valuable tools. They're valuable tools for the neonatologists in their decisions, in their decisions and their discussions with parents and how to feed premature. And the labels, which is a component in all of this, they've been reviewed by the regulators and never call for net warning. So -- this is a consensus statement made by these three agencies, three regulators here in the U.S. and they're basically -- Vijay, they're actually endorsing an expert panel with dozens of researchers that were conveyed by the secretary of HHS, and I think the researchers issued a 100-page document-or-so. I think they looked at thousands of publications. I think it was 600-specific to the relationship between NEC and feeding. And in that joint statement, the agencies, they reiterated the importance of preterm formula as the standard of care. And they also clearly state there's no conclusive evidence that the formula causes NEC. So, I think this is only one of a handful of times where the three agencies, the most prominent and significant health agencies and regulators in the U.S. have come together and put out a joint statement. Obviously, we saw that during the COVID pandemic. But I think before that, I think it was during the HIV pandemic. So I think the statement says a lot, Vijay. At this point, though, at this point, the judge in our trial right now has not allowed the joint statement or the underlying report to be entered into evidence. I don't know the reasons there, but I think it would be -- we believe that it's the joint statement, the report, the expert testimony, I think those are important pieces of information for a jury to consider as they're making their decisions. So, I don't know how to cap that, but I would say beyond this case and as the cases move to more of the federal side, my expectation here is that the juries in these cases would be allowed to consider the criticality of that important evidence. So, to your question on the liability portion and kind of what to do? If I take a step back on this one, I've been thinking about this quite a bit. But as health care innovators, we develop health care products based on problems that we see. We run the clinical trials. We gather the data. We review the data with the regulators. You guys know this process pretty well. And ultimately, the regulator decides if the products are safe and they're fit for purpose and they decide how they got to be labeled. And that's the country, that's the market that I want to be in, where the products, the labels, they're evaluated through a well-established regulatory process by expert regulators that have unfettered access to the best scientific evidence rather than trying to do this, regulate products through uncertainty and unpredictive jury trials. So ultimately, to your question, if the regulatory process is disregarded, if the science is disregarded, it's going to be very difficult for any company to remain on the market with these products. Taking on that indefinite liability here, at least in the United States, that would be an issue that the United States would confront. It wouldn't be an issue for premature babies in international countries because this issue -- this is not an issue and the products are still available there. So yes, I do think there needs to be some fortitude here by those that can make decisions, prioritize the babies, prioritize preterm babies all 370,000 every single year that rely on these products. Over those that seem to kind of distort and abuse this tort system that we have in our country here for financial gains. I'm hoping it doesn't come to that. But I've been pretty clear that this is -- we stand behind the products, but if the process won't be -- is going to be disregarded then this is something that we will not continue adding to the liability here. So, there's a playbook it seems for these things to happen. You take a decade, 10-plus years to litigate this and come to some resolution. I don't intend to follow that playbook. And I intend to resolve this faster. And yes, there are different ways to resolve this and different ways to look at this. And we are having conversations at all levels to be able to express the concern that this could cause to families here in the United States." }, { "speaker": "Operator", "text": "Our next question will come from Joanne Wuensch from Citi. Your line is open." }, { "speaker": "Joanne Wuensch", "text": "Congratulations on earlier-than-expected completion of enrollment in your PFA catheter clinical trial. But I would really love to get your view on the state of the electrophysiology market. What you're seeing in terms of PFA uptake and how that is impacting your mapping and navigation systems?" }, { "speaker": "Robert Ford", "text": "Sure, Joanne. I mean I think this quarter was a continuation of the trend that we've been seeing since the arrival of PFA. We're growing a little bit lower than the market. The market has kind of grown pretty significantly here. But if you look at our growth rate, prior to PFA, we're actually growing faster now with PFA. And I think there's a couple of factors there. I think you mentioned one of those, which is cardiac mapping. Right now, we're seeing about 90-plus percent of the cases, at least here in the U.S., being masked. If you look at where we were before, Joanne, we were mapping about maybe between 25% and 30% of RF cases, we're now mapping 50-plus. So that is a little bit of a tailwind for us. We're seeing a pretty strong growth in procedures. So -- and I think that's probably what's helped drive some of the market growth that we're seeing. But I also think that the volume increase is actually due to improved treatment guidelines that we're seeing and quite frankly, new technologies that are helping to identify AFib patients, too. So, I think it's a combination of factors there that are helping to drive more producers. And then for us, the RF portion of it is still a growth piece for us. As I said in my comments, we grew ablation catheters double digits, too. So, we're seeing about 20% of the PFA cases, at least the ones that we're mapping, use RF catheters and we're in those cases. So, I think the key thing here is just to at least right now, PFA is really being used for de novo procedures, right? So, if you kind of break that out, it's about of all ablation procedures are de novo. The other two-thiirds are VT ablation, SVT ablation, redos. And in those cases, they're using -- we're still using RF and RF plays an important role there, which is why we've initiated our focal FLEX trial to be able to have the optionality, to be able to toggle between PFA and RF. So, we still think that's an important part there. So -- but I think the team has done a really good job here at leveraging our open mapping system I made comments, we used the open mapping system as a design input for R&D programs to start off with. And now that open system is allowing us to be in more cases and partner more with the electrophysiologists. So I think that is -- that's what we're seeing, and we're very committed to be able to bring PFA to the market. We've completed the enrollment, like you said. And we completed the CE Mark enrollment beginning of this year. So we're committed to the space, but we do feel that it's a full portfolio approach. You need good mapping which is why we invested in our next-generation HD grid. You need to have a PFA portfolio that's pretty complete. You need to have RF, and I think that's what the team has been building, I'd say, very, very successfully." }, { "speaker": "Operator", "text": "Our next question will come from Matt Miksic from Barclays. Your line is open." }, { "speaker": "Matt Miksic", "text": "I'd a follow-up on Libre in the diabetes business. And just a couple of topics that come up quite a bit, the last few months around the market and competition. The first being kind of anything you can comment on regarding your share trends, in particular, in the DME channel, anything you're doing there differently, did differently, what you're seeing as a user of Lingo for the last couple of months, I complemented the team on putting together a great product. Question, just curious about the timing and the plan for Rio and thoughts on potential reimbursement for that certain non-insulin intensive type 2 community. And then lastly, just zooming out for a sec and getting back to your comments and plans for gross margin, how -- if you could to scale the expansion into OTC of Libre in this platform kind of plays a role in hitting your '24 gross margin plans and your plans for expansion going forward as you scale this business?" }, { "speaker": "Robert Ford", "text": "You lined up a lot there, Matt. I'm going to make sure that Mike here helps me stay with all the questions that you laid out there. I mean I think regarding your Libre question on competitiveness, yes, I think the team has done a really good job here in the U.S., not just in the DME channel but at the endo's offices, at the primary care channel, with the basal population. I think it's kind of an all-out all-channel, real strong execution there. U.S., we grew 26% in the U.S. this quarter. And that was having some of the challenges we had there regarding some kind of temporary supply challenges with Libre 3. So, we haven't really unleashed Libre 3 fully yet, and a lot of the share gains that we're getting are with Libre 2. But that piece is behind us. We invested in a new manufacturing line. We have a new manufacturing, a whole brand-new manufacturing facility come up and towards the end of the year. So that will -- as we go into next year, that will all be kind of behind us. So, I think our position here in the U.S. and globally, quite frankly, is strengthened by the product portfolio, the cost position that we had. You're mentioning gross margins in Libre. That's a key aspect here. We've always talked about. You got to have cost leadership here because as the market expands to basal and oral meds, GLP-1 users. And as that population grows, you're going to have a much larger TAM to operate in. But yes, you are going to see -- you're going to have to make some pricing adjustments to be able to get that reimbursement, so you got to have your cost structure in place to be able to benefit, have the top line growth and not have that come at the expense of gross margin. And our gross margins, as we've grown Libre, have actually expanded. As our manufacturing scale continues to ramp up, some of the costs associated with these products, because there's a lot of automation, we've been doing this from day one, some of the costs are depreciation in the equipment. So as a lot of our facilities are running through their depreciation schedules, those will help our gross margins, too. So I feel good about our opportunity to drive the market, to be competitive, to lead in technology, to lead in scale and cost and take advantage of what we believe is a mass market opportunity for us. I think you had a question on Rio. Listen, the initial focus is on Lingo right now. We've got that -- think of Rio as another arrow here in the quiver that we can pull out if we need to ahead of schedule. We do have a schedule. I'm not going to lay out what that schedule is, but for some reason we need to do that, we'll be able to do that. But the focus is on Lingo right now, and we've got a nice opportunity here to build a completely new segment of biowearables with consumers. So..." }, { "speaker": "Operator", "text": "And our last question will come from Danielle Antalffy from UBS. Your line is open." }, { "speaker": "Danielle Antalffy", "text": "Congrats on a really good quarter here. I just wanted to follow up on the structural heart component of the business. Robert, you talked about this earlier in response to Josh's question. But just digging a little bit deeper, as we look into 2025, I mean, you've got potential indication expansion for LAA closure, but you do have some competitive data coming on the tricuspid side of things at TCP and whether or not that chose a mortality benefit. So just curious about how you think about those two markets specifically and sustainable growth in those franchises, there are some puts and takes there. So, I just wanted to get your sense of how to think about that as we head into next year?" }, { "speaker": "Robert Ford", "text": "Sure. Just to remind me again there, Danielle, tricuspid and what was the other one?" }, { "speaker": "Danielle Antalffy", "text": "Sorry, left aerial appendage closure..." }, { "speaker": "Robert Ford", "text": "Yes. Okay. Good. Yes, these are great areas of investment for us. And the investment of money, time, effort, thinking, power, all of that. So, I think, as I said on business hitting its stride, I definitely would say that about the Amulet team. They're definitely hitting their stride. We saw nice growth this quarter, 25% globally, 40% growth in the U.S. here. So -- and we're making the investments. I mean, I think you saw our registry data shows a really good positive results from Amulet, 95% of the closure rates achieved and sustained after 45 days, I think that's pretty good. 90% closure rate when using Amulet for those that have failed proper closure with the competitor product. So -- but we're investing in there. We've got our CATALYST trial that's looking at comparing Amulet to anticoagulants for people that have a risk of AFib, expect to complete that trial next year. And then the team has been working on Amulet 2.0. And I expect that we will be beginning or entering the trial in that business with that product towards the end of this year. So really nice progress on the appendage side, whether -- and quite frankly, PFO, too, is doing really well, and that's a great growth driver for us, too. On the tricuspid side, yes, there's going to be a lot of data coming out over the next 12, 24 months. I expect that. I think with any new category here, Danielle, you're going to have to make the investments. I mean nobody was doing anything from an interventional perspective on the tricuspid, right? So as companies are developing technologies, I think you are going to see a lot of clinical readouts and clinical data more to be able to kind of support the use of these technologies. I think we saw one recently at ESC specifically to TriClip, a European study, and this is the second RCT that's basically confirming what the TRILUMINATE RCTs showed, which is much superior to medical therapy and extremely effective at reducing TR. So, I think that's an area of investment for us. Without a doubt, I think that there's an opportunity here that the team's been working on regarding our full portfolio approach with our structural products, and I think TriClip plays an important role there. We're excited about the NCD that was opened and looking forward to that, so that's another opportunity for us in 2025. But quite frankly, I just think there's a great opportunity here with our team. We've got, I would say, some built-in advantages as it comes to the TriClip product. We've got manufacturing scale, the sales force and all of that. And there's definitely demand and we're seeing that and the launch is going very well. So, I think that, yes, you're going to see more data, and that's good, and it's a growth opportunity for us. I think this is a $1 billion business for us here over time. But you're going to have to make the investments on the clinical side to be able to kind of support the adoption of it. So very excited about structural heart overall. And ultimately excited about the entire company and business. We've had -- yes, I'm really pleased with the performance of the first three quarters. We're on track to finish the year at the high end of the initial guidance that we provided back in January. Sales growth has been strong. Gross margin profile continues to expand. EPS growth is now accelerating throughout the year as we were lapping some of those COVID comps. The pipeline is richer than ever. So, I think we've got great momentum heading into next year. And with that, I'm going to wrap up and thank all of you for joining us." }, { "speaker": "Mike Comilla", "text": "Thank you, operator, and thank you all for your questions. This now concludes Abbott's conference call. A webcast replay of this call will be available after 11 a.m. Central Time today on Abbott's Investor Relations website at abbottinvestor.com. Thank you for joining us today." }, { "speaker": "Operator", "text": "Thank you. This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone, have a wonderful day." } ]	Abbott Laboratories	247,483

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